Compendium of Recent FTC Policy Statements, Advisory Opinions, and Final Rules

Federal Trade Commission
January 17, 2025
Compendium of Recent
FTC Policy Statements,
Advisory Opinions, and
Final Rules

Office of Policy Planning
January 17, 2025
In the last four years, the FTC has published policy statements and rulemakings on a wide
variety of topics pertaining to competition and consumer protection. The FTC staff has compiled these
policy statements and final rules into the attached compendium. They reflect our work on a wide array
of important and popular priorities, ranging from restoring robust enforcement of corporate
accountability laws to protecting Americans from discrete unlawful practices like junk fees,
subscription traps, noncompetes, and much more.
We share these materials in case they are useful to states and advocates as they work in the
years ahead to promote fair, honest, and competitive markets. For example, they may be useful as
models for policy initiatives like state legislation or rulemakings. Additionally, many states have “mini
FTC Act” statutes that provide state attorneys general and private plaintiffs with legal tools similar to
the FTC Act’s prohibitions on unfair methods of competition and unfair or deceptive acts or practices.
Accordingly, these materials may also be useful for efforts to enforce existing state laws.
We believe these policy statements and the explication of our legal authorities in the statements
of basis and purpose accompanying these rulemakings reflect the best interpretation of the FTC Act
and other statutes the FTC administers, and they may also be the best interpretation of parallel “mini
FTC Acts.” We note that under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), what
matters is the “best reading” of a statute, id. at 373, regardless of whether an agency adopts it. We
believe that the interpretations set forth in these documents reflect the best reading of the laws and that
the reasoning provided therein will therefore prove to be durable.
We further note that the statements of basis and purpose in the enclosed final rulemakings
describe in detail the extensive evidence supporting the FTC’s rules, as well as our fulsome analysis of
the significant benefits the rules would provide for consumers, businesses, workers, and the economy.
States and advocates may find this evidentiary record and analysis useful as they contemplate future
policy initiatives.
Finally, we thank states and advocates for your partnership over the years. States and advocates
have always played a vital role in protecting consumers and competition, and they have been an
invaluable partner to our work at the FTC. We hope these materials can be helpful as they continue to
carry out our shared mission of promoting fair, honest, and competitive markets.
Hannah Garden-Monheit
Director, Office of Policy Planning
Federal Trade Commission
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580

T ABLE OF CONTENTS
Policy Statements
Statement of the Commission on the Withdrawal of the Statement of Enforcement Principles
Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (Jul. 9, 2021) ...5
Policy Statement on Repair Restrictions Imposed by Manufacturers and Sellers (Jul. 21, 2021)
......................................................................................................................................................12
Statement of the Commission on Breaches by Health Apps and Other Connected Devices (Sept.
15, 2021) ......................................................................................................................................14
Enforcement Policy Statement Regarding Negative Option Marketing (Oct. 28, 2021) ............16
Policy Statement on Education Technology and the Children’s Online Privacy Protection Act
(May 19, 2022).............................................................................................................................31
Policy Statement on Rebates and Fees in Exchange for Excluding Lower Cost Drug Products
(Jun. 16, 2022) .............................................................................................................................35
Policy Statement on Enforcement Related to Gig Work (Sept. 15, 2022) ...................................41
Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the
Federal Trade Commission Act (Nov. 10, 2022) .........................................................................58
Policy Statement on Biometric Information and Section 5 of the Federal Trade Commission Act
(May 18, 2023).............................................................................................................................74
Merger Guidelines (Dec. 18, 2023) .............................................................................................86
Statement Concerning Brand Drug Manufacturers’ Improper Listing of Patents in the Orange
Book (Sept. 14, 2023) ..................................................................................................................137
Policy Statement on Franchisors’ Use of Contract Provisions, Including Non-Disparagement,
Goodwill, and Confidentiality Clauses (Jul. 12, 2024)................................................................143
Staff Guidance on the Unlawfulness of Undisclosed Fees Imposed on Franchisees (Jul. 12, 2024)
......................................................................................................................................................150
Joint Statement on Competition in Generative AI Foundation Models and AI Products (Jul. 23,
2024) ............................................................................................................................................152
Policy Statement on Exemption of Protected Labor Activity by Workers from Antitrust Liability
(Jan. 14, 2025)..............................................................................................................................155
Antitrust Guidelines for Business Activities Affecting Workers (Jan. 16, 2025) ........................167

Advisory Opinions
Commission Statement on the Holder Rule and Attorneys’ Fees and Costs (Jan. 18, 2022) ......180
Final Rules
Made in USA Labeling Rule (Jul. 14, 2021) ...............................................................................184
Standards for Safeguarding Customer Information – 2021 Amendments (Dec. 9, 2021) ...........198
Standards for Safeguarding Customer Information – 2023 Amendments (Nov. 13, 2023) .........241
Combating Auto Retail Scams Trade Regulation Rule (Jan. 4, 2024) .........................................252
Trade Regulation Rule on Impersonation of Government and Businesses (Mar. 1, 2024) .........358
Telemarketing Sales Rule Amendments (Apr. 16, 2024) .............................................................373
Non-Compete Clause Rule (May 7, 2024) ..................................................................................400
Health Breach Notification Rule (May 30, 2024) ........................................................................565
Ophthalmic Practice Rules (Eyeglass Rule) Amendments (Jul. 26, 2024) ..................................602
Trade Regulation Rule on the Use of Consumer Reviews and Testimonials (Aug. 22, 2024) ....650
Negative Option Rule (Nov. 15, 2024) ........................................................................................696
Trade Regulation Rule on Unfair or Deceptive Fees (Dec. 17, 2024) .........................................766

UNITED STATES OF AMERICA
Federal Trade Commission
WASHINGTON, D.C. 20580
STATEMENT OF THE COMMISSION
On the Withdrawal of the Statement of Enforcement Principles
Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act
July 9, 2021
Section 5 of the Federal Trade Commission Act prohibits “unfair methods of competition
in or affecting commerce.”1 In 2015, the Federal Trade Commission under Chairwoman Edith
Ramirez published the Statement of Enforcement Principles Regarding “Unfair Methods of
Competition” Under Section 5 of the FTC Act (hereinafter “2015 Statement”), which established
principles to guide the agency’s exercise of its “standalone” Section 5 authority.2 Although
presented as a way to reaffirm the Commission’s preexisting approach to Section 5 and preserve
doctrinal flexibility,3 the 2015 Statement contravenes the text, structure, and history of Section 5
and largely writes the FTC’s standalone authority out of existence. In our view, the 2015
Statement abrogates the Commission’s congressionally mandated duty to use its expertise to
identify and combat unfair methods of competition even if they do not violate a separate antitrust
statute. Accordingly, because the Commission intends to restore the agency to this critical
mission, the agency withdraws the 2015 Statement.
I. 	Background
On August 13, 2015, the Federal Trade Commission issued the 2015 Statement, which
announced that the Commission would apply Section 5 using “a framework similar to the rule of
reason,” by only challenging actions that “cause, or [are] likely to cause, harm to competition or
the competitive process, taking into account any associated cognizable efficiencies and business
justifications[.]”4 The 2015 Statement advised that the Commission is “less likely” to raise a
1 15 U.S.C. § 45(a)(1).
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.

2
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.

3
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.
L. REV . 227, 229-240 (1980).
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).

4
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”).

5
III. 	The 2015 Statement Overlooks the Unique Features of Section 5, Ratifies an
Unadministrable Approach, and Perpetuates Uncertainty in the Law
In addition to flouting a clear congressional mandate, the 2015 Statement fails to consider
or even recognize the unique features of or limits on Section 5. By instead confining Section 5 to
the framework that presently governs the Sherman and Clayton Acts, the 2015 Statement
willfully surrenders the Commission’s key institutional advantages as an administrative agency
with the power to adjudicate cases, issue rules and industry guidance, and conduct detailed
marketplace studies.26
The Commission’s efforts to constrain Section 5 in this way have only hindered the
agency’s enforcement efforts. Coupling Section 5 to the Sherman Act has led courts to bind the
FTC to liability standards created by generalist judges in private treble-damages actions under
the Sherman Act, despite the striking differences in institutional contexts and the Commission’s
unique role as an expert public body.27 Aside from invitations to collude—which the agency has
long treated as a violation of Section 528—the Commission has pled a standalone Section 5 claim
just once since the issuance of the 2015 Statement.29 In practice, the Statement has doubled
down on the Commission’s longstanding failure to investigate and pursue “unfair methods of
competition.”
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

6
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. M ASON 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).

7
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.
IV. 	Looking Ahead
Withdrawing the 2015 Statement is only the start of our efforts to clarify the meaning of
Section 5 and apply it to today’s markets. Section 5 is one of the Commission’s core statutory
authorities in competition cases; it is a critical tool that the agency can and must utilize in
fulfilling its congressional mandate to condemn unfair methods of competition. In the coming
months, the Commission will consider whether to issue new guidance or to propose rules that
will further clarify the types of practices that warrant scrutiny under this provision. In the
meantime, the Commission will exercise responsibly its prosecutorial discretion in determining
which cases are appropriate under Section 5, consistent with legal precedent.
37 See Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U.
CHI . L. REV . 357, 359-63 (2020); Sandeep Vaheesan, Resurrecting “A Comprehensive Charter of
Economic Liberty”: The Latent Power of the Federal Trade Commission, 19 U. PA. J. BUS . L. 645, 668-
70 (2017); Jan M. Rybnicek & Joshua D. Wright, Defining Section 5 of the FTC Act: The Failure of the
Common Law Method and the Case for Formal Agency Guidelines, 21 GEO. M ASON L. REV . 1287, 1288,
1304-05 (2014); Kovacic & Winerman, supra note 17, at 933-34; C. Scott Hemphill, An Aggregate
Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, 109 COLUM . L.
REV . 629, 674-80 (2009); Crane, supra note 26, at 78-79.

UNITED STATES OF AMERICA
Federal Trade Commission
WASHINGTON, D.C. 20580
Policy Statement of the Federal Trade Commission
on Repair Restrictions Imposed by Manufacturers and Sellers
In 2019, the Federal Trade Commission (“Commission”) called for public comment and
empirical research on repair restrictions, which culminated in the Commission’s “Nixing the
Fix” report to Congress.1 The Commission is now issuing this policy statement regarding its
enforcement policy with respect to repair restrictions.
Restricting consumers and businesses from choosing how they repair products can substantially
increase the total cost of repairs, generate harmful electronic waste, and unnecessarily increase
wait times for repairs. In contrast, providing more choice in repairs can lead to lower costs,
reduce e-waste by extending the useful lifespan of products, enable more timely repairs, and
provide economic opportunities for entrepreneurs and local businesses.
In 2019, the Commission convened a workshop on “Nixing the Fix” and sought input from
consumers, independent businesses, manufacturers, and others. Through this work, the
Commission uncovered evidence that manufacturers and sellers may, without reasonable
justification, be restricting competition for repair services in numerous ways, including:
imposing physical restrictions (e.g., the use of adhesives); limiting the availability of parts,
manuals, diagnostic software, and tools to manufacturers’ authorized repair networks; using
designs that make independent repairs less safe; limiting the availability of telematics
information (i.e., information on the operation and status of a vehicle that is collected by a
system contained in the vehicle and wirelessly relayed to a central location, often the
manufacturer or dealer of the vehicle); asserting patent rights and enforcement of trademarks in
an unlawful, overbroad manner; disparaging non-OEM parts and independent repair; using
unjustified software locks, digital rights management, and technical protection measures; and
imposing restrictive end user license agreements.
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, F ED. TRADE C OMM’ 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 C OMM’ 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).

2
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.”).

1
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).

2
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.

3
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.
Ill. 2014); FTC, State of Illinois, and State of Ohio v. One Technologies, LP, No. 3:14-cv-05066
(N.D. Cal. 2014); FTC v. Health Formulas, LLC, No. 2:14-cv-01649-RFB-GWF (D. Nev. 2016);
FTC v. BunZai Media Group, Inc., No. 2:15-cv- 04527-GW-PLA (C.D. Cal. 2015); FTC v.
NutraClick LLC, No. 2:16-cv-06819-DMG-JPR (C.D. Cal. 2016) (NutraClick I); FTC v.
DOTAuthority.com, Inc., No. 0:16-cv-62186-WJZ (S.D. Fla. 2016); FTC v. XXL Impressions,
No. 1:17-cv-00067-NT (D. Me. 2017); FTC v. AAFE Products Corp., No. 3:17-cv-00575 (S.D.
Cal. 2017); FTC v. RevMountain, LLC, No. 2:17-cv-02000-APG-GWF (D. Nev. 2017); FTC v.
Pact, Inc., No. 2:17-cv-01429 (W.D. Wash. 2017); FTC v. Tarr, No. 3:17-cv-02024-LAB-KSC
(S.D. Cal. 2017); FTC v. Credit Bureau Center, LLC, No. 17-cv-00194 (N.D. Ill. 2017); FTC v.
AdoreMe, Inc., No. 1:17-cv-09083 (S.D.N.Y. 2017); FTC v. Triangle Media Corp., No. 3:18-cv-
01388-LAB-LL (S.D. Cal. 2018); In re: UrthBox, Inc., No. C-4676 (FTC 2019); FTC v. Elite IT
Partners, Inc., No. 2:19-cv-00125-RJS (D. Utah 2019); FTC v. Apex Capital Group, LLC, No.
2:18-cv-09573-JFW-JPR (C.D. Cal. 2018); FTC v. AH Media, No. 3:19-cv-04022-JD (N.D. Cal.
2019); FTC v. Age of Learning, Inc., No. 2:20-cv-07996 (C.D. Cal. 2020); FTC v. NutraClick,
LLC, No. 2:20-cv-08612 (C.D. Cal. 2020) (NutraClick II).

4
Section 5 of the FTC Act: Section 5 of the FTC Act, which prohibits unfair or deceptive
acts or practices, is the core consumer protection statute enforced by the Commission, and
therefore, has traditionally served as the primary mechanism for addressing deceptive negative
option claims.7 In its guidance and cases, the FTC has highlighted four basic Section 5
requirements that negative option marketing must follow to comply with Section 5.8 First,
marketers must clearly and conspicuously disclose the material terms of a negative option offer
including, at a minimum, key terms such as the existence of the negative option offer, the offer’s
total cost, and how to cancel the offer.9 Second, sellers must disclose these material terms before
consumers agree to the purchase.10 Third, marketers must obtain consumers’ express informed
7 Section 5 specifically states that “unfair or deceptive acts or practices in or affecting commerce
. . . are . . . declared unlawful.” The FTC Act defines “unfair or deceptive acts or practices” to
include such acts or practices involving foreign commerce that cause or are likely to cause
reasonably foreseeable injury within the United States or involve material conduct occurring
within the United States (15 U.S.C. § 45(a)(4)(A)). It also defines “unfair” practices as those
that cause or are likely “to cause substantial injury to consumers which is not reasonably
avoidable by consumers themselves and not outweighed by countervailing benefits to consumers
or to competition” (15 U.S.C. § 45(n)).
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.

5
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).

6
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).

7
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.
Dec. 30, 2008) (Stip. Perm. Inj.) (defendants allegedly caused more than $171 million in
unauthorized charges to consumers’ accounts for bogus travel and buyers’ clubs in part by using
unauthorized remotely created checks).
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.

8
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).

9
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.
II. 	Principles For Negative Option Marketing
Given the number of applicable statutory and regulatory requirements and the ongoing
problems in the marketplace, the Commission now issues the following enforcement guidance
based on its enforcement history.34 This guidance covers three areas commonly addressed by the
Commission in its negative option cases: disclosures, consent, and cancellation. These
principles convey the Commission’s current views on the application of relevant statutes and
regulations to negative option marketing and, as such, should help marketers in their compliance
efforts and better understand how the Commission enforces the law.
Disclosures: ROSCA35 requires marketers to clearly and conspicuously disclose the
material terms of the transaction.36 Pursuant to longstanding precedent, any express claim or
32 15 U.S.C. §§ 1693-1693r.
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.

10
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.

11
• 	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.

12
• 	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).

13
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.

14
• 	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.

15
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.
Cal. June 3, 2020) (alleging that app developer allowed third-party ad networks to use persistent identifiers to track
users of its 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); Complaint, United States v. Retro
Dreamer, Case No. 5:15-cv-2569 (C.D. Cal. Dec. 17, 2015) (alleging that app developer allowed third-party
advertisers to collect persistent identifiers through its child-directed apps without complying with COPPA);
Complaint, United States v. LAI Sys., LLC, Case No. 2:15-cv-9691 (C.D. Cal. Dec. 17, 2015).
7 See, e.g., COPPA Rule Review, FTC-2019-0054 (Project No. P195404), Comments of Campaign for a
Commercial-Free Childhood, et al., Comment No. 117343, at 8 (Dec. 11, 2019) (“In many cases, parents and
students are not even aware of what data is being collected, why it is being collected, who is collecting it, or where it
is being stored. This data is often used to build behavioral profiles that allow third parties to create more effective
marketing campaigns, targeted advertisements, and, ultimately, psychological manipulation of other children.”).
8 See Complying with COPPA: Frequently Asked Questions, FED. TRADE COMM’N (July 2020) § N,
https://www.ftc.gov/business-guidance/resources/complying-coppa-frequently-asked-
questions#N.%20COPPA%20AND%20SCHOOLS.
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).
2

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.
Cal. Feb. 16, 2022). Complaint, United States v. Musical.ly, Case No. 2:19-cv-1439 (C.D. Cal. Feb. 27, 2019).
15 15 U.S.C. § 6502(b)(1)(D); 16 C.F.R. § 312.8. See also Complaint, In re Retina-X Studios, LLC, FTC File No.
1723118 (Mar. 26, 2020). Complaint, United States v. Unixiz, Inc. d/b/a/ iDressup.com, No. 5:19-cv-02222-NC
(N.D. Cal. April 24, 2019); Complaint, United States v. VTech Elecs. Ltd., Case No. 1:18-cv-114 (N.D. Ill. Jan. 8,
2018); Complaint, United States v. RockYou, Inc., No 3:12-cv-01487-SI (N.D. Cal. Mar. 26, 2012).
16 16 C.F.R. § 312.10.
3

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.
4

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. M EIER ET AL., O VERVIEW OF FTC A CTIONS ,
F ED. TRADE C OMM’ 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 F ED. TRADE COMM’ N, REP . ON REBATE
W ALLS , 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. F OOD AND D RUG A DMIN. (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, F ED.
TRADE C OMM’ 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 P HARMACEUTICAL I NDUSTRY: A D ISCUSSION OF
COMPETITIVE AND A NTITRUST I SSUES IN AN ENVIRONMENT OF C HANGE, B UREAU OF ECON . S TAFF R EP ., F ED. TRADE
COMM’ N (Mar. 1999).
1

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. S EN. F INANCE C OMM., S TAFF R EP ., I NSULIN: EXAMINING THE F ACTORS D RIVING THE R ISING C OST OF A
CENTURY O LD D RUG, 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. A M. M ED. A SSOC . H. F ORUM 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 P ATH A HEAD, 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, K AISER F AMILY
F OUNDATION (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 P OPULATION 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 F UND
(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. D IABETES 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.
2

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. A M. M ED. A SSOC .
I NTERN M ED. 112-114 (2019) (finding one of every four patients rations insulin due to cost within one sample);
I NSULIN S ENATE R EP ., 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 M AYO C LINIC P ROC . 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 A TT’ Y G EN., P RESCRIPTION
I NSULIN D RUG P RICING R EP ., 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 A TT’ Y G EN. I NSULIN 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…”).
3

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.”); I NSULIN S ENATE R EP ., 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 W ALL R EP ., supra note 2, at 2.
19 Id. at 2; I NSULIN S ENATE R EP ., 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. M ED. A SSOC . I NTERN. M ED. 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).
4

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, P HARMACY B ENEFIT M ANAGERS: O WNERSHIP OF M AIL-O RDER P HARMACIES (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.”).
5

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. A REEDA & H ERBERT H OVENKAMP, A NTITRUST LAW : A N A NALYSIS OF A NTITRUST P RINCIPLES
AND THEIR A PPLICATION ⁋ 2362i (4th & 5th ed. 2015-2021) (collecting and discussing cases involving commercial
bribery under Section 2(c)); JOSEPH BAUER ET AL., K INTNER 'S F EDERAL A NTITRUST 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).
6

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.
No. C-4662 (FTC Oct. 25, 2018) (requiring Uber to implement a comprehensive privacy program to protect personal
data collected from both riders and drivers); Decision & Order, Amazon.com., Dkt. No. C-4746 (FTC June 10, 2021)
(requiring Amazon to refund Amazon Flex drivers $61.7 million in tips that Amazon promised drivers but failed to
pay); Compl. ¶¶ 61–69, In re HomeAdvisor, Inc., Dkt. No. 9407 (FTC Mar. 11, 2022) (FTC challenging a lead-
generation platform’s alleged misrepresentations to small businesses about the platform’s effectiveness); see also
Letter from Protect Our Rests. to Fed. Trade Comm’n (July 21, 2021) (explaining how various practices that result
in diners paying higher prices to food delivery platforms also harm small businesses).
4 This Policy Statement elaborates on principles adopted by the Commission in individual cases and rules 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
at least one existing statutory or regulatory requirement. 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. 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).
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I. 	Background on Gig Work
The gig economy touches nearly every aspect of American life, from food delivery to
transportation to household services. Gig work involves activity where people earn income
providing on-demand work, often through a digital service like an app.5 Ride-hailing companies
recruit workers to drive customers in the worker’s personal vehicle. Food delivery services find
workers to deliver items from restaurants, grocery stores, and other merchants to customers.
Service apps connect workers with customers seeking help with cleaning, home repair, and other
temporary jobs. The gig work model is expanding into healthcare, retail, and other segments of
the economy.6 Demand for some services gig workers provide grew during the COVID-19
pandemic.7 Demand for other gig services, particularly transportation, decreased during that
same time and caused financial struggles for some workers, illustrating the precarious nature of
gig work.8
Sixteen percent of Americans report earning money through an online gig platform.9 Gig
workers live throughout the United States, in urban, suburban, and rural areas.10 As highlighted
5 See, e.g., Internal Revenue Serv., Gig Economy Tax Center (last updated Mar. 15, 2022); Elka Torpey & Andrew
Hogan, Working in a Gig Economy, U.S. Bureau of Labor Stat. (May 2016). Gig work also may be referred to as
“crowdwork,” contract work, on-call arrangements, or temporary work. See Gallup, Inc., Gallup’s Perspective on
the Gig Economy and Alternative Work Arrangements, at 7 (2018).
6 See, e.g., Fiona Greig & Daniel M. Sullivan, The Online Platform Economy Through the Pandemic JPMorgan
Chase Inst. (Oct. 2021) (reporting that some gig workers “transport people or goods” while other workers “offer a
growing variety of services including dog walking, home repair, telemedicine, and many others”); see also U.S.
Census Bureau, Selected Industries That Contributed to the U.S. Gig Economy: 2019 (June 30, 2022).
7 See, e.g., Accenture, Platforms Work, at 21 & ex.4 (2021) (showing with Uber data that “COVID-19 suppressed
demand for rideshare and enabled strong growth in delivery”).
8 See, e.g., Greig & Sullivan, The Online Platform Economy Through the Pandemic (noting that drivers for rideshare
platforms were “most likely to have received unemployment insurance” during the COVID-19 pandemic).
9 Anderson et al., The State of Gig Work in 2021, at 3, 16; see also Fed. Rsrv. Sys. Bd. of Governors, Report on the
Economic Well-Being of U.S. Households in 219, Featuring Supplemental Data from April 2020, at 18 (May 2020)
(“Nearly one in three adults earned money from gigs.”); cf. Katherine G. Abraham et al., Nat’l Bureau of Econ.
Rsch. Working Paper 24950, Measuring the Gig Economy: Current Knowledge and Open Issues (Aug. 2018)
(explaining why precisely measuring the number of gig workers in the U.S. economy is so difficult).
10 See Anderson et al., The State of Gig Work in 2021, at 24 (noting that comparable percentages of adults in urban,
suburban, and rural areas have earned money through an online gig platform in the past year); see also Ctr. for Rural
Innovation & Rural Innovation Strategies, Inc., The Growing Gig Economy in Rural America, at 4 (Nov. 2021).
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in the FTC’s Serving Communities of Color report, gig workers are disproportionately people of
color11: 30% of Latino adults, 20% of Black adults, and 19% of Asian adults report having
engaged in gig work, compared to only 12% of White adults.12 Many gig workers have lower
incomes and, because they may not be covered by wage and hour laws, can earn less than the
minimum wage.13 More than half of American gig workers report that the money they earn
through the gig economy is essential or important for meeting their basic needs.14
Gig workers are paid in different ways, including weekly, in “batches” after completing
multiple gigs, or immediately upon completing a gig (for a fee).15 Many workers are heavily
dependent on customer tips.16 Gig companies may generate revenue from multiple sources,
including a “take rate”17 (a percentage of customer payments for workers’ services), customer
fees, and commissions charged to merchants.
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).
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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).
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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.
III. 	FTC Enforcement Priorities
The FTC plays a vital role in addressing these and other challenges facing gig workers,
including practices directed toward customers, workers, and honest businesses. As the only
federal agency dedicated to enforcing consumer protection and competition laws in broad sectors
26 See, e.g., Exec. Order No. 14,036, Promoting Competition in the American Economy, § 1, 86 Fed. Reg. 36,987,
36,987 (July 14, 2021); U.S. Dep’t of the Treasury, The State of Labor Market Competition, at i.
6 of 17

of the economy, the FTC examines unlawful business practices and harms to market participants
holistically, complementing the efforts of other enforcement agencies with jurisdiction in this
space. This integrated approach to investigating unfair, deceptive, and anticompetitive conduct is
especially appropriate for the gig economy, where law violations often have cross-cutting causes
and effects.
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.
A. 	Holding Gig Companies Accountable for Their Claims and Conduct
Concerning Gig Work’s Costs & Benefits
Gig companies that classify their workers as independent contractors may seek to retain
control over their workforce while simultaneously shifting costs and risks onto workers. So
classified, workers may be deprived of the protections of an employment relationship to, for
example, insist on minimum pay and recordkeeping standards,29 understand what comprises an
hour of payable work,30 or share information about their income with coworkers to assess unfair
compensation practices or organize for higher compensation.31 A range of FTC authorities can
apply when gig companies seek to exploit this vulnerability by disclosing pay and costs in an
27 For example, the Commission regulates earnings claims made to gig workers just as it would in any other business
or money-making opportunity. See Advance Notice of Proposed Rulemaking: Deceptive or Unfair Earnings Claims,
87 Fed. Reg. 13,951, 13,953 & n.26 (Mar. 11, 2022) [hereinafter “Earnings Claims ANPRM”].
28 “The use of the word ‘consumer’” in the FTC Act “is to be read in its broadest sense.” S. Rep. No. 93–151, at 27
(1973); see, e.g., Decision & Order, Amazon.com, Dkt. No. C-4746 (FTC recovering $61.7 million in unpaid tips to
Amazon Flex drivers, regardless of the drivers’ employment classification); Compl. ¶ 5, Uber Techs., Dkt.
No. C-4662 (“Uber Drivers are consumers who use the [Uber] App to locate Riders in need of transportation.”).
29 See 29 U.S.C. §§ 206–07 (minimum pay and overtime), 211(c) (recordkeeping).
30 See id. § 203(o) (defining “[h]ours worked” for purposes of calculating minimum pay and overtime pay).
31 See id. § 157.
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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).
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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);
Fed. Trade Comm’n, Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct Around Endorsements
and Testimonials (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.
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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.
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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”).
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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.
pt. 444).
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
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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.
C. 	Policing Unfair Methods of Competition That Harm Gig Workers
Anticompetitive mergers or practices may prevent gig workers from obtaining
competitive compensation or more favorable terms or working conditions. Such conduct may
also lead to higher prices or fees, diminished service, or less favorable contractual terms for
customers or businesses. Firms that undertake such conduct may run afoul of the antitrust laws,
and the Commission will focus its resources on investigating potential unlawful conduct by or
linked to lower job satisfaction” and do not correlate with greater pay or training); see also FTC Comm’r Noah J.
Phillips, Prepared Remarks at FTC Workshop on Non-compete Clauses in the Workplace, at 2–3 (Jan. 9, 2020)
(“When you can exit a job, you have greater leverage to improve the terms of your employment.”); FTC Comm’r
Rebecca Kelly Slaughter, Prepared Remarks at FTC Workshop on Non-Compete Clauses in the Workplace, at 5
(Jan. 9, 2020) (prioritizing investigation into “potential restraints that may be inhibiting competition for labor” and
noting that non-compete clauses can “affect people’s livelihoods and ability to earn a living”).
63 See, e.g., Matt Marx & Lee Fleming, Non-Compete Agreements: Barriers to Entry … and Exit?, 12 Innovation
Pol’y & Econ. 39, 51 (2012) (“Non-competes assist in preserving the firm’s competitive position by discouraging
entry.”); see also U.S. Dep’t of the Treasury, The State of Labor Market Competition, at 16 (“Lower worker
mobility increases recruitment costs for all firms as fewer workers are seeking to switch jobs than otherwise would,
absent the post-employment restrictive employment agreement.”).
64 15 U.S.C. § 1.
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 . . . .”).
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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).
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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).
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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).
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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.
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1
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.
I. Introduction
Pursuant to the FTC’s analysis of the decided cases and prior enforcement actions, this
policy statement describes the key principles of general applicability concerning whether
conduct is an unfair method of competition. Consistent with the Supreme Court’s interpretation
of the FTC Act in at least twelve decisions, this statement makes clear that Section 5 reaches
beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to
negatively affect competitive conditions.3
1 Pub. L. No. 63-203, 38 Stat. 717; 15 U.S.C. § 45(a)(1).
2 Fed. Trade Comm’n, Statement of the Commission on the Withdrawal of the Statement of Enforcement Principles
Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (July 9, 2021),
https://www.ftc.gov/legal-library/browse/statement-commission-withdrawal-statement-enforcement-principles-
regarding-unfair-methods.
3 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

2
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”).
4 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. N O. 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

3
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. N O.
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. N O. 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. N O. 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”).

4
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. N O. 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. N O. 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. N O. 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. N O. 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. N O. 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. N O. 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

5
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

6
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. N O. 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. N O. 63-533, at 8 (anticipating that the commission would use its investigatory powers in “aid of the
courts.”).
30 S. REP. N O. 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. N O. 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

7
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 T ULSA 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. N O. 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.
REC . 12146 (statement of Sen. Henry Hollis) (observing that the DOJ would be able to focus on “the great task of
prosecuting suits for the dissolution of monopolies, leaving to the trade commission the important service of
policing competition, so as to protect small business men, keep an open field for new enterprise, and prevent the
development of trusts”).
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.

8
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.
2. 	That is unfair
The method of competition must be unfair, meaning that the conduct goes beyond
competition on the merits. Competition on the merits may include, for example, superior
products or services, superior business acumen, truthful marketing and advertising practices,
44 Ethyl, 729 F.2d at 136. See also Boise, 637 F.2d at 581.
45 Ethyl, 729 F.2d at 136–37.
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).

9
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. N O. 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”).

10
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.
IV. 	Potential Cognizable Justifications
In the event that conduct prima facie constitutes an unfair method of competition,
liability normally ensues under Section 5 absent additional evidence. There is limited caselaw on
what, if any, justifications may be cognizable in a standalone Section 5 unfair methods of
competition case, and some courts have declined to consider justifications altogether.60 In
instances where a party chooses to assert justifications as an affirmative defense, the FTC can
56 See Sperry & Hutchinson, 405 U.S. at 244 (explaining that “unfair competitive practices [are] not limited to those
likely to have anticompetitive consequences after the manner of the antitrust laws”); Ethyl, 729 F.2d at 138 (finding
that evidence of actual harm can be “a relevant factor in determining whether the challenged conduct is unfair” but
is not required); Boise, 637 F.2d at 581-82. In re Coca-Cola Co., 117 F.T.C. 795, 915 (1994) (rejecting argument
that Section 5 violation requires showing “anticompetitive effects”). See also supra notes 19-21 and accompanying
text (explaining that a showing of an actual anticompetitive injury is unnecessary to prove a violation of Section 5
because that section was designed to stop in their incipiency acts and practices that could lead to violations of the
Sherman and Clayton Acts).
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.
v. Fed. Trade Comm’n, 442 F.2d 1, 19-20 (7th Cir. 1971) (No proof of foreclosure necessary in an exclusive dealing
contract case under Section 5 (citing Brown Shoe).
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.

11
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”).

12
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:
o 	invitations to collude,71
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.
Fed. Trade Comm’n, 168 F.2d 175, 181 (7th Cir. 1948).
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,

13
o 	mergers, acquisitions, or joint ventures that have the tendency to ripen into
violations of the antitrust laws,72
o 	a series of mergers, acquisitions, or joint ventures that tend to bring about the
harms that the antitrust laws were designed to prevent, but individually may not
have violated the antitrust laws,73 and
o 	loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the
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:
o 	practices that facilitate tacit coordination,76
o 	parallel exclusionary conduct that may cause aggregate harm,77
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 L OY. 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

14
o 	conduct by a respondent that is undertaken with other acts and practices that
cumulatively may tend to undermine competitive conditions in the market,78
o 	fraudulent and inequitable practices that undermine the standard-setting process
or that interfere with the Patent Office’s full examination of patent applications,79
o 	price discrimination claims such as knowingly inducing and receiving
disproportionate promotional allowances against buyers not covered by Clayton
Act,80
o 	de facto tying, bundling, exclusive dealing, or loyalty rebates that use market
power in one market to entrench that power or impede competition in the same or
a related market,81
o 	a series of mergers or acquisitions that tend to bring about the harms that the
antitrust laws were designed to prevent, but individually may not have violated
the antitrust laws,82
o 	mergers or acquisitions of a potential or nascent competitor that may tend to
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 Y ALE 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. D EP’ T OF JUSTICE & FED. T RADE COMM ’ N, A NTITRUST G UIDELINES FOR THE L ICENSING OF I NTELLECTUAL
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 P HILIP A REEDA & H ERBERT H OVENKAMP, A NTITRUST L AW: A N
A NALYSIS OF A NTITRUST PRINCIPLES AND T HEIR A PPLICATION ¶ 701at p. 200 (4 th ed. 2015) (acquisition of “an

15
o 	using market power in one market to gain a competitive advantage in an adjacent
market by, for example, utilizing technological incompatibilities to negatively
impact competition in adjacent markets,84
o 	conduct resulting in direct evidence of harm, or likely harm to competition, that
does not rely upon market definition,85
o 	interlocking directors and officers of competing firms not covered by the literal
language of the Clayton Act,86
o 	commercial bribery and corporate espionage that tends to create or maintain
market power,87
o 	false or deceptive advertising or marketing which tends to create or maintain
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.
REV. 1879 (2020).
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
A NTITRUST L.J. 823 (2010). See also DANIEL A. CRANE , T HE I NSTITUTIONAL STRUCTURE OF A NTITRUST
E NFORCEMENT 138 (2011) (The Commission is on strongest ground when challenging market power created by
fraud or deception).

16
o 	discriminatory refusals to deal which tend to create or maintain market power.89
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 A NTITRUST 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.
1

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 T ECHNOLOGY (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 U SES OF FACIAL RECOGNITION T ECHNOLOGIES (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 N AT’ L I NSTITUTE FOR STANDARDS AND T ECH ., FACE RECOGNITION V ENDOR T EST (FRVT) PART 2: I DENTIFICATION
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 I NSIDER (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, NYT IMES (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,
2

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, E DSURGE (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, P ORTLAND , O R ., CITY CODE Chapter 34.10 (2022) (effective Jan. 1, 2021); Biometric Identifier
Information, N EW Y ORK , N.Y., A DMIN . 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 P ORTLAND , O R ., CITY CODE Chapter 34.10 (prohibiting use of face recognition technologies by private entities in
places of public accommodation).
15 N EW Y ORK , N.Y., A DMIN . 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.
3

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, V ICE (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, T HE 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 U SES OF FACIAL RECOGNITION T ECHNOLOGIES , 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 F ACTS : BEST PRACTICES FOR COMMON U SES OF FACIAL RECOGNITION
T ECHNOLOGIES , 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, N AT’L I NSTITUTE FOR STANDARDS AND T ECH .,
https://pages.nist.gov/frvt/html/frvt_demographics.html (last accessed Aug. 31, 2022); N AT ’ L I NSTITUTE FOR
STANDARDS AND T ECH ., FACE RECOGNITION V ENDOR T EST (FRVT) PART 8: SUMMARIZING D EMOGRAPHIC
D IFFERENTIALS (2022), https://pages.nist.gov/frvt/reports/demographics/nistir_8429.pdf; N AT’ L I NSTITUTE FOR
STANDARDS AND T ECH ., FACE RECOGNITION V ENDOR T EST (FRVT) PART 3: D EMOGRAPHIC E FFECTS 2 (2019),
https://nvlpubs.nist.gov/nistpubs/ir/2019/nist.ir.8280.pdf.
4

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. E QUAL EMP. OPPORTUNITY COMM ’ N, EEOC-NVTA-2022-2, T HE A MERICANS WITH D ISABILITIES
A CT AND THE U SE OF SOFTWARE , A LGORITHMS , AND A RTIFICIAL I NTELLIGENCE TO A SSESS JOB A PPLICANTS AND
E MPLOYEES (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); S ELIN E. N UGENT ET AL ., I NST . FOR ETHICAL A.I., RECRUITMENT AI HAS A
D ISABILITY PROBLEM : Q UESTIONS E MPLOYERS SHOULD BE A SKING TO E NSURE 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, V ICE
(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 O NLINE H ARMS THROUGH I NNOVATION (June 2022); FTC, B IG D ATA A
T OOL FOR I NCLUSION OR E XCLUSION? U NDERSTANDING THE I SSUES (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.
5

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
6

 	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”).
7

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.
8

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).
9

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).
10

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).
11

 	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).
12

Merger Guidelines
U.S. Department of Justice and the Federal Trade Commission
Issued: December 18, 2023

1
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).

2
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.

3
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.
* 	* 	*

4
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.

5
2. Applying the Merger Guidelines
This section discusses the frameworks the Agencies use to assess whether a merger may
substantially lessen competition or tend to create a monopoly.
2.1. Guideline 1: Mergers Raise a Presumption of Illegality When They
Significantly Increase Concentration in a Highly Concentrated Market.
Market concentration and the change in concentration due to the merger are often useful
indicators of a merger’s risk of substantially lessening competition. In highly concentrated markets, a
merger that eliminates a significant competitor creates significant risk that the merger may substantially
lessen competition or tend to create a monopoly. As a result, a significant increase in concentration in a
highly concentrated market can indicate that a merger may substantially lessen competition, depriving
the public of the benefits of competition.
The Supreme Court has endorsed this view and held that “a merger which produces a firm
controlling an undue percentage share of the relevant market, and results in a significant increase in the
concentration of firms in that market[,] is so inherently likely to lessen competition substantially that it
must be enjoined in the absence of [rebuttal] evidence.”9 In the Agencies’ experience, this legal
presumption provides a highly administrable and useful tool for identifying mergers that may
substantially lessen competition.
An analysis of concentration involves calculating pre-merger market shares of products10 within
a relevant market (see Section 4.3 for a discussion of market definition and Section 4.4 for more details
on computing market shares). The Agencies assess whether the merger creates or further consolidates a
highly concentrated market and whether the increase in concentration is sufficient to indicate that the
merger may substantially lessen competition or tend to create a monopoly.11
The Agencies generally measure concentration levels using the Herfindahl-Hirschman Index
(“HHI”).12 The HHI is defined as the sum of the squares of the market shares; it is small when there are
many small firms and grows larger as the market becomes more concentrated, reaching 10,000 in a
market with a single firm. Markets with an HHI greater than 1,800 are highly concentrated, and a change
of more than 100 points is a significant increase.13 A merger that creates or further consolidates a highly
9 United States v. Phila. Nat’l Bank, 374 U.S. 321, 363 (1963); see, e.g., FTC v. v. Hackensack Meridian Health, Inc., 30
F.4th 160, 172-73 (3d Cir. 2022); United States v. AT&T, Inc., 916 F.3d at 1032.
10 These Guidelines use the term “products” to encompass anything that is traded between firms and their suppliers,
customers, or business partners, including physical goods, services, or access to assets. Products can be as narrow as an
individual brand, a specific version of a product, or a product that includes specific ancillary services such as the right to
return it without cause or delivery to the customer’s location.
11 Typically, a merger eliminates a competitor by bringing two market participants under common control. Similar concerns
arise if the merger threatens to cause the exit of a current market participant, such as a leveraged buyout that puts the target
firm at significant risk of failure.
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
16.672 = 1667).

6
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.
A merger eliminates competition between the merging firms by bringing them under joint
control.17 If evidence demonstrates substantial competition between the merging parties prior to the
14 The change in HHI from a merger of firms with shares a and b is equal to 2ab. For example, in a merger between a firm
with 20% market share and a firm with 5% market share, the change in HHI is 2 x 20 x 5 = 200.
15 The first merger guidelines to reference an HHI threshold were the merger guidelines issued in 1982. These guidelines
referred to mergers with HHI above 1,000 as concentrated markets, with HHI between 1,000 and 1,800 as “moderately
concentrated” and above 1,800 as “highly concentrated,” while they referred to an increase in HHI of 100 as a “significant
increase.” Each subsequent iteration until 2010 maintained those thresholds. See Fed. Trade Comm’n & U.S. Dep’t of Justice,
Horizontal Merger Guidelines § 1.51 (1997); Fed. Trade Comm’n & U.S. Dep’t of Justice, Horizontal Merger Guidelines
§ 1.51 (1992); U.S. Dep’t of Justice, Merger Guidelines § 3(A) (1982). During this time, courts routinely cited to the
guidelines and these HHI thresholds in decisions. See, e.g., Chicago Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410, 431 (5th
Cir. 2008); FTC v. H.J. Heinz Co., 246 F.3d 708, 716 (D.C. Cir. 2001); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1211 (11th
Cir. 1991). Although the Agencies raised the thresholds for the 2010 guidelines, based on experience and evidence developed
since, the Agencies consider the original HHI thresholds to better reflect both the law and the risks of competitive harm
suggested by market structure and have therefore returned to those thresholds.
16 Phila. Nat’l Bank, 374 U.S. at 364-65 (“Without attempting to specify the smallest market share which would still be
considered to threaten undue concentration, we are clear that 30% presents that threat.”).
17 The competitive harm from the elimination of competition between the merging firms, without considering the risk of
coordination, is sometimes referred to as unilateral effects. The elimination of competition between the merging firms can
also lessen competition with and among other competitors. When the elimination of competition between the merging firms

7
merger, that ordinarily suggests that the merger may substantially lessen competition.18Although a
change in market structure can also indicate risk of competitive harm (see Guideline 1), an analysis of
the existing competition between the merging firms can demonstrate that a merger threatens competitive
harm independent from an analysis of market shares.
Competition often involves firms trying to win business by offering lower prices, new or better
products and services, more attractive features, higher wages, improved benefits, or better terms relating
to various additional dimensions of competition. This can include competition to research and develop
products or services, and the elimination of such competition may result in harm even if such products
or services are not yet commercially available. The more the merging parties have shaped one another’s
behavior, or have affected one another’s sales, profits, valuation, or other drivers of behavior, the more
significant the competition between them.
The Agencies examine a variety of indicators to identify substantial competition. For example:
Strategic Deliberations or Decisions. The Agencies may analyze the extent of competition
between the merging firms by examining evidence relating to 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 competitive impact of recent relevant mergers, entry, expansion, or exit events.
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. The Agencies use a variety of tools, detailed in Section 4.2, to
assess customer substitution.
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).

8
about price, quality, wages, or another dimension of competition. Section 4.2 describes a variety of
approaches to measuring such impacts.
Additional Evidence, Tools, and Metrics. The Agencies may use additional evidence, tools, and
metrics to assess the loss of competition between the firms. Depending on the realities of the market,
different evidence, tools, or metrics may be appropriate.
Section 4.2 provides additional detail about the approaches that the Agencies use to assess
competition between or among firms.
2.3. Guideline 3: Mergers Can Violate the Law When They Increase the
Risk of Coordination.
The Agencies determine that a merger may substantially lessen competition when it
meaningfully increases the risk of coordination among the remaining firms in a relevant market or
makes existing coordination more stable or effective.19 Firms can coordinate across any or all
dimensions of competition, such as price, product features, customers, wages, benefits, or geography.
Coordination among rivals lessens competition whether it occurs explicitly—through collusive
agreements between competitors not to compete or to compete less—or tacitly, through observation and
response to rivals. Because tacit coordination often cannot be addressed under Section 1 of the Sherman
Act, the Agencies vigorously enforce Section 7 of the Clayton Act to prevent market structures
conducive to such coordination.
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.”).

9
described below. Where a market is not highly concentrated, the Agencies may still consider other risk
factors.
Prior Actual or Attempted Attempts to Coordinate. Evidence that firms representing a
substantial share in the relevant market appear to have previously engaged in express or tacit
coordination to lessen competition is highly informative as to the market’s susceptibility to coordination.
Evidence of failed attempts at coordination in the relevant market suggest that successful coordination
was not so difficult as to deter attempts, and a merger reducing the number of rivals may tend to make
success more likely.
Elimination of a Maverick. A maverick is a firm with a disruptive presence in a market. The
presence of a maverick, however, only reduces the risk of coordination so long as the maverick retains
the disruptive incentives that drive its behavior. A merger that eliminates a maverick or significantly
changes its incentives increases the susceptibility to coordination.
2.3.B. Secondary Factors
The Agencies also examine whether secondary factors demonstrate that a merger may
meaningfully increase the risk of coordination, even absent the primary risk factors. Not all secondary
factors must be present for a market to be susceptible to coordination.
Market Concentration. Even in markets that are not highly concentrated, coordination becomes
more likely as concentration increases. The more concentrated a market, the more likely the Agencies
are to conclude that the market structure suggests susceptibility to coordination.
Market Observability. A market is more susceptible to coordination if a firm’s behavior can be
promptly and easily observed by its rivals. Rivals’ behavior is more easily observed when the terms
offered to customers are readily discernible and relatively observable (that is, known to rivals).
Observability can refer to the ability to observe prices, terms, the identities of the firms serving
particular customers, or any other competitive actions of other firms. Information exchange
arrangements among market participants, such as public exchange of information through
announcements or private exchanges through trade associations or publications, increase market
observability. Regular monitoring of one another’s prices or customers can indicate that the terms
offered to customers are relatively observable. Pricing algorithms, programmatic pricing software or
services, and other analytical or surveillance tools that track or predict competitor prices or actions
likewise can increase the observability of the market.
Competitive Responses. A market is more susceptible to coordination if a firm’s prospective
competitive reward from attracting customers away from its rivals will be significantly diminished by its
rivals’ likely responses. This is more likely to be the case the stronger and faster the responses from its
rivals because such responses reduce the benefits of competing more aggressively. Some factors that
increase the likelihood of strong or rapid responses by rivals include: (1) the market has few significant
competitors, (2) products in the relevant market are relatively homogeneous, (3) customers find it
relatively easy to switch between suppliers, (4) suppliers use algorithmic pricing, or (5) suppliers use
meeting-competition clauses. The more predictable are rivals’ responses to strategic actions or changing
competitive conditions, and the more interactions firms have across multiple markets, the greater the
susceptibility to coordination.
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

10
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).

11
2.4.A. Actual Potential Competition: Eliminating Reasonably Probable Future Entry
In general, expansion into a concentrated market via internal growth rather than via acquisition
benefits competition.22 Merging a current and a potential market participant eliminates the possibility
that the potential entrant would have entered on its own—entry that, had it occurred, would have
provided a new source of competition in a concentrated market.
To determine whether an acquisition that eliminates a potential entrant into a concentrated
market may substantially lessen competition,23 the Agencies examine (1) whether one or both24 of the
merging firms had a reasonable probability of entering the relevant market other than through an
anticompetitive merger, and (2) whether such entry offered a substantial likelihood of ultimately
producing deconcentration of the market or other significant procompetitive effects.25
Reasonable Probability of Entry. The Agencies’ starting point for assessment of a reasonable
probability of entry is objective evidence regarding the firm’s available feasible means of entry,
including its capabilities and incentives. Relevant objective evidence can include, for example, evidence
that the firm has sufficient size and resources to enter; evidence of any advantages that would make the
firm well-situated to enter; evidence that the firm has successfully expanded into similarly situated
markets in the past or already participates in adjacent or related markets; evidence that the firm has an
incentive to enter; or evidence that industry participants recognize the company as a potential entrant.
This analysis is not limited to whether the company could enter with its pre-merger production facilities,
but also considers overall capability, which can include the ability to expand or add to its capabilities on
its own or in collaboration with someone other than the acquisition target.
Subjective evidence that the company considered entering absent the merger can also indicate a
reasonable probability that the company would have entered without the merger. Subjective evidence
that the company considered organic entry as an alternative to merging generally suggests that, absent
the merger, entry would be reasonably probable.
Likelihood of Deconcentration or Other Significant Procompetitive Effects. New entry can
yield a variety of procompetitive effects, including increased output or investment, higher wages or
improved working conditions, greater innovation, higher quality, and lower prices. If the merging firm
had a reasonable probability of entering a highly concentrated relevant market, this suggests benefits
that would have resulted from its entry would be competitively significant, unless there is substantial
direct evidence that the competitive effect would be de minimis. To supplement the suggestion that new
entry yields procompetitive effects, the Agencies will consider projections of the potential entrant’s
22 See Ford Motor Co. v. United States, 405 U.S. 562, 587 (1972) (referring to the “typical[]” competitive concern when “a
potential entrant enters an oligopolistic market by acquisition rather than internal expansion” as being “that such a move has
deprived the market of the pro-competitive effect of an increase in the number of competitors”).
23 Harm from the elimination of a potential entrant can occur in markets that do not yet consist of commercial products, even
if the market concentration of the future market cannot be measured using traditional means. Where there are few equivalent
potential entrants, including one or both of the merging firms, that indicates that the future market, once commercialized, will
be concentrated. The Agencies will consider other potential entrants’ capabilities and incentives in comparison to the merging
potential entrant to assess equivalence.
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).

12
competitive significance, such as market share, its business strategy, the anticipated response of
competitors, or customer preferences or interest.
A merger of two potential entrants can also result in a substantial lessening of competition. The
merger need not involve a firm that has a commercialized product in the market or an existing presence
in the same geographic market. The Agencies analyze similarly mergers between two potential entrants
and those involving a current market participant and a potential entrant.
2.4.B. Perceived Potential Competition: Lessening of Current Competitive Pressure
A perceived potential entrant can stimulate competition among incumbents. That pressure can
prompt current market participants to make investments, expand output, raise wages, increase product
quality, lower product prices, or take other procompetitive actions. The acquisition of a firm that is
perceived by market participants as a potential entrant can substantially lessen competition by
eliminating or relieving competitive pressure.
To assess whether the acquisition of a perceived potential entrant may substantially lessen
competition, the Agencies consider whether a current market participant could reasonably consider one
of the merging companies to be a potential entrant and whether that potential entrant has a likely
influence on existing competition.26
Market Participant Could Reasonably Consider a Firm to Be a Potential Entrant. The starting
point for this analysis is evidence regarding the company’s capability of entering or applying
competitive pressure. Objective evidence is highly probative and includes evidence of feasible means of
entry or communications by the company indicating plans to expand or reallocate resources in a way
that could increase competition in the relevant market. Objective evidence can be sufficient to find that
the firm is a potential entrant; it need not be accompanied by any subjective evidence of current market
participants’ internal perceptions or direct evidence of strategic reactions to the potential entrant. If such
evidence is available, it can weigh in favor of finding that a current market participant could reasonably
consider the firm to be a potential entrant.
Likely Influence on Existing Rivals. Direct evidence that the firm’s presence or behavior has
affected or is affecting current market participants’ strategic decisions is not necessary but can establish
a showing of a likely influence. Even without such direct evidence, circumstantial evidence that the
firm’s presence or behavior had an effect on the competitive reactions of firms in the market may also
show likely influence. Objective evidence establishing that a current market participant could reasonably
consider one of the merging firms to be a potential entrant can also establish that the firm has a likely
influence on existing market participants. Subjective evidence indicating that current market
participants—including, for example, customers, suppliers, or distributors—internally perceive the
merging firm to be a potential entrant can also establish a likely influence.
2.4.C. Distinguishing Potential Entry from Entry as Rebuttal
When evaluating a potentially unlawful merger of current competitors, the Agencies will assess
whether entry by other firms would be timely, likely, and sufficient to replace the lost competition using
the standards discussed in Section 3.2. The existence of a perceived or actual potential entrant may not
meet that standard when considering a merger between firms that already participate in the relevant
market. The competitive impact of perceived and actual potential entrants is typically attenuated
26 See United States v. Falstaff Brewing Corp., 410 U.S. 526, 533-36 (1973); Marine Bancorp., 418 U.S. at 624-25.

13
compared to competition between two current market participants. However, because concentrated
markets often lack robust competition, the loss of even an attenuated source of competition such as a
potential entrant may substantially lessen competition in such markets. Moreover, because the Agencies
seek to prevent threats to competition in their incipiency, the likelihood of potential entry that could
establish that a merger’s effect “may be” to substantially lessen competition will generally not equal the
likelihood of entry that would rebut a demonstrated risk that competition may be substantially lessened.
2.5. 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.
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.

14
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.
Rivals or potential rivals may be excluded from the relevant market if limiting their access to the
related product could lead them to exit the market or could deter them from entering. For example,
potential rivals may not enter if the merged firm ties up or obstructs so many routes to market that the
remaining addressable market is too small. Exclusion can arise when a new entrant would need to invest
not only in entering the relevant market, but also in supplying its own substitute for the related product,
sometimes referred to as two-stage entry or multi-level entry.
Because the merged firm could use its ability to limit access to the related product in a range of
ways, the Agencies focus on the overall risk that the merged firm will do so, and do not necessarily
identify which precise actions the merged firm would take to lessen competition.
2.5.A.1. 	Ability and Incentive to Foreclose Rivals
The Agencies assess the merged firm’s ability and incentive to substantially lessen competition
by limiting access to the related product for a group of dependent rivals in the relevant market by
examining four factors.
1. Availability of Substitutes. The Agencies assess the availability of substitutes for the related
product. The merged firm is more able to limit access when there are few alternative options to the
merged firm’s related product, if these alternatives are differentiated in quality, price, or other
characteristics, or if competition to supply them is limited.
2. Competitive Significance of the Related Product. The Agencies consider how important the
related product is for the dependent firms and the extent to which they would be weakened or excluded
from the relevant market if their access was limited.
3. Effect on Competition in the Relevant Market. The Agencies assess the importance of the
dependent firms for competition in the relevant market. Competition can be particularly affected when
the dependent firms would be excluded from the market altogether.
4. Competition Between the Merged Firm and the Dependent Firms. The merged firm’s
incentive to limit the dependent firms’ access depends on how strongly it competes with them. If the
dependent firms are close competitors, the merged firm may benefit from higher sales or prices in the
relevant market when it limits their access. The Agencies may also assess the potential for the merged
28 See Illumina, Inc. v. FTC, No. 23-60167, slip op. at 17 (5th Cir. Dec. 15, 2023) (“[T]here are myriad ways in which [the
merged firm] could engage in foreclosing behavior . . . such as by making late deliveries or subtly reducing the level of
support services.”).

15
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.
The Agencies assess the extent of competition with rivals and the risk of coordination using
analogous methods to the ones described in Guidelines 2 and 3, and Section 4.2.
* 	* 	*
In addition to the evidentiary, analytical, and economic tools in Section 4, the following
additional considerations and evidence may be important to this assessment:
Barriers to Entry and Exclusion of Rivals. The merged firm may benefit more from limiting
access to dependent rivals or potential rivals when doing so excludes them from the market, for example
by creating a need for the firm to enter at multiple levels and to do so with sufficient scale and scope
(multi-level entry).
Prior Transactions or Prior Actions. If firms used prior acquisitions or engaged in prior actions
to limit rivals’ access to the related product, or other products its rivals use to compete, that suggests that
the merged firm has the ability and incentive to do so. However, lack of past action does not necessarily
indicate a lack of incentive in the present transaction because the merger can increase the incentive to
foreclose.
Internal Documents. Information from business planning and merger analysis documents
prepared by the merging firms might identify instances where the firms believe they have the ability and
incentive to limit rivals’ access. Such documents, where available, are highly probative. The lack of
such documents, however, is less informative.
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).

16
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.
Nature and Purpose of the Merger. When the nature and purpose of the merger is to foreclose
rivals, including by raising their costs, that suggests the merged firm is likely to foreclose rivals.
Trend Toward Vertical Integration. The Agencies will generally consider evidence about the
degree of integration between firms in the relevant and related markets, as well as whether there is a
trend toward further vertical integration and how that trend or the factors driving it may affect
competition. A trend toward vertical integration may be shown through, for example: a pattern of
vertical integration following mergers by one or both of the merging companies; or evidence that a
merger was motivated by a desire to avoid having its access limited due to similar transactions among
other companies that occurred or may occur in the future.
* 	* 	*
If the parties offer rebuttal evidence, the Agencies will assess it under the approach laid out in
Section 3.31 When assessing rebuttal evidence focused on the reduced profits of the merged firm from
limiting access from rivals, the Agencies examine whether the reduction in profits would prevent the full
range of reasonably probable strategies to limit access. When evaluating whether this rebuttal evidence
is sufficient to conclude that no substantial lessening of competition is threatened by the merger, the
Agencies will give little weight to claims that are not supported by an objective analysis, including, for
example, speculative claims about reputational harms. Moreover, the Agencies are unlikely to credit
claims or commitments to protect or otherwise avoid weakening the merged firm’s rivals that do not
align with the firm’s incentives. The Agencies’ assessment will be consistent with the principle that
firms act to maximize their overall profits and valuation rather than the profits of any particular business
30 See Brown Shoe, 370 U.S. at 328 (“If the share of the market foreclosed is so large that it approaches monopoly
proportions, the Clayton Act will, of course, have been violated . . . .”). The Agencies will generally infer, in the absence of
countervailing evidence, that the merging firm has or is approaching monopoly power in the related product if it has a share
greater than 50% of the related product market. A merger involving a related product with share of less than 50% may still
substantially lessen competition, particularly when that related product is important to its trading partners.
31 A common rebuttal argument is that the merger would lead to vertical integration of complementary products and as a
result, “eliminate double marginalization,” since in specific circumstances such a merger can confer on the merged firm an
incentive to decrease prices to purchasers. The Agencies examine whether elimination of double marginalization satisfies the
approach to evaluating procompetitive efficiencies in Section 3.3, including examining: (a) whether the merged firm will be
more vertically integrated as a result of the merger, for example because it increases the extent to which it uses internal
production of an input when producing output for the relevant market; (b) whether contracts short of a merger have
eliminated or could eliminate double marginalization such that it would not be merger-specific, and (c) whether the merged
firm has the incentive to reduce price in the relevant market given that such a reduction would reduce sales by the merged
firm’s rivals in the relevant market, which would in turn lead to reduced revenue and margin on sales of the related product to
the dependent rivals.

17
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.
Undermining Competition. The merged firm might use visibility into a rival’s competitively
sensitive information to undermine competition from the rival. For example, the merged firm’s ability to
preempt, appropriate, or otherwise undermine the rival’s procompetitive actions can discourage the rival
from fully pursuing competitive opportunities. Relatedly, rivals might refrain from doing business with
the merged firm rather than risk that the merged firm would use their competitively sensitive business
information to undercut them. Those rivals might become less-effective competitors if they must rely on
less-preferred trading partners or accept less favorable trading terms because their outside options have
worsened or are more limited.
Facilitating Coordination. A merger that provides access to rivals’ competitively sensitive
information might facilitate coordinated interaction among firms in the relevant market by allowing the
merged firm to observe its rivals’ competitive strategies faster and more confidently. (See Guideline 3.)
2.5.C. Mergers that Threaten to Limit Rivals’ Access and Thereby Create Barriers to
Entry and Competition
When a merger gives a firm the ability and incentive to limit rivals’ access, or where it gives the
merged firm increased visibility into its rivals’ competitively sensitive information, the merger may
create entry barriers as described above. In addition, the merged firm’s rivals might change their
behavior because of the risk that the merged firm could limit their access. That is, the risk that the
merger will give a firm the ability and incentive to limit rivals’ access or will give the merged firm
increased visibility into sensitive information can dissuade rivals from entering the market or expanding
their operations.
Rivals or potential rivals that face the threat of foreclosure, or the risk of sharing sensitive
information with rivals, may reduce investment or adjust their business strategies in ways that lessen
competition. Firms may be reluctant to invest in a market if their success is dependent on continued
supply from a rival, particularly because the merged firm may become more likely to foreclose its

18
competitor as that competitor becomes more successful. Firms may use expensive strategies to try to
reduce their dependence on the merged firm, weakening the competitiveness of their products and
services. Even if the merged firm does not deliberately seek to weaken rivals, rivals or potential rivals
may fear that their access will be limited if the merged firm decides to use its own products exclusively.
These effects may occur irrespective of the merged firm’s incentive to limit access and are greater as the
merged firm gains greater control over more important inputs that those rivals use to compete.
2.6. Guideline 6: Mergers Can Violate the Law When They Entrench or
Extend a Dominant Position.
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.

19
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:
 Increasing Switching Costs. The costs associated with changing suppliers (often referred to
as switching costs) can be an important barrier to competition. A merger may increase
switching costs if it makes it more difficult for customers to switch away from the dominant
firm’s product or service, or when it gives the dominant firm control of something customers
use to switch providers or of something that lowers the overall cost to customers of switching
providers. For example, if a dominant firm merges with a complementary product that
interoperates with the dominant firm’s competitors, it could reduce interoperability, harming
competition for customers who value the complement.
 Interfering With the Use of Competitive Alternatives. A dominant position may be threatened
by a service that customers use to work with multiple providers of similar or overlapping
bundles of products and services. If a dominant firm acquires a service that supports the use
of multiple providers, it could degrade its utility or availability or could modify the service to
steer customers to its own products, entrenching its dominant position. For example, a closed
messaging communication service might acquire a product that allowed users to send and
receive messages over several competing services through a single user interface, which
facilitates competition. The Agencies would examine whether the acquisition would entrench
the messaging service’s market power by leading the merged firm to degrade the product or
otherwise reduce its effectiveness as a cross-service tool, thus reducing competition.
 Depriving Rivals of Scale Economies or Network Effects. Scale economies and network
effects can serve as a barrier to entry and competition. Depriving rivals of access to scale
economies and network effects can therefore entrench a dominant position. If a merger
enables a dominant firm to reduce would-be rivals’ access to additional scale or customers by
acquiring a product that affects access such as a customer acquisition channel, the merged
firm can limit the ability of rivals to improve their own products and compete more
effectively.36 Limiting access by rivals to customers in the short run can lead to long run
entrenchment of a dominant position and tend to create monopoly power.
36 The Agencies’ focus here is on the artificial acquisition of network participants that occurs directly as a result of the
merger, as opposed to future network growth that may occur through competition on the merits.

20
For example, if two firms operate in a market in which network effects are significant but in
which rivals voluntarily interconnect, their merger can create an entity with a large enough
user base that it may have the incentive to end voluntary interconnection. Such a strategy can
lessen competition and harm trading partners by creating or entrenching dominance in this
market. This can be the case even if the merging firms did not appear to have a dominant
position prior to the merger because their interoperability practices strengthened rivals.
Eliminating a Nascent Competitive Threat. A merger may involve a dominant firm acquiring a
nascent competitive threat—namely, a firm that could grow into a significant rival, facilitate other
rivals’ growth, or otherwise lead to a reduction in its power.37 In some cases, the nascent threat may be a
firm that provides a product or service similar to the acquiring firm that does not substantially constrain
the acquiring firm at the time of the merger but has the potential to grow into a more significant rival in
the future. In other cases, factors such as network effects, scale economies, or switching costs may make
it extremely difficult for a new entrant to offer all of the product features or services at comparable
quality and terms that an incumbent offers. The most likely successful threats in these situations can be
firms that initially avoid directly entering the dominant firm’s market, instead specializing in (a) serving
a narrow customer segment, (b) offering services that only partially overlap with those of the incumbent,
or (c) serving an overlapping customer segment with distinct products or services.
Firms with niche or only partially overlapping products or customers can grow into longer-term
threats to a dominant firm. Once established in its niche, a nascent threat may be able to add features or
serve additional customer segments, growing into greater overlap of customer segments or features over
time, thereby intensifying competition with the dominant firm. A nascent threat may also facilitate
customers aggregating additional products and services from multiple providers that serve as a partial
alternative to the incumbent’s offering. Thus, the success and independence of the nascent threat may
both provide for a direct threat of competition by the niche or nascent firm and may facilitate
competition or encourage entry by other, potentially complementary providers that may provide a partial
competitive constraint. In this way, the nascent threat supports what may be referred to as “ecosystem”
competition. In this context, ecosystem competition refers to a situation where an incumbent firm that
offers a wide array of products and services may be partially constrained by other combinations of
products and services from one or more providers, even if the business model of those competing
services is different.
Nascent threats may be particularly likely to emerge during technological transitions.
Technological transitions can render existing entry barriers less relevant, temporarily making
incumbents susceptible to competitive threats. For example, technological transitions can create
temporary opportunities for entrants to differentiate or expand their offerings based on their alignment
with new technologies, enabling them to capture network effects that otherwise insulate incumbents
from competition. A merger in this context may lessen competition by preventing or delaying any such
beneficial shift or by shaping it so that the incumbent retains its dominant position. For example, a
dominant firm might seek to acquire firms to help it reinforce or recreate entry barriers so that its
dominance endures past the technological transition. Or it might seek to acquire nascent threats that
might otherwise gain sufficient customers to overcome entry barriers. In evaluating the potential for
entrenching dominance, the Agencies take particular care to preserve opportunities for more competitive
markets to emerge during such technological shifts.
37 The Agencies assess acquisitions of nascent competitive threats by non-dominant firms under the other Guidelines.

21
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. . . .”).

22
2.7. 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.
The recent history and likely trajectory of an industry can be an important consideration when
assessing whether a merger presents a threat to competition. The Supreme Court has explained that “a
trend toward concentration in an industry, whatever its causes, is a highly relevant factor in deciding
how substantial the anticompetitive effect of a merger may be.”40 It has also underscored that “Congress
intended Section 7 to arrest anticompetitive tendencies in their incipiency.41 The Agencies therefore
examine whether a trend toward consolidation in an industry would heighten the competition concerns
identified in Guidelines 1-6.
The Agencies therefore closely examine industry consolidation trends in applying the
frameworks above. For example:
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).

23
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.
2.8. Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions,
the Agencies May Examine the Whole Series.
A firm that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same
or related business lines may violate Section 7.42 In these situations, the Agencies may evaluate the
series of acquisitions as part of an industry trend (see Guideline 7) or evaluate the overall pattern or
strategy of serial acquisitions by the acquiring firm collectively under Guidelines 1-6.
In expanding antitrust law beyond the Sherman Act through passage of the Clayton Act,
Congress intended “to permit intervention in a cumulative process when the effect of an acquisition may
be a significant reduction in the vigor of competition, even though this effect may not be so far-reaching
as to amount to a combination in restraint of trade, create a monopoly, or constitute an attempt to
monopolize.”43 As the Supreme Court has recognized, a cumulative series of mergers can “convert an
industry from one of intense competition among many enterprises to one in which three or four large
[companies] produce the entire supply.”44 Accordingly, the Agencies will consider individual
acquisitions in light of the cumulative effect of related patterns or business strategies.
The Agencies may examine a pattern or strategy of growth through acquisition by examining
both the firm’s history and current or future strategic incentives. Historical evidence focuses on the
strategic approach taken by the firm to acquisitions (consummated or not), both in the markets at issue
and in other markets, to reveal any overall strategic approach to serial acquisitions. Evidence of the
firm’s current incentives includes documents and testimony reflecting its plans and strategic incentives
both for the individual acquisition and for its position in the industry more broadly. Where one or both
of the merging parties has engaged in a pattern or strategy of pursuing consolidation through acquisition,
the Agencies will examine the impact of the cumulative strategy under any of the other Guidelines to
determine if that strategy may substantially lessen competition or tend to create a monopoly.
2.9. Guideline 9: When a Merger Involves a Multi-Sided Platform, the
Agencies Examine Competition Between Platforms, on a Platform, or to
Displace a Platform.
Platforms provide different products or services to two or more different groups or “sides” who
may benefit from each other’s participation. Mergers involving platforms can threaten competition, even
when a platform merges with a firm that is neither a direct competitor nor in a traditional vertical
relationship with the platform. When evaluating a merger involving a platform, the Agencies apply
Guidelines 1-6 while accounting for market realities associated with platform competition. Specifically,
42 Such strategies may also violate Section 2 of the Sherman Act and Section 5 of the FTC Act. Fed. Trade Comm’n, Policy
Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, at
12-14 & nn.73 & 82 (Nov. 10, 2022) (noting that “a series of . . . acquisitions . . . that tend to bring about the harms that the
antitrust laws were designed to prevent” has been subject to liability under Section 5).
43 H.R. Rep. No. 81-1191, at 8 (1949).
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)).

24
the Agencies consider competition between platforms, competition on a platform, and competition to
displace the platform.
Multi-sided platforms generally have several attributes in common, though they can also vary in
important ways. Some of these attributes include:
 Platforms have multiple sides. On each side of a platform, platform participants provide or
use distinct products and services.45 Participants can provide or use different types of
products or services on each side.
 A platform operator provides the core services that enable the platform to connect participant
groups across multiple sides. The platform operator controls other participants’ access to the
platform and can influence how interactions among platform participants play out.
 Each side of a platform includes platform participants. Their participation might be as simple
as using the platform to find other participants, or as involved as building platform services
that enable other participants to connect in new ways and allow new participants to join 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.

25
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:
A. Mergers involving two platform operators eliminate the competition between them. In a
market with a platform, entry or growth by smaller competing platforms can be particularly
challenging because of network effects. A common strategy for smaller platforms is to
specialize, providing distinctive features. Thus, dominant platforms can lessen competition
and entrench their position by systematically acquiring firms competing with one or more
sides of a multi-sided platform while they are in their infancy. The Agencies seek to stop
these trends in their incipiency.
B. A platform operator may acquire a platform participant, which can entrench the operator’s
position by depriving rivals of participants and, in turn, depriving them of network effects.
For example, acquiring a major seller on a platform may make it harder for rival platforms to
recruit buyers. The long-run benefits to a platform operator of denying network effects to
rival platforms create a powerful incentive to withhold or degrade those rivals’ access to
platform participants that the operator acquires. The more powerful the platform operator, the
greater the threat to competition presented by mergers that may weaken rival operators or
increase barriers to entry and expansion.
C. Acquisitions of firms that provide services that facilitate participation on multiple platforms
can deprive rivals of platform participants. Many services can facilitate such participation,
such as tools that help shoppers compare prices across platforms, applications that help
sellers manage listings on multiple platforms, or software that helps users switch among
platforms.
D. Mergers that involve firms that provide other important inputs to platform services can
enable the platform operator to deny rivals the benefits of those inputs. For example,
acquiring data that helps facilitate matching, sorting, or prediction services may enable the
platform to weaken rival platforms by denying them that data.
The Agencies protect competition on a platform in any markets that interact with the platform.
When a merger involves a platform operator and platform participants, the Agencies carefully examine
whether the merger would create conflicts of interest that would harm competition. A platform operator
that is also a platform participant may have a conflict of interest whereby it has an incentive to give its
own products and services an advantage over other participants competing on the platform. Platform
operators must often choose between making it easy for users to access their preferred products and
directing those users to products that instead provide greater benefit to the platform operator. Merging
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

26
the product market for the advantaged product, where the harm to competition may be experienced both
on the platform and in other channels.
The Agencies protect competition to displace the platform or any of its services. For example,
new technologies or services may create an important opportunity for firms to replace one or more
services the incumbent platform operator provides, shifting some participants to partially or fully meet
their needs in different ways or through different channels. Similarly, a non-platform service can lessen
dependence on the platform by providing an alternative to one or more functions provided by the
platform operators. When platform owners are dominant, the Agencies seek to prevent even relatively
small accretions of power from inhibiting the prospects for displacing the platform or for decreasing
dependency on the platform.
In addition, a platform operator that advantages its own products that compete on the platform
can lessen competition between platforms and to displace the platform, as the operator may both
advantage its own product or service, and also deprive rival platforms of access to it, limiting those
rivals’ network effects.
2.10. Guideline 10: When a Merger Involves Competing Buyers, the Agencies
Examine Whether It May Substantially Lessen Competition for
Workers, Creators, Suppliers, or Other Providers.
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).

27
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.
Labor markets frequently have characteristics that can exacerbate the competitive effects of a
merger between competing employers. For example, labor markets often exhibit high switching costs
and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new
job. Switching costs can also arise from investments specific to a type of job or a particular geographic
location. Moreover, the individual needs of workers may limit the geographical and work scope of the
jobs that are competitive substitutes.
In addition, finding a job requires the worker and the employer to agree to the match. Even
within a given salary and skill range, employers often have specific demands for the experience, skills,
availability, and other attributes they desire in their employees. At the same time, workers may seek not
only a paycheck but also work that they value in a workplace that matches their own preferences, as
different workers may value the same aspects of a job differently. This matching process often narrows
the range of rivals competing for any given employee. The level of concentration at which competition
concerns arise may be lower in labor markets than in product markets, given the unique features of
certain labor markets. In light of their characteristics, labor markets can be relatively narrow.
The features of labor markets may in some cases put firms in dominant positions. To assess this
dominance in labor markets (see Guideline 6), the Agencies often examine the merging firms’ power to
cut or freeze wages, slow wage growth, exercise increased leverage in negotiations with workers, or
generally degrade benefits and working conditions without prompting workers to quit.
If the merger may substantially lessen competition or tend to create a monopoly in upstream
markets, that loss of competition is not offset by purported benefits in a separate downstream product
market. Because the Clayton Act prohibits mergers that may substantially lessen competition or tend to
create a monopoly in any line of commerce and in any section of the country, a merger’s harm to
competition among buyers is not saved by benefits to competition among sellers. That is, a merger can
substantially lessen competition in one or more buyer markets, seller markets, or both, and the Clayton
Act protects competition in any one of them.52 If the parties claim any benefits to competition in a
relevant buyer market, the Agencies will assess those claims using the frameworks in Section 3.
Just as they do when analyzing competition in the markets for products and services, the
Agencies will analyze labor market competition on a case-by-case basis.
51 A decrease in wages is understood as relative to what would have occurred in the absence of the transaction; in many cases,
a transaction will not reduce wage levels, but rather slow wage growth. Wages encompass all aspects of pecuniary
compensation, including benefits. Job quality encompasses non-pecuniary aspects that workers value, such as working
conditions and terms of employment.
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)

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2.11. Guideline 11: When an Acquisition Involves Partial Ownership or
Minority Interests, the Agencies Examine Its Impact on Competition.
In many acquisitions, two companies come under common control. In some situations, however,
the acquisition of less-than-full control may still influence decision-making at the target firm or another
firm in ways that may substantially lessen competition. Acquisitions of partial ownership or other
minority interests may give the investor rights in the target firm, such as rights to appoint board
members, observe board meetings, influence the firm’s ability to raise capital, impact operational
decisions, or access competitively sensitive information. The Agencies have concerns with both cross-
ownership, which refers to holding a non-controlling interest in a competitor, as well as common
ownership, which occurs when individual investors hold non-controlling interests in firms that have a
competitive relationship that could be affected by those joint holdings.
Partial acquisitions that do not result in control may nevertheless present significant competitive
concerns. The acquisition of a minority position may permit influence of the target firm, implicate
strategic decisions of the acquirer with respect to its investment in other firms, or change incentives so
as to otherwise dampen competition. The post-acquisition relationship between the parties and the
independent incentives of the parties outside the acquisition may be important in determining whether
the partial acquisition may substantially lessen competition. Such partial acquisitions are subject to the
same legal standard as any other acquisition.53
The Agencies recognize that cross-ownership and common ownership can reduce competition by
softening firms’ incentives to compete, even absent any specific anticompetitive act or intent. While the
Agencies will consider any way in which a partial acquisition may affect competition, they generally
focus on three principal effects:
First, a partial acquisition can lessen competition by giving the partial owner the ability to
influence the competitive conduct of the target firm.54 For example, a voting interest in the target firm or
specific governance rights, such as the right to appoint members to the board of directors, influence
capital budgets, determine investment return thresholds, or select particular managers, can create such
influence. Additionally, a nonvoting interest may, in some instances, provide opportunities to prevent,
delay, or discourage important competitive initiatives, or otherwise impact competitive decision making.
Such influence can lessen competition because the partial owner could use its influence to induce the
target firm to compete less aggressively or to coordinate its conduct with that of the acquiring firm.
Second, a partial acquisition can lessen competition by reducing the incentive of the acquiring
firm to compete.55 Acquiring a minority position in a rival might blunt the incentive of the partial owner
to compete aggressively because it may profit through dividend or other revenue share even when it
loses business to the rival. For example, the partial owner may decide not to develop a new product
feature to win market share from the firm in which it has acquired an interest, because doing so will
53 See United States v. E. I. du Pont de Nemours & Co., 353 U.S. 586, 592 (1957) (“[A]ny acquisition by one corporation of
all or any part of the stock of another corporation, competitor or not, is within the reach of [Section 7 of the Clayton Act]
whenever the reasonable likelihood appears that the acquisition will result in a restraint of commerce or in the creation of a
monopoly of any line of commerce.”).
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).

29
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.
* 	* 	*
The analyses above address common scenarios that the Agencies use to assess the risk that a
merger may substantially lessen competition or tend to create a monopoly. However, they are not
exhaustive. The Agencies have in the past encountered mergers that lessen competition through
mechanisms not covered above. For example:
A. A merger that would enable firms to avoid a regulatory constraint because that constraint was
applicable to only one of the merging firms;
B. A merger that would enable firms to exploit a unique procurement process that favors the
bids of a particular competitor who would be acquired in the merger; or
C. In a concentrated market, a merger that would dampen the acquired firm’s incentive or
ability to compete due to the structure of the acquisition or the acquirer.
As these scenarios and these Guidelines indicate, a wide range of evidence can show that a
merger may lessen competition or tend to create a monopoly. Whatever the sources of evidence, the
Agencies look to the facts and the law in each case.
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.

30
3. Rebuttal Evidence Showing that No Substantial Lessening of
Competition is Threatened by the Merger
The Agencies may assess whether a merger may substantially lessen competition or tend to
create a monopoly based on a fact-specific analysis under any one or more of the Guidelines discussed
above.56 The Supreme Court has determined that analysis should consider “other pertinent factors” that
may “mandate[] a conclusion that no substantial lessening of competition [is] threatened by the
acquisition.”57 The factors pertinent to rebuttal depend on the nature of the threat to competition or
tendency to create a monopoly resulting from the merger.
Several common types of rebuttal and defense evidence are subject to legal tests established by
the courts. The Agencies apply those tests consistent with prevailing law, as described below.
3.1. Failing Firms
When merging parties suggest the weak or weakening financial position of one of the merging
parties will prevent a lessening of competition, the Agencies examine that evidence under the “failing
firm” defense established by the Supreme Court. This defense applies when the assets to be acquired
would imminently cease playing a competitive role in the market even absent the merger.
As set forth by the Supreme Court, the failing firm defense has three requirements:
A. “[T]he evidence show[s] that the [failing firm] face[s] the grave probability of a business
failure.”58 The Agencies typically look for evidence in support of this element that the
allegedly failing firm would be unable to meet its financial obligations in the near future.
Declining sales and/or net losses, standing alone, are insufficient to show this requirement.
B. “The prospects of reorganization of [the failing firm are] dim or nonexistent.”59 The
Agencies typically look for evidence suggesting that the failing firm would be unable to
reorganize successfully under Chapter 11 of the Bankruptcy Act, taking into account that
“companies reorganized through receivership, or through [the Bankruptcy Act] often
emerge[] as strong competitive companies.”60 Evidence of the firm’s actual attempts to
resolve its debt with creditors is important.
C. “[T]he company that acquires the failing [firm] or brings it under dominion is the only
available purchaser.”61 The Agencies typically look for evidence that a company has made
unsuccessful good-faith efforts to elicit reasonable alternative offers that pose a less severe
danger to competition than does the proposed merger.62
56 See United States v. AT&T, Inc., 916 F.3d at 1032.
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.

31
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.
The Agencies also assess whether the merger may increase entry barriers. For example, the
merging firms may have a greater ability to discourage or block new entry when combined than they
would have as separate firms. Mergers may enable or incentivize unilateral or coordinated exclusionary
Liquidation value is the highest value the assets could command outside the market. If a reasonable alternative offer was
rejected, the parties cannot claim that the business is failing.
63 Citizen Publ’g, 394 U.S. at 139.
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).

32
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, and firms also
often work together using contracts short of a merger to combine complementary assets without the full
anticompetitive consequences of a merger.
Merging parties sometimes raise a rebuttal argument that, notwithstanding other evidence that
competition may be lessened, evidence of procompetitive efficiencies shows that no substantial
lessening of competition is in fact threatened by the merger. This argument asserts that the merger
would not substantially lessen competition in any relevant market in the first place.68 When assessing
this argument, the Agencies will not credit vague or speculative claims, nor will they credit benefits
outside the relevant market that would not prevent a lessening of competition in the relevant market.
Rather, the Agencies examine whether the evidence69 presented by the merging parties shows each of
the following:
Merger Specificity. The merger will produce substantial competitive benefits that could not be
achieved without the merger under review.70 Alternative ways of achieving the claimed benefits are
considered in making this determination. Alternative arrangements could include organic growth of one
of the merging firms, contracts between them, mergers with others, or a partial merger involving only
those assets that give rise to the procompetitive efficiencies.
67 Phila. Nat’l Bank, 374 U.S. at 371; Procter & Gamble Co., 386 U.S. at 580 (“Congress was aware that some mergers
which lessen competition may also result in economies but it struck the balance in favor of protecting competition.”).
68 United States v. Anthem, 855 F.3d 345, 353-55 (D.C. Cir. 2017) (although efficiencies not a “defense” to antitrust liability,
evidence sometimes used “to rebut a prima facie case”); Saint Alphonsus Medical Center-Nampa, 778 F.3d at 791 (“The
Clayton Act focuses on competition, and the claimed efficiencies therefore must show that the prediction of anticompetitive
effects from the prima facie case is inaccurate.”).
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.

33
Verifiability. These benefits are verifiable, and have been verified, using reliable methodology
and evidence not dependent on the subjective predictions of the merging parties or their agents.
Procompetitive efficiencies are often speculative and difficult to verify and quantify, and efficiencies
projected by the merging firms often are not realized. If reliable methodology for verifying efficiencies
does not exist or is otherwise not presented by the merging parties, the Agencies are unable to credit
those efficiencies.
Prevents a Reduction in Competition. To the extent efficiencies merely benefit the merging
firms, they are not cognizable. The merging parties must demonstrate through credible evidence that,
within a short period of time, the benefits will prevent the risk of a substantial lessening of competition
in the relevant market.
Not Anticompetitive. Any benefits claimed by the merging parties are cognizable only if they do
not result from the anticompetitive worsening of terms for the merged firm’s trading partners.71
Procompetitive efficiencies that satisfy each of these criteria are called cognizable efficiencies.
To successfully rebut evidence that a merger may substantially lessen competition, cognizable
efficiencies must be of a nature, magnitude, and likelihood that no substantial lessening of competition
is threatened by the merger in any relevant market. Cognizable efficiencies that would not prevent the
creation of a monopoly cannot justify a merger that may tend to create a monopoly.
71 The Agencies will not credit efficiencies if they reflect or require a decrease in competition in a separate market. For
example, if input costs are expected to decrease, the cost savings will not be treated as an efficiency if they reflect an increase
in monopsony power.

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4. Analytical, Economic, and Evidentiary Tools
The analytical, economic, and evidentiary tools that follow can be applicable to many parts of
the Agencies’ evaluation of a merger as they apply the factors and frameworks discussed in Sections 2
and 3.
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.

35
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.

36
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.

37
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.
4.2.C. Considerations When Terms Are Set Through Bargaining or Auctions
In some industries, buyers and sellers negotiate prices and other terms of trade. In bargaining,
buyers commonly negotiate with more than one seller and may play competing sellers off against one
another. In other industries, sellers might sell their products, or buyers might procure inputs, using an
auction. Negotiations may involve aspects of an auction as well as aspects of one-on-one negotiation.
Competition among sellers can significantly enhance the ability of a buyer to obtain a result more
favorable to it, and less favorable to the sellers, compared to a situation where the elimination of
competition through a merger prevents buyers from playing those sellers off against each other in
negotiations.
Sellers may compete even when a customer does not directly play their offers against each other.
The attractiveness of alternative options influences the importance of reaching an agreement to the

38
negotiating parties and thus the terms of the agreement. A party that has many attractive alternative
trading partners places less importance on reaching an agreement with any one particular trading partner
than a party with few attractive alternatives. As alternatives for one party are eliminated (such as
through a merger), the trading partner gains additional bargaining leverage reflecting that loss of
competition. A merger between sellers may lessen competition even if the merged firm handles
negotiations for the merging firms’ products separately.
Thus, qualitative or quantitative evidence about the leverage provided to buyers by competing
suppliers may be used to assess the extent of competition among firms in this setting. Analogous
evidence may be used when analyzing a setting where terms are set using auctions, for example,
procurement auctions where suppliers bid to serve a buyer. If, for some categories of procurements,
certain suppliers are often among the most attractive to the buyer, competition among that group of
suppliers is likely to be strong.
Firms sometimes keep records of the progress and outcome of individual sales efforts, and the
Agencies may use these data to generate measures of the extent to which customers would likely
substitute between the two firms. Examples of such measures might include a diversion ratio based on
the rate at which customers would buy from one firm if the other one was not available, or the frequency
with which the two firms bid on contracts with the same customer.
4.2.D. Considerations When Firms Determine Capacity and Output
In some markets, the choice of how much to produce (output decisions) or how much productive
capacity to maintain (capacity decisions) are key strategic variables. When a firm decreases output, it
may lose sales to rivals, but also drive up prices. Because a merged firm will account for the impact of
higher prices across all of the merged firms’ sales, it may have an incentive to decrease output as a result
of the merger. The loss of competition through a merger of two firms may lead the merged firm to leave
capacity idle, refrain from building or obtaining capacity that would have been obtained absent the
merger, lay off or stop hiring workers, or eliminate pre-existing production capabilities. A firm may also
divert the use of capacity away from one relevant market and into another market so as to raise the price
in the former market. The analysis of the extent to which firms compete may differ depending on how a
merger between them might create incentives to suppress output.
Competition between merging firms is greater when (1) the merging firms’ market shares are
relatively high; (2) the merging firms’ products are relatively undifferentiated from each other; (3) the
market elasticity of demand is relatively low; (4) the margin on the suppressed output is relatively low;
and (5) the supply responses of non-merging rivals are relatively small. Qualitative or quantitative
evidence may be used to evaluate and weigh each of these factors.
In some cases, competition between firms—including one firm with a substantial share of the
sales in the market and another with significant excess capacity to serve that market—can prevent an
output suppression strategy from being profitable. This can occur even if the firm with the excess
capacity has a relatively small share of sales, as long as that firm’s ability to expand, and thus keep
prices from rising, makes an output suppression strategy unprofitable for the firm with the larger market
share.
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.

39
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.

40
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.
Market participants often encounter a range of possible substitutes for the products of the
merging firms. However, a relevant market cannot meaningfully encompass that infinite range of
substitutes.78 There may be effective competition among a narrow group of products, and the loss of that
competition may be harmful, making the narrow group a relevant market, even if competitive constraints
from significant substitutes are outside the group. The loss of both the competition between the narrow
group of products and the significant substitutes outside that group may be even more harmful, but that
does not prevent the narrow group from being a market in its own right.
Relevant markets need not have precise metes and bounds. Some substitutes may be closer, and
others more distant, and defining a market necessarily requires including some substitutes and excluding
others. Defining a relevant market sometimes requires a line-drawing exercise around product features,
such as size, quality, distances, customer segment, or prices. There can be many places to draw that line
and properly define a relevant market. The Agencies recognize that such scenarios are common, and
indeed “fuzziness would seem inherent in any attempt to delineate the relevant . . . market.”79 Market
participants may use the term “market” colloquially to refer to a broader or different set of products than
those that would be needed to constitute a valid relevant antitrust market.
The Agencies rely on several tools to demonstrate that a market is a relevant antitrust market.
For example, the Agencies may rely on any one or more of the following to identify a relevant antitrust
market.
A. Direct evidence of substantial competition between the merging parties can demonstrate that
a relevant market exists in which the merger may substantially lessen competition and can be
sufficient to identify the line of commerce and section of the country affected by a merger,
even if the metes and bounds of the market are only broadly characterized.
76 Id. at 325.
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.

41
B. Direct evidence of the exercise of market power can demonstrate the existence of a relevant
market in which that power exists. This evidence can be valuable when assessing the risk that
a dominant position may be entrenched, maintained, or extended, since the same evidence
identifies market power and can be sufficient to identify the line of commerce and section of
the country affected by a merger, even if the metes and bounds of the market are only
broadly characterized.
C. A relevant market can be identified from evidence on observed market characteristics
(“practical indicia”), such as industry or public recognition of the submarket as a separate
economic entity, the product’s peculiar characteristics and uses, unique production facilities,
distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.80
Various practical indicia may identify a relevant market in different settings.
D. Another common method employed by courts and the Agencies is the hypothetical
monopolist test.81 This test examines whether a proposed market is too narrow by asking
whether a hypothetical monopolist over this market could profitably worsen terms
significantly, for example, by raising price. An analogous hypothetical monopsonist test
applies when considering the impact of a merger on competition among buyers.
The Agencies use these tools to define relevant markets because they each leverage market
realities to identify an area of effective competition.
Section 4.3.A below describes the Hypothetical Monopolist Test in greater detail. Section 4.3.B
addresses issues that may arise when defining relevant markets in several specific scenarios.
4.3.A. The Hypothetical Monopolist Test
This Section describes the Hypothetical Monopolist Test, which is a method by which the
Agencies often define relevant antitrust markets. As outlined above, a relevant antitrust market is an area
of effective competition. The Hypothetical Monopolist/Monopsonist Test (“HMT”) evaluates whether a
group of products is sufficiently broad to constitute a relevant antitrust market. To do so, the HMT asks
whether eliminating the competition among the group of products by combining them under the control
of a hypothetical monopolist likely would lead to a worsening of terms for customers. The Agencies
generally focus their assessment on the constraints from competition, rather than on constraints from
regulation, entry, or other market changes. The Agencies are concerned with the impact on economic
incentives and assume the hypothetical monopolist would seek to maximize profits.
When evaluating a merger of sellers, the HMT asks whether a hypothetical profit-maximizing
firm, not prevented by regulation from worsening terms, that was the only present and future seller of a
group of products (“hypothetical monopolist”) likely would undertake at least a small but significant and
non-transitory increase in price (“SSNIP”) or other worsening of terms (“SSNIPT”) for at least one
80 Brown Shoe, 370 U.S. at 325, quoted in United States v. U.S. Sugar Corp., 73 F.4th 197, 204-07 (3d Cir. 2023) (affirming
district court’s application of Brown Shoe practical indicia to evaluate relevant product market that included, based on the
unique facts of the industry, those distributors who “could counteract monopolistic restrictions by releasing their own
supplies”).
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).

42
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.
4.3.B. Implementing the Hypothetical Monopolist Test
The SSNIPT. A SSNIPT may entail worsening terms along any dimension of competition,
including price (SSNIP), but also other terms (broadly defined) such as quality, service, capacity
investment, choice of product variety or features, or innovative effort.
Input and Labor Markets. When the competition at issue involves firms buying inputs or
employing labor, the HMT considers whether the hypothetical monopsonist would undertake at least a
SSNIPT, such as a decrease in the offered price or a worsening of the terms of trade offered to suppliers,
or a decrease in the wage offered to workers or a worsening of their working conditions or benefits.
The Geographic Dimension of the Market. The hypothetical monopolist test is generally
applied to a group of products together with a geographic region to determine a relevant market, though
for ease of exposition the two dimensions are discussed separately, with geographic market definition
discussed in Section 4.3.D.2.
Negotiations or Auctions. The HMT is stated in terms of a hypothetical monopolist undertaking
a SSNIPT. This covers settings where the hypothetical monopolist sets terms and makes them worse. It
also covers settings where firms bargain, and the hypothetical monopolist would have a stronger
bargaining position that would likely lead it to extract a SSNIPT during negotiations, or where firms sell
their products in an auction, and the bids submitted by the hypothetical monopolist would result in the
purchasers of its products experiencing a SSNIPT.
Benchmark for the SSNIPT. The HMT asks whether the hypothetical monopolist likely would
worsen terms relative to those that likely would prevail absent the proposed merger. In some cases, the
Agencies will use as a benchmark different outcomes than those prevailing prior to the merger. For
example, if outcomes are likely to change absent the merger, e.g., because of innovation, entry, exit, or
exogenous trends, the Agencies may use anticipated future outcomes as the benchmark. Or, if suppliers
in the market are coordinating prior to the merger, the Agencies may use a benchmark that reflects
conditions that would arise if coordination were to break down. When evaluating whether a merging
firm is dominant (Guideline 6), the Agencies may use terms that likely would prevail in a more
competitive market as a benchmark.83
82 If the pricing incentives of the firms supplying the products in the group differ substantially from those of the hypothetical
monopolist, for reasons other than the latter’s control over a larger group of substitutes, the Agencies may instead employ the
concept of a hypothetical profit-maximizing cartel comprised of the firms (with all their products) that sell the products in the
candidate market. This approach is most likely to be appropriate if the merging firms sell products outside the candidate
market that significantly affect their pricing incentives for products in the candidate market. This could occur, for example, if
the candidate market is one for durable equipment and the firms selling that equipment derive substantial net revenues from
selling spare parts and service for that equipment. Analogous considerations apply when considering a SSNIPT for terms
other than price.
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

43
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.
Sometimes evidence is presented in the form of “critical loss analysis,” which can be used to
assess whether undertaking at least a SSNIPT on one or more products in a candidate market would
raise or lower the hypothetical monopolist’s profits. Critical loss analysis compares the magnitude of the
two offsetting effects resulting from the worsening of terms. The “critical loss” is defined as the number
of lost unit sales that would leave profits unchanged. The “predicted loss” is defined as the number of
unit sales that the hypothetical monopolist is predicted to lose due to the worsening of terms. The
worsening of terms raises the hypothetical monopolist’s profits if the predicted loss is less than the
fact, it does. The problem with using prevailing prices to define the market when a firm is already dominant is known as the
“Cellophane Fallacy.”
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.

44
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.
4.3.D. Market Definition in Certain Specific Settings
This Section provides details on market definition in several specific common settings. In much
of this section, concepts are presented for the scenario where the merger involves sellers. In some cases,
clarifications are provided as to how the concepts apply to merging buyers; in general, the concepts
apply in an analogous way.
4.3.D.1. 	Targeted Trading Partners
If the merged firm could profitably target a subset of customers for changes in prices or other
terms, the Agencies may identify relevant markets defined around those targeted customers. The
Agencies may do so even if firms are not currently targeting specific customer groups but could do so
after the merger.
For targeting to be feasible, two conditions typically must be met. First, the suppliers engaging in
targeting must be able to set different terms for targeted customers than other customers. This may
involve identification of individual customers to which different terms are offered or offering different
terms to different types of customers based on observable characteristics.86 Markets for targeted
customers need not have precise metes and bounds. In particular, defining a relevant market for targeted
customers sometimes requires a line-drawing exercise on observable characteristics. There can be many
places to draw that line and properly define a relevant market. Second, the targeted customers must not
be likely to defeat a targeted worsening of terms by arbitrage (e.g., by purchasing indirectly from or
through other customers). Arbitrage may be difficult if it would void warranties or make service more
difficult or costly for customers, and it is inherently impossible for many services. Arbitrage on a modest
scale may be possible but sufficiently costly or limited, for example due to transaction costs or search
costs, that it would not deter or defeat a discriminatory pricing strategy.
If prices are negotiated or otherwise set individually, for example through a procurement auction,
there may be relevant markets that are as narrow as an individual customer. Nonetheless, for analytic
convenience, the Agencies may define cluster markets for groups of targeted customers for whom the
85 The recapture rate is sometimes referred to as the aggregate diversion ratio, defined in Section 4.2.B.
86 In some cases, firms offer one or more versions of products or services defined by their characteristics (where brand might
be a characteristic). When customers can select among these products and terms do not vary by customer, the Agencies will
typically define markets based on products rather than the targeted customers. In such cases, relevant antitrust markets may
include only some of the differentiated products, for example products with only “basic” features, or products with “premium
features.” The tools described in Section 4.2 can be used to assess competition among differentiated products.

45
conditions of competition are reasonably similar. (See Section 4.3.D.4 for further discussion of cluster
markets.)
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.

46
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.

47
aggregate them into a cluster market for acute care services if the conditions of competition are
reasonably similar across the services in the cluster.
The Agencies need not separately analyze market definition for each product included in the
cluster market, and market shares will typically be calculated for the cluster market as a whole.
Analogously, the Agencies sometimes define a market as a cluster of targeted customers (see
Section 4.3.D.1) or a cluster of customers located in a region (see Section 4.3.D.2.b).
4.3.D.5. 	Bundled Product Markets
Firms may sell a combination of products as a bundle or a “package deal,” rather than offering
products “a la carte,” that is, separately as standalone products. Different bundles offered by the same or
different firms might package together different combinations of component products and therefore be
differentiated according to the composition of the bundle. If the components of a bundled product are
also available separately, the bundle may be offered at a price that represents a discount relative to the
sum of the a la carte product prices.
The Agencies take a flexible approach based on the specific circumstances to determine whether
a candidate market that includes one or more bundled products, standalone products, or both is a
relevant antitrust market. In some cases, a relevant market may consist of only bundled products. A
market composed of only bundled products might be a relevant antitrust market even if there is
significant competition from the unbundled products. In other cases, a relevant market may include both
bundled products and some unbundled component products.
Even in cases where firms commonly sell combinations of products or services as a bundle or a
“package deal,” relevant antitrust markets do not necessarily include product bundles. In some cases, a
relevant market may be analyzed as a cluster market, as discussed in Section 4.3.D.4.
4.3.D.6. 	One-Stop Shop Markets
In some settings, the Agencies may consider a candidate market that includes one or more “one-
stop shops,” where customers can select a combination of products to purchase from a single seller,
either in a single purchase instance or in a sequence of purchases. Products are commonly sold at a one-
stop shop when customers value the convenience, which might arise because of transaction costs or
search costs, savings of time, transportation costs, or familiarity with the store or web site.
A multi-product retailer such as a grocery store or online retailer is an example of a one-stop
shop. Customers can select a particular basket of groceries from a range of available goods and different
customers may select different baskets. Some customers may make multiple stops at specialty shops
(e.g., butcher, baker, greengrocer), or they may do the bulk of their shopping at a one-stop shop (the
grocery store) but also shop at specialty shops for particular product categories.
There are several ways in which markets may be defined in one-stop shop settings, depending on
market realities, and the Agencies may further define more than one relevant antitrust market for a
particular merger. For example, a relevant market may consist of only one-stop shops, even if there is
significant competition from specialty shops; or it may include both one-stop shops and specialty shops.
When a product category is sold by both one-stop shops and specialty suppliers (such as a type of
produce sold in grocery stores and produce stands), the Agencies may define relevant antitrust markets
for the product category sold by a particular type of supplier, or it may include multiple types of
suppliers.

48
4.3.D.7. 	Market Definition When There is Harm to Innovation
When considering harm to competition in innovation, market definition may follow the same
approaches that are used to analyze other dimensions of competition. In the case where a merger may
substantially lessen competition by decreasing incentives to innovate, the Agencies may define relevant
antitrust markets around the products that would result from that innovation if successful, even if those
products do not yet exist.91 In some cases, the Agencies may analyze different relevant markets when
considering innovation than when considering other dimensions of competition.
4.3.D.8. 	Market Definition for Input Markets and Labor Markets
The same market definition tools and principles discussed above can be used for input markets
and labor markets, where labor is a particular type of input. In input markets, firms compete with each
other to attract suppliers, including workers. Therefore, input suppliers are analogous to customers in the
discussions above about market definition. In defining relevant markets, the Agencies focus on the
alternatives available to input suppliers. An antitrust input market consists of a group of products and a
geographic area defined by the location of the buyers or input suppliers. Just as buyers of a product may
consider products to be differentiated according to the brand or the identity of the seller, suppliers of a
product or service may consider different buyers to be differentiated. For example, if the suppliers are
contractors, they may have distinct preferences about who they provide services to, due to different
working conditions, location, reliability of buyers in terms of paying invoices on time, or the propensity
of the buyer to make unexpected changes to specifications.
The HMT considers whether a hypothetical monopsonist likely would undertake a SSNIPT, such
as a reduction in price paid for inputs, or imposing less favorable terms on suppliers. (See Section 4.2.C
for more discussion about competition in settings where terms are set through auctions and negotiations,
as is common for input markets.)
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”).

49
As discussed above, the Agencies may use evidence about market shares and market
concentration as part of their analysis. These structural measures can provide insight into the market
power of firms as well as into the extent to which they compete. Although any market that is properly
identified using the methods in Section 4.3 is valid, the extent to which structural measures calculated in
that market are probative in any given context depends on a number of considerations. The following
market considerations affect the extent to which structural measures are probative in any given
context.92
First, structural measures may be probative if the market used to estimate them includes the
products that are the focus of the competitive concern that the structural inquiry intends to address. For
example, the concentration measures discussed in Guideline 1 will be most probative about whether the
merger eliminates substantial competition between the merging parties when calculated on a market that
includes at least one competing product from each merging firm.
Second, the market used to estimate shares should be broad enough that it contains sufficient
additional products so that a loss of competition among all the suppliers of the products in the market
would lead to significantly worse terms for at least some customers of at least one product. Markets
identified using the various tools in Section 4.3 can satisfy this condition—for example, all markets that
satisfy the HMT do so.
Third, the competitive significance of the parties may be understated by their share when
calculated on a market that is broader than needed to satisfy the considerations above, particularly when
the market includes products that are more distant substitutes, either in the product or geographic
dimension, for those produced by the parties.
4.4.A. Market Participants
All firms that currently supply products (or consume products, when buyers merge) in a relevant
market are considered participants in that market. Vertically integrated firms are also included to the
extent that their inclusion accurately reflects their competitive significance. Firms not currently
supplying products in the relevant market, but that have committed to entering the market in the near
future, are also considered market participants.
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).

50
costs are important; or for services or digital goods, other factors may be important, such as language or
regulation.
In markets for relatively homogeneous goods where a supplier’s ability to compete depends
predominantly on its costs and its capacity, and not on other factors such as experience or reputation in
the relevant market, a supplier with efficient idle capacity, or readily available “swing” capacity
currently used in adjacent markets that can easily and profitably be shifted to serve the relevant market,
may be a rapid entrant. However, idle capacity may be inefficient, and capacity used in adjacent markets
may not be available, so a firm’s possession of idle or swing capacity alone does not make that firm a
rapid entrant.
4.4.B. Market Shares
The Agencies normally calculate product market shares for all firms that currently supply
products (or consume products, when buyers merge) in a relevant market, subject to the availability of
data. The Agencies measure each firm’s market share using metrics that are informative about the
market realities of competition in the particular market and firms’ future competitive significance. When
interpreting shares based on historical data, the Agencies may consider whether significant recent or
reasonably foreseeable changes to market conditions suggest that a firm’s shares overstate or understate
its future competitive significance.
How market shares are calculated may further depend on the characteristics of a particular
market, and on the availability of data. Moreover, multiple metrics may be informative in any particular
case. For example:
 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).
1

II. 	Statutory and regulatory background
In 1984, Congress passed the Hatch-Waxman Act5 to encourage generic drug
competition, establishing an abbreviated regulatory pathway for speedy approval of generic
equivalent drugs through the filing of an abbreviated new drug application (“ANDA”).6
Alternately, a company seeking to market a modified (“follow-on”) version of an existing brand
drug—such as with a “new indication or new dosage form”—can file an application pursuant to
Section 505(b)(2).7
As part of the Hatch-Waxman framework, brand drug manufacturers are required to
submit information to the FDA about certain types of patents covering the products described in
their new drug application (“NDA”). “The purpose of listing a patent in the Orange Book is to
put potential generic manufacturers on notice that the brand considers the patent to cover its
drug.”8 The Orange Book patent list is the statutory mechanism for identifying and potentially
resolving certain patent disputes while 505(b)(2) applications9 and ANDAs are still under review
by the FDA.
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:
(I) claims the drug for which the applicant submitted the application and is a drug
substance (active ingredient) patent or a drug product (formulation or
composition) patent; or
(II) claims a method of using such drug for which approval is sought or has been
granted in the application.11
“Patent information that is not the type of patent information required by subsection
(b)(1)(A)(viii) shall not be submitted. . . .”12
A drug company that seeks to market a generic or follow-on version of a brand drug for
which there are patents listed in the Orange Book must provide a “certification” with respect to
each listed patent “which claims the listed drug . . . or which claims a use for such listed drug for
5 Pub. L. No. 98-417, 98 Stat. 1585 (1984). See also H.R. REP. N O. 98-857, at 14–15 (1984), reprinted in 1984
U.S.C.C.A.N. 2647, 2647–48.
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).
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. T RADE COMM ’ N., G ENERIC DRUG E NTRY PRIOR TO PATENT E XPIRATION: A N FTC STUDY 39-52 (2022)
www.ftc.gov/sites/default/files/documents/reports/generic-drug-entry-prior-patent-expiration-ftc-
study/genericdrugstudy_0.pdf.
3

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.
Jan. 8, 2002), https://www.ftc.gov/sites/default/files/documents/amicus_briefs/re-buspirone-antitrust-
litigation/buspirone.pdf; Brief for Fed. Trade Comm’n as Amicus Curiae, American Bioscience, Inc. v. Bristol-
Myers Squibb Co., No. 00-cv-08577 (C.D. Cal. September 7, 2000),
https://www.ftc.gov/sites/default/files/documents/amicus_briefs/american-bioscience-v.bristol-
myers/amicusbrief.pdf.
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.
4

IV. 	The FTC will enforce the law against those companies and individuals who continue
to improperly list patents in the Orange Book
The FTC intends to use its full legal authority to protect patients and payors, including
Medicare and Medicaid, from business practices that tend to negatively affect competitive
conditions. This includes taking actions against companies and individuals that improperly list
patents in the Orange Book that do not meet the statutory listing criteria.
Listing patents in the Orange Book that do not meet the statutory listing criteria may
constitute an unfair method of competition in violation of Section 5 of the FTC Act.25 First, the
Commission views the improper listing of patents in the Orange Book as a method of
competition. It is undertaken by a brand drug manufacturer and is not an inherent market
condition.26 Second, improperly listing patents in the Orange Book can be unfair because it is not
competition on the merits of drug quality or price, and it tends to negatively affect competitive
conditions by impeding opportunities for generic rivals to compete, thus limiting consumer
choice.27 Further, recognizing that improperly listing patents in the Orange Book can be an unfair
method of competition is consistent with the FTC’s historical use of Section 5, which has
reached “conduct resulting in direct evidence of harm, or likely harm to competition, that does
not rely upon market definition.”28 Accordingly, the FTC intends to scrutinize whether brand
drug companies and responsible individuals are improperly listing patents in violation of Section
5.
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).
5

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.
6

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,
F ED . T RADE C OMM ’ 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, F ED . T RADE C OMM ’ N, https://reportfraud.ftc.gov (last visited June 6, 2024); Lesley Fair, Franchise
Fundamentals: Reducing the risks – and reporting if things go awry, F ED . T RADE C OMM ’ 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).
1

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.
II. 	Responses to Request for Information
For several years, the Commission has been concerned that current and former franchisees are
reluctant to file reports or speak with Commission staff about their experiences with particular
franchises. Franchisee advocates have stated that franchisees fear retribution for speaking out
against the franchisor.8 Franchisees may even be worried about speaking with regulators
anonymously.9
In 2023, the Commission issued a Request for Information (“RFI”) related to franchise
agreements and franchisor business practices in order to explore the ways in which franchisors
may exert control over franchisees and their workers, including the effect certain contractual
provisions have on franchisees’ ability to file reports with regulators.10 The RFI sought public
comment on several topics, including whether non-disparagement, goodwill, and similar clauses
inhibit franchisees from filing reports with regulators or from providing information to
prospective franchisees or third parties about their experience with a franchise system.11
The Commission posted approximately 2,200 public comments in response to the RFI.12 Among
the commenters who addressed the question of whether such clauses impact franchisees’ ability
to speak with regulators, some expressed concerns that such clauses are likely to impede
franchisees from speaking with the government.13 Some of those commenters filed their
7 See infra n.13 (comments filed in response to the Request for Information); F ED . T RADE C OMM ’ N , C ONSUMER
S ENTINEL N ETWORK B OOK 2023, https://www.ftc.gov/system/files/ftc_gov/pdf/CSN-Annual-Data-Book-2023.pdf.
Of the 110,504 reports related to business and job opportunities, 3,232 pertained to franchises.
8 See e.g, Federal Trade Commission: Actions Needed to Improve Education Efforts and Awareness of Complaint
Process for Franchise Owners, G OVERNMENT A CCOUNTABILITY O FFICE (Apr. 5, 2023),
https://www.gao.gov/assets/gao-23-105338.pdf.
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
2

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”).
3

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.
4

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).
5

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
6

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.
Nos. 1, 14 (requiring that employee agreements include language protecting the right to communicate with the
EEOC and comparable regulatory agencies).
7

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&registrantEmail=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, C AL . D EP ’ T OF F IN . P ROT . & I NNOVATION ,
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).
1

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.
2

1
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.

2
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.
1. Concentrated control of key inputs. Specialized chips, substantial compute, data at scale, and
specialist technical expertise are critical ingredients to develop foundation models. This could
potentially put a small number of companies in a position to exploit existing or emerging
bottlenecks across the AI stack and to have outsized influence over the future development of
these tools. This could limit the scope of disruptive innovation, or allow companies to shape it
to their own advantage, at the expense of fair competition that benefits the public and our
economies.
2. Entrenching or extending market power in AI-related markets. Foundation models are
arriving at a time when large incumbent digital firms already enjoy strong accumulated
advantages. For example, platforms may have substantial market power at multiple levels
related to the AI stack. This can give these firms the ability to protect against AI-driven
disruption, or harness it to their particular advantage, including through control of the
channels of distribution of AI or AI-enabled services to people and businesses. This may allow
such firms to extend or entrench the positions that they were able to establish through the
last major technological shift to the detriment of future competition.
3. Arrangements involving key players could amplify risks. Partnerships, financial investments,
and other connections between firms related to the development of generative AI have been
widespread to date. In some cases, these arrangements may not harm competition but in
other cases these partnerships and investments could be used by major firms to undermine
or coopt competitive threats and steer market outcomes in their favour at the expense of the
public.
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:
1. Fair dealing. When firms with market power engage in exclusionary tactics, they can deepen
their moats, discourage investment and innovation by third parties, and undermine
competition. The AI ecosystem will be better off the more that firms engage in fair dealing.
2. Interoperability. Competition and innovation around AI will likely be greater the more that AI
products and services and their inputs are able to interoperate with each other. Any claims
that interoperability requires sacrifices to privacy and security will be closely scrutinized.
3. Choice. Businesses and consumers in the AI ecosystem will benefit if they have choices among
diverse products and business models resulting from a competitive process. This means
scrutinizing ways that companies may employ mechanisms of lock-in that could prevent
companies or individuals from being able to meaningfully seek or choose other options. It also
means scrutinizing investments and partnerships between incumbents and newcomers, to
ensure that these agreements are not sidestepping merger enforcement or handing
incumbents undue influence or control in ways that undermine competition. For content
creators, choice among buyers could limit the exercise of monopsony power that can harm
the free flow of information in the marketplace of ideas.

3
Other competition risks associated with AI
We are mindful of other risks that can arise where AI is deployed in markets. These include, for
instance, the risk that algorithms can allow competitors to share competitively sensitive information,
fix prices, or collude on other terms or business strategies in violation of our competition laws; or the
risk that algorithms may enable firms to undermine competition through unfair price discrimination
or exclusion. We will be vigilant of these and other risks that might emerge as AI technology develops
further.
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.

1
Federal Trade Commission Enforcement Policy Statement on Exemption of Protected
Labor Activity by Workers from Antitrust Liability0F
1
I. 	Introduction
Congress enacted the Clayton and Norris-LaGuardia Acts in significant part to protect the
ability of workers to organize and to collectively bargain over wages and labor conditions.
Several provisions of these acts prevent courts from enjoining qualifying labor activity and
shield such activity from antitrust liability. Collectively, these provisions are known as the labor
exemption to the antitrust laws, and they shield from antitrust liability the conduct of bona fide
labor organizations engaged in labor disputes—i.e., organizing and bargaining over the terms and
conditions of employment.
It has long been clear that employees who are directly hired by an employer are protected
from antitrust liability by the labor exemption when they are organizing or bargaining with that
employer over their compensation and/or working conditions. More recently, however, the rise of
independent contracting, and of “gig work” in particular, has presented questions about the labor
exemption’s application to the organizing and bargaining of workers who are classified—or
potentially misclassified—by a firm as independent contractors.1F
2 Particularly as gig workers
contemplate efforts to organize or bargain collectively with platforms for the first time, they face
a patchwork of cases regarding the exemption’s application.
In this enforcement policy statement, the Commission clarifies its view that the labor
exemption’s application does not turn on whether a worker is formally classified by a firm as an
independent contractor under the Fair Labor Standards Act (“FLSA”), the National Labor
Relations Act (“NLRA”), tax law, state common law, or any other law. Rather, workers’
organizing and collective bargaining activity may be protected from antitrust liability when what
is at issue is the compensation for their labor or their working conditions. Workers engaged in
such protected activity are not categorically beyond the scope of the labor exemption from
antitrust liability simply because they do not have a formal employer-employee relationship with
the firm with whom they seek to negotiate over the compensation for their labor or their working
conditions.
II. 	Background
A. 	Enactment of the Labor Exemption from the Antitrust Laws
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 See, e.g., Rebecca K. Slaughter, Comm’r, Fed. Trade Comm., Comment Letter on Dep’t of Labor Notice of
Proposed Rulemaking re: Independent Contractor Status under the Fair Labor Standards Act (Oct. 26, 2020),
https://www.ftc.gov/system/files/documents/public_statements/1582178/comment_of_commissioner_rebecca_kelly
_slaughter_on_the_department_of_labor_proposed_rule_on_0.pdf.

2
The labor exemption from the antitrust laws stems from several enactments in which
Congress sought to broadly protect workers’ ability to organize and to negotiate for better pay
and working conditions. After Congress passed the Sherman Act in 1890, employers used the Act
to challenge and disrupt the activities of labor unions. Indeed, twelve of the first thirteen
successful antitrust lawsuits under the Sherman Act were brought against labor unions, not
corporations.2F
3 In what was popularly known as the “Danbury Hatters’ Case,” the Supreme Court
in 1908 enjoined employees of a Danbury, Connecticut hat manufacturer from unionizing,
unanimously holding that organizations of laborers were not exempt from the Sherman Act.3F
4
In response to such uses of the Sherman Act against organizing workers, Congress
enacted Sections 6 and 20 of the Clayton Act in 1914,4F
5 creating what is known as the labor
exemption to the antitrust laws. Section 6 of the Clayton Act provides that the “labor of a human
being is not a commodity or article of commerce” and that the antitrust laws shall not be
“construed to forbid the existence and operation of labor . . . organizations” or “to forbid or
restrain individual members of such organizations from lawfully carrying out the legitimate
objects” of those organizations.5F
6
Section 20 of the Clayton Act prohibits “restraining order[s] or injunction[s] . . . in any
case between an employer and employees, or between employers and employees, or between
employees, or between persons employed and persons seeking employment, involving, or
growing out of, a dispute concerning terms or conditions of employment,” unless necessary to
protect certain property interests.6F
7 It further prohibits “restraining order[s] or injunctions” that
“prohibit any person or persons” from engaging in certain protected activities, including “ceasing
to perform any work or labor,” peacefully persuading others to “abstain from working,” “ceasing
to patronize” parties to a dispute, peacefully persuading others not to patronize parties to a
dispute, peacefully and lawfully assembling, providing strike benefits, and “doing any act or
thing which might lawfully be done in the absence of such dispute by any party thereto.”7F
8
Senator Ashurst referred to the labor provisions of the bill as the “laborer’s bill of rights.”8F
9
Despite the broad language of the Clayton Act, courts construed Sections 6 and 20
narrowly and continued to issue injunctions and impose antitrust liability on labor unions’
3 Edward Berman, LABOR AND THE S HERMAN A CT 3 (1930). See also Kate Andrias, Beyond the Labor Exemption:
Labor’s Antimonopoly Vision and the Fight for Greater Democracy 6 (2023) (“By one count, at least 4,300
injunctions were issued against union activity between 1880 and 1930.”).
4 Loewe v. Lawlor, 208 U.S. 274 (1908).
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 A NTITRUST 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).

3
organizing and collective bargaining activity.9F
10 In response, Congress passed the Norris-
LaGuardia Act in 1932, which expanded the labor exemption.10F
11 As the Supreme Court has
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.”11F
12
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.”12F
13 Specifically, Section 2 of the Norris-
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[.]13F
14
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.”14F
15 It further provides that “nor
10 See, e.g., 3 Julian O. von Kalinowinski, A NTITRUST LAWS AND TRADE R EGULATION § 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.

4
shall any such restraining order or temporary or permanent injunction be issued contrary to the
public policy” quoted above.15F
16 Section 113(c) of the Act then defines “labor dispute” to include:
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.16F
17
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.”17F
18
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.18F
19
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.19F
20 In
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.20F
21 Additionally, many gig workers have
lower incomes and may earn less than the minimum wage.21F
22 More than half of American gig
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

5
workers report that the money they earn through the gig economy is essential or important for
meeting their basic needs.22F
23
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.
III. 	Analysis
The protection of all workers from antitrust liability when they are engaged in protected
labor activities is firmly grounded in the statutory text of the Clayton and Norris-LaGuardia Acts,
is consistent with existing case law, and constitutes sound enforcement policy reflective of the
original meaning of the labor exemption.
A. Workers Engaged in Protected Labor Activity Are Exempt from Antitrust
Liability Even If Classified (or Misclassified) as Independent Contractors
The Supreme Court has explained that the labor exemption’s definition of a protected
“‘labor dispute’ must not be narrowly construed because the statutory definition itself is
extremely broad and because Congress deliberately included a broad definition to overrule
judicial decisions that had unduly restricted the Clayton Act’s labor exemption from the antitrust
laws.”23F
24 Indeed, several aspects of the plain text of the labor exemption make clear that the
Faverio, and Risa Gelles-Watnick, Pew Research Center, The State of Gig Work in 2021, at 4–5, 7, 23 (Dec. 8,
2021); Gallup, Gallup’s Perspective on the Gig Economy and Alternative Work Arrangements, at 8 (2018).
23 See Anderson et al., supra n. 22, 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”).
24 Jacksonville Bulk Terminals, Inc. v. Int’l Longshoremen’s Ass’n, 457 U.S. 702, 712 (1982); see also Bowater SS
Co. v. Patterson, 303 F.2d 369, 383 (2nd Cir. 1962) (cautioning against allowing formal legal distinctions imported
from other areas of law to undermine the public policy set forth in Norris-LaGuardia, even though those legal
distinctions might be accorded deference in other legal settings: “the policy behind the Norris-LaGuardia Act was a
strong one; we cannot think Congress would have meant this to be defeated by” technical legal distinctions between
corporate entities, “however much these might properly be respected for other purposes”).

6
exemption’s protections are not limited to workers who are formally classified as the direct
employee of an employer.
First, the original Clayton Act labor exemption provisions protect not only “employees,”
but also “any person or persons.”24F
25 And the subsequently enacted Norris-LaGuardia labor
exemption provisions extend to the “individual unorganized worker,”25F
26 and to “persons engaged
in the same industry, trade, craft, or occupation.”26F
27 As the Supreme Court has explained in
another context, “‘workers’ [is] a term that everyone agrees easily embraces independent
contractors.”27F
28
In any event, even were the labor exemption limited to “employees,” as used in statutes
enacted in the early 20 th century, that term often had a broader meaning than that used in the
common law to differentiate employees from independent contractors.28F
29 For that reason, when
interpreting the term “employee” in the original versions of the NLRA and the FLSA, the
Supreme Court construed the term to be broader than the workers who would have constituted
employees under the common law.29F
30 For example, interpreting the term “employee” in the
original version of the NLRA, the Court rejected the argument that newsboys classified as
independent contractors under common law tests were unprotected.30F
31 Rather, it held that where
“the economic facts of the relation make it more nearly one of employment than of independent
business enterprise . . . those characteristics may outweigh technical legal classification for
purposes unrelated to [the NLRA’s] objectives and bring the relation within its protections.”31F
32
Congress later overruled the Court’s expansive interpretation of “employee” in the NLRA
(but not the FLSA) by expressly exempting “independent contractors” from the definition of
“employee” in the NLRA in 1947.32F
33 Congress similarly amended the Social Security Act to
expressly exclude independent contractors.33F
34 However, never in the intervening decades did it
adopt such a limitation on the labor exemption to the antitrust laws.
Second, the definition of “labor dispute” adopted in the Norris-LaGuardia Act expressly
provides that the exemption’s application does not turn on formalistic “employer and employee”
relationships between the disputants. Instead, disputes are covered “regardless of whether or not
the disputants stand in the proximate relation of employer and employee.”34F
35 The definition of
25 29 U.S.C. § 52 (1914).
26 Id. § 102 (declaring public policy); see also id. § 101 (precluding orders “contrary to the public policy declared”).
27 Id. § 113(a).
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).

7
“labor dispute” thus “establishe[s] that the allowable area of union activity was not to be
restricted to an immediate employer-employee relation.”35F
36
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.36F
37 And in Milk Wagon Drivers’ Union v. Lake Valley Farm Products, Inc., the Court held
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.”37F
38
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 20 th 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.38F
39
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.”39F
40 Rather, examining dictionaries spanning from 1891 and 1933, the Court
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).”40F
41 Accordingly, the Court held that the
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.”41F
42
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.

8
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.42F
43 In Confederación
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.43F
44 Examining the text and
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.’”44F
45 The First Circuit further noted Supreme Court cases
rejecting “interpretation of the exemption limited to employees alone.”45F
46 The court concluded
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.”46F
47
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.”47F
48 Courts have similarly rejected
application of the labor exemption to disputes regarding the sale of other commodities,48F
49 or
regarding the terms of sale of a finished product.49F
50
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.”).

9
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,”50F
51 to “a businessman organization” seeking a better “return on capital
investment,”51F
52 and to “an association of individual practitioners each exercising his calling as an
independent unit.”52F
53 These cases are all consistent with the First Circuit’s holding that the core
question is “whether what is at issue is compensation for [a worker’s] labor” or working
conditions.53F
54 As such, owners of independent businesses that sell finished products or are
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.54F
55 In a footnote, the Court stated, “[o]f course, a party
seeking refuge in the statutory exemption must be a bona fide labor organization, and not an
independent contractor or entrepreneur.”55F
56 However, this statement was mere dicta because, as
the Court explained, there was “no dispute” that the Equity union seeking the labor exemption’s
protections was a bona fide labor group.56F
57 In any event, the Commission does not read this dicta
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.

10
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.57F
58 The Fourth Circuit reversed the district court’s holding that
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.58F
59 The Fourth Circuit found the
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.59F
60
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.60F
61 Instead, the court went on to reject application of the
exemption to the horseshoers’ conduct because it found that there was no employer-employee
relationship involved in the dispute—whether extant or prospective.61F
62 The Fourth Circuit
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.”62F
63 Rather, “[t]he only interests [they] sought to . . . advance[]” through their boycott and
price-fixing were “of those independent horseshoers who render services to trainers and owners
for a certain fee, unilaterally fixed, per horse.”63F
64
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.64F
65 Moreover, although Taylor applies the NLRA test for independent
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 . . . .”).

11
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.65F
66
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.’”66F
67 A dispute concerning “the hours,
wages, job security, and working conditions” of workers who provide labor services qualifies as
“concerning terms or conditions of employment.”67F
68 In contrast, disputes concerning the price of
commodities or other finished products are not protected.68F
69 Accordingly, with respect to
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.69F
70
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.70F
71
Formal recognition as a union is not necessary for a labor group to be considered a bona fide
labor organization.71F
72 Moreover, the protected conduct of a labor organization such as a union
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).

12
conditions), the union’s activity can still be protected by the labor exemption.72F
73 The test for
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.”73F
74 In
contrast, “antitrust immunity is forfeited when a union combines with one or more employers in
an effort to restraint trade.”74F
75
IV. 	Conclusion
The Commission believes that workers who provide labor services are not subject to
antitrust liability when engaging in protected collective action—such as seeking better
compensation and job conditions—even if the firm whose labor practices the workers seek to
improve classifies (or misclassifies) them as independent contractors. This view is not only the
best reading of the labor exemption’s text and history, but it is also sound policy. As the Norris-
LaGuardia Act recognizes, workers must be free to organize and to bargain collectively as a
counterbalance to the power of “owners of property . . . organize[d] in the corporate and other
forms of ownership association.”75F
76 That is no less true simply because a firm seeks to classify
such workers as independent contractors; for example, many gig workers face significant power
imbalances in securing adequate compensation and safe, secure working conditions.76F
77
Reading the labor exemption as categorically excluding all independent contractors
would give employers both the incentive and the opportunity to exploit such asymmetries. Under
such a reading, firms could absolve themselves of responsibilities under employment and labor
laws by classifying their workforce as independent contractors. Firms could also simultaneously
wield antitrust law to prevent those same workers from organizing to attain the rights afforded to
employees under such laws. Additionally, businesses would have an opportunity and incentive to
classify (or misclassify) their workers as independent contractors to suppress wages and to gain
an unfair advantage against competitors who provide better compensation and job conditions to
workers.77F
78 Just as Congress did nearly a century ago, the Commission emphasizes that the
antitrust laws should not be used to disrupt collective action by workers who provide labor
services to improve their terms and conditions of employment. Accordingly, the Commission
will not challenge collective action by independent contractors who provide labor services and
are seeking better compensation and job conditions because such activities are exempted under
the Clayton Act and the Norris-LaGuardia Act.
73 See H. A. Artists & Assocs. v. Actors' Equity Ass’n, 451 U.S. 704, 707 (1981) (holding actors’ union did not forfeit
immunity by combining with a non-labor group when independent contractor theatrical agents agreed to become
franchised by the union; franchise restrictions protected the wage structure the union negotiated with theatre
producers); Am. Fed’n of Musicians, 391 U.S. at 105 (holding that “involvement of the orchestra leaders” who were
“employers and independent contractors” did not “create[] a combination or conspiracy with a ‘non-labor’ group
which violates the Sherman Act”).
74 Am. Fed'n of Musicians, 391 U.S. at 105-106.
75 H. A. Artists, 451 U.S. at 716.
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 Y ALE L. & P OL’ 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

1
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.

2
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.
As discussed further in Sections 1–5, the Agencies may investigate certain types of agreements
or business practices as potential violations of the antitrust laws. Examples of such agreements include:
1. 	Agreements between companies not to recruit, solicit, or hire workers, or to fix wages or
terms of employment, may violate the antitrust laws and may expose companies and
executives to criminal liability. Where appropriate, DOJ exercises its authority to bring felony
criminal charges against companies and individuals who participate in these conspiracies.
2. 	Agreements in the franchise context not to poach, hire, or solicit employees of the
franchisor or franchisees may violate the antitrust laws. No-poach and similar agreements are
subject to antitrust scrutiny even if they are between a franchisor and a franchisee or, for
example, among the franchisees of the same franchisor.
3. 	Exchanging competitively sensitive information with companies that compete for workers
may violate the antitrust laws. This includes exchanges of information about compensation or
other terms or conditions of employment, and other exchanges of information that harm
competition for workers. Exchanging such information with competitors may be illegal even if
companies use a third party or intermediary—including a third party using an algorithm—to
share such information.
4. 	Employment agreements that restrict workers’ freedom to leave their job may violate the
antitrust laws. These include non-compete provisions that prevent workers from leaving their
job to join a competing or potentially competing employer; that prevent workers from leaving
their job to start a new business; or that require workers to pay a penalty upon leaving their job.
5. 	Other restrictive, exclusionary, or predatory employment conditions that harm
competition may violate the antitrust laws. These include overly broad non-disclosure
agreements, training repayment agreement provisions, non-solicitation agreements, and exit fee
or liquidated damages provisions.
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

3
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).

4
1. 	Some types of agreements, including wage-fixing and no-poach
agreements, may violate the antitrust laws and can lead to criminal
charges
Businesses that compete with each other for workers may be committing an antitrust crime if
they enter into an agreement not to recruit, solicit, or hire workers or to fix wages or terms of
employment. Even if criminal charges are not pursued, these agreements may also be subject to civil
liability.9 Such agreements can violate the antitrust laws whether they are informal or formal, written or
unwritten, or spoken or unspoken.10
Examples include:
• 	agreements between businesses, or between individuals at different businesses, about workers’
salaries or other terms of compensation, such as bonuses, benefits, or other terms of
employment, either at a specific level or within a range (sometimes called “wage-fixing
agreements”); and
• 	agreements between businesses, or between individuals at different businesses, not to hire,
solicit, and/or otherwise compete for current, former, or potential workers (sometimes called
“no-poach” agreements, which may also be referred to as “no-hire” or “no-solicit”11 or “market
allocation” agreements).
The Agencies focus on the substance of a wage-fixing or no-poach agreement regardless of its
precise form. If companies agree to align, stabilize, or otherwise coordinate the wages they set,
including by agreeing to a range, ceiling, or benchmark for calculating wages, it does not matter if they
do not agree on a specific wage.12 Similarly, if a company agrees to restrict its ability to hire another
9 See United States v. Lucasfilm Ltd., No. 10-02220 RBW (D.D.C. June 3, 2011); United States v. Adobe Sys., Inc., No. 1:10-
CV-01629-RBW (D.D.C. Mar. 17, 2011); United States v. eBay, Inc., No. 12-CV-05869-EJD-PSG (N.D. Cal. 2014); In re:
Guardian Service Industries, Inc., No. 241 0082 (F.T.C. Dec. 4, 2024).
10 See United States v. Jindal, No. 4:20-CR-00358, 2021 WL 5578687, at *4–5 (E.D. Tex. Nov. 29, 2021); United States v.
DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759, at *9 (D. Colo. Jan. 28, 2022); United States v. Manahe, No. 2:22-
CR-00013-JAW, 2022 WL 3161781, at *6 (D. Me. Aug. 8, 2022).
11 In this context, the term “no-poach agreement” refers to the types of market-allocation agreements that affect employees’
attempts to get other jobs, such as an agreement between two competitors not to try to hire or solicit each other’s employees,
or an agreement to request permission from the other company before trying to hire an employee. These no-poach agreements
are different than, for example, agreements between an employer and its workers that prevent the workers from soliciting
clients or vendors at a future employer or for a future competing business. Non-solicitation agreements are discussed below.
12 See Arizona v. Maricopa Cnty. Med. Soc., 457 U.S. 332, 348 (1982) (holding, in a civil case, that an agreement among
doctors fixing maximum rates that the doctors could receive for their services was a per se violation of the antitrust laws);
Plymouth Dealers’ Ass’n of No. Cal. v. United States, 279 F.2d 128, 132 (9th Cir. 1960) (holding, in a civil case, that an
agreement to fix the starting point for prices is a per se violation of the antitrust laws); Plea Agreement, United States v.
Topkins, No. CR-15-201 (N.D. Cal. Apr. 30, 2015) (defendant pled guilty to price-fixing conspiracy implemented through
conspirators’ joint use of specific pricing algorithms), available at https://www.justice.gov/atr/case-document/file/628891/dl;
Press Release, U.S. Dep’t of Just., Former E-Commerce Executive Charged with Price Fixing in the Antitrust Division's First
Online Marketplace Prosecution (Apr. 6, 2015), https://www.justice.gov/opa/pr/former-e-commerce-executive-charged-
price-fixing-antitrust-divisions-first-online-marketplace.

5
company’s workers, it does not matter if the agreement does not completely prohibit hiring the other
company’s workers. For example, an agreement not to “cold call” workers is considered a no-solicit
agreement regardless of whether the firms are allowed to hire the workers who applied for a position
without first being solicited.13
When formed between competing or potentially competing employers, these types of
agreements—whether entered into directly or through an intermediary14—are illegal even if they did not
result in actual harm such as lower wages.15 Nor does it matter if the agreement does not include
specific pay rates. For example, an agreement to set a starting point for compensation may be a form of
wage fixing under the law.16
The DOJ may criminally investigate and, where appropriate, bring felony charges against the
participants in these agreements, including both individuals and companies.
The Criminal Antitrust Anti-Retaliation Act (CAARA) provides whistleblower protections for
employees, contractors, subcontractors, and agents who report antitrust crimes, including no-poach and
wage-fixing agreements.17
2. 	Franchise no-poach agreements may violate the antitrust laws
No-poach clauses in franchise agreements are also subject to antitrust scrutiny. Often, franchisors
compete with franchisees for workers.18 Franchisors sometimes enter into agreements with franchisees
in which the franchisor and franchisee agree not to compete for workers. Such an agreement can be per
13 In re High-Tech Emp. Antitrust Litig., 856 F. Supp. 2d 1103, 1122 (N.D. Cal. 2012) (in private civil damages case
following Department of Justice consent decree, holding that plaintiffs plausibly alleged that five no-cold-call agreements
were per se violations of the antitrust laws); In re Animation Workers Antitrust Litigation, 123 F. Supp. 3d 1175, 1213 (N.D.
Cal. 2015) (in private civil damages case following Department of Justice consent decree, holding that plaintiffs had
plausibly alleged that anti-solicitation agreements were per se violations of the antitrust laws); Final Judgment, United States
v. Ass’n of Fam. Prac. Residency Dirs., No. 95-0575-CV-W-2 (W.D. Mo. Aug. 15, 1996) (entering consent decree in a civil
case to resolve allegations that defendants established policies prohibiting the use of certain practices for recruiting medical
residents, which restrained price and other forms of competition), available at https://www.justice.gov/atr/case-
document/file/628591/dl.
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”).

6
se illegal under the antitrust laws.19 In other words, the agreement itself may be illegal regardless of
whether it actually harms workers.
Similarly, a franchisor may violate the antitrust laws by organizing or enforcing a no-poach
agreement among franchisees that compete for workers.20 Agreements among franchisees, either written
or unwritten, not to poach, hire, or solicit each other’s workers may violate other federal and state
laws.21
3. 	Sharing competitively sensitive information—including wage
information—with competitors may violate antitrust laws
Sharing competitively sensitive information with competitors about terms and conditions of
employment may violate the antitrust laws.22 Exchanging competitively sensitive compensation or other
employment information with a competitor may be unlawful when the information exchange has, or is
likely to have, an anticompetitive effect, whether or not that effect was intended.23 An information
exchange may be explicit or it may be implied from the conduct of parties who share competitively
sensitive information (for example, information about compensation, benefits, or the terms of an
employment contract). In addition, information exchanges may indicate the existence of a wage-fixing
conspiracy.
Providing competitively sensitive information through an algorithm or through a third party’s
tool or product may also be unlawful. For example, the DOJ obtained a court-ordered settlement with a
group of poultry processing companies and a data consulting company to resolve allegations that they
(i) directly exchanged competitively sensitive information about current and future wages and benefits
for plant workers; and (ii) did so through a third-party firm that facilitated the exchange of competitively
sensitive compensation information.24
Information exchanges facilitated by or through a third party (including through an algorithm or
other software) that are used to generate wage or other benefit recommendations can be unlawful even if
the exchange does not require businesses to strictly adhere to those recommendations.25 An agreement
19 See, e.g., Deslandes v. McDonald’s USA, LLC, 81 F.4th 699, 705 (7th Cir. 2023).
20 See United States v. Apple Inc., 791 F.3d 290, 325 (2d Cir. 2015).
21 See, e.g., Wash. Rev. Code Ann. § 49.62.060 (“No franchisor may restrict, restrain, or prohibit in any way a franchisee
from soliciting or hiring any worker of a franchisee of the same franchisor.”); Minn. Stat. Ann. § 181.99.
22 See Am. Column & Lumber Co. v. United States, 257 U.S. 377, 410–12 (1921).
23 See Final Judgment, United States v. Utah Soc. for Healthcare Hum. Res. Admin., Civ. A. No. 94-C-282G (D. Utah Sep.
12, 1994), available at https://www.justice.gov/atr/case-document/file/628496/dl (entering consent decree to resolve
allegations that a society of HR professionals conspired to exchange nonpublic prospective and current wage information
about registered nurses, which enabled hospitals to keep nurses’ wages artificially low).
24 Final Judgment, United States v. Cargill Meat Solutions Corp., No. 1:22-CV-01821 (D. Md. June 5, 2023), available at
https://www.justice.gov/d9/2023-11/418169.pdf; see also Jien v. Perdue Farms, Inc., No. 1:19-CV-2521-SAG, 2020 WL
5544183 (D. Md. Sept. 16, 2020).
25 See Duffy v. Yardi Sys., Inc., No. 2:23-CV-01391-RSL, 2024 WL 4980771, at *5 (W.D. Wash. Dec. 4, 2024).

7
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.
4. 	Non-compete clauses can violate antitrust and other laws
Non-compete clauses that restrict workers from switching jobs or starting a competing business
can violate the antitrust laws.26 By preventing workers from leaving jobs to pursue better employment
opportunities, non-competes decrease competition for workers. Non-competes may also harm
competition by preventing other businesses from obtaining enough workers to enter a market or prevent
potential competitors from forming, thereby blocking competitors from competing effectively with the
original employer.
The Agencies may investigate and take action against non-competes and other restraints on
worker mobility that limit competition. For example, in 2020, the DOJ entered into a deferred
prosecution agreement in which a medical oncology practice admitted to conspiring to allocate
chemotherapy and radiation treatments for cancer patients.27 To remediate the harm and increase
competition in the treatment of cancer patients going forward, the criminal resolution required the
defendant to waive and not enforce non-compete provisions in contracts with its current or former
employees who open or join an oncology practice in the region.
In 2021, the FTC pursed several enforcement actions charging the use of non-competes as unfair
methods of competition under Section 5 of the Federal Trade Commission Act. These actions resulted in
orders requiring the firms to eliminate non-competes for thousands of workers.28 The FTC has also
26 See, e.g., United States v. Am. Tobacco Co., 221 U.S. 106 (1911) (holding that several tobacco companies violated both
Section 1 and Section 2 of the Sherman Act because of the collective effect of six of the companies’ practices, one of which
was the “constantly recurring” use of non-compete clauses); Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057, 1082 (2d
Cir. 1977) (“[E]mployee agreements not to compete are proper subjects for scrutiny under section 1 of the Sherman Act.”);
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-
decision-and-order.pdf; Decision, In re: Prudential Security, Inc., No. C-4787 (F.T.C. Feb. 23, 2023), available at
https://www.ftc.gov/system/files/ftc_gov/pdf/c47872210026prudentialsecurityfinalconsent.pdf; Decision and Order, In re
Anchor Glass Container Corp., No. C-4793 (F.T.C May 18, 2023), available at
https://www.ftc.gov/system/files/ftc_gov/pdf/211_0182_c4793_anchor_glass_final_order_with_appendices.pdf.
27 Deferred Prosecution Agreement, United States v. Fla. Cancer Specialists & Rsch. Inst., LLC, No. 2:20-cr-00078-TPB-
MRM (M.D. Fla. Apr. 30, 2020), available at https://www.justice.gov/atr/case-document/file/1281681/dl; Press Release, U.S.
Dep’t of Just., Leading Cancer Treatment Center Admits to Antitrust Crime and Agrees to Pay $100 Million Criminal
Penalty (Apr. 30, 2020), https://www.justice.gov/opa/pr/leading-cancer-treatment-center-admits-antitrust-crime-and-agrees-
pay-100-million-criminal.
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-

8
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.
Non-competes may also violate other federal laws, such as the National Labor Relations Act33
and the Packers and Stockyards Act.34 Non-competes can also violate state laws, including laws banning
unfair methods of competition and unfair or deceptive practices, as well as statutes banning or restricting
some or all non-competes.35
decision-and-order.pdf; Decision, In re: Prudential Security, Inc., No. C-4787 (F.T.C. Feb. 23, 2023), available at
https://www.ftc.gov/system/files/ftc_gov/pdf/c47872210026prudentialsecurityfinalconsent.pdf; Decision and Order, In re
Anchor Glass Container Corp., No. C-4793 (F.T.C May 18, 2023), available at
https://www.ftc.gov/system/files/ftc_gov/pdf/211_0182_c4793_anchor_glass_final_order_with_appendices.pdf.
29 Decision and Order, In the Matter of Zimmer Holdings, Inc., No. C-4534 (F.T.C. Aug. 11, 2015), available at
https://www.ftc.gov/system/files/documents/cases/150820zimmerdo.pdf; Press Release, Fed. Trade Comm’n, FTC Approves
Final Order Requiring Divestitures of Hundreds of Retail Gas and Diesel Fuel Stations Owned by 7-Eleven, Inc. (Nov. 10,
2021), https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-
hundreds-retail-gas-diesel-fuel-stations-owned-7; Decision and Order at 12–14, In the Matter of Davita Inc. and Total Renal
Care, Inc., No. C-4752 (F.T.C. Jan. 10, 2022), available at
https://www.ftc.gov/system/files/documents/cases/211_0056_c4752_davita_utah_health_order.pdf; Press Release, Fed.
Trade Comm’n, FTC Approves Final Order Restoring Competitive Markets for Gasoline and Diesel in Michigan and Ohio
(Aug. 9, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-
competitive-markets-gasoline-diesel-michigan-ohio.
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.

9
5. 	Other restrictive, exclusionary, or predatory employment
conditions can also be unlawful
The Agencies may also investigate and take action against other restrictive agreements that
impede worker mobility or otherwise undermine competition.
The following examples illustrate how restrictive conditions could potentially violate the
antitrust laws or other federal or state laws.
• 	Non-disclosure agreements can violate the antitrust laws when they span such a large scope of
information that they function to prevent workers from seeking or accepting other work or
starting a business after they leave their job. For example, a non-disclosure agreement drafted so
broadly as to prohibit disclosure of any information that is “usable in” or “relates to” an industry
may be unlawful.36 Non-disclosure agreements can also violate federal law when they are
worded so broadly as to suggest that workers who report potential violations of law to state or
federal law enforcement or regulators, or who cooperate with a government investigation, could
face lawsuits and adverse employment consequences.37
• 	Training repayment agreement provisions are requirements that a person repay any training
costs if they leave their employer. Depending on the facts and circumstances, these provisions
can be anticompetitive, such as if they function to prevent a worker from working for another
firm or starting a business.38
• 	Non-solicitation agreements that prohibit a worker from soliciting former clients or customers
of the employer similarly can, depending on the facts and circumstances, be anticompetitive,
such as if they are so broad that they function to prevent a worker from seeking or accepting
another job or starting a business.
• 	Exit fee and liquidated damages provisions require workers to pay a financial penalty for
leaving their employer. Depending on the facts and circumstances, these provisions can be
anticompetitive,39 such as if they prevent workers from working for another firm or starting a
business.
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).

10
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.
Other federal agencies have their own authorities to address unfair methods of competition,
including practices that undermine labor market competition.41 Many of these agencies have enforced
against restraints on worker mobility.42 State law also sets limits on training repayment requirements
and NDA restrictions.43
6. 	The antitrust laws apply to agreements that businesses reach with
independent contractors
The antitrust laws prohibit anticompetitive conduct directed at workers, which includes both
employees and independent contractors. Many businesses hire workers as independent contractors rather
than as employees. Independent contractors typically are hired to perform discrete jobs, are not under
the direct supervision of the firm, and often use their own tools.44 With the growth of technology
platforms such as smartphone apps, some firms use independent contractors rather than employees to
match workers who provide labor with consumers seeking their services.
The antitrust laws also apply to these kinds of platform businesses, with respect to both their
employees and independent contractors seeking work through their platform. For example, an agreement
between two or more competing platforms to fix the compensation of independent contractors offering
their services via the platforms may constitute the type of per se violation of the antitrust laws that the
exposes the platforms to criminal liability.
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).

11
7. 	False earnings claims can violate the law
The Agencies may investigate and take action against businesses that make false or misleading
claims about potential earnings that workers (including both employees and independent contractors)
may realize. For example, the FTC has taken action against an online retailer,45 a ride-sharing
company,46 a customer service gig work platform,47 and a food delivery company48 for allegedly falsely
advertising that workers would earn substantially more in compensation and/or tips than they did in
reality. When workers are lured to these businesses by false earnings promises, honest businesses are
less able to fairly compete for those workers.
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.

12
8. 	Report violations
The Department of Justice’s Antitrust Division and the Federal Trade Commission encourage
anyone who notices any of the above activities or other suspicious behavior and believes that there has
been an antitrust violation to report it to either or both offices.
Contact the Antitrust Division’s Complaint
Center
Contact the FTC’s Bureau of Competition
Complaint Intake
E-mail: antitrust.complaints@usdoj.gov 	Online complaint portal:
https://www.ftc.gov/enforcement/report-
antitrust-violation
Phone: 202-307-2040; 888-647-3258
Mail: Complaint Center, U.S. Department of
Justice, Antitrust Division
950 Pennsylvania Avenue NW
Room 3322
Washington, DC 20530
Mail: Office of Policy and Coordination,
Bureau of Competition, Federal Trade
Commission
600 Pennsylvania Avenue NW
Washington, DC 20580
The Antitrust Division and the FTC encourage anyone seeking to submit a complaint to provide
the following types of information with your complaint:
• 	What are the names of companies, individuals, or organizations that are involved?
• 	How have these companies, individuals, or organizations potentially violated federal antitrust
laws?
• 	What examples can you give of the conduct that you believe may violate the antitrust laws?
• 	Who is affected by this conduct?
• 	How do you believe competition may have been harmed?
• 	How did you learn about the situation?

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of the Secretary
January 18, 2022
Commission Statement on the Holder Rule and Attorneys’ Fees and Costs
This advisory opinion addresses the Federal Trade Commission’s Trade Regulation Rule
Concerning Preservation of Consumers’ Claims and Defenses, 16 C.F.R. § 433.2, commonly
known as the Holder Rule, and its impact on consumers’ ability to recover costs and attorneys’
fees. This issue has arisen repeatedly in court cases, with some courts correctly concluding that
the Holder Rule does not limit recovery of attorneys’ fees and costs when state law authorizes
awards against a holder,1 and others misinterpreting the Holder Rule as a limitation on the
application of state cost-shifting laws to holders.2
Background on the Rule. The Commission adopted the Holder Rule to protect consumers
when they purchase goods or services on credit. The Commission identified multiple practices
that sellers use to “cut off” consumers’ rights so that the holder of the loan may demand full
payment from the consumer despite misconduct by the seller.3 The Commission determined that
1 See, e.g., In re Stewart, 93 B.R. 878 (Bankr. E.D. Pa. 1988); Home Sav. Ass’n v. Guerra, 733
S.W.2d 134 (Tex. 1987); Kish v. Van Note, 692 S.W.2d 463 (Tex. 1985); Reliance Mortg. Co. v.
Hill-Shields, No. 05-99-01615-CV, 2001 Tex. App. LEXIS 140 (Tex. App. Jan. 10, 2001);
Oxford Fin. Cos. v. Velez, 807 S.W.2d 460 (Tex. App. 1991); Green Tree Acceptance, Inc. v.
Pierce, 768 S.W.2d 416 (Tex. App. 1989); see also Pulliam v. HNL Auto. Inc., 60 Cal. App. 5th
396, 274 Cal. Rptr. 3d 547, 559-67 (Cal. Ct. App. 2021), review granted, 484 P.3d 564, 277 Cal.
Rptr. 3d 323 (Cal. Apr. 28, 2021) (No. S267576) (concluding that Holder Rule does not limit
attorney fee recovery from holder; rejecting contrary position attributed to FTC and ruling that
such an agency interpretation would not be entitled to deference).
2 See, e.g., Spikener v. Ally Fin., Inc., 50 Cal. App. 5th 151, 162, 263 Cal. Rptr. 3d 726, 735 (Cal.
Ct. App. 2020) (concluding statements by the Commission in 2019 (84 Fed. Reg. 18,711, 18,713
(May 2, 2019)) demonstrate “clear intent” to preempt attorney fee recovery “regardless of
whether state claim being asserted pursuant to the Holder Rule contains fee-shifting provisions”,
but declining to express opinion on whether costs are preempted for the same reason); Order on
Motion, Reyes v. Beneficial State Bank, No. BCV-17-100082 (Cal. Sup. Ct., Kern Co., Dec. 5,
2019), appeal docketed, No. F080827 (Cal. Ct. App. Feb. 13, 2020) (ruling state statute is
preempted by Commission statements on application of Holder Rule to attorney’s fees); see also
Lafferty v. Wells Fargo Bank, NA, 25 Cal. App. 5th 398, 414-16, 275 Cal. Rptr. 3d 842, 855-57
(Cal. Ct. App. 2018) (concluding that second sentence of the Holder Rule Notice caps attorneys’
fees claim against defendant-holder unless “another state or local cause of action can be found to
support such a claim,” but that costs are not subject to the same cap).
3 See 40 Fed. Reg. 53,506, 53,507-08 (1975) (use of promissory notes and waiver of defense
clauses in seller-financed sales); Id. at 53,514-15 (use of “vendor-related” or “direct” loans by

sellers’ use of these practices to foreclose consumer claims and defenses constitutes an unfair
practice under Section 5 of the FTC Act.4 To preserve consumers’ claims and defenses, the
Holder Rule requires a seller that finances sales to include in credit contracts the following
provision, also known as the “Holder Rule Notice”:
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT
IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE
DEBTOR COULD ASSERT AGAINST THE SELLER OF
GOODS OR SERVICES OBTAINED PURSUANT HERETO OR
WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER
BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID
BY THE DEBTOR HEREUNDER.
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”); W ASH . 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 .
Ann. § 367.220(1) (West 2015) (court may award attorneys’ fees and costs to prevailing party in
any action under Kentucky Consumer Protection Act), with W ASH . REV. CODE § 4.84.185 (court
may award fees incurred in opposing claims or defenses that court finds were “frivolous and
advanced without reasonable cause”); COLO . REV. STAT . § 6-1-113(2)(b) (2021) (in successful
action to enforce liability, “person who is found to have engaged or caused another to engage in”
deceptive trade practice is liable for costs and attorney fees).
Statement on the Holder Rule and Attorneys’ Fees 	Page 2

Further, if the applicable law requires or allows costs or attorneys’ fee awards against a
holder, the Holder Rule does not impose a cap on such an award. The sentence in the Holder
Rule Notice that limits recovery to “amounts paid by the debtor” applies only to monetary
recovery against holders based on the Holder Rule Notice (i.e., recovery on the claims or
defenses the debtor could assert against the seller); the Rule places no cap on a consumer’s right
to recover from the holder for other reasons. Thus, for example, in an action between a
consumer and a holder, if the applicable law authorizes the consumer to recover costs or fees
from parties that unsuccessfully oppose the consumer’s claims or defenses, a prevailing
consumer’s right to recovery against the holder is not restricted by the Holder Rule Notice. In
this scenario, the cost or fee award is separate and supported by a law that is independent of the
Holder Rule. Thus, the Holder Rule Notice does not limit costs or attorneys’ fees that the
applicable law directs or permits a court to award against a holder because of its role in litigation.
In a situation where the applicable law permits assessing costs or attorneys’ fees
exclusively against the seller, the seller’s liability for such costs and fees may be raised against
the holder because of the Holder Rule Notice. The holder’s obligation to pay costs or fee awards
available exclusively against the seller, however, would be limited to the amount paid by the
consumer. Thus, for example, if a consumer is awarded fees in a suit solely against the seller, or
the law allows awards only against a seller that has engaged in specified conduct, the Holder
Rule Notice authorizes the consumer to recover such an award from the holder up to the amount
paid. The consumer also may rely on a claim against the seller for costs or attorneys’ fees to
offset an obligation to the holder.
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
1 This program consisted of compliance
monitoring, counseling, and targeted enforcement
pursuant to the FTC’s general authority under 15
U.S.C. 45 (‘‘Section 5’’ of the FTC Act). Section 5
prohibits unfair or deceptive acts or practices in or
affecting commerce. An act or practice is deceptive
if it is likely to mislead consumers acting
reasonably under the circumstances and is
material—that is, likely to affect a consumer’s
decision to purchase or use the advertised product
or service. A claim need not mislead all—or even
most—consumers to be deceptive under the FTC
Act. Rather, it need only be likely to deceive some
consumers acting reasonably. See FTC Policy
Statement on Deception, 103 F.T.C. 174 (1984)
(appended to Cliffdale Assocs., Inc., 103 F.T.C. 110,
177 n.20 (1984) (‘‘A material practice that misleads
a significant minority of reasonable consumers is
deceptive.’’); see also FTC v. Stefanchik, 559 F.3d
924, 929 (9th Cir. 2009) (‘‘The FTC was not required
to show that all consumers were deceived . . . .’’).
2 Commenters argued such a rule could have a
strong deterrent effect against unlawful MUSA
claims without imposing new burdens on law-
abiding companies. See generally Transcript of
Made in USA: An FTC Workshop (Sept. 26, 2019)
at 63–72, available at https://www.ftc.gov/news-
events/events-calendar/made-usa-ftc-workshop;
FTC Staff Report, Made in USA Workshop (June
2020) (‘‘MUSA Report’’), available at https://
www.ftc.gov/system/files/documents/reports/made-
usa-ftc-workshop/p074204_-_musa_workshop_
report_-_final.pdf.
3 See Section 320933 of the Violent Crime and
Law Enforcement Act of 1994, Public Law 103–322,
108 Stat. 1796, 2135, codified in relevant part at 15
U.S.C. 45a. Section 45a also states: ‘‘This section
shall be effective upon publication in the Federal
Register of a Notice of the provisions of this
section.’’ The Commission published such a notice
in 1995 (60 FR 13158 (Mar. 10, 1995).
4 Under the statute, violations of any rule
promulgated pursuant to Section 45a ‘‘shall be
treated by the Commission as a violation of a rule
under section 57a of this title regarding unfair or
deceptive acts or practices.’’ For violations of rules
issued pursuant to 15 U.S.C. 57a, the Commission
may commence civil actions to recover civil
penalties. See 15 U.S.C. 45(m)(1)(A).
5 See, e.g., Vulcan Lamp Works, Inc., 32 F.T.C. 7
(1940); Windsor Pen Corp., 64 F.T.C. 454 (1964)
(articulating this standard as a ‘‘wholly of domestic
origin’’ standard).
6 This principle was incorporated into the
Commission’s 1997 Enforcement Policy Statement
on U.S. Origin Claims (the ‘‘Policy Statement’’)
following consumer research and public comment,
as the ‘‘all or virtually all’’ principle. Specifically,
the Policy Statement provides a marketer making an
unqualified claim for its product should, at the time
of the representation, have a reasonable basis for
asserting ‘‘all or virtually all’’ of the product is
made in the United States. FTC, Issuance of
Enforcement Policy Statement on ‘‘Made in USA’’
and Other U.S. Origin Claims, 62 FR 63756, 63766
information directly to the manager of the
certification office, send it to the attention of
the person identified in Related Information.
Information may be emailed to: 9-ANM-
Seattle-ACO-AMOC-Requests@faa.gov.
(2) Before using any approved AMOC,
notify your appropriate principal inspector,
or lacking a principal inspector, the manager
of the responsible Flight Standards Office.
(j) Related Information
(1) Refer to Mandatory Continuing
Airworthiness Information (MCAI) Civil
Aviation Authority of Israel (CAAI) Israeli
AD ISR–I–24–2021–6–6R1, dated June 27,
2021, for related information. This MCAI
may be found in the AD docket on the
internet at https://www.regulations.gov by
searching for and locating Docket No. FAA–
2021–0566.
(2) For more information about this AD,
contact Brian Hernandez, Aerospace
Engineer, Systems and Equipment Section,
FAA, Seattle ACO Branch, 2200 South 216th
St., Des Moines, WA 98198; phone and fax:
206–231–3535; email: Brian.Hernandez@
faa.gov.
(k) Material Incorporated by Reference
(1) The Director of the Federal Register
approved the incorporation by reference
(IBR) of the service information listed in this
paragraph under 5 U.S.C. 552(a) and 1 CFR
part 51.
(2) You must use this service information
as applicable to do the actions required by
this AD, unless this AD specifies otherwise.
(i) IAI-Aviation Group Alert Service
Bulletin 368–24–098, Revision 1, dated June
2021.
(ii) [Reserved]
(3) For service information identified in
this AD, contact Israel Aerospace Industries,
Ltd., Ben Gurion Airport, Israel 70100;
telephone 972–39359826; email tmazor@
iai.co.il.
(4) You may view this service information
at the FAA, Airworthiness Products Section,
Operational Safety Branch, 2200 South 216th
St., Des Moines, WA. For information on the
availability of this material at the FAA, call
206–231–3195.
(5) You may view this service information
that is incorporated by reference at the
National Archives and Records
Administration (NARA). For information on
the availability of this material at NARA,
email fedreg.legal@nara.gov, or go to: https://
www.archives.gov/federal-register/cfr/ibr-
locations.html.
Issued on July 8, 2021.
Gaetano A. Sciortino,
Deputy Director for Strategic Initiatives,
Compliance & Airworthiness Division,
Aircraft Certification Service.
[FR Doc. 2021–15026 Filed 7–12–21; 11:15 am]
BILLING CODE 4910–13–P
FEDERAL TRADE COMMISSION
16 CFR Part 323
[3084–AB64]
Made in USA Labeling Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
issues a final rule related to ‘‘Made in
USA’’ and other unqualified U.S.-origin
claims on product labels.
DATES : This final rule is effective August
13, 2021.
FOR FURTHER INFORMATION CONTACT: Julia
Solomon Ensor (202–326–2377) or
Hampton Newsome (202–326–2889),
Attorneys, Division of Enforcement,
Bureau of Consumer Protection, Federal
Trade Commission, Room CC–9528, 600
Pennsylvania Avenue NW, Washington,
DC 20580.
SUPPLEMENTARY INFORMATION :
I. Background
On July 16, 2020, the Commission
published a Notice of Proposed
Rulemaking (‘‘NPRM’’) (85 FR 43162)
seeking comments on a new rule
regarding unqualified U.S.-origin claims
(‘‘MUSA claims’’) on product labels.
The NPRM was preceded by a review of
the Commission’s longstanding program
to prevent deceptive MUSA claims.1
The review included a 2019 public
workshop and public comment period,
where stakeholders expressed nearly
universal support for a rule addressing
MUSA labels.2
The Commission published a new
rule in the NPRM pursuant to its
authority under 15 U.S.C. 45a (‘‘Section
45a’’). Section 45a declares: ‘‘[t]o the
extent any person introduces, delivers
for introduction, sells, advertises, or
offers for sale in commerce a product
with a ’Made in the U.S.A.’ or ‘Made in
America’ label, or the equivalent
thereof, in order to represent that such
product was in whole or substantial part
of domestic origin, such label shall be
consistent with decisions and orders of
the Federal Trade Commission.’’ The
statute authorizes the agency to issue
rules to effectuate this mandate and
prevent unfair or deceptive acts or
practices relating to MUSA labeling.3
Specifically, under the statute, the
Commission ‘‘may from time to time
issue rules pursuant to section 553 of
title 5, United States Code’’ requiring
MUSA labeling to ‘‘be consistent with
decisions and orders of the Federal
Trade Commission issued pursuant to
[Section 5 of the FTC Act].’’ The statute
authorizes the FTC to seek civil
penalties for violations of such rules.4
Consistent with these statutory
provisions, the NPRM proposed a rule
covering labels on products that make
unqualified U.S.-origin claims.
Consistent with the Commission’s
MUSA Decisions and Orders since the
1940s,5 the NPRM proposed to codify
the established principle that
unqualified U.S.-origin claims imply to
consumers no more than a de minimis
amount of the product is of foreign
origin. 6
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37023	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
(Dec. 2, 1997). The Commission first used the ‘‘all
or virtually all’’ language in Hyde Athletic
Industries, File No. 922–3236 (consent agreement
accepted subject to public comment Sept. 20, 1994)
and New Balance Athletic Shoes, Inc., Docket 9268
(complaint issued Sept. 20, 1994). In the 1997
Federal Register Notice requesting public comment
on Proposed Guides for the Use of U.S. Origin
Claims, the Commission explained the ‘‘all or
virtually all’’ standard merely rearticulated
longstanding principles governing MUSA claims.
FTC, Request for Public Comment on Proposed
Guides for the use of U.S. Origin Claims, 62 FR
25020 (May 7, 1997). The Commission has routinely
applied this standard in its MUSA Decisions and
Orders since 1997. See Compilation of cases at
https://www.ftc.gov/tips-advice/business-center/
legal-resources?type=case&field_consumer_
protection_topics_tid=234.
7 See, e.g., Textile Fiber Products Identification
Act (15 U.S.C. 70b); Wool Products Labeling Act (15
U.S.C. 68); American Automobile Labeling Act (49
U.S.C. 32304); Agricultural Marketing Act (7 U.S.C.
1638a); Buy American Act (41 U.S.C. 10a–10c); and
implementing rules.
8 As discussed in Section III of this Notice, the
Commission has added a provision (section 323.6)
in the final Rule related to petitions for exemption.
9 Comments appear on FTC Docket FTC–2020–
0056 and are available at www.regulations.gov. For
purposes of this Notice, all comments are referred
to by their short docket number (e.g., ‘‘1’’), rather
than long docket number (e.g., ‘‘FTC–2020–0056–
0001’’).
10 See, e.g., Senators Sherrod Brown, Tammy
Baldwin, Christopher Murphy, and Richard
Blumenthal (‘‘Senators’’) (373); North American
Insulation Manufacturers (631); see also Letter from
Representative Frank Pallone, Jr., Chairman, and
Representative Jan Schakowsky, Chair,
Subcommittee on Consumer Protection and
Commerce, U.S. House of Representatives (Oct. 15,
2020). But see Retail Industry Leaders Association
(‘‘RILA’’) (570) (arguing low levels of enforcement
activity suggest codifying the guidance into a rule
is unnecessary).
11 UIUC Accounting Group A13 (5); Delphine
MUREKATETE, iMSA Program, University of
Illinois at Urbana Champaign (21); Anonymous
Anonymous (24); UIUC–BADM 403–A02 (25);
Nirma Ramirez (26); Jaymee Westover (358); Joy
Winzerling (419); United Steelworkers (526);
Anonymous Anonymous (533); R–CALF USA (588).
12 Chris Jay Hoofnagle (613) (advocating use of
civil penalties to deter MUSA fraud).
13 UIUC Accounting Group A13 (5); Chris Posey
(7); Family Farm Action Alliance (543).
14 See, e.g., United Steelworkers (526); Alliance
for American Manufacturing (‘‘AAM’’) (611).
15 Honey Boynton (32); Holly Mastromatto (33);
Doug Thompson (123); Lucilla Rinehimer (702).
16 UIUC Accounting Group A13 (5); UIUC Group
A06 Anonymous (22); Truth in Advertising, Inc.
(‘‘TINA.org’’) (369); Senators (373); Southern
Shrimp Alliance (380); Council for Responsible
Nutrition (‘‘CRN’’) (569); Personal Care Products
Council (‘‘PCPC’’) (587); Anonymous Anonymous
(592); Alliance for AAM (611); National Association
of Manufacturers (‘‘NAM’’) (623); Coalition for a
Prosperous America (625).
17 15 U.S.C. 45a.
18 UIUC Accounting Group A13 (50); UIUC Group
A06 (22); TINA.org (369); Senators (373); Southern
Shrimp Alliance (380); AAM (611); Coalition for a
Prosperous America (625).
19 TINA.org (369) (emphasis in original) (also
arguing the Commission may draw support from the
dictionary definition of ‘‘labels,’’ which includes
digital labels).
20 Id. at 2. TINA.org also suggested ‘‘courts
regularly interpret laws expansively in the face of
technological innovation,’’ and the ‘‘possibility that
Congress may not have anticipated the application
of the term label to apply online does not change
[the] outcome.’’
The NPRM, consistent with the
Commission’s prior rulings and
consumer perception surveys, proposed
a rule prohibiting marketers from
including unqualified U.S.-origin claims
on labels unless: (1) Final assembly or
processing of the product occurs in the
United States; (2) all significant
processing for the product occurs in the
United States; and (3) all or virtually all
of the product’s ingredients or
components are made and sourced in
the United States. By codifying existing
guidance, the proposed rule sought to
impose no new obligations on market
participants.
To avoid confusion or perceived
conflict with other country-of-origin
labeling laws and regulations, the
NPRM contained a provision specifying
the rule does not supersede, alter, or
affect any other federal or state statute
or regulation relating to country-of-
origin labels, except to the extent a state
country-of-origin statute, regulation,
order, or interpretation is inconsistent
with the proposed rule.7
In response to the NPRM, the
Commission received hundreds of
comments, discussed infra Section II.
Although some raised concerns or
recommended changes to the
Commission’s proposal, the majority
supported finalizing the rule as drafted.
Accordingly, the Commission adopts
the proposed rule with limited
modifications as discussed below.8 The
rule will take effect August 13, 2021.
II. Response to Comments
The Commission received more than
700 comments 9 in response to the
NPRM from individuals, industry
groups, consumer organizations, and
members of Congress. Commenters
generally supported the rule,10 stating it
provided much-needed clarity 11 and
would deter bad actors 12 without
imposing new burdens on marketers.13
Most commenters agreed the rule
should incorporate the longstanding ‘‘all
or virtually all’’ standard.14
Additionally, the majority of
commenters addressing the issue agreed
the proposed rule represented a proper
exercise of the Commission’s
rulemaking authority under Section 45a.
Although the Commission received
mostly supportive comments, some
commenters raised concerns with the
Commission’s proposal to codify the
‘‘all or virtually all’’ guidance through
rulemaking, suggesting the standard
may not reflect current consumer
perception. Others proposed specific
additions to the rule, including
additional definitions, guidance on
implied claims, and an effective date.
Members of the beef and shrimp
industries requested specific guidance
for their industries. A few stakeholders
proposed changes outside the scope of
the FTC’s Section 45a rulemaking
authority. For example, some
commenters proposed making country-
of-origin labeling mandatory in all
instances. Finally, some raised
miscellaneous concerns about particular
businesses’ practices or claims.15 As
discussed below, these comments do
not provide a compelling basis to
change the substantive requirements of
the rule proposed in the NPRM.
A. Rulemaking Authority Regarding
Mail Order Advertising
Eleven stakeholders filed comments
addressing the FTC’s rulemaking
authority under Section 45a, with the
majority agreeing the proposed rule is
consistent with that grant of authority.16
As described in Section I, Section 45a
authorizes the Commission ‘‘[to] issue
rules pursuant to section 553 of title 5
[of the U.S.C.]’’ to govern the use of
‘‘ ‘Made in the U.S.A.’ or ‘Made in
America’ label[s], or the equivalent
thereof’’ when a person ‘‘introduces,
delivers for introduction, sells,
advertises, or offers for sale [a product]
in commerce.’’ The statute provides
such labels must be ‘‘consistent with
decisions and orders of the Federal
Trade Commission issued pursuant to
[Section 5 of the FTC Act].’’ 17
1. Comments
Eleven commenters addressed the
Commission’s authority under Section
45a. The majority asserted the proposed
rule was within the scope of Section
45a’s grant of rulemaking authority, and
the proposed rule appropriately covered
labels in mail order (electronic)
advertising. 18 For example, TINA.org
argued the Commission properly
interpreted Section 45a as authorizing
coverage of electronic labels because
Section 45a does not limit the term
‘‘labels’’ to physical labels, and physical
and digital labels are ‘‘functionally
equivalent’’ in terms of providing
product information to
consumers. 19 TINA.org further noted
‘‘[w]hen Congress seeks to limit ‘labels’
to the physical, it knows how . . . [and
here] the statute makes no attempt to
restrict the definition or distinguish
physical labels from digital labels.’’ 20
Moreover, TINA.org explained, limiting
the proposed rule to physical labels
without addressing electronic labels
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37024 	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
21 Id. at 5.
22 Id. at 3 (emphasis in original).
23 Southern Shrimp Alliance (380); AAM (611).
24 AAM (611). Coalition for a Prosperous America
(625) agreed Section 45a’s plain language permits
coverage of electronic claims (arguing coverage is
authorized where a ‘‘substantial part’’ of the
product is of domestic origin) (citing Section 45a
(‘‘To the extent any person introduces, delivers for
introduction, sells, advertises, or offers for sale in
commerce a product with a ‘Made in the U.S.A.’ or
‘Made in America’ label, or the equivalent thereof,
in order to represent that such product was in
whole or substantial part of domestic origin, such
label shall be consistent with decisions and orders
of the Federal Trade Commission issued pursuant
to section 45 of this title (emphasis added).’’)).
25 AAM (611).
26 CRN (569); PCPC (587); Anonymous
Anonymous (592); NAM (623).
27 PCPC (587); CRN (569).
28 Anonymous Anonymous (56).
29 NAM (623) at 5.
30 Shirley Boyd (6).
31 Southern Shrimp Alliance (380); AAM (611).
32 See TINA.org (369).
33 See, e.g., In re Vulcan Lamp Works, Inc., 32
F.T.C. 7 (1940).
34 CRN (569); Consumer Technology Association
(‘‘CTA’’) (579); Global Organization for EPA and
DHA Omega-3s (604); American Association of
Exporters and Importers (‘‘AAEI’’) (605); NAM
(623); Pharmavite LLC (695).
35 CRN (569).
would ‘‘leave American consumers
unprotected.’’ 21 Accordingly, TINA.org
concluded, ‘‘[a]s a matter of statutory
interpretation, the Commission can
regulate digital MUSA labels. As a
matter of consumer protection, the
Commission ought to regulate digital
MUSA labels.’’ 22
The Southern Shrimp Alliance
(‘‘SSA’’) and AAM agreed, arguing
Congress made an affirmative decision
to defer to the FTC when it removed a
definition of ‘‘labels’’ that appeared in
initial drafts of the legislation.23
Moreover, AAM argued the text of
Section 45a specifically authorizes
coverage of electronic labels because of
the words ‘‘the equivalent thereof’’ in
the phrase authorizing coverage of
products introduced into commerce
‘‘with a ‘Made in the U.S.A.’ or ‘Made
in America’ label, or the equivalent
thereof.’’ 24 AAM argued the phrase
refers to the ‘‘equivalent’’ of introducing
a product into commerce with a label,
i.e., making a claim on a website.25
In contrast, four commenters asserted
the proposed rule exceeds the scope of
the Commission’s rulemaking authority
under Section 45a. 26 CRN and PCPC
argued Section 45a’s consistent use of
the term ‘‘label’’ demonstrates
Congress’s intent to authorize a rule
limited to labels on products, not one
that would cover advertising
generally. 27 An anonymous commenter
argued Section 45a does not provide
authority to regulate claims in mail
order advertising materials as proposed
in Section 323.3, so the proposed rule
‘‘should be revised to only cover labels
on products.’’ 28 Should the FTC finalize
a rule that purports to cover more than
labels on products, NAM warned, the
result could be ‘‘lengthy litigation
[, which would leave] manufacturers
and consumers alike . . . without clear
guidance at a time when manufacturers
need as much regulatory certainty as
possible.’’ 29 Given these concerns over
the scope of the Commission’s
rulemaking authority, Shirley Boyd
stated the Commission should proceed
pursuant to the Magnuson Moss
Warranty-Federal Trade Commission
Improvements Act to issue a broader
rule covering MUSA advertising
generally.30
2. Analysis
After reviewing the comments, the
Commission has concluded proposed
Section 323.3 falls within the scope of
its authority under Section 45a. As
described above, Section 45a authorizes
the Commission to issue rules to govern
labeling of products as ‘‘Made in the
U.S.A.’’ or ‘‘Made in America,’’ or the
equivalent thereof. Section 45a
specifies: ‘‘[t]o the extent any person
introduces, delivers for introduction,
sells, advertises, or offers for sale in
commerce a product with a ‘Made in the
U.S.A.’ or ’Made in America’ label, or
the equivalent thereof, in order to
represent that such product was in
whole or substantial part of domestic
origin, such label shall be consistent
with decisions and orders of the Federal
Trade Commission.’’ The Commission is
empowered to ensure such labels are
consistent with decisions and orders of
the Federal Trade Commission defining
unfair or deceptive acts or practices
under Section 5. The Commission
agrees with SSA and AAM that
Congress’s removal of a definition of
‘‘label’’ from Section 45a before its
passage strongly suggests Congress
deliberately chose to defer to the FTC’s
interpretation of the term in the context
of MUSA claims.31 Moreover, the
Commission agrees with TINA.org that
digital and physical labels are
functionally equivalent, especially with
the growth of e-commerce, and a failure
to cover labels in print or electronic
mail order catalogs or promotional
materials would leave consumers
without much-needed protection.32
The final rule does not cover MUSA
claims in all advertising. Instead, as
Section 323.3 explains, the rule covers
labels appearing in all contexts,
whether, for example, they appear on
product packaging or online. With this
clarification, the Commission adopts
Section 323.3 as proposed.
B. ‘‘All or Virtually All’’ Standard
As described in Section I above, the
NPRM proposed to codify the
Commission’s longstanding
interpretation of Section 5’s
requirements governing substantiation
of unqualified MUSA claims. This
interpretation was first articulated in
Commission cases dating back to the
1940s 33 and was formalized in the 1997
Policy Statement. Specifically, the
NPRM proposed to prohibit unqualified
MUSA claims on labels unless: (1) Final
assembly or processing of the product
occurs in the United States, (2) all
significant processing that goes into the
product occurs in the United States, and
(3) all or virtually all ingredients or
components of the product are made
and sourced in the United States.
Although many commenters,
particularly those with interest in food
products, supported the decision to
incorporate the ‘‘all or virtually all’’
guidance, others raised concerns. In
particular, commenters questioned
whether the ‘‘all or virtually all’’
standard represents current consumer
understanding of MUSA claims. Some
proposed alternative standards for
consideration.
After analyzing these comments, as
discussed below in Section II.B.3., the
Commission has determined it has a
reasonable basis to adopt the
longstanding ‘‘all or virtually all’’
standard, and the rule provides
appropriate and clear guidance to
marketers.
1. Consumer Perception Testing
Six commenters argued the FTC
should conduct new consumer
perception testing before codifying the
‘‘all or virtually all’’ guidance into a
rule.34 They noted the Commission has
not conducted comprehensive testing
since the 1990s. CRN explained
‘‘codifying a standard for unqualified
U.S.-origin claims that is based on
consumer perception data that has not
been reanalyzed by the Commission in
over 20 years’’ is potentially
problematic because ‘‘[g]iven significant
changes to the global economy,
consumer perceptions of U.S.-origin
claims are very likely to have changed
over time and consumer perception in
1997, and even 2013, could be very
different from how consumers perceive
U.S.-origin claims today.’’ 35 CTA agreed
and asserted that proposing to codify
the ‘‘all or virtually standard’’ without
conducting new consumer perception
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37025	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
36 CTA (579).
37 NAM (623).
38 See, e.g., CTA (579) (arguing the ‘‘all or
virtually all’’ guidance deters innovation because
many electronic product components are only made
internationally); Personal Care Products Council
(587) (guidance deters manufacturers from using
maximum levels of U.S. parts and materials); AAEI
(605) (guidance negatively impacts U.S. companies
that will not risk making the claim).
39 National Fisheries Institute (‘‘NFI’’) (628); RILA
(570); TRAVIS HEDSTROM (600); Acuity Brands
(609); NAM (623); American Coatings Association
(‘‘ACA’’) (666) (stating marketers need guidance on
percentage values or other guidance on how to deal
with trace components of foreign/unknown origin).
40 NFI (628).
41 See Cal. Bus. & Prof. Code § 17533.7 (as revised
in 2015).
42 RILA (570).
43 TRAVIS HEDSTROM (660).
44 GOED (604); Pharmavite LLC (695).
45 The California law makes such an allowance,
although it is not unlimited. Specifically, California
permits up to 10% (instead of 5%) of costs to be
attributable to imported content if that content
cannot be made or obtained in the USA for reasons
other than cost. Cal. Bus. & Prof. Code § 17533.7.
46 BWC (622). Indeed, BWC argued, given
consumer expectations and current supply chains,
rather than analyzing the percentage of costs
attributable to U.S. versus foreign costs, it might be
more appropriate to analyze the proportion of an
entity’s overall manufacturing workforce in the U.S.
Id.
47 NAM (623). See also Glenda Smith (612)
(requesting more detail on how to handle raw
materials not capable of being sourced in the USA).
48 CBP defines ‘‘substantial transformation’’ as a
manufacturing process that results in a new and
different product with a new name, character, and
use different from that which existed before. This
standard does not take into account the origin of
materials or parts. See 19 CFR part 134; Energizer
Battery, Inc. v. United States, 190 F. Supp. 3d 1308
(Ct. Int’l Tr. 2016) (holding a substantial
transformation occurs when a product emerges from
a manufacturing process with a new name,
character, and use, and the ‘‘simple assembly’’ of
a limited number of components does not constitute
a substantial transformation).
49 International Precious Metals Institute, Inc.
(‘‘IPMI’’) (520); AAEI (605); American Apparel and
Footwear Association (‘‘AAFA’’) (675).
50 AAEI (605). See also BWC (622) (raising
concerns about increased regulatory burden).
51 AAFA (675) (also suggesting the FTC
‘‘eliminate’’ qualified claims for any products that
do not meet the ‘‘substantial transformation’’
threshold).
52 China (699).
testing ‘‘put the cart before the horse.’’ 36
NAM also encouraged the FTC to
undertake a comprehensive review
similar to the Commission’s process in
the 1990s before promulgating any
rule.37
2. Alternative Standards
In addition to requesting the FTC
conduct new perception testing,
numerous commenters proposed
alternatives to the ‘‘all or virtually all’’
standard. These proposals, which were
based on policy arguments and were not
accompanied by supporting consumer
perception evidence, fell into two
groups. On one hand, more than twenty
commenters, mostly individual
consumers, suggested unqualified
MUSA claims should be limited to
products 100% made in the United
States. On the other hand, other
commenters, mostly manufacturers,
argued ‘‘all or virtually all’’ is too strict,
and by incorporating it into a rule, the
FTC could chill unqualified claims,
discourage innovation, and harm
industries where parts or ingredients are
not available in the United States.38 To
address these concerns, this second
group of commenters suggested
alternatives: (1) Introducing a
percentage-of-costs standard; (2)
adopting a standard that makes
allowances for imported parts or
materials not available in the United
States; (3) aligning with U.S. Customs
and Border Protection’s (‘‘CBP’’)
substantial transformation standard; or
(4) adding a safe harbor for ‘‘good faith’’
efforts to comply.
i. Percentage-Based Standards
Several commenters argued the
Commission should provide marketers
greater certainty by promulgating a
‘‘bright line’’ rule outlining a specific
percentage of manufacturing costs that
must be attributable to U.S. costs to
substantiate an unqualified claim.39 For
example, NFI suggested the FTC could
align the rule with California state
law,40 which permits manufacturers to
make unqualified MUSA claims for
products with up to 5% of the final
wholesale value of the product
attributable to articles, units, or parts of
the merchandise obtained from outside
the USA. 41
RILA agreed a rule providing a bright-
line percentage would help marketers
comply, and suggested the FTC consider
‘‘analogous federal regulations that
incentivize U.S. manufacturing,’’ and
incorporate a 70% threshold for
unqualified claims. 42 Alternatively, one
commenter suggested a rule that would
permit an unqualified claim for a
product assembled in the United States
where more than 50% of its value is
based on components of U.S.-origin.43
Two representatives of the dietary
supplement industry, the Global
Organization for EPA and DHA Omega-
3s (‘‘GOED’’) and Pharmavite LLC, made
an alternative percentage-based
proposal with different standards for
active and inactive ingredients.
Specifically, they argued consumers
likely interpret an unqualified MUSA
claim to mean 100% of a dietary
supplement’s active ingredients are
made and sourced in the United States.
They claimed, however, consumers care
less about the origin of inactive
ingredients. Accordingly, they
contended the rule should incorporate a
10% tolerance for foreign-made or
sourced inactive ingredients.44
ii. Unavailability Exemption
Other commenters argued the rule
should allow marketers to make
unqualified MUSA claims for products
that include imported content only if
the imported components are not
available in the United States.45 Some
argued there should be a blanket
exemption for such content. For
example, Bradford White Corporation
(‘‘BWC’’) suggested the rule broadly
allow marketers to exclude foreign parts
from the analysis if those parts cannot
be ‘‘reasonably sourced’’ from a
domestic manufacturer. 46 Others agreed
the rule should permit unqualified
claims for products that contain foreign
content that cannot be sourced in the
United States, but argued this
exemption should be capped at a certain
percentage of manufacturing costs. In
NAM’s view, a rule permitting
marketers to incorporate an appropriate
percentage of imported components or
labor, not otherwise unavailable
domestically, ‘‘would give
manufacturers clear and predictable
rules and play a significant role in
helping to encourage manufacturers to
increase domestic investments in order
to meet an attainable standard.’’ 47
iii. Substantial Transformation Analysis
Several commenters suggested the
FTC adopt a ‘‘substantial
transformation’’ standard for
unqualified claims.48 Three commenters
from U.S. trade associations 49
explained harmonizing the FTC’s rule
with the CBP standard for determining
foreign country of origin pursuant to the
Tariff Act, 19 U.S.C. 1304, would
provide clarity and alleviate the burden
on U.S. companies that ‘‘must navigate
a number of different country of origin
requirements.’’ 50 AAFA explained
adopting the ‘‘substantial
transformation’’ standard would result
in a ‘‘clear, simple, and easy-to-
understand rule.’’ 51 The People’s
Republic of China (‘‘China’’) also
argued, to avoid uncertainties and bias,
the FTC should incorporate CBP’s
‘‘change in Tariff Classification’’
analysis, as suggested in Article 9 of the
World Trade Organization’s (‘‘WTO’’)
Agreement on Rules of Origin.52
iv. Good Faith Efforts To Comply
PCPC and RILA recommended the
Commission provide safe harbors for
two types of good-faith efforts to
comply. PCPC, a trade association
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53 PCPC (587). Although not specifically
advocating for a good-faith claim safe harbor, the
Family Farm Action Alliance similarly argued the
FTC should continue its practice of counseling
inadvertent offenders into compliance (543).
54 PCPC (587) at 3.
55 RILA (570).
56 Commission staff considered this study
previously as part of a request for a staff advisory
opinion on unqualified MUSA claims for recycled
gold jewelry products. See Response to Request for
FTC Staff Advisory Opinion (Sept. 9, 2014), https://
www.ftc.gov/system/files/documents/closing_
letters/made-usa/140909madeisusajvc.pdf
(declining to provide an opinion stating MUSA
claims for recycled jewelry do not deceive
consumers based on perception evidence provided
by Richline Group).
57 See also Hanna, Transcript of Made in USA: An
FTC Workshop (Sept. 26, 2019) (hereinafter,
‘‘MUSA Tr.’’) at 14 (study showed ‘‘25% or 30% of
[American consumers] really did feel that
everything, including the natural resource,
including the gold, had to be part of the final
product in order to say it was made in the USA’’).
58 62 FR 25020, 25036.
59 Hanna, MUSA Tr. at 15.
60 See, e.g., FTC Staff Closing Letter to Niall
Luxury Goods, LLC (Nov. 20, 2015), available at
https://www.ftc.gov/system/files/documents/
closing_letters/nid/151120niall_letter.pdf.
61 See Policy Statement, 62 FR 63756, 63768.
representing manufacturers,
distributors, and suppliers of personal
care products, suggested incorporating a
safe harbor for ‘‘good actors who are
trying to overcome the difficulties in
sourcing domestic components and
materials.’’ 53 PCPC explained, ‘‘[a] safe
harbor provision for unqualified claims
would not dilute the purpose of the
FTC’s goal with this proposed rule—to
deter bad actors from making false
claims. Rather, such a provision would
provide businesses who in good faith
make every reasonable effort to make as
much of their product as possible in the
U.S. the flexibility to comply with any
new regulations.’’ 54
Alternatively, RILA suggested that to
avoid deterring retailers and
marketplaces from offering products
with MUSA labels the final rule should
‘‘include an express statement . . . that
allows retailers and marketplaces that
have exercised reasonable due diligence
to rely on documented supplier and
vendor certifications to substantiate
MUSA labeling claims.’’ 55
3. Analysis
The Commission has concluded it is
not necessary to undertake additional
consumer perception testing before
adopting the proposed Rule.
Accordingly, the Commission adopts
the ‘‘all or virtually all standard’’ to
govern unqualified claims as proposed
in the NPRM. Although some
commenters speculated consumer
perception may have shifted over time,
or argued the Commission should adopt
a new standard for unqualified claims,
there is no evidence on the record
disputing the Commission’s past
findings that at least a significant
minority of consumers expect a MUSA-
advertised product to be ‘‘all or virtually
all’’ made in the United States. Nor is
there evidence suggesting new
perception testing would find
otherwise.
Indeed, the limited survey evidence
submitted in conjunction with the 2019
workshop on MUSA claims suggested
consumer perception has remained
stable since the 1990s. Specifically, one
panelist, Mark Hanna of Richline Group,
Inc. submitted a survey, conducted in
2013, which found almost 3 in 5
Americans (57%) agree ‘‘Made in
America’’ means all parts of a product,
including any natural resources it
contains, originated in the United
States.56 Additionally, the survey found
33 percent of consumers thought 100
percent of a product must originate in
a country for that product to be labeled
as ‘‘Made’’ in that country.57 These
findings are consistent with the FTC’s
1995 survey, which found roughly 30
percent of consumers would be
deceived by an unqualified MUSA
claim for a product where 70 percent of
the cost was incurred in the United
States. 58 As Hanna explained during the
workshop, ‘‘at least 25% of the
consumers were skeptical that if there’s
something introduced to that finished
product other than something that
originated in the US now, they didn’t
think it should be made in the USA.’’ 59
Accordingly, the Commission has a
reasonable basis to conclude the ‘‘all or
virtually all’’ standard accurately
represents current consumer perception
regarding unqualified MUSA claims.
Should future consumer research clearly
establish the ‘‘all or virtually all’’
standard is inapplicable to a specific
class of products, entities may petition
the Commission for an exemption from
the Rule’s requirements, as discussed in
Section III of this document.
While commenters proposed
alternative standards that might
promote certain policy goals, the
Commission declines to adopt these
alternative proposals for the reasons
discussed below. Section 45a authorizes
the Commission to issue rules to ensure
products labeled as ‘‘Made in the
U.S.A.,’’ or the equivalent thereof,
comport with the requirements of
Section 5 of the FTC Act that prohibit
unfairness or deception. The ‘‘all or
virtually all’’ standard is designed to
prevent consumer deception and,
therefore, the Commission declines to:
(1) Adopt a bright-line, percentage-
based standard; (2) include a broad
carve-out for inputs not available in the
United States; (3) incorporate CBP’s
‘‘substantial transformation’’ standard;
or (4) provide a safe harbor for good-
faith efforts to comply.
First, percentage-based, bright-line
rules could allow deceptive unqualified
claims in circumstances where the low
cost of the foreign input does not
correlate to the importance of that input
to consumers. For example, the
Commission’s enforcement experience
has established unqualified U.S.-origin
claims for watches that incorporate
imported movements may mislead
consumers because, although the cost of
an imported movement is often low
relative to the overall cost to
manufacture a watch, consumers may
place a premium on the origin and
quality of a watch movement and
consider the failure to disclose the
foreign origin of this component to be
material to their purchasing decision.
Under those circumstances, the foreign
movement likely is not a de minimis
consideration for consumers, and an
unqualified U.S.-origin claim for a
watch containing an imported
movement would likely deceive
consumers.60 The Policy Statement has
instructed marketers since the 1990s
that the cost of foreign versus U.S. parts
and labor is only one factor to consider
in determining how material a part may
be to consumers.61 Accordingly, the
Commission declines to adopt a
percentage-based standard because the
‘‘all or virtually all’’ standard is better
tailored to prevent unqualified U.S.-
origin claims that will mislead
consumers in making purchasing
decisions. By maintaining this
precedent, the rule accounts for the
likelihood consumers interpret MUSA
claims somewhat differently for
different product categories.
Second, the record similarly does not
support excluding foreign content
unavailable in the United States from
the ‘‘all or virtually all’’ analysis.
Specifically, as described above,
consumer perception testing has
consistently shown consumers expect
products labeled as MUSA to contain no
more than a de minimis amount of
foreign content. There is no evidence
this takeaway varies in scenarios where
some parts or inputs are not available in
the United States. Indeed, the Policy
Statement explains unqualified claims
for such products could be deceptive,
for example, ‘‘if the [nonindigenous]
imported material constitutes the whole
or essence of the finished product (e.g.,
the rubber in a rubber ball or the coffee
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62 Id. at 63769 n.117.
63 The Policy Statement explains in some cases
‘‘where [a raw] material is not found or grown in
the United States [and that raw material does not
constitute the whole or essence of the finished
product], consumers are likely to understand that
a ‘Made in USA’ claim on a product that
incorporates such materials (e.g., vanilla ice cream
that uses vanilla beans, which, the Commission
understands, are not grown in the United States)
means that all or virtually all of the product, except
for those materials not available here, originated in
the United States.’’ Id. The Policy Statement
provides that this guidance applies only to raw
materials, not manufactured inputs.
64 See, e.g., FTC v. World Travel Vacation
Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988).
65 See FTC, ‘‘Complying with the Made in USA
Standard,’’ at 7–8 (Dec. 1998), available at https://
www.ftc.gov/system/files/documents/plain-
language/bus03-complying-made-usa-standard.pdf
(also providing an example of a certification a
marketer could request from a supplier that
generally would constitute an acceptable basis for
determining the appropriate country-of-origin
designation for a product).
66 RILA (570).
67 E.g., AAEI (605) (advocating adoption of the
‘‘substantial transformation’’ standard).
68 See, e.g., Shirley Boyd (6); Pacific Coast
Producers (27); RILA (570); Vietnam (577); AAEI
(605); NFI (628); ACA (666); AAFA (675).
69 AAEI (605).
70 Deontae Lafayette (20); Jaymee Westover (358).
71 Shirley Boyd (6); Pacific Coast Producers (27);
RILA (570).
72 Pacific Coast Producers (27).
73 LSA (404).
74 SSA (380) (further explaining menus should
fall under this definition because they are used in
the direct sale or offer for sale of a product, are
disseminated in print or can be delivered by
electronic means, and are solely disseminated to
solicit the purchase of a product).
75 Frost Brown Todd LLC (522).
beans in ground coffee).’’ 62 However,
the flexibility inherent in the ‘‘all or
virtually all’’ analysis accounts for the
possibility a marketer could substantiate
an unqualified claim for a product
containing nonindigenous raw materials
if the manufacturer has evidence
demonstrating the specific claim in
context does not deceive consumers.63
Third, the record also does not
support adopting government standards
developed for other purposes (e.g., the
CBP substantial transformation standard
developed for the imposition of tariffs)
as part of the rule. Based on its
enforcement experience, the
Commission is concerned the standards
adopted by CBP for purposes of
calculating tariffs are not an appropriate
fit for the Commission’s regulation of
MUSA claims on product labels for
purposes of consumer disclosure. For
example, there is ample evidence
consumers care deeply about the source
of the components used to manufacture
drywall for construction projects. Under
a substantial transformation analysis,
drywall made wholly of materials from
one nation, but substantially
transformed in a different country,
would be labeled as originating from the
country where those materials were
ultimately transformed into a final
product. Marketers would not need to
disclose the origin of the inputs other
than labor (information highly material
to many consumers). Thus, employing
such a standard would in some cases
conflict with the Rule’s purpose of
ensuring consumers have the material
information necessary to make informed
purchasing decisions.
Finally, the rule does not include an
explicit carve-out for businesses that act
in good faith. Courts have long held
good faith is not a defense for a
violation of Section 5 of the FTC Act,64
and the Commission intends to enforce
the rule consistent with this precedent.
Violative claims made in good faith can
still deceive and cause significant harm
to consumers. However, the FTC
clarifies it will continue to: (1) Advise
marketers that, if provided in good faith,
marketers can rely on information from
suppliers about the domestic content in
the parts, components, and other
elements they produce; 65 (2) generally
conserve enforcement resources for
intentional, repeated, or egregious
offenders; and (3) provide informal staff
counseling where appropriate.
C. Requests for Additional Definitions
and Other Clarifications
The Commission received several
comments arguing the proposed Rule
was unclear or provided insufficient
guidance for marketers. To remedy these
asserted problems, several commenters
urged the FTC to add definitions for
particular terms, including ‘‘all or
virtually all’’ and ‘‘significant
processing.’’ Other commenters
expressed concern the Rule was not
sufficiently clear about the range of
claims it would cover, suggesting the
FTC list additional synonyms for ‘‘Made
in USA’’ to which the rule would apply.
Finally, others requested a delayed
effective date to allow marketers to
update materials and come into
compliance.
1. Definitions
More than twenty commenters
recommended adding definitions or
providing more information to clarify
the rule. Without definitions, the
commenters feared marketers would
‘‘lack clear guidance for verifying
MUSA claims’’ and thus ‘‘may be
deterred from’’ making them
altogether.66 Some of these commenters
offered clarifying edits or proposed
definitions, often as fallback positions to
their main arguments advocating
alternative standards entirely.67
In particular, in addition to
commenters who recommended
specifying percentage thresholds for ‘‘all
or virtually all,’’ several commenters
requested the Commission generally
define the phrase, without providing
specific information on what that
definition should include (e.g., factors
considered, etc.).68 As AAEI elaborated:
‘‘One of the FTC’s stated reasons for this
proposed rulemaking is to ‘provide
more certainty to marketers about the
standard for making unqualified claims
on product labels.’ Yet, the proposed ‘all
or virtually all’ standard does not
provide that certainty . . . It simply
codifies the FTC’s already existing
ambiguous standards.’’ 69 Two
commenters specifically asked the
Commission to incorporate information
on whether marketers should consider
the origin of product packaging into
such a definition. 70
Similarly, three commenters
requested the Commission define
‘‘significant processing.’’ 71 As Pacific
Coast Producers explained, the
‘‘significant processing’’ and ‘‘all or
virtually all’’ ‘‘terms have always been
ambiguous, and the proposed rule does
not help to remove the ambiguity or
provide any meaningful guidance to
industry.’’ 72
Finally, more than thirty commenters,
primarily representing the domestic
shrimp industry, argued the
Commission should clarify that the
definitions of ‘‘mail order catalog’’ and
‘‘mail order promotional material’’
include restaurant menus. As the
Louisiana Shrimp Association (‘‘LSA’’)
explained, ‘‘inappropriate practices by
some restaurants in offering menu items
that falsely indicate to customers that
imported shrimp is domestic, such as
‘Gulf Shrimp’. . . not only confuse
consumers, but fatally undermine the
marketing efforts of restaurants that do
carry domestic shrimp.’’ 73 To solve this
problem, SSA urged the Commission to
‘‘exercise jurisdiction over ‘Made in
U.S.A.’ statements on restaurant menus,
as a form of ‘Mail order promotional
material’ or ‘mail order catalog.’ ’’ 74
2. Covered Claims
Several commenters suggested the
Rule was not sufficiently clear about
which U.S.-origin claims it covers. In
particular, commenters requested a
longer list of claims the Commission
considers equivalent to ‘‘Made in USA,’’
as well as a specific statement that the
Rule covers implied claims.
One commenter suggested adding
‘‘constructed,’’ ‘‘fabricated,’’ and
‘‘assembled’’ to the list.75 Another
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76 R–CALF USA (588).
77 Salvatore J. Versaggi (496).
78 See, e.g., Shirley Boyd (6); Power Planter Inc.
(325); AAM (611); American Shrimp Processors
Association (‘‘ASPA’’) (633).
79 AAM (611).
80 ACA (666); McKenna Walsh (581).
81 As discussed in Section III, the Final Rule
contains a provision clarifying that, in appropriate
circumstances, covered entities may petition the
Commission for an exemption from the Rule’s
requirements.
82 See Policy Statement, 62 FR 63756, 63768 (Dec.
2, 1997).
83 16 CFR 323.1.
84 See generally https://www.ftc.gov/tips-advice/
business-center/advertising-and-marketing/made-
in-usa. The Commission has explained that prior to
the 1990s, this standard was described as the
‘‘wholly domestic’’ standard, and both ‘‘wholly
domestic’’ and ‘‘all or virtually all’’ refer to the
concept that ‘‘unqualified claims of domestic origin
have been treated as claims that the product was in
all but de minimis amounts made in the United
States.’’ 62 FR 63756 (Dec. 2, 1997).
proposed ‘‘processed,’’ ‘‘fabricated,’’
and ‘‘packaged.’’ 76 Finally, one
commenter suggested, to deter
unscrupulous marketers effectively, the
list should include claims that products
are ‘‘Distributed by:’’ a company name
followed by a U.S. address.77
Several commenters also asked the
Commission to clarify that the Rule
covers implied claims. 78 As AAM
explained, ‘‘the use of iconography,
such as the American flag, used in the
promotion of products should also be
considered for its potential to evoke the
positive qualities consumers associate
with ’Made in USA,’ as well as the
prospect of such iconography being
used in a deceptive manner.’’ 79
3. Effective Date
Finally, two commenters requested
the FTC provide an extended
compliance period before the rule’s
effective date. Specifically, ACA and
McKenna Walsh argued companies
would need time to come into
compliance with the Rule. In their view,
the FTC should delay implementation to
give companies the opportunity to
generate new marketing materials and
run out old stock.80
4. Analysis
After analyzing the comments, the
Commission finds the rule and its
coverage clear on its face, with
sufficient flexibility to address a
changing marketplace. Therefore, as
discussed further below, the
Commission issues the rule without
additional definitions or clarifications,
or a delayed effective date.81
i. Definitions
The Commission declines to adopt
definitions of ‘‘all or virtually all’’ and
‘‘significant processing,’’ or to expand
the existing definition of ‘‘mail order
catalog’’ or ‘‘mail order promotional
material.’’ The Commission has issued
extensive guidance to help marketers
understand the ‘‘all or virtually all’’
standard. As the Policy Statement
explains, ‘‘A product that is all or
virtually all made in the United States
will ordinarily be one in which all
significant parts and processing that go
into the product are of U.S. origin.’’ In
other words, where a product is labeled
or otherwise advertised with an
unqualified claim, it should contain
only a de minimis, or negligible, amount
of foreign content. Although there is no
single ‘‘bright line’’ to establish when a
product is or is not ‘‘all or virtually all’’
made in the United States, there are a
number of factors to consider in making
this determination. First, in order for a
product to be considered ‘‘all or
virtually all’’ made in the United States,
the final assembly or processing of the
product must take place in the United
States. Beyond this minimum threshold,
the Commission will consider other
factors, including but not limited to the
portion of the product’s total
manufacturing costs attributable to U.S.
parts and processing; how far removed
from the finished product any foreign
content is; and the importance of the
foreign content to the form or function
of the product. Accordingly, the
Commission’s existing guidance and
enforcement documents, including the
Policy Statement, decisions and orders
enforcing the ‘‘all or virtually all’’
standard, and staff closing letters,
together provide ample guidance to
marketers.
As discussed above in Section II.B.3.,
‘‘all or virtually all’’ and ‘‘significant
processing’’ intentionally incorporate
flexibility to allow marketers to
substantiate their claims consistent with
consumer perception of their particular
products. The Commission’s
enforcement program has long
recognized the need for such flexibility
as described in the Policy Statement,
which was based on the Commission’s
decisions and orders. The Commission
has continued to follow this flexible
approach, and incorporated it into its
post-Policy Statement decisions and
orders. Adding specific definitions for
these terms may increase clarity for
marketers in the short term because the
rule covers so many product categories
across a range of circumstances, but the
Commission has determined adding
further specificity also increases the risk
the rule would chill certain non-
deceptive claims. Marketers seeking
additional guidance may look to the
Policy Statement, decisions and orders,
and other Commission guidance to
understand how the FTC has analyzed
‘‘all or virtually all’’ and ‘‘significant
processing.’’ 82
The Commission also declines to
adopt a definition of ‘‘mail order
catalog’’ or ‘‘mail order promotional
material’’ that specifically incorporates
restaurant menus. The Commission has
not reviewed perception evidence
regarding consumer understanding of
MUSA claims on restaurant menus, and
therefore declines to define such claims
as covered ‘‘labels’’ for purposes of
Section 45a.
ii. Covered Claims
The Commission also concludes it is
unnecessary to revise the definitions to
provide an expanded list of synonyms
for the term ‘‘Made in U.S.A.,’’ or
provide further clarification the rule
covers implied claims. Section 323.1 as
proposed already defines ‘‘Made in
U.S.A.’’ as ‘‘any unqualified
representation, express or implied, that
a product or service, or a specified
component thereof, is of U.S. origin,
including, but not limited to, a
representation that such product or
service is ‘made,’ ’manufactured,’ ’built,’
’produced,’ ’created,’ or ’crafted’ in the
United States or in America, or any
other unqualified U.S.-origin claim’’
(emphasis added).83
The list of equivalents to ‘‘Made in
USA’’ set forth in Section 323.1 is not
exhaustive because the means of
communicating U.S. origin are too
numerous to list. The Commission
believes the non-exhaustive list of
examples given provide sufficient
guidance on the scope of covered
express and implied claims. These
examples are based on the
Commission’s decades of enforcement
experience addressing MUSA claims.
For other claims, the Commission will
analyze them in context, including the
terms used, their prominence, and their
proximity to images and other text.
iii. Effective Date
Lastly, the Commission declines to
delay the rule’s effective date. As
discussed above in Section I, the rule
codifies the FTC’s longstanding
guidance on MUSA claims. The FTC has
incorporated the ‘‘all or virtually all’’
standard into decisions and orders and
guidance for industry and the public
since the 1990s. 84 Because the rule
merely codifies these longstanding
enforcement principles and imposes no
new requirements on marketers, the
Commission concludes a delayed
effective date is unnecessary.
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37029	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
85 North Dakota Farmers Union (412).
86 The Commission also received more than 150
comments stating country-of-origin labeling should
be mandatory for beef products.
87 See, e.g., Mexico’s National Confederation of
Livestock Organizations (431); North American
Meat Institute and Meat Importers’ Council of
America (508); National Cattlemen’s Beef
Association (589); Montana Stockgrowers
Association (635); Embassy of Canada (637). Some
of these stakeholders argued the FTC should
specifically exempt meat labeling from the Rule’s
coverage.
88 North American Meat Institute and the Meat
Importers’ Council of America (508). See also
National Cattlemen’s Beef Association (589)
(‘‘remind[ing] FTC that the Federal Meat Inspection
Act of 1906 (21 U.S.C. 601 et seq.) grants the U.S.
Department of Agriculture (USDA) primary
jurisdiction over all meat food product oversight
activities, including the approval and verification of
geographic and origin labeling claims.’’).
89 Montana Stockgrowers Association (635).
90 Mexico’s National Confederation of Livestock
Organizations (431); National Cattlemen’s Beef
Association (589); see also Embassy of Canada (637)
(stating, in light of 2015 WTO proceedings, the
Government of Canada ‘‘will continue to closely
monitor the development of the proposed’’ Rule).
91 7 CFR part 60.
92 7 U.S.C. 1638(1).
93 7 CFR 60.128.
94 ASPA (633) (citing 7 CFR 60.119).
95 See, e.g., Southern Shrimp Alliance (380).
96 ASPA (633), at 2.
97 See Memorandum of Understanding between
Federal Trade Commission and the Food and Drug
Administration, 36 FR 18539 (Sept. 16, 1971).
98 15 U.S.C. 45a.
99 21 U.S.C. 601(n)(1); 9 CFR 317.8(a) (prohibiting
labels that convey ‘‘any false indication of origin’’).
100 See R. Edelstein Letter to E. Drake (Mar. 26,
2020).
D. Guidance for Specific Industries
Some commenters requested tailored
guidance for specific industries.
Specifically, representatives of the beef
and shrimp industries requested
guidance on whether the Rule would
apply to their products, and specific
guidance on how to apply ‘‘all or
virtually all’’ in these contexts.
1. Beef
The Commission received more than
450 comments urging the Commission
to clarify that the rule applies to beef
products. These stakeholders, primarily
U.S. ranchers and industry groups
representing domestic ranchers,
generally supported the rule and argued
it should supersede United States
Department of Agriculture (‘‘USDA’’)
guidance on using ‘‘Product of USA’’
claims on beef product labels. Although
they acknowledged the USDA’s
longstanding authority over beef
labeling, they expressed concern
USDA’s Food Safety Inspection Service
(‘‘FSIS’’) Food Standards and Labeling
Policy Book currently authorizes
producers to place ‘‘Product of USA’’
labels on beef products processed in the
USA but comprised of cattle born,
raised, and slaughtered overseas. These
commenters argued such labels deceive
consumers, and ‘‘put U.S. family
farmers and ranchers at an unfair
disadvantage in the marketplace,
because they are not able to differentiate
their domestically produced meat and
meat products from foreign produced
meat and meat products.’’ 85
Accordingly, they argued the ‘‘all or
virtually all’’ standard should apply to
beef products, and beef products should
only bear a ‘‘Product of USA’’ label if
they derive from animals born, raised,
slaughtered, and processed in the
United States. 86
In contrast, five commenters argued
Congress granted the USDA generally,
and the FSIS specifically, authority to
address country-of-origin labeling for
meat and meat food products. Therefore,
they argued, the FTC should defer to the
USDA on this issue.87 The North
American Meat Institute and the Meat
Importers’ Council of America
submitted a joint comment stating beef
commenters’ concerns ‘‘are misplaced
because they fail to recognize that the
[USDA’s FSIS] has primary jurisdiction
over the meat and poultry labeling
through the authority provided in the
Federal Meat Inspection Act (FMIA) and
the Poultry Products Inspection Act
(PPIA).’’ 88 The Montana Stockgrowers
Association agreed, explaining that even
though it ‘‘supports USA beef as being
defined as born, raised, harvested, and
processed in the USA . . . [its members]
think the [USDA] should be the lead
agency to address enforcement of labels
that include all meat products.’’ 89
Moreover, some commenters raised
concerns applying the FTC’s rule to beef
products could lead to challenges in, or
even sanctions by, the WTO, given past
proceedings relating to beef labeling.90
2. Shrimp
The Commission also received dozens
of comments from representatives of the
domestic shrimp industry. Most of these
expressed general support for the
proposed rule, and recommended the
FTC allow MUSA labels only for shrimp
caught, harvested, and processed in the
United States.
Although they expressed enthusiasm
for the potential application of the
proposed MUSA rule’s ‘‘all or virtually
all’’ standard in shrimp labeling,
commenters acknowledged that USDA’s
Country of Origin Labeling (‘‘COOL’’)
regulations 91 have primary authority in
this space. The COOL regulations
require ‘‘retail establishments’’ to
provide country-of-origin information
for wild and farm-raised fish and
shellfish,92 and incorporate specific
standards under which marketers can
label shrimp as MUSA.93 However,
commenters identified a possible gap in
regulatory coverage, explaining that,
pursuant to USDA Agricultural
Marketing Service (‘‘AMS’’) regulations
governing country-of-origin labeling for
fish and shellfish, COOL does not apply
to processed shrimp products, including
breaded or marinated shrimp.94 In
addition, as described above in Section
II.C.1., these commenters noted that
USDA COOL regulations do not apply to
claims regarding shrimp or shrimp
products on restaurant menus.95 Thus,
these commenters urged the FTC to
‘‘us[e] its authority to enforce the MUSA
rule [with respect to these categories of
shrimp products, thereby] . . . filling a
void in federal labeling accountability
and providing certainty to the seafood
market during this time of widespread
economic instability.’’ 96
3. Analysis
The FTC shares jurisdiction over
country-of-origin claims for agricultural
products with the USDA and, in some
instances, the Food and Drug
Administration (‘‘FDA’’). USDA and
FDA have primary jurisdiction over
labeling issues for the food products
within their purview. 97 Section 45a
specifically provides that ‘‘Nothing in
this section shall preclude the
application of other provisions of law
relating to labeling.’’ 98 Accordingly,
Section 323.5(a) of this rule makes clear
that the rule does not supersede, alter,
or affect the application of any other
federal statute or regulation relating to
country-of-origin labeling requirements,
including but not limited to regulations
issued under the FMIA, 21 U.S.C. 601
et seq.; the Poultry Products Inspection
Act, 21 U.S.C. 451 et seq.; or the Egg
Products Inspection Act, 21 U.S.C. 1031
et seq.
Congress has granted the USDA’s
FSIS specific authority to regulate
agricultural products, including, among
others, beef and chicken products. The
USDA regulates labels on meat products
sold at retail pursuant to the FMIA,
which prohibits misleading labels.99
Although FSIS’s Policy Book has
permitted voluntary claims of ‘‘Product
of USA’’ for imported products under
FSIS’s jurisdiction, including beef
products, processed in the USA, FSIS
recently explained this guidance ‘‘may
be misleading to consumers and may
not meet consumer expectations of what
‘Product of USA’ signifies.’’ 100
Accordingly, the USDA announced
plans to initiate a rulemaking to
alleviate any potential confusion in the
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101 Id.
102 7 U.S.C. 1638(1); 7 CFR 60.128.
103 The FTC notes deceptive claims on restaurant
menus appear to be largely a regional issue, and
therefore are being addressed through state
legislation. See, e.g., La. R.S. § 40:5.5.4 (requiring
food service establishments to provide notice to
consumers if crawfish or shrimp is imported); La.
R.S. § 56:578.14 (‘‘No owner or manager of a
restaurant that sells imported crawfish or shrimp
shall misrepresent to the public, either verbally, on
a menu, or on signs displayed on the premises, that
the crawfish or shrimp is domestic.’’). FTC staff will
continue to monitor this issue.
104 BWC (622); AAFA (675). Additionally, PCPC
(589) argued the Rule should specifically preempt
a private right of action. However, two commenters
agreed with the section as drafted as a means to
‘‘ensure regulatory certainty and consistency of
product U.S. origin labels nationwide.’’ RILA (570).
See also NAM (623) (recognizing the ‘‘value of
utilizing preemption to create a uniform MUSA
standard’’).
105 UIUC Accounting Group A13 (5); Shirley Boyd
(6); UIUC—BADM 40—A02 (22); Senators (373);
United Steelworkers (526); Women Involved in
Farm Economics/Pam Potthoff Beef Chairman (672).
106 The Commission received 30 comments
arguing country-of-origin labeling should be
mandatory for all products. See, e.g., J R. Brookshire
(9). Additionally, six commenters argued
specifically in favor of mandatory country-of-origin
labeling for all products sold online. See, e.g., Made
in USA Foundation (2).
107 Twelve commenters requested coverage of
qualified claims. See, e.g., Shirley Boyd (6); United
Steelworkers (526); AAM (611); CPA (625).
108 Six commenters argued civil penalties should
be linked to company size. See, e.g., Chris Posey (7).
109 See City of New York v. FCC, 486 U.S. 57, 64
(1988) (‘‘The statutorily authorized regulations of an
agency will pre-empt any state or local law that
conflicts with such regulations or frustrates the
purposes thereof.’’).
110 See, e.g., Mozilla v. FCC, 940 F.3d 1, 74–75
(D.C. Cir. 2019).
111 See, e.g., Shirley Boyd (6) (‘‘The FTC’s final
rules should apply to labeling, advertising and
other promotional and marketing materials in
addition to labels and mail order catalogs/
promotional materials.’’).
112 15 U.S.C. 45(a), 52.
113 Made in USA Foundation (2).
114 United Steelworkers (526).
marketplace. 101 As that proceeding
unfolds, the Commission remains
committed to engaging with the USDA
to ensure American consumers receive
truthful and accurate information about
the beef products they buy.
Under its COOL regulations, USDA’s
AMS has primary authority over
country-of-origin labels for most fish
and shellfish products.102 Because
Section 45a’s general grant of
rulemaking authority does not authorize
the Commission to issue regulations that
would preclude the application of
existing statutes and regulations
addressing agricultural product labeling,
the FTC defers to AMS’s regulatory
scheme for COOL for fish and shellfish.
Section 323.5 makes clear the rule does
not supersede, alter, or affect any other
federal statute or regulation relating to
country-of-origin labeling requirements.
However, to the extent certain, limited
categories of agricultural products fall
outside USDA’s jurisdiction, the
Commission will analyze claims on a
case-by-case basis and consult with
other agencies as appropriate.103
E. Other Proposals
Some commenters proposed a series
of other amendments, arguing variously
that the Rule should preempt state law
entirely; 104 cover MUSA advertising
generally; 105 make country-of-origin
labeling mandatory for all products; 106
incorporate provisions relating to
qualified U.S.-origin claims; 107 and
include language specifically correlating
penalties to firm sizes.108 The
Commission declines to adopt these
changes, which are inconsistent with its
rulemaking mandate under Section 45a.
As discussed above, Section 45a grants
the Commission authority to issue rules
to prevent unfair or deceptive acts or
practices relating to MUSA labeling.
Specifically, Section 45a authorizes the
Commission to issue rules to require
MUSA labeling to ‘‘be consistent with
decisions and orders of the Federal
Trade Commission issued pursuant to
[Section 5 of the FTC Act].’’ The FTC
may seek civil penalties for violations of
such rules.
1. Preemption
The Commission intends to preempt
state statutes or regulations that are
inconsistent with the Commission’s
rules only to the extent of the
inconsistency. 109 When it enacted
Section 45a, Congress declined to
expressly preempt state regulation or
otherwise demonstrate a clear intent for
federal law to occupy the field of
regulation in question.110 Accordingly,
Section 323.5 of the Rule preempts a
state statute, regulation, order, or
interpretation ‘‘to the extent that such
statute, regulation, order, or
interpretation is inconsistent with the
provisions of this part, and then only to
the extent of the inconsistency.’’
Moreover, the rule makes clear that a
state statute, regulation, order, or
interpretation is not inconsistent with
the rule if the protection such statute,
regulation, order, or interpretation
affords any consumer is greater than the
protection provided by the rule.
2. MUSA Advertising Generally
Some commenters encouraged the
Commission to expand the proposed
rule to cover all advertising that
includes any U.S.-origin claim, rather
than focusing as proposed on MUSA
labeling.111 Section 45a, however, is
directed at labels on products declaring
that a product is ‘‘in whole or
substantial part of domestic origin’’ and
thus may be labeled ‘‘Made in the
U.S.A.,’’ or the equivalent thereof. The
statute does not explicitly address
general advertising claims beyond the
context of labeling. Accordingly, in
enacting this rule, the Commission has
not focused on advertising more
generally, but retains the proposed
rule’s focus on MUSA claims on labels
or in mail order or catalog advertising,
including in online marketplaces, that
depict a product label. However, the
FTC’s general authority under Sections
5 and 12 of the FTC Act covers
advertising, including advertising of
qualified and unqualified MUSA
claims.112
3. Mandatory Country-of-Origin
Labeling
Other commenters recommended the
Commission make country-of-origin
labeling mandatory. For example, the
Made in USA Foundation proposed that
the Rule should require that all
advertisements for specified categories
of products, including all products
advertised for sale on the internet,
disclose the country of origin of the
products in a clear and prominent
manner. 113 While the Commission
acknowledges that many consumers
may find such information to be
valuable in many circumstances,
Section 45a does not authorize the
Commission to establish a mandatory
country-of-origin labeling scheme. The
statute grants the Commission authority
to issue rules to ensure that Made in
USA claims are not deceptive and are
consistent with the Commission’s
decisions and orders defining unfair or
deceptive acts or practices under
Section 5. Accordingly, the Commission
lacks authority under Section 45a to
enact this proposal.
4. Qualified U.S.-Origin Claims
Some commenters also argued that
the rule should also address qualified
U.S.-origin claims. The United
Steelworkers asserted that, ‘‘[a]s firms
with global supply chains seek to
benefit from the value consumers place
in products with American content, we
must ensure that qualified claims
accurately represent the level of value
creation in the United States.’’ 114
Section 45a, however, is directed to
labels on products declaring that a
product is ‘‘in whole or substantial part
of domestic origin,’’ and therefore the
Rule is directed to unqualified claims,
rather than more varied qualified
claims. Accordingly, the FTC will
continue to address deceptive qualified
U.S.-origin claims under its general
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115 15 U.S.C. 45(a).
116 Chris Posey (7).
117 See 15 U.S.C. 45(m)(1)(A) (establishing civil
penalties for violations of Commission rules); see
also 16 CFR 1.98 (stating currently applicable
maximum civil penalty amounts).
118 15 U.S.C. 45(m)(1)(C). 	119 See 16 CFR 1.25.
120 5 U.S.C. 603–605.
121 Anonymous (24) (commenter is unaware of
small entities affected by the NPRM); UIUC—BADM
403—A02 (25) (commenter is unaware of small
entities affected by the NPRM); Family Farm Action
Alliance (543) (anticipating positive economic
outcomes for small business entities as a result of
the rule); Leo McDonnell (578) (anticipating
benefits for small businesses, including ranchers
and feeders); McKenna Walsh (581) (stating the
Rule will be helpful for small businesses lacking
resources to engage in MUSA litigation); Natural
Continued
authority in Section 5 of the FTC Act.115
Marketers should continue to consult
the Policy Statement for guidance on the
application of the Commission’s Section
5 analysis to such claims including, but
not limited to, ‘‘Assembled in USA,’’
claims indicating the amount of U.S.
content (e.g., ‘‘60% U.S. Content’’),
claims indicating the parts or materials
that are imported (e.g., ‘‘Made in USA
from imported leather’’), or claims about
specific processes or parts (e.g., claims
a product is ‘‘designed,’’ ‘‘painted,’’ or
‘‘written’’ in the United States).
5. Civil Penalties
Some commenters argued that larger
businesses may not be sufficiently
deterred by the current maximum civil
penalty amounts for violations of
Commission rules and recommended
that civil penalties should be increased
for larger firms. 116 The Commission
lacks authority, however, to establish
civil penalty maximums that depart
from the levels provided by statute.
Civil penalty amounts for violations of
the Commission’s rules are established
by the FTC Act.117 Nonetheless, the
Commission believes that its civil
penalty authority generally provides an
effective deterrent against rule
violations, and notes that civil penalties
for violations of a rule are assessed per
violation. Moreover, the FTC Act
establishes a series of factors for courts
to consider in assessing appropriate
civil penalty amounts in individual
enforcement matters, including ‘‘the
degree of culpability, any history of
prior such conduct, ability to pay, effect
on ability to continue to do business,
and such other matters as justice may
require.’’ 118 To the extent firm size is an
appropriate consideration within one or
more of these factors, the Commission
will take that factor into account in
seeking civil penalties.
III. Final Rule
For the reasons described above, the
Commission has determined to adopt
the substantive provisions of the rule as
initially proposed. Specifically, the rule
covers labels on products that make
unqualified MUSA claims. It codifies
the Commission’s previous MUSA
Decisions and Orders and prohibits
marketers from making unqualified
MUSA claims on labels unless: (1) Final
assembly or processing of the product
occurs in the United States, (2) all
significant processing that goes into the
product occurs in the United States, and
(3) all or virtually all ingredients or
components of the product are made
and sourced in the United States. The
rule also covers labels making
unqualified MUSA claims appearing in
mail order catalogs or mail order
advertising.
To avoid confusion or perceived
conflict with other country-of-origin
labeling laws and regulations, the rule
specifies that it does not supersede,
alter, or affect any other federal or state
statute or regulation relating to country-
of-origin labels, except to the extent that
a state country-of-origin statute,
regulation, order, or interpretation is
inconsistent with the rule.
Finally, the Commission has adopted
a new Section, 323.6, to address
commenter concerns about the
applicability of the ‘‘all or virtually all’’
standard across product categories. This
provision allows marketers and other
covered persons to seek full or partial
exemptions if they can demonstrate
application of the rule’s requirements to
a particular product or class of product
is not necessary to prevent the acts or
practices to which the rule relates. The
Commission’s rules of practice
governing petitions for rulemaking
provide the procedures for submitting
such petitions.119 Pursuant to this
process, interested persons may file
relevant consumer perception evidence
and data with the Commission. If the
Commission deems the petition
sufficient to warrant further
consideration, it will follow the
procedures outlined in Section 1.25 of
its rules.
IV. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
federal agencies to seek and obtain
Office of Management and Budget
(‘‘OMB’’) approval before undertaking a
collection of information directed to ten
or more persons. The Commission has
determined that there are no new
requirements for information collection
associated with this final rule.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996, requires that the
Commission provide an Initial
Regulatory Flexibility Analysis with a
proposed rule, and a Final Regulatory
Flexibility Analysis with the final Rule,
unless the Commission certifies that the
proposed Rule will not have a
significant impact on a substantial
number of small entities.120
The Commission recognizes some
affected entities may qualify as small
businesses under the relevant
thresholds. However, the Commission
anticipates that the final Rule will not
have the threshold impact on small
entities. First, the rule includes no new
barriers to making claims, such as
reporting or approval requirements.
Second, the rule merely codifies
standards established in FTC
enforcement Decisions and Orders for
decades. Therefore, the Rule imposes no
new burdens on law-abiding businesses.
Accordingly, the Commission certifies
that the final rule will not have a
significant economic impact on a
substantial number of small businesses.
Although the Commission certifies
under the RFA that the amendment will
not have a significant impact on a
substantial number of small entities, the
Commission has determined,
nonetheless, that it is appropriate to
publish a Final Regulatory Flexibility
Analysis in order to explain the impact
of the amendments on small entities as
follows:
A. Description of the Need for and
Objectives of the Rule
The Commission proposed the MUSA
Labeling Rule for two primary reasons:
To strengthen its enforcement program
and make it easier for businesses to
understand and comply with the law.
Specifically, by codifying the existing
standards applicable to MUSA claims in
a rule as authorized by Congress, the
FTC will be able to provide more
certainty to marketers about the
standard for making unqualified claims
on product labels, without imposing any
new obligations on market participants.
In addition, enactment of the Rule will
enhance deterrence by authorizing civil
penalties against those making unlawful
MUSA claims on product labels.
B. Issues Raised by Comments in
Response to the IRFA
The Commission received six
comments specifically related to the
impact of the Rule on small
businesses.121 Of those six, all
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Products Association (618) (stating the rule would
require small dietary supplement businesses to
relabel products).
122 Natural Products Association (618). 	123 Id.
anticipated the rule would benefit small
businesses, with the exception of the
Natural Products Association, which
argued that the Rule would impose costs
on dietary supplement manufacturers
that would have to relabel products.122
The FTC notes that the rule imposes no
new requirements on dietary
supplement manufacturers, and that
products requiring relabeling as a result
of the FTC’s rule were likely deceptively
labeled prior to the Rule’s publication.
The Chief Counsel for Advocacy of the
Small Business Administration did not
submit comments.
C. Estimate of Number of Small Entities
to Which the Rule Will Apply
The Small Business Administration
estimates that in 2018 there were 30.2
million small businesses in the United
States. The rule will apply to small
businesses that make MUSA claims on
product labels. The Commission
estimates the rule will not have a
significant impact on these small
businesses because it does not impose
any new obligations on law-abiding
businesses; rather, it merely codifies
standards established in FTC
enforcement Decisions and Orders for
decades.
D. Projected Reporting, Recordkeeping,
and Other Compliance Requirements,
Including Classes of Covered Small
Entities and Professional Skills Needed
To Comply
The rule imposes no affirmative
reporting or recordkeeping
requirements. The rule’s compliance
requirements, consistent with the Policy
Statement and longstanding
Commission case law, require that
marketers may not make unqualified
U.S.-origin claims on product labels
unless final assembly or processing of
the product occurs in the United States,
all significant processing that goes into
the product occurs in the United States,
and all or virtually all ingredients or
components of the product are made
and sourced in the United States. The
small entities potentially covered by the
rule will include all such entities that
make MUSA claims on product labels.
The rule codifies the standard for
MUSA claims established in
Commission Decisions and Orders, and
no new obligations are anticipated.
E. Description of Steps Taken To
Minimize Significant Economic Impact,
if Any, on Small Entities, Including
Alternatives
The Commission sought comment and
information on the need, if any, for
alternative compliance methods that
would reduce the economic impact of
the rule on such small entities. Several
commenters proposed alternatives to the
proposed rule including: (1) Introducing
a percentage-of-costs standard; (2)
adopting a standard that makes
allowances for imported parts or
materials not available in the United
States; (3) aligning with CBP’s
substantial transformation standard; or
(4) adding a safe harbor for ‘‘good faith’’
efforts to comply. Other commenters
proposed that the Commission provide
for a delayed effective date to allow
businesses additional time to comply.
As discussed above, the Commission
has declined to adopt these alternatives
because it believes they would
undermine the effectiveness of the rule.
In addition, the Natural Products
Association recommended the FTC
incorporate an example specific to
dietary supplements.123 The
Commission has declined to include
examples specific to any particular
industry in the Rule. The rule codifies
the standards articulated in Commission
enforcement decisions that have been
applicable to MUSA claims for decades.
FTC guidance and enforcement
decisions provide numerous examples
demonstrating how to apply the ‘‘all or
virtually all’’ standard in a variety of
industries. Accordingly, the
Commission has concluded that it is
unnecessary to provide industry-
specific examples in the Rule.
As described previously, the rule
merely codifies standards already
established in FTC enforcement
Decisions and Orders. It does not
impose new substantive obligations on
businesses that have already been
complying with their obligations to
avoid deceptive claims under Section 5
of the FTC Act. Under these
circumstances, the Commission does
not believe a special exemption for
small entities or significant compliance
alternatives are necessary or appropriate
to minimize the compliance burden, if
any, on small entities while achieving
the intended purposes of the rule.
Nonetheless, the Commission has
adopted a provision allowing covered
persons to petition the Commission for
an exemption from the Rule if
application of the rule’s requirements is
not necessary to prevent the acts or
practices to which the rule relates.
VI. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has
designated this rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
VII. Final Rule Language
List of Subjects in 16 CFR Part 323
Labeling, U.S. origin.
■ For the reasons stated in the preamble,
the Federal Trade Commission adds part
323 to subchapter C of title 16 of the
Code of Federal Regulations as follows:
PART 323—MADE IN USA LABELING
Sec.
323.1 Definitions.
323.2 Prohibited acts.
323.3 Applicability to mail order
advertising.
323.4 Enforcement.
323.5 Relation to Federal and State laws.
323.6 Exemptions.
Authority: 15 U.S.C. 45a.
§ 323.1 Definitions.
As used in this part:
(a) The term Made in the United
States means any unqualified
representation, express or implied, that
a product or service, or a specified
component thereof, is of U.S. origin,
including, but not limited to, a
representation that such product or
service is ‘‘made,’’ ‘‘manufactured,’’
‘‘built,’’ ‘‘produced,’’ ‘‘created,’’ or
‘‘crafted’’ in the United States or in
America, or any other unqualified U.S.-
origin claim.
(b) The terms mail order catalog and
mail order promotional material mean
any materials, used in the direct sale or
direct offering for sale of any product or
service, that are disseminated in print or
by electronic means, and that solicit the
purchase of such product or service by
mail, telephone, electronic mail, or
some other method without examining
the actual product purchased.
§ 323.2 Prohibited acts.
In connection with promoting or
offering for sale any good or service, in
or affecting commerce as ‘‘commerce’’ is
defined in section 4 of the Federal Trade
Commission Act, 15 U.S.C. 44, it is an
unfair or deceptive act or practice
within the meaning of section 5(a)(1) of
the Federal Trade Commission Act, 15
U.S.C. 45(a)(1), to label any product as
Made in the United States unless the
final assembly or processing of the
product occurs in the United States, all
significant processing that goes into the
product occurs in the United States, and
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37033	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
1 See 15 U.S.C. 45a.
2 See generally Statement of Commissioner Rohit
Chopra Regarding Activating Civil Penalties for
Made in USA Fraud (Apr. 17, 2019), https://
www.ftc.gov/public-statements/2019/04/statement-
commissioner-rohit-chopra-regarding-activating-
civil-penalties.
3 Even without a final rule, Commissioners could
have sought more in administrative settlements,
given that much of the Made in USA fraud detected
by Commission staff met the definition of
‘‘dishonest or fraudulent’’ in Section 19 of the FTC
Act. 15 U.S.C. 57b. Instead, Commissioners
routinely accepted settlements with no meaningful
relief at all.
4 The Commission received over 700 comments in
response to its Notice of Proposed Rulemaking on
Made in USA labeling. See FTC Seeks Comments
on MUSA Rulemaking, Matter No. P074204, Docket
ID FTC–2020–0056 (July 16, 2020), https://
www.regulations.gov/docket/FTC-2020-0056.
5 See ‘‘Made in USA’’ and Other U.S. Origin
Claims, 62 FR 63756 (Dec. 2, 1997).
6 See 16 CFR 323.3.
7 See 7 U.S.C. 227.
all or virtually all ingredients or
components of the product are made
and sourced in the United States.
§ 323.3 Applicability to mail order
advertising.
To the extent that any mail order
catalog or mail order promotional
material includes a seal, mark, tag, or
stamp labeling a product Made in the
United States, such label must comply
with § 323.2.
§ 323.4 Enforcement.
Any violation of this part 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.
§ 323.5 Relation to Federal and State laws.
(a) In general. This part shall not be
construed as superseding, altering, or
affecting the application of any other
federal law or regulation relating to
country-of-origin labeling requirements,
including but not limited to the Federal
Meat Inspection Act, 21 U.S.C. 601 et
seq., the Poultry Products Inspection
Act, 21 U.S.C. 451 et seq., and the Egg
Products Inspection Act, 21 U.S.C. 1031
et seq. In addition, this part shall not be
construed as superseding, altering, or
affecting any other State statute,
regulation, order, or interpretation
relating to country-of-origin labeling
requirements, except to the extent that
such statute, regulation, order, or
interpretation is inconsistent with the
provisions of this part, and then only to
the extent of the inconsistency.
(b) Greater protection under State law.
For purposes of this section, a State
statute, regulation, order, or
interpretation is not inconsistent with
the provisions of this part if the
protection such statute, regulation,
order, or interpretation affords any
consumer is greater than the protection
provided under this part, as determined
by the Commission on its own motion
or upon the petition of any interested
party.
§ 323.6 Exemptions.
Any person to whom this Rule applies
may petition the Commission for a
partial or full exemption. The
Commission may, in response to
petitions or on its own authority, issue
partial or full exemptions from this part
if the Commission finds application of
the Rule’s requirements is not necessary
to prevent the acts or practices to which
the Rule relates. The Commission shall
resolve petitions using the procedures
provided in § 1.25 of this chapter. If
appropriate, the Commission may
condition such exemptions on
compliance with alternative standards
or requirements to be prescribed by the
Commission.
By direction of the Commission.
April J. Tabor,
Secretary.
The following Appendices will not
Appear in the Code of Federal
Regulations.
Appendix I: Statement of Commissioner
Rohit Chopra Joined by Chair Lina
Khan and Commissioner Rebecca Kelly
Slaughter
Today, the Commission has voted to adopt
a final Made in USA rule. The final rule
reflects a substantial number of comments
from the public, which overwhelmingly
supported this policy change by the
Commission. By formally codifying this rule,
the Commission has activated a broader
range of remedies, including the ability to
seek redress, damages, penalties, and other
relief from those who lie about a Made in
USA label. The rule will especially benefit
small businesses that rely on the Made in
USA label, but lack the resources to defend
themselves from imitators.
Absent this rule, the Commission would be
unable to seek this full set of sanctions.
Importantly, this is a ‘‘restatement rule,’’
which affirms longstanding guidance and
legal precedent with respect to Made in USA
labels—thereby imposing no new obligations
on manufacturers and sellers. Because of the
stricter sanctions they trigger, restatement
rules such as this one will increase fraud
deterrence and ensure that victims can be
made whole.
Background on the FTC’s Permissive Policy
on Made in USA Fraud
For decades, there has been a bipartisan
consensus among Commissioners that Made
in USA fraud should not be penalized. In my
view, this policy posture was in direct
contravention of both the letter and spirit of
the law Congress enacted.
In 1994, shortly after the North American
Free Trade Agreement took effect, Congress
enacted legislation to protect the integrity of
our national brand by explicitly authorizing
the FTC to trigger penalties and other relief
for Made in USA fraud, but only after
formally codifying a rule.1 However, the
Commission never even proposed one.2
Instead, over the past quarter century,
Commissioners implemented a highly
permissive Made in USA fraud policy, where
violators faced essentially no consequences
whatsoever. Even in cases of blatant abuse of
the Made in USA label, Commissioners
routinely voted to allow wrongdoers to settle
for no restitution, no forfeiture of ill-gotten
gains, no admission or findings of liability,
and no notice to victims.3 In adopting this
rule, the Commission acknowledges that this
longstanding policy was misguided and
agrees that the codification of today’s final
rule is long overdue.
Noteworthy Provisions of the Final Rule
In 2019, TINA.org filed a petition with the
Commission to promulgate a rule, given the
rampant Made in USA fraud across sectors of
the economy. In 2020, the Commission
issued a Notice of Proposed Rulemaking and
then analyzed a substantial number of
comments from producers, consumers,
foreign governments, and others.4 After
considering these comments, the
Commission has adopted a rule consistent
with the authority granted by Congress in
1994. There are several aspects worthy of
brief discussion.
First, the Commission has codified the ‘‘all
or virtually all’’ standard, consistent with the
FTC’s longstanding Enforcement Policy
Statement on U.S. Origin Claims.5 This
standard covers unqualified claims. The
Commission must protect the public from
deception, and the agency declines to adopt
alternative approaches, as explained in the
final rule.
Second, the Commission has outlined a
definition of ‘‘label’’ consistent with the
Commission’s expertise on labeling. While
the Commission declines to adopt a
definition that includes a list of specific
examples, such as restaurant menus, the
definition of label does extend beyond labels
physically affixed to a product. As described
in the rule, other depictions of labels are also
covered; in some circumstances, labels
appearing online may also be subject to the
rule.6 The Commission declines to cover
advertising more broadly, as this is
inconsistent with the authority granted by
Congress.
Third, there was considerable interest in
the rulemaking from farmers, ranchers, and
others in the meat and agricultural industry,
with the majority of comments arguing in
favor of stricter standards. The rule declines
to grant an exemption sought by the
meatpacking industry, as this would be
inconsistent with the Commission’s authority
prescribed by Congress under the Packers
and Stockyards Act. 7 However,
contemporaneous with the FTC’s vote today,
the U.S. Department of Agriculture has
announced that it will be conducting a top-
to-bottom review of its labeling standard.
USDA has previously acknowledged that its
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37034 	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
1 I have voted to support every MUSA
enforcement action recommended to the
Commission by staff since joining the Commission.
See In the Matter of Gennex Media, LLC No. C–4741
(Apr. 2021), https://www.ftc.gov/system/files/
documents/cases/2023122gennexmediafinalorder.
pdf; In the Matter of Chemence, Inc., et al., No. 4738
(Feb. 2021), https://www.ftc.gov/system/files/
documents/cases/2021-02-10_chemence_admin_
order.pdf; In the Matter of Williams-Sonoma, Inc.,
No. C–4724 (July 2020), https://www.ftc.gov/
system/files/documents/cases/2023025c4724
williamssonomaorder.pdf; U.S. v. iSpring Water
Systems, LLC, et al., No. 1:16–cv–1620–AT (N.D.
Ga. 2019); https://www.ftc.gov/system/files/
documents/cases/172_3033_ispring_water_systems_
-_stipulated_order.pdf; In the Matter of Sandpiper
Gear of California, Inc. et al., No. 182–3095, https://
www.ftc.gov/enforcement/cases-proceedings/182-
3095/sandpiper-california-inc-et-al-matter;
Underground Sports d/b/a Patriot Puck, et al., No.
182–3113 (April 2019), https://www.ftc.gov/
enforcement/cases-proceedings/182-3113/
underground-sports-inc-doing-business-patriot-
puck-et-al; In the Matter of Nectar Sleep, LLC,
No.182–3038 (Sept. 2018), https://www.ftc.gov/
enforcement/cases-proceedings/182-3038/nectar-
brand-llc.
2 Conf. Rep. on H.R. 3355 (filed in House
(8/21/1994)).
3 Several commenters echoed the concerns I
raised in my statement when the Commission
sought comment on this proposed Rule and those
raised by Commissioner Phillips. See Council for
Responsible Nutrition Comment; Personal Care
Products Council Comment; National Association of
Manufacturers Comment; Anonymous Comment
592.
4 See Part 323.1(b).
5 See Part 323.3.
6 Guidance on the definition of ‘‘label’’ can be
found in analogous FTC rules and guides in a
variety of contexts. There, ‘‘labels’’ repeatedly have
been defined as a distinct subcategory of advertising
(in other words, not coterminous with advertising)1
and have been described as objects attached to a
product or its packaging.1 Given both the statutory
guidance Congress provided when it drafted this
statute, and precedent concerning the term ‘‘label’’
in FTC rules and guides, the Commission has ample
landmarks to draft a Rule that falls within its
jurisdictional boundaries.
7 Statement of Commissioner Christine S. Wilson
Concurring in Part, Dissenting in Part, Notice of
Proposed Rulemaking related to Made in USA
Claims (June 22, 2020), https://www.ftc.gov/system/
files/documents/public_statements/1577099/
p074204musawilsonstatementrev.pdf.
8 Report: Americans Going Online . . . Explosive
Growth, Uncertain Destinations, Pew Research
Center (Oct. 16, 1995) (noting ‘‘most consumers are
still feeling their way through cyberspace . . . [and]
have yet to begin purchasing goods and services
online’’), available at: https://www.people-
press.org/1995/10/16/americans-going-online-
explosive-growth-uncertain-destinations/.
9 U.S. Innovation and Competition Act, S. 1260,
Section 2510, 117th Cong. (June 8, 2021), https://
www.democrats.senate.gov/imo/media/doc/
DAV21A48.pdf.
10 See UIUC Accounting Group Comment; Shirley
Boyd Comment; UIUC—BADM Comment; Senators
Comment; United Steelworkers Comment; Women
Involved in Farm Economics/Pam Potthoff Beef
Chairman Comment.
‘‘Product of USA’’ designation may be
deceptive. I am extremely grateful to
Secretary Tom Vilsack and USDA staff for the
action they are taking.
I hope the USDA will study the FTC’s
rulemaking record carefully and come to the
same conclusion I have: The USDA’s Product
of USA standard is misleading and distorts
competition in the retail market for beef and
other products. I also believe that unqualified
‘‘Product of USA’’ claims for meat products
are only appropriate when the animal was
born, raised, and slaughtered in the United
States. Given our shared jurisdiction, I expect
that the Commission will deepen its
partnership with the USDA and closely
coordinate on any enforcement proceeding
with respect to retail sales of meat and other
products.
Conclusion
The Commission appreciates the
substantial public interest in protecting the
Made in USA brand. The final rule provides
substantial benefits to the public by
protecting businesses from losing sales to
dishonest competitors, and protecting
families seeking to purchase American-made
goods. More broadly, this long-overdue rule
is an important reminder that the
Commission must do more to use the
authorities explicitly authorized by Congress
to protect market participants from fraud and
abuse. I thank my fellow Commissioners and
members of the Commission staff who
contributed to the development of this final
rule, as well as members of the public for
their thoughtful contributions.
Appendix II: Dissenting Statement of
Commissioner Christine S. Wilson
Today the Commission announces a Final
Rule with respect to ‘‘Made in USA’’ (MUSA)
labels. I support the FTC’s prosecution of
MUSA fraud 1 and supported its
consideration of a rule that addresses
deceptive MUSA claims on labels, consistent
with the authority granted to the FTC by
Congress in Section 45a. The Rule
announced today, however, exceeds that
authority.
Section 45a of the FTC Act—the provision
pursuant to which we advance this Rule—
authorizes the Commission to issue rules
governing MUSA claims on products ‘‘with
a ‘Made in the U.S.A.’ or ‘Made in America’
label, or the equivalent thereof.’’ The
provision is titled ‘‘Labels on products’’ and
repeatedly references ‘‘labels.’’ The
Commission nonetheless has chosen to
promulgate a rule that could be read to cover
all advertising, not just labeling.
This Rule is not supported by the plain
language of 45a. It is clear Congress intended
to extend rulemaking authority over the
many potential variations (or ‘‘equivalents’’)
of ‘‘Made in the U.S.A.’’ or ‘‘Made in
America’’ claims that may be found on labels,
not labels and claims made in advertising or
marketing. The legislative history for Section
45a supports this interpretation. Specifically,
the Conference Report on H.R. 3355
discusses any label characterizing ‘‘a product
as ‘Made in the U.S.A.’ or the equivalent
thereof,’’ signaling Congress’ intent that the
statute should cover not just literal
invocations of ‘‘Made in the U.S.A.,’’ but also
equivalents to that claim (i.e., Made in
America, American Made, and so on).2
The Commission’s Rule defines the term
far more broadly than any FTC precedent,
and in a way that, in my view, exceeds our
statutory grant of rulemaking authority.3 The
Rule we issue today will cover not just labels,
but all:
‘‘materials, used in the direct sale or direct
offering for sale of any product or service,
that are disseminated in print or by
electronic means, and that solicit the
purchase of such product or service by mail,
telephone, electronic mail, or some other
method without examining the actual
product purchased’’ 4 that include ‘‘a seal,
mark, tag, or stamp labeling a product Made
in the United States.’’ 5
This language could bring within the scope
of the Rule stylized marks in online
advertising or paper catalogs and potentially
other advertising marks, such as hashtags,
that contain MUSA claims.6
In the statement I issued when the
Commission sought comment on this
proposed Rule, I noted that were Congress
drafting this statute now, it might choose
language to encompass those broader
contexts, including online advertising.7 But
there was no plausible argument to be made
that the ordinary meaning of the text when
enacted in 1994 encompassed online
advertising—a period when online shopping
was largely unfamiliar to most consumers.8
As it happens, the Senate recently passed the
Country of Origin Labeling Online Act
(COOL Act), which prohibits deceptive
country-of-origin representations. There
Congress did, in fact, specify its application
to labeling as well as other forms of online
advertising:
it shall be unlawful to make any false or
deceptive representation that a product or its
parts or processing are of United States origin
in any labeling, advertising, or other
promotional materials, or any other form of
marketing, including marketing through
digital or electronic means in the United
States. 9
This language, in contrast to Section 45a,
leaves no doubt it applies to labeling and
advertising and confirms Congress views
‘‘labeling’’ as distinct from ‘‘advertising or
other promotional materials,’’ including in an
online context.
To the extent the Commission seeks to
issue a broader prohibition on Made in USA
fraud, as Commissioner Chopra asserted
when the Commission sought comment on
this Rule, it has other options. The
Commission can institute a rulemaking
proceeding pursuant to Section 18 of the FTC
Act. Several commenters suggested that
rather than promulgate a limited rule for
labeling claims, the Commission should
conduct a full proceeding to address all
advertising claims. 10 The Commission has
not taken this action. The Commission
alternatively could work with Congress to
effectuate the passage of the COOL Act,
which would appear to moot this Rule if
enacted.
Accordingly, because this Rule exceeds the
scope of authority granted by Congress to the
FTC, I dissent. I do not support creatively
and expansively interpreting the agency’s
jurisdiction with respect to rulemaking
authority.
The Commission, for more than 80 years,
built a comprehensive program to ensure
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37035	Federal Register / Vol. 86, No. 132 / Wednesday, July 14, 2021 / Rules and Regulations
11 The FTC has issued over 150 closing letters to
companies making misleading U.S.-origin claims.
Made in USA Workshop Report at 3 (June 2020).
Companies only receive closing letters if they
demonstrate to staff they will come into compliance
with the FTC’s Enforcement Policy Statement on
‘‘Made in the USA.’’ The staff’s workshop report
explains ‘‘companies often produce substantiation
for updated claims to the FTC staff, and then
present a plan that includes training staff, updating
online marketing materials (e.g., company websites
and social media platforms), updating hardcopy
marketing materials (e.g., product packaging,
advertisements, tradeshow materials), and working
with dealers, distributors, and third-party retailers
to ensure downstream claims are in compliance.’’
Id. at 3 n.7. The FTC has also settled over 25
enforcement actions, charging that companies
refused to come into compliance or engaged in
outright fraud. Id.
12 I would note as well that seeking civil penalties
for deceptive MUSA claims, as defined under the
Commission’s Rule, could have adverse market
effects. Excessive penalties, divorced from harm,
can result in over-deterrence. Importantly, the costs
associated with over-deterrence are likely to
increase with the expansiveness of the definition of
labelling.
13 AMG v. FTC, slip op No. 19–508 (Apr. 22,
2021), https://www.supremecourt.gov/opinions/
20pdf/19-508_l6gn.pdf.
14 See Federal Trade Commission Improvements
Act of 1980, Public Law 96–252, 94 Stat. 374 (1980)
(reforming the ability of the FTC to promulgate
rules by requiring a multi-step process with public
comment and subject to Congressional review). This
Act also authorized $255 million in funding for the
Commission and was the first time since 1977 the
agency was funded through the traditional funding
process after the backlash from Congress over its
rulemaking activities. See Kintner, Earl, et al., ‘‘The
Effect of the Federal Trade Commission
Improvements Act of 1980 on the FTC’s
Rulemaking and Enforcement Authority,’’ 58 Wash.
U. Law Rev. 847 (1980); see also J. Howard Beagles
III and Timothy J. Muris, FTC Consumer Protection
at 100: 1970s Redux or Protecting Markets to Protect
Consumers?, 83 Geo. Wash. L. Rev. 2157 (2015)
(describing the ‘‘disastrous failures’’ of the FTC in
the 1970s and the 1980s from enforcement and
regulatory overreach and quoting Jean Carper, The
Backlash at the FTC, Wash. Post, C1 (Feb. 6, 1977)
(describing the backlash from Congress at the FTC,
after a period of intense rulemaking activity
culminating in the agency’s being dubbed the
‘‘National Nanny’’)); see also Alex Propes, Privacy
and FTC Rulemaking: A Historical Context, IAB
(Nov. 6, 2018) (discussing how the FTC’s
rulemaking history could be influencing
Congressional comfort with vesting the FTC with
additional privacy authority), https://www.iab.com/
news/privacy-ftc-rulemaking-authority-a-historical-
context/.
15 See Transcript: Oversight of the Federal Trade
Commission: Strengthening Protections for
Americans’ Privacy and Data Security (May 8,
2019), available at: https://docs.house.gov/
meetings/IF/IF17/20190508/109415/HHRG-116-
IF17-Transcript-20190508.pdf. At this Hearing, Rep.
McMorris Rogers stated: ‘‘In various proposals,
some groups have called for the FTC to have
additional resources and authorities. I remain
skeptical of Congress delegating broad authority to
the FTC or any agency. However, we must be
mindful of the complexities of this issue as well as
the lessons learned from previous grants of
rulemaking authority to the Commission.’’
Transcript at 8–9. Rep. Walden similarly stated: ‘‘it
has been a few decades, but there was a time when
the FTC, as we heard, was given broad rulemaking
authority but stepped past the bounds of what
Congress and the public supported. This required
further congressional action and new restrictions on
the Commission.’’ Transcript at 62.
consumers can trust ‘‘Made in the USA’’
claims.11 My colleagues believe the
Commission’s 80 year MUSA enforcement
program was a failure and only a rule and the
imposition of penalties will deter false
MUSA claims. I believe administrative
consents, which were an integral part of this
program, can be an appropriate remedy to
address deceptive MUSA claims, consistent
with the views of bipartisan Commissions
during the last 25 years. I support seeking
monetary relief where appropriate but cannot
support acting outside the constraints of our
legislative authority.12
I fear as well this Commission’s desire to
promulgate or utilize our regulatory authority
in ways that exceed the boundaries of
underlying statutes and corresponding
Congressional intent will continue. The
Supreme Court’s recent decision in AMG 13
has eliminated the FTC’s ability to seek
equitable monetary relief under Section 13(b)
of the FTC Act to compensate consumers.
Thus, the temptation to test the limits of our
remaining sources of authority is strong. I
urge my colleagues to pause. Previous FTC
forays into areas outside its jurisdictional
authority have resulted in swift
condemnation from the courts and
Congress.14 Expansive interpretations of our
rulemaking authority will not engender
confidence among members of Congress who
have in the past expressed qualms about the
FTC’s history of frolics and detours.15
[FR Doc. 2021–14610 Filed 7–13–21; 8:45 am]
BILLING CODE 6750–01–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 573
[Docket No. FDA–2020–F–1289]
Food Additives Permitted in Feed and
Drinking Water of Animals;
Selenomethionine Hydroxy Analogue
AGENCY : Food and Drug Administration,
HHS.
ACTION : Final rule.
SUMMARY : The Food and Drug
Administration (FDA, we, or the
Agency) is amending the regulations for
food additives permitted in feed and
drinking water of animals to provide for
the safe use of selenomethionine
hydroxy analogue as a source of
selenium in feed for beef and dairy
cattle. This action is in response to a
food additive petition filed by Adisseo
France S.A.S.
DATES : This rule is effective July 14,
2021. See section V of this document for
further information on the filing of
objections. Submit either electronic or
written objections and requests for a
hearing on the final rule by August 13,
2021.
ADDRESSES : You may submit objections
and requests for a hearing as follows.
Please note that late, untimely filed
objections will not be considered.
Electronic objections must be submitted
on or before August 13, 2021. The
https://www.regulations.gov electronic
filing system will accept objections until
11:59 p.m. Eastern Time at the end of
August 13, 2021. Objections received by
mail/hand delivery/courier (for written/
paper submissions) will be considered
timely if they are postmarked or the
delivery service acceptance receipt is on
or before that date.
Electronic Submissions
Submit electronic objections in the
following way:
• Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting objections.
Objections submitted electronically,
including attachments, to https://
www.regulations.gov will be posted to
the docket unchanged. Because your
objection will be made public, you are
solely responsible for ensuring that your
objection does not include any
confidential information that you or a
third party may not wish to be posted,
such as medical information, your or
anyone else’s Social Security number, or
confidential business information, such
as a manufacturing process. Please note
that if you include your name, contact
information, or other information that
identifies you in the body of your
objection, that information will be
posted on https://www.regulations.gov.
• If you want to submit an objection
with confidential information that you
do not wish to be made available to the
public, submit the objection as a
written/paper submission and in the
manner detailed (see ‘‘Written/Paper
Submissions’’ and ‘‘Instructions’’).
Written/Paper Submissions
Submit written/paper submissions as
follows:
• Mail/Hand delivery/Courier (for
written/paper submissions): Dockets
Management Staff (HFA–305), Food and
Drug Administration, 5630 Fishers
Lane, Rm. 1061, Rockville, MD 20852.
• For written/paper objections
submitted to the Dockets Management
Staff, FDA will post your objection, as
well as any attachments, except for
information submitted, marked and
identified, as confidential, if submitted
as detailed in ‘‘Instructions.’’
Instructions: All submissions received
must include the Docket No. FDA–
2020–F–1289 for ‘‘Food Additives
Permitted in Feed and Drinking Water
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1 Pubic Law 106–102, 113 Stat. 1338 (1999).
2 See 15 U.S.C. 6801(b), 15 U.S.C. 6805(b)(2).
3 16 CFR 314.2(c).
4 16 CFR 314.3(a).
5 16 CFR 314.3(a), (b).
6 16 CFR 314.3(a), (b).
7 16 CFR 314.4(b).
8 16 CFR 314.4(c).
9 16 CFR 314.4(e).
10 16 CFR 314.4(a).
11 16 CFR 314.4(d).
12 Safeguards Rule, Request for Comment, 81 FR
61632 (Sept. 7, 2016).
13 The 28 public comments received prior to
March 15, 2019, are posted at: https://www.ftc.gov/
policy/public-comments/initiative-674.
14 See, e.g., Mortgage Bankers Association
(comment 39, NPRM); National Automobile Dealers
Association (Comment 40, NPRM); Data &
Marketing Association (comment 38, NPRM);
Electronic Transactions Association (comment 24,
NPRM); State Privacy & Security Coalition
(comment 26, NPRM).
15 FTC Notice of Proposed Rulemaking, 84 FR
13158 (April 4, 2019).
FEDERAL TRADE COMMISSION
16 CFR Part 314
RIN 3084–AB35
Standards for Safeguarding Customer
Information
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is issuing a final rule (‘‘Final Rule’’) to
amend the Standards for Safeguarding
Customer Information (‘‘Safeguards
Rule’’ or ‘‘Rule’’). The Final Rule
contains five main modifications to the
existing Rule. First, it adds provisions
designed to provide covered financial
institutions with more guidance on how
to develop and implement specific
aspects of an overall information
security program, such as access
controls, authentication, and
encryption. Second, it adds provisions
designed to improve the accountability
of financial institutions’ information
security programs, such as by requiring
periodic reports to boards of directors or
governing bodies. Third, it exempts
financial institutions that collect less
customer information from certain
requirements. Fourth, it expands the
definition of ‘‘financial institution’’ to
include entities engaged in activities the
Federal Reserve Board determines to be
incidental to financial activities. This
change adds ‘‘finders’’—companies that
bring together buyers and sellers of a
product or service—within the scope of
the Rule. Finally, the Final Rule defines
several terms and provides related
examples in the Rule itself rather than
incorporates them from the Privacy of
Consumer Financial Information Rule
(‘‘Privacy Rule’’).
DATES :
Effective date: This rule is effective
January 10, 2022.
Applicability date: The provisions set
forth in § 314.5 are applicable beginning
December 9, 2022.
FOR FURTHER INFORMATION CONTACT:
David Lincicum (202–326–2773),
Katherine McCarron (202–326–2333), or
Robin Wetherill (202–326–2220),
Division of Privacy and Identity
Protection, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Avenue NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
I. Background
Congress enacted the Gramm Leach
Bliley Act (‘‘GLB’’ or ‘‘GLBA’’) in 1999.1
The GLBA provides a framework for
regulating the privacy and data security
practices of a broad range of financial
institutions. Among other things, the
GLBA requires financial institutions to
provide customers with information
about the institutions’ privacy practices
and about their opt-out rights, and to
implement security safeguards for
customer information.
Subtitle A of Title V of the GLBA
required the Commission and other
Federal agencies to establish standards
for financial institutions relating to
administrative, technical, and physical
safeguards for certain information.2
Pursuant to the Act’s directive, the
Commission promulgated the
Safeguards Rule (16 CFR part 314) in
2002. The Safeguards Rule became
effective on May 23, 2003.
The current Safeguards Rule requires
a financial institution to develop,
implement, and maintain a
comprehensive information security
program that consists of the
administrative, technical, and physical
safeguards the financial institution uses
to access, collect, distribute, process,
protect, store, use, transmit, dispose of,
or otherwise handle customer
information.3 The information security
program must be written in one or more
readily accessible parts.4 The safeguards
set forth in the program must be
appropriate to the size and complexity
of the financial institution, the nature
and scope of its activities, and the
sensitivity of any customer information
at issue.5 The safeguards must also be
reasonably designed to ensure the
security and confidentiality of customer
information, protect against any
anticipated threats or hazards to the
security or integrity of the information,
and protect against unauthorized access
to or use of such information that could
result in substantial harm or
inconvenience to any customer. 6
In order to develop, implement, and
maintain its information security
program, a financial institution must
identify reasonably foreseeable internal
and external risks to the security,
confidentiality, and integrity of
customer information that could result
in the unauthorized disclosure, misuse,
alteration, destruction, or other
compromise of such information.7 The
financial institution must then design
and implement safeguards to control the
risks identified through the risk
assessment, and must regularly test or
otherwise monitor the effectiveness of
the safeguards’ key controls, systems,
and procedures.8 The Rule also requires
the financial institution to evaluate and
adjust its information security program
in light of the results of this testing and
monitoring, any material changes in its
operations or business arrangements, or
any other circumstances it knows or has
reason to know may have a material
impact on its information security
program. 9 The financial institution must
also designate an employee or
employees to coordinate the information
security program.10
Finally, the current Safeguards Rule
requires financial institutions to take
reasonable steps to select and retain
service providers capable of maintaining
appropriate safeguards for customer
information and require those service
providers by contract to implement and
maintain such safeguards. 11
II. Regulatory Review of the Safeguards
Rule
On September 7, 2016, the
Commission solicited comments on the
Safeguards Rule as part of its periodic
review of its rules and guides.12 The
Commission sought comment on a
number of general issues, including the
economic impact and benefits of the
Rule; possible conflicts between the
Rule and state, local, or other Federal
laws or regulations; and the effect on the
Rule of any technological, economic, or
other industry changes. The
Commission received 28 comments
from individuals and entities
representing a wide range of
viewpoints.13 Most commenters agreed
there is a continuing need for the Rule
and it benefits consumers and
competition. 14
On April 4, 2019, the Commission
issued a notice of proposed rulemaking
(NPRM) setting forth proposed
amendments to the Safeguards Rule (the
‘‘Proposed Rule’’).15 In response, the
Commission received 49 comments
from various interested parties
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70273	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
16 The 49 relevant public comments received on
or after March 15, 2019, can be found at
Regulations.gov. See FTC Seeks Comment on
Proposed Amendments to Safeguards and Privacy
Rules, 16 CFR part 314, Project No. P145407,
https://www.regulations.gov/docket/FTC-2019-
0019/document.
17 See FTC, Information Security and Financial
Institutions: An FTC Workshop to Examine
Safeguards Rule Tr. (July 13, 2020), https://
www.ftc.gov/system/files/documents/public_events/
1567141/transcript-glb-safeguards-workshop-
full.pdf [hereinafter Safeguards Workshop Tr.].
18 The 11 relevant public comments relating to
the subject matter of the July 13, 2020, workshop
can be found at https://www.regulations.gov/
document/FTC-2020-0038-0001. This document
cites comments using the last name of the
individual submitter or the name of the
organization, followed by the number based on the
last two digits of the comment ID number.
19 See Encore Capital Group (comment 25,
NPRM); Justine Bykowski (comment 12, NPRM);
‘‘Peggy from Bloomington, MN’’ (comment 13,
NPRM); ‘‘Anonymous’’ (comment 20, NPRM).
20 ‘‘Jane Q. Citizen’’ (comment 14, NPRM).
21 In a separate final rule, published elsewhere in
this issue of the Federal Register, the Commission
is amending the Privacy Rule to reflect changes
made by the Dodd-Frank Act, limiting that rule to
certain auto dealers. Through that proceeding, the
Commission is also removing examples of financial
institutions from the Privacy Rule that are no longer
covered under the rule in the wake of these
changes.
including industry groups, consumer
groups, and individual consumers.16 On
July 13, 2020, the Commission held a
workshop concerning the proposed
changes and conducted panels with
information security experts discussing
subjects related to the Proposed Rule.17
The Commission received 11 comments
following the workshop.18 After
reviewing the initial comments to the
Proposed Rule, conducting the
workshop, and then reviewing the
comments received following the
workshop, the Commission now issues
final amendments to the Safeguards
Rule.
III. Overview of Final Rule
As noted above, the Final Rule
modifies the current Rule in five
primary ways. First, the Final Rule
amends the current Rule to include
more detailed requirements for the
development and establishment of the
information security program required
under the Rule. For example, while the
current Rule requires financial
institutions to undertake a risk
assessment and develop and implement
safeguards to address the identified
risks, the Final Rule sets forth specific
criteria for what the risk assessment
must include, and requires the risk
assessment be set forth in writing. As to
particular safeguards, the Final Rule
requires that they address access
controls, data inventory and
classification, encryption, secure
development practices, authentication,
information disposal procedures,
change management, testing, and
incident response. And while the Final
Rule retains the requirement from the
current Rule that financial institutions
provide employee training and
appropriate oversight of service
providers, it adds mechanisms designed
to ensure such training and oversight
are effective. Although the Final Rule
has more specific requirements than the
current Rule, it still provides financial
institutions the flexibility to design an
information security program
appropriate to the size and complexity
of the financial institution, the nature
and scope of its activities, and the
sensitivity of any customer information
at issue.
Second, the Final Rule adds
requirements designed to improve
accountability of financial institutions’
information security programs. For
example, while the current Rule allows
a financial institution to designate one
or more employees to be responsible for
the information security program, the
Final Rule requires the designation of a
single Qualified Individual. The Final
Rule also requires periodic reports to
boards of directors or governing bodies,
which will provide senior management
with better awareness of their financial
institutions’ information security
programs, making it more likely the
programs will receive the required
resources and be able to protect
consumer information.
Third, recognizing the impact of the
additional requirements on small
businesses, the Final Rule exempts
financial institutions that collect
information on fewer than 5,000
consumers from the requirements of a
written risk assessment, incident
response plan, and annual reporting to
the Board of Directors.
Fourth, the Final Rule expands the
definition of ‘‘financial institution’’ to
include entities engaged in activities the
Federal Reserve Board determines to be
incidental to financial activities. This
change brings ‘‘finders’’—companies
that bring together buyers and sellers of
a product or service—within the scope
of the Rule. Finders often collect and
maintain very sensitive consumer
financial information, and this change
will require them to comply with the
Safeguards Rule’s requirements to
protect that information. This change
will also bring the Rule into harmony
with other Federal agencies’ Safeguards
Rules, which include activities
incidental to financial activities in their
definition of financial institution.
Finally, the Final Rule includes
several definitions and related
examples, including of ‘‘financial
institution,’’ in the Rule itself rather
than incorporate them from a related
FTC rule, the Privacy of Consumer
Financial Information Rule, 16 CFR part
313. This will make the rule more self-
contained and will allow readers to
understand its requirements without
referencing the Privacy Rule.
IV. Section-by-Section Analysis
General Comments
The Commission received 49
comments in response to the NPRM for
the Proposed Rule, from a diverse set of
stakeholders, including industry groups,
individual businesses, consumer
advocacy groups, academics,
information security experts,
government agencies, and individual
consumers. It also hosted a workshop on
the Proposed Rule, which included
approximately 20 security experts.
Some of the comments simply
expressed general support 19 or general
disapproval 20 of the Proposed Rule.
Many, however, offered detailed
responses to specific proposals in the
NPRM. In general, industry groups were
opposed to most or all of the Proposed
Rule, and consumer advocacy groups,
academics, and security experts were
generally in favor of the amendments.
The comments and workshop record are
discussed in the following Section-by-
Section analysis.
Sec. 314.1: Purpose and Scope
The Purpose and Scope section of the
current Rule generally states the Rule
implements the Gramm-Leach-Bliley
Act and applies to the handling of
customer information by financial
institutions over which the FTC has
jurisdiction. In its NPRM, the
Commission proposed adding a
definition of ‘‘financial institution’’
modeled on the definition included in
the Commission’s Privacy Rule (16 CFR
part 313) and a series of examples
providing guidance on what constitutes
a financial institution under the
Commission’s jurisdiction. Other than
expanding the definition of ‘‘financial
institution’’ as discussed below, the new
language was not meant to reflect a
substantive change to the Safeguards
Rule; rather, it was meant to allow the
Rule to be read on its own, without
reference to the Privacy Rule.21 The
Commission received no comments that
addressed this section specifically, and
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70274 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
22 Several commenters addressed the change to
the definition of ‘‘financial institution.’’ Those
comments are addressed in the discussion of the
definition of ‘‘financial institution’’ below.
23 American Council on Education (comment 24,
NPRM), at 7.
24 HITRUST, (comment 18, NPRM), at 2.
25 National Automobile Dealers Association
(comment 46, NPRM), at 11–12.
26 National Automobile Dealers Association
(comment 46, NPRM), at 11–12.
27 Money Services Round Table (comment 53,
NPRM), at 5 n.14.
28 National Independent Automobile Dealers
Association (comment 48, NPRM), at 4; National
the Commission adopts the language of
the Proposed Rule in the Final Rule.22
Sec. 314.2: Definitions
The Proposed Rule added a number of
definitions to § 314.2. The Proposed
Rule also retained paragraph (a), which
states terms used in the Safeguards Rule
have the same meaning as set forth in
the Privacy Rule.
The American Council on Education
(ACE) suggested all terms from the
Privacy Rule, such as ‘‘consumer,’’
‘‘customer,’’ and ‘‘customer
information,’’ be included in the Final
Rule in order to make the Final Rule
easier for regulated entities to
understand. 23 On the other hand,
HITRUST recommended no definitions
from the Privacy Rule be duplicated in
the Safeguards Rule, reasoning that in
the event of a need to amend the terms,
it would require the amendment of two
rules rather than one.24
The Commission is persuaded
including all terms from the Privacy
Rule within the Safeguards Rule will
improve clarity and ease of use.
Accordingly, the Commission has
determined to delete paragraph (a),
since it is no longer necessary to state
all terms in the Safeguards Rule have
the same meaning as in the Privacy
Rule. It also adds the Privacy Rule
definitions of ‘‘consumer,’’ ‘‘customer,’’
‘‘customer relationship,’’ ‘‘financial
product or service,’’ ‘‘nonpublic
personal information,’’ ‘‘personally
identifiable financial information,’’
‘‘publicly available information,’’ and
‘‘you’’ to the definitions in the Final
Rule. No substantive change to these
definitions is intended.
Authorized User
The Proposed Rule added a definition
for the term ‘‘authorized user’’ as
paragraph (b). Proposed paragraph (b)
defined an authorized user of an
information system as any employee,
contractor, agent or other person that
participates in your business operations
and is authorized to access and use any
of your information systems and data.
This term was used in § 314.4(c)(10) of
the Proposed Rule, which required
financial institutions to implement
policies to monitor the activity of
‘‘authorized users’’ and detect
unauthorized access to customer
information.
The Commission received one
comment on this proposed definition
from the National Automobile Dealers
Association (NADA), which suggested
the term ‘‘authorized user’’ was used
inconsistently and was too vague.25
NADA pointed out while ‘‘authorized
user’’ is a defined term, the term
‘‘authorized individual’’ was used in
proposed § 313.4(c)(1) (addressing
access controls for information systems)
and (c)(3) (addressing access controls for
physical data). NADA also argued the
inclusion of ‘‘other person that
participates in the business operations
of an entity’’ within the definition of
‘‘authorized user’’ was unclear and
created ambiguity in its application.26
The Commission agrees with NADA’s
points, and, in response, modifies the
Final Rule in two ways. First, the Final
Rule replaces the term ‘‘authorized
individual’’ with ‘‘authorized user’’ in
§ 313.4(c)(1). As described further
below, because the Final Rule combines
§ 313.4(c)(3) with § 313.4(c)(1), there is
no need to make a corresponding
change to that section.
Second, because the Commission
agrees the ambiguities in the definition
of ‘‘authorized user’’ from the Proposed
Rule could create confusion, it makes
several changes to the definition. It
deletes the phrase ‘‘other person that
participates in the business operations
of an entity.’’ The Commission agrees
this phrase was vague. The Commission
had intended it to cover any person the
financial institution allows to access
information systems or data, including,
for example, ‘‘customers’’ of the
financial institutions. For the purpose of
controlling authorized access and
detecting unauthorized access (which is
where the definition of ‘‘authorized
user’’ appears), financial institutions
should monitor anomalous patterns of
usage of their systems, not only by
employees and agents, but also by
customers and other persons authorized
to access systems or data. To clarify this
point, the Commission adds ‘‘customer
or other person’’ to the definition of
‘‘authorized users.’’
The Commission intends that the
definition of ‘‘authorized users’’ should
include anyone who the financial
institution authorizes to access an
information system or data, regardless of
whether that user actually uses the data.
Thus, for clarity, the Commission has
deleted the requirement that the
authorized user be authorized to use the
information system or data. Finally, the
definition of authorized user should
include users who can access both
‘‘information systems and data’’ and
users authorized to access either
information systems or data.
Accordingly, for clarification purposes,
the Commission modifies the definition
of authorized user in the Final Rule as
any employee, contractor, agent,
customer or other person that is
authorized to access any of your
information systems or data.
Security Event
In proposed paragraph (c), the
Commission defined security event as
an event resulting in unauthorized
access to, or disruption or misuse of, an
information system or information
stored on such information system. This
term was used in provisions requiring
financial institutions to establish a
written incident response plan designed
to respond to security events. It also
appeared in the provision requiring the
coordinator of a financial institution’s
information security program to provide
an annual report to the financial
institution’s governing body; the
required report must identify all
security events that took place that year.
Commenters expressed three main
concerns with this definition. The first
relates to whether the term ‘‘security
event’’ should be expanded to instances
in which there is unauthorized access
to, or disruption or misuse of,
information in physical form, as
opposed to electronic form. The
Proposed Rule used the term ‘‘security
event’’ instead of ‘‘cybersecurity event’’
to clarify that an information security
program encompasses information in
both digital and physical forms and that
unauthorized access to paper files, for
example, would also be a security event
under the Rule. The Money Services
Round Table (MSRT), however, noted
despite the use of the more general
‘‘security’’ in the defined term, the
definition itself is limited to events
involving information systems.27 The
Commission agrees this creates a
contradiction. Accordingly, the Final
Rule includes the compromise of
customer information in physical form
in the definition of ‘‘security event.’’
Second, some industry groups argued
a ‘‘security event’’ should occur only
when there is ‘‘unauthorized access’’ to
an information system, not in cases in
which there has been a ‘‘disruption or
misuse’’ of such systems (e.g., a
ransomware attack). 28 These
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70275	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
Automobile Dealers Association (comment 46,
NPRM), at 12–13; Consumer Data Industry
Association (comment 36, NPRM), at 3–4.
29 National Independent Automobile Dealers
Association (comment 48, NPRM), at 4; National
Automobile Dealers Association (comment 46,
NPRM), at 12–13.
30 HITRUST (comment 18, NPRM), at 3; American
Council on Education (comment 24, NPRM), at 7;
Mortgage Bankers Association (comment 26,
NPRM), at 4–5; Consumer Data Industry
Association (comment 36, NPRM), at 3–4; National
Automobile Dealers Association (comment 46,
NPRM), at 12–13; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 4.
31 Mortgage Bankers Association (comment 48,
NPRM), at 4–5; National Automobile Dealers
Association (comment 46, NPRM), at 12–13;
National Independent Automobile Dealers
Association (comment 48, NPRM) at 4; American
Council on Education (comment 24, NPRM), at 7.
32 National Automobile Dealers Association
(comment 46, NPRM), at 13.
33 American Council on Education (comment 24,
NPRM), at 7; Princeton University Center for
Information Technology Policy (comment 54,
NPRM), at 4.
34 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 4.
35 American Council on Education (comment 24,
NPRM), at 7.
commenters argued the disruption or
misuse of information systems is not
directly related to the protection of
customer information and is, therefore,
outside the Commission’s statutory
authority. 29 The Commission disagrees.
Requiring a financial institution to
protect against disruption and misuse of
its information system is within the
Commission’s authority under the
GLBA, which directed the Commission
to promulgate a rule that required
financial institutions to ‘‘to protect
against any anticipated threats or
hazards to the security or integrity’’ of
customer information. A disruption or
misuse of an information system will be,
in many cases, a threat to the ‘‘integrity’’
of customer information. In addition,
disruption or misuse may also indicate
the existence of a security weakness that
could be exploited to gain unauthorized
access to customer information. For
example, an event in which ransomware
placed on a system is used to encrypt
customer information, rendering it
useless, raises the possibility similar
software could have been used to
exfiltrate customer information.
Accordingly, the Final Rule retains the
inclusion of ‘‘misuse or disruption’’
within the definition of ‘‘security
event.’’
Third, several commenters suggested
the definition of ‘‘security event’’ be
limited to events in which there is a risk
of consumer harm or some other
negative effect.30 Similarly, some
commenters argued the definition
should exclude events that involve
encrypted information in which the
encryption key was not compromised or
when there is evidence the information
accessed has not been misused.31 The
Commission declines to narrow the
provision in this manner. It believes a
financial institution should still engage
in its incident response procedures to
determine whether the event indicates a
weakness that could endanger customer
information and to respond accordingly.
The financial institution can then take
the appropriate steps in response.
Further, § 314.4(h) of the Final Rule,
which sets forth the requirement for an
incident response plan, requires the
incident response plan be designed to
respond only to security events
‘‘materially affecting the confidentiality,
integrity, or availability of customer
information,’’ limiting the impact of the
definition of ‘‘security event.’’
Accordingly, the Final Rule defines
security event as an event resulting in
unauthorized access to, or disruption or
misuse of, an information system,
information stored on such information
system, or customer information held in
physical form. The Proposed Rule
placed this definition as paragraph (c),
out of alphabetical order. The Final Rule
adopts it as paragraph (p), placing it in
alphabetical order with the other
definitions in § 314.2.
Encryption
Proposed paragraph (e) defined
encryption as the transformation of data
into a form that results in a low
probability of assigning meaning
without the use of a protective process
or key. This term was used in proposed
§ 314.4(c)(4), which generally required
financial institutions to encrypt
customer information. This definition
was intended to define the process of
encryption while not requiring any
particular technology or technique for
achieving the protection provided by
encryption.
NADA argued this definition should
be made more flexible by adding an
alternative so it would read ‘‘the
transformation of data into a form that
results in a low probability of assigning
meaning without the use of a protective
process or key or securing information
by another method that renders the data
elements unreadable or unusable’’
(emphasis added).32 On the other hand,
others argued the Proposed Rule’s
definition did not sufficiently protect
customer information.33 For example,
the Princeton University Center for
Information Technology Policy
(‘‘Princeton Center’’) suggested the Rule
should be changed ‘‘to clarify that
encryption must be consistent with
current cryptographic standards and
accompanied by appropriate safeguards
for cryptographic key material.’’ 34
Similarly, ACE argued the definition
should include ‘‘the transformation of
data in accordance with industry
standards.’’ 35
The Commission agrees the proposed
definition should be tethered to some
technical standard, without being too
prescriptive about what that standard is.
Under the proposed definition, as well
as NADA’s proposed definition,
financial institutions could have
claimed they were ‘‘encrypting’’ data if
they were aggregating it, scrambling it,
or redacting it in a way that made it
possible to re-identify the data through,
for example, the application of common
algorithms or programs. The
Commission does not believe this would
have provided consumers with
sufficient protection. The Commission
also agrees with the commenters who
stated the definition should signal that
encryption should be cryptographically
based.
Accordingly, the Final Rule defines
encryption as the transformation of data
into a form that results in a low
probability of assigning meaning
without the use of a protective process
or key, consistent with current
cryptographic standards and
accompanied by appropriate safeguards
for cryptographic key material. This
definition does not require any specific
process or technology to perform the
encryption but does require that
whatever process is used be sufficiently
robust to prevent the deciphering of the
information in most circumstances.
Financial Institution
Incidental Activity
The Proposed Rule made one
substantive change to the definition of
‘‘financial institution’’ it incorporated
from the Privacy Rule. The change was
designed to include entities
‘‘significantly engaged in activities that
are incidental to [] financial activity’’ as
defined by the Bank Holding Company
Act. This proposed change brought only
one activity into the definition that was
not covered before: the act of ‘‘finding’’
as defined in 12 CFR 225.86(d)(1). The
proposed revision to paragraph (f)
added an example of a financial
institution acting as a finder by
‘‘bringing together one or more buyers
and sellers of any product or service for
transactions that the parties themselves
negotiate and consummate.’’ This
example used the language set forth in
12 CFR 225.86(d)(1), which defines
‘‘finding’’ as an activity incidental to a
financial activity under the Bank
Holding Company Act. The Commission
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36 See 12 CFR 1016.3(l) (defining ‘‘financial
institution’’ for entities regulated by agencies other
than the FTC). See also 17 CFR 248.3(n) (defining
‘‘financial institution’’ to include ‘‘any institution
the business of which is . . . incidental to . . .
financial activities’’ for Security and Exchange
Commission’s rule implementing GLBA’s safeguard
provisions.).
37 15 U.S.C. 6801 et seq.
38 15 U.S.C. 6809(3).
39 12 U.S.C. 1843(k).
40 12 CFR 225.86.
41 Electronic Privacy Information Center
(comment 55, NPRM), at 9; Independent
Community Bankers of America (comment 35,
NPRM), at 3; National Automobile Dealers
Association (comment 46, NPRM), at 13–16.
42 Association of National Advertisers (comment,
Workshop), at 4–5; internet Association (comment,
Workshop), at 4–5; see also Anonymous (comment
15, NPRM) (questioning whether any governing
body would oversee any future determinations by
the Federal Reserve Board that activities are
incidental to financial activity).
43 Association of National Advertisers (comment
5, Workshop), at 5.
44 12 CFR 225.86 (d).
45 12 CFR 225.86 (d)(1)(i).
46 See Final Rule 16 CFR 314.2(b)(1).
47 16 CFR 314.1; Final Rule 16 CFR 314.2(c).
48 National Pawnbrokers Association (comment
32, NPRM), at 5–6 (arguing that transaction-
reporting vendors be included in definition);
National Consumer Law Center and others
(comment 58, NPRM), at 5 (arguing that consumer
reporting agencies be included explicitly in the
definition); see also American Escrow Association
(comment, Workshop), at 2–3 (requesting that the
Rule specifically set out the duties of real estate
settlement operations and other businesses that
handle but do not maintain sensitive information);
Beverly Enterprises, LLC (comment 3, NPRM), at 3–
4 (requesting that the Rule specifically set out
duties related to online notarizations); Yangxue Li
(comment 5, NPRM) (asking whether Rule would
set forth specific guidelines for different industries);
Slobadon Raybolka (comment 17, NPRM)
(suggesting that companies that perform online
background checks be covered by the rule); The
Clearing House (comment 49, NPRM) (suggesting a
separate set of more stringent rules for fintech
companies).
49 Electronic Privacy Information Center
(comment 55, NPRM), at 9.
50 See 15 U.S.C. 6801 (requiring agencies to
promulgate Rule establishing standards for financial
institutions); 15 U.S.C. 6809(3) (defining ‘‘financial
institutions’’ as an ‘‘institution the business of
which is engaging in financial activities as
described’’ in the Bank Holding Company Act).
51 In the Matter of Facebook, Inc., Docket No. C–
4365 (Apr. 28, 2020); FTC v. Wyndham Worldwide
Corporation, 799 F.3d 236 (3d Cir. 2015); FTC v. D-
Link Systems, Inc., Case No. 3:17–cv–00039–JD
(N.D. Cal. July 2, 2019); In the Matter of Twitter,
Inc., Docket No. C–4316 (Mar. 11, 2011).
52 National Federation of Independent Business
(comment 16, NPRM), at 2–3.
53 Privacy Rule, Final Rule, 65 FR 33645 (May 24,
2000) at 33656.
adopts this proposal without
modification.
The change to the definition of
‘‘financial institution’’ brings it into
harmony with other agencies’ GLB
rules. 36 The change is supported by the
language of the Gramm-Leach-Bliley
Act.37 The Act defines a ‘‘financial
institution’’ as any institution ‘‘the
business of which is engaging in
financial activities as described in
section 1843(k) of title 12.’’ 38 That
section, in turn, describes activities that
are financial in nature as those the
Board has determined ‘‘to be financial
in nature or incidental to such financial
activity.’’ 39 The Final Rule’s definition
mirrors this language. The change will
not lead to a significant expansion of the
Rule coverage as it expands the
definition only to include entities
engaged in activity incidental to
financial activity, as determined by the
Federal Reserve Board. The Board has
determined only one activity to be
incidental to financial activity—‘‘acting
as a finder.’’ 40
Several commenters who addressed
this issue supported the inclusion of
activities incidental to financial
activities. 41 Other commenters
expressed concern the proposed change
in the definition would expand the
Rule’s coverage to businesses that
should not be considered financial
institutions.42 They argued the
definition of the term ‘‘finder’’ is too
broad and companies that connect
buyers and sellers in non-financial
contexts would be swept
inappropriately into the definition of
‘‘financial institution.’’ The Association
of National Advertisers argued
advertising agencies could be
considered ‘‘finders’’ because they play
a role in connecting buyers and
sellers.43
In response, the Commission notes
the Federal Reserve Board describes
acting as a finder as ‘‘bringing together
one or more buyers and sellers of any
product or service for transactions that
the parties themselves negotiate and
consummate.’’ 44 The Board sets forth
several activities within the scope of
acting as a finder, such as ‘‘[i]dentifying
potential parties, making inquiries as to
interest, introducing and referring
potential parties to each other, []
arranging contacts between and
meetings of interested parties’’ and
‘‘[c]onveying between interested parties
expressions of interest, bids, offers,
orders and confirmations relating to a
transaction.’’ 45
Although this language is somewhat
broad, its scope is significantly limited
in the context of the Safeguards Rule.
First, the Safeguards Rule applies only
to transactions ‘‘for personal, family, or
household purposes.’’ 46 Therefore, only
finding services involving consumer
transactions will be covered. Second,
the Safeguards Rule applies only to the
information of customers, which are
consumers with which a financial
institution has a continuing
relationship. 47 Therefore, it will not
apply to finders that have only isolated
interactions with consumers and do not
receive information from other financial
institutions about those institutions’
customers. This significantly narrows
the types of finders that will have
obligations under the Rule, excluding,
the Commission believes, most
advertising agencies and similar
businesses that generally do not have
continuing relationships with
consumers who are using their services
for personal or household purposes.
The Commission believes entities that
perform finding services for consumers
with whom they have an ongoing
relationship are properly considered
‘‘financial institutions’’ for purposes of
the Rule. Accordingly, the Commission
adopts the changes to the definition of
‘‘financial institution’’ as proposed.
Other Changes to Definition of
‘‘Financial Institutions’’
Other commenters suggested
modifying the definition of ‘‘financial
institution’’ 48 in different ways. The
Electronic Privacy Information Center
(EPIC) argued the definition should be
expanded by treating more activities as
financial activities.49 EPIC pointed out
information shared with social media
companies, retailers, apps, and devices
generally is not covered under the
Safeguards Rule. The Commission
understands the concern that many
businesses fall outside the coverage of
the Safeguards Rule, despite handling
sensitive consumer information, but the
Commission’s authority to regulate
activity under the Safeguards and
Privacy Rules is established by the
GLBA. The Rule’s application is limited
to financial institutions as defined by
that statute and cannot be extended
beyond that definition.50 The
institutions discussed by EPIC,
however, are still covered by the FTC
Act’s prohibition against deceptive or
unfair conduct, including with respect
to their use and protection of consumer
information. 51
The National Federation of
Independent Business (NFIB) argued
individuals and sole proprietors should
be excluded from the definition of
‘‘financial institution’’ because an
individual cannot be an ‘‘institution.’’ 52
When the Privacy Rule was
promulgated in 2000, commenters also
suggested the definition should exclude
sole proprietors.53 The Commission
noted there was no basis to exclude sole
proprietors and ‘‘[w]hether or not a
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54 Money Services Round Table (comment 53,
NPRM), at 5–6.
55 Id. at 5.
56 Final Rule § 314.2(j).
57 Indeed, Workshop participant Scott Wallace
noted, in conducting penetration testing, ‘‘the first
thing [he does]’’ is generally to ‘‘prepare for the
phishing campaign.’’ Remarks of Scott Wallace,
Safeguards Workshop Tr., supra note 17, at 131–32.
58 Money Services Round Table (comment 53,
NPRM), at 5; Consumer Data Industry Association
(comment 36, NPRM), at 4; American Council on
Education (comment 24, NPRM), at 7–8.
59 See Remarks of Serge Jorgensen, Safeguards
Workshop Tr., supra note 17, at 58–59 (noting
cybersecurity attacks can take advantage of systems
that are connected to the systems in which sensitive
information is stored); Remarks of Tom Dugas,
Safeguards Workshop Tr., supra note 17, at 138
(noting a vulnerability in one system can result in
the exposure of information maintained in another
system); see also Remarks of Rocio Baeza,
Safeguards Workshop Tr., supra note 17, at 106–07
(noting the heightened importance of encryption in
a context where numerous systems are connected);
Remarks of James Crifasi, Safeguards Workshop Tr.,
supra note 17, at 107–08 (same).
60 Section 314.4(c)(5) in the Final Rule.
61 Electronic Transactions Association (comment
27, NPRM), at 4; U.S. Chamber of Commerce
(comment 33, NPRM), at 9; CTIA (comment 34,
NPRM), at 7–9; Global Privacy Alliance (comment
38, NPRM), at 9; National Automobile Dealers
Association (comment 46, NPRM), at 29; National
Independent Automobile Dealers Association
(comment 48, NPRM), at 6.
62 See, e.g., NIST Special Publication 800–63B,
Digital Identity Guidelines, 5.1.3.3 (restricting use
of verification using the Public Switched Telephone
Network (SMS or voice) as an ‘‘out-of-band’’ factor
for multi-factor authentication).
63 See, e.g., Remarks of Wendy Nather, Safeguards
Workshop Tr., supra note 17, at 231–32.
commercial enterprise is operated by a
single individual is not determinative’’
of whether the enterprise is a financial
institution. The Commission has not
changed its position on this matter and
declines to make this change to the
definition of ‘‘financial institution.’’
The Final Rule adopts this definition
as proposed without change.
Information Security Program
Paragraph (i) of the Final Rule adopts
the existing Rule’s paragraph (c) and
does not alter the definition of
‘‘information security program.’’ The
Commission received no comments on
this definition, and accordingly, adopts
the current definition in the Final Rule.
Information System
Proposed paragraph (h) defined
information system as a discrete set of
electronic information resources
organized for the collection, processing,
maintenance, use, sharing,
dissemination or disposition of
electronic information, as well as any
specialized system such as industrial/
process controls systems, telephone
switching and private branch exchange
systems, and environmental control
systems. The term ‘‘information system’’
was used throughout the proposed
amendments to designate the systems
that must be covered by the information
security program.
The MSRT suggested this definition
was too narrow in some respects and too
broad in others.54 It argued the
definition of ‘‘information system’’ was
too narrow because it did not include
physical systems or employees and
would exclude them from some of the
provisions of the Rule. Specifically, the
MSRT argued that based on this
definition, the penetration tests required
by § 314.4(d)(2) would not be required
to test ‘‘potential human
vulnerabilities’’ such as social
engineering or phishing. 55 The
Commission does not agree. Penetration
testing, as defined by the Final Rule, is
a process through which testers
‘‘attempt to circumvent or defeat the
security features of an information
system.’’ 56 One way such security
features are tested is through social
engineering and phishing.57 The fact
that the testing involves employees with
access to the information system, rather
than just the system itself, does not
exclude such tests from the definition of
‘‘penetration testing.’’ Attempted social
engineering and phishing are important
parts of testing the security of
information systems and would not be
excluded by this definition.
The MSRT also argued the definition
was too broad, and was joined by other
commenters in this concern.58 These
commenters shared a concern the
proposed definition would include
systems that are in no way connected to
customer information and would
require financial institutions to include
all systems in their possession,
regardless of their involvement with
customer information. The Commission
agrees the definition should be limited
to those systems that either contain
customer information or are connected
to systems that contain customer
information, and adds that limitation to
the Final Rule. The Rule does not limit
the definition to only those systems that
contain customer information, because a
common source of data breaches is a
vulnerability in a connected system that
an attacker exploits to gain access to the
company’s network and move within
the network to obtain access to the
system containing sensitive
information.59 Accordingly, the
definition of information system in the
Final Rule is modified to a discrete set
of electronic information resources
organized for the collection, processing,
maintenance, use, sharing,
dissemination or disposition of
electronic information containing
customer information or any such
system connected to a system
containing customer information, as
well as any specialized system such as
industrial/process controls systems,
telephone switching and private branch
exchange systems, and environmental
controls systems, that contains customer
information or that is connected to a
system that contains customer
information.
Multi-Factor Authentication
Proposed paragraph (i) defined multi-
factor authentication as authentication
through verification of at least two of
the following types of authentication
factors: Knowledge factors, such as a
password; possession factors, such as a
token; or inherence factors, such as
biometric characteristics. This term was
used in proposed § 314.4(c)(6),60 which
required financial institutions to
implement multi-factor authentication
for individuals accessing networks that
contain customer information.
Several commenters argued the
definition should explicitly include
SMS text messages as an acceptable
example of a possession factor or
otherwise to be explicitly allowed.61
The Proposed Rule did not include SMS
text messages as an example of a
possession factor.62 Most commenters
who addressed this issue interpreted
this exclusion from the examples as
forbidding financial institutions from
using SMS text messages as a possession
factor for multi-factor authentication.
That is not the effect of this exclusion,
however. The language of the definition
neither prohibits nor recommends use
of SMS text messages. Indeed, SMS text
messages are not addressed at all. In
some cases, use of SMS text messages as
a factor may be the best solution
because of its low cost and easy use, if
its risks do not outweigh those benefits
under the circumstances.63 In other
instances, however, the use of SMS text
messages may not be a reasonable
solution, such as when extremely
sensitive information can be obtained
through the access method being
controlled, or when a more secure
method can be used for a comparable
price. A financial institution will need
to evaluate the balance of risks for its
situation. If, however, the Commission
were to explicitly allow use of SMS text
messages, this could be considered a
safe harbor that would not require the
company to consider risks associated
with use of SMS text as a factor in a
particular use case. Accordingly, the
Final Rule does not include SMS text
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64 Princeton University Center for Information
Technology Policy (comment 54, NPRM) at 9–10.
65 See 16 CFR 313.3(o)(1).
66 16 CFR 313.3(o)(2)(i)(F).
67 See, e.g., New York Department of Financial
Service (comment 40, NPRM), at 1 (arguing the
Proposed Rule would ‘‘further advance efforts to
protect financial institutions and consumers from
cybercriminals.’’); Princeton University Center for
Information Technology Policy (comment 54,
NPRM), at 1 (stating the Proposed Rule ‘‘would
significantly reduce data security risks for the
customers of financial institutions.’’); National
Consumer Law Center and others (comment 58,
NPRM), at 2 (stating requirements of Proposed Rule
are ‘‘reasonable and common-sense measures that
any company dealing with large amounts of
consumer personal information should take.’’).
68 See, e.g., HITRUST (comment 18, NPRM), at 1–
2; American Council on Education (comment 24,
NPRM), at 2–4; Cristian Munarriz (comment 21,
NPRM); Electronic Transactions Association
(comment 27, NPRM), at 1–2; National Pawnbrokers
Association (comment 32, NPRM), at 3; CTIA
(comment 34, NPRM), at 5; Consumer Data Industry
Association (comment 36, NPRM), at 2; Wisconsin
Bankers Association (comment 37, NPRM), at 1–2;
Global Privacy Alliance (comment 38, NPRM), at 5–
6; Bank Policy Institute (comment 39, NPRM), at 2;
American Financial Services Association (comment
41, NPRM), at 4; National Association of Dealer
Counsel (comment 44, NPRM), at 1; ACA
International, (comment 45, NPRM), at 4; National
Automobile Dealers Association (comment 46,
NPRM), at 11; National Independent Automobile
Dealers Association (comment 48, NPRM), at 2–3;
Money Services Round Table (comment 53, NPRM),
at 1–4; Software & Information Industry Association
(comment 56, NPRM), at 1–3; Gusto and others
(comment 11, Workshop), at 2; Association of
National Advertisers (comment 5, Workshop), at 1–
3; internet Association (comment 9, Workshop), at
2–3.
69 Electronic Transactions Association (comment
27, NPRM), at 1–2.
70 CTIA (comment 34, NPRM), at 5.
messages in the examples of possession
factors.
The final Rule adopts the proposed
definition of ‘‘multi-factor
authentication’’ without change as
paragraph (k) of this section.
Penetration Testing
Proposed paragraph (j) defined
penetration testing as a test
methodology in which assessors attempt
to circumvent or defeat the security
features of an information system by
attempting penetration of databases or
controls from outside or inside your
information systems. This term was
used in proposed § 314.4(d)(2), which
required financial institutions to
continually monitor the effectiveness of
their safeguards or to engage in annual
penetration testing. The Commission
received no comments concerning this
definition. The Final Rule adopts the
definition from the Proposed Rule as
paragraph (m) of this section.
Personally Identifiable Financial
Information
To minimize cross-referencing to the
Privacy Rule, as noted above, the
Commission is adding several
definitions to the Final Rule. One of
these definitions is ‘‘personally
identifiable financial information,’’
which is identical to the definition
currently contained in the Privacy Rule.
This term is included within the ambit
of ‘‘customer information,’’ in both the
existing Rule and the Final Rule.
The Princeton Center suggested
expanding the definition of ‘‘personally
identifiable financial information’’ from
the Privacy Rule to include ‘‘aggregate
information or blind data that does not
contain personal identifiers such as
account numbers, names, or
addresses.’’ 64 The Princeton Center
further suggested clarifying that, for
information to not be considered
‘‘personally identifiable financial
information,’’ the financial institution
must be required to demonstrate the
information is not ‘‘reasonably linkable’’
to individuals.
The Commission does not believe this
amendment is necessary. The definition
of ‘‘personally identifiable financial
information’’ is already a broad one.65 It
includes not just information associated
with types of personal information such
as a name or address or account
number, but also information linked to
a persistent identifier (‘‘any information
you collect through an Internet ‘cookie’
(an information collecting device from a
web server’’)).66 While there may be
some merit to limiting the exception for
aggregate information or blind data to
data that cannot be reasonably linkable
to an individual, for purposes of a rule
that can be periodically updated to keep
up with changing technology, the
current approach is more concrete and
enforceable, and less subject to
differences in interpretation.
Service Provider
Proposed paragraph (k) adopted the
existing Rule’s definition and does not
alter the definition of ‘‘service
provider.’’ The Commission received no
comments on this definition and adopts
it as paragraph (q) of the Final Rule.
Sec. 314.3: Standards for Safeguarding
Customer Information
Proposed § 314.3, which required
financial institutions to develop an
information security program
(paragraph (a)) and set forth the
objectives of the Rule (paragraph (b)),
was largely identical to the existing
Rule. It changed only the requirement
that ‘‘safeguards’’ be based on the
elements set forth in § 314.4, by
replacing ‘‘safeguards’’ with
‘‘information security program.’’ The
Commission received no comments on
this proposal and adopts it without
change in the Final Rule.
Sec. 314.4: Elements
Proposed § 314.4 altered the current
Rule’s required elements of an
information security program and added
several new elements.
General Comments
The Commission received many
comments addressing the new elements,
both in favor of the changes and
opposed to them. The comments in
favor of the changes generally argued
these changes would protect consumers
by improving the data security of
institutions that hold their
information.67 Most of the comments
opposed to the proposed elements fell
into several categories, objecting: (1)
The proposed changes were too
prescriptive and did not allow financial
institutions sufficient flexibility in
managing their information security; (2)
the proposed amendments would be too
expensive for financial institutions,
particularly smaller institutions, to
adopt; and (3) some of the requirements
should not apply to all customer
information but should be limited to
some subset of especially ‘‘sensitive’’
customer information. The Commission
does not agree with these comments for
the reasons discussed below, and
accordingly, retains the general
approach of the Proposed Rule in the
Final Rule.
Flexibility
Many industry groups argued the new
proposed elements were too
prescriptive, lacked flexibility, would
quickly become outdated, and would
force financial institutions to engage in
activities that would not enhance
security.68 For example, the Electronics
Transactions Association argued the
Proposed Rule would ‘‘limit the ability
of industry to develop new and
innovative approaches to information
security.’’ 69 Similarly, CTIA
commented the Proposed Rule would
create a ‘‘prescriptive core of
requirements that covered businesses
must follow, irrespective of whether risk
assessments show they are
necessary.’’ 70
The Commission, however, believes
the elements provide sufficient
flexibility for financial institutions to
adopt information security programs
suited to the size, nature, and
complexity of their organization and
information systems. The elements for
the information security programs set
forth in this section are high-level
principles that set forth basic issues the
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71 American Council on Education (comment 24,
NPRM), at 13–14; Wisconsin Bankers Association
(comment 37, NPRM), at 1–2; American Financial
Services Association (comment 41, NPRM), at 4;
National Association of Dealer Counsel (comment
44, NPRM), at 1; National Automobile Dealers
Association (comment 46, NPRM), at 11; National
Independent Automobile Dealers Association,
(comment 48, NPRM), at 3; Gusto and others
(comment 11, Workshop), at 2–4; National
Pawnbrokers Association (comment 3, NPRM), at 2;
see also Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 72–74 (describing
study that found compliance would be expensive
for automobile dealers).
72 See, e.g., Slides Accompanying Remarks of
James Crifasi, FTC, ‘‘NADA Cost Study: Average
Cost Per U.S. Franchised Dealership,’’ Event
Materials, Information Security and Financial
Institutions: An FTC Workshop to Examine
Safeguards Rule (July 13, 2020) https://www.ftc.gov/
system/files/documents/public_events/1567141/
slides-glb-workshop.pdf (hereinafter Safeguards
Workshop Slides), at 25 (estimating an upfront cost
of $293,975 per dealership, and an recurring annual
cost of $276,925); see also Remarks of James Crifasi,
Safeguards Workshop Tr., supra note 17, at 72–75;
Remarks of Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 78 (estimating the
average annual salary of a CISO can range from
$180,000 to upwards of $400,000); Slides
Accompanying Remarks of Lee Waters, ‘‘Estimated
Costs of Proposed Changes,’’ Safeguards Workshop
Slides, at 26 (estimating the annual costs of a
security program to include: Multi-factor
authentication, $50 for smart card readers, and $10
each for smart cards; a CISO, either an in-house
CISO, $180,000, an in-house cybersecurity analyst,
$76,000, or an outsourced cybersecurity contractor,
between $120,000 and $240,000; penetration
testing, average cost $4,800; and physical security,
$215,000 for construction, and $10,000 to $20,000
for new or upgraded locks); see also Remarks of Lee
Waters, Safeguards Workshop Tr., supra note 17, at
75–76.
73 See, e.g., Slides Accompanying Remarks of Lee
Waters, ‘‘Estimated Costs of Proposed Changes,’’
Safeguards Workshop Slides, supra note 72, at 26
(estimating costs of an in-house CISO to be
$180,000 annually, and an in-house cybersecurity
analyst to be $76,000 annually; and estimating an
outsourced cybersecurity contractor would cost
between $120,000 to $240,000 annually); see also
Remarks of Lee Waters, Safeguards Workshop Tr.,
supra note 17, at 75–76; Remarks of Brian
McManamon, Safeguards Workshop Tr., supra note
17, at 78 (estimating that the average annual salary
of a CISO can range from $180,000 to upwards of
$400,000).
74 See Remarks of Lee Waters, Safeguards
Workshop Tr., supra note 17, at 119–20 (noting
when small businesses have to spend money to hire
third-party vendors and security experts to comply
with regulations, that affects consumer prices and
small business profit margins); Slides
Accompanying Remarks of James Crifasi, ‘‘NADA
Cost Study: Average Cost Per U.S. Franchised
Dealership,’’ Safeguards Workshop Slides, supra
note 72, at 25; see also Remarks of James Crifasi,
supra note 17, at 73 (noting the requirements ‘‘start
becoming a little bit unaffordable here.’’).
75 The Small Business Administration’s Office of
Advocacy commented it was concerned the FTC
had not gathered sufficient data as to either the
costs or benefits of the proposed changes for small
financial institutions. Office of Advocacy, U.S.
Small Business Administration (comment 28,
NPRM), at 3–4. The FTC shares the Office of
Advocacy’s interest in ensuring that regulatory
changes have an evidentiary basis. Many of the
questions on which the FTC sought public
comment, both in the regulatory review and in the
proposed Rule context, specifically related to the
costs and benefits of existing and proposed Rule
requirements. Following the initial round of
commenting, the Commission conducted the FTC
Safeguards Workshop and solicited additional
public comments with the explicit goal of gathering
additional data relating to the costs and benefits of
the proposed changes. See Public Workshop
Examining Information Security for Financial
Institutions and Information Related to Changes to
the Safeguards Rule, 85 FR 13082 (Mar. 6, 2020).
As detailed throughout this document, the
Commission believes there is a strong evidentiary
basis for the issuance of the final Rule.
76 16 CFR 314.3.
77 16 CFR 314.4.
78 Several speakers at the Safeguards Workshop
also raised this concern. See, e.g., Slides
Accompanying Remarks of James Crifasi, ‘‘NADA
Cost Study: Average Cost Per U.S. Franchised
Dealership,’’ in Safeguards Workshop Slides, supra
note 72, at 25 (estimating appointing a CISO to
increase program accountability would be a one-
time, up-front cost of $27,500, with a recurring
annual cost of $51,000); Remarks of James Crifasi,
Safeguards Workshop Tr., supra note 17, at 72–75;
Slides Accompanying Remarks of Lee Waters,
‘‘Estimated Costs of Proposed Changes,’’ in
Safeguards Workshop Slides, supra note 72, at 26
(estimating costs of an in-house CISO to be
$180,000 annually, and an in-house cybersecurity
analyst to be $76,000 annually; and estimating that
an outsourced cybersecurity contractor would cost
between $120,000 to $240,000 annually); Remarks
of Lee Waters, Safeguards Workshop Tr., supra note
17, at 75–76; Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 78
(estimating that the average annual salary of a CISO
can range from $180,000 to upwards of $400,000).
programs must address, and do not
prescribe how they will be addressed.
For example, the requirement that the
information security program be based
on a risk assessment sets forth only
three general items the assessment must
address: (1) Criteria for evaluating risks
faced by the financial institution; (2)
criteria for assessing the security of its
information systems; and (3) how the
identified risks will be addressed. Other
than meeting these basic requirements,
financial institutions are free to perform
their risk assessments in whatever way
they choose, using whatever method or
approach works best for them, as long
as the method identifies reasonably
foreseeable risks. The other elements are
similarly flexible. The two elements that
are more prescriptive, encryption and
multi-factor authentication, allow
financial institutions to adopt
alternative solutions when necessary.
Comments concerning individual
elements are addressed separately in the
more detailed analysis below.
Cost
Another common theme among the
comments from industry groups was the
proposed information security program
elements would be prohibitively
expensive, especially for smaller
businesses. 71 Commenters argued the
Proposed Rule would have required
financial institutions to implement
expensive changes to their systems and
hire highly-compensated professionals
to do so.72 Industry groups were
particularly concerned about the
requirement that financial institutions
designate a single qualified individual
to coordinate their information security
programs, arguing this would require
hiring professionals that were both
expensive, with salaries of more than
$100,000 suggested by some, and in
limited supply.73 Overall, several
commenters argued some financial
institutions would be unable to afford to
bring themselves into compliance with
the Proposed Rule.74
The Commission recognizes properly
securing information systems can be an
expensive and technically difficult task.
However, the Commission believes the
additional costs imposed by the
Proposed Rule are mitigated for several
reasons and, ultimately, those costs are
justified in order to protect customer
information as required by the GLBA.75
First, for almost 20 years, financial
institutions have been required under
the current Safeguards Rule to have
information security programs in place.
The current Safeguards Rule requires
financial institutions to ‘‘develop,
implement, and maintain a
comprehensive [written] information
security program . . . appropriate to
[the financial institutions’] size and
complexity, the nature and scope of
[their] activities, and the sensitivity of
any customer information at issue.’’ 76
This comprehensive program must be
coordinated by one or more individuals
and based on a risk assessment.77 As
such, financial institutions complying
with the current Rule will not be
required to establish an information
security program from scratch. Instead,
they can compare their existing
programs to the revised Rule, and
address any gaps. The Commission
believes many of the requirements set
forth in the Final Rule are so
fundamental to any information security
program that the information security
programs of many financial institutions
will already include them if those
programs are in compliance with the
current Safeguards Rule.
Second, a number of commenters who
raised concerns about the costs imposed
by the Rule believed the Proposed Rule
would have required the hiring of a
highly-compensated expert to serve as a
Chief Information Security Officer
(CISO).78 It is correct the Proposed Rule
would have modified the current
requirement of designating an
‘‘employee or employees to coordinate
your information security program’’ by
requiring the designation of a single
qualified individual responsible for
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79 See, e.g., Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 89–90
(noting the size of a financial institution and the
amount and nature of the information it holds factor
into an appropriate information security program);
see also Slides Accompanying Remarks of Rocio
Baeza, ‘‘Models for Complying to the Safeguards
Rule Changes,’’ in Safeguards Workshop Slides,
supra note 72, at 27–28 (describing three different
compliance models: In-house, outsource, and
hybrid, with costs ranging from $199 per month to
more than $15,000 per month); Remarks of Rocio
Baeza, Safeguards Workshop Tr., supra note 17, at
81–83 (describing three compliance models in more
detail).
80 See Remarks of Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 78 (describing
virtual CISO services).
81 See, e.g., Electronic Transactions Association
(comment 27, NPRM), at 2–4; CTIA (comment 34,
NPRM), at 10; Global Privacy Alliance (comment
38, NPRM), at 7–8; American Financial Services
Association (comment 41, NPRM), at 5; ACA
International (comment 45, NPRM), at 13; Money
Services Round Table (comment 53, NPRM), at 6–
7.
82 See, e.g., Electronic Transactions Association
(comment 27, NPRM), at 2; Global Privacy Alliance
(comment 38, NPRM), at 7.
83 16 CFR 314.2(b).
overseeing and implementing the
security program. This individual was
referred to in the Proposed Rule as a
Chief Information Security Officer or
‘‘CISO.’’ As discussed in detail below,
the Final Rule does not use this term,
though the concept is the same: The
person designated to coordinate the
information security program need only
be ‘‘qualified.’’ No particular level of
education, experience, or certification is
prescribed by the Rule. Accordingly,
financial institutions may designate any
qualified individual who is appropriate
for their business. Only if the
complexity or size of their information
systems require the services of an expert
will the financial institution need to
hire such an individual.79
Finally, the Commission believes
while large financial institutions may
well incur substantial costs to
implement complex information
security programs, there are much more
affordable solutions available for
financial institutions with smaller and
simpler information systems. For
example, there are very low-cost or even
free vulnerability assessment programs
available: ‘‘virtual CISO’’ services
enable a third party to provide security
support for many companies, splitting
the cost of information security
professionals among them; many
applications and hardware have built-in
encryption requirements; 80 and there
are affordable multi-factor
authentication solutions aimed at
businesses of various sizes.
Considering these points, although
there will undoubtedly be expenses
involved for some, or even many,
financial institutions to update their
programs, the Commission believes
these expenses are justified because of
the vital importance of protecting
customer information collected,
maintained, and processed by financial
institutions. Congress recognized the
importance of securing consumers’
sensitive financial information when it
passed the GLBA, which required the
FTC to promulgate the Safeguards Rule.
The importance, as well as the
difficulty, of protecting customer
information has only increased in the
more than twenty years since the
passage of the GLBA. The Commission
believes the amendments to the
Safeguards Rule are necessary to ensure
the purposes of the GLBA are satisfied,
and so consumers can have confidence
financial institutions are providing
reasonable safeguards to protect their
information.
‘‘Sensitive’’ Customer Information
Several industry groups also
suggested significant portions of the
Proposed Rule should not apply to all
customer information, but rather only to
some subset of particularly ‘‘sensitive’’
customer information, such as account
numbers or social security numbers.81
These commenters generally argued the
definition of ‘‘customer information’’ is
too broad, as it will include information
the commenters felt is not particularly
sensitive, such as name and address,
and does not justify extensive
safeguards. 82
The Commission does not agree that
some portion of customer information is
not entitled to the protections required
by the Final Rule. The Safeguards Rule
defines ‘‘customer information’’ as ‘‘any
record containing nonpublic personal
information’’ about a customer handled
or maintained by or on behalf of a
financial institution.83 The Final Rule
defines ‘‘nonpublic personal
information’’ as ‘‘personally identifiable
financial information,’’ but does not
include information that is ‘‘publicly
available.’’ Although this definition is
broad, the Commission believes
information covered by it is rightfully
considered sensitive and should be
protected accordingly. The businesses
regulated by the Safeguards Rule are not
just any businesses, but are financial
institutions and are responsible for
handling and maintaining financial
information that is both important to
consumers and valuable to attackers
who try to obtain the information for
financial gain. Even the fact that a
consumer is a customer of a particular
financial institution is generally
nonpublic and can be sensitive. For
example, the revelation of a customer
relationship between a consumer and a
particular type of financial institution,
such as debt collectors or payday
lenders, may make those customers’
information more vulnerable to
compromise by facilitating social
engineering or similar attacks. The
nature of the relationship between
customers and their financial
institutions makes all nonpublic
information held by the financial
institution inherently sensitive and
worthy of the level of protection set
forth in the Rule.
Although the Commission believes all
customer information should be
safeguarded by financial institutions
and declines to exclude any portion of
that information from protection under
any of the provisions of the Rule, it
notes the Rule does contemplate
financial institutions will consider the
sensitivity of particular information in
designing their information security
programs and safeguards. The elements
required by this section are generally
flexible enough to allow financial
institutions to treat various pieces of
information differently. For example,
paragraph (c)(1) requires information
security programs to include safeguards
that address access control of customer
information. The paragraph requires
financial institutions to develop
measures to ensure only authorized
users access customer information, but
does not prescribe any particular
measures that must be adopted. When
designing these measures, a financial
institution may design a system in
which more sensitive information is
protected by more stringent access
controls. Even in the more specific
provisions of the Rule, there is
flexibility to address the relative
sensitivity of information. For example,
in § 313.4(c)(5)’s requirement that
customer information be protected by
multi-factor authentication, financial
institutions have flexibility to
implement the multi-factor
authentication depending on the
sensitivity of the information. The
financial institution may select factors
such as SMS text messages to access less
sensitive information, but determine
more sensitive information should be
protected by other, more secure, factors
for authentication.
Third-Party Standards and Frameworks
In addition, in the NPRM, the
Commission asked whether the
Safeguards Rule should incorporate
outside standards, such as the National
Institute of Standards and Technology
(‘‘NIST’’) framework, either as required
elements of an information security
program or as a safe harbor that would
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70281	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
84 Cisco Systems, Inc. (comment 51, NPRM), at 4;
National Consumer Law Center and others
(comment 58), at 2; Anonymous (comment 2,
Workshop).
85 Cisco Systems, Inc. (Comment 51, NPRM), at 4.
86 Anonymous (comment 2, Workshop). The ISO/
IEC 27001 standard is an information security
standard issued by the International Organization
for Standardization. See ISO/IEC 27001 Information
Security Management, ISO, https://www.iso.org/
isoiec-27001-information-security.html (last
accessed 15 Dec. 2020).
87 National Consumer Law Center and others
(comment 58, NPRM), at 2.
88 HITRUST (comment 18, NPRM), at 2; see also
Consumer Reports (comment 52, NPRM), at 6–7
(discouraging the adoption of outside standards as
a safe harbor for companies).
89 Mortgage Bankers Association (comment 26,
NPRM), at 2 (suggesting Rule be modified so
financial institutions that use the NIST
Cybersecurity Framework would be in de facto
compliance with the Rule); see also National
Pawnbrokers Association (comment 32, NPRM), at
6–7 (advocating for the adoption of safe harbors for
small financial institutions without detailing what
should be required to qualify for the safe harbor).
90 Consumer Reports (comment 52, NPRM), at 6–
7.
91 Section 314.4(a).
92 84 FR 13165.
93 U.S. Chamber of Commerce (comment 33,
NPRM), at 10; National Automobile Dealers
Association (comment 46), at 17–19; National
Independent Automobile Dealers Association
(comment 48, NPRM), at 5; ACA International
(Comment 45, NPRM), at 8.
94 See. e.g., Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 78 (estimating the
average annual salary of a CISO can range from
$180,000 to upwards of $400,000).
95 National Automobile Dealers Association
(comment 46, NPRM), at 17–19; National
Independent Automobile Dealers Association
(comment 48, NPRM), at 5; U.S. Chamber of
Commerce (comment 33, NPRM), at 10; ACA
International (comment 45, NPRM), at 8.
96 National Automobile Dealers Association
(comment 46, NPRM), at 18–19; U.S. Chamber of
Commerce (comment 33, NPRM), at 10; ACA
International (comment 45, NPRM), at 8.
97 84 FR 13175.
treat compliance with such a standard
as compliance with the Safeguards Rule.
Some commenters advocated for the
adoption of an outside standard into the
Safeguards Rule.84 Cisco Systems, Inc.
suggested the Safeguards Rule should be
connected to NIST guidance, arguing
this would allow the Rule to evolve as
NIST’s guidance evolves.85 An
anonymous commenter suggested the
Rule should comply with ‘‘international
standard ISO/IEC 27001.’’ 86 The
National Consumer Law Center argued
certain financial institutions with
particularly sensitive customer
information should be required to
comply with guidelines issued by NIST
and the Federal Financial Institutions
Examination Council (FFIEC).87 Other
commenters acknowledged the value of
outside standards but were opposed to
the Rule requiring compliance with
them. 88
Some commenters suggested while
compliance with outside standards
should not be required, compliance
should serve as a ‘‘safe harbor’’ for
compliance with the Rule.89 On the
other hand, Consumer Reports noted
while such standards can be helpful
guidance, they should not be a safe
harbor for compliance with the Rule
because financial institutions must take
steps to ensure they are responding to
changing information security threats
regardless of the requirements of an
outside framework.90
The Commission declines to change
the Rule to incorporate or reference a
particular security standard or
framework for a variety of reasons. First,
it is not clear the more detailed
frameworks would apply well to
financial institutions of various sizes
and industries. In addition, mandating
companies follow a particular security
standard or framework would reduce
the flexibility built into the Rule.
Similarly, the Commission declines to
make compliance with an outside
standard a safe harbor for the Rule. In
such a scenario, the use of safe harbors
would not greatly enhance regulatory
stability or predictability for financial
institutions because the Commission
would be required to actively monitor
whether those standards continued to
provide equivalent protections for
Safeguards compliance and modify the
Rule if a standard became inadequate. In
addition, in investigating possible
violations of the Rule, the Commission
would be required to independently
verify whether the financial institution
had in fact complied with the outside
framework, which would require
substantial effort and expense on the
part of the Commission and the target of
the investigation.
Specific Elements
In addition to these generally
applicable comments, commenters
addressed many of the individual
elements set forth by this section. These
elements are discussed in more detail
below.
Paragraph (a)—Designation of a Single
Qualified Individual
Proposed paragraph (a) changed the
current requirement that institutions
designate an ‘‘employee or employees to
coordinate your information security
program’’ to instead require the
financial institution to designate ‘‘a
qualified individual responsible for
overseeing and implementing your
information security program and
enforcing your information security
program.’’ 91 This individual was
referenced in the Proposed Rule as a
Chief Information Security Officer or
‘‘CISO.’’
The notice of proposed rulemaking for
the Proposed Rule emphasized the use
of the term ‘‘CISO’’ was for clarity in the
Proposed Rule.92 Despite the use of the
term ‘‘CISO,’’ the Proposed Rule did not
require financial institutions to actually
grant that title to the designated
individual. Commenters that responded
to this proposal, however, generally
assumed the person designated to
coordinate and oversee a financial
institution’s information security
program would be required to have the
qualifications, duties, responsibilities,
and accompanying pay of a CISO as that
position is generally understood in the
information security field.93 The
position of CISO is generally limited to
large companies with fairly complex
information security systems, so the
salary of this position is often very
high. 94 Accordingly, many commenters
argued hiring a CISO would be
prohibitively expensive for many
financial institutions.95 Additionally,
commenters argued the hiring of such
an in-demand professional would be
difficult because of a general shortage of
such professionals available for hiring.96
By using the term ‘‘CISO,’’ the
Commission did not intend to require
all financial institutions hire a highly
qualified professional with an extremely
high salary, regardless of the financial
institutions’ size or complexity. The
Proposed Rule required only that
financial institutions designate a
‘‘qualified individual’’ to oversee and
enforce their information security
program, without specifying any
particular level of experience,
education, or compensation, or
requiring any particular duties outside
of overseeing the financial institution’s
information security program and other
requirements specifically set forth in the
Rule.97 The use of the term ‘‘CISO’’ in
the Proposed Rule, however, caused
confusion about the requirements of this
section. Accordingly, the Final Rule
replaces the term ‘‘CISO’’ with
‘‘Qualified Individual’’ to refer to the
individual designated under this section
of the Rule.
The use of the term ‘‘Qualified
Individual’’ is meant to clarify the only
requirement for this designated
individual is that he or she be qualified
to oversee and enforce the financial
institution’s information security
program. What qualifications are
necessary will depend upon the size
and complexity of a financial
institution’s information system and the
volume and sensitivity of the customer
information the financial institution
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98 Remarks of James Crifasi, Safeguards Workshop
Tr., supra note 17, at 74 (stating car dealerships can
rely on existing staff for this role); Remarks of Lee
Waters, Safeguards Workshop Tr., supra note 17, at
78–79 (stating any dealership with any IT staff at
all would have someone who could assume the role
of ‘‘qualified individual,’’ perhaps requiring some
additional research or outside help); Remarks of
Rocio Baeza, Safeguards Workshop Tr., supra note
17, at 81–82 (stating companies may use an existing
employee for the role and ‘‘for any areas where
there may be skill gaps, that can be supplemented
with either certifications or some type of
education.’’).
99 16 CFR 314.4.
100 National Independent Automobile Dealers
Association (comment 48, NPRM), at 5; Consumer
Data Industry Association (comment 36, NPRM), at
5; National Association of Dealer Counsel (comment
44, NPRM), at 2; ACA International (comment 45,
NPRM), at 7–8; Money Services Round Table
(comment 53, NPRM), at 10; Gusto and others
(Comment 11, Workshop), at 2; see also Remarks of
James Crifasi, Safeguards Workshop TR, supra note
17, at 74 (stating ‘‘when we’re talking about a small
and medium business [. . .] we really need to see
that ‘qualified individual’ be a mix of folks’’).
101 Consumer Data Industry Association
(comment 36, NPRM), at 5.
102 ACA International (comment 45, NPRM), at 7–
8. NPA raised similar concerns. National
Pawnbrokers Association (comment 3, Workshop),
at 2.
103 Consumer Data Industry Association
(comment 36, NPRM), at 5; National Automobile
Dealers Association (comment 46, NPRM), at 19;
ACA International (comment 45, NPRM), at 8.
104 National Automobile Dealers Association
(comment 46, NPRM), at 19.
105 National Consumer Law Center and others
(comment 58, NPRM), at 3 (arguing that a clear line
of reporting with a single responsible individual
could have prevented the Equifax consumer data
breach).
106 Remarks of Adrienne Allen, Safeguards
Workshop Tr., supra note 17, at 182–84 (stating that
without a single responsible individual,
information security staff ‘‘can fall into traps of
each relying on someone else to make a hard call
. . . [In a program without a single coordinator]
issues can sometimes fall through the cracks.’’);
Remarks of Michele Norin, Safeguards Workshop
Tr., supra note 17, at 184–85 (‘‘I think it’s extremely
important to have a person in front of the
information security program. I think that there are
so many components to understand, to manage, to
keep an eye on. I think it’s difficult to do that if
it’s part of someone else’s job. And so I found that
it’s extremely helpful to have a person in charge of
that program just from a pure basic management
perspective and understanding perspective.’’).
107 See, e.g., Federal Trade Commission Staff
Comment on the Preliminary Draft for the NIST
Privacy Framework: A Tool for Improving Privacy
through Enterprise Risk Management (Oct. 24,
2019), at 12–14 (suggesting NIST clarify that one
person should be in charge of the program). https://
www.ftc.gov/system/files/documents/advocacy_
documents/ftc-staff-comment-preliminary-draft-
nist-privacy-framework/p205400nistprivacy
frameworkcomment.pdf.
108 U.S. House, Committee on Oversight and
Government Reform, Majority Staff Report, The
Equifax Data Breach, at 55–62, 115th Congress (Dec.
2018).
109 Id.
possesses or processes. The Qualified
Individual of a financial institution with
a very small and simple information
system will need less training and
expertise than a Qualified Individual for
a financial institution with a large,
complex information system. The exact
qualifications will depend on the nature
of the financial institution’s information
system. Each financial institution will
need to evaluate its own information
security needs and designate an
individual with appropriate
qualifications to meet those needs.
The Commission believes, in many
cases, financial institutions’ current
coordinators, whether their own
employees or third-party contractors,
may be qualified for this role.98 Because
the current Safeguards Rule requires
financial institutions to designate an
‘‘employee or employees to coordinate
your information security program,’’
financial institutions in compliance
with that Rule will already have one or
more information security coordinators.
Although the current Rule does not
expressly require that these coordinators
be qualified for that position, the
current Rule requires a financial
institution to maintain ‘‘appropriate’’
safeguards, regularly test those
safeguards, and evaluate and adjust the
information security program in light of
that testing.99 In order to effectively
comply with these ongoing
requirements, a financial institution’s
coordinator must have some level of
information security training and
knowledge and, therefore, will likely be
an appropriate Qualified Individual
under the Final Rule. Accordingly, in
many cases this amendment to the Rule
will not require any additional hiring
expenses.
In addition to explicitly requiring that
the information security program
coordinator be qualified for the role, the
Commission proposed to require the
designation of a single employee, as
opposed to the multiple coordinators
allowed by the existing Rule. Some
commenters objected to this proposal on
the grounds that it would interfere with
financial institutions’ flexibility in
organizing their information security
personnel.100 For example, the
Consumer Data Industry Association
(‘‘CDIA’’) commented the designation of
a single coordinator would interfere
with financial institutions’ ability to
organize their program ‘‘to share
responsibilities among different
personnel with different strengths.’’ 101
Similarly, ACA International argued this
requirement would prevent financial
institutions from having multiple staff
members share responsibilities for
information security programs.102
Other commenters argued the
designation of a single individual as the
coordinator of the information security
program provides no proven benefits
over the use of multiple coordinators.103
Similarly, NADA argued that, while the
appointment of a single qualified
individual might improve
accountability, improving
accountability does not improve
security. 104 On the other hand, a group
of consumer and advocacy groups
including the National Consumer Law
Center (‘‘NCLC’’) argued appointing a
single individual as the coordinator of
the information security program can
increase security and prevent security
events based on lack of accountability
and poor coordination.105
The Commission retains the
requirement to designate a single
qualified individual, because it believes
there are clear benefits to the
designation of a single coordinator.
Designating a single coordinator to
oversee an information security program
clarifies lines of reporting in enforcing
the program, can avoid gaps in
responsibility in managing data
security, and improve
communication.106
The Commission disagrees with the
commenter who stated improved
accountability does not lead to
improved security. The goal of
improving accountability is to ensure
information security staff and financial
institution management give the
necessary attention and resources to
information security. In addition, an
individual that has clear responsibility
for the strength of a financial
institution’s information security
program will be accountable to improve
the program and ensure it protects
customer information. 107
The major breach that occurred at
national consumer reporting agency
Equifax in 2017 demonstrates the
importance of clear lines of reporting
and accountability in management of
information security programs. The U.S.
House Committee on Oversight and
Government Reform issued a report on
the breach that identified Equifax’s
organization as one of the major causes
of the breach.108 The report indicated
Equifax’s division of responsibility for
information security between two
individuals that reported to two
different company officers contributed
to failures of communication, oversight,
and enforcement that led to millions of
consumers’ data being compromised.109
Increasing accountability for individuals
and organizations can directly lead to
improved security for customer
information.
Finally, the Commission does not
believe the requirement to designate a
single Qualified Individual would
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110 See Remarks of Adrienne Allen, Safeguards
Workshop Tr., supra note 17, at 189–90 (noting
that, even where there is a single point person,
decision makers rarely operate ‘‘in a vacuum.’’).
111 National Automobile Dealers Association
(comment 46, NPRM), at 18.
112 See Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 79–80 (stating that,
in his work as a third-party information security
service provider, he is often overseen by executives
without technical backgrounds); see also Remarks
of Rocio Baeza, Safeguards Workshop Tr., supra
note 17, at 105–06 (noting distinction in how
executives and technical staff may understand their
organizations’ use of encryption); Remarks of
Karthik Rangarajan, Safeguards Workshop Tr.,
supra note 17, at 196 (discussing challenges
inherent in discussing technical issues with board
members who lack a technical background)and at
211 (noting organizations can successfully manage
their relationships with third-party service
providers without ‘‘becom[ing] experts’’ in the
services provided).
113 Proposed 16 CFR 314.4(b).
114 Proposed 16 CFR 314.4(b)(1), (2), and (3).
115 See, e.g., Proposed 16 CFR 314.4(c)(2) and (10)
and (e).
116 ACA International (comment 45, NPRM), at
12; U.S. Chamber of Commerce (comment 33,
NPRM), at 10.
117 U.S. Chamber of Commerce (comment 33,
NPRM), at 10.
118 Consumer Data Industry Association
(comment 36, NPRM), at 5.
119 Inpher, Inc. (comment 50, NPRM), at 4.
prevent the approach of having multiple
people responsible for different aspects
of the program, as some commenters
asserted. While the Qualified Individual
appointed as the coordinator of the
information security program would
have ultimate responsibility for
overseeing and managing the
information security program, financial
institutions may still assign particular
duties and responsibilities to other staff
members. 110 A financial institution may
organize its personnel in teams or share
decision making between individuals.
Moreover, the Rule does not require this
be the Qualified Individual’s sole job—
he or she may have other duties. The
Rule requires only that one individual
assume the ultimate responsibility for
overseeing and enforcing the program.
Accordingly, the Final Rule requires
designation of a single Qualified
Individual, as proposed, but no longer
uses the term ‘‘CISO.’’
Third-Party Coordinators
The Proposed Rule stated that the
Qualified Individual would not need to
be an employee of the financial
institution, but could be an employee of
an affiliate or a service provider. This
change was intended to accommodate
financial institutions that may prefer to
retain an outside expert, lack the
resources to employ a qualified person
to oversee a program, or decide to pool
resources with affiliates to share staff to
manage information security. The
Proposed Rule required, however, that
to the extent a financial institution used
a service provider or affiliate, the
financial institution must still: (1)
Retain responsibility for compliance
with the Rule; (2) designate a senior
member of its personnel to be
responsible for direction and oversight
of the Qualified Individual; and (3)
require the service provider or affiliate
to maintain an information security
program that protects the financial
institution in accordance with the Rule.
The Commission received one
comment on this aspect of the
provision. NADA argued that, because a
senior member of a financial
institution’s personnel must be
responsible for the oversight of a third-
party Qualified Individual, the
supervising individual would need to be
an expert in information security, and
the financial institution would still be
required to hire an expensive employee
to supervise the third-party Qualified
Individual.111 The Rule, however, does
not require individuals responsible for
overseeing third-party Qualified
Individuals to be information security
experts themselves. The senior
personnel that oversees the third-party
Qualified Individual is charged with
supervising and monitoring the third-
party so the financial institution is
aware of its data security needs and the
safeguards being used to protect its
information systems. This person does
not need to be qualified to coordinate
the information security program him or
herself. Technical staff are frequently
supervised by employees or officers
with limited technical expertise.112 The
Rule requires only the same
responsibilities a supervisor would have
in overseeing an in-house information
security coordinator of a financial
institution. Accordingly, the
Commission adopts the proposed
paragraph without modification.
Proposed Paragraph (b)
The NPRM proposed amending
paragraph (b) to clarify a financial
institution must base its information
security program on the findings of its
risk assessment by adding an explicit
statement that financial institutions’
‘‘information security program [shall be
based] on a risk assessment.’’ 113 In
addition, the Proposed Rule removed
existing § 314.4(b)’s requirement that
the risk assessment must include
consideration of specific risks 114
because these specific risks are set forth
elsewhere in the Proposed Rule.115 The
Commission received no comments on
this paragraph and adopts paragraph (b)
as proposed.
Written Risk Assessment
Paragraph (b)(1) of the Proposed Rule
required the risk assessment be written
and include: (1) Criteria for the
evaluation and categorization of
identified security risks or threats the
financial institution faces; (2) criteria for
the assessment of the confidentiality,
integrity, and availability of the
financial institution’s information
systems and customer information,
including the adequacy of the existing
controls in the context of the identified
risks or threats to the financial
institution; and (3) requirements
describing how identified risks will be
mitigated or accepted based on the risk
assessment and how the information
security program will address the
financial institution’s risks. Commenters
raised several concerns about the
Proposed Rule’s provisions on risk
assessment, none of which merit
changes to the Proposed Rule.
First, some commenters objected to
the level of specificity of the Proposed
Rule, with some arguing the
requirements were too specific, and
others arguing the requirements were
not specific enough. With respect to the
Proposed Rule being too specific,
commenters such as ACA and U.S.
Chamber of Commerce argued it
removed financial institutions’
flexibility in performing risk
assessments.116 The U.S. Chamber of
Commerce contended, because the
criteria are too specific, a risk
assessment performed using them
would not be ‘‘sufficiently risk
based.’’ 117 CDIA expressed concern it
was unclear ‘‘what level of specificity is
required’’ in the written risk assessment
and if detailed risk assessments are
required, they ‘‘could themselves
become a roadmap for a security
breach.’’ 118
In contrast, several other commenters
recommended the Rule set forth more
specific criteria for risk assessments.
Inpher suggested the Commission add a
requirement that risk assessments
require financial institutions to examine
‘‘technologies that are deployed by
[financial institutions’] information
security systems, and evaluate the
feasibility’’ of adopting ‘‘privacy
enhancing technologies’’ that would
better address vulnerabilities and thwart
threats.119 Inpher also recommended the
Rule require financial institutions to
conduct privacy impact assessments
with ‘‘specific guidelines to review
internal data protection standards and
adherence to fair information
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70284 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
120 Id.
121 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 2.
122 HALOCK Security Labs (comment 4,
Workshop) at 2. See Rocio Baeza (comment 12,
Workshop) at 2–3 (suggesting a detailed list of
requirements for the risk assessment).
123 See, e.g., Remarks of Chris Cronin, Safeguards
Workshop Tr., supra note 17, at 25 (stating that
evaluating the likelihoods and impacts of potential
security risks and evaluating existing controls is an
important component of a risk assessment);
Remarks of Serge Jorgensen, Safeguards Workshop
Tr., supra note 17, at 29–30 (emphasizing the
importance of risk assessments as tools for adjusting
existing security measures to account for both
current and future security threats); Nat. Inst. of Sci.
& Tech., U.S. Dept. of Com., Special Publication
800–30 Rev. 1, Guide for Conducting Risk
Assessments 1 (2012) (describing the purpose of
risk assessments as the identification of and
prioritization of risk in order to inform decision
making and risk response).
124 ACA International further argued because risk
assessment criteria are generally understood, they
do not need to be included in the Final Rule. ACA
International (comment 45, NPRM). The
Commission believes it is helpful to be clear about
the criteria the risk assessment must contain, even
if those criteria are commonly understood.
125 National Association of Dealer Counsel
(comment 44, NPRM), at 3; National Automobile
Dealers Association (comment 46, NPRM), at 20.
126 National Automobile Dealers Association
(comment 46, NPRM), at 20.
127 See, e.g., Slides Accompanying Remarks of
Rocio Baeza, in Safeguards Workshop Slides, supra
note 72, at 27–28 (describing three different
compliance models: In-house, outsource, and
hybrid, with costs ranging from $199 per month to
more than $15,000 per month); Slides
Accompanying the Remarks of Brian McManamon,
‘‘Sample Pricing,’’ in Safeguards Workshop Slides,
supra note 72, at 29 (estimating the cost of
cybersecurity services based on number of
endpoints: $2K–$5K per month for 25–250
endpoints; $5K–$15K for 250–750 endpoints;
$15K–$30K for 750–1,000 endpoints; and $30K–
$50K for 1,500–2,500 endpoints); see also Remarks
of Brian McManamon, Safeguards Workshop Tr.,
supra note 17, at 83–85.
128 See Remarks of Chris Cronin, Safeguards
Workshop Tr., supra note 17, at 48–49 (noting all
information security frameworks and guidelines are
based on risk analysis).
129 National Automobile Dealers Association
(comment 46, NPRM) at 20.
130 Id.
principles.’’ 120 The Princeton Center
suggested the Rule require risk
assessments to include threat modeling
and adopt the concept of defense in
depth. 121 HALOCK Security Labs
recommended the Rule specifically
require ‘‘a) That risk assessments should
evaluate the likelihood of magnitudes of
harm that result from threats and errors,
b) That risk assessments should
explicitly estimate foreseeable harm to
consumers as well as to the covered
financial institutions, c) That risk
mitigating controls are commensurate
with the risks they address, [and] d)
That risk assessments estimate
likelihoods and impacts using available
data.’’ 122
The Commission believes the
Proposed Rule’s provisions on risk
assessment strike the right balance
between specificity and flexibility. The
amendments provide only a high-level
list of criteria the risk assessment must
address. They essentially require that
the financial institution identify and
evaluate risks to its systems, evaluate
the adequacy of its existing controls for
addressing these risks, and identify how
these risks can be mitigated. These are
core requirements of any risk-
assessment.123 The Rule does not
require any specific methodology or
approach for performing the assessment.
Financial institutions are free to perform
the risk assessment using the method
most suitable for their organization as
long as that method meets the general
requirements set forth in the Rule. 124
And while the Commission agrees the
additional requirements suggested by
some commenters may be beneficial in
many, or even most, risk assessments, it
believes a more flexible requirement
will better allow financial institutions to
find the risk assessment method that
best fits their organization and will
better accommodate changes in
recommended approaches in the future.
In response to CDIA’s concern about
the risk assessment providing a
roadmap for bad actors, certainly, the
written risk assessment will include
details about a financial institution’s
systems that could assist an attacker if
obtained by the attacker. Accordingly,
the risk assessment should be protected
as any other sensitive information
would be. The Commission does not
view this concern as a reason not to
create such a document. Indeed, the
concern would apply to any written
document that provides information
regarding a financial institution’s
information security procedures, from a
network diagram to written security
code.
Second, some commenters argued
implementing the risk-assessment
provision as proposed would be too
expensive and difficult for financial
institutions.125 For example, NADA
argued the contemplated risk
assessment would be very costly
because the criteria set out in paragraph
(b)(1) are ‘‘well outside the scope of
expertise of anyone but the most
sophisticated IT professionals.’’ 126 In
response, although the Commission
declines to modify the provision, it
addresses NADA’s concern in § 314.6 by
exempting financial institutions that
maintain information concerning fewer
than 5,000 consumers from the specific
requirements of paragraph (b)(1), and
from the requirement to memorialize the
risk assessment in writing. For those
financial institutions that do not qualify
for this exemption, the Commission
believes they will be able to perform the
required risk assessment in a manner
that is practical and affordable for their
institution. There are many resources
available to financial institutions to aid
in risk assessment, including service
providers that can assist institutions of
various sizes.127
While acknowledging there will be
some cost to conducting a risk
assessment, the Commission believes a
properly conducted risk assessment is
an essential part of a financial
institution’s information security
program. The entire Safeguards Rule,
both as it currently exists and as
amended, requires that the information
security program be based on a risk
assessment. An information security
program cannot properly guard against
risks to customer information if those
risks have not been identified and
assessed. 128 The Commission believes
this requirement properly emphasizes
the importance of robust risk
assessments, while providing financial
institutions sufficient flexibility in
performing these assessments. Finally,
the Commission notes, because the
current Rule also requires that a risk
assessment be performed, financial
institutions that have complied with the
current Rule have already conducted a
risk assessment. And, even if that risk
assessment was not memorialized in
writing, the work conducted for that risk
assessment should be useful in
performing future risk assessments.
Third, NADA objected to the
requirement that the risk assessment
describe how each identified risk will
be ‘‘mitigated or accepted,’’ arguing it is
not clear when it is appropriate to
‘‘accept a risk.’’ 129 NADA argued that
documenting a decision to accept a risk
would ‘‘create a record that can be
distorted and second guessed after the
fact,’’ and ‘‘context is lost when it is
written and reviewed after an incident
has occurred.’’ 130 The Rule does not
require a financial institution to mitigate
every risk identified, no matter how
remote or insignificant. Instead, the
Rule allows a financial institution to
accept a risk, if its assessment of the risk
reveals that the chance it will produce
a security event is very small, if the
consequences of the risk are minimal, or
the cost of mitigating the risk far
outweighs the benefit. In those cases,
the financial institution may choose to
accept the risk. A financial institution
concerned that its decision to accept a
risk will later be questioned may choose
to set forth whatever context or
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70285	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
131 Inpher, Inc. (comment 50, NPRM), at 3; Global
Privacy Alliance (comment 38, NPRM), at 11.
132 National Automobile Dealers Association
(comment 46, NPRM), at 20.
133 NADA disagreed with the Commission’s
statement in the NPRM for the Proposed Rule that
‘‘most financial institutions already implement’’ the
specific requirements in paragraph (c), stating that
many financial institutions ‘‘do not currently
implement some or all of these measures.’’ National
Automobile Dealers Association (comment 46,
NPRM), at 20. The Commission continues to believe
most financial institutions institute some form of
most of these measures, such as access control,
secure disposal, and monitoring authorized users,
based on its enforcement and business outreach
experience. While NADA’s statement that some
financial institutions implement none of the
measures may be true, this underlines the necessity
of making these elements explicit requirements
under the Rule, as these elements are necessary for
a reasonable information security program for all
financial institutions. Indeed, a financial institution
that utilizes none of these elements and exercises
no access control, no secure disposal procedures,
and does not monitor users of its systems is
unlikely to be in compliance with the current Rule.
134 Global Privacy Alliance (comment 38, NPRM),
at 6.
135 Global Privacy Alliance (comment 38, NPRM),
at 9–10.
136 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 4–5.
137 Reynolds and Reynolds Company (comment 7,
Workshop), at 7.
138 Consumer Reports (comment 52, NPRM), at 7.
139 American Council on Education (comment 24,
NPRM), at 10.
140 National Automobile Dealers Association
(comment 46, NPRM), at 23; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 5; American Council on Education
(comment 24, NPRM), at 10;
141 National Independent Automobile Dealers
Association (comment 48, NPRM), at 5; American
Council on Education (comment 24, NPRM), at 10.
142 NIADA suggested instituting physical access
controls would cost a dealership $215,000 because
each computer would need to have its own lockable
cubicle and there would need to be lockable offices
for all desks. See Remarks of Lee Waters, Safeguards
Workshop Tr., supra note 17, at 76. As originally
promulgated, the Rule already requires financial
institutions implement ‘‘physical safeguards that
are appropriate to your size and complexity.’’ 16
CFR 314.3. The Final Rule’s requirement is
consistent with that longstanding requirement. If
computers have technical safeguards preventing
unauthorized users from accessing customer
information, they usually will not need to be in a
lockable area, particularly if they are not generally
left unattended and are not likely to be stolen.
Similarly, desks would need to be in lockable
offices only if they contain accessible paper records.
A lockable file cabinet may be a more economical
solution.
explanation it sees fit in the written
assessment.
Finally, while several commenters
supported the idea of conducting
‘‘periodic’’ risk assessments as required
by the Proposed Rule,131 NADA
objected it is unclear how often
financial institutions need to conduct
risk assessments under this section. 132
In order to be effective, a risk
assessment must be subject to periodic
reevaluation to adapt to changes in both
financial institutions’ information
systems and changes in threats to the
security of those systems. The
Commission declines, however, to set
forth a specific schedule for risk
assessments. The Commission believes
it would not be appropriate to set forth
an inflexible schedule for periodic risk
assessments because each financial
institution must set its own schedule
based on the needs and resources of its
institution.
The Final Rule adopts § 314.4(b) as
proposed.
Paragraph (c)
Proposed paragraph (c) retained the
existing Rule’s requirement for financial
institutions to design and implement
safeguards to control the risks identified
in the risk assessment. In addition, it
added more detailed requirements for
what the safeguards must address (e.g.,
access controls, data inventory,
disposal, change management,
monitoring). These specific
requirements represent elements of an
information security program that the
Commission views as essential and
should be addressed by all financial
institutions. 133
As a preliminary matter, Global
Privacy Alliance (GPA) argued all of
these elements should be made optional
and financial institutions should be
required only to take these elements
‘‘into consideration’’ when designing
their information security programs.134
While the Commission agrees it is
important that the Rule allow financial
institutions flexibility in designing their
information security programs, these
elements are such important parts of
information security that each program
must address them. For example, an
information security program that has
no access controls or does not contain
any measures to monitor the activities of
users on the systems cannot be said to
be protecting the financial institution’s
systems. The Final Rule, therefore,
continues to require each information
security program to contain safeguards
that address these elements, with
modifications described below.
Access Controls
Proposed paragraph (c)(1) required
financial institutions to ‘‘place access
controls on information systems,
including controls to authenticate and
permit access only to authorized
individuals to protect against the
unauthorized acquisition of customer
information and to periodically review
such access controls.’’
Commenters suggested a number of
modifications to this provision. First,
GPA argued this provision should
require controls on access to
information, rather than on information
systems. 135 Second, several commenters
suggested adding further safeguards to
the ‘‘access control’’ requirement. For
example, the Princeton Center argued
the Rule should adopt the ‘‘Principle of
Least Privilege,’’ a principle that no user
should have access greater than is
necessary for legitimate business
purposes.136 Reynolds and Reynolds
Company (Reynolds) suggested the Rule
clarify that financial institutions must
‘‘vet, control, and monitor user access to
sensitive information.’’ 137 Consumer
Reports argued paragraph (c)(1) should
be amended to control access not just to
authorized users, but to further limit
access to when such access is
reasonably necessary.138 ACE argued
that any requirement for physical access
control allow financial institutions to
determine which locations should have
restricted access, rather than limiting
physical access to every building and
office within, say, a college campus.139
Finally, some commenters argued the
proposed language was too vague,140
particularly as it applied to vendor-
supplied services.141
In response to the comments, the
Commission makes a number of changes
to this provision in the Final Rule. First,
the Commission clarifies that the Rule
requires access controls, not just for
information systems, but for all
customer information, whether it is
housed in information systems or in
physical locations. To streamline the
Rule, the Final Rule combines the
separate physical access controls
requirement found in proposed
paragraph (c)(3) with this paragraph.
Physical access controls will generally
be most important in situations in
which sensitive customer information is
kept in physical form (such as hard-
copy loan applications, or printed
consumer reports). It may also require
physical restrictions to access machines
that contain customer information (e.g.,
locked doors and/or key card access to
a computer lab).142 The Commission
declines to make any changes in
response to ACE’s concern that every
physical location will need to be
protected—as the Rule states, physical
controls must be implemented to protect
unauthorized access to customer
information. Where no customer
information exists, the Rule would not
require physical controls.
Second, the Commission agrees with
the commenters who advocated that the
Rule implement the principle of least
privilege. The Commission does not
believe it is appropriate, for example,
for larger companies to give all
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70286 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
143 NPA expressed concern about the effect of the
Rule on pawnbrokers who the commenter stated are
required by law to allow law enforcement access to
their physical records. National Pawnbrokers
Association (comment 32, NPRM), at 7. Nothing in
the Rule conflicts with any such requirements. Law
enforcement appropriately accessing customer
information under a law that requires that access
would be considered authorized use under those
circumstances.
144 As noted above, the Commission is also
changing the term ‘‘authorized individuals’’ to
‘‘authorized users.’’
145 Proposed 16 CFR 314.4(c)(2).
146 See, e.g., Complaint at 11, FTC v. Wyndham
Worldwide Corp., No. CV 2:12–cv–01365–SPL (D.
Ariz. June 26, 2012) (alleging company failed to
provide reasonable security by, among other things,
failing to inventory computers connected to its
network).
147 National Automobile Dealers Association
(comment 46, NPRM), at 23–24; American Financial
Services Association (comment 41, NPRM), at 5;
American Council on Education (comment 24,
NPRM), at 10.
148 American Council on Education (comment 24,
NPRM), at 10.
149 Another commenter criticized proposed
paragraph (c)(2) because some financial institutions
‘‘have no control’’ over which networks they
transmit customer information. National
Pawnbrokers Association (comment 32, NPRM), at
7. Paragraph (c)(2) does not require a financial
system to identify all networks over which it may
transmit customer information. See also, infra, this
document’s discussion of NPA’s comments on
§ 314.4(f) of the Final Rule, noting financial
institutions are generally not required to oversee
other entities’ service providers over which they
have no control.
150 Inpher, Inc. (comment 50, NPRM), at 4;
Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 3;
Electronic Privacy Information Center (comment 55,
NPRM), at 8; National Consumer Law Center and
others (comment 58, NPRM), at 3.
employees and service providers access
to all customer information. Such
overbroad access could create additional
harm in the event of an intruder gaining
access to a system by impersonating an
employee or service provider.
Accordingly, the Commission clarifies
this in the Final Rule by adding a
requirement that not only must a
financial institution implement access
controls, but it should also restrict
access only to customer information
needed to perform a specific function.
As to the suggestion the Commission
impose monitoring requirements for
access, that requirement exists in
paragraph (c)(8). And as to the
suggestion the requirement is too vague
as to service providers, the Commission
believes the Final Rule is clear: When a
vendor accesses the financial
institution’s data or information
systems, the financial institution must
ensure appropriate access controls are
in place. Separately, under paragraph
(f), the financial institution must
reasonably oversee the vendor’s
safeguards, which would necessarily
include access controls for the vendor’s
system.
Finally, as to the suggestion the
provision is vague generally, as
discussed above, the Final Rule seeks to
preserve flexibility in its provisions,
both so that financial institutions can
design programs appropriate for their
systems and so that changes in
technology or security practices will not
render the Rule obsolete. The
Commission believes maintaining less
prescriptive requirements is the best
way to achieve the goal of flexibility and
protecting customer information.143
Accordingly, the Commission
combines paragraphs (c)(1) and (3) from
the Proposed Rule into revised
paragraph (c)(1) of the Final Rule, which
requires implementing and periodically
reviewing access controls on customer
information, including technical and, as
appropriate, physical controls to (1)
authenticate and permit access only to
authorized users to protect against the
unauthorized acquisition of customer
information and (2) limit authorized
users’ access only to customer
information that they need to perform
their duties and functions, or, in the
case of customers, to access their own
information.144
System Inventory
In the NPRM, the Commission
proposed to require the financial
institution to ‘‘[i]dentify and manage the
data, personnel, devices, systems, and
facilities that enable [the financial
institution] to achieve business
purposes in accordance with their
relative importance to business
objectives and [the financial
institution’s] risk strategy.’’ 145 This
requirement was designed to ensure the
financial institution inventoried the
data in its possession, inventoried the
systems on which that data is collected,
stored, or transmitted, and had a full
understanding of the relevant portions
of its information systems and their
relative importance.146 The Commission
retains this provision in the Final Rule
without modification.
Commenters raised two general
objections to this provision. First, some
commenters argued it was too vague and
that it was not clear how such an
inventory should be conducted or what
systems should be included. 147 The
Commission believes the language
provides effective guidance while still
allowing a variety of approaches by
financial institutions in identifying
systems involved in their businesses.
This provision requires a financial
institution to identify all ‘‘data,
personnel, devices, systems, and
facilities’’ that are a part of its business
and to determine their importance to the
financial institution. This inventory of
systems must include all systems that
are a part of the business so the
financial institution can locate all
customer information it controls, the
systems connected to that information,
and how they are connected. This
inventory forms the basis of an
information security program because a
system cannot be protected if the
financial institution does not
understand its structure or know what
data is stored in its systems.
Second, ACE suggested the scope of
this provision should be limited to
systems ‘‘directly related to the privacy
and security of ‘customer
information.’ ’’ 148 The Commission
declines to make this change because
the purpose of this provision is to allow
financial institutions to obtain a clear
picture of their systems and to identify
where customer information is kept and
how it can be accessed. An inventory
must examine all systems in order to
identify all systems that contain
customer information or are connected
to systems that do. If a financial
institution does not first examine all
systems and instead limits the inventory
to systems it considers to be directly
related to security, it could give an
incomplete picture of the financial
institution’s systems and could result in
some customer information or ways to
connect to that information being
overlooked.149
The Commission adopts paragraph
(c)(2) of the Proposed Rule as final,
without modifications.
Access to Physical Location
Proposed paragraph (c)(3) would have
required that financial institutions
restrict access to physical locations
containing customer information only to
authorized individuals. The Final Rule
combines this section with proposed
paragraph (c)(1) in order to eliminate
redundancy and clarify that access
controls must consider both electronic
and physical access.
Encryption
Proposed paragraph (c)(4) required
financial institutions to encrypt all
customer information, both in transit
over external networks and at rest. The
Proposed Rule allowed financial
institutions to use alternative means to
protect customer information, subject to
review and approval by the financial
institution’s Qualified Individual.
Several commenters supported the
inclusion of an encryption
requirement. 150 In fact, some suggested
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151 Inpher, Inc. (comment 50, NPRM), at 4.
152 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 3.
153 National Pawnbrokers Association (comment
32, NPRM), at 3; U.S. Chamber of Commerce
(comment 33, NPRM), at 11; CTIA (comment 34,
NPRM) at 10; Wisconsin Bankers Association
(comment 37, NPRM), at 2.
154 Global Privacy Alliance (comment 38, NPRM),
at 7–8.
155 Bank Policy Institute (comment 39, NPRM), at
14; Mortgage Bankers Association (comment 26,
NPRM), at 6; Global Privacy Alliance (comment 38,
NPRM), at 7–8.
156 Bank Policy Institute (comment 39, NPRM), at
14.
157 U.S. Chamber of Commerce (comment 33,
NPRM), at 11; American Financial Services
Association (comment 41, NPRM), at 5; ACA
International (comment 45, NPRM), at 13; CTIA
(comment 34, NPRM), at 10.
158 Mortgage Bankers Association (comment 26,
NPRM), at 6; Wisconsin Bankers Association
(comment 37, NPRM), at 2; American Financial
Services Association (comment 41, NPRM), at 5;
Ken Shaurette (comment 19, NPRM), (suggesting
the Commission consider whether ‘‘databases,
applications and operating systems are prepared to
fully support full encryption without significant
performance impact or ability to continue to
function.’’); National Automobile Dealers
Association (comment 46, NPRM), at 25–26
(arguing the terms ‘‘at rest’’ and ‘‘in transit’’ are
unclear).
159 Mortgage Bankers Association (comment 26,
NPRM), at 6.
160 Wisconsin Bankers Association (comment 37,
NPRM), at 2 (discussing FFIEC Information
Technology Booklet); American Financial Services
Association (comment 41, NPRM), at 5 (discussing
FFIEC Cybersecurity Assessment Tool).
161 See Remarks of Matthew Green, Safeguards
Workshop Tr, supra note 17, at 225 (noting website
usage of encryption is above 80 percent; ‘‘Let’s
Encrypt’’ provides free TLS certificates; and costs
have gone down to the point that if a financial
institution is not using TLS encryption for data in
motion, it is making an unusual decision outside
the norm); Remarks of Rocio Baeza, Safeguards
Workshop Tr., supra note 17, at 106 (‘‘[T]he
encryption of data in transit has been standard.
There’s no pushback with that.’’); see also National
Pawnbrokers Association (comment 3, Workshop),
at 2 (‘‘[I]n states that allow us to use technology for
the receipt of information from consumer customers
and software to print our pawn tickets and store
information, we believe our members have access
through their software providers to protections that
comply with the Safeguards Rule.’’).
162 See Remarks of Wendy Nather, Safeguards
Workshop Tr., supra note 17, at 267 (‘‘we have a
lot more options, a lot more technologies today than
we did before that are making both of these
solutions, both encryption and MFA, easier to use,
more flexible, in some cases cheaper, and we
should be encouraging their adoption wherever
possible.’’); Remarks of Matthew Green, Safeguards
Workshop Tr., supra note 17, at 265–66 (‘‘I think
that we’re in a great time when we’ve reached the
point where we can actually mandate that
encryption be used. I mean, years ago—I’ve been in
this field for 15, you know, 20 years now, I guess.
And, you know, encryption used to be this exotic
thing that was very, very difficult to use, very
expensive and not really feasible for securing
information security systems. And we’ve reached
the point where now it is something that’s come to
be and we can actually build well. So I’m really
happy about that.’’).
163 See Remarks of Randy Marchany, Safeguards
Workshop Tr., supra note 17, at 229–30 (noting
encryption is already built into the Microsoft Office
environment and a number of Microsoft products,
such as Spreadsheets, Excel, Docs, and PowerPoint,
support that encryption feature). Other applications
that have encryption built in include database
applications; app platforms iOS and Android; and
development frameworks for web applications on
banking sites.
the Proposed Rule did not go far enough
in requiring encryption. Inpher
suggested the Rule should require
encryption of customer information
when in use, in addition to when in
transit or at rest.151 The Princeton
Center suggested requiring encryption of
data while in transit over internal
networks, in addition to requiring it for
external networks, noting the blurring of
the distinction between internal and
external networks. 152
In contrast, others argued encryption
could be too expensive and technically
challenging for some financial
institutions and should not be required
in all cases.153 Indeed, GPA argued the
Rule should not require encryption at
all, financial institutions should be free
to adopt other protective measures for
customer information, and the Rule
should allow financial institutions to
‘‘determine the controls that are most
appropriate for protecting the sensitive
information that they handle.’’ 154
Similarly, some commenters argued
financial institutions should be required
to encrypt customer information only
when the risk to the customer
information justifies it.155 Others
suggested encryption in more limited
circumstances, such as on systems ‘‘to
which unauthorized individuals may
have access,’’ 156 for sensitive data,157 or
for data in transit. 158 The Mortgage
Bankers Association argued encryption
at rest is unnecessary because customer
information at rest in a financial
institution’s system is sufficiently
protected by controlling access to the
system.159 Two commenters stated
guidelines issued by the Federal
Financial Institutions Examination
Council (FFIEC) do not require most
banks to encrypt data at rest, unless the
institution’s risk assessment indicates
such encryption is necessary.160
The Commission declines to modify
the encryption requirement from the
Proposed Rule. As to the comments that
suggest the requirement should be
relaxed, the Commission notes there are
numerous free or low cost encryption
solutions available to financial
institutions, particularly for data in
transit, 161 that make encryption a
feasible solution in most situations. For
data at rest, encryption is now cheaper,
more flexible, and easier than ever
before.162 In many cases, widely used
software and hardware have built-in
encryption capabilities.163
In response to the argument that the
Rule should not require encryption at
rest because FFIEC guidelines do not
require it, the Commission notes the
Safeguards Rule is very different from
the guidelines issued by the FFIEC. The
depository financial institutions
regulated by the banking agencies are
subject to regular examinations by their
regulator. The guidelines created by the
FFIEC are designed to be used by the
examiner, as part of those examinations,
to evaluate the security of the financial
institution; the examiner thus has a
direct role in regularly verifying the
financial institution has taken
appropriate steps to protect its customer
information. In contrast, the Safeguards
Rule regulates covered financial
institutions directly and must be usable
by those entities to determine
appropriate information security
without any interaction between the
financial institution and the
Commission. The Commission does not
have the ability to examine each
financial institution and work with that
institution to ensure their information
security is appropriate. Therefore, a
requirement that institutions encrypt
information by default is appropriate for
the Safeguards Rule, as the Commission
believes encryption of customer
information at rest is appropriate in
most cases.
Finally, while some commenters
suggested eliminating the encryption
requirement for certain types of data
(e.g., non-sensitive) or certain categories
of data (e.g., data at rest), the
Commission notes, as discussed in more
detail above, the fact that an individual
is a customer of a financial institution
alone may be sensitive. In any event, the
Rule provides financial institutions with
flexibility to adopt alternatives to
encryption with the approval of the
Qualified Individual.
Similarly, the Commission declines to
extend the encryption requirement to
data in use or to data transmitted over
internal networks, as some commenters
suggested. The Commission does not
believe the technology that would
encrypt data while in use (as opposed
to in transit or at rest) has been adopted
widely enough at this time to justify
mandating its use by all financial
institutions under the FTC’s
jurisdiction. As to encryption of data
transmitted over internal networks, the
Commission acknowledges, due to
changes in network design and the
growth of cloud and mobile computing,
the distinction between internal and
external networks is less clear than it
once was. However, the Commission
believes requiring all financial
institutions to encrypt all
communications over internal networks
would be unduly burdensome at this
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164 The Commission believes transmissions of
customer information to remote users or to cloud
service providers should be treated as external
transmissions, as those transmissions are sent out
of the financial institution’s systems.
165 Bank Policy Institute (comment 39, NPRM), at
13–14.
166 See, e.g., Payment Card Industry (PCI) Data
Security Standard Requirements and Security
Assessment Procedures Version 3.2.1, PCI Security
Standards Council (May 2018), https://
www.pcisecuritystandards.org/document_library
(last accessed 30 Nov. 2020) (Requirement 4 encrypt
transmission of cardholder data across open, public
networks).
167 See, e.g., Encrypted Traffic Management,
Broadcom Inc., https://www.broadcom.com/
products/cyber-security/network/encrypted-traffic-
management (last accessed 30 Nov. 2020); SSL
Visibility, F5, Inc., https://www.f5.com/solutions/
application-security/ssl-visibility (last accessed 30
Nov. 2020).
168 Bank Policy Institute (comment 39, NPRM), at
14; New York Insurance Association (comment 31,
NPRM), at 1.
169 New York Insurance Association (comment
31, NPRM) at 1.
170 National Pawnbrokers Association (comment
3, Workshop), at 2–3.
171 Id. at 2.
172 NADA suggested it is not clear how the
encryption requirement will apply to customer
information held on a service provider’s system or
on the systems of the subcontractors of the service
provider. National Automobile Dealers Association
(comment 46, NPRM), at 21–22. The Commission
believes the Final Rule lays out a financial
institution’s obligations in this situation: It requires
customer information be encrypted unless
infeasible. Section 314.4(e), in turn, requires
financial institutions to require service providers to
implement and maintain appropriate safeguards by
contract and to periodically assess the continued
adequacy of those measures. A financial institution
that uses a service provider to store and process
customer information must require that service
provider to encrypt that information and
periodically determine whether it continues to do
so. If it is infeasible for the service provider to meet
these requirements then the financial institution’s
Qualified Individual must work with the service
provider to develop compensating controls or cease
doing business with the service provider.
173 See, e.g., Complaint, FTC v. D-Link Systems,
Inc., No. 3:17–CV–00039–JD (N.D. Cal. March 20,
2017) (alleging company failed to provide
reasonable security when it failed to adequately test
the software on its devices).
174 See, e.g., Complaint, Lenovo, FTC No. 152–
3134 (January 2, 2018) (alleging company failed to
provide reasonable security by failing to properly
assess and address security risks caused by third-
party software).
175 American Council on Education (comment 24,
NPRM), at 11; National Automobile Dealers
Association (comment 46, NPRM), at 26–27.
time. There remain significant costs and
technical hurdles to encrypting
transmissions on internal networks that
would not be reasonable to impose on
all financial institutions, especially
smaller institutions with simpler
systems that might realize less benefit
from this approach. While the
Commission encourages financial
institutions to consider whether it
would be appropriate for them to
encrypt the transmission of customer
information over internal networks, it
declines to require this for all financial
institutions. 164
Commenters pointed to three
additional concerns about encryption,
none of which the Commission finds
persuasive. First, the Bank Policy
Institute commented the encryption
requirement would in fact weaken
security by blocking surveillance of the
information by the financial institution
and requiring the ‘‘broad distribution’’
of encryption keys. 165 The Commission
does not believe an encryption
requirement would weaken security.
Encryption is almost universally
recommended by security experts and
included in most security standards.166
Further, new tools have been developed
to address the issue the Bank Policy
Institute has raised. Many financial
institutions have monitoring tools on
the edge of their networks to monitor
data leaving the network. It used to be
the case these network monitoring tools
could not see the content of encrypted
data as it left the corporate network and
was transmitted to the internet.
However, there are now tools available
that can see the data as it departs the
network, even if the data is
encrypted.167 Any marginal security
costs of encryption are far outweighed
by the benefits of rendering customer
information unreadable.
Second, some commenters argued
financial institutions should be able to
implement alternatives to encryption
without obtaining approval from the
Qualified Individual.168 The New York
Insurance Association expressed
concern financial institutions might feel
they need to encrypt all customer
information because of the risk that the
alternative controls approved by the
Qualified Individual would be ‘‘second
guessed’’ in the event unencrypted data
is compromised. 169 The Commission,
however, believes this concern is a core
element of information security based
on risk assessment. Every aspect of an
information security program is based
on the judgment of the financial
institution and its staff. The Qualified
Individual’s decision concerning
alternate controls, like other decisions
by the financial institution and its staff,
will be subject to review in any
enforcement action to determine
whether the decision was appropriate. If
the Qualified Individual is not required
to make a formal decision, it is much
more likely a decision not to encrypt
information will be made even if there
is no compensating control, or even
made without the Qualified Individual’s
knowledge.
Third, the National Pawnbrokers
Association (‘‘NPA’’) expressed concern
that if pawnbrokers are required to
encrypt customer information they may
fall out of compliance with state and
local regulations concerning transaction
reporting. 170 NPA stated pawnbrokers
are often required by state or local law
to report every pawn transaction, along
with nonpublic personally identifiable
consumer information, to law
enforcement, and the agencies that
receive this information ‘‘prefer to take
this information electronically and in
unencrypted forms.’’ 171 The
Commission believes if transmitting the
information in unencrypted form is a
preference of the agencies and not a
requirement, then pawnbrokers can
comply with both the Safeguards Rule
and these laws by encrypting any
transmissions that include customer
information. If there are cases where a
required transmission of customer
information cannot be encrypted for
technical reasons, then the
pawnbroker’s Qualified Individual will
need to work with the law enforcement
agency to implement alternative
compensating controls to ensure the
customer information remains secure
during these transmissions.172
The Final Rule adopts this paragraph
as paragraph (c)(3) without revision.
Secure Development Practices
Proposed paragraph (c)(5) required
financial institutions to ‘‘[a]dopt secure
development practices for in-house
developed applications utilized’’ for
‘‘transmitting, accessing, or storing
customer information.’’ In this
paragraph, the Commission proposed
requiring financial institutions to
address the security of software they
develop to handle customer
information, as distinct from the
security of their networks that contain
customer information.173 In addition,
the Proposed Rule required ‘‘procedures
for evaluating, assessing, or testing the
security of externally developed
applications [financial institutions]
utilize to transmit, access, or store
customer information.’’ This provision
required financial institutions to take
steps to verify that applications they use
to handle customer information are
secure. 174
Some commenters argued evaluating
the security of externally developed
software would be too expensive or
impractical for some financial
institutions, 175 while others raised
different concerns. The American
Council on Education suggested, in
cases in which a financial institution
cannot obtain access to a software
provider’s code or technical
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70289	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
176 American Council on Education (comment 24,
NPRM), at 11.
177 National Automobile Dealers Association
(comment 46, NPRM), at 26–27.
178 Proposed 16 CFR 314.4(c)(6).
179 Justine Bykowski (comment 12, NPRM);
Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 6–7;
Electronic Privacy Information Center (comment 55,
NPRM), at 8; National Consumer Law Center and
others (comment 58, NPRM), at 2; see also Remarks
of Wendy Nather, Safeguards Workshop Tr., supra
note 17, at 240–41 (discussing the security poverty
line).
180 American Council on Education (comment 24,
NPRM), at 11–12.
181 National Independent Automobile Dealers
Association (comment 48, NPRM), at 6; see also Ken
Shaurette (comment 19, NPRM) (questioning
whether multi-factor authentication is appropriate
for all financial institutions).
182 National Independent Automobile Dealers
Association (comment 48, NPRM), at 6.
183 Cisco Systems, Inc. (comment 51, NPRM), at
2–4.
184 Bank Policy Institute (comment 39, NPRM), at
11–13; Global Privacy Alliance (comment 38,
NPRM), at 8.
185 Electronic Transactions Association (comment
27, NPRM), at 3 n.1; U.S. Chamber of Commerce
(comment 33, NPRM), at 11; CTIA (comment 34,
NPRM), at 11; Global Privacy Alliance (comment
38, NPRM), at 8; Bank Policy Institute (comment 39,
NPRM), at 12; National Automobile Dealers
Association (comment 46, NPRM), at 28; National
Independent Automobile Dealers Association
(comment 48, NPRM), at 6; New York Insurance
Association (comment 31, NPRM), at 1.
186 CTIA (comment 34, NPRM), at 11; Electronic
Transactions Association (comment 27, NPRM), at
3 n.1; U.S. Chamber of Commerce (comment 33,
NPRM), at 11.
187 American Council on Education (comment 24,
NPRM), at 11.
188 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 6–7;
see also Remarks of Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 102 (stating his
company TECH LOCK supports requiring multi-
factor authentication for users connecting from
internal networks).
189 CTIA (comment 34, NPRM), at 11–12; see also
Electronic Transactions Association (comment 27,
NPRM) at 3 (suggesting use of the term ‘‘alternative
compensating controls’’).
190 See, e.g., Slides Accompanying Remarks of
Brian McManamon, ‘‘MFA/2FA Pricing (Duo),’’ in
Safeguards Workshop Slides, supra note 72, at 30
(setting forth prices for multi-factor/two-factor
services from Duo, including free services for up to
ten users); Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 102–03;
Slides Accompanying Remarks of Lee Waters,
‘‘Estimated Costs of Proposed Changes,’’ in
Safeguards Workshop Slides, supra note 72, at 26
estimating costs of MFA to be $50 for smartcard or
fingerprint readers, and $10 each per smartcard);
Slides Accompanying Remarks of Wendy Nather,
‘‘Authentication Methods by Industry,’’ in
Safeguards Workshop Slides, supra note 72, at 37
(chart showing the use of MFA solutions such as
Duo Push, phone call, mobile passcode, SMS
passcode, hardware token, Yubikey passcode, and
U2F token in industries such as financial services
and higher education); Remarks of Wendy Nather,
Safeguards Workshop Tr., supra note 17, at 233–34.
infrastructure, then evaluating the
security of its software is infeasible.176
NADA further suggested in order to
evaluate the security of software,
financial institutions would need to hire
an expensive IT professional.177
The Commission does not agree with
these assertions. Evaluating the security
of software does not require access to
the source code of that software or
access to the provider’s infrastructure.
For example, a provider can supply the
steps it took to ensure the software was
secure, whether it uses encryption to
transmit information, and the results of
any testing it conducted. In addition,
there are third party services that assess
software. An institution can also set up
automated searches regarding
vulnerabilities, patches, and updates to
software listed on the financial
institution’s inventory. The exact nature
of the evaluation required will depend
on the size of the financial institution
and the amount and sensitivity of
customer information associated with
the software. If the software will be used
to handle large amounts of extremely
sensitive information, then a more
thorough evaluation will be warranted.
Likewise, the nature of the software
used will also affect the evaluation.
Software that has been thoroughly
tested by third parties may need little
more than a review of the test results,
while software that has not been widely
used and tested will require closer
examination.
The Commission adopts proposed
paragraph (c)(5) as paragraph (c)(4) of
the Final Rule.
Multi-Factor Authentication
Proposed paragraph (c)(6) required
financial institutions to ‘‘implement
multi-factor authentication for any
individual accessing customer
information’’ or ‘‘internal networks that
contain customer information.’’ 178 The
Proposed Rule would have allowed
financial institutions to adopt a method
other than multi-factor authentication
that offers reasonably equivalent or
more secure access controls with the
written permission of its Qualified
Individual. In the Final Rule, the
Commission retains the general
requirements of proposed paragraph
(c)(6) as paragraph (c)(5), with some
modifications described below.
Although several commenters
expressed support for including a multi-
factor authentication requirement in the
Final Rule,179 others opposed such a
requirement. For example, ACE argued
a blanket requirement mandating multi-
factor authentication for all institutions
of all sizes and complexities is not the
best solution. 180 The National
Independent Automobile Dealers
Association (NIADA) commented the
costs of multi-factor authentication
would be too high for some financial
institutions because it would need to be
built into their information systems
from scratch. 181 NIADA also argued
adopting multi-factor authentication
would disrupt a financial institution’s
activities as employees had to ‘‘jump
through multiple hoops to log in.’’ 182
Cisco Systems, Inc. argued that while
multi-factor authentication is an
effective safeguard, it should not be
specifically required by the Rule
because, while it is currently good
security practice, in the future multi-
factor authentication may become
outdated, and that allowing financial
institutions to satisfy the Rule in this
way could result in inadequate
protection.183
Other commenters did not dispute the
benefits of multi-factor authentication
generally, but argued the Rule should
limit the multi-factor authentication
requirement. Some of these commenters
stated the Rule should only require
multi-factor authentication when the
financial institution’s risk assessment
justifies it. 184 Others argued there
should be a distinction between internal
access and external access. For example,
some commenters argued the Rule
should not require multi-factor
authentication when a user accesses
customer information from an internal
network, 185 because there are other
controls on internal access that make
multi-factor authentication
unnecessary.186 Another commenter
stated requiring multi-factor
authentication when a customer
accesses their information from an
external network could create problems
for some institutions.187 Finally, the
Princeton Center argued the Rule should
be amended to clarify that multi-factor
authentication should be required for
internal and external networks.188
Finally, CTIA took issue with the
proposed requirement that the Qualified
Individual be permitted to approve
‘‘reasonably equivalent or more secure’’
controls if multi-factor authentication is
not feasible, suggesting instead that
Qualified Individuals be permitted to
approve ‘‘effective alternative
compensating controls.’’ 189
The Commission disagrees with the
commenters who stated the Rule should
not include a multi-factor
authentication requirement. As to costs,
many affordable multi-factor
authentication solutions are available in
the marketplace. 190 Most financial
institutions will be able to find a
solution that is both affordable and
workable for their organization. In the
cases when that it is not possible, the
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191 See also Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 103–04 (noting
even where legacy systems do not support multi-
factor authentication, alternative measures can be
used and ‘‘it’s things that can easily be done.’’)
192 See, e.g., Remarks of Randy Marchany,
Safeguards Workshop Tr., supra note 17, at 236–38
(describing how Virginia Tech implemented multi-
factor authentication in 2016 for its more than
156,000 users); Slides Accompanying Remarks of
Wendy Nather, ‘‘Authentication Methods by
Industry,’’ in Safeguards Workshop Slides, supra
note 72, at 37 demonstrating the types of multi-
factor authentication used by health care, financial
services, higher education and the Federal
Government); Remarks of Wendy Nather,
Safeguards Workshop Tr., supra note 17, at 233–35.
193 See Remarks of Wendy Nather, Safeguards
Workshop Tr., supra note 17, at 234 (describing
how a phone call to a landline is popular in some
segments).
194 See, e.g., Remarks of Matthew Green,
Safeguards Workshop Tr., supra note 17, at 266
(explaining passwords are not enough of an
authentication feature but when MFA is used and
deployed, the defenders can win against attackers);
id. at 239 (describing how because smart phones
have modern secure hardware processors, biometric
sensors and readers built in, increasingly
consumers can get the security they need through
the devices they already have by storing
cryptographic authentication keys on the devices
and then using the phone to activate them).
195 The Mortgage Bankers Association expressed
concern the Proposed Rule would not allow the use
of a single-sign on process, where a user is given
access to multiple applications with the use of one
set of credentials. Mortgage Bankers Association
(comment 26, NPRM), at 7. The Commission does
not view the Rule as preventing such a system, if
the user has used multi-factor authentication to
access the system and the system is designed to
ensure any user of a given application has been
subjected to multi-factor authentication.
196 See Remarks of Pablo Molina, Safeguards
Workshop Tr., supra note 17, at 30 (mentioning
‘‘phishing,’’ or social engineering, as a common
type of cybersecurity attack); Remarks of Lee
Waters, Safeguards Workshop, supra note 17, at 91
(same); Remarks of Michele Norin, Safeguards
Workshop Tr., supra note 17, at 179 (same); see also
Cyber Div., Fed. Bureau of Investigation, Private
Industry Notification No. 20200303–001, Cyber
Criminals Conduct Business Email Compromise
through Exploitation of Cloud-Based Email
Services, Costing U.S. Businesses Over Two Billion
Dollars, (March 2020), https://www.ic3.gov/media/
news/2020/200707-4.pdf, at 1–2, (last accessed 1
Dec. 2020) (‘‘Between January 2014 and October
2019, the Internet Crime Complaint Center (IC3)
received complaints totaling over $2.1 billion in
actual losses from [Business Email Compromise
(‘‘BEC’’)] scams targeting the largest [cloud-based
email] platforms. Losses from BEC scams overall
have increased every year since IC3 began tracking
the scam in 2013 and have been reported in all 50
states and in 177 countries.’’).
197 Consumer Data Industry Association
(comment 36, NPRM), at 6–7; Cisco Systems, Inc.
(comment 51, NPRM), at 3–4.
198 Bank Policy Institute (comment 39, NPRM), at
11.
199 NADA argued, for financial institutions that
have appointed a third party to act as their
information security coordinator, this provision
would require the institution to turn over
decisionmaking to someone ‘‘with no stake in the
business outcome.’’ National Automobile Dealers
Association (comment 46, NPRM), at 29–30. This
concern misinterprets the role of the Qualified
Individual. Whether the Qualified Individual is
inside the company or at a third-party company,
that individual will report to and be supervised by
senior management of a financial institution (unless
the Qualified Individual is the head of the financial
institution). If a Qualified Individual recommends
a safeguard that would not be practical for the
business, the financial institution is not required to
adopt this safeguard but can use an alternative
adequate safeguard that will be functional. Indeed,
when it comes to third parties, the Rule specifically
requires someone in the financial institution direct
and oversee the third party.
200 Proposed 16 CFR 314.4(c)(7).
201 See Information Technology Laboratory
Computer Security Resource Center, Glossary,
National Institute of Standards and Technology,
https://csrc.nist.gov/glossary/term/audit-trail (last
accessed Dec. 2, 2020).
202 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 8;
Electronic Privacy Information Center (comment 55,
NPRM), at 8.
Rule allows financial institutions to
adopt reasonably equivalent controls.191
As to potential disruptions requiring
multi-factor authentication may cause,
the Commission notes that many
organizations, both financial institutions
and otherwise, currently require
employees to use multi-factor
authentication without major
disruption.192 Many multi-factor
authentication systems are available that
do not materially increase the time it
takes to log into a system as compared
to the use of only a password.193 In
short, multi-factor authentication is an
extremely effective way to prevent
unauthorized access to a financial
institution’s information system,194 and
its benefits generally outweigh any
increased time it takes to log into a
system. In those situations when the
need for quick access outweighs the
security benefits of multi-factor
authentication, the Rule allows the use
of reasonably equivalent controls.
Finally, although the Commission
agrees the Rule should not lock
financial institutions into using
outmoded or obsolete technologies, the
basic structure of using multiple factors
to identify a user is unlikely to be
rendered obsolete in the near future.
The Rule’s definition of multi-factor
authentication addresses only this
principle and does not require any
particular technology or technique to
achieve it. This should allow it to
accommodate most changes in
information security practices. In the
event of an unforeseen change to the
information security environment that
would discount the value of multi-factor
authentication, the Commission will
adjust the Rule accordingly.195
The Commission agrees with the
commenter who stated multi-factor
authentication is justified both when
external users, such as customers, and
internal users, such as employees,
access an information system. Multi-
factor authentication can prevent many
attacks focused on using stolen
passwords from both employees and
customers to access customer
information. Other common attacks on
information systems, such as social
engineering or brute force password
attacks, target employee credentials and
use those credentials to get access to an
information system. 196 These attacks
can usually be stopped through the use
of multi-factor authentication.
Accordingly, the Final Rule requires
multi-factor authentication whenever
any individual—employee, customer or
otherwise—accesses an information
system. If a financial institution
determines it is not the best solution for
its information system, it may adopt
reasonably equivalent controls with the
approval of the Qualified Individual.
The Commission recognizes the
language of the Proposed Rule may have
created some confusion by its use of the
term ‘‘internal networks’’ to define the
systems affected by the multi-factor
authentication requirement, instead of
the term ‘‘information systems’’ as used
other places in the Rule.197 In addition,
the Commission agrees with
commenters that argued separating the
multi-factor authentication into two
sentences created confusion.198
Accordingly, the Commission modifies
paragraph (c)(5) of the Final Rule, which
was proposed as paragraph (c)(6), to
require financial institutions to
‘‘[i]mplement multi-factor
authentication for any individual
accessing any information system,
unless your Qualified Individual has
approved in writing the use of
reasonably equivalent or more secure
access controls.’’
Finally, the Commission declines to
adopt CTIA’s proposed alternative that
would allow Qualified Individuals to
approve ‘‘effective alternative
compensating controls,’’ even if they are
not ‘‘reasonably equivalent or more
secure’’ than multi-factor
authentication. Given the important role
multi-factor authentication has in access
control, any alternative measure should
provide at least as much protection as
multi-factor authentication.199
Audit Trails
Proposed paragraph (c)(7) required
information security programs to
include audit trails designed to detect
and respond to security events.200 Audit
trails are chronological logs that show
who has accessed an information system
and what activities the user engaged in
during a given period.201
Some commenters supported this
requirement.202 The Princeton Center
noted audit trails are ‘‘crucial to
designing effective security measures
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70291	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
203 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 8.
204 Id.
205 National Automobile Dealers Association
(comment 46, NPRM), at 30–31; National
Independent Automobile Dealers Association
(comment 48, NPRM), at 6; American Financial
Services Association (comment 41, NPRM), at 6;
Global Privacy Alliance (comment 38, NPRM), at
11.
206 Global Privacy Alliance (comment 38, NPRM),
at 11.
207 American Financial Services Association
(comment 41, NPRM), at 6.
208 American Council of Education (comment 24,
NPRM), at 12.
209 National Automobile Dealers Association
(comment 46, NPRM), at 30–31.
210 See Final Rule, 16 CFR 314.4(c)(8).
211 Proposed 16 CFR 314.4(c)(8).
212 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 8;
Electronic Privacy Information Center (comment 55,
NPRM), at 8; Consumer Reports (comment 52,
NPRM), at 7.
213 Consumer Reports (comment 52, NPRM), at 7–
8.
214 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 8–9.
215 National Automobile Dealers Association
(comment 46, NPRM), at 31; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 6.
216 National Automobile Dealers Association
(comment 46, NPRM), at 31–32.
217 American Financial Service Association
(comment 41, NPRM), at 6.
218 Cybersecurity Assessment Tool, FFIEC,
https://www.ffiec.gov/pdf/cybersecurity/FFIEC_
CAT_May_2017_Cybersecurity_Maturity_June2.pdf
at 37 (last visited December 3, 2020).
219 National Automobile Dealers Association
(comment 46, NPRM), at 32.
220 American Council on Education (comment 24,
NPRM), at 12.
221 Id.
222 See, e.g., Complaint, Rite Aid Corp., FTC No.
072–3121 (November 22, 2010) (alleging company
failed to provide reasonable data security when it
failed to implement policies and procedures to
dispose securely of personal information).
223 As to the Princeton Center’s suggestion
financial institutions periodically review their
disposal practices (Princeton University Center for
Information Technology Policy (comment 54,
NPRM), at 8–9), the Commission believes this
Continued
that allow institutions to detect and
respond to security incidents.’’ 203 It
also stated audit trails ‘‘help understand
who has accessed the system and what
activities the user has engaged in.’’ 204
Other commenters argued this
requirement imposed unclear
obligations or would not improve
security.205 For example, GPA
commented the Proposed Rule conflated
the use of logs to reconstruct past events
and the active use of logs to monitor
user activity.206 The American Financial
Services Association argued adding
logging capabilities to some legacy
systems would be expensive and
difficult. 207 Another commenter argued
the increased use of cloud storage
would mean that financial institutions
might not have access to any audit
trails.208 In addition, NADA argued it
did not believe maintenance of logs
would increase security but would
instead create records that could be
sought by parties ‘‘seeking to place
blame’’ for breaches.209
The Commission believes logging user
activity is a crucial component of
information security because in the
event of a security event it allows
financial institutions to understand
what was accessed and when. However,
the term ‘‘audit trails’’ may have been
unclear in this context. In order to
clarify that logging user activity is a part
of the user monitoring process, the Final
Rule does not include paragraph (c)(7)
of the Proposed Rule and instead
modifies the user monitoring provision
to include a requirement to log user
activity. 210 By putting the ‘‘monitoring’’
and ‘‘logging’’ requirements together,
the Final Rule provides greater clarity
on the comment raised by the GPA:
Financial institutions are expected to
use logging to ‘‘monitor’’ active users
and reconstruct past events.
Disposal Procedures
Proposed paragraph (c)(8) required
financial institutions to develop
procedures for the secure disposal of
customer information that is no longer
necessary for their business operations
or other legitimate business purposes.211
The Proposed Rule allowed the
retention of information when retaining
the information is required by law or
where targeted disposal is not feasible.
Some commenters supported the
inclusion of a disposal requirement as
proposed or suggested that the disposal
requirements should be strengthened.212
Consumer Reports argued financial
institutions should be required to
dispose of customer information when it
is no longer needed for the business
purpose for which it was gathered.213
The Princeton Center suggested the Rule
require disposal after a set period unless
the company can demonstrate a current
need for the data and that financial
institutions periodically review their
data practices to minimize their data
retention. 214
Several other commenters opposed
the disposal requirement as set forth in
the Proposed Rule. Some argued the
requirement to dispose of information
goes beyond the Commission’s authority
under the GLB Act.215 NADA argued the
GLB Act does not ‘‘contain[ ] any
authority to require financial
institutions to delete any information’’
and a requirement to have procedures to
delete information for which a company
has no legitimate business purpose
would constitute a ‘‘new privacy
regime.’’ 216 The American Financial
Services Association (AFSA) stated the
requirement was too prescriptive and
the Rule should allow financial
institutions to retain information as long
as that retention complies with the
retention policy created by the financial
institution. 217 AFSA further argued the
proposed requirement exceeds the
Federal banking standards, pointing to
the FFIEC Cybersecurity Assessment
Tool, which sets disposal of records
‘‘according to documented requirements
and within expected time frames’’ as a
baseline requirement for access and data
management.218
Yet other commenters suggested
modifying the requirement. NADA
argued that if there was to be a disposal
requirement, then it should be modeled
after the Disposal Rule, which requires
businesses to properly dispose of
consumer reports, but does not have an
explicit requirement to dispose of
information on any particular
schedule. 219 ACE suggested modifying
the Proposed Rule to require disposal of
information only where there is no
longer any ‘‘legitimate purpose’’ rather
than any ‘‘legitimate business
purpose.’’ 220 It argued in some cases a
financial institution may have legitimate
purposes for retaining information that
are not readily defined as ‘‘business’’
purposes, such as the retention of data
by educational institutions for
institutional research or student
analytics. 221
The Commission believes requiring
the disposal of customer information for
which the financial information has no
legitimate business purpose is within
the authority granted by the GLB Act to
protect the security of customer
information. The disposal of records,
both physical and digital, can result in
exposure of customer information if not
performed properly. 222 Similarly, if
records are retained when they are no
longer necessary, there is a risk those
records will be subject to unauthorized
access. The risk of unauthorized access
may be reasonable where the retention
of data provides some benefit. In
situations where the information is no
longer needed for a legitimate business
purpose, though, the risk to the
customer information becomes
unreasonable because the retention is no
longer benefiting the customer or
financial institution. Disposing of
unneeded customer information,
therefore, is a vital part of protecting
customer information and serves the
purpose of the GLB Act.223
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70292 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
requirement is already encompassed in the
requirement contained in § 314.4(g) to periodically
review their safeguards overall.
224 Proposed 16 CFR 314.4(c)(9).
225 See, e.g., Change Management, Rutgers OIT
Information Security Office, https://rusecure.
rutgers.edu/content/change-management (last
accessed 1 Dec. 2020).
226 Electronic Privacy Information Center
(comment 55, NPRM), at 8; National Consumer Law
Center and others, (comment 58, NPRM) at 3.
227 American Council on Education (comment 24,
NPRM), at 12–13; National Automobile Dealers
Association (comment 46, NPRM), at 33.
228 National Automobile Dealers Association
(comment 46, NPRM), at 32–33.
229 American Council on Education (comment 24,
NPRM), at 12.
230 See Remarks of Rocio Baeza, Safeguards
Workshop Tr., supra note 17, at 95 (‘‘[E]very time
there is a change to any of these [network]
environments, that is creating additional risk.’’);
Remarks of Scott Wallace, Safeguards Workshop
Tr., supra note 17, at 147–48 (giving an example of
an incident in which network changes led to the
exposure of sensitive information); Remarks of
Matthew Green, Safeguards Workshop Tr., supra
note 17, at 252 (noting it is ‘‘a little dangerous’’ to
make ‘‘major changes’’ to an information system at
a time of heightened stress).
231 National Automobile Dealers Association
(comment 46, NPRM), at 33 n.96.
232 Proposed 16 CFR 314.4(c)(10).
233 National Automobile Dealer Association
(comment 46, NPRM), at 33.
234 See Remarks of Nicholas Weaver, Safeguards
Workshop Tr., supra note 17, at 124–25.
235 American Financial Services Association
(comment 41, NPRM), at 6.
The Commission disagrees with
commenters who suggested narrowing
the disposal requirement or doing away
with it altogether. As noted above,
although no disposal requirement
appears in FFIEC guidelines, those
guidelines represent a different
regulatory approach and are not an
appropriate model for the Safeguards
Rule.
Finally, as to setting retention periods
or narrowing the legitimate business
purposes for which financial
institutions may retain customer
information, the Commission recognizes
financial institutions need some
flexibility. Whereas customers may
want to, for example, access and transfer
older data in some circumstances, in
other circumstances, retaining such data
would not be consistent with any
legitimate business purpose. The
Commission believes the Princeton
Center’s recommendation that
companies be required to delete
information after a set period unless the
information is still needed for a
legitimate business purpose properly
balances the needs of financial
institutions with the need to protect
customer information. Thus, the
Commission modifies proposed
paragraph (c)(6) to require the deletion
of customer information two years after
the last time the information is used in
connection with providing a product or
service to the customer unless the
information is required for a legitimate
business purpose as paragraph (c)(6)(i)
of the Final Rule. In addition, paragraph
(c)(6)(ii) of the Final Rule requires
financial institutions to periodically
review their policies to minimize the
unnecessary retention of information.
Change Management
Proposed paragraph (c)(9) required
financial institutions to adopt
procedures for change management.224
Change management procedures govern
the addition, removal, or modification
of elements of an information system.225
This paragraph required financial
institutions to develop procedures to
assess the security of devices, networks,
and other items to be added to their
information system, or the effect of
removing such items or otherwise
modifying the information system. For
example, a financial institution that
adds additional servers or other
machines to its information system
would need to evaluate the security of
the new devices and the effect of adding
them to the existing network.
Some commenters supported this
requirement, 226 while others stated it
was too broad and would impose
unnecessary burdens on financial
institutions.227 In particular, NADA
argued financial institutions that have
not made changes in their systems ‘‘for
some time’’ should not be required to
create procedures for change
management.228 ACE argued including a
change management requirement is
unnecessary because such a requirement
is ‘‘generally incorporated into an
organization’s IT operations’’ for non-
security purposes and the security
considerations of those changes will be
considered as part of those
procedures.229
Alterations to an information system
or network introduce heightened risk of
cybersecurity incidents; 230 thus, it is
important to expressly require change
management to be a part of an
information security program. The
Commission agrees with ACE that many
financial institutions will already have
change management procedures in
place. If those procedures adequately
consider security issues involved in the
change, then they may satisfy this
requirement.
As to the comment a financial
institution that has not made changes to
its environment in some time should
not be required to have change
management processes, the Commission
disagrees. Few information systems can
remain unchanged for a significant
period of time, given the changing
technical requirements for business and
security. Indeed, NADA acknowledges
financial institutions will need to
‘‘adapt[] their programs to keep up with
changes in data security.’’ 231 For this
reason, all financial institutions must
have procedures for when the changes
occur. As with all of the requirements
of the Rule, though, the exact nature of
these procedures will vary depending
on the size, complexity and nature of
the information system. A simple
system may have equally simple change
management procedures.
The Commission adopts this proposed
paragraph as paragraph (c)(7) of the
Final Rule without change.
System Monitoring
Proposed paragraph (c)(10) required
financial institutions to implement
policies and procedures designed ‘‘to
monitor the activity of authorized users
and detect unauthorized access or use
of, or tampering with, customer
information by such users.’’ 232 The
Proposed Rule required financial
institutions to take steps to monitor
those users and their activities related to
customer information in a manner
adapted to the financial institution’s
particular operations and needs.
NADA stated this requirement would
create unnecessary expense because it
would require financial institutions to
‘‘continually monitor all authorized
use’’ and would mean ‘‘yet more new
employees or third-party IT
consultants.’’ 233 The Commission
disagrees, however, noting that
monitoring of system use can be
automated. 234 There is no requirement a
separate staff member would be
required to exclusively monitor system
use.
In addition, one commenter stated
monitoring the use of paper files is
impossible and should be excluded
from this provision.235 The Commission
acknowledges monitoring of paper
records is qualitatively different than
the monitoring of electronic records.
This requirement goes hand in hand
with limiting access to documents,
whether electronic or paper. For
example, if an institution has a file room
and access to the room is limited to
particular employees (e.g., the payroll
office), the institution should have
measures in place to ensure those access
controls are in fact being utilized (e.g.,
sign in with front desk, logging of key
card access, security camera).
As discussed above, this paragraph is
amended to also require the logging of
user activity, but is otherwise adopted
as proposed as paragraph (c)(8).
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70293	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
236 Financial institutions that choose the option of
continuous monitoring would also be satisfying
§ 314.4(c)(8).
237 Proposed 16 CFR 314.4(d)(1) and (2).
238 American Council on Education (comment 24,
NPRM), at 13–14.
239 American Council on Education (comment 24,
NPRM), at 13.
240 American Council on Education (comment 24,
NPRM), at 14.
241 National Pawnbrokers Association (comment
3, Workshop), at 2.
242 Global Privacy Alliance (comment 38, NPRM),
at 10–11.
243 National Independent Automobile Dealers
Association (comment 48, NPRM), at 6; American
Financial Services Association (comment 41,
NPRM), at 6.
244 American Financial Services Association
(comment 41, NPRM), at 6.
245 CTIA (comment 34, NPRM) at 12–13 (arguing
penetration testing should be required only once
every two years and vulnerability testing be
required only once a year).
246 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 5.
247 Money Services Round Table (comment 53,
NPRM), at 9; see also Gusto and others (Comment
11, Workshop), at 2 (arguing penetration testing and
vulnerability assessments both have their
weaknesses and financial institutions should
develop a testing program that it is appropriate for
them).
248 The Commission believes a system for
continuous monitoring will include some form of
vulnerability assessment as part of monitoring the
information system.
249 Remarks of Frederick Lee, Safeguards
Workshop Tr., supra note 17, at 139–40.
250 See id. at 129–30 (noting the cost of a
penetration test can increase significantly
depending on the complexity of the system to be
tested and the scope of the test).
Proposed Paragraph (d)
Proposed paragraph (d)(1) retained
the current Rule’s requirement that
financial institutions ‘‘[r]egularly test or
otherwise monitor the effectiveness of
the safeguards’ key controls, systems,
and procedures, including those to
detect actual and attempted attacks on,
or intrusions into, information
systems.’’
Proposed paragraph (d)(2) provided
further detail to this requirement by
stating the monitoring must take the
form of either ‘‘continuous monitoring’’
or ‘‘periodic penetration testing and
vulnerability assessments.’’ The
proposal explained continuous
monitoring is any system that allows
real-time, ongoing monitoring of an
information system’s security, including
monitoring for security threats,
misconfigured systems, and other
vulnerabilities. 236 For those who elected
to engage in periodic penetration testing
and vulnerability assessment, the
proposal required penetration testing at
least once annually (or more frequently
if called for in the financial institution’s
risk assessment) and vulnerability
assessments at least twice a year.237
Some commenters thought the
proposal went too far in requiring
continuous monitoring or penetration
and vulnerability testing, while others
thought the proposal did not go far
enough. On one hand, ACE argued
continuous monitoring is too
burdensome and difficult for some
financial institutions, 238 particularly
those with ‘‘highly decentralized
systems,’’ such as colleges and
universities, which could be required to
monitor their entire system. 239 ACE
further suggested the Rule should not
prescribe any particular testing
methodology or schedule and should
allow financial institutions to develop a
testing approach appropriate for the
financial institution. 240 The NPA
commented penetration and
vulnerability testing would be too
expensive for small pawnbrokers with
small staffs and a small customer base,
where their members would be ‘‘likely
to notice a penetration of our
records.’’ 241 One commenter stated the
requirements for monitoring and testing
were ‘‘overlapping and confusing’’ and
suggested the Commission avoid
confusion by including continuous
monitoring, penetration testing,
vulnerability scanning, periodic risk
assessment reviews, and logging as
optional components of an information
security program to be included on an
as-needed basis.242 Some commenters
recommended the testing requirement
be limited to electronic data and
exclude monitoring of physical data.243
The American Financial Services
Association argued the testing of
physical safeguards required by
paragraph (d)(1) ‘‘would be
impossible.’’ 244 Finally, CTIA argued,
for entities that choose the approach of
penetration and vulnerability testing,
these tests should be required less
regularly. 245
On the other hand, the Princeton
Center suggested, rather than requiring
either continuous monitoring or
penetration testing, the Rule should
require both. It noted continuous
monitoring is very effective at detecting
problems with, and threats to, ‘‘off-the-
shelf systems’’ but penetration testing is
better at ‘‘for checking the interaction
between systems, proprietary systems,
or subtle security issues.’’ 246 Similarly,
the MSRT was concerned that the
Proposed Rule suggested annual
penetration testing alone could protect
financial institutions, rather than serve
as a supplement to proper
monitoring. 247
The Commission agrees with
commenters who pointed out the
difficulty of applying certain testing
requirements to physical safeguards.
Although the general testing
requirement set forth in paragraph (d)(1)
should apply to physical safeguards
(e.g., testing effectiveness of physical
locks), the continuous monitoring,
vulnerability assessment, and
penetration testing in paragraph (d)(2) is
not relevant to information in physical
form. Accordingly, the final version of
paragraph (d)(2) is limited to safeguards
on information systems.
The Commission also agrees biannual
vulnerability testing may not be
sufficient to detect new threats. Thus,
given the relative ease with which
vulnerability assessments can be
performed, it modifies the Final Rule to
require financial institutions to perform
assessments when there is an elevated
risk of new vulnerabilities having been
introduced into their information
systems, in addition to the required
biannual assessments.
Beyond these modifications, the
Commission believes the proposal
struck the right balance between
flexibility and protection of customer
information, and adopts the proposed
provision as final. For commenters
concerned about costs of testing and
continuous monitoring, the Commission
notes the Rule requires one, not both.
Although many financial institutions
may choose to use both, the
Commission agrees the costs of
requiring both for all financial
institutions may not be justified. 248 As
to arguments that the testing required by
the Rule is too frequent and will
therefore be too costly, the Commission
does not agree vulnerability assessments
will be costly. Indeed, there are
resources for free and automated
vulnerability assessments.249 And
although the Commission acknowledges
penetration testing can be a somewhat
lengthy and costly process for large or
complex systems, 250 a longer period
between penetration tests will leave
information systems vulnerable to
attacks that exploit weaknesses
normally revealed by penetration
testing.
Two other portions of the Final Rule
should help financial institutions
concerned about the costs of monitoring
and testing. First, because the
Commission is limiting the definition of
‘‘information system’’ in the Final Rule,
financial institutions will be able to
limit this provision’s application by
segmenting their network and
conducting monitoring or testing only of
systems that contain customer
information or that are connected to
such systems. Second, this requirement
does not apply to those institutions that
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70294 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
251 Proposed 16 CFR 314.4(e)(1).
252 Electronic Privacy Information Center
(comment 55, NPRM), at 8.
253 U.S. Chamber of Commerce (comment 33,
NPRM), at 12; see also American Financial Services
Association (comment 41, NPRM), at 6 (stating the
Commission should acknowledge that a training
program for a small financial institution will be
different than a program for a larger program).
254 National Automobile Dealers Association
(comment 46, NPRM), at 34.
255 Proposed 16 CFR 314.4(e)(2).
256 National Automobile Dealers Association
(comment 46, NPRM), at 35; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 7.
257 National Automobile Dealers Association
(comment 46, NPRM), at 35.
258 NADA also asks whether this provision would
require financial institutions to hire more personnel
if they do not have enough qualified staff. Id. The
Final Rule does require the hiring of additional
personnel if existing personnel are not enough to
maintain the financial institution’s information
security program.
259 One commenter, on the other hand, approved
of the decision not to define ‘‘qualified’’ in the
Proposed Rule, but argued the requirement in its
totality was unclear because it did not set forth
‘‘how the Commission would hold covered entities
accountable.’’ American Council on Education
(comment 24, NPRM) at 14. The Commission
believes the term ‘‘qualified’’ provides a clear
enough requirement to allow a financial
institution’s compliance to be evaluated.
maintain records on fewer than 5,000
individuals. Accordingly, for example,
it should not apply to businesses small
enough for staff to personally know a
majority of customers.
Finally, the Commission does not
believe the testing requirements are
duplicative of other provisions of the
Final Rule. The provision relating to
additional risk assessments,
§ 314.4(b)(2), requires a financial
institution to reevaluate its risks and to
determine if safeguards should be
modified or added—it does not require
testing to detect threats and technical
vulnerabilities in the existing system.
Section 313.4(c)(8)’s requirement that
financial institutions monitor users’
activity in an information system is
focused on one aspect of information
security—detecting and preventing
unauthorized access and use of the
system. The requirement of this
paragraph, on the other hand, is focused
on testing the overall effectiveness of a
financial institution’s safeguards. It is
broader than paragraph (c)(8)’s
requirement and is necessary to ensure
financial institutions test the strength of
their safeguards as a whole.
Accordingly, the Final Rule requires
financial institutions to perform
vulnerability assessments at least once
every six months and, additionally,
whenever there are material changes to
their operations or business
arrangements and whenever there are
circumstances they know or have reason
to know may have a material impact on
their information security program.
Proposed Paragraph (e)
Proposed paragraph (e) set forth a
requirement that financial institutions
implement policies and procedures ‘‘to
ensure that personnel are able to enact
[the financial institution’s] information
security program.’’ This requirement
included four components: (1) General
employee training; (2) use of qualified
information security personnel; (3)
specific training for information security
personnel; and (4) verification that
security personnel are taking steps to
maintain current knowledge on security
issues.
General Employee Training
Proposed paragraph (e)(1) required
financial institutions to provide their
personnel with ‘‘security awareness
training that is updated to reflect risks
identified by the risk assessment.’’ 251
While one commenter specifically
supported the inclusion of this training
requirement,252 the U.S. Chamber of
Commerce argued the Rule should not
have any specific training requirements
at all.253 NADA stated the requirement
that the training be ‘‘updated to reflect
risks identified by the risk assessment’’
will require companies to develop
individualized training programs to suit
their financial institution and that such
a process would be expensive and
unnecessary because ‘‘general security
awareness’’ is generally enough for most
financial institutions. 254
Given the current Rule includes a
similar training requirement and
training remains a vital part of effective
information security, the Commission
declines to eliminate it. The
Commission believes the Final Rule’s
training requirement retains the same
flexibility as the existing Rule and
allows financial institutions to adopt a
training program appropriate to their
organization.
The Commission disagrees with
NADA’s concern the requirement to
update training programs would be too
expensive. Without a requirement that
the training program be updated based
on an assessment of risks, employees
may be subject to the same training year
after year, which might reflect obsolete
threats, as opposed to addressing
current ones. The Commission
interprets this provision to require only
that the training program be updated as
necessary based on changes in the
financial institution’s risk assessment.
The provision also gives financial
institutions the flexibility to use
programs provided by a third party, if
that program is appropriate for the
financial institution. In order to clarify
updates are required only when needed
by changes in the financial institution or
new security threats, though, the Final
Rule states training programs need to be
updated only ‘‘as necessary.’’
Information Security Personnel
Proposed paragraph (e)(2) required
financial institutions to ‘‘[u]tiliz[e]
qualified information security
personnel,’’ employed either by them or
by affiliates or service providers,
‘‘sufficient to manage [their] information
security risks and to perform or oversee
the information security program.’’ 255
This proposed provision was designed
to ensure information security
personnel used by financial institutions
are qualified for their positions and
information security programs are
sufficiently staffed.
Some commenters argued this
provision was too vague because it does
not define what personnel are necessary
and what ‘‘qualified’’ means.256 NADA
argued hiring additional staff to meet
this requirement could be prohibitively
expensive. 257
As discussed in relation to the
appointment of a ‘‘Qualified
Individual,’’ the Commission believes a
more specific definition of ‘‘qualified’’
would not be appropriate because each
financial institution has different needs
and different levels of training,
experience, and expertise will be
appropriate for the information security
staff of each institution. The term
‘‘qualified’’ conveys only that staff must
have the abilities and expertise to
perform the duties required by the
information security program.258 The
Commission declines to include a more
prescriptive set of qualification
requirements in the Final Rule.259
As to the concern about expense, the
Commission acknowledges hiring
employees or retaining third parties to
maintain financial institutions’
information security programs can be a
substantial expense. But the expense is
necessary to effectuate Congressional
intent that financial institutions
implement reasonable safeguards to
protect customer information. The Rule
requires only that a financial institution
have personnel ‘‘sufficient’’ to manage
its risk and to maintain its information
security program. A financial institution
is required only to have the staff
necessary to maintain its information
security. An information security
program that is not properly maintained
cannot offer the protection it is designed
to provide. A financial institution that
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70295	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
260 See, e.g., Slides Accompanying Remarks of
Rocio Baeza, ‘‘Models for Complying to the
Safeguards Rule Changes,’’ in Safeguards Workshop
Slides, supra note 72, at 27–28 (describing three
different compliance models: In-house, outsource,
and hybrid, with costs ranging from $199 per month
to more than $15,000 per month); see also remarks
of Rocio Baeza, Safeguards Workshop Tr., supra
note 17, at 81–83; slides Accompanying Remarks of
Brian McManamon, ‘‘Sample Pricing,’’ in
Safeguards Workshop Slides, supra note 72, at 29
(estimating the cost of cybersecurity services based
on number of endpoints); Remarks of Brian
McManamon, Safeguards Workshop Tr., supra note
17, at 83–85.
261 Proposed 16 CFR 314.4(e)(3).
262 National Automobile Dealers Association
(comment 46, NPRM), at 35.
263 See, e.g., Federal Trade Commission,
Cybersecurity for Small Business, https://
www.ftc.gov/tips-advice/business-center/small-
businesses/cybersecurity (last accessed 1 Dec.
2020); Remarks of Kiersten Todt, Safeguards
Workshop Tr. at 86–88 (describing the resources of
the Cyber Readiness Institute).
264 The Clearing House suggested the Rule should
require background checks on employees. The
Clearing House (Comment 49, NPRM) at 19.
265 Proposed 16 CFR 314.4(e)(4).
266 National Automobile Dealers Association
(comment 46, NPRM), at 35–36.
267 Proposed 16 CFR 314.4(g).
268 The Clearing House wrote in support of this
element of the Proposed Rule, noting it would bring
the Safeguards Rule’s provisions relating to service
provider oversight into better alignment with
security guidelines for banks. The Clearing House
(comment 49, NPRM), at 14.
269 National Automobile Dealers Association
(comment 46, NPRM), at 37; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 7; see also Wangyang Shen (comment 3,
Privacy Rule) (noting difficulty of supervising cloud
services).
270 National Automobile Dealers Association
(comment 46, NPRM), at 22; National Association
of Dealer Counsel (comment 44, NPRM), at 3.
271 Internet Association (comment 9, Workshop),
at 3–4.
does not comply with this requirement,
by definition, has insufficient staffing,
and thus, cannot reasonably protect
customer information.
Although the expense is necessary,
the level of expense is mitigated by
several factors. First, existing financial
institutions should already have
information security personnel (either
in the form of employees or third-party
service providers) qualified to perform
the duties necessary to maintain
reasonable security in order to comply
with the requirements of the current
Rule. Depending on the skills of those
employees, additional staffing may not
be necessary to meet the demands of the
Final Rule. Second, the required staffing
will vary greatly based on the size and
complexity of the information system. A
financial institution with an extremely
simple system may not require even a
single full time employee. Finally, the
Rule allows the use of service providers
to meet this requirement. This can
significantly reduce costs as services
exist to share the expense of qualified
personnel and offer information security
support at significantly less than the
cost of employing a single qualified
employee. 260 The Commission
continues to believe utilizing qualified
and sufficient information security
personnel is a vital part of any
information security program and
accordingly, adopts proposed paragraph
(e)(2) in the Final Rule without
modification.
Training of Security Personnel
The Proposed Rule also required
financial institutions to ‘‘[p]rovid[e]
information security personnel with
security updates and training sufficient
to address relevant security risks.’’ 261
This is separate from paragraph (e)(1)’s
requirement to train all personnel
generally.
Some commenters argued providing
ongoing training could be too costly for
some financial institutions. 262 The
Commission disagrees. Maintaining
awareness of emerging threats and
vulnerabilities is a critical aspect of
information security. In order to
perform their duties, security personnel
must be educated on the changing
nature of threats to the information
systems they maintain. There are
resources that will allow smaller
institutions to meet this requirement at
little or no cost, such as published
security updates, online courses, and
educational publications.263 For
financial institutions that utilize service
providers to meet information security
needs, the service provider is likely to
include assurances that provided
personnel will be trained in current
security practices. The Commission
views the use of such a service provider
as meeting this requirement, as the
financial institution is ‘‘providing’’ the
service as part of the price it pays to the
service provider. Thus, the Final Rule
adopts paragraph (e)(3) as proposed.264
Verification of Current Knowledge
Proposed paragraph (e)(4) required
financial institutions to ‘‘[v]erify[ 	] that
key information security personnel take
steps to maintain current knowledge of
changing information security threats
and countermeasures.’’ 265 This
requirement was intended to
complement the proposed requirement
regarding ongoing training of data
security personnel, by requiring
verification such training has taken
place.
NADA argued this requirement
should not apply to smaller financial
institutions, stating the examples set
forth in the Proposed Rule would be
difficult for some smaller financial
institutions to perform.266 The examples
provided with the Proposed Rule were
that a financial institution could: (1)
Offer incentives or funds for key
personnel to undertake continuing
education that addresses recent
developments, (2) include a requirement
to stay abreast of security research as
part of their performance metrics, or (3)
conduct an annual assessment of key
personnel’s knowledge of threats related
to their information system. The
Commission believes smaller financial
institutions can take advantage of any of
these methods, particularly ‘‘requiring
key personnel to undertake continuing
education’’ as part of that personnel’s
duties. If they outsource responsibility
for data security to service providers,
they can simply include these
requirements in their contracts.
The Commission believes the rapidly
changing nature of information security
mandates this requirement, in order that
information security leadership can
properly supervise the information
security program. Accordingly, the Final
Rule adopts proposed paragraph (e)(4)
without change.
Proposed Paragraph (f)
Proposed paragraphs (f)(1) and (2)
retained the current Rule’s requirement,
found in existing paragraphs (d)(1) and
(2), to oversee service providers, and
added a paragraph (f)(3), requiring
financial institutions also periodically
assess service providers ‘‘based on the
risk they present and the continued
adequacy of their safeguards.’’ 267 The
current Rule expressly requires an
assessment of service providers’
safeguards only at the onboarding stage;
proposed paragraph (f)(3) required
financial institutions to monitor their
service providers on an ongoing basis to
ensure they are maintaining adequate
safeguards to protect customer
information they possess or access.268
Several commenters argued it would
be costly and difficult for some financial
institutions to periodically assess their
service providers.269 These commenters
were particularly concerned with
smaller financial institutions’ ability to
‘‘monitor’’ larger service providers.270
The Internet Association commented
the requirement to periodically assess
service providers would be too onerous
for the service providers themselves,
arguing the requirement would place
‘‘service providers under constant
surveillance by their financial
institution clients.’’ 271 HITRUST
suggested the Rule should state the
periodic assessment requirement may be
satisfied by requiring service providers
to obtain and maintain information
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70296 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
272 HITRUST (comment 18, NPRM), at 3–4.
273 Consumer Reports (comment 52, NPRM) at 7.
274 American Financial Services Association
(comment 41, NPRM), at 7.
275 For example, in 2013, attackers were
reportedly able to use stolen credentials obtained
from a third-party service provider to access a
customer service database maintained by national
retailer Target Corporation, resulting in the theft of
information relating to 41 million customer
payment card accounts. Kevin McCoy, Target to pay
$18.5M for 2013 data breach that affected 41
million consumers, USA Today, May 23, 2017,
https://www.usatoday.com/story/money/2017/05/
23/target-pay-185m-2013-data-breach-affected-
consumers/102063932/.
276 The National Pawnbrokers Association
expressed concern they cannot control vendors of
local law enforcement agencies to whom they are
required to provide customer information. National
Pawnbrokers Association (comment 32, NPRM), at
2. However, the Rule does not require financial
institutions oversee service providers employed by
other entities over which they have no control.
277 Consumer Reports (comment 52, NPRM), at 6;
Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 7;
Electronic Privacy Information Center (comment 55,
NPRM), at 8; Credit Union National Association
(comment 30, NPRM), at 2; Heartland Credit Union
Association (comment 42, NPRM), at 2; National
Association of Federally-Insured Credit Unions
(comment 43, NPRM), at 1; HITRUST (comment 18,
NPRM), at 2.
278 Credit Union National Association (comment
30, NPRM), at 2.
279 Consumer Reports (comment 52, NPRM), at 6.
security certifications provided by third
parties and based on proper information
security frameworks.272 In contrast,
Consumer Reports took issue with the
Rule requiring only ‘‘assessment’’ of
service providers, and argued financial
institutions should be required to
monitor their service providers for
compliance. 273 Yet other commenters
expressed confusion over the term
‘‘service provider,’’ asking whether it
would cover national consumer
reporting agencies that smaller financial
institutions would be hard-pressed to
assess.274
The Commission retains the service
provider oversight requirement from
proposed paragraph (f) without
modification. Some high profile
breaches have been caused by service
providers’ security failures,275 and the
Commission views the regular
assessment of the security risks of
service providers as an important part of
maintaining the strength of a financial
institution’s safeguards.
The Commission disagrees with the
commenters who expressed concerns
this provision, and particularly the
assessment requirement, would impose
undue costs on financial institutions.
The Rule would require financial
institutions only to assess the risks
service providers present and evaluate
whether they continue to provide the
safeguards required by contract, which
need not include extensive investigation
of a service provider’s systems. In the
case of large service providers, this
oversight may consist of reviewing
public reports of insecure practices,
changes in the services provided, or
security failures in the services
provided. In other circumstances, such
as where a large company hires a vendor
to secure sensitive customer
information, certifications, reports, or
even third-party audits may be
appropriate. The exact steps required
depend both on the size and complexity
of the financial institution and the
nature of the services provided by the
service provider. For this reason, the
Commission declines to adopt the
suggestion to allow a financial
institution to accept an information
security certification from the service
provider to satisfy the service provider
oversight requirement. The fact that a
company maintains an information
security certification may be a
significant part of assessing the
adequacy of a service provider’s
safeguards, but the Commission
declines to prescribe a one-size-fits all
approach, given the variation in size
and complexity of financial institutions
and their service providers.
To avoid imposing undue costs on
financial institutions, the Commission
declines to require ongoing monitoring,
rather than periodic assessment, as
recommended by Consumer Reports.
The Commission believes periodic
assessment strikes the right balance
between protecting consumers and
imposing undue costs on financial
institutions. The Commission
acknowledges financial institutions may
have limited bargaining power in
obtaining services from large service
providers and limited ability to demand
access to a service provider’s systems. In
those cases, any sort of hands-on
assessment of the provider’s systems
may not be possible.
As to the concern the assessment
requirement will impose undue burdens
on the service providers themselves, the
Commission does not believe this
concern justifies a modification to the
proposed requirement. First, the Rule
does not require ‘‘constant surveillance’’
by financial institutions—they are
required only to ‘‘periodically assess’’
the risks presented by service providers.
Second, as discussed above, the
supervision of service providers is a
vitally important aspect of information
security, and while there may be some
burdens on the service providers
associated with being supervised, these
are necessary burdens. A financial
institution must be sure a service
provider is protecting the information of
its customers, and any expenses this
involves are a necessary part of fulfilling
this duty.
Finally, as to concerns about potential
ambiguities in the definition of service
provider, the amendments preserve the
definition in the current Rule. Thus,
entities subject to this requirement
under the Final Rule will remain the
same as under the existing Rule and
may include consumer reporting
agencies. As discussed above, even
larger service providers such as national
CRAs can be subjected to some form of
review by financial institutions.276
The Commission adopts proposed
paragraph (f) in the Final Rule without
modification.
Proposed Paragraph (g)
Paragraph (g) of the Proposed Rule
retained the language of existing
paragraph (e) in the current Rule, which
requires financial institutions to
evaluate and adjust their information
security programs in light of the result
of testing required by this section,
material changes to their operations or
business arrangements, or any other
circumstances they know or have reason
to know may have a material impact on
their information security program. The
Commission received no comments on
this paragraph and adopts the language
of the Proposed Rule.
Proposed Paragraph (h)
Proposed paragraph (h) required
financial institutions to establish
written incident response plans that
addressed (1) the goals of the plan; (2)
the internal processes for responding to
a security event; (3) the definition of
clear roles, responsibilities and levels of
decision-making authority; (4) external
and internal communications and
information sharing; (5) identification of
requirements for the remediation of any
identified weaknesses in information
systems and associated controls; (6)
documentation and reporting regarding
security events and related incident
response activities; and (7) the
evaluation and revision as necessary of
the incident response plan following a
security event.
Several commenters supported the
proposal to require an incident response
plan. 277 The Credit Union National
Association observed an incident
response plan ‘‘helps ensure that an
entity is prepared in case of an incident
by planning how it will respond and
what is required for the response.’’ 278
Consumer Reports noted a rapid
response to a security event can limit
damage caused by the event.279 The
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70297	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
280 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 7.
281 HITRUST (comment 18, NPRM), at 2.
282 South Carolina Department of Consumer
Affairs (comment 47, NPRM), at 2.
283 National Automobile Dealer Association
(comment 46, NPRM), at 38; National Independent
Automobile Dealers Association (comment 48,
NPRM), at 7.
284 National Automobile Dealer Association
(comment 46, NPRM), at 38.
285 National Automobile Dealer Association
(comment 46, NPRM), at 12, 38–39. NPA also asked
for greater detail on what constitutes an ‘‘incident.’’
National Pawnbroker Association (comment 32,
NPRM), at 4.
286 American Council on Education (comment 24,
NPRM), at 15.
287 Mortgage Bankers Association (comment 26,
NPRM), at 4.
288 Mortgage Bankers Association (comment 26,
NPRM), at 4.
289 American Council on Education (comment 24,
NPRM), at 15.
290 Id.
291 National Pawnbroker Association (comment
32, NPRM), at 4.
292 See Remarks of Serge Jorgenson, Safeguards
Workshop Tr., supra note 17, at 52 (observing a
prompt response to an incident can prevent a
‘‘threat actor running around in my environment for
days, months, years, and able to access anything
they want.’’).
293 Although the Commission agrees with the
South Carolina Department of Consumer Affairs
that notification of senior personnel is valuable, the
requirement that the plan address ‘‘the definition of
clear roles, responsibilities and levels of decision-
making authority’’ will almost always result in
communication of decision-making to senior
personnel authorized to make decisions about the
security response. Coupled with the requirement
the Qualified Individual report to the board or
equivalent body on material events affecting
security, the Commission does not see the need to
make this change.
294 See, e.g., FTC, Data Breach Response: A Guide
for Business (2019), www.ftc.gov/tips-advice/
business-center/guidance/data-breach-response-
guide-business; NIST, Guide for Cybersecurity
Event Recovery (2016), nvlpubs.nist.gov/nistpubs/
SpecialPublications/NIST.SP.800-184.pdf; Orion
Cassetto, Incident Response Plan 101: How to Build
One, Templates and Examples, Exabeam:
Information Security Blog (November 21, 2018),
www.exabeam.com/incident-response/incident-
response-plan/ (last visited December 2, 2020).
Princeton Center commented ‘‘a written
incident response plan is an essential
component of a good security
system.’’ 280 HITRUST commented
incident response plans can help
organizations ‘‘to better allocate limited
resources.’’ 281 The South Carolina
Department of Consumer Affairs
suggested the provision go further by
requiring the incident response plan
include a process for notifying senior
information security personnel of the
event. 282
Other commenters opposed requiring
an incident response plan or objected to
particular aspects of the requirement.
Some commenters suggested requiring
financial institutions to have incident
response plans is outside the
Commission’s authority under the GLB
Act. 283 NADA argued the requirement
for an incident response plan was
overbroad in light of the broad
definition of security event,284 and the
requirement was vague as to what the
plan should include. 285
Other commenters argued the
requirement was too burdensome. ACE
argued ‘‘the range of security events that
might occur and their potential impacts
on institutional capacity to recover’’
make establishing an incident response
plan that will allow an institution to
‘‘respond to, and recover from, any
security event materially affecting . . .
customer information’’ impossible.286
The Mortgage Bankers Association
(‘‘MBA’’) suggested ‘‘institutions of
smaller sizes may not necessarily be
capable of addressing all seven of the
proposed goals.’’ 287 Further, the MBA
argued an incident response plan
requirement had ‘‘the potential to
cripple small businesses under the
pressure of repeatedly checking the
boxes for potentially harmless
events.’’ 288
Finally, some commenters raised
questions about what it means for
customer information to be in a
financial institution’s ‘‘possession’’ for
purposes of the incident response plan
requirement. ACE argued the
requirement does not adequately
account for customer information held
in cloud storage operated by third
parties, asserting such information is
not technically within the financial
institution’s possession.289 ACE
suggested the provision should apply to
customer information for which the
financial institution is responsible,
instead. 290 Relatedly, the NPA
expressed concern pawnbrokers might
be subject to liability under the
Proposed Rule when law enforcement
agencies or their third-party vendors
make public disclosures of customer
information pawnbrokers are obligated
to report.291
The Commission retains the
requirement for financial institution to
develop and implement an incident
response plan, with one modification
described below. The Commission
believes the creation of an incident
response plan is directly related to
safeguarding customer information and
is within its authority under the GLBA.
The requirement to create an incident
response plan focuses on preparing
financial institutions to respond
promptly and appropriately to security
events, and mitigating any weaknesses
in their information systems in the
process. By responding quickly and
promptly mitigating weaknesses,
financial institutions can stop ongoing
or future compromise of customer
information.292 A well-organized
response to a security event can limit
the number of consumers affected by an
outside attacker by promptly identifying
the attack and taking steps to stop the
attack.
The Commission disagrees with the
commenters who stated this
requirement was too burdensome. The
Final Rule requires incident response
plans address ‘‘security event[s]
materially affecting the confidentiality,
integrity, or availability of customer
information in [a financial institution’s]
control.’’ Significantly, the plan must
address events that ‘‘materially’’ affect
customer information. Thus, the
required incident response plan does
not require a plan to address every
security event that may occur. The plan
need not include minute details or all
possible scenarios. Instead, the Rule
requires the plan to establish a system—
for example, by laying out clear lines of
responsibility, systems for information
sharing, and methods for evaluating
possible solutions—that will facilitate a
financial institution’s response to
security events regardless of the nature
of the event. A detailed approach may
be appropriate for some financial
institutions, such as those with
especially complicated systems or
personnel hierarchies, but the Rule is
designed to give financial institutions
the flexibility needed to develop plans
that best suit their needs.293
Moreover, the Commission believes
the requirement is clear as to what an
incident response plan should include.
The seven listed requirements for the
incident response plans provide
sufficient guidance to financial
institutions designing incident response
plans while giving them flexibility to
design a plan suited to their
organization. In addition, there are
many resources for designing incident
response plans available for financial
institutions, as well as service providers
that can assist with the design
process.294 Individual institutions can
determine the exact details of the plans.
To address questions about whether
information is in the financial
institution’s ‘‘possession,’’ the
Commission is revising paragraph (h) of
the Final Rule to require financial
institutions develop incident response
plans ‘‘designed to promptly respond to,
and recover from, any security event
materially affecting . . . customer
information in your control.’’ (emphasis
added) Replacing the term ‘‘possession’’
with ‘‘control’’ resolves the questions
raised by ACE and the NPA regarding
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295 NADA further argued the incident response
plan constitutes a de facto consumer notification
requirement. National Automobile Dealer
Association (comment 46, NPRM), at 39. Financial
institutions have an independent obligation to
perform notification as required by state law,
whether or not they have an incident response plan
in place. The fact that the Rule requires a plan that
sets forth procedures for satisfying that requirement
does not impose any independent notification
requirement on the financial institution.
296 Consumer Reports (comment 52, NPRM), at 6;
Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 7;
Credit Union National Association (comment 30,
NPRM), at 2; Heartland Credit Union Association
(comment 42, NPRM), at 2; National Association of
Federally-Insured Credit Unions (comment 43,
NPRM), at 1–2.
297 Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 7.
298 National Association of Federally-Insured
Credit Unions (comment 43, NPRM), at 1.
299 National Association of Federally-Insured
Credit Unions (comment 43, NPRM), at 1–2.
300 National Independent Automobile Dealers
Association (comment 48, NPRM), at 7; American
Council on Education (comment 24, NPRM), at 15.
301 American Council on Education (comment 24,
NPRM), at 15.
302 Id.
303 Standards for Safeguarding Customer
Information, SNPRM, published elsewhere in this
issue of the Federal Register.
304 Proposed 16 CFR 314.4(i).
305 Rocio Baeza (comment 12, Workshop), at 3–8
(supporting requirement and providing sample
report form and compliance questionnaire); see also
The Clearing House (comment 49, NPRM), at 15–
16 (arguing that Rule should require more
involvement from Board and senior management).
306 Remarks of Michele Norin, Safeguards
Workshop Tr., supra note 17, at 194.
307 Remarks of Adrienne Allen, Safeguards
Workshop Tr., supra note 17, at 199–200.
308 American Council on Education (comment 24,
NPRM), at 16.
309 Id.
310 Id.
311 National Automobile Dealer Association
(comment 46, NPRM), at 41. NADA also argued the
whether financial institutions must plan
for security events affecting data that
has been transferred to various kinds of
third parties. Where a financial
institution has voluntarily opted to store
its customer information in the cloud, to
whatever extent the information is no
longer in the ‘‘possession’’ of the
financial institution, it is certainly
within the institution’s ‘‘control.’’ By
contrast, customer information that has
been obtained by a third party such as
a law enforcement agency, over whom
a financial institution has no authority
and of whose actions the financial
institution has no knowledge, cannot
fairly be said to be in the financial
institution’s control. Consequently, the
financial institution need not account
for possible disclosures of that
information by the third party.295
Notification of Security Events to the
Commission
The Commission also requested
comment on whether the Rule should
require financial institutions to report
security events to the Commission.
Several commenters supported this
requirement.296 The Princeton
University Center for Information
Technology Policy noted such a
reporting requirement would ‘‘provide
the Commission with valuable
information about the scope of the
problem and the effectiveness of
security measures across different
entities’’ and ‘‘help the Commission
coordinate responses to shared
threats.’’ 297 The National Association of
Federally-Insured Credit Unions argued
requiring financial institutions to report
security events to the Commission
would provide an ‘‘appropriate
incentive for covered financial
companies to disclose information to
consumers and relevant regulatory
bodies.’’ 298 NAFCU also suggested
notification requirements are important
because they ‘‘ensure independent
assessment of whether a security
incident represents a threat to consumer
privacy.’’ 299
Other commenters opposed the
inclusion of a reporting requirement.300
ACE argued such a requirement ‘‘would
simply add another layer on top of an
already crowded list of federal and state
law enforcement contacts and state
breach reporting requirements.’’ 301 ACE
also suggested any notification
requirement should be limited to a more
restricted definition of ‘‘security event’’
than the definition in the Proposed
Rule, so financial institutions would
only be required to report incidents that
could lead to consumer harm.302
The Commission agrees with
commenters that stated a requirement
financial institutions report security
events to the Commission would have
many benefits, including allowing the
Commission to identify emerging threats
and assisting the Commission’s
enforcement of the Rule. In addition,
such a requirement would be unlikely to
create a significant burden on financial
institutions because a security event
that leads to notification to the
Commission is very likely to create
breach notification obligations under
various state laws, and the financial
institution will thus already be engaged
in notifying consumers and state
regulators. The addition of a notification
to the FTC would not require any
significant additional preparation or
effort. However, because the notice of
proposed rulemaking did not set forth a
detailed proposal for a notification
requirement, the Final Rule does not
include such a requirement. Instead, the
Commission is issuing a supplemental
notice of proposed rulemaking (SNPRM)
that proposes adding a requirement
financial institutions notify the
Commission of detected security events
under certain circumstances.303
Proposed Paragraph (i)
Proposed paragraph (i) required a
financial institution’s CISO to ‘‘report in
writing, at least annually, to [the
financial institution’s] board of directors
or equivalent governing body’’ regarding
the following information: (1) The
overall status of the information security
program and financial institution’s
compliance with the Safeguards Rule;
and (2) material matters related to the
information security program,
addressing issues such as risk
assessment, risk management and
control decisions, service provider
arrangements, results of testing, security
events or violations and management’s
responses thereto, and
recommendations for changes in the
information security program.304 For
financial institutions that did not have
a board of directors or equivalent, the
proposal required the CISO to make the
report to a senior officer responsible for
the financial institution’s information
security program.
One commenter supported this
requirement.305 Additionally, several
workshop participants emphasized the
value of communication between
information security leaders and
corporate boards or their equivalent. For
example, workshop participant Michele
Norin stated it is ‘‘important’’ for the
topic of information security to be
discussed at the level of the board or
senior leadership regularly, and at least
once per year.306 Participant Adrienne
Allen agreed annual reporting made
sense as a requirement, but noted for
some financial institutions, particularly
those with an online presence, even
more frequent communication could be
beneficial.307
ACE argued the Proposed Rule
created too much emphasis on a single
annual report and should instead focus
on regular reporting to the Board or
equivalent. 308 It also expressed concern
the report required by the Proposed
Rule would be too detailed and would
not allow the Board to see ‘‘the forest for
the trees,’’ 309 the requirements for the
report were too prescriptive, and the
requirements focused too much on
compliance rather than security.310
Similarly, NADA argued the report
would not improve security but would
instead create ‘‘unnecessary liability
exposure for the board/leadership of the
entity.’’ 311 HITRUST suggested
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70299	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
reports by third-party Qualified Individuals might
not include useful information and were ‘‘more
likely to be filled with platitudes and/or efforts to
‘upsell’ the dealership on additional CISO
services.’’ Id. at 42. NADA provided no support for
this claim. The Commission notes such a report
would not meet the requirements of this provision,
and the financial institution would be justified in
terminating their relationship with that provider or,
at least, demanding a revised report that did meet
those requirements.
312 HITRUST (comment 18, NPRM), at 4.
313 See Remarks of Karthik Rangarajan,
Safeguards Workshop Tr., supra note 17, at (‘‘If
quarter over quarter, year over year, this watermark
isn’t reducing, then board of directors should be
able to challenge us and say maybe you’re not
mapping your risks correctly, or vice versa if it’s
reducing but we’re seeing more incidents, we’re
seeing potential breaches, things like that, then the
board of directors should be able to say maybe you
don’t have the right risk quantification framework
or the right risk management framework.’’).
314 Workshop participants Adrienne Allen,
Karthik Rangarajan, and Michele Norin each
emphasized this point. See Safeguards Workshop
Tr., supra note 17, pp. 201–09.
315 See Juhee Kwon Jackie Rees Ulmer, & Tawei
Wang, The Association Between Top Management
Involvement and Compensation and Information
Security Breaches, Journal of Information Systems,
Spring 2013, at 219–236 (‘‘. . . the involvement of
an IT executive decreases the probability of
information security breach reports by about 35
percent . . .’’); Julia L. Higgs, Robert E. Pinsker,
Thomas Joseph Smith, & George Young, The
Relationship Between Board-Level Technology
Committees and Reported Security Breaches,
Journal of Information Systems, Fall 2016, at 79–98
(‘‘[A]s a technology committee becomes more
established, its firm is not as likely to be breached.
To obtain further evidence on the perceived value
of a technology committee, this study uses a returns
analysis and finds that the presence of a technology
committee mitigates the negative abnormal stock
returns arising from external breaches.’’).
316 Indeed, workshop participants discussed a
variety of strategies for meaningful communication
between security personnel and senior leadership.
Participants noted the proper content, style, and
cadence of reporting (beyond the minimum annual
report) will vary depending on, among other things,
the type of financial institution in question and the
level of familiarity of leadership with the relevant
technical issues. See Safeguards Workshop Tr.,
supra note 17, at 194–200.
317 NADA argued reports required by this
provision would be expensive because the Proposed
Rule stated they would need to be prepared by a
‘‘CISO,’’ which NADA takes to mean a highly
compensated expert of the type retained by the
most sophisticated large institutions. National
Automobile Dealer Association (comment 46,
NPRM), at 41. As discussed above, however, the
Rule does not require all financial institutions to
retain such an expert. Instead, the report will be
made by the Qualified Individual, whose expertise
and compensation will vary according to the size
and complexity of a financial institution’s
information system.
318 National Automobile Dealer Association
(comment 46, NPRM), at 41 n.126; American
Council on Education (comment 24, NPRM), at 16.
319 American Council on Education (comment 24,
NPRM), at 16.
320 American Council on Education (comment 24,
NPRM), at 4–5.
Qualified Individuals should be able to
meet this reporting requirement by
submitting a report from an information
security certification program to the
Board or equivalent body.312
The Commission adopts the proposal
as final, with one modification
discussed below. This provision is
intended to ensure the governing body
of the financial institution is engaged
with and informed about the state of the
financial institution’s information
security program. Likewise, this will
create accountability for the Qualified
Individual by requiring him or her to set
forth the status of the information
security program for the governing
body. 313 This will help financial
institutions to ensure their information
security programs are being maintained
appropriately and given the necessary
resources. Written reports will create a
record of decisions made and the
information upon which they were
based, which may aid future decision-
making.314 Management involvement in
information security programs can
improve the strength of those programs
and help to reduce breaches.315
The Commission disagrees with the
commenters who stated the reporting
requirement would be too prescriptive.
In fact, the language only requires
reporting of (1) the overall status of the
information security program and its
compliance with this Rule; and (2)
material matters related to the
information security program. The
language includes examples of what
material matters might include, such as
risk assessments and security events,
but does not require all of them be
included. The financial institution and
the Qualified Individual will be
responsible for determining what is
material for their organization. The
Commission does not believe these
requirements call for overly detailed
reports.316
Although the Commission agrees a
certification report from a Qualified
Individual could be a part of the annual
report and may cover many material
matters, it may not suffice in all cases;
thus, the Commission declines to
include such a one-size-fits-all
requirement.
As to the suggestion to require
‘‘regular’’ reporting, the Commission
agrees more regular reporting may be
the best approach for many financial
institutions. To this end, the
Commission modifies the requirement
in the final rule to say ‘‘regularly, and
at least annually.’’ 317 Beyond this
modification, the Final Rule adopts
proposed paragraph (i) as proposed.
Board Certification
The Commission specifically sought
comment on whether the Board or
equivalent should be required to certify
the contents of the report. The two
commenters who addressed this
question stated they should not.318 ACE
noted ‘‘governing boards generally will
not have the knowledge and expertise to
independently certify’’ the technical
aspects of the report and certification
might require the employment of
outside auditors.319 The Commission
agrees senior management of financial
institutions will often lack the technical
expertise to personally attest to its
validity. In addition, the primary
purpose of the required report is to
encourage communication between
information security personnel and
senior management, not to show
compliance with the Rule. Requiring the
governing board to certify the contents
of the report would likely transform the
report into a compliance document and
might reduce its efficacy as a
communication between the Qualified
Individual and the Board. Accordingly,
the Commission declines to adopt this
requirement in the Final Rule.
§ 314.5: Effective Date
The Proposed Rule set a new effective
date for some portions of the Rule.
Proposed § 314.5 provided certain
elements of the information security
program would not be required until six
months after the publication of a final
rule, rather than immediately upon
publication. The paragraphs that would
have a delayed effective date were:
§ 314.4(a), related to the appointment of
a Qualified Individual; § 314.4(b)(1),
relating to conducting a written risk
assessment; § 314.4(c)(1) through (8),
setting forth the new elements of the
information security program;
§ 314.4(d)(2), requiring continuous
monitoring or annual penetration testing
and biannual vulnerability assessment;
§ 314.4(e), requiring training for
personnel; § 314.4(f)(3), requiring
periodic assessment of service
providers; § 314.4(h), requiring a written
incident response plan; and § 314.4(i),
requiring annual written reports from
the Qualified Individual. All other
requirements under the Safeguards Rule
would remain in effect during this six-
month period. These remaining
requirements largely mirrored the
requirements of the existing Rule.
All commenters that addressed this
provision noted the difficulty of
complying with some of the provisions
of the Proposed Rule, and argued
financial institutions should be given
more time to comply with them. ACE
suggested financial institutions be given
one year to create a plan for compliance
and two years to come into actual
compliance. 320 AFSA suggested
compliance not be required for two
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321 American Financial Services Association
(comment 41, NPRM), at 7.
322 ACA International (comment 45, NPRM), at
10–11.
323 Proposed 16 CFR 314.6.
324 Consumer Reports (comment 52, NPRM), at 6;
see also Credit Union National Association
(comment 30, NPRM), at 2 (noting the exemption
will be helpful for smaller businesses, but
suggesting other changes to the Proposed Rule so
the exemption is not required).
325 National Pawnbrokers Association (comment
32, NPRM), at 6.
326 Id.; see also National Independent Automobile
Dealers Association (comment 48, NPRM), at 3.
327 ACA International (comment 45, NPRM), at
11–12.
328 American Council on Education (comment 24,
NPRM), at 5.
329 Ahmed Aly (comment 22, NPRM).
330 ACA International (comment 45, NPRM), at
11–12.
331 American Financial Services Association
(comment 41, NPRM), at 3–4.
332 National Automobile Dealers Association
(comment 46, NPRM), at 43–44. NADA also
suggested information about customers for which
the nonpublic information has been removed
should not be counted to the total. If the
information is anonymized or otherwise
transformed so it is no longer reasonably linkable
to a customer, that information will not count
towards the exemption. NADA’s example of
retaining only ‘‘name, phone number, address, and
VIN of the vehicle they own,’’ would still count as
customer information under the Rule.
333 National Independent Automobile Dealers
Association (comment 48, NPRM), at 3.
334 National Pawnbrokers Association (comment
32, NPRM), at 6.
335 ACA International (comment 45, NPRM), at
12.
336 National Federation of Independent Business
(comment 16, NPRM), at 4.
337 Small Business Administration Office of
Advocacy (comment 28, NPRM), at 6.
338 Independent Community Bankers of America
(comment 35, NPRM), at 4; see also American
Escrow (comment 6, Workshop), at 3 (arguing even
small companies may need to comply with all
portions of the Rule to maintain consumer
confidence); see also Caiting Wang (Comment 6,
Privacy) (suggesting exempted provisions should be
optional for smaller businesses, or the Commission
create a fund to enable small businesses to comply
with these provisions).
339 See, e.g., Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 85
(noting continuous monitoring allows organizations
years. 321 ACA International requested
the effective date be one year after
publication of the Rule.322
The Commission agrees some
financial institutions may need longer to
modify their information security
programs to comply with the new
requirements in the Final Rule,
especially given the current pandemic
and the strains it is placing on
businesses. Accordingly, the Final Rule
extends the effective date for these
enumerated provisions to one year after
the publication of this document.
Proposed § 314.6: Exceptions
Proposed § 314.6 exempted financial
institutions that maintain customer
information concerning fewer than five
thousand consumers from certain
requirements of the Proposed Rule,
namely § 314.4(b)(1), requiring a written
risk assessment; § 314.4(d)(2), requiring
continuous monitoring or annual
penetration testing and biannual
vulnerability assessment; § 314.4(h),
requiring a written incident response
plan; and § 314.4(i), requiring an annual
written report by the CISO (as revised,
the Qualified Individual). 323 This
proposed section was designed to
reduce the burden on smaller financial
institutions.
The Commission sought comment on
whether it was appropriate to include
such an exemption, whether the specific
exemptions were appropriate, whether
the use of the number of customers
concerning whom the financial
institution retains customer information
is the most effective way to determine
which financial institutions should be
exempted and, if so, whether five
thousand customers was an appropriate
number. After reviewing the comments
received, the Commission retains the
exemption for financial institutions
with fewer than 5,000 customers as
proposed.
Several commenters supported the
inclusion of an exemption for small
financial institutions. Consumer Reports
supported the exemption as
proposed.324 NPA supported the
decision to base this exemption on the
number of customers whose information
the financial institution maintains, but
questioned how the number of
customers would be determined.325
NPA asked whether the number of
customers would be counted on an
annual basis or include all records the
financial institution maintains. It also
asked if each transaction with a
customer would be counted
separately.326
Some commenters argued the number
of customers whose records a financial
institution maintains was the wrong
measure by which to assess whether the
exemption should apply. For example,
commenters suggested the Rule should
take into account businesses with
revenue beneath a certain threshold,327
the number of students enrolled at
covered educational institutions,328 or
the number of individuals employed by
the financial institution.329
Additionally, some commenters
argued the threshold for application of
the exemption should be higher. ACA
International suggested the exemption
should apply to all financial institutions
maintaining records concerning fewer
than 10,000 customers.330 AFSA
suggested a 50,000 customer
threshold.331 NADA 332 and NIADA 333
argued the threshold should be raised to
100,000 customers. Without proposing a
specific alternative, NPA expressed
concern the 5,000-customer threshold
may be too low, noting pawnbrokers
who accept firearms as collateral are
required to keep customer records
related to certain transactions for twenty
years. 334
As to the substance of the exemption,
some commenters felt it did not go far
enough to relieve the burden of the rule
for small financial institutions. ACA
International proposed eligible financial
institutions should also be exempt from
the requirement to designate a single
qualified individual to oversee their
information security programs.335 The
National Federation of Independent
Business argued businesses with 15 or
fewer employees should be exempted
from the Rule entirely and instead held
only to a requirement to take
‘‘commercially reasonable steps’’ to
safeguard customer information.336 The
Small Business Administration Office of
Advocacy suggested, in the absence of
additional information regarding the
impact of the proposed changes on
small businesses, the Rule should
‘‘maintain the status quo’’ for small
entities as defined by the Small
Business Administration’s size
standards.337
On the other hand, other commenters
opposed the inclusion of any
exemption. The Independent
Community Bankers of America noted
the Federal Financial Institutions
Examination Council Interagency
Guidelines Establishing Standards for
Safeguarding Customer Information
(‘‘FFIEC Guidelines’’), which detail how
depository institutions are required to
protect customer information, include
no exemption for smaller institutions
and suggested the Rule should also have
no exemption and apply equally to all
financial institutions. 338
Under the existing Rule, there is no
exception for smaller entities. Still, the
Commission continues to believe it is
appropriate to exempt small businesses
from some of the revised Rule’s
requirements. Although the FFIEC
Guidelines do not exempt small
businesses from its requirements, the
FFIEC Guidelines regulate only
depository financial institutions subject
to an entirely different regulatory
regime, including supervision by their
regulatory agencies. While the
provisions from which eligible financial
institutions are exempt have significant
benefits for the security of customer
information and other sensitive data,339
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70301	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
to detect and quickly respond to threats); Remarks
of Frederick Lee, Safeguards Workshop Tr., supra
note 17, at 126–28 (Frederick Lee) (discussing
benefits of penetration testing); Remarks of Tom
Dugas, Safeguards Workshop Tr., supra note 17, at
143 (noting the importance of vulnerability scans);
Remarks of Michele Norin, Safeguards Workshop
Tr., supra note 17, 194–95 (asserting annual
reporting by the Qualified Individual to an
organization’s board or equivalent is beneficial);
Remarks of Adrienne Allen, Safeguards Workshop
Tr., supra note 17, at 201.
340 See Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 91–92 (noting
companies that control large amounts of consumer
data should in most instances implement the full
range of data security safeguards, whereas small
businesses with less data may need to focus on
cybersecurity basics); see also Remarks of Lee
Waters, Safeguards Workshop Tr., supra note 17, at
91 (‘‘[T]he amount of data [that a business holds]
would definitely have an influence on whether a
business is even going to be attacked.’’); Remarks
of Rocio Baeza, Safeguards Workshop Tr., supra
note 17, at 94 (citing the volume of consumer
records held by an organization as an important
factor in assessing cybersecurity risk).
341 See, e.g., Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 91–92 (noting small
businesses with an enormous amount of consumer
records need to follow all of the safeguards and
‘‘can’t get away with just doing the basics’’); see
also ACA International (comment 45, NPRM) at 11
(‘‘Many small financial institutions, including a
number of ACA members, have objectively limited
operations in terms of number of employees and
revenues, but handle large volumes of consumer
account data for each of their clients on whose
behalf they are collecting debts.’’).
342 See. e.g., Remarks of Rocio Baeza, Safeguards
Workshop Tr., supra note 17, at 94 (opining ‘‘the
better indicators for cybersecurity risk are going to
be two things: The volume of consumer records that
a financial institution holds and also the rate of
change.’’); Remarks of Lee Waters, Safeguards
Workshop Tr., supra note 17, at 91 (noting the
amount of data a company holds influences
whether it is going to be attacked).
343 See Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 89–90
(noting the size of a financial institution and the
amount and nature of the information it holds factor
into an appropriate information security program).
344 The Commission understands this provision to
count all individual consumers about which a
financial institution maintains customer
information, including both current and former
customers. The exemption counts consumers rather
than transactions so a financial institution that had
100 transactions with a single customer would
count only a single consumer.
345 44 U.S.C. 3502(3)(A)(i).
346 See 44 U.S.C. 3502(3)(A).
347 See Standards for Safeguarding Customer
Information, 67 FR 36484, 36491 (May 23, 2002).
those provisions may be less necessary
in situations where the overall volume
of retained data is low. This is true in
part because the potential for
cumulative consumer harm is less
where fewer consumers’ information
may be exposed as the result of a
security incident.340
For similar reasons, the Commission
finds the number of individuals
concerning whom a financial institution
maintains customer information is the
appropriate measure of whether the
exemption should apply to a particular
financial institution. The application of
the exemption should take into account
both the potential burden of compliance
to financial institutions and the risk to
consumers when standards are
relaxed—in other words, the purpose of
the exemption is to avoid imposing
undue burden while assuring customer
information is subject to necessary
protections. Even a very small financial
institution, depending on its business
model, may retain very large quantities
of sensitive customer information.341
Adequate security is necessary to
protect such information, which may
constitute an attractive target for bad
actors such as identity thieves; the value
of the target is correlated with the
volume of information maintained. 342
While a business’s revenue or number of
employees may provide a measure of
the burden of compliance for that
business, these figures do not capture
consumer risk. By contrast, the number
of individuals about whom a financial
institution maintains customer
information is a proxy for the level of
security necessary in light of both the
risk of attack and the potential
consumer harm should a security
incident occur. 343 In addition, basing
the exemption on the number of
individuals concerning whom a
financial institution maintains customer
information provides an incentive to
financial institutions to reduce the
amount of information they retain. A
financial institution may choose to
dispose of information so it holds
information on few enough consumers
to qualify for exemption. 344
The Final Rule adopts this section as
proposed. The Commission continues to
believe the cutoff for financial
institutions maintaining information
concerning 5,000 consumers
appropriately balances the need for
security with the burdens on smaller
businesses. The requirements to which
exempted financial institutions would
still be required to adhere are tailored to
balance the importance of adequately
securing customer information against
the need to limit financial burdens for
small businesses. Many of these
requirements were already in force as
part of the existing Rule—for example,
covered financial institutions were
already required to design and
implement a written information
security program, conduct risk
assessments, perform an initial
assessment of their service providers,
and designate one or more employees to
oversee information security. For
reasons discussed elsewhere in this
document, the new requirements that
apply to exempted financial
institutions, such as the requirement to
designate a single qualified individual
to oversee information security rather
than one or more individuals, will
ensure financial institutions of all sizes
continue to adequately protect customer
information in an environment of
increasing cybersecurity risk, while
avoiding the imposition of undue
burden.
IV. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 35, requires Federal
agencies to seek and obtain Office of
Management and Budget (OMB)
approval before undertaking a collection
of information directed to ten or more
persons. 345 A ‘‘collection of
information’’ occurs when ten or more
persons are asked to report, provide,
disclose, or record information in
response to ‘‘identical questions.’’ 346
Applying these standards, neither the
Safeguards Rule nor the amendments
constitute a ‘‘collection of
information.’’ 347 The Rule calls upon
affected financial institutions to develop
or strengthen their information security
programs in order to provide reasonable
safeguards. Under the Rule, each
financial institution’s safeguards will
vary according to its size and
complexity, the nature and scope of its
activities, and the sensitivity of the
information involved. For example, a
financial institution with numerous
employees would develop and
implement employee training and
management procedures beyond those
that would be appropriate or reasonable
for a sole proprietorship, such as an
individual tax preparer or mortgage
broker. Similarly, a financial institution
that shares customer information with
numerous service providers would need
to take steps to ensure such information
remains protected, while a financial
institution with no service providers
would not need to address this issue.
Thus, although each financial
institution must summarize its
compliance efforts in one or more
written documents, the discretionary
balancing of factors and circumstances
the Rule allows—including the myriad
operational differences among
businesses it contemplated—does not
require entities to answer ‘‘identical
questions’’ and therefore does not
trigger the PRA’s requirements.
The amendments to the Rule do not
change this analysis because they retain
the existing Rule’s process-based
approach, allowing financial
institutions to tailor their programs to
reflect the financial institutions’ size,
complexity, and operations, and to the
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348 5 U.S.C. 603 et seq.
349 See Public Workshop Examining Information
Security for Financial Institutions and Information
Related to Changes to the Safeguards Rule, 85 FR
13082 (Mar. 6, 2020).
350 Small Business Administration Office of
Advocacy (comment 28, NPRM), at 6.
sensitivity and amount of customer
information they collect. For example,
amended § 314.4(b) would require a
written risk assessment, but each risk
assessment will reflect the particular
structure and operation of the financial
institution and, though each assessment
must include certain criteria, these are
only general guidelines and do not
consist of ‘‘identical questions.’’
Similarly, amended § 314.4(h), which
requires a written incident response
plan, is only an extension of the
preexisting requirement of a written
information security plan and would
necessarily vary significantly based on
factors such as the financial institution’s
internal procedures, which officials
within the financial institution have
decision-making authority, how the
financial institution communicates
internally and externally, and the
structure of the financial institution’s
information systems. Likewise, the
proposed requirement for Qualified
Individuals to produce annual reports
under proposed § 314.4(i) does not
consist of answers to identical
questions, as the content of these reports
would vary considerably between
financial institutions and Qualified
Individuals are given flexibility in
deciding what to include in the reports.
Finally, the modification of the
definition of ‘‘financial institution’’ to
include ‘‘activities incidental to
financial activities’’ and therefore bring
finders under the scope of the Rule do
not constitute a ‘‘collection of
information,’’ and therefore do not
trigger the PRA’s requirements.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA),
as amended by the Small Business
Regulatory Enforcement Fairness Act of
1996, requires an agency to either
provide an Initial Regulatory Flexibility
Analysis (IRFA) with a proposed Rule,
or certify that the proposed Rule will
not have a significant impact on a
substantial number of small entities.348
The Commission published an Initial
Regulatory Flexibility Analysis in order
to inquire into the impact of the
Proposed Rule on small entities. In
response, the Commission received
comments that argued the revision to
the Safeguards Rule would be unduly
burdensome for smaller financial
institutions. The discussion below
summarizes these comments and the
Commission’s response to them.
1. Description of the Reason for Agency
Action
The Commission issues these
amendments to clarify the Safeguards
Rule by including a definition of
‘‘financial institution’’ and related
examples in the Safeguards Rule rather
than incorporating them from the
Privacy Rule by reference. The
amendments also expand the definition
of ‘‘financial institution’’ in the Rule to
include entities engaged in activities
incidental to financial activities. This
change would bring ‘‘finders’’ within
the scope of the Rule. This change
harmonizes the Rule with other
agencies’ rules and requires finders that
collect consumers’ sensitive financial
information to comply with the
Safeguards Rule’s process-based
approach to protect that data.
In addition, the amendments modify
the Safeguards Rule to include more
detailed requirements for the
information security program required
by the Rule.
2. Issues Raised by Comments in
Response to the IRFA
As stated above, the Commission
received several comments that argued
the revised Safeguards Rule would
impose unduly heavy burdens on
smaller businesses. The Small Business
Administration’s Office of Advocacy
commented it was concerned the FTC
had not gathered sufficient data as to
either the costs or benefits of the
proposed changes for small financial
institutions. The FTC shares the Office
of Advocacy’s interest in ensuring
regulatory changes have an evidentiary
basis. Many of the questions on which
the FTC sought public comment, both in
the regulatory review and in the
proposed rule context, specifically
related to the costs and benefits of
existing and proposed Rule
requirements. Following the initial
round of commenting, the Commission
conducted the FTC Safeguards
Workshop and solicited additional
public comments with the explicit goal
of gathering additional data relating to
the costs and benefits of the proposed
changes.349 As detailed throughout this
document, the Commission believes
there is a strong evidentiary basis for the
issuance of the Final Rule.
The Office of Advocacy also argued
the Proposed Rule’s requirements were
unduly prescriptive and should not be
enacted as they apply to small
businesses until the Commission can
‘‘ascertain the quantitative impact on
small entities.’’ 350 The Office of
Advocacy, along with other
commenters, argued the amendments
taken together would create a large
burden on smaller financial institutions.
In particular, commenters pointed to the
requirements that financial institutions
appoint a chief information security
officer, customer information be
encrypted, financial institutions utilize
multi-factor authentication, and
financial institutions regularly update
training programs. These comments and
the Commission’s response are
discussed at length above. Most
commenters did not provide any
specific estimates of these expenses, but
two commenters did provide a summary
of their expected expenses.
As discussed in the document, the
Commission believes any burden
imposed by the revised Rule is
substantially mitigated by the fact the
Rule continues to be process-based,
flexible, and based on the financial
institution’s size and complexity. In
addition, the amendments exempt
institutions that maintain information
on fewer than 5,000 consumers from
certain requirements that require
additional written product and might
pose a greater burden on smaller
entities. The Commission believes most
of the entities covered by the exemption
will be small businesses. Finally, the
Commission believes all financial
institutions, including small businesses,
that comply with the current Safeguards
Rule will already be in compliance with
most of the new provisions of the
revised Rule as part of their current
information security program.
In addition, in response to the
comments concerned about the burden
of the amendments, the Commission
extended the effective date from six
months after the publication of the Final
Rule to one year after the publication to
allow financial institutions additional
time to come into compliance with the
revised Rule. In addition, in response to
comments that argued hiring a chief
information security officer would be
prohibitively expensive for small
financial institutions, the Commission
amended the rule to clarify such an
employee was not required for all
financial institutions. The Final Rule is
modified to clarify a financial
institution need only appoint an
individual who is qualified to
coordinate its information security
program, and those qualifications will
vary based on the complexity of the
program and size and nature of the
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70303	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
351 The U.S. Small Business Administration Table
of Small Business Size Standards Matched to North
American Industry Classification System Codes
(‘‘NAICS’’) are generally expressed in either
millions of dollars or number of employees. A size
standard is the largest a business can be and still
qualify as a small business for Federal Government
programs. For the most part, size standards are the
annual receipts or the average employment of a
firm. Depending on the nature of the financial
services an institution provides, the size standard
varies. By way of example, mortgage and
nonmortgage loan brokers (NAICS code 522310) are
classified as small if their annual receipts are $8.0
million or less. Consumer lending institutions
(NAICS code 522291) are classified as small if their
annual receipts are $41.5 million or less.
Commercial banking and savings institutions
(NAICS codes 522110 and 522120) are classified as
small if their assets are $600 million or less. Assets
are determined by averaging the assets reported on
businesses’ four quarterly financial statements for
the preceding year. The 2019 Table of Small
Business Size Standards is available at https://
www.sba.gov/sites/default/files/2019-08/
SBA%20Table%20of%20Size%20Standards_
Effective%20Aug%2019%2C%202019_Rev.pdf.
352 See, e.g., Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 78
(describing virtual CISO services); Matthew Green,
Safeguards Workshop Tr., supra note 17, at 225
(noting website usage of encryption for data in
motion is above 80 percent; ‘‘Let’s Encrypt’’
provides free TLS certificates; and costs have gone
down to the point that if a financial institution is
not using TLS encryption for data in motion, it is
making an unusual decision outside the norm);
Rocio Baeza, Safeguards Workshop Tr., supra note
17, at 106 (‘‘[T]he encryption of data in transit has
been standard. There’s no pushback with that.’’);
Slides Accompanying the Remarks of Lee Waters,
‘‘Information Security Programs and Smaller
Businesses,’’ in Safeguards Workshop Slides, supra
note 72, at 26 (‘‘Estimated Costs of Proposed
Changes,’’ estimating costs of multi-factor
authentication to be $50 for smartcard or fingerprint
readers, and $10 each per smartcard); Slides
Accompanying Remarks of Wendy Nather,
Safeguards Workshop Slides, supra note 72, at 37
(chart showing the use of multi-factor
authentication solutions such as Duo Push, phone
call, mobile passcode, SMS passcode, hardware
token, Yubikey passcode, and U2F token in
industries such as financial services and higher
education).
financial institution. The Commission
also clarified employee training
programs need to be updated only as
necessary, to respond to a comment
regular updating would be difficult for
smaller financial institutions.
3. Estimate of Number of Small Entities
to Which the Amendments Will Apply
As previously discussed in the IRFA,
determining a precise estimate of the
number of small entities 351—including
newly covered entities under the
modified definition of financial
institution—is not readily feasible.
Financial institutions already covered
by the Rule as originally promulgated
include lenders, financial advisors, loan
brokers and servicers, collection
agencies, financial advisors, tax
preparers, and real estate settlement
services, to the extent they have
‘‘customer information’’ within the
meaning of the Rule. Finders are also
covered under the Final Rule. However,
it is not known whether any finders are
small entities, and if so, how many there
are. The Commission requested
comment and information on the
number of ‘‘finders’’ that would be
covered by the Rule’s modified
definition of ‘‘financial institution,’’ and
how many of those finders, if any, are
small entities. The Commission received
no comments that addressed this
question.
4. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
The Rule does not impose any
reporting or any specific recordkeeping
requirements as discussed earlier. See
supra Section IV (Paperwork Reduction
Act). With regard to other compliance
requirements, the addition of definitions
and examples from the Privacy Rule is
not expected to have an impact on
covered financial institutions, including
those that may be small entities. (The
preceding section of this analysis
discusses classes of covered financial
institutions that may qualify as small
entities.) The addition of ‘‘finders’’ to
the definition of financial institutions
imposes the obligations of the Rule on
entities that engage in ‘‘finding’’ activity
and also collect customer information.
The addition of more detailed
requirements may require some
financial institutions to perform
additional risk assessments or
monitoring, or to create additional
safeguards as set forth in the Proposed
Rule. These obligations may require
institutions to retain employees or third-
party service providers with skills in
information security, but, as discussed
above, the Commission believes most
financial institutions will have already
complied with many parts of the Rule
as part of their information security
programs required under the existing
Rule. There may be additional related
compliance costs (e.g., legal, new
equipment or systems, modifications to
policies or procedures), but, as
discussed above, the Commission
believes these are limited by several
factors, including the flexibility of the
Rule, the existing safeguards in place to
comply with the existing Rule, and the
exemption for financial institutions that
maintain less consumer information.
Although two commenters provided
summaries of the expected expenses for
some financial institutions to comply
with the Rule, those estimates did not
provide sufficient detail to fully
evaluate whether they were accurate or
representative of other financial
institutions and appeared to be based, at
least in part, on a misunderstanding of
the requirement to appoint a Qualified
Individual. The Commission believes,
for most smaller financial institutions,
there are very low-cost solutions for any
additional duties imposed by the Final
Rule. This view is supported by the
comments of several experts at the
Safeguards Rule Workshop.352
The Commission believes the
protection of consumers’ financial
information is of the utmost importance
and the cost of the safeguards required
to provide that protection is justified
and necessary. The Commission
carefully balanced the cost of these
requirements with the need to protect
consumer information and has made
every effort to ensure the Final Rule
retains flexibility so financial
institutions can tailor information
security programs to the size and
complexity of the financial institution,
the nature and scope of its activities,
and the sensitivity of any customer
information at issue.
5. Description of Steps Taken To
Minimize Significant Economic Impact,
if Any, on Small Entities, Including
Alternatives
The standards in the Final Rule allow
a small financial institution to develop
an information security program
appropriate to its size and complexity,
the nature and scope of its activities,
and the sensitivity of any customer
information at issue. The amendments
include certain design standards (e.g., a
company must implement encryption,
authentication, and incident response)
in the Rule, in addition to the
performance standards (reasonable
security) the Rule currently uses. As
discussed, while these design standards
may introduce some additional burden,
the Commission believes many financial
institutions’ existing information
security programs already meet most of
these requirements. In addition, the
requirements in the Final Rule, like
those in the existing Rule, are designed
to allow financial institutions flexibility
in how and whether they should be
implemented. For example, the
requirement encryption be used to
protect customer information in transit
and at rest may be met with effective
alternative compensating controls if
encryption is infeasible for a given
financial institution.
In addition, the amendments exempt
financial institutions that maintain
relatively small amounts of customer
information from certain requirements
of the Final Rule. The exemptions
would apply to financial institutions
that maintain customer information
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70304 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
concerning fewer than ten thousand
consumers. The Commission believes
exempted financial institutions are
generally, but not exclusively, small
entities. Such financial institutions are
not required to perform a written risk
assessment, conduct continuous
monitoring or annual penetration testing
and biannual vulnerability assessment,
prepare a written incident response
plan, or prepare an annual written
report by the Qualified Individual.
These exemptions are intended to
reduce the burden on smaller financial
institutions. The Commission believes
the obligations subject to these
exemptions are the ones most likely to
cause undue burden on smaller
financial institutions.
Exempted financial institutions will
still need to conduct risk assessments,
design and implement a written
information security program with the
required elements, utilize qualified
information security personnel and train
employees, monitor activity of
authorized users, oversee service
providers, and evaluate and adjust their
information security program. These are
core obligations under the Rule any
financial institution that collects
customer information must meet,
regardless of size.
The Commission considered allowing
compliance with a third-party data
security standard, such as the NIST
framework, to act as a safe harbor for
compliance with the Rule. The
Commission, however, determined any
reduction of burden created by allowing
such safe harbors is offset by issues they
would cause. For example, such safe
harbors would require the Commission
to monitor the third-party standard or
standards to determine whether they
continued to align with the Safeguards
Rule. In addition, the Commission
would still have to investigate a
company’s compliance with the outside
standard in any enforcement action. The
Commission also does not agree
compliance with an outside standard is
likely to be less burdensome than
complying with the Safeguards Rule
itself.
VI. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 314
Consumer protection, Credit, Data
protection, Privacy, Trade practices.
For the reasons stated above, the
Federal Trade Commission amends 16
CFR part 314 as follows:
PART 314—STANDARDS FOR
SAFEGUARDING CUSTOMER
INFORMATION
■ 1. The authority citation for part 314
continues to read as follows:
Authority: 15 U.S.C. 6801(b), 6805(b)(2).
■ 2. In § 314.1, revise paragraph (b) to
read as follows:
§ 314.1 Purpose and scope.
* 	* 	* 	* 	*
(b) Scope. This part applies to the
handling of customer information by all
financial institutions over which the
Federal Trade Commission (‘‘FTC’’ or
‘‘Commission’’) has jurisdiction.
Namely, this part applies to those
‘‘financial institutions’’ over which the
Commission has rulemaking authority
pursuant to section 501(b) of the
Gramm-Leach-Bliley Act. An entity is a
‘‘financial institution’’ if its business is
engaging in an activity that is financial
in nature or incidental to such financial
activities as described in section 4(k) of
the Bank Holding Company Act of 1956,
12 U.S.C. 1843(k), which incorporates
activities enumerated by the Federal
Reserve Board in 12 CFR 225.28 and
225.86. The ‘‘financial institutions’’
subject to the Commission’s
enforcement authority are those that are
not otherwise subject to the enforcement
authority of another regulator under
section 505 of the Gramm-Leach-Bliley
Act, 15 U.S.C. 6805. More specifically,
those entities include, but are not
limited to, mortgage lenders, ‘‘pay day’’
lenders, finance companies, mortgage
brokers, account servicers, check
cashers, wire transferors, travel agencies
operated in connection with financial
services, collection agencies, credit
counselors and other financial advisors,
tax preparation firms, non-federally
insured credit unions, investment
advisors that are not required to register
with the Securities and Exchange
Commission, and entities acting as
finders. They are referred to in this part
as ‘‘You.’’ This part applies to all
customer information in your
possession, regardless of whether such
information pertains to individuals with
whom you have a customer
relationship, or pertains to the
customers of other financial institutions
that have provided such information to
you.
■ 3. Revise § 314.2 to read as follows:
§ 314.2 Definitions.
(a) Authorized user means any
employee, contractor, agent, customer,
or other person that is authorized to
access any of your information systems
or data.
(b)(1) Consumer means an individual
who obtains or has obtained a financial
product or service from you that is to be
used primarily for personal, family, or
household purposes, or that individual’s
legal representative.
(2) For example:
(i) An individual who applies to you
for credit for personal, family, or
household purposes is a consumer of a
financial service, regardless of whether
the credit is extended.
(ii) An individual who provides
nonpublic personal information to you
in order to obtain a determination about
whether he or she may qualify for a loan
to be used primarily for personal,
family, or household purposes is a
consumer of a financial service,
regardless of whether the loan is
extended.
(iii) An individual who provides
nonpublic personal information to you
in connection with obtaining or seeking
to obtain financial, investment, or
economic advisory services is a
consumer, regardless of whether you
establish a continuing advisory
relationship.
(iv) If you hold ownership or
servicing rights to an individual’s loan
that is used primarily for personal,
family, or household purposes, the
individual is your consumer, even if
you hold those rights in conjunction
with one or more other institutions.
(The individual is also a consumer with
respect to the other financial
institutions involved.) An individual
who has a loan in which you have
ownership or servicing rights is your
consumer, even if you, or another
institution with those rights, hire an
agent to collect on the loan.
(v) An individual who is a consumer
of another financial institution is not
your consumer solely because you act as
agent for, or provide processing or other
services to, that financial institution.
(vi) An individual is not your
consumer solely because he or she has
designated you as trustee for a trust.
(vii) An individual is not your
consumer solely because he or she is a
beneficiary of a trust for which you are
a trustee.
(viii) An individual is not your
consumer solely because he or she is a
participant or a beneficiary of an
employee benefit plan that you sponsor
or for which you act as a trustee or
fiduciary.
(c) Customer means a consumer who
has a customer relationship with you.
(d) Customer information means any
record containing nonpublic personal
information about a customer of a
financial institution, whether in paper,
electronic, or other form, that is handled
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70305	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
or maintained by or on behalf of you or
your affiliates.
(e)(1) Customer relationship means a
continuing relationship between a
consumer and you under which you
provide one or more financial products
or services to the consumer that are to
be used primarily for personal, family,
or household purposes.
(2) For example:
(i) Continuing relationship. A
consumer has a continuing relationship
with you if the consumer:
(A) Has a credit or investment account
with you;
(B) Obtains a loan from you;
(C) Purchases an insurance product
from you;
(D) Holds an investment product
through you, such as when you act as
a custodian for securities or for assets in
an Individual Retirement Arrangement;
(E) Enters into an agreement or
understanding with you whereby you
undertake to arrange or broker a home
mortgage loan, or credit to purchase a
vehicle, for the consumer;
(F) Enters into a lease of personal
property on a non-operating basis with
you;
(G) Obtains financial, investment, or
economic advisory services from you for
a fee;
(H) Becomes your client for the
purpose of obtaining tax preparation or
credit counseling services from you;
(I) Obtains career counseling while
seeking employment with a financial
institution or the finance, accounting, or
audit department of any company (or
while employed by such a financial
institution or department of any
company);
(J) Is obligated on an account that you
purchase from another financial
institution, regardless of whether the
account is in default when purchased,
unless you do not locate the consumer
or attempt to collect any amount from
the consumer on the account;
(K) Obtains real estate settlement
services from you; or
(L) Has a loan for which you own the
servicing rights.
(ii) No continuing relationship. A
consumer does not, however, have a
continuing relationship with you if:
(A) The consumer obtains a financial
product or service from you only in
isolated transactions, such as using your
ATM to withdraw cash from an account
at another financial institution;
purchasing a money order from you;
cashing a check with you; or making a
wire transfer through you;
(B) You sell the consumer’s loan and
do not retain the rights to service that
loan;
(C) You sell the consumer airline
tickets, travel insurance, or traveler’s
checks in isolated transactions;
(D) The consumer obtains one-time
personal or real property appraisal
services from you; or
(E) The consumer purchases checks
for a personal checking account from
you.
(f) Encryption means the
transformation of data into a form that
results in a low probability of assigning
meaning without the use of a protective
process or key, consistent with current
cryptographic standards and
accompanied by appropriate safeguards
for cryptographic key material.
(g)(1) Financial product or service
means any product or service that a
financial holding company could offer
by engaging in a financial activity under
section 4(k) of the Bank Holding
Company Act of 1956 (12 U.S.C.
1843(k)).
(2) Financial service includes your
evaluation or brokerage of information
that you collect in connection with a
request or an application from a
consumer for a financial product or
service.
(h)(1) Financial institution means any
institution the business of which is
engaging in an activity that is financial
in nature or incidental to such financial
activities as described in section 4(k) of
the Bank Holding Company Act of 1956,
12 U.S.C. 1843(k). An institution that is
significantly engaged in financial
activities, or significantly engaged in
activities incidental to such financial
activities, is a financial institution.
(2) Examples of financial institutions
are as follows:
(i) A retailer that extends credit by
issuing its own credit card directly to
consumers is a financial institution
because extending credit is a financial
activity listed in 12 CFR 225.28(b)(1)
and referenced in section 4(k)(4)(F) of
the Bank Holding Company Act of 1956
(12 U.S.C. 1843(k)(4)(F)), and issuing
that extension of credit through a
proprietary credit card demonstrates
that a retailer is significantly engaged in
extending credit.
(ii) An automobile dealership that, as
a usual part of its business, leases
automobiles on a nonoperating basis for
longer than 90 days is a financial
institution with respect to its leasing
business because leasing personal
property on a nonoperating basis where
the initial term of the lease is at least 90
days is a financial activity listed in 12
CFR 225.28(b)(3) and referenced in
section 4(k)(4)(F) of the Bank Holding
Company Act, 12 U.S.C. 1843(k)(4)(F).
(iii) A personal property or real estate
appraiser is a financial institution
because real and personal property
appraisal is a financial activity listed in
12 CFR 225.28(b)(2)(i) and referenced in
section 4(k)(4)(F) of the Bank Holding
Company Act, 12 U.S.C. 1843(k)(4)(F).
(iv) A career counselor that
specializes in providing career
counseling services to individuals
currently employed by or recently
displaced from a financial organization,
individuals who are seeking
employment with a financial
organization, or individuals who are
currently employed by or seeking
placement with the finance, accounting
or audit departments of any company is
a financial institution because such
career counseling activities are financial
activities listed in 12 CFR
225.28(b)(9)(iii) and referenced in
section 4(k)(4)(F) of the Bank Holding
Company Act, 12 U.S.C. 1843(k)(4)(F).
(v) A business that prints and sells
checks for consumers, either as its sole
business or as one of its product lines,
is a financial institution because
printing and selling checks is a financial
activity that is listed in 12 CFR
225.28(b)(10)(ii) and referenced in
section 4(k)(4)(F) of the Bank Holding
Company Act, 12 U.S.C. 1843(k)(4)(F).
(vi) A business that regularly wires
money to and from consumers is a
financial institution because transferring
money is a financial activity referenced
in section 4(k)(4)(A) of the Bank
Holding Company Act, 12 U.S.C.
1843(k)(4)(A), and regularly providing
that service demonstrates that the
business is significantly engaged in that
activity.
(vii) A check cashing business is a
financial institution because cashing a
check is exchanging money, which is a
financial activity listed in section
4(k)(4)(A) of the Bank Holding Company
Act, 12 U.S.C. 1843(k)(4)(A).
(viii) An accountant or other tax
preparation service that is in the
business of completing income tax
returns is a financial institution because
tax preparation services is a financial
activity listed in 12 CFR 225.28(b)(6)(vi)
and referenced in section 4(k)(4)(G) of
the Bank Holding Company Act, 12
U.S.C. 1843(k)(4)(G).
(ix) A business that operates a travel
agency in connection with financial
services is a financial institution
because operating a travel agency in
connection with financial services is a
financial activity listed in 12 CFR
225.86(b)(2) and referenced in section
4(k)(4)(G) of the Bank Holding Company
Act, 12 U.S.C. 1843(k)(4)(G).
(x) An entity that provides real estate
settlement services is a financial
institution because providing real estate
settlement services is a financial activity
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70306 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
listed in 12 CFR 225.28(b)(2)(viii) and
referenced in section 4(k)(4)(F) of the
Bank Holding Company Act, 12 U.S.C.
1843(k)(4)(F).
(xi) A mortgage broker is a financial
institution because brokering loans is a
financial activity listed in 12 CFR
225.28(b)(1) and referenced in section
4(k)(4)(F) of the Bank Holding Company
Act, 12 U.S.C. 1843(k)(4)(F).
(xii) An investment advisory company
and a credit counseling service are each
financial institutions because providing
financial and investment advisory
services are financial activities
referenced in section 4(k)(4)(C) of the
Bank Holding Company Act, 12 U.S.C.
1843(k)(4)(C).
(xiii) A company acting as a finder in
bringing together one or more buyers
and sellers of any product or service for
transactions that the parties themselves
negotiate and consummate is a financial
institution because acting as a finder is
an activity that is financial in nature or
incidental to a financial activity listed
in 12 CFR 225.86(d)(1).
(3) Financial institution does not
include:
(i) Any person or entity with respect
to any financial activity that is subject
to the jurisdiction of the Commodity
Futures Trading Commission under the
Commodity Exchange Act (7 U.S.C. 1 et
seq.);
(ii) The Federal Agricultural Mortgage
Corporation or any entity chartered and
operating under the Farm Credit Act of
1971 (12 U.S.C. 2001 et seq.);
(iii) Institutions chartered by Congress
specifically to engage in securitizations,
secondary market sales (including sales
of servicing rights) or similar
transactions related to a transaction of a
consumer, as long as such institutions
do not sell or transfer nonpublic
personal information to a nonaffiliated
third party other than as permitted by
§§ 313.14 and 313.15; or
(iv) Entities that engage in financial
activities but that are not significantly
engaged in those financial activities,
and entities that engage in activities
incidental to financial activities but that
are not significantly engaged in
activities incidental to financial
activities.
(4) Examples of entities that are not
significantly engaged in financial
activities are as follows:
(i) A retailer is not a financial
institution if its only means of
extending credit are occasional ‘‘lay
away’’ and deferred payment plans or
accepting payment by means of credit
cards issued by others.
(ii) A retailer is not a financial
institution merely because it accepts
payment in the form of cash, checks, or
credit cards that it did not issue.
(iii) A merchant is not a financial
institution merely because it allows an
individual to ‘‘run a tab.’’
(iv) A grocery store is not a financial
institution merely because it allows
individuals to whom it sells groceries to
cash a check, or write a check for a
higher amount than the grocery
purchase and obtain cash in return.
(i) Information security program
means the administrative, technical, or
physical safeguards you use to access,
collect, distribute, process, protect,
store, use, transmit, dispose of, or
otherwise handle customer information.
(j) Information system means a
discrete set of electronic information
resources organized for the collection,
processing, maintenance, use, sharing,
dissemination or disposition of
electronic information containing
customer information or connected to a
system containing customer
information, as well as any specialized
system such as industrial/process
controls systems, telephone switching
and private branch exchange systems,
and environmental controls systems that
contains customer information or that is
connected to a system that contains
customer information.
(k) Multi-factor authentication means
authentication through verification of at
least two of the following types of
authentication factors:
(1) Knowledge factors, such as a
password;
(2) Possession factors, such as a token;
or
(3) Inherence factors, such as
biometric characteristics.
(l)(1) Nonpublic personal information
means:
(i) Personally identifiable financial
information; and
(ii) Any list, description, or other
grouping of consumers (and publicly
available information pertaining to
them) that is derived using any
personally identifiable financial
information that is not publicly
available.
(2) Nonpublic personal information
does not include:
(i) Publicly available information,
except as included on a list described in
paragraph (l)(1)(ii) of this section; or
(ii) Any list, description, or other
grouping of consumers (and publicly
available information pertaining to
them) that is derived without using any
personally identifiable financial
information that is not publicly
available.
(3) For example:
(i) Nonpublic personal information
includes any list of individuals’ names
and street addresses that is derived in
whole or in part using personally
identifiable financial information (that
is not publicly available), such as
account numbers.
(ii) Nonpublic personal information
does not include any list of individuals’
names and addresses that contains only
publicly available information, is not
derived, in whole or in part, using
personally identifiable financial
information that is not publicly
available, and is not disclosed in a
manner that indicates that any of the
individuals on the list is a consumer of
a financial institution.
(m) Penetration testing means a test
methodology in which assessors attempt
to circumvent or defeat the security
features of an information system by
attempting penetration of databases or
controls from outside or inside your
information systems.
(n)(1) Personally identifiable financial
information means any information:
(i) A consumer provides to you to
obtain a financial product or service
from you;
(ii) About a consumer resulting from
any transaction involving a financial
product or service between you and a
consumer; or
(iii) You otherwise obtain about a
consumer in connection with providing
a financial product or service to that
consumer.
(2) For example:
(i) Information included. Personally
identifiable financial information
includes:
(A) Information a consumer provides
to you on an application to obtain a
loan, credit card, or other financial
product or service;
(B) Account balance information,
payment history, overdraft history, and
credit or debit card purchase
information;
(C) The fact that an individual is or
has been one of your customers or has
obtained a financial product or service
from you;
(D) Any information about your
consumer if it is disclosed in a manner
that indicates that the individual is or
has been your consumer;
(E) Any information that a consumer
provides to you or that you or your
agent otherwise obtain in connection
with collecting on, or servicing, a credit
account;
(F) Any information you collect
through an internet ‘‘cookie’’ (an
information collecting device from a
web server); and
(G) Information from a consumer
report.
(ii) Information not included.
Personally identifiable financial
information does not include:
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(A) A list of names and addresses of
customers of an entity that is not a
financial institution; and
(B) Information that does not identify
a consumer, such as aggregate
information or blind data that does not
contain personal identifiers such as
account numbers, names, or addresses.
(o)(1) Publicly available information
means any information that you have a
reasonable basis to believe is lawfully
made available to the general public
from:
(i) Federal, State, or local government
records;
(ii) Widely distributed media; or
(iii) Disclosures to the general public
that are required to be made by Federal,
State, or local law.
(2) You have a reasonable basis to
believe that information is lawfully
made available to the general public if
you have taken steps to determine:
(i) That the information is of the type
that is available to the general public;
and
(ii) Whether an individual can direct
that the information not be made
available to the general public and, if so,
that your consumer has not done so.
(3) For example:
(i) Government records. Publicly
available information in government
records includes information in
government real estate records and
security interest filings.
(ii) Widely distributed media. Publicly
available information from widely
distributed media includes information
from a telephone book, a television or
radio program, a newspaper, or a
website that is available to the general
public on an unrestricted basis. A
website is not restricted merely because
an internet service provider or a site
operator requires a fee or a password, so
long as access is available to the general
public.
(iii) Reasonable basis. (A) You have a
reasonable basis to believe that mortgage
information is lawfully made available
to the general public if you have
determined that the information is of
the type included on the public record
in the jurisdiction where the mortgage
would be recorded.
(B) You have a reasonable basis to
believe that an individual’s telephone
number is lawfully made available to
the general public if you have located
the telephone number in the telephone
book or the consumer has informed you
that the telephone number is not
unlisted.
(p) Security event means an event
resulting in unauthorized access to, or
disruption or misuse of, an information
system, information stored on such
information system, or customer
information held in physical form.
(q) Service provider means any person
or entity that receives, maintains,
processes, or otherwise is permitted
access to customer information through
its provision of services directly to a
financial institution that is subject to
this part.
(r) You includes each ‘‘financial
institution’’ (but excludes any ‘‘other
person’’) over which the Commission
has enforcement jurisdiction pursuant
to section 505(a)(7) of the Gramm-
Leach-Bliley Act.
■ 4. In § 314.3, revise paragraph (a) to
read as follows:
§ 314.3 Standards for safeguarding
customer information.
(a) Information security program. You
shall develop, implement, and maintain
a comprehensive information security
program that is written in one or more
readily accessible parts and contains
administrative, technical, and physical
safeguards that are appropriate to your
size and complexity, the nature and
scope of your activities, and the
sensitivity of any customer information
at issue. The information security
program shall include the elements set
forth in § 314.4 and shall be reasonably
designed to achieve the objectives of
this part, as set forth in paragraph (b) of
this section.
* 	* 	* 	* 	*
■ 5. Revise § 314.4 to read as follows:
§ 314.4 Elements.
In order to develop, implement, and
maintain your information security
program, you shall:
(a) Designate a qualified individual
responsible for overseeing and
implementing your information security
program and enforcing your information
security program (for purposes of this
part, ‘‘Qualified Individual’’). The
Qualified Individual may be employed
by you, an affiliate, or a service
provider. To the extent the requirement
in this paragraph (a) is met using a
service provider or an affiliate, you
shall:
(1) Retain responsibility for
compliance with this part;
(2) Designate a senior member of your
personnel responsible for direction and
oversight of the Qualified Individual;
and
(3) Require the service provider or
affiliate to maintain an information
security program that protects you in
accordance with the requirements of
this part.
(b) Base your information security
program on a risk assessment that
identifies reasonably foreseeable
internal and external risks to the
security, confidentiality, and integrity of
customer information that could result
in the unauthorized disclosure, misuse,
alteration, destruction, or other
compromise of such information, and
assesses the sufficiency of any
safeguards in place to control these
risks.
(1) The risk assessment shall be
written and shall include:
(i) Criteria for the evaluation and
categorization of identified security
risks or threats you face;
(ii) Criteria for the assessment of the
confidentiality, integrity, and
availability of your information systems
and customer information, including the
adequacy of the existing controls in the
context of the identified risks or threats
you face; and
(iii) Requirements describing how
identified risks will be mitigated or
accepted based on the risk assessment
and how the information security
program will address the risks.
(2) You shall periodically perform
additional risk assessments that
reexamine the reasonably foreseeable
internal and external risks to the
security, confidentiality, and integrity of
customer information that could result
in the unauthorized disclosure, misuse,
alteration, destruction, or other
compromise of such information, and
reassess the sufficiency of any
safeguards in place to control these
risks.
(c) Design and implement safeguards
to control the risks you identity through
risk assessment, including by:
(1) Implementing and periodically
reviewing access controls, including
technical and, as appropriate, physical
controls to:
(i) Authenticate and permit access
only to authorized users to protect
against the unauthorized acquisition of
customer information; and
(ii) Limit authorized users’ access
only to customer information that they
need to perform their duties and
functions, or, in the case of customers,
to access their own information;
(2) Identify and manage the data,
personnel, devices, systems, and
facilities that enable you to achieve
business purposes in accordance with
their relative importance to business
objectives and your risk strategy;
(3) Protect by encryption all customer
information held or transmitted by you
both in transit over external networks
and at rest. To the extent you determine
that encryption of customer
information, either in transit over
external networks or at rest, is
infeasible, you may instead secure such
customer information using effective
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alternative compensating controls
reviewed and approved by your
Qualified Individual;
(4) Adopt secure development
practices for in-house developed
applications utilized by you for
transmitting, accessing, or storing
customer information and procedures
for evaluating, assessing, or testing the
security of externally developed
applications you utilize to transmit,
access, or store customer information;
(5) Implement multi-factor
authentication for any individual
accessing any information system,
unless your Qualified Individual has
approved in writing the use of
reasonably equivalent or more secure
access controls;
(6)(i) Develop, implement, and
maintain procedures for the secure
disposal of customer information in any
format no later than two years after the
last date the information is used in
connection with the provision of a
product or service to the customer to
which it relates, unless such
information is necessary for business
operations or for other legitimate
business purposes, is otherwise required
to be retained by law or regulation, or
where targeted disposal is not
reasonably feasible due to the manner in
which the information is maintained;
and
(ii) Periodically review your data
retention policy to minimize the
unnecessary retention of data;
(7) Adopt procedures for change
management; and
(8) Implement policies, procedures,
and controls designed to monitor and
log the activity of authorized users and
detect unauthorized access or use of, or
tampering with, customer information
by such users.
(d)(1) Regularly test or otherwise
monitor the effectiveness of the
safeguards’ key controls, systems, and
procedures, including those to detect
actual and attempted attacks on, or
intrusions into, information systems.
(2) For information systems, the
monitoring and testing shall include
continuous monitoring or periodic
penetration testing and vulnerability
assessments. Absent effective
continuous monitoring or other systems
to detect, on an ongoing basis, changes
in information systems that may create
vulnerabilities, you shall conduct:
(i) Annual penetration testing of your
information systems determined each
given year based on relevant identified
risks in accordance with the risk
assessment; and
(ii) Vulnerability assessments,
including any systemic scans or reviews
of information systems reasonably
designed to identify publicly known
security vulnerabilities in your
information systems based on the risk
assessment, at least every six months;
and whenever there are material
changes to your operations or business
arrangements; and whenever there are
circumstances you know or have reason
to know may have a material impact on
your information security program.
(e) Implement policies and
procedures to ensure that personnel are
able to enact your information security
program by:
(1) Providing your personnel with
security awareness training that is
updated as necessary to reflect risks
identified by the risk assessment;
(2) Utilizing qualified information
security personnel employed by you or
an affiliate or service provider sufficient
to manage your information security
risks and to perform or oversee the
information security program;
(3) Providing information security
personnel with security updates and
training sufficient to address relevant
security risks; and
(4) Verifying that key information
security personnel take steps to
maintain current knowledge of changing
information security threats and
countermeasures.
(f) Oversee service providers, by:
(1) Taking reasonable steps to select
and retain service providers that are
capable of maintaining appropriate
safeguards for the customer information
at issue;
(2) Requiring your service providers
by contract to implement and maintain
such safeguards; and
(3) Periodically assessing your service
providers based on the risk they present
and the continued adequacy of their
safeguards.
(g) Evaluate and adjust your
information security program in light of
the results of the testing and monitoring
required by paragraph (d) of this
section; any material changes to your
operations or business arrangements;
the results of risk assessments
performed under paragraph (b)(2) of this
section; or any other circumstances that
you know or have reason to know may
have a material impact on your
information security program.
(h) Establish a written incident
response plan designed to promptly
respond to, and recover from, any
security event materially affecting the
confidentiality, integrity, or availability
of customer information in your control.
Such incident response plan shall
address the following areas:
(1) The goals of the incident response
plan;
(2) The internal processes for
responding to a security event;
(3) The definition of clear roles,
responsibilities, and levels of decision-
making authority;
(4) External and internal
communications and information
sharing;
(5) Identification of requirements for
the remediation of any identified
weaknesses in information systems and
associated controls;
(6) Documentation and reporting
regarding security events and related
incident response activities; and
(7) The evaluation and revision as
necessary of the incident response plan
following a security event.
(i) Require your Qualified Individual
to report in writing, regularly and at
least annually, to your board of directors
or equivalent governing body. If no such
board of directors or equivalent
governing body exists, such report shall
be timely presented to a senior officer
responsible for your information
security program. The report shall
include the following information:
(1) The overall status of the
information security program and your
compliance with this part; and
(2) Material matters related to the
information security program,
addressing issues such as risk
assessment, risk management and
control decisions, service provider
arrangements, results of testing, security
events or violations and management’s
responses thereto, and
recommendations for changes in the
information security program.
■ 6. Revise § 314.5 to read as follows:
§ 314.5 Effective date.
Section 314.4(a), (b)(1), (c)(1) through
(8), (d)(2), (e), (f)(3), (h), and (i) are
effective as of December 9, 2022.
■ 7. Add § 314.6 to read as follows:
§ 314.6 Exceptions.
Section 314.4(b)(1), (d)(2), (h), and (i)
do not apply to financial institutions
that maintain customer information
concerning fewer than five thousand
consumers.
By direction of the Commission,
Commissioners Phillips and Wilson
dissenting.
April Tabor,
Secretary.
Note: The following appendix will not
appear in the Code of Federal Regulations.
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70309	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
1 16 CFR part 314. Pursuant to the Gramm Leach
Bliley Act (‘‘GLB’’ or ‘‘GLBA’’), Public Law 106–
102, 113 Stat. 1338 (1999) (codified as amended in
scattered sections of 12 and 15 U.S.C.), the
Commission promulgated the Safeguards Rule in
2001.
2 See, e.g., 2020 Internet Crime Report, Fed. Bur.
Investigations,at 20 (Mar. 2021) (reporting
consumer loss of over $128 million resulting from
corporate data breaches to those who filed
complaints in 2020 alone); Int’l Bus. Mach, Cost of
a Data Breach, at 4 (2021) (estimating that the
average cost of single data breach has risen to $4.24
million).
3 2013 Identity Fraud Report: Data Breaches
Becoming a Treasure Trove for Fraudsters, Javelin
Strategy, at 1 (Feb. 2013) (reporting that 1 in 4
recipients of a data breach notification become
victims of identity theft); Michelle Singletary, Your
online profile may help identity thieves,
Washington Post (Feb. 28, 2012), https://
www.washingtonpost.com/business/economy/
michelle-singletary-your-online-profile-may-help-
identity-thieves/2012/02/28/gIQAXFjygR_story.html
(reporting that recipients of data breach letters are
9.5% more likely to suffer identity theft).
4 See Erika Harrell, Victims of Identity Theft,
2018, U.S. Dep’t of Just., at 1 (Apr. 2021), https://
bjs.ojp.gov/content/pub/pdf/vit18.pdf.
5 See 2021 Consumer Aftermath Report, Identity
Theft Resource Center (2021), at 6 (finding that in
a study of 427 identity crime victims, 21% of them
suffered losses of over $20,000).
6 The Commission first sought public comments
on the proposed amendments in April 2019. See
Privacy of Consumer Financial Information Rule
Under the Gramm-Leach-Bliley Act, 84 FR 13150;
Standards for Safeguarding Customer Information,
84 FR 13158 (April 4, 2019). The agency received
almost 50 comments from consumer groups,
industry associations, and data security experts. See
FTC Seeks Comment on Proposed Amendments to
Safeguards and Privacy Rules, 16 CFR part 314,
Project No. P145407, (FTC–2019–0019) (‘‘2019
Safeguards and Privacy NPRM ’’), https://
www.regulations.gov/docket/FTC-2019-0019/
document. Further, the Commission conducted a
workshop discussing the proposed amendments
with information security professionals and experts,
including IT staff from financial institutions
covered by the Safeguards Rule. See Transcript,
Information Security and Financial Institutions: An
FTC Workshop to Examine Safeguards Rule, Fed.
Trade Comm’n (July 13, 2020) (‘‘Safeguards
Workshop’’), https://www.ftc.gov/system/files/
documents/public_events/1567141/transcript-glb-
safeguards-workshop-full.pdf. Connected with the
workshop, the Commission sought and received
another round of public comments on the
amendments. The eleven relevant public comments
relating to the subject matter of the July 13, 2020,
workshop can be found here: Postponement of
Public Workshop Related to Proposed Changes to
the Safeguards Rule, 85 FR 23354 (FTC–2020–0038)
(Apr. 27, 2020) (‘‘Workshop Comment Docket’’),
https://www.regulations.gov/document/FTC-2020-
0038-0001.
7 See, e.g., Electronic Privacy Information Center,
Comment Letter No. 55 on 2019 Safeguards and
Privacy NPRM (FTC–2019–0019), at 3 (Aug. 1,
2019) (citing dramatic increase in data breaches at
financial services firms affecting millions of
consumers), https://www.regulations.gov/comment/
FTC-2019-0019-0055; Consumer Reports, Comment
Letter No. 52 on 2019 Safeguards and Privacy
NPRM (FTC–2019–0019) (Aug. 2, 2019), https://
www.regulations.gov/comment/FTC-2019-0019-
0052 (noting several high profile data breaches at
financial institutions as evidence for the need for
stronger regulation); Inpher, Inc., Comment Letter
No. 50 on 2019 Safeguards and Privacy NPRM
(FTC–2019–0019), at 1 (Aug. 1, 2019), https://
www.regulations.gov/comment/FTC-2019-0019-
0050 (pointing to major breaches at financial
institutions as evidence for the need of stronger
security regulations); Independent Community
Bankers of America, Comment Letter No. 35 on
2019 Safeguards and Privacy NPRM (FTC–2019–
0019) (Aug. 2, 2019), https://www.regulations.gov/
comment/FTC-2019-0019-0035 (noting that FTC-
regulated financial institutions are subject to less
stringent security requirements than those regulated
by banking agencies, even though many handle the
same types of information as those financial
institutions); National Consumer Law Center et al.,
Comment Letter No. 58 on 2019 Safeguards and
Privacy NPRM (FTC–2019–0019) (Aug. 2, 2019),
https://www.regulations.gov/document/FTC-2019-
0019-0058 (arguing that the recent Equifax breach
showed the need for strengthening the Safeguards
Rule); Cisco Systems, Inc., Comment Letter No. 51
on 2019 Safeguards and Privacy NPRM (FTC–2019–
0019) (Aug. 2, 2019), https://www.regulations.gov/
document/FTC-2019-0019-0051 (noting that
sophisticated hacking techniques used in state
sponsored attacks are likely to be adopted by ‘‘more
garden variety, less sophisticated hackers.’’);
Safeguards Workshop, at 24–26 (July 13, 2020)
(remarks of Chris Cronin) (stating that many
companies do not conduct complete or adequate
risk assessments). Id. at 38–39 (remarks of Serge
Jorgensen) (noting that businesses’ understanding of
the need for security has improved, but that they
continue to struggle to implement controls across
business units). Id. at 39–41 (remarks of Chris
Cronin) (stating that, ‘‘as a rule,’’ businesses of all
sizes are ‘‘behind’’ on cybersecurity, attributing this
in part to consultants whose advice about
reasonable security is motivated by a desire to
‘‘make the clients happy’’). Id. at 43 (remarks of
Pablo Molina) (citing ‘‘the mounting losses that
come from cybercrime’’ as evidence that many
businesses are ‘‘falling behind’’ cybercriminals). Id.
at 114 (remarks of Brian McManamon) (noting that
‘‘the proposed changes are the minimum necessary
to have an effective security program in place.’’). Id.
at 44 (remarks of Sam Rubin) (noting that, in his
experience, companies make significant
investments in technical security measures but that
investment in personnel to oversee and use those
measures is ‘‘a huge shortcoming that I’m seeing in
the field.’’); The Clearing House Association LLC,
Comment Letter No. 49 on 2019 Safeguards and
Privacy NPRM (FTC–2019–0019), at 7–9 (Aug. 2,
2019), https://www.regulations.gov/comment/FTC-
2019-0019-0049 (citing a 2018 study by the Center
for Financial Inclusion that showed widespread
data security failures among financial technology
companies around the globe).
8 Press Release, Fed. Trade Comm’n, Equifax to
Pay $575 Million as Part of Settlement with FTC,
CFPB, and States Related to 2017 Data Breach, (July
22, 2019), https://www.ftc.gov/news-events/press-
releases/2019/07/equifax-pay-575-million-part-
settlement-ftc-cfpb-states-related.
9 See infra, note 7.
10 See, e.g., for Single Qualified Individual
Requirement: National Consumer Law Center et al.,
Continued
Appendix—Statements Issued on
October 27, 2021
Statement of Chair Lina M. Khan Joined by
Commissioner Rebecca Kelly Slaughter
Regarding Regulatory Review of the
Safeguards Rule
Today the FTC is significantly
strengthening the Safeguards Rule,1 first
promulgated by the FTC twenty years ago
pursuant to a Congressional directive to
protect personal information that is stored by
financial institutions. This revamping—the
first time in the Rule’s history—is sorely
needed. In the twenty years since the Rule
was first issued, the complexity of
information security has increased
drastically, the use of computer networks in
every aspect of life has expanded
exponentially, and, most notably, an
unending chain of damaging data breaches
caused by inadequate security have cost
Americans heavily.2 The amendments
adopted today require financial institutions
to develop information security programs
that can meet the challenges of today’s
security environment.
For Americans, the harms stemming from
the types of security vulnerabilities that this
Rule addresses are all too real. Victims of
breaches have their most sensitive
information exposed, making them more
vulnerable to identity theft, phishing attacks,
and other forms of fraud.3 In 2018, almost 10
percent of Americans suffered some form of
identity theft, costing many of them
hundreds of dollars and dozens of hours of
time, an experience that many describe as
distressing.4 For some, the cost is much
higher, with victims losing tens of thousands
of dollars.5
The Rule amendments the FTC is issuing
today are strongly supported by the evidence
in the record.6 The evidence gathered from
information security experts, industry
associations, and consumer groups—those
with hands-on experience in the area and
knowledge of the field—decisively show that
the amendments are necessary. Of course, all
of this information supplements the
experience that Commission staff has
obtained over twenty years of enforcing the
Rule, and gained through investigations of
companies’ data security practices under the
FTC’s deception and unfairness authority.
The dissent’s conclusion that these
amendments are unnecessary is belied by
both the reality of rampant data security
breaches as well as the robust evidentiary
record. The recent history of major data
breaches affecting millions of consumers
shows that more needs to be done to protect
consumers’ sensitive information. Despite the
increasing sophistication of cyberattacks,
many businesses continue to offer inadequate
security.7 In particular, the massive Equifax
breach, which the FTC alleged was caused by
inadequate data security that could have
been easily corrected by the company, is a
glaring example of how a financial
institution’s lax security practices can have
devastating consequences for Americans.8
The dissent’s suggestion that our current
framework is sufficient falls flat in the face
of such a stark example of the harm that can
arise from avoidable lax security practices by
covered financial institutions. Moreover, the
dissent’s complaint that the rule is also
informed by evidence arising from breaches
and practices occurring in other types of
industries misses the mark. Not only is there
substantial evidence in the rulemaking
record clearly illustrating security lapses of
financial institutions that are covered by the
Rule, 9 but the implication that we shouldn’t
use our broader knowledge of common
security pitfalls is unwise.
The record evidence also shows that the
amendment’s requirements track bedrock
principles of data security and represent
proven elements of effective data security
programs that reduce the risk of breaches.10
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supra note 7, at 3 (arguing that a clear line of
reporting with a single responsible individual could
have prevented the Equifax consumer data breach);
Safeguards Workshop, at 182–84 (remarks of
Adrienne Allen) (stating that without a single
responsible individual, information security staff
‘‘can fall into traps of each relying on someone else
to make a hard call . . . [In a program without a
single coordinator] issues can sometimes fall
through the cracks.’’). Id. at 184–85 (remarks of
Michele Norin) (‘‘I think it’s extremely important to
have a person in front of the information security
program. I think that there are so many components
to understand, to manage, to keep an eye on. I think
it’s difficult to do that if it’s part of someone else’s
job. And so I found that it’s extremely helpful to
have a person in charge of that program just from
a pure basic management perspective and
understanding perspective.’’); Risk Assessment
Requirement: Id. at 25 (remarks of Chris Cronin)
(stating that evaluating the likelihoods and impacts
of potential security risks and evaluating existing
controls is an important component of a risk
assessment). Id. at 29–30 (remarks of Serge
Jorgensen) (emphasizing the importance of risk
assessments as tools for adjusting existing security
measures to account for both current and future
security threats); Encryption Requirement:
Princeton University Center for Information
Technology Policy, Comment Letter No. 54 on 2019
Safeguards and Privacy NPRM (FTC–2019–0019), at
3 (Aug. 2, 2019), https://www.regulations.gov/
document/FTC-2019-0019-0054 (noting the
effectiveness of encryption); Inpher, Inc., supra note
7, at 4; Safeguards Workshop, at 225 (remarks of
Matthew Green) (noting website usage of encryption
is above 80 percent; ‘‘Let’s Encrypt’’ provides free
TLS certificates; and costs have gone down to the
point that if a financial institution is not using TLS
encryption for data in motion, it is making an
unusual decision outside the norm). Id. at 106
(remarks of Rocio Baeza) (‘‘[T]he encryption of data
in transit has been standard. There’s no pushback
with that.’’); Multifactor Authentication
Requirement: Princeton University Center for
Information Technology Policy, supra note 10, at 6–
7; Electronic Privacy Information Center, supra,
note 7, at 8; National Consumer Law Center et al.,
supra note 7, at 2; Safeguards Workshop, at 102
(remarks of Brian McManamon) (stating that his
company TECH LOCK supports requiring multi-
factor authentication for users connecting from
internal networks). Id. at 266 (remarks of Matthew
Green) (explaining that passwords are not enough
of an authentication feature but when MFA is used
and deployed, the defenders can win against
attackers). Id. at 239 (describing how because smart
phones have modern secure hardware processors,
biometric sensors and readers built in, increasingly
consumers can get the security they need through
the devices they already have by storing
cryptographic authentication keys on the devices
and then using the phone to activate them);
Incident Response Plan: Credit Union National
Association, Comment Letter No. 30 on 2019
Safeguards and Privacy NPRM (FTC–2019–0019), at
2 (Aug. 1, 2019), https://www.regulations.gov/
document/FTC-2019-0019-0030 (noting that that an
incident response plan ‘‘helps ensure that an entity
is prepared in case of an incident by planning how
it will respond and what is required for the
response.’’). Consumer Reports, supra note 7, at 6
(observing that ‘‘a written incident response plan is
an essential component of a good security
system.’’); HITRUST, Comment Letter No. 18 on
2019 Safeguards and Privacy NPRM (FTC–2019–
0019), at 2 (July 1, 2019), https://
www.regulations.gov/document/FTC-2019-0019-
0018 (commenting that incident response plans can
help organizations ‘‘to better allocate limited
resources.). Safeguards Workshop, at 52 (remarks of
Serge Jorgenson) (observing that a prompt response
to an incident can prevent a ‘‘threat actor running
around in my environment for days, months, years,
and able to access anything they want.’’); Board
Reporting Requirement: Workshop participants
Adrienne Allen, Karthik Rangarajan, and Michele
Norin each emphasized that such reporting can aid
decision making. See Safeguards Workshop, at 201–
09; see also Rocio Baeza, Comment Letter No. 12
on Workshop Comment Docket (FTC–2020–0038),
at 3–8 (Aug. 12, 2020), https://www.regulations.gov/
comment/FTC-2020-0038-0012 (supporting
requirement and providing sample report form and
compliance questionnaire); Juhee Kwon et al., The
Association Between Top Management Involvement
and Compensation and Information Security
Breaches, J. L. Info. Sys., at 219–236 (2013) (‘‘. . .
the involvement of an IT executive decreases the
probability of information security breach reports
by about 35 percent . . .’’); Julia L. Higgs et al., The
Relationship Between Board-Level Technology
Committees and Reported Security Breaches, J. L.
Info. Sys., at 79–98 (2016) (‘‘[A]s a technology
committee becomes more established, its firm is not
as likely to be breached. To obtain further evidence
on the perceived value of a technology committee,
this study uses a returns analysis and finds that the
presence of a technology committee mitigates the
negative abnormal stock returns arising from
external breaches.’’).
11 16 CFR 314.4(c)(1).
12 16 CFR 314.4(c)(2).
13 16 CFR 314.4(c)(8).
14 16 CFR 314.4(c)(3) and 314.4(c)(5).
15 Compl. for Permanent Injunction & Other
Relief., FTC v. Equifax, Inc., No. 1:19–mi–99999–
UNA (N.D. Ga. July 22, 2019) ¶ 17.
16 Id. ¶ 22.E.
17 Id. ¶ 22.F.
18 While the dissent questions the requirements in
the Rule regarding elevating security issues to the
top levels of the corporate structure, research
supports these requirements. Boards are becoming
increasingly involved in cybersecurity governance,
as demonstrated by surveys of practitioners and the
growth of literature aimed at educating board
members on cybersecurity. Some studies suggest
that Board attention to data security decisions can
dramatically improve data safeguarding. For
example, one study found a 35% decrease in the
probability of information security breaches when
companies include the Chief Information Security
Officer (or equivalent) in the top management team
and the CISO has access to the board. See Juhee
Kwon et al., supra note 10. see also Safeguards
Workshop, at 201–09.
19 U.S. H. Rep. Comm. on Oversight and Gov.
Reform, Majority Staff Report on The Equifax Data
Breach, 115th Cong., at 55–62 (Dec. 2018).
20 See, e.g., Safeguards Workshop, at 267 (remarks
of Wendy Nather) (‘‘we have a lot more options, a
lot more technologies today than we did before that
are making both of these solutions, both encryption
and MFA, easier to use, more flexible, in some cases
cheaper, and we should be encouraging their
adoption wherever possible.’’). Id. at 265–66
(remarks of Matthew Green) (‘‘I think that we’re in
a great time when we’ve reached the point where
we can actually mandate that encryption be
used. . . . And we’ve reached the point where now
it is something that’s come to be and we can
actually build well.’’). Id. at 229–30 (remarks of
Randy Marchany) (noting that encryption is already
built into the Microsoft Office environment and that
a number of Microsoft products, such as
The amended Rule requires that financial
institutions’ information security plans
address such core concepts as controlling
who is accessing their system,11
understanding their system,12 monitoring
what users do in their system,13 and
protecting the information contained in their
system.14 More particularly, it also requires
encryption of customer information and the
use of multifactor authentication. Adopting
these practices will reduce the chances of a
breach occurring.
In fact, it is likely that the massive breach
at Equifax could have been prevented or
mitigated by adopting practices required by
these amendments. For example, the
Commission’s complaint alleged that the
vulnerability that led to the breach was not
detected for four months because Equifax’s
automated vulnerability scanner was not
configured to scan all of the networks in the
system, something that could have been
prevented if Equifax had performed an
adequate inventory of its system as required
by § 314.4(c)(2) of the amended Rule.15
Equifax allegedly did not encrypt the data of
145 million consumers as required by
§ 314.4(c)(3) of the amended Rule; such
encryption might have prevented the
intruders from misusing individuals’
sensitive information, even if they were able
to obtain it.16 In addition, the complaint
charged that Equifax did not adequately
monitor activity on its network, which
allowed intruders to access and use their
network undetected for months; such
monitoring will be required by
§ 314.4(c)(8).17 Finally, and perhaps most
importantly, Equifax split authority over its
information security program between two
people, which caused failures of
communications and oversight.18 Indeed, the
U.S. House Committee on Oversight and
Government identified Equifax’s organization
as one of the major causes of the breach.19
Appointing a single Qualified Individual as
the coordinator of Equifax’s information
security system, as required by § 314.4(a) of
the amended Rule, could have helped
prevent or limit the scope of one of the
largest breaches in American history. By
implementing the measures required in the
amended Rule, financial institutions will
prevent or mitigate many future breaches,
protecting consumers and their information.
There is also no support for the dissent’s
notion that the amendments eliminate
financial institutions’ flexibility in a way that
will hurt smaller businesses. The
amendments require that information
security programs address certain aspects of
security, but do not prescribe any particular
method for doing so. Specifically, the
amended Rule requires that the information
security program address areas such as access
control, change management, information
disposal, and monitoring user activity, but it
does not require that financial institutions
take any particular action in those areas. In
fact, the Rule recognizes the concerns of
small businesses and adopts appropriate
flexibilities. Section 314.6 of the revised Rule
exempts financial institutions that maintain
information concerning fewer than 5,000
consumers from certain requirements. In
addition, financial institutions with smaller
and simpler systems may determine that
minimal procedures are required in those
areas, and they retain flexibility under these
amendments to follow that route. Moreover,
the record contains significant evidence that
there are free and low-cost solutions for
smaller businesses with more modest data
security needs.20
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Spreadsheets, Excel, Docs, and PowerPoint, support
that encryption feature). Id. at 225. Id. at 106
(Remarks of Rocio Baeza) (‘‘[T]he encryption of data
in transit has been standard. There’s no pushback
with that.’’). Id. at 74 (remarks of James Crifasi)
(stating that car dealerships can rely on existing
staff for the role of Qualified Individual). Id. at 78–
79 (remarks of Lee Waters) (stating that any
dealership with any IT staff at all would have
someone who could assume the role of ‘‘qualified
individual,’’ perhaps requiring some additional
research or outside help). Id. at 81–82 (remarks of
Rocio Baeza) (stating that companies may use an
existing employee for the role and ‘‘for any areas
where there may be skill gaps, that can be
supplemented with either certifications or some
type of education.’’). Id. at 89–90 (remarks of Brian
McManamon) (noting that the size of a financial
institution and the amount and nature of the
information that it holds factor into an appropriate
information security program); Presentation Slides,
Inf. Security & Fin. Inst.: An FTC Workshop of GLB
Safeguards, at 27–28 (July 13, 2020) (slides
Accompanying remarks of Rocio Baeza, ‘‘Models for
Complying to the Safeguards Rule Changes)
(‘‘Safeguards Workshop Presentation Slides’’)
https://www.ftc.gov/system/files/documents/
public_events/1567141/slides-glb-workshop.pdf
(describing three different compliance models: In-
house, outsource, and hybrid, with costs ranging
from $199 per month to more than $15,000 per
month). Safeguards Workshop, at 81–83 (remarks of
Rocio Baeza) (describing three compliance models
in more detail); Safeguards Workshop Presentation
Slides, at 29 (remarks of Brian McManamon,
‘‘Sample Pricing’’) (estimating the cost of
cybersecurity services based on number of
endpoints). Id. at 83–85.
1 Public Law 106–102, 113 Stat. 1338 (1999).
Notably, even as it transferred authority for other
consumer financial regulation to the Consumer
Financial Protection Bureau in the Dodd-Frank Act,
Congress left this rulemaking authority with the
Commission, a vote of confidence in our approach.
15 U.S.C. 6804(a)(1).
2 16 CFR part 314.
3 See, e.g., Federal Trade Commission, Statement
Marking the FTC’s 50th Data Security Settlement,
at 1 (Jan. 31, 2014), https://www.ftc.gov/system/
files/documents/cases/140131gmrstatement.pdf
(‘‘FTC Data Security Statement’’) (‘‘Through its
settlements, testimony, and public statements, the
Commission has made clear that it does not require
perfect security; reasonable and appropriate
security is a continuous process of assessing and
addressing risks; there is no one-size-fits-all data
security program; and the mere fact that a breach
occurred does not mean that a company has
violated the law.’’); see also Prepared Statement of
the Federal Trade Commission: Before the
Committee on Homeland Security and
Governmental Affairs Permanent Subcommittee on
Investigations, 116 Cong. 3 (2019) (statement of
Andrew Smith, Director, Bureau of Consumer
Protection) (‘‘[t]here is no one-size-fits-all data
security program . . .’’), https://www.ftc.gov/
system/files/documents/public_statements/
1466607/commission_testimony_re_data_security_
senate_03072019.pdf. Federal Trade Commission,
Stick with Security: A Business Blog Series (Oct.
2017), https://www.ftc.gov/news-events/blogs/
business-blog/2017/10/stick-security-ftc-resources-
your-business.
4 FTC Notice of Proposed Rulemaking, 84 FR
13158 (Apr. 4, 2019), https://
www.federalregister.gov/documents/2019/04/04/
2019-04981/standards-for-safeguarding-customer-
information (‘‘The Commission continues to believe
that a flexible, non-prescriptive Rule enables
covered organizations to use it to respond to the
changing landscape of security threats, to allow for
innovation in security practices, and to
accommodate technological changes and
advances.’’).
5 Under the FTC’s unfairness authority, the
Commission brings cases when companies under its
jurisdiction fail to employ ‘‘reasonable’’ security.
FTC Data Security Statement, supra note 3 (‘‘The
touchstone of the Commission’s approach to data
security is reasonableness: a company’s data
security measures must be reasonable and
appropriate in light of the sensitivity and volume
of consumer information it holds, the size and
complexity of its business, and the cost of available
tools to improve security and reduce
vulnerabilities.’’).
6 See, e.g., In the matter of Ascension Data &
Analytics, LLC, FTC File No. 1923126 (2020),
https://www.ftc.gov/enforcement/cases-
proceedings/192-3126/ascension-data-analytics-llc-
matter; U.S. v. Mortgage Solutions FCS, Inc., Civ.
Action No. 4:20–cv–110 (N.D. Cal 2020), https://
www.ftc.gov/enforcement/cases-proceedings/182-
3199/mortgage-solutions-fcs-inc; FTC v. Equifax,
Inc., Civ. Action No. 1:19–cv–03297–TWT (N.D. Ga.
2019), https://www.ftc.gov/enforcement/cases-
proceedings/172-3203/equifax-inc.
7 Dissenting Statement of Commissioner Noah
Joshua Phillips and Commissioner Christine S.
Wilson, Review of Safeguards Rule (Mar. 5, 2019),
https://www.ftc.gov/system/files/documents/
public_statements/1466705/reg_review_of_
safeguards_rule_cmr_phillips_wilson_dissent.pdf;
See, e.g., Noah Joshua Phillips (@FTCPhillips),
Twitter (Mar. 5, 2019, 3:08 p.m.), https://
twitter.com/FTCPhillips/status/
1103024596247289867 (‘‘A reexamination of the
Rule may indeed be appropriate and necessary; but,
before we borrow from other existing schemes, we
must first understand whether the existing Rule is
inadequate for its purpose and whether the data
supports the efficacy of the alternatives.’’); Christine
S. Wilson, Remarks at NAD 2020, One Step
Forward, Two Steps Back: Sound Policy on
Consumer Protection Fundamentals 7–8 (Oct. 5,
2020), https://www.ftc.gov/system/files/documents/
public_statements/1581434/wilson_remarks_at_
nad_100520.pdf.
We believe that these amendments
represent a much-needed step forward in
protecting Americans’ data security. Given
growing recognition that the requirements
captured in the Rule represent best practices,
some financial institutions seem to have
already taken appropriate steps to protect
customers’ data and meet the requirements
set out in the amended Rule. It is important,
though, to require those that lag behind to
strengthen their security and prevent future
breaches before they occur, rather than in the
wake of a devastating breach after the damage
has already been done.
Joint Statement of Commissioners Noah
Joshua Phillips and Christine S. Wilson in
the Matter of the Final Rule Amending the
Gramm-Leach-Bliley Act’s Safeguards Rule
In 1999, Congress passed the Gramm-
Leach-Bliley Act, which charged the Federal
Trade Commission (the ‘‘Commission’’) with
promulgating and enforcing a regulation to
ensure that financial firms take care to
safeguard the information they collect from
consumers.1 The Safeguards Rule 2 has
established more data security obligations for
consumer financial data than for data
collected by non-financial firms, a gap that
underlies our view—shared by our
colleagues—that congressional data security
legislation is warranted.
One hallmark of the Safeguards Rule is its
recognition that, in a world of continuously
evolving threats and standards, a one-size-
fits-all approach to data security may not
work. Under Democratic and Republic
leadership, the Commission has repeatedly
emphasized this principle.3 We have
traditionally eschewed an overly prescriptive
approach, both to data security in general
and to the Safeguards Rule itself.4 The FTC
has never demanded ‘‘perfect’’ security
because the Commission has recognized that
data security is neither cost- nor
consequence-free, and often requires
tradeoffs. 5 At the same time, during our
tenure, the Commission has continued to
enforce data security standards vigorously,
including those embodied in the Safeguards
Rule.6
In March 2019, the Commission approved
a Notice of Proposed Rulemaking (‘‘NPRM’’)
proposing additional requirements to the
Safeguards Rule. While we recognize the
value in regularly reviewing our rules and
updating them as needed, we dissented then
because the proposal lacked data
demonstrating the need for and efficacy of
the proposed amendments.7
We appreciate Staff’s diligent work on this
rule and many of the modifications made to
the original proposal. The Federal Register
Notice does a commendable job of presenting
the full panoply of comments that the
Commission received. The FTC is at its best
when it seeks input from experts, industry,
and consumer groups; this rulemaking
process reflects a commitment to that
approach. But the comment period did not
produce data demonstrating that the previous
iteration of the rule was inadequate, or that
the costs and consequences of the new
prescriptive obligations will translate into
actual consumer safeguards. That was our
concern, and the comments did not allay it.
In fact, as several commenters observed,
the new prescriptive requirements could
weaken data security by diverting finite
resources towards a check-the-box
compliance exercise and away from risk
management tailored to address the unique
security needs of individual financial
institutions. It is ironic that the revisions
mandate a risk assessment and then order
firms to prioritize specified precautions
ahead of the risks and needs counseled by
that assessment. The revisions also impose
intrusive corporate governance obligations
wholly unsupported by record evidence of
prevalent failures at the senior managerial
level.
For these reasons, which we explain more
fully below, we dissent.
The Record Fails To Provide a Basis for the
New Requirements
We expressed concern in March 2019 that
some of the proposals in the NPRM tracked
issues that arose in cases involving firms not
covered by the Safeguards Rule. That is,
those failures occurred at companies to
which the Safeguards Rule did not apply.
And heightened obligations imposed in a
settlement context, when a company has
engaged in risky and allegedly illegal
behavior, may not be appropriate for all
market participants. We did not see evidence
that covered firms had a systematic
problem—i.e., that the Rule was not
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8 Commenters on the proposed rules reflected
these same concerns. See, e.g, CTIA (comment 34,
NPRM) at 4, https://www.regulations.gov/comment/
FTC/2019-0019-0034 (observing that most examples
cited in the NPRM are from non-financial firms and
arguing that the FTC’s action in Equifax
demonstrated that the agency is able to use to the
current framework effectively); Global Privacy
Alliance (comment 38, NPRM) at 4, https://
www.regulations.gov/comment/FTC/2019-0019-
0038 (the changes to the rules started not from FTC
experience but rather from state laws); Electronic
Transactions Association (comment 27, NPRM),
https://www.regulations.gov/comment/FTC/2019-
0019-0027 (the current rule is effective and there
are no harms that warrant these changes); National
Automobile Dealers Association (comment 46,
NPRM) at 6, https://www.regulations.gov/comment/
FTC/2019-0019-0046 (‘‘[N]ew requirements for all
financial institutions should not be based on
unrelated enforcement actions that may not be
generally applicable to all financial institutions
subject to the Rule.’’).
9 Federal Trade Commission, Data Security,
https://www.ftc.gov/datasecurity.
10 One study cited by commenters pointed toward
widespread problems among fintech firms
‘‘including misuse of cryptography, use of weak
cryptography, and excessive permission
requirements.’’ The Clearing House Association
LLC (comment 49, NPRM) at 7–9, https://
www.regulations.gov/comment/FTC/2019-0019-
0049 (citing a 2018 study by the Center for
Financial Inclusion, https://content.centerfor
financialinclusion.org/wp-content/uploads/sites/2/
2018/09/CFI43-CFI_Online_Security-Final-
2018.09.12.pdf). This study included firms from
around the world and did not indicate that this
limited set of issues arose in U.S. firms covered by
the Safeguards Rule. See also National Automobile
Dealers Association (comment 46, NPRM) at 46,
https://www.regulations.gov/comment/FTC/2019-
0019-0046 (‘‘These requirements have largely not
been proven to be necessary or effective.’’).
Participants at the FTC’s July 2020 Workshop
generally agreed that companies could invest more
in security, but the fact of under-investment does
not mean that these changes to the Safeguards Rule
constitute the best course of action. FTC,
Information Security and Financial Institutions: An
FTC Workshop to Examine Safeguards Rule Tr. at
23–70 (July 13, 2020), https://www.ftc.gov/system/
files/documents/public_events/1567141/transcript-
glb-safeguards-workshop-full.pdf (‘‘Safeguards
Workshop’’).
11 Consumer Reports (comment 52, NPRM),
https://www.regulations.gov/comment/FTC/2019-
0019-0052 at 2. Not all the commenters agreed with
this perspective, and some felt that these rules
would have prevented the Equifax breach. See
National Consumer Law Center and others
(comment 58, NPRM), https://www.regulations.gov/
comment/FTC/2019-0019-0058. Chair Khan and
Commissioner Slaughter focus on the Equifax
breach to justify the adoption of prescriptive and
complex data security measures, measures that
match the sophistication and complexity of the
consumer financial data managed by one of the
largest credit bureaus. But even assuming the new
rules would have prevented it, one (albeit) high-
profile breach, without more, should not be
extrapolated to an entire industry with diverse
business models housing varied consumer financial
data. Reasonable safeguards for a company like
Equifax, based on its size and complexity, the
nature and scope of its activities, and the sensitivity
of the information involved, would likely outpace
procedures that would be appropriate or reasonable
for a sole proprietorship or small business.
12 While the Final Rule is based on proposals
from New York State Department of Financial
Services (‘‘NYDFS’’), the FTC imposes its
requirements much more broadly than the NYDFS
Cybersecurity Requirements for Financial Services
Companies, 23 NYCRR Pt. 500. The NYDFS
requirements exempt a much larger cross-section of
organizations from the most onerous, prescriptive,
and expensive provisions in their rule. 23 NYCRR
§ 500.19. Nor do the exceptions in the Final Rule,
while helpful, suffice.
13 Unfortunately, this is not the first time this
Commission has emphasized what we can do over
what we should do. See, e.g., Joint Statement of
Commissioners Noah Joshua Phillips and Christine
S. Wilson, In the matter of Resident Home LLC,
Commission File No. 2023179 (Oct. 7, 2021),
https://www.ftc.gov/system/files/documents/
public_statements/1597270/resident_home_
dissenting_statement_wilson_and_phillips_final_
0.pdf; Joint Statement of Commissioners Noah
Joshua Phillips and Christine S. Wilson, U.S. v.
iSpring Water Systems, LLC, Commission File No.
C4611 (Apr. 12, 2019), https://www.ftc.gov/system/
files/documents/public_statements/1513499/
ispring_water_systems_llc_c4611_modified_joint_
statement_of_commissioners_phillips_and_wilson_
4-12.pdf.
14 Cybersecurity Requirements for Financial
Services Companies, 23 NYCRR Pt. 500 (2016).
15 See Consumer Data Industry Association
(comment 36, NPRM) at 2, https://
www.regulations.gov/document?D=FTC-2019-0019-
0036 (noting that the NY rule is too recent and
Congress is debating new legislation that should be
left to Congress to resolve); National Automobile
Dealers Association (comment 46, NPRM) at 46,
https://www.regulations.gov/comment/FTC-2019-
0019-0046 (The new rules ‘‘are premature as they
are based on untested and new standards in a
rapidly changing environment, and in a context
where federal debate is ongoing.’’); New York
Insurance Association (comment 31, NPRM),
https://www.regulations.gov/comment/FTC-2019-
0019-0031 (it is premature to adopt these rules
without the benefit of the state’s experience).
16 We appreciate the time and resources the
NYDFS invested in commenting on our proposed
rule. Though the NYDFS does say that its rules have
‘‘enhanced cybersecurity protection across the
financial industry and fostered an environment in
which the threat of a cyber attack is taken seriously
at all levels of New York’s financial services firms,’’
it offers no supporting data. New York State
Department of Financial Services (comment 40,
NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0040.
17 As several commenters pointed out, the NYDFS
rules are more nuanced that the amendments
introduced today. For instance, under the NYDFS
regulations, certain additional requirements only
apply to a category of sensitive data, a limitation
not carried through to the Safeguards Rule. See, e.g.,
U.S. Chamber of Commerce (comment 33, NPRM),
https://www.regulations.gov/comment/FTC-2019-
0019-0033; CTIA (comment 34, NPRM), https://
www.regulations.gov/comment/FTC/2019-0019-
0034; Electronic Transactions Association
(comment 27, NPRM), https://www.regulations.gov/
comment/FTC/2019-0019-0027. These distinctions
only raise more questions and concerns about
basing our regulations on the New York rules.
18 See, e.g., Fourth Amendment is Not for Sale
Act, S. 1265, 117th Cong. (2021); Data Care Act of
2021, S. 919, 117th Cong. (2021); Data Protection
Act of 2021, S. 2134, 117th Cong. (2021); SAFE
DATA Act, S. 2499, 117th Cong. (2021); Consumer
Online Privacy Rights Act, S. 2968, 116th Cong.
(2019). See also, California Privacy Rights Act of
2020, Cal. Civ. Code § 1798.100 et seq.; Virginia
Consumer Data Protection Act, Va. Code § 59.1–575
et seq.; and Colorado Privacy Act, 2021 Colo. ALS
483, 2021 Colo. Ch. 483, 2021 Colo. SB. 190.
19 Council Directive 2016/679, art. 32 2016 O.J.
(L119).
20 See, e.g., Joseph Menn and Christopher Bing,
Hackers of SolarWinds stole data on U.S. sanctions
policy, intelligence probes, Reuters (Oct. 8, 2021),
https://www.reuters.com/world/us/hackers-
solarwinds-breach-stole-data-us-sanctions-policy-
intelligence-probes-2021-10-07/; Stephanie Kelly
and Jessica Resnick-ault, One password allowed
hackers to disrupt Colonial Pipeline, CEO tells
senators, Reuters (June 8, 2021), https://
www.reuters.com/business/colonial-pipeline-ceo-
tells-senate-cyber-defenses-were-compromised-
working.8 The Commission can—and does—
promote best practices and reasonable care
requirements through speeches, guidance,
reports, and the like, to help financial firms
evaluate whether they are taking proper
precautions.9 But new rules that set concrete
standards for all companies, regardless of
risk, require more justification. Such rules
make companies liable for penalties, and
could focus efforts on compliance to address
penalty deterrence rather than risk.
Dozens of commenters have shared their
views on the Safeguards proposal, and FTC
Staff held a workshop to evaluate the need
to change the Rule. While there is no
shortage of opinions as to the need and
benefits of the proposed changes (nor is there
a shortage of opinions critiquing the new
requirements), this process failed to provide
evidence of market failure or other systemic
problems 10 necessitating the proposed
changes for firms already governed by the
requirements of the Rule. In fact, one
commenter that generally supported the rule
changes noted that it was not clear that the
new rules would have prevented the alleged
lapses that led to the Equifax breach, the
largest Safeguards case on record.11
That these proposals may constitute best
practices appropriate to certain firms or
situations does not justify imposing them on
every firm and in every situation.12 The FTC
historically has been appropriately cautious
in mandating specific security practices, and
we see no sound basis in the rulemaking
record to change that approach.13
The Revised Safeguards Rule Is Premature
In our 2019 statement, we expressed
concern that the proposals in the NPRM were
premature. They are based in large part on
the New York Department of Financial
Service data security rules,14 adopted in
2016. At the same time, Congress and the
Executive Branch were evaluating new
privacy and data security legislation that may
overlap with the proposed amendments.15
Since our original statement, we have been
provided with no additional information on
the impact and efficacy of the NYDFS rules.16
Without this critical input, we do not believe
adopting wholesale the NYDFS approach is
the prudent course.17 We would have been
better served by monitoring the efficacy,
costs and unintended consequences of the
NYDFS rules during this ramp-up period.
Imposing similar rules on far more firms
across a broader array of industries makes
even less sense.
Congress, with the encouragement of the
Commission, has continued to consider
legislative initiatives in this area. Throughout
2019, 2020 and 2021, we saw the release of
several draft bills addressing data security, as
well as privacy.18 And other developments,
such as data security requirements of the
General Data Protection Regulation 19 and
new cybersecurity incidents 20 ensure that
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70313	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
ahead-hack-2021-06-08; Carly Page, The Accellion
data breach continues to get messier, TechCrunch
(July 8, 2021), https://techcrunch.com/2021/07/08/
the-accellion-data-breach-continues-to-get-messier/;
Peter Valdes-Dapena, Volkswagen hack: 3 million
customers have had their information stolen, CNN
(June 11, 2021), https://www.cnn.com/2021/06/11/
cars/vw-audi-hack-customer-information/
index.html.
21 Sen. Roger Wicker, Rep. Cathy McMorris
Rodgers, & Noah Phillips, FTC must leave privacy
legislating to Congress, Wash. Examiner (Sept. 29,
2021), https://www.washingtonexaminer.com/
opinion/op-eds/ftc-must-leave-privacy-legislating-
to-congress. Substance aside, businesses and
consumers need confidence to plan around new
rules. As the recent—and perhaps future—debate
about net neutrality rules has demonstrated, agency
rules are subject to disruptive swings that
undermine such confidence.
22 The Commission itself acknowledges the
importance of flexibility in issuing the Final Rule.
See, e.g., Final Rule at 27 (‘‘The Commission,
however, believes that the elements provide
sufficient flexibilityfor financial institutions to
adopt information security programs suited to the
size, nature, and complexity of their organization
and information systems.’’)
23 See Final Rule; American Council on
Education (comment 24, NPRM) at 13–14, https://
www.regulations.gov/comment/FTC-2019-0019-
0024; Wisconsin Bankers Association (comment 37,
NPRM) at 1–2, https://www.regulations.gov/
comment/FTC-2019-0019-0037; American Financial
Services Association (comment 41, NPRM) at 4,
https://www.regulations.gov/comment/FTC-2019-
0019-0041; National Association of Dealer Counsel
(comment 44, NPRM) at 1, https://
www.regulations.gov/comment/FTC-2019-0019-
0044; National Automobile Dealers Association
(comment 46, NPRM) at 11, https://
www.regulations.gov/comment/FTC-2019-0019-
0046; National Independent Automobile Dealers
Association, (comment 48, NPRM) at 3, https://
www.regulations.gov/comment/FTC-2019-0019-
0048; Gusto and others (comment 11, Workshop) at
2–4, https://www.regulations.gov/comment/FTC-
2019-0019-0011; National Pawnbrokers Association
(comment 3, NPRM) at 2, https://
www.regulations.gov/comment/FTC-2019-0019-
0032; See also Remarks of James Crifasi, Safeguards
Workshop, supra note 10, Tr. at 72–74, https://
www.ftc.gov/system/files/documents/public_events/
1567141/transcript-glb-safeguards-workshop-
full.pdf (study showing that compliance costs are
unaffordable for small businesses).
24 Small Business Administration Office of
Advocacy (comment 28, NPRM) at 3–4, https://
www.regulations.gov/comment/FTC-2019-0019-
0028 (‘‘An agency cannot consider alternatives that
minimize any significant economic impact if the
agency does not know what the economic impact
of the proposed action is.’’).
25 See CTIA (comment 34, NPRM), https://
www.regulations.gov/comment/FTC-2019-0019-
0034 (noting the need for more study on the costs
to competition); U.S. Chamber of Commerce
(comment 33, NPRM) at 4, https://
www.regulations.gov/comment/FTC-2019-0019-
0033 (‘‘Some private organizations can absorb the
added costs, while others cannot.’’). See also
Christine S. Wilson, Remarks at the Future of
Privacy Forum, A Defining Moment for Privacy:
The Time is Ripe for Federal Privacy Legislation 13
(Feb. 6, 2020), https://www.ftc.gov/system/files/
documents/public_statements/1566337/
commissioner_wilson_privacy_forum_speech_02-
06-2020.pdf (‘‘Importantly, the legislative
framework should also consider competition.
Regulations, by their nature, will impact markets
and competition. GDPR may have lessons to teach
us in this regard. Research indicates that GDPR may
have decreased venture capital investment and
entrenched dominant players in the digital
advertising market.’’); Noah Joshua Phillips,
Prepared Remarks at internet Governance Forum
USA, Keep It: Maintaining Competition in the
Privacy Debate (July 27, 2018), https://www.ftc.gov/
system/files/documents/public_statements/
1395934/phillips_-_internet_governance_forum_7-
27-18.pdf (discussing the competition impacts of
new privacy rules).
26 See U.S. Chamber of Commerce (comment 33,
NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0033; Consumer Data Industry
Association (comment 36, NPRM), https://
www.regulations.gov/comment/FTC-2019-0019-
0036; Global Privacy Alliance (comment 38,
NPRM), https://www.regulations.gov/comment/
FTC/2019-0019-0038. While some parts of the rule,
such as encryption requirements, allow security
officials to make a written determination that a
different precaution is appropriate, it seems
unlikely that any individual security official will
risk liability to make such a determination and the
specific requirements here will likely become the
default rule. American Council on Education
(comment 24, NPRM) at 12, https://
www.regulations.gov/comment/FTC-2019-0019-
0024 (‘‘In the absence of a clear delineation by the
Commission of what alternatives an institutional
information security executive might approve that
the Commission considers reasonably equivalent,
and assurance that they are reasonably applicable
in our contexts, that pressure release valve in the
requirement seems unlikely to release much
pressure.’’); Software Information & Industry
Association (comment 29, NPRM) at 3, https://
www.regulations.gov/comment/FTC-2019-0019-
0056 (‘‘The mere threat of a per se law violation
will chill these approvals except in the most
ironclad circumstances, thereby potentially
thwarting industry-wide adoption of new and better
security standards.’’); New York Insurance
Association (comment 31, NPRM), https://
www.regulations.gov/comment/FTC-2019-0019-
0031 (‘‘This runs the risk that companies might feel
compelled to encrypt all consumer data regardless
of whether the CISO’s compensating controls would
be second guessed in the event a company were to
lose unencrypted customer information.’’);
Mortgage Bankers Association (comment 26, NPRM)
at 4, https://www.regulations.gov/comment/FTC-
2019-0019-0026 (noting the obligation to prepare an
incident response plan had ‘‘the potential to cripple
small businesses under the pressure of repeatedly
checking the boxes for potential harmless events.’’).
27 Bank Policy Institute (comment 39, NPRM) at
6, https://www.regulations.gov/comment/FTC-2019-
0019-0039 (‘‘When the sector surveyed its
information security teams in late 2016, CISOs
reported that approximately 40% of their cyber
team’s time was spent on compliance related
matters, not on cybersecurity. Due to one
framework issuance, in particular, the
reconciliation process delayed one firm’s
implementation of a security event monitoring tool
intended to better detect and respond to cyber-
attacks by 3–6 months. With respect to another
issuance, another firm stated that 91 internal
meetings were held to determine how that issuance
aligned with its program and in gathering data for
eventual regulatory requests.’’).
28 See U.S. Chamber of Commerce (comment 33,
NPRM) at 4, https://www.regulations.gov/comment/
FTC-2019-0019-0033 (‘‘the proposed requirements
would increasingly divert company resources
toward compliance and away from risk
management activities that are tailored to
businesses’ unique security needs.’’); Software
Information & Industry Association (comment 29,
NPRM) at 3, https://www.regulations.gov/comment/
FTC-2019-0019-0056 (‘‘The effect of a prescriptive
approach in this enforcement structure is to place
companies in the position of forced compliance
with potentially unnecessary or inapplicable
requirements without the appropriate process for
these covered entities to explain to a supervisory
authority why it is unnecessary.’’); American
Financial Services Association (comment 41,
NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0041. In some cases, asking too
much of small businesses for whom all this is a
substantial undertaking may lead them to fail at
even the basic protections. Safeguards Workshop,
supra note 10, Tr. at 118–19 (July 13, 2020), https://
www.ftc.gov/system/files/documents/public_events/
1567141/transcript-glb-safeguards-workshop-
full.pdf.
29 See Bank Policy Institute (comment 39, NPRM),
https://www.regulations.gov/comment/FTC-2019-
0019-0039; Money Services Round Table (comment
53, NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0053.
30 See Consumer Data Industry Association
(comment 36, NPRM) at 7–8, https://
www.regulations.gov/comment/FTC-2019-0019-
Continued
these issues will continue to draw
congressional attention. The decisions about
tradeoffs in this space are complex and
significant for consumers, business, and
government; intrusive mandates are best left
to the people’s representatives rather than to
the vagaries of the administrative rulemaking
process.21
The Revised Rules Inhibit Flexibility and
Impose Substantial Costs
The Safeguards Rule originally drafted and
evaluated by the Commission embraced a
flexible approach, emphasizing protections
targeted to a company’s size and risk
profile.22 As we wrote in 2019, these new
rules move us away from that approach; that
loss of flexibility will impose costs without
necessarily improving safeguards for
consumer data, which should be the point of
this exercise.
Commenters and the Commission itself
have noted that there are financial impacts to
these new requirements.23 The Small
Business Administration’s Office of
Advocacy stated its belief that the
Commission itself does not appear to
understand fully the economic impact of the
proposed changes to the Safeguards Rule.24
The burden of these new rules may also
reduce competition and innovation, as
smaller firms less able to absorb the financial
costs cede ground to larger firms better
equipped to handle new regulatory
mandates.25
Security itself may also suffer. A series of
specific rules can incentivize companies to
move from a thoughtful assessment of risk
and precautions to a check-the-box exercise
to ensure that they are complying with
regulatory mandates—in other words, from a
focus on real security to an emphasis on rule
compliance.26 One commenter cited data
demonstrating that when security personnel
are busy with compliance and regulatory
response, they have less time to focus on a
firm’s actual security needs.27 Further,
without the flexibility to prioritize, finite
resources may be diverted to areas of lower
risk but higher regulatory scrutiny; 28
commenters noted the irony of mandating a
risk assessment and then ordering firms to
prioritize specified precautions ahead of the
risks and needs counseled by that
assessment.29 And potentially innovative
security practices that address changing
threats and needs may be discouraged.30 As
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70314 	Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
0036 (minimization requirement can impact
innovative uses more broadly).
31 See Cisco Systems Inc. (comment 51, NPRM) at
3, https://www.regulations.gov/comment/FTC-2019-
0019-0051 (noting also in the context of multi-factor
authentication that there will come a time when it
is no longer the ‘‘appropriate baseline’’ and
‘‘covered entities could find themselves in full
compliance with the rule as long as they use access
control technology no less protective than MFA as
defined in the Proposed Amendments.’’).
32 National Automobile Dealers Association
(comment 46, NPRM), https://www.regulations.gov/
comment/FTC-2019-0019-0046.
33 See CTIA (comment 34, NPRM) at 3–5, https://
www.regulations.gov/comment/FTC-2019-0019-
0034 (flexibility in the rule allowed it to keep up
with evolving threats, whereas new rule could limit
innovation); HITRUST Alliance (comment 18,
NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0018 (expressing concern about
creating outdated requirements); The American
Financial Services Association (comment 41,
NPRM), https://www.regulations.gov/comment/
FTC-2019-0019-0041.
34 National Automobile Dealers Association
(comment 46, NPRM) https://www.regulations.gov/
comment/FTC-2019-0019-0046 (arguing that the
Commission needs additional study into the costs
and benefits); See also Consumer Data Industry
Association (comment 36, NPRM), https://
www.regulations.gov/comment/FTC-2019-0019-
0036 (benefits of new rule not justified by
tradeoffs).
35 American Council on Education (comment 24,
NPRM) at 16, https://www.regulations.gov/
comment/FTC-2019-0019-0024; National
Automobile Dealers Association (comment 46,
NPRM) at 41, https://www.regulations.gov/
comment/FTC-2019-0019-0046.
36 U.S. Chamber of Commerce (comment 33,
NPRM) at 12, https://www.regulations.gov/
comment/FTC-2019-0019-0033; National
Automobile Dealers Association (comment 46,
NPRM) at 34–36, https://www.regulations.gov/
comment/FTC-2019-0019-0046.
37 See Final Rule. See also American Council on
Education (comment 24, NPRM) at 14, https://
www.regulations.gov/comment/FTC-2019-0019-
0024 (critiquing the intrusion on personnel
practices).
38 U.S. v. Facebook, Inc., Civ. Action No. 19–cv–
2184 (D.D.C. July 24, 2019), https://www.ftc.gov/
enforcement/cases-proceedings/092-3184/facebook-
inc.
39 These governance rules may not even promote
security. See Consumer Data Industry Association
(comment 36, NPRM), https://www.regulations.gov/
comment/FTC-2019-0019-0036 (arguing that the
annual reporting will become a checkbox exercise).
one commenter noted, ‘‘[e]ven today’s best
practices will be overtaken by future changes
in both technology and the capabilities of
threat actors,’’ 31 and these proscriptive rules
lose the ‘‘self-modernizing’’ nature of flexible
requirements, 32 locking in place the primacy
of current practices.33
The reduction in flexibility and imposition
of these costs must be justified by a
significant reduction in risk or some other
substantial consumer benefit. But the record
provides scant support for these tradeoffs. Or
as one commenter put it:
[A]s with many of these requirements, we
do not take issue with the notion that there
is merit to this step [requiring monitoring],
and that many financial institutions will
implement some version of this control.
However, by making this an explicit, stand-
alone requirement, the Commission is
enshrining costs and efforts that will be
extensive and will likely not be needed in all
circumstances.34
The Rules Involve the FTC in the Internal
Governance Decisions of Covered Firms
The specifics of the proposals also raise
issues, as we expressed in 2019, with regard
to mandating the appropriate level of board
engagement,35 hiring and training
requirements,36 and program accountability
structures.37 We wrote then, and remain
concerned now, that the Commission is
substituting its own judgement about
governance decisions for those of private
companies covered by this Rule.
In certain extraordinary cases involving
clear evidence of management failure, we
have imposed prescriptive governance
obligations on respondents.38 Those rare and
egregious instances cannot justify a similar
approach in a broad rulemaking absent a real
record of widespread corporate
mismanagement or failure at the senior
management level.
The Commission has elected to proceed
with most of these governance requirements,
forcing the hand of management and shifting
their priorities to avoid the risk of regulatory
action, 39 without clear evidence of their need
or efficacy.
Conclusion
Regularly reviewing our rules to ensure
that they address the current environment is
an important part of the FTC’s regular
process. But rules have far-reaching and
frequently unintended impacts in the real
world; when imposing additional legal
obligations in the rulemaking context, we
must do so with great care. The amended
Safeguards Rule replaces a rule that has
worked well for 20 years, a rule that took a
principle-based approach in order to provide
financial institutions flexibility to determine
the appropriate and realistic security
safeguards for their organizations. The record
before us at best fails to convince that the
changes are necessary and at worst raises
concern about the substantial costs and risks
in imposing these amendments. Accordingly,
we dissent.
[FR Doc. 2021–25736 Filed 12–8–21; 8:45 am]
BILLING CODE 6750–01–P
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77499	Federal Register / Vol. 88, No. 217 / Monday, November 13, 2023 / Rules and Regulations
1 Public Law 106–102, 113 Stat. 1338 (1999).
2 See 15 U.S.C. 6801(b), 6805(b)(2).
3 67 FR 36483 (May 23, 2002).
4 Id.
5 84 FR 13158 (Apr. 4, 2019).
6 The 49 relevant public comments received on or
after March 15, 2019, can be found at
Regulations.gov. See FTC Seeks Comment on
Proposed Amendments to Safeguards and Privacy
Rules, 16 CFR part 314, Project No. P145407,
https://www.regulations.gov/docket/FTC-2019-
0019/comments. The 11 relevant public comments
relating to the subject matter of the July 13, 2020,
workshop can be found at: https://
www.regulations.gov/document/FTC-2020-0038-
0001/comment. This notice cites comments using
the last name of the individual submitter or the
name of the organization, followed by the number
based on the last two digits of the comment ID
number.
7 See FTC, Information Security and Financial
Institutions: FTC Workshop to Examine Safeguards
Rule Tr. (July 13, 2020), https://www.ftc.gov/
system/files/documents/public_events/1567141/
transcript-glb-safeguards-workshop-full.pdf.
8 86 FR 70272 (Dec. 9. 2021).
9 84 FR 13158, 13163 (Apr. 4, 2019).
10 Id. at 13169.
11 See Interagency Guidance on Response
Programs for Unauthorized Access to Customer
Information and Customer Notice, 70 FR 15736,
15752 (Mar. 29, 2005) (originally issued by the
Office of the Comptroller of the Currency; the Board
of Governors of the Federal Reserve System; the
Federal Deposit Insurance Corporation; and the
Office of Thrift Supervision) (‘‘At a minimum, an
institution’s response program should contain
procedures for the following: . . . Notifying its
primary Federal regulator as soon as possible when
the institution becomes aware of an incident
involving unauthorized access to or use of sensitive
customer information, as defined below; . . . [and
notifying] customers when warranted’’), https://
www.occ.treas.gov/news-issuances/federal-register/
2005/70fr15736.pdf (emphasis in original).
Authority: 49 U.S.C. 106(f), 106(g); 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
§ 71.1 [Amended]
■ 2. The incorporation by reference in
14 CFR 71.1 of FAA Order JO 7400.11H,
Airspace Designations and Reporting
Points, dated August 11, 2023, and
effective September 15, 2023, is
amended as follows:
Paragraph 5000 Class D Airspace.
* 	* 	* 	* 	*
ASO GA D Eastman, GA [Amended]
Heart of Georgia Regional Airport, GA
(Lat 32°12′59″ N, long 83°07′43″ W)
That airspace extending upward from the
surface to and including 2,500 feet MSL
within a 4.6-mile radius of the Heart of
Georgia Regional Airport. This Class D
airspace area is effective during the specific
dates and times established in advance by a
Notice to Air Missions. The effective date
and time will thereafter be continuously
published in the Chart Supplement.
* 	* 	* 	* 	*
Paragraph 6005 Class E Airspace Areas
Extending Upward From 700 Feet or More
Above the Surface of the Earth.
* 	* 	* 	* 	*
ASO GA E5 Eastman, GA [Amended]
Heart of Georgia Regional Airport, GA
(Lat 32°12′59″ N, long 83°07′43″ W)
That airspace extending upward from 700
feet above the surface within a 7.1-mile
radius of Heart of Georgia Regional Airport.
* 	* 	* 	* 	*
Issued in College Park, Georgia, on
November 7, 2023.
Lisa E. Burrows,
Manager, Airspace & Procedures Team North,
Eastern Service Center, Air Traffic
Organization.
[FR Doc. 2023–25016 Filed 11–9–23; 8:45 am]
BILLING CODE 4910–13–P
FEDERAL TRADE COMMISSION
16 CFR Part 314
RIN 3084–AB35
Standards for Safeguarding Customer
Information
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is issuing a final rule (‘‘Final Rule’’) to
amend the Standards for Safeguarding
Customer Information (‘‘Safeguards
Rule’’ or ‘‘Rule’’) to require financial
institutions to report to the Commission
any notification event where
unencrypted customer information
involving 500 or more consumers is
acquired without authorization.
DATES : The amendments are effective
May 13, 2024.
FOR FURTHER INFORMATION CONTACT:
David Lincicum (202–326–2773),
Division of Privacy and Identity
Protection, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Avenue NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
I. Background
Congress enacted the Gramm Leach
Bliley Act (‘‘GLBA’’) in 1999. 1 The
GLBA provides a framework for
regulating the privacy and data security
practices of a broad range of financial
institutions. Among other things, the
GLBA requires financial institutions to
provide customers with information
about the institutions’ privacy practices
and about their opt-out rights, and to
implement security safeguards for
customer information.
Subtitle A of Title V of the GLBA
required the Commission and other
Federal agencies to establish standards
for financial institutions relating to
administrative, technical, and physical
safeguards for certain information.2
Pursuant to the GLBA’s directive, the
Commission promulgated the
Safeguards Rule in 2002.3 The
Safeguards Rule became effective on
May 23, 2003. 4
II. Regulatory Review of the Safeguards
Rule
On April 4, 2019, the Commission
issued a notice of proposed rulemaking
(‘‘NPRM’’) setting forth proposed
amendments to the Safeguards Rule.5 In
response, the Commission received 49
comments from various interested
parties including industry groups,
consumer groups, and individual
consumers.6 On July 13, 2020, the
Commission held a workshop
concerning the proposed changes and
conducted panels with information
security experts discussing subjects
related to the proposed amendments.7
The Commission received 11 comments
following the workshop. After reviewing
the initial comments to the NPRM,
conducting the workshop, and then
reviewing the comments received
following the workshop, the
Commission issued final amendments to
the Safeguards Rule on December 9,
2021.8
In the NPRM, the Commission
explained that its proposed
amendments to the Safeguards Rule
were based primarily on the
cybersecurity regulations issued by the
New York Department of Financial
Services, 23 NYCRR 500
(‘‘Cybersecurity Regulations’’). 9 The
Commission also noted that the
Cybersecurity Regulations require
covered entities to report security events
to the superintendent of the Department
of Financial Services. 10 Relatedly, for
many years, some other Federal
agencies enforcing the GLBA have
required financial institutions to
provide notice to the regulator, and in
some instances notice to consumers as
well. 11 Although the Commission did
not include a similar reporting
requirement in the NPRM, it did seek
comment on whether the Safeguards
Rule should be amended to require that
financial institutions report security
events to the Commission. Specifically,
the Commission requested comments on
whether such a requirement should be
added and, if so, (1) the appropriate
deadline for reporting security events
after discovery, (2) whether all security
events should require notification or
whether notification should be required
only under certain circumstances, such
as a determination of a likelihood of
harm to customers or that the event
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77500 	Federal Register / Vol. 88, No. 217 / Monday, November 13, 2023 / Rules and Regulations
12 Id.
13 86 FR 70272 (Dec. 9. 2021).
14 See 86 FR 70062, 70067 (Dec. 9, 2021).
15 The 14 relevant public comments received can
be found at Regulations.gov. See FTC Seeks
Comment on Proposed Amendments to Safeguards
and Privacy Rules, 16 CFR part 314, Project No.
P145407, https://www.regulations.gov/docket/FTC-
2021-0071/comments.
16 See Anonymous (Comment 2); Briggs
(Comment 4); Clearing House Association L.L.C.
(‘‘Clearing House’’) (Comment 11); Anonymous
(Comment 14); Securities Industry and Financial
Markets Association (‘‘SIFMA’’) and Bank Policy
Institute (‘‘BPI’’) (‘‘SIFMA/BPI’’) (Comment 15)
(supporting notification requirement for financial
institutions that are not regulated by non-FTC
financial agencies); American Council on Education
(Comment 18) (supporting proposed notice
requirement with revisions); Electronic Privacy
Information Center (‘‘EPIC’’) (Comment 19).
17 See, e.g., Anonymous (Comment 2); Briggs
(Comment 4); The Clearing House (Comment 11) at
2 (describing breaches in the fintech industry).
18 Clearing House (Comment 11) at 1–2.
19 EPIC (Comment 19) at 2.
20 See American Financial Services Association
(‘‘AFSA’’) (Comment 12); Consumer Data Industry
Association (‘‘CDIA’’) (Comment 13); American
Escrow Association (Comment 16); CTIA (Comment
20); National Automobile Dealers Association
(‘‘NADA’’) (Comment 21); U.S. Chamber of
Commerce (Comment 22).
21 See, e.g., AFSA (Comment 12) at 3; CDIA
(Comment 13) at 2–3; CTIA (Comment 20) at 2–4;
NADA (Comment 21) at 2–3; U.S. Chamber of
Commerce (Comment 22) at 3.
22 CTIA (Comment 20) at 6–7.
23 While some States that require notification to
a State agency make companies’ breach
notifications public, see, e.g., N.H. Dep’t of Just.,
Off. of Attorney Gen., Security Breach Notifications,
https://www.doj.nh.gov/consumer/security-
breaches/, other States do not make notifications
public, and as noted above, not all States require
notice to a State government agency. Some non-
governmental sources report breach notifications,
but there is no guarantee that such sources are
comprehensive as they depend in part on reporting
by consumers who received a breach notification
letter. Thus, the Commission could not obtain
comprehensive data relating to breaches at
regulated financial institutions by compiling reports
of breaches from other sources.
24 See, e.g., Clearing House (Comment 11) at 8;
CDIA (Comment 13) at 3; CTIA (Comment 20) at 4.
affects a certain number of customers,
(3) whether such reports should be
made public, (4) whether events
involving encrypted information should
be included in the requirement, and (5)
whether the requirement should allow
law enforcement agencies to prevent or
delay notification if notification would
affect law-enforcement investigations.12
The final rule, which the Commission
published in the Federal Register on
December 9, 2021, did not include a
reporting requirement.13 However, on
the same date, the Commission
published a supplemental notice of
proposed rulemaking (‘‘SNPRM’’) in the
Federal Register, which proposed
further amending the Safeguards Rule to
require financial institutions to report to
the Commission certain security events
as soon as possible, and no later than 30
days after discovery of the event.14
Specifically, the Commission proposed
to require financial institutions to notify
the Commission electronically through a
form located on the FTC’s website about
any security event that resulted or is
reasonably likely to result in the misuse
of customer information affecting at
least 1,000 consumers. The Commission
proposed that the notification include a
limited set of information, consisting of
(1) the name and contact information of
the reporting financial institution, (2) a
description of the types of information
involved in the security event, (3) the
date or the date range of the security
event, if it can be determined, and (4)
a general description of the security
event. In response to the SNPRM, the
Commission received 14 comments
from various interested parties,
including industry groups, consumer
groups, and individual consumers.15
After reviewing the comments, the
Commission now finalizes the proposed
amendments with minor changes.
III. Overview of Final Rule
The Final Rule requires financial
institutions to report notification events,
defined as the unauthorized acquisition
of unencrypted customer information,
involving at least 500 customers to the
Commission. The notice to the
Commission must include: (1) the name
and contact information of the reporting
financial institution; (2) a description of
the types of information that were
involved in the notification event; (3) if
the information is possible to determine,
the date or date range of the notification
event; (4) the number of consumers
affected; (5) a general description of the
notification event; and, if applicable,
whether any law enforcement official
has provided the financial institution
with a written determination that
notifying the public of the breach would
impede a criminal investigation or cause
damage to national security, and a
means for the Federal Trade
Commission to contact the law
enforcement official. The notice must be
provided electronically through a form
located on the FTC’s website, https://
www.ftc.gov.
IV. Detailed Analysis
The following section discusses the
comments that the Commission received
in response to the SNPRM.
General Comments
Several commenters generally
supported the inclusion of a notification
requirement in the Rule.16 Some of
these commenters pointed to frequent
data breaches as an indication that
companies’ data security practices are
inadequate and stated that requiring
companies to provide notice to the
Commission would enable the
Commission to more easily enforce the
Rule.17 The Clearing House argued that
the requirement is appropriate because
it would place financial institutions
covered by the Rule in the same
position as banks, which are required to
report data breaches to their prudential
regulators. 18 The Electronic Privacy
Information Center (‘‘EPIC’’) suggested
that the amendment would incentivize
‘‘use of strong data security measures by
financial institutions, bring additional
accountability and transparency to the
handling of security events, and
enhance the data security and privacy of
all consumers.’’ 19
Other commenters opposed the
proposal.20 Many of these commenters
argued that the proposed notification
requirement would be duplicative of
State breach notification laws and is,
therefore, unnecessary. 21 The
Commission, however, disagrees that
requiring financial institutions to
provide notice to the Commission is
redundant because of State breach
notification laws. State breach
notification laws provide notice to
consumers and in some cases also to
State regulators, while the notice
requirement of the Final Rule requires
notice to the Commission and is
designed to ensure that the Commission
receives notice of security breaches
affecting financial institutions under the
Commission’s jurisdiction. Notice to
consumers or to State regulators does
not achieve this purpose. Receipt of
these notices will enable the
Commission to monitor for emerging
data security threats affecting financial
institutions and to facilitate prompt
investigative response to major security
breaches. CTIA argued that the
Commission could achieve this goal by
accessing and reviewing regulated
entities’ reports to consumers and State
authorities under State notification
laws.22 The Commission disagrees that
this indirect method would be as
efficient or effective as requiring
regulated financial institutions to
directly notify the Commission. 23 Such
an approach would be extremely
burdensome on the Commission and
would require the diversion of resources
from enforcement to search for and
collect information about breaches
involving regulated financial
institutions. Also, as some of the
commenters noted,24 State laws vary in
what types of incidents must be
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25 See, e.g., Tex. Bus. & Com. Code 521.053(i)
(requiring companies to notify Texas Attorney
General if a breach affects at least 250 Texas
residents); Va. Code Ann. 18.2–186.6(E) (requiring
companies to notify Virginia Attorney General if a
breach affects at least 1,000 Virginia residents); Fla.
Stat. 501.171(3) (requiring businesses to notify the
Florida Department of Legal Affairs if a breach
affects at least 500 individuals in Florida).
26 See, e.g., AFSA (Comment 12) at 1; CDIA
(Comment 13) at 2–3; American Escrow Association
(Comment 16) at 2; CTIA (Comment 20) at 3–6;
NADA (Comment 21) at 2–3; U.S. Chamber of
Commerce (Comment 22) at 2–3.
27 See EPIC (Comment 19) at 2, see also
Anonymous (Comment 2); Briggs (Comment 4).
28 NADA argues that banking regulations are not
relevant examples because they are designed ‘‘to
protect depositors and to ensure the public interest
in the safety and soundness of banks,’’ rather than
to facilitate enforcement. NADA (Comment 21) at
4–5, n.8. The banking regulations, however, are also
designed to facilitate enforcement. In addition, the
Safeguards Rule is also designed to protect
customers of financial institutions and ensure the
public interest in the safety of consumer’s financial
information.
29 NADA (Comment 21) at 4–5, n. 9.
30 See, e.g., Interagency Guidance on Response
Programs for Unauthorized Access to Customer
Information and Customer Notice, 70 FR 15736,
15752 (Mar. 29, 2005) (originally issued by the
Office of the Comptroller of the Currency, the Board
of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the
Office of Thrift Supervision); 45 CFR 164.408
(requiring covered entities to report breaches
affecting 500 or more individuals to the Secretary
of Health and Human Services); 12 CFR 53.3
(requiring banking organizations to report security
events to the Office of the Comptroller of the
Currency); 12 CFR 225.302 (requiring Board-
supervised banking organization to report certain
breaches to the Board); 12 CFR 304.23 (requiring
certain bank organizations to report breaches to the
FDIC); see also 87 FR 16590 (Mar. 23, 2022)
(proposed rule requiring companies to report
security incidents to the SEC).
31 See, e.g., Tex. Bus. & Com. Code 521.053(i)
(requiring companies to notify Texas Attorney
General if a breach affects at least 250 Texas
residents); Va. Code Ann. 18.2–186.6(E) (requiring
companies to notify Virginia Attorney General if a
breach affects at least 1,000 Virginia residents); Fla.
Stat. 501.171(3) (requiring businesses to notify the
Florida Department of Legal Affairs if a breach
affects at least 500 individuals in Florida).
32 NADA (Comment 21) at 3–5.
33 NADA (Comment 21) at 4.
34 See, e.g., FTC v. Equifax, 1:19–cv–03297–TWT
(N.D. Ga., July 22, 2019), available at https://
www.ftc.gov/legal-library/browse/cases-
proceedings/172-3203-equifax-inc.
35 AFSA (Comment 12) at 1.
reported and to whom.25 The
Safeguards Rule notice requirement will
establish a uniform reporting
requirement for all regulated financial
institutions, assisting the Commission
in getting consistent information about
notification events affecting those
financial institutions regardless of
which State’s consumers are affected.
This benefit is not offset by the cost to
financial institutions because the
burden on individual financial
institutions is minimal, as the Final
Rule does not require an extensive
report and, in many instances, financial
institutions will already be preparing
notices to consumers and State agencies.
Some commenters argued that the
notification requirement would not
improve financial institutions’ data
security.26 Other commenters disagreed
with this assertion, arguing that the
notification requirement would further
incentivize financial institutions to
protect customer information.27 The
Commission agrees with these
commenters that the notification
requirement will increase the efficiency
and effectiveness of the Commission’s
enforcement of the Rule. As noted
above, while State breach notification
laws require notice to consumers, some
States do not require that such notices
be provided to State regulators as well,
and not all State regulators that do
receive such notices publish them. By
requiring financial institutions to
provide notice directly to the
Commission, the Commission will not
have to devote resources to continually
search for breach notifications posted by
other sources in order to know that a
financial institution has experienced a
breach. Without a notification, the
Commission would have no guarantee
that it has found all breaches in its
searches. The required notices will
enable the Commission to identify
breaches that merit investigation more
quickly and efficiently. Also, receiving
notice of breaches will allow the
Commission to develop better
awareness of emerging risks to financial
institutions’ security. The Commission
expects that these benefits will enable
more efficient enforcement of the Rule,
which will in turn increase financial
institutions’ incentive to comply. In
addition, as discussed below, making
the notices public will enable
consumers to make more informed
decisions about which financial
institutions they choose to entrust with
their information, providing financial
institutions with an additional incentive
to comply with the Rule.
The National Automobile Dealers
Association (‘‘NADA’’) argued that a
requirement for financial institutions to
report events in order to facilitate
enforcement against them is
‘‘unprecedented’’ 28 and ‘‘raises serious
questions,’’ including ‘‘potential First
Amendment and potentially even Fifth
Amendment concerns.’’ 29 The
Commission disagrees. Far from being
unique, the requirement to report
security events to law enforcement
agencies that might result in
enforcement actions against the
notifying company is common. Many
Federal agencies 30 require regulated
entities to report data breaches to them,
and most States require that companies
report breaches to State attorneys
general or other State law enforcement
and have done so for years.31
NADA also argued that requiring
reporting security events to assist the
Commission to enforce the Safeguards
Rule is inappropriate because not every
breach is the result of a failure to
comply with the Safeguards Rule.32
NADA suggested that the reporting
requirement should only ‘‘apply after a
series of security events,’’ because only
multiple events can be ‘‘suggestive of
compliance failures,’’ while any single
breach ‘‘certainly . . . is not.’’ 33 While
the Commission acknowledges that not
every notification event is necessarily
the result of a failure to comply with the
Safeguards Rule, it disagrees that a
single breach cannot be ‘‘suggestive of
compliance failures.’’ 34 Indeed, the fact
that an institution has not experienced
a breach does not necessarily mean that
the institution is in compliance with the
Rule’s requirements. The Commission
believes that taking action to correct a
potential Safeguards Rule violation
before additional security events can
harm consumers is appropriate and
desirable. The American Financial
Services Association (‘‘AFSA’’)
contended that ‘‘the FTC should clarify
what factors in a report could lead to
enforcement concerns,’’ arguing that
otherwise ‘‘institutions may seek to
minimize all risks associated with a
report.’’ 35 The Commission does not
believe that providing a guide to when
a report could possibly lead to
enforcement is either possible or
desirable because the reports are
unlikely to contain all of the
information that the Commission would
need to determine that law enforcement
is appropriate or necessary. Such
determinations are typically made
following investigations that afford
entities the opportunity to provide
context and information.
In addition, the Commission notes
that requiring a financial institution to
report an event is not suggesting that
every notification event is the result of
a violation of the Rule and will result in
an enforcement action or even
investigation. Rather, the reporting
requirement will provide the
Commission with valuable information
about security threats to financial
institutions and assist in the
determination of whether any
individual event should be investigated
further. This will improve the
Commission’s ability to respond to data
breaches and may enable the
Commission to issue business and
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36 CDIA (Comment 13) at 2–3; SIFMA/BPI
(Comment 15) at 8; ETA (Comment 17) at 2–3; CTIA
(Comment 20) at 3–6; NADA (Comment 21) at 2–
3; U.S. Chamber of Commerce (Comment 22).
37 CDIA (Comment 13) at 2–3; CTIA (Comment
20) at 6; NADA (Comment 21) at 2–3.
38 American Escrow Association (Comment 16) at
2; ACE (Comment 18) at 2, 7–8; EPIC (Comment 19)
at 6–7.
39 See, e.g., Ala. Code 8–38–5(d); Ariz. Rev. Stat.
18–552(E); Cal. Civ. Code 1798.82(d); Fla. Stat.
501.171(3)(b); Mich. Comp. Laws 445.72(6); Mo.
Rev. Stat. 407.1500(2)(4); N.H. Rev. Stat. Ann. 359–
C:20(IV); N.Y. U.C.C. Law 899–AA(7); and Or. Rev.
Stat. 646A.604(5).
40 As discussed below, the Final Rule no longer
requires the financial institution to determine
whether misuse had occurred or was likely.
41 See, e.g., SIFMA/BPI (Comment 15) at 8–9;
CTIA (Comment 20) at 11–12; NADA (Comment 21)
at 2–3.
42 See CDIA (Comment 13) at 4–5; SIFMA/BPI
(Comment 15) at 9–10; American Escrow
Association (Comment 16) at 2–3; ETA (Comment
17) at 2; CTIA (Comment 20) at 11–14.
43 See, e.g., CDIA (Comment 13) at 4–5.
44 AFSA (Comment 12) at 2; CDIA (Comment 13)
at 6; SIFMA/BPI (Comment 15) at 9; ACE (Comment
18); CTIA (Comment 20) at 12; NADA (Comment
21) at 3; U.S. Chamber of Commerce (Comment 22)
at 4.
45 SIFMA/BPI (Comment 15) at 9; ETA (Comment
17) at 2; CTIA (Comment 20) at 11.
46 EPIC (Comment 19) at 4.
47 Id.
consumer education about emerging
threats.
Other commenters argued that the
reporting requirement would be unduly
burdensome. 36 Some of these
commenters suggested that because the
Rule’s requirement may differ from
State notification laws’ requirements,
complying with the Rule will be
burdensome.37 Other commenters
disagreed, noting that the information
required is limited to basic information
about the company and the notification
event.38 The Commission agrees with
these commenters. The information
required to be reported is minimal and
is very similar to the information
required by many State notification
laws. 39 The company will have this
information as the result of even a basic
investigation of the security event, an
investigation that would be required in
any event to comply with the Rule and
basic security practices. The fact that
some State laws may be triggered under
different circumstances and may require
different information does not render
this simple report burdensome.
In addition to addressing the
proposed amendment in general,
commenters also addressed specific
elements of the proposed amendments.
These comments are addressed in the
following detailed discussion.
Triggering Event
The Commission adopts proposed
§ 314.4(j) as originally proposed, with
minor changes. Proposed paragraph (j)
would have required financial
institutions that become aware of a
security event to promptly determine
the likelihood that customer
information has been or will be
misused. Under the provision as
originally proposed, financial
institutions would have been required
to make a report to the Commission
upon determining that, among other
conditions, ‘‘misuse of customer
information ha[d] occurred or . . . [was]
reasonably likely [to occur].’’ However,
upon consideration of the comments,
Commission is clarifying the triggering
language by adding a new paragraph (m)
in § 314.2, which defines the term
‘‘notification event’’ as the ‘‘acquisition
of . . . [unencrypted customer]
information without the authorization of
the individual to which the information
pertains.’’ Section 314.2(m) further
clarifies that: (1) ‘‘[c]ustomer
information is considered unencrypted
. . . if the encryption key was accessed
by an unauthorized person;’’ and (2)
‘‘[u]nauthorized acquisition will be
presumed to include unauthorized
access to unencrypted customer
information unless you have reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.’’
Several commenters addressed
whether becoming aware of a security
event is an appropriate trigger for the
notification process. In a joint comment,
the Securities Industry and Financial
Markets Association (‘‘SIFMA’’) and the
Bank Policy Institute (‘‘BPI’’) argued
that the notification process should not
begin when a financial institution
becomes aware of an event, but instead
begin when the financial institution
‘‘determines’’ a security event has
occurred. SIFMA and BPI suggested that
‘‘determination’’ takes place sometime
after ‘‘discovery,’’ and that financial
institutions should have 30 days to
notify the Commission after making this
determination rather than after
discovery. SIFMA and BPI argued that
‘‘determination’’ ‘‘connotes a higher
standard of certainty than ‘discovery,’ ’’
and would include determining whether
any further requirements for notice,
such as number of consumers affected,
had been met. The Commission
disagrees that 30 days after discovery of
a notification event is insufficient time
to determine whether the event meets
the requirements for notification and to
prepare the notice. The Commission
expects that companies will be able to
decide quickly whether a notification
event has occurred by determining
whether unencrypted customer
information has been acquired and, if
so, how many consumers are affected,
so there will not be a significant
difference between ‘‘determination’’ and
‘‘discovery.’’ 40 In addition, the
notification to the Commission requires
minimal details and will not take
significant time to prepare and, as
discussed above, many States require
reports containing similar information,
so the financial institutions will need to
prepare such a report in any event.
Other commenters argued the term
‘‘security event’’ is too broad a term to
act as a trigger for the notification
process, stating that the term
encompasses types of incidents that
pose little risk of consumer harm and
for which notification is unnecessary.41
Some commenters felt notification
should be required only when harm to
consumers has occurred or is likely to
occur, rather than when ‘‘misuse’’ has
occurred or is reasonably likely.42 Some
commenters argued a trigger that
requires consumer harm would be more
in accord with State notification laws.43
Similarly, several commenters argued
the notification requirement should
exclude security events that involve
only encrypted customer information,
because there is little chance of
consumer harm in such cases.44 Others
argued requiring financial institutions to
report breaches that do not involve
possible harm to consumers would be
unduly burdensome on financial
institutions and would produce an
overwhelming number of reports to the
Commission. 45 Conversely, EPIC argued
notice should be required for all
security events regardless of whether
misuse had occurred or was likely.46
EPIC argued that removing the analysis
of whether misuse was likely would
lower the burden of determining
whether a report should be made and
would prevent attempts by financial
institutions to avoid reporting to the
Commission.47
The Commission agrees with EPIC
that the trigger for notification requires
clarification. The meaning of the term
‘‘misuse’’ in the proposed rule was
ambiguous. It was not clear if
acquisition of customer information
alone constituted misuse, or if other
forms of misuse, such as alteration of
data, would fall within the notification
requirement. Given this ambiguity,
financial institutions would have had
difficulty evaluating the likelihood of
misuse of customer information that has
been acquired without authorization. At
the same time, the ambiguity could have
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48 See also 74 FR 42962, 42966 (Aug. 25, 2009).
Examples of this rebuttable presumption cited in
that rulemaking, and equally relevant here,
included a circumstance where ‘‘an unauthorized
employee inadvertently accesses an individual’s
PHR and logs off without reading, using, or
disclosing anything. If the unauthorized employee
read the data and/or shared it, however, he or she
‘acquired’ the information, thus triggering the
notification obligation in the rule.’’ Another
example related to a lost laptop: ‘‘If an entity’s
employee loses a laptop in a public place, the
information would be accessible to unauthorized
persons, giving rise to a presumption that
unauthorized acquisition has occurred. The entity
can rebut this presumption by showing, for
example, that the laptop was recovered, and that
forensic analysis revealed that files were never
opened, altered, transferred, or otherwise
compromised.’’ Id. at 42966.
49 Id.
50 See, e.g., Ala. Code 8–38–2(6)(b)(2); Alaska
Stat. 45.48.090(7); Colo. Rev. Stat. 6–1–716 (2)(a.4);
815 Ill. Comp. Stat. 530/5 (‘‘Personal Information’’
definition); NY Gen. Bus. Law 899–aa(b); Tex. Bus.
& Com. Code 521.053(a).
51 AFSA (Comment 12) at 2; CDIA (Comment 13)
at 5–6; ETA (Comment 17) at 2; CTIA (Comment 20)
at 11–12.
52 AFSA (Comment 12) at 2; CDIA (Comment 13)
at 5–6; ETA (Comment 17) at 2; CTIA (Comment 20)
at 11–12.
53 16 CFR 314.2(d).
54 16 CFR 314.2(l).
55 CTIA (Comment 20) at 9–10; NADA (Comment
21) at 7.
56 Clearing House (Comment 11) at 9; ACE
(Comment 18) at 7; EPIC (Comment 19) at 6–7.
been used as an opportunity to
circumvent the reporting requirement.
Specifically, because the proposed rule
required the financial institution to
assess the likelihood of misuse, it would
have allowed financial institutions to
underestimate the likelihood of misuse,
and, thereby, the need to report the
security event.
Accordingly, the Final Rule requires
notification where customer information
has been acquired, rather than when
misuse is considered likely.
Specifically, the Commission is adding
a new § 314.2(m) that defines the term
‘‘[n]otification event’’ to mean the
acquisition of unencrypted customer
information without the authorization of
the individual to which the information
pertains. Section 314.2(m) also provides
that unauthorized access of information
will be presumed to result in
unauthorized acquisition unless the
financial institution can show that there
has not been, or could not reasonably
have been, unauthorized acquisition of
such information. This rebuttable
presumption is consistent with the
Health Breach Notification Rule. See 16
CFR 318.2(a) (‘‘Unauthorized
acquisition will be presumed to include
unauthorized access to unsecured PHR
[personal health record] identifiable
health information unless the vendor of
personal health records, PHR related
entity, or third party service provider
that experienced the breach has reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.’’). 48 Here, too, the
presumption is ‘‘intended to address the
difficulty of determining whether access
to data (i.e., the opportunity to view the
data) did or did not lead to acquisition
(i.e., the actual viewing or reading of the
data).’’ 49
The Commission also agrees
notification should not be required
when harm to consumers is rendered
extremely unlikely because the
customer information is encrypted.
Accordingly, the Final Rule does not
require notification if the customer
information acquired is encrypted, so
long as the encryption key was not
accessed by an unauthorized person.
See § 314.2(m). By requiring notice
relating to unauthorized acquisition
only of unencrypted customer
information, this change brings the Rule
into accord with most State breach
notification laws. If customer
information was encrypted but the
encryption key was also accessed
without authorization, then the
customer information will be
considered to be unencrypted. Someone
who has both the encrypted information
and the encryption key can easily
decrypt the information.50
In summary, the Final Rule requires
notification if the financial institution
discovers that unencrypted customer
information has been acquired without
authorization. See § 314.2(m). Unlike
under the proposed rule, notification is
not conditioned on the assessment of
likelihood of misuse. The Commission
believes that determining whether
acquisition has occurred simplifies the
requirement and will enable financial
institutions to more speedily determine
whether a notification event has
occurred. In addition, the Commission
believes this change will reduce the
number of notifications by excluding
events where encrypted information
was acquired, while ensuring it receives
notice of events that are more likely to
result in harm. As noted earlier, the
Rule also includes a rebuttable
presumption stating that when there is
unauthorized access to data,
unauthorized acquisition will be
presumed unless the entity that
experienced the breach ‘‘has reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.’’ See § 314.2(m).
Some commenters argued the
notification requirement should trigger
only when especially ‘‘sensitive’’
information is involved.51 These
commenters argue that requiring
notification when any kind of customer
information is involved would result in
notifications when there is no risk of
harm to consumers. 52 The Commission
disagrees with this contention. The
definition of ‘‘customer information’’ in
the Rule does not encompass all
information that a financial institution
has about consumers. ‘‘Customer
information’’ is defined as records
containing ‘‘non-public personal
information’’ about a customer.53 ‘‘Non-
public personal information’’ is, in turn,
defined as ‘‘personally identifiable
financial information,’’ and excludes
information that is publicly available or
not ‘‘personally identifiable.’’ 54 The
Commission believes security events
that trigger the notification
requirement—where customers’ non-
public personally identifiable,
unencrypted financial information has
been acquired without authorization—
are serious and support the need for
Commission notification.
In the SNPRM, the Commission asked
whether, rather than having a stand-
alone reporting requirement, the Rule
should require reporting only when
another State or Federal statute, rule, or
regulation requires a financial
institution to provide notice of a
security event or similar event to a
governmental entity. Some commenters
supported this suggestion, arguing that
such a requirement would reduce
duplicative notice and consumer
confusion.55 Other commenters opposed
it, arguing that because of the varied
nature of State notification laws, this
would produce inconsistent reporting to
the Commission.56 The Commission
agrees that a stand-alone requirement
will help ensure the Commission
receives consistent information
regarding security events.
Determination of Scope of Security
Event
After a financial institution becomes
aware of a security event, the proposed
rule would have required it to
determine whether at least 1,000
consumers have been affected or
reasonably may be affected and, if so, to
notify the Commission.
A number of commenters expressed
views pertaining to the minimum
threshold for the number of affected
customers. Some commenters agreed
that notification of security events
should not be required if the number of
consumers that could be affected fell
below the proposed threshold (1,000
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57 CDIA (Comment 13) (suggesting a requirement
of notification when a security event affects at least
1,000 consumers and may cause substantial harm);
American Escrow Association (Comment 16) at 2
(supporting 1,000 consumer requirement while
suggesting other changes to the notice requirement);
ACE (Comment 17) at 2 (stating that requiring
notice when 1,000 consumers are affected would be
appropriate, if notices were required only when
there was a risk of substantial harm); EPIC
(Comment 19) at 4 (suggesting that notice be
required whenever an event involves the
information of at least 1,000 consumers regardless
of the likelihood of misuse).
58 Clearing House (Comment 11) at 4–5
(suggesting a requirement for notice for any security
event involving sensitive customer information,
regardless of the number of consumers potentially
affected by the event).
59 AFSA (Comment 12) at 2; see also Anonymous
(Comment 2) (arguing that threshold should be
proportional to the size of the financial
information).
60 Id.
61 Clearing House (Comment 11) at 5. While the
Rule requires direct notice of breaches only to the
Commission, consumers affected by smaller
breaches could learn of those breaches when the
Commission makes the notices public. Also, the
Rule does not limit State consumer notification
laws that require direct notification of consumers.
62 45 CFR 164.400 through 164.414.
63 See, e.g., CDIA (Comment 13) at 7; ACE
(Comment 18) at 8; U.S. Chamber of Commerce
(Comment 22) at 4.
64 Anonymous (Comment 2) (suggesting a two-
week deadline); Clearing House (Comment 11) at 6
(recommending a 36-hour deadline).
65 See SIFMA/BPI (Comment 15) at 8 (arguing that
30 days should not begin until financial
information has determined that security event
meets notification requirements); CTIA (Comment
20) at 14 (same).
66 See SIFMA/BPI (Comment 15) at 10; ACE
(Comment 18) at 4–5; CTIA (Comment 20) at 15;
U.S. Chamber of Commerce (Comment 22) at 5.
67 EPIC (Comment 19) at 5–6.
68 See Securities and Exchange Commission,
Cybersecurity Risk Management, Strategy,
Governance, and Incident Disclosure, 88 FR 51896,
51898 (Aug. 8, 2023) (allowing delay of required
disclosure of material cybersecurity incidents if the
United States Attorney General determines that
immediate disclosure would pose a substantial risk
to national security or public safety and notifies the
Commission of such determination in writing);
Office of the Comptroller of the Currency, Federal
Reserve System, Federal Deposit Insurance
Corporation, Computer-Security Incident
Notification Requirements for Banking
Organizations and Their Bank Service Providers, 86
FR 66424 (Nov. 23, 2021) (adopting regulations that
require banking organizations to notify their
primary Federal Regulator of any ‘‘computer
security incident’’ that rises to the level of a
‘‘notification incident,’’ as soon as possible and no
longer than 36 hours after the banking organization
determines that a notification incident has
occurred).
consumers). 57 The Clearing House,
however, suggested that notification
should be required in all cases,
regardless of the number of consumers
potentially affected.58
AFSA suggested there should be a
higher threshold of affected consumers
before notice is required.59 AFSA
argued that the thousand consumer
threshold was too low because of ‘‘the
large number of financial institutions
with many more customers.’’ 60 The
Commission disagrees that the fact that
some financial institutions hold the
information of millions of consumers
suggests a higher threshold is
appropriate. The Clearing House,
conversely, argues the Rule should
require that the Commission receive
notice whenever any consumer is
affected, because otherwise consumers
whose information was involved in
smaller breaches would have no notice
of the breach and would be ‘‘without the
benefit of important notices’’ if financial
institutions were not required to report
breaches affecting fewer consumers.61
The Commission does not agree that
setting a minimum threshold of
consumers affected before requiring
notification would leave consumers
involved in smaller breaches without
notice, as consumers will typically
receive direct notification under State
breach notification laws, regardless of
whether notice to the Commission is
required. In determining the proper
threshold, the Commission notes that
numerous State laws require
notification of breaches either with no
minimum threshold, or with a threshold
of 250 or 500 people. The Commission’s
own Health Breach Notification Rule,
and the Health Insurance Portability and
Accountability Act (HIPAA) Breach
Notification Rule,62 also require
notification of breaches involving 500 or
more people. The Commission
concludes that a lower threshold than in
the proposed rule is appropriate.
Accordingly, the Commission is
adopting a minimum threshold of 500
consumers, rather than the minimum
threshold of 1,000 consumers that was
in proposed § 314.4(j). The Commission
believes a security event that involves
the acquisition of unencrypted customer
information involving at least 500
consumers is significant enough to
warrant notification of the Commission,
regardless of the size of the financial
institution.
Time To Report
The proposed Rule would have
required Commission notification
within 30 days from discovery of the
notification event. Some commenters
that addressed this deadline agreed that
this would provide financial institutions
sufficient time to make the required
determinations and to notify the
Commission.63 Other commenters
argued that financial institutions should
be given significantly less time to notify
the Commission.64 Other commenters
argued that financial institutions should
be given more time to notify the
Commission.65 The Commission
believes that a 30-day deadline properly
balances the need for prompt
notification with the need to allow
financial institutions to investigate a
security event, determine whether the
information was acquired without
authorization and how many consumers
were affected, and learn enough about
the event to make the notification to the
Commission meaningful. Accordingly,
finalized § 314.2(j)(1) retains the 30-day
deadline from the SNPRM.
Some commenters argued that
financial institutions should be
permitted to delay or withhold
notification of a security event to the
Commission at the request of a law-
enforcement agency or if notification
would interfere with a law enforcement
investigation.66 Alternatively, EPIC
suggested the Commission should not
allow companies to delay reporting in
cases of a law enforcement
investigation, but should instead delay
publication of the notice in cases where
publication would interfere with an
investigation.67 The Commission agrees
that, while notifications to the
Commission should not be made public
if law enforcement has requested a
delay, there is no reason to delay notice
to the Commission itself on that basis.
This conclusion is consistent with the
approach taken by the Securities and
Exchange Commission and by other
Federal financial regulators in
rulemakings that require notice of cyber
incidents to a regulator, as opposed to
notice directly to consumers.68
Accordingly, § 314.4(j)(1)(vi) of the
Final Rule provides that a financial
institution’s notice must (1) indicate
whether any law enforcement official
has provided the institution with a
written determination that public
disclosure of the breach would impede
a criminal investigation or cause
damage to national security, and (2)
provide a means for the Commission to
contact the law enforcement official. In
order that notice to the public is not
delayed indefinitely, the provision also
provides that a law enforcement official
may request an initial delay of up to 30
days following the date when the
disclosure is filed with the Commission.
The delay may be extended for an
additional period of up to 60 days if the
law enforcement official seeks such an
extension in writing. Additional delay
may be permitted only if the
Commission staff determines that public
disclosure of a notification event
continues to impede a criminal
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69 SIFMA/BPI argued that financial institutions
should be allowed to notify the Commission by
phone because that ‘‘could foster confidentiality.’’
SIFMA/BPI (Comment 15) at 7. Similarly, the U.S.
Chamber of Commerce suggested that financial
institutions should be allowed to notify the
Commission by alternative means, such as mail,
‘‘where covered entities may lack access to the
internet.’’ U.S. Chamber of Commerce (Comment
22) at 4. The Commission believes that notification
should be limited to the form on the Commission’s
website, as this will ensure that all notifications are
received and recorded in the same way. The
Commission believes that it is not likely that a
financial institution that has suffered a notification
event will not be able to access the internet for the
entirety of the 30-day reporting window.
70 See AFSA (Comment 12) at 2; ACE (Comment
18) at 2; U.S. Chamber of Commerce (Comment 22)
at 4.
71 NADA (Comment 21) at 6.
72 EPIC (Comment 19) at 3.
73 Id.
74 As noted above, if applicable, financial
institutions would also inform the Commission
whether any law enforcement official has provided
a written determination that notifying the public of
the breach would impede a criminal investigation
or cause damage to national security, and a means
for the FTC to contact the law enforcement official.
75 Briggs (Comment 4); Clearing House (Comment
11) at 10; EPIC (Comment 19) at 5–6.
76 AFSA (Comment 12) at 2–3; CDIA (Comment
13) at 7; SIFMA/BPI (Comment 15) at 5–7; ACE
(Comment 18) at 5–7; CTIA (Comment 20) at 15–
16; NADA (Comment 21) at 5–6; U.S. Chamber of
Commerce (Comment 22) at 5.
77 SIFMA/BPI (Comment 15) at 7; ACE (Comment
18) at 5–7; CTIA (Comment 20) at 15–16; NADA
(Comment 21) at 6.
78 NADA (Comment 21) at 6.
79 AFSA (Comment 12) at 2–3; NADA (Comment
21) at 5.
80 CDIA (Comment 13) at 7; see also SIFMA/BPI
(Comment 15) at 6 (suggesting that publication of
the reports could cause confusion for consumers
and investors); ACE (Comment 18) at 5–7.
81 CTIA (Comment 20) at 16.
82 SIFMA/BPI (Comment 15) at 6.
investigation or cause damage to
national security.
The proposed § 314.4(j) did not
address when a security event should be
treated as discovered. The Commission
believes adding such a provision will
clarify the rule and prevent confusion.
Accordingly, under the Final Rule, a
notification event shall be treated as
discovered as of the first day on which
such event is known. Financial
institutions will be deemed to have
knowledge of a notification event if the
event is known to any person, other
than the person committing the breach,
who is the financial institution’s
employee, officer, or other agent.
Therefore, in instances where an
employee, officer, or other agent of the
financial institution accesses customer
information without authorization, a
financial institution will be deemed to
have knowledge of a notification event
if the event is known to another
employee, officer, or other agent of the
financial institution.
Contents of Notice
The proposed Rule required that a
notice be made electronically on a form
on the FTC’s website,69 and that such
notice must include the following
information: (1) the name and contact
information of the reporting financial
institution; (2) a description of the types
of information that were involved in the
notification event; (3) if the information
is possible to determine, the date or date
range of the notification event; and (4)
a general description of the notification
event.
Several commenters supported these
elements as an appropriate level of
detail.70 However, NADA was opposed
to the requirement that the report
include a description of the security
event, 71 while EPIC suggested the Rule
should require a more detailed
description of the security event. 72 EPIC
argued that financial institutions should
also be required to provide a
comprehensive description of the types
of information involved in the security
event and a comprehensive description
of the security event, because ‘‘it is
critical that financial institutions
provide a sufficiently detailed account
of each security event to enable the FTC
and affected consumers to assess
whether and how personal information
is at risk.’’ 73 The Commission believes
that, with the exception noted below,
the proposed elements generally
provide sufficient information to the
Commission and the public without
imposing undue burdens on reporting
financial institutions. If the Commission
determines more information is needed,
it will obtain that information from the
financial institution. The Commission
believes, however, that knowing the
number of consumers affected or
potentially affected by the notification
event would allow it to better evaluate
the impact of a particular event.
Providing this information, which
financial institutions will typically
determine in the course of responding to
a breach, will not significantly add to
the burden to financial institutions.
Accordingly, the Final Rule retains the
proposed elements, while adding a
requirement to provide the number of
consumers affected or potentially
affected by the notification event.74
Publication of Notices
The SNPRM requested public
comment on whether submitted reports
should be made public. Several
commenters argued that making the
reports public would benefit consumers
by helping them to make informed
decisions about which financial
institutions to entrust with their
financial information or to determine
whether they might have been affected
by a security event.75 Other commenters
argued the reports should be
confidential and not shared with the
public.76 Some commenters argued that
making the reports public could
encourage further cybersecurity attacks
on affected financial institutions by
making potential attackers aware of
vulnerabilities that have not been
remedied by the time the notice is made
public.77 NADA argued that the
description of the event in particular
should not be made public, suggesting
the description provided no benefit to
consumers and would not improve data
security.78 The Commission disagrees
that making the reports public will
increase risk to financial institutions’
data security. As discussed above, most
financial institutions are already subject
to State breach notification laws, many
of which require notification to a State
agency that then makes the notification
public. In addition, the general nature of
the information required to be included
in the report is unlikely to provide
potential attackers any advantage in
comprising the financial institution’s
security.
Other commenters argued that
publication of the notices could create
undue media coverage and that the
information would be too general to
assist consumers in making informed
decisions.79 Similarly, CDIA argued that
because State law requires direct
consumer notification to those affected
by the breach, making the information
public to all consumers would cause
‘‘consumer confusion and angst about
whether the consumer’s information has
been compromised.’’ 80 CTIA also
argued that financial institutions that
have suffered a security event should
not be subject to the punishment of
‘‘name and shame.’’ 81 SIFMA and BPI
suggested that making the reports public
would limit the information financial
institutions are willing to share in the
reports in order to avoid public
revelation of the details of the breach.82
As discussed above, the Commission
acknowledges not all security events at
financial institutions are the result of a
failure to comply with the Safeguards
Rule. Nevertheless, the Commission
believes providing more information to
consumers about these events will both
benefit consumers and incentivize
companies to better protect that
information. The Commission is not
persuaded that attention given to
breaches is ‘‘undue’’ or otherwise
inappropriate, as suggested by some
commenters. Apart from providing
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83 Clearing House (Comment 11) at 8–9; EPIC
(Comment 19); see also Anonymous (Comment 14)
(stating that if there is a data breach, consumers
‘‘need to know what happened to their
information.’’
84 See AFSA (Comment 12) at 3; CDIA (Comment
13) at 8; SIFMA/BPI (Comment 15) at 10; CTIA
(Comment 20) at 16–17; NADA (Comment 21) at 7;
see also American Council on Education (Comment
18) at 8 (stating that the Commission should engage
with covered financial institutions about existing
notification requirements before establishing a
consumer notification requirement).
85 44 U.S.C. 3502(3)(A)(i).
86 According to the Identity Theft Resource
Center, 108 entities in the ‘‘Banking/Credit/
Financial’’ category suffered data breaches in 2019,
which affected more than 100 million consumers.
2019 End-of-Year Data Breach Report, Identity Theft
Resource Center at 2, available at https://www.idthe
ftcenter.org/wp-content/uploads/2020/01/
01.28.2020_ITRC_2019-End-of-Year-Data-Breach-
Report_FINAL_Highres-Appendix.pdf. On average,
each breach would have involved more than
930,000 consumers, far over both the 500 and the
1,000 consumer thresholds.
87 According to the Identity Theft Resource
Center, 108 entities in the ‘‘Banking/Credit/
Financial’’ category suffered data breaches in 2019.
2019 End-of-Year Data Breach Report, Identity
Theft Resource Center at 2, available at https://
www.idtheftcenter.org/wp-content/uploads/2020/
01/01.28.2020_ITRC_2019-End-of-Year-Data-
Breach-Report_FINAL_Highres-Appendix.pdf.
Although this number may exclude some entities
that are covered by the Safeguards Rule but are not
contained in the ‘‘Banking/Credit/Financial’’
category, not every security event will trigger the
reporting obligations (e.g., breaches affecting less
than 500 people). Therefore, Commission staff
estimated in the SNPRM that 110 institutions
would have reportable events. Because of the
change in the reporting threshold the Commission
expects an additional 5 entities to have reporting
obligations.
88 See, e.g., Cal. Civil Code 1798.82; Tex. Bus. &
Com. Code 521.053; Fla. Stat. 501.171.
89 This figure is derived from the mean hourly
wage for Information security analysts. See
actionable information for individuals
who are directly affected, reporting
provides a broader value to the general
public to consider proactive measures,
such as implementing a credit freeze,
prioritizing methods to secure their own
data, and determining where to do
business. The Commission does not
believe a confidential reporting system
is needed in order to incentivize more
comprehensive reporting by financial
institutions. The general level of detail
required to be reported under
§ 314.4(j)(1) will not compromise a
financial institution’s security posture
going forward—the report requires only
the most general information and cannot
provide a meaningful roadmap for
attackers. Accordingly, the Commission
intends to enter notification event
reports into a publicly available
database.
The SNPRM also asked for comment
on whether the Commission should
require financial institutions that suffer
a security event to directly notify
affected consumers, as well as the
Commission. Some commenters were in
favor of requiring consumer notification,
at least when notification of the
Commission was required.83 Most
commenters who addressed the issue,
however, opposed such a requirement,
pointing to the existing regime of State
consumer notification laws and arguing
that a separate FTC notification
requirement would be duplicative and
unduly burdensome. 84 The Commission
agrees that, because all States have some
form of consumer notification
requirement, a direct consumer
notification requirement in the
Safeguards Rule would be largely
duplicative of those State laws.
Therefore, the Commission has not
included such a requirement in the
Final Rule.
Finally, the Commission is revising
§ 314.4(c) to correct a typographical
error. As originally promulgated, that
section required a financial institution
to ‘‘[d]esign and implement safeguards
to control the risks you identity through
risk assessment. . . .’’ Actually, a
financial institution must ‘‘[d]esign and
implement safeguards to control the
risks you identify through risk
assessment. . . .’’ In the Final Rule,
this error is corrected.
Section 314.5: Effective Date
The proposed rule revised § 314.5 so
that the reporting requirement in
§ 314.4(j) would not go into effect until
six months after the publication of a
final rule. As proposed, finalized § 314.5
provides that § 314.4(j) will become
effective on May 13, 2024.
V. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
Federal agencies to obtain Office of
Management and Budget (‘‘OMB’’)
approval before undertaking a collection
of information directed to ten or more
persons. Pursuant to the regulations
implementing the PRA (5 CFR
1320.8(b)(3)(vi)), an agency may not
collect or sponsor the collection of
information, nor may it impose an
information collection requirement,
unless it displays a currently valid OMB
control number.
The amendment requiring financial
institutions to report certain security
events to the Commission discussed
above constitutes a ‘‘collection of
information’’ for purposes of the PRA.85
As required by the PRA, the FTC
submitted the proposed information
collection requirement to OMB for its
review at the time of the publication of
the SNPRM. OMB directed the
Commission to resubmit the
requirement at the time the Final Rule
is published. Accordingly, FTC staff has
estimated the information collection
burden for this requirement as set forth
below.
The amendment will affect only those
financial institutions that suffer a
security event in which unencrypted
customer information affecting at least
500 consumers is acquired without
authorization. Although the SNPRM
proposed a 1,000-consumer cut-off for
notification, the Commission believes
that the reducing the reporting
threshold by 500 consumers will likely
make only a small difference in the
number of breaches reported.86
Assuming that reducing the reporting
threshold by 500 individuals will lead
an additional 5% of financial
institutions to report—a generous
estimate—FTC staff estimates the
reporting requirement will affect
approximately 115 financial institutions
each year.87 FTC staff anticipates the
burden associated with the reporting
requirement will consist of the time
necessary to compile the requested
information and report it via the
electronic form located on the
Commission’s website. FTC staff
estimates this will require
approximately five hours for affected
financial institutions, for a total annual
burden of approximately 575 hours (115
responses × 5 hours).
The Commission does not believe the
reporting requirement would impose
any new investigative costs on financial
institutions. The information about
notification events required by the
reporting requirement is information the
Commission believes financial
institutions would acquire in the normal
course of responding to a notification
event. In addition, in many cases, the
information requested by the reporting
requirement is similar to information
entities are required to disclose under
various States’ data breach notification
laws.88 As a result, FTC staff estimates
the additional costs imposed by the
reporting requirement will be limited to
the administrative costs of compiling
the requested information and reporting
it to the Commission on an electronic
form located on the Commission’s
website.
FTC staff derives the associated labor
cost by calculating the hourly wages
necessary to prepare the required
reports. FTC staff anticipates that
required information will be compiled
by information security analysts in the
course of assessing and responding to a
notification event, resulting in 3 hours
of labor at a mean hourly wage of $57.63
(3 hours × $57.63 = $172.89). 89 FTC staff
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77507	Federal Register / Vol. 88, No. 217 / Monday, November 13, 2023 / Rules and Regulations
‘‘Occupational Employment and Wages—May
2022,’’ Bureau of Labor Statistics, U.S. Department
of Labor (April 5, 2023), Table 1 (‘‘National
employment and wage data from the Occupational
Employment Statistics survey by occupation, May
2023’’), available at https://www.bls.gov/
news.release/pdf/ocwage.pdf.
90 This figure is derived from the mean hourly
wage for Lawyers. See ‘‘Occupational Employment
and Wages—May 2019,’’ Bureau of Labor Statistics,
U.S. Department of Labor (March 31, 2020), Table
1 (‘‘National employment and wage data from the
Occupational Employment Statistics survey by
occupation, May 2019’’), available at https://
www.bls.gov/news.release/pdf/ocwage.pdf.
91 CDIA (Comment 13) at 2–3; SIFMA/BPI
(Comment 15) at 8; ETA (Comment 17) at 2–3; CTIA
(Comment 20) at 3–6; NADA (Comment 21) at 2–
3; U.S. Chamber of Commerce (Comment 22).
92 American Escrow Association (Comment 16) at
2; ACE (Comment 18) at 2, 7–8; EPIC (Comment 19)
at 6–7.
93 5 U.S.C. 601–612.
94 5 U.S.C. 603–605.
95 CDIA (Comment 13) at 2–3; SIFMA/BPI
(Comment 15) at 8; ETA (Comment 17) at 2–3; CTIA
(Comment 20) at 3–6; NADA (Comment 21) at 2–
3; U.S. Chamber of Commerce (Comment 22).
96 American Escrow Association (Comment 16) at
2; ACE (Comment 18) at 2, 7–8; EPIC (Comment 19)
at 6–7.
97 American Escrow Association (Comment 16) at
2 (stating that the reporting requirement ‘‘does not
appear to be onerous as a reporting matter and we
also agree with the FTC’s conclusion that there
would not be a significant impact on small
business’’).
98 The U.S. Small Business Administration Table
of Small Business Size Standards Matched to North
American Industry Classification System Codes
(‘‘NAICS’’) are generally expressed in either
millions of dollars or number of employees. A size
standard is the largest that a business can be and
still qualify as a small business for Federal
Government programs. For the most part, size
standards are the annual receipts or the average
employment of a firm. Depending on the nature of
the financial services an institution provides, the
size standard varies. By way of example, mortgage
and nonmortgage loan brokers (NAICS code
522310) are classified as small if their annual
receipts are $15 million or less. Consumer lending
institutions (NAICS code 52291) are classified as
small if their annual receipts are $47 million or less.
Commercial banking and savings institutions
(NAICS codes 522110 and 522120) are classified as
small if their assets are $850 million or less. Assets
are determined by averaging the assets reported on
businesses’ four quarterly financial statements for
the preceding year. The 2023 Table of Small
Business Size Standards is available at https://
www.sba.gov/document/support--table-size-
standards.
also anticipates that affected financial
institutions may use attorneys to
formulate and submit the required
report, resulting in 2 hours of labor at
a mean hourly wage of $78.74 (2 hours
× $78.74 = $157.48).90 Accordingly, FTC
staff estimates the approximate labor
cost to be $330 per report (rounded to
the nearest dollar). This yields a total
annual cost burden of $37,950 (115
annual responses × $330).
The Commission is providing an
online reporting form on the
Commission’s website to facilitate
reporting of qualifying notification
events. As a result, the Commission
does not anticipate covered financial
institutions will incur any new capital
or non-labor costs in complying with
the reporting requirement.
Pursuant to Section 3506(c)(2)(A) of
the PRA, the FTC invited comments on:
(1) whether the disclosure requirements
are necessary, including whether the
information will be practically useful;
(2) the accuracy of our burden estimates,
including whether the methodology and
assumptions used are valid; (3) ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(4) ways to minimize the burden of
providing the required information to
the Commission. Although the
Commission received several comments
that argued that the required
notifications would be burdensome for
businesses, none addressed the accuracy
of the Commission’s burden estimate.91
Other commenters argued that the
reporting requirement would create
little burden. 92 For the reasons
discussed above, the Commission agrees
with these commenters and does not
believe that reporting requirement will
create a significant burden for
businesses.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 93 requires that the Commission
provide an Initial Regulatory Flexibility
Analysis (‘‘IRFA’’) with a proposed rule,
and a Final Regulatory Flexibility
Analysis (‘‘FRFA’’) with the final rule,
unless the Commission certifies that the
Rule will not have a significant
economic impact on a substantial
number of small entities.94 As discussed
in the IRFA, the Commission does not
believe this amendment to the
Safeguards Rule has the threshold
impact on small entities. The reporting
requirement will apply to financial
institutions that, in most cases, already
have an obligation to disclose similar
information under certain Federal and
State laws and regulations and will not
require additional investigation or
preparation.
In this document, the Commission
adopts the amendments proposed in its
SNPRM with only minimal
modifications. In its IRFA, the
Commission determined that the
proposed rule would not have a
significant impact on small entities
because of the minimal information
being requested. Although the
Commission certifies under the RFA
that the rule will not have a significant
impact on a substantial number of small
entities, and hereby provides notice of
that certification to the Small Business
Administration, the Commission
nonetheless has determined that
publishing a FRFA is appropriate to
ensure that the impact of the rule is
fully addressed. Therefore, the
Commission has prepared the following
analysis:
1. Need for and Objectives of the Final
Rule
The need for and the objective of the
Final Rule is to ensure the Commission
is aware of notification events that
could suggest a financial institution’s
security program does not comply with
the Rule’s requirements, thus facilitating
Commission enforcement of the Rule.
To the extent the reported information
is made public, the information will
also assist consumers by providing
information as to notification events
experienced by various financial
institutions.
2. Significant Issues Raised in Public
Comments in Response to the IRFA
Although the Commission received
several comments that argued that the
required notifications would be
burdensome for businesses,95 none
argued specifically that smaller
businesses in particular would be
subject to special burden. Other
commenters argued that the reporting
requirement would create little
burden. 96 One commenter specifically
argued that the requirement would not
create significant burden for small
businesses.97 As discussed above, the
Commission does not anticipate that
covered financial institutions will incur
any new capital or non-labor costs in
complying with the reporting
requirement. Additionally, the average
annual labor costs per covered financial
institution are de minimis because most
entities, including small entities, will
only infrequently be required to file a
report. Thus, the Commission does not
believe that the reporting requirement
will create a significant burden for
financial institutions in general,
including small businesses.
The Commission did not receive any
comments filed by the Chief Counsel for
Advocacy of the Small Business
Administration (‘‘SBA’’).
3. Description and an Estimate of the
Number of Small Entities to Which the
Final Rule Will Apply, or Explanation
Why No Estimate Is Available
As explained in the IRFA,
determining a precise estimate of the
number of small entities 98 that would
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77508 	Federal Register / Vol. 88, No. 217 / Monday, November 13, 2023 / Rules and Regulations
99 See, e.g., 2023 Verizon Data Breach
Investigations Report at 65, available at https://
www.verizon.com/business/resources/reports/dbir/
(reporting cybersecurity incidents and confirmed
data disclosures for companies with fewer than or
more than 1000 employees).
have to report a notification event in a
given year is not readily feasible. No
commenters addressed this issue. Both
small entities and larger ones
experience security incidents involving
disclosure of consumer information.99
However, other factors complicate the
analysis. There are no estimates
available reflecting the percentage of
financial institutions under the
Commission’s jurisdiction that would be
considered small entities, and small
entities may be more likely to
experience notification events that fall
below the notification threshold, for
example. Such factors are not reflected
in industry and economic sector data,
and, therefore, it is not possible to
estimate the number of small entities
covered by the Rule from such data.
Projecting from entities’ past
experiences of actual breaches,
however, as discussed in the section
discussing the PRA, FTC staff estimates
the Rule’s reporting requirement would
affect approximately 115 entities per
year in the future. Accordingly, even if
every financial institution required to
report in a given year were a small
entity, the reporting requirement would
affect only approximately 115 such
entities. Regardless, as discussed above,
these amendments will not add any
significant additional burdens on any
covered small businesses.
4. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
The notification requirement imposes
reporting requirements. As outlined
above, the amendment will affect only
those financial institutions that suffer a
notification event in which unencrypted
customer information affecting at least
500 consumers is acquired without
authorization. If such an event occurs,
the affected financial institution may
expend costs to provide the Commission
with the information required by the
reporting requirement. As noted in the
PRA analysis above, the total estimated
annual cost burden for all entities
subject to the reporting requirement will
be approximately $37,950.
5. Description of Steps Taken To
Minimize Significant Economic Impact,
If Any, on Small Entities, Including
Alternatives
The Commission did not propose any
specific small entity exemption or other
significant alternatives because the
burden imposed upon small businesses
is minimal. In drafting the reporting
requirement, the Commission has made
every effort to avoid unduly
burdensome requirements for entities.
The reporting requirement only
mandates that affected financial
institutions provide the Commission
with information necessary to assist it in
its regulatory and enforcement efforts.
The rule minimizes burden on all
covered financial institutions, including
small businesses, by providing for
reporting through an online form on the
Commission’s website. In addition, the
rule requires that only notification
events involving at least 500 consumers
must be reported, which will reduce
potential burden on small businesses
that retain information on fewer
consumers. Therefore, the Commission
does not believe that any alternatives for
small entities are required or
appropriate.
VII. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 314
Consumer protection, Computer
technology, Credit, Privacy, Trade
practices.
For the reasons stated above, the
Federal Trade Commission amends 16
CFR part 314 as follows:
PART 314—STANDARDS FOR
SAFEGUARDING CUSTOMER
INFORMATION
■ 1. The authority citation for part 314
continues to read as follows:
Authority: 15 U.S.C. 6801(b), 6805(b)(2).
■ 2. In § 314.2:
■ a. Redesignate paragraphs (m) through
(r) as paragraphs (n) through (s),
respectively; and
■ b. Add a new paragraph (m). The
addition reads as follows:
§ 314.2 Definitions.
* 	* 	* 	* 	*
(m) Notification event means
acquisition of unencrypted customer
information without the authorization of
the individual to which the information
pertains. Customer information is
considered unencrypted for this
purpose if the encryption key was
accessed by an unauthorized person.
Unauthorized acquisition will be
presumed to include unauthorized
access to unencrypted customer
information unless you have reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.
* 	* 	* 	* 	*
■ 3. In § 314.4, revise the introductory
text of paragraph (c) and add paragraph
(j) to read as follows:
§ 314.4 Elements.
* 	* 	* 	* 	*
(c) Design and implement safeguards
to control the risks you identify through
risk assessment, including by:
* 	* 	* 	* 	*
(j) Notify the Federal Trade
Commission about notification events in
accordance with paragraphs (j)(1) and
(2) of this section.
(1) Notification requirement. Upon
discovery of a notification event as
described in paragraph (j)(2) of this
section, if the notification event
involves the information of at least 500
consumers, you must notify the Federal
Trade Commission as soon as possible,
and no later than 30 days after discovery
of the event. The notice shall be made
electronically on a form to be located on
the FTC’s website, https://www.ftc.gov.
The notice shall include the following:
(i) The name and contact information
of the reporting financial institution;
(ii) A description of the types of
information that were involved in the
notification event;
(iii) If the information is possible to
determine, the date or date range of the
notification event;
(iv) The number of consumers
affected or potentially affected by the
notification event;
(v) A general description of the
notification event; and
(vi) Whether any law enforcement
official has provided you with a written
determination that notifying the public
of the breach would impede a criminal
investigation or cause damage to
national security, and a means for the
Federal Trade Commission to contact
the law enforcement official. A law
enforcement official may request an
initial delay of up to 30 days following
the date when notice was provided to
the Federal Trade Commission. The
delay may be extended for an additional
period of up to 60 days if the law
enforcement official seeks such an
extension in writing. Additional delay
may be permitted only if the
Commission staff determines that public
disclosure of a security event continues
to impede a criminal investigation or
cause damage to national security.
(2) Notification event treated as
discovered. A notification event shall be
treated as discovered as of the first day
on which such event is known to you.
You shall be deemed to have knowledge
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77509	Federal Register / Vol. 88, No. 217 / Monday, November 13, 2023 / Rules and Regulations
of a notification event if such event is
known to any person, other than the
person committing the breach, who is
your employee, officer, or other agent.
■ 4. Revise § 314.5 to read as follows:
§ 314.5 Effective date.
Section 314.4(j) is effective as of May
13, 2024.
By direction of the Commission.
April J. Tabor,
Secretary.
[FR Doc. 2023–24412 Filed 11–9–23; 8:45 am]
BILLING CODE 6750–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2023–0882]
Special Local Regulations; San Diego
Parade of Lights, San Diego, CA
AGENCY : Coast Guard, DHS.
ACTION : Notification of enforcement of
regulation.
SUMMARY : The Coast Guard will enforce
the San Diego Parade of Lights special
local regulations on the waters of San
Diego Bay, California on December 10,
2023 and December 17, 2023. These
special local regulations are necessary to
provide for the safety of the
participants, crew, spectators, sponsor
vessels, and general users of the
waterway. During the enforcement
period, persons and vessels are
prohibited from anchoring, blocking,
loitering, or impeding within this
regulated area unless authorized by the
Captain of the Port Sector San Diego or
a designated representative.
DATES : The regulations in 33 CFR
100.1101 will be enforced from 5 p.m.
through 8 p.m. on December 10, 2023,
and from 5 p.m. through 8 p.m. on
December 17, 2023, for Item 5 in Table
1 of Section 100.1101.
FOR FURTHER INFORMATION CONTACT: If
you have questions about this
publication of enforcement, call or
email Lieutenant Shelley Turner,
Waterways Management, U.S. Coast
Guard Sector San Diego, CA; telephone
(619) 278–7656, email
MarineEventsSD@uscg.mil.
SUPPLEMENTARY INFORMATION : The Coast
Guard will enforce the special local
regulations in 33 CFR 100.1101 for the
San Diego Parade of Lights in San Diego
Bay, CA in 33 CFR 100.1101, Table 1,
Item 5 of that section from 5 p.m. until
8 p.m. on December 10, 2023, and on
December 17, 2023. This enforcement
action is being taken to provide for the
safety of life on navigable waterways
during the event. The Coast Guard’s
regulation for recurring marine events in
the San Diego Captain of the Port Zone
identifies the regulated entities and area
for this event. During the enforcement
periods and under the provisions of 33
CFR 100.1101, persons and vessels are
prohibited from anchoring, blocking,
loitering, or impeding within this
regulated area, unless authorized by the
Captain of the Port, or his designated
representative. The Coast Guard may be
assisted by other Federal, State, or local
law enforcement agencies in enforcing
this regulation.
In addition to this document in the
Federal Register, the Coast Guard will
provide the maritime community with
advance notification of this enforcement
period via the Local Notice to Mariners,
marine information broadcasts, and
local advertising by the event sponsor.
J.W. Spitler,
Captain, U.S. Coast Guard, Captain of the
Port Sector San Diego.
[FR Doc. 2023–25028 Filed 11–9–23; 8:45 am]
BILLING CODE 9110–04–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2023–0871]
Special Local Regulation; Marine
Events Within the Eleventh Coast
Guard District—Mission Bay Parade of
Lights
AGENCY : Coast Guard, DHS.
ACTION : Notification of enforcement of
regulation.
SUMMARY : The Coast Guard will enforce
the special local regulation on the
waters of Mission Bay, CA, during the
Mission Bay Parade of Lights on
December 10, 2022. This special local
regulation is necessary to provide for
the safety of the participants, crew,
sponsor vessels of the event, and general
users of the waterway. During the
enforcement period, persons and vessels
are prohibited from entering into,
transiting through, or anchoring within
this regulated area unless authorized by
the Captain of the Port Sector San Diego
or their designated representative.
DATES : The regulations in 33 CFR
100.1101 for the location described in
Item 6 in Table 1 to § 100.1101, will be
enforced from 5:30 p.m. through 8 p.m.
on December 10, 2023, and December
17, 2023.
FOR FURTHER INFORMATION CONTACT: If
you have questions about this
notification of enforcement, call or
email Lieutenant Shelley Turner,
Waterways Management, U.S. Coast
Guard Sector San Diego, CA; telephone
(619) 278–7656, email
MarineEventsSD@uscg.mil.
SUPPLEMENTARY INFORMATION : The Coast
Guard will enforce the special local
regulations in 33 CFR 100.1101 for the
location identified in Item No. 6 in
Table 1 to § 100.1101, from 5:30 p.m.
until 8 p.m. on December 10, 2023, and
December 17, 2023, for the Mission Bay
Parade of Lights in Mission Bay, CA.
This action is being taken to provide for
the safety of life on the navigable
waterways during the event. Our
regulation for recurring marine events in
the San Diego Captain of the Port Zone,
§ 100.1101, Item No. 6 in table 1 to
§ 100.1101, specifies the location of the
regulated area for the Mission Bay
Parade of Lights, which encompasses
portions of Mission Bay. Under the
provisions of § 100.1101, persons and
vessels are prohibited from entering
into, transiting through, or anchoring
within this regulated area unless
authorized by the Captain of the Port, or
his designated representative. The Coast
Guard may be assisted by other Federal,
State, or local law enforcement agencies
in enforcing this regulation.
In addition to this document in the
Federal Register, the Coast Guard will
provide the maritime community with
advance notification of this enforcement
period via the Local Notice to Mariners
and marine information broadcasts.
J.W. Spitler,
Captain, U.S. Coast Guard, Captain of the
Port Sector San Diego.
[FR Doc. 2023–25027 Filed 11–9–23; 8:45 am]
BILLING CODE 9110–04–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2023–0870]
RIN 1625–AA00
Safety Zone; APEC 2023 Fireworks;
San Francisco Bay, San Francisco, CA
AGENCY : Coast Guard, Department of
Homeland Security (DHS).
ACTION : Temporary final rule.
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590 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
FEDERAL TRADE COMMISSION
16 CFR Part 463
RIN 3084–AB72
Combating Auto Retail Scams Trade
Regulation Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is issuing this Combating Auto Retail
Scams Trade Regulation Rule (‘‘CARS
Rule,’’ ‘‘Rule,’’ or ‘‘Final Rule’’) and
Statement of Basis and Purpose (‘‘SBP’’)
related to the sale, financing, and
leasing of covered motor vehicles by
covered motor vehicle dealers. The
Final Rule, among other things,
prohibits motor vehicle dealers from
making certain misrepresentations in
the course of selling, leasing, or
arranging financing for motor vehicles,
requires accurate pricing disclosures in
dealers’ advertising and sales
communications, requires dealers to
obtain consumers’ express, informed
consent for charges, prohibits the sale of
any add-on product or service that
confers no benefit to the consumer, and
requires dealers to keep records of
certain advertisements and customer
transactions.
DATES : This rule is effective July 30,
2024.
ADDRESSES : Copies of this document are
available on the Commission’s website,
www.ftc.gov.
FOR FURTHER INFORMATION CONTACT:
Daniel Dwyer or Sanya Shahrasbi,
Division of Financial Practices, Bureau
of Consumer Protection, Federal Trade
Commission, 202–326–2957 (Dwyer),
202–326–2709 (Shahrasbi), ddwyer@
ftc.gov, sshahrasbi@ftc.gov.
SUPPLEMENTARY INFORMATION :
Table of Contents
I. Background
A. Statutory Authority
B. Commission Actions Following the
Dodd-Frank Act and the Rulemaking
Process
II. Motor Vehicle Financing and Leasing
A. Overview of the Motor Vehicle
Marketplace
B. Deceptive and Unfair Practices in the
Motor Vehicle Marketplace
1. Bait-and-Switch Tactics
2. Unlawful Practices Relating to Add-On
Products or Services and Hidden Charges
C. Law Enforcement and Other Responses
III. Section-by-Section Analysis
A. § 463.1: Authority
B. § 463.2: Definitions
1. Overview
2. Definition-by-Definition Analysis
(a) Add-On or Add-On Product(s) or
Service(s)
(b) Add-On List
(c) Cash Price Without Optional Add-Ons
(d) Clearly and Conspicuously
(e) Motor Vehicle (finalized as ‘‘‘Covered
Motor Vehicle’ or ‘Vehicle’ ’’)
(f) Dealer or Motor Vehicle Dealer
(finalized as ‘‘‘Covered Motor Vehicle
Dealer’ or ‘Dealer’ ’’)
(g) Express, Informed Consent
(h) GAP Agreement
(l) Government Charges
(j) Material or Materially
(k) Offering Price
C. § 463.3: Prohibited Misrepresentations
1. General Comments
2. Paragraph-by-Paragraph Analysis of
§ 463.3
(a) The Costs or Terms of Purchasing,
Financing, or Leasing a Vehicle
(b) Any Costs, Limitation, Benefit, or Any
Other Aspect of an Add-On Product or
Service
(c) Whether Terms Are, or Transaction Is,
for Financing or a Lease
(d) The Availability of Any Rebates or
Discounts That Are Factored Into the
Advertised Price but Not Available to All
Consumers
(e) The Availability of Vehicles at an
Advertised Price
(f) Whether Any Consumer Has Been or
Will Be Preapproved or Guaranteed for
Any Product, Service, or Term
(g) Any Information on or About a
Consumer’s Application for Financing
(h) When the Transaction Is Final or
Binding on All Parties
(i) Keeping Cash Down Payments or Trade-
in Vehicles, Charging Fees, or Initiating
Legal Process or Any Action If a
Transaction Is Not Finalized or If the
Consumer Does Not Wish To Engage in
a Transaction
(i) Keeping Cash Down Payments or Trade-
in Vehicles, Charging Fees, or Initiating
Legal Process or Any Action If a
Transaction Is Not Finalized or If the
Consumer Does Not Wish To Engage in
a Transaction
(j) Whether or When a Dealer Will Pay Off
Some or All of the Financing or Lease on
a Consumer’s Trade-in Vehicle
(k) Whether Consumer Reviews or Ratings
Are Unbiased, Independent, or Ordinary
Consumer Reviews or Ratings of the
Dealer or the Dealer’s Products or
Services
(l) Whether the Dealer or Any of the
Dealer’s Personnel or Products or
Services Is or Was Affiliated With,
Endorsed or Approved by, or Otherwise
Associated With the United States
Government or Any Federal, State, or
Local Government Agency, Unit, or
Department, Including the United States
Department of Defense or Its Military
Departments
(m) Whether Consumers Have Won a Prize
or Sweepstakes
(n) Whether, or Under What
Circumstances, a Vehicle May Be Moved,
Including Across State Lines or Out of
the Country
(o) Whether, or Under What
Circumstances, a Vehicle May Be
Repossessed
(p) Any of the Required Disclosures
Identified in This Part
D. § 463.4: Disclosure Requirements
1. Overview
2. Paragraph-by-Paragraph Analysis of
§ 463.4
(a) Offering Price
(b) Add-On List
(c) Add-Ons Not Required
(d) Total of Payments and Consideration
for a Financed or Lease Transaction
(e) Monthly Payments Comparison
E. § 463.5: Dealer Charges for Add-Ons and
Other Items
1. Overview
2. Paragraph-by-Paragraph Analysis of
§ 463.5
(a) Add-Ons That Provide No Benefit
(b) Undisclosed or Unselected Add-Ons
(c) Any Item Without Express, Informed
Consent
F. § 463.6: Recordkeeping
G. § 463.7: Waiver Not Permitted
H. § 463.8: Severability
I. § 463.9: Relation to State Laws
IV. Effective Date
V. Paperwork Reduction Act
A. Add-On List Disclosures
B. Disclosures Relating to Cash Price
Without Optional Add-Ons
C. Prohibited Misrepresentations and
Required Disclosures
D. Recordkeeping
E. Capital and Other Non-Labor Costs
1. Disclosures
2. Recordkeeping
VI. Regulatory Flexibility Act
A. Significant Impact Analysis
1. Comments on Significant Impact
2. Certification of the Final Rule
(a) Industry Averages
(b) Dealer Size Based on the Number of
Employees
B. Initial and Final Regulatory Flexibility
Analysis
1. Comments on the Initial Regulatory
Flexibility Analysis
(a) Description of the Reasons Why Action
by the Agency Is Being Considered
(b) Succinct Statement of the Objectives of,
and Legal Basis for, the Proposed Rule
(c) Description of and, Where Feasible,
Estimate of the Number of Small Entities
to Which the Proposed Rule Will Apply
(d) Description of the Projected Reporting,
Recordkeeping, and Other Compliance
Requirements of the Proposed Rule
(e) Duplicative, Overlapping, or Conflicting
Federal Rules
(f) Description of Any Significant
Alternatives to the Proposed Rule Which
Accomplish the Stated Objectives of
Applicable Statutes and Which
Minimize Any Significant Economic
Impact of the Proposed Rule on Small
Entities
2. Final Regulatory Flexibility Analysis
(a) Statement of the Need for, and
Objectives of, the Rule
(b) Issues Raised by Comments, Including
Comments by the Chief Counsel for
Advocacy of the SBA, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
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591	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
1 Public Law 111–203, 124 Stat. 1376 (2010).
2 12 U.S.C. 5519(d). See 12 U.S.C. 5519(f)(1) and
(2) for definitions of the terms ‘‘motor vehicle’’ and
‘‘motor vehicle dealer’’ under section 1029 of the
Dodd-Frank Act, respectively.
3 See 12 U.S.C. 5519(a) (discussing the authority
over ‘‘motor vehicle dealer[s] that [are]
predominantly engaged in the sale and servicing of
motor vehicles, the leasing and servicing of motor
vehicles, or both’’); 12 U.S.C. 5519(d)
(‘‘Notwithstanding section 57a of title 15, the
Federal Trade Commission is authorized to
prescribe rules under sections 45 and 57a(a)(1)(B)
of title 15[ ] in accordance with section 553 of title
5, with respect to a person described in subsection
(a).’’); 5 U.S.C. 553. Because the Commission has
authority to promulgate this Rule in accordance
with the APA, it is not required to include a
statement as to the prevalence of the acts or
practices treated by the Rule under section 18(d) of
the FTC Act. Compare 12 U.S.C. 5519(d) and (a)
(providing the FTC with APA rulemaking authority
for purposes of section 1029 of the Dodd-Frank
Act), with 15 U.S.C. 57a(b)(3) (requiring a statement
as to prevalence for certain rulemaking proceedings
by the Commission under non-APA procedures),
and 15 U.S.C. 57a(b)(1) (establishing that certain
rulemaking proceedings by the Commission under
non-APA procedures are subject to requirements in
addition to those under the APA).
4 See 12 U.S.C. 5411(a).
5 76 FR 14014, 14015 (Mar. 15, 2011).
6 See Fed. Trade Comm’n, ‘‘The Road Ahead:
Selling, Financing & Leasing Motor Vehicles’’ (Apr.
12, 2011), https://www.ftc.gov/news-events/events/
2011/04/road-ahead-selling-financing-leasing-
motor-vehicles (providing materials from
roundtable in Detroit, Michigan); Fed. Trade
Comm’n, ‘‘The Road Ahead: Selling, Financing &
Leasing Motor Vehicles’’ (Aug. 2, 2011), https://
www.ftc.gov/news-events/events/2011/08/road-
ahead-selling-financing-leasing-motor-vehicles
(providing materials from roundtable in San
Antonio, Texas); Fed. Trade Comm’n, ‘‘The Road
Ahead: Selling, Financing & Leasing Motor
Vehicles’’ (Nov. 17, 2011), https://www.ftc.gov/
news-events/events/2011/11/road-ahead-selling-
financing-leasing-motor-vehicles (providing
materials from roundtable in Washington, District
of Columbia).
7 As used herein, references to the ‘‘Statement of
Basis and Purpose’’ or ‘‘SBP’’ refer to the portions
of this document that precede the regulatory text of
the Final Rule. References to the ‘‘Rule,’’ ‘‘Final
Rule,’’ or ‘‘CARS Rule’’ refer to the text in part
463—Combating Auto Retail Scams (‘‘CARS’’)
Trade Regulation Rule. Because the Final Rule is
narrower than the proposed Motor Vehicle Dealers
Trade Regulation Rule in the NPRM, the
Commission has modified the Rule title to reflect
the more limited scope.
8 See Press Release, Fed. Trade Comm’n, ‘‘FTC
Proposes Rule to Ban Junk Fees, Bait-and-Switch
Tactics Plaguing Car Buyers’’ (June 23, 2022),
https://www.ftc.gov/news-events/news/press-
releases/2022/06/ftc-proposes-rule-ban-junk-fees-
bait-switch-tactics-plaguing-car-buyers.
9 See Fed. Trade Comm’n, Notice of Proposed
Rulemaking, Motor Vehicle Dealers Trade
Regulation Rule, 87 FR 42012 (released June 23,
2022; published July 13, 2022) [hereinafter NPRM],
https://www.govinfo.gov/content/pkg/FR-2022-07-
13/pdf/2022-14214.pdf.
10 The Commission received 27,349 comment
submissions filed online in response to its NPRM.
See Gen. Servs. Admin., Dkt. No. FTC–2022–0046,
Proposed Rule, Motor Vehicle Dealers Trade
Regulation Rule (July 13, 2022), https://
www.regulations.gov/document/FTC-2022-0046-
0001 (noting comments received). To facilitate
public access, over 11,000 such comments have
been posted publicly on Regulations.gov at https://
www.regulations.gov/document/FTC-2022-0046-
0001/comment (noting posted comments). As
explained at Regulations.gov, agencies may choose
to redact or withhold certain submissions (or
portions thereof) such as those containing private
or proprietary information, inappropriate language,
or duplicate/near duplicate examples of a mass-
mail campaign. See Gen. Servs. Admin.,
Regulations.gov Frequently Asked Questions, Find
Dockets, Documents, and Comments FAQs, ‘‘How
are comments counted and posted to
Regulations.gov?,’’ https://www.regulations.gov/
faq?anchor=downloadingdata (last visited Dec. 5,
2023). The Commission has considered all timely
and responsive public comments it received in
response to its NPRM.
11 See, e.g., Individual commenter, Doc. No. FTC–
2022–0046–4648 (‘‘As a young Marine stationed in
Continued
(c) Description and Estimate of the Number
of Small Entities to Which the Final Rule
Will Apply or an Explanation of Why No
Such Estimate Is Available
(d) Description of the Projected Reporting,
Recordkeeping, and Other Compliance
Requirements
(e) Description of the Steps the
Commission Has Taken To Minimize the
Significant Economic Impact on Small
Entities Consistent With the Stated
Objectives of Applicable Statutes
VII. Final Regulatory Analysis Under Section
22 of the FTC Act
A. Introduction
B. Estimated Benefits of Final Rule
1. Consumer Time Savings When Shopping
for Motor Vehicles
2. Reductions in Deadweight Loss
3. Framework
4. Estimation
5. Benefits Related to More Transparent
Negotiation
C. Estimated Costs of Final Rule
1. Prohibited Misrepresentations
2. Required Disclosure of Offering Price in
Advertisements and in Response to
Inquiry
3. Disclosure of Add-On List and
Associated Prices
4. Required Disclosure of Total of
Payments for Financing/Leasing
Transactions
5. Prohibition on Charging for Add-Ons
that Provide No Benefit
6. Requirement to Obtain Express,
Informed Consent Before Any Charges
7. Recordkeeping
D. Other Impacts of Final Rule
E. Conclusion
F. Appendix: Derivation of Deadweight
Loss Reduction
G. Appendix: Uncertainty Analysis
VIII. Other Matters
I. Background
A. Statutory Authority
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘Dodd-
Frank Act’’) was signed into law in
2010. 1 Section 1029 of the Dodd-Frank
Act authorizes the FTC to prescribe
rules with respect to unfair or deceptive
acts or practices by motor vehicle
dealers. 2 The FTC is authorized to do so
under the FTC Act and in accordance
with section 553 of the Administrative
Procedure Act (‘‘APA’’).3 The grant of
APA rulemaking authority set forth in
section 1029 of the Dodd-Frank Act
became effective as of July 21, 2011—
the designated ‘‘transfer date’’
established by the Treasury
Department. 4
B. Commission Actions Following the
Dodd-Frank Act and the Rulemaking
Process
Following enactment of the Dodd-
Frank Act, the Commission published in
the Federal Register a notice discussing
its authority to prescribe rules with
respect to unfair or deceptive acts or
practices by motor vehicle dealers and
announcing that it would be hosting a
series of public roundtables to explore
consumer protection issues pertaining
to motor vehicle sales and leasing,
including what consumer protection
issues, if any, exist that could be
addressed through a possible
rulemaking. 5 The Commission sought
participation from regulators, consumer
advocates, industry participants, and
other interested parties and ultimately
held three such public roundtables.6
The Commission subsequently
focused on enforcement and business
guidance in the motor vehicle dealer
marketplace. As discussed in SBP II.C,7
however, certain unfair and deceptive
acts or practices have persisted, despite
more than a decade of enforcement and
education. Accordingly, on June 23,
2022, the Commission announced a
notice of proposed rulemaking
(‘‘NPRM’’) addressing unfair or
deceptive acts or practices by motor
vehicle dealers. 8 That notice was
published in the Federal Register on
July 13, 2022.9 The NPRM, among other
things, proposed to (i) prohibit motor
vehicle dealers from making certain
misrepresentations, (ii) require accurate
pricing disclosures, (iii) prohibit the
sale of any add-on product or service
that confers no benefit to the consumer,
(iv) require express, informed consent
for add-ons and other charges, and (v)
impose certain recordkeeping
requirements. The comment period for
the NPRM closed on September 12,
2022.
In response to the NPRM and
proposed rule, the Commission received
more than 27,000 comments from
stakeholders representing a wide range
of viewpoints.10 These stakeholders
included numerous individual
consumers who described deceptive
practices during recent car purchases
and many who discussed current or
former military service and deceptive
and predatory practices common near
military installations.11 Commenters
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592 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
a military town I was taken advantage of by a
dealership when purchasing my first car. It set me
back financially for years. I know of many young
military people who purchased vehicle[ ]s and
we[ ]re instantly so far upside down after leaving
the dealership with thousands of dollars in add on
junk charges . . . .’’); Individual commenter, Doc.
No. FTC–2022–0046–0542 (‘‘As a former member of
the Military, the amount of scams and horror stories
I have heard regarding young service members
buying cars is absurd. . . . Someone shouldn’t
have to do hours of research on how to buy a car
so they don’t get taken advantage of.’’); Individual
commenter, Doc. No. FTC–2022–0046–0637 (‘‘As a
small business owner and active duty military
member I have played the role of both a buyer,
toiling for hours to just reach fair deals on vehicles,
as well as that of an advocate for my Sailors who
have been preyed upon by local dealerships.
Nowhere else in our society do so many average
citizens have to mentally prepare for a battle over
fair pricing and treatment for something that is
realistically a modern necessity.’’); Individual
commenter, Doc. No. FTC–2022–0046–9840 (‘‘I
can’t list the number of times I have either seen, or
have stepped in a situation, where car dealers have
either attempted to take, or have successfully taken,
advantage of a young military member or their
family by baiting and switching when it came to the
price of a car, or stated that the price was one
amount, only to be charged, and over-charged a
higher amount. These dealers have even attempted
to pull unethical tricks on me and my wife, even
after they found out that I was a military member,
a combat veteran, that was serving this great
nation.’’); Individual commenter, Doc. No. FTC–
2022–0046–0845 (‘‘Predatory practices like [bait-
and-switch pricing] are common near military
installations . . . .’’).
12 Industry commenters claimed that many of the
areas covered by the proposed rule are already
addressed in industry guidance. The Commission
notes that, although industry guidance can provide
helpful information to dealers, dealers who choose
not to follow such guidance, or who engage in
deceptive or unfair practices, subject their
customers to significant harm. The Rule addresses
such practices, thus protecting consumers and law-
abiding dealers.
13 Unless otherwise indicated, the terms ‘‘auto,’’
‘‘automobile,’’ ‘‘car,’’ ‘‘motor vehicle,’’ and
‘‘vehicle,’’ as used in this SBP and the
Commission’s final regulatory analysis, refer to
‘‘Covered Motor Vehicle’’ as defined in this part.
14 During 2017 to 2022, an average of 91% of
American workers who did not work from home
drove to work. See U.S. Census Bureau, ‘‘American
Community Survey: Means of Transportation to
Work by Selected Characteristics, 2022: ACS 1-Year
Estimates Subject Tables’’ (2023), https://data.
census.gov/table?q=Commuting&tid=
ACSST1Y2022.S0802 (reporting 110,245,368
workers 16 years and over who drove alone to work
in a car, truck, or van, and 13,881,067 workers 16
years and over who drove by carpool to work in a
car, truck or van, together accounting for 91% of the
total of 136,196,004 workers 16 years and over who
did not work from home); U.S. Census Bureau,
‘‘American Community Survey: Means of
Transportation to Work by Selected Characteristics,
2021: 2017–2021 ACS 5-Year Estimates Subject
Tables’’ (2022), https://data.census.gov/
table?q=Commuting&tid=ACSST5Y2021.S0802
(reporting 113,724,271 workers 16 years and over
who drove alone to work in a car, truck, or van, and
13,340,838 workers 16 years and over who drove by
carpool to work in a car, truck or van, together
accounting for 91% of the total of 140,223,271
workers 16 years and over who did not work from
home).
15 Nat’l Auto. Dealers Ass’n, ‘‘NADA Data 2022’’
7, https://www.nada.org/media/4695/download
?inline (noting average retail selling price of
$46,287 for new vehicles sold by dealerships in
2022).
16 Id. at 10 (noting average retail selling price of
$30,736 for used vehicles sold by new-vehicle
dealerships in 2022).
17 Lydia DePillis, ‘‘How the Costs of Car
Ownership Add Up,’’ N.Y. Times (Oct. 6, 2023),
https://www.nytimes.com/interactive/2023/10/07/
business/car-ownership-costs.html (citing average
monthly payment figures from TransUnion).
18 Id. (citing data from AAA and the U.S. Census
Bureau).
19 Bureau of Econ. Analysis, ‘‘National Data:
National Income and Product Accounts, Personal
Consumption Expenditures by Major Type of
Product’’ tbl. 2.3.5, https://apps.bea.gov/iTable/
?reqid=19&step=2&isuri=1&categories=survey
#eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDNd
LCJkYXRhIjpbWyJjYXRlZ29yaWVzIiwiU3VydmV5I
l0sWyJOSVBBX1RhYmxlX0xpc3QiLCI2NSJdXX0=
(last revised July 27, 2023) (listing estimated annual
expenditure rates of between $713.1 billion and
$737.1 billion in 2022).
20 Melinda Zabritski, Experian Info. Sols., Inc.,
‘‘State of the Automotive Finance Market Q4 2020’’
5, https://www.experian.com/content/dam/
marketing/na/automotive/quarterly-webinars/
credit-trends/2020-quarterly-trends/v2-2020-q4-
state-automotive-market.pdf (on file with the
Commission).
21 Fed. Rsrv. Bank of N.Y., ‘‘Quarterly Report on
Household Debt and Credit, 2023: Q1’’ 3–4 (May
2023), https://www.newyorkfed.org/medialibrary/
interactives/householdcredit/data/pdf/HHDC_
2023Q1; Fed. Rsrv. Bank of N.Y., ‘‘Data Underlying
Report’’ on ‘‘Page 3 Data’’ and ‘‘Page 4 Data’’ tabs,
https://www.newyorkfed.org/medialibrary/
interactives/householdcredit/data/xls/HHD_C_
Report_2023Q1 (last visited Dec. 5, 2023) (listing
number of open ‘‘Auto Loan’’ accounts and total
outstanding balance in such accounts).
22 Fed. Rsrv. Bank of N.Y., ‘‘Quarterly Report on
Household Debt and Credit, 2023: Q1’’ 3, 21 (May
2023), https://www.newyorkfed.org/medialibrary/
interactives/householdcredit/data/pdf/HHDC_
2023Q1; Fed. Rsrv. Bank of N.Y., ‘‘Data Underlying
Report’’ on ‘‘Page 3 Data’’ and ‘‘Page 21 Data’’ tabs,
https://www.newyorkfed.org/medialibrary/
interactives/householdcredit/data/xls/HHD_C_
Report_2023Q1 (last visited Dec. 5, 2023) (listing
total ‘‘Auto Loan’’ debt balance compared to other
product type categories).
23 See Consumer Fin. Prot. Bureau, ‘‘Financially
Fit? Comparing the Credit Records of Young
Servicemembers and Civilians’’ 27 (July 2020),
https://files.consumerfinance.gov/f/documents/
cfpb_financially-fit_credit-young-servicemembers-
civilians_report_2020-07.pdf.
also included dealerships and their
employees, industry groups, consumer
and community groups, and Federal and
State lawmakers and law enforcement
agencies. Many commenters, such as
consumers, some dealers and dealer
employees, consumer groups, and
lawmakers and enforcers, were
supportive of the proposed rule in
whole or in part. Many of these
commenters also urged the FTC to
include additional protections for
consumers and law-abiding businesses,
while others, such as industry groups,
dealers, and dealer employees, asked
questions or criticized the proposal.12
These comments and responses to
comments are discussed primarily in
the discussion of the Final Rule in SBP
III.
The Commission notes that it has
undertaken careful review and
consideration of each of the comments
it received in response to its NPRM. The
Commission has dedicated the majority
of its section-by-section analysis to
descriptions of, and responses to,
comments or portions thereof that were
critical of the Commission’s proposal or
that urged the Commission to adopt
additional requirements. Thus, to
ensure that this document also reflects
the many comments in the public record
from stakeholders who supported the
proposal as is, the Commission has
excerpted a number of such comments
in portions of its SBP.
II. Motor Vehicle Financing and
Leasing
A. Overview of the Motor Vehicle
Marketplace
For many consumers, buying or
leasing a motor vehicle is essential,
expensive, and time-consuming.13
Americans rely on their vehicles for
work, school, childcare, groceries,
medical visits, and many other
important tasks in their daily lives.14
These vehicles have become
increasingly costly: the average price of
a new vehicle sold at a new car
dealership in 2022 was more than
$46,000,15 while the average price of a
used vehicle sold at such dealerships
was more than $30,000.16 By the second
quarter of 2023, the average monthly
payment for used cars reached $533,
and the average monthly payment for
new cars reached $741—both record
highs.17 Vehicles are now many
consumers’ largest expense—on a par
with housing, child care and food, and
accounting for 16% of the median
annual household income before
taxes. 18 In 2022 alone, Americans spent
more than $720 billion on motor
vehicles and vehicle parts. 19
Given these costs, many consumers
who purchase a motor vehicle rely on
financing to complete their purchases.
According to public reports, 81% of
new motor vehicle purchases, and
nearly 35% of used vehicle purchases,
are financed. 20 By the first quarter of
2023, Americans had more than 107
million outstanding auto financing
accounts and owed more than $1.56
trillion thereon,21 making auto finance
the third-largest source of debt for U.S.
consumers, and the second-largest for
U.S. consumers ages 40 and over.22
Servicemembers have an average of
twice as much auto debt as civilians—
particularly young servicemembers,
who generally require vehicles for
transportation while living on military
bases.23 By the age of 24, around 20
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593	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
24 See Consumer Fin. Prot. Bureau, ‘‘Protecting
Servicemembers from Costly Auto Loans and
Wrongful Repossessions’’ (July 18, 2022), https://
www.consumerfinance.gov/about-us/blog/
protecting-servicemembers-from-costly-auto-loans-
and-wrongful-repossessions/.
25 Mary W. Sullivan, Matthew T. Jones & Carole
L. Reynolds, Fed. Trade Comm’n, ‘‘The Auto Buyer
Study: Lessons from In-Depth Consumer Interviews
and Related Research’’ 15 (July 2020) [hereinafter
Auto Buyer Study], https://www.ftc.gov/system/
files/documents/reports/auto-buyer-study-lessons-
depth-consumer-interviews-related-research/
bcpreportsautobuyerstudy.pdf (noting that the
purchase transactions in the FTC’s qualitative study
often took 5 hours or more to complete, with some
extending over several days); Cf. Cox Auto., ‘‘2020
Cox Automotive Car Buyer Journey’’ 6 (2020)
[hereinafter 2020 Cox Automotive Car Buyer
Journey], https://b2b.autotrader.com/app/uploads/
2020-Car-Buyer-Journey-Study.pdf (reporting
average consumer time spent shopping for a vehicle
at 14 hours, 53 minutes); Cox Auto., ‘‘2022 Car
Buyer Journey: Top Trends Edition’’ 6 (2023)
[hereinafter 2022 Car Buyer Journey], https://
www.coxautoinc.com/wp-content/uploads/2023/01/
2022-Car-Buyer-Journey-Top-Trends.pdf (reporting
average consumer time spent shopping for a vehicle
at 14 hours, 39 minutes).
26 For example, consumers have complained
about going to a dealership based on an offer that
the dealer refuses to honor only after they have
spent hours driving there and additional time on
the lot. See, e.g., Complaint ¶¶ 23–26, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
0169 (N.D. Ill. Mar. 31, 2022) (alleging that many
consumers drive hours to dealerships based on the
advertised prices; that test-driving and selecting a
vehicle, and negotiating the price and financing
terms, is an often hours-long process; and that, after
this time, dealers falsely told consumers that add-
on products or packages were required to purchase
or finance the vehicle, even though they were not
included in the low prices advertised or disclosed
to consumers who called to confirm prices).
27 Unless otherwise indicated, the terms ‘‘dealer,’’
‘‘dealership,’’ and ‘‘motor vehicle dealer’’ as used
in this SBP and the Commission’s final regulatory
analysis refer to ‘‘ ‘Covered Motor Vehicle Dealer’ or
‘Dealer’ ’’ as defined in this part.
28 See Nat’l Auto. Dealers Ass’n, ‘‘Dealer-Assisted
Financing Benefits Consumers,’’ https://
www.nada.org/autofinance/[https://
web.archive.org/web/20220416131718/https://
www.nada.org/autofinance/] (Apr. 16, 2022) (noting
that 7 out of 10 consumers finance through their
dealership). This is also known as ‘‘dealer
financing,’’ because consumers obtain financing
through the dealer that partners with other entities
in the financing process.
29 Dealers often originate the contract governing
the extension of retail credit or retail leases and
then sell, or otherwise assign, these contracts to
unaffiliated third-party finance or leasing sources,
including such third parties the dealer may have
contacted in the course of arranging dealer-
provided ‘‘indirect’’ financing. See Consumer Fin.
Prot. Bureau, ‘‘Automobile Finance Examination
Procedures’’ 3 (Aug. 2019), https://files.consumer
finance.gov/f/documents/201908_cfpb_automobile-
finance-examination-procedures.pdf.
30 See Nat’l Auto. Dealers Ass’n, Nat’l Ass’n of
Minority Auto. Dealers & Am. Int’l Auto. Dealers
Ass’n, ‘‘Fair Credit Compliance Policy & Program’’
2 (2015), https://www.nada.org/media/4558/
download?inline. (defining ‘‘buy rate’’ as ‘‘the rate
at which the finance source will purchase the credit
contract from the dealer’’).
31 See, e.g., id. at 1 n.4 & accompanying text.
32 Id. (describing this as the amount dealers earn
for arranging financing, measured as the difference
between the consumer’s annual percentage rate
(‘‘APR’’) and the wholesale ‘‘buy rate’’ at which a
finance source buys the finance contract from the
dealer, and noting that finance sources typically
permit dealers to retain the dealer participation).
33 Nat’l Auto. Dealers Ass’n, ‘‘Average Dealership
Profile’’ 1 (2020), https://www.nada.org/media/
4136/download?attachment[http://web.archive.org/
web/20220623204158/https://www.nada.org/
media/4136/download?attachment] (June 23, 2022).
34 Nat’l Indep. Auto. Dealers Ass’n, ‘‘NIADA Used
Car Industry Report 2020’’ 21 (2020).
35 Id. at 8, 10.
36 Melinda Zabritski, Experian Info. Sols., Inc.,
‘‘State of the Automotive Finance Market Q2 2020’’
8 (2020), https://www.experian.com/content/dam/
marketing/na/automotive/quarterly-webinars/
credit-trends/2020-q2-safm-final.pdf [http://
web.archive.org/web/20201106002015/https://
www.experian.com/content/dam/marketing/na/
automotive/quarterly-webinars/credit-trends/2020-
q2-safm-final.pdf] (Mar. 6, 2023).
37 Consumer Fin. Prot. Bureau, ‘‘Automobile
Finance Examination Procedures’’ 4 (Aug. 2019),
https://files.consumerfinance.gov/f/documents/
201908_cfpb_automobile-finance-examination-
procedures.pdf.
38 Consumer Fin. Prot. Bureau, ‘‘Consumer Voices
on Automobile Financing’’ 5 (June 2016), https://
files.consumerfinance.gov/f/documents/201606_
cfpb_consumer-voices-on-automobile-financing.pdf.
39 Melinda Zabritski, Experian Info. Sols., Inc.,
‘‘State of the Automotive Finance Market Q4 2020’’
26 (2020), https://www.experian.com/content/dam/
marketing/na/automotive/quarterly-webinars/
credit-trends/2020-quarterly-trends/v2-2020-q4-
state-automotive-market.pdf [http://
web.archive.org/web/20210311174922/https://
www.experian.com/content/dam/marketing/na/
automotive/quarterly-webinars/credit-trends/2020-
quarterly-trends/v2-2020-q4-state-automotive-
market.pdf] (Mar. 6, 2023).
40 See Fed. Trade Comm’n, ‘‘Financing or Leasing
a Car,’’ https://www.consumer.ftc.gov/articles/0056-
financing-or-leasing-car (last visited Dec. 5, 2023)
(‘‘The annual mileage limit in most standard leases
is 15,000 or less.’’); Consumer Fin. Prot. Bureau,
‘‘What should I know about the differences between
leasing and buying a vehicle?,’’ https://
www.consumerfinance.gov/ask-cfpb/what-should-i-
know-about-the-differences-between-leasing-and-
buying-a-vehicle-en-815/ (last visited Aug. 24, 2023)
(‘‘Most leases restrict your mileage to 10,000–15,000
miles per year.’’).
percent of young servicemembers have
at least $20,000 in auto debt, which
equates to nearly two-thirds of an
enlisted soldier’s typical base salary at
that age.24
In addition to the expense, the
process of buying or leasing a vehicle is
often time-consuming and arduous. It
can take several hours or days to finalize
a transaction, 25 on top of the hours it
can take, particularly in rural areas, to
drive to a dealership.26 Consumers may
need to take time off work or arrange
childcare, and families with a single
vehicle may be forced to delay other
important appointments due to the
length of the vehicle-buying or -leasing
process.
Most consumers—approximately
70%—finance vehicle purchases
through a motor vehicle dealer,27 using
what is known as dealer-provided
‘‘indirect’’ financing.28 This financing is
typically offered through dealers’
financing and insurance (‘‘F&I’’) offices,
which may also offer leasing and add-
on products or services. In the dealer-
provided financing scenario, the dealer
collects financial information about the
consumer and forwards that information
to prospective motor vehicle financing
entities. These financing entities
evaluate this information and, in the
process, determine whether, and on
what terms, to provide credit.29 These
terms include the ‘‘buy rate’’: a risk-
based finance charge that reflects the
interest rate at which the entity will
finance the deal. 30 Dealers often add a
finance charge called a ‘‘dealer reserve’’
or ‘‘markup’’ to the buy rate.31 Unlike
the buy rate, the markup is not based on
the underwriting risk or credit
characteristics of the applicant, and
dealers retain the markup as profit.32
New vehicle dealers average a gross
profit of about $2,444 per vehicle,33
more than half of which comes from the
dealers’ F&I offices. Independent used
vehicle dealers averaged a gross profit of
more than $6,000 per vehicle, as of
2019.34 While some used vehicle
dealerships do not have a separate F&I
office, more than half of such
dealerships sell add-on products.35
Six to eight percent of financed
vehicle purchases use what is called
‘‘buy here, pay here’’ dealers.36 In this
scenario, consumers typically borrow
from, and make their payments directly
to, the dealership.
The remainder of financed vehicle
transactions use what is commonly
referred to as ‘‘direct’’ financing,
provided by a credit union, bank, or
other financing entity.37 In this scenario,
consumers typically receive an interest
rate quote from the financing entity
prior to arriving at a dealership to
purchase a vehicle, and use the
financing to pay for their chosen
vehicle. 38 Dealerships do not profit on
the financing portion of the vehicle sale
transaction when a consumer arranges
financing directly.
Finally, consumers may choose to
lease a vehicle from a dealership rather
than purchase one. In this scenario,
consumers may drive a vehicle for a set
period of time—typically around three
years 39—and for a certain maximum
number of miles—typically 10,000–
15,000 miles per year—in exchange for
an upfront payment, a monthly
payment, and fees before, during, and at
the end of the lease, including for excess
wear and usage over the mileage limit.40
When consumers lease a vehicle, they
do not own it, and they must return the
vehicle when the lease expires, though
they may have the option to purchase
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41 Melinda Zabritski, Experian Info. Sols., Inc.,
‘‘State of the Automotive Finance Market Q4 2020’’
5 (2020), https://www.experian.com/content/dam/
marketing/na/automotive/quarterly-webinars/
credit-trends/2020-quarterly-trends/v2-2020-q4-
state-automotive-market.pdf [https://
www.experian.com/content/dam/marketing/na/
automotive/quarterly-webinars/credit-trends/2020-
quarterly-trends/v2-2020-q4-state-automotive-
market.pdf] (Mar. 6, 2023).
42 See Fed. Trade Comm’n, ‘‘FTC Policy
Statement on Deception’’ 2, 5, 103 F.T.C. 174 (1984)
[hereinafter FTC Policy Statement on Deception]
(appended to Cliffdale Assocs., Inc., 103 F.T.C. 110,
183 (1984)), https://www.ftc.gov/system/files/
documents/public_statements/410531/831014
deceptionstmt.pdf.
43 Id.
44 15 U.S.C. 45(n).
45 See, e.g., Fed. Trade Comm’n, ‘‘Consumer
Sentinel Network Data Book 2022’’ app. B3 at 85
(Feb. 2023) [hereinafter Consumer Sentinel Network
Data Book 2022], https://www.ftc.gov/system/files/
ftc_gov/pdf/CSN-Data-Book-2022.pdf (reporting
complaints about new and used motor vehicle sales,
financing, service & warranties, and rentals &
leasing, collectively, of more than 100,000 in 2020,
2021, and 2022); Fed. Trade Comm’n, ‘‘Consumer
Sentinel Network Data Book 2021’’ app. B3 at 85
(Feb. 2022) [hereinafter Consumer Sentinel Network
Data Book 2021], https://www.ftc.gov/system/files/
ftc_gov/pdf/CSN%20Annual%20Data%20
Book%202021%20Final%20PDF.pdf (reporting
complaints about new and used motor vehicle sales,
financing, service & warranties, and rentals &
leasing, collectively, of more than 100,000 in 2019,
2020, and 2021).
46 According to commenters, complaints to the
Better Business Bureau about new and used auto
dealers, when combined, have been either the first
or second highest regarding any industry in the U.S.
for the past twenty years. See Comment of Nat’l
Consumer L. Ctr. et al., Doc. No. FTC–2022–0046–
7607 at ii; see also Better Bus. Bureau, ‘‘BBB
Complaint and Inquiry Statistics,’’ https://
www.bbb.org/all/bbb-complaint-statistics (last
visited Dec. 5, 2023) (listing complaint statistics
from 2010 through 2022, sorted by industry). In
addition, for the past seven years annual surveys of
State and local consumer protection agencies have
reported that auto-related complaints were the top
complaint received from consumers. See Comment
of Nat’l Consumer L. Ctr. et al., Doc. No. FTC–2022–
0046–7607 at 13; Consumer Fed’n of Am., ‘‘2022
Consumer Complaint Survey Report’’ 4–5 (May
2023), https://consumerfed.org/wp-content/
uploads/2023/05/2022-Consumer-Complaint-
Survey-Report.pdf (‘‘For the seventh year in a row,
auto sales, leases and repairs are the #1 complaint
category. Consumers filed complaints about add-on
products and services, bait and switch pricing, and
mechanical condition issues.’’).
47 See Consumer Sentinel Network Data Book
2021, supra note 45, at 8 (listing vehicle-related
complaints as the seventh most common report
category, outside of identity theft, in 2021);
Consumer Sentinel Network Data Book 2022, supra
note 45, at 8 (listing motor vehicle-related
complaints as the fifth most common report
category, outside of identity theft, in 2022).
48 See Consumer Sentinel Network Data Book
2021, supra note 45, at 18 (listing vehicle-related
complaints as the eighth most common complaint
category for military consumers, outside of identity
theft categories, in 2021); Consumer Sentinel
Network Data Book 2022, supra note 45, at 18
(listing vehicle-related complaints as the ninth most
common complaint category for military
consumers, outside of identity theft categories, in
2022).
49 See, e.g., United States v. Brien, 617 F.2d 299,
308 (1st Cir. 1980); United States v. Offs. Known as
50 State Distrib. Co., 708 F.2d 1371, 1374–75 (9th
Cir. 1983); Keith B. Anderson, Fed. Trade Comm’n,
‘‘Consumer Fraud in the United States: An FTC
Survey’’ 80 (2004), https://www.ftc.gov/sites/
default/files/documents/reports/consumer-fraud-
united-states-ftc-survey/040805confraudrpt.pdf
(staff report noting consumers who reported they
were victims of fraud complained to an official
source only 8.4 percent of the time, filing
complaints with the BBB in 3.5 percent of incidents
and to a Federal agency, including the FTC, in only
1.4 percent of cases).
50 See Complaint, Fed. Trade Comm’n v. N. Am.
Auto. Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar.
31, 2022); see also WardsAuto, ‘‘WardsAuto 2020
Megadealer 100,’’ https://www.wardsauto.com/
dealers/wardsauto-2020-megadealer-100-industry-
force (last visited Dec. 5, 2023) (listing Napleton
Automotive Group as the 13th-ranked dealership
group by total revenue).
51 Complaint ¶ 27, Fed. Trade Comm’n v. N. Am.
Auto. Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar.
31, 2022) (alleging that defendants buried charges
for add-ons in voluminous paperwork, making them
difficult to detect); see Press Release, Fed. Trade
Comm’n, ‘‘FTC Returns Additional $857,000 To
Consumers Harmed by Napleton Auto’s Junk Fees
and Discriminatory Practices’’ (Nov. 20, 2023),
https://www.ftc.gov/news-events/news/press-
releases/2023/11/ftc-returns-additional-857000-
consumers-harmed-napleton-autos-junk-fees-
discriminatory-practices.
52 For example, in a recent action involving
deceptive pre-approval claims, the FTC had
received roughly 30 complaints about the
company’s pre-approval conduct in the five-year
period prior to announcing its action. But in the
five months following announcement of the action,
more than 900 additional consumers came forward
with complaints about the conduct. See Press
Release, Fed. Trade Comm’n, ‘‘FTC Announces
Claims Process for Consumers Harmed by Credit
Karma ‘Pre-Approved’ Offers for Which They Were
Denied’’ (Dec. 5, 2023), https://www.ftc.gov/news-
events/news/press-releases/2023/12/ftc-announces-
claims-process-consumers-harmed-credit-karma-
pre-approved-offers-which-they-were (‘‘[W]ithin
five months of that announcement, the agency
received nearly 900 more such complaints’’).
53 While other issues exist in the motor vehicle
sales, financing, and leasing space, including issues
involving discrimination, financing application
falsification, data privacy and security, and yo-yo
financing, this Rule’s core focus is on
misrepresentations and add-on and pricing
practices.
the vehicle at the end of the lease
period. Nearly 27% of new vehicles are
leased, as are just over 8% of used
vehicles. 41
B. Deceptive and Unfair Practices in the
Motor Vehicle Marketplace
Section 5 of the Federal Trade
Commission Act (‘‘FTC Act’’), as
amended (15 U.S.C. 45), authorizes the
FTC to address deceptive or unfair acts
or practices in or affecting commerce,
including in the motor vehicle
marketplace.
An act or practice is deceptive if there
is a representation, omission, or other
practice that is likely to mislead
consumers acting reasonably under the
circumstances and is material to
consumers—that is, it is likely to affect
consumers’ conduct or decisions with
regard to a product or service.42
Deceptive conduct can involve omission
of material information, the disclosure
of which is necessary to prevent the
claim, practice, or sale from being
misleading. 43
An act or practice is considered unfair
under section 5 of the FTC Act if: (1) it
causes, or is likely to cause, substantial
injury to consumers; (2) the injury is not
reasonably avoidable by consumers; and
(3) the injury is not outweighed by
countervailing benefits to consumers or
to competition.44
In each of the past four years, the FTC
received more than 100,000 complaints
regarding motor vehicle sales, financing,
service and warranties, and rentals and
leasing. 45 This industry is also
consistently at or near the top of private
sources of consumer complaints.46
Many of these complaints concerned
deceptive or unfair acts or practices
affecting U.S. consumers. Complaints
about motor vehicle transactions are
regularly in the top ten complaint
categories tracked by the FTC.47 For
military consumers as well, auto-related
complaints are among the top 10
complaint categories outside of identity
theft. 48
Moreover, law enforcement
experience shows that complaints are
just the tip of the iceberg.49 The
Commission’s recent enforcement action
against a large, multistate dealership
group is illustrative of this point in the
motor vehicle marketplace: in that
matter, the Commission received 391
complaints—about add-ons and other
issues—over a several-month period
prior to filing a complaint against the
thirteenth largest dealership group in
the country by revenue as of 2020.50
However, in a survey of the dealer’s
customers over the same time period,
83% of respondents—or at least 16,848
customers—indicated they were subject
to the dealer’s unlawful practices
related to add-ons alone. 51
Similarly, in other contexts where
companies were charged with making
misrepresentations or engaging in
misconduct regarding add-on products,
information obtained after filing has
shown widespread harm far beyond the
initial consumer complaint volumes
reported prior to filing.52
As examined in greater detail in the
paragraphs that follow, consumers in
the motor vehicle marketplace are
confronted with chronic deceptive or
unfair practices, including bait-and-
switch tactics and hidden charges.53
1. Bait-and-Switch Tactics
Advertisements for motor vehicles are
often consumers’ first contact in the
vehicle-buying or -leasing process.
Dealers utilize a variety of means to
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54 Nat’l Auto. Dealers Ass’n, ‘‘NADA Data 2022’’
15, https://www.nada.org/media/4695/download?
inline (listing average dealership advertising per
new vehicle sold of $718 in 2022, and $602 in
2021).
55 Id. at 16 (listing 68.2% of estimated advertising
expenditures by medium as internet expenditures).
56 See, e.g., Complaint, Timonium Chrysler, Inc.,
No. C–4429 (F.T.C. Jan. 28, 2014) (alleging
dealership advertised internet prices and dealer
discounts that were only available through rebates
not applicable to the typical consumer); Complaint,
Ganley Ford West, Inc., No. C–4428 (F.T.C. Jan. 28,
2014) (alleging dealership advertised discounts on
vehicle prices, but failed to disclose that discounts
were only available on the most expensive models);
Complaint, Progressive Chevrolet Co., No. C–4578
(F.T.C. June 13, 2016) (alleging deceptive failure to
disclose material conditions of obtaining the lease
monthly payment in their online and print
advertising); Complaint ¶¶ 38–46, Fed. Trade
Comm’n v. Tate’s Auto Ctr. of Winslow, Inc., No.
3:18–cv–08176–DJH (D. Ariz. July 31, 2018)
(alleging that company issued advertisements for
attractive terms but concealed that the terms were
only applicable to lease offers); Complaint ¶¶ 36–
38, United States v. New World Auto Imports, Inc.,
No. 3:16–cv–02401–K (N.D. Tex. Aug. 18, 2016)
(alleging misrepresentation that terms were for
financing instead of leasing); Complaint ¶¶ 85–87,
Fed. Trade Comm’n v. Universal City Nissan, Inc.,
No. 2:16–cv–07329 (C.D. Cal. Sept. 29, 2016)
(alleging that dealerships claimed consumers could
finance the purchase of vehicles with attractive
terms and buried disclosures indicating that such
terms were applicable to leases only).
57 Complaint ¶¶ 82–84, Fed. Trade Comm’n v.
Universal City Nissan, Inc., No. 2:16–cv–07329
(C.D. Cal. Sept. 29, 2016) (alleging
misrepresentation that dealer would pay off a
consumer’s trade-in when in fact consumers were
still responsible for outstanding debt on trade-in
vehicles); Complaint ¶¶ 17–19, TXVT Ltd. P’ship,
No. C–4508 (F.T.C. Feb. 12, 2015) (alleging
misrepresentation in leasing advertising that the
dealership would pay off the negative equity of a
consumer’s trade in vehicle, when in fact, it was
merely rolled into the financed amount for the
consumer’s newly financed vehicle).
58 See, e.g., Complaint ¶¶ 12, 17–19, Traffic Jam
Events, LLC, No. 9395 (F.T.C. Aug. 7, 2020);
Complaint ¶¶ 4, 7–9, Fowlerville Ford, Inc., No. C–
4433 (F.T.C. Feb. 20, 2014).
59 See, e.g., Complaint ¶¶ 25, 27–28, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
0169 (N.D. Ill. Mar. 31, 2022).
60 See Ben Eisen, ‘‘Car Dealer Markups Helped
Drive Inflation, Study Finds,’’ Wall St. J., Apr. 23,
2023, https://www.wsj.com/articles/car-dealer-
markups-helped-drive-inflation-study-finds-
7c1d5a2d; U.S. Bureau of Labor Statistics,
‘‘Automotive Dealerships 2019–2022: Dealer
Markup Increases Drive New-Vehicle Consumer
Inflation’’ (Apr. 2023), https://www.bls.gov/opub/
mlr/2023/article/automotive-dealerships-
markups.htm.
61 See Nat’l Consumer L. Ctr., ‘‘Auto Add-ons
Add Up: How Dealer Discretion Drives Excessive,
Arbitrary, and Discriminatory Pricing’’ (Oct. 1,
2017), https://www.nclc.org/images/pdf/car_sales/
report-auto-add-on.pdf; Adam J. Levitin, ‘‘The Fast
and the Usurious: Putting the Brakes on Auto
Lending Abuses,’’ 108 Geo. L.J. 1257, 1265–66
(2020), https://www.law.georgetown.edu/
georgetown-law-journal/wp-content/uploads/sites/
26/2020/05/Levitin_The-Fast-and-the-Usurious-
Putting-the-Brakes-on-Auto-Lending-Abuses.pdf
(discussing ‘‘loan packing’’ as the sale of add-on
products that are falsely represented as being
required in order to obtain financing); Complaint
¶¶ 12–19, Fed. Trade Comm’n v. Liberty Chevrolet,
Inc., No. 1:20–cv–03945 (S.D.N.Y. May 21, 2020)
(alleging deceptive and unauthorized add-on
charges in consumers’ transactions); Complaint
¶¶ 59–64, Fed. Trade Comm’n v. Universal City
Nissan, Inc., No. 2:16–cv–07329 (C.D. Cal. Sept. 29,
2016) (alleging deceptive and unauthorized add-on
charges in consumers’ transactions); Complaint
¶¶ 6, 9, TT of Longwood, Inc., No. C–4531 (F.T.C.
July 2, 2015) (alleging misrepresentations regarding
prices for added features); see also Auto Buyer
Study, supra note 25, at 14 (‘‘Several participants
who thought that they had not purchased add-ons,
or that the add-ons were included at no additional
charge, were surprised to learn, when going through
the paperwork, that they had in fact paid extra for
add-ons. This is consistent with consumers’
experiencing fatigue during the buying process or
confusion with a financially complex transaction,
but would also be consistent with dealer
misrepresentations.’’).
62 Consumers for Auto Reliability and Safety,
Comment Letter on Motor Vehicle Roundtables,
Project No. P104811 at 2–3 (Apr. 1, 2012), https://
www.ftc.gov/sites/default/files/documents/public_
comments/public-roundtables-protecting-
consumers-sale-and-leasing-motor-vehicles-project-
no.p104811-00108/00108-82875.pdf (citing a U.S.
Department of Defense data call summary that
found that the vast majority of military counselors
have clients with auto financing problems and cited
‘‘loan packing’’ and yo-yo financing as the most
frequent auto lending abuses affecting
servicemembers).
63 Complaint ¶¶ 17–19, Fed. Trade Comm’n v.
Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y.
May 21, 2020); Complaint ¶ 60, Fed. Trade Comm’n
v. Universal City Nissan, Inc., No. 2:16–cv–07329
(C.D. Cal. Sept. 29, 2016); Carole L. Reynolds &
Stephanie E. Cox, Fed. Trade Comm’n, ‘‘Buckle Up:
Navigating Auto Sales and Financing’’ (2020)
[hereinafter Buckle Up], https://www.ftc.gov/
reports/buckle-navigating-auto-sales-financing.
64 See, e.g., Buckle Up, supra note 63, at 10–11
(noting the long, complex transaction process);
Complaint ¶¶ 23–28, Fed. Trade Comm’n v. N. Am.
Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar.
31, 2022) (same).
65 Complaint ¶ 24, Fed. Trade Comm’n v. N. Am.
Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar.
31, 2022); see also Buckle Up, supra note 63, at 10–
11.
reach consumers, including social
media and online advertisements,
television and radio commercials, and
direct mail marketing. New vehicle
dealers spend an average of more than
$700 on advertising per vehicle
sold 54—more than two-thirds of which
goes toward online advertising.55
The FTC has brought many law
enforcement actions involving motor
vehicle dealers’ deceptive advertising
and other unlawful tactics. Such actions
have charged dealers with, inter alia,
making misrepresentations regarding
the price of a vehicle, the availability of
discounts and rebates, the monthly
payment amount for a financed
purchase or lease, the amount due at
signing, and whether an offer pertains to
a purchase or a lease.56 Other such
actions have charged dealers with
misrepresentations regarding whether
the dealer or consumer is responsible
for paying off ‘‘negative equity,’’ i.e., the
outstanding debt on a vehicle that is
being ‘‘traded in’’ as part of another
vehicle purchase. 57 And in other FTC
actions, some dealers have lured
potential buyers through financial
incentives incidental to the purchase,
such as deceptive promises of a valuable
prize that is redeemable only by visiting
the dealership.58
Deceptive tactics can cause significant
consumer harm and impede
competition, competitively
disadvantaging law-abiding dealers.
When dealerships advertise prices,
discounts, or other terms that are not
actually available to typical consumers,
consumers who select that dealership
instead of others spend time visiting the
dealership or otherwise interacting with
the dealership under false pretenses.
2. Unlawful Practices Relating to Add-
On Products or Services and Hidden
Charges
Another key consumer protection
concern is the sale of add-on products
or services in a deceptive or unfair
manner. Add-ons in connection with
the sale or financing of motor vehicles
include extended warranties, service
and maintenance plans, payment
programs, guaranteed automobile or
asset protection (‘‘GAP’’) agreements,
emergency road service, VIN etching
and other theft protection devices, and
undercoating. Individual add-ons can
cost consumers thousands of dollars and
can significantly increase the overall
cost to the consumer in the
transaction. 59 Moreover, in the past two
years, dealers have substantially
increased prices for these add-ons,
notwithstanding that such products or
services largely are not constrained by
supply. 60
A significant consumer protection
concern is consumers paying for add-
ons without knowing about, or
expressly agreeing to, these products or
services.61 This type of payment
packing has been a particular concern in
the military community. 62 The
protracted and paperwork-heavy
vehicle-buying or -leasing process can
make it difficult for consumers to spot
add-on charges, particularly when
advertised prices or payment terms do
not mention add-ons. 63 If consumers are
financing or leasing the vehicle, they
undergo a separate financing process
after selecting a vehicle, which can
include wading through a thick stack of
dense paperwork filled with fine
print. 64 For example, according to an
FTC law enforcement action, consumers
visiting one large dealership group were
required to complete a stack of
paperwork that ran more than sixty
pages and required more than a dozen
signatures.65 This paperwork can
include hidden charges for add-on
products or services, causing consumers
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66 Complaint ¶¶ 25, 27, 29–32, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
01690 (N.D. Ill. Mar. 31, 2022); see also Complaint
¶¶ 17–19, Fed. Trade Comm’n v. Liberty Chevrolet,
Inc., No. 1:20–cv–03945 (S.D.N.Y. May 21, 2020);
Dale Irwin, Slough Connealy Irwin & Madden LLC,
Comment Letter on Public Roundtables: Protecting
Consumers in the Sale and Leasing of Motor
Vehicles, Project No. P104811, Submission No.
558507–00060 (Dec. 29, 2011), https://
www.regulations.gov/comment/FTC-2022-0036-
0051 (consumer protection lawyer noting ‘‘payment
packing’’ among problems ‘‘that cry out for scrutiny
and regulation’’); Michael Archer, Comment Letter
on Public Roundtables: Protecting Consumers in the
Sale and Leasing of Motor Vehicles, Project No.
P104811, Submission No. 558507–00041 at 3 (Aug.
6, 2011), https://www.regulations.gov/comment/
FTC-2022-0036-0014 (workshop panelist stating, ‘‘I
have seen cases wherein the dealer uses financing
to pack in extra costs or to wipe out trade-in
value.’’); Dawn Smith, Comment Letter on Public
Roundtables: Protecting Consumers in the Sale and
Leasing of Motor Vehicles, Project No. P104811,
Submission No. 558507–00027 (July 27, 2011),
https://www.regulations.gov/comment/FTC-2022-
0036-0043 (‘‘Confusing or misleading sales terms[.]
Extra fees was [sic] added at the time of purchase
and to this day I still do not understand what the
fee was for; it made the payment higher.’’); Carrie
Ferraro, Legal Servs. of N.J., Comment Letter on
Public Roundtables: Protecting Consumers in the
Sale and Leasing of Motor Vehicles, Project No.
P104811, Submission No. 558507–00061 (Dec. 29,
2011), https://www.regulations.gov/comment/FTC-
2022-0036-0059 (citing ‘‘[d]ealers engage[d] in
packing’’ as an example of the common consumer
complaints of car-sales-related fraud received by
LSNJ’s legal advice hotline); Rosemary Shahan,
Consumers for Auto Reliability and Safety,
Comment Letter on Public Roundtables: Protecting
Consumers in the Sale and Leasing of Motor
Vehicles, Project No. P104811, Submission No.
558507–00069 at 3 (Jan. 31, 2012), https://
www.regulations.gov/comment/FTC-2022-0036-
0069 (noting that ‘‘[m]any common auto scams do
not generate complaints in proportion to how
pervasive or costly the practices are, simply because
the consumers generally remain unaware they have
been scammed,’’ including as a result of ‘‘[l]oan
packing’’); Mary W. Sullivan, Matthew T. Jones &
Carole L. Reynolds, Fed. Trade Comm’n, ‘‘The Auto
Buyer Study: Lessons from In-Depth Consumer
Interviews and Related Research,’’ Supplemental
Appendix: Redacted Interview Transcripts at 525
(2020) [hereinafter Auto Buyer Study: Appendix],
https://www.ftc.gov/system/files/documents/
reports/buckle-navigating-auto-sales-financing/
bcpstaffreportautobuyerstudysuppappendix.pdf
(Study participant 169810: consumer had
‘‘additional items’’ charges on contract that
consumer could not identify); id. at 730, 740–42
(Study participant 188329: dealer did not tell
consumer about GAP or service contract but
consumer was charged $599 and $1,950 for those
add-ons, respectively); Press Release, N.Y. State
Att’y Gen., ‘‘A.G. Schneiderman Announces Nearly
$14 Million Settlement with NYC and Westchester
Auto Dealerships for Deceptive Practices that
Resulted in Inflated Car Prices’’ (June 17, 2015),
https://ag.ny.gov/press-release/2015/ag-
schneiderman-announces-nearly-14-million-
settlement-nyc-and-westchester-auto (‘‘This
settlement is part of the [New York] attorney
general’s wider initiative to end the practice of
‘jamming,’ unlawfully charging consumers for
hidden purchases by car dealerships.’’).
67 Under the Truth in Lending Act (‘‘TILA’’) and
its implementing Regulation Z, required add-on
products or services must be factored into the APR
and the finance charge disclosed during the
transaction. See 15 U.S.C. 1605, 1606, 1638; 12 CFR
226.4, 226.18(b), (d), (e), and 226.22. It is legally
impermissible for dealers to include charges for
such products in a consumer’s contract without
disclosing them. See, e.g., Complaint ¶¶ 57–60, Fed.
Trade Comm’n v. Stewart Fin. Co. Holdings, Inc.,
No. 1:03–CV–2648 (N.D. Ga. Sept. 4, 2003) (alleging
violations for failure to include the cost of required
add-on products in the finance charge and annual
percentage rate disclosed to consumers).
68 See, e.g., Buckle Up, supra note 63, at 6; Fed.
Trade Comm’n, Military Consumer Financial
Workshop, Panel 1, Tr. 19:25–41 (July 19, 2017),
https://www.ftc.gov/news-events/events-calendar/
military-consumer-workshop; Fed. Trade Comm’n,
‘‘The Road Ahead: Selling, Financing & Leasing
Motor Vehicles,’’ Public Roundtable, Session 2, Tr.
at 40–41 (Aug. 2 2011), https://www.ftc.gov/news-
events/events/2011/08/road-ahead-selling-
financing-leasing-motor-vehicles (noting that
optional products and services are often already
included in the monthly payment prices advertised
or quoted); Christopher Kukla, Ctr. for Responsible
Lending, Comment Letter on Public Roundtables:
Protecting Consumers in the Sale and Leasing of
Motor Vehicles, Project No. P104811, Submission
No. 558507–00071 at 10 (Feb. 1, 2012), https://
www.regulations.gov/comment/FTC-2022-0036-
0068 (discussing how dealers conceal packing by
expressing an increase in price in terms of monthly
payment); Att’ys General of 31 States & DC,
Comment Letter on Public Roundtables: Protecting
Consumers in the Sale and Leasing of Motor
Vehicles, Project No. P104811, Submission No.
558507–00112 at 5 (Apr. 13, 2012), https://
www.regulations.gov/comment/FTC-2022-0036-
0124 (discussing the ‘‘age-old auto salesperson’s
trick’’ of quoting monthly payment prices without
disclosing that the quote includes the cost of
optional items that the customer has not yet agreed
to purchase).
69 See, e.g., Complaint ¶¶ 9, 26, Fed. Trade
Comm’n v. Liberty Chevrolet, Inc., No. 1:20–cv–
03945 (S.D.N.Y. May 21, 2020) (charging defendants
with discriminating on the basis of race, color, and
national origin by charging higher interest rates and
inflated fees); Press Release, N.Y. State Att’y Gen.,
‘‘Attorney General James Delivers Restitution to
New Yorkers Cheated by Auto Dealership’’ (Nov.
17, 2020), https://ag.ny.gov/press-release/2020/
attorney-general-james-delivers-restitution-new-
yorkers-cheated-auto-dealership (dealership
targeted Chinese speakers for unlawful payment
packing or ‘‘jamming’’); Military Consumer
Financial Workshop, Tr. 19:21 (July 19, 2017),
https://www.ftc.gov/news-events/events/2017/07/
military-consumer-workshop (panelist discussing
servicemembers experiencing payment packing);
see also Fed. Trade Comm’n, ‘‘Staff Perspective: A
Closer Look at the Military Consumer Financial
Workshop’’ 2–3 (Feb. 2018), https://www.ftc.gov/
system/files/documents/reports/closer-look-
military-consumer-financial-workshop-federal-
trade-commission-staff-perspective/military_
consumer_workshop_-_staff_perspective_2-2-18.pdf
(explaining the unique situation of servicemembers
whose steady paychecks make them attractive
customers for dealers, while having no or minimal
credit history, meaning they qualify for less
advantageous credit terms and higher interest rate
financing).
70 See, e.g., Buckle Up, supra note 63, at 6
(observing that the introduction of ‘‘add-ons during
financing discussions caused several participants’
total sale price to balloon from the cash price’’); id.
at 9 (observing that, for most consumers in the
study, ‘‘add-ons did not come up until the financing
process, if at all, after a long car-buying process and
at a time when the consumer often felt pressure to
close the deal’’); id. (noting that most study
participants’ contracts included add-ons charges,
but that many ‘‘were unclear what those add-ons
included, and sometimes did not realize they had
purchased any add-ons at all’’); id. at 7 (explaining
situations where the consumer reached the
financing office after negotiating with the sales staff
and were then told that the agreed upon price was
not compatible with key financing terms—for
example, a promised rebate or discount could not
be combined with an advertised interest rate).
71 Complaint ¶¶ 12–19, Fed. Trade Comm’n v.
Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y.
May 21, 2020) (alleging deceptive and unauthorized
add-on charges in consumers’ transactions);
Complaint ¶¶ 59–64, Fed. Trade Comm’n v.
Universal City Nissan, Inc., No. 2:16–cv–07329
(C.D. Cal. Sept. 29, 2016) (alleging deceptive and
unauthorized add-on charges in consumers’
transactions); Complaint ¶¶ 6, 9, TT of Longwood,
No. C–4531 (F.T.C. July 2, 2015) (alleging
misrepresentations regarding prices for added
features); see also Auto Buyer Study, supra note 25,
at 14.
72 Complaint ¶¶ 4–14, Nat’l Payment Network,
Inc., No. C–4521 (F.T.C. May 4, 2015) (alleging
failure to disclose fees associated with financing
program; misleading savings claims in
advertisements); Complaint ¶¶ 4–13, Matt Blatt Inc.,
No. C–4532 (F.T.C. July 2, 2015) (alleging failure to
disclose fees associated with financing program;
misleading savings claims); Buckle Up, supra note
63, at 10 (noting that some Auto Buyer Study
participants did not fully understand material
aspects of extended warranties or service plans they
purchased and ‘‘were surprised to discover during
the interview that their plans had unexpected
limitations’’ or that ‘‘they had to pay out-of-pocket
for repairs or services that were not covered’’; for
example, one ‘‘consumer purchased a ‘Lifetime’
maintenance plan, only to discover later that he
received a one-year plan that covered periodic oil
changes’’). Cf. Consent Order ¶¶ 10–16, Santander
to purchase those add-ons without
knowing about or agreeing to them, or
without knowing or agreeing to their
costs or other key terms.66
Unscrupulous dealers are able to slip
the often considerable additional costs
for these items past consumers
unnoticed and into purchase contracts
through a variety of means, including by
not mentioning them at all,67 or by
focusing consumers’ attention on other
aspects of the complex transaction, such
as monthly payments, which might
increase only marginally with the
addition of prorated add-on costs, or
may even be made to decrease if the
financing term is extended.68 This type
of conduct can target immigrants,
communities of color, and
servicemembers.69 In other instances,
dealers might wait until late in the
transaction to mention add-ons, and
then do so in a misleading manner. For
example, participants in an FTC
qualitative study on consumers’ car-
buying experiences cited situations
where dealers waited until the financing
stage to mention add-ons, after
consumers believed they had agreed on
terms, and even though many add-ons
have nothing to do with financing and
were not mentioned at all during the
sales process or when prices were
initially negotiated. 70 According to FTC
enforcement actions, dealers also have
represented that add-ons are required
when in fact they are not,71 have
misrepresented the purported benefits
of add-ons, and have failed to disclose
material limitations.72
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597	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
Consumer USA, Inc., CFPB No. 2018–BCFP–0008
(Nov. 20, 2018) (finding that defendant sold GAP
product allegedly providing ‘‘full coverage’’ to
consumers with loan-to-value ratios (‘‘LTVs’’) above
125%, when in fact coverage was limited to 125%
of LTV).
73 Complaint ¶ 27, Fed. Trade Comm’n v. N. Am.
Auto. Servs., Inc., No. 1:22–cv–01690 (N.D. Ill. Mar.
31, 2022).
74 The study is described in the Commission’s
reports: Auto Buyer Study, supra note 25, and
Buckle Up, supra note 63. Some industry
commenters critiqued the FTC’s reliance on this
qualitative study. The Commission notes that the
study provides helpful qualitative insight from
consumer interviews regarding their recent motor
vehicle purchases and is one of the many sources
the Commission has considered, including
consumer complaints, enforcement actions,
outreach and dialogue with stakeholders and
consumer groups, among others, as described in
this SBP and in the NPRM.
75 Auto Buyer Study: Appendix, supra note 66, at
130 (Study participant 152288); see also id. at 202–
03 (Study participant 180267: dealership included
a charge for GAP in the final paperwork but not in
retail sales contract); id. at 296 (Study participant
146748: consumer learned during interview with
FTC that consumer purchased GAP: ‘‘maybe they’re
just throwing that in there without telling you’’).
76 Individual commenter, Doc. No. FTC–2022–
0046–4648.
77 Individual commenter, Doc. No. FTC–2022–
0046–0016.
78 Individual commenter, Doc. No. FTC–2022–
0046–1216.
79 Individual commenter, Doc. No. FTC–2022–
0046–3615.
80 Individual commenter, Doc. No. FTC–2022–
0046–7366.
81 Individual commenter, Doc. No. FTC–2022–
0046–3693.
82 Individual commenter, Doc. No. FTC–2022–
0046–3678.
83 Individual commenter, Doc. No. FTC–2022–
0046–1479.
84 Individual commenter, Doc. No. FTC–2022–
0046–1878.
Indeed, as previously noted, in a
recent FTC enforcement action, the
Commission cited a survey finding that
83% of consumers from the named
dealers were charged for add-on
products or services that they did not
authorize or as a result of deceptive
claims. 73
One participant in an FTC qualitative
study of consumers’ car-buying
experiences summed up these issues
during an interview after having
purchased a vehicle.74 The consumer
purchased a $2,000 service contract that
the dealer falsely said was free, and a
$900 GAP agreement that the dealer
falsely said was mandatory. The
consumer only learned about these
purchases during the study interview.
This consumer remarked:
I feel I’ve been taken advantage of, to be
honest with you. Even though I thought that
I was getting a great deal with the interest
rate, but I know [sic] see that they’re also
very sneaky about putting stuff on your
paperwork. They only let you skim through
the paperwork that you have to sign and they
just kind of tell you what it is. This is this,
this is that, this is this, and then you just sign
it away. You’re so tired, you’re so worn
down, you don’t want to be there no more.
You just want to get it done and over with.
They take advantage of that. Yes, they still
play this friendly card, you know, thank you
for your business card kind of thing. Like I
said, they never lose. They never lose.75
Similarly, in response to the
Commission’s notice of proposed
rulemaking, thousands of commenters
described issues they faced when
purchasing, financing, or leasing a
vehicle. Many comments the
Commission received in support of the
NPRM were from self-identified military
consumers and dealership employees.
Examples of supportive comments
include the following:
• As a young Marine stationed in a
military town I was taken advantage of
by a dealership when purchasing my
first car. It set me back financially for
years. I know of many young military
people who purchased vehicle[]s and
we[]re instantly so far upside down after
leaving the dealership with thousands
of dollars in add on junk charges . . . .
Please make it more difficult for
dishonest dealers like these to
financially burden young Americans
and Americans of any age for that
matter.76
• Imagine going to a restaurant
franchise and order[ing] a burger and
fries for $10 and the franchise
employees say[,] ‘Sorry that will be $25
dollars, there is a $10 restaurant
adjustment price due to market
conditions and $5 for us to place and
document your order.’ You would walk
away without hesitation because that
would [be] absolutely ridiculous. Yet,
dealerships are allowed to do exactly
that. . . . IT IS TIME TO CHANGE
AND PROTECT CONSUMERS[.]77
• As in many other areas, it is the
vulnerable in our society who are
probably most affected by such
deceptive practices. . . . Sadly, it is
often these very people who desperately
need a dependable, affordable car for
transportation to work, school,
shopping, or medical care. To entice,
pressure, or trick people into buying a
car that is more than they can afford sets
them up for financial failure, not only
in possibly having a needed car
repossessed, but in long-term damage to
their credit. . . . In closing, I would be
extremely happy to see rules such as
those described above enacted, and
don’t think these could come a day too
soon. It’s a step in the right direction for
the protection of the consumer.78
• None of us working here at the
dealership in sales benefit from [unfair
and deceptive practices]. We cringe as
much as every customer and have to
show up to work every[ ]day and hope
we are not forced to screw someone
with these BS products. . . . I would
hope when [t]he regulators are making
their decisions, they understand the
positive implications this would have
for dealership employees both
financially and mentally. 79
• Generally, I’m not a person in favor
of government regulation. However, as a
potential customer and cash buyer, I feel
there is certainly a need to bring car
dealers back into check. I’m just looking
for a more honest and transparent
process. I don’t want to be taken
advantage of. I certainly don’t want my
family members or [s]oldiers to be taken
advantage of. Therefore, I feel it is in the
best interest of future customers to
support this regulation. 80
• I cannot stress enough my support
for these new rules. Currently,
dealerships across the US, including the
one I work for, have made the car
buying process needlessly confusing,
expensive, and frustrating by engaging
in false advertising and hidden add-on
products.81
• I can tell you after many years of car
buying I have NEVER walked out of a
dealership feeling good. Even worse,
I’ve never purchased a car feeling like
I fully understood what I was
getting. . . . Looking forward to seeing
the change happen SOON! 82
• When I buy a gallon of milk from
the store, the price is written next to the
milk. When I go pay, I pay the price
advertised next to the milk. Would it be
OK if I go up to pay and that gallon of
milk had anywhere between 1% and
1,200% markup depending on the day,
what you look like, what you drove to
the store in, if you’re a man or a
woman? 83
• We ended up having to drive 3
hours to the [vehicle we] wanted. Upon
arriving to pick[ ]up the car we were
told there was a [$]4,300 increase over
MSRP. We were told if we didn’t take
it they had someone else waiting to
purchase it. We needed the car and
didn’t have time to hunt down another
one so ended up purchasing it. Very
disappointed in the long and awful
process. 84
• The worst is dealing with car
dealers. You never know what the real
price is on a vehicle until you spend a
few hours with them. Mandatory
add[-] on[ ]s, market availability
surcharges, doc fees that vary from
dealer to dealer. . . . Then dealing with
the finance manager who tr[ie]s to sell
you everything you don’t[ ]need. They
high pressure the consumer on
purchasing extend[ed] warranties. There
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598 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
85 Individual commenter, Doc. No. FTC–2022–
0046–0825.
86 Individual commenter, Doc. No. FTC–2022–
0046–4833.
87 Individual commenter, Doc. No. FTC–2022–
0046–1690.
88 Complaint, Fed. Trade Comm’n v. Rhinelander
Auto Ctr., Inc., No. 3:23–cv–00737 (W.D. Wis. Oct.
24, 2023); Complaint, Fed. Trade Comm’n v.
Passport Auto. Grp., Inc., No. 8:22–cv–02670–GLS
(D. Md. Oct. 18, 2022); Complaint, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
01690 (N.D. Ill. Mar. 31, 2022); Complaint, Traffic
Jam Events, LLC, No. 9395 (F.T.C. Aug. 7, 2020);
Complaint, Fed. Trade Comm’n v. Liberty
Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. May
21, 2020); Complaint, Federal-Mogul Motorparts
LLC, No. C–4717 (F.T.C. May 12, 2020); Complaint,
LightYear Dealer Techs., LLC, No. C–4687 (F.T.C.
Sept. 3, 2019); Complaint, Fed. Trade Comm’n v.
Passport Imports, Inc., No. 8:18–cv–03118 (D. Md.
Oct. 10, 2018); Complaint, Fed. Trade Comm’n v.
Tate’s Auto Ctr. of Winslow, Inc., No. 3:18–cv–
08176–DJH (D. Ariz. July 31, 2018); Complaint,
Cowboy AG, LLC, No. C–4639 (F.T.C. Jan. 4, 2018);
Complaint, Fed. Trade Comm’n v. Norm Reeves,
Inc., No. 8:17–cv–01942 (C.D. Cal. Nov. 3, 2017);
Complaint, Asbury Auto. Grp., Inc., No. C–4606
(F.T.C. Mar. 22, 2017); Complaint, CarMax, Inc., No.
C–4605 (F.T.C. Mar. 22, 2017); Complaint, West-
Herr Auto. Grp., Inc., No. C–4607 (F.T.C. Mar. 22,
2017); Complaint, Fed. Trade Comm’n v.
Volkswagen Grp. of Am., Inc., No. 3:16–cv–01534
(N.D. Cal. Jan. 31, 2017); Complaint, Fed. Trade
Comm’n v. Uber Techs., Inc., No. 3:17–cv–00261
(N.D. Cal. Jan. 19, 2017); Complaint, Gen. Motors
LLC, No. C–4596 (F.T.C. Dec. 8, 2016); Complaint,
Jim Koons Mgmt. Co., No. C–4598 (F.T.C. Dec. 8,
2016); Complaint, Lithia Motors, Inc., No. C–4597
(F.T.C. Dec. 8, 2016); Complaint, Fed. Trade
Comm’n v. Universal City Nissan, Inc., No. 2:16–
cv–07329 (C.D. Cal. Sep. 29, 2016); Complaint,
United States v. New World Auto Imports, Inc., No.
3:16–cv–02401–K (N.D. Tex. Aug. 18, 2016);
Complaint, Progressive Chevrolet Co., No. C–4578
(F.T.C. June 13, 2016); Complaint, BMW of N. Am.,
LLC, No. C–4555 (F.T.C. Oct. 21, 2015); Complaint,
United States v. Tricolor Auto Acceptance, LLC, No.
3:15–cv–3002 (N.D. Tex. Sept. 15, 2015);
Complaint, JS Autoworld, Inc., No. C–4535 (F.T.C.
Aug. 13, 2015); Complaint, TC Dealership, L.P., No.
C–4536 (F.T.C. Aug. 13, 2015); Complaint, Matt
Blatt Inc., No. C–4532 (F.T.C. July 2, 2015);
Complaint, TT of Longwood, Inc., No. C–4531
(F.T.C. July 2, 2015); Complaint, Fin. Select, Inc.,
No. C–4528 (F.T.C. June 2, 2015); Complaint, First
Am. Title Lending of Ga., LLC, No. C–4529 (F.T.C.
June 2, 2015); Complaint, City Nissan Inc., No. C–
4524 (F.T.C. May 4, 2015); Complaint, Jim Burke
Auto., Inc., No. C–4523 (F.T.C. May 4, 2015);
Complaint, Nat’l Payment Network, Inc., No. C–
4521 (F.T.C. May 4, 2015); Complaint, TXVT Ltd.
P’ship, No. C–4508 (F.T.C. Feb. 12, 2015);
Complaint, Fed. Trade Comm’n v. Regency Fin.
Servs., LLC, No. 1:15–cv–20270–DPG (S.D. Fla. Jan.
26, 2015); Complaint, United States v. Billion Auto,
Inc., No. 5:14–cv–04118–MWB (N.D. Iowa Dec. 11,
2014); Complaint, Fed. Trade Comm’n v. Ramey
Motors, Inc., No. 1:14–cv–29603 (S.D. W. Va. Dec.
11, 2014); Complaint, Fed. Trade Comm’n v.
Consumer Portfolio Servs., Inc., No. 14–cv–00819
(C.D. Cal. May 28, 2014); Complaint, Nissan N. Am.,
Inc., No. C–4454 (F.T.C. May 1, 2014); Complaint,
TBWA Worldwide, Inc., No. C–4455 (F.T.C. May 1,
2014); Complaint, Bill Robertson & Sons, Inc., No.
C–4451 (F.T.C. Apr. 11, 2014); Complaint,
Paramount Kia of Hickory, LLC, No. C–4450 (F.T.C.
Apr. 11, 2014); Complaint, Fed. Trade Comm’n v.
Abernathy Motor Co., No. 3:14–cv–00063–BRW
(E.D. Ark. Mar. 12, 2014); Complaint, Fowlerville
Ford, Inc., No. C–4433 (F.T.C. Feb. 20, 2014);
Complaint, Infiniti of Clarendon Hills, Inc., No. C–
4438 (F.T.C. Feb. 20, 2014); Complaint, Luis
Alfonso Sierra, No. C–4434 (F.T.C. Feb. 20, 2014);
Complaint, Mohammad Sabha, No. C–4435 (F.T.C.
Feb. 20, 2014); Complaint, Norm Reeves, Inc., No.
C–4436 (F.T.C. Feb. 20, 2014); Complaint, Ganley
Ford West, Inc., No. C–4428 (F.T.C. Jan. 28, 2014);
Complaint, Timonium Chrysler, Inc., No. C–4429
(F.T.C. Jan. 28, 2014); Complaint, Courtesy Auto
Grp., Inc., No. 9359 (F.T.C. Jan. 7, 2014); Complaint,
Franklin’s Budget Car Sales, Inc., No. C–4371
(F.T.C. Oct. 3, 2012); Complaint, Fed. Trade
Comm’n v. Matthew J. Loewen, No. 2:12–cv–01207–
MJP (W.D. Wash. July 13, 2012); Complaint, Key
Hyundai of Manchester, LLC, No. C–4358 (F.T.C.
May 4, 2012); Complaint, Billion Auto, Inc., No. C–
4356 (F.T.C. May 1, 2012); Complaint, Frank Myers
AutoMaxx, LLC, No. C–4353 (F.T.C. Apr. 19, 2012);
Complaint, Ramey Motors, Inc., No. C–4354 (F.T.C.
Apr. 19, 2012); Complaint, Fed. Trade Comm’n v.
Hope for Car Owners, LLC, No. 2:12–cv–00778–
GEB–EFB (E.D. Cal. Mar. 27, 2012); Complaint, Fed.
Trade Comm’n v. NAFSO VLM, Inc., No. 2:12–cv–
00781–KJM–EFB (E.D. Cal. Mar. 27, 2012);
Complaint, Fed. Trade Comm’n v. Stewart Fin. Co.
Holdings, Inc., No. 1:03–CV–2648 (N.D. Ga. Sept. 4,
2003); Complaint, Pacifico Ardmore, Inc., No. C–
3920 (F.T.C. Feb. 7, 2000).
89 Operation Steer Clear and Operation Ruse
Control, brought with State law enforcement
partners around the nation and Canada,
encompassed 252 enforcement actions. See Press
Release, Fed. Trade Comm’n, ‘‘Multiple Law
Enforcement Partners Announce Crackdown on
Deception, Fraud in Auto Sales, Financing and
Leasing’’ (Mar. 26, 2015), https://www.ftc.gov/news-
events/press-releases/2015/03/ftc-multiple-law-
enforcement-partners-announce-crackdown.
90 For example, the FTC has held public
workshops: (1) in conjunction with the National
Highway Traffic Safety Administration to examine
the consumer privacy and security issues posed by
automated and connected motor vehicles, see Fed.
Trade Comm’n, ‘‘Connected Cars: Privacy, Security
Issues Related to Connected, Automated Vehicles’’
(June 28, 2017), https://www.ftc.gov/news-events/
events-calendar/2017/06/connected-cars-privacy-
security-issues-related-connected; (2) to explore
competition and related issues in the U.S. motor
vehicle distribution system including how
consumers and businesses may be affected by State
regulations and emerging trends in the industry, see
Fed. Trade Comm’n, ‘‘Auto Distribution: Current
Issues & Future Trends’’ (Jan. 19, 2016), https://
www.ftc.gov/news-events/events-calendar/2016/01/
auto-distribution-current-issues-future-trends; (3)
on military consumer financial issues, including
automobile purchases, financing, and leasing, see
Fed. Trade Comm’n, ‘‘Military Consumer
Workshop’’ (July 19, 2017), https://www.ftc.gov/
news-events/events-calendar/military-consumer-
workshop; and (4) through a series of three
roundtables on numerous issues in selling,
financing, and leasing automobiles, see Fed. Trade
Comm’n, ‘‘The Road Ahead: Selling, Financing &
Leasing Motor Vehicles’’ (Apr. 12, 2011), https://
www.ftc.gov/news-events/events-calendar/2011/04/
road-ahead-selling-financing-leasing-motor-
vehicles; Fed. Trade Comm’n, ‘‘The Road Ahead:
Selling, Financing & Leasing Motor Vehicles’’ (Aug.
2, 2011), https://www.ftc.gov/news-events/events-
calendar/2011/08/road-ahead-selling-financing-
leasing-motor-vehicles; Fed. Trade Comm’n, ‘‘The
Road Ahead: Selling, Financing & Leasing Motor
Vehicles’’ (Nov. 17, 2011), https://www.ftc.gov/
news-events/events-calendar/2011/11/road-ahead-
selling-financing-leasing-motor-vehicles; see also
Consumers for Auto Reliability and Safety,
Comment Letter on Motor Vehicle Roundtables,
Project No. P104811, at 6 (Apr. 1, 2012), https://
www.ftc.gov/sites/default/files/documents/public_
comments/public-roundtables-protecting-
consumers-sale-and-leasing-motor-vehicles-project-
no.p104811-00108/00108-82875.pdf (stating that
the Director of the Navy-Marine Corps Relief
Society in San Diego indicated before the California
Assembly Committee on Banking and Finance that
‘‘the number one issue they are confronted with is
used car dealers who are taking advantage of
military personnel’’). These events, and others, have
included speakers representing consumers, dealers,
regulators, and other industry stakeholders.
needs [to be] some sort of policing [of]
these unscrupulous car dealers to
protect the buyers.85
• This is a good start to making car
purchasing a better experience. . . . I
remember looking at a Lexus and being
told by the dealership, the only one in
the state, that [S]cotchguard and
undercoating were mandatory and they
refused to sell any vehicles without
them. There were two Acura dealerships
in town and one of them included ‘free’
lifetime oil changes that I didn’t learn
about until negotiating the price and
had already spent two hours in
negotiations. All of these services/price
adjustments were not disclosed at the
start of the negotiation and were only
revealed either in the manager’s office
or when the purchase agreement was
presented to me by the salesperson.
After spending time on the test drive
and negotiating the price, it felt that
these last minute price adjustments
were being revealed that late in the
process so that I wouldn’t leave.86
• Please enact and enforce these
regulations to protect vulnerable
consumers from predatory business
practices enjoyed by dealers. Our family
experienced such practices when trying
to purchase a vehicle in early 2022. It
was only after five hours at the
dealership that we discovered the dealer
had added on a $3,000 market
adjustment and $3,100 in other add-ons
(nitrogen-filled tires, LoJack, paint
protection) to MSRP. This raised the
price by about $6,000 and caused us to
use extra PTO over that week to find a
new vehicle at a price within our
budget. Greater transparency in the car-
buying process is desperately needed to
protect vulnerable consumers—who
usually lack any bargaining power—
against power dealer networks and their
special interest groups. . . .87
C. Law Enforcement and Other
Responses
The Commission has taken action to
protect consumers from deceptive and
unfair acts or practices in the motor
vehicle marketplace. As noted in the
NPRM, the Commission has brought
more than 50 auto law enforcement
actions; 88 led two law enforcement
sweeps, including one that involved 181
State enforcement actions; 89 published
two reports on a qualitative study of
consumer experiences while purchasing
motor vehicles; and held workshops
with various stakeholders to discuss the
motor vehicle marketplace.90
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91 The CFPB has brought at least 23 enforcement
actions involving motor vehicles, financing, or add-
on products or services. See Consent Order ¶¶ 3,
13–57, Toyota Motor Credit Corp., CFPB No. 2023–
CFPB–0015 (Nov. 20, 2023) (finding auto lender
engaged in unfair or abusive acts or practices by
making it unreasonably difficult for consumers to
cancel unwanted add-ons; failing to ensure
consumers received refunds of payments they had
made for certain add-ons that had become void and
worthless; and failing to provide refunds owed to
consumers who canceled their vehicle service
agreements);
Complaint ¶¶ 75–104, CFPB v. USASF Servicing,
LLC, No. 1:23–cv–03433–VMC (N.D. Ga. Aug. 2,
2023) (alleging auto loan servicer illegally disabled
and repossessed consumers’ vehicles, wrongfully
double-billed consumers, misapplied payments,
and failed to ensure refunds of unearned GAP
premiums to which consumers were entitled);
Consent Order ¶¶ 7–33, TMX Finance LLC, CFPB
No. 2023–CFPB–0001 (Feb. 23, 2023) (finding auto
lender understated and inaccurately disclosed the
finance charge and annual percentage rate on loans
and unfairly charged borrowers for a product that
provided no benefit); Complaint ¶¶ 33–135, 171–
226, CFPB v. Credit Acceptance Corp., No. 1:23–cv–
00038 (S.D.N.Y. Jan. 4, 2023) (alleging indirect auto
lender misrepresented key terms of loans provided
to subprime and deep-subprime consumers and
substantially assisted dealers in the deceptive sale
of add-on products); Consent Order ¶¶ 7–22, Wells
Fargo Bank, N.A., CFPB No. 2022–CFPB–0011 (Dec.
20, 2022) (finding bank incorrectly applied
borrowers’ auto loan payments, erroneously
assessed fees and interest, wrongly repossessed
borrowers’ vehicles, and failed to ensure borrowers
received refunds of unearned GAP fees at early
payoff); Consent Order ¶¶ 4–55, Hyundai Capital
America, CFPB No. 2022–CFPB–0005 (July 26,
2022) (finding auto finance company furnished
inaccurate information about consumers to credit
reporting agencies); Consent Order ¶¶ 4–14, 3rd
Generation, Inc., CFPB No. 2021–CFPB–0003 (May
21, 2021) (finding subprime auto loan servicer
charged interest on late payments of fees without
the knowledge or consent of consumers); Consent
Order ¶¶ 8–50, Santander Consumer USA Inc.,
CFPB No. 2020–BCFP–0027 (Dec. 22, 2020) (finding
auto finance company provided inaccurate records
to credit reporting agencies); Consent Order ¶¶ 11
–52, Nissan Motor Acceptance Corp., CFPB No.
2020–BCFP–0017 (Oct. 13, 2020) (finding auto
finance company misrepresented financing
extension agreements, repossessions, and
limitations to consumer bankruptcy protections);
Consent Order ¶¶ 8–22, Lobel Fin. Corp., CFPB No.
2020–BCFP–0016 (Sept. 21, 2020) (finding auto-
loan servicer unfairly charged delinquent
consumers add-on charges in the form of Loss
Damage Waiver premiums); Consent Order ¶¶ 6–30,
Santander Consumer USA Inc., CFPB No. 2018–
BCFP–0008 (Nov. 20, 2018) (finding auto finance
company sold GAP to consumers with LTV over
125%, misrepresenting that such consumers would
be fully covered with total loss);
Consent Order ¶¶ 27–39, Wells Fargo Bank, N.A.,
CFPB No. 2018–BCFP–0001 (Apr. 20, 2018) (finding
bank imposed duplicative or unnecessary forced-
placed auto loan insurance on consumers); Consent
Order ¶¶ 12–23, Toyota Motor Credit Corp., CFPB
No. 2016–CFPB–0002 (Feb. 2, 2016) (finding auto
finance company engaged in discriminatory pricing
markup for motor vehicle financing, without regard
to creditworthiness); Consent Order ¶¶ 73–75, Y
King S Corp., CFPB No. 2016–CFPB–0001 (Jan. 21,
2016) (finding used car dealer failed to disclose
mandatory add-ons as financing charges); Consent
Order ¶¶ 12–51, Interstate Auto Grp., Inc., CFPB
No. 2015–CFPB–0032 (Dec. 17, 2015) (finding
dealership and financing company reported
information they knew or had reasonable cause to
believe was inaccurate to credit reporting entities,
harming consumer credit); Consent Order ¶¶ 7–90,
Westlake Servs., LLC, CFPB No. 2015–CFPB–0026
(Sept. 30, 2015) (finding indirect auto financing
entity used illegal debt collection tactics); Consent
Order ¶¶ 8–23, Fifth Third Bank, CFPB No. 2015–
CFPB–0024 (Sept. 28, 2015) (finding discrimination
against loan applicants in credit applications based
on characteristics such as race and national origin);
Consent Order ¶¶ 9–24, Am. Honda Fin. Corp.,
CFPB No. 2015–CFPB–0014 (July 14, 2015) (same);
Consent Order ¶¶ 4–60, DriveTime Auto. Grp.,
Inc., CFPB No. 2014–CFPB–0017 (Nov. 19, 2014)
(finding buy-here-pay-here dealership made
harassing debt collection calls and provided
inaccurate credit information to credit reporting
agencies); Consent Order ¶¶ 4–37, First Investors
Fin. Servs. Grp., Inc., CFPB No. 2014–CFPB–0012
(Aug. 20, 2014) (finding auto financing company
provided inaccurate records to credit reporting
agencies); Consent Order ¶¶ 7–27, Ally Fin. Inc.,
CFPB No. 2013–CFPB–0010 (Dec. 20, 2013) (finding
auto lender engaged in discriminatory pricing);
Consent Order ¶¶ 14–29, U.S. Bank Nat’l Ass’n,
CFPB No. 2013–CFPB–0004 (June 26, 2013) (finding
bank failed to properly disclose all the fees charged
to participants in the companies’ Military
Installment Loans and Educational Services auto
loans program, and misrepresented the true cost
and coverage of add-on products financed along
with the auto loans); Consent Order ¶¶ 10–22,
Dealers’ Fin. Servs., LLC, CFPB No. 2013–CFPB–
0004 (June 26, 2013) (finding financing company
made deceptive statements regarding the cost of
add-on products and the scope of coverage of the
vehicle service contract).
92 Operation Steer Clear and Operation Ruse
Control, brought with State law enforcement
partners around the nation and Canada,
encompassed 252 enforcement actions. See Press
Release, Fed. Trade Comm’n, ‘‘Multiple Law
Enforcement Partners Announce Crackdown on
Deception, Fraud in Auto Sales, Financing and
Leasing’’ (Mar. 26, 2015), https://www.ftc.gov/news-
events/press-releases/2015/03/ftc-multiple-law-
enforcement-partners-announce-crackdown.
Separately, the California Attorney General’s office
sued a dealership chain under State consumer
protection laws for deceiving consumers about add-
on product charges and misrepresenting consumers’
income on credit applications; the alleged practices
specifically targeted low-income consumers with
subprime credit. Complaint ¶¶ 37–86, People v.
Paul Blanco’s Good Car Co. Auto Grp., No. RG–
19036081 (Cal. Super. Ct. Sept. 23, 2019).
93 See, e.g., Cal. Veh. Code 11713.1(b), (c); Or.
Admin. R. 137–020–0020(3)(c); Wis. Admin. Code
Trans. 139.03(3); Ind. Code 24–4.5–3–202.
94 Or. Admin. R. 137–020–0020(3)(c); Official
Commentary, Or. Admin. R. 137–020–0020(3)(c).
95 Cal. Veh. Code 11713.1(b), (c); Wis. Admin.
Code Trans. 139.03(3).
96 Ind. Code 24–4.5–3–202(3)(e)(ix) (prohibiting
the sale of any GAP coverage when the LTV is less
than 80%); Cal. Civ. Code 2982.12(a)(5)(B)
(prohibiting the sale of any GAP waiver in three
scenarios, including when the amount financed for
the vehicle exceeds the amount covered by the GAP
waiver).
97 See Fed. Trade Comm’n, Business Guidance,
‘‘Automobiles,’’ https://www.ftc.gov/business-
guidance/industry/automobiles (last visited Dec. 5,
2023).
98 See Fed. Trade Comm’n, ‘‘Buying and Owning
a Car,’’ https://consumer.ftc.gov/shopping-and-
donating/buying-and-owning-car (last visited Dec.
5, 2023).
99 See, e.g., Ill. Sec’y of State Police, Dealer
Handbook (Apr. 2022), https://www.ilsos.gov/
publications/pdf_publications/sos_dop66.pdf; Wis.
DOT—Div. of Motor Vehicles, Motor Vehicle
Salesperson Manual—2020, https://wisconsin
dot.gov/Documents/dmv/shared/salesmanual-
20.pdf; Enf’t Div. of the Tex. Dep’t of Motor
Vehicles, Motor Vehicle Dealer Manual (2017),
https://www.txdmv.gov/sites/default/files/body-
files/Motor_Vehicle_Dealer_Manual.pdf.
As discussed in the NPRM, the
Commission’s law enforcement partners
have also brought actions addressing
unfair, abusive, and deceptive practices
in the motor vehicle industry. For
example, the Consumer Financial
Protection Bureau (‘‘CFPB’’) has taken
action against third-party motor vehicle
financing entities in matters that raise
similar, and sometimes identical, claims
of deceptive and unfair acts or practices
as have been at issue in FTC
enforcement actions.91
In addition, States have engaged in
enforcement actions alleging similar
dealer misconduct in the motor vehicle
dealer marketplace, and have
implemented legislative and regulatory
measures to address corresponding
consumer protection issues. With regard
to law enforcement, State regulators and
Attorneys General have participated in
law enforcement sweeps with the FTC,
and have filed hundreds of actions
alleging unlawful conduct by motor
vehicle dealerships across the
country.92 Furthermore, with regard to
legislative and regulatory efforts, at least
four States have enacted consumer
protection measures relating to pricing
or add-ons by motor vehicle dealers.93
For example, to ‘‘ensure that dealers do
not add in hidden or undisclosed costs
after the price for a vehicle has been
advertised,’’ Oregon promulgated a rule
that requires dealerships to state an
‘‘offering price’’ that is the actual offer
and amount the consumer can pay to
own the vehicle, excluding only taxes
and other specific items.94 California
and Wisconsin have similarly enacted
laws that make it unlawful for
dealerships to advertise a total price
without including additional costs to
the purchaser outside the mandatory
tax, title, and registration fees.95 Other
States, such as Indiana, have enacted
codes that prohibit the sale of add-ons
in certain circumstances. 96
The Commission and its law
enforcement partners also regularly
provide business guidance and
consumer education regarding the motor
vehicle marketplace. The Commission
has compiled its motor vehicle business
guidance into a portal on its website,
with links to guidance documents,
frequently asked questions, and legal
resources.97 Likewise, the Commission
provides a web page for consumers to
learn more about buying, financing, and
leasing motor vehicles. 98 Several States
have published similar such guidance
manuals for motor vehicle dealers,99
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600 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
100 See, e.g., Cal. Dept. of Just., ‘‘Buying and
Maintaining a Car,’’ https://oag.ca.gov/consumers/
general/cars (last visited Dec. 5, 2023); Fla.
Highway Safety & Motor Vehicles, ‘‘Buying from a
Licensed Dealer,’’ https://www.flhsmv.gov/safety-
center/consumer-education/buying-vehicle-florida/
buying-licensed-dealer (last visited Dec. 5, 2023);
Or. Dep’t of Just., ‘‘Buying a Vehicle,’’ https://
www.doj.state.or.us/consumer-protection/motor-
vehicles/buying-a-vehicle/ (last visited Dec. 5,
2023).
101 Complaint ¶ 17, Fed. Trade Comm’n v.
Passport Auto. Grp., Inc., No. 8:22–cv–2670 (D. Md.
Oct. 18, 2022).
102 Id. ¶ 18. Recent actions outside the auto
marketplace, even in transactions that may not be
as complex and time consuming as motor vehicle
transactions, further illustrate unfair and deceptive
practices related to advertising, add-ons, and
hidden charges. In one such action, the court noted
‘‘the realities of the disparate bargaining power’’
between the corporate defendant and its customers,
adding that customers ‘‘might have believed the
[add-on] fees were mandatory,’’ and ‘‘might not
have had the time’’ to negotiate or complain about
them. Fed. Trade Comm’n v. FleetCor Techs., Inc.,
1:19–cv–5727, 2022 WL 3350066, at *13 (N.D. Ga.
Aug. 9, 2022) (granting the Commission’s motion to
exclude the defendant’s expert testimony); see also
Fed. Trade Comm’n v. FleetCor Techs., Inc., 620 F.
Supp. 3d 1268, 1337 (N.D. Ga. 2022) (finding on
summary judgment that (1) defendants did not tell
consumers about fees at sign-up; (2) disclosures
about fees in contractual documents were
inadequate; and (3) defendants failed to get consent
to add-on charges); id. at 1334 (concluding that
defendants had ‘‘charged a slew of fees that: were
never discoverable to customers [and] were
obscured by undecipherable language’’); Complaint
¶¶ 41–43, Fed. Trade Comm’n v. Harris Originals of
NY, Inc., No. 2:22–cv–4260 (E.D.N.Y. July 20, 2022)
(alleging that a jewelry company charged military
consumers for add-on products without their
consent or under false pretenses); Complaint ¶¶ 61–
73, Fed. Trade Comm’n v. Benefytt Techs., Inc., No.
8:22–cv–1794 (M.D. Fla. Aug. 8, 2022) (alleging
illegal add-on charges by healthcare companies);
Complaint ¶¶ 1–4, Fed. Trade Comm’n v. First Am.
Payment Sys., LP, No. 4:22–cv–654 (E.D. Tex. July
29, 2022) (alleging that a payment processing
company misrepresented the terms and costs of its
services, resulting in unexpected and unauthorized
fees); Fed. Trade Comm’n, Notice of Proposed
Rulemaking, Trade Regulation Rule on Unfair or
Deceptive Fees, 88 FR 77420, 77435–37 (released
Oct. 11, 2023; published Nov. 9, 2023), https://
www.govinfo.gov/content/pkg/FR-2023-11-09/pdf/
2023-24234.pdf.
103 Complaint ¶¶ 3–5, 11–18, 33–43, 48–51, Fed.
Trade Comm’n v. Rhinelander Auto Ctr., Inc., No.
3:23–cv–00737 (W.D. Wis. Oct. 24, 2023).
104 Complaint ¶¶ 128–30, CFPB v. Credit
Acceptance Corp., No. 1:23–cv–38 (S.D.N.Y. Jan. 4,
2023).
105 Complaint ¶ 3, Massachusetts v. Jaffarian’s
Serv., Inc., No. 2277–cv–881 (Mass. Super. Ct. Sept.
15, 2022); Assurance of Discontinuance ¶¶ 7–9, In
re Hometown Auto Framingham, Inc., No. 2384–cv
–116 (Mass. Super. Ct. Jan. 17, 2023).
106 Complaint ¶ 5, Massachusetts v. Jaffarian’s
Serv., Inc., No. 2277–cv–881 (Mass. Super. Ct. Jan.
17, 2023).
107 Consumer Fin. Prot. Bureau, ‘‘Supervisory
Highlights: Issue 24, Summer 2021’’ 3–4 (June
2021), https://files.consumerfinance.gov/f/
documents/cfpb_supervisory-highlights_issue-24_
2021-06.pdf (finding servicers added and
maintained unnecessary collateral protection
insurance (CPI) when consumers had adequate
insurance and thus the CPI provided no benefit to
the consumers, and also when consumers’ vehicles
had been repossessed even though no actual
insurance protection was provided after
repossession).
108 Consumer Fin. Prot. Bureau, ‘‘Supervisory
Highlights: Issue 28, Fall 2022’’ 4–5 (Nov. 2022),
https://files.consumerfinance.gov/f/documents/
cfpb_supervisory-highlights_issue-28_2022-11.pdf
(finding consumers paid off their vehicle financing
early but servicers failed to ensure consumers
received refunds for unearned fees related to add-
on products which no longer offered any possible
benefit to consumers after payoff).
109 Cal. Civ. Code 2982.12.
110 Press Release, Off. of the Att’y Gen. of Cal.,
‘‘Attorney General Bonta and Assemblymember
Maienschein Announce Legislation to Strengthen
Protections for Car Buyers’’ (Feb. 16, 2022), https://
oag.ca.gov/news/press-releases/attorney-general-
bonta-and-assemblymember-maienschein-
announce-legislation.
111 Cal. Civ. Code 2982.12.
112 Id.
while others have provided online
consumer education resources.100
While some commenters stated that
existing Federal and State efforts are
sufficient, recent Commission and
partner actions indicate that misconduct
has persisted despite prior law
enforcement and other efforts, and
despite the NPRM’s detailed description
of chronic problems relating to bait-and-
switch tactics and hidden add-on and
other charges. For example, in a recent
enforcement action, filed after
publication of the NPRM, the
Commission charged several auto dealer
locations in an auto dealership group
with misrepresenting the price of
vehicles. According to the complaint,
the dealers advertised one price to lure
consumers to their dealerships, then
charged them hundreds to thousands of
dollars more than the advertised price
by tacking on bogus extra fees for
inspection, reconditioning, preparation,
and certification. 101 The action also
addressed the practice of dealers
charging Black and Latino consumers
these fees more often and in higher
amounts. 102
Multiple actions by partners since
publication of the Commission’s NPRM
have involved auto add-ons. The
Commission and the State of Wisconsin
alleged that a dealership group, its
current and former owners, and its
general manager deceived consumers by
tacking on hundreds or even thousands
of dollars for add-ons without those
consumers’ authorization or by leading
the consumers to believe the add-ons
were mandatory, and doing so
disproportionately more frequently with
American Indian customers.103 The
CFPB and the New York State Office of
the Attorney General alleged that a
subprime auto lender knew or recklessly
disregarded that dealers were tricking
borrowers into purchasing add-on
products without their knowledge or
consent and had incentivized such
behavior.104 In addition, the
Commonwealth of Massachusetts has
brought two recent cases involving
unfair add-on pricing practices.105 In
one such case, Massachusetts
emphasized the dynamics of auto
transactions that frequently lead to
deceptive and unfair practices,
particularly with respect to add-ons,
noting that add-on products ‘‘are often
sprung on consumers in the final steps
of completing a transaction’’ after
‘‘multiple rounds of negotiation on the
price of a car and/or car financing.’’ 106
Efforts to combat deceptive and unfair
practices in the motor vehicle industry
since the NPRM have gone beyond
enforcement actions. The CFPB
announced that it uncovered several
unlawful practices through supervisory
examinations, including auto loan
servicers charging for add-ons that
provide no benefit to the consumer 107
and failing to ensure consumers
received refunds for add-on products
that no longer offered any benefits.108 In
addition, the State of California enacted
new legislation that regulates a
particular type of add-on product—GAP
agreements.109 A press release
introducing the legislation cited
concerns about unfair practices in the
sale of GAP agreements, stating that this
add-on has little value and is often
targeted at consumers with lower
incomes and subprime credit.110
California’s law requires several
disclosures related to GAP agreements,
including disclosures pertaining to their
financed cost and informing consumers
that such products are optional.111 The
law also prohibits the sale of GAP
agreements that will not actually cover
consumers’ debt.112
Despite the array of actions by the
Commission and its partners, unfairness
and deception continue in the motor
vehicle marketplace, including (1)
deceptive or unfair sales and advertising
tactics and (2) hidden charges,
particularly with respect to add-on
products or services. To address the
harm these issues inflict on consumers
and on law-abiding dealers, the Final
Rule, in general:
• Prohibits dealers from making
misrepresentations regarding material
information, including about the cost of
the vehicle, the financing terms, and the
availability of rebates or discounts;
• Requires dealers to disclose the
offering price of the vehicle—its full
cash price, provided that dealers may
exclude required government charges;
that optional add-ons are not required;
the total of payments for the vehicle
when making a representation about
monthly payment; and that a discussed
lower monthly payment will increase
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601	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
113 Regarding the thousands of comments
received, the Commission notes that many
commenters raised similar concerns or addressed
overlapping issues. To avoid repetition, the
Commission has endeavored to respond to issues
raised in similar comments together. Responses
provided in any given section apply equally to
comments addressing the same subject in the
context of other sections. Moreover, throughout the
SBP, the Commission discusses justifications for the
Final Rule that are informed by its careful
consideration of all comments received, even where
that discussion is not linked to a particular
comment.
114 The proposed authority provision in the
NPRM omitted the second reference to ‘‘unfair’’ acts
or practices with regard to the proposed
recordkeeping requirements; the Final Rule
consistently refers to both ‘‘unfair’’ and ‘‘deceptive’’
acts or practices together.
115 One industry group argued that the proposed
rule violated the APA because it did not comply
with the FTC’s rule requiring publication of an
Advance Notice of Proposed Rulemaking (‘‘ANPR’’),
16 CFR 1.10. Section 1.10, however, like the rest of
subpart B of part 1 of the Commission’s Rules of
Practice, applies only to ‘‘proceedings for the
promulgation of rules as provided in section
18(a)(1)(B) of the Federal Trade Commission Act.’’
16 CFR 1.7. The ANPR requirement in section 1.10
implements section 18(b)(2) of the FTC Act, which
requires an ANPR when the Commission
promulgates rules under the procedures set forth in
that section. In this case, the FTC is acting under
statutory authority under section 1029(d) of the
Dodd-Frank Act, see NPRM at 42031, which
authorizes the Commission to promulgate rules
using the APA’s informal notice-and-comment
procedure, see 5 U.S.C. 553, notwithstanding the
additional procedural requirements set forth in
section 18. Accordingly, this rulemaking is
governed by subpart C of part 1 of the Commission’s
Rules of Practice, which ‘‘sets forth procedures for
the promulgation of rules under authority other
than section 18(a)(1)(B) of the FTC Act.’’ 16 CFR
1.21. Neither subpart C nor the APA requires
publication of an ANPR.
This is consistent with Commission practice in
prior notices to issue or amend regulations,
including with the Made in USA Labeling Rule, the
Children’s Online Privacy Protection Act Rule, and
the Telemarketing Sales Rule. See, e.g., Fed. Trade
Comm’n, Notice of Proposed Rulemaking, Made in
USA Labeling Rule, 85 FR 43162 (July 16, 2020),
https://www.govinfo.gov/content/pkg/FR-2020-07-
16/pdf/2020-13902.pdf (issuing original notice of
proposed rulemaking that was not preceded by an
advance notice of proposed rulemaking); Fed. Trade
Comm’n, Notice of Proposed Rulemaking,
Children’s Online Privacy Protection Rule, 64 FR
22750 (Apr. 27, 1999), https://www.govinfo.gov/
content/pkg/FR-1999-04-27/pdf/99-10250.pdf
(same); Fed. Trade Comm’n, Notice of Proposed
Rulemaking, Telemarketing Sales Rule, 60 FR 8313
(Feb. 14, 1995), https://www.govinfo.gov/content/
pkg/FR-1995-02-14/pdf/95-3537.pdf (same); Fed.
Trade Comm’n, Notice of Proposed Rulemaking,
Telemarketing Sales Rule, 78 FR 41200 (July 19,
2013), https://www.govinfo.gov/content/pkg/FR-
2013-07-09/pdf/2013-12886.pdf (issuing notice of
proposed rulemaking for rule amendment that was
not preceded by an advance notice of proposed
rulemaking); Fed. Trade Comm’n, Proposed Rule,
Children’s Online Privacy Protection Rule, 76 FR
59804 (Sept. 27, 2011), https://www.govinfo.gov/
content/pkg/FR-2011-09-27/pdf/2011-24314.pdf
(same); Fed. Trade Comm’n, Notice of Proposed
Rulemaking, Telemarketing Sales Rule, 74 FR 41988
(Aug. 19, 2009), https://www.govinfo.gov/content/
pkg/FR-2009-08-19/pdf/E9-19749.pdf (same); Fed.
Trade Comm’n, Notice of Proposed Rulemaking,
Children’s Online Privacy Protection Rule, 70 FR
2580 (Jan. 14, 2005), https://www.govinfo.gov/
content/pkg/FR-2005-01-14/pdf/05-877.pdf (same);
Fed. Trade Comm’n, Notice of Proposed
Rulemaking, Telemarketing Sales Rule, 69 FR 67287
(Nov. 17, 2004), https://www.govinfo.gov/content/
pkg/FR-2004-11-17/pdf/04-25470.pdf (same); Fed.
Trade Comm’n, Notice of Proposed Rulemaking,
Telemarketing Sales Rule, 69 FR 7330 (Feb. 13,
2004), https://www.govinfo.gov/content/pkg/FR-
2004-02-13/pdf/04-3287.pdf (same); Fed. Trade
Comm’n, Notice of Proposed Rulemaking,
Telemarketing Sales Rule, 67 FR 4492 (Jan. 30,
2002), https://www.govinfo.gov/content/pkg/FR-
2002-01-30/pdf/02-1998.pdf (same); Fed. Trade
Comm’n, Notice of Proposed Rulemaking,
Children’s Online Privacy Protection Rule, 66 FR
54963 (Oct. 31, 2001), https://www.govinfo.gov/
content/pkg/FR-2001-10-31/pdf/01-27390.pdf
(same). This is also true of regulation amendments
pursuant to the authority under which this Final
Rule is promulgated—that which Congress granted
to the Commission under section 1029 of the Dodd-
Frank Act, 15 U.S.C. 5519, pertaining to motor
vehicle dealers. See, e.g., Fed. Trade Comm’n,
Notice of Proposed Rulemaking, Used Motor
Vehicle Trade Regulation Rule, 77 FR 74746, 74748
(Dec. 17, 2012), https://www.govinfo.gov/content/
pkg/FR-2012-12-17/pdf/2012-29920.pdf (‘‘Because
the Dodd-Frank Act authorized the Commission to
use APA procedures for notice and public comment
in issuing or amending rules with respect to motor
vehicle dealers, the FTC will not use the procedures
set forth in Section 18 of the FTC Act, 15 U.S.C.
57a, with respect to these proposed revisions to the
Used Car Rule and the Used Car Buyers Guide.
Accordingly, the Commission is publishing this
Notice of Proposed Rulemaking pursuant to Section
553 of the APA.’’); see also Fed. Trade Comm’n,
Notice of Proposed Rulemaking, Privacy of
Consumer Financial Information Rule Under the
Gramm-Leach-Bliley Act (‘‘Privacy Rule’’), 84 FR
13150 (Apr. 4, 2019), https://www.govinfo.gov/
content/pkg/FR-2019-04-04/pdf/2019-06039.pdf
(issuing notice of proposed rulemaking for rule
amendment that was not preceded by an advance
notice of proposed rulemaking).
This same commenter argued the FTC had not
complied with the ‘‘Principles of Regulation’’
enumerated in section 1(b) of Executive Order
12866. See Comment of Nat’l Auto. Dealers Ass’n,
Doc. No. FTC–2022–0046–8368 at 34–36 & n.123;
E.O. 12866 3(b) (defining ‘‘Agency’’ to mean an
authority of the United States ‘‘other than those
considered to be independent regulatory agencies’’).
This provision of the Executive Order does not
apply to independent agencies such as the FTC.
Regardless, the Commission did take into account
the principles set forth in section 1(b), as is evident
throughout the NPRM. See, e.g., NPRM at 42015–
17 (identifying problems in the marketplace); id. at
42028–42031 (soliciting comments on alternative
approaches); id. at 42036–42044 (assessing costs
and benefits).
The same commenter also argued that the
Commission’s denial of its request to extend the
comment period prejudiced the commenter’s ability
to collect and provide data pertaining to the
proposed rule and was inconsistent with the
Commission’s grant of extensions in other
rulemakings. As described in its letter, the
Commission also received requests opposing an
extension of the comment period. See Letter, Fed.
Trade Comm’n, ‘‘Duration of the Public Comment
Period in Matter No. P204800’’ (Aug. 23, 2022),
https://www.ftc.gov/system/files/ftc_gov/pdf/
Matter%20No.%20204800%20-%20Letter%
20re%20Extension%20for%20publication.pdf. In
the letter, the Commission noted its ongoing
engagement with stakeholders on issues relating to
the sale, financing, and lease of motor vehicles,
since before its 2011 Federal Register notice
inviting stakeholder feedback on these issues and
continuing since that time. See Fed. Trade Comm’n,
Public Roundtables: Protecting Consumers in the
Sale and Leasing of Motor Vehicles, 76 FR 14,014
(Mar. 15, 2011), https://www.federalregister.gov/
documents/2011/03/15/2011-5873/public-
roundtables-protecting-consumers-in-the-sale-and-
leasing-of-motor-vehicles. The Commission
determined that a sixty-day comment period, along
with an additional twenty days following the public
announcement and release of the NPRM and prior
to its publication in the Federal Register, provided
meaningful opportunity to comment. See also
Steven J. Balla, ‘‘Public Commenting on Federal
Agency Regulations: Research on Current Practices
Continued
the total amount the consumer will pay,
if true;
• Prohibits dealers from charging for
add-on products or services that provide
no benefit to the consumer; and
• Requires dealers to obtain express,
informed consent from the consumer for
any charge.
As discussed in the section-by section
analysis in SBP III and in response to
comments, the Commission is declining
to finalize certain provisions proposed
in the NPRM, including the provision
that dealers must disclose a list of prices
for all optional add-on products or
services, and the provision that dealers
must obtain certain signed declinations
from consumers prior to charging for
optional add-on products or services.
The Commission also is finalizing the
defined terms ‘‘Covered Motor Vehicle’’
and ‘‘Covered Motor Vehicle Dealer’’ to
reflect edits to narrow the scope of these
definitions compared to the scope of the
terms ‘‘Motor Vehicle’’ and ‘‘Motor
Vehicle Dealer’’ in the NPRM.
III. Section-by-Section Analysis
The following discussion provides a
section-by-section analysis that states
the provisions proposed in the NPRM,
and discusses the comments received,
the Commission’s responses to
comments, and the provisions adopted
in the Final Rule.113
A. § 463.1: Authority
Section 463.1 states that the Final
Rule is promulgated pursuant to section
1029 of the Dodd-Frank Act, and that it
is an unfair or deceptive act or practice
within the meaning of section 5(a)(1) of
the FTC Act to violate, directly or
indirectly, any provision of the Final
Rule, including the recordkeeping
requirements, which are necessary to
prevent such unfair or deceptive acts or
practices and to enforce this Rule.114
The prohibition against violating any
applicable provision ‘‘directly or
indirectly’’ applies to each section of
part 463. As discussed in SBP I.A,
section 1029 authorizes the FTC to
prescribe rules under Sections 5 and
18(a)(1)(B) of the FTC Act with respect
to motor vehicle dealers predominantly
engaged in the sale and servicing of
motor vehicles, the leasing and
servicing of motor vehicles, or both.115
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602 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
and Recommendations to the Administrative
Conference of the United States’’ App. A (2011),
https://www.acus.gov/sites/default/files/
documents/Consolidated-Reports-%2B-
Memoranda.pdf (reporting data from a pool of 703
comment periods associated with actions by dozens
of Federal agencies, and finding that the average
duration of comment periods for proposed agency
actions was 38.7 days, and 45.1 days for actions that
are economically significant).
116 15 U.S.C. 57a(a)(1)(B) (the Commission ‘‘may
include requirements prescribed for the purpose of
preventing’’ unfair or deceptive acts or practices). 	117 §§ 463.3(b), 463.4(c), 463.5(a).
118 Individual commenter, Doc. No. FTC–2022–
0046–7445 at 10–11.
119 § 463.3(b) (emphasis added).
120 See §§ 463.2(k) (defining Offering Price),
463.4(a) (requiring disclosure of Offering Price); see
also § 463.3(p) (prohibiting misrepresentations
regarding the disclosures required by the Final
Rule).
121 See NPRM at 42044, 42046 (proposed
§§ 463.2(b), 463.4(b), 463.5(b)).
The Final Rule defines with specificity
certain unfair or deceptive acts or
practices; the Final Rule provisions are
also ‘‘prescribed for the purpose of
preventing such acts or practices.’’ 116
B. § 463.2: Definitions
1. Overview
The proposed rule included
definitions for the following terms:
‘‘Add-on’’ or ‘‘Add-on Product(s) or
Service(s)’’; ‘‘Add-on List’’; ‘‘Cash Price
without Optional Add-ons’’; ‘‘Clearly
and Conspicuously’’; ‘‘Dealer’’ or
‘‘Motor Vehicle Dealer’’; ‘‘Express,
Informed Consent’’; ‘‘GAP Agreement’’;
‘‘Government Charges’’; ‘‘Material’’ or
‘‘Materially’’; ‘‘Motor Vehicle’’; and
‘‘Offering Price.’’ In the definition-by-
definition analysis in SBP III.B.2, the
Commission discusses each definition
proposed in the NPRM, relevant
comments that are not otherwise
addressed in the discussion of the
corresponding substantive provisions of
the Final Rule, and the definition the
Commission is finalizing.
2. Definition-by-Definition Analysis
(a) Add-On or Add-On Product(s) or
Service(s)
The proposed rule defined ‘‘Add-on’’
or ‘‘Add-on Product(s) or Service(s)’’ as
‘‘any product(s) or service(s) not
provided to the consumer or installed
on the vehicle by the motor vehicle
manufacturer and for which the Motor
Vehicle Dealer, directly or indirectly,
charges a consumer in connection with
a vehicle sale, lease, or financing
transaction.’’ This term appeared in the
following definitions and substantive
provisions of the rule proposal: the
definitions of ‘‘Add-on List’’ and ‘‘Cash
Price without Optional Add-ons’’; the
Prohibited Misrepresentations provision
at proposed § 463.3(b); the add-on list
disclosure provision at proposed
§ 463.4(b); the requirement to disclose
that add-ons are not required at
proposed § 463.4(c); the prohibition
against charging for add-ons that
provide the consumer no benefit at
proposed § 463.5(a); and the proposed
provision relating to undisclosed or
unselected add-ons at § 463.5(b). As
discussed in the following paragraphs,
in response to stakeholder comments,
the Commission declines to finalize
certain of these provisions; in the Final
Rule, this term appears in paragraph (a)
of the Prohibited Misrepresentations
section (§ 463.3); the Disclosure
Requirements provision in paragraph (c)
of § 463.4; and the provision in
§ 463.5(a) titled ‘‘Dealer Charges for
Add-ons and Other Items’’ and subtitled
‘‘Add-ons that provide no benefit.’’
For the following reasons, the
Commission adopts the definition of
‘‘Add-on’’ or ‘‘Add-on Product(s) or
Service(s)’’ largely as proposed, with
conforming modifications to reflect
changes to the defined terms ‘‘‘Covered
Motor Vehicle’ or ‘Vehicle’’’ and
‘‘‘Covered Motor Vehicle Dealer’ or
‘‘Dealer’’’ as described in more detail in
the discussion of § 463.2(e) and (f), in
SBP III.B.2(e) and (f).
The Commission received several
comments relating to the scope of its
proposed definition for ‘‘Add-on’’ or
‘‘Add-on Product(s) or Service(s).’’
Industry association and other
commenters recommended that the
Commission broaden the definition to
include manufacturer-provided
products or services, expressing concern
that exclusion of such products or
services would put other companies that
provide such items at a competitive
disadvantage. Products or services
provided by manufacturers, however,
are already covered by several
provisions of the Final Rule. Under the
substantive provisions the Commission
is finalizing, dealers are prohibited from
making misrepresentations regarding
material information, including about
the ‘‘costs or terms of purchasing,
financing, or leasing a Vehicle’’
(§ 463.3(a)); must disclose the vehicle’s
true ‘‘Offering Price,’’ which includes
any amounts dealers charge for items
already installed or provided by the
manufacturer (§§ 463.4(a) and 463.2(k));
and are required to obtain ‘‘Express,
Informed Consent’’ for charges for any
item (§§ 463.5(c) and 463.2(g)). The
additional substantive add-on-specific
provisions 117 address harms associated
with products or services not provided
to the consumer or installed on the
vehicle by the motor vehicle
manufacturer. Commenters did not
provide evidence that the proposed
provisions covering manufacturer-
provided products or services would be
insufficient to address consumer harm.
Accordingly, the Commission has
determined not to include
manufacturer-provided products or
services within this defined term. The
Commission will continue to monitor
this issue to determine whether
additional action is warranted.
One individual commenter expressed
concern that, under the Commission’s
proposed definition, dealers could raise
the price of a vehicle by advertising
additional products or services, such as
‘‘free lifetime benefits’’ with the vehicle,
and that dealers could mislead
consumers by charging more for the
vehicle based on a supposedly ‘‘free’’
add-on.118 The Commission notes that
the Rule the Commission is finalizing
contains several provisions relating to
this concern. For example, dealers are
prohibited from making
misrepresentations under § 463.3,
including misrepresentations regarding
‘‘costs, limitation, benefit, or any other
aspect’’ of add-ons.119 Furthermore,
dealers are required to disclose a
vehicle’s offering price, which must
include charges for required add-ons;
this disclosure will allow consumers to
know the true price of the vehicle and
comparison shop before selecting and
visiting a particular dealership.120
Several dealership association
commenters expressed concern that the
proposed definition was too broad,
contending that it might apply to
hundreds of items and include fees,
such as a processing or document fee,
that a dealer charges a consumer. As
discussed in SBP III.B.2(b), III.D.2(b),
and III.E.2(b), upon careful review of
comments, including comments
regarding the breadth of this
requirement, the Commission has
determined not to finalize the provision
that would have required listing all
optional add-ons—the ‘‘Add-on List’’
definition and the associated
requirement that dealers disclose such a
list—as well as proposed § 463.5(b)
relating to undisclosed or unselected
add-ons. 121 The remaining substantive
provisions that use the term ‘‘Add-ons’’
prohibit misrepresentations (§ 463.3(b));
require dealers to disclose, if true, that
add-ons are not required (§ 463.4(c));
and prohibit charges for add-ons that
provide the consumer no benefit
(§ 463.5(a)). The law already prohibits
misrepresentations, regardless of the
product or service at issue; dealers that
offer consumers additional products or
services are already required to ask
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603	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
122 Comment of Serv. Cont. Indus. Council,
Guaranteed Asset Prot. All., & Motor Vehicle Prot.
Prods. Ass’n, Doc. No. FTC–2022–0046–8113 at 13–
14.
123 Id. at 13.
124 See, e.g., English v. Gen. Elec. Co., 496 U.S.
72, 79 (1990).
125 See 15 U.S.C. 1012(b).
126 See Union Labor Life Ins. Co. v. Pireno, 458
U.S. 119, 129 (1982) (setting forth test for whether
an activity constitutes the ‘‘business of insurance’’);
Humana Inc. v. Forsyth, 525 U.S. 299, 307–08
(1999) (establishing criteria for whether a Federal
law operates to ‘‘invalidate, impair, or supersede’’
State law).
127 The Supreme Court has refused to interpret
the McCarran Ferguson Act to invalidate Federal
law when applied to remedy a misrepresentation
and undo the harm caused by alleged deception.
See SEC v. Nat’l Sec., Inc., 393 U.S. 453, 462 (1969).
Moreover, lower courts have rejected precisely the
concern raised by the commenter about credit life
insurance. See Fed. Trade Comm’n. v. Dixie Fin.
Co., 695 F.2d 926, 930 (5th Cir. 1983) (McCarran
Ferguson Act does not preclude FTC investigation
of ‘‘whether the sale of insurance is a precondition
to the arrangement of credit’’); Fed. Trade Comm’n
v. Mfrs. Hanover Consumer Servs., Inc., 567 F.
Supp. 992, 94 (E.D. Pa. 1983) (same).
consumers if they want such products,
rather than suggesting that such
products or services are mandatory,
when they are not; and any hardship
associated with refraining from charging
for products or services that provide
consumers no benefits are outweighed
by the harms to consumers and
competition from permitting this
practice, as explained in the analysis of
§ 463.5(a).
Commenters including an industry
association suggested limiting the
definition to products or services sold at
the ‘‘point of vehicle purchase’’ to
clarify that indirect charges, such as the
inclusion of a one-year subscription to
a satellite radio service, need not be
separately itemized.122 The industry
association commenter suggested that,
as proposed, the definition would
include charges for which dealers and
consumers ‘‘would otherwise not
account.’’ 123 The Commission has
determined not to finalize the add-on
list and form requirements in proposed
§§ 463.4(b) and 463.5(b). For the
provisions being finalized, excluding
subscription charges, or including only
items added to the vehicle at the ‘‘point
of vehicle purchase,’’ would narrow the
definition of ‘‘Add-on’’ and the
corresponding requirements in a
manner that would allow for deceptive
or unfair practices, including by
allowing dealers to represent a price
that is not the offering price, or to
deceptively state that add-ons are
required. In the example provided by
the commenter, if the satellite radio
subscription service is mandatory, it
needs to be included in the offering
price of the vehicle, as required by
§ 463.4(a) of the Final Rule; if it is not
mandatory, the dealer needs to disclose,
when making any representations about
the service, that it is not required under
§ 463.4(c). Further, regardless of
whether such a product or service is
mandatory or optional, dealers must
follow other aspects of the Final Rule,
including by not making any
misrepresentations about the
subscription under § 463.3 and by
obtaining the express, informed consent
of the consumer for the associated
charges under § 463.5(c).
Another industry association
commenter contended that add-ons sold
in the marine industry are typically
different than those offered in the
context of automobile sales and
described in the NPRM. While all motor
vehicle dealers must refrain from
engaging in deceptive or unfair conduct
relating to add-ons, the Commission is
excluding recreational boats and marine
equipment from the Final Rule’s
definition of ‘‘ ‘Covered Motor Vehicle’
or ‘Vehicle,’ ’’ as discussed in additional
detail in the definition-by-definition
analysis of § 463.2(e) in SBP III.B.2(e).
An industry association commenter
and comments from a number of
dealership associations noted that
certain State laws already regulate the
sale of add-ons, including, for example,
laws in many States that regulate
vehicle sales contracts or deceptive
sales practices generally or that regulate
insurance products. To the extent that
the Final Rule’s add-on provisions may
duplicate State law, commenters have
provided no evidence that any such
duplication in the provisions that
incorporate this defined term—which
prohibit misrepresentations, require
disclosures in the event add-ons are not
required, and prohibit charges for add-
ons from which the consumer would
not benefit—will harm consumers or
competition. Moreover, the Final Rule
provides additional remedies that will
benefit consumers who encounter
conduct that is already illegal under
State or Federal law, including by
adding a mechanism for the
Commission to redress consumers
injured by a dealer’s violation of the
rule, and will assist law-abiding dealers
that presently lose business to
competitors that act unlawfully. Under
the Final Rule, State laws may provide
more or less specific requirements as
long as such requirements are not
inconsistent with part 463, as set forth
at § 463.9, and in the event of an
inconsistency, the Rule only affects
such State law to the extent of the
inconsistency. 124
A few dealership association
commenters expressed concern that the
proposed definition of ‘‘Add-on
Products or Services’’ would include
insurance-related products, such as
credit life and credit disability
insurance, and as such, could implicate
the McCarran-Ferguson Act’s reverse-
preemption of certain Federal laws that
‘‘invalidate, impair, or supersede’’ State
laws enacted ‘‘for the purpose of
regulating the business of
insurance.’’ 125 Commenters have
provided no evidence that the Rule will
invalidate, impair, or supersede State
laws enacted for the purpose of
regulating the business of insurance.126
To the contrary, the Final Rule
addresses deceptive or unfair conduct—
it prohibits dealers, inter alia, from
making misrepresentations regarding
material information about add-ons,
from failing to disclose when add-ons
are not required, and from charging for
add-ons from which the consumer
would not benefit. Nor has the
Commission been presented with
evidence that the Rule’s other
substantive provisions (prohibiting
misrepresentations; requiring
disclosures of a vehicle’s offering price
and about total of payments; and
requiring consumers’ express, informed
consent before charging them)
invalidate, impair, or supersede State
laws enacted for the purpose of
regulating insurance.127
A number of industry and dealership
association commenters contended that,
as proposed, this definition may extend
to products or services that are provided
by the manufacturer but that are
installed by a distributor of motor
vehicles, or alternatively, by the dealer,
at the instruction of the manufacturer.
Relatedly, a State governmental
association commenter expressed
concern that the proposed definition
could create confusion with regard to
the sale of used vehicles, where a prior
owner of a vehicle may have added a
product to the vehicle. The commenter
contended that a motor vehicle dealer
selling the used vehicle may be unaware
of the added product, and further, that
listing any such items may confuse
buyers.
To the extent the commenters’
concerns stem from the proposed
provisions related to add-on lists and
proposed § 463.5(b)’s provisions related
to separate disclosures, the Commission
is not finalizing those provisions. Under
the provisions being finalized, if a
product is provided to the dealer by the
manufacturer or another entity, and a
consumer chooses to have the product
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604 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
128 The language requirements, as they relate to
obtaining express, informed consent, are further
explained in the discussion of § 463.5(c) in SBP
III.E.2(c).
installed and pay for it, the dealer may
install it and charge for it, as long as the
dealer complies with the provisions of
the Final Rule, including by disclosing
that the product is not required and by
obtaining the consumer’s express,
informed consent for the charge. If the
manufacturer requires the dealer to
install the product or if the dealer
chooses to install the product, and the
dealer requires any consumer to pay
charges for it, the amount of the charge
must be included in the vehicle’s
offering price, and the dealer must
comply with other aspects of the Final
Rule, including the express, informed
consent requirement. Relatedly,
regarding used vehicles, if a prior owner
of such a vehicle installed an add-on,
and the dealer that subsequently sells
such a vehicle requires any consumer to
pay charges for the add-on, the amount
of those charges must be included in the
vehicle’s offering price and the dealer
must comply with other aspects of the
Final Rule, including the express,
informed consent requirement at
§ 463.5(c). If, alternatively, the dealer
does not require any consumers to pay
for the pre-installed add-on, then the
dealer does not have to add that amount
to the vehicle’s offering price, and there
is no charge for that add-on for which
the dealer must obtain express,
informed consent. Thus, the definition
of ‘‘Add-on’’ and the Rule requirements
being finalized address deceptive or
unfair price and add-on disclosures and
hidden charges without requiring
dealers to list or itemize charges that
they do not impose on consumers. For
the reasons explained in this section,
the Commission is finalizing the
definition of ‘‘Add-on’’ or ‘‘Add-on
Product(s) or Service(s)’’ largely as
proposed, with conforming
modifications to reflect changes to the
defined terms ‘‘‘Covered Motor Vehicle’
or ‘Vehicle’’’ and ‘‘‘Covered Motor
Vehicle Dealer’ or ‘Dealer’’’ as described
in more detail in the discussion of
§ 463.2(e) and (f), in SBP III.B.2(e) and
(f).
(b) Add-On List
The NPRM proposed defining the
term ‘‘Add-on List,’’ which appeared in
the associated Add-on List disclosure
provision at proposed § 463.4(b), as well
as in the recordkeeping provision at
proposed § 463.6(a)(2). Based on the
following, the Commission has
determined not to include this
definition in its Final Rule.
Several commenters supported the
substantive add-on list proposal and its
associated definition, and commenters
including consumer advocacy
organizations urged the Commission to
finalize additional related restrictions or
disclosures, such as requiring add-on
prices to be fixed and non-negotiable, or
requiring a distinct add-on list for each
vehicle sold. Other commenters,
including dealership associations,
raised concerns that, as proposed, the
add-on list definition could impose
significant economic burdens on
dealerships for a disclosure that, in
some circumstances, might be too
voluminous to be optimally meaningful
to consumers, or permit price ranges
that could be too broad to prevent
abuses and effectively inform
consumers.
After careful consideration, and in
light of the concerns raised by
commenters, the Commission has
determined not to include the add-on
list disclosure provision at proposed
§ 463.4(b) or the recordkeeping
provision at proposed § 463.6(a)(2) in its
Final Rule, and therefore will not
include a definition of the term ‘‘Add-
on List’’ in its Final Rule. Here, as
elsewhere, the Commission remains
committed to promoting fair, non-
deceptive, and competitive markets for
consumer products and services; it will
continue to monitor the marketplace for
add-on-related acts or practices that are
unfair or deceptive, and will evaluate
whether to propose additional measures
pertaining to such products and
services.
(c) Cash Price Without Optional Add-
Ons
The NPRM proposed defining the
term ‘‘Cash Price without Optional Add-
ons,’’ which appeared in the proposed
provision addressing undisclosed or
unselected add-ons at § 463.5(b). Based
on the following, the Commission is
declining to finalize this definition.
A number of commenters favored the
proposed provision and definition, and
several, including consumer advocacy
organizations, urged the Commission to
include additional requirements, such
as requiring the proposed disclosure
documents associated with this
proposed definition to be available in
different languages, while others,
including a dealership association,
raised concerns that the definition and
relevant provision were burdensome or
confusing for dealers.
As explained in additional detail in
SBP III.E.2(b) with respect to § 463.5(b),
in light of commenter concerns that the
proposed provision using this term
would increase costs for legitimate
dealers and add to the time and
paperwork for consumers in an already
lengthy, paperwork-heavy transaction,
the Commission has elected not to
include a Cash Price without Optional
Add-ons disclosure requirement in its
Final Rule. Thus, after careful
consideration, and in light of the
concerns raised by commenters, the
Commission has determined not to
include a definition of ‘‘Cash Price
without Optional Add-ons’’ in its Final
Rule.
(d) Clearly and Conspicuously
The proposed rule defined the term
‘‘Clearly and Conspicuously’’ as ‘‘in a
manner that is difficult to miss (i.e.,
easily noticeable) and easily
understandable,’’ including in all of
seven enumerated ways, listing
proposed requirements for ‘‘any
communication that is solely visual or
solely audible,’’ ‘‘[a] visual disclosure,’’
‘‘[a]n audible disclosure,’’ and ‘‘any
communication using an interactive
electronic medium,’’ and providing,
inter alia, that such disclosures ‘‘must
use diction and syntax understandable
to ordinary consumers and must appear
in each language in which the
representation that requires the
disclosure appears’’ and ‘‘must not be
contradicted or mitigated by, or
inconsistent with, anything else in the
communication.’’ Based on the
following, the Commission is finalizing
this definition largely as proposed, with
a modification to clarify that the
definition applies whether the term
appears as an adjective or an adverb, by
adding the parentheses in the following
manner to the defined term: ‘‘Clear(ly)
and Conspicuous(ly).’’
Some consumer advocacy
organization commenters favored the
Commission’s proposed definition
while also suggesting that the
Commission include a provision
requiring translation of any deal
consummating documents, including
buyer’s orders and retail installment
sales contracts, into the language in
which the negotiations were conducted.
This issue, however, is addressed by
§ 463.5(c) of the Rule, which requires
express, informed consent for each item
charged.128 As explained in additional
detail in the paragraph-by-paragraph
analysis of § 463.5(c) in SBP III.E.2(c), if
a deal-consummating document is
provided in a language that the
consumer does not understand, and the
document’s contents are not otherwise
clearly understood by the consumer,
then the consumer is in no position to
give unambiguous assent to the charges
described therein. The Commission
therefore has determined not to add
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605	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
129 16 CFR 14.9 is an enforcement policy
statement that provides information to advertisers
about clear and conspicuous disclosures in foreign
language advertisings and sales materials, including
ensuring the language of the disclosure matches the
language in the publication. See 16 CFR 14.9.
130 See Appear (defs. 1b, 4, 6), Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/appear (last visited Dec. 5,
2023); see also Order ¶¶ 2–3, Asbury Auto. Grp.,
Inc., No. C–4606 (F.T.C. Mar. 22, 2017) (identical
usage in definition provision); Order ¶ 2, Lithia
Motors, Inc., No. C–4597 (F.T.C. Dec. 8, 2016)
(same); Order ¶¶ 2–3, Jim Koons Mgmt. Co., No. C–
4598 (F.T.C. Dec. 8, 2016) (same).
131 17 CFR 162.2.
such a provision to its ‘‘Clear(ly) and
Conspicuous(ly)’’ definition. However,
the Commission will continue to
monitor the marketplace and determine
whether further language requirements
or additional measures are warranted to
address deceptive or unfair practices—
particularly those that target or
otherwise disproportionately impact
language-minority communities.
Commenters, including consumer
advocacy organizations, expressed
concern that proposed § 463.2(d)(5) may
be read to apply only to certain
disclosures with triggering
representations and only to disclosures
that are in writing. These commenters
also requested that the Commission
incorporate into its Final Rule the FTC’s
policy statement regarding foreign
language advertising and sales
materials, which is separately codified
at 16 CFR 14.9.129 In response, the
Commission notes that to be clear and
conspicuous, the disclosure must be
‘‘easily understandable,’’ as stated in the
definition. If a disclosure is being made
in a language the consumer does not
understand, it does not meet this
requirement. Further, the disclosures
highlighted by the commenters are
indeed subject to the language
requirements of § 463.2(d)(5), which
requires that disclosures ‘‘appear in
each language in which the
representation that requires the
disclosure appears.’’ With regard to the
offering price disclosure in § 463.4(a)(1),
the applicable ‘‘representation that
requires the disclosure’’ is the
‘‘advertisement that references . . . a
specific Vehicle’’; thus, for example, if
an advertisement that references a
specific vehicle is in Spanish, the
offering price disclosure must also be in
Spanish. Similarly, in § 463.4(a)(2), the
applicable representation that requires
the disclosure is an ‘‘advertisement that
represents . . . any monetary amount or
financing term for any Vehicle.’’ In
§ 463.4(a)(3), the applicable
representation is ‘‘any communication
. . . that includes a reference . . .
regarding a specific Vehicle, or any
monetary amount or financing term for
any Vehicle.’’ In § 463.4(c) and (d), ‘‘any
representation’’ regarding an add-on
product or service or a monthly
payment for any vehicle, respectively,
triggers the language requirement of
§ 463.2(d)(5). The monthly payments
comparison disclosure in § 463.4(e) is
required when there is a ‘‘comparison
between payment options . . . that
includes discussion of a lower monthly
payment.’’ Thus, the language
requirements in § 463.2(d)(5) apply.
In response to this concern regarding
the applicability of § 463.2(d)(5) to
disclosures that are not in writing, the
Commission notes that its use of the
word ‘‘appear’’ in § 463.2(d)(5)
incorporates common meanings, such as
‘‘to show up,’’ ‘‘to come into existence,’’
or ‘‘to become evident or manifest,’’
which cause this provision to apply
whether the representation requiring the
disclosure appears visually, orally, or
otherwise.130 Where the Commission
instead intended a provision to be
limited to a visual disclosure, as in
§ 463.2(d)(2), the Rule states so
explicitly.
In response to the request that the
Commission incorporate into this Rule
its policy statement regarding foreign
language advertising and sales
materials, separately codified at 16 CFR
14.9, the Commission emphasizes that
the enforcement statement sets out what
is already impermissible under current
law and is consistent with the
requirements the Commission is
finalizing. To the extent dealers take
actions that are inconsistent with
Commission statements about such law,
they are risking enforcement
proceedings by the Commission or
others. Accordingly, the Commission
has determined not to add to the Rule
further requirements regarding foreign
language advertising. The Commission
will continue to monitor the market to
determine whether further action is
warranted.
Industry association commenters
raised concerns about how the
Commission’s proposed definition
interacts with other Federal laws, such
as Regulations Z and M, which
implement the Truth in Lending Act
and the Consumer Leasing Act,
respectively, and contended that it
conflicts with a clear and conspicuous
definition in Commodity Futures
Trading Commission regulations.131
Industry and dealership association
commenters contended that State
advertising standards already address
what constitutes ‘‘clear and
conspicuous’’ advertising and provide
guidance on disclosures, such that the
FTC’s proposal will cause confusion or
possible conflict with State law.
The Commission’s definition of
‘‘Clear(ly) and Conspicuous(ly)’’ is not
inconsistent with the existing Federal
legal requirements raised by these
commenters. Dealers can comply with
these laws to the extent they apply as
well as with the requirements that
follow from the Commission’s
definition. Regarding State law,
commenters did not provide examples
of actual conflicts. Further, to the extent
there is truly an inconsistency between
the operation of the Commission’s
definition and any State law, the
Commission notes that the definition is
based on decades of Commission
experience policing deceptive and
unfair conduct; addresses harmful
practices including those related to
hidden disclosures and charges; and
that § 463.9 of the Final Rule sets out
the Rule’s relation to State laws.
Other industry association
commenters also contended that the
proposed definition of ‘‘Clearly and
Conspicuously’’ would be overly broad
and challenging for compliance, but did
not explain why or suggest alternative
language. In addition, some dealership
association commenters requested more
guidance to understand the definition.
The Commission’s definition spells out,
in seven subparts, what clear and
conspicuous means, using simple terms
that provide additional information
about how dealers can make a
disclosure in a manner that is easily
understandable and easily noticeable to
the consumer. The definition elaborates
basic, common-sense principles,
including that visual disclosures be in a
size that consumers will easily notice
and that audible disclosures be in a
volume, speed, and cadence such that
consumers will easily hear it. Thus, for
example, disclosures in an illegible font,
or that consumers cannot hear, are not
clear and conspicuous. The Commission
also notes that it did not mandate
specific fonts, volumes, or other
prescriptive measures. Thus, dealers
have the flexibility to determine the best
way to meet the definition’s
requirements for their consumers under
the circumstances.
A dealership association commenter
contended that the proposed definition
does not include a reasonableness
standard and may be interpreted as
prohibiting any limitations and
exclusions, given the requirement in
proposed § 462.3(d)(7) that a disclosure
must not be contradicted or mitigated by
or inconsistent with anything else in the
communication. The commenter further
asked whether a statement such as
‘‘with approved credit’’ would
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132 Comment of Ohio Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–6657 at 4.
133 See FTC Policy Statement on Deception, supra
note 42, at 2–5.
134 Complaint ¶¶ 5–7, Progressive Chevrolet Co.,
No. C–4578 (F.T.C. June 13, 2016) (alleging ads
touting attractive terms deceptively failed to
disclose high credit score requirement).
135 Removatron Int’l Corp. v. Fed. Trade Comm’n,
884 F.2d 1489, 1496–97 (1st Cir. 1989); see also
Fed. Trade Comm’n v. Brown & Williamson
Tobacco Corp., 778 F.2d 35, 42–43 (D.C. Cir. 1985)
(finding that a disclosure in virtually illegible form,
placed in an inconspicuous corner of Barclay
advertisements, did not eliminate deception); see
Fed. Trade Comm’n v. Cap. Choice Consumer
Credit, Inc., 2003 U.S. Dist. LEXIS 29086, at *5 (S.D.
Fla. June 2, 2003) (finding that, where
advertisements promised a general purpose credit
card, such as VISA or MasterCard, ‘‘fine print on
reverse side’’ of ad clarifying that the credit card
was a ‘‘merchandise card and not a major bank
card’’ was inadequate to modify net impression);
Fed. Trade Comm’n v. Cyberspace.com LLC, 453
F.3d 1196, 1200 (9th Cir. 2006) (rejecting
defendant’s argument that truthful fine print notices
on reverse side of checks, invoices, and marketing
inserts cured deception that check/invoice was a
refund rather than offer for services); Fed. Trade
Comm’n v. Alcoholism Cure Corp., No. 3:10–cv–
266–J–34JBT, 2011 WL 13137951, at * 51 (M.D. Fla.
Sept. 16, 2011) (finding that ‘‘not MD’’ disclaimers
were inadequate to dispel net impression regarding
professional qualifications of defendant and other
employees as advertised); Fed. Trade Comm’n v.
Wash. Data Res., 856 F. Supp. 2d 1247, 1274–75
(M.D. Fla. 2012) (rejecting defendants’ argument
that retainer agreement contained sufficient
disclaimer to dispel a misrepresentation about
whether a home loan was guaranteed).
136 The Commission has included such
requirements elsewhere. See, e.g., Order ¶ 6, United
States v. Sunkey Publ’g, Inc., No: 3:18–cv–1444–
HNJ (N.D. Ala. Sept. 6, 2018).
137 See. e.g., Palmer v. Champion Mortg., 465 F.3d
24, 28 (1st Cir. 2006) (applying an objective
standard in evaluating Truth in Lending Act claim
regarding clear and conspicuous disclosure); Smith
v. Check-N-Go of Ill., Inc., 200 F.3d 511, 515 (7th
Cir. 1999) (same); Zamarippa v. Cy’s Car Sales, Inc.,
674 F.2d 877, 879 (11th Cir. 1982) (same);
Bustamante v. First Fed. Sav. & Loan Ass’n, 619
F.2d 360, 364 (5th Cir. 1980) (same); see also
Herrera v. First N. Sav. & Loan Ass’n, 805 F.2d 896,
900 (10th Cir. 1986) (resolving question of clear and
conspicuous disclosure under Truth in Lending Act
as a legal, rather than factual, matter); Dixey v.
Idaho First Nat’l Bank, 677 F.2d 749 (9th Cir. 1982)
(same).
138 Complaint ¶¶ 6–14, Jim Burke Auto., Inc., No.
C–4523 (F.T.C. May 4, 2015); Complaint ¶¶ 6, 9, TT
of Longwood, Inc., No. C–4531 (F.T.C. July 2, 2015);
Complaint ¶ 13, City Nissan Inc., No. C–4524
(F.T.C. May 4, 2015); Complaint ¶¶ 17–19, Fed.
Trade Comm’n v. Liberty Chevrolet, Inc., No. 1:20–
cv–03945 (S.D.N.Y. May 21, 2020); Complaint
¶¶ 4–9, 12–15, 18–20, Billion Auto, Inc., No. C–
4356 (F.T.C. May 1, 2012) (alleging false ads
promising to pay off consumers’ existing motor
vehicle debt and failing to disclose legally required
financing and leasing terms); see also Complaint
¶¶ 57–60, Fed. Trade Comm’n v. Stewart Fin. Co.
Holdings, Inc., No. 1:03–CV–2648 (N.D. Ga. Sept. 4,
2003) (alleging violations for failure to include the
cost of required add-on products in the finance
charge and annual percentage rate disclosed to
consumers).
139 See FTC Policy Statement on Deception, supra
note 42, at 2–5 (describing application of reasonable
consumer standard).
140 See, e.g., Decision and Order, JS Autoworld,
Inc., No. C–4535 (F.T.C. Aug. 13, 2015); Decision
and Order, Nat’l Payment Network, Inc., No. C–
4521 (F.T.C. May 4, 2015); Decision and Order, Matt
Blatt Inc., No. C–4532 (F.T.C. July 2, 2015);
Decision and Order, Ganley Ford West, Inc., No. C–
4428 (F.T.C. Jan. 28, 2014).
impermissibly mitigate an offer of low
financing under this proposed
definition. 132 The Commission responds
as follows. The standard is an objective
one, evaluated from the perspective of a
reasonable consumer.133 The definition
does not prohibit all advertising that
contains limitations and exclusions, but
it does provide that if dealers are
advertising offers that are limited in
some way, they may not misrepresent
such offers. Thus, if a dealer presents
consumers with an unqualified
representation of low financing terms,
those terms must be available to typical
consumers. Alternatively, a dealer may
offer low financing terms to consumers
with particular credit characteristics if
that requirement is presented in a
manner that does not deceive reasonable
consumers. For example, a dealer may
offer ‘‘0% annual percentage rate (APR)
for consumers with a credit score above
800.’’ By contrast, it would be deceptive
if the dealer offered ‘‘0% APR,’’ and
then separately disclosed in fine print
that such terms are only available to
consumers with a credit score above
800, because the qualifying disclosure is
inconsistent with an offer of ‘‘0% APR’’
that contained no limitations and thus
indicated that 0% APR is available to
the typical consumer regardless of credit
score. 134 Further, the Commission notes
that to qualify as clear and conspicuous,
‘‘disclaimers or qualifications in any
particular ad are not adequate to avoid
liability unless they are sufficiently
prominent and unambiguous to change
the apparent meaning of the claims and
to leave an accurate impression.
Anything less is only likely to cause
confusion by creating contradictory
double meanings.’’ 135
Lastly, another dealership association
commenter asked how the proposed
definition translates to visual, audible,
and electronic media disclosures and
expressed concern about subjectivity,
characterizing the terms ‘‘easily’’
understood and ‘‘unavoidable’’ within
the proposed definition as subjective
and open to different interpretations,
particularly in the context of websites
and internet promotions. Here, the
Commission declines to mandate more
prescriptive language regarding, for
example, font sizes, what volumes are to
be used, and where exactly the language
should appear on a website, such as on
an overlay with mandated color, size,
and location.136 As courts 137 have
recognized, whether a disclosure is clear
and conspicuous is an objective
standard rather than a subjective one.
While more prescriptive language
would provide additional objective
criteria, the Commission is concerned
such language might constrain dealers
from determining the best way to meet
the definition’s requirements for their
consumers under the circumstances
involved, and might require dealers that
are already making clear and
conspicuous disclosures to change their
existing disclosure materials.
The Commission reiterates that the
definition of ‘‘Clear(ly) and
Conspicuous(ly)’’ elaborates basic,
common-sense principles, such as
requiring visual disclosures in a size
consumers can see and audible
disclosures in a volume they can hear.
Regarding the requirement that internet
disclosures be unavoidable, this
language requires evaluating an
objective standard—whether or not
consumers could have avoided the
disclosure. In addition, the disclosure
must be easily noticeable and easily
understandable, as set forth expressly in
the definition. Disclosures that do not
meet this standard include those that
are buried in other text, including as
illustrated by many FTC actions against
dealers.138 Regarding the requirement
that disclosures be ‘‘easily’’ noticeable
and understandable, the standard is also
an objective one, evaluated from the
perspective of a reasonable consumer.
Determining how reasonable consumers
are likely to respond may be resolved on
the basis of the advertisement, context,
or disclosure itself, or based on extrinsic
evidence, such as consumer
complaints.139 To this end, as noted
previously, the definition enumerates in
seven subparts the meaning of clear and
conspicuous using simple terms that
provide additional guidance on how
dealers may make disclosures that are
easily understandable and easily
noticeable to the consumer.
After carefully considering the
comments, the Commission adopts
§ 463.2(d) with a modification to clarify,
through the addition of parentheses—
‘‘Clear(ly) and Conspicuous(ly)’’—that
the definition applies whether the term
is used as an adjective or adverb.
Consistent with the Commission’s
experience addressing unfair or
deceptive conduct, the Commission has
defined the term ‘‘Clear(ly) and
Conspicuous(ly)’’ to include disclosures
that are easily understandable and
easily noticeable, while also providing
dealers with additional information on
how to meet those requirements.140
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607	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
141 According to the National Highway Traffic
Safety Administration, ‘‘Public road means any
road under the jurisdiction of and maintained by a
public authority and open to public travel.’’ 23 CFR
1300.3.
142 Comment of Structured Fin. Ass’n, Doc. No.
FTC–2022–0046–7646 at 3.
143 The Marine Retailers Association of the
Americas requested that transactions in excess of
$70,000 be excluded from coverage, as an
alternative to excluding marine transactions
altogether. See Comment of Marine Retailers Ass’n
of the Ams., Doc. No. FTC–2022–046–9291 at 4.
(e) Motor Vehicle (Finalized as
‘‘ ‘Covered Motor Vehicle’ or ‘Vehicle’ ’’)
The proposed rule defined the term
‘‘Motor Vehicle’’ as ‘‘(1) any self-
propelled vehicle designed for
transporting persons or property on a
street, highway, or other road; (2)
Recreational boats and marine
equipment; (3) Motorcycles; (4) Motor
homes, recreational vehicle trailers, and
slide-in campers, as those terms are
defined in §§ 571.3(b) and 575.103(d) of
title 49, Code of Federal Regulations, or
any successor thereto; and (5) Other
vehicles that are titled and sold through
Dealers.’’ The Commission has
determined to finalize the definition
with the modifications discussed in the
following paragraphs.
The Commission received several
comments regarding the substance and
scope of this proposed definition. A
number of industry association
commenters requested that certain
vehicle types, including marine
vehicles, motorcycles, RVs, and other
recreational vehicles be excluded from
coverage. These commenters contended
that the dealerships that sell such
vehicles function differently from
automobile dealerships, and that
recreational vehicles are discretionary,
rather than essential, purchases. After
careful consideration, the Commission
is excluding recreational boats and
marine equipment; motorcycles; and
motor homes, recreational vehicle
trailers, and slide-in campers from the
definition of ‘‘ ‘Covered Motor Vehicle’
or ‘Vehicle.’ ’’ Moving forward, the
Commission will continue to monitor
for unfair and deceptive practices to
determine whether further action is
warranted to protect consumers,
through law enforcement, a future
rulemaking, or other measures. The
Commission notes that no dealer may
misrepresent material terms; deceive
customers about prices, add-ons, or
payments; charge for products that
provide no benefit; or charge consumers
without express, informed consent. To
the extent that dealers engage in such
conduct, they are in violation of the FTC
Act.
Another commenter contended it was
unclear whether all-terrain vehicles, go-
carts, snowmobiles, scooters, electric
bicycles, and golf carts were covered by
the proposed definition. In response, the
Commission has modified the first
enumerated subpart of the definition to
refer only to vehicles designed for use
on a ‘‘public’’ street, highway, or road,
and to expressly exclude scooters,
electric bicycles, and golf carts. The
definition of ‘‘ ‘Covered Motor Vehicle’
or ‘Vehicle’ ’’ in the Final Rule does not
cover all-terrain vehicles, go-carts, or
snowmobiles because such vehicles are
not designed for use on a ‘‘public’’
street, highway, or road.141
A number of industry association
commenters claimed that the proposed
definition conflicts with definitions of
motor vehicle under various State laws,
and one such commenter requested that,
rather than finalize a definition of
‘‘Motor Vehicle,’’ the Commission defer
to the definitions promulgated by each
State’s department of motor vehicles.
The commenters did not explain how
the Rule’s definition may actually
conflict with any laws, or how any
alleged duplication would harm
consumers or competition. To the extent
that States have broader or narrower
definitions, it is not clear why motor
vehicle dealers covered by the Rule
cannot comply with the Rule’s
provisions and applicable State laws.
Moreover, the Final Rule provides
additional remedies that will benefit
consumers who encounter conduct that
is already illegal under State or Federal
law, including by adding a mechanism
for the Commission to redress
consumers injured by a dealer’s
violation of the rule, and will assist law-
abiding dealers that presently lose
business to competitors that act
unlawfully. Section 463.9 provides
further discussion of State laws.
Thus, after careful consideration of
the comments, the Commission is
finalizing the definition of ‘‘Motor
Vehicle’’ with modifications, including
adding the word ‘‘Covered’’ to the
definition to reflect the fact that the
definition is narrower than the term
‘‘Motor Vehicle’’ in the NPRM and
adding ‘‘or Vehicle’’ to the definition to
clarify that all references in the Rule to
the term ‘‘Covered Motor Vehicle’’ and
‘‘Vehicle’’ refer to the defined term.
(f) Dealer or Motor Vehicle Dealer
(Finalized as ‘‘ ‘Covered Motor Vehicle
Dealer’ or ‘Dealer’ ’’)
The proposed rule defined the term
‘‘Dealer’’ or ‘‘Motor Vehicle Dealer’’ as
‘‘any person or resident in the United
States, or any territory of the United
States, that: (1) Is licensed by a State, a
territory of the United States, or the
District of Columbia to engage in the
sale of motor vehicles; (2) Takes title to,
holds an ownership interest in, or takes
physical custody of motor vehicles; and
(3) Is predominantly engaged in the sale
and servicing of motor vehicles, the
leasing and servicing of motor vehicles,
or both.’’ Based on the following, the
Commission is finalizing this definition
in the Final Rule with modifications for
clarity.
Many stakeholders commented in
support of the proposed rule and
expressed no concern over this
definition. Other commenters expressed
views that the Commission examines in
the following paragraphs.
A few industry association
commenters contended that parts of the
proposed definition may have captured
certain financial entities, such as
financial entities that maintain licenses
to engage in the sale of motor vehicles,
and requested that the Commission
make clear that any rule does not apply
to such entities. In response, the
Commission notes that only entities that
meet all three components of the
definition are covered ‘‘Dealers.’’ Thus,
an entity that maintains an applicable
license to engage in the sale of Covered
Motor Vehicles but is not, for example,
predominantly engaged in the sale or
leasing of motor vehicles would not be
a covered ‘‘Dealer.’’
Another industry association
commenter similarly requested a ‘‘carve-
out’’ from any definition of ‘‘Dealer’’ for
trusts and trusts’ investors.142 This
commenter asserted that trusts and their
investors do not satisfy two of the
definition’s components and did not
describe how any part of the definition
creates concerns or is unclear. The
Commission reiterates that if an entity
meets the three parts of the ‘‘Covered
Motor Vehicle Dealer’’ definition, then
it is covered; if an entity does not meet
these three parts, it is not covered. The
Commission sees no benefit to adding
language stating that entities that do not
meet the definition are not covered.
Other commenters, including vehicle
association commenters, claimed that
dealerships specializing in RV, marine,
motorcycles, and other recreational
vehicles, including certain high-end
recreational vehicles, 143 should be
excluded from coverage, generally
contending that such dealerships
operate differently from automobile
dealerships, and that these types of
vehicles are used for different purposes
than are automobiles. As explained in
the section-by-section analysis of the
definition of ‘‘Covered Motor Vehicle’’
in SBP III.B.2(e), after considering
stakeholder comments, the Commission
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144 The Oxford Advanced American Dictionary
defines ‘‘servicing’’ as ‘‘the act of checking and
repairing a vehicle, machine, etc. to keep it in good
condition’’; see also 15 U.S.C. 5519(b)(3) (referring
to ‘‘the sale, financing, leasing, rental, repair,
refurbishment, maintenance, or other servicing of
motor vehicles, motor vehicle parts, or any related
or ancillary product or service’’).
145 Used Motor Vehicle Trade Regulation Rule
(‘‘Used Car Rule’’), 81 FR 81664, 81667 (Nov. 18,
2016).
146 See 12 U.S.C. 5519(a), (f).
147 Section 1029(d) of the Dodd-Frank Act defines
‘‘motor vehicle dealer’’ as ‘‘any person or resident
in the United States, or any territory of the United
States, who—(A) is licensed by a State, a territory
of the United States, or the District of Columbia to
engage in the sale of motor vehicles; and (b) takes
title to, holds an ownership in, or takes physical
custody of motor vehicles.’’ 15 U.S.C. 5519(f)(2).
Parts (A) and (B) of this definition are identical
to parts (1) and (2) of the definition of ‘‘ ‘Covered
Motor Vehicle Dealer’ or ‘Dealer’ ’’ in the Final
Rule.
Section 1029(d) of the Dodd-Frank Act states that
the Commission ‘‘is authorized to prescribe rules
under sections 5 and 18(a)(1)(B) of the Federal
Trade Commission Act in accordance with section
553 of title 5, United States Code, with respect to
a person described in subsection (a).’’ 15 U.S.C.
5519(d). Section 1029(a) in turn, provides the CFPB
‘‘may not exercise any rulemaking, supervisory,
enforcement or any other authority . . . over a
motor vehicle dealer that is predominantly engaged
in the sale and servicing of motor vehicles, the
leasing and servicing of motor vehicles, or both.’’
15 U.S.C. 5519(a). The last clause is identical to part
(3) of the definition in the Final Rule.
Several commenters requested that the
Commission allow consumers to buy vehicles
directly from manufacturers. Nothing in the Rule
prohibits consumers from doing so.
148 See, e.g., Person, Black’s Law Dictionary (11th
ed. 2019) (defining ‘‘person’’ to include ‘‘[a] human
being’’ and ‘‘[a]n entity (such as a corporation) that
is recognized by law as having most of the rights
and duties of a human being.’’); Person, Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/person (last visited Dec. 5,
2023) (defining ‘‘person’’ to include ‘‘human’’ and
‘‘one (such as a human being, a partnership, or a
corporation) that is recognized by law as the subject
of rights and duties’’); see also 12 U.S.C. 5481(19)
(Dodd-Frank Act statutory authority for the Final
Rule defining ‘‘person’’ as ‘‘an individual,
partnership, company, corporation, association
(incorporated or unincorporated), trust, estate,
cooperative organization, or other entity’’); 1 U.S.C.
1 (Dictionary Act defining ‘‘person’’ to include
‘‘corporations, companies, associations, firms,
partnerships, societies, and joint stock companies,
as well as individuals’’). The application of covered
motor vehicle dealer and dealer to entities also is
consistent with these terms’ use in the NPRM and
commenter understanding of these terms in the
course of public comment.
is removing marine, motorcycle, RV,
and certain other vehicles from the
definition in § 463.2(e), and to reflect
this change, finalizing the defined term
as ‘‘ ‘Covered Motor Vehicle’ or
‘Vehicle,’ ’’ thereby excluding from the
Final Rule entities who otherwise
would have qualified as ‘‘Dealers’’
solely based on their sale and servicing,
or leasing and servicing, of such
vehicles. The Commission underscores
that, regardless of the definition of
‘‘Covered Motor Vehicle’’ under the
Final Rule, unfair and deceptive
practices remain unlawful under the
FTC Act. The Commission will continue
to monitor all vehicle markets to
determine whether additional action is
warranted to protect consumers.
Some dealership association
commenters argued that, under the
Commission’s proposal, this definition
exempted dealers subject to the
jurisdiction of the CFPB. Other such
commenters similarly contended that,
under the proposal, used car dealers
that do not engage in extensive post-sale
repairs do not ‘‘service’’ vehicles or that
do not have separate service
departments may have been excluded
from coverage, contending further that
excluding such dealers would put other
dealers at a competitive disadvantage.
Contrary to these commenters’
assertions, the definition does not
contain such exclusions. By its plain
terms, the definition applies to dealers
that meet its three enumerated
components. Nowhere does the
definition limit coverage of dealers
based on CFPB jurisdictional
considerations. Likewise, the definition
does not condition coverage on whether
a dealership has a service department or
include any other requirement or
limitation beyond those enumerated in
§ 463.2(f). By its plain meaning, the term
‘‘servicing’’ covers, for instance,
‘‘checking and repairing a vehicle,
machine, etc. to keep it in good
condition.’’ 144 As the Commission has
previously stated, the term ‘‘servicing’’
‘‘captures activities undertaken by
essentially all used car dealers.’’ 145
Thus, the definition does not place
dealers with separate servicing
departments at a competitive
disadvantage, and the Commission need
not remove the term ‘‘servicing of motor
vehicles’’ from the Final Rule.
One such commenter further
contended that the proposed definition
did not cover certain entities, including
certain direct sellers or manufacturers or
others not licensed in a particular State,
or lenders who offer add-on products
such as GAP agreements and debt
suspension products. As previously
discussed, the Final Rule applies to all
dealers that meet the three parts of this
definition.146 To the extent that the
definition does not apply to specific
entities, this reflects the scope and
bounds of the rulemaking authority
Congress delegated to the Commission
under the Dodd-Frank Act.147
Finally, some industry and dealership
association commenters posited that the
proposal conflicted with Federal and
State law or duplicated the regulatory
authority of State enforcement agencies.
These commenters did not provide
information regarding how duplicative
laws prohibiting misrepresentations,
requiring disclosures, or prohibiting
charges for items that would not benefit
the consumer or for items without
express, informed consent would create
harmful consequences, and the
Commission is not aware of any laws
that allow such conduct by those that
the Rule defines as ‘‘Covered Motor
Vehicle Dealer[s].’’ Moreover, the Final
Rule provides additional remedies that
will benefit consumers who encounter
conduct that is already illegal under
State or Federal law, including by
adding a mechanism for the
Commission to redress consumers
injured by a dealer’s violation of the
Rule, and will assist law-abiding dealers
that presently lose business to
competitors that act unlawfully. To the
extent the Rule may overlap with State
law, dealers can comply with these laws
and also with the requirements that
follow from the operation, in the Rule,
of the Commission’s definition. To the
extent there is truly an inconsistency
between the provisions of the Final Rule
and a State law, § 463.9 sets out the
Rule’s relation to State laws.
Thus, after careful consideration of
the comments, the Commission is
finalizing the definition of ‘‘ ‘Covered
Motor Vehicle Dealer’ or ‘Dealer’ ’’ with
modifications for clarity. The definition
in the Final Rule incorporates the
phrase ‘‘including any individual or
entity’’ to confirm that the term
‘‘person,’’ like all undefined terms in
this part, is used according to its
ordinary meaning and includes
individuals and corporate entities and
adds the word ‘‘Covered’’ to the
definition to reflect the narrowed scope
of ‘‘Covered Motor Vehicle.’’ 148
(g) Express, Informed Consent
The proposed rule defined the term
‘‘Express, Informed Consent’’ as ‘‘an
affirmative act communicating
unambiguous assent to be charged,
made after receiving and in close
proximity to a Clear and Conspicuous
disclosure, in writing, and also orally
for in-person transactions’’ of ‘‘(1) What
the charge is for’’ and ‘‘(2) The amount
of the charge, including, if the charge is
for a product or service, all fees and
costs to be charged to the consumer over
the period of repayment with and
without the product or service.’’ The
proposed rule also included in this
definition three examples of what does
not constitute express, informed
consent: ‘‘(i) A signed or initialed
document, by itself; (ii) Prechecked
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149 Comment of Ga. Auto. Dealers Ass’n, Doc. No.
FTC–2022–0046–10806 at 4.
150 See FTC Policy Statement on Deception, supra
note 42, at 1–2, 5; see also Fed. Trade Comm’n v.
Fleetcor Techs., Inc., 620 F. Supp. 3d 1268, 1303
(N.D. Ga. 2022); Fed. Trade Comm’n v. Crescent
Pub. Grp., Inc., 129 F. Supp. 2d 311, 321 (S.D.N.Y.
2001); Thompson Med. Co., Inc., 104 F.T.C. 648,
816 (1984).
151 Some commenters, including certain industry
associations, requested that the Rule include
additional definitions, including for the terms
‘‘charged,’’ ‘‘item,’’ ‘‘discount,’’ ‘‘rebate,’’ ‘‘trade-in
value,’’ and ‘‘online service.’’ In response, the
Commission notes that for terms not defined in the
Rule, the plain meaning of the terms apply.
boxes; or (iii) An agreement obtained
through any practice designed or
manipulated with the substantial effect
of subverting or impairing user
autonomy, decision-making, or choice.’’
In both the NPRM and in the provisions
the Commission is finalizing, this
definition is used exclusively in
§ 463.5(c). As such, comments regarding
the definition are examined in the
discussion of that provision in SBP
III.E.2(c). As stated therein, the
Commission is finalizing this definition
substantively as proposed.
(h) GAP Agreement
The proposed rule defined the term
‘‘GAP Agreement’’ as ‘‘an agreement to
indemnify a vehicle purchaser or lessee
for any of the difference between the
actual cash value of the insured’s
vehicle in the event of an unrecovered
theft or total loss and the amount owed
on the vehicle pursuant to the terms of
a loan, lease agreement, or installment
sales contract used to purchase or lease
the vehicle, or to waive the unpaid
difference between money received
from the purchaser’s or lessee’s motor
vehicle insurer and some or all of the
amount owed on the vehicle at the time
of the unrecovered theft or total loss.’’
The proposed definition also noted that
this included ‘‘products or services
otherwise titled ‘Guaranteed
Automobile Protection Agreement,’
‘Guaranteed Asset Protection
Agreement,’ ‘GAP insurance,’ or ‘GAP
Waiver[ ].’ ’’ This term appeared in two
sections of the rule proposal: in the
provision regarding dealer charges for
add-ons from which the consumer
would not benefit at proposed
§ 463.5(a), and in the recordkeeping
provision at proposed § 463.6(a)(4).
Comments regarding the proposed
definition are examined in the
discussion of § 463.5(a) in SBP III.E.2(a).
As stated therein, the Commission is
finalizing this definition substantively
as proposed, with typographical
modifications to correct a misplaced
period in the original proposal and a
modification removing the extraneous
term ‘‘insured’s’’ from the phrase
‘‘actual cash value of the insured’s
Vehicle.’’ In addition, the Final Rule
capitalizes the defined term ‘‘Vehicle’’
to conform with the revised definition
of ‘‘ ‘Covered Motor Vehicle’ or
‘Vehicle’ ’’ at § 463.2(e).
(i) Government Charges
The proposed rule defined
‘‘Government Charges’’ as ‘‘all fees or
charges imposed by a Federal, State or
local government agency, unit, or
department, including taxes, license and
registration costs, inspection or
certification costs, and any other such
fees or charges.’’ This term appeared in
two provisions of the rule proposal: in
the proposed definition of ‘‘Offering
Price’’ at § 463.2(k), which pertains to
the proposed offering price disclosure
provision at § 463.4(a); as well as in the
proposed provision relating to
undisclosed or unselected Add-ons at
§ 463.5(b). As explained in further detail
in the paragraph-by paragraph analysis
of § 463.5(b) in SBP III.E.2(b), the
Commission has determined not to
finalize § 463.5(b), and as such will
refrain from examining this proposed
definition in relation to that provision.
Comments regarding the proposed
definition are examined in the
discussion of § 463.4(a) in SBP III.D.2(a).
As stated therein, the Commission is
finalizing this definition substantively
as proposed, with a typographical
modification to include a serial comma
for consistency.
(j) Material or Materially
The proposed rule defined ‘‘Material’’
or ‘‘Materially’’ as ‘‘likely to affect a
person’s choice of, or conduct regarding,
goods or services.’’ This term appeared
in the prohibited misrepresentations
provisions at § 463.3(b) and (g), and in
the recordkeeping provision at
§ 463.6(a). As described in detail in the
section-by-section analysis of § 463.3 in
SBP III.C, the Final Rule modifies the
introductory paragraph of § 463.3 from
the Commission’s original proposal to
add the word ‘‘Material,’’ such that the
Commission’s materiality standard
applies to all subparts of § 463.3. The
Final Rule accordingly removes the
word ‘‘Material’’ from § 463.3(b) and (g)
so as to avoid duplication. Based on the
following, the Commission is finalizing
this definition, now at § 463.2(j),
substantively as proposed.
A dealership association commenter
noted that the proposed definition did
not use the term ‘‘significance,’’ and
asserted that ‘‘Material’’ information
should be significant and not ‘‘rooted in
personal preference.’’ 149 The
Commission notes that this definition
adopts the meaning of the term as
articulated through decades of
enforcement actions 150 instead of using
a different term such as ‘‘significance,’’
and does not use the term ‘‘personal
preference’’ or rely on ‘‘personal
preference’’ any more than the phrase
‘‘likely to affect’’ or ‘‘significant’’ does.
Thus, the Commission is finalizing this
definition substantively as proposed.
(k) Offering Price
The proposed rule defined ‘‘Offering
Price’’ as ‘‘the full cash price for which
a Dealer will sell or finance the motor
vehicle to any consumer, excluding only
required Government Charges.’’ This
term appeared in two provisions of the
rule proposal: in the proposed offering
price disclosure provision at § 463.4(a),
as well as in the proposed provision
relating to undisclosed or unselected
add-ons at § 463.5(b). As explained in
further detail in the paragraph-by-
paragraph analysis of § 463.5(b) in SBP
III.E.2(b), the Commission has
determined not to finalize § 463.5(b),
and as such, will refrain from examining
this proposed definition in relation to
that provision. Comments regarding the
proposed definition are examined in the
discussion of § 463.4(a) in SBP
III.D.2(a).151 As stated therein, the
Commission is finalizing this definition
largely as proposed, with a modification
to clarify that dealers may, but need not,
exclude required government charges
from a motor vehicle’s offering price. In
addition, the definition in the Final
Rule substitutes ‘‘Vehicle’’ for ‘‘motor
vehicle’’ to clarify that the term
conforms with the revised definition of
‘‘ ‘Covered Motor Vehicle’ or ‘Vehicle’ ’’
at § 463.2(e).
C. § 463.3: Prohibited
Misrepresentations
1. General Comments
The proposed rule set forth
prohibitions against certain
misrepresentations by motor vehicle
dealers. Based on the following, the
Commission has determined to finalize
these prohibitions, with minor
revisions.
The following paragraphs discuss
comments relating to § 463.3 generally
and Commission responses to such
comments, followed by comments
relating to each paragraph of § 463.3 and
Commission responses to such
comments.
The NPRM proposed prohibiting
dealers from making any
misrepresentation, expressly or by
implication, regarding specific listed
categories. The Commission received
many comments regarding this
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610 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
152 See Motor Vehicle Dealers Trade Regulation
Rule, Comment Docket, https://
www.regulations.gov/document/FTC-2022-0046-
0001/comment.
153 Individual commenter, Doc. No. FTC–2022–
0046–0036.
154 Individual commenter, Doc. No. FTC–2022–
0046–0099.
155 Individual commenter, Doc. No. FTC–2022–
0046–0906.
156 Individual commenter, Doc. No. FTC–2022–
0046–1878.
157 Individual commenter, Doc. No. FTC–2022–
0046–3686.
158 Individual commenter, Doc. No. FTC–2022–
0046–4752.
159 Individual commenter, Doc. No. FTC–2022–
0046–5580.
160 Individual commenter, Doc. No. FTC–2022–
0046–2378.
161 Individual commenter, Doc. No. FTC–2022–
0046–3693.
162 Individual commenter, Doc. No. FTC–2022–
0046–4959.
163 Individual commenter, Doc. No. FTC–2022–
0046–0017.
164 Individual commenter, Doc. No. FTC–2022–
0046–0034.
165 Individual commenter, Doc. No. FTC–2022–
0046–0005.
166 Individual commenter, Doc. No. FTC–2022–
0046–1935.
proposal, including comments
supporting such a provision, comments
urging the Commission to broaden the
provision, and comments urging the
Commission to limit or forgo the
provision.
Thousands of commenters expressed
support for the proposed rule.152 Many
of these commenters specifically
expressed concern about misleading
advertisements and deceptive pricing.
Many individual commenters cited
examples of such conduct from their
own experiences purchasing or leasing
vehicles, and many commenters with
experience operating or working for a
dealership shared their observations or
experiences. For example:
• I have been looking for a car at
MSRP and most dealers[’] websites will
list it at that price. [T]hen when you
drive there the[y] will say well there is
a market adjustment from 5,000 to
20,000 dollars. [N]ow . . . you need a
car and have wasted 3–4 hours and
picked out what you thought was your
next car.153
• I am currently in discussions with
two dealerships for a new car. Both
assure me there is absolutely no dealer
markup, come to find out they are
adding 3/5k of ‘‘mandatory’’ add-ons
respectively once I get in the door.154
• The last vehicle I purchased 2 years
ago was a nightmare. Drove 5 hrs[.] to
a dealer in Southern California. I called
the dealer and confirmed the price on
their website was what I was going to
pay. When I arrived there, they had a
list of $2500 [i]n additional charges that
were not disclosed when I called and
before I started driving. Purchasing a
vehicle shouldn’t be such a stressful
process.155
• Most recently I started looking
myself for a new lease, and looked at the
RAV 4 prime. Went to my local dealer
after seeing an ad on their site for $450
a month. Not only did they not honor
the deal, but wouldn’t even discuss that
it was on their own site. I was told the
SE model was [$5000] over MSRP and
the XSE was [$8000] over.156
• I have contacted 10 different car
dealerships in the past month looking to
purchase a new or used SUV. 9 out of
the 10 dealerships I contacted online or
visited in-person in California changed
or lied about the online advertised price
of the vehicle I was inquiring about or
said the car was sold or not available
and tried to sell me a more expensive
vehicle.157
• Once I was led to the F&I office I
was told that I HAD to buy a $995 paint
protection product that I didn[’]t want
or need. I asked to see the contract for
this product which clearly stated in
bold letters ‘ACCEPTANCE OF THIS
CONTRACT IS VOLUNTARY AND
DOES NOT AFFECT THE FINANCING
OF THE VEHICLE’ I pointed this out to
the salesman and told him that I didn’t
want this product[.] [H]e looked me in
the eyes with my wife present and said
‘‘You have to buy it[.]’’ 158
• At the dealership, the salesman
offered a price of $38,000, over $8,000
more than the advertised price. When I
challenged the extra cost, he said the
advertisement included every possible
rebate and discount and no one could
receive them together (some were
exclusionary with other discounts).159
• While there are good honorable
dealerships, far too many play games.
Rarely is the price of [a] car advertised
online or via mail EVER the actual
price. Far too often in the F&I office the
finance manager tries to [gloss] over
add[-]ons that they just arbitrarily added
on without telling you OR state I cannot
get your loan approved without an
extended warranty as an example I
experienced. . . . I worked for a Toyota
dealership many years ago and left the
industry because it made me sick seeing
the games played taking advantage of
people. Change is needed and sooner
than later.160
• I work as a salesperson at a local
Nissan dealership. . . . Currently,
dealerships across the US, including the
one I work for, have made the car
buying process needlessly confusing,
expensive, and frustrating by engaging
in false advertising and hidden add-on
products. While these practices are very
unscrupulous, they are incredibly
effective at what they are designed to
do: drive revenue for the store. If these
regulations are passed, they would
certainly take a significant toll on my
personal finances. But the longer I work
in my position, the more I realize that
no one should be allowed to engage in
such exploitative conduct in the course
of running a business.161
• I am in the auto industry and work
at a very transparent and honest
dealership. I think most of these rules
are great. I hear horror stories about
honest people seeing a car advertised for
one price, only to be told there are
additional a[d]d-ons and markups once
they arrive. I think this is unfair. I’m
also shocked every time I hear about a
dealership charging for mandatory
window etching and nitrogen filled
tires. I even know of reputable
dealerships that add GPS tracking and
theft recovery devices to every new car,
even though these cars come with GPS
theft recovery from the manufacturer.
Stopping these practices will help
restore consumers’ faith in car
dealerships, save them money, and lead
to a more honest and ethical
industry. . . . 162
Other commenters expressed support
for transparent pricing generally,
stating, for example:
• A consumer should be able to see
a price, walk into a dealership, and pay
that price. Plain and simple, just like
ANY OTHER RETAILER.’’ 163
• If I walk into Best Buy and see a
price they HAVE to sell it to me for that
price or cheaper. These rules are long
over due. 164
• I believe if they advertise a car, it
should be available for sale—at the
advertised price—just as a supermarket
can’t advertise a price for something
they don’t have, or add a ‘coupon
redemption fee’ to it. I believe these
rules are an extremely reasonable
approach to a long-standing problem
and urge you to adopt them.165
• I used to work in the retail auto
industry and these proposed rules will
help everyone (including the dealers
who are fighting them). Consumers will
benefit from the transaction
transparency, and over the long term
even the shady dealers will benefit by
treating consumers fairly and
developing long term relations.166
• These regulations would be the best
thing to happen for consumer protection
since the Mo[n]roney Label. I not only
have had to navigate and negotiate
erroneous fees at dealers, but I’ve also
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611	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
167 Individual commenter, Doc. No. FTC–2022–
0046–10441.
168 See, e.g., Complaint, CarMax, Inc., No. C–4605
(F.T.C. Mar. 22, 2017) (alleging Defendants misled
consumers by representing that the used motor
vehicles Defendants sold had been subject to
rigorous inspection but omitting important safety
information about recalls); Complaint, West-Herr
Auto. Grp., Inc., No. C–4607 (F.T.C. Mar. 22, 2017)
(alleging Defendants failed to disclose, or disclose
adequately, that used motor vehicles it sold were
subject to open recalls for safety issues); Complaint,
Asbury Auto. Grp., Inc., No. C–4606 (F.T.C. Mar. 22,
2017) (alleging deceptive failure to disclose material
information about the safety of used motor vehicles
sold by Defendants); Complaint ¶¶ 20–24, Fed.
Trade Comm’n v. Passport Imports, Inc., No. 8:18–
cv–03118 (D. Md. Oct. 10, 2018) (alleging
Defendants misled consumers by mailing ‘‘Urgent
Recall’’ notices that were similar to and had the
same color scheme as notices manufacturers are
required by the U.S. Department of Transportation’s
NHTSA to use when sending information about
vehicle recalls, even though in the ‘‘vast majority
of instances’’ the recipients’ cars were not subject
to an open recall).
169 One commenter expressed concern that the
prohibited misrepresentations would cause
dealerships to provide less information, because
discussing pricing and quotes would result in
providing further documentation for every
conversation. However, as the FTC Act already
prohibits misrepresentations, and given that pricing
and financing information are among the most
salient aspects of a consumer’s shopping for a
vehicle, the Commission considers it unlikely that
§ 463.3 would result in less information or the
creation of additional documentation.
170 Under section 19(a)(1) of the FTC Act, the
Commission may sue in Federal district court ‘‘any
person, partnership, or corporation’’ that ‘‘violates
any rule under [the FTC Act] respecting unfair or
deceptive acts or practices.’’ 15 U.S.C. 57b(a)(1).
Where such liability is found, under section 19(b)
a court may ‘‘grant such relief as [it] finds necessary
to redress injury . . . resulting from the rule
violation,’’ including the ‘‘rescission or reformation
of contracts, the refund of money or return of
property, [or] the payment of damages.’’ Id. 57b(b).
A few commenters requested that the Rule go
further in providing remedies, including by
allowing for a private right of action to enforce Rule
violations. The Commission notes that, depending
on State law, consumers may be able to use State
statutes that prohibit unfair or deceptive practices
to challenge conduct that violates this Rule.
There is nothing in the FTC Act or this Rule that
would preclude consumers from exercising any
such legal rights under State law. The Commission
will continue to monitor the market to determine
whether additional steps are needed.
171 See NPRM at 42045 (proposed § 463.3(b), (g)).
172 NPRM at 42019.
173 FTC Policy Statement on Deception, supra
note 42, at 5 & nn.47–55.
worked at dealers whose transparency
and forthrightness put them at a
disadvantage. Many dealers advertise
vehicles that can not [sic] be purchased
or leased at the advertised price due to
deceptive adverts either not disclosed or
in a print so fine it can’t be read. Please
pass this ruling. My grandma shouldn’t
have to pay more than someone else just
because she’s not a good negotiator.167
Consumer advocacy organization
commenters and individual commenters
urged the FTC to include additional
specific provisions in § 463.3, including
a prohibition against misrepresentations
regarding the safety, mechanical or
structural condition, odometer reading,
or history of a vehicle. Similarly,
commenters including a municipal
regulator urged the Commission to
specifically prohibit misrepresentations
regarding certification of used vehicles,
citing enforcement actions it brought
against dealers that misrepresented used
vehicles as ‘‘certified pre-owned’’ or
‘‘manufacturer certified.’’ The FTC takes
seriously deception relating to the safety
or condition of a vehicle and the
practice of charging consumers more
based on false claims or reassurances.168
Depending on the claim made by the
dealership and the specific facts at
issue, deceptive conduct in either of
these areas may be covered by the
enumerated misrepresentation
paragraphs the Commission is
finalizing, such as by § 463.3(a) if it
relates to the terms of the purchase,
lease, or financing. The FTC will
continue to monitor dealer
misrepresentations to determine
whether additional action is needed.
In addition, a number of credit union
commenters requested that the
Commission explicitly address
misrepresentations involving dealers’
refusal to accept outside financing to
purchase a vehicle. These commenters
cited several examples of consumers
being told that they could not use
outside financing, that they would not
receive a lower interest rate from an
outside financial institution, or that a
particular interest rate was the best rate
the consumer can get. The Rule already
covers such conduct. For example,
§ 463.3(a) of the Rule, which prohibits
dealers from misrepresenting the cost or
terms of financing a vehicle, covers
these and other misrepresentations
regarding financing, including the
availability of outside or ‘‘indirect’’
financing terms, or the costs of such
financing as compared to those of any
dealer-provided financing.
Two individual commenters posited
that any language prohibiting
misrepresentations should explicitly
include the word ‘‘omissions,’’ in order
to ensure that dealers do not sneak in
additional costs without consumers’
consent or understanding. The
Commission appreciates this concern,
and notes that the Rule has many
provisions prohibiting such misconduct,
including the required disclosures
regarding price, add-ons, and total
amount of payments in § 463.4 of the
Final Rule, as well as the requirement
in § 463.5(c) to obtain consumers’
express, informed consent before
charging for any items.
Other commenters, including
dealership associations, individual
commenters, and a United States
Representative, questioned whether
certain of the proposed
misrepresentation provisions were
duplicative of other laws, such as the
Truth in Lending Act (‘‘TILA’’), the
Consumer Leasing Act (‘‘CLA’’), or State
regulations, and in some instances
whether compliance with State
regulations should act as a safe harbor.
The Commission notes that another
statute—the FTC Act—already prohibits
misrepresentations in or affecting
commerce, and to the extent there is
duplication between the FTC Act and
other existing statutes pertaining to
deception, there is no evidence that
duplicative misrepresentation
prohibitions have harmed consumers or
competition. 169 The Commission further
notes that the Final Rule provides
additional remedies that will benefit
consumers who encounter conduct that
is otherwise already illegal under
Federal law, and will aid law-abiding
dealers that lose business to competitors
that act unlawfully.170 State laws may
provide more or less specific
requirements as long as those
requirements are not inconsistent with
part 463, as set forth in § 463.9, and in
the event of an inconsistency, the Rule
only affects such State law to the extent
of the inconsistency. Because dealers
are already prohibited from engaging in
‘‘deceptive acts or practices’’ under the
FTC Act, dealers should be able to
comply with these provisions without
the need for a safe harbor.
Industry association commenters also
claimed that the prohibited
misrepresentation proposal ignored the
materiality prong of the Commission’s
deception standard, and further
observed that some of the prohibited
misrepresentations in the proposed rule
explicitly included a materiality
requirement,171 while others did not. As
the NPRM made clear, the
Commission’s proposed
misrepresentation section, at § 463.3,
addressed misrepresentations that are
all material.172 The Commission need
not explicitly specify materiality in its
description of these misrepresentations;
indeed, the Commission has long
considered certain categories of
information, express claims, and
intended implied claims to be
presumptively material. 173
Nevertheless, rather than using the term
‘‘Material’’ in certain individual
enumerated paragraphs, the
Commission has determined to modify
the introductory text of § 463.3 from the
Commission’s original proposal in order
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174 The Final Rule prohibits misrepresentations in
specific categories. In contrast, some FTC rules go
further by prohibiting misrepresentations of ‘‘any
material aspect’’ of the transaction. See, e.g.,
Mortgage Assistance Relief Services Rule, 16 CFR
322.3(b); Telemarketing Sales Rule, 16 CFR
310.3(a)(2)(x).
175 FTC Policy Statement on Deception, supra
note 42, at 2 (citing Am. Home Prods., 98 F.T.C.
136, 374 (1981), aff’d, 695 F.2d 681, 687 (3d Cir.
1982) (evaluation of the entire document); Warner
Lambert, 86 F.T.C. 1398, 1489–90 (1975), aff’d 562
F.2d 749 (D.C. Cir. 1977), cert. denied, 435 U.S. 950
(1978) (juxtaposition of phrases); Firestone Tire &
Rubber Co., 81 F.T.C. 398, 456 (1972), aff’d, 481
F.2d 246 (6th Cir.), cert. denied, 414 U.S. 1112
(1973) (nature of the claim); see also Kraft, Inc. v.
Fed. Trade Comm’n, 970 F.2d 311, 319 (7th Cir.
1992) (‘‘Commission may rely on its own reasoned
analysis to determine what claims, including
implied ones, are conveyed in a challenged
advertisement, so long as those claims are
reasonably clear from the face of the
advertisement.’’).
176 FTC Policy Statement on Deception, supra
note 42, at 2 n.8.
177 The interpretation or reaction does not have to
be the only one; when a seller’s representation
conveys more than one meaning to reasonable
consumers, one of which is false, the seller is liable
for the misleading interpretation. See FTC Policy
Statement on Deception, supra note 42, at 3.
Further, an interpretation will be presumed
reasonable if it is the one the respondent intended
to convey. Id.
178 The FTC’s Policy Statement on Deception and
scores of FTC cases make clear that both express
and implied claims can be deceptive. See, e.g., ECM
Biofilms, Inc. v. Fed. Trade Comm’n, 851 F.3d 599
(6th Cir. 2017) (affirming Commission’s finding that
an additive manufacturer’s unqualified
biodegradability claim conveyed an implied claim
that its plastic would completely biodegrade within
five years); POM Wonderful LLC, No. C–9344
(F.T.C. Jan. 10, 2013) (Opinion of the Commission),
aff’d as modified, POM Wonderful, LLC v. Fed.
Trade Comm’n, 777 F.3d 478 (D.C. Cir. 2015)
(finding that company’s advertisements would
reasonably be interpreted by consumers to contain
an implied claim that POM products treat, prevent,
or reduce the risk of certain health conditions and
for some ads that these effects were clinically
proven); Kraft, Inc. v. Fed. Trade Comm’n, 970 F.2d
311 (7th Cir. 1992) (affirming finding of deception
where Kraft ads juxtaposed references to the milk
contained in Kraft singles and the calcium content
of the milk, the combination of which implied that
each Kraft single contained the same amount of
calcium as five ounces of milk).
179 FTC Policy Statement on Deception, supra
note 42, at 2; Int’l Harvester Co., 104 F.T.C. 949,
1057–58 (1984).
180 See Fed. Trade Comm’n v. Freecom
Commc’ns, 401 F.3d 1192, 1202 (10th Cir. 2005)
(‘‘Because the primary purpose of § 5 is to protect
the consumer public rather than punish the
wrongdoer, the intent to deceive the consumer is
not an element of a § 5 violation.’’).
181 See Fed. Trade Comm’n v. Figgie Int’l, Inc.,
994 F.2d 595, 605–06 (9th Cir. 1993) (holding that
section 19 of the FTC Act does not require proof
of individual consumer reliance; rather, there is a
‘‘presumption of actual reliance’’ that arises once
the Commission has proved that a defendant made
material misrepresentations, that they were widely
disseminated, and that consumers purchased the
defendant’s product).
to specifically prohibit
misrepresentations regarding material
information about the enumerated
paragraphs. As such, the Commission is
also removing what would otherwise be
redundant references to the term
‘‘Material’’ within paragraphs (b) and (g)
of § 463.3.
A national dealership association
incorrectly asserted that this section is
problematic because there is no
requirement that the representation or
omission be material or be viewed from
the perspective of a consumer acting
reasonably under the circumstances. As
adopted in the final rule, this section
adds the term ‘‘Material,’’ stating that it
is an unfair or deceptive practice for any
motor vehicle dealer to make any
misrepresentation, expressly or by
implication, regarding material
information about the specific categories
enumerated in § 463.3.174 The
Commission is not aware of situations
where dealers have made
misrepresentations expressly or by
implication regarding material
information about these specific
categories that are not deceptive or
unfair, nor did commenters describe any
such situations.
The Commission further notes that, by
the terms of this section, a court must
find that the dealer made an express or
implied misrepresentation regarding
material information for § 463.3 to be
violated. For an express or implied
misrepresentation regarding material
information to be made in violation of
the FTC Act and this Rule, there must
be a representation that misleads
consumers acting reasonably under the
circumstances regarding material
information. Whether such a
representation has occurred depends on
the facts. In the case of implied
representations, whether a
representation has occurred is often
evident from an examination of the
representation itself, including, for
example, an evaluation of the document
in which a representation is made, the
juxtaposition of language in that
document, the nature of the
representation, and the nature of the
transaction. 175 In other situations,
extrinsic evidence that it is reasonable
for consumers to reach the implied
representation may be helpful, such as
consumer testimony, surveys, or other
reliable evidence of consumer
interpretation.176
For example, if a dealer offers
discounted coffee for customers who
visit its dealership before 10 a.m. and
honors that offer, but makes no
representations, expressly or by
implication, about discounted cars, the
dealer will not have violated § 463.3(d),
which prohibits express or implied
misrepresentations regarding rebates
and discounts, even if a consumer holds
an unreasonable belief that the offer was
for discounted cars. On the other hand,
if a dealership’s advertisement depicts a
car with a consumer standing next to it
holding a cup of coffee, and states,
‘‘10% discount available before 10
a.m.,’’ such an advertisement can
convey several representations that may
mislead reasonable consumers,177
including that the car is available at a
10% discount.
Commenters including industry
associations opined on the term
‘‘implied,’’ contending for example that
the idea that a misrepresentation can be
implied is overly broad, and a
dealership association commenter
expressed concern that the inclusion of
‘‘implied’’ creates too much uncertainty.
As has been recognized under the law
for decades, however, representations
can mislead consumers, even without
making express claims.178 Take, for
example, an advertisement that shows a
picture of a new sedan for sale. Even if
the advertisement does not expressly
state that consumers could use the
vehicle to drive at speeds higher than 25
miles per hour, there is an implied
representation that a product is fit for
the purposes for which it is sold.179
Thus, limiting the Rule to prohibit only
express misrepresentations would
significantly hamper its usefulness to
consumers.
One industry association commenter
further argued that the proposed rule
created a new deception standard that
ignored intent and reliance. This
argument, however, misstates the law,
which does not require intent 180 or
reliance 181 to establish deception.
Thus, the Commission is finalizing
the introductory paragraph of § 463.3
largely as proposed, with a modification
stating that it applies to
misrepresentations regarding material
information. For consistency with other
parts of the Rule, the Commission is
also removing the shorthand ‘‘FTC Act’’
that appeared in parentheses after ‘‘the
Federal Trade Commission Act’’ in the
introductory paragraph of the proposed
rule. For clarity and consistency with
the revised definition of ‘‘Covered
Motor Vehicle Dealer’’ (at § 463.2(f) and
discussed in SBP III.B.2(f)), the
Commission is adding the word
‘‘Covered’’ to ‘‘Motor Vehicle Dealer’’ in
the introductory paragraph. Finally,
without changing any substantive
requirements for covered entities, the
Commission is adding the following
sentence to the end of § 463.3, at newly
designated paragraph (q): ‘‘The
requirements in this section also are
prescribed for the purpose of preventing
the unfair or deceptive acts or practices
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613	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
182 Examples of ‘‘costs or terms of purchasing,
financing, or leasing a vehicle’’ include, among
other things, express or implied representations
regarding a vehicle’s total cost, down payments,
interest rates, repayment schedules, the price for
added features, other charges, certainty or finality
of terms, and the availability of discounts. The
Commission has brought numerous enforcement
actions where, for example, dealers have
misrepresented the total price a consumer could
pay for vehicles, or concealed a required down
payment or other restrictions on the offer. See, e.g.,
Complaint ¶¶ 10–11, Fed. Trade Comm’n v. Liberty
Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. May
21, 2020) (alleging false ads stating a certain price
but charging consumers higher prices); Complaint
¶¶ 38–46, Fed. Trade Comm’n v. Tate’s Auto Ctr.
of Winslow, Inc., No. 3:18–cv–08176–DJH (D. Ariz.
July 31, 2018) (alleging false ads touting attractive
terms but concealing (i) ads were for lease offers
only and required substantial initial payment, (ii)
discounts were subject to material limitations, or
(iii) other legally required disclosures); Complaint
¶¶ 7–16, Cowboy AG, LLC, No. C–4639 (F.T.C. Jan.
4, 2018) (alleging false ads touting attractive terms,
but concealing substantial down payments, offers
were for leases and not purchases, material
eligibility restrictions, and other legally required
disclosures).
183 Some commenters repeat this and similar
questions, regarding what types of disclosures are
required, through provision (o); the same response
applies—provisions (a) through (o) do not
affirmatively require particular disclosures. As with
all misrepresentations prohibited by the Rule, and
under section 5 of the FTC Act, misrepresentations
are barred whether they are made expressly or by
implication.
184 See Trade Regulation Rule Concerning
Preservation of Consumers’ Claims and Defenses, 16
CFR 433.2 [hereinafter Holder Rule].
185 The National Automobile Dealers Association
commissioned a survey, released in May of 2023,
that asserted the Commission’s proposed rule
would lead to an increase in consumer transaction
time. Edgar Faler et al., Ctr. for Auto. Rsch.,
‘‘Assessment of Costs Associated with the
Implementation of the Federal Trade Commission
Notice of Proposed Rulemaking (RIN 2022—14214),
CFR part 463’’ (2023), https://www.cargroup.org/
wp-content/uploads/2023/05/CAR-Report_CFR-
Part-463_Final_May-2023.pdf. This survey was
released more than seven months after the closure
of the comment period for the notice of proposed
rulemaking on September 12, 2022, and is not part
of this rulemaking record. These facts
notwithstanding, the Commission observes that
each respondent to this survey was presented with
a leading statement at the beginning of the survey
asserting, inter alia, that the proposed rule would
impose ‘‘new duties [that] are expected to create
additional monitoring, training, forms, and
compliance review responsibilities as well as a
modification of record keeping systems and
coordination with outside IT and other vendors’’
and ‘‘increase the time of a motor vehicle
transaction, inhibit online sales, limit price
disclosures, and increase customer confusion and
frustration.’’ Id. at 34, 36 (introductory instructions
on the survey instrument sent to respondents). In
addition, this survey did not explain its selection
process or criteria for the 60 dealers it surveyed, nor
why only 40 such dealerships provided fully
completed survey responses. Moreover, the survey
report attributed much of this estimated increase to
proposed rule provisions that the Commission is
not finalizing.
defined in this part, including those in
§§ 463.4 and 463.5.’’
The Commission examines each
paragraph of § 463.3, including by
examining related comments and
Commission responses to those
comments. The Commission then
discusses the corresponding provisions
of the Final Rule.
2. Paragraph-by-Paragraph Analysis of
§ 463.3
(a) The Costs or Terms of Purchasing,
Financing, or Leasing a Vehicle
Proposed § 463.3(a) prohibited
misrepresentations regarding the cost or
terms of purchasing, financing, or
leasing a vehicle. The Commission is
finalizing this provision largely as
proposed, with the minor modification
of capitalizing the defined term
‘‘Vehicle’’ to conform with the revised
definition at § 463.2(e) (explained in
SBP III.B.2(e)). As previously discussed,
the addition of ‘‘material’’ to the
introductory paragraph of § 463.3 will
apply to this paragraph and to all
paragraphs of § 463.3 that follow.
A number of commenters expressed
support for this proposed provision,
contending, inter alia, that it would
level the playing field for car buyers and
address unfair and deceptive practices
related to financing terms and
conditions.
The Commission received a number
of industry association comments
requesting that the Commission clarify
the operation of proposed § 463.3(a),
including for example, by clarifying
whether it would require dealers to
discuss all purchase, finance, or lease
terms, or whether it would require
dealers to read aloud all the terms of the
buyer’s order and finance or lease
agreement. Dealership association
commenters expressed a related concern
that this proposed provision lacked
specific guidance on dealer compliance.
To begin, misrepresentations
regarding ‘‘costs or terms of purchasing,
financing, or leasing a vehicle’’ refer to
the ordinary plain meaning of the words
used in the provision.182 Second, as the
language in the introductory paragraph
of § 463.3 makes clear, its paragraphs—
including paragraph (a) of § 463.3—
prohibit misrepresentations regarding
material information. By its terms, this
paragraph requires no particular
affirmative disclosures, whether written
or oral; rather, this paragraph obligates
dealers to refrain from
misrepresentations regarding material
information about the costs or terms of
purchasing, financing, or leasing a
vehicle.183
The Commission received comments
from industry associations requesting
that the Final Rule provide a safe harbor
from liability stemming from dealers’
violations of the Rule to vehicle credit
contract assignees, who take or receive
these contracts subject to all claims and
defenses consumers could assert against
the dealer under the Commission’s
Trade Regulation Rule Concerning
Preservation of Consumers’ Claims and
Defenses, also known as the ‘‘Holder
Rule.’’ 184 The Rule, however, does not
create liability for these entities under
the Holder Rule where it did not
previously exist; the Rule addresses
conduct that is unfair or deceptive
under the FTC Act. When enacting the
Holder Rule, the Commission did not
include a safe harbor or exceptions
involving any specific deceptive or
unfair conduct, and the Commission
declines to do so through this Rule.
A comment from a motor vehicle
industry association argued that this
provision would likely be inapplicable,
or less impactful, with regard to RV
sales because the RV industry rarely
offers leases, if at all, and because RV
sales are usually not financed through
RV manufacturer-controlled financing
companies. To the extent that specific
provisions do not apply to specific
entities, such provisions do not impose
any obligations upon those entities.
Nevertheless, as explained in the
analysis of the ‘‘Covered Motor Vehicle’’
definition, § 463.2(e), the Commission is
excluding recreational vehicle dealers
from the definition of ‘‘Covered Motor
Vehicle.’’
After carefully considering the
comments, the Commission is finalizing
paragraph (a) of § 463.3 with the minor
modification of capitalizing ‘‘Vehicle.’’
This provision prohibits
misrepresentations regarding ‘‘[t]he
costs or terms of purchasing, financing,
or leasing a Vehicle.’’
Misrepresentations of the price,
discounts, or other terms are likely to
cause consumers to waste time pursuing
unavailable or inapplicable offers and to
spend more money on a vehicle rather
than undergoing the hours-long process
to begin the vehicle search and
shopping process anew at another
dealership. Prohibiting these
misrepresentations will save consumers
time and money and ensure that dealers
compete on a level playing field.185
(b) Any Costs, Limitation, Benefit, or
Any Other Aspect of an Add-On
Product or Service
Proposed § 463.3(b) prohibited
misrepresentations concerning any
costs, limitation, benefit, or any other
material aspect of an add-on product or
service. Section 463.3(b) of the Final
Rule adopts this provision without
substantive modification. As described
in detail in SBP III.C.1, the Commission
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614 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
186 See FTC Policy Statement on Deception, supra
note 42, at 2, 5; see also Fed. Trade Comm’n v.
Crescent Publ’g Grp., Inc., 129 F. Supp. 2d 311, 321
(S.D.N.Y. 2001).
187 E.g., Cost, Cambridge Dictionary, https://
dictionary.cambridge.org/us/dictionary/english/cost
(‘‘Cost’’ is defined as ‘‘the amount of money needed
to buy, do, or make something’’); Limitation,
Cambridge Dictionary, https://dictionary.
cambridge.org/us/dictionary/english/limitation
(‘‘Limitation’’ is defined as ‘‘something that controls
or reduces something’’); Benefit, Cambridge
Dictionary, https://dictionary.cambridge.org/us/
dictionary/english/benefit (‘‘Benefit’’ is defined as
‘‘a helpful or good effect, or something intended to
help’’).
188 See, e.g., Complaint ¶¶ 26–27, 70–71, Fed.
Trade Comm’n v. N. Am. Auto. Servs., Inc., No.
1:22-cv-01690 (N.D. Ill. Mar. 31, 2022) (alleging
deceptive and unauthorized add-on charges; unfair
discrimination against minority consumers);
Complaint ¶¶ 12–19, Fed. Trade Comm’n v. Liberty
Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y. May
21, 2020) (alleging deceptive and unauthorized add-
on charges in consumers’ transactions); Complaint
¶¶ 59–64, Fed. Trade Comm’n v. Universal City
Nissan, Inc., No. 2:16-cv-07329 (C.D. Cal. Sept. 29,
2016) (deceptive and unauthorized add-on charges
in consumers’ transactions); Complaint ¶¶ 4–14,
Nat’l Payment Network, Inc., No. C–4521 (F.T.C.
May 4, 2015) (alleging failure to disclose fees
associated with financing program; misleading
savings claims in advertisements); Complaint ¶¶ 4–
13, Matt Blatt Inc., No. C–4532 (F.T.C. July 2, 2015)
(alleging failure to disclose fees associated with
financing program; misleading savings claims). Cf.
Consent Order ¶¶ 10–16, Santander Consumer
USA, Inc., CFPB No. 2018–BCFP–0008 (Nov. 20,
2018) (finding defendant sold GAP product
allegedly providing ‘‘full coverage’’ to consumers
with loan-to-value ratios (‘‘LTVs’’) above 125%,
when in fact coverage is limited to 125% of LTV).
189 See, e.g., Consumer Fin. Prot. Bureau,
‘‘Supervisory Highlights: Issue 12, Summer 2016’’
5 (June 2016), https://files.consumerfinance.gov/f/
documents/Supervisory_Highlights_Issue_12.pdf
(finding that one or more auto lenders deceptively
advertised the benefits of their GAP agreement
products, leaving the impression that these
products would fully cover the remaining balance
of a consumer’s loan in the event of vehicle loss
when, in fact, the product only covered amounts
below a certain loan to value ratio).
190 It is well-settled that, if one makes a claim
that, absent additional information, would mislead
a consumer acting reasonably under the
circumstances about a material fact, such conduct
would violate the law. See FTC Policy Statement on
Deception, supra note 42, at 2; Int’l Harvester Co.,
104 F.T.C. 949, 1057–58 (1984).
is modifying § 463.3 from the
Commission’s original proposal to
include the term ‘‘Material’’ in the
introductory paragraph rather than in
paragraphs (b) or (g) of § 463.3. Section
463.3(b) of the Final Rule therefore
deletes reference to the term ‘‘Material.’’
The Commission received a number
of comments expressing support for
prohibiting misrepresentations about
add-ons, including comments that
requested specific additional add-on-
related misrepresentation prohibitions.
For example, an auto dealer commenter
expressed support for prohibiting
misrepresentations about whether or not
a car has add-ons already installed.
Consumer advocacy organization
commenters recommended that the
Commission include a new paragraph in
§ 463.3 prohibiting misrepresentations
regarding the consumer’s right to cancel
add-on products or services. This
provision, however, already covers such
conduct: It prohibits misrepresentations
regarding material information about
any costs, limitation, benefit, or any
other aspect of an add-on product or
service. ‘‘Material’’ means likely to
affect a consumer’s conduct or
choices. 186 A consumer’s right to cancel
is likely to affect the consumer’s
conduct regarding an add-on product or
service. Thus, § 463.3(b) includes
representations about a consumer’s right
to cancel an add-on product or service.
A number of dealership association
commenters argued that the language
used in this provision is vague or
confusing. The terms ‘‘Material’’ and
‘‘Add-on Product or Service,’’ however,
are specifically defined in § 463.2. The
remaining terms in this provision are
commonly used and can be understood
according to their plain meaning.187 The
NPRM examined misrepresentations
regarding the coverage and costs of add-
ons, and enforcement actions by the
Commission and other agencies have
documented many instances of such
misrepresentations.188 Examples of the
type of conduct prohibited include
misrepresenting whether add-ons are
required in order to purchase or lease a
vehicle, including by representing that
such charges are required when in fact
they are not, or misrepresenting that
advertised prices do not include fees
beyond routine taxes and fees only to
subsequently require the purchase of
add-ons; misrepresenting what is, or is
not, covered by, among others, an
extended warranty, service or
maintenance plan, or GAP
agreement; 189 and misrepresenting that
consumers have provided express,
informed consent to be charged for add-
ons.
Commenters including a number of
motor vehicle dealership associations
requested that the Commission clarify
how extensive disclosures would need
to be to satisfy this provision. One such
commenter requested that the
Commission explain what conduct
would be required under this paragraph,
and expressed concern that, if the
paragraph required disclosures, such a
requirement would affect the length of
the transaction. Another industry
association commenter suggested that,
in the event dealers provide consumers
with a verbal or written disclosure
stating that such products have costs,
limitations, or benefits, and stating
information about other material
aspects, the Commission modify its
proposal to shift to consumers the
burden of proving any relevant dealer
misrepresentation. An individual
commenter expressed support for
applying § 463.3(a) and (b) to dealer
advertisements of free lifetime benefits
programs and requiring dealers to make
disclosures about any costs, limitations,
benefits, or any other aspect of an add-
on product or service. The Commission
notes that paragraphs (a) and (b) of
§ 463.3 already apply to free lifetime
benefits programs. Regarding
disclosures, the Commission is
concerned about including additional
disclosure requirements beyond the few
areas included in the Rule, or shifting
the burden to consumers to hunt for and
decipher disclosures, given that the auto
finance and lease process is already
lengthy, complex, document-heavy, and
dense. Accordingly, as discussed in
regard to § 463.3(a), these provisions do
not mandate set disclosures or allow for
disclosures to be used as a shield when
there are misrepresentations to
consumers; rather, they prohibit express
or implied misrepresentations.190
Several dealership association
commenters pointed to State laws that,
they contended, may already prohibit
misrepresentations about add-ons or
may otherwise protect consumers. As
discussed previously, to the extent there
may be duplication between the
provisions the Commission is finalizing
and other laws, there is no evidence that
duplicative misrepresentation
prohibitions have harmed consumers or
competition. Moreover, the Final Rule
provides additional remedies that will
benefit consumers who encounter
conduct that is already illegal under
State or Federal law and will assist law-
abiding dealers that presently lose
business to competitors that act
unlawfully. Under § 463.9, States may
provide more or less specific
requirements relating to motor vehicle
dealers so long as those requirements
are not inconsistent with part 463, and
in the event of an inconsistency, the
Rule only affects such State law to the
extent of the inconsistency.
Based on a review of the comments
and the responses discussed, the
Commission adopts paragraph (b) of
§ 463.3 without substantive
modification. As discussed in SBP
III.C.1, the Commission has determined
to modify the introductory paragraph of
§ 463.3 from the Commission’s original
proposal so that each paragraph of
§ 463.3 prohibits misrepresentations
regarding material information. As such,
the Commission is finalizing a version
of § 463.3(b) that removes what would
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615	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
191 The FTC has alleged that misrepresentations
that particular terms are available for financing or
for a lease violate the FTC Act. See Complaint
¶¶ 38–39, Fed. Trade Comm’n v. Tate’s Auto Ctr.,
No. 3:18–cv–08176–DJH (D. Ariz. July 31, 2018)
(alleging false ads touting attractive terms but
concealing ads were for lease offers only);
Complaint ¶¶ 10, 13, TC Dealership, L.P., No. C–
4536 (F.T.C. Aug. 13, 2015) (same); Complaint
¶¶ 9–12, Cowboy AG, LLC, No. C–4639 (F.T.C. Jan.
4, 2018) (same); Complaint ¶¶ 36–38, United States
v. New World Auto Imports, Inc., No. 3:16–cv–
02401–K (N.D. Tex. Aug. 18, 2016) (alleging
misrepresentation that terms were for financing
instead of leasing); Complaint ¶¶ 28–37, 44, Fed.
Trade Comm’n v. Universal City Nissan, Inc., No.
2:16–cv–07329 (C.D. Cal. Sept. 29, 2016) (alleging
advertisements with key terms that were not
generally available).
192 Section 463.3(d) (emphasis added).
193 See, e.g., Rebate, Cambridge Dictionary,
https://dictionary.cambridge.org/us/dictionary/
english/rebate (last visited Dec. 5, 2023) (defining
‘‘rebate’’ as ‘‘an amount of money that is returned
to you, especially by the government, for example
when you have paid too much tax’’ or ‘‘an amount
of money that is paid back to you after you have
paid too much’’); Discount, Cambridge Dictionary,
https://dictionary.cambridge.org/us/dictionary/
english/discount (last visited Dec. 5, 2023) (‘‘[A]
reduction in the usual price’’).
194 See NPRM section IV.C, 87 FR at 42020
(proposed § 463.3(d) prohibited misrepresentations
concerning ‘‘[t]he availability of any rebates or
discounts that are factored into the advertised price
but not available to all consumers,’’ and the NPRM
explained ‘‘[w]hen dealers advertise rebates and
discounts, or offer prices that factor in such rebates
and discounts, but in fact those rebates and
discounts are not available to the typical consumer,
but only a select set of customers, such conduct
induces the consumer to select and transact with
the dealer under false pretenses’’).
195 See, e.g., Complaint ¶¶ 6–13, Jim Burke Auto.,
Inc., No. C–4523 (F.T.C. May 4, 2015) (alleging
promises of prices and discounts not generally
available to consumers); Complaint ¶¶ 6, 9, TT of
Longwood, Inc., No. C–4531 (F.T.C. July 2, 2015)
(alleging promises of prices and discounts not
generally available to consumers); Complaint ¶¶ 8–
9, JS Autoworld, Inc., No. C–4535 (F.T.C. Aug. 13,
2015) (alleging false ads touting prices but
concealing discounts with material eligibility
limitations); Complaint ¶¶ 7–9, TC Dealership, L.P.,
No. C–4536 (F.T.C. Aug. 13, 2015) (alleging false
ads touting attractive prices but concealing
Continued
otherwise be redundant explicit
reference to the term ‘‘Material.’’ This
provision prohibits misrepresentations
regarding ‘‘[a]ny costs, limitation,
benefit, or any other aspect of an Add-
on Product or Service.’’
Misrepresentations regarding add-ons
are likely to affect a consumer’s
conduct, including the consumer’s
decision to purchase the product or
service.
(c) Whether Terms Are, or Transaction
Is, for Financing or a Lease
Proposed § 463.3(c) prohibited
misrepresentations regarding whether
the terms are, or the transaction is, for
financing or a lease. Upon review and
consideration of public comments, the
Commission is finalizing paragraph (c)
of § 463.3 without modification from the
Commission’s original proposal.
A few industry association and
individual commenters posited that this
proposed provision was unnecessary,
either because other statutes or
regulations, including TILA and some
State regulations, address this issue, or
because vehicle manufacturers already
monitor such misrepresentations. As
noted in SBP III.C.1, even given the
possibility of overlap between this
provision and existing Federal or State
law, there is no evidence that
duplicative misrepresentation
prohibitions have harmed consumers or
competition. Further, given that the
conduct covered by this provision is
already unlawful under the FTC Act and
may duplicate other laws, or be
prohibited by manufacturer rules, it
should not be difficult to follow this
provision. 191
Accordingly, after careful
consideration, the Commission adopts
paragraph (c) of § 463.3 as proposed.
Misrepresentations regarding whether
terms are, or a transaction is, for
financing or a lease are likely to affect
a consumer’s conduct, including by
causing consumers to enter into a
monetary transaction for a product they
do not want, or, if the true
circumstances are revealed prior to
consummation of the transaction, to
waste time traveling to, and potentially
spending hours at, the dealership.
(d) The Availability of Any Rebates or
Discounts That Are Factored Into the
Advertised Price but Not Available to
All Consumers
Proposed § 463.3(d) prohibited
misrepresentations concerning the
availability of any rebates or discounts
that are factored into the advertised
price but not available to all consumers.
Upon review and consideration of
public comments, the Commission is
finalizing paragraph (d) of § 463.3
without modification from the
Commission’s original proposal.
Comments in support of this proposed
provision, including those from a group
of State attorneys general and from two
United States Senators, generally
contended that the proposed provision
would increase the transparency of the
purchase transaction by requiring
dealers to be honest when they advertise
the availability of discounts.
An individual commenter suggested
that the Commission modify proposed
§ 463.3(d) to require dealers to disclose
all representations regarding rebates or
discounts in writing, in a clear and
conspicuous manner. The Commission
notes this paragraph prohibits
misrepresentations regardless of the
medium. Further, this paragraph focuses
on misrepresentations; disclosures
regarding price, add-ons, and total of
payments are addressed in the
discussion of § 463.4, as is a discussion
of why the Commission has determined
not to include additional disclosure
requirements in this Final Rule. The
same commenter also requested that the
Final Rule text include examples of
situations where discounts or rebates
may not be available. The Commission
describes examples here rather than
adding them to the Final Rule text, as
it would be difficult to anticipate all
such examples and the text would
become unwieldy. Examples include
where an advertised rebate or discount
applies only to the most expensive
version of a particular vehicle make and
model or is only available to consumers
with high credit scores.
The Commission received comments
from a dealership association and an
individual commenter asking for
additional detail about proposed
§ 463.3(d), pointing to a State regulation
that includes disclosures and asking
which types of rebates the provision
covers. Here, the Commission notes
that, as the language in § 463.3(d) states,
this provision applies to ‘‘any rebates
and discounts’’ advertised by dealers,
and is not limited to any particular type
of rebate or discount.192 The terms in
this provision may be interpreted
according to their plain meaning, as
they are commonly used and
understood. 193 Additionally, the
language of this provision, the NPRM,
and Commission enforcement actions
provide further context. In proposing
§ 463.3(d) to specifically address the
availability of discounts and rebates, the
Commission included additional
language (‘‘that are factored into the
advertised price but not available to all
consumers’’) to describe the manner in
which such misrepresentations often
occur: a dealer represents an advertised
price which includes a discount or
rebate that is not generally available to
consumers.194 The NPRM’s discussion
of proposed § 463.3(d) described both a
scenario in which a dealer advertised a
rebate or discount separately, and one in
which rebates or discounts are factored
into the advertised price but the rebates
and discounts are not available to a
typical consumer. The conduct in either
such scenario would violate this
provision and, depending on the
circumstances, may violate other
provisions the Commission is finalizing,
such as paragraph (a) of § 463.3.
Enforcement actions cited in the NPRM
provide further illustration of deceptive
practices involving rebates and
discounts.195 The Commission declines
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616 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
discounts were subject to material eligibility
limitations and trade-in requirement); Complaint
¶¶ 4–5, Timonium Chrysler, Inc., No. C–4429
(F.T.C. Jan. 28, 2014) (alleging dealership advertised
internet prices and dealer discounts but failed to
disclose consumer would have to qualify for
multiple rebates not generally available to them);
Complaint ¶¶ 4–5, Ganley Ford West, Inc., No. C–
4428 (F.T.C. Jan. 28, 2014) (alleging dealership
advertised discounts on vehicle prices, but failed to
disclose discounts were only available on the most
expensive models).
196 See, e.g., Decision and Order, Timonium
Chrysler, Inc., No. C–4429 (F.T.C. Jan. 28, 2014).
197 See Complaint ¶¶ 4–5, Ganley Ford West, Inc.,
No. C–4428 (F.T.C. Jan. 28, 2014) (alleging false ads
touting price discount but concealing offer was
limited to certain high-end models).
198 See Complaint ¶¶ 8–9, JS Autoworld, Inc., No.
C–4535 (F.T.C. Aug. 13, 2015) (alleging false ads
touting prices but concealing discounts with
material eligibility limitations); Complaint ¶¶ 7–9,
TC Dealership, L.P., No. C–4536 (F.T.C. Aug. 13,
2015) (alleging false ads touting attractive prices but
concealing discounts were subject to material
eligibility limitations and trade-in requirement);
Complaint ¶ 14, TXVT Ltd. P’ship, No. C–4508
(F.T.C. Feb. 12, 2015) (alleging false ads failed to
disclose that it would match consumers’ income tax
refunds only up to $1,000); Complaint ¶¶ 4–5,
Timonium Chrysler, Inc., No. C–4429 (F.T.C. Jan.
28, 2014) (alleging false ads touting pricing and
discounts but concealing material qualifications
and restrictions); Complaint ¶¶ 6, 9, TT of
Longwood, Inc., No. C–4531 (F.T.C. July 2, 2015)
(alleging promises of prices and discounts not
generally available to consumers); Complaint ¶¶ 6–
13, Jim Burke Auto., Inc., No. C–4523 (F.T.C. May
4, 2015) (alleging promises of prices and discounts
not generally available to consumers); see also Auto
Buyer Study, supra note 25, at 8 (‘‘A number of
[study] participants were attracted by promotional
offers in ads that they did not qualify for, but did
not realize that they did not qualify until they got
to the dealer. Some did not learn that they did not
qualify until they got to the financing stage of the
transaction.’’).
199 The commenter also expressed concern about
misrepresentations regarding the refundability of
deposits and recommended that the Commission
include language in § 463.3(e) addressing this issue.
Because representations and practices regarding the
refundability of deposits are related to the costs or
terms of purchasing, financing, or leasing a vehicle,
this issue is covered by § 463.3(a). Thus, the
Commission declines to adopt the commenter’s
recommendation.
to add additional requirements, such as
disclosure requirements, to its Final
Rule, given the already lengthy,
complex, and document-heavy nature of
auto transactions.
A number of dealership association
commenters contended that the
proposed paragraph would prohibit
dealers from displaying beneficial
information to consumers or would
prohibit dealers from advertising rebates
and incentives of limited availability. In
addition, commenters including one
such dealership association requested
that the Commission adopt an approach
the commenter contended is used in
some States: allowing dealers to display,
below the advertised sales price, a
rebate or incentive that is not available
to all purchasers. Moreover, a number of
industry association and dealership
association commenters argued that the
proposed paragraph was more stringent
than, and inconsistent with, the
Commission’s prior articulation of the
deception standard, further noting the
existence of Commission orders that
prohibit defendants from representing
that a price, discount, rebate, or other
incentive is available, unless it is in fact
available to all or unless a defendant
provides a clear and conspicuous
disclosure of any qualifications or
restrictions. Section 463.3(d) prohibits
misrepresentations; it does not prohibit
a dealer from advertising, in a truthful
manner, rebates or discounts with
limitations. Thus, this paragraph allows
for the representation of limited offers,
as long as such representation is
truthful, and any limitations are clear
and conspicuous to consumers. The
paragraph is also consistent with the
Commission’s prior enforcement order
practice in this area, which both
prohibits misrepresentations regarding
rebates and prohibits representations
regarding rebates without disclosing any
material qualifications or restrictions.196
The paragraph simply contains one of
these prohibitions but not the second.
A dealership association commenter
expressed concern that this proposed
provision would penalize dealers if
consumers were to confuse a rebate or
discount offered for one vehicle with a
vehicle that does not contain such an
offer. As under current law, dealers are
prohibited under § 463.3(d) from both
express and implied misrepresentations.
If, for example, a dealer states or implies
that a discount is available on several
types of vehicles when, in truth, the
discount is only available on one such
type of vehicle, such conduct would
violate this paragraph. If, alternatively,
the dealer does not state or imply that
a discount is available for several types
of vehicles, and offers a discount for one
type of vehicle, this conduct would not
violate this paragraph, as long as the
dealer makes no other express or
implied misrepresentations.
After careful review of the comments,
the Commission is adopting paragraph
(d) of § 463.3 as proposed. When dealers
advertise rebates or discounts in a
misleading manner, including when
such rebates or discounts are not
available to the typical consumer, or
apply only to the most expensive
versions of the make and model,197 such
conduct induces consumers to select
and transact with the dealer under false
pretenses.198
(e) The Availability of Vehicles at an
Advertised Price
Proposed § 463.3(e) prohibited
misrepresentations regarding the
availability of vehicles at an advertised
price. Upon reviewing the comments
pertaining to this provision, the
Commission is finalizing paragraph (e)
of § 463.3 largely as proposed, with the
minor modification of capitalizing the
defined term ‘‘Vehicles.’’
One individual commenter
recommended that proposed § 463.3(e)
be expanded to prohibit certain specific
misrepresentations about advertised
vehicle availability, including whether
any specific vehicle is already reserved
for another consumer; whether the
availability is subject to a requirement
that the consumer pay a deposit; and
regarding the amount of time until the
vehicle becomes available. Another
individual commenter recommended
that the Rule require disclosure of how
long each vehicle has been in the
dealer’s inventory, to prevent dealers
from misrepresenting that a vehicle
recently became available. Here, the
Commission notes that, to the extent
any such misrepresentations regarding
the availability of vehicles were made
with express or implied reference to the
price of the vehicle, each would be
prohibited by § 463.3(e).199
Furthermore, to the extent such
misrepresentations included reference
to the subject of another paragraph of
§ 463.3, they would be prohibited by the
Final Rule. For example, if an
advertisement were to make a claim
about the monthly payment for a
specific vehicle, but the vehicle is not
actually available, it would be covered
under the bar against misrepresentations
regarding costs or terms in paragraph (a)
of § 463.3. In addition, under the Final
Rule, dealers are also subject to
disclosure requirements under § 463.4,
including the requirement at § 463.4(a)
to disclose the vehicle’s offering price in
any advertisement that references a
specific vehicle, or any monetary
amount or financing term for any
vehicle. And if a dealer discloses the
offering price for a vehicle, but the
vehicle is not available to consumers,
§ 463.3(e) applies. Beyond this, the
Commission will continue to monitor
whether other misrepresentations
regarding availability are being made
without reference to price, or to the
subject of another paragraph of § 463.3,
to determine whether additional action
is warranted.
The Commission received comments
from a number of dealership
associations and individuals requesting
that the Final Rule limit dealers’
responsibility for unanticipated delays,
or otherwise expressing concern about
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617	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
200 FTC Policy Statement on Deception, supra
note 42, at 1 n.5 (‘‘Advertising that lacks a
reasonable basis is also deceptive.’’) (citing
Firestone Tire & Rubber Co., 81 F.T.C. 398, 451–52
(1972) (additional citations omitted)); see Fed.
Trade Comm’n v. US Sales Corp., 785 F. Supp. 737,
748 (N.D. Ill. 1992) (‘‘Apart from challenging the
truthfulness of an advertiser’s representations, the
FTC may challenge the representation as
unsubstantiated if the advertiser lacked a
reasonable basis for its claims.’’); see also Fed.
Trade Comm’n v. Am. Screening, LLC, 4:20–CV–
01021–RLW (E.D. Mo. July 14, 2022) (granting
summary judgment for the FTC upon finding that
American Screening’s claim that its COVID–19
protective equipment was available and would ship
quickly was false and lacked a reasonable basis);
Fed. Trade Comm’n v. John Beck Amazing Profits,
LLC, 865 F. Supp. 2d 1052 (C.D. Cal. 2012) (finding
that the defendants’ representations were
unsubstantiated in violation of section 5, because
Defendants conceded that during the time period in
which their infomercial was aired they did not have
evidence supporting their representations that
consumers who purchased their product would be
able to earn money easily and because survey
results revealed that less than one percent of
consumers actually generated any revenue or
profits); Fed. Trade Comm’n v. Elegant Sols., Inc.,
8:19–cv–01333–JVS–KES (C.D. Cal., July 6, 2020)
(finding that defendants made false or
unsubstantiated representations, including
representing that consumers would be enrolled in
a repayment plan that may be forgiven after a
specific number of years even though there were no
Federal loan forgiveness programs with those
repayment terms).
201 Fed. Trade Comm’n, ‘‘FTC Policy Statement
Regarding Advertising Substantiation,’’ (appended
to In re Thompson Med. Co., Inc., 104 F.T.C. 648,
839 (1984)); Fed. Trade Comm’n v. John Beck
Amazing Profits, LLC, 865 F. Supp. 2d 1052, 1067
(C.D. Cal. 2012).
202 Fed. Trade Comm’n, ‘‘FTC Policy Statement
Regarding Advertising Substantiation,’’ (appended
to In re Thompson Med. Co., Inc., 104 F.T.C. 648,
839 (1984)); see Fed. Trade Comm’n v. Am.
Screening, LLC, 4:20–CV–01021–RLW (E.D. Mo.,
July 14, 2022) (granting FTC’s motion for summary
judgment and finding that Defendants’
representations that it had protective equipment in
stock and would ship it to consumers within seven
to ten business days were material to consumers
seeking such equipment during a global pandemic).
203 This provision would not prohibit dealers
from advertising a vehicle with limitations on
availability in a truthful manner, such that any
limitations are clear and conspicuous to the
consumer. For example, dealers should not
affirmatively represent that a vehicle is available on
its lot without a reasonable basis that the vehicle
is on the lot or without clearly and conspicuously
noting that the vehicle will be made available after
transfer from an affiliate’s lot.
204 Comment of Tex. Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8102 at 21; see 43 Tex.
Admin. Code 215.247(2) (2023).
how dealers would be able to comply
with this proposed provision. One
industry association commenter stated
that unanticipated delays could result
from factors beyond the reasonable
control of the dealer, such as shipping
or production issues. Other dealership
association commenters contended that,
because of supply chain disruptions,
adjustments to inventory and other
information may not always be
displayed on a retailer’s website
instantaneously.
As is the case under current law,
under this provision, dealers may not
make claims about the availability of
vehicles at an advertised price without
a reasonable basis at the time the claims
are made.200 Objective claims about
products or services represent,
explicitly or by implication, that an
advertiser has a reasonable basis to
support those claims. 201 Consumers
would be less likely to be affected by
claims for products and services if they
knew the advertiser did not have a
reasonable basis for believing them to be
true.202 If a dealer has a reasonable basis
to make a claim about the availability of
vehicles at the time the claim is made,
the dealer would not be in violation of
the provision if a vehicle later becomes
unavailable because of circumstances
that a dealer could not reasonably
anticipate or control.
A few dealership association
commenters claimed that promulgation
of § 463.3(e) would cause regulatory
confusion because State guidelines or
rules already address issues about the
availability of vehicles, including, for
example, by requiring dealers to note
the location of the vehicle.203 As
described in SBP III.C.1, States may
provide more or less specific
requirements relating to motor vehicle
dealers so long as those requirements
are not inconsistent with part 463, and
in the event of an inconsistency, the
Rule only affects such State law to the
extent of the inconsistency. To the
extent there are actual inconsistencies,
§ 463.9 is clear that this Rule’s
prohibition against misrepresentations
controls.
After careful consideration of the
comments, the Commission is adopting
paragraph (e) of § 463.3 largely as
proposed, with the minor modification
of capitalizing the defined term
‘‘Vehicles.’’ This paragraph prohibits
dealers from promoting low prices for
specific vehicles, but then later
misrepresenting, among other things,
that the advertised vehicle is no longer
available or no longer available at the
advertised price. Such
misrepresentations are likely to induce
consumers to waste their time traveling
to a particular dealership to pursue a
specific offer on a specific vehicle when
the offer or vehicle itself may not
actually be available.
(f) Whether Any Consumer Has Been or
Will Be Preapproved or Guaranteed for
Any Product, Service, or Term
Proposed § 463.3(f) prohibited
misrepresentations regarding whether a
consumer has been or will be
preapproved or guaranteed for any
product, service, or term. Upon
reviewing public comments, the
Commission is finalizing paragraph (f)
of § 463.3 without modification from the
Commission’s original proposal.
One dealership association
commenter recommended that
compliance with a State law that
prohibits certain misleading statements,
such as ‘‘we finance anyone’’ and ‘‘no
credit rejected’’ and similar statements,
should function as a safe harbor against
liability under this proposed
paragraph.204 Yet, while compliance
with the State law cited may require
dealers to refrain from using certain
frequently misleading statements, as
described by the commenter, that law
does not generally prohibit all
misrepresentations regarding material
information about consumer
preapprovals or guarantees; even if it
did, there is no evidence that
duplicative laws prohibiting
misrepresentations harm consumers or
competition, and no evidence of
benefits to consumers or competition in
allowing one such law to act as a safe
harbor against another such law.
Further, given that current law already
prohibits deceptive conduct generally,
dealers should be able to comply with
the Commission’s Rule, which provides
further protections for consumers and
law-abiding dealers. Thus, the
Commission declines to adopt the
recommended safe harbor.
Therefore, after careful consideration,
the Commission is finalizing paragraph
(f) of § 463.3. Misrepresentations
regarding preapproval or guarantees for
a product, service, or term—as with
misrepresentations about availability
and price, described previously—are
likely to impact consumers’ conduct
with regard to motor vehicle sales,
financing, or leasing transactions,
including by inducing consumers to
waste time pursuing illusory offers.
(g) Any Information on or About a
Consumer’s Application for Financing
Proposed § 463.3(g) prohibited dealers
from misrepresenting any material
information on or about a consumer’s
application for financing. After carefully
reviewing public comments, the
Commission is adopting paragraph (g) of
§ 463.3 without substantive
modification. As with § 463.3(b), the
only adopted modification is the
deletion of the term ‘‘Material,’’ which
nonetheless applies to the operation of
each of the misrepresentation
paragraphs in § 463.3, including
paragraph (g), through the addition of
the term in the introductory paragraph
of § 463.3.
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618 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
205 Individual commenter, Doc. No. FTC–2022–
0046–7445 at 12.
206 See Complaint ¶¶ 18–36, Fed. Trade Comm’n
v. Tate’s Auto Ctr. of Winslow, Inc., No. 3:18–cv–
08176–DJH (D. Ariz. July 31, 2018); Consumer Fin.
Prot. Bureau, ‘‘Supervisory Highlights: Issue 30,
Summer 2023’’ 5 (July 2023), https://files.consumer
finance.gov/f/documents/cfpb_supervisory-
highlights_issue-30_2023-07.pdf (finding that
dealers ‘‘fraudulently included’’ in financing
documents add-ons, such as undercoating, that
were not actually present on the vehicle, creating
‘‘improperly inflated loan amounts’’ that caused
consumers to pay improper additional interest).
The Commission received a number
of comments regarding this provision,
including comments that expressed
support for prohibiting
misrepresentations about a consumer’s
application for financing.
A credit union commenter requested
that, in addition to this proposal, the
Commission consider implementing a
requirement to clearly and
conspicuously disclose any potential
financing limitations prior to vehicle
purchase negotiations, contending that
such a measure would better enable
consumers to choose a motor vehicle
dealer and financing option that best
serves their needs. To the extent a
dealer misrepresents a consumer’s
financing options or limitations,
including prior to or during the process
of selling, leasing, or arranging
financing for a vehicle, such conduct is
prohibited by this provision, and
depending on the circumstances, may
also violate other provisions of the Rule.
For example, as discussed in this
paragraph-by-paragraph analysis,
§ 463.3(a) of the Final Rule prohibits
misrepresentations regarding the cost or
terms of financing a vehicle; this
prohibition includes misrepresentations
about available vehicle financing.
Furthermore, this provision pertains to
misrepresentations; comments
pertaining to proposed disclosures
regarding price, add-ons, and total of
payments are examined in the
Commission’s discussion of § 463.4,
wherein the Commission explains its
determination not to finalize any
additional disclosure requirements not
included in its NPRM.
An individual commenter, while
expressing support for regulation of
such misrepresentations, also noted
concern for the ‘‘grave consequences of
falsifying information on a customer’s
application for financing,’’ and urged
the Commission to consult with other
law enforcement agencies to further
address such problems.205 The
Commission appreciates the concern
and the seriousness of falsifying
information on a consumer’s application
for financing, and coordinates regularly
with other law enforcement agencies
regarding areas of shared jurisdiction
and responsibility, including motor
vehicle sales and financing. The
Commission will continue to monitor
financing application falsification issues
to determine whether any additional
action, beyond § 463.3(g), is needed.
A number of dealership association
commenters contended that the
proposed language was vague and did
not adequately explain the type of
behavior this paragraph would prohibit.
Relatedly, some dealership association
commenters contended that this
provision lacked specific guidance
about what a motor vehicle dealer must
or must not disclose. This provision,
however, utilizes terms which are
commonly used and understood, and
which may be interpreted according to
their plain meaning. Read together with
the introductory paragraph of § 463.3,
§ 463.3(g) prohibits misrepresentation
. . . regarding material information
about ‘‘[a]ny information on . . . a
consumer’s application for financing.’’
By its terms, this prohibition includes
any misrepresentations of material
information on a financing application.
For example, dealers would make
misrepresentations in violation of this
provision by including, on a consumer’s
application that is submitted to a third-
party financing institution, consumer
income information that is different
from what the consumers have stated to
the dealer that the consumers actually
earn, or by representing a different
down payment amount than the amount
the consumer has actually provided, or
by misrepresenting that the vehicle is
being sold or leased with certain add-on
products.206 Moreover, as described in
detail with regard to other paragraphs of
§ 463.3, this provision does not require
any particular affirmative disclosures,
instead obligating dealers to refrain from
certain misrepresentations.
One dealership association
commenter questioned whether a dealer
would be held responsible for a
customer’s false statement about his or
her income. If a consumer falsely states
they have a higher income, that
consumer would not be misled into
thinking he has a higher income. If,
however, a consumer’s application
falsely states a higher income because a
dealer has altered the information, that
consumer would be misled into
thinking that the application they are
signing accurately reflects the
information the consumer provided, and
§ 463.3(g) would be violated.
Additionally, if a dealer advises a
consumer to include other sources of
payment as income or advises the
consumer to list a higher income in
other ways, such conduct may mislead
the consumer into thinking that it is
proper to calculate income for auto
retail installment contracts in a
particular way, and there may be a
violation of § 463.3(g).
After careful review and
consideration of the comments, the
Commission adopts paragraph (g) of
§ 463.3 without substantive
modification, prohibiting
misrepresentations regarding material
information about any information on or
about a consumer’s application for
financing. It is likely to affect a
consumer’s choices if the consumer
knows a dealer is misrepresenting the
consumer’s income, or other aspects of
financing applications. If, for example, a
consumer knew the truth—that the
dealer is inflating the consumer’s
income such that the consumer would
not otherwise obtain financing for a
particular vehicle—the consumer might
opt to finance a less expensive car,
rather than risking repossession.
Material misrepresentations on
consumers’ financing paperwork are
also likely to cause consumers
substantial injury, including by causing
them to take on debt beyond that which
the financing company would have
approved, and increasing the risk of
repossession and harmful consequences
to consumers’ credit. Consumers cannot
avoid the injury from dealers
misrepresenting the information
consumers provide them, and this
practice provides no countervailing
benefits to consumers or competition.
(h) When the Transaction Is Final or
Binding on All Parties
(i) Keeping Cash Down Payments or
Trade-In Vehicles, Charging Fees, or
Initiating Legal Process or Any Action If
a Transaction Is Not Finalized or If the
Consumer Does Not Wish To Engage in
a Transaction
Proposed § 463.3(h) prohibited
dealers from misrepresenting when the
transaction is final or binding on all
parties. Proposed § 463.3(i) prohibited
dealers from making misrepresentations
about keeping cash down payments or
trade-in vehicles, charging fees, or
initiating legal process or any action if
a transaction is not finalized or if the
consumer does not wish to engage in a
transaction. After careful review and
consideration of the comments, the
Commission is finalizing paragraphs (h)
and (i) of § 463.3 with the minor
modification of capitalizing the defined
term ‘‘Vehicles’’ in § 463.3(i) to conform
with the revised definition at § 463.2(e).
Some commenters, including a group
of State attorneys general and consumer
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207 Complaint ¶¶ 67–72, Fed. Trade Comm’n v.
Universal City Nissan, Inc., No. 2:16–cv–07329
(C.D. Cal. Sept. 29, 2016); State ex rel. Dewine v.
Dads Car Lot Inc., No. 13–cv–4036, 2014 BL
468717, at * 1 (Ohio Com. Pl. June 6, 2014) (finding
defendant violated State consumer sales practices
act by including ‘‘spot delivery’’ document that
allowed defendant to keep ‘‘all funds on deposit’’);
Att’ys Gen. of 31 States & DC, Comment Letter on
Public Roundtables: Protecting Consumers in the
Sale and Leasing of Motor Vehicles, Project No.
P104811, Submission No. 558507–00112 at 4 (Apr.
13, 2012), https://www.ftc.gov/sites/default/files/
documents/public_comments/public-roundtables-
protecting-consumers-sale-and-leasing-motor-
vehicles-project-no.p104811-00112/00112-
82927.pdf (recommending, among other rules
aimed at deterring yo-yo sales, FTC adopt rules that
would require dealers to disclose the consumer’s
‘‘right to walk away’’ if financing is rejected and,
in the context of spot delivery, to disclose financing
has not been finalized as well as the responsibilities
and potential consequences for consumers); Legal
Aid Just. Ctr., Comment Letter on Public
Roundtables: Protecting Consumers in the Sale and
Leasing of Motor Vehicles, Project No. P104811,
Submission No. 558507–00066 at 26, 29 (Jan. 30,
2012), https://downloads.regulations.gov/FTC-2022-
0036-0062/attachment_2.pdf (explaining that in a
yo-yo sale the dealer misrepresents to the consumer
that credit has been finalized, when in fact the
dealer treats the sale as contingent, retaining the
ability to call off or seize the vehicle later; a ‘‘yo-yo
case can result in substantial distress to the person
who has been tricked’’; and ‘‘[t]he harm to the
marketplace occurs when the consumer believes a
credit sale has been completed and stops shopping
for a car on credit’’); Nat’l Consumer L. Ctr., ‘‘In
Harm’s Way—At Home: Consumer Scams and the
Direct Targeting of America’s Military and
Veterans’’ 41 (May 2003), https://filearchive.nclc.
org/special_projects/military/report-scams-facing-
military.pdf (listing ‘‘Spot Delivery’’ or ‘‘yo-yo
sales’’ among scams commonly aimed at military
members).
208 See Orkin Exterminating Co., Inc., 108 F.T.C.
263 (1986), aff’d sub nom. Orkin Exterminating Co.
v. F.T.C., 849 F.2d 1354 (11th Cir. 1988) (finding
that defendant’s practice of unilaterally raising
consumers’ annual renewal fees where the
consumers’ contracts contained a ‘‘lifetime
guarantee’’ as to the amount of the fee was unfair
under section 5 of the FTC Act); see also First
Amended Complaint ¶¶ 59–61, Fed. Trade Comm’n
v. BF Labs, Inc., No. 4:14–cv–00815 (W.D. Mo. May
14, 2015) (alleging as unfair defendants’ practice of
unilaterally failing to provide paid-for services
while refusing to refund consumers’ upfront
payments).
209 Fed. Trade Comm’n, ‘‘FTC Policy Statement
Regarding Advertising Substantiation,’’ (appended
to In re Thompson Med. Co., Inc., 104 F.T.C. 648,
839 (1984)); Fed. Trade Comm’n v. John Beck
Amazing Profits, LLC, 865 F. Supp. 2d 1052, 1067
(C.D. Cal. 2012).
210 On May 31, 2023, the Commission received a
petition for rulemaking under 16 CFR 1.31
regarding yo-yo financing. Petition for Rulemaking
Concerning the Finality of a Car Purchase (Yo-Yo
Financing), Doc. No. FTC–2023–0035–0002. The
Commission will address this petition separately.
advocacy organizations, generally
supported prohibiting
misrepresentations about when the
transaction is final or binding on all
parties but urged the Commission to
include additional requirements or
prohibitions. For instance, several
commenters, including consumer
advocacy organizations and individual
commenters, requested that the
Commission add to its Final Rule a
provision requiring dealers to include,
in every consumer credit contract, a
finality clause stating that the
transaction is final as soon as the
consumer credit contract is signed, or
alternatively, a provision requiring
dealers to include in retail installment
contracts a clause prohibiting financing-
contingent sales. Commenters including
a group of State attorneys general
recommended that the Commission
require any dealer that does not
ultimately secure financing under
previously presented terms to unwind
the transaction, return any down
payment in full, and return any traded-
in vehicle. Such commenters also
recommended that the Commission
implement restrictions, such as
requiring dealers to be reasonably
certain that a consumer will qualify for
quoted financing terms; requiring a
written disclosure that the consumer
must sign advising the consumer that
financing is not final; or setting a short
deadline by which the dealer must
either arrange financing or cancel the
transaction. Other commenters,
including a State consumer protection
agency, also supported requiring the
contractual contingency to be disclosed
conspicuously and limiting the
contingency to a short period of time. A
number of these commenters, including
consumer advocacy organizations,
provided examples of how spot delivery
transactions can harm consumers.
The provision’s prohibitions and
requirements address many of these
commenters’ concerns regarding spot
delivery and yo-yo financing. Spot
delivery and yo-yo financing refer to
situations where a dealer delivers a
vehicle to a consumer on the spot before
the financing or leasing has been
finalized, leads a consumer to believe
that the transaction is final, and then
later directs the consumer to return the
vehicle and engages in certain tactics,
such as failing to return the consumer’s
trade-in vehicle while refusing to honor
the finance or lease transaction, or
pressuring the consumer to enter into a
new transaction.207 Paragraphs (h) and
(i) of § 463.3 prohibit misrepresentations
regarding the finality of the transaction
and return of down payments and trade-
in vehicles. Under these provisions, if a
consumer is under the impression that
the transaction is final, and the dealer
subsequently causes the consumer to
return the vehicle to the lot because the
transaction was not final, or the dealer
takes or threatens to take possession of
the vehicle but refuses to return the
down payment or trade-in vehicle, the
dealer has violated either § 463.3(h), by
misrepresenting the finality of the
transaction, or § 463.3(i), by falsely
representing, expressly or by
implication, that the dealer has a legal
basis to keep the down payment or
trade-in vehicle in the event the
transaction is not finalized, or both.208
Regarding the recommendation to
include a requirement that dealers be
reasonably certain that consumers will
qualify for quoted financing terms, the
Rule the Commission is finalizing
already contains several provisions in
addition to § 463.3(h) and (i) that
address this conduct. For example, the
Rule prohibits misrepresentations
regarding material information about the
costs or terms of financing (§ 463.3(a)),
or about whether any consumer has
been or will be preapproved or
guaranteed for any product, service, or
term (§ 463.3(f)). As explained in the
paragraph-by-paragraph analysis of
§ 463.3(e) in SBP III.C.2(e), existing law
requires dealers to have a reasonable
basis for their claims. Objective claims
about products or services represent,
explicitly or by implication, that an
advertiser has a reasonable basis to
support those claims. 209 Thus, to avoid
misrepresentation, dealers must
reasonably believe that consumers will
qualify for quoted financing terms, or
that the transaction will be finalized on
the terms presented, in order to
represent such terms to consumers.
Regarding additional provisions that
would require certain contractual
measures, such as finality clauses or
prohibitions against financing-
contingent sales, the Commission is
concerned that requiring specific
contract provisions would obligate
dealers that are not engaged in spot
delivery to change their contracts even
though their customers do not
experience harm stemming from spot
delivery practices. Before requiring any
such changes, the Commission has
determined to continue to monitor the
market to evaluate whether additional
steps are warranted.210
Some commenters, including
dealership associations, requested that
the Commission clarify how dealers
could document compliance with these
proposed provisions, such as how
dealers could establish that appropriate
disclosures had been made. One such
commenter, for instance, asked whether
written agreements required by State
law were sufficient to satisfy the
requirements of these provisions. As
noted elsewhere in this paragraph-by-
paragraph analysis of § 463.3 in SBP
III.C.2, these provisions do not require
any particular affirmative disclosures,
instead obligating dealers to refrain from
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620 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
211 See NPRM at 42020–21. Individual
commenter, Doc. No. FTC–2022–0046–9469 at 5–6.
212 One commenter questioned whether this
section would prohibit a dealer from retaining a
down payment on a special order vehicle where the
customer refuses to take delivery of the vehicle.
Comment of Minn. Auto. Dealers Ass’n, Doc. No.
FTC–2022–0046–8670 at 10. Sections 463.3(h) and
(i) prevent misrepresentations, including
misrepresenting that a dealer can keep a down
payment when a dealer does not have a legal basis
to do so. If the dealer does not make a
misrepresentation, this provision would not be
violated. 	213 See SBP I.A, n.3.
certain misrepresentations. Section
463.6 discusses records dealers need to
keep to demonstrate compliance with
the requirements of the Final Rule, and
enumerates five such categories of
records, including copies of finance and
lease documents signed by the
consumer, whether or not final approval
is received for a financing or lease
transaction. The Commission declines
to include in this Final Rule additional
requirements regarding any specific
documents dealers must keep in order
to demonstrate compliance with
§ 463.3(h) or (i).
One individual commenter requested
that the Commission include in the CFR
the examples of harmful conduct related
to yo-yo financing that it published in
the NPRM.211 The Commission has
determined that each such example
describes conduct that violates this
rulemaking. Rather than adding them to
the text of the Final Rule, the
Commission repeats those examples in
this paragraph-by-paragraph analysis of
§ 463.3(h) and (i), in order to avoid
voluminous modifications to the Rule
text itself.
Commenters including a dealership
association asserted that the issue of
when a contract is final or binding is
one of State law, and thus it is within
the purview of each State to determine
when a contract is final or binding,
arguing that § 463.3(h) therefore should
be removed from the Final Rule.
Another such commenter contended
that even courts experienced in contract
interpretation have difficulty
determining when an agreement is final,
and that dealers therefore are likely to
transgress this prohibition in proposed
§ 463.5(h) accidentally. This provision,
however, requires that a dealer’s express
or implied representations regarding
material information be truthful, which
is consistent with current law and with
the Commission’s authority to prohibit
unfair or deceptive acts or practices.
Moreover, under § 463.9, this Rule does
not affect State law pertaining to
contracts so long as State law is not
inconsistent with part 463, and in the
event of an inconsistency, the Rule only
affects such State law to the extent of
the inconsistency. 212 In the case of
§ 463.3(h), for example, an
inconsistency would include State law
allowing material misrepresentations
regarding whether transactions are final;
the Commission is unaware of any such
law. Further, to the extent dealers are
concerned they may transgress this
prohibition because courts have had
difficulty interpreting their contracts,
then, as they should be doing under
current law prohibiting
misrepresentations, dealers should
carefully consider the net impression
they are conveying with the language
they use, both in their contracts and in
the context in which these contracts are
presented, as such language may
confuse consumers as well.
Several dealership association
commenters claimed that State law
already prohibits misrepresentations
about spot delivery transactions or
otherwise protects consumers in such
transactions. One such commenter
asserted that Massachusetts law
prohibits spot deliveries, and cautioned
the FTC not to create uncertainty with
its Rule such that one might think spot
deliveries are allowed in Massachusetts.
Another such commenter asked whether
this provision applies in addition to
State law or instead of it. Other
commenters, including consumer
advocacy organizations, asserted that
less than half of the States have statutes,
regulations, or administrative
pronouncements about yo-yo
transactions; that there are significant
variations in such law from State to
State; and that State regulation often
does not provide sufficient protections
for consumers. As described throughout
the paragraph-by-paragraph analysis of
§ 463.3 in SBP III.C.2, State law may
provide more or less specific
requirements than those under the Final
Rule as long as those requirements are
not inconsistent with part 463, and in
the event of an inconsistency, the Rule
only affects such State law to the extent
of the inconsistency. As for any States
that prohibit spot delivery, such
prohibitions are consistent with the
provisions of this Rule. Finally, as to
whether additional provisions are
warranted to protect consumers, the
Commission will continue to monitor
the market to make this determination.
Commenters including an industry
association contended that the
Commission should not take action to
disrupt spot delivery transactions to
consumers, stating that there may be
reasons to keep down payments even
when consumers are not permitted to
keep the vehicle, or claiming that
although abusive spot deliveries have
occurred, they are not a systemic
problem in the marketplace. The
Commission, however, need not show
that abusive spot deliveries are systemic
in order to finalize these provisions
barring misrepresentations.213 Further,
these misrepresentation prohibitions do
not alter requirements under current
law prohibiting dealers from making
express or implied misrepresentations.
After careful consideration of the
recommendations and record, the
Commission has determined to finalize
paragraphs (h) and (i) of § 463.3 largely
as proposed, with the minor
modification of capitalizing the defined
term ‘‘Vehicles’’ in § 463.3(i). The
Commission notes, however, that it has
significant concerns about consumer
harm due to yo-yo financing and will
continue to examine these issues even
as it finalizes these prohibitions against
certain misrepresentations.
Misrepresentations about when the
transaction is final or binding on all
parties, as well as about keeping down
payments or trade-in vehicles, charging
fees, or initiating legal process or any
action, are likely to affect consumer
conduct, including regarding whether to
enter into a new transaction with less
beneficial terms for the consumer, and
are likely to mislead consumers.
(i) Keeping Cash Down Payments or
Trade-In Vehicles, Charging Fees, or
Initiating Legal Process or Any Action If
a Transaction Is Not Finalized or If the
Consumer Does Not Wish To Engage in
a Transaction
Proposed § 463.3(i) is discussed with
§ 463.3(h).
(j) Whether or When a Dealer Will Pay
Off Some or All of the Financing or
Lease on a Consumer’s Trade-in Vehicle
Proposed § 463.3(j) prohibited
misrepresentations regarding whether or
when a motor vehicle dealer will pay off
some or all of the financing or lease on
a consumer’s trade-in vehicle. The
Commission is finalizing paragraph (j)
of § 463.3 largely as proposed, with
minor modifications—substituting
‘‘Dealer’’ for ‘‘Motor Vehicle Dealer’’
and capitalizing ‘‘Vehicle’’—to conform
with the revised definitions of
‘‘ ‘Covered Motor Vehicle’ or ‘Vehicle’ ’’
and ‘‘ ‘Covered Motor Vehicle Dealer’ or
‘Dealer’ ’’ at § 463.2(e) and (f).
The Commission received several
comments in response to this paragraph,
including from individual commenters
who expressed support for prohibiting
dealers from misrepresenting whether
they would pay off outstanding balances
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621	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
214 See, e.g., Individual commenter, Doc. No.
FTC–2022–0046–3770 (‘‘I agree that these changes
need to take place. No one should have to pay what
was owed on a trade in after the dealership said
they would pay off the trade in . . . .’’).
215 For example, commenters stated that
occasionally the previous finance or lease source
will not provide a timely payoff for a traded vehicle
or will refuse to accept a payoff claiming more
money is due; or a previous finance or lease source
may accept a payoff, but will refuse to credit its
former customer’s account and release the title
promptly. In addition, an industry association
commenter requested that the Commission narrow
this prohibition to specifically address the fact
patterns giving rise to it that the Commission sets
forth in the NPRM, and, in so doing recognize that
it is in a dealer’s business interest to pay off the
existing loan quickly so that the vehicle can be
more easily and quickly retailed.
216 See paragraph-by-paragraph analysis of
§ 463.3(e) in SBP III.C.2(e) (discussing deception
and reasonable basis).
217 See Individual commenter, Doc. No. FTC–
2022–0046–7905 at 1.
218 See Comment of State of S.C. Dep’t of
Consumer Affs., Doc. No. FTC–2022–0046–7891 at
6.
219 Individual commenter, Doc. No. FTC–2022–
0046–2364 (‘‘Many favorable ([i.e.] 5 star) Dealer
reviews I have read appear suspect with generic,
similar wording (or no wording at all) seemingly
provided to offset lower Dealer ([i.e.] 1 star) ratings.
I recommend that for [§ 463.3(k)] the following (or
similar) be appended: Additionally, consumer
reviews may not be created, editorialized, modified
or removed by any Dealer or third party acting at
the direction of any Dealer. Consumer reviews
should be modifiable or removable by the
originating author.’’).
remaining on a trade-in vehicle.214
Other commenters, including an
industry association and dealership
associations, requested that the
Commission limit dealer responsibility
under this provision for unanticipated
delays stemming from circumstances
beyond a dealer’s reasonable control,
arguing that proposed § 463.3(j) made
no exception for unanticipated delays
such as a previous financing source
declining to accept a payoff or refusing
to release the vehicle title after receiving
a payoff.215 The Commission notes that,
as is the case under current law, under
this provision, dealers are not permitted
to make claims about whether or when
they will pay off some or all of the
financing or lease on a consumer’s
trade-in vehicle if the truth of those
claims depends on circumstances
outside their control and the dealer does
not possess a reasonable basis for such
claims. 216
An individual commenter contended
that requiring additional disclosures
about this provision would confuse the
consumer. 217 This provision, however,
does not necessitate any affirmative
disclosures from dealers. Instead, it
prohibits dealers from misleading
consumers about whether or when they
will pay off some or all of the financing
or lease on a consumer’s trade-in
vehicle.
One State consumer protection agency
commenter requested that the
Commission require, in situations where
a buyer’s credit information or trade-in
vehicle are evidently insufficient to
support a deal, that the dealer require
additional down payment or other
security, or affirmatively disclose that
the dealer is not responsible for paying
off liens.218 Without further information
on the costs and benefits of such a
proposal, the Commission declines to
add such requirements to this Final
Rule. The Commission notes, however,
that the Rule prohibits dealers from
misleading consumers regarding when
trade-in vehicles have negative equity
and from otherwise failing to obtain the
consumer’s express, informed consent
prior to charging the consumer for any
item, including any amounts associated
with trading in a vehicle. The
Commission will continue to monitor
this area to determine whether any such
additional measures are warranted to
protect consumers or competition.
The Commission also received a
number of comments from dealership
associations arguing that existing State
and Federal laws address dealers’
obligations in connection with
informing consumers how much each
consumer is responsible for financing.
The Commission notes that commenters
presented no actual conflicts between
this provision and other laws, and to the
extent duplicative laws prohibit
misrepresentations in this area, the
Commission has not observed harmful
consequences to consumers or
competition. Further, as noted
elsewhere in the section-by-section
analysis, State laws may provide more
or less specific requirements as long as
those requirements are not inconsistent
with part 463, under § 463.9, and in the
event of an inconsistency, the Rule only
affects such State law to the extent of
the inconsistency.
After carefully considering the
comments, the Commission is finalizing
this provision with the two minor
modifications to conform with the
defined terms ‘‘ ‘Covered Motor Vehicle’
or ‘Vehicle’ ’’ and ‘‘ ‘Covered Motor
Vehicle Dealer’ or ‘Dealer.’ ’’ This
provision prohibits dealers from making
misrepresentations about paying off the
financing or lease on a trade-in vehicle.
Such conduct includes misrepresenting
to consumers who trade in a vehicle that
the dealer will pay off any outstanding
balance owed on the trade-in vehicle
when the consumer purchases a vehicle
from the dealer. For example, when
such a dealer takes a trade-in, if the
dealer remits payment to the entity to
whom the trade-in payment is owed, as
consumers would expect, but also adds
this payment to the amount the
consumer owes on the vehicle the
consumer is purchasing from the dealer,
the consumer is the party that has
ultimately paid off the trade-in amount,
contrary to the impression made by the
dealer. This provision also prohibits
dealers that are going out of business
from representing expressly or by
implication that they will pay off liens
if they do not, in fact, pay off the liens,
or do not pay them off in a timely
manner. Such misrepresentations are
likely to affect a consumer’s choice to
visit a particular dealership or select a
particular vehicle.
(k) Whether Consumer Reviews or
Ratings Are Unbiased, Independent, or
Ordinary Consumer Reviews or Ratings
of the Dealer or the Dealer’s Products or
Services
Proposed § 463.3(k) prohibited
misrepresentations about whether
‘‘consumer reviews or ratings are
unbiased, independent, or ordinary
consumer reviews or ratings of the
Dealer or its products or services.’’
Upon careful review and consideration
of the comments, the Commission is
finalizing paragraph (k) of § 463.3 with
one technical clarification to replace
‘‘its’’ with ‘‘the Dealer’s.’’ The Rule’s
requirements apply to all individuals
and entities that meet the definition of
‘‘Dealer.’’
An individual commenter
recommended that the Commission
modify this provision to include
language explicitly prohibiting dealers
from creating, editorializing, modifying,
or removing consumer reviews.219 Here,
the Commission notes that if such acts
or practices would result in reviews that
are not independent or do not otherwise
reflect ordinary consumer experience,
they already would violate this
provision. For example, if a dealer
created a positive review, edited or
modified negative reviews to make them
sound positive, or removed negative
reviews while keeping positive reviews,
such practices would violate this
provision.
A few individual commenters
recommended that the Rule include
additional provisions related to
consumer reviews, including a
requirement for the creation of an online
database for consumer reviews and
complaints about dealerships, and a
requirement for dealers to post
consumer reviews online and in the
dealership location. The Commission
notes that while some reviews are
available online, additional information
could assist consumers, and the
Commission will consider whether such
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622 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
220 See, e.g., Fed. Trade Comm’n, Notice of
Proposed Rulemaking, Trade Regulation Rule on
the Use of Consumer Reviews and Testimonials, 88
FR 49364 (July 31, 2023) (to be codified at 16 CFR
465), https://www.govinfo.gov/content/pkg/FR-
2023-07-31/pdf/2023-15581.pdf; Fed. Trade
Comm’n, Guides Concerning Use of Endorsements
and Testimonials in Advertising, 16 CFR 255; Fed.
Trade Comm’n, ‘‘FTC’s Endorsement Guides: What
People are Asking,’’ https://www.ftc.gov/business-
guidance/resources/ftcs-endorsement-guides-what-
people-are-asking; Fed. Trade Comm’n, ‘‘Soliciting
and Paying for Online Reviews: A Guide for
Marketers,’’ https://www.ftc.gov/business-guidance/
resources/soliciting-paying-online-reviews-guide-
marketers; Fed. Trade Comm’n, ‘‘Disclosures 101
for Social Media Influencers,’’ https://www.ftc.gov/
business-guidance/resources/disclosures-101-
social-media-influencers.
221 See Complaint ¶¶ 73–78, Fed. Trade Comm’n
v. Universal City Nissan, Inc., No. 2:16-cv-07329
(C.D. Cal. Sept. 29, 2016); see also Fed. Trade
Comm’n, Notice of Proposed Rulemaking, Trade
Regulation Rule on the Use of Consumer Reviews
and Testimonials, 88 FR 49364, 49371–75 (July 31,
2023) (to be codified at 16 CFR 465), https://
www.govinfo.gov/content/pkg/FR-2023-07-31/pdf/
2023-15581.pdf (discussing such enforcement
actions).
222 See Complaint ¶¶ 73–78, Fed. Trade Comm’n
v. Universal City Nissan, Inc., No. 2:16-cv-07329
(C.D. Cal. Sept. 29, 2016).
223 One commenter conducted a study of Google
reviews of U.S. car dealerships from April 2008 to
September 2022. The commenter found by
examining a 2% sample of these reviews that
consumers gave on average 4.47 stars out of 5 stars
and made several other conclusions about
consumer satisfaction with the auto transaction
experience based on that methodology. Comment of
Inst. for Regul. Analysis & Engagement, Doc. No.
FTC–2022–0046–10164 at 2–5. The Commission
notes that, consistent with its enforcement
experience, there is no guarantee that those reviews
are a genuine reflection of consumer experience.
Moreover, the Commission notes that oftentimes
consumers do not realize that they have been
charged without their authorization. See SBP II.B.
Thus, such a study that relies on Google star ratings
is not conclusive of consumer experience.
224 See § 463.1 (‘‘It is an unfair or deceptive act
or practice within the meaning of section 5(a)(1) of
the Federal Trade Commission Act (15 U.S.C.
45(a)(1)) to violate any applicable provision of this
part, directly or indirectly . . . .’’).
225 See 15 U.S.C. 45b.
226 Individual commenter, Doc. No. FTC–2022–
0046–7445 at 17.
227 The Commission discussed government
impersonation scams in its Notice of Proposed
Rulemaking for a Trade Regulation Rule on
Impersonation of Government and Business. See 87
FR 62741 (Oct. 17, 2022). The Commission
observed, inter alia, ‘‘ongoing widespread fraud
measures are needed as it continues to
monitor the marketplace, including after
the Rule goes into effect.
Several dealership associations asked
what type or format of reviews or ratings
would be covered by this proposed
provision. As proposed, § 463.3(k)
applied to all reviews or ratings, in any
format or wherever displayed, that are
likely to mislead consumers as to
whether such reviews or ratings are
unbiased, independent, or ordinary
consumer reviews or ratings. Relatedly,
industry and dealership associations
contended that the language used in the
proposed provision was vague and
confusing, and requested that the
Commission further define the phrase,
‘‘unbiased, independent, or ordinary
consumer reviews or ratings.’’ To begin,
the operative terms in this phrase are
commonly used and understood and
may be interpreted according to their
plain meaning without further
definition. Moreover, the Commission
has, for decades, provided information
and guidance on avoiding deception
through the use of endorsements,
testimonials, and online reviews.220
Enforcement actions by the Commission
have documented examples of the types
of misrepresentations that would be
covered by this provision.221 For
example, dealerships and their
employees have posted positive, five-
star online reviews that falsely purport
to be objective or independent.222 As
these sources make clear, a person who
is unbiased, independent, and an
ordinary consumer would be someone
who was not paid or given something of
value to write a review and who has no
employment or familial relationship or
other unexpected material connection to
the dealership.223
An industry association commenter
expressed concern that this proposed
provision did not appear to be limited
to misrepresentations that may occur
when a dealership, and not an unrelated
third party, affirmatively publishes
consumer reviews. To the extent an
independent third party that does not
have a material connection with the
dealership makes any such claims, those
claims would not be covered by this
provision. This provision concerns
situations where there is such a
relationship between the third party and
the dealer. For example, if a dealer were
to pay a third party or consumer to post
positive reviews that misrepresent their
status as unbiased, independent, or
ordinary consumer reviews, the dealer
would be violating this provision.224
One industry association commenter
contended that the Consumer Review
Fairness Act 225 already prohibits the
conduct covered by this provision. The
Consumer Review Fairness Act makes it
illegal for businesses to have form
contracts that disallow or restrict
consumers from posting negative
reviews. Section 463.3(k) prohibits
misrepresentations regarding the
authenticity of consumer reviews
generally. These provisions are not in
conflict, and as discussed in SBP III.C.1,
to the extent the provision creates any
duplication, the Commission has seen
no harm to consumers or competition
from duplicative prohibitions of
deceptive conduct.
Whether reviews or ratings about a
seller or the seller’s products or services
are from unbiased, independent, or
ordinary consumers is material to
consumers’ decision-making because a
consumer is more likely to interact with
a particular dealership if the dealership
has positive reviews or ratings from
unbiased, independent, or ordinary
consumers. Thus, after careful review of
all the comments, the Commission is
finalizing paragraph (k) of § 463.3
without substantive modification from
the Commission’s original proposal.
(l) Whether the Dealer or Any of the
Dealer’s Personnel or Products or
Services Is or Was Affiliated With,
Endorsed or Approved by, or Otherwise
Associated With the United States
Government or Any Federal, State, or
Local Government Agency, Unit, or
Department, Including the United States
Department of Defense or Its Military
Departments
Proposed § 463.3(l) prohibited
misrepresentations that ‘‘the Dealer or
any of its personnel or products or
services is or was affiliated with,
endorsed or approved by, or otherwise
associated with the United States
government or any Federal, State, or
local government agency, unit, or
department, including the United States
Department of Defense or its Military
Departments.’’ Upon careful review and
consideration of the comments, the
Commission is finalizing paragraph (l)
of § 463.3 with one technical
clarification to replace ‘‘its’’ with ‘‘the
Dealer’s.’’ The Rule’s requirements
apply to all individuals and entities that
meet the definition of ‘‘Dealer.’’
One individual commenter
recommended that the Commission
additionally prohibit dealers from
‘‘causing any person to impersonate a
police officer for any purpose.’’ 226 The
commenter contended that such a
prohibition would address a common
yo-yo financing tactic, wherein dealers
exert pressure on consumers to return
vehicles by calling the consumers on the
phone, falsely claiming to be police
officers, and falsely representing that
there is a warrant for the consumers’
arrest or that the dealer has reported the
consumers’ vehicles as stolen. The
Commission is likewise concerned
about such conduct, and notes that it
would be covered by the language in
this paragraph, which applies broadly to
misrepresentations of affiliation with,
endorsement or approval by, or
association with ‘‘any Federal, State, or
local government agency, unit, or
department,’’ including State or local
police officials.227 By misrepresenting
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623	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
schemes in which scammers impersonate law
enforcement or government officials in attempts to
extort money or steal personally identifiable
information.’’ See id. at 62742 (citing
announcements on March 7, 2022, and May 20,
2022, by the Federal Bureau of Investigation and the
Social Security Administration’s Office of the
Inspector General, in coordination with other
Federal law enforcement agencies, respectively).
228 One commenter further opined that ‘‘the
Department of Defense has itself dealt with this
situation in the case of military lending and sales.’’
Comment of Kan. Auto. Dealers Ass’n, Doc. No.
FTC–2022–0046–4510 at 7.
229 Comment of N.C. Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–11223 at 9.
230 See, e.g., Complaint ¶¶ 5–6, 9–11, 14, Traffic
Jam Events, LLC, No. 9395 (F.T.C. Aug. 7, 2020)
(alleging auto marketer misrepresented that it
provided COVID–19 stimulus relief to consumers);
Complaint ¶¶ 14–26, Fed. Trade Comm’n v. Ponte
Invs., LLC, No. 1:20–cv–00177 (D.R.I. Apr. 17, 2020)
(alleging misrepresentation of government
affiliation by company that impersonated the U.S.
Small Business Administration with business
names ‘‘SBA Loan Program’’ and ‘‘SBA Loan
Program.com’’ and claimed to help businesses
obtain access to coronavirus relief programs
administered by the agency); Complaint ¶¶ 24–36,
Fed. Trade Comm’n v. DOTAuthority.com, Inc., No.
0:16–cv–62186 (S.D. Fla. Sept. 13, 2016) (alleging
defendants misrepresented affiliation with U.S.
Department of Transportation by claiming to be the
‘‘Compliance Unit’’ of ‘‘DOTAuthority’’ and
providing a telephone number with a Washington,
DC area code).
231 See, e.g., Fed. Trade Comm’n, ‘‘The Road
Ahead: Selling, Financing, & Leasing Motor
Vehicles,’’ Public Roundtable, Panel 1: Military
Consumers and the Auto Sales and Financing
Process, Remarks by Hollister K. ‘‘Holly’’ Petraeus,
Dir., Off. of Servicemember Affs., CFPB, Tr. at 11
(Aug. 2, 2011), https://www.ftc.gov/system/files/
documents/public_events/52654/080211_ftc_
sess1.pdf (‘‘[S]ervicemembers don’t always realize if
they buy and finance a car here in the U.S., they
can’t take it out of the country unless they have a
letter of permission from the lienholder to do so.
And some of the lienholders won’t give that
permission. . . . [W]e [heard from] a JAG in
Germany saying, ‘I see a number of people who end
Continued
police involvement in potential vehicle
repossession, such conduct would also
violate paragraph (o) of § 463.3 of the
Final Rule.
A number of dealership association
commenters contended that some States
address this type of deception.228 As
noted in response to similar commenter
contentions regarding other proposed
provisions, the Commission has seen no
harm to consumers or competition from
duplicative misrepresentation
prohibitions, and overlap between the
Commission’s Rule provisions and
existing law is indicative of dealers’
ability to comply with these provisions.
Moreover, including such a provision in
the Final Rule additionally benefits
consumers who encounter such
conduct, and aids law-abiding dealers
that otherwise lose business to
competitors that act unlawfully.
Further, § 463.9 discusses part 463’s
relation to State laws.
A dealership association commenter
claimed that many dealerships in the
commenter’s State work with military
personnel to promote charitable causes,
and questioned whether a banner listing
a dealership at a charitable military
event would be considered a
misrepresentation that the dealership is
‘‘associated’’ with the military.229 Here,
the Commission notes that a banner that
conveys true participation in a
charitable military event, and does not
deceptively represent an affiliation
with, endorsement or approval by, or
association with the military, would not
violate this provision. The
Commission’s law enforcement practice
provides further guidance on this point:
the Commission’s many enforcement
actions alleging misrepresentation of
government affiliation provide examples
of the types of conduct that would
violate this provision.230
Representations about whether a
seller or any of its personnel, products,
or services is or was affiliated with,
endorsed or approved by, or otherwise
associated with the government are
likely to affect consumers’ conduct.
Consumers are more likely to visit a
dealership and select a vehicle or
product if they believe that a specific
dealer or a dealer’s personnel, products,
or services have been approved by a
government entity. The Commission
thus adopts paragraph (l) of § 463.3
without substantive modification from
the Commission’s original proposal.
(m) Whether Consumers Have Won a
Prize or Sweepstakes
Proposed § 463.3(m) prohibited
misrepresentations about whether
consumers have won a prize or
sweepstakes. Upon careful review and
consideration of the comments, the
Commission is finalizing paragraph (m)
of § 463.3 without modification from its
original proposal.
Comments from dealership
associations contended that some States
or municipalities address this type of
deception. As discussed in SBP III.C.1,
the Commission has not seen harm to
consumers or competition from multiple
prohibitions against misrepresentations.
Furthermore, any significant overlap
between the Commission’s Rule
provisions and existing law is indicative
of dealers’ ability to comply with these
provisions. Finally, § 463.9 discusses
part 463’s relation to State laws.
Misrepresentations about whether
consumers have won a prize or
sweepstakes harm consumers by
inducing consumers to choose and
transact with a particular dealership
under false pretenses. Thus, the
Commission adopts paragraph (m) of
§ 463.3 without modification from the
Commission’s original proposal.
(n) Whether, or Under What
Circumstances, a Vehicle May Be
Moved, Including Across State Lines or
Out of the Country
Proposed § 463.3(n) prohibited
misrepresentations regarding whether,
or under what circumstances, a vehicle
may be moved, including across State
lines or out of the country. Upon careful
review and consideration of the
comments, the Commission is finalizing
paragraph (n) of § 463.3 largely as
proposed, with the minor modification
of capitalizing the word ‘‘State,’’ as well
as the defined term ‘‘Vehicle’’ to
conform with the revised definition at
§ 463.2(e).
The Commission received comments
including from dealership associations
arguing that proposed § 463.3(n) would
pose issues for dealers who must
comply with limitations imposed by
manufacturers or distributors on the
export of new motor vehicles. These
commenters requested clarification
about liability under this provision in
the event dealers communicate any such
export limitations to consumers or take
other steps to prevent the export of new
vehicles. Section 463.3(n), however,
does not prohibit dealers from
accurately and non-deceptively
communicating whether, or under what
circumstances, a vehicle may be
moved—it instead prohibits
representations that mislead consumers
about this information.
Commenters including a dealership
association objected to this proposed
provision by asserting that a State or
insurance company may prescribe, and
the parties to a contract may agree upon,
whether a leased or purchased vehicle
may be driven to a particular area. This
provision, however, does not prevent
parties from discussing and agreeing to
whether a vehicle may be moved.
Instead, § 463.3(n) prohibits
misrepresentations about whether, or
under what circumstances, a vehicle
may be moved, including regarding any
liens or other restrictions that would
prevent or hinder consumers’ ability to
move the vehicle beyond certain
boundaries. Furthermore, interaction
with State laws is explained in the
section-by-section analysis of § 463.9.
Representations about whether, and
under what circumstances, a consumer
may move a vehicle are material as they
are likely to affect a reasonable
consumer’s decision to purchase a
vehicle, including decisions of military
consumers who may frequently need to
move.231
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624 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
up having to do what you would call ‘‘voluntary
repossession’’ on their car because they bought this
car, they’re excited about it, and . . . the person
who made them the loan didn’t say ‘‘Oh, by the
way, if you go overseas, we’re not gonna let you
take it with you.’’’ And . . . sometimes, they’ll find
that their warranty is no good overseas, either.’’).
232 Comment of 18 State Att’ys Gen., Doc. No.
FTC–2022–0046–8062 at 13.
233 See, e.g., Complaint ¶¶ 10–21, CFPB v. USASF
Servicing, LLC, No. 1:23-cv-03433–VCM (N.D. Ga.
Aug. 2, 2023); Consumer Fin. Prot. Bureau,
‘‘Supervisory Highlights: Issue 28, Fall 2022’’ 6–7
(Nov. 2022), https://files.consumerfinance.gov/f/
documents/cfpb_supervisory-highlights_issue-28_
2022-11.pdf (finding that, in certain instances, auto
servicers engaged in unfair acts or practices by
activating vehicle disabling devices in consumers’
vehicles when consumers were not past due on
payment, contrary to relevant contracts and
disclosures, including by causing the devices to
sound late payment warning beeps and by
preventing consumers from starting their vehicles).
234 See 15 U.S.C. 45; see also, e.g., Int’l Harvester
Co., 104 F.T.C. 949, 1064–67 (1984) (finding that
manufacturer’s failure to adequately disclose that
its tractors had a serious safety hazard constituted
unfair conduct, where the hazard caused serious
injury to a small number of consumers, consumers
could not have reasonably avoided the harm
because the respondent did not adequately disclose
the serious risk, and the cost of the respondent
disclosing the risk was very small in relation to the
substantial injury).
235 See 50 U.S.C. 3952(a). 	236 NPRM at 42022.
Based on a review of the comments
and for the reasons previously
discussed, the Commission is finalizing
paragraph (n) of § 463.3 largely as
proposed, with the minor modification
of capitalizing ‘‘State’’ and the defined
term ‘‘Vehicle.’’
(o) Whether, or Under What
Circumstances, a Vehicle May Be
Repossessed
Proposed § 463.3(o) prohibited
misrepresentations regarding whether,
or under what circumstances, a vehicle
may be repossessed. After careful
review and consideration of the
comments, the Commission is finalizing
paragraph (o) of § 463.3 with the minor
modification of capitalizing the defined
term ‘‘Vehicle’’ to conform with the
revised definition at § 463.2(e).
A number of commenters, including
consumer advocacy organizations and a
group of State attorneys general,
expressed concern about electronic
disablement of vehicles, including
through the use of starter interrupt
devices, which are sometimes utilized
for vehicle repossession. Many of these
commenters expressed concern about
the potential for harm to consumers if
such devices are activated without
regard to the location or operational
state of the vehicle, and recommended
that the Commission restrict their use.
Alternatively, one such commenter
recommended that the Commission add
a provision to part 463 that would
require dealers to disclose any such
technology, obtain the consumer’s
express, informed consent to its use,
and limit its use to one time, not to
exceed 30 days, once a consumer is in
default. Finally, the comment from a
group of State attorneys general
recommended that the Commission
require additional disclosures any time
a starter interrupt device is installed,
provide advance notice to consumers
prior to activating such devices, and
enable consumers to restart their
vehicles in emergency or unsafe
situations. 232
The Commission recognizes the
potential for abuse with regard to
vehicle disablement technology.233 It is
already illegal under section 5 of the
FTC Act to engage in deception,
including regarding vehicle disablement
technology, and to unfairly cause
substantial injury to consumers, such as
by disabling a vehicle while it is being
operated on the highway. 234 This
provision will further provide
protection for consumers from unfair or
deceptive conduct surrounding the
repossession of vehicles. Moving
forward, the Commission will continue
to monitor the motor vehicle
marketplace for developments in this
area to determine whether additional
restrictions are warranted.
A number of dealership association
commenters contended that this
provision would inhibit dealers from
making representations about their
lawful rights to repossess vehicles,
positing that, upon making any such
representations, this provision might
require dealers to carry out
repossessions without exception or risk
violating this provision. This provision,
however, does not prevent dealers from
providing accurate information to
consumers about when a vehicle can, or
will, be repossessed. Even where dealers
have a lawful right to repossess a
vehicle, current law, as well as this
provision, prohibit dealers from
misrepresenting whether or when they
may take such action. Current law,
including at the Federal level, imposes
some such restrictions in this regard: for
example, the Servicemembers Civil
Relief Act prohibits repossession of
vehicles during a servicemember’s
period of military service without a
court order, as long as the
servicemember either placed a deposit
for the vehicle or made at least one
installment payment on the contract
before entering military service.235 This
provision prevents dealers from
representing that they may repossess
military consumers’ vehicles under such
circumstances. However, dealers may
still accurately and non-deceptively
inform a consumer about the
circumstances under which a vehicle
can be repossessed or when the dealer
may take action. In providing
consumers with such information,
however, dealers must refrain from
representing, including by implication,
that repossession is likely when in truth
it is not.
After considering the comments, the
Commission is finalizing paragraph (o)
of § 463.3 largely as proposed, with the
minor modification of capitalizing the
defined term ‘‘Vehicle.’’ This provision
prohibits dealers from making
misrepresentations regarding material
information about repossession of a
vehicle. Information about whether, or
under what circumstances, a vehicle
may be repossessed is likely to affect
consumers’ conduct, including by
impacting military consumers’ conduct
regarding which payments to prioritize
while serving our country.
(p) Any of the Required Disclosures
Identified in This Part
Proposed § 463.3(p) prohibited
misrepresentations of any of the
required disclosures identified in this
part. As the Commission noted in its
NPRM, this was including but not
limited to representations that limit or
contradict the required disclosures.236
Upon careful review and consideration
of the comments, the Commission is
finalizing paragraph (p) of § 463.3 as
proposed.
The Commission received a
dealership association comment that
contended generally that the proposed
prohibited misrepresentations in this
provision were already addressed in
State statutes and regulations, and
asserted that such State measures
should suffice given that, according to
the commenter, State regulators are
more readily available to the public. As
discussed in SBP III.C.1, the
Commission has seen no harm to
consumers or competition from
duplicative prohibitions of deceptive
conduct, and commenters did not cite
State laws that permit
misrepresentations or otherwise present
a possible conflict with the Rule.
Moreover, the Final Rule provides
additional remedies that will benefit
consumers who encounter conduct that
is already illegal under State or Federal
law, including by adding a mechanism
for the Commission to redress
consumers injured by a dealer’s
violation of the rule, and will assist law-
abiding dealers that presently lose
business to competitors that act
unlawfully. Furthermore, State laws
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625	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
237 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ such unfair or deceptive
acts or practices).
238 15 U.S.C. 45.
239 Comment of Or. Consumer Just., Doc. No.
FTC–2022–0046–8492 at 4; cf. Individual
commenter, Doc. No. FTC–2022–0046–0144
(recommending the disclosed offering price
separately list MSRP, markup, all fees, and add-on
costs); Comment of Legal Aid Just. Ctr., Doc. No.
FTC–2022–0046–7833 at 2 (‘‘[D]ealers should be
required to verbally disclose and explain in a
language the customer understands the material
terms of the contact [sic] (including APR, total
number of monthly payments required, etc.) before
customers sign[] the contract and receive the
customers’ consent that they understand these
terms. After this verbal disclosure, a consent form
should be required. This form should be provided
in the language preferred by the customer, and
should ensure that the customer was provided with
accurate and agreed-upon terms prior to signing.’’);
Individual commenter, Doc. No. FTC–2022–0046–
1641 (‘‘Mortgage lenders are required to give a
borrower a disclosure document prior to closing to
show all costs and expenses; car dealers should
have to do the same thing.’’).
240 In addition to the disclosures noted, a few
commenters requested additional provisions to
address concerns regarding transparency in pricing,
Continued
may provide more or less specific
requirements, as long as those
requirements are not inconsistent with
part 463, and in the event of an
inconsistency, the Rule only affects
such State law to the extent of the
inconsistency. Accordingly, the
Commission adopts this provision
without modification from its original
proposal.
The Commission hereby determines it
is an unfair or deceptive act in violation
of the FTC Act for any dealer to make
any misrepresentations, expressly or by
implication, regarding material
information about the subjects set forth
in the paragraphs of § 463.3. Such
misrepresentations are likely to cause
consumers to waste significant time or
money beyond what dealers led them to
believe would be necessary to purchase
or lease a vehicle. Thus, these
misrepresentations are material and are
likely to cause substantial injury to
consumers. This injury is not reasonably
avoidable by consumers themselves
because information about the truth or
falsity of the dealer’s misrepresentations
is within the control of the dealer, and
there are no countervailing benefits to
consumers or to competition from the
illegal practice of making
misrepresentations. Further, these
provisions also serve to help prevent
dealers from failing to make disclosures
required by § 463.4, and from charging
for add-ons that provide no benefit and
from failing to obtain express, informed
consent for charges, as required by
§ 463.5, including by prohibiting
misrepresentations regarding costs and
terms. 237 To reflect this, and without
changing any substantive requirements
for covered entities, the Commission is
adding the following sentence to the
end of § 463.3, at newly designated
paragraph (q): ‘‘The requirements in this
section also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.4
and 463.5.’’ Thus, this Rule requires
dealers to refrain from making material
misrepresentations about the topics
enumerated in § 463.3. The prohibitions
contained in § 463.3 help protect
consumers from deceptive
representations and promote the ability
of honest dealers to compete on honest
terms.
D. § 463.4: Disclosure Requirements
1. Overview
The proposed rule included five
disclosure requirements for motor
vehicle dealers regarding certain pricing
and financing information (in proposed
§ 463.4(a) through (e)). These provisions
proposed to require dealers to disclose
a vehicle’s offering price; an add-on list
with each optional add-on for which the
dealer charges consumers and the price
of each such add-on; that such add-ons
are not required and that the consumer
can purchase or lease a vehicle without
the add-ons; and information about a
vehicle’s total of payments when
making certain representations about
monthly payments.
In its NPRM, the Commission
specifically requested comments
regarding key aspects of the proposed
disclosures. In response, various
stakeholder groups and individuals
provided comments regarding the
proposed provisions. In this section, the
Commission discusses the comments,
responses to the comments, and any
changes made to this section based on
the comments.
The Commission received many
comments in favor of its proposal,
including from consumer groups,
financial services groups, dealerships
and dealership employees, individual
consumers, and others. These comments
supported the proposed disclosures as
addressing bad actors and unlawful
practices in the automotive marketplace
while promoting transparency, reducing
consumer confusion, and refraining
from inhibiting consumer choice or
materially increasing the time or
paperwork required.
A number of such comments,
however, urged the Commission to
adopt additional disclosures, both in the
areas covered by its proposal and
elsewhere. Regarding disclosures
covered in the proposal, for example,
commenters suggested more detailed
requirements, including regarding
specific disclosure language and
specific placement of disclosures. The
Commission agrees with commenters
that key information affecting pricing,
add-ons, and costs must be disclosed
clearly and conspicuously to consumers
in order to address consumer deception
and unauthorized charges during the
motor vehicle buying and leasing
process. To provide flexibility for
dealers and room for disclosures to be
made in a manner that is clear and
conspicuous to consumers in particular
circumstances, however, the
Commission declines to include
additional prescriptive language about
the form of such disclosures. Further,
the Commission emphasizes that, in
accordance with the provision being
finalized at § 463.3(p), any material
misrepresentations regarding the
disclosures in the Final Rule violate
section 5 of the FTC Act 238 and part
463.
The additional disclosures
recommended by commenters included,
inter alia: a disclosure regarding the
installation and use of any electronic
disabling devices; a disclosure
explaining the fees certain lenders may
charge to accept a consumer’s loan
application; a disclosure of the invoice
price, or the price a dealer paid the
manufacturer for the vehicle; a
disclosure of any potential value gap
between a vehicle’s price and its
appraised value; a disclosure, prior to
purchase negotiations, of any potential
financing limitations imposed by the
dealer; a disclosure of credit
characteristics relied upon by the dealer
and certain terms; a disclosure that, as
with a mortgage loan settlement
statement, itemizes all the elements of
the sale for car purchases; 239 and
disclosure signage in dealership
showrooms or on sales desks explaining
that add-ons are not required. As for
disclosures in additional areas, the
Commission recognizes that vehicle
purchase and lease transactions are
lengthy and document-heavy, and while
consumers may benefit from additional
information, each additional disclosure
requirement could increase the cost to
comply with part 463 and would risk
crowding out the information in the
Commission’s proposed disclosures.
Accordingly, the Commission has
determined not to expand § 463.4 of this
Final Rule to include additional
disclosures.240 The Commission will
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626 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
including related to interest rates, and that the Rule
require dealers to maintain a fiduciary relationship
to customers. The Commission recognizes the
concerns regarding pricing transparency and
deceptive conduct related to pricing, and will
continue to monitor such issues, including after this
provision (§ 463.4(a), offering price disclosure) and
the misrepresentation provisions (§ 463.3) are in
effect.
241 Comment of Nat’l Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 104, 122; Comment of
Ohio Auto. Dealers Ass’n, Doc. No. FTC–2022–
0046–6657 at 6, 9; see Comment of Compliance
Sys., Doc. No. FTC–2022–0046–7836 at 1.
242 Each year since FY2002, the Small Business
Administration’s Office of the National
Ombudsman has rated the Federal Trade
Commission an ‘‘A’’ on its small business
compliance assistance work. See U.S. Small Bus.
Admin., ‘‘National Ombudsman’s Annual Reports
to Congress,’’ https://www.sba.gov/document/
report—national-ombudsmans-annual-reports-
congress (providing reports from FY2013–FY2020);
Letter from Edith Ramirez, Chairwoman, Fed. Trade
Comm’n, to Senator David Vitter, Chairman, Comm.
on Small Bus. and Entrepreneurship at 1 (Nov. 16,
2015), https://www.ftc.gov/system/files/documents/
reports/federal-trade-commission-rule-compliance-
guides-small-businesses-other-small-entities-
commission/eighth_section_212_report_to_
congress_july_2014-june_2015.pdf (citing
Commission’s ‘‘A’’ rating for ‘‘Compliance
Assistance’’ by the Nat’l Ombudsman from
FY2002–FY–2014).
continue to monitor the marketplace to
evaluate the efficacy and sufficiency of
the present disclosures.
In addition, the Commission received
a number of comments requesting that
it publish forms for the disclosures
proposed in this section. These
comments requested either that the use
of such forms be required or that the
Commission provide a ‘‘safe harbor’’
from liability under part 463 for
dealerships that utilize them.241 The
Commission did not receive, in the
course of public comment, evidence
sufficient to conclude that uniform
formatting for the delivery of such
disclosures would be necessary to make
them effective. Nor has the Commission
received evidence to establish that
mandating use of a particular form
disclosure would obviate deceptive and
unfair conduct in all circumstances. For
example, forms that were required or
that provided a ‘‘safe harbor’’ from
liability could be presented (1) with
other elements that are distracting or
confusing, (2) with information that
modifies or contradicts the form
disclosures, (3) with instructions,
discouragement, or time pressure that
causes consumers not to review the
forms or that makes such review
impracticable or impossible, or (4)
through the use of forms that are pre-
completed in whole or in part, to the
extent this makes the information
therein easy for consumers to miss. The
end result of such an approach would
be to enable deception while also
making such deception more difficult to
detect. Accordingly, the Commission
declines to mandate particular
disclosure forms as a requirement across
all transactions or to shield against
liability even where dealers otherwise
engage in deceptive or unfair conduct.
The Commission also notes that,
because it is not mandating particular
disclosure forms, dealers that are
already complying with the law will
avoid additional compliance costs
associated with using a new form, and
all dealers will have the flexibility to
convey the disclosures in a manner that
is clear and conspicuous under the
particular circumstances of their
transactions.
The Commission also received
comments that expressed opposition to
this section. Some individual
commenters argued that the required
disclosures were unduly extensive,
prescriptive or untested, or that the
substance of these disclosures is already
conveyed to consumers before the
consummation of the transaction. In
response, the Commission stresses that
this section is limited in both its scope
and its requirements. Each of the
disclosures in § 463.4 is focused on one
key category of information: vehicle
price, add-on optionality, or total of
payments. This section requires the
clear and conspicuous disclosure of this
information but does not include
prescriptive requirements. So, for
example, a written disclosure would
have to be in a size that stands out, but
a specific font or font size is not
mandated, nor are the specific terms or
format used, nor are any particular uses
of capitalization, punctuation, ink color,
or paper color or size. The proposal
refrained from additional formal
mandates in order to provide dealers
with flexibility, within the bounds of
the law, to provide this essential
information, including so that dealers
already conveying this information in a
non-deceptive manner may continue to
do so. Accordingly, the Commission
also finds that testing of these
requirements is unnecessary.
Furthermore, each of the disclosure
requirements being finalized addresses
the unfair or deceptive act or practice of
withholding essential information from
consumers or presenting such
information to them in a deceptive
manner. After reviewing comments,
including those that contended the
proposal was not prescriptive enough,
the Commission concludes that this is
the correct approach, and as such, has
determined not to adopt any additional
specifications dictating the form or
manner in which the disclosures must
be presented to consumers. Here, as
elsewhere, the Commission will
continue its long track record of
working to assist with legal
compliance.242 Further, for dealers
already conveying this information
clearly and conspicuously, complying
with this provision should not be
burdensome.
Other commenters, including an
industry association, contended that
these disclosures would have the effect
of limiting the products and services
consumers are offered or otherwise
restrict lawful sales practices. In
response, the Commission reiterates that
this section focuses on one of the most
foundational pieces of information
regarding the sale of vehicles, add-ons,
and financing: their cost. Dealers
already providing this information in a
non-deceptive manner will need to
make minimal, if any, changes to their
disclosure practices. The Commission
has seen no evidence that disclosing
cost information has caused dealers to
cease offering products.
Some commenters, including
dealership associations, contended that
the presence of some State standards in
this area makes Federal regulation
unnecessary or contradictory. In
response, the Commission notes that it
drew from several State statutory and
regulatory provisions in formulating its
proposal, and it observes that the
existence and functioning of such
standards demonstrates the
practicability of such disclosure
measures. Dealers can comply with any
State laws requiring the same conduct
as well as this section. Similarly, to the
extent a State requires additional
disclosures regarding vehicle price, add-
ons, or total of payments, nothing
prevents dealers from providing those
disclosures as well as those required
under § 463.4 so long as the State
disclosures are not inconsistent with
part 463. To the extent there is truly a
conflict between this section and State
law, § 463.9 provides that part 463 will
govern, but only to the extent of the
inconsistency, and only if the State
statute, regulation, order, or
interpretation affords consumers less
protection than does the corresponding
provision of part 463. Moreover, a
number of States do not have existing
standards in the areas covered by this
part; in such States, the Commission’s
disclosures will operate as a key
safeguard.
Other commenters, including an
industry association, argued that
requiring disclosures would increase the
time and paperwork for consumers to
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627	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
243 See § 463.4(a) (stating that Offering Price must
be disclosed in writing if the communication with
the consumer, or the dealer’s response, is in
writing); § 463.4(c), (d), (e) (requiring that
disclosures be in writing if the dealer’s associated
representation is in writing).
244 Milavetz, Gallop & Milavetz, P.A. v. United
States, 559 U.S. 229, 249 (2010) (emphasis original).
245 Zauderer v. Off. of Disciplinary Couns., 471
U.S. 626, 651 (1985).
246 Id. at 652.
247 Id. at 652–53.
248 Id. at 651.
249 See id. at 651.
250 Zauderer v. Off. of Disciplinary Couns., 471
U.S. 626, 651 (1985) (emphasis original).
251 Ass’n of Priv. Sector Colls. & Univs. v.
Duncan, 110 F. Supp. 3d 176, 199 (D.D.C. 2015),
aff’d, 640 F. App’x 5 (D.C. Cir. 2016).
252 Spirit Airlines, Inc. v. U.S. Dep’t of Transp.,
687 F.3d 403, 412–15 (D.C. Cir. 2012) (internal
brackets omitted).
253 Am. Hosp. Ass’n v. Azar, 983 F.3d 528, 540
(D.C. Cir. 2020) (quoting Zauderer v. Off. of
Disciplinary Couns., 471 U.S. 626, 650–651 (1985)).
254 Further, as explained in the paragraph-by-
paragraph analysis of § 463.4 in SBP III.D.2, the
failure to disclose this information is itself a
deceptive or unfair practice.
255 Milavetz, Gallop & Milavetz, P.A. v. United
States, 559 U.S. 229, 249 (2010).
256 The commenter attributes the intermediate
scrutiny test to Pagan v. Fruchey, 492 F.3d 766, 771
(6th Cir. 2007), though it was in fact formulated by
the Supreme Court in Central Hudson.
257 Milavetz, Gallop & Milavetz, P.A. v. United
States, 559 U.S. 229, 249 (2010).
buy or lease a vehicle. In response, the
Commission notes that the section
includes requirements for the disclosure
of salient, material information early in
the process, thus eliminating the time
consumers would otherwise spend
pursuing misleading offers—time which
can then be spent pursuing truthful
offers in the absence of deception. These
measures will further allow consumers
to compare dealerships in advance
based on truthful terms; thus,
dealerships will earn business based on
the actual terms offered, and not lose
business to dealers who compete by
omitting or hiding actual terms.
Moreover, the disclosures required by
this section are limited to key
information affecting pricing, add-ons,
and total of payments, needed to
address consumer deception and
unauthorized charges during the
vehicle-buying and leasing process, and
are required to be in writing only where
the dealer is responding to written
consumer communications or already
providing consumers with
representations in writing.243 As
explained in detail in the paragraph-by-
paragraph analysis of § 463.4(e) in SBP
III.D.2(e), in order to avoid any
additional written disclosure
requirements, the Commission is
declining to mandate that its required
disclosures be made in writing in every
instance.
An industry association commenter
argued that the proposed disclosure
requirements in § 463.4 of the NPRM
violate the First Amendment. This
commenter contended that the proposed
disclosures constituted compelled
speech; that they would be subject to
intermediate judicial scrutiny were they
to be challenged in court; and that, in
the event of such a challenge, the
Commission’s actions would fail to
satisfy that standard of scrutiny, or a
less stringent one.
The Commission first addresses the
applicable First Amendment standard of
review for this rulemaking effort in the
event of a judicial challenge. If so
challenged, the disclosures in § 463.4
would not be subject to intermediate
judicial scrutiny, but instead to the less
rigorous review standard set forth in
Zauderer v. Office of Disciplinary
Counsel, 471 U.S. 626, 651 (1985).
When, as is the case here, a regulation
‘‘impose[s] a disclosure requirement
rather than an affirmative limitation on
speech,’’ and is ‘‘directed at misleading
commercial speech,’’ Zauderer
governs.244
Under that standard, a commercial
speaker’s rights ‘‘are adequately
protected as long as disclosure
requirements are reasonably related to
the State’s interest in preventing
deception of consumers.’’ 245 In
Zauderer, the Court upheld a rule
requiring attorneys who advertised on a
contingency-fee basis to disclose that
clients who did not prevail in litigation
might nevertheless be liable for
significant costs.246 The Court found
that ‘‘the possibility of deception is []
self-evident’’ when an advertisement
discloses only one type of charge (fees)
without mentioning another (costs).247
In upholding the challenged rule as
reasonable, the Court emphasized that
the rule merely mandated disclosure of
‘‘purely factual and uncontroversial
information about the terms under
which . . . services will be available,’’
and that the ‘‘constitutionally protected
interest in not providing [such]
information . . . is minimal.’’ 248
As in Zauderer, § 463.4 requires only
‘‘purely factual and uncontroversial
information about the terms under
which [commercial goods or services]
will be available.’’ 249 These material
facts include the offering price of the
motor vehicle; that add-on products or
services are not required and the
consumer can purchase or lease the
vehicle without the add-on, if true; the
total amount the consumer will pay to
purchase or lease the vehicle and, if that
amount assumes the consumer will
provide consideration, the amount of
such consideration; and when a lower
monthly payment will increase the total
amount the consumer will pay to
purchase or lease the vehicle. As in
Zauderer, any ‘‘constitutionally
protected interest’’ a motor vehicle
dealer might have ‘‘in not providing
[this] factual information . . . is
minimal.’’ 250
Courts applying Zauderer have
repeatedly affirmed the constitutionality
of regulations requiring disclosures of
complete information about the cost of
a purchase, which are similar to the
required disclosures in § 463.4. For
example, courts upheld a regulation
requiring schools to ‘‘disclose the ‘total
cost’ of . . . tuition, fees, books, and
supplies for its programs,’’ finding that
this information was ‘‘purely factual
and uncontroversial.’’ 251 In another
instance, a court upheld under Zauderer
a rule requiring airlines to prominently
disclose the ‘‘total, final price’’ of
airfare, finding it was ‘‘reasonably
related to the government’s interest in
preventing deception of consumers.’’ 252
In yet another case, a court upheld a
rule requiring hospitals to disclose their
rates to consumers, finding they were
‘‘ ‘factual and uncontroversial’ and
directly relevant to ‘the terms under
which [hospitals’] services will be
available’ to consumers.’’ 253 The
disclosure provisions the Commission is
finalizing in § 463.4, like the provisions
upheld in these cases, merely require
factual and uncontroversial disclosures
to provide consumers with accurate and
timely pricing and financing
information as they consider motor
vehicle purchases and leases.254
As discussed, Zauderer applies here
because § 463.4 would ‘‘impose a
disclosure requirement rather than an
affirmative limitation on speech.’’ 255
The Commission notes, however, that
disclosure requirements in § 463.4
likewise would pass muster even if, as
the commenter suggested, they were
evaluated under the intermediate
scrutiny standard formulated in Central
Hudson Gas & Electric Corp. v. Public
Service Commission of New York, 447
U.S. 557 (1980), and subsequent cases
applying that standard.256 As an initial
matter, Central Hudson applies not to
disclosure requirements, such as those
the commenter challenges, but to
affirmative limitations on speech.257
The Central Hudson test requires
restrictions on lawful, non-misleading
speech to satisfy three remaining
criteria. First, there must be a
substantial governmental interest in the
restriction; second, the restriction must
directly advance that interest; and third,
the restriction may not be more
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628 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
258 See Cent. Hudson Gas & Elec. Corp. v. Pub.
Serv. Comm’n of N.Y., 447 U.S. 557, 566 (1980).
Although the Supreme Court in Central Hudson
treated the question whether regulated speech is
truthful and non-misleading as one of four criteria,
it has alternately treated this question as a threshold
inquiry, after which the three remaining criteria are
evaluated. See Fla. Bar v. Went For It, Inc., 515 U.S.
618, 623–24 (1995). Because the government is
‘‘free to prevent the dissemination of commercial
speech that is false, deceptive, or misleading,’’
Zauderer v. Off. of Disciplinary Couns., 471 U.S.
626, 638 (1985), if a challenged restriction fails this
threshold inquiry, Central Hudson does not apply.
259 Bd. of Trs. of State Univ. of N.Y. v. Fox, 492
U.S. 469, 480 (1989).
260 Id. (citation omitted).
261 Id. (quoting In re R.M.J., 455 U.S. 191, 203
(1982)).
262 NPRM at 42012.
263 Edenfield v. Fane, 507 U.S. 761, 769 (1993).
264 Nothing could be more directly relevant to
accurate pricing than disclosure of the actual price
itself. See Spirit Airlines, Inc. v. U.S. Dep’t of
Transp., 687 F.3d 403, 415 (D.C. Cir. 2012)
(substantial governmental interest ‘‘is clearly and
directly advanced by a regulation requiring that the
total, final price be’’ prominently disclosed).
265 Id. Further, the Commission has taken into
account prior enforcement work and other
initiatives. See NPRM at 42022–25 (explaining
rationale behind disclosure requirements and
extensively citing prior enforcement experience and
record evidence); see also Lorillard Tobacco Co. v.
Reilly, 533 U.S. 525, 555 (2001) (‘‘We do not . . .
require that empirical data come accompanied by
a surfeit of background information. We have
permitted litigants to justify speech restrictions by
reference to studies and anecdotes . . . or even . . .
based solely on history, consensus, and simple
common sense.’’ (internal quotation marks and
alterations omitted)); Fla. Bar v. Went For It, Inc.,
515 U.S. 618, 628, (1995) (same); Burson v.
Freeman, 504 U.S. 191, 211 (1992) (finding speech
restrictions justified even under strict scrutiny
based on a ‘‘long history, a substantial consensus,
and simple common sense’’); Milavetz, Gallop &
Milavetz, P.A. v. United States, 559 U.S. 229, 251
(2010) (‘‘When the possibility of deception is as
self-evident as it is in this case, we need not require
the State to conduct a survey of the public before
it may determine that the advertisement had a
tendency to mislead.’’ (internal quotation marks
and alterations omitted)); Am. Hosp. Ass’n v. Azar,
983 F.3d 528, 540 (D.C. Cir. 2020) (finding
reasonable relationship between rule and
governmental interests where ‘‘the Secretary,
relying on complaints from consumers, studies of
state initiatives, and analysis of industry practices,
reasonably concluded that the rule’s disclosure
scheme will help the vast majority of consumers’’).
extensive than necessary to advance the
interest. 258 Under the Central Hudson
test, it is not necessary that ‘‘the manner
of restriction is absolutely the least
severe that will achieve the desired
end.’’ 259 Rather, there merely must be a
‘‘ ‘fit’ between the [restriction’s] ends
and the means chosen to accomplish
those ends—a fit that is not necessarily
perfect, but reasonable.’’ 260 In other
words, the restriction should be ‘‘one
whose scope is ‘in proportion to the
interest served.’ ’’ 261
The disclosure provisions the
Commission is finalizing in § 463.4
satisfy these criteria. First, the
disclosure provisions serve a substantial
governmental interest by requiring
motor vehicle dealers to provide
accurate terms, and in particular,
accurate pricing information, in
advertising and sales discussions.262 As
the Supreme Court has made clear, the
government’s ‘‘interest in ensuring the
accuracy of commercial information in
the marketplace is substantial.’’ 263 And
as explained in the paragraph-by-
paragraph analysis of § 463.4 in SBP
III.D.2, the disclosure requirements set
forth there are aimed at ensuring that
consumers receive accurate pricing
information and other material
transaction terms, and that dealers
refrain from the unfair or deceptive act
or practice of failing to provide this
information.264 The required
disclosures directly advance, ‘‘fit’’
reasonably with, and are proportionate
to, their intended ends of prohibiting
and preventing unfair or deceptive
conduct in motor vehicle transactions.
They prevent dealers from luring
consumers to dealerships with unfair or
deceptive advertising tactics, from
padding prices with unwanted add-on
products or services, and from
misdirecting consumers about the true
cost of a vehicle through discussions of
monthly payment amounts. The
disclosure requirements effectively
‘‘impose[] no burden on speech other
than requiring [motor vehicle dealers] to
disclose the total price consumers will
have to pay. This the First Amendment
plainly permits.’’ 265
After careful consideration of the
comments, the Commission has
determined to finalize the introductory
paragraph of § 463.4 and certain of the
disclosure requirements included in its
NPRM, with some minor textual
changes. The introductory paragraph of
the NPRM proposed that it would be ‘‘a
violation of this part and an unfair or
deceptive act or practice in violation of
section 5 of FTC Act for any Motor
Vehicle Dealer to fail to make any
disclosure required by this section,
Clearly and Conspicuously.’’ The
Commission is finalizing this paragraph
with the minor textual change of
substituting ‘‘Federal Trade Commission
Act’’ for ‘‘FTC Act’’ for clarity and
conformity with other parts of the Rule.
The Commission is also adding the
word ‘‘Covered’’ to the defined term
‘‘Covered Motor Vehicle Dealer’’ to
conform with the revised definition at
§ 463.2(f), discussed in SBP III.B.2(f).
The Commission is finalizing the
specific disclosure requirements
proposed at § 463.4(a), (c), (d), and (e),
with modifications noted in the
paragraph-by-paragraph analysis in SBP
III.D.2(a), III.D.2(c), III.D.2(d), and
III.D.2(e).
In the paragraphs that follow, the
Commission discusses the disclosure
requirements proposed in the NPRM,
the comments relating to the specific
disclosures, responses to the comments,
and the disclosure requirements
adopted in § 463.4.
2. Paragraph-by-Paragraph Analysis of
§ 463.4
(a) Offering Price
The offering price disclosure
provision in proposed § 463.4(a)
required dealers to disclose a vehicle’s
offering price in advertisements that
reference a specific vehicle or represent
a monetary amount or financing term for
any vehicle, as well as upon receipt of
a consumer communication about a
specific vehicle or any monetary
amount or financing term for any
vehicle. The Commission proposed
defining ‘‘Offering Price,’’ in § 463.2(k),
as ‘‘the full cash price for which a
Dealer will sell or finance the motor
vehicle to any consumer, excluding only
required Government Charges.’’ The
Commission also proposed defining the
term ‘‘Government Charges,’’ then in
§ 463.2(h), to mean ‘‘all fees or charges
imposed by a Federal, State or local
government agency, unit, or department,
including taxes, license and registration
costs, inspection or certification costs,
and any other such fees or charges.’’ For
the reasons discussed in the following
paragraphs, the Commission is
finalizing the offering price disclosure
provision at § 463.4(a), as well as the
corresponding ‘‘Offering Price’’ and
‘‘Government Charges’’ definitions in
§ 463.2 (finalized at § 463.2(k) and (i),
respectively), largely as proposed. The
Commission is including a modification
to the offering price definition to clarify
that dealers may, but need not, exclude
required government charges from a
motor vehicle’s offering price, and is
substituting ‘‘Vehicle’’ for ‘‘motor
vehicle’’ to conform with the revised
definition at § 463.2(e), discussed in
SBP III.B.2(e). Additionally, the
Commission is including a
typographical modification to the
‘‘Government Charges’’ definition to
include a serial comma for consistency.
The Commission also is capitalizing the
defined terms ‘‘Vehicle’’ throughout, in
its singular, plural, and possessive
forms, and is adding language to the end
of § 463.4(a)(3)(ii) clarifying that the
requirements in § 463.4(a) ‘‘also are
prescribed for the purpose of preventing
the unfair or deceptive acts or practices
defined in this part, including those in
§§ 463.3(a) and (b) and 463.5(c).’’
The Commission received a
significant number of comments on its
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629	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
266 See, e.g., Comment of Nat’l Consumer L. Ctr.
et al., Doc. No. FTC–2022–0046–7607 at 17–20.
267 Individual commenter, Doc. No. FTC–2022–
0046–6649.
268 Individual commenter, Doc. No. FTC–2022–
0046–6225.
269 Individual commenter, Doc. No. FTC–2022–
0046–6089.
270 Individual commenter, Doc. No. FTC–2022–
0046–6656.
271 Individual commenter, Doc. No. FTC–2022–
0046–5238.
272 Individual commenter, Doc. No. FTC–2022–
0046–5227.
273 Individual commenter, Doc. No. FTC–2022–
0046–5228.
274 Individual commenter, Doc. No. FTC–2022–
0046–5219.
275 Individual commenter, Doc. No. FTC–2022–
0046–0900.
proposed offering price disclosures.
Many commenters supported the
Commission’s proposal to require
dealers to provide uniform,
comprehensive, and accurate pricing
information. These commenters noted,
inter alia, that despite laws generally
prohibiting unfair or deceptive acts or
practices, present market conditions fail
to balance the ‘‘playing field’’ of
information between consumers and
motor vehicle dealers, allowing dealers
to take advantage of consumers by
hiding information about pricing,
imposing surprise price increases, or
using pricing advertising tactics that
systematically deceive consumers.266
Many consumers also underscored the
need for the proposed disclosure
requirements. Commenters in support
noted, for instance:
• Buying a car has always been a
horrible experience for me. The endless
driving to dealerships who advertise
vehicles for a sale price only to find that
the vehicle does not exist, or the price
advertised for the specific vehicle is not
what they had posted. The
salespersons[’] tactics, always
attempting to put you in a vehicle based
on a car payment, along with dancing
around the simple question of the actual
out the door price of the vehicle. . . .
It is such a shame that the dealerships
just do not give the customer the price
of the vehicle without them wanting to
start a ‘‘folder’’ and take all of your
information, a copy of your drivers
license, ect [sic] . . . . Please regulate
the automobile dealerships, especially
now when it seems they are at their
worst with these ridiculous add on fees
(paint and upholstery protector, ect [sic]
which was not added at the
manufacturer) along with adjustments
on top of the MSRP.267
• Buying a car in the US is now akin
to what I used to do in the Army: Before
going into the dealership, I have to
spend hours conducting ‘‘intelligence
prep of the battlefield’’ to understand
the tactics the dealership’s sales and
finance & incentives staff will throw at
me. . . . It has been made increasingly
worse by dealerships that advertise a
false price to entice a buyer but ‘‘bait-
and-switch’’ with Additional Dealer
Mark-Ups (ADM), and bogus fees and
charges for supposedly dealer-installed
items tha[t] the consumer doesn’t want
in the first place. . . . Unless the FTC
passes this proposed rule, things will
get worse before they get better.268
• Though I am not usually a fan of
adding layers of governmental
regulations to what should be a simple
transaction, there definitely needs to be
a change in what is allowed in the car
buying process. . . . As consumers we
should not have to spend hours reading
tiny print in obscure sections of a
website in order to validate a posted
price. The price should not be elevated
at the last minute in a hidden line item
such as a mandatory detailing package
or service plan you do not want or need
to the tune of thousands of dollars. . . .
We should not have to spend hours at
a dealer and go through mounds of
paperwork with a fine tooth comb in
order to simply see the ACTUAL price
of the vehicle. It is a ridiculous ploy to
confuse people into purchasing things
they do not want or need.269
• I have been trying to buy a new car
for the last two years but with
unexpected costs I am not able to have
a clear written contract on the car and
its pricing. I have contacted several
dealers in my area and many of them
have issues that prevent me from
commited [sic] to buying from them.
This ranges from them not being able to
give me a written sheet of the cost of the
car, fees, ect [sic] showing me how
much I will be paying in the end. . . .
Most of the dealerships I spoke to would
not give me a sales sheet of the vehicle
I want to purchase to show me how
much I will be paying in total. I would
have to put a down payment and just
trust them over the phone. If I can’t get
it in writing it is hard to commit to a
down payment I could lose.270
• Vehicles are typically the second
largest purchase made by people. Given
the choices available according to
respective needs/wants, purchasing a
vehicle should be the same as going to
any other mass-market retailer and
picking that appliance with a set price.
So why do we need to haggle or expend
additional intellectual and emotional
bandwidth towards ensuring that the
transaction is as initially stated? There
are instances where I’d rather be back
conducting combat operations in Iraq
than go through the dealer process, as it
incenses me that this corrupt way of
doing business is given a free pass. . . .
If you are a reputable and honest
dealership, then there should be no
worry; it will be business as usual.271
• Think of us, the car buying public.
We are mad as hell. Please start fixing
this crooked business model where
nobody even knows what they are
supposed to be paying.272
• As a consumer, I fully support this
new proposed rules update. The
dealership experience has been an
anxiety provoking event everytime [sic]
I attempt to purchase a car. I have
multiple friends and family that all
report shady practices, bait and switch,
and up charging at point of sale during
their car buying process. Please pass
these regulations! 273
• I am writing in FULL support of the
FTC rules and regulations. . . . Buyers
deserve to know Out the door prices and
not be hassled by nonsensical add-ons
for the dealership’s benefit. People
should feel comfortable and excited to
buy their 1st car rather than the dread
I feel.274
• We find the vehicle we came to see
and see a sticker beside the
manufacture[r] one with added prices.
These typically include car alarms, VIN
etching, protection packages, floor mats,
market adjustment, etc. We go to
purchase the vehicle now and they say
that none of these can be removed from
the price of the car (even though they
advertised them without them at a much
lower price). We attempt to negotiate
them off and find out their [sic] is an
additional addon like reconditioning
fee. We fail at getting the price of the
vehicle down to the advertised price
and leave.275
• I have financed all of my cars, and
the total cost for the vehicle has always
been hidden, either physically or
through the dealer trying to move focus
onto other numbers such as the monthly
payment. Since monthly payments will
vary due to credit history, down
payments, interest rates, taxes, and
more, it is not an effective tool for
measuring a deal. $300 a month could
be a great deal on one car, and a horrible
deal on another. I would greatly benefit
from the proposal[’]s provision to
clearly list and advertise the price of the
car without additional add[-]ons. It
would greatly reduce the work of
finding the right car at the right
dealership. In each of the 3 cases, I have
gone to multiple dealers, wanting to
purchase a specific vehicle on their lot,
and walked away because of the hidden
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630 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
276 Individual commenter, Doc. No. FTC–2022–
0046–6490.
277 Individual commenter, Doc. No. FTC–2022–
0046–3693.
278 A number of these commenters further
requested that the term ‘‘Offering Price’’ include
additional dealer fees that are known to the dealer
at the time they are advertised and imposed by the
dealer rather than a government entity. These
requests are addressed in the discussion of the
Commission’s definition of ‘‘Government Charges’’
in SBP III.B.2(i).
279 If a dealer does not require any consumer to
pay for an add-on, current law, as well as
provisions in this Rule, require dealers to refrain
from deception in this regard. See, e.g., § 463.3(a),
(b) (prohibiting material misrepresentations
regarding the costs or terms of purchasing,
financing, or leasing a vehicle, as well as any costs,
limitation, benefit, or any other material aspect of
add-ons); § 463.4(c) (requiring disclosures regarding
optional add-ons).
280 See, e.g., Impose, Cambridge Advanced
Learner’s Dictionary & Thesaurus, https://
dictionary.cambridge.org/us/dictionary/english/
impose (‘‘to officially force a rule, tax, punishment,
etc. to be obeyed or received’’).
281 Individual commenter, Doc. No. FTC–2022–
0046–7445 at 15–16.
costs being added to the price of the
car. 276
• I work as a salesperson at a local
Nissan dealership. . . . Currently,
dealerships across the US, including the
one I work for, have made the car
buying process needlessly confusing,
expensive, and frustrating by engaging
in false advertising and hidden add-on
products. While these practices are very
unscrupulous, they are incredibly
effective at what they are designed to
do: drive revenue for the store. If these
regulations are passed, they would
certainly take a significant toll on my
personal finances. But the longer I work
in my position, the more I realize that
no one should be allowed to engage in
such exploitative conduct in the course
of running a business. . . . Good,
ethical dealers will not have to make
any changes if these rules are put into
place. I also happen to know that
several of the comments in opposition
to the proposed regulations are solicited
by dealerships and their management.
The dealership group I work for, for
example, sent out a company-wide
email encouraging employees to post
comments on this site in opposition to
these rules. But there’s no question: The
American people want these
regulations. They need these
regulations. The only ones that don’t
want them are crooked auto dealerships
across the US. It’s been far too long that
such dealerships have run amuck with
underhanded sales practices and
deception. I would urge the FTC to
stand strong against . . . dealership
groups[]or any lobbyists and get these
rules passed! I know there will be stiff
resistance but it’s of the utmost
importance to good dealerships,
transparent salespeople, and, most
importantly, the average American
consumer! 277
A number of commenters supported
the offering price disclosure
requirement and associated definitions;
some expressed support while urging
additional protections. A number of
commenters, including consumer
advocacy organizations as well as
individual commenters, requested that
the Commission require a vehicle’s
offering price to include additional
items, such as charges for add-ons
attached to the vehicle when it is
offered, and charges for add-ons
required by the dealer to be sold with
the vehicle; to exclude rebate
information, including rebates
contingent upon the use of a certain
financing company or upon qualifying
for any other rebate; and to prohibit the
exclusion of certain charges, including
the advertisement of an offering price
that factors out a down payment
amount.278
To begin, the Commission notes that
by the terms of the proposed ‘‘Offering
Price’’ definition, the only charges a
dealer was permitted to exclude from a
vehicle’s offering price were required
government charges. Thus, under the
proposal, if a dealer were to charge any
consumer for a preinstalled add-on, or
require any consumer to pay for an add-
on to purchase or finance the vehicle,
then the charges for such add-ons would
be required to be included in the
vehicle’s offering price. 279 In addition,
while the proposed provision did not
prevent dealers from presenting
consumers with accurate and non-
misleading additional information,
including terms of limited availability,
the required offering price disclosure
needed to remain clearly and
conspicuously presented to consumers,
and could not be based on discounts or
rebates that are not available to ‘‘any
consumer,’’ including rebates
contingent upon the use of a certain
financing company or upon qualifying
for any other rebate. Similarly, under
the proposal, if the dealer required a
down payment amount to sell or finance
the vehicle, the offering price could not
factor out such an amount.
With respect to the proposed
definition of ‘‘Government Charges,’’
which is used in the definition of
‘‘Offering Price,’’ a number of consumer
advocacy organization commenters
contended the definition should be
narrow to accomplish the Commission’s
goal of ensuring that consumers have
access to accurate pricing information
before they enter a dealership,
emphasizing that only charges that are
imposed by, and payable to, a
government entity should be permitted
to be excluded from a vehicle’s offering
price, and that document fees that some
States allow dealers to charge should
not be excluded from the offering price.
The Commission notes that, as
proposed, the term ‘‘Government
Charges’’ is limited to those charges
‘‘imposed by a Federal, State or local
government agency, unit, or
department.’’ The Commission specified
in this proposed definition that such
charges need be ‘‘imposed by’’ a
government entity rather than, for
instance, having merely been
‘‘authorized by’’ or ‘‘allowed by’’ such
an entity. This language does not reach
charges that are authorized by a
government entity but not required,
since such charges have not been
‘‘imposed’’ 280 by the government. This
distinction therefore excludes from the
definition of ‘‘Government Charges’’
fees, such as dealership document
preparation fees that State or local law
does not require consumers to pay.
Furthermore, the definition of ‘‘Offering
Price’’ at § 463.2(k) permits only
‘‘required’’ government charges to be
excluded from a vehicle’s offering price.
Thus, charges the government does not
require consumers to pay, but allows the
dealer to charge or to pass along to the
consumer, such as document fees, must
be included in the disclosed offering
price if the dealer requires such charges
of any consumer.
Relatedly, an individual commenter
suggested that the Commission delete
the phrase ‘‘inspection or certification
costs’’ from the definition of
‘‘Government Charges’’ in order to avoid
confusion about the status of inspection
or certification charges that ‘‘are NOT
imposed by the Government,’’ as well as
explicitly state in the definition that the
term does ‘‘not include dealer document
or document processing fees (‘‘doc
fees’’), or electronic titling and
registration fees, which are not imposed
by the Government.’’ 281 Regarding the
phrase ‘‘inspection or certification
costs,’’ such costs that are not
‘‘imposed’’ by the government are
excluded from the definition of
‘‘Government Charges,’’ as the plain
language makes clear. Similarly, as
noted, dealer document or document
processing fees and any other fees that
are not imposed by the government are
excluded from the definition, as the
plain language states.
Some commenters, including a group
of State attorneys general, likewise
recommended that a vehicle’s offering
price include ‘‘anticipated’’ or
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631	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
282 See, e.g., Comment of 18 State Att’ys Gen.,
Doc. No. FTC–2022–0046–8062 at 7; Comment of
Consumer Att’ys & Advocs., Doc. No. FTC–2022–
0046–7695 at 2–3 (requesting that the vehicle’s
offering price include ‘‘an estimate of government
fees and charges such as sales tax and registration
based on the dealer’s location’’).
283 See § 463.2(k) (defining ‘‘Offering Price’’ as
‘‘the full cash price for which a Dealer will sell or
finance the Vehicle to any consumer, provided that
the Dealer may exclude only required Government
Charges’’).
284 Some commenters described situations in
which a dealer may decline to sell or finance a
vehicle to a particular consumer, including due to
legal requirements, irrespective of whether the
dealer otherwise intends to honor its offering price
disclosures. These situations include, for example,
a consumer who presented identity theft indicia
under the Commission’s Red Flags Rule, 16 CFR
681; a consumer on the Specially Designated
Nationals List maintained by the Office of Foreign
Assets Control; a consumer who cannot produce the
required proof of insurance or license to complete
the transaction; or a consumer who is abusive or
violent at the dealership. The Commission’s
offering price provision is a pricing disclosure; it
will not otherwise alter the status quo on whether
a given sale or financing transaction must be
consummated.
285 As is the case under current law, under part
463, any qualifying information necessary to
prevent deception regarding a material fact must be
conveyed clearly and conspicuously. See FTC
Policy Statement on Deception, supra note 42, at 1
n.4, 4.
‘‘estimated’’ government charges.282 The
Commission agrees that consumers
would benefit from knowing this
information early on in their shopping
experience, and notes that dealers are
permitted under this Final Rule to
provide additional, truthful information
along with a vehicle’s offering price.
Rather than requiring that anticipated
government charges be included in the
offering price, the Commission is
modifying the definition from its
original proposal to make clear that
dealers need not exclude any such
charges from the offering price. The
Commission will evaluate whether the
definition, as finalized, as well as its
associated disclosure, effectively
address deceptive and unfair market
conduct, and will consider future
modifications as market practices
evolve.
Thus, the Commission is finalizing a
definition of ‘‘Offering Price’’ that
clarifies that dealers may, but need not,
exclude required government charges
from a vehicle’s offering price that
meets the requirements of § 463.2(k). In
particular, the Commission is finalizing
a definition of ‘‘Offering Price’’ that
removes the phrase ‘‘excluding only’’
and adds the phrase ‘‘provided that the
Dealer may exclude only’’ in its place.
The definition also substitutes
‘‘Vehicle’’ for ‘‘motor vehicle’’ to
conform with the revised definition of
‘‘‘Covered Motor Vehicle’ or ‘Vehicle’’’
at § 463.2(e), such that the definition
reads as follows: ‘‘Offering Price means
the full cash price for which a Dealer
will sell or finance the Vehicle to any
consumer, provided that the Dealer may
exclude only required Government
Charges.’’
Other commenters, including
consumer advocacy organizations,
proposed additional requirements to the
disclosure at § 463.4(a): prescribing
formatting, posting, and presentation
requirements for offering price
information, such as attaching a written
offering price to each vehicle, providing
written offering price information in
response to consumer communications
regardless of whether the
communications are written, and
requiring offering price to be the most
conspicuous piece of information
displayed to consumers. Regarding the
manner in which the offering price must
be presented, the Commission proposed
that all disclosures under § 463.4,
including the offering price disclosure,
be presented clearly and conspicuously.
As previously discussed, the proposed
disclosure provisions were directed at
addressing unlawful conduct while
providing dealers with flexibility to
present such disclosures in a manner
that is clear and conspicuous to their
consumers under the particular
circumstances. Thus, the Commission
has determined not to adopt further
formatting, posting, or presentation
requirements for its offering price
disclosure.
Some commenters, including
consumer advocacy organizations and a
consumer protection agency, proposed
that the Commission adopt an
additional requirement providing that
dealers must accept an offer from a
buyer of the offering price. In response,
the Commission notes that, under its
proposal, if a dealer were requiring any
consumer to pay a price that was higher
than the disclosed offering price, or
adding other conditions—such as
requiring the use of a particular finance
company or the purchase of an add-on—
to obtain the vehicle at the offering
price, such practices would violate part
463, including the offering price
provision, which requires disclosure of
the full cash price for which the dealer
will sell or finance the vehicle to any
consumer,283 and the related
requirement the Commission is
finalizing under § 463.3(p), which
prohibits misrepresentations regarding
the required disclosures in part 463.284
An individual commenter proposed
that the Commission adopt additional
requirements requiring dealers to
itemize and disclose each sub-
component of the offering price,
including any applicable document fee.
The Commission notes that it has not
been presented with any evidence that
the benefits of such additional
disclosure requirements outweigh the
costs to consumers and competition.
The Commission may consider
additional such restrictions or
additional guidance in the future, based
on stakeholder experience with part 463
and whether it effectively remediates
unlawful conduct.
Other individual commenters
proposed that the Commission impose
limitations on the price of the vehicle—
for example, prohibiting dealers from
charging more than MSRP for the
vehicle—or prohibit or limit particular
charges, such as dealer fees, document
fees, and destination charges. The
Commission notes that several Rule
provisions will prohibit hidden charges
and deception related to pricing,
including § 463.4(a) (offering price
disclosure) and § 463.3(a) (prohibition
against misrepresenting the costs or
terms of purchasing, financing, or
leasing a vehicle). Before including
additional provisions, the Commission
will continue studying the market,
including after the Rule is in effect, to
determine whether additional steps are
needed.
Other commenters opposed the
offering price disclosure and related
definitions. Commenters including an
industry association contended that, by
defining ‘‘Offering Price’’ in § 463.2(k)
as the price ‘‘for which a Dealer will sell
or finance the motor vehicle to any
consumer,’’ the Commission would
prohibit dealers from changing vehicle
prices as market conditions change,
thereby making vehicle pricing less
dynamic than under current industry
practice.
Section 463.4 and the offering price
definition in § 463.2(k), however, do not
alter the current status quo on pricing
accuracy or pricing changes. Consistent
with the law, the offering price—as with
a presently advertised price—must be
truthful and non-misleading. If the
offering price is only available for a
certain period of time, the
advertisement must convey that fact
clearly and conspicuously, and if it is
no longer available, the dealer must
cease advertising the offering price.285
Some commenters expressed a related
concern that the Commission’s offering
price disclosure requirement could
require dealers to change their practices
when an advertised vehicle is no longer
available. For example, one industry
commenter asked whether, under such
circumstances, a dealer would somehow
be obligated to sell some other vehicle
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632 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
286 A number of dealership associations expressed
a related concern that the Commission, through its
offering price proposal, was somehow seeking to
restrict competition between dealers to being only
about the price of vehicles. The associations
described other areas, beyond vehicle price, by
which dealerships currently distinguish themselves
(e.g., their range of products and services; their
service availability; the convenience of their
locations; and the nature of their sales staffing and
process). In response, the Commission notes that it
has long recognized the importance of protecting
competition across both price and quality metrics,
including providing consumers with truthful,
nondeceptive advertising. See, e.g., Cal. Dental
Ass’n v. Fed. Trade Comm’n, 526 U.S. 756, 766–68
(1999) (affirming Commission exercise of law
enforcement authority against industry guidelines
that unlawfully restricted both price advertising
and advertising relating to the quality of dental
services). As noted, the offering price disclosure
requirement does not prevent dealers from
presenting accurate and non-misleading additional
information, including information about any such
distinguishing characteristics, so long as the
offering price is presented clearly and
conspicuously.
287 For reference, § 463.3(p), which the
Commission is finalizing, see SBP III.C.2(p),
prohibits dealers from making material
misrepresentations regarding ‘‘[a]ny of the required
disclosures’’ under the Final Rule.
288 See NPRM at 42023.
289 Comment of Tex. Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8102 at 29–30.
to that consumer at the offering price.
Here, the offering price disclosure
requirement does not alter the status
quo: Under § 463.4(a), as under current
law, if an offer is limited to a particular
period of time, the offer must convey
that fact, and once a price is no longer
available, the dealer must cease
advertising that price. Regarding which
vehicles to sell at an advertised offering
price, under the Commission’s proposal,
the dealer must disclose the offering
price for the vehicles advertised. If the
dealer charges a different price, then the
dealer has not disclosed the offering
price for which the dealer will sell or
finance the vehicle, and the dealer has
misrepresented the price of the vehicle,
in violation of several provisions,
including §§ 463.3(b) and (p) and
463.4(a). For example, if a dealer
conveys that all vehicles of a certain
nature or in a certain category are
available at a particular offering price,
but charges a higher offering price for
any vehicle of that nature or in that
category, the dealer has violated the
Rule.
Other comments, including from a
member of Congress and from
dealership associations, raised concerns
that the Commission’s proposal would
limit dealers from advertising rebates,
discounts, or incentives of limited
availability, including when
qualifications for such rebates,
discounts, or incentives are identified in
the advertising, further contending that
such a result would contradict prior
FTC practice. Relatedly, commenters
including an industry association
questioned whether the Commission’s
proposal prohibited dealers from
advertising additional vehicle prices,
contending that such a result would
conflict with the longstanding
obligation under Federal law to disclose
a vehicle’s Manufacturer’s Suggested
Retail Price, or MSRP. The Commission
notes, however, that the offering price
disclosure requirement does not prevent
dealers from presenting accurate and
non-misleading additional information,
including terms of limited availability,
so long as the required offering price
disclosure remains clearly and
conspicuously presented to
consumers. 286 If, however, a dealer’s
disclosure were to give consumers a net
pricing impression that is contrary to
that which is actually available, then the
disclosure would violate § 463.4(a), and
the related requirement under
§ 463.3(p).287
Some commenters, including
dealership associations, generally
concluded the Commission’s proposed
offering price definition, or its
associated disclosure provision, were
unnecessary, confusing, burdensome, or
likely to hinder comparison shopping.
Some commenters, for instance,
contended that their respective States
already prohibit misrepresenting price
terms, rendering the Commission’s
proposal redundant. The Commission
notes, however, that a simple disclosure
of the offering price, using the same
definition across States, addresses
multiple issues, including: the
promotion of prices based on dealer
discounts, rebates, or other price
reductions when such benefits are in
fact subject to hidden or undisclosed
restrictions that render them
unavailable to typical customers; the
concealment or omission of additional
dealer charges, such as for document
preparation fees, amounting to several
hundred dollars; the advertisement of a
price without disclosing material
limitations or additional charges
required by the dealer that are fixed and
thus can be readily included in the price
at the outset; and the inducement to
pursue pricing offers that are not
actually available or to pay more for a
vehicle due to inadequate or
nonexistent disclosures. Moreover, this
disclosure and the associated
definitions should produce the corollary
benefit of increasing price competition
among dealers, who will be able to
compete on truthful, standard terms.288
The Commission also concludes that the
claim that its offering price disclosure
requirement would limit comparison
shopping appears to follow from the
mistaken notion that the offering price
disclosure prohibits dealerships from
conveying accurate additional
information to consumers, including
information about rebates, discounts, or
other limited-availability incentives.
Relatedly, some dealership
association commenters contended
there are areas of overlap, or potential
conflict, with State law. Pursuant to
§ 463.9 of part 463, where it is possible
for dealers to comply with both State
law and the provisions of this
regulation, or where State law affords
greater consumer protection, part 463
will not displace existing State pricing
or disclosure regimes. This addresses
many of the commenters’ concerns
about State law. Some dealership
associations, for instance, contend that
their respective States require dealers to
separately disclose a dealer document
fee and not represent that the fee is
required by the State, or that they allow
dealers, with certain limitations, to
incorporate rebates into an advertised
price. Regarding document fees, dealers
can simultaneously comply with part
463, which requires document fees to be
included in the offering price unless
they are ‘‘required’’ government charges,
and with State law that permits but does
not require document fees to be
excluded from a vehicle’s advertised
price, or that requires disclosure of the
amount of the document fee and that
such a fee is not required by the State,
by disclosing the offering price and any
additional State-required information,
such as the amount of the dealer
document fee. Similarly, regarding
rebates, in addition to the offering price,
dealers may provide consumers with
additional pricing information,
including regarding rebates or other
incentive pricing, so long as the offering
price remains clear and conspicuous,
and any additional information is
truthful and non-misleading and
otherwise complies with part 463 and
existing law.
Another dealership association
commenter urged the Commission to
consider using an existing definition,
including a State-law definition of
‘‘sales price’’ or the definition of ‘‘cash
price’’ under the Truth in Lending Act’s
Regulation Z, in lieu of its proposed
offering price definition.289 The
Commission notes that its offering price
definition overlaps substantially with
the commenter’s suggested State-law
‘‘sales price’’ definition, which,
according to the commenter, requires
that a vehicle’s advertised price be one
at which ‘‘the dealer must be willing to
sell the motor vehicle . . . to any retail
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633	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
290 Id.; see also 43 Tex. Admin. Code 215.250(a),
(b) (2023).
291 Comment of Tex. Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8102 at 29–30; see also 43
Tex. Admin. Code 215.250(b)(3) (2023).
292 See 12 CFR 226.2(a)(9).
293 The industry association commenter further
contended that this provision would apply to
dealers based on whether they have a service
department, but this is incorrect, as explained in
the analysis of the definition of ‘‘ ‘Covered Motor
Vehicle Dealer’ or ‘Dealer’ ’’ in SBP III.B.2(f).
294 See, e.g., Buckle Up, supra note 63, at 5
(noting consumer confusion about how the vehicle
price they were offered was determined and that
consumers did not understand they could negotiate
price); id. at 9 (observing add-on products or
services, which typically increase a vehicle’s
purchase price, were ‘‘the single greatest area of
confusion’’ in the study); Att’ys Gen. of 31 States
& DC, Comment Letter on Public Roundtables:
Protecting Consumers in the Sale and Leasing of
Motor Vehicles, Project No. P104811, Submission
No. 558507–00112–1 at 5–6 (Apr. 13, 2012), https://
www.ftc.gov/sites/default/files/documents/public_
comments/public-roundtables-protecting-
consumers-sale-and-leasing-motor-vehicles-project-
no.p104811-00112/00112-82927.pdf.
295 Comment of Tex. Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8102 at 14.
296 Id.
297 Indeed, as the Commission also noted in its
NPRM, an entity that induces the first contact
through false or misleading representation is liable
under the FTC Act, regardless if the buyer later
becomes fully informed. See, e.g., Resort Car Rental
Sys., Inc. v. Fed. Trade Comm’n, 518 F.2d 962, 964
(9th Cir. 1975); Fed. Trade Comm’n v. Gill, 71 F.
Supp. 2d 1030, 1046 (C.D. Cal. 1999), aff’d, 265
F.3d 944 (9th Cir. 2001).
298 For example, California and Wisconsin have
similarly enacted laws that make it unlawful for
dealerships to advertise a total price without
including additional costs to the purchaser outside
the mandatory fees such as tax, title, and
registration fees. Cal. Veh. Code 11713.1(b), (c)
(2023); Wis. Admin. Code. Trans. 139.03(3) (2023).
In Louisiana, the advertised price must be the full
cash price for which a vehicle will be sold to any
and all members of the buying public. La. Admin.
Code tit. 46, pt. V, 719 (2023).
buyer’’; which ‘‘must’’ include certain
additional charges that are fixed and
thus can be readily included in the price
at the outset, including ‘‘[d]estination
and dealer preparation charges’’; and
which permits only certain categories of
costs and charges to be excluded.290
Based on the commenter’s description,
unlike the Commission’s definition, this
State-law definition permits the
exclusion of fees ‘‘allowed’’ by law or
those which the law has
‘‘prescribed.’’ 291 Again, the Rule
permits only charges that the
government requires the consumer to
pay to be excluded from a vehicle’s
offering price, by defining ‘‘Offering
Price’’ to allow only ‘‘required
Government Charges’’ to be excluded.
This difference from the State law
described by the commenter, however,
creates no conflict—a dealer governed
by that State law will be able to comply
with both requirements by disclosing an
offering price that excludes only
required government charges and
includes allowable government charges.
Similarly, commenters have not
demonstrated any actual conflicts
between the proposed offering price
definition and TILA’s definition of
‘‘cash price.’’ 292 Dealers can comply
with both requirements by disclosing an
offering price that excludes only
required government charges. And the
Rule’s definition addresses specific
unfair and deceptive conduct in the
auto marketplace. Were offering prices
to exclude additional categories, the
resulting disclosure provision at
§ 463.4(a) would permit dealers to lure
consumers to dealership lots based on a
price that is not actually the price the
dealer would require the consumer to
pay, a result that would require
consumers to spend time traveling to
the dealership and time on the lot to
attempt to discover the true price, and
that would place dealerships that
choose to advertise the price truthfully
at a competitive disadvantage.
Relatedly, commenters including an
industry association contended that no
additional regulation of pricing or credit
and lease advertising was necessary
beyond that provided by existing
practice or by the Truth in Lending Act,
the Consumer Leasing Act, and their
implementing Regulations Z and M, and
relatedly, that the Commission’s offering
price disclosure requirement
duplicated, modified, or ignored such
existing law. The disclosure
requirement, however, is consistent
with these existing legal obligations and
does not disturb them; dealers can and
should make the disclosures required
under TILA and other laws as well as
the offering price disclosure required by
the Final Rule. The provision requires
dealers to disclose simple and highly
material pricing information under
certain circumstances.293 Providing
consumers with accurate and timely
pricing and financing information is
critical, especially in the context of
motor vehicle sales.294
Several commenters requested
modifications to limit or expand the
proposed definition of ‘‘Government
Charges,’’ or clarification regarding this
term’s application to certain fees. For
example, commenters, including a
dealership association, urged the
Commission to modify this proposed
definition to include charges that are
‘‘allowed to be charged but not required
or imposed by a Federal, State, or local
government agency, unit, or
department.’’ 295 One such commenter
provided the example of certain
registration and title charges, which it
described as ‘‘not necessarily imposed
or mandatory fees’’ and for which ‘‘the
amount may vary, depending on the
county’’ and the dealership, and within
a governmentally determined range.296
Regarding registration and title charges,
to the extent such charges are required
by a government agency, unit, or
department, then they fall within the
‘‘Government Charges’’ definition as
charges ‘‘imposed by’’ such agency,
unit, or department. If, however, there
are title, registration, or other fees,
beyond any title and registration fees
required by the government, that dealers
are allowed, but not required, to charge,
such fees do not fall within the
‘‘Government Charges’’ definition, and
to the extent a dealer imposes such
allowable charges on any consumer,
such fees must be included in the
offering price. Were the Commission to
categorize such allowed, but not
required, amounts as ‘‘Government
Charges,’’ dealers would be allowed to
exclude them from a vehicle’s offering
price but then require consumers to pay
them anyway, thereby allowing dealers
to lure consumers to their lots based on
a price that is not actually the price the
dealer would require the consumer to
pay—a fact that consumers would not
learn until they have spent time
traveling to the dealership and time on
the lot, if they learn this fact at all.297
Further, under such circumstances,
dealerships that choose to advertise the
price truthfully would be at a
competitive disadvantage. The
Commission therefore declines to
finalize the definition with such a
modification.
Commenters, including a number of
dealership associations, contended there
were burdens associated with the
Commission’s offering price disclosure
requirement, claiming it would cause
dealers to require documenting every
contact with a consumer in which a
specific vehicle was mentioned, thereby
lengthening the sales process and
increasing the recordkeeping burden.
Comments regarding recordkeeping
requirements, including records that
must be created and maintained under
this Rule, are addressed in the section-
by-section analysis of § 463.6. Here, the
Commission notes that accurate pricing
communication is already required by
law. Section 463.4(a) does not require a
complex or lengthy disclosure, is based
on similar provisions already in
operation in certain States,298 will
operate as a key safeguard in States
without such provisions, and, as
discussed in the following paragraphs,
addresses deceptive and unfair conduct.
Further, this offering price requirement
will save consumers time when
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634 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
299 See FTC Policy Statement on Deception, supra
note 42, at 2, 5 (describing the Commission’s ‘‘net
impression’’ standard for determining the meaning
of an advertisement).
300 Kraft, Inc., 114 F.T.C. 40, 120 (1991) (quoting
Thompson Med. Co., Inc., 104 F.T.C. 648, 788
(1984), aff’d, 791 F. 2d 189 (D.C. Cir. 1986), cert.
denied, 479 U.S. 1086 (1987)).
301 See Any (def. 1), Merriam-Webster.com
Dictionary, https://www.merriam-webster.com/
dictionary/any (defining ‘‘any’’ as ‘‘one or some
indiscriminately of whatever kind’’).
302 See, e.g., Complaint ¶¶ 23–26, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
01690 (N.D. Ill. Mar. 31, 2022) (alleging that many
consumers drive hours to dealerships).
303 See, e.g., Auto Buyer Study, supra note 25, at
15 (noting that the purchase transactions in the
FTC’s qualitative study often took 5 hours or more
to complete, with some extending over several
days); Cf. 2020 Cox Automotive Car Buyer Journey,
supra note 25, at 6 (reporting average consumer
time spent shopping for a vehicle at 14 hours, 53
minutes, including 1 hour, 49 minutes visiting
dealerships/sellers).
shopping for a vehicle by requiring the
provision of salient, material
information early in the process and
eliminating time otherwise spent
pursuing misleading offers. For dealers
already disclosing accurate pricing
information upfront, this provision
allows them to compete on an even
playing field.
Another industry association
commenter contended that, by requiring
offering price to be disclosed when an
advertisement references a specific
vehicle or represents a monetary
amount or financing term ‘‘by
implication,’’ the Commission’s
disclosure requirement could apply to
advertisements that merely list a
dealer’s website, on which specific
vehicles and their prices appear. Under
the Commission’s proposal, an
advertisement that does not expressly
reference a specific vehicle or expressly
refer to a monetary amount or financing
term would not do so ‘‘by implication’’
solely by referring to a website,
document, or other destination where
such information may otherwise be
available, absent evidence that the net
impression of a reasonable consumer is
that the advertisement implicitly
references such terms.299 The phrasing
in the Commission’s requirement—
‘‘expressly or by implication’’—refers to
the nature of the claims conveyed by a
dealer’s advertisement (i.e., whether
such claims are made expressly or by
implication). For more than three
decades, the Commission has explained
express and implied claims as follows:
Express claims directly state the
representation at issue. Implied claims are
any claims that are not express. They range
on a continuum from claims that would be
‘‘virtually synonymous with an express claim
through language that literally says one thing
but strongly suggests another to language
which relatively few consumers would
interpret as making a particular
representation.’’ 300
This same industry association
commenter contended that its
aforementioned concerns—that the
disclosure requirement would prohibit
dynamic pricing, and that the
requirement would extend to
advertisements simply by virtue of their
referencing a dealer’s website—would
together cause dealers to curb their
pricing representations in advertising,
either by limiting such representations
to a vehicle’s MSRP or by factoring out
pricing altogether. As previously
discussed, these concerns appear to
misunderstand either existing legal
requirements or the fact that an offering
price disclosure would operate
consistent with those requirements. The
Commission’s requirement simply
requires dealers to disclose an offering
price and does not alter the current
status quo on pricing accuracy. To the
extent there is a concern that requiring
accurate pricing information limits
dealers to advertising MSRP or forgoing
advertising pricing information
altogether, such concerns apply equally
under current law—including in States
with pricing disclosure requirements
that resemble the Commission’s offering
price disclosure requirement. The
Commission, however, has not been
presented with evidence suggesting that
dealers will not want to distinguish
themselves from other dealers on price,
and will instead default to advertising a
price that is offered by all of their
competitors.
Another concern raised by this same
industry association commenter was
that, by requiring an offering price ‘‘in
the Dealer’s first response’’ to a
consumer communication that
references a specific vehicle or a
monetary amount or financing term for
any vehicle, the requirement would
prohibit dealers from explaining the
offering price and why it is being
provided, and that as a result,
consumers may understand the offering
price to be non-negotiable. Under
§ 463.4, however, dealers continue to be
permitted to communicate accurate
additional information, including the
availability of discounts or the dealer’s
willingness to negotiate, as long as the
offering price disclosure remains clear
and conspicuous.
The same industry association
commenter asserted that mandating the
disclosure of the offering price in
connection with ‘‘any communication
with a consumer’’ would result in
excessive and non-responsive
disclosures. The commenter provided
the example of a consumer who contacts
a dealership to ask whether the
dealership has ‘‘a silver [Ford] F–150 in
stock,’’ arguing that the Commission’s
proposal would require the dealer to
respond with offering price information
for each of the numerous (in the
commenter’s example, 40) silver F–150
vehicles the dealer has in stock. To
begin, if the entire communication
simply asks, ‘‘Do you have a silver Ford
F–150 in stock?,’’ it does not concern a
‘‘specific vehicle’’; it concerns a group
of vehicles—silver Ford F–150s—and,
under § 463.4, the dealer is not required
to disclose an offering price, so long as
the dealer’s reply does not reference
either (1) a specific vehicle or (2) a
monetary amount or financing term for
any vehicle, whether a specific vehicle
or a group of vehicles.301 If, however,
the dealer chooses to respond by
discussing a specific vehicle—whether
by describing that vehicle, referring to a
stock or VIN number, or using other
means—the dealer is required to
disclose the offering price for that
specific vehicle. If the dealer chooses to
respond by discussing several specific
vehicles, the offering price disclosure
requirement applies for each such
vehicle. Finally, the offering price
disclosure requirement applies if the
dealer’s response references a monetary
amount or financing term, such as a
down payment or monthly payment
amount, for a specific vehicle or a group
of vehicles. This requirement applies
only to the dealer’s first response
regarding the specific vehicle. It does
not apply to subsequent
communications about that specific
vehicle.
The failure to disclose a vehicle’s
offering price in an advertisement or
other communication that references a
specific vehicle, or a monetary amount
or financing term for any vehicle, is
likely to cause substantial injury to
consumers who waste time and effort
pursuing offers that are not actually
available or end up paying more for a
vehicle than they expected or being
subject to hidden charges.
Buying or leasing a vehicle is time-
consuming and often the most
expensive purchase a consumer makes
without knowing the actual price of the
product at the outset. Consumers can
spend hours driving to a dealership.302
Once at the dealership, it can then take
several hours to days to finalize a
transaction 303 before the consumer
learns the price of the vehicle. And
many consumers never learn the true
price at all; part of the finalization
process includes signing dense
paperwork, where information regarding
the price of the vehicle and charges for
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635	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
304 See Nat’l Consumer L. Ctr., ‘‘Auto Add-Ons
Add Up: How Dealer Discretion Drives Excessive,
Arbitrary and Discriminatory Pricing’’ (2017),
https://www.nclc.org/wp-content/uploads/2022/09/
auto_add_on_charts.pdf; Complaint ¶¶ 25, 27–28,
Fed. Trade Comm’n v. N. Am. Auto. Servs., Inc.,
No. 1:22–cv–01690 (N.D. Ill. Mar. 31, 2022)
(alleging defendants charged thousands of
consumers hundreds to thousands of dollars each
for unauthorized add-ons, totaling in aggregate over
$70 million since 2017); Complaint ¶¶ 59, 61, Fed.
Trade Comm’n v. Universal City Nissan, Inc., No.
2:16–cv–07329 (C.D. Cal. Sept. 29, 2016) (alleging
unauthorized add-on charges costing thousands of
dollars).
305 According to public reports, 81% of new
motor vehicle purchases, and nearly 35% of used
vehicle purchases, are financed. See Melinda
Zabritski, Experian Info. Sols., Inc., ‘‘Automotive
Industry Insights: Finance Market Report Q4 2020’’
at 4, https://www.autofinancenews.net/wp-content/
uploads/2021/03/2020-Q4-Auto-Finance-News-
Industry-Pulse.pdf.
306 See, e.g., Complaint ¶¶ 17–19, 44, Fed. Trade
Comm’n v. Liberty Chevrolet, Inc., No. 1:20–cv–
03945 (S.D.N.Y. May 21, 2020) (dealers inflated the
car price on paperwork in the middle of the sale
without the consumer’s knowledge or
authorization, a practice they internally referred to
as adding ‘‘air money’’); Complaint ¶¶ 24–27, Fed.
Trade Comm’n v. N. Am. Auto. Servs., Inc., No.
1:22–cv–01690 (N.D. Ill. Mar. 31, 2022) (alleging
that defendants buried charges for add-ons in
voluminous paperwork, making it difficult to
detect).
307 See, e.g., Fed. Trade Comm’n. v. Windward
Mktg., Inc., 1997 WL 33642380, at *10 (N.D. Ga.
Sept. 30, 1997)) (‘‘[A]ny representations concerning
the price of a product or service are presumptively
material.’’); Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984); see also Fed. Trade Comm’n v.
Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321
(S.D.N.Y. 2001) (‘‘Information concerning prices or
charges for goods or services is material, as it is
‘likely to affect a consumer’s choice of or conduct
regarding a product.’ ’’).
308 Consumers who expect particular prices,
based on the MSRP or Kelley Blue Book, are also
misled when true pricing information is not
disclosed upfront. See, e.g., Individual commenter,
Doc. No. FTC–2022–0046–1878 (‘‘We ended up
having to drive 3 hours to get the [vehicle we]
wanted. Upon arriving to pickup the car we were
told there was a 4300 increase over MSRP.’’);
Individual commenter, Doc. No. FTC–2022–0046–
1690 (‘‘It was only after five hours at the dealership
that we discovered the dealer had added on a $3000
market adjustment and $3100 in other add-ons
(nitrogen-filled tires, LoJack, paint protection) to
MSRP.’’). The average transaction price of a new
vehicle exceeded the average manufacturer’s
suggested retail price (MSRP) for twenty
consecutive months between 2021 and 2023. See
Cox Auto., ‘‘After Nearly Two Years, New-Vehicle
Transaction Prices Fall Below Sticker Price in
March, According to New Data from Kelley Blue
Book’’ (Apr. 11, 2023), https://
www.coxautoinc.com/market-insights/kbb-atp-
march-2023/; see also Edmunds, ‘‘8 Out of 10 of Car
Shoppers Paid Above Sticker Price for New
Vehicles in January, According to Edmunds’’ (Feb.
15, 2022), https://www.edmunds.com/industry/
press/8-out-of-10-of-car-shoppers-paid-above-
sticker-price-for-new-vehicles-in-january-according-
to-edmunds.html; iSeeCars, ‘‘10 New Cars Priced
the Highest Over MSRP, Even as Peak Pricing
Eases’’ (Mar. 19, 2023), https://www.yourerie.com/
news/10-new-cars-priced-the-highest-over-msrp-
even-as-peak-pricing-eases/ (finding the average
new car price was 8.8% over MSRP).
other items is easily obscured,
especially if consumers are not provided
with baseline price information around
which to anchor the lengthy, dense
discussions and process. When
consumers are not provided with such
price information, they are susceptible
to hidden charges such as ‘‘junk fees’’ or
unnecessary add-ons that can cost
consumers thousands of dollars and
significantly increase their overall
expense. 304 These hidden charges
substantially injure consumers by
increasing their total cost as well as
their debt burden in the many instances
where vehicle purchases are
financed.305
Moreover, the consumer injury caused
by the lack of price information is not
reasonably avoidable. The dealer has
sole control over pricing information
and the timing of when it is provided to
consumers. Even if the consumer learns
of the price of the vehicle before
finalizing the transaction, the consumer
has already spent time and effort
traveling to the dealer, on the dealership
lot, and in the financing office, and for
many, the immediate need for the
vehicle for work, school, childcare,
groceries, medical visits, and other vital
household reasons makes it infeasible to
start the process anew at a different
dealership. Further, during the lengthy
vehicle-buying process and in complex,
dense paperwork, it is especially easy to
hide or alter price information or
include hidden charges when
consumers are not provided with
baseline price information around
which to anchor the discussion of
vehicles, monetary amounts, or
financing terms. 306
The injury to consumers from a lack
of price information is not outweighed
by benefits to consumers or competition
from withholding this basic
information. Instead, upfront
information about the offering price
protects consumers from lost time and
effort, supracompetitive prices, and
unexpected charges while increasing
price competition among dealers, who
should be able to compete on truthful,
standard terms. The costs of providing
price information—which the dealer
determines and can calculate upfront—
are minimal for dealers that are already
advertising a specific vehicle, monetary
amount, or financing term, especially
when compared to the injury to
consumers.
Thus, the failure to disclose a
vehicle’s offering price in an
advertisement or other communication
that references a specific vehicle, or a
monetary amount or financing term for
any vehicle is an unfair practice.
The Commission notes that
§ 463.4(a)(1) and (2) affects only dealers
that are already advertising about
specific vehicles or monetary amounts
or financing terms; it does not affect
businesses that do not expend funds on
advertising specific vehicles, monetary
amounts, or financing terms. The
Commission will continue to monitor
the market to assess whether this
approach is sufficient to address the
harms associated with a lack of price
and charge information. If not, the
Commission will revisit whether
additional measures are necessary, such
as requiring price information in all
advertising, requiring total charge
estimates, or prohibiting charges for
additional items along with a vehicle
sale.
Regarding deception, price is one of
the most material pieces of information
for a consumer in making an informed
purchasing decision. 307 Yet, including
as illustrated by the Commission’s law
enforcement efforts, it can be difficult
for consumers to uncover the actual
price for which a dealer will sell an
advertised vehicle until visiting the
dealership and spending hours on the
lot. When an advertisement or other
communication references a monetary
amount or financing term, it is
reasonable for a consumer to expect that
those amounts and terms are available at
other standard terms. If instead, for
example, a dealer advertises a low
monthly payment based on an
unexpectedly long financing term or an
unexpectedly high interest rate that
results in a higher price than standard
terms would have, then the consumer is
lured to the dealership based on a
misimpression of what they reasonably
expect the total price to be.
If a dealer advertises a specific
vehicle, it is reasonable for a consumer
to expect to learn the true offering price
of the vehicle upon visiting the
dealership. Consumers are misled when
dealers misrepresent or otherwise
obscure price information or charge for
items beyond the advertised vehicle
during the long and complex sales,
financing, and leasing process.308
If consumers knew that the true price
was beyond what was expected or that
the prices and charges were for
unwanted items, that would likely affect
their choice to visit one dealership over
another dealership. Thus, misleading
consumers about price information is
material. See, e.g., Fed. Trade Comm’n
v. Windward Mktg., Inc., No. Civ.A.
1:96–CV–615F, 1997 WL 33642380, at
*10 (N.D. Ga. Sept. 30, 1997) (‘‘[A]ny
representations concerning the price of
a product or service are presumptively
material.’’ (citing Removatron Int’l
Corp., 111 F.T.C. 206, 309 (1988));
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309 Even if some consumers were not misled by
the failure to disclose the offering price, to show
deception under the FTC Act, ‘‘the FTC need not
prove that every consumer was injured. The
existence of some satisfied customers does not
constitute a defense. . . .’’ Fed. Trade Comm’n v.
Amy Travel Serv., Inc., 875 F.2d 564, 572 (7th Cir.
1989), vacated in part on other grounds, Fed. Trade
Comm’n v. Credit Bureau Ctr., LLC, 937 F.3d 764
(7th Cir. 2019); accord Fed. Trade Comm’n v.
Stefanchik, 559 F.3d 924, 929 n.12 (9th Cir. 2009).
310 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
311 To the extent any add-on charges are required
by a dealership, and thus are not optional, such
charges would have to be included in the offering
price, pursuant to §§ 463.2(k) and 463.4(a).
312 See NPRM at 42044 (noting, in the definition
of ‘‘Add-on List’’ at proposed § 463.2(b) that ‘‘[i]f
the Add-on price varies, the disclosure must
include the price range the typical consumer will
pay instead of the price’’); see also Fed. Trade
Comm’n v. Five-Star Auto Club, Inc., 97 F. Supp.
2d 502, 528 (S.D.N.Y. 2000) (‘‘at the very least it
would have been reasonable for consumers to have
assumed that the promised rewards were achieved
by the typical Five Star participant’’); Complaint
¶¶ 28–50, Fed. Trade Comm’n v. Universal City
Nissan, Inc., No. 2:16–cv–07329 (C.D. Cal. Sept. 29,
2016) (alleging unlawful deception where a dealer’s
ads list prominent terms not generally available to
consumers, including where those terms are subject
to various qualifications or restrictions); Complaint
¶¶ 8–10, Progressive Chevrolet Co., No. C–4578
(F.T.C. June 13, 2016) (alleging advertised offer was
deceptive because the typical consumer would not
qualify for the offer).
313 Working in tandem, proposed § 463.4(b)(1)
and (2) would mean that dealers who engage in
advertising and charge for optional add-ons must
have a website, online service, or other mobile
application by which to disclose an add-on list.
Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984)); see also Fed. Trade
Comm’n v. Crescent Pub. Grp., Inc., 129
F. Supp. 2d 311, 321 (S.D.N.Y. 2001)
(‘‘Information concerning prices or
charges for goods or services is material,
as it is ‘likely to affect a consumer’s
choice of or conduct regarding a
product.’ ’’).309
Thus, it is an unfair or deceptive act
or practice for dealers to fail to disclose
the offering price in an advertisement or
other communication that references,
expressly or by implication, a specific
vehicle or any monetary amount or
financing term for any vehicle.
Furthermore, this provision also
serves to prevent the misrepresentations
prohibited by § 463.3—including
misrepresentations regarding costs or
add-ons—by requiring consumers to be
told the true price of the vehicle in
advertisements and other
communications. It also helps prevent
dealers from failing to obtain the
express, informed consent of consumers
for charges, as addressed by
§ 463.5(c).310 Thus, the Commission is
requiring dealers to disclose a vehicle’s
offering price when advertising or
otherwise communicating about a
specific vehicle or monetary amount or
financing term for any vehicle. This
provision allows consumers to compare
offers based on the same price terms and
to select dealers that truly offer the
lowest price rather than dealers that
advertise deceptively low prices but
charge more. When price information in
the market is distorted or concealed—
especially in document- and time-
intensive vehicle transactions—
consumers are unable to effectively
differentiate between sellers, and sellers
trying to deal honestly with consumers
are put at a competitive disadvantage.
For the foregoing reasons, and having
considered the comments that it
received on this proposed provision, the
Commission is finalizing the offering
price provision at § 463.4(a) with
modifications to capitalize the defined
term ‘‘Vehicle’’ in its singular, plural,
and possessive forms, to correspond to
the revised definition at § 463.2(e), and
to add language clarifying that the
provision is also prescribed for the
purpose of preventing unfair or
deceptive acts or practices defined in
this Rule. The Commission is finalizing
the corresponding ‘‘Offering Price’’ and
‘‘Government Charges’’ definitions in
§ 463.2 largely as proposed, with
modifications to the ‘‘Offering Price’’
definition to conform with the defined
term ‘‘Vehicle’’ and to clarify that
dealers may, but need not, exclude
required government charges from a
vehicle’s offering price, and a
typographical modification to the
‘‘Government Charges’’ definition to
include a serial comma for consistency.
(b) Add-On List
The Commission’s proposed add-on
list disclosure provision (proposed
§ 463.4(b)) required the disclosure, both
online and at each dealership, of a list
of all optional add-ons for which the
dealer charges consumers and the price
of each such add-on.311 As proposed, if
the price of the add-on varies based on
the specifics of the transaction, the add-
on list would have to include the range
the typical consumer will pay.312 Due to
space constraints, dealer advertisements
presented not online but in another
format—such as in print, radio, or
television—would not be required to
include the add-on list, disclosing
instead the website, online service, or
mobile application where consumers
can access the add-on list.313
Many commenters, including
consumer advocacy organizations,
supported the proposal to require
dealers to provide consumers with clear,
accurate pricing information for add-on
products or services altogether in one
list. Some commenters raised concerns
that, without significant modification,
the Commission’s proposal to allow for
the disclosure of price range
information where the price of an add-
on varies based on the specifics of the
transaction would allow for significant
abuses, including by permitting dealers
to disclose ranges so broad they would
be meaningless. Such commenters urged
the Commission to modify its definition
of ‘‘Add-on List’’ to require, where a
price range is listed for a given add-on,
the add-on list further indicate the low,
median, and high prices charged to
consumers for each such add-on over
the preceding two years; or that the
Commission require dealers to create
individualized add-on lists for each
vehicle sold, containing one fixed, non-
negotiable price for each add-on.
Relatedly, other commenters, including
industry organizations, expressed
concerns regarding the add-on list
proposal, including that the proposal to
allow for price range information was
vague or confusing, and that certain
aspects of the proposed definition,
including the scope of add-ons covered,
as well as the requirement to keep such
add-on lists updated, would impose
extensive economic burdens.
After careful review of the comments,
the Commission has determined not to
finalize its proposed add-on list
provision (proposed § 463.4(b)). Here,
the Commission believes its proposal
would benefit from further review and
refinement. The Commission
nevertheless emphasizes that, under
existing law, dealers are prohibited from
misrepresentations regarding material
information about any costs, limitation,
benefit, or any other aspect of an add-
on, and from charging for add-ons
without obtaining the express, informed
consent of the consumer—conduct
which the Final Rule prohibits as well,
including in §§ 463.3(b) and § 463.5(c).
The Commission also emphasizes that,
in addition to the Rule’s prohibitions,
industry guidance and effective self-
regulatory efforts can serve a role in
helping prevent problematic dealer
behavior in this area. The Commission
will continue to monitor the motor
vehicle marketplace for issues
pertaining to add-ons and will consider
implementing additional measures in
the future if it determines such
measures are warranted to address
deceptive or unfair acts or practices
related to add-on products or services.
(c) Add-Ons Not Required
For optional add-on products or
services, the Commission’s proposed
§ 463.4(c) required dealers to disclose,
when making any representation about
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314 Individual commenter, Doc. No. FTC–2022–
0046–3693.
315 Individual commenter, Doc. No. FTC–2022–
0046–5268.
316 Individual commenter, Doc. No. FTC–2022–
0046–1365.
317 Individual commenter, Doc. No. FTC–2022–
0046–9883; see also Individual commenter, Doc.
No. FTC–2002–0046–9632 (‘‘I was told that GAP
insurance was required to be included. . . . I [later]
contacted and asked for copies of my contracts. On
September 5 [the dealer] sent me an email with a
credit contract attached. I am including it here. It
says my monthly payment is over $370. It also
shows the cash price as close to $17,000.00. I can
also see it says the GAP is optional. I never saw this
contract. I never signed this contract.’’).
318 Individual commenter, Doc. No. FTC–2022–
0046–6816.
319 In such cases, however, § 463.4(a) of the Final
Rule requires these non-optional add-ons to be
included in a vehicle’s offering price; if the dealer
requires the consumer to pay for them, they are part
of the full cash price for which a dealer will sell
or finance the vehicle to any consumer. See SBP
III.D.2(a).
an optional add-on, that the add-on is
not required and the consumer can
purchase or lease the vehicle without
the add-on. For the reasons discussed in
the paragraphs that follow, the
Commission is finalizing the required
disclosure at § 463.4(c) largely as
proposed. The Commission is
capitalizing the defined term ‘‘Vehicle’’
to conform with the definition at
§ 463.2(e). The Commission also is
adding language to the end of § 463.4(c)
clarifying that the requirements in
§ 463.4(c) ‘‘also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and (b) and 463.5(c).’’
A number of commenters, including a
group of State attorneys general,
supported this proposed requirement,
contending that unscrupulous dealers
have exploited the vehicle sales process
to saddle consumers with unwanted
add-on products or services, and that
such a disclosure would importantly
help consumers avoid discovering these
additional charges only after completing
the purchase, assenting to them because
they believed the add-ons to be required
in order to purchase the vehicle, or
paying for them unknowingly because
they never uncovered the charges. Many
individual commenters also stressed the
need for add-on disclosure
requirements. For example:
• Salespeople such as myself are
responsible for selling the car and all
aftermarket/add-on products. This has
put me in a unique position to see how
these proposed regulations would
impact automotive sales. I cannot stress
enough my support for these new rules.
. . . The payments calculated by
management include add-ons, but the
price of the add-ons and how they affect
the payments are not shown. The add-
ons ‘‘packed’’ in the first payment often
include an extended warranty, GAP
insurance, tire and wheel protection, an
oil change package, a theft recovery
device, and sometimes more depending
on the situation. 314
• Car buying is one of the most
miserable consumer experiences in
existence. Frankly, I’m disappointed
that this issue hasn’t been addressed
decades ago. It’s well past time that the
deceptive practices that car dealers use
to manipulate and take advantage of
customers is made illegal. What other
business can legally lie about the price
of the product that they sell, and slip
extra unwanted products into the deal
that they don’t reveal and won’t remove
upon request? These practices are
arcane and unfair, especially
considering the absurd cost of
automobiles today. I wholeheartedly
approve of what the proposed rules are
attempting to accomplish. Please do not
allow a powerful lobbying group to limit
or change good legislation that benefits
tens of millions of Americans who
currently dread the car buying
experience for far more reasons than just
price.315
• . . . I am not against business
making a profit, in fact most Americans
understand businesses need to make
money too, however most dealers will
not disclose additional costs to the
purchaser until it is time to sign
paperwork for purchase. Rather than
simply being upfront with what their
desired price is and how much they
make from the sale rather they are fed
lines about ‘‘common practices’’, [sic]
‘‘these are normal fees’’ or simply not
being forthright about additional costs
on items only installed on location at
the dealerships to drive the price up.
Even more insulting is when buyer[s]
ask to have options removed from the
vehicle dealers stall or flat out refuse to
do so. 316
• It is about time something like this
is brought up. This will have no effect
on the honest dealers out there. . . .
This will really help the consumer. . . .
We will be able to compare apples to
apples. You won’t show up at the
dealership with the lowest price only to
find out that they have all these other
fees that make them the least desirable
of the choices. Also, adding stuff like
pinstriping for large fees will come to an
end. . . . I have no problem with a
dealer making money. They are a
business and have overhead. I have a
problem when they try [to] gloss over
everything they are trying to charge you
for. This ruling needs to take effect.
Anyone posting against it is someone
working for a dealer. Like I mentioned
before, if you are doing everything on
the up and up, not only do you get good
reviews and repeat business, but this
ruling will not even effect [sic] you.317
• I also agree that Enhanced Informed
Consent in F & I office is necessary. One
of my cohort was almost coerced into
non-equivalent decision-making
scenarios in the finance office with their
car purchases. The finance officer flat
out ask[ed] them, ‘‘did you want the 2
year, 30[,000] mile extended warrant[y],
or the 4 year 50[,000] mile extended
warranty?’’ The wife sat there and
asked, ‘‘I’m confused. Do I HAVE to
pick one of those?’’ Her husband said,
‘‘No, he’s trying to trick you into buying
one. You don’t need any at all.’’ They
then promptly threatened to walk out
and the finance manager came out and
did their paperwork without further
conflict.318
Several commenters offered support
while also proposing that the
Commission adopt additional measures
to further ensure that consumers
understand that optional add-ons are
not required. One dealership group, for
example, commenting in support of
disclosures that optional add-ons are
not required, recommended that dealers
be required to include signage on their
websites and in their showrooms or on
their sales desks that set out both
components of the Commission’s
proposal: that add-ons are not required,
and that consumers may purchase or
lease the vehicle without add-ons. Other
commenters, including a consumer
protection agency and a consumer
advocacy organization, suggested that
the Commission modify the language in
proposed § 463.4(c) to strike the ‘‘if
true’’ language, asserting that all add-
ons should be optional and not required
to consummate the sale or lease of a
vehicle. At least one individual
commenter recommended that the
Commission prohibit dealers from pre-
installing add-ons.
In response to these comments, the
Commission notes that, were it to
require signage stating, generally, that
add-ons are optional, or to strike the ‘‘if
true’’ language from this disclosure, it
would cause consumers to be presented
with information that may not be
accurate in all circumstances. Some
add-ons might already be installed on
the vehicle or otherwise required by the
dealer. As explained in SBP III.D.2(a)
with regard to § 463.4(a), charges for
such add-ons must be included in the
vehicle’s offering price. 319 In such cases,
representing that add-ons are
categorically optional would mislead
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638 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
320 See Rule Concerning Cooling-Off Period for
Sales Made at Homes or at Certain Other Locations,
16 CFR 429.
321 See, e.g., California Car Buyer’s Bill of Rights,
Cal. Civ. Code 2981 (requiring dealers to provide a
written list of specified items purchased and their
effect on monthly payments, including GAP, theft
deterrent devices, and surface protection products);
Minn. Stat. 59D.06(b) (requiring any person offering
a GAP waiver to disclose that the waiver is not
required for a consumer to buy or lease the vehicle);
Wash. Rev. Code. 48.160.050(9) (mandating that
GAP waivers disclose that ‘‘neither the extension of
credit, the terms of the credit, nor the terms of the
related motor vehicle sale or lease, may be
conditioned upon the purchase of the waiver.’’); La.
Stat. Ann. 32:1261(A)(2)(a) (declaring it unlawful
for a dealer to require, as a condition of sale and
delivery, for a consumer to purchase ‘‘special
features, appliances, accessories, or equipment not
desired or requested by the purchaser.’’).
the consumer. Relatedly, by requiring
that charges for mandatory items be
included in the vehicle’s offering price,
the Final Rule allows dealers to
customize the vehicles they are selling
while protecting consumers by requiring
dealers to disclose the offering price for
such customized vehicles. Accordingly,
the Commission declines to prohibit the
practice of pre-installing add-ons in this
Final Rule, but will continue to monitor
the market to determine whether pre-
installed add-ons require further
regulation. At the same time, the
Commission emphasizes that the
protections contemplated here and
elsewhere in this Final Rule prohibit
dealers from obscuring price
information and whether an add-on is
optional, and further require dealers to
obtain the express, informed consent of
the consumer to charge a consumer for
any add-on.
Additionally, several commenters
indicated their support for the
Commission’s proposal while also
recommending that the Commission
consider further steps to protect
consumers from deceptive or unfair
practices pertaining to the inclusion of
add-ons in consumer vehicle sales or
leases. Some commenters, including a
group of State attorneys general and a
dealership association, requested that
the Commission require dealers to
disclose any mandatory add-ons and
whether those add-ons are required in
order to obtain financing, including by
requiring such disclosure in an
addendum sticker affixed to the motor
vehicle. In response, the Commission
notes that other provisions of the Final
Rule prohibit misconduct in this area,
including by requiring, at § 463.4(a),
that charges for such add-ons must be
included in the vehicle’s offering price.
While consumers may benefit from
repeated or additional disclosures, each
additional disclosure requirement
would increase both the cost to comply
with the regulation and the risk of
crowding out other important
information. Given these risks, the
Commission declines to include
additional requirements regarding the
content or form of its add-on disclosure
at § 463.4(c). The Commission will
continue to monitor the market to gather
additional information on this issue and
will consider whether to modify or
expand this or other sections in the
future based on stakeholder experience
with this provision and whether it
effectively halts unlawful conduct.
Other commenters, including
consumer advocacy organizations and
consumer attorneys and advocates,
urged the Commission to adopt a thirty-
day ‘‘cooling-off’’ period for the sale of
vehicle-related add-ons, similar to that
required by the Commission for door-to-
door and other off-premises sales,320
which would grant consumers time to
review the paperwork after the
transaction, and to cancel unexpected or
otherwise unwanted add-ons for a full
refund. As explained in greater detail in
the discussion of § 463.5(c), in SBP
III.E.2(c), the Commission also has
determined not to include in this Final
Rule a ‘‘cooling-off’’ period in which
add-on products or services may be
canceled. In this regard, the
Commission would benefit from
additional information, including the
length of time needed for such ‘‘cooling
off’’ rights to be effective. The
Commission may consider revisiting
this decision in the future based on
actual stakeholder experience with the
provisions of the Final Rule and
whether they effectively halt unlawful
conduct.
Other commenters presented
questions or critiques regarding this
proposed disclosure. As with the
Commission’s proposed disclosures
generally, some commenters, including
an industry association and a dealership
association, contended that existing
requirements in a number of States to
disclose that add-ons are optional make
Federal regulation in this area
unnecessary or contradictory. As
described in detail in SBP III.D.1, the
Commission first observes that the
functioning of such standards
demonstrates the practicability of its
proposed disclosure that add-ons are
not required. To the extent a State
requires additional disclosures
regarding add-ons, nothing prevents
dealers from providing those disclosures
as well as those required under part 463
so long as the State disclosures are not
inconsistent with those required under
part 463. To the extent there is truly an
inconsistency between this part and
State law, § 463.9 provides that part 463
will govern, but only to the extent of the
inconsistency, and only if the State
statute, regulation, order, or
interpretation affords consumers less
protection than does the corresponding
provision of this part. Finally, a number
of States do not have existing standards
in this area; in such States, the
Commission’s disclosures operate as a
key safeguard.
Commenters, including dealership
associations, argued that dealers would
develop and use an additional form to
demonstrate compliance with this
disclosure requirement, thereby
burdening the vehicle sales and delivery
process. The Commission begins by
noting that any such steps are not
required by part 463; on the contrary,
the Commission structured this
disclosure to provide dealers with
flexibility, within the bounds of the law,
to provide this essential information in
a manner that is clear and conspicuous
under the particular circumstances of
their transactions. This requirement
does not require a complex or lengthy
disclosure, is based on similar
provisions already in operation in
certain States,321 and for dealers already
disclosing accurate add-on information,
this provision requires no significant
additional burden.
When making a representation about
an add-on product or service, the failure
to disclose that the add-on is not
required and the consumer can
purchase or lease the vehicle without
the add-on, if true, is likely to cause
substantial injury to consumers who
end up paying more for a vehicle sales
or lease transaction than they expected
by being subject to charges of which
they are not aware or which they believe
are required because they were never
told they could decline the charges.
Absent this information, consumers
cannot reasonably avoid the injury of
being charged for these products
because they are not aware that they
have an option to begin with. When
consumers are presented with motor
vehicle transaction documents that
include a variety of charges, it is
difficult to detect any charges that are
added to the contract beyond those that
are required or have been agreed upon,
especially in a stack of lengthy,
complex, highly technical, and often
pre-populated documents, at the close
of a long sales, financing or leasing
process after an already-lengthy process
of selecting the vehicle and negotiating
over its price or payment terms.
Consumers cannot reasonably avoid
charges of which they are unaware, or
regarding which they do not know they
have a choice.
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639	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
322 See Nat’l Auto. Dealers Ass’n et al.,
‘‘Voluntary Protection Products: A Model
Dealership Policy’’ 4 (2019), https://www.nada.org/
regulatory-compliance/voluntary-protection-
products-model-dealership-policy (stating
dealerships should ‘‘prominently display to
customers a poster stating that [add-on products or
services] offered by the dealership are optional and
are not required to purchase or lease a vehicle or
obtain warranty coverage, financing, financing on
particular terms, or any other product or service
offered by the dealership. . . .’’).
323 See, e.g., Fed. Trade Comm’n. v. Windward
Mktg., Inc., 1997 WL 33642380, at *10 (N.D. Ga.
Sept. 30, 1997)) (‘‘[A]ny representations concerning
the price of a product or service are presumptively
material.’’); Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984); see also Fed. Trade Comm’n v.
Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321
(S.D.N.Y. 2001) (‘‘Information concerning prices or
charges for goods or services is material, as it is
‘likely to affect a consumer’s choice of or conduct
regarding a product.’ ’’).
324 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
325 Individual commenter, Doc. No. FTC–2022–
0046–1216.
326 Individual commenter, Doc. No. FTC–2022–
0046–3693.
The injury to consumers from a lack
of information about add-on optionality
is not outweighed by benefits to
consumers or competition from
withholding this basic information.
Instead, information about the optional
nature of these products or services
protects consumers from lost time and
effort, supracompetitive transaction
costs, and unexpected charges while
increasing competition among dealers,
who are able to compete on truthful,
standard terms. Moreover, the cost of
providing this threshold information is
minimal, especially when compared to
the injury to consumers, and providing
such information is consistent with
existing industry guidance.322
This provision addresses deceptive
conduct as well. Throughout the lengthy
vehicle sales, financing, or leasing
process, dealers often discuss various
different charges at various different
times. Such charges include charges the
government requires the consumers to
pay and financing costs. Dealers then
often present consumers a total amount
to pay that differs from the advertised or
sticker price. Given that some additional
charges are required, if a dealer also
discusses charges for items that are not
required, such as optional add-ons, it is
reasonable for consumers to believe that
charges for such items are required. In
the course of a lengthy transaction
involving extensive negotiations,
dealers can obscure such products and
their associated charges in dense
paperwork. Moreover, the omitted
information is highly material: if
consumers knew that a particular
optional add-on was not required to
purchase the vehicle, it would likely
affect their choice about whether to
purchase the add-on.323
Thus, it is an unfair or deceptive act
or practice for dealers to fail to disclose,
when making a representation about an
add-on product or service, that the add-
on is not required and the consumer can
purchase or lease the vehicle without
the add-on, if true. Further, this
provision also serves to prevent the
misrepresentations prohibited by
§ 463.3—including misrepresentations
regarding material information about the
costs or terms of purchasing, financing,
or leasing a vehicle, or about any costs,
limitations, benefits, or any other aspect
of an add-on—by requiring consumers
to be told whether represented add-ons
are optional. It also helps prevent
dealers from failing to obtain the
express, informed consent of the
consumer for charges, as addressed by
§ 463.5(c).324 Thus, the Commission is
requiring dealers to disclose, when
making representations about add-ons,
that the add-ons are not required and
the consumer can purchase or lease the
vehicle without the add-ons, if true.
For the foregoing reasons, and having
considered all of the comments that it
received on this proposal, the
Commission is finalizing the required
disclosure at § 463.4(c) largely as
proposed, with the minor modifications
of capitalizing the defined term
‘‘Vehicle’’ and clarifying that the
requirements of § 463.4(c) also are
‘‘prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.3(a) and (b)
and 463.5(c).’’
(d) Total of Payments and Consideration
for a Financed or Lease Transaction
Section 463.4(d) of the Commission’s
proposed rule required dealers, when
making any representation about a
monthly payment for any vehicle, to
disclose the total amount the consumer
will pay to purchase or lease the vehicle
at that monthly payment after making
all payments as scheduled. If the total
amount disclosed assumes the
consumer will provide consideration,
the proposed rule required dealers to
disclose the amount of consideration to
be provided by the consumer. For the
reasons discussed in the following
paragraphs, the Commission is
finalizing the required disclosure at
§ 463.4(d) largely as proposed. The
Commission is capitalizing the defined
term ‘‘Vehicle’’ to conform with the
definition at § 463.2(e), and making the
minor grammatical correction of
replacing the semicolon and the word
‘‘and’’ at the end of § 463.4(d)(1) with a
period. The Commission also is adding
language to the end of § 463.4(d), at
newly designated (d)(3), clarifying that
the requirements in § 463.4(d) ‘‘also are
prescribed for the purpose of preventing
the unfair or deceptive acts or practices
defined in this part, including those in
§§ 463.3(a) and 463.5(c).’’
A number of commenters, including
consumer advocacy organizations,
supported this proposed requirement,
contending it would provide essential
information to the consumer while not
contributing to information overload,
and noting the information to be
disclosed would have been calculated
by the dealer in the process of
determining the proposed monthly
payment. Many individual commenters
also stressed the need for the
Commission’s proposal:
• Small businesses are a cornerstone
of our economy. Automotive dealers,
like other retailers, deserve to make a
reasonable profit in order to maintain
their physical plants, to purchase
inventory, and to pay their staff. That
being said, some auto dealers have for
years used misleading and often out-
and-out deceptive sales tactics (i.e., lies)
to generate sales. . . . Sometimes the
unwary consumer may not even realize
that the actual price differs from the
quoted price, because the automobile
finance agent speaks only in terms of
monthly payments rather than the total
cost. The consumer may not even
realize that he or she has been ‘‘taken’’
until a friend with an amortization table
runs the numbers.325
• At most dealerships, including the
one I work at, when a customer asks to
see figures on a car after a test drive,
management goes out of their way to
make sure the customer only sees the
monthly payment. The typical numbers
presented to the customer initially show
the price of the car, the trade-in value,
the down payment, and the monthly
payment options in bold numbers at the
bottom. The payments calculated by
management include add-ons, but the
price of the add-ons and how they affect
the payments are not shown. . . .
Compounding this issue of hidden add-
ons is that salespeople are instructed to
figure out the customer’s budget
beforehand (e.g., $450 per month). If the
monthly payment with the car and add-
ons comes out to be less than $450 per
month, management will often raise the
price of the add-ons to get the payment
to $450 or even slightly above.326
• I wholeheartedly support the
proposed regulation changes for car
dealerships and the car buying process.
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640 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
327 Individual commenter, Doc. No. FTC–2022–
0046–5567.
328 Individual commenter, Doc. No. FTC–2022–
0046–2176.
329 Individual commenter, Doc. No. FTC–2022–
0046–4034.
330 Individual commenter, Doc. No. FTC–2022–
0046–4911.
331 Individual commenter, Doc. No. FTC–2022–
0046–5958.
332 Individual commenter, Doc. No. FTC–2022–
0046–8847.
333 Individual commenter, Doc. No. FTC–2022–
0046–6405.
334 Individual commenter, Doc. No. FTC–2022–
0046–3860.
335 Individual commenter, Doc. No. FTC–2022–
046–9469 at 6–7.
336 See, e.g., Writing, Black’s Law Dictionary (11th
ed. 2019) (defining ‘‘writing’’ as ‘‘[a]ny intentional
recording of words in a visual form, whether in
handwriting, printing, typewriting, or any other
tangible form that may be viewed or heard with or
without mechanical aids.’’); cf. Fed. R. Evid. 1001(a)
(defining ‘‘writing’’ as letters, words, numbers, or
their equivalent set down in any form’’).
337 These association commenters made these
contentions regarding the monthly payment
disclosures at both § 463.4(d) and (e). The
Commission responds to these contentions in this
section.
338 One industry commenter, in expressing
concern that § 463.4(d) and (e) may conflict with
Regulations Z and M, questioned whether the FTC
coordinated with the Federal Reserve Board.
Several Senators similarly questioned whether the
FTC consulted with the Federal Reserve Board,
CFPB, or other agencies. Although the Commission
cannot comment on specific interactions, it
coordinates regularly with other Federal agencies,
including the Federal Reserve Board and the CFPB.
339 See 12 CFR 1026.24(b), (d)(2)(ii).
340 See 12 CFR 1013.7(b), (d)(2)(iii).
As an average consumer who has bought
3 vehicles with financing and 2 without,
I can see the obvious benefit these
proposed regulations would have on the
car buying process. The vast quantities
of paperwork and add [-]ons make it
easy for car dealers to switch things
around to their benefit. I had one
dealership . . . change the term of my
auto loan from 72 to 84 months in the
middle of reprinting the final sales sheet
because of another obvious error in the
first copy. In the midst of all the
distractions and misdirection going on,
[I] didn’t notice [‘]til[l] after the fact. I
felt powerless and cheated. . . .327
• There is no reason that buying a car
has to be a chore and so ambiguous on
price. The dealer was also so twisted up
on getting me to focus on the monthly
payment and not the total price of the
car and that is where they were able to
sneak the price up. Practices like this
are also why people have such a disdain
for purchasing a new/used car.328
• I have experienced many of the
‘‘typical’’ tactics that one hears about
when negotiati[ng] with an automobile
dealership, like the salesperson always
wanting to talk about the monthly
payment and never the actual trade-in
price and sales price. . . . I agree that
the whole car buying process could be
made easier and I see no reasons that
any fair and honest car dealership
would object to these proposed changes/
rules as they, in my estimation are all
things that a fair and honest car dealer
should be doing anyway. The only car
dealers that should be objecting to these
new rules should be the unscrupulous
dealers.329
• When buying a car dealers try to
negotiate the monthly payment, so the
actual total cost is hidden from the
buyer until they get into the ‘‘financing
office’’ where all kinds of unexpected
add-ons are sprung on the consumer.330
• I am trying to buy a new car, from
the factory, with no modifications or
alterations, is it so much to ask for? The
process of figuring out the price of the
car is impossible. The sales people are
all about the monthly payment, when I
asked them what the car price is the
answer is always what payment are you
looking for. 331
• They only want to gain the amount
you can be ‘‘comfortable’’ on your
monthly payment so that they can
stretch out the term and hammer you
with hidden fees and other expenses
you won[’]t be able to see right away.332
• Dealerships always want you to
come in so they can manipulate you
into a car you can[’]t afford and pay for
things you don’t need by hiding them in
a monthly payment. 333
• If we had to do our grocery
shopping the same way dealers want us
to buy a car, most Americans would
starve before sunset. ‘‘What kind of
monthly payment are you looking for in
a banana?’’ is a conversation I should
never be forced to have. . . .334
One individual commenter requested
that the Commission make clear that
handwritten negotiation notes made by
a dealer would trigger the requirement
that this proposed disclosure be made in
writing. 335 In response, the Commission
affirms such representations have been
made ‘‘in writing,’’ 336 and thus, where
dealers represent a monthly payment in
such notes, this provision requires them
to provide the disclosures in § 463.4(d)
in writing.
Other commenters, including industry
associations and individual
commenters, questioned whether the
proposal would require a disclosure in
every place a monthly payment appears
on a dealer’s website, or otherwise
would be difficult or infeasible given
the frequency with which dealers
provide consumers with monthly
payment information, suggesting that
such a requirement could either
overwhelm consumers or dissuade
dealers from providing monthly
payment information, or arguing 337 that
the proposal overlapped with other laws
such as the Truth in Lending Act or the
Consumer Leasing Act. Regarding
monthly payment amounts appearing
more than once or in multiple places,
the Commission notes that, as proposed,
this section would require disclosure of
the total purchase or lease amount for a
vehicle including any assumed
consumer-provided consideration, and
only when making a representation
about the vehicle’s monthly payment
amount; it would not require a complex
or lengthy disclosure. Consumers shop
for vehicles and interact with online
interfaces, and other advertising in
many different ways; thus, it is
important for this simple disclosure to
accompany a monthly payment
representation however a consumer
might encounter it. Moreover, the
Commission has taken into account
existing disclosure obligations.338
Monthly payment amounts for motor
vehicle sales or leases constitute so-
called ‘‘triggering terms’’ under the
Truth in Lending Act, the Consumer
Leasing Act, and their implementing
Regulations Z and M. As such, dealers
currently providing such information,
including on their websites or other
online interfaces, are bound by existing
laws that require providing consumers
with additional terms in a clear and
conspicuous way: in the case of vehicle
credit transaction offers, this includes
the terms of repayment, which reflect
the repayment obligations over the full
term of the loan; 339 in the case of
vehicle lease offers, this includes the
number, amounts, and due dates or
periods of scheduled payments under
the lease.340 The Commission’s
disclosure requirement takes into
account these existing obligations,
requiring, specifically: the total amount
the consumer will pay to purchase or
lease the vehicle at a represented
monthly payment amount including any
assumed consumer-provided
consideration. Similarly, regarding the
feasibility of providing this disclosure
as often as dealers provide consumers
with monthly payment information:
once dealers choose to make a
representation about a monthly
payment, they are capable of disclosing
a total of payments for the consumer
based on the same inputs needed to
arrive at that voluntary monthly
payment representation.
The Commission further notes that, in
the event a monthly payment is already
being disclosed, the associated total of
payment would be calculated with the
same financing or leasing estimates used
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341 As is currently the case under Federal law and
the Final Rule, the terms must be the terms
available to the typical consumer. See, e.g., Fed.
Trade Comm’n v. Five Star Auto Club, 97 F. Supp.
2d 502, 528 (S.D.N.Y. 2000) (‘‘[A]t the very least it
would have been reasonable for consumers to have
assumed that the promised rewards were achieved
by the typical Five Star participant.’’). This is
consistent with prior FTC enforcement actions. See,
e.g., Complaint ¶¶ 48–53, 82–84, Fed. Trade
Comm’n v. Universal City Nissan, Inc., No. 2:16–
cv–07329 (C.D. Cal. Sept. 29, 2016) (alleging
unlawful deception where a dealer’s advertisements
list prominent terms not generally available to
consumers, including where those terms are subject
to various qualifications or restrictions); Complaint
¶¶ 8–10, Progressive Chevrolet Co., No. C–4578
(F.T.C. June 13, 2016) (alleging advertised offer was
deceptive because the typical consumer would not
qualify for the offer).
342 One commenter requested clarification or
deletion of ‘‘any,’’ ‘‘by implication’’ and
‘‘indirectly’’ from § 463.4(c) and (e) for the same
reasons it articulated with regard to § 463.4(d): that
the terms are too vague. The explanation provided
in the text pertains to these sections as well.
343 The FTC Policy Statement on Deception and
FTC cases make clear that both express and implied
claims can be deceptive. See, e.g., ECM Biofilms,
Inc. v. Fed. Trade Comm’n, 851 F.3d 599 (6th Cir.
2017) (affirming Commission’s finding that an
additive manufacturer’s unqualified
biodegradability claim conveyed an implied claim
that its plastic would completely biodegrade within
five years); POM Wonderful LLC, Doc. No. C–9344
(F.T.C. Jan. 10, 2013) (Opinion of the Commission),
generally aff’d by POM Wonderful, LLC v. Fed.
Trade Comm’n, 777 F.3d 478 (D.C. Cir. 2015)
(finding that company’s advertisements would
reasonably be interpreted by consumers to contain
an implied claim that POM products treat, prevent,
or reduce the risk of certain health conditions and
for some ads that these effects were clinically
proven); Kraft, Inc. v. Fed. Trade Comm’n, 970 F.2d
311 (7th Cir. 1992) (affirming finding of deception
where Kraft advertisements juxtaposed references to
the milk contained in Kraft singles and the calcium
content of the milk, the combination of which
implied that each Kraft single contained the same
amount of calcium as five ounces of milk). Further,
to be considered reasonable, the interpretation or
reaction does not have to be the only one; when a
seller’s representation conveys more than one
meaning to reasonable consumers, one of which is
false, the seller is liable for the misleading
interpretation. See FTC Policy Statement on
Deception, supra note 42, at 3. Further, an
interpretation will be presumed reasonable if it is
the one the respondent intended to convey. Id.
344 See, e.g., Telemarketing Sales Rule, 16 CFR
310.3(a)(2) (prohibiting ‘‘[m]isrepresenting, directly
or by implication, in the sale of goods or services’’
a list of ten categories of material information); 16
CFR 310.2(o) (defining ‘‘debt relief service’’ as any
program or service ‘‘represented, directly or by
implication, to renegotiate, settle, or in any way
alter’’ certain terms); 16 CFR 310.5(a)(2) (requiring
telemarketers to keep records of certain prize and
prize-recipient information ‘‘for prizes that are
represented, directly or by implication, to have a
value of $25.00 or more’’); Business Opportunity
Rule, 16 CFR 437.1(c) (defining a ‘‘(b)usiness
opportunity’’ as a commercial arrangement in
which, among other criteria, ‘‘[t]he seller, expressly
or by implication, orally or in writing, represents
that’’ it will provide, inter alia, business locations,
outlets, accounts, or customers); Disclosure
Requirements and Prohibitions Concerning
Franchising, 16 CFR 436.1(e) (defining ‘‘(f)inancial
performance representation’’ as any representation
to a prospective franchisee that states, ‘‘expressly or
by implication, a specific level or range’’ of sales,
income, or profits); Military Credit Monitoring Rule,
16 CFR 609.3(e) (describing as prohibited materials
those that ‘‘expressly or by implication’’ represent
certain ‘‘interfering, detracting, inconsistent, and/or
undermining’’ information); Rules and Regulations
Under Fur Products Labeling Act, 16 CFR 301.14
(requiring an ‘‘unknown’’ origin disclosure when
‘‘no representations are made directly or by
implication’’ regarding the origin of used furs); 16
CFR 301.18 (regulating the ‘‘passing off’’ of
domestic furs as imported by prohibiting labeling,
invoicing, or advertising that ‘‘represent[s] directly
or by implication’’ that such furs have been
imported); 16 CFR 301.43 (regulating the use of
deceptive trade or corporate names by prohibiting
any ‘‘representation which misrepresents directly or
by implication’’ certain information); Power Output
Claims for Amplifiers Utilized in Home
Entertainment Products, 16 CFR 432.1(a) (defining
the regulation’s scope when certain amplifier
features or characteristics are ‘‘represented, either
expressly or by implication, in connection with the
advertising, sale, or offering for sale’’).
345 See FTC Policy Statement on Deception, supra
note 42, at 2.
346 12 CFR 1026.24(d) (emphasis added).
347 12 CFR 1013.7(d) (emphasis added).
348 See, e.g., Business Opportunity Rule, 16 CFR
437.6 (prohibiting ‘‘any seller, directly or indirectly
through a third party’’ from engaging in certain
prohibited practices); Credit Practices Rule, 16 CFR
444.2 (prohibiting as unfair ‘‘a lender or retail
installment seller directly or indirectly’’ taking or
receiving certain obligations from a consumer); 16
CFR 444.3 (prohibiting as deceptive ‘‘a lender or
retail installment seller, directly or indirectly’’
misrepresenting cosigner liability, and prohibiting
as unfair ‘‘a lender or retail installment seller,
directly or indirectly’’ obligating a cosigner under
certain circumstances); 16 CFR 444.4 (prohibiting as
unfair the act or practice of ‘‘a creditor, directly or
indirectly’’ levying or collecting certain late
charges); Telemarketing Sales Rule, 16 CFR
310.3(a)(3) (prohibiting as deceptive the act or
practice of ‘‘[c]ausing billing information to be
submitted for payment, or collecting or attempting
Continued
to calculate the monthly payment.
Dealers already must be prepared to
calculate such a total to satisfy their
obligations under TILA, the CLA, or
their implementing regulations.341
Regarding § 463.4(d)’s similarity to
existing laws, as discussed previously,
this provision is indeed consistent with
other laws, and commenters have not
indicated how providing truthful
information about total payment
amounts along with information they
already provide about monthly payment
amounts would unduly burden them or
harm consumers, or how providing such
information in writing before providing
consumers with the contract, if they are
already providing monthly payment
information in writing prior to the
contract, would do so.
Some dealership associations
described certain elements of the
proposal as vague or unclear, requesting
that the Commission clarify its use of
the term ‘‘by implication’’ with regard to
a monthly payment, or alternatively,
that the Commission omit the terms
‘‘any’’ (as it pertains to ‘‘any
representation’’), ‘‘by implication,’’ and
‘‘indirectly’’ from the proposed
disclosure provision.342 Regarding the
use of the term ‘‘by implication’’ with
regard to a monthly payment, as
discussed in the section-by-section
analysis of § 463.3 in SBP III.C with
respect to the prohibition on express or
implied misrepresentations, the
Commission notes that such language is
consistent with longstanding law, and
given that representations can mislead
reasonable consumers even without
making express claims, the provision
could be rendered meaningless without
it. 343 Variations of the phrase ‘‘expressly
or by implication’’ appear frequently in
existing Commission guides and
regulations,344 and implied claims are
treated extensively in the longstanding
FTC Policy Statement on Deception,
which the Commission issued in 1983
to provide guidance to the public on the
meaning of deception.345 Furthermore,
this language serves to help ensure that
dealers may not avoid this disclosure
requirement by making only implied
reference to monthly payments,
including by referring to a monthly
payment amount that is not explicitly
identified as such, or by referring to a
regular periodic payment made on a
different installment basis (e.g., a
biweekly payment) to indirectly
illustrate a consumer’s monthly
payment obligations.
These same reasons also counsel
against deleting the terms ‘‘any’’ and
‘‘indirectly’’ from this proposed
disclosure provision. To begin, one
dealership association commenter
suggested deleting these terms from the
regulatory text, but did not explain the
nature of its specific concern regarding
its use of the term ‘‘any,’’ instead
claiming generally that the terms with
which the commenter took issue were
‘‘broad,’’ ‘‘vague,’’ and ‘‘imprecise.’’ As
proposed, the Commission’s total
payments disclosure would be required
when a dealer makes ‘‘any
representation . . . about a monthly
payment for any vehicle.’’ These
disclosure circumstances are markedly
similar to those under Regulation Z and
Regulation M: Regulation Z requires the
disclosure of additional payment terms
when ‘‘any’’ of a number of terms is set
forth, including ‘‘[t]he amount of any
payment’’; 346 Regulation M similarly
requires the disclosure of additional
terms when ‘‘any’’ of a number of items
is stated, including ‘‘[t]he amount of any
payment.’’ 347 The use of the term ‘‘any’’
is consistent with existing law, and thus
is not confusing or impracticable.
Furthermore, as with representations
made ‘‘by implication,’’ the Commission
has a longstanding practice of regulating
representations made ‘‘indirectly’’ in the
same manner as those made directly,348
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642 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
to collect payment for goods or services or a
charitable contribution, directly or indirectly’’
without express verifiable authorization); 16 CFR
310.4(a)(7) (prohibiting as abusive the act or
practice of ‘‘[c]ausing billing information to be
submitted for payment, directly or indirectly,
without the express informed consent of the
customer or donor’’); Mail, internet, or Telephone
Order Merchandise Rule, 16 CFR 435.1(f) (defining
‘‘Telephone’’ as ‘‘any direct or indirect use of the
telephone to order merchandise. . . .’’);
Preservation of Consumers’ Claims and Defenses, 16
CFR 433.2 (prohibiting as an unfair or deceptive act
or practice ‘‘for a seller, directly or indirectly’’ to
take or receive a consumer credit contract which
does not contain the Commission’s ‘‘Holder Rule’’
provision); Prohibition of Energy Market
Manipulation Rule, 16 CFR 317.3 (declaring ‘‘[i]t
shall be unlawful for any person, directly or
indirectly’’ to engage in certain energy market
manipulation practices); Trade Regulation Rule
Pursuant to the Telephone Disclosure and Dispute
Resolution Act of 1992, 16 CFR 308.7(i) (declaring
that regulated persons may not ‘‘report or threaten
directly or indirectly to report adverse information’’
on a consumer report under certain circumstances).
349 Importantly, as is the case under current law,
a dealer may not mislead the consumer about the
likelihood of qualifying for any particular credit or
leasing terms in the course of providing this
disclosure. Generally speaking, such deception is
less likely where the dealer communicates to the
consumer any assumptions it may have made, along
with the basis for any such assumptions, in a
manner in which the consumer understands this
information.
350 Buckle Up, supra note 63, at 7.
351 Consumer Fin. Prot. Bureau, ‘‘Quarterly
Consumer Credit Trends: Growth in Longer-Term
Auto Loans’’ 7–8 (Nov. 2017), https://files.consumer
finance.gov/f/documents/cfpb_consumer-credit-
trends_longer-term-auto-loans_2017Q2.pdf; see also
Zhengfeng Guo et al., Off. of the Comptroller of the
Currency, ‘‘A Puzzle in the Relation Between Risk
and Pricing of Long-Term Auto Loans’’ 2, 4–5, 20
(June 2020), https://www.occ.gov/publications-and-
resources/publications/economics/working-papers-
banking-perf-reg/pub-econ-working-paper-puzzle-
long-term-auto-loans.pdf (finding motor vehicle
financing with six-plus-year terms have higher
default rates than shorter-term financing during
each year of their lifetimes, after controlling for
borrower and loan-level risk factors).
352 See Auto Buyer Study, supra note 25, at 14
(‘‘[T]he dealer can extend the maturity of the
financing to reduce the effect of the add-on on the
monthly payment, obscuring the total cost of the
add-on’’); Auto Buyer Study: Appendix, supra note
66, at 229, 233 (Study participant 457481)
(dealership pitching add-ons at the end of the
negotiation, and in terms of consumer’s monthly
price); Auto Buyer Study: Appendix, supra note 66,
at 701 (Study participant 437175) (dealership
pitching add-ons in terms of monthly price); see
also Complaint ¶¶ 12–19, Fed. Trade Comm’n v.
Liberty Chevrolet, Inc., No. 1:20–cv–03945 (S.D.N.Y.
May 21, 2020) (alleging dealership included
deceptive and unauthorized add-on charges in
consumers’ transactions); Complaint ¶¶ 21–28, Fed.
Trade Comm’n v. Ramey Motors, No. 1:14–cv–
29603 (S.D. W. Va. Dec. 11, 2014) (alleging dealer
emphasized attractive terms such as low monthly
payments but concealed substantial cash down
payments or trade-in requirements); Complaint
¶¶ 38–46, Fed. Trade Comm’n v. Billion Auto, Inc.,
No. 5:14–cv–04118–MWB (N.D. Iowa Dec. 11, 2014)
(alleging dealer touted attractive terms such as low
monthly payments but concealed significant extra
costs).
353 See, e.g., Fed. Trade Comm’n v. Windward
Mktg., Inc., No. Civ.A. 1:96–CV–615F, 1997 WL
33642380, at *10 (N.D. Ga. Sept. 30, 1997) (‘‘[A]ny
representations concerning the price of a product or
service are presumptively material.’’); Removatron
Int’l Corp., 111 F.T.C. 206, 309 (1988) (‘‘The
Commission presumes as material express claims
and implied claims pertaining to a product’s . . .
cost.’’ (citing Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984)).
and it does so to help ensure that its
requirements are effective and not easily
avoided. The Commission thus declines
to modify their usage in § 463.4(d).
Some commenters, including a
dealership association, questioned
whether the disclosure requirement
would require dealers to obtain
individuals’ consumer reports before
providing monthly payment
information. In response, the
Commission notes that § 463.4(d) does
not alter the status quo regarding the
information a dealer must have in order
to represent a monthly payment
amount. As previously discussed, this
provision does not require disclosure of
a monthly payment; instead, if a dealer
chooses to represent a monthly payment
amount, § 463.4(d) requires a
corresponding disclosure of ‘‘the total
amount the consumer will pay to
purchase or lease the vehicle at that
monthly payment.’’ As previously
explained in detail, dealers are capable
of disclosing a total of payments for the
consumer based on such voluntary
monthly payment representations.
Furthermore, to the extent a dealer may
be providing consumers with estimated
monthly payment information, the
dealer may use the same assumptions
used for estimating the monthly
payment in order to determine the total
of payments. Further, as is required
under other law and this Rule, the
dealer must refrain from deception,
including by avoiding assumptions that
the consumer would not reasonably
expect or for which the consumer would
not reasonably qualify.349
When making a representation,
expressly or by implication, directly or
indirectly, about a monthly payment for
any vehicle, the failure to disclose the
total amount the consumer will pay,
inclusive of any consideration, to
purchase or lease the vehicle at that
monthly payment after making all
payments as scheduled is likely to cause
substantial injury to consumers who
waste time and effort pursuing offers
that are not actually available at
reasonably expected terms; or who pay
more for a vehicle sales or lease
transaction than they expected by being
subject to hidden charges or an
unexpected down payment or trade-in
requirement; or who are subject to the
higher financing or leasing costs and
greater risk of default associated with an
unexpectedly lengthy loan or lease term.
Moreover, when a consumer pays for his
or her vehicle over a longer period of
time, there is an increased likelihood
that negative equity will result when the
consumer needs or wants to purchase or
lease another vehicle, because a
vehicle’s value tends to decline faster
than the amount owed.350 Longer motor
vehicle financing term lengths also have
higher rates of default, potentially
posing greater risks to both borrowers
and financing companies. 351 Even if a
consumer eventually learns the true
total payment, or later learns that the
terms being discussed are based on a
previously undisclosed requirement that
the consumer provide consideration,
such as a down payment, the consumer
cannot recover the time spent pursuing
the offer that the consumer had
expected.
The injury caused by the failure to
disclose the total amount and
consideration is not reasonably
avoidable. As the Commission has
observed previously, withholding total
payment information enables dealers to
focus consumers on the monthly
payment amount in isolation. Under
such circumstances, dealers may add
unwanted, undisclosed, or even
fictitious add-on charges more easily,
since consumers may not notice the
relatively small changes an add-on
charge makes when secreted within a
monthly vehicle payment, despite the
fact that such hidden charges can cost
a consumer more than a thousand
dollars over the course of an auto
financing or lease term.352 The absence
of information concerning the total of
payments—which is within the sole
control of the dealership—also enables
dealers to use claims regarding monthly
payment amounts to falsely imply
savings or parity between different
offers where reduced monthly payments
increase the total vehicle cost due to an
increased payment term or annual
percentage rate.
The injury to consumers from a lack
of total payment information is not
outweighed by benefits to consumers or
competition from withholding this basic
information. Instead, the burden of
disclosing this information—which the
dealer determines and can calculate
upfront—is minimal for dealers who are
already making representations about a
monthly payment for a vehicle,
especially when compared to the injury
to consumers.
Regarding deception, as detailed in
the NPRM and in this SBP, cost is one
of the most material pieces of
information for a consumer in making
an informed purchasing decision.353 Yet
it can be difficult for consumers to
uncover the actual costs, and their
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643	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
354 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
355 Individual commenter, Doc. No. FTC–2022–
0046–0141.
356 Individual commenter, Doc. No. FTC–2022–
0046–0985.
357 Individual commenter, Doc. No. FTC–2022–
0046–1652.
358 Individual commenter, Doc. No. FTC–2022–
0046–7569.
359 Individual commenter, Doc. No. FTC–2022–
0046–0115.
360 Individual commenter, Doc. No. FTC–2022–
0046–0050.
actual associated terms, for which a
dealer will sell or lease an advertised
vehicle until visiting the dealership and
spending hours on the lot. When an
advertisement or other communication
references a monetary amount or
financing term, it is reasonable for a
consumer to expect that those amounts
and terms are available for a vehicle at
other standard terms, and, in the
absence of information to the contrary,
that no down payment or other
consideration is required. If instead, for
example, a dealer advertises a low
monthly payment based on an
unexpectedly long financing term or
unexpectedly high interest rate that
results in a higher total payment than
standard terms would have yielded, or
based on an expected but undisclosed
down payment or other consideration to
be provided by the consumer, the
consumer will be induced to visit the
dealership based on a misimpression of
what they reasonably expect the total
payment to be.
If consumers knew that the true terms
were beyond what was expected, or
their transaction included charges for
unwanted items, that would likely affect
their choice to visit a particular
dealership over another dealership.
Thus, misleading consumers about cost
information is material. A lack of total
payment information therefore is likely
to affect a consumer’s decision to
purchase or lease a particular vehicle
and is material, and paying an increased
total cost causes substantial consumer
injury.
Thus, it is an unfair or deceptive act
or practice for dealers to fail to disclose
when making any representation about
a monthly payment for any vehicle, the
total amount the consumer will pay to
purchase or lease the vehicle at that
monthly payment after making all
payments as scheduled, inclusive of
assumed consideration. Further, this
provision also addresses the
misrepresentations prohibited by
§ 463.3—including misrepresentations
regarding material information about the
costs or terms of purchasing, financing,
or leasing a vehicle—by requiring
consumers to be provided with the total
payment amount associated with any
represented monthly payment amount.
It also helps prevent dealers from failing
to obtain the express, informed consent
of the consumer for charges, as required
by § 463.5(c).354 To address these unfair
or deceptive acts or practices, the
Commission is requiring dealers to
disclose, when making any
representation about a monthly payment
for any vehicle, the total amount the
consumer will pay to purchase or lease
the vehicle at that monthly payment
after making all payments as scheduled,
inclusive of assumed consideration. As
with a vehicle’s price, when cost
information in the market is distorted or
concealed—especially in document- and
time-intensive vehicle transactions—
consumers are unable to effectively
differentiate between sellers, and sellers
trying to deal honestly with consumers
are put at a competitive disadvantage.
For the foregoing reasons, and having
considered all of the comments that it
received, the Commission is finalizing
the required disclosure at § 463.4(d)
largely as proposed, with the minor
modifications of capitalizing the defined
term ‘‘Vehicle,’’ substituting a period for
a semi-colon and the word ‘‘and’’ at the
end of § 463.4(d)(1), and clarifying that
the requirements of § 463.4(d) also are
‘‘prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.3(a) and
463.5(c).’’
(e) Monthly Payments Comparison
Proposed § 463.4(e) required dealers,
when making any comparison between
payment options that includes
discussion of a lower monthly payment,
to disclose that the lower monthly
payment will increase the total amount
the consumer will pay to purchase or
lease the vehicle, if true. For the reasons
discussed in the following paragraphs,
the Commission is finalizing the
required disclosure at § 463.4(e) largely
as proposed. The Commission is
capitalizing the defined term ‘‘Vehicle’’
to conform with the definition at
§ 463.2(e). The Commission also is
adding language to the end of § 463.4(e)
clarifying that the requirements in
§ 463.4(e) ‘‘also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and 463.5(c).’’
A number of institutional commenters
supported such a provision,
emphasizing that it would provide an
appropriate amount of helpful
information and help make the true
terms of a car deal much clearer to
consumers. Many individual
commenters also stressed the need for
the Commission’s proposal:
• My car buying experience involving
dealers has include [sic] many of the
issues identified, such as: . . .
Negotiating a 4 year loan with a known
loan payment (did math prior to final
steps). Presented paperwork with a
similar but lesser monthly payment.
Dealer had changed terms to 5 year loan
without open disclosure. Happy to hear,
‘‘the bank gave you a better rate, you got
a smaller payment,’’ almost didn’t catch
what they’d done.355
• I have purchased about 10 new
vehicles in my lifetime. . . . They prey
on monthly payments as a tool, saying
they can lower the monthly payment
but not telling customers they added
months or years to the term. Anything
that forces them to be honest is a great
justice for consumers! 356
• Sometimes, when you are in
negotiations with a car dealer, they
engage in deceptive practices by
lowering your monthly payment amount
without telling you how they lowered it.
They may have increased your down
payment or increased your interest rate
or increased your term of the loan. This
can lead [t]o much higher costs for the
consumer. I had reached an agreement
with a dealer to lower my monthly
payments, but what they didn’t tell me
until I got into the F & I manager’s office
is that my deal [was] for 6 years, not 4,
and they increased my interest rate.357
• . . . I was quoted a payment at 72
months with adding aftermarket
warranty but come to find out they
extended my term to 76 months in order
to meet what I wanted to pay monthly.
I did not find this out until after I
bought the car. Very dishonest
dealership. This last minute bait and
switch has to stop.358
• I purchased a truck from a
Tennessee truck dealer. After agreeing
on a monthly payment of $920 for 72
months, I travelled to the dealership to
complete the purchase, but the finance
office changed the terms to 84 months
with the same monthly payment,
effectively adding $11,000 to their
profit! 359
• I just want to walk in to a
dealership, find a car that fits my needs
and buy it. And what is up with these
RIDUCULOUSLY [sic] long loan terms?
72 MONTHS? If someone cannot afford
a car dealers shouldn’t extend the loan,
they should steer them to a more
affordable car! 360
The Commission received numerous
comments relating to the scope and
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644 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
361 As previously indicated, some such
association commenters contended generally that
the proposed total of payments disclosures at
§ 463.4(d) and (e) overlapped with the Truth in
Lending Act or other laws. The Commission
responds to this point in the context of the
discussion of § 463.4(d), in SBP III.D.2(d).
362 Depending on the circumstances, a dealer may
need to take additional measures, such as disclosing
the specific basis for any increase in total costs, or
amount of any such increase, in order to avoid
deceiving consumers.
363 See, e.g., Fed. Trade Comm’n v. Windward
Mktg., Inc., No. Civ.A. 1:96–CV–615F, 1997 WL
33642380, at *10 (N.D. Ga. Sept. 30, 1997) (‘‘[A]ny
representations concerning the price of a product or
service are presumptively material.’’); Removatron
Int’l Corp., 111 F.T.C. 206, 309 (1988) (‘‘The
Commission presumes as material express claims
and implied claims pertaining to a product’s . . .
cost.’’ (citing Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984)); see also Fed. Trade Comm’n v.
Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321
(S.D.N.Y. 2001) (‘‘Information concerning prices or
charges for goods or services is material, as it is
‘likely to affect a consumer’s choice of or conduct
regarding a product.’ ’’).
terms of its proposed monthly payments
comparison disclosure. A number of
institutional and individual commenters
urged the Commission to require that
such disclosures uniformly be provided
to consumers in writing. The
Commission agrees with commenters
that many monthly payment
comparisons happen verbally, in the
course of discussions with consumers.
As proposed, the Commission’s monthly
payment comparison disclosure made
clear that such discussions are covered,
and that dealers would be required to
inform consumers in the course of such
discussions—‘‘[w]hen making any
comparison between payment
options’’—if a represented lower
monthly payment will increase the total
amount the consumer will pay to
purchase or lease the vehicle. The
Commission believes there are
significant consumer benefits when
such disclosures are made verbally,
close in time to when monthly payment
options are discussed. Given that car-
buying and leasing transactions are
already lengthy and paperwork-heavy,
the Commission believes it must be
judicious with any additional written
disclosure requirements to avoid
crowding out other disclosures or other
important information. Accordingly, the
Commission has determined not to
modify § 463.4(e) from its original
proposal in order to mandate that the
required disclosure always be made in
writing. The Commission will continue
to monitor the market for any further
developments in this area and will
consider whether to modify this or other
Final Rule provisions in the future.
Some commenters, including
consumer advocacy organizations, urged
the Commission to adopt specific
proposed language rather than a general
disclosure requirement, or a
requirement that this disclosure include
the total amount the consumer will pay
at the lower monthly payment under
discussion. Regarding the proposal to
require particular, uniform disclosure
language, the Commission did not
receive, in the course of public
comment, evidence sufficient to
conclude that uniform formatting for the
delivery of such disclosures would be
necessary to make them effective. The
Commission currently lacks information
to evaluate whether any particular form
disclosure would effectively
communicate the required information
to consumers in a manner that in all
circumstances obviates deceptive or
unfair conduct. Moreover, regarding the
proposal to require that the monthly
payment comparison disclosure
additionally require dealers to disclose
the new total amount that the consumer
will pay, the Commission emphasizes
that part 463 will require such a
disclosure without the need to modify
this provision from the Commission’s
original proposal. As noted in the
paragraph-by-paragraph analysis of
§ 463.4(d) in SBP III.D.2(d), the
Commission is finalizing § 463.4(d),
which requires dealers making any
representation about a monthly payment
for a vehicle to disclose the total amount
the consumer will pay to purchase or
lease the vehicle at a given monthly
payment amount after making all
payments as scheduled, inclusive of
assumed consideration, largely as
proposed. The monthly payment
comparison discussions covered by
§ 463.4(e) are those that ‘‘include[]
discussion of a lower monthly
payment.’’ To the extent a dealer, in the
course of such discussions, makes a
representation ‘‘about a monthly
payment for any Vehicle,’’ § 463.4(d)
will require the dealer to disclose the
total amount the consumer will pay at
that monthly payment amount.
Comments, including those from a
number of dealership associations 361
and an individual commenter,
characterized the Commission’s
proposal as burdensome and likely to
lead to excessive disclosures while
providing little additional assistance to
consumers. In response, the
Commission emphasizes the
streamlined nature of proposed
§ 463.4(e). In its proposal, the
Commission refrained from additional
formal mandates in order to provide
dealers with flexibility, within the
bounds of the law, to provide this
essential information—that a given
lower monthly payment will increase
the total amount the consumer will
pay—including so that dealers already
conveying this information in a non-
deceptive manner may continue to do
so.
Thus, after careful review of the
comments, the Commission has
determined to finalize § 463.4(e) largely
as proposed. When making any
comparison between payment options,
expressly or by implication, directly or
indirectly, that includes discussion of a
lower monthly payment, the failure to
disclose that the lower monthly
payment will increase the total amount
the consumer will pay to purchase or
lease the vehicle, if true, is likely to
mislead consumers regarding the total
terms associated with the lower
monthly payment amount. When a
dealer elects to compare between
different monthly payment options, if
the lower monthly payment would
result in a higher total transaction cost,
discussion of this fact is necessary to
prevent the comparison from being
misleading. Absent this information, it
is reasonable for a consumer who is
presented with a monthly payment
comparison to expect that the lower
monthly payment amount would
correspond to lower total transaction
cost. This is because the opposite can
only be true if the dealer has created a
so-called ‘‘apples to oranges’’
comparison, in which an undisclosed
element of the transaction—such as the
length of the payment term, or the
existence of a balloon payment—has not
been kept constant across the two
monthly payment scenarios being
compared. Under such circumstances,
without providing the consumer with
further information, the dealer’s claims
regarding monthly payment amounts
falsely imply saving or parity between
different offers where reduced monthly
payments increase the total vehicle cost.
Thus, where a lower monthly payment
amount represents a more expensive
transaction, the dealer must, at a
minimum, disclose this simple but
counterintuitive fact to not deceive
consumers.362
Furthermore, as explained in the
NPRM and in the paragraph-by-
paragraph discussion of § 463.4(d) in
SBP III.D.2(d), cost is one of the most
material pieces of information for a
consumer in making an informed
purchasing decision. 363
Regarding unfairness, when making
any comparison between payment
options, expressly or by implication,
directly or indirectly, that includes
discussion of a lower monthly payment,
the failure to disclose that the lower
monthly payment will increase the total
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645	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
364 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
amount the consumer will pay to
purchase or lease the vehicle, if true, is
likely to cause substantial injury to
consumers who waste time and effort
pursuing offers that are not actually
available at the total payment amount
they expect; or who pay more for a
vehicle sales or lease transaction than
they expected by being subject to
hidden charges or an unexpected down
payment or trade-in requirement; or
who are subject to the higher financing
costs and greater risk of default
associated with an unexpectedly
lengthy loan term.
Furthermore, the injury caused by
withholding this information is not
reasonably avoidable by consumers.
During negotiations, if dealers agree to
a lower monthly payment, consumers
have no reason to expect that this
apparent ‘‘concession’’ in fact means an
increased total vehicle cost due to an
increased payment term or annual
percentage rate. Under such
circumstances, dealers can also add
unwanted, undisclosed, or even
fictitious add-on charges more easily, by
increasing the payment term enough
that including add-on charges would
still result in a lower monthly payment
as a ‘‘concession’’ to the consumer. The
injury to consumers from a lack of price
information is not outweighed by any
benefits to consumers or competition
from withholding this basic
information. Instead, information about
increased cost protects consumers from
lost time and effort, and unexpected
charges while increasing competition
among dealers, who would be able to
compete on truthful, standard terms.
The costs of stating that the total
payment has increased—which the
dealer determines and can calculate
upfront—are minimal for dealers that
are already making representations
about a monthly payment for a vehicle,
especially when compared to the injury
to consumers.
Thus, it is an unfair or deceptive act
or practice for dealers to fail to disclose,
when making any comparison between
payment options, expressly or by
implication, directly or indirectly, that
includes discussion of a lower monthly
payment, that the lower monthly
payment will increase the total amount
the consumer will pay to purchase or
lease the vehicle, if true. Further, this
provision also serves to prevent the
misrepresentations prohibited by
§ 463.3—including misrepresentations
regarding material information about the
costs or terms of purchasing, financing,
or leasing a vehicle—by requiring
consumers to be given accurate
information that the total payment will
increase when presented with a lower
monthly payment. It also helps prevent
dealers from failing to obtain the
express, informed consent of the
consumer for charges, as addressed by
§ 463.5(c), including charges relating to
the financing or lease of a vehicle.364
Thus, the Commission is requiring
dealers to disclose, when making any
comparison between payment options,
expressly or by implication, directly or
indirectly, that includes discussion of a
lower monthly payment, that the lower
monthly payment will increase the total
amount the consumer will pay to
purchase or lease the vehicle, if true. As
with a vehicle’s price, when cost
information in the market is distorted or
concealed—especially in document- and
time-intensive vehicle transactions—
consumers are unable to effectively
differentiate between sellers, and sellers
trying to deal honestly with consumers
are put at a competitive disadvantage.
For the foregoing reasons, and having
considered all of the comments that it
received on this proposed provision, the
Commission is finalizing the required
disclosure at § 463.4(e) largely as
proposed, with the minor modifications
of capitalizing the defined term
‘‘Vehicle’’ additional language clarifying
that the requirements in § 463.4(e) ‘‘also
are prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.3(a) and
463.5(c).’’
E. § 463.5: Dealer Charges for Add-Ons
and Other Items
1. Overview
Proposed § 463.5 prohibited motor
vehicle dealers from charging for add-on
products or services from which the
consumer would not benefit; from
charging consumers for undisclosed or
unselected add-ons unless certain
requirements were met; and from
charging for any item unless the dealer
obtains the express, informed consent of
the consumer for the item.
In response to the NPRM, various
stakeholder groups and individuals
submitted comments regarding these
proposed provisions. Among these were
comments in favor of the provisions;
comments that urged the Commission to
include additional restrictions on add-
on charges; and comments questioning
or recommending against the proposed
provisions.
After careful consideration of the
comments, the Commission has
determined to finalize § 463.5(a) and (c)
without substantive modification and
has determined not to finalize § 463.5(b)
regarding undisclosed or unselected
add-ons. The Commission also is
making minor textual edits to the
introductory language in § 463.5 for
clarity and consistency: substituting
‘‘Federal Trade Commission Act’’ for
‘‘FTC Act’’; adding ‘‘Covered’’ to ‘‘Motor
Vehicle Dealer’’ to conform with the
defined term at § 463.2(f) (‘‘ ‘Covered
Motor Vehicle Dealer’ or ‘Dealer’ ’’), and
capitalizing ‘‘Vehicles’’ to conform with
the defined term at § 463.2(e)
(‘‘ ‘Covered Motor Vehicle’ or
‘Vehicle’ ’’).
In the following analysis, the
Commission examines each proposed
provision in § 463.5; the substantive
comments relating to each provision;
responses to these comments; and the
Commission’s final determination with
regard to each proposed provision.
2. Paragraph-by-Paragraph Analysis of
§ 463.5
(a) Add-Ons That Provide No Benefit
Section 463.5(a) of the proposed rule
prohibited motor vehicle dealers from
charging for add-ons if the consumer
would not benefit from such an add-on,
including a pair of enumerated
examples. For the following reasons, the
Commission is finalizing this provision
largely as proposed, with modifications
to correct a misplaced hyphen; add the
word ‘‘that’’ before ‘‘are duplicative of
warranty coverage’’; and capitalize the
defined term ‘‘Vehicle’’ to conform with
the revised definition at § 463.2(e). The
Commission also is adding language to
the end of § 463.5(a), at newly
designated (a)(3), clarifying that the
requirements in § 463.5(a) ‘‘also are
prescribed for the purpose of preventing
the unfair or deceptive acts or practices
defined in this part, including those in
§ 463.3(a) and (b) and paragraph (c) of
this section.’’ Relatedly, the
Commission is finalizing the definition
of the term ‘‘GAP Agreement,’’ which is
referenced in this provision and defined
in § 463.2(h) of the Final Rule,
substantively as proposed, with minor
modifications to correct a misplaced
period, substitute ‘‘Vehicle’’ for both
‘‘vehicle’’ and ‘‘motor vehicle’’ to
conform with the revised definition at
§ 463.2(e), and remove an extraneous
term—‘‘insured’s’’—without changing
the definition’s operation.
Many commenters, including a
number of industry participants and
associations, stated that products that
provide no benefit to the consumer
should not be sold in connection with
the sale or financing of vehicles. Many
commenters that supported the
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646 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
365 See, e.g., Individual commenter, Doc. No.
FTC–2022–0046–1608 at 6.
366 See, e.g., Comment of 18 State Att’ys Gen., Doc
No. FTC–2022–0046–8062 at 9.
367 See, e.g., Individual commenter, Doc. No.
FTC–2022–0046–0565.
368 Individual commenter, No. FTC–2002–0046–
0565.
369 Individual commenter, No. FTC–2002–0046–
4552.
370 Individual commenter, Doc. No. FTC–2022–
0046–0854.
371 Individual commenter, Doc. No. FTC–2022–
0046–1393.
372 Individual commenter, Doc. No. FTC–2022–
0046–5493.
373 Individual commenter, Doc. No. FTC–2022–
0046–6816.
374 See, e.g., Legal Aid Just. Ctr., Doc. No. FTC–
2022–0046–7833 at 3.
375 Comment of Legal Action Chi., Doc. No. FTC–
2022–0046–8097 at 10.
376 See also Consumer Fin. Prot. Bureau, ‘‘What
Is Vendor’s Single Interest (VSI) insurance? ’’ (Aug.
16, 2016), https://www.consumerfinance.gov/ask-
cfpb/what-is-vendors-single-interest-vsi-insurance-
en-731/.
provision stated, inter alia, that the
examples the Commission enumerated
in this paragraph were obvious 365 and
particularly helpful for less-experienced
buyers who may be led to believe that
a particular product or service would be
beneficial.366 Some individual
commenters, for instance, noted that
they had no way to confirm whether the
‘‘nitrogen-filled’’ tires they purchased
with their vehicle actually had more
nitrogen than naturally exists in the air,
even though they were told the
purchase of this service was
mandatory.367 At least one individual
commenter described requesting to see
the nitrogen tank after such a purchase
and being denied by the dealer.
Examples of public comments about
add-ons include the following:
• I would argue that this does not go
far enough but it [is] a good start. As
someone who is trying to purchase a
new vehicle, there is a[n] endless
supply of ‘‘perk packages’’ or ‘‘Family
deals’’ that I ‘‘must purchase’’ if I would
like to acquire a car from a dealer. These
include a variety of dubious products
such as insurance policies that pay out
$3,500 if your car is stolen (and can’t be
found) in the first 90 days of ownership,
if your car is totaled by your insurance
company in the first 90 days they’ll pay
$3,500. Nitrogen in the tires (A $196
value). Vin Etching on the windows,
plastic stickers on the door handles to
prevent scratches. These items are a
requirement to bundle with the vehicle
and a deal that provides ‘‘over $7,000 in
value’’ for $2,995. These tricks ignore
the obvious, such as your car can not be
both stolen (unrecovered) AND totaled
so it’s impossible to collect on both
policies so the cumulative ‘‘value’’ of
this package is overstated.368
• One of the latest scams is to force
you to buy a $1,000 gps unit so they can
recover the car if you miss payments.
This shouldn’t be allowed. 369
• Second vehicle I purchased had a
$1,650 ‘‘protection pkg’’ plus the usual
nitrogen in the tires BS. This time I
asked to be shown the nitrogen tank
they fill the tires with, they refused
saying due to insurance rules customers
aren’t allowed in the shop. I asked them
to take off the paint and fabric
protection charge also, they declined at
first until I reminded them they just got
the vehicle the night before and there
was still plastic factory coverings on the
seats and strips of plastic on the
vehicles body protecting certain areas.
This time they mumbled some excuse
about the addendum added to the price
is put on the vehicle as soon as it arrives
and they hadn’t had ‘‘time’’ to apply all
the overpriced add[-]ons.370
• I’m a former carsalesperson
[sic]. . . . Dealers should be banned
from selling . . . special paints to
protect from rust . . . . No coatings are
added. 371
• I worked at a Dodge/Ram dealership
for three years at the make ready
(carwash) department. When new
vehicles arrived their tires were rarely
deflated and then filled with nitrogen. It
is my understanding that the
manufacture initially paid for the
nitrogen fill and the customer was later
charged. 372
• [O]ne of my previous purchases
almost ended . . . with GAP that was so
unnecessary, the lender called us a few
days later after we already had the car
and told us we’d be experiencing a
lower monthly payment unless we
wanted the price of the product back in
a check because of the price we
negotiated and the sizable down
payment, it was impossible for GAP to
ever be required. 373
A number of individual commenters
indicated they did not consider nitrogen
tires a valuable purchase and expressed
no desire to purchase them. Many
commented that, when they informed
their respective dealers that they did not
want these add-ons, the dealers would
represent, inter alia, that nitrogen tires
were required by law, that their
insurance premium would increase
without the add-on, that new foreign
vehicles coming into the country must
have nitrogen-filled tires under the law,
or that the consumer needed to
purchase nitrogen tires to meet fuel
economy standards.
Other commenters supported this
proposed provision while also
recommending that the Commission
broaden its scope to prohibit the sale of
add-on products or services that provide
only ‘‘minimal’’ benefit to
consumers. 374 One such commenter, for
instance, suggested the provision be
expanded to prohibit dealers from
charging for an add-on unless it
provides a ‘‘substantial, material
benefit’’ to consumers.375 Another
commenter contended that there are a
number of add-ons not meeting such
standards being sold in connection with
the sale or financing of vehicles,
including future servicing packages for
vehicle tune-ups and oil changes that
are sold to remote or out-of-State
consumers who are exceedingly
unlikely to return to the dealership for
such services; tracking devices that are
used almost exclusively for electronic
repossession; and ‘‘vendor’s single
interest’’ or ‘‘VSI’’ insurance, which
protects the financing entity, but not the
consumer, in the event that the vehicle
is damaged or destroyed.376
The Commission acknowledges the
considerable consumer harm that results
from the sale of such add-ons and notes
that several provisions in the Rule it is
finalizing will address misconduct
related to these and other add-ons,
including many of the practices
described by those commenters
recommending further action. For
example, to the extent that dealers make
misrepresentations about any benefit of
an add-on, such conduct would violate
§ 463.3(b) of the Final Rule. Thus, were
a dealer, for instance, to promote the
sale of an add-on—such as a tracking
device that is used almost exclusively
for electronic repossession—based on its
supposed benefit to the consumer, when
the product primarily benefits another
party, such conduct would violate the
Rule even if the product otherwise
provides an ancillary or marginal
benefit to consumers. And if the add-on
provided no benefit to the consumer
and only a benefit to another party,
§ 463.5(a) would prohibit the dealer
from charging the consumer for it.
Further, to the extent that dealers charge
for add-ons without express, informed
consumer consent for the charge, such
conduct would violate § 463.5(c).
The Commission recognizes that there
may be significant consumer benefits
from implementing additional
restrictions on the sale of add-on
products or services. However, without
additional information on costs and
benefits to consumers or competition
associated with such restrictions, the
Commission has determined not to
implement such restrictions in this
Final Rule. The Commission will
continue to monitor the motor vehicle
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647	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
377 One consumer attorney commenter requested
that the Commission clarify that warranty
disclaimers are not a valid defense to common law
fraud and statutory consumer fraud, and that, if
fraud is proven, warranty disclaimers are not an
allowable defense to UCC actions. In response, the
Commission notes that none of the provisions the
Commission is finalizing state that warranty
disclaimers are a defense to common law fraud or
in UCC actions.
marketplace to gather additional
information on this issue and will
consider whether to modify or expand
§ 463.5(a) in the future, including on the
basis of stakeholder experience with
this provision and whether it effectively
addresses unlawful conduct.
Commenters also urged the
Commission to adopt a number of
additional measures regarding the sale
of such add-ons. A consumer advocacy
organization, for instance, proposed that
the Commission require dealers to list
coverage limitations for add-ons that
may overlap with a vehicle’s warranty
coverage, observing that consumers
commonly are not aware of important
limitations until the add-on, such as a
warranty or service contract, is needed,
and only then does the consumer learn
the add-on does not provide the
anticipated benefits. A State consumer
protection agency recommended that
the Commission require affirmative
disclosures for the sale of add-ons that
may provide only ‘‘nominal’’ benefit,
offering a list of what they characterized
as such products for the Commission to
consider in conjunction with this
recommendation.
In response, the Commission notes
that other provisions in part 463 address
misconduct relating to these issues,
including by prohibiting
misrepresentations regarding material
information about add-ons, by requiring
disclosures about optional add-ons, and
by requiring dealers to obtain the
express, informed consent of the
consumer for add-on charges. Thus,
misrepresenting the coverage limitations
of an add-on; making representations
regarding an optional add-on without
disclosing that it is not required and
that the consumer can purchase or lease
the vehicle without the add-on; and
charging for an add-on under false
pretenses or without the consumer’s
express, informed consent would violate
other provisions the Commission is
finalizing. The Commission is
concerned that requiring additional
disclosures may have the effect of
reducing the saliency of key information
in what is already a lengthy, paperwork-
heavy transaction. Accordingly, the
Commission has determined not to
adopt additional such disclosure
measures in this Final Rule.
In addition, at least one consumer
protection agency commenter asked the
Commission to consider deeming it an
unfair or deceptive act or practice to sell
any add-on product for a price greater
than the value of the product itself. The
Commission declines to restrict the sale
of add-on products at a price higher
than the value of the product itself,
absent additional information, including
information regarding the costs and
benefits to consumers and competition
of such a restriction.377
A number of industry association
commenters claimed the provision was
vague and requested the Commission set
forth how to calculate the loan-to-value
(‘‘LTV’’) ratio at which a GAP agreement
would be non-beneficial, given that
there could be fluctuation of the vehicle
value in the future. Some suggested that
the Commission adopt a presumption or
safe harbor that dealers complying with
an LTV calculation set by the
Commission be deemed in compliance
with the portion of the proposal related
to GAP agreements.
Other industry association
commenters argued against adopting a
set LTV ratio as the basis for
determining whether a consumer would
benefit from a GAP agreement, claiming
that the vehicle financing entity is best
positioned to determine whether such
an add-on would be beneficial.
Relatedly, some industry association
commenters contended that certain GAP
agreements sold on a low-LTV loan, or
that limit benefits based on a
consumer’s LTV ratio, could still
provide additional benefits.
A financing association commenter
contended that any final rule should not
create rules around the calculation of
the LTV ratio. Another financing group
proposed that the Commission require
dealers to provide disclosures that
would inform consumers of any
potential value gap between a vehicle’s
purchase price and its appraised value.
With regard to establishing LTV ratio
parameters for the sale of GAP
agreements, without further information
from commenters regarding the costs
and benefits of establishing a particular
LTV ratio as the basis for determining
whether a consumer would benefit from
a GAP agreement, or a particular
method for calculating the LTV ratio,
and given the Commission’s previously
stated information saliency concerns
about finalizing additional disclosures
in an already lengthy transaction, the
Commission has determined not to
establish in this Final Rule a particular
numeric threshold or calculation
regarding the sale of GAP agreements to
consumers, or to require additional
associated disclosures. Regarding the
benefits of certain GAP agreements, this
provision restricts sales of GAP
agreements where the consumer would
not benefit. If there are benefits to the
consumer, dealers must abide by other
provisions in the Final Rule, including
the requirements that the dealer
represents the extent of those benefits
accurately (§ 463.3(b)) and obtains
express, informed consent from the
consumer for the charges for this item
(§ 463.5(c)).
The Commission also received some
industry association comments claiming
that each State imposes differing
requirements as to coverage,
disclosures, exceptions, and product
terms of GAP agreements. One such
commenter asked for guidance on how
a bright-line, State-law rule on LTV
ratios would interact with the FTC’s
proposal. Another such commenter
requested the FTC reconcile different
State-law approaches to the sale of GAP
agreements, particularly regarding how
this proposed provision would interact
with a State law that, according to the
commenter, only requires a dealer to
have a reasonable belief that the
customer may be eligible for a benefit.
In response, the Final Rule does not
disturb State law unless it is
inconsistent with part 463, and then
only to the extent of the inconsistency.
Where, for example, State laws restrict
the sale of GAP agreements if the LTV
ratio for the transaction is below a
certain threshold, or require that dealers
have a ‘‘reasonable belief’’ that the GAP
agreement would benefit the consumer,
dealers in that State can, and must,
comply with the State law and with the
Rule. Pursuant to such State law,
dealers would be prohibited from
selling the product if the LTV ratio is
below the established threshold or if
they do not reasonably believe the GAP
agreement would benefit the consumer
and, pursuant to the Final Rule, if the
LTV ratio would result in the consumer
not benefitting financially. To the extent
there is an actual conflict between the
Commission’s Final Rule and a State
law—and the Commission is skeptical
that there is such a State law that
explicitly allows for the sale of a
product that does not benefit the
consumer—the Commission refers
commenters to § 463.9, which sets forth
the Rule’s relation to State laws.
With respect to the proposed
definition of ‘‘GAP Agreement,’’ an
industry association commenter
contended that the phrase ‘‘the actual
cash value of the insured’s vehicle in
the event of an unrecovered theft or
total loss’’ meant the value of the
vehicle at some point in the future, and
asserted that future vehicle values
cannot be accurately determined at the
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648 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
378 15 U.S.C. 1012(b).
379 See Consumer Fin. Prot. Bureau, ‘‘Supervisory
Highlights: Issue 19, Summer 2019’’ 3–4 (Sept.
2019), https://files.consumerfinance.gov/f/
documents/cfpb_supervisory-highlights_issue-19_
092019.pdf (finding instances in which auto lenders
sold ‘‘a GAP product to consumers whose low LTV
meant that they would not benefit from the
product’’).
380 See, e.g., Shannon Osaka, ‘‘Electric vehicles
are hitting a road block: Car dealers,’’ Wash. Post
(Nov. 9, 2023), https://www.washingtonpost.com/
climate-solutions/2023/11/09/car-dealerships-ev-
sales (describing a dealership salesperson offering
an electric vehicle-buyer a plan for oil changes and
an extended warranty for a gas-powered car); see
also Consumer Fin. Prot. Bureau, ‘‘Supervisory
Highlights: Issue 24, Summer 2021’’ 3–4 (June
2021), https://files.consumerfinance.gov/f/
documents/cfpb_supervisory-highlights_issue-24_
2021-06.pdf (finding servicers added and
maintained unnecessary collateral protection
insurance (CPI) when consumers had adequate
insurance and thus the CPI provided no benefit to
the consumers, and also when consumers’ vehicles
had been repossessed even though no actual
insurance protection was provided after
repossession).
381 Comment of Competitive Enter. Inst., Doc. No.
FTC–2022–0046–7670 at 6.
time of sale. The proposed definition,
however, did not prescribe how dealers
must calculate a vehicle’s cash value;
rather, it explains that the term ‘‘GAP
Agreement’’ means an agreement to
indemnify a vehicle purchaser for any
difference between such value, however
determined, in the event of an
unrecovered theft or total loss, and the
amount owed, regardless of what that
difference may be. Upon examination of
this phrase, however, the Commission
has determined to remove the term
‘‘insured’s’’ because it is extraneous and
does not affect the operation of this
definition: with or without the term, the
phrase describes the manner in which a
qualifying GAP agreement determines
the amount to indemnify a vehicle
purchaser or lessee. In context in this
definition, it is clear without the term
‘‘insured’s’’ that the applicable
‘‘Vehicle’’ is the one covered by the
GAP agreement. Omitting this
unnecessary term thus avoids confusion
without substantively changing this
definition.
One industry association commenter
argued that reference to ‘‘GAP
insurance’’ should be removed from the
definition of ‘‘GAP Agreement’’ because
of the McCarran-Ferguson Act’s reverse-
preemption of certain Federal laws that
‘‘invalidate, impair, or supersede’’ State
laws enacted ‘‘for the purpose of
regulating the business of
insurance.’’ 378 As previously discussed
with regard to the definition of ‘‘Add-
on,’’ however, commenters have
provided no evidence that the proposed
or Final Rule would invalidate, impair,
or supersede State laws enacted for the
purpose of regulating insurance. Rather
than affecting any State’s regulation of
insurance, the Final Rule prohibits
dealers from making misrepresentations
regarding add-ons, from failing to
disclose when add-ons are not required,
and from charging for add-ons that
provide no benefit or for which the
consumer has not provided express,
informed consent. The Commission
therefore finalizes the definition of
‘‘GAP Agreement’’ largely as proposed
in its NPRM with minor modifications
to correct a misplaced period, substitute
‘‘Vehicle’’ for both ‘‘vehicle’’ and
‘‘motor vehicle’’ to conform with the
revised definition at § 463.2(e), and
remove an extraneous term—
‘‘insured’s’’—without changing the
definition’s operation.
While acknowledging that products or
services that provide no benefit to
consumers should not be sold,
commenters including an industry
association also argued that the
Commission’s proposed provision was
vague and required more research. Some
industry association commenters
expressed concern regarding how the
Commission would determine whether
an item would not benefit the consumer.
In response, the Commission provides
the following information. Proposed
§ 463.5(a) included enumerated
examples of add-ons from which
consumers would not benefit: (1)
nitrogen-filled tires that contain no
more nitrogen than normally found in
the air, and (2) products or services that
do not provide coverage for the vehicle,
the consumer, or the transaction, or are
duplicative of warranty coverage for the
vehicle, including a GAP agreement if
the consumer’s vehicle or neighborhood
is excluded from coverage or the LTV
ratio would result in the consumer not
benefitting financially.379 As these
examples illustrate, determining that a
consumer would not benefit from an
add-on involves analyzing objective
standards under the circumstances,
such as whether the add-on provides
benefits; whether the consumer is
eligible to use the add-on; whether the
add-on’s coverage excludes the vehicle
at issue; and whether the add-on is
incompatible with the vehicle at issue.
Thus, additional examples of add-ons
that would be prohibited by this
provision include the following:
purported rust-proofing add-ons that do
not actually prevent rust; purported
theft-prevention or theft-deterrent add-
ons that do not prevent or deter theft;
and add-ons that the vehicle itself
cannot support, including engine oil-
change services for a vehicle, such as an
electric vehicle, that does not use engine
oil, or software or audio subscription
services for a vehicle that cannot
support the software or utilize the
subscription. 380
One association commenter argued
that the phrase ‘‘nitrogen-filled tire
related-products or services that contain
no more nitrogen than naturally exists
in the air’’ in proposed § 463.5(a)(1)
would create a standard with which it
may be impossible to comply because
‘‘no individual set of tires could have a
higher total quantity of nitrogen than
that in ‘the air’ that stretches around the
planet.’’ 381 This commenter requested
that the Commission clarify to avoid
this possible reading. Here, the
Commission notes that the phrase does
not prohibit such tires if they do not
contain a ‘‘higher total quantity of
nitrogen than that in the air’’; instead,
charging for a nitrogen-filled tire would
fail by this standard if it contains ‘‘no
more nitrogen than’’ the proportion that
‘‘naturally exists in the air.’’
One industry association commenter
requested more explanation from the
Commission regarding what would be
considered ‘‘duplicative of warranty
coverage’’ under proposed § 463.5(a)(2),
while another contended that vehicle
service contracts that overlap with a
manufacturer’s warranty may still
provide additional, beneficial coverage,
such as after the manufacturer’s
warranty expires. In response, the
Commission notes that this provision
prohibits the sale of warranties that are
duplicative. A dealer may offer a
warranty add-on that has some overlap
in coverage with existing warranty
coverage for the vehicle, but the add-on
must provide additional protection.
Moreover, other provisions of the Final
Rule address misconduct relating to
warranties, including by prohibiting
misrepresentations regarding material
information about any costs, limitation,
benefit, or any other aspect of the
warranty product or service. For
example, under the Final Rule, a dealer
may not mislead a consumer as to the
benefits or conditions of the warranty,
including amount or length of coverage
(§ 463.3(b)). In addition, under
§ 463.5(c), the dealer must obtain the
express, informed consent of the
consumer for the charge for the
warranty (§ 463.5(c)).
Other commenters, including an
industry association, asserted that this
proposed provision would cause dealers
to stop offering beneficial products or
services. The Commission notes that its
proposal did not require such a result
and emphasizes that this provision
would prevent charges to consumers for
products or services that provide them
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382 Removatron Int’l Corp. v. Fed. Trade Comm’n,
884 F. 2d 1489, 1497 (1st Cir. 1989) (‘‘Disclaimers
or qualifications . . . are not adequate to avoid
liability unless they are sufficiently prominent and
unambiguous to change the apparent meaning of
the claims and to leave an accurate impression.
Anything less is only likely to cause confusion by
creating contradictory double meanings.’’).
383 See, e.g., Fed. Trade Comm’n v. Windward
Mktg., Ltd., No. Civ.A. 1:96–CV–615F, 1997 WL
33642380, at *10 (N.D. Ga. Sept. 30, 1997) (‘‘[A]ny
representations concerning the price of a product or
service are presumptively material.’’); Removatron
Int’l Corp., 111 F.T.C. 206, 309 (1988) (‘‘The
Commission presumes as material express claims
and implied claims pertaining to a product’s . . .
cost.’’ (citing Thompson Med. Co., Inc., 104 F.T.C.
648, 817 (1984)); see also Fed. Trade Comm’n v.
Crescent Pub. Grp., Inc., 129 F. Supp. 2d 311, 321
(S.D.N.Y. 2001) (‘‘Information concerning prices or
charges for goods or services is material, as it is
‘likely to affect a consumer’s choice of or conduct
regarding a product.’ ’’).
384 Even under a hypothetical scenario wherein a
consumer understood an add-on would not benefit
them but wanted to pay extra for the add-on
anyway, in the case of an act or practice challenged
by the agency as deceptive or unfair, ‘‘the FTC need
not prove that every consumer was injured. The
existence of some satisfied customers does not
constitute a defense . . . .’’ Fed. Trade Comm’n v.
Amy Travel Serv., Inc., 875 F.2d 564, 572 (7th Cir.
1989), vacated in part on other grounds, Fed. Trade
Comm’n v. Credit Bureau Ctr., LLC, 937 F.3d 764
(7th Cir. 2019); accord Fed. Trade Comm’n v.
Stefanchik, 559 F.3d 924, 929 n.12 (9th Cir. 2009).
385 See, e.g., Consumer Fin. Prot. Bureau,
‘‘Supervisory Highlights: Issue 19, Summer 2019’’
3–4 (Sept. 2019), https://files.consumerfinance.gov/
f/documents/cfpb_supervisory-highlights_issue-19_
092019.pdf (describing findings, from supervisory
examinations, of lenders selling GAP agreements to
consumers whose low LTV meant that they would
not benefit from the product: ‘‘By purchasing a
product they would not benefit from, consumers
demonstrated that they lacked an understanding of
a material aspect of the product. The lenders had
sufficient information to know that these consumers
would not benefit from the product. These sales
show that the lenders took unreasonable advantage
of the consumers’ lack of understanding of the
material risks, costs, or conditions of the product.’’).
386 See, e.g., NPRM at 42030 (Question 33) (‘‘In
particular, the Commission is contemplating
whether any final Rule should restrict dealers from
selling add-ons (other than those already installed
on the vehicle) in the same transaction, or on the
same day, the vehicle is sold or leased.’’); id.
(Question 38) (discussing proposed § 463.5(c) and
asking ‘‘Does the proposal provide a meaningful
way to obtain consent in an already disclosure-
heavy transaction? If it would result in too many
disclosures, what other measures could be taken to
protect consumers from unauthorized charges? ’’).
no benefit. To the extent that a
prohibition against charging consumers
for items that provide no benefit to the
consumer may cause some dealers to
discontinue offering beneficial products,
consumers would be free to instead visit
other dealerships or to seek the same or
similar offerings from other providers.
Dealers, of course, continue to be free
under the Final Rule to offer beneficial
add-ons to consumers—consistent with
existing law and with other provisions
of this Rule.
Some commenters, including industry
associations and a dealership
association, raised concerns about
compliance administrability for this
proposed provision in the case of
products attached to a vehicle by
manufacturers that may provide no
benefit, questioning whether, if this
proposal went into effect, dealers would
be prohibited from charging for such
products. In response, the Commission
refers commenters to the definition of
‘‘Add-on’’ or ‘‘Add-on Product(s) or
Service(s)’’ in § 463.2(a). Notably, ‘‘Add-
on’’ is defined, in relevant part, as any
‘‘product(s) or service(s) not provided to
the consumer or installed on the Vehicle
by the Vehicle manufacturer . . .’’
Thus, if an add-on product or service is
installed on the vehicle by the motor
vehicle manufacturer, it falls outside the
scope of this definition, and
concomitantly, outside the scope of the
provision at § 463.5(a). Nonetheless,
other provisions in the Final Rule
address misconduct relating to this
issue. For instance, as examined in
additional detail in the discussion of
§ 463.4, in SBP III.D, the offering price
for the vehicle would be required to
incorporate the charges for any such
items if the dealer requires the
consumer to pay for them. In addition,
as described in additional detail in the
discussion of § 463.5(c), in SBP
III.E.2(c), a dealer may not charge for
any such item unless the dealer obtains
the express, informed consent of the
consumer for the charge.
Another industry association
commenter incorrectly stated that this
provision was beyond the FTC’s
authority and correctly noted that the
Commission has the authority to see
that products are marketed and
advertised fairly and honestly. As the
commenter acknowledged, the
Commission has the authority to
address unfair and deceptive conduct;
that is precisely what this provision
does. Dealerships charging consumers
for add-ons from which the consumers
would not benefit is both a deceptive
and unfair act or practice in violation of
the FTC Act, as discussed in the
following paragraphs. To address this
deception or unfairness, the
Commission is finalizing this provision
with minor modifications, including
one to correct a typographical error in
the placement of a hyphen in a phrase
in proposed § 463.5(a)(1). In the NPRM,
the relevant phrase appeared as, ‘‘(1)
Nitrogen-filled tire related-products or
services’’; in the Final Rule, the
corrected phrase will now read as
follows: ‘‘(1) Nitrogen-filled tire-related
products or services.’’ For clarity, the
Commission is also adding the word
‘‘that’’ before ‘‘are duplicative of
warranty coverage;’’ capitalizing the
defined term ‘‘Vehicle’’ to conform with
the revised definition at § 463.2(e); and
adding language clarifying that the
requirements of § 463.5(a) also are
‘‘prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in § 463.3(a) and (b) and
paragraph (c) of this section.’’
Dealerships charging consumers for
add-ons from which the consumers
would not benefit involves deceptive
conduct. When a dealer charges
consumers for add-ons that would not
benefit the consumers, the dealer either
(1) discusses the add-on charges or (2)
is silent about these items. In the first
scenario, if a dealer discusses add-on
charges, consumers typically would not
agree to pay such charges for additional
products from which they could not
benefit unless they are led to believe,
directly or by omission, that these
products would in fact be beneficial to
them. Thus, the dealer would be
misleading consumers, even in the
event the dealer subsequently provides
a disclaimer indicating the add-on
would not benefit the consumer.382 In
the second scenario, it is reasonable for
consumers to believe that the terms they
have agreed to are what was negotiated,
and do not include additional charges
for optional, undisclosed items—
particularly items that would not benefit
the consumer. If a dealer charges
consumers for such items under such
circumstances, the dealer is misleading
the consumer. Misleading consumers
about cost information is material.383 If
consumers knew that a dealership was
charging them for items from which
they would not benefit, such knowledge
likely would affect their commercial
choices, including whether to continue
with, or ultimately consummate, the
vehicle sale or financing transaction.384
Such charges are also unfair. When
charges for any add-on accompany the
already lengthy and complex car-buying
process, it is difficult to obtain consent
that is truly express and informed.385
Rather than prohibiting all such charges
or taking other measures, as specifically
contemplated in the NPRM,386 however,
this provision focuses on charges for
add-ons that would not benefit the
consumer. Charges for add-ons that
would not benefit the consumer can cost
consumers thousands of dollars and
significantly increase the overall cost to
the consumer in the transaction,
including by increasing the amount
financed and total of payments, thereby
increasing the risk the consumer will
ultimately default on repayment
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387 See, e.g., Complaint ¶¶ 25–28, Fed. Trade
Comm’n v. N. Am. Auto. Servs., Inc., No. 1:22–cv–
01690 (N.D. Ill. Mar. 31, 2022).
388 See, e.g., Auto Buyer Study, supra note 25, at
13–15, 17–18.
389 See Removatron Int’l Corp. v. Fed. Trade
Comm’n, 884 F. 2d 1489, 1497 (1st Cir. 1989)
(‘‘Disclaimers or qualifications . . . are not
adequate to avoid liability unless they are
sufficiently prominent and unambiguous to change
the apparent meaning of the claims and to leave an
accurate impression. Anything less is only likely to
cause confusion by creating contradictory double
meanings.’’).
390 Even in the hypothetical scenario where some
consumers could have avoided the injury because
they understood that an add-on would not benefit
them but wanted to pay extra for the add-on
anyway, the dealer’s conduct in selling non-
beneficial add-ons would still be unfair because it
substantially injures other consumers who do not
wish to pay for items that would not benefit them
and, as discussed in the SBP text, cannot reasonably
avoid the harm, and no countervailing benefits
outweigh the costs. See FTC v. Amazon.com, Inc.,
2016 U.S. Dist. LEXIS 55569, *15, *18–21 (W.D.
Wash. Apr. 26, 2016) (finding unfairness even
though some consumers could have avoided the
charge). Additionally, consumers who truly wish to
purchase add-ons that do not benefit them may still
be able to do so directly from the add-on provider.
391 See Nat’l Auto. Dealers Ass’n et al.,
‘‘Voluntary Protection Products: A Model
Dealership Policy’’ 5 (2019), https://www.nada.org/
regulatory-compliance/voluntary-protection-
products-model-dealership-policy (explaining that
when determining which voluntary protection
products to offer to customers, ‘‘the dealership
should have confidence in the value that the
product offers to customers,’’ including that the
dealership should understand ‘‘whether its
coverage is already provided by another product
being purchased by the customer,’’ and stating ‘‘[i]t
is essential that customers have a clearly defined
path to receiving such benefits.’’).
392 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
393 See, e.g., Comment of Nat’l Consumer L. Ctr.
et al., Doc. No. FTC–2022–0046–7607 at 30–31.
Instead, advocates recommended that the
Commission require a cooling-off period for add-
ons, similar to that required by the Commission for
door-to-door and other off-premises sales, which
would grant consumers time to review the
paperwork after the transaction, and to cancel
unexpected or otherwise unwanted add-ons for a
full refund. Id. This comment is addressed when
discussing § 463.5(c) in SBP III.E.2(c).
obligations. 387 This injury is not
reasonably avoidable by consumers
when dealers are silent about such
charges and simply include them in
dense, lengthy contracts, as explained in
detail in SBP II.B.2.388 If a dealer
instead describes what the charges are
for, such a description either
deceptively states or implies that the
add-on would benefit the consumer, or
acknowledges the add-on would not
benefit the consumer, the latter of which
would create ‘‘contradictory double
meanings’’ 389 and, if discovered, would
still result in the dealer wasting the
consumers’ time. 390 Further, there are
no benefits to consumers or to
competition from charging consumers
for add-ons that would not benefit them.
Moreover, charging for non-beneficial
products is inconsistent with industry
guidance, 391 and dealerships that profit
from such sales place dealerships that
do not at a competitive disadvantage.
Thus, it is an unfair or deceptive act or
practice for dealers, in connection with
the sale or financing of vehicles, to
charge for an add-on product or service
if the consumer would not benefit from
such an add-on product or service. This
provision also serves to prevent
misrepresentations prohibited by
§ 463.3 of the Final Rule, including
misrepresentations regarding material
information about the costs or terms of
purchasing, financing, or leasing a
vehicle, and about any costs, limitation,
benefit, or other aspect of an add-on.
This provision further helps prevent
dealers from failing to obtain express,
informed consent for charges, as
prohibited by § 463.5(c).392
(b) Undisclosed or Unselected Add-Ons
The Commission’s proposed
provisions relating to undisclosed or
unselected add-on products or services,
at § 463.5(b), prohibited dealers from
charging for optional add-ons before
undertaking certain measures.
Specifically, proposed § 463.5(b)(1)
prohibited dealers from charging for
optional add-ons unless the dealers
disclosed, and offered to consummate
the transaction for, the cash price at
which a consumer may purchase the
vehicle without such add-ons. This
proposed provision also required the
consumer to decline to purchase the
vehicle for the cash price without the
add-on by means of a written
declination, with date and time
recorded, and signed by the consumer
and a manager of the motor vehicle
dealer. The proposed requirements of
§ 463.5(b)(1) applied before the dealer
referenced any aspect of financing for a
specific vehicle, aside from the offering
price, or before consummating a non-
financed sale. Proposed § 463.5(b)(2)
required similar steps before charging
for any optional add-on in a financed
transaction, including that the dealer
disclose, and offer to consummate the
transaction for, a vehicle’s cash price
without optional add-ons plus the
finance charge for such transaction,
separately itemizing the components of
the offer. This proposed provision also
required a written, dated, time-stamped,
and signed declination. Finally,
proposed § 463.5(b)(3) required dealers
to disclose the cost of the transaction,
whether financed or not, without any
optional add-ons, as well as the charges
for the optional add-ons selected by the
consumer, separately itemized. Each
proposed provision required clear and
conspicuous disclosure of specific
information relating to optional add-ons
and their associated costs.
As discussed in the following
paragraphs, the Commission has
determined not to finalize the proposed
provisions at § 463.5(b) regarding
undisclosed or unselected add-ons.
Many commenters described the likely
benefits of such proposed provisions,
and a number of commenters indicated
how such provisions would be feasible,
including by reference to similar
disclosure regimes already in effect at
the State or local level. Commenters also
credited the Commission’s goals for
such provisions.
However, other commenters opposed
these proposed provisions, contending
they would be burdensome and time-
consuming. Others similarly expressed
concern that, given the duration,
complexity, and paperwork-heavy
nature of motor vehicle sales and
financing transactions, these provisions
would not effectively resolve the
problem of add-ons being sold without
express, informed consumer consent.393
Having considered the comments, the
Commission declines to include in this
Final Rule the proposed provisions
relating to undisclosed or unselected
add-on products or services at
§ 463.5(b). The Commission notes that
various commenters were concerned
about the extent to which this proposal
would add documents and time to the
transaction. If finalized, this would have
been the sole provision in the Final Rule
that affirmatively requires the dealer
and consumer, in all circumstances, to
view and sign additional documentation
during the purchase, finance, or lease
process, in what is already a document-
heavy, time-consuming, and
complicated transaction. The
Commission further notes that, as a
matter of existing law, dealers are
already prohibited from engaging in
misrepresentations regarding add-ons
and from charging for add-ons without
express, informed consent—conduct
which the Final Rule prohibits as well.
Accordingly, the Commission has
determined not to include this provision
in its Final Rule.
The Commission will continue to
monitor the motor vehicle marketplace
for issues pertaining to unselected or
undisclosed add-ons, and will consider
implementing additional measures in
the future if it determines such
measures are necessary to address
deceptive or unfair practices relating to
add-ons.
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394 Individual commenter, Doc. No. FTC–2022–
0046–0794.
395 Individual commenter, Doc. No. FTC–2022–
0046–0671.
396 Individual commenter, Doc. No. FTC–2022–
0046–0073.
397 Individual commenter, Doc. No. FTC–2022–
0046–9917.
398 See discussion in SBP II.B.2.
399 See § 463.2(g) (defining ‘‘Express, Informed
Consent’’ to include an affirmative act
communicating ‘‘unambiguous assent to be
charged’’); § 463.2(d) (defining ‘‘Clear(ly) and
Conspicuous(ly)’’ to include a manner that is
‘‘easily understandable’’).
(c) Any Item Without Express, Informed
Consent
Section 463.5(c) of the proposed rule
prohibited motor vehicle dealers, in
connection with the sale or financing of
vehicles, from charging consumers for
any item unless the dealer obtains the
express, informed consent of the
consumer for the charge. Upon careful
review and consideration of the
comments, the Commission is finalizing
this provision with one modification
from its original proposal: the addition
of language to the end of § 463.5(c)
clarifying that the requirements in
§ 463.5(c) ‘‘also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and (b), 463.4, and paragraph (a) of this
section.’’ In addition, the Commission is
finalizing the corresponding definition
of ‘‘Express, Informed Consent,’’ now at
§ 463.2(g).
Many commenters favored the
proposed provision and expressed the
need for such a provision. For example:
• In one instance a salesman who
appeared busy and trying to help me
efficiently navigate the process rushed
me to sign a small paper, ‘‘just sign this
quickly and we’ll be on our way,’’ I was
told, without disclosure that they were
selling me something that I did not
want. I found it later and felt cheated.394
• They made me sign the sales bill on
an electronic device, but the finance guy
never pointed to me any number I was
getting charge[d] for, and never pointed
to me the total amount I was getting
billed for. He seem[ed] to be in a hurry
and he even told me he had people
waiting for him to see. I think it was all
planned to push the buyer to blindly
sign the bill of sale without explaining
anything because he was scrolling the
electronic pages in a hurry and going
straight to the sign box line. I thought
I signed the agreed amount, I trust them,
but, instead, they charge me for things
I never agreed on. I went back to the
dealer in less than 48 hours when I
discovered the fraud and asked them to
remove the extra fees they charged me
for, they refused and they forced me to
pay for it, I asked them and requested
them to take the car back, they refused
it again, at the end, they gave me a little
bit of a discount, but, not compared to
what I got charged for. . . .395
• I am an attorney in private practice
in NY representing consumers for 33
years. It never ceases to amaze me how
car dealers defraud honest trusting
consumers substantial sums of money
through various common deceptive and
fraudulent practices ranging from
altering documents, concealing
documents, having consumers sign
blank documents, lying about the
material terms of the deal, altering the
prices, adding on other contracts or
items never discussed and selling
vehicles with undisclosed damages and
defects. 396
• I have worked in the automotive
business for many year[s]. I realize there
are plenty of dealers around the US that
have deceptive business practices,
however this isn’t the case for all
dealers. I believe there can be laws that
can be put in place to help prevent
dealers from adding additional backend
products without consent or
knowledge. 397
Others supported the proposed
provision and urged the Commission to
include additional measures, such as a
thirty-day ‘‘cooling-off’’ period within
which consumers would be able to
receive a full refund for any add-ons. A
number of commenters, including
consumer advocacy organizations,
contended that such an additional time
frame to review, and potentially cancel,
any add-ons would counter the high-
pressure, confusing environment of the
dealership F&I office and undermine
any efforts to misrepresent add-on
charges and coverage. Such commenters
also indicated that such a provision
would allow consumers the opportunity
to compare prices and providers, and
ultimately help increase competition in
the marketplace. A few individual
commenters requested that the
Commission provide a cooling-off
period not only for add-ons, but for the
full vehicle purchase, and a prohibition
on charging non-refundable deposits.
The Commission agrees that a
‘‘cooling off’’ provision could offer
consumers additional protection from
unwanted add-ons; however, additional
information would assist the
Commission in evaluating the potential
benefits of such a provision. Such
information might include, for example,
what length a cooling-off period would
need to be in order to offer adequate
protection to consumers and to
competition, or how consumers would
most effectively be made aware of such
a cooling-off period in the course of the
complicated, lengthy, and document-
heavy vehicle sale or financing
transaction. Such information would be
particularly relevant given that, in the
Commission’s law enforcement
experience, consumers have paid
unauthorized charges on years-long
contracts without learning of the
charges.398 Accordingly, the
Commission will continue to monitor
the market to determine whether, after
adoption of this Rule, it appears that a
cooling-off period or other measures
would be warranted.
Other commenters, including
consumer advocacy organizations,
emphasized the importance of having
disclosures and other documents
available in the language used to
negotiate the sale or lease. Here, the
Commission notes that a dealer does not
obtain the express, informed consent of
the consumer if the consumer’s assent to
a charge is ambiguous or based on a
disclosure the consumer does not easily
understand.399 Thus, if a dealer uses
one language during negotiations and a
different language in its contracts, and
the consumer does not understand and
assent to the charges, the dealer is
violating § 463.5(c). Furthermore, the
Commission notes that the definition of
‘‘Express, Informed Consent’’ it is
finalizing at § 463.2(g) requires, inter
alia, a clear and conspicuous disclosure
of what the charge is for and the amount
of the charge, and the Commission’s
definition of ‘‘Clear(ly) and
Conspicuous(ly),’’ at § 463.2(d)(5),
requires disclosures to appear ‘‘in each
language in which the representation
that requires the disclosure appears.’’
Other commenters, including a
consumer advocacy organization and a
consumer protection agency,
recommended the Commission
prescribe additional requirements for
obtaining express, informed consent for
charges, such as boxes for signatures
and date-and-time recordings, and a
requirement that dealers comply with
the E-Sign Act. Other commenters also
discussed obtaining consent through
electronic signatures. Commenters
including consumer advocacy
organizations, for instance, reported
cases wherein documents that were
signed and supposedly provided
electronically to consumers, were never
actually delivered to the consumer, or
delivered days later. According to these
commenters, some consumers would
sign on a small signature pad where
they could not see the terms of the
document being signed. Other
practitioner commenters reported that
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652 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
400 See § 463.2(g) (defining ‘‘Express, Informed
Consent’’ to include requiring clear and
conspicuous disclosures of what the charge is for
and the amount of the charge).
401 See, e.g., Fed. Trade Comm’n v. Amazon.com,
Inc., 71 F. Supp. 3d 1158, 1163 (W.D. Wash. 2014).
402 Complaint ¶¶ 24–25, 29–49, 76, Fed. Trade
Comm’n v. North Am. Auto. Servs., Inc., No. 1:22–
cv–01690 (N.D. Ill. Mar. 31, 2022).
403 Complaint ¶¶ 17–19, 44, Fed. Trade Comm’n
v. Liberty Chevrolet, No. 1:20–cv–03945 (S.D.N.Y.
May 21, 2020).
404 Complaint ¶¶ 59–64, 91, Fed. Trade Comm’n
v. Universal City Nissan, No. 2:16–cv–07329 (C.D.
Cal. Sept. 29, 2016).
405 See, e.g., Complaint ¶¶ 29, 47, Fed. Trade
Comm’n v. Yellowstone Cap. LLC, No. 1:20–cv–
06023–LAK (S.D.N.Y. Aug. 3, 2020).
406 See, e.g., Complaint ¶¶ 11–14, 21, Bionatrol
Health, LLC, No. C–4733 (F.T.C. Mar. 5, 2021).
407 See, e.g., Complaint ¶¶ 8–9, 42, Fed. Trade
Comm’n v. T-Mobile USA, Inc., No. 2:14–cv–00967–
JLR (W.D. Wash. July 1, 2014); Complaint ¶¶ 9, 49,
Fed. Trade Comm’n v. AT&T Mobility, LLC, No.
1:14–cv–03227–HLM (N.D. Ga. Oct. 8, 2014).
408 See, e.g., Fed. Trade Comm’n v. FleetCor
Techs., Inc., 620 F. Supp. 3d 1268, 1333–38 (N.D.
Ga. 2022); Fed. Trade Comm’n v. Amazon.com,
Inc., No. C14–1038–JCC, 2016 WL 10654030, at *8
(W.D. Wash. July 22, 2016); Fed. Trade Comm’n v.
Inc21.com Corp., 745 F. Supp. 2d 975, 1005 (N.D.
Cal. 2010), aff’d, 475 F. App’x 106 (9th Cir. 2012).
409 15 U.S.C. 8402(a)(2), 8403(2) (Restore Online
Shoppers’ Confidence Act); 16 CFR 310.4(a)(7)
(Telemarketing Sales Rule).
410 The Commission has required express,
informed consent provisions in orders against
motor vehicle dealers and others. See Stipulated
Order at Art. IV, Fed. Trade Comm’n v. Passport
Auto. Grp., Inc., No. 8:22–cv–02670–TDC (D. Md.
Oct. 18, 2022); Stipulated Order at Art. II, Fed.
Trade Comm’n v. North Am. Auto. Servs., Inc., No.
1:22–cv–01690 (N.D. Ill. Mar. 31, 2022) Stipulated
Order at Art. II, Fed. Trade Comm’n v. Liberty
Chevrolet, No. 1:20–cv–03945 (S.D.N.Y. May 22,
2020); Stipulated Order at Art. III, Fed. Trade
Comm’n v. Consumer Portfolio Servs., No. 14–cv–
00819 (C.D. Cal. June 11, 2014). Similarly, the
Commission has required such provisions in orders
in other contexts. See, e.g., Stipulated Order at Art.
III, Fed. Trade Comm’n v. Yellowstone Cap. LLC,
No. 1:20–cv–06023–LAK (S.D.N.Y. May 4, 2021);
Stipulated Order at Art. IV, Fed. Trade Comm’n v.
Prog. Leasing, No. 1:20–cv–1668–JPB (N.D. Ga. Apr.
22, 2020); Decision and Order at Art. VI, Bionatrol
Health, LLC, No. C–4733 (F.T.C. Mar. 5, 2021);
Stipulated Order at Art. I.E, Fed. Trade Comm’n v.
BunZai Media Grp., Inc., No. CV 15–4527–GW
(PLAx) (C.D. Cal. June 27, 2018); Stipulated Order
at Art. I, Fed. Trade Comm’n v. T-Mobile USA, Inc.,
No. 2:14–cv–00967–JLR (W.D. Wash. Dec. 19, 2014);
Stipulated Order at Art. I, Fed. Trade Comm’n v.
AT&T Mobility, LLC, No. 1:14–cv–03227–HLM
(N.D. Ga. Oct. 8, 2014); Decision and Order at Art.
I, Google, Inc., No. C–4499 (F.T.C. Dec. 2, 2014);
Consent Order, Apple Inc., No. C–4444 (F.T.C. Mar.
27, 2014); cf. Fed. Trade Comm’n v. Kennedy, 574
F. Supp. 2d 714, 720–21 (S.D. Tex. 2008)
(consumers charged without express, informed
consent for web services could not reasonably avoid
harm when told that websites were ‘‘free’’).
consumers’ electronic signatures were
applied to contracts with very different
terms from what the consumers believed
they were accepting. An individual
commenter recommended that dealers
be required to provide paper documents
where requested and consumers be
allowed to consent on paper documents
only, noting that elderly consumers or
those for whom English is a second
language may have difficulty with
electronic signatures. Another
individual commenter expressed the
view that anyone needing assistance
understanding the sales price or
disclosures should be provided
independent legal counsel at the
dealership’s expense.
While the Commission agrees that
additional measures to promote express,
informed consent could reduce the
incidence of unauthorized charges and
aid with enforcement efforts, the
Commission has determined not to
include in this Final Rule provisions
that would require new forms during
the vehicle sale or financing transaction.
This way, law-abiding dealers would
not have to change their practices for
obtaining express, informed consent.
Thus, the Commission declines to add
further requirements, including those
involving signature boxes or date-and-
time recordings. Regarding the E-Sign
Act, nothing in the Rule modifies
compliance obligations under this Act.
Instead, the Final Rule requires that,
regardless of whether any given
signature may have been obtained
through electronic or other means, the
dealer must obtain the express,
informed consent of the consumer to
any item for which the dealer charges
the consumer. Furthermore, the
Commission notes that a dealer has not
obtained express, informed consent if a
dealer has consumers sign an electronic
keypad without seeing and
understanding the terms, or applies
their electronic signatures on contracts
with terms different from those to which
the consumer agreed.400 In such
circumstances, the consumer has not
demonstrated informed consent, or
unambiguous assent to be charged,
including because the signatures are not
in close proximity to clear and
conspicuous disclosures regarding the
charges.
Other commenters, including industry
and dealership associations, claimed
that the Commission did not provide
enough information regarding what
would constitute express, informed
consent to charges, contending that
additional detail was needed, or that the
provision and associated definition of
‘‘Express, Informed Consent’’ were too
vague. The Commission notes, however,
that the phrase ‘‘Express, Informed
Consent’’ is consistent with existing
legal standards.401 Commission
enforcement actions over the years have
challenged as deceptive or unfair the
failure to get express, informed consent
to charges, including in actions
involving motor vehicle dealers and
others:
• Rushing consumers through stacks
of auto paperwork more than 60 pages
deep and requiring over a dozen
signatures, where the paperwork
included charges for unwanted add-
ons. 402
• Double charging certain fees
without consumers’ knowledge or
consent in highly technical documents
presented at the close of a long
financing process after an already
lengthy process of selecting a vehicle
and negotiating over its price.403
• Presenting consumers with
preprinted sales and financing forms
that included add-ons consumers had
not requested, and rushing consumers
through the closing process while
directing them where to sign forms,
including forms that were blank.404
• Charging consumers more for a
product or service than they agreed to
pay.405
• Charging consumers for more
products than they requested. 406
• Cramming charges onto consumers’
bills for services that the consumers did
not request without the consumers’
knowledge or consent. 407
Courts have found the failure to
obtain express, informed consent to be
a violation of the FTC Act.408 Other
statutes and rules enforced by the
Commission include express, informed
consent requirements for consumer
purchases,409 and similar provisions
have appeared in Commission orders
resolving charges that motor vehicle
dealers or other sellers have levied
unauthorized charges on consumers.410
In short, the prohibition in § 463.5(c)
against charging consumers for products
or services without their express,
informed consent, and the
corresponding definition of ‘‘Express,
Informed Consent’’ in § 463.2(g) are
consistent with existing law in
articulating what motor vehicle dealers
must do—and already should be doing.
The Commission further notes that
the proposed definition of ‘‘Express,
Informed Consent’’ provided
information regarding what was
required by § 463.5(c): an affirmative act
by the consumer communicating
unambiguous assent to be charged,
made after receiving and in close
proximity to a clear and conspicuous
disclosure, in writing, and also orally
for in-person transactions, of the
following: (1) what the charge is for; and
(2) the amount of the charge, including,
if the charge is for a product or service,
all fees and costs to be charged to the
consumer over the period of repayment
with and without the product or service.
As is evident from this language, there
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653	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
411 See NPRM at 42046. The term ‘‘item’’ includes
‘‘a distinct part in an enumeration, account, or
series’’ as well as ‘‘a separate piece of news or
information.’’ See Item (defs. 1, 3), Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/item (last visited Sept. 14,
2023).
412 See NPRM at 42046 (emphasis added).
must be an affirmative act that itself
conveys the consumer’s unambiguous
assent to the specific charge: it must
clearly and expressly communicate both
that the consumer has been informed
about the charge and consents to the
charge. This act cannot be susceptible to
alternative interpretations, i.e., that the
consumer meant to communicate
something other than the consumer’s
authorization to be charged for the
specific add-on or other item in
question. For example, a consumer
might ask, ‘‘how much would it cost to
get the car with [a specific add-on]? ’’
Such a statement does not convey
unambiguous assent to be charged for
the mentioned add-on; rather, it could
merely convey curiosity, interest, or a
desire to evaluate options. Similarly, if
a consumer responds to a salesperson’s
description of an add-on by saying
‘‘OK,’’ this response may merely
confirm that the consumer had heard or
understood information and does not
indicate the consumer’s unambiguous
assent to purchase, let alone be charged
for, such an item.
Relatedly, some commenters,
including dealership associations,
suggested that the addition, by the
consumer, of a signature or set of
initials, accompanied by a
corresponding date can be partial
evidence of an affirmative, or ‘‘Express,’’
act. The Commission notes that the
extent to which these, or other, acts
indicate ‘‘Express, Informed Consent’’
depends on circumstances and context.
A consumer signing a lengthy document
with pre-checked boxes does not, by
itself, demonstrate express, informed
consent. This is particularly so at the
end of an hours-long transaction, at
which point actions that, under other
circumstances, may indicate assent are
increasingly less likely to do so
unambiguously, given that at the close
of a transaction, consumers expect to be
finalizing previously agreed-upon terms
instead of discussing new products or
services hours into the deal. For
express, informed consent to be
effective, the consumer must
understand what a charge is for and the
amount of the charge, including all costs
and fees over the length of the payment
period. A signed and dated document
would not satisfy the requirement for
express, informed consent, for example,
if the consumer was directed to sign the
final page of a contract or an electronic
signature pad and the signed and dated
document did not reflect the terms to
which the consumer had agreed. In such
cases, the signed and dated document
does not represent the consumer’s
unambiguous assent to be charged,
made after receiving, and in close
proximity to, a clear and conspicuous
disclosure of what the charges are for
and the amount of the charges.
Some industry association
commenters argued that the proposed
definition was too prescriptive, and
would require, for instance, video
records to demonstrate compliance, or
that the proposed language was
overreaching, and requiring express,
informed consent for every item on a
contract would be complicated and
time-consuming. The Commission notes
again that, under current law,
dealerships are already required to
obtain consumers’ express, informed
consent to charges. If dealers are already
obtaining such consent, as is required
by law, they need not take additional
steps, such as by using a separate
disclosure form or videos, or by
spending additional time during the
transaction to comply with this
provision.
A dealership association commenter
requested examples of recordkeeping
and best practices evidencing oral
disclosures that would satisfy the
requirement to obtain express, informed
consent. The express, informed consent
requirement and definition require the
disclosure to be made in writing in
addition to orally for in-person
transactions. Furthermore, under other
provisions of the Rule, such as the
definition of ‘‘Clear(ly) and
Conspicuous(ly)’’ at § 463.2(d)(7),
dealers are prohibited from
contradicting information that is
required to be disclosed; thus, for
example, dealers’ oral representations
must be consistent with the written
disclosure required for obtaining
express, informed consent. Best
practices for satisfying the requirement
to obtain express, informed consent
include presenting key information and
finalizing actual terms early in the
transaction—for example, by including
full cost information, such as estimated
taxes, costs of any selections made by
the consumer, and any other
components of cost, on dealer
websites—and maintaining records that
this was done. The Commission notes
that, as a transaction progresses,
consumers expect to be finalizing
previously agreed-upon terms instead of
discussing new charges and new
products or services. In lieu of finalizing
additional formal mandates in the Rule
regarding recordkeeping and best
practices evidencing express, informed
consent, the Commission recognizes
that industry members and other
stakeholders will have significant room
to develop self-regulatory programs and
guidance tailoring these and other
topics to the specifics of their business
operations.
Some dealership association
commenters expressed concern that
such a provision would be inconsistent
with State laws and would complicate
the car buying experience. While the
Commission is not aware of any laws
that allow dealers to charge consumers
without their express, informed consent,
and thus is not aware of any
inconsistences with this provision,
§ 463.9 of the Final Rule specifies what
dealers must do in the case of actual
conflicts with State law. State laws may
provide more or less specific
requirements—including requirements
that provide greater protection—as long
as they do not conflict with the Final
Rule, as set forth in § 463.9. The
Commission also notes that to the extent
there is overlap with existing law, there
is no evidence that duplicative
prohibitions against deceptive and
unfair conduct, including prohibitions
against charging consumers without
express, informed consent, have harmed
consumers or competition.
Commenters, including an industry
association, inquired whether the term
‘‘item,’’ as used in this proposed
provision, differed from the term ‘‘Add-
on Product or Service’’ defined in
§ 463.2 of the Commission’s proposal.
The industry association also argued
that requiring express, informed consent
is beyond what is required under the
Truth in Lending Act. The Commission
responds as follows: Consistent with its
plain meaning, the term ‘‘item’’ is
broader than, and thereby encompasses,
the term ‘‘Add-on Product(s) or
Service(s),’’ which is limited by its
definition in § 463.2 of the Final
Rule.411 As proposed, § 463.5 addressed
‘‘Dealer Charges for Add-ons and Other
Items.’’ 412 It did so in recognition of the
fact that add-ons are one type of ‘‘item,’’
but that ‘‘Other Items’’ for which a
dealer might charge exist as well. Thus,
as proposed, § 463.5 applied to charges
generally, whether such charges were
for an add-on or for another item. As
previously discussed, charging
consumers without their express,
informed consent to the charge has long
been an unfair or deceptive practice
under the FTC Act. This has been the
case regardless of what the charge is for.
Accordingly, dealers already should be
obtaining consumers’ express, informed
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654 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
413 This commenter also contended that this
provision would result in many disclosures when
combined with proposed § 463.5(b). Comment of
Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022–
0046–8368 at 98–99. As discussed previously, the
Commission declines to finalize proposed
§ 463.5(b).
414 See NPRM at 42045.
415 See Holder Rule, 16 CFR 433.2.
416 See Holder Rule, 16 CFR 433.2; see also Fed.
Trade Comm’n, Advisory Opinion Regarding F.T.C.
Trade Regulation Rule Concerning Preservation of
Consumers’ Claims and Defenses (May 3, 2012),
https://www.ftc.gov/system/files/documents/
advisory_opinions/16-c.f.r.part-433-federal-trade-
commission-trade-regulation-rule-concerning-
preservation-consumers-claims/
120510advisoryopinionholderrule.pdf (last visited
Dec. 5, 2023).
417 See Complaint ¶¶ 29–32, Fed. Trade Comm’n
v. Tate’s Auto Ctr. of Winslow, Inc., No. 3:18-cv-
08176–DJH (D. Ariz. July 31, 2018) (alleging a
financing entity ceased business with Tate’s Auto
Center after concerns about loan falsification and
substantial losses).
418 See SBP II.B.2.
consent for charges, whether it is for an
Add-on or any other item, regardless of
what may be required under other laws.
Commenters, including this same
industry association commenter, also
questioned how a dealership would
calculate ‘‘the amount of the charge . . .
with and without the product or
service’’ as would be required under
proposed § 463.2(g)(2), as well as how
this proposed provision would work in
a non-financed transaction. 413
Conversely, an individual commenter
stated that current F&I practices already
routinely disclose the proposed charges
with and without the product or service.
The Commission notes that its proposed
definition of ‘‘Express, Informed
Consent’’ plainly required disclosure of
the ‘‘amount of the charge, including, if
the product is for a product or service,
all fees and costs to be charged to the
consumer over the period of repayment
with and without the product or
service.’’ 414 The amount the dealer will
charge the consumer over the period of
repayment with the product or service
is the total charge for that product or
service. In the event the charge is for an
optional product or service, the amount
the dealer will charge the consumer
without the product or service is zero;
in the event the charge is for a non-
optional item, the dealer’s disclosure
must clearly indicate as such. Regarding
non-financed transactions, as with a
financed transaction, the amount the
dealer will charge the consumer over
the period of repayment with the
product or service is the total charge for
that product or service. If the period of
repayment is such that full payment is
due upon receipt of the vehicle, the
amount required to be disclosed is the
total charge for that product or service
to be paid upon receipt of the vehicle.
The amount the dealer will charge the
consumer without the product or
service, if it is optional, is zero; in the
event the charge is for a non-optional
item, the dealer’s disclosure must
clearly indicate such. Sharing this basic
information with consumers—how
much they will pay for the item and
how much they will pay without it—
addresses practices, such as hiding add-
on charges, misrepresenting whether
such charges are required in connection
with the vehicle sale or financing
transaction, or misrepresenting how
such charges influence the total of
payments for the transaction.
An industry association comment
stated that, were the Commission’s
proposal to become final, the
Commission would be able to obtain
monetary relief from dealers for harmed
consumers, and argued that Holder Rule
protections for such consumers thus
would be unnecessary.415 Accordingly,
it urged the Commission to modify its
proposal to include a safe harbor for
contract assignees, which it argued
would be incapable of detecting
deficiencies in sale or lease transactions,
such as dealer misrepresentations or a
lack of consumer consent, unless those
deficiencies were apparent from the face
of the contract. Here, the Commission
emphasizes that no provision of the
Final Rule changes the status quo
regarding the responsibilities of
assignees or other subsequent holders of
motor vehicle financing under the
Holder Rule. The Commission did not
include, when enacting the Holder Rule,
a safe harbor from liability for claims or
defenses based on their capability of
detection by such assignees or other
subsequent holders, and the
Commission does not believe on the
basis of comments received in the
course of this rulemaking that such a
change would be warranted as a
consequence of finalizing this Rule. The
Holder Rule provides important
protections for harmed consumers, even
when there is law that allows the
Commission or other law enforcers to
obtain remedies for harmed consumers,
including where the consumers are
seeking recourse from, or defending
themselves against, parties that have not
been the subject of law enforcement
actions.416 Furthermore, while the
Commission understands that dealers
are often in the best position to ensure
they have, in the first instance, obtained
a consumer’s express, informed consent
for charges, there are steps an assignee
or other subsequent holder of the
consumer credit contract, such as a
third-party financing entity, can take to
address concerns about contracts
obtained without express, informed
consent. For example, if a financing
entity receives complaints from
consumers or others that specific
charges were obtained without
authorization or sees that charges for a
particular item are occurring
substantially more frequently at a given
dealership than at others, the financing
company can take steps to make sure
the dealer is obtaining express,
informed consent. Further, if a financing
entity is concerned that a dealership
may be acting in violation of the Final
Rule, it may arrange its business
relationships accordingly, including by
altering or withdrawing its business
from the dealership.417
Another industry association
commenter asked for clarification
regarding the extent to which particular
rules are necessary to obtain customer
authorization for charges, thus reflecting
what is already necessary under State or
Federal law, as opposed to preventative
measures that the Commission
otherwise deems necessary. The
Commission notes that this provision is
consistent with the requirements of the
FTC Act, which already prohibits
charging consumers without express,
informed consent, and is needed to
address unfair and deceptive conduct.
As the Commission set forth in its
NPRM, the length and complexity of
motor vehicle transactions has created
an environment rife with deceptive and
unfair conduct. Consumer complaints
and the Commission’s extensive law
enforcement experience, among other
sources, indicate that some dealers have
added thousands of dollars in
unauthorized charges to motor vehicle
transactions, including for add-ons
consumers had already rejected.418 Such
issues are exacerbated when, for
example, preprinted dealer contracts
automatically include charges for
optional add-ons that the consumer has
not selected; when dealers rush
consumers through stacks of paperwork
with buried charges after a lengthy
process; when dealers misinform
consumers that the documents they are
signing represent agreed-upon terms; or
when dealers ask consumers to sign
blank documents.
Charging consumers without their
express, informed consent causes
substantial injury to consumers in the
amount of the unauthorized charge.
This injury is not reasonably avoidable
when dealers do not clearly and
conspicuously disclose to the consumer
what the charge is for and the amount
of the charge, since this information is
within the unilateral control of the
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655	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
419 See, e.g., Fed. Trade Comm’n v. FleetCor
Techs., Inc., 620 F. Supp. 3d 1268, 1334–39 (N.D.
Ga. Aug. 9, 2022); Fed. Trade Comm’n v. Inc21.com
Corp., 745 F. Supp. 2d 975, 1001–03 (N.D. Cal.
Sept. 21, 2010).
420 See 15 U.S.C. 57a(a)(1)(B) (the Commission
‘‘may include requirements prescribed for the
purpose of preventing’’ unfair or deceptive acts or
practices).
dealer. There are no countervailing
benefits to consumers or to competition
that outweigh this injury. To the
contrary, if all dealers obtained express,
informed consent to charges, they
would not lose business to dealers who
do not do so.
Charging for an item without
obtaining the consumer’s express,
informed consent is also a deceptive
practice under section 5 of the FTC
Act. 419 When a dealer presents a
consumer with whom the dealer has
negotiated a finalized sale or financing
contract, the dealer is representing that
the contract includes only charges that
were negotiated and to which the
consumer agreed. If the dealer failed to
obtain the consumer’s express, informed
consent, however, such a representation
is false or misleading. It is also material:
if consumers knew that they had not, in
fact, authorized a charge that the dealer
nonetheless included in their sales or
financing contract, this information
likely would have affected the
consumers’ willingness to continue to
engage with the dealership, as well as
consumers’ willingness to select and
pay for any such item. The express,
informed consent requirement also
serves to prevent the misrepresentations
prohibited by § 463.3 of the Final Rule—
including misrepresentations regarding
material information about the costs or
terms of purchasing, financing, or
leasing a vehicle, and about any costs,
limitation, benefit, or other aspect of an
add-on.420 The requirement also serves
to prevent violations of the disclosure
requirements in § 463.4 and the
prohibition against charging for non-
beneficial add-ons in § 463.5(a). By
operation of the definition of ‘‘Express,
Informed Consent’’ at § 463.2(g), this
requirement reduces the likelihood that
dealers will fail to disclose what a given
charge is for and the amount of the
charge including all fees and costs to be
charged to the consumer over the period
of repayment with and without the
charged item, thereby making the
disclosures of information required by
§ 463.4 more likely. The same is true
regarding the requirements of § 463.5(a):
the requirement that dealers obtain
informed and unambiguous assent to be
charged for each product or service
makes it less likely that dealers will
charge consumers for items from which
they would not benefit; consumers
typically do not provide informed,
unambiguous assent to be charged for
additional products from which they
could not benefit unless they are led to
believe, directly or by omission, that
these products would be beneficial.
Thus, the Commission has
determined to finalize proposed
§ 463.5(c), prohibiting dealers from
charging a consumer for any item unless
the dealer obtains the express, informed
consent of the consumer for the charge,
with the addition of language clarifying
that the requirements in § 463.5(c) ‘‘also
are prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.3(a) and (b),
463.4, and paragraph (a) of this section.’’
In addition, the Commission has
determined to finalize its definition of
‘‘Express, Informed Consent,’’ now at
§ 463.2(g), substantively as proposed.
F. § 463.6: Recordkeeping
Proposed § 463.6 required motor
vehicle dealers to create and retain, for
a period of twenty-four months from the
date the record is created, all records
necessary to demonstrate compliance
with the Final Rule, including those in
five enumerated paragraphs. This
proposed section further provided that
dealers may retain such records in any
legible form, and in the same manner,
format, or place as they may already
keep such records in the ordinary
course of business, and that failure to
keep all required records required will
be a violation of the Rule. As examined
in additional detail in the following
analysis, several commenters supported
the proposal; several urged the
Commission to adopt broader
recordkeeping requirements; and several
other commenters argued that the
proposed requirements were too broad.
After careful consideration, the
Commission has determined to adopt
these recordkeeping requirements
largely as proposed, with two
conforming modifications to remove
references to proposed provisions not
adopted in the Final Rule; one
typographical modification to include a
serial comma for consistency; and minor
textual changes to ensure consistency
with the defined terms at § 463.2(e) and
(f) by replacing ‘‘Motor Vehicle Dealer’’
with ‘‘Covered Motor Vehicle Dealer’’ or
‘‘Dealer,’’ replacing ‘‘Motor Vehicle’’
with ‘‘Vehicle,’’ and capitalizing
‘‘vehicle.’’ In the following paragraphs,
the Commission discusses each
proposed recordkeeping requirement,
the comments the Commission received
on each such requirement as well as the
Commission’s responses to such
comments, and the provisions the
Commission is finalizing.
Section 463.6(a) of the proposed rule
required motor vehicle dealers to create
and retain, for a period of twenty-four
months from the date the record is
created, all records necessary to
demonstrate compliance with the Final
Rule, including (1) copies of materially
different advertisements, sales scripts,
training materials, and marketing
materials regarding the price, financing,
or lease of a motor vehicle that the
dealer disseminated during the relevant
time period; (2) copies of all materially
different add-on lists and all documents
describing such products or services
that are offered to consumers; (3) copies
of all purchase orders; financing and
lease documents with the dealer signed
by the consumer, whether or not final
approval is received for a financing or
lease transaction; and all written
communications relating to sales,
financing, or leasing between the dealer
and any consumer who signs a purchase
order or financing or lease contract with
the dealer; (4) records demonstrating
that add-ons in consumers’ contracts
meet the requirements of § 463.5,
including copies of all service contracts,
GAP agreements, and calculations of
loan-to-value ratios in contracts
including GAP agreements; and (5)
copies of all written consumer
complaints relating to sales, financing,
or leasing, inquiries related to add-ons,
and inquiries and responses about
vehicles referenced in § 463.4.
Proposed § 463.6(b) provided that a
motor vehicle dealer may keep the
required records ‘‘in any legible form,
and in the same manner, format, or
place as they may already keep such
records in the ordinary course of
business.’’ This proposed paragraph also
specified that failure to keep all records
required under paragraph (a) of this
section would be a violation of the Final
Rule.
Many commenters, including State
regulators, legal aid groups, consumer
advocacy organizations, and individual
commenters, endorsed the
Commission’s proposed rule generally,
without criticism of its proposed
recordkeeping requirements. In
addition, one such association
commenter expressly stated that it
supported each of the proposed
recordkeeping provisions, explaining
that these proposed provisions were
needed to address ‘‘bait and switch’’
tactics, provide evidence of whether
required disclosures are made, and
identify consumers harmed by illegal
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656 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
421 Comment of Nat’l Consumer L. Ctr. et al., Doc.
No. FTC–2022–0046–7607 at 48–49; see also
Comment of N.Y.C. Dep’t of Consumer and Worker
Prot., Doc. No. FTC–2022–0046–7564 at 6 (noting
retention requirements are vital to investigations,
particularly with respect to mandatory disclosures).
422 See, e.g., Telemarketing Sales Rule, 16 CFR
310.5; Business Opportunity Rule, 16 CFR 437.7.
423 See § 463.2(j).
424 One industry commentor questioned the
utility of records in FTC actions. This commenter
also stated that the FTC is not a supervisory agency
and thus should not be seeking to create a records
inspection scheme. As noted previously,
recordkeeping requirements are necessary here to
prevent unfair and deceptive practices by
mandating preservation of written materials that
reflect dealer transactions and to enable effective
enforcement of the Rule. The Commission has the
authority to prescribe rules for the purpose of
preventing unfair or deceptive acts or practices. See
15 U.S.C. 57a(a)(1)(B). The Commission routinely
includes recordkeeping requirements in rules, see,
e.g., Telemarketing Sales Rule, 16 CFR 310.5;
Business Opportunity Rule, 16 CFR 437.7, and
courts have ordered companies to maintain records
in FTC orders, see, e.g., Final Judgment at 20–21,
Fed. Trade Comm’n v. Elegant Sols., Inc., No. 8:19–
cv–01333–JVS–KES (C.D. Cal., July 17, 2020); Order
for Permanent Injunction and Monetary Judgment at
27–28, Fed. Trade Comm’n. v. Consumer Defense,
LLC, No. 2:18–cv–00030–JCM–BNW (D. Nev. Dec. 5,
2019).
425 See, e.g., Va. Code sec. 46.2–1529 (requiring
retention for five years of ‘‘all dealer records’’
regarding, among other things, vehicle purchases,
sales, trades, and transfers of ownership).
practices. 421 Here, the Commission
notes that record retention requirements
are necessary to preserve written
materials that reflect the transactions
between the dealer and purchasing
consumers, and to assist the
Commission to enforce its Rule by
enabling it to ascertain whether dealers
are complying with its requirements; to
identify persons who are involved in
any challenged practices; and to identify
consumers who may have been injured.
Such requirements are particularly
important in the case of complicated,
lengthy, and document-heavy vehicle
sale or financing transactions, in which
law violations may be more difficult for
consumers and others to detect. Indeed,
the Commission routinely includes
recordkeeping requirements in its
rules.422
Several commenters, including
consumer advocacy organizations,
consumer protection agencies, a group
of State attorneys general, and
individual commenters, urged the
Commission to consider expanding the
proposed twenty-four-month record
retention period, noting that the
contract period for most retail
installment contracts is much longer
than twenty-four months, and that State
limitations periods for claims relating to
the subject matter of the Commission’s
proposed rule often extend well beyond
this proposed timeframe. Numerous
such commenters, for instance,
recommended a record retention period
of the longer of seven years or the length
of the consumer’s financing contract.
The Commission understands that
there would be benefits to a longer
period, especially given that vehicle
financing repayment terms are often far
longer than twenty-four months, and
that many dealers likely already
maintain, in the ordinary course of
business, the types of records set forth
in proposed § 463.6. The Commission,
however, is also mindful that other
commenters raised concerns about the
costs associated with record retention,
including costs that would increase
with any extension of the retention
period. Rather than limiting the types of
records to be maintained, and thus
hampering the Commission’s ability to
ensure compliance with the Final Rule,
the Commission has determined to
adopt a retention period that is shorter
than the time period of many motor
vehicle financing contracts, in order to
minimize burdens. In the event the
Commission subsequently determines
that a twenty-four-month retention
period is insufficient to ensure
compliance with this Rule, the
Commission may consider other
measures in the future.
In addition, a number of commenters,
including consumer advocacy
organizations, recommended additional
provisions, including an explicit
requirement to retain language-
translated versions of required records,
and a requirement to make retained
records available to consumers upon
request. Regarding language-translated
versions of required records,
§ 463.6(a)(3), (a)(4), and (a)(5) require
dealers to retain copies of ‘‘all’’ listed
records, while § 463.6(a)(1) mandates
that dealers retain ‘‘Materially different’’
copies of records. Thus, for the records
listed in § 463.6(a)(3), (a)(4), and (a)(5),
any translations are required to be
retained; in the case of § 463.4(a)(1), the
Rule requires materially different
translations to be maintained.423 The
Commission therefore has determined
not to add to the recordkeeping section
of the Rule a standalone requirement to
retain translated versions. The
Commission will continue to monitor
the marketplace to determine whether
additional action or protections are
warranted.
The Commission also declines to
include in this Final Rule an additional
requirement that dealers provide
retained records to consumers upon
request. Such a requirement may be
beneficial; however, it is not clear to
what extent dealers currently refuse to
provide consumers with such records,
and there is insufficient information in
the rulemaking record to assess the
impact of—or need for—such a
modification of the existing requirement
to retain and preserve materials in the
Rule. The Commission will continue to
monitor the motor vehicle marketplace,
including issues relating to information
access, to determine whether additional
action or protections are warranted.
Other commenters—particularly auto
industry participants—objected to the
proposed recordkeeping
requirements. 424 Several such
commenters contended that the
proposed requirements were new
obligations that went beyond specific
State recordkeeping requirements. Some
dealership associations argued that
existing State recordkeeping
requirements are sufficient and that a
Commission rule was unnecessary. One
such commenter argued that the
existence of overlapping, but different,
State and Federal standards may make
compliance difficult for motor vehicle
dealers.
In response, the Commission notes
that the recordkeeping requirement is
necessary to ensure motor vehicle dealer
compliance with the Final Rule, and
therefore may have different
requirements than State standards. To
provide dealers with flexibility and to
minimize burden, however, the
proposed rule permitted dealers to
retain records ‘‘in any legible form,’’
including ‘‘the same manner, format, or
place’’ in which records are kept in the
ordinary course of business. To the
extent dealers have fashioned their
ordinary record retention practices
around State recordkeeping standards,
the proposed rule thus allowed for
record retention in the form required by
State recordkeeping standards.
Additionally, as discussed in the
following paragraphs, the Commission
is not finalizing recordkeeping
requirements that dealers maintain Add-
on Lists and Cash Price without
Optional Add-ons disclosures and
declinations, further reducing burdens.
One industry association commenter
suggested that this requirement would
increase risks of identity theft and raise
privacy concerns. The Commission
notes that many dealers already have
obligations to retain customer records
under State law.425 Dealers are required
to have systems in place to protect this
information, given that the failure to
adequately protect such information
violates existing law, including section
5 of the FTC Act and the Commission’s
Standards for Safeguarding Customer
Information, also known as the
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657	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
426 15 U.S.C. 45; 16 CFR 314; see also Decision
and Order, LightYear Dealer Techs., LLC, No. C–
4687 (F.T.C. Sept. 3, 2019) (consent order); FTC
Business Guidance, ‘‘FTC Safeguards Rule: What
Your Business Needs to Know,’’ https://
www.ftc.gov/business-guidance/resources/ftc-
safeguards-rule-what-your-business-needs-know
(last visited Dec. 5, 2023).
Safeguards Rule.426 Thus, to the extent
the Final Rule requires dealers to collect
personal information beyond that which
they are already collecting, they should
already have systems in place to protect
such information.
Some commenters raised concerns
about the requirement in proposed
§ 463.6(a)(1) to preserve, inter alia,
materially different advertisements,
sales scripts, and marketing materials.
One such dealership association
commenter argued that dealers should
not be required to retain sales scripts,
training materials, and marketing
materials, while another dealership
association commenter argued that
dealers should not be required to
maintain advertisements, positing that
these materials are publicly available
and could be requested from advertisers
as concerns arise with respect to
particular ads. Commenters including
two dealership organizations argued
that digital advertisements would be
difficult to retain, with one such
commenter urging the Commission to
adopt an approach that would permit
dealers to retain a representative
example of a vehicle advertisement and
the underlying data used to populate
vehicle ads. The other such commenter
suggested that the proposed
recordkeeping requirement could be
unduly burdensome because ‘‘all
materials’’ related to its online
inventory ‘‘could be deemed some
version of materially different
advertisements and marketing materials
regarding price or financing of a motor
vehicle.’’ Another dealership
organization commenter raised a similar
concern about website listings and
questioned whether the term
‘‘advertisement’’ includes television ads
and email campaigns.
After considering these comments, the
Commission has determined that the
proposed recordkeeping requirements in
§ 463.6(a)(1) strike an appropriate
balance by requiring the retention of
materials needed to enable effective
enforcement while only requiring such
records to be retained for twenty-four
months and in any legible form.
Advertisements and marketing materials
regarding the price, financing, or lease
of a motor vehicle are critical to
determining compliance with virtually
every provision in the Final Rule, as
they are often consumers’ first contact
in the vehicle-buying or -leasing
process, and often contain key
representations about pricing,
payments, and other terms. Scripts and
training materials are important
evidence of a dealer’s compliance
program regarding the Final Rule’s
requirements, including of the
information and instructions that
dealership staff are given with respect to
the areas that are addressed by the Final
Rule. Furthermore, regarding the
contention that advertisements are
available publicly or could be requested
separately, a core purpose of the
recordkeeping requirement is to ensure
that disseminated representations are
preserved for a sufficient period of time
to allow for compliance concerns to be
addressed. A compliance regime that,
contrary to the Commission’s proposal,
allowed the destruction of
advertisements after they have been
publicly presented, or that requires the
Commission to try to obtain materials
from advertisers or third parties, would
not serve this purpose.
With respect to the scope of
advertisements that must be retained,
the recordkeeping requirement does not
differ with respect to the form of the
advertisement, since the same
enforcement concerns are raised
regardless of whether an ad is presented
in digital, hardcopy, email, audio,
televised, or other format. The
recordkeeping requirement does not
require all advertisements to be
retained, however, as § 463.6(a)(1)
specifically includes the proviso that ‘‘a
typical example of a credit or lease
advertisement may be retained for
advertisements that include different
Vehicles, or different amounts for the
same credit or lease terms, where the
advertisements are otherwise not
Materially different.’’ Regarding the
commenter’s proposal to allow dealers
to retain a ‘‘representative’’ example of
an advertisement with digital data that
can recreate different versions of the
advertisement, this provision, as
proposed, permitted dealers to preserve
typical examples of advertisements in
this manner so long as such records are
already kept in in the ordinary course of
business, capture all differences that
would be material to consumers, and
accurately show how the offers have
been presented to consumers. Materially
different website listings, television
advertisements, and email campaigns
must be preserved, consistent with the
plain meaning of the terms used in the
section.
With respect to proposed
§ 463.6(a)(2)’s requirement to maintain
copies of all materially different add-on
lists, an industry association commenter
contended that retaining materially
different add-on lists would be difficult,
given the scope of the term ‘‘Add-on’’
and the consequent size of the list as
well as its dynamic nature. One
dealership association commenter
argued that the proposed requirement to
retain add-on lists was unnecessary,
contending that concerns could be
addressed as they arise, and requesting
to replace this proposed requirement
with a requirement to retain a master
copy of each insurance product, service
contract, or other add-on in the dealer’s
general business file. After carefully
considering the comments, the
Commission has determined not to
finalize the proposed requirement at
§ 463.4(b) to disclose an add-on list, and
consequently will not be finalizing the
proposed requirement at § 463.6(a)(2)
that dealers retain materially different
add-on lists.
Several commenters, including
industry associations, argued that
certain of the proposed requirements to
preserve written material, including
written communications under
proposed § 463.6(a)(3) and written
consumer complaints, and inquiries and
responses about vehicles referenced in
§ 463.4, under proposed § 463.6(a)(5),
would be unduly burdensome.
Generally, these commenters contended
that the various ways consumers may
communicate with dealers—including
chat features on a dealer’s website,
emails and text messages with
salespersons, and social media posts—
would require the development of new
and onerous preservation systems. A
dealership organization commenter
raised concerns about retaining text
messages and emails, contending that
salespeople may use their personal
phones and email addresses, even if the
dealership has policies against such use.
One industry association commenter
argued that third parties might have
records related to add-ons and that this
provision should only apply to
‘‘complaints’’ relating to add-ons
instead of ‘‘inquiries’’ relating to add-
ons. One dealership association
commenter argued that dealers should
not be required to retain consumer
complaints, contending it should be the
businesses’ decision whether to
maintain such materials, and also
arguing that the Rule should not require,
under proposed § 463.6(a)(4), the
preservation of materials such as pricing
options presented to consumers,
contending that such materials should
be limited to the two parties to the
agreement.
After considering these comments, the
Commission has determined to finalize
requirements to retain written materials
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658 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
427 As noted previously, a dealership association
commenter argued that dealers should not be
required to preserve complaints and certain add-on
materials, contending that it should be a business
decision whether to retain such records. The
Commission declines to substantively modify these
requirements from the Commission’s original
proposal, given the importance of these materials in
ensuring compliance with the other requirements of
the Rule.
428 See SBP II.B (discussing how complaints
represent the tip of the iceberg in terms of actual
consumer harm).
429 This is consistent with the Commission’s prior
enforcement order practice. See, e.g., Stipulated
Order at 25, Fed. Trade Comm’n v. N. Am. Auto.
Servs., Inc., No. 1:22–cv–0169 (N.D. Ill. Mar. 31,
2022) (requiring retention of ‘‘records of all
consumer complaints and refund requests, whether
received directly or indirectly, such as through a
third party, and any response’’).
430 The term ‘‘written’’ means ‘‘made or done in
writing.’’ See Written, Merriam-Webster.com
Dictionary, https://www.merriam-webster.com/
dictionary/written (last visited Dec. 5, 2023). The
term ‘‘consumer’’ includes ‘‘one that utilizes
economic goods.’’ See Consumer (def. a), Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/consumer (last visited Dec.
5, 2023). The term ‘‘complaint’’ includes an
‘‘expression of grief, pain, or dissatisfaction,’’
‘‘something that is the cause or subject of protest
or outcry,’’ and ‘‘a formal allegation against a
party.’’ See Complaint (defs. 1, 2a, 3), Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/complaint (last visited Dec.
5, 2023).
431 See SBP II.B.
432 See 15 U.S.C. 45(a).
under § 463.6(a)(3), (4), and (5), with a
limiting modification to § 463.6(a)(4).
These requirements are necessary to
address unfair and deceptive practices
by mandating that dealers preserve
written materials that reflect the
transactions between the dealer and
purchasing consumers, and to assist the
Commission in its enforcement of the
Rule. 427 Such materials are particularly
important given that the vast majority of
consumers do not file a complaint, and
with hidden charges, many consumers
never know about the illegal conduct in
the first place.428 For instance, as
explained in SBP II.B, a survey of one
dealership group’s customers showed
that 83% of the respondents were
subject to the dealer’s unlawful
practices related to add-ons. This equals
16,848 consumers—far more than the
391 complaints received against the
dealer over the time period covered by
the survey.
To minimize burden, as previously
noted, the retention requirements are for
a period of twenty-four months. Further,
as stated previously, § 463.6(b) permits
dealers to retain records ‘‘in any legible
form,’’ which could, for example,
include using the backup and export
features that already exist in many
social media services, email platforms,
chat platforms, and text systems, instead
of creating entirely new systems.
Regarding dealers that use third parties
to administer add-ons, commenters did
not explain why they cannot access
records related to add-ons from these
parties.429 Further, altering the language
in the provision to apply to
‘‘complaints’’ rather than ‘‘inquiries’’
related to add-ons could invite
arguments that consumer statements,
such as, ‘‘Why was I charged for this
add-on that I did not know about?’’ are
not ‘‘complaints,’’ but simply
‘‘inquiries.’’ With respect to the use of
salespeople’s personal devices to
conduct motor vehicle dealer activities,
including the sale, financing, or leasing
of vehicles, as with any business,
dealers should ensure that their
employees are communicating with
consumers through appropriate
channels that can be monitored and
controlled by the dealership.
Some commenters, including an
industry association and a dealership
organization, also raised concerns about
how to determine what would
constitute ‘‘written consumer
complaints’’ under proposed
§ 463.6(a)(5). For purposes of the Rule,
the Commission refers commenters to
the plain meaning of the terms used in
the phrase, which terms are commonly
used and understood.430
Two industry association commenters
argued that the proposed requirement to
retain written communications would
be particularly burdensome for
recreational vehicle dealers, contending
that that this was particularly so given
that many RV dealers are small
businesses. In response, the
Commission notes that, as explained in
the paragraph-by-paragraph analysis of
§ 463.2(e) and (f) in SBP III.B.2(e) and
(f), it has determined not to finalize the
Rule with respect to dealers
predominantly engaged in the sale,
leasing, or servicing of RVs, but it will
continue to monitor the marketplace to
determine whether modifications or
revisions may be warranted in the
future.
Finally, one industry association
commenter argued that the proposed
recordkeeping requirements and costs
were unwarranted given that the
Commission has brought an average of
fewer than four enforcement actions a
year against motor vehicle dealers in the
past decade. In response, the
Commission notes that its experience
indicates that the number of
enforcement actions is not remotely
reflective of the total violations of law
in the auto marketplace. To uncover
misconduct and bring actions, law
enforcement agencies and officials often
rely on complaints from affected parties.
As previously discussed, however,
consumer complaints typically
represent just the ‘‘tip of the iceberg’’ in
terms of actual violations, and the vast
majority of consumers who are
subjected to unlawful practices in this
area may not realize they are being
victimized.431 Further, the Commission
has limited law enforcement resources
and jurisdiction over a broad range of
commerce.432 The number of actions it
brings relating to motor vehicle
dealers—as with actions in any area—is
necessarily limited by these resource
constraints, even when there are
ongoing, chronic problems that cause
substantial consumer harm. Despite
these constraints, the Commission and
its law enforcement partners have taken
significant action aimed at addressing
unfair and deceptive practices in the
motor vehicle marketplace, as explained
in SBP II.C. Given that problems with
bait-and-switch advertising, add-ons,
and other aspects of vehicle-buying and
-leasing have continued to be a source
of consumer harm despite this action,
additional measures are warranted. And
the Commission has taken steps to
minimize burden, including by
declining to finalize the add-on list
disclosure requirements in proposed
§ 463.4(b), as well as the itemized
disclosures required in proposed
§ 463.5(b) and their corresponding
proposed recordkeeping requirements.
Moreover, the recordkeeping provisions
permit dealers to retain records in any
legible form, providing a flexible
standard that permits the use of
ordinary and standard forms of data and
document retention.
The Commission adopts in the Final
Rule recordkeeping requirements largely
as they were set forth in the proposed
rule, with two substantive
modifications. After careful
consideration, the Commission is
removing the requirements to retain
copies of add-on lists required by
proposed § 463.6(a)(2) and records
showing compliance with the cash price
without optional add-ons disclosures
and declinations required by proposed
§ 463.6(a)(4). These changes will reduce
record creation and retention burdens
for dealers. As previously described, the
Final Rule also contains one
typographical modification of adding a
serial comma and conforming edits for
consistency with the defined terms in
§ 463.2(e) and (f).
The Commission adopts these
recordkeeping requirements to promote
effective and efficient enforcement of
the Rule, thereby deterring and
preventing deception and unfairness. As
discussed throughout this SBP, the
rulemaking record, including the
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659	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
433 Some enforcement actions have specifically
alleged that a defendant failed to maintain
documents required under a prior order with the
FTC. Complaint ¶¶ 42–45, Fed. Trade Comm’n v.
Norm Reeves, Inc., No. 8:17–cv–01942 (C.D. Cal.
Nov. 3, 2017) (alleging dealer failed to keep records
of previous advertisements needed to demonstrate
compliance with prior order); Complaint ¶¶ 32–35,
Fed. Trade Comm’n v. New World Auto Imports,
Inc., No. 3:16–cv–22401 at (N.D. Tex. Aug. 18,
2016) (same).
434 See, e.g., 16 CFR 310.5 (Telemarketing Sales
Rule); 16 CFR 437.7 (Business Opportunity Rule);
16 CFR 453.6 (Funeral Industry Practices Rule); 16
CFR 301.41 (Fur Products Labeling Rule).
435 See MARS Rule (Regulation O), 12 CFR
1015.8, previously published by the Commission at
16 CFR 322.1.
436 See, e.g., Wis. Admin. Code Trans. 139.09
(similar waiver prohibition clause in Wisconsin’s
Motor Vehicle Trade Practices rule).
437 See MARS Rule, 16 CFR 322.8 (Commission
Rule), 12 CFR 1015.11 (CFPB Rule); Telemarketing
Sales Rule, 16 CFR 310.9.
438 Comment of 18 State Att’ys Gen., Doc. No.
FTC–2022–0046–8062 at 11.
439 See City of Columbus v. Ours Garage &
Wrecker Serv., Inc., 536 U.S. 424, 433 (2002) (‘‘The
principle is well settled that local governmental
units are created as convenient agencies for
exercising such of the governmental powers of the
State as may be entrusted to them in its absolute
discretion.’’) (quoting Wis. Pub. Intervenor v.
Mortier, 501 U.S. 597, 607–08 (1991)).
Commission’s law enforcement
experience, indicates that there are
chronic problems confronting
consumers in the motor vehicle sales,
financing, and leasing process, which
include advertising misrepresentations
and unlawful practices related to add-
ons and hidden charges.433 The
recordkeeping requirements in the Final
Rule will assist the Commission in
investigating and prosecuting law
violations and help the Commission
identify injured consumers for paying
consumer redress. The recordkeeping
requirements are flexible, allowing
dealers to retain materials in any legible
form, and are limited to a period of
twenty-four months from the date the
record is created. The recordkeeping
requirements are consistent with, and
similar to, the recordkeeping
requirements in other Commission
rules, as tailored to individual
industries and markets.434
G. § 463.7: Waiver Not Permitted
Proposed § 463.7 prohibited waiver of
the requirements of the Final Rule by
providing that it constituted a violation
of the Rule ‘‘for any person to obtain, or
attempt to obtain, a waiver from any
consumer of any protection provided by
or any right of the consumer under’’ the
Rule. Comments that addressed this
proposed provision generally either
supported it or expressed no opinion on
it. Comments in support noted that the
provision would help provide
consistency in the protection it would
provide to consumers and emphasized
that it would prohibit unscrupulous
dealers from causing consumers to sign
away their rights. This proposed
provision was modeled on a similar
provision in the Mortgage Assistance
Relief Services (‘‘MARS’’) Rule, which
was originally promulgated by the
Commission and subsequently
republished by the CFPB.435 Moreover,
at least one State has a similar waiver
provision in its rule covering motor
vehicle dealer practices.436 The
Commission concludes that this
provision is necessary to prevent
circumvention of the Rule, and, after
review of the comments, adopts this
prohibition as it was originally
proposed.
H. § 463.8: Severability
Proposed § 463.8 provided that the
provisions of the Final Rule ‘‘are
separate and severable from one
another. If any provision is stayed or
determined to be invalid, it is the
Commission’s intention that the
remaining provisions will continue in
effect.’’ This proposed provision was
modeled on similar provisions in other
rules, including the Commission’s
Telemarketing Sales Rule and the MARS
Rule.437 A number of commenters,
including dealership associations,
raised general concerns that the
proposed provisions may be too
integrated with each other for
severability to be possible. Such
commenters, however, did not provide
examples of any such instances wherein
they believed certain provisions could
not remain in effect if other provisions
were stayed or determined to be invalid.
Upon consideration of the comments,
the Commission concludes that
severability is possible in the event any
provision is stayed or determined to be
invalid. The Rule the Commission is
finalizing includes prohibitions against
misrepresentations regarding material
information (§ 463.3), required
disclosures (§ 463.4), and prohibitions
against charging for add-ons that
provide no benefit or any item without
express, informed consent (§ 463.5)—
each of which dealers are capable of
abiding by independently, as well as by
the provisions that independently
support their operation, including
Authority (§ 463.1), Definitions
(§ 463.2), Recordkeeping (§ 463.6),
Waiver not permitted (§ 463.7), and
Relation to State laws (§ 463.9). Thus,
the Commission has determined to
adopt this provision in the Final Rule as
it was originally proposed.
I. § 463.9: Relation to State Laws
Proposed § 463.9 provided that the
Rule does not supersede, alter, or affect
‘‘any other State statute, regulation,
order, or interpretation relating to Motor
Vehicle Dealer requirements, except to
the extent that such statute, regulation,
order, or interpretation is inconsistent
with’’ the Rule, ‘‘and then only to the
extent of the inconsistency.’’ Proposed
§ 463.9 further provided that, for
purposes of this provision, a State
statute, regulation, order, or
interpretation is not ‘‘inconsistent’’ if
the protection such statute, regulation,
order, or interpretation affords any
consumer ‘‘is greater than the protection
provided under’’ the Rule. After
carefully considering the comments, the
Commission adopts § 463.9 largely as
proposed in the Final Rule.
Numerous State regulator commenters
contended that the proposed rule would
create a uniform baseline of protection
that would complement State standards.
A comment from a group of eighteen
State attorneys general contended that
many of the Proposed rule’s
requirements were similar to, or the
same as, requirements that currently
exist under State laws or regulations,
and highlighted the benefit to law
enforcement from establishing a
consistent Federal baseline while
providing States with flexibility to
impose heightened consumer
protections.438
One municipal licensing entity
commenter that expressed general
support of the Commission’s proposed
rule also posited that the Commission
should broaden proposed § 463.9 to
expressly include municipalities. With
respect to the applicability of the
provision to municipalities, the
Commission notes that State political
subdivisions exercise delegated power
of their State, and as such, § 463.9
applies to municipal standards as
well. 439
Other commenters, including
dealership associations, referred
generally to potential conflicts between
the Commission’s proposed rule and
State laws, but such commenters
typically did not point to any specific
purported conflicts with State law. To
the extent some such commenters
argued that certain proposed provisions
would conflict with State laws, such
arguments are addressed in the SBP’s
corresponding paragraph-by-paragraph
analysis of the relevant Rule provision.
Generally, the Commission is not aware
of State laws that allow dealers to make
misrepresentations regarding material
information; prohibit the disclosure of
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440 See, e.g., Pirouzian v. SLM Corp., 396 F. Supp.
2d 1124, 1131 (S.D. Cal. 2005) (reasoning that the
more inclusive definition of ‘‘debt collector’’ under
California law is not ‘‘inconsistent’’ with the Fair
Debt Collection Practices Act because by ‘‘enlarging
the pool of entities who can be sued’’ the State law
offered greater protection).
441 See, e.g., 10 U.S.C. 987(d)(1) (Military Lending
Act); 15 U.S.C. 1692n (Fair Debt Collection
Practices Act); 12 CFR 1006.104 (Regulation F); 15
U.S.C. 1693q (Electronic Funds Transfer Act); see
also 21 U.S.C. 387p(a)(1) (Family Smoking
Prevention and Tobacco Control Act).
442 See 5 U.S.C. 553(d) (requiring publication of
a substantive APA rule ‘‘not less than 30 days
before its effective date’’ except ‘‘as otherwise
provided by the agency for good cause found and
published with the rule’’). Significant rules defined
by Executive Order 12866 and major rules defined
by the Small Business Regulatory Enforcement
Fairness Act are required to have a 60-day delayed
effective date. See E.O. 12866, 58 FR 51735 (Oct.
4, 1993); 5 U.S.C. 801(a)(3)).
accurate information regarding a
vehicle’s offering price, optional vehicle
add-ons, or total payment information;
or permit dealers to charge consumers
for add-ons that provide no benefit to
the consumer or to charge for items
without consumers’ express, informed
consent. To the extent there truly are
conflicts, as discussed in the following
paragraphs, § 463.9 establishes the
framework for addressing any such
inconsistencies.
Commenters including dealership
associations also argued that existing
State standards are sufficient and
identified State requirements that the
commenters argued would be redundant
with, or superior to, one or more
provisions in the Commission’s
proposed rule. To the extent the Rule
prohibits conduct that is already
prohibited by State laws, the
Commission has not seen evidence that
State and Federal standards prohibiting
the same misconduct has harmed
consumers or competition. Moreover,
such overlap is indicative of dealers’
ability to comply with the relevant
provisions in the Rule. To the extent
State laws have additional requirements
that provide greater protections or are
not otherwise inconsistent with part
463, dealers must continue to follow
those laws.
Several dealership association
commenters expressed concern
regarding how to determine whether a
State statute, regulation, order, or
interpretation affords ‘‘greater
protection’’ than a provision in the
Commission’s proposed rule. One such
commenter, for example, raised
concerns that proposed § 463.5(a) may
conflict with a pending California bill
that would prohibit the sale of GAP
when a vehicle has less than a 70%
loan-to-value ratio. An industry
association commenter claimed that the
Commission’s proposed definitions of
‘‘Dealer or Motor Vehicle Dealer’’ would
conflict with analogous State
definitions. In response, the
Commission emphasizes that § 463.9
would be triggered only if there were an
actual inconsistency between State law
and the Final Rule, and in the event of
an inconsistency, the Rule only affects
such State law to the extent of the
inconsistency. The commenter
examples did not present any such
inconsistencies because it is possible to
comply with both the cited State law
examples and with the Final Rule. For
instance, a dealer operating in a State
that prohibits the sale of a GAP
agreement when a vehicle transaction
involves a loan-to-value ratio below
70% would need to abide by the ratio
set forth by State law and also by the
Rule’s prohibition against charging for
the product if the consumer would not
benefit from it. Similarly,
notwithstanding a commenter’s claims
that the proposed rule’s definition of
‘‘Dealer or Motor Vehicle Dealer’’ would
conflict with analogous State standards,
the commenter did not identify any
actual conflicts; nevertheless, to the
extent State and Federal standards cover
independent areas or actors, each actor
must comply with the standards—
whether State, Federal, or both—under
which the actor is covered.440 Further
discussion of how State laws interact
with specific sections of the Rule are
explained in the corresponding section-
by-section analysis for the relevant
sections.
Some such commenters also
questioned whether more coordination
with States and Federal agencies was
needed, without explaining what
coordination was needed. In any event,
the Commission coordinates regularly
with States and Federal counterparts.
Many commenters’ concerns focused
on the written disclosures proposed in
§ 463.5(b), which the Commission has
determined not to include in this Final
Rule. For instance, a substantial number
of commenters, including industry
associations, argued that proposed
§ 463.5(b) would have created different
Federal and State requirements for
written disclosures that would result in
duplicative paperwork. A dealership
association specifically argued that
proposed § 463.5(b) may have conflicted
with a State pre-contract disclosure
requirement pertaining to six categories
of add-ons because it would have
required an additional disclosure about
a broader category of add-ons. An
industry association similarly pointed to
this State’s pre-contract disclosure
requirement as a reason that additional
disclosures under this Rule, including
those required by proposed § 463.5(b),
could result in consumer confusion. At
least four commenters, including
industry associations and a dealership
organization, argued that the proposed
rule’s requirement under § 463.5(b) to
create new documentation may conflict
with the ‘‘single document’’
requirements, in effect in many States,
which mandate that the entire motor
vehicle sale, financing, or lease
agreement—including any add-on
products or services—be within one
document. As discussed in the
paragraph-by-paragraph analysis of
§ 463.5 in SBP III.E.2, the Commission
has determined not to finalize the
written disclosures requirement under
this provision.
After carefully considering the
comments regarding proposed § 463.9,
the Commission is finalizing this
section largely as proposed, with one
minor modification: the Commission is
adding ‘‘Covered’’ to the term ‘‘Motor
Vehicle Dealer’’ in § 463.9(a) to conform
with the revised definition in § 463.2(f).
Section 463.9 provides a uniform floor
of protection with the Commission’s
Final Rule, while also permitting States
to enact stronger protections, using a
standard that has been applied in other
laws and regulations for several
decades.441 This provision is necessary
to address unfair and deceptive
practices and to enable the Commission
to enforce the Rule.
IV. Effective Date
The Final Rule becomes effective on
July 30, 2024. One industry association
commenter objected that the NPRM did
not include an effective date or inquire
into the timing for feasibly
implementing the Rule. Another such
commenter requested at least 18 months
for stakeholders to prepare for Rule
compliance, but did not explain why it
would take 18 months to refrain from
conduct that is already illegal, such as
making misrepresentations. Rules are
generally required to be published 30 to
60 days before their effective date,
though in some circumstances, agencies
may cite good cause for the rule to
become effective sooner than 30 days
from publication.442 Given the
significant harm to consumers and law-
abiding dealers from deceptive or unfair
acts or practices; and the fact that, for
dealers already complying with the law,
compliance with the Rule the
Commission is finalizing should not be
onerous; the NPRM did not propose or
contemplate any additional delay.
Nevertheless, after a review of
comments, the Commission is providing
dealers until July 30, 2024 to make
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443 OMB assigned the rulemaking control number
3084–0172 for PRA review purposes.
444 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
445 One commenter suggested the FTC did not
comply with several provisions of the PRA,
specifically those contained in 5 CFR
1320.5(a)(1)(iv), 1320.8(d)(1), 1320.11(a),
1320.11(b), and 1320.11(d). The commenter does
not explain the basis for the purported deficiencies.
These provisions generally relate to the submission
of a collection of information to OMB, and
solicitation and consideration of public comments.
The FTC has complied with these provisions. The
FTC submitted an Information Collection Request to
Office of Management and Budget on July 13, 2022,
concurrently with publication of the NPRM, in
accordance with 5 CFR 1320.11(b). See Motor
Vehicle Dealers Trade Regulation Rule, ICR
202202–3084–001, OMB 3084–0172, https://
omb.report/icr/202202-3084-001. Because the FTC
complied with this requirement, the collection of
information proposed in the NPRM is not, as the
commenter contends, subject to disapproval under
5 CFR 1320.11(d).
The Commission also did not violate 5 CFR
1320.5(a)(1)(iv) and 1320.11(a), providing for
comments to be submitted to OMB, as the
commenter contends. Those provisions are limited
by 5 CFR 1320.8(d)(3), which provides that the
agency need not direct comments to OMB ‘‘if the
agency provides notice and comment through the
notice of proposed rulemaking . . . for the same
purposes as are listed under’’ 5 CFR 1320.8(d)(1).
The Commission solicited comments in the NPRM
on the subjects enumerated in 5 CFR 1320.8(d)(1),
see NPRM at 42028–31, 42035–43, and it was not
necessary for the Commission to also direct those
same comments to OMB. The Commission thus did
not violate 5 CFR 1320.5(a)(iv) or 1320.11(a).
Further, contrary to the commenter’s assertion,
the Commission demonstrated throughout the
NPRM that the information collection-related
requirements it embodies are necessary, offer utility
and public benefit, and minimize burdens. See, e.g.,
NPRM at 42027, 42043. Moreover, the Commission
requested comments on the necessity, utility,
benefits, and burdens of the proposed rule, see
NPRM at 42028–31, 42035–43, and has further
taken into consideration and addressed comments
in this SBP.
446 NPRM at 42031.
447 NPRM at 42031 n.154, 42036.
448 See also Used Car Rule, 81 FR at 81668 (noting
that the term ‘‘servicing’’ used in this same context
‘‘captures activities undertaken by essentially all
used car dealers,’’ including by preparing vehicles
for sale by addressing any obvious mechanical
problems and by undertaking the general industry
practice of appearance reconditioning).
449 NAICS is the standard used by Federal
statistical agencies in classifying business
establishments for the purpose of collecting,
analyzing, and publishing statistical data related to
the U.S. business economy. North American
Industry Classification System, U.S. Census Bureau,
https://www.census.gov/naics/.
450 U.S. Census Bureau, ‘‘All Sectors: County
Business Patterns, including ZIP Code Business
Patterns, by Legal Form of Organization and
Employment Size Class for the U.S., States, and
Selected Geographies: 2019,’’ https://
data.census.gov/cedsci/table?q=CBP2019.
CB1900CBP&n=44111%3A44112&tid=
CBP2019.CB1900CBP&hidePreview=true&nkd=
EMPSZES∼001,LFO∼001 (listing 21,427
establishments for ‘‘new car dealers,’’ NAICS code
44111, and 25,098 establishments for ‘‘used car
dealers,’’ NAICS code 44112). See NPRM at 42031.
451 U.S. Census Bureau, ‘‘All Sectors: County
Business Patterns, including ZIP Code Business
Patterns, by Legal Form of Organization and
Employment Size Class for the U.S., States, and
Selected Geographies: 2021,’’ https://
data.census.gov/table?q=CB2100CBP&n=
44111:44112&tid=CBP2021.CB2100CBP&nkd=
EMPSZES∼001,LFO∼001 (listing 21,622
establishments for ‘‘new car dealers,’’ NAICS code
44111, and 25,649 establishments for ‘‘used car
dealers,’’ NAICS code 44112).
changes to their operations, if needed,
in light of the Rule’s requirements.
V. Paperwork Reduction Act
On July 13, 2022, the Commission
submitted the NPRM and an
accompanying Supporting Statement to
the Office of Management and Budget
(‘‘OMB’’) for review under the
Paperwork Reduction Act (‘‘PRA’’), 44
U.S.C. 3501–3521. On July 29, 2022,
OMB directed the Commission to
resubmit its request when the proposed
rule was finalized.443
The Commission is now submitting
the Final Rule and a Supplemental
Supporting Statement to OMB. The
disclosure and recordkeeping
requirements of the Rule constitute
‘‘collection[s] of information’’ for
purposes of the PRA.444 The associated
burden analysis follows.445
In the NPRM, the Commission
provided estimates and solicited
comments regarding the proposed rule,
including regarding (1) the proposed
add-on list disclosure requirement; (2)
the proposed cash price without
optional add-ons disclosure
requirement; (3) other proposed
provisions prohibiting certain
misrepresentations and requiring certain
disclosures; (4) the proposed
recordkeeping provisions; and (5)
estimated capital and other non-labor
costs. As previously discussed, after
carefully reviewing the comments, the
Commission has made certain changes
to the relevant provisions in the Final
Rule. Specifically, the Commission has
determined not to finalize requirements,
pursuant to proposed § 463.4(b), that
dealers disclose an add-on list or,
pursuant to proposed § 463.5(b), that
dealers refrain from charging for
optional add-ons unless enumerated
requirements relating to the vehicle’s
cash price without optional add-ons are
met.
In the NPRM, the Commission
estimated that the disclosure and
recordkeeping requirements would
impact approximately 46,525 franchise,
new motor vehicle and independent/
used motor vehicle dealers in the
U.S.446 In the NPRM, the Commission
explained that this figure was exclusive
to automobile dealers, and invited
comments regarding market information
for dealers of other types of motor
vehicles, such as boats, RVs, and
motorcycles. 447 In response, one
industry association commenter noted
the absence of such other motor vehicle
dealers from the Commission’s estimate.
Another commenter also noted the
absence of such dealers in the estimate
and argued that the Commission’s
estimate also erroneously included
independent used motor dealers which
the commenter contended do not
perform any servicing work, but stated
that the Commission’s estimate was
fairly accurate numerically. As
discussed in the paragraph-by-
paragraph analysis of § 463.2(e) in SBP
III.B.2(e), the Commission has
determined to expressly exclude
‘‘Recreational boats and marine
equipment,’’ ‘‘Motorcycles, scooters,
and electric bicycles,’’ ‘‘Motor homes,
recreational vehicle trailers, and slide-in
campers,’’ and ‘‘Golf carts’’ from the
Final Rule’s definition of ‘‘Covered
Motor Vehicle.’’ Further, as examined in
the paragraph-by-paragraph analysis of
§ 463.2(f) in SBP III.B.2(f), the plain
meaning of the term ‘‘servicing’’ covers
activities that are undertaken by
independent used car dealers.448 Thus,
the Commission bases its estimate of the
entities covered by the Final Rule on the
same North American Industry
Classification System (‘‘NAICS’’) 449
categories—‘‘new car dealers’’ and
‘‘used car dealers’’—as it did in the
NPRM. 450 As with other figures in this
section, the NAICS data assembled by
the U.S. Census Bureau have been
revised since the publication of the
Commission’s NPRM with more recent
data. Based on these revisions, the
Commission now estimates that the
Final Rule’s disclosure and
recordkeeping requirements will impact
approximately 47,271 franchise, new
motor vehicle and independent/used
motor vehicle dealers in the United
States.451
The estimated overall annual hours
burden for the Final Rule’s collections
of information is 1,595,085 hours. The
estimated overall annual labor cost for
the Final Rule’s collections of
information is $51,904,537. The
estimated overall annual capital and
other non-labor cost for the Final Rule’s
collections of information is
$14,181,300.
A. Add-On List Disclosures
Section 463.4(b) of the proposed rule
required motor vehicle dealers that
charge for optional add-on products or
services to disclose clearly and
conspicuously in advertisements and on
any website, online service, or mobile
application through which they market
motor vehicles, and at any dealership,
an itemized add-on list of such products
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452 NPRM at 42032–33, 40235, 42040.
453 NPRM at 42033, 42039.
454 The Commission produced and considered
alternative cost estimate scenarios for the Rule
provisions in its preliminary regulatory analysis,
see NPRM at 42036–44, and its final regulatory
analysis in section VII. The Commission also
invited comments on the accuracy of its PRA
burden estimates, including the validity of the
methodology and assumptions used, see NPRM at
42035. The Commission provides a single estimate
per Rule provision for this separate Paperwork
Reduction Act burden analysis in conformity with
the PRA. See 44 U.S.C. 3506(c)(1)(A)(iv) (providing,
for each collection of information, including those
arising from rules published as final rules in the
Federal Register, that agencies shall conduct a
review that includes ‘‘a specific, objectively
supported estimate of burden’’).
455 Some commenters suggested that providing an
Offering Price may be difficult due to pricing
changes over time. As explained in SBP III.D.2(a),
limited-time offers should be clearly disclosed as
such. Advertising prices without disclosing
material limitations that would mislead consumers
is a deceptive or unfair practice.
456 As stated in SBP III.B.2(k) and SBP III.D.2(a),
the Commission is finalizing this Offering Price
definition at § 463.2(k) largely as proposed, with a
modification to clarify that dealers may, but need
not, exclude required government charges from a
vehicle’s offering price. In addition, this definition
in the Final Rule substitutes ‘‘Vehicle’’ for ‘‘motor
vehicle’’ to clarify that the term is consistent with
the revised definition of ‘‘‘Covered Motor Vehicle’
or ‘Vehicle’ ’’ at § 463.2(e). The Commission also
added language to the end of § 463.4(a) clarifying
that the requirements in § 463.4(a) ‘‘also are
prescribed for the purpose of preventing the unfair
or deceptive acts or practices defined in this part,
including those in §§ 463.3(a) and (b) and
§ 463.5(c).’’
457 See NPRM at 42033, 42039–40.
or services and their prices. In the
NPRM, the Commission estimated costs
for the add-on list disclosure and
solicited comments on its burden
analysis. 452 One industry association
made several arguments, including that
the Commission underestimated the
time and resources required because an
add-on list can be lengthy, vary by
vehicle and over time, and require
working with several third parties. This
commenter also argued that periodic
revision of such lists would take more
than the estimated one hour of clerical
time per dealer, per year. The
commenter, however, did not offer any
specific estimates for such periodic
revision activities.
As explained in the section-by-section
analysis of § 463.4 in SBP III.D.2, after
careful consideration, the Commission
has determined not to finalize its
proposed add-on list provision at
§ 463.4(b).
B. Disclosures Relating to Cash Price
Without Optional Add-Ons
Section 463.5(b) of the proposed rule
required motor vehicle dealers that
charge for optional add-on products or
services to provide certain itemized
disclosures regarding pricing and cost
information without such add-ons. In
response to the Commission’s estimates
with respect to this proposed provision,
one industry association argued that the
Commission did not provide adequate
explanation of the assumptions it used
to arrive at its cost estimates for this
proposed provision, and contended that
the Commission underestimated the
costs associated with developing,
printing, and presenting the proposed
disclosures. This commenter also
contended that the proposed
requirement would have required
significant training costs; that multiple
forms would have been required for
each motor vehicle transaction; and that
aspects of the required disclosures
would be duplicative of information
already provided by dealerships in the
ordinary course of business. The
commenter estimated that developing a
disclosure form for this proposed
provision would cost dealers at least
$750 and suggested that other attendant
costs would be in the hundreds of
millions or billions of dollars, without
explaining how it arrived at such
estimated figures.
As explained in the section-by-section
analysis of § 463.5 in SBP III.E, after
careful consideration, the Commission
has determined not to include in this
Final Rule the itemized disclosure
provisions at proposed § 463.5(b). The
Commission notes that imposing
unauthorized charges—including
charges buried in lengthy contracts or
included in contracts that consumers
are rushed through—is a violation of
both the Final Rule’s § 463.5(c) and of
the FTC Act. The Commission will
continue to monitor the market to
determine whether additional steps are
warranted to combat unauthorized
charges for add-ons or other items in the
motor vehicle marketplace.
C. Prohibited Misrepresentations and
Required Disclosures
Section 463.3 of the Final Rule
prohibits dealers from making any
misrepresentation regarding material
information about the categories
enumerated in the section.
The provisions in this section have
been adopted largely without
modification from the NPRM, wherein
the Commission estimated that any
additional costs associated with the
proposed misrepresentation
prohibitions would be de minimis.453
One industry association commenter
argued that a bar on misrepresentations
in the Final Rule would require
increased training and compliance costs
and result in longer transaction times
and costs related to working with
vehicle manufacturers about online
advertisements. This section, however,
does not require any additional
disclosures or information collection.
Thus, while dealers might elect to
enhance their training and
compliance,454 refraining from making
misrepresentations does not require
additional training or compliance costs
or transaction time. The Commission
therefore affirms its prior estimate that
any additional costs associated with the
prohibitions in § 463.3 against making
misrepresentations would be de
minimis.
Section 463.4(a) of the Final Rule
requires dealers to clearly and
conspicuously disclose a vehicle’s
offering price in advertisements and
other communications that reference a
specific vehicle, or any monetary
amount or financing term for any
vehicle. ‘‘Offering Price’’ is defined in
§ 463.2(k) of the Rule as ‘‘the full cash
price for which a Dealer will sell or
finance the Vehicle to any consumer,
provided that the Dealer may exclude
only required Government Charges.’’
The information required by § 463.4(a)
is necessary to address unfair or
deceptive conduct associated with the
failure to provide such price
information and unfairly charging
unexpected prices or for hidden items
that can add hundreds or thousands of
dollars to a vehicle sale.455
This provision is being adopted
largely as proposed.456 In response to
the NPRM, one industry association
commenter claimed there would be an
average of three offering price
disclosures per transaction, since,
according to the commenter, consumers,
on average discuss three specific motor
vehicles per transaction. This
commenter also contended that the
number of required offering price
disclosures would obligate dealers to
incur additional training costs. As the
Commission explained in its NPRM,
vehicle pricing activities and
representations are usually and
customarily performed by dealers in the
course of their regular business
activities. While this provision may
increase the importance of those
activities, or alter when in the course of
business they are undertaken, the
Commission estimates that any
additional attendant costs are de
minimis.457
Section 463.4(d) of the Final Rule
require dealers, when making any
representation about a monthly payment
for any vehicle, to disclose the total
amount the consumer will pay to
purchase or lease the vehicle at that
monthly payment after making all
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663	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
458 These provisions in the Final Rule capitalize
the defined term ‘‘Vehicle’’ to conform with the
revised definition of ‘‘ ‘Covered Motor Vehicle’ or
‘Vehicle’ ’’ at § 463.2(e). The Commission also
substituted a period for a semi-colon and the word
‘‘and’’ at the end of § 463.4(d)(1), and added
language to the end of § 463.4(d) and (e) clarifying
that the requirements in these paragraphs ‘‘also are
prescribed for the purpose of preventing the unfair
or deceptive acts or practices defined in this part,
including those in §§ 463.3(a) and § 463.5(c).’’
459 The estimates throughout this section have
been updated with more recent data since the
publication of the NPRM. Labor rates are based on
new data from the Bureau of Labor Statistics. See
U.S. Bureau of Labor Statistics, ‘‘May 2022 National
Industry-Specific Occupational Employment and
Wage Estimates NAICS 441100—Automobile
Dealers’’ (Apr. 25, 2023), https://www.bls.gov/oes/
current/naics4_441100.htm. The number of
dealerships has been updated to reflect new data
from Census County Business Patterns. See U.S.
Census Bureau, ‘‘All Sectors: County Business
Patterns, including ZIP Code Business Patterns, by
Legal Form of Organization and Employment Size
Class for the U.S., States, and Selected Geographies:
2021,’’ https://data.census.gov/table?q=
CB2100CBP&n=44111:44112&tid=CBP2021.
CB2100CBP&nkd=EMPSZES∼001,LFO∼001.
460 This provision in the Final Rule capitalizes
the defined term ‘‘Vehicle’’ to conform with the
revised definition of ‘‘ ‘Covered Motor Vehicle’ or
‘Vehicle’ ’’ at § 463.2(e). The Commission also
added language to the end of § 463.4(c) clarifying
that the requirements in this paragraph ‘‘also are
prescribed for the purpose of preventing the unfair
or deceptive acts or practices defined in this part,
including those in §§ 463.3(a) and (b) and
§ 463.5(c).’’
461 As with § 463.3, § 463.5(a) does not require
any additional disclosures or information
collection. Thus, while dealers might elect to
enhance their training and compliance policies, or
to take steps to document compliance with
§ 463.5(a), any such additional measures are not
required by this provision.
462 See SBP III.E.2(c).
463 In its NPRM, the Commission noted that it
anticipated this section would require dealers to
provide readily available information to consumers
in direct communications with customers, and that
dealers complying with existing law have policies
in place to prevent charges without consent,
thereby estimating minimal additional resulting
costs. See NRPM at 42033, 42036–44. The
Commission did not receive comments discussing
attendant burdens in sufficient detail for revised
cost estimates, and thus affirms its prior estimate
regarding additional costs associated with
§ 463.5(c).
464 The Final Rule also contains one
typographical modification to § 463.6—adding a
serial comma—and minor textual changes to ensure
consistency with the defined terms at § 463.2(e) and
(f).
465 NPRM at 42033–34, 42043.
payments as scheduled, as well as the
amount of consideration to be provided
by the consumer if the total amount
disclosed assumes the consumer will
provide consideration. Section 463.4(e)
of the Final Rule requires dealers, when
making any comparison between
payment options that includes
discussion of a lower monthly payment
to disclose, if true, that a lower monthly
payment will increase the total amount
the consumer will pay to purchase or
lease the vehicle.
These provisions have been adopted
largely as proposed.458 In response to
the Commission’s estimates with respect
to these proposed provisions, one
commenter raised concerns that these
disclosures would intrude on existing
disclosures, and that any associated
paperwork burden would be confusing,
duplicative, and unnecessary. The
commenter also argued that these
disclosures would add time to the
transaction process and require
additional staff training. No commenters
provided alternative estimates of the
costs associated with this provision.
Failing to disclose information about
the total of payments for a vehicle when
representing monthly payment
information is deceptive or unfair, as set
forth in SBP III.D.2(d). Dealers already
generate the required information
during the normal course of business,
and disclosing this total of payments
information provides consumers with
fundamental information that is readily
available to the dealer when making
representations regarding monthly
payments, at which time such
disclosures are required. Nevertheless,
there may be upfront labor costs
associated with developing procedures
to provide these disclosures consistently
at the appropriate point in the
transaction and with training
employees. The Commission estimates
such upfront costs as follows: 8
compliance manager hours per dealer
on implementing a template disclosure
script that contains the required
information and on ensuring sales staff
consistently deliver the disclosure at an
appropriate time during the transaction,
for an upfront hours burden of 378,168
(8 hours × 47,271). Applying labor cost-
rates of $31.21 per hour yields
$11,802,623.28 ($31.21 × 378,168
hours).459 After a review of comments,
the Commission is adding ongoing
training costs. Specifically, the
Commission estimates annual ongoing
costs of 1 hour of training time for sales
and related employees per year, for an
annual hours burden of 417,110 (1 hour
× 417,110 sales and related employees).
Applying labor cost-rates of $29.43 per
hour, the total estimated ongoing labor
cost burden is $12,275,547.30 across the
industry (417,110 sales and related
employees × 1 hour × $29.43).
Further, § 463.4(c) of the Final Rule
requires dealers that sell optional add-
on products or services to disclose to
consumers that these add-ons are not
required, and that the consumer can
purchase or lease the vehicle without
these add-ons. This requirement has
been adopted largely as proposed, and
is necessary to address deceptive and
unfair practices regarding these
products or services, including
misrepresentations that these products
are required when they are not, and
charging consumers for such products
without the consumers’ express,
informed consent.460 It requires a
simple disclosure of information that is
known to the dealer, and the
Commission anticipates that the
information collection burdens
associated with this requirement is de
minimis.461
Similarly, § 463.5(c) of the Final Rule
requires dealers to refrain from charging
consumers for any item unless the
dealer obtains the express, informed
consent of the consumer for the
charge.462 In response to the
Commission’s estimates with respect to
these proposed provisions, some
commenters generally discussed
burdens, as addressed in the section-by-
section analysis in SBP III, that they
contended would accompany this
proposed provision, but none provided
sufficient detail for cost estimates. The
Commission notes that this provision
addresses the unfair or deceptive
practice of charging consumers for items
they do not know about or to which
they have not agreed, or in amounts
beyond those to which the consumer
has agreed. As dealers must currently
have policies in place to prevent charges
without consent in order to comply with
current law, the Commission anticipates
that any burdens associated with this
provision will be de minimis.463
D. Recordkeeping
Section 463.6 of the Final Rule
requires dealers to create and retain, for
a period of twenty-four months from the
date the record is created, all records
necessary to demonstrate compliance
with the Rule, including with its
disclosure requirements. This provision
has been adopted with revisions to
account for other changes in the Final
Rule, as explained in SBP III.F.464 These
recordkeeping provisions are necessary
to promote effective and efficient
enforcement of the Rule, thereby
deterring dealers from engaging in
deceptive or unfair acts or practices.
In the NPRM, the Commission
provided cost estimates and solicited
comment on its recordkeeping burden
analysis. 465 The Commission
anticipated that dealers would incur
certain incremental costs related to: (i)
recordkeeping systems; and (ii)
calculations of loan-to-value ratios for
contracts with GAP agreements.
Several commenters, including
industry associations, dealership
organizations, and a dealership
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664 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
466 In its NPRM, the Commission estimated costs
to create and implement a loan-to-value calculation
process. NPRM at 42034. Such costs are already
accounted for in the Commission’s estimates for the
time required to modify existing recordkeeping
systems, and thus are not separately itemized here.
467 Applicable wage rates are based on data from
the Bureau of Labor Statistics. See U.S. Bureau of
Labor Statistics, ‘‘May 2022 National Industry-
Specific Occupational Employment and Wage
Estimates NAICS 441100—Automobile Dealers’’
(Apr. 25, 2023), https://www.bls.gov/oes/current/
naics4_441100.htm.
468 These arguments are addressed in the section-
by-section analysis of § 463.5. See SBP III.E.
469 In response to comments, the Commission has
revised the number of transactions across the
industry from the NPRM to exclude private party
and fleet transactions. The estimated percentage of
sales including GAP agreements is derived from
data provided by an industry commenter. Comment
of Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022–
0046–8368 at 12.
470 One commenter claimed generally that the
Commission underestimated these costs, referring
to arguments the commenter made with respect to
the Commission’s burden analysis of specific
disclosure and recordkeeping provisions. The
Commission has responded to those arguments in
the foregoing analysis, with the exception of
recordkeeping storage costs, which are addressed in
the following discussion.
471 NPRM at 42034.
association, generally contended that
the Commission underestimated the
burdens of compliance relating to the
changes dealers would need to make to
their existing recordkeeping systems.
These commenters, however, did not
provide the Commission with
alternative estimates regarding such
burdens. As explained in the section-by-
section analysis of the Recordkeeping
section, § 463.6, in SBP III.F, this
provision gives dealers the flexibility to
retain materials in any legible form,
including in the same manner, format,
and place as they may already keep
such records in the ordinary course of
business. The Commission nonetheless
has determined, in response to
comments, to revise its estimates
regarding incremental storage expenses
that may be associated with the
recordkeeping requirements in the Final
Rule, and, as provided in the capital and
other non-labor costs discussion in the
following paragraphs, the Commission
is adding an estimate of incremental
additional storage costs to its estimate.
Further, the Commission notes that its
initial recordkeeping cost estimates
were based on a proposal that required
records regarding add-on list disclosures
and cash price without optional add-on
disclosures—records that the Rule the
Commission is finalizing does not
require dealers to retain. Given that the
Commission is not finalizing these
additional record-related requirements,
the estimates provided in its NPRM may
overestimate attendant costs resulting
from the Rule’s recordkeeping
requirements. Notwithstanding this
possibility, the Commission maintains
its prior calculations of the time
required to modify existing
recordkeeping systems.466 The
Commission anticipates that it will take
covered motor vehicle dealers
approximately 15 hours to modify their
existing recordkeeping systems to retain
the required records for the 24-month
period specified in the Rule. This yields
a general recordkeeping burden of
709,065 hours annually (47,271 motor
vehicle dealers × 15 hours per year).
The Commission anticipates that
programming, administrative,
compliance, and clerical staff are likely
to perform the tasks necessary to
comply with the recordkeeping
requirements in § 463.6 of its Rule. In
particular, the Commission estimates
this 15-hour per-dealer labor hours
burden to design, implement, or update
systems for record storage and create the
templates necessary to accommodate
retention of all relevant materials, as
follows: 8 hours of time for a
programmer, at a cost-rate of $40.24 per
hour; 5 hours of additional clerical staff
work, at a cost-rate of $20.16 per hour;
1 hour of sales manager review, at a
cost-rate of $80.19 per hour; and 1 hour
of review by a compliance officer, at a
cost-rate of $31.21 per hour.467
Applying these cost-rates to the
estimated per-dealer hours burden
described previously, the total estimated
initial labor cost burden is $534.12 per
average dealership (($40.24 per hour ×
8 hours) + ($20.16 per hour × 5 hours)
+ ($80.19 per hour × 1 hour) + ($31.21
per hour × 1 hour)), totaling
$25,248,386.52 across the industry
($534.12 per average dealership ×
47,271 dealerships).
The Commission also received
comments regarding its cost estimates
relating to the records of loan-to-value
ratios for transactions that include GAP
agreement sales. One industry
association commenter argued that this
recordkeeping requirement would also
require additional training, that creating
a loan-to-value calculator template for
GAP agreements would be difficult
given the variation of loan-to-value
ratios, and that this recordkeeping
requirement would lengthen the time to
conduct vehicle sale or financing
transactions.468 No commenter provided
alternative estimates of the costs
associated with the Commission’s
proposed recordkeeping requirements.
As explained in the paragraph-by-
paragraph analysis of § 463.5 in SBP
III.E.2, the Commission is not
mandating a particular LTV threshold or
method of calculation, but rather
requiring that dealers not charge a
consumer for GAP agreements or other
products or services if the consumer
would not benefit from the product or
service. The Commission anticipates
that, to the extent dealers do not
currently retain any materials used to
make such an assessment, dealers may
incur certain additional costs.
Specifically, the Commission
anticipates that dealers will expend one
minute per sales or financing
transaction for a salesperson to perform
the calculation contemplated by this
requirement, at a cost rate of $28.41 per
hour. The Commission estimates that
covered motor vehicle dealers sell
approximately 31,562,959 vehicles each
year, and that approximately 17% of
such sales include GAP agreements, for
an estimated total of 5,444,502 covered
vehicle sales.469 While the number of
motor vehicles sold will vary by
dealership, this yields an average sales
volume of 115 sales transactions per
average dealership per year that include
a GAP agreement (5,444,502 covered
vehicle sales/47,271 dealerships). This
yields an estimated annual hours
burden for all dealers of 90,742 hours
(5,444,502 covered transactions × 1/60
hours). Applying the associated labor
rates yields an estimated annual labor
cost for all dealers of $2,577,980.22
(90,742 hours × $28.41 per hour).
E. Capital and Other Non-Labor Costs
The Commission anticipates that the
Final Rule will impose limited capital
and non-labor costs. The Commission
presented estimates in the NPRM with
respect to such costs and solicited
comments on its burden analysis. Here,
the Commission discusses its estimates
for the capital and non-labor costs
associated with the Rule’s disclosure
and recordkeeping requirements. While
some commenters generally discussed
burdens that they contended would
accompany these proposed provisions,
none provided any alternative cost
estimates regarding capital and other
non-labor costs. 470
1. Disclosures
The Commission anticipates that the
Rule’s disclosure requirements will
impose de minimis capital and other
non-labor costs. As the Commission
noted in the NPRM, dealers already
have in place existing systems for
providing sales- and contract-related
disclosures to buyers and lessees, as
well as to consumers seeking
information during the vehicle-
shopping process.471 While the Final
Rule’s disclosure requirements may
result in limited additions to the
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665	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
472 Id.
473 Id.
474 Id.
475 NPRM at 42034–35.
476 Our review of dealer transaction records
suggests that a typical transaction generates 3.4 MB
of data under the status quo. Given the average
number of transactions per dealer, this suggests that
storing all these records would require dedicated
space of roughly 4.2 GB per year. With a two-year
retention window, this corresponds to 8.4 GB of
storage at any given time. We estimate that the
(annual) amount budgeted here should be sufficient
to maintain at least 1 TB of storage—either on
premises or through a cloud storage vendor—which
is sufficient for more than 100 times the data
storage capacity necessary to retain all transaction
files generated by a typical dealership in a year
under the status quo. The Commission anticipates
that this amount of data storage capacity will be
more than sufficient to also allow for dealers to
keep any necessary records of correspondence with
consumers who ultimately do not complete
transactions at the dealership.
477 See Public Law 104–121 (1996).
478 5 U.S.C. 603(a), 604(a).
479 5 U.S.C. 605(b).
480 NPRM at 42035.
481 See, e.g., Press Release, Fed. Trade Comm’n,
‘‘FTC Proposes Rule to Ban Junk Fees, Bait-and-
Switch Tactics Plaguing Car Buyers’’ (June 23,
2022), https://www.ftc.gov/news-events/news/press-
releases/2022/06/ftc-proposes-rule-ban-junk-fees-
bait-switch-tactics-plaguing-car-buyers; Lesley Fair,
‘‘Proposed FTC Rule Looks Under the Hood at the
Car Buying Process,’’ Fed. Trade Comm’n Business
Blog (June 23, 2022), https://www.ftc.gov/business-
guidance/blog/2022/06/proposed-ftc-rule-looks-
under-hood-car-buying-process; Alan S. Kaplinsky,
A Close Look at The Federal Trade Commission’s
Proposed Rule for Motor Vehicle Dealers, with
Special Guests Sanya Shahrasbi and Daniel Dwyer,
Staff Attorneys, FTC Bureau of Consumer
Protection, Division of Financial Practices,
Consumer Finance Monitor (Aug. 11, 2022), https://
www.ballardspahr.com/Insights/Blogs/2022/08/
Podcast-The-FTCs-Proposed-Rule-Motor-Vehicle-
Dealer-Guests-Sanya-Shahrasbi-and-Daniel-Dwyer.
482 Each year since FY2002, the Small Business
Administration’s Office of the National
Ombudsman has rated the Federal Trade
Commission an ‘‘A’’ on its small business
compliance assistance work. See U.S. Small
Business Administration, ‘‘2013–2020 SBA Nat’l
Ombudsman’s Ann. Reps. to Cong.,’’ https://
www.sba.gov/document/report—national-
ombudsmans-annual-reports-congress (providing
reports from FY2013–FY2020); Letter from Joseph
J. Simons, Chairman of the Federal Trade
Commission, to Senator James Risch, Chairman of
the Committee on Small Business and
Entrepreneurship, U.S. Senate, and to Congressman
Steve Chabot, Chairman of the Committee on Small
Business, U.S. House of Representatives, https://
www.ftc.gov/system/files/documents/reports/
federal-trade-commission-rule-compliance-guides-
small-businesses-other-small-entities-commission/
tenth_section_212_report_to_congress_july_2016-
june_2017_1_0.pdf (citing Commission’s ‘‘A’’ rating
for ‘‘Compliance Assistance’’ by the National
Ombudsman from FY2002–FY2016).
483 The Commission received 27,349 comment
submissions filed in response to its NPRM. See Gen.
Servs. Admin., Doc. No. FTC–2022–0046–0001,
Proposed Rule, Motor Vehicle Dealers Trade
Regulation Rule (July 13, 2022), https://
www.regulations.gov/document/FTC-2022-0046-
0001 (noting comments received). To facilitate
public access, 11,232 such comments have been
posted publicly at www.regulations.gov. Id. (noting
posted comments). Posted comment counts reflect
the number of comments that the agency has posted
to Regulations.gov to be publicly viewable.
Agencies may choose to redact or withhold certain
Continued
information that must be provided
during the transaction process,
depending on a dealer’s current
business operations, the Commission
anticipates that these changes will not
require substantial investments in new
systems. 472 Further, many dealers may
elect to furnish some disclosures
electronically, further reducing total
costs.473
The Commission previously estimated
non-labor costs for providing
disclosures in written or electronic
form. This estimate was based on
proposed § 463.5(b), which required
written disclosures in all transactions in
which dealers charge for optional add-
ons. As discussed in the paragraph-by-
paragraph analysis of § 463.5 in SBP
III.E.2, the Commission has determined
not to finalize the proposed provision at
§ 463.5(b). While some commenters
generally discussed burden with respect
to disclosure requirements being
finalized by the Commission, no
commenter estimated non-labor costs
associated with such requirements. The
Commission estimates that the non-
labor costs related to disclosures, which
relate to fundamental information (the
vehicle offering price, that optional add-
ons are not required, and regarding the
total amount to purchase or lease the
vehicle), will be de minimis.
2. Recordkeeping
In the NPRM, the Commission
observed that dealers already have in
place existing recordkeeping systems for
the storage of documentation they
would retain in the ordinary course of
business irrespective of the Rule’s
requirements. 474 Commenters including
industry associations, a dealership
organization, and a dealership
association argued that the Commission
underestimated the burdens associated
with the Commission’s proposed
requirements to retain written
communications, as well as the need to
develop new systems to capture these
materials. The Commission disagrees
that the recordkeeping requirements in
§ 463.6 mandate the creation of new
recordkeeping systems. As explained in
the section-by-section analysis of
§ 463.6, this provision gives dealers the
flexibility to retain materials in any
legible form, including in the same
manner, format, or place as they may
already keep such records in the
ordinary course of business.
The Commission is, however, revising
its estimates regarding incremental
storage expenses that may be associated
with the recordkeeping requirements in
the Final Rule to add such
recordkeeping storage costs to its
estimate. The Commission previously
noted, and continues to believe, that
dealers that store records in hard copy
are unlikely to require extensive
additional storage for physical
document retention, and, due to the low
cost of electronic storage options, that
expanding electronic storage capacity
would impose minimal costs.475 The
Commission also invited comments on
estimated storage costs; while some
commenters generally discussed
burdens, as addressed in the section-by-
section analysis of the recordkeeping
requirements in § 463.6, that they
contended would accompany the
proposed provisions, the Commission
did not receive any comments that
provided estimates. The Commission
nevertheless has conducted additional
research, and now estimates that each
dealer will need to spend approximately
$300 per year in investment in
additional IT systems and hardware for
additional storage (either on premises or
electronically) to retain records, the
annual cost for which would be
$14,181,300 for all covered dealers
($300 × 47,271 covered dealers).476
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996,477 requires an
agency to provide an Initial Regulatory
Flexibility Analysis (‘‘IRFA’’) and Final
Regulatory Flexibility Analysis
(‘‘FRFA’’) of any rule subject to notice-
and-comment requirements, 478 unless
the agency head certifies that the
regulatory action will not have a
significant economic impact on a
substantial number of small entities.479
In the NPRM, the Commission provided
an IRFA, stated its belief that the
proposal will not have a significant
economic impact on small entities, and
solicited comments on the burden on
any small entities that would be
covered.480 In addition to publishing the
NPRM in the Federal Register, the
Commission announced the proposed
rule through press releases, social media
posts, and blog articles directed toward
businesses and consumers, as well as
through other outreach,481 in keeping
with the Commission’s history of small
business guidance and outreach.482
The Commission thereafter received
over 27,000 public comments, many of
which identified themselves as being
from small dealers, industry
associations that represent small
dealers, and employees of small
dealers.483 The Commission greatly
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666 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
submissions (or portions thereof) such as those
containing private or proprietary information,
inappropriate language, or duplicate/near duplicate
examples of a mass-mail campaign. Gen. Servs.
Admin., Regulations.gov Frequently Asked
Questions, https://regulations.gov/faq.
484 The Office of Advocacy has emphasized that,
while it is housed within SBA, it is an independent,
stand-alone office that has its own statutory charter,
leadership structure, and appropriations account.
SBA Advocacy, ‘‘Background Paper: Office of
Advocacy 2017–2020’’ 111–19 (Jan. 2021), https://
advocacy.sba.gov/wp-content/uploads/2021/02/
Background-Paper-Office-of-Advocacy-2017-2020-
web.pdf; see also 15 U.S.C. 634a through 634g. SBA
Advocacy’s Chief Counsel is appointed from
civilian life by the President, with the advice and
consent of the Senate, and most of SBA Advocacy’s
professionals serve at the pleasure of the Chief
Counsel. 15 U.S.C. 634a, 634d(1) (empowering
Chief Counsel for Advocacy to employ and fix the
compensation of additional staff personnel); SBA
Advocacy, ‘‘Background Paper: Office of Advocacy
2017–2020’’ 95 (Jan. 2021), https://advocacy.sba.
gov/wp-content/uploads/2021/02/Background-
Paper-Office-of-Advocacy-2017-2020-web.pdf. SBA
Advocacy does not circulate its work for clearance
with the SBA Administrator, OMB, or any other
Federal agency prior to publication. 15 U.S.C. 634f.
485 An industry association commenter argued
that the Commission did not make a formal section
605(b) certification, publish the certification in the
Federal Register, or provide the certification to the
Chief Counsel for Advocacy of the Small Business
Administration. This comment misunderstands the
RFA. The RFA does not require certification when
a rule is proposed. See 5 U.S.C. 605(b) (providing
that the head of the agency may make the
certification ‘‘at the time of publication of the final
rule’’). The Commission’s NPRM stated its belief
that the proposal would not have a significant
economic impact on a substantial number of small
entities, invited comment on this issue, and also
provided an IRFA. The Commission has carefully
reviewed the SBA’s and others’ comments, is
making changes to the proposal, and is now
publishing the Final Rule and making a formal
certification, as is required by the RFA.
Although the Commission included the NPRM in
its Fall 2022 Regulatory Agenda, and explained in
its NPRM that the proposed rulemaking was not
included in the Commission’s Spring 2022
Regulatory Agenda because the Commission first
considered the NPRM after the publication deadline
for the Regulatory Agenda, see NPRM at 42031
n.153, the same commenter argued that the RFA
and Executive Order 12866 required the
Commission to include it in earlier Regulatory
Agendas. As an initial matter, Executive Order
12866 does not apply to independent agencies such
as the FTC. Regardless, as discussed in SBP II.C,
Commission has engaged in a sustained effort over
many years to engage with consumer and dealer
groups, and other stakeholders, regarding the issues
addressed in the Rule. See supra note 90. Neither
the RFA nor Executive Order 12866 precludes the
Commission from promulgating the Rule regardless
of whether it was included in an earlier Regulatory
Agenda (or even arguably could have been). Section
602(d) of the RFA explicitly provides that
‘‘[n]othing in this section precludes an agency from
considering or acting on any matter not included in
a regulatory flexibility agenda.’’ See Coastal
Conservation Ass’n v. Locke, No. 2:09–CV–641–
FTM–29, 2011 WL 4530631, at *38 (M.D. Fla. Aug.
16, 2011), report & recommendation adopted sub
nom. Coastal Conservation Ass’n v. Blank, No.
2:09–CV–641–FTM–29, 2011 WL 4530544 (M.D.
Fla. Sept. 29, 2011) (denying request for injunction
based on allegation of noncompliance with 5 U.S.C.
602(d)). Similarly, Executive Order 12866 explicitly
provides that it ‘‘does not create any right or
benefit, substantive or procedural, enforceable at
law or equity by a party against the United States,’’
let alone one that would preclude adoption of the
Rule. See E.O. 12866, 58 FR 51735, 51744 (Sept. 30,
1993); see also Trawler Diane Marie, Inc. v. Brown,
918 F. Supp. 921, 932 (E.D.N.C. 1995), aff’d sub
nom. Trawler Diane Marie, Inc. v. Kantor, 91 F.3d
134 (4th Cir. 1996) (denying request to invalidate
regulation based on allegation of noncompliance
with Executive Order 12866).
486 See Comment of SBA Advocacy, Doc. No.
FTC–2022–0046–6664 at 3.
487 Comment of SBA Advocacy, Doc. No. FTC–
2022–0046–6664 at 3.
488 Comment of SBA Advocacy, Doc. No. FTC–
2022–0046–6664 at 3.
489 After additional research, the Commission
estimates that each dealer will need to spend
approximately $300 per year on storage (either on
premises or in the cloud) to store the records the
Rule requires them to maintain. Based on a review
of the transaction records the Commission has
received from dealers through investigations, this
amount is likely to be more than sufficient.
Commission review suggests that a typical vehicle
transaction generates 3.4 MB of data under the
status quo. Given the average number of
transactions per dealer, this suggests that storing all
these records would require dedicated space of
roughly 4.2 GB per year. With a two-year retention
window, this corresponds to 8.4 GB of storage at
any given time. The Commission estimates that the
$300 annual amount budgeted here should be
sufficient to maintain at least 1 TB of storage—
either on premises or through a cloud storage
vendor—which is sufficient for more than 100 times
the data storage capacity necessary to retain all
transaction files generated by a typical dealership
in a year under the status quo. The Commission
appreciates, and thoroughly considered,
the feedback it received from such
stakeholders in developing the Final
Rule; made changes from the proposed
rule in response to such feedback; and
will continue to engage with
stakeholders moving forward to
facilitate implementation of the Rule.
As previously discussed, after
reviewing comments, the Commission
has determined, as an alternative to
finalizing the proposed rule in its
entirety, to finalize a Rule that does not
contain the proposed add-on list
disclosure requirements at § 463.4(b), or
the proposed disclosures and
declinations pertaining to a vehicle’s
cash price without optional add-ons at
§ 463.5(b). Furthermore, as discussed in
the paragraph-by-paragraph analysis of
§ 463.2(e) in SBP III.B.2(e), in response
to public comments and after careful
consideration, the Commission has
determined to exclude recreational
boats and marine equipment;
motorcycles; and motor homes,
recreational vehicle trailers, and slide-in
campers from the Rule’s definition of
‘‘Covered Motor Vehicle.’’ After careful
consideration of the comments and
following its determination not to
finalize the proposed rule in its entirety,
the Commission is certifying that the
Final Rule will not have a significant
economic impact on a substantial
number of small entities. In the
following paragraphs, the Commission
discusses comments from the public, as
well as from the U.S. Small Business
Administration Office of Advocacy
(‘‘SBA Advocacy’’), and the reasons for
the Commission’s conclusion that the
Rule will not have a significant
economic impact on a substantial
number of small entities.484 Given,
however, that the Commission believes
that the vast majority of covered entities
are small entities and provided an IRFA
in the NPRM, in the interest of
thoroughness, the Commission has also
performed an FRFA, as described in
SBP VI.B.2.
A. Significant Impact Analysis
1. Comments on Significant Impact
In the NPRM, the Commission stated
its belief that the proposed rule would
not have a significant economic impact
on a substantial number of small
entities, and invited comments.485
Several commenters, including industry
associations and a dealership
association, generally argued that the
Rule would impose substantial
economic burdens on small entities, and
some suggested that small entities may
be disproportionately burdened by the
Rule given limited legal and compliance
staff. No commenters provided
comprehensive alternative empirical
cost or revenue data that could be used
to put costs in context. Commenters,
including an industry association and
SBA Advocacy, argued that the
Commission did not provide a sufficient
factual basis for, or analysis of, the
effects on small entities, and that the
proposed rule would be unduly
burdensome for smaller motor vehicle
dealers. 486 The comment from SBA
Advocacy further argued that the
Commission provided no information
about the economic impact of the
proposed rule on small entities, but
noted that if the total estimated cost of
$1,360,694,552 were divided by the
number of dealers estimated in the
NPRM (46,525), the cost would be
roughly $29,000 per such dealer.487 The
comment from SBA Advocacy also
argued that the Commission failed to
include familiarization and training
costs or costs that the Commission
could not quantify, such as investments
in additional IT systems and
hardware.488
The Commission has considered these
comments carefully and has taken them
into account in setting forth the factual
basis for the certification in SBP VI.A.2,
including by modifying its analysis to
add an estimate of familiarization and
training costs in response to such
concerns. 489 The Commission notes, as
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667	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
anticipates that this amount of data storage capacity
will be more than sufficient to also allow for dealers
to keep any necessary records of correspondence
with consumers who ultimately do not complete
transactions at the dealership.
490 NPRM at 42013.
491 As noted in the NPRM, new vehicle dealers
averaged a gross profit of about $2,444 per new
vehicle, and about $2,675 per used vehicle, and
independent used vehicle dealerships had an
average gross profit of more than $6,000 per vehicle.
See NPRM at 42014 (citing Nat’l Auto Dealers
Ass’n, ‘‘Average Dealership Profile’’ 1 (2020),
https://www.nada.org/media/4136/
download?attachment [http://web.archive.org/web/
20220623204158/https://www.nada.org/media/
4136/download?attachment] (June 23, 2022) and
Nat’l Indep. Auto Dealers Ass’n, ‘‘NIADA Used Car
Industry Report 2020’’ at 21).
492 Notably, while many industry commenters
claimed that the burden of the Rule would be
substantial, none provided data on revenue or
profit.
493 U.S. Census Bureau, ‘‘Annual Retail Trade
Survey: 2021’’ (Dec. 15, 2022), https://
www.census.gov/data/tables/2021/econ/arts/
annual-report.html. Gross margin minus operating
expenses was determined by deducting total 2021
operating expenses ($144,268 million) from 2021
gross margin ($226,118 million). Gross margin
represents total sales less the cost of goods sold.
Operating expenses include but are not limited to
annual payroll, commissions, data processing,
equipment, advertising, lease and rental payments,
utilities, and repair and maintenance. See Glossary,
U.S. Census Bureau, https://www.census.gov/
glossary (last visited Dec. 5, 2023). Note that the
operating expenses amount may include some
costs—such as payments for deceptive advertising
or commissions earned on unauthorized charges—
that are not legitimate expenses. If these were
excluded, the gross margin minus operating cost
figures would be even lower than those described
in the text.
494 See North American Industry Classification
System, U.S. Census Bureau, https://
www.census.gov/naics/. These standards are
determined by the Small Business Size Standards
component of the NAICS, which is available at
https://www.sba.gov/document/support-table-size-
standards.
495 The census report does not provide sufficient
detail to provide a precise numerical estimate of the
number of small entities covered by the Rule. The
census data provide the number of dealers with
fewer than 250 employees, and also provide
revenue and gross margin figures for the motor
vehicle dealers industry, without further
breakdown. For that reason, the census data do not
provide sufficient information to calculate the
specific number of dealers that are small entities.
Nor did commenters provide comprehensive
alternative firm size data.
496 The $1.075 billion figure was determined by
summing the unrounded total highest estimated
costs associated with the Final Rule’s total of
payments disclosure requirements ($246 million),
offering price disclosure requirements ($46
million), requirements regarding certain add-ons
and express, informed consent ($406 million),
prohibitions on misrepresentations ($130 million),
and recordkeeping requirements ($248 million),
using a 7% discount rate. The $1.270 billion figure
was determined by summing the unrounded total
highest estimated costs associated with the Final
Rule’s total of payments disclosure requirements
($296 million), offering price disclosure
requirements ($46 million), requirements regarding
certain add-ons and express, informed consent
($475 million), prohibitions on misrepresentations
($157 million), and recordkeeping requirements
($296 million), using a 3% discount rate.
497 U.S. Census Bureau, ‘‘Annual Retail Trade
Survey: 2021, Sales’’ (Dec. 15, 2022), https://
www2.census.gov/programs-surveys/arts/tables/
2021/sales.xlsx (showing $1,264,635 million in
estimated annual sales in 2021 for automobile
dealers, NAICS code 4411); U.S. Census Bureau,
‘‘Annual Retail Trade Survey: 2021, Gross Margin’’
(Dec. 15, 2022), https://www2.census.gov/programs-
surveys/arts/tables/2021/gm.xlsx (showing
$226,118 million in estimated annual gross margin
in 2021 for automobile dealers, NAICS code 4411);
U.S. Census Bureau, ‘‘Annual Retail Trade Survey:
2021, Total Operating Expenses’’ (Dec. 15, 2022),
https://www2.census.gov/programs-surveys/arts/
tables/2021/exp.xlsx (showing $144,268 million in
estimated annual operating expenses in 2021 for
automobile dealers, NAICS code 4411).
498 The calculations in this analysis were
performed using unrounded inputs in order to
maintain accuracy. Nevertheless, for ease of
reference, such inputs have been rounded where
they are described in the text.
SBA Advocacy did in its comment, that
the NPRM estimated a total cost for the
proposed rule of $1,360,694,552. This
estimate was for costs over a ten-year
time period. Thus, dividing this
estimate by the number of affected
dealers estimated in the NPRM yields a
cost of roughly $29,000 per dealer over
a ten-year period—or approximately
$2,900 per year per dealer.490 This
figure—$2,900—is slightly more than
the average gross profit described in the
NPRM for a single vehicle sale by a new
vehicle dealer, and less than half of the
average gross profit described in the
NPRM for a single vehicle sale by an
independent used vehicle dealer.491
After carefully reviewing the
comments, the Commission does not
conclude that the Final Rule will
impose a significant economic burden
on a substantial number of smaller
entities.492 As described in SBP
VI.A.2(b), the estimated economic
impact of the Final Rule, controlling for
firm size based on available census data,
is less than or equal to 0.27% of annual
sales, 1.49% of the gross margin, and
4.12% of the gross margin minus
operating expense for dealerships of all
sizes.493 The Commission further notes
that, in response to comments from SBA
Advocacy and others, the Paperwork
Reduction Act analysis incorporates
additional estimates for training and
storage costs beyond those estimated in
the NPRM.
2. Certification of the Final Rule
The Commission hereby certifies that
the Final Rule will not have a
significant economic impact on a
substantial number of small entities.
As an initial matter, the Commission
believes that a substantial number of
small entities are covered by the Rule.
New vehicle dealers (NAICS code
44111) are classified as small entities if
they have an average of 200 or fewer
employees, and used car dealers (NAICS
code 44112) are classified as small
entities if they have average annual
revenues of $30.5 million or less.494
Census data indicate that the vast
majority of dealers classified into these
NAICS codes are small entities.495 There
are approximately 47,271 covered
dealers in the United States, of which
over 93% have fewer than 100
employees. Thus, while the Commission
cannot determine the precise number of
small entities affected by the Rule,
census data suggest that the vast
majority of covered dealers are small
entities.
The Commission certifies that the
Rule will not have a significant
economic impact on a substantial
number of small entities. The
Commission has analyzed the costs of
the Rule (1) based on industry averages
and (2) accounting for dealer size based
on the number of employees. Under
either measure, the Rule will not have
a significant economic impact on a
substantial number of small entities.
(a) Industry Averages
The Commission estimates a total cost
for the Final Rule, at the scenario
reflecting the Commission’s highest cost
estimates, of $1.075 billion to $1.270
billion over a ten-year period.496 Using
the highest end of this highest-cost
scenario, the Rule will have an
estimated cost of $1.270 billion over ten
years using a 3% discount rate. This
translates to an average estimated per-
year cost of $127 million ($1.270 billion
× 0.1). Census data show that, in 2021,
automobile dealers had annual sales of
$1.265 trillion, gross margin of $226.118
billion, 497 and gross margin minus
operating expenses of $81.850 billion.
Discounting these numbers over a 10-
year period using a 3% discount rate
equates to average annual sales of
$1.079 trillion, gross margin of $192.883
billion, and gross margin minus
operating expenses of $69.820 billion.
The estimated yearly cost of the Rule
therefore is approximately 0.01% of
annual sales ($127 million/$1.079
trillion), 0.07% of gross margin ($127
million/$192.883 billion), and 0.18% of
gross margin minus operating expenses
($127 million/$69.820 billion) across
the industry.498
(b) Dealer Size Based on the Number of
Employees
In addition to considering industry
averages, the Commission has analyzed
the cost of the Rule accounting for
dealer size based on the number of
employees. Certain costs are fixed (i.e.,
remain the same regardless of the
number of employees) while other costs
scale with dealer size. We consider both
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668 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
499 As used here, ‘‘pricing hours’’ means time
spent by a sales and marketing manager reviewing
dealership policies and procedures for determining
the public-facing prices of vehicles in inventory.
500 Applicable wage rates throughout this section
are based on data from the Bureau of Labor
Statistics. See U.S. Bureau of Labor Statistics, ‘‘May
2022 National Industry-Specific Occupational
Employment and Wage Estimates NAICS 441100—
Automobile Dealers’’ (Apr. 25, 2023), https://
www.bls.gov/oes/current/naics4_441100.htm.
501 Based on 2021 census data, dealers with fewer
than five employees have an average of 1.62
employees (34,616 employees at all dealerships
with fewer than five employees/21,356 dealers with
fewer than five employees); dealers with 5–9
employees have an average of 6.50 employees
(35,794 employees/5,507 dealers); dealers with 10–
19 employees have an average of 13.77 employees
(52,852 employees/3,837 dealers); dealers with 20–
49 employees have an average of 33.62 employees
(253,365 employees/7,536 dealers); dealers with
50–99 employees have an average of 69.52
employees (423,351 employees/6,090 dealers);
dealers with 100–249 employees have an average of
140.31 employees (386,001 employees/2,751
dealers); dealers with 250–499 employees have an
average of 317.25 employees (57,105 employees/180
dealers); dealers with 500–999 employees have an
average of 580.56 employees (5,225 employees/9
dealers); and dealers with 1,000 or more employees
have an average of 1,913.60 employees (9,568
employees/5 dealers). See U.S. Census Bureau, ‘‘All
Sectors: County Business Patterns, Including ZIP
Code Business Patterns, by Legal Form of
Organization and Employment Size Class for the
U.S., States, and Selected Geographies: 2021,’’
https://data.census.gov/table?q=CB2100CBP&n=
44111:44112&tid=CBP2021.CB2100CBP&nkd=
LFO∼001.
(1) first-year compliance costs and (2)
costs in subsequent years.
(1) First-year compliance costs. First-
year compliance costs are the sum of: (1)
upfront fixed costs; (2) one year of
annual ongoing costs that are fixed; and
(3) one year of annual ongoing costs that
scale.
The Commission estimates the
upfront fixed costs per dealer under the
highest-cost scenario as follows: $963.44
to update policies and procedures to
provide the offering price disclosure
required by § 463.4(a) ((8 estimated
pricing hours 499 × $80.19 per hour) + (8
estimated programming hours × $40.24
per hour)); $249.68 to design disclosures
required by § 463.4(d) and (e) and
inform associates of their obligations to
provide these disclosures (8 estimated
compliance manager hours × $31.21 per
hour); $1,783.56 to cull add-ons with no
consumer benefit from offerings,
develop policies regarding when certain
add-ons may or may not be sold, and
create nonmandatory disclosures, in
response to the requirements of § 463.5
((16 estimated compliance manager
hours × $31.21 per hour) + (12 estimated
sales manager hours × $80.19 per hour)
+ (8 estimated programmer hours ×
$40.24 per hour)); and $534.12 to
upgrade recordkeeping systems and
create the templates necessary to
accommodate retention of all relevant
material under § 463.6 ((8 estimated
programmer hours × $40.24 per hour) +
(5 estimated clerical hours × $20.16 per
hour) + (1 estimated sales manager hour
× $80.19 per hour) + (1 estimated
compliance manager hour × $31.21 per
hour)). These figures total $3,530.80 per
dealer.500
The Commission estimates the annual
fixed ongoing costs per dealer for the
first year under the highest-cost scenario
as follows: $390.13 to conduct a
heightened compliance review of
public-facing representations to ensure
compliance with § 463.3 (150 estimated
documents per year × 5 estimated
minutes of review per document ×
$31.21 per hour of compliance officer
review); and $300 estimated for
expanded storage to retain records
required under § 463.6. These figures
total $690.13 per dealer per year.
The Commission estimates annual
ongoing costs that scale with dealer size
based on number of employees as
follows. The Commission estimates that
annual costs that scale with dealer size
are $76.86 per employee per year.
Annual ongoing costs that scale with
dealer size include: $26.53 per
employee to provide the total of
payments disclosures required by
§ 463.4(d) and (e) (((417,110 sales &
related employees × 1 estimated hour
for training × $29.43 per hour) +
(19,228,256 total covered transactions
involving monthly payments or
financing × (2/60 estimated disclosure
hours per transaction × $28.41 per hour
+ $0.15 printing costs per disclosure)))/
1,257,877 total employees); $36.40 per
employee for training and the delivery
of a disclosure under a regime in which
dealers choose to deliver an itemized
disclosure to comply with § 463.5
(((417,110 sales & related employees × 1
estimated hour for training × $29.43 per
hour) + ((10,343,319 new vehicle sales
+ 21,219,640 used vehicle sales) × (2/60
estimated disclosure hours per sale
transaction × $28.41 per hour + $0.11
physical costs per disclosure)))/
1,257,877 total employees); and $13.93
per employee to generate and store
calculations required to be retained
under § 463.6 ((31,562,959 vehicle sales
× 1/60 estimated hours per transaction
× $28.41 per hour/1,257,877 total
employees) + (5,444,502 vehicle sales
with GAP agreement × 1/60 estimated
hours per transaction × $28.41 per hour/
1,257,877 total employees)).
Next, the Commission uses census
data on the average number of
employees at dealerships within
different dealer size cohorts to
determine the per-dealer cost for each
dealer cohort.501 Multiplying the
estimated cost per employee ($76.86) by
the average number of employees within
different dealer size cohorts yields
annual ongoing scaled costs per dealer
of: $124.59 per dealer with fewer than
5 employees ($76.86 × 1.62 employees);
$499.59 per dealer with between 5 and
9 employees ($76.86 × 6.50 employees);
$1,058.73 per dealer with between 10
and 19 employees ($76.86 × 13.77
employees); $2,584.18 per dealer with
between 20 and 49 employees ($76.86 ×
33.62 employees); $5,343.19 per dealer
with between 50 and 99 employees
($76.86 × 69.52 employees); $10,784.88
per dealer with between 100 and 249
employees ($76.86 × 140.31 employees);
$24,384.79 per dealer with between 250
and 499 employees ($76.86 × 317.25
employees); $44,623.26 per dealer with
between 500 and 999 employees ($76.86
× 580.56 employees); and $147,085.08
per dealer with 1,000 or more
employees ($76.86 × 1,913.60
employees).
Thus, the total first-year compliance
costs based on dealer size are $4,345.51
($3,530.80 + $690.13 + $124.59) per
dealer with fewer than 5 employees;
$4,720.51 ($3,530.80 + $690.13 +
$499.59) per dealer with between 5 and
9 employees; $5,279.66 ($3,530.80 +
$690.13 + $1,058.73) per dealer with
between 10 and 19 employees;
$6,805.11 ($3,530.80 + $690.13 +
$2,584.18) per dealer with between 20
and 49 employees; $9,564.12 ($3,530.80
+ $690.13 + $5,343.19) per dealer with
between 50 and 99 employees;
$15,005.80 ($3,530.80 + $690.13 +
$10,784.88) per dealer with between 100
and 249 employees; $28,605.72
($3,530.80 + $690.13 + $24,384.79) per
dealer with between 250 and 499
employees; $48,844.18 ($3,530.80 +
$690.13 + $44,623.26) per dealer with
between 500 and 999 employees; and
$151,306.01 ($3,530.80 + $690.13 +
$147,085.08) per dealer with 1,000 or
more employees.
To analyze the economic effect of the
costs of the Rule by dealer size, the
Commission compares per-dealer costs
to per-dealer sales, gross margin, and
gross margin minus operating expenses.
The Commission does not have data on
how sales, gross margin, and operating
expenses are apportioned to dealerships
based on the number of employees.
Accordingly, the Commission assumes
that sales, gross margin, and operating
expenses are apportioned to dealerships
pro rata with the number of employees.
Dividing the 2021 industry-wide figures
for annual sales ($1.265 trillion), gross
margin ($226.118 billion), and gross
margin minus operating expenses
($81.850 billion) by the total number of
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669	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
502 Data on the number of employees comes from
the 2021 census. See U.S. Census Bureau, ‘‘All
Sectors: County Business Patterns, Including ZIP
Code Business Patterns, by Legal Form of
Organization and Employment Size Class for the
U.S., States, and Selected Geographies: 2021,’’
https://data.census.gov/table?q=CB2100CBP&n=
44111:44112&tid=CBP2021.CB2100CBP&nkd=
EMPSZES∼001,LFO∼001.
503 Average ongoing compliance costs after the
first year equal: 0.05% of annual sales, 0.28% of
gross margin, and 0.77% of gross margin minus
operating expenses for dealers with fewer than 5
employees, and less than one-half of one percent of
annual sales, gross margin, and gross margin minus
operating expenses for the remaining categories of
dealers.
504 Comment of SBA Advocacy, Doc. No. FTC–
2022–0046–6664 at 6. SBA Advocacy also raised
concerns that the proposal could make the buying
process more cumbersome and confusing, noting
that the proposal requires additional disclosures,
and the proposal prohibited dealers from relying on
a signed or initialed document, by itself, or
prechecked boxes to establish express, informed
consent. These arguments are addressed in the
discussion of disclosures in §§ 463.4, 463.5 and the
definition of ‘‘Express, Informed Consent’’ in
§ 463.2.
The industry group also argued that the number
of complaints is overstated because it includes: (1)
complaints that are not applicable to motor vehicle
dealers or conduct addressed by the Rule, and (2)
consumers who did not report a loss. This industry
group also argued that the Commission failed to
take notice of survey data indicating that the
majority of consumers are satisfied with their
vehicle purchases. See, e.g., Cox Auto., ‘‘2021 Cox
Automotive Car Buyer Journey Study’’ (2022)
[hereinafter 2021 Cox Automotive Car Buyer
Journey Study], https://www.coxautoinc.com/wp-
content/uploads/2022/01/2021-Car-Buyer-Journey-
Study-Overview.pdf. First, in the Commission’s
experience, complaints understate harm caused by
unlawful conduct in a given category,
notwithstanding any inclusion of complaints that
may pertain to ancillary or related issues. See SBP
II.B (discussing how complaints represent the tip of
the iceberg in terms of actual consumer harm and
citing case where prior to FTC action, there were
391 complaints about add-ons and other issues but
survey results during the same period indicted that
at least 16,848 customers were subject to unlawful
practices related to add-ons alone). Moreover, the
Commission’s reported complaint numbers may be
underinclusive of relevant complaints filed by
consumers (e.g., complaints about vehicle financing
issues may be filed under the ‘‘Banks and Lenders’’
category; vehicle repossession issues may be filed
under the ‘‘Debt Collection’’ category; and
complaints about deceptive online vehicle
shopping may be filed under the ‘‘Online Shopping
and Negative Reviews’’ category). With regard to
consumers who did not report a loss, the
Commission disagrees that such consumers were
not harmed or that their experience is not relevant
to the Rule. For example, many consumers
experience a law violation or other harmful
conduct, but choose not to consummate the
transaction, including consumers who waste time
pursuing misleading offers. Further, survey data
indicating that a majority of customers are
‘‘satisfied’’ do not indicate whether those customers
had hidden charges in their contracts and whether
they ever became aware of such charges. Surveys
cited by the Commission have identified situations
where customers are unaware of add-on charges in
their contracts; indeed, in one case, 79% of
consumers were unaware of such charges. See SBP
II.B (discussing hidden charges in auto contracts).
Consumers might be satisfied with a purchase until
they later learn they are paying for items they did
not authorize, if they learn this at all. Further, ‘‘the
FTC need not prove that every consumer was
injured. The existence of some satisfied customers
does not constitute a defense . . . .’’ Fed. Trade
Comm’n v. Amy Travel Serv., Inc., 875 F.2d 564,
572 (7th Cir. 1989), vacated in part on other
grounds, Fed. Trade Comm’n v. Credit Bureau Ctr.,
LLC, 937 F.3d 764 (7th Cir. 2019); accord Fed.
Trade Comm’n v. Stefanchik, 559 F.3d 924, 929
n.12 (9th Cir. 2009).
employees (1,257,877),502 each
employee represents an additional
$1,005,372.54 in sales ($1.265 trillion/
1,257,877 employees), $179,761.61 in
gross margin ($226.118 billion/
1,257,877 employees), and $65,069.96
in gross margin minus operating
expenses ($81.850 billion/1,257,877
employees). Multiplying these per-
employee figures by the average number
of employees of dealers within different
size cohorts provides per-dealer sales,
gross margin, and gross margin minus
operating expenses for each cohort. For
instance, dealers with fewer than 5
employees have estimated annual sales
of $1,629,611.16 (1.62 employees ×
$1,005,372.54 sales per employee),
annual gross margin of $291,376.10
(1.62 employees × $179,761.61 gross
margin per employee), and annual per-
dealer gross margin minus operating
expenses of $105,472.17 (1.62
employees × $65,069.96 gross margin
minus operating expenses per
employee).
The Commission then divides first-
year compliance costs by these figures
to yield cost as a percentage of sales,
gross margin, and gross margin minus
operating costs. Applying this method
to each of the dealer size cohorts, first-
year compliance costs are equivalent to:
0.27% of annual sales ($4,345.51/
$1,629,611.16), 1.49% of gross margin
($4,345.51/$291,376.10), and 4.12% of
gross margin minus operating expenses
($4,345.51/$105,472.07) for dealers with
fewer than 5 employees; 0.07% of
annual sales ($4,720.51/$6,534,647.69),
0.40% of gross margin ($4,720.51/
$1,168,401.53), and 1.12% of gross
margin minus operating expenses
($4,720.51/$422,936.98) for dealers with
5–9 employees; 0.04% of annual sales
($5,279.66/$13,848,305.89), 0.21% of
gross margin ($5,279.66/$2,476,090.91),
and 0.59% of gross margin minus
operating expenses ($5,279.66/
$896,293.27) for dealers with 10–19
employees; and less than one-half of one
percent of the annual sales, gross
margin, and gross margin minus
operating expenses for the remaining
categories of dealers.
(2) Costs in subsequent years. The
estimated cost of compliance with the
Rule drops after the first year, given the
absence of upfront costs, which are not
incurred after the first year. Compliance
costs in subsequent years—which are
limited to annual ongoing costs (both
fixed and those that scale with dealer
size)—are therefore a smaller percentage
of annual sales, gross margin, and gross
margin minus operating expenses, equal
to less than two percent of these metrics
for dealers of all sizes.503
The Commission does not find that
these compliance costs represent a
significant economic burden. The
Commission therefore certifies that the
Final Rule will not have a significant
economic impact on a substantial
number of small entities.
B. Initial and Final Regulatory
Flexibility Analysis
The NPRM noted the Commission’s
belief that the proposed rule would not
have a significant economic impact on
small entities, but nevertheless
examined the six IRFA factors, and
invited comment on the proposed rule’s
burdens on small businesses. In the
following paragraphs, the Commission
discusses comments and then sets forth
a FRFA.
1. Comments on the Initial Regulatory
Flexibility Analysis
(a) Description of the Reasons Why
Action by the Agency Is Being
Considered
The IRFA explained that the
Commission proposed the Rule to
address misleading practices and
unauthorized charges to consumers
during the vehicle buying or leasing
process, and to deter dealer misconduct
and remedy consumer harm. The
Commission further noted that its law
enforcement, outreach and other
engagement in this area, and the
hundreds of thousands of consumer
complaints received by the FTC,
indicated that dealership misconduct
and deceptive tactics persisted despite
Federal and State law enforcement
efforts. In response, the comments from
SBA Advocacy and one industry group
argued that the number of complaints
received by the Commission is
insufficient to support a rulemaking
given the total number of vehicle
transactions in the United States.504
Similarly, the industry group argued
that the Commission has not filed
enough law enforcement actions against
motor vehicle dealers to justify the
proposal, and that, where it has brought
enforcement actions, the Commission
has managed to obtain redress for
harmed consumers without the need for
an additional monetary remedy. As
explained in SBP II.B and in the section-
by-section analysis of the recordkeeping
requirements in § 463.6 in SBP III.F,
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670 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
505 One industry group argued that the majority
of the FTC’s enforcement actions have pertained to
deceptive advertising, and few have alleged
unlawful conduct involving add-ons. The
Commission agrees that many of its actions have
alleged deceptive pricing. In focusing on certain
actions that involved allegations that dealers placed
unauthorized charges for add-ons, however, the
commenter leaves out other unlawful conduct
related to add-ons. Such conduct includes, for
example, misrepresentations regarding the pricing
of add-ons (Complaint ¶¶ 6–12, TT of Longwood,
Inc., No. C–4531 (F.T.C. July 2, 2015)), or failing to
disclose that mandatory add-ons were included in
the cost of credit (Consent Order ¶¶ 73–75, Y King
S Corp., CFPB No. 2016–CFPB–0001 (Jan. 21,
2016)). In addition, unauthorized charges are likely
to go unnoticed by consumers, which can hamper
enforcement efforts. See, e.g., Auto Buyer Study,
supra note 25, at 14 (describing several study
participants who thought they had not purchased
add-ons, or that add-ons were free, and only learned
during the study that they were charged for add-
ons).
506 See AMG Cap. Mgmt., LLC v. Fed. Trade
Comm’n, 141 S. Ct. 1341 (2021).
507 NPRM at 42035.
508 Id. at 42035. The Commission explained that,
because of the relative size of the automobile
market compared to other types of motor vehicle
dealers, and the greater availability of relevant
information for this market, its NPRM analysis
exclusively considered automobile dealers. The
Commission invited submissions of market
information for other types of motor vehicles such
as boats, RVs, and motorcycles that would allow
expansion of the scope of its analysis. See NPRM
at 42035–36.
509 U.S. Census Bureau, ‘‘All Sectors: County
Business Patterns, Including ZIP Code Business
Patterns, by Legal Form of Organization and
Employment Size Class for the U.S., States, and
Selected Geographies: 2021,’’ https://
data.census.gov/table?q=CB2100CBP&
n=44111:44112&tid=CBP2021.
CB2100CBP&nkd=EMPSZES∼001,LFO∼001 (listing
21,622 establishments for ‘‘[n]ew car dealers,’’
NAICS code 44111, and 25,649 establishments for
‘‘[u]sed car dealers,’’ NAICS code 44112).
510 See SBP VI.A.2.
511 NPRM at 42035; see also id. at 42033–34
(describing recordkeeping requirements and
analyzing cost burden). To avoid duplicative or
unnecessary analysis, the information required by
the IRFA can be provided with or as part of any
other analysis required by any other law. 5 U.S.C.
605(a).
512 See NPRM at 42027, 42035 (enumerating
records to be retained and time period for
retention).
513 See 5 U.S.C. 603(c)(1)–(4).
514 Comment of SBA Advocacy, Doc. No. FTC–
2022–0046–6664.
515 Off. of Advoc., U.S. Small Bus. Admin., ‘‘A
Guide for Government Agencies: How to Comply
with the Regulatory Flexibility Act’’ 39 (2017),
https://advocacy.sba.gov/wp-content/uploads/
2019/06/How-to-Comply-with-the-RFA.pdf.
consumer complaints represent the ‘‘tip
of the iceberg’’ of actual misconduct, as
many unlawful practices go undetected
or unreported by consumers. Further,
the Commission has taken significant
action aimed at addressing law
violations in the motor vehicle dealer
marketplace, despite limited resources
and a broad mandate to address
unlawful practices across much of the
nation’s commercial activity,505 and,
particularly given the Supreme Court’s
2021 ruling limiting the FTC’s ability to
obtain redress for consumers, it is
difficult to get full redress for
consumers.506 Despite these
Commission actions, as well as the
hundreds of additional actions brought
by other Federal and State regulators,
the deceptive or unfair acts or practices
addressed by the proposed rule persist.
(b) Succinct Statement of the Objectives
of, and Legal Basis for, the Proposed
Rule
The objectives of the Rule and its
legal basis, including the specific grant
of rulemaking authority under section
1029 of the Dodd-Frank Act, 12 U.S.C.
5519, were set forth in the IRFA.507 The
objectives and legal basis, and
comments on these topics, additionally
have been discussed throughout this
SBP.
(c) Description of and, Where Feasible,
Estimate of the Number of Small
Entities to Which the Proposed Rule
Will Apply
In its IRFA, the Commission
estimated that there were approximately
46,525 franchise, new motor vehicle,
and independent/used motor vehicle
dealers.508 As discussed in the
Paperwork Reduction Act analysis in
SBP III.V, the Commission received
comments from SBA Advocacy and
others on this estimate, and the
Commission has responded to those
comments by making certain changes to
the proposal in light of the comments
received. The Commission has revised
its estimate of covered dealers to 47,271
franchise, new motor vehicle, and
independent/used motor vehicle dealers
based on newly available NAICS data
assembled by the U.S. Census
Bureau.509
Regarding the estimate of the number
of small entities affected by the Final
Rule, as noted in the Certification of the
Final Rule, 510 while the Commission
cannot determine the precise number of
small entities, the data the Commission
does have reinforce the Commission’s
initial view that most covered entities
are small entities.
(d) Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements of the
Proposed Rule
An industry association commenter
argued that the Commission did not
‘‘accurately’’ lay out the proposed rule’s
projected requirements. The commenter
did not provide an explanation of what
it alleged to be inaccurate in the
Commission’s description. This
comment notwithstanding, the NPRM
described the proposed rule’s projected
requirements, including by elaborating
on the proposed recordkeeping
requirements and providing estimates
regarding the anticipated recordkeeping
time and resource obligations for
programmers, clerical staff, sales
managers, and compliance officers.511
The NPRM also provided a detailed
description of the recordkeeping
requirements for entities to be covered
by the Rule.512
(e) Duplicative, Overlapping, or
Conflicting Federal Rules
An industry association commenter
argued that the Commission failed to
identify relevant Federal rules that may
duplicate, overlap, or conflict with the
proposal. This commenter’s arguments
that the proposed rule conflicts with
Federal statutes are addressed in the
section-by-section analysis in SBP III.
Commenters provided no examples of
actual conflicts between the proposals
and Federal law. Further, there is no
evidence that duplicative laws
prohibiting misrepresentations or unfair
acts or practices have harmed
consumers or competition. Moreover,
the additional remedies provided by the
Final Rule will benefit consumers who
encounter conduct that is already illegal
and will assist law-abiding dealers that
presently lose business to competitors
that act unlawfully.
(f) Description of Any Significant
Alternatives to the Proposed Rule
Which Accomplish the Stated
Objectives of Applicable Statutes and
Which Minimize Any Significant
Economic Impact of the Proposed Rule
on Small Entities
Statutory examples of ‘‘significant
alternatives’’ include different
requirements or timetables that take into
account the resources available to small
entities; the clarification, consolidation,
or simplification of compliance and
reporting requirements under the Rule
for small entities; the use of
performance rather than design
standards; and an exemption from
coverage of the Rule, or any part thereof,
for small entities.513 Comments from
SBA Advocacy and from a national
industry association argued that the
Commission did not set forth
alternatives to the proposed rule.514
In its Regulatory Flexibility Act
compliance guidance to Federal
agencies, the SBA Office of Advocacy
provides that, ‘‘[i]f an agency is unable
to analyze small business alternatives
separately, then alternatives that reduce
the impact for businesses of all sizes
must be considered.’’ 515 As the
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671	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
516 NPRM at 42036–37; see also id. at 42029–30
(indicating, in Questions for Comment 26.b, 28.a, &
30 that the Commission was considering alternative
approaches).
517 See Comment of SBA Advocacy, Doc. No.
FTC–2022–0046–6664 at 4–6. As addressed in SBP
III.C.2(a) and SBP III.E.2(c), in responding to a
similar comment by financial institutions, the Final
Rule does not change the status quo regarding the
responsibilities of contract assignees or other
subsequent holders of motor vehicle financing
under the Holder Rule, and the Commission
declines to create a safe harbor for contract
assignees where it did not previously exist.
Similarly, one comment recommended that the
Commission add a rule provision authorizing an
alternative compliance mechanism, stating that
such a provision would aid not just smaller entities
but larger entities as well. Under this alternative
mechanism, independent accountability
organizations could apply to the Commission for
authorization to review and assess auto dealers’
adherence to a set of rule compliance guidelines
that would be created. See Comment of BBB Nat’l
Programs, Doc. No. FTC–2022–0046–8452 at 1–3.
This comment suggested that such an alternative
compliance mechanism would have several
benefits, including educating industry participants
and allowing for industry oversight beyond the
capacity of the FTC. The Commission agrees with
the goals of educating stakeholders and maximizing
resources used to ensure compliance with the Rule
but notes that these goals can be furthered without
adding alternate mechanisms with as-yet unknown
guidelines, that may or may not be sufficient to
protect consumers, to the Rule that the Commission
is finalizing. The Commission notes that the Rule
finalizes certain baseline protections that should
already be in place under the law. The Commission
encourages stakeholders, such as auto dealer trade
associations, BBB, and others, to educate their
members and the public about the Rule and
encourage compliance, as such groups have done
when issuing guidance on other aspects of the law.
518 Comment of SBA Advocacy, Doc. No. FTC–
2022–0046–6664 at 5–6; see generally Comment of
Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022–
0046–8368. The National Automobile Dealers
Association also argues that the Commission should
have considered whether to do a rule in the first
instance. The NPRM provides a detailed
explanation of why, more than a decade after
Congress granted the FTC APA rulemaking
authority with respect to motor vehicle dealers, and
continued enforcement, outreach, and other
initiatives, a rule is needed to address ongoing
problems related to bait-and-switch tactics and
hidden charges.
519 Separately, the Commission notes that the
NPRM identified and solicited comments on
alternatives to every substantive requirement,
including the areas specifically addressed by the
commenters. See, e.g., NPRM at 42028–30 (Q4–7,
Q10, Q16, Q28, Q33, Q36–38); id. at 42040–41.
520 5 U.S.C. 604(a)(1)-(6).
Commission explained in its NPRM, it
‘‘envisioned and drafted this Rule
mindful that most motor vehicle dealers
are small entities,’’ and drafted its
proposal in the first instance to
minimize economic impact on all motor
vehicle dealers.516 For example, the
Rule prohibits conduct that already
violates the FTC Act, but still takes
steps to minimize burdens for dealers of
all sizes, by, for example, allowing
records to be kept in any legible form
already kept in the ordinary course of
business, and by limiting recordkeeping
requirements to twenty-four months
from the date the record is created
despite the fact that motor vehicle
financing terms are generally years
longer than this period. Commenters
generally appear to understand the
relevant market in a similar manner. For
instance, the possible alternatives raised
by the comment from SBA Advocacy
would apply uniformly to both large
and small businesses. These alternatives
included excluding vehicle dealers that
do not sell automobiles, regardless of
the size of the dealer, and creating a
carve-out for banks and other financing
companies that would cover multi-
billion dollar institutions. 517 Comments
from SBA Advocacy and a national
industry association also discussed the
proposed rule’s disclosure requirements
in an industry-wide manner, not
limiting their comments to businesses
under any particular size threshold.518
Nevertheless, the Commission has
reviewed these comments carefully, has
responded to comments on alternatives
in the corresponding sections of its
section-by-section analysis, and has
determined to modify the definition of
‘‘Covered Motor Vehicle’’ at § 463.2(e)
and not to finalize the requirements
proposed in §§ 463.4(b) and 463.5(b).519
2. Final Regulatory Flexibility Analysis
Although the Commission is
certifying that the Rule will not have a
significant economic impact on a
substantial number of small entities, the
Commission has prepared the following
FRFA with this Final Rule. In the
following paragraphs, the Commission
provides the information required for a
FRFA: (1) a statement of the need for,
and objectives of, the Rule; (2) a
statement of the significant issues raised
by public comments in response to the
IRFA, including any comments filed by
the Chief Counsel for Advocacy of the
Small Business Administration in
response to the proposed rule, the
Commission’s assessment and response,
and any resulting changes; (3) a
description of and an estimate of the
number of small entities to which the
Rule will apply or an explanation of
why no such estimate is available; (4) a
description of the projected reporting,
recordkeeping, and other compliance
requirements; and (5) a description of
the steps the agency has taken to
minimize the significant economic
impact on small entities consistent with
the stated objectives of applicable
statutes, including a discussion of any
significant alternatives for small
entities. 520
(a) Statement of the Need for, and
Objectives of, the Rule
The FTC issues this Final Rule to
address deceptive and unfair acts or
practices during the vehicle buying or
leasing process, and to provide an
additional enforcement tool to remedy
consumer harm and assist law-abiding
dealers. As detailed in SBP II.B.1, these
deceptive and unfair practices include
bait-and-switch tactics, such as dealers
advertising deceptively low prices or
other deceptive terms to induce
consumers to visit the dealership, and
charging such consumers additional,
unexpected amounts, including after the
consumers have invested significant
time and effort traveling to, and
negotiating at, the dealership premises.
At present, consumers may never learn
that they are paying substantial
unexpected charges, given the
complexity and length of the motor
vehicle sale, financing, or lease
transaction and its attendant contracts
and other documents. Law enforcement,
outreach and other engagement in this
area, as well as the number of consumer
complaints each year regarding motor
vehicle dealer practices, indicate that
unlawful conduct persists despite
Federal and State law enforcement
efforts.
(b) Issues Raised by Comments,
Including Comments by the Chief
Counsel for Advocacy of the SBA, the
Commission’s Assessment and
Response, and Any Changes Made as a
Result
The comments regarding the IRFA are
addressed in SBP VI.B, and the
comments regarding the other
provisions of the NPRM are discussed in
the SBP’s section-by-section analysis in
SBP III. As noted, the Commission has
made certain changes to the Rule after
carefully reviewing the comments.
These changes include modification of
the definition of ‘‘Covered Motor
Vehicle’’ at § 463.2(e), removal of the
add-on list disclosure requirement in
proposed § 463.4(b) and the
requirements in proposed § 463.5(b),
and removal of the corresponding
recordkeeping requirements in proposed
§ 463.6(a)(2) and (a)(4).
(c) Description and Estimate of the
Number of Small Entities to Which the
Final Rule Will Apply or an Explanation
of Why No Such Estimate Is Available
The Final Rule applies to covered
motor vehicle dealers, as defined in
§ 463.2(f), of covered motor vehicles at
§ 463.2(e): ‘‘any self-propelled vehicle
designed for transporting persons or
property on a public street, highway, or
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521 The Commission is authorized to prescribe
rules with respect to a motor vehicle dealer that is
predominantly engaged in the sale and servicing of
motor vehicles, the leasing and servicing of motor
vehicles, or both, as defined in 12 U.S.C. 5519(a).
522 See SBP VI.A.2.
road,’’ and, in light of comments
received, excludes specific categories as
detailed in § 463.2(e).521 As explained
in the Certification,522 the Commission
cannot determine the precise number of
small entities to which the Final Rule
applies, but census data indicate that
the vast majority of the estimated 47,271
dealers covered by the Rule are small
entities according to the applicable U.S.
Small Business Administrator’s relevant
size standards.
(d) Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements
The Final Rule prohibits certain
unfair or deceptive acts or practices and
contains recordkeeping requirements.
The Final Rule contains no reporting
requirements.
The Final Rule requires covered
motor vehicle dealers to clearly and
conspicuously disclose the offering
price of a vehicle in certain
advertisements and in response to
consumer communications. It also
requires dealers to make certain other
disclosures during the sale, financing, or
leasing process. To enforce the Rule and
prevent the unfair or deceptive practices
prohibited by the Rule, the Rule further
requires dealers to retain records
necessary to demonstrate compliance
with the Rule. Such records include
advertising materials and copies of
purchase orders and financing and lease
documents. The Rule requires such
records to be retained for a period of
twenty-four months from the date they
are created and provides that they may
be kept in any legible form, and in the
same manner, format, or place as they
may already be kept in the ordinary
course of business. Further details on
these provisions are discussed
throughout this SBP, including in the
section-by-section analysis of the
recordkeeping requirements in § 463.6,
as well as in the preceding Paperwork
Reduction Act analysis.
(e) Description of the Steps the
Commission Has Taken To Minimize
the Significant Economic Impact on
Small Entities Consistent With the
Stated Objectives of Applicable Statutes
The Final Rule addresses certain
unfair or deceptive acts or practices in
motor vehicle sales, financing, and
leasing. In drafting its NPRM, reviewing
public comments, and modifying the
Rule from its original proposal, the
Commission has taken specific steps to
avoid unduly burdensome requirements
for small entities. The Commission
believes that the Final Rule—including
the prohibitions against making specific
misrepresentations and against charging
consumers for any item unless the
dealer obtains the express, informed
consent of the consumer for the
charge—is necessary to protect
consumers, including small-business
consumers that purchase, finance, or
lease motor vehicles. By addressing
these practices, the Rule also will
benefit competition by preventing law-
abiding dealers, many of which are
small businesses, from losing business
due to unlawful practices by other
dealers.
For each provision in the Rule, the
Commission has attempted to reduce
the burden on businesses, including
small entities. For example, the
Commission limited the number of
disclosures that dealers are required to
make under the Final Rule, and in
response to comments, further limited
such disclosures by determining not to
finalize the disclosures in proposed
§§ 463.4(b) and 463.5(b). Similarly, the
Commission has limited the duration of
the Rule’s recordkeeping requirements
to twenty-four months from the date the
relevant record is created, even though
this period is far shorter than the length
of many financing contracts.
As previously noted, the Commission
does not believe the Final Rule imposes
a significant economic impact on a
substantial number of small entities.
Nonetheless, the Commission has taken
care to avoid extensive requirements
related to form. For example, the
Commission does not specify the form
in which records required by the Final
Rule must be kept. Moreover, the Rule’s
disclosure requirements do not mandate
specific font sizes. In sum, the
Commission has worked to minimize
any significant economic impact on
small businesses.
VII. Final Regulatory Analysis Under
Section 22 of the FTC Act
A. Introduction
The Federal Trade Commission (FTC)
is finalizing a Rule to address unfair or
deceptive acts or practices by covered
motor vehicle dealers when engaging
with consumers who are shopping for
covered motor vehicles. The Rule
contains several provisions targeted at
addressing price-related deception and
unfairness for consumers with respect to
purchasing, leasing, and financing new
and used motor vehicles. The Final Rule
prohibits misrepresentations regarding
material information about certain
aspects of motor vehicles and motor
vehicle financing. The Final Rule also
mandates certain disclosures about
vehicle price, payments, and add-ons,
while prohibiting charges for add-on
products and services that would not
benefit the consumer or for any item
unless the dealer obtains the express,
informed consent of the consumer for
the charge.
Section 22 of the FTC Act, 15 U.S.C.
57b–3, requires the Commission to issue
a final regulatory analysis when
publishing a final rule. The final
regulatory analysis must contain (1) a
concise statement of the need for, and
objectives of, the final rule; (2) a
description of any alternatives to the
final rule which were considered by the
Commission; (3) an analysis of the
projected benefits, any adverse
economic effects, and any other effects
of the final rule; (4) an explanation of
the reasons for the determination of the
Commission that the final rule will
attain its objectives in a manner
consistent with applicable law and the
reasons the particular alternative was
chosen; and (5) a summary of any
significant issues raised by the
comments submitted during the public
comment period in response to the
preliminary regulatory analysis, and a
summary of the assessment by the
Commission of such issues.
As discussed previously, the FTC
issues this Final Rule to address
deceptive and unfair acts or practices
during the vehicle buying or leasing
process, and to provide an additional
enforcement tool to remedy consumer
harm and assist law-abiding dealers.
These deceptive and unfair practices
include bait-and-switch tactics, such as
dealers advertising deceptively low
prices or other deceptive terms to
induce consumers to visit the
dealership; and charging such
consumers additional, unexpected
amounts, including after the consumers
have invested significant time and effort
traveling to, and negotiating at, the
dealership premises. At present,
consumers may never learn that they are
paying substantial unexpected charges,
given the complexity and length of the
motor vehicle sale, financing, or lease
transaction and its attendant contracts
and other documents. Law enforcement,
outreach, and other engagement in this
area, as well as the number of consumer
complaints each year regarding motor
vehicle dealer practices, indicate that
unlawful conduct persists despite
Federal and State law enforcement
efforts.
In response to public comments, the
Commission considered and made a
number of revisions from the proposed
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673	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
523 These revisions and alternatives the
Commission considered are described in detail in
the Commission’s Statement of Basis and Purpose,
as is the Commission’s explanation why the Final
Rule will attain its objectives in a manner
consistent with applicable law.
524 See Fed. Trade Comm’n, Notification of Intent
to Request Public Comment, Regulatory Review
Schedule, 87 FR 47947 (Aug. 5, 2022), https://
www.govinfo.gov/content/pkg/FR-2022-08-05/pdf/
2022-16863.pdf.
525 While whole calendar years are used here for
ease of reference, this analysis estimates costs and
benefits over a ten-year period running from the
Rule’s effective date. For the purposes of
discounting, the Commission assumes that any
upfront costs or benefits occur immediately upon
the effective date of the Rule and are therefore not
discounted. The Commission further assumes that
ongoing costs and benefits occur at the end of each
period, such that even ongoing costs/benefits that
occur in year 1 are discounted.
rule, which in turn have necessitated
revisions to the regulatory analysis,
resulting in this final regulatory
analysis. 523 The most significant
revisions to the proposed rule impacting
the regulatory analysis are the removal
of proposed §§ 463.4(b) (requiring the
disclosure of add-on lists) and 463.5(b)
(requiring various itemized disclosures
relating to undisclosed or unselected
add-ons). As a result of the
Commission’s determination not to
finalize these sections of the proposed
rule, costs and benefits associated with
those provisions have been excluded
from the final regulatory analysis. The
Commission also has made revisions in
response to public comments, the
availability of newer data, the
identification of additional relevant
data, and the application of newer
scholarly research. The final regulatory
analysis thus builds upon the
preliminary regulatory analysis, while
incorporating several updates:
• The analysis of consumer time
savings has been revised in response to
public comments and changes following
the NPRM.
• A section quantifying the reduction
in deadweight loss resulting from the
Rule has been added, based upon recent
research that allows the Commission to
quantify both how dealer markups will
respond to price transparency and how
new and used vehicle quantities will
respond to changes in price.
• Training costs have been added for
some provisions in response to public
comments.
• Information systems costs have
been added to the Recordkeeping
section in response to public comments,
based on estimates of how much data
would be required and the cost of cloud
or on-premises data storage.
• Wages used to monetize labor costs
have been updated to reflect new data
from the Bureau of Labor Statistics.
• The number of dealers has been
updated to reflect new data from Census
County Business Patterns.
• The number of transactions subject
to the Rule has been revised in response
to public comments, and the
Commission’s identification of
additional data sources that can be used
to exclude private party and fleet
transactions.
The Final Rule contains requirements
in the following areas:
1. Prohibited misrepresentations;
2. Required disclosure of offering
price in certain advertisements and in
response to inquiry;
3. Required disclosure of total of
payments for financing and leasing
transactions;
4. Prohibition on charging for add-ons
in certain circumstances;
5. Requirement to obtain express,
informed consent before any charges;
and
6. Recordkeeping.
In the following analysis, we describe
the anticipated impacts of the Final
Rule. Where possible, we quantify the
benefits and costs and present them
separately by provision. If a benefit or
cost is quantified, we indicate the
sources of the data relied upon. If an
assumption is needed, the text makes
clear which quantities are being
assumed.
A period of 10 years is used in the
baseline scenario because FTC rules are
generally subject to review every 10
years.524 Quantifiable aggregate benefits
and costs across three different sets of
assumptions are summarized as the net
present value over this 10-year time
frame in Table 1.1. Quantifiable benefits
include time savings from a more
efficient shopping and sales process and
a reduction in deadweight loss, both of
which ultimately result from greater
transparency under the Rule.
Quantifiable costs primarily reflect the
resources expended by automobile
dealers in developing the systems
necessary to comply with the provisions
of the Rule. In addition, we expect
additional benefits and costs that we are
presently unable to quantify. Among the
unquantified benefits are time savings
that accrue to individuals who abandon
vehicle transactions entirely; additional
time savings on activities that
individuals engage in digitally under
the status quo; reductions in deadweight
loss resulting from direct price effects in
the markets for used vehicles or vehicle
add-ons; and the benefit of reduced
stress, discomfort, and unpleasantness
experienced by motor vehicle
consumers under the status quo. Among
the unquantified costs would be any
potential reductions in consumer
information resulting from changes in
dealers’ policies regarding marketing
and advertisements. The discount rate
reflects society’s preference for
receiving benefits earlier rather than
later; a higher discount rate is associated
with a greater preference for benefits in
the present. The present value is
obtained by multiplying each year’s net
benefit by a discount factor a number of
times equal to the number of years in
the future the net benefit accrues.525
TABLE 1.1—PRESENT V ALUE OF NET BENEFITS (IN MILLIONS), 2024–2033
Low estimate 	Base case 	High estimate
3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
rate
Benefits:
Time Savings .................................... 	$7,463 	$6,145 	$14,926 	$12,290 	$24,036 	$19,790
Deadweight Loss Reduction ............. 	568 	468 	1,298 	1,069 	2,307 	1,899
Total Benefits ............................. 	8,031 	6,613 	16,224 	13,359 	26,343 	21,690
Costs:
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
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674 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
526 See SBP II.B–C.
527 NPRM at 42037 & n.180.
528 Comment of Am. for Fin. Reform et al., Doc.
No. FTC–2022–0046–7607.
TABLE 1.1—PRESENT VALUE OF NET BENEFITS (IN M ILLIONS), 2024–2033—Continued
Low estimate 	Base case 	High estimate
3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
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
In this section, we describe the
beneficial impacts of the Rule, by (1)
providing quantitative estimates where
possible, (2) identifying quantitative
benefits that cannot be estimated at this
time due to a lack of data, and (3)
describing benefits that can only be
assessed qualitatively. The benefits cut
across multiple areas addressed by the
Rule and these benefits are impossible
to identify separately by area. As a
result, we enumerate the benefits of the
Rule not by provision, but by category.
1. Consumer Time Savings When
Shopping for Motor Vehicles
Several provisions of the Rule would
benefit consumers by saving them time
as they complete motor vehicle
transactions. Required disclosures of
relevant prices and prohibitions of
misrepresentations, inter alia, would
save consumers time when shopping for
a vehicle by requiring the provision of
salient, material information early in the
process and eliminating time spent
pursuing misleading offers. The
Commission’s enforcement record
shows that consumer search and
shopping is sometimes influenced by
unfair or deceptive advertising that
draws consumers to a dealership in
pursuit of an advertised deal, only to
find out at some point later in the
process (if at all) that the advertised deal
is not actually available to them.526 This
bait-and-switch advertising has the
effect of wasting consumers’ time
traveling to and negotiating with
unscrupulous dealerships, time which
would otherwise be spent pursuing
truthful offers in the absence of
deception and unfairness. If consumers
are faced with hard constraints on their
time or other resources, this wasted time
may mean that they are unable to find
the deal that best fits their needs and
preferences. Additionally, motor vehicle
consumers frequently begin the process
of shopping for a motor vehicle (e.g., by
visiting a dealership in response to an
ad or initiating negotiations in response
to a quoted price that is incomplete) and
then later abandon the nascent
transaction entirely when additional
information is revealed. In these
instances, consumers do not purchase or
lease a vehicle at all. The Rule would
also save consumers time by avoiding
these abandoned transactions. However,
because the Commission has been
unable to identify data to determine the
quantity of such abandoned transactions
and the amount of time spent pursuing
them, this benefit remains unquantified
in the analysis.
Obviously, many consumers end up
purchasing and leasing vehicles under
the status quo—either because full
revelation of prices and terms still
results in a mutually beneficial
transaction or because full revelation
never occurs and consumers are
deceived into completing a transaction
that is not mutually beneficial. These
consumers also spend additional,
unnecessary time discovering
information that dealers would be
required to disclose earlier once the
Rule is in effect. The Commission
expects the Rule’s required disclosures
and prohibitions against
misrepresentations to improve
information flows and consumer search
efficiency, including but not limited to,
addressing the influence of deception
and unfairness on consumer search and
shopping behavior.
The Commission’s preliminary
analysis estimated that the proposed
rule would allow consumers to spend 3
fewer hours completing each motor
vehicle transaction and result in
(quantifiable) overall time savings
valued at between $30 billion and $35
billion. In this final regulatory analysis,
the Commission takes into account the
effects of revisions to the proposed rule
and additional data, addresses industry
comments, and employs an alternative
analytical approach with a sensitivity
analysis. This sensitivity analysis
reflects a ‘‘high-end’’ estimate that
consumers will save as many as 3.3
hours per completed transaction; a
‘‘base case’’ estimate—representing the
most likely scenario—that consumers
will save 2.05 hours per transaction; and
a possible ‘‘low-end’’ savings estimate of
1.02 hours. Using a 7% discount rate,
these time savings estimates result in a
range of between $6.1 billion and $19.8
billion in total savings, with a base case
of $12.3 billion.
In its preliminary analysis, the
Commission relied on results from the
2020 Cox Automotive Car Buyer Journey
study, which showed that consumers
spent roughly 15 hours researching,
shopping, and visiting dealerships for
each motor vehicle transaction.527 Based
on the proposed rule provisions
prohibiting misrepresentations and
requiring price transparency, the
Commission assumed each consumer
who consummated a vehicle transaction
would spend 3 fewer hours shopping
online, corresponding with dealerships,
visiting dealer locations, and negotiating
with dealer employees. The 3 hours
corresponded to 20% of an average
consumer’s time spent on such activities
in 2019 (pre-COVID).
The Commission received a number
of comments emphasizing the
unnecessary time consumers must
spend to ascertain the price and terms
when attempting to consummate a
vehicle transaction. One group of
commenters, for example, asserted that
‘‘[t]he most important factor for
consumers purchasing a vehicle is its
price, yet the price is almost impossible
to ascertain without spending hours at
the dealership.’’ 528 Another group of
commenters provided a compilation of
numerous consumer complaints,
including many that described
consumers spending hours at a
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675	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
529 Comment of Consumer Reps. et al., Doc. No.
FTC–2022–0046–7520 at 3, 11, 12, 16, 38 (including
story from Illinois consumer describing ‘‘[spending]
about 4 hours at the dealership while the salesman
kept changing the terms of the deal . . . .’’; story
from Connecticut consumer describing how, ‘‘[a]fter
nearly three hours of paperwork . . . I was finally
presented with the official bill to pay the balance.
The price was now higher than the original adjusted
sticker.’’; story from New Jersey consumer
describing how, ‘‘[a]fter 4 hours of negotiations . . .
I finally got nearly the same price as the verified
offer [for the vehicle] but about $1000 less on my
trade-in[ ] (that was also part of the verified offer).
The [dealer] also added on Accessories ‘other
products’ [of] $474.00 . . . .’’; story from Texas
consumer describing how ‘‘[t]he [dealership]
finance manager kept me there for two hours, and
said the deal was done. I went to get my wife, when
we got back the price had gone up $3,000.00.’’).
530 2020 Cox Automotive Car Buyer Journey,
supra note 25, at 1.
531 See 2021 Cox Automotive Car Buyer Journey
Study, supra note 504, at 16.
532 See 2022 Car Buyer Journey, supra note 25, at
6. 533 Interestingly, consumer satisfaction with the
car buying process, as measured by this same
survey, was highest during the COVID–19
pandemic when the time spent on research,
shopping, and visiting dealerships was lowest, and
has since dropped back to pre-pandemic levels.
2022 Car Buyer Journey, supra note 25, at 5.
534 When the transaction volume from the
preliminary analysis is applied to the Commission’s
current methodology and sensitivity analysis, time
savings under the Final Rule ranges from a high-end
of $35 billion to a low-end of $11 billion, with a
base case of $22 billion (assuming a 7% discount
rate). In comparison, the preliminary analysis
computed savings under the proposed rule as
approximately $31 billion (also assuming a 7%
discount rate). The residual difference in base case
savings is attributable to less time saved per
transaction—partially explained by additional
provisions in the NPRM that the Commission is not
finalizing—as well as updates to the underlying
wages used to monetize the consumer time savings.
535 This same organization commissioned a study
that was recently released asserting the proposed
rule would lead to an increase in consumer
transaction time. This survey, however, had
numerous methodological shortcomings rendering
its results unreliable. For example, the survey
presented each respondent at the outset with a
leading statement telling them the rule would
impose ‘‘new duties [that] are expected to create
additional monitoring, training, forms, and
compliance review responsibilities as well as a
modification of record keeping systems and
coordination with outside IT and other vendors’’
and ‘‘increase the time of a motor vehicle
transaction, inhibit online sales, limit price
disclosures, and increase customer confusion and
frustration.’’ Edgar Faler et al., Ctr. for Auto. Rsch.,
‘‘Assessment of Costs Associated with the
Implementation of the Federal Trade Commission
Notice of Proposed Rulemaking (RIN 2022–14214),
CFR part 463’’ 34–36 (2023), https://
www.cargroup.org/wp-content/uploads/2023/05/
CAR-Report_CFR-Part-463_Final_May-2023.pdf
(introductory instructions on the survey instrument
sent to respondents). Moreover, the survey started
with a sample size of 60 dealers (id. at 7) in an
industry with an estimated 46,525 dealers, NPRM
at 42,031 & n.154, but only 40 dealers actually
completed responses to many key questions (id. at
29). The survey does not describe how these 40–
60 dealers were chosen. Although the survey
estimates that the proposed rule would require
consumers to spend additional time on motor
vehicle transactions, this conclusion is based on the
responses of just 40 dealers and included no
consumers. Id. at 29–32. Moreover, the survey
report attributed much of this estimated increase to
Continued
dealership trying to ascertain the final
price and terms of the transaction.529
The improved information flow under
the Final Rule will provide quantifiable
benefits for consumers by reducing or
eliminating this unnecessary need to
spend time penetrating opaque pricing
and terms, and will provide qualitative
benefits by reducing frustration and
stress in the car buying process.
Some industry commenters
questioned the appropriateness of the
data and assumptions used to quantify
the time savings benefit. A number of
industry association commenters argued
that the 15-hour figure did not represent
a reasonable base from which time
savings attributable to the Rule could be
derived. One such commenter criticism
asserted that the publication from which
it was sourced only surveyed consumers
who used the internet during research
and shopping and therefore could not be
representative of the time spent by
consumers who do not use the internet.
Still other commenters noted that
additional data from the same
organization were available. The
Commission disagrees that the 15-hour
estimate is an unreasonable base from
which to derive time savings from the
Rule. While the Cox Automotive Study
acknowledges only internet users were
surveyed, the study also indicates its
‘‘[r]esults are weighted to be
representative of the buyer
population.’’ 530 Also, while more recent
data were available at the time of the
analysis for the NPRM, those data were
from an extraordinary period (the
COVID–19 pandemic). The Commission
expects that the data used for the
preliminary analysis are more
representative of consumer experiences
over the analysis window than the more
recent data. While not dispositive, the
limited data available since the NPRM
was published bears this hypothesis out.
In the 2021 Cox Automotive Car Buyer
Journey Study, consumers spent roughly
12-and-a-half hours researching,
shopping, and visiting dealerships for
each motor vehicle transaction.531 In
contrast, in the 2022 Car Buyer Journey
study, consumers spent roughly 14-and-
a-half hours researching, shopping, and
visiting dealerships for each motor
vehicle transaction. 532 This admittedly
short trend suggests that the COVID–19
pandemic had a significant effect on
motor vehicle shopping, reducing the
amount of time the typical consumer
spent on these activities, and that time
spent on these activities has already
rebounded to previous levels.533
Another industry association
commenter suggested that the figure
included categories of time use that
could not conceivably be affected by the
proposed rule, such as online research
into vehicle features, and that attention
should be restricted to time spent
shopping. The Commission finds that
several provisions in the Rule clearly
have the potential to reduce time spent
across most categories covered by the
15-hour figure, including the largest
category (‘‘Researching and Shopping
Online’’). This category of time use
would include comparing listed vehicle
prices across dealerships that, under the
Rule, would be transparent and
comparable in a way that they were not
in the status quo, thus saving consumers
time.
Some commenters also noted that the
total base of transactions reported in the
preliminary analysis appeared to
overstate the number of transactions to
which the proposed rule would apply.
First, commenters asserted that the 62.1
million transactions double-counted
new vehicle leases in the data source
from which it was obtained (2019
National Transportation Statistics, Table
1–17). Second, commenters asserted
that the number included private party
transactions that would be entirely
unaffected by the proposed rule.
Finally, commenters argued that the
transactions number contained
wholesale and fleet transactions, where
the amount of time spent researching,
shopping, and visiting dealers is likely
to be substantially different relative to a
household consumer.
The Commission has verified that the
source data were revised to fix the
erroneous double-counting of leases
between the time they were accessed by
the Commission for the drafting of the
preliminary analysis and the time that
comments were received. The final
analysis uses the revised data. In
addition, in response to comments that
private party transactions should be
excluded from the analysis, the
Commission is revising its analysis.
Additional data would be necessary to
quantify any time savings benefits for
wholesale and fleet transactions.
Accordingly, the Commission has
excluded all transactions occurring
through non-retail channels from the
final analysis. 534
A number of comments raised
concerns about the foundations of the 3-
hour time-savings assumption. One
industry organization noted that the Cox
Automotive study cited in the NPRM
does not itself address the proposals in
the NPRM (which the survey, of course,
predated) and does not estimate time
savings.535 Another organization
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676 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
proposed rule provisions that are not in the Final
Rule. Id. at 25.
536 In fact, the sensitivity analysis in Table 2.3 of
this final regulatory analysis presents a range of
reasonable estimates for time savings that includes
the 3-hour time-saving assumption from the
preliminary analysis in the NPRM.
537 Cox Auto. et al., ‘‘Car Buyer Journey 2019’’
(2019) [hereinafter Car Buyer Journey 2019], https://
www.coxautoinc.com/wp-content/uploads/2019/06/
2019-Car-Buyer-Journey-Study-FINAL-6-11-19.pdf.
While Cox Automotive has released subsequent Car
Buyer Journey studies, none of these subsequent
studies quantify time savings from shopping
digitally. In addition, to the extent that shoppers
compensate by spending more time at home on
these activities, these time savings should be
reduced to reflect net time savings from performing
these activities digitally. We believe that the nature
of performing these activities digitally vs. at the
dealership suggests these offsets should be small.
538 The 2020 Cox Automotive Digitization of End-
to-End Retail study reports the fraction of
consumers who are already engaging in various
activities online under the status quo. Cox Auto.,
‘‘Digitization of End-to-End Retail’’ (2021)
[hereinafter Digitization of End-to-End Retail],
https://www.coxautoinc.com/wp-content/uploads/
2021/01/2020-Digitization-of-End-to-End-Retail-
Study-FINAL.pdf. While the activities listed across
studies do not match perfectly, we map the activity
categories to the closest corresponding activity in
the other study and, in our final analysis, exclude
from the time savings calculation the percentage of
transactions corresponding to the fraction of
consumers already engaging in that activity online.
While it is likely that consumers shopping digitally
under the status quo will also experience some
additional time savings under the Rule, there is
insufficient data to estimate this marginal savings
and so we leave this benefit unquantified in the
analysis.
539 2020 Cox Automotive Car Buyer Journey,
supra note 25, at 15 (noting an average of 2.2
dealerships visited among new car buyers).
540 Shoppers who negotiate purchase price
digitally under the status quo will likely also obtain
time savings from mandatory offering price
disclosures, corresponding to the time and effort
they put into contacting and exchanging email with
dealerships. We lack sufficient data on the time
spent on these activities to quantify these benefits,
however.
541 See §§ 463.3(a), (b), and (f); 463.4(c); and
463.5(a) and (c). The Commission notes that time
savings would likely be higher in this category had
it determined to finalize proposed § 463.4(b), which
would have required disclosure of an add-on list.
expressed confusion as to whether the
assumption was intended as a flat 3-
hour time savings or a 20% time
savings, asserting that dynamism in
automotive retailing will likely lead to
evolution in the total amount of time
spent shopping.
While the Commission believes its 3-
hour time-saving assumption in the
NPRM remains reasonable, the
Commission has conducted additional
analyses, the results of which
demonstrate the positive net benefits of
the Rule even when applying more
conservative assumptions around time
savings and adjusting for the removal of
certain proposed provisions from the
NPRM. 536 Using recent figures from Cox
Automotive’s Car Buyer Journey 2019
study, the Commission notes that
consumers who do various activities in
the vehicle buying process digitally
(‘‘digital consumers’’) save time at the
dealership relative to those who do not
(‘‘non-digital consumers’’).537 The
Commission’s revised base case time
savings calculation assumes that only
the fraction of consumers who are not
currently shopping digitally will
experience time savings, and that these
savings will be proportional to the time
savings found in the Car Buyer Journey
2019 study for digital consumers.538
Because the Commission expects the
provisions of the Rule to emulate some
of the time-saving features of
completing these activities digitally, the
time savings benefits of the Rule are
assumed to be a proportion of the time
saved by status quo digital consumers,
with the proportion determined by how
closely the status quo digital shopping
experience is expected to resemble the
shopping experience for all consumers
once the Rule is in effect. Additionally,
because these numbers only reflect time
saved at the dealership of purchase, we
assume that these same consumers will
also save time on these activities to the
extent that they are initiated at
dealerships visited prior to the
dealership at which they purchase
(‘‘non-purchase dealerships’’). Based on
2020 data from Cox Automotive, the
average consumer visits 1 non-purchase
dealership for each transaction.539 Table
2.1 documents both the fraction of
consumers performing activities
digitally under the status quo and the
time saved at the dealership by these
consumers on each activity.
TABLE 2.1—COMPLETING ACTIVITIES DIGITALLY
Activity
% of Consumers
digital
(2020
digitization)
Time saved at
dealership
(2019 journey)
(minutes)
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
activities and the anticipated effects of
the Rule, our base case estimates assume
that non-digital consumers will save an
amount of time negotiating a vehicle
purchase price equal to the amount of
time saved by those negotiating
purchase price digitally under the status
quo (43 minutes). For non-digital
consumers, it is currently time-
consuming to obtain comparable price
quotes from dealerships. Many
dealerships will not initiate price
negotiations in earnest without a
competing price quote in writing, which
can only be obtained by visiting a
dealership for the non-digital consumer.
Mandating offering price disclosures—
which are comparable across
dealerships by definition—early in the
shopping process will emulate the price
discovery function of negotiating prices
online, in which comparable price
quotes can be obtained (with effort) via
email.540
The Commission anticipates that the
impact of the Rule on time spent
selecting F&I add-ons and discussing
and signing paperwork will be
moderate. In our base case estimates,
non-digital consumers will save an
amount of time doing these activities
equal to the half the amount of time
saved by those doing these activities
digitally under the status quo (33 × 0.5
= 16.5 minutes and 45 × 0.5 = 22.5
minutes, respectively). Time saved
selecting add-ons flows primarily from
the prohibitions on various
misrepresentations, the mandatory
disclosures regarding whether add-ons
are required, and the prohibition on
charging for add-ons under certain
circumstances.541 Time saved
discussing and signing paperwork also
flows from the prohibitions on various
misrepresentations, several disclosures
mandated by the Rule, and the
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677	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
542 See §§ 463.3; 463.4(c), (d), and (e); and
§ 463.5(c).
543 Again, status quo digital shoppers will likely
obtain time savings on these activities as well, to
the extent that their paperwork will also be less
likely to require close scrutiny and revisions. We
lack sufficient data on the time spent on these
activities to quantify these benefits, however.
544 See §§ 463.3(i) and (j); 463.4(d).
545 See Progressive, ‘‘Consumers embrace online
car buying,’’ http://www.progressive.com/resources/
insights/online-car-buying-trends/ (last visited Dec.
5, 2023).
546 See 2021 Cox Automotive Car Buyer Journey
Study, supra note 504, at 16 (noting total time of
2:09 spent ‘‘Visiting Other Dealerships/Sellers’’ and
total time of 2:37 spent ‘‘With the Dealership/Seller
Where Purchased’’).
547 See U.S. Dep’t. of Transp., Off. of the Sec’y of
Transp., Bureau of Transp. Stat., ‘‘National
Transportation Statistics 2021, 50th Anniversary
Edition’’ 21 (2021), https://www.bts.dot.gov/sites/
bts.dot.gov/files/2021-12/NTS-50th-complete-11-30-
2021.pdf (Table 1–17).
548 See Edmunds, ‘‘Automotive Industry Trends
2020’’ 7 (2020), https://static.ed.edmunds-
media.com/unversioned/img/industry-center/
insights/2020-automotive-trends.pdf.
549 See Auto. News, ‘‘Used-vehicle volume hits
lowest mark in nearly a decade’’ (Jan. 13, 2023),
https://www.autonews.com/used-cars/used-car-
volume-hits-lowest-mark-nearly-decade (estimating
19,100,000 of used vehicle sales in the year 2022
occurred within the retail channel). The same
Automotive News source reports a total used
vehicle sales number of approximately 40 million
for 2019. Id. The conclusions of the analysis are
robust to using this total figure instead.
550 A recent report by the Center for Automotive
Research estimates that there approximately 43
million non-fleet, non-private party sales in 2019
based on privately sourced data. Edgar Faler et al.,
Ctr. for Auto. Rsch., ‘‘Assessment of Costs
Associated with the Implementation of the Federal
Trade Commission Notice of Proposed Rulemaking
(RIN 2022–14214), CFR part 463’’ 5 (2023), https://
www.cargroup.org/wp-content/uploads/2023/05/
CAR-Report_CFR-Part-463_Final_May-2023.pdf.
While this would result in a savings estimate
approximately 22% higher, the Commission relies
on its analysis of the publicly available data
described herein.
551 Daniel S. Hamermesh, ‘‘What’s to Know About
Time Use? ’’ 30 J. Econ. Survs. 198, 201 (2016),
https://onlinelibrary.wiley.com/doi/epdf/10.1111/
joes.12107.
552 Note that we assume only one consumer is
involved in each transaction; to the extent that
multiple members of a household may visit
dealerships for each transaction, these calculations
are likely to underestimate the total time savings.
prohibition on charging for items
without express, informed consent.542
For non-digital consumers, considerable
time must be spent at the dealership
both closely reviewing paperwork (e.g.,
to ensure that unwanted optional add-
ons are not being added to the
transaction; to ensure that the financing
terms, including monthly payments,
total payments, and term length, are as
expected; and to confirm that terms in
the contract generally conform to what
was discussed) and waiting for sales and
F&I staff at the dealership to consult
with managers and revise paperwork as
needed. Digital consumers, however,
may have access outside the dealership
to add-on menus where they can select
their desired F&I products affirmatively
without worry that dealership staff will
misrepresent the products or pressure
them into selecting something
unwanted. In addition, digital
consumers may receive and review
paperwork before arriving at the
dealership. This way, any necessary
revisions can be performed by the
dealership asynchronously so that the
consumer is free to spend that time as
they wish instead of being stuck in an
F&I office. The noted Rule provisions
will give consumers confidence that the
add-on options presented to them are
non-deceptive and the contract
paperwork they are asked to review will
not yield any unpleasant surprises. As
a result, on average they will neither
need to engage in such close scrutiny of
their contract documents, nor spend as
much time waiting for dealership staff
to speak to managers or make changes
as the first draft will be more likely to
conform to their expectations. 543
The Commission assumes that the
Rule will likely not assist consumers
much (if at all) in reducing time spent
obtaining a trade-in offer. In our base
case estimates, we assume non-digital
consumers will not save additional time
on obtaining a trade-in offer under the
Rule. There are various provisions in
the Rule that touch trade-in offers made
by dealerships 544 and may increase
consumer confidence in dealer contracts
as discussed previously. In addition,
trade-in values are an important piece of
transaction pricing, so greater price
transparency may save consumers time
on the trade-in aspect of transactions
that involve them. There is a concern,
however, that dealers may spend more
time trying to extract maximum value
out of any given trade-in opportunity
once the Rule is in effect. Because the
Commission believes that greater
transparency in vehicle pricing and add-
ons will lead to reduced markups on
these products (see ‘‘Reductions in
Deadweight Loss’’), it is possible that
dealers will attempt to make up these
lost profits by maximizing trade-in
margins, which may lead to increased
time spent on negotiations. Since we do
not have sufficient data to determine the
balance of these two effects, we assume
in the base case that they offset. In
sensitivity analyses where we explore
alternative assumptions, note that time
savings from this activity only apply to
the roughly 50% (by one estimate) of
vehicle purchase transactions at
dealerships where consumers trade in a
vehicle.545
Finally, data from the 2021 Cox
Automotive Car Buyer Journey Study
reveal that consumer time spent at non-
purchase dealerships is roughly 82% of
the time spent at the dealership of
purchase. 546 Additionally, the average
consumer visits 1 non-purchase
dealership for each transaction, so
under the dual assumptions that (1) the
proportions of time spent at dealerships
across these activities is consistent
across purchase and non-purchase
dealerships and (2) the noted time
savings are constant as a fraction of time
spent, we multiply the time savings
numbers by this ratio to obtain the
additional time saved at non-purchase
dealerships.
Proceeding as in the preliminary
analysis, we assume that motor vehicle
purchase, financing, and lease
transactions will be stable at the 2019
level of 57.9 million transactions per
year.547 As discussed previously, the
final analysis excludes private party,
fleet, and wholesale transactions.
According to Edmunds Automotive
Industry Trends 2020, 19.3% of new
vehicle sales in 2019 were fleet sales.548
This fraction of the 17.1 million new
vehicle sales and leases in the data are
excluded from the analysis. An
Automotive News article from January
2023 (citing data from Cox Automotive)
states that 48% of all used vehicle sales
occurred outside of the retail
channel.549 As with new vehicle sales,
this fraction of the 40.8 million used
vehicle transactions in the data are
excluded from the analysis. Adding up
the covered transactions (35 million) 550
and applying the time savings
calculated from the base case
assumptions, we anticipate that the Rule
will generate a total time savings of
more than 72 million hours per year.
According to the Bureau of Labor
Statistics Occupational Employment
Statistics, the average hourly wage of
U.S. workers in 2021 was $29.76, and
recent research suggests that individuals
living in the U.S. value their non-work
time at 82% of average hourly
earnings. 551 Thus, the value of non-
work time for the average U.S. worker
would be $24.4 per hour. As a result,
our final analysis refines the estimate to
a present value of between $12.3 billion
and $14.9 billion as described in Table
2.2, which translates to savings of
roughly $1.75 billion per year.552
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553 See Car Buyer Journey 2019, supra note 537,
at 9 (Consumers who negotiate (88% vs. 64%) and
complete paperwork online (74% vs. 65%) are more
satisfied with their dealership experience.); 2022
Car Buyer Journey, supra note 25, at 22 (‘‘More
[financing] steps completed online = higher
satisfaction & less time at the dealership’’); Cox
Auto., ‘‘Cox Automotive Car Buyer Journey Study:
Pandemic Edition’’ 22 (2021), https://
www.coxautoinc.com/wp-content/uploads/2021/02/
Cox-Automotive-Car-Buyer-Journey-Study-
Pandemic-Edition-Summary.pdf (‘‘Heavy Digital
Buyers were the Most Satisfied’’).
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 year b ........... 	............................................................................................. 	34,986,253
Value of time for vehicle-shopping consumers c ................ 	............................................................................................. 	$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.
a Averages 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.
b For total volume, National Transportation Statistics Table 1–17. For retail/non-fleet fraction, Edmunds Automotive Industry Trends 2020 (for
new vehicles), supra note 548548, and Cox Automotive via Automotive News (for used vehicles), supra note 549549.
c BLS Occupational Employment Statistics (May 2022) and Hamermesh (2016).
Due to the uncertainty surrounding
how the Rule will translate into time
savings for consumers and to which
activities it will most strongly apply, we
explore a range of alternative
assumptions regarding what fraction of
the documented time savings digital
consumers experience will be received
by non-digital consumers under the
Rule. In our low-end scenario, we
assume that the Rule will result in half
the consumer time savings of the base
case. In our high-end scenario, we
assume that all the time savings
experienced by digital consumers under
the status quo—including time saved
getting a trade-in offer—will be received
by non-digital consumers under the
Rule. The low-end assumptions
correspond to a total time savings of
more than 35.85 million hours per year
while the upper bound assumptions
correspond to a total time savings of
more than 115.47 million hours per
year. The results of this analysis are
presented in Table 2.3. Importantly,
over the whole range of these alternative
assumptions we find that benefits
exceed costs. In fact, holding other
benefit and cost estimates constant, the
time savings generated by the Rule
could be de minimis and the implied
benefits would still exceed the costs.
While there are some activities in the
car buying process that the Rule may
not affect (e.g., test driving vehicles,
etc.), the data discussed suggest that
there is ample room for the Rule to
eliminate unnecessary time across
various activities. And even though
digital consumers spend less time on
these activities, results across several
studies suggest that this reduction in
time leads to a better experience for
consumers.553
TABLE 2.3—SENSITIVITY ANALYSIS OF TIME S AVINGS
Low end 	Base case 	High end
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 transaction b ........................ 	......................................................................... 	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.
a Averages 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.
b Time savings for ‘‘Get a Trade-In Offer’’ assumed to be zero for lease transactions or sales without trade-ins (estimated at 50%).
2. Reductions in Deadweight Loss
The status quo in this industry
features consumer search frictions,
shrouded prices, deception, and
obfuscation. As a result, dealers likely
charge higher prices for a number of
products and services than could be
supported once the Rule is in effect.
Recent research suggests that when
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679	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
554 Marco A. Haan et al., ‘‘A Model of Directed
Consumer Search,’’ 61 Int’l J. Indus. Org. 223, 223–
55 (2018), https://doi.org/10.1016/
j.ijindorg.2018.09.001; Jose´ Luis Moraga-Gonzalez et
al., ‘‘Consumer Search and Prices in the Automobile
Market.’’ 90 Rev. Econ. Stud. 1394–1440 (2023),
https://doi.org/10.1093/restud/rdac047.
555 See Off. of Mgmt. & Budget, Exec. Off. of the
President, ‘‘Circular A–4’’ 38 (2003), https://
www.transportation.gov/sites/dot.gov/files/docs/
OMB%20Circular%20No.%20A-4_0.pdf: ‘‘A
regulation that restricts the supply of a good,
causing its price to rise, produces a transfer from
buyers to sellers. The net reduction in the total
surplus (consumer plus producer) is a real cost to
society, but the transfer from buyers to sellers
resulting from a higher price is not a real cost since
the net reduction automatically accounts for the
transfer from buyers to sellers.’’ To the extent any
price changes caused by the Rule result in transfers
to consumers from dealers who were in violation
of existing laws, such transfers would be consistent
with the agency’s mission of providing redress to
injured consumers and its history of doing so in
enforcement actions.
consumers are able to observe prices for
vehicles before visiting dealerships—as
is intended by the Rule—prices and
dealer profits are likely to fall.554 When
not accompanied by changes in quantity
(due to a fixed supply of the good), price
adjustments serve to transfer welfare
from one side of the market (e.g.,
dealers) to the other (e.g., consumers),
which typically have no net effect on
the outcome in a regulatory analysis.555
A decrease in vehicle prices, however,
will likely also lead to an increase in the
number sold as the supply is not fixed.
As a result, this quantity expansion
effect unambiguously increases welfare
by reducing the deadweight loss that
occurs when firms can charge prices
that are marked up over marginal costs.
3. Framework
When a policy reduces the price of a
good—either through a reduction in
firm costs or, as in this case, a reduction
in firm market power—the quantity of
the good sold will typically increase. If
a distortion exists in the market causing
the product in question to be sold at a
price above the marginal (social) cost of
production (e.g., a tax, an externality, or
a markup enabled by market power),
this quantity expansion has the effect of
reducing deadweight loss in that
market. In the simple case where there
is one good subject to the policy and
that good has no close substitutes or
complements, this welfare effect can be
easily illustrated as in Figure 1.
The solid line reflects the demand for
the good, where some quantity is
purchased at a market price of p0 (point
A), which is higher than marginal costs
(MC). Because of this wedge between
price and marginal costs, there is a
reduction in welfare relative to the
outcome where prices equal marginal
costs; this deadweight loss is illustrated
on the graph by the bordered triangle
(ACD). Holding everything else
constant, when prices fall from p0 to p1,
this deadweight loss is reduced to some
extent. Part of this increase in welfare
will go to consumers, and part will go
to producers.
Imagine that this graph depicts the
market for new automobiles. The Final
Rule will increase price competition,
thus reducing market power and
shifting prices closer to marginal costs
in the new automobile market. If this
market satisfied the criteria for the
simple case described herein (i.e., no
close substitutes or complements), the
only data we would need to estimate
this change in total welfare would be
the predicted change in price, the
predicted change in quantity (which can
be calculated from an estimate of the
slope or elasticity of the demand curve
for new vehicles), and some information
or assumption about the shape of the
demand curve between points A and B.
Of course, the new automobile market is
closely linked to the used automobile
market, so this simple picture does not
capture the entire story.
When a good has a close substitute
(like used versus new vehicles), a price
decrease for that good will cause
demand for the related good to decrease.
Also, in the case of automobiles, there
is a long-run link between the new and
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680 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
556 Assmt. & Standards Div., Ofc. of Transp. & Air
Quality, U.S. Env’t Prot. Agency, ‘‘The Effects of
New-Vehicle Price Changes on New- and Used-
Vehicle Markets and Scrappage’’ (2021), https://
cfpub.epa.gov/si/si_public_file_download.cfm?p_
download_id=543273&Lab=OTAQ.
557 See Paul L. E. Grieco et al., ‘‘The Evolution of
Market Power in the US Automobile Industry’’
(2022), mimeo.
558 Paul L. E. Grieco et al., ‘‘The Evolution of
Market Power in the US Automobile Industry’’ 19
(2022), mimeo.
559 Paul L. E. Grieco et al., ‘‘The Evolution of
Market Power in the US Automobile Industry’’ 19
(2022), mimeo.
560 Aggregate cost of good i is equal to (1¥mi) ×
pi × Qi, where mi, pi, and Qi are the markup, price,
and quantity sold of good i, respectively.
561 Charles Murry & Yiyi Zhou, ‘‘Consumer
Search and Automobile Dealer Colocation,’’ 66
Mgmt. Sci. 1909–1934 (2020), https://doi.org/
10.1287/mnsc.2019.3307.
562 Jose´ Luis Moraga-Gonzalez et al., ‘‘Consumer
Search and Prices in the Automobile Market,’’ 90
Rev. Econ. Stud. 1394–1440 (2022), https://doi.org/
10.1093/restud/rdac047.
563 The baseline new vehicle markup estimate of
15% is defined as the ratio of the price-cost margin
to unit price, i.e. (pi¥MCi)/pi, and is sometimes
referred to as the Lerner index. With knowledge of
either price or marginal cost, this can be rearranged
to express the price-cost markup, i.e. (pi¥MCi)/MCi,
which is used in the formula referenced here.
used vehicle markets as a new vehicle
purchased today becomes a potentially
available used vehicle tomorrow. These
linkages between the markets will
dampen the demand response to any
given price change in the primary
market. In practice, this means that our
estimates of the responsiveness of new
vehicle purchases to price changes (i.e.,
the price elasticity of demand for new
vehicles) will overstate the change in
quantity resulting from a change in
prices, because such estimates typically
assume that all other prices remain
constant. In addition, if there are
distortions present in the market for
related goods (i.e., used vehicles are also
sold at a markup over marginal costs)
only examining the welfare effect in the
primary market will understate the total
welfare effect, as there will be an
analogous reduction in deadweight loss
in the market for the related good. These
linkages between markets for related
goods become difficult to explain
graphically. However, we have included
in the technical appendix an algebraic
derivation of the total welfare effect in
new and used vehicle markets resulting
from the finalization of the Rule. The
resulting formula requires estimates of
seven parameters in order to compute
the welfare effect: two ‘‘policy
elasticities’’ that reflect the
responsiveness of quantities of new and
used vehicles sold to a change in prices
in the new vehicle market after all
adjustments have occurred in both
markets, two baseline markups that
represent the differences between prices
and marginal costs for new and used
vehicles, two quantities that reflect the
aggregate costs of all new and used
vehicles sold under the status quo, and
the predicted change in prices due to
the Rule.
4. Estimation
To obtain ‘‘policy elasticities’’ we
reference a U.S. Environmental
Protection Agency report titled ‘‘The
Effects of New-Vehicle Price Changes on
New- and Used-Vehicle Markets and
Scrappage’’ (‘‘EPA Report’’).556 In this
report, the authors ‘‘developed a
theoretical model of the relationships
between new- and used-vehicle markets,
scrappage, and total vehicle inventory’’
that allows for simulation of prices and
quantities in these markets. The model
is calibrated using a range of demand
elasticity estimates from a review of the
relevant literature on auto markets. The
resulting simulations examine the long-
run ‘‘steady state’’ of vehicle inventories
and demand, accounting for cross-
market demand effects as well as the
endogenous supply of used vehicles
resulting from changes in demand for
new vehicles in previous periods.
Importantly, among the outputs of their
simulations are the ‘‘policy price
elasticities’’ required by our welfare
change formula. Our base case estimates
of deadweight loss reduction use the
long-run policy price elasticities that
result from calibrating the model with
the EPA Report’s intermediate values for
the aggregate new vehicle and outside
option demand elasticities, but we
explore sensitivity to other calibration
scenarios.
To obtain baseline estimates of new-
vehicle markups, we refer to a recent
paper entitled ‘‘The Evolution of Market
Power in the US Automobile Industry’’
by Paul Grieco, Charles Murry, and Ali
Yurukoglu.557 The authors specify a
model of the U.S. new car industry to
explore trends in concentration and
markups. The authors find that markups
in the industry have been falling over
time generally, but have been fairly
stable since the early 2000s.558 As our
baseline, we use their most recent
estimate of industry markups, which
was 15% in 2018.559 While this estimate
reflects markups over production costs
by manufacturers and not markups over
wholesale prices paid by dealers, it is
the wedge between retail price and
production cost that matters for welfare.
As we are unaware of any publicly
available data measuring used-vehicle
markups, we explore two alternatives
that we believe reflect the limiting
cases: (1) used vehicles have no markup
and (2) used-vehicle markups are the
same as new-vehicle markups.
We obtain both quantities of new- and
used-vehicles sold as well as average
prices from National Transportation
Statistics, Table 1–17. As before, we
exclude private party, fleet, and
wholesale transactions. This exclusion
is likely to bias our estimate of the total
welfare effect downward because,
unlike the time savings benefits of the
Rule which may be restricted to dealer-
consumer transactions, the price effects
of the Rule are likely to carry over to
private party and fleet transactions.
Using these aggregate figures along with
an estimate of baseline markups, we
estimate the aggregate cost of new- and
used-vehicles sold in 2019.560
Finally, based on the academic
literature on search costs in the
automobile market, the Rule is expected
to reduce prices of new vehicles by
reducing the markup that dealers are
able to charge over marginal costs. We
have identified two papers that
empirically estimate the effect of price
transparency or reduced search frictions
on auto markups by specifying a
structural model of the new-vehicle
market, estimating the structural
parameters, and then conducting
counterfactual simulations where search
frictions are reduced. Murry and Zhou
(2020) simulate a full information
counterfactual in the Ohio automobile
market where search frictions are
eliminated entirely and find that
markups are reduced by $333. 561
Moraga-Gonzalez et al. (2022) simulate
a counterfactual in the Dutch
automobile market where prices are
observed prior to costly consumer
search (i.e., visiting dealerships) and
find that markups are reduced from
40.52% to 32.59%.562 For our base case
estimates, we use the smaller Murry and
Zhou (2020) estimate, primarily because
their model is estimated using U.S. data
consistent with our setting. However,
we note that Moraga-Gonzalez et al.
offers evidence to suggest that
significantly larger changes in markups
may result from the Rule.
Using these parameters obtained from
the literature in combination, we
implement the formula for the change in
total welfare given in the technical
appendix. For each market—new and
used—the formula multiplies the policy
price elasticity by the percent change in
price to get the percent change in
quantity, and then multiplies this by the
aggregate markup (as given by the price-
cost markup 563 at baseline times the
aggregate cost of baseline transactions)
to get the approximate change in total
welfare per year. As an example, our
base case estimate assumes a policy
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681	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
564 2020 Cox Automotive Car Buyer Journey,
supra note 25, at 37.
565 See, e.g., Off. of the Sec’y, Dep’t of Transp.,
Dkt. No. DOT–OST–2010–0140, ‘‘Enhancing Airline
Passenger Protections II—Final Regulatory
Analysis’’ (Apr. 20, 2011), https://
www.regulations.gov/document/DOT-OST-2010-
0140-2046.
566 Applicable wage rates for the Commission’s
preliminary regulatory analysis, which was
published in its NPRM, were based on data from the
Bureau of Labor Statistics’ May 2020 National
Industry-Specific Occupational Employment and
Wage Estimates for NAICS industry category
441100—Automobile Dealers, which is available at
Continued
price elasticity of new-vehicle demand
of ¥0.25, a policy price elasticity of
used-vehicle demand (with respect to
new-vehicle price) of ¥0.04, and used
car markups equal to new car markups
(15%), resulting in the following
calculation:
This annual reduction in deadweight
loss is then applied to each year of the
10-year analysis period and discounted
to the present to yield the total benefit.
We highlight this base case (bolded in
Table 2.4) but explore several scenarios
that vary along two dimensions: (1) the
‘‘policy elasticity’’ of new- and used-
vehicle demand with respect to the
change in price and (2) the existence of
baseline markups in the used-vehicle
market. In Table 2.4, baseline markups
for used vehicles vary across columns
while the relevant policy price
elasticities vary across rows: Scenario A
corresponds to new-/used-vehicle
elasticities of ¥0.14 and 0.01, Scenario
B corresponds to new-/used-vehicle
elasticities of ¥0.17 and ¥0.04,
Scenario C corresponds to new-/used-
vehicle elasticities of ¥0.23 and ¥0.10,
and Scenario E corresponds to new-/
used-vehicle elasticities of ¥0.39 and
¥0.12.
TABLE 2.4—REDUCTION IN DEADWEIGHT LOSS ( IN MILLIONS), 2024–2033
Scenario
No used-vehicle markups 	Symmetric markups
Total @ 3%
discount Total @ 7%
discount Total @ 3%
discount Total @ 7%
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
Negotiation
An additional, albeit difficult to
quantify, benefit is the reduction in
discomfort and unpleasantness that
consumers associate with negotiating
motor vehicle transactions under the
status quo. According to the 2020 Cox
Automotive Car Buyer Journey study,
filling out paperwork, negotiating
vehicle price, and dealing with
salespeople are three of the top four
frustrations for consumers at car
dealerships. 564 Once the Rule is in
effect, all three of these issues will be
mitigated somewhat by the transparency
facilitated by the Rule’s required
disclosures and the time that consumers
spend shopping and negotiating motor
vehicle transactions will be less
stressful. While we expect an increase
in social welfare through this channel,
due to a lack of data allowing this more
qualitative benefit to be translated into
a quantitative gain, these benefits are
left unquantified in the analysis.
C. Estimated Costs of Final Rule
In this section, we describe the costs
of the Rule provisions as enumerated in
SBP VII.A, provide quantitative
estimates where possible, and describe
costs that we can only assess
qualitatively. Some industry
commenters questioned the
appropriateness of the data and
assumptions used in the NPRM,
including the discussion of costs in the
preliminary regulatory analysis. The
Commission used a variety of data
sources in its calculations for the NPRM
and in the Rule, including wage data
from the Bureau of Labor Statistics
Occupational Employment Statistics,
establishment counts from U.S. Census
County Business Patterns, transaction
counts from National Transportation
Statistics, and breakdowns of motor
vehicle transactions (e.g., by financing,
GAP agreement, F&I add-ons) from
numerous industry sources. Where such
data was not available (e.g., regarding
time devoted to compliance tasks), the
Commission made assumptions based
on a review of previous regulatory
analyses that featured similar
requirements, with adjustments made
based on our understanding of the
particulars of motor vehicle dealer
operations.565
Throughout this section, the cost of
employee time is monetized using
wages obtained from the Bureau of
Labor Statistics Industry-Specific
Occupational Employment and Wage
Estimates for Automobile Dealers.566
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682 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
https://www.bls.gov/oes/2020/may/oes_nat.htm.
Labor rates in the present analysis have been
updated based on data from the Bureau of Labor
Statistics’ May 2022 National Industry-Specific
Occupational Employment and Wage Estimates for
NAICS industry category 441100—Automobile
Dealers, which is available at https://www.bls.gov/
oes/current/naics4_441100.htm.
567 This assumption would hold, for example, if
both the product and labor markets in this industry
were competitive.
568 Comment of Nat’l Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 299–300.
This is valid under the assumption that
the opportunity cost of hours spent in
compliance activities is hours spent in
other productive activities, the social
value of which is summarized by the
employee’s wage.567 To the extent that
these activities can be accomplished
using time during which employees
would otherwise be idle under the
status quo, our estimates will overstate
the welfare costs of the Rule.
1. Prohibited Misrepresentations
In its preliminary analysis, the
Commission presented two scenarios
that estimated the costs associated with
the Rule provisions prohibiting
misrepresentations. First, as all the
misrepresentations prohibited by the
Rule are material and therefore
deceptive under section 5 of the FTC
Act, one scenario assumed that all
motor vehicle dealers are compliant
with section 5 under the status quo and
will therefore conduct no additional
review.
The second scenario allowed for costs
incurred by firms because of the
enhanced penalty associated with
violating the Rule (relative to a de novo
violation of section 5 of the FTC Act)
under the assumption that dealers may
expend additional resources to ensure
compliance. This ‘‘heightened
compliance review’’ scenario assumed
that each of the 46,525 dealers would
have a professional spend 5 additional
minutes reviewing each public-facing
representation (assumed to be 150 per
year on average). At a labor rate of
$26.83 per hour for compliance officers
employed at auto dealers, this cost was
estimated to be $15.6 million per year.
The Commission received comments
about the appropriateness of the data
and assumptions used to estimate the
cost of complying with this provision of
the Rule. The most specific criticism
contended that the number of
documents dealers would need to
review would be ‘‘several times’’ the
150 assumed and that review would
require at least 15 minutes per
document because ‘‘dealers typically do
not fully control the advertising
platforms they use given the direct
involvement of the vehicle OEMs . . .
and that of other third parties. Also,
many dealers, and especially small
business dealers do not employ internal
compliance officers or attorneys who
could conduct marketing reviews.’’ 568
As there is scant empirical evidence
provided for these assertions, the
Commission’s preliminary estimates
remain unchanged (with the exception
of updates to more recent data where
available). However, we have conducted
a sensitivity analysis in which all labor
hours in the base case analysis are
increased by an order of magnitude, in
keeping with the spirit of the comments
discussed; see SBP VII.G. As can be seen
in the results from that analysis, the
Rule clearly still generates net benefits
for society.
TABLE 3.1—ESTIMATED COMPLIANCE COSTS FOR P ROHIBITED M ISREPRESENTATIONS
2024–2033
Scenario 1—No Review:
No Cost ............................................................................. 	.................................................................................................. 	$0
Total Cost .................................................................. 	.................................................................................................. 	$0
Scenario 2—Heightened Compliance Review:
Number of dealers a .......................................................... 	.................................................................................................. 	47,271
Number of documents per dealer per year ...................... 	.................................................................................................. 	150
Minutes of review per document ...................................... 	.................................................................................................. 	5
Cost per hour of review .................................................... 	.................................................................................................. 	$31.21
Total Cost ................................................................................. 	3% discount rate ..................................................................... 	$157,310,579
Total Cost ................................................................................. 	7% discount rate ..................................................................... 	$129,526,073
Note: In scenarios with ongoing expenses, costs have been discounted to the present at both 3% and 7% rates.
a County Business Patterns 2021, NAICS Code 4411 (Automobile Dealers, used and new).
2. Required Disclosure of Offering Price
in Advertisements and in Response to
Inquiry
The Rule requires all dealers to
disclose an offering price in any
advertisement that references an
individual vehicle or in response to any
consumer inquiry about an individual
vehicle. For this provision, the
Commission’s preliminary analysis
presented two cost scenarios for dealers
when complying with the Rule. First,
because dealers already price all
vehicles in inventory under the status
quo, one scenario assumed that there
would be no additional cost of
complying with this provision. This
scenario assumes that the initial pricing
and any subsequent re-pricing of
vehicles in inventory would take no (or
minimal) additional time under the
Rule.
As with the prohibition on
misrepresentations, the second scenario
considers the enhanced penalty
associated with violating the Rule and
allows for costs given that dealers may
expend additional resources to ensure
that the prices they disclose conform to
the Rule’s definition of offering price,
thus minimizing the risk of penalties
should they fail to conform to that
definition. The latter scenario assumed
that, in the first year under the Rule,
each of the 46,525 dealers would have
a sales and marketing manager spend 8
hours reviewing their policies and
procedures for determining the public-
facing prices of vehicles in inventory. In
addition, each dealer would employ a
programmer for 8 hours to update any
automated systems that need to be
updated in accordance with these new
policies and procedures. At labor rates
of $63.93 per hour and $28.90,
respectively, this cost was estimated at
$34.5 million. Both scenarios assume
that, once calculated, the time required
to train employees to include prices in
response to consumer inquiries about
specific vehicles will either be
negligible or be subsumed by training
costs included under other provisions.
Finally, the time required to deliver the
disclosures is also negligible, as prices
are already typically disclosed in
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683	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
569 Comment of Nat’l Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 300.
advertisements and in interactions with
consumers under the status quo; the
Rule just requires the price to conform
to a specific definition.
Some commenters raised issues with
the assumptions regarding the time and
resources necessary to determine
compliant prices as well as deliver the
required disclosures. The comments
asserted that vehicle prices change
frequently in response to market
conditions, which would make it
difficult to ensure that offering prices
are accurate. Additionally, comments
disputed the notion that delivery of the
information to consumers in accordance
with the Rule’s provisions would not be
costly, in terms of employee time and
consumer time. One comment suggested
that ‘‘there would be an average of three
Offering Price disclosures based there
[sic] being an average of three dealer-
customer discussions regarding three
specific motor vehicles, per
transaction,’’ 569 asserting that the
frequency of these disclosures would
have implications for the cost estimates
that had not been considered in the
preliminary analysis.
If indeed the Rule required significant
additional employee time spent per
transaction, that would have
implications for the cost estimates.
However, as previously discussed, it is
the understanding of the Commission
that virtually all dealer-customer
discussions regarding specific motor
vehicles that occur under the status quo
already include time devoted to a
discussion of the vehicle’s price. The
only change under the Rule is that,
within that price discussion an offering
price (as defined by the Rule) must be
provided. The cost of determining this
price is included under the second
scenario in our preliminary analysis,
and sensitivity to the specific
assumptions of that scenario have been
explored in the Appendix. The results
from our analysis indicate that the Rule
generates net benefits for society under
a wide range of plausible assumptions
about the inputs to our cost
calculations.
Commenters also raised concerns
about the potential for behavioral
adjustment by dealerships, choosing to
refrain from advertising individual
vehicles or responding to consumer
inquiries about specific vehicles and
thus increasing consumers’ costs of
search. The Commission, however, has
not been presented with compelling
evidence that dealers will forego
competition with other dealers on price,
choosing instead to default to
advertising a focal price (such as
MSRP). Indeed, the Commission’s
offering price disclosure requirement is
similar to existing requirements in a
number of States, and the Commission
is not aware of any such behavioral
adjustments (e.g., eliminating prices
from advertisements, refusing to
respond to consumer inquiries, etc.)
having occurred in those States. As a
result, the Commission’s preliminary
estimates remain unchanged (with the
exception of updates to more recent data
where available).
T ABLE 3.2—ESTIMATED COMPLIANCE COSTS FOR O FFERING PRICE DISCLOSURES
2024
Scenario 1—No Review:
No Cost ............................................................................................................................................................................... 	$0
Total Cost .................................................................................................................................................................... 	$0
Scenario 2—Calculation of Offering Price:
Number of dealers a ............................................................................................................................................................ 	47,271
Pricing hours per dealer ..................................................................................................................................................... 	8
Cost per hour of pricing ...................................................................................................................................................... 	$80.19
Programming hours per dealer ........................................................................................................................................... 	8
Cost per hour of programming ........................................................................................................................................... 	$40.24
Total Cost .................................................................................................................................................................... 	$45,542,772
a County Business Patterns 2021, NAICS Code 4411 (Automobile Dealers, used and new).
3. Disclosure of Add-On List and
Associated Prices
In the NPRM, the proposed rule
would have required all dealers to
disclose an itemized menu of all
optional add-on products and services
along with prices, or price ranges, on all
dealer-operated websites, online
services, and mobile applications as
well as at all dealership locations.
Various commenters expressed concern
that the add-on list requirement would
have been too complex and potentially
confusing, as discussed in the
paragraph-by-paragraph analysis in SBP
III.D.2(b). As a result, the Commission
has determined not to finalize § 463.4(b)
of the proposed rule. While the
preliminary analysis estimated
compliance costs between
approximately $42 million and $43
million for the disclosure of add-on lists
and associated prices, those costs are
not included in the final analysis.
4. Required Disclosure of Total of
Payments for Financing/Leasing
Transactions
The Rule requires all dealers to
disclose, when representing a monthly
payment, the total of payments for the
financing or leasing contract. In
addition, in any comparison of two
payment options with different monthly
payments, the dealer is required to
disclose that the option with the lower
monthly payment features a higher total
of payments (if true).
The Commission’s preliminary
analysis presented two cost scenarios,
corresponding to different methods by
which dealers may choose to comply
with the Rule. In the first scenario, we
assumed that dealers would incur a one-
time, upfront cost of both designing the
required disclosures and informing
associates of their obligations to provide
the disclosures. Importantly, ongoing
costs on a per transaction basis were
assumed to be negligible, reflecting a
compliance regime where dealers
already generate the required
information during the normal course of
business and must only convey it to
consumers at an appropriate point in
the transaction. In the second scenario,
we assumed that dealers incur an
additional ongoing cost per financed or
leased transaction in order to
communicate the required disclosures
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684 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
570 While disclosures of this nature are already
required to be present in the financing contract by
the Truth in Lending Act (TILA), the Rule would
change the timing of a subset of those disclosures.
As a result, the dealer may have to develop and
deliver a separate document in the event that the
standard TILA disclosure has not yet been
generated at the point where disclosure is required
under the Rule.
571 Comment of Nat’l Auto Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 301.
572 Without cross-tabulations of fleet sales and
sales involving financing, we assume that these are
independent such that the fraction of covered
transactions involving financing is equal to the
fraction of covered transaction times the fraction of
financed transactions.
to consumers in writing, reflecting a
compliance regime where dealers find it
necessary to maintain a documentary
record of compliance with the Rule.570
The upfront costs (and total costs
under Scenario 1) of complying with
this provision as estimated by the
preliminary analysis were limited to 8
hours spent by a compliance manager
(at a rate of $26.83) on the creation of
a template disclosure script that
contains the required information and
informing sales staff of their obligations
to deliver the disclosure at an
appropriate time during the transaction.
This cost was estimated at $10 million.
The preliminary estimates of
additional ongoing costs—as in Scenario
2—included 2 minutes of sales associate
time per financed/leased transaction (at
a rate of $21.84) spent on the process of
populating and delivering a printed
version of the disclosure, with $0.15 per
disclosure spent on printing costs. The
total additional cost under this scenario
is estimated at $213.4 to $249.5 million.
Comments from industry groups
asserted that the preliminary analysis
underestimated training costs and that it
would be difficult to determine the total
of payments for financing prior to
knowing the details of the transaction.
One comment contended that ‘‘these
mandates . . . necessarily would
involve significant annual training
requirements for new employees given
that . . . the average dealer experiences
an annual sales consultant turnover rate
of 67%.’’ 571 The comment further
asserted that dealers cannot determine
the total cost of a financing or leasing
agreement without knowing the terms
for which consumers qualify and what
terms they want. The comment argued
that as a result, only the scenario with
costs incurred on a per transaction basis
should be considered. Finally, the
comment argued that the per-transaction
costs in Scenario 2 are too low, both
because the Commission underestimates
the time required to deliver, discuss,
and review disclosures and because
multiple disclosures would have to be
made per transaction (as terms are
changed).
These comments misunderstand the
Commission’s analysis with respect to
the costs of complying with this
provision. Scenario 1 does not
anticipate that the dealer presents a
consumer with the total of payments for
a financing or leasing contract at the
outset of the transaction. It requires only
that, at the point where the dealer
engages in discussions regarding
different monthly payments for
financing or leasing arrangements, the
information that must be disclosed (i.e.,
the total of payments and a comparison
of these totals across differing monthly
payments) is already available to the
dealer under the status quo. The only
additional cost incurred per transaction
would be the delivery of this
information to the consumer (the
determination of which is contemplated
in the costs estimated under Scenario 1).
With respect to the comment
regarding insufficient allowance for
training costs in light of employee churn
in the industry, the Commission has
determined this to be a valid critique of
the preliminary analysis. As a result, the
final regulatory analysis includes an
additional ongoing cost for both
Scenarios. This ongoing cost includes
training for sales staff and budgets 1
hour of training for each of the 417,110
sales and related employees across the
industry, at an (average) cost of $29.43
per hour. The resulting additional
ongoing costs in both scenarios amounts
to $12.3 million per year. Further, as
discussed in a previous section, the
final analysis excludes private party,
fleet, and wholesale transactions.572 The
remainder of the Commission’s
preliminary estimates remain
unchanged (with the exception of
updates to more recent data where
available). Concerns about
underestimates of the time required to
review disclosures on a per-transaction
basis are addressed by the Commission’s
sensitivity analyses conducted in the
Appendix.
T ABLE 3.4—ESTIMATED COMPLIANCE C OSTS FOR FINANCING COSTS
2024 only 	2024–2033
Scenario 1—Creation of disclosure and training
only:
Upfront costs:
Number of dealers .................................... 	................................................................................. 	47,271 	..............................
Compliance manager hours per dealer .... 	................................................................................. 	8 	..............................
Cost per hour of disclosure creation ........ 	................................................................................. 	$31.21 	..............................
Subtotal ............................................. 	................................................................................. 	$11,802,623 	..............................
Ongoing costs:
Number of sales and related employees a 	................................................................................. 	.............................. 	417,110
Training hours per employee ................... 	................................................................................. 	.............................. 	1
Cost per hour of training .......................... 	................................................................................. 	.............................. 	$29.43
Subtotal ............................................................ 	3% discount rate .................................................... 	.............................. 	$104,712,908
7% discount rate .................................................... 	.............................. 	$86,218,307
Scenario 1—Total Cost ................................... 	3% discount rate .................................................... 	.............................. 	$116,515,532
7% discount rate .................................................... 	.............................. 	$98,020,931
Scenario 2—Disclosures per transaction:
Covered new vehicle sales per year b ............. 	................................................................................. 	.............................. 	10,343,319
% New vehicle sales involving financing c ....... 	................................................................................. 	.............................. 	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
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685	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
573 The physical costs are $.15 per paper
disclosure and $.02 per electronic disclosure,
assuming that 27% are made electronically. This
assumption is informed by a consumer survey that
indicates 73% of consumers with motor vehicles
prefer to receive registration renewal notices by
mail as opposed to electronically. See Consumer
Action, ‘‘Your opinion wanted: Paper vs. electronic
bills, statements and other communications’’ 4
(2018–2019), https://www.consumer-action.org/
downloads/Consumer_Action_Paper_v_electronic_
survey.pdf (showing that 1800 of 2456 respondents
who owned and needed to periodically register a
motor vehicle preferred mail notices).
T ABLE 3.4—ESTIMATED COMPLIANCE C OSTS FOR FINANCING COSTS —Continued
2024 only 	2024–2033
Total transactions involving monthly pay-
ments/financing.
................................................................................. 	.............................. 	19,228,256
Disclosure minutes per transaction ................. 	................................................................................. 	.............................. 	2
Cost per hour of disclosure ............................. 	................................................................................. 	.............................. 	$28.41
Printing cost per disclosure ............................. 	................................................................................. 	.............................. 	$0.15
Subtotal ............................................................ 	3% discount rate .................................................... 	.............................. 	$179,930,957
7% discount rate .................................................... 	.............................. 	$148,151,196
Total Cost ........................................................ 	3% discount rate .................................................... 	.............................. 	$296,446,489
7% discount rate .................................................... 	.............................. 	$246,172,126
Note: In scenarios with ongoing expenses, costs have been discounted to the present at both 3% and 7% rates.
a Bureau of Labor Statistics Industry-Specific Occupational Employment and Wage Estimates for NAICS Code 441100—Automobile Dealers,
May 2021.
b For 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).
c Melinda Zabritski, Experian Info. Sols. Inc., ‘‘State of the Automotive Finance Market Q4 2020’’.
5. Prohibition on Charging for Add-Ons
That Provide No Benefit
The Rule prohibits dealers from
charging for add-on products or services
from which the targeted consumer
would not benefit. Compliance with this
provision will require dealers to
develop policies and transaction-level
rules about when consumers can be
charged for add-on products and
services. The Rule as proposed in the
NPRM also would have included
additional provisions relating to add-
ons that have not been finalized. These
included a prohibition on charging for
optional add-on products or services
unless dealership employees made a
number of disclosures at various points
before finalizing a transaction. This
provision would have required each
dealer to design form disclosures, create
a system for populating these forms,
train their sales staff on the disclosure
requirements, and provide the
disclosures in writing, with the
appropriate information filled in, to
each consumer prior to completing the
transaction.
The Commission’s preliminary
analysis relating to the cost of
complying with these disclosure
requirements budgeted for 8 hours of
compliance manager time (at a cost of
$26.83 per hour) and 4 hours of sales
manager time (at a cost of $63.93 per
hour) to design disclosure forms, and an
additional 8 hours of programmer time
(at a cost of $28.90) to create a system
to populate these forms. The
preliminary analysis also budgeted for 2
minutes of sales associate time (at a rate
of $21.84 per hour) and $0.11 in
printing/electronic delivery costs per
disclosure, with the number of
disclosures determined by the fraction
of transactions involving optional add-
ons and/or financing.
In response to numerous comments,
the Commission has determined not to
finalize the proposal in § 463.5(b),
which would have required the delivery
of written disclosures and
acknowledgement via signature of those
disclosures by consumers. Various
commenters were concerned that the
add-on disclosures would add
documents and time to the transaction.
In response to these comments, the
Commission has determined to omit
what would have been the only
provision affirmatively requiring the
dealer and consumer to review
additional documentation during a
transaction. As a result, while the
preliminary analysis estimated
compliance costs between
approximately $883 million and $1
billion for the disclosure of total costs
for cash and financed transactions with
optional add-on products, the cost
estimate in the final analysis is on the
order of one-tenth to one-half of the
preliminary estimate (depending on the
scenario).
As a result, the Commission has
substantially revised the cost analysis in
this section. First, the Commission
assumes that each dealer will employ 8
hours of compliance manager time (at a
rate of $31.21) and 8 hours of sales
manager time (at a rate of $80.19) in the
first year under the Rule, to cull add-ons
with no value from their offerings and
develop policies regarding when certain
add-ons may or may not be sold.
Second, the Commission budgets for 1
hour of training per year for each of the
417,110 sales and related employees
across the industry, to apprise them of
these policies and their obligations
under the Rule. Finally, the Commission
includes a second cost scenario in
which dealers will choose to deliver one
itemized disclosure to each customer
before the finalization of each
transaction. Although this is not
required under the Final Rule, dealers
may wish to have documentation of
compliance with the provisions of the
Rule. As in the preliminary analysis, the
Commission assumes that each dealer
will employ 8 hours of compliance
manager time and 4 hours of sales
manager time creating this disclosure
and 8 hours of programmer time
creating a system to populate these
forms when provided inputs by sales
staff. The same occupational wage data
have been used, but the rates have been
updated to match the most recent data
available. We further assume, as in the
preliminary analysis, that sales staff will
spend 2 minutes per disclosure (at a rate
of $28.41 per hour) updating, printing,
and delivering these forms to consumers
and that the physical costs of delivering
the disclosure are roughly $.11 per
disclosure.573 Finally, as discussed in a
previous section, the final analysis
excludes private party, fleet, and
wholesale transactions.
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686 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
TABLE 3.5—ESTIMATED COMPLIANCE COSTS FOR P ROHIBITION ON CERTAIN ADD-O NS
2024 only 	2024–2033
Scenario 1—Policies and Training Only:
Upfront costs:
Number of dealers .................................... 	................................................................................. 	47,271 	..............................
Compliance manager hours per dealer .... 	................................................................................. 	8 	..............................
Cost per hour of compliance manager ..... 	................................................................................. 	$31.21 	..............................
Sales manager hours per dealer .............. 	................................................................................. 	8 	..............................
Cost per hour of sales manager .............. 	................................................................................. 	$80.19 	..............................
Subtotal ............................................. 	................................................................................. 	$42,127,915 	..............................
Ongoing costs:
Number of sales and related employees 	................................................................................. 	.............................. 	417,110
Training hours per employee ................... 	................................................................................. 	.............................. 	1
Cost per hour of training .......................... 	................................................................................. 	.............................. 	$29.43
Scenario 1—Subtotal ....................................... 	3% discount rate .................................................... 	.............................. 	$146,840,824
7% discount rate .................................................... 	.............................. 	$128,346,223
Scenario 2—Disclosure creation and delivery:
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,
Informed Consent Before Any Charges
The Rule requires dealers to obtain
express, informed consent before
charging any consumer for any product
or service in association with the sale,
financing, or lease of a vehicle. Because
we presume that all dealers who are
complying with the law currently have
policies in place to prevent charges
without consent, we assume that there
will be no additional costs imposed by
this provision.
7. Recordkeeping
The Final Rule requires dealers to
retain records of all documents
pertaining to Rule compliance. These
recordkeeping requirements include:
• Copies of all materially different
marketing materials, sales scripts, and
training materials that discuss sales
prices and financing or lease terms.
• Records demonstrating that all add-
ons charged for meet the requirements
stated in the Rule, including
calculations of loan-to-value ratios in
contracts including GAP agreements.
• Copies of all purchase orders,
financing and lease contracts signed by
the consumer (whether or not final
approval is received), and all written
communications with any consumer
who signs a purchase order or financing
or lease contract.
• Copies of all written consumer
complaints, inquiries related to add-ons,
and inquiries and responses about
individual vehicles.
Most of these documents are already
produced in the normal course of
business under the status quo, or the
costs of creating them have already been
accounted for in previous sections. In its
preliminary analysis, the Commission
assumed that each dealer would incur
an upfront cost, employing 8 hours of
programmer time, 5 hours of clerical
time, 1 hour of sales manager time, and
1 hour of compliance officer time, at
hourly rates of $28.90, $18.37, $63.93,
and $26.83, respectively, in order to
upgrade their systems and create the
templates necessary to accommodate
retention of all relevant materials. The
Commission also assumed that each
dealer would employ 1 additional
minute of sales staff time per transaction
to populate forms and store relevant
materials.
One industry commenter contended
that the proposed rule would impose
substantial and costly recordkeeping
mandates, citing primarily the various
channels through which dealers would
be required to capture and retain
communications. The Commission
believes the recordkeeping requirements
strike an appropriate balance, requiring
the retention of materials needed to
allow effective enforcement while being
mindful of dealer burden. In addition,
the recordkeeping requirements are
similar to analogous requirements in
other Commission disclosure rules, as
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687	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
574 16 CFR 310.5 (Telemarketing Sales Rule); 16
CFR 437.7 (Business Opportunity Rule); 16 CFR
453.6 (Funeral Industry Practices Rule); 16 CFR
301.41 (Fur Products Labeling).
575 Comment of Nat’l Auto. Dealers Ass’n, Doc.
No. FTC–2022–0046–8368 at 12 n.43 (indicating
15.3% (18.2%) for new (used) vehicles). These rates
were weighted by transactions counts to calculate
an overall rate of 17%.
576 Our review of dealer transaction records
suggests that a typical transaction generates 3.4 MB
of data under the status quo. Given the average
number of transactions per dealer, this suggests that
storing all these records would require dedicated
space of roughly 4.2 GB per year. With a two-year
retention window, this corresponds to 8.4 GB of
storage at any given time. We estimate that the
(annual) amount budgeted here should be sufficient
to maintain at least 1 TB of storage—either on
premises or through a cloud storage vendor—which
is sufficient for more than 100 times the data
storage capacity necessary to retain all transaction
files generated by a typical dealership in a year
under the status quo. The Commission anticipates
that this amount of data storage capacity will be
more than sufficient to also allow for dealers to
keep any necessary records of correspondence with
consumers who ultimately do not complete
transactions at the dealership.
tailored to individual industries and
markets. 574
As such, the Commission’s final
analysis retains its preliminary
estimates—appropriately updated where
more recent data were available—with a
few changes. First, we made
adjustments to the cost estimates
associated with the required loan-to-
value calculations for all transactions
with GAP agreements. Based on a
comment from one industry group, we
revised down the share of covered new
and used vehicle sales with a GAP
agreement to 17%.575 As in the
preliminary analysis, for these
transactions sales staff will spend an
additional minute to generate and store
the relevant calculations. As discussed
in a previous section, the final analysis
excludes private party, fleet, and
wholesale transactions. In addition, the
expansion of the volume of records that
dealers are required to retain and
manage will likely require investment in
additional IT systems and hardware,
which was left unquantified in the
preliminary analysis. After additional
research, the Commission estimates that
each dealer will need to spend
approximately $300 per year on storage
(either on premises or in the cloud) to
house the records that the Rule requires
them to maintain. Based on a review of
the transaction records we have
received from dealers through
investigations, this amount is likely to
be more than sufficient for
compliance.576
TABLE 3.6—ESTIMATED COMPLIANCE COSTS FOR RECORDKEEPING
2024 only 	2024–2033
Updating systems:
Number of dealers ........................................... 	................................................................................. 	47,271 	..............................
Programming hours per dealer ....................... 	................................................................................. 	8 	..............................
Cost per hour of programming ........................ 	................................................................................. 	$40.24 	..............................
Clerical hours per dealer ................................. 	................................................................................. 	5 	..............................
Cost per hour of clerical work ......................... 	................................................................................. 	$20.16 	..............................
Sales manager hours per dealer ..................... 	................................................................................. 	1 	..............................
Cost per hour of sales manager review .......... 	................................................................................. 	$80.19 	..............................
Compliance manager hours per dealer ........... 	................................................................................. 	1 	..............................
Cost per hour of compliance review ................ 	................................................................................. 	$31.21 	..............................
Subtotal .................................................... 	................................................................................. 	$25,248,387 	..............................
Hardware and Storage (per year):
Number of dealers ........................................... 	................................................................................. 	.............................. 	47,271
Cost of hardware/storage ................................ 	................................................................................. 	.............................. 	$300
Recordkeeping (per transaction):
Number of covered motor vehicle sales .......... 	................................................................................. 	.............................. 	31,562,959
% of sales with GAP agreement a ................... 	................................................................................. 	.............................. 	17%
Number of motor vehicle sales with GAP
agreement.
................................................................................. 	.............................. 	5,444,502
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.
a Comment of Nat’l Auto. Dealers Ass’n, Doc. No. FTC–2022–0046–8368 at 12 n.43.
D. Other Impacts of Final Rule
As the status quo in this industry
features consumer search frictions,
shrouded prices, deception, and
obfuscation, dealers likely charge higher
prices for a number of products and
services than could be supported once
the Rule is in effect. SBP VII.B
discussed the Commission’s expectation
that prices are likely to adjust in
response to the transparency facilitated
by the Rule, and quantified the benefits
that result when vehicle quantities
increase in response to a more
transparent and less deceptive
equilibrium. The price changes in the
new vehicle market discussed in SBP
VII.B will also have the effect of
transferring $3.4 billion per year from
dealers whose conduct under the status
quo would not have complied with the
Rule to consumers. In addition, other
prices may be impacted by the Rule,
such as used vehicle prices and add-on
prices. As we have insufficient data to
predict these price effects, neither the
transfers associated with these potential
price changes nor the resulting quantity
adjustments and deadweight loss
reductions are quantified in the current
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688 	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
577 See Tom Blake et al., ‘‘Price Salience and
Product Choice,’’ 40 Mktg. Sci. 619–36 (2021),
https://doi.org/10.1287/mksc.2020.1261.
578 See Nat’l Consumer Law Ctr., ‘‘Auto Add-ons
Add Up: How Dealer Discretion Drives Excessive,
Inconsistent, and Discriminatory Pricing’’ (Oct. 1,
2017), https://www.nclc.org/images/pdf/car_sales/
report-auto-add-on.pdf; Consumers for Auto
Reliability and Safety, Comment Letter on Motor
Vehicle Roundtables, Project No. P104811 at 2–3
(Apr. 1, 2012), https://www.ftc.gov/sites/default/
files/documents/public_comments/public-
roundtables-protecting-consumers-sale-and-leasing-
motor-vehicles-project-no.p104811-00108/00108-
82875.pdf (citing a U.S. Department of Defense data
call summary that found that the vast majority of
military counselors have clients with auto financing
problems and cited ‘‘loan packing’’ and yo-yo
financing as the most frequent auto lending abuses
affecting servicemembers); Adam J. Levitin, ‘‘The
Fast and the Usurious: Putting the Brakes on Auto
Lending Abuses,’’ 108 Geo. L.J. 1257, 1265–66
(2020), https://www.law.georgetown.edu/
georgetown-law-journal/wp-content/uploads/sites/
26/2020/05/Levitin_The-Fast-and-the-Usurious-
Putting-the-Brakes-on-Auto-Lending-Abuses.pdf
(discussing ‘‘loan packing’’ as the sale of add-on
products that are falsely represented as being
required in order to obtain financing.); Complaint
¶¶ 12–19, Fed. Trade Comm’n v. Liberty Chevrolet,
Inc., No. 1:20–cv–03945 (S.D.N.Y. May 21, 2020)
(alleging deceptive and unauthorized add-on
charges in consumers’ transactions); Complaint
¶¶ 59–64, Fed. Trade. Comm’n v. Universal City
Nissan, No. 2:16–cv–07329 (C.D. Cal. Sept. 29,
2016) (alleging deceptive and unauthorized add-on
charges in consumers’ transactions); Complaint
¶¶ 6, 9, TT of Longwood, Inc., No. C–4531 (F.T.C.
July 2, 2015) (alleging misrepresentations regarding
prices for added features); see also Auto Buyer
Study, supra note 25, at 14 (‘‘Several participants
who thought that they had not purchased add-ons,
or that the add-ons were included at no additional
charge, were surprised to learn, when going through
the paperwork, that they had in fact paid extra for
add-ons. This is consistent with consumers’
experiencing fatigue during the buying process or
confusion with a financially complex transaction,
but would also be consistent with dealer
misrepresentations.’’).
analysis. Finally, it may be the case that
enhanced transparency of the Rule leads
to fewer of certain types of transactions
relative to the status quo. Recent
evidence suggests that price shrouding
of the kind that is prevalent in the motor
vehicle market results in consumers
spending more than they would
otherwise.577 We expect that this
phenomenon may extend especially to
the motor vehicle add-on market, where
the Commission has compiled
substantial evidence that individuals
frequently inadvertently purchase add-
ons that they did not want and
ultimately will not use.578 While much
of this effect may ultimately be
transfers, we reiterate that to the extent
they represent transfers from dishonest
dealers to consumers, this may be
considered a benefit of the Rule.
In addition, deceptive practices by
dishonest dealers lead consumers to
engage with those dealers instead of
honest dealerships. Once the Rule is in
effect, some business that would
otherwise have gone to dealers using
bait-and-switch tactics or deceptive
door opening advertisements will now
go to honest dealerships. Again,
assuming that the costs of the firms are
similar, any one-for-one diversion of
sales from one set of businesses to
another is generally characterized as a
transfer under OMB guidelines.
However, in this case, it would
represent a transfer from the set of
dishonest dealers to honest dealers,
which may weigh differently if profits
from law violations are not counted
towards social welfare in the regulatory
analysis.
E. Conclusion
The Commission has attempted to
catalog and quantify the incremental
benefits and costs of the provisions
included in the Final Rule.
Extrapolating these benefits over the 10-
year assessment period and discounting
to the present provides an estimate of
the present value for total benefits and
costs of the Rule, with the difference—
net benefits—providing one measure of
the value of regulation.
Using our base case estimates, the
present value of quantified benefits for
consumers from the Rule’s requirements
over a 10-year period using a 7%
discount rate is estimated at $13.4
billion. The present value of quantified
costs for covered motor vehicle dealers
of complying with the Rule’s
requirements over a 10-year period
using a 7% discount rate is estimated at
$1.1 billion. This generates an estimate
of the present value of quantified net
benefits equal to $12.3 billion using a
discount rate of 7%. Using the best (or
worst) case assumptions discussed in
the preceding analysis results in net
benefits of $21.2 billion (or $5.5 billion)
using a discount rate of 7%.
Given that we expect unquantified
benefits to outweigh unquantified costs
for this Rule, this regulatory analysis
indicates that adoption of the Rule
would result in benefits to the public
that outweigh the costs.
PRESENT V ALUE OF NET BENEFITS (IN M ILLIONS), 2024–2033
Low estimate 	Base case 	High estimate
3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
rate 3% Discount
rate 7% Discount
rate
Benefits:
Time Savings .................................... 	$7,463 	$6,145 	$14,926 	$12,290 	$24,036 	$19,790
Deadweight Loss Reduction ............. 	568 	468 	1,298 	1,069 	2,307 	1,899
Total Benefits ............................. 	8,031 	6,613 	16,224 	13,359 	26,343 	21,690
Costs:
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.
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689	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
579 See Henrik J. Kleven, ‘‘Sufficient Statistics
Revisited.’’ 13 Annual Rev. Econ. 515–38. (2021),
https://doi.org/10.1146/annurev-economics-060220-
023547.
F. Appendix: Derivation of Deadweight
Loss Reduction
The derivation of the formula for the
reduction in deadweight loss from the
Rule follows from ‘‘Sufficient Statistics
Revisited’’ by Henrik Kleven.579 In the
source article, the wedge between costs
and prices is tax rates, but here we
consider producer markups; the
fundamental principles are unchanged.
We have a mass of consumers i with
utility function ui(xiO, xiN, xiU) over new
cars, used cars, and the numeraire (good
0) who face the following budget
constraint:
given markups Tij for good j and
consumer i and income Yi for consumer
i. Pre-markup prices are normalized to
one so xij is the cost of consumer i’s
purchase of good j. Total profits from
the consumption of consumer i are Ti =
SjTijx ij.
Define a policy to be evaluated as q.
Total welfare is defined as:
Here, vi(q) is the indirect utility
function for consumer i, so the first term
is consumer surplus and the second
term is producer surplus, while m is the
value of a dollar of profit. The change
in welfare from policy q, translated into
dollars by dividing by m, is:
The first term is the total effect on
profit from the reform and the second
term is the ‘‘mechanical’’ effect;
assuming quantities stay constant, how
much profits will fall if the policy goes
into effect. We can rewrite this as
follows:
Where
is labelled the ‘‘policy elasticity’’ for
good and consumer with respect to
policy . We make the following
additional assumptions/simplifications:
1. The outside good is priced at cost.
2. All consumers face the same
markups so Tik = Tk.
3. For simplicity, all elasticities are
assumed to be cost share-weighted
averages of individual effects, so
As a result, the welfare change from
the Auto Rule (q) is:
Assuming that the Rule affects only
markups for new vehicles, we can
rewrite the ‘‘policy elasticities’’ as a
product of a price elasticity and the
elasticity of price with respect to the
Rule, as follows:
where
is the long-run ‘‘policy price elasticity’’
of demand for good w.r.t. the price of
good , including the effects that a price
change has on the prices of related
goods. The formula accounts for
demand feedback effects between the
new and used car markets but assumes
no dynamics in the path from the policy
to the long-run steady-state. Computing
this formula requires estimates of seven
parameters: two ‘‘policy price
elasticities’’ that reflect the
responsiveness of quantities of new and
used vehicles sold to a change in prices
in the new vehicle market after all
adjustments have occurred in both
markets, two baseline markups that
represent the differences between prices
and marginal costs for new/used
vehicles, two quantities that reflect the
aggregate cost of all new/used vehicles
sold under the status quo, and the
predicted change in prices due to the
Rule. Calibration of these parameters is
discussed in the main text.
G. Appendix: Uncertainty Analysis
While the main text uses alternative
assumptions to explore sensitivity to a
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number of discrete scenarios, in this
appendix we allow variation in most of
the assumptions that underlie our
model. This Monte Carlo analysis
procedure allows us to more fully
characterize the uncertainty around our
central estimate of net benefits, under
the assumption that our basic model is
specified correctly. Most of the
assumptions in our analysis refer to
amounts of time, either amounts of time
dealerships employees must spend on a
compliance task or amounts of time that
consumers save on various activities
related to the automobile shopping
process. Deviations for these
assumptions are centered on the
parameters used in the main text.
Elsewhere, as with assumptions
regarding fractions or proportions, our
base case is often an extreme case (i.e.,
0 or 1). In these cases, deviations are
typically not centered on the base case
and are allowed to vary across the
whole range as dictated by the
parameter. Still, we can expect the
average results from this sensitivity
analysis to be similar to the result in the
main text. The object of interest here is
the distribution of estimates, which
indicates the expected variation in net
benefits if the true parameters deviate
from our predictions (with errors of the
form modeled).
For most assumptions, we draw from
a symmetric, triangular distribution
around the base case assumption with a
specified upper and lower bound. In
this distribution, the probability of
drawing particular parameter value
increases linearly from the lower bound
to the base case assumption before
decreasing linearly to the upper bound,
such that the area inscribed by the
triangle is equal to 1. We emphasize this
distribution because it is a parsimonious
way to incorporate variation in
parameter values over a finite range and
incorporates our preferred estimates as
the most likely outcome. For a few
parameters where we think it is
appropriate to de-emphasize the main
estimate parameter, we draw from a
uniform distribution. Importantly, all
draws are independent; there is no
correlation between the deviations
drawn in any given Monte Carlo trial.
An additional sensitivity analysis
considers a situation where our errors
across all labor time parameters are
correlated; specifically, that all of our
estimates of the time required for
compliance tasks are 1/10th of the true
time required.
To incorporate uncertainty in time
savings benefits to consumers, we allow
the time saved by digital consumers to
vary by up to ten minutes more or less
than the main analysis parameters. The
share of these time savings received by
non-digital consumers under the Rule is
modeled as uniformly distributed
between zero (no savings) and one
(savings equivalent to what digital
consumers receive in the status quo).
TABLE A.1—ALTERNATIVE PARAMETERS : BENEFITS OF TIME S AVINGS FOR COMPLETED TRANSACTIONS
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
bound
Price Negotiation Time Savings .................................. 	43 	Triangular ......................... 	33 	53
Add-on Negotiation Time Savings .............................. 	33 	Triangular ......................... 	23 	43
Paperwork Time Savings ............................................ 	45 	Triangular ......................... 	35 	55
Trade-In Negotiation Time Savings ............................ 	26 	Triangular ......................... 	16 	36
Fraction of Price Time Savings Under Rule ............... 	1.0 	Uniform ............................. 	0 	1
Fraction of Add-on Time Savings Under Rule ............ 	0.5 	Uniform ............................. 	0 	1
Fraction of Paperwork Time Savings Under Rule ...... 	0.5 	Uniform ............................. 	0 	1
Fraction of Trade-In Time Savings Under Rule .......... 	0.0 	Uniform ............................. 	0 	1
For the deadweight loss reduction
component of benefits, we explore
sensitivity only to baseline used-vehicle
markups, allowing them to vary from 0
to the baseline new-vehicle markup of
15%. In the main text, we explore a
number of scenarios for deadweight loss
reduction corresponding to greater and
lesser demand elasticities as well.
The following tables describe the
distributions we model for cost
parameters in the simulation exercise.
All cost parameters are assumed to be
drawn from triangular distributions. The
tables follow the same order as the
discussion in the main text.
TABLE A.2—ALTERNATIVE PARAMETERS : COSTS OF MISREPRESENTATION PROHIBITION COMPLIANCE
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
bound
Document Review Minutes ......................................... 	5 	Triangular ......................... 	0 	10
Documents Reviewed ................................................. 	150 	Triangular ......................... 	100 	200
T ABLE A.3—ALTERNATIVE PARAMETERS : COSTS OF OFFERING PRICE DISCLOSURES
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
bound
Template Creation Sales Manager Hours .................. 	8 	Triangular ......................... 	4 	12
Template Creation Web Developer Hours .................. 	8 	Triangular ......................... 	4 	12
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TABLE A.5—ALTERNATIVE PARAMETERS: COSTS OF FINANCING DISCLOSURES
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
bound
Disclosure Creation Compliance Manager Hours ...... 	8 	Triangular ......................... 	4 	12
Disclosure Training Hours ........................................... 	1 	Triangular ......................... 	0 	2
Disclosure Delivery Time Minutes .............................. 	2 	Triangular ......................... 	0 	4
Printing Costs .............................................................. 	0.15 	Triangular ......................... 	0.10 	0.20
T ABLE A.6—ALTERNATIVE PARAMETERS : COSTS OF ITEMIZED DISCLOSURES
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
bound
Electronic Disclosure Share (Scenario 2 only) ........... 	0.27 	Triangular ......................... 	0.04 	0.50
Upfront Sales Manager Hours (Scenario 1) ............... 	8 	Triangular ......................... 	4 	12
Upfront Compliance Manager Hours (Scenario 1) ..... 	8 	Triangular ......................... 	4 	12
Disclosure Training Hours (Scenario 1) ...................... 	1 	Triangular ......................... 	0 	2
Disclosure Creation Sales Manager Hours (Scenario
2 only).
4 	Triangular ......................... 	2 	6
Disclosure Creation Compliance Manager Hours
(Scenario 2 only).
8 	Triangular ......................... 	4 	12
Disclosure Creation Web Developer Hours (Scenario
2 only).
8 	Triangular ......................... 	4 	12
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 P ARAMETERS: R ECORDKEEPING COSTS
Base case 	Monte Carlo
Parameter 	Parameter value 	Modeled distribution 	Distribution lower
bound Distribution upper
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
from these parameter distributions,
recording the costs and benefits of each
potential outcome. The distribution of
costs and benefits is plotted in the
following table for discount rates of 3%
and 7%.
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Differencing the costs and benefits
from each simulation iteration yields a
distribution of net benefits under the
various parameter draws. We again plot
this distribution under 3% and 7%
discount rates.
This exercise finds heterogeneity in
net benefits under the alternative
parameter distributions, but the Rule
still yields positive net benefits in all
simulated outcomes.
Finally, to examine the sensitivity of
the net benefits conclusions to the
possibility of systematic
underestimating of labor costs, we
calculate costs and benefits in a scenario
where all labor costs turn out to be ten
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693	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
times larger than the parameter values
in the main text. All non-labor hours
costs (including benefits hours, wage
rates, and prevalence counts) are
unchanged in this analysis.
TABLE A.8—PRESENT VALUE OF NET BENEFITS (IN MILLIONS), L ABOR COSTS × 10, 2024–2033
Base case
3% Discount rate 	7% Discount rate
Benefits:
Time savings .................................................................................................................................... 	$14,926 	$12,290
Deadweight Loss Reduction ............................................................................................................. 	1,298 	1,069
Total Benefits ............................................................................................................................ 	16,224 	13,359
Costs:
Prohibition on Misrepresentations .................................................................................................... 	1,573 	1,295
Offering Price Disclosure .................................................................................................................. 	455 	455
Finance/Lease Total of Payments Disclosure .................................................................................. 	2,743 	2,279
Prohibition re: Certain Add-ons & Express, Informed Consent ....................................................... 	4,471 	3,830
Recordkeeping .................................................................................................................................. 	1,868 	1,583
Total Costs ................................................................................................................................ 	11,111 	9,443
Net Benefits ............................................................................................................................... 	5,114 	3,916
Note: ‘‘Base Case’’ reflects base case benefit estimates and high cost scenarios with ten times the labor costs as in the main analysis. Not all
impacts can be quantified; estimates only reflect quantified costs and benefits.
VIII. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this Rule as a ‘‘major rule,’’
as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 463
Consumer protection, Motor vehicles,
Reporting and recordkeeping
requirements, Trade practices.
■ For the reasons stated in the preamble,
the Federal Trade Commission adds part
463 to subchapter D of Title 16 of the
Code of Federal Regulations to read as
follows:
PART 463—COMBATING AUTO
RETAIL SCAMS TRADE REGULATION
RULE
Sec.
463.1 Authority.
463.2 Definitions.
463.3 Prohibited misrepresentations.
463.4 Disclosure requirements.
463.5 Dealer charges for Add-ons and other
items.
463.6 Recordkeeping.
463.7 Waiver not permitted.
463.8 Severability.
463.9 Relation to State laws.
Authority: 15 U.S.C. 41 et seq.; 12 U.S.C.
5519.
§ 463.1 Authority.
This part is promulgated pursuant to
section 1029 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010, 12 U.S.C. 5519(d). It is an
unfair or deceptive act or practice
within the meaning of section 5(a)(1) of
the Federal Trade Commission Act (15
U.S.C. 45(a)(1)) to violate any applicable
provision of this part, directly or
indirectly, including the recordkeeping
requirements which are necessary to
prevent such unfair or deceptive acts or
practices and to enforce this part.
§ 463.2 Definitions.
(a) ‘‘Add-on’’ or ‘‘Add-on product(s)
or Service(s)’’ means any product(s) or
service(s) not provided to the consumer
or installed on the Vehicle by the
Vehicle manufacturer and for which the
Dealer, directly or indirectly, charges a
consumer in connection with a Vehicle
sale, lease, or financing transaction.
(b)–(c) [Reserved]
(d) ‘‘Clear(ly) and Conspicuous(ly)’’
means in a manner that is difficult to
miss (i.e., easily noticeable) and easily
understandable, including in all of the
following ways:
(1) In any communication that is
solely visual or solely audible, the
disclosure must 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
must 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.
(2) A visual disclosure, by its size,
contrast, location, the length of time it
appears, and other characteristics, must
stand out from any accompanying text
or other visual elements so that it is
easily noticed, read, and understood.
(3) An audible disclosure, including
by telephone or streaming video, must
be delivered in a volume, speed, and
cadence sufficient for ordinary
consumers to easily hear and
understand it.
(4) In any communication using an
interactive electronic medium, such as
the internet or software, the disclosure
must be unavoidable.
(5) The disclosure must use diction
and syntax understandable to ordinary
consumers and must appear in each
language in which the representation
that requires the disclosure appears.
(6) The disclosure must comply with
these requirements in each medium
through which it is received.
(7) The disclosure must not be
contradicted or mitigated by, or
inconsistent with, anything else in the
communication.
(e) ‘‘Covered Motor Vehicle’’ or
‘‘Vehicle’’ means any self-propelled
vehicle designed for transporting
persons or property on a public street,
highway, or road. For purposes of this
part, the term Covered Motor Vehicle
does not include the following:
(1) Recreational boats and marine
equipment;
(2) Motorcycles, scooters, and electric
bicycles;
(3) Motor homes, recreational vehicle
trailers, and slide-in campers; or
(4) Golf carts.
(f) ‘‘Covered Motor Vehicle Dealer’’ or
‘‘Dealer’’ means any person, including
any individual or entity, or resident in
the United States, or any territory of the
United States, that:
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(1) Is licensed by a State, a territory
of the United States, or the District of
Columbia to engage in the sale of
Covered Motor Vehicles;
(2) Takes title to, holds an ownership
interest in, or takes physical custody of
Covered Motor Vehicles; and
(3) Is predominantly engaged in the
sale and servicing of Covered Motor
Vehicles, the leasing and servicing of
Covered Motor Vehicles, or both.
(g) ‘‘Express, Informed Consent’’
means an affirmative act communicating
unambiguous assent to be charged,
made after receiving and in close
proximity to a Clear and Conspicuous
disclosure, in writing, and also orally
for in-person transactions, of the
following:
(1) What the charge is for; and
(2) The amount of the charge,
including, if the charge is for a product
or service, all fees and costs to be
charged to the consumer over the period
of repayment with and without the
product or service. The following are
examples of what does not constitute
Express, Informed Consent:
(i) A signed or initialed document, by
itself;
(ii) Prechecked boxes; or
(iii) An agreement obtained through
any practice designed or manipulated
with the substantial effect of subverting
or impairing user autonomy, decision-
making, or choice.
(h) ‘‘GAP Agreement’’ means an
agreement to indemnify a Vehicle
purchaser or lessee for any of the
difference between the actual cash value
of the Vehicle in the event of an
unrecovered theft or total loss and the
amount owed on the Vehicle pursuant
to the terms of a loan, lease agreement,
or installment sales contract used to
purchase or lease the Vehicle, or to
waive the unpaid difference between
money received from the purchaser’s or
lessee’s Vehicle insurer and some or all
of the amount owed on the Vehicle at
the time of the unrecovered theft or total
loss, including products or services
otherwise titled ‘‘Guaranteed
Automobile Protection Agreement,’’
‘‘Guaranteed Asset Protection
Agreement,’’ ‘‘GAP insurance,’’ or ‘‘GAP
Waiver.’’
(i) ‘‘Government Charges’’ means all
fees or charges imposed by a Federal,
State, or local government agency, unit,
or department, including taxes, license
and registration costs, inspection or
certification costs, and any other such
fees or charges.
(j) ‘‘Material’’ or ‘‘Materially’’ means
likely to affect a person’s choice of, or
conduct regarding, goods or services.
(k) ‘‘Offering Price’’ means the full
cash price for which a Dealer will sell
or finance the Vehicle to any consumer,
provided that the Dealer may exclude
only required Government Charges.
§ 463.3 Prohibited misrepresentations.
It is a violation of this part and an
unfair or deceptive act or practice in
violation of section 5 of the Federal
Trade Commission Act for any Covered
Motor Vehicle Dealer to make any
misrepresentation, expressly or by
implication, regarding Material
information about the following:
(a) The costs or terms of purchasing,
financing, or leasing a Vehicle.
(b) Any costs, limitation, benefit, or
any other aspect of an Add-on Product
or Service.
(c) Whether the terms are, or
transaction is, for financing or a lease.
(d) The availability of any rebates or
discounts that are factored into the
advertised price but not available to all
consumers.
(e) The availability of Vehicles at an
advertised price.
(f) Whether any consumer has been or
will be preapproved or guaranteed for
any product, service, or term.
(g) Any information on or about a
consumer’s application for financing.
(h) When the transaction is final or
binding on all parties.
(i) Keeping cash down payments or
trade-in Vehicles, charging fees, or
initiating legal process or any action if
a transaction is not finalized or if the
consumer does not wish to engage in a
transaction.
(j) Whether or when a Dealer will pay
off some or all of the financing or lease
on a consumer’s trade-in Vehicle.
(k) Whether consumer reviews or
ratings are unbiased, independent, or
ordinary consumer reviews or ratings of
the Dealer or the Dealer’s products or
services.
(l) Whether the Dealer or any of the
Dealer’s personnel or products or
services is or was affiliated with,
endorsed or approved by, or otherwise
associated with the United States
government or any Federal, State, or
local government agency, unit, or
department, including the United States
Department of Defense or its Military
Departments.
(m) Whether consumers have won a
prize or sweepstakes.
(n) Whether, or under what
circumstances, a Vehicle may be moved,
including across State lines or out of the
country.
(o) Whether, or under what
circumstances, a Vehicle may be
repossessed.
(p) Any of the required disclosures
identified in this part.
(q) The requirements in this section
also are prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.4 and 463.5.
§ 463.4 Disclosure requirements.
It is a violation of this part and an
unfair or deceptive act or practice in
violation of section 5 of the Federal
Trade Commission Act for any Covered
Motor Vehicle Dealer to fail to make any
disclosure required by this section,
Clearly and Conspicuously.
(a) Offering Price. In connection with
the sale or financing of Vehicles, a
Vehicle’s Offering Price must be
disclosed:
(1) In any advertisement that
references, expressly or by implication,
a specific Vehicle;
(2) In any advertisement that
represents, expressly or by implication,
any monetary amount or financing term
for any Vehicle; and
(3) In any communication with a
consumer that includes a reference,
expressly or by implication, regarding a
specific Vehicle, or any monetary
amount or financing term for any
Vehicle. With respect to such
communications:
(i) The Offering Price for the Vehicle
must be disclosed in the Dealer’s first
response regarding that specific Vehicle
to the consumer; and
(ii) If the communication or response
is in writing, the Offering Price must be
disclosed in writing. The requirements
in this paragraph (a) also are prescribed
for the purpose of preventing the unfair
or deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and (b) and 463.5(c).
(b) [Reserved]
(c) Add-ons not required. When
making any representation, expressly or
by implication, directly or indirectly,
about an Add-on Product or Service, the
Dealer must disclose that the Add-on is
not required and the consumer can
purchase or lease the Vehicle without
the Add-on, if true. If the representation
is in writing, the disclosure must be in
writing. The requirements in this
paragraph (c) also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and (b) and 463.5(c).
(d) Total of payments and
consideration for a financed or lease
transaction. (1) When making any
representation, expressly or by
implication, directly or indirectly, about
a monthly payment for any Vehicle, the
Dealer must disclose the total amount
the consumer will pay to purchase or
lease the Vehicle at that monthly
payment after making all payments as
scheduled. If the representation is in
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695	Federal Register / Vol. 89, No. 3 / Thursday, January 4, 2024 / Rules and Regulations
writing, the disclosure must be in
writing.
(2) If the total amount disclosed
assumes the consumer will provide
consideration (for example, in the form
of a cash down payment or trade-in
valuation), the Dealer must disclose the
amount of consideration to be provided
by the consumer. If the representation is
in writing, the disclosure must be in
writing.
(3) The requirements in this
paragraph (d) also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and 463.5(c).
(e) Monthly payments comparison.
When making any comparison between
payment options, expressly or by
implication, directly or indirectly, that
includes discussion of a lower monthly
payment, the Dealer must disclose that
the lower monthly payment will
increase the total amount the consumer
will pay to purchase or lease the
Vehicle, if true. If the representation is
in writing, the disclosure must be in
writing. The requirements in this
paragraph (e) also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in §§ 463.3(a)
and 463.5(c).
§ 463.5 Dealer charges for Add-ons and
other items.
It is a violation of this part and an
unfair or deceptive act or practice in
violation of section 5 of the Federal
Trade Commission Act for any Covered
Motor Vehicle Dealer, in connection
with the sale or financing of Vehicles,
to charge for any of the following.
(a) Add-ons that provide no benefit. A
Dealer may not charge for an Add-on
Product or Service if the consumer
would not benefit from such an Add-on
Product or Service, including:
(1) Nitrogen-filled tire-related
products or services that contain no
more nitrogen than naturally exists in
the air; or
(2) Products or services that do not
provide coverage for the Vehicle, the
consumer, or the transaction or that are
duplicative of warranty coverage for the
Vehicle, including a GAP Agreement if
the consumer’s Vehicle or neighborhood
is excluded from coverage or the loan-
to-value ratio would result in the
consumer not benefiting financially
from the product or service.
(3) The requirements in this
paragraph (a) also are prescribed for the
purpose of preventing the unfair or
deceptive acts or practices defined in
this part, including those in § 463.3(a)
and (b) and paragraph (c) of this section.
(b) [Reserved]
(c) Any item without Express,
Informed Consent. A Dealer may not
charge a consumer for any item unless
the Dealer obtains the Express, Informed
Consent of the consumer for the charge.
The requirements in this paragraph (c)
also are prescribed for the purpose of
preventing the unfair or deceptive acts
or practices defined in this part,
including those in §§ 463.3(a) and (b),
463.4, and paragraph (a) of this section.
§ 463.6 Recordkeeping.
(a) Any Covered Motor Vehicle Dealer
subject to this part must create and
retain, for a period of twenty-four
months from the date the record is
created, all records necessary to
demonstrate compliance with this part,
including the following records:
(1) Copies of all Materially different
advertisements, sales scripts, training
materials, and marketing materials
regarding the price, financing, or lease
of a Vehicle, that the Dealer
disseminated during the relevant time
period; Provided that a typical example
of a credit or lease advertisement may
be retained for advertisements that
include different Vehicles, or different
amounts for the same credit or lease
terms, where the advertisements are
otherwise not Materially different;
(2) [Reserved]
(3) Copies of all purchase orders;
financing and lease documents with the
Dealer signed by the consumer, whether
or not final approval is received for a
financing or lease transaction; and all
written communications relating to
sales, financing, or leasing between the
Dealer and any consumer who signs a
purchase order or financing or lease
contract with the Dealer;
(4) Records demonstrating that Add-
ons in consumers’ contracts meet the
requirements of § 463.5, including
copies of all service contracts, GAP
Agreements and calculations of loan-to-
value ratios in contracts including GAP
Agreements; and
(5) Copies of all written consumer
complaints relating to sales, financing,
or leasing, inquiries related to Add-ons,
and inquiries and responses about
Vehicles referenced in § 463.4.
(b) Any Dealer subject to this part may
keep the records required by paragraph
(a) of this section in any legible form,
and in the same manner, format, or
place as they may already keep such
records in the ordinary course of
business. Failure to keep all records
required under paragraph (a) of this
section will be a violation of this part.
§ 463.7 Waiver not permitted.
It is a violation of this part for any
person to obtain, or attempt to obtain, a
waiver from any consumer of any
protection provided by or any right of
the consumer under this part.
§ 463.8 Severability.
The provisions of this part are
separate and severable from one
another. If any provision is stayed or
determined to be invalid, it is the
Commission’s intention that the
remaining provisions will continue in
effect.
§ 463.9 Relation to State laws.
(a) In general. This part will not be
construed as superseding, altering, or
affecting any other State statute,
regulation, order, or interpretation
relating to Covered Motor Vehicle
Dealer requirements, except to the
extent that such statute, regulation,
order, or interpretation is inconsistent
with the provisions of this part, and
then only to the extent of the
inconsistency.
(b) Greater protection under State law.
For purposes of this section, a State
statute, regulation, order, or
interpretation is not inconsistent with
the provisions of this part if the
protection such statute, regulation,
order, or interpretation affords any
consumer is greater than the protection
provided under this part.
By direction of the Commission.
Joel Christie,
Acting Secretary.
[FR Doc. 2023–27997 Filed 12–28–23; 8:45 am]
BILLING CODE P
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15017	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
procedure under 5 U.S.C. 553(b) are
unnecessary.
Regulatory Notices and Analyses
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current. It, therefore: (1) is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under Department of
Transportation (DOT) Regulatory
Policies and Procedures (44 FR 11034;
February 26, 1979); and (3) does not
warrant preparation of a regulatory
evaluation as the anticipated impact is
so minimal. Since this is a routine
matter that only affects air traffic
procedures and air navigation, it is
certified that this rule, when
promulgated, does not have a significant
economic impact on a substantial
number of small entities under the
criteria of the Regulatory Flexibility Act.
Environmental Review
The FAA has determined that this
action of amending the using agency
information for restricted areas R–
2510A and R–2510B, qualifies for
categorical exclusion under the National
Environmental Policy Act (42 U.S.C.
4321 et seq.) and its implementing
regulations at 40 CFR part 1500, and in
accordance with FAA Order 1050.1F
‘‘Environmental Impacts: Policies and
Procedures,’’ paragraph 5–6.5a, which
categorically excludes from further
environmental impact review
rulemaking actions that designate or
modify classes of airspace areas,
airways, routes, and reporting points
(see 14 CFR part 71, Designation of
Class A, B, C, D, and E Airspace Areas;
Air Traffic Service Routes; and
Reporting Points), and paragraph 5–
6.5d, which categorically excludes from
further environmental impact review
the modification of the technical
description of special use airspace
(SUA) that does not alter the
dimensions, altitudes, or times of
designation of the airspace (such as
changes in designation of the
controlling or using agency, or
correction of typographical errors). This
airspace action is an administrative
change to the description of restricted
areas R–2510A and R–2510B to update
the using agency name. It does not alter
the restricted area dimensions,
designated altitudes, times of
designation, or use of the airspace.
Therefore, this airspace action is not
expected to result in any significant
environmental impacts. In accordance
with FAA Order 1050.1F, paragraph 5–
2 regarding Extraordinary
Circumstances, this action has been
reviewed for factors and circumstances
in which a normally categorically
excluded action may have a significant
environmental impact requiring further
analysis. Accordingly, the FAA has
determined that no extraordinary
circumstances exist that warrant
preparation of an environmental
assessment or environmental impact
study.
Lists of Subjects in 14 CFR Part 73
Airspace, Prohibited areas, Restricted
areas.
The Amendment
In consideration of the foregoing, the
Federal Aviation Administration
amends 14 CFR part 73 as follows:
PART 73—SPECIAL USE AIRSPACE
■ 1. The authority citation for 14 CFR
part 73 continues to read as follows:
Authority: 49 U.S.C. 106(f), 106(g), 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
§ 73.25 [Amended]
■ 2. Section 73.25 is amended as
follows:
* 	* 	* 	* 	*
R–2510A 	El Centro, CA [Amended]
By removing the existing using agency and
substituting the following:
Using agency. U.S. Marine Corps,
Commanding Officer, Marine Corps Air
Station Yuma, Yuma, AZ.
R–2510B 	El Centro, CA [Amended]
By removing the current using agency and
adding the following in its place:
Using agency. U.S. Marine Corps,
Commanding Officer, Marine Corps Air
Station Yuma, Yuma, AZ.
* 	* 	* 	* 	*
Issued in Washington, DC, on February 26,
2024.
Frank Lias,
Manager, Rules and Regulations Group.
[FR Doc. 2024–04361 Filed 2–29–24; 8:45 am]
BILLING CODE 4910–13–P
FEDERAL TRADE COMMISSION
16 CFR Part 461
RIN 3084–AB71
Trade Regulation Rule on
Impersonation of Government and
Businesses
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : This final rule prohibits the
impersonation of government,
businesses, and their officials or agents
in interstate commerce. This document
contains the text of the final rule and
the rule’s Statement of Basis and
Purpose (‘‘SBP’’), including a Regulatory
Analysis.
DATES : This rule is effective April 1,
2024.
FOR FURTHER INFORMATION CONTACT:
Christopher E. Brown (202–326–2825),
Attorney, Division of Marketing
Practices, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Avenue NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
I. Background
A. Advance Notice of Proposed
Rulemaking
On December 23, 2021, the Federal
Trade Commission (‘‘Commission’’ or
‘‘FTC’’) published an advance notice of
proposed rulemaking (‘‘ANPR’’) to
address certain deceptive or unfair acts
or practices of impersonation. 1 As part
of the ANPR, the Commission requested
comment on any issues or concerns
relevant or appropriate to this
rulemaking to combat impersonation of
governments, businesses, or their
agents, and whether and how to proceed
with a notice of proposed rulemaking
(‘‘NPRM’’). 2 The Commission took
comments for 60 days, and received 164
comments from representatives from a
broad spectrum of businesses, trade
associations, government or law-
enforcement organizations, and
individual consumers, which are
publicly available on this rulemaking’s
docket at https://www.regulations.gov/
docket/FTC-2021-0077/comments.
Commenters generally expressed
support for the Commission’s
proceeding with the rulemaking. They
also voiced deep concerns about the
prevalence and harmfulness of both
government and business
impersonation. No commenter
expressed the view that the Commission
should not commence the rulemaking.
Commenters also offered suggestions for
the Commission’s consideration in
drafting the proposed rule and other
recommendations in furtherance of the
proposed rulemaking.
B. Notice of Proposed Rulemaking
Based on an extensive review of the
comments received in response to the
ANPR, the Commission’s own history of
enforcement, and other considerations
that occurred after the ANPR’s
publication, 3 the Commission published
the NPRM on October 17, 2022.4 In the
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15018 	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
NPRM, the Commission stated it has
reason to believe impersonation of
government, businesses, and their
officials or agents is prevalent.5 The
Commission identified no disputed
issues of material fact based on the
comment record; explained its
considerations in developing the
proposed rule; solicited additional
public comment thereon, including
posing specific questions designed to
assist the public in submitting
comment; and provided interested
parties the opportunity to request to
present their position orally at an
informal hearing.6 Finally, the NPRM
set out the Commission’s proposed rule.
In response to the NPRM, the
Commission received 78 comments
from entities and individuals interested
in the proposed rule, discussed in
Section III. 7 Although some raised
concerns and recommended specific
modifications or additions to the
Commission’s proposal, the majority
generally supported the rule proposed
in the NPRM. Two commenters timely
submitted requests for interested parties
to make an oral statement at an informal
hearing.8
C. Notice of Informal Public Hearing
On March 30, 2023, the Commission
published an Initial Notice of Informal
Hearing (‘‘Notice of Hearing’’). 9 The
Notice designated the Commission’s
Chief Administrative Law Judge, D.
Michael Chappell, to serve as the
presiding officer of the informal hearing
and stated that any member of the
public wishing to speak at the informal
hearing or make a documentary
submission to be placed on the public
rulemaking record (or both) should
submit a comment on or before April 14,
2023. 10
On May 4, 2023, Chief Judge Chappell
presided over the informal hearing
using video conferencing, which
enabled the public to watch live from
the Commission’s website, https://
www.ftc.gov. Because there were no
disputed issues of material fact to
resolve, the informal hearing included
no cross examination or rebuttal
submissions, and the presiding officer
made no recommended decision. The
informal hearing included oral
statements from 14 interested parties.11
The majority of commenters who
presented oral statements at the
informal hearing or filed documentary
submissions generally expressed strong
support for the Commission’s proposed
rule.12 Several commenters, however,
also expressed concern that the
proposed rule language does not explain
the circumstances under which the
Commission would apply proposed
§ 461.4, which would prohibit providing
the means and instrumentalities to
commit violations of government and
business impersonation. Some
suggested alternative language imposing
a scienter requirement to narrow the
scope of this provision, discussed in
Section III.D.
In crafting the final rule, the
Commission has carefully considered
the comments received in response to
the NPRM and on the rulemaking
record, which includes the oral
statements and documentary
submissions in response to the Notice of
Hearing. The final rule contains some
changes from the proposed rule. These
modifications, discussed in detail in
Section III, are based upon input from
commenters and careful consideration
of relevant law. Section III also
discusses commenters’
recommendations that the Commission
declined to adopt, along with the
Commission’s reasons for rejecting
them. Accordingly, the Commission
adopts the proposed rule with limited
modifications as discussed below. The
rule will take effect April 1, 2024.
II. The Legal Standard for Promulgating
the Rule
The Commission is promulgating 16
CFR part 461 pursuant to section 18 of
the FTC Act, 15 U.S.C. 57a, the
Administrative Procedure Act (‘‘APA’’),
and Part 1, subpart B of the
Commission’s Rules of Practice.13 This
authority permits the Commission to
promulgate, modify, and repeal trade
regulation rules that define with
specificity acts or practices that are
unfair or deceptive in or affecting
commerce within the meaning of
section 5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1).
The Commission’s Rules of Practice
further provide that if the Commission
determines to promulgate a rule, it will
adopt a SBP, which must address three
factors: (1) The prevalence of the acts or
practices addressed by the rule; (2) the
manner and context in which the acts or
practices are unfair or deceptive; and (3)
the economic effect of the rule, taking
into account the effect on small
businesses and consumers.14 In this
section of the preamble, the
Commission summarizes its findings
regarding each of these factors.
A. Prevalence of Acts or Practices
Addressed by the Rule
In its ANPR, the Commission cited
public data from the Consumer Sentinel
Network database and described its
enforcement record, demonstrating
government and business impersonation
scams are not only highly prevalent but
increasingly harmful.15 In the NPRM,
the Commission also took notice of
additional indications of prevalence that
came after the ANPR’s publication.16
Specifically, the NPRM cited data from
a broad spectrum of commenters
(businesses, trade associations, and
government or law-enforcement
organizations) regarding the prevalence
of government and business
impersonation scams, which echoed the
Commission’s findings that these
schemes are among the most common
deceptive or unfair practices affecting
U.S. consumers and businesses and
continue to be a significant source of
consumer injury.17
B. Manner and Context in Which the
Acts or Practices Are Deceptive or
Unfair
A representation, omission, or
practice is deceptive if it is material and
likely to mislead a consumer acting
reasonably under the circumstances.18
The most frequent allegations in the
Commission’s enforcement actions
involving government and business
impersonation pertain to defendants
tricking consumers to pay money or
disclose personal information by
making, expressly or by implication,
statements that misrepresent the
defendants’ identity.19 Nearly as
frequent are allegations of
misrepresentations concerning
defendants’ affiliation with,
endorsement or approval by, or other
association with a government or
business. The Commission has further
found false threats of severe
consequences and promises of benefits
are additional deceptive tactics
deployed by government and business
impersonators. In the Commission’s
experience, such claims regarding
identity, affiliation, or endorsement are
material to consumers making their
decision to trust impersonators. The
numerous government and business
impersonation complaints consumers
submit to the Commission each year, as
well as comments submitted in
connection with this rulemaking
proceeding, consistently reference these
same concerns. Accordingly, the
specific practices described in the
preamble to the proposed rule reflect
the type of conduct most commonly
associated with deceptive and unfair
practices pertaining to government and
business impersonation.20
C. The Economic Effect of the Rule
As part of the rulemaking proceeding,
the Commission solicited comment and
data (both qualitative and quantitative)
on the economic impact of the proposed
rule and its costs and benefits.21 In
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15019	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
issuing the final rule, the Commission
has carefully considered the comments
received and the costs and benefits of
each provision, as discussed in more
detail below in Section VI. The record
demonstrates the most significant
anticipated benefit of the final rule is
the Commission’s ability to obtain
monetary relief. This is particularly
critical because that ability was
curtailed by the U.S. Supreme Court’s
decision in AMG Cap. Mgmt., LLC v.
FTC, which holds that equitable
monetary relief, including consumer
redress, is not available under section
13(b) of the FTC Act.22 Further,
obtaining monetary relief based on
violations of the final rule under section
19(b) of the FTC Act will be
significantly faster than obtaining such
relief under section 19(a)(2) without a
rule violation.23 By enabling the
Commission to obtain monetary relief
more efficiently, the final rule would
also reduce the expenditure of
Commission resources.24 As an
additional benefit, the rule enables the
Commission to obtain civil penalties
against violators.25 The final rule also
provides a benefit to businesses through
increased deterrence of business
impersonators, which reduces
businesses’ expenditure of resources
associated with monitoring for and
addressing impersonation.26 Moreover,
as the record and the Commission’s law
enforcement experience demonstrate,
the final rule is unlikely to impose costs
on any honest business, and may
increase deterrence of impersonation
scams, which would benefit consumers
through a reduction in their total
financial losses from these schemes.27
III. Response to Comments
The Commission received 78
comments in response to the NPRM
from a diverse group of individuals,
industry groups and trade associations,
consumer organizations, and
government agencies.28 The
Commission received 28 comments in
response to the Notice of Hearing,
including oral presentations from 14
commenters.29 Commenters generally
supported the proposed rule,
recognizing the Commission’s authority
to protect consumers from the
increasing number of government and
business impersonation frauds targeting
consumers.
In the NPRM, the Commission invited
comment on any issues or concerns the
public believes are relevant or
appropriate to the Commission’s
consideration of the proposed rule.30
The NPRM also posed eight specific
questions for the public.31 Some of these
questions relate to the Paperwork
Reduction Act (‘‘PRA’’) and Regulatory
Flexibility Act (‘‘RFA’’), and are
addressed in Sections V and VI,
respectively.32 The other questions,
along with common issues or concerns
relevant to the Commission’s
consideration of the proposed rule
outside of the specific questions, are
addressed in this section of the
preamble.
A. Finalizing the Proposed Rule as a
Final Rule
In Question 1 of the NPRM, the
Commission asked whether it should
finalize the proposed rule as a final rule,
and how, if at all, it should change the
proposed rule in promulgating the final
rule.33 The majority of commenters did
not express a clear view regarding
whether the Commission should adopt
the proposed rule as final. Many of
these commenters, however, did share
their experience regarding the
prevalence and harmfulness of various
kinds of government and business
impersonation frauds.34 Some of these
commenters complained more generally
about various non-impersonation
scams.35 The majority of commenters
that addressed Question 1 of the NPRM
were substantially supportive of the
proposed rule, but stopped short of
urging the Commission to finalize the
text of the proposed rule without
modification. These commenters
typically recommended either
broadening or narrowing the scope or
text of the rule in response to other
specific questions asked in the NPRM or
relevant to the Commission’s
consideration of the proposed rule.36
Six commenters explicitly addressed
the Commission’s question regarding
finalizing the proposed rule as a final
rule, and without recommending
additional modifications to the text of
the proposed rule, urged the
Commission to do so.37 Some of these
commenters stated the proposed rule is
in the public interest because it would
allow for civil penalties against
government and business
impersonators, provide redress for
victims of impersonation scams, and
deter future bad acts.38
Several government agencies and
trade associations explained how the
proposed rule would benefit them, their
members, or the people they serve. The
United States Patent and Trademark
Office (‘‘USPTO’’) described its
experience of agency impersonation,
and stated that reliance on the FTC’s
enforcement capabilities through such a
rule would allow the USPTO to
conserve and allocate its resources to
different enforcement efforts that impact
the USPTO and its stakeholders.39
Similarly, the Marine Retailers
Association of the Americas (‘‘MRAA’’),
a trade association representing marine
retailers, argued the benefits associated
with finalizing the proposed rule would
reduce the financial burden on
businesses and improve trust among
consumers.40 The United States
Copyright Office (‘‘USCO’’) expressed
support for finalizing the proposed rule,
arguing that doing so would allow the
Commission to move more quickly to
put a stop to impersonation scams.41
The USPTO and the USCO explained
they do not have law enforcement
authority to remedy the harms resulting
from bad actors impersonating the
agencies, and USCO argued the
proposed rule would foster public trust
in the copyright system.42 The Cellular
Telecommunications and internet
Association (‘‘CTIA’’), a trade
association for wireless service
providers, argued in favor of finalizing
the proposed rule because its scope is
‘‘targeted and judicious,’’ and
appropriately focused on the bad actors
that harm consumers.43
Somos, Inc., which manages registry
databases for the telecommunications
industry, stated it ‘‘strongly supports the
Commission’s proposed rules,’’ but
suggested the Commission explicitly
clarify that spoofing a telephone number
of a business or government entity to aid
in that impersonation violates the rule.44
The Commission is not persuaded that
explicitly stating telephone spoofing, or
any specific type of government or
business impersonation, constitutes a
violation of the rule is necessary.45
Moreover, the Telemarketing Sales Rule
(‘‘TSR’’) already bars telemarketers from
‘‘failing to transmit. . .the telephone
number and. . .the name of the
telemarketer to any caller identification
service in use by a recipient of a
telemarketing call.’’ 46 By definition, a
spoofed telephone number is not the
number of the telemarketer, and the
Commission can rely on this prohibition
to bring an enforcement action for
violation of the TSR against a
telemarketer that uses a spoofed
number.
The Commission also received several
comments that identified the lack of
access to accurate information
concerning domain name registrants
(commonly known as ‘‘WHOIS’’ data) as
a significant impediment to combatting
the use of domain names to impersonate
government and businesses.47 These
commenters expressed support for
expanding the text or scope of the final
rule to address this issue.48 In
particular, a few commenters urged the
Commission to issue a final rule that
requires domain name registrars to
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15020 	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
collect, verify, maintain, and disclose
accurate WHOIS data to the FTC and
third-party victims on request for such
information based on credible evidence
of impersonation fraud.49 The Coalition
for Online Accountability (‘‘COA’’), a
group advocating for online
transparency and accountability, argued
‘‘[t]here is no justification for the
redaction of data of legal person
registrants or the overwhelming denial
of reasonable access to personal WHOIS
data for legitimate third-party
interests. . ..’’ 50 Both the Messaging
Malware Mobile Anti-Abuse Working
Group (‘‘M3AAWG’’) and the Anti-
Phishing Working Group (‘‘APWG’’)
also suggested the Commission
encourage Domain Name System
(‘‘DNS’’) registries and registrars to
engage in DNS mitigation and
frequently impersonated entities to
participate as ‘‘trusted notifiers’’ to
address fraudulently registered domain
names.51
The Commission declines to adopt
commenters’ suggestion that the final
rule expressly reference in
accompanying examples the use of
domain names in impersonation
schemes. Rather, the Commission here
repeats what it previously stated in the
NPRM and earlier in this SBP, that the
following list of examples of conduct
covered by the prohibition on the
impersonation of government and
businesses was intended to be
illustrative, not exhaustive: (1) calling,
messaging, or otherwise contacting an
individual or entity while posing as a
government or an officer or agent or
affiliate or endorsee thereof, including
by identifying a government or officer
by name or by implication; (2) sending
physical mail through any carrier using
addresses, government seals or
lookalikes, or other identifying insignia
of a government or officer thereof; (3)
creating a website or other electronic
service impersonating the name,
government seal, or identifying insignia
of a government or officer thereof or
using ‘‘.gov’’ or any lookalike, such as
‘‘govusa.com’’; (4) creating or spoofing
an email address using ‘‘.gov’’ or any
lookalike; (5) placing advertisements
that pose as a government or officer
thereof against search queries for
government services; (6) using a
government seal on a building,
letterhead, website, email, vehicle, or
other physical or digital place; (7)
calling, messaging, or otherwise
contacting an individual or entity while
posing as a business or an officer or
agent or affiliate or endorsee thereof,
including by naming a business by
name or by implication, such as ‘‘card
member services’’ or ‘‘the car
dealership’’; (8) sending physical mail
through any carrier using addresses,
seals, logos, or other identifying insignia
of a business or officer thereof; (9)
creating a website or other electronic
service impersonating the name, logo,
insignia, or mark of a business or a close
facsimile or keystroke error, such as
‘‘ntyimes.com,’’ ‘‘rnicrosoft.com,’’
‘‘microsoft.biz,’’ or
‘‘carnegiehall.tixsales.com’’; (10)
creating or spoofing an email address
that impersonates a business; (11)
placing advertisements that pose as a
business or officer thereof against search
queries for business services; and (12)
using, without authorization, a
business’s mark on a building,
letterhead, website, email, vehicle, or
other physical or digital place.52
Accordingly, the Commission finds the
final rule is drafted with sufficient
clarity and flexibility to address the
unauthorized use of internet identifiers,
including but not limited to domain
names.
Only one commenter suggested in
response to Question 1 of the NPRM
that the proposed rule should not be
finalized.53 The Americans for
Prosperity Foundation (‘‘AFPF’’), a
501(c)(3) nonpartisan education
organization, argued the Commission
should ‘‘abandon its Section 18
rulemaking ambitions, instead
refocusing its efforts on case-by-case
enforcement actions in federal court in
cases involving concrete harm to
consumers.’’ 54
The Commission disagrees with the
AFPF’s suggestion that the section 18
rulemaking process is too difficult or
unwieldy to address many of the unfair
or deceptive acts or practices prevalent
in commerce. In 1975, Congress passed
the Magnuson-Moss Warranty—Federal
Trade Commission Improvement Act
laying out specific procedures for the
promulgation of ‘‘Trade Regulation
Rules’’ to protect consumers in a
dynamic and changing economic
landscape.55 The Commission’s
regulations at 16 CFR part 1, subpart B,
respect the underlying statutory
requirements of section 18, which
provide ample transparency and
opportunity for public participation in
the promulgation of Trade Regulation
Rules. The Commission intends
therefore to fulfill its mission to protect
against unfair or deceptive acts or
practices in or affecting commerce and
to provide consumers and businesses
with due process, clarity, and
transparency while crafting the rules to
do so. Accordingly, the Commission
rightfully responds to Congress’s grant
of authority by initiating this
rulemaking.
The AFPF also expressed various
criticisms specific to the language of the
proposed rule and recommended
several suggested revisions discussed in
greater detail in Sections III.C and III.D
below.
Following review of all comments and
careful consideration of the relevant
law, the final rule issued by the
Commission contains some minor
changes from the proposed rule, as
discussed in Section III.
B. Relevant Evidence Regarding
Provisions of the Proposed Rule,
Prevalence, Impact and Alternative
Proposals
In the ANPR, the Commission asked
specific questions about the prevalence
of impersonation fraud, and requested
the data source commenters relied upon
for formulating their answer(s).56 The
ANPR also asked specific questions
regarding how to craft a proposed rule
to maximize the benefits to consumers
and minimize the costs to businesses,
and what alternatives to regulations the
Commission should consider in
addressing impersonation frauds.57 In
Question 2 of the NPRM, the
Commission posed these same or nearly
identical specific questions regarding
each different provision of the proposed
rule.58 Six commenters specifically
addressed these questions.59 Each of
these commenters described various
types of government and business
impersonation scams common to their
own experience or industry in support
of their view that such frauds are highly
prevalent.60 For example, the Toy
Association noted various business
impersonation scams experienced by its
members, including counterfeit or non-
compliant toys, falsified documents
regarding endorsement and affiliation
related to counterfeit toys, false
solicitation and phishing schemes
collecting customer information, and
domain impersonation.61 Similarly, the
USPTO and USCO described several
examples of government impersonation
scams involving the trademark and
copyright registration processes,
respectively, and included illustrative
examples as attachments with their
public comment.62
Other commenters particularly
concerned with online business
impersonation cited data from studies or
reports regarding trends in these kinds
of impersonation frauds, and recent
examples of phishing attacks against
consumers through the impersonation of
recognized online companies in support
of their arguments regarding
prevalence.63 A small number of
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15021	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
commenters addressed the impact
(including any benefits and costs) on
consumers, governments, and
businesses, discussed in more detail in
Section VI.
Only one commenter suggested an
alternative proposal for the
Commission’s consideration.64
Specifically, the M3AAWG
recommended as an alternative to the
means and instrumentalities provision
in proposed § 461.4 that the
Commission ‘‘identify best practices or
safe harbors to incentivize prompt
mitigation efforts and sound verification
techniques’’ to address the use of
domain names in business
impersonation schemes.65 M3AAWG
argued this alternative to regulation
would avoid the risk of inadvertently
imposing ‘‘secondary or intermediary
liability against legitimate businesses,
technologies or services’’ exploited by
impersonators.66
Upon review of the comments
received in response to Question 2 of
the NPRM, the Commission concludes
such comments support its own
findings that government and business
impersonation schemes are both
prevalent and harmful. The Commission
declines at this time to adopt
M3AAWG’s alternative proposal for
§ 461.4. As discussed in Section III.D,
the Commission is continuing to review
comments and records relevant to the
means and instrumentalities provision
in proposed § 461.4 to determine
whether additional action or protections
are warranted and is requesting
additional public comment through a
SNPRM, published elsewhere in this
issue of the Federal Register.
C. Clarity of Prohibitions Against
Impersonation of Government &
Businesses
In Question 5 of the NPRM, the
Commission solicited comment
regarding whether the proposed rule’s
one-sentence prohibitions against
impersonation of government in § 461.2
and against impersonation of businesses
in § 461.3 are clear and unambiguous,
and how, if at all, they should be
improved.67 The Commission received
several comments that addressed this
question directly 68 or indirectly.69 Two
commenters considered the one-
sentence prohibitions to be clear and
unambiguous and/or deferred to the
Commission’s construction, but
suggested certain additions or
modifications.70 For example, the USCO
suggested the Commission consider
whether the definition of ‘‘officer,’’
which covers representatives of both
governments and businesses, should be
bifurcated into two separate and more
specific terms to define representatives
of governments and businesses,
respectively.71 No other commenter
suggested a revision to the definitions in
proposed § 461.1. The USPTO suggested
the Commission broaden the exemplary
‘‘list of matter’’ used to impersonate a
government to specifically reference
‘‘logos.’’ 72 In support of this
recommendation, the USPTO noted ‘‘the
use of logos’’ was explicitly identified in
the NPRM’s examples of unlawful
conduct that would be covered by the
prohibition against business
impersonation in proposed § 461.3, but
not in the NPRM’s examples of unlawful
conduct that would be covered by the
prohibition of government
impersonation in proposed § 461.2. The
USPTO further asserted government
agencies also ‘‘use logos in addition to
official seals and insignia,’’ and
provided an illustrative example of
impersonators misusing the USPTO’s
logo.73
Three commenters indicated the
language of proposed §§ 461.2 and 461.3
was vague or provided inadequate
guidance, and warranted modification.74
Some commenters raised constitutional
concerns based on the purported
overbreadth of the one-sentence
prohibitions.75 These commenters’
constitutional arguments addressed two
primary considerations: (1) whether the
proposed rule provides due process
notice; 76 and (2) whether it encroaches
upon free speech protected under the
First Amendment.77 The AFPF stated
the proposed rule is an ‘‘open-ended
regulation,’’ arguing it ‘‘fails to provide
constitutionally adequate notice of
required or prohibited conduct’’ and
otherwise falls short of section 18’s
specificity requirements.78 Other
commenters wary of inadvertent
intrusions on protected speech asserted
any final prohibition should exempt
innocent behavior such as parody 79 and
non-commercial or otherwise legitimate
speech.80
In his documentary submission in
response to the Notice of Informal
Hearing, William MacLeod echoed
concerns he previously expressed in
response to the NPRM that the language
in proposed §§ 461.2 and 461.3
‘‘depart[s] from the standards of
deception that the Commission applies
under Section 5.’’ 81 MacLeod noted
that: ‘‘[i]ts terms do not include
‘deception’ or ‘fraud’ or critical
elements of the FTC’s deception policy
statement.’’ 82 He raised additional
concerns about ‘‘impersonations and
affiliations [that] can be false, but also
unbelievable.’’ 83 MacLeod argued that
the prohibitions, as written, are too
broad and would proscribe non-
deceptive acts or practices, such as
‘‘fictional depictions’’ in television
advertisements.84
Raising First Amendment concerns,
the AFPF similarly asserted that the
proposed rule’s ‘‘falsely pose as’’
language, ‘‘read literally,’’ would
impose civil penalties on ‘‘utterly
innocuous conduct’’ and ‘‘would appear
to make it unlawful for anyone to dress
up as an FTC Commissioner, politicians,
or . . . a Microsoft executive and attend
a Halloween party.’’ 85 It also expressed
concern that the proposed prohibitions
did not require ‘‘materiality,’’
‘‘consumer harm,’’ or ‘‘connection to
interstate commerce.’’ 86 Several
commenters suggested alternative
language to cure what they perceived to
be the overbreadth of the prohibition
provisions. For example, M3AAWG
recommended that the final rule adopt
a definition of ‘‘impersonation’’ that
mirrors the definition of ‘‘criminal
impersonation’’ in 18 U.S.C. Chapter
43.87 M3AAWG asserted that such a
definition would narrow the scope of
the rule to cover only those bad actors
with ‘‘clear intent and specific
knowledge’’ of prohibited acts.
MacLeod proposed narrowing the
focus of the final rule by adopting
language that specifies particular
prohibited practices or the mens rea of
its intended targets.88 The AFPF agreed
with MacLeod and suggested that the
Commission revise the proposed rule to
‘‘explicitly incorporate Section 5’s
statutory prohibition . . . [and]
requirements set forth in the
Commission’s Deception Statement.’’ 89
After analyzing and considering the
comments, the Commission is
persuaded that the language of the final
rule should adhere more closely to the
language of section 5 of the FTC Act to
avoid any potential confusion about the
scope of the rule. The Commission
believes that these revisions sufficiently
address some commenters’ concerns
that the language of the proposed rule
put it in conflict with Due Process
requirements and the First Amendment.
The Commission emphasizes that it
does not intend for the final rule to
regulate non-commercial speech. To
adhere more closely to the language of
section 5 of the FTC Act and case law,
the Commission has revised the final
regulatory text to incorporate relevant
language from section 5. Specifically,
the Commission has replaced
‘‘unlawful’’ with ‘‘unfair or deceptive
act or practice,’’ and added ‘‘materially’’
and ‘‘in or affecting commerce’’ in
§§ 461.2 and 461.3. These changes make
it abundantly clear that the scope of the
final regulatory text is coterminous with
the scope of the FTC’s authority under
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15022 	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
the FTC Act, and they clearly specify
the misconduct prohibited by the final
rule. Accordingly, false impersonations
or misrepresentations that are not
material to a commercial transaction,
such as impersonation in purely artistic
or recreational costumery or
impersonation in connection with
political or other non-commercial
speech, are not covered by the final rule.
The Commission concludes that it is
unnecessary to divide the definition of
‘‘officer’’ into two separate terms as
suggested by the USCO. Section 461.1
defines ‘‘officer’’ to ‘‘include[ ]
executives, officials, employees, and
agents,’’ which the Commission believes
appropriately describes and covers both
government and business
representatives.
As previously stated, the NPRM’s list
of examples of prohibited conduct
covered by the rule is intended to be
illustrative, not exhaustive, and
therefore, the Commission declines to
adopt the USPTO’s suggestion that it
enlarge that exemplary ‘‘list of matter.’’
Rather, the Commission maintains that
not including specific prohibitions in
the regulatory text provides it with
sufficient flexibility to address the many
types of ‘‘matter’’ (including objects,
items, logos, insignia, etc.) used to
impersonate governments and
businesses alike, which are too
numerous to list.
The Commission declines to adopt a
definition of ‘‘impersonation’’ that
reflects a criminal regulatory scheme as
proposed by M3AAWG. The FTC Act
does not include a mens rea
requirement, and there is no evidence in
the record that the imposition of such a
requirement is warranted. Furthermore,
while intent is not required under the
rule or the FTC Act, in any action
seeking civil penalties for violation of
the rule, the Commission will need to
establish ‘‘actual knowledge or
knowledge fairly implied on the basis of
objective circumstances that such act is
unfair or deceptive and is prohibited by
such rule.’’ 90
The Commission rejects the
recommendation by both MacLeod and
AFPF to incorporate the FTC Deception
Policy Statement into the final rule.
Nevertheless, as discussed earlier in this
Section III.C, informed by MacLeod’s
and AFPF’s comments, the Commission
has revised the regulatory text of
§§ 461.2 and 461.3 to mirror the
language of section 5 of the FTC Act
more closely. In particular, the reference
to ‘‘unfair or deceptive act or practice,’’
and the inclusion of materiality and
interstate commerce requirements
should address commenters’ concerns
that this rule might be read to cover
impersonation in connection with
artistic costumery, parody, or other non-
commercial speech.91 The Commission
further notes that, by the terms of these
sections, a court must find that the
alleged defendant made an express or
implied misrepresentation regarding
material information for §§ 461.2 and
461.3 to be violated. For an express or
implied misrepresentation regarding
material information to be made in
violation of the FTC Act and this rule,
there must be a representation that
misleads consumers acting reasonably
under the circumstances regarding
material information. Thus, while the
Commission rejects the
recommendation by both MacLeod and
AFPF to incorporate the FTC Deception
Policy Statement into the final rule, by
incorporating the changes above, the
Commission has ensured that the final
rule is consistent with the Deception
Policy Statement, is consistent with
other relevant Commission rules, and
provides further specificity regarding
the prohibited acts and practices under
section 5 of the FTC Act.
D. Prohibition Against Providing Means
and Instrumentalities
In Question 6 of the NPRM, the
Commission asked whether the final
rule should contain the prohibition in
proposed § 461.4 against providing the
means and instrumentalities for
violations against government or
business impersonation. The
Commission received more than 20
comments that expressly addressed this
question.92 Many of the sentiments
reflected in these comments were also
echoed by several commenters that
presented oral statements in response to
the Notice of Informal Hearing.93A few
commenters arguing for the importance
of holding intermediaries accountable
for enabling or promoting
impersonation schemes encouraged the
Commission to finalize the text of the
proposed provision without
modification.94 These commenters
specifically argued that finalizing the
proposed § 461.4 could help to combat
impersonation schemes perpetrated by
foreign-based scammers—beyond U.S.
court jurisdiction—that obtain services
from U.S.-based instrumentalities, such
as payment processors and internet
service providers.95
Addressing means and
instrumentality liability, both the AFPF
and MacLeod reiterated their concerns
referenced in Section III.C, regarding
section 18’s specificity requirements,
due process notice, free speech, and
conformity to the FTC’s Deception
Policy Statement.96 Most commenters
who addressed Question 6 expressed
support for means and instrumentalities
liability, but with some concern or
suggested modifications. Some
supportive commenters cautioned that
the proposed means and
instrumentalities provision could be
read too broadly.97 Others expressed the
concern that without a specific scienter
or knowledge requirement, the proposed
rule provision runs the risk of imposing
strict liability against innocent and
unwitting third-party providers of
services or products.98 Accordingly,
several commenters urged the
Commission to clarify the scope of
means and instrumentalities liability or
explicitly include a specific knowledge
requirement in the final rule
provision.99
For example, the Consumer
Technology Association (‘‘CTA’’), a
trade association representing the U.S.
consumer technology industry, stated
that the Commission’s explanation and
examples of the ‘‘means and
instrumentalities’’ provision in the
NPRM seem to limit its applicability,
but such limitation ‘‘is not squarely
reflected in the text of the proposed
rule.’’ 100 The CTA therefore urged the
FTC to clarify that ‘‘means and
instrumentalities’’ liability applies only
‘‘to entities that have knowledge or
consciously avoid knowing that they are
making representations being used to
commit impersonation fraud.’’
USTelecom, a trade association
representing the broadband technology
industry, argued that a discrepancy
exists between the case law, the NPRM’s
discussion of means and instrumentality
liability, and the proposed rule
provision. It urged the Commission to
‘‘adjust the proposed language in § 461.4
to codify the requirement that the
person has knowledge or reason to
expect it is providing the means and
instrumentalities . . .’’ (emphasis in
original).101 Similarly, the American Bar
Association Section of Intellectual
Property Law suggested that the
Commission ‘‘explicitly include [in
§ 461.4] the language referenced in the
[NPRM] from Shell Oil Co., 128 F.T.C.
749 (1999)—acting with ‘knowledge or
reason to expect that consumers may
possibly be deceived as a result.’ ’’ 102
Other commenters argued that
inclusion of a scienter requirement is a
necessary but not sufficient
modification of the proposed language
to impose means and instrumentalities
liability. For example, the internet &
Television Association (‘‘NCTA’’), a
trade association for the United States
cable television industry, argued that
such ‘‘liability requires both providing
deceptive means and instrumentalities,
e.g., providing false or misleading
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15023	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
claims or counterfeit items, and actual
knowledge that the deceptive
representations or goods will be used to
commit impersonation violations’’
(emphasis in original).103 Likewise,
M3AAWG advocated that, in addition to
a ‘‘knowledge or reason-to-know test,’’
primary liability under a revised § 461.4
should also require that the provision of
such means and instrumentalities be
done willfully or in bad faith, and with
clear intent and specific knowledge.104
A few commenters urged the
Commission to adopt a final rule that
explicitly recognizes specific or defined
‘‘means and instrumentality’’ violations
perpetrated in connection with
impersonation frauds, such as the use of
legal process documents 105 or
manipulated media technologies (i.e.,
deepfakes) 106 or failure to disclose
WHOIS data.107
Based upon the comments received
on the proposed provision regarding
means and instrumentalities, the
Commission has decided that this
specific provision warrants further
analysis and consideration; thus, the
Commission has decided not to finalize
proposed § 461.4. The Commission is
not aware of any other rule, whether
issued pursuant to section 18 or APA
rulemaking authority, that identifies a
means and instrumentalities violation.
The Commission notes that it has used
means and instrumentalities allegations
as a type of deception to establish
primary liability in the absence of
privity between the defendant and the
deceived persons, albeit rarely, in
connection with matters that involve
impersonation.108 Pending further
analysis and consideration, the
Commission declines to adopt proposed
§ 461.4 at this time. The Commission is
still considering the provision regarding
means and instrumentalities, as well as
issues related to the impersonation of
individuals or entities other than
governments and business in interstate
commerce and is requesting public
comment through a Supplemental
Notice of Proposed Rulemaking
(‘‘SNPRM’’), published elsewhere in this
issue of the Federal Register.
E. Inclusion of Prohibition Against
Impersonating Nonprofits
In response to the ANPR, the
Commission received a number of
comments that urged the Commission to
include ‘‘nonprofit’’ entities in the
proposed rule’s definition of businesses
that can be impersonated.109 The
Commission agreed with these
comments, and consequently, defined a
‘‘business’’ that may be impersonated to
include nonprofits in § 461.1 of the
proposed rule, notwithstanding the fact
that the Commission is authorized to
sue a corporation only when the
corporation is ‘‘organized to carry on
business for its own profit or that of its
members.’’ 110 As the Commission
explained in the NPRM, the reason for
doing so is because for profit businesses
may impersonate nonprofit business.111
In Question 7 of the NPRM, the
Commission solicited comment
regarding whether any final rule should
keep the prohibition against
impersonating nonprofit
organizations.112 The Commission
received more than a dozen comments
that specifically addressed this
question, and each of them expressed
support for a final rule keeping the
prohibition against impersonating
nonprofits.113 None of the comments
responding to the NPRM or Notice of
Hearing opposed doing so. The vast
majority of commenters who addressed
this question were themselves nonprofit
organizations operating as trade
associations, and referenced their own
experience with impersonation frauds
in support of a final rule keeping the
prohibition against impersonating
nonprofits.114 Several commenters
expressed the view that nonprofits are
often the subject of impersonation
scams in the same way as for profit
businesses and government agencies.115
Other commenters asserted that
impersonation of nonprofits could be
uniquely harmful because bad actors
‘‘prey[ ] on the goodwill of individuals
attempting to make donations, and
misappropriate[ ] those donations to
corrupt private actions.’’ 116 Some
commenters noted that nonprofits are
particularly susceptible to being
impersonated in scams involving
affiliation or endorsement claims
because nonprofits often offer awards or
seals of approval.117
Finally, two commenters cited
trademark law in support of keeping
nonprofits in the definition of business
and a final rule that includes the
prohibition against impersonating
nonprofits. Specifically, both INTA and
the Toy Association stated that
trademark law has ‘‘long recognized that
the misuse of names of non-profit
organizations can lead to harmful
consumer confusion.’’ 118 In INTA’s and
the Toy Association’s view, the same
applies with respect to impersonation
schemes; thus, the final rule should also
make no distinction between for profit
and nonprofit businesses.
Based upon the record, including
public comments in response to
Question 7 of the NPRM, the
Commission has determined that the
final rule will retain the definition of
‘‘business’’ in § 461.1 that includes
nonprofits and the prohibition against
impersonating nonprofit organizations
in § 461.3.
F. Inclusion of Individuals or Entities
Other Than Government and Business
Impersonators
In the NPRM, the Commission asked
whether the proposed rule should be
expanded to address the impersonation
of individuals or entities other than
governments and business in interstate
commerce.119 The NPRM identified
romance and grandparent
impersonation scams as illustrative, but
non-exhaustive, examples of other types
of impersonation fraud, and solicited
further comment regarding their
prevalence and impact, and alternative
proposals to regulation. Six commenters
specifically addressed these questions,
and each of them stated that the
Commission should expand the reach of
the proposed rule to extend beyond
government and business
impersonators.120 Some commenters
asserted that fraudsters often
impersonate individuals in similar ways
they impersonate government and
businesses.121 In support of expanding
the rule, several commenters argued that
romance and grandparent
impersonation scams were harmful and
prevalent, citing to data from the FTC
and other sources showing a steady
increase in the number of consumer
reports and median individual losses for
such scams.122 A comment submitted by
a group of students at Rutgers Law
School asserted that older consumers
are susceptible to ‘‘interpersonal
confidence fraud and romance scams’’
and provided relevant data
demonstrating that older consumers
may be more likely to fall victim to
these kinds of impersonation than to
government impersonation.123 Several
commenters also stated that while the
number of reports of these two types of
impersonation scams are not as high as
government and business
impersonation, they are likely
underreported, and that median
individual losses are often higher.124
The AARP stated that, ‘‘[o]f all fraud
activity, romance scams and scams
impersonating a family member in
trouble are the most insidious, given the
emotional devastation that combines
with often significant financial
losses.’’ 125 A joint comment submitted
by several consumer and privacy
advocacy organizations argued that such
evidence ‘‘should be sufficient
justification’’ for the Commission to
‘‘add a subsection to proposed Section
461 to cover ‘Impersonation of
Individuals.’ ’’ 126
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A few commenters discussed the
prevalence and harmfulness of other
kinds of impersonation scams as
support for expanding the rule beyond
government and businesses to include
individuals. For example, the NCTA
stated that its member companies had
observed an increase in sophisticated
residential IP address scams that
impersonate online subscribers for
illegal purposes such as piracy and
fraud.127 NCTA encouraged the
Commission to consider a new rule to
prohibit impersonation of individuals
through ‘‘unauthorized use of an
individual’s online credentials,
accounts, IP addresses, and digital
networks.’’ 128 The Recording Industry
Association of America (‘‘RIAA’’)
described impersonation scams
involving offers of NFTs and mobile
apps suggesting affiliation with sound
recording artists and phishing scams
where third parties claimed to be a
music artist’s manager or producer.129
RIAA recommended that the
Commission expand the rule to include
the following: ‘‘[I]t [is] unlawful to
falsely pose as or to misrepresent,
directly or by implication, affiliation
with, including endorsement or
sponsorship by, an individual, for
financial gain.’’ 130
The Rutgers Law Students noted the
prevalence of social media, and profiles
of celebrities and influencers in current
modes of online communication,
arguing that it would be a ‘‘grave
oversight’’ to omit persons with such
notable identities from a rule
prohibiting impersonation.131 The
students also argued that individuals are
more likely than government agencies or
businesses to suffer direct harm to their
identities from impersonation scams
and less likely to be able to repair the
reputational injuries.132 Accordingly,
they proposed that the Commission add
another section to the rule with
language prohibiting the impersonation
of ‘‘any person’’ that parallels the
language in §§ 461.2 and 461.3
prohibiting the impersonation of
government and businesses,
respectively.133 The students further
stated that this additional provision
‘‘closes a loophole’’ that proposed
§§ 461.2 and 461.3 leave open regarding
the impersonation of former government
and business officials.134 Finally, the
students concluded that adding such a
narrowly drafted provision would not
burden honest businesses or
individuals, and would benefit
consumers because the median
individual losses for other kinds of
impersonation frauds are often greater
than for government and business
impersonation.135 Both the students and
the NCTA agreed that expanding the
proposed rule to prohibit impersonation
of individuals would not impact
recreational or comedic impersonations
of individuals in television or film.136
Upon consideration of the comments
received in response to Question 8 of
the NPRM and all relevant records and
data, the Commission is seeking
additional public comment about
potentially expanding part 461 to cover
impersonation of individuals or entities
other than governments and businesses
in interstate commerce in a SNPRM
published elsewhere in this issue of the
Federal Register.137
G. Requiring Domain Name Registrars
To Collect, Verify, Maintain, and
Disclose Accurate WHOIS Data
The Commission received several
comments that identified the lack of
access to accurate information
concerning domain name registrants
(commonly known as ‘‘WHOIS’’ data) as
a significant impediment to combatting
the use of domain names to impersonate
government and businesses.138 These
commenters expressed support for
expanding the text or scope of the final
rule to protect consumers from this
increasingly prevalent impersonation
scheme.139 In particular, a few
commenters urged the Commission to
issue a final rule that requires domain
name registrars to collect, verify,
maintain, and disclose accurate WHOIS
data to the FTC and third-party victims
on request for such information based
on credible evidence of impersonation
fraud.140 As previously noted, the COA
argued that the redaction or denial of
reasonable access to WHOIS data is
unjustified.141 Both M3AAWG and
APWG also suggested that the
Commission encourage DNS registries
or registrars to engage in DNS mitigation
and frequently impersonated entities to
participate as ‘‘trusted notifiers’’ to
address fraudulently registered domain
names.142
Because the deceptive use of internet
domain names is already covered under
the rule, the Commission declines to
adopt commenters’ suggestion that the
final rule expressly reference in the text
or accompanying examples the use of
domain names in impersonation
schemes. As previously noted in Section
III.A, the NPRM’s preamble contained a
list of examples of conduct covered by
the prohibition on the impersonation of
government and businesses that was
intended to be illustrative, not
exhaustive.143 Such a comprehensive
list would be both impossible and
would not provide the trade regulation
rule with the flexibility to accommodate
changes in the marketplace and
scammers’ behavior. The Commission
finds therefore that the final rule is
drafted with sufficient clarity and
flexibility to address the unauthorized
use of internet identifiers, including but
not limited to, domain names.
Furthermore, the Commission declines
to issue a final rule that imposes
affirmative requirements upon domain
name registrars which is beyond the
purview of this rulemaking and doing so
arguably would place an impracticable
burden upon consumers to know about
and verify the trustworthiness of such
WHOIS data.
H. Comments Regarding Limitation of
Remedies
A small number of commenters urged
the Commission to clarify that any final
rule regarding impersonation would not
limit any rights and remedies already
available to businesses and consumers
that have been the subject of
impersonation.144 For example,
notwithstanding its support of the
Commission’s rulemaking to address
impersonation, the American Bar
Association Section of Intellectual
Property Law asserted that many
government impersonation scams
should be referred to the Department of
Justice for criminal prosecution, and
therefore, cautioned that any regulatory
approach ‘‘not dilute the impetus for a
criminal law solution.’’ 145 Other
commenters suggested that the
Commission clarify that any final rule is
not intended to limit any existing
private right of action or civil
remedies.146 Specifically, the Toy
Association and INTA both advocated
that any final rule on impersonation not
be interpreted as limiting the rights and
remedies available to trademark owners
under the Lanham Act and the Anti-
Cybersquatting Consumer Protection
Act. INTA further proposed that the
Commission issue a clarification that
any final rule is intended only to
complement—not expand or contract—
the legal protections available to private
parties under the entire body of federal
or state trademark and unfair
competition law.147
By issuing the final rule regarding
government and business
impersonation, the Commission does
not preempt or intend to preempt action
in the same area, which is not
inconsistent with this final rule, by any
federal, state, municipal, or other local
government. This final rule does not
annul or diminish any rights or
remedies provided to consumers or
businesses by any federal, state law,
municipal ordinance, or other local
regulation, insofar as those rights or
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15025	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
remedies are equal to or greater than
those provided by this final rule.
IV. Final Rule
For the reasons described above, the
Commission has determined to adopt
the provisions of proposed § 461.1 as
initially proposed, and the provisions of
§§ 461.2 and 461.3 with clarifying
modifications. The Commission
declines to finalize proposed § 461.4 at
this time.
Specifically, the Commission
concludes that the proposed definition
of ‘‘officer’’ is sufficient to cover both
government and business
representatives, and therefore, need not
be divided into two separate terms.
Further, the final rule includes a
definition of ‘‘materially’’—which has
been used in other section 18 rules—to
avoid potential confusion or potential
perceived conflict with non-commercial
speech. For these same reasons, the final
rule replaces ‘‘unlawful’’ with ‘‘unfair or
deceptive act or practice’’ and adds
‘‘materially’’ and ‘‘in or affecting
commerce’’ in §§ 461.2 and 461.3. Such
revised language further clarifies that
the rule conforms to the well-
established standards for deception and
unfairness under the FTC Act. Finally,
the Commission declines to finalize the
proposed § 461.4 provision regarding
means and instrumentalities at this time
because further analysis and
consideration is warranted based on the
record, including comments. The
Commission is requesting additional
public comment on this provision, and
on issues related to the impersonation of
individuals or entities other than
governments and business in interstate
commerce, through a SNPRM,
published elsewhere in this issue of the
Federal Register.
V. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
federal agencies to seek and obtain
Office of Management and Budget
(‘‘OMB’’) approval before undertaking a
collection of information directed to ten
or more persons. In Question 3 of the
NPRM, the Commission asked
commenters whether the proposed rule
contained a collection of information.148
No comments responding to the NPRM
or Notice of Hearing addressed this
question. While the Commission has
revised the rule based on the comments
it received, it has not added any new
requirements that would collect
information from the public.
Accordingly, the Commission has
determined that there are no new
requirements for information collection
associated with this final rule.
VI. Regulatory Analysis and Regulatory
Flexibility Act Requirements
Under section 22 of the FTC Act, the
Commission, when it promulgates a
final rule, must issue a ‘‘final regulatory
analysis.’’ 149 The required contents of
this final regulatory analysis are: (1) ‘‘a
concise statement of the need for, and
the objectives of, the final rule’’; (2) ‘‘a
description of any alternatives to the
final rule which were considered by the
Commission’’; (3) ‘‘an analysis of the
projected benefits and any adverse
economic effects and any other effects of
the final rule’’; (4) ‘‘an explanation of
the reasons for the determination of the
Commission that the final rule will
attain its objectives in a manner
consistent with applicable law and the
reasons the particular alternative was
chosen’’; and (5) ‘‘a summary of any
significant issues raised by the
comments submitted during the public
comment period in response to the
preliminary regulatory analysis, and a
summary of the assessment by the
Commission of such issues.’’ 150
Additionally, the Regulatory Flexibility
Act (‘‘RFA’’), 5 U.S.C. 601–612, requires
an agency to provide a Final Regulatory
Flexibility Analysis (‘‘FRFA’’) with the
final rule, if any, unless the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities.151
The NPRM included an Initial
Regulatory Flexibility Analysis
(‘‘IRFA’’) even though the Commission
did not expect that the proposed rule
would have a significant economic
impact on a substantial number of small
entities.152 The Commission invited
public comment on the proposed rule’s
effect on small entities to ensure that no
significant impact would be
overlooked.153
The FTC does not expect that the final
rule will have a significant economic
impact on a substantial number of small
entities, and this SBP serves as notice to
the Small Business Administration of
the agency’s certification of no
significant impact. The final rule
imposes no disclosure or recordkeeping
requirements. As such, both the burdens
imposed on small entities and the
economic impact of the final rule are
likely to be minimal, if any.
Furthermore, as noted in the IRFA, the
rule does not change the law regarding
the legality of government and business
impersonation, which are already
prohibited by section 5 of the FTC
Act.154 Although the Commission
certifies the final rule would not, if
promulgated, have a significant impact
on a substantial number of small
entities, the Commission has
determined, nonetheless, it is
appropriate to conduct the following
FRFA,155 which incorporates the
Commission’s initial findings, as set
forth in the NPRM,156 addresses the
required contents of the final regulatory
analysis, and describes the steps the
Commission has taken in the final rule
to minimize its impact on small entities.
A. Concise Statement of the Need for,
and Objectives of, the Final Rule
Based upon the record, including
public comments, the Commission is
implementing the rule to expand the
remedies available to it to combat
government and business impersonation
deception. Throughout this rulemaking
proceeding, the Commission has
described how the U.S. Supreme Court
decision in AMG Cap. Mgmt., LLC v.
FTC, 141 S. Ct. 1341, 1352 (2021)
overturned how section 13(b) of the FTC
Act had historically been understood for
40 years to provide equitable monetary
relief, and made it significantly more
difficult for the Commission to obtain
money for injured consumers.157 The
objective of this final rule is to make
available a shorter, faster and more
efficient path for recovery of money for
injured consumers directly through
federal court action in Commission
enforcement actions involving
impersonation of government or
business.158 Further, the rule would
deter illegal impersonation and allow
for the imposition of civil penalties,
where appropriate.159
B. Discussion of Significant Alternatives
the Commission Considered That Would
Accomplish the Stated Objectives of the
Final Rule and That Would Minimize
Any Significant Economic Impact of the
Final Rule on Small Entities
Through the NPRM, the Commission
requested public comment on what
impact (including costs) will be
incurred by existing and future
businesses to comply with the proposed
rule, and whether the Commission
should consider alternative proposals to
the proposed rule.160 This information
was requested by the Commission to
minimize the final rule’s burden on all
businesses, including small entities. As
explained throughout this SBP, the
Commission has considered the
comments and alternatives proposed by
commenters and finds the final rule will
not create a significant economic impact
on small entities.161 Indeed, the type of
deception that will be unlawful under
the final rule is already unlawful under
the FTC Act, but the final rule would
allow the Commission to obtain
monetary relief more efficiently than it
could solely under section 19(a)(2) of
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15026 	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
the FTC Act (i.e., without a rule
violation). Accordingly, the Commission
does not propose any specific small
entity exemption or other significant
alternatives.
C. Summary of Significant Issues Raised
by the Public Comments in Response to
the Preliminary Regulatory Analysis and
IRFA
None of the comments received
during the public comment period
raised any significant issues in response
to the preliminary regulatory analysis
required pursuant to section 22 of the
FTC Act.162 In the IRFA, however, the
Commission sought comment regarding
the impact of the proposed rule and any
alternatives the Commission should
consider, with a specific focus on the
effect of the rule on small entities. In the
NPRM, the Commission reiterated this
request for comment in Question 4,
asking whether the proposed rule, if
promulgated, would have a significant
impact on a substantial number of small
entities. Two commenters that
specifically addressed the impact of the
proposed rule on small entities stated it
would have a beneficial economic
impact by reducing the time and
financial burden small entities expend
on fighting impersonation frauds.163
One commenter urged the Commission
not to implement a final rule that would
require third-party providers of
government filing services to include
extensive disclosures in their marketing
materials, arguing such disclosure
requirements could lead to small
businesses declining the offered services
and falling out of compliance with
government filing obligations.164 This
commenter, however, did not identify
any proposed disclosure requirements
that were the subject of his concern, nor
does the Commission impose any such
disclosure requirements in connection
with the final rule. None of the
comments responding to the NPRM or
Notice of Hearing disputed the analysis
in the IRFA. Finally, the Small Business
Administration did not submit
comments.
After reviewing the public comments
on the proposed rule, as discussed
throughout this SBP, the Commission
concludes the final rule will not unduly
burden small entities. The
Commission’s explanation in the IRFA
regarding the proposed rule is true of
the final rule—it only constitutes a
significant economic impact for small
entities violating existing law, which are
not entitled to procedural protections
when agencies consider rulemaking.165
D. Analysis of Projected Benefits and
Adverse Effects of the Final Rule
In the NPRM, the Commission invited
public comment and data on any
benefits and costs of proceeding with
the rulemaking to inform a final
regulatory analysis.166 In issuing the
final rule, the Commission has carefully
considered the comments received and
the costs and benefits of each provision.
As discussed throughout this SBP, the
Commission believes, and the record
demonstrates, the final rule would
provide several benefits to consumers,
businesses, and competition, and help
preserve agency resources, without
imposing any significant adverse effects.
The Commission’s explanation in the
IRFA regarding the proposed rule is true
of the final rule—it is difficult to
quantify with precision what all its
benefits may be, but it is helpful to
begin with the scope of the problem the
final rule would address, and then
describe the benefits qualitatively. As
discussed in the NPRM, reported
consumer losses due to government
impersonation topped $445 million in
2021; 167 and as anticipated, remained
large, and even increased substantially,
with total consumer losses of $513
million reported in 2022 and more than
$483 million for the first ten months of
2023.168 Similarly, the annual consumer
loss reported due to business
impersonation has increased from $453
million in 2021 to $670 million in
2022.169 Accordingly, the most
significant anticipated benefit of the
final rule is that it will allow the
Commission to provide monetary relief
to victims of rule violations and seek
civil penalties against violators.170
Furthermore, the final rule should
reduce economic harm resulting from
impersonation because its potential
deterrent effects make it less likely
impersonators get to keep their ill-gotten
gains and more likely they must pay
civil penalties.
The final rule also would provide the
benefit of a shorter path to obtaining
consumer redress because the
Commission could directly pursue in
federal court section 19 remedies in
government and business impersonation
enforcement actions that do not
implicate an existing rule. The
availability of more immediate
consumer redress in federal court under
section 19 would allow the Commission
to reduce the expense of litigating and
minimize the litigation fora and scope.
The Commission could then apply the
savings of these enforcement resources
to investigating and, where the facts
warrant, bringing enforcement actions
in additional impersonation matters.
The final rule also would benefit
businesses whose brands are harmed by
impersonators.171 As several
commenters have mentioned, a final
rule that would allow the Commission
to bring enforcement actions more
efficiently against impersonators would
save businesses the time and other
resources dedicated to monitoring and
combatting these kinds of deception.
The record is devoid of any evidence
suggesting the final rule would cause
harm or adversely impact economic
conditions.
E. Description and an Estimate of the
Number of Small Entities to Which the
Final Rule Will Apply, or Explanation
Why No Estimate Is Available
Small entities engaging in the
impersonation of government and
business potentially may be found
across a variety of industries and
economic sectors, but industry and
sector data do not identify entities by
such conduct. Accordingly, it is not
possible to estimate the number of small
entities to which the final rule will
apply. However, because the
Commission finds the final rule will not
impose any recordkeeping or other
compliance costs on covered entities,
the Commission concludes the final rule
will not have a significant impact on a
substantial number of small entities,
notwithstanding the lack of data on how
many small entities will be covered by
the final rule.
F. Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements of the Final
Rule, Including an Estimate of the
Classes of Small Entities That Will Be
Subject to the Requirements of the Final
Rule and the Type of Professional Skills
That Will Be Necessary To Implement
the Final Rule
The final rule does not have any
reporting or recordkeeping
requirements.172 As explained
previously, the final rule would apply to
no small entities other than small
entities violating existing law, and
therefore, no classes of small entities
will be subject to the requirements of
the final rule. Finally, no professional
skills are necessary for compliance with
the final rule other than honesty and
integrity.
G. An Explanation of the Reasons for
the Determination of the Commission
That the Final Rule Will Attain Its
Objectives in a Manner Consistent With
Applicable Law and the Reasons the
Particular Alternative Was Chosen
The Commission’s primary objective
in commencing this rulemaking was to
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15027	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
expand the remedies available to it in
combatting two prevalent categories of
impersonation scams most frequently
reported by consumers—government
impersonators and business
impersonators. As explained throughout
this SBP, based upon the record,
including public comments, the
Commission finds the final rule will
attain this objective in a manner
consistent with applicable law.
The final rule is straightforward and
defines with specificity acts or practices
that are unfair or deceptive in or
affecting commerce within the meaning
of section 5(a)(1) of the FTC Act, 15
U.S.C. 45(a)(1). It also avoids novelty by
borrowing from existing rules and
statutory definitions.173 At the same
time, the final rule is drafted with
sufficient flexibility to address the
various types of conduct covered by the
prohibition on the impersonation of
government and businesses.
Furthermore, this rulemaking has
provided ample transparency and
opportunity for public participation in
accordance with the underlying
statutory requirements of section 18 of
the FTC Act, 15 U.S.C. 57a, the
Administrative Procedure Act, and Part
1, subpart B of the Commission’s Rules
of Practice.174
VII. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has
designated this rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
Endnotes
1 Fed. Trade Comm’n, Advance Notice of
Proposed Rulemaking: Trade Regulation Rule
on Impersonation of Government and
Businesses, 86 FR 72901 (Dec. 23, 2021),
https://www.federalregister.gov/documents/
2021/12/23/2021-27731/trade-regulation-
rule-on-impersonation-of-government-and-
businesses.
2 See id. at 72904.
3 Those included, among others, numerous
reports of government impersonation scams
reported to federal agencies as reflected in
the following public announcements. On
March 7, 2022, the Federal Bureau of
Investigation issued a Public Service
Announcement ‘‘warning the public of
ongoing widespread fraud schemes in which
scammers impersonate law enforcement or
government officials in attempts to extort
money or steal personally identifiable
information.’’ Similarly, on May 20, 2022,
multiple federal law enforcement agencies
issued a scam alert spearheaded by the Social
Security Administration’s Office of the
Inspector General warning the public of
government impersonation scams involving
the reproduction of federal law enforcement
credentials and badges. On June 3, 2022, the
Commission issued a press release noting
that in some impersonation scams, fraudsters
have instructed consumers to convert cash
into cryptocurrency under false threats of
government investigations or fraud. See Fed.
Trade Comm’n, Notice of Proposed
Rulemaking: Trade Regulation Rule on
Impersonation of Government and
Businesses, 87 FR 62741, 62742 (Oct. 17,
2022), https://www.federalregister.gov/
documents/2022/10/17/2022-21289/trade-
regulation-rule-onimpersonation-of-
government-and-businesses.
4 See id. at 62741–51.
5 See id. at 62741–42.
6 Id. at 62750.
7 See Fed. Trade Comm’n, Trade
Regulation Rule on Impersonation of
Government and Businesses, https://
www.regulations.gov/docket/FTC-2022-0064/
comments.
8 Cindy L. Brown and Raye Mitchell, Cmt.
on NPRM at 9 (Dec. 19, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0077 (‘‘Brown Cmt.’’); William
MacLeod, Cmt. on NPRM at 2 (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0078 (‘‘MacLeod Cmt.’’).
9 Fed. Trade Comm’n, Initial Notice of
Informal Hearing: Trade Regulation Rule on
Impersonation of Government and
Businesses, 88 FR 19024 (Mar. 30, 2023),
https://www.federalregister.gov/documents/
2023/03/30/2023-06537/trade-regulation-
rule-on-impersonation-of-government-and-
businesses. This Initial Notice of Informal
Hearing also served as the Final Notice of
Informal Hearing. The Commission
determined William MacLeod’s comment in
response to the NPRM represented an
‘‘adequate request’’ for such an informal
hearing. The comment from Cindy Brown
explicitly requesting to make a presentation
at an informal hearing also represented an
‘‘adequate request’’ triggering the
Commission’s obligation to hold an informal
hearing but was inadvertently omitted from
inclusion in the Initial Notice of Informal
Hearing.
10 Because this informal hearing was the
first held in several decades, the Commission
allowed interested parties to request the
opportunity to make an oral comment in
response to the Notice of Informal Hearing as
well as the NPRM. However, the Commission
noted that in the future it may limit oral
statements to those who requested to make
an oral statement in response to the NPRM,
as provided for in the Rules of Practice. Id.
at 19025 n.24.
11 Although Cindy Brown did not submit a
request to make an oral statement in response
to the Notice of Hearing, she was permitted
to make an oral statement at the hearing
based upon her prior comment in response
to the NPRM in which she explicitly stated
her interest ‘‘in making a presentation at an
informal hearing.’’
12 The Notice of Informal Public Hearing
comments addressing specific provisions of
the rule or questions in the NPRM soliciting
public comment are discussed in Section III
within the substantive discussions on the
relevant provisions.
13 5 U.S.C. 551 et seq.; 16 CFR 1.7–1.20.
14 Rules of Practice, 16 CFR 1.14(a)(1)(i)–
(iii). In addition, in accordance with 16 CFR
1.14(a)(2), the regulatory analysis is provided
in Section VI of this SBP.
15 ANPR, 86 FR at 72901; see also Fed.
Trade Comm’n, Explore Government
Imposter Scams, TABLEAU PUBLIC, https://
public.tableau.com/app/profile/
federal.trade.commission/viz/
GovernmentImposter/Infographic.
16 NPRM, 87 FR at 62742.
17 Id. at 62742–46.
18 In re Cliffdale Assocs., Inc., 103 F.T.C.
110, 174 (1984); see also In re POM
Wonderful LLC, No. 9344, 2013 WL 268926,
at *18 (Jan. 16, 2013).
19 ANPR, 86 FR at 72901.
20 NPRM, 87 FR at 62746–47.
21 ANPR, 86 FR at 72903–04; see also
NPRM, 87 FR at 62748–49.
22 See AMG Cap. Mgmt., LLC v. FTC, 141
S. Ct. 1341, 1352 (2021).
23 See 15 U.S.C. 57b(a) and (b); see also
NPRM, 87 FR at 62746 (discussing AMG Cap.
Mgmt.).
24 The Commission can recover money for
consumers directly through a federal court
action or obtain civil penalties directly from
a federal court when the Rule has been
violated. Without the Rule, the path to
monetary relief is longer, and requires the
Commission to first issue a final cease-and-
desist order—which might not become final
until after the resolution of any resulting
appeal. Then, to recover money for
consumers, the Commission must prove that
the violator engaged in fraudulent or
dishonest conduct in a second action in
federal court. See 15 U.S.C. 57b(a) and (b).
25 See section 5(m)(1)(A) of the FTC Act, 15
U.S.C. 45(m)(1)(A) (providing that violators
of a trade regulation rule ‘‘with actual
knowledge or knowledge fairly implied on
the basis of objective circumstances that such
act is unfair or deceptive and is prohibited
by such rule’’ are liable for civil penalties for
each violation). In addition, any entity or
person who violates such a rule (irrespective
of the state of knowledge) is liable for injury
caused to consumers by the rule violation.
The Commission may pursue such recovery
in a suit for consumer redress under section
19 of the FTC Act, 15 U.S.C. 57b.
26 NPRM, 87 FR at 62749.
27 Id.
28 https://www.regulations.gov/document/
FTC-2021-0077-0001/comment.
29 https://www.regulations.gov/docket/
FTC-2023-0030/comments.
30 NPRM, 87 FR at 62750.
31 Id.
32 Id., Question 3 (Does the proposed rule
contain a collection of information?) and
Question 4 (Would the proposed rule, if
promulgated, have a significant economic
impact on a substantial number of small
entities? If so, how could it be modified to
avoid a significant economic impact on a
substantial number of small entities?)
33 NPRM, 87 FR at 62750.
34 See, e.g., Anonymous, Cmt. on NPRM
(Nov. 3, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0011 (describing
impersonation of accounts payable in
medical device industry); Bernadette Padilla,
Cmt. on NPRM (Nov. 8, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0014 (describing police impersonation
scam involving stolen PII); Anonymous
Meeting Planner, Cmt. on NPRM (Dec. 6,
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2022), https://www.regulations.gov/
comment/FTC-2022-0064-0030 (describing
attendee list and hotel reservation
impersonation scams); California IT in
Education, Cmt. on NPRM (Nov. 9, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0034 (describing attendee list
impersonation scam); Illinois Landscape
Contractors Association, Cmt. on NPRM (Dec.
12, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0038 (describing
attendee list and hotel reservation
impersonation scams).
35 See e.g., Salina Maddox, Cmt. on NPRM
(Oct. 22, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0003 (spam calls);
Tatiana Alvarez, Cmt. on NPRM (Nov. 22,
2022), https://www.regulations.gov/
comment/FTC-2022-0064-0008 (Romanian
mob scam); Tinee Carraker, Cmt. on NPRM
(Nov. 4, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0012 (foreclosure
scam); Susan Rounsley, Cmt. on NPRM (Nov.
6, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0013 (violations of
Do Not Call requirements).
36 See, e.g., Suhkvir Singh/Rutgers Law
School Students, Cmt. on NPRM (Nov. 22,
2022), https://www.regulations.gov/
comment/FTC-2022-0064-0019 (‘‘Rutgers
Law Students/Singh Cmt.’’); AIM, the
European Brands Association, Cmt. on NPRM
(Dec. 13, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0041 (‘‘AIM
Cmt.’’); The Messaging Malware Mobile Anti-
Abuse Working Group, Cmt. on NPRM (Dec.
15, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0051 (‘‘M3AAWG
Cmt.’’); The International Trademark
Association, Cmt. on NPRM (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0054 (‘‘INTA Cmt.’’); Electronic
Privacy Information Center, National
Consumer Law Center, National Consumers
League, Consumer Action, Consumer
Federation of America, National Association
of Consumer Advocates, and U.S. PIRG, Cmt.
on NPRM (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0070 (‘‘EPIC Cmt.’’); Recording Industry
Association of America, Cmt. on NPRM (Dec.
16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0064 (‘‘RIAA
Cmt.’’).
37 United States Patent and Trademark
Office, Cmt. on NPRM at 2–3 (Dec. 2, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0026 (‘‘USPTO Cmt.’’); INTA Cmt.
on NPRM; United States Copyright Office,
Cmt. on NPRM (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0067 (‘‘USCO Cmt.’’); The Toy
Association, Inc., Cmt. on NPRM at 2 (Dec.
16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0069 (‘‘Toy Cmt.’’);
Cellular Telecommunications and Internet
Association, Cmt. on NPRM (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0066 (‘‘CTIA Cmt.’’); Marine
Retailers Association of the Americas,
National Marine Manufacturers Association,
National RV Dealers Association, Cmt. on
NPRM (Dec. 19, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0076 (‘‘MRAA Cmt.’’).
38 See, e.g., USPTO Cmt. on NPRM at 2–3;
USCO Cmt. on NPRM at 2; Toy Cmt. on
NPRM at 2; CTIA Cmt. on NPRM at 3; MRAA
Cmt. on NPRM at 4. See also supra, note 25.
39 USPTO Cmt. on NPRM at 2–3.
40 MRAA Cmt. on NPRM at 4.
41 USCO Cmt. on NPRM at 2–3.
42 Id.; USPTO Cmt. on NPRM at 2.
43 CTIA Cmt. on NPRM at 5, 7.
44 Somos, Inc., Cmt. on NPRM at 2–3 (Dec.
16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0068 (‘‘Somos
Cmt.’’).
45 In explaining the scope of the proposed
rule, the NPRM provided an illustrative, but
non-exhaustive, list of unlawful conduct that
would be covered by the prohibitions against
impersonating government and businesses.
NPRM, 87 FR at 62746–47. That list merely
provides examples as it would be
impracticable to list all possible violative
conduct.
46 16 CFR 310.4(a)(8).
47 USTelecom Cmt. on NPRM at 2;
M3AAWG Cmt. on NPRM at 3–4; RIAA Cmt.
on NPRM at 3; Anti-Phishing Working
Group, Cmt. on NPRM at 1–2 (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0073 (‘‘APWG Cmt.’’), https://
www.regulations.gov/comment/FTC-2022-
0064-0073 (‘‘APWG Cmt.’’); Coalition for
Online Accountability, Cmt. on NPRM at 1–
3 (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0074 (‘‘COA Cmt.’’); INTA Cmt. on
NPRM at 8–10; Coalition for a Secure &
Transparent Internet, Cmt. on NPRM at 1
(Dec. 16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0065 (‘‘CSTI
Cmt.’’).
48 Id.
49 M3AAWG Cmt. on NPRM at 3–4; RIAA
Cmt. on NPRM at 3–4; AIM Cmt. on NPRM
at 1; COA Cmt. on NPRM at 1–3; INTA Cmt.
on NPRM at 8–10.
50 COA Cmt. on NPRM at 2.
51 M3AAWG Cmt. on NPRM at 3–4; APWG
Cmt. on NPRM at 1–2; see also APWG, Cmt.
on Informal Hearing at 1–2 (Apr. 14, 2023),
https://www.regulations.gov/comment/FTC-
2023-0030-0027 (‘‘APWG IH Cmt.’’).
52 See NPRM, 87 FR at 62746–47. The
example of voice cloning—a relatively new
technology—emphasizes the need for an
illustrative, but non-exhaustive, list of
unlawful conduct. Audio deepfakes,
including voice cloning, are generated,
edited, or synthesized by artificial
intelligence, or ‘‘AI,’’ to create fake audio that
seems real. See Khanjani, et. al., How Deep
are the Fakes? Focusing on Audio Deepfake:
A Survey, available at https://arxiv.org/ftp/
arxiv/papers/2111/2111.14203.pdf.
53 Americans for Prosperity Foundation,
Cmt. on NPRM at 1–2 (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0062 (‘‘AFPF Cmt.’’).
54 Id. at 1.
55 Public Law 93–637, 88 Stat. 2183 (1975).
56 ANPR, 86 FR at 72904.
57 Id.
58 NPRM, 87 FR at 62750, Question 2.
59 USPTO Cmt. on NPRM at 3–9;
M3AAWG Cmt. on NPRM at 6–9; INTA Cmt.
on NPRM at 3–5; Toy Cmt. on NPRM at 3–
5; USCO Cmt. on NPRM at 3–7; MRAA Cmt.
on NPRM at 2–4.
60 USPTO Cmt. on NPRM at 3–9;
M3AAWG Cmt. on NPRM at 6–9; INTA Cmt.
on NPRM at 3–5; Toy Cmt. on NPRM at 3–
5; USCO Cmt. on NPRM at 3–7; MRAA Cmt.
on NPRM at 2–4.
61 Toy Cmt. on NPRM at 3–5.
62 USPTO Cmt. on NPRM at 3–9; USCO
Cmt. on NPRM at 3–4;
63 INTA Cmt. on NPRM at 3; M3AAWG
Cmt. on NPRM at 7.
64 M3AAWG Cmt. on NPRM at 9.
65 Id.
66 Id.
67 NPRM, 87 FR at 62750, Question 5.
68 USCO Cmt. on NPRM at 8; USPTO Cmt.
on NPRM at 10; INTA Cmt. on NPRM at 6–
7; M3AAWG Cmt. on NPRM at 9; MacLeod
Cmt. on NPRM at 1–2; AFPF Cmt. on NPRM
at 3–6.
69 NetChoice Cmt. on NPRM at 2; Toy Cmt.
on NPRM at 2; ZoomInfo Technologies LLC,
Cmt. on NPRM at 1–2 (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0079 (‘‘Zoom NPRM Cmt.’’).
70 USCO Cmt. on NPRM at 8; USPTO Cmt.
on NPRM at 10.
71 USCO Cmt. on NPRM at 8.
72 USPTO Cmt. on NPRM at 10.
73 Id. at 9–10.
74 MacLeod Cmt. on NPRM at 2; AFPF Cmt.
on NPRM at 3; M3AAWG Cmt. on NPRM at
9. 75 M3AAWG Cmt. on NPRM at 2;
NetChoice Cmt. on NPRM at 2; Toy Cmt. on
NPRM at 2; AFPF Cmt. on NPRM at 2, 4;
Zoom Cmt. on NPRM at 1; INTA Cmt. on
NPRM at 5–6; William MacLeod, Cmt. on
Informal Hearing at 5–7 (Apr. 14, 2023),
https://www.regulations.gov/comment/FTC-
2023-0030-0019 (‘‘MacLeod IH Cmt.’’).
76 AFPF Cmt. on NPRM at 2, 4; see also
MacLeod IH Cmt. at 2.
77 AFPF Cmt. on NPRM at 3, 4. M3AAWG
Cmt. on NPRM at 2; NetChoice Cmt. on
NPRM at 2; INTA Cmt. on NPRM at 5–6; Toy
Cmt. on NPRM at 2; Zoom Cmt. on NPRM at
1; MacLeod IH Cmt. at 5–7.
78 AFPF Cmt. on NPRM at 2, 6.
79 NetChoice Cmt. on NPRM at 2;
M3AAWG Cmt. on NPRM at 3.
80 AFPF Cmt. on NPRM at 4; INTA Cmt. on
NPRM at 5–6; Toy Cmt. on NPRM at 2; Zoom
Cmt. on NPRM at 1; MacLeod IH Cmt. at 5.
81 MacLeod IH Cmt. at 1; see also MacLeod
Cmt. on NPRM at 1.
82 MacLeod IH Cmt. at 2.
83 Id. at 3.
84 Id. at 3.
85 AFPF Cmt. on NPRM at 3–4.
86 Id. at 3, 5–6.
87 M3AAWG Cmt. on NPRM at 9.
88 Id. at 1, 5.
89 AFPF Cmt. on NPRM at 5.
90 See 15 U.S.C. 45(m)(1)(A).
91 See Cent. Hudson Gas & Elec. Corp. v.
Pub. Serv. Comm’n of N.Y., 447 U.S. 557,
563–64 (1980) (‘‘[T]here can be no
constitutional objection to the suppression of
commercial messages that do not accurately
inform the public about lawful activity. The
government may ban forms of
communication more likely to deceive the
public than to inform it, or commercial
speech related to illegal activity.’’) (citations
omitted); see also Zauderer v. Office of
Disciplinary Counsel, 471 U.S. 626, 638
(1985) (holding it is ‘‘well settled’’ that ‘‘[t]he
States and the Federal Government are free
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15029	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
to prevent the dissemination of commercial
speech that is false, deceptive, or
misleading’’).
92 USPTO Cmt. on NPRM; Anonymous,
Cmt. on NPRM (Dec. 9, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0033 (‘‘0033 Cmt.’’); AIM Cmt. on
NPRM; Erik M. Pelton & Associates, PLLC,
Cmt. on NPRM (Dec. 14, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0045; NetChoice Cmt. on NPRM;
M3AAWG Cmt. on NPRM; Consumer
Technology Association, Cmt. on NPRM
(Dec. 16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0073 (‘‘CTA
Cmt.’’); NCTA—The internet and Television
Association, Cmt. on NPRM (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0071 (‘‘NCTA Cmt.’’); ASAE Cmt.
on NPRM; INTA Cmt. on NPRM; Somos Cmt.
on NPRM; CTIA Cmt. on NPRM; USCO Cmt.
on NPRM; USTelecom Cmt. on NPRM;
American Society of Association Executives,
Center for Exhibition Industry Research
Destinations International, Exhibition
Services & Contractors Association,
Exhibitions & Conferences Alliance,
Experiential Designers + Producers
Association, International Association of
Exhibitions & Events, International
Association of Venue Managers, PCMA,
Society of Independent Show Organizers,
UFI, Cmt. on NPRM (Dec 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0060 (‘‘ECA Cmt.’’); RIAA Cmt. on
NPRM; American Bar Association Section of
Intellectual Property Law, Cmt. on NPRM at
3 (Dec. 16, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0061 (‘‘ABA–IPL Cmt.’’); AFPF Cmt. on
NPRM; Zoom Cmt. on NPRM; American
Bankers Association, ACA International,
American Association of Healthcare
Administrative Management, Credit Union
National Association, Mortgage Bankers
Association National Association of
Federally-Insured Credit Unions (the
Associations), Cmt. on NPRM (Dec. 16, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0080 (‘‘Assocns. Cmt.’’); COA
Cmt. on NPRM; MacLeod Cmt. on NPRM;
Brown Cmt. on NPRM.
93 A copy of the transcript of the May 4,
2023 Informal Hearing is available at https://
www.ftc.gov/system/files/ftc_gov/pdf/
impersonationruleinformalhearing
transcript.pdf. References to the transcript
from the May 4, 2023 Informal Hearing are
cited herein as: Name of commenter, May
2023 Tr at page no. (e.g., Doe, May 2023 Tr
at #); see CTA, May 2023 Tr at 16; MacLeod,
May 2023 Tr at 27; USTelecom, May 2023 Tr
at 30; Chilson, May 2023 Tr at 34; VON, May
2023 Tr at 36; American Bankers Association
(ABA), May 2023 Tr at 39–40; INCOMPAS,
May 2023 Tr at 42, 44; NCTA, May 2023 Tr
at 51–52.
94 USPTO Cmt. on NPRM at 10; USCO Cmt.
on NPRM at 8; RIAA Cmt. on NPRM at 3;
ABA, May 2023 Tr at 39–40.
95 USPTO Cmt. on NPRM at 10; USCO Cmt.
on NPRM at 8; RIAA Cmt. on NPRM at 3;
ABA, May 2023 Tr at 39–40.
96 AFPF Cmt. on NPRM at 3–5; MacLeod
IH Cmt. at 6–7; McLeod, May 2023 Tr at 27.
97 0033 Cmt. on NPRM; ABA–IPL Cmt. on
NPRM at 2; Zoom Cmt. on NPRM at 1.
98 ABA–IPL Cmt. on NPRM at 1–2;
NetChoice Cmt. on NPRM at 2; USTelecom
Cmt. on NPRM at 2; see also CTA, May 2023
Tr at 16; VON, May 2023 Tr at 36; ABA, May
2023 Tr at 39–40; INCOMPAS, May 2023 Tr
at 42.
99 NetChoice Cmt. on NPRM at 2; CTA
Cmt. on NPRM; American Society of
Association Executives, Cmt. on NPRM at 1
(Dec. 16, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0057 (‘‘ASAE
Cmt.’’); INTA Cmt. on NPRM; Somos Cmt. on
NPRM; CTIA Cmt. on NPRM at 7; USTelecom
Cmt. on NPRM at 2; ECA Cmt. on NPRM at
3; ABA–IPL Cmt. on NPRM at 3; Zoom Cmt.
on NPRM at 2; Cmt. on NPRM at 3; see also
CTA, May 2023 Tr at 16; MacLeod, May 2023
Tr at 27; USTelecom, May 2023 Tr at 30;
Chilson, May 2023 Tr at 34; VON, May 2023
Tr at 36; INCOMPAS, May 2023 Tr at 42, 44;
NCTA, May 2023 Tr at 51–52.
100 CTA Cmt. on NPRM at 7.
101 USTelecom Cmt. on NPRM at 2.
102 ABA–IPL Cmt. on NPRM at 3.
103 NCTA Cmt. on NPRM at 2.
104 M3AAWG Cmt. on NPRM at 10.
105 Brown Cmt. on NPRM at 8.
106 M3AAWG Cmt. on NPRM at 3.
107 COA Cmt. on NPRM at 3; M3AAWG
Cmt. on NPRM at 4–5. ‘‘WHOIS data’’ is a
commonly used internet record listing that
identifies who owns a domain and how to get
in contact with them.
108 See, e.g., Compl. at 3–5 & Ex. H, FTC
v. Moore, No. 5:18–cv–01960 (C.D. Cal. filed
Sept. 13, 2018) (alleging that a seller of
variety of fake but genuine-looking financial
documents provided to others the means and
instrumentalities with which to make
misrepresentations regarding a person’s
identity).
109 NPRM, 87 FR at 62746.
110 Id. at 62751; see also 15 U.S.C. 44.
111 NPRM, 87 FR at 62747.
112 Id. at 62750.
113 Minnesota Nursery & Landscape
Association, Cmt. on NPRM at 2 (Dec. 2,
2022), https://www.regulations.gov/
comment/FTC-2022-0064-0027; Louise
Nemmers, Cmt. on NPRM (Dec. 5, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0028; California Landscape
Contractors Association, Cmt. on NPRM (Dec.
6, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0029; Outdoor
Power Equipment Institute, Cmt. on NPRM at
2 (Dec. 7, 2022), https://www.regulations.gov/
comment/FTC-2022-0064-0032; AIM Cmt. on
NPRM at 2; AARP, Cmt. on NPRM (Dec. 14,
2022), https://www.regulations.gov/
comment/FTC-2022-0064-0043 (‘‘AARP
Cmt.’’); Minnesota Municipal Utilities
Association, Cmt. on NPRM (Dec. 14, 2022),
https://www.regulations.gov/comment/FTC-
2022-0064-0048; M3AAWG Cmt. on NPRM at
10; CTA Cmt. on NPRM; ASAE Cmt. on
NPRM; INTA Cmt. on NPRM; Toy Cmt. on
NPRM at 6; RIAA Cmt. on NPRM at 2;
National Association of Broadcasters, Cmt.
on NPRM (Dec. 19, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0075; MRAA Cmt. on NPRM at 4.
114 See, e.g., Toy Cmt. on NPRM at 6;
MRAA Cmt. on NPRM at 4; AARP Cmt. at 2;
CTA Cmt. on NPRM at 1; ASAE Cmt. on
NPRM; RIAA Cmt. on NPRM at 1; INTA Cmt.
on NPRM at 2.
115 AIM Cmt. on NPRM at 2; M3AAWG
Cmt. on NPRM at 10; CTA Cmt. on NPRM at
1. 116 Toy Cmt. on NPRM at 6; INTA Cmt. on
NPRM at 6.
117 Toy Cmt. on NPRM at 6; RIAA Cmt. on
NPRM at 3.
118 INTA Cmt. on NPRM at 6; Toy Cmt. on
NPRM at 6.
119 NPRM, 87 FR at 62750.
120 Rutgers Law Students/Singh Cmt. on
NPRM; AIM Cmt. on NPRM; AARP Cmt. on
NPRM; NCTA Cmt. on NPRM; EPIC Cmt. on
NPRM; RIAA Cmt. on NPRM.
121 AIM Cmt. on NPRM at 2; Rutgers Law
Students/Singh Cmt. on NPRM at 1.
122 Rutgers Law Students/Singh Cmt. on
NPRM at 1–2; AARP Cmt. on NPRM at 2;
EPIC Cmt. on NPRM at 5.
123 Rutgers Law Students/Singh Cmt. on
NPRM at 1–2.
124 Rutgers Law Students/Singh Cmt. on
NPRM at 2–4; AARP Cmt. on NPRM at 1–2;
EPIC Cmt. on NPRM at 4–5.
125 AARP Cmt. on NPRM at 2.
126 EPIC Cmt. on NPRM at 5.
127 NCTA Cmt. on NPRM at 3, 8.
128 Id.
129 RIAA Cmt. on NPRM at 3.
130 Id. at 2.
131 Rutgers Law Students/Singh Cmt. on
NPRM at 2.
132 Id.
133 Id. at 3.
134 Id.
135 Id. at 3–4.
136 Id.; NCTA Cmt. on NPRM at 8, n. 16.
137 The Commission also is exploring other
tools to address the fake endorsement
concerns raised by the RIAA and Rutgers
Law School Students. Specifically, in the
Commission’s proposed Rule on the Use of
Consumer Reviews and Testimonials, § 465.2
would prohibit businesses from purchasing a
consumer review, or from disseminating or
causing the dissemination of a consumer
testimonial or celebrity testimonial when the
business knew or should have known it was
false or fake. See Fed. Trade Comm’n, Notice
of Proposed Rulemaking: Trade Regulation
Rule on the Use of Consumer Reviews and
Testimonials, 88 FR 49364, 49391 (Jul. 31,
2023), https://www.federalregister.gov/
documents/2023/07/31/2023-15581/trade-
regulation-rule-on-the-use-of-consumer-
reviews-and-testimonials#sectno-reference-
465.2.
138 USTelecom Cmt. on NPRM at 2;
M3AAWG Cmt. on NPRM at 3–4; RIAA Cmt.
on NPRM at 3; APWG Cmt. on NPRM; COA
Cmt. on NPRM at 1–3; INTA Cmt. on NPRM
at 8–10; CSTI Cmt. on NPRM at 1.
139 Id.
140 M3AAWG Cmt. on NPRM at 3–4; RIAA
Cmt. on NPRM at 3–4; AIM Cmt. on NPRM
at 1; COA Cmt. on NPRM at 1–3; INTA Cmt.
on NPRM at 8–10.
141 COA Cmt. on NPRM at 2.
142 M3AAWG Cmt. on NPRM at 3–4;
APWG Cmt. on NPRM at 1–2; see also
APWG, Cmt. on Informal Hearing at 1–2
(Apr. 14, 2023), https://www.regulations.gov/
comment/FTC-2023-0030-0027 (‘‘APWG IH
Cmt.’’).
143 See also supra, note 52.
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15030 	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
1 Fed. Trade Comm’n, Fraud Reports: Trends
Over Time (2021), https://public.tableau.com/app/
profile/federal.trade.commission/viz/FraudReports/
FraudFacts.
2 Fed. Trade Comm’n, Consumer Sentinel
Network Data Book 2023 (2024), https://
www.ftc.gov/reports/consumer-sentinel-network-
data-book-2023.
3 Fed. Trade Comm’n, Fraud Reports: Top
Reports, Tableau Public (last accessed Feb. 8, 2024),
https://public.tableau.com/app/profile/
federal.trade.commission/viz/FraudReports/
TopReports; see also Fed. Trade Comm’n,
Consumer Sentinel Network Data Book 2020 (2021)
at 4–8, https://www.ftc.gov/system/files/documents/
reports/consumer-sentinel-network-databook-2020/
csn_annual_data_book_2020.pdf; see also,
Consumer Sentinel Network Data Book 2023, supra
note 2.
144 Toy Cmt. on NPRM at 2; M3AAWG
Cmt. on NPRM at 2; ABA–IPL Cmt. on NPRM
at 3; INTA Cmt. on NPRM at 2.
145 ABA–IPL Cmt. on NPRM at 3.
146 Toy Cmt. on NPRM at 2; M3AAWG
Cmt. on NPRM at 2; INTA Cmt. on NPRM at
2. 147 INTA Cmt. on NPRM at 6–7.
148 NPRM, 87 FR at 62750.
149 See 15 U.S.C. 57b–3(b)(2).
150 15 U.S.C. 57b–3(b)(2)(A).
151 See 5 U.S.C. 603–605; see also section
22(b) of the FTC Act, 15 U.S.C. 57b–3(b).
152 NPRM, 87 FR at 62749–50; see also 5
U.S.C. 603.
153 NPRM, 87 FR at 62750.
154 NPRM, 87 FR at 62749.
155 See 15 U.S.C. 57b–3(b)(3)(A)(ii) (‘‘In
order to avoid duplication or waste, the
Commission is authorized to . . . whenever
appropriate, incorporate any data or analysis
contained in a regulatory analysis issued
under this subsection in the statement of
basis and purpose.’’).
156 NPRM, 87 FR at 62749–50.
157 See ANPR, 86 FR at 72901 & n.24
(discussing AMG Cap. Mgmt.); NPRM, 87 FR
at 62746 (same).
158 See ANPR, 86 FR at 72901 & n.24;
NPRM, 87 FR at 62746; see also 15 U.S.C.
57b(a) and (b).
159 See 15 U.S.C. 45(m)(1)(A).
160 NPRM, 87 FR at 62750.
161 Only one commenter suggested an
alternative to regulation, which the
Commission declines to adopt for the reasons
previously stated in Section III.B.
162 See supra note 161.
163 Toy Cmt. on NPRM at 5–6; MRAA Cmt.
on NPRM at 4.
164 Robert Kamerschen, Cmt. on NPRM at
2 (Nov. 30, 2022), https://
www.regulations.gov/comment/FTC-2022-
0064-0023.
165 See NPRM, 87 FR at 62750.
166 NPRM, 87 FR at 62748.
167 Id.
168 See Fed. Trade Comm’n, Explore
Government Imposter Scams, TABLEAU
PUBLIC, https://public.tableau.com/app/
profile/federal.trade.commission/viz/
FraudReports/SubcategoriesOverTime (last
visited December 21, 2023).
169 Id.
170 See 15 U.S.C. Secs. 45(m)(1)(A) and
57b.
171 See Toy Cmt. on NPRM at 5–6; MRAA
Cmt. on NPRM at 4; see also NPRM, 87 FR
at 62749.
172 NPRM, 87 FR at 62750.
173 See, e.g., TSR, 16 CFR 310.3(a)(2)(vii);
R-Value Rule, 16 CFR 460.21; Regulation O
(Mortgage Assistance Relief Services), 12 CFR
1015.3(b)(3).
174 5 U.S.C. 551 et seq.; 16 CFR 1.7 through
1.20.
List of Subjects in 16 CFR Part 461
Consumer protection, Impersonation,
Trade Practices.
■ For the reasons set forth above, the
Federal Trade Commission amends 16
CFR Chapter I by adding part 461 to
read as follows:
PART 461—RULE ON
IMPERSONATION OF GOVERNMENT
AND BUSINESSES
Sec.
461.1 Definitions.
461.2 Impersonation of Government
Prohibited.
461.3 Impersonation of Businesses
Prohibited.
Authority: 15 U.S.C. 41 through 58.
§ 461.1 Definitions.
As used in this part:
Business means a corporation,
partnership, association, or any other
entity that provides goods or services,
including not-for-profit entities.
Government includes federal, state,
local, and tribal governments as well as
agencies and departments thereof.
Materially means likely to affect a
person’s choice of, or conduct regarding,
goods or services.
Officer includes executives, officials,
employees, and agents.
§ 461.2 Impersonation of Government
Prohibited.
It is a violation of this part, and an
unfair or deceptive act or practice to:
(a) materially and falsely pose as,
directly or by implication, a government
entity or officer thereof, in or affecting
commerce as commerce is defined in
the Federal Trade Commission Act (15
U.S.C. 44); or
(b) materially misrepresent, directly
or by implication, affiliation with,
including endorsement or sponsorship
by, a government entity or officer
thereof, in or affecting commerce as
commerce is defined in the Federal
Trade Commission Act (15 U.S.C. 44).
§ 461.3 Impersonation of Businesses
Prohibited.
It is a violation of this part, and an
unfair or deceptive act or practice to:
(a) materially and falsely pose as,
directly or by implication, a business or
officer thereof, in or affecting commerce
as commerce is defined in the Federal
Trade Commission Act (15 U.S.C. 44); or
(b) materially misrepresent, directly
or by implication, affiliation with,
including endorsement or sponsorship
by, a business or officer thereof, in or
affecting commerce as commerce is
defined in the Federal Trade
Commission Act (15 U.S.C. 44).
By direction of the Commission.
April J. Tabor,
Secretary.
Note: The following statement will not
appear in the Code of Federal Regulations.
Statement of Chair Lina M. Khan Joined
by Commissioner Rebecca Kelly
Slaughter and Commissioner Alvaro M.
Bedoya
Today the Federal Trade Commission
finalizes its rule prohibiting government
and business impersonation schemes
and issues a supplemental notice of
proposed rulemaking to extend this
prohibition to impersonation of
individuals. This final rule marks the
first time since 1980 that the
Commission has finalized a brand-new
trade regulation rule prohibiting an
unfair or deceptive practice.
Impersonation schemes cheat
Americans out of billions of dollars
every year. Fraudsters pretending to
represent government agencies—like the
Social Security Administration or the
IRS—tell targets that if they do not hand
over money or their sensitive personal
information, then they could lose a
government benefit, face a tax liability,
or even be arrested. Scammers also
commonly claim false affiliations with
household brand names to bilk
consumers for bogus services. This
category of fraud skyrocketed during the
coronavirus pandemic—with imposters
scamming Americans out of reported $2
billion between October 2020 and
September 2021, an 85 percent increase
year-over-year. 1 Losses remain high:
FTC data show that in 2023 consumers
reported losing $2.7 billion to reported
imposter scams.2 Impersonation fraud
has remained one of the largest sources
of total reported consumer financial
losses for several years.3
Public comments submitted to the
Commission provide a snapshot of how
impersonation frauds can devastate:
• One commenter reported on how a
friend was scammed by someone
claiming that they were with Publisher’s
Clearing House and that she had won a
sweepstakes. Her friend was scammed
out of a total of $367,000: ‘‘She used all
of her savings . . . to help her
grandchildren go to college and wiped
out her IRA and now is left to pay the
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15031	Federal Register / Vol. 89, No. 42 / Friday, March 1, 2024 / Rules and Regulations
4 Comment Submitted by Anonymous, FTC Seek
Comments on Advanced Notice of Proposed Rule;
Impersonation ANPR, Regulations.gov (Feb. 22,
2022), https://www.regulations.gov/comment/FTC-
2021-0077-0131.
5 Comment Submitted by Jamila Sherman, FTC
Seek Comments on Advanced Notice of Proposed
Rule; Impersonation ANPR, Regulations.gov (Feb.
22, 2022), https://www.regulations.gov/comment/
FTC-2021-0077-0127.
6 Comment Submitted by Susan Frost, FTC Seek
Comments on Advanced Notice of Proposed Rule;
Impersonation ANPR, Regulations.gov (Feb. 16,
2022), https://www.regulations.gov/comment/FTC-
2021-0077-0031.
7 Bob Violino, AI Tools Such As ChatGPT Are
Generating A Mammoth Increase In Malicious
Phishing Emails, CNBC (Nov. 28, 2023), https://
www.cnbc.com/2023/11/28/ai-like-chatgpt-is-
creating-huge-increase-in-malicious-phishing-
email.html.
8 Eric Revell, AI Voice Cloning Scams On The
Rise, Expert Warns, Fox Business (Sept. 23, 2023),
https://www.foxbusiness.com/technology/ai-voice-
cloning-scams-on-rise-expert-warns.
9 AMG Cap. Mgmt., LLC v. FTC, 593 U.S. (2021).
10 Press Release, Fed. Trade Comm’n, FTC Votes
to Update Rulemaking Procedures, Sets Stage for
Stronger Deterrence of Corporate Misconduct (July
1, 2021), https://www.ftc.gov/news-events/news/
press-releases/2021/07/ftc-votes-update-
rulemaking-procedures-sets-stage-stronger-
deterrence-corporate-misconduct.
penalties for depleting it. This woman is
now, at age 70, in a position of living
only on her social security and has to
try to find work. . . .’’ 4
• Another commenter received a call
from someone claiming to be with the
U.S. Treasury Department, who asserted
that her social security number had
been compromised. This person lost all
her money: ‘‘That money is from my
mother’s life insurance policy who
passed in 2019. My father needs that
money to survive. I am devastated.’’ 5
• A third commenter spoke of her
mother being scammed by someone
pretending to be with a government
agency: ‘‘Before we, her family, realized
the extent to which the imposters
preyed upon her, she had divulged
identity and banking information.’’ 6
The rise of generative AI technologies
risks making these problems worse by
turbocharging scammers’ ability to
defraud the public in new, more
personalized ways. For example, the
proliferation of AI chatbots gives
scammers the ability to generate spear-
phishing emails using individuals’
social media posts and to instruct bots
to use words and phrases targeted at
specific groups and communities.7 AI-
enabled voice cloning fraud is also on
the rise, where scammers use voice-
cloning tools to impersonate the voice of
a loved one seeking money in distress
or a celebrity peddling fake goods.8
Scammers can use these technologies to
disseminate fraud more cheaply, more
precisely, and on a much wider scale
than ever before.
In its supplemental NPRM, the
Commission proposes to expand the
rule’s prohibitions to also cover
impersonation of individuals. If
adopted, this additional protection will
equip enforcers to seek civil penalties
and redress when fraudsters
impersonate individual people, not just
government or business entities. Given
the proliferation of AI-enabled fraud,
this additional protection seems
especially critical. Notably, the
supplemental proposal also
recommends extending liability to any
actor that provides the ‘‘means and
instrumentalities’’ to commit an
impersonation scam. Under this
approach, liability would apply, for
example, to a developer who knew or
should have known that their AI
software tool designed to generate
deepfakes of IRS officials would be used
by scammers to deceive people about
whether they paid their taxes. Ensuring
that the upstream actors best positioned
to halt unlawful use of their tools are
not shielded from liability will help
align responsibility with capability and
control.
By unlocking civil penalties and
redress, the final rule, along with the
proposed supplemental provisions, will
promote both more efficient
enforcement and greater deterrence. In
2020, the Supreme Court held that the
Commission cannot rely on Section
13(b) of the FTC Act to get money back
to defrauded consumers,9 so
rulemakings—while not a substitute for
a legislative fix—can help ensure that
lawbreakers do not profit from their
lawbreaking and that wronged
consumers can be made whole.
This rule marks the agency’s first
brand-new Section 18 rulemaking since
1980. Although the authority to issue
rules is clearly laid out in the FTC Act,
bureaucratic red tape presented an
obstacle to the agency’s exercise of this
important statutory authority. Thanks to
efforts initiated under Commissioner
Slaughter’s leadership to align the
procedural requirements for Section 18
rulemaking with the FTC Act’s statutory
text, Section 18 rulemakings can now
proceed more efficiently.10 This effort
took two years from proposal to final
rule, finally putting lie to the old idea
that this must be an impossibly long
process.
Many thanks to the FTC team for their
swift work and dedication. This rule
banning government and business
impersonation will allow us to more
vigorously and effectively protect
Americans from fraudsters. And we are
eager for public input on the
supplemental NPRM that would extend
this rule to cover impersonation of
individuals. With the rapid rise of voice
cloning fraud and other AI-based scams,
additional protection for consumers
seems especially critical. As these
technologies enable more sophisticated
and innovative forms of fraud, we will
continue to ensure the Commission is
activating all the tools Congress has
given us and faithfully executing on our
statutory mandate.
[FR Doc. 2024–04335 Filed 2–29–24; 8:45 am]
BILLING CODE 6750–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–R06–OAR–2022–0279; FRL–10675–
02–R6]
Air Plan Approval; Oklahoma; Updates
to the State Implementation Plan
Incorporation by Reference Provisions
AGENCY : Environmental Protection
Agency (EPA).
ACTION : Final rule.
SUMMARY : Pursuant to the Federal Clean
Air Act (CAA or the Act), the
Environmental Protection Agency (EPA)
is approving revisions to the Oklahoma
State Implementation Plan (SIP)
submitted by the State of Oklahoma
designee on December 17, 2021, and
January 20, 2023. This action addresses
the submittal of revisions to the
Oklahoma SIP to update the
incorporation by reference provision of
Federal requirements under Oklahoma
Administrative Code (OAC).
DATES : This rule is effective April 1,
2024.
ADDRESSES : The EPA has established a
docket for this action under Docket ID
No. EPA–R06–OAR–2022–0279. All
documents in the docket are listed on
the https://www.regulations.gov
website. Although listed in the index,
some information is not publicly
available, e.g., Confidential Business
Information or other information whose
disclosure is restricted by statute.
Certain other material, such as
copyrighted material, is not placed on
the internet. Publicly available docket
materials are available electronically
through https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Adina Wiley, EPA Region 6 Office, Air
Permits Section, 214–665–2115,
wiley.adina@epa.gov. Please call or
email the contact listed above if you
need alternative access to material
indexed but not provided in the docket.
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26760 	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
1 Notice of Proposed Rulemaking (‘‘2022 NPRM’’),
87 FR 33677 (June 3, 2022).
2 Public Law 103–297, 108 Stat. 1545 (1997)
(codified as amended at 15 U.S.C. 6101 through
6108).
3 15 U.S.C. 6102(a)(1).
4 15 U.S.C. 6102(a)(3).
5 See Statement of Basis and Purpose and Final
Rule (‘‘Original TSR’’), 60 FR 43842 (Aug. 23, 1995).
6 See, e.g., 16 CFR 310.3(a); see also Original TSR,
60 FR at 43848–51.
7 See, e.g., 16 CFR 310.3(a)(1), 310.5; see also
Original TSR, 60 FR at 43846–48, 43851, 43857.
8 Original TSR, 60 FR at 43857.
9 See Statement of Basis and Purpose and Final
Amended Rule (‘‘2003 TSR Amendments’’), 68 FR
4580 (Jan. 29, 2003) (adding Do Not Call Registry,
charitable solicitations, and other provisions). The
Telemarketing Act was amended in 2001 to extend
its coverage to telemarketing calls seeking
charitable contributions. See Uniting and
Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism
Act (‘‘USA PATRIOT Act’’), Public Law 107–56,
115 Stat. 272 (Oct. 26, 2001) (adding charitable
contribution to the definition of telemarketing and
amending the Act to require certain disclosures in
calls seeking charitable contributions).
10 See Statement of Basis and Purpose and Final
Rule Amendments (‘‘2008 TSR Amendments’’), 73
FR 51164 (Aug. 29, 2008) (addressing the use of
robocalls).
11 See Statement of Basis and Purpose and Final
Rule Amendments (‘‘2010 TSR Amendments’’), 75
FR 48458 (Aug. 10, 2010) (adding debt relief
provisions including a prohibition on
misrepresenting material aspects of debt relief
services in Section 310.3(a)(2)(x)). The Commission
subsequently published technical corrections to
Section 310.4 of the TSR. 76 FR 58716 (Sept. 22,
2011).
12 See Statement of Basis and Purpose and Final
Rule Amendments (‘‘2015 TSR Amendments’’), 80
FR 77520 (Dec. 14, 2015) (prohibiting the use of
remotely created checks and payment orders, cash-
to-cash money transfers, and cash reload
mechanisms).
13 When the Commission decided in 2003 and
2010 to make substantive amendments to the TSR,
it declined to modify the Rule’s recordkeeping
provisions. See 2003 TSR Amendments, 68 FR at
4645, 4653–54 (declining to implement any of the
suggested recordkeeping revisions that were raised
in the public comments); 2010 TSR Amendments,
75 FR at 48502.
14 2022 NPRM, 87 FR at 33679–81.
15 The Commission issued the 2022 NPRM after
it had embarked on a regulatory review of the TSR
in 2014. In that review, it sought feedback on a
number of issues, including the existing
recordkeeping requirements. See 2014 TSR Rule
Review, 79 FR 46732, 46735 (Aug. 11, 2014).
16 2022 NPRM, 87 FR at 33682–83.
Strategic Infrastructure, Washington, DC
20546.
Nanette Smith,
Team Lead, NASA Directives and
Regulations.
[FR Doc. 2024–07421 Filed 4–15–24; 8:45 am]
BILLING CODE 7510–13–P
FEDERAL TRADE COMMISSION
16 CFR Part 310
RIN 3084–AB19
Telemarketing Sales Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
adopts amendments to the
Telemarketing Sales Rule (‘‘TSR’’) that,
among other things, require
telemarketers and sellers to maintain
additional records of their telemarketing
transactions, prohibit material
misrepresentations and false or
misleading statements in business to
business (‘‘B2B’’) telemarketing calls,
and add a new definition for the term
‘‘previous donor.’’ These amendments
are necessary to address technological
advances and to continue protecting
consumers, including small businesses,
from deceptive or abusive telemarketing
practices.
DATES : The amendments are effective
May 16, 2024. However, compliance
with 16 CFR 310.5(a)(2) is not required
until October 15, 2024. The
incorporation by reference of certain
material listed in the rule is approved
by the Director of the Federal Register
as of May 16, 2024.
ADDRESSES : Relevant portions of the
record of this proceeding, including this
document, are available at https://
www.ftc.gov.
FOR FURTHER INFORMATION CONTACT:
Patricia Hsue, (202) 326–3132, phsue@
ftc.gov, or Benjamin R. Davidson, (202)
326–3055, bdavidson@ftc.gov, Division
of Marketing Practices, Bureau of
Consumer Protection, Federal Trade
Commission, 600 Pennsylvania Avenue
NW, Mail Stop CC–6316, Washington,
DC 20580.
SUPPLEMENTARY INFORMATION : This
document states the basis and purpose
for the Commission’s decision to adopt
amendments to the TSR that were
proposed and published for public
comment in the Federal Register on
June 3, 2022 in a Notice of Proposed
Rulemaking (‘‘2022 NPRM’’).1 After
careful review and consideration of the
entire record on the issues presented in
this rulemaking proceeding, including
26 public comments submitted by a
variety of interested parties, the
Commission has decided to adopt, with
several modifications, the proposed
amendments to the TSR intended to
curb deceptive or abusive practices in
telemarketing and improve the
effectiveness of the TSR.
I. Background
Congress enacted the Telemarketing
and Consumer Fraud and Abuse
Prevention Act (‘‘Telemarketing Act’’ or
‘‘Act’’) in 1994 to curb abusive
telemarketing practices and provide key
anti-fraud and privacy protections to
consumers.2 The Act directed the
Commission to adopt a rule prohibiting
deceptive or abusive telemarketing
practices.3 The Act also directed the
Commission to include, among other
provisions, disclosure requirements and
to consider recordkeeping requirements
in its rulemaking.4 Pursuant to the Act,
the Commission promulgated the TSR
on August 23, 1995.5
The Rule prohibits deceptive or
abusive telemarketing practices, such as
misrepresenting several categories of
material information or making false or
misleading statements to induce a
person to pay for a good or service.6 The
Rule also requires sellers and
telemarketers to make specific
disclosures and keep certain records of
their telemarketing activities.7 The
Commission determined that
recordkeeping requirements were
necessary to ‘‘ascertain whether sellers
and telemarketers are complying with
the [. . .TSR], identify persons who are
involved in any challenged practices,
and [ ] identify customers who may have
been injured.’’ 8
Since 1995, the Commission has
amended the Rule on four occasions: (1)
in 2003 to create the National Do Not
Call (‘‘DNC’’) Registry and extend the
Rule to telemarketing calls soliciting
charitable contributions (‘‘charity
calls’’); 9 (2) in 2008 to prohibit
prerecorded messages (‘‘robocalls’’) in
sales calls and charity calls; 10 (3) in
2010 to ban the telemarketing of debt
relief services requiring an advance
fee; 11 and (4) in 2015 to bar the use in
telemarketing of certain payment
mechanisms widely used in fraudulent
transactions.12
Despite making significant
amendments to the Rule, the
Commission has not updated the
recordkeeping provisions since the
Rule’s inception in 1995.13 Evolutions
in technology and the marketplace have
made it more difficult for regulators to
enforce the TSR, particularly provisions
relating to the DNC Registry.14 As a
result, the Commission solicited
comment during its regulatory review
process on whether it should update the
recordkeeping provisions, and
subsequently proposed amending them
in the 2022 NPRM.15
The 2022 NPRM also proposed
applying the TSR’s prohibitions on
deceptive telemarketing to B2B calls.16
The original TSR generally excluded
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26761	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
17 Original TSR, 60 FR at 43867, 43861.
18 2003 TSR Amendments, 68 FR at 4663; 2022
NPRM, 87 FR at 33682–83.
19 2003 TSR Amendments, 68 FR at 4663; 2022
NPRM, 87 FR at 33682–83.
20 Section 310.3(a)(2) prohibits, among other
things, misrepresenting: the total cost to purchase
a good or service, material restrictions on the use
of the good or service, material aspects of the
central characteristics of the good or service,
material aspects of the seller’s refund policy, the
seller’s affiliation with or endorsement by any
person or government agency, or material aspects of
a negative option feature or debt relief service. See
16 CFR 310.3(a)(2)(i)–(x).
21 Section 310.3(a)(4) prohibits making false or
misleading statements to induce any person to pay
for goods or services or induce a charitable
contribution. See 16 CFR 310.3(a)(4).
22 2022 NPRM, 87 FR at 33682–83. When the
Commission issued the 2022 NPRM, it also issued
an Advance Notice of Proposed Rulemaking (‘‘2022
ANPR’’) in which it sought public comment on
whether to extend all of the TSR’s protections to
B2B calls. 2022 ANPR, 87 FR 33662 (June 3, 2022).
The Commission addresses the public comments
submitted in response to the 2022 ANPR in a Notice
of Proposed Rulemaking that the Commission is
issuing simultaneously with this Final Rule.
23 See 2008 TSR Amendments, 73 FR at 51185. To
qualify for this narrow exemption, sellers and
telemarketers must also comply with the provisions
of Section 310.4(b)(1)(v)(B).
24 Id.
25 Pursuant to the USA PATRIOT Act, the
Commission amended the TSR in 2003 to extend its
coverage to charity calls. 2003 TSR Amendments,
68 FR at 4582. As part of that amendment, the
Commission defined ‘‘donor’’ as ‘‘any person
solicited to make a charitable contribution.’’ Id. at
4590.
26 2022 NPRM, 87 FR at 33679.
27 16 CFR 310.5(a).
28 16 CFR 310.5(b) & (c).
29 See, e.g., Prepared Statement of the Federal
Trade Commission Before the United States Senate
Committee on Commerce, Science and
Transportation: Abusive Robocalls and How We
Can Stop Them (Apr. 18, 2018), available at https://
www.ftc.gov/system/files/documents/public_
statements/1366628/p034412_commission_
testimony_re_abusive_robocalls_senate_
04182018.pdf (last visited Dec. 11, 2023); see also
Prepared Statement of the Federal Trade
Commission: Oversight of the Federal Trade
Commission Before the United States Senate
Committee on Commerce, Science, and
Transportation (Aug. 5, 2020), available at https://
www.ftc.gov/system/files/documents/public_
statements/1578963/p180101testimonyftcover
sight20200805.pdf (last visited Dec. 21, 2023).
From 2019 to 2023, the Commission received on
average nearly 4 million Do Not Call complaints per
year, and the DNC Registry currently has over 249
million active telephone numbers. FTC, Do Not Call
Data Book 2023 (‘‘2023 DNC Databook’’), at 6 (Nov.
2023), available at https://www.ftc.gov/system/files/
ftc_gov/pdf/Do-Not-Call-Data-Book-2023.pdf (last
visited Dec. 11, 2023). By comparison, within one
year of its launch, the DNC Registry had over 62
million active telephone numbers registered, and
the Commission received over 500,000 Do Not Call
complaints. See Annual Report to Congress for FY
2003 and 2004 Pursuant to the Do Not Call
Implementation Act on Implementation of the
National Do Not Call Registry, at 3 (Sept. 2005),
available at https://www.ftc.gov/sites/default/files/
documents/reports/national-do-not-call-registry-
annual-report-congress-fy-2003-and-fy-2004-
pursuant-do-not-call/051004dncfy0304.pdf (last
visited Dec. 11, 2023); National Do Not Call Registry
Data Book for Fiscal Year 2009, at 4 (Nov. 2009),
available at https://www.ftc.gov/sites/default/files/
documents/reports_annual/fiscal-year-2009/
091208dncadatabook.pdf (last visited Dec. 11,
2023). Conversely, technological advancements
have also reduced the burden and costs of
recordkeeping. 2022 NPRM, 87 FR at 33685 n.95
and 33690–91.
30 See supra note 29. On June 25, 2019, the FTC
announced ‘‘Operation Call it Quits,’’ which
included 94 actions against illegal robocallers,
many of which used spoofing technology. See Press
Release, FTC, Law Enforcement Partners Announce
New Crackdown on Illegal Robocalls (June 25,
2019), available at https://www.ftc.gov/news-
events/press-releases/2019/06/ftc-law-enforcement-
partners-announce-new-crackdown-illegal (last
visited Dec. 11, 2023).
31 See supra note 29.
32 2022 NPRM, 87 FR at 33680–81.
33 Id. at 33680. In other instances, voice providers
assert it is cost prohibitive to retrieve because they
only maintain records in an easily retrievable
format for several months before archiving them in
the ordinary course of business.
B2B calls, except those selling office
and cleaning supplies, because in the
Commission’s experience at the time,
those calls were ‘‘by far the most
significant business-to-business problem
area.’’ 17 In 2003, the Commission
considered extending the TSR’s
protections to B2B calls selling internet
or web services, but decided against
doing so for fear of chilling
technological innovation.18 It did,
however, note it would ‘‘continue to
monitor closely’’ B2B telemarketing
practices in this area and ‘‘may revisit
the issue in subsequent Rule Reviews
should circumstances warrant.’’ 19 Since
then, the Commission has continued to
see small businesses harmed by
deceptive B2B telemarketing, and the
2022 NPRM proposed extending Section
310.3(a)(2)’s prohibition on
misrepresentations 20 and Section
310.3(a)(4)’s prohibition on false or
misleading statements 21 to B2B calls.22
Finally, the 2022 NPRM proposed
adding a definition for ‘‘previous
donor.’’ In 2008 the Commission
amended the TSR to prohibit robocalls,
but allowed charity robocalls if the
recipient is a ‘‘member of, or previous
donor to, a non-profit charitable
organization on whose behalf the call is
made.’’ 23 The Commission intended
this narrow exemption to apply only to
consumers who had previously donated
to the soliciting organization,24 but the
Commission did not define ‘‘previous
donor.’’ 25 The new definition will
clarify that telemarketers are prohibited
from making charity robocalls unless
the call recipient donated to the
soliciting non-profit charitable
organization (‘‘charity’’) within the last
two years.26
II. Overview of the Proposed
Amendments to the TSR
A. Recordkeeping
The TSR’s recordkeeping provisions,
which have remained unchanged since
the Rule was promulgated in 1995,
generally require telemarketers and
sellers to keep for a 24-month period
records of: (1) any substantially different
advertisement, including telemarketing
scripts; (2) lists of prize recipients,
customers, and telemarketing employees
directly involved in sales or
solicitations; and (3) all verifiable
authorizations or records of express
informed consent or express
agreement. 27 They may keep the records
in any form and in the same manner and
format as they would keep such records
in the ordinary course of business, and
they may allocate responsibilities of
complying with the Rule’s
recordkeeping requirements between
the seller and telemarketer.28
The telemarketing landscape has
changed drastically since 1995.
Technological advancements have made
it easier and cheaper for unscrupulous
telemarketers to engage in illegal
telemarketing, resulting in a greater
proliferation of unwanted calls.29 Bad
actors hide their identities by using
technology to ‘‘spoof’’ or fake a calling
number, making it more difficult for the
Commission to identify the responsible
parties or obtain records of their illegal
telemarketing activities. 30 Technology
also allows these bad actors to operate
from anywhere in the world, posing
additional challenges to the
Commission’s law enforcement
efforts.31
The primary hurdles in enforcing the
TSR in the current telemarketing
landscape are in: (1) identifying the
telemarketer and seller responsible for
the telemarketing campaign; (2)
obtaining call detail records; and (3)
linking the content of the telemarketing
calls with the call detail records to
determine which TSR provisions might
apply to the telemarketing activity.
As explained in more detail in the
2022 NPRM, to identify the responsible
parties and obtain evidence of their
telemarketing activities, the
Commission often must issue civil
investigative demands to multiple voice
service providers to trace a call from the
consumer to the telemarketer’s voice
provider.32 In some instances, by the
time the Commission has identified the
relevant voice provider, the voice
provider may not have retained records
of the telemarketing calls such as the
date, time, call duration, and
disposition of each call, or the phone
number(s) that placed and received each
call (i.e. ‘‘call detail records’’). 33 As a
result, the call detail records either no
longer exist or are not available for law
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34 Id.
35 Id. at 33681.
36 Id. at 33680–82.
37 Id.
38 Soundboard technology is technology that
allows a live agent to communicate with a call
recipient by playing recorded audio snippets
instead of using his or her own live voice. See FTC
Staff Opinion Letter on Soundboard Technology, at
1 (Nov. 10, 2016), available at https://www.ftc.gov/
system/files/documents/advisory_opinions/letter-
lois-greisman-associate-director-division-marketing-
practices-michael-bills/161110staffopsound
boarding.pdf (last visited Dec. 11, 2023).
39 The proposed amendments stated the call
detail records include for each call a telemarketer
places or receives, the calling number; called
number; time, date, and duration of the call; and the
disposition of the call, such as whether the call was
answered, dropped, transferred, or connected. If the
call was transferred, the record should also include
the phone number or IP address that the call was
transferred to as well as the company name, if the
call was transferred to a company different from the
seller or telemarketer that placed the call. 2022
NPRM, 87 FR at 33684.
40 For each consumer with whom a seller asserts
it has an established business relationship, the
proposed amendments stated a seller must keep a
record of the name and last known phone number
of that consumer, the date the consumer submitted
an inquiry or application regarding that seller’s
goods or services, and the goods or services
inquired about. A seller may also show it has an
established business relationship with a consumer
if that consumer purchased, rented, or leased the
seller’s goods or services or had a financial
transaction with the seller during the 18 months
before the date of the telemarketing call. Another
proposed amendment modifies the existing
recordkeeping provisions to state that records of
existing customers should also include the date of
the financial transaction to establish EBR under
these circumstances. Id. at 33685.
41 If a telemarketer intends to assert that a
consumer is a previous donor to a particular
charity, the Commission proposed that for each
such consumer the telemarketer must keep a record
of that consumer’s name and last known phone
number, and the last date that consumer donated
to the particular charity. The proposed amendments
also included a new definition of ‘‘previous donor.’’
Id. at 33685.
42 The proposed amendments stated that service
providers include, but are not limited to, voice
providers, autodialers, sub-contracting
telemarketers, or soundboard technology platforms.
The Commission did not intend for this provision
to include every voice provider involved in
delivering the outbound call and limited this
provision to the service providers with which the
seller or telemarketer has a business relationship.
For each such entity, the seller or telemarketer must
keep records of any applicable contracts, the date
the contract was signed, and the time period the
contract is in effect. The proposed amendments also
stated that the records should be retained for five
years after the contract expires or five years from
the date the telemarketing activity covered by the
contract ceases, whichever is shorter. Id. at 33685–
86.
43 For the entity-specific do-not-call registry, the
Commission proposed requiring telemarketers and
sellers to retain records of: (1) the consumer’s name,
(2) the phone number(s) associated with the DNC
request, (3) the seller or charitable organization
from which the consumer does not wish to receive
calls, (4) the telemarketer that made the call; (5) the
date the DNC request was made; and (6) the good
or service being offered for sale or the charitable
purpose for which contributions are being solicited.
Id. at 33686.
44 The Commission proposed requiring
telemarketers or sellers to keep records of every
version of the FTC’s DNC Registry the telemarketer
or seller downloaded to ensure compliance with the
TSR. Id. at 33686.
45 Id. at 33684.
46 Id.
47 Id. at 33680–82.
48 Id. at 33686.
49 Id.
50 Id. at 33686–87. The proposed amendment also
stated that for a copy of the consent provided under
Sections 310.3(a)(3), 310.4(a)(7),
310.4(b)(1)(iii)(B)(1), or 310.4(b)(1)(v)(A), a
complete record must include all of the
requirements outlined in those respective sections.
51 2022 NPRM, 87 FR at 33686–87.
52 The proposed amendments required records
containing international phone numbers to comport
enforcement purposes, and the
Commission cannot identify the bad
actor responsible for the spoofed or
otherwise illegal calls.34
Call detail records are also necessary
to ascertain compliance with certain
provisions of the TSR such as the DNC
Registry.35 And as detailed in the 2022
NPRM, even when the Commission and
other law enforcers are successful in
obtaining call detail records, the records
alone do not contain sufficient
information about the content of the
calls for regulators to determine whether
the telemarketer or seller has violated
the TSR.36
The proposed amendments to the
recordkeeping requirements addressed
the challenges identified above. They
included new recordkeeping
requirements of telemarketing activity
that telemarketers or sellers are in the
best position to provide.37 Specifically,
the proposed amendments required the
retention of the following new
categories of information: (1) a copy of
each unique prerecorded message,
including each call a telemarketer
makes using soundboard technology; 38
(2) call detail records of telemarketing
campaigns; 39 (3) records sufficient to
show a seller has an established
business relationship (‘‘EBR’’) with a
consumer; 40 (4) records sufficient to
show a consumer is a previous donor to
a particular charity; 41 (5) records of the
service providers that a telemarketer
uses to deliver outbound calls; 42 (6)
records of a seller or charitable
organization’s entity-specific do-not-call
registries; 43 and (7) records of the
Commission’s DNC Registry that were
used to ensure compliance with this
Rule.44
The proposed amendments also
required the retention of other new
records that help identify the nature and
purpose of each call including: (1) the
identity of the telemarketer who placed
or received each call; (2) the seller or
charitable organization for which the
telemarketing call is placed or received;
(3) the good, service, or charitable
purpose that is the subject of the call; (4)
whether the call is to a consumer or
business, utilizes robocalls, or is an
outbound call; and (5) the telemarketing
script(s) and the robocall recording (if
applicable) that was used in the call.45
The proposed amendments also
required the retention of records
regarding the caller ID transmitted if the
call was an outbound call, including the
name and phone number that was
transmitted, and records of the
telemarketer’s authorization to use the
phone number and name that was
transmitted.46
The proposed amendments also
modified or clarified existing
recordkeeping requirements to delineate
more clearly the information
telemarketers or sellers must keep to
comply with those provisions, and
specified what information is required
to assert an exemption or affirmative
defense to the TSR.47 Specifically, the
proposed amendments modified the
recordkeeping provisions to require
retention of a customer or prize
recipient’s last known telephone
number and last known physical or
email address, and the date a customer
bought a good or service.48 It modified
the time period to keep records from
two years to five years from the date the
record is made, except for advertising
materials under Section 310.5(a)(1) and
service contracts under Section
310.5(a)(9), which require retention of
records for five years from the date the
records under those sections are no
longer in use.49
The proposed amendments clarified
that records of verifiable authorizations,
express informed consent or express
agreement (collectively, ‘‘consent’’)
include a consumer’s name and phone
number, a copy of the consent requested
in the same manner and format that it
was presented to that consumer, a copy
of the consent provided, the date the
consumer provided consent, and the
purpose for which consent was given
and received.50 The NPRM also
proposed that if the telemarketer or
seller requested consent verbally, the
copy of consent requested did not
require a recording of the conversation.
A copy of the telemarketing script
would suffice as a complete record of
the consent requested. But the NPRM
made clear that this proposal only
applies to telemarketing calls where no
other provision of the TSR requires a
recording of consent.51
The proposed amendments also
included new format requirements for
records containing a phone number,
time or call duration; 52 clarified that a
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26763	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
with International Telecommunications Union’s
Recommendation E.164 format and domestic
numbers to comport with the North American
Numbering plan. The Commission proposed that
records containing time and call duration be kept
to the closest whole second, and time must be
recorded in Coordinated Universal Time (UTC). Id.
at 33687.
53 The Commission proposed a safe harbor for
temporary and inadvertent errors in keeping call
detail records if the telemarketer or seller can
demonstrate that: (1) it has established and
implemented procedures to ensure completeness
and accuracy of its records under Section
310.5(a)(2); (2) it trained its personnel in the
procedures; (3) it monitors compliance and enforces
the procedures, and documents its monitoring and
enforcement activities; and (4) any failure to keep
accurate or complete records under Section
310.5(a)(2) was temporary and inadvertent. Id. at
33687.
54 Id. at 33687.
55 Original TSR, 60 FR at 43861.
56 Id.; see also 2002 Notice of Proposed
Rulemaking (‘‘2002 NPRM’’), 67 FR 4492, 4500 (Jan.
30, 2002); 2014 TSR Rule Review, 79 FR at 46738.
57 2002 NPRM, 67 FR at 4500, 4531. ‘‘internet
Services’’ meant any service that allowed a business
to access the internet, including internet service
providers, providers of software and telephone or
cable connections, as well as services that provide
access to email, file transfers, websites, and
newsgroups. Id. ‘‘Web services’’ was defined as
‘‘designing, building, creating, publishing,
maintaining, providing, or hosting a website on the
internet.’’ Id. The Commission intended for the
term internet services to encompass any and all
services related to accessing the internet and the
term web services to encompass any and all
services related to operating a website. Id.
58 2003 TSR Amendments, 68 FR at 4663.
59 Id.
60 A 2018 survey conducted by the Better
Business Bureau revealed that the same scams that
harm consumers, such as tech support scams and
imposter scams, also harm small businesses, and
that 57% of scams that impact small businesses are
perpetrated through telemarketing. Better Business
Bureau, Scams and Your Small Business Research
Report, at 9–10 (June 2018), available at https://
www.bbb.org/SmallBizScams (last visited Dec. 11,
2023).
61 See, e.g., FTC v. Your Yellow Book Inc., No.
14–cv–786–D (W.D. Ok. July 24, 2014), available at
https://www.ftc.gov/system/files/documents/cases/
140807youryellowbookcmpt.pdf (last visited Dec.
11, 2023); FTC v. OnlineYellowPagesToday.com,
Inc., No. 14–cv–0838 RAJ (W.D. Wash. June 9,
2014), available at https://www.ftc.gov/system/files/
documents/cases/140717onlineyellowpages
cmpt.pdf (last visited Dec. 11, 2023); FTC v. Modern
Tech. Inc., et al., No. 13–cv–8257 (Nov. 18, 2013)
available at https://www.ftc.gov/sites/default/files/
documents/cases/131119yellowpagescmpt.pdf (last
visited Dec. 11, 2023); FTC v. 6555381 Canada Inc.
d/b/a Reed Publishing, No. 09–cv–3158 (N.D. Ill.
May 27, 2009) available at https://www.ftc.gov/
sites/default/files/documents/cases/2009/06/
090602reedcmpt.pdf (last visited Dec. 11, 2023);
FTC v. 6654916 Canada Inc. d/b/a Nat’l. Yellow
Pages Online, Inc., No. 09–cv–3159 (N.D. Ill. May
27, 2009), available at https://www.ftc.gov/sites/
default/files/documents/cases/2009/06/090602
nypocmpt.pdf (last visited Dec. 11, 2023); FTC v.
Integration Media, Inc., No. 09–cv–3160 (N.D. Ill.
May 27, 2009), available at https://www.ftc.gov/
sites/default/files/documents/cases/2009/06/
090602goamcmpt.pdf (last visited Dec. 11, 2023);
FTC v. Datacom Mktg. Inc., et al., No. 06–cv–2574
(N.D. Ill. May 9, 2006), available at https://
www.ftc.gov/sites/default/files/documents/cases/
2006/05/060509datacomcomplaint.pdf (last visited
Dec. 11, 2023); FTC v. Datatech Commc’ns, Inc.,
No. 03–cv–6249 (N.D. Ill. Aug. 3, 2005) (filing
amended complaint), available at https://
www.ftc.gov/sites/default/files/documents/cases/
2005/08/050825compdatatech.pdf (last visited Dec.
11, 2023); FTC v. Ambus Registry, Inc., No. 03–cv–
1294 RBL (W.D. Wash. June 16, 2003), available at
https://www.ftc.gov/sites/default/files/documents/
cases/2003/07/ambuscomp.pdf (last visited Dec. 11,
2023).
62 See FTC v. Epixtar Corp., et al., No. 03–cv–
8511(DAB) (S.D.N.Y. Nov. 3, 2003), available at
https://www.ftc.gov/sites/default/files/documents/
cases/2003/11/031103comp0323124.pdf (last
visited Dec. 11, 2023); FTC v. Mercury Mktg. of Del.,
Inc., No. 00–cv–3281 (E.D. Pa. Aug. 12, 2003) (filing
for an Order to Show Cause Why Defendants
Should Not be Held in Contempt), available at
https://www.ftc.gov/sites/default/files/documents/
cases/2003/08/030812contempmercury
marketing.pdf (last visited Dec. 11, 2023).
63 See, e.g., FTC v. Pointbreak Media, LLC, No.
18–cv–61017–CMA (S.D. Fla. May 7, 2018),
available at https://www.ftc.gov/system/files/
documents/cases/matter_1723182_pointbreak_
complaint.pdf (last visited Dec. 11, 2023); FTC v.
7051620 Canada, Inc. No. 14–cv–22132 (S.D. Fla.
June 9, 2014), available at https://www.ftc.gov/
system/files/documents/cases/140717national
busadcmpt.pdf (last visited Dec. 11, 2023).
64 See, e.g., FTC v. Prod. Media Co., No. 20–cv–
00143–BR (D. Or. Jan. 23, 2020), available at
https://www.ftc.gov/system/files/documents/cases/
production_media_complaint.pdf (last visited Dec.
11, 2023).
65 See, e.g., FTC v. First Am. Payment Sys., LP,
et al., No. 4:22–cv–00654 (E.D. Tex. July 29, 2022),
available at https://www.ftc.gov/system/files/ftc_
gov/pdf/Complaint%20%28file%20stamped%29_
0.pdf (last visited Dec. 11, 2023).
66 See, e.g., FTC v. DOTAuthority.com, No. 16–
cv–62186 (S.D. Fla. Sept. 13, 2016) available at
https://www.ftc.gov/system/files/documents/cases/
162017dotauthoriity-cmpt.pdf (last visited Dec. 11,
2023); FTC v. D & S Mktg. Sols. LLC, No. 16–cv–
01435–MSS–AAS (M.D. Fla. June 6, 2016),
available at https://www.ftc.gov/system/files/
documents/cases/160621dsmarketingcmpt.pdf (last
visited Dec. 11, 2023).
67 See Press Release, FTC, BBB, and Law
Enforcement Partners Announce Results of
Operation Main Street: Stopping Small Business
Scams Law Enforcement and Education Initiative
(June 18, 2018), available at https://www.ftc.gov/
news-events/press-releases/2018/06/ftc-bbb-law-
enforcement-partners-announce-results-operation-
main (last visited Dec. 11, 2023).
68 2022 NPRM, 87 FR at 33682–84.
69 Id.; see also 16 CFR 310.5 (recordkeeping
requirements); 310.8 (fee for access to the Do Not
Call Registry).
failure to keep each record required
under Section 310.5 in a complete and
accurate manner constitutes a violation
of the TSR; and created a safe harbor for
incomplete or inaccurate call detail
records where the omission was
temporary and inadvertent.53 Finally,
the Commission proposed modifying
the compliance obligations in Section
310.5(e) to obligate both telemarketers
and sellers to keep records if they fail
to allocate recordkeeping obligations
between themselves. 54
B. B2B Telemarketing
The Original TSR exempted B2B calls
other than those selling office and
cleaning supplies, which the
Commission considered the ‘‘most
significant business-to-business problem
area’’ at the time.55 The Commission
stated, however, it would reconsider the
B2B exemption if ‘‘additional [B2B]
telemarking activities become
problems.’’ 56 In 2003, the Commission
reconsidered the scope of the B2B
exemption and proposed requiring B2B
calls selling internet or web services to
comply with the TSR because they had
become an emerging area for fraud.57
The Commission ultimately decided not
to modify the B2B exemption because
the Commission wanted to ‘‘move
cautiously so as not to chill innovation
in the development of cost-efficient
methods for small businesses to join in
the internet marketing revolution.’’ 58
But the Commission again noted it
would ‘‘continue to monitor closely’’
the B2B telemarketing practices in this
area and ‘‘may revisit the issue in
subsequent Rule Reviews should
circumstances warrant.’’ 59
Since 2003, the Commission has
continued to see small business harmed
by numerous types of deceptive B2B
telemarketing schemes, 60 including
those selling business directory
listings,61 web hosting or design
services,62 search engine optimization
services,63 market-specific advertising
opportunities, 64 payment processing
services,65 and schemes that
impersonate the government.66 For
example, some of these schemes were
the subject of a coordinated FTC-led
crackdown on scams targeting small
businesses, called ‘‘Operation Main
Street,’’ announced in June 2018.67
To address these scams, the 2022
NPRM proposed applying the TSR’s
prohibitions against misrepresentations,
as articulated in Sections 310.3(a)(2)
and 310.3(a)(4), to B2B telemarketing.
Specifically, sellers and telemarketers
would be prohibited from making: (1)
several types of material
misrepresentations in the sale of goods
or services; and (2) false or misleading
statements to induce a person to pay for
goods or services or to induce a
charitable contribution (collectively,
‘‘misrepresentations’’). 68 The 2022
NPRM did not propose applying any
other provisions of the TSR to B2B calls,
such as recordkeeping, DNC Registry, or
DNC fee access requirements. 69
C. New Definition for ‘‘Previous Donor’’
The 2022 NPRM proposed adding a
new definition for the term ‘‘previous
donor’’ to clarify that telemarketers are
prohibited from making charity
robocalls unless the consumer donated
to the soliciting charity within the last
two years. When the Commission
amended the TSR to prohibit robocalls
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70 2008 TSR Amendments, 73 FR at 51164.
71 Id. at 51193.
72 Id. at 51194.
73 16 CFR 310.2(p). The Commission declined to
limit the definition of donor to those who have ‘‘an
established business relationship with the non-
profit charitable organization’’ because it wanted
the term ‘‘[to] encompass not only those who have
agreed to make a charitable contribution but also
any person who is solicited to do so, to be
consistent with [the Rule’s] use of the term
‘customer.’ ’’ 2003 TSR Amendments 68 FR at 4590.
74 The Commission proposed that the definition
of ‘‘previous donor’’ be limited to those who
donated to a charity within the past two years so
that consumers will not receive robocalls in
perpetuity from organizations to which they have
donated. The Commission chose two years to
account for the possibility that consumers who
donate annually may not necessarily donate exactly
one year apart. 2022 NPRM, 87 FR at 33688.
75 The Commission also received 114 unique
comments in response to the 2014 Rule Review
reflecting the opinions of State and Federal
agencies, consumer advocacy groups, consumers,
academics, and industry. 2022 ANPR, 87 FR at
33664. The comments addressing whether the
Commission should amend the TSR’s
recordkeeping provisions are summarized in the
2022 NPRM. 2022 NPRM, 87 FR at 33682.
76 Many commenters filed one comment in
response to the 2022 ANPR or 2022 NPRM that
addressed issues raised by both documents.
Comments regarding the proposals in the 2022
NPRM will be addressed in this Final Rule.
Comments regarding the proposals in the 2022
ANPR will be addressed in the Notice of Proposed
Rulemaking that the Commission is issuing
concurrently with this Final Rule (‘‘2024 NPRM’’).
We cite public comments by name of the
commenting organization or individual, the
rulemaking (ANPR comments were assigned ‘‘33’’
and the NPRM comments were assigned ‘‘34’’), and
the comment number. All comments submitted can
be found at www.regulations.gov.
77 National Association of Attorneys General on
behalf of 43 State Attorneys General (‘‘NAAG’’) 34–
20.
78 World Privacy Forum (‘‘WPF’’) 34–21;
Electronic Privacy and Information Center, National
Consumer Law Center (on behalf of its low-income
clients), Center for Digital Democracy, Consumer
Action, Consumer Federation of America,
FoolProof, Mountain State Justice, New Jersey
Citizen Action, Patient Privacy Rights, Public Good
Law Center, Public Knowledge, South Carolina
Appleseed Legal Justice Center, and Cathy Lesser
Mansfield (Senior Instructor in Law at Case Western
Reserve University School of Law) (‘‘EPIC’’) 34–23.
79 Bradley 34–15; Cassady 34–2; Chen 34–9;
Kreutzmann 34–5, Yang 34–12, and 4 Anonymous
submitters at 34–3, 34–4, 34–7, and 34–11. Four
commenters submitted consumer complaints or
were not relevant to the proceeding. See
Anonymous 34–6, 34–8, and 34–16; and Grener 34–
10.
80 Enterprise Communications Advocacy
Coalition (‘‘ECAC’’) 34–22; National Federation of
Independent Business 33–4 (‘‘NFIB’’); Ohio Credit
Union League (‘‘OCUL’’) 34–19; Professional
Association for Customer Engagement 33–15
(‘‘PACE’’); Revenue Based Finance
Coalition(‘‘RBFC’’) 34–13; Third Party Payment
Processors Association (‘‘TPPPA’’) 34–14; US
Chamber of Commerce (‘‘Chamber’’) 34–24; and
USTelecom—The Broadband Association
(‘‘USTelecom’’) 33–14.
81 Rapid Financial Services, LLC and Small
Business Financial Solutions, LLC (‘‘Rapid
Finance’’) 34–17; Sirius XM Radio (‘‘Sirius’’) 34–18.
82 Many of the consumer comments generally
stated that they supported the recordkeeping
amendments because they would help protect
consumers from deceptive telemarketing and with
enforcing the TSR. See, e.g., Cassady 34–3; Chen
34–9; and Anonymous 34–11 and 34–3. One
commenter generally urged more enforcement and
larger penalties. Kowalski 33–7.
83 One anonymous commenter did not support
any recordkeeping because it required collection of
too much data, which the commenter believed
infringed on a consumer’s privacy. Anonymous 34–
4.
84 The record includes the 2014 Rule Review, the
2022 NPRM, 2022 ANPR, and the law enforcement
cases and experience referenced therein, which are
hereby incorporated by reference.
85 The Commission’s decision to amend the Rule
is made pursuant to the rulemaking authority
granted by the Telemarketing Act to protect
consumers, including small businesses, from
deceptive or abusive practices. 15 U.S.C. 6102(a).
86 2022 NPRM, 87 FR at 33688.
in 2008,70 it included a narrow
exemption allowing charity robocalls to
prior donors, recognizing a charity’s
strong interest in reaching consumers
with ‘‘whom the charity has an existing
relationship—i.e. members of, or
previous donors to[,] the non-profit
organization on whose behalf the calls
are made.’’ 71 The Commission meant to
limit the exemption to consumers with
actual relationships to the soliciting
organization, because allowing
‘‘telefunders to make impersonal
prerecorded cold calls on behalf of
charities that have no prior relationship
with the call recipients . . . would
defeat the amendment’s purpose of
protecting consumers’ privacy.’’ 72 But
in creating the exemption, the
Commission did not update the
definition of ‘‘donor’’ or include a
definition of ‘‘previous donor.’’ Because
‘‘donor’’ is defined as ‘‘any person
solicited to make a charitable
contribution,’’ 73 the Commission’s 2008
Amendment could be misinterpreted as
allowing a telemarketer to send
robocalls to any consumer it had
previously solicited for a donation on
behalf of a charity, regardless of whether
the consumer donated to or has an
existing relationship with that charity.
Adding a definition for ‘‘previous
donor’’ makes clear a seller or
telemarketer may only make charity
robocalls to a donor who has previously
provided a charitable contribution to
that particular charity within the last
two years.74
D. Overview of Public Comments
Received in Response to the 2022 NPRM
In response to the 2022 NPRM,75 the
Commission received 26 comments 76
representing the views of State
governments, 77 consumer groups,78
consumers,79 industry trade
associations,80 and businesses.81 The
vast majority of the comments focused
on the proposed recordkeeping
amendments. Commenters on behalf of
government, individual consumers, and
consumer advocacy groups generally
supported amending the recordkeeping
requirements but also submitted
suggestions for additional
amendments. 82 Industry groups and
businesses had mixed comments. Some
commenters did not support any
recordkeeping amendments, citing the
burden they would impose, while others
were generally supportive or supportive
of specific proposed amendments.83
Similarly, industry groups and
businesses did not support applying the
TSR’s prohibitions against deceptive
telemarketing to B2B calls; while
government, individual consumers, and
consumer organizations were
supportive. Only three comments
touched on the proposed amendment to
add a new definition of ‘‘previous
donor.’’ The comments and the basis for
the Commission’s adoption or rejection
of the commenters’ suggested
modifications to the proposed
amendments are analyzed in Section III
below.
III. Final Amended Rule
The Commission has carefully
reviewed and analyzed the record
developed in this proceeding.84 The
record, which includes the
Commission’s law enforcement
experience and that of its State and
Federal counterparts, support the
Commission’s view the proposed
amendments in the 2022 NPRM are
necessary and appropriate to protect
consumers, including small businesses,
from deceptive or abusive telemarketing
practices and ensure the Commission
and other regulators can effectively and
efficiently enforce the TSR.85
The Final Rule requires sellers and
telemarketers to keep additional records
of their telemarketing activities,
prohibits misrepresentations in B2B
telemarketing, and adds a new
definition for previous donor. The Final
Rule also implements several other
clerical modifications as originally
proposed in the 2022 NPRM.86
In some instances, the Commission
has clarified or made modifications to
its original proposal in response to the
public comments submitted. The
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87 The Telemarketing Act authorizes the
Commission to include recordkeeping requirements
in the Rule. 15 U.S.C. 6102(a)(3).
88 The 2022 NPRM also proposed changing the
records retention period under this provision from
two years to five years from the date that the
records are no longer in use. See infra Section
III.A.10 (Time Period to Keep Records).
89 Sirius 34–18 at 8.
90 ECAC 34–22 at 2.
91 NAAG 34–20 at 3–4; PACE 33–15 at 2; WPF
34–21 at 2.
92 PACE 33–15 at 2.
Commission otherwise adopts the
amendments proposed in the 2022
NPRM as set forth in Section VII—
Congressional Review Act (‘‘Final
Rule’’) below. The primary
modifications and clarifications
between the proposed rule published in
the 2022 NPRM and the Final Rule are:
• The term ‘‘prerecorded message’’
includes telemarketing calls made using
‘‘digital soundboard’’ rather than
‘‘soundboard technology’’ to make clear
the term includes any digital or sound
technologies that sellers or
telemarketers use to convey a verbal
message to a consumer in telemarketing;
• Telemarketers and sellers will have
one hundred and eighty days after the
Final Rule is published to implement
any new systems, software, or
procedures necessary to comply with
the new requirement that they keep call
detail records under Section 310.5(a)(2);
• Sellers and telemarketers need not
retain records of the calling number,
called number, date, time, duration, and
disposition of telemarketing calls under
Sections 310.5(a)(2)(vii) and (x) for any
calls made by an individual
telemarketer who manually enters a
single telephone number to initiate a
call to that telephone number. Such
sellers and telemarketers, however,
must still comply with the other
requirements under Section 310.5(a)(2);
• Modified Section 310.4(b)(2) to
state it is also an abusive telemarketing
act or practice and a violation of the
TSR for any person to sell, rent, lease,
purchase, or use any list established to
comply with the TSR’s recordkeeping
requirements under Section 310.5. This
modification makes clear telemarketers
and sellers cannot use any consumer
lists created for recordkeeping purposes
for any other purpose;
• In obtaining written consent to
contact a consumer using robocalls on
behalf of a ‘‘specific seller,’’ the written
agreement must identify the ‘‘specific
seller’’ by its legal entity name to make
clear that any agreement to receive
robocalls is limited to that legal entity.
The seller or telemarketer obtaining
consent from the consumer must ensure
the consumer understands which legal
entity they have authorized to send
robocalls;
• Where no provision of the TSR
requires a recording of the call, the Final
Rule modifies what was proposed in the
NPRM and now states a complete record
of consent that is verbally requested
must include a recording of the consent
requested as well as the consent
provided, and that recording must make
clear the purpose for which consent was
provided;
• Service providers referenced under
Section 310.5(a)(9) include any entity
that provides ‘‘digital soundboard’’
technology rather than ‘‘soundboard
technology platforms’’ to make clear
sellers and telemarketers must retain
records of any entity that provides any
digital or sound technologies sellers or
telemarketers use to convey a verbal
message to a consumer in telemarketing;
• Sellers and telemarketers must
retain records of their service providers
under Section 310.5(a)(9) for five years
from the date the contract expires;
• For records of the entity-specific
DNC list under Section 310.5(a)(10),
sellers and telemarketers must retain a
record of the telemarketing entity that
made the call and not the individual
telemarketer;
• Under Section 310.5(a)(11), sellers
and telemarketers need only retain
records of which version of the FTC
DNC Registry they used to comply with
the TSR rather than the version itself. A
record of which version used includes:
(1) the name of the entity which
accessed the registry; (2) the date the
DNC Registry was accessed; (3) the
subscription account number that was
used to access the registry; and (4) the
telemarketing campaign(s) for which it
was accessed;
• The new formatting requirements
under Section 310.5(b) apply to new
records created after the Final Rule goes
into effect;
• The safe harbor to retain call detail
records under Section 310.5(a)(2) will
grant sellers and telemarketers thirty
days to correct any inadvertent errors
from the date of discovery, if the seller
or telemarketer who made the error
otherwise complies with the other
provisions of the safe harbor; and
• Under Section 310.5(e), sellers who
delegate recordkeeping responsibilities
to a telemarketer must also retain access
rights to those records so the seller can
produce responsive records in the event
it has hired a telemarketer overseas.
A. Recordkeeping Requirements
The Final Rule requires sellers and
telemarketers to maintain additional
records that, in the Commission’s law
enforcement experience, are difficult for
the Commission to obtain but are
necessary to ensure compliance with the
TSR.87 The Final Rule also clearly
defines the information telemarketers or
sellers must retain to comply with
existing provisions and specifies the
records needed to assert an exemption
or affirmative defense to the TSR. In this
section, the Commission details the
public comments it received in response
to each proposed amendment to the
recordkeeping requirements, and the
Commission’s response.
1. Section 310.5(a)(1)—Substantially
Different Advertising Materials and
Each Unique Prerecorded Message
Section 310.5(a)(1) currently requires
sellers and telemarketers to keep records
of ‘‘all substantially different
advertising, brochures, telemarketing
scripts, and promotional materials.’’ The
2022 NPRM proposed modifying
Section 310.5(a)(1) to require retention
of a copy of each unique robocall,
including each call a telemarketer
makes using soundboard technology.88
The Commission received five public
comments addressing this proposal. The
Enterprise Communications Advocacy
Coalition (‘‘ECAC’’) and Sirius XM
Radio (‘‘Sirius’’) object to this proposed
amendment, stating it would be overly
burdensome. Sirius states requiring the
retention of each unique robocall would
‘‘generate massive amounts of data that
then needs to be searched, analyzed,
secured, and retained, and will be
extremely burdensome.’’ 89 ECAC claims
robocalls are ‘‘typically stored as .wav
files that are significantly larger than
text files. While storage costs may have
decreased over time, the expense
associated with the storage of these large
.wav files will be a significant burden
on lawful telemarketers.’’ 90
The National Association of Attorneys
General (on behalf of 43 State Attorneys
General) (‘‘NAAG’’), Professional
Association for Customer Engagement
(‘‘PACE’’), and World Privacy Forum
(‘‘WPF’’) all state they generally support
this amendment.91 PACE further states
their members ‘‘often keep copies of
[each unique robocall] despite the TSR
currently not requiring businesses to do
so. Retaining these records will protect
American consumers, who receive
countless prerecorded messages, and
protect companies, who will be able to
prove compliance with the TSR.’’ 92
The Commission is not persuaded by
ECAC’s and Sirius’ arguments. In the
Commission’s experience, robocalls are
typically of short duration and the file
sizes are minimal. As ECAC notes, the
cost of storage may be decreasing every
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93 See, e.g., PACE 33–15 at 2.
94 2022 NPRM, 87 FR at 33689.
95 WPF 34–21 at 2.
96 Id.
97 16 CFR 310.5(a)(1).
98 2022 NPRM, 87 FR at 33684.
99 ECAC 34–22 at 3.
100 NFIB 33–4 at 4–5.
101 Sirius 34–18 at 7.
102 OCUL also generally objects to the proposed
recordkeeping requirements as overly burdensome,
stating it would require a significant investment to
collect and retain new data points in a constricted
time frame. OCUL 34–19 at 2.
Other commenters generally objected to the
recordkeeping amendments, arguing that they
require telemarketers and sellers to retain more
information than they would in the ordinary course
of business and are ‘‘contrary to data minimization
principles’’ articulated by the Commission
elsewhere. See, e.g., Sirius 34–18 at 2, 4–6; NFIB
33–4 at 3–4. The Commission interprets these
arguments to refer to the new requirement that
sellers and telemarketers retain call detail records.
NFIB lists other categories in their comment as
examples of burden, such as records of established
business relationships, customer lists, consent, and
entity-specific DNCs or versions of the FTC’s DNC
Registry. NFIB 33–4 at 3–4. None of these
categories, however, is new, and the TSR has
always required telemarketers and sellers to keep
these records. See, e.g., 16 CFR 310.5(a)(3) and (5)
(requiring records of consent and customer lists);
310.4(b)(3)(iii) and (iv) (requiring records of an
entity-specific DNC or a version of the FTC’s DNC
Registry that a seller or telemarketer used to qualify
for the safe harbor provisions); see also 2015 TSR
Amendments, 80 FR at 77554 (stating the seller or
telemarketer bears the burden of demonstrating the
seller has an existing relationship with a customer
whose number is on the DNC).
The Commission notes that the call detail records
primarily reflect sellers’ and telemarketers’ business
practices rather than implicate any consumer
information. The only new items of consumer
information that sellers and telemarketers are
required to retain under the new recordkeeping
amendments are a consumer’s phone number and
the option to retain the consumer’s last known
email address rather than a physical address. See
proposed amendments under Sections 310.5(a)(2)
(call detail records); (a)(3) (prize recipients); (a)(4)
(customer records); and (a)(6) (previous donor). As
explained in the 2022 NPRM, the Commission
believes that telemarketers and sellers likely retain
this information in the ordinary course of business.
2022 NPRM, 87 FR at 33684–85. Furthermore, they
must already retain consumers’ phone numbers to
comply with the entity-specific DNC requirements.
As discussed in additional detail in Section
III.A.3—Prize Recipients and Customer Records, the
Commission will prohibit use of any records
created to comply with the TSR’s recordkeeping
requirements for any other purpose.
103 ECAC 34–22 at 3.
104 Id. at 4. The Commission does not find ECAC’s
argument persuasive. Even if a telemarketer
deviates from a script, fails to use the script, or the
company constantly updates the scripts, there is
still a script associated with a particular call and
in the Commission’s law enforcement experience,
telemarketers typically retain that information in
the ordinary course of business.
year. Moreover, the Commission
proposed requiring a copy of each
unique robocall, not every robocall used.
Finally, as some commenters have
stated,93 businesses typically keep these
records in the ordinary course of
business. In the FTC’s law enforcement
experience, records of each unique
prerecorded message are necessary for
the Commission to ensure compliance
with the TSR, and requiring retention of
each unique robocall should not impose
an undue burden.
With respect to calls utilizing
soundboard technology, the
Commission sought comment on the
burden that may be imposed by
requiring sellers or telemarketers to
keep each unique prerecorded message
involving the use of soundboard
technology, including how many
telemarketers employ soundboard
technology in telemarketing, how many
calls they make using soundboard
technology, the average duration of each
call, and whether the telemarketer
typically keeps recordings of such calls
in the ordinary course of business.94
The FTC’s law enforcement experience
demonstrates the use of soundboard
technology is ongoing. The Commission
did not receive any public comments
regarding this issue. WPF did note,
however, the Commission should be
mindful of using technological language
that is broad enough to encompass a
variety of digital and other sound
technologies and recommended the use
of the term ‘‘digital soundboard’’ in lieu
of ‘‘soundboard technology.’’ 95 In light
of this recommendation, the
Commission states that the term
‘‘prerecorded message’’ includes
telemarketing calls made using ‘‘digital
soundboard’’ rather than ‘‘soundboard
technology’’ to make clear the term
includes any digital or sound
technologies that sellers or
telemarketers use to convey a verbal
message to a consumer in telemarketing.
Some digital soundboard technologies
allow a seller or telemarketer to mimic
or clone the voice of a specific
individual and calls using this
technology would be subject to this
provision of the TSR to the extent that
the mimic or cloning creates a
prerecorded message that is used in
telemarketing.
WPF also ‘‘encourage[s] the FTC to
require telemarketers to keep a copy of
the full range of materials involved in
the advertising campaign, including
transcripts.’’ 96 The Commission notes
the TSR’s recordkeeping provisions
already require telemarketers and sellers
to retain a copy of each substantially
different advertising, brochure,
telemarketing script, and promotional
material.97 The 2022 NPRM simply
clarified telemarketing scripts include
robocall and upsell scripts, and the
failure to keep one substantially
different version of each record under
Section 310.5(a)(1) is a violation of the
TSR.98
2. Section 310.5(a)(2)—Call Detail
Records
The 2022 NPRM proposed adding
Section 310.5(a)(2) to require retention
of call detail records, including, for each
call a telemarketer places or receives:
the calling number; called number;
time, date, and duration of the call; and
the disposition of the call, such as
whether the call was answered,
dropped, transferred, or connected. For
transfers, the record included the phone
number or IP address the call was
transferred to and the company name, if
transferred to a company different from
the seller or telemarketer that placed the
call. The 2022 NPRM also required the
retention of other records regarding the
nature and purpose of each call
including: (1) the telemarketer who
placed or received each call; (2) the
seller or charity for which the
telemarketing call is placed or received;
(3) the good, service, or charitable
purpose that is the subject of the call; (4)
whether the call is to a consumer or
business, utilizes robocalls, or is an
outbound call; and (5) the telemarketing
script(s) and robocall (if applicable) that
was used in the call. Finally, the 2022
NPRM required retention of records
regarding the caller ID transmitted for
outbound calls, including the name and
phone number transmitted, and records
of the telemarketer’s authorization to
use that phone number and name.
The Commission received eight
comments regarding this proposal.
ECAC,99 the National Federation of
Independent Businesses (‘‘NFIB’’),100
and Sirius 101 objected, stating that
compliance with this provision would
impose enormous expense on
businesses engaged in lawful
telemarketing.102 ECAC states its
members ‘‘make hundreds of millions of
calls each year’’ and ‘‘[f]actoring in the
size of a CDR file’’ multiplied by the
number of calls its members make each
year, ‘‘the expense associated with this
retention . . . would be massive.’’ 103
ECAC also argues that, while its
members likely keep information
regarding the nature and purpose of the
calls in the ordinary course of business,
associating particular scripts with a
particular call is unworkable because
‘‘well-trained telemarketers are able to
deviate from scripts or not use them at
all’’ and ‘‘scripts are constantly
changing and evolving to reflect
consumer questions and concerns.’’ 104
Sirius argues the Commission’s
‘‘overly prescriptive’’ approach would
impair a business’s ability to adapt to
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105 Sirius 34–18 at 7–8.
106 NFIB 33–4 at 5.
107 Sirius 34–18 at 8.
108 Cassady 34–2; EPIC 34–23 at 4; NAAG 34–20
at 5; WPF 34–21 at 2.
109 NAAG 34–20 at 5.
110 EPIC 34–23 at 4.
111 Id.
112 WPF 34–21 at 2; NAAG 34–20 at 6.
113 Cassady 34–2.
114 PACE 33–15 at 2.
115 Id.
116 2022 NPRM, 87 FR at 33680–82, 33684.
117 2022 NPRM, 87 FR at 33690–91.
118 PACE 33–15 at 2.
119 WPF 34–21 at 2.
120 FTC, Policy Statement of the Federal Trade
Commission on Biometric Information and Section
5 of the Federal Trade Commission Act (May 18,
2023), available at https://www.ftc.gov/system/files/
ftc_gov/pdf/p225402biometricpolicystatement.pdf
(last visited Jan 24, 2024).
changing market conditions and a
company’s ability to innovate. It would
also impose ‘‘significant administrative
burdens’’ and ‘‘substantial transactional
costs’’ on sellers and telemarketers to
establish contracts and systems to
capture the information requested.105
And NFIB argues sellers and
telemarketers would ‘‘incur substantial
costs to: (1) establish in-house, or
purchase from others, systems designed
and built to accomplish the newly-
mandated, extraordinarily-detailed
recordkeeping, and (2) employ
personnel to maintain and operate the
systems.’’ 106 At minimum, Sirius
requests the Commission allow a
‘‘phase-in’’ period of a few years to
allow companies sufficient time to
adjust agreements, implement new
systems, and build compliance plans.107
The Electronic Privacy and
Information Center (on behalf of 13
advocacy groups) (‘‘EPIC’’), NAAG,
WPF, and an individual consumer, all
support the proposed amendments.108
NAAG echoed the Commission’s law
enforcement experience and agreed the
amendments are necessary to ensure
compliance with the TSR and should
not be overly burdensome to create and
maintain these records.109 EPIC stated
they ‘‘strongly support’’ the amendment
which rectifies ‘‘a major weakness in the
existing rule’’ of requiring retention of
only ‘‘prizes awarded and sales’’ which
are of ‘‘little use in identifying
violations of the do-not-call rule’’
without accompanying records of
calls.110 EPIC particularly applauded
the amendment requiring retention of
any caller ID information transmitted
and the telemarketer’s authorization to
use that caller ID because spoofing has
undermined consumers’ faith in the
U.S. telecommunication system, making
it harder for emergency calls to reach
consumers. 111 WPF and NAAG also
commented that requiring records of
call transfers and the identity of the
recipient of those transfers is
particularly important because it is
‘‘otherwise impossible to trace
fraudulent activity’’ when transfers
typically appear as a separate inbound
call to the recipient in the voice
provider’s call records.112 The
individual consumer stated retaining
call detail records was necessary to
enforce the TSR and ‘‘a fair
compromise’’ in comparison to
requiring recordings of all telemarketing
transactions which would be overly
burdensome to small businesses.113
PACE notes some of its members are
able to maintain the requested records
and already do so in the ordinary course
of business, but the proposed
amendments may not be technically
feasible for all members, particularly
those who do not use software to engage
in telemarketing but use employees in
retail locations. 114 PACE members
raised particular concerns about the
technical capacity to record ‘‘the
duration of the call, disposition of the
call, and to whom the call was
transferred.’’ 115
As explained in the 2022 NPRM, the
proposed addition of Section 310.5(a)(2)
is necessary for the Commission to
determine whether the TSR applies and
which sections of the TSR the seller and
telemarketer must comply with for a
telemarketing campaign.116 The
Commission is cognizant this
amendment will require some
administrative costs in establishing a
new recordkeeping system. In the 2022
NPRM, the Commission provided an
estimate of those costs and invited
comment about those estimates,117 but
did not receive any public comment
specifically disputing its estimates.
Nevertheless, in determining whether to
implement the proposed amendments,
the Commission considers whether the
proposed amendments strike an
appropriate balance between the goal of
protecting consumers from deceptive or
abusive telemarketing and the harm
from imposing compliance burdens.
To address the concerns raised by the
public comments, the Commission will
provide a grace period of one hundred
and eighty days from the date Section
310.5(a)(2) is published in the Federal
Register for sellers and telemarketers to
implement any new systems, software,
or procedures necessary to comply with
this new provision. Furthermore, the
Commission will modify this
amendment and provide an exemption
for calls made by an individual
telemarketer who manually enters a
single telephone number to initiate a
call. For such calls, the seller or
telemarketer need not retain records of
the calling number, called number, date,
time, duration, and disposition of the
telemarketing call under Sections
310.5(a)(2)(vii) and (x) but must
otherwise comply with the other
requirements under Section 310.5(a)(2).
Making this modification should
alleviate the general concerns
commenters have raised regarding the
feasibility and burden of creating and
retaining call detail records. The
Commission is not persuaded that
requiring sellers and telemarketers to
retain call detail records of their
telemarketing campaigns would impose
an undue burden if the seller or
telemarketer can use automated
mechanisms to conduct their campaigns
instead of placing calls manually. In
those situations, as PACE notes, the
seller or telemarketer already maintains
similar call detail records in the
ordinary course of business.118
Nor is the Commission persuaded by
Sirius’ arguments that the proposed
amendments are overly prescriptive and
requiring retention of these records
would stifle innovation. The proposed
amendments merely identify the
information sellers and telemarketers
must retain. It does not dictate the form
or ‘‘look and feel’’ of business records as
Sirius’ suggests. As discussed in more
detail in Section III.A.11—Format of
Records, the Commission believes the
amendment to Section 310.5(a)(2)
strikes the appropriate balance between
providing specificity about the
information sellers and telemarketers
are required to keep without prescribing
how it must do so.
EPIC and WPF’s comments also
suggested additional modifications to
Section 310.5(a)(2). WPF requested the
Commission consider requiring sellers
and telemarketers to retain records of
their use of voice biometrics in call
centers, including whether voice
biometrics recognition or voice emotion
analysis software was used, whether a
consumer’s records were marked with
any inferences from any voice biometric
analysis, and whether that analysis was
shared with any other parties. 119 The
FTC’s Policy Statement on Biometric
Information notes significant privacy
concerns regarding the collection and
use of biometric information and the
possibility such practices may be
considered an ‘‘unfair’’ practice under
Section 5 of the FTC Act.120
Furthermore, the collection and use of
such information might be considered
abusive and violative of a consumer’s
right to privacy, which Congress gave
the Commission the power to regulate
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121 15 U.S.C. 6102(a)(1).
122 EPIC 34–23 at 5.
123 Id.
124 16 CFR 310.5(a)(2).
125 PACE 33–15 at 4.
126 NAAG 34–20 at 9.
127 WPF 34–21 at 3.
128 16 CFR 310.5(a)(3).
129 2022 NPRM, 87 FR at 33686.
130 NAAG 34–20 at 9; PACE 33–15 at 5.
131 EPIC 34–23 at 15; WPF 34–21 at 3. When
consumer data is transferred as part of the sale,
assignment, or change in ownership, dissolution, or
termination of the business, EPIC also urges the
Commission to require a successor to acknowledge
liability for any TSR violations regarding the calls
that those records document. EPIC 34–23 at 15–16.
EPIC argues that this will deter a fraudulent seller
or telemarketer from shutting their businesses and
selling their assets, including customer lists, to a
sham successor as a means of evading liability. The
Commission does not believe such an amendment
is necessary at this time.
132 2022 NPRM, 87 FR at 33686.
133 See generally Federal Trade Commission 2020
Privacy and Data Security Update, available at
https://www.ftc.gov/system/files/documents/
reports/federal-trade-commission-2020-privacy-
data-security-update/20210524_privacy_and_data_
security_annual_update.pdf (last visited Dec. 11,
2023).
134 2003 TSR Amendments, 68 FR at 4645.
135 15 U.S.C. 6102(a)(3)(A); see also 2002 NPRM,
67 FR at 4510–11.
with respect to telemarketing.121
Although the Commission does not
believe it has the evidence now either
to require the retention of voice
biometric recognition data in
telemarketing or place restrictions on its
use, it will continue to monitor voice
biometric use in telemarketing.
EPIC requested the Commission
consider requiring telemarketers and
sellers to also retain records of
campaign IDs for each call, arguing it is
necessary to tie the call detail records to
a particular campaign. 122 The
Commission recognizes the concern
EPIC has raised and addressed it by
requiring sellers and telemarketers to
retain records that identify, for each
call, the nature and purpose of that call,
such as the seller or soliciting charity
for whom the telemarketing call was
placed, the good or service sold or the
charitable purpose of the call, and the
telemarketing script or the robocall
recording that was used. This
information is at least as comprehensive
as a campaign ID. The Commission
believes specifying the substantive
information sellers and telemarketers
are required to retain, rather than
identifying a particular data category
such as campaign ID that may be subject
to change over time, will more
effectively enable the Commission and
other regulators to enforce the TSR.
Finally, EPIC requested the
Commission consider requiring sellers
and telemarketers to keep records of the
originating or gateway
telecommunications provider for each
campaign, rather than any service
provider the telemarketer is in a
business relationship with, as the NPRM
proposes.123 The Commission believes
requiring retention of the call detail
records and records of the seller or
telemarketer’s service providers strikes
an appropriate balance between the
Commission’s interest in having
sufficient information to enforce the
TSR and industry’s concerns regarding
burden.
3. Sections 310.5(a)(3) and (4)—Prize
Recipients and Customer Records
The TSR currently requires
telemarketers and sellers to retain the
‘‘name and last known address’’ of each
prize recipient.124 The 2022 NPRM
proposed requiring sellers and
telemarketers to also retain the last
known telephone number and physical
or email address for each prize
recipient. The Commission received
three comments regarding this proposal,
and all were supportive of the
amendment. PACE states it believes this
was a ‘‘prudent measure, and many
telemarketers and sellers that reward
prizes likely already comply with this
proposal.’’ 125 NAAG agrees, stating the
requirement ‘‘reflects current business
practices’’ and telemarketers and sellers
‘‘likely keep such information in the
regular course of their business.’’ 126
WPF concurs, but also suggests the
Commission consider requiring sellers
and telemarketers to retain this data in
an encrypted state. 127
With respect to ‘‘Customer Records’’
under Section 310.5(a)(4), the TSR
requires sellers or telemarketers to
retain the ‘‘name and last known
address of each customer, the goods or
services purchased, the date such goods
or services were shipped or provided,
and the amount paid by the customer
for the goods or services.’’ 128 Similarly,
the Commission proposed modifying
this provision to account for current
business practices and require the
retention of the customer’s last known
telephone number and the customer’s
last known physical address or email
address. The Commission also proposed
adding the date the consumer purchased
the good or service to account for the
new requirement that telemarketers and
sellers keep records of each consumer
with whom a seller intends to assert it
has an EBR.129
The Commission received four
comments regarding this amendment.
NAAG and PACE support this proposal,
and agree it is necessary to establish
EBR and likely that telemarketers and
sellers already retain this information in
the ordinary course of business.130 EPIC
and WPF, however, do not support this
amendment unless the Commission
concurrently passes commensurate
privacy protections.131
The Commission notes that, as it
recognized in the 2022 NPRM, requiring
sellers and telemarketers to retain
additional personal identifying
information (such as consumers’ names,
phone numbers, and either their
physical or email address, in
combination with goods or services they
purchased) may raise privacy
concerns.132 The Commission
emphasizes once more that sellers and
telemarketers have an obligation under
Section 5 of the FTC Act to adhere to
the commitments they make about their
information practices and take
reasonable measures to secure
consumers’ data.133
But the Commission also recognizes
the concerns raised by the comments. It
agrees additional protections, similar to
those it incorporated into the TSR when
it prohibited the sale or use of any lists
established or maintained to comply
with the TSR’s DNC Registry or entity-
specific DNC,134 should also apply to
any lists of consumers that sellers or
telemarketers create or maintain in
order to comply with the amended
recordkeeping provisions.
Thus, the Commission will amend
Section 310.4(b)(2) to state it is also an
abusive telemarketing act or practice
and a violation of the TSR for any
person to sell, rent, lease, purchase, or
use any list established to comply with
Section 310.5. Amending the TSR to
specify that the sale or use of a list
created to comply with the
recordkeeping provisions is consistent
with the Telemarketing Act’s emphasis
on privacy protection. The Act
authorizes the Commission to regulate
‘‘calls which the reasonable consumer
would consider coercive or abusive of
such consumer’s right to privacy.’’ 135
The Commission agrees with
commenters that consumers would
consider it coercive and an abuse of
their right to privacy if telemarketers or
sellers are allowed to use any consumer
information they collect and maintain
under the TSR’s recordkeeping
provisions for any other purpose.
4. Section 310.5(a)(5)—Established
Business Relationship
The 2022 NPRM proposed adding
Section 310.5(a)(5) to further clarify
what records a seller must keep to
‘‘demonstrate that the seller has an
established business relationship’’ with
a consumer. Specifically, for each
consumer with whom a seller asserts it
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136 A seller may also show it has an established
business relationship with a consumer if that
consumer purchased, rented, or leased the seller’s
goods or services or had a financial transaction with
the seller during the 18 months before the date of
the telemarketing call. The Commission is
modifying the existing recordkeeping provisions to
state that records of existing customers should also
include the date of the financial transaction to
support the existence of an EBR under these
circumstances. See Section III.A.3 (Prize Recipients
and Customer Records).
137 EPIC also urged the Commission to modify the
EBR requirements to include consumers who
purchased a good or service from the seller. EPIC
34–23 at 14. The Commission does not believe this
is necessary since sellers and telemarketers must
already keep records of customers, which includes
consumers who purchased a good or service from
the seller. 16 CFR 310.5(a)(3). Furthermore, as
discussed in Section III.A.3—Prize Recipients and
Customer Records above, the Commission is
amending the customer records provision to
include the date the consumer purchased the good
or service to account for the new EBR
recordkeeping requirements.
EPIC also urges the Commission to consider
clarifying that EBR may only be asserted as an
affirmative defense if the seller or telemarketer
intentionally called the consumer because it has an
established business relationship with the
consumer. EPIC 34–23 at 15. The TSR does not
currently contemplate the use of EBR in this
manner but rather allows telemarketers and sellers
to call a consumer if the seller can demonstrate it
has an EBR with that consumer and otherwise
meets other requirements under the TSR. Making
any modifications to this framework would require
additional consideration.
138 EPIC 34–23 at 15; NAAG 34–20 at 7; and
PACE 33–15 at 2–3.
139 OCUL 34–19 at 2; Sirius 34–18 at 5.
140 2022 NPRM, 87 FR at 33685.
141 The Commission also proposed adding a new
definition of ‘‘previous donor.’’ See supra Section
II.C.
142 NAAG 34–20 at 7.
143 WPF 34–21 at 1.
144 2022 NPRM, 87 FR 33686–87.
145 Id. at 33681.
146 Id. at 33686–87.
147 Id. For example, a copy of the consent
provided to receive prerecorded sales messages
under Section 310.4(b)(1)(v)(A) must evidence, in
writing: (1) the consumer’s name, telephone
number, and signature; (2) that the consumer stated
she is willing to receive prerecorded messages from
or on behalf of a specific seller; (3) that the seller
obtained consent only after clearly and
conspicuously disclosing that the purpose of the
written agreement is to authorize that seller to place
prerecorded messages to that consumer; and (4) that
the seller did not condition the sale of the relevant
good or service on the consumer providing consent
to receive prerecorded messages. The TSR also
states that a seller must obtain consent from the
consumer, and the Commission reiterates that this
means a seller must obtain consent directly from
the consumer and not through a ‘‘consent farm.’’
148 2022 NPRM, 98 FR at 33686–87.
149 See EPIC 34–23 at 10–11; NAAG 34–20 at 10;
PACE 33–15 at 5; and WPF 34–21 at 3.
150 PACE 33–15 at 5.
151 WPF 34–21 at 3.
152 EPIC 34–23 at 10–13.
has an established business
relationship, the seller must keep a
record of the name and last known
phone number of that consumer, the
date the consumer submitted an inquiry
or application regarding that seller’s
goods or services, and the goods or
services inquired about.136
The Commission received five
comments addressing this proposed
amendment. EPIC,137 NAAG, and PACE
all support this amendment, agreeing it
is necessary for a seller to establish a
business relationship with a consumer
and it is likely businesses already retain
such records. 138 The Ohio Credit Union
League (‘‘OCUL’’) made a general
objection stating it was unclear when a
credit union member’s business
relationship begins or ends, while Sirius
objected on the grounds ‘‘it was
unnecessary’’ since ‘‘sellers and
telemarketers must already collect
information sufficient to demonstrate an
established business relationship to use
as an affirmative defense.’’ 139
The Commission is not persuaded by
either OCUL’s or Sirius’s objections. As
the Commission noted in its 2022
NPRM, this requirement only applies if
a seller intends to assert it has an
established business relationship with a
consumer.140 As Sirius notes, sellers
must already collect this information in
the ordinary course of business and thus
the amendment should not impose an
additional burden.
5. Section 310.5(a)(6)—Previous Donor
Similar to the EBR requirements
described above, the Commission also
proposed adding Section 310.5(a)(6) to
clarify that, if a telemarketer intends to
assert that a consumer is a previous
donor to a particular charity,141 the
telemarketer must keep a record, for
each such consumer, of the name and
last known phone number of that
consumer, and the last date the
consumer donated to the particular
charity. The Commission received two
comments on this proposed
amendment. NAAG agreed with this
proposed amendment, stating it was
akin to the proposed amendment for
EBR and should not ‘‘impose any undue
burden.’’ 142 WPF concurred stating the
new recordkeeping provision will
‘‘serve to clarify the exemption for
charitable donations.’’ 143
6. Section 310.5(a)(8)—Records of
Consent
Section 310.5(a)(5) of the TSR
requires sellers or telemarketers to keep
records of ‘‘[a]ll verifiable
authorizations or records of express
informed consent or express agreement
required to be provided or received
under this Rule.’’ The Commission
proposed modifying this provision to
clarify what constitutes a complete
record of consent sufficient for a
telemarketer or seller to assert an
affirmative defense.144 It wanted to
make clear that common practices
previously employed by telemarketers
or sellers, such as maintaining a list of
IP addresses and timestamps as proof of
consent, are insufficient to demonstrate
that a consumer has, in fact, provided
consent to receive robocalls or receive
telemarketing calls when the consumer
has registered her phone number on the
DNC Registry. 145
Specifically, the 2022 NPRM
proposed that for each consumer from
whom a seller or telemarketer states it
has obtained consent, sellers or
telemarketers must maintain records of
that consumer’s name and phone
number, a copy of the consent requested
in the same manner and format it was
presented to that consumer, a copy of
the consent provided, the date the
consumer provided consent, and the
purpose for which consent was given
and received.146 For a copy of the
consent provided under Sections
310.3(a)(3), 310.4(a)(7),
310.4(b)(1)(iii)(B)(1), or
310.4(b)(1)(v)(A), a complete record
must also include all of the
requirements outlined in those
respective sections. 147 The 2022 NPRM
also stated if consent were requested
verbally, a copy of the telemarketing
script of the request would suffice as a
copy of the consent requested, and a
recording of the conversation was not
necessary unless another provision of
this Rule required it.148
The Commission received four
comments regarding this proposed
amendment. EPIC, NAAG, PACE, and
WPF all generally support the proposed
amendment. 149 PACE states it
‘‘welcomes these provisions in order to
better ascertain what records are
necessary to assert an affirmative
defense’’ and the proposed records
‘‘flow logically from the TSR.’’ 150
But EPIC, NAAG, and WPF also
submitted suggestions on additional
amendments, arguing the Commission
should implement more stringent
requirements. WPF suggests the
Commission consider updating how a
consumer ‘‘may withdraw or revoke
consent, and create responsibilities for
telemarketers to provide a clear
opportunity to revoke or consent in each
communication.’’ 151 EPIC asks the
Commission to specify that in
identifying the ‘‘specific seller’’ from
whom a consumer has provided written
express agreement to receive robocalls,
the telemarketer or seller must retain
records of the ‘‘legal name of the seller
whose goods [or] services are being
promoted.’’ 152 EPIC believes this will
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153 Id.
154 A negative option feature is defined as ‘‘an
offer or agreement to sell or provide any goods or
services, a provision under which a 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 CFR 310.2(w).
155 88 FR 24716 (Apr. 24, 2023).
156 2008 TSR Amendments 73 FR at 51186; see
also supra note 147.
157 2008 TSR Amendments 73 FR at 51186.
158 EPIC 34–23 at 12.
159 EPIC also requested that the Commission
clarify that the TSR’s language regarding consent is
similar to the TCPA’s language regarding consent or
that the consent requirements do not ‘‘lower the bar
below the current requirements of the TCPA.’’ EPIC
34–23 at 13. The new amendments to the TSR do
not alter substantive requirements for consent
under the TSR. They merely clarify what records
are necessary to maintain proof of consent.
160 2022 NPRM, 87 FR at 33687.
161 EPIC 34–23 at 11.
162 Id.
163 Id.
164 Id.
165 NAAG 34–20 at 10. NAAG has also urged the
Commission to require a recording whenever a
telemarketing call includes a negative option offer.
NAAG 34–20 at 6. It also requests that the
Commission require a full refund if a consumer
complains of unauthorized charges and the seller is
unable to provide a recording of the transaction as
proof of consent. Id. Since the Commission has
issued the Negative Option NPRM, the Commission
will not address this comment here.
‘‘reduce obfuscation’’ on the ‘‘scope of
the consumer’s consent’’ and identify
the proper defendant if ‘‘legal action is
necessary.’’ 153
The Commission believes WPF’s
recommendation is primarily applicable
to transactions involving a negative
option feature 154 where a consumer
may wish to cancel a subscription plan
and revoke billing authorization. The
Commission published a Notice of
Proposed Rulemaking regarding the
Negative Option Rule (‘‘Negative Option
NPRM’’) on April 24, 2023, which also
addresses telemarketing transactions.155
Because the proposed Negative Option
Rule would apply a more
comprehensive and consistent
framework for negative option
transactions regardless of the sales
medium, the Commission declines to
make any further amendments to the
TSR to address WPF’s comment at this
time.
With respect to EPIC’s request
regarding the identification of a
‘‘specific seller,’’ the Commission stated
in the Statement of Basis and Purpose
finalizing the TSR amendments
prohibiting robocalls that it used the
term ‘‘specific seller’’ to ‘‘make it clear
that prerecorded calls may be placed
only by or on behalf of the specific
seller identified in the agreement.’’ 156
The Commission wanted to ensure any
agreement to receive robocalls would be
limited to the seller identified in the
agreement and could not be
transferrable to any other party.157
Requiring companies to use the legal
entity name to identify the specific
seller in the written agreement is a
natural extension of the Commission’s
intention in using the term ‘‘specific
seller.’’ Thus, the Commission states
now that in identifying the specific
seller in any written agreement, the
seller should use its legal entity name to
make clear any agreement to receive
robocalls is limited to that specific legal
entity. The Commission also states the
burden will be on the seller or
telemarketer to ensure and prove a
consumer understands which specific
legal entity would be permitted to send
the consumer robocalls. In
circumstances where the legal entity’s
name may not be recognizable to
consumers, perhaps because the
consumers would recognize a brand or
product name but not the legal entity
name, the seller or telemarketer may
need to take extra steps to ensure the
consumer has knowingly agreed to
receive robocalls from the specific
seller.
EPIC also requests the Commission
require sellers and telemarketers to
‘‘retain records regarding the owner of
the website where consent was
purportedly obtained’’ and a record of
‘‘the relevant webform completion, or of
some other admissible evidence of the
specific consumer providing consent via
a specific web page on a specific date/
time.’’ 158 For telemarketers or sellers
who obtain consumer consent via a
website, the Commission believes the
new recordkeeping provision requiring
records of ‘‘a copy of the request for
consent in the same manner and format
in which was presented to that
consumer’’ would require a telemarketer
or seller to keep a copy of the web page
or web pages that were used to request
consent from the consumer. The copy of
the web page could be maintained as
screenshots so long as the screenshot
accurately reflects what a consumer
viewed in providing consent. Sellers
and telemarketers who obtain consent
via website will also need to keep ‘‘a
copy of the consent provided’’ under the
new recordkeeping provisions. The
Commission believes a screenshot of the
web page a consumer completed to
provide consent could satisfy this
requirement if the screenshot also
accurately reflects what a consumer
submitted in providing consent. The
Commission declines to specify the
format a company must use to keep a
copy of consent requested or provided
to allow businesses the flexibility of
retaining records as they would in the
ordinary course of business. Rather, it
believes specifying the categories of
information required to adequately
reflect consent will provide sufficient
guidance. The Commission cautions,
however, an IP address with a
timestamp is not sufficient as a record
of consent. The Commission does not
believe any additional amendments are
necessary at this time.159
EPIC and NAAG also raised concerns
regarding the Commission’s statement
regarding the records for verbal consent.
In the 2022 NPRM, the Commission
stated if a seller or telemarketer requests
consent verbally, a telemarketing script
would suffice as a record of the consent
requested as long as no other provision
of the TSR required a recording.160 EPIC
requests the Commission make clear the
reference to verbal consent only applies
to billing authorization under Section
310.4(a)(7), and any authorization
required to receive robocalls or to
receive telemarketing calls to phone
numbers on the DNC Registry must be
provided in writing. EPIC also raised
concerns over whether the
Commission’s statement meant that a
script is an ‘‘acceptable record of the
language the caller used to request
consent’’ or if ‘‘the Commission is also
suggesting that [a script] is an
acceptable record of the consumer’s
grant of consent.’’ 161 If the former, EPIC
argues using a telemarketing script as a
record of the request for consent is
insufficient when telemarketers often
fail to follow the scripts.162 If the latter,
EPIC argues it would ‘‘eviscerate the
recordkeeping requirement’’ when the
new consent requirements include ‘‘ ‘a
copy of the request provided.’ ’’ 163 EPIC
also argues allowing a recording of only
the consent provided without the actual
request for consent would allow the
telemarketer or seller to record a series
of the ‘‘word ‘yes,’ which would be
meaningless without any context.’’ 164
NAAG takes it a step further and urges
the Commission to require recordings of
the entire telemarketing transaction
whenever consent is requested
verbally.165
The 2022 NPRM specifies that, with
respect to requests for verbal consent
where no provision of the TSR requires
a recording, a telemarketing script
would be sufficient for a copy of the
request for consent. It did not propose
that a telemarketing script would be
sufficient as a record of the consent
provided. But the Commission
recognizes the concerns raised by
NAAG and EPIC, that without a
recording of the consent requested, a
recording of the request provided would
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166 ECAC 34–22 at 4.
167 The TSR states it is an abusive practice to
‘‘cause billing information to be submitted for
payment, directly or indirectly, without the express
informed consent of the customer or donor.’’ 16
CFR 310.4(a)(7). This prohibition applies to all
telemarketing transactions subject to the TSR. Thus,
requiring a recording of every telemarketing call
whenever consent is requested would essentially
mean that all telemarketing calls subject to the TSR
would need to be recorded.
168 See 16 CFR 310.3(a)(3), 310.4(a)(7),
310.4(b)(1)(iii)(B)(1), and 310.4(b)(1)(v)(A).
169 The Commission reiterates that a seller or
telemarketer may not use an oral recording of
consent for any provision of the TSR that requires
consent to be provided in writing.
170 EPIC 34–23 at 7–8; NAAG 34–20 at 7–8; PACE
33–15 at 3; WPF 34–21 at 2.
171 WPF 34–21 at 2; see also Section III.A.2 (Call
Detail Records).
172 EPIC 34–23 at 8.
173 PACE 33–15 at 3.
174 Id.
175 Id.
176 Id.
177 If, after the end of a fixed term contract, a
service provider continues to provide services and
the telemarketer or seller continues to pay for those
services, the Commission will consider the contract
extended until performance ceases.
be meaningless. Given that industry has
stated scripts are not ‘‘set in stone’’ and
‘‘[w]ell-trained telemarketers are able to
deviate from scripts or not use them at
all,’’ 166 the Commission states that, for
a complete record of consent that is
requested verbally and where no
provision of the TSR requires a
recording, a telemarketer or seller must
retain a recording of the consent
requested as well as the consent
provided to comply with proposed
Section 310.5(a)(8). In addition, the
recording must make clear the purpose
for which consent was provided. The
Commission does not believe requiring
a recording of both the consent
requested and provided would result in
additional burden to businesses since it
believes most businesses would have
made a recording of both to comply
with the recordkeeping provisions in
the ordinary course of business.
In further response to NAAG and
EPIC’s concern, the Commission does
not believe a recording of the entire
telemarketing transaction is necessary if
it is not otherwise required by another
provision of the TSR. To require a
recording of the entire transaction
whenever consent is requested would
effectively require a recording of all
telemarketing transactions that are
subject to the TSR.167
The Commission reiterates that sellers
and telemarketers remain obligated to
comply with all requirements outlined
in other consent provisions in the
TSR. 168 For transactions involving
preacquired account information,
telemarketers and sellers must fulfill the
requirements of Section 310.4(a)(7)(i)
and (ii), which include recording the
entire telemarketing transaction if there
is a free-to-pay conversion feature. For
consent to receive robocalls or calls to
phone numbers on the DNC Registry,
telemarketers and sellers must abide by
the requirements of Sections
310.4(b)(1)(iii)(B)(1) and (b)(1)(v)(A),
respectively, which include obtaining a
consumer’s written consent.169 And for
telemarketing transactions using certain
payment methods, telemarketers and
sellers must comply with Section
310.3(a)(3), which includes obtaining a
consumer’s authorization to be billed in
writing or, if verbal consent is
requested, a recording of the transaction
that evidences a consumer has received
specific information. The Commission
reiterates this rule amendment does not
modify the requirements for consent
outlined in the TSR; rather it clarifies
what records must be kept to
demonstrate compliance with the
existing requirements.
7. Section 310.5(a)(9)—Other Service
Providers
The Commission proposed requiring
sellers and telemarketers to keep records
of all service providers the telemarketer
uses to deliver an outbound call in their
telemarketing campaigns, such as voice
providers, autodialers, sub-contracting
telemarketers, or soundboard
technology platforms. The provision
would only apply to the service
providers with which the seller or
telemarketer has a business relationship,
and not to every service provider
involved in delivering an outbound call.
For each service provider, the seller or
telemarketer would keep records of any
applicable contracts, the date the
contract was signed, and the time period
the contract is in effect. The seller or
telemarketer would keep such records
for five years from the date the contract
expires or five years from the date the
telemarketing activity covered by the
contract ceases, whichever is shorter.
The Commission received four
comments on this proposal. EPIC,
NAAG, PACE, and WPF all support the
proposed amendment, but also
suggested some modifications.170 WPF
repeated its request the Commission use
broader terminology than ‘‘soundboard
technology platforms’’ in defining
service providers.171 EPIC repeated its
request the Commission require sellers
and telemarketers to also keep records
of which service provider they used for
each telemarketing campaign to ensure
those service providers are also
complying with the TSR. 172
The Commission clarifies that service
providers referenced under this
provision include any entity that
provides ‘‘digital soundboard’’
technology rather than ‘‘soundboard
technology platforms,’’ to make clear
that sellers and telemarketers must
retain records of any entity that
provides any digital or sound
technologies that sellers or
telemarketers use to convey a verbal
message to a consumer in telemarketing.
This includes, for example, service
providers that telemarketers or sellers
use to mimic or clone the voice of an
individual to deliver live and
prerecorded outbound telemarketing
calls. With respect to EPIC’s concerns of
ensuring service providers are also
complying with the TSR, as discussed
above in Section III.A.2—Call Detail
Records, the Commission believes it is
not necessary to require records of the
service provider used per telemarketing
campaign. Requiring retention of all call
detail records and records of the service
providers used in making outbound
telemarketing calls would be sufficient
for the Commission and other law
enforcement agencies to enforce the TSR
and strikes an appropriate balance
against industry’s concerns regarding
burden.
PACE requests the Commission limit
this provision to the service providers
with which sellers and telemarketers
have a direct contractual relationship
rather than a ‘‘business
relationship.’’ 173 PACE argues it would
be unreasonable to expect a seller to
maintain records of its telemarketers’
voice providers when the contractual
relationship is between the telemarketer
and voice provider. 174 PACE also asks
the Commission limit the five year
retention time period from the date the
contract expires rather than when the
telemarketing activity covered by the
contract ceases.175 PACE expressed
concerned one party to the contract
might cease the telemarketing activity
without informing the other party and it
would be difficult to identify when the
retention period is triggered. 176
The Commission recognizes the
potential for uncertainty in the scenario
PACE raises and will modify the
recordkeeping requirements accordingly
to require retention of any records under
this provision for five years from the
date the contract expires. 177 With
respect to PACE’s request to limit the
recordkeeping requirements to those
service providers with whom sellers or
telemarketers have a direct contractual
relationship, the Commission is not
persuaded that requiring records of
service providers with which they have
a business relationship would cause
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178 2022 NPRM, 87 FR at 33686.
179 ECAC 34–22 at 4; NAAG 34–20 at 8; PACE 33–
15 at 3–4; WPF 34–21 at 3.
180 ECAC 34–22 at 4.
181 Id.
182 PACE 33–15 at 4.
183 16 CFR 310.4(b)(3)(iii).
184 2022 NPRM, 87 FR at 33686.
185 ECAC 34–22 at 4; NAAG 34–20 at 8; PACE 33–
15 at 3–4; WPF 34–21 at 3.
186 WPF 34–21 at 3.
187 ECAC 34–22 at 4.
188 WPF 34–21 at 3.
189 PACE 33–15 at 4.
190 Id.
191 Id.
additional burden. As explained in
more detail in Section III.A.14—
Compliance Obligation, the Commission
will allow sellers and telemarketers to
allocate recordkeeping responsibilities
between themselves. In the scenario that
PACE raises, a seller can simply require
their telemarketer to retain records of all
the service providers it uses to make
outbound telemarketing calls on the
seller’s behalf.
8. Sections 310.5(a)(10)—Entity-Specific
DNC List
The 2022 NPRM also proposed
requiring telemarketers and sellers to
maintain for five years records related to
the entity-specific DNC list and its
corresponding safe harbor provision
under Section 310.4(b)(3)(iii).178
Specifically, the Commission proposed
requiring telemarketers and sellers to
retain records of: (1) the consumer’s
name, (2) the phone number(s)
associated with the DNC request, (3) the
seller or charitable organization from
which the consumer does not wish to
receive calls, (4) the telemarketer that
made the call; (5) the date the DNC
request was made; and (6) the good or
service being offered for sale or the
charitable purpose for which
contributions are being solicited.
The Commission received four
comments on this proposal. NAAG,
PACE, and WPF, generally support the
provision, noting that businesses likely
retain this information in the ordinary
course of business, while ECAC raised
concerns. 179 ECAC agrees that
businesses likely keep most of the data
listed in the proposed provision, but
stated the requirements should not
include retention of consumer phone
numbers or records of the purpose of the
call (e.g., the good or service offered for
sale or the charitable purpose of
contributions solicited) because both are
burdensome to retain and irrelevant to
the entity-specific TSR provisions.180
Instead, ECAC argues the Commission
should modify the entity-specific DNC
requirements so it prohibits calls to
specific numbers rather than specific
people, similar to how the DNC Registry
is applied. 181 PACE also requested the
Commission clarify that the new entity-
specific DNC recordkeeping provision
requires retention of the telemarketing
entity that made the call rather than the
individual telemarketer. 182
The Commission clarifies that the
new recordkeeping provision requires
retention of the identity of the
telemarketing company that made the
call and not the individual telemarketer.
This requirement is particularly
important for sellers or charitable
organizations who engage multiple
telemarketing entities to sell their good
or service or seek a charitable
contribution through telemarketing.
Sellers or charities already should know
which telemarketing entity logged the
consumer’s request to cease receiving
calls on their behalf and ensure all their
telemarketers abide by that request.
Similarly, when a telemarketer
engages in telemarketing on behalf of
multiple sellers or charitable
organizations, it is important to require
the retention of records of the purpose
of the call any time a consumer asks a
telemarketer to add them to the entity-
specific DNC list. Since the entity-
specific DNC prohibition is seller or
charitable organization specific,
telemarketers already should retain this
information in the ordinary course of
business because telemarketers must
keep track of which seller on whose
behalf they cannot contact specific
consumers.
With respect to ECAC’s concerns that
retaining consumer phone numbers is
irrelevant and overly burdensome, the
Commission notes the safe harbor
provision for the entity-specific DNC list
is phone-number based and not based
on a consumer’s name. Section
310.4(b)(3) states that a seller or
telemarketer shall not be liable for
violating the entity-specific DNC
provisions if, among other things, they
maintain and record a ‘‘list of telephone
numbers the seller or charitable
organization may not contact, in
compliance with [the entity-specific
DNC provision.]’’ 183 Telemarketers
must already retain a consumer’s phone
number in the ordinary course of
business to comply with the TSR;
including it in the new recordkeeping
provision would not impose additional
burden on businesses.
9. Section 310.5(a)(11)—DNC Registry
The 2022 NPRM also proposed
requiring telemarketers and sellers to
maintain, for five years, records of every
version of the FTC’s DNC Registry the
telemarketer or seller downloaded in
implementing the process referenced in
the safe harbor provision of Section
310.4(b)(3)(iv).184
The Commission received four
comments on this provision. NAAG,
PACE, and WPF generally support the
proposed provision, but also request
some clarifications or modifications,
while ECAC generally objects to the
requirement.185 WPF notes it ‘‘strongly
support[s]’’ the proposed changes,
noting they would ensure the ‘‘integrity
of the Do Not Call Registry.’’ 186 ECAC
argues the Commission should not
require records of every version of the
DNC Registry used because it ‘‘imposes
significant costs and burdens’’ that
‘‘greatly exceed any marginal benefit’’ to
the Commission, particularly when
many of its members outsource
scrubbing responsibilities to third
parties and may never download the
DNC Registry in the first place.187
WPF requests the Commission require
telemarketers to keep records of how
many times they accessed the DNC
Registry or parts of the DNC Registry.188
PACE requests the Commission clarify
how it believes sellers and telemarketers
would comply with the proposal that
they retain records of ‘‘every version of
the registry they have downloaded.’’ 189
PACE states it would be ‘‘redundant’’ if
the Commission is requiring businesses
to ‘‘maintain separate versions of the
registry apart from the up-to-date one’’
since most businesses only ‘‘scrub
against the current version’’ of the
registry in the ordinary course of
business. 190 PACE would support
requiring them to ‘‘document the
version of the registry they used’’ since
doing so would reduce ‘‘redundancy
and data storage costs associated with
keeping expired registries.’’ 191
Given the objections raised, the
Commission will modify this provision
to clarify that sellers and telemarketers
need not keep every version of the DNC
Registry they accessed to comply with
the TSR’s safe harbor rules. Instead,
sellers and telemarketers must retain
records of which version they used by
keeping records of: (1) the name of the
entity which accessed the registry; (2)
the date the DNC Registry was accessed;
(3) the subscription account number
that was used to access the registry; and
(4) the telemarketing campaign(s) for
which it was accessed. Amending this
provision to retain this information will
address ECAC’s concerns that the seller
or telemarketer may use a third-party
service to access the DNC Registry, and
PACE’s concern that retaining the actual
version of the DNC Registry would be
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192 16 CFR 310.4(b)(2).
193 The records covered by these two sections
include advertising materials and a list of the
service providers who assisted in outbound
telemarketing. See supra Sections III.A.1
(Substantially Different Advertising Materials) and
III.A.7 (Other Service Providers).
194 2022 NPRM, 87 FR at 33686.
195 EPIC 34–23 at 4–5; NAAG 34–20 at 8–9; WPF
34–21 at 3.
196 ECAC 34–22 at 6; NFIB 33–4 at 5; OCUL 34–
19 at 2–3; PACE 33–15 at 4; Sirius 34–18 at 3;
Chamber 34–24 at 1.
197 PACE 33–15 at 4.
198 Id.
199 Sirius 34–18 at 3.
200 Id.
201 OCUL 34–19 at 2–3.
202 15 U.S.C. 57b(d).
203 15 U.S.C. 45(m); 28 U.S.C. 2462; see also
United States v. MyLife.com, Inc., 567 F. Supp. 3d
1152, 1166 (C.D. Cal. Oct. 19, 2021) (holding the
statute of limitations for civil penalties under the
FTC Act is five years); United States v. Dish
Network, LLC, 75 F. Supp. 3d 942, 1004–05 (C.D.
Ill. 2014) (holding the three-year statute of
limitations in 15 U.S.C. 57b does not apply to
claims for civil penalties under Section 5(m) of the
FTC Act, and since Section 5(m) is silent, the
applicable statute of limitations is five years under
28 U.S.C. 2462). The statute of limitations for a
private right of action under the Telemarketing Act
is three years. 15 U.S.C. 6104(a).
204 EPIC 34–23 at 4–5.
205 2022 NPRM, 87 FR at 33687.
206 PACE 33–15 at 5.
207 Id.
208 EPIC 34–23 at 13.
209 Id.
redundant and burdensome. It would
also address WPF’s request that sellers
and telemarketers should keep records
of the number of times they access the
DNC Registry. Presumably, sellers and
telemarketers only access the DNC
Registry to ensure compliance with the
TSR’s DNC prohibitions since accessing
the DNC Registry for any other purpose
would be a violation of the TSR.192
10. Time Period To Keep Records
The Commission proposed changing
the time period that telemarketers and
sellers must keep records from two
years to five years from the date the
record is made, except for Sections
310.5(a)(1) and (a)(9),193 where the
Commission proposed requiring
retention for five years from the date
that records covered by those sections
are no longer in use. The Commission
received nine comments on this
proposal.194 EPIC, NAAG, and WPF
support the proposal, citing as
rationales for their support the amount
of time necessary to complete an
investigation of TSR violations and that
telemarketers fail to comply with
litigation holds that are issued while
investigations are pending.195 ECAC,
NFIB, OCUL, PACE, Sirius, and the US
Chamber of Commerce (‘‘Chamber’’) all
object, raising burden concerns.196
PACE stated the Commission cannot
assume its proposal would not be
unduly burdensome based on the fact
that data storage costs have decreased
since 2014. 197 This is particularly true
for small businesses, according to PACE,
when the Commission is simultaneously
expanding the number of records that
must be retained and the length of time
those records must be retained.198 Sirius
and OCUL also argue the FTC should
not require retention of records ‘‘beyond
the agency’s statute of limitations.’’ 199
Sirius argues the appropriate statute of
limitations is three years,200 and OCUL
argues that while the TSR does not
‘‘specify a statute of limitations,’’ courts
will ‘‘apply the statute of limitations of
the state where the case is filed,’’ which
is two years in Ohio.201
The Commission is not persuaded by
the general burden concerns
commenters have raised. None of the
commenters provided any information
on what the burden would be and why
small businesses would not be able to
comply with the new recordkeeping
amendments. As mentioned in Section
III.A.2—Call Detail Records, the
Commission provided an estimate of the
additional cost of complying with the
new recordkeeping amendments but did
not receive any comment or data on
why its estimate is inaccurate.
Additionally, the Commission notes
the statute of limitations for the FTC to
seek civil penalties under the TSR is
five years and not two or three years, as
some commenters argued. Although the
statute of limitations to seek consumer
redress for TSR violations is three years
under Section 19 of the FTC Act,202 the
applicable statute of limitations for civil
penalties is five years under Section 5
of the FTC Act.203 As such, the
Commission believes it is appropriate
and necessary to require the retention of
records for five years. This requirement
is particularly important when, as EPIC
has noted, not all companies will
comply with a litigation hold request
while an investigation is pending,
potentially leaving law enforcement
agencies with no recourse in enforcing
the TSR. 204
11. Section 310.5(b)—Format of Records
The 2022 NPRM proposed modifying
the formatting requirements to require
records that include phone numbers
comport with the International
Telecommunications Union’s
Recommendation E.164 format for
international phone numbers and North
American Numbering plan for domestic
phone numbers.205 For records that
include time and call duration, the 2022
NPRM proposed industry keep these
records to the closest whole second, and
record times in Coordinated Universal
Time (UTC). The Commission received
two comments on this proposal. Both
commenters support the amendments,
but also requested clarifications or
modifications.
PACE asked the Commission to clarify
that the new amendments requiring that
time be kept in UTC format applies only
to new records moving forward.206 It
also requested the Commission allow
businesses a reasonable time to
implement the proposed changes since
it may require reprogramming software
and IT systems.207 The Commission
clarifies that the new formatting
requirements apply only to new records
created after the proposed amendments
go into effect. Additionally, as stated in
Section III.A.2—Call Detail Records, the
Commission will allow sellers and
telemarketers a one hundred eighty-day
grace period to implement any new
systems, software, or procedures
necessary to comply with that new
provision. The Commission believes
that should provide companies
sufficient time to reprogram any
software systems necessary to also
comport with the new formatting
requirements.
EPIC requests the Commission require
companies to maintain records in a
format that is easily retrievable and
inexpensive to produce and make clear
the regulated party is responsible for the
cost of producing the records.208 EPIC
also requests the Commission impose
more specific formatting requirements
and require telemarketers and sellers to
keep their records in a format that ‘‘is
commonly used to work with large data
sets’’ and ‘‘easily readable’’ such as
‘‘separate columns for separate data
points rather than every data point
within the same single data field.’’ 209
The Commission considered EPIC’s
suggestions and declines to impose
more specific formatting requirements.
Technology is advancing at such a rapid
pace that the Commission is concerned
more specific formatting requirements
might become obsolete in the future.
Moreover, in the Commission’s
experience, companies that use
technologies such as an autodialer to
make telemarketing calls rather than
manual means typically retain records
of those calls in an easily retrievable
format. The Commission believes
allowing companies to retain records as
they would in the ordinary course of
business strikes an appropriate balance
between law enforcement’s interest in
obtaining the information necessary to
enforce the TSR and industry’s concerns
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210 Id.
211 15 U.S.C. 6104(d).
212 2022 NPRM, 87 FR 33687.
213 NAAG 34–20 at 10.
214 EPIC 34–23 at 5.
215 PACE 33–15 at 6.
216 Id.
217 Id. PACE also cites to the example NFIB
provided in its comment as an example of why
PACE believes the Commission should provide
some leniency and an opportunity to cure rather
than penalize inadvertent errors.
218 NFIB 33–4 at 6–7; Sirius 34–18 at 8.
219 Sirius 34–18 at 8.
220 NFIB 33–4 at 7.
221 Id.
222 Id.
223 Id.
224 Id.
225 Although Sirius did not provide a definition
for what it meant by ‘‘type of record,’’ the
Commission interprets it to mean the categories the
Commission has outlined under the amended
Section 310.5(a), which would limit the number of
categories to eleven.
226 2022 NPRM, 87 FR at 33687.
227 PACE 33–15 at 6; Sirius 34–18 at 8.
228 WPF 34–21 at 4.
229 NFBI 33–4 at 8.
230 PACE 33–15 at 6; see also Section III.A.12
(Violation of Recordkeeping Provisions which
provides additional discussion about the proposed
safe harbor).
about burden. Finally, the Commission
does not believe it is appropriate to
require sellers and telemarketers to
affirmatively bear the cost of producing
records to private litigants regardless of
the outcome of their suits as EPIC
requests, 210 when Congress already
included a provision in the
Telemarketing Act that allows a court to
award the cost of the suit and any
reasonable attorney or expert witness
fees to the prevailing party.211
12. Section 310.5(c)—Violation of
Recordkeeping Provisions
The 2022 NPRM proposed clarifying
that the failure to keep each record
required by Section 310.5 in a complete
and accurate manner constitutes a
violation of the TSR.212 The
Commission received five comments on
this proposal. EPIC and NAAG support
the proposal, stating it is a ‘‘common-
sense approach in deterring deceptive
telemarketers/sellers from harming
consumers’’ 213 and ‘‘inaccurate or
incomplete records are of little use.’’ 214
PACE also supports the proposed
clarification, stating the proposal is
‘‘logical and in line with the spirit of the
TSR and its accompanying
legislation.’’ 215 But PACE raised
concerns about the requirement that
records be kept in an accurate and
complete manner, arguing that
companies who fail to keep all or some
records in a complete and accurate
manner through inadvertent error
should not be penalized in the same
way as telemarketers and sellers who
fail to keep all or some categories of
records. 216 Instead, PACE urges
leniency for situations where the failure
is inadvertent rather than willful and
requests the Commission provide ‘‘a 30-
day cure period when the alleged
violation can be easily corrected.’’ 217
NFIB and Sirius object to this
proposal. 218 Sirius proposes the
Commission ‘‘count violations by each
type of record rather than by each
record, as proposed.’’ 219 NFIB argues
allowing civil penalties for ‘‘each
erroneous error’’ is as ‘‘perverse as the
evil the FTC states it is addressing, for
it would allow the FTC to put a seller
or telemarketer out of business for a
relatively minor mistake that affected
many records.’’ 220 NFIB provides an
example to illustrate its concerns
describing a situation where a company
‘‘made the relatively minor mistake of
keeping calls in the time zone of the
person called, rather than in
Coordinated Universal Time (UTC)
format.’’ 221 NFIB believes in this
situation the company would be facing
astronomically high fines for the
hundreds of thousands of calls it makes
a year. 222 Instead, NFIB argues the FTC
should provide a reasonable time period
to cure these errors once discovered,
such as 90 days, and only commence
imposing fines for each week after the
reasonable period expires. 223 According
to NFIB, this would be a more balanced
system that ‘‘avoids both the extreme
that a relatively minor design violation
yields an astronomical fine that puts the
seller or marketer out of business and
the opposite extreme that a violation
results in such a small fine that a seller
or marketer accepts fines as an annoying
but manageable cost of doing
business.’’ 224
The Commission recognizes NFIB’s
and PACE’s concerns regarding
inadvertent errors resulting in large
penalties and, thus, included a safe
harbor provision for call detail records
in the proposed amendments. As
discussed in Section III.A.13—Safe
Harbor for Incomplete or Inaccurate
Records Pursuant to Section 310.5(a)(2)
below, the Commission believes it has
provided a reasonable grace period for
sellers and telemarketers to cure any
inadvertent deficiencies in their
recordkeeping system before any civil
penalties might apply and the proposed
example NFIB raises would fall squarely
within the safe harbor, provided the
company followed the other
requirements of the safe harbor.
Regarding Sirius’s suggestion that
failure to retain each type of record
equal one violation, the Commission is
not persuaded imposing civil penalties
for each type of record would provide
sufficient incentive for companies to
abide by the recordkeeping provisions
given the limited number of categories
of records sellers and telemarketers are
required to retain.225
13. Section 310.5(d)—Safe Harbor for
Incomplete or Inaccurate Records Kept
Pursuant to Section 310.5(a)(2)
The Commission proposed including
a safe harbor provision for temporary
and inadvertent errors in keeping call
detail records pursuant to Section
310.5(a)(2). Specifically, the 2022 NPRM
stated a seller or telemarketer would not
be liable for failing to keep records
under Section 310.5(a)(2) if it can
demonstrate that: (1) it established and
implemented procedures to ensure
completeness and accuracy of its
records under Section 310.5(a)(2); (2) it
trained its personnel in the procedures;
(3) it monitors compliance and enforces
the procedures, and documents its
monitoring and enforcement activities;
and (4) any failure to keep accurate or
complete records under Section
310.5(a)(2) was temporary and
inadvertent.226
The Commission received four
comments on this proposal. PACE states
a ‘‘safe harbor for maintaining call detail
records is necessary’’ while Sirius states
it would ‘‘provide a good foundation for
seller and telemarketer compliance
plans.’’ 227 WPF states it does not
‘‘object to the safe harbor proposed’’
because it was ‘‘narrow enough to allow
companies to make the kinds of
mistakes that occur in day to day
business, and provides incentives to
correct the errors.’’ 228
NFIB, however, states it does not
deem the safe harbor sufficient because
it is ‘‘complex and limited’’ and does
not provide a ‘‘great source of comfort
to sellers and marketers in its current
form.’’ 229 Because the safe harbor
would apply in the scenario NFIB posits
above where a company fails to keep
call times in UTC format, the
Commission believes the safe harbor
provides adequate protection against
inadvertent and temporary errors. The
Commission, however, will revise this
provision to provide sellers or
telemarketers thirty days to cure an
inadvertent error, as PACE suggests.230
14. Section 310.5(e)—Compliance
Obligations
The Commission proposed modifying
the compliance obligations in Section
310.5(e) to state that, in the event the
seller and telemarketer failed to allocate
responsibility between themselves for
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231 2022 NPRM, 87 FR at 33687.
232 NAAG 34–20 at 10; PACE 33–15 at 6; Sirius
34–18 at 8.
233 PACE 33–15 at 6.
234 EPIC 34–23 at 8–10.
235 Id at 10.
236 Id.
237 Id.
238 Id.
239 2022 NPRM, 87 FR at 33694.
240 NFIB 33–4 at 5–6.
241 15 U.S.C. 6102(a)(1).
242 Id. 6102(a)(2).
243 Id. 6102(a)(3).
244 NFIB 33–4 at 6.
245 15 U.S.C. 6102(a)(1) (emphasis added).
246 Id. 6102(a)(2) (emphasis added).
247 Id. 6102(a)(3) (emphasis added).
248 Id.
249 The Commission also notes that the official
codification of the Telemarketing Act in the United
States Code aligns the indentation of the statement
Continued
maintaining the required records, the
responsibility for complying with the
recordkeeping requirements would fall
on both parties.231 The Commission
received four comments on this
proposal. NAAG, PACE, and Sirius
supported the proposal.232 PACE states
that ‘‘not only do we consider this fair,
but we believe it will encourage parties
to negotiate their contracts and cease
regarding TSR recordkeeping as an
afterthought.’’ 233
EPIC, however, objects to this
amendment and strongly urges the
Commission to require both
telemarketers and sellers to retain
records rather than allowing them to
allocate responsibilities.234 Specifically,
EPIC raises a concern that a seller may
allocate responsibilities to a
telemarketer that resides outside the
United States and would not be subject
to U.S. jurisdiction and process.235 EPIC
argues that if the Commission is
inclined to designate only one party, it
should be the seller who is responsible
because the seller should be accountable
for the telemarketers it hires, is less
likely to be overseas and
undercapitalized compared to
telemarketers, and likely receives most
of the sales proceeds.236 But EPIC still
believes the Commission should
explicitly require both sellers and
telemarketers be responsible for
recordkeeping to prevent any
gamesmanship where sellers move
overseas to avoid liability.237 In the
event the Commission is not persuaded,
EPIC also argues the Commission
should require sellers to audit their
telemarketers, including reviewing an
actual production of preserved records,
and require sellers who hire overseas
telemarketers to require those
telemarketers to have a U.S.-based agent
so their records would be subject to U.S.
jurisdiction and process.238
The Commission shares EPIC’s
concerns regarding gamesmanship and
the challenges of obtaining records from
overseas entities. The Commission is
also concerned about sellers hiring
unscrupulous telemarketers and
disclaiming any responsibility for
recordkeeping by allocating the
responsibility to those telemarketers.
The Commission notes that under the
proposed amendment, sellers who
allocate recordkeeping responsibilities
to their telemarketers would be required
to ‘‘establish and implement practices
and procedure to ensure the
telemarketer is complying with the
[TSR’s recordkeeping provisions].’’ 239
But given the concerns EPIC has raised,
the Commission will modify this
provision to also require sellers who
allocate recordkeeping responsibilities
to their telemarketer to retain access
rights to those records so the seller can
produce responsive records in the event
it has hired a telemarketer overseas.
Requiring sellers to ensure their
telemarketers are abiding by the TSR’s
recordkeeping provisions and retain
access to their telemarketer’s records of
telemarketing activities on the seller’s
behalf should not impose onerous
obligations, and such access may never
be necessary. Sellers likely already take
such steps in the ordinary course of
business, given that telemarketers are
acting as their agents and their
telemarketers’ violations of the TSR
could also expose them to liability
under the TSR.
15. Authority To Require Recordkeeping
NFIB argues the new recordkeeping
proposals exceed the FTC’s statutory
authority under the Telemarketing
Act. 240 Section 6102(a) of the
Telemarketing Act directs the
Commission to: (1) prescribe rules
prohibiting deceptive or abusive
telemarketing acts or practices; 241 (2)
include in those rules a definition of
deceptive acts or abusive practices that
shall include fraudulent charitable
solicitations and may include actions
that constitute assisting or facilitating
such as credit card laundering; 242 and
(3) include in those rules a specific list
of abusive practices that govern patterns
and timing of unsolicited calls, and
disclosures of certain material
information in sales or charity calls.243
It also states at the end of Section
6102(a) that ‘‘[i]n prescribing the rules
described in this paragraph, the
Commission shall also consider
recordkeeping requirements.’’
NFIB argues the directive to consider
recordkeeping requirements applies
only to the specific list of abusive
practices under Section 6102(a)(3) and,
since the other paragraphs are silent as
to recordkeeping, the Act affirmatively
prohibits the FTC from requiring
recordkeeping. 244 The Commission does
not agree. The language of the Act
shows the directive to consider
recordkeeping applies to the Act’s
mandate to promulgate rules addressing
deceptive or abusive telemarketing
practices and is not limited to the
specific abusive practices identified in
Section 6102(a)(3).
Section 6102(a) generally requires the
Commission to promulgate rules
regarding deceptive or abusive
telemarketing acts or practices. Section
6102(a)(1) states: ‘‘[t]he Commission
shall prescribe rules prohibiting
deceptive telemarketing acts or practices
and other abusive telemarketing acts or
practices.’’ 245 Sections 6102(a)(2) and
(a)(3) then identify specific provisions
that Congress instructs the Commission
to include, or consider including, when
it promulgates its rules under Section
6102(a)(1). Section 6102(a)(2) directs the
Commission to ‘‘include in such rules
respecting deceptive telemarketing acts
or practices’’ a definition of deceptive
telemarketing acts or practices, which
may include, among other things, credit
card laundering. 246 Section 6102(a)(3)
directs the Commission to ‘‘include in
such rules respecting other abusive
telemarketing acts or practices’’ specific
requirements including: (1) ‘‘a
requirement that telemarketers may not
undertake a pattern of unsolicited
telephone calls which the reasonable
consumer would consider coercive or
abusive of such consumer’s right to
privacy’’; (2) ‘‘restrictions on the hours
of the day and night when unsolicited
telephone calls can be made to
consumers’’; (3) ‘‘a requirement that any
person engaged in telemarketing for the
sale of goods or services’’ make certain
disclosures; and (4) ‘‘a requirement that
any person engaged in telemarketing for
the solicitation of charitable
contributions’’ make certain
disclosures. 247 At the end of Section
6102(a)(3), in a separate unnumbered
sentence, the Act states ‘‘[i]n prescribing
the rules described in this paragraph,
the Commission shall also consider
recordkeeping requirements.’’ 248 Thus,
Congress directed the Commission to
promulgate rules prohibiting deceptive
or abusive telemarketing acts or
practices under Section 6102(a)(1), and
Sections 6102(a)(2) and (a)(3) merely
inform what types of acts or practices
the Commission should include, or
consider including, when it promulgates
those rules.249
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‘‘In prescribing the rules described in this
paragraph, the Commission shall consider
recordkeeping requirements’’ with Section 6102(a)
rather than with Section 6102(a)(3). As such, it
supports the Commission’s position that the
directive to consider recordkeeping refers generally
to Section 6102(a) and is not limited to the specific
acts and practices listed in Section 6102(a)(3). See,
e.g., https://www.govinfo.gov/content/pkg/
USCODE-2011-title15/pdf/USCODE-2011-title15-
chap87.pdf (last visited November 21, 2023).
250 H.R. Rep. No. 103–20, 103rd Cong., 1st Sess.
(‘‘House Report’’) at 1; S. Rep. No. 103–80, 103rd
Cong., 1st Sess. (‘‘Senate Report’’) at 1 (stating the
purpose of the bill was ‘‘to prevent fraudulent or
harassing telemarketing practices’’).
251 Original TSR 60 FR at 43857; 2003 TSR
Amendments, 68 FR at 4653; 2014 TSR Rule
Review, 79 FR at 46735.
252 NFIB 33–4 at 5–6.
253 See, e.g., NAAG 34–20 at 3–10.
254 See. e.g., U.S. Sugar Corp. v. EPA, 830 F.3d
579, 617–18 (D.C. Cir. 2016) (upholding EPA’s
authority to require recordkeeping in regulating
even though Congress was silent on that issue
because ‘‘Congress plainly intended EPA to regulate
sources burning ‘any’ solid waste, a goal
presumably advanced by the recordkeeping
presumption’’).
255 Congress has amended the Telemarketing Act
numerous times over the years but made no changes
to the recordkeeping provision. See, e.g., supra note
13. Given that the TSR has always included
recordkeeping requirements since its inception in
1995 and the FTC has reported to Congress on its
rulemaking efforts at various congressional
hearings, Congress’s silence on this issue can be
interpreted as agreement with the FTC’s statutory
construction. See, e.g., Washington All. of Tech.
Workers v. U.S. Dep’t of Homeland Sec., 50 F.4th
164, 182 (D.C. Cir. 2022) (quoting Jackson v. Modly,
949 F.3d 763, 772–73 (D.C. Cir. 2020)).
256 15 U.S.C. 6101(5). The Commission’s position
is also supported by the legislative history, which
demonstrates that Congress intended for the
Commission to consider recordkeeping
requirements more broadly. See Senate Report at 7.
The Senate Report references Section 3(a)(5) in an
earlier version of the Act that directed the
Commission to ‘‘prescribe rules regarding
telemarketing activities’’ and in prescribing those
rules to ‘‘consider the inclusion of . . . (5)
recordkeeping requirements.’’ Telemarketing and
Consumer Fraud and Abuse Prevention Act, S. 568,
103rd Cong. (1993). At minimum, this legislative
history supports the position that the Commission
may require recordkeeping for all abusive
telemarketing acts or practices it identifies in
promulgating the TSR and is not limited to those
specific acts or practices listed in Section
6103(a)(3).
257 15 U.S.C. 6102(a)(3)(A).
258 16 CFR 310.4(b).
259 16 CFR 310.4(b)(1)(iii) and (b)(1)(v). See also
Original TSR, 60 FR at 43854 (stating the entity-
specific DNC provisions are intended to effectuate
the requirements of Section 6102(a)(3)(A) of the
Telemarketing Act); 2002 NPRM, 67 FR at 4518
(proposing the DNC Registry to ‘‘fulfill the mandate
in the Telemarketing Act that the Commission
should prohibit telemarketers from undertaking ‘a
pattern of unsolicited telephone calls which the
reasonable consumer would consider coercive or
abusive of such consumer’s right to privacy’’’)
(quoting 15 U.S.C. 6102(a)(3)(A)); 2006 Denial of
Petition for Proposed Rulemaking, Revised
Proposed Rule With Request for Public Comments,
Revocation of Non-enforcement Policy, Proposed
Rule (‘‘2006 NPRM’’), 73 FR 58716, 58726
(proposing adding an express prohibition against
[robocalls] pursuant to Section 6102(a)(3)(A) of the
Telemarketing Act).
260 See supra Sections II.A (Recordkeeping) and
II.C (New Definition for ‘‘Previous Donor’’).
NFIB’s interpretation of Section
6102(a)(3) improperly divorces that
provision from the rest of the statute. As
discussed, Section 6102(a)(3) contains
Congress’s specific guidance regarding
the types of rules the Commission must
adopt or consider adopting to
implement Section 6102(a)(1)’s general
grant of authority to ban deceptive or
abusive telemarketing practices. Section
6102(a)(3) states when the Commission
‘‘prescrib[es] the rules described’’ by
Congress, it ‘‘shall also consider
recordkeeping requirements.’’ This
provision thus authorizes the
Commission to adopt—or not adopt—
recordkeeping requirements and declare
violations of such requirements to be an
abusive telemarketing practice.
But even if Section 6102(a)(3) did not
expressly authorize the Commission to
consider recordkeeping requirements,
the Commission may still require
recordkeeping under Section 6102(a)(1).
Congress’s purpose in enacting the
Telemarketing Act was to prevent
deceptive or abusive telemarketing acts
or practices.250 As the Commission has
noted over the years, recordkeeping
provisions prevent deceptive or abusive
telemarketing acts or practices because
they are necessary to effectively enforce
the TSR. 251 NFIB’s assertion that ‘‘the
rules for recordkeeping do not prevent
or address deceptive or other abusive
telemarketing acts or practices’’ is not
an accurate assertion 252 and it is
undermined by the Commission’s law
enforcement experience and that of
other enforcers. 253
Even if Section 6102(a)(1) could be
read as being silent on recordkeeping,
that would not prohibit the Commission
from including recordkeeping in any
rules the Commission promulgates
under this section of the Act. Rather,
Congress directed the Commission to
prescribe rules prohibiting deceptive
telemarketing acts or practices and the
Commission is granted authority to
issue rules, including recordkeeping
provisions, for any deceptive or abusive
telemarketing acts or practices it
identifies in promulgating the TSR.254
Congress’s silence would make sense
given the Commission had yet to
identify these deceptive or abusive acts
or practices in the TSR at the time the
Telemarketing Act was passed, and it
was unknown whether and what form of
recordkeeping would be necessary to
ensure compliance.255 Interpreting the
Telemarketing Act to prohibit the
Commission from requiring
recordkeeping would contradict the
Act’s stated purpose—to ‘‘enact
legislation that will offer consumers
necessary protection from telemarketing
deception and abuse.’’ 256
Nothing in the text of the Act prevents
the Commission from requiring persons
to keep records substantiating their
compliance with any requirement of the
TSR. Nor does NFIB explain why
Congress would have intended to
deprive the Commission of records
essential to the enforcement of the rule.
NFIB’s interpretation would give
telemarketers and sellers a perverse
incentive to commit deceptive and
abusive practices while destroying any
record of those violations.
Finally, even if a court determines the
Act only permits recordkeeping for rules
that address the specific acts and
practices listed in Section 6102(a)(3),
the TSR’s recordkeeping provisions
meet those criteria. The Final Rule
requires recordkeeping for eleven
general categories of information: (1)
advertisements, including telemarketing
scripts and robocall recordings; (2) call
detail records; (3) prize recipients; (4)
customers; (5) customer information to
establish a business relationship; (6)
previous donors; (7) telemarketers’
employees; (8) consent; (9) service
providers; (10) entity-specific DNC; and
(11) versions of the FTC’s DNC. Each of
these categories is necessary to ensure
compliance with the provisions of the
TSR the Commission promulgated to
address the specifics acts or practices
identified in Section 6102(a)(3).
For example, Section 6102(a)(3)(A) of
the Act requires the FTC to prohibit ‘‘a
pattern of unsolicited telephone calls
which the reasonable consumer would
consider coercive or abusive of such
consumer’s right to privacy.’’ 257
Accordingly, the Commission
promulgated Section 310.4(b) of the TSR
to prohibit certain ‘‘patterns of
calls,’’ 258 including prohibitions against
robocalls, calls to consumers who have
asked a specific seller to stop calling,
and calls to consumers who have
registered their phone numbers on the
FTC’s DNC Registry. 259 As explained in
more detail in Section II—Overview of
the Proposed Amendments to the TSR
above, the Commission needs all eleven
categories of information set forth in the
Final Rule, including the requirement
that sellers and telemarketers retain call
detail records to ensure compliance
with these prohibitions.260
Similarly, Section 6102(a)(3)(B) of the
Act requires the FTC to place
restrictions on when telemarketers can
make unsolicited calls, while Sections
6102(a)(3)(C) and (D) require the FTC to
mandate certain disclosures. The FTC
promulgated Section 310.4(c) of the TSR
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261 2022 NPRM, 87 FR at 33687.
262 The Commission received an additional ten
comments addressing whether the Commission
should generally repeal the B2B exemption in its
entirety. The Commission addresses those
comments in the 2024 NPRM, issued this same day.
263 Anonymous 34–11, 33–11, and 33–13; EPIC
34–23 at 17; NAAG 34–20 at 10; Rapid Finance 34–
17 at 3; USTelecom 33–14 at 3–4; WPF 34–21 at 4.
264 EPIC 34–23 at 17.
265 NAAG 34–20 at 10.
266 WPF 34–21 at 4.
267 Anonymous 34–11, 33–11, and 33–13.
268 USTelecom 33–14 at 3–4.
269 Id.
270 Rapid Finance 34–17 at 3.
271 Id. Rapid Finance also argues that the
amendments will close the gap between how B2B
sellers and B2B telemarketers are treated under the
TSR. Id. at 6–7. Rapid Finance appears to be under
the misimpression that the B2B exemption only
applies to telemarketers and not to sellers. That is
incorrect and the Commission clarifies that the
exemption under Section 310.6(a)(7) applies to both
sellers and telemarketers. The Commission also
notes that Rapid Finance raised other issues that the
Commission is not addressing because they are
unrelated to the focus of this rulemaking. Id. at 6.
272 NFIB 33–4 at 8–12; RBFC 34–13 at 1–4;
TPPPA 34–14 at 2; PACE 33–15 at 7–9.
273 RBFC 34–13 at 3.
274 AMG Cap. Mgmt., LLC v. FTC, 141 S. Ct. 1341
(2021).
275 15 U.S.C. 53(b).
276 NFIB 33–4 at 11; PACE 33–15 at 7–9.
277 PACE 33–15 at 8; see also NFIB 33–4 at 11
(arguing all five findings in the Telemarketing Act
reference consumer harm and not harm to
businesses).
278 PACE 33–15 at 7–9. NFIB raises separate
objections to repealing the B2B exemption based on
changing market forces described in the
Commission’s 2022 ANPR. NFIB 33–4 at 9–10. As
explained in the 2024 NPRM that the Commission
is issuing concurrently with this Final Rule, the
Commission declined to move forward with
narrowing the B2B exemption as proposed in the
2022 ANPR. As such, the Commission will not
address NFIB’s argument here since it is not
applicable in requiring B2B telemarketing to
comply with the TSR’s misrepresentation
provisions.
279 15 U.S.C. 6106(4).
280 15 U.S.C. 6106(4) (emphasis added).
281 See, e.g., Customer, Merriam-Webster
Dictionary, available at https://www.merriam-
webster.com/dictionary/customer (last visited Feb.
1, 2024) (defining customer as ‘‘one that purchases
a commodity or service’’).
to prohibit calls to a person’s residence
outside of certain hours and Sections
310.4(d) and (e) to require telemarketers
to disclose the identity of the seller or
charity, the purpose of the call, the
nature of the good or service being sold,
and that no purchase is required to win
a prize or participate in a prize
promotion. The TSR’s existing and
amended recordkeeping requirements
are necessary to ensure compliance with
these provisions of the TSR. For
example, call detail records are needed
to ensure telemarketers abide by the call
time restrictions, while the
requirements to retain records of
advertisements, telemarketing scripts,
robocalls, consent, customers, prize
recipients, and call details regarding the
content of the call are required to
determine whether a telemarketer has
made the necessary disclosures.
B. Modification of the B2B Exemption
The 2022 NPRM proposed narrowing
the B2B exemption to require B2B
telemarketing calls to comply with
Section 310.3(a)(2)’s prohibition on
misrepresentations and Section
310.3(a)(4)’s prohibition on false or
misleading statements.261 The
Commission received twelve comments
on this proposal. 262 Rapid Financial
Services, LLC and Small Business
Financial Solutions, LLC (collectively,
‘‘Rapid Finance’’), EPIC, NAAG,
USTelecom—The Broadband
Association (‘‘USTelecom’’), WPF, and
three anonymous commenters all
support the proposal.263 EPIC strongly
supports the proposal, stating ‘‘there is
no reason to believe that phone-based
attempts to exploit small business
victims have diminished since the
pandemic began.’’ 264 NAAG states
‘‘misrepresentations and false or
misleading statements, in any form, are
harmful to trade and commerce in
general.’’ 265 WPF argues ‘‘there is no
downside to this particular update—the
FTC Act already prohibits such
activity.’’ 266 The anonymous
commenters expressed concern over the
harm that businesses suffer from
deceptive telemarketing. 267
USTelecom highlights small and
medium-sized businesses (‘‘SMBs’’), in
particular, ‘‘can be disproportionately
impacted by malicious B2B
telemarketers’’ and scammers primarily
use phones as the primary means of
contacting SMBs.268 USTelecom also
argues bad actors hide behind the B2B
exemption and other legal ambiguities
to avoid accountability, citing to a
particularly pernicious example of a
high-volume B2B telemarketing robocall
campaign purporting to sell services
that help SMBs boost their companies’
Google listing that tied up the business’s
phone lines. 269
Rapid Finance states, as a general
matter, it ‘‘does not oppose, and indeed
supports the application of the TSR to
B2B calls to prohibit material
misrepresentations and false or
misleading statements in B2B
telemarketing transactions, including
prohibiting the specific
misrepresentations listed in Section
310.3(a)(2).’’ 270 Rapid Finance explains
its business customers are ‘‘often the
target of telemarketers seeking to peddle
so-called debt settlement services to
them.’’ 271
NFIB, Revenue Based Finance
Coalition (‘‘RBFC’’), Third Party
Payment Processors Association
(‘‘TPPPA’’), and PACE all object to this
proposed amendment.272 RBFC argues
amending the TSR to apply to deceptive
B2B telemarketing would ‘‘undermine
the Supreme Court’s interpretation of
the FTC’s authority to impose
penalties,’’ 273 citing AMG Capital
Management, LLC v. FTC.274 RBFC’s
arguments are inapposite because the
Supreme Court’s decision in AMG
concerned the FTC’s authority to obtain
consumer redress under Section 13(b) of
the FTC Act; 275 the decision did not
address or implicate the Commission’s
authority to promulgate rules under the
Telemarketing Act.
PACE and NFIB argue applying the
TSR to B2B telemarketing exceeds the
scope of the FTC’s authority under the
Telemarketing Act.276 They claim the
Telemarketing Act is limited to
consumer harm because of its
‘‘consistent use of consumer-oriented
language’’ and the focus on consumer
harm in the statutory text and legislative
history. 277 PACE also argues the
Telemarketing Act’s directive for the
Commission to identify deceptive
telemarketing practices is also limited to
consumer harm, because the
Commission itself has historically
conceptualized deception from a
consumer perspective in its policy
statements. 278
The Commission disagrees. The
Telemarketing Act directs the FTC to
promulgate a rule that addresses
deceptive and abusive telemarketing
practices which, in the Commission’s
law enforcement experience, includes
B2B telemarketing. The language of the
Act supports the Commission’s position.
First, the Act defines ‘‘telemarketing,’’
as ‘‘a plan, program, or campaign which
is conducted to induce purchases of
goods or services . . ., by use of one or
more telephones and which involves
more than one interstate telephone
call.’’ 279 The Act exempts from the
definition of telemarketing ‘‘the
solicitation of sales through the mailing
of a catalog’’ which meet certain criteria
and ‘‘where the person making the
solicitation does not solicit customers
by telephone but only receives calls
initiated by customers in response to the
catalog during those calls. . . .’’ 280 The
Act only specifies that ‘‘telemarketing’’
must involve the use of one interstate
telephone call but does not identify who
must participate in the call. To the
extent it identifies any participant, it
uses the term customers, which
includes businesses.281
Second, Section 6102(a)(1) directs the
Commission to ‘‘prescribe rules
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282 15 U.S.C. 6102(a)(1).
283 15 U.S.C. 6102(a)(2).
284 15 U.S.C. 6102(a)(3)(C) and (D) (emphasis
added).
285 NFIB 33–4 at 11; PACE 33–15 at 7–9.
286 Title I of that legislation created the
Magnuson-Moss Warranty Act (‘‘Magnuson-Moss’’),
Public Law 93–637 (1975) (codified as amended at
15 U.S.C. 2301), extending Commission jurisdiction
over consumer product warranties. Title II,
separately known as the Federal Trade Commission
Improvement Act (‘‘FTCIA’’), modernized the FTC
Act by expanding the Commission’s anti-fraud
powers, including power to ‘‘redress consumer
injury resulting from violations of the [FTC Act]’’
by filing civil actions in district court. S. Rep. No.
93–151, at 3 (1973). Public Law 93–637; Public Law
93–153. p. 2533 (1975) (codified as amended at 15
U.S.C. 45 et seq.).
287 15 U.S.C. 2103(1) and (3).
288 See supra note 286.
289 S. Rep. No. 93–151, at 27.
290 Senate Report at 7.
291 Id.
292 See Prepared Statement of the Federal Trade
Commission before the United States House of
Representatives Committee on Small Business
(Sept. 28, 1994) (detailing the Commission’s law
enforcement actions against telemarketers who have
harmed small businesses).
293 Original TSR, 60 FR at 43861–62.
294 Id.
295 Id. at 43862.
296 2022 NPRM, 87 FR at 33682–83. Although the
Commission’s law enforcement efforts have
primarily focused on harms to small businesses, the
Commission believes that the Telemarketing Act
authorizes the Commission to apply the TSR to B2B
telemarketing more broadly for the reasons stated
here. Similar to the recordkeeping provision, the
Commission notes that Congress has amended the
Telemarketing Act numerous times but made no
changes to prohibit the TSR’s application to some
B2B telemarketing. Congress’s silence here can also
be interpreted as agreement with the FTC’s
statutory construction. See supra note 255.
297 15 U.S.C. 6101(3) (emphasis added).
298 The legislative history supports the
Commission’s position that, even assuming a
narrower definition of consumer, the Telemarketing
Act allows the Commission to regulate B2B
telemarketing. The Senate Report on the Act
explains that telemarketing fraud ‘‘affects a cross
section of Americans, including small business.’’
Senate Report at 2.
299 15 U.S.C. 6102(a) and 6106(4).
prohibiting deceptive telemarketing acts
or practices and other abusive
telemarketing acts or practices.’’ 282
Section 6102(a)(2) directs the
Commission to include in its rules ‘‘a
definition of deceptive telemarketing
acts or practices which shall include
fraudulent charitable solicitations, and
which may include acts or practices of
entities or individuals that assist or
facilitate deceptive telemarketing,
including credit card laundering.’’ 283
Congress used broad language, similar
to the language of the FTC Act, in
directing the FTC to promulgate a rule.
The Act does not limit the scope of the
rule promulgated under the Act to
telemarketing that harms natural
persons. Nor does the Act prohibit
applying the rule to telemarketing that
harms businesses or other organizations.
Third, Sections 6102(a)(3)(C) and (D)
direct the Commission to require ‘‘any
person engaged in telemarketing’’ to
‘‘promptly and clearly disclose to the
person receiving the call the purpose of
the call is to’’ sell a good or service or
solicit a charitable solicitation.284 Once
again, Congress did not specify that the
disclosure must be made to a natural
person rather than a business. It simply
specified that the disclosure be made to
the person who received the call.
Although PACE and NFIB argue the
Commission’s authority is limited to
addressing deceptive or abusive
telemarketing practices that harm
natural persons because of the Act’s
liberal use of the term ‘‘consumer,’’ 285
none of the Act’s provisions described
above uses the word ‘‘consumer.’’
Moreover, the Act never defines the
term ‘‘consumer.’’ Given the Act’s broad
language, the most logical reading of the
term ‘‘consumer’’ is that it encompasses
all—including businesses—who
consume a product or service.
The absence of a definition is notable
when Congress has defined ‘‘consumer’’
in other contexts, such as when it
enacted the Magnuson-Moss Warranty—
Federal Trade Commission
Improvement Act in 1975 (‘‘Magnuson-
Moss’’).286 Under Title I of Magnuson-
Moss, which extended the
Commission’s jurisdiction over
consumer product warranties, Congress
narrowly defined ‘‘consumer’’ to mean a
buyer of any ‘‘consumer product’’ which
is ‘‘normally used for personal, family,
or household purposes.’’ 287 Congress
also clarified that the narrow definition
of consumer was limited to Title I of the
Magnuson-Moss Act and did not apply
to Title II, which among other things,
codified the FTC’s ability to seek
consumer redress by filing civil actions
in Federal court.288 Under Title II,
Congress stated the term ‘‘consumer’’ in
the FTC Act should still be construed
broadly without the limitations imposed
in section 101(3) of title I of S. 356.289
Here, no such definition exists. If
Congress had intended to limit the
scope of the Telemarketing Act to those
acts and practices directed at
individuals rather than businesses, it
would have done so.
The Commission’s position is also
supported by the legislative history. A
Senate Report on the Act explained that,
in directing the Commission to define
‘‘fraudulent telemarketing acts or
practices’’ in its rulemaking, that
Congress intended the rule ‘‘to
encompass the types of unlawful
activities that are currently being
addressed by the both the FTC and the
States in their telemarketing cases.’’ 290
The Report also stated Congress intends
the ‘‘rule to be flexible enough to
encompass the changing nature of
[fraudulent telemarketing] activity while
at the same time providing
telemarketers with guidance as to the
general nature of prohibited
conduct.’’ 291 At the time the
Telemarketing Act was passed, the
Commission’s law enforcement
experience included cases against
deceptive B2B telemarketing. 292 In
promulgating the original TSR, the
Commission considered exempting all
B2B telemarketing but stated, given its
‘‘extensive enforcement experience
pertaining to deceptive telemarketing
directed to businesses,’’ it did not
believe ‘‘an across-the-board exemption
for business-to-business contacts is
appropriate.’’ 293 Instead, the original
TSR excluded from the B2B exemption
telemarketing schemes that sell
nondurable office or cleaning supplies
because, in the Commission’s law
enforcement experience, these B2B
schemes ‘‘have been by far the most
significant business-to-business problem
area [that] such telemarketing falls
within the Commission’s definition of
deceptive telemarketing acts or
practices.’’ 294 The Commission also
stated it would reconsider the scope of
the B2B exemption ‘‘if additional
business-to-business telemarketing
activities become problems after the
Final Rule has been in effect.’’ 295 Each
time the Commission has considered
applying the TSR to other B2B
telemarketing, it has done so based on
its law enforcement experience in
keeping with Congress’s directive.296
But even if the term ‘‘consumer’’ is
construed more narrowly to exclude
businesses, the Act’s language still
supports the Commission’s position that
the Act allows it to regulate B2B
telemarketing. First, one of the Act’s
findings states ‘‘[c]onsumers and others
are estimated to lose $40 billion a year
in telemarketing fraud.’’ 297 The
legislative history makes clear Congress
was concerned about telemarketing
fraud against small businesses.298
Second, the Act uses broad language in
the definition of telemarketing, in its
directives to promulgate rules regarding
deceptive or abusive telemarketing
under Section 6102(a)(1), and in its
directives of what to include in those
rules under Sections 6102(a)(2),
(a)(3)(C), and (a)(3)(D). These provisions
do not contain any reference to a
‘‘consumer.’’ 299 If Congress intended to
construe consumer narrowly, Congress’s
omission of the term consumer from
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300 TPPPA 34–14 at 2.
301 RBFC 34–13 at 2–3.
302 RBFC 34–13 at 3; see also Better Business
Bureau, Scams and Your Small Business Research
Report, at 7–8 (2018), available at https://
www.bbb.org/content/dam/bbb-institute-(bbbi)/
files-to-save/bbb_smallbizscamsreport-final-06-
18.pdf (last visited Dec. 11, 2023). RBFC argues that
any application of the TSR should be limited to the
BBB’s top five scams impacting small businesses
including: ‘‘(1) bank/credit card company
imposters, (2) directory listing and advertising
services; (3) fake invoice/supplier bills; (4) fake
checks; and (5) tech support scams.’’ RBFC 34–13
at 3.
303 RBFC 34–13 at 2–3; WPF 34–21 at 4.
304 See Section II.B (B2B Telemarketing).
305 Id.
306 2022 NPRM, 87 FR at 33687–88.
307 To qualify for this narrow exemption,
telemarketers must also comply with the provisions
of Section 310.4(b)(1)(v)(B).
308 WPF 34–21 at 1.
309 EPIC 34–23 at 16.
310 Anonymous 34–7.
311 See Section 310.4(b)(1)(v)(B)(iii) (requiring
sellers and telemarketers to comply with all other
requirements of this part, which include the entity-
specific do not call provisions).
312 2022 NPRM, 87 FR at 33688.
313 310 CFR 310.2(y).
these provisions of the Act demonstrates
Congress did not intend to limit the TSR
to telemarketing that harms only
individual consumers.
Finally, RBFC and TPPPA make
general objections that prohibiting
misrepresentations in B2B telemarketing
is unnecessary; that it would ‘‘unduly
burden legitimate business
activities’’; 300 and would not provide
small businesses any additional
protections when the FTC has authority
already to pursue bad actors that harm
businesses under the FTC Act.301 RBFC
also argues if the Commission were to
prohibit misrepresentations in B2B
telemarketing, it should only do so in
the areas where there is a history of
deception such as the top five scams
identified in the Better Business
Bureau’s research report issued in
2018.302
The Commission is not persuaded by
these arguments. The Commission notes
that requiring B2B telemarketers to
comply with the TSR’s prohibitions
against misrepresentations would
provide the Commission with additional
tools to obtain monetary redress for
those harmed by illegal telemarketing
and civil penalties against bad actors
who violate the law, creating a deterrent
effect. Importantly, the proposed
amendment refrains from imposing any
burdens on B2B sellers and
telemarketers, including recordkeeping
requirements. And, as commenters have
noted, because businesses must already
comply with the FTC Act, which
prohibits deceptive or unfair conduct,
complying with the TSR should not
create significant burden.303 The
Commission also does not believe it
should limit the prohibition against
misrepresentations to just the five top
scams identified in the BBB’s 2018
report. The Commission has monitored
deceptive telemarketing impacting small
businesses since 1995 and has observed
not only the increase in deceptive
telemarketing but how easily scammers
shift tactics and peddle different
products or services to small
businesses.304 Given the Commission’s
extensive law enforcement experience
in B2B telemarketing cases—including
schemes involving deceptive business
directory listings, web hosting or design,
search engine optimization services, and
government impersonators 305—the
Commission believes applying the
TSR’s prohibitions against
misrepresentations in Section
310.3(a)(2) and 310.3(a)(4) is
appropriate.
C. New Definition of ‘‘Previous Donor’’
The 2022 NPRM proposed adding a
new definition for the term ‘‘previous
donor’’ to identify consumers who have
donated to a particular charity within
the two-year period immediately
preceding the date the consumer
receives a robocall on behalf of that
charity.306 The Commission proposed
including this new definition to make
clear that telemarketers are allowed to
place charity robocalls only to
consumers who have previously
donated to that charity within the last
two years.307
The Commission received three
comments on the new definition. WPF
supports the new definition, stating it
would ‘‘clarify the exemption for
charitable donations’’ and ‘‘effectively
close what has been a fairly significant
loophole.’’ 308 EPIC also supports the
new definition and the clarification that
the robocall exemption only applies to
consumers who have previously
donated to the soliciting charity, but it
also urges the Commission to emphasize
the limited scope of this exemption
from the general prohibition against
robocalls. 309 One anonymous
commenter objected to this new
definition, arguing there should not be
an exemption to place robocalls to prior
donors in the first place.310
The Commission emphasizes the
exemption to allow a telemarketer to
place charity robocalls is narrow in
scope and amending the TSR to add a
new definition of ‘‘previous donor’’ will
ensure the exemption remains narrow.
The Commission understands some
consumers do not want to receive any
robocalls, including from charities they
have supported through a donation. In
such cases, the Commission notes that
a consumer who does not want to
receive such robocalls may request to be
added to that charity’s do-not-call list. If
the consumer has done so, the
exemption to place robocalls does not
apply and it is a violation of the TSR for
a telemarketer to place robocalls to the
consumer on behalf of that charity.311
D. Corrections to the Rule
In the 2022 NPRM, the Commission
proposed the following five corrections
to the Rule:
• In all instances where Sections
310.6(b)(1), (b)(2), and (b)(3) cross-
reference Sections 310.4(a)(1), (a)(7), (b),
and (c), change these citations so that
they cross-reference Sections
310.4(a)(1), (a)(8), (b), and (c).
• Modifying the time requirements in
the definition of EBR from months to
days as follows:
Æ Changing the time requirement to
qualify for EBR in Section 310.2(q)(1)
from 18 months between the date of the
telephone call and financial transaction
to 540 days.
Æ Changing the time requirement to
qualify for EBR in Section 310.2(q)(2)
from three months between the date of
the telephone call and the date of the
consumer’s inquiry or application to 90
days.
• Adding an email address to Section
310.7 for State officials or private
litigants to provide notice to the
Commission that they intend to bring an
action under the Telemarketing Act.
• Amending Section 310.5(a)(7) so it
is consistent in form with the new
proposed additions to Section 310.5(a).
• Amending Section 310.5(f) to
remove an extraneous word.312
The Commission did not receive any
comments on the proposed
modifications and will implement the
amendments as proposed.
The Commission will also make the
following additional non-substantive
modifications to the Rule:
• Change all references in the TSR
from ‘‘this Rule’’ to ‘‘this part.’’
• Renumber the footnotes in the TSR
so the first footnote starts at one.
Finally, as described in Section III.B—
Modification of the B2B Exemption,
some commenters did not understand
the term ‘‘consumer’’ includes
businesses. To address any confusion,
the Commission will change references
to ‘‘consumer’’ in the amendments of
the recordkeeping requirements and
definition of EBR to the defined term
‘‘person.’’ 313 The Commission will also
modify the references to ‘‘consumer’’
and ‘‘business’’ in the new
recordkeeping requirement to retain call
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314 OMB Control No: 3084–0097, ICR Reference
No: 202208–3084–001, available at https://
www.reginfo.gov/public/do/PRAViewICR?ref_
nbr=202208-3084-001 (last visited Dec. 11, 2023).
315 2022 NPRM, 87 FR at 33690–91.
316 This PRA analysis focuses only on the
information collection requirements created by or
otherwise affected by these now final rule
amendments.
317 See OMB Control No. 3084–0097, ICR
Reference 202204–3084–004, Notice of Office of
Management and Budget Action (June 16, 2022).
318 See, e.g., ECAC 34–22 at 3; NFIB 33–4 at 4–
5; Sirius 34–18 at 7–8.
319 See, e.g., NAAG 34–20 at 9; PACE 33–15 at 2–
5.
320 As described above in Section II.A—
Recordkeeping and in the 2022 NPRM, changing
industry practice including increased spoofing of
Caller ID information has made it more difficult to
identify the telemarketers and sellers responsible
for particular telemarketing campaigns and has
hindered evidence gathering. As a result, two years
is no longer always a sufficient amount of time for
the Commission to fully complete its investigations
of noncompliance and therefore the Commission is
increasing the required retention period for
recordkeeping under the Rule. Given the decreasing
cost of data storage, the Commission does not
believe that changing the length of time sellers and
telemarketers are required to keep records will be
unduly burdensome. 2022 NPRM, 87 FR at 33680–
82, 33686.
321 2022 NPRM, 87 FR at 33690–91.
322 See, e.g., PACE 33–15 at 2.
323 See National Do not Call Registry Data Book
for Fiscal Year 2022 (‘‘Data Book’’), available at
https://www.ftc.gov/system/files/ftc_gov/pdf/DNC-
Data-Book-2022.pdf (last visited Dec. 11, 2023). An
exempt entity is one that, although not subject to
the TSR, voluntarily chooses to scrub its calling
lists against the data in the Registry.
detail records in Section 310.5(a)(2)(iv)
to ‘‘individual consumer’’ and ‘‘business
consumer.’’ While these modifications
do not substantively alter the scope or
application of the TSR, the Commission
believes they will resolve any remaining
uncertainty.
IV. Paperwork Reduction Act
The current Rule contains various
provisions that constitute information
collection requirements as defined by 5
CFR 1320.3(c), the definitional
provision within the Office of
Management and Budget (‘‘OMB’’)
regulations implementing the
Paperwork Reduction Act (PRA). 44
U.S.C. chapter 35. OMB has approved
the Rule’s existing information
collection requirements through October
31, 2025.314 The 2022 NPRM’s proposed
amendments made changes in the Rule’s
recordkeeping requirements that
increased the PRA burden as detailed
below. 315 Accordingly, FTC staff
submitted the 2022 NPRM and the
associated Supporting Statement to
OMB for review under the PRA.316 On
June 16, 2022, OMB directed the FTC to
resubmit its request when the proposed
rule is finalized.317
None of the public comments
submitted addressed the estimated PRA
burden included in the 2022 NPRM, but
some commenters did raise general
burden concerns. 318 Other commenters
concurred that sellers and telemarketers
likely retained the required records in
the ordinary course of business and that
the cost of electronic storage is
decreasing. 319 The Commission’s
responses to those concerns are set forth
in more detail in Section III—Final
Amended Rule, and in some instances
the Commission made modifications to
the proposed rule to address the
concerns and reduce the estimated PRA
burden.
The Final Rule contains new
recordkeeping requirements and
modifications to existing recordkeeping
requirements. The new recordkeeping
provisions require sellers or
telemarketers to retain: (1) a copy of
each unique prerecorded message; (2)
call detail records of telemarketing
campaigns; (3) records sufficient to
show a seller has an established
business relationship with a consumer;
(4) records sufficient to show a
consumer is a previous donor to a
particular charitable organization; (5)
records regarding the service providers
that a telemarketer uses to deliver
outbound calls; (6) records of a seller or
charitable organization’s entity-specific
do-not-call registries; and (7) records of
which version of the Commission’s DNC
Registry were used to ensure
compliance with this Rule. The Final
Rule modifies existing recordkeeping
requirements by: (1) changing the time-
period for retaining records from two
years to five years; 320 (2) clarifying the
records necessary for sellers or
telemarketers to demonstrate that the
person it is calling has consented to
receive the call; and (3) specifying the
format for records that include phone
numbers, time, or call duration.
As explained above and in the 2022
NPRM, 321 the Commission believes that
for the most part, sellers and
telemarketers already generate and
retain these records either because the
TSR already requires it or because they
already do so in the ordinary course of
business. For example, to comply with
the TSR, sellers and telemarketers must
already have a reliable method to
identify whether they have a previous
business relationship with a customer or
whether the customer is a prior donor.
They must also access the DNC Registry
and maintain an entity-specific DNC
registry. Moreover, sellers and
telemarketers are also likely to keep
records about their existing customers
or donors and service providers in the
ordinary course of business. The Final
Rule now further requires telemarketers
and sellers to keep call detail records of
their telemarketing campaigns.
Specifically, it requires sellers and
telemarketers to keep call detail records
of their telemarketing campaigns
because in the Commission’s
experience, sellers and telemarketers
use technologies that can easily generate
these records. If a seller or telemarketer
does not use such technology, however,
and an individual telemarketer must
manually enter a single telephone
number to initiate a call to that number,
then the seller or telemarketer does not
need to retain records of the calling
number, called number, date, time,
duration and disposition of the
telemarketing call under Sections
310.5(a)(2)(vii) and (x) of the Final Rule
for those calls. The Commission made
this modification to reduce the
anticipated PRA burden for those sellers
and telemarketers who manually place
telemarketing calls. However, as a
matter of caution, the Commission
estimates the anticipated PRA burden
will stay roughly the same as what was
projected in 2022 NPRM, because that
estimate was largely based on the use of
automated mechanisms. Further, the
Commission’s enforcement of the Rule
and review of the comments shows few
sellers and telemarketers manually
place telemarketing calls.322 Thus, the
anticipated PRA burden could be
significantly lower than the estimates
set out below.
A. Estimated Annual Hours Burden
The Commission estimates the PRA
burden of the Final Rule based on its
knowledge of the telemarketing industry
and data compiled from the Do Not Call
Registry. In calendar year 2022, 10,804
telemarketing entities accessed the Do
Not Call Registry; however, 549 were
exempt entities obtaining access to
data.323 Of the non-exempt entities,
6,562 obtained data for a single State.
Staff assumes these 6,562 entities are
operating solely intrastate, and thus
would not be subject to the TSR.
Therefore, Staff estimates approximately
3,693 telemarketing entities (10,804—
549 exempt—6,562 intrastate) are
currently subject to the TSR. The
Commission also estimates there will be
75 new entrants to the industry per year.
The Commission has previously
estimated that complying with the
TSR’s current recordkeeping
requirements requires 100 hours for new
entrants to develop recordkeeping
systems that comply with the TSR and
1 hour per year for established entities
to file and store records after their
systems are created, for a total annual
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324 See Information Collection Activities;
Proposed Collection; Comment Request 87 FR
23177 (Apr. 19, 2022).
325 See ‘‘Recordkeeping for new entrants for live
& prerecorded calls’’ under IC (Information
Collection) List, available at https://
www.reginfo.gov/public/do/PRAViewIC?ref_
nbr=202208-3084-001&icID=185985 (last visited
Dec. 11, 2023).
326 This figure is derived from the mean hourly
wage shown for ‘‘Computer Support Specialist.’’
See ‘‘Occupational Employment and Wages-May
2022’’ Bureau of Labor Statistics, U.S. Department
of Labor, Last Modified April 25, 2023, Table 1
(‘‘National employment and wage data from the
Occupational Employment Statistics survey by
occupation, May 2022’’) available at https://
www.bls.gov/news.release/pdf/ocwage.pdf (last
visited October 24, 2023).
327 See Gartner, Inc. ‘‘IT Key Metrics Data 2020:
Infrastructure Measures—Storage Analysis.’’
Gartner December 18, 2019.
328 Amazon’s storage rate for S3 Standard—
Infrequent Access storage is $0.0125 per GB per
month. See https://aws.amazon.com/s3/pricing/
?nc=sn&loc=4 (last visited Dec. 11, 2023); Google’s
storage rate for Archive Storage in parts of North
America is $0.0012 per GB per month. See https://
cloud.google.com/storage/pricing (last visited Dec.
11, 2023).
329 5 U.S.C. 601–612.
330 5 U.S.C. 605.
331 2022 NPRM, 87 FR at 33691–92.
332 5 U.S.C. 605(b).
333 Id.
recordkeeping burden of 4,385 hours for
established entities and 7,500 hours for
new entrants who must develop
required record systems.324
Because the Final Rule contains new
recordkeeping requirements, the
Commission anticipates that in the first
year after the proposed amendments
take effect, every entity subject to the
TSR would need to ensure that their
recordkeeping systems meet the new
requirements. The Commission
estimates this undertaking will take 50
hours. This includes 10 hours to verify
the entities are maintaining the required
records, and 40 hours to create and
retain call detail records. This yields an
additional one-time burden of 184,650
hours for established entities (50 hours
× 3,693 covered entities).
For new entrants, the Commission
estimates that the new requirements
will increase their overall burden for
establishing new recordkeeping systems
by 50 hours per year. This yields a total
added burden for new entrants of 3,750
hours (50 hours × 75 new entrants per
year) in addition to what OMB has
already approved. 325
B. Estimated Annual Labor Costs
The Commission estimates annual
labor costs by applying appropriate
hourly wage rates to the burden hours
described above. The Commission
estimates that established entities will
employ skilled computer support
specialists to modify their
recordkeeping systems. Applying a
skilled labor rate of $30.97/hour 326 to
the estimated 184,650 burden hours for
established entities yields
approximately $5,718,611 in one-time
labor costs during the first year after the
amendments take effect.
As described above, the Commission
estimates that with the Final Rule new
entrants will spend approximately 50
additional hours per year to establish
new recordkeeping systems. Applying a
skilled labor rate of $30.97/hour to the
estimated 3,750 burden hours for new
entrants, the Commission estimates that
the annual labor costs for new entrants
would be approximately $116,138.
C. Estimated Non-Annual Labor Costs
Staff previously estimated the non-
labor costs to comply with the TSR’s
recordkeeping requirements were de
minimis because most affected entities
would maintain the required records in
the ordinary course of business. Staff
estimated that the recordkeeping
requirements could require $50 per year
in office supplies to comply with the
Rule’s recordkeeping requirements.
Because the Final Rule requires
retention of additional records, Staff
estimates that these requirements will
increase to $60 per year in office
supplies on average for each of the 3,768
covered entities per year in office
supplies. This equates to roughly
$226,080 in total for all covered entities.
The new recordkeeping requirements
also require entities to retain call detail
records and audio recordings of
prerecorded messages used in calls.
Staff estimates the costs associated with
preserving these records will also be de
minimis. The Commission regularly
obtains call detail records from voice
providers when investigating potential
TSR violations, and these records are
kept in databases with small file sizes
even when the database contains
information about a substantial number
of calls. For example, the Commission
received a 2.9 gigabyte database that
contained information about 56 million
calls. The Commission also received a
1.2 gigabyte database that contained
information about 5.5 million calls.
Similarly, audio files of most
prerecorded messages will not be very
large because prerecorded messages are
typically short in duration. Storing
electronic data is very inexpensive.
Electronic storage can cost $.74 per
gigabyte for onsite storage including
hardware, software, and personnel
costs.327 Commercial cloud-based
storage options are less expensive and
can cost around $.20 per gigabyte per
year.328 The Commission estimates the
non-labor costs associated with
electronically storing audio files of
prerecorded messages and call detail
records will cost around $5 a year on
average for each of the 3,768 covered
entities per year for electronic storage.
This equates to roughly $18,840 in total
for all covered entities.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996, requires that the
Commission conduct an analysis of the
anticipated economic impact of the
proposed amendments on small
entities.329 The RFA requires that the
Commission provide an Initial
Regulatory Flexibility Analysis
(‘‘IRFA’’) with a proposed rule and a
Final Regulatory Flexibility Analysis
(‘‘FRFA’’) with the Final Rule unless the
Commission certifies that the rule will
not have a significant economic impact
on a substantial number of small
entities.330
As discussed in the 2022 NPRM, the
Commission did not believe the
proposed amendment requiring
additional recordkeeping would have a
significant economic impact upon small
entities, although it may affect a
substantial number of small
businesses. 331 In the Commission’s
view, the proposed amendment would
not significantly increase the costs of
small entities that are sellers or
telemarketers because the proposed
amendments primarily require these
entities to retain records that they are
already generating and preserving in the
ordinary course of business. The
Commission also did not believe that
the proposed amendments requiring
small entities that are sellers or
telemarketers to comply with the TSR’s
prohibitions on misrepresentations
should impose any additional costs.
Therefore, based on available
information, the Commission certified
that amending the Rule as proposed
would not have a significant economic
impact on a substantial number of small
entities, and provided notice of that
certification to the Small Business
Administration (‘‘SBA’’).332
Notwithstanding the certification, the
Commission also published an IRFA in
the 2022 NPRM and invited comment
on the impact the proposed
amendments would have on small
entities covered by the Rule.333 The
Commission did not receive any
comments that provided empirical
information on the burden the proposed
amendments would have on small
entities, but some commenters raised
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334 See, e.g., NFIB 33–4 at 4–5; PACE 33–15 at 2.
335 Supra Section III.A.2 (Call Detail Records).
336 5 U.S.C. 605(b).
337 2022 NPRM, 87 FR at 33678–84.
338 16 CFR 310.2(dd). The Commission notes that,
as mandated by the Telemarketing Act, the
interstate telephone call requirement in the
definition excludes small business sellers and the
telemarketers which serve them in their local
market area, but may not exclude some small
business sellers and telemarketers in multi-state
metropolitan markets, such as Washington, DC.
339 Telemarketers are typically classified as
‘‘Telemarketing Bureaus and Other contact
Centers,’’ (NAICS Code 561422). See Table of Small
Business Size Standards Matched to North
American Industry Classification System Codes,
available at https://www.sba.gov/sites/sbagov/files/
2023-06/Table%20of%20Size%20Standards_
Effective%20March%2017%2C%202023%20
%282%29.pdf (last visited October 24, 2023).
general burden concerns, in particular
with respect to the recordkeeping
requirement that sellers and
telemarketers retain call detail
records. 334 As discussed in more detail
in Section III—Final Amended Rule, the
Commission does not believe the Final
Rule would impose significant
additional burden since the
recordkeeping amendments primarily
require small entities that are sellers and
telemarketers to retain records that they
would keep in the ordinary course of
business. The Commission also
amended the Final Rule so that entities
that do not utilize certain technology are
not required to retain certain call detail
records, to reduce the burden imposed
on those entities.335 Finally, the FTC
Act already requires sellers and
telemarketers that are small entities to
comply with the Final Rule’s
prohibition against misrepresentations
in telemarketing. Thus, the Commission
certifies that the Final Rule would not
have a significant economic impact on
a substantial number of small entities
and provides notice of that certification
to the Small Business Administration
(‘‘SBA’’).336 The Commission has
nonetheless deemed it appropriate as a
matter of discretion to provide this
FRFA.
A. Statement of the Need for, and
Objectives of, the Rule
The Final Rule requires telemarketers
and sellers to maintain additional
records regarding their telemarketing
transactions. As described in the 2022
NPRM 337 and in Section II—Overview
of the Proposed Amendments to the
TSR, the Final Rule updates the TSR’s
existing recordkeeping requirements so
that the requirements comport with the
substantial amendments to the TSR
since the recordkeeping requirements
were first made. The requirements are
also necessary in light of the
technological advancements that have
made it easier and cheaper for
unscrupulous telemarketers to engage in
illegal telemarketing. The Final Rule
also requires B2B telemarketers to
comply with the TSR’s prohibition on
misrepresentations. These amendments
are necessary to help protect businesses
from deceptive telemarketing practices.
The Final Rule also amends the
definition of ‘‘previous donor’’ to clarify
that a seller or telemarketer may not use
prerecorded messages to solicit
charitable donations on behalf of a
charitable organization unless the
recipient of the call previously donated
to that charitable organization within
the last two years.
B. Issues Raised by Public Comments in
Response to the IRFA
As stated above, the Commission did
not receive any comments relating to the
IRFA or that provided empirical
information on the burden the proposed
amendments would have on small
entities, but some commenters raised
general burden concerns. The
Commission details these concerns and
its responses in more detail in Section
III—Final Amended Rule.
Commenters stated, in particular, that
requiring retention of call detail records
and each version of the DNC used for
compliance would cause significant
burden to businesses. Commenters also
argued changing the time period to
retain records from two years to five
years would also impose additional
burdens.
To address concerns regarding the
burden of retaining call detail records,
the Final Rule provides an exemption
for calls made by an individual
telemarketer who manually enters a
single telephone number to initiate
those calls. For such calls, the seller or
telemarketer does not need to retain
records of the calling number, called
number, date, time, duration, and
disposition of the call. This
modification should address burden
concerns raised for small businesses
which do not employ software or other
technology to automate their
telemarketing activity and still use
manual operations.
The Final Rule also provides a one
hundred and eighty-day grace period
from the date Section 310.5(a)(2)—
which requires retention of call detail
records—is published in the Federal
Register so sellers and telemarketers can
implement any new systems, software,
or procedures necessary to comply with
this new provision. This modification
similarly should alleviate commenters’
concerns regarding the time necessary to
come into compliance.
The Final Rule also modifies the
recordkeeping requirement regarding
DNC compliance and now requires
records of which version of the DNC
rather than each version used for
compliance, significantly reducing the
burden associated with this
requirement. With respect to the time
period to retain records, the
Commission does not believe changing
the time period to retain records would
impose a significant burden because
many businesses already retain the
necessary records in the ordinary course
of business.
C. Estimated Number of Small Entities
to Which the Final Rule Will Apply
The Final Rule affects sellers and
telemarketers engaged in
‘‘telemarketing,’’ defined by the Rule to
mean ‘‘a plan, program, or campaign
which is conducted to induce the
purchase of goods or services or a
charitable contribution, by use of one or
more telephones and which involves
more than one interstate telephone
call.’’ 338 As noted above, staff estimate
3,693 telemarketing entities are
currently subject to the TSR, and
approximately 75 new entrants enter the
market per year. For telemarketers, a
small business is defined by the SBA as
one whose average annual receipts do
not exceed $25.5 million. 339 Because
virtually any business could be a seller
under the TSR, it is not possible to
identify average annual receipts that
would make a seller a small business as
defined by the SBA. Commission staff
are unable to determine a precise
estimate of how many sellers or
telemarketers constitute small entities as
defined by SBA. The Commission
sought comment on this issue but did
not receive any information from
commenters.
D. Projected Reporting, Recordkeeping,
and Other Compliance Requirements,
Including Classes of Small Entities and
Professional Skills Needed To Comply
The Final Rule contains new
recordkeeping requirements and
modifications to existing recordkeeping
requirements. The new recordkeeping
requirements would require sellers or
telemarketers to retain: (1) a copy of
each unique prerecorded message; (2)
call detail records of telemarketing
campaigns; (3) records sufficient to
show a seller has an established
business relationship with a consumer;
(4) records sufficient to show a
consumer is a previous donor to a
particular charitable organization; (5)
records regarding the service providers
that a telemarketer uses to deliver
outbound calls; (6) records of a seller or
charitable organization’s entity-specific
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26783	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
340 OCUL 34–19 at 3.
341 Id.
do-not-call registries; and (7) records of
which version of the Commission’s DNC
Registry that were used to ensure
compliance with this Rule. The
proposed modifications to the existing
recordkeeping requirements would: (1)
change the time period for retaining
records from two years to five years; (2)
clarify the records necessary for sellers
or telemarketers to demonstrate that the
person they are calling has consented to
receive the call; and (3) specify the
format for records that include phone
numbers, time, or call duration. The
small entities potentially covered by the
proposed amendment will include all
such entities subject to the Rule. The
Commission has described the skills
necessary to comply with these
recordkeeping requirements in Section
IV—Paperwork Reduction Act above.
E. Identification of Duplicative,
Overlapping, or Conflicting Federal
Rules
The Telephone Consumer Protection
Act of 1991, 47 U.S.C. 227, and its
implementing regulations, 47 CFR
64.1200 (collectively, ‘‘TCPA’’) contain
recordkeeping requirements that may
overlap with the recordkeeping
requirements proposed by the new rule.
For example, the proposed provision
requiring sellers or telemarketers to
keep a record of consumers who state
they do not wish to receive any
outbound calls made on behalf of a
seller or telemarketer, 16 CFR
310.5(a)(10), overlaps to some degree
with the TCPA’s prohibition on a person
or entity initiating a call for
telemarketing unless such person or
entity has procedures for maintaining
lists of persons who request not to
receive telemarketing calls including a
requirement to record the request. The
Final Rule’s recordkeeping requirements
do not conflict with the TCPA’s
recordkeeping requirements because
sellers and telemarketers can comply
with both sets of requirements
simultaneously. Moreover, in the
Commission’s experience, the
recordkeeping requirements under the
TCPA do not lessen the need for the
more robust recordkeeping requirements
the Commission is proposing to further
its law enforcement efforts. The
Commission invited comment and
information regarding any potentially
duplicative, overlapping, or conflicting
Federal statutes, rules, or policies and
received one comment about a potential
conflict.
OCUL argues the Commission cannot
proceed with the proposed amendments
until the Federal Communications
Commission (‘‘FCC’’) has clarified
whether it will allow the establishment
of a new code that will inform the
telemarketer placing the call why its call
was blocked.340 OCUL argues that this
would lead to telemarketers and sellers
being unable to keep complete or
accurate records, subjecting them to
violations, if they do not know why a
call was blocked. 341 The Commission
does not see a conflict between the
FCC’s ongoing rulemaking and the
proposed amendments in the 2022
NPRM. The Final Rule does not require
the telemarketer or seller to retain
records detailing why a call was
blocked. Simply stating that a call was
blocked as a record of the disposition of
the call will suffice.
F. Description of Steps Taken To
Minimize Significant Economic Impact,
if any, on Small Entities, Including
Alternatives
The Commission has not proposed
any specific small entity exemption or
other significant alternatives to the
proposed rule. The Commission has
made every effort to avoid imposing
unduly burdensome requirements on
sellers and telemarketers by limiting the
recordkeeping requirements to records
that are both necessary for the
Commission’s law enforcement and
typically already kept in the ordinary
course of business. As detailed above in
Sections III—Final Amended Rule and
IV—Paperwork Reduction Act, the
Commission has made additional
modifications to the proposed
amendments to further reduce the
burden on small entities of complying
with the Final Rule. These
modifications include exempting sellers
or telemarketers from retaining some
call detail records for calls that are
manually placed, and requiring sellers
and telemarketers to retain records of
which version of the FTC’s DNC
Registry they used rather than each
version used for compliance.
VI. Incorporation by Reference
Consistent with 5 U.S.C. 552(a) and 1
CFR part 51, the Final Rule incorporates
the specifications of the following
standard issued by the International
Telecommunications Union: ITU–T
E.164: Series E: Overall Network
Operation, Telephone Service, Service
Operation and Human Factors
(published 11/2010). The E.164
standard establishes a common
framework for how international
telephone numbers should be arranged
so that calls can be routed across
telephone networks. Countries use this
standard to establish their own
international telephone number formats
and ensure that those numbers have the
information necessary to route
telephone calls successfully between
countries.
This ITU standard is reasonably
available to interested parties. The ITU
provides free online public access to
view read-only copies of the standard.
The ITU website address for access to
the standard is: https://www.itu.int/en/
pages/default.aspx.
VII. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated these rule amendments as
not a ‘‘major rule,’’ as defined by 5
U.S.C. 804(2).
List of Subjects in 16 CFR Part 310
Advertising; Consumer protection;
Incorporation by reference; Reporting
and recordkeeping requirements;
Telephone; Trade practices.
For the reasons discussed in the
preamble, the Federal Trade
Commission amends title 16 of the Code
of Federal Regulations, part 310, as
follows:
PART 310—TELEMARKETING SALES
RULE
■ 1. The authority for part 310
continues to read as follows:
Authority: 15 U.S.C. 6101–6108.
■ 2. In § 310.2,
■ a. Revise paragraph (q);
■ b. Redesignate paragraphs (aa)
through (hh) as (bb) through (ii);
■ c. Add a new paragraph (aa).
The revisions and addition read as
follows:
§ 310.2 Definitions.
* 	* 	* 	* 	*
(q) Established business relationship
means a relationship between a seller
and a person based on:
(1) The person’s purchase, rental, or
lease of the seller’s goods or services or
a financial transaction between the
person and seller, within the 540 days
immediately preceding the date of a
telemarketing call; or
(2) The person’s inquiry or
application regarding a good or service
offered by the seller, within the 90 days
immediately preceding the date of a
telemarketing call.
* 	* 	* 	* 	*
(aa) Previous donor means any person
who has made a charitable contribution
to a particular charitable organization
within the 2-year period immediately
preceding the date of the telemarketing
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1 For offers of consumer credit products subject
to the Truth in Lending Act, 15 U.S.C. 1601 et seq.,
and Regulation Z, 12 CFR pt. 226, compliance with
the recordkeeping requirements under the Truth in
Lending Act, and Regulation Z, will constitute
compliance with § 310.5(a)(4) of this part.
call soliciting on behalf of that
charitable organization.
* 	* 	* 	* 	*
§ 310.3 [Amended]
■ 3. In § 310.3, redesignate footnotes
659 through 663 as footnotes 1 through
5.
■ 4. In § 310.4, revise paragraph (b)(2)
and redesignate footnotes 664 through
666 as footnotes 1 through 3 to read as
follows:
§ 310.4 Abusive telemarketing acts or
practices.
* 	* 	* 	* 	*
(b) * * *
(2) It is an abusive telemarketing act
or practice and a violation of this part
for any person to sell, rent, lease,
purchase, or use any list established to
comply with § 310.4(b)(1)(iii)(A) or
§ 310.5, or maintained by the
Commission pursuant to
§ 310.4(b)(1)(iii)(B), for any purpose
except compliance with the provisions
of this part or otherwise to prevent
telephone calls to telephone numbers on
such lists.
* 	* 	* 	* 	*
■ 5. Revise § 310.5 to read as follows:
§ 310.5 Recordkeeping requirements.
(a) Any seller or telemarketer must
keep, for a period of 5 years from the
date the record is produced unless
specified otherwise, the following
records relating to its telemarketing
activities:
(1) A copy of each substantially
different advertising, brochure,
telemarketing script, and promotional
material, and a copy of each unique
prerecorded message. Such records
must be kept for a period of 5 years from
the date that they are no longer used in
telemarketing;
(2) A record of each telemarketing
call, which must include:
(i) The telemarketer that placed or
received the call;
(ii) The seller or person for which the
telemarketing call is placed or received;
(iii) The good, service, or charitable
purpose that is the subject of the
telemarketing call;
(iv) Whether the telemarketing call is
to an individual consumer or a business
consumer;
(v) Whether the telemarketing call is
an outbound telephone call;
(vi) Whether the telemarketing call
utilizes a prerecorded message;
(vii) The calling number, called
number, date, time, and duration of the
telemarketing call;
(viii) The telemarketing script(s) and
prerecorded message, if any, used
during the call;
(ix) The caller identification
telephone number, and if it is
transmitted, the caller identification
name that is transmitted in an outbound
telephone call to the recipient of the
call, and any contracts or other proof of
authorization for the telemarketer to use
that telephone number and name, and
the time period for which such
authorization or contract applies; and
(x) The disposition of the call,
including but not limited to, whether
the call was answered, connected,
dropped, or transferred. If the call was
transferred, the record must also include
the telephone number or IP address that
the call was transferred to as well as the
company name, if the call was
transferred to a company different from
the seller or telemarketer that placed the
call; provided, however, that for calls
that an individual telemarketer makes
by manually entering a single telephone
number to initiate the call to that
number, a seller or telemarketer need
not retain the records specified in
paragraphs (a)(2)(vii) and (a)(2)(x) of this
section.
(3) For each prize recipient, a record
of the name, last known telephone
number, and last known physical or
email address of that prize recipient,
and the prize awarded for prizes that are
represented, directly or by implication,
to have a value of $25.00 or more;
(4) For each customer, a record of the
name, last known telephone number,
and last known physical or email
address of that customer, the goods or
services purchased, the date such goods
or services were purchased, the date
such goods or services were shipped or
provided, and the amount paid by the
customer for the goods or services; 1
(5) For each person with whom a
seller intends to assert it has an
established business relationship under
§ 310.2(q)(2), a record of the name and
last known telephone number of that
person, the date that person submitted
an inquiry or application regarding the
seller’s goods or services, and the goods
or services inquired about;
(6) For each person that a telemarketer
intends to assert is a previous donor to
a particular charitable organization
under § 310.2(aa), a record of the name
and last known telephone number of
that person, and the last date that
person donated to that particular
charitable organization;
(7) For each current or former
employee directly involved in telephone
sales or solicitations, a record of the
name, any fictitious name used, the last
known home address and telephone
number, and the job title(s) of that
employee; provided, however, that if the
seller or telemarketer permits fictitious
names to be used by employees, each
fictitious name must be traceable to only
one specific employee;
(8) All verifiable authorizations or
records of express informed consent or
express agreement (collectively,
‘‘Consent’’) required to be provided or
received under this part. A complete
record of Consent includes the
following:
(i) The name and telephone number of
the person providing Consent;
(ii) A copy of the request for Consent
in the same manner and format in
which it was presented to the person
providing Consent;
(iii) The purpose for which Consent is
requested and given;
(iv) A copy of the Consent provided;
(v) The date Consent was given; and
(vi) For the copy of Consent provided
under §§ 310.3(a)(3), 310.4(a)(7),
310.4(b)(1)(iii)(B)(1), or
310.4(b)(1)(v)(A), a complete record
must also include all information
specified in those respective sections of
this part;
(9) A record of each service provider
a telemarketer used to deliver an
outbound telephone call to a person on
behalf of a seller for each good or
service the seller offers for sale through
telemarketing. For each such service
provider, a complete record includes the
contract for the service provided, the
date the contract was signed, and the
time period the contract is in effect.
Such contracts must be kept for 5 years
from the date the contract expires;
(10) A record of each person who has
stated she does not wish to receive any
outbound telephone calls made on
behalf of a seller or charitable
organization pursuant to
§ 310.4(b)(1)(iii)(A) including: the name
of the person, the telephone number(s)
associated with the request, the seller or
charitable organization from which the
person does not wish to receive calls,
the telemarketer that called the person,
the date the person requested that she
cease receiving such calls, and the
goods or services the seller was offering
for sale or the charitable purpose for
which a charitable contribution was
being solicited; and
(11) A record of which version of the
Commission’s ‘‘do-not-call’’ registry was
used to ensure compliance with
§ 310.4(b)(1)(iii)(B). Such record must
include:
(i) The name of the entity which
accessed the registry;
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26785	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
(ii) The date the ‘‘do-not-call’’ registry
was accessed;
(iii) The subscription account number
that was used to access the registry; and
(iv) The telemarketing campaign for
which it was accessed.
(b) A seller or telemarketer may keep
the records required by paragraph (a) of
this section in the same manner, format,
or place as they keep such records in the
ordinary course of business. The format
for records required by paragraph
(a)(2)(vii) of this section, and any other
records that include a time or telephone
number, must also comply with the
following:
(1) The format for domestic telephone
numbers must comport with the North
American Numbering plan;
(2) The format for international
telephone numbers must comport with
the standard established in the
International Telecommunications
Union’s Recommendation ITU–T E.164:
Series E: Overall Network Operation,
Telephone Service, Service Operation
and Human Factors, published 11/2010
(incorporated by reference, see
paragraph (g)(1) of this section);
(3) The time and duration of a call
must be kept to the closest second; and
(4) Time must be recorded in
Coordinated Universal Time (UTC).
(c) Failure to keep each record
required by paragraph (a) of this section
in a complete and accurate manner, and
in compliance with paragraph (b) of this
section, as applicable, is a violation of
this part.
(d) For records kept pursuant to
paragraph (a)(2) of this section, the
seller or telemarketer will not be liable
for failure to keep complete and
accurate records pursuant to this part if
it can demonstrate, with documentation,
that as part of its routine business
practice:
(1) It has established and
implemented procedures to ensure
completeness and accuracy of its
records;
(2) It has trained its personnel, and
any entity assisting it in its compliance,
in such procedures;
(3) It monitors compliance with and
enforces such procedures, and
maintains records documenting such
monitoring and enforcement; and
(4) Any failure to keep complete and
accurate records was temporary, due to
inadvertent error, and corrected within
30 days of discovery.
(e) The seller and the telemarketer
calling on behalf of the seller may, by
written agreement, allocate
responsibility between themselves for
the recordkeeping required by this
section. When a seller and telemarketer
have entered into such an agreement,
the terms of that agreement will govern,
and the seller or telemarketer, as the
case may be, need not keep records that
duplicate those of the other. If by
written agreement the telemarketer
bears the responsibility for the
recordkeeping requirements of this
section, the seller must establish and
implement practices and procedures to
ensure the telemarketer is complying
with the requirements of this section.
These practices and procedures include
retaining access to any record the
telemarketer creates under this section
on the seller’s behalf. If the agreement
is unclear as to who must maintain any
required record(s), or if no such
agreement exists, both the telemarketer
and the seller are responsible for
complying with this section.
(f) In the event of any dissolution or
termination of the seller’s or
telemarketer’s business, the principal of
that seller or telemarketer must
maintain all records required under this
section. In the event of any sale,
assignment, or other change in
ownership of the seller’s or
telemarketer’s business, the successor
business must maintain all records
required under this section.
(g) The material required in this
section is incorporated by reference into
this section with the approval of the
Director of the Federal Register under 5
U.S.C. 552(a) and 1 CFR part 51. All
approved material is available for
inspection at the Federal Trade
Commission (FTC) and at the National
Archives and Records Administration
(NARA). Contact FTC at: FTC Library,
(202) 326–2395, Federal Trade
Commission, Room H–630, 600
Pennsylvania Avenue NW, Washington,
DC 20580, or by email at Library@
ftc.gov. For information on the
availability of this material at NARA,
email fr.inspection@nara.gov or go to
www.archives.gov/federal-register/cfr/
ibr-locations.html. It is available from:
The International Telecommunications
Union, Telecommunications
Standardization Bureau, Place des
Nations, CH–1211 Geneva 20; (+41 22
730 5852); https://www.itu.int/en/
pages/default.aspx.
(1) Recommendation ITU–T E.164:
Series E: Overall Network Operation,
Telephone Service, Service Operation
and Human Factors, published 11/2010.
(2) [Reserved]
■ 6. Amend § 310.6 as follows:
■ a. In paragraphs (b)(1), (b)(2), and
(b)(3), remove the words ‘‘§§ 310.4(a)(1),
(a)(7), (b), and (c)’’ and add, in their
place, the words ‘‘§ 310.4(a)(1), (a)(8),
(b), and (c)’’; and
■ b. Revise paragraph (b)(7) to read as
follows:
§ 310.6 Exemptions.
* 	* 	* 	* 	*
(b) * * *
(7) Telephone calls between a
telemarketer and any business to induce
the purchase of goods or services or a
charitable contribution by the business,
provided, however that this exemption
does not apply to:
(i) The requirements of § 310.3(a)(2)
and(4); or
(ii) Calls to induce the retail sale of
nondurable office or cleaning supplies;
provided, however, that
§§ 310.4(b)(1)(iii)(B) and 310.5 shall not
apply to sellers or telemarketers of
nondurable office or cleaning supplies.
■ 7. Amend § 310.7 by revising
paragraph (a) to read as follows:
§ 310.7 Actions by states and private
persons.
(a) Any attorney general or other
officer of a State authorized by the State
to bring an action under the
Telemarketing and Consumer Fraud and
Abuse Prevention Act, and any private
person who brings an action under that
Act, must serve written notice of its
action on the Commission, if feasible,
prior to its initiating an action under
this part. The notice must be sent to the
Office of the Director, Bureau of
Consumer Protection, Federal Trade
Commission, Washington, DC 20580, at
tsrnotice@ftc.gov and must include a
copy of the State’s or private person’s
complaint and any other pleadings to be
filed with the court. If prior notice is not
feasible, the State or private person
must serve the Commission with the
required notice immediately upon
instituting its action.
* 	* 	* 	* 	*
§§ 310.3, 310.4, 310.6, 310.8, 310.9
[Amended]
■ 8. In addition to the amendments set
forth above, in 16 CFR part 310, remove
the words ‘‘this Rule’’ and add, in their
place, the words ‘‘this part’’ in the
following places:
■ a. Section 310.3(a) introductory text,
(b), (c) introductory text, (d)
introductory text, and newly
redesignated footnotes 2 and 5.
■ b. Section 310.4(a) introductory text,
(a)(2)(ii), (b)(1) introductory text, (b)(2),
(c), (d) introductory text, (e)
introductory text, and newly
redesignated footnotes 1 and 2;
■ c. Section 310.6(a) and (b)
introductory text;
■ d. Section 310.8(a), (b), and (e); and
■ e. Section 310.9.
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26786 	Federal Register / Vol. 89, No. 74 / Tuesday, April 16, 2024 / Rules and Regulations
By direction of the Commission.
Joel Christie,
Acting Secretary.
[FR Doc. 2024–07180 Filed 4–15–24; 8:45 am]
BILLING CODE 6750–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 9988]
RIN 1545–BQ63
Elective Payment of Applicable Credits
Correction
In rule document 2024–04604,
beginning on page 17546, in the issue of
Monday, March 11, 2024, the title is
corrected to read as set for above.
[FR Doc. C1–2024–04604 Filed 4–15–24; 8:45 am]
BILLING CODE 0099–10–D
FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Parts 11, 73, and 74
[MB Docket No. 20–401; FCC 24–35; FR ID
213398]
Program Originating FM Broadcast
Booster Stations
AGENCY : Federal Communications
Commission.
ACTION : Final rule.
SUMMARY : In a Report and Order, the
Federal Communications Commission
(Commission) finds that allowing FM
booster stations to originate content on
a limited basis would serve the public
interest. The Report and Order adopts
rules to allow for the voluntary
implementation of program originating
FM booster stations, subject to future
adoption of processing, licensing, and
service rules proposed concurrently in a
further notice of proposed rulemaking,
published elsewhere in this issue of the
Federal Register. The rule changes in
this document are needed to expand the
potential uses of FM booster stations,
which currently may not originate
programming. The intended effect is to
allow radio broadcasters to provide
more relevant localized programming
and information to different zones
within their service areas.
DATES : Effective date: May 16, 2024.
FOR FURTHER INFORMATION CONTACT:
Albert Shuldiner, Chief, Media Bureau,
Audio Division, (202) 418–2721,
Albert.Shuldiner@fcc.gov; Irene
Bleiweiss, Attorney, Media Bureau,
Audio Division, (202) 418–2785,
Irene.Bleiweiss@fcc.gov. For additional
information concerning the Paperwork
Reduction Act (PRA) information
collection requirements contained in
this document, contact Cathy Williams
at (202) 418–2918, Cathy.Williams@
fcc.gov.
SUPPLEMENTARY INFORMATION : This is a
summary of the Commission’s Report
and Order (R&O), MB Docket No. 20–
401; FCC 24–35, adopted on March 27,
2024, and released on April 2, 2024. The
full text of this document will be
available via the FCC’s Electronic
Comment Filing System (ECFS), https://
www.fcc.gov/cgb/ecfs/. Documents will
be available electronically in ASCII,
Microsoft Word, and/or Adobe Acrobat.
Alternative formats are available for
people with disabilities (braille, large
print, electronic files, audio format), by
sending an email to fcc504@fcc.gov or
calling the Commission’s Consumer and
Governmental Affairs Bureau at (202)
418–0530 (voice), (202) 418–0432
(TTY). The Commission published the
notice of proposed rulemaking (NPRM)
at 86 FR 1909 on January 11, 2021.
Paperwork Reduction Act of 1995
Analysis
This document does not contain new
or modified information collection
requirements subject to the Paperwork
Reduction Act of 1995 (PRA), Public
Law 104–13. In addition, therefore, it
does not contain any new or modified
information collection burdens for small
business concerns with fewer than 25
employees, pursuant to the Small
Business Paperwork Relief Act of 2002,
Public Law 107–198, see 44 U.S.C.
3506(c)(4).
Congressional Review Act
The Commission has determined, and
the Administrator of the Office of
Information and Regulatory Affairs,
Office of Management and Budget,
concurs, that these rules are non-major
under the Congressional Review Act, 5
U.S.C. 804(2). The Commission will
send a copy of the R&O to Congress and
the Government Accountability Office
(GAO) pursuant to 5 U.S.C. 801(a)(1)(A).
Synopsis
1. Introduction. In the R&O, the
Commission expands the potential uses
of FM boosters, which are low power,
secondary stations that operate in the
FM broadcast band. As a secondary
service, FM booster stations are not
permitted to cause adjacent-channel
interference to other primary services or
previously-authorized secondary
stations. They must operate on the same
frequency as the primary station, and
have been limited to rebroadcasting the
primary station’s signal in its entirety
(i.e., no transmission of original
content). Historically, the sole use of FM
boosters has been to improve signal
strength of primary FM stations in areas
where reception is poor due to terrain
or distance from the transmitter. The
R&O amends the Commission’s rules to
allow FM and low power FM (LPFM)
broadcasters to employ FM booster
stations to originate programming for up
to three minutes per hour. This
represents a change from current
requirements of 47 CFR 74.1201(f) and
74.1231 which, respectively, define FM
booster stations as not altering the signal
they receive from their primary FM
station and prohibit FM boosters from
making independent transmissions.
2. GeoBroadcast Solutions, LLC
(GBS), the proponent of the rule
changes, has developed technology
designed to allow licensees of primary
FM and LPFM broadcast stations to
‘‘geo-target’’ a portion of their
programming by using FM boosters to
originate different content for different
parts of their service areas. Prior to
proposing rule changes, GBS tested its
technology under different conditions in
three radio markets and concluded that
the technology could be deployed for
limited periods of time within the
primary station’s protected service
contour without causing any adjacent-
channel interference, and that any
resulting co-channel interference (self-
interference to the licensee’s own
signal) would be manageable and not
detrimental to listeners. GBS filed a
Petition for Rulemaking (Petition)
seeking to allow FM boosters to
originate programming. The Petition
suggested that geo-targeted broadcasting
can deliver significant value to
broadcasters, advertisers, and listeners
in distinct communities by broadcasting
more relevant localized information and
advancing diversity. Stations might, for
example, air hyper-local news and
weather reports most relevant to a
particular community. Stations also
might air advertisements or
underwriting acknowledgements from
businesses that are only interested in
reaching small geographic areas, thereby
enhancing the stations’ ability to
compete for local support. GBS pointed
out that many other types of media,
such as online content providers, cable
companies, and newspapers are able to
differentiate their content
geographically, but that no such option
has existed for radio broadcasting. On
April 2, 2020, the Consumer and
Governmental Affairs Bureau issued a
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38342 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1 Non-Compete Clause Rule, NPRM, 88 FR 3482
(Jan. 19, 2023) (hereinafter ‘‘NPRM’’).
2 § 910.2(a)(1)(i) and § 910.2(a)(2)(i).
3 See § 910.1 (defining ‘‘senior executive’’).
4 See Part IV.C.3.
5 § 910.2(a)(1)(ii).
6 § 910.2(b)(1).
7 § 910.2(b)(4).
8 § 910.2(a)(1).
9 § 910.2(a)(2).
10 § 910.1.
11 Id.
12 Id.
13 Id.
14 Id.
15 § 910.3(a).
16 § 910.3(b).
17 § 910.3(c); see also Part V.C.
18 § 910.4.
FEDERAL TRADE COMMISSION
16 CFR Parts 910 and 912
RIN 3084–AB74
Non-Compete Clause Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : Pursuant to the Federal Trade
Commission Act (‘‘FTC Act’’), the
Federal Trade Commission
(‘‘Commission’’) is issuing the Non-
Compete Clause Rule (‘‘the final rule’’).
The final rule provides that it is an
unfair method of competition for
persons to, among other things, enter
into non-compete clauses (‘‘non-
competes’’) with workers on or after the
final rule’s effective date. With respect
to existing non-competes—i.e., non-
competes entered into before the
effective date—the final rule adopts a
different approach for senior executives
than for other workers. For senior
executives, existing non-competes can
remain in force, while existing non-
competes with other workers are not
enforceable after the effective date.
DATES : The final rule is effective
September 4, 2024.
FOR FURTHER INFORMATION CONTACT:
Benjamin Cady or Karuna Patel, Office
of Policy Planning, 202–326–2939
(Cady), 202–326–2510 (Patel), Federal
Trade Commission, 600 Pennsylvania
Avenue NW, Mail Stop CC–6316,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
I. Background
A. Summary of the Final Rule’s
Provisions
The Commission proposed the Non-
Compete Clause Rule on January 19,
2023 pursuant to sections 5 and 6(g) of
the FTC Act. 1 Based on the
Commission’s expertise and after careful
review and consideration of the entire
rulemaking record—including empirical
research on how non-competes affect
competition and over 26,000 public
comments—the Commission adopts this
final rule addressing non-competes.
The final rule provides that it is an
unfair method of competition—and
therefore a violation of section 5—for
employers to, inter alia, enter into non-
compete clauses with workers on or
after the final rule’s effective date.2 The
Commission thus adopts a
comprehensive ban on new non-
competes with all workers.
With respect to existing non-
competes, i.e., non-competes entered
into before the final rule’s effective date,
the Commission adopts a different
approach for senior executives 3 than for
other workers. Existing non-competes
with senior executives can remain in
force; the final rule does not cover such
agreements.4 The final rule allows
existing non-competes with senior
executives to remain in force because
this subset of workers is less likely to be
subject to the kind of acute, ongoing
harms currently being suffered by other
workers subject to existing non-
competes and because commenters
raised credible concerns about the
practical impacts of extinguishing
existing non-competes for senior
executives. For workers who are not
senior executives, existing non-
competes are no longer enforceable after
the final rule’s effective date.5
Employers must provide such workers
with existing non-competes notice that
they are no longer enforceable.6 To
facilitate compliance and minimize
burden, the final rule includes model
language that satisfies this notice
requirement.7
The final rule contains separate
provisions defining unfair methods of
competition for the two subcategories of
workers. Specifically, the final rule
provides that, with respect to a worker
other than a senior executive, it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; to enforce or
attempt to enforce a non-compete
clause; or to represent that the worker
is subject to a non-compete clause.8 The
Commission describes the basis for its
finding that these practices are unfair
methods of competition in Parts IV.B.1
through IV.B.3.
The final rule provides that, with
respect to a senior executive, it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; to enforce or
attempt to enforce a non-compete clause
entered into after the effective date; or
to represent that the senior executive is
subject to a non-compete clause, where
the non-compete clause was entered
into after the effective date.9 The
Commission describes the basis for its
finding that these practices are unfair
methods of competition in Part IV.C.2.
The final rule defines ‘‘non-compete
clause’’ as ‘‘a term or condition of
employment that prohibits a worker
from, penalizes a worker for, or
functions to prevent a worker from (1)
seeking or accepting work in the United
States with a different person where
such work would begin after the
conclusion of the employment that
includes the term or condition; or (2)
operating a business in the United
States after the conclusion of the
employment that includes the term or
condition.’’ 10 The final rule further
provides that, for purposes of the final
rule, ‘‘term or condition of
employment’’ includes, but is not
limited to, a contractual term or
workplace policy, whether written or
oral.11 The final rule further defines
‘‘employment’’ as ‘‘work for a
person.’’ 12
The final rule defines ‘‘worker’’ as ‘‘a
natural person who works or who
previously worked, whether paid or
unpaid, without regard to the worker’s
title or the worker’s status under any
other State or Federal laws, including,
but not limited to, whether the worker
is an employee, independent contractor,
extern, intern, volunteer, apprentice, or
a sole proprietor who provides a service
to a person.’’ 13 The definition further
states that the term ‘‘worker’’ includes a
natural person who works for a
franchisee or franchisor, but does not
include a franchisee in the context of a
franchisee-franchisor relationship.14
The final rule does not apply to non-
competes entered into by a person
pursuant to a bona fide sale of a
business entity. 15 In addition, the final
rule does not apply where a cause of
action related to a non-compete accrued
prior to the effective date.16 The final
rule further provides that it is not an
unfair method of competition to enforce
or attempt to enforce a non-compete or
to make representations about a non-
compete where a person has a good-
faith basis to believe that the final rule
is inapplicable. 17
The final rule does not limit or affect
enforcement of State laws that restrict
non-competes where the State laws do
not conflict with the final rule, but it
preempts State laws that conflict with
the final rule.18 Furthermore, the final
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38343	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
19 § 910.5.
20 § 910.6.
21 For ease of reference, the Commission uses the
term ‘‘employer’’ in this Supplementary
Information to refer to a person for whom a worker
works. The text of part 910 does not use the term
‘‘employer.’’
22 Harlan Blake, Employee Agreements Not to
Compete, 73 Harv. L. Rev. 625, 629–31 (1960).
23 The Mitchel court expressed concern that non-
competes threaten ‘‘the loss of [the worker’s]
livelihood, and the subsistence of his family.’’
Mitchel v. Reynolds, 1 P. Wms. 181, 190 (Q.B.
1711). The court likewise emphasized ‘‘the great
abuses these voluntary restraints’’ are subject to—
for example, ‘‘from masters, who are apt to give
their apprentices much vexation’’ by using ‘‘many
indirect practices to procure such bonds from them,
lest they should prejudice them in their custom,
when they come to set up for themselves.’’ Id.
24 Restatement (Second) of Contracts sec. 188,
cmt. g (1981).
25 See, e.g., Navarre Chevrolet, Inc. v. Begnaud,
205 So. 3d 973, 975 (La. Ct. App. 3d 2016); Eastman
Kodak Co. v. Carmosino, 77 A.D.3d 1434, 1435
(N.Y. App. Div. 4th 2010); Access Organics, Inc. v.
Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee
v. Isaac, 178 P.3d 616, 621 (Idaho 2008); Softchoice,
Inc. v. Schmidt, 763 NW2d 660, 666 (Minn. Ct.
App. 2009).
26 15 U.S.C. 1.
27 See, e.g., Newburger, Loeb & Co., Inc. v. Gross,
563 F.2d 1057, 1082 (2d Cir. 1977) (‘‘Although such
issues have not often been raised in the federal
courts, employee agreements not to compete are
proper subjects for scrutiny under section 1 of the
Sherman Act. When a company interferes with free
competition for one of its former employee’s
services, the market’s ability to achieve the most
economically efficient allocation of labor is
impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and
experience and thereby forestall new entry.’’)
(internal citation omitted).
28 221 U.S. 106, 181–83 (1911).
29 See NPRM at 3494 (describing recent legislative
activity at the State level).
30 See Parts IV.B.3.a and IV.C.2.c.ii.
31 See Parts IV.B.3.b and IV.C.2.c.i.
32 See, e.g., Dave Jamieson, Jimmy John’s Makes
Low-Wage Workers Sign ‘Oppressive’ Noncompete
Agreements, HuffPost, Oct. 13, 2014, https://
www.huffpost.com/entry/jimmy-johns-non-
compete_n_5978180; Spencer Woodman, Exclusive:
Amazon Makes Even Temporary Warehouse
Workers Sign 18-Month Non-Competes, The Verge,
Mar. 26, 2015, https://www.theverge.com/2015/3/
26/8280309/amazon-warehouse-jobs-exclusive-
noncompete-contracts.
33 See, e.g., Conor Dougherty, How Noncompete
Clauses Keep Workers Locked In, N.Y. Times, May
13, 2017, https://www.nytimes.com/2017/05/13/
business/noncompete-clauses.html; Lauren Weber,
The Noncompete Clause Gets a Closer Look, Wall
St. J., Jul. 21, 2021, https://www.wsj.com/articles/
the-noncompete-clause-gets-a-closer-look-
11626872430.
34 See Part I.B.2. As described therein, this is
likely a conservative estimate.
35 See Part IV.B.2.b.i.
36 See id.
37 See Part IX.C.2.
rule includes a severability clause
clarifying the Commission’s intent that,
if a reviewing court were to hold any
part of any provision or application of
the final rule invalid or unenforceable—
including, for example, an aspect of the
terms or conditions defined as non-
competes, one or more of the particular
restrictions on non-competes, or the
standards for or application to one or
more category of workers—the
remainder of the final rule shall remain
in effect.19 The final rule has an
effective date of September 4, 2024.20
B. Context for the Rulemaking
1. Growing Concerns Regarding the
Harmful Effects of Non-Competes
The purpose of this rulemaking is to
address conduct that harms fair
competition. Concern about non-
competes dates back centuries, and the
evidence of harms has increased
substantially in recent years. However,
the existing case-by-case and State-by-
State approaches to non-competes have
proven insufficient to address the
tendency of non-competes to harm
competitive conditions in labor,
product, and service markets.
The ability of employers 21 to enforce
non-competes has always been
restricted, based on public policy
concerns that courts have recognized for
centuries. For example, in Mitchel v.
Reynolds (1711), an English case that
provided the foundation for American
common law on non-competes,22 the
court noted that workers were
vulnerable to exploitation through non-
competes and that non-competes
threatened a worker’s ability to practice
a trade and earn a living.23 These
concerns have persisted. Today, non-
competes between employers and
workers are generally subject to greater
scrutiny under State common law than
other employment terms ‘‘because they
are often the product of unequal
bargaining power and because the
employee is likely to give scant
attention to the hardship he may later
suffer through loss of his livelihood.’’ 24
For these reasons, State courts often
characterize non-competes as
‘‘disfavored.’’ 25
Furthermore, as ‘‘contract[s] . . . in
restraint of trade,’’ 26 non-competes have
always been subject to our nation’s
antitrust laws.27 As early as 1911, in the
formative antitrust case of United States
v. American Tobacco Co., the Supreme
Court held that several tobacco
companies violated both section 1 and
section 2 of the Sherman Act because of
the ‘‘constantly recurring’’ use of non-
competes, among other practices.28
Concerns about non-competes have
increased substantially in recent years
in light of empirical research showing
that they tend to harm competitive
conditions in labor, product, and service
markets. Changes in State laws
governing non-competes 29 in recent
decades have allowed researchers to
better isolate the effects of non-
competes, giving rise to a body of
empirical research documenting these
harms. This research has shown that the
use of non-competes by employers tends
to negatively affect competition in labor
markets, suppressing earnings for
workers across the labor force—
including even workers not subject to
non-competes. 30 This research has also
shown that non-competes tend to
negatively affect competition in product
and service markets, suppressing new
business formation and innovation.31
Alongside this large body of empirical
work, news reports revealed that
employers subject even middle-income
and low-wage workers to non-competes
on a widespread basis.32 Workers came
forward to recount how—by blocking
them from taking a better job or starting
their own business, and subjecting them
to threats and litigation from their
employers—non-competes derailed
their careers, destroyed their finances,
and upended their lives.33
Yet despite the mounting empirical
and qualitative evidence confirming
these harms and the efforts of many
States to ban them, non-competes
remain prevalent in the U.S. economy.
Based on the available evidence, the
Commission estimates that
approximately one in five American
workers—or approximately 30 million
workers—is subject to a non-compete.34
The evidence also indicates that
employers frequently use non-competes
even when they are unenforceable
under State law.35 This suggests that
employers may believe workers are
unaware of their legal rights; that
employers may be seeking to take
advantage of workers’ lack of knowledge
of their legal rights; or that workers are
unable to enforce their rights through
case-by-case litigation. 36 In addition, the
ability of States to regulate non-
competes effectively is constrained by
employers’ use of choice-of-law
provisions, significant variation in how
courts apply choice-of-law rules in
disputes over non-competes, and the
increasingly interstate nature of work.
As the public comments attest, this
patchwork of laws and legal uncertainty
has become extremely burdensome for
both employers and workers.37
As concern about the harmful effects
of non-competes increased, the
Commission began exploring the
potential for Federal rulemaking on
non-competes. In 2018 and 2019, the
Commission held several hearings on
twenty-first century competition and
consumer protection issues, including
‘‘the use of non-competition agreements
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38 Hearings on Competition and Consumer
Protection in the 21st Century, Notice, 83 FR 38307,
38309 (Aug. 6, 2018).
39 FTC, Non-Competes in the Workplace:
Examining Antitrust and Consumer Protection
Issues (Jan. 9, 2020), https://www.ftc.gov/news-
events/events/2020/01/non-competes-workplace-
examining-antitrust-consumer-protection-issues.
40 FTC, Solicitation for Public Comments on
Contract Terms that May Harm Competition (Aug
5, 2021), https://www.regulations.gov/document/
FTC-2021-0036-0022; FTC, Making Competition
Work: Promoting Competition in Labor Markets
(Dec. 6–7, 2021), https://www.regulations.gov/
docket/FTC-2021-0057/comments.
41 See NPRM at 3498–99.
42 FTC, Press Release, FTC Approves Final Orders
Requiring Two Glass Container Manufacturers to
Drop Noncompete Restrictions That They Imposed
on Workers (Feb. 23, 2023), https://www.ftc.gov/
news-events/news/press-releases/2023/02/ftc-
approves-final-orders-requiring-two-glass-container-
manufacturers-drop-noncompete-restrictions; FTC,
Press Release, FTC Approves Final Order Requiring
Anchor Glass Container Corp. to Drop Noncompete
Restrictions That It Imposed on Workers (June 2,
2023), https://www.ftc.gov/news-events/news/press-
releases/2023/06/ftc-approves-final-order-requiring-
anchor-glass-container-corp-drop-noncompete-
restrictions-it.
43 FTC, Press Release, FTC Approves Final Order
Requiring Michigan-Based Security Companies to
Drop Noncompete Restrictions That They Imposed
on Workers (Mar. 8, 2023), https://www.ftc.gov/
news-events/news/press-releases/2023/03/ftc-
approves-final-order-requiring-michigan-based-
security-companies-drop-noncompete-restrictions.
44 FTC, Analysis of Agreement Containing
Consent Order to Aid Public Comment, In re
Prudential Sec., Inc. et al. at 1 (Jan. 4, 2023).
45 NPRM, supra note 1.
46 Id. at 3482–83.
47 The public comments are available online. See
Regulations.gov, Non-Compete Clause Rule
(NPRM), FTC–2023–0007, https://
www.regulations.gov/docket/FTC-2023-0007/
comments. The Commission cannot quantify the
number of individuals or entities represented by the
comments. The number of comments undercounts
the number of individuals or entities represented by
the comments because many comments, including
comments from different types of organizations,
jointly represent the opinions or interests of many.
48 This reflects information provided by
commenters. Commenters self-identify their State
and are not required to include geographic
information.
49 Though most commenters identifying as
workers did not provide information regarding their
income or compensation levels, many provided
information about their particular jobs or industries
from which the Commission was able to infer a
broad range of income levels based on occupational
data from the Bureau of Labor Statistics (‘‘BLS’’).
BLS wage data for each year can be found at
Occupational Employment and Wage Statistics,
Tables Created by BLS, https://www.bls.gov/oes/
tables.htm (hereinafter ‘‘BLS Occupational
Employment and Wage Statistics’’). The
Commission used data from the May 2022 National
XLS table, generally for private ownership.
50 To be clear, the Commission does not rely on
any particular individual comment submission for
its findings, but rather provides here (and
throughout this final rule) examples of comments
that were illustrative of themes that spanned many
comments. The Commission’s findings are based on
consideration of the totality of the evidence,
including its review of the empirical literature, its
review of the full comment record, and its expertise
in identifying practices that harm competition.
51 Individual commenter, FTC–2023–0007–2215.
Comment excerpts have been cleaned up for
grammar, spelling, and punctuation.
52 Individual commenter, FTC–2023–0007–12689.
and the conditions under which their
use may be inconsistent with the
antitrust laws.’’ 38 In January 2020, the
Commission held a public workshop on
non-competes. The speakers and
panelists who participated in the
workshop—and the hundreds of public
comments the Commission received in
response to the workshop—addressed a
wide range of issues, including statutory
and judicial treatment of non-competes;
the economic literature regarding the
effects of non-competes; and whether
the Commission should initiate a
Federal rulemaking on non-competes.39
The Commission also sought public
comment on non-competes as part of an
August 2021 solicitation for public
comment on contract terms that may
harm competition and a December 2021
public workshop on competition in
labor markets.40 The Commission has
also addressed non-competes in
connection with its merger review
work.41
In 2021, the Commission initiated
investigations into the use of non-
competes. In 2023, the Commission
secured final consent orders settling
charges that certain firms engaged in an
unfair method of competition in
violation of section 5 because their use
of non-competes tended to impede
rivals’ access to the restricted
employees’ labor, harming workers,
consumers, and competitive
conditions.42
The Commission also secured a final
consent order settling charges that
another firm violated section 5 by using
non-competes with its employees.43 The
Commission’s complaint alleged the
firm’s imposition of non-competes took
advantage of the unequal bargaining
power between the firm and its
employees, including low-wage security
guard employees, and thus reduced
workers’ job mobility; limited
competition for workers’ services; and
ultimately deprived workers of higher
wages and more favorable working
conditions. 44
Based on the feedback obtained from
years of extensive public outreach and
fact-gathering, in January 2023, the
Commission published a notice of
proposed rulemaking (NPRM)
concerning non-competes.45 The
proposed rule would have categorically
banned employers from using non-
competes with all workers and required
rescission of all existing non-
competes.46
In response to the NPRM, the
Commission received over 26,000
public comments.47 The comments
reflected a diverse cross-section of the
U.S. The Commission received
comments from employers and workers
in a wide range of industries and from
every State; 48 from small, medium, and
large businesses; and from workers with
wide-ranging income levels.49 The
Commission also received comments
from representatives of different
industries through trade and
professional groups as well as from
academics and researchers. Federal,
State, and local governmental
representatives also submitted public
comments.
Among these comments, over 25,000
expressed support for the Commission’s
proposal to categorically ban non-
competes. Among the public
commenters were thousands of workers
who described how non-competes
prevented them from taking a better job
or starting a competing business, as well
as numerous small businesses who
struggled to hire talented workers.
Commenters stated that non-competes
have suppressed their wages, harmed
working conditions, negatively affected
their quality of life, reduced the quality
of the product or service their company
provided, prevented their business from
growing and thriving, and created a
climate of fear that deters competitive
activity. The following examples are
illustrative of the comments the
Commission received: 50
• I currently work in sales for an asphalt
company in Michigan. The company had me
sign a two year non-compete agreement to
not work for any other asphalt company
within 50 miles if I decide to resign. After
two years with the company I have been
disheartened at how poorly customers are
being treated and how often product quality
is sub-par. I would love to start my own
business because I see this as an opportunity
to provide a better service at a lower cost.
However, the non-compete agreement stands
in the way even though there are no trade
secrets and too many customers in this
market.51
• [I] signed a non-compete clause for
power-washing out of duress. My boss said
that if I didn’t sign before the end of the
week, not to come in the next week. . . . I’d
like to start my own business but I would
have to find another job and wait 5 years. All
I know is power-washing and these business
owners all want me to sign a non-compete
clause. It’s one big circle of wealthy business
owners keeping the little man down.
Essentially, non-compete clauses limit an
employee’s opportunity to excel in whatever
skill or trade they’re familiar with. In the
land of the free, we should be free to start a
business not limited by greedy business
owners.52
• In October 2020, I started working as a
bartender at a company called [REDACTED]
for $10 an hour. On my first day, I
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53 Individual commenter, FTC–2023–0007–8852.
54 Individual commenter, FTC–2023–0007–0026.
55 Individual commenter, FTC–2023–0007–9671.
56 Individual commenter, FTC–2023–0007–6142.
57 Individual commenter, FTC–2023–0007–15497.
58 Individual commenter, FTC–2023–0007–14956.
59 Individual commenter, FTC–2023–0007–0922.
60 Individual commenter, FTC–2023–0007–10729.
61 Individual commenter, FTC–2023–0007–10871.
62 Individual commenter, FTC–2023–0007–10968.
63 Individual commenter, FTC–2023–0007–16347.
64 Individual commenter, FTC–2023–0007–3963.
unknowingly signed a 2-year non-compete,
slipped between other paperwork while my
boss rushed me, and downplayed its
importance. . . . At [REDACTED], I was
sexually harassed and emotionally abused. I
needed money, so I searched for a new job
while remaining at [REDACTED] for one
year. I was eventually offered a bartending
job at a family-owned bar with better wages,
conditions, and opportunities. Upon
resigning, I was threatened with a non-
compete I didn’t know existed. Still, I
couldn’t take it anymore, so believing it was
an unenforceable scare tactic, I took the new
job, thinking our legal system wouldn’t allow
a massive company with over 20 locations to
sue a young entry-level worker with no
degree. In December 2021, I was sued for
$30,000 in ‘‘considerable and irreparable
damages’’ for violating the non-
compete. . . .53
• I am a physician in a rural underserved
area of Appalachia. . . . ‘‘[N]on-compete’’
clauses have become ubiquitous in the
healthcare industry. With hospital systems
merging, providers with aggressive non
compete clauses must abandon the
community that they serve if they chose to
leave their employer. . . . Healthcare
providers feel trapped in their current
employment situation, leading to significant
burnout that can shorten their career
longevity. Many are forced to retire early or
take a prolonged pause in their career when
they have no other recourse to combat their
employer.54
• I am a practicing physician who signed
an employment contract containing a
noncompete agreement in 2012, entering into
this agreement with an organization that no
longer exists. My original employer merged
with, and was made subsidiary to, a new
organization that is run under religious
principles in conflict with my own. . . . I
would have never signed such an agreement
with my new employer, yet I am bound to
this organization under threat of legal
coercion. To be clear, the forced compromise
of my religious principles does direct harm
to me. My only recourse to this coercion is
to give up medical practice anywhere
covered by my current medical license,
which is injurious to the patients in my care,
and to myself.55
• I am the owner of a small-midsize freight
brokerage, and non-competes of large
brokerages have time and time again
constrained talent from my business.
Countless employees of [a] mega brokerage
. . . have left and applied for our company
and we must turn them away. These are
skilled brokers that are serving the market
and their clients well due to THEIR
skillsets. . . . These non-competes affect not
just me but the clients they work with as
these skilled brokers are forced out of the
entire logistics market for an entire year and
possibly a lifetime when they pick up a new
career in a different field because of these
aggressive non-competes. . . .56
• I was laid off from my company in 2008
due to the economy, not to any fault of my
own. However, when I was offered a job at
another company, my former company
threatened them and my offer was rescinded.
I was unable to find gainful employment for
months, despite opportunities in my field,
and had to utilize unemployment when I
otherwise would not have needed it. To find
work, I ultimately had to switch fields, start
part time somewhere, and just continue to
work my way up. All of this because I was
laid off to no fault of my own. 57
• I was terminated by a large hospital
organization suddenly with a thriving, full
Pediatric practice. . . . My lawyer and I
believe the non-compete does not apply in
my circumstances and that the noncompete
is overly broad, restrictive and harmful to the
public (my patients). I started seeing my
patients mostly gratuitously in their homes
so they would not go without the care they
wanted and needed . . . The judge awarded
the order and I was told I cannot talk to
patients on the phone, text patients, zoom
visits or provide any pediatric care within
my non-compete area. Patients are angry and
panicked. I’m worried every day about my
patients and how I can continue to care for
them. . . . Patients have a right to choose
and keep their doctor. The trust built
between a patient and his doctor is crucial
to keeping a patient healthy. It’s not a
relationship that can or should be
replaced. . . . Patients should always come
first and that is not happening.58
• When I first graduated veterinary school
I signed a noncompete clause that was for 7
years. I tried to negotiate it to a more
reasonable time period but the employer
wouldn’t budge. There weren’t many job
openings for new graduates at the time and
I had student loans to pay back so I signed
it. . . . I moved back home to a small town
and took a job that required a 10-radial-mile,
2-year noncompete (this is currently
considered ‘‘reasonable/standard’’ in my
industry). Unfortunately since it’s a rural area
the 10 miles blocked me out of the locations
of all other veterinary clinics in the county
and I had to commute an hour each way to
work in the next metropolitan area. This put
a lot of stress on my family since I have
young children. Some days I didn’t even get
to see them when they were awake.59
• I work for a large electronic health
records company . . . that is known for
hiring staff right out of college, myself
included. I was impressed with their starting
salary and well-advertised benefits, so I was
quick to accept their offer. After accepting
their offer, I was surprised to receive a
contract outlining a strict non-compete
agreement . . . I feel disappointed that this
information was not made apparent to me
prior to my acceptance of the position, and
now I feel stuck in a job that I’ve quickly
discovered is not a good long-term fit for me.
I am certain that many other recent graduates
often find themselves in a similar position—
they accept shiny offers from a workplace,
not knowing whether the company and
position will be the right fit for them, and
find themselves trapped by such contracts as
mine. 60
• Non competes are awful. I am being sued
right now for going into business on my own
in Boston, Massachusetts, by my former
employer who says I signed a non-compete
in 2003, 20 years ago. . . . I am fighting
them in court. Hopefully I will prevail. . . .
[The] corporation I worked for is a billion-
dollar corporation. And they just keep trying
scare tactics to make me back down. They
went as far as trying to get a preliminary
injunction ordered against me. And the judge
refused but I still have to spend $1,000 an
hour to defend myself.61
• I have been working in the field of multi-
media in the DC/Baltimore region since the
early 2000s. . . . I was 26 when I first
became employed, and at that time a
requirement was that I sign a non-compete
agreement. . . . This means I can’t be an
entrepreneur- which kills any opportunities
for me to grow something of my own- which
could potentially provide jobs for others in
the future. So what this non-compete does is
basically enables businesses to be small
monopolies. I could literally have a new
lease on my career if non competes were
abolished. As of now, when I think of
working someplace else I have to consider
changing careers altogether.62
• A former employer had me sign a non-
compete when I started employment at an
internship in college. It was a part-time
position of 20 hours of work as an electrical
engineer, while I finished university. After
university, I worked for this employer
another 4 years full time, but then found a
better job in another state. It was not a
competitor, but a customer of my former
employer. My former employer waited till
the day after my 4-week notice to tell me that
I had signed a non-compete agreement and
that it [barred] me from working for any
competitor, customer or any potential
customer up to 5 years after leaving the
company with no geographic limitations.
This was effectively the entire semi-
conductor industry and put my entire career
at risk.63
• Non-competes serve little more purpose
than to codify and entrench inefficiencies. I
have seen this firsthand in the context of a
sophisticated management consulting
environment where company owners
provided ever less support in terms of
contributing to projects or even to sales of
new business while still feeling secure
through agreements that substantially limited
anyone from working in the relevant industry
for two years on a global basis after
leaving. . . . The reality is that there are
innumerable retention mechanisms (such as
good working conditions, compensation,
culture, management, growth trajectory and/
or strategy) that can contribute to loyal
employees without the need for non-
competes.64
The Commission has undertaken
careful review of the public comments
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65 This is likely a conservative estimate. Surveys
of workers likely underreport the share of workers
subject to non-competes, since many workers may
not know they are subject to a non-compete. See,
e.g., Alexander J.S. Colvin & Heidi Shierholz, Econ.
Policy Inst., Noncompete Agreements, Report (Dec.
10, 2019) at 3.
66 See infra note 288 and accompanying text.
67 See Parts IV.A through IV.C (describing this
evidence).
68 Evan P. Starr, J.J. Prescott, & Norman D.
Bishara, Noncompete Agreements in the US Labor
Force, 64 J. L. & Econ. 53, 53 (2021).
69 The final survey sample of 11,505 responses
represented individuals from nearly every
demographic in the labor force. Id. at 58.
70 Id. at 63.
71 Id.
72 Michael Lipsitz & Evan Starr, Low-Wage
Workers and the Enforceability of Noncompete
Agreements, 68 Mgmt. Sci. 143, 144 (2022)
(analyzing data from the Starr, Prescott, & Bishara
survey).
73 Tyler Boesch, Jacob Lockwood, Ryan Nunn, &
Mike Zabek, New Data on Non-Compete Contracts
and What They Mean for Workers (2023), https://
www.minneapolisfed.org/article/2023/new-data-on-
non-compete-contracts-and-what-they-mean-for-
workers.
74 Natarajan Balasubramanian, Evan Starr, &
Shotaro Yamaguchi, Employment Restrictions on
Resource Transferability and Value Appropriation
from Employees (Jan. 18, 2024), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3814403.
75 Id. at 11 (reporting that if a worker has a non-
compete, there is a 70%–75% chance that all three
restrictive covenants are present).
76 Colvin & Shierholz, supra note 65 at 1.
77 Donna S. Rothstein & Evan Starr, Noncompete
Agreements, Bargaining, and Wages: Evidence from
the National Longitudinal Survey of Youth 1997,
June 2022 Mthly. Lab. Rev. (2022).
78 BLS, NLSY97 Data Overview, https://
www.bls.gov/nls/nlsy97.htm.
79 Rothstein & Starr, supra note 77 at 1.
80 Matthew S. Johnson & Michael Lipsitz, Why
Are Low-Wage Workers Signing Noncompete
Agreements?, 57 J. Hum. Res. 689, 700 (2022).
81 Matt Marx, The Firm Strikes Back: Non-
Compete Agreements and the Mobility of Technical
Professionals, 76 a.m. Socio. Rev. 695, 702 (2011).
Calculated as 92.60% who signed a non-compete of
the 46.80% who were asked to sign a non-compete.
82 Kurt Lavetti, Carol Simon, & William D. White,
The Impacts of Restricting Mobility of Skilled
Service Workers: Evidence from Physicians, 55 J.
Hum. Res. 1025, 1042 (2020).
83 Omesh Kini, Ryan Williams, & Sirui Yin, CEO
Noncompete Agreements, Job Risk, and
Compensation, 34 Rev. Fin. Stud. 4701, 4707
(2021).
84 Liyan Shi, Optimal Regulation of Noncompete
Contracts, 91 Econometrica 425, 447 (2023).
and the entirety of the rulemaking
record. Based on this record and the
Commission’s experience and expertise
in competition matters, the Commission
issues this final rule pursuant to its
authority under sections 5 and 6(g) of
the FTC Act.
2. Prevalence of Non-Competes
Based on its own data analysis,
studies published by economists, and
the comment record, the Commission
finds that non-competes are in
widespread use throughout the
economy and pervasive across
industries and demographic groups,
albeit with some differences in the
magnitude of the prevalence based on
industries and demographics. The
Commission estimates that
approximately one in five American
workers—or approximately 30 million
workers—is subject to a non-compete.65
As described in Part II.F, the inquiry
as to whether conduct is an unfair
method of competition under section 5
focuses on the nature and tendency of
the conduct, not whether or to what
degree the conduct caused actual
harm.66 Although a finding that non-
competes are prevalent is not necessary
to support the Commission’s
determination that the use of non-
competes by employers is an unfair
method of competition, the Commission
finds that non-competes are prevalent
and in widespread use throughout the
economy, which is why researchers
have observed such significant negative
actual effects from non-competes on
competitive conditions in labor markets
and markets for products and services. 67
A 2014 survey of workers finds that
18% of respondents work under a non-
compete and 38% of respondents have
worked under one at some point in their
lives.68 This study has the broadest and
likely the most representative coverage
of the U.S. labor force among the
prevalence studies discussed here.69
This study reports robust results
contradicting the prior assumptions of
some that non-competes were, in most
cases, bespoke agreements with
sophisticated and highly-paid workers.
It finds that, among workers without a
bachelor’s degree, 14% of respondents
reported working under a non-compete
at the time surveyed and 35% reported
having worked under one at some point
in their lives.70 For workers earning less
than $40,000 per year, 13% of
respondents were working under a non-
compete and 33% worked under one at
some point in their lives.71 Furthermore,
this survey finds that 53% of workers
covered by non-competes are hourly
workers. 72 The survey suggests that a
large share of workers subject to non-
competes are relatively low-earning
workers. In addition, a survey from the
Federal Reserve Board of Governors
found that 11.4% of workers have non-
competes, including workers with
relatively low earnings and low levels of
education. The survey finds some
degree of geographic heterogeneity,
though it finds that large numbers of
workers in all regions of the country
have non-competes (including 7.0% of
workers in States which broadly do not
enforce non-competes).73
Furthermore, a survey of workers
conducted in 2017 estimates that 24.2%
of workers are subject to a non-
compete. 74 This survey also finds that
non-competes are often used together
with other restrictive employment
agreements, including non-disclosure
agreements (‘‘NDAs’’) and non-
recruitment and non-solicitation
agreements. 75 A methodological
limitation of this survey is that it is a
convenience sample of individuals who
visited Payscale.com during the time
period of the survey and is therefore
unlikely to be fully representative of the
U.S. working population. While
weighting based on demographics helps,
it does not fully mitigate this concern.
Additionally, a 2017 survey of
business establishments with 50 or more
employees estimates that 49% of such
establishments use non-competes for at
least some of their employees, and 32%
of such establishments use non-
competes for all of their employees.76
Other estimates of non-compete use
cover subsets of the U.S. labor force.
One 2022 study is based on National
Longitudinal Survey of Youth (NLSY)
data.77 The NLSY is an often-used labor
survey conducted by the Bureau of
Labor Statistics (‘‘BLS’’) that consists of
a nationally representative sample of
8,984 men and women born from 1980–
84 and living in the U.S. at the time of
the initial survey in 1997; it is a subset
of the workforce by age of worker.78 The
2022 study using NLSY data reports
prevalence of non-competes to be 18%,
in line with the number estimated based
on the 2014 survey of workers directed
solely at calculating the prevalence of
non-competes. 79
Non-competes are pervasive across
occupations. For example, a survey of
independent hair salon owners finds
that 30% of hair stylists worked under
a non-compete in 2015.80 A survey of
electrical and electronic engineers finds
that 43% of respondents signed a non-
compete.81 A different study finds that
45% of physicians worked under a non-
compete in 2007. 82 One study published
in 2021 finds that 62% of CEOs worked
under a non-compete between 1992 and
2014. 83 Another, published in 2023,
supports that finding and reflects an
upward trend in the use of non-
competes among executives—
specifically, the proportion of
executives working under a non-
compete rose from ‘‘57% in the early
1990s to 67% in the mid-2010s.’’ 84 The
2014 survey reports industry-specific
rates ranging from 9% in the Agriculture
and Hunting category to 32% in the
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85 Starr, Prescott, & Bishara, supra note 68 at 67.
86 Balasubramanian et al., supra note 74 at 47.
87 Id.
88 Kristopher J. Brown, Stephen R. Flora, & Mary
K. Brown, Noncompete Clauses in Applied
Behavior Analysis: A Prevalence and Practice
Impact Survey, 13 Behavioral Analysis Practice 924
(2020) (survey of 610 workers).
89 Comment of Am. Coll. of Cardiology, FTC–
2023–0007–18077, at 2. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents or the
time period.
90 William C. Cirocco. Restrictive Covenants in
Physician Contracts: An American Society of Colon
and Rectal Surgeons’ Survey, 54 Diseases of the
Colon and Rectum 482 (2011). The survey
examined 157 colorectal surgeons who had
completed their residency in the prior decade.
91 Comment of Am. Ass’n of Hip and Knee
Surgeons, FTC–2023–0007–21076, at 4. The
comment said the internal poll was conducted in
early 2023, but the comment did not provide a
citation to the survey or the underlying data,
including the number of respondents.
92 Comm. Workers of Am. and Nat’l Employment
L. Project, Broken Network: Workers Expose Harms
of Wireless Telecom Carriers’ Outsourcing to
‘Authorized Retailers’ (Feb. 2023), https://cwa-
union.org/sites/default/files/2023-02/20230206_
BrokenNetwork.pdf, at 12. The survey had 204
respondents.
93 Colvin & Shierholz, supra note 65 at 13.
94 Comment of Nat’l Assoc. of Wholesaler-
Distribs., FTC–2023–0007–19347, at 2. The
comment did not provide a citation to the survey
or the underlying data, including the number of
respondents.
95 Comment of Indep. Lubricant Mfrs. Ass’n,
FTC–2023–0007–19445, at 3. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents.
96 Calculated as 77%*95% (assuming that the
95% reported in their comment applies to the 77%
who reported using restrictive covenants).
Comment of Mich. Chamber of Com., FTC–2023–
0007–20855. The comment did not provide a
citation to the survey or the underlying data,
including the number of respondents.
97 Comment of Gas and Welding Distribs. Ass’n,
FTC–2023–0007–20934, at 2–3. The comment did
not provide a citation to the survey or the
underlying data. The comment said the survey took
place after the NPRM was proposed and had 161
respondents.
98 Comment of Nat’l Ass’n of Mfrs., FTC–2023–
0007–20939, at 2 (citing Nat’l Ass’n of Mfrs.,
Noncompete Survey Data Report, https://
www.nam.org/wp-content/uploads/2023/03/
Noncompete_Survey_Data_Report.pdf). The survey
had 150 respondents.
99 Comment of Soc. for Hum. Res. Mgmt., FTC–
2023–0007–20903, at 5 n.2. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents.
100 Comment of The Authors Guild, FTC–2023–
0007–20854, at 7. The comment did not provide a
citation to the survey or the underlying data, but
said it had 630 respondents.
101 Comment of HR Policy Ass’n, FTC–2023–
0007–20998, at 8.
102 Id.
103 Comment of Retail Indus. Leaders Ass’n, FTC–
2023–0007–20989, at 6. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents or the
time period.
104 Comment of Sm. Bus. Majority, FTC–2023–
0007–21093 (citing Small Business Majority,
Opinion Poll: Small Business Owners Support
Banning Non-Compete Agreements (Apr. 13, 2013),
https://smallbusinessmajority.org/sites/default/
files/research-reports/2023-non-compete-poll-
report.pdf).
105 See Rothstein & Starr, supra note 77 and
accompanying text.
106 See supra notes 80–87 and accompanying text.
Information category.85 The
Balasubramaian et al. survey reports
industry-specific rates ranging from
12% in the Arts, Entertainment, and
Recreation category to 30% in the
Professional, Scientific, and Technical
category.86 The same survey also reports
occupation-specific rates ranging from
8% in the Community and Social
Services category to 32% in the
Computer and Mathematical category.87
In addition, commenters presented
survey data on the prevalence of non-
competes in various occupations and
industries. The Commission does not
rely on these surveys to support its
finding that non-competes are in
widespread use throughout the
economy. Because the Commission
lacked access to a detailed description
of the methodology for these surveys
(unlike for the surveys described
previously), the Commission cannot
evaluate how credible their research
designs are. However, they generally
confirm the Commission’s finding that
non-competes are in widespread use
throughout the economy and pervasive
across industries and demographic
groups.
For example, commenters reported
that 33% of practitioners in the applied
behavioral analysis field reported being
subject to a non-compete,88 along with
68% of cardiologists,89 42% of
colorectal surgeons, 90 72% of members
of the American Association of Hip and
Knee Surgeons,91 and 31% of wireless
telecommunications retail workers.92
Other commenters cited a 2019 study
finding that 29% of businesses where
the average wage is below $13 per hour
use non-competes for all their
workers.93
Several trade organizations included
information in their comments about the
percentage of their members that use
non-competes for at least some of their
workers, based on surveys of their
membership. For the National
Association of Wholesaler-Distributors,
this figure was 80%; 94 for the
Independent Lubricant Manufacturing
Association, 69%; 95 for the Michigan
Chamber of Commerce, 73%; 96 for the
Gas and Welding Distributors
Association, 80%; 97 and for the
National Association of Manufacturers,
70%. 98 One industry organization said
its survey found that 57% of
respondents require workers earning
over $150,000 to sign non-competes. 99
A survey by the Authors Guild finds
that 19.2% of respondents reported that
non-competes prevented them from
publishing a similar or competing
book.100 The HR Policy Association
stated that 75% of respondents
indicated they use non-competes for
less than 10% of their workers, and
nearly one third indicated they use non-
competes for less than 1% of their
workers.101 The association stated that
its survey covered 3 million workers
and argued that its survey finding less
usage of non-competes was more
representative than studies cited in the
NPRM.102 However, the commenter did
not provide the data underlying its
claims. The Retail Industry Leaders
Association stated that a recent survey
of its members indicated that, among
members that use non-competes, the
majority do so with less than 1% of
their workforce and an additional
quarter use non-competes with less than
10% of their workforce.103 Additionally,
a commenter referenced a survey of
small business owners finding that 48%
use non-competes for their own
business. 104
Several commenters misrepresented
the Commission’s finding related to
prevalence as based on ‘‘a single study
from 2021’’ (Starr, Prescott, and Bishara,
2021), which relied on survey data from
2014. The Commission’s finding is not
based on a single study. The NLSY
study reaches similar conclusions about
the prevalence of non-competes across
the economy, 105 and the occupation-
specific studies indicate that non-
competes are pervasive in various
occupations. 106 Furthermore, despite its
methodological limitations, the data
submitted by commenters generally
comport with the estimates reported in
the academic literature. One commenter
stated the respondents to the Starr,
Prescott, and Bishara survey were not
necessarily representative of the
population. The Commission believes
that the weighting of the data
sufficiently addresses this concern.
Another commenter argued that
individuals may misunderstand
contracts that they have signed, leading
them to mistakenly believe they are
bound by a non-compete. The
Commission does not find this to be a
plausible explanation for the high
numbers of workers, businesses, and
trade associations that report that non-
competes are prevalent.
The Commission appreciates the
additional estimates provided by
commenters. The comments broadly
corroborate the Commission’s finding
that non-competes are used across the
workforce, with some heterogeneity in
the magnitude of the prevalence. The
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38348 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
107 Federal Trade Commission Act of 1914, Public
Law 63–203, 38 Stat. 717, 719 (hereinafter ‘‘FTC Act
of 1914’’).
108 FTC Act of 1914, 38 Stat. at 719. Section 5 is
codified as amended at 15 U.S.C. 45. Congress later
amended the term ‘‘in commerce’’ to ‘‘in or
affecting commerce.’’ The Supreme Court has
explained that this amended phrase makes section
5 of the FTC Act ‘‘coextensive with the
constitutional power of Congress under the
Commerce Clause.’’ United States v. Am. Bldg.
Maintenance Indus., 422 U.S. 271, 277 n.6 (1975).
For simplicity, this statement of basis and purpose
often refers to ‘‘unfair methods of competition’’
without the commerce requirement, but the
Commission acknowledges that it has power to
prevent only such methods that are in or affect
commerce as that term is defined in the Act. See
15 U.S.C. 44.
109 See 15 U.S.C. 45(a)(2).
110 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495, 532 (1935).
111 See FTC v. R. F. Keppel & Bro., Inc., 291 U.S.
304, 310–11 (1934); see also Schechter Poultry, 295
U.S. at 532.
112 See E.I. du Pont de Nemours v. FTC (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.’’).
113 S. Rep. No. 62–1326, at 14 (1913) (hereinafter
‘‘Cummins Report’’). After analyzing a series of
Supreme Court decisions interpreting the Sherman
Act—e.g., Standard Oil Co. of New Jersey v. United
States, 221 U.S. 1, 60 (1911)—the Senate committee
feared that the rule of reason meant that ‘‘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’’ and that this made
it ‘‘imperative to enact additional legislation.’’
Cummins Report at 11–12.
114 FTC v. Brown Shoe Co., 384 U.S. 316, 322
(1966); see also FTC v. Motion Picture Advert. Serv.
Co., 344 U.S. 392, 394–95 (1953).
115 R.F. Keppel & Bro., 291 U.S. at 312.
116 Id. at 311 n.2.
117 See, e.g., id. at 311; A.L.A. Schechter Poultry
Corp. v. United States, 295 U.S. 495, 532 (1935);
Brown Shoe Co., 384 U.S. at 320–22.
118 FTC v. Texaco, 393 U.S. 223, 225–26 (1968)
(citing Atl. Refin. Co. v. FTC, 381 U.S. 357, 376
(1965)).
119 Spiegel, Inc. v. FTC, 540 F.2d 287, 292 (7th
Cir. 1976) (quoting FTC v. Sperry & Hutchinson Co.,
405 U.S. 233, 244 (1972)); cf., Chuck’s Feed & Seed
Co. v. Ralston Purina Co., 810 F.2d 1289, 1292–93
(4th Cir. 1987).
120 Federal Trade Commission Act, Public Law
447, 75th Cong., 3d Sess. (March 21, 1938) c. 49;
52 Stat. 111 (1938).
121 United States v. Am. Bldg. Maintenance
Indus., 422 U.S. 271, 277 n.6 (1975). As noted, the
Commission’s authority does not reach certain
enumerated industries or activities—a list that has
also grown over time. See 15 U.S.C. 45(a)(2); see
also Part II.E.1. Some of these industries are
statutorily prohibited from engaging in unfair or
deceptive practices or unfair methods of
competition under different laws overseen by other
agencies. See, e.g., 49 U.S.C. 41712(a) (allowing the
Secretary of Transportation to ‘‘decide whether an
air carrier, foreign air carrier, or ticket agent’’ has
engaged in such conduct).
122 15 U.S.C. 41.
123 Id. (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 11,092 (‘‘[W]e want trained
experts; we want precedents; we want a body of
administrative law built up.’’).
124 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495, 533 (1935).
125 FTC v. Cement Inst., 333 U.S. 683, 720 (1948);
Atl. Ref. Co. v. FTC, 381 U.S. 357, 368 (1965); FTC
v. Texaco, 393 U.S. 223, 226 (1968); Official Airline
Guides, Inc. v. FTC, 630 F.2d 920, 927 (2d. Cir.
1980) (quoting Cement Inst., 333 U.S. at 720); see
also FTC v. Motion Picture Advert. Serv. Co., 344
U.S. 392, 396 (1953); FTC v. Ind. Fed’n of Dentists,
476 U.S. 447, 454 (1986).
Commission finds that this
heterogeneity is insufficient to warrant
industry-specific exclusions from
coverage under the final rule in part
because employers’ use of non-competes
is prevalent across labor markets and for
the reasons discussed in Part V.D
regarding requests for exclusions.
II. Legal Authority
A. The History of the Commission and
Section 5 of the FTC Act
The FTC Act was enacted in 1914.107
Section 5 of that Act ‘‘declared’’ that
‘‘unfair methods of competition in
commerce’’ are ‘‘unlawful,’’ and it
‘‘empowered and directed’’ the
Commission ‘‘to prevent’’ entities
subject to its jurisdiction from ‘‘using’’
such methods.108 Congress removed
certain enumerated industries,
activities, or entities—such as
banks 109—from the Commission’s
jurisdiction but otherwise envisioned a
Commission whose purview would
cover commerce across the national
economy.
The term ‘‘‘unfair methods of
competition’ . . . was an expression
new in the law’’ when it first appeared
in the FTC Act.110 Congress purposely
introduced this phrase to distinguish
the Commission’s authority from the
definition of ‘‘unfair competition’’ at
common law. Because the ‘‘meaning
which the common law had given to
[‘unfair competition’] was . . . too
narrow,’’ Congress adopted ‘‘the broader
and more flexible phrase ‘unfair
methods of competition.’ ’’ 111 Using this
new phrase also made clear that
Congress designed section 5 to extend
beyond the reach of other antitrust
laws—most notably, the Sherman Act—
whose text did not include the term
‘‘unfair methods of competition.’’ 112 In
particular, Congress wanted the
Commission to apply a standard that
would reach conduct not captured by
other antitrust laws and the rule of
reason, which courts applied when
interpreting the Sherman Act, making it
‘‘impossible to predict with any
certainty’’ whether courts would
condemn the many ‘‘practices that
seriously interfere with
competition.’’ 113 Allowing the
Commission to prevent unfair methods
of competition would also help the
Commission achieve a core purpose of
the Act: to stop ‘‘trade restraints in their
incipiency’’ before they grew into
violations of other antitrust laws.114
By design, the new phrase ‘‘unfair
methods of competition’’ did ‘‘not
‘admit of precise definition.’ ’’ 115
Congress intentionally gave the
Commission flexibility to adapt to
changing circumstances. 116 The
Supreme Court has affirmed the more
inclusive scope of section 5 on
numerous occasions 117 and has
affirmed the Commission’s power under
the Act to condemn coercive and
otherwise unfair practices that have a
tendency to stifle or impair
competition.118 Federal appellate courts
have likewise consistently held that the
Commission’s authority under section 5
extends beyond ‘‘the letter’’ of other
antitrust laws.119
Congress further expanded the
Commission’s jurisdiction over time.
Congress extended the Commission’s
authority in 1938 by adding the further
prohibition on ‘‘unfair or deceptive acts
or practices.’’ 120 And in 1975, Congress
amended the phrase ‘‘in commerce’’ in
section 5 to ‘‘in or affecting commerce,’’
a change that was ‘‘specifically designed
to expand the Commission’s jurisdiction
. . . to make it coextensive with the
constitutional power of Congress under
the Commerce Clause.’’ 121
Congress gave careful thought to the
structure of the FTC as an independent
agency entrusted with this considerable
responsibility. The Commission would
consist of five members, no more than
three of whom could be part of the same
political party, who would serve for
terms of seven years. 122 The
Commission would draw on trained
expert staff to develop the body of law
regarding what constitutes unfair
methods of competition (and, later,
unfair and deceptive practices),123 both
through acting as ‘‘a quasi judicial
body’’ 124 that determines whether
conduct is an unfair method of
competition in adjudications and
through authority to promulgate
legislative rules delineating conduct
that constitutes an unfair method of
competition. Recognizing that the
Commission is an expert agency in
making such determinations about
anticompetitive conduct, courts
reviewing Commission determinations
as to what practices constitute an unfair
method of competition have given the
Commission’s decisions ‘‘great
weight.’’ 125
The FTC Act today reflects a careful
balance from Congress. Congress has
directed the Commission to proceed
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126 See, e.g., Holloway v. Bristol-Myers Corp., 485
F.2d 986, 988–89 (D.C. Cir. 1973); Liu v. Amerco,
677 F.3d 489, 492 (1st Cir. 2012).
127 Congress has authorized the FTC to seek civil
monetary remedies against parties who engage in
unfair or deceptive acts or practices under some
circumstances. See 15 U.S.C. 45(m); 15 U.S.C. 57b.
128 See 15 U.S.C. 45(b); 15 U.S.C. 53(b).
129 See 15 U.S.C. 45(l).
130 15 U.S.C. 46(g).
131 As explained in more detail later in this Part,
Congress added section 18 to the FTC Act in 1975,
and that section provides the process the
Commission must go through to promulgate rules
defining unfair or deceptive acts or practices. See
Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, Public Law 93–637,
88 Stat. 2183 (Jan. 4, 1975) (hereinafter ‘‘Magnuson-
Moss Act’’); 15 U.S.C. 57a. Congress provided,
however, that ‘‘[a]ny proposed rule under section
6(g) . . . with respect to which presentation of data,
views, and arguments was substantially completed
before’’ section 18 was enacted ‘‘may be
promulgated in the same manner and with the same
validity as such rule could have been promulgated
had’’ section 18 ‘‘not been enacted.’’ 88 Stat. 2198;
15 U.S.C. 57a note. This list therefore includes a
handful of rules promulgated under section 6(g) but
after 1975 because those rules were substantially
completed before section 18’s enactment.
132 Advertising and Labeling as to Size of
Sleeping Bags, 28 FR 10900 (Oct. 11, 1963),
repealed by 60 FR 65528 (Dec. 20, 1995).
133 Misuse of ‘‘Automatic’’ or Terms of Similar
Import as Descriptive of Household Electric Sewing
Machines, 30 FR 8900 (Jul. 15, 1965), repealed by
55 FR 23900 (June 13, 1990).
134 Deception as to Nonprismatic and Partially
Prismatic Instruments Being Prismatic Binoculars,
29 FR 7316 (Jun. 5, 1964), repealed by 60 FR 65529
(Dec. 20, 1995).
135 Deceptive Use of ‘‘Leakproof,’’ ‘‘Guaranteed
Leakproof,’’ etc., as Descriptive of Dry Cell
Batteries, 29 FR 6535 (May 20, 1964), repealed by
62 FR 61225 (Nov. 17, 1997).
136 Deceptive Advertising and Labeling as to Size
of Tablecloths and Related Products, 29 FR 11261
(Aug. 5, 1964), repealed by 60 FR 65530 (Dec. 20,
1995).
137 Misbranding and Deception as to Leather
Content of Waist Belts, 29 FR 8166 (Jun. 27, 1964),
repealed by 61 FR 25560 (May 22, 1996).
138 Deceptive Advertising and Labeling of
Previously Used Lubricating Oil, 29 FR 11650 (Aug.
14, 1964), repealed by 61 FR 55095 (Oct. 24, 1996).
139 Unfair or Deceptive Advertising and Labeling
of Cigarettes in Relation to the Health Hazards of
Smoking, 29 FR 8324 (July 2, 1964), repealed by 30
FR 9485 (July 29, 1965). As explained in more
detail herein, Congress superseded this rule with
legislation.
140 Incandescent Lamp (Light Bulb) Industry, 35
FR 11784 (Jul. 23, 1970), repealed by 61 FR 33308
(Jun. 27, 1996).
141 Deceptive Advertising as to Sizes of Viewable
Pictures Shown by Television Receiving Sets, 31 FR
3342 (Mar. 3, 1966), repealed by 83 FR 50484 (Oct.
9, 2018).
142 Discriminatory Practices in Men’s and Boys’
Tailored Clothing Industry, 32 FR 15584 (Nov. 9,
1967), repealed by 59 FR 8527 (Feb. 23, 1994).
143 Failure to Disclose that Skin Irritation May
Result from Washing or Handling Glass Fiber
Curtains and Draperies and Glass Fiber Curtain and
Drapery Fabrics, 32 FR 11023 (Jul. 28, 1967),
repealed by 60 FR 65532 (Dec. 20, 1995).
144 Deception as to Transistor Count of Radio
Receiving Sets, Including Transceivers, 33 FR 8446
(Jun. 7, 1968), repealed by 55 FR 25090 (Jun. 20,
1990).
145 Failure to Disclose the Lethal Effects of
Inhaling Quick-Freeze Aerosol Spray Products Used
for Frosting Cocktail Glasses, 34 FR 2417 (Feb. 20,
1969), repealed by 60 FR 66071 (Dec. 21, 1995).
146 Deceptive Advertising and Labeling as to
Length of Extension Ladders, 34 FR 929 (Jan. 22,
1969), repealed by 60 FR 65533 (Dec. 20, 1995).
147 Games of Chance in the Food Retailing and
Gasoline Industries, 34 FR 13302 (Aug. 16, 1969),
repealed by 61 FR 68143 (Dec. 27, 1996).
148 Unsolicited Mailing of Credit Cards, 35 FR
4614 (Mar. 17, 1970), repealed by 36 FR 45 (Jan. 5,
1971). This rule was rescinded in response to an
amendment to the Truth in Lending Act that
prohibited similar conduct. See Public Law 91–508,
84 Stat. 1126 (1970).
149 Posting of Minimum Octane Numbers on
Gasoline Dispensing Pumps, 36 FR 23871 (Dec. 16,
1971), repealed by 43 FR 43022 (Sept. 22, 1978).
This rule was superseded by the Petroleum
Marketing Practices Act, Public Law 95–297, 92
Stat. 333 (June 19, 1978). A similar regulation was
promulgated under that law at 16 CFR part 306.
against a broader range of
anticompetitive conduct than other
antitrust laws like the Sherman and
Clayton Acts can reach. On the other
hand, Congress has never established a
private right of action under section
5, 126 nor has it authorized the
Commission to recover civil penalties or
other monetary relief from parties who
engage in unfair methods of
competition. 127 Instead, the
Commission may either pursue an
adjudication under section 5(b) or seek
an injunction in Federal court under
section 13(b) against a party that has
engaged in an unfair method of
competition.128 As explained below, it
may also promulgate rules prohibiting
unfair methods of competition. The
Commission cannot obtain civil
penalties or other monetary relief
against parties for using an unfair
method of competition, although it can
obtain civil penalties in court if a party
is ordered to cease and desist from a
violation and fails to do so.129
B. The Commission’s Authority To
Promulgate the Rule
Alongside section 5, Congress
adopted section 6(g) of the Act, in
which it authorized the Commission to
‘‘make rules and regulations for the
purpose of carrying out the provisions
of’’ the FTC Act, which include the
Act’s prohibition of unfair methods of
competition. 130 The plain text of section
5 and section 6(g), taken together,
empower the Commission to promulgate
rules for the purpose of preventing
unfair methods of competition. That
includes legislative rules defining
certain conduct as an unfair method of
competition.
The Commission has exercised its
authority under section 6(g) to
promulgate legislative rules on many
occasions stretching back more than half
a century. Between 1963 and 1978,131
the Commission relied on section 6(g) to
promulgate the following rules: (1) a
rule declaring it an unfair method of
competition (‘‘UMC’’) and an unfair or
deceptive act or practice (‘‘UDAP’’) to
mislead consumers about the size of
sleeping bags by representing that the
‘‘cut size’’ represents the finished
size; 132 (2) a rule declaring it a UMC
and UDAP to use the word ‘‘automatic’’
or similar words to describe household
electric sewing machines; 133 (3) a rule
declaring it a UMC and UDAP to
misrepresent nonprismatic instruments
as prismatic; 134 (4) a rule declaring it a
UMC and UDAP to advertise or market
dry cell batteries as ‘‘leakproof;’’ 135 (5)
a rule declaring it a UMC and UDAP to
misrepresent the ‘‘cut size’’ as the
finished size of tablecloths and similar
products; 136 (6) a rule declaring it a
UMC and UDAP to misrepresent that
belts are made of leather if they are
made of other materials; 137 (7) a rule
declaring it a UMC and UDAP to
represent used lubricating oil as new; 138
(8) a rule declaring it a UDAP to fail to
disclose certain health warnings in
cigarette advertising and on cigarette
packaging (‘‘Cigarette Rule’’); 139 (9) a
rule declaring it a UMC and UDAP to
fail to disclose certain features of light
bulbs on packaging; 140 (10) a rule
declaring it a UMC and UDAP to
misrepresent the actual size of the
viewable picture area on a TV; 141 (11)
a rule declaring a presumption of a
violation of section 2(d) and (e) of the
amended Clayton Act for certain
advertising and promotional practices in
the men’s and boy’s clothing
industry; 142 (12) a rule declaring it a
UMC and UDAP to fail to make certain
disclosures about the handling of glass
fiber products and contact with certain
products containing glass fiber; 143 (13)
a rule declaring it a UMC and UDAP to
make certain misrepresentations about
transistors in radios; 144 (14) a rule
declaring it a UDAP to fail to disclose
certain effects about inhaling certain
aerosol sprays; 145 (15) a rule declaring
it a UMC and UDAP to misrepresent the
length or size of extension ladders; 146
(16) a rule declaring it a UDAP to make
certain misrepresentations, or fail to
disclose certain information, about
games of chance; 147 (17) a rule
declaring it a UMC and UDAP to mail
unsolicited credit cards; 148 (18) a rule
declaring it a UMC and UDAP to fail to
disclose the minimum octane number
on gasoline pumps (‘‘Octane Rule’’); 149
(19) a rule declaring it a UMC and
UDAP to sell finished articles of
clothing without a permanent tag or
label disclosing care and maintenance
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150 Care Labeling of Textile Wearing Apparel, 36
FR 23883 (Dec. 16, 1971).
151 Retail Food Store Advertising and Marketing
Practices, 36 FR 8777 (May 13, 1971).
152 Use of Negative Option Plans by Sellers in
Commerce, 38 FR 4896 (Feb. 22, 1973).
153 Cooling-off Period for Door-to-Door Sales, 37
FR 22934 (Oct. 26, 1972).
154 Power Output Claims for Amplifiers Used in
Home Entertainment Products, 39 FR 15387 (May
3, 1974).
155 Preservation of Consumers’ Claims and
Defenses, 40 FR 53506 (Nov. 18, 1975).
156 Mail Order Merchandise, 40 FR 49492 (Oct.
22, 1975) (regulatory text), 40 FR 51582 (Nov. 5,
1975) (statement of basis and purpose). The Mail
Order Rule has since been updated to become the
Mail, internet, or Telephone Order Merchandise
Rule, or MITOR. See 79 FR 55619 (Sept. 17, 2014).
The updates to the rule were based on the
Commission’s authority to regulate unfair or
deceptive acts or practices.
157 Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity
Ventures, 43 FR 59614 (Dec. 21, 1978).
158 Teresa Moran Schwartz & Alice Saker Hrdy,
FTC Rulemaking: Three Bold Initiatives and Their
Legal Impact, 2–3 (Sept. 22, 2004).
159 U.S. to Require Health Warning for Cigarettes,
N.Y. Times (June 25, 1964) at 1, 15 (tobacco
industry indicating plans to immediately challenge
the Commission’s authority to issue the regulation),
https://www.nytimes.com/1964/06/25/archives/us-
to-require-health-warning-for-cigarettes-trade-
commission-orders.html.
160 Tobacco Inst., Tobacco—A Vital U.S. Industry
(1965), https://acsc.lib.udel.edu/exhibits/show/
legislation/cigarette-labeling.
161 Public Law 89–92, 79 Stat. 282 (July 27, 1965);
see 15 U.S.C. 1331 et seq.
162 FTC Bars Grocery Ads for Unavailable
Specials, N.Y. Times (May 13, 1971) at 1, https://
www.nytimes.com/1971/05/13/archives/f-t-c-bars-
grocery-ads-for-unavailable-specials-bars-grocery;
16 CFR 424.1 and 424.2. The rule was amended
after its enactment in 1971 to add an exception and
defenses but otherwise remains intact as
promulgated. Amendment to Trade Regulation Rule
Concerning Retail Food Store Advertising and
Marketing Practices, 54 FR 35456–08 (Aug. 28,
1989); see also Retail Food Store Advertising and
Marketing Practices Rule, 79 FR 70053–01 (Nov. 25,
2014).
163 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672 (D.C. Cir. 1973).
164 Nat’l Petroleum Refiners, 482 F.2d at 674, 698;
see also Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957,
967 (D.C. Cir. 1985) (concluding, after extensive
review of the legislative history related to the FTC’s
rulemaking authority originating in 1914 and
extending through amendments to the FTC Act in
1980, that ‘‘Congress has not at any time withdrawn
the broad discretionary authority originally granted
the Commission in 1914 to define unfair practices
on a flexible, incremental basis.’’).
165 Nat’l Petroleum Refiners, 482 F.2d at 678.
166 United States v. JS & A Grp., Inc., 716 F.2d
451, 454 (7th Cir. 1983).
167 Magnuson-Moss Act, 88 Stat. 2183; see 15
U.S.C. 57a.
168 S. Rep. No. 93–151, at 32 (1973).
169 H.R. Conf. Rep. No. 93–1606, at 30 (1974).
170 15 U.S.C. 57a(a)(2).
171 Magnuson-Moss Act, 88 Stat. 2183.
172 Magnuson-Moss Act, 88 Stat. 2183.
173 See Undelivered Mail Order Merchandise and
Services, 36 FR 19092 (Sept. 28, 1971) (initial
NPRM); 39 FR 9201 (Mar. 8, 1974) (amended
NPRM); 40 FR 49492 (Oct. 22, 1975) (final
regulatory text).
instructions; 150 (20) a rule declaring a
UMC and UDAP for a grocery store to
offer products for sale at a stated price
if those products will not be readily
available to consumers (‘‘Unavailability
Rule’’); 151 (21) a rule declaring it a UMC
and UDAP for a seller to fail to make
certain disclosures in connection with a
negative option plan (‘‘Negative Options
Rule’’); 152 (22) a rule declaring it a
UDAP for door-to-door sellers to fail to
furnish certain information to
buyers; 153 (23) a rule declaring it a UMC
and UDAP to fail to make certain
disclosures about sound power
amplification for home entertainment
products; 154 (24) a rule declaring it a
UDAP for sellers failing to include
certain contract provisions preserving
claims and defenses in consumer credit
contracts (‘‘Holder Rule’’); 155 (25) a rule
declaring it a UMC or UDAP to solicit
mail order merchandise from a buyer
unless the seller can ship the
merchandise within 30 days (‘‘Mail
Order Rule’’); 156 and (26) a rule
declaring it a UDAP for a franchisor to
fail to furnish a franchisee with certain
information.157
Some of these rules attracted
significant attention. For instance, the
Commission began the rulemaking
process to require warnings on cigarette
packages just one week after the
Surgeon General’s ‘‘landmark report’’
that determined smoking is a health
hazard, 158 and that rule was front-page
news.159 Following a lobbying campaign
by the tobacco industry,160 Congress
supplanted the Commission’s regulation
with the Cigarette Labeling and
Advertising Act but did not disturb the
Commission’s rulemaking authority.161
The Unavailability Rule was likewise
front-page news upon its release in
1971, and Congress left it intact.162
In National Petroleum Refiners
Association v. FTC (‘‘Petroleum
Refiners’’), the D.C. Circuit expressly
upheld the Octane Rule as a proper
exercise of the Commission’s power
under section 6(g) to make rules
regulating both unfair methods of
competition and unfair or deceptive acts
or practices.163 After construing ‘‘the
words of the statute creating the
Commission and delineating its
powers,’’ the court held ‘‘that under the
terms of its governing statute . . . and
under Section 6(g) . . . 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.’’ 164 That interpretation was
also ‘‘reinforced by the construction
courts have given similar provisions in
the authorizing statutes of other
administrative agencies.’’ 165 The
Seventh Circuit later agreed with the
D.C. Circuit’s decision and
‘‘incorporate[d] [it] by reference’’ when
rejecting a challenge to the Mail Order
Rule.166
Following such rulemakings and the
D.C. Circuit’s confirmation of the
Commission’s rulemaking power in
Petroleum Refiners, Congress in 1975
enacted a new section 18 of the FTC
Act. This new section introduced
special procedures, beyond those
required under the Administrative
Procedure Act, for promulgating rules
for unfair or deceptive acts or practices,
and it eliminated the Commission’s
authority to issue such rules under
section 6(g).167 But Congress pointedly
chose not to restrict the Commission’s
authority to promulgate rules regulating
unfair methods of competition under
section 6(g). That choice was deliberate.
While considering this legislation,
Congress knew that the Commission had
promulgated rules regulating unfair
methods of competition and that the
D.C. Circuit in Petroleum Refiners had
confirmed the Commission’s authority
to do so. 168 And Congress expressly
considered—but rejected—an
amendment to the FTC Act under which
‘‘[t]he FTC would have been prohibited
from prescribing rules with respect to
unfair competitive practices.’’ 169
Instead, the enacted section 18
confirmed the Commission’s authority
to make rules under section 6(g). The
law expressly preserved ‘‘any authority
of the Commission to prescribe rules
(including interpretive rules), and
general statements of policy, with
respect to unfair methods of
competition in or affecting
commerce.’’ 170 Congress also made
clear that Section 18 ‘‘shall not affect
the validity of any rule which was
promulgated under section 6(g).’’ 171
And it provided that ‘‘[a]ny proposed
rule under section 6(g)’’ with certain
components that were ‘‘substantially
completed before’’ section 18’s
enactment ‘‘may be promulgated in the
same manner and with the same validity
as such rule could have been
promulgated had this section not been
enacted.’’ 172 Among the substantially
completed rules at the time was the
Mail Order Rule, which proposed to
define—and upon promulgation did
define—certain conduct as both an
unfair method of competition and an
unfair or deceptive act or practice.173
The 1975 legislation thus expressly
permitted the Commission to
promulgate a rule under section 6(g)
that defined an unfair method of
competition and evinces Congress’s
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174 United States v. JS & A Grp., 716 F.2d 451,
454 (7th Cir. 1983).
175 Public Law 96–252, 94 Stat. 374 (1980).
176 Id.; see 15 U.S.C. 57b–3(a)(1).
177 15 U.S.C. 57b–3(a)(1).
178 Id.
179 15 U.S.C. 57b–3(b).
180 Congress has also amended section 6 since the
D.C. Circuit decided Petroleum Refiners, but it left
section 6(g) untouched. See Public Law 109–455,
120 Stat. 3372 (2006).
181 Apex Hosiery Co. v. Leader, 310 U.S. 469, 488
(1940).
182 Id. at 489.
183 See, e.g., Comment of Lev Menand et al., FTC–
2023–0007–20871; Comment of Peter Shane et al.,
FTC–2023–0007–21024; Comment of Yelp, FTC–
2023–0007–20974; Comment of Veeva Systems,
FTC–2023–0007–18078.
184 Comment of Sm. Bus. Majority, FTC–2023–
0007–21022.
185 Some commenters argued that the 1975
Magnuson-Moss Act, which created additional
procedures the Commission must use to promulgate
rules regulating unfair or deceptive acts or
practices, implies that the Commission entirely
lacks authority to promulgate rules regulating unfair
methods of competition. The Commission disagrees
with these comments and notes the effect of the
1975 legislation, which preserved the Commission’s
existing rulemaking authority.
186 E.g., Comment of Fed’n of Am. Hosps., FTC–
2023–0007–21034.
187 15 U.S.C. 45(a)(2).
188 15 U.S.C. 45(a)(2), (3).
intent to leave in place the
Commission’s authority to promulgate
such rules under section 6(g). As the
Seventh Circuit later put it, ‘‘Congress
. . . considered the controversy
surrounding the Commission’s
substantive rulemaking power under
Section 6(g) to have been settled by the
Octane Rating case.’’ 174
Congress again confirmed the
Commission’s authority to promulgate
rules regulating unfair methods of
competition under section 6(g) when it
enacted section 22 of the FTC Act as
part of the Federal Trade Commission
Improvements Act of 1980. 175 Section
22 imposes certain procedural
requirements the Commission must
follow when it promulgates any ‘‘rule.’’
Section 22(a) defines ‘‘rule’’ as ‘‘any rule
promulgated by the Commission under
section 6 or section 18’’ while excluding
from that definition ‘‘interpretive rules,
rules involving Commission
management or personnel, general
statements of policy, or rules relating to
Commission organization, procedure, or
practice.’’ 176 Thus, by its terms, section
22(a) demonstrates the 1980 Congress’s
understanding that the Commission
maintained authority to promulgate
rules under section 6 that are not merely
‘‘interpretive rules, rules involving
Commission management or personnel,
general statements of policy, or rules
relating to Commission organization,
procedure, or practice.’’ 177 Section 22
envisions rules that will have the force
of law as legislative rules and defines
‘‘rule’’ based on whether it may ‘‘have
an annual effect on the national
economy of $100,000,000 or more,’’
‘‘cause a substantial change in the cost
or price of goods or services,’’ or ‘‘have
a significant impact upon’’ persons and
consumers. 178 Section 22(b) of the Act
similarly contemplates authority to
make legislative rules by imposing
regulatory analysis obligations on any
rules that the Commission promulgates
under section 6.179 The specific
obligations in section 22(b), such as the
requirement for the Commission to
conduct a cost-benefit analysis, assume
that section 6(g) authorizes substantive
and economically significant rules.
Both the 1975 and 1980 amendments
to the FTC Act thus indicate that
Congress understood the Commission
possessed rulemaking power under
section 6(g) and chose to leave that
authority in place.180 As the Supreme
Court has observed, ‘‘[t]he long time
failure of Congress to alter’’ a statutory
provision, like section 6(g) here, ‘‘after
it had been judicially construed, and the
enactment by Congress of legislation
which implicitly recognizes the judicial
construction as effective, is persuasive
of legislative recognition that the
judicial construction is the correct
one.’’ 181 That is especially true when,
as here, ‘‘the matter has been fully
brought to the attention of the public
and the Congress, the latter has not seen
fit to change the statute.’’ 182 Were there
any doubt that the 1914 Congress
granted the Commission the authority to
make rules under section 6(g) to prevent
unfair methods of competition, the
Congresses of 1975 and 1980 eliminated
such doubt by ratifying the D.C.
Circuit’s decision holding that the
Commission has such authority.
C. Comments and Responses Regarding
the Commission’s Legal Authority
The Commission received many
comments supporting, discussing, or
questioning its authority to promulgate
the final rule. Numerous commenters
supported that the Commission has
such authority, including, among others,
legal scholars and businesses.183 In
addition, hundreds of small
businesses—hailing from 45 States and
the District of Columbia—joined a
comment by the Small Business
Majority supporting the final rule.184
Commenters questioning the
Commission’s authority typically
advanced one of three arguments. First,
some commenters claimed the FTC Act
does not grant the Commission
authority to promulgate the rule.
Second, some commenters contended
that the validity of non-competes is a
major question that Congress has not
given the Commission the authority to
address. And third, some commenters
argued that Congress had impermissibly
delegated to the Commission authority
to promulgate nationwide rules
governing methods of competition. A
smaller number of comments asserted
other, miscellaneous reasons the
Commission allegedly lacked authority
to promulgate the rule. The Commission
has considered these comments and
disagrees for the reasons explained
below.
1. The Commission’s Authority Under
the FTC Act
The Commission received numerous
comments claiming that it lacks
authority under the FTC Act to
promulgate rules prohibiting unfair
methods of competition. The
Commission disagrees. Congress
expressly granted the Commission
authority to promulgate such rules in
the original FTC Act of 1914, Congress
enacted legislation in 1975 expressly
preserving that authority,185 and it
imposed requirements in 1980 that
presumed that authority.
The Commission is not persuaded by
commenters’ arguments in opposition to
its authority. For instance, some
commenters argued that Congress’s
choice to exclude certain industries
from the Commission’s jurisdiction
indicates that Congress did not intend to
give the Commission power to pass
rules that affect commerce across the
national economy.186 But Congress
expressly ‘‘empowered and directed’’
the Commission to prevent unfair
methods of competition throughout the
economy, 187 in any activities ‘‘in or
affecting commerce,’’ subject only to
limited exceptions. The final rule will
apply only to the extent that the
Commission has jurisdiction under the
FTC Act. The Act does not limit the
Commission’s authority to pursue, for
example, industry-specific rulemaking.
Where Congress wished to limit the
scope of the Commission’s authority
over particular entities or activities, it
did so expressly, demonstrating its
intent to give the Commission broad
enforcement authority over activities in
or affecting commerce outside the scope
of the enumerated exceptions.188 That
section 22 of the FTC Act requires the
Commission to perform a regulatory
analysis for amendments to rules based
on, inter alia, ‘‘their annual effect on the
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189 15 U.S.C. 57b–3 (outlining requirements of the
Commission’s rulemaking process for new rules and
amendments); see also Part II.E (discussing the
Commission’s jurisdiction).
190 Whitman v. Am. Trucking Ass’ns, 531 U.S.
457, 468 (2001); see, e.g., Comment of La. And 12
Other States, FTC–2023–0007–21094.
191 See Part II.B (discussing the Commission’s
history of using section 6(g) to promulgate rules).
192 Id.
193 E.g., Comment of Nat’l Ass’n of Mfrs., FTC–
2023–0007–20939; Comment of La. And 12 Other
States, FTC–2023–0007–21094.
194 United States v. Gonzales, 520 U.S. 1, 6
(1997).
195 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 686 (D.C. Cir. 1973).
196 Id. at 704; see also, e.g., Comment from La.
and 12 Other States, FTC–2023–0007–21094
(identifying statements and failed bills that, the
commenters say, show the Commission was not
intended to possess rulemaking authority).
197 Nat’l Petroleum Refiners, 482 F.2d at 709.
198 For example, while the Senate was
considering amendments to the FTC Act, Senator
Hart read excerpts of Nat’l Petroleum Refiners into
the record. See 120 Cong. Rec. 40712 (Dec. 18,
1974). These short excerpts included the court
acknowledging that it was considering whether the
Commission ‘‘is empowered to promulgate
substantive rules’’ that would ‘‘give greater
specificity and clarity to the broad standard of
illegality—‘unfair methods of competition’ . . .—
which the agency is empowered to prevent.’’ Id.
(quoting Nat’l Petroleum Refiners, 482 F.2d at 673).
Senator Hart then explained that the ‘‘procedural
requirements . . . respecting FTC rulemaking’’ in
the bill under consideration ‘‘are limited to unfair
or deceptive acts or practices rules.’’ Id. ‘‘These
provisions and limitations,’’ he explained, ‘‘are not
intended to affect the Commission’s authority to
prescribe and enforce rules respecting unfair
methods of competition.’’ Id. ‘‘Rules respecting
unfair methods of competition,’’ Senator Hart said,
‘‘should continue to be prescribed in accordance
with’’ the APA. Id.; see also Comment of Lev
Menand et al., FTC–2023–0007–20871 at 3–6
(recounting legislative history that preceded the
1975 amendments to the FTC Act).
199 See Barnhart v. Sigmon Coal Co., 534 U.S.
438, 457 (2002) (‘‘Floor statements from two
Senators [who were sponsors of the bill] cannot
amend the clear and unambiguous language of a
statute.’’).
200 This includes arguments about the legislative
intent, structure, or post-enactment history of the
1914 FTC Act.
201 See, e.g., Nat’l Petroleum Refiners, 482 F.2d at
695–96 & n. 32, 38–39; NPRM at 3544 (dissenting
statement of Commissioner Wilson).
202 Nat’l Petroleum Refiners, 482 F.2d at 694; see
also 16 CFR 4.14(c) (‘‘Commission action’’ requires
‘‘the affirmative concurrence of a majority of the
participating Commissioners’’).
203 W. Va. v. EPA, 597 U.S. 697, 721 (2022)
(cleaned up).
204 Id. at 723 (cleaned up).
205 The Commission notes that some commenters
either implicitly or explicitly focused on the
Commission’s rulemaking authority, as opposed to
the Commission’s authority to define non-competes
as an unfair method of competition, as a major
question. The Commission has already addressed
national economy’’ confirms the
same. 189
Other commenters argued that the
Commission is relying on vague or
ancillary provisions for its authority and
invoked the familiar refrain that
Congress ‘‘does not . . . hide elephants
in mouseholes.’’ 190 None of the
provisions on which the Commission is
relying are either vague or ancillary. As
explained earlier, preventing unfair
methods of competition is at the core of
the Commission’s mandate, the plain
text of the Act gives the Commission
rulemaking authority to carry out that
mandate, and the Commission has
exercised this rulemaking authority
before.191 The D.C. Circuit and Seventh
Circuits have upheld that exercise of
authority, and Congress preserved this
authority in subsequent amendments to
the Act following the D.C. Circuit’s
decision.192
Additional commenters cited select
legislative history from the 1914 FTC
Act to suggest the Commission lacks
authority to promulgate rules regulating
competition. 193 ‘‘[T]here is no reason to
resort to legislative history’’ when, as
here, the text of the statute speaks
plainly.194 Even if that were not the
case, however, the legislative history
does not unambiguously compel a
different conclusion. Faced with similar
arguments to those raised by
commenters here, in National Petroleum
Refiners, the D.C. Circuit conducted an
exhaustive review of the 1914 FTC Act
and concluded ‘‘the legislative history
of section 5 and Section 6(g) is
ambiguous’’ and ‘‘certainly does not
compel the conclusion that the
Commission was not meant to exercise
the power to make substantive rules
with binding effect[.]’’ 195 As the D.C.
Circuit explained, even individual
statements by some Congresspeople that
might suggest otherwise,196 when
properly contextualized, ‘‘can be read to
support substantive rule-making of the
kind asserted by the’’ Commission.197
Statements from the enactment of the
1975 Magnuson Moss Act, which added
section 18 to the FTC Act, confirm the
Commission’s authority to promulgate
rules under section 6(g). That legislative
history reveals Congress in 1975 made
a considered decision to reject an effort
to overturn the D.C. Circuit’s
interpretation of the FTC Act and
instead confirmed that section 6(g)
authorizes the Commission to
promulgate legislative rules concerning
unfair methods of competition.198 More
importantly, these sorts of individual
statements cannot trump the plain text
of the Act that Congress passed,199
which gave the Commission the
authority ‘‘to make rules and regulations
for the purpose of carrying out the
provisions’’ of the FTC Act. Indeed,
even if the legislative history were to be
selectively read to cut against the
Commission’s authority, the
Commission would still conclude that
section 6(g) confers authority to
promulgate this final rule because the
plain text of the statute (including both
the original 1914 Act and subsequent
enacted amendments to the FTC Act)
unambiguously confers that authority.
In short, neither the legislative history
of the FTC Act, nor any of the other
arguments commenters raised about the
Commission’s rulemaking authority
overcome the plain meaning of the Act
or Congress’s ratification of the
Commission’s power to make rules
preventing unfair methods of
competition, as discussed in Part II.B.200
The Commission acknowledges that
individual members of the Commission
have, at times, disclaimed the
Commission’s authority to promulgate
rules regulating unfair methods of
competition. 201 The statement of an
individual Commissioner does not
reflect the views of or bind ‘‘[t]he
Commission itself,’’ which has
concluded—just as it did when it issued
such rules in the past—that it does
possess such authority.202 In any event,
the Commission has reviewed these
statements, along with the many
comments it received, and does not
believe any of the arguments raised in
support of that position overcome the
plain meaning of the FTC Act
provisions.
2. Major Questions Doctrine
Many commenters assert that the
Commission lacks the authority to adopt
the final rule based on the major
questions doctrine. That doctrine, as the
Supreme Court recently explained in
West Virginia v. EPA, ‘‘teaches that
there are extraordinary cases . . . in
which the history and the breadth of the
authority that the agency has asserted,
and the economic and political
significance of that assertion, provide a
reason to hesitate before concluding that
Congress meant to confer such
authority.’’ 203 In such cases,
‘‘something more than a merely
plausible textual basis for the agency
action is necessary. The agency instead
must point to clear congressional
authorization for the power it
claims.’’ 204 Having considered the
factors that the Supreme Court has used
to identify major questions, the
Commission concludes that the final
rule does not implicate the major
questions doctrine. And even if that
doctrine did apply, the Commission
concludes that Congress provided clear
authorization for the Commission to
promulgate this rule. 205
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the source of its rulemaking authority, see Part II.B.
But to be clear, the Commission concludes that
neither its rulemaking authority under section 6(g)
nor its authority to use that power to define non-
competes as an unfair method of competition
implicates the major questions doctrine, and that
even assuming either did, Congress has provided
express statutory authority for both.
206 W. Va. v. EPA, 597 U.S. at 725.
207 See Part II.B (discussing the Commission’s
history of promulgating rules under section 6(g)).
208 See Part II.B (discussing Cigarette Rule and
Holder Rule); see also ‘‘U.S. to Require Health
Warning for Cigarettes,’’ N.Y. Times (June 25, 1964)
at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission’s authority
to issue the regulation).
209 W. Va. v. EPA, 597 U.S. at 725; see Part II.B
(discussing decisions from the D.C. Circuit and
Seventh Circuit affirming the Commission’s
rulemaking power under section 6(g)).
210 See Part II.B (discussing the history and
content of sections 18 and 22 of the FTC Act).
211 See Federal Cigarette Labeling and Advertising
Act, Public Law 89–92, 79 Stat. 282 (July 27, 1965).
212 15 U.S.C. 57a(a)(2); see Part II.B (discussing
the Mail Order Rule).
213 W. Va. v. EPA, 597 U.S. at 724.
214 See, e.g., FTC v. R.F. Keppel & Bro., 291 U.S.
304, 311 n.2, 314 (1934).
215 In those orders, the party agreed, inter alia, to
cease and desist from enforcing or attempting to
enforce existing non-competes and from entering
into or attempting to enter into new ones, and also
agreed to provide notice to affected employees that
they are no longer subject to a non-compete. See
Part I.B n.42–44 (citing recent Commission
investigations and consent orders involving non-
competes).
216 To the extent that any commenters argued the
Commission lacked authority over the entire subject
matter of non-compete agreements, the Commission
did not see any compelling explanation that an
agreement not to compete falls outside the meaning
of a ‘‘method of competition.’’
217 Comment of Int’l Ctr. For L. & Econs., FTC–
2023–0007–20753, at 75–76.
218 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672 at 685 (D.C. Cir. 1973) (recognizing that
the Commission may ‘‘choose[ ]to elaborate’’ section
5’s ‘‘comprehensive statutory standards through
rule-making or through case-by-case adjudication’’).
219 Id. at 681; see generally Part IX.C.2 (discussing
the value of rulemaking).
220 15 U.S.C. 45(a)(2).
221 Mail Order Merchandise, 40 FR 49492 (Oct.
22, 1975); see 16 CFR part 435.
222 See Part II.B (listing rules promulgated by the
FTC exercising authority under sections 5 and 6(g)).
223 United States v. JS & A Grp., 716 F.2d 451,
454 (7th Cir. 1983).
224 See Part II.B.
225 The Commission’s adjudicatory power, like its
rulemaking power, stretches across the national
economy. For instance, the Commission has found
companies in a variety of industries participated in
price-fixing conspiracies that violated section 5 and
ordered them to cease and desist from such
practices following an adjudication. See, e.g.,
Eugene Dietzgen Co. v. FTC, 142 F.2d 321 (7th Cir.
1944) (scientific instruments); U.S. Maltsters Ass’n
v. FTC, 152 F.2d 161 (7th Cir. 1945) (malt
manufacturers); Keasbey & Mattison Co. v. FTC, 159
F.2d 940 (6th Cir. 1947) (asbestos insulation); Allied
Paper Mills v. FTC, 168 F.2d 600 (7th Cir. 1948)
(book paper manufacturers); Bond Crown & Cork.
Co. v. FTC, 176 F.2d 974 (4th Cir. 1949) (bottle cap
manufacturers). Price-fixing is just one example.
The Commission’s adjudicatory power also
supported a cease-and-desist order concerning a
food manufacturer’s resale practices more than 100
years ago. FTC v. Beech-Nut Packing, 257 U.S. 441
(1922). And it supported a cease-and-desist order
Continued
The agency authority underlying this
final rule rests on firm historical footing.
There is nothing novel about the
Commission’s assertion of authority to
promulgate legislative rules under
section 6(g).206 As explained in Part II.B,
the Commission has used this authority
for more than 60 years to promulgate
many rules defining unfair methods of
competition and/or unfair or deceptive
acts or practices. 207 The Commission’s
use of this power sometimes garnered
significant attention, such as when it
made national news by requiring
cigarette warnings in the immediate
wake of the Surgeon General’s
groundbreaking report on the health
effects of smoking.208 And the
Commission’s rulemaking authority was
long ago ‘‘addressed’’—and affirmed—
‘‘by a court.’’ 209 Moreover, after that
high-profile rulemaking and judicial
affirmation, Congress considered—and
twice reaffirmed—the Commission’s
authority to issue legislative rules
defining unfair methods of competition
under section 6(g).210 Indeed, even
when Congress decided to displace the
FTC’s Cigarette Rule with legislation, it
left the Commission’s rulemaking
authority in place.211 Likewise, when
Congress added procedural steps the
Commission must take when
promulgating rules concerning unfair or
deceptive acts or practices, it expressly
allowed the Commission to complete
certain ongoing rulemakings, including
one that relied on section 6(g) to define
an unfair method of competition.212
This is not a situation where Congress
‘‘conspicuously and repeatedly’’
declined to grant the agency the claimed
power.213
Nor does the substance of the rule
represent any departure from the
Commission’s past practices. Since its
establishment in 1914, the Commission
has had the authority to determine
whether given practices constitute
unfair methods of competition. Rather
than trying to define all the many and
varied practices that are unfair,
Congress empowered the Commission to
respond to changing market conditions
and to bring specialized expertise to
bear when making unfairness
determinations. 214 As noted in Part I.B,
the Commission has previously secured
consent orders premised on the use of
non-competes being an unfair method of
competition,215 and there is little
question that the Commission has the
authority to determine that non-
competes are unfair methods of
competition through adjudication.216
Indeed, one commenter who asserted
the rule would violate the major
questions doctrine expressly agreed that
the Commission could determine that a
specific non-compete is an unfair
method of competition through case-by-
case adjudication. 217 The Commission is
making the same kind of determination
here through rulemaking rather than
adjudication. 218 And because the
rulemaking process allows all interested
parties a chance to weigh in, this
process ‘‘may actually be fairer to
parties than total reliance on case-by-
case adjudication.’’ 219 This is thus not
a situation where the agency’s action
would fundamentally change the nature
of the regulatory scheme. Determining
whether a practice is an ‘‘unfair method
of competition’’ under section 5 has
been a core task of the Commission for
more than a century—and, indeed, goes
to the heart of its mandate.
Additionally, non-competes have
already been the subject of FTC scrutiny
and enforcement actions, so subjecting
them to rulemaking is a more
incremental—and thus less significant—
step than it would be for an agency to
wade into an area not currently subject
to its enforcement authority. And the
present rulemaking is consistent with
both Congress’s intent for the
Commission and the Commission’s
prior practice. Congress ‘‘empowered
and directed’’ the Commission ‘‘to
prevent persons, partnerships, or
corporations’’ within the Commission’s
jurisdiction ‘‘from using unfair methods
of competition in or affecting
commerce.’’ 220 Following that directive,
the Commission has previously used its
section 6(g) authority to promulgate
rules that reach industries across the
economy. For example, the Mail Order
Rule placed restrictions on any sale
conducted by mail, 221 and the Negative
Option Rule requires certain disclosures
for some negative option plans. These
rules—promulgated nearly 50 or more
years ago—applied across the industries
within the FTC’s jurisdiction, yet no
court has held that they exceeded the
Commission’s authority.222 Indeed, the
Seventh Circuit upheld the Mail Order
Rule as a valid exercise of that
authority. 223
Congress itself recognized that the
Commission’s authority will sometimes
affect firms across the economy. Indeed,
addressing unfair methods of
competition and unfair and deceptive
practices across industries (other than
the industries, activities, or entities
Congress expressly exempted) is the
core of the Commission’s mandate—and
the Commission has long pursued that
mandate through both rulemaking 224
and adjudication.225 Congress imposed
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within the past few years enjoining a
pharmaceutical company from entering into reverse
payment settlement schemes. Impax Labs., Inc. v.
FTC, 994 F.3d 484 (5th Cir. 2021). In the century
between, the Commission has found section 5
violations based on false advertising, monopoly
maintenance, exclusive dealing, and more in
diverse sectors throughout the country.
226 15 U.S.C. 57b–3; see also Part II.B.
227 W. Va. v. EPA, 597 U.S. 697, 716, 723 (2002).
228 FTC Act of 1914, 38 Stat. at 721–22; see 15
U.S.C. 45(a), 46(g); see also Part II.A (discussing the
Commission’s rulemaking authority).
229 FTC v. Texaco, Inc., 393 U.S. 223, 225 (1968).
230 Cf. W. Va. v. EPA, 597 U.S. at 729 (noting the
Court’s view that the EPA had traditionally lacked
the expertise needed to develop the rule at issue);
Ala. Ass’n of Realtors v. HHS, 594 U.S. 758, at 764–
65 (2021) (questioning the link between the Center
for Disease Control and an eviction moratorium);
see also Part II.A (discussing Congress’s creation of
the Commission as an expert body); Parts IV.B and
IV.C (discussing the rationale for the rule and
explaining the negative effects non-competes have
on competition). The Commission also notes that
through, inter alia, the roundtables and
enforcement actions described in Part I.B, and
through this rulemaking process, it has acquired
expertise on non-competes specifically. The
Commission further notes that non-competes are,
inherently, a method of competition.
231 Mistretta v. United States, 488 U.S. 361, 372
(1989).
232 Id.
233 Id. (alteration in original).
234 Gundy v. United States, 139 S. Ct. 2116, 2121
(2019) (citing Nat’l Broadcasting Co. v. United
States, 319 U.S. 190, 216 (1943); N.Y. Cent. Secs.
Corp. v. United States, 287 U.S. 12, 24 (1932);
Yakus v. United States, 321 U.S. 414, 422 (1944);
Fed. Power Comm’n v. Hope Natural Gas Co., 320
U.S. 591 (1944); and Whitman v. Am. Trucking
Ass’ns, 531 U.S. 457, 472 (2001)).
235 TOMAC, Taxpayers of Mich. Against Casinos
v. Norton, 433 F.3d 852, 866 (D.C. Cir. 2006)
(quoting Am. Power & Light Co. v. SEC, 329 U.S.
90, 104 (1946)).
236 15 U.S.C. 45(a)(1)–(2).
237 15 U.S.C. 46(g).
238 As the D.C. Circuit noted in Nat’l Petroleum
Refiners Ass’n v. FTC, ‘‘the Supreme Court has
ruled that the powers specified in Section 6 do not
stand isolated from the Commission’s enforcement
and law applying role laid out in Section 5.’’ 482
F.2d 672, 677 (D.C. Cir. 1973) (citing United States
v. Morton Salt Co., 338 U.S. 632 (1950)).
239 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495 (1935).
240 Gundy, 588 U.S. at 2129 (internal quotation
omitted); cf. also Panama Refin. Co. v. Ryan, 293
U.S. 388 (1935) (finding impermissible delegation).
241 Schechter Poultry, 295 U.S. at 532–33.
242 Id. at 529–42.
243 Id. at 533.
244 5 U.S.C. 553, 702.
certain requirements in section 22 on
any amendment to a Commission rule
promulgated under section 6 (or section
18) that would have certain substantial
effects on the national economy, the
price of goods or services, or regulated
entities and consumers.226 Congress
thus anticipated—and intended—that
the Commission’s rulemaking power
carried the potential to affect the
economy in considerable ways, and
Congress already considered and
specified the necessary steps and checks
to ensure the Commission’s exercise of
that power is appropriate. For all these
reasons, the final rule does not involve
a ‘‘major question’’ as the Supreme
Court has used that term.
Even if the final rule does present a
major question, the final rule passes
muster because the FTC Act provides
clear authorization for the Commission’s
action. In cases involving major
questions, courts expect Congress to
‘‘speak clearly’’ if it wishes to assign the
disputed power.227 Congress did so
when it ‘‘declared unlawful’’ in the FTC
Act ‘‘[u]nfair methods of competition’’
and empowered the Commission ‘‘to
make rules and regulations for the
purpose of carrying out the provisions
of th[e] Act.’’ 228 Congress ‘‘[i]n large
measure’’ left ‘‘the task of defining
‘unfair methods of competition’ . . . to
the Commission.’’ 229 That is precisely
what the Commission has done here, for
the reasons elaborated in Part IV.
Finally, there is no doubt that the
Commission has expertise in the field
(competition) it is regulating here.230
For these reasons, even if the final rule
involves a major question, Congress has
clearly delegated to the Commission the
authority to address that question.
3. Non-Delegation Doctrine
Some commenters also objected that
Congress violated the non-delegation
doctrine by empowering the
Commission to promulgate rules
regulating unfair methods of
competition. The Commission disagrees.
The non-delegation doctrine provides
that ‘‘Congress generally cannot delegate
its legislative power to another
Branch.’’ 231 But the Constitution does
not ‘‘prevent Congress from obtaining
the assistance of its coordinate
Branches.’’ 232 ‘‘So long as Congress
shall lay down by legislative act an
intelligible principle to which the
person or body authorized to [exercise
the delegated authority] is directed to
conform, such legislative action is not a
forbidden delegation of legislative
power.’’ 233 Applying this rule, the
Supreme Court has ‘‘over and over
upheld even very broad delegations’’
including those directing agencies ‘‘to
regulate in ‘the public interest,’ . . . to
set ‘fair and equitable’ prices and ‘just
and reasonable’ rates,’’ and ‘‘to issue
whatever air quality standards are
‘requisite to protect the public
health.’ ’’ 234 ‘‘The Supreme Court has’’
also ‘‘explained that the general policy
and boundaries of a delegation ‘need not
be tested in isolation’ ’’ and ‘‘[i]nstead,
the statutory language may derive
content from the ‘purpose of the Act, its
factual background and the statutory
context in which they appear.’ ’’ 235
Here, Congress ‘‘declared unlawful’’
any ‘‘unfair methods of competition in
or affecting commerce’’ and
‘‘empowered and directed’’ the
Commission ‘‘to prevent’’ entities
within its jurisdiction ‘‘from using
unfair methods of competition.’’ 236
Congress also instructed the
Commission to ‘‘make rules and
regulations for the purpose of carrying
out the provisions’’ of the FTC Act.237
Congress’s stated purpose and policy in
section 5 provides the Commission with
an intelligible principle to guide its
section 6(g) rulemaking authority.238
Were there any doubt, the Supreme
Court has laid it to rest in A.L.A.
Schechter Poultry Corp. v. United
States.239 Schechter Poultry marked one
of two occasions ‘‘in this country’s
history’’ that the Supreme Court ‘‘found
a delegation excessive,’’ and ‘‘in each
case . . . Congress had failed to
articulate any policy or standard to
confine discretion.’’ 240 The Court
offered the FTC Act, however, as a
counterexample of proper Congressional
delegation. The Court recognized that
the phrase ‘‘unfair methods of
competition’’ in the FTC Act was ‘‘an
expression new in the law’’ without
‘‘precise definition,’’ but that Congress
had empowered the Commission to
‘‘determine[ ] in particular instances,
upon evidence, in the light of particular
competitive conditions and of what is
found to be a specific and substantial
public interest’’ whether a method of
competition is unfair.241 The FTC Act
stood in contrast, the Court explained,
to the National Industrial Recovery Act
(‘‘NIRA’’), which the Court held
included an unconstitutional
delegation.242
The Commission recognizes that
Schechter Poultry approved of the FTC
Act’s adjudicatory process for
determining unfair methods of
competition without commenting on the
Act’s rulemaking provision. But the
‘‘unfair method of competition’’
authority the Court approvingly cited in
Schechter Poultry is the same
intelligible principle the Commission is
applying in this rulemaking. And just as
the adjudication process provides for a
‘‘formal complaint, for notice and
hearing, for appropriate findings of fact
supported by adequate evidence, and for
judicial review,’’ 243 the APA
rulemaking process provides for a
public notice of proposed rulemaking,
the opportunity to ‘‘submi[t] . . .
written data, views, or arguments,’’
agency consideration of those
comments, and judicial review.244 If
Congress may permissibly delegate the
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245 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 685 (D.C. Cir. 1973); cf. SEC v. Chenery
Corp., 332 U.S. 194, 202–03 (1947) (‘‘Some
principles must await their own development,
while others must be adjusted to meet particular,
unforeseeable situations. In performing its
important functions in these respects, therefore, an
administrative agency must be equipped to act
either by general rule or by individual order. To
insist upon one form of action to the exclusion of
the other is to exalt form over necessity.’’).
246 U.S. Const. art. I, sec. 8, cl. 3.
247 15 U.S.C. 44, 45(a)(1).
248 United States v. Am. Bldg. Maintenance
Indus., 422 U.S. 271, 277, n.6 (1975).
249 See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567
U.S. 519, 549 (2012) (‘‘Congress’s power’’ under the
Commerce Clause ‘‘is not limited to regulation of
an activity that by itself substantially affects
interstate commerce, but also extends to activities
that do so only when aggregated with similar
activities of others.’’); see also Part I.B.2 (discussing
prevalence of non-competes) and Part IX.C.2
(addressing the need for a nationwide regulation
prohibiting non-competes).
250 U.S. Const. amend. X.
251 See U.S. Const. art. I, sec. 10, cl. 1.
252 See, e.g., L & H Sanitation, Inc. v. Lake City
Sanitation, Inc., 769 F.2d 517, 522 (8th Cir. 1985).
253 See Parts IV.B and IV.C, Part X.F.6.
254 This includes, for example, a commenter who
argued that the NPRM was not the product of
reasoned decision-making, asserting that the
Commission had failed to consider key aspects of
the rule or misconstrued evidence; commenters
who argued that the rule was arbitrary and
capricious for failing to consider less restrictive
alternatives; commenters who argued that the
NPRM failed to consider State policy or that the
Commission would be acting arbitrarily by not
passing a uniform rule; and commenters who
argued that the Commission had failed to consider
reliance interests. The Commission has addressed
the concerns underlying these comments in other
parts of this statement of basis and purpose.
255 5 U.S.C. 553; see also Elec. Priv. Info. Ctr. v.
DHS, 653 F.3d 1, 5 (D.C. Cir. 2011) (APA ‘‘generally
require[s] an agency to publish notice of a proposed
rule in the Federal Register and to solicit and
consider public comments upon its proposal.’’).
256 Trudeau v. FTC, 456 F.3d 178, 188–89 (D.C.
Cir. 2006) (internal quotation marks omitted); see 5
U.S.C. 704.
authority to determine through
adjudication whether a given practice is
an unfair method of competition, it may
also permit the Commission to do the
same through rulemaking.245
For these reasons, the Commission
concludes that its authority to
promulgate rules regulating unfair
methods of competition is not an
impermissible delegation of legislative
authority.
4. Other Challenges to the Commission’s
Authority
Finally, a handful of comments raised
other, miscellaneous arguments
contending that the Commission lacks
authority to promulgate the rule. The
Commission has reviewed and
considered these comments and
concludes they do not undercut the
Commission’s authority to promulgate
the final rule.
The Commission received several
comments about the Commerce Clause.
That clause allows Congress ‘‘to regulate
Commerce with foreign Nations, and
among the several States, and with the
Indian tribes.’’ 246 Consistent with that
clause, the FTC Act empowers the
Commission to prevent unfair methods
of competition ‘‘in or affecting
commerce,’’ which the Act also defines
consistently with the Constitution.247
One commenter wrote to support the
rule and emphasized that non-competes
restrict the free flow of interstate
commerce. Others argued that the
proposed rule would violate the
Commerce Clause by regulating local
commerce. The Commission has
considered these comments and
concludes that it may promulgate the
final rule consistent with the Commerce
Clause. The final rule extends to the full
extent of the FTC’s jurisdiction, which
in turn extends no further than the
Commerce Clause permits. As the
Supreme Court has explained, the
phrase ‘‘in or affecting commerce’’ in
section 5 of the FTC Act is ‘‘coextensive
with the constitutional power of
Congress under the Commerce
Clause.’’ 248 In this final rule, the
Commission finds the use of non-
competes by employers substantially
affects commerce as that term is defined
in the FTC Act. The final rule is
therefore a lawful exercise of Congress’s
delegated power.249
Relatedly, one commenter objected
that the rule would violate the Tenth
Amendment, which provides that ‘‘[t]he
powers not delegated to the United
States by the Constitution, nor
prohibited by it to the States, are
reserved to the States respectively, or to
the people.’’ 250 But as just explained,
the Constitution grants Congress the
power to regulate interstate commerce,
and pursuant to that power Congress
granted the Commission authority to
prevent unfair methods of competition
in or affecting commerce. The
Commission is not intruding on any
power reserved to the States.
Some commenters objected that the
rule infringes on the right to contract.
One of these commenters acknowledged
that the Constitution’s Contracts Clause
does not apply to the Federal
government.251 Regardless, even
assuming the Constitution protects a
right to contract that can be asserted
against a Federal regulation, that right
sounds in substantive due process, and
the Commission must offer only a
rational basis for the rule.252 As relevant
here, the final rule advances the
Commission’s congressional mandate to
prevent unfair methods of competition
and will promote competition and
further innovation among its many
benefits.253 There is a rational
relationship between regulating non-
competes and these legitimate
government purposes.
One commenter argued that the
proposed rule was unconstitutionally
vague. This commenter’s objection
focused on the proposed provision
governing de facto non-competes. The
Commission is not adopting that
proposed language in the final rule.
Instead, the Commission has clarified
the scope of its definition of non-
compete clause. Whether a specific
clause falls within the scope of the final
rule will necessarily depend on the
precise language of the agreement at
issue, but the text of the final rule
provides regulated parties with
sufficient notice of what the law
demands to satisfy any due process
vagueness concerns.
D. Compliance With the Administrative
Procedure Act (‘‘APA’’)
Some commenters also contended
that the Commission has not complied
with the Administrative Procedure Act
(‘‘APA’’).254 At a high level, the APA
requires prior public notice, an
opportunity to comment, and
consideration of those comments before
an agency can promulgate a legislative
rule.255 The Commission has engaged in
that process, which has led to this final
rule and the accompanying explanation.
Some comments failed to recognize the
NPRM was a preliminary step that did
not fossilize the Commission’s
consideration of arguments or weighing
of evidence. Moreover, the APA ‘‘limits
causes of action under the APA to final
agency action.’’ 256 It is this final rule,
not the NPRM, that constitutes final
agency action. Before adopting this final
rule, the Commission reviewed and
considered all comments received. In
many instances, the Commission has
made changes relative to the proposed
rule to address concerns that
commenters raised. In all cases,
however, the Commission has complied
with the APA.
E. The Commission’s Jurisdiction Under
the FTC Act
The Commission’s jurisdiction
derives from the FTC Act. Employers
that are outside the Commission’s
jurisdiction under the FTC Act are not
subject to the final rule. The
Commission clarifies in the definition of
person in § 910.1, that the rule applies
only to those within the Commission’s
jurisdiction. Some commenters sought a
more detailed accounting of the
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257 15 U.S.C. 45(a)(2); see also FTC v. AT&T
Mobility LLC, 883 F.3d 848, 853–56 (9th Cir. 2018)
(en banc).
258 15 U.S.C. 45(a)(2).
259 15 U.S.C. 44.
260 NPRM at 3510.
261 Id. (citing Parker v. Brown, 317 U.S. 341, 350–
51 (1943)).
262 For example, a few community bank
commenters expressed concern that because the
Federal Deposit Insurance Corporation (‘‘FDIC’’)
can enforce the FTC Act against banks, the rule
could be applied by the FDIC to banks. The FTC
Act is the Commission’s organic statute, and
interpretive authority of the FTC Act rests with the
Commission. Whether other agencies enforce
section 5 or apply the rule to entities under their
own jurisdiction is a question for those agencies. At
the same time, as discussed in this Part II.E.1, the
Commission applies and enforces the rule only to
the extent of its jurisdiction.
263 26 U.S.C. 501(c)(3). Other, less frequently
invoked paragraphs of section 501(c) also identify
corporations and organizations that qualify for tax-
exempt status. The distinctions between these
entities and those claiming tax-exempt status under
501(c)(3) are analyzed under the same standard.
264 15 U.S.C. 44.
Commission’s jurisdiction under the
FTC Act. The Commission addresses
those comments in this section.
Comments seeking an exclusion for
entities within the Commission’s
jurisdiction are addressed in Parts V.D.3
and V.D.4.
1. Generally
Certain entities that would otherwise
be subject to the final rule may fall
outside the FTC’s jurisdiction under the
FTC Act. The FTC Act exempts certain
entities or activities from the
Commission’s enforcement jurisdiction,
which otherwise applies to ‘‘persons,
partnerships, or corporations.’’ 257 For
example, the Act exempts ‘‘banks’’ and
‘‘persons, partnerships, or corporations
insofar as they are subject to the Packers
and Stockyards Act.’’ 258 And the Act
excludes from its definition of
‘‘corporation’’ any entity that is not
‘‘organized to carry on business for its
own profit or that of its members.’’ 259
The NPRM explained that, where an
employer is exempt from coverage
under the FTC Act, the employer would
not be subject to the rule.260 The NPRM
also explained State and local
government entities—as well as some
private entities—may not be subject to
the rule when engaging in activity
protected by the State action
doctrine. 261 Some commenters stated
that the Commission should restate,
clarify, interpret, or limit the reach of its
authority under the FTC Act in the rule.
In response, the Commission explains
that the final rule extends to covered
persons that are within the
Commission’s jurisdiction. The
Commission does not believe restating
or further specifying each jurisdictional
limit in the final rule’s text is necessary;
the FTC Act defines the limits of the
Commission’s jurisdiction and those
limits govern this rule. Moreover, the
Commission cannot here provide
guidance that applies to every fact and
circumstance. Whether an entity falls
under the Commission’s jurisdiction can
be a fact-specific determination. An
attempt by the Commission to capture
all potential interpretations of the laws
governing exclusions from the FTC Act
may create confusion rather than clarity.
In response to commenters who asked
the Commission to affirm that the final
rule does not bind agencies that regulate
firms outside the Commission’s
jurisdiction under the FTC Act, the
Commission affirms that the
Commission applies the final rule only
to entities that are covered by the FTC
Act.262
A State government agency
commenter suggested that the
Commission explicitly exempt State and
local governments from the rule. The
commenter pointed to conflicts-of-
interest policies used by some State
agencies to preclude former employees
from working on related projects or jobs
in the private sector, which the
commenter stated do not implicate the
policy concerns the FTC seeks to
address in the rule. The commenter also
noted the complexity of when the
Commission’s jurisdiction might extend
to State and local governments. The
Commission clarifies in the definition of
‘‘person’’ in § 910.1 that the final rule
applies only to a legal entity within the
Commission’s jurisdiction. The
Commission also explains in Part III.E
that the definition of ‘‘person’’ is
coextensive with the Commission’s
authority to issue civil investigative
demands. Nothing in this rule changes
the extent of the Commission’s
jurisdiction over State and local
governments. The Commission declines
to specify all circumstances under
which a governmental entity or quasi-
governmental entity would or would not
be subject to the Commission’s
jurisdiction and, thus, this final rule. In
any event, with respect to the
government ethics policies referenced
by the commenter, to the extent the
commenter is referring to traditional
‘‘cooling off’’ policies that preclude
former government employees from
working on discrete, specific projects
that fell within the scope of their former
official governmental position to
address ethical concerns, such policies
would not meet the definition of ‘‘non-
compete clause’’ in § 910.1 because they
do not prohibit, penalize or function to
prevent a worker from switching jobs or
starting a new business.
2. Jurisdiction Over Entities Claiming
Nonprofit Status Under the FTC Act or
the Internal Revenue Code
Commenters from the healthcare
industry argued that the Commission
should restate, clarify, interpret, or limit
the reach of its authority under the FTC
Act specifically for the healthcare
industry. They pointed to the
prevalence of healthcare organizations
registered under section 501(c) of the
Internal Revenue Code claiming tax-
exempt status as nonprofits.
Commenters contended that these
organizations are categorically outside
the Commission’s authority under the
FTC Act. In fact, under existing law,
these organizations are not categorically
beyond the Commission’s jurisdiction.
To dispel this misunderstanding, the
Commission summarizes the existing
law pertaining to its jurisdiction over
non-profits.
a. Comments Received
Business and trade industry
commenters from the healthcare
industry, including, for example,
hospitals, physician practices, and
surgery centers, focused on whether the
Commission has jurisdiction over
nonprofit organizations registered under
section 501(c)(3) of the Internal Revenue
Code in light of the FTC Act’s definition
of ‘‘corporation.’’ Section 501(c)(3)
exempts from taxation certain religious,
charitable, scientific, educational, and
other corporations, ‘‘no part of the net
earnings of which inure[] to the benefit
of any private shareholder or
individual.’’ 263 An entity is a
‘‘corporation’’ under the FTC Act only
if it is ‘‘organized to carry on business
for its own profit or that of its
members.’’ 264 Several industry
commenters argued the Commission
does not have jurisdiction over entities
that claim tax-exempt status as
nonprofits because they are, by
definition, not ‘‘organized to carry on
business for [their] own profit or that of
[their] members.’’ The Commission
presumes that commenters self-
identifying as or referring to
‘‘nonprofits,’’ ‘‘not-for-profits,’’ or other
similar terms without further
explanation are referencing entities
claiming tax-exempt status under
section 501(c)(3) or other provisions of
the Internal Revenue Code. Some
commenters contended that, to avoid
confusion, the rule should state it does
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265 15 U.S.C. 45(a)(2). The Commission focuses on
coverage as ‘‘corporations’’ in this section.
266 15 U.S.C. 44.
267 In the Matter of Coll. Football Ass’n, 117
F.T.C. 971, 992–999 (1990).
268 California Dental Ass’n v. FTC, 526 U.S. 756,
766 (1999); Cmty. Blood Bank of Kansas City Area,
Inc. v. FTC, 405 F.2d 1011, 1016 (8th Cir. 1969);
FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 (11th
Cir. 1991).
269 Blood Bank, 405 F.2d at 1018; see also, e.g.,
FTC v. Nat’l Comm’n on Egg Nutrition, 517 F.2d
485, 488 (7th Cir. 1975).
270 Coll. Football Ass’n, 117 F.T.C. at 998.
271 Id. at 994 (internal quotation and citation
omitted).
272 Id. at 994.
273 In the Matter of the Am. Med. Assoc., 94 F.T.C.
701, 1979 WL 199033, at *221 (FTC Oct. 12, 1979).
274 The Commission offers examples of decisions
from the IRS and Tax Court as examples that the
Commission may deem persuasive. Although
‘‘[r]ulings of the Internal Revenue Services are not
binding upon the Commission,’’ the Commission
has recognized that ‘‘a determination by another
Federal agency that a respondent is or is not
organized and operated exclusively for
eleemosynary purposes should not be disregarded.’’
Am. Med. Assoc., 1979 WL 199033 at *221.
275 In the Matter of Preferred Health Servs., Inc.,
FTC No. 41–0099, 2005 WL 593181, at *1 (Mar. 2,
2005).
276 Id. at *1.
277 In the Matter of Boulder Valley Individual
Prac. Assoc., 149 F.T.C. 1147, 2010 WL 9434809, at
*2 (Apr. 2, 2010).
278 Boulder Valley, 2010 WL 9434809, at *2. The
Commission has similarly exercised jurisdiction
where an entity claiming nonprofit tax-exempt
status provides pecuniary benefit to for-profit
entities or individuals. See, e.g., In the Matter of
Mem’l Hermann Health Network Providers, 137
F.T.C. 90, 92 (2004); Preferred Health, 2005 WL
593181, at *1–*2; Advoc. Health Partners, F.T.C.
No. 31–0021, 2007 WL 643035, at *3–*4 (Feb. 7,
2007); Conn. Chiropractic Ass’n, F.T.C. No. 71–
0074, 2008 WL 625339, at *2 (Mar. 5, 2008); Am.
Med. Ass’n v. FTC, 638 F.2d 443 (2d Cir. 1980),
aff’d, 455 U.S. 676 (1982).
279 Redlands Surgical Servs. v. Comm’r, 242 F.3d
904, 904–05 (9th Cir. 2001); see also St. David’s
Health Care Sys. v. United States, 349 F.3d 232, 239
(5th Cir. 2003).
280 See Fam. Tr. of Mass., Inc. v. United States,
892 F. Supp. 2d 149, 155–156 (D.D.C. 2012); I.R.S.
G.C.M. 39,674 (Oct. 23, 1987); Bubbling Well
Church of Universal Love, Inc. v. Comm’r, No.
5717–79X, 1980 WL 4453 (T.C. June 9, 1980)
(‘‘[E]xcessive payments made purportedly as
compensation constitute benefit inurement in
contravention of section 501(c)(3).’’).
not apply to entities claiming tax-
exempt status as non-profits. At least
one commenter stated that the
Commission should clarify whether and
how the rule would apply to healthcare
entities claiming tax-exempt status as
nonprofits and then reopen the
comment period. One commenter
sought clarification on how ownership
interest in a for-profit entity or joint
venture with a for-profit partner by an
entity that claims tax-exempt status as a
nonprofit would affect the rule’s
applicability.
b. The Final Rule
The final rule applies to the full scope
of the Commission’s jurisdiction. Many
of the comments about nonprofits
erroneously assume that the FTC’s
jurisdiction does not capture any entity
claiming tax-exempt status as a
nonprofit. Given these comments, the
Commission summarizes Commission
precedent and judicial decisions
construing the scope of the
Commission’s jurisdiction as it relates to
entities that claim tax-exempt status as
nonprofits and to other entities that may
or may not be organized to carry on
business for their own profit or the
profit of their members.
Congress empowered the Commission
to ‘‘prevent persons, partnerships, or
corporations’’ from engaging in unfair
methods of competition.265 To fall
within the definition of ‘‘corporation’’
under the FTC Act, an entity must be
‘‘organized to carry on business for its
own profit or that of its members.’’ 266
These FTC Act provisions, taken
together, have been interpreted in
Commission precedent 267 and judicial
decisions 268 to mean that the
Commission lacks jurisdiction to
prevent section 5 violations by a
corporation not organized to carry on
business for its own profit or that of its
members.
The Commission stresses, however,
that both judicial decisions and
Commission precedent recognize that
not all entities claiming tax-exempt
status as nonprofits fall outside the
Commission’s jurisdiction. As the
Eighth Circuit has explained, ‘‘Congress
took pains in drafting § 4 [15 U.S.C. 44]
to authorize the Commission to regulate
so-called nonprofit corporations,
associations and all other entities if they
are in fact profit-making
enterprises.’’ 269 The Commission
applies a two-part test to determine
whether a corporation is organized for
profit and thus within the Commission’s
jurisdiction. As the Commission has
explained, ‘‘[t]he not-for profit
jurisdictional exemption under Section
4 requires both that there be an adequate
nexus between an organization’s
activities and its alleged public
purposes and that its net proceeds be
properly devoted to recognized public,
rather than private, interests.’’ 270
Alternatively stated, the Commission
looks to both ‘‘the source of the income,
i.e., to whether the corporation is
organized for and actually engaged in
business for only charitable purposes,
and to the destination of the income,
i.e., to whether either the corporation or
its members derive a profit.’’ 271 This
test reflects the Eighth Circuit’s analysis
in Community Blood Bank of Kansas
City Area, Inc. v. FTC and ‘‘the
analogous body of federal law which
governs treatment of not-for-profit
organizations under the Internal
Revenue Code.’’ 272 Under this test, a
corporation’s ‘‘tax-exempt status is
certainly one factor to be considered,’’
but that status ‘‘does not obviate the
relevance of further inquiry into a
[corporation’s] operations and
goals.’’ 273
Merely claiming tax-exempt status in
tax filings is not dispositive. At the
same time, if the Internal Revenue
Service (‘‘IRS’’) concludes that an entity
does not qualify for tax-exempt status,
such a finding would be meaningful to
the Commission’s analysis of whether
the same entity is a corporation under
the FTC Act. Administrative
proceedings and judicial decisions
involving the Commission or the IRS 274
have identified numerous private
benefits that, if offered, could render an
entity a corporation organized for its
own profit or that of its members under
the FTC Act, bringing it within the
Commission’s jurisdiction. For instance,
the Commission has exercised
jurisdiction in a section 5 enforcement
action over a physician-hospital
organization because the organization
engaged in business on behalf of for-
profit physician members.275 That
organization, which consisted of over
100 private physicians and one non-
profit hospital, claimed tax-exempt
status as a nonprofit.276 Similarly, the
Commission has exercised jurisdiction
over an independent physician
association claiming tax-exempt status
as a nonprofit. The association consisted
of private, independent physicians and
private, small group practices.277 That
association was organized for the
pecuniary benefit of its for-profit
members because it ‘‘contract[ed] with
payers, on behalf of its [for-profit]
physician members, for the provision of
physician services for a fee.’’ 278 Under
IRS precedent in the context of
purportedly tax-exempt nonprofit
hospitals and other related entities that
partner with for-profit entities, where
the purportedly nonprofit entity ‘‘has
ceded effective control’’ to a for-profit
partner, ‘‘conferring impermissible
private benefit,’’ the entity loses tax-
exempt status.279 The IRS has also
rejected claims of nonprofit tax-exempt
status for entities that pay unreasonable
compensation, including percentage-
based compensation, to founders, board
members, their families, or other
insiders. 280
These examples are illustrative. As
has been the case for decades, under
Commission precedent and judicial
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281 The Commission cannot predict precisely how
many entities claiming nonprofit tax-exempt status
may be subject to the final rule. The Commission
finds that the benefits of the final rule justify
implementing it no matter how many nonprofit
entities claiming tax-exempt status it ultimately
reaches—including under the unlikely assumption
that it does not reach any of them.
282 15 U.S.C. 45(a)(1).
283 The Clayton Antitrust Act (38 Stat. 730, ch.
323, Pub. L. 63–212, Oct. 15, 1914) was signed into
law weeks after the FTC Act of 1914, 38 Stat. 717.
284 See FTC v. Ind. Fed’n of Dentists, 476 U.S.
447, 454 (1986); FTC v. Sperry & Hutchinson, 405
U.S. 233, 243–44 (1972); FTC v. Brown Shoe Co.,
384 U.S. 316, 321 (1966); FTC v. Motion Picture
Advert. Serv., 344 U.S. 392, 394–95 (1953); FTC v.
R.F. Keppel & Bro., 291 U.S. 304, 309–10 (1934).
While some commenters argued the Commission
should apply the rule of reason in this rule, as
outlined in Parts II.A, II.B, II.C, and II.F, neither the
text of section 5, the Supreme Court and other
courts’ interpretation of section 5, nor the
legislative history support the conclusion that the
Commission should apply the rule of reason to
determine whether conduct violates section 5 as an
unfair method of competition. The Commission
outlines the legal standard for finding certain uses
of non-competes to be unfair methods of
competition in the final rule in this Part II.F.
285 See e.g., Sperry & Hutchinson Co., 405 U.S. at
243 (holding section 5 reaches conduct shown to
exploit consumers, citing R.F. Keppel & Bro., 291
U.S. at 313); Atl. Refin. Co. v. FTC, 381 U.S. 357,
369 (1965) (holding that the ‘‘utilization of
economic power in one market to curtail
competition in another . . . . bolstered by actual
threats and coercive practices’’ was an unfair
method of competition); FTC v. Texaco, 393 U.S.
223, 228–29 (1968) (finding that use of ‘‘dominant
economic power . . . in a manner which tended to
foreclose competition’’ is an unfair method of
competition); E.I. du Pont de Nemours v. FTC
(Ethyl), 729 F.2d 128, 137, 140 (2d Cir. 1984)
(finding that unfair methods of competition
includes practices that are ‘‘collusive, coercive,
predatory, restrictive or deceitful’’ as well as
‘‘exclusionary’’).
286 See, e.g., Motion Picture Advert. Serv. Co., 344
U.S. at 395–96; Luria Bros. & Co. v. FTC, 389 F.2d
847, 860–61 (3d Cir. 1968). As the Supreme Court
has made clear, the inquiry into the nature of the
commercial setting does not, however, require
market definition or proof of market power. See,
e.g., Atl. Refin. Co., 381 U.S. at 371 (finding it
‘‘unnecessary to embark upon a full scale economic
analysis of competitive effect’’). On November 10,
2022, the Commission issued a policy statement
describing the key principles of general
applicability concerning whether conduct is an
unfair method of competition under section 5. FTC,
Policy Statement Regarding the Scope of Unfair
Methods of Competition Under Section 5 of the
Federal Trade Commission Act (Nov. 10, 2022)
(hereinafter ‘‘FTC Policy Statement’’). The FTC
Policy Statement cites a number of cases explaining
that section 5 does not require market definition or
proof of market power. Id. at 10.
287 See, e.g., Brown Shoe Co., 384 U.S. at 320
(‘‘Thus the question . . . is whether the Federal
Trade Commission can declare it to be an unfair
practice for Brown, the second largest manufacturer
of shoes in the Nation, to pay a valuable
consideration to hundreds of retail shoe purchasers
in order to secure a contractual promise from them
that they will deal primarily with Brown and will
not purchase conflicting lines of shoes from
Brown’s competitors. We hold that the Commission
has power to find, on the record here, such an
anticompetitive practice unfair . . . .’’)
288 Atl. Refin. Co., 381 U.S. at 371 (It is
‘‘unnecessary to embark upon a full scale economic
analysis of competitive effect.’’); Texaco, 393 U.S.
at 230 (‘‘It is enough that the Commission found
that the practice in question unfairly burdened
competition for a not insignificant volume of
commerce.’’); Union Circulation Co. v. FTC, 241
F.2d 652, 657 (2d Cir. 1957) (‘‘The agreements
should be struck down if their reasonable tendency,
as distinguished from actual past effect, is to injure
or obstruct competition. Under the Federal Trade
Commission Act, industry agreements and practices
have been enjoined without an actual showing of
injury to competition . . . .’’). See also Sperry &
Hutchinson Co., 405 U.S. at 244 (‘‘[U]nfair
competitive practices [are] not limited to those
likely to have anticompetitive consequences after
the manner of the antitrust laws.’’); Ethyl, 729 F.2d
at 138 (finding that evidence of actual harm is not
required); In re Coca-Cola Co., 117 F.T.C. 795, 915
n.25 (1994) (rejecting argument that section 5
violation requires showing of ‘‘anticompetitive
effects’’).
289 Motion Picture Advert. Serv. Co., 344 U.S. at
395; Union Circulation Co., 241 F.2d at 658 (‘‘The
tendency of the ‘no-switching’ agreements is to
discourage labor mobility, and thereby the
magazine-selling industry may well become static
in its composition to the obvious advantage of the
large, well-established signatory agencies and to the
disadvantage of infant organizations.’’).
290 Atl. Refin. Co., 381 U.S. at 371; Texaco, 393
U.S. at 230; L.G. Balfour Co. v. FTC, 442 F.2d 1, 19–
20 (7th Cir. 1971) (no proof of foreclosure of a
relevant market necessary in an exclusive dealing
contract case under section 5 (citing Brown Shoe)).
291 See Part II.A.
292 See, e.g., Ethyl, 729 F.2d at 137–39; FTC
Policy Statement, supra note 286, at 9.
293 See e.g., Sperry & Hutchinson Co., 405 U.S. at
243; Ethyl, 729 F.2d at 139, 140 (finding that unfair
methods of competition include practices that are
‘‘collusive, coercive, predatory, restrictive, or
deceitful’’ as well as ‘‘exclusionary’’); FTC Policy
Statement, supra note 286, at 7, 9.
decisions construing the scope of the
Commission’s jurisdiction, any entity
satisfying the two-prong test falls within
the Commission’s jurisdiction. Such
entities would thus be bound by the
final rule.281
F. The Legal Standard for Unfair
Methods of Competition Under Section
5
In section 5 of the FTC Act, ‘‘unfair
methods of competition in or affecting
commerce’’ are ‘‘declared unlawful.’’ 282
In enacting section 5, Congress
intentionally did not mirror either the
common law or the text or judicial
interpretations of the Sherman Act, but
instead adopted this new term.283 As
the Supreme Court has confirmed, this
different term reflects a distinct
standard.284 Under section 5, the
Commission assesses two elements: (1)
whether the conduct is a method of
competition, as opposed to a condition
of the marketplace, and (2) whether it is
unfair, meaning that it goes beyond
competition on the merits. The latter
inquiry has two components: (a)
whether the conduct has indicia of
unfairness and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.
Indicia of unfairness include the
extent to which the conduct may be
coercive, exploitative, collusive,
abusive, deceptive, predatory, or
involve the use of economic power of a
similar nature.285 Indicia of unfairness
may also be present if the conduct is
otherwise restrictive or exclusionary,
depending on the circumstances, such
as the nature of the commercial setting
and the current and potential future
effects of the conduct.286 Notably,
section 5 does not limit indicia of
unfairness to conduct that benefits one
or more firms and necessarily
disadvantages others. Instead, restrictive
and exclusionary conduct may also be
unlawful where it benefits specific firms
while tending to negatively affect
competitive conditions. 287
The second prong, whether conduct
tends to negatively affect competitive
conditions, focuses on the nature and
tendency of the conduct. It does not
turn on whether the conduct directly
caused actual harm in the specific
instance at issue and therefore does not
require a detailed economic analysis or
current anticompetitive effects.288
Instead, the inquiry examines whether
the conduct has a tendency to
negatively affect competitive conditions,
including by raising prices, reducing
output, limiting choice, lowering
quality, reducing innovation, impairing
or excluding other market participants,
reducing the likelihood of potential or
nascent competition, reducing labor
mobility, suppressing worker
compensation or degrading working
conditions for workers. These concerns
may arise when the conduct is
examined in the aggregate along with
the conduct of others engaging in the
same or similar conduct.289 Section 5
does not require a separate showing of
market power or market definition.290
Nor does section 5 import the rule-of-
reason analysis applied under other
antitrust laws, including in some
Sherman Act cases.291
The Commission weighs the two
elements—indicia of unfairness and
tendency to negatively affect
competitive conditions—on a sliding
scale. Where the indicia of unfairness
are clear, conduct may be an unfair
method of competition with only a
limited showing of a tendency to
negatively affect competitive
conditions. 292 For example, conduct
that is coercive and exploitative evinces
facial unfairness and weighs heavily as
clear indicia of unfairness.293 Where
indicia of unfairness are less clear,
conduct may still violate section 5
where it tends to negatively affect
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294 Atl. Refin. Co., 381 U.S. at 369–70; Texaco,
393 U.S. at 228–29.
295 Atl. Refin. Co., 381 U.S. at 371. See also
Texaco, 393 U.S. at 230 (finding that the practice
unfairly burdened competition for a not
insignificant volume of commerce); FTC v. R.F.
Keppel & Bro., 291 U.S. 304, 309 (1934) (‘‘A practice
so widespread and so far reaching in its
consequences is of public concern if in other
respects within the purview of the statute.’’).
296 Texaco, 393 U.S. at 230 (further noting that
‘‘[i]t is enough that the Commission found that the
practice in question unfairly burdened competition
for a not insignificant volume of commerce.’’).
297 Id. at 230. See also Shell Oil Co. v. FTC, 360
F.2d 470, 487 (5th Cir. 1966) (‘‘A man operating a
gas station is bound to be overawed by the great
corporation that is his supplier, his banker, and his
landlord.’’).
298 291 U.S. 304, 313.
299 291 U.S. at 308–09.
300 241 F.2d 652, 655 (2d Cir. 1957).
301 Id. at 658. Notably, the court also considered
facially coercive conduct by which the door-to-door
subscription agencies coerced magazine publishers
into not doing business with one of their
competitors because the competitor hired their
former workers. Id. at 655–56. The court upheld the
Commission’s order concluding this conduct was
an unfair method of competition under section 5.
The court did not conduct any related economic
analysis and simply concluded that the ‘‘illegal
scheme of coercion . . . is clearly unjustified.’’ Id.
302 Id. at 658; see also Nichols v. Spencer Intern.
Press, Inc., 371 F.2d 332, 334 (7th Cir. 1967)
(‘‘Granting that the antitrust laws were not enacted
for the purpose of preserving freedom in the labor
market, nor of regulating employment practices as
such, nevertheless it seems clear that agreements
among supposed competitors not to employ each
other’s employees not only restrict freedom to enter
into employment relationships, but may also,
depending upon the circumstances, impair full and
free competition in the supply of a service or
commodity to the public.’’)
303 FTC v. Brown Shoe Co., 384 U.S. 316, 320, 322
(1966).
304 FTC v. Motion Picture Advert. Serv. Co., 344
U.S. 392, 395–96 (1953); see also L.G. Balfour Co.
v. FTC, 442 F.2d 1, 14 (7th Cir. 1971) (holding that
a firm’s exclusive dealing contracts violated section
5 where such contracts were ‘anti-competitive’ ’’).
305 Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant’s distribution contracts
at issue ‘‘may well provide Atlantic with an
economical method of assuring efficient product
distribution among its dealers’’ and 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’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (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, 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.
306 See, e.g., FTC v. Ind. Fed. Dentists, 476 U.S.
447, 463 (1986); Fashion Originators’ Guild of Am.
v. FTC, 312 U.S. 457, 468 (1941); FTC v. Superior
Ct. Trial Lawyers Ass’n, 493 U.S. 411, 423–24
(1990).
307 See, e.g., Ind. Fed’n of Dentists, 476 U.S. at
464. 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).
308 NCAA v. Alston, 594 U.S. 69, 100–101 (2021);
Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38
Continued
competitive conditions, but a stronger
showing of such tendency is required.
In many cases the Commission (and
courts) have held conduct to constitute
an unfair method of competition by
pointing to clear indicia of unfairness,
including coercive or exploitative
conduct, without conducting a detailed
economic analysis of its effects. In
Atlantic Refining Co. v. FTC and FTC v.
Texaco, Inc., the Supreme Court held
that the Commission established an
unfair method of competition where an
oil company used its economic power
over its gas stations to coerce them into
buying certain tires, batteries, or
accessories only from firms that paid the
oil company a commission.294 The
Court determined in Atlantic Refining
that ‘‘a full-scale economic analysis of
competitive effect’’ was not required
and the Commission needed only to
show that the conduct burdened ‘‘a not
insubstantial portion of commerce.’’ 295
The Court reiterated this standard in
Texaco holding that, even though the
impact was less harmful than the
conduct in Atlantic Refining, ‘‘the
anticompetitive tendencies of [the
challenged] system are clear, and . . .
the Commission was properly fulfilling
the task that Congress assigned it in
halting this practice in its
incipiency.’’ 296 As the Court observed,
‘‘[t]he Commission is not required to
show that a practice it condemns has
totally eliminated competition.’’ 297 In
FTC v. R.F. Keppel & Brother, Inc., the
Supreme Court held that the
Commission established an unfair
method of competition where a
manufacturer exploited the inability of
children to protect themselves in the
marketplace by marketing inferior goods
to them through use of a gambling
scheme.298 The Court considered the
extent of the practice and concluded
‘‘[the practice] is successful in diverting
trade from competitors’’ without
engaging in a full-scale economic
analysis.299
In other cases, the Commission (and
courts) have held exclusionary or
restrictive conduct was an unfair
method of competition based on
evidence of the conduct’s tendency to
negatively affect competitive conditions
without focusing on the indicia of
unfairness, including whether the
conduct is coercive or exploitative. But
an evidentiary showing or detailed
economic analysis that such conduct
generated actual anticompetitive effects
or would do so in the future still was
not required. For example, in Union
Circulation Company v. FTC, the
Second Circuit held the Commission
established an unfair method of
competition where a group of door-to-
door subscription solicitation agencies
agreed not to hire workers who were
previously employed by another
signatory agency.300 The court looked to
whether the ‘‘reasonably foreseeable
effect’’ of the agencies’ conduct would
be to ‘‘impair or diminish competition
between existing [competitors]’’ or
prevent potential new rivals.301 In
finding the conduct was an unfair
method of competition, the court
concluded that ‘‘[t]he tendency of the
. . . agreements is to discourage labor
mobility, and thereby the magazine-
selling industry may well become static
in its composition to the obvious
advantage of the large, well established
signatory agencies and to the
disadvantage of infant
organizations.’’ 302 In FTC v. Brown
Shoe Co., the Supreme Court held that
an exclusive dealing arrangement under
which the Brown Shoe Company offered
shoe retailers ‘‘a valuable consideration
. . . to secure a contractual promise
from them that they will deal primarily
with Brown and will not purchase
conflicting lines of shoes from Brown’s
competitors’’ violated section 5
consistent with the Commission’s
authority ‘‘to arrest trade restraints in
their incipiency.’’ 303 Of course,
evidence of actual adverse effects on
competition meets the requirement to
show a tendency to negatively affect
competitive conditions. For example, in
FTC v. Motion Picture Advertising
Service Co., the Supreme Court held
that an exclusive dealing arrangement
violated section 5 where there was
‘‘substantial evidence’’ that the
contracts ‘‘unreasonably restrain
competition.’’ 304
Respondents in unfair method of
competition cases sometimes assert
purported justifications as an
affirmative defense. Some courts have
declined to consider justifications
altogether. However, where defendants
raise justifications as an affirmative
defense, the Commission and courts
have consistently held that pecuniary
benefit to the party responsible for the
conduct in question is not cognizable as
a justification.305 Additionally, to the
extent justifications are asserted, they
must be legally cognizable, 306 non-
pretextual, 307 and any restriction used
to bring about the benefit must be
narrowly tailored to limit any adverse
impact on competitive conditions.308
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(D.C. Cir. 2005); 2000 Collaboration Guidelines, sec.
3.36b. See also Union Circulation Co. v. FTC, 241
F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here
went beyond what was necessary to curtail and
eliminate fraudulent practices.’’).
309 NPRM, proposed § 910.1(a).
310 Id. at 3508.
311 Id. at 3509.
312 Id.
313 Id., proposed § 910.1(d).
314 Id., proposed § 910.1(c).
315 Id. at 3510.
316 Id., proposed § 910.1(c).
317 15 U.S.C. 57b–1(a)(6).
318 NPRM at 3510.
III. Section 910.1: Definitions
Section 910.1 sets forth definitions of
several terms used in the final rule.
A. Definition of ‘‘Business Entity’’
The Commission adopts the definition
of ‘‘business entity’’ as proposed.
1. Proposed Definition
The Commission proposed to define
‘‘business entity’’ as ‘‘a partnership,
corporation, association, limited
liability company, or other legal entity,
or a division or subsidiary thereof.’’ 309
The term ‘‘business entity’’ was used in
two places: (1) in proposed § 910.3,
which contained an exception for
certain non-competes entered into in the
context of a sale of a business by a
substantial owner of, or substantial
member or substantial partner in, the
business entity,310 and (2) in proposed
§ 910.1(e), which defined ‘‘substantial
owner, substantial member, or
substantial partner’’ as an owner,
member, or partner holding at least a
25% ownership interest in a business
entity.
The Commission explained in the
NPRM that it proposed including
divisions and subsidiaries in the
definition of ‘‘business entity’’ to apply
the sale-of-a-business exception where a
person is selling a division or subsidiary
of a business entity. 311 The Commission
stated the primary rationale for the sale-
of-business exception—to help protect
the value of a business acquired by a
buyer—also applies where a person is
selling a division or subsidiary of a
business entity. 312
2. Comments Received
Two commenters specifically
addressed the definition of business
entity. One commenter suggested a new
definition using a functional test that
the commenter asserted would prevent
employers from structuring their
businesses as several smaller legal
entities in order to fall within the sale-
of-a-business exception. Another
commenter also suggested that the
definition be amended to explicitly
include ‘‘general partnerships’’ and
trusts.
3. The Final Rule
The Commission adopts the definition
of ‘‘business entity’’ as proposed. The
Commission declines to adopt a
functional test for the definition of
‘‘business entity.’’ As described in
greater detail in Part V.A, the sale-of-a-
business exception in the final rule does
not contain a 25% ownership threshold,
so employers will not have an incentive
to structure their businesses as several
smaller legal entities in order to fall
within the sale-of-a-business exception.
The Commission also believes replacing
the current bright-line definition of
‘‘business entity’’ with a functional test
would make it more difficult for
workers and employers to know
whether a given non-compete is
enforceable in the context of the sale of
a business. The Commission concludes
adding the terms ‘‘general partnerships’’
and ‘‘trusts’’ to the definition is
unnecessary, because the phrase ‘‘other
legal entity’’ already includes those
entity types.
B. Definition of ‘‘Employment’’
The Commission proposed to define
‘‘employment’’ as ‘‘work for an
employer, as the term employer is
defined in § 910.1(c).’’ 313 That
provision defined ‘‘employer’’ as ‘‘a
person, as defined in 15 U.S.C. 57b–
1(a)(6) [section 20 of the FTC Act], that
hires or contracts with a worker to work
for the person.’’ 314 Section 20 defines
‘‘person’’ as ‘‘any natural person,
partnership, corporation, association, or
other legal entity, including any person
acting under color or authority of State
law.’’ The Commission intended the
proposed definition of ‘‘employer’’ to
clarify that an employment relationship
exists, for purposes of the final rule,
regardless of whether an employment
relationship exists under another law,
such as a Federal or State labor law.315
The final rule clarifies the definitions to
better reflect that intent.
While commenters generally did not
address the proposed definition of
‘‘employment,’’ many commenters
expressed concern that the proposed
definition of ‘‘employer’’ would exclude
workers hired by one entity to work for
another, such as workers hired through
a staffing agency. To avoid excluding
such workers, and consistent with the
Commission’s intent to cover workers
irrespective of whether they are
classified as in an ‘‘employer-employee’’
relationship under other State and
Federal laws, the final rule defines
‘‘employment’’ as ‘‘work for a person’’
and makes corresponding changes to the
definition of ‘‘employer,’’ described in
Part III.C. This definition of
‘‘employment’’ better clarifies that an
employment relationship exists, for
purposes of the final rule, regardless of
whether an employment relationship
exists under another law, such as a
Federal or State labor law.
C. Proposed Definition of ‘‘Employer’’
The Commission proposed to define
employer as a ‘‘person, as defined in 15
U.S.C. 57b–1(a)(6) [section 20 of the
FTC Act], that hires or contracts with a
worker to work for the person.’’ 316
Section 20 defines ‘‘person’’ as ‘‘any
natural person, partnership,
corporation, association, or other legal
entity, including any person acting
under color or authority of State
law.’’ 317 The Commission clarified in
the NPRM that a person meeting the
definition of an employer under
proposed § 910.1(c) would be an
employer regardless of whether the
person meets another legal definition of
employer, such as a definition in
Federal or State labor law.318 In
response to concerns raised by
commenters, the final rule does not
adopt a definition of ‘‘employer.’’
1. Comments Received
Several commenters expressed
support for the proposed definition of
‘‘employer.’’ A few commenters
suggested changes to the definition of
‘‘employer’’ to maximize the final rule’s
coverage and close potential loopholes.
Worker and employer advocates noted
the proposed definition appeared to
exclude certain persons who are
commonly understood to be a worker’s
employer because it assumed that a
worker’s employer is the same legal
entity that hired or contracted with the
worker. These commenters contended
the proposed definition would not cover
arrangements such as when a worker is
employed through a contractual
relationship with a professional
employer organization or staffing
agency; under a short-term ‘‘loan-out
arrangement,’’ during which a worker
hired by one employer may work for
another employer; under contract with a
parent, subsidiary, or affiliate of the
business who hired them; or by persons
or entities who share common control
over the worker’s work. A few of these
commenters also stated that the
proposed definition creates a loophole
allowing evasion of the rule through
third-party hiring. Most commenters
that addressed this issue suggested
listing one or more such arrangements
in the definition of ‘‘employer’’ to
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319 29 U.S.C. 203(g). 	320 NPRM at 3509.
321 Id.
322 Id.
323 Id. at 3510.
324 Id. at 3509.
325 Id.
326 Id.
ensure these kinds of arrangements are
covered.
One worker advocacy group argued
the term ‘‘hires or contracts’’ in the
proposed definition of ‘‘employer’’ is in
tension with the Commission’s stated
intent to broadly cover all workers,
including externs, interns, and
volunteers. This commenter suggested
the definition of ‘‘employer’’
incorporate language from the Fair
Labor Standards Act (‘‘FLSA’’)
definition of ‘‘employ,’’ which includes
to ‘‘suffer or permit to work.’’ 319 The
commenter suggested this language
because of its breadth, noting the
language originated in State laws
designed to reach businesses that use
third parties to illegally hire and
supervise children.
One industry trade organization
argued that, to minimize inconsistencies
with the FLSA, the Commission should
incorporate the FLSA’s definition of
‘‘employer.’’
2. Final Rule
After considering the comments, the
Commission has revised the definitions
of ‘‘non-compete clause’’ and ‘‘worker’’
as described in Parts III.D and III.G.
These revisions make the definition of
‘‘employer’’ unnecessary, so the
Commission is not finalizing a
definition of ‘‘employer.’’
These revisions clarify that the final
rule covers all workers regardless of
whether they work for the same person
that hired or contracted with them to
work. As explained in Part III.D, in the
definition of ‘‘non-compete clause,’’ the
Commission has revised the phrase
‘‘contractual term between an employer
and a worker’’ to read ‘‘term or
condition of employment’’ and has
revised the phrase ‘‘after the conclusion
of the worker’s employment with the
employer’’ to read ‘‘after the conclusion
of the employment that includes the
term or condition.’’ Furthermore, as
explained in Part III.G, in the definition
of ‘‘worker,’’ the Commission has
revised the phrase ‘‘a natural person
who works, whether paid or unpaid, for
an employer’’ to read ‘‘a natural person
who works or who previously worked,
whether paid or unpaid.’’
The Commission is adopting this
more general language, rather than
listing the exact kinds of contractual
arrangements and entities (e.g., staffing
agencies, affiliates, joint employers, etc.)
to avoid unnecessary or confusing
terminology, evasion of the final rule
through complex employment
relationships, and the need to specify
myriad fact-specific scenarios. The
language is designed to capture indirect
employment relationships as a general
matter without regard to the label used.
D. Definition of ‘‘Non-Compete Clause’’
Based on the comments received, the
Commission adopts a slightly modified
definition of ‘‘non-compete clause’’ in
§ 910.1. Section 910.1 defines a ‘‘non-
compete clause’’ as a term or condition
of employment that prohibits a worker
from, penalizes a worker for, or
functions to prevent a worker from (A)
seeking or accepting work in the United
States with a different person where
such work would begin after the
conclusion of the employment that
includes the term or condition; or (B)
operating a business in the United
States after the conclusion of the
employment that includes the term or
condition. Section 910.1 further
provides that, for purposes of the final
rule, ‘‘term or condition of employment
‘‘includes, but is not limited to, a
contractual term or workplace policy,
whether written or oral.’’ Similar to the
proposed rule, the final rule applies to
terms and conditions that expressly
prohibit a worker from seeking or
accepting other work or starting a
business after their employment ends,
as well as agreements that penalize or
effectively prevent a worker from doing
the same.
1. Proposed Definition
The Commission’s proposed
definition of ‘‘non-compete clause’’
consisted of proposed § 910.1(b)(1) and
(b)(2). Proposed § 910.1(b)(1) would
have defined ‘‘non-compete clause’’ as
‘‘a contractual term between an
employer and a worker that prevents the
worker from seeking or accepting
employment with a person, or operating
a business, after the conclusion of the
worker’s employment with the
employer.’’ Proposed § 910.1(b)(2)
would have provided that the definition
in proposed § 910.1(b)(1) includes ‘‘a
contractual term that is a de facto non-
compete clause because it has the effect
of prohibiting the worker from seeking
or accepting employment with a person
or operating a business after the
conclusion of the worker’s employment
with the employer.’’
The Commission explained that the
proposed definition of non-compete
clause would be limited to non-
competes between employers and
workers and would not apply to other
types of non-competes, for example,
non-competes between two
businesses. 320 The Commission further
explained the definition would be
limited to post-employment restraints
(i.e., restrictions on what the worker
may do after the conclusion of the
worker’s employment) and would not
apply to concurrent-employment
restraints (i.e., restrictions on what the
worker may do during the worker’s
employment).321
In the NPRM, the Commission noted
that, rather than expressly prohibiting a
worker from competing against their
employer, some non-competes require
workers to pay damages if they compete
against their employer. The Commission
explained that courts generally view
these contractual terms as non-competes
and that proposed § 910.1(b)(1)
encompassed them. 322
The Commission also expressed
concern that workplace policies—for
example, a term in an employee
handbook stating that workers are
prohibited from working for certain
types of firms or in certain fields after
their employment ends—could have the
same effects as a contractual non-
compete even if they are not
enforceable, because workers may
believe they are bound by the policy.
The Commission sought comment on
whether the term ‘‘non-compete clause’’
should expressly include a provision in
a workplace policy.323
The Commission stated that proposed
§ 910.1(b)(1) was a generally accepted
definition of non-compete clause that
covers both express non-competes and
terms purporting to bind a worker that
have the same functional effect as non-
competes. 324 The Commission stated
that the definition would generally not
apply to other types of restrictive
employment agreements that do not
altogether prevent a worker from
seeking or accepting other work or
starting a business after their
employment ends and do not generally
prevent other employers from
competing for that worker’s labor.325 At
the same time, the Commission
expressed concern about unusually
restrictive employment agreements that,
while not formally triggered by seeking
or accepting other work or starting a
business after their employment ends,
nevertheless restrain such an unusually
large scope of activity that they have the
same functional effect as non-
competes.326 The Commission noted
judicial opinions finding some such
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327 Wegmann v. London, 648 F.2d 1072, 1073 (5th
Cir. 1981) (holding that liquidated damages
provisions in a partnership agreement were de facto
non-compete clauses ‘‘given the prohibitive
magnitudes of liquidated damages they specify’’);
Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303,
306, 319 (Cal. Ct. App. 2020) (holding that an NDA
that defined ‘‘confidential information’’ ‘‘so broadly
as to prevent [the plaintiff] in perpetuity from doing
any work in the securities field’’ operated as a de
facto non-compete clause and therefore could not
be enforced under California law, which generally
prohibits enforcement of non-compete clauses).
328 NPRM, proposed § 910.1(b)(2).
329 While the NPRM generally used the term ‘‘de
facto non-competes,’’ the final rule uses the term
‘‘functional non-competes.’’ The Commission
believes this term more clearly conveys that certain
terms are considered non-competes under the final
rule where they function to prevent workers from
seeking or accepting other work or starting a
business after their employment ends.
330 See, e.g., Cal. Dental Ass’n v. FTC, 526 U.S.
756, 770–71 (1999). 	331 See supra note 327 and accompanying text.
restrictive employment agreements to be
de facto non-competes. 327
Proposed § 910.1(b)(2) accordingly
sought to clarify that the definition in
proposed § 910.1(b)(1) includes
contractual terms that are de facto non-
competes because they have the effect of
prohibiting the worker from seeking or
accepting employment with a person or
operating a business after the
conclusion of the worker’s employment
with the employer. It then provided two
illustrative, non-exhaustive examples of
contractual terms that may be such
functional non-competes: (1) an NDA
between an employer and a worker
written so broadly that it effectively
precludes the worker from working in
the same field after the conclusion of
the worker’s employment with the
employer; and (2) a training-repayment
agreement (‘‘TRAP’’) that requires the
worker to pay the employer or a third-
party entity for training costs if the
worker’s employment terminates within
a specified time period, where the
required payment is not reasonably
related to the costs the employer
incurred to train the worker. 328
2. Coverage of the Definition
a. Comments Received
Most of the comments on the
definition of ‘‘non-compete clause’’
addressed whether, and under what
circumstances, the rule should apply to
functional non-competes.329 Many
commenters that generally supported
the NPRM agreed the definition of non-
compete clause should cover other
restrictive employment agreements
when they function as non-competes.
These commenters argued that, when
restraints on labor mobility are banned,
companies switch to functionally
equivalent restraints. Some commenters
asked the Commission to adopt a
broader definition of functional non-
competes or to expand the rule to ban
additional types of restrictive
employment agreements altogether. A
few commenters asked the Commission
to broaden proposed § 910.1(b)(1) and
(2) by replacing the terms ‘‘prevent’’ and
‘‘prohibit’’ with ‘‘restrains’’ and
‘‘limits.’’
In contrast, many commenters who
generally opposed the NPRM stated that
proposed § 910.1(b)(2) was
overinclusive. Many such commenters
also asserted the definition was vague
and could lead to confusion and
significant litigation. Several comments
suggested clarifications, such as
including additional examples of
functional non-competes; creating safe
harbors for certain restrictive
employment covenants; replacing
proposed § 910.1(b)(2) with a standard
based on antitrust law’s ‘‘quick look’’
test; 330 or revising the provision to
focus on the ‘‘primary purpose’’ of a
restrictive employment covenant.
Several commenters argued the
Commission failed to cite evidence that
functional non-competes are anti-
competitive. Other commenters
expressed concern that prohibiting
functional non-competes would
undermine the rule’s intent to permit
less restrictive alternatives to non-
competes.
At least one commenter argued that
proposed § 910.1(b)(2) should be
removed because it was redundant, as
the proposed definition of non-compete
clause in proposed § 910.1(b)(1) already
captured any term that prevents an
employee from seeking alternative
employment, without regard to how the
term is labeled. Some commenters who
generally supported the NPRM also
expressed concern that ambiguity in
proposed § 910.1(b)(2) could enable
employers to intimidate workers by
suggesting that restrictive employment
agreements used to evade a final rule are
not non-competes under the functional
test. Other commenters who generally
supported the rule asked for greater
specificity in proposed § 910.1(b)(2) to
prevent adverse judicial interpretations
that could undermine the effectiveness
of the rule.
Many commenters addressed issues
specific to other types of restrictive
employment agreements, including
NDAs (also sometimes referred to as
confidentiality agreements), TRAPs,
non-solicitation agreements, and garden
leave and severance agreements.
With respect to NDAs, some
commenters stated that the Commission
rightly identified overbroad NDAs as a
potential method of evasion of the rule
and supported the Commission’s
recognition of overbroad NDAs as
functional non-competes. In contrast,
some commenters contended that by
covering functional non-competes, the
proposed rule would limit their ability
to use NDAs. Some commenters argued
that providing that overbroad NDAs
may be functional non-competes would
be inconsistent with the proposed rule’s
separate preliminary finding that NDAs
are less restrictive alternatives to non-
competes. Similarly, some commenters
contended that a functional test may
frustrate employers’ ability to use NDAs
to protect legitimate trade secrets or to
enjoin a former worker employed with
a competitor under the Defend Trade
Secrets Act of 2016, in part because they
would be concerned about potential
legal liability. Some commenters
contended that the example of an
overbroad NDA in proposed
§ 910.1(b)(2) would discourage the use
of NDAs, including the use of narrowly
tailored NDAs, and undermine
confidence in their enforceability. Some
commenters stated that reference to
cases, including Brown v. TGS
Management Co.331 and similar cases,
represent outliers that are likely to cause
more confusion than clarity.
Other commenters addressed the
proposed definition’s application to
TRAPs, which are agreements in which
the worker agrees to pay the employer
for purported training expenses if the
worker leaves their job before a certain
date. Several commenters asked the
Commission to ban all forms of TRAPs.
These commenters argued that
employers are increasingly adopting
TRAPs and that abusive TRAPs are
pervasive throughout the economy.
Some commenters asserted millions of
workers are likely bound by TRAPs.
Commenters stated TRAPs may impose
penalties that are disproportionate to
the value of training workers received or
require the worker to pay alleged
training expenses for on-the-job
training. Some commenters contended
TRAPs may be even more harmful than
non-competes, because while non-
competes prohibit or prevent workers
from seeking or accepting other work or
starting a business after they leave their
job, TRAPs can prevent workers from
leaving their job for any reason.
Some commenters expressed concern
that the example in proposed
§ 910.1(b)(2)(ii) of a TRAP that was a
functional non-compete was too narrow,
and that the Commission should not
imply that TRAPs with penalties that
are reasonably related to an employer’s
training expenses cannot be functional
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332 See ULC, Uniform Restrictive Employment
Agreement Act (2021), sec. 14.
333 NPRM at 3509.
334 Commenters also provided purported business
justifications for forfeiture-for-competition clauses,
which are addressed in Part IV.D.2.
non-competes. One commenter asked
the Commission to adopt the standard
for TRAPs in the Uniform Restrictive
Employment Agreement Act.332
Another commenter suggested that the
Commission ban TRAPs below an
income threshold of $75,000. Another
commenter asked the Commission to
clarify that costs that are inherent in any
employer-employee relationship—such
as time spent by a supervisor training a
new employee how to perform routine
business procedures typical for their
position or role—should not be
considered costs that are ‘‘reasonably
related to the costs’’ of training.
At least one commenter urged the
Commission to treat as functional non-
competes other employment terms
similar to TRAPs such as equipment
loans, where employers provide
employees with a loan to purchase
equipment that the worker needs in
order to perform their job, and damages
provisions containing open-ended costs
related to the employee’s departure—
including hiring and training
replacements or vague harms such as
reputational damages, loss of good will
or lost profits. In contrast, some
commenters argued that TRAPs should
be excluded from coverage under
proposed § 910.1(b)(2) because they are
not unfair or anti-competitive.
Regarding non-solicitation
agreements—which prohibit a worker
from soliciting former clients or
customers of the employer—a few
commenters expressed concern that
overbroad non-solicitation agreements
may be permitted because they were not
listed in the regulatory text for proposed
§ 910.1(b)(2) as examples of functional
non-competes (although the
Commission described them in the
preamble to the proposed rule as
restrictive employment agreements that
may fall within the definition of non-
compete clause if they restrain such an
unusually large scope of activity that
they are de facto non-compete
clauses). 333 These commenters asked
the Commission to revise proposed
§ 910.1(b)(2) to expressly cover non-
solicitation agreements that prohibit
workers from doing business with
prospective or actual customers to an
extent that would effectively preclude
them from continuing to work in the
same field or that prevent a worker from
doing business with their former
employer’s client where the client
solicits the worker directly. Other
commenters, however, expressed
concern that the proposed rule could
undermine employers’ confidence in the
enforceability of non-solicitation
agreements and asked that the final rule
clarify that non-solicitation agreements
are generally not prohibited, or exclude
them altogether.
Some comments addressed no-hire
clauses, which bar former workers from
hiring their former colleagues. One
employment lawyer stated that these are
less restrictive than non-compete
clauses. Other commenters stated that
no-hire clauses can still limit careers or
make it hard for new businesses to find
staff. Some commenters expressed
concerns with no-business or non-
dealing clauses, which bar former
workers from doing business with
former clients or customers even if the
clients or customers sought them out.
These commenters stated such
agreements limit the options of clients
and customers.
Many commenters raised questions
about forfeiture-for-competition clauses,
which they stated are often a component
of deferred compensation arrangements
for executives. Commenters stated that
deferred compensation plans often
include forfeiture clauses, or
contingencies on receiving the promised
compensation, to incentivize their
recipients to act in ways that benefit the
employer. These commenters stated that
agreements not to compete for a period
of time after employment ends are a
common feature of forfeiture clauses.
Some commenters stated that such
forfeiture-for-competition clauses are
non-competes and have the same
negative effects as non-competes
because they are contingent on
competition—they require workers to
give up bonus pay or other post-
employment benefits if they work for a
competing employer or start a
competing business, and they keep
other employers from being able to hire
those workers. Other commenters stated
forfeiture-for-competition clauses are a
common and important component of
deferred compensation arrangements for
highly compensated employees and
senior executives.334 Other commenters
argued the clauses allow workers to
choose between receiving the deferred
compensation and forfeiting it if they
choose to work for a competitor, and
thus they are not non-competes. Other
commenters urged the Commission to
either clarify that forfeiture-for-
competition clauses are not non-
competes or to carve them out
explicitly.
Many commenters also addressed the
application of the rule to garden leave
agreements. In using the term ‘‘garden
leave,’’ commenters seemed to be
referring to a number of different types
of agreements. Some commenters
referred to garden leave agreements as
those in which, before a worker left
their job, they remained employed and
received full pay for a specified period
of time but their access to co-workers
and company facilities was restricted. In
contrast, other commenters considered
‘‘garden leave’’ an arrangement to make
payments to a worker after their
employment concluded. Commenters
used different terminology to refer to
these kinds of agreements, including
severance pay, partial pay, and full pay
akin to administrative leave, in
exchange for an agreement not to
compete. Some commenters argued it is
coercive for a worker to sign a non-
compete in exchange for severance pay
and argued garden leave arrangements
are non-competes because they limit a
worker’s options to work for a
competitor. Some commenters asked the
Commission to adopt a durational limit
for garden leave. At least one
commenter also urged the Commission
to clarify that an employer cannot
unilaterally terminate garden leave.
Other commenters requested
clarification that garden leave was not a
non-compete on the basis that garden
leave does not create a legal obligation
on the part of the worker to refrain from
competing. Some commenters requested
a specific exclusion for garden-leave
arrangements. They argued that by
forcing employers to pay workers,
garden leave would reduce the overuse
of non-competes. One talent industry
commenter argued that the rule should
expressly allow for ‘‘fee tails,’’ which
require talent agents to pay a portion of
future commissions to former
employers.
b. The Final Rule
After considering the comments, the
Commission has slightly modified the
definition of non-compete clause to
clarify its scope. In the final rule,
§ 910.1 defines ‘‘non-compete clause’’ as
a term or condition of employment that
either ‘‘prohibits’’ a worker from,
‘‘penalizes’’ a worker for, or ‘‘functions
to prevent’’ a worker from (A) seeking
or accepting work in the United States
with a different person where such work
would begin after the conclusion of the
employment that includes the term or
condition; or (B) operating a business in
the United States after the conclusion of
the employment that includes the term
or condition.
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335 This example is based on the agreements
described in Jamieson, supra note 32. The company
agreed to remove the non-competes in 2016 as part
of a settlement. Office of the Att’y Gen. of the State
of N.Y., Press Release, A.G. Schneiderman
Announces Settlement With Jimmy John’s To Stop
Including Non-Compete Agreements In Hiring
Packets (June 22, 2016), https://ag.ny.gov/press-
release/2016/ag-schneiderman-announces-
settlement-jimmy-johns-stop-including-non-
compete.
336 This example is based on AK Steel Corp. v.
ArcelorMittal USA, LLC, 55 NE3d 1152, 1156 (Ohio
Ct. App. 2016).
337 This example is based on Press-A-Dent, Inc. v.
Weigel, 849 NE2d 661, 668–70 (Ind. Ct. App. 2006)
(holding that the agreement was an unlawful non-
compete).
338 See, e.g., Wichita Clinic, P.A. v. Louis, 185
P.3d 946, 951 (Kan. Ct. App. 2008); Grayhawk
Homes, Inc. v. Addison, 845 SE2d 356 (Ga. Ct. App.
2020); Salewski v. Pilchuck Veterinary Hosp., Inc.,
359 P.3d 884 (Wash. Ct. App. 2015).
339 See., e.g., Palmer v. BRG of Ga., Inc., 498 U.S.
46, 49–50 (1990) (‘‘[A]greements between
competitors to allocate territories to minimize
competition are illegal’’ (citing United States v.
Topco Assocs., Inc., 405 U.S. 596 (1972)); FTC v.
Actavis, Inc., 570 U.S. 136, 154 (2013) (‘‘payment
in return for staying out of the market’’ may violate
the antitrust laws).
340 See supra note 338 and accompanying text.
341 See, e.g., Brown v. TGS Mgmt. Co., LLC, 57
Cal. App. 5th 303, 306, 316–19 (Cal. Ct. App. 2020);
Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir.
1981); TLS Mgmt. & Mktg. Servs. v. Rodriguez-
Toledo, 966 F.3d 46, 59–60 (1st Cir. 2020).
342 TLS Mgmt. & Mktg. Servs., 966 F.3d at 57.
Pursuant to the term ‘‘prohibits,’’ the
definition applies to terms and
conditions that expressly prohibit a
worker from seeking or accepting other
work or starting a business after their
employment ends. Examples of such
agreements would be a contractual term
between a national sandwich shop
chain and its workers stating that, for
two years after the worker leaves their
job, they cannot work for another
sandwich shop within three miles of
any of the chain’s locations,335 or a
contractual term between a steelmaker
and one of its executives prohibiting the
executive from working for any
competing business anywhere in the
world for one year after the end of the
executive’s employment.336 The vast
majority of existing agreements covered
by the final rule fall into this category
of agreements that expressly prohibit a
worker from seeking or accepting other
work or starting a business after their
employment ends.
Pursuant to the term ‘‘penalizes,’’ the
definition also applies to terms and
conditions that require a worker to pay
a penalty for seeking or accepting other
work or starting a business after their
employment ends. One example of such
a term is a term providing that, for two
years after the worker’s employment
ends, the worker may not engage in any
business within a certain geographic
area that competes with the employer
unless the worker pays the employer
liquidated damages of $50,000. 337
Because such an agreement penalizes
the worker for seeking or accepting
other work or for starting a business
after the worker leaves their job, it
would be a non-compete clause under
§ 910.1. Indeed, where an agreement
restricts who a worker can work for or
their ability to start a business after they
leave their job, State courts generally
characterize the agreement as a non-
compete, regardless of whether the
agreement contains an express
prohibition or requires the worker to
pay liquidated damages.338
Another example of a term that
‘‘penalizes’’ a worker, under § 910.1, is
an agreement that extinguishes a
person’s obligation to provide promised
compensation or to pay benefits as a
result of a worker seeking or accepting
other work or starting a business after
they leave their job. One example of
such an agreement is a forfeiture-for-
competition clause, which, similar to
the agreement with liquidated damages
described previously, imposes adverse
financial consequences on a former
employee as a result of the termination
of an employment relationship,
expressly conditioned on the employee
seeking or accepting other work or
starting a business after their
employment ends. An additional
example of a term that ‘‘penalizes’’ a
worker under § 910.1 is a severance
arrangement in which the worker is
paid only if they refrain from
competing. The Commission also notes
that a payment to a prospective
competitor to stay out of the market may
also violate the antitrust laws even if it
is not a non-compete under this rule. 339
The common thread that makes each
of these types of agreements non-
compete clauses, whether they
‘‘prohibit’’ or ‘‘penalize’’ a worker, is
that on their face, they are triggered
where a worker seeks to work for
another person or start a business after
they leave their job—i.e., they prohibit
or penalize post-employment work for
another employer or business. As
elaborated in Part IV, such non-
competes are inherently restrictive and
exclusionary conduct, and they tend to
negatively affect competitive conditions
in both labor and product and service
markets by restricting the mobility of
workers and preventing competitors
from gaining access to those workers.
Pursuant to the term ‘‘functions to
prevent,’’ the definition of non-compete
clause also applies to terms and
conditions that restrain such a large
scope of activity that they function to
prevent a worker from seeking or
accepting other work or starting a new
business after their employment ends,
although they are not expressly
triggered by these specific undertakings.
This prong of the definition does not
categorically prohibit other types of
restrictive employment agreements, for
example, NDAs, TRAPs, and non-
solicitation agreements. These types of
agreements do not by their terms
prohibit a worker from or penalize a
worker for seeking or accepting other
work or starting a business after they
leave their job, and in many instances
may not have that functional effect,
either. However, the term ‘‘functions to
prevent’’ clarifies that, if an employer
adopts a term or condition that is so
broad or onerous that it has the same
functional effect as a term or condition
prohibiting or penalizing a worker from
seeking or accepting other work or
starting a business after their
employment ends, such a term is a non-
compete clause under the final rule.
In response to the comments alleging
that covering ‘‘de facto’’ or ‘‘functional’’
non-competes is overinclusive or vague,
the Commission notes that the
definition’s three prongs—‘‘prohibit,’’
‘‘penalize,’’ and ‘‘function to prevent’’—
are consistent with the current legal
landscape governing whether a
particular agreement is a non-compete.
In addition to generally accepted
definitions of non-competes
encompassing the ‘‘prohibits’’ prong of
the definition, terms that ‘‘penalize’’
workers for seeking or accepting other
work or starting a business after they
leave their job (for example, by
requiring them to pay liquidated
damages) are typically considered non-
competes under State law.340 And the
‘‘functions to prevent’’ prong of the
definition is likewise consistent with
legal decisions holding that restrictive
employment agreements other than non-
competes may be analyzed under the
State law test applicable to non-
competes where they function similarly
to non-competes. 341 As the First Circuit
stated in a recent opinion, ‘‘[O]verly
broad nondisclosure agreements, while
not specifically prohibiting an employee
from entering into competition with the
former employer, raise the same policy
concerns about restraining competition
as noncompete clauses where, as here,
they have the effect of preventing the
defendant from competing with the
plaintiff.’’ 342 The fact that whether a
given restrictive covenant rises to the
level of being a functional non-compete
will turn on the facts and circumstances
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343 See Parts IV.B and IV.C.
344 See Part IV.B.2.b.
345 This example is based on sec. 9 of the Uniform
Restrictive Employment Agreement Act, supra note
332.
346 This example is based on Brown v. TGS
Mgmt., 57 Cal. App. 5th at 316–19 (‘‘Collectively,
these overly restrictive provisions [in the NDA at
issue] operate as a de facto noncompete provision;
they plainly bar Brown in perpetuity from doing
any work in the securities field.’’).
347 This example is based on TLS Mgmt. & Mktg.
Servs., 966 F.3d at 57 (holding that the NDA was
unenforceable).
348 Comment of Jonathan F. Harris, Dalie´ Jime´nez,
& Jonathan Glater, FTC–2023–0007–20873 at 4.
349 Id. at 6–7.
of particular covenants and the
surrounding market context does not
render this aspect of the final rule
overinclusive or vague. Such covenants
would be subject to case-by-case
adjudication for whether they constitute
an unfair method of competition even in
the absence of the final rule.
In response to the comments alleging
the Commission failed to cite evidence
that functional non-competes harm
competition, the Commission disagrees.
This final rule is based on a robust
evidentiary record that includes
significant empirical evidence and
thousands of public comments, as well
as the Commission’s longstanding
expertise in evaluating competition
issues. Based on this record, the
Commission finds that non-competes
are restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets
and markets for products and
services. 343 In addition, the Commission
finds that, with respect to workers other
than senior executives, non-competes
are exploitative and coercive.344 The
Commission finds that the functional
equivalents of non-competes—because
they prevent workers from engaging in
the same types of activity—are likewise
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in a similar way.
In response to the commenters who
expressed concern that prohibiting
functional non-competes would
undermine the rule’s intent to permit
reasonable substitutes, the Commission
stresses that, as described throughout
this Part III.D, the ‘‘functions to
prevent’’ prong of the definition of non-
compete clause captures only
agreements that function to prevent a
worker from seeking or accepting other
work or starting a business after they
leave their job—not appropriately
tailored NDAs or TRAPs that do not
have that functional effect.
While many commenters requested
the Commission state expressly in the
final rule whether various specific
restrictive employment agreements
satisfy the definition of non-compete
clause, the Commission declines to
adopt a definition that attempts to
capture or carve out every edge case.
Rather, the final rule focuses on
providing a clear, understandable, and
generally applicable definition of non-
compete clause that reflects the need for
case-by-case consideration of whether
certain restrictive covenants rise to the
level of being functional non-
competes—which is fully consonant
with the legal landscape employers
generally face today. The Commission
nevertheless here responds to comments
regarding the restrictive clauses that
commenters contended should be
expressly addressed in the final rule.
As noted in this Part III.D, restrictive
employment agreements other than non-
competes—such as NDAs, non-
solicitation agreements, and TRAPs—do
not by their terms or necessarily in their
effect prevent a worker from seeking or
accepting work with a person or
operating a business after the worker
leaves their job. For example, a garden-
variety NDA in which the worker agrees
not to disclose certain confidential
information to a competitor would not
prevent a worker from seeking work
with a competitor or from accepting
such work after the worker leaves their
job. Put another way, an NDA would not
be a non-compete under § 910.1 where
the NDA’s prohibitions on disclosure do
not apply to information that (1) arises
from the worker’s general training,
knowledge, skill or experience, gained
on the job or otherwise; or (2) is readily
ascertainable to other employers or the
general public.345
However, NDAs may be non-competes
under the ‘‘functions to prevent’’ prong
of the definition where they span such
a large scope of information that they
function to prevent workers from
seeking or accepting other work or
starting a business after they leave their
job. Examples of such an agreement may
include an NDA that bars a worker from
disclosing, in a future job, any
information that is ‘‘usable in’’ or
‘‘relates to’’ the industry in which they
work.346 Such an agreement would
effectively prevent the worker from
working for another employer in that
industry. A second example would be
an NDA that bars a worker from
disclosing any information or
knowledge the worker may obtain
during their employment whatsoever,
including publicly available
information. 347 These agreements are so
broadly written that, for practical
purposes, they function to prevent a
worker from working for another
employer in the same field and are
therefore non-competes under § 910.1.
Under the final rule’s definition of
non-compete clause, the same inquiry
applies to non-solicitation agreements.
Non-solicitation agreements are
generally not non-compete clauses
under the final rule because, while they
restrict who a worker may contact after
they leave their job, they do not by their
terms or necessarily in their effect
prevent a worker from seeking or
accepting other work or starting a
business. However, non-solicitation
agreements can satisfy the definition of
non-compete clause in § 910.1 where
they function to prevent a worker from
seeking or accepting other work or
starting a business after their
employment ends. Whether a non-
solicitation agreement—or a no-hire
agreement or a no-business agreement,
both of which were referenced by
commenters, as discussed previously—
meets this threshold is a fact-specific
inquiry. The Commission further notes
that—like all the restrictive employment
agreements described in this Part III.D—
non-solicitation agreements, no-hire,
and no-business agreements are subject
to section 5’s prohibition of unfair
methods of competition, irrespective of
whether they are covered by the final
rule.
Depending on the facts and
circumstances, a TRAP can also
function to prevent a worker from
working for another firm or starting a
business. For example, one commenter
cited a TRAP that required entry-level
workers at an IT staffing agency who
were earning minimum wage or nothing
at all during their training periods to
pay over $20,000 if they failed to
complete a certain number of billable
hours.348 The commenter also cited a
TRAP requiring nurses to work for three
years or else repay all they have earned,
plus paying the company’s ‘‘future
profits,’’ attorney’s fees, and arbitration
costs.349 These types of TRAPs may be
functional non-competes because when
faced with significant out-of-pocket
costs for leaving their employment—
dependent on the context of the facts
and circumstances—workers may be
forced to remain in their current jobs,
effectively prevented from seeking or
accepting other work or starting a
business.
In response to the comments, the
Commission declines at this time to
either categorically prohibit all TRAPs
related to leaving employment, or to
exempt such provisions altogether. The
Commission agrees with comments
raising substantial concerns about the
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350 The term and practice of ‘‘garden leave’’
appears to have a British origin and is recognized
by the Government of the United Kingdom. See
Gov.UK, Handing in your notice, https://
www.gov.uk/handing-in-your-notice/gardening-
leave (‘‘Your employer may ask you not to come
into work, or to work at home or another location
during your notice period. This is called ‘gardening
leave’.’’).
potential effects of such agreements on
competitive conditions. As noted in the
summary of the comments, commenters
cited TRAPs that impose penalties
disproportionate to the value of training
workers received and/or that claimed
training expenses for on-the-job
training. However, the evidentiary
record before the Commission
principally relates to non-competes,
meaning on the present record the
Commission cannot ascertain whether
there are any legitimate uses of TRAPs
that do not tend to negatively affect
competitive conditions. When TRAPs
function to prevent a worker from
seeking or accepting other work or
starting a business after the employment
associated with the TRAP, they are non-
competes under § 910.1.
The Commission notes that clauses
requiring repayment of a bonus when a
worker leaves their job would not be
non-competes under § 910.1 where they
do not penalize or function to prevent
a worker from seeking or accepting work
with a person or operating a business
after the worker leaves their job. For
example, a provision requiring the
repayment of a bonus if the worker
leaves before a certain period of time
would not be a non-compete under
§ 910.1 where the repayment amount is
no more than the bonus that was
received, and the agreement is not tied
to who the worker can work for, or their
ability to start a business, after they
leave their job. Similarly, a term or
condition under which a worker loses
accrued sick leave when their
employment ends would not function to
prevent a worker from seeking or
accepting work with a person or
operating a business after the worker
leaves their job.
With respect to garden leave
agreements, as noted previously,
commenters used the term ‘‘garden
leave’’ to refer to a wide variety of
agreements. The Commission declines
to opine on how the definition of non-
compete clause in § 910.1 would apply
in every potential factual scenario.
However, the Commission notes that an
agreement whereby the worker is still
employed and receiving the same total
annual compensation and benefits on a
pro rata basis would not be a non-
compete clause under the definition,350
because such an agreement is not a post-
employment restriction. Instead, the
worker continues to be employed, even
though the worker’s job duties or access
to colleagues or the workplace may be
significantly or entirely curtailed.
Furthermore, where a worker does not
meet a condition to earn a particular
aspect of their expected compensation,
like a prerequisite for a bonus, the
Commission would still consider the
arrangement ‘‘garden leave’’ that is not
a non-compete clause under this final
rule even if the employer did not pay
the bonus or other expected
compensation. Similarly, a severance
agreement that imposes no restrictions
on where the worker may work
following the employment associated
with the severance agreement is not a
non-compete clause under § 910.1,
because it does not impose a post-
employment restriction.
The Commission declines a
commenter’s request to replace the term
‘‘prevent’’ with ‘‘restrains’’ or ‘‘limits.’’
Commenters generally did not express
concern about the term ‘‘prevent’’ and
the Commission is concerned that
different language could greatly expand
the scope of the definition and reduce
its clarity.
The Commission also declines to
adopt alternative de facto tests raised by
commenters, such as a version of the
‘‘quick look’’ test. As described in Part
II.F, the legal standard under section 5
of the FTC Act is distinct from that of
the Sherman Act. The Commission also
declines to adopt a test that would
consider the primary purpose of a
restrictive employment agreement. The
Commission believes that it can be
difficult to establish an employer’s
subjective ‘‘purpose’’ in entering into an
agreement. In addition, such a test could
allow extremely overbroad agreements
that dramatically restrict a worker’s
ability to compete against the
employer—and have the negative effects
described in Parts IV.B and IV.C—as
long as the employer entered into the
agreement without the subjective intent
to restrict competition.
The Commission agrees with the
commenter who stated that proposed
§ 910.1(b)(2) was redundant because
proposed § 910.1(b)(1) was already a
functional definition. In the final rule,
the Commission has revised the text of
the definition of non-compete clause to
address confusion among commenters
about whether proposed § 910.1(b)(2)
clarified the definition or extended it.
In response to the commenters
requesting that the Commission clarify
the circumstances under which the
definition would apply to various other
types of restrictive employment
agreements, the Commission declines at
this time to enumerate every
circumstance that may arise. As noted,
a restrictive employment covenant may
be a non-compete clause under § 910.1
if it expressly prohibits a worker from,
or penalizes a worker for, seeking or
accepting other work or starting a
business, or if it does not do so
expressly but is so broad or onerous in
scope that it functionally has the same
effect of preventing a worker from doing
the same.
3. International Application of the Rule
a. Comments Received
The Commission received several
comments expressing concern about
whether the final rule would apply to
non-competes that restrict work outside
the U.S. In response, the final rule’s
definition of non-compete clause
clarifies that it applies only to work in
the U.S. or operating a business in the
U.S.
Some commenters raised concerns
about the cross-border movement of
workers. A research center commenter
asserted there is a global shortage of
science and technology workers and
stated that the final rule’s adoption
could exacerbate the U.S. shortage by
allowing other countries to more easily
poach U.S. workers. An academic
commenter argued that banning non-
competes might deter foreign investors
from sending workers to the U.S. if the
final rule would invalidate their non-
competes.
Some commenters argued that legal
systems in the People’s Republic of
China or other jurisdictions provide
insufficient protection for U.S.
companies’ trade secrets, confidential
information, or patent rights, and
contended employers need non-
competes as ex ante protection. These
commenters generally say that trade
secrets litigation is more challenging in
some jurisdictions outside the U.S., for
example because of less extensive
discovery processes, less frequent use of
preliminary injunctions, insufficient
remedies, and a lower propensity to
prosecute criminal intellectual property
cases. An academic commenter argued
that some courts may have fewer
protections for confidential information
compared to the U.S., so a suit
concerning only a non-compete is less
likely to reveal trade secrets through the
course of litigation and thus more
effectively prevent technologies from
leaking to other governments and
protecting U.S. national security
interests. However, the comments
provided limited evidence on non-
competes and trade secret protection
outside the U.S., and collectively only
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351 Agreement on Trade-Related Aspects of
Intellectual Property Rights, Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade
Organization, Annex 1C, sec. 7, art. 39, para. 2, 33
I.L.M. 81 (as amended Jan. 23, 2017).
352 50 U.S.C. 1709.
353 Implementation of Additional Export Controls:
Certain Advanced Computing and Semiconductor
Manufacturing Items; Supercomputer and
Semiconductor End Use; Entity List Modification,
Interim Final Rule, 87 FR 62186 (Oct. 13, 2022).
354 See Part IV.D.2.
discussed evidence from a few
jurisdictions. One commenter noted that
legal information and data from some
jurisdictions may not be fully accurate
because not all court decisions are
public.
Two commenters highlighted the
domestic semiconductor industry and
the CHIPS Act of 2022, arguing the
Chinese government seeks to acquire IP
related to semiconductors and
semiconductor experts with relevant
knowledge and information. Those
comments expressed concern that a ban
on non-competes would damage the
semiconductor industry, which relies on
skilled workers and trade secrets, by
weakening trade secrets protection and
disincentivizing investment. Another
commenter argued the proposed rule
would undermine export controls
designed to prevent foreign countries
from acquiring U.S. technology and
knowledge by allowing workers to move
to foreign competitors. One commenter
argued the proposed rule conflicts with
an October 2022 Bureau of Industry and
Security (‘‘BIS’’) export control
rulemaking, stating that the rulemaking
limits worker mobility in certain
industries from the U.S. to the People’s
Republic of China. Another commenter
suggested the proposed rule would
violate the World Trade Organization’s
Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS),
which requires that persons ‘‘shall have
the possibility of preventing information
lawfully within their control from being
disclosed to, acquired by, or used by
others without their consent . . . .’’ 351
Finally, one commenter argued that by
making it more difficult for businesses
to protect against international theft of
their intellectual property, the rule is at
odds with the purposes of the Protecting
American Intellectual Property Act of
2022.352
Some of these commenters made
recommendations for the final rule. A
law firm suggested that the final rule
prevent evasion by barring employers
from selecting the law of non-U.S.
jurisdictions to govern employment
contracts with U.S.-based workers. A
trade association requested that the final
rule cover only agreements subject to
the law of a U.S. State. An academic
commenter suggested revisions to the
text of the proposed rule to ensure the
final rule applies only within the U.S.
The commenter also recommended
stating that a non-compete restricting
work outside the U.S. is not a per se
unfair method of competition and
providing guidance on how employers
should evaluate international non-
competes, using factors such as the
business justification for the non-
compete and the impact on the worker.
The commenter recommended applying
the law of the jurisdiction where the
worker seeks to be employed.
b. The Final Rule
In response to commenters’ concerns,
in this final rule the Commission adopts
changes to the definition of ‘‘non-
compete clause’’ that expressly limit the
definition of non-compete to terms or
conditions that prevent workers from
seeking or accepting work in the U.S. or
operating a business in the U.S. The
final rule does not apply to non-
competes if they restrict only work
outside the U.S. or starting a business
outside the U.S.
This revision clarifies for stakeholders
the scope of the final rule and confirms
it does not prohibit employers from
using non-competes that restrict work
outside the U.S., in compliance with
those jurisdictions’ own laws. The
Commission understands that, as a
commenter noted, some companies
operating or competing globally already
draft non-competes that comply with
the laws of multiple jurisdictions and,
thus, amending their non-competes to
reflect this application of the final rule
would not pose a significant challenge
for those entities.
The Commission’s revision clarifying
the final rule’s application to work or
starting a business only in the U.S. also
addresses the concerns from some
commenters about key U.S. workers and
technology flowing overseas, because
the final rule does not ban non-
competes that restrict workers from
working or starting a business outside
the U.S. It also clarifies that the final
rule would not invalidate non-competes
entered into by foreign companies with
foreign workers unless they restrict a
worker’s ability to work or start a
business inside the U.S. Other questions
about the final rule’s application to
cross-border or non-U.S. employment
are also addressed by the Foreign Trade
Antitrust Improvements Act, codified at
15 U.S.C. 45(a)(3).
The Commission agrees with the
academic commenter that, for non-
competes that apply outside the U.S.,
the law of the relevant jurisdiction
should govern any issue other than
restricting work or starting a business in
the U.S. However, the Commission
declines to adopt a balancing test for
non-competes restricting a worker’s
ability to work or start a business
outside the U.S., as a bright-line rule
that applies only to work or starting a
business in the U.S. is more
administrable. In addition, the
Commission declines to add language in
the final rule stating that it does not
apply to overseas employers or to non-
competes not subject to U.S. State law.
The final rule may apply to overseas
employers if the non-compete purports
to restrict work or starting a business in
the U.S. and the reviewing court applies
U.S. law.
The empirical evidence cited in the
NPRM focused on the U.S., primarily
consisting of studies based on the effects
of changes in State laws in the U.S. The
comments provided limited evidence on
non-competes and trade secret
protection outside the U.S., leaving
many issues and most jurisdictions
unaddressed. The Commission also
notes, as one commenter did, that legal
information and data from some
jurisdictions may not be fully accurate
because not all court decisions are
public. On the current record, the
Commission cannot reach conclusions
on whether other jurisdictions have
sufficient alternatives to non-competes,
the scope of any potential risk, and
many of the other issues raised. As a
result, the Commission limits
application of the final rule to work in
the U.S., where the Commission has
ample evidence on non-competes’
negative effects.
One commenter argued the rule
conflicts with BIS’s October 2022 export
control rulemaking, which restricts the
ability of U.S. persons to support
development or production at certain
semiconductor facilities in the People’s
Republic of China without a license
from BIS.353 While the revision
addresses the commenter’s underlying
concern about protection of sensitive
technology from other governments by
not banning non-competes that restrict
the movement of workers to and in
other jurisdictions, neither the NPRM
nor the final rule is inconsistent with
the BIS rule. The final rule will not
affect BIS’s ability to grant or decline to
grant a license. With respect to the
commenter that suggested the rule
would violate TRIPS, the Commission
has found that U.S. law provides
alternative means of protecting trade
secrets, 354 and TRIPS does not require
enforcement of non-competes.
With respect to the commenter that
stated that the final rule should include
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355 These comments are described in greater
detail in Part III.G.
a choice-of-law provision to prevent
evasion, there is an existing body of law
in the U.S. governing choice of law and
conflict of law issues. Accordingly, the
Commission declines to add any
provisions concerning choice of law or
conflict of law to the final rule. Rather,
such questions are left to the relevant
jurisdiction, whether that is a U.S. State,
the Federal government, or another
jurisdiction, as determined by
applicable law.
4. Other Issues Relating to the Definition
a. Comments Received
While most commenters focused on
the proposed definition’s application to
functional non-competes or
international application, some
commenters addressed other issues
relating to the proposed definition.
Several commenters stated that the
definition should cover workplace
policies or handbooks, to minimize
confusion and make clear that
employers are prohibited from
including non-competes in workplace
policies or handbooks, even if such
clauses are unenforceable because they
are not formal binding contracts. Some
commenters stated that such policies or
handbooks can affect a worker’s
decision to leave their job to work with
a competitor or start their own
businesses. Others stated the same about
oral agreements. One commenter stated
that the definition should not cover
workplace policies because they apply
only during, not after, employment.
A few commenters said the
Commission should state explicitly in
the definition of ‘‘non-compete clause’’
that restrictions on concurrent
employment, such as prohibitions on
‘‘moonlighting’’ with competitors, are
excluded. Other commenters urged the
Commission to expand the definition to
include restraints on concurrent
employment because workers often
need to take additional jobs during
economic downturns, and low-wage
workers generally need to take on
additional jobs.
An organized labor commenter argued
that no-raid agreements, which the
commenter described as agreements
between labor organizations not to
attempt to organize workers already
under representation by another union,
should be exempted from the definition.
An industry trade organization asked
the Commission to clarify whether the
definition would apply to non-competes
in agreements between motor carriers
and brokers in the trucking industry. In
addition, a few commenters stated that
proposed § 910.1(b)(1) was too broad or
potentially ambiguous without pointing
to any specific features of the definition.
b. The Final Rule
To address the concerns raised by
commenters about workplace policies
and handbooks, the definition of non-
compete clause in § 910.1 uses the
phrase ‘‘a term or condition of
employment’’ instead of ‘‘contractual
term.’’ The definition further clarifies
that term or condition of employment
includes ‘‘a contractual term or
workplace policy, whether written or
oral.’’ The Commission finds that
employers have used restrictions in
handbooks, workplace policies, or other
vehicles that are not formal written
contracts to successfully prevent
workers from seeking or accepting other
employment or starting a new business.
The Commission finds, consistent with
the views expressed by commenters,
that such restrictions in handbooks,
workplace policies, or other such
vehicles have the same tendency to
negatively affect competitive conditions
as a formal binding contract term. To
provide that such conduct is covered by
the definition of non-compete clause,
this language clarifies that the definition
of non-compete clause is not limited to
clauses in written, legally enforceable
contracts and applies to all forms a non-
compete might take, including
workplace policies or handbooks and
informal contracts. Given the comments
expressing concern about oral
representations, the Commission
clarifies in the definition of non-
compete clause that clauses that purport
to bind a worker are covered, whether
written or oral, and provides in
§ 910.2(a)(1) and (2) that it is an unfair
method of competition to make
representations that a worker is subject
to a non-compete. (However, as
explained in Part V.C, such
representations are not prohibited
where the person has a good-faith basis
to believe that the final rule is
inapplicable.)
The Commission declines to extend
the reach of the final rule to restraints
on concurrent employment. Although
several commenters raised this issue,
the evidentiary record before the
Commission at this time principally
relates to post-employment restraints,
not concurrent-employment restraints.
The fact that the Commission is not
covering concurrent-employment
restraints in this final rule does not
represent a finding or determination as
to whether these terms are beneficial or
harmful to competition. The
Commission relatedly clarifies that
fixed-duration employment contracts,
i.e., contracts between employers and
workers whereby a worker agrees to
remain employed with an employer for
a fixed term and the employer agrees to
employ the worker for that period, are
not non-compete clauses under the final
rule because they do not restrain post-
employment conduct.
While the final rule does not extend
to restraints on concurrent employment,
the Commission has made a technical
edit to the definition of non-compete to
clarify how it relates to seeking and
accepting employment. Proposed
§ 910.1(b) defined non-compete clause
as a contractual term that ‘‘prevents the
worker from seeking or accepting
employment with a person . . . after the
conclusion of the worker’s employment
with the employer.’’ Because, as a
technical matter, non-competes can also
prevent workers from seeking or
accepting future employment with
another person before their work for
their previous employer has concluded,
the Commission has clarified the
relevant language to read ‘‘that prevents
a worker from seeking or accepting work
in the United States with a different
person where such work would begin
after the conclusion of the employment
that includes the term or condition’’ and
‘‘that prevents a worker from operating
a business in the United States after the
conclusion of the employment that
includes the term or condition’’
(emphases added).
In addition, in response to comments
expressing concern about evasion of the
rule through third-party hiring,355 the
Commission has revised the phrase
‘‘after the conclusion of the worker’s
employment with the employer’’ to read
‘‘after the conclusion of the employment
that includes the term or condition.’’
The Commission recognizes that non-
competes can cover workers who are
hired by one party but work for another,
such as workers hired through staffing
agencies. The Commission intends for
the final rule to apply to such non-
competes, and for this revision to
eliminate any ambiguity as to whether
such clauses are covered by the
definition of non-compete clause in
§ 910.1.
With respect to the comment about
union no-raid agreements, the
Commission notes that the definition
would apply only to the extent the
agreement is a ‘‘term or condition of
employment’’ and only if the agreement
‘‘prevents a worker from seeking or
accepting work in the United States
with a different person where such work
would begin after the conclusion of the
employment that includes the term or
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356 § 910.1.
357 See Part IV.C.3.
358 See § 910.2(a)(1)(i).
359 NPRM, proposed § 910.1(f).
360 Id.
361 Id. at 3511.
362 Id.
363 Id.
364 Id.
365 Id.
366 Id. at 3511, 3520.
367 Id.
368 Id.
369 Id. at 3511.
370 Id.
371 Id.
condition’’ or ‘‘operating a business in
the United States after the conclusion of
the employment that includes the term
or condition.’’ 356 The Commission’s
understanding is that union no-raid
agreements are not terms and conditions
of employment that prevent workers
from seeking or accepting work or
operating a business.
With respect to the comment asking
whether the definition would apply to
non-competes in agreements between
motor carriers and brokers in the
trucking industry, the Commission
notes as a general matter that the
definition would not apply to non-
competes between businesses, but the
Commission declines to opine on
specific factual circumstances.
E. Definition of ‘‘Person’’
The proposed rule did not separately
define the term ‘‘person.’’ Instead,
proposed § 910.1(c)—the proposed
definition of ‘‘employer’’—stated that an
employer ‘‘means a person, as defined
in 15 U.S.C. 57b–1(a)(6), that hires or
contracts with a worker to work for the
person.’’ The statutory provision cross-
referenced in proposed § 910.1(c) is
section 20(a)(6) of the FTC Act, which
defines ‘‘person’’ for purposes of the
Commission’s authority to issue civil
investigative demands. Section 20(a)(6)
defines ‘‘person’’ as ‘‘any natural
person, partnership, corporation,
association, or other legal entity,
including any person acting under color
or authority of State law.’’ No comments
were received concerning the use of
‘‘person’’ in proposed § 910.1(c).
As explained in Part III.C, the
Commission has removed the defined
term ‘‘employer’’ from the regulatory
text of the final rule. However, the
regulatory text still uses the term
‘‘person.’’ For example, § 910.2(a)(1)
prohibits a ‘‘person’’ from, among other
things, entering into a non-compete
clause. As a result, the Commission has
adopted a separate definition of the term
‘‘person.’’ Section 910.1 defines
‘‘person’’ as ‘‘any natural person,
partnership, corporation, association, or
other legal entity within the
Commission’s jurisdiction, including
any person acting under color or
authority of State law.’’ This text
consists of the proposed definition from
section 20(a)(6), plus the phrase ‘‘within
the Commission’s jurisdiction,’’ which
clarifies that only persons within the
Commission’s jurisdiction are subject to
the final rule.
F. Definitions Related to Senior
Executives
With respect to existing non-
competes, i.e., non-competes entered
into before the final rule’s effective date,
the Commission adopts a different
approach for ‘‘senior executives’’ than
for other workers. Existing non-
competes with senior executives can
remain in force; the final rule does not
cover such agreements.357 For workers
who are not senior executives, existing
non-competes are no longer enforceable
after the final rule’s effective date.358
The Commission describes its rationale
for the final rule’s differential treatment
of senior executives in Part IV.C.
Section 910.1 defines the term ‘‘senior
executive’’ as well as related terms.
Because the Commission’s rationale for
the final rule’s differential treatment of
senior executives provides important
context for these definitions, the
Commission describes these definitions
in Part IV.C.4.
G. Definition of ‘‘Worker’’
1. Proposed Definition
In the NPRM, the Commission
proposed to define ‘‘worker’’ in
proposed § 910.1(f) as ‘‘a natural person
who works, whether paid or unpaid, for
an employer.’’ 359 Proposed § 910.1(f)
also stated that ‘‘the term [worker]
includes, without limitation, an
employee, individual classified as an
independent contractor, extern, intern,
volunteer, apprentice, or sole proprietor
who provides a service to a client or
customer.’’ 360
In the NPRM, the Commission
explained it intended the term ‘‘worker’’
to include not only employees, but also
individuals classified as independent
contractors, as well as other kinds of
workers.361 The Commission explained
that, under proposed § 910.1(f), the term
‘‘worker’’ would include any natural
person who works, whether paid or
unpaid, for an employer, without regard
to whether the worker is classified as an
‘‘employee’’ under the FLSA or any
other statute that draws a distinction
between ‘‘employees’’ and other types of
workers.362
The Commission stated in the NPRM
that it was concerned that if the rule
were to define workers as ‘‘employees’’
according to, for example, the FLSA
definition, employers may misclassify
employees as independent contractors
to evade the rule’s requirements.363 The
Commission explained it had no reason
to believe non-competes that apply to
workers who are treated as independent
contractors under the FLSA or interns
tend to negatively affect competitive
conditions to a lesser degree than non-
competes that apply to employees, and
that such non-competes may, in fact, be
more harmful to competition, given that
these other types of workers tend to
have shorter working relationships.364
In addition, the Commission explained
that the purported business
justifications for applying non-competes
to independent contractors would not
be different or more cognizable from
those related to employees.365
Proposed § 910.1(f) also stated the
term worker ‘‘does not include a
franchisee in the context of a franchisee-
franchisor relationship.’’ 366 The
Commission explained that the
relationship between a franchisor and
franchisee may in some cases be more
analogous to the relationship between
two businesses than the relationship
between an employer and a worker, and
that the evidentiary record before the
Commission related primarily to non-
competes arising solely out of
employment.367 The Commission
therefore stated that it believed it would
be appropriate to clarify that a
franchisee—in the context of a
franchisor-franchisee relationship—is
not a ‘‘worker’’ for purposes of proposed
§ 910.1(f).368
Proposed § 910.1(f) further clarified,
however, that the term worker ‘‘includes
a natural person who works for the
franchisee or franchisor,’’ and that
‘‘non-competes between franchisors and
franchisees remain subject to [F]ederal
antitrust law as well as all other
applicable law.’’ 369 The Commission
explained that these laws include State
laws that apply to non-competes in the
franchise context.370 The Commission
also clarified that it was not proposing
to find that non-competes between
franchisors and franchisees are
beneficial to competition. 371
2. Comments Received
Several commenters stated that they
agreed with the proposed definition of
‘‘worker’’ because it applies to all
workers without regard to their
classification. Many of these
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372 See, e.g., Dynamex Operations W. v. Superior
Ct., 4 Cal. 5th 903, 955–957 (Cal. 2018).
373 See § 910.2(b).
commenters specifically urged the
Commission to adopt a final definition
that includes all categories of workers
regardless of whether they are classified
as employees, including independent
contractors, ‘‘gig’’ workers, and others.
These commenters pointed to the
Commission’s preliminary finding that
non-competes are widely used across
the economy. They cited employers’
frequent misclassification of workers as
independent contractors, agreeing with
concerns raised in the NPRM that, if
‘‘worker’’ excludes independent
contractors, employers may misclassify
workers as independent contractors to
avoid complying with the rule. Many
commenters stated that millions of
workers are misclassified as
independent contractors, including a
disproportionate number of women,
people of color, and low-income
workers. These commenters expressed
concern that, if the rule excluded
independent contractors from coverage,
it would fail to benefit these groups, for
whom non-competes may be
particularly exploitative and coercive.
On the other hand, several
commenters suggested removing bona
fide independent contractors and sole
proprietors from the definition of
‘‘worker.’’ Two industry groups
contended that there is a lack of data
regarding the prevalence and effects of
non-competes among independent
contractors as opposed to other kinds of
workers and that, as a legal matter, the
evidence is insufficient to justify
including independent contractors as
‘‘workers’’ under the rule. A few
industry organizations also contended
that, because they have more control
over their work and generally work for
more than one employer, independent
contractors have greater bargaining
power than other workers. One
academic commenter suggested that
non-competes between employers and
independent contractors are more akin
to agreements between businesses than
agreements between employers and
workers. A few of these industry
organizations also contended that non-
competes are justified because
independent contractors provide
services outside the scope of their
employers’ expertise and thus have
greater access to sensitive information
than other workers. Other industry
organizations contended that small
businesses employ more independent
contractors than their larger rivals.
These commenters stated that, to protect
small businesses from being impacted
disproportionately by the rule, the
definition of ‘‘worker’’ should exclude
independent contractors. Finally, a few
industry trade organizations and an
academic commenter stated that
independent contractors should be
excluded from coverage under the rule
to avoid ‘‘free riding,’’ in which a
contractor working for one firm can use
that firm’s assets—like tools or
databases—to benefit another firm.
Several commenters suggested
changes to the definition of ‘‘worker’’ to
maximize the rule’s coverage and close
potential loopholes. One worker
advocacy group noted that, combined
with the proposed definition of
‘‘employer,’’ the proposed definition of
‘‘worker’’—a natural person who works
‘‘for an employer’’—appeared to exclude
workers who work for a person other
than the person who hired or contracted
with them to work. The commenter
noted that workers are often employed
indirectly—by way of a contractual
relationship with a staffing agency, an
affiliate of their common-law employer,
or some entity other than their common-
law employer—and that non-competes
are often imposed on workers by the
non-hiring party. In order to ensure
these workers are covered by the rule,
the commenter suggested that the
definition of ‘‘worker’’ should also cover
a person who works ‘‘directly or
indirectly’’ for an employer and that the
definition specifically include ‘‘a person
who works for the employer under an
arrangement with a professional
employer organization, statutory
employer, wholly owned entity of
which the person is the sole or principal
employee or service provider, loan-out
arrangement or similar arrangement.’’
The same commenter also argued that
employers often impose non-competes
on workers who own a portion of the
business while not applying the same
restriction to outside investors who do
not work for the company, and that such
worker-owner non-competes should be
treated as employment-related non-
competes. In order to ensure these
workers are covered by the rule, the
commenter suggested that ‘‘worker’’
should also include ‘‘a person who
holds direct or indirect equity or other
interest in the employer and who
provides services to or for the benefit of
the employer.’’ Another commenter
suggested that, for clarity, ‘‘worker’’
should specifically exclude a
‘‘substantial owner, member or partner’’
as defined in the sale-of-business
exception.
Several State attorneys general, local
government commenters, academic
commenters, and a worker advocacy
group warned that categorically
excluding franchisees from the
definition of ‘‘worker’’ would lead
employers to misclassify workers as
franchisees to evade the rule’s
requirements. Some commenters
suggested incorporating the ‘‘ABC’’
test—a common law test designed to
determine whether a worker is an
employee based on fact-specific
conditions—into the definition of
‘‘worker’’ to prevent evasion.372
Some commenters requested that the
Commission revise the definition of
‘‘worker’’ to exclude or include certain
workers from coverage under the rule.
These comments are addressed in Part
IV.C (comments requesting an exclusion
for senior executives) and in Part V.D
(comments requesting exclusions for
other categories of workers).
3. The Final Rule
After considering the comments, the
Commission revised the definition of
‘‘worker’’ in three ways to clarify that
the term covers all current and former
workers, regardless of which entity
hired or contracted with them to work,
and regardless of a worker’s title or
status under any other applicable law.
First, the Commission added ‘‘or who
previously worked’’ to the basic
definition of ‘‘worker’’ as ‘‘a natural
person who works.’’ This revision is
designed to clarify that former workers
are considered ‘‘workers’’ under the
final rule, such as where an employer is
required to notify a former worker that
their non-compete is no longer
enforceable. 373
Second, the Commission removed
‘‘for an employer’’ from the definition.
This revision is designed to ensure that
the final rule covers workers who are
hired by one party but work for another,
closing the unintended loophole
identified by commenters regarding
third-party hiring.
Third, the Commission added
‘‘without regard to the worker’s title or
the worker’s status under any other
State or Federal laws’’ prior to the list
of examples of different categories of
workers that the definition covers. This
change is designed to make more
explicit that the term ‘‘worker’’ includes
all workers regardless of their titles,
status under other laws, or the details of
the contractual relationship with their
employer.
The Commission has made two
additional changes to the definition for
clarity. First, the Commission has
revised the phrase ‘‘individual classified
as an independent contractor’’ to
‘‘independent contractor.’’ Second, the
Commission has added ‘‘a natural
person who works for a franchisee or
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374 U.S. Treasury Dep’t, Report, The State of
Labor Market Competition (Mar. 7, 2022)
(hereinafter ‘‘Treasury Labor Market Competition
Report’’).
375 Employee or Independent Contractor
Classification Under the Fair Labor Standards Act,
89 FR 1638, 1735 (Jan. 10, 2024).
376 NPRM at 3519.
377 See § 910.2(a)(1)(i) and § 910.2(a)(2)(i).
378 See § 910.1 (defining ‘‘senior executive’’).
franchisor’’ to the non-exclusive list of
examples of types of workers that would
be covered by the definition. This
language is simply moved from
elsewhere in the definition. Third, the
Commission has removed the sentence
reading ‘‘[n]on-competes between
franchisors and franchisees would
remain subject to Federal antitrust law
as well as all other applicable law’’ from
the definition to avoid the implication
that only such non-competes remain
subject to Federal antitrust law and
other applicable law.
The Commission declines to specify
that a ‘‘worker’’ includes an owner who
provides services to or for the benefit of
their business because the definition
already encompasses the same.
The Commission is not persuaded by
commenters’ arguments that
independent contractors or sole
proprietors are inherently different from
other kinds of workers with respect to
non-competes, and therefore declines to
exclude them from the definition of
‘‘worker.’’ Commenters did not present
persuasive evidence that non-competes
that apply to independent contractors or
sole proprietors tend to negatively affect
competitive conditions to a lesser
degree—or are restrictive, exclusionary,
exploitative, or coercive to a lesser
degree—than non-competes that apply
to other workers. As noted by
commenters who supported including
independent contractors, non-competes’
tendency to negatively affect
competitive conditions by restricting
workers’ ability to change jobs or start
businesses is not contingent on whether
the worker is an employee or an
independent contractor. While some
commenters contended that
independent contractors have more
independence and more access to
intellectual property than other workers,
commenters did not provide evidence
that this is the case. Moreover, even
were this to be true, it would not justify
an exclusion, because the Commission
generally declines to exclude workers
based on their access to intellectual
capital or their independence for the
reasons explained in Part V.D.
Furthermore, whether a worker is an
employee or an independent contractor
does not impact employers’ ability to
exploit imbalances of bargaining power
or limit employers’ ability to use less
restrictive alternatives to non-competes
to protect their intellectual property.
While commenters who supported
excluding independent contractors
contended that independent contractors
have more bargaining power than other
workers, this contention is not backed
by evidence. While some economists
hypothesize that, theoretically,
independent contractors may have more
bargaining power vis-a`-vis employers
than employees do, they do not provide
empirical evidence to support that
assertion. Furthermore, as described by
a report from the Treasury Department
that was based on an extensive literature
review, independent contractors may
have less bargaining power than
employees in many respects.374
The Commission is also not
persuaded that non-competes are
necessary to prevent ‘‘free riding’’ by
independent contractors who use one
firm’s assets to benefit another. The
final rule prohibits agreements that
restrain a worker from working after the
scope of employment has ended and
does not prohibit agreements which
prevent a worker from working for two
firms simultaneously. In addition, any
‘‘free riding’’ may be addressed through
less restrictive means, including
through agreements prohibiting an
independent contractor from using
assets provided by one firm to benefit
another.
Nor is the Commission persuaded that
small businesses will be
disproportionately harmed by a rule
which prohibits non-competes for
independent contractors. Commenters
did not provide evidence to support
their assertion that small businesses
employ more independent contractors
than larger ones.
The Commission agrees with the
commenters who contended that
excluding independent contractors may
have the effect of excluding
misclassified workers, who may be
among the most vulnerable to
exploitation and coercion. The recent
overview by the U.S. Department of
Labor (‘‘DOL’’) of the evidence on
misclassification led it to conclude that
although the prevalence of
misclassification of employees as
independent contractors is unclear,
there is evidence that it is nonetheless
‘‘substantial’’ and has a disproportionate
effect on workers who are people of
color or immigrants because of the
disparity in occupations most affected
by misclassification, which include jobs
in construction, trucking, delivery,
home care, agriculture, personal care,
ride-hailing services, and janitorial and
building services. 375 The Commission
also agrees with commenters’
contentions that excluding independent
contractors from the definition of
‘‘worker’’ could increase employers’
incentive to misclassify workers as
independent contractors. Indeed,
misclassification is often motivated by
attempts to evade the application of
laws.
Because there is no reason to believe
non-competes that apply to independent
contractors or sole proprietors tend to
negatively affect competitive conditions
to a lesser degree, or are restrictive,
exclusionary, exploitative, or coercive to
a lesser degree, than non-competes that
apply to employees—and in light of
substantial evidence of widespread
employee misclassification—the
Commission declines to exclude
independent contractors from the
definition of ‘‘worker.’’ For this reason,
the Commission also declines to
incorporate the ‘‘ABC’’ test or other tests
designed to differentiate between
independent contractors and employees.
IV. Section 910.2: Unfair Methods of
Competition
A. Introduction
1. Overview of the Commission’s
Findings and Determinations
In the NPRM, the Commission
proposed to categorically ban employers
from using non-competes with all
workers, including existing agreements.
However, the Commission sought
comment on whether it should adopt
different standards for non-competes
with senior executives, and, if so, how
it should define senior executives.376
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
non-competes with all workers are an
unfair method of competition—although
its rationale differs with respect to
workers who are and are not senior
executives.
The final rule provides that it is an
unfair method of competition—and
therefore a violation of section 5—for
employers to, inter alia, enter into non-
competes with workers on or after the
final rule’s effective date.377 The
Commission thus adopts a
comprehensive ban on new non-
competes with all workers. With respect
to existing non-competes, i.e., non-
competes entered into before the final
rule’s effective date, the Commission
adopts a different approach for senior
executives 378 than for other workers.
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379 See Part IV.C.3.
380 See § 910.2(a)(1)(ii) and § 910.2(a)(1)(iii).
381 See § 910.2(b).
382 See § 910.2(a)(1).
383 In addition to the findings described in Parts
IV.B and C, the Commission finds that the use of
non-competes by employers substantially affects
commerce as that term is defined in section 5 and
burdens a not insubstantial portion of commerce.
The findings in Parts IV.B and C apply with respect
to senior executives and other workers, whether
considered together or respectively. The evidence
establishes that non-competes affect labor mobility,
workers’ earnings, new business formation, and
innovation, including empirical evidence
specifically identifying cross-border effects with
respect to earnings, see infra notes 464–468 and
accompanying text, and innovation, see infra note
563 and accompanying text.
384 See NPRM at 3484–93.
385 The Commission discusses comments
addressing specific studies in Parts IV.B, IV.C, and
IV.D.
386 In Parts IV.B and C, the Commission describes
how these ‘‘enforceability’’ studies show that
increased enforceability of non-competes results in
various harms, such as reduced earnings, new
business formation, and innovation. Notably, the
available evidence also shows that workers are
chilled from engaging in competitive activity even
where a non-compete is likely unenforceable—for
example, because they are unaware of the law or
unable to afford a legal battle against the employer.
See Part IV.B.3.a.i. The fact that many workers may
not adjust their behavior in response to changes in
State-level enforceability of non-competes suggests
that the final rule could result in even greater
effects than those observed in the research,
particularly because it would require employers to
provide workers with notice that their non-compete
is no longer in effect, which would help correct for
workers’ lack of knowledge of the law. See
§ 910.2(b).
Existing non-competes with senior
executives can remain in force; the final
rule does not cover them.379 For
workers who are not senior executives,
existing non-competes are no longer
enforceable after the final rule’s
effective date.380 Employers must
provide such workers with existing non-
competes notice that the non-competes
will not be enforced after the final rule’s
effective date. 381
Specifically, with respect to workers
who are not senior executives, the
Commission determines that it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; enforce or
attempt to enforce a non-compete
clause; or represent to the worker that
the worker is subject to a non-compete
clause.382 The Commission finds that
with respect to these workers, these
practices are unfair methods of
competition in several independent
ways:
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets.
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in product and
service markets.
• The use of non-competes is
exploitative and coercive conduct that
tends to negatively affect competitive
conditions in labor markets.
• The use of non-competes is
exploitative and coercive conduct that
tends to negatively affect competitive
conditions in product and service
markets.
In contrast, with respect to senior
executives, the Commission determines
that it is an unfair method of
competition for a person to enter into or
attempt to enter into a non-compete
clause; enforce or attempt to enforce a
non-compete clause entered into after
the effective date; or represent that the
senior executive is subject to a non-
compete clause, where the non-compete
clause was entered into after the
effective date. The Commission does not
find that non-competes with senior
executives are exploitative and coercive.
With respect to senior executives, the
Commission finds that non-competes
are unfair methods of competition in
two independent ways:
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in product and
service markets.
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets.
The final rule allows existing non-
competes with senior executives to
remain in force. Because the harm of
these non-competes is principally that
they tend to negatively affect
competitive conditions (rather than
exploiting or coercing the executives
themselves), and due to practical
concerns with extinguishing existing
non-competes for such executives, the
final rule prohibits employers only from
entering into or enforcing new non-
competes with senior executives.
Parts IV.B and IV.C set forth the
findings that provide the basis for the
Commission’s determinations that the
foregoing practices are unfair methods
of competition under section 5 for these
two categories of workers,
respectively.383 In these sections, the
Commission also describes and
responds to comments regarding the
preliminary findings in the NPRM that
informed its preliminary determinations
related to unfair methods of
competition.
2. Analytical Framework for Assessing
Empirical Evidence
Before turning to the basis for its
findings, the Commission describes the
analytical framework it has applied in
assessing the empirical evidence on
non-competes. In the NPRM, the
Commission discussed the existing
empirical literature on non-competes
and its assessment of those studies,
including its preliminary view of which
studies were more robust and thus
should be given more weight.384 In
response, some commenters argued the
Commission gave too much weight to
certain studies or too little weight to
others.385
The Commission notes that the
methodologies of empirical studies on
the effects of non-competes vary widely.
In this final rule, based on the
Commission’s longstanding expertise
assessing empirical evidence relating to
the effects of various practices on
competition, the Commission gives
more weight to studies with
methodologies that it finds are more
likely to yield accurate, reliable, and
precise results. In evaluating studies,
the Commission utilized the following
five principles that reflect best practices
in the economic literature.
First, the Commission gives more
weight to studies examining the effects
of a change in legal status or a change
in the enforceability of non-competes,
and less weight to studies that simply
compare differences between workers
who are subject to non-competes and
those who are not. Studies that look at
what happens before and after a change
in State law that affects the
enforceability of non-competes provide
a reliable way to study the effects of the
change. This is especially true when
only the enforceability of non-competes
changes, and not other factors affecting
firms and workers. If other substantial
changes do not also occur around the
same time, this study design often
allows the researcher to infer that the
change caused the effects—since the
likelihood that confounding variables
are driving the effects or outcomes is
minimal. 386
In contrast, other studies of the use of
non-competes compare a sample of
workers who are subject to non-
competes with a sample of workers who
are not subject to non-competes. The
shortcoming of these studies is that they
cannot easily differentiate between
correlation and causation. For example,
if such a study shows that workers with
non-competes earn more, there could be
many confounding reasons for this
result. For example, employers may be
more likely to enter into non-competes
with workers who earn more. In
contrast, a study showing that workers’
earnings increase or decrease when non-
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387 See, e.g., Starr, Prescott, & Bishara, supra note
68 at 73 (‘‘Our analysis of the relationships between
noncompete use and labor market outcomes . . . is
best taken as descriptive and should not be
interpreted causally.’’); Johnson & Lipsitz, supra
note 80 at 711 (‘‘These regressions [of firm
investment on non-compete use] should be
interpreted as correlations rather than causation,
since the decisions to make these investments and
use [non-competes] are made jointly.’’).
388 Matthew S. Johnson, Kurt J. Lavetti, & Michael
Lipsitz, The Labor Market Effects of Legal
Restrictions on Worker Mobility, Nat’l Bureau of
Econ. Rsch. 2 (2023) (‘‘. . . cross-sectional variation
in enforceability might be correlated with other
unobserved differences across states.’’).
389 Jonathan M. Barnett & Ted Sichelman, The
Case for Noncompetes, 87 U. Chi. L. Rev. 953
(2020).
competes are made more or less
enforceable provides much stronger
evidence regarding the effect of non-
competes, in isolation. Researchers
studying non-competes are aware of this
bias and frequently caution that
estimates of the correlation between
outcomes and the use of non-competes
should not be misinterpreted as
causal. 387
Second, the Commission gives more
weight to studies examining the effects
of changes in non-compete
enforceability and less weight to studies
that simply compare economic
outcomes between States where non-
competes are more enforceable and
States where non-competes are less
enforceable. This latter category of
studies is known as ‘‘cross-sectional
studies of enforceability.’’ Like studies
based on the use of non-competes, these
cross-sectional studies of enforceability
cannot easily differentiate between
correlation and causation. This is
because differences between States that
are unrelated to non-competes and their
enforceability can easily pollute
comparisons. For example, non-
competes are less enforceable in
California than in Mississippi, and the
cost of living is higher in California than
in Mississippi. However, the difference
in the cost of living is likely to be due
to underlying differences between the
economies and geographies of the two
States, rather than being attributable to
non-competes. In contrast, studies
examining how changes in
enforceability of non-competes affect
various outcomes—studies that look at
what happens within States before and
after a change in State law that affects
the enforceability of non-competes—
allow researchers to infer that the
change caused the effects.388
Despite having this limitation, the
Commission believes that cross-
sectional studies of enforceability are
still superior to the ‘‘use’’ studies
described under the first principle. This
is because although comparisons of
different States may have unreliable
results due to confounding variables—
depending on which States are
compared—‘‘use’’ studies are inherently
unreliable due to confounding effects.
For example, because employers enter
into non-competes more often with
highly paid workers, all ‘‘use’’ studies
related to worker earnings are
inherently unreliable, although studies
that utilize data on the use of non-
competes but employ a design that
plausibly identifies a causal effect may
be less unreliable.
Third, the Commission gives more
weight to studies assessing changes in
the enforceability of non-competes in
multiple States. This reduces the
possibility that the observed change in
economic outcomes was driven by an
idiosyncratic factor unique to a
particular State. For example, assume
State X changed its laws to make non-
competes less enforceable, and new
business formation subsequently
increased compared with other States.
However, around the same time it
changed its non-compete law, State X
also enacted legislation to provide
attractive tax incentives to
entrepreneurs. It would be difficult to
isolate the effect of the change in non-
compete law from the effect of the tax
law change. For this reason, the
Commission gives more weight to
studies that analyze the effects of
multiple changes in enforceability. For
example, if a study shows that,
compared with other States that did not
change their non-compete laws, new
business formation rose not only in
State X, but also in several other States
that changed their laws to make non-
competes less enforceable, the
Commission would be more confident
inferring that changes in non-compete
law caused these effects.
Fourth, the Commission gives more
weight to studies that use sophisticated,
nuanced measures of enforceability,
such as non-binary measures of non-
compete enforceability that capture
multiple dimensions of non-compete
enforceability. This fourth guiding
principle ensures accuracy and
granularity in the measurement of non-
compete enforceability.
A variety of different factors affect the
enforceability of non-competes from
State to State, including (among others)
the permissible geographic scope and
duration of non-competes and how high
the employer’s burden of proof is to
establish that a non-compete is
enforceable. Given the different factors
involved, the overall level of non-
compete enforceability from State to
State falls along a spectrum; it is not as
simple as whether non-competes are
enforceable or not. Thus, scales which
use binary measures miss nuance
between States. This is true for
enforceability overall (e.g., scales which
simply assign States to ‘‘enforcing’’ or
‘‘non-enforcing’’ categories) and for
elements of enforceability (e.g., scales
which assess whether a non-compete is
enforceable if a worker is fired with a
yes or no answer). While no scale is
perfect, scales which allow for
multidimensionality and granularity
measure non-compete enforceability
(and thus the effects that stem from it)
with a higher degree of accuracy.389
Fifth, the Commission gives more
weight to studies in which the outcome
studied by the researchers is the same
as the outcome the Commission is
interested in or is an effective proxy for
the outcome the Commission is
interested in. It gives less weight to
studies that use ineffective proxies. For
example, some outcomes are relatively
easy to study. There is extensive data on
workers’ earnings at the State level, so
researchers can simply use this data to
study how changes in non-compete
enforceability affect workers’ earnings
in a State. Other outcomes, however,
may be more challenging to quantify
directly, and thus researchers may use
proxies for understanding the effect they
are studying. For example, there is no
single metric that measures innovation
in the economy. For this reason, to learn
about how non-competes affect
innovation, a researcher might study the
effect of changes in non-compete
enforceability on the number of patents
issued in the State as a proxy for
innovation. However, proxies can
sometimes be ineffective or inapt. For
example, a study that analyzes the effect
of non-compete enforceability on the
number of patents issued is generally a
weaker proxy for innovation than a
study that also takes into account the
quality of patents issued. For this
reason, the Commission gives more
weight to studies that measure the exact
outcome of interest or studies that use
effective proxies.
While these five guiding principles
are important indicators of the relative
strength of empirical studies evaluated
by the Commission for the purpose of
this final rule, the Commission’s
assessment of empirical studies was
holistic and relied on its economic
expertise. In addition to the guiding
principles described in this Part IV.A.2,
the Commission’s holistic, expert
assessment of the empirical evidence
also included considering
characteristics of studies important in
any context, such as data quality,
statistical precision, and other factors.
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390 For the sake of readability, in this Part IV.B,
the Commission refers to non-competes with
workers other than senior executives as ‘‘non-
competes.’’
391 Some of the studies described in Part IV.B
analyze non-competes between employers and
workers across the labor force. Other studies
analyze non-competes with particular populations
of workers. In each of the studies described in Part
IV.B, non-competes with workers other than senior
executives represented a large enough segment of
the sample that the study supports findings related
to the effects of non-competes for such workers.
Studies that focus primarily on non-competes for
senior executives are described in Part IV.C, which
explains the Commission’s findings related to non-
competes with senior executives.
392 NPRM at 3504.
393 See Part II.F.
394 NPRM at 3500.
395 See, e.g., Am. Tobacco Co., 221 U.S. 106, 181–
83 (1911) (holding that several tobacco companies
violated Sections 1 and 2 of the Sherman Act due
to the collective effect of six of the companies’
practices, one of which was the ‘‘constantly
recurring’’ use of non-competes); Newburger, Loeb
& Co., Inc., 563 F.2d 1057, 1082 (2d Cir.)
(‘‘Although such issues have not often been raised
in the federal courts, employee agreements not to
compete are proper subjects for scrutiny under
section 1 of the Sherman Act. When a company
interferes with free competition for one of its former
employee’s services, the market’s ability to achieve
the most economically efficient allocation of labor
is impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and
experience and thereby forestall new entry.’’)
(internal citation omitted).
396 NPRM at 3500 (‘‘Non-competes also restrict
rivals from competing against the employer to
attract their workers.’’).
397 See Part II.F.
In some instances, the Commission
cites studies beyond those discussed in
the NPRM. The Commission cites such
studies only where they check or
confirm analyses discussed in the
NPRM, or where the Commission is
responding to comments raising them.
The Commission’s findings do not rest
on these studies, however, and they are
not necessary to support its findings.
B. Section 910.2(a)(1): Unfair Methods
of Competition—Non-Competes With
Workers Other Than Senior Executives
The Commission now turns to the
basis for its findings that non-competes
with workers other than senior
executives are an unfair method of
competition. As explained in Part II.F,
under section 5, the Commission
assesses two elements: (1) whether the
conduct is a method of competition, as
opposed to a condition of the
marketplace, and (2) whether it is
unfair, meaning that it goes beyond
competition on the merits. The latter
inquiry has two components: (a)
whether the conduct has indicia of
unfairness, and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.
Non-competes with workers other
than senior executives satisfy all the
elements of the section 5 inquiry.390 As
described in Part IV.B.2, such non-
competes are facially unfair because
they are restrictive and exclusionary,
and because they are exploitative and
coercive. And as described in Part
IV.B.3, such non-competes tend to
negatively affect competitive conditions
in labor markets and markets for
products and services. As explained in
Part II.F, the legal standard for an unfair
method of competition under section 5
requires only a tendency to negatively
affect competitive conditions. The
inquiry does not turn on whether the
conduct directly caused actual harm in
a specific instance. Here, the tendency
of non-competes to impair competition
is obvious from their nature and
function. And even if this tendency
were not facially obvious, the evidence
confirms that non-competes do in fact
have a negative effect on competitive
conditions.
The Commission finds that the
empirical research described in this Part
IV.B supports findings related to
workers other than senior executives.391
1. The Commission Finds That Non-
Competes Are a Method of Competition,
Not a Condition of the Marketplace
With respect to the first element,
whether the conduct is a method of
competition, the Commission
preliminarily found in the NPRM that
non-competes are a method of
competition under section 5 because
they are specific conduct undertaken by
an actor in a marketplace, as opposed to
merely a condition of the
marketplace.392 No commenters
disagreed with this finding, and the
Commission reaffirms its preliminary
finding that non-competes are a method
of competition.
2. The Commission Finds That Non-
Competes Are Facially Unfair Conduct
The Commission finds that non-
competes are facially unfair conduct
under section 5 because they are
restrictive and exclusionary. The
Commission further finds that non-
competes are facially unfair under
section 5 because they are exploitative
and coercive.
a. Non-Competes Are Restrictive and
Exclusionary Conduct
Under section 5, indicia of unfairness
may be present where conduct is
restrictive or exclusionary, provided
that the conduct also tends to negatively
affect competitive conditions.393 In the
NPRM, the Commission explained that
non-competes are restrictive conduct.394
No commenters disputed this analysis,
and the Commission reaffirms its
preliminary finding that non-competes
are restrictive.
The restrictive nature of non-
competes is evident from their name
and function: non-competes restrict
competitive activity. They do so by
restricting a worker’s ability to seek or
accept other work or start a business
after the worker leaves their job, and by
restricting competitors from hiring that
worker. Because non-competes facially
restrict competitive activity, courts have
long held they are restraints of trade and
proper subjects for scrutiny under the
antitrust laws.395
The restrictions that non-competes
impose on workers are often substantial.
Non-competes can severely restrict a
worker’s ability to compete against a
former employer. For most workers, the
most natural alternative employment
options are jobs in the same geographic
area and in the same field. These are the
very jobs that non-competes typically
prevent workers from taking.
Furthermore, for most workers, the most
practical entrepreneurship option is
starting a business in the same field.
This is the very opportunity that non-
competes typically prevent workers
from pursuing. Moreover, the record
before the Commission reflects that non-
competes are often so broad as to force
a worker to sit out of the labor market
altogether.
In the NPRM, the Commission used
the term ‘‘restrictive’’ to encompass both
restrictive and exclusionary conduct.396
In this final rule, in addition to finding
that they are restrictive conduct, the
Commission separately finds that non-
competes are exclusionary conduct
because they tend to impair the
opportunities of rivals. Where a worker
is subject to a non-compete, the ability
of a rival firm to hire that worker is
impaired. In addition, where many
workers in a market are subject to non-
competes, the ability of firms to expand
into that market, or entrepreneurs to
start new businesses in that market, is
impaired.
For the foregoing reasons, the
Commission finds that the use of non-
competes with workers other than
senior executives is facially unfair
under section 5 because it is conduct
that is restrictive or exclusionary.
b. Non-Competes Are Exploitative and
Coercive Conduct
Conduct may violate section 5 where
it is exploitative or coercive and tends
to negatively affect competitive
conditions.397 Indeed, where conduct is
exploitative or coercive, it evidences
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398 See id.
399 NPRM at 3502–04.
400 Id. at 3504.
401 Treasury Labor Market Competition Report,
supra note 374 at i–ii.
402 Id. at i.
403 Id.
404 Id.
405 Id.
406 Id.
407 Id. at ii.
408 Id.
409 See, e.g., Samuel Stores, Inc. v. Abrams, 108
A. 541, 543 (Conn. 1919); Sunder Energy, LLC v.
Jackson, 305 A.3d 723, 753 (Del. Ct. Chancery
2023).
410 Starr, Prescott, & Bishara, supra note 68 at 72
(‘‘Taken together, the evidence in this section
indicates that employers present (or employees
receive) noncompete proposals as take-it-or-leave-it
propositions.’’).
411 See, e.g., Todd D. Rakoff, Contracts of
Adhesion: An Essay in Reconstruction, 96 Harv. L.
Rev. 1173 (1983); Russell Korobkin, Bounded
Rationality, Standard-Form Contracts, and
Continued
clear indicia of unfairness, and less may
be necessary to show a tendency to
negatively affect competitive
conditions. 398
In the NPRM, the Commission
preliminarily found that non-competes
with workers other than senior
executives were exploitative and
coercive because in imposing them on
workers, employers take advantage of
their unequal bargaining power.399 The
Commission also preliminarily found
that non-competes are exploitative and
coercive at the time of the worker’s
potential departure, because they force
a worker to either stay in a job the
worker wants to leave or force the
worker to bear other significant harms
and costs, such as leaving the workforce
or their field for a period of time;
relocating to a different area; violating
the non-compete and facing the risk of
expensive and protracted litigation; or
attempting to pay the employer to waive
the non-compete. 400
The Commission received an
outpouring of comments on the question
of whether non-competes were
exploitative or coercive. Thousands of
workers described non-competes as
pernicious forces in their lives that took
advantage of their lack of bargaining
power and forced them to make choices
detrimental to their finances, their
careers, and their families. Above all,
the predominant themes that emerged
from the comments were powerlessness
and fear.
Thousands of workers reported
feeling powerless to avoid non-
competes, either because the worker
needed the job or because non-competes
were pervasive in the worker’s field.
Hundreds of workers reported non-
competes were unilaterally imposed on
them. Workers overwhelmingly reported
that they did not bargain over non-
competes, did not receive compensation
for non-competes, and were not
represented by counsel in connection
with non-competes, with only rare
exceptions.
And hundreds of workers reported
that even where they wanted a job with
better pay or working conditions, or to
strike out on their own, the fear of
litigation from a deep-pocketed
employer or the fear of being without
work prevented them from doing so.
Hundreds of workers described how this
fear coerced them into remaining in jobs
with poor conditions or pay, including
dangerous or toxic work environments;
into leaving an industry or profession
that they invested, trained, studied, or
were experienced in, damaging or
derailing their careers; into moving
away from their home, uprooting or
separating their families; or into
enduring long-distance commutes,
which made it harder to care for and
spend precious time with their loved
ones. Many workers described how this
fear hung above them even if they
thought the non-compete was overbroad
and probably unenforceable under State
law, because having to defend a lawsuit
from an employer for any length of time
would devastate their finances.
Based on the entirety of the record, for
the following reasons, the Commission
finds non-competes with workers other
than senior executives are exploitative
and coercive because they are
unilaterally imposed by a party with
superior bargaining power, typically
without meaningful negotiation or
compensation, and because they trap
workers in worse jobs or otherwise force
workers to bear significant harms and
costs.
i. Non-Competes With Workers Other
Than Senior Executives Are Unilaterally
Imposed
The Commission finds that employers
almost always unilaterally impose non-
competes, exploiting their superior
bargaining power to impose—without
any meaningful negotiation or
compensation—significant restrictions
on workers’ abilities to leave for better
jobs or to engage in competitive activity.
The Commission finds that employers
have significantly more bargaining
power than workers. Most workers,
especially workers other than senior
executives, depend on income from
their jobs to get by—to pay their rent or
mortgage, pay their bills, and put food
on the table. The loss of a job or a job
opportunity can severely damage
workers’ finances and is far more likely
to have serious financial consequences
for a worker than the loss of a worker
or a job candidate would have for most
employers.
The Treasury Department, in a report
based on an extensive literature review,
finds that firms generally have
considerable labor market power.401 The
report states that concentration in
particular industries and locations can
increase employers’ labor market
power. 402 However, the report explains
that, even in the absence of
concentration, firms have significant
labor market power due to a variety of
factors.
As the report notes, some of these
factors are inherent in the firm-worker
relationship. The report states that
workers are at an informational
disadvantage relative to firms, often not
knowing what other workers earn or the
competitive wages for their labor.403
The report states further that workers
often have limited or no ability to
switch locations and occupations
quickly and may lack the financial
resources to support themselves while
they search for jobs that pay more and
better match their skills and abilities.404
According to the report, these
conditions often enable firms to exert
market power even in labor markets that
are not highly concentrated. 405
In addition to factors inherent to the
employer-worker relationship, the
report concludes that firms use a wide
range of practices to restrain
competition for workers, including
sharing wage information and
conspiring to fix wages with other firms;
agreeing not to hire other firms’
workers; and adopting non-competes,
mandatory arbitration agreements, and
overbroad NDAs. 406 The report also
states that practices such as outsourcing
and worker misclassification have
further diminished workers’ market
power. 407 Overall, the report finds that
employers’ labor market power has
resulted in a 20% decrease in wages
relative to the level in a fully
competitive market.408
The Commission finds that employers
are able to exploit their considerable
labor market power—and indeed
routinely do so—with respect to non-
competes imposed on workers other
than senior executives. Employers are
repeat players likely to have greater
experience and skill at bargaining than
individual workers in the context of
negotiating employment terms such as
non-competes.409 Research has found
that employers present non-competes in
standard-form contracts,410 which
workers are unlikely to read,411 and that
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Unconscionability, 70 U. Chi. L. Rev. 1203, 1217
(2003).
412 Starr, Prescott, & Bishara, supra note 68 at 72.
413 J.J. Prescott & Evan Starr, Subjective Beliefs
About Contract Enforceability, Forthcoming, J. L.
Stud. 10–11 (2022).
414 Marx (2011), supra note 81 at 706.
415 Individual commenter, FTC–2023–0007–4414.
416 Individual commenter, FTC–2023–0007–
10547.
417 Individual commenter, FTC–2023–0007–
12428.
418 Individual commenter, FTC–2023–0007–
12480.
419 Individual commenter, FTC–2023–0007–
14706.
420 Individual commenter, FTC–2023–0007–2347.
421 Individual commenter, FTC–2023–0007–2600.
422 Individual commenter, FTC–2023–0007–5933.
423 Industries that the Commission considered as
higher wage industries included but were not
limited to engineers, entertainment (namely on-air
talent), entrepreneurs, financial services, dentists,
physicians, sales workers, tech industry workers,
and veterinarians. Industries were assessed as high
wage based on BLS occupational wage data. BLS,
Occupational Employment and Wage Statistics,
https://www.bls.gov/oes/tables.htm (based on the
May 2022 National XLS table).
workers rarely bargain over non-
competes and rarely seek the assistance
of counsel in reviewing non-
competes. 412 Many workers also lack
the legal training or legal knowledge
necessary to understand whether a
particular non-compete is enforceable or
the consequences of entering into a non-
compete. The available evidence
indicates that many workers are not
aware of the applicable law governing
non-competes or their rights under
those laws.413 Research has also found
that employers exploit their power over
workers by providing them with non-
competes after they have accepted the
job offer—and in many cases, on or after
their first day of work—when the
worker’s negotiating power is at its
weakest, since the worker may have
turned down other job offers or left their
previous job. 414
The comment record provides strong
support for the Commission’s finding
that non-competes are coercive and
exploitative because they are typically
unilaterally imposed by employers on
workers other than senior executives.
Illustrative examples of the comments
the Commission received include the
following:
• I am a practicing OB/GYN physician in
Shreveport, LA. . . . I was put into a non-
negotiable, vague non-compete with NO
expiration date. . . . I needed a job. I was in
a large amount of debt with accumulating
interest during my four years of residency
with a minimal salary. Honestly, I could not
afford an attorney. So naively I trusted that
the people that had been training me for the
past 4 years would not take advantage of me
in a contract. I did not have the ability to
seek advice on ‘‘how’’ to negotiate a contract
with my mentors since my mentors were the
ones who wrote the contract.415
• As [a] physician who recently negotiated
a new contract, I support FTC changes to the
non-compete rules. . . . All three
institutions [I considered working for] had
unreasonable and onerous non-competes.
Essentially making it impossible to get
another job in the entire state of NJ—not just
a few mile radius but two thirds of the
state. . . . Non-competes are never
negotiable even when hiring a lawyer to
review and negotiate the contract. Hospitals
refused to negotiate on the majority of the
contract citing it is [an] across the board
provision that cannot be altered.416
• I’m a worker that has had to consider
whether to take a job that requires signing a
no-compete agreement . . . . Several times
in my career, after weeks of interviewing and
salary negotiation, I’ve found myself facing a
required no-compete agreement that would
drastically limit my future career options and
negotiating power. Several times I’ve
accepted these agreements because I had
already turned down competing offers and
found myself with limited options.417
• I’m a project manager at an Interior
Design & Home Staging company in
Manhattan; we’re the largest staging company
on the East Coast. After I accepted my job
offer and went in to file paperwork, I was
very briefly walked through what this non-
compete means (the details were not made
entirely clear; I believe they left it
intentionally murky) and it was buried deep
in the new employee rules and regulations
packet I needed to read and sign at my
onboarding. I personally am very against
these agreements because, as mine states, I
cannot work with ‘‘a competing staging
company’’ or for any of the clients of my
current company. Again, we’re the largest
staging firm on the east coast and have a lot
of clients (we do over 100 stagings per year).
Essentially, I am completely shut out of
working in the industry in NYC as there are
only a handful of other staging companies
that can pay me a living wage to do so.418
• You might say that we might be able to
negotiate out of a non-compete in our
contract, but that is simply not true. In my
hospital, I was already established, owning a
house and having kids in school in a spouse
in a career when the Hospital came forward
and sit on my next contract renewal that I
had no choice, but to sign a noncompete.
They had me over a barrel. At my next
contract negotiation, I try to negotiate out of
the noncompete, with less salary or less
benefits, and it was a nonstarter. There is
zero tolerance for negotiating out of the
noncompete.419
• At the end of 2018, as a Manager at a
small business (150 employees) in a niche
technology industry, I was offered shares in
our company as we were acquired by a
Private Equity firm. . . . I worked with a
company-provided attorney on an
Employment Agreement. This agreement
offered a 6-month severance with a 1-year
non-compete period, which I negotiated
down to a 6-month non-compete to match the
severance period. Later that month, I was
sent an additional, previously unseen 120-
page Share Agreement that governed how I
would vest the shares I had earned. I didn’t
realize it at the time, but buried toward the
end of this document was another non-
compete that had a much longer timeframe
dictated—1 year from when I no longer held
any shares. As it would potentially take up
to 6 years for the company to sell again, that
meant an incredibly long and indefinite
sounding time period. I was given only one
business day to review this agreement, and
was sent a signature packet the following
day. I honestly thought I was signing my
Employment Agreement negotiated with a
company attorney, not the share agreement
that neither myself nor the attorney had
reviewed, and which I had only received the
day prior. 420
• Desperate to obtain an entry level job in
the Accounting field in which I am currently
obtaining my Associate’s degree, I was
presented with an offer of employment and
a non-compete agreement contract to sign.
Because I needed to pay rent, I signed it.421
• On the first day of my husband’s
employment, without prior notice, an
extensive 2 year non-compete clause was put
in his employment contract and while it was
noted within the clause he could seek
counsel, when you are in the middle of your
first day of work it’s not practical. In
addition, for most people, if it is your first
experience with a non-compete, you likely
do not have the funds to pay a $750 per hour
lawyer to advise and negotiate on your
behalf, nor realize the possible long-term
consequences.422
Many commenters agreed with the
Commission’s preliminarily finding that
employers generally have considerable
labor market power. Even commenters
opposing the NPRM did not generally
dispute the notion that there is unequal
bargaining power between employers
and workers. Many workers stated that
non-competes are pervasive in their
industry, meaning they could not find a
job without one. Many commenters
stated that high wages or skills do not
automatically translate into more
bargaining power or sufficiently
mitigate the harms from non-competes,
especially in concentrated markets or
markets where so many employers use
non-competes that workers effectively
have no choice but to sign them.
Commenters also said that
underrepresented groups may have even
less bargaining power to negotiate non-
competes and are less likely to have the
resources for litigation, which could
have an increased deterrent effect on
worker mobility.
Hundreds of commenters stated that
workers are rarely, if ever, able to
negotiate their non-competes because
non-competes are typically presented in
a take-it-or-leave-it fashion. These
comments spanned both lower-wage
workers and workers in high-wage
industries.423 Workers often stated that
they were ‘‘forced’’ to sign a non-
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424 Starr, Prescott, & Bishara, supra note 68 at 81.
425 See supra note 413 and accompanying text.
426 Starr, Prescott, & Bishara, supra note 68 at 72.
compete. Very few workers said they
were able to decline signing a non-
compete and still be hired or employed.
An employment law firm also agreed
with the Commission and stated that
non-competes are rarely subject to
negotiation.
Confirming the research described in
this Part IV.B.2.b.i, many workers—
including highly paid and highly skilled
workers—stated that they did not
receive notice that they would be
required to sign a non-compete until
after accepting a job offer. Some workers
said they were told of the non-compete
after accepting the job but before
starting work. Many workers who
described when they were notified of a
non-compete said it was on their first
day of work or even later. Many workers
stated that they were required to sign
their non-compete after a merger or
acquisition—i.e., after they were already
on the job but there was a change in
ownership of the company. For
example, a trade organization stated that
it is common for the purchaser of a
business to impose non-competes on its
workers, which may trap workers in an
organization different from the one they
originally agreed to work for. An
employment law firm commented that
even highly paid or highly skilled
workers do not always receive notice of
non-competes with the employment
offer.
Many workers also stated that non-
competes are often hidden or obscured.
Several workers said their non-compete
was buried in other paperwork or
confusingly worded or vague. Some
commenters stated that their employer
refused to allow them to have a copy of
their non-compete. Many workers said
their employers gave them misleading
or incorrect information about the terms
or enforcement of non-competes. Each
of the above categories included not
only workers from low-wage industries,
but also workers from high-wage
industries. While these practices appear
to be commonplace, based on the
comments, the Commission also notes
that even workers who knew about non-
competes before accepting the job
offer—and who did not report being
misled about the non-compete—did not
report bargaining or negotiating over it.
Only a small number of workers
reported any negotiating over non-
competes. For example, a sales worker
said they were able to negotiate a non-
compete, though that worker still
supported the proposed rule. A surgeon
group stated hospitals were willing to
negotiate over non-competes, but that
hospitals use the non-competes as a
negotiating tactic to drive down surgeon
salaries.
Few workers who submitted
comments reported being compensated
for signing a non-compete. Among those
workers who did report receiving
compensation, most still said they
considered their non-competes to be
exploitative or coercive. For example,
some workers said they were laid off
and then required to sign a non-compete
as a condition for receiving severance. A
few workers said their employer had
threatened to withhold their
commissions and/or pay on departure if
they did not sign a non-compete. One
worker reported never receiving the
compensation associated with a non-
compete, because they were terminated
two months after signing.
In addition, the Commission finds
that employers frequently impose non-
competes even when they are
unenforceable under State law. An
economist suggested that non-competes
may be used in States in which they are
unenforceable because the employer
hopes the State’s policy might change,
or the employer might be able to forum-
shop to apply the law of another
jurisdiction more favorable to non-
competes. Some commenters stated that
firms may remind workers they are
subject to a non-compete upon
departure even when those non-
competes are unenforceable because
they hope that workers and competitors
will abide by them.
These comments that employers often
use unenforceable non-competes are
supported by research finding that
employers frequently use non-competes
even when they are unenforceable
under State law.424 This research
suggests that employers may believe
workers are unaware of their legal
rights, or that employers may be seeking
to take advantage of workers’ lack of
knowledge of their legal rights or the
challenges workers face enforcing their
rights.
A far smaller number of
commenters—a group that included
many businesses and trade
organizations, and very few workers—
argued that non-competes were not
exploitative or coercive. An industry
organization said non-competes are
understandable to a layperson with
respect to their geographic scope, time
in effect, and industry to which they
apply, while an alternative trade secret
case would be more complex. But even
if workers understand the basic terms of
non-competes, that does not alter the
Commission’s core concern that non-
competes are exploitative and coercive
because they take advantage of unequal
bargaining power between employers
and workers and force workers to stay
in jobs they want to leave or otherwise
bear significant harms or costs. It also
does not alter the Commission’s concern
that non-competes tend to negatively
affect competitive conditions. Moreover,
the Commission notes that the available
evidence indicates that many workers
are not aware of the applicable law
governing non-competes or their rights
under those laws.425 In addition, many
commenters stated that non-competes
were not disclosed to them before they
started their job. Furthermore, the
Commission addresses why trade secret
law is a less restrictive alternative for
protect employers’ legitimate interests
in Part IV.D.2.
A few commenters stated that unequal
bargaining power does not constitute an
unfair method of competition. In
response, the Commission notes that it
does not find that unequal bargaining
power itself is an unfair method of
competition; rather, unequal bargaining
power informs its analysis of
exploitation and coercion.
The comment record indicates that
while some highly paid workers may
seek the assistance of counsel when
negotiating non-competes, many do not.
Commenters did not present studies or
other quantitative evidence that
undermines the finding in Starr,
Prescott, & Bishara that less than 8% of
workers seek assistance of counsel in
connection with non-competes.426 The
Commission thus finds that the vast
majority of workers lack assistance of
counsel in connection with entering
non-competes. The Commission
believes that its definition of senior
executives, discussed in Part IV.C.4,
captures those workers who are most
likely to seek assistance of counsel. To
the extent any other individual workers
seek assistance of counsel and/or are
able to actually bargain over non-
competes sufficient that a given non-
compete is not exploitative and
coercive, the Commission still finds that
such non-competes are unfair methods
of competition for the independent
reason that they are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions.
Overall, the comments provide strong
support for the Commission’s finding
that, with respect to workers other than
senior executives, employers almost
always unilaterally impose non-
competes—exploiting their superior
bargaining power to significantly restrict
workers’ abilities to leave for better jobs
or engage in competitive activity.
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427 These comments are addressed in greater
detail in Part IV.B.3.a.iii.
428 Individual commenter, FTC–2023–0007–0747.
429 Individual commenter, FTC–2023–0007–2855
430 Individual commenter, FTC–2023–0007–7561.
431 Individual commenter, FTC–2023–0007–8858.
432 Individual commenter, FTC–2023–0007–
15249.
ii. Non-Competes With Workers Other
Than Senior Executives Trap Workers in
Jobs or Force Them to Otherwise Bear
Significant Harms and Costs
The Commission finds that non-
competes are exploitative and coercive
because they force workers to either stay
in jobs they want to leave or bear other
significant harms and costs, such as
leaving the workforce or their field for
a period of time; relocating out of their
area; or violating the non-compete and
facing the risk of expensive and
protracted litigation. In addition, the
Commission finds non-competes exert a
powerful in terrorem effect: they trap
workers in jobs and force them to bear
these harms and costs even where
workers believe the non-competes are
overbroad and unenforceable, due to
workers’ fear that having to defend a
lawsuit from their employer for any
length of time would devastate their
finances or ruin their professional
reputations.
The comment record provides strong
support for this finding. Many workers
submitted comments supportive of the
Commission’s preliminary finding that
non-competes coerce workers into
remaining in their current jobs. Many
workers reported staying in their jobs
because they feared harm to their
careers if they were forced out of their
field; feared having to relocate or endure
a lengthy commute due to a non-
compete; or feared their non-competes
would cause them to be unemployed if
they left. Several workers reported they
were unable to take a specific desired
job because of a non-compete. Many
workers recounted how non-competes
trapped them in jobs with poor working
conditions or where they were subject to
illegal conduct, including sexual
harassment. 427 Some workers said they
were subject to particularly broad, even
global, non-competes, meaning leaving
their field was their only option if they
left their current job. These comments
spanned both lower-wage workers and
workers in high-wage industries.
Illustrative examples of the comments
the Commission received include the
following:
• I am a journalist who has been forced to
move across the country three times, and
leave my field entirely for one year, in order
to comply with stringent non-compete
agreements. . . . In [one] situation, I was
stuck working for abusive management who
fostered a toxic and abusive workplace, and
I had to work there for more than a year until
I could find a job in another city entirely
because they had threatened to sue me under
the non-compete if I left and worked for
another local station. . . . [E]ven if these
clauses are unenforceable, as we’ve all heard
before, who can afford the legal
representation to go up against a corporation
and their lawyers when the lawsuit threat
comes? My life would have been very
different if I weren’t trapped by non-
competes at points in my career.428
• As a veterinarian I support the
elimination of non-compete agreements. In
our profession they still are overwhelmingly
the normal expectation with contracts. . . .
[C]ompanies use the fear of litigation to
enforce them. As veterinary medicine very
quickly becomes more corporate owned,
basically they pit us as a singular employee
against large corporations that have
substantial means both financially and
legally. No reasonable employee wants to
take on that battle or even can financially
take on that battle. So regardless if the
clauses are ‘unenforceable’ they are enforced
via intimidation. . . . When [my] job was a
terrible fit and my boss ultimately ended up
‘not renewing my contract’ I was still left
with a noncompete. This basically eliminated
my ability to work within a reasonable
distance of our home. I ended up commuting
an hour and 15 minutes one way for 10
months until my husband, myself, and my
very young child were able to move closer to
my new job. While it was likely legally
unreasonable in nature, I did not have the
resources financially to even consider the
legal battle that would have had to happen
for reconsideration and I desperately needed
an income to continue to pay the student
debt that comes with being a young doctor.
Furthermore I had a baby that needed my
focus as well.429
• I was fired unjustly 11/2021 for
declining the Covid vaccine. My medical and
religious exemptions were both denied. In
addition to this, I was required by my former
employer contract to abide by the two-year
10 mile restrictive covenant. This greatly
hindered my ability to find employment, and
I was out of work for approximately three
months. I could only find part-time work for
a fraction of my former salary. Had I not had
the noncompete clause, I could have found
a full-time job almost immediately. 430
• Unfortunately, the average dental school
graduate has nearly $300,000 in student loan
debt, and most new dentists are unable to
make their practice-ownership dreams a
reality immediately after residency. Thus, we
rely on entry-level associate dentist positions
to gain experience, pay off debt, and become
fiscally/professionally prepared to become
practice owners. Much to my dismay, upon
interviewing for my first associate dentist
position, I quickly realized how non-
competes are being used in the dental
profession to prevent vulnerable young
dentists like myself from taking the next step
in our careers. . . . Although dental
associate positions come with relatively high
compensation, it doesn’t make this issue any
less problematic.431
• My daughter had an inter-state non-
compete enforced as a minimum wage
medical scribe. Originally she was working
with a medical scribe company in Indiana
prior to Covid. Due to COVID and graduating
from college she then moved to our home in
Oregon. She applied for a medical scribe job
in Oregon with a company that did not
provide any scribe services in Indiana. But
her original scribe company had 1 ‘‘office’’
they were providing scribe services to in
Salem, Oregon. My daughter had applied
with the local scribe company to provide
services but when examined further found
that her original scribe company from
Indiana was going to enforce a $5000 non-
compete buy-out fee on her to provide the
services in Salem, Oregon that were within
the sphere of restriction for her ‘‘new’’ local
scribe opportunity.432
Many commenters explained that
non-competes forced them to relocate
and described the toll the relocation
took on their families. Other
commenters stated that their families
have been forced to live apart, or they
had been separated from elderly
relatives, due to a non-compete forcing
the relocation of one of the family
members. Many commenters described
how long commutes undertaken to
avoid non-competes increased
transportation costs and caused the
worker to lose precious time with their
families.
The comment record bolsters the
Commission’s finding that employers
wield non-competes to coerce and
exploit workers into refraining from
competitive activity even where non-
competes are unenforceable. Many
workers explained that they—and others
in their industry—abided by non-
competes, even where they believed the
non-compete was overbroad and likely
unenforceable. According to a law firm
specializing in executive compensation,
even workers who can afford counsel
may be unwilling to mount a long and
uncertain legal battle to challenge a non-
compete. The firm said employers
almost always have deeper pockets and
more access to counsel than individual
workers, making workers more reluctant
to litigate. Commenters further stated
that employers may be able to deduct
litigation costs as a business expense,
giving them the wherewithal to enforce
their non-competes.
Many workers with non-competes
stated that they feared legal action from
their employer or enormous legal fees if
they left their current job, and most of
those workers said they could not afford
litigation. Workers also stated that they
are reluctant to engage in litigation
against an employer because it would
harm their reputation in their industry.
Many workers reported being
threatened with litigation over a non-
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433 See Part IV.B.2.b.i.
compete when they attempted to leave
an employer. Some commenters said
their non-competes contained
additional clauses making litigation
more difficult, such as attorneys’ fee-
shifting provisions or forced arbitration.
Other workers feared having to pay
financial penalties or feared having their
compensation clawed back if their
employer claimed they violated the non-
compete. Each of the above comment
categories included numerous
comments from workers in high-wage
industries.
Commenters asserted that employers
have several advantages in litigation,
further increasing the risk of challenging
a non-compete. A commenter said even
an extremely overbroad non-compete
may be enforceable because a court can
modify it to reduce its scope or
duration. An employment attorney said
employers who use overbroad non-
competes to stifle competition suffer
few if any negative consequences for
doing so. The employment attorney
further said that most employers do well
even in a legal regime that nominally
disfavors non-competes, due to the
chilling effect of the threat of litigation.
One researcher cited in the NPRM stated
that non-competes have a powerful
chilling effect because State laws
generally do not prohibit employers
from requiring employees to sign
overbroad non-competes. Accordingly,
the researcher recommended that non-
competes be banned rather than
restricted in scope, thereby preventing
the possibility of lawsuits (and the
threat thereof).
No commenters submitted studies or
empirical evidence to contradict or
otherwise call into question the research
cited in the NPRM finding employers
frequently use non-competes even when
they are unenforceable under State law.
Many commenters said they perceived
non-competes to be a tool used to
intimidate workers, and others
specifically said they had been
intimidated when their employers took
legal action against other workers who
left. These comments spanned workers
in both lower-wage and high-wage
industries.
The comments reflected that fields
with high compensation levels were not
immune from coercion and exploitation,
and that, to the contrary, specialization
can increase employers’ ability to coerce
and exploit workers. For example, some
commenters said highly trained and/or
specialized workers face heightened
challenges in finding a job that does not
violate a non-compete without
relocating or become entirely
unemployable, given the smaller
number of such specialized jobs
available. One commenter said that
many workers are compensated highly
because they are in a small field or have
a niche skillset, meaning non-competes
significantly limit their ability to find
another job in their field. Some
commenters in professions requiring
advanced education also submitted
comments stating that significant
student loan debt decreased their
bargaining power or increased the
financial risk of attempting to change
jobs. An employment law firm stated
that highly paid or highly skilled
workers in roles that are not limited to
a single industry or business, such as
finance or human resources, are more
likely to be able to find employment in
another industry, while those with
training and expertise in a particular
industry or type of business are at a
greater risk of unemployment. Some
medical organizations and others
pointed out that non-competes can be
particularly exploitative and coercive
for professions such as physicians that
require State licenses, credentials, and
insurance, making relocation even more
difficult.
A far smaller number of commenters
claimed non-competes are not
exploitative or coercive and do not trap
workers in jobs or force workers to bear
significant harms or costs. Several
commenters argued that, because non-
competes are often not exploitative and
coercive at the time of contracting, they
are also not exploitative and coercive at
the time workers seek to leave their jobs.
According to these commenters, to the
extent a non-compete is bargained for
and fairly compensated, that same non-
compete does not become exploitative
and coercive at the time of departure. In
response, the Commission notes that
commenters overwhelmingly reported
workers rarely bargain in connection
with, or receive compensation for, non-
competes,433 and the mere existence of
compensation does not automatically
make that compensation fair.
Some business and business
association commenters contended that
workers with higher earnings can more
easily forgo wages to wait out non-
competes, and thus do not feel forced to
stay in their jobs. These commenters
also argued that non-competes for these
workers are often tied to equity or
severance, which the worker can choose
to forego if they want to compete. These
comments are contrary to the extensive
comment record indicating that even
workers with higher earnings cannot
afford to forgo compensation and feel
forced to stay in jobs they want to leave
due to non-competes. To the extent any
such individual workers bargained for
or received compensation for a non-
compete, the Commission still finds that
such non-competes are unfair methods
of competition for the independent
reason that they are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions.
Overall, the comments provide strong
support for the Commission’s finding
that non-competes are exploitative and
coercive because they trap workers in
jobs or force them to bear significant
harms and costs.
For the foregoing reasons, the
Commission finds that non-competes
with workers other than senior
executives are exploitative and coercive
and thus facially unfair under section 5.
3. The Commission Finds That Non-
Competes Tend To Negatively Affect
Competitive Conditions
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes tend to negatively affect
competitive conditions in labor markets
for the reasons explained in this Part
IV.B.3.a. (As explained in Part IV.B.3.b,
the Commission further finds that non-
competes tend to negatively affect
competitive conditions in markets for
products and services.)
As explained in Part II.F, the legal
standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions. The inquiry
does not turn on whether the conduct
directly caused actual harm in a specific
instance. Here, the tendency of non-
competes to impair competition is clear
from their nature and function. In any
event, the evidence confirms that non-
competes do in fact have a negative
effect on competitive conditions.
The Commission turns now to the
significant evidence of harm to
competition in labor markets from non-
competes, including evidence of
suppressed labor mobility, suppressed
earnings, and reduced job quality.
a. Non-Competes Tend to Negatively
Affect Competitive Conditions in Labor
Markets
The Commission finds that non-
competes tend to negatively affect
competitive conditions in labor markets
by inhibiting efficient matching between
workers and employers.
Labor markets function by matching
workers and employers. In a
competitive labor market, workers
compete for jobs by offering their skills
and time (i.e., their labor services) to
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434 See Treasury Labor Market Competition
Report at 3–4.
435 See id.
436 See N. Pac. Ry. Co. v. United States, 356 U.S.
1, 4 (1958).
437 See NCAA v. Bd. of Regents of Univ. of Okla.,
468 U.S. 85, 106–07 (1984).
438 See Part IV.B.3.a.i–ii.
439 See Part IV.B.3.a.iii.
440 As the Commission stated in the NPRM, it
does not view reduced labor mobility as a harm in
and of itself. See NPRM at 3490. Instead, the
Commission finds that the empirical evidence
showing non-competes reduce labor mobility is
powerful evidence that non-competes do indeed
restrict labor market competition by inhibiting the
movement of workers between firms—and therefore
efficient matching between workers and firms.
441 NPRM at 3489.
442 Id.
443 Johnson, Lavetti, & Lipsitz, supra note 388.
This study was updated in 2023. The updated
employers, and employers in turn
compete for those labor services by
offering better pay, benefits, or other
elements of job satisfaction.434 A worker
who is seeking a better job—more pay,
better hours, better working conditions,
more enjoyable work, or whatever the
worker may be seeking—can enter the
labor market by looking for work.
Prospective employers can compete for
the worker’s services, and the worker’s
current employer may also compete by
seeking to retain the worker—e.g., by
offering a raise, promotion, or other
enticement. 435 Ultimately, the worker
chooses the job that best meets their
objectives, and the employer chooses
the worker who best meets theirs. In
general, the more jobs and the more
workers that are available—i.e., the
more competing options the worker and
employer each have—the stronger the
match will be.
Thus, a key component of a
competitive labor market is voluntary
labor mobility. Choice—the ability of
market participants to satisfy their
preferences where possible—facilitates
competition. In the labor market,
voluntary labor mobility reflects both
the choices or preferences of workers
and that of rival competitors.
However, non-competes introduce a
major friction that tends to impair the
competitive functioning of labor
markets. Non-competes inhibit the
efficient matching between workers and
employers via the competitive process
because, even if a competing employer
offers a better job and the worker wants
to accept that better job, the non-
compete will prevent the worker from
accepting it if the new job is within the
scope of the non-compete (or if the
worker is unsure or afraid it may be).
Meanwhile, the employer who would
like to hire the worker is prevented from
competing to attract that talent. The
result is less competition among
employers for the worker’s services and
less competition among workers for
available jobs. Since the worker is
prevented from taking many jobs that
would otherwise be available, the
worker may decide not to look for a job
at all. Or the worker may enter the labor
market but take a job in which they are
less productive, such as when a non-
compete forces a worker to leave their
field of expertise and training.
In this way, non-competes frustrate
competitive processes in labor markets.
In competitive markets, the
‘‘unrestrained interaction of competitive
forces’’ yields a variety of benefits such
as lower prices for consumers, better
wages and working conditions for
workers, and higher quality products.436
In contrast, when ‘‘[i]ndividual
competitors lose their freedom to
compete’’ in the labor market, the
importance of worker preference in
setting the level of wages and working
conditions is reduced, which is ‘‘not
consistent with [the] fundamental goal
of antitrust law.’’ 437 The restraint
imposed by non-competes on the
interaction of competing employers and
competing workers directly undercuts
the functioning of the competitive
process in determining wages and
working conditions. Accordingly, non-
competes facially harm the competitive
process and tend to negatively affect
competitive conditions in labor markets.
Evidence that non-competes have in fact
had actual detrimental impacts on
outcomes of the competitive process—
such as workers’ earnings, new business
formation, and innovation—
demonstrate that non-competes do in
fact harm competition.
The Commission notes that the actual
effect of any one individual non-
compete on the overall level of
competition in a particular labor market
may be marginal or impossible to
discern statistically. However, as
explained in Part I.B.2, non-competes
are prevalent across the U.S. labor force.
The empirical literature and other
record evidence discussed in this
section reflect that non-competes, in the
aggregate, negatively affect competitive
conditions in labor markets—resulting
in harm not only to workers subject to
non-competes and the employers
seeking to hire them, but also workers
and employers who lack non-competes.
The Commission finds that evidence
of the effects of non-competes on
workers’ labor mobility and earnings is
sufficient to support its finding that
non-competes tend to negatively affect
competitive conditions in labor
markets. 438 In addition, the Commission
believes that this finding is further
bolstered by strong qualitative evidence
that non-competes reduce job quality.439
The Commission’s findings relating to
labor mobility and earnings are
principally based on the empirical
evidence described in Parts IV.B.3.a.i
and ii. However, the comments provide
strong qualitative evidence that bolsters
these findings. Furthermore, the
Commission notes that the legal
standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions; empirical
evidence of actual harm is not necessary
to establish that conduct is an unfair
method of competition. In the case of
non-competes, however, there is
extensive empirical evidence, as well as
extensive corroborating public
comments, that non-competes
negatively affect competitive conditions
in labor markets.
i. Non-Competes Suppress Labor
Mobility
Evidence of Suppressed Labor Mobility
The Commission finds that non-
competes tend to negatively affect
competitive conditions in labor markets
by suppressing labor mobility, which
inhibits efficient matching between
workers and employers. The evidence
indicates that non-competes reduce
labor mobility. Several empirical studies
find that non-competes limit the
movement of workers between firms
and reduce the pool of labor available to
existing employers and potential
entrants.440
In the NPRM, the Commission
described the empirical research on
non-competes and labor mobility.441
The Commission stated that, across the
board, studies of non-competes and
labor mobility find decreased rates of
mobility, measured by job separations,
hiring rates, job-to-job mobility, implicit
mobility defined by job tenure, and
within-industry and between-industry
mobility.442 Based on that body of
empirical evidence and its review of the
record as a whole following the
comment period, the Commission finds
that non-competes reduce labor
mobility.
Several empirical studies find that
non-competes reduce labor mobility.
Some of these studies analyze the effects
of non-competes on labor mobility
across the labor force.
A study by Johnson, Lavetti, and
Lipsitz examined the impact on labor
mobility of all legal changes in the
enforceability of non-competes from
1991 to 2014 across the entire labor
force.443 This study finds that
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version of the study reports results slightly
differently than the 2022 version cited in the
NPRM, but the analysis and results themselves do
not meaningfully change. Accordingly, the update
to Johnson, Lavetti, and Lipsitz does not materially
affect the Commission’s analysis of the study.
444 Id. at 21.
445 Evan Starr, Consider This: Training, Wages,
and the Enforceability of Covenants Not to
Compete, 72 I.L.R. Rev. 783 (2019). The value is
calculated as 8.2% = 0.56/6.46, where 0.56 is the
reported impact on tenure and 6.46 is mean tenure
in the sample.
446 Evan Starr, J.J. Prescott, & Norman Bishara,
The Behavioral Effects of (Unenforceable)
Contracts, 36 J. L., Econ., & Org. 633, 652 (2020).
447 Id. at 664.
448 See Part IV.B.2.b.ii.
449 See Part IV.E (describing the final rule’s notice
requirement).
450 Jessica S. Jeffers, The Impact of Restricting
Labor Mobility on Corporate Investment and
Entrepreneurship, 37 Rev. Fin. Stud. 1 (2024). The
2024 version of Jeffers’ paper finds a decline in the
departure rate of 7% of the sample mean, and a
decline in the within-industry departure rate of
10%.
451 Natarajan Balasubramanian, Jin Woo Chang,
Mariko Sakakibara, Jagadeesh Sivadasan, & Evan
Starr, Locked In? The Enforceability of Covenants
Not to Compete and the Careers of High-Tech
Workers, 57 J. Hum. Res. S349, S351 (2022).
452 Lipsitz & Starr, supra note 72 at 157. 453 See Part IV.B.2.b.ii.
substantial decreases in non-compete
enforceability cause a significant
increase in job-to-job mobility in
industries that use non-competes at a
high rate.444
Evan Starr’s study comparing workers
in occupations that use non-competes at
a high versus low rate finds that a State
moving from mean enforceability to no
enforceability would cause a decrease in
employee tenure for workers in high-use
occupations of 8.2%, compared with
those in low-use occupations. Tenure in
this study serves as a proxy for mobility,
since tenure is the absence of prior
mobility.445 This use of a proxy means
the outcome of interest is not precisely
measured, and the study is less robust
than those that examine changes in legal
enforceability of non-competes. The
study’s findings are, however,
consistent with the other studies finding
that non-competes reduce labor
mobility.
Starr, Prescott, and Bishara’s study of
non-compete use likewise finds that
having a non-compete was associated
with a 35% decrease in the likelihood
that a worker would leave for a
competitor.446 While this finding is
based on the use of non-competes (and
is accordingly given less weight), the
authors also survey workers, who report
that the cause of their reduced mobility
is their non-compete. The study finds
that the mechanism underlying reduced
mobility is not whether non-competes
are legally enforceable or not, but rather,
it is the worker’s belief about the
likelihood that their employer would
seek to enforce a non-compete. Workers
who did not believe that employers
would enforce non-competes in court
were more likely to report they would
be willing to leave for a competitor.447
This study thus not only supports the
Commission’s finding that the use of
non-competes impacts labor mobility,
but also supports the Commission’s
finding that non-competes can exert an
in terrorem effect on labor mobility even
where they are unenforceable.448 This
supports the need to ensure that
workers are aware of the prohibition on
non-competes.449
Other studies analyze how non-
competes affect the labor mobility of
specific populations of workers. A study
by Jessica Jeffers finds that decreases in
non-compete enforceability were
associated with a substantial increase in
departure rates of workers, especially
for other employers in the same
industry. 450 This study’s sample is
limited to knowledge workers (i.e.,
workers whose primary asset is
applying their mental skills to tasks),
and the study uses a binary—rather than
continuous—measure of non-compete
enforceability. It does, however,
examine several changes in the
enforceability of non-competes to
generate its results, making it fairly
robust.
In addition, two recent studies
examined subgroups of the population
that were affected by State law changes
and find major effects on those
populations’ labor force mobility.
Balasubramanian et al., in 2022, focused
on Hawaii’s ban of non-competes for
high-tech workers and find that the ban
increased mobility by 12.5%.451 Lipsitz
and Starr, in 2022, focused on Oregon’s
ban of non-competes for hourly workers
and find that mobility increased by
17.3%. 452
Comments Pertaining to Labor Mobility
Evidence and Commission Responses
The Commission’s finding that non-
competes suppress labor mobility is
principally based on the empirical
evidence described in this Part
IV.B.3.a.i. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Many commenters agreed with the
Commission’s preliminary finding that
non-competes suppress labor mobility
and stated that this reduction in labor
mobility leads to less labor market
competition and poorer wages and
working conditions.
In response to the NPRM’s discussion
of this literature, some commenters
questioned the adequacy of the studies.
For example, one commenter stated that
the available research is either limited
to specific sectors of the economy,
limited geographically, or limited by
small sample sizes. Some commenters
claimed the empirical research lacked
appropriate counterfactuals.
The Commission acknowledges that
some of the studies focus on specific
industries or specific geographies, and
that the studies vary in the
methodologies the authors rely on.
These arguments do not undermine the
utility of the studies, particularly given
that they all find that non-competes
reduce labor mobility. Moreover, the
Commission finds that each of the
studies discussed in this Part IV.B.3.a.i
conduct their analyses against
appropriate counterfactuals. And while
there may be some variation in the
magnitude of the effect on mobility
among industries, several of the
empirical studies find economy-wide
effects. That evidence shows that non-
competes restrict the movement of
workers to a significant degree.
Additionally, the record is replete
with examples of commenters who
recounted personal stories that accord
with the empirical literature. The
Commission received comments from
several thousand individual workers
stating that their mobility is or has been
restricted by a non-compete. While
some commenters who opposed the
proposed rule disputed that non-
competes prevent workers from finding
other jobs in their industry, the
Commission finds the weight of the
evidence clearly demonstrates a
significant effect on labor mobility.
The Commission further notes that
many commenters’ submissions
substantiated its finding that non-
competes can have an in terrorem effect
on labor mobility even where they
would not ultimately be enforceable in
court. 453 As many commenters
explained, the high costs and
complexities of non-compete litigation
can have a chilling effect on workers
and thus reduce worker mobility
regardless of whether a court would
enforce the non-compete. For this
reason, the very existence of a non-
compete is likely to deter workers from
switching jobs or starting their own
business, even if it would ultimately not
be enforced. This supports the
Commission’s view that not only should
non-competes’ enforcement be
prohibited, it is also important to
provide a readily understandable,
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454 See Part IX.C. See also supra note 386
(explaining that studies assessing changes in
enforceability of non-competes likely underestimate
the effects of non-competes, given that workers may
refrain from seeking or accepting work or starting
a business even if the non-compete is likely
unenforceable, and explaining the importance of
notice to workers).
455 Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant’s distribution contracts
at issue ‘‘may well provide Atlantic with an
economical method of assuring efficient product
distribution among its dealers’’ and 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’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (following the
same reasoning as Atlantic Refining and finding
that the ‘‘anticompetitive tendencies of such a
system [were] clear’’); L.G. Balfour Co. v. FTC, 442
F.2d 1, 15 (7th Cir. 1971) (‘‘While it is relevant to
consider the advantages of a trade practice on
individual companies in the market, this cannot
excuse an otherwise illegal business practice.’’).
Justifications that are not cognizable under other
antitrust laws are also not cognizable under section
5.
456 NPRM at 3486–88.
457 Johnson, Lavetti & Lipsitz, supra note 388 at
37.
458 Id. at 3. The NPRM reported an increase in
average earnings of 3.3–13.9%. Those numbers
were taken from an earlier version of the Johnson,
Lavetti, and Lipsitz paper. The updated paper finds
an increase in average earnings of 3.2–14.2%. The
change does not materially affect the paper’s
findings or the Commission’s analysis of the paper.
459 Id. at 42. The 2023 version of the paper by
Johnson, Lavetti, and Lipsitz reports earnings
increases of 1.3% for White men, and increases
between 1.5–3.2% for workers in other
demographic groups, corresponding to a change in
non-compete enforceability equal to the difference
between the 75th and 25th percentiles. These
differences are statistically significant for Black
men and non-White, non-Black women.
460 Id. The 2023 version of the paper reports that
the earnings gaps would close by 1.5–3.8% given
a change in non-compete enforceability equal to the
difference between the 75th and 25th percentiles.
461 Starr, supra note 445 at 783.
462 Lipsitz & Starr, supra note 72 at 143.
463 Balsubramanian et al., supra note 451 at S349.
uniform Federal approach, and notice to
workers of unenforceability.454
Some commenters who generally
opposed the rule questioned the virtue
of labor mobility, arguing that when
colleagues leave, remaining workers can
experience increased workloads or harm
to their employer. However, this
comment ignores the benefits that will
also accrue from those same firms
having more ready access to incoming
potential colleagues as well. The
Commission also notes that unfair
conduct cannot be justified on the basis
that it provides the firm undertaking the
conduct with pecuniary benefits.455
Some commenters argued labor
mobility has generally been increasing
in the U.S. labor market. Setting aside
whether this is true, it is not probative
of whether the practice of using non-
competes reduces labor mobility or
negatively affects labor market
competition.
For these reasons, the empirical
evidence that non-competes suppress
labor mobility supports the
Commission’s finding that non-
competes tend to negatively affect
competitive conditions in labor markets.
ii. Non-Competes Suppress Workers’
Earnings
Evidence of Suppressed Earnings
The Commission finds that non-
competes suppress workers’ earnings as
a result, in part, of decreased labor
mobility, supporting the Commission’s
finding that non-competes tend to
negatively affect competitive conditions
in labor markets. As the NPRM
explained, many studies find increased
enforceability of non-competes reduces
earnings for workers across the labor
market generally; for specific types of
workers; and even for workers not
subject to non-competes.456 Several
major empirical studies of how changes
in non-compete enforceability affect
workers’ earnings show that increased
enforceability of non-competes
suppresses workers’ earnings.
A study conducted by Johnson,
Lavetti, and Lipsitz finds that non-
competes limit workers’ ability to
leverage favorable labor markets to
receive greater pay.457 The authors find
that when non-competes are more
enforceable, workers’ earnings are less
responsive to low unemployment rates,
which workers typically leverage to
negotiate pay raises. The authors
estimate that a nationwide ban on non-
competes would increase average
earnings by approximately 3–14%.458 Of
the studies of how non-competes affect
earnings, this study has the broadest
coverage. It spans the years 1991 to
2014, examines workers across the labor
force, and uses all known common law
and statutory changes in non-compete
enforceability to arrive at its estimates.
This study is very robust, as it satisfies
all of the principles outlined in Part
IV.A.2.
The same study also finds that non-
competes increase racial and gender
wage gaps by disproportionately
suppressing the wages of women and
non-White workers. While the study
estimates that earnings of White men
would increase substantially if a
nationwide ban on non-competes is
enacted, the comparable earnings
increase for workers in other
demographic groups would be up to
twice as large, depending on the
characteristics of the group.459 The
authors estimate that making non-
competes unenforceable would close
racial and gender wage gaps by
meaningful amounts, although the
mechanism behind this effect is
unclear. 460
Furthermore, a study conducted by
Evan Starr estimates that earnings fall
by about 4% where a State shifts its
policy from non-enforcement of non-
competes to a higher level of
enforceability. 461 This study covers a
sample which is broadly representative
of the entire labor force from 1996 to
2008. Unlike many of the other studies
described in this Part IV.B.3, this study
does not use a change in enforceability
of non-competes to analyze the impact
of enforceability. Rather, it examines the
differential impact of enforceability on
workers in occupations that use non-
competes at a high rate versus workers
in occupations that use non-competes at
a low rate. As described in Part IV.A.2,
studies comparing differential usage of
non-competes are generally less
informative than studies examining
changes in enforceability, although in
this particular study the comparison
between workers in high- and low-use
occupations may effectively control for
State-level differences between labor
markets, lending more credibility to the
estimates. More importantly, the
Commission notes that the study
corroborates the estimates from other
studies that rely on more credible
research designs, and therefore is
appropriately viewed as additional
evidence supporting the range of
estimated effects on wages across the
labor market.
Two additional studies analyze effects
of non-competes on earnings for specific
populations of workers. A study
conducted by Lipsitz and Starr focuses
on a natural experiment in Oregon,
where non-competes were banned for
hourly workers with relatively low
earnings. The study estimates that when
Oregon stopped enforcing non-competes
for hourly workers, their wages
increased by 2–3% relative to workers
in States that did not experience legal
changes. The study also finds a greater
effect (4.6%) on workers in occupations
that used non-competes at a relatively
high rate.462 The authors additionally
find that women’s earnings increased at
a higher rate, with earnings increases
after the non-compete ban of 3.5% for
women, versus 1.5% for men.
A study by Balasubramanian et al.
focuses on a natural experiment in
Hawaii, which banned non-competes for
high-tech workers in 2015. The study
finds earnings of new hires increased by
about 4% after the ban, relative to
earnings in other States without bans.463
In addition to this research, which
shows that increased enforceability of
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464 The NPRM cited an earlier version of Johnson,
Lavetti, and Lipsitz’s study that estimated that a
legal change in one State would have an effect on
the earnings of workers just across that State’s
border that was 87% as great as for workers in the
State in which the law was changed. NPRM at 3488.
The data cited in this final rule reflect an updated
version of this study.
465 Johnson, Lavetti, & Lipsitz, supra note 388 at
51. Seventy-six percent is calculated as the
coefficient on the donor State NCA score (¥.137)
divided by the coefficient on own State NCA score
(¥.181).
466 See U.S. Econ. Rsch. Serv., Commuting Zones
and Labor Market Areas, https://www.ers.usda.gov/
data-products/commuting-zones-and-labor-market-
areas/.
467 The Commission notes that the estimates in
the updated version of Johnson, Lavetti, and
Lipsitz’s study are slightly different, but
qualitatively similar to the earlier estimates noted
in the NPRM. The results remain statistically
significant and do not materially affect the
Commission’s analysis.
468 Johnson, Lavetti, & Lipsitz, supra note 388 at
30.
469 Evan Starr, Justin Frake, & Rajshree Agarwal,
Mobility Constraint Externalities, 30 Org. Sci. 961
(2019), online ahead of print at https://
pubsonline.informs.org/doi/abs/10.1287/
orsc.2018.1252 at 6.
470 Id. at 11.
471 Id. at 10.
472 Id. at 13.
473 Starr, Prescott, & Bishara supra note 68 at 75.
474 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 40. The percentage range is calculated
as e¥0.030¥1 and e¥0.076¥1, respectively.
475 Lavetti, Simon, & White, supra note 82 at
1051. The increase in earnings is calculated as
e0.131¥1.
476 Rothstein & Starr, supra note 77 at 1.
non-competes reduces workers’ earnings
across the labor market generally and for
specific types of workers, two empirical
studies find that increased
enforceability of non-competes
suppresses earnings even for workers
who are not subject to non-competes.
The Johnson, Lavetti, and Lipsitz
study, in a separate analysis, isolates the
impact of a State’s enforceability policy
on workers not directly affected by that
policy to demonstrate that non-
competes affect not just the workers
subject to non-competes, but the broader
labor market as well. The study finds
that increases in non-compete
enforceability in one State have negative
impacts on workers’ earnings in
bordering States, and that the effects are
nearly as large as the effects in the State
in which enforceability changed (but
taper off as the distance to the bordering
State increases).464 The study estimates
that a legal change in one State has an
effect on the earnings of workers just
across that State’s border that is 76% as
great as for workers in the State in
which the law was changed.465 In other
words, when one State changes its law
to be more permissive of non-competes
and itself experiences a decrease in
workers’ earnings of 4%, workers just
across the border (i.e., workers who
share a labor market) 466 would
experience decreased earnings of 3%.467
The authors conclude that, since the
workers across the border are not
directly affected by the law change (i.e.,
contracts that they have signed do not
become more or less enforceable), this
effect must be due to changes in the
local labor market.468 The researchers
based their analysis on where workers
worked, rather than their residence, so
the results are not tainted by workers
who worked in the State where the law
changed but lived across the border.
The second of these studies, a study
conducted by Starr, Frake, and Agarwal,
analyzed workers without non-competes
who worked in States and industries in
which non-competes were used at a
high rate.469 The authors find that,
when the rate of use of non-competes in
an industry in a State is higher, wages
are lower for workers who do not have
non-competes but who work in the same
State and industry. This study also finds
that this effect is stronger where non-
competes are more enforceable. 470
The authors show that the reduction
in earnings (and in labor mobility) is
due to a reduction in the rate of job
offers. Individuals in State/industry
combinations that use non-competes at
a high rate do not receive job offers as
frequently as individuals in State/
industry combinations in which non-
competes are not frequently used.471
The authors also demonstrate that
decreased mobility and earnings are not
due to increased job satisfaction (i.e., if
workers are more satisfied with their
jobs, they may be less likely to change
jobs, and more likely to accept lower
pay).472
Given some methodological
limitations of this study, the
Commission views it as supporting the
other evidence that non-competes have
negative spillover effects on earnings for
workers without non-competes and
reduce labor mobility. Namely, the
research design relies on cross-sectional
differences in enforceability of non-
competes. Although this study also
examines the use of non-competes, it
does not compare individuals who are
bound by non-competes to individuals
who are not. Instead, it examines the
rate of use across industries and States,
and therefore avoids the statistical
biases inherent in studies which
compare individuals with and without
non-competes. The authors also employ
tests to increase confidence in the
causal interpretation of these results,
but they cannot conclusively rule out
explanations outside of the scope of
their data.
Several additional studies examine
the association between non-compete
use—rather than enforceability—and
earnings. For the reasons described in
Part IV.A.2, the Commission finds that
these studies are less credible in
measuring how non-competes affect
earnings, and accordingly the
Commission gives these studies
minimal weight.
In one such study, Starr, Prescott, and
Bishara examine survey results and find
that non-compete use is associated with
6.6% to 11% higher earnings.473 In
another study, using Payscale.com data,
Balasubramanian, Starr, and Yamaguchi
find that individuals with non-competes
(regardless of what other post-
contractual restrictions they had) had
2.1–8.2% greater earnings than
individuals with no post-contractual
restrictions. However, this positive
association may be due to non-competes
often being bundled with NDAs. The
authors find that, compared with
individuals subject only to NDAs, non-
competes are associated with a 3.0–
7.3% decrease in earnings, though the
authors do not disentangle this effect
from the effects of non-solicitation and
non-recruitment provisions.474 Another
study, by Lavetti, Simon, and White,
finds that use of non-competes among
physicians is correlated with greater
earnings (by 14%) and greater earnings
growth. 475 Finally, Rothstein and Starr
find that greater use of non-competes is
correlated with higher earnings.476
Because these studies merely reflect
correlation and are unlikely to reflect
causation, the Commission gives them
little weight. The NPRM noted that the
Lavetti, Simon, and White physician
study partially mitigates this
methodological flaw by comparing
earnings effects in a high- versus a low-
enforceability State (Illinois versus
California). However, at best, this
comparison is a cross-sectional
comparison with a minimally small
number of States being compared. The
study does not consider changes in non-
compete enforceability over time.
Therefore, it is impossible to
disentangle underlying differences in
those two States from the effects of non-
compete enforceability. The
Commission accordingly gives this
study, like the other studies reliant on
comparisons of populations using non-
competes and not using non-competes,
little weight, though the shortcoming is
slightly mitigated in the case of this
study. While this study is specific to
physicians, the Commission nonetheless
finds that studies employing stronger
methodologies (especially studies of
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477 Balasubramanian et al., supra note 451.
478 Johnson, Lavetti, & Lipsitz, supra note 388.
479 Individual commenter, FTC–2023–0007–8067.
480 Individual commenter, FTC–2023–0007–0616.
481 Individual commenter, FTC–2023–0007–0651.
482 Individual commenter, FTC–2023–0007–0857.
Relative value units are a component of a
methodology that calculates earnings for some
healthcare workers.
483 Individual commenter, FTC–2023–0007–
11973.
484 Individual commenter, FTC–2023–0007–
11137.
485 Individual commenter, FTC–2023–0007–7238.
486 Individual commenter, FTC–2023–0007–2416.
487 See also Part IV.B.3.a.iii (summarizing
comments from workers and worker advocates
stating that non-competes increase illegal conduct
by employers and make it harder for workers to
report illegal conduct).
488 Dept. of the Treasury, Non-Compete Contracts:
Economic Effects and Policy Implications (March
2016) at 20.
489 See Part IV.A.2.
workers positioned similarly in the
income distribution 477 and studies
which broadly represent the U.S.
workforce 478) provide compelling
evidence that non-competes
significantly suppress wages.
Comments Pertaining to Suppressed
Earnings and Commission Responses
The Commission’s finding that non-
competes suppress earnings is
principally based on the empirical
evidence described in this Part
IV.B.3.a.ii. However, the comments
provide strong qualitative evidence that
bolsters this finding.
The Commission received thousands
of comments from workers describing
how non-competes suppressed their
earnings. These commenters spanned a
wide variety of industries, hailed from
across the U.S., and recounted a
common experience: a non-compete
prevented them from earning more.
Illustrative examples of these comments
include the following:
• I worked at a TV station. A corporation
owned us and forced me to sign a yearly non-
compete in order to remain in my position.
After a few years, I was offered a
management job with a much bigger title and
much more money. . . . However, the
corporation that owned us wouldn’t even talk
about letting me out of the non-compete.
They wouldn’t even discuss a settlement.
They totally refused to allow me to pursue
a much higher salary and a much higher
position, no matter what was offered. I was
forced to choose between staying in my
current job, and not being able to improve my
job or money, or being unemployed for 6
months.479
• I have been subject to a non-compete for
11 years in aggregate as a physician. Because
of my non-compete, I am unable to take a
position with another organization without
having to drive much farther outside of my
non-compete stipulated geographic
restrictions (which would add to the time
that I am away from my family, and costs
more in fuel and vehicle maintenance).
Because of my non-compete, I haven’t had a
raise in 6 years, because I can’t negotiate with
my employer because I have no bargaining
position to negotiate from if I don’t have
options of alternate employment within the
restrictions of my non-compete. 480
• I recently received two job offers with
better compensation, but I had my non-
compete reviewed by an attorney and learned
that it would open myself up to a significant
lawsuit and potential fines. I most likely have
to sit out a year and either work completely
outside my field where I have advanced
degrees or not work at all. Since I am the
primary breadwinner, this is not financially
possible for my family, so I have to stick with
my current employer who has not given me
a pay increase in 2 years.481
• I am a Certified Nurse Practitioner and
signed [a non-compete]. I live in Minnesota
and would be required to travel one hour one
way in order to fulfill [the] agreement. . . .
My employer increased my responsibilities
(on-call hours added) without additional pay
using vague language in my binding
agreement. I would have to hire a lawyer and
spend thousands of dollars to file a lawsuit
to get the agreement releasing me. . . . My
employer took advantage of my binding
agreement and did not increase my [Relative
Value Unit] rate in 5 years for my or other
Nurse Practitioners in our organization.482
• I was just starting out in my career when
I finally got a part time job in my field of
geology. Unfortunately, it didn’t last long and
I was let go. But because of a non compete
agreement I had to sign I couldn’t take
another job in my field even though I had a
good lead on one. Instead I had to take a job
as a waitress making less than minimum
wage.483
• I work for an IT company, low-level
employee just above minimum wage, and I
had to sign one of these to get the job even
though I don’t know any knowledge above
what someone could learn in 10 or 15 hours
on YouTube, yet I still had to sign this which
makes it so I can’t compete . . . if they
offered me better pay. 484
• I began working for my employer 10
years ago as a very young and inexperienced
single mother. I desperately needed a job that
could pay more than minimum wage, and I
eagerly accepted my position and non-
compete status. I have now been working at
almost the same rate of pay (as raises are not
readily given to us regardless of recessions or
cost of living increases)—for a DECADE. My
children are approaching college age, and I
will absolutely need a higher income to help
fund their educations.485
• I am in the laboratory medicine field and
was laid off from a job as an implementation
rep for an instrument vendor. Other
companies were the competition, and I was
held to a non-compete. This caused me to go
from a six figure salary with great benefits
back to the hospital making barely 60k as a
single mother with twins and no emergency
fund saved! I later went into the UV
disinfection field and developed a
tremendous amount of knowledge regarding
minimizing the spread of infections in
hospitals (pre-covid). After 5 years, I was laid
off and prevented from continuing in this
niche field that I had spent so much time
developing a skillset and statistics within. I
was only given a 2 week severance (along
with a reminder of legal action if I worked
for the competition). Companies use this as
a bully tactic! 486
In addition to receiving thousands of
comments recounting personal stories of
non-competes stymieing the
commenters’ ability to get a better-
paying job or a raise, many commenters
also described how, over the long term,
non-competes can lower wages and
diminish career prospects for workers
forced to sit out of the market or start
over in a new field. The Commission
also received numerous comments
stating that non-competes exacerbate
wage gaps based on gender and race,
including by decreasing
entrepreneurship and wages to a greater
extent for women and people of color
and by giving firms more power to
engage in wage discrimination.487
With respect to the empirical
literature, numerous commenters agreed
that there is a wealth of empirical
evidence to support the Commission’s
preliminary finding that, by inhibiting
efficient matching between workers and
employers, the use of non-competes is
harming workers by suppressing their
earnings. In addition to the literature
discussed in the NPRM and in this final
rule, some commenters pointed to a
2016 report from the Treasury
Department that examines the
correlation between non-compete
enforceability and both earnings and
earnings growth at the State level. The
Treasury report finds that a one-
standard-deviation increase in State-
level enforceability of non-competes is
correlated with 1.38% to 1.86% lower
earnings, which can be found in both
lower earnings upon starting a job and
lower earnings growth.488 The
Commission agrees with commenters
that this provides additional support for
the final rule. However, the Commission
gives less weight to cross-sectional
studies of enforceability, like the 2016
Treasury report, that examine the
correlation between non-compete
enforceability and earnings growth.489
The Commission relies more heavily on
the studies that find that non-competes
suppress earnings based on examining
natural experiments.
Some commenters opposing the rule
argued that studies of non-compete use,
including the studies described in this
Part IV.B.3.a.ii, show a positive
association between non-compete use
and earnings, especially when early
notice of non-competes is provided,
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490 See Figure 3; Johnson, Lavetti, & Lipsitz, supra
note 388 at 17.
491 See Part X.F.5.
492 See Treasury Labor Market Competition
Report at i.
493 Comment of Evan Starr, FTC–2023–0007–
20878.
494 These commenters were generally referring to
higher-wage workers, but not senior executives.
Comments that focused on senior executives are
addressed in Part IV.C.
495 Workers in the occupation Computer and
Information Research Scientists (SOC code 15–
1221) in the private sector had median earnings of
$156,620 in 2022, while Software Developers (SOC
code 15–1252) in the private sector had median
earnings of $127,870 in 2022. BLS, Occupational
Employment and Wage Statistics, https://
www.bls.gov/oes/tables.htm. These private-sector
data are from the May 2022 National industry-
specific and by ownership XLS table (see table
labeled ‘‘national_owner_M2022_dl’’).
496 Lipsitz & Starr, supra note 72 at 148.
497 Johnson, Lavetti, & Lipsitz, supra note 388 at
57.
while others cautioned against
interpreting these relationships as
causal. The Commission agrees with
commenters who caution against a
causal interpretation of these studies,
which are unable to determine whether
non-compete use causes differences in
earnings, whether earnings cause
differences in non-compete use, or
whether a third factor simultaneously
determines both, as discussed in Part
IV.A.2.
Some commenters opposing the rule
stated that the most comprehensive
study of the earnings effects of non-
competes (the Johnson, Lavetti, and
Lipsitz study described in this Part
IV.B.3.a.ii) examines only relatively
incremental changes in laws governing
the enforceability of non-competes (i.e.,
changes other than full bans), and
claimed that this study thus does not
shed light on the effects of a full
prohibition. In response, the
Commission notes that the analysis in
Johnson, Lavetti, and Lipsitz finds that
the effects of changes in non-compete
enforceability are broadly linear. This
means the effect of a change in
enforceability twice the size of another
change results in a change in workers’
earnings that is approximately twice as
large. As a result, the Commission finds
that it would be appropriate to
extrapolate from the effects of
incremental changes in non-compete
laws to the effects of prohibitions, at
least in the context of worker
earnings. 490 In other words, if
incremental changes in enforceability
lead to a certain level of earnings effects,
it is reasonable to presume—based on
the linearity of the relationship between
changes in enforceability and workers’
earnings—larger changes will lead to
larger effects.
That said, in the regulatory impact
analysis, the Commission does not
extrapolate from the incremental
changes observed in these studies with
respect to earnings effects.491 Instead,
the Commission follows a conservative
approach and assumes that the
prohibition in the final rule, even
though it is comprehensive, will have
the same effects on earnings as the
incremental legal changes observed in
these studies. Therefore, even if the
effects of changes in non-compete
enforceability are not linear, the
Commission’s analysis of the economic
impacts of the final rule is not
undermined because, if anything, it
underestimates the benefits of the rule.
A commenter argued that the Johnson,
Lavetti, and Lipsitz dataset is outdated
because it examines enforceability
between 1991 and 2014. In response, the
Commission finds that while the
enforceability measures contained in
that dataset do not perfectly reflect
current enforceability due to changes in
State law in the intervening several
years, the measures still reflect the
impacts of non-compete enforceability
on economic outcomes, and likely still
have strong predictive power.
Some commenters opposing the rule
asserted that the overall competitiveness
of U.S. labor markets undermines the
argument that workers suffer from non-
competes. In response, the Commission
notes that a range of factors have
weakened competition in labor
markets.492 In any event, the level of
competitiveness of a labor market does
not justify use of a practice that tends
to negatively affect competitive
conditions.
Some commenters opposing the rule
pointed to academic writings, including
a summary of the research by an FTC
economist writing in his personal
capacity in 2019, stating that there was
limited evidence on the effects of such
clauses. The Commission finds that
these writings are generally outdated
and disagrees with them. As the various
explanations of the empirical research
in Parts IV.B and IV.C illustrate, much
of the strongest evidence on the effects
of non-competes has been published in
recent years. The Commission notes
further that Evan Starr, one expert who
voiced concerns over the state of the
evidence in the past, submitted a
comment that was broadly supportive of
the interpretation of the evidence in the
NPRM and of the proposed rule.493
Other comments opposing the rule
stated that the heterogeneity of the
impact of a non-compete ban on
earnings undermined the Commission’s
preliminary finding regarding the effects
of non-competes on earnings. These
commenters asked whether the
population-wide average effects noted
in certain studies apply across the
workforce or only to certain individuals
(e.g., at certain points in the income
distribution), certain professions, or in
certain geographies (e.g., where local
labor markets tend to be more
concentrated). Another commenter
argued that if a ban on non-competes
drives up earnings for highly skilled
workers, wages might decrease for other
categories of workers.494
In response to these comments, the
Commission finds that, while estimates
of the magnitude of the effect of non-
competes on earnings vary to some
extent across groups of workers, the
effects are directionally and
qualitatively similar across groups. For
example, while Balasubramanian et al.
do not report a table with average
earnings for workers in their study,
workers in the high tech jobs studied
tend to be relatively highly paid, and
the study finds non-competes suppress
these workers’ earnings.495 On the lower
end of the earnings spectrum, Lipsitz
and Starr report average earnings of
$16.41 per hour for workers in their
study, which corresponds to annual
earnings of approximately $34,133 per
year (assuming 2,080 hours worked per
year), and their study likewise finds that
non-competes suppress the earnings of
these workers.496
Additionally, Johnson, Lavetti, and
Lipsitz’s study of workers across the
economy shows that, while college-
educated workers and workers in
occupations and industries in which
non-competes are used at a high rate
experience relatively larger adverse
effects on their earnings from non-
compete enforceability, the estimated
effect of increased enforceability on
other workers is still negative (albeit
statistically insignificant in this
study).497 In short, while these studies
do not estimate the magnitude of
negative effects for every subset of the
population, the finding of negative
effects on earnings is consistent across
dissimilar subsets of the population.
A commenter that opposed the NPRM
asserted that a categorical ban could
decrease wages for highly paid workers,
arguing that such workers could
negotiate higher wages in exchange for
the non-compete that they would lose
with a ban. This speculative assertion is
belied by the comment record, which
indicates that the highly paid, highly
skilled workers who are not senior
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498 See Parts IV.B.2.b.i and IV.C.1.
499 See, e.g., Balasubramanian et al., supra note
451.
500 Lipsitz & Starr, supra note 72, Online
Appendix at 18.
501 Norman D. Bishara, Fifty Ways to Leave Your
Employer: Relative Enforcement of Covenants Not
to Compete, Trends, and Implications for Employee
Mobility Policy, 13 U. Pa. J. Bus. L. 751 (2011);
Barnett & Sichelman, supra note 389.
502 Takuya Hiraiwa, Michael Lipsitz, & Evan
Starr, Do Firms Value Court Enforceability of
Noncompete Agreements? A Revealed Preference
Approach (2024), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4364674.
503 Balasubramanian et al., supra note 451.
504 Attenuation bias occurs when the independent
variable (here, whether a worker is covered by the
ban) is measured with error.
505 Matthew S. Johnson, Kurt Lavetti, & Michael
Lipsitz, The Labor Market Effects of Legal
Restrictions on Worker Mobility (2021) at 11;
https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=3455381.
506 Id. at 2.
executives are also unlikely to negotiate
non-competes. 498 It is also belied by
empirical evidence that non-competes
suppress earnings for highly paid
workers.499
Similarly, commenters opposing the
rule questioned whether earnings effects
merely result from firms hiring different
types of workers after changes in non-
compete enforceability (for example,
workers with different levels of
experience or education). In response to
these comments, the Commission first
notes that the studies find adverse
impacts across the labor force.
Therefore, even if a different mix of
types of workers were hired due to non-
compete enforceability, the evidence
shows workers’ wages are suppressed
across the labor force when non-
competes are more enforceable.
Additionally, the Commission notes that
the study by Lipsitz and Starr compares
the earnings growth of individual
workers before and after the legal
change in Oregon, showing that
earnings growth increased after the non-
compete ban. This provides some
evidence that the effects observed in the
literature are not simply due to
substitution, since individual workers’
earnings trajectories would not be
changed if all the effects were simply
due to firms substituting one type of
worker for another. 500
Some commenters opposing the rule
asserted that enforceability indices are
likely measured with substantial error.
These commenters argue that the
indices are based on qualitative analyses
of State laws and not data on how
frequently non-competes are actually
enforced or the results of these
enforcement cases. The Commission
finds the enforceability indices are
sufficiently reliable, because they are
generated through careful analysis of
State law that takes into account
variation in legal enforceability along
multiple dimensions. 501 Moreover, a
2024 study using enforcement outcome
data finds that a non-compete ban in
Washington increased earnings,
consistent with the studies using
enforceability indices. 502
Some commenters opposing the rule
asserted that Hawaii’s prohibition of
non-competes in the technology
industry may not have covered the
workers claimed (in particular, omitting
workers in the broadcast industry).503
These commenters also asserted that
Hawaii simultaneously banned non-
solicitation clauses.
The Commission finds the study of
Hawaii’s non-compete ban to be
informative, despite these limitations.
First, any workers omitted from
coverage by the statute, but considered
as affected in the study, would lead to
a phenomenon known as ‘‘attenuation
bias,’’ which causes estimated effects to
underestimate the true impact.504
Second, the non-solicitation agreements
banned by the Hawaii law were non-
solicitation of coworker agreements
(otherwise known as non-recruitment
agreements)—agreements under which
workers are barred from recruiting
former coworkers, as opposed to non-
solicitation of client agreements, under
which workers are barred from
soliciting former clients. While non-
solicitation of coworker agreements may
have a marginal impact on workers’
earnings (e.g., in situations in which
workers only find out about job
opportunities via past coworkers), the
Commission does not find it likely that
they have a major effect on workers’
earnings. They may prevent some
workers from hearing about some job
opportunities, but unlike non-competes,
they do not prevent workers from taking
those opportunities. And unlike non-
solicitation of client agreements, they do
not frustrate workers’ ability to build up
a client base after moving to a new
employer. The Commission therefore
finds it likely that much of the impact
identified in the study of the Hawaii law
is due to non-competes. The
Commission also notes that the Hawaii
study is directionally consistent with
the results from other more robust
studies that use different methodologies.
Some commenters opposing the rule
argued that the impact of Oregon
banning non-competes for low-wage
workers may have been limited because
the law did not affect existing non-
competes; because non-competes were
already disfavored in Oregon before the
law change; and because the law
included multiple carve-outs.
Commenters also argued the negative
effects on earnings found in Oregon may
have been confounded by the Great
Recession.
The Commission finds that those
concerns are not a compelling reason to
discard the study. The study carefully
examines multiple comparisons of
workers within Oregon and across
States. The results therefore cannot be
explained by a differential response of
Oregon to the Great Recession, a
differential response of hourly workers
to the Great Recession, or even a
differential response of hourly workers
in Oregon to the Great Recession. The
Commission also does not believe that
the study is undermined because the
law did not affect existing non-competes
and included multiple carve-outs, or
because non-competes were disfavored
in Oregon before the law changed.
These factors likely mitigated the
magnitude of the law’s negative effect
on earnings, rather than exaggerating it.
Some commenters opposing the rule
argued that Johnson, Lavetti, and
Lipsitz 505 claim that ‘‘[t]he overall effect
of [non-compete] enforceability on
earnings is ambiguous,’’ and that this
undermines the Commission’s
preliminary findings. However, these
commenters take this quote out of
context. The authors were referring to a
theoretical model, not to the empirical
work in their paper. When economists
do empirical research, they often begin
by constructing a theoretical model and
describing what the theory would
predict; they then describe their
empirical findings, which may show a
different result. The authors described
that it is unclear, theoretically, whether
non-compete enforceability would
increase or decrease earnings. However,
the empirical findings of the study were
clear: as the authors stated, ‘‘We find
that increases in [non-compete]
enforceability decrease workers’
earnings.’’ 506 The fact that the authors
described the theoretical results of a
hypothesized model as ambiguous does
not undermine the fact that their study
had clear empirical results.
Some healthcare businesses and trade
organizations opposing the rule argued
that, without non-competes, physician
shortages would increase physicians’
wages beyond what the commenters
view as fair. The commenters provided
no empirical evidence to support these
assertions, and the Commission is
unaware of any such evidence. Contrary
to commenters’ claim that the rule
would increase physicians’ earnings
beyond a ‘‘fair’’ level, the weight of the
evidence indicates that the final rule
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507 See Part IV.B.3.b.iv for a more detailed
summary of these comments.
508 NPRM at 3504.
509 Treasury Labor Market Competition Report at
i.
510 Individual commenter, FTC–2023–0007–
12813.
511 Individual commenter, FTC–2023–0007–4989.
will lead to fairer wages by prohibiting
a practice that suppresses workers’
earnings by preventing competition; that
is, the final rule will simply help ensure
that wages are determined via fair
competition. The Commission also
notes that it received a large number of
comments from physicians and other
healthcare workers stating that non-
competes exacerbate physician
shortages. 507
One commenter opposing the rule
criticized the analysis in the Johnson,
Lavetti, and Lipsitz study, suggesting
that data on where individuals live are
not necessarily indicative of where
individuals work, and that identified
spillover effects may simply be due to
cross-border commuters. The
Commission disagrees, because, as
noted, the study considers whether the
workers are subject to enforceable non-
competes based on their work location.
A commenter also argued that if the
absence of non-competes helped
workers, one would expect California,
North Dakota, and Oklahoma to have
the highest median incomes among all
the States. The Commission believes
this expectation is inapt. Given the
evidence that non-competes suppress
workers’ earnings, earnings in
California, North Dakota, and Oklahoma
are likely higher than they would be if
non-competes were enforceable, but
there is no reason to expect they would
necessarily be higher than all other
States.
One commenter opposing the rule
asserted that the Commission’s citation
of one study in the NPRM was
insufficient to show that non-competes
are directly tied to discriminatory
behavior by employers, or that non-
competes worsen racial or gender wage
gaps. The Commission does not rest its
finding in this final rule that non-
competes tend to negatively affect
competitive conditions on findings of
increased discriminatory behavior or
exacerbation of gender and wage gaps.
The Commission merely notes that there
are two empirical studies—described
under ‘‘Evidence of suppressed
earnings’’—that find that non-competes
do, in fact, exacerbate earnings gaps.
One commenter opposing the rule
stated that closing racial and gender
wage gaps may harm racial minorities
and women if their wages were to fall
in absolute terms. Another commenter
argued that the proposed rule would
reduce capital investment and output,
which would decrease White male
workers’ wages. In response, the
Commission notes that the study by
Johnson, Lavetti, and Lipsitz shows that
the impact of a decrease in non-compete
enforceability on earnings is positive for
workers in each of these groups.
The empirical evidence makes clear
that, by restricting a worker’s ability to
leave their current job to work for a
competitor or to start a competing
business, non-competes reduce workers’
earnings, supporting the Commission’s
finding that non-competes tend to
negatively affect competitive conditions
in labor markets.
iii. Non-Competes Reduce Job Quality
In the NPRM, the Commission
recognized that non-competes may also
negatively affect working conditions,
i.e., job quality,508 although this had not
been studied in the empirical literature
(likely because it is harder to quantify).
Competition in labor markets yields not
only higher earnings for workers, but
also better working conditions.509 In a
well-functioning labor market, workers
who are subject to poor working
conditions can offer their labor services
to an employer with better working
conditions. Such workers can also start
businesses, giving them more control
over working conditions. Non-competes
frustrate this competitive process by
restricting a worker’s ability to switch
jobs or start a business. Furthermore, in
a well-functioning labor market,
employers compete to retain their
workers by improving working
conditions. Where workers are locked
into a job—because their alternative
employment options are restricted—
those competitive forces are diminished
and working conditions can suffer. The
Commission accordingly sought
comment on this topic.
In response, thousands of workers
with non-competes described how, by
frustrating these competitive processes,
non-competes prevent them from
escaping poor working conditions or
demanding better working conditions.
Based on the large number of comments
the Commission received on this issue
and the wide variety of negative and
severe impacts commenters described,
the Commission finds that, in addition
to suppressing earnings, non-competes
negatively affect working conditions for
a significant number of workers.
The Commission finds that the effects
of non-competes on labor mobility and
workers’ earnings are sufficient,
standing alone, to support its finding
that non-competes with workers other
than senior executives tend to
negatively affect competitive conditions
in labor markets. However, the
Commission believes its finding that
non-competes are an unfair method of
competition is further bolstered by this
strong qualitative evidence related to
non-competes degrading working
conditions.
Numerous workers and worker
advocacy organizations described how
non-competes compel workers to
endure jobs with poor working
conditions. Illustrative examples of
these comments include the following:
• In March 2018, I was fired from a job in
local news for refusing to go into an unsafe
situation. I’d recently received a letter from
a man threatening to kidnap me. When my
boss decided he would still send me out
alone in the field, I fought him on it, lost, and
was terminated. Three weeks later, I found
out I was pregnant. Unable to work in my
field because of a noncompete enforced even
AFTER I was terminated, I had no choice but
to apply for WIC and government assistance,
and work at a retail job making half my
previous salary. I wanted to work. I wanted
money to support my child. I wanted money
to move closer to home, to escape a domestic
violence situation. My noncompete kept me
in a horrible spot, and nearly cost me my
life.510
• I started my first job as a Nurse
Practitioner in 2019. All positions I
interviewed for required a non-
compete. . . . In my case, I work for an
employer that is hostile, discriminated
against me during pregnancy and maternity
leave and has raised his voice at me in
meetings. He told me I was lucky to even
have a job after becoming pregnant. I learned
after starting at the practice that he has
shown this pattern before with previous
employees. I say this because all of these
above-mentioned reasons are why I have the
right to want to quit my job and move on.
I desperately want to leave and start another
job but I can’t because of the non compete.
I feel like a prisoner to my job. I feel
depressed in my work conditions and I feel
like I have no way out. 511
• I’m a barber and violated a non-compete
about 6 months ago. . . . I worked for my
previous employer for two years in a toxic
environment. I told my employer how work
was affecting my home life on more than one
occasion and she did nothing. . . . How was
I to know that I would be working in a toxic
environment when I applied? So ultimately,
I decided in order to be happy and make a
living wage, I’d have no choice but to violate
my non-compete. She came after me in no
time flat. Now I’m paying legal fees and at
risk of going to court and losing my job for
6 more months. . . . [I]f I’m working in poor
working conditions, I should be able to work
where I please. For two years, my job and
employer affected my mental health. I chose
to take anti-depressants after things got bad
at work, upped my dosage twice as work
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512 Individual commenter, FTC–2023–0007–3323.
513 Individual commenter, FTC–2023–0007–3955.
514 Individual commenter, FTC–2023–0007–1252.
515 For example, the National Women’s Law
Center, which operates and administers the TIME’S
UP Legal Defense Fund, reported that among
individuals who contacted the Fund to request legal
assistance related to sexual harassment in the
workplace, 72% reported facing retaliation, and,
among those, 36% had been fired. Comment of Nat’l
Women’s L. Ctr., FTC–2023–0007–20297 at 5 (citing
Jasmine Tucker & Jennifer Mondino, Coming
Forward: Key Trends and Data from the TIME’S UP
Legal Defense Fund, 4 (Oct. 2020), https://nwlc.org/
wp-content/uploads/2020/10/NWLC-Intake-Report_
FINAL_2020-10-13.pdf).
became progressively worse and since I’ve
left, I’ve stopped taking my medication.512
• I am a commissioned employee in the
mortgage world, and I had a non-compete
with my former company in Ohio. Near the
end of my time at this company, they merged
with another company and put the new
company in charge of the sales staff. It was
miserable. We started having issues, even
with having basic supplies, and it went from
just harming me to harming my ability to get
business complete, which harms the
consumer. I left and I was sued for a three
year period. . . . I really do not feel that
[non-competes] should be allowed. You are
stuck at employers and they can treat you in
any manner that they please because they
know that they can make your life a living
hell if you leave them.513
• Like many new graduates in the medical
field, I signed on with a company that made
numerous empty promises. . . . What I was
not prepared for, was the company’s strategic
increase in facilities in which I was to
perform services under this contract. In the
short span of 2 years, I did
neurophysiological monitoring for 24
facilities . . . . When working conditions fell
apart regardless of my requests for adequate
sleep following 36 hours straight of working
on call at my designated stroke hospital, time
for meals or breaks within 18+ hour work
days, and a reasonable travel distance within
the area the company demanded I relocate to,
I was met with threats from HR regarding my
non-compete if I were to leave. . . . Working
conditions became so intense, I was placed
on migraine medications at the
recommendations of my doctor and required
three separate trips in the ER for medical
conditions related to stress, inability to eat or
drink while tied within tens of hours long
surgeries . . . . Again I was met with threats
from HR and now their legal team. 514
Many commenters stated that non-
competes harm working conditions for
lower-wage workers. However, there
were many commenters in higher-wage
jobs who also stated that non-competes
harmed their working conditions. For
example, numerous physicians
explained that they were trapped in jobs
with poor working conditions because
of non-competes. Many of these
physicians described how non-competes
accelerate burnout in their profession by
making it harder for workers to escape
bad working conditions or demand
better working conditions. Many
commenters recounted how they left
poor work environments but non-
competes harmed them by forcing them
to leave their field, move out of the area
where they lived, or spend time and
money defending themselves from legal
action. Many commenters argued that
prohibiting non-competes would
increase workers’ bargaining power and
in turn incentivize employers to provide
better work environments.
Workers in both high-wage and low-
wage professions, as well as worker
advocacy groups, stated that by
diminishing workers’ competitive
alternatives, non-competes keep
workers trapped in jobs where they
experience dangerous, abusive, or toxic
conditions; discrimination; sexual
harassment; and other forms of
harassment. These commenters also
described how non-competes trap some
workers in jobs where their employer
commits wage and hour violations, such
as wage theft, as employers that use
non-competes can insulate themselves
from the free and fair functioning of
competitive markets and are thus more
likely to be able to steal worker wages
with impunity. Several commenters said
they were unable to receive benefits
because a non-compete rendered them
unable to switch to a job with better
benefits or rendered them unable to
leave their job when their employer took
their benefits away. A professional
membership network for survivors of
human trafficking explained that
traffickers masquerading as legitimate
businesses use non-competes to prevent
trafficking victims from leaving.
Some workers and advocacy
organizations stated that non-competes
increase the potential for harm from
retaliation. These commenters stated
that restricting a worker’s employment
opportunities makes it even harder for
workers to find new jobs after
experiencing retaliation. These
commenters argued that this
discourages workers from reporting
fraud, harassment, discrimination, or
labor violations. A labor union
commented that, by making it harder for
workers to find new jobs, non-competes
can deter unionization and chill
activities protected by the National
Labor Relations Act, including activities
to address unsafe, unfair, or
unsatisfactory working conditions.
According to a trade organization of
attorneys, whistleblower protections
may come too late for a fired
whistleblower who cannot obtain
another job because of a non-compete.
Several commenters provided survey or
case evidence showing that workers
who report sexual harassment, wage
theft, or poor working conditions are
frequently retaliated against, including
by being fired.515 These commenters
stated that, because non-competes make
it harder for these workers to find new
jobs, non-competes decrease the
likelihood that workers report these
kinds of harms.
Many workers described how, by
limiting their ability to get out of
harmful workplace environments, non-
competes contributed to stress-related
physical and mental health problems.
Many commenters, particularly in the
healthcare profession, stated that
suicide is a major problem in their
profession and described non-competes
as one of the stressors, because non-
competes make it harder to leave jobs
with unsustainable demands, leaving
workers feeling trapped.
While thousands of commenters
described, often in personal terms, how
non-competes have negatively affected
their working conditions, the
Commission received few comments
from workers or worker advocates
stating that non-competes improved
working conditions. The few comments
received stated that workers who remain
with an employer can be harmed by
departing and competing colleagues, via
increased workloads or harm to their
employer.
Taken together, these comments
provide strong qualitative evidence that
non-competes degrade working
conditions, which supports the
Commission’s finding that non-
competes tend to negatively affect
competition in labor markets.
b. Non-Competes Tend to Negatively
Affect Competitive Conditions in
Product and Service Markets
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes tend to negatively affect
competitive conditions in markets for
products and services by inhibiting new
business formation and innovation.
New businesses are formed when new
firms are founded by entrepreneurs or
spun off from existing firms. New
business formation increases
competition by reducing concentration,
bringing new ideas to market, and
forcing incumbent firms to respond to
new firms’ ideas instead of stagnating.
New businesses disproportionately
create new jobs and are, as a group,
more resilient to economic
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516 See, e.g., The Importance of Young Firms for
Economic Growth, Policy Brief, Ewing Marion
Kauffman Foundation (Sept. 24, 2015).
517 Aaron K. Chatterji, Spawned With a Silver
Spoon? Entrepreneurial Performance and
Innovation in the Medical Device Industry, 30
Strategic Mgmt. J. 185 (2009).
518 See, e.g., Evan Starr, Natarajan
Balasubramanian, & Mariko Sakakibara, Screening
Spinouts? How Noncompete Enforceability Affects
the Creation, Growth, and Survival of New Firms,
64 Mgmt. Sci. 552 (2018).
519 See, e.g., Shi, supra note 84.
520 See Part IV.B.3.b.i.
521 See Part IV.B.3.a. While the Commission
focuses on the most direct negative effects on
competition in product and service markets in this
Part IV.B.3.b, inefficient matching between workers
and firms may have additional negative effects,
including on output.
522 See Part IV.B.3.a.i.
523 Jeffers, supra note at 450. The 2024 version of
Jeffers’ study reports a 7% impact.
524 Matt Marx, Employee Non-Compete
Agreements, Gender, and Entrepreneurship, 33 Org.
Sci. 1756 (2022).
525 Id. at 1763.
526 Matthew S. Johnson, Michael Lipsitz, & Alison
Pei, Innovation and the Enforceability of Non-
Compete Agreements, Nat’l. Bur. Of Econ. Rsch.
(2023) at 36.
527 Ege Can and Frank M. Fossen, The
Enforceability of Non-Compete Agreements and
Different Types of Entrepreneurship: Evidence From
Utah and Massachusetts, 11 J. of Entrepreneurship
and Pub. Pol. 223 (2022).
downturns. 516 With respect to spinoffs,
research shows that spinoffs within the
same industry are highly successful
relative to other entrepreneurial
ventures.517
Non-competes, however, tend to
negatively affect competitive conditions
in product and service markets by
inhibiting new business formation in
two ways. First, since many new
businesses are formed by workers who
leave their jobs to start firms in the same
industry, non-competes reduce the
number of new businesses that are
formed in the first place.518 Second,
non-competes deter potential
entrepreneurs from starting or spinning
off new businesses—and firms from
expanding their businesses—by locking
up talented workers.519 Non-competes
thus create substantial barriers to
potential new entrants into markets and
also stymie competitors’ ability to grow
by making it difficult for those entrants
to find skilled workers.
Innovation refers to the process by
which new ideas result in new products
or services or improvements to existing
products or services. Innovation may
directly improve economic outcomes by
increasing product quality or decreasing
prices, and innovation by one firm may
also prompt other firms to compete and
improve their own products and
services. However, non-competes tend
to negatively affect competitive
conditions in product and service
markets by inhibiting innovation.
Non-competes tend to reduce
innovation in three ways. First, non-
competes prevent workers from starting
businesses in which they can pursue
innovative new ideas.520 Second, non-
competes inhibit efficient matching
between workers and firms.521 Where
workers are less able to match with jobs
that maximize their talents, employers’
ability to innovate is constrained. Third,
and relatedly, non-competes reduce the
movement of workers between firms.522
This decreases knowledge flow between
firms, which limits the cross-pollination
of innovative ideas.
As described in Parts IV.B.3.b.i and ii,
the Commission finds that the effects of
non-competes on new business
formation and innovation are sufficient
to support its finding that non-competes
tend to negatively affect competitive
conditions in product and service
markets. In addition, as described in
Parts IV.B.3.b.iii and iv, the Commission
believes this finding is further bolstered
by evidence that non-competes increase
concentration and consumer prices, as
well as evidence that non-competes
reduce product quality.
The Commission’s findings relating to
new business formation and innovation
are principally based on the empirical
evidence described in Parts IV.B.3.b.i
and ii. However, the comments provide
strong qualitative evidence that bolsters
these findings. Furthermore, the
Commission notes that the legal
standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions; empirical
evidence of actual harm is not necessary
to establish that conduct is an unfair
method of competition. In the case of
non-competes, however, there is
extensive empirical evidence, as well as
extensive corroborating public
comments, that non-competes
negatively affect competitive conditions
in product and service markets.
i. Non-Competes Inhibit New Business
Formation
Evidence of Inhibited New Business
Formation
The Commission finds that non-
competes tend to negatively affect
competitive conditions in product and
service markets by inhibiting new
business formation. The weight of the
empirical evidence establishes that
when non-competes become more
enforceable, the rate of new business
formation (i.e., the number of new
businesses formed) declines.
Several empirical studies assess the
effects of non-competes on the rate of
new business formation. A study
conducted by Jessica Jeffers examines
several State law changes in the
technology sector and the professional,
scientific, and technical services sector
and finds a decline in new firm entry
when non-competes become more
enforceable. Jeffers finds that as non-
competes became more enforceable, the
entry rate of new firms decreases
substantially.523 Jeffers’ study uses
several changes in non-compete
enforceability that are measured in a
binary fashion. While this study
therefore does not satisfy all the
principles outlined in Part IV.A.2, it
satisfies most of them and is accordingly
quite robust and weighted highly.
Another study, conducted by Matt
Marx, examines the impact of several
changes in non-compete enforceability
between 1991 and 2014 on new
business formation, and likewise finds a
negative effect of non-competes on new
business formation.524 Marx finds that,
when non-competes become more
enforceable, men are less likely to found
a rival startup after leaving their
employer, that women are even less
likely to do so (15% less likely than
men), and that the difference is
statistically significant. 525 This study
therefore supports both that non-
competes inhibit new business
formation and that non-competes tend
to have more negative impacts for
women than for men. Marx uses several
changes in non-compete enforceability
measured in a continuous fashion. The
study therefore satisfies the principles
outlined in Part IV.A.2 and is weighted
highly.
In addition, Johnson, Lipsitz, and Pei
analyze the extent to which non-
compete enforceability affects the rate of
firm entry in high-tech industries. They
find that an average increase in non-
compete enforceability decreases the
establishment entry rate by 3.2%.526
Outside of examining only innovative
industries, this study’s methodology is
otherwise strong, and the study is
therefore weighted highly. While this
study uses multiple changes in a
granular measure of non-compete
enforceability, a quite robust
methodology, the study is limited to
high-tech industries.
In addition, a study conducted by Can
and Fossen indicates that decreases in
enforceability of non-competes in Utah
and Massachusetts increased
entrepreneurship among low-wage
workers.527 Can and Fossen examine
just two changes in non-compete
enforceability, measured in a binary
fashion, and the study is therefore given
slightly less weight than studies which
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38390 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
528 Benjamin Glasner, The Effects of Noncompete
Agreement Reforms on Business Formation: A
Comparison of Hawaii and Oregon, Econ.
Innovation Group White Paper (2023), https://
eig.org/noncompetes-research-note/.
529 Toby E. Stuart & Olav Sorenson, Liquidity
Events and the Geographic Distribution of
Entrepreneurial Activity, 48 Admin. Sci. Q. 175
(2003).
530 Starr, Balasubramanian, & Sakakibara, supra
note 518 at 561. 32.5% is calculated as 0.0013/
0.004, where 0.0013 is the coefficient reported in
Table 2, Column 6, and 0.004 is the mean WSO
entry rate reported in Table 1 for ‘‘nonlaw’’ firms.
531 For reviews of the literature, see, e.g., Steven
Klepper, Spinoffs: A Review and Synthesis, 6
European Mgmt. Rev. 159 (2009) and April Franco,
Employee Entrepreneurship: Recent Research and
Future Directions, in Handbook of Entrepreneurship
Research 81 (2005).
532 See Am. Bar Ass’n, Model Rule 5.6, https://
www.americanbar.org/groups/professional_
responsibility/publications/model_rules_of_
professional_conduct/rule_5_6_restrictions_on_
rights_to_practice/.
533 Salome´ Baslandze, Entrepreneurship Through
Employee Mobility, Innovation, and Growth, Fed.
Res. Bank of Atlanta Working Paper No. 2022–10
(2022), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4277191.
534 Samila & Sorenson find that a 1% increase in
venture capital funding increased the number of
new firms by 0.8% when non-competes were
enforceable, and by 2.3% when non-competes were
not enforceable. Sampsa Samila & Olav Sorenson,
Noncompete Covenants: Incentives to Innovate or
Impediments to Growth, 57 Mgmt. Sci. 425, 432
(2011). The values are calculated as 0.8% =
e 0.00755¥1 and 2.3% = e0.00755 + 0.0155¥1,
respectively.
535 Gerald A. Carlino, Do Non-Compete
Covenants Influence State Startup Activity?
Evidence from the Michigan Experiment, Fed. Res.
Bank of Phila. Working Paper No. 21–26 at 16
(2021).
536 Hyo Kang & Lee Fleming, Non-Competes,
Business Dynamism, and Concentration: Evidence
From a Florida Case Study, 29 J. Econ. & Mgmt.
Strategy 663, 673 (2020).
537 Id. at 674. The value is calculated as 15.8%
= e 0.1468¥1.
538 In the NPRM, the Commission stated that the
evidence relating to the effects of non-competes on
job creation was inconclusive. However, in the final
rule, the Commission does not make a separate
finding that non-competes reduce job creation.
examine more changes or use a more
granular measure of enforceability. The
study corroborates the results of studies
using these stronger methodologies.
Furthermore, a study conducted by
Benjamin Glasner focused on high-tech
industries finds that technology workers
increased entrepreneurial activity in
Hawaii after non-competes were
restricted, but finds no effect on
entrepreneurial activity from Oregon’s
restriction on non-competes with low-
wage workers.528 Similar to the study by
Can and Fossen, this study by Glasner
uses two changes in non-compete
enforceability measured in a binary
fashion. Additionally, a study published
by Stuart and Sorenson shows that
increased enforceability of non-
competes decreases the amount by
which firm acquisitions and IPOs
induce additional local business
formation. 529 This study uses cross-
sectional variation in non-compete
enforceability measured in a binary
fashion, and studying the amount by
which firm acquisitions and IPOs
induce additional local business
formation does not cover all
entrepreneurship. These studies are
thus given more limited weight, but
generally are in line with other evidence
that non-competes reduce new business
formation and innovation.
Additionally, a study conducted by
Starr, Balasubramanian, and Sakakibara
analyzes the effect of non-compete
enforceability on spinouts (i.e., when a
firm creates a new business by splitting
off part of its existing business). The
authors find that, when non-compete
enforceability increases by one standard
deviation, the rate of spinouts within
the same industry decreases by 32.5%—
a major decrease in new business
formation.530 Research shows that
spinouts within the same industry are
highly successful, on average, when
compared with typical entrepreneurial
ventures.531 This study uses cross-
sectional differences in non-compete
enforceability, measured in a
continuous fashion, though it attempts
to avoid problems related to the use of
cross-sectional differences in non-
compete enforceability by using law
firms—which likely do not use non-
competes due to ethical limits in the
legal profession 532—as a control group.
The Commission therefore gives this
study somewhat less weight than
studies of changes in non-compete
enforceability, though the findings
corroborate the findings of the studies
by Jeffers and Marx.
In addition, a study by Salome´
Baslandze shows that non-competes
reduce new business formation, finding
that greater non-compete enforceability
inhibits entry by spinouts founded by
former employees of existing firms. 533
Baslandze notes that spinouts tend to
innovate more and are relatively higher
quality than other new firms. This study
examines changes in non-compete
enforceability on a continuous measure
but assumes that changes over a 19-year
period occur smoothly over time instead
of identifying exactly when the legal
changes were made. While this study
uses changes in non-compete
enforceability and corroborates the
findings of the aforementioned studies
on new business formation, the
assumption regarding the timing of
changes yields an imprecise measure of
non-compete enforceability over time.
The Commission therefore gives this
study somewhat less weight than
studies which precisely identify the
timing of changes in non-compete
enforceability.
Finally, in a 2011 study, Samila and
Sorenson find that when non-competes
are more enforceable, rates of
entrepreneurship, patenting, and
employment growth slow. They find
that an increase in venture capital
funding creates three times as many
new firms where non-competes are
unenforceable, compared to where non-
competes are enforceable.534 This study
uses cross-sectional variation in non-
compete enforceability along two
dimensions, both of which are measured
in a binary fashion. Due to this
measurement, the Commission gives
this study less weight, though its results
corroborate the findings of the other
studies on new business formation.
The Commission gives minimal
weight to two additional studies. One of
these estimates the job creation rate at
startups increased by 7.8% when
Michigan increased non-compete
enforceability. 535 However, the
Commission places less weight on this
study than the studies discussed
previously because it examines only one
legal change in one State and because
the change to non-compete
enforceability was accompanied by
several other simultaneous changes to
Michigan’s antitrust laws. Thus, it is not
possible to isolate the effect of the
change in non-compete enforceability
standing alone.
The other study finds mixed effects of
non-compete enforceability on the entry
of businesses into Florida. The study
examines a legal change in Florida
which made non-competes more
enforceable. The authors find larger
businesses entered the State more
frequently (by 8.5%) but smaller
businesses entered less frequently (by
5.6%) following the change.536
Similarly, Kang and Fleming find that
employment at large businesses rose by
15.8% following the change, while
employment at smaller businesses
effectively did not change. 537 This study
examines a single change in non-
compete enforceability. However, the
Commission gives this study minimal
weight because the study does not
examine new business formation
specifically; instead, it assesses the
number of ‘‘business entries,’’ which
does not necessarily reflect new
business formation because it also
captures existing businesses moving to
the State.
Additional research analyzes the
effects of non-competes on the number
of jobs created by new businesses.538
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Instead, it cites the research described herein—
which relates solely to job creation at newly
founded firms—to support its finding that non-
competes inhibit new business formation.
539 Johnson, Lipsitz, and Pei, supra note 526 at
36.
540 Id. While this study satisfies each of the other
metrics outlined in Part IV.A.2, the sample is
restricted to firms in innovative industries, and
therefore the outcome of interest is not reflective of
the entire population.
541 Starr, Balasubramanian, & Sakakibara, supra
note 518 at 552.
542 NPRM at 3488–89.
543 While this study satisfies some of the
principles for robust design outlined in Part IV.A.2,
the Commission notes that average per-firm
employment does not precisely correspond to the
economic outcome of interest, which is overall
employment or job creation.
544 Calculated as 1.4%¥1.1%, based on the effect
for non-within-industry spinouts (1.4%) and the
relative impact on within-industry spinouts
compared with non-within-industry spinouts
(¥1.1%). See Starr, Balasubramanian, & Sakakibara,
supra note 518 at 561.
545 Calculated as 1.5%¥0.7%, based on the effect
for non-within-industry spinouts (1.5%) and the
relative impact on within-industry spinouts
compared with non-within-industry spinouts
(¥0.8%). See id. at 563.
546 There are also two studies analyzing how non-
competes affect job creation or employment
generally. Neither study relates to new business
formation specifically. Goudou finds a decreased
job creation rate from an increase in non-compete
enforceability in Florida. Felicien Goudou, The
Employment Effects of Non-compete Contracts: Job
Retention versus Job Creation (2023), https://
www.jesugogoudou.me/uploads/JMP_Felicien_
G.pdf. This study considers just one change in non-
compete enforceability, and is therefore given less
weight, though the results corroborate findings in
papers which satisfy more of the guideposts in Part
IV.A.2. Additionally, the 2023 version of Johnson,
Lavetti, & Lipsitz, supra note 388, finds that
increased non-compete enforceability reduces
employment by 1.9%, though they do not estimate
the impact on job creation directly. Rather, the
authors look only at the closely related metric of
changes in overall employment. This study
otherwise has a strong methodology, as discussed
in Part IV.B.3.a.ii.
547 Individual commenter, FTC–2023–0007–3299.
548 Individual commenter, FTC–2023–0007–1448.
549 Comment of Three Oaks Health, FTC–2023–
0007–1397.
550 Individual commenter, FTC–2023–0007–
10157.
551 Individual commenter, FTC–2023–0007–
11922.
While the research described previously
shows that non-competes inhibit the
rate of new business formation, this
research indicates that even where new
businesses are created, these new
businesses have fewer workers where
non-competes are more enforceable.
This evidence suggests that non-
competes not only prevent small
businesses from being formed, but they
also hinder entrepreneurship by tending
to reduce the number of employees new
firms are able to hire.
In addition to analyzing the rate of
firm entry in high-tech industries,
Johnson, Lipsitz, and Pei analyzes the
number of jobs created at newly
founded firms in innovative
industries. 539 Using evidence from
several State law changes, the authors
find that increases in non-compete
enforceability lead to a reduction in the
number of jobs created at newly
founded firms in innovative industries
(though not necessarily across all
industries or all types of firms) by
7.2%.540
A study by Starr, Balasubramanian,
and Sakakibara finds that increases in
non-compete enforceability decreased
average per-firm employment at new
firms. 541 In the NPRM, the Commission
stated that this study found that several
increases in non-compete enforceability
were associated with a 1.4% increase in
average per-firm employment at new
firms.542 However, upon further review
of the study, the Commission interprets
this study as finding that increases in
non-compete enforceability decreased
average per-firm employment at new
firms—both for spinouts within the
same industry and spinouts into a
different industry.543 For spinouts into
a different industry, average per-firm
employment at the time of founding
decreases by 1.4% due to greater non-
compete enforceability. For spinouts
into the same industry, average per-firm
employment decreases by 0.3%.544 At
seven years after founding, the results
are similar: spinouts into a different
industry have average per-firm
employment that is 1.5% lower due to
greater non-compete enforceability,
while spinouts into the same industry
have per-firm employment that is 0.7%
lower.545 The Commission notes that
this study compares States with
different levels of enforceability, using
law firms as a control group, instead of
considering changes in non-compete
enforceability. It is therefore given less
weight than studies with stronger
methodologies. 546
Comments Pertaining to Inhibited New
Business Formation and the
Commission’s Responses
The Commission’s finding that non-
competes inhibit new business
formation is principally based on the
empirical evidence described in this
Part IV.B.3.b.i. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Hundreds of commenters agreed with
the Commission’s preliminary finding
that non-competes reduce new business
formation. Illustrative examples of
comments the Commission received
include the following:
• I am a hairstylist . . . and have been
with the company for 11 years. Our work
conditions have changed drastically over the
years and Covid has really sent us on a sharp
decline. It is not the same salon I signed on
to work for. That being said, a few coworkers
want to open a salon and take some of us
with them to bring back the caliber of service
we want to give our clients. Our non-compete
contracts state that we can’t work within 30
miles of this salon. We didn’t expect that
standards would drop so low and they would
raise prices so high that we lost so many
clients. . . . We have all had enough of the
toxic environment and need to be free of this
unfair contract.547
• I am a veterinarian that has had to suffer
under non-compete clauses my entire career.
I have had to sell my home and relocate
several times including moving out of State
due to non-compete clauses. I’m currently
stuck in a [non-compete covering a] 30 mile
radius of all 4 practices of a group of
hospitals I work for. This basically keeps me
from working in an enormous area. I had to
sign it due to circumstances out of my
control and they took advantage of my
situation. I recently tried to start my own
business, not related to the type of practice
that I have the non-compete clause with, and
had to abandon the idea because I couldn’t
get funding without my current employer
releasing me from the contract or by
relocating again out of the huge area of non-
compete.548
• We own a small family practice in urban
Wisconsin. I previously was employed by a
large healthcare organization and burned out.
When I left to star[t] my own business, I was
restricted from working close by, by a non-
compete. I spent $24,000 [in] legal fees
challenging this successfully. . . . Now as a
business owner for 5 years, we have the
opportunity to hire some physician assistants
who have been terminated without cause
from my prior employer. I am unable to do
so because they also had to sign non-
competes. I have seen many disgruntled
patients who have delayed care because of
this. 549
• I am aesthetic nurse practitioner wanting
to start my own business but I am tied to a
2 year 10 mile non compete. I was basically
obligated to sign the non-compete when I
needed to reduce my hours to finish my
master’s degree (that I paid for and they
wanted me to get). I feel forced to stay at a
job that is not paying me what I am worth. 550
• I am a licensed social worker with a non-
compete which is hindering my employment
options. . . . I would like to start my own
business as the mental health facility I work
for is not supportive of mental health. This
rule would be a great benefit for mental
health professionals and those seeking
quality mental health services.551
• As a recently graduated physician, I
wanted to start my own practice and become
a small business owner. However, I also
needed a source of income to start out and
wanted to work part time at a local hospital
for income and benefits. However, due to a
non-compete clause in their contracts, I
could not start my own business and practice
in the same city if I was to work with them.
This hindered my ability to work as much as
I wanted (ended up having to work as an
independent contractor for significantly less
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552 Individual commenter, FTC–2023–0007–
11777.
553 Comment of NW Workers’ Justice Project,
FTC–2023–0007–15199 (discussing a client).
554 Individual commenter, FTC–2023–0007–
12904.
555 Individual commenter, FTC–2023–0007–
12697.
shifts per month and no benefits), and made
it more difficult to get my business off the
ground due to expenses for providing my
own benefits. Banning non-compete clauses
would significantly help the ability for
citizens to pursue starting small businesses
or other work to increase their income and
prosperity.552
• Mr. Z had worked for a company for over
15 years installing windshields in vehicles.
He was a lower-level employee making
$18.50 an hour and did not learn any trade
secrets or confidential information. After
years of working for the company the
employer refused to raise his wages despite
his experience, so he decided to start his own
business. Shortly after giving notice and
beginning his new endeavor, he received a
letter from his previous employer informing
him that he was in breach of his non-compete
agreement and the employer would enforce
it if he continued with his business plan. 553
• Non-competes have prohibited me from
making a living as a fitness and wellness
professional to such an extent, that it hurt me
economically. I opened up my own business
that was different than my previous
employer, even though it was different and
I told him I was going to focus on a different
area in wellness, my previous employer sued
me. I ended up having to hire an attorney to
defend myself and when it was all said and
done, I spent close to 12,000 in fees and
penalties.554
• Non compete agreements are detrimental
to the average worker, preventing them from
pursuing better paying job offers or from
starting their own business in the same
industry. I am directly affected by a non-
compete clause I had signed as part of a job
acceptance. I am now forming my own
business in the same industry as my
employer, and cannot do business within a
50-mile radius of my employer. That radius
covers the hometown I live in. Even though
we are in the same industry, we have very
different target markets. 555
As these comment excerpts reflect,
many potential entrepreneurs wrote to
the Commission to describe how they
wanted to strike out on their own, but
a non-compete preventing them from
doing so. These comments indicate that
non-competes have deprived
communities of homegrown
businesses—with respect to everything
ranging from tech companies, to hair
salons, to physician practices, and many
more types of firms. This deprives
markets of competing firms that can
reduce concentration—which in turn
has benefits for lowering prices and
raising the quality of products and
services, and increasing innovation in
bringing new ideas to market—as well
as depriving communities of
opportunities for new job creation.
Even where entrepreneurs were able
to start businesses, they explained how
non-competes prevented them from
hiring talented workers and made it
harder for their nascent businesses to
grow and thrive. Many other
commenters described personal
experiences in which their newly
formed businesses were threatened by
litigation costs related to non-competes.
Other commenters stated that the threat
of litigation related to non-competes
increases the risk and cost of starting a
new business, particularly if that
business intends to compete against a
large incumbent firm. One commenter
stated that incumbent firms can use
non-compete litigation as a mechanism
to chill startup formation where startups
lack the resources to contest a non-
compete.
Numerous small businesses and
organizations representing small
businesses submitted comments
expressing support for the proposed rule
and describing how it would help small
business owners. These commenters
contend that categorically prohibiting
non-competes will empower small
businesses by providing them with new
access to critical talent and will drive
small business creation as
entrepreneurial employees will be free
to compete against their former
employers. Many small businesses also
argued that non-competes can hinder
small business formation and can keep
small businesses from growing once
they are formed. The extensive
comments the Commission received
from small businesses are also
addressed in Part XI.C.
Some small businesses said they
spent tens or hundreds of thousands of
dollars defending themselves from non-
compete lawsuits. A one-person
surveying firm said it has to regularly
turn down work because of the former
employer’s threat to sue over a non-
compete. A small, five-worker firm said
it was sued by a billion-dollar company
for violating a non-compete despite the
fact that the firm waited out the non-
compete period and did not use
proprietary information or pursue the
former employer’s customers; it fears
the legal fees will force it out of
business. A legal aid organization
relayed the story of a client, a self-
employed beauty worker who was
unable to provide their service during a
non-compete lawsuit despite working
outside the non-compete geographic
radius. The CEO of one small transport
and logistics company said a ban would
remove a tool used mostly by the largest
companies in each industry to maintain
their market dominance, as small
competitors cannot match their legal
budgets. Further, many workers said
they would open their own business if
non-competes were banned.
Many small businesses shared their
experiences of how non-competes have
made hiring more difficult. For
example, a small physician practice said
non-competes made it difficult to
compete with larger practices to attract
and retain physicians. A small business
and a medical association said small
businesses could not afford a lawsuit
when hiring workers. An IT startup
tried to hire an executive who had
retired from a large firm, but the large
firm sued the startup to enforce what
the startup said was an unenforceable
non-compete. According to the startup,
because a lawsuit would have cost up to
$200,000, it was forced to settle and
could not work with numerous potential
clients, and its growth was significantly
slowed. It stated that it continues to turn
away many potential hires to avoid
being sued over non-competes.
Other commenters raised additional
issues relevant to hiring. According to
one technology startup organization, the
inability to assemble the right team is a
major reason startups fail, and small
businesses lose opportunities because
they must avoid hiring workers who are
subject to even unenforceable non-
competes. That organization also said
startups currently face legal and time
costs from navigating the patchwork and
complexity of State non-compete laws,
especially when trying to determine if a
potential hire’s non-compete is
enforceable; the time and expense of
navigating this landscape will thus often
cause the startups to forego that hire.
That organization said some non-
competes prevent experienced workers
from counseling, advising, or investing
in startups, and such mentoring can
double a startup’s survival rate.
Several self-identified entrepreneurs
commented that because of their non-
competes, they feared not being able to
operate, build, or expand their business.
Numerous workers reported that they
wanted to or planned to start their own
business, but their non-compete made
them too afraid to do so. A public policy
organization referenced the Census
Bureau’s Annual Business Survey to
argue that a majority of business owners
and an even higher majority of Black
business owners view starting their own
business as the best avenue for their
ideas, and that non-competes may
prevent these potential entrepreneurs’
ideas from coming to market.
Several commenters stated that non-
competes make it harder for new
businesses to hire workers with relevant
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556 Baslandze, supra note 533 at 40.
557 Starr, Balasubramanian, & Sakakibara, supra
note 518.
558 Ex Parte Communication: Email from G.
Carlino to E. Wilkins (Jan. 30, 2023), https://
www.ftc.gov/system/files?file=ftc_gov/pdf/P201200
NonCompeteNPRMExParteCarlinoRedacted.pdf.
559 In particular, the long time period and the
difference-in-difference methodology used in the
study do not mitigate concerns that decreases in
employment due to non-compete enforceability
could drive increases in the job creation rate. The
concern is not that the findings somehow represent
effects on anything other than the average job
creation rate (as noted by the author in his ex parte
communication), but that a rate is comprised of a
numerator and denominator, and effects on either
may drive effects on the rate as a whole. This
concern is shared by at least two empirical studies
of non-competes. See Johnson, Lavetti, & Lipsitz
supra note 388 at 19 and Johnson, Lipsitz, & Pei
supra note 526 at 19.
experience or industry knowledge.
Some commenters argued that non-
compete bans, such as in California,
have contributed to higher rates of
successful start-ups, while new firms in
States where non-competes are more
enforceable tend to be smaller and are
more likely to fail.
In contrast, several commenters
opposed to the rule argued that non-
competes promote new business
formation by protecting small and new
firms’ investments, knowledge, and
workers from appropriation by
dominant firms poaching their
employees. Commenters also theorized
that, while non-competes directly
inhibit employee spinoffs, they may
encourage businesses to enter the
market by enhancing their ability to
protect their investments. As described
in Part IV.D.2, the Commission finds
that firms have viable alternatives for
protecting these investments that
burden competition to a less significant
degree than non-competes. The
Commission further notes that these
commenters did not provide evidence to
support their assertions.
In addition, when assessing how non-
competes affect new business formation,
the Commission believes it is important
to consider the net impact. It is possible
that the effects described by these
commenters and the effects described by
the Commission earlier in this Part
IV.B.3.b.i can be occurring at the same
time. That is, a non-compete might in
some instances be protecting a firm’s
investments in a manner that is
productivity-enhancing holding all else
equal. But even that same non-compete
can—and certainly non-competes in the
aggregate do—inhibit new business
formation by prohibiting workers from
starting new businesses and by locking
up talented workers, preventing the
worker from efficiently matching with
the job that is the highest and best use
of their talents. What the empirical
evidence shows is that non-competes
reduce new business formation, overall
and on net, indicating that the tendency
of non-competes to inhibit new business
formation more than counteracts any
tendency of non-competes to promote
new business formation.
Other commenters said non-competes
protect firms’ value and assets for sale
in future acquisitions, which they said
drives seed capital investment in start-
ups. An investment industry
organization commented that private-
equity financing, particularly for early-
stage companies, often includes non-
competes and is used to support growth,
in turn increasing competition. In
response, the Commission notes that
these commenters provided no
empirical evidence that decreases in
non-compete enforceability have
affected seed capital investment and
private-equity financing. Moreover, the
Commission notes that there is no
indication that small businesses or
early-stage companies in States that
have banned or limited non-competes
have been unable to obtain financing.
To the contrary, California, where non-
competes are unenforceable, has a
thriving start-up culture.
Other commenters addressed
empirical research related to new
business formation. Some commenters
similarly argued that research on the
average quality of employee spinouts
due to changes in non-compete
enforceability may imply negative
effects of the rule (e.g., if prohibiting
non-competes decreases average
employment or average survival rates of
new firms). Some commenters also
noted that the Baslandze study finds
that weaker non-compete enforceability
increases the rate at which spinouts
form but result in a lower proportion of
high-quality spinouts.556
In response to these comments, the
Commission notes commenters
primarily referenced Starr,
Balasubramanian, & Sakakibara 557 to
support this view. The findings in this
study have been misinterpreted by
commenters. This study actually finds
that spinouts that form when non-
compete enforceability is stricter are
lower quality (i.e., create fewer jobs), but
that the effect is less drastic for spinouts
within the same industry versus
spinouts into different industries.
Coupled with other evidence discussed
in Part IV.B.3.b.i, the weight of which
points to increased job creation due to
the rule, the Commission finds that
empirical studies have not established
that non-competes lead to higher-quality
startups or higher-quality spinouts. The
Commission also notes that the result in
the Baslandze study regarding the
quality of spinouts is theoretical, and
the study does not test this theory
empirically.
Commenters also argued that non-
competes may have different effects on
different types of workers—for example,
across different industries, occupations,
or levels of pay—and that these
differences may affect the impacts of
non-competes on new business
formation. In response, the Commission
notes that the studies show negative
effects across a range of industries and
are directionally consistent, even if they
do not provide results for all subgroups.
Commenters asserted that non-
competes may affect job creation
through several different mechanisms.
The Commission agrees and finds that,
regardless of the specific mechanism,
the weight of the evidence indicates that
non-competes inhibit job creation.
Commenters opposing the rule also
questioned the usefulness of studies of
Michigan’s law change, given that
existing non-competes remained
enforceable under the Michigan law;
they state that as a result, it would take
longer for effects from the law to be
realized. As noted under ‘‘Evidence of
inhibited new business formation,’’ the
Commission gives minimal weight to
this study, but for other reasons.
In an ex parte communication entered
into the record, the author of the study
of the Michigan law change expressed
concern over the Commission’s
interpretation of the study.558 In
particular, he stated that his
methodology mitigated concerns that
the study’s findings of an increase in the
job creation rate may be due to
decreases in that rate’s denominator
(total employment). While the
Commission does not agree with this
assessment, 559 the Commission places
less weight on the study for different
reasons, as noted.
Some commenters who opposed the
rule also addressed the evidence
relating to non-competes and job
creation, although these commenters
generally did not focus on job creation
related to new businesses specifically.
Some of these commenters asserted that
the studies addressed in the NPRM
indicated that non-competes are
associated with a greater number of jobs
available and increased rates of job
creation, rather than decreased rates of
job creation. Some asserted that the
evidence on job creation is mixed and
that the issue is understudied. In the
NPRM, the Commission stated that the
evidence relating to the effects of non-
competes on job creation was
inconclusive. However, in the final rule,
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560 Zhaozhao He, Motivating Inventors: Non-
Competes, Innovation Value and Efficiency 21
(2023), https://ssrn.com/abstract=3846964. Thirty
one percent is calculated as e 0..272¥1.
561 Id. at 17.
562 Johnson, Lipsitz, & Pei, supra note 526.
563 Id.
564 Emma Rockall & Kate Reinmuth, Protect or
Prevent? Non-Compete Agreements and Innovation
(2023), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4459683.
565 Samila & Sorenson, supra note 534 at 432. The
value is calculated as 6.6% = e0.0208 + 0.0630¥e0.0208 .
566 Id.
567 Carlino, supra note 535 at 40.
568 Id. at 48.
569 Clemens Mueller, Non-Compete Agreements
and Labor Allocation Across Product Markets,
Proceedings of the EUROFIDAI-ESSEC Paris
December Finance Meeting 2023 (2023), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=4283878.
the Commission does not make a
separate finding that non-competes
reduce job creation. Instead, it cites the
research described herein—which
relates to job creation at newly founded
firms—to support its finding that non-
competes inhibit new business
formation.
ii. Non-Competes Inhibit Innovation
Evidence of Inhibited Innovation
The Commission finds that non-
competes tend to negatively affect
competitive conditions in product and
service markets by inhibiting
innovation. Three highly reliable
empirical studies find that non-
competes reduce innovation.
One such study, a study by Zhaozhao
He, finds that the value of patents,
relative to the assets of the firm,
increases by about 31% when non-
compete enforceability decreases.560 In
contrast to some other studies of
innovation discussed here, He’s study
focuses on the value of patents, rather
than the mere number of patents. The
study does so to mitigate concerns that
patenting volume may not represent
innovation.561 The study analyzes the
impact of several legal changes to non-
compete enforceability, using a binary
measure of non-compete enforceability.
While this study therefore does not
satisfy all the principles outlined in Part
IV.A.2, it nonetheless satisfies many of
them and contains a reasonably strong
methodology.
A second study, by Johnson, Lipsitz,
and Pei, finds that increased
enforceability of non-competes
decreases the rate of ‘‘breakthrough’’
innovations and innovations which
make up the most cited patents. This
study lends weight to the finding that
non-competes harm both the quantity
and the quality of innovation.562 The
authors also show that when non-
compete enforceability decreases,
patenting increases even in industries
where most new innovations are
patented. These increases imply that the
effect is a true increase in innovation,
rather than firms substituting between
patents and non-competes.
Johnson, Lipsitz, and Pei also show
that State-level changes in non-compete
policy do not simply reallocate
innovative activity across State lines,
which would result in no change in
innovation at the national level. Instead,
they find that decreasing non-compete
enforceability, even in one State,
increases innovative activity
nationally.563 Johnson, Lipsitz, and Pei’s
study uses several legal changes to
analyze the impact of enforceability. It
also uses several metrics of quality and
quantity to mitigate concerns over
whether patenting is an accurate
reflection of innovation, especially in
this context. The study thus satisfies all
the principles outlined in Part IV.A.2
and is therefore given substantial weight
by the Commission.
A third study, by Rockall and
Reinmuth, finds that non-competes have
a significant negative impact on
innovation. They further find that this
effect is not driven solely by the entry
of new businesses. Their work suggests
a potentially central role for knowledge
spillovers, which are hampered when
worker mobility is diminished. The
study uses many changes to non-
compete enforceability quantified on a
continuous basis and considers several
metrics which represent the quantity
and quality of patenting, in order to
accurately capture the relationship
between non-competes and
innovation.564 Similar to the study by
Johnson, Lipsitz, and Pei, this study
therefore satisfies all the principles
described in Part IV.A.2 and is given
substantial weight.
The Commission places the greatest
weight on the foregoing three studies, in
which factors unrelated to the legal
changes at issue are less likely to drive
the results. There are additional studies
that relate to non-competes and
innovation, but the Commission gives
them less weight.
A study by Samila and Sorenson finds
that venture capital induced less
patenting by 6.6 percentage points when
non-competes are enforceable.565
However, the authors note that
patenting may or may not reflect the
true level of innovation, as firms may
use patenting as a substitute for non-
competes where they seek to protect
sensitive information.566 Furthermore,
this study assesses only the quantity of
patents and does not take into account
the quality of patents, which would be
a better proxy for innovation. For this
reason, the Commission gives less
weight to this study (although its
findings are directionally consistent
with the first three studies described
herein). This study also uses cross-
sectional variation in non-compete
enforceability, which is measured along
two dimensions in a binary fashion. In
addition, a study by Gerald Carlino
examined how patenting activity in
Michigan was affected by an increase in
non-compete enforceability. The study
finds that mechanical patenting
increased following the change in the
law, but that drug patenting fell, and
that the quality of computer patents
fell. 567 However, the increase in
mechanical patenting appears to have
primarily occurred approximately 14
years after non-compete enforceability
changed. This suggests that some other
mechanism may have led to the increase
in patenting activity.568 Moreover, the
study uses a single change in non-
compete enforceability to generate its
results, and it uses only one measure of
innovation outside of patent quantity—
quality as measured by patent citations.
Finally, this study examines a change to
non-compete enforceability which was
accompanied by several other changes
to Michigan’s antitrust laws, making it
impossible to identify the effect of the
change in non-compete enforceability
standing alone. For these reasons, the
Commission gives less weight to this
study.
A study by Clemens Mueller does not
estimate the overall impact of non-
compete policy on innovation, but
instead focuses on career detours of
inventors.569 Mueller shows that
inventors are more likely to take ‘‘career
detours’’—that is, to change industries
to avoid the reach of their non-
compete—when enforceability of non-
competes is stricter. Due to the lower
match quality between that inventor and
their new industry, the innovative
productivity of those inventors suffers
after they take career detours. However,
the Commission assigns this study less
weight because, while its methodology
satisfies the principles outlined in Part
IV.A.2, the study is only informative of
the productivity of individuals taking
career detours. It does not address
whether innovation in the aggregate
increases. Mueller uses several changes
in non-compete enforceability to
generate results, but those changes are
measured in binary—rather than
continuous—fashion.
Coombs and Taylor examine the
impact of non-compete enforceability on
innovation. They find that research
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38395	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
570 Porcher L. Taylor, III, and Joseph E. Coombs,
Non-Competition Agreements and Research
Productivity in the Biotechnology Industry, 26
Frontiers of Entrepreneurship Rsch. 1 (2006).
571 Raffaele Conti, Do Non-Competition
Agreements Lead Firms to Pursue Risky R&D
Strategies?, 35 Strategic Mgmt. J. 1230 (2014).
572 Fenglong Xiao, Non-Competes and
Innovation: Evidence from Medical Devices, 51
Rsch. Pol’y 1 (2022).
573 Alessandra Colombelli, Jackie Krafft &
Francesco Quatraro, High-Growth Firms and
Technological Knowledge: Do Gazelles Follow
Exploration or Exploitation Strategies?, 23 Indus.
And Corp. Change 262 (2014).
574 Individual commenter, FTC–2023–0007–0198.
575 Individual commenter, FTC–2023–0007–3885.
576 Individual commenter, FTC–2023–0007–0760.
577 Individual commenter, FTC–2023–0007–
19807.
578 Individual commenter, FTC–2023–0007–
12872.
productivity, as measured by the
number of products in biotechnology
firms’ prospectuses, was lower in
California than other States, which they
suggest implies that California’s ban on
non-competes hampers research
productivity. 570 However, this study is
purely cross-sectional, and results may
be due to other differences between
California and other States; the
Commission accordingly places less
weight on this study.
Two additional studies address firm
strategies related to innovation.
However, the Commission gives them
little weight because the outcomes
studied do not inform how non-
competes would affect the overall level
of innovation in the economy. The first,
by Raffaele Conti, uses two changes in
non-compete enforceability (in Texas
and Florida), and indicates that firms
engage in riskier strategies with respect
to research and development (‘‘R&D’’)
when non-compete enforceability is
greater.571 However, this study does not
address whether these riskier strategies
lead to greater innovation. The second,
by Fenglong Xiao, finds that increases in
non-compete enforceability led to
increases in exploitative innovation
(i.e., innovation which stays within the
bounds of the innovating firm’s existing
competences) in the medical device
industry.572 The study finds this
increase in exploitative innovation leads
to an increase in the rate at which new
medical devices are introduced.
However, the study also finds that
explorative innovation (i.e., innovation
which moves outside those bounds)
decreased, and explorative innovation is
the mode of innovation which the
empirical literature has found to be
associated with high growth firms.573
The net impact on innovation from this
study is thus unclear. The study
examines several changes in non-
compete enforceability, measured with a
binary indicator of non-compete
enforceability.
Comments Pertaining to Inhibited
Innovation and the Commission’s
Responses
The Commission’s finding that non-
competes inhibit innovation is
principally based on the empirical
evidence described in this Part
IV.B.3.b.ii. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Several academics and economic
research groups, among other
commenters, agreed with the
Commission’s preliminary finding that
non-competes inhibit innovation.
Commenters argued that non-competes
reduce knowledge flow and
collaboration, force workers to leave
their field of expertise, and discourage
within-industry spinouts that promote
innovation. Many commenters stated
that banning non-competes would make
it easier for workers to pursue
innovative ideas and to hire the best
talent to help develop those ideas.
Illustrative examples of comments the
Commission received include the
following:
• I am a geneticist at Stanford University,
and I am co-founding a biotech startup that
aims to discover new cancer
immunotherapies. Many of the most talented
geneticists, immunologists, cancer biologists,
and other scientists with unique and valuable
skillsets for drug development are bound by
non-competes that prevent them from leaving
jobs at big pharma companies to join biotech
startups like mine. The result is artificial
scarcity in the market for top scientific
talent—a phenomenon that precludes healthy
competition between industry incumbents
and new entrants. Given that much of our
country’s most cutting-edge translational
research happens within biotech startups,
and given that many of the most successful
drugs on the market originate in biotech
startups, non-competes in pharma and
biotech prevent the most talented scientists
from working on the most innovative science
and obstruct the development of new
treatments and cures for human disease—
leaving our society worse off.574
• As a practicing Physician for over thirty
years, and one who trained fellows in pain
management, who followed many of their
students’ careers, I was able to see the
detriments of unfair Non-Compete clauses in
their contracts. Often a physician would take
a job, and if it did not work out, the
restrictions were so severe, that they would
need to move to a new geographic location
in order to be employed. . . . Other
scenarios exist as well. Where large
institutions can block scientific discovery of
their research physicians from moving to
other institutions which may be better able
to support their research, potentially
blocking the promotion of scientific
discovery. 575
• I am an engineer in the orthopedic space.
I have an idea for a truly innovative foot and
ankle plating system that I believe could
become the standard of care for fracture
fixation and foot deformity correction. It
could save 10–15 minutes of operating room
time per surgery, which studies show carries
a cost of $1000 (times millions of surgeries
annually). It does not directly compete with
my former employer’s product, but I have to
wait a year to start engaging surgeons about
it because of a very broad non-compete, for
a product that does not even compete. 576
• I currently work as a mid-level technical
employee at a company that enforces long (a
year or longer) noncompetes. . . . After
working for larger companies for a few years
after college, many of my friends started their
own companies. Some succeeded massively
and some didn’t but what was common
among most of them was that the companies
they started were somewhat related to what
they were working on before. They either saw
a gap in the industry while working for a
larger company, or had a bold idea in their
domains that they wanted to quit their jobs
and try executing it. All this risk taking has
in turn resulted in innovation, more
competition, and hundreds of jobs. This
would not have been possible if these people
were under non-compete agreements from
their previous employers. In fact, many of my
friends who are currently working for
companies that have non-competes have
personally told me that they want to try a
different approach than the current
incumbents in their industry, but they simply
can’t take this risk because of the long non-
competes they are under. Note that non-
competes are even more consequential for
workers of relatively less experience because
sitting out for 1 year while only having 3 to
4 years of experience is a lot more
detrimental to one’s career when compared
to an individual with 20 years of experience.
Given that younger workers are more willing
to take risks and try new ideas, the impact
of non-competes on innovation is far worse
than many think.577
• I am an engineer who has worked on
software and hardware in several domains,
including the semiconductor industry. I
perceive non-competes to not only be
detrimental to free trade but also to be
detrimental to American innovation and
manufacturing. If the United States is serious
about supporting the growth of the
semiconductor industry in the U.S., it must
ensure that semiconductor companies inside
the United States truly act to benefit
American innovation. . . . The FTC would
act prudently to ban such agreements. 578
• I am a physician. I have worked for
public entities for my entire career. I have
worked under non-competes for my entire
career. The result of these non-compete
clauses is that myself and my colleagues keep
our imagination and creativity locked away.
We see novel applications of pharmaceuticals
and medical devices which our leadership
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579 Individual commenter, FTC–2023–0007–2340.
does not want to pursue, and we are also
precluded from pursuing these ideas due to
the noncompete. We see new ways to reach
people and help people with our unique skill
sets, and our noncompete keeps us from
being able to reach them. The noncompete
allows our employer to own us. They
monopolize the talent of their workforce and
this deprives the community of the
innovation that may stem from the
unleashing of the creativity of the physician
workforce. I see the direct impact of non-
compete clauses. The public has so much to
gain by releasing healthcare workers from
their noncompete clauses. These talented
individuals, once released from their
noncompetes, will begin to contribute to
their communities with new ideas and
innovation that will serve their communities.
Many entities have so many reasons to avoid
innovation and this stifles the individuals
who work for them and oppresses new ideas.
Once released from the bureaucracy and
burden of non-competes I believe you will
see an abundance of community outreach,
device innovation and community service
from many physicians currently subjugated
by their noncompete clauses.579
A research organization said a ban on
non-competes would increase the value
workers realize from creativity and
inventiveness, though it also asserted
that non-competes can incentivize firms
to create and share information. Some
workers commented that they had
innovative ideas or research that their
employer was unwilling to pursue, but
the worker could not leave to pursue
their ideas elsewhere. A commenter also
argued that captive workforces can stifle
competition for workers and for clients
or patients that leads to innovation.
According to several commenters,
trapping workers in jobs can also lead
to decreased productivity and so-called
‘‘quiet quitting.’’
Some commenters contended that
California’s ban on non-competes
helped Silicon Valley and other
industries in California thrive. For
example, a public policy organization
pointed to industry clusters where
studies have identified job hopping,
which may otherwise be prohibited by
non-competes, as the primary
mechanism of knowledge diffusion and
argued that restricting non-competes for
knowledge workers would improve the
U.S.’s competitiveness. Other
commenters questioned whether non-
competes played a role in Silicon
Valley’s growth. In response, the
Commission notes that it does not
attribute California’s success in the
technology industry to its non-compete
laws. The Commission merely notes (in
Part IV.D) that the technology industry
is highly dependent on protecting trade
secrets and that it has thrived in
California despite the inability of
employers to enforce non-competes,
suggesting that employers have less
restrictive alternatives for protecting
trade secrets.
Other commenters opposing the rule
argued that non-competes may promote
innovation by encouraging firms to
make productivity-enhancing
investments and by decreasing the risk
of workers leaving. These commenters
stated that non-competes protect firms’
investments in workers, R&D,
intellectual capital, and innovation. The
Commission does not believe that non-
competes are needed to protect valuable
firm investments. As described in Part
IV.D.2, the Commission finds that firms
have less restrictive alternatives that
protect these investments adequately
while burdening competition to a less
significant degree.
In addition, when assessing how non-
competes affect innovation, the
Commission believes it is important to
consider the net impact. It is possible
that the effects described by these
commenters and the effects described by
the Commission earlier in this Part
IV.B.3.b.ii can be occurring at the same
time. That is, a non-compete might in
some instances be protecting a firm’s
investments in a manner that is
productivity-enhancing holding all else
equal. But even that same non-compete
can—and certainly non-competes in the
aggregate do—inhibit innovation by
preventing workers from starting new
businesses in which they can pursue
innovative ideas; inhibiting efficient
matching between workers and firms;
and reducing the movement of workers
between firms. What the empirical
evidence shows is that non-competes
reduce innovation, overall and on net,
indicating that the tendency of non-
competes to inhibit innovation more
than counteracts any tendency of non-
competes to promote innovation.
The Commission addresses the
available evidence on the relationship
between non-competes and firm
investment in Part IV.D.1.
A business commenter contended that
worker mobility does not necessarily
improve innovation since the new firm
may be unable or unwilling to use the
worker’s knowledge or ideas, or the new
start-up may fail and leave consumers
with less innovative products and
services. In response, the Commission
notes that it is certainly possible that
some workers switch jobs to firms that
are unable or unwilling to use their
knowledge or ideas, or to startups that
may fail. However, the fact that the
empirical evidence shows that reduced
non-compete enforceability increases
innovation suggests that these effects are
outweighed by workers who can switch
jobs to firms that make better use of
their talents, or to startups that thrive
and bring innovative new products to
market.
Other commenters stated that non-
competes promote the sharing of ideas
and information within firms and
incentivize risk-taking. The Commission
is not aware of evidence that non-
competes promote the sharing of ideas
within firms specifically, but in any
event the Commission explains in Part
IV.D.2 that trade secrets and NDAs
provide less restrictive means than non-
competes for protecting confidential
information. With respect to risk-taking,
the Commission notes that the Conti
study finds that firms engage in riskier
R&D strategies when non-compete
enforceability is greater, but it is not
clear whether these riskier R&D
strategies translate into increased
innovation.
Commenters also argued that non-
competes may have different effects on
different types of workers—for example,
across different industries, occupations,
or levels of pay—and that these
differences may affect the impacts of
non-competes on innovation. In
response, the Commission notes that the
most methodologically robust studies
show negative effects across a range of
industries and are directionally
consistent, even if they do not provide
results for all subgroups.
A research organization argued that
non-competes decrease the likelihood
that innovative technologies are
developed outside the U.S. and that
non-competes promote economic
growth, competitiveness, and national
security. The Commission is not aware
of any reliable evidence of the effects of
non-competes on whether innovative
technologies are developed outside the
U.S. However, the weight of the
empirical evidence indicates that non-
competes reduce the amount of
innovation occurring within the U.S.
Some commenters noted that
innovation hubs have emerged in States
that enforce non-competes. In response,
the Commission notes that it does not
find that it is impossible for innovation
hubs to emerge where non-competes are
enforceable. Instead, the Commission
finds that, overall, non-competes inhibit
innovation.
One commenter performed an
empirical exercise in which he
correlated Global Innovation Index
rankings of innovation clusters with the
enforceability of non-competes in each
location. The commenter found that
only one of the top five clusters bans
non-competes, and only three others in
the top 100 ban non-competes. The
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580 Comment of Mark Cohen, FTC–2023–0007–
12064, at 12–13.
581 Referring to Xiao, supra note 572 and Conti,
supra note 571.
582 NPRM at 3492–93.
583 Barnett & Sichelman, supra note 389.
584 The allegedly flawed measures use binary
indicators for enforcement versus non-enforcement,
or binary indicators for several facets of
enforceability (Stuart and Sorenson, supra note 529;
Mark J. Garmaise, Ties that Truly Bind:
Noncompetition Agreements, Executive
Compensation, and Firm Investment, 27 J. L., Econ.,
& Org. (2011)), and the more recent measure is more
nuanced (Bishara, supra note 501).
commenter cited the success of Chinese
innovation clusters, noting that non-
competes are permitted in each of
them. 580 The Commission does not find
this evidence persuasive. Other
differences across countries may explain
these results better than policy towards
non-competes, which is one factor
among many that affect the level of
innovation in an economy.
Some commenters argued that the
empirical research cited in the NPRM
has mixed results. These commenters
point to the study by Xiao (2022)
showing that non-competes increase
exploitative innovation (innovation that
incrementally extends firms’ existing
capabilities), but not explorative
innovation (innovation that extends the
scope of firms’ capabilities). In
response, the Commission notes that,
within this particular study, the net
impact of non-competes on innovation
was unclear. But the Commission does
not believe the evidence overall is
mixed, given that the three empirical
studies of the effects of non-competes
on innovation that use the most reliable
empirical methods all find that non-
competes reduce innovation.
Some commenters claimed that two
studies cited in the NPRM—the Xiao
and Conti studies—had findings that
were omitted or misinterpreted: first,
the Xiao finding that non-compete
enforceability increases the rate of new
discoveries of medical devices due to
increases in the rate of exploitative
innovation but not explorative
innovation); and second, the Conti
finding that greater non-compete
enforceability leads to riskier
innovation, which these commenters
assert is a positive outcome.581 In
response, the Commission notes that the
NPRM described both of these findings
and did not omit or misinterpret
them.582 The Commission explains why
it gives these studies little weight under
‘‘Evidence of inhibited innovation.’’
A commenter asserted that the He
study is insufficient evidence to support
a finding, and that the study examines
the effects of non-compete
enforceability on the value of patents,
which the commenter asserts misses
other aspects of innovation. In response,
the Commission believes that the He
study is methodologically robust and
that, while no single metric can capture
all aspects of innovation, the value of
patents is a meaningful proxy. The
Commission also notes that the effects
observed in the He study are
considerable, as the study finds that the
value of patents, relative to the assets of
the firm, increases by about 31% when
non-compete enforceability decreases.
In addition, the Commission notes that
the comment record provides
substantial qualitative support in line
with the empirical findings.
Furthermore, additional research,
published since the release of the
NPRM, helps confirm the Commission’s
finding regarding the effect of non-
competes on innovation. As described
under ‘‘Evidence of inhibited
innovation,’’ this evidence moves
beyond assessing the impact of non-
competes on the value of patents or the
number of patents to identify the quality
of new innovation, as well as the
mechanisms underlying these effects.
Many commenters referred to a law
review article, which was also
submitted as a comment itself, that
critiques the literature on non-competes
and innovation.583 First, the authors
argue that a measure of enforceability
used in part of the economic literature
is incorrect and that a more recently
developed measure is imperfect but
better. 584 The Commission agrees with
the authors that the more recently
developed measure of enforceability, the
scale based on Bishara (2011), is
stronger than other measures of
enforceability due to its granularity.
This metric is used in many studies
cited in this final rule, including the
Johnson, Lipsitz, and Pei study, which
largely reinforces the conclusions in the
He study, lending weight to the
conclusions in these studies that non-
competes suppress the overall level of
innovation in the economy.
Second, the authors argue that a given
non-compete may be governed by the
laws of a State other than the State
where the worker lives, which
undermines the reliability of studies
analyzing the effects of non-compete
enforceability. The authors argue that
cross-border enforcement of non-
competes may be a difficult issue to
properly address in empirical work and
has not been accounted for in the work
to date. In response, the Commission
notes that if the State law that applied
to a given non-compete were totally
random—for example, if a non-compete
in Oregon was no more likely to be
governed by Oregon’s law than any
other State’s law—we would expect to
observe no effects on economic
outcomes (such as earnings, innovation,
and new business formation) from
changes in State law. Instead, the
empirical research shows that changes
in State law have clear impacts on
economic outcomes in particular States.
This indicates that enough non-
competes within a particular State are
subject to that State’s law for changes in
that State’s law to affect economic
outcomes in that State.
Third, the authors argue that there is
a lack of data on the use of non-
competes and that such data are needed
to completely assess the effects of non-
competes. Although there is not
comprehensive data on individual
workers’ employment agreements, the
Commission believes the studies that
examine changes in enforceability do so
based on sufficient data to be reliable
and are otherwise methodologically
sound. These studies are also highly
probative with respect to the effects of
the final rule because what they are
examining—how changes in the
enforceability of non-competes affect
various outcomes—matches closely
with what the final rule does. The
Commission also notes that there is
considerable data regarding the
prevalence of non-competes, which it
discussed in Part I.B.2.
Fourth, the article argues that some
studies of non-competes have small
sample sizes, which may lead to
measurement error. In response to
concerns about small sample sizes, the
Commission notes that the most recent
studies use a greater breadth of variation
in the legal environment surrounding
non-competes, overcoming this obstacle.
Fifth, the article expresses concern
about certain studies that are based on
legal changes in Michigan. The
Commission takes this critique into
account throughout this final rule and
notes it when discussing the applicable
studies that examine legal changes in
Michigan, including under ‘‘Evidence of
inhibited innovation.’’
In an ex parte communication
included in the public record, the
author of one of the studies of
innovation stated that studies which
examine multiple legal changes may be
biased, since affected parties may
anticipate the legal change and adjust
their behavior prior to the date that the
legal change is made. The author stated
that examination of the legal change in
Michigan was therefore preferable, since
it was ‘‘inadvertent’’ and therefore not
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38398 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
585 Ex Parte Communication: Email from G.
Carlino, supra note 558.
586 Johnson, Lavetti & Lipsitz, supra note 388 at
12–14.
587 Id. at 12.
588 See Part IV.B.3.b.i.
589 See Part IV.C.2.c.i (describing a study
addressing how non-competes force firms to make
inefficiently high buyout payments).
590 Naomi Hausman & Kurt Lavetti, Physician
Practice Organization and Negotiated Prices:
Evidence from State Law Changes, 13 Am Econ. J.
Applied Econ. 278 (2021).
591 Michael Lipsitz & Mark Tremblay,
Noncompete Agreements and the Welfare of
Consumers 6 (2021), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3975864. Concentration is
measured by an employment-based Herfindahl-
Hirschman Index (HHI).
592 Id. at 3.
593 See Lavetti, Simon, & White, supra note 82.
subject to anticipation effects.585 The
Commission agrees that, in general,
anticipation effects can bias the findings
of empirical studies. However,
empirical work shows that the legal
changes used in much of the literature
on non-competes are not subject to
anticipation effects.586 This may be
because the vast majority are changes
based on judicial decisions, rather than
statutory changes, as hypothesized by
researchers. 587 Moreover, even if
anticipation effects occur in studies of
non-compete enforceability, that would
likely not change the measurable
observed benefits of reducing non-
compete enforceability, and may indeed
lead to underestimation of observed
benefits. Underestimation would occur
if parties were adjusting their behavior
in advance of the change in
enforceability in the same direction as
the effects observed after the change.
This would occur if, for example, firms
began to decrease use of non-competes
in advance of a decrease in non-compete
enforceability, knowing that those non-
competes would soon be less
enforceable. This ultimately would
mean that the actual effects on labor
mobility, earnings, new business
formation, innovation, and other
outcomes could be even greater.
Additionally, the legal change in
Michigan is subject to other criticism, as
discussed under ‘‘Evidence of inhibited
innovation’’ and by commenters.
iii. Non-Competes May Increase
Concentration and Consumer Prices
Evidence of Increased Concentration
and Consumer Prices
As described in Parts IV.B.3.b.i and ii,
the Commission finds that non-
competes tend to negatively affect
competitive conditions in product and
service markets by inhibiting new
business formation and innovation, and
have in fact done so. The Commission
finds that these effects, standing alone,
are sufficient to support its finding that
non-competes tend to negatively affect
competitive conditions in product and
service markets.
However, the Commission notes that
there is also evidence that non-competes
increase industrial concentration more
broadly, which in turn tends to raise
consumer prices. The empirical
literature on these effects is less
developed than the empirical work
documenting declines in new business
formation and innovation; specifically,
the empirical evidence on consumer
prices relates only to healthcare markets
(though the evidence on concentration
spans all industries in the economy).
For this reason, the Commission does
not rest its finding that non-competes
tend to negatively affect competitive
conditions in product and service
markets on a finding that non-competes
increase concentration and consumer
prices. However, there are several
reliable studies finding that non-
competes increase concentration and/or
consumer prices, bolstering the
Commission’s finding that non-
competes tend to negatively affect
competitive conditions in product and
service markets.
The Commission finds that non-
competes reduce new business
formation.588 By doing so, non-
competes may increase concentration.
Non-competes may also stunt the
growth of existing firms that would
otherwise better challenge dominant
firms, for example, by limiting potential
competitors’ access to talented
workers.589
Non-competes may also affect prices
in a variety of ways. By suppressing
workers’ earnings, non-competes
decrease firms’ costs, which firms may
theoretically pass through to consumers
in the form of lower prices. However,
non-competes may also have several
countervailing effects that would tend to
increase prices. First, non-competes
may increase concentration, which
could lead to less competition between
firms on price, and therefore higher
prices for consumers. Second, by
inhibiting efficient matching between
workers and firms, non-competes may
reduce the productivity of a firm’s
workforce, which may lead to higher
prices. Third, by inhibiting innovation,
non-competes may hinder the
development of lower-cost products or
more efficient manufacturing processes.
One study, by Hausman and Lavetti,
focuses on physician markets. The study
finds that as the enforceability of non-
competes increases, these markets
become more concentrated, and prices
for consumers for physician services
increase. The study finds that while
non-competes allow physician practices
to allocate clients more efficiently
across physicians, this comes at the cost
of greater concentration and higher
consumer prices. This study examines
several changes in non-compete
enforceability measured continuously.
The authors note that, in theory, if
decreased non-compete enforceability
decreases earnings, then the fall in
prices may simply be due to pass-
through of labor costs. However,
empirical research shows that decreased
non-compete enforceability increases
earnings (as discussed in Part
IV.B.3.a.ii). Even if that were not the
case, Hausman and Lavetti show that
labor cost pass-through cannot explain
their findings.590 This study satisfies all
of the principles described in Part
IV.A.2, and is accordingly weighted
highly by the Commission.
Another study, by Lipsitz and
Tremblay, examines all industries in the
economy and shows empirically that
increased enforceability of non-
competes at the State level increases
concentration. 591 Lipsitz and Tremblay
theorize that non-competes inhibit
entrepreneurial ventures that could
otherwise enhance competition in goods
and service markets. The authors show
that the potential for harm is greatest in
the industries in which non-competes
are likely to be used at the highest
rate.592
If the general causal link governing
the relationship between enforceability
of non-competes, concentration, and
consumer prices acts similarly to that
identified in the study by Hausman and
Lavetti, then it is plausible that
increases in concentration identified by
Lipsitz and Tremblay would lead to
higher prices in a broader set of
industries than healthcare. Lipsitz and
Tremblay use several changes in non-
compete enforceability measured in a
continuous fashion, but do not measure
the impact on consumer prices or
welfare. The Commission therefore
finds the study’s conclusion that non-
competes increase concentration highly
robust, but the study is not itself direct
empirical evidence of a relationship
between non-competes and prices.
Two additional studies assess the
effects of non-competes on
concentration and prices. However, the
Commission gives these studies little
weight.
A study of physician non-competes by
Lavetti, Simon, and White finds that
prices charged by physicians with non-
competes are similar to those charged by
physicians without non-competes. 593
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38399	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
594 See Part IV.A.2 (describing the shortcomings
of such studies).
595 Kenneth A. Younge, Tony W. Tong, & Lee
Fleming, How Anticipated Employee Mobility
Affects Acquisition Likelihood: Evidence From a
Natural Experiment, 36 Strategic Mgmt. J. 686
(2015).
596 See also Part XI.C.2, which addresses these
types of comments in greater detail. 	597 Hausman & Lavetti, supra note 590.
598 These comments are summarized in greater
detail in Part IV.B.3.b.iv.
599 See Part IV.B.3.b.iv.
600 In the NPRM, the Commission noted that
innovation and entrepreneurship can, in turn, have
positive effects on product quality. See NPRM at
3492. The Commission did not make specific
findings on the effect of non-competes on consumer
choice. However, the Commission discussed the
closely related questions of how non-competes
affect new business formation, innovation,
concentration, and consumer prices. See id. at
3490–93.
The Commission gives this study less
weight because it merely analyzes
differences between workers based on
the use of non-competes.594
A study by Younge, Tong, and
Fleming finds that non-competes
contribute to economic concentration
because non-compete enforceability
increases the rate of mergers and
acquisitions. 595 This study uses one
change in non-compete enforceability—
in Michigan—to generate its results.
However, in addition to its use of a
single legal change in a single State, the
change to non-compete enforceability
was accompanied by several other
changes to Michigan’s antitrust laws, so
it is not possible to identify the effect of
the change in non-compete
enforceability standing alone.
Comments Pertaining to Increased
Concentration and Consumer Prices and
the Commission’s Responses
Several commenters addressed the
question of whether non-competes affect
concentration and consumer prices.
Some commenters asserted that the rule
would lower consumer prices by
improving matches between employers
and workers, increasing productivity.
Commenters also argued that locking up
talent, particularly in specialized
markets, prevents entrepreneurship and
new business formation and can thus
contribute to increased concentration.
Some commenters opposing the
NPRM claimed that banning non-
competes could increase concentration.
These commenters argued that larger
firms could discourage companies from
expanding into new and underserved
markets by poaching, or threatening to
poach, their key employees, leading to
increased costs that could force some
firms out of business. These
commenters also argued that non-
competes protect small businesses from
dominant consolidators, as high
recruitment, retention, and other costs
may induce small businesses to sell or
larger businesses may hire away their
workers. A medical trade organization
stated that without non-competes,
independent practices might not be able
to afford to hire and thus may be unable
to grow or compete.596
While these commenters theorize that
prohibiting non-competes would
increase concentration, the Commission
notes that the available evidence
indicates that non-competes increase
concentration, rather than reducing it.
The Commission further notes that these
theories are inconsistent with the robust
empirical literature finding that non-
competes reduce new business
formation, as well as with the hundreds
of comments from small businesses,
including physician practices,
recounting how non-competes stymied
their ability to enter markets or grow
because they make it harder to hire
talent.
Several commenters claimed that
prohibiting non-competes would
increase worker earnings and increase
transaction costs related to hiring,
which firms would pass through to
consumers in the form of higher prices.
However, the only study of how non-
competes affect prices—the Hausman
and Lavetti study—finds that decreased
non-compete enforceability decreases
prices in the healthcare market, rather
than increasing them. Moreover, while
it is theoretically possible that higher
labor costs could be passed on to
consumers in the form of higher prices,
there are several countervailing effects
from prohibiting non-competes that
would tend to lower prices.
Additionally, empirical research shows
that labor cost pass-through cannot
explain decreases in prices in healthcare
markets associated with non-competes
becoming less enforceable. 597
An insurance company stated that
insurance premiums would increase if
the rule allows non-profit hospitals to
dominate the hospital market and have
more leverage in network negotiations.
These commenters do not provide any
empirical evidence to support this
assertion. Moreover, for the reasons
described in Part V.D.5, the Commission
disagrees that the ability to use non-
competes will provide a material
competitive advantage to non-profit
hospitals. Another commenter stated
that if non-competes are prohibited,
physicians will leave States with lower
market reimbursement rates for those
with higher rates, increasing healthcare
costs and shortages. Commenters did
not cite any empirical evidence that
supports this hypothetical assertion that
the final rule would increase healthcare
costs or shortages due to physicians
leaving States with lower
reimbursement rates, and the
Commission is aware of none. However,
the Commission notes that it received
many comments from doctors, nurses,
and other healthcare professionals
asserting that non-competes worsen
healthcare shortages.598
Some commenters stated that non-
competes may improve access to
physicians due to non-compete-led
consolidation or more efficient patient-
sharing within practices, and that
Hausman and Lavetti’s study is unable
to quantify these benefits. In response,
the Commission notes that there is no
empirical literature bearing out this
theory, and that the commenters
overwhelmingly stated that non-
competes decrease patients’ access to
the physicians of their choice, increase
healthcare shortages, and negatively
affect the quality of health care.599
iv. Non-Competes May Reduce Product
and Service Quality and Consumer
Choice
The negative effects of non-competes
on competition may also degrade
product and service quality and
consumer choice. Competition
encourages firms to expand their
product offerings and innovate in ways
that lead to new and better products and
services. 600 However, by inhibiting new
business formation, increasing
concentration, and reducing innovation,
non-competes reduce competitive
pressure in product and service markets,
which may reduce product quality and
consumer choice. In addition, poor
working conditions and less optimal
matching of workers and firms may lead
to reductions in the quality of products
and services. For these reasons, non-
competes may tend to negatively affect
competitive conditions in product and
service markets by reducing product
quality and consumers’ options.
Such effects are less readily
quantifiable than the other negative
effects of non-competes on product and
service markets—i.e., the negative
effects on new business formation,
innovation, concentration, and
consumer prices. It is thus unsurprising
that there are not reliable empirical
studies of these effects. However, the
Commission received an outpouring of
public comments on this issue.
Hundreds of commenters, primarily
from the healthcare field, described how
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601 As described in Parts IV.B.3.b.i and ii, the
Commission finds that the effects of non-competes
on new business formation and innovation,
standing alone, are sufficient to sustain its finding
that non-competes tend to negatively affect
competitive conditions in product and service
markets.
602 See President’s Advisory Commission on
Consumer Protection and Quality in the Health Care
Industry, Consumer Bill of Rights and
Responsibilities, Executive Summary (1997),
https://govinfo.library.unt.edu/hcquality/cborr/
index.htm.
603 See William F. Sherman et al., The Impact of
a Non-Compete Clause on Patient Care and
Orthopaedic Surgeons in the State of Louisiana:
Afraid of a Little Competition?, 14 Orthopedic Revs.
(Oct. 2022), https://www.ncbi.nlm.nih.gov/pmc/
articles/PMC9569414/.
604 Individual commenter, FTC–2023–0007–
19853.
605 Individual commenter, FTC–2023–0007–4072.
606 Individual commenter, FTC–2023–0007–4440.
607 Individual commenter, FTC–2023–0007–4270.
608 Individual commenter, FTC–2023–0007–2384.
non-competes reduce product and
service quality and consumer choice.
The large number of comments the
Commission received on this issue, the
wide variety of impacts commenters
describe, and the fact that the impacts
commenters describe are
overwhelmingly negative, indicate that
non-competes reduce product quality
and consumer choice, further bolstering
the Commission’s finding that non-
competes tend to negatively affect
competitive conditions in product and
service markets.601
The commenters who addressed the
effects of non-competes on product
quality and consumer choice primarily
discussed the healthcare industry. The
majority of these comments focused on
how non-competes harm patient care.
Hundreds of physicians and other
commenters in the healthcare industry
stated that non-competes negatively
affect physicians’ ability to provide
quality care and limit patient access to
care, including emergency care. Many of
these commenters stated that non-
competes restrict physicians from
leaving practices and increase the risk of
retaliation if physicians object to the
practices’ operations, poor care or
services, workload demands, or
corporate interference with their clinical
judgment. Other commenters from the
healthcare industry said that, like other
industries, non-competes bar
competitors from the market and
prevent providers from moving to or
starting competing firms, thus limiting
access to care and patient choice.
Physicians and physician organizations
said non-competes contribute to
burnout and job dissatisfaction, and said
burnout negatively impacts patient care.
In addition, physicians and physician
organizations stated that, to escape non-
competes, physicians often leave the
area, and that this severs many
physician/patient relationships. These
commenters stated that non-competes
therefore cause patients to lose the
knowledge, trust, and compatibility that
comes with long-established
relationships. These commenters also
said that strong physician/patient
relationships and continuity of care
improve health outcomes, particularly
for complex, chronic conditions or
patients who need multiple surgeries.
These commenters described how
patients who lose their physicians to
non-competes either travel long
distances to see that physician, switch
physicians, or lose access entirely if no
other physicians are available. One
physician argued that taking away a
patient’s ability to choose their provider
violates the Patients’ Bill of Rights.602
One medical society cited a 2022
survey of Louisiana surgeons in which
64.4% of the surgeons believed non-
competes force patients to drive long
distances to maintain continuity of care,
and 76.7% believed they force surgeons
to abandon their patients if they seek
new employment. 603 This study had a
small sample size and thus the
Commission gives it limited weight, but
the Commission notes that it accords
with the many comments the
Commission received describing how
patients must drive long distances to
maintain continuity of care—or are
unable to do so, resulting in harms to
their health. Illustrative comments on
how non-competes affect the quality of
patient care include the following:
• As a primary care physician I truly hope
to see [the rule] move forward. I recently left
my position at one company and for a year
commuted an hour to be outside of my non-
compete radius. I recently returned to my
community and discovered I have more
patients than I can count who simply didn’t
get care for over a year because they didn’t
want to find a new [primary care physician]
but also couldn’t make the hour drive to see
me at my new location. The commute was
annoying for me, but ultimately the only ones
truly hurt were patients. Let’s stop hurting
our patients by restricting their ability to see
their physicians.604
• My practice has operated since the 1990s
in Danville, Kentucky. We are the only
cardiology practice that has been present and
has worked tirelessly to serve this rural
community. The practice was a private
practice originally. Unfortunately, just as
most cardiac practices throughout the
country have had to, our practice had to
come under the control of these hospital
systems to maintain its viability. . . . The
CEO and the administration . . . have
squeezed us out and forced us to leave the
area with the employment contract non-
compete in place. . . . I have spent the last
6 months hugging patients, medical staff,
nursing who are stricken by the fact that we
are being pushed out. Patients desperately
ask me how they can maintain care if they
have to travel up to an hour to see their
doctors with this change. They worry how
they can pay for the steep gas prices to see
their doctors. . . . They are truly concerned
for the health of their families. All the while
all I can do is tell them that my non-compete
does not allow me, their cardiologist for the
past decade, to give them any advice on how
to maintain their care.605
• As a Physician, I had a non compete
clause in my contract that extended two
counties wide (100 square miles). . . .
[W]hen I would not sign a contract
amendment regarding pay that was very
unfavorable and nebulous I was called in and
summarily dismissed ‘no cause.’ Because of
that I had to work out of state and my
patients were instantly without a physician.
The community did not have enough
physicians to be able to care for the patients
who now had no medical provider. During
COVID this lack of access to healthcare for
patients most certainly led to increased
unnecessary illness and death. . . . Patients
are suffering with access to healthcare, and
physician shortages are being exacerbated
because every time a physician has to leave
because of a non compete clause they start
hiring and credentialing all over again and it
can take months for them to be able to work
again.606
• Being a therapist, non-competes are
extremely scary when it comes to patient
care. Some include date ranges in which we
cannot communicate with our patients, some
of whom have severe trauma histories or
suicidal ideations. If a clinician changes
companies but is unable to continue meeting
a patient, who is at fault if there is an injury
or death? . . . Some non-competes include
mileage in which a clinician cannot create
their own company or rent out an office
within a certain radius—how is this a safe
practice? How can clients continue to work
on their mental health and desire to stay
alive if they have to change clinicians due to
a noncompete clause? 607
• Due to mistreatment and to escape
workplace toxicity, one of my colleagues left
our practice in compliance to our non-
compete conditions, even though they caused
great hardship. I, too, wanted to leave, but
could not because doing so would have
harmed my family’s well being. What I
witnessed in the aftermath was
unconscionable. There was a void in patient
care and months later, there still is a void.
Not only was this physician required to move
quite a distance from the practice, he was
forbidden to even inform his patients that he
was leaving. The practice in turn, did not
inform the patients, and when asked, just
informed them that he was no longer with
the practice. Consequently, wait times to
treat cancers doubled and now have
tripled. 608
• I would like to open a new clinic in my
town, but my noncompete would disallow
that from happening immediately.
Furthermore, I worry that my patients that
need medical care wouldn’t be able to access
it at my current clinic because the providers
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609 Individual commenter, FTC–2023–0007–1206.
610 Individual commenter, FTC–2023–0007–0677.
611 Lavetti, Simon, & White, supra note 82.
612 See supra note 305 and accompanying text.
613 See, e.g., Comment of Am. Med. Ass’n, FTC–
2023–0007–21017, at 4–5 (citing AMA Code of
Medical Ethics Opinion 11.2.3.1). After the
comment period closed, the AMA adopted a policy
supporting banning non-competes for physicians in
clinical practice who are employed by hospitals,
hospital systems, or staffing companies, though not
those employed by private practices. This policy
change does not have legal effect. Andis
Robeznieks, AMA Backs Effort to Ban Many
Physician Noncompete Provisions, Am. Med. Ass’n
(Jun. 13, 2023), https://www.ama-assn.org/medical-
residents/transition-resident-attending/ama-backs-
effort-ban-many-physician-noncompete. 	614 See Model Rule 5.6, supra note 532.
are booked out 6+ months, and if one left that
would make those immediately increase to
nearly a year, which could potentially cause
my patient lasting damage. If I could open
my own clinic locally without the constraints
of the noncompete, those patients would be
able to continue care as necessary with me,
and I wouldn’t feel stuck with poor
management worsening patient care for my
patients.609
• As a veterinarian, I can personally assure
the FTC that such restrictions have caused
both death and permanent disability of
pets. . . . In nearly every scenario I have
heard of, the veterinary business that requires
and enforces non-compete clauses is
underserving the pet-owning public. This is
the current situation for veterinary medicine
on a national level. Hospitals are so
overwhelmed that they are not accepting new
patients, turning away emergency cases, and
imposing extremely long (several months or
more) waiting lists for appointments and/or
scheduled procedures. If a hospital cannot
accommodate the patients who require
veterinary care, that hospital is not able to
compete with the existing demand for
services. . . . Is it fair for pet owners who
cannot get their pets in to see a veterinarian
(even on emergency situations) to have the
veterinary hospitals who refuse to see their
pets remove other options for care via non-
compete clauses? These clauses are being
blatantly abused by certain large veterinary
businesses so that these organizations can
maintain a pool of potential patients (on
waiting lists) to draw from. Unfortunately,
many of these dogs and cats die while
waiting to be seen. At least in my profession,
the non-compete concept has reached an
epitome of unethical conduct. In addition,
economic growth has been stunted due to
self-serving greedy people in power. Please
get rid of this horrible clause and lets make
sure pets and their owners get what they
need, when they need it.610
Some hospital associations argued
that a study of physician markets 611
shows that non-competes improve
patient care. According to these
commenters, this research finds that
non-competes make in-practice referrals
more likely, increasing revenue and
wages and providing patients with more
integrated and better care. In response,
the Commission notes that while the
study finds that non-competes make
physicians more likely to refer patients
to other physicians within their
practice—increasing revenue for the
practice—it makes no findings on the
impact on the quality of patient care.
The Commission further notes that
pecuniary benefits to a firm cannot
justify an unfair method of
competition.612
Some medical practices argued that
within-group referrals allow physicians
to coordinate care plans and simplify
logistics, and that non-competes protect
the stability of those care teams to
patients’ benefit. Some industry
associations and hospitals argued that
non-competes improve patient choice
and continuity of care because they stop
physicians from leaving a health
provider, benefiting patients who
cannot follow the provider due to
geographic or insurance limitations.
One physician association said
physicians leaving jobs can be costly to
patients, who must transfer records and
reevaluate insurance coverage.
The Commission notes that the vast
majority of comments from physicians
and other stakeholders in the healthcare
industry assert that non-competes result
in worse patient care. The Commission
further notes that the American Medical
Association discourages the use of non-
competes because they ‘‘can disrupt
continuity of care, and may limit access
to care.’’ 613 In addition, there are
alternatives for improving patient
choice and quality of care, and for
retaining physicians, that burden
competition to a much less significant
degree than non-competes.
A related issue frequently raised in
the comments is the impact non-
competes have on healthcare shortages.
According to many commenters, non-
competes contribute to shortages by
preventing physicians from moving to
areas where their skills and specialties
are needed; forcing physicians out of
such areas; or forcing them out of
practice entirely due to contractual
restrictions or burnout. Such shortages,
according to these commenters,
decrease access to care, increase wait
times, lead to canceled procedures, and
decrease the quality of care. Many
commenters stated that these effects of
non-competes are particularly acute in
rural, underserved, and less affluent
areas that already have difficulty
attracting healthcare professionals.
Some commenters argued that provider
shortages can, in combination with non-
competes, create monopolies.
A smaller number of commenters
from the healthcare industry argued that
non-competes alleviate healthcare
shortages and prevent hospital or
facility closures by keeping physicians
from leaving underserved areas and
reducing fluctuations in labor costs.
Some of these commenters asserted that
a ban on non-competes would upend
healthcare labor markets, thereby
exacerbating healthcare workforce
shortages, especially in rural and
underserved areas. A medical society
argued that non-competes can allow
groups to meet contractual obligations
to hospitals, as physicians leaving can
prevent the group from ensuring safe
care. As the Commission notes, there are
not reliable empirical studies of these
effects, and these commenters do not
provide any. However, the Commission
notes that the rule will increase labor
mobility generally, which makes it
easier for firms to hire qualified
workers.
Commenters in a variety of industries
beyond healthcare markets also
provided a wide range of examples of
how non-competes diminish the quality
of goods and services, including
preventing businesses from hiring
experienced staff and creating worker
shortages. Commenters stated that,
where firms in a market use non-
competes, it can be difficult for other
firms to remain in the market, and
consumers thus lose the freedom to
choose providers. Several comments
pointed favorably to the American Bar
Association’s longstanding ban on non-
competes for most lawyers to protect
clients’ freedom to choose their lawyer,
in contrast with other highly paid and
highly skilled professions such as
physicians and their patients or
clients.614
Commenters from outside the
healthcare industry mainly focused on
how non-competes increase
concentration within industries, which
reduces firms’ incentive to innovate and
results in consumers having fewer
choices. Other commenters described
how non-competes lock highly talented
workers out of their fields or force them
into jobs where they are less productive,
depriving the marketplace of the
products and services they would have
developed. Illustrative examples of
these comments include the following:
• As a software developer who often works
under contracts containing sections
stipulating non-compete agreements, I have
observed first hand how they can harm the
economy by bolstering monopolies, such as
in sectors where clientele only have a single
choice for meeting their engineering needs.
Often, these clients have no other options
and are forced to meet whatever arbitrary
price point is set by the leading (sole)
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615 Individual commenter, FTC–2023–0007–5818.
616 Individual commenter, FTC–2023–0007–1980.
617 Individual commenter, FTC–2023–0007–4446.
618 Several commenters requested changes to
proposed § 910.2(a) to provide various exceptions to
coverage under the final rule. The Commission
addresses these comments in Part V.C.
company, and that company may in turn
operate howsoever they choose without
feeling the need to adopt reasonable business
practices that might exist were there
competition.615
• As an aspiring tree care professional,
non-compete agreements prevent me from
switching employers/companies to access
better work conditions or opportunities. No
tree service company has ever invested in
me. I learned to climb and saw while
working for Federal agencies (USDA and
NPS), and also through self-education and
practice on my own. I believe that non-
compete agreements have adversely limited
competition in the tree service industry. This
hurts employees who could do better if they
were free to change their place of
employment, and it hurts consumers who
have fewer tree service providers to choose
from. 616
• I worked in a business supplying
technology and materiel considered critical
for national defense. I was labeled an expert
in the field by my DoD customers and
commended multiple times for solving
logistical and technical problems with
protective equipment during the previous
two wars. I lead development contracts from
the DoD to advance the state-of-the-art in
warfighter protection, which set multiple
records for figures of merit within my
business, and which our program manager
volunteered was the most exciting
technology she had ever managed. When my
business decided to discontinue that
technology and transfer me, my noncompete
agreement prevented me from continuing to
support the DoD. I was removed from
consideration at another firm in the third
round of interviews because of my
noncompete agreement—again, for a
technology my business had decided to not
pursue and had transferred me out of. So,
instead of having the opportunity to advance
my career into management in the service of
protecting warfighters, I had to exit that
industry and move laterally, into a different
industry that cannot value 20 years of my
expertise, and which will not further the
defense of my country. If the FTC had
nationalized a prohibition on noncompete
clauses two years ago, this would not have
happened, and I would have had the
opportunity to advance my career, improve
my family’s economic fortune, and continue
to contribute to our nation’s defense. 617
Overall, the Commission believes that
the large number of comments it
received on the issue of product quality
and consumer choice and the wide
variety of overwhelmingly negative
impacts commenters describe further
bolsters the Commission’s finding that
non-competes tend to negatively affect
competitive conditions in product and
service markets.
4. Prohibitions in Section 910.2(a)(1)
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission adopts § 910.2(a)(1), which
defines unfair methods of competition
related to non-competes with respect to
workers other than senior executives.
Section 910.2(a)(1) provides that, with
respect to a worker other than a senior
executive, it is an unfair method of
competition for a person to enter into or
attempt to enter into a non-compete
clause; enforce or attempt to enforce a
non-compete clause; or represent that
the worker is subject to a non-compete
clause.
Part IV.A sets forth the Commission’s
determination that the foregoing
practices are unfair methods of
competition under section 5, and Parts
IV.B.1 through IV.B.3 explain the
findings that provide the basis for this
determination. In this Part IV.B.4, the
Commission explains the three prongs
of § 910.2(a)(1) and addresses comments
on proposed § 910.2(a).618
a. Entering Into or Attempting To Enter
Into (§ 910.2(a)(1)(i))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘enter into or attempt to
enter into a non-compete clause with a
worker.’’ The Commission adopts this
same language in the final rule in
§ 910.2(a)(1)(i). As a result, the final rule
prohibits persons from entering into or
attempting to enter into non-competes
with workers other than senior
executives as of the effective date.
(Section 910.2(a)(2)(i) separately
prohibits persons from entering into or
attempting to enter into non-competes
with senior executives as of the effective
date.)
A business commenter requested that
the Commission remove ‘‘attempt to
enter into’’ from § 910.2(a) on the basis
that it may encourage workers to sue
employers for contractual provisions
that have no practical effect on the
worker or which are not finalized in any
employment agreement. The
Commission disagrees that conduct that
would be covered by the attempt
provision—such as presenting the
worker with a non-compete, even if the
employer and worker do not ultimately
execute the non-compete—has no
practical effect on the worker. The
Commission is concerned that such
attempts to enter into non-competes still
have in terrorem effects that deter
competition. For example, workers
presented with non-competes may not
realize they are not bound by them.
Such workers may therefore refrain from
seeking or accepting other work or
starting a business, yielding the same
tendency of non-competes to negatively
affect competitive conditions that
motivate this final rule.
The Commission accordingly finalizes
the language as proposed.
b. Enforcing or Attempting To Enforce
(§ 910.2(a)(1)(ii))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘maintain with a worker a
non-compete clause.’’ In addition,
proposed § 910.2(b)(1) would have
provided that, to comply with this
prohibition on maintaining a non-
compete, an employer that entered into
a non-compete with a worker prior to
the compliance date must ‘‘rescind the
non-compete no later than the
compliance date.’’
As elaborated in Part IV.E, the
Commission has decided not to finalize
a rescission requirement. As a result, the
Commission also removes ‘‘maintain’’
from the text of § 910.2(a), to avoid any
ambiguity about whether the final rule
contains a rescission requirement.
Instead of a rescission requirement, the
final rule focuses more narrowly on the
future enforcement of existing non-
competes with workers other than
senior executives. It provides that, with
respect to a worker other than a senior
executive, it is an unfair method of
competition for a person to enforce or
attempt to enforce a non-compete
clause. An employer attempts to enforce
a non-compete where, for example, it
takes steps toward initiating legal action
to enforce the non-compete, even if the
court does not enter a final order
enforcing the non-compete.
For workers other than senior
executives, this prohibition on enforcing
a non-compete applies to all non-
competes, but affects only enforcement
or attempted enforcement conduct taken
after the effective date of the rule. In so
doing, the Commission reduces the
burden on employers by eliminating the
need to take steps to formally rescind
provisions of existing contracts, instead
simply requiring that employers refrain
from enforcing or attempting to enforce
in the future (after the effective date)
non-competes that are rendered
unenforceable by this provision of the
rule.
As explained in Part IV.C, the
Commission in the final rule does not
prohibit the future enforcement or
attempted enforcement of existing non-
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619 See Part IV.C.3.
620 See Part IV.B.3.a.
621 See, e.g., Balasubramanian, Starr, &
Yamaguchi, supra note 74 at 35 (finding that 97.5%
of workers with non-competes are also subject to a
non-solicitation agreement, NDA, or a non-
recruitment agreement, and 74.7% of workers with
non-competes are subject to all three provisions).
622 Camilla A. Hrdy & Christopher B. Seaman,
Beyond Trade Secrecy: Confidentiality Agreements
that Act Like Noncompetes, 133 Yale L. J. 669, 676
(2024) (‘‘Courts across jurisdictions routinely give
confidentiality agreements ‘more favorable
treatment’ than noncompetes. And confidentiality
agreements are not typically subject to the same
limitations that are applied to noncompetes. . . .
Overall, courts tend to apply a default rule of
enforceability.’’) (internal citations omitted).
competes with senior executives. The
Commission considered whether to take
this approach for workers other than
senior executives, but based on the
totality of the evidentiary record
concludes that such non-competes
should not remain in force after the
effective date for three main reasons.
First, existing non-competes with
workers other than senior executives
negatively affect competitive conditions
to a significant degree, for the same
reasons as new non-competes. The
Commission believes that non-competes
with such workers that were entered
into before the effective date implicate
the concerns described in Part IV.B.3—
relating to the negative effects of non-
competes on competitive conditions in
labor, product, or service markets—to
the same degree as non-competes
entered into as of the effective date. Of
course, the Commission notes that the
empirical evidence quantifying the
harms to competition from non-
competes by definition relates to
existing non-competes.
Second, for workers other than senior
executives, existing non-competes not
only impose acute, ongoing harms to
competition, they also impose such
harms on individual workers by
restricting them from engaging in
competitive activity by seeking or
accepting work or starting their own
business after their employment ends.
As described in Part IV.B.2.b, the
Commission received thousands of
comments from workers that described
non-competes as pernicious forces in
their lives that forced them to make
choices that were detrimental to their
finances, their careers, and their
families. These concerns are less present
for senior executives, who are far more
likely than other workers to have
negotiated their non-compete and
received compensation in return,
thereby mitigating this kind of acute,
ongoing harm.
Third, because the Commission finds
that non-competes with workers other
than senior executives generally are not
bargained for and such workers
generally do not receive meaningful, if
any, compensation for non-competes,
the practical considerations that are
present with respect to existing non-
competes for senior executives
(discussed in Part IV.C.3) are far less
likely to be present for other workers.
For these reasons, the Commission
concludes that, consistent with the
proposed rule, existing non-competes
with workers other than senior
executives should not remain in force
after the effective date.
Several commenters argued that the
Commission should allow all existing
non-competes to remain in effect. Some
of these commenters argued that the
rule would upset bargained-for
agreements. Commenters asserted that
workers who received benefits in
exchange for agreeing to non-competes
would receive a windfall if such clauses
cannot be maintained and are no longer
enforceable. A few of these commenters
also argued that invalidating existing
non-compete agreements will upset
workers’ economic interests because
they will lose out on enhanced
compensation that they have received or
expect to receive in exchange for their
non-competes. Some commenters
contended that invalidating existing
non-competes would be especially
harmful to workers’ interests in non-
competes tied to particularly large
amounts of compensation, complex
compensation arrangements, or unique
forms of compensation such as equity
grants. Relatedly, some commenters
expressed concern that the NPRM did
not explain whether employers could
recoup benefits already paid in
exchange for non-competes. A few
commenters suggested that they have
given workers confidential and trade
secret information in exchange for the
worker agreeing to a non-compete that
may no longer be enforceable.
The Commission is not persuaded by
comments arguing that the rule would
upset existing bargained-for agreements.
As noted in Part IV.B and Part IV.C, the
Commission finds that workers who are
not senior executives are unlikely to
negotiate non-competes or to receive
compensation for them. Moreover, the
Commission has also determined that
non-competes with senior executives
that predate the effective date may be
enforced,619 which will substantially
reduce the number of workers with
complex compensation arrangements
whose non-competes are rendered
unenforceable after the effective date.
Other commenters argued that
employers relied on the expectation of
a non-compete when deciding how
much to invest in training their workers
or the extent to which they share trade
secrets with their workers. In response,
the Commission notes that firms that are
concerned about retention have tools
other than non-competes for retaining
workers, including fixed-duration
employment contracts (i.e., forgoing at-
will employment and instead making a
mutual contractual commitment to a
period of employment) and providing
improved pay and benefits (i.e.,
competing on the merits to retain the
worker’s labor services). In addition,
while some workers that have received
training may leave a firm for a
competitor, firms will also be able to
attract highly trained workers from
competitors, and this increased job-
switching will likely lead to more
efficient matching between workers and
employers overall.620
The Commission is not persuaded by
commenters who contended that
invalidating existing non-competes
would disturb employer expectations
with respect to sharing trade secrets or
other commercially sensitive
information. As explained in Part
IV.D.2, the Commission finds that
employers have adequate alternatives to
non-competes to protect these interests,
including trade secret law and NDAs,
and that these alternatives do not
impose the same burden on competition
as non-competes. Some commenters
contended that employers may not have
adequate alternatives in place for
existing non-competes and that former
workers may not agree to new NDAs.
But the Commission finds that it is rare
for an employer who entered into a non-
compete agreement as a means of
protecting trade secrets or commercially
sensitive information to have not also
entered into an NDA with the worker.621
This is especially true given that non-
competes are generally less enforceable
than NDAs.622 In any event, nothing in
the final rule prevents employers from
entering new NDAs with workers.
Some commenters contended that
invalidating existing non-competes
would enable new employers to ‘‘free
ride’’ off former employers’ investments
in training. The Commission addresses
comments about ‘‘free riding’’ and
training investments in Part IV.D.2.
Several comments argued that a final
rule should not invalidate existing non-
competes because the economic impact
is too unpredictable. These commenters
maintained that the number of
individual employment contracts that
would be invalidated means that the
economic impact would be
exceptionally widespread, and likely
impossible to accurately predict. In
response, the Commission notes that it
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623 See Part X.E.
624 See Part V.C.
625 See Prescott & Starr, supra note 413 at 10–11.
626 See Starr, Prescott, & Bishara, supra note 68
at 81.
627 NPRM, proposed § 910.2(a).
628 Id. at 3500.
629 Id. at 3502–04.
630 Id. at 3520.
631 See § 910.1.
has assessed the benefits and costs of
the final rule and finds that the final
rule has substantial benefits that clearly
justify the costs (even in the absence of
full monetization).623
c. Representing (§ 910.2(a)(1)(iii))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘represent to a worker that
the worker is subject to a non-compete
clause where the employer has no good
faith basis to believe that the worker is
subject to an enforceable non-compete
clause.’’ The Commission adopts the
same language in the final rule.
Pursuant to § 910.2(a)(1)(iii), it is an
unfair method of competition for an
employer to represent that a worker
other than a senior executive is subject
to a non-compete clause. The ‘‘good
faith’’ language remains in the final rule
but, for clarity, it has been moved to
§ 910.3, which contains exceptions to
the final rule.624
Under this ‘‘representation’’ prong,
the final rule prohibits an employer
from, among other things, threatening to
enforce a non-compete against the
worker; advising the worker that, due to
a non-compete, they should not pursue
a particular job opportunity; or telling
the worker that the worker is subject to
a non-compete. The Commission
believes that this prohibition on
representation is important because
workers often lack knowledge of
whether employers may enforce non-
competes. 625 In addition, the evidence
indicates that employers frequently use
non-competes even when they are
unenforceable under State law,
suggesting that employers may believe
workers are unaware of or unable to
vindicate their legal rights.626
Employers can exploit the fact that
many workers lack knowledge of
whether non-competes are
unenforceable under State law by
representing to workers that they are
subject to a non-compete when they are
not or when the non-compete is
unenforceable. Such misrepresentations
can have in terrorem effects on workers,
causing them to refrain from looking for
work or taking another job, thereby
furthering the adverse effects on
competition that the Commission is
concerned about.
In addition, threats to litigate against
a worker—even where the worker is
aware of the Commission’s rule and
believes the non-compete is
unenforceable—may deter the worker
from seeking or accepting work or
starting their own business. As
explained in Part IV.B.2.b.ii, many
commenters—including highly paid
workers—explained in their comments
that they believed their non-compete
was unenforceable, but they
nevertheless refrained from seeking or
accepting work or starting their own
business because they could not afford
to litigate against their employer for any
length of time. For this reason, the
Commission believes it is important for
the final rule to prohibit employers not
only from enforcing or attempting to
enforce non-competes against workers
other than senior executives, but also
threatening to do so.
A commenter suggested limiting the
‘‘representation’’ prong to instances
where the employer has no good-faith
basis to believe the non-compete is valid
‘‘under local or State law,’’ even if the
non-compete is invalid under the final
rule. The Commission does not adopt
this approach because representing to
workers that they are subject to a non-
compete, where the rule provides that
the non-compete is unenforceable,
would mislead the worker and would
tend to deter them from competing
against the employer by seeking or
accepting work or starting a business.
C. Section 910.2(a)(2): Unfair Methods
of Competition—Non-Competes With
Senior Executives
In the NPRM, the Commission
proposed to prohibit non-competes—
including non-competes entered into
before the effective date—with all
workers. 627 The Commission
preliminarily found that all non-
competes, whether with senior
executives or other workers, were
restrictive conduct that negatively
affected competitive conditions.628
However, while the Commission
preliminarily found that non-competes
with workers other than senior
executives were exploitative and
coercive, the Commission stated that
this finding did not apply to senior
executives. 629 The Commission
requested comment on that preliminary
finding, as well as on whether non-
competes with senior executives should
be excluded from the rule or otherwise
subject to a different standard. The
NPRM did not define the term ‘‘senior
executive,’’ but sought comment on
potential approaches to defining the
term.630
In the final rule, the Commission does
not find that senior executives—
specifically, highly paid workers with
the highest levels of authority in an
organization—are exploited or coerced
in connection with non-competes, and it
describes the record on this issue in Part
IV.C.1. The Commission does, however,
find that non-competes with senior
executives are an unfair method of
competition, based on the totality of the
evidence, including its review of the
empirical literature, its review of the
full comment record, and its expertise
in identifying practices that impair
competitive conditions in the economy.
Specifically, the Commission finds that
such non-competes are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions
in product and service markets and
labor markets. Indeed, non-competes
with senior executives may tend to
negatively affect competitive conditions
in product and service markets to an
even greater degree than non-competes
with other workers, given the outsized
role senior executives play in forming
new businesses and setting the strategic
direction of firms with respect to
innovation. The Commission explains
the basis for these findings in Part
IV.C.2.
Because non-competes with senior
executives are not exploitative or
coercive, however, this subset of
workers is less likely to be subject to the
kind of acute, ongoing harms currently
being suffered by other workers subject
to existing non-competes. In addition,
commenters raised credible concerns
about the practical impacts of
extinguishing existing non-competes for
senior executives. For these reasons, as
described in Part IV.C.3, the
Commission allows existing non-
competes with senior executives to
remain in force—unlike existing non-
competes with all other workers, which
employers may not enforce after the
effective date.
In Part IV.C.4, the Commission
explains the final rule’s definition of
‘‘senior executive’’ and the related
definitions it is adopting.631 The
Commission finds that the final rule’s
definition of ‘‘senior executive’’
appropriately captures the workers that
are more likely to have complex
compensation packages that present
practical challenges to untangle, and
who are less likely to be exploited or
coerced in connection with their non-
competes. To capture this subset of
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38405	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
632 Id.
633 NPRM at 3503.
634 Id. at 3504.
635 Id. at 3503–04.
636 Stewart J. Schwab & Randall S. Thomas, An
Empirical Analysis of CEO Employment Contracts:
What Do Top Executives Bargain For?, 63 Wash. &
Lee L. Rev. 231, 256–57 (2006).
637 Id. at 244.
638 BLS, Occupational Employment and Wage
Statistics, Tables Created by BLS, https://
www.bls.gov/oes.tables.htm. These data are from
the May 2022 National XLS table for Top
Executives under private ownership.
639 For the sake of readability, the Commission
refers to the commenters based on how they
described themselves. For example, if a commenter
said they were a senior executive, the Commission
refers to them as a senior executive (rather than as
a ‘‘self-described senior executive’’).
workers for whom the Commission
decides to leave existing non-competes
unaffected, the final rule adopts a
definition of senior executive that uses
both an earnings test and a job duties
test. Specifically, the final rule defines
the term ‘‘senior executive’’ to refer to
workers earning more than $151,164
who are in a ‘‘policy-making position’’
as defined in the final rule.632
Finally, in Part IV.C.5, the
Commission explains the regulatory text
it is adopting in § 910.2(a)(2), which
defines unfair methods of competition
related to non-competes with senior
executives.
1. The Commission Does Not Find That
Non-Competes With Senior Executives
Are Exploitative or Coercive
The Commission stated in the NPRM
that its preliminary finding that non-
competes are exploitative and coercive
did not apply to senior executives. The
Commission stated that non-competes
with senior executives are unlikely to be
exploitative or coercive at the time of
contracting, because senior executives
are likely to negotiate the terms of their
employment and may often do so with
the assistance of counsel. 633 The
Commission also stated that such non-
competes are unlikely to be exploitative
or coercive at the time of the executive’s
potential departure, because senior
executives are likely to have bargained
for a higher wage or more generous
severance package in exchange for
agreeing to the non-compete.634 The
Commission sought comment on
whether there are other categories of
highly paid or highly skilled workers
(i.e., other than senior executives) who
are not exploited or coerced in
connection with non-competes.635
Based on the totality of the record,
including the many comments
submitted on these questions, the
Commission finds that senior
executives—specifically, highly paid
workers with the highest levels of
authority in an organization—are
substantially less likely than other
workers to be exploited or coerced in
connection with non-competes. For
these reasons, the Commission does not
find that non-competes with senior
executives are exploitative or coercive.
There is little empirical evidence on
the question of whether non-competes
with senior executives are exploitative
or coercive. A 2006 study of non-
competes with CEOs finds that many of
these workers negotiated a severance
period as long or longer than their non-
compete period, making it easier to sit
out of the market.636 However, this
study was limited to very-high-earning
CEOs at large public companies—the
average total compensation of the CEOs
studied was $1.65 million 637—so its
findings do not necessarily capture the
experiences of other senior executives.
Many Americans work in positions with
‘‘senior executive’’ classifications.
According to BLS, there were almost 3.4
million ‘‘top executives’’ in the U.S. in
2022 at firms under private ownership,
and the median income for these
workers was $99,240.638
The comment record on whether
senior executives experience
exploitation and coercion in relation to
their non-competes is mixed. Many
commenters asserted that, because some
senior executives negotiate their non-
competes with the assistance of expert
counsel, they are likely to have
bargained for a higher wage or more
generous severance package in exchange
for agreeing to the non-compete, and
thus their non-competes are not
exploitative or coercive. Several
commenters stated that senior
executives frequently negotiate non-
competes for valuable consideration
and/or typically agree to non-competes
only in exchange for compensation.
Some senior executives said they were
not exploited or coerced in connection
with non-competes. 639 Several
commenters agreed with the
Commission’s preliminary finding that
senior executives often obtain the
assistance of counsel with respect to
non-competes. Some commenters stated
that to the extent a non-compete is not
exploitative or coercive at the time of
contracting, it is also not exploitative or
coercive at the time of departure. One
CEO stated that non-competes should be
permissible for senior executives when
they are entered into in exchange for
severance and when the senior
executive leaves voluntarily.
The Commission notes that a
relatively small number of self-
identified senior executives submitted
comments in their personal capacity.
While the Commission did receive some
comments from self-identified senior
executives suggesting that their non-
competes were exploitative and
coercive, such comments were far less
common than for other workers.
However, some senior executives did
report experiencing similar issues of
exploitation and coercion. Several
senior executives said that their non-
competes were required and non-
negotiable. Multiple senior executives
described their own non-competes as
‘‘one-sided’’ in favor of the employer.
Some senior executives said they were
not given consideration for the non-
compete, and even some who said they
received consideration still said their
non-competes were exploitative and
coercive. For example, some senior
executives said they: (1) were required
to sign a non-compete under threat of
losing their job or their earned
compensation; (2) were forced into a
stock share buyout that included a non-
compete; or (3) could obtain long-term
compensation only if they signed a non-
compete. Two advocacy groups stated
that many senior executives may lack
power to avoid non-competes and that
employers still hold most of the leverage
in employment negotiations, even with
respect to senior executives. An
employment law firm stated that in its
experience, it had not seen higher
compensation for senior executives and
other highly paid workers in
jurisdictions where non-competes were
allowed, and that employers rarely
provide compensation for non-
competes. The firm said that senior
executives and other highly paid
workers are more likely to receive
severance payments, but such payments
are paid only in some cases. It said that
even when paid, the severance
payments often do not fully compensate
for what a senior executive could have
otherwise earned during the non-
compete period.
Furthermore, several self-identified
senior executives said they felt unable
to leave their company because of their
non-competes. Many of these
commenters said they feared being
unemployed. Some senior executives
said they feared or could not afford
litigation, while two senior executives
said that they could not afford to fight
non-competes they believed were
unenforceable. Several self-identified
senior executives, having spent their
careers in one industry, said they were
forced to sit out of the market for long
periods, forgoing earnings and the
ability to work. Others reported
struggling to find a job and suffering
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640 One of those commenters cited two USA
Today articles that examined Federal workforce
records for 88 companies in the S&P 100 to assess
the number of Asian and Latina women in
executive positions. The articles did not include the
underlying data used for the evaluation. See Jessica
Guynn & Jayme Fraser, Asian Women Are Shut Out
of Leadership at America’s Top Companies. Our
Data Shows Why, USA Today (Apr. 25, 2022),
https://www.usatoday.//money/2022/04/25/asian-
women-executives-discrimination-us-companies/
7308310001/?gnt-cfr=1; Jessica Guynn & Jayme
Fraser, Only Two Latinas Have Been CEOs at a
Fortune 500 Company: Why So Few Hispanics
Make It to the Top, USA Today (Aug. 2, 2022),
https://www.usatoday.com/story/money/2022/08/
02/hispanic-latina-business-demographics-
executive//?gnt-cfr=1. These news reports find a
disparity in the number of Asian and Latina women
in senior executive roles at these companies but
make no specific findings on bargaining power.
While lack of representation and other factors may
impact bargaining power, the Commission believes
that these two articles (with no underlying data
provided) are insufficient evidence at this time to
find exploitation and coercion with respect to this
subset of senior executives.
641 See Part IV.B.2.b.i–ii.
642 See Part IV.B.2.b.ii.
643 See id. 	644 See Part II.F.
financially, including living on Social
Security or nearing bankruptcy.
One law firm specializing in
executive compensation said many
senior executives may have achieved
top roles at companies because they
have spent decades in the same industry
and would struggle to find work with
firms other than competitors. Another
law firm said senior executives blocked
from an industry could lose their long-
cultivated reputation in the industry
and, as a result, time out of an industry
could harm their careers. Worker
advocacy organizations and a law firm
said senior executives tend to be
relatively older and, as older workers
are forced out of the job market, they are
likely to be losing out on increasingly
scarce employment opportunities
relative to their younger counterparts.
Another advocacy group argued that the
Commission did not provide sufficient
evidence to support its preliminary
finding that non-competes are not
exploitative and coercive for senior
executives. A few commenters
suggested that senior executives from
historically marginalized groups may be
paid less and have less bargaining
power than other senior executives.640
Critically, the Commission received
an outpouring of comments indicating
that highly paid workers who are not
senior executives (i.e., who are not
workers with the highest levels of
authority in an organization) are often
coerced or exploited via non-competes.
The Commission received many
comments from workers in relatively
higher-wage fields—such as medicine,
engineering, finance and insurance, and
technology—who stated that employers
exploited and coerced them through the
use of non-competes.641 The vast
majority of higher-wage workers who
are not senior executives reported that
they lacked bargaining power in relation
to their employer; did not negotiate
their non-compete or receive
compensation for it; and/or were not
informed of the non-compete until after
they received the job offer. Many of
these workers stated that their non-
compete was hidden or obscured; that
their employers misled them about the
terms of a non-compete; and/or that the
non-compete was confusingly worded
or vague. In addition, many high-wage
workers recounted how non-competes
coerced them into refraining from
competing against their employer by
forcing them to stay in jobs they wanted
to leave or forcing them to leave their
profession, move their families far away,
and/or commute long distances. And a
large share of high-wage workers argued
that even where their non-competes
were overbroad and likely
unenforceable, they were deterred from
seeking or accepting other work or
starting a business by the threat of a
lawsuit from their employer, which they
said would be ruinous to their finances
and professional reputations. 642 The
Commission accordingly finds that
higher-wage workers who are not senior
executives are often exploited and
coerced through employers’ use of non-
competes.
In addition, the Commission believes
it is appropriate to conclude that lower-
earning workers, regardless of their job
title or function in an organization, are
more likely to be exploited or coerced
in connection with non-competes. As
noted, many workers classified as ‘‘top
executives’’ make under $100,000.
Commenters did not self-report their
income, so the Commission cannot
definitively determine that the self-
identified senior executives who
reported exploitation and coercion are
lower-wage senior executives. Because
of their incomes, however, lower-wage
senior executives are likely subject to
many of the same exploitative and
coercive factors that affect other
workers, such as the inability to afford
a non-compete lawsuit, forgo work for a
lengthy period, leave the field, or
relocate.643 Comments from some senior
executives confirmed that they did not
have sufficient bargaining power to
negotiate the non-compete or
consideration for it, suffered serious
financial harm from non-competes, and
could not afford to litigate their non-
competes. Accordingly, the Commission
finds that a mere job title alone is
insufficient to confer bargaining power
on a worker, and lower-wage senior
executives can be subject to the same
exploitation and coercion that other
workers face.
However, having considered the
comments and the available empirical
evidence on this question, the
Commission does not find that non-
competes with highly paid workers who
are also senior executives are likely to
be exploitative or coercive. The
Commission stresses that it is not
affirmatively finding that such non-
competes can never be exploitative or
coercive. The Commission has simply
determined the record before it is
insufficient to support such a finding at
this time.
2. The Use of Non-Competes With
Senior Executives is an Unfair Method
of Competition Under Section 5
While the Commission does not find
that non-competes with senior
executives are exploitative and coercive,
the Commission determines that these
non-competes are nonetheless unfair
methods of competition, for the reasons
described herein.
To determine whether conduct is an
unfair method of competition under
section 5, the Commission assesses two
elements: (1) whether the conduct is a
method of competition, as opposed to a
condition of the marketplace and (2)
whether it is unfair, meaning that it goes
beyond competition on the merits. The
latter inquiry has two components: (a)
whether the conduct has indicia of
unfairness and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.644
Non-competes with senior executives
satisfy all the elements of the section 5
inquiry. As described in Part IV.C.2.a,
these non-competes are methods of
competition. As described in Part
IV.C.2.b, these non-competes are facially
unfair conduct because they are
restrictive and exclusionary. And as
described in Part IV.C.2.c, these non-
competes tend to negatively affect
competitive conditions in product and
service markets and in labor markets.
Because the Commission finds that non-
competes with senior executives are
unfair methods of competition, the
Commission declines to exclude them
from the final rule. However, as
described in Part IV.C.3, the final rule
allows existing non-competes with
senior executives to remain in effect,
due to the considerations described
therein.
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645 See Part IV.B.1.
646 See Part I.B.2 (noting studies estimating that
about two-thirds of senior executives work under
non-competes).
647 See Part IV.C.2.i–ii (describing the negative
effects of non-competes with senior executives on
markets for products and services and labor
markets).
648 NPRM at 3502.
649 Id. at 3513.
650 Id. 	651 Id.
a. The Commission Finds That Non-
Competes With Senior Executives are a
Method of Competition, Not a Condition
of the Marketplace
With respect to the first element—
whether conduct is a method of
competition—the Commission finds that
non-competes with senior executives
are a method of competition for the
same reasons as non-competes with
other workers.645
b. Non-Competes With Senior
Executives are Facially Unfair Conduct
Because They are Restrictive and
Exclusionary
In Part IV.B.2.a, the Commission finds
that non-competes with workers other
than senior executives are facially unfair
conduct because they are restrictive and
exclusionary. The Commission finds
that non-competes with senior
executives are facially unfair conduct
for the same reasons.
Like non-competes for all other
workers, the restrictive nature of non-
competes with senior executives is
evident from their name and function:
non-competes restrict competitive
activity. They prevent senior executives
from seeking or accepting other work or
starting a business after leaving their
job. And like non-competes for all other
workers, non-competes with senior
executives are exclusionary because
they impair the opportunities of rivals.
Where a worker is subject to a non-
compete, the ability of a rival firm to
hire that worker is impaired. In
addition, where many workers in a
market are subject to non-competes, the
ability of firms to expand into that
market, or entrepreneurs to start new
businesses in that market, is impaired.
While non-competes may impair the
opportunities of rivals in all labor
markets, non-competes for senior
executives are especially pernicious in
this regard. Senior executives are
relatively few in number, are bound by
non-competes at high rates,646 and have
highly specialized knowledge and skills.
Therefore, it can be extremely difficult
for existing firms and potential new
entrants to hire executive talent and to
form the most productive matches.
Because senior executives are often
compensated in return for their promise
not to compete, some commenters argue
that non-competes with senior
executives are not unfair methods of
competition. However, agreements can
present concerns under the antitrust
laws even when both parties benefit.
Here, non-competes with senior
executives are not unfair methods of
competition under section 5 because
they are unfair to the individual
executive, but because they tend to
negatively impact competitive
conditions—i.e., harm competition in
product and service markets, as well as
in labor markets—by imposing serious
negative externalities on other workers,
rivals, and consumers.647
c. Non-Competes With Senior
Executives Tend To Negatively Affect
Competitive Conditions
The Commission finds non-competes
with senior executives tend to
negatively affect competitive conditions
in product and service markets and in
labor markets. As explained in Part II.F,
the legal standard for an unfair method
of competition under section 5 requires
only a tendency to negatively affect
competitive conditions. The inquiry
does not turn on whether the conduct
directly caused actual harm in a specific
instance. Here, the tendency of non-
competes to impair competition is
obvious from their nature and function,
as it is for non-competes with workers
who are not senior executives. And even
if this tendency were not facially
obvious, the evidence confirms that
non-competes with senior executives do
in fact negatively affect competitive
conditions.
i. Non-Competes With Senior
Executives Tend To Negatively Affect
Competitive Conditions in Product and
Service Markets
In the NPRM, the Commission stated
that non-competes with senior
executives may harm competition in
product and service markets in unique
ways. 648 The Commission stated that
non-competes with senior executives
may contribute more to negative effects
on new business formation and
innovation than non-competes with
other workers, to the extent that senior
executives may be likely to start
competing businesses, be hired by
potential entrants or competitors, or
develop innovative products and
services.649 The Commission also stated
that non-competes with senior
executives may also block potential
entrants, or raise their costs, to a high
degree, because such workers are likely
to be in high demand by potential
entrants.650 The Commission
preliminarily concluded that, as a
result, prohibiting non-competes for
senior executives may have relatively
greater benefits for consumers than
prohibiting non-competes for other
workers.651
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes with senior executives
tend to negatively affect competitive
conditions in markets for products and
services, inhibiting new business
formation and innovation.
Non-Competes With Senior Executives
Inhibit New Business Formation and
Innovation
In Part IV.B.3.b, the Commission
described the extensive empirical
evidence indicating that non-competes
inhibit new business formation and
innovation. The Commission’s finding
in Part IV.B.3.b that non-competes
inhibit new business formation and
innovation does not examine non-
competes with senior executives
specifically. However, the Commission
finds that non-competes with senior
executives inhibit new business
formation and innovation at least as
much as non-competes with other
workers and likely to a greater extent,
given the outsized role of senior
executives in forming new businesses,
serving on new businesses’ executive
teams, and setting the strategic direction
of businesses with respect to
innovation.
Specifically, non-competes with
senior executives tend to negatively
affect competitive conditions in product
and service markets in three ways. First,
non-competes with senior executives
inhibit new business formation. In Part
IV.B.3.b.i, the Commission finds that
non-competes with workers other than
senior executives inhibit new business
formation. The Commission finds that
non-competes with senior executives
inhibit new business formation as much
as non-competes with other workers and
likely to a greater extent, due to the
important role senior executives play in
new business formation.
Senior executives are particularly
well-positioned to form new businesses
because of their strategic expertise and
business acumen; knowledge of
multiple facets of their industries;
experience making policy decisions for
businesses; and ability to secure
financing. Senior executives are also
often crucial to the formation of
startups, because startups often begin by
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652 See, e.g., Leslie Crowe, How to Hire Your First
Leadership Team (Oct. 24, 2023), https://
baincapitalventures.com/insight/how-to-hire-your-
first-leadership-team-as-a-startup-founder/.
653 Bradley Hendricks, Travis Howell, &
Christopher Bingham, How Much Do Top
Management Teams Matter in Founder-Led Firms?,
40 Strategic Mgmt. J. 959 (2019).
654 Yasemin Y. Kor, Experience-Based Top
Management Team Competence and Sustained
Growth, 14 Org. Sci. 707 (2003).
655 Agnieszka Kurczewska & Micha5 Mackiewicz,
Are Jacks-of-All-Trades Successful Entrepreneurs?
Revisiting Lazear’s Theory of Entrepreneurship, 15
Baltic J. of Mgmt. 411 (2020).
656 Kathleen M. Eisenhardt, Top Management
Teams and the Performance of Entrepreneurial
Firms, 40 Small Bus. Econ. 805 (2013).
657 See, e.g., Jean-Philippe Deschamps, Innovation
Leaders: How Senior Executives Stimulate, Steer
and Sustain Innovation (John Wiley & Sons, 2009);
Jean-Philippe Deschamps & Beebe Nelson,
Innovation Governance: How Top Management
Organizes and Mobilizes For Innovation (John
Wiley & Sons, 2014).
658 Christopher Kurzhals, Lorenz Graf-Vlachy, &
Andreas Ko¨ nig, Strategic Leadership and
Technological Innovation: A Comprehensive
Review and Research Agenda, 28 Corp. Governance:
An Int’l Review 437 (2020); Pascal Back & Andreas
Bausch, Not If, But How CEOs Affect Product
Innovation: A Systematic Review and Research
Agenda, 16 Int’l J. of Innovation and Tech. Mgmt.
1930001 (2019); Vassilis Papadakis & Dimitris
Bourantas, The Chief Executive Officer as Corporate
Champion of Technological Innovation: An
Empirical Investigation, 10 Tech. Analysis &
Strategic Mgmt. 89 (1998) (finding that CEO
characteristics significantly influence technological
innovation, and that the influence is particularly
powerful for new product introductions).
659 Vincent L. Barker III & George C. Mueller, CEO
Characteristics and Firm R&D Spending, 48 Mgmt.
Sci. 782 (2002).
660 Qing Cao, Zeki Simsek, & Hongping Zhang,
Modelling the Joint Impact of the CEO and the TMT
on Organizational Ambidexterity, 47 J. of Mgmt.
Stud. 1272 (2010); Olubunmi Faleye, Tunde
Kovacs, & Anand Venkateswaran, Do Better-
Connected CEOs Innovate More?, 49 J. of Fin. And
Quant. Analysis 1201 (2014).
661 See, e.g., Orly Lobel, Talent Wants to Be Free
(Yale Univ. Press, 2013).
662 Yihui Pan, The Determinants and Impact of
Executive-Firm Matches, 63 Mgmt. Sci. 185 (2017);
Matthew Ma, Jing Pan, & Xue Wang, An
Examination of Firm-Manager Match Quality in the
Executive Labor Market (2021), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3067808.
663 Shi, supra note 84 at 427.
664 Id.
forming a leadership team, which is
often comprised of experienced and
knowledgeable executives from
elsewhere in the industry.652 Empirical
research shows that when startups hire
top management teams from other firms,
they are more likely to grow beyond
their initial stages 653 and that top
managers’ experience in an industry
allows startups to grow more quickly.654
Additionally, empirical research finds
that startups that hire top management
teams with experience are more likely to
become successful businesses.655
Empirical research also finds that, in
addition to experience, top management
teams that have worked together in the
past are more successful than those that
have not.656 For these reasons, non-
competes with senior executives not
only inhibit new business formation by
blocking the executives from forming
new businesses; they also prevent other
potential founders from forming new
businesses, because potential founders
are less likely to start new businesses
when they are unable to assemble the
executive team they need because so
many executives in the industry are tied
up by non-competes. By inhibiting new
business formation, these non-competes
deprive product and service markets of
beneficial competition from new
entrants—competition that in turn tends
to benefit consumers through lower
prices or better product quality.
Second, non-competes with senior
executives inhibit innovation. In Part
IV.B.3.b.ii, the Commission finds that
non-competes with workers other than
senior executives inhibit innovation.
The Commission finds that non-
competes with senior executives inhibit
innovation at least as much as non-
competes with other workers and likely
to a greater extent, because senior
executives play a crucial role in setting
the strategic direction of firms with
respect to innovation.
Non-competes with senior executives
inhibit innovation by impeding efficient
matching between workers and firms.
As described in Part IV.B.3.a, labor
markets function by matching workers
and employers. The same is true for
senior executives. Executives compete
for roles at firms, and firms compete to
attract (often highly sought-after)
executives; executives choose the role
that best meets their objectives, and
firms choose the executive who best
meets theirs. Non-competes impede this
competitive process by blocking
executives from pursuing new
opportunities (i.e., positions that are
within the scope of their non-compete)
and by preventing firms from competing
to attract their talent. Thus, because
non-competes are prevalent, the quality
of the matches between executives and
firms suffers.
By inhibiting efficient matching
between firms and executives, non-
competes frustrate the ability of firms to
hire executives who can best maximize
the firm’s capacity for innovation.
Senior executives play an important role
in advancing innovation at firms.657
Senior executives are often a
fundamental part of the innovative
process, guiding the strategic direction
of the firm in terms of topics of new
research and the depth of new research;
determining the allocation of R&D
funding; and making the decision to
develop (and supervising the
development of) new products and
services.658
Research shows that labor mobility
among senior executives may tend to
foster innovation. Empirical research
finds that executives with shorter job
tenures tend to engage in more
innovation than those who are longer
tenured at firms. 659 In addition,
empirical research shows that the
strength of executives’ external
networks—which are likely stronger
among executives hired externally—
increase the rate of innovation.660
Finally, when senior executives are
hired by new companies, they bring
their experience and understanding of
the industry, which may cross-pollinate
with the capabilities of the new
company, cultivating new research
which would not otherwise be
achieved.661 By inhibiting efficient
matching between executives and firms,
non-competes impede the ability of
firms to develop innovative products
and services that benefit consumers.
Furthermore, empirical research
shows that better matching among
executives and firms drives productivity
as well as innovation. When firms and
executives have a higher quality match,
the firm as a whole is more
productive.662 By inhibiting efficient
matching between firms and executives,
non-competes tend to reduce the
productivity of firms.
In theory, firms that seek to hire an
executive could just pay the executive’s
employer (or former employer) to escape
the non-compete. However, research by
Liyan Shi describes how non-competes
with senior executives force firms to
make inefficiently high buyout
payments. Shi ultimately concludes that
‘‘imposing a complete ban on
noncompete clauses would be close to
implementing the social optimum.’’ 663
Shi explains that firms and executives
jointly create market power by entering
into non-competes and excluding rivals
from hiring experienced labor in a
competitive labor market. The existence
of a non-compete forces rivals to make
an inefficiently high buyout payment,
where the inefficiency arises due to the
market power of the incumbent firm
created by the non-compete. Rival firms
must either make these payments,
which therefore lead to deadweight
economic loss, or forgo the payment—
and, consequently, the ability to hire a
talented executive (and perhaps the
ability to enter the market at all, for
potential new firms).664 New and small
businesses in particular might be unable
to afford these buyouts. By calibrating
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665 See Part IV.B.3.b.i–ii.
666 Comment of Liyan Shi, FTC–2023–0007–
19810.
667 See FTC Policy Statement, supra note 286.
this theoretical model to data on
executive non-competes and executive
compensation, the study shows that
banning non-competes would result in
nearly optimal social welfare gains.
Shi notes that such a mechanism
could be tempered by the ability of a
labor market to provide viable
alternative workers for new or
competing businesses. However, when a
particular type of labor is somewhat
scarce, when on-the-job experience
matters significantly, or when frictions
prevent workers from moving to new
jobs—all of which tend to be the case for
senior executives—there is no way for
the market to fill the gap created by non-
competes.
Some of the evidence in this study
arises from analysis of non-compete use
coupled with non-compete
enforceability. Other evidence in the
study, including the finding that a ban
on non-competes is close to optimal,
relies not on use at the individual level,
but on prevalence of non-competes
across a labor market. The latter
approach does not rely, therefore, on
comparing individuals with and
without non-competes, and is therefore
not subject to the estimation bias that
leads the Commission to give less
weight to evidence based on the use of
non-competes.
Relevant Comments and Commission
Responses
Many commenters stated that non-
competes with senior executives reduce
new business formation and innovation,
confirming the Commission’s findings.
Several senior executives recounted
personal experiences in which a non-
compete prevented them from starting a
business. A tech executive stated that
they knew many tech executives who
would have left their roles to start
within-industry spinoffs if not for their
non-competes. A senior executive stated
that they had planned to start a small
business that would not have harmed
the former employer but had signed a
non-compete that prevented them from
doing so. A former executive stated that
they were sued after starting a new
business despite confirming with the
CEO of their former employer that doing
so would not violate the non-compete.
Another senior executive said their non-
compete prevented them from taking a
job at a smaller, more innovative
company in their industry. Some
commenters warned that permitting
non-competes for senior executives
would reinforce dominant positions for
industry incumbents who can foreclose
new entrants from access to critical
talent and expertise. An advocate for
startups stated that small businesses
significantly benefit from mentorship
from experienced founders, which can
be inhibited by non-competes.
Other commenters argued that the
Commission should exclude senior
executives from coverage under the final
rule because doing so would benefit
competition in product and service
markets. These commenters generally
stated that non-competes may promote
innovation by encouraging firms to
make productivity-enhancing
investments, such as investments in
developing trade secrets. The
Commission does not believe that non-
competes are needed to protect valuable
firm investments. As discussed in Part
IV.D, the Commission finds that
employers have less restrictive
alternatives for protecting valuable
investments and that these alternatives
are available for senior executives as
well as for other workers.
In addition, when assessing how non-
competes with senior executives affect
competition in product and service
markets, the Commission believes it is
important to consider the net impact. It
is possible that the effects described by
these commenters and the effects
described by the Commission earlier in
this Part IV.C.2.c.i can be occurring at
the same time. That is, a non-compete
with a senior executive might in some
instances be protecting a firm’s
investments in a manner that is
productivity-enhancing, holding all else
equal. At the same time, however, that
same non-compete may restrict the
executive’s ability to start a new
business after leaving the firm. And
even that same non-compete can—and
certainly non-competes in the aggregate
do—prevent the most efficient match
between senior executives and the firms
that can make the highest and best use
of their talents, and decrease knowledge
flow between firms, which limits the
cross-pollination of innovative ideas.
What the empirical evidence shows is
that overall, i.e., in net effect, non-
competes reduce new business
formation and innovation,665 indicating
that the tendency of non-competes to
inhibit new business formation and
innovation more than counteracts any
effect of non-competes on promoting
new business formation and innovation
by protecting a firm’s investments.
A commenter—referencing the Shi
study—argued that banning buyout
clauses in non-competes would enhance
economic efficiency relative to banning
non-competes altogether. Other
commenters, including Shi, the author
of the study, disagreed with this
claim.666 In response to these
comments, the Commission finds that
prohibiting buyout clauses would not
enhance efficiency relative to
prohibiting non-competes altogether.
The Commission does not believe
prohibiting buyout clauses would
address the tendency of non-competes
for senior executives to negatively affect
competitive conditions, because it
would mean that fewer executives could
escape their non-competes, reducing
labor mobility and efficient matching
between executives and firms even
further.
Some commenters disputed the
Commission’s legal rationale for
prohibiting non-competes with senior
executives. One comment stated that the
NPRM did not cite any case law where
a non-compete for a senior executive
violated antitrust law and argued that
there is no widespread case law to
support a per se ban. In response, the
Commission notes that it is determining
that non-competes are an unfair method
of competition under section 5, not a
per se violation of the Sherman Act. For
the reasons described in this Part IV.C.2,
the Commission finds that non-
competes are restrictive and
exclusionary and that, based on the
totality of the evidence, they tend to
negatively affect competitive conditions
at least as much as non-competes with
other workers, and likely even more so,
given the outsize role of senior
executives in new business formation
and innovation. For these reasons, the
Commission finds that these non-
competes are an unfair method of
competition under section 5.
Another commenter stated that the
NPRM did not satisfy the standard for
finding a tendency to negatively affect
competitive conditions for senior
executives as set forth in the
Commission’s section 5 Policy
Statement.667 The commenter stated
that a per se ban on non-competes
considers neither the size, power, or
purpose of the firm nor how non-
competes interact with individual
markets. The commenter argued that the
evidence cannot justify an economy-
wide ban.
The Commission finds that non-
competes for senior executives are an
unfair method of competition under
section 5 for all the reasons described in
this Part IV.C.2. The Commission states
the applicable legal standard under
section 5 in Part II.F, which is
consistent with the standard set forth in
the Policy Statement. As noted in Part
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668 Garmaise, supra note 584.
669 Shi, supra note 84.
670 See Part IV.B.3.a.
671 Garmaise, supra note 584 at 403. The
reduction in earnings is calculated as e¥1.3575*0.1
¥1, where ¥1.3575 is taken from Table 4.
672 Id. at 402.
673 Id. at 379.
674 Kini, Williams, & Yin, supra note 83.
II.F, the Commission need not make a
separate showing of market power or
market definition. Nor must the
Commission show that the conduct
directly caused actual harm in the
specific instance at issue. Instead, the
inquiry under section 5 focuses on the
nature and tendency of the conduct.
Moreover, as noted in Part II.F, the
Commission may consider the aggregate
effect of conduct as well. The language
in the Policy Statement stating that the
size, power, and purpose of the
respondent may be relevant is not
limiting, but instead provides guidance
regarding factors the Commission may
consider in evaluating potentially unfair
methods of competition. This guidance
may be especially relevant in individual
cases and less so in section 5
rulemakings. Finally, as described in
Part II.F, a finding that conduct is an
unfair method of competition does not
require definition of a market or
consideration of individual markets.
Moreover, as described in Part V.D, the
Commission considered and finds no
basis for excluding particular industries
or workers.
ii. Non-Competes With Senior
Executives Tend to Negatively Affect
Competitive Conditions in Labor
Markets
The effects of non-competes with
senior executives on product and
service markets are the primary reason
why the Commission finds that non-
competes with senior executives are an
unfair method of competition. However,
non-competes also tend to negatively
affect competitive conditions in labor
markets.
Non-Competes With Senior Executives
Suppress Labor Mobility and Earnings
In Part IV.B.3.a, the Commission
describes extensive empirical evidence
that non-competes reduce labor mobility
and worker earnings. The Commission’s
finding in Part IV.B.3.a that non-
competes suppress labor mobility and
earnings does not examine non-
competes with senior executives
specifically. However, the evidence
cited by the Commission is also
probative with respect to non-competes
with senior executives.
Non-competes reduce labor mobility
for senior executives for the same
reasons they reduce labor mobility for
other workers—they directly restrict
workers from seeking or accepting other
work or starting a business after they
leave their job. In Part IV.B.3.a.i, the
Commission cites empirical evidence
that non-competes reduce labor
mobility. This evidence shows that non-
competes reduce labor mobility for all
subgroups of workers that have been
studied, including inventors, high-tech
workers, low-wage workers, and
workers across the labor force. The
impact of non-competes on labor
mobility is direct, since non-competes
directly prohibit certain types of
mobility. Therefore, the Commission
finds the non-competes restrict the labor
mobility of senior executives as well.
This finding is supported by Mark
Garmaise’s study of the relationship
between non-compete enforceability
and the labor mobility and earnings of
executives.668 Garmaise finds that
stricter non-compete enforceability
reduces within-industry executive
mobility by 47% and across-industry
executive mobility by 25%. The study,
which is limited to senior executives,
uses multiple legal changes in non-
compete enforceability, measured along
multiple dimensions in a binary
fashion. The Shi study qualitatively
confirms these results—that executives
experience greater labor mobility in the
absence of non-competes.669 However,
that study examines use, and not just
enforceability, of non-competes, so the
Commission gives it less weight.
Furthermore, by inhibiting efficient
matching between executives and
firms—through a similar mechanism as
for all other workers 670—non-competes
reduce executives’ earnings. Like non-
competes for other workers, non-
competes block senior executives from
switching to a job in which they would
be better paid. And by doing so, non-
competes decrease opportunities (and
earnings) for senior executives who are
not subject to non-competes—as well as
for workers who are not senior
executives, but who would otherwise
move into one of those roles.
As described in Part IV.B.3.a.ii, the
empirical research indicates that non-
competes suppress wages for a wide
range of subgroups of workers across the
spectrum of income and job function,
including workers who are not subject
to non-competes. Importantly, an
empirical study that does focus on
senior executives finds that non-
competes suppress earnings of senior
executives. The Garmaise study finds
that decreased enforceability of non-
competes increases executives’ earnings
by 12.7%.671 Garmaise also finds that
decreased enforceability of non-
competes increases earnings growth for
CEOs by 8.2%. Since much of the
increase in earnings is attributable to an
increase in earnings growth (as opposed
to earnings at the start of the
employment relationship), Garmaise
hypothesizes that earnings increase
because CEOs are more likely to invest
in their own human capital when they
have no non-compete.672 However,
Garmaise also notes that while non-
competes may offer benefits to firms
which use them, there may be negative
impacts across the labor markets in
which they are used.673 This is the only
study of executive earnings that does
not examine the use of non-competes: it
examines multiple legal changes in non-
compete enforceability, measured along
multiple dimensions (though in a binary
fashion).
As noted in Part IV.C.1, many senior
executives negotiate valuable
consideration for non-competes.
However, the evidence suggests that
non-competes still have a net negative
effect on senior executives’ earnings,
because the suppression of earnings
through reduced labor market
competition more than cancels out the
compensation that some of these
executives individually receive for their
non-competes.
A second study, by Kini, Williams,
and Yin, 674 simultaneously estimates
the impact of non-compete
enforceability and non-compete use on
earnings and finds a positive
correlation. The Commission gives this
study less weight because it analyzes
the use of non-competes. As described
in Part IV.A.2, such studies cannot
easily differentiate between correlation
and causation. Kini, Williams, and Yin
use an enforceability measure to
generate their estimates, but do not
estimate models that omit use of non-
competes, meaning that the Commission
does not interpret the findings as
representing a causal relationship.
Relevant Comments and Commission
Responses
Many commenters addressed negative
effects of non-competes with senior
executives on competition in labor
markets. Non-competes, these
commenters stated, can negatively affect
a senior executive’s career when they
leave their field or sit out of the
workforce for a period, causing their
skills and knowledge (particularly in
fast-paced fields) to stagnate and
affecting their reputations. Like other
workers, some senior executives said
their non-compete limited their options
and earnings in their specialized field.
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675 See Part IV.D.2. 	676 § 910.2(a)(2).
677 See Part IV.C.2
678 Because the Commission proposed to require
employers to rescind existing non-competes—see
NPRM, proposed § 910.2(b)(1)—many of these
comments addressed the proposed rescission
requirement specifically. Comments that pertain
only to the issue of rescission, and that do not apply
to whether existing non-competes for senior
executives may remain in effect generally, are
addressed in Part IV.E.
Other commenters argued the
Commission should exclude senior
executives from the rule because they
earn more compensation, including
higher wages, for non-competes than
they would gain under the final rule.
Many of these commenters argued that
because senior executives have
bargaining power, any findings on
decreased wages would not apply to
them. Some employers stated they
compensated their senior executives for
non-competes. Some industry
organizations stated that some
additional compensation and bonuses
might not be offered if non-competes are
banned. One business stated the
compensation it pays executives takes
their non-competes into account.
Another business stated it provides
severance benefits in exchange for non-
competes that fully compensate the
executive for the duration of the non-
compete.
In response to these comments, the
Commission notes the Garmaise study
indicates that non-competes have a net
negative effect on earnings for senior
executives in the aggregate because they
suppress competition, even if individual
senior executives receive some amount
of compensation for their personal non-
compete. Garmaise’s analysis accounts
for any compensation the executive
receives for the non-compete.
An industry trade organization stated
that non-competes create job
opportunities for executives and other
highly skilled workers, rather than
restricting them, because, without non-
competes to protect confidential
information, employers will often be
reluctant to expand their executive
teams. The Commission notes this
assertion is unsupported by empirical
evidence, and the Commission finds
that firms have less restrictive
alternatives for protecting confidential
information. 675
An investment industry organization
stated that the Commission cannot
assume senior executives will be
equally or more effective at new firms
compared to their old firms. In
response, the Commission notes that
voluntary labor mobility—for senior
executives and all workers—typically
reflects a mutually beneficial outcome.
To the extent a firm is willing to pay
more to attract a particular worker to
come work for them, it is typically
because the firm places a higher value
on the worker’s productivity than the
worker’s current employer. In addition,
the Commission notes that many
commenters stated that non-competes
often force senior executives to sit out
of the workforce, causing them to lose
valuable knowledge and skills. In
general, senior executives are more
likely to be effective when they can
remain in the industry in which they
have experience and expertise, rather
than starting over in a new industry
because of a non-compete.
An industry trade organization stated
that the Commission’s assertion that
wages are reduced across the labor
market is inconsistent with the NPRM’s
preliminary finding that non-competes
are not coercive or exploitative for
senior executives, because when more
issues are left for negotiation, the job
market is increasingly competitive, as
workers can differentiate themselves
through their terms and tailor their
terms to each employer. The
Commission does not believe these
findings are in tension. Agreements do
not need to be exploitative or coercive
to inhibit efficient matching between
workers and firms or to negatively affect
competitive conditions. Furthermore,
the Commission believes that executives
have many other ways to differentiate
themselves other than based on non-
compete terms.
One commenter argued that the
findings in the Kini, Williams, and Yin
study should not be interpreted as
representing a causal relationship. Upon
further consideration, the Commission
agrees with this comment and does not
interpret this study causally, as
described in this Part IV.C.2.c.ii.
For these reasons, the Commission
finds that non-competes with senior
executives are an unfair method of
competition. As a result, the
Commission declines to exclude senior
executives from the final rule altogether.
3. The Final Rule Allows Existing Non-
Competes With Senior Executives To
Remain in Effect
The final rule prohibits employers
from, among other things, entering into
or enforcing new non-competes with
senior executives—i.e., non-competes
entered into on or after the effective
date.676 However, the Commission
decides to allow existing non-competes
with senior executives—i.e., non-
competes entered into before the
effective date—to remain in effect. The
Commission describes the basis for this
determination in this Part IV.C.3.
The Commission believes the
evidence could provide a basis for
prohibiting employers from enforcing
existing non-competes with senior
executives, as the final rule does for all
other workers, given the tendency of
such agreements to negatively affect
competitive conditions.677 However, the
Commission has decided to allow
existing non-competes for senior
executives to remain in effect, based on
two practical considerations that are far
more likely to be present for senior
executives than other workers. First, as
described in Part IV.C.1, senior
executives are substantially less likely
than other workers to be exploited or
coerced in connection with non-
competes. As a result, this subset of
workers is substantially less likely to be
subject to the kind of acute, ongoing
harms currently being suffered by other
workers with existing non-competes
(even if senior executive’s existing non-
competes are still harming competitive
conditions in the economy overall).
Second, commenters raised credible
concerns about the practical impacts of
extinguishing existing non-competes for
senior executives, as described in this
Part IV.C.3. 678
Numerous businesses and trade
associations argued that, if the final rule
were to invalidate existing non-
competes for senior executives, that
would present practical challenges for
employers, because many such non-
competes were exchanged for
substantial consideration. According to
commenters, consideration exchanged
for non-competes includes long-term
incentive plans, bonuses, stock awards,
options, or severance payments, among
other arrangements.
Some commenters were concerned
about a potential windfall for workers.
They argued that if the non-compete
portion of the contract were rescinded
or otherwise invalidated, the worker
may be left with any benefits already
received in exchange for the non-
compete, such as equity or bonuses, and
could also compete. An industry
association stated that some of its
members’ workers have already received
thousands or hundreds of thousands of
dollars in additional compensation
alongside non-competes, though it was
unclear what each worker received.
Some business associations said
businesses do not have a clear way to
recover those payments or benefits. A
commenter asked whether a worker who
forfeited equity for competing could get
the equity back or if executives who
were compensated by their new
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679 See Part IV.B.2.b.
680 See Balasubramanian, Starr, & Yamaguchi,
supra note 74 (finding that 97.5% of workers with
non-competes are also subject to a non-solicitation
agreement, NDA, or non-recruitment agreement,
and 74.7% of workers with non-competes are also
subject to all three other types of provisions).
employers for the non-compete would
be paid twice.
The Commission views the problem
as more complex than these commenters
suggest. First, the empirical evidence
and comments illustrate that in many
cases, non-competes are currently
trapping workers, including senior
executives, in their jobs, meaning the
employer is getting not only the benefit
of trapping that individual worker, but
also the benefit of non-competition.679
In such circumstances, employers may
have already received part or all of the
benefit they sought from entering a non-
compete, though the value would be
difficult if not impossible to
quantitatively assess. Moreover, it is
impracticable for the Commission to
untangle whether, to the extent some
workers received compensation that was
denominated consideration for a non-
compete, that non-compete
simultaneously suppressed other
compensation to the worker such as
wages. For example, some commenters
who described negotiating their non-
competes stated the employer used it as
a tactic to drive down wages.
In addition, most workers subject to a
non-compete are subject to other
restrictive covenants,680 both mitigating
any purported harm and complicating
any quantitative valuation of a non-
compete.
The Commission also notes that, to
the extent equity was provided as
consideration, owning a share in the
prior employer may induce workers not
to risk lowering the value of that equity
by competing. However, the concern
about workers seeking already-forfeited
compensation is misplaced, as the final
rule will not impact workers who
forfeited compensation for competing
under a then-valid non-compete.
Overall, however, where an employer
has provided meaningful consideration
in exchange for a non-compete, the
comments indicate that being unable to
enforce that non-compete may
complicate that exchange in a way that
would be difficult to value and
untangle. These difficult practical
assessments indicate that the final rule
should contain a limited, easily
administrable exception for existing
non-competes with senior executives,
who are considerably more likely than
other workers to have negotiated non-
competes and received substantial
consideration in return.
In addition, an employment attorney
suggested that employers may suspend
any mid-stream benefits and terminate
unvested options and stock and cancel
bonuses. One commenter suggested
employers may seek refunds from
workers, which could create
uncertainty. Similarly, an industry
association said senior workers who
signed a non-compete as part of a
severance agreement might see their
severance payments taken away, as
employers would need to decide
whether to continue paying despite the
elimination of non-competes or, to the
extent they legally can, attempt to
renegotiate any outstanding severance
agreements. Finally, a business said
executives in the middle of their
contracts might need to renegotiate
those contracts. The Commission shares
these concerns about the practicalities
of untangling non-competes that are
more likely to have been bargained for.
Senior executives who engaged in a fair
bargaining process may have obtained
significant consideration and planned
accordingly, as have their employers.
While employers’ ability to stop
payments or claw back consideration is
uncertain, any efforts to do so could be
disruptive.
Other commenters stated that they
believed rescission could result in
litigation against workers. An
employment lawyer said litigation was
difficult to predict but that there could
be litigation seeking declarations from
courts on how the rule impacts existing
contracts. A group of commenters stated
that rescinding or invalidating
agreements would lead to increased
litigation against workers who received
the benefit of the bargain but were no
longer bound by a non-compete in
exchange, and that such litigation
would seek to nullify severance
agreements, employment agreements,
clawback agreements, and others.
One business said the NPRM was
silent on how to address specially taxed
arrangements, but the business did not
provide additional details on any such
arrangements. A law firm said workers
who received consideration in a prior
year would have paid taxes on it and
would now need to amend their prior
tax return to get a refund if they have
to pay back that consideration, while
employers might have to amend their
return to reflect the loss of a deduction.
That law firm also said some executives
and other workers use and plan for non-
competes to reduce their ‘‘golden
parachute’’ tax burden.
Finally, an accountant explained that
valuations of senior executive non-
competes are conducted during many
merger and acquisition transactions.
Similarly, an industry association said
acquisition prices may include the value
of non-competes that ensure the buyer
retains certain talent, so if non-competes
were rescinded or invalidated the buyer
would lose the value of what they paid
for with no way to recoup the costs. The
commenter stated that the bargained-for
value of such sales may decrease if
existing senior executive non-competes
cannot be enforced. The exemption for
existing non-competes addresses this
concern. Moreover, this concern does
not exist for future transactions in any
event, since they would not account for
non-competes that have been banned.
In response to the foregoing
comments, the Commission finds it
plausible that rendering existing non-
competes with senior executives
enforceable could create some of these
practical implementation challenges.
The Commission accordingly elects to
exclude existing non-competes with
senior executives from the rule,
reducing the burden of implementation
of the final rule.
The Commission also understands
that some of these practical concerns
could arise for workers other than senior
executives if they received substantial
consideration in exchange for a non-
compete. However, the evidence
indicates that any such agreements with
workers other than senior executives are
very rare, and that such workers are
more likely to experience exploitation
and coercion in connection with non-
competes. Therefore, allowing only
existing non-competes with senior
executives to remain in force will
significantly reduce these practical
concerns for employers. In contrast, a
wider exemption for all existing
agreements would leave in place a large
number of non-competes that tend to
harm competitive conditions, including
a large number of exploitative and
coercive non-competes for which no
meaningful consideration was received.
Some commenters suggested the
Commission exempt from the final rule
non-competes in exchange for which the
worker received consideration. One
business asked for an exception to the
final rule for paid non-competes,
asserting that such an exception would
allow workers to receive guaranteed
payments while accessing information
and training and would allow workers
to start their own businesses after the
non-compete period. Another business
recommended allowing non-competes
that provide severance equal to a
worker’s salary for the non-compete
period. An employment attorney
suggested an exception from the rule for
non-competes that are part of a
severance agreement or where the
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38413	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
681 NPRM at 3520.
682 This threshold is based on the 85th percentile
of earnings of full-time salaried workers nationally.
See Part IV.C.4.b.
683 See Part IV.C.1.
684 See id.
685 See Part X.F.11.
686 NPRM at 3520.
687 Id.
688 Id.
worker receives a paid non-compete
period or garden leave, which the
attorney says do not align with the
Commission’s concerns about non-
competes and represent a balanced
trade-off.
The Commission declines to adopt an
exception for non-competes in exchange
for which the worker received
consideration (whether under an
existing or future non-compete). The
fact that a worker received
compensation for a non-compete does
not mean the worker received fair
compensation, i.e., compensation
commensurate with earnings that would
be received in a competitive labor
market. In addition, such an exception
would raise significant administrability
concerns. For example, a rule that
exempts non-competes exchanged for
‘‘substantial consideration’’ or
‘‘meaningful consideration’’ would not
provide sufficient clarity to employers
and workers to avoid significant
compliance costs and litigation risks.
Requiring a brighter-line specific
amount (or standard) of compensation
would be unlikely to appropriately
capture highly fact-specific, varying
financial circumstances of workers and
firms. Moreover, it would be difficult to
prevent employers from suppressing
compensation or benefits along other
dimensions (e.g., a requirement for
severance equal to the worker’s salary
during the non-compete period as one
commenter suggested could lead to the
salary being suppressed). The
Commission also notes, however, that
while it is not adopting a blanket
exemption from the final rule for non-
competes in exchange for which the
worker received consideration, it is
satisfying this request to some extent by
adopting an exemption for existing non-
competes for senior executives, which
are the non-competes most likely to
have been exchanged for consideration.
Finally, the Commission concludes
that allowing existing non-competes for
senior executives to remain in effect is
appropriate despite the significant
negative effects of such non-competes
on competition described in Part IV.C.2.
The Commission took into
consideration that non-competes with
senior executives are less likely to be
causing ongoing harm to individuals by
preventing them from seeking or
accepting other work or starting their
own business, because such non-
competes were likely to have been
negotiated or exchanged for
consideration. In addition, the negative
effects of these non-competes on
competitive conditions will subside
over time as these non-competes expire.
4. Defining Senior Executives
As noted earlier, the Commission did
not define the term ‘‘senior executive’’
in the NPRM. Instead, the Commission
requested comment on how the term
should be defined.681 In this final rule,
the Commission adopts a definition of
‘‘senior executive’’ to isolate the
workers who are least likely to have
experienced exploitation and coercion
and most likely to have bargained for
meaningful compensation for their non-
compete. Workers for whom
exploitation and coercion concerns are
likely most relevant and who are
unlikely to have bargained for or
received meaningful consideration for a
non-compete—namely, lower-earning
workers, and relatively higher paid or
highly skilled workers who lack policy-
making authority in an organization—do
not fall within this final definition.
This definition is relevant because, as
explained in Part IV.C.2, the basis for
the Commission’s findings that non-
competes with senior executives are
unfair methods of competition differs in
some ways from the evidence and
rationales underpinning its findings that
non-competes with other workers are
unfair methods of competition.
Furthermore, as explained in Part
IV.C.3, the final rule allows existing
non-competes with senior executives to
remain in force, while prohibiting
employers from enforcing existing non-
competes with other workers after the
effective date.
The Commission defines ‘‘senior
executives’’ based on an earnings test
and a job duties test. In general, the term
‘‘senior executives’’ refers to workers
earning more than $151,164 682 who are
in a ‘‘policy-making position’’ as
defined in the final rule. The
Commission adopted this definition
after considering the many comments
on who senior executives are and how
to define them. Notably, the
Commission concluded that, unlike
highly paid senior executives, highly
paid workers other than senior
executives and lower-wage workers
with senior executive titles as a formal
matter likely experience exploitation
and coercion and are unlikely to have
engaged in bargaining in connection
with non-competes, much like lower-
wage workers. 683 In other words, the
Commission finds that the only group of
workers that is likely to have bargained
for meaningful compensation in
exchange for their non-compete is
senior executives who are both highly
paid and, as a functional matter,
exercise the highest levels of authority
in an organization.684 The Commission
estimates that approximately 0.75% of
workers are such senior executives.685
a. Definition of ‘‘Senior Executive’’
The NPRM requested comment on
how to define senior executives while
providing sufficient clarity to employers
and workers.686 The NPRM stated that
there is no generally accepted legal
definition of ‘‘senior executive’’ and that
the term is challenging to define given
the variety of organizational structures
used by employers. 687 The NPRM raised
the possibility of looking to existing
Securities and Exchange Commission
(‘‘SEC’’) definitions; adopting a
definition closely based on a definition
in an existing Federal regulation;
adopting a new definition; defining the
category according to a worker’s
earnings; using some combination of
these approaches; or using a different
approach.688 Commenters proposed a
wide variety of definitions, largely
focused on two types: an exception
based on a worker’s job duties or title,
and an exception based on a
compensation threshold. Upon review
of the full record, the Commission
determines that a test that combines
both of these criteria best captures the
subset of workers who are likely to have
bargained for meaningful compensation
in exchange for their non-compete in a
readily administrable manner.
i. The Need for a Two-Part Test
Many commenters suggested
combining a compensation threshold
with a job duties test. For example, one
business supported excepting workers
who met a combination of tests based on
a compensation threshold, FLSA
exemption status, and access to trade
secrets. A law firm suggested the final
rule should account for both pay,
exempting only low-wage hourly
workers, and job duties in determining
an exception. One commenter suggested
defining ‘‘senior executive’’ based on
total compensation, job title, and job
duties. Though the Commission does
not adopt these specific duties and wage
combinations, the Commission agrees
that a combined approach is necessary.
The Commission has determined that
the definition of ‘‘senior executive’’
should include both a compensation
threshold and job duties test, similar to
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38414 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
689 The FLSA is the Federal statute establishing
minimum wage, overtime, recordkeeping, and
youth employment standards. See 29 U.S.C. 201 et
seq.
690 See Part IV.C.1.
691 See Part IX.C.
the DOL regulations that define and
delimit the FLSA’s exemption for
executive employees.689 The key
advantage of a compensation threshold,
as one industry organization commenter
stated, is that compensation thresholds
are objective and easily understood by
all stakeholders—yielding significant
administrability benefits. However,
since not all workers above any given
compensation threshold are senior
executives, a job duties test is also
needed to identify senior executives.
The two-part test isolates the workers
most likely to have bargaining power to
negotiate meaningful consideration for a
non-compete and least likely to
experience exploitation and coercion in
connection with non-competes. A
compensation threshold ensures that
stakeholders do not need to spend time
assessing the job duties of workers
below the threshold—minimizing the
amount of detailed analysis
stakeholders must undertake. A
compensation threshold also helps
ensure that workers who work in
positions with ‘‘senior executive’’
classifications but likely lack
meaningful bargaining power due to
their relatively low incomes and who
likely did not receive meaningful
consideration for a non-compete are
excluded from the definition. The job
duties test ensures that the definition
identifies the individuals most likely to
have bespoke, negotiated agreements—
those with the highest level of authority
over the organization—while also
ensuring that high-earning workers who
are not senior executives, who likely
experience exploitation and coercion
from non-competes and do not generally
bargain over them, are not captured by
the definition. 690
Clarity from a compensation
threshold is essential, as without clarity
workers and employers would often be
uncertain about a non-compete’s
enforceability (absent adjudication), and
such uncertainty often fosters in
terrorem effects.691 For example, an
attorney commenter stated that an
exception for executive, management,
and professional employees and those
with access to trade secrets would
inherently lack clarity. A lack of clarity
could also facilitate evasion by
employers, as one law firm commented.
While there may be some workers
other than senior executives as defined
here who may have bargained for
consideration for a non-compete, the
benefits to workers and employers of a
clear and administrable definition
outweigh the risk that some bargained-
for non-competes are invalidated. In
Part IV, the Commission finds even
bargained-for non-competes tend to
negatively affect competitive conditions.
The Commission finds that the need to
avoid an overinclusive exception that
increases those harms to competitive
conditions outweighs the risk that in
rare instances private parties with non-
competes other than with senior
executives may need to restructure their
employment agreements to utilize less
restrictive alternatives that burden
competition to a lesser degree.
Many commenters sought an
exception for senior executives and/or
highly paid and highly skilled workers
based on justifications such as access to
trade secrets or confidential
information, rather than compensation
thresholds. Some argued that
compensation thresholds do not align
with or allow individualized
assessments of which workers meet a
given justification such as access to
confidential information. One law firm
commented that a bright-line
compensation threshold would
eliminate non-competes for lower wage
workers while allowing non-competes
for what the commenter viewed as
legitimate business purposes. Some
commenters opposed an exception for
senior executives because they believed
‘‘senior executive’’ would be too
difficult to define. In Part V.D.2, the
Commission explains why it is not
adopting an exception for workers based
on their access to trade secrets and other
intellectual property. Further, in the
Commission’s view, eliminating the
need for individualized assessments for
most workers is the primary advantage
of a compensation threshold, not a
drawback (although the Commission
declines to adopt a compensation
threshold alone for reasons stated
previously and in Part V.D.1). However,
the evidence indicates that an exception
for existing senior executive non-
competes is appropriate, which the
Commission defines here.
Commenters, both those supporting
and opposing the rule, pointed out
several issues with compensation
thresholds standing alone. Some
commenters were concerned a
compensation threshold would exclude
some workers, such as many physicians,
from the final rule’s benefits based on
their income level. Two commenters
said an exception would penalize the
advancement of workers near a
threshold and those workers may have
to choose between higher wages or
being free from a non-compete.
Including the job duties tests alongside
the compensation threshold mitigates
the risk of such cliff effects, assuming
they exist (which is far from clear).
Some commenters asserted a
threshold would need to be updated for
inflation, while one law firm
commented that frequent updates would
make the final rule more difficult to
understand and implement.
Commenters also pointed out the need
to explain when the threshold would be
measured. While adjusting for inflation
could be important to ensure the final
rule continues serving its intended
function if the compensation threshold
governed a total exemption from the
rule (as these commenters assume), it is
unnecessary to the final rule because the
exception adopted applies only to
existing non-competes (i.e., it has only
one-time application). The Commission
explains in Part IV.C.4.b its reasons for
declining to adopt a locality adjustment.
ii. The Final Rule’s Definition of
‘‘Senior Executive’’
Based on the considerations described
in Part IV.C.4.a.i, the Commission
adopts a two-pronged definition of
‘‘senior executive’’ in § 910.1. Under
§ 910.1, a senior executive is a worker
who was in a policy-making position
and who received from a person for the
employment:
• Total annual compensation of at
least $151,164 in the preceding year
(under paragraph (2)(i)); or
• Total compensation of at least
$151,164 when annualized if the worker
was employed during only part of the
preceding year (under paragraph (2)(ii));
or
• Total compensation of at least
$151,164 when annualized in the
preceding year prior to the worker’s
departure if the worker departed from
employment prior to the preceding year
and the worker is subject to a non-
compete (under paragraph (2)(iii)).
Paragraph (2)(ii) applies to workers
who were in a policy-making position
during only part of the preceding year,
which includes workers who were hired
or who left a business entity within the
preceding year as well as workers who
were promoted to or demoted from a
policy-making position in the preceding
year. Paragraph (2)(iii) ensures that the
exception applies to senior executives
who departed from the employer more
than one year before the effective date
but are still subject to a non-compete
(e.g., a worker who left more than a year
ago and has a non-compete term of 18
months). To account for those senior
executives, paragraph (2)(iii) considers
total annual compensation in the year
preceding their departure.
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38415	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
692 BLS, Labor Force Statistics from the Current
Population Survey, https://www.bls.gov/cps///
nonhourly-workers.htm (based on the data from the
table ‘‘Annual average 2023’’).
693 However, at the time of commenting the
highly compensated employee threshold was
$107,432 and the Department had not proposed a
new threshold.
694 29 CFR 541.601; see also Defining and
Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales, and
Computer Employees, NPRM, 88 FR 62152, 62157
(Sept. 8, 2023) (hereinafter ‘‘2023 FLSA NPRM’’).
695 See Bur. Of Labor Stats., Research Series on
Percentiles of Usual Weekly Earnings of Nonhourly
Full-Time Workers, at https://www.bls.gov/cps/
research/nonhourly/earnings-nonhourly-
workers.htm (based on the table ‘‘Annual average
2023’’); 2023 FLSA NPRM at 62153. The DOL
proposed a threshold at $143,998, the 85th
percentile of full-time salaried workers at the time
the 2023 FLSA NPRM was proposed. When the
highly compensated employee test was originally
created in 2004, its $100,000 threshold exceeded
the annual earnings of 93.7% of salaried workers.
Id. at 62159.
696 IRS, Definitions, (Aug. 29, 2023) (Highly
Compensated Employees), https://www.irs.gov/
retirement-plans/plan-participant-employee/
definitions; IRS, COLA Increases for Dollar
Limitations on Benefits and Contributions, (updated
Nov. 7, 2023), https://www.irs.gov/retirement-
plans/cola-increases-for-dollar-limitations-on-
benefits-and-contributions.
697 DC Code sec. 32–581.02(a)(1) (effective Oct. 1,
2022) (where the employee’s compensation is less
than $150,000, or less than $250,000 if the
employee is a medical specialist, employers may
not require or request that the employee sign an
agreement or comply with a workplace policy that
includes a non-compete).
698 BLS Occupational Employment and Wage
Statistics, supra note 49. These data are from the
May 2022 National XLS table for Chief Executives
under private ownership.
699 See id. These data are from the May 2022
National XLS table for private ownership.
700 Id. These data are from the May 2022 National
XLS table for Top Executives under private
ownership.
701 Id. These data are from the May 2022 National
XLS table for General and Operations Managers
under private ownership.
To clarify the definition’s
compensation threshold, the final rule
includes definitions of ‘‘total annual
compensation’’ and ‘‘preceding year.’’
To clarify the job duties test, the final
rule includes definitions of ‘‘policy-
making position’’ as well as two
additional terms that are in the
definition of ‘‘policy-making position’’:
‘‘officer’’ and ‘‘policy-making
authority.’’ These definitions are
described in Parts IV.C.4.b and IV.C.4.c.
b. Defining the Compensation Threshold
Pursuant to § 910.1, the senior
executive exception applies only to
workers who received total annual
compensation of at least $151,164 from
a person for employment in a policy-
making position in the most relevant
preceding year. Section 910.1 further
defines ‘‘total annual compensation’’
and ‘‘preceding year,’’ respectively. This
threshold is based on the 85th
percentile of earnings of full-time
salaried workers nationally.692
The Commission draws this line
between more highly paid and less
highly paid workers based on its
assessment of which workers are more
likely to experience exploitation and
coercion and less likely to have engaged
in bargaining in connection with non-
competes and the need to implement a
two-part test. As commenters noted,
there is no single compensation
threshold above which zero workers
will have been coerced and exploited
and below which zero workers will have
been uncompensated for the non-
compete that binds them. Based on the
Commission’s expertise and after careful
review of the rulemaking record,
including relevant data, the empirical
research, and the public comments, the
Commission concludes $151,164 in total
annual compensation reflects a
compensation threshold under which
workers are likely to experience such
exploitation and coercion and are less
likely to have bargained for their non-
competes, while providing employers a
readily administrable line. With this
line, market participants can easily
know that workers below the line
cannot be subject to non-competes,
minimizing both in terrorem effects and
eliminating the administrative burden of
conducting a job duties test for those
workers.
The Commission looked to several
sources and suggestions from the
comments in selecting a threshold.
Numerous commenters suggested the
Commission should look to the FLSA,
and some specifically recommended the
FLSA regulations’ threshold for highly
compensated employees.693 DOL sets
the compensation threshold for highly
compensated employees in its overtime
regulations under the FLSA based on
earnings of full-time salaried workers.
Since January 2020, based on a
regulation adopted in 2019, that
threshold is $107,432 and reflects the
80th percentile of full-time salaried
workers nationally using combined
2018 and 2019 data. 694 In September
2023, DOL proposed raising that
threshold to the 85th percentile of full-
time salaried workers nationally and,
inter alia, updating the amount to reflect
more current earnings data. For 2023,
the 85th percentile of full-time salaried
workers nationally is $151,164.695 The
Commission recognizes DOL’s expertise
in determining who qualifies as a highly
compensated worker and employers’
likely familiarity with DOL regulations.
Given this familiarity, the Commission
borrows from DOL’s definition of
compensation to minimize compliance
burdens on employers.
Another Federal regulatory threshold
for high wage workers noted by
commenters also aligns with the 85th
percentile of full-time salaried workers
nationally in 2023 or approximately
$150,000. In the retirement context, the
IRS sets a threshold for highly
compensated employees at $150,000 for
2023 and $155,000 for 2024.696
Additionally, the District of Columbia
bans non-competes for workers making
less than $150,000.697
The Commission analyzed
occupational wage data to identify a
threshold that would capture more
highly paid senior executives, who are
likely to have bespoke, negotiated non-
competes. BLS’s most recent wage data
indicates that workers in the ‘‘chief
executive’’ category have a median wage
of $209,810.698 Thus, most ‘‘chief
executives,’’ most if not all of whom
would meet the duties component of the
two-part test in this final rule, earn well
above the $151,164 compensation
threshold, ensuring that the threshold is
likely not underinclusive. The
Commission notes that some very high-
wage occupations have a median wage
above $151,164, including: physicians;
surgeons; computer and information
systems managers; and dentists.699 To
qualify for the exemptions, these
workers would have to also meet the job
duties portion of the senior executive
test, which is appropriate because the
Commission finds that workers in these
professions are often subject to coercion
and exploitation and rarely have
bespoke, negotiated non-competes.
The Commission also considered a
lower wage threshold of approximately
$100,000, which would be closer in
range to the DOL highly compensated
employee threshold of $107,432 that
DOL adopted in 2019. According to
2022 BLS data, the median wage for
‘‘top executives’’ in the U.S. is
$99,240. 700 Workers in the ‘‘top
executive’’ category include ‘‘chief
executives,’’ but also include officials
with less authority like ‘‘general and
operations managers.’’ The latter have
an annual median wage of $97,030 with
their earnings at the 75th percentile
being $154,440.701 The Commission
believes that a significant number of
general and operations managers (some
of whom may be in a policy-making
position) likely do not have bespoke,
negotiated non-competes. For example,
a vice president of operations of a local
retail chain with only a few locations
would likely be in this category. The
same vice president—unlike the vice
president of a multinational
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38416 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
702 Id.
703 See also 2023 FLSA NPRM at 62176.
704 See Steven Ruggles, Sarah Flood, Matthew
Sobek, Daniel Backman, Annie Chen, Grace Cooper,
Stephanie Richards, Renae Rodgers, & Megan
Schouweiler. IPUMS USA: Version 15.0 [dataset].
Minneapolis, MN: IPUMS, 2024. https://doi.org/
10.18128/D010.V15.0 (American Community
Survey 2022 data, adjusted to 2023 dollars and
excluding government and non-profit workers).
705 See Part X.F.11.
706 29 CFR 778.211(c); see also U.S. DOL, Fact
Sheet #56C: Bonuses under the Fair Labor
Standards Act (FLSA) (Dec. 2019), https://
www.dol.gov/agencies/whd/fact-sheets/56c-
bonuses.
corporation—is unlikely to possess the
same bargaining power or to have a
bespoke, negotiated employment
agreement. Moreover, to the extent an
individual’s total compensation is under
$151,164, in the unlikely event the
individual received consideration for
their non-compete, such consideration
is unlikely to represent a significant part
of their compensation.
Similarly, the Commission believes a
$107,432 (or thereabouts) threshold
would be overinclusive and individuals
who likely do not have bespoke,
negotiated non-competes—and who
were likely to be exploited and
coerced—could meet the threshold test.
The $107,432 threshold was adopted
based on earnings in 2018 and 2019.
Adjusting for inflation, $107,432 in June
2019 is the equivalent of $130,158 in
February 2024. Moreover, as noted
previously, BLS data reflect that chief
executives generally earn significantly
more than $130,158. In contrast,
occupations with a median wage below
$151,164 but above $107,432 include:
advertising, marketing, promotions,
public relations, purchasing, and sales
managers; financial managers; software
developers; physician assistants;
optometrists; nurse practitioners; and
pharmacists. 702 These are occupations
that the comment record reflects often
experience coercion and exploitation
with respect to non-competes and rarely
have negotiated or compensated non-
competes. A civic organization
commenter also argued that the DOL
regulations’ ‘‘highly compensated
employee’’ definition’s $107,432
threshold was close to the median wage
in some industries and areas and cited
several cases that it said demonstrate
that adopting this threshold would
exclude workers who are vulnerable to
exploitation and coercion.
Accordingly, the Commission adopts
a threshold of $151,164. This threshold,
combined with the duties test, reflects
highly compensated individuals who
are most likely to have the bespoke,
complex non-competes that the
Commission elects to leave undisturbed,
and who the Commission finds are less
likely to experience coercion and
exploitation. This threshold also has
significant administrability benefits, as
it is calculated in accord with
definitions used in FLSA compliance,
with which employers are generally
familiar. This alignment will yield
efficiency benefits that reduce
compliance burdens on employers.
After careful review, the Commission
decided not to choose a threshold
higher or lower in part because as the
compensation threshold in the rule
increased, fewer small businesses and
firms in areas with lower wages and
costs of living would have senior
executives with non-competes who
would qualify for the exception as
compared to larger businesses.
Similarly, the lower a threshold is, the
more workers who live in areas with
higher wages and costs of living would
fall above the threshold.703
The Commission also declines to
adopt a locality adjustment. Some
commenters said that a uniform national
threshold could lead to geographic
disparities because of the different cost
of living and average incomes in
different areas. Geographic disparities
are difficult to resolve, as disparities
often exist not just between States, but,
for example, between urban and rural
areas within a State. The Commission
considered this factor in selecting the
$151,164 threshold compared to other
options. Tailoring a compensation
threshold to every locality or even State
or region would be burdensome and
generate significant confusion for
workers and employers. The
Commission finds that the importance
of a uniform threshold to avoid
confusion and for administrability
outweighs the drawbacks of any
geographic disparities, particularly in
light of comments from employers
stating that the existing patchwork of
State laws is burdensome to navigate.
The Commission notes that neither DOL
nor IRS have adopted thresholds for
highly compensated individuals that
vary geographically. Given the rise in
remote work, applying geographic
variation to employers and workers
would also prove burdensome.
Moreover, total annual compensation
under § 910.1 includes traditional
bonuses or compensation a senior
executive might receive, such as a bonus
tied to performance that is paid
pursuant to any prior contract,
agreement, or promise. The rule also
allows for the entire amount of such
bonuses to be credited to total annual
compensation, thus, increasing the
likelihood of capturing highly
compensated policy-making individuals
across the nation.
The Commission estimates that
approximately 92% of workers will fall
below this compensation threshold,
ensuring that existing non-competes
will be unenforceable for the vast
majority of workers most likely to
experience exploitation and coercion in
connection with non-competes. 704 The
Commission also estimates that
approximately 0.75% of workers are
likely to be considered senior
executives. 705 The compensation
threshold reflects the Commission’s
finding that non-competes are very
rarely bargained for, and to the extent
they are, below $151,164 such
bargaining is almost non-existent and
consideration for a non-compete, if any,
is likely to be relatively small. Pairing
the compensation threshold with the
duties test will also minimize
compliance costs, as employers and the
Commission will not need to conduct
job duties tests for those workers whose
compensation fall below the threshold.
i. Definition of ‘‘Total Annual
Compensation’’
Section 910.1 provides that ‘‘total
annual compensation’’ is based on the
worker’s earnings over the preceding
year. It is based on DOL’s regulation
defining ‘‘total annual compensation’’
for highly compensated employees in 29
CFR 541.601(b)(1) and matches DOL’s
determination of what types of
compensation can count towards total
annual compensation for highly
compensated employees.
Section 910.1, like DOL’s definition,
states that total annual compensation
may include salary, commissions,
nondiscretionary bonuses and other
nondiscretionary compensation earned
during that 52-week period.
Nondiscretionary bonuses and
compensation includes compensation
paid pursuant to any prior contract,
agreement, or promise, including
performance bonuses the terms of which
the worker knows and can expect.706
The definition further states that total
annual compensation does not include
board, lodging and other facilities as
defined in 29 CFR 541.606, and does not
include payments for medical
insurance, payments for life insurance,
contributions to retirement plans and
the cost of other similar fringe benefits.
Section 541.606 is part of DOL’s
regulations concerning salary
requirements for employees employed
in a bona fide executive, administrative,
or professional capacity, and applies to
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38417	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
707 29 CFR 541.601(a)(1) (‘‘[A]n employee with
total annual compensation of at least $107,432 is
deemed exempt under section 13(a)(1) of the Act if
the employee customarily and regularly performs
any one or more of the exempt duties or
responsibilities of an executive, administrative or
professional employee as identified in subparts B,
C or D of this part.’’).
708 29 CFR 541.601(b)(1); Defining and Delimiting
the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer
Employees, 69 FR 22122, 22175 (Apr. 23, 2004)
(‘‘This change will ensure that highly compensated
employees will receive at least the same base salary
throughout the year as required for exempt
employees under the standard tests, while still
allowing highly compensated employees to receive
additional income in the form of commissions and
nondiscretionary bonuses.’’).
709 IRS, COLA Increases for Dollar Limitations on
Benefits and Contributions, (updated Nov. 7, 2023),
https://www.irs.gov/retirement-plans/cola-
increases-for-dollar-limitations-on-benefits-and-
contributions; Treas. Reg. sec. 1.401(a)(17)–1. 	710 Hiraiwa, Lipsitz & Starr, supra note 502.
highly compensated employees.707 That
regulation cross-references DOL’s
regulations on wage payments under the
FLSA in 29 CFR part 531, including the
term ‘‘other facilities’’ defined in 29
CFR 531.32.
This regulatory text makes one
modification to the DOL approach to
correspond to the final rule’s purposes
and the non-compete context. Based on
comments received, the Commission
decided not to adopt DOL’s base salary
requirement for highly compensated
employees in its definition of
compensation, which serves a different
purpose than the definition adopted
here. The 2019 DOL regulation requires
that a portion of the worker’s total
annual compensation must be paid on a
salary or fee basis in order to qualify as
a highly compensated employee, to
ensure that the worker receives at least
a base salary and to guard against
potential abuses.708 In contrast, the
exception in § 910.2(a)(2) applies only
to senior executives. The Commission
understands that compensation for
senior executives can be structured in
many different ways. A law firm
commented that senior executive
compensation can be particularly
complex, as base salary may be 20% or
less of a senior executive’s annual pay,
and much of their pay is variable and
does not vest until the end of the year.
One comment said some CEOs receive
only a $1 salary and receive the rest of
their compensation in other forms. The
definition of total annual compensation
in the final rule is designed to allow for
different forms of nondiscretionary
compensation without requiring
employers to pay a particular amount as
salary.
ii. Definition of ‘‘Preceding Year’’
The definitions of ‘‘senior executive’’
and ‘‘total annual compensation’’ in
§ 910.1 use the term ‘‘preceding year.’’
To provide clarity and facilitate
compliance, the Commission defines the
term ‘‘preceding year’’ in § 910.1 as a
person’s choice among the following
time periods: the most recent 52-week
year, the most recent calendar year, the
most recent fiscal year, or the most
recent anniversary of hire year. The
term ‘‘preceding year’’ is drawn from
DOL’s FLSA regulations in 29 CFR
541.601(b)(4), which states that ‘‘[t]he
employer may utilize any 52-week
period as the year, such as a calendar
year, a fiscal year, or an anniversary of
hire year. If the employer does not
identify some other year period in
advance, the calendar year will apply.’’
Here, the Commission similarly gives
employers flexibility to minimize
compliance costs, as many employers
may have compensation more readily
available based on the last calendar
year, their fiscal year, or the anniversary
of a worker’s hire as part of tax and
other reporting requirements.
iii. Other Proposed Compensation
Thresholds
In seeking to exempt senior
executives and highly paid workers
from the rule altogether, commenters
suggested several possible wage-related
thresholds, including specific dollar
thresholds (e.g., $100,000) not tied to
any existing metric or standard; whether
the worker is an hourly worker; annual
compensation at or above some multiple
of the Federal poverty level or minimum
wage, as in New Hampshire, Maine, and
Rhode Island statutes; State average
wages or ten times the local median
wage; and $330,000, the IRS annual
compensation limit for 401(k)
retirement contributions.709
As explained in Part V.D, the
Commission declines to exempt workers
from the rule altogether based on their
earnings. With respect to defining the
workers whose existing non-competes
the Commission exempts, the
Commission also declines to use these
thresholds or standards. For the reasons
described in this Part IV.C.4.b, the
Commission believes the compensation
threshold it is adopting—in
combination with the job duties test it
is adopting—most effectively isolates
the workers (namely, senior executives)
who are likely to bargain with
employers and receive compensation for
their non-competes and who are
unlikely to be exploited or coerced in
connection with non-competes. While
thresholds based on State lines or
metrics would reflect differences in
wages and costs of living among States,
they would not reflect differences
between, for example, urban and rural
areas within a State and could generate
confusion where the threshold varies
between States, in addition to increasing
compliance burdens by requiring
employers to assess which State
adjustment applies—a particularly
challenging task in increasingly cross-
border and remote work environments.
Using the local median wage would
generate too much unpredictability for
employers and workers and would face
the same administrability and confusion
challenges to an even higher degree. In
contrast, a uniform national
compensation threshold as part of the
test provides clarity that reduces the
risks of in terrorem effects and increases
ease of compliance. Finally, the
$330,000 threshold is an annual
compensation limit, while the IRS has a
different test to identify highly
compensated employees. A $330,000
threshold would be too high for
employers in areas with lower average
incomes and costs of living and would
likely exclude from the definition many
senior executives who bargained for
their non-compete in exchange for
consideration.
One business recommended an
exception for individuals in the top
10% income tier at their respective
employers to exempt workers at start-
ups that might not be able to
compensate their workers at a high level
but whose workers may still be exposed
to trade secrets. Another proposed using
Internal Revenue Code section 414(q),
defining highly compensated employee
as the highest paid 1% or 250
employees in the corporation. A
percentage threshold, however, has
significant practical issues including
workers entering and exiting, earnings
changes, and factoring in independent
contractors, workers at subsidiaries, or
workers at parent companies. It would
also lead to disparities between large
and small firms, as large firms could use
non-competes for far more workers than
could small firms.
Other commenters pointed to State
laws setting a compensation threshold
to support excluding highly paid
workers from the final rule or suggested
the Commission look to those States as
an example. A public policy
organization that supported a
categorical ban said any threshold
should be at least higher than $100,000,
citing research on Washington’s non-
compete reforms that indicated
employers did not value non-competes
up to that threshold.710 The
compensation threshold the
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38418 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
711 17 CFR 240.3b–7; NPRM at 3520.
712 See Part IV.C.4.c.ii.
713 17 CFR 240.3b–7 (‘‘The term executive officer,
when used with reference to a registrant, means its
president, any vice president of the registrant in
charge of a principal business unit, division or
function (such as sales, administration or finance),
any other officer who performs a policy making
function or any other person who performs similar
policy making functions for the registrant.
Executive officers of subsidiaries may be deemed
executive officers of the registrant if they perform
such policy making functions for the registrant.’’);
17 CFR 240.3b–2 (‘‘The term officer means a
president, vice president, secretary, treasury or
principal financial officer, comptroller or principal
accounting officer, and any person routinely
performing corresponding functions with respect to
any organization whether incorporated or
unincorporated.’’). 	714 17 CFR 240.3b–7.
Commission is adopting is higher than
this amount.
c. Defining the Job Duties Component
i. Definitions of ‘‘Officer,’’ ‘‘Policy-
Making Authority,’’ and ‘‘Policy-Making
Position’’
In NPRM, the Commission suggested
that the final rule’s definition of senior
executive could be based on SEC Rule
3b–7. 711 The Commission did not
receive comments specifically
addressing this option, but the
Commission carefully considered
arguments for and against job duties or
job title distinctions as well as
numerous comments on potential job
duties tests, alone or in combination
with compensation thresholds, before
determining that a modified version of
SEC Rule 3b–7’s job duties requirements
would best meet the exception’s goals.
The duties test adopted by the
Commission is precise and more
tailored than the other definitions
proposed by commenters 712 and
minimizes the risk that workers who
likely experienced exploitation and
coercion are included in the definition
of senior executive. The test focuses
primarily on job duties, rather than
solely on job titles, because businesses
do not all use the same job titles, and
a job title might not reflect the worker’s
actual level of authority in an
organization, which is a key indicator of
whether a worker is likely to face
exploitation and coercion or to have
bargained in connection with non-
competes.
Section 910.1 defines ‘‘policy-making
position’’ as a business entity’s
president, chief executive officer or the
equivalent, any other officer of a
business entity who has policy-making
authority, or any other natural person
who has policy-making authority for the
business entity similar to an officer with
policy-making authority. The definition
of ‘‘policy-making position’’ further
states that an officer of a subsidiary or
affiliate of a business entity that is part
of a common enterprise who has policy-
making authority for the common
enterprise may be deemed to have a
policy-making position for the business
entity for purposes of this paragraph.
Finally, the definition of ‘‘policy-
making position’’ states that a natural
person who does not have policy-
making authority over a common
enterprise may not be deemed to have
a policy-making position even if the
person has policy-making authority over
a subsidiary or affiliate of a business
entity that is part of the common
enterprise.
Section 910.1 also defines terms used
in the definition of ‘‘policy-making
position.’’ Section 910.1 defines
‘‘officer’’ as a president, vice president,
secretary, treasurer or principal
financial officer, comptroller or
principal accounting officer, and any
natural person routinely performing
corresponding functions with respect to
any business entity whether
incorporated or unincorporated. To
account for differences in the way
business entities may use and define job
titles, the definition includes workers in
equivalent roles. By incorporating this
definition of ‘‘officer,’’ ‘‘senior
executive’’ applies to workers at the
highest levels of a business entity.
This definition is nearly verbatim of
the SEC definition of ‘‘officer’’ in 17
CFR 240.3b–2. That term ‘‘officer’’ is
used in SEC Rule 3b–7.713 To maintain
consistency with the SEC regulations by
ensuring that ‘‘officer’’ has the same
meaning, and to utilize the SEC’s
expertise in this area, the Commission
adopts the SEC’s definition of ‘‘officer.’’
Section 910.1 defines ‘‘policy-making
authority’’ as final authority to make
policy decisions that control significant
aspects of a business entity or a
common enterprise. The definition
further states that policy-making
authority does not include authority
limited to advising or exerting influence
over such policy decisions or having
final authority to make policy decisions
for only a subsidiary of or affiliate of a
common enterprise.
Accordingly, for a worker to be a
senior executive, in addition to meeting
the compensation threshold, the worker
must be at the level of a president, chief
executive officer or the equivalent,
officer (defined in § 910.1), or in a
position that has similar authority to a
president or officer. Further, an officer
or other qualifying person must have
policy-making authority. Presidents,
chief executive officers, and their
equivalents are presumed to be senior
executives (i.e., employers do not need
to consider the further element of
‘‘policy-making authority’’). The term
‘‘chief executive officer or the
equivalent’’ was added to the definition
of ‘‘policy-making position’’ to increase
clarity on who was included and to
reflect the wider range of businesses
with various structures that are subject
to the final rule (as compared to SEC
Rule 3b–7). The definition of ‘‘policy-
making position’’ includes workers with
equivalent authority because job titles
and specific duties may vary between
companies. This ensures that the term
‘‘senior executive’’ is broad enough to
cover more than just a president or chief
executive officer, especially for larger
companies, as others may have final
policy-making authority over significant
aspects of a business entity.
For example, many executives in
what is often called the ‘‘C-suite’’ will
likely be senior executives if they are
making decisions that have a significant
impact on the business, such as
important policies that affect most or all
of the business. Partners in a business,
such as physician partners of an
independent physician practice, would
also generally qualify as senior
executives under the duties prong,
assuming the partners have authority to
make policy decisions about the
business. The Commission notes that
such partners would also likely fall
under the sale of business exception in
§ 910.3 if the partner leaves the practice
and sells their shares of the practice. In
contrast, a physician who works within
a hospital system but does not have
policymaking authority over the
organization as a whole would not
qualify.
The Commission changed some
aspects of SEC Rule 3b–7 to fit the
context of this rulemaking. First,
because § 910.2(a)(2) will extend to non-
public companies, unlike SEC
regulations, the final rule’s definition of
‘‘policy-making position’’ does not
include the phrase ‘‘any vice president
of the registrant in charge of a principal
business unit, division or function (such
as sales, administration or finance)’’ in
the definition of ‘‘executive officer.’’ 714
The Commission believes that in the
context of this final rule, in which the
definition is relevant to a broader array
of entities than public companies, that
phrase would encompass workers who,
despite their titles, are among those who
are likely to be coerced or exploited by
non-competes. For example, this aspect
of the definition can be too easily
applied to managers of small
departments, who the Commission finds
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38419	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
715 Id.
716 See, e.g., SEC v. Enters. Solutions, 142 F.
Supp. 2d 561, 570, 574 (S.D.N.Y. 2001) (finding that
a so-called consultant’s role was ‘‘sufficiently
similar to the duties of an officer or director of the
company that his involvement, along with his
history of criminal and regulatory violations, ought
to have been disclosed’’ where the consultant
controlled the company, including hiring the CEO,
arranging loans from companies controlled by the
consultant, negotiating acquisitions, and putting his
daughter on the board in his place); In re Weeks,
SEC Release No. 8313 at *9 (Oct. 23, 2003) (finding
a consultant was de facto in charge of the company
while the officers and directors were figureheads
who lacked authority and influence over the
company).
717 SEC v. Prince, 942 F. Supp. 2d 108, 133–36
(D.D.C. 2013).
718 Id. at 136.
719 FTC v. WV Universal Mgmt., LLC, 877 F.3d
1234, 1240 (11th Cir. 2017) (‘‘[C]ourts have justly
imposed joint and several liability where a common
enterprise exists’’).
are unlikely to have bargained for their
non-competes. At the same time, a
manager who does in fact have policy-
making authority would meet the
definition of ‘‘officer’’ in § 910.1 and
thus be included in the definition of
senior executives (if the manager also
meets the compensation threshold).
Similarly, depending on the
organization, a vice president may have
final policy-making authority over
significant aspects of a business entity.
The adapted definition is based on
functional job duties rather than formal
job titles.
Second, SEC Rule 3b–7 uses the term
‘‘policy making function’’ as part of its
definition of the types of job duties that
could classify a person as an ‘‘executive
officer.’’ 715 While the term ‘‘policy
making function’’ is undefined in SEC
Rule 3b–7 and other SEC regulations,
the Commission believes that defining
the term ‘‘policy-making authority’’ in
§ 910.1 would provide greater clarity
and facilitate compliance with the final
rule. The final rule applies to a wider
range of business entities than SEC
rules, and the Commission seeks to
minimize the need to consult with
counsel about the meaning of this term.
The Commission is also concerned that
if the term is left undefined, employers
could, inadvertently or otherwise, label
too many workers who have any
involvement in the employer’s policy
making as senior executives, especially
workers without bargaining power.
In defining this term, the Commission
seeks to broadly align with the SEC’s
definition of ‘‘executive officer’’ while
focusing on senior executives in a wider
variety of entities, who are less likely to
experience exploitation and coercion.
As explained in Part IV.C.4.b with
respect to the compensation threshold,
there is no job duties test that will
exclude every worker who experiences
exploitation and coercion with respect
to non-competes while including every
worker who does not. Building on the
SEC definition provides firms and
workers with a more administrable
definition that isolates workers at the
most senior level of an organization.
To ensure that the final rule’s job
duties test for senior executives broadly
aligns with the SEC definition, the
Commission looked to case law
interpreting that SEC definition. Few
courts have interpreted SEC Rule 3b–7’s
‘‘policy making function’’ language,
though some courts view it as an officer
test. 716 In the most in-depth discussion,
the U.S. District Court for DC
considered a defendant who was a
member of a corporate body that
discussed important policy decisions
and made recommendations to the CEO,
and supervised and had ‘‘substantial
influence’’ over a major aspect of the
company’s business. However, the court
held that only the CEO, and not the
defendant, had authority to make
company policy and ultimate decisions
on significant issues.717 The court
conducted a fact-intensive analysis of
the defendant’s duties and held that the
defendant did not have the authority to
make policy. The court also held that
the term did not include individuals
solely ‘‘involved in discussing company
strategy and policy.’’ 718
The Commission finds this case law
instructive and thus defines ‘‘policy-
making authority’’ in the final rule as
‘‘final authority to make policy
decisions that control significant aspects
of a business entity and does not
include authority limited to advising or
exerting influence over such policy
decisions.’’ Adding this definition
provides stakeholders with additional
clarity as to what type of authority
meets the definition of ‘‘senior
executive’’ and prevents overbroad
application of the definition. It
expressly does not include workers who
merely advise on or influence policy, as
a wide range of workers in an
organization can advise on or influence
policy without being a senior executive.
In order to ensure that lower-level
workers, whom the Commission finds
likely experience exploitation and
coercion, are not included in the
definition of senior executive, policy-
making authority is assessed based on
the business as a whole, not a particular
office, department, or other sublevel. It
considers the authority a worker has to
make policy decisions that control a
significant aspect of a business entity
without needing a higher-level worker’s
approval. For example, if the head of a
marketing division in a manufacturing
firm only makes policy decisions for the
marketing division, and those decisions
do not control significant aspects of the
business (which would likely be
decisions that impact the business
outside the marketing division), that
worker would not be considered a
senior executive. Similarly, in the
medical context, neither the head of a
hospital’s surgery practice nor a
physician who runs an internal medical
practice that is part of a hospital system
would be senior executives, assuming
they are decision-makers only for their
particular division. The definition is
limited to the workers with sufficient
pay and authority such that they are
more likely to have meaningful
bargaining power and actually
negotiated their non-competes.
For the same reason, the Commission
added language to the definitions of
‘‘policy-making authority’’ and ‘‘policy-
making position’’ to exclude from the
definition of ‘‘senior executives’’
workers with policy-making authority
over only a subsidiary or affiliate of a
common enterprise who do not have
policy-making authority over the
common enterprise. One commenter
argued that the proposed definition of
‘‘business entity’’ would allow firms to
divide themselves into separate entities
to evade the final rule. In addition to
sharing this concern, the Commission is
concerned that executives of
subsidiaries or affiliates of a common
enterprise 719 could rely on their final
authority to make policy decisions for
only that subsidiary or affiliate to
classify the head of each office as a
senior executive even though that
individual only has authority over one
component of a coordinated common
enterprise. Rather, the worker must have
policy-making authority with respect to
the common enterprise as a whole, not
just a segment of it, to be a senior
executive. Workers who head a
subsidiary or affiliate of a common
enterprise are similar to department
heads; the senior executives controlling
the entire common enterprise control
those individual subsidiaries and
affiliates. As the Commission has
explained, the Commission finds that
department heads and other highly paid
non-senior executives do not have
sufficient bargaining power to avoid
exploitation and coercion and are
unlikely to have bargained in
connection with non-competes. The job
duties test identifies the workers with
the highest levels of authority in an
organization, i.e., the workers most
likely to have bargaining power and a
bespoke, negotiated agreement, and a
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720 See FTC v. E.M.A. Nationwide, Inc., 767 F.3d
611, 636–37 (6th Cir. 2014).
721 See id. (‘‘‘If the structure, organization, and
pattern of a business venture reveal a ‘common
enterprise’ or a ‘maze’ of integrated business
entities, the FTC Act disregards corporateness.
Courts generally find that a common enterprise
exists ‘if, for example, businesses (1) maintain
officers and employees in common, (2) operate
under common control, (3) share offices, (4)
commingle funds, and (5) share advertising and
marketing.’’’) (quoting FTC v. Wash. Data. Res., 856
F. Supp. 2d 1247, 1271 (M.D. Fla. 2012)). In
assessing a common enterprise, ‘‘no one factor is
controlling,’’ and ‘‘federal courts routinely consider
a variety of factors.’’ FTC v. Wyndham Worldwide
Corp., No. CIV.A. 13–1887 ES, 2014 WL 2812049,
at *7 (D.N.J. Jun. 23, 2014); see also Del. Watch Co.
v. FTC, 332 F.2d 745, 746 (2d Cir. 1964) (‘‘[T]he
pattern and frame-work of the whole enterprise
must be taken into consideration.’’)
722 See 29 CFR 541.100(a).
723 See DOL, Fact Sheet #17A: Exemption for
Executive, Administrative, Professional, Computer
& Outside Sales Employees Under the Fair Labor
Standards Act (FLSA) (revised Sept. 2019), https://
www.dol.gov/agencies/whd/fact-sheets/17a-
overtime.
724 Id.
725 See NPRM at 3511.
726 See 2023 FLSA NPRM at 62190 (estimating
that 36.4 million salaried, white-collar employees
currently qualify as FLSA-exempt executive,
administrative, or professional employees).
727 See Part IV.C.1.
728 See Part IX.C.
729 See Part IV.C.4.b.
common enterprise is effectively a
single organization. Such workers may
have a senior executive job title, but
they are unlikely to meet the job duties
test.
To be considered a ‘‘common
enterprise’’ for the purposes of defining
policy-making authority and policy-
making position, the Commission looks
beyond legal corporate entities to
whether there is a common enterprise of
‘‘integrated business entities.’’ 720 This
means that the various components of
the common enterprise have, for
example, one or more of the following
characteristics: maintain officers,
directors, and workers in common;
operate under common control; share
offices; commingle funds; and share
advertising and marketing.721 Therefore,
the definitions of policy-making
authority and policy-making position
include provisions whose purpose is to
exclude those executives of a subsidiary
or affiliate of a common enterprise from
being considered senior executives. For
example, if a business operates in
several States and its operations in each
State are organized as their own
corporation, assuming these businesses
and the parent company meet the
criteria for a common enterprise, the
head of each State corporation would
not be a senior executive. Rather, only
the senior executives of the parent
company (or whichever company is
making policy decisions for the
common enterprise) could qualify as
senior executives for purposes of this
final rule, because they are the workers
with the highest level of authority in the
organization and most likely to have
bargaining power and a bespoke,
negotiated agreement. However, a
worker could qualify as a senior
executive even if they were an executive
of one or more subsidiaries or affiliates
of the common enterprise, so long as
that senior executive exercised policy-
making authority over the common
enterprise in its entirety. These
provisions are consistent with the
approach taken elsewhere in this final
rule to focus on real-world implications
and authority rather than formal titles,
labels, or designations. This exclusion
from the definitions of ‘‘policy-making
authority’’ and ‘‘policy-making
position’’ applies only to common
enterprises; for subsidiaries or affiliates
that are not part of a common
enterprise, a worker could qualify as a
senior executive if they have policy-
making authority over that subsidiary or
affiliate and meet all of the
requirements.
The Commission has also substituted
‘‘business entity’’ in the definitions of
‘‘officer’’ and ‘‘policy-making position’’
where SEC Rule 3b–7 uses the word
‘‘registrant’’ and 17 CFR 240.3b–2 uses
‘‘organization,’’ because ‘‘registrant’’ has
a specific meaning in the SEC context
that is inapplicable to the wider array of
business entities covered by this final
rule and because ‘‘business entity’’ is
defined in § 910.1 and is used
throughout this final rule. The
Commission substituted ‘‘natural
person’’ where SEC Rule 3b–7 and 17
CFR 240.3b–2 use ‘‘person’’ because
‘‘person’’ is separately defined for
purposes of this final rule in § 910.1.
ii. Other Proposed Job Duties Tests
The FLSA
Numerous commenters suggested
basing a job duties test on the categories
of occupations that are exempt from
requirements under the FLSA. Some
commenters suggested using only some
of the exemptions such as executive
employees,722 administrative
employees, learned or creative
professionals, or workers in the practice
of medicine.723 DOL’s regulations also
set a salary threshold at not less than
$684 per week ($35,568 annually), 724
though other commenters suggested
using a higher compensation threshold.
One civic organization opposed
applying any FLSA exemptions, stating
that the FLSA provides numerous
exemptions that do not relate to any
non-compete policy considerations, and
an exception or more lenient standards
for FLSA-exempt workers would not
solve the problems caused by non-
competes. It opposed using the FLSA’s
executive, administrative, or
professional exemptions, arguing that
updates to the FLSA’s salary threshold
are often delayed and outdated, often
falling below the poverty threshold, and
the duties test serves as a loophole for
wage and hour protections.
Commenters offered several reasons
for adopting the FLSA exemptions:
these categories are already well-
established in Federal law; nonexempt
workers under the FLSA tend not to
have access to trade secrets or be able
to take an employer’s goodwill and are
thus less likely to harm the employer;
the exemptions would capture both
wage and job duties tests; some States
use a similar standard to the FLSA in
their non-compete statutes; and the
exemptions would ban non-competes
for low-skilled workers for whom there
are insufficient justifications for non-
competes. An employment attorney also
pushed back on the NPRM’s concerns
that the FLSA exemptions could enable
misclassification,725 asserting that
misclassification under the FLSA is
unlawful and penalized, and thus
usually inadvertent.
The Commission does not adopt the
FLSA exemptions for purposes of this
final rule because it would exempt
millions of non-competes that harm
competition and workers. For example,
the FLSA exempts most highly paid and
highly skilled workers,726 who the
Commission finds experience
exploitation and coercion (except where
those workers are also senior
executives).727 The Commission also
adopts brighter-line rules than the FLSA
to ease compliance burdens and address
in terrorem effects that result from
uncertainty about whether a non-
compete is unenforceable.728 Although
the Commission does not believe that
the FLSA job duties tests are
appropriate for this final rule, it does
view the FLSA wage threshold
methodology for ‘‘highly compensated
employees’’ as a useful benchmark.729
Trade Secret and Confidential
Information Exceptions
Numerous commenters urged the
Commission not to ban non-competes
for workers who have access to trade
secrets and confidential information,
often noting this justification is
commonly used for highly paid and
highly skilled workers, including senior
executives. One comment expressly
stated that this exception should apply
regardless of earnings, though many
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38421	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
730 See NPRM at 3520 (citing 17 CFR
229.402(a)(3)).
731 See 17 CFR 229.402(a)(3).
732 Additionally, while the reporting obligations
of public companies may provide them with an
incentive to avoid generating a profusion of ‘‘senior
executives,’’ privately held companies would not
face a similar constraint and could potentially avoid
any ‘‘per-company’’ limitations through corporate
restructuring.
733 This provision determines who is an ‘‘officer’’
‘‘on the basis of all the facts and circumstances in
the particular case (such as the source of the
individual’s authority, the term for which the
individual is elected or appointed, and the nature
and extent of the individual’s duties) . . . .’’ Treas.
Reg. sec. 1.280G–1, Q/A–18. 	734 See Part IX.C.
others did not mention compensation
thresholds. One business suggested a
bright-line rule for the types of
confidential business information that
can be protected by a non-compete
based on existing State statutes, to
increase certainty about what is
allowed. Commenters suggested
exceptions based on a variety of job
types they viewed as more likely to be
exposed to trade secrets and
confidential information, including all
highly skilled workers; key scientific,
technical, R&D, or sales workers; or
workers with highly detailed knowledge
of business and marketing plans. The
Commission explains why it is not
adopting exceptions based on access to
trade secrets or other intellectual
property in Parts V.D.1 and V.D.2.
Additional Proposed Job Duties and Job
Title Tests
The Commission carefully considered
several other proposed tests. The NPRM
stated that the Commission could base
the definition of senior executive on
SEC Regulation S–K’s definition of
senior executives.730 Commenters did
not discuss this potential option. The
Commission is not adopting this
approach because it bears little relation
to the likelihood that a senior executive
bargained for a non-compete, and
because it would designate roughly
seven individuals per company as
‘‘senior executives’’ regardless of their
compensation level or the size of the
company, meaning it would not apply
equally among employers or workers.731
For example, a ten-person company
could potentially use non-competes for
most of its workforce irrespective of
whether they are senior executives,
whereas a company with ten thousand
employees would be limited to the same
number.732
One commenter proposed adopting a
definition similar to the tax code
provision on ‘‘golden parachute
payments.’’ 733 Several commenters
drafted their own definition of senior
executive based on job duties, titles, or
ownership status, such as C-suite
executives and their immediate
subordinates, partners and equity
holders, managers, workers involved in
strategic decision-making, and more.
The Commission carefully considered
each proposed definition and how it
would operate in practice before
selecting the two-part test. Elements of
some of these proposals, such as
strategy development or decision-
making, are also similar to the job duties
test the Commission is finalizing. The
Commission believes that definitions
based on job titles alone would be
inadequate because, as one industry
association commented, employers
define job titles differently, and a title
might not accurately reflect a worker’s
job duties. The other definitions
proposed by commenters, such as the
provision on golden parachute
payments, would generally require a
more fact-intensive analysis than the job
duties test the Commission is adopting.
Market participants would need to
conduct the analysis for more workers,
including workers who are exploited
and coerced by non-competes. A more
fact-intensive analysis would require
more resources for litigation and is thus
likely to have in terrorem effects for
lower-wage workers.734 Moreover, many
of these proposals would exempt more
workers than the Commission’s
definition, such as managers, even
though workers in such roles and
occupations are often coerced and
exploited by non-competes.
As explained in this Part, the
Commission pairs a relatively easy-to-
apply job duties test with a
compensation threshold to maximize
administrability and clarity while
identifying those senior executives most
likely to have bargained for non-
competes. In addition, proposals to
except partners, shareholders, and
similar groups are likely covered by the
sale of business exception if they sell
their share of the business upon leaving.
5. Prohibitions in Section 910.2(a)(2)
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission adopts § 910.2(a)(2), which
defines unfair methods of competition
related to non-competes with respect to
senior executives. Section 910.2(a)(2)
provides that, with respect to a senior
executive, it is an unfair method of
competition for a person: (i) to enter
into or attempt to enter into a non-
compete clause; (ii) to enforce or
attempt to enforce a non-compete clause
entered into after the effective date; or
(iii) to represent that the senior
executive is subject to a non-compete
clause, where the non-compete clause
was entered into after the effective date.
Part IV.A.1 sets forth the Commission’s
determination that the foregoing
practices are unfair methods of
competition under section 5, and Part
IV.C.2 explains the findings that provide
the basis for this determination.
Section 910.2(a)(2) uses similar
language as § 910.2(a)(1); however, there
are two key differences. First, the
prohibition in § 910.2(a)(2)(ii) on
enforcing or attempting to enforce a
non-compete applies only to non-
competes entered into after the effective
date. Second, the prohibition in
§ 910.2(a)(2)(iii) on representing that a
senior executive is subject to a non-
compete applies only where the non-
compete was entered into after the
effective date. Sections 910.2(a)(2)(ii)
and (iii) include this language because,
for the reasons described in Part IV.C.3,
the Commission has determined not to
prohibit existing non-competes with
senior executives—i.e., non-competes
entered into before the effective date—
from remaining in effect.
Otherwise, the explanation of the
three prongs of § 910.2(a)(1) in Part
IV.B.4—relating to issues such as, for
example, what ‘‘attempt to enter into’’
and ‘‘attempt to enforce’’ mean, and
what conduct the ‘‘representation’’
prong applies to—is applicable to the
corresponding language in § 910.2(a)(2).
The good-faith exception in § 910.3 is
also applicable to the relevant
prohibitions with respect to senior
executives and is explained in Part V.C.
D. Claimed Justifications for Non-
Competes Do Not Alter the
Commission’s Finding That Non-
Competes Are an Unfair Method of
Competition
For the reasons described in Parts
IV.B and IV.C, the Commission
determines that certain practices related
to non-competes are unfair methods of
competition under section 5. In this Part
IV.D, the Commission finds the claimed
justifications for non-competes do not
alter the Commission’s determination
that non-competes are an unfair method
of competition.
As noted in Part II.F, some courts
have declined to consider justifications
altogether and the Commission and
courts have consistently held that
pecuniary benefit to the party
responsible for the conduct in question
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38422 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
735 Atl. Refin. Co., 381 U.S. at 371 (considering
that defendant’s distribution contracts at issue
‘‘may well provide Atlantic with an economical
method of assuring efficient product distribution
among its dealers’’ and 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’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (following the
same reasoning as Atlantic Refining and finding
that the ‘‘anticompetitive tendencies of such system
[were] clear’’); L.G. Balfour Co. v. FTC, 442 F.2d 1,
15 (7th Cir. 1971) (‘‘While it is 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.
736 See, e.g., FTC v. Ind. Fed’n of Dentists, 476
U.S. 447, 463 (1986); Fashion Originators’ Guild of
Am. v. FTC, 312 U.S. 457, 467–68 (1941); FTC v.
Superior Ct. Trial Lawyers Ass’n, 493 U.S. 411,
423–24 (1990).
737 See, e.g., Ind. Fed’n of Dentists, 476 U.S. at
464. See also United States v. Microsoft Corp., 253
F.3d 35, 62–64, 74 (D.C. Cir. 2001); Eastman Kodak
Co. v. Image Tech. Svcs., 504 U.S. 451, 484–85
(1992); Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585, 608–10 (1985).
738 NCAA v. Alston, 594 U.S. 69, 99–104 (2021);
Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38
(D.C. Cir. 2005); 2000 Collaboration Guidelines, sec.
3.36b. See also Union Circulation Co. v. FTC, 241
F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here
went beyond what was necessary to curtail and
eliminate fraudulent practices.’’).
739 NPRM at 3504–08.
740 See, e.g., United States v. Addyston Pipe &
Steel Co., 85 F. 271, 281 (6th Cir. 1898); Polk Bros.,
Inc. v. Forest City Enters., 776 F.2d 185, 189 (7th
Cir. 1985).
741 See FTC, In the Matter of O–I Glass, Inc and
In the Matter of Ardagh Group S.A., Ardagh Glass
Inc., and Ardagh Glass Packaging Inc., Analysis of
Agreements Containing Consent Order to Aid
Public Comment, FTC File No. 2110182 (Jan. 4,
2023) at 6–7; FTC, In the Matter of Prudential
Security, Inc., et al., Analysis of Agreement
Containing Consent Order to Aid Public Comment,
FTC File No. 2210026 (Jan. 4, 2023) at 7; FTC, In
the Matter of Anchor Glass Container Corp. et al.,
FTC File No. 2210182 Analysis of Agreement
Containing Consent Order to Aid Public Comment
(Mar. 15, 2023) at 6.
742 See Part IV.D.2.
743 See Part IV.D.3.
744 Starr, supra note 445 at 796–97.
745 Id. at 797.
is not cognizable as a justification.735
However, where defendants raise
justifications as an affirmative defense,
they must be legally cognizable,736 and
non-pretextual,737 and any restriction
used to bring about the benefit must be
narrowly tailored to limit any adverse
impact on competitive conditions.738
In the NPRM, the Commission
considered the commonly cited
business justifications for non-competes
and preliminarily found they did not
alter the Commission’s determination
that non-competes are an unfair method
of competition.739 The Commission has
reviewed and considered the comments
on its analysis of the justifications for
non-competes. For two reasons, the
claimed justifications for non-competes
do not alter the Commission’s
determination that non-competes are an
unfair method of competition. First,
employers have more narrowly tailored
alternatives to non-competes for
protecting valuable investments that
tend to negatively affect competitive
conditions to a lesser degree. Second,
the asserted benefits from the claimed
business justifications from non-
competes do not justify the considerable
harm from non-competes.
1. Claimed Business Justifications for
Non-Competes and Empirical Evidence
Claimed business justifications for
non-competes relate to increasing
employers’ incentives to make
productive investments, such as
investments in worker human capital
(worker training), client and customer
attraction and retention, or in creating
or sharing trade secrets or other
confidential information with workers.
According to these asserted
justifications, without non-competes,
employment relationships are subject to
an investment hold-up problem.
Investment hold-up would occur where
an employer—faced with the possibility
that a worker may depart after receiving
some sort of valuable investment or
obtaining valuable information—opts
not to make that investment in the first
place, thereby decreasing the firm’s
productivity and overall social welfare.
For example, according to this claimed
justification, an employer may be more
reticent to make capital investments or
invest in workers’ human capital by
training its workers if it knows the
worker may depart for or may establish
a competing firm. Similarly,
commenters argued that employers may
decrease investments or experience
harm if a worker takes a trade secret or
other confidential information to a
competitor.
Courts have cited these justifications
when upholding non-competes under
State common law and in cases
challenging non-competes under the
Sherman Act.740 However, courts have
not considered non-competes’ aggregate
harms, and neither legislatures nor
courts have had occasion to consider
these justifications in the context of
section 5. The Commission has
considered them and found them
unavailing in cases in which it has
successfully obtained consent decrees
against non-competes alleged to be an
unfair method of competition in
violation of section 5. 741
There is some empirical evidence that
non-competes increase investment in
human capital of workers, capital
investment, and R&D investment.
However, the Commission also finds
that there are alternatives that burden
competition to a lesser degree,742 and,
in any event, these claimed benefits do
not justify the harms from non-
competes.743
As explained in the NPRM, a study by
Evan Starr finds that moving from mean
non-compete enforceability to no non-
compete enforceability would decrease
the number of workers receiving
training by 14.7% in occupations that
use non-competes at a high rate (relative
to a control group of occupations that
use non-competes at a low rate).744 The
study further finds that changes in
training are primarily due to changes in
firm-sponsored, rather than employee-
sponsored, training.745
Firm-sponsored training is the type of
investment in human capital that non-
competes are often theorized to protect,
as the firm may be unwilling to make an
unprotected investment. However, the
study does not distinguish between core
training, i.e., training required to
perform job duties, and advanced
training, i.e., training with potential to
increase productivity beyond the
baseline requirements for job
performance. When non-competes are
more enforceable, workers may receive
additional core training rather than
advanced training, but this may actually
reflect a reduction in efficiency. When
non-competes are more enforceable,
labor mobility decreases and workers
may also move to new industries to
avoid potentially triggering non-
compete clause violations (as discussed
in Part IV.B.2.b.ii), both of which make
experienced workers less often available
for hire. Firms therefore may need to
train workers at a greater rate because
they will hire inexperienced workers
who require more core training. On the
other hand, advanced training can be
associated with productivity gains, and
firms using non-competes may increase
rates of advanced training for
experienced workers because non-
competes increase the likelihood that
firms receive a return on the training
investment. The study does not
distinguish between these types of
training, and thus leaves unclear
whether the observed increases in
training reflect productivity gains or
losses (or neither in net).
Additionally, the Starr study uses
data on the use of non-competes,
comparing high- and low-use
occupations, rather than changes in
enforceability; however, the study does
not examine differences between
individuals who are bound by non-
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746 Jeffers, supra note 450 at 28. Jeffers reports
34%–39% increases in capital investment due to
increases in non-compete enforceability at
knowledge-intensive firms in the 2024 version of
the study, and the Commission calculates increases
of 7.9% across all sectors (see Part X.F.9.a.i).
747 Id. at 29.
748 Johnson, Lipsitz, and Pei, supra note 526.
749 Shi, supra note 84.
750 See Part IV.A.2.
751 Starr, Prescott, & Bishara, supra note 68 at 76.
752 Johnson & Lipsitz, supra note 80 at 711.
753 Starr, Prescott, & Bishara, supra note 68 at 73;
Johnson & Lipsitz, supra note 80 at 711.
754 See Part IV.A.2 (describing the analytical
framework the Commission is applying to weigh the
empirical studies, including why it assigns greater
weight to studies assessing changes in non-compete
enforceability than to studies of non-compete use).
755 Kenneth A. Younge & Matt Marx, The Value
of Employee Retention: Evidence from a Natural
Experiment, 25 J. Econ. & Mgmt. Strategy 652
(2016).
756 Id. at 674.
competes and individuals who are not.
This study is the only study that
attempts to identify the causal link
between non-competes and worker
human capital investment, and the
Commission gives it some weight,
though not as much weight as it would
receive if it examined changes in non-
compete enforceability. The
Commission also weights it less highly
because it does not distinguish between
core and advanced training.
The second study, by Jessica Jeffers,
finds knowledge-intensive firms invest
substantially less in capital equipment
following decreases in the enforceability
of non-competes, though the effect is
much more muted (and statistically
insignificant) when considering all
industries. 746 While firms may invest in
capital equipment for many different
reasons, Jeffers examines this outcome
(as opposed to labor-focused outcomes)
to avoid looking at R&D expenditure as
a whole, which is in large part
composed of labor expenses. This
allows the study to isolate the effects of
non-compete enforceability on
investment from other effects of non-
competes, such as reduced worker
earnings.
Jeffers finds that there are likely two
mechanisms driving these effects: first,
that firms may be more likely to invest
in capital when they train their workers
because worker training and capital
expenditure are complementary (i.e., the
return on investment in capital
equipment is greater when workers are
more highly trained); and second, that
non-competes reduce competition, and
firms’ returns to capital expenditure are
greater when competition is lower,
incentivizing firms to invest more in
capital.747 Jeffers does not find any
impact of non-compete enforceability on
R&D expenditure (intangible
investment). The sample in this study’s
examination of capital investment is
limited to incumbent firms, and the
study also finds decreases in new firm
entry due to increases in non-compete
enforceability. The study therefore does
not offer clear insights into the overall
net effect on capital investment (which
includes investment by incumbent firms
as well as investment by entering firms).
Additionally, the Commission notes that
if Jeffers’ hypothesis—that firms
increase investment in capital because
of decreased competition—is correct,
then this increased capital investment
may not necessarily reflect increased
economic efficiency. Jeffers uses
multiple changes in non-compete
enforceability, measured in a binary
fashion, and the Commission therefore
gives this study substantial weight, but
less weight than studies which
additionally measure enforceability in a
non-binary fashion.
Two studies published after the
release of the NPRM also assess the
effects of non-competes on firm
investments. A study by Johnson,
Lipsitz, and Pei revisits the form of the
regressions used by Jeffers. The authors
find that greater non-compete
enforceability increases R&D
expenditure.748 This is consistent with
the NPRM’s preliminary finding, and
the finding of the Jeffers study, that
there is evidence that non-competes
increase employee human capital
investment and other forms of
investment. The Commission gives this
study substantial weight because it
examines multiple changes in non-
compete enforceability measured in a
non-binary fashion.
Similarly, a study by Liyan Shi
examines the relationship between non-
compete enforceability, the use of non-
competes among executives, and firm
investment.749 Shi finds that intangible
capital (expenditure on R&D) is
positively associated with use of non-
competes, especially in States that
enforce non-competes more strictly.
However, Shi finds that—unlike in the
Jeffers study—physical capital
expenditure has no relationship with
the use of non-competes, even in high
enforceability States. The Commission
notes that this evidence pertains
specifically to non-competes with
highly paid senior executives: the
executives in Shi’s study earned
$770,000 in cash compensation, on
average. The Commission also notes that
this evidence arises from analysis of
non-compete use coupled with non-
compete enforceability. The
Commission therefore gives less weight
to these empirical findings.
As the NPRM described, there are also
two studies examining the impact of
non-compete use (as opposed to non-
compete enforceability) on investment.
However, these studies simply compare
differences between samples of workers
that do and do not use non-competes, a
methodology the Commission gives less
weight to.750 The first is a study by
Starr, Prescott, and Bishara using their
2014 survey of non-compete use. They
find no statistically significant
association with either training or the
sharing of trade secrets (after inclusion
of control variables) but do not examine
other investment outcomes.751 The
second study, by Johnson and Lipsitz,
examines investment in the hair salon
industry. That study finds that firms
that use non-competes train their
employees at a higher rate and invest in
customer attraction through the use of
digital coupons (on so-called ‘‘deal
sites’’) to attract customers at a higher
rate, both by 11 percentage points.752
As the Commission stated in the
NPRM, it gives these two studies (the
2021 Starr, Prescott, and Bishara studies
and the 2021 Johnson and Lipsitz
studies) minimal weight, because they
do not necessarily represent causal
relationships, a point recognized by the
authors of both of these studies.753
Similar to other studies of non-compete
use—as opposed to changes in non-
compete enforceability—these studies
are less reliable because the use of non-
competes and the decision to invest may
be jointly determined by other
characteristics of the firms, labor
markets, or product markets. 754
One additional study, by Younge and
Marx, finds that the value of publicly
traded firms increased by 9% due to an
increase in non-compete
enforceability. 755 As the Commission
noted in the NPRM, the authors
attribute this increase to the value of
retaining employees, which comes with
the negative effects to parties other than
the firm (employees, competitors, and
consumers) described in Parts IV.B and
IV.C. As the NPRM stated, if the benefits
to the firm arise primarily from
reductions in labor costs, then the
increase in the value of firms is in part
a transfer from workers to firms and is
therefore not necessarily a benefit of
non-competes. However, the authors do
not explore the extent to which
increases in firm value arise from
decreases in labor costs. The authors
additionally note that since the time
frame used in the study is short, ‘‘there
may be deleterious effects of non-
competes in the long run’’ which are
absent in their findings.756 This study
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38424 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
757 Recent evidence suggests that trade secret
litigation does not increase following bans on non-
competes. Brad N. Greenwood, Bruce Kobayashi,
Evan Starr, Can You Keep a Secret? Banning
Noncompetes Does Not Increase Trade Secret
Litigation (2024), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4771171. The Commission
does not rely on this study to support the findings
described in this Part IV.D.
758 See, e.g., David S. Levine & Christopher B.
Seaman, The DTSA at One: An Empirical Study of
the First Year of Litigation Under the Defend Trade
Secrets Act, 53 Wake Forest L. Rev. 106, 120–22
(2018).
759 NPRM at 3505–07.
760 Id.
761 Id. at 3505–06.
762 Id. at 3506–07.
763 Id. at 3507.
764 Id.
765 Since the NPRM was issued, Minnesota has
become the fourth State to make non-competes
unenforceable. See Minn. Stat. Ann. sec. 181.988
(effective July 1, 2023).
766 NPRM at 3507.
767 Non-competes have been void in California
since 1872, in North Dakota since 1865, and in
Oklahoma since 1890. See Ronald J. Gilson, The
Legal Infrastructure of High Technology Industrial
Districts: Silicon Valley, Route 128, and Non-
Compete Clauses, 74 N.Y.U. L. Rev. 575, 616 (1999)
(California); Werlinger v. Mut. Serv. Casualty Ins.
Co., 496 NW2d 26, 30 (N.D. 1993) (North Dakota);
Brandon Kemp, Noncompetes in Oklahoma Mergers
and Acquisitions, 88 Okla. Bar J. 128 (2017)
(Oklahoma). Minnesota also recently prohibited
non-competes, through a law that took effect in July
2023. See Minn. Stat. sec. 181.988. However,
Minnesota’s experience is too new to draw
conclusions about the ability of industries that
depend on trade secrets to thrive where non-
competes are unenforceable.
768 Josh Dylan, What Is Market Cap In Stocks?,
Nasdaq.com (Aug, 12, 2022), https://
www.nasdaq.com/articles/whatmarketcap-in-stocks;
Ewing Marion Kauffman Found., State
Entrepreneurship Rankings, https://www..com/
public_affairs//02/25/_foundation_state_
entrepreneurship_rankings.html.
769 See, e.g., Gilson, supra note 767 at 594–95.
770 See, e.g., id. at 585–86, 590–97; Bruce Fallick,
Charles A. Fleischman, & James B. Rebitzer, Job-
Hopping in Silicon Valley: Some Evidence
Concerning the Microfoundations of a High-
Technology Cluster, 88 Rev. Econ. & Statistics 472,
477 (2006).
does not address the effects of non-
competes on firm investments
specifically.
As the Commission stated in the
NPRM, it is unaware of any evidence of
a relationship between the
enforceability of non-competes and the
rate at which companies invest in
creating or sharing trade secrets.757
Similarly, the Commission is unaware
of any evidence non-competes reduce
trade secret misappropriation or the loss
of other types of confidential
information, difficult areas for
researchers to study given the lack of
reliable data on firms’ trade secrets and
confidential information.758 As
explained in Part IV.D.2, even assuming
non-competes do reduce
misappropriation or information loss,
the Commission finds that there are
alternatives to protect these investments
that burden competition to a lesser
degree.
2. Employers Have Alternatives to Non-
Competes for Protecting Valuable
Investments
a. The Proposed Rule
In the NPRM, the Commission
preliminarily found that employers have
alternatives to non-competes for
protecting valuable investments.759 The
Commission stated that these
alternatives may not be as protective as
employers would like, but they
reasonably accomplish the same
purposes as non-competes while
burdening competition to a less
significant degree.760
The Commission stated that trade
secret law—a form of intellectual
property law that protects confidential
business information—already provides
significant legal protections for an
employer’s trade secrets.761 The
Commission also stated that employers
that seek to protect valuable
investments are able to enter into NDAs
with their workers. NDAs, which are
also commonly known as
confidentiality agreements, are contracts
in which a party agrees not to disclose
or use information designated as
confidential.762 The Commission further
stated that, if an employer wants to
prevent a worker from leaving right after
receiving valuable investment in their
human capital, the employer can sign
the worker to an employment contract
with a fixed duration.763 In addition, the
Commission stated that employers that
wish to retain their workers can also pay
their workers more, offer them better
hours or better working conditions, or
otherwise improve the conditions of
their employment—i.e., compete to
retain their labor services.764
The Commission also noted that in
three States—California, North Dakota,
and Oklahoma—employers generally
cannot enforce non-competes, so they
must protect their investments using
one or more of these less restrictive
alternatives. 765 The Commission stated
that the economic success in these three
States of industries that are highly
dependent on trade secrets and other
confidential information illustrates that
companies have viable alternatives to
non-competes for protecting valuable
investments.766
b. The Commission’s Final Findings
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
the asserted business justifications for
non-competes do not alter the
Commission’s determination that non-
competes are an unfair method of
competition. Employers have
alternatives to non-competes for
protecting valuable investments that
burden competition to a less significant
degree. Rather than restraining a broad
scope of beneficial competitive
activity—by barring workers altogether
from leaving work with the employer or
starting a business and by barring
competing employers and businesses
from hiring those workers—these
alternatives are much more narrowly
tailored to limit impacts on competitive
conditions.
For the protection of trade secrets and
other confidential information, these
alternatives include enforcement of
intellectual property rights under trade
secret and patent law, NDAs, and
invention assignment agreements.
Employers also have alternative
mechanisms to protect their investments
in worker human capital, including
fixed duration contracts, and competing
on the merits to retain workers by
providing better pay and working
conditions.
The experiences of certain States in
banning non-competes bolster this
conclusion. Non-competes have been
void in California, North Dakota, and
Oklahoma since the 1800s.767 In these
three States, employers generally cannot
enforce non-competes, so they must
protect their investments using one or
more less restrictive alternatives. There
is no evidence that employers in these
States have been unable to protect their
investments (whether in human capital,
physical capital, intangible assets, or
otherwise) or have been disincentivized
from making them to any discernible
degree. Rather, in each of these States,
industries that depend on highly trained
workers and trade secrets and other
confidential information have
flourished. California, for example, is
home to four of the world’s ten largest
companies by market capitalization, and
it also maintains a vibrant startup
culture. 768 Technology firms are highly
dependent on highly-trained and skilled
workers as well as protecting trade
secrets and other confidential
information—and, since the 1980s,
California has become the epicenter of
the global technology sector, even
though employers cannot enforce non-
competes.769 Indeed, researchers have
posited that high-tech clusters in
California may have been aided by
increased labor mobility due to the
unenforceability of non-competes.770 In
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38425	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
771 Brian T. Yeh, Protection of Trade Secrets:
Overview of Current Law and Legislation, Cong.
Rsch. Serv. 4 (Apr. 22, 2016) (Report R43714),
https://sgp.fas.org/crs/secrecy/R43714.pdf.
772 See Levine & Seaman, supra note 758 at 113.
The three States that have not adopted the UTSA
offer protection to trade secrets under a different
statute or under common law. Yeh, supra note 771
at 6 n.37.
773 Uniform Trade Secrets Act with 1985
Amendments (Feb. 11, 1986) at sec. 1(2).
774 Id. at secs. 2–4.
775 Defend Trade Secrets Act of 2016, Public Law
114–153, 130 Stat. 376, 379 (2016).
776 U.S. Senate, Report to Accompany S. 1890, the
Defend Trade Secrets Act of 2016, S. Rep. No. 114–
220 at 3 (2016).
777 18 U.S.C. 1836(b)(3).
778 18 U.S.C. 1836(b)(2).
779 18 U.S.C. 1831 (economic espionage); 18
U.S.C. 1832 (theft of trade secrets).
780 18 U.S.C. 1831 through 1832.
781 18 U.S.C. 1834, 2323.
782 18 U.S.C. 1834, 2323.
783 The UTSA generally defines a ‘‘trade secret’’
as information that (1) derives independent
economic value from not being generally known to
other persons who can obtain economic value from
its disclosure or use and (2) is the subject of
reasonable efforts to maintain its secrecy. UTSA,
supra note 773 at sec. 1(4). The DTSA and EEA use
a similar definition. 18 U.S.C. 1839(3). The
Supreme Court has held that ‘‘some novelty’’ is
required for information to be a trade secret,
because ‘‘that which does not possess novelty is
usually known.’’ Kewanee Oil Co. v. Bicron Corp.,
416 U.S. 470, 476 (1974). As the high court of one
State noted in applying a State statute based on the
UTSA, ‘‘business information may . . . fall within
the definition of a trade secret, including such
matters as maintenance of data on customer lists
and needs, source of supplies, confidential costs,
price data and figures.’’ U.S. West Commc’ns, Inc.
v. Off. of Consumer Advoc., 498 NW2d 711, 714
(Iowa 1993). See also Confold Pac., Inc. v. Polaris
Indus., Inc., 433 F.3d 952, 959 (7th Cir. 2006) (‘‘A
trade secret is really just a piece of information
(such as a customer list, or a method of production,
or a secret formula for a soft drink) that the holder
tries to keep secret by executing confidentiality
agreements with employees and others and by
hiding the information from outsiders by means of
fences, safes, encryption, and other means of
concealment, so that the only way the secret can be
unmasked is by a breach of contract or a tort.’’).
784 Gloria Huang, Lex Machina Releases its 2023
Trade Secret Litigation Report, Lex Machina (Jul.
13, 2023), https://.com/blog/lex-machina-releases-
its-2023-trade-secret-litigation-report/.
785 Kenneth A. Kuwayti & John R. Lanham,
Morrison Foerster, Client Alert, Happy Anniversary,
DTSA: The Defend Trade Secrets Act at Five (May
25, 2021), https://www.mofo.com///210525-defend-
trade-secrets-act-dtsa.
786 Id. at n.5.
787 The Commission uses the term ‘‘NDA’’ to refer
to contractual provisions that are designed to
protect trade secrets or other business information
that has economic value. Employers may also seek
to use NDAs to protect other kinds of information,
such as information about discrimination,
harassment, sexual assault, corporate wrongdoing,
or information that may disparage the company or
its executives or employees. These types of NDAs
have been widely criticized for, among other things,
their pernicious effects on workers. See, e.g., Rachel
S. Arnow-Richman et al., Supporting Market
Accountability, Workplace Equity, and Fair
Competition by Reining In Non-Disclosure
Agreements, UC-Hastings Research Paper 2–6 (Jan.
2022), https://papers.ssrn.com/sol3/.?abstract_=.
North Dakota and Oklahoma, the energy
industry has thrived, and firms in the
energy industry depend on highly-
trained workers as well as the ability to
protect trade secrets and other
confidential information.
The Commission finds that the
economic success in these three States
of industries that are highly dependent
on highly trained workers, trade secrets,
and other confidential information
illustrates that non-competes are not
necessary to protect employers’
legitimate interests in trained workers or
securing their intellectual property and
confidential information. These
alternatives are available to employers
and viable both with respect to senior
executives and to workers other than
senior executives. The Commission
addresses these alternatives in this Part
IV.D.2.b and summarizes and responds
to the comments on these alternatives in
Part IV.D.2.c.
i. Trade Secret Law
The Commission finds that trade
secret law provides employers with a
viable, well-established means of
protecting investments in trade secrets,
without the need to resort to the use of
non-competes with their attendant
harms to competition. Trade secret law
is a form of intellectual property law
that is specifically focused on providing
employers with the ability to protect
their investments in trade secrets.771
Forty-seven States and DC have
adopted the Uniform Trade Secrets Act
(‘‘UTSA’’).772 The UTSA provides a
civil cause of action for trade secret
misappropriation, which refers to
disclosure or use of a trade secret by a
former employee without express or
implied consent.773 The UTSA also
provides for injunctive and monetary
relief, including compensatory damages,
punitive damages, and attorney’s
fees. 774
In addition, in 2016, Congress enacted
the Defend Trade Secrets Act of 2016
(‘‘DTSA’’), which established a civil
cause of action under Federal law for
trade secret misappropriation. 775 The
DTSA brought the rights of trade secret
owners ‘‘into alignment with those long
enjoyed by owners of other forms of
intellectual property, including
copyrights, patents, and trademarks.’’ 776
Similar to State laws modeled on the
UTSA, the DTSA authorizes civil
remedies for trade secret
misappropriation, including injunctive
relief, damages (including punitive
damages), and attorney’s fees.777 The
DTSA also authorizes a court, in
‘‘extraordinary circumstances,’’ to issue
civil ex parte orders for the ‘‘seizure of
property necessary to prevent the
propagation or dissemination of the
trade secret that is the subject of the
action.’’ 778 There is thus a clear Federal
statutory protection that specifically
governs protection of trade secrets.
Trade secret theft is also a Federal
crime. The Economic Espionage Act of
1996 (‘‘EEA’’) makes it a Federal crime
to steal a trade secret for either (1) the
benefit of a foreign entity (‘‘economic
espionage’’) or (2) the economic benefit
of anyone other than the owner (‘‘theft
of trade secrets’’). 779 The EEA
authorizes substantial criminal fines
and penalties for these crimes.780 The
EEA further authorizes criminal or civil
forfeiture, including of ‘‘any property
constituting or derived from any
proceeds obtained directly or indirectly
as a result of’’ an EEA offense.781 The
EEA also requires offenders to pay
restitution to victims of trade secret
theft. 782
Under the UTSA, DTSA, and EEA, the
term ‘‘trade secret’’ is defined
expansively and includes a wide range
of confidential information.783 The
viability of trade secret law as a means
for redressing trade secret theft is
illustrated by the fact that firms
regularly bring claims under trade secret
law. A recent analysis by the legal
analytics firm Lex Machina finds that
1,156 trade secret lawsuits were filed in
Federal court in 2022. 784 In addition, an
analysis by the law firm Morrison
Foerster finds that 1,103 trade secret
cases were filed in State courts in
2019. 785 The number of cases filed in
State court has held steady since 2015,
when 1,161 cases were filed.786 The fact
that a considerable number of trade
secret lawsuits are filed in Federal and
State courts—over 2,200 cases per
year—and the fact that this number has
held relatively steady for several years
suggests that many employers
themselves view trade secret law as a
viable means of obtaining redress for
trade secret theft.
The use of trade secret law burdens
competition to a lesser degree than the
use of non-competes. Trade secret law
provides firms with a viable means of
redressing trade secret
misappropriation—and deterring trade
secret misappropriation by workers—
without blocking beneficial competitive
activity, such as workers switching to
jobs in which they can be more
productive or starting their own
businesses.
ii. NDAs
NDAs provide employers with
another well-established, viable means
for protecting valuable investments.787
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38426 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
788 See Chris Montville, Reforming the Law of
Proprietary Information, 56 Duke L.J. 1159, 1168
(2007).
789 Arnow-Richman, supra note 787 at 2–3.
790 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 44. The value 97.5% is calculated as
(1¥0.6%/24.2%), where 0.6% represents the
proportion of workers with only a non-compete (see
Table 1 on page 36), and no other post-employment
restriction, and 24.2% represents the proportion of
workers with a non-compete, regardless of what
other post-employment restrictions they have.
791 Montville, supra note 788 at 1179–83.
792 See Part III.D.2.b.
793 MAI Basic Four, Inc. v. Basis, Inc., 880 F.2d
286, 288 (10th Cir. 1989).
794 35 U.S.C. 271.
795 Yeh, supra note 771 at 3–4.
796 Id. at 4–5. See also United States v. Dubilier
Condenser Corp., 289 U.S. 178, 186 (1933) (rather
than seeking a patent, an inventor ‘‘may keep his
invention secret and reap its fruits indefinitely.’’).
797 Yeh, supra note 771 at 4–5.
798 See, e.g., Milliken & Co. v. Morin, 731 SE2d
288, 294–95 (S.C. 2012); Revere Transducers, Inc.
v. Deere & Co., 595 NW2d 751, 759–60 (Iowa 1999);
Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879, 886–
87 (N.J. 1988).
NDAs are contracts in which a party
agrees not to disclose and/or use
information designated as confidential.
If a worker violates an NDA, the worker
may be liable for breach of contract.788
Employers regularly use NDAs to
protect trade secrets and other
confidential business information.
Researchers estimate that between 33%
and 57% of U.S. workers are subject to
at least one NDA.789 One study finds
that 95.6% of workers with non-
competes are also subject to an NDA;
97.5% of workers with non-competes
are also subject to a non-solicitation
agreement, NDA, or a non-recruitment
agreement; and 74.7% of workers with
non-competes are subject to all three
provisions. 790 In most States, NDAs are
more enforceable than non-competes.791
While some commenters argued that
NDAs would not be an adequate
alternative to non-competes because of
the NPRM’s proposed functional
definition of ‘‘non-compete clause,’’ the
final rule will not prevent employers
from adopting garden-variety NDAs;
rather, it prohibits only NDAs that are
so overbroad as to function to prevent
a worker from seeking or accepting
employment or operating a business.792
Appropriately tailored NDAs burden
competition to a lesser degree than non-
competes. Such NDAs may prevent
workers from disclosing or using certain
information, but they generally do not
prevent workers from seeking or
accepting other work, or starting their
own business, after their employment
ends. As the Tenth Circuit has stated,
workers subject to NDAs, unlike
workers subject to non-competes,
‘‘remain free to work for whomever they
wish, wherever they wish, and at
whatever they wish,’’ subject only to the
terms that prohibit them from disclosing
or using certain information.793
iii. Other Means of Protecting Valuable
Investments
The Commission finds that employers
have additional well-established means
of protecting valuable investments in
addition to trade secret law and NDAs.
For the protection of trade secrets and
other confidential information, the
Commission finds that these additional
means include patent law and invention
assignment agreements. Patent law
provides inventors with the right, for a
certain period of time, to exclude others
from making, using, offering for sale, or
selling an invention or importing it into
the U.S. 794 During the period when
patent protection is effective, patents
grant the patent holder these exclusive
rights, while other firms may use trade
secrets if they are independently
developed, reverse-engineered, or
inadvertently disclosed. 795 In some
cases, however, firms may choose to
keep their invention a trade secret rather
than seeking a patent because patent
protection only lasts a certain number of
years, after which the invention
becomes part of the public domain.796
Where a technology, process, design, or
formula is able to meet the rigorous
standards for patentability, patent law
provides companies with a less
restrictive alternative than non-
competes for protecting it.797
Employers can further protect their
property interests in these forms of
intellectual property through
appropriately tailored invention
assignment agreements. These are
agreements that give the employer
certain rights to inventions created by
the employee during their employment
with a firm.798 Like patent law, this tool,
when appropriately tailored, provides
employers with additional protection
for some of their most valuable
intellectual property interests.
With respect to investments in worker
human capital, the Commission finds
that these less restrictive alternatives
include fixed duration contracts and
competing on the merits to retain
workers. If an employer wants to
prevent a worker from leaving right after
receiving valuable training, the
employer can sign the worker to an
employment contract with a fixed
duration. An employer can establish a
term that is long enough for the
employer to recoup its human capital
investment, without restricting who the
worker can work for, or their ability to
start a business, after their employment
ends. In doing so, the employer makes
a commitment to the worker and vice
versa.
Finally, instead of using non-
competes to lock in workers, the
Commission finds that employers that
wish to retain their workers can also
compete on the merits for the worker’s
labor services—i.e., they can provide a
better job than competing employers by
paying their workers more, offering
them better hours or better working
conditions, or otherwise improving the
conditions or desirability of their
employment. These are all viable tools
for protecting human capital
investments and other investments an
employer may make that do not rely on
suppressing competition.
c. Comments and Responses to
Comments
Many commenters agreed with the
Commission’s preliminary finding that
employers have less restrictive
alternatives to non-competes. These
commenters asserted that trade secret
law, combined with NDAs, creates a
powerful deterrent to post-employment
disclosures of trade secrets and
confidential information, and that these
tools adequately protect valuable
investments in the absence of non-
competes. The Commission agrees with
these commenters. Other commenters
asserted that the alternatives to non-
competes identified in the NPRM are
inadequate for protecting employer
investments. The Commission
summarizes and responds to the
comments it received on less restrictive
alternatives in this Part IV.D.2.c.
i. Comments and Responses to
Comments on Trade Secrets and Other
Confidential Information
Several commenters who generally
supported the proposed rule stated that
trade secret law and NDAs offer
meaningful enforcement advantages to
employers compared with non-
competes. A few commenters stated
that, unlike non-competes, trade secret
law and NDAs are broadly enforceable
in all fifty States. A few commenters
stated that, while monetary penalties for
breaching non-competes are ordinarily
difficult to obtain, employers can obtain
substantial monetary recovery for trade
secret law and NDA violations. The
Commission agrees with these
comments.
Several commenters stated that the
scope of trade secret law is limited in
various respects. Several commenters
stated, for example, that customer lists,
pricing, and bid development
information are typically excluded from
the definition of ‘‘trade secret’’ under
the DTSA and the law of many States.
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799 See U.S. West Commc’ns, Inc. v. Off. of
Consumer Advoc., 498 NW2d 711, 714 (Iowa 1993)
(‘‘business information may . . . fall within the
definition of a trade secret, including such matters
as maintenance of data on customer lists and needs
. . .’’); Guy Carpenter & Co. v. Provenzale, 334 F.3d
459, 467 (5th Cir. 2003) (‘‘A customer list may be
a trade secret, but not all customer lists are trade
secrets under Texas law. The broader rule of trade
secrets, that they must be secret, applies to
customer lists’’); Home Paramount Pest Control
Cos. v. FMC Corporation/Agricultural Prods. Group,
107 F. Supp. 2d 684, 692 (D. Md. 2000) (‘‘There is
no question that a customer list can constitute a
trade secret.’’); Liebert Corp. v. Mazur, 827 NE2d
909, 922 (2005) (‘‘[W]hether customer lists are trade
secrets depends on the facts of each case.’’).
800 See, e.g., Tendeka, Inc. v. Glover, No. CIV.A.
H–13–1764, 2015 WL 2212601 at *14 (S.D. Tex.
May 11, 2015).
801 In some States, under the ‘‘inevitable
disclosure doctrine,’’ courts may enjoin a worker
from working for a competitor of the worker’s
employer where it is ‘‘inevitable’’ the worker will
disclose trade secrets in the performance of the
worker’s job duties. See, e.g., PepsiCo, Inc. v.
Redmond, 54 F.3d 1262, 1269, 1272 (7th Cir. 1995).
The inevitable disclosure doctrine is controversial.
Several States have declined to adopt it altogether,
citing the doctrine’s harsh effects on worker
mobility. See Bayer Corp. v. Roche Molecular Sys.,
Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999);
LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 470–
71 (Md. 2004). Other States have required
employers to meet high evidentiary burdens related
to inevitability, irreparable harm, and bad faith
before issuing an injunction pursuant to the
doctrine. See generally Eleanore R. Godfrey,
Inevitable Disclosure of Trade Secrets: Employee
Mobility v. Employer Rights, 3. J. High Tech. L. 161
(2004).
In response to these comments, the
Commission notes that customer
information may be classified as trade
secrets under certain circumstances,
such as when the information is not
generally known or not otherwise easy
to obtain and when a firm has taken
measures to protect the confidentiality
of the information.799 Employers may
also use NDAs to protect such
information. NDAs broadly protect all
information defined as confidential,
regardless of whether such information
constitutes a ‘‘trade secret’’ under State
or Federal law.800
Some commenters argued that other
tools under intellectual property law,
such as patent and trademark law, are
inadequate to protect employers’
investments. These commenters
misinterpret the Commission’s findings.
The Commission did not find in the
NPRM, nor does it find in this final rule,
that patent law standing alone or
trademark law standing alone provide
employers benefits equal to the benefits
they may reap from an unfair method of
competition, namely the use of non-
competes. Rather, the Commission finds
that patent law can be used, together
with the other tools the Commission
cites, including NDAs and fixed-term
employment contracts, to protect
legitimate investments in intellectual
property and worker human capital
investment and therefore that these
tools, taken together, are viable
alternatives to non-competes.
A number of commenters stated that
there are enforceability disadvantages to
trade secret law and NDAs compared to
non-competes. Several commenters
stated that trade secret law and NDAs
are inadequate to protect employer
investments prophylactically because
employers can enforce them only after
the trade secrets or other confidential
information have already been
disclosed. These commenters stated that
trade secrets and confidential
information can be highly valuable, and
its value could be destroyed as soon as
a worker discloses such information to
a competing employer. Additionally,
some commenters argued that trade
secret law and NDAs are inadequate to
protect employers’ investments because
enforcement outcomes for trade secrets
and NDAs are less predictable and
certain than with non-competes. Some
comments suggested that this purported
clarity of non-competes benefits
workers, arguing that non-competes
offer bright lines workers can follow to
ensure against unintended violations.
Other commenters assert that non-
competes themselves are not necessarily
effective as a prophylactic remedy,
because it is often unclear whether a
particular non-compete is enforceable,
and non-competes are difficult to
enforce in many jurisdictions. A few
commenters stated that prophylactic
remedies are already available under
trade secret law in almost half of U.S.
States where the doctrine of inevitable
disclosure is recognized, while other
commenters were concerned that not all
States recognize the doctrine. Other
commenters argued the inevitable
disclosure doctrine may be worse for
workers, and one commenter argued
that the final rule would increase the
use of the inevitable disclosure doctrine
and thus reduce worker mobility.
Some commenters stated that
prophylactic remedies are necessary to
adequately protect trade secrets and
confidential information because
workers can exploit their former
employers’ trade secrets and
confidential information without ever
disclosing the information themselves,
thus leaving aggrieved employers with
no recourse under trade secret law or an
NDA. Specifically, these commenters
argued that when workers take new
roles, they will inevitably use their
knowledge of former employers’
confidential information. For example,
where a worker has experience with
attempts and failures to develop new
ideas or products with a former
employer, they will likely use this
knowledge to prevent a new employer
from making similar mistakes, thus free
riding off the former employer’s
development efforts, costs, and time. A
commenter argued that preventing non-
competes from restricting this type of
misappropriation would discourage
investment and harm innovation in the
long run.
The Commission believes that what
some commenters describe as the
‘‘prophylactic’’ benefits of non-
competes—that an employer can block a
worker from taking another job, without
respect to any alleged misconduct—is
also the source of their overbreadth
because it enables employers to restrict
competition in both labor markets and
product and service markets, as detailed
in Parts IV.B and IV.C. That employers
prefer to wield non-competes as a blunt
instrument on top of or in lieu of the
specific legal tools designed to protect
legitimate investments in intellectual
property and other investments cannot
justify an unfair method of competition.
The Commission also disagrees that
banning non-competes would
discourage investment and would harm
innovation in the long run. As discussed
in Part IV.B.3.b.ii, the Commission finds
that the weight of the evidence indicates
that non-competes reduce innovation by
preventing workers from starting
businesses in which they can pursue
innovative new ideas; inhibiting
efficient matching between workers and
firms (making it less likely that workers
match with firms that can maximize
their talent and productivity); and
decreasing the cross-pollination of
ideas.
Additionally, the Commission notes
that non-compete agreements
themselves cannot be said to provide
ironclad ‘‘prophylactic’’ protections
against disclosure of trade secrets and
other confidential information. As other
commenters point out, in the absence of
this rule, it is often unclear whether and
to what extent a specific non-compete is
enforceable, and they are difficult to
enforce in many jurisdictions.
Moreover, non-competes do not prevent
the worker from disclosing trade secrets
or confidential information after the end
of the non-compete period or outside of
the clause’s geographic restriction. The
Commission also notes that, as a few
commenters stated, prophylactic
remedies are already available under
trade secret law in almost half of U.S.
States where the doctrine of inevitable
disclosure is recognized.801
Several commenters argued that
detecting and proving violations of
NDAs and trade secret law is more
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802 See supra note 305 and accompanying text.
803 See Parts IV.B and IV.C.
804 See Part IV.B.3.b.ii.
805 See e.g., In re Adegoke, 632 B.R. 154, 167
(Bankr. N.D. Ill. 2021); Houser v. Feldman, 569 F.
Supp. 3d 216, 230 n.7 (E.D. Pa. 2021); AvidAir
Helicopter Supply, Inc. v. Rolls-Royce Corp., 663
F.3d 966, 974 (8th Cir. 2011).
806 See Parts IV.B. and IV.C (describing the
negative externalities from non-competes).
difficult than for non-competes, and that
enforcement is accordingly more
expensive, because it is more difficult to
detect and obtain evidence of the
disclosure or use of confidential
information than it is to determine that
a former worker has moved to a
competitor. Some commenters asserted
that trade secret litigation is expensive
because the cases are fact-intensive and
involve litigating multiple challenging
issues. Some commenters argued that as
a result, the proposed rule conflicted
with Congressional intent underlying
the DTSA. A few commenters similarly
argued that breaches of non-solicitation
agreements are difficult to detect and
can be enforced only after the
solicitation has occurred. While the
Commission recognizes that trade
secrets litigation and NDA and non-
solicitation enforcement may be more
costly than non-compete enforcement in
some instances, the Commission is not
persuaded that higher costs associated
with alternative tools make those tools
inadequate. The comments do not
establish that pursuing remedies
through trade secrets litigation or NDA
enforcement are prohibitively
expensive. In any event, the
Commission and courts have
consistently held that pecuniary benefit
to the party responsible for the conduct
in question is not cognizable as a
justification. 802 While employers may
find that protecting trade secrets and
confidential information or customer
relationships by using non-competes to
restrict worker mobility, regardless of
whether that worker would
misappropriate confidential information
or solicit customers, is easier for them,
the Commission finds that same
overbreadth of non-competes imposes
significant negative externalities on
workers, consumers, businesses, and
competition as a whole.803 This
overbreadth that employers benefit from
wielding is what causes the harms from
non-competes relative to more
narrowly-tailored alternatives.
Some commenters contended that
higher burdens for establishing
violations of trade secret and IP laws
will harm employer incentives to share
trade secrets with workers and to invest
in valuable skills training. The
Commission is not persuaded that
higher evidentiary burdens render trade
secret law and NDAs inadequate for
protecting employers’ valuable
investments. Heightened standards are a
valuable mechanism to filter out
overbroad restrictions on beneficial
competitive activity. The comment
record is replete with examples of
workers bound by non-competes who
lacked knowledge of trade secrets or
whose employment with a competitor
never threatened their previous
employer’s investments. To the extent
trade secret law and NDAs require
higher evidentiary showings, that makes
these alternatives more tailored tools for
protecting employers’ valuable
investments without unduly restricting
a worker from engaging in competitive
activity.
Some commenters argued that,
without non-competes, employers
would limit access to valuable trade
secrets within the workplace because
trade secret law requires employers to
show reasonable efforts to maintain the
secrecy of an alleged trade secret to
prove a violation, and that reduced rates
of intrafirm trade secrets sharing will
ultimately harm innovation as well as
workers. In response, the Commission
notes that the empirical evidence
indicates otherwise: when non-
competes are more enforceable, the
overall level of innovation decreases.804
Furthermore, these comments seem to
overstate the burden of reasonable
efforts to keep information secret. Under
the DTSA, courts have found that
employers meet this requirement by
sharing information at issue only among
workers bound by NDAs or maintaining
such information in password-protected
digital spaces.805 Accordingly,
assertions that employers will need to
take extraordinary precautions to
maintain secrecy over trade secrets and
confidential information are
inconsistent with standards courts
typically recognize for determining
whether reasonable efforts were taken to
keep such information confidential. The
Commission is not persuaded that
requirements in trade secret law to show
reasonable efforts to maintain secrecy
will deter intrafirm information sharing,
or otherwise make alternative tools
inadequate.
Several commenters argued that the
Commission should not find that
employers have adequate alternatives to
protecting their valuable investments
because there is a lack of empirical
evidence specifically showing that trade
secret law and NDAs are effective for
the purpose of protecting trade secrets
and confidential information. In
response, the Commission notes that
trade secret law is a body of law that is
specifically designed to protect the
interests being asserted; employers
consistently bring cases under this body
of law; and a preference among firms for
a blunter instrument for protecting trade
secrets and confidential information
cannot justify an unfair method of
competition that imposes significant
negative externalities on workers, other
firms, consumers, and the economy.806
An industry trade organization
commenter stated that neither fixed-
duration employment contracts nor
improved pay, benefits, or working
conditions specifically protect against
the disclosure of confidential
information. In response, the
Commission notes that firms can protect
against the disclosure of confidential
information using trade secret law and
NDAs, and, where applicable, patent
law and invention assignment
agreements. And in response to these
commenters, the Commission notes that
companies in California, North Dakota,
and Oklahoma have been able to protect
their trade secrets and other confidential
information adequately using tools other
than non-competes since the late
nineteenth century. Industries that are
highly dependent on trade secrets and
other confidential information have
flourished in those States even though
non-competes have been unenforceable.
A few commenters disputed the
NPRM’s contention that the rate at
which employers pursue trade secrets
litigation is evidence of the viability of
trade secret law as a means for
redressing trade secret theft or
protecting confidential information, in
part because those employers were not
necessarily relying exclusively on trade
secret law. The Commission does not
assert that these data, alone,
conclusively establish trade secret law
is a perfect vehicle for redressing trade
secret theft. Rather, the data show trade
secret litigation is more than a mere
theoretical possibility—it is an avenue
many companies choose to redress trade
secret theft and indeed it is the body of
law designed and developed for this
very purpose. Accordingly, the
Commission believes that the fact that
many companies bring claims under the
well-established body of State and
Federal law on trade secrets is relevant
evidence that trade secret law provides
a viable means for redressing trade
secret theft.
Some commenters suggested a higher
volume of trade secrets litigation in
California may reflect a higher rate of
trade secret disclosure due to the State’s
policy against enforcing non-competes.
However, these commenters did not
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38429	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
807 See NPRM at 3507.
808 62 Cal. 2d 239, 242 (Cal. 1965).
809 See generally David R. Trossen, Edwards and
Covenants Not to Compete in California: Leave Well
Enough Alone, 24 Berkeley Tech. L.J. 539, 546
(2009).
810 See, e.g., D’sa v. Playhut, Inc., 102 Cal. Rptr.
2nd 495, 497–501 (Cal. Ct. App. 2nd 2000); Dowell
v. Biosense Webster, Inc., 102 Cal. Rptr. 3d 1, 11
(Cal. Ct. App. 2nd 2009); Arthur J. Gallagher & Co.
v. Lang, 2014 WL 2195062 (N.D. Cal. May 23, 2014)
at *4 n.3.
811 Starr, Prescott & Bishara, supra note 68 at 81.
812 Id. at 68.
provide evidence to support this
hypothesis. The Commission also notes
industries in California that depend on
protecting trade secrets have thrived
despite the inability to enforce non-
competes; indeed, the State is the
capital of the global technology
industry. Therefore, regardless of
whether there is a higher rate of trade
secret litigation in California, the less
restrictive alternatives identified in this
Part IV.D have provided sufficient
protection to enable these companies to
grow, thrive, and innovate.
Furthermore, the rate of trade secret
litigation in California may result from
factors unique to California’s economy,
such as California’s high concentration
of technology companies relative to
other States. As such, the Commission
does not believe there is credible
evidence to suggest trade secrets are
disclosed at a higher rate in California
than in other jurisdictions.807
Many commenters agreed with the
Commission’s preliminary conclusion
that the economic success in California,
North Dakota, and Oklahoma of
industries highly dependent on trade
secrets and other confidential
information illustrates that companies
have viable alternatives to non-
competes for protecting valuable
investments. In contrast, a few
commenters argued that the
Commission mischaracterized
California’s non-compete ban because
they claim that California permits non-
competes to protect trade secrets, citing
dicta from the 1965 California Supreme
Court case Muggill v. Reuben H.
Donnelley Corp.808 However, the
Commission is unaware of any cases in
which a California court has actually
upheld a non-compete agreement under
California law based on the dicta in this
opinion, and commenters do not point
to any. 809 To the contrary, California
courts have consistently refused to
enforce non-competes even where
employers alleged they were needed to
protect trade secrets. 810
Another commenter argued that
California’s experience does not
necessarily demonstrate anything about
the effect of banning non-competes
because California employers impose
non-competes at rates comparable to
other States. In response, the
Commission notes that while Starr,
Prescott, and Bishara state that workers
are covered by non-competes at
‘‘roughly the same rate’’ in States where
non-competes are unenforceable and
enforceable,811 when the authors control
for employee characteristics to compare
‘‘observationally equivalent
employees,’’ they find that non-
competes are less common (by 4–5
percentage points) in nonenforcing
States compared to States that permit
vigorous enforcement of non-
competes.812 Additionally, California,
North Dakota, and Oklahoma are still
distinct from other States because
employers may not actually enforce
non-competes, even if employers in
those States continue to enter into them.
A commenter argued that the
Commission misattributes California’s
success in the technology industry and
North Dakota’s and Oklahoma’s success
in the energy industry to their non-
compete laws, rather than the presence
of top universities and venture capital
firms in the State (in the case of
California) or of abundant natural
resources in the State (in the case of
North Dakota and Oklahoma). The
Commission believes that this
commenter mischaracterizes its
analysis. The Commission does not
attribute California’s success in the
technology industry and North Dakota’s
and Oklahoma’s success in the energy
industry to their non-compete laws. The
Commission merely notes that these
industries are highly dependent on
protecting trade secrets and having
highly trained workers, and that these
industries have thrived in these States
despite the inability of employers to
enforce non-competes.
One commenter argued that there are
no alternatives that adequately protect
employers’ legitimate interests because
other restrictive employment
agreements do not sweep as broadly as
non-competes. In this Part IV.D, the
Commission concludes that less
restrictive alternatives such as trade
secret law, IP law, and NDAs are
adequate to protect trade secrets and
other confidential information even
where they do not sweep as broadly as
non-competes. Indeed, the Commission
believes that non-competes are
overbroad with respect to protecting
trade secrets and other confidential
information, because they enable
employers to restrict a wide swath of
beneficial competitive activity without
respect to any alleged misconduct. That
employers prefer to wield non-competes
as a blunt instrument on top of or in lieu
of the specific legal tools designed to
protect legitimate investments in
intellectual property and other
investments cannot justify an unfair
method of competition.
ii. Comments and Responses to
Comments on Human and Physical
Capital Investment
Several commenters addressed the
evidence concerning the effects of non-
competes on human capital investment
and other investment. Several
commenters asserted that, even if non-
competes increased human capital
investment, they still left workers worse
off because they suppressed workers’
mobility and wages overall. Workers
and worker advocates also argued that
workers lose the value of their skills and
human capital investment when non-
competes force them to sit out of the
workforce, and non-competes can
decrease their incentive to engage in
human capital investment since they
cannot capitalize on their skills and
knowledge. These commenters stated
that many workers, particularly highly
skilled workers, have had some form of
education prior to working for their
employer, diminishing any potential
need for non-competes to protect the
employers’ human capital investment.
For example, many physicians pointed
out that they had to go through medical
school, residency, internships, and/or
fellowships—significant investments
that they made, not their employers.
Some commenters questioned the link
between increased human capital
investment and non-compete
enforcement, arguing that employer
human capital investment will still be
provided without non-competes. Other
commenters also stated that prohibiting
non-competes would make it easier for
firms to hire trained workers, because it
would be easier for them to switch jobs.
More generally, one advocacy
organization said that employers
frequently make investments that do not
work out and should not place the risk
of that investment onto their workers. A
commenter who discussed physician
non-competes argued that investment-
based justifications for non-competes
overestimate the value added by
employers while failing to recognize the
value physicians bring to employers.
Some businesses and trade
organizations argued that employers
invest significant time and money into
training workers who lack the specific
skills needed for the job. These
commenters stated that, without non-
competes, employers risk the worker
taking that investment to a competitor.
Some commenters state that this risk is
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38430 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
813 Kurt Lavetti, Economic Welfare Aspects of
Non-Compete Agreements, Remarks at the FTC
Workshop on Non-Competes in the Workplace, at
145–46 (Jan. 9, 2020), at https://www.ftc.gov//files//
_events/1556256/non-compete-workshop-
transcript-full.pdf.
814 Starr, Prescott & Bishara, supra note 68 at 53.
815 See NPRM at 3495 n.162.
816 See Montville, supra note 788 at 1161.
817 See, e.g., Mayu Takeuchi & Joseph Parilla,
Federal Investments in Sector-Based Training Can
Boost Workers’ Upward Mobility, Brookings Inst.
(Dec. 7, 2023), https://www.brookings.edu/articles/
federal-investments-in-sector-based-training-can-
boost-workers-upward-mobility/.
greatest in underserved areas and when
there are worker shortages. Several
commenters said that employment
restrictions such as non-competes
incentivize businesses to pay for
credentials, training, and advanced
education that low-wage and other
workers would be unable to afford on
their own, facilitating upward mobility.
For highly educated workers, such as
physicians, some employers said they
need non-competes to protect payments
for continuing education as well as
mentorships and on the job training.
Businesses and their advocates asserted
that in some industries, many new
employees are unprofitable for a
significant period, requiring up-front
investment and training from employers
who want to recoup that investment.
In response, the Commission notes
that, as described in Part IV.D.2.b.iii,
firms have less restrictive alternatives
for protecting human capital
investments, including fixed-duration
contracts and competing on the merits
for the worker’s labor services through
better pay, benefits, or working
conditions. Through these means,
employers can retain workers without
restricting who they can work for, or
their ability to start a business, after
their employment ends. The
Commission also notes that these
commenters often inaccurately describe
the increased labor mobility afforded by
the final rule as a one-way street. While
it will be easier under the final rule for
workers to switch jobs and work for a
competitor, it will also be easier for
firms to hire talented workers, since
those workers are not subject to non-
competes. In general, firms will benefit
from access to a wider pool of labor,
because the rule eliminates the friction
non-competes impose on the free
functioning of competition in labor
markets. Whether this will be a net
benefit to a particular firm, or not, will
depend on the firm’s ability to compete
for workers on the merits to attract and
retain talent.
A group of healthcare policy
researchers stated that the investment
justifications offered by corporate
owners of physician practices are
misleading since the true value of the
investment in the practice is the book of
business and referrals. These
researchers suggested that non-competes
are used to circumvent laws that
prohibit payment for physician referrals.
The Commission notes that this
comment aligns with a statement by
researcher Kurt Lavetti at the
Commission’s 2020 forum on non-
competes. Lavetti stated that patient
referrals are a valuable asset, but buying
or selling those referrals is illegal, so
non-competes are a secondary method
of protecting that asset.813
Commenters also stated that non-
competes protect investments other than
in human capital, capital expenditures,
and R&D, including recruiting and
hiring, providing client and customer
service, facilities, marketing, and
technology, among others. The
Commission is unaware of any
empirical evidence showing that non-
competes increase these types of
investments, and commenters did not
provide any. In general, however, firms
can protect investments in trade secrets
and confidential information, and
investments in workers, through the less
restrictive alternatives described in Part
IV.D.2.b.
Two trade organizations stated that
prohibiting non-competes could cause
businesses to lose staff, and that losing
staff could cause them to reduce
investments that may be based on
staffing assumptions. These commenters
did not provide empirical evidence to
support these arguments. The
Commission also notes that firms would
not necessarily lose workers because of
the final rule. As described previously,
some firms may lose workers because it
will be easier for workers to leave for
better opportunities, while some firms
may gain workers by attracting workers
from other firms. Additionally, firms
can retain workers by competing on the
merits for their labor services—i.e., by
offering better jobs than their
competitors.
Commenters asserted that Starr,
Prescott, and Bishara 814 found that
notice of non-competes alongside a job
offer is positively correlated with
training compared to later notice. In
response, the Commission notes that the
evidence is a correlation between early
notice and training, not a causal finding,
so the Commission gives it minimal
weight. In addition, regardless of
whether there is an increase in training
where notice of non-competes is
provided along with the job offer
instead of later on, this data is not
salient on the question of whether
employers have less restrictive
alternatives to protecting training
investments.
A few commenters stated non-
competes protect against the
‘‘disclosure’’ of general trade knowledge
and skills, while the less restrictive
alternatives cited in the NPRM do not.
Relatedly, some commenters argued
prohibiting non-competes and broadly
enabling workers to take general trade
knowledge and skills to competitors
will mean that their new employers will
free ride off investments the former
employers made in their human capital,
which will discourage future investment
in human capital. The Commission does
not believe preventing workers from
using their general trade knowledge and
skills, including their gains in trade
knowledge and skills through
experience with a particular employer,
is a legally cognizable or legitimate
justification for non-competes. Under
State common law, preventing a worker
from using their general knowledge and
skills with another employer is not a
legitimate interest that can justify a non-
compete.815 Indeed, there is a general
principle in the law of restrictive
employment agreements—and trade
secret law as well—that these tools
cannot be used to prevent workers from
using their general trade knowledge and
skills.816 The Commission does not
view the inability to prevent disclosure
or use of general skills and knowledge
as a shortcoming of trade secret law and
NDAs; instead, it considers the use of
general skills and knowledge as
beneficial competitive activity.
Moreover, the Commission notes that
sectoral job training strategies can be a
tool for employers and workers to access
worker training that is transferrable
across employers.817
One commenter asserted trade secret
law and NDAs are inadequate to protect
employers’ goodwill, while another
commenter asserted these tools are
inadequate to protect investments in
relationships with clients. Regarding
whether trade secret law and NDAs are
adequate to protect employers’ client
relationships, the Commission
interprets this to refer to employers’
concern that a client will follow a
worker to a competitor. The
Commission believes that employers
have alternatives for protecting these
investments, including fixed-duration
contracts (in the case of goodwill),
NDAs (in the case of client lists), and
competing on the merits to retain
workers and/or clients. Firms can seek
to protect client relationships by
offering superior service and value—
through the free and fair functioning of
competition. These more narrowly
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818 See Part IV.B.3.b.ii.
819 See Part IV.C.2 (describing the negative
externalities of non-competes for senior executives).
820 See Part IV.C.3.
tailored alternatives reasonably protect
the applicable interest while burdening
competition to a lesser degree because
they do not restrict the worker’s ability
to seek or accept work or start a
business after their employment ends.
Therefore, while trade secret law and
NDAs may not protect goodwill or client
relationships, the Commission finds that
employers have adequate alternative
tools to protect these interests.
Furthermore, the Commission notes the
final rule does not restrict employers
from using trade secret law and NDAs
in tandem—along with other
alternatives—to protect their
investments, and comments maintaining
that employers lack adequate
alternatives to non-competes because
the commenter views just one of these
mechanisms as inadequate are
unpersuasive.
A commenter argued the final rule
may implicate the ability of Federal
contractors to provide letters of
commitment, which are often required
by government agencies and require
contractors to identify key personnel
who will work on an awarded contract,
sometimes for years in the future. In
response, the Commission notes that
contractors have alternatives to non-
competes to retain key personnel,
including by using fixed-term
employment contracts or providing the
key personnel a better job than
competitors.
A commenter stated that fixed-
duration employment contracts are not
necessarily effective at protecting
human capital investments because
employers may not know at the time of
hiring when they will be providing
training to a worker. This commenter
also stated that improving the pay,
benefits, and working conditions of
workers is not necessarily an effective
means for protecting human capital
investments. In response, the
Commission notes employers may enter
into fixed-duration employment
contracts with their workers at any time,
not just at the outset of the employment
relationship. It further notes competing
to retain a trained worker will not work
in every instance, but it is an important
option available to employers and the
provision of training can itself be a
competitive differentiator for an
employer.
A commenter also asserted California
has the highest cost of living and, if this
is attributable to the absence of non-
competes, the proposed rule could risk
increasing the cost of living nationwide.
The commenter did not provide
evidence to support the existence of an
inverse relationship between non-
compete enforceability and cost of
living, and the Commission is aware of
no such evidence. The Commission thus
does not believe that there is a basis to
conclude the final rule would increase
the cost of living nationwide.
iii. Comments Regarding Alternatives to
Non-Competes for Senior Executives
Commenters offered the same
justifications for non-competes with
senior executives: that they increase
employers’ incentive to make
productive investments. However, many
commenters argued senior executives
are more likely than other workers to
have knowledge of trade secrets and
other competitively sensitive
information or to have customer
relationships and thus non-competes for
senior executives are necessary, and
other tools such as trade secret law and
NDAs are not viable alternatives.
In response, the Commission finds
that these tools—trade secret law,
NDAs, patents, and invention
assignment agreements—provide viable
means of protecting valuable
investments against disclosure by senior
executives, just as they do for all other
workers. Commenters do not identify
any reasons why senior executives are
uniquely situated with respect to these
less restrictive alternatives—i.e., why
trade secret law or NDAs may not
adequately protect firm investments
from disclosure by senior executives
specifically—and the Commission is not
aware of any such reasons.
Some commenters argued non-
competes with executives and high-
wage workers promote competition
because they encourage innovation in
businesses by providing investors with
more confidence that executives will
not share trade secrets with competitors,
decreasing competition. An industry
organization asserted that non-competes
allow executives to share ideas and
business decisions with other workers
within the business and collaborate to
make strategic decisions. A commenter
stated that an executive leaving to start
a competing product could also delay
the timeline for both the former
employer’s product and the competing
product. As noted previously, the
Commission does not believe there is
reliable empirical data on the
relationship between non-competes and
disclosure of confidential information,
but employers have alternatives to
protect such information. Further, the
empirical evidence shows non-competes
overall inhibit innovation on the output
side; therefore, to the extent any of these
effects are occurring, they are more than
outweighed by the negative effects of
non-competes on innovation.818
According to some commenters, an
executive moving to a competitor could
unfairly advantage the competitor and
irreparably harm the former employer.
In response, the Commission notes that
there is nothing inherently unfair about
an executive moving to a competitor,
particularly if this results from
competition on the merits (such as the
competitor paying more or otherwise
making a more attractive offer). If
companies seek to retain their
executives, they have other means for
doing so—such as increasing the
executives’ compensation or entering
fixed-duration contracts—that do not
impose significant negative externalities
on other workers and on consumers, as
non-competes do.819
Some commenters also said senior
executives may have more client,
business partner, and customer
relationships than other employees and
may contribute substantially to a firm’s
goodwill. The Commission believes that
employers have alternatives for
protecting goodwill and client/customer
relationships. For example, if a firm
wants to keep a worker from departing
and taking goodwill or clients or
customers with them, it can enter a
fixed-duration contract with the worker,
otherwise seek to retain the worker
through competition on the merits, or
seek to retain the client/customer
through competition on the merits.
An accountant with experience
analyzing executive non-competes for
business valuations said such valuations
are calculated based on the potential
harm if the executive violated the non-
compete. In addition, some commenters
argued non-competes for senior
executives and other important workers
increase the value of firms in mergers
and acquisitions because they ensure
such valuable workers stay after the
sale. An investment industry
organization said investors seek to
ensure the right workers who know the
business stay and run the newly
acquired business. In addition, that
organization said some institutional
investors may require contracts
retaining key workers.
In response, the Commission notes
that valuation of senior executive non-
competes in such contexts is part of the
reason the Commission is allowing such
existing senior executive non-competes
to remain in force.820 In future
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38432 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
821 See Bd. of Govs. of the Fed. Reserve Sys.,
Incentive Compensation Practices: A Report on the
Horizontal Review of Practices at Large Banking
Organizations (Oct. 2011), https://
www.federalreserve.gov/publications/other-
reports//incentive-compensation-practices-report-
201110.pdf.
822 See Part IV.C.3.
823 Federal Reserve Report on Incentive
Compensation Practices, supra note 821 at 16–17.
824 See § 910.2(a)(2).
825 See Kini, Williams, & Yin, supra note 83.
transactions, businesses and investors
have other methods of incentivizing
senior executives and other workers to
remain, including fixed duration
contracts and competing to retain
workers on the merits, and thereby
enhancing the value of firms and
transactions—methods that do not
impose such significant externalities on
other workers and consumers.
Some industry organizations said
non-competes increase employer
investment in management and
leadership training for executives. An
investment industry organization said
non-competes allow senior executives to
access training and experience for their
own benefit and the benefit of investors
in the firm. In response, the
Commission notes that employers have
alternative mechanisms to protect their
investments in worker training,
including fixed-duration contracts and
improved compensation.
Some commenters argued that non-
competes may improve executive
performance, as some executives have
non-competes tied to deferred
compensation and other future benefits,
which encourages long-term value
creation by incentivizing executives to
focus on long-term rather than short-
term gains. A law firm said that
forfeiture-for-competition clauses are an
important component of deferred
compensation agreements, and deferred
compensation incentivizes long-term
value-building and penalizes, via
reduction or forfeiture, harm to the
business, which the commenter said
includes working for a competitor. The
commenter claimed that if forfeiture-for-
competition clauses are banned, firms
would shift some of the deferred
compensation to more short-term
awards, which would in turn increase
risk-taking and decrease overall wealth
accumulation. The commenter cited a
review by the Federal Reserve after the
2008 financial crisis which found that
deferred compensation can mitigate
executive risk-taking activities.821 It also
cited other Federal agencies and court
decisions recognizing the value of
deferred compensation to mitigate risk.
Separately, the firm argued that without
forfeiture-for-competition clauses, an
executive who moves to a competitor
will compete less against their former
employer so as not to devalue their
equity award, thus degrading
competition. Commenters also
contended that State courts have
recognized forfeiture-for-competition
clauses to be reasonable and that some
State statutes governing non-competes
carve them out.
In response, the Commission
recognizes that many existing deferred
compensation contracts may have been
negotiated to include non-competes or
forfeiture-for-competition clauses that
may not be easily separated, and the
final rule allows existing senior
executive non-competes to remain in
force.822 However, the Commission is
not persuaded that non-competes are
necessary for future deferred
compensation agreements. The Federal
Reserve study on the value of deferred
compensation does not mention non-
competes or forfeiture-for-competition
clauses. While the study states that
clawback provisions may discourage
specific types of behavior, it notes that
they do not affect most risk-related
decisions.823 The commenter did not
explain why non-competes are
necessary for deferred compensation to
reduce risk-taking or how post-
employment competition could impact
performance while at the firm. The
commenter also did not explain why
firms would forgo the benefits of
deferred compensation even without a
forfeiture-for-competition clause. The
commenter separately argued that an
executive who moves to a competitor
will be conflicted and compete less
against their former employer so as not
to devalue their equity award. The
comment framed this as an
anticompetitive problem akin to
interlocking directorates under the
Clayton Act, as it could increase
collusion (though the commenter
provided no support for this argument).
The commenter did not, however,
explain why an executive would move
to a competitor if doing so would
devalue their own equity. The
Commission also does not believe that
the solution to this type of
anticompetitive behavior, even if it were
to occur, is to further restrict
competition by blocking the executive
from moving to the competitor in the
first place.
Some commenters argued that
forfeiture-for-competition clauses,
which are sometimes attached to
deferred compensation arrangements,
were also justified. Some commenters
contended that workers subject to
forfeiture-for-competition clauses who
choose to work for a competitor are
likely to be compensated by the
competitor for whom they will be
working. Separately, a law firm and an
investment industry organization stated
that it would be unfair for companies to
continue making deferred compensation
or other payments to former workers
who now work for a competitor if
forfeiture-for-competition clauses were
banned. A law firm also stated that
forfeiture-for-competition clauses allow
senior executives to retire without
losing their deferred compensation,
which in turn clears a path for younger
workers to move up, while protecting
senior executives’ retirement benefits. In
response, the Commission notes that
pre-existing agreements for senior
executives are not banned under the
final rule.824 The Commission also sees
no reason why deferred compensation,
including for retiring workers, cannot be
used without forfeiture-for-competition
clauses.
Some commenters stated that the
study by Kini, Williams, and Yin,
discussed in the NPRM with respect to
senior executive earnings, 825 finds that
CEOs with non-competes are more
frequently forced to resign their
position. Commenters note that Kini,
Williams, and Yin also find that CEO
contracts more closely align the
incentives of executives (with respect to
stock prices and risk taking) with
shareholders when the executives have
non-competes or when those non-
competes are more enforceable. In
response, the Commission notes that, as
indicated by commenters, this study
examines the use of non-competes in
conjunction with their enforceability.
The Commission therefore finds that the
results may not reflect a causal
relationship. For example, the use of
non-competes and the propensity of the
board to force an executive to resign
may be jointly determined by the
strength of the relationship or the trust
between management and the board,
rather than the use of non-competes
causing forced turnover. The
Commission also notes that—as shown
in the study—there are other methods
by which boards may encourage
executives to perform, such as by
structuring financial incentives to
encourage or discourage risk taking,
according to the preferences of the
board. Boards can also fire poorly
performing executives even without
non-competes.
One commenter said that a ban on
non-competes may encourage U.S.
companies to relocate their executive
teams outside the U.S. in order to
continue using non-competes. The
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38433	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
826 See Part II.F (stating that the inquiry as to
whether conduct tends to negatively affect
competitive conditions focuses on the nature and
tendency of the conduct and does not require a
detailed economic analysis).
827 See, e.g., Parts IV.B.3.a.iii and IV.B.3.b.iv.
828 See Part IV.B.3.a.ii; Part IV.C.2.c.ii.
829 See Part IV.B.3.a.ii.
830 See Part X.F.6.
831 See Part IV.B.3.b.i-ii; Part IV.C.2.c.i.
832 See Part IV.B.3.b.iii.
833 See Part IV.C.2.c.i.
834 See Part X.F.6.
835 See Part II.F.
836 See Part IV.D.1.
837 See Part IV.B.3.b.iii.
838 See Hausman & Lavetti, supra note 590 at 278.
commenter did not provide specific
evidence to support this assertion. The
Commission believes that firms’
decisions on where to locate their
executive teams are likely influenced by
a multitude of factors other than
whether the firm may or may not use
non-competes.
3. The Asserted Benefits From These
Justifications Do Not Justify the Harms
From Non-Competes
a. The Commission’s Final Findings
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
the claimed business justifications for
non-competes do not justify the harms
from non-competes—for either senior
executives or for workers other than
senior executives, whether considered
together or separately—because the
evidence indicates that increasing
enforceability of non-competes has a net
negative impact along a variety of
measures. Whether the benefits from a
practice outweigh the harms is not
necessarily an element of section 5,826
but, in any event, the benefits from the
justifications cited in Part IV.D.1 clearly
do not justify the harms from non-
competes.
Not all the harms from non-competes
are readily susceptible to
monetization. 827 However, even the
quantifiable harms from non-competes
are substantial and clearly not justified
by the purported benefits. Non-
competes cause considerable harm to
competition in labor markets and
product and service markets. Non-
competes obstruct competition in labor
markets because they inhibit optimal
matches from being made between
employers and workers across the labor
force through the process of competition
on the merits for labor services. The
available evidence indicates that
increased enforceability of non-
competes substantially suppresses
workers’ earnings, on average, across the
labor force generally and for specific
types of workers.828
In addition to the evidence showing
that non-competes reduce earnings for
workers across the labor force, there is
also evidence that non-competes reduce
earnings specifically for workers who
are not subject to non-competes.829
These workers are harmed by non-
competes, because their wages are
depressed, but they do not necessarily
benefit from any purported incentives
for increased human capital investment
that non-competes may provide.
Overall, these harms to labor markets
are significant. The Commission
estimates the final rule will increase
workers’ total earnings by an estimated
$400 billion to $488 billion over ten
years, at the ten-year present discounted
value.830
The available evidence also indicates
non-competes negatively affect
competition in product and service
markets. The weight of the evidence
indicates non-competes have a negative
impact on new business formation and
innovation. 831 There is evidence that
non-competes increase consumer prices
and concentration in the health care
sector.832 There is also evidence non-
competes foreclose the ability of
competitors to access talent.833 While
available data do not allow for precise
quantification of some of these effects,
they are nonetheless substantial: the
Commission estimates that the rule will
reduce spending on physician services
over ten years by $74–194 billion in
present discounted value, will result in
thousands to tens of thousands of
additional patents per year, and will
increase in the rate of new firm
formation by 2.7%.834
In the Commission’s view, the
asserted benefits from non-competes do
not justify their harms. Even if the
businesses using non-competes benefit,
pecuniary benefits to the party
undertaking the unfair method of
competition are not a sufficient
justification under section 5.835 As
described in Part IV.D.1, the most
commonly cited justifications for non-
competes are that they increase
employers’ incentive to make
productive investments in, for example,
trade secrets, customer lists, and human
and physical capital investment. There
is some evidence that non-competes
increase human and physical capital
investment, as noted previously.836
However, the empirical literature does
not show the extent to which human
capital investment and other investment
benefits from non-competes accrue to
any party besides the employer, and to
the extent it addresses this issue it
suggests otherwise. For example, in
theory, if increased human capital
investment from non-competes
benefited workers, they would likely
have higher earnings when non-
competes are more readily available to
firms (i.e., when legal enforceability of
non-competes increases). However, as
explained in Parts IV.B.3.a.ii and
IV.C.2.c.ii, the empirical evidence
indicates that, on net, greater
enforceability of non-competes reduces
workers’ earnings. Likewise, in theory,
if increased human capital investment
increased innovation that redounds to
the benefit of the economy and society
as a whole, one would expect to see
legal enforceability of non-competes
yield such benefits, but as elaborated in
Part IV, the empirical evidence on
innovation effects indicates the
opposite.
Moreover, the Commission is also not
aware of any evidence that these
potential benefits of non-competes lead
to reduced prices. Indeed, the only
empirical study of the effects of non-
competes on consumer prices—in the
health care sector—finds increased
prices as the enforceability of non-
competes increases.837 That study,
which finds that non-compete
enforceability increased physician pay,
also finds that labor cost pass-through is
not driving price decreases. 838
Furthermore, there is no evidence
that, in the three States in which non-
competes are generally void, the
inability to enforce non-competes has
materially harmed employers,
consumers, innovation (or economic
conditions more generally), or workers.
As a result, the Commission finds that
the asserted benefits from non-competes
do not justify the harms they cause.
The Commission finds that the harms
from non-competes are clearly not
justified by the purported benefits,
regardless of whether one considers
senior executives or workers other than
senior executives together or separately.
In this Part IV.D.3, the Commission
explains why, for workers overall, the
asserted benefits from non-competes do
not justify the harms they cause. This is
at least as true for senior executives as
for other workers. As described in Part
IV.C.2.c.i, non-competes with senior
executives tend to negatively affect
competitive conditions in product and
service markets at least as much as non-
competes with other workers—and
likely to a greater extent—given the
outsized role of senior executives in
forming new businesses, serving on new
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38434 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
839 See NPRM, proposed § 910.2(b).
840 Id. at 3513.
841 Id. at 3514.
842 Id. at 3513.
businesses’ executive teams, and setting
the strategic direction of businesses
with respect to innovation. At the same
time, firms have the same less restrictive
alternatives available for senior
executives as they do for other workers,
as described in Part IV.D.2.c.iii. For
these reasons, whether one considers
non-competes with senior executives or
non-competes with other workers, the
claimed business justifications for non-
competes do not justify the harms from
non-competes.
b. Responses to Comments
Commenters focused on the question
of whether employers have adequate
alternatives to non-competes and the
analysis of costs and benefits of the
proposed rule in the preliminary
regulatory impact analysis, rather than
the balancing analysis discussed in this
Part IV.D.3 specifically. These
comments are addressed in Part IV.D.2
and in Part X, respectively.
E. Section 910.2(b): Notice Requirement
for Existing Non-Competes
The Commission proposed to require
employers to rescind (i.e., legally
modify) existing non-competes and
provide notice to inform workers that
they are no longer bound by existing
non-competes. 839 Based on comments,
the Commission is not adopting a
rescission requirement in the final rule.
Rather than require employers to legally
modify existing non-competes, the final
rule prohibits employers from enforcing
existing non-competes with workers
other than senior executives after the
compliance date.
The final rule adopts the notice
requirement—for workers who are not
senior executives—with minor revisions
to facilitate compliance and to improve
the likelihood of workers being
meaningfully informed. The revisions
include an option for employers to make
the notice more accessible to workers
who speak a language other than
English. The final rule also simplifies
compliance and ensures that workers
have prompt notice that their non-
competes are no longer in force by
requiring employers to provide notice
by the effective date, rather than 45 days
thereafter.
1. The Proposed Rule
Proposed § 910.2(b)(1) would have
required employers to rescind existing
non-competes with all workers.
Proposed § 910.2(b)(2) would have
required employers that rescinded non-
competes to provide notice to the
affected workers that their non-compete
is no longer in effect and may not be
enforced.
As proposed, § 910.2(b)(2) had three
subparagraphs that imposed various
requirements related to the notice.
Proposed § 910.2(b)(2)(i) stated that an
employer that rescinds a non-compete
pursuant to § 910.2(b)(1) must provide
notice in an individualized
communication to the worker that the
worker’s non-compete is no longer in
effect and may not be enforced. The
Commission stated in the NPRM that an
employer could not satisfy the notice
requirement by, for example, posting a
notice at the employer’s workplace.840
Proposed § 910.2(b)(2)(i) also stated that
the employer must provide the notice in
writing on paper or in a digital format
such as an email or text message within
45 days of rescinding the non-compete.
Proposed § 910.2(b)(2)(ii) stated that
the employer must provide the notice to
both current workers and former
workers when the employer has the
former worker’s contact information
readily available. To ease the burden of
compliance, proposed § 910.2(b)(2)(iii)
provided model language that would
satisfy the notice requirement. Proposed
§ 910.2(b)(2)(iii) and § 910.2(b)(3)
provided a safe harbor for employers
using the model language, while also
permitting an employer to use different
language, provided that the language
communicates to the worker that the
worker’s non-compete is no longer in
effect and may not be enforced.841
In the NPRM, the Commission stated
that the purpose of the proposed notice
requirement was to ensure that workers
are informed that their existing non-
competes are no longer in effect. The
Commission cited evidence indicating
that many workers are not aware of the
applicable law governing non-competes
or their rights under those laws, and
stated that it was therefore concerned
that, absent a notice requirement,
workers may not know that their non-
competes are no longer enforceable as of
the effective date. 842
2. The Final Rule
a. The Final Rule Does Not Require
Rescission (Legal Modification) of
Existing Non-Competes
The Commission has eliminated the
proposed rule’s requirement that
employers rescind (i.e., legally modify)
existing non-competes. The Commission
believes the proposed rescission
requirement would have imposed
unnecessary burdens on employers, as
other aspects of the final rule provide
less burdensome means of ensuring that
workers other than senior executives
will not be bound or chilled from
competitive activity by non-competes
after the effective date. Under
§ 910.2(a)(1)(ii), it is an unfair method of
competition for a person to enforce or
attempt to enforce a non-compete
(except where, under § 910.3 the person
has a good-faith basis to believe that the
final rule is inapplicable). Further,
under § 910.2(b)(1), the person who
entered into the non-compete must
provide clear and conspicuous notice to
the worker by the effective date that the
worker’s non-compete clause is no
longer in effect and will not be, and
cannot legally be, enforced against the
worker. These provisions are sufficient
to achieve the purposes of the proposed
rescission requirement without
requiring any affirmative conduct
beyond the notice requirement.
The Commission has also eliminated
the proposed rescission requirement in
response to comments expressing
confusion about the requirement and
concern about its practical implications.
Some comments interpreted the
proposed rescission requirement to
mean that the worker and employer
must be returned to their original
positions (i.e., on the day they entered
into the non-compete) and presumed to
not have entered into it or that it
mandated wholly new contracts to
replace any existing agreements that
contained non-competes. Some
commenters objected to what they
considered the high compliance costs of
rescinding and revising every
employment contract with a non-
compete. Some businesses said their
contracts with senior executives and
potentially other workers would be
unwound by a rescission requirement.
Other commenters said that if the
Commission promulgated the proposed
rescission requirement, it would be
disregarding the role non-competes
played in the overall value of the
exchange for an employment contract.
An industry association said rescission
would require assessment of each
contract’s severability under relevant
State law, and the answers would vary
widely.
The Commission does not intend for
the final rule to have such effect and has
omitted the rescission requirement
proposed in the NPRM. The
Commission also adopts § 910.3(b),
which provides an exception for causes
of action that accrued before the
effective date, to be clear that the final
rule does not render any existing non-
competes unenforceable or invalid from
the date of their origin. Instead, it is an
unfair method of competition to enforce
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843 § 910.2(b)(1).
844 This language mirrors language in other
Federal regulations. See, e.g., 17 CFR 9.11 (notice
of disciplinary action must be made personally by
mail at the person’s last known address or last
known email address); 29 CFR 38.79 (written notice
must be sent to a ‘‘complainant’s last known
address, email address (or another known method
of contacting the complainant in writing)’’); 16 CFR
318.5 (providing for written notification at an
individual’s last known address, or email if the
individual chooses that option).
845 Under the final rule, notice is only required
for existing non-competes, i.e., those that have not
elapsed.
846 The Commission notes that this required
notice is a routine disclosure of valuable, factual
information to workers that does not implicate the
First Amendment. See Milavetz, Gallop & Milavetz,
P.A. v. United States, 559 U.S. 229, 249–53 (2010)
(citing Zauderer v. Off. of Disciplinary Counsel, 471
U.S. 626, 651 (1985)). As described in this Part IV.E,
the Commission adopts this notice requirement to
ensure workers do not wrongly believe they remain
bound by unenforceable non-competes after the rule
goes into effect. The Commission’s conclusion that
such notice is necessary to achieve the full benefits
of the final rule is based on its expertise and on
empirical evidence supporting the Commission’s
finding of an in terrorem effect related to non-
competes.
847 See Prescott & Starr, supra note 413; see also
Part IV.B.2.b.ii (describing the Commission’s
finding that non-competes are exploitative and
coercive where they trap workers in jobs or force
them to bear significant harms or costs, even where
workers believe the non-compete is unenforceable).
certain non-competes beginning on the
effective date. Actions taken before the
effective date—for example, enforcing
an existing non-compete or making
representations related to an existing
non-compete—are not unfair methods of
competition under the final rule. As
noted elsewhere, the Commission also
exempts from the rule future
enforcement of existing non-competes
with senior executives.
Commenters also argued that a
rescission requirement would be
impermissibly retroactive, present due
process concerns, and/or constitute an
impermissible taking under the Fifth
Amendment. The Commission responds
to these comments in Part V.B.
Numerous commenters opposed the
proposed rescission requirement based
on perceived challenges presented by
proposed § 910.1(b)(2), which addressed
de facto non-competes, and its
purported ambiguity with respect to
which contractual terms employers
would be required to rescind. The
Commission has removed the rescission
requirement for the reasons described in
this Part IV.E.2.a and has also revised
the proposed rule’s language concerning
de facto non-competes to clarify the
scope of the definition.
b. The Final Rule’s Notice Requirement
While the final rule does not require
rescission (i.e., legal modification) of
existing non-competes, the final rule
does prohibit enforcement of existing
non-competes after the effective date
and requires the person who entered
into the non-compete with the worker to
provide clear and conspicuous notice to
the worker, by the effective date, that
the worker’s non-compete will not be,
and cannot legally be, enforced against
the worker.843 The notice must identify
the person who entered into the non-
compete with the worker and must be
on paper delivered by hand to the
worker, or by mail at the worker’s last
known personal street address, or by
email at an email address belonging to
the worker, including the worker’s
current work email address or last
known personal email address, or by
text message at a mobile telephone
number belonging to the worker.844
Several commenters emphasized the
importance of notice, especially for
former workers who may be actively
refraining from competitive activity (in
compliance with a non-compete), and
who may continue to do so if they are
not informed that their non-compete is
no longer in effect. One commenter
highlighted the importance of notice,
because a non-compete may be coercive
regardless of its enforceability. Many
commenters emphasized the need for
clear and concise language in the
notices, including in languages other
than English. One commenter asked the
Commission to use concrete, lay-
friendly terms to help reduce workers’
fears of being sued. A commenter that
recommended notice in languages other
than English suggested that such a
requirement apply to medium and large
businesses with a threshold percentage
of workers (such as 10%) who primarily
speak a language other than English.
Commenters also suggested changes
in notice procedures to improve the
chances of workers receiving and
understanding the notice. One
commenter stated that text messages
should not qualify as a primary means
of individual notice because they are too
casual, may be automatically deleted,
and the sender may not be identifiable.
However, in this commenter’s view, text
messages could be a secondary form of
notice. Some commenters suggested that
in addition to individual notice, the
final rule should require an employer to
post a copy of the notice in the
workplace and/or online.
A number of commenters asserted
that the requirement for employers to
provide notice to former workers when
‘‘the employer has the worker’s contact
information readily available’’ was
confusing or burdensome. A commenter
stated that employers do not update
former employees’ contact information,
so such information is likely incomplete
and might be inaccurate. One
commenter asserted that a requirement
to provide notice within 45 days of the
effective date is too difficult for small
businesses. Another commenter
suggested that the final rule should
require contacting only former workers
who left the firm two years or less
before the effective date, unless the non-
compete has elapsed.845 Some
commenters expressed concern that
former workers might not be notified
under the ‘‘readily available’’ standard.
A commenter stated that, to avoid
confusion and evasion, employers
should be required to send notice to
former workers at the worker’s last
known home address, email address, or
cell phone number. Commenters also
contended that the meaning of
‘‘individualized communication’’ was
not clear or that compliance with it
would be too difficult or burdensome.
The Commission finalizes the
proposed rule’s notice requirement
largely as proposed, with minor
revisions to facilitate compliance,
reduce burdens on employers, and
improve accessibility for non-English
speakers.846 The final rule also requires
covered businesses to provide notice by
the effective date, rather than 45 days
thereafter, to simplify the final rule and
to secure its benefits for competition in
labor markets and product and service
markets as soon as practicable.
The Commission finalizes a notice
requirement because the available
evidence indicates that many workers
are not aware of the applicable law
governing non-competes or their rights
under those laws, or are unable to
enforce their rights—and are chilled
from engaging in competitive activity as
a result. The evidence shows that even
when employers impose non-competes
that are unenforceable under State law,
many workers believe they are bound by
them (or are otherwise unable to enforce
their rights to be free of non-
competes).847 As a result, the
Commission finds that even after the
final rule is in effect, absent a clear
notice requirement, many workers may
be unaware that, because of the final
rule, their employer cannot enforce a
non-compete and that the Commission
has the authority to take action against
employers who violate the final rule.
Accordingly, absent notice, these
workers may continue to be chilled from
switching jobs or starting their own
business. This would tend to negatively
affect competitive conditions in the
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38436 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
848 § 910.2(b)(4)–(5).
849 § 910.2(b)(2)(ii).
850 § 910.2(b)(3).
851 NPRM, proposed § 910.2(b)(2)(iii).
852 § 910.2(b)(4).
853 The Commission addresses the effective date
in Part VIII.
854 Employers have many record-keeping
requirements under State and Federal laws under
which they may retain the contact information
described in § 910.2(b)(2)(ii). See, e.g., IRS, Circular
E, Employer’s Tax Guide, Pub. 15, 8 (2024) (‘‘Keep
all records of employment taxes for at least 4
years,’’ including addresses of employees and
recipients and forms with addresses.); USCIS,
Handbook for Employers M–274, Sec. 10.0,
Retaining Form I–9 (requiring retention of I–9 form,
which includes employees’ addresses, email
addresses, and telephone numbers).
same manner as if non-competes were
in full force and effect.
A notice requirement helps address
this concern by informing individual
workers, to the extent possible, that after
the effective date the employer will not
enforce any non-compete against the
worker. The Commission believes that
prompt and clear notice to workers
other than senior executives that non-
competes are no longer enforceable is
essential to furthering the purposes of
the final rule—to allow workers to seek
or accept another job or to leave to start
and run a business, and to allow other
employers to compete freely for
workers. Indeed, the Commission has
refined the model language to make it
shorter and clearer than the proposed
model language.
While the proposed rule would have
required employers to provide the
notice no later than 45 days after the
compliance date, the final rule requires
notice no later than the effective date
(i.e., no later than 120 days after the
final rule is published in the Federal
Register). The Commission believes that
it is practicable and reasonable for
employers to provide the notice by the
effective date. The Commission has
designed the notice requirement to
make compliance as easy as possible for
employers. The final rule provides safe
harbor model language that satisfies the
notice requirement; 848 gives employers
several options for providing the
notice—on paper, by mail, by email, or
by text; 849 and exempts employers from
the notice requirement where the
employer has no record of a street
address, email address, or mobile
telephone number for the worker.850
In addition, while the model language
in the proposed rule used the phrase
‘‘the non-compete clause in your
contract is no longer in effect,’’ 851 the
model language in the final rule uses the
phrase ‘‘[EMPLOYER NAME] will not
enforce any non-compete clause against
you.’’ 852 Because this language does not
identify the recipient as having a non-
compete, the employer does not need to
determine which of its workers have
non-competes; instead, it can simply
send a mass communication such as a
mass email to current and former
workers.
Furthermore, requiring notice by the
effective date simplifies the final rule
and allows its benefits to begin sooner.
In response to commenters that
contended that they need more time to
provide workers notice, the Commission
believes that providing notice should
not be time-consuming, even for small
businesses, particularly given that the
final rule provides model language,
allows use of the worker’s last known
contact information for notice, allows
digital notice, and (unlike in the
proposed rule) categorically exempts an
employer who has no such information
from the notice requirement. Moreover,
as described in Part IV.B.2.b.ii, non-
competes trap workers in jobs or force
them to bear other significant harms or
costs—even where workers believe the
non-compete is unenforceable. Given
the limited burdens associated with
providing notice only to workers whose
last known contact information is on file
and employers’ option to simply copy
and paste the safe harbor model notice,
as well as the known and currently
ongoing acute harms of non-competes
(including their in terrorem effects) and
the importance of workers knowing as
soon as possible that their non-compete
is unenforceable, the Commission
declines to extend the time to provide
notice.853 The Commission finds that
120 days is more than adequate for
employers to complete this task.
In response to comments expressing
concern that the NPRM’s
‘‘individualized communication’’
requirement was unclear or
burdensome, the Commission has
removed that language. Instead, the final
rule ensures each worker will receive
notice while specifying several
permissible methods for providing the
notice, which furthers compliance
certainty while giving employers a range
of options and an efficient means of
complying. By allowing a number of
formats for such communications,
including digital formats, employers are
more likely to be able to contact workers
rapidly, individually, and have
flexibility to do so at low cost.
Accordingly, § 910.2(b)(2) of the final
rule allows for notice by text message,
by email, as well as paper notice by
hand or by mail to the worker’s last
known street address. The final rule
gives employers flexibility to choose
among these methods. In responses to
the concerns expressed by the
commenter about text messages, the
Commission believes that text messages
should be a permissible method for
providing the notice because they are
widely used, delivered quickly, low-cost
for employers, and an effective means of
communication for workers who do not
have email accounts.
In response to comments contending
that notice to former workers is too
burdensome or difficult, the
Commission believes that providing
notice to former workers is critical
because former workers may be
refraining from competitive activity
because they believe they are subject to
a non-compete. The Commission
disagrees that providing notice to former
workers will be burdensome. The
Commission believes that most
employers have contact information for
former workers who may be subject to
non-competes.854 And under the final
rule, in those rare cases in which an
employer has no record of a street
address, email address, mobile
telephone number, or other method of
contacting the worker or former worker,
§ 910.2(b)(3) exempts the employer from
the final rule’s notice requirement with
respect to the worker. Furthermore, by
specifying the circumstances under
which notice may not be provided, this
exemption also addresses concerns
expressed by some commenters that
ambiguity in the proposed rule’s
‘‘readily available’’ standard for
notifying former workers would lead to
fewer former workers being notified.
In response to comments contending
that notice to former workers is too
burdensome or difficult, the
Commission believes that providing
notice to former workers is critical
because former workers may be
refraining from competitive activity
because they believe they are subject to
a non-compete. In light of the comments
about the proposed ‘‘readily available’’
contact information standard, the
Commission in this final rule does not
adopt that language and instead requires
that the notice must be on paper
delivered by hand to the worker, or by
mail at the worker’s last known personal
street address, or by email at an email
address belonging to the worker,
including the worker’s current work
email address or last known personal
email address, or by text message at a
mobile telephone number belonging to
the worker. The Commission agrees
with commenters that stated that most
employers have such contact
information for both present and former
workers. For those rare cases in which
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38437	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
855 See Sandy Dietrich & Erik Hernandez, Census
Bureau, Nearly 68 Million People Spoke a Language
Other Than English at Home in 2019 (Dec. 6, 2022)
at Table 1, https://www.census.gov/library/stories/
2022/12/languages-we-speak-in-united-states.html.
856 NPRM, proposed § 910.3.
857 Id., proposed § 910.1(e).
858 Id. at 3515.
859 Id. at 3514–15.
860 Id.
861 See, e.g., 17 CFR 240.13d–1 (requiring
reporting by beneficial owners holding more than
5% interest in an equity security).
an employer has no record of a street
address, email address, mobile
telephone number, or other method of
contacting the worker or former worker,
§ 910.2(b)(3) exempts the employer from
the final rule’s notice requirement.
The Commission agrees with
comments that notices in other
languages spoken by workers would
help achieve the goal of informing
workers that their non-competes are no
longer enforceable and help employers
to comply with the final rule. However,
to avoid imposing a burden of
translation on employers, § 910.2(b)(6)
makes it optional to provide notices in
languages other than English. The
Commission encourages employers to
provide this notice to workers who
speak languages other than English. To
facilitate the provision of notices in
other languages, the final rule provides
a model notice in English and links to
translations of other languages that are
commonly spoken in U.S. homes,
including Spanish, Chinese, Arabic,
Vietnamese, Tagalog, and Korean.855
V. Section 910.3: Exceptions
A. Section 910.3(a): Exception for
Persons Selling a Business Entity
In the NPRM, the Commission
proposed an exception for certain non-
competes between the seller and the
buyer of a business that applied only to
a substantial owner, member, or partner,
defined as an owner, member, or partner
with at least 25% ownership interest in
the business entity being sold. Based on
comments, the Commission adopts an
exception for the bona fide sale of a
business without requiring that the
seller have at least a 25% ownership
interest.
1. The Proposed Rule
Proposed § 910.3 allowed non-
competes where the restricted party is
‘‘a person who is selling a business
entity or otherwise disposing of all of
the person’s ownership interest in the
business entity, or . . . selling all or
substantially all of a business entity’s
operating assets,’’ and is also ‘‘a
substantial owner of, or substantial
member or substantial partner in, the
business entity at the time the person
enters into the non-compete.’’ 856 The
Commission proposed to define
‘‘substantial owner, substantial member,
and substantial partner’’ as ‘‘an owner,
member, or partner holding at least a 25
percent ownership interest in a business
entity.’’ 857 The text of proposed § 910.3
stated that non-competes allowed under
the proposed exception would remain
subject to Federal antitrust law and all
other applicable law.
The Commission stated in the NPRM
that its proposal to exempt from the rule
non-competes between the seller and
the buyer of a business did not reflect
a finding that such non-competes are
beneficial to competition. 858 Rather, the
Commission explained that such non-
competes may implicate unique
interests and have unique effects, and
the evidentiary record did not permit
the Commission to thoroughly assess
the full implications of restricting their
enforceability.859 The Commission
noted that because all States permit
non-competes between the seller and
the buyer of a business to some degree,
and because the laws that apply to these
types of non-competes have seen fewer
changes recently than the laws
applicable to non-competes that arise
solely out of employment, there have
not been natural experiments allowing
researchers to assess this type of non-
compete’s effect on competition.860
2. Comments Received
A few commenters suggested
eliminating the proposed exception.
These commenters contended that non-
competes between the seller and the
buyer of a business may still be
exploitative and coercive, particularly
in the case of small business owners in
transactions with larger, better-
resourced corporations. However, most
commenters who addressed the issue
supported an exception that would
allow certain non-competes between the
seller and the buyer of a business. These
commenters agreed with the NPRM that
State common law generally applies
less-intensive scrutiny to non-competes
ancillary to the sale of a business and
that every State statute banning non-
competes has an exception which
allows some or all non-competes
between the seller and the buyer of a
business. Most of the commenters who
supported some form of exception for
non-competes between the seller and
the buyer of a business contended that
they are necessary to protect the value
of the sale by ensuring the effective
transfer of the business’s goodwill.
According to these commenters, a buyer
will be less willing to pay for a business
if they cannot obtain assurance that they
will be protected from future
competition by the seller, and so a
failure to exempt related non-competes
may chill acquisitions. Commenters
stated that sellers of a business have
more bargaining power than workers do
and generally receive a portion of the
sales price, making exploitation and
coercion less likely. They also noted
that non-competes between the seller
and the buyer of a business remain
subject to State limitations on scope,
duration, and reasonableness.
Some commenters supported the
proposed 25% ownership threshold.
However, most commenters who
otherwise supported the exception
stated that the proposed 25% ownership
threshold is too high. They argued that
the 25% threshold does not account for
the reality of most transactions, in
which owners with less than 25%
interest in a business may have
significant goodwill and receive
significant proceeds from a sale. Some
commenters focused on the tax costs of
the threshold, pointing to IRS
provisions that currently allow
taxpayers to deduct from their taxable
income the portion of the sales price
made in exchange for non-competes.
Others argued that the 25% threshold
would disincentivize equity-based
consideration. To avoid these harms,
these commenters suggested a variety of
other thresholds, including the 5%
ownership threshold used in SEC
regulations.861 Some commenters
contended that the Commission failed to
provide evidence justifying the
proposed 25% ownership threshold.
Others questioned the effectiveness of
ownership as a proxy for goodwill or the
likelihood of exploitation and coercion.
As examples, these commenters pointed
to passive investors who may have
significant ownership stakes in a
business but none of its goodwill, and
owners whose interests may be
purchased for less than fair market
value or who are excluded from sales
negotiations.
A few commenters argued that the
proposed 25% threshold would preempt
the laws of California and other States
which ban non-competes except in the
sale of a business, none of which require
that the seller have a substantial
ownership stake. They pointed to cases
in which California courts applied the
exception and allowed enforcement of
non-competes against shareholders
holding as little as a 3% ownership
interest. In light of these statutes, some
of these commenters urged the
Commission to adopt an exception for
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38438 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
862 See NPRM at 3514–15.
863 See, e.g., U.S. v. Addyston Pipe & Steel Co.,
85 F. 271, 281 (6th Cir. 1898) (‘‘For the reasons
given, then, covenants in partial restraint of trade
are generally upheld as valid when they are
agreements [inter alia] by the seller of property or
business not to compete with the buyer in such a
way as to derogate from the value of the property
or business sold . . . . Before such agreements are
upheld, however, the court must find that the
restraints attempted thereby are reasonably
necessary . . . to the enjoyment by the buyer of the
property, good will, or interest in the partnership
bought. . . .’’).
864 Black’s Law Dictionary defines bona fide as
‘‘[m]ade in good faith; without fraud or deceit,’’ and
‘‘[s]incere; genuine.’’ (11th ed. 2019).
agreements that involve the sale of a
business or equity in a company
without a threshold ownership
requirement.
Some commenters urged the
Commission to adopt a case-by-case
assessment of business sales based on
State law, such as a ‘‘totality of the
circumstances’’ or ‘‘reasonableness’’
test. Others proposed replacing the
ownership-based exception with an
exception for founders, key workers
with IP access, and/or those with
goodwill. At least one commenter asked
the Commission to use a bright-line rule
rather than a functional or definitional
test that would require adjudication and
interpretation by courts.
Some commenters presented
empirical evidence to justify a lower
ownership threshold. A few
commenters pointed to data suggesting
that more than 96% of CEOs of the
3,000 largest publicly traded companies
own less than 25% of their company.
One commenter pointed to data
suggesting that the average duration of
a startup’s life from fundraising to
acquisition is 6.1 years, arguing that it
is unlikely for venture-capital backed
businesses to operate and grow for that
period of time without accepting
funding that dilutes founders’ and key
employees’ equity stake in the business.
Other commenters supporting a lower
threshold provided anecdotal evidence
that businesses cede large shares to
financial backers, resulting in many
owner-operators holding significantly
less than a 25% share in their business.
Finally, some commenters focused on
eliminating potential loopholes to the
proposed exception. Some commenters
expressed concern that employers may
set up sham transactions with wholly
owned subsidiaries in order to impose
non-competes that would otherwise be
prohibited under the rule, urging the
Commission to clarify that the exception
applies only to bona fide transfers to an
independent third party. Some
commenters contended that firms may
use ‘‘springing’’ non-competes (in
which a worker must agree at the time
of hiring to a non-compete in the event
of some future sale) and repurchase
rights, mandatory stock redemption
programs, or similar stock-transfer
schemes (pursuant to which a worker
may be required to sell their shares if a
certain event occurs) to impose non-
competes on their workers which would
otherwise be prohibited. They urged the
Commission to address those instances
specifically, including by defining the
exception by the percentage of total
equity value received in liquid proceeds
at the time of the relevant transaction.
3. The Final Rule
The Commission adopts a sale of
business exception for substantially the
same reasons articulated in the NPRM.
However, in response to comments
concerning the ownership percentage
threshold, the Commission modifies
§ 910.3(a) so that it no longer includes
the proposed requirement that the
restricted party be ‘‘a substantial owner
of, or substantial member or substantial
partner in, the business entity’’ to fall
under the exception. The Commission
otherwise adopts this provision largely
as proposed. To address commenters’
concerns that employers will use sham
transactions, stock-transfer schemes or
other mechanisms designed to evade the
rule, § 910.3(a) requires that, to fall
under the exemption, a non-compete
must be entered into pursuant to a bona
fide sale.
The Commission reiterates that
§ 910.3(a) does not reflect a finding that
non-competes between the seller and
the buyer of a business are beneficial to
competition or that they are not
restrictive and exclusionary or
exploitative and coercive. Indeed, the
Commission acknowledges that some
non-competes between the seller and
buyer of a business may be exploitative
and coercive due to an imbalance in
bargaining power and/or may tend to
harm competitive conditions. However,
commenters did not present empirical
research on the prevalence of non-
competes between the seller and the
buyer of a business or on the aggregate
economic effects of applying additional
legal restrictions to non-competes
between the seller and buyer of a
business. The Commission’s decision to
adopt § 910.3(a) reflects the view of the
Commission and most commenters that,
compared to non-competes arising
solely out of an employment
relationship, non-competes between the
sellers and buyers of businesses may
implicate unique interests and have
unique effects that this rulemaking
record does not address.862
The proposed requirement that an
excepted non-compete bind only a
‘‘substantial’’ owner, member or partner
of the business entity being sold was
designed to allow those non-competes
between the seller and the buyer of a
business which are critical to effectively
transfer goodwill while prohibiting
those which are more likely to be
exploitative and coercive due to an
imbalance of bargaining power between
the seller and the buyer. However,
commenters persuasively argued that
the proposed 25% ownership threshold
was too high because it failed to reflect
the relatively low ownership interest
held by many owners, members, and
partners with significant goodwill in
their business. The Commission
declines to maintain the ‘‘substantial’’
interest requirement with a lower
percentage threshold for the same
reason.
The Commission also declines to
adopt a threshold of $1 million,
$250,000, or some other dollar limit on
the proceeds received by the seller. On
the current record, these thresholds
were not sufficiently correlated to
sellers’ goodwill or bargaining power for
a broadly generalizable approach. The
Commission declines to adopt a
‘‘totality of the circumstances’’ or
‘‘reasonableness’’ test in the text of
§ 910.3(a) because they would provide
little meaningful guidance to buyers and
sellers and would be difficult to
administer. For the same reasons, the
Commission declines to replace the
ownership-based exception with an
exception for founders, key workers,
workers with access to intellectual
property, and/or workers with goodwill.
Furthermore, non-competes allowed
under the exception will continue to be
governed by State law, which generally
requires a showing that a non-compete
is necessary to protect the value of the
business being sold, as well as Federal
antitrust law.863
Finally, the Commission agrees with
commenters’ concerns about the risks
that firms may abuse the exception
through sham transactions with wholly
owned subsidiaries, ‘‘springing’’ non-
competes, repurchase rights, mandatory
stock redemption programs, or similar
evasion schemes. The Commission adds
the term ‘‘bona fide’’ and makes changes
clarifying that any excepted non-
compete must be made ‘‘pursuant to a
bona fide sale’’ to ensure that such
schemes are prohibited under the rule.
A bona fide sale is one made in good
faith as opposed to, for example, a
transaction whose sole purpose is to
evade the final rule.864 In general, the
Commission considers a bona fide sale
to be one that is made between two
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865 See, e.g., Bosley Med. Grp. v. Abramson, 161
Cal. App. 3d 284, 291 (Cal. Ct. App. 1984) (refusing
to enforce non-compete imposed on physician
under agreement requiring physician to purchase
9% of stock at hiring and resell to corporation upon
termination because agreement ‘‘was devised to
permit plaintiffs to accomplish that which the law
otherwise prohibited: an agreement to prevent
defendant from leaving plaintiff medical group and
opening a competitive practice’’).
866 See proposed § 910.2(b)(1).
867 As discussed in Part V.B.1, courts have
explained that an ‘‘administrative . . . rule is
retroactive [only] if it takes away or impairs vested
rights acquired under existing law, or creates a new
obligation, imposes a new duty, or attaches a new
disability in respect to transactions or
considerations already passed.’’ Regents of the
Univ. of Cal. v. Burwell, 155 F. Supp. 3d 31, 44
(D.D.C. 2016) (alteration in original) (quoting Nat’l
Min. Ass’n v. DOL, 292 F.3d 849, 859 (D.C. Cir.
2002)). But a regulation is not retroactive simply
because it ‘‘impair[s] the future value of past
bargains’’ if it does not also ‘‘render[ ] past actions
illegal or otherwise sanctionable.’’ Nat’l Cable &
Telecomms. Ass’n v. FCC, 567 F.3d 659, 670 (D.C.
Cir. 2009).
868 Landgraf v. USI Film Prods., 511 U.S. 244, 269
(1994).
869 Burwell, 155 F. Supp. 3d at 44 (alteration in
original) (quoting Nat’l Min. Ass’n, 292 F.3d at 859).
870 Id. (alterations in original) (quoting Ne. Hosp.
Corp. v. Sebelius, 657 F.3d 1, 14 (D.C. Cir. 2011)).
871 Nat’l Cable, 567 F.3d at 670 (internal
quotation omitted) (quoting Mobile Relay Assocs. v.
FCC, 457 F.3d 1, 11 (D.C. Cir. 2006)).
872 For instance, the D.C. Circuit found that
agency action impermissibly attached a ‘‘new
disability’’ when a Department of Interior rule made
mine operators ineligible for a surface mining
permit based on ‘‘pre-rule violations.’’ Nat’l Min.
Ass’n v. U.S. DOI, 177 F.3d 1, 8 (D.C. Cir. 1999).
Here, the final rule imposes no penalties or other
disabilities on persons who entered into non-
competes before the effective date.
873 Nat’l Cable, 567 F.3d at 661.
874 Id. at 670.
875 Id. at 670.
independent parties at arm’s length, and
in which the seller has a reasonable
opportunity to negotiate the terms of the
sale. So-called ‘‘springing’’ non-
competes and non-competes arising out
of repurchase rights or mandatory stock
redemption programs are not entered
into pursuant to a bona fide sale
because, in each case, the worker has no
good will that they are exchanging for
the non-compete or knowledge of or
ability to negotiate the terms or
conditions of the sale at the time of
contracting. Similarly, sham
transactions between wholly owned
subsidiaries are not bona fide sales
because they are not made between two
independent parties.
The Commission declines to
specifically delineate each kind of sales
transaction which is not a bona fide sale
under the exception to avoid the
appearance that any arrangement not
listed is allowed under the exception.
Courts have effectively identified and
prohibited such schemes pursuant to
State statutes prohibiting non-
competes. 865 In addition, non-competes
allowed under the sale-of-business
exception remain subject to Federal and
State antitrust laws, including section 5
of the FTC Act.
B. Section 910.3(b): Exception for
Existing Causes of Action
Proposed § 910.2(a) would have
prohibited employers from maintaining
an existing non-compete with a worker.
The proposed rule also would have
required employers to rescind existing
non-competes.866 Commenters argued
that any invalidation or rescission
required of existing non-competes
would be impermissibly retroactive,
present due process concerns, and/or
constitute an impermissible taking
under the Fifth Amendment.
As described in Part IV.C.5, the
Commission adopts a modified
§ 910.2(a) under which existing non-
competes for workers who are not senior
executives are no longer enforceable.
The Commission adds an exception in
§ 910.3(b) in response to comments
raising concerns related to retroactivity.
Section 910.3(b) specifies that the final
rule does not apply if a cause of action
related to a non-compete provision
accrued prior to the effective date. This
includes, for example, where an
employer alleges that a worker accepted
employment in breach of a non-compete
if the alleged breach occurred prior to
the effective date. This provision
responds to concerns that the final rule
would apply retroactively by
extinguishing or impairing vested rights
acquired under existing law prior to the
effective date.867 In this Part V.B, the
Commission addresses commenters’
arguments regarding retroactivity, due
process, and impermissible taking under
the Fifth Amendment.
1. Retroactivity
A number of commenters asserted
that applying the final rule to prohibit
the enforcement of existing non-
competes would render the final rule
impermissibly retroactive. The
Commission disagrees. A rule ‘‘does not
operate ‘retrospectively’ merely because
it is applied in a case arising from
conduct antedating the [rule’s]
enactment, or upsets expectations based
in prior law.’’ 868 Rather, courts have
explained that an ‘‘administrative . . .
rule is retroactive [only] if it takes away
or impairs vested rights acquired under
existing law, or creates a new obligation,
imposes a new duty, or attaches a new
disability in respect to transactions or
considerations already passed.’’ 869 ‘‘A
rule that ‘alter[s]’ the past legal
consequences of ‘past action’ is
retroactive,’’ while a rule that ‘‘‘alter[s]
only the ‘future effect’ of past actions, in
contrast, is not.’’ 870 Agency action ‘‘that
only upsets expectations based on prior
law is not retroactive.’’ 871
The final rule is not impermissibly
retroactive because it does not impose
any legal consequences on conduct
predating the effective date. The
Commission is not creating any new
obligations, imposing any new duties, or
attaching any new disabilities for past
conduct.872 And to minimize concerns
about retroactivity, the Commission
adopts § 910.3(b), which states that the
final rule does not apply where a cause
of action related to a non-compete
accrues before the effective date. The
notice requirement in § 910.2(b)
likewise does not render the final rule
impermissibly retroactive because that
requirement merely requires notice that
non-competes that exist after the
effective date will not be enforced in the
future with respect to workers other
than senior executives. No penalties
attach to persons who entered non-
competes before the effective date.
This final rule is analogous to the FCC
rulemaking upheld in National Cable &
Telecommunications Ass’n v. FCC.
There, the agency promulgated a rule
that ‘‘forbade cable operators not only
from entering into new exclusivity
contracts, but also from enforcing old
ones.’’ 873 The court upheld the rule
against a retroactivity challenge because
the FCC had ‘‘impaired the future value
of past bargains but ha[d] not rendered
past actions illegal or otherwise
sanctionable.’’ 874 This final rule does
the same with existing non-competes.
The final rule does not render it illegal
or otherwise sanctionable for parties to
have entered into non-competes before
the effective date; it merely provides
that persons cannot enforce or attempt
to enforce such agreements with
workers other than senior executives or
represent to such workers that they are
bound by an enforceable non-compete
after the effective date. It is thus not
impermissibly retroactive.
In National Cable, the court also
considered whether the agency had
‘‘balance[d] the harmful ‘secondary
retroactivity’ of upsetting prior
expectations or existing investments
against the benefits of applying [its]
rules to those preexisting interests.’’ 875
While commenters did not frame their
objection as one of ‘‘secondary
retroactivity,’’ some did object that the
final rule would upset the benefits of
pre-existing bargains. As in National
Cable, however, the Commission has
‘‘expressly consider[ed] the relative
benefits and burdens of applying its rule
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876 Id. at 671.
877 See Part IV.B.
878 See Part IV.B.2.b.
879 Part I.B.1.
880 U.S. Const. amend. V.
881 Cedar Point Nursery v. Hassid, 594 U.S. 139,
148 (2021).
882 Penn Cent. Transp. Co. v. City of N.Y., 438
U.S. 104 (1978).
883 Lingle v. Chevron U.S.A. Inc., 544 U.S. 528,
540 (2005).
884 Connolly v. Pension Ben. Guar. Corp., 475 U.S.
211, 224 (1986); see also Nat’l Min. Ass’n v. Babbitt,
172 F.3d 906, 917 (D.C. Cir. 1999) (applying
Connolly to a Takings challenge to an
administrative rule).
885 Murr v. Wis., 582 U.S. 383, 405 (2017); see also
Connolly, 475 U.S. at 225.
886 See Hiraiwa, Lipsitz, & Starr (2023) (showing
that firms do not value the ability to enforce non-
competes for workers earning up to $100,000 per
year and potentially more).
887 Connolly, 475 U.S. at 225–26.
888 See Part IV.D.2.
889 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 35.
890 See § 910.6.
891 Penn Cent. Transp. Co. v. City of N.Y., 438
U.S. 104, 124 (1978) (internal citation omitted).
892 See 15 U.S.C. 45(a); see also Parts IV.B and C
(the Commission’s findings outlining the public
benefits of the final rule and the public harm from
the use of non-competes).
to existing contracts.’’ 876 This
consideration led the Commission to
adopt the various exceptions described
in the final rule, including the decision
not to apply the final rule to non-
competes entered into with senior
executives before the effective date. As
explained in Part IV.B, however, the
Commission has determined that, for
workers other than senior executives,
there are substantial benefits to applying
the rule to prohibit the future
enforcement of non-competes entered
into before the effective date. These
benefits include the anticipated increase
in worker earnings, new business
formation, and innovation.877
Additionally, the Commission finds
such agreements are generally coercive
and exploitative, so prohibiting their
future enforcement is also a benefit.878
In the Commission’s view, these
significant benefits justify any burdens
of applying the final rule to the future
enforcement of pre-existing agreements
with workers other than senior
executives. Having balanced the
burdens and benefits of so applying the
final rule, the Commission has satisfied
its obligation to consider the secondary
retroactivity effects of the final rule.
Moreover, the Commission notes that
non-competes were already subject to
case-by-case adjudication under section
5. 879 Employers were thus already
responsible, even before the final rule,
for ensuring their non-competes are not
unfair methods of competition.
2. Takings
The Commission also disagrees with
commenters who contended that
applying the final rule to non-competes
entered into before the effective date
would violate the Fifth Amendment by
effecting a taking without due
compensation. Some comments
interpreted the proposed rescission
requirement to mean that the worker
and employer must be returned to their
original positions (i.e., on the day they
entered into the non-compete) and
presumed to not have entered the
agreement, or that the rule would
mandate wholly new contracts to
replace any existing agreements that
contained non-competes. The
Commission does not intend the final
rule to have such effect and has omitted
the rescission requirement proposed in
the NPRM. The Commission also adopts
§ 910.3(b), which provides an exception
for causes of action that accrued before
the effective date, to clarify that the final
rule is purely prospective. The final rule
does not render any existing non-
competes unenforceable or invalid from
the date of their origin. Instead, under
the final rule, it is an unfair method of
competition to enforce certain non-
competes beginning on the effective
date. Action taken before the effective
date to enforce an existing non-compete
or representations made before the
effective date related to an existing non-
compete are not an unfair method of
competition under the final rule. The
final rule does not effectuate a taking.
The Takings Clause provides that
‘‘private property’’ shall not ‘‘be taken
for public use, without just
compensation.’’ 880 When, as here, ‘‘the
government, rather than appropriating
private property for itself or a third
party, imposes regulations that restrict
an owner’s ability to use his own
property,’’ courts consider whether the
regulation ‘‘goes too far’’ and constitutes
a ‘‘regulatory taking.’’ 881 Consistent
with the Supreme Court’s decision in
Penn Central Transportation Co. v. City
of New York (‘‘Penn Central’’), this is
necessarily an ‘‘ad hoc, factual
inquir[y]’’ and focuses on three factors:
‘‘the economic impact of the regulation
on the claimant’’; ‘‘the extent to which
the regulation has interfered with
distinct investment-backed
expectations’’; and ‘‘the character of the
governmental action.’’ 882 ‘‘[T]he Penn
Central inquiry turns in large part, albeit
not exclusively, upon the magnitude of
a regulation’s economic impact and the
degree to which it interferes with
legitimate property interests.’’ 883 As a
general matter, ‘‘the fact that legislation
disregards or destroys existing
contractual rights does not always
transform the regulation into an illegal
taking.’’ 884
Under the Penn Central test, the final
rule does not effect a taking as a matter
of law. First, the economic impact of the
regulation on employers with existing
non-competes with workers who are not
senior executives is insufficient to
constitute a taking.885 The Commission
has found that such agreements are
rarely the product of bargaining, and
that little to nothing is offered in
exchange for them. And research has
confirmed that for many such
agreements, employers do not value the
ability to enforce the agreements.886 The
final rule also includes provisions that
allow employers and workers to
‘‘moderate and mitigate the economic
impact’’ of the final rule.887 The
Commission has made clear that
employers may continue to use
reasonable NDAs and trade secrets law
to protect their interests, including
customer goodwill.888 In fact, one study
finds that 97.5% of workers with non-
competes are also subject to a non-
solicitation agreement, NDA, or a non-
recruitment agreement, and 74.7% of
workers with non-competes are subject
to all three provisions. 889 And in cases
where non-competes with workers other
than senior executives were tied to
benefits like cash or equity, the
Commission has provided time for those
agreements to be renegotiated if
necessary. 890 For senior executives, the
Commission allows existing agreements
to continue to be enforced.
The character of the governmental
action here also counsels against
viewing the final rule as a taking. ‘‘A
‘taking’ may more readily be found
when the interference with property can
be characterized as a physical invasion
by government . . . than when
interference arises from some public
program adjusting the benefits and
burdens of economic life to promote the
common good.’’ 891 There is no physical
invasion here, and the final rule is
promulgated under the Commission’s
authority to identify and prohibit unfair
methods of competition.892 Among
other economic benefits described in
Part IV.B, the Commission finds
economy-wide benefits, including
increases in new business formation and
innovation. The Commission also finds
that the final rule will increase earnings
for workers by preventing enforcement
of agreements that suppress their
earnings. Moreover, non-competes have
long been subject to government
regulation, including not only section 5
of the FTC Act, but also State common
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893 See § 910.3(b).
894 See Part I.B.
895 Connolly v. Pension Ben. Guar. Corp., 475 U.S.
211, 226 (1986).
896 Commenters invoking a due process concern
outside the retroactivity context provided little
contextual detail on the precise substance of the
concern, nor did they explain what further process
would be due before the Commission could
promulgate the rule.
897 See, e.g., N. Am. Butterfly Ass’n v. Wolf, 977
F.3d 1244, 1265 (D.C. Cir. 2020) (citing Mathews v.
Eldridge, 424 U.S. 319, 333–34 (1976)).
898 The Commission adopts § 910.3(b)(3) out of an
abundance of caution and does not believe that any
of the requirements in the final rule run afoul of the
First Amendment because the Commission finds
that the use of certain existing non-competes is an
unlawful unfair method of competition.
899 See E.R.R. Presidents’ Conference v. Noerr
Motor Freight, Inc., 365 U.S. 127 (1961); United
Mine Workers of Am. v. Pennington, 381 U.S. 657
(1965).
900 Pro. Real Est. Invs., Inc. v. Columbia Pictures
Indus., Inc., 508 U.S. 49, 60 (1993).
901 Cent. Hudson Gas & Elec. v. Pub. Serv.
Comm’n of N.Y., 447 U.S. 557, 563 (1980).
902 Id. at 563–64.
law, State enactments, and other Federal
antitrust laws.
Finally, the final rule does not upset
investment-backed expectations to the
extent necessary to constitute a taking.
Even in States that prohibit some or all
non-competes, employers make many
investments in workers that they would
continue to make regardless of their
ability to use non-competes, such as
training, or that would be protected by
other mechanisms, such as reasonable
NDAs, trade secret law, and/or fixed
term contracts. In other words, non-
competes are not a prerequisite to
employers’ productivity and output, in
large part because (as described in Part
IV.D) employers have reasonable
alternatives to protecting the
investments they make. The
Commission has also lessened the
economic burden of the final rule by
creating an exception for situations
where a cause of action accrued before
the effective date.893 Furthermore,
States and the Federal government have
regulated and considered further
regulating non-competes for years, and
the Commission issued the NPRM more
than 18 months before the effective
date—and began exploring whether to
regulate non-compete agreements more
than five years ago.894 There has thus
been ample notice that non-competes
may become unenforceable by rule,895
and prior to this rule non-competes
were already subject to case-by-case
adjudication under section 5. For all
these reasons, the Commission does not
believe the final rule constitutes a
taking.
3. Due Process
Similarly, the Commission disagrees
with commenters who argued that
applying the final rule to existing non-
competes would present due process
concerns. Assuming that these due
process concerns are independent of
other constitutional concerns like the
alleged retroactive application of the
final rule,896 which are addressed in
Parts V.B.1 and V.B.2, the Commission
disagrees that there is any due process
infirmity. Due process requires the
government, at a minimum, to provide
notice and an opportunity to be heard
before depriving any person of
property. 897 By issuing the NPRM and
engaging in notice-and-comment
rulemaking, the Commission has
provided sufficient due process. And on
top of the notice-and-comment process,
there will be further process in an
administrative adjudication or in court
before any person is found to have
violated the rule.
C. Section 910.3(c): Good Faith
Exception
The Commission adds an exception in
§ 910.3(c) in an abundance of caution to
ensure the final rule does not infringe
on activity that is protected by the First
Amendment 898 and to improve clarity
in § 910.2(a). The exception states: ‘‘It is
not an unfair method of competition to
enforce or attempt to enforce a non-
compete clause or to make
representations about a non-compete
clause where a person has a good-faith
basis to believe that this part 910 is
inapplicable.’’ A similar ‘‘good-faith
basis’’ clause was in proposed
§ 910.2(a).
As described in Parts IV.B.4 and
IV.C.5, the final rule includes a
prohibition on enforcing or attempting
to enforce non-competes in both
§ 910.2(a)(1) and (2). Under the Noerr-
Pennington doctrine, filing a lawsuit—
even if the suit may tend to restrict
competition and is ultimately
unsuccessful—is typically protected
under the First Amendment right to
petition and immune from antitrust
scrutiny. 899 However, courts have
recognized that where a lawsuit is a
‘‘sham,’’ i.e., objectively baseless and
subjectively designed solely to prevent
competition, it is not protected.900 For
a non-compete covered by the final rule,
enforcing or attempting to enforce the
non-compete would likely be
considered a ‘‘sham’’ lawsuit.
Accordingly, such a lawsuit would not
enjoy protection under the First
Amendment. Section 910.3(b) ensures,
however, that if a circumstance arises
under which an employer’s enforcement
of or attempt to enforce a non-compete
is protected by the First Amendment,
the final rule does not run afoul of it.
As explained in Parts IV.B.4 and
IV.C.5, the Commission adopts a
prohibition on ‘‘representing’’ that a
worker is subject to a non-compete in
§§ 910.2(a)(1)(iii) and 910.2(a)(2)(iii). In
§ 910.3(c), the Commission incorporates
a ‘‘good-faith’’ exception that applies to
the prohibition on ‘‘representing’’ the
worker is subject to a non-compete.
Taken together, these provisions of the
final rule prohibit an employer from
representing to a worker that the worker
is subject to a non-compete unless the
employer has a good-faith basis to
believe the worker is subject to an
enforceable non-compete.
The Supreme Court has held ‘‘there
can be no constitutional objection to the
suppression of commercial messages
that do not accurately inform the public
about lawful activity.’’ 901 Accordingly,
‘‘[t]he government may ban forms of
communication more likely to deceive
the public than to inform it, . . . or
commercial speech related to illegal
activity.’’ 902 The final rule does not
cover protected speech because it
prohibits only misrepresentations about
whether a non-compete covered by the
rule is enforceable. The good-faith
exception in § 910.3(b) ensures,
however, that the final rule does not run
afoul of the First Amendment if a
circumstance arises under which an
employer’s representation that a worker
is subject to a non-compete is protected
by that Amendment.
In the NPRM, the Commission stated
that an employer would have no good
faith basis to believe that a worker is
subject to an enforceable non-compete
‘‘where the validity of the rule . . . has
been adjudicated and upheld.’’ Some
commenters stated that legal challenges
to the final rule will create uncertainty
and unpredictability related to
compliance. The Commission believes
the foregoing statement in the NPRM
would contribute to this confusion and
does not adopt it in this final rule. The
Commission clarifies that the absence of
a judicial ruling on the validity of the
final rule does not create a good-faith
basis for non-compliance. If the rule is
in effect, employers must comply.
D. Requests To Expand Final Rule
Coverage or To Provide an Exception
From Coverage Under the Final Rule
In the NPRM, the Commission
preliminarily concluded that applying
the rule uniformly to all employers and
workers would advance the proposed
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903 NPRM at 3518. The NPRM’s proposed
definition of ‘‘worker’’ excluded franchisees in the
context of franchisee-franchisor relationships. Id. at
3520. The NPRM also proposed an exception for
certain non-competes between the seller and the
buyer of a business.
904 NPRM at 3519.
905 The Commission received over 26,000 public
comments from a wide range of stakeholders.
Among these comments, over 25,000 expressed
support for the Commission’s proposal to
categorically ban non-competes.
906 See, e.g., Atl. Refin. Co. v. FTC, 381 U.S. 357,
371 (1965) (‘‘Upon considering the destructive
effect on commerce that would result from the
widespread use of these contracts by major oil
companies and suppliers, we conclude that the
Commission was clearly justified in refusing the
participants an opportunity to offset these evils by
a showing of economic benefit to themselves.’’); see
also Part II.F.
907 See Part IX.C.
908 See Part IV.B.3.a.ii.
909 See Part IV.C.2.c.i.
910 See Part IV.B.3.b.i.
rule’s objectives to a greater degree than
differentiating among workers on the
basis of industry or occupation,
earnings, another factor, or some
combination of factors, and that it
would better ensure workers are aware
of their rights under the rule.903 The
Commission sought comment on this
topic, including what specific
parameters or thresholds, if any, should
apply in a rule differentiating among
workers. 904
The vast majority of commenters
supported the Commission’s proposal to
ban non-competes categorically for all
workers. 905 Commenters from a broad
spectrum of job types and industries
stated that non-competes harm
competition in a way that hurts workers
and employers.
Commenters also supported the rule
with perspectives specific to particular
industries. In response to the
Commission’s request for comment on
the issue, some commenters argued that
the Commission should further expand
the rule to cover non-competes between
franchisors and franchisees.
Other commenters argued the
Commission should differentiate among
workers and employers along different
parameters. They stated that workers
with higher earnings, higher skills,
specific job titles, or access to specific
types of information should be
excluded. Some stated that particular
industries should be excluded
wholesale, including all workers in an
industry regardless of their job duties,
while some stated that only certain
workers in particular industries should
be excluded.
In adopting the final rule, the
Commission considered each request for
exclusion from or expansion of coverage
under the final rule and concludes that
the use of covered non-competes is an
unfair method of competition. The
Commission also concludes that
applying the final rule as adopted in
part 910 to the full extent of the
Commission’s jurisdiction with respect
to covered workers advances the final
rule’s objectives to a greater degree than
differentiating among workers. In
response to, inter alia, comments
regarding the potential costs and
difficulties that may result from
invalidating existing non-competes for
certain senior executives, however, the
final rule differentiates between senior
executives and other workers by
allowing existing non-competes for
senior executives to remain in force.
The final rule adopts a uniform rule
categorically banning new non-
competes for all workers. The
Commission substantiates its finding
that the use of non-competes with
workers is an unfair method of
competition in Parts IV.B and IV.C.
In this Part V.D, the Commission
addresses comments related to
differentiation or exclusion of certain
workers, employers, or industries.
Comments related to expanding or
limiting the definition of worker or
employer are addressed in Parts III.C
and III.G. Comments related to the
Commission’s jurisdiction and
exclusions from the Commission’s
jurisdiction in the FTC Act are
addressed in Part II.E. Comments related
to the prevalence of non-competes
within and across industries are
addressed in Part I.B.2.
Overall, the Commission is committed
to stopping unlawful conduct related to
the use of certain non-competes to the
full extent of its authority and
jurisdiction. The Commission finds
every use of a non-compete covered by
the final rule to be an unfair method of
competition under section 5 of the FTC
Act for the reasons in Parts IV.B and
IV.C. The use of an unfair method of
competition cannot be justified on the
basis that it provides a firm with
pecuniary benefits.906 To the extent
commenters argue for an exception
based on this justification, the
Commission declines to create any
exception on that basis. Moreover, a
uniform rule carries significant benefits,
which many commenters who otherwise
opposed the NPRM acknowledged. 907
Among those benefits is the certainty for
both workers and employers from a
uniform rule, which also lessens the
likelihood of litigation over uncertain
applications. Exceptions for certain
industries or types of workers would
likely increase uncertainty and litigation
costs, as parties would dispute whether
a specific business falls within an
industry-wide exception. Most
importantly, exceptions would fail to
remedy the tendency of non-competes
to negatively affect competitive
conditions in the excepted industries or
for excepted types of workers and
would likely have in terrorem effects.
1. Differentiation by Worker
Compensation or Skills
Many commenters sought an
exception for highly paid or highly
skilled workers, often alongside requests
for an exception for senior executives,
while many others asked the
Commission to keep these workers
within the scope of the final rule.
Commenters seeking an exception
argued that highly paid and highly
skilled workers in particular did not
experience exploitation and coercion
and were more likely to have access to
confidential information or client or
customer relationships, along with the
other justifications for non-competes
discussed in Part IV.D. Commenters’
specific arguments on the evidence
concerning highly paid or highly skilled
workers are considered in the relevant
subsections of Part IV.B. Many
commenters proposed using a
compensation threshold to differentiate
highly paid workers and senior
executives, discussed in IV.C.4.b. Other
commenters suggested an exception
based on the FLSA exemptions or the
worker’s level of access to confidential
information, discussed in Parts IV.C.4.
and V.D.2.
The Commission finds that non-
competes have a tendency to negatively
affect competitive conditions in labor
markets and product and service
markets, including non-competes
binding highly paid and highly skilled
workers. The evidence shows that,
among the other effects described in
Part IV.B, non-competes for highly paid
and highly skilled workers suppress
wages for these workers,908 restrict
competitors’ access to highly skilled
workers, 909 and restrict
entrepreneurship. 910 Notably, as
described in Parts IV.B.2 and IV.C.1, the
Commission concludes that non-
competes for highly paid or highly
skilled workers who are not senior
executives are generally exploitative
and coercive. The Commission finds
that highly paid and highly skilled
workers who are not senior executives
only rarely negotiate meaningful
consideration in exchange for a non-
compete. As the Commission finds, the
overwhelming response from
commenters, particularly workers, was
that non-competes are exploitative and
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911 See Part IV.B.2.b.
912 See Part IV.D.2.
913 For a more detailed discussion of proposed
§ 910.1(i), see Part IV.C.4.a.
914 Individual commenter, FTC–2023–0007–
10710.
coercive for many workers in highly
paid professions other than senior
executives. 911 While there may be
highly paid or highly skilled workers
who do not meet the definition of
‘‘senior executive’’ and who are not
exploited or coerced, including workers
above the definition’s total
compensation threshold, the
Commission explains in Part IV.C.4 why
a compensation threshold is necessary—
but not sufficient—for purposes of
defining senior executives whose
existing non-competes may remain in
force under the final rule. Further, the
Commission finds that employers have
sufficient alternatives to non-competes
for highly paid and highly skilled
workers.912 The Commission also
explains why it is not exempting all
non-competes that were exchanged for
consideration in Part IV.C.3.
Accordingly, the final rule does not
include any workers other than highly
paid senior executives in the exception
from the ban on enforcing existing non-
competes. To ensure that only workers
for whom there is insufficient evidence
of exploitation and coercion are
included in the exception, the final rule
narrowly defines senior executive in
§ 910.1.913
2. Differentiation by Worker Access to
Information
Some commenters suggested
excluding workers with access to trade
secrets, confidential business
information, or other intellectual
capital. Commenters contended these
workers are uniquely situated because
of their access to valuable employer
information. Many commenters
responded to these arguments and
disagreed with them. Some commenters
stated that employers overstate the
proportion of workers who have access
to such information. Commenters also
stated that employers exaggerate the
amount or quality of information that
should be appropriately considered a
trade secret, confidential business
information, or other intellectual
capital, and therefore exaggerate the
purported cost to the firm of not being
able to use non-competes. Commenters
also stated that employers have
alternatives to non-competes that
generate less harm to competition, to
workers, to the economy, and to rival
firms, including NDAs and fixed-term
employment contracts.
The Commission declines to adopt an
exclusion based on workers’ access to
trade secrets, confidential business
information, or other intellectual capital
because it finds such an exclusion
would be unnecessary, unjustified,
unworkable, and prone to evasion. The
Commission finds the use of non-
competes to be an unfair method of
competition and addresses claimed
justifications related to trade secrets,
confidential business information, or
other intellectual capital in Part IV.D.
The Commission finds that protecting
trade secrets, confidential information,
and other intellectual capital is an
insufficient justification for non-
competes because employers have less
restrictive alternatives for protecting
such information. Moreover, if the
Commission were to exempt workers
with access to confidential information,
employers could argue that most or all
workers fall under the exception,
requiring workers to engage in complex
and fact-specific litigation over the
protected status of the underlying
information. As explained in Part IX.C,
such case-by-case adjudication of the
enforceability of non-competes has an in
terrorem effect that would significantly
undermine the Commission’s objective
to address non-competes’ tendency to
negatively affect competitive conditions
in a final rule.
3. Differentiation by Industry Other
Than Healthcare
Some businesses and organizations
argued that specific industries should be
exempt from the final rule. The
Commission carefully considered these
comments and declines to adopt any
industry-based exceptions. The
Commission notes that while some
commenters characterized purported
justifications for an exclusion from the
final rule as unique to a particular
industry, the purported justifications
were in fact the same as the those
addressed in Part IV.D, namely, the
need to protect investments in labor,
trade secrets, confidential business
information, or other intellectual
capital. The Commission addresses
those arguments in full in Part IV.D, but
in this Part V.C.3 further discusses
examples of comments seeking
industry-based exceptions.
a. Client- and Sales-Based Industries
Some commenters in client- or sales-
based industries, including real estate
and insurance, argued they are unique
and should be excluded from any rule.
A real estate commenter argued that job
switching by real estate employees is
similar to the sale of a business where
the goodwill and book of business
generated by the departing employee
must remain with the business. A
timeshare industry commenter claimed
the industry had unique features
justifying the use of non-competes with
highly paid workers, such as the cost of
marketing and cultivation of
relationships to bring in and maintain
customers as well as the need to protect
proprietary targets and strategies for
resort development, due in part to the
limited number of available resort
contracts. A commenter representing
insurance marketing organizations
(IMOs), which serve as facilitators
between insurance carriers, agents, and
consumers similarly argued for an
exclusion, citing client goodwill,
purported trade secrets in sales
methods, sales leads, unique
compensation structures, and company
analyses, and consumer harm from
potential agent misconduct if the agent
moves to a new IMO and changes the
consumer’s policy. Some businesses
stated that non-competes rarely impact
a worker’s ability to find other work in
their industry, sometimes because the
new employer ‘‘buys out’’ the non-
compete.
The majority of commenters from the
real estate and insurance industry
workers and small, independent
insurance agencies, supported a
comprehensive ban. These comments
painted a picture consistent with the
Commission’s findings in Part IV.B
regarding indicia of unfairness,
including facial unfairness, and the
tendency of non-competes to negatively
affect competitive conditions in the
labor and product and service markets.
A worker from the real estate industry
stated that non-competes are standard in
the industry for all workers, regardless
of their position in a company.
Commenters stated that they were asked
to sign after starting their job, with one
worker stating that they faced the option
of either signing the non-compete or
leaving and losing future commissions
for work they had done. Workers noted
that they were terminated without cause
and still required to comply with a non-
compete, and that they had no
bargaining power for promotion or wage
increases. The following examples are
illustrative of the comments the
Commission received:
• As an aspiring entrepreneur in the real
estate space, I am in a relatively small market
where one company dominates. I recently
ended my employment with them. They use
non-competes to restrict competition and
trap employees. The abolition of non-
competes is paramount as small towns/cities
grow. . . . 914
• I signed a non-compete after working at
a Real Estate Brokerage for several months. I
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915 Individual commenter, FTC–2023–0007–5502.
916 Individual commenter, FTC–2023–0007–6782.
917 Individual commenter, FTC–2023–0007–
10919.
918 Individual commenter, FTC–2023–0007–
19441.
919 See Nat’l Soc’y of Prof. Engrs. v. United States,
435 U.S. 679 (1978) (confirming that limiting
competition, even if based on the specific
advantages of doing so because of the particular
nature of an industry, is not a cognizable
justification).
was told I had to sign it or I would not be
paid on the transactions I had pending. The
non-compete was so overreaching—there was
no geographical scope, the penalty was more
than prohibitive. I was told that no one really
enforces them or attempts to. I signed it,
collected my outstanding pay and left the
company within 90 days. Fast forward 4
years, I have been defending myself in
litigation over this non-compete for over 3
years. Unable to afford qualified
representation.915
• I am a business owner and have had 40
independent contractors under my business
at my peak. They were all under non-
compete, and if I could go back, I would
eliminate the non-compete. It doesn’t help
the employee or contractor, and it doesn’t
help the business either. It spurs an
unhealthy work environment. Clogs up the
judicial system with frivolous cases where
they try and scare people from earning a
living. . . . I 100% support this ban, and it
should go into effect immediately.916
Commenters stated that non-competes
are standard in the insurance industry
and that the industry is facing
significant consolidation, fueled in part
by private equity firms. These
commenters argued that workers in the
insurance industry are prohibited from
seeking jobs with higher pay and better
benefits in their specialty. Commenters
stated that they were not able to
negotiate better conditions at their
current job and that employers can
change the employment terms at will, so
workers face reduced commissions and
pay while still being held to a non-
compete. Commenters stated that
insurance agents are highly trained and
specialized, and non-competes force
them to leave their specialty and start
over in a new specialty for less pay.
Commenters also argued that non-
competes thwart consumer choice
because insurance agents create
relationships with their customers, and
customers lose the ability to choose the
same agent if the agent is bound by a
non-compete. Commenters also noted
that standard employment agreements
in the insurance industry require
workers to pay their own costs to defend
against noncompete litigation even if
the worker is successful in the challenge
such that even if a worker does not
violate the terms of a noncompete, or
the noncompete is not enforceable,
workers who change jobs or start a new
agency are often faced with significant
legal bills. Commenters noted that
although independent licensing agents
are meant to be able to contract with
multiple insurance companies, they are
heavily restricted by non-competes,
creating regional monopolies. The
following examples are illustrative of
the comments the Commission received:
• As a captive ‘‘Independent Contractor’’
for a large insurance company, this rule
would be a lifeline should I decide to pursue
an independent agent opportunity. The
insurance company I represent, has gradually
cut commissions over the past few years . . .
that makes it extremely uncompetitive
compared to peers. There is absolutely no
reason why I should be held prisoner and not
be able to pursue far more favorable, and
beneficial opportunities, for both myself and
my family.917
• Ideally I would like to start my own
insurance agency but am currently prevented
from doing so due to a non-compete clause.
We are already somewhat limited in
employment opportunities here in rural West
Texas . . . . I’m finding it difficult to find a
path to provide for my family during the two
year period [of the non-compete], and
therefore am considering scrapping the new
business idea and remaining at my current
job. . . . In a sense, I feel trapped at my
current job, and ultimately I feel hobbled
from achieving my full potential as a future
small business owner.918
The Commission declines to adopt an
exclusion for client- or sales-based
industries such as real estate and
insurance. The use of non-competes is
an unfair method of competition and the
purported justifications raised by
commenters do not change the
Commission’s finding. The Commission
also notes that, to the extent
commenters seeking an exception are
referencing different restrictive
covenants, including some garden
variety non-solicitation agreements,
which do not prohibit or function to
prevent a worker from switching jobs or
starting a new business as described in
Part III.D, the final rule does not apply
to them. Thus, the Commission focuses
on commenters’ purported need for an
exclusion based on non-competes alone.
In response to commenters arguing
that information and techniques related
to sales, including strategy on
developing business, is confidential or
proprietary and that workers’ ability to
move to another job or start a business
would thus harm them, the Commission
notes that any specific information or
truly proprietary techniques can be
protected by much less restrictive
alternatives, such as trade secret law
and NDAs. For example, proprietary
targets and strategies for timeshares or
unique compensation structures or
company analyses cited by IMOs can be
otherwise protected. Moreover,
companies can compete on the merits to
retain their customers by offering better
products and services. Requiring
workers to leave the industry or the
workforce is an overbroad restriction
that tends to negatively affect—and
actually harms—competition with
attendant harm to workers and rivals, as
outlined in Part IV.B.
With respect to commenter arguments
that non-competes are needed to protect
specialization related to particular
products and skills related to sales, as
the Commission finds in Part IV.D,
preventing workers from using their
general trade knowledge and skills,
including their gains in the same
through experience with a particular
employer, is not a legally cognizable
justification for non-competes. That a
real estate, insurance, or any other sales
agent inherently learns skills and gains
knowledge in the performance of their
job, becoming a more effective
salesperson over time, is not itself a
cognizable justification for preventing
the worker from re-entering the labor
market as a worker or business owner.
Employers’ efforts to use non-competes
to prevent workers from using general
trade knowledge and skills is an unfair
method of competition under section 5
because it is an attempt to avoid
competition on the merits.919 To the
extent employers seek to protect
legitimate investments in training, the
Commission finds employers have less
restrictive alternatives, including fixed
duration contracts and better pay or
other terms and conditions of
employment to retain the worker.
Finally, the Commission notes that
because all covered employers can no
longer maintain or enforce non-
competes with workers who are not
senior executives, employers may also
have a larger pool of trained and
experienced workers to hire from.
The Commission disagrees with
commenters arguing that a worker
leaving a sales position is akin to the
sale of a business. Unlike the seller of
a business, a worker is in an unequal
bargaining position and does not receive
compensation when leaving the firm.
The fact that a worker generates
goodwill for an employer is not a
cognizable justification for non-
competes. First, it not clear that the
employer would lose goodwill
associated with their business if a
particular worker leaves. Moreover,
commenters do not specify the extent to
which their legitimate investment in the
worker—separate from employing the
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38445	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
920 Umit G. Gurun, Noah Stoffman, & Scott E.
Yonker, Unlocking Clients: The Importance of
Relationships in the Financial Advisory Industry,
141 J. of Fin. Econ. 1218–43 (2021).
921 Christopher P. Clifford & William C. Gerken,
Property Rights to Client Relationships and
Financial Advisor Incentives, 76 J. of Fin. 2409–45
(2021).
922 Gjergji Cici, Mario Hendriock, & Alexander
Kempf, The Impact of Labor Mobility Restrictions
on Managerial Actions: Evidence from the Mutual
Fund Industry, 122 J. of Banking & Fin. 105994
(2021).
923 Individual commenter, FTC–2023–0007–0953.
924 See Part IV.C.2.c.i.
worker to use their general skills and
knowledge to successfully perform the
job—generates such goodwill. To the
extent employers do seek to protect
investments in goodwill, the employer
has less restrictive alternatives to attract
and retain workers and customers or
clients.
b. Industries With Apprenticeships or
Other Required Training
Some commenters representing
industries with apprenticeships or that
require training as a part of
employment, such as real estate
appraisers, plumbers, and veterinarians,
argued their industry should be
excluded from the final rule. These
commenters contended that a significant
investment is needed to make workers
productive in their industries and that
they need to use non-competes to
protect that investment. Each
commenter cited an apprenticeship or
training period during which they are
not able to bill or must bill a lower
amount for a worker’s labor.
Worker commenters from these
industries stated that non-competes
leave them unable to launch or progress
in their career because non-competes tie
them to their first employer. Some
appraiser commenters noted that, while
their share of the appraisal fee rises to
some extent after completing their
apprenticeship, they cannot negotiate
higher shares of the fee or other better
working conditions because of non-
competes. A union commenter
representing plumbers noted that
plumbers with non-competes are not
able to accept better offers of
employment, with better pay and
benefits, including union positions.
Other worker commenters mentioned
geographic overbreadth and excessively
long non-competes of two years. Many
veterinarian commenters supported the
proposed rule, stating that non-
competes artificially held down their
compensation and did not allow them to
start new practices in areas where the
need for more veterinary services is
great, with some commenters stating
that this contributed to consolidation.
The Commission declines to exclude
industries, such as real estate appraisal,
plumbing, and veterinary medicine, in
which an industry must purportedly
invest in significant training or
apprenticeship of workers before the
employer considers them to be
productive. The Commission finds that
these employers have less restrictive
alternatives—namely fixed duration
contracts—to protect their investment in
worker training. A return on investment
in the training does not require that the
worker be unable to work for a period
after leaving employment. Moreover,
employers stand to benefit from the
final rule through having access to a
broader labor supply—including
incoming experienced workers—with
fewer frictions in matching with the best
worker for the job.
c. Financial Services
Some commenters representing
financial services companies opposed
the rule, arguing non-competes are
necessary for the industry and their
industry is unique because non-
competes have been used for decades,
while numerous firms have entered the
market, workers are mobile, and there is
no evidence of blocked or curbed entry,
lack of access to talent, lower
innovation, or other negative impacts in
that market. These commenters mention
that mobility and access to talent is
possible because new employers often
‘‘buy out’’ a worker’s non-compete to
hire a worker who may be otherwise
bound by a non-compete. Several
commenters also contend that non-
competes are especially vital to firms
that focus on securities or commodities
trading because disclosure of
commercially sensitive information to
competitors can be extremely damaging
to their former employers’ profitability.
Commenters identified three studies
which they contend suggest that non-
competes improve worker productivity.
First, commenters identified two studies
on the Broker Protocol, an agreement
among financial advisory firms which
ostensibly limited the use of NDAs, non-
solicitation agreements, and non-
competes simultaneously. One study by
Gurun, Stoffman, and Yonker finds that
firms that joined the Protocol
experienced higher rates of employee
misconduct and earned increased
fees.920 The other study, by Clifford and
Gerken, finds that firms which joined
the Protocol invested more heavily in
licensure and experienced fewer
customer complaints.921 Commenters
noted that these two studies have
conflicting findings on advisor
misconduct. The authors themselves
discuss these findings, with each
criticizing the approach of the other.
One commenter stated that, from a
technical standpoint, the Clifford and
Gerken study has a superior approach
due to its substantially larger sample
size and its analysis of the assumptions
underlying the methodologies used in
both studies. A third study—a study of
the mutual fund industry by Cici,
Hendriock, and Kempf—finds that
mutual fund managers increase their
firms’ revenue when non-competes are
more enforceable by investing in higher
performing funds, attracting new
clients, and increasing revenue from
fees. 922 This study uses three changes in
non-compete enforceability, measured
in a binary fashion.
A commenter representing a large
group of public equity investors
supported the rule, stating that a
comprehensive ban would create an
inclusive labor market, which is integral
to long-term corporate value and a
dynamic, innovative, and equitable
economy. Financial services worker
commenters also supported the rule,
citing to their failure to be paid for their
skills over time, the threat of litigation
in seeking new employment, and the
overbroad nature of non-competes in the
industry. The following example is
illustrative of the comments the
Commission received:
• I am a female finance professional with
strong qualifications and experience. I am
subject to an extremely long and
comprehensive non compete contract which
I was induced to sign at a young age. I have
been offered many positions at other firms
who would be more willing to provide me
with leadership opportunities and a path to
further advancement, but I am unable to
consider them and I am essentially trapped
at my firm. . . .923
The Commission declines to exclude
financial services companies over which
it has jurisdiction from the final rule.
The Commission finds in Part IV.C that
non-competes are restrictive,
exclusionary, and also exploitative and
coercive for higher wage and highly
skilled workers, including workers in
finance. The Commission also finds in
Part IV.B and IV.C that non-competes
tend to negatively affect competitive
conditions in labor market through
reduced labor mobility and in the
product and services market through
reduced innovation and new business
formation. Evidence that new employers
sometimes buy out non-competes also
suggests that such clauses harm
competition by raising the cost to
compete and creating deadweight
economic loss for the new employer.924
The empirical evidence provided by
commenters arguing for differentiation
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925 Id.
926 Individual commenter, FTC–2023–0007–
12779.
927 Austan Goolsbee & Chad Syverson, The
Strange and Awful Path of Productivity in the U.S.
Construction Sector (NBER Working Paper 30845,
Jan. 2023).
928 Allison L. Huang, Robert E. Chapman, & David
Burty, Metrics and Tools for Measuring
Construction Productivity: Technical and Empirical
Considerations, Nat’l Inst. of Standards and Tech.,
Bldg. and Fire Rsch. Lab., NIST Special
Publication 110 (September 2009).
929 McKinsey & Co., The Next Normal in
Construction: How Disruption is Reshaping the
World’s Largest Ecosystem (June 2020).
for the finance industry does not
support their claims. The Commission
finds that it is difficult to weigh the
evidence in the two studies of the
Broker Protocol because they reach
conflicting results, though the
Commission agrees that the technical
approach in the Clifford and Gerken
study is superior due to its larger
sample size. More importantly, both
studies primarily concerned non-
solicitation agreements, and do not
isolate any effects of non-competes. So
even if the studies did not reach
conflicting results, the Commission
believes they still would yield little
reliable information about the effects of
non-competes specifically. With respect
to the study of the mutual fund
industry, the Commission notes that
under section 5, firms may not justify
unfair methods of competition based on
pecuniary benefit to themselves.925 The
study does not establish that there were
societal benefits from the attraction of
new clients or the increased fee
revenue—just that the firms benefited.
Therefore, this study does not establish
a business justification that the
Commission considers cognizable under
section 5.
d. On-Air Talent
Some commenters opposing the rule
stated that investment in on-air talent
would be considerably reduced without
non-competes. Commenters argued that
on-air talent becomes well-known
because of employers’ investment and
reputation and that employers must be
able to use non-competes to protect this
investment. The Commission also
received a number of comments from
and on behalf of on-air talent. Those
commenters stated that non-competes
are ubiquitous for on-air talent, that they
are often localized geographically, that
they suppress compensation, and that
they force workers seeking a better
match to move out of their localities.
The following example is illustrative of
the comments the Commission received:
• I am a professional broadcast journalist
subject to a non-compete agreement with
every employment contract I have ever
signed, which is the industry standard. I
understand the need for contractual
agreements with on-air talent and some off-
air talent, but non-compete agreements have
historically offered nothing to employees
besides restricting where they work, and how
much money they are able to earn . . .
[while] knowing that employees would have
to completely relocate if they wanted to seek
or accept another opportunity.926
The Commission declines to exclude
on-air talent from the final rule. The
Commission finds the use of non-
compete agreements is an unfair method
of competition as outlined in Part IV.B,
and commenters do not provide
evidence that a purported reduction in
investment in on-air talent would be so
great as to overcome that finding.
Specifically, the success of on-air talent
is a combination of the employer’s
investment and the talent of the worker,
both of which benefit the employer. As
noted in Part IV.D, other less restrictive
alternatives, including fixed duration
contracts and competing on the merits
to retain the talent, allow employers to
make a return on their own investments.
Moreover, as stated in Part II.F, firms
may not justify unfair methods of
competition based on pecuniary benefit
to themselves. Employers in this context
do not establish that there are societal
benefits from their investment in on-air
talent, but only that the firms benefited.
e. Construction
A commenter representing companies
who provide skilled workers in
construction stated that the Commission
should exclude the industry from the
rule because non-competes are
necessary to the industry’s success. The
commenter states that non-competes are
necessary for investment in innovation
and productivity in the industry. The
comment cites to three studies. Two of
the studies find a general reduction in
productivity in construction and
conclude, inter alia, further study is
warranted to better understand the
trend—Goolsbee and Syverson 927 and
Huang, Chapman, and Burty (‘‘NIST
study’’ 928). The third study is a
McKinsey & Company report published
in 2020 predicting innovation in the
construction industry in the coming
years.929
The evidence cited by this commenter
is exclusively about broad trends in
productivity in the industry, and what
may impact those trends. None of the
studies explicitly examines non-
competes, and they do not support
inferences on the effects of non-
competes in this particular industry.
Indeed, the Commission finds that the
final rule addresses issues raised by the
commenter. For example, the
commenter notes that productivity in
the industry has been broadly declining
for years. Notably, this downward trend
exists with non-competes in use in the
industry. The Commission notes that,
under its analysis of the effect of the
final rule, productivity will benefit
because the final rule frees up labor and
allows for greater innovation. The NIST
study raises ‘‘skilled labor availability’’
as the very first factor that affects
productivity. The Commission finds in
Part IV that non-competes suppress
labor mobility and the Commission
believes the final rule will result in
firms having access to workers who are
a better, more productive fit. The
McKinsey & Company report notes that
changes in the industry will require
adaptation by firms. The Commission
believes the final rule will facilitate this
adaptation by sharing non-confidential
know-how across firms through
increased mobility of workers. The rule
may also help mitigate, and certainly
will not exacerbate, concerns over
increased concentration in the industry
raised in the McKinsey & Company
report, as the Commission finds that
non-competes inhibit new business
formation in Part IV.B.3.b.i. Moreover,
the Commission believes non-competes
may increase concentration, as
discussed in Part IV.B.3.b.iii.
Additionally, the Commission finds
that less restrictive alternatives,
including appropriately tailored NDAs
and non-solicitation agreements, are
sufficient to address disclosure of
confidential information and concerns
related to client business. With respect
to concerns that the construction
industry as a whole is suffering from
under-investment in capital and that the
final rule may further disincentivize
capital investment, as the Commission
finds in Part IV.B.3.b.i, non-competes
inhibit new business formation. The
increase in new business formation from
the final rule will bring new capital to
bear in the industry. The Commission
addresses the empirical literature and
comments related to capital investment
in detail Part IV.D.1. The Commission
notes here that it is not clear any
purported capital investment associated
with non-competes is entirely beneficial
because it may be the result of firms
over-investing in capital because they
do not face competition on the merits.
Even if there is some net decrease in
capital investment due to the final rule,
commenters provide no reason to
believe it would be a material amount.
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930 NPRM at 3510.
931 Id. (citing 15 U.S.C. 45(a)(2)).
932 Id. (citing 15 U.S.C. 44).
933 See Fed. Power Comm’n v. Tuscarora Indian
Nation, 362 U.S. 99, 116–17 (1960) (examining case
law supporting the conclusion that ‘‘a general
statute in terms applying to all persons includes
Indians and their property interests’’); FTC v. AMG
Servs., Inc., No. 2:12–CV–00536–GMN, 2013 WL
7870795, at *16–*21 (D. Nev. July 16, 2013), report
and recommendation adopted, No. 2:12–CV–
00536–GMN, 2014 WL 910302 (D. Nev. Mar. 7,
2014) (discussing the FTC Act’s applicability to
Indian Tribes and tribal businesses).
934 See, e.g., AMG Servs., 2013 WL 7870795, at
*22 (finding genuine dispute of material fact barring
summary judgment on question of whether tribal
chartered corporations were corporations under the
FTC Act).
935 The commenter also asked the Commission to
engage Indian tribes about the proposed rule, citing
Executive Order 13175. However, the Commission
notes that Executive Order 13175, which requires
consultation with Indian Tribes before
promulgating certain rules, does not apply to
independent regulatory agencies such as the
Commission. E.O. No. 13175, 65 FR 67249 (Nov. 6,
2000) (stating that the term ‘‘agency,’’ which
governs the applicability of the executive order,
excludes agencies ‘‘considered to be independent
regulatory agencies, as defined in 44 U.S.C.
3502(5)’’); 44 U.S.C. 3502(5) (listing the
Commission as an ‘‘independent regulatory
agency’’). The Commission did, however, provide
extensive opportunities for public input from any
and all stakeholders, including a 120-day comment
period (extended from 90 days) and a public forum
held on February 16, 2023, that provided an
opportunity to directly share experiences with non-
competes.
4. Exclusion for Covered Market
Participants That Have Competitors
Outside the FTC’s Jurisdiction
The Commission explained in the
NPRM that some entities that would
otherwise be employers may not be
subject to the final rule to the extent
they are exempted from coverage under
the FTC Act.930 As described in Part
II.E.1, the Act exempts, inter alia,
‘‘banks,’’ ‘‘persons, partnerships, or
corporations insofar as they are subject
to the Packers and Stockyards Act of
1921’’ 931 as well as an entity that is not
‘‘organized to carry on business for its
own profit or that of its members.’’ 932
A few business and trade organization
commenters argued the Commission
should rescind the proposal or should
not promulgate the rule because limits
on the Commission’s jurisdiction mean
that the rule will distort competitive
conditions where coverage by the final
rule may not be universal. These
commenters identified industries where
employers excluded from the
Commission’s jurisdiction compete with
covered persons, including livestock
and meatpacking industries, and areas
where government or private employers
subject to the State action doctrine
compete with covered employers. They
contended that excluded employers will
be able to use non-competes while their
covered competitors are legally
prohibited from doing so, advantaging
excluded employers.
The Commission declines to rescind
the proposal or otherwise refrain from
promulgating a rule simply because the
rule would not cover firms outside the
Commission’s jurisdiction. As an initial
matter, jurisdictional limits are not
unique to the Commission. All agencies
have limits on their jurisdiction—many
of which do not neatly map to all
competitors in a particular market.
Moreover, as explained in Parts IV and
X, the final rule will have substantial
benefits notwithstanding the FTC Act’s
jurisdictional limits, including increases
in worker earnings, new firm formation,
competition, innovation, and a decrease
in health care prices (and potentially
other prices). Furthermore, the
Commission finds the risk of material
disparate impact in markets where some
but not all employers are covered by the
final rule is minimal and, in any event,
the final rule’s overall benefits justify
any such potential impact. As
commenters acknowledged, excluded
employers already compete with
covered employers in the same markets.
That is, coverage under the FTC Act—
whether an employer is subject to the
FTC Act and enforcement by the FTC—
differs across a range of topics and long
predates this final rule, which does not
materially alter the status quo in that
respect. Moreover, even in the absence
of the rule, firms within the jurisdiction
of the FTC Act are already subject to
potential FTC enforcement against
unfair methods of competition,
including against non-competes, while
firms outside the FTC’s jurisdiction are
not. The final rule does not alter that
basic landscape.
At least one financial services
industry commenter stated that national
banks are outside of the Commission’s
jurisdiction and argued the final rule
should exclude bank holding
companies, subsidiaries, and other
affiliates of Federally regulated banks to
avoid disparate treatment of workers
employed by different affiliates within
the same organization, and because
those entities are already heavily
regulated. The Commission declines to
exclude bank holding companies,
subsidiaries, and other affiliates of
Federally regulated banks that fall
within the Commission’s jurisdiction.
While these institutions may be highly
regulated, and depending on the
corporate structure non-competes may
be allowed for some workers but not
others, the Commission finds that
neither factor justifies excluding them
from the final rule. If Federally
regulated banks are concerned about
disparate treatment of workers
employed by their own different
affiliates, they have the option to stop
using non-competes across all their
affiliates.
A corporation wholly owned by an
Indian tribe asserted that the
Commission should exclude Indian
tribes and their wholly owned business
entities from the definition of
‘‘employer.’’ The commenter asserted
that the FTC Act does not explicitly
grant jurisdiction over Indian tribes and
their corporate arms. The commenter
further argued that critical tribal
revenue will be lost if tribal businesses’
ability to retain skilled workers is
impacted. The Commission declines to
categorically exclude tribes or tribal
businesses from coverage under the
final rule. The FTC Act is a law of
general applicability that applies to
Indians, Indian Tribes, and tribal
businesses.933 The Commission
recognizes, however, that in some
instances these entities may be
organized in such a way that they are
outside the Commission’s
jurisdiction.934 Whether a given Tribe or
tribal business is a corporation within
the FTC Act will be a fact-dependent
inquiry. The Commission is aware of no
evidence suggesting the final rule would
disproportionately impact tribes or
tribal businesses.935
5. Coverage of Healthcare Industry
Many commenters representing
healthcare organizations and industry
trade associations stated the
Commission should exclude some or all
of the healthcare industry from the rule
because they believe it is uniquely
situated in various ways. The
Commission declines to adopt an
exception specifically for the healthcare
industry. The Commission is not
persuaded that the healthcare industry
is uniquely situated in a way that
justifies an exemption from the final
rule. The Commission finds use of non-
competes to be an unfair method of
competition that tends to negatively
affect labor and product and services
markets, including in this vital industry;
the Commission also specifically finds
that non-competes increase healthcare
costs. Moreover, the Commission is
unconvinced that prohibiting the use of
non-competes in the healthcare industry
will have the claimed negative effects.
a. Comments Received
Many business and trade industry
commenters from the healthcare
industry seeking an exception,
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936 Some commenters also contended that the
health care industry should be exempt from the rule
because many health care providers fall outside of
the Commission’s jurisdiction. The Commission
summarizes and responds to those commenters in
Part II.E.2.
including, for example, hospitals,
physician practices, and surgery centers,
focused on whether the Commission has
jurisdiction to regulate nonprofit
entities registered under section 501(c)
of the Internal Revenue Code. The
Commission addresses its jurisdiction in
Part II.E and considers comments
related to requests for an industry-based
exclusion for all or part of the
healthcare industry in this section. As
stated in Part II.E, entities claiming tax
exempt status are not categorically
beyond the Commission’s jurisdiction,
but the Commission recognizes that not
all entities in the healthcare industry
fall under its jurisdiction.
Based on the assumption that entities
claiming tax-exempt status as nonprofits
and publicly owned healthcare
organizations would be exempt, many
industry commenters contended that
for-profit healthcare organizations must
be also exempted from the rule as a
matter of equal treatment. Commenters
cited data from the American Hospital
Association (AHA) indicating that as
many as 58% of all U.S. hospital
systems claim tax-exempt status as
nonprofits, 24% are for-profit hospitals,
and 19% are State and local government
hospitals. One commenter cited AHA
data indicating that 78.8% of for-profit
hospitals are located in the same
Hospital Referral Region (HRR) as at
least one entity that claims tax-exempt
status as a nonprofit. Many commenters
argued that for-profit entities and
entities that claim nonprofit status
compete for patients, physician and
non-physician staff, and market share.
These commenters contended that a rule
covering only for-profit healthcare
entities will distort the market in favor
of entities claiming tax-exempt status as
nonprofits, which would continue using
non-competes. One commenter
identifying as an entity claiming
nonprofit tax-exempt status argued that
such entities need to rely on non-
competes to compete with for-profit
competitors because, unlike for-profit
health systems, they invest significantly
in specialized training and mentorship,
and offer a guaranteed minimum salary
to recent graduates.
Some commenters contended that
favoring entities claiming tax-exempt
status as nonprofits would have
negative effects. Some commenters
argued that disparate coverage under the
rule may exacerbate consolidation in the
healthcare industry by advantaging
entities that claim tax-exempt status as
nonprofits. They stated that increased
consolidation would reduce the
available supply of skilled labor for for-
profit hospitals, increasing labor costs
and contributing to higher prices paid
by patients. Commenters noted a trend
in physicians increasingly leaving
private practice to work at large hospital
groups claiming tax-exempt status as
nonprofits, which, they contended, may
continue to lock those physicians up
using non-competes. Industry
commenters also argued that insurance
premiums will rise more than they
would absent the rule because of the
greater market power and resulting
leverage of entities that claim tax-
exempt status as nonprofits in provider
network negotiations. One
manufacturing industry association
commenter argued that the burden of
rising premiums will be passed on to
manufacturers who provide health
insurance to their employees.
Commenters also argued that a rule
covering for-profit healthcare providers
would cause independent, physician-
owned practices, and small community
practices to suffer a competitive
disadvantage compared to larger entities
that claim tax-exempt status as
nonprofits and public hospital groups,
reducing the number of these practices
and interrupting continuity of care for
their patients. Commenters stated that
such practices will suffer these
consequences acutely in States or
localities that are particularly saturated
with entities that claim tax-exempt
status as nonprofits or exempt State or
local hospitals, and cited New York and
Mississippi as examples. A commenter
claimed that public hospitals regulated
by the Commission will incur losses
because of their reduced ability to hire
and retain physicians that perform
profitable procedures. One commenter
cited a 1996 Commission study to
contend that, all else equal, hospitals
that claim tax-exempt status as
nonprofits set higher prices when they
have more market power. A business
commenter contended that, given what
they considered a large-scale exemption
of certain physician employers from the
Commission’s jurisdiction, the States
are more appropriate regulators of non-
competes between physicians and
employers. Other commenters claimed
that the Commission must further study
the consequences of differential
treatment.
Conversely, many commenters
vociferously opposed exempting entities
that claim tax-exempt status as
nonprofits from coverage under the final
rule. Several commenters contended
that, in practice, many entities that
claim tax-exempt status as nonprofits
are in fact ‘‘organized to carry on
business for [their] own profit or that of
[their] members’’ such that they are
‘‘corporations’’ under the FTC Act.
These commenters cited reports by
investigative journalists to contend that
some hospitals claiming tax-exempt
status as nonprofits have excess revenue
and operate like for-profit entities. A
few commenters stated that
consolidation in the healthcare industry
is largely driven by entities that claim
tax-exempt status as nonprofits as
opposed to their for-profit competitors,
which are sometimes forced to
consolidate to compete with the larger
hospital groups that claim tax-exempt
status as nonprofits. Commenters also
contended that many hospitals claiming
tax-exempt status as nonprofits use self-
serving interpretations of the IRS’s
‘‘community benefit’’ standard to fulfill
requirements for tax exemption,
suggesting that the best way to address
unfairness and consolidation in the
healthcare industry is to strictly enforce
the IRS’s standards and to remove the
tax-exempt status of organizations that
do not comply. An academic commenter
argued that the distinction between for-
profit hospitals and nonprofit hospitals
has become less clear over time, and
that the Commission should
presumptively treat hospitals claiming
nonprofit tax-exempt status as operating
for profit unless they can establish that
they fall outside of the Commission’s
jurisdiction.
The Commission also received many
comments about coverage of the health
care sector generally under the rule.
Some commenters urged the
Commission to ensure that health care
workers, including doctors and
physicians, were covered by the final
rule. Several commenters stated that
eliminating non-competes would allow
doctors wishing to change jobs to stay
in the same geographic area, fostering
patient choice and improving continuity
of care. Other commenters urged the
Commission to create an exception for
health care workers. Some argued that
the evidence does not support the
Commission’s conclusion that non-
competes depress earnings in health
care. Other reasons commenters cited in
support of an exception included
concerns about continuity and quality of
care for patients, the increased costs for
employers of health care workers,
physicians’ negotiating power with their
employers, and the effect on incentives
for employers to train their health care
workers.936
Thousands of healthcare workers
submitted comments supporting a ban
on non-competes. Worker commenters
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937 Individual commenter, FTC–2023–0007–
10085.
938 Individual commenter, FTC–2023–0007–0924.
939 See Atl. Refin. Co. v. FTC, 381 U.S. 357, 371
(1965) (‘‘Upon considering the destructive effect on
commerce that would result from the widespread
use of these contracts by major oil companies and
suppliers, we conclude that the Commission was
clearly justified in refusing the participants an
opportunity to offset these evils by a showing of
economic benefit to themselves.’’).
940 In the Matter of the Am. Med. Assoc., 94 F.T.C.
701, 1979 WL 199033 (FTC Oct. 12, 1979).
941 In the Matter of Ky. Household Goods Carriers
Ass’n, Inc., 139 F.T.C. 404, 405 (2005) (‘‘The
Supreme Court has made clear that the state action
doctrine only applies when (1) the challenged
restraint is clearly articulated and affirmatively
expressed as state policy, and (2) the policy is
actively supervised by the State itself.’’) (citation
and alterations omitted); see also id. at 410–13
(applying test); Elec. Inspectors, Inc. v. Vill. of East
Hills, 320 F.3d 110, 117–19 (2d Cir. 2003).
942 Colo. Rev. Stat. sec. 8–2–113(5)(a) (Colorado
statute banning non-competes for physicians); D.C.
Code sec. 32–581.01 (D.C. statute banning non-
competes for medical specialists earning less than
$250,000, compared to $150,000 for other workers);
Fla. Stat. sec. 542.336 (Florida statute banning non-
competes for physician specialists in certain
circumstances); Ind. Code Ann. secs. 25–22.5–5.5–
2 and 2.5(b) (Indiana statute banning non-competes
for primary care physicians and restricting non-
competes for other physicians); Iowa Code sec.
135Q.2(3)(a) (banning non-competes for health care
employment agency workers who provide nursing
services); Ky. Rev. Stat. sec. 216.724(1)(a) (Kentucky
statute banning non-competes for temporary direct
care staff of health care services agencies); N.M.
Stat. Ann. secs. 24–1I–1 and 2 (New Mexico statute
banning non-competes for several types of health
care practitioners); S.D. Codified Laws secs. 53–9–
11.1–11.2 (South Dakota statute banning non-
Continued
did not always identify whether they
were working at for-profit organizations,
entities that claim tax-exempt status as
nonprofits, or State or local healthcare
organizations, but each category was
represented in the comments. These
commenters detailed the negative effects
of non-competes on their families, their
mental health, their financial health,
and their career advancement, as
elaborated in Part IV.B.2.b.ii.
Specifically, healthcare workers
commented that because non-competes
prohibited them from switching jobs or
starting their own businesses, they had
to stay at jobs with unsafe and hostile
working conditions, to take jobs with
long commutes, to relocate their
families, to give up training
opportunities, and to abandon patients
who wanted to continue seeing them.
Illustrative comments are highlighted in
Parts I and IV.
Additionally, commenters stated the
hardship patients have suffered because
of non-competes when, for example,
their physician was required to move
out of their area to work for a different
employer. The Commission highlights
some of these comments in Part
IV.B.2.b.ii and includes two further
illustrative comments here:
• As a patient, non compete clauses are
affecting mine and my [family’s] ability to
receive medical care. Our pediatrician left a
practice and we aren’t able to be informed
where they are going. When we find out, it
is an hour away [because] of the non
compete. And when we look for other
[doctors] closer they aren’t accepting new
patients. So for an entire year we are driving
2 [hours] round trip to see our pediatrician
until they can move back to a local medical
group. The non compete clause is not just
affecting the life of the [doctor], but is also
impacting many of us who rely on their
services.937
• As a family physician this has caused
much grief and obstructs my desire to work
and provide care for underserved
populations. I am a NHSC scholarship
recipient and due to non compete clauses
was unable to continue working in the town
I served due to its rurality. This created a
maternity desert in the region I served. Now
in a more metropolitan area, there has been
an exodus of physicians in the area due to
non compete clauses that has caused
worsening access to primary care, specialty
services, including behavioral health and
substance use disorder treatment. 938
A number of physician group
commenters stated that nonprofit
healthcare organizations regularly
impose non-competes on physicians,
and that the impact of the rule would be
limited if nonprofits are not required to
comply. Some physician group
commenters urged the Commission to
work with other agencies to fill in gaps
in applying the rule based on the
Commission’s jurisdiction, citing the
importance of banning non-competes as
widely as possible because of the harms
they impose on physicians and patients
irrespective of employer status.
Specifically, commenters suggested that
the Commission use its antitrust and
referral authority to aggressively
monitor nonprofit organizations for
antitrust violations, to collaborate with
other Federal agencies, including the
IRS, and to provide incentives and
guidance to States, which can enact
measures to ensure that a prohibition on
non-competes is implemented
comprehensively. One commenter also
noted that a ban would bring scrutiny to
non-competes and would likely
intensify pressure to eliminate them. A
few commenters also contended that
entities claiming tax-exempt status as
nonprofits are subject to the
Commission’s jurisdiction as ‘‘persons’’
under the FTC Act.
b. The Final Rule
After carefully considering
commenters’ arguments, the
Commission declines to exempt for-
profit healthcare employers or to
exempt the healthcare industry
altogether.
First, as described in Part IV, the
Commission finds that certain uses of
non-competes are an unfair method of
competition. The use of unfair methods
of competition cannot be justified on the
basis that it provides a firm with
pecuniary benefits to help them
compete with other firms that use
similar tactics.939 In this case, for-profit
and other covered entities have urged
the Commission to allow them to
continue to employ an unfair method of
competition (i.e., use non-competes)
because some competitors are not
prohibited from doing so as they are
beyond the Commission’s jurisdiction.
The Commission is committed to
stopping unlawful conduct to the full
extent of its jurisdiction. For example,
the Commission would not refrain from
seeking to enjoin unlawful price fixing
by a for-profit within its jurisdiction
because entities outside its jurisdiction
under the FTC Act would not be subject
to the same FTC action.
Second, the Commission disagrees
with commenters’ contention that all
hospitals and healthcare entities
claiming tax-exempt status as nonprofits
necessarily fall outside the
Commission’s jurisdiction and, thus, the
final rule’s purview. As explained in
Part II.E.2, a corporation’s ‘‘tax-exempt
status is certainly one factor to be
considered,’’ but that status is not
coterminous with the FTC’s jurisdiction
and therefore ‘‘does not obviate the
relevance of further inquiry into a
[corporation’s] operations and
goals.’’ 940 Accordingly, as noted by
commenters, entities that claim tax-
exempt nonprofit status may in fact fall
under the Commission’s jurisdiction.
Similarly, whether the final rule would
apply to quasi-public entities or certain
private entities that partner with States
or localities, such as hospitals affiliated
with or run in collaboration with States
or localities, depends on whether the
particular entity or action is an act of
the State itself under the State action
doctrine, which is a well-established,
fact-specific inquiry. 941 Thus, some
portion of the 58% of hospitals that
claim tax-exempt status as nonprofits
and the 19% of hospitals that are
identified as State or local government
hospitals in the data cited by AHA
likely fall under the Commission’s
jurisdiction and the final rule’s purview.
Further, many States have banned non-
competes for a variety of healthcare
professionals in both for-profit and
nonprofits entities by statute.942 Even if
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38450 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
competes for several types of healthcare
practitioners); Tex. Bus. & Com. Code secs. 15.50–
.52 (Texas statute restricting the use of non-
competes for physicians).
943 See, e.g., Press Release, Office of U.S. Sen.
Chuck Grassley, Bipartisan Senators Probe Potential
Abuse Of Tax-Exempt Status By Nonprofit
Hospitals (Aug. 9, 2023), https://
www.grassley.senate.gov/news/news-releases/
bipartisan-senators-probe-potential-abuse-of-tax-
exempt-status-by-nonprofit-hospitals; Request for
Information Regarding Medical Payment Products,
88 FR 44281 (July 12, 2023); U.S. Gov’t
Accountability Off., Testimony Before the
Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives, Tax
Administration: IRS Oversight of Hospital’s Tax-
Exempt Status, GAO–23–106777 (Apr. 26, 2023),
https://www.gao.gov/assets/gao-23-106777.pdf;
Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of
Assessment Appeals, 289 A.3d 1142 (Pa. Commw.
Ct. 2023) (holding that for-profit hospitals
purchased by nonprofit claiming tax exempt status
under Federal law do not qualify under State law
for nonprofit tax exemption); Phoenixville Hosp.,
LLC v. Cnty. of Chester Bd. of Assessment Appeals,
293 A.3d 1248 (Pa. Commw. Ct. 2023); Brandywine
Hosp., LLC v. Cnty. of Chester Bd. of Assessment
Appeals, 291 A.3d 467 (Pa. Commw. Ct. 2023);
Jennersville Hosp., LLC v. Cnty of Chester Bd. of
Assessment Appeals, 293 A.3d 1248 (Pa. Commw.
Ct. 2023); The Daily, How Nonprofit Hospitals Put
Profits Over Patients (Jan. 5, 2023), https://
www.nytimes.com/2023/01/25/podcasts/the-daily/
nonprofit-hospitals-investigation.html; Gov’t
Accountability Off., Tax Administration:
Opportunities Exist to Improve Oversight of
Hospitals’ Tax-Exempt Status, GAO–20–679 (Sept.
17, 2020), https://www.gao.gov/products/gao-20-
679; Danielle Ofri, Why Are Nonprofit Hospitals So
Highly Profitable?, N.Y. Times, Feb. 20, 2020,
https://www.nytimes.com/2020/02/20/opinion/
nonprofit-hospitals.html; Maya Miller & Beena
Raghavendran, Thousands of Poor Patients Face
Lawsuits From Nonprofit Hospitals That Trap Them
in Debt, ProPublica (Sept. 13, 2019), https://
www.propublica.org/article/thousands-of-poor-
patients-face-lawsuits-from-nonprofit-hospitals-
that-trap-them-in-debt.
944 See, e.g., Michael G. Vita & Seth Sacher, The
Competitive Effects of Not-For-Profit Hospital
Mergers: A Case Study, 49 J. Indus. Econ. 63 (2001),
http://onlinelibrary.wiley.com/doi/10.1111/1467-
6451.00138/epdf (finding substantial price
increases resulting from a merger of nonprofit,
community-based hospitals, and determining that
mergers involving nonprofit hospitals are a
legitimate focus of antitrust concern); Steven Tenn,
The Price Effects of Hospital Mergers: A Case Study
of the Sutter-Summit Transaction, 18 Int’l J. Econ.
Bus. 65, 79 (2011), http://www.tandfonline.com/
doi/full/10.1080/13571516.2011.542956 (finding
evidence of post-merger price increases ranging
from 28%–44%, and concluding that ‘‘[o]ur results
demonstrate that nonprofit hospitals may still raise
price quite substantially after they merge. This
suggests that mergers involving nonprofit hospitals
should perhaps attract as much antitrust scrutiny as
other hospital mergers.’’).
945 See, e.g., FTC v. OSF Healthcare Sys., 852 F.
Supp. 2d 1069, 1081 (N.D. Ill. 2012) (‘‘[T]he
evidence in this case reflects that nonprofit
hospitals do seek to maximize the reimbursement
rates they receive.’’); FTC v. ProMedica, No. 3:11 CV
47, 2011 WL 1219281 at *22 (N.D. Ohio Mar. 29,
2011) (finding that a nonprofit hospital entity
‘‘exercises its bargaining leverage to obtain the most
favorable reimbursement rates possible from
commercial health plans.’’); United States v.
Rockford Mem’l Corp., 898 F.2d 1278, 1284–87 (7th
Cir. 1990) (rejecting the contention that nonprofit
hospitals would not seek to maximize profits by
exercising their market power); FTC v. Univ.
Health, Inc., 938 F.2d 1206, 1213–14 (11th Cir.
1991) (‘‘[T]he district court’s assumption that
University Health, as a nonprofit entity, would not
act anticompetitively was improper.’’); Hospital
Corp. of America v. FTC, 807 F.2d 1381, 1390–91
(7th Cir. 1986) (rejecting the contention that
nonprofit hospitals would not engage in
anticompetitive behavior). See also FTC & Dep’t of
Jusitce, Improving Health Care: A Dose of
Competition 29–33 (2004), https://www.ftc.gov/
sites/default/files/documents/reports/improving-
health-care-dose-competition-report-federal-trade-
commission-and-department-justice/
040723healthcarerpt.pdf (discussing the
significance of nonprofit status in hospital merger
cases, and concluding that the best available
empirical evidence indicates that nonprofit
hospitals exploit market power when given the
opportunity and that ‘‘the profit/nonprofit status of
the merging hospitals should not be considered a
factor in predicting whether a hospital merger is
likely to be anticompetitive’’).
the final rule’s coverage extends only to
hospitals that do not identify as tax-
exempt non-profits based on AHA data,
as explained in Part IV.A.1, the
Commission finds every use of covered
non-competes to be an unfair method of
competition and concludes that the
evidence supports the Commission’s
decision to promulgate this final rule,
which covers the healthcare industry to
the full extent of the Commission’s
authority.
Relatedly, in response to commenters’
concern that large numbers of
healthcare workers will not benefit from
the final rule because they work for
entities that the final rule does not
cover, the Commission notes many
workers at hospitals, including those
that claims tax-exempt status as a
nonprofit or government-owned
hospital, contract with or otherwise
work for a for-profit entity, such as a
staffing agency or physician group.
Although some of these individuals may
work at an excluded hospital, the final
rule applies to their employer—the
staffing agency or for-profit physician
group—because it is covered by the final
rule.
The Commission disagrees with
commenters stating the ability to use
non-competes will provide a material
competitive advantage to entities
claiming tax-exempt status as nonprofit
or publicly owned entities that are
beyond the Commission’s jurisdiction.
To the contrary, those entities outside
FTC jurisdiction that continue to deploy
non-competes may be at a self-inflicted
disadvantage in their ability to recruit
workers, even if they derive some short-
term benefit from trapping current
workers in their employment.
Furthermore, commenters’ concern that
for-profit healthcare entities will be at a
competitive disadvantage is based on
the false premise that entities outside
the jurisdiction of the FTC will not be
otherwise regulated or scrutinized with
respect to the use of non-competes.
States currently regulate non-competes
by statute, regulation, and common law.
According to the AHA data cited by
commenters, over 12% (398/3,113) of
nonprofit hospitals and 13% of
government hospitals (187/1,409) are in
States that ban non-competes for all
employers. In any event, even if true,
arguments that for-profit and other
covered entities could suffer
competitive harm by not being able to
employ an unfair method of competition
would not change the Commission’s
finding that use of certain non-competes
is an unfair method of competition, as
further discussed in Part IV.
While the Commission shares
commenters’ concerns about
consolidation in healthcare, it disagrees
with commenters’ contention that the
purported competitive disadvantage to
for-profit entities stemming from the
final rule would exacerbate this
problem. As some commenters stated,
the Commission notes that hospitals
claiming tax-exempt status as nonprofits
are under increasing public scrutiny.
Public and private studies and reports
reveal that some such hospitals are
operating to maximize profits, paying
multi-million-dollar salaries to
executives, deploying aggressive
collection tactics with low-income
patients, and spending less on
community benefits than they receive in
tax exemptions.943 Economic studies by
FTC staff demonstrate that these
hospitals can and do exercise market
power and raise prices similar to for-
profit hospitals. 944 Thus, as courts have
recognized, the tax-exempt status as
nonprofits of merging hospitals does not
mitigate the potential for harm to
competitive conditions.945
Commenters provide no empirical
evidence, and the Commission is
unaware of any such evidence, to
support the theory that prohibiting non-
competes would increase consolidation
or raise prices. To the contrary, as
elaborated in Parts IV.B.3.a and IV.B.3.b,
the empirical literature suggests, and the
Commission finds, that the final rule
will increase competition and efficiency
in healthcare markets, as workers at for-
profit healthcare entities will be able to
spin off new practices or work for
different employers where their
productivity is greater. This is true even
if the Commission does not reach some
portion of healthcare entities. While the
Commission’s prior research may
indicate, as one commenter suggested,
that nonprofit hospitals set higher prices
when they have more market power, the
Commission finds that the final rule is
not likely to increase healthcare prices
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946 15 U.S.C. 18; 15 U.S.C. 45; Univ. Health, Inc.,
938 F.2d at 1214–16.
947 Id.
948 See, e.g., In the Matter of RWJ Barnabas Health
and Saint Peters Healthcare Sys., Docket No. 9409
(Jun. 2, 2022) (complaint); FTC v. Advoc. Health
Care, No. 15 C 11473, 2017 WL 1022015, at *1 (N.D.
Ill. Mar. 16, 2017); FTC v. Penn State Hershey Med.
Ctr., 838 F.3d 327, 332 (3d Cir. 2016).
949 See, e.g., FTC, Competition in the Health Care
Marketplace, https://www.ftc.gov/tips-advice/
competition-guidance/industry-guidance/health-
care; FTC, Overview of FTC Actions in Health Care
Services and Products (2022), https://www.ftc.gov/
system/files/ftc_gov/pdf/2022.04.08
%20Overview%20Healthcare%20
%28final%29.pdf; Joseph Farrell et al., Economics
at the FTC: Retrospective Merger Analysis with a
Focus on Hospitals, 35 Rev. Indus. Org. 369 (2009),
http://link.springer.com/content/pdf/
10.1007%2Fs11151-009-9231-2.pdf; FTC,
Examining Health Care Competition (Mar. 20–21,
2014), https://www.ftc.gov/news-events/events-
calendar/2014/03/examining-health-care-
competition; FTC & Dep’t of Justice, Examining
Health Care Competition (Feb. 24–25, 2015),
https://www.ftc.gov/news-events/events-calendar/
2015/02/examining-health-care-competition;
Improving Health Care: A Dose of Competition,
supra note 945.
950 See, e.g., FTC, FTC Policy Perspectives on
Certificates of Public Advantage (Aug. 15, 2022),
www.ftc.gov/copa; FTC, Physician Group and
Healthcare Facility Merger Study (ongoing, initiated
Jan. 2020), https://www.ftc.gov/enforcement/
competition-matters/2021/04/physician-group-
healthcare-facility-merger-study; Christopher
Garmon, The Accuracy of Hospital Merger
Screening Methods, 48 RAND J. of Econ. 1068
(2017), https://www.ftc.gov/system/files/
documents/reports/accuracy-hospital-merger-
screening-methods/rwp_326.pdf; Joseph Farrell, et
al., Economics at the FTC: Hospital Mergers,
Authorized Generic Drugs, and Consumer Credit
Markets, 39 Rev. Indus. Org. 271 (2011), http://
link.springer.com/content/pdf/10.1007%2Fs11151-
011-9320-x.pdf; Devesh Raval, Ted Rosenbaum, &
Steve Tenn, A Semiparametric Discrete Choice
Model: An Application to Hospital Mergers, 55
Econ. Inquiry 1919 (2017).
951 NPRM at 3511, 3520.
952 Id. at 3511.
953 Id. at 3520.
954 Trade Regulation Rule on Franchising and
Business Opportunity Ventures, 43 FR 59614,
59625 (Dec. 21, 1978).
through this same mechanism because it
is unlikely to lead to significant
increases in healthcare nonprofits’
market share, if at all.
Moreover, the Commission has other
tools to address consolidation in
healthcare markets and is committed to
using them. The Clayton Act grants the
Commission authority to enforce
compliance with, inter alia, section 7 of
the Clayton Act. The Clayton Act does
not include any carveout for entities
that are nonprofit or otherwise do not
operate for profit—and the FTC’s
jurisdictional limit based on the
definition of ‘‘corporation’’ in the FTC
Act does not apply in this context.946
Accordingly, the Commission has
authority under the Clayton Act to
review and challenge mergers and
acquisitions involving healthcare
entities or hospitals regardless of
nonprofit status.947 Thus, even if the
jurisdictional limitations of the final
rule were to somehow incentivize some
hospitals and other healthcare entities
claiming non-profit status to
consolidate, the Commission will
continue to scrutinize those mergers and
work with State partners to vigorously
defend competition. 948 For the same
reason, the Commission disagrees with
commenters who contended that the
effects of consolidation and staffing
shortages will be worse in areas highly
saturated with nonprofits claiming tax-
exempt status.
Finally, the Commission disagrees
with commenters that stated the
Commission must further study the final
rule’s effect on healthcare workers and
entities. The Commission has specific,
long-time expertise in the healthcare
market as anticompetitive mergers and
conduct in healthcare markets have long
been a focus of FTC law enforcement,
research, and advocacy.949 This work
includes economic analyses of the
effects of mergers involving nonprofit
hospitals and studies of the impacts of
hospital mergers. 950 Accordingly, given
this expertise and the extensive record
in the rulemaking, the Commission
finds it has sufficient understanding of
healthcare markets and that the
evidence supports the final rule’s
application to the healthcare industry.
6. Coverage of Franchisors Vis-a`-Vis
Franchisees
a. The Proposed Rule
The Commission proposed to exclude
franchisees from the definition of
‘‘worker’’ and requested comment on
whether and to what extent the rule
should cover non-competes between
franchisors and franchisees
(‘‘franchisor/franchisee non-
competes’’). 951 The Commission
explained that it proposed to exclude
franchisees from the definition of
‘‘worker’’ because, in some cases, the
relationship between a franchisor and
franchisee may be more analogous to the
relationship between two businesses
than the relationship between an
employer and a worker.952 The
Commission also noted that the
evidentiary record relates primarily to
non-competes that arise out of
employment. However, the Commission
stated that, in some cases, franchisor/
franchisee non-competes may present
concerns under section 5 similar to the
concerns presented by non-competes
between employers and workers and
sought comment on coverage of
franchisor/franchisee non-competes.953
b. Comments Received
Many commenters requested that the
final rule cover franchisor/franchisee
non-competes. Numerous commenters
contended the franchisee-franchisor
relationship is closer to a relationship
between a worker and an employer than
a relationship between businesses.
These commenters argued that
franchisees are often individual
business owners who, like workers, lack
bargaining power to negotiate over non-
competes. One commenter stated that
the Commission acknowledged in the
Franchise Rule that franchisees
generally lack bargaining power.954
Several commenters, including industry
commenters representing franchisees,
argued that franchisees tend to suffer
even greater power imbalances than
workers because many risk significant
personal assets to start their franchises.
According to these commenters, this
risk places acute strain on franchisees’
bargaining leverage when negotiating to
renew franchise agreements because, if
they choose to reject a new agreement,
they not only lose the opportunity to
continue working in the same field due
to their non-compete, but also the value
of their investment.
Commenters seeking coverage of
franchisor/franchisee non-competes also
stated that these non-competes do not
protect legitimate interests because
franchisors generally do not entrust
franchisees with trade secrets or details
about their broader commercial strategy.
These commenters stated that, even if
franchisees do receive such information,
franchisors have less restrictive
alternatives for protecting it, including
NDAs and trade secret law. Some
commenters also stated that non-
competes have anticompetitive effects
because franchisors may degrade the
quality of inputs or raise input prices
without fearing that their existing
franchisees will leave for a competitor.
Many franchisee commenters also
stated their desire to compete after
exiting their franchise relationships.
Franchisees also stated that their non-
competes harm their negotiating
position in bargaining over franchise
renewal terms. These franchisees stated
that franchisors can impose higher
royalty rates or other less favorable
terms over time as the franchisees feel
powerless to refuse or make effective
counteroffers, due to their non-
competes. Many franchisees asserted
that their non-competes are overbroad
because they restrain individual owners’
spouses and other close relatives from
competing in the same industry. Some
franchisees stated that their non-
competes include penalties for choosing
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38452 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
955 State statutes, regulations, orders, or
interpretations, including State common law, are
referred to as ‘‘State laws’’ for ease of reference.
956 NPRM at 3515.
957 Comments on the Commission’s authority to
promulgate this final rule, separate from the issue
of preemption of State law, are summarized in Part
II.
958 Am. Optometric Ass’n v. FTC, 626 F.2d 896,
910 (1980).
959 See, e.g., Federal Preemption: A Legal Primer,
Cong. Rsch. Serv., 23 (May 18, 2023) (Report
R45825), https://crsreports.congress.gov/product/
pdf/R/R45825/3.
960 Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta,
458 U.S. 141, 153 (1982).
not to renew their contracts even if they
do not compete.
Other commenters, primarily
franchisors and trade organizations,
stated that franchisor/franchisee non-
competes should be excluded from the
final rule. Many of these commenters
argued that franchisor/franchisee non-
competes are more similar to restrictive
covenants between businesses than non-
competes between employers and
workers. Some of these commenters
argued that franchisor/franchisee non-
competes are more justified than non-
competes in the employment context
because, unlike employment
relationships, entering into a franchise
agreement is completely voluntary.
Some commenters argued that, unlike
non-competes in the employment
context, franchisor/franchisee non-
competes are only entered into by
individuals with access to substantial
capital and who therefore always have
the option of starting their own
businesses.
Many of these commenters argued
that prohibiting non-competes for
franchisees would threaten to severely
disrupt or destroy the franchise business
model, and that this would harm
franchisors and franchisees alike, as
franchising offers a unique opportunity
for working people to become
entrepreneurs with established brands.
Commenters asserted non-competes are
critical to the franchise business model
because they offer both franchisors and
franchisees confidence that existing
franchisees will likely stay with a brand
and refrain from using a franchise’s
trade secrets to unfairly compete against
the franchisor. Commenters also
asserted that franchisees are often
exposed to proprietary information
through training manuals and
operational support and that non-
competes help protect this information.
In addition, commenters contended
franchisor/franchisee non-competes
protect investments made by other
franchisees and maintain a franchise’s
goodwill.
Commenters supporting the exclusion
of franchisor/franchisee non-competes
from the final rule also asserted that the
Commission lacked an evidentiary basis
for covering such non-competes. These
commenters also claimed no State has
prohibited non-competes for
franchisees, and the Commission would
therefore lack data from natural
experiments to justify extending a final
rule to the franchise context.
c. The Final Rule
The Commission continues to believe
that, as many commenters attested,
franchisor/franchisee non-competes
may in some cases present concerns
under section 5 similar to the concerns
presented by non-competes between
employers and workers. The comments
from franchisors, franchisees, and others
provide the Commission with further
information about non-competes in the
context of the franchisor/franchisee
relationship, but the evidentiary record
before the Commission continues to
relate primarily to non-competes that
arise out of employment. Accordingly,
the final rule does not cover franchisor/
franchisee non-competes. Non-competes
used in the context of franchisor/
franchisee relationships remain subject
to State common law and Federal and
State antitrust laws, including section 5
of the FTC Act.
VI. Section 910.4: Relation to State
Laws and Preservation of State
Authority and Private Rights of Action
In proposed § 910.4, the Commission
addressed State laws and preemption.
Based on comments, the Commission
adopts a modified provision clarifying
and explaining that States may continue
to enforce laws that restrict non-
competes and do not conflict with the
final rule, even if the scope of the State
restrictions is narrower than the final
rule.955
A. The Proposed Rule
The NPRM contained an express
preemption provision, proposed § 910.4,
that explained the proposed rule
preempted State laws inconsistent with
the rule and did not preempt State laws
that offer greater protection than the
rule. The NPRM explained that when a
State law offers greater protection than
the rule, employers would be able to
comply with both the NPRM and the
State law. Thus, the proposed rule
would have established a regulatory
floor, but not a ceiling. The NPRM
provided two hypothetical examples,
one of a State law that would be
inconsistent with, and therefore
preempted by, proposed § 910.2(a) and
one that would not because it satisfied
the savings clause by offering greater
protection and was not inconsistent
with proposed part 910. 956
B. Authority for Preemption
Numerous commenters supported the
preemption of inconsistent State laws.
Some commenters asserted the
Commission lacks the legal authority to
preempt State laws, including State
common law, on non-competes because
Congress allegedly did not confer the
necessary authority to the Commission
or because of federalism principles.
They argued there must be clear
Congressional intent to preempt State
laws relating to non-competes.957
Numerous commenters asserted the
Commission lacks clear authority from
Congress to preempt State laws on non-
competes, arguing the FTC’s statutory
authority neither expressly nor
impliedly authorizes preemption of
non-competes. Commenters made
similar points based on cases about the
preemptive force of the Commission’s
UDAP regulations. For example, one
commenter asserted the FTC may not
have the authority to preempt less
restrictive State laws, citing American
Optometric Association v. FTC, in
which the court noted the need for
congressional authorization for the
Commission to preempt an entire field
of State laws that arise from the State’s
police powers.958
The Commission finds it has the
authority to promulgate regulations that
preempt inconsistent State laws under
section 6(g), together with section 5, of
the FTC Act. Even without an express
preemption provision, Federal statutes
and regulations preempt conflicting
State laws. Under the Supreme Court’s
conflict preemption doctrine, a Federal
statute or regulation impliedly preempts
State laws when it is impossible for the
regulated parties to comply with both
the Federal and the State law, or when
a State law is an obstacle to achieving
the full purposes and objectives of the
Federal law.959 ‘‘Federal regulations
have no less pre-emptive effect than
Federal statutes.’’ 960 Indeed, even
commenters who questioned the FTC’s
authority to preempt State laws agreed
that if a Federal agency promulgates a
rule pursuant to its Congressionally
conferred authority, the rule preempts
conflicting State laws.
As discussed in Parts II.A, II.B, and
II.C, the Commission has the authority
to promulgate this final rule.
Accordingly, the final rule preempts
conflicting State laws. To provide a
clear explanation of the Commission’s
intent and the scope of preemption
effected by the final rule, the final rule
includes an express preemption
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961 Many FTC regulations, including regulations
promulgated under section 6(g) of the FTC Act,
include provisions addressing State laws and
preemption. See, e.g., Funeral Rule, 16 CFR 453.9
(exempting from preemption State laws that ‘‘afford
an overall level of protection that is as great as, or
greater than, the protection afforded by’’ the FTC’s
Rule) (emphasis added); Concerning Cooling Off
Period for Sales Made at Homes or at Certain Other
Locations, 16 CFR 429.2(b) (exempting laws and
ordinances that provide ‘‘a right to cancel a door-
to-door sale that is substantially the same or greater
than that provided in this part’’) (emphasis added);
Business Opportunity Rule, 16 CFR 437.9(b) (‘‘The
FTC does not intend to preempt the business
opportunity sales practices laws of any [S]tate or
local government, except to the extent of any
conflict with this part. A law is not in conflict with
this Rule if it affords prospective purchasers equal
or greater protection[.]’’) (emphasis added); Mail,
internet, or Telephone Order Merchandise Rule, 16
CFR 435.3(b) (‘‘This part does supersede those
provisions of any State law, municipal ordinance,
or other local regulation which are inconsistent
with this part to the extent that those provisions do
not provide a buyer with rights which are equal to
or greater than those rights granted a buyer by this
part.’’) (emphasis added); Franchise Rule, 16 CFR
436.10(b) (‘‘The FTC does not intend to preempt the
franchise practices laws of any [S]tate or local
government, except to the extent of any
inconsistency with part 436. A law is not
inconsistent with part 436 if it affords prospective
franchisees equal or greater protection[.]’’)
(emphasis added); Labeling and Advertising of
Home Insulation, 16 CFR 460.24(b) (preemption of
‘‘State and local laws and regulations that are
inconsistent with, or frustrate the purposes of this
regulation’’). See also Part II.B.
962 Comment of Dep’t of Justice Antitrust Div.,
FTC–2023–0007–20872 at 7. 	963 See Part IX.C.
964 See, e.g., Comment of Mech. Contractors Ass’n
of Am., FTC–2023–0007–18218 (although opposed
to the proposed rule, MCCA’s position supports a
single Federal rule and some level of preemption).
965 See Comment of the Attys. Gen. of 17 States
and DC, FTC–2023–0007–21043, at 14–15
(‘‘jurisdictions like Colorado, Illinois, Washington,
and the District of Columbia have passed laws that
ban non-competes for workers making under a
specified income threshold and also include
remedies provisions that authorize [S]tate agencies
and residents to enforce the law’’); id. at 9–11
(discussing State enforcement, private action, and
damages in several State non-compete laws).
provision at § 910.4.961 As discussed in
Part VI.D, the Commission has modified
proposed § 910.4 to make clear that even
when the scope of non-compete
prohibitions under a State law is less
than that of the final rule, State
authorities and persons may enforce the
State law by, for example, bringing
actions against non-competes that are
illegal under the State law.
C. The Benefits of Preemption
Numerous commenters stated that
variations in State laws chill worker
mobility and expressed support for a
uniform Federal standard. Some
commenters explained that a
preemption clause could bring clarity to
the law’s effect.
The U.S. Department of Justice
commented that, due to the patchwork
of State laws, a worker may be free to
switch jobs in one jurisdiction but
subject to a non-compete in another,
creating uncertainty as to the non-
compete’s enforceability for both firms
and workers. 962 In another commenter’s
view, the variation in State non-compete
laws creates competitive disadvantages
for companies in States that ban such
clauses, necessitating a Federal ban.
Another commenter pointed out that
most States have not passed statutes that
ban or restrict non-competes, and that
existing statutes cover different
categories of workers and different wage
levels, making it difficult for workers to
know whether employers can enforce a
particular non-compete. The commenter
stated that variations in the legal
authority of State attorneys general to
take action on the public’s behalf also
limit the effectiveness of State
restrictions on non-competes. A number
of commenters explained that the
difficulties arising from variations in
State non-compete laws are exacerbated
by the increase in remote and hybrid
work, and workers who travel to work
across State lines. Accordingly, many
commenters favored a uniform Federal
standard that would promote certainty
for employers and workers. Even some
commenters who generally opposed
banning non-competes favored
preemption to eliminate the patchwork
of State laws that makes it difficult for
workers to know the applicable law and
encourages forum shopping by
employers who want to bring suits in
sympathetic jurisdictions.
Other commenters opposed
preemption, asserting that State
legislatures and courts are best situated
to address non-competes and that the
States have historically regulated this
area. They contended States should be
allowed to continue adjusting the scope
of restrictions on non-competes
including applicability to different types
of workers, time span, and geographic
scope.
The Commission finds that
preemption of State laws, including
State common law, that conflict with
the final rule best mitigates the negative
effects of the patchwork of State laws,
including chilling worker mobility and
undercutting competitive conditions in
labor and product and services
markets. 963 Preempting this patchwork
with a Federal floor is particularly
important given the increase in work
across State lines, and remote and
hybrid work, since the COVID–19
pandemic.
Moreover, as discussed in Part IX.C,
preemption furthers a primary goal of
the final rule: to provide a uniform, high
level of protection for competition that
is easy for both employers and workers
to understand and makes it less likely
that employers will subject workers to
illegal non-competes or forum shop.
Indeed, some commenters who
otherwise opposed the proposed ban on
non-competes regarded the patchwork
itself burdensome to employers as well
as workers and noted the rule would
reduce burden by eliminating
uncertainty and confusion caused by
State law variations.964 As described in
Part IX.C, the Commission has
determined that declining to issue this
final rule and continuing to rely solely
on State laws and case-by-case
adjudication would be less effective
than issuing a clear national standard.
The Commission concludes, however,
that supplementing the final rule with
additional State authority and resources,
so long as the State laws are not
inconsistent with the final rule, will
assist in protecting both workers and
competition.
D. The Extent of Preemption
Some commenters strongly supported
the NPRM but expressed concern that
the preemption provision as proposed
could undermine States’ efforts to curb
non-competes and would thereby
undercut the final rule’s effectiveness.
These commenters stated that under one
interpretation, proposed § 910.4 could
preempt State laws that prohibit non-
competes for workers earning less than
a specified income because the law as
a whole may not be deemed to provide
greater protection than the final rule. In
their view, such an interpretation would
not further the final rule’s goals, because
States with income-based restrictions on
non-competes rather than complete bans
may offer covered workers protections
against non-competes that the FTC’s
proposed rule would not provide, such
as State enforcement, private rights of
action, and certain financial
penalties.965
These commenters also asserted that
in many cases, State agencies and
residents could be better positioned to
respond to unlawful non-compete use
specific to a particular State, but they
would be unable to do so and
dependent on the Commission if their
laws were fully preempted. To enable
concurrent enforcement of State laws
that restrict the use of non-competes,
thereby increasing the enforcement
resources devoted to the issue, they
recommended a ‘‘savings clause’’ that
would exempt from preemption State
laws that provide workers with
protections substantially similar to or
greater than those afforded by the
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966 Another comment recommended a similar
formulation, which would exempt from preemption
State laws that offer workers protection that is equal
to or greater than the protection provided by the
final rule. This commenter asserted that this
formulation would allow existing State law to
stand.
967 See Uniform Restrictive Employment
Agreement Act, supra note 332 at sec. 5, sec. 8.
968 See Comment of ULC, FTC–2023–0007–20940.
969 See also Part II.E (discussing comments on the
Commission’s jurisdiction under the FTC Act).
970 The effect of part 910 is limited to non-
competes. It would not broadly preempt other uses
of State antitrust and consumer protection law.
971 See, e.g., Sprietsma v. Mercury Marine, 537
U.S. 51, 62–70 (2002) (finding Federal Boat Safety
Act did not relieve defendant from liability for State
common law tort claim because it did not expressly
nor impliedly preempt State common law).
972 See, e.g., FTC, A Brief Overview of the Federal
Trade Commission’s Investigative, Law
Enforcement, and Rulemaking Authority App. A
(May 2021), https://www.ftc.gov/about-ftc/mission/
enforcement-authority; Holloway v. Bristol-Myers
Corp., 485 F.2d 986, 997 (D.C. Cir. 1973).
973 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 7 (‘‘jurisdictions like
Colorado, Illinois, Washington, and the District of
Columbia have passed laws that ban non-competes
for workers making under a specified income
threshold and also include remedies provisions that
authorize state agencies and residents to enforce the
law’’). See also 2023 Cal. Legis. Serv. Ch. 157 (S.B.
699) West (adding Cal. Bus. & Prof. Code sec.
16600.5, Sept. 1, 2023) (providing for a private right
of action in regard to California’s non-compete
statute).
974 See Part II.E (discussing the Commission’s
jurisdiction under the FTC Act). See, e.g., Cal. Bus.
& Prof. Code secs. 16600–16602 (broad coverage);
Minn. Stat. Ann. sec. 181.988, subdiv. 1 (b)
(‘‘‘Employer’ means any individual, partnership,
association, corporation, business, trust, or any
person or group of persons acting directly or
indirectly in the interest of an employer in relation
to an employee.’’).
rule. 966 They also recommended that
the rule not preempt State antitrust and
consumer protection laws that may
protect workers against non-competes
and other restrictive employment
arrangements as those laws can provide
another enforcement avenue for State
agencies and residents.
Another commenter recommended
including a narrow reverse preemption
provision so that relevant State laws in
States that enact the Uniform Restrictive
Employment Agreement Act 967 would
not be preempted.968 The comment
asserted that by doing so, a final rule
would preserve a role for the States and
encourage their cooperation with the
Commission, and also provide greater
protections for employees than the
proposed rule provided in several ways,
such as allowing for greater enforcement
and including classes of employers that
the final rule would not cover.969 The
uniform law would ban non-competes
for workers earning at or below the
State’s annual mean wage and would
allow non-competes for those earning
more, but apply limits and require
disclosures for any non-compete.
Based on comments, the Commission
has modified the final rule’s preemption
provision to clarify and explain that
State laws that restrict non-competes
and do not conflict with the final rule
are not preempted. Section 910.4 also
expressly references State common law,
antitrust law, and consumer protection
law, so that the intended scope of
preemption is clear. State common law
is expressly referenced because many
States do not have a general non-
compete statute, and the common law
varies considerably.
Section 910.4(b) reflects the
Commission’s intent that States may
continue to enforce in parallel laws that
restrict non-competes and do not
conflict with the final rule, even if the
scope of the State restrictions is
narrower than that of the final rule. That
is, State laws cannot authorize non-
competes that are prohibited under this
final rule, but States may, for example,
continue to pursue enforcement actions
under their laws prohibiting non-
competes even if the State laws prohibit
a narrower subset of non-competes than
this rule prohibits.
Accordingly, § 910.4(a) states that the
final rule will not be construed to annul,
or exempt any person from complying
with, any State statute, regulation,
order, or interpretation applicable to a
non-compete, including, but not limited
to, State antitrust and consumer
protection laws and State common law.
Rather, the final rule supersedes such
laws to the extent, and only to the
extent, that such laws would otherwise
permit or authorize a person to engage
in conduct that is an unfair method of
competition under § 910.2(a) or conflict
with the notice requirement in
§ 910.2(b).970 These revisions provide
that when States have restricted non-
competes and their laws do not conflict
with the final rule, employers must
adhere to both provisions, and workers
are protected by both provisions
(including State restrictions and
penalties that exceed those in Federal
law).
For example, § 910.4 makes clear that
the final rule does not preempt State
law enforcement where a State bans
non-competes only for workers earning
below a certain amount and thus has a
ban that is narrower than the final rule.
Thus, if a State’s law bars non-competes
only for workers who earn less than
$150,000 per year, the final rule and the
law are different in scope of protection
but not directly inconsistent. The State
may continue to enforce its ban for
workers earning less than $150,000, but
all non-competes covered by the final
rule, regardless of a worker’s earnings,
remain an unfair method of competition
under the final rule and are therefore
unlawful.
In response to concerns raised by
commenters and to further bolster the
consistent use of State laws, the
Commission expressly recognizes State
authority and the existence of private
rights of action arising under State laws
that restrict non-competes or bar unfair
methods of competition. This is set forth
in § 910.4, now titled ‘‘Relation to State
laws and preservation of State authority
and private rights of action,’’ and is
detailed in § 910.4(b). That section
provides that unless a State law
conflicts with the final rule and is
superseded as described in § 910.4(a),
part 910 does not limit or affect the
authority of State attorneys general and
other State agencies or the rights of a
person to bring a claim or regulatory
action arising under State laws,
including State antitrust and consumer
protection laws and State common law.
Section 910.4(b) also explains that
persons retain the right to bring a claim
or regulatory action under State laws
unless the laws conflict with the final
rule and have been superseded as
described in § 910.4(a).
These modifications are consistent
with many commenters’
recommendations and recognize State-
based enforcement as a potent force that
supplements Federal enforcement. In
addition, the modifications, particularly
those that explain § 910.4 does not
exempt any person from complying
with State laws, are intended to curb the
use of preemption as a defense against
State restrictions of non-competes.971
Under the final rule, States may
continue to play a critical role in
restricting the use of non-competes. In
contrast to the FTC Act, which cannot
be enforced by private persons or State
authorities, 972 the non-compete laws of
numerous States provide for such
enforcement.973 Non-competes that are
outside the FTC’s jurisdiction or
otherwise outside the scope of the final
rule may be covered by State non-
compete laws.974 State penalties can be
substantial and may be particularly
important as a deterrent.
The modifications also reflect the
Commission’s long history of working in
concert with States and encouraging
concurrent enforcement of State laws to
pursue common goals. While the
Commission recognizes this will leave
some variation in the enforcement
exposure covered persons face among
States, that variation will be greatly
reduced by the final rule, which sets a
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38455	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
975 The Commission has taken this position in
previous regulations. See, e.g., Part 429—Cooling-
Off Period for Door-to-Door Sales, 37 FR 22934 (Oct.
26, 1972).
976 For a previous example, see Trade Regulation
Rule; Funeral Industry Practices, 47 FR 42260,
42287 (Sept 24, 1982) (noting the purpose of the
rule’s provision addressing relation of the rule to
State law is ‘‘to encourage [F]ederal-[S]tate
cooperation by permitting appropriate [S]tate
agencies to enforce their own [S]tate laws that are
equal to or more stringent than the trade regulation
rule’’).
977 NPRM at 3518–19 & n.429.
978 In the NPRM, proposed § 910.5 addressed the
compliance date.
979 See also Part X.F.6.
980 See NPRM at 3518–19.
floor that applies nationally.975 As it has
done in the past, the Commission will
‘‘share the field’’ with States and partner
with them in the battle against abusive
non-competes. 976 As set out in Part
IX.C, the Commission considered and
rejected the alternative of relying on
existing State laws alone. Consistent
with that determination, the
Commission declines to adopt the
suggestion from a comment that relevant
State laws in States that enact the
Uniform Restrictive Employment
Agreement Act not be preempted.
VII. Section 910.5: Severability
The Commission stated in the NPRM
that it may adopt a severability
clause 977 and it received a comment
stating the Commission should adopt
such a clause to protect the rights and
securities of workers if one part of the
rule or one category of workers were
invalidated. The Commission adds
§ 910.5, together with this section, to
clarify the Commission’s intent. 978
Section 910.5 states that if any
provision of the final rule is held to be
invalid or unenforceable either facially,
or as applied to any person or
circumstance, or stayed pending further
agency action, such invalidity shall not
affect the application of the provision to
other persons or circumstances or the
validity or application of other
provisions. Section 910.5 also states that
if any provision or application of the
final rule is held to be invalid or
unenforceable, the provision or
application shall be severable from the
final rule and shall not affect the
remainder thereof. This provision
confirms the Commission’s intent that
the remainder of the final rule remain in
effect in the event that a reviewing court
stays or invalidates any provision, any
part of any provision, or any application
of the rule—including, for example, an
aspect of the terms and conditions
defined as non-competes, one or more of
the particular restrictions on non-
competes, or the standards for or
application to one or more categories of
workers.
The Commission finds that each of
the provisions, parts of the provisions,
and applications of the final rule
operate independently and that the
evidence and findings supporting each
provision, part of each provision, and
application of each provision stand
independent of one another. In this final
rule, the Commission determines that
certain conduct is an unfair method of
competition in Part IV.B and Part IV.C
and differentiates between senior
executives and workers who are not
senior executives with respect to
existing non-competes. The final rule
distinguishes between the two in both
the final rule’s operation and in the
bases for adopting the final rule. The
difference in restrictions among
different workers, and the distinct bases
for adopting the restrictions, is
described in detail in Parts IV.B and
IV.C. The Commission also estimates
the effect of excluding senior executives
entirely from the rule in Part X.F.11 and
finds that the benefits of covering only
those workers who are not senior
executives justify the costs.
The Commission promulgates each
provision, part of each provision, and
application of each provision as a valid
exercise of its legal authority. Were any
provision, part of any provision, or any
application of any provision of the final
rule stayed or held inapplicable to a
particular category of workers, to
particular conduct, or to particular
circumstances, the Commission intends
the remaining elements or applications
of the final rule to prohibit a non-
compete between covered persons and
covered workers as an unfair method of
competition.
In Parts IV.B and IV.C, the
Commission finds that the use of non-
competes is an unlawful unfair method
of competition under section 5 of the
FTC Act because it is restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions
in several independent ways. In support
of its finding that the use of non-
competes is an unlawful unfair method
of competition for workers who are not
senior executives, the Commission
additionally finds that the use of non-
competes is exploitative and coercive in
Part IV.B.2.b.
The Commission relies principally on
empirical evidence regarding the effects
of changes in non-compete
enforceability, both when finding in
Part IV.B.3.a and Part IV.C.2.c.ii that the
use of non-competes tends to negatively
affect competitive conditions in labor
markets, and when finding in Part
IV.B.3.b and Part IV.C.2.c.i that the use
of non-competes tends to negatively
affect competitive conditions in product
and service markets. The Commission
further analyzes and quantifies these
effects in Part X.F.6, including
sensitivity analyses that compare the
estimated effects of smaller changes in
enforceability and larger changes in
enforceability.
Based on this empirical evidence and
analysis, the Commission believes that
more limited application of the rule—
which might result were a court to
render the final rule inapplicable in
some way—may be equivalent to
smaller changes in the enforceability of
non-competes in the empirical
literature. As described in Part IV.B.3.a
and IV.B.3.b, smaller changes in
enforceability change the magnitude,
but not the directional nature, of the
labor market and product and service
market effects.979 Accordingly,
consistent with the findings related to
the use of certain non-competes being
an unfair method of competition in Part
IV, the empirical evidence on the use of
non-competes, the regulatory impact
analysis in Part X, and its expertise, the
Commission finds that any smaller
reduction in enforceability resulting
from circumstances in which a court
stays or invalidates some application of
the final rule would not impair the
function of the remaining parts of the
final rule nor would it undermine the
justification or necessity for the final
rule as applied to other persons,
conduct, or circumstances. The
Commission intends for any remaining
application of the final rule to be in
force because it is committed to
stopping any and all unlawful conduct
related to the use of certain non-
competes and the Commission finds
every use of a non-compete covered by
the final rule to be an unlawful unfair
method of competition under section 5
of the FTC Act. 980
In Part X, the Commission conducts a
regulatory impact analysis for the final
rule as applied to all workers, as applied
to all workers other than senior
executives, and as applied to senior
executives. The Commission finds that
the asserted benefits of the use of non-
competes do not justify the harms from
the use of non-competes for any
category of workers. The Commission’s
findings and differential analysis
demonstrate that the asserted benefits
from the use of non-competes do not
justify the harms from the use of non-
competes for higher- or lower-wage
earners, including, for example, lower-
wage workers defined as workers whose
total annual compensation is less than
$151,164.
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981 Id. at 3483, 3515–16. In the NPRM and herein,
the Commission refers to the period between the
publication of the final rule and the date on which
compliance with the final rule is required as the
‘‘compliance period.’’ See id. at 3515.
982 Id. at 3516.
983 Id. (addressing compliance with proposed
§ 910.2(b)(2)).
984 The comment did not consider the limitations
on the effective date imposed by the CRA.
For instance, if, for any reason, a
reviewing court were to stay or
invalidate the final rule as applied to
senior executives, the Commission
would intend for the remainder of the
final rule to apply to all workers other
than senior executives. Likewise, if a
reviewing court were to stay or
invalidate the final rule to apply to
workers other than senior executives,
the Commission would intend for the
remainder of the final rule to apply to
senior executives. Additionally, if a
reviewing court were to stay or
invalidate the final rule as applied to
some other subset of workers, the
Commission would intend for the
remainder of the final rule to apply to
all but those workers. So, for example,
if a reviewing court were to stay or
invalidate the final rule as applied to
workers other than lower-wage
workers—defined as workers whose
total annual compensation is less than
$151,164—the Commission would
intend for the remainder of the final rule
to apply to those workers, and further
notes the evidentiary record
demonstrates that application of the rule
to those remaining workers would be
beneficial and achieve lawful objectives.
In the same way, if a reviewing court
were to stay or invalidate the provision
of the final rule regarding enforcing an
existing non-compete or the notice
requirement, the Commission would
intend for the remainder of the final rule
to apply. As described in Part IX.C,
although the Commission concludes
that a national standard is most
effective, a number of States currently
apply different standards to different
workers and States also apply a myriad
of legal standards to non-competes
generally. Accordingly, were a
reviewing court to stay or invalidate a
particular application of the final rule,
a covered person could simply comply
with the provisions, parts of provisions,
or applications of the final rule that
remain in effect.
The Commission’s adoption of the
final rule does not hinge on the same
restrictions applying to all non-
competes, on the final rule applying to
all workers, or on joint adoption or
operation of each provision.
Accordingly, the Commission considers
each of the provisions adopted in the
final rule to be severable, both within
each provision and from other
provisions in part 910. In the event of
a stay or invalidation of any provision,
any part of any provision, or of any
provision as it applies to certain
conduct or workers, the Commission’s
intent is to otherwise preserve and
enforce the final rule to the fullest
possible extent.
VIII. Section 910.6: Effective Date
The Commission adopts a uniform
effective date of 120 days after
publication of the final rule in the
Federal Register. The final rule will go
into effect, and compliance with the
final rule will be required, on that date.
Based on comments urging the
Commission to reduce the compliance
period from the 180-day period
proposed in the NPRM so that the
benefits of the final rule may be
obtained as soon as possible, the
Commission’s findings that the use of
non-competes is exploitative and
coercive for the vast majority of
workers, and modifications in the final
rule that reduce covered entities’
compliance burden, the Commission
modifies the date that compliance with
the final rule is required from 180 days
to 120 days after publication in the
Federal Register.
A. The Proposed Rule
In the NPRM the Commission
proposed a compliance date of 180 days
after publication of the final rule in the
Federal Register. The Commission
stated that, during the compliance
period, employers would need to: (1)
assess whether to implement
replacements for existing non-competes
(such as NDAs), draft those covenants,
and then negotiate and enter into those
covenants with the relevant workers; (2)
remove any non-competes from
employment contracts that they provide
to new workers; and (3) rescind, no later
than the date that compliance is
required, any non-competes that it
entered into prior to the compliance
date.981 The Commission preliminarily
found that 180 days would be enough
time for employers to accomplish all of
these tasks.982 The NPRM would have
also required employers to provide the
notice specified in proposed
§ 910.2(b)(2) within 45 days of
rescinding the non-compete. 983
The Commission also stated that it
proposed to establish an effective date
of 60 days after the final rule is
published in the Federal Register even
though compliance would not be
required for 180 days.
B. Comments Received
Many worker commenters urged the
Commission to act as quickly as
possible to bring the final rule into
force, citing the current acute, ongoing
harms to their earnings, mobility,
quality of life, and other significant
impacts and noting the final rule’s
potential for immediate relief if their
non-compete was no longer in force.
Representatives of many local
governments from different States
contended that the negative effects of
non-competes and the anticipated
benefits of the proposed rule justified
allowing the Commission’s rule to go
into effect as soon as possible. Other
commenters supported the compliance
date as proposed or favored other
measures to obtain the anticipated
benefits of the final rule as soon as
practicable. Another commenter
contended that the 180-day compliance
period was sufficient to allow
businesses to ensure compliance and
suggested that the Commission move
the effective date back to the day or the
day after the final rule is published.984
Several commenters suggested the
Commission adopt a longer compliance
period of one year, 18 months, or two
years. These commenters generally
stated that businesses need more time to
adjust their compensation packages,
contracting practices, and employee
policies to comply with the rule and to
protect their intellectual property. At
least one commenter also argued the
Commission should adopt a two-year
compliance period to allow courts
sufficient time to hear and resolve
challenges to the final rule. One
commenter asserted that the compliance
period would be especially burdensome
for smaller business. Another industry
commenter argued application of the
rule should be phased in over time.
C. The Final Rule
The Commission adopts a 120-day
compliance period. As outlined in Parts
IV.B and IV.C, based on both
voluminous comments from the public
as well as a significant body of
empirical evidence, the Commission
finds that the use of non-competes is
coercive and exploitative for the vast
majority of workers across different
earnings levels and occupations and
that for all workers it tends to negatively
affect competitive conditions in labor
markets and also tends to negatively
affect competitive conditions in product
and service markets—and that such
actual harms are in fact currently
ongoing. The Commission adopts a 120-
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985 See Part IV.E (describing why the Commission
is not finalizing a rescission requirement).
986 § 910.2(b)(4) and (5).
987 § 910.2(b)(2)(ii).
988 § 910.2(b)(3).
989 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 44.
990 NPRM at 3516.
991 Id. at 3519–21.
992 Id. at 3521.
993 Id. at 3497.
day compliance period to stop these
unfair methods of competition as soon
as practicable. The Commission finds
that a 120-day period appropriately
balances the interests at hand.
The Commission has taken several
steps in the final rule to make
compliance as simple as possible for
employers. These steps make it
practicable and reasonable to require
compliance within 120 days. The final
rule allows regulated entities to enforce
existing non-competes with senior
executives, who commenters contended
are most likely to have complex
compensation arrangements that
include non-competes. Accordingly,
there is no need for a lengthy
compliance period, as the most complex
existing arrangements are left in place.
The Commission also eliminated the
rescission requirement for all workers.
Under the final rule, employers will not
need to rescind (i.e., legally modify)
existing non-competes for any workers;
rather, employers will simply be
prohibited from enforcing them after the
effective date of the final rule and will
be required to provide the notice in
§ 910.2(b)(1). 985 While employers are
required to provide notice to workers
with existing non-competes who are not
senior executives, under § 910.2(b), the
final rule provides model safe harbor
language that satisfies the notice
requirement. 986 The final rule gives
employers several options for providing
the notice—on paper, by mail, by email,
or by text.987 And employers are exempt
from the notice requirement where the
employer has no record of a street
address, email address, or mobile
telephone number for the worker.988
Furthermore, as explained in Part IV.E,
the Commission has simplified the
notice requirement to facilitate
employers’ ability to comply by simply
sending a mass communication such as
a mass email to current and former
workers.
Starting on the effective date of the
final rule, employers will be prohibited
from entering into new non-competes
barred by this final rule and from
enforcing non-competes that the
employer entered into prior to that date
with workers other than senior
executives. Prior to the effective date
employers will need to identify each of
their workers with existing non-compete
agreements and can assess which, if
any, are senior executives and
determine if they wish to maintain those
non-competes. Employers will also need
to assess and revise, if necessary, any
employment policies or handbooks that
purport to bind workers even after the
effective date.
To the extent they have confidential
business information, trade secrets, or
other investments to protect with
respect to a particular worker,
employers will be able to assess their
options to lawfully protect that
information. However, new protections
will be unnecessary in many cases,
because, for example, 95.6% of workers
subject to non-competes are already
subject to an NDA.989 In the rare case
where compensation might be tied to a
non-compete that is not with a senior
executive, the employer and worker can
determine whether to amend their
original employment agreement. The
Commission concludes that the 120-day
compliance period gives employers
more than sufficient time to complete
these tasks. For example, firms routinely
complete entire onboarding processes
for new employees in much shorter
timeframes than 120 days.
The Commission also finds that the
120-day compliance period gives small
businesses enough time to comply with
the final rule. Although small
businesses may have limited staff and
funds compared to larger firms, they
also have fewer workers, and the
exclusion for existing non-competes for
senior executives will relieve the
compliance burden altogether for those
small firms that use non-competes only
with those workers. Moreover, the steps
the Commission has taken to reduce the
compliance burden of § 910.2(b) will
further simplify and streamline
compliance for small businesses.
The Commission has also determined
it is not necessary to extend the
compliance period to give courts time to
adjudicate pending non-compete
litigation because, as described in Part
V.C.3, the Commission has adopted
§ 910.3(b), which provides that the final
rule does not apply where a cause of
action related to a non-compete arose
prior to the effective date. The
Commission also finds that a longer
compliance period is not needed to hear
and resolve challenges to the final rule,
especially given the ability of a
challenger to seek a preliminary
injunction.
In sum, the Commission finds that
due to modifications reducing covered
entities’ burden to comply with the final
rule, a compliance period of 120 days is
sufficient time to comply with the final
rule. Given these changes the longer
compliance period proposed in the
NPRM is no longer warranted and
would allow the use of certain non-
competes that are an unfair method of
competition—and their related harms
and costs—to continue for longer than
necessary. The substantial benefits to
competition and to workers of the final
rule taking effect as soon as possible
outweigh any concerns about potential
difficulties in meeting an earlier
compliance date.
The Commission also adopts a 120-
day effective date. The Commission
concludes that it would ease the burden
of implementation and reduce possible
confusion by having a uniform date for
when the final rule goes into effect and
when compliance under the final rule is
required. A 120-day effective date
complies with the requirements of the
Congressional Review Act that a ‘‘major
rule’’ may not take effect fewer than 60
days after the rule is published in the
Federal Register.
IX. Alternative Policy Options
Considered
The Commission proposed to ban
non-competes categorically, with a
limited exception for non-competes
entered into by a person who is selling
a business entity. In the NPRM, the
Commission discussed and sought
comment on potential alternatives to the
proposed categorical ban, including
discrete alternatives that would
implement a rebuttable presumption of
unlawfulness or apply different
standards to different categories of
workers.990 The Commission also
sought comment on whether a rule
should apply a different standard to
senior executives, and whether, in lieu
of the proposed rule, the Commission
should adopt a disclosure rule or
reporting rule.991 The Commission
sought comment on all aspects of
potential alternatives, including
whether the Commission should adopt
one of the identified alternatives or
some other alternative instead of the
proposed rule. 992 The Commission also
sought comment on the extent to which
a uniform Federal standard for non-
competes would promote certainty for
employers and workers. 993
The Commission received many
comments on these questions, as well as
on the question of whether the
Commission should issue a Federal
standard for non-competes or continue
relying on existing law and case-by-case
litigation to address harms from non-
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994 Id. at 3517.
995 Id. at 3517–19.
996 See Part IV.B.2.b.
997 See Prescott & Starr, supra note 413.
998 Starr, Prescott, & Bishara, supra note 68 at 633,
652, 664.
competes. In this section, the
Commission discusses the comments
received regarding these alternatives
and the reasons it has decided not to
adopt them. This Part IX addresses these
comments but does not address
alternatives related to the design of
specific regulatory provisions, which
are discussed in the Part addressing the
relevant provision.
A. Categorical Ban vs. Rebuttable
Presumption
1. The Rebuttable Presumption
Alternative Generally
While preliminarily finding that a
categorical ban would best achieve the
proposed rule’s objectives, the
Commission nevertheless sought
comment on the alternative of a
rebuttable presumption, under which it
would be presumptively unlawful for an
employer to use a non-compete, but a
non-compete would be permitted if the
employer could meet a certain
evidentiary burden or standard.994 The
Commission also sought feedback on the
form any rebuttable presumption should
take. 995
Most commenters that addressed this
issue, including those both supporting
and opposing the proposed rule,
discouraged the Commission from
including a rebuttable presumption in
the final rule. These commenters
contended that a rebuttable
presumption would add complexity and
uncertainty to the rule.
Supporters of the proposed rule
asserted that a rebuttable presumption
would undermine the rule’s
effectiveness, failing to deter employers
from imposing non-competes while
making litigation too uncertain and
costly for most workers to pursue. Some
of these commenters contended that a
rebuttable presumption would also do
little to reduce the chilling effects of
non-competes. They argued that
employers would continue to impose
non-competes that are unlikely to
survive a rebuttable presumption.
Many commenters critical of the
proposed rule opposed a rebuttable
presumption for essentially the same
reasons they opposed the rule in
general. They contended that, in States
where non-competes are generally
enforceable, a rebuttable presumption
would inappropriately shift the burden
of proof from workers to employers.
Many of these commenters specifically
opposed a rebuttable presumption that
would use a test similar to antitrust
law’s ‘‘quick look’’ analysis, contending
that the Commission’s analysis of
empirical research on non-competes
cannot substitute for the lengthy
experience courts usually have with a
particular restraint before giving it
quick-look treatment. A few
commenters contended that a rebuttable
presumption would increase litigation
and raise employers’ compliance costs
by complicating the determination of
whether a given non-compete is likely
valid, requiring more lawyer
involvement in drafting clauses and
more reliance on courts to determine a
non-compete’s validity.
A few commenters supported a
rebuttable presumption, arguing the
Commission’s proposed ban on non-
competes was too blunt an instrument.
Some also contended that a rebuttable
presumption would offer a more flexible
approach akin to the majority of State
law approaches. At least one commenter
stated a rebuttable presumption would
make the final rule more likely to
survive judicial review. A few
commenters stated a rebuttable
presumption would provide more
protections than most State laws by
allowing only non-competes that the
commenter contended are not unfair to
the worker, such as where highly paid
workers agree to narrow non-competes
in exchange for bargained-for
consideration. One commenter argued a
rebuttable presumption would enable
the Commission to accrue more
experience adjudicating non-competes
and assessing their impact on
competition.
Commenters advocating for a
rebuttable presumption generally
preferred a test focusing on one or more
factors, including: the non-compete’s
geographic scope and duration; the
presence and amount of any liquidated
damages or penalty provision; whether
the clause is narrowly tailored to
prevent competition with actual
competitors; the restrained worker’s
duties and income; and the availability
of less restrictive alternatives. A few
commenters supported a
‘‘preponderance’’ (as opposed to a
‘‘clear and convincing’’) standard to
permit as many non-competes as
possible but acknowledged that such a
rule may be so similar to the existing
common law as to be redundant.
After carefully reviewing and
considering the comments, the
Commission concludes that a rule
implementing a rebuttable presumption
is not preferrable to the final rule as
adopted. Based on the Commission’s
expertise, including careful review and
consideration of the entire rulemaking
record, the Commission finds that a
rebuttable presumption would be less
effective than the final rule for
achieving the Commission’s stated
goals. A rebuttable presumption also
presents administrability concerns that
the final rule does not.
Overall, the comments reinforced the
Commission’s concerns that a rebuttable
presumption would foster substantial
uncertainty about the validity of a given
non-compete and would do little to
reduce the in terrorem effects of non-
competes. Research demonstrates that
employers maintain non-competes even
where they likely cannot enforce
them,996 that many workers are not
aware of the applicable law governing
non-competes or their rights under
those laws,997 and that the degree to
which non-competes inhibit worker
mobility is affected not only by whether
a non-compete is actually enforceable
but also on whether a worker believes
their employer may enforce it.998
Accordingly, the Commission concludes
that a rule implementing a rebuttable
presumption would be inadequate to
reduce the prevalence of non-competes,
their chilling effect on worker mobility,
or their tendency to negatively affect
competitive conditions. Relatedly, the
Commission believes a rebuttable
presumption would increase litigation
costs for workers and employers relative
to the final rule as adopted.
The Commission also believes that, in
important respects, a rebuttable
presumption for non-competes is
inconsistent with the Commission’s
findings in this final rule. As discussed
in greater detail in Part IX.C, a rule that
provides for case-by-case,
individualized assessment of non-
competes is unlikely to address the
negative effects of non-competes on
competition in the aggregate. In
addition, by focusing on considerations
specific to the worker and the employer,
a rebuttable presumption is unlikely to
address the external effects of non-
competes (i.e., the effects on persons
other than the parties to the non-
compete), including their negative
effects on the earnings of workers who
are not covered by non-competes.
The Commission recognizes there
may be some benefits to a rebuttable
presumption relative to the status quo.
Because it puts the burden of proof on
employers, a rebuttable resumption
would be stricter than the current law
in States where non-competes are
allowed, and research suggests even a
small decrease in enforceability would
increase worker mobility, raise wages,
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999 Johnson, Lavetti, & Lipsitz, supra note 388
(decreasing enforceability increases worker mobility
and earnings); Johnson, Lipsitz, & Pei, supra note
526 at 2–5 (enforceability negatively impacts patent
quantity and quality).
1000 NPRM at 3519.
1001 Id. at 3521 n.446 (noting certain provisions in
the Commission’s Franchise Rule (16 CFR part 436),
such as § 436.5(i) and (q), require non-competes to
be disclosed to a franchisee).
1002 Id. at 3521.
1003 Id., citing Starr, Prescott, & Bishara, supra
note 68 at 75.
1004 Id. at 3487, citing Starr, Prescott, & Bishara,
supra note 68 at 73.
1005 Id. at 3521. 	1006 Starr, Prescott, & Bishara, supra note 68 at 75.
and promote innovation.999 But the
categorical ban adopted in the final rule
would have greater benefits in these
respects without the drawbacks
explained in this Part IX.A.1.
2. Discrete Alternatives Related to
Rebuttable Presumptions
In the NPRM, the Commission also
sought comment on four discrete
alternatives to the proposed rule:
Alternative #1 (categorical ban below
some threshold, rebuttable presumption
above); Alternative #2 (categorical ban
below some threshold, no requirements
above); Alternative #3 (rebuttable
presumption for all workers); and
Alternative #4 (rebuttable presumption
below some threshold, no requirements
above).1000
As explained in Part IX.A.1, the
Commission finds a rebuttable
presumption would be ineffective in
addressing the harms to competitive
conditions caused by non-competes. For
the same reasons, the Commission
declines to adopt Alternatives #1, #3,
and #4, all of which contemplated a
rebuttable presumption for some or all
workers.
While the vast majority of
commenters supported the
Commission’s proposal to ban non-
competes categorically for all workers, a
number of commenters suggested that
the Commission permit non-competes
with senior executives (or other highly
skilled or highly paid workers) and
other workers. The Commission
addresses these comments in Part IV.C
and V.D.1, where it finds that such non-
competes tend to negatively affect
competitive conditions in labor markets
and in product and service markets, and
that non-competes are also exploitative
and coercive for workers other than
senior executives. For these reasons, the
Commission declines to adopt
Alternative #2, which contemplated
imposing no requirements on workers
above a certain wage or other threshold.
B. Other Discrete Alternatives
1. Disclosure Rule
In the NPRM, the Commission sought
comment on the potential alternative of
adopting disclosure requirements
related to non-competes.1001 The
Commission explained that the rule
could, for example, require an employer
to disclose to a worker prior to making
an employment offer that the worker
will be subject to a non-compete and/or
to explain the terms of the non-compete
and how the worker would be affected
by signing it.1002 The Commission noted
that a 2021 study by Starr, Prescott, and
Bishara finds that disclosure of non-
competes to workers prior to the
acceptance of a job offer was associated
with increased earnings, rates of
training, and job satisfaction. 1003 The
authors of the study, however,
cautioned that their analysis ‘‘should
not be interpreted causally,’’ a point the
Commission noted in explaining why it
gave minimal weight to the study.1004
The Commission preliminarily
concluded in the NPRM that a
disclosure requirement would not
achieve the objectives of the proposed
rule.1005
In general, commenters stated they
agreed with the Commission’s
preliminary view that, while there may
be some benefits to a disclosure rule, it
would not achieve the objectives of the
rule. Workers and worker advocacy
groups stated that non-competes are
often presented to workers on their first
day on the job, or after they accept an
employment offer. Although these
commenters generally supported a
comprehensive ban, they noted that if
the Commission did not pursue a ban,
a disclosure requirement may help
improve workers’ awareness of non-
competes before accepting an offer. On
the other hand, these commenters
contended that a disclosure rule would
do little to reduce the prevalence of
non-competes, because workers have
little choice but to accept non-competes,
which are typically presented as ‘‘take-
it-or-leave-it’’ terms and are ubiquitous
in many fields.
Many trade organizations, advocacy
groups, and academics who were
generally supportive of the rule stated
that a disclosure rule would fail to
mitigate the competitive harms caused
by non-competes in the aggregate. While
acknowledging a disclosure rule may
ameliorate some problems related to
worker awareness of non-competes,
these commenters contended that non-
competes are unfair and coercive
because employees generally lack
adequate bargaining power to refuse to
sign or bargain over non-competes even
when they are presented at the time of
an employment offer, and that a
disclosure rule would therefore not have
the effect of making non-competes less
unfair or coercive. A few commenters
opposed a disclosure rule generally but
urged the Commission to adopt a
disclosure requirement for any non-
competes permitted by the final rule,
including for any non-competes entered
into by a person who is selling a
business.
On the other hand, some trade
organizations, advocacy groups, and
businesses that generally opposed the
rule advocated for the Commission to
adopt a disclosure rule in lieu of the
proposed categorical ban. These
commenters contended that a disclosure
rule would substantially mitigate the
unfairness of non-competes that are
entered into without adequate notice to
the worker without drastically altering
the legal status quo, thereby maintaining
the protections for trade secrets, training
expenditures, and intellectual property
they contend that non-competes
provide. They stated that eight States
and the District of Columbia have
statutory notice requirements for non-
competes.
Most of the commenters who
supported a disclosure rule also argued
that rather than demonstrating that non-
competes tend to negatively affect
competitive conditions, the available
evidence merely demonstrates
opportunistic behavior by employers
(such as presenting non-competes only
after prospective workers have taken
hard-to-reverse steps towards accepting
employment) and workers (such as
seeking to be excused from a non-
compete after recognizing its impact on
future job prospects). These commenters
asserted that a disclosure rule would be
better suited to address these types of
opportunistic behaviors than a
categorical ban.
Some commenters based their support
for a disclosure rule on their contention
that workers have sufficient bargaining
power to negotiate over non-competes
when they are provided with notice of
them. One such commenter pointed to
the cited research by Starr, Prescott, and
Bishara finding that disclosure of non-
competes to workers prior to acceptance
of a job offer may increase earnings,
increase rates of training, and increase
job satisfaction.1006 The commenter also
referenced the study’s finding that of
those workers who did not attempt to
negotiate a non-compete, 52% reported
that they thought the terms were
reasonable and 41% reported that they
assumed the terms to be non-
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1007 Id. at 72.
1008 The Commission notes that the Franchise
Rule requires franchisors to disclose any non-
compete that franchisees must impose on managers.
16 CFR 436.5(o)(3). These non-competes are
prohibited by the final rule. See Parts III.D and
V.D.6.
1009 See Part IV.B.2.b.i.
1010 Indeed, the authors of this study note that
‘‘unobservables may more plausibly account for
these estimates.’’ See Starr, Prescott, & Bishara,
supra note 68 at 77 n.35.
1011 Id. at 72. The study finds that 38% of workers
asked to sign a non-compete before accepting a job
offer assumed they could not negotiate, versus 48%
of workers asked after accepting a job offer.
1012 The Commission considered whether a
disclosure rule would be appropriate for senior
executives, but concludes that it is not because it
would fail to address many of the ways in which
non-competes are restrictive and exclusionary and
tend to negatively affect competitive conditions.
1013 Id. at 3521.
1014 Id.
1015 Id.
1016 Id.
negotiable. 1007 The commenter
contended that a disclosure rule would
decrease the number of workers who
assumed non-competes were non-
negotiable.
A few commenters contended a
disclosure rule may be more likely to
withstand judicial review because the
Commission could promulgate a
disclosure rule in this context under its
UDAP authority pursuant to the
Magnuson-Moss Act. In addition, a few
commenters requested the Commission
adopt timing rules for when the
disclosure must be provided, such as by
requiring that employers disclose a non-
compete in the job advertisement, at the
time of the job offer, or at least five
business days prior to the worker’s
deadline to sign an employment
agreement.
The Commission declines to adopt a
disclosure rule. 1008 The Commission
finds that merely ensuring workers are
informed about non-competes would
not address the negative externalities
non-competes impose on workers,
rivals, and consumers. As described in
Part IV.B.3.a.ii, non-competes suppress
wages for workers across the labor force,
including workers who are not subject
to non-competes. Ensuring that a worker
who enters into a non-compete is
informed about the non-compete does
not address the harm to these other
workers. In addition, it does not address
the ways in which non-competes harm
consumers and the economy through
reduced new business formation and
innovation, described in Part IV.B.3.b.
In other words, non-competes have
negative spillover effects on workers,
consumers, businesses, and the
economy that disclosure cannot
remediate.
The Commission also finds that a
disclosure requirement would not be as
effective as a categorical ban in
addressing the exploitation and
coercion of workers through non-
competes. As described in Part
IV.B.2.b.i, there is a significant
imbalance in bargaining power between
employers and most workers, which is
particularly acute in the context of
negotiating employment terms such as
non-competes. And, as many comments
from workers and worker advocacy
groups attest, non-competes are often
included in standard-form contracts and
offered on a take-it-or-leave-it basis.1009
As a result, workers have limited
practical ability to negotiate non-
competes even if they are notified of
such clauses prior to accepting their
employment offer. Indeed, as described
in Part IV.B.2.b.i, the comment record
reflects that very few workers (other
than senior executives) bargain over
their non-competes—whether the
worker knew about the non-compete
before the job offer and understood its
terms, or not.
The Commission gives the findings of
the Starr, Prescott, and Bishara study on
the impacts of disclosure little weight
because the study reflects only
correlation, not causation, with respect
to the effects of a disclosure rule
(similar to the ‘‘use’’ studies the
Commission gives little weight to, as
described in Part IV.A.2). The study
merely compares a set of workers whose
firms disclosed the non-compete and
workers whose firms did not, and any
correlation may thus be attributable to
confounding factors. This comparison—
similar to comparisons of workers with
and without non-competes—may be
polluted by differences between firms
that opt to disclose non-competes and
those that do not, or differences between
workers who are the beneficiaries of
disclosure versus those who are not.1010
For example, it is possible that firms
that disclose non-competes are also
more responsible employers in general
that tend to pay their workers more,
train their workers more, and have more
satisfied workers. The Commission
therefore does not find that this
evidence represents a causal
relationship between the disclosure of
non-competes and earnings and other
outcomes. Moreover, the weight of the
evidence discussed in Parts IV.B and
IV.C finding increased earnings, new
business formation, and innovation
from the final rule significantly surpass
the potential effects of disclosing non-
competes.
One commenter stated that the Starr,
Prescott, and Bishara study suggests that
a disclosure rule would decrease the
number of workers who assume a non-
compete with which they are presented
is non-negotiable. The study suggests
that the potential effects of a disclosure
rule in this respect would be, at best,
limited.1011 For the reasons described in
this Part IX.B.1, the Commission is
skeptical that a disclosure requirement
would meaningfully increase the share
of workers who actually bargain over
non-competes.
A disclosure rule may address some
deceptive or misleading practices in
connection with non-competes.
However, considering that a disclosure
rule is not likely to significantly reduce
the negative competitive impacts of
non-competes on labor markets and on
product and service markets, this
benefit is significantly outweighed by
the limitations of a disclosure rule.1012
The Commission further concludes
that a disclosure rule is not necessary
for non-competes in the context of sales
of a business entity. As described in Part
V.A, persons selling a business entity
tend to have bargaining power in the
context of the transaction, and the
Commission is unaware of evidence that
deceptive and misleading practices in
connection with non-competes (such as
waiting to disclose a non-compete until
after the job offer) are common with
respect to business sales.
2. Reporting Rule
In the NPRM, the Commission sought
comment on a reporting rule as a
potential alternative to the proposed
rule.1013 The Commission stated that it
could require employers to report
certain information to the Commission
relating to their use of non-competes; for
example, employers that use non-
competes could be required to submit a
copy of the non-compete to the
Commission. 1014 As the Commission
explained, a reporting rule might enable
the Commission to monitor the use of
non-competes and could potentially
discourage employers from using non-
competes that are not clearly justified
under existing law. 1015
The Commission stated in the NPRM
that it did not believe a reporting rule
would achieve the objectives of the
proposed rule. The Commission stated
that merely requiring employers to
report their non-competes to the
Commission would not meaningfully
reduce the prevalence of non-competes
and would therefore fail to reduce the
negative effects non-competes have on
competitive conditions in labor markets
and product and service markets. 1016 At
the same time, the Commission stated
that a reporting rule would impose
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1017 Id. 	1018 See Part IV.B.2.b.
1019 Mass. Gen. Laws Ann. ch. 149, sec. 24L; Or.
Rev. Stat. Ann. sec. 653.295.
significant and recurring compliance
costs on employers.1017
Most commenters addressing this
topic agreed with the Commission’s
preliminary view that a reporting rule
would not achieve the goals of the
proposed rule. At least one business
opposed any reporting requirement due
to the cost of compliance and to avoid
exposing any confidential information
contained in employment agreements.
At the same time, some commenters
stated that a reporting rule may assist
enforcement and provide quantitative
data sets to measure compliance, while
recognizing that such benefits would
lose significance if the Commission
were to adopt the proposed rule. One
commenter suggested that, to improve
the effectiveness of any reporting rule,
any such rule should include a
provision stating that any non-competes
which were not properly disclosed to
State and Federal authorities are null
and void.
The Commission declines to adopt a
reporting rule. A reporting rule would
impose recurring compliance costs on
employers, compared with the proposed
rule, which largely imposes one-time
costs. At the same time, a reporting rule
would be inadequate to address the
negative effects of non-competes on
competitive conditions in labor markets
and product and service markets, or the
Commission’s concerns about
exploitation and coercion through the
use of non-competes, since it would
allow for the continued use of non-
competes.
3. Limitations on Scope and Duration
In addition to those alternatives listed
in the NPRM, a few commenters
suggested adopting an alternative rule
that allows non-competes but sets a
limitation on their geographic scope
and/or duration. Some commenters
suggested a geographic limit of five, ten,
or thirty miles and/or a temporal limit
of six months or one, two, or three
years, while others suggested a fact-
specific requirement that the geographic
scope or duration of a non-compete be
‘‘reasonable.’’ Many of these
commenters cited State laws that take a
similar approach.
A few commenters opposed this
alternative. One worker advocacy group
argued that any bright-line limit may
end up serving as a default, encouraging
employers to impose non-competes of
the maximum allowable scope or
duration even if that limit is longer or
broader than they otherwise would have
imposed. At least one academic
commenter argued that setting
geographic scope or duration limitations
on non-competes is unlikely to have a
substantial impact, pointing to the
continued prevalence of overly broad
non-competes despite State laws
designed to set upper limits on
geographic scope and duration.
The Commission declines to adopt a
standard providing that the geographic
scope or duration of non-competes must
be ‘‘reasonable.’’ The Commission is
concerned a reasonableness standard
would foster significant uncertainty
among workers and businesses about
the enforceability of non-competes, for
the same reasons a rebuttable
presumption would. In addition, as
described in Part II.C.1 of the NPRM, all
States where non-competes are
enforceable currently apply a
reasonableness standard, so a Federal
reasonableness standard would not
mitigate the negative effects of non-
competes that are presently occurring.
The Commission also declines to
adopt the alternative of imposing limits
on the scope and duration of non-
competes. Such a rule would be
insufficient to address the negative
effects of non-competes on competitive
conditions in labor markets or products
and services markets. Although a non-
compete that lasts for a shorter duration
or within a smaller geographic area
curtails job mobility for the individual
worker it binds to a lesser degree, it
nonetheless curtails the worker’s job
mobility and the ability of competing
employers to recruit and access talent.
Non-competes limited in duration and
scope still tend to inhibit efficient
matching between workers and
employers, with spillover effects on new
business formation and innovation
through the mechanisms described in
Parts IV.B and IV.C. Furthermore,
limitations on the scope and duration of
non-competes would not address the
spillover effects from non-competes on
other workers and consumers. In short,
even if a non-compete applies only to a
relatively delimited location or time
period, it still—by design—cuts off free
and fair competition in labor and
product and service markets.
In addition, most of the commenters
who stated that they were exploited and
coerced by non-competes did not do so
on the basis that the non-compete was
overbroad in scope or duration. Instead,
most of the commenters who described
the terms of their non-competes
described limits on scope and duration
that were within the bounds of what is
typically permissible under State
law. 1018 Some of these commenters even
stated expressly that they were subject
to the non-compete that was standard or
typical in their field. Even these
commenters, however, explained how
they were exploited and coerced in
connection with non-competes because
the non-compete was unilaterally
imposed and because the non-compete
trapped them in worse jobs or forced
them to bear significant harms or costs.
For these reasons, the Commission
declines to adopt bright-line limits on
the scope and duration of non-
competes.
4. Compensation Requirement
Some commenters requested that the
Commission adopt an alternative that
would permit non-competes so long as
the worker is compensated. Some
commenters pointed to Massachusetts
and Oregon law governing non-
competes under which, for certain
workers, non-competes may be enforced
if, inter alia, they include a minimum
level of compensation or consideration
to the worker separate from
compensation for employment.1019
The Commission declines to adopt a
rule requiring compensation for non-
competes. First, such a rule would not
address the harms to competitive
conditions that non-competes cause,
which result in harm to other workers,
to rivals of employers, and to
consumers. The Commission finds in
Parts IV.B.3.a.ii and IV.C.2.c.ii. that non-
competes harm workers other than the
workers who sign them, by reducing the
number of job opportunities and thereby
inhibiting efficient matching for all
workers. The Commission further finds
in Parts IV.B.3.b and IV.C.2.c.i that non-
competes inhibit new business
formation and innovation, which affects
consumers. Therefore, even if a worker
were fully compensated for a non-
compete, the fact of that compensation
would not redress these negative
externalities. Second, this alternative
would be ineffective or significantly less
effective because of the in terrorem
effect of non-competes, which the
Commission finds to be grounded in
empirical evidence and supported by
the comment record described in Part
IV.B.2.b. Third, such a rule would be
difficult to administer and potentially
easy to evade, as employers could
suppress other wages or job quality
while labeling some compensation as
attributable to the non-compete.
5. Combination of Different Alternatives
Some commenters suggested the
possibility of combining two or more of
the alternatives discussed in this Part IX
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1020 NPRM at 3497.
1021 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 11.
1022 SEC v. Chenery Corp., 332 U.S. 194, 203
(1947); NLRB v. Bell Aerospace Co. Div. of Textron,
Inc., 416 U.S. 267, 293 (1974); Wright & Miller,
Federal Practice and Procedure sec. 8117 (2d ed.
2023).
1023 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 681–82 (D.C. Cir. 1973); see also id. at 690
(stating that ‘‘the historic case-by-case purely
adjudicatory method of elaborating the Section 5
standard and applying it to discrete business
practices has not only produced considerable
uncertainty’’ but has also spawned lengthy
litigation).
1024 See Part X.F.6 (estimating that 49.4% of the
5.91 million firms in the U.S. use non-competes).
1025 See Wright & Miller, Federal Practice and
Procedure sec. 8117 (2d ed. 2023); Nat’l Petroleum
Refiners, 482 F.2d at 690 (‘‘[W]hen delay in agency
proceedings is minimized by using rules, those
violating the statutory standard lose an opportunity
to turn litigation into a profitable and lengthy game
of postponing the effect of the rule on their current
practice. As a result, substantive rules will protect
the companies which willingly comply with the
law against what amounts to the unfair competition
of those who would profit from delayed
enforcement as to them.’’) (citation omitted).
in place of a categorical ban. While a
combination of these regulations or
limitations might modulate some of the
ways in which non-competes are
exploitative and coercive, they would
not be as effective as a comprehensive
ban. In particular, a combination
approach would lack the clarity of a
comprehensive ban and thus would not
be as effective as a categorical ban in
addressing the exploitation and
coercion of workers through non-
competes. Moreover, as noted
previously, the alternatives discussed
would do little to address the tendency
of non-competes to negatively affect
competitive conditions and to cause
spillover effects on other workers and
on consumers. Accordingly, a
combination of these alternative
regulations or limitations would fail to
remedy the aggregate and spillover
effects of non-competes and thus would
not achieve the Commission’s stated
goals.
C. The No-Action Alternative: Reliance
on Existing Legal Frameworks Instead of
a Clear National Standard
The Commission sought comment on
whether a Federal standard for non-
competes would promote certainty for
employers and workers.1020 The
Commission finds that a clear national
standard for non-competes will more
effectively address non-competes’
tendency to negatively affect
competitive conditions than case-by-
case adjudication or relying on existing
law alone. The Commission also finds
that declining to adopt the final rule,
and instead relying on case-by-case
adjudication or existing law alone,
would not address the exploitation and
coercion of workers through non-
competes.
1. Comments Received
Many commenters expressed support
for the NPRM because they viewed
current laws as insufficient to protect all
workers, rivals, or consumers, regardless
of where they are located, from the
negative effects of non-competes on
competitive conditions in labor markets
and markets for products and services.
Numerous workers, businesses, and
other commenters said the patchwork of
State laws and confusion about those
laws, particularly reasonableness tests,
makes it difficult for workers and
businesses to understand the law and in
turn contributes to the use of
unenforceable or overbroad non-
competes and chills worker mobility.
Several commenters also said that case-
by-case adjudication and reasonableness
tests make it difficult for parties to
predict outcomes, which in turn raises
litigation costs. Even some organizations
opposed to the proposed rule or who
supported a different policy believed
that a Federal rule could be beneficial,
such as to businesses operating in
multiple jurisdictions.
In addition, according to commenters,
case-by-case adjudication under State
law cannot address the harms caused by
non-competes through their use in the
aggregate. Some commenters also
asserted that the patchwork of State
laws is complicated by remote and
hybrid workers. Others argued that State
laws are skewed in favor of employers
or leave workers vulnerable to
unreasonable agreements. Some argued
that many workers, businesses, non-
competes, and labor markets cross State
lines, demonstrating the need for one
standard. Several State Attorneys
General also said that numerous
complications arise when localities span
more than one State and those States
have different laws on non-competes;
workers become confused and
enforcement of non-competes can have
spillover effects in another State.1021
In contrast, many commenters stated
that case-by-case adjudication is
preferable to a Federal rule because it
allows individual facts to be considered.
In addition, many commenters argued
that existing State legislative and
judicial decisions are sufficient to
impose limitations on non-competes
while recognizing legitimate business
interests. Commenters also argued that
States should be allowed to continue
their natural experiments with non-
competes; that non-competes
historically have been and should
remain an issue of State law; and that
States are best suited to make policy
judgments for their citizens.
Some commenters argued that
unenforceable or overly broad non-
competes are not a problem because
courts can strike down or reform them.
Some employers asserted that they
specifically, or employers more
generally, did not enter into
unenforceable non-competes. Other
commenters argued that employers did
not use choice of law clauses to evade
State laws, stating the clauses are the
products of arms-length bargaining and
provide certainty and predictability.
2. Responses to Comments and the
Commission’s Findings
a. The Value of Rulemaking
The Commission has the authority to
make rules and regulations to carry out
the FTC Act’s prohibition on unfair
methods of competition under sections
5 and 6(g) of the FTC Act as described
in Parts II.A through II.C, and the
Supreme Court has stated that agencies
generally have discretion to choose
between rulemaking and
adjudication. 1022 Based on the empirical
evidence, the comments, and the
Commission’s expertise, the
Commission finds that rulemaking is the
appropriate method of addressing non-
competes.
The prevalence of non-competes
across the economy, described in Part
I.B.2, and the scale of the harms they
cause, described in Parts IV.B and IV.C,
show that it is more efficient to address
the harms to competition from non-
competes via rulemaking compared to
case-by-case adjudication. As the D.C.
Circuit stated in ruling that the
Commission had the authority to
promulgate unfair methods of
competition rules, ‘‘the availability of
substantive rule-making gives any
agency an invaluable resource-saving
flexibility in carrying out its task of
regulating parties subject to its statutory
mandate.’’ 1023 The Commission
estimates that there are 2.92 million
firms using non-competes in the
U.S.1024 Adjudicating individual cases
against even just one-tenth of 1% of
these employers would be slow,
inefficient, and costly for the
Commission, employers, and workers.
Rulemaking provides notice of the
application of section 5 to non-competes
in a clearer and more accessible way
than piecemeal litigation and avoids
compliance delays. 1025 The final rule
will provide all market participants
greater clarity about their obligations
under section 5 of the FTC Act,
facilitating compliance. Additionally,
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1026 See Nat’l Petroleum Refiners, 482 F.2d at 690
(‘‘With the issues in Section 5 proceedings reduced
by the existence of a rule delineating what is a
violation of the statute or what presumptions the
Commission proposes to rely upon, proceedings
will be speeded up.’’).
1027 See Part IV.B.3.a–b.
1028 See, e.g., Combating Auto Retail Scams Trade
Regulation Rule, 89 FR 590, 600 (Jan. 4, 2024)
(stating that rulemaking was necessary because
certain unfair and deceptive acts and practices had
persisted despite more than a decade of Federal and
State enforcement, education, and other action in
the motor vehicle dealer marketplace).
1029 Nat’l Petroleum Refiners, 482 F.2d at 683
(citations omitted); see also Wright & Miller,
Federal Practice and Procedure sec. 8117 (2d ed.
2023).
1030 Nat’l Petroleum Refiners, 482 F.2d at 683
(citations omitted).
1031 See also Part IV.B.2.b.ii (describing
exploitative and coercive effects of the risk and cost
of being subject to a non-compete suit).
1032 Lipsitz & Starr, supra note 72 at 144
(analyzing data from the Starr, Prescott, & Bishara
survey).
1033 Graham v. Cirocco, 69 P.3d 194, 200 (Kan.
App. 2003).
1034 Blake, supra note 22 at 682–83 (noting that
this may not be applicable if the worker has
bargaining power and it may be inefficient to tailor
non-competes to each worker, and recommending
that courts only sever when they determine the
employer acted fairly).
1035 See NPRM at 3495.
1036 See Part I.B.1.
1037 See 15 U.S.C. 15.
1038 NPRM at 3496.
the final rule will simplify enforcement
proceedings by streamlining the proof
required. 1026
In addition, the principal harms from
non-competes arise from their tendency
to negatively affect competitive
conditions in the aggregate. A single
non-compete with a single worker may
not do much to inhibit efficient
matching between workers and
employers across a labor market or
suppress new business formation or
innovation (and what effects it does
have would be difficult to measure), but
the Commission finds based on
empirical evidence that the use of many
non-competes across the labor market
does have these aggregate net negative
effects.1027 For this reason, rulemaking
is preferable to individual litigation for
addressing the negative effects of non-
competes. Past Commission experience
has also illustrated that case-by-case
enforcement, education, and other
enforcement mechanisms are not always
sufficient to stop widespread harms. 1028
A Federal rulemaking is the most
efficient method to address the scale of
harm to competitive conditions in labor,
product, and service markets caused by
non-competes.
Finally, ‘‘utilizing rule-making
procedures opens up the process of
agency policy innovation to a broad
range of criticism, advice and data that
is ordinarily less likely to be
forthcoming in adjudication.’’ 1029
Rulemaking is particularly beneficial
when, as here, ‘‘a vast amount of data
had to be compiled and analyzed, and
the Commission, armed with these data,
had to weigh the conflicting
policies.’’ 1030 Rulemaking also allows
for more fulsome engagement from the
public by providing for public comment
on a complete regulatory scheme. The
Commission greatly benefited from the
submitted comments.
b. Case-by-Case Litigation Alone Cannot
Address the Negative Effects of Non-
Competes on Competition
The Commission finds that case-by-
case litigation alone is insufficient to
address the harms to competition from
non-competes due to the cost of
litigation, which deters many workers
from challenging non-competes, and the
limited resources of public enforcement
agencies. In addition, individual
litigation is not well-suited to redress
the negative externalities non-competes
impose on other workers, other
employers, consumers, and the
economy from their use in the aggregate.
Many commenters addressed the
shortcomings of individual litigation as
a means for addressing the harms of
non-competes. Numerous commenters
noted that litigation is costly and many
workers cannot afford to litigate their
non-competes.1031 Many commenters,
including workers, entrepreneurs, and
employment attorneys, shared examples
of five-figure and six-figure litigation
costs related to non-compete lawsuits.
Numerous commenters reported that the
fear of litigation costs induced them to
refrain from seeking or accepting other
work or starting a business, even though
they thought the non-compete was
likely unenforceable. Many other
commenters stated that they complied
with a non-compete after they were
threatened with enforcement, even
though they were unsure about the non-
compete’s enforceability. One study
finds that 53% of workers subject to
non-competes are hourly workers,1032
who are particularly unlikely to be able
to afford a court challenge.
Commenters also noted some non-
competes include liquidated damages
clauses or fee-shifting provisions
requiring the worker to pay the
employer’s attorney and other costs if
the employer wins, further increasing
the costs (and risks) of challenging a
non-compete. In addition, commenters
stated that litigation is time-consuming
and could take as long or longer than
the non-compete period. For example,
one commenter shared a decision in the
commenter’s own case where the
appellate court found the non-compete
violated public policy by leaving an area
with only one surgeon in a specialty—
but reached that decision only after the
two-year non-compete had already run
its course.1033 Commenters also said
workers who sued their employer could
experience reputational harm and
difficulty finding work going forward.
Litigation can be even riskier if a
court might reform a non-compete,
which leaves the worker subject to some
restrictions even if the initial non-
compete was impermissibly broad.
Several commenters cited a Harvard
Law Review article that discusses the
consequences of allowing courts to
sever or reform overbroad non-
competes:
For every covenant that finds its way to
court, there are thousands which exercise an
in terrorem effect on employees who respect
their contractual obligations and on
competitors who fear legal complications if
they employ a covenantor, or who are
anxious to maintain gentlemanly relations
with their competitors. Thus, the mobility of
untold numbers of employees is restricted by
the intimidation of restrictions whose
severity no court would sanction. If
severance is generally applied, employers
can fashion truly ominous covenants with
confidence that they will be pared down and
enforced when the facts of a particular case
are not unreasonable.1034
If there is no penalty for drafting
overbroad non-competes (as is true in
most States),1035 employers have little
incentive to draft non-competes
narrowly, particularly if a court is likely
to revise it rather than strike it down, or
if a worker is unlikely to be able to
litigate at all. An employment attorney
commented it is particularly difficult to
advise workers about whether their
specific non-compete is enforceable
when it is possible a court may modify
the underlying non-compete.
Case-by-case litigation under other
antitrust laws alone is also insufficient
to address the harms from non-
competes. Non-competes restrain trade
and therefore are subject to the Sherman
Act.1036 While private litigants may
bring private causes of action to enforce
the Sherman Act, 1037 the Commission
views private litigation under the
Sherman Act as an ineffectual response
in the context of non-competes based on
the history of cases by private litigants
arising under that Act, as explained in
the NPRM. 1038 For an individual
litigant, proving harm to competition in
the relevant geographic and product
markets is a resource-intensive task that
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1039 See, e.g., U.S. Healthcare, Inc. v.
Healthsource, Inc., 986 F.2d 589, 599 (1st Cir. 1993)
(‘‘In practice, the frustrating but routine question
how to define the product market is answered in
antitrust cases by asking expert economists to
testify.’’).
1040 See NPRM at 3496–97 (discussing non-
compete cases that have been brought under the
antitrust laws).
1041 See Part II.A.
1042 See Part II.F.
1043 FTC, Congressional Budget Justification—
Fiscal Year 2025, at 8 (2024), https://www.ftc.gov/
system/files/ftc_gov/pdf/fy25-cbj.pdf.
1044 Id.
1045 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 7.
1046 Id.
1047 See Part I.B.2.
1048 See NPRM at 3494–95.
1049 A few commenters suggested that the
Commission could create guidelines instead of a
rule to explain what factors the agency would look
at in an enforcement action. By definition, however,
a guidance document would ‘‘not have the force
and effect of law.’’ Perez v. Mortg. Bankers Ass’n,
575 U.S. 92, 97 (2015) (quoting Shalala v. Guernsey
Mem’l Hosp., 514 U.S. 87, 99 (1995)). Guidelines
would not bind employers or courts and would not
provide workers with the same clarity about the
enforceability of their non-competes. Moreover,
case-by-case litigation itself is not suited to address
the negative externalities of non-competes, a
concern the issuance of guidelines would not
address. The Commission finds that the issuance of
guidelines is not a viable alternative to the final rule
for the same reasons that it finds that the no-action
alternative generally is not a viable alternative to
the final rule.
typically requires expert testimony.1039
This makes an already expensive
proposition even less palatable for most
workers and further tips the risk-versus-
reward calculus away from litigation. In
addition, to succeed on a Sherman Act
claim, a plaintiff must show harm to
competition as a whole, not just to
themselves. It may be difficult or
impossible for a worker to establish that
their individual non-compete—or a
single firm’s use of a non-compete—
adversely affected competition in a
labor market or product/service market
sufficiently to violate the Sherman
Act.1040 Section 5, on the other hand, is
more inclusive than the Sherman
Act. 1041 As outlined in Part II.F, section
5 requires a showing of indicia of
unfairness and a tendency to negatively
affect competitive conditions. It does
not require a separate showing of market
power or market definition—nor does it
require proof of harm to competition by
each non-compete. 1042
Case-by-case litigation by public
enforcers, such as the Commission or
State attorneys general, is a potential
alternative or supplement to private
litigation under other antitrust laws. But
the ability of public enforcers to engage
in effective case-by-case litigation
related to non-competes, absent a rule,
is limited.
As cited in Parts I.B. and II.C.2, the
FTC has previously secured consent
orders premised on the use of non-
competes being an unfair method of
competition under section 5, and the
Commission has the authority to
determine that non-competes are unfair
methods of competition through
adjudication. However, FTC resource
constraints limit the potential
effectiveness of enforcement of section 5
on a purely case-by-case basis. The
Commission is an independent agency
that works to promote fair and open
markets and protect the entire American
public from unfair and deceptive
business practices. The Commission has
fewer than 1,500 employees for its
entire body of work related to this
mission, 1043 which includes
investigating, challenging, and litigating
anticompetitive mergers and conduct;
processing and reviewing merger filings;
and investigating and challenging a
wide range of consumer protection
issues. 1044
Similarly, several State Attorneys
General commented that the multi-
factor common law approaches to non-
compete law result in piecemeal
decisions that do not address the non-
compete problem in a uniform
manner.1045 These State Attorneys
General also noted that some State
enforcement agencies lack
straightforward authority to enforce
existing common law protections
related to non-competes and argued that
the challenges associated with common
law enforcement underscore the need
for a Federal rule. 1046 And the resource
limitations to pursue non-competes
comprehensively through enforcement
limit States equally—if not more.
The Commission estimates that there
are approximately 30 million individual
non-competes in the U.S.1047 In contrast
to the large volume of non-competes,
the resources of public enforcement
agencies are limited. Public enforcers
must balance competing demands for
resources and priorities when they bring
public enforcement actions. Public
enforcers cannot conceivably investigate
the specific details of every non-
compete or initiate litigation concerning
more than a small fraction of unlawful
non-competes. A Federal rule provides
clarity to market participants, engages
all stakeholders in the development of
the rule, and more effectively ceases an
unfair method of competition.
The significant limitations on the
ability of private and public litigants to
challenge unlawful non-competes have
practical implications. Courts cannot
strike down an unenforceable non-
compete that they never had the
opportunity to review. Moreover, as
detailed in Part IV.B.2.b, non-compete
restrictions may still have significant in
terrorem effects when workers are
uncertain about the enforceability of
their non-competes or lack the ability to
challenge their use.
Furthermore, case-by-case litigation is
insufficient to address negative
externalities from non-competes (i.e.,
harms non-competes cause to persons
other than the parties to the non-
compete). As described in Parts IV.B
and IV.C, non-competes impose
significant negative externalities on
other workers, other firms, consumers,
and the economy. Individual non-
compete cases are not well-suited for
redressing these harms. For example,
while the precise reasonability test for
non-competes differs from State to State,
the test typically considers the business
interest asserted by the employer; the
harm to the worker; and the injury to
the public from the loss of the worker’s
services.1048 This test does not generally
account for the harms experienced by
other workers, other firms, consumers,
and the economy resulting from the
negative effects of non-competes on
competition.
Furthermore, because the significant
harms of non-competes result from their
aggregate use, they are unlikely to be
captured by an assessment of an
individual worker’s non-compete or an
individual firm’s use of non-competes.
This is true regardless of whether those
non-competes are challenged under
State non-compete laws or under other
antitrust laws. It is likewise true
regardless of whether non-competes are
challenged by private litigants or public
enforcers. Accordingly, the Commission
finds that case-by-case litigation alone is
insufficient to address the negative
externalities of non-competes.
The Commission, by contrast, is well-
positioned to evaluate non-competes
holistically. The Commission is an
expert agency and has used its expertise
to assess the weight of the empirical
evidence and comment record to
evaluate the aggregate effects of non-
competes. The Commission here
implements a clear national standard
through notice-and-comment
rulemaking to protect competition,
based on the evidence that the use of
non-competes in the aggregate
negatively affects competition and
harms workers and consumers.
For all these reasons, the Commission
finds that case-by-case litigation is not
a viable alternative to the final rule.1049
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1050 See NPRM at 3494 (summarizing recent State
non-compete legislation).
1051 See Cal. Bus. & Prof. Code sec. 16600; N.D.
Cent. Code sec. 9–08–06; Okla. Stat. Ann. tit. 15,
sec. 219A. Minnesota banned non-competes signed
on or after July 1, 2023, after the comment period
closed. Minn. Stat. Ann. sec. 181.988.
1052 In most States, those limits apply to just one
or two occupations (most commonly, physicians).
See Beck Reed Riden LLP, Employee Noncompetes:
A State-by-State Survey (Feb. 19, 2024), https://
beckreedriden.com/wp-content/uploads/2024/02/
BRR-Noncompetes-20240219-50-State-Noncompete-
Survey-Chart.pdf (hereinafter ‘‘Beck Reed Riden
Chart’’).
1053 See NPRM at 3494–95.
1054 See, e.g., Beck Reed Riden Chart, supra note
1052.
1055 NPRM at 3495.
1056 Id.
1057 Gillian Lester & Elizabeth Ryan, Choice of
Law and Employee Restrictive Covenants: An
American Perspective, 31 Comp. Lab. & Pol’y J. 389,
396–402 (2010).
1058 Id. at 402–04.
1059 Id. at 397 (‘‘In general, courts defer to choice
of law clauses because they are presumed to
represent the express intention of the parties.’’). Cf.
Cal. Lab. Code sec. 925(a) (stating that employers
shall not require an employee who primarily
resides and works in California, as a condition of
employment, to agree to a provision that would
either (1) require the employee to adjudicate
outside of California a claim arising in California or
(2) deprive the employee of the substantive
protection of California law with respect to a
controversy arising in California).
1060 Lester & Ryan, supra note 1057 at 394–95.
1061 Id. at 395 (‘‘The state of the law is perhaps
characterized more by inconsistency than anything
else, so much so that commentators lament the
‘disarray’ and ‘mish-mash’ of the law, and criticize
courts for their ‘post-hoc rationalizing of intuitions’
or their use of a ‘hodgepodge of factors, often with
insignificant explanation of how they decide what
weight to give each.’’’) (internal citations omitted).
1062 See generally Timothy P. Glynn,
Interjurisdictional Competition in Enforcing Non-
Compete Agreements: Regulatory Risk Management
and the Race to the Bottom, 65 Wash. & Lee L. Rev.
1381, 1386 (2008) (noting ‘‘judicial attempts to
preempt other courts from disregarding the parties’
choice of law’’). Some States have attempted to
defend against this by enacting statutes banning
selection of a different State’s law for a non-
compete. See Minn. Stat. Ann. sec. 181.988(3)(a)
(Minnesota); Cal. Lab. Code sec. 925 (California);
Colo. Rev. Stat. sec. 8–2–113(6) (Colorado); Mass.
Gen. Laws ch. 149, sec. 24L(e) (Massachusetts); La.
Rev. Stats. 23:921(2) (Louisiana). Many of these
statutes are relatively recent, however, and it
remains to be seen how effective they will be.
1063 Lester & Ryan, supra note 1057 at 389.
1064 See, e.g., Alexander J.S. Colvin, Econ. Pol’y
Inst., Report, The Growing Use of Mandatory
Arbitration (Apr. 6, 2018).
1065 See, e.g., Nitro-Lift Techs. v. Howard, 568
U.S. 17, 20–22 (2012).
c. State Law Alone Cannot Address the
Negative Effects of Non-Competes on
Competition
The Commission appreciates that
States have enacted legislation in recent
years to ban or restrict non-competes
and ameliorate their negative effects.1050
The Commission has long recognized
the value of concurrent enforcement of
Federal and State law and believes
States have an important role to play in
restricting the use of non-competes.
Indeed, in this final rule, the
Commission has revised § 910.4 to
ensure that States may continue to
enforce laws that restrict non-competes
and do not conflict with the final rule.
However, the Commission believes that
reliance on State law alone is
insufficient to address the negative
effects of non-competes on competition.
The practical ability of States to address
the harms to their residents from non-
competes is limited by various factors,
including employers’ use of choice-of-
law, forum-selection, and arbitration
clauses; significant confusion among
both employers and workers resulting
from the patchwork of State law, which
chills workers from engaging in
competitive activity even where non-
competes are likely unenforceable under
State law and also increases employers’
compliance costs, particularly given the
increase in interstate remote work;
spillover effects from other States’ laws;
and incentives for States to adopt
permissive non-compete policies.
Many States have adopted statutory
restrictions or compete bans on non-
competes. Four States—California,
Minnesota, North Dakota, and
Oklahoma—have adopted statutes
rendering non-competes void for nearly
all workers. 1051 The majority of the
remaining 46 States have statutory
provisions or case law that ban or limit
the enforceability of non-competes for
workers in certain specified
occupations.1052 The general language
of the test for whether a non-compete is
reasonable is fairly consistent from State
to State. 1053 However, the specifics of
the application of the standard differ
from State to State. For example, States
vary in how narrowly or broadly they
define legitimate business interests and
the extent to which courts are permitted
to modify an unenforceable non-
compete. States also differ with respect
to statutory restrictions on non-
competes.1054 As a result, among the 46
States where non-competes may be
enforced, variation exists with respect to
the enforceability of non-competes. 1055
State law also differs with respect to
the steps courts take when they
conclude that a non-compete is
unenforceable as drafted. As noted in
the NPRM, the majority of States have
adopted the ‘‘reformation’’ or ‘‘equitable
reform’’ doctrines, which allow courts
to revise the text of an unenforceable
non-compete to make it enforceable.1056
Because the enforceability of non-
competes and courts’ positions with
respect to unenforceable non-competes
vary from State to State, the question of
which State’s law applies in a legal
dispute can determine the outcome of a
non-compete case. Non-competes often
contain choice-of-law provisions
designating a particular State’s law for
resolution of any future dispute.1057
Furthermore, some non-competes
include forum-selection provisions
specifying the court and location where
a dispute may be heard.1058 The default
rule under conflict-of-laws principles is
that the court honors the parties’ choice
of law, meaning that the burden is
typically on the worker—the vast
majority of whom the Commission finds
are exploited and coerced when
entering into a non-compete—to
negotiate for the law of a different forum
to apply.1059
There is significant variation,
however, in how courts apply choice of
law rules in disputes over non-
competes. 1060 As a result, it can be
difficult for employers and workers to
predict how disputes over choice of law
(and, in turn, the enforceability of the
non-compete) will be resolved. 1061
Several commenters agreed that a
Federal rule would alleviate these
problems.
Choice of law provisions may also
mean that workers lose their own State’s
protections. For example, workers from
States where non-competes are banned
commented that they faced enforcement
of non-competes that selected the law of
another State. This raises the concern
that choice of law clauses can be used
to evade State bans or restrictions by
forum shopping.1062 As two scholars
note, when ‘‘the parties or issues
involved have connections to multiple
jurisdictions,’’ the law ‘‘confounds
lawyers and commentators because of
its complexity and
unpredictability.’’ 1063
Employers may also impose
arbitration clauses, which require that
legal disputes with the employer—
including disputes related to non-
competes—be resolved through binding
arbitration rather than in court.1064
Where such clauses are valid, the
Federal Arbitration Act requires that
courts enforce them. 1065 Choice of law,
forum selection, and arbitration clauses
create opportunities for employers to
forum-shop in ways that undermine any
given State’s ability to effectively
regulate non-competes.
Numerous workers, businesses, and
other commenters said the patchwork of
State laws and confusion about those
laws makes it difficult for workers and
businesses to understand whether a
particular non-compete would be
enforceable. The lack of a clear national
standard, and resulting confusion,
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1066 Starr, Prescott, & Bishara, supra note 68 at 53,
81.
1067 Colvin & Shierholz, supra note 65 at 5–6.
1068 See FTC, Analysis of Agreement Containing
Consent Order to Aid Public Comment, In re
Prudential Sec., Inc. et al., Matter No. 211 0026 at
1, 5–7 (Dec. 28, 2022).
1069 Starr, Prescott, & Bishara, supra note 68 at
633, 663.
1070 Id. at 633, 652, 664.
1071 Id.
1072 See, e.g., Johnson, Lavetti, & Lipsitz, supra
note 388 (finding that increases in non-compete
enforceability in one State have negative impacts on
workers’ earnings in bordering States, and that the
effects are nearly as large as the effects in the State
in which enforceability changed, but taper off as the
distance to the bordering State increases).
1073 New State Ice Co. v. Leibmann, 285 U.S. 262,
311 (1932) (Brandeis, dissenting).
1074 See Beck Reed Riden Chart, supra note 1052.
1075 See, e.g., Glynn, supra note 1062 at 1385–86
(stating that ‘‘because employers typically are the
first movers in [non-compete] litigation, they often
can litigate in a hospitable judicial forum,’’ and
noting a rise in interjurisdictional disputes related
to non-compete enforcement and ‘‘judicial attempts
to preempt other courts from disregarding the
parties’ choice of law’’).
1076 15 U.S.C. 57b–3(b)(2)(C), (E).
1077 NPRM at 3521–31.
1078 See 15 U.S.C. 57b–3(b)(1)(A) through (C).
contributes to non-competes being used
in jurisdictions where they are
unenforceable. Starr, Prescott, and
Bishara find that employers frequently
use non-competes even when they are
unenforceable under State law.1066
Similarly, Colvin and Shierholz find
that 45.1% of workplaces in California
use non-competes even though they are
unenforceable there.1067 Anecdotally, an
economist commented that the
Commission’s Prudential Security case,
in which the employer continued using
non-competes after they were held
unenforceable by a court, was an
example of employers enforcing
unenforceable non-competes.1068
While the Commission has no doubt
that many employers aim to ensure their
contracts comply with applicable law,
the empirical evidence indicates that at
least some employers are using
unenforceable non-competes, and some
workers are turning down jobs where
their non-competes are likely
unenforceable. Some commenters
referenced Starr, Prescott, and Bishara’s
finding that workers frequently cite non-
competes as a factor in turning down job
offers in both States that enforce non-
competes and in those that do not.1069
The study also finds that workers are
more likely to report that they would be
willing to leave for a competitor when
they did not believe their employer
would attempt to enforce a non-compete
in court. 1070 The study suggests that
whether a worker’s non-compete is
enforceable may matter less than
whether the employer is willing to try
to enforce it.1071 The Commission notes
that this study does not necessarily
indicate a causal relationship, but it
does indicate that for many workers, the
in terrorem effect of non-competes may
outweigh any State protections.
Furthermore, the ability of States to
address harms to their residents from
non-competes is limited by spillover
effects from other States. The economies
of States are closely interconnected.
Therefore, even where a State adopts a
law that strictly regulates non-competes,
such a law can be undermined by
permissive non-compete laws in a
nearby State. 1072
Finally, several comments argued that
State regulation of non-competes should
continue by quoting Justice Brandeis’s
dissent in New State Ice Co. v.
Leibmann: ‘‘[i]t is one of the happy
incidents of the [F]ederal system that a
single courageous State may, if its
citizens choose, serve as a laboratory;
and try novel social and economic
experiments without risk to the rest of
the country.’’ 1073 The Commission
disagrees that further laboratory testing
by States is needed. States have been
experimenting with non-compete
regulation for more than a century, with
laws ranging from full bans to notice
requirements, compensation thresholds,
bans for specific professions,
reasonableness tests, and more.1074 Past
State experimentation and legal changes
yielded a considerable body of
empirical research, which as described
in Parts IV.B and IV.C, demonstrates
that non-competes negatively affect
competitive conditions in labor markets
and in product and service markets.
This evidence supports the
Commission’s finding that non-
competes are an unfair method of
competition.
Individual States’ non-compete
policies can cause spillover effects that
negatively affect competitive conditions
in other States. Individual States’ non-
compete policies can also affect the
operation of legal regimes in other
States. Choice of law provisions cause
confusion for workers even in States
where non-competes are unenforceable.
There are incentives for some States to
adopt extremely permissive non-
compete policies to attract employers
that favor non-competes, and potentially
even to enable employers to ‘‘export’’
those permissive policies to other States
through choice-of-law provisions.1075 In
short, States are interconnected with
respect to non-competes. Without a
uniform standard through the final rule,
States are forced to balance the benefit
to their residents of laws regulating non-
competes against the fear that some
employers may shift jobs to States
where non-competes are more
enforceable. One benefit of the
Commission’s rulemaking is it resolves
this problem. The rulemaking record
shows banning non-competes will
improve competitive conditions in all
States and will benefit workers in all
States.
X. Regulatory Analysis
A. Introduction
The Commission has examined the
economic impacts of the final rule as
required by section 22 of the FTC Act
(15 U.S.C. 57b–3). Section 22 directs the
Commission to issue a final regulatory
analysis that analyzes the projected
benefits and any adverse economic
effects and any other effects of the final
rule. The final regulatory analysis must
also summarize and assess any
significant issues raised by comments
submitted during the public comment
period in response to the preliminary
regulatory analysis.1076
B. Preliminary Analysis
Pursuant to section 22 of the FTC Act,
the Commission issued a preliminary
regulatory analysis of its proposed
rule. 1077 The preliminary regulatory
analysis contained (1) a concise
description of the need for, and
objectives of, the proposed rule; (2) a
description of any reasonable
alternatives to the proposed rule that
may accomplish the stated objective of
the final rule in a manner consistent
with applicable law; and (3) for the
proposed rule and for each of the
alternatives described, a preliminary
analysis of the projected benefits and
any adverse economic effects and any
other effects. 1078
In the preliminary regulatory analysis,
the Commission described the
anticipated effects of the proposed rule
and quantified the benefits and costs to
the extent possible. For each benefit or
cost quantified, the analysis identified
the data sources relied upon and, where
relevant, the quantitative assumptions
made. The preliminary analysis
measured the benefits and costs of the
proposed rule against a baseline in
which the Commission did not
promulgate a rule regarding non-
competes and included in the scope of
the analysis the broadest set of
economic actors possible. Several of the
benefits and costs were quantifiable, but
not monetizable—especially with
respect to differentiating between
transfers, benefits, and costs. The
Commission preliminarily found that
others were not quantifiable. The
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1079 Johnson, Lavetti, & Lipsitz, supra note 388 at
17.
1080 In other words, taking all changes in non-
compete enforceability between 1991 and 2014 (the
range studied in the relevant literature) into
account, the Commission considers a change whose
magnitude is equal to the average of the magnitudes
of all those changes. See Johnson, Lavetti, & Lipsitz,
supra note 388 for more details.
1081 Hausman & Lavetti, supra note 590.
1082 The evidence in the empirical literature is
mixed. Younge & Marx (supra note 755) find an
increase in firm value when non-competes became
enforceable in Michigan. Hiraiwa, Lipsitz, & Starr
(supra note 502) find no effect on firm value when
non-competes were prohibited for the majority of
workers in Washington.
1083 See Part V.D.3.
preliminary analysis discussed any
bases for uncertainty in the estimates.
The Commission preliminarily found
substantial positive effects of the
proposed rule: an increase in workers’
earnings by $250–$296 billion annually
(with some portion representing an
economic transfer from firms to
workers); an increase in new firm
formation and competition; a reduction
in health care prices (and prices in other
markets may also fall); and an increase
in innovation. The Commission noted
that several of these benefits overlap
(e.g., increases in competition may fully
or in part drive decreases in prices and
increases in innovation). The
Commission also preliminarily found
some costs of the proposed rule. Direct
compliance and contract updating
would result in $1.02 to $1.77 billion in
one-time costs, and firm investment in
human capital and capital assets would
fall.
The Commission preliminarily
concluded that the substantial labor
market and product and service market
benefits of the proposed rule would
exceed the costs. Furthermore, the
Commission preliminarily found the
benefits would persist over a
substantially longer time horizon than
most costs of compliance and contract
updating.
C. Public Comments on the Preliminary
Regulatory Impact Analysis
Based on the comments received, the
final regulatory analysis reflects greater
quantification where possible and
includes sensitivity analyses to reflect
different assumptions, including
assumptions commenters suggested.
The final regulatory analysis concludes,
consistent with the preliminary
analysis, that the benefits of the final
rule justify the costs.
Some commenters urged the
Commission to quantify the costs and
benefits to a greater degree. In the final
analysis, the Commission incorporates
greater quantification where possible.
That some effects cannot be quantified
or monetized does not, however,
undermine the Commission’s
conclusion that the benefits justify the
costs.
Some commenters focused on the
methodology used to estimate earnings
effects in the preliminary analysis,
stating that extrapolating estimated
effects on earnings based on linear
predictions may result in incorrect
estimates. These commenters stated that
linear predictions might be particularly
unreliable outside the range observed in
the data. While as a general matter,
linear extrapolation may not be
appropriate in all circumstances,
especially in the absence of data
supporting such an approach, the
Commission notes the linear effect of
non-compete enforceability on earnings
was statistically tested in the economic
literature.1079
Nevertheless, to test and confirm the
robustness of the conclusions drawn in
the preliminary analysis from the linear
approach, in this final analysis, the
Commission uses several estimation
approaches. For its primary analysis, the
Commission adopts an approach that
does not rely on extrapolation.
Specifically, the Commission assumes
that the historical average change 1080 in
non-compete enforceability observed at
the State level represents the total
change in enforceability that results
from the rule. This approach is hereafter
referred to as the ‘‘average enforceability
change approach.’’ It likely
underestimates the effects of the rule
because the State-level changes that
would occur under the rule (which
adopts a near comprehensive ban)
would be substantially larger than the
changes observed historically. The
Commission also conducted sensitivity
analyses with two other approaches—
described further in Parts X.C and
X.F.6.a—that use linear extrapolation to
scale up the effects estimated in the
literature to estimate the effects of the
final rule (i.e., a near comprehensive
ban).
Some commenters alleged the
proposed rule would increase inflation.
Some commenters also stated the
proposed rule would harm shareholders
by decreasing corporate profits. In
response, the Commission notes that the
regulatory analysis attempts to quantify
and monetize real costs and benefits of
the final rule as opposed to nominal
costs and benefits. Therefore, net
benefits are benefits that represent
increased economic efficiency resulting
from the final rule rather than increases
in the dollar value of output that may
be due to inflation. Additionally,
earnings increases are due, at least in
part, to increased economic efficiency,
which would likely lower prices.
Accordingly, the Commission does not
expect that prices will rise because of
the rule. Indeed, empirical evidence
shows that in physician clinics, prices
fall with decreased non-compete
enforceability. 1081 Similarly, while the
effect of the final rule on corporate
profits is unclear, 1082 the Commission’s
analysis is focused on overall gains or
losses in economic surplus—i.e., the net
benefits to society, not to individual
corporations.
Some commenters stated that certain
costs may be missing from the
preliminary analysis, including costs
related to worker misconduct and
litigation over the validity of the final
rule. The Commission finds no evidence
or compelling arguments directly
linking non-competes to worker
misconduct and therefore does not
consider such costs.1083 Costs related to
litigation over the validity of the rule are
outside the scope of the regulatory
analysis under section 22, which is
concerned with costs and benefits
should the final rule be implemented.
Some commenters stated the rule may
have beneficial tax ramifications for
businesses and workers with non-
competes that are no longer enforceable,
including based on changes in
amortization schedules. In response, the
Commission notes that any tax savings
under the final rule represent transfers
from the government to firms that
previously used non-competes.
Significantly, the Commission is
allowing existing non-competes with
senior executives, who may be most
likely to have non-competes with tax
implications, to remain in effect. This
will mitigate the need for tax-related
administrative work. In response to
comments on the tax ramifications of
clawed back pay, the final rule does not
encourage or require firms to ‘‘claw
back’’ compensation and given the
exclusion for senior executives’ existing
non-competes in the final rule,
situations in which a firm would be in
a position to consider clawing back pay
are likely to be extremely limited, if any.
Some commenters stated workers may
be harmed if firms claw back workers’
earnings, if workers lose long-term
incentive payments, retention bonuses,
and severance payments, or if workers
must pay for training out of pocket in
response to the rule. First, in Parts
IV.B.3.a.iiv and X.F.6.a, the Commission
finds earnings increases overall
associated with decreases in non-
compete enforceability. With respect to
existing non-competes, non-competes
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1084 Starr, supra note 445.
1085 See Part IV.B.3.b.ii, discussing Johnson,
Lipsitz, & Pei, supra note 526.
1086 Commenters used the words ‘‘requisite’’ and
‘‘discretionary’’ in lieu of ‘‘core’’ and ‘‘advanced,’’
respectively.
1087 This estimate is drawn from the Fitzpatrick
Matrix, which is a fee schedule used by many U.S.
courts for determining the reasonable hourly rates
in the District of Columbia for attorneys’ fee awards
under Federal fee-shifting statutes. It is used here
as a proxy for market rates for litigation counsel in
the Washington, DC area, which likely represent the
high end of rates for litigation counsel in the U.S.
The estimate is therefore adjusted to reflect a
national rate by multiplying by the ratio of the
hourly wage of attorneys nationwide to the hourly
wage of attorneys in the Washington, DC metro
area, based on BLS Occupational Employment and
Wage Statistics data. The Commission
conservatively uses the rates of a tenth-year
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://
www.justice.gov/usao-dc/page/file/1504361/
dl?inline. See BLS Occupational Employment and
Wage Statistics, https://www.bls.gov/oes/data.htm.
with senior executives, which are most
likely to be structured with incentive
payments, bonuses, and severance, may
remain in effect under the final rule. To
the extent any other existing non-
competes with such structures are not
excluded from the final rule, as noted in
Parts III.D and IV.D, deferred
compensation and other structured
payments generally have many material
contingencies other than a non-compete,
which means incentive payments and
retention bonuses will continue to
retain value for the employer. Going
forward, under the final rule,
agreements for deferred compensation
and other structured payments may be
permissible as long as they do not fall
within the definition of non-compete
clause in § 910.1. With respect to
payments for training, the Commission
notes evidence that worker-sponsored
training is unaffected by legal
enforceability of non-competes,1084 and
it is therefore unlikely that workers will
incur costs related to training as a result
of the final rule.
Some commenters disagreed with the
Commission’s use of patenting activity
as a proxy for innovation in the
preliminary analysis, stating that the
value of innovation may not be captured
in patenting, in part because employers
may use patents as a substitute for non-
competes. First, the Commission agrees
that innovation likely has value above
and beyond patenting. That patenting
does not capture the full value of
innovation is not a basis for dismissing
its value as a proxy altogether. Second,
while it is theoretically possible firms
may substitute from the use of non-
competes to the use of patents to protect
intellectual property, the empirical
literature shows increases in innovation
do not follow from the simple
substitution of protections between non-
competes and patents. Specifically, the
empirical literature confirms the
innovations prompted by decreased
non-compete enforceability are
qualitatively valuable, and—examining
the relationship between non-compete
enforceability and patenting for drugs
and medical devices, where patenting is
ubiquitous 1085 —it shows the patents
reflect true net increases in innovation
(as opposed to substitutions). One
commenter stated there can be difficulty
ascertaining the value of patenting. The
Commission finds that there are several
estimates of the private value of a patent
(e.g., the value to the patenting firm) in
the literature, but no estimates of the
social value of a patent, as further
discussed in Part X.F.6.b. The
Commission therefore stops short of
monetizing this benefit. The final
analysis addresses effects on innovation
in greater detail in Part X.F.6.b.
Some commenters asserted the
research related to investment in human
capital does not distinguish between
two different types of training: core
training, i.e., training required to
perform job duties, and advanced
training, i.e., training with potential to
increase productivity beyond the
baseline requirements for job
performance.1086 Commenters stated
that when non-competes are more
enforceable, workers may receive
additional core training rather than
advanced training. In other words, when
non-competes are more enforceable,
labor mobility decreases and workers
may also move to new industries to
avoid potentially triggering non-
compete clause violations (as discussed
in Part IV.B.3.b.ii), both of which make
experienced workers less often available
for hire. Firms therefore may need to
train workers at a greater rate because
they will hire inexperienced workers
who require more core training.
Research finding increases in training
associated with increases in non-
compete enforceability therefore may
not imply increases in advanced
training—i.e., the kind of training that
increases productivity of workers
already able to perform job duties, with
net benefits for society as a whole. In
response, the Commission agrees that
decreases in training under the final
rule may represent decreases in core,
rather than advanced, training. It is not
possible to discern whether the
observed effects on training in the
literature represent core versus
advanced training because evidence that
would facilitate such an analysis does
not exist. Importantly, a decrease in core
training would be economically
beneficial because it would reflect a
more efficient use of the labor force.
Therefore, to the extent a decrease in
training reflects a change in core
training, this would be a net benefit of
the final rule—not a cost. On the other
hand, to the extent a decrease in
training is due to a change in advanced
training, this would represent a net cost
of the final rule. The Commission
further discusses investment in human
capital in Part X.F.7.a.
Some commenters stated that costs
associated with rescinding existing non-
competes and updating contractual
practices may be greater than estimated
in the NPRM and attributed the greater
cost to the need for high-cost outside
counsel. In response, the Commission
finds it likely that many firms will not
need to use costly outside counsel (or
indeed, any counsel) to comply with the
final rule. This is especially true since
the final rule allows non-competes for
senior executives to remain in effect,
since it does not require rescission of
any existing contracts, and since it
provides a model safe harbor notice for
other workers and makes other
adjustments to simplify the notice
process. In response to commenters
stating that firms will need more time to
implement than estimated in the NPRM,
the Commission conducts an updated
analysis in Part X.F.7.b. The
Commission notes that the model
language provided in the final rule and
allowing employers to use the last
known address, mail or electronic, will
significantly simplify the notice process
for employers. Additionally, the
Commission performs two sensitivity
analyses in Part X.F.7.b. The first
assumes an attorney’s time is more
costly—it replaces the primary estimate
of the average hourly productivity of an
attorney ($134.62 per hour, based on
BLS earnings data) with an estimated
rate of the cost of outside counsel who
is a tenth-year attorney ($483 per
hour). 1087 The second makes different
assumptions about the time spent by
employers related to existing non-
competes that will be no longer be
enforceable and updating contractual
practices. Finally, the Commission
clarifies the definition of ‘‘non-compete
clause’’ in Part III.D to reduce confusion
and give employers and workers a
clearer understanding of what is
prohibited. This, in turn, will reduce
compliance costs and potential
litigation costs over what constitutes a
non-compete.
One commenter from the retail
industry claimed the cost of
implementing the proposed rule could
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1088 Greenwood, Kobayashi & Starr, supra note
757. The Commission notes that this study
supplements—but is not necessary to support—its
finding that no evidence supports the conclusion
that litigation costs will increase under the final
rule. That finding is based on the Commission’s
expertise and the rulemaking record, including
relevant comments. This study was published after
the close of the comment period.
1089 Starr, Balasubramanian, & Sakakibara, supra
note 518.
1090 Griffin Toronjo Pivateau, Preserving Human
Capital: Using the Noncompete Agreement to
Achieve Competitive Advantage, 4 J. Bus.
Entrepreneurship & L. 319 (2010).
1091 As described in detail in this Part X, the
Commission’s final analysis, including its
quantification and monetization of effects, therefore
is not precisely the same as its preliminary analysis.
1092 The Commission is not required to analyze
costs and benefits of regulatory alternatives in its
final regulatory analysis. See 15 U.S.C. 57b–
3(b)(2)(B).
be $100,000 to $200,000 per firm but
did not support this assertion with any
evidence. The Commission disagrees
with this assertion, which does not align
with its careful estimates based on
empirical evidence and significant
expertise presented in Part X.F.7.b.ii.
The Commission’s estimates also
acknowledge and account for
potentially heterogeneous costs across
firms.
Some commenters stated that
employers would need to spend
substantial resources to litigate trade
secret disputes and violations of post-
employment restrictions other than non-
competes. One commenter stated that
the cost of a trade secret case may range
from $550,000 to $7.4 million,
depending on the monetary value of the
trade secret claim. The Commission
analyzes costs of litigation in Part
X.F.7.c. The Commission agrees with
commenters that trade secret litigation,
and litigation over post-employment
restrictions other than non-competes,
may be costly. However, the
Commission notes that no evidence
exists to support the hypothesis that
litigation on these fronts will increase
because of the final rule. Indeed, recent
evidence suggests that trade secret
litigation does not increase following
bans on non-competes.1088 Moreover,
the final rule, with its clear and bright-
line standard (as compared to the
current patchwork of State laws), would
likely decrease litigation attempting to
enforce non-competes, including
litigation initiated by former employers
against workers who start their own
business or who find a new employer.
While the Commission does not have
evidence on the frequency of these
different types of litigation, it expects
the decrease in non-compete litigation
would likely offset potential increases
in other litigation.
Positing that firms will be reluctant to
share trade secrets with workers under
the rule, some commenters also stated
that the costs of lessened sharing of
trade secrets should be taken into
account. Since no data exists on the
effect of non-competes on the monetary
value of shared trade secrets, the
Commission does not quantify or
monetize this effect. Moreover, there is
no evidence that employers will lessen
the extent to which they share trade
secrets under the final rule, much less
that any change would be material. As
detailed in Part IV.D, employers have
less restrictive alternatives to non-
competes that mitigate these concerns.
Some commenters reference the Starr,
Balasubramanian, and Sakakibara
study 1089 and the Commission’s
interpretation of it in the NPRM to
assert that firms founded because of the
rule may be of lower quality than
existing firms in terms of average
employment and survival rates, and
adjustments should be made to the
Commission’s analysis to account for
these differences. Upon further review,
the Commission interprets the authors’
findings to show that within-industry
spinouts resulting from lessened non-
compete enforceability tend to be lower
quality than non-within industry
spinouts resulting from lessened non-
compete enforceability. However, both
types of spinouts are better, on average,
than spinouts that form under stricter
non-compete enforceability. The study’s
results therefore suggest that, if
anything, the Commission
underestimates the final rule’s benefits
from new business formation, because
the estimates do not adjust for quality.
Some commenters asserted that,
because of the positive effects of the
proposed rule on labor mobility, firms
may face greater costs associated with
turnover (especially firms that currently
use non-competes) due to the cost of
finding a replacement, the cost of
training a replacement, and the cost of
lost productivity. Based on Pivateau
(2011),1090 one commenter estimated
that turnover costs 25% of the annual
salary of a worker. Some commenters
also argued that some firms may face
decreased costs of turnover, because
more plentiful availability of labor can
reduce the cost of hiring. The
Commission finds that there may be
distributional effects of increased
turnover—benefits for firms that face a
lower cost of hiring and costs for firms
losing workers who had been bound by
non-competes—and assesses the same
in Part X.F.9.c.
Some commenters offered additional
empirical evidence not discussed in the
NPRM that was not specific to the
proposed regulatory analysis. The
Commission responds to those
comments in Part IV.
D. Summary of Changes to the
Regulatory Analysis
In the final regulatory analysis
presented in Part X.F, the Commission
updates its analyses based on the
parameters of the final rule, comments
received, supporting empirical evidence
raised by commenters, changes in the
status quo regarding regulation of non-
competes, and reanalysis of evidence
presented in the NPRM.1091 This
includes the Commission’s attempt to
quantify and monetize, to the extent
feasible, all costs and benefits of the
final rule, as well as transfers and
distributional effects. The Commission
additionally analyzes hypothetical
scenarios to assess what otherwise
unmonetized benefits and costs would
lead to a final rule that is net beneficial.
Finally, the Commission elects to
include an analysis of an alternative the
Commission considered, namely an
analysis of fully excluding senior
executives.1092
Under the final rule, existing non-
competes with senior executives may
remain in effect. While this change
likely affects some costs and benefits
associated with the final rule
temporarily, the Commission does not
specifically quantify or monetize those
effects. The effect on persistent costs
and benefits would be temporary, as
senior executives will eventually move
out of their jobs and retire or move into
new jobs, to which the final rule will
apply. The Commission notes
throughout its analysis, however, how
different estimates may be affected by
this differential treatment of senior
executives even if it cannot quantify the
precise effect.
E. Summary of Benefits and Costs
The Commission considered several
effects of the final rule on economic
outcomes: earnings, innovation,
entrepreneurship, distributional effects
on workers, investment in human
capital, capital investment, legal and
administrative costs, prices, labor
mobility and turnover, and litigation
costs.
The Commission describes the
primary estimates of benefits, transfers,
costs, and distributional effects
associated with each of these outcomes
in Table 1. Table 1 also reports whether
the outcome for each effect is
quantifiable or monetizable and
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38470 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
discusses important nuance or
uncertainty.
TABLE 1
Category 	Extent of characterization 	Description of estimate 	Discussion
Earnings ......................................... 	Quantified ..................................... 	The estimated ten-year present
discounted value of increased
worker earnings is $400-$488
billion. Effect on earnings par-
tially represents a transfer and
partially represents a benefit of
the final rule.
The extent to which the estimated
increase 	in 	worker 	earnings
represents a benefit versus a
transfer is unclear, though there
is evidence to suggest that a
substantial portion is a benefit.
Innovation ...................................... 	Quantified ..................................... 	Annual count of new patents esti-
mated to rise by 3,111–5,337 in
the first year, rising to 31,110–
53,372 in the tenth year. An-
nual spending on R&D esti-
mated to fall by $0-$47 billion.
Effect on innovation represents
a benefit of the final rule.
Estimates of the societal value of
innovation are not available.
The two effects on innovation
together represent a benefit be-
cause more output (amount of
innovation) is produced with
less input (R&D spending).
Prices ............................................. 	Partially Quantified ....................... 	The estimated ten-year present
discounted value of decreases
in spending on physician and
clinical services is $74-$194 bil-
lion. Prices in other sectors may
decrease as well but are not
quantified. The effect on prices
partially represents a transfer
and partially represents a ben-
efit of the final rule.
Price changes encompass trans-
fers (from firms to consumers)
and 	benefits 	(since 	price
changes are likely due to in-
creased competition); however,
the exact split is not clear. In-
creased competition may also
increase 	consumer 	quantity,
choice, and quality. Prices out-
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
discounted value of the net ef-
fect of the final rule on invest-
ment in human capital ranges
from a benefit of $32 billion to a
cost of $41 billion. The effect on
investment in human capital
may represent a cost or benefit
of the final rule.
The range in estimates reflects
uncertainty over whether de-
creased investment in human
capital under the final rule re-
flects reductions in advanced
investment (which the firms opt
into to increase productivity) or
core investment (which is no
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-
crease litigation costs. Effects
on litigation costs may rep-
resent a cost or benefit of the
final rule.
Estimates of the effect of the final
rule on total litigation costs are
not quantifiable. Litigation costs
may rise or fall depending on
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.
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38471	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1093 The Commission notes that it does not
believe there is a likely scenario in which firm exit
and lost capital investment, especially when
balanced against firm entry and gained capital
investment at new firms, would change this
outcome. Firm exit and lost capital investment,
which are not quantified and are discussed as
distributional effects in Part X.F.9, would not, for
example, result in costs large enough to overcome
the break-even analyses (even if, for example, the
value of earnings representing productivity
increases or the social value of patents had to be
marginally higher) or the finding that the benefits
justify the costs.
TABLE 1—Continued
Category 	Extent of characterization 	Description of estimate 	Discussion
Firm Expansion and Formation ..... 	Quantified ..................................... 	The final rule is estimated to in-
crease new firm formation by
2.7–3.2% and decrease capital
investment at incumbent firms
by 0–7.9%. These effects rep-
resent a shift in productive ca-
pacity from incumbent firms to
new firms. The overall effect on
firm expansion and formation
represents a distributional effect
of the final rule.
New firm formation is generally a
benefit, but may also crowd out
incumbent firms and is there-
fore not a pure benefit. De-
creased capital investment at
incumbent 	firms 	may 	be
counterbalanced by increased
capital investment at new firms
or rebalancing across indus-
tries, and therefore may or may
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-
ers. The differential effect on
different groups of workers rep-
resents a distributional effect of
the final rule.
Labor Mobility ................................ 	Partially Monetized ....................... 	Some firms may save on turnover
costs (due to easier hiring as
more 	potential 	workers 	are
available), while some firms
may 	have 	greater 	turnover
costs (due to lost workers newly
free from non-competes). The
latter is estimated to be no
more than $131 per worker with
a non-compete, while estimates
are not available to monetize
the former. While it is unclear
whether labor mobility costs
represent a net cost or benefit
of the final rule, they likely rep-
resent 	a 	distributional 	effect
(costing firms which use non-
competes 	and 	helping 	firms
which do not) of the final rule.
The estimate of the increase in
turnover costs for firms using
non-competes 	is 	an 	upper
bound, since it encompasses
effects on investment in work-
ers’ human capital, hiring work-
ers, and lost productivity of
workers, all of which are ex-
pected to diminish under the
final rule.
Note: Present values are calculated using
discount rates of 2%, 3%, and 7%.
The Commission finds that, even in
the absence of a full monetization of all
costs and benefits of the final rule, the
final rule has substantial benefits that
clearly justify the costs. While data
limitations make it challenging to
monetize all the expected effects of the
final rule, the Commission believes it
has quantified the effects of the final
rule likely to be the most significant in
magnitude, and thus, potentially drive
whether and the extent to which the
final rule is net beneficial. This includes
both benefits and costs. Based on those
quantifications, the Commission is able
to make conservative assumptions,
based on its expertise, under which the
final rule would be net beneficial. In
this context, by conservative
assumption, the Commission means that
it is presuming the benefits it quantifies
to be relatively low in value for
purposes of this analysis, i.e., lower
than it believes is likely the case. With
respect to costs, the Commission
assumes costs are on the higher end of
the estimated range, which is higher
than the Commission believes is likely
to be the case. Through this analysis,
provided in detail in Part X.F.10, the
Commission further bolsters its finding
that the benefits of the final rule justify
the costs.1093
Specifically, the Commission finds
that even if only 5.5% of the estimated
$400–$488 billion increase in worker
earnings represents increased
productivity resulting from improved,
more productive matches between
workers and employers, the benefits
will outweigh the costs. In Part X.F.6.a,
the Commission explains that the
economic literature does not provide a
way to separate increased productivity
from the total effect on earnings (i.e.,
transfers versus benefits in the
regulatory impact analysis sense).
However, the Commission finds that
based on the literature, some part of the
increase in worker earnings represents
increased productivity and believes that
5.5%, and likely more, represents
increased productivity. Similarly, even
presuming that no part of the effect on
earnings is a benefit (as opposed to a
transfer), the Commission finds that if
the social value of a patent were at least
$297,144, then the monetizable benefits
will exceed monetized costs. Notably,
the literature finds that the average
private value of a patent may be as high
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38472 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1094 Churn in this context means turnover that is
neither job creation nor job destruction—essentially
the movement of workers among jobs.
1095 See § 910.2(a)(1).
1096 See § 910.2(a)(2).
1097 The preliminary analysis in the NPRM did
not estimate or apply a coverage rate based on
jurisdiction.
as $32,459,680, again making this
assumption regarding the social value of
a patent quite conservative. Finally,
even presuming none of the earnings are
benefits (rather than transfers) and that
the social value of a patent is zero (an
implausibly low estimate), if all the lost
investment in human capital is core, the
monetized benefits would also exceed
monetized costs. Notably, in conducting
these analyses, in each instance, the
Commission further makes the very
conservative assumption that
monetizable benefits other than the
benefit being analyzed are zero. That is,
the Commission assumes that patents
have no social value and that no
reduced investment in human capital is
core when considering how much of
earnings must represent increased
productivity in order for the monetized
benefits to exceed the monetized costs.
This break-even analysis shows that
while data limitations making it
challenging to monetize all of the
expected benefits of the rule, the
Commission finds that the final rule can
be shown to be net beneficial even
under very conservative assumptions.
F. Final Regulatory Analysis
1. Background
As discussed in Part IV.B.3.a, non-
competes inhibit worker mobility,
creating worse matches between
workers and firms and decreasing
workers’ productivity and therefore
their earnings. Non-competes also
prevent firms from hiring talented and
experienced workers; inhibit new
business formation; and reduce the flow
of innovative workers between firms,
harming innovation. The final rule
increases competition in labor markets
by allowing workers to move more
freely between jobs and increases
competition in product and service
markets by ensuring that firms are able
to hire appropriate workers, that
workers are able to create new
entrepreneurial ventures, and that
worker flow between firms enhances
innovation.
2. Economic Rationale for the Final Rule
The final rule addresses two primary
economic problems. First, non-competes
tend to harm competitive conditions in
labor markets. Non-competes increase
barriers to voluntary labor mobility and
prevent firms from competing for
workers’ services, thus creating frictions
and obstructing the functioning of labor
markets. These frictions inhibit the
formation of optimal and efficient
matches in the labor market, resulting in
diminished worker and firm
productivity and in lower wages.
The second economic problem is that
non-competes tend to harm competitive
conditions in product and service
markets. Non-competes create a barrier
to new business formation and
entrepreneurial growth, which
negatively affects consumers by
lessening competition in product and
service markets. Non-competes also
make it difficult for competitors to hire
talented workers, which reduces these
competitors’ ability to effectively
compete in the marketplace.
Additionally, non-competes impede
innovation by preventing the churn 1094
of innovative workers between firms,
limiting the spread and recombination
of novel ideas, which may negatively
affect technological growth rates.
3. Purpose of the Final Rule
The final rule provides that, with
respect to a worker other than a senior
executive, it is an unfair method of
competition—and thus a violation of
section 5 of the FTC Act—for a person
to enter into or attempt to enter into a
non-compete; enforce or attempt to
enforce a non-compete; or represent that
the worker is subject to a non-
compete.1095 The final rule also
provides that, with respect to senior
executives, it is an unfair method of
competition—and thus a violation of
section 5 of the FTC Act—for a person
to enter into or attempt to enter into a
non-compete; enforce or attempt to
enforce a non-compete entered into after
the effective date; or represent that the
worker is subject to a non-compete,
where the non-compete was entered
into after the effective date.1096
4. Baseline Conditions
a. Estimate of the Affected Workforce
As described in Part II.E, some
workers may not be subject to the final
rule to the extent they are employed by
an entity or in a capacity that is
exempted from coverage under the FTC
Act. The Commission estimates the
fraction of the workforce who would be
covered under the final rule (the
‘‘coverage rate’’) by applying
conservative assumptions to individual-
level data on the characteristics of the
workforce from the American
Community Survey (ACS) for 2017 to
2021. 1097 Residents of four States
(California, Minnesota, North Dakota,
and Oklahoma) are excluded from the
sample used for the computation, since
these States already generally do not
enforce non-compete agreements.
To estimate the coverage rate, workers
are classified according to three criteria:
(1) whether the individual is identified
as working for the government; (2)
whether the individual is identified as
working for a non-profit organization;
and (3) whether the individual works in
an industry or in a capacity that is likely
to be outside the jurisdiction of the FTC
Act. Government employment consists
of employment with local, State, and
Federal governments, in addition to
individuals on active duty in the U.S.
Armed Forces or Commissioned Corps.
Nonprofit status is self-reported by
survey respondents. Industries are
defined based on the North American
Industry Classification System (NAICS).
Such a classification of workers is
necessarily imperfect as the FTC’s
jurisdiction does not exclude all
workers that may be identified in the
data as government employees or map
directly into the data on non-profit
status or the NAICS classifications that
are available within the ACS. For
example, the FTC Act is likely to
exempt some firms that are classified as
non-profits but not others, as described
in Part II.E. Also, in some instances,
only a subset of a given NAICS category
(and not the entire category) appeared
likely to fall outside the jurisdiction of
the FTC Act. When ambiguity arose, the
Commission was overinclusive in
excluding workers. For example, the
Commission classified all nonprofits as
outside the coverage of the final rule for
the purposes of estimating the coverage
rate. Moreover, in estimating the
coverage rate, the Commission excluded
entire industries in calculating the
coverage rate when some subset of that
industry appeared to be outside the
Commission’s jurisdiction. This over-
inclusiveness has the effect of
underestimating the coverage rate of the
final rule, and thus the overall net effect
of the final rule will be conservative.
Using data from the ACS and the
assumptions detailed in Part X.F.4, the
Commission estimates that the final rule
is likely to cover 80% of the private U.S.
workforce.
b. Non-Compete Enforceability
For regulatory analyses, the effects of
the final rule are measured against a
baseline representing conditions that
would exist in the absence of the rule.
The extent of the final rule’s costs and
benefits depends on the degree to which
it will change the enforceability of non-
competes relative to what it would be in
the baseline. Currently, non-competes
are broadly prohibited in four States:
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1098 See NPRM at 3493–97 (describing the law
governing non-competes at the time the NPRM was
published). Minnesota prohibited non-competes
after the publication of the NPRM. See Minn. Stat.
Ann. sec. 181.988.
1099 Bishara, supra note 501 at 751.
1100 Different researchers have rescaled this score
in different ways (e.g., from zero to 470, or scaled
such that the mean score is zero and the standard
deviation of the score is one). The Commission uses
the scaling from zero to one because that is the way
it is used in the majority of the studies which are
relied on in the final analysis, as well as for easy
interpretability and consistency across the final
analysis.
1101 Calculated using data from 2009, the most
recent year with publicly available data, and
rescaled to a zero to one scale. See Starr, supra note
445.
1102 Changes of zero (i.e., years in which the score
in a given State was the same as the prior year) were
excluded from this calculation. The Commission
notes that the study which reports this average
(Johnson, Lipsitz, & Pei, supra note 526) was
released after publication of the NPRM. The
Commission also notes that the data underlying this
calculation were used in other studies discussed in
the NPRM; Johnson, Lipsitz, & Pei report the
average score in the most accessible fashion and is
therefore used here. The average they report is the
average change in the analysis sample they select,
which is chosen for analytical reasons to ensure
accuracy of their estimates. Use of the underlying
data to re-calculate the average score or use of
scores provided by other researchers would not
change the overall outcomes, conditional on sample
selection. Moreover, the Commission reports the
estimates resulting from a full extrapolation in this
final analysis, which does not use this average score
change in its sensitivity analysis, and is the method
used in the NPRM. As noted, the Commission
believes that the full extrapolation method is a
valid, but potentially less precise method.
Accordingly, the use of this score supplements—but
is not necessary to support—the Commission’s
ultimate finding that the benefits to the final rule
justify the costs.
1103 Johnson, Lavetti, & Lipsitz, supra note 388 at
17.
1104 When considering studies which do not
report the relationship between non-compete
enforceability and economic outcomes based on a
numeric score, the Commission is unable to scale
the effect to reflect the average magnitude change
of 0.081.
1105 See, e.g., Jeffers, supra note 450.
California, North Dakota, Oklahoma,
and Minnesota. In some other States,
non-competes are prohibited for some,
but not all, workers. For non-competes
that are not prohibited expressly by
statute, some version of a
reasonableness test is used under State
law to determine whether a given non-
compete is enforceable or not. These
reasonableness tests examine whether
the restraint is greater than needed to
protect an employer’s purported
business interest. Non-competes can
also be found unreasonable where the
employer’s need for the non-compete is
outweighed by the hardship to the
worker or the likely injury to the public.
Because these cases arise in the context
of individual litigation, courts focus the
‘‘likely injury to the public’’ inquiry on
the loss of the individual worker’s
services and not on the aggregate effects
of non-competes on competition in the
relevant market or overall in the
economy. 1098
Researchers have used various scoring
systems to capture the enforceability of
non-competes State by State over time.
As described in Part IV.A.2, the
Commission gives greatest weight to
studies that measure enforceability
granularly (i.e., not using a binary score
but, for example, an integer scale) and
along various dimensions (e.g., the
employer’s burden of proof in non-
compete litigation and the extent to
which courts are permitted to modify
unenforceable non-competes to make
them enforceable). The scoring system
which fits these criteria best 1099 has
been used to study the effect of non-
compete enforceability on several
economic outcomes. This score, which
varies across States and across years,
measures non-compete enforceability
along a scale which runs from zero to
one. 1100 A score of zero indicates
enforceability equal to that of the State
which enforces non-competes least
(North Dakota). A score of one indicates
enforceability equal to that of the State
which enforces non-competes most
readily (Florida). The final analysis
relies on this score heavily as a granular
and reliable scoring system that allows
the Commission to consider the effect of
non-compete enforceability on several
economic outcomes. The studies that
use this score form much of the basis for
the final regulatory analysis.
5. Estimating the Effect of the Rule on
a State-Level Enforceability Metric
In the absence of the rule, the average
State enforceability score—in States that
do not broadly prohibit them—when
measured on a scale of 0 (lowest
enforceability) to 1 (highest
enforceability), is 0.78. The final rule
will result in State-level enforceability
of non-competes falling from its level in
the absence of the rule to zero (i.e., an
average decrease of 0.78, excluding
States that broadly prohibit non-
competes). 1101 Using data on scores
from 1991 to 2014, researchers report
that the average magnitude of a change
in the score (i.e., the size of the change,
regardless of whether it was a score
increase or decrease) from year to year
was 0.081. 1102 In other words, when a
State’s score changed from one year to
the next, the average magnitude of that
change was 0.081, on a scale of zero to
one. Since the decrease that will result
from the final rule is significantly larger
than the average decrease considered in
the literature (0.78 v. 0.081), the
Commission considered different
methods for the primary estimate in this
final analysis. Consistent with the
NPRM, this final analysis could attempt
to scale up, or extrapolate, estimated
effects to account for this larger
decrease. As discussed in Part X.C,
some commenters criticized this
approach, stating that it may result in
unreliable estimates absent evidence
that the economic effects the
Commission is attempting to measure
would scale up linearly.
The Commission notes in X.C that
empirical studies show a linear
extrapolation is appropriate for
measuring earnings effects.1103
However, similar evidence supporting
the use of linear extrapolation is not
available for all economic outcomes the
Commission is measuring in this final
analysis. To maintain consistent
reporting across economic outcomes
and to avoid extrapolation, the final
analysis considers the effect of a change
equal to 0.081 when possible.1104 That
is, for the purposes of the final analysis,
the Commission conservatively assumes
the projected effects on economic
outcomes due to the final rule are equal
to the effects the economic literature
associates with an average magnitude
change in the non-compete
enforceability score from year to year.
The economic literature reports
enforceability changes as simply
increases or decreases in some
studies,1105 and the magnitude of those
legal changes in this final analysis is
assumed to mirror the average
magnitude change of 0.081. The
Commission makes these assumptions
to avoid the possibility of inadvertently
inflating the effects of changes in the
enforceability score. The final rule will
result in greater changes in
enforceability than the changes
examined in empirical studies. There is
a possibility that the magnitude of
change for particular economic
outcomes will not be the same in
response to every reduction in
enforceability. For example, it is
possible that for some economic
outcomes, as enforceability gets closer
to zero, the changes in the outcome
being measured will be lower with each
change in enforceability.
At the same time, the Commission
notes that this may result in
underestimating benefits of the final
rule—the average magnitude change of
0.081 is much smaller than the average
0.78 change it would take for
enforceability to reflect the final rule. To
reflect this possibility, the final analysis
includes sensitivity analyses which
extrapolate beyond an average
magnitude change. In these sensitivity
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38474 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1106 By transfers, the Commission refers to ‘‘a gain
for one group and an equal-dollar-value loss for
another group.’’ See Off. of Mgmt. & Budget,
Circular A–4 (Nov. 9, 2023), 57, https://
www.whitehouse.gov/wp-content/uploads/2023/11/
CircularA-4.pdf.
1107 Calculated as ¥(e ¥0.107*0.081¥1), where
¥0.107 is the estimated coefficient of earnings on
non-compete enforceability score in Johnson,
Lavetti, & Lipsitz (supra note 388), and 0.081
represents the size of an average magnitude change
calculated in Johnson, Lipsitz, & Pei (supra note
526) which scales the effect to represent the effect
of an average sized change in the non-compete
enforceability score.
1108 This figure represents total annual earnings
in the U.S. in the most recent year with data
available (2022), adjusted to 2023 dollars: see
https://data.bls.gov/cew/apps/table_maker/v4/
table_maker.htm#type=0&year=2022&qtr=A&
own=5&ind=10&supp=0. Earnings from California,
North Dakota, Oklahoma, and Minnesota (States
which broadly do not enforce non-competes) are
subtracted out, since enforceability in those States
will be broadly unaffected by the rule. The estimate
is additionally adjusted to account for the
proportion of the workforce the Commission
estimates are currently covered by the
Commission’s jurisdiction (80%), as discussed in
Part X.F.4.a. Numerically, $6.2 trillion is calculated
as ($9.1 trillion ¥ $1.6 trillion) * 80% = $6.0
trillion, adjusted to $6.2 trillion to adjust to 2023
dollars. $9.1 trillion is total private earnings in 2022
in the U.S. (the most recent year with data
available), and $1.6 trillion is total private earnings
in 2022 in CA, ND, OK, and MN.
1109 For illustrative purposes, State-specific
estimates are displayed in Appendix Table A.1. In
this table, 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 earnings).
Total employed population and average annual
earnings are taken from the Census Bureau
Quarterly Census of Employment and Wages for
2022 (see https://www.bls.gov/cew/data.htm).
1110 The percentage effect, 3.2%, is reported by
Johnson, Lavetti, & Lipsitz (supra note 388) as the
lower end of a range of possible effects of a ban on
non-competes, relative to non-compete
enforceability in 2014. The estimate is constructed
by calculating the change in the enforceability score
in each State which would bring that State’s score
to zero (representing no enforceability of non-
competes) and scaling the estimated effect on
worker earnings by that amount. The Commission
uses the low end of the reported range in order to
exercise caution against extrapolation, since the
estimate uses an out-of-sample approximation: the
changes in most States necessary to arrive at a score
of zero are greater than the changes examined in the
study (though this approximation is consistent with
the results of a test in Johnson, Lavetti, and Lipsitz
which shows that the effect of enforceability on
earnings is roughly linear: namely, a change in
enforceability that is twice as large results in a
change in earnings that is twice as large). The
Commission also notes that the estimated range is
based on enforceability in 2014. Since then, some
changes in State law have made non-competes more
difficult to enforce for subsets of their workforces
so that a prohibition on non-competes today is
likely to have a slightly lesser effect than a
prohibition would have had in 2014.
1111 This estimate differs from total affected
earnings for the primary analysis because the
estimate of 3.2% takes into account enforceability
in California, North Dakota, and Oklahoma.
Earnings in those States is therefore added back into
total affected earnings. However, earnings in
Minnesota are still omitted, since the prohibition in
that State was enacted after the conclusion of the
study period in Johnson, Lavetti, and Lipsitz (2023):
see Minn. Stat. sec. 181.988. Total annual earnings
in the U.S. for the affected population excluding
MN are calculated as ($9.1 trillion ¥ $0.2 trillion)
* 80%, updated to adjust to 2023 dollars. $9.1
trillion is earnings for all workers in the US in 2022
(the most recent year with available data) and $0.2
trillion is earnings for workers in MN. See https://
data.bls.gov/cew/apps/table_maker/v4/table_
maker.htm#type=0&year=2022&qtr=A&
own=5&ind=10&supp=0.
analyses, the estimated effects from the
empirical literature are scaled up on a
State-by-State basis (rather than taking
the average) to account for the estimated
size of the decrease in each State’s
score. The Commission notes that linear
extrapolation provides a robust estimate
of earnings changes based on the
empirical literature, but for consistency,
the Commission reports effects based on
the average magnitude change as its
primary analysis.
6. Benefits of the Rule
The Commission finds several
benefits attributable to the final rule, as
reflected in part by the effects of the rule
on earnings and prices, and all the
effects on output and innovation, as
summarized in Table 1 in Part X.E.
a. Earnings
The Commission finds labor markets
will function more efficiently under the
final rule, which will lead to an increase
in earnings or earnings growth.
Specifically, in this regulatory analysis,
the Commission finds that the estimated
ten-year present discounted value of
increased worker earnings is $400–$488
billion. The final rule will result in
additional earnings stemming from
improvements in allocative efficiency
due to more productive matching
between businesses, which are
economic benefits. In other words, the
increase in worker mobility will allow
employers to hire workers who are a
better, more productive fit with the
positions they are seeking to fill, which
in turn will increase productivity
overall. A portion of the additional
earnings are transfers from firms to
workers resulting from more plentiful
employment options outside the
firm, 1106 as workers who are not bound
by non-competes will be in a different
bargaining position with their employer.
To the extent other better opportunities
with different employers exist for a
given worker, their current employers
will now be competing with those other
employers and may increase worker
compensation to keep those workers.
The Commission finds that the
economic literature does not provide a
way to separate the total effect on
workers’ earnings into transfers and
benefits.
The increase in worker earnings
resulting from the final rule is
calculated as follows:
Increase in worker earnings = (%
Increase in Earnings caused by the
change in enforceability of non-
competes) * (Total Affected
Earnings)
The primary approach in this analysis
is to estimate the percentage increase in
earnings assuming that the effect of the
final rule will be the same as the effect
of an average magnitude change in non-
compete enforceability, as discussed in
Part X.F.5. The Commission estimates
the percentage increase in workers’
earnings to be 0.86%.1107 The
Commission estimates total affected
annual earnings to be $6.2 trillion (in
2023 dollars).1108
Multiplying the percentage effect
(0.86%) by overall affected annual
earnings ($6.2 trillion) results in an
annual earnings effect of $53 billion.
The ten-year effect on earnings,
discounted separately by 2%, 3%, and
7%, is reported in the first row of Table
2. 1109
This primary approach requires no
extrapolation (i.e., it does not scale the
effect on economic outcomes to account
for the fact that the effect of the rule on
enforceability scores will be greater than
the changes studied in the economic
literature). However, it may understate
the increase in workers’ earnings
resulting from the final rule. Thus, the
Commission conducts two sensitivity
analyses to assess how the estimated
effect of the rule would change if effects
are extrapolated to represent changes in
enforceability scores greater than those
examined in the literature.
The first sensitivity analysis, hereafter
referred to as the ‘‘full extrapolation’’
approach, calculates the effect on
worker earnings in an identical fashion
to the primary analysis but relies on an
estimate of the percentage increase in
worker earnings which extrapolates to
the effect of a complete prohibition on
the use of non-competes. This results in
an effect on worker earnings equal to
3.2% (instead of 0.86% in the primary
analysis).1110 For this estimate, total
affected earnings are equal to $7.3
trillion in 2023 dollars. 1111 The
estimated effect on earnings across the
workforce for this first sensitivity
analysis is therefore given by the
percentage effect on earnings (3.2%)
multiplied by the total annual wages in
the U.S. for the affected population
($7.3 trillion). This results in an annual
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38475	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1112 This estimate is comparable to the estimate
of $250 billion per year reported in the NPRM. See
NPRM at 3523. The estimate in the NPRM was
based on earnings in 2020 (as opposed to 2022 in
this final regulatory analysis), included earnings in
Minnesota (which has since passed a bill
prohibition non-competes), and did not adjust for
the estimate of the affected workforce discussed in
Part X.F.4.a.
1113 Enforceability score data come from Starr
(2019), which reports scores for 2009 (the most
recent data available). Scores are adjusted to a scale
of zero to one.
1114 In particular, for each State, the Commission
calculates the percentage effect on earnings as
e(0.107*DEnf)¥1, where DEnf is equal to the
enforceability score in that State minus the lowest
observed enforceability score, excluding CA, ND,
OK, and MN (0.53).
1115 Calculated as ¥ (e ¥0.107*0.064¥1), where
¥0.107 is the estimated coefficient of earnings on
non-compete enforceability score in Johnson,
Lavetti, & Lipsitz (supra note 388), and 0.064
represents the scaling factor due to West Virginia’s
score change.
1116 Calculated as $0.29 trillion * 80%, where
$0.29 trillion is earnings in WV in 2022 (the most
recent year with data available) adjusted to 2023
dollars. See https://data.bls.gov/cew/apps/table_
maker/v4/table_maker.htm#type=0&
year=2022&qtr=A&own=5&ind=10&supp=0.
1117 For further discussion of this study, see the
discussion in Part IV.B.3.a.ii of Starr, supra note
445.
1118 The change in enforceability which generates
the estimate in Starr (supra note 445) is a one
standard deviation change, as measured using non-
compete enforceability scores for all 50 States and
the District of Columbia in 1991, which is a change
on a scale of zero to one of approximately 0.17,
calculated as 1/[1.60¥(¥4.23)]. Scaling the
estimate, a change equal to 0.081 would result in
an earnings effect of 0.5%, calculated as
e (0.0099*0.081/0.172)¥1.
1119 Calculated as $6.2 trillion * 0.5%.
1120 Calculated as (199,240 * 246,440)/
(147,886,000 * 61,900), where 199,240 and
147,886,000 are employment for Chief Executives
and All Workers, respectively, and 246,440 and
61,900 are dollar earnings for Chief Executives and
All Workers, respectively, in 2022. See Occupation
Employment and Wage Statistics, BLS, https://
www.bls.gov/oes/tables.htm. The Commission notes
that Chief Executives are used as an illustrative
example, and are an imperfect proxy for senior
executives: some Chief Executives (as classified by
BLS) may not be senior executives under the final
rule, and some senior executives under the rule
may not be Chief Executives.
1121 Off. of Mgmt. & Budget, Circular A–4 (Nov.
9, 2023) at 57.
estimated earnings gain of $234
billion. 1112 The ten-year effect,
discounted at 2%, 3%, and 7%, is
displayed in the second row of Table 2.
The second sensitivity analysis,
hereafter referred to as the ‘‘partial
extrapolation’’ approach, uses the same
formula as the other two analyses (%
effect on earnings * total affected
earnings) but is more conservative in its
estimate of the percent effect on
earnings than the full extrapolation
estimate. The full extrapolation
approach assumes that enforceability
scores fall to zero. The partial
extrapolation approach instead assumes
that enforceability scores fall to the
minimum observed enforceability score
ignoring scores in States that broadly
prohibit non-competes (a more
moderate extrapolation). The minimum
observed enforceability score excluding
States that broadly prohibit non-
competes is 0.53 (on a scale of zero to
one), which is the enforceability score
in New York.1113 This analysis
calculates the change in each State’s
score that would bring it to 0.53, and
scales the effect on worker earnings
estimated in the empirical literature by
that amount. 1114 For example, West
Virginia’s enforceability score is 0.59.
To change to New York’s enforceability
score would imply a decrease in West
Virginia’s score of 0.06 (calculated as
0.59—0.53). This implies a percent
effect on earnings in West Virginia of
0.64%.1115
Total affected earnings in each State
are calculated by multiplying total
earnings in that State (adjusted to 2023
dollars) by the estimated percentage of
covered workers (80%). For example, in
West Virginia, total earnings are
estimated to be $0.24 trillion.1116
Next, the percent increase in earnings
in each State is multiplied by total
affected earnings in that State. In West
Virginia, this results in an earnings
increase of 0.64% * $0.24 trillion = $152
million. Finally, the earnings increases
are added across States. The overall
estimated effect is an annual increase in
earnings of $161 billion. The ten-year
effect, discounted at 2%, 3%, and 7%,
is displayed in the third row of Table 2.
TABLE 2
Estimated ten-year increase in earnings
($ billions), assuming:
2% Discount
rate 3% Discount
rate 7% Discount
rate
Primary estimate (average enforceability change) ...................................................................... 	$488 	$468 	$400
Estimate (full extrapolation) ......................................................................................................... 	2,148 	2,060 	1,762
Estimate (partial extrapolation) .................................................................................................... 	1,488 	1,427 	1,221
The estimated effects on earnings in
Table 2 are based on estimates of the
percentage change in earnings from a
study in the empirical literature that
aligns with the metrics outlined in Part
IV.A.2. Another study in the literature
estimates earnings effects using a
comparison between workers in
occupations that use non-competes at a
high rate versus a low rate.1117 After
adjusting the finding from that study to
the average magnitude enforceability
change, the estimated effect on worker
earnings is 0.5%, 1118 or $31 billion
annually. 1119
The Commission notes that, as
discussed in Part X.E, earnings of senior
executives who continue to work under
non-competes are included in the
calculations in this Part X.F.6.a. If the
Commission were able to identify those
senior executives, their omission from
the calculations would decrease the
earnings effect of the final rule, since
the earnings effect for those senior
executives (and others, because of
spillovers) would be pushed further into
the future, causing steeper discounting.
However, while senior executives are
paid relatively highly, there are
relatively few of them: for example,
based on BLS data on earnings by
occupation, Chief Executives’ earnings
comprise just 0.5% of all earnings.1120
Therefore, the impact on the earnings
calculations of omitting or pushing
forward the earnings of senior
executives who would continue to work
under a non-compete is limited.
Discussion of Transfers Versus Benefits
It is difficult to determine the extent
to which the earnings effects represent
transfers versus benefits. Transfers, in
this context, refer to ‘‘a gain for one
group and an equal-dollar-value loss for
another group.’’ 1121 Such transfers do
not represent a net benefit or cost to the
economy as a whole for purposes of
regulatory impact analysis.
To the extent a prohibition on non-
competes leads to greater competition in
the labor market and a more efficient
allocation of labor by allowing workers
to sort into their most productive
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1122 Johnson, Lavetti, & Lipsitz, supra note 388.
1123 Id. (note: a new version of this paper, posted
in 2023 after the NPRM was published, revised this
estimate slightly).
1124 Starr, Frake, & Agarwal, supra note 469.
1125 The Commission notes that Part IV.B.3.a.ii
does not measure or consider whether earnings are
transfers or benefits because to the extent that the
earnings that are transfers represent firms’ ability to
suppress earnings using an unfair method of
competition, the transfer of such earnings from
firms to workers through the use of non-competes
still reflect the tendency of non-competes to
negatively affect competitive conditions in the labor
market.
1126 These values represent the range reported in
Johnson, Lipsitz, & Pei, supra note 526, considering
both raw patent counts and patent counts weighted
by a measure of their quality: the number of
citations received in the five years after the patent
is granted. The findings by Johnson, Lipsitz, & Pei
are qualitatively confirmed in the literature, with
similar estimates generated by He (supra note
560)—a study discussed in the NPRM—and Rockall
& Reinmuth (supra note 564).
1127 This analysis assumes that the effect on
patenting increases by an identical amount each
year (2.0–3.4%), ensuring that the overall average
annual change is equal to that reported in Johnson,
Lipsitz, & Pei (supra note 526).
1128 This is the number of granted utility patents,
which are patents for new or improved innovation
and are the types of patents studied by Johnson,
Lipsitz, & Pei (Id.). The figure comes from 2020,
which is the most recent data available from the
U.S. Patent and Trademark Office. It excludes States
in which non-competes are not enforceable
(California, Oklahoma, North Dakota, and
Minnesota). Data available at https://
www.uspto.gov/web/offices/ac/ido/oeip/taf/st_co_
20.htm.
matches with firms (including new
firms that may be formed), then the
resulting earnings increases may reflect
higher productivity and so represent a
net benefit to the economy. However,
some increases in earnings when non-
competes are prohibited may simply
represent a transfer of income from
firms to workers (or, if firms pass labor
costs on to consumers, from consumers
to workers).
Several pieces of evidence support the
Commission’s finding that at least part
of the increase in earnings represents a
social benefit or net benefit to the
economy, rather than just a transfer. As
described in Part IV.B.3.a.ii, two studies
have sought to estimate the external
effect of non-compete use or
enforceability: that is, the effect of use
or enforceability on individuals other
than those directly affected by non-
compete use or enforceability.
One study directly estimates the
external effect of a change in non-
compete enforceability.1122 While use of
non-competes is not observed in the
study, the effects of changes in a State’s
laws are assessed on outcomes in a
neighboring State. Since the
enforceability of the contracts of
workers in neighboring States are not
affected by these law changes, the effect
must represent a change related to the
labor market which workers in both
States share. The estimate suggests that
workers in the neighboring State
experience effects on their earnings that
are 76% as large as workers in the State
in which enforceability changed.1123 In
other words, two workers who share a
labor market would experience nearly
the same increase in their earnings from
a prohibition on non-competes, even if
the prohibition only affects one worker.
While the study does not directly
estimate the differential effects by use,
the effects on workers unaffected by a
change in enforceability may be similar
to the effects on workers not bound by
non-competes.
A second study demonstrates that
when the use of non-competes by
employers increases, wages decrease for
workers who do not have non-competes
but who work in the same State and
industry. This study also finds that this
effect is stronger where non-competes
are more enforceable.1124 Since the
affected workers are not bound by non-
competes themselves, the differential in
earnings likely does not completely
represent a transfer resulting from a
change in bargaining power between a
worker bound by a non-compete and
their employer.
Overall, these studies suggest there
are market-level dynamics governing the
relationship between earnings and the
enforceability of non-competes:
specifically, restrictions on the
enforceability of non-competes affect
competition in labor markets by
alleviating frictions and allowing for
more productive matching. Changes in
enforceability or use of non-competes
have spillover effects on the earnings of
those workers who should not be
directly affected because they do not
have non-competes or they work in
nearby labor markets that did not
experience changes in enforceability. If
non-competes simply changed the
relative bargaining power of workers
and firms, without affecting market
frictions or competition, then these
patterns are less likely to be observed.
Additionally, new business formation
when non-competes are less enforceable
(see Part IV.B.3.b.i for a discussion of
the evidence) may create new
productive opportunities for workers.
Due to the uncertainty related to
earnings as transfers versus benefits, the
Commission analyzes various scenarios
that allocate the percent of the earnings
effect to a benefit at different levels in
Part X.F.10. This does not represent a
finding that no part or only a small part
of the effect on earnings is a benefit;
rather, it is to ensure that the total
estimated effect of the final rule is
robust for the purposes of the regulatory
impact analysis to the possibility that a
small percentage of the effect on
earnings represents a net benefit.1125
b. Innovation
The Commission finds that an
additional benefit of the rule would be
to increase the annual count of new
patents by 3,111–5,337 in the first year,
rising to 31,110–53,372 in the tenth
year. By alleviating barriers to
knowledge-sharing that inhibit
innovation, and by allowing workers
greater opportunity to form innovative
new businesses, the final rule will
increase innovation. Studies have
sought to directly quantify this effect,
primarily focused on patenting activity.
The Commission therefore considers the
effect on patenting in support of its
findings related to innovation. Lacking
an estimate of the social value of a
patent, the Commission does not
monetize this benefit. The Commission
also finds that the rule will reduce
expenditure on R&D by $0 to $47 billion
per year. In light of the increase in
overall innovation, this reduction is a
cost savings for firms, but may not
reflect a market-level effect because it
does not measure potential expenditure
on R&D by new firms formed as a result
of the final rule. The change in
patenting due to the rule for each year
is calculated as follows:
Increase in # of Patents = (% Increase
in Patenting) * (Total # of Affected
Patents)
The Commission estimates the
percentage increase in patenting to
average 10.9%–18.7% annually over a
ten-year period,1126 which is the
percentage effect on patenting of an
average magnitude change in non-
compete enforceability, as discussed in
Part X.F.5. The Commission assumes
that the full effect on patenting phases
in over the course of a ten-year period,
resulting in an effect of 2.0%–3.4% in
the first year, increasing to 19.8%–
34.0% by the tenth year.1127 The total
number of affected patents in each year
is 156,976.1128
The results of the analysis, for the top
and bottom end of the reported range of
percentage increases in patenting, are
displayed in Table 3.
As a sensitivity analysis, mirroring
the analysis in Part X.F.6.a, the
Commission assumes that enforceability
scores in each State will fall to the
lowest observed score among States
which do not broadly prohibit non-
competes. The Commission calculates
the percentage change in patenting in
each State by extrapolating the
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1129 Calculated as e (1.43*0.06)¥1 and e(2.56*0.06)¥1,
where 1.43 and 2.56 represent the coefficients
reported in Johnson, Lipsitz, & Pei (Id.) as the lower
and upper bounds of the reported coefficient range,
and 0.06 is the decline in the enforceability score
in West Virginia.
1130 Data available at https://www.uspto.gov/web/
offices/ac/ido/oeip/taf/st_co_20.htm.
1131 Leonid Kogan, Dimitris Papanikolaou, Amit
Seru, & Noah Stoffman, Technological Innovation,
Resource Allocation, and Growth, 132 The
Quarterly J. of Econ. 665 (2017).
1132 Ariel Pakes, Patents as Options: Some
Estimates of the Value of Holding European Patent
Stocks, 54 Econometrica 755 (1986).
1133 Johnson, Lipsitz, & Pei, supra note 526.
1134 He, supra note 560.
1135 Johnson, Lipsitz, & Pei (supra note 526) find
a negative effect on R&D spending of 8.1% due to
an average magnitude change in non-compete
enforceability, while Jeffers (supra note 450) finds
no economically or statistically significant effect on
R&D spending.
1136 Total U.S. R&D spending was estimated by
the NSF in 2019, the most recent available year
with finalized estimates, excluding nonprofits,
higher education, and nonfederal and Federal
government. Nat’l Ctr. for Sci. and Engrg. Stats.,
New Data on U.S. R&D: Summary Statistics from
the 2019–20 Edition of National Patterns of R&D
Resources (Dec. 27, 2021), https://ncses.nsf.gov/
pubs/nsf22314; Nat’l Ctr. for Sci. and Engrg. Stats.,
U.S. R&D Increased by $51 Billion in 2020 to $717
Billion; Estimate for 2021 Indicates Further Increase
to $792 Billion (Jan. 4, 2023), https://ncses.nsf.gov/
pubs/nsf23320. Note that the data are not broken
out by State, and therefore the final analysis cannot
exclude CA, ND, OK, and MN.
percentage increase in patenting to
reflect the size of the change in that
State’s enforceability score. For
example, as noted in Part X.F.6.a, West
Virginia’s score would fall from 0.59 to
0.53 as a result of this analysis. The
percentage change in patenting in West
Virginia would therefore average 9.0%–
16.6%, 1129 resulting in an increase of
1.9%–3.6% in the first year, rising to
19.2%–35.6% by the tenth year.
The annual State-specific percentage
changes are multiplied by the number of
annual patents granted in each State.1130
Finally, the changes in patenting across
States are combined across States for a
national estimate. The results are
reported in Table 3. As States have
broadly decreased legal enforceability of
non-competes in recent years, the
changes necessary to move to lower
enforceability are likely overestimated
in this sensitivity analysis. This causes
the values estimated by this method to
likely overestimate the true extent of the
benefit.
TABLE 3
Year relative to publication of the rule
Estimated annual
count of additional
patents using low
estimate of inno-
vation effect
Estimated annual
count of additional
patents using high
estimate of
innovation effect
Estimated annual
count of additional
patents using low
estimate of
innovation effect
and extrapolation
approach
Estimated annual
count of additional
patents using high
estimate of
innovation effect
and extrapolation
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
estimates that assess the overall social
value of a patent and therefore the
Commission does not monetize the
estimated effects on innovative output.
Estimates of the effect of a patent on a
firm’s value in the stock market exist in
the empirical literature,1131 as do
estimates of the sale value of a patent at
auction. 1132 However, those estimates
do not include the effects on follow-on
innovation, consumers (who may
benefit from more innovative products),
competitors, or the rents that are shared
with workers, and instead reflect solely
the private effect of a patent to the
relevant firms.
The Commission notes that patent
counts may not perfectly proxy for
innovation. However, by using citation-
weighted patents, as well as other
measures of quality, the study by
Johnson, Lipsitz, and Pei shows that
patent quality, not just patent quantity,
increase when non-competes become
less enforceable. 1133 Similarly, the study
by He shows that the value of patents
also increases when non-competes
become less enforceable.1134
The second effect of the final rule
associated with innovation is a possible
change in spending on R&D. The change
in R&D spending due to the final rule is
calculated as follows:
Reduction in R&D Spending = (%
Reduction in Spending) * (Total
Affected Spending)
The Commission estimates that the
percentage reduction in spending is 0–
8.1%, with the broad range reflecting
disagreement in the empirical
literature. 1135 Total affected spending is
$575 billion (in 2023 dollars).1136
Multiplying the percentage effect by
total affected spending, the overall
annual effect is a reduction of $0-$47
billion in R&D spending in 2023 dollars.
The Commission notes that, in light of
the increases in innovation identified in
this Part X.F.6.b, reductions in R&D
spending represent a cost savings for
firms. Put differently, reductions in R&D
spending may cause commensurate
reductions in innovative output. Insofar
as reductions in R&D spending resulting
from the rule could have countervailing
effects on innovation, the estimated
increase in innovative output represents
the net effect, which would otherwise
be even larger, if R&D spending were
held constant.
Notably, empirical estimates of R&D
spending are based on observed changes
among incumbent firms and therefore
may not reflect market-level effects.
Decreased investment at the firm level
(the level of estimation in the studies
that report effects of enforceability on
R&D spending) does not necessarily
mean that investment would decrease at
the market level, since new firms
entering the market may contribute
additional R&D spending not captured
in the referenced studies. For these
reasons, the Commission stops short of
classifying the effect on R&D spending
as a benefit of the final rule.
The Commission notes that, as
discussed in Part X.E, the estimated
effects on innovation do not take into
account that some senior executives
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38478 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1137 3.5% is calculated as ¥(e(0.427 * 0.081) ¥1),
where 0.427 is the coefficient relating non-compete
enforceability and physician prices in Hausman &
Lavetti (supra note 590), and 0.081 represents the
average magnitude non-compete enforceability
score, as described in Part X.F.5.
1138 See https://www.cms.gov/Research-Statistics-
Data-and-Systems/Statistics-Trends-and-Reports/
NationalHealthExpendData/National
HealthAccountsStateHealthAccountsProvider.
Spending in 2020, the most recent year with
available data, was $679 billion, which is $801
billion adjusted to 2023 dollars. CA, ND, OK, and
MN are omitted.
1139 In the absence of data on the percentage of
physician practices that are non-profit, the
Commission uses a range of three different
assumptions on the share of covered hospitals. In
the first two scenarios, the Commission assumes
that the set of covered hospitals is all hospitals that
are not non-profit. The first scenario uses 2020 data
from the American Hospital Association indicating
that 65% of hospitals report that they are non-
profits (based on data available at https://
www.ahadata.com/aha-dataquery). The second
scenario uses 2017–2021 data from the American
Community Survey indicating that 38.1% of
hospital employment is at non-profits (see https://
www.washingtonpost.com/business/2023/05/12/
force-behind-americas-fast-growing-nonprofit-
sector-more). Finally, consistent with the
Commission’s findings in Part V.D.4, the
percentages of firms that report themselves as
nonprofit in the data, which reflects registered tax-
exempt status under IRS regulations, does not
equate to the Commission’s jurisdiction. It is likely
the Commission may have jurisdiction over some
hospitals and other healthcare organizations
identified as nonprofits. Therefore, the third
scenario assumes that 75% are covered.
1140 Calculated as e(0.427 * 0.06) ¥1, where 0.427
is the coefficient reported in Hausman and Lavetti
(supra note 590), and 0.06 is the decline in the
enforceability score in West Virginia.
may continue to work under non-
competes under the rule. The
Commission is unable to separate the
effects of senior executives’ non-
competes from other workers’ non-
competes on innovation. Some effects
estimated in this Part X.F.6.b may occur
further in the future than assumed in
this analysis, based on the extent of
continued use of non-competes for
senior executives.
Overall, the Commission finds that
the final rule will significantly increase
innovation. Furthermore, the increase in
innovation may be accompanied by a
decrease in spending on R&D that
would, thus, be a cost saving to firms.
c. Prices
The Commission finds that consumer
prices may fall under the final rule
because of increased competition. The
only empirical study of this effect
concerns physician practice prices.
Based on this study, the Commission
estimates the ten-year present value
reduction in spending for physician and
clinical services from the decrease in
prices is $74–$194 billion. The
Commission finds some of the price
effects may represent transfers from
firms to consumers and some may
represent benefits due to increased
economic efficiency. Some of the
benefits may overlap with benefits
otherwise categorized, such as benefits
related to innovation.
The decrease in prices for physician
services because of the final rule is
calculated as follows:
Decrease in Prices = (% Decrease in
Prices) * (Total Affected Spending)
The Commission estimates the
percentage decrease in prices for
physician services to be 3.5%.1137 Total
spending on physician and clinical
services was $801 billion in 2023
dollars, excluding States that broadly do
not enforce non-competes.1138 The
Commission separately multiplies
spending by 35%, 61.9%, and 75%
(estimates of the proportion of hospitals
covered by the Commission’s
jurisdiction as a proxy for total
physician and clinical services spending
covered by the Commission’s
jurisdiction) to arrive at total affected
spending.1139 The ten-year sum of
discounted spending decreases for these
analyses are presented in Table 4.
As a sensitivity analysis, mirroring
the analysis in Part X.F.6.a, the
Commission assumes that enforceability
scores in each State will fall to the
lowest observed score among States
which do not broadly prohibit non-
competes. The Commission calculates
the percentage change in prices in each
State by extrapolating the percentage
decrease in prices to reflect the size of
the change in that State’s enforceability
score. As noted in Part X.F.6.a, West
Virginia’s score would fall from 0.59 to
0.53 as a result of this analysis. The
percentage decrease in prices in West
Virginia would therefore be 2.5%.1140
This percentage decrease is multiplied
by State-specific physician spending,
adjusted by the relevant multiplier to
account for the Commission’s
jurisdiction, and summed over States.
The ten-year present discounted value
of the spending decreases estimated by
this analysis are presented in Table 4.
TABLE 4
Assumed
percent of
physicians
covered
(%)
Estimated spending reduction over ten years
(billions of dollars) assuming:
2% Discount
rate 3% Discount
rate 7% Discount
rate
Primary estimate (average magnitude enforceability change) ........................ 	35
61.9
75
$90
160
194
$87
153
186
$74
131
159
Sensitivity analysis (partial extrapolation approach) ....................................... 	35
61.9
75
257
455
552
247
437
529
211
373
459
Several effects of the final rule,
including changes in capital investment,
new firm formation, and innovation,
may possibly filter through to consumer
prices. Prices, therefore, may act as a
summary metric for the effects on
consumers. The Commission notes,
however, that prices are an imperfect
measure for the effect on consumers. For
example, increased innovation
catalyzed by the final rule could result
in quality increases in products, which
might increase prices (all else equal),
but nevertheless, consumers may be
better off. New firm formation may
result in a broader set of product
offerings, even if prices are unaffected.
Finally, some portion of this effect may
represent a transfer from physician
practices to consumers. For all these
reasons, as well as to avoid double-
counting (since prices may reflect
changes in innovation, investment,
market structure, wages, and other
outcomes that are measured elsewhere),
the Commission considers evidence on
prices to be corroborating evidence,
rather than a unique cost or benefit,
though some portion of the total effect
likely represents a standalone benefit of
the rule. The Commission also notes
increased competition brought about by
the final rule will likely increase
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38479	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1141 Sebastian Heise, Fatih Karahan, & Ays¸egu¨ l
S¸ahin The Missing Inflation Puzzle: The Role of the
Wage-Price Pass-Through, 54 J. Money, Credit &
Banking 7 (2022).
1142 Whether this assumption yields an
overestimate or underestimate depends on what
happens to training of workers in occupations with
a low-rate of non-competes use when the
enforceability of non-competes changes. If the effect
of a change in non-compete enforceability on
workers in occupations that use non-competes at a
low rate is small, this assumption yields an
overestimate of the overall effect on training. If the
effect on those workers is large, it results in an
underestimate.
consumer quantity, choice, and quality.
These effects are not quantified in the
literature.
To draw inferences to other
industries, the Commission notes that if
the relationship between non-compete
enforceability and prices observed in
healthcare markets holds in other
industries, then under the final rule
prices would likely decrease, and
product and service quality would
likely increase. Insofar as such effects
may be driven by increases in
competition, as discussed in Part
IV.B.3.b.iii, e.g., because of new firm
formation, it is likely output would also
increase. However, the evidence in the
literature addresses only healthcare
markets and therefore the Commission
cannot say with certainty that similar
price effects would be present for other
products and services.
In many settings, it is possible that
increases in worker earnings from
restricting non-competes may increase
consumer prices because of higher
firms’ costs.1141 There is no empirical
evidence that enforceability of non-
competes increase prices due to
increased labor costs. Additionally,
greater wages for workers freed from
non-competes may result from better
worker-firm matching, which could
simultaneously increase wages and
increase productivity, leading to lower
prices.
The Commission notes that, as
discussed in Part X.E, the estimates of
the effect of the rule on prices do not
separately account for the effect of
senior executives who may continue to
have non-competes under the rule. The
Commission is unable to monetize or
quantify these effects separately because
there is no accounting in the applicable
literature of why, nor to which groups
of workers, the observed price effects
occur. If such non-competes have a large
impact, some of the effects estimated in
this section may occur further in the
future than described in this Part
X.F.6.c.
7. Costs of the Final Rule
The Commission finds costs
associated with the final rule, including
legal and administrative costs, and
possibly costs related to investment in
human capital and litigation, as
summarized in Table 1 in Part X.E. The
Commission notes the final analysis
includes effects on investment in
human capital and litigation costs in
this Part X.F.7 discussing costs
associated with the final rule, though it
is not clear whether effects associated
with investment in human capital are
costs or benefits, and it is not clear
whether litigation costs would rise or
fall under the final rule.
a. Investment in Human Capital
The Commission estimates the ten-
year present discounted value of the net
effect of the final rule on investment in
human capital (i.e., worker training)
ranges from a benefit of $32 billion to
a cost of $41 billion. The Commission
notes that this wide range represents
substantial uncertainty in the
interpretation of the estimates that exist
in the economic literature. The
estimates contained in this Part X.F.7.a
are separated along lines created by that
uncertainty.
There are two primary sources of
uncertainty. The first pertains to the
extent to which lost investment in
human capital is ‘‘core’’ versus
‘‘advanced.’’ As discussed in Part
IV.B.3.b.ii, when non-competes are
enforceable, fewer workers will be
available due to decreased labor
mobility, including workers who would
be a good skills match for a particular
job, as well as workers moving to new
industries to avoid triggering a potential
non-compete clause violation. This may
require retraining of workers forced into
a new field that would not otherwise be
necessary for an experienced worker
within the same industry. The departure
of experienced workers from the
industry also means firms will be
required to invest in the human capital
of inexperienced workers who replace
them. This type of investment in
training to address a skills mismatch—
which is referred to as the ‘‘core’’
training scenario—contrasts with what
is referred to as the ‘‘advanced’’ training
scenario, which is investment in
training that builds upon the
productivity of workers who may
already be experienced in an industry.
Insofar as reductions in investment in
human capital due to the final rule
represent reductions in core investment,
the rule will save firms money and will
additionally not require workers to forgo
time spent producing goods and
services to train. Therefore, such
reductions would represent a benefit of
the final rule. However, insofar as
reductions in investment in human
capital from the final rule represent
reductions in advanced investment,
there may be productivity losses for
workers. The estimates in the literature
do not allow the Commission to
distinguish between the types of forgone
human capital investment in the final
analysis. This final analysis therefore
separately estimates the effects
assuming lost investment in human
capital is core and assuming it is
advanced.
The second source of uncertainty
pertains to the specific estimates of the
effect of non-compete enforceability on
investment of human capital. Starr
(2019) estimates the differential effect of
non-compete enforceability on training
in occupations which use non-competes
at a high rate versus those that use non-
competes at a low rate but does not
estimate the absolute effect on
investment across the workforce.
Therefore, this final analysis separately
estimates the effects on training under
two different assumptions—that the
increase in training due to greater non-
compete enforceability affects all
workers, or only workers in high-use
occupations—to demonstrate how this
uncertainty affects the estimates.1142
The Commission notes that some of
the estimates described in this Part
X.F.7 may overlap with estimates
reported in other sections of the
regulatory analysis. For example, if
decreased enforceability of non-
competes decreases investment in
workers’ human capital, and this
decreased investment would be
reflected in lower wages for workers,
then the estimate of the wage increase
resulting from the final rule will already
account for the extent to which
decreased investment decreases wages.
That is, if investment were held
constant, the earnings increase
associated with the final rule may be
even larger.
i. Estimates Assuming Lost Investment
in Human Capital Is Core Training
The first set of estimates assumes that
all lost training is core. This results in
estimated effects of the final rule that
represent upper bounds on the benefits
associated with the final rule’s effect on
investment in human capital. In these
scenarios, the final rule will allow firms
to hire experienced workers instead of
needing to provide costly training to
workers new to the industry or a
position. The change in investment in
core training brought about by the rule
is calculated as follows:
Effect of Decreased Investment in Core
Training = Additional Output of
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38480 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1143 Excluding States which broadly prohibit non-
competes (CA, ND, OK, and MN), the BLS reports
employment of 126.4 million individuals in May
2022 (the most recent year with occupation-specific
data available), 56.6 million of whom work in
occupations that use non-competes at a high rate,
as defined in Starr, supra note 445; see https://
www.bls.gov/oes/tables.htm. The Commission
estimates that 80% of employed individuals are
covered by the Commission’s jurisdiction (see Part
X.F.4.a), resulting in 101.1 million covered workers,
45.3 million of whom work in high-use
occupations. The Commission notes that these
estimates include public employment, as data on
occupation-specific employment at the State level
are not available by firm ownership. Occupation-
specific employment data are necessary to split
workers into low- and high-use occupations.
Workers including those estimated to be bound by
non-competes and those who are not are included
in this estimate, since the empirical estimate of the
increase in training reflects a sample representative
of the full workforce, not just those bound by non-
competes.
1144 The coefficient reported by Starr (supra note
445), 0.77%, corresponds to a one standard
deviation increase on Starr’s scale, and represents
the percentage point effect on the percentage of
workers trained (rather than the amount of training
they receive). Rescaling to a scale of zero to one,
a one standard deviation increase is equal to a
change in the enforceability measure of 0.17. Since
estimates for earnings and innovation use a mean
enforceability change of 0.081 on a scale of zero to
one, the coefficient in Starr is rescaled to 0.77 *
(0.081/0.17) = 0.364%, which represents the change
in the fraction of covered workers receiving training
due to an average magnitude change of 0.081.
1145 85 hours per year is calculated as 5.7 weeks
per year * 20.1 hours per week * 73.9%, where
73.9% is the percentage of training that is firm-
sponsored (the type of training likely to be affected
by the final rule). These three estimates (5.7 weeks
per year, 20.1 hours per week, and 73.9% of
training being firm sponsored) are estimated in
Harley J. Frazis & James R. Spletzer, Worker
Training: What We’ve Learned from the NLSY79,
128 Monthly Lab. Rev. 48 (2005).
1146 The Commission assumes that the average
hourly output of workers is twice their average
earnings and estimates average earnings to be
$30.38 per hour, which is the average hourly
earnings for workers in training ages 22–64
currently holding one job in the Survey of Income
and Program Participation for all waves from 1996
to 2008. The dollar value is adjusted to 2023
dollars.
1147 2022 Training Industry Report, Training
Magazine (Nov. 2022) at 17.
1148 Calculated as 15.8% * 148.9 million, where
15.8% is the percentage of workers who receive
training, according to Frazis & Spletzer supra note
1145 at 48. 148.9 million is the estimated number
of workers in the U.S. in May 2022 according to
https://www.bls.gov/oes/tables.htm. Note that all
workers are included in this estimate (not just
workers in States which enforce non-competes)
because the estimate of training expenditures also
covers all workers.
1149 Excluding States which broadly prohibit non-
competes (CA, ND, OK, and MN), the BLS reports
employment of 126.4 million individuals in May
2022 (the most recent year with occupation-specific
data available), 56.6 million of whom work in
occupations that use non-competes at a high rate,
as defined in Starr (supra note 445) (see https://
www.bls.gov/oes/tables.htm). The Commission
estimates that 80% of employed individuals are
covered by the Commission’s jurisdiction (see Part
X.F.4.a), resulting in 101.1 million covered workers,
45.3 million of whom work in high-use
occupations. See supra note 1143. 	1150 As discussed in Part X.F.7.a.i.
Workers Resulting From Less Time
Spent Training + Reduced Direct
Outlays on Training
Additional Output of Workers Resulting
From Less Time Spent Training
The first component is additional
output of workers resulting from less
time spent on otherwise unnecessary
training if they were better matched
with firm and industry. The change in
the output of workers from less time
spent training because of the final rule
is calculated as follows:
Additional Output of Workers Resulting
From Less Time Spent Training =
(Total # of Affected Workers) *
(Percentage Point Decrease in
Trained Workers) * (Average Hours
Spent Training Per Worker) *
(Average Hourly Output of Workers)
The Commission estimates the total
number of affected workers as 101.1
million workers, assuming all workers
are affected, and 45.3 million workers,
assuming only workers in high-use
occupations are affected.1143 The
percentage point decrease in trained
workers is estimated to be 0.4.1144
Average hours spent training per worker
is estimated to be 85 hours per year.1145
Average hourly output of workers is
estimated to be $60.77. 1146
The total additional output due to
forgone training time is therefore
calculated as $1.9 billion per year when
all workers are assumed to be affected,
or $0.8 billion per year when only
workers in high-use occupations are
assumed to be affected.
Reduced Direct Outlays on Human
Capital Investment
The second component of the
economic effect calculated in the final
analysis is reduced direct outlays on
human capital investment—or the out-
of-pocket cost to firms for training. The
change in direct outlays on human
capital investment resulting from the
rule is calculated as follows:
Reduced Direct Outlays = [(Total Direct
Outlays)/(# of Workers Receiving
Training)] * [(Total # of Affected
Workers) * (Percentage Point
Decrease in Trained Workers)]
Total direct outlays on human capital
investment are estimated to be $105
billion in 2023 dollars.1147 The
estimated number of workers receiving
training is 23.5 million workers.1148 The
Commission estimates the total number
of affected workers as 101.1 million
workers, assuming all workers are
affected, and 45.3 million workers,
assuming only workers in high-use
occupations are affected.1149 The
percentage point decrease in trained
workers is estimated to be 0.4.1150
This calculation results in annual cost
savings of $1.6 billion, assuming the
training rates of workers in all
occupations are affected and $0.7 billion
assuming the training rates of workers
only in high-use occupations are
affected. The ten-year present value
effects of the final rule on investment in
human capital, assuming that lost
investment is core investment,
discounted at 2%, 3%, and 7% and
separately assuming effects on workers
in all occupations versus just workers in
occupations that use non-competes at a
high rate, are presented in the first two
rows of Table 5.
ii. Estimates Assuming Lost Investment
in Human Capital Is Advanced Training
The second set of estimates of the
effects on human capital investment in
the final analysis assumes all training is
advanced. The Commission begins with
the same approach (calculated in Part
X.F.7.a.i) to estimate the direct gain in
output of workers and reduced direct
outlays from foregone advanced human
capital investment because such
investment is costly for firms and
results in decreased time spent on
productive activities by workers,
regardless of whether the investment is
core or advanced. The major difference
is that the Commission nets out an
additional component which represents
lost long-term productivity of workers
caused by lost investment in their
human capital. The Commission nets
out this additional component based on
the assumption that advanced human
capital investment results in some
increased long-term productivity in
workers (because it assumes that firms
would not otherwise make such a costly
investment). This results in estimated
effects of the final rule that represent
upper bounds on the costs associated
with changes in investment in human
capital. Therefore, the estimated effect
of the rule on advanced human capital
investment is calculated as follows:
Effect of Decreased Investment in
Advanced Training = Additional
Output of Workers Resulting from
Less Time Spent Training +
Reduced Direct Outlays on
Training¥Lost Output Resulting
from Foregone Advanced Training
The first two components—additional
output of workers due to less time spent
training and reduced direct outlays on
training—are calculated in Part
X.F.7.a.i. The lost output of workers due
to lost investment in their human
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1151 Excluding States which broadly prohibit non-
competes (CA, ND, OK, and MN), the BLS reports
employment of 126.4 million individuals in May,
2022 (the most recent year with occupation-specific
data available), 56.6 million of whom work in
occupations that use non-competes at a high rate,
as defined in Starr (Id.) (see https://www.bls.gov/
oes/tables.htm). The Commission estimates that
80% of employed individuals are covered by the
Commission’s jurisdiction (see Part X.F.4.a),
resulting in 101.1 million covered workers, 45.3
million of whom work in high-use occupations. See
supra note 1143.
1152 As discussed in Part X.F.7.a.i.
1153 The Commission assumes that the average
hourly output of workers is twice their average
earnings and estimates average earnings to be
$30.38 per hour, which is the average hourly
earnings for workers in training ages 22–64
currently holding one job in the Survey of Income
and Program Participation for all waves from 1996
to 2008. The dollar value is adjusted to November
2023 dollars using https://www.bls.gov/data/
inflation_calculator.htm.
1154 See https://fred.stlouisfed.org/release/
tables?rid=50&eid=6462#snid=6449, which reports
average weekly hours and overtime of all employees
on private nonfarm payrolls by industry sector,
seasonally adjusted. The reported value, 34.3, is
multiplied by 52 to get annual hours worked.
1155 This figure is the midpoint of two estimates
in the literature: Harley Frazis & Mark A.
Loewenstein, Reexamining the Returns to Training:
Functional Form, Magnitude, and Interpretation, 40
J. Hum. Res. 453 (2005) [3.7%] and Gueorgui
Kambourov, Iourii Manovskii, & Miana Plesca,
Occupational Mobility and the Returns to Training,
53 Can. J. of Econ. 174 (2020) [9.1%].
1156 There is no perfect estimate of the rate of
human capital depreciation in the economic
literature. Studies typically make assumptions they
deem reasonable to estimate this rate, with 20%
representing neither the low end nor the high end
of the range of such assumptions. See, e.g., Rita
Almeida & Pedro Carneiro, The Return to Firm
Investments in Human Capital, 16 Lab. Econs. 97
(2009), who assume that the human capital
depreciation rate may range from 5% to 100%.
capital due to the rule in each year is
calculated as follows:
Lost Output from Lost Investment in
Human Capital = (Total # of
Affected Workers) * (Percentage
Point Decrease in Trained Workers)
* (Average Hourly Output of
Workers) * (Average Hours Worked
per Year) * (% Productivity Loss)
The Commission estimates the total
number of affected workers as 101.1
million workers, assuming all workers
are affected, and 45.3 million workers,
assuming only workers in high-use
occupations are affected.1151 The
percentage point decrease in trained
workers is estimated to be 0.4.1152
Average hourly output of workers is
estimated to be $60.77.1153 The average
number of hours worked per year is
1,784.1154 The Commission assumes the
percent productivity loss to be 6.4%.1155
In the first year, this yields a total
estimate of lost output from lost
investment in human capital of $1.5
billion or $0.7 billion (under the
separate assumptions of all workers
being affected and only high-use
occupation workers being affected).
Since the returns to advanced training
persist to some extent over time, in the
second year, returns to advanced
training from the first year are assumed
to depreciate by 20%,1156 and the
calculation is redone according to the
depreciated return to advanced training.
In the third year, training from the first
year again depreciates, and so on until
the tenth year (the end of the horizon
considered).
Additionally, in the second year, a
new round of advanced training is
forgone. An additional $1.5 billion or
$0.7 billion in lost output is therefore
incurred in the second year under the
final rule, and the depreciation
calculations are again repeated for the
new round of advanced training until
year ten. New rounds of advanced
training are forgone in each year
through the tenth. Lost output from lost
advanced training in the tenth year is
therefore the sum of a depreciated
return to training from each of the prior
nine years plus lost output from lost
training in the tenth year itself.
To arrive at estimates of overall lost
productivity due to lost advanced
training, lost productivity in each year
(separately due to lost training in each
prior year) is added together. Finally,
lost productivity due to lost advanced
training is subtracted from the two
components calculated in Part X.F.7.a.i
(additional output of workers from less
time spent training and reduced direct
outlays). The ten-year discounted effects
of the final rule on investment in human
capital, assuming lost investment is
advanced training investment,
discounted at 2%, 3%, and 7%, and
separately assuming workers in all
occupations versus just workers in
occupations that use non-competes at a
high rate, are presented in the last two
rows of Table 5.
TABLE 5
2% Discount
rate 3% Discount
rate 7% Discount
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.
Negative values represent net cost estimates,
while positive values represent net benefit
estimates.
As discussed in Part X.E, the
Commission notes that the estimates in
this Part X.F do not account for senior
executives who continue to work under
non-competes under the rule. If the
effects on training are due to effects on
such senior executives, then the effects
discussed herein would occur further
into the future than discussed.
b. Legal and Administrative Costs
Related to Compliance
The Commission finds that firms with
existing non-competes will have related
legal and administrative compliance
costs as a result of the final rule. The
Commission quantifies and monetizes
these costs and conducts related
sensitivity analyses.
i. Legal Costs
The Commission finds one-time legal
costs related to firms’ compliance with
the final rule are estimated to total $2.1-
$3.7 billion. The Commission estimates
two main components of legal costs: (1)
updating existing employment
agreements or terms to ensure new hire
employment terms comply with the
final rule; and (2) advising employers
about potential operational or
contractual changes for workers who
will no longer have enforceable non-
competes. The latter includes
determination of workers whose non-
competes are no longer enforceable
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38482 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1157 This process would likely be straightforward
for most firms (i.e., simply not using non-competes
or removing one section from a boilerplate
contract). There may be firms for which it is more
difficult and requires more time. This analysis uses
an average time spent of one hour, which
conservatively represents the average time spent to
do so, and accounts for variation across firms.
1158 According to BLS, the median wage for a
lawyer was $65.26 per hour in 2022, or $67.31 in
2023 dollars. See https://www.bls.gov/ooh/legal/
lawyers.htm. As in Part X.F.7.a, the Commission
doubles this number to reflect the lost productivity
of the worker.
1159 Calculated as 6.88 million * 0.494. Here, 6.88
million is the number of establishments in the U.S.
(excluding California, North Dakota, Oklahoma, and
Minnesota, where non-competes are broadly
unenforceable) in 2021 (the most recent year with
data available): see https://www.census.gov/data/
tables/2021/econ/susb/2021-susb-annual.html. This
value is multiplied by 49.4%, the percentage of
firms using non-competes in the U.S. according to
Colvin & Shierholz (supra note 65).
1160 The Commission emphasizes that this is an
average to underscore there would likely be large
differences in the extent to which firms update their
contractual practices. Many firms, including those
that use non-competes only with workers who do
not have access to sensitive information, or those
which are already using other types of restrictive
employment provisions to protect sensitive
information, may opt to do nothing. There is
evidence indicating firms that use non-competes are
already using other types of restrictive employment
provisions: Balasubramanian et al. (2024) find that
95.6% of workers with non-competes are also
subject to an NDA, 97.5% of workers with non-
competes are also subject to a non-solicitation
agreement, NDA, or a non-recruitment agreement,
and that 74.7% of workers with non-competes are
also subject to all three other types of provisions.
See Balasubramanian, Starr, & Yamaguchi (supra
note 74). Other firms may employ several hours or
multiple days of lawyers’ time to arrive at a new
contract. The estimated range of four to eight hours
represents an average taken across these different
possibilities. For example, if two-thirds of firms that
currently use non-competes opt to make no changes
to their contractual practices (for example, because
they are one of the 97.5% of firms which already
implement other post-employment restrictions, or
because they will rely on trade secret law in the
future, or because they are using non-competes with
workers who do not have access to sensitive
information), and one-third of such firms spend (on
average) the equivalent of 1.5 to 3 days of an
attorney’s time, this would result in the estimate of
4–8 hours on average.
1161 Calculated as 5.91 million * 0.494. Here, 5.91
million is the number of firms in the U.S.
(excluding California, North Dakota, Oklahoma, and
Minnesota, where non-competes are broadly
unenforceable) in 2021 (the most recent year with
data available): see https://www.census.gov/data/
tables/2021/econ/susb/2021-susb-annual.html. This
value is multiplied by 49.4%, the percentage of
firms using non-competes in the U.S. according to
Colvin & Shierholz (supra note 65). The
Commission notes that this analysis assumes that
decisions regarding protection of sensitive
information and contract updating are made at the
firm (a collection of establishments under shared
ownership and operational control), rather than
establishment, level, since sensitive information is
likely shared across business establishments of a
firm. This explains the difference between the
number of businesses used here (2.9 million) versus
the number used to calculate the cost of contract
revision (3.4 million).
1162 This estimate is drawn from the Fitzpatrick
Matrix. See supra note 1087 and accompanying
text. Note that the Commission does not double this
number to reflect productivity, since the cost of
outside counsel’s time likely already reflects the
productivity of that worker.
under the rule, as opposed to those that
fall under the exemption for senior
executives.
For the first component, firms must
consider what changes to their
contractual practices are needed to
ensure that incoming workers are not
offered or subject to non-competes and
what revisions to human resources
materials and manuals are needed to
ensure they are not misused on a
forward-going basis. Firms may respond
by removing specific non-compete
language from standard contracts and
human resources (H.R.) materials and
manuals used for future employees. The
second component involves strategic
decisions and changes in response to
the final rule. For example, firms may
adjust other contractual provisions such
as NDAs. This legal work is not
mandated or required by the rule; it
would be undertaken only by the subset
of firms and workers for whom firms
conclude that such alternatives would
be desirable. Additionally, such
adjustments are likely unnecessary for
senior executives whose non-competes
continue to be enforceable under the
rule. Therefore, this component
additionally involves identifying senior
executives whose existing non-competes
are unaffected. For any such legal work,
firms may use in-house counsel or
outside counsel.
Legal costs are therefore calculated as
follows:
Legal Costs = Modify Standard Contract
Language/H.R. Materials and
Manuals Costs + Revise Contractual
Practices Costs
One component of the legal cost will
be due to the modification of standard
contracts to remove prohibited language
regarding non-competes which is
calculated as follows:
Modify Standard Contract Language/
H.R. Materials and Manuals =
(Average Hours Necessary for
Modification) * (Cost per Hour) *
(# of Affected Businesses)
The Commission estimates that, on
average, modifying standard contract
language and H.R. materials and
manuals would take the equivalent of
one hour of a lawyer’s time.1157 The
estimated cost per hour is $134.62 in
2023 dollars, 1158 and the number of
affected businesses is 3.4 million.1159
This results in a total one-time
modification cost of $457 million.
Another component of legal costs
relates to any firm-level revision to their
contractual practices, including
identification of senior executives,
which is calculated as follows:
Revise Contractual Practices Costs =
(Average Hours Necessary to
Update Contractual Practices) *
(Cost per Hour) * (# of Affected
Businesses)
The Commission estimates the
average firm employs the equivalent of
four to eight hours of a lawyer’s time to
update its contractual practices and
determine which employees may fall
under the final rule’s exemption.1160
The Commission estimates the cost of a
lawyer’s time to be $134.62 as discussed
in this Part X.F.7.b.i. The number of
affected businesses is estimated to be
2.9 million. 1161
Under the assumption that the
average firm that uses a non-compete
employs the equivalent of four to eight
hours of a lawyer’s time, the total one-
time expenditure on revising
contractual practices would range from
$1.6 billion (assuming four hours are
necessary) to $3.1 billion (assuming
eight hours are necessary).
Some commenters indicated that
some firms may use outside counsel,
which is more costly to firms, to remove
non-competes from contracts of
incoming workers and to update
contractual practices. While
commenters did not provide data to
support this assertion, as a sensitivity
analysis, the Commission replaces the
estimate of the hourly earnings of a
lawyer with an estimate of the cost of
outside counsel ($483 per hour),
conservatively overestimating costs by
using the estimated rate of a tenth-year
lawyer.1162 Under this sensitivity
analysis, the Commission estimates the
total cost of ensuring that incoming
workers’ contracts do not contain non-
competes would be $1.6 billion and the
cost of updating contractual practices
would be $5.6-$11.3 billion. Some
commenters stated that the hourly cost
of lawyers’ time may be even greater
than the value assumed in the
sensitivity analysis ($483 per hour). The
Commission finds that the sensitivity
analysis assuming a rate of $438 per
hour provides a reasonable estimate of
the costs under the assumption that
outside counsel would be used, and that
higher rates (e.g., $749 per hour, as
stated by one commenter) are
unreasonably high, especially as an
average across many firms.
The Commission believes the
exclusion of existing non-competes with
senior executives could result in lower
net legal costs than the Commission’s
estimate. First, for senior executives
who currently work under a non-
compete, firms will have a longer time
period during which they may update
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38483	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1163 More than 60%; see Part I.B.2.
1164 The Commission notes that identification of
such workers is accounted for in revision of
contract costs calculated in Part X.F.7.b.i.
1165 See, e.g., the supporting statement for the
Notice of Rescission of Coverage and Disclosure
Requirements for Patient Protection under the
Affordable Care Act (CMS–10330/OMB Control No.
0938–1094) at 5, which estimates time spent
customizing and sending similar notice. Available
at https://www.reginfo.gov/public/do/
DownloadDocument?objectID=119319401.
1166 According to BLS, the median wage for a
human resources specialist was $30.88 per hour in
2022, which is equivalent to $31.85 in November
2023 dollars, updated for inflation using https://
www.bls.gov/data/inflation_calculator.htm. See
https://www.bls.gov/ooh/business-and-financial/
human-resources-specialists.htm. As in Part
X.F.7.a, the Commission doubles this number to
reflect the lost productivity of the worker.
1167 As calculated in Part X.F.7.b.i., the
Commission conservatively assumes that each
establishment—a physical location of a business—
must engage in its own communication, and that
each establishment has digital contact information
for at least one worker, and will therefore engage
in digital notice provision.
1168 See infra note 1165 (CMS Supporting
Statement assumes 66% of workers require mailed
notice from their health insurance companies).
contractual practices. For example, for a
senior executive who does not change
jobs for 5 years after the compliance
date of the final rule, the firm will have
5 years to determine how it wants to
update contractual practices for an
incoming senior executive who replaces
the current one. Delaying costs in this
way reduces their economic effect due
to discounting. Additionally, if a senior
executive remains in their job for over
ten years, then the cost of updating
contractual practices would fall outside
the scope of the Commission’s estimates
altogether.
At the same time, when the final rule
goes into effect, firms will need to
identify senior executives whose
existing non-competes are not covered
by the final rule in order to determine
which contractual practices they may
need to update immediately. The
Commission does not include a separate
legal cost for identifying senior
executives and estimates the range of
attorney time for revising contractual
practices under the final rule, which
encompasses identifying senior
executives, to be the same as the
estimate for the proposed rule—4 to 8
hours. This is in part because the
strategic considerations involved in
revision of contractual practices will
likely include such identification.
Moreover, the Commission believes the
identification of such workers will not
be difficult or time consuming. Firms
can use the compensation threshold to
rule out the vast majority of workers
from the exemption and the definition
of senior executive in § 910.1 includes
clear duties to determine whether any
executives who meet the compensation
threshold are senior executives under
the final rule. It also provides that the
CEO and/or president of a firm is a
senior executive without the need to
conduct any duties analysis.
Another reason the Commission does
not add to its estimate of 4 to 8 hours
to account for identification of senior
executives is that excluding existing
non-competes with senior executives
would otherwise decrease this estimate,
likely to a greater degree than the cost
of identifying senior executives. As
noted, a significant amount of time
spent by attorneys as estimated in the
NPRM was intended to account for
revising contractual practices for more
complex agreements. Commenters noted
that employment terms with senior
executives are often individualized so
that attorney and firm time would be
spent on their agreements regardless of
whether a non-compete may be
included. Since firms use non-competes
for senior executives at a high rate,1163
revising contractual practices for senior
executives may constitute a significant
portion of the overall estimate of the
cost of revising contractual practices,
and given their exclusion, the
Commission finds that the cost estimate
for revising contractual practices likely
represents an overestimate overall. The
Commission does not, however, reduce
its final cost estimates to account for
this change. As noted in Part X.D, this
final analysis generally does not account
for the temporal difference in coverage
of non-competes for senior executives.
The same is true here and, to be
consistent across the estimates in this
final regulatory analysis, the
Commission does not estimate a
reduction in legal cost but notes
potential bases for differences in
estimates where relevant.
Overall, the Commission
acknowledges that there may be
substantial heterogeneity in the costs for
individual firms; however, these
numbers may be overestimates. For
firms whose costs of removing non-
competes for incoming workers is
greater, the work of ensuring that
contracts comply with the law would
overlap substantially with the costs of
updating contractual practices.
ii. Administrative Costs for Notification
Requirement
The Commission finds the total one-
time costs for implementing the
notification requirement are estimated
to be $94 million. These costs relate to
the provision of notice to workers other
than senior executives as required by
§ 910.2(b). Notably, firms may use the
model notice language provided by the
Commission, and the form of this model
notice enables firms to choose to send
the notice to workers regardless of
whether they have non-competes as
described in Part IV.E. The notice
provision cost is calculated as follows:
Notice Provision Cost = Digital Notice
Provision Costs + Mailed Notice
Provision Costs
The first component, digital notice
provision costs, are calculated as
follows:
Digital Notice Provision Costs =
(Average Hours Necessary to
Compose and Send Notice) * (Cost
per Hour) * (# of Affected
Businesses)
The Commission estimates that 20
minutes ( 1⁄ 3 of one hour) are necessary
for a human resources specialist to
compose and send this notice in a
digital format to all of a firm’s workers
who are not senior executives 1164 and
applicable former workers, on
average. 1165 The cost per hour is
estimated to be $63.70. 1166 The
estimated number of affected businesses
is 3.4 million.1167 The digital notice
provision cost is therefore estimated to
be $72 million.
Businesses may not have digital
contact information for some workers.
The cost of mailed notice provision
would include the cost of postage and
the cost of a human resource
professional’s time. Mailed notice
provision costs are therefore calculated
as follows:
Cost of Mailed Notice Provision =
Number of Workers with Non-
competes Receiving Physical Notice
* (Cost of One Printed Page +
Mailing Cost + Cost of Human
Resource Professional’s Time)
The number of workers with non-
competes receiving physical notice is
the total number of covered workers
(101.1 million; see Part X.F.7.a.i) times
the percentage of workers who have
non-competes (18.1%) times the
percentage of workers who require
mailed notice (assumed to be 66% of
workers 1168 ), for a total of 12.3 million
workers. The Commission notes that the
percentage of workers who require
mailed notice is likely a substantial
overestimate, since it is estimated based
on the percentage of individuals who
receive health information digitally. The
Commission believes employers are
more likely to have digital means of
providing the notice to their current
workers especially, but also to their
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38484 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1169 Greenwood, Kobayashi, & Starr, supra note
757. The Commission notes that this study
supplements—but is not necessary to support—its
finding that no evidence supports the conclusion
that litigation costs will increase under the final
rule. That finding is based on the Commission’s
expertise and the rulemaking record, including
relevant comments. This study was published after
the close of the comment period.
former workers. The Commission adopts
this estimate as an upper bound.
The cost per worker is estimated as 5
cents for one printed page plus mailing
cost of 70 cents plus one minute of an
HR professional’s time, at $63.70 per
hour, for a total of $1.81 per notice. The
overall cost of mailed notice provision
is therefore estimated to be $22 million.
The total cost of the notice provision is
therefore $94 million.
Commenters stated that it may take
two hours of a legal professional’s time
to provide notice. The Commission
finds this estimated time to be a
substantial overestimate and reiterates
that this analysis incorporates a legal
professional’s time necessary to identify
senior executives and to strategize
updates to firm contractual practices
into its estimate of legal costs in
X.F.7.b.i. The model notice language
alleviates the need for a legal
professional’s time and the Commission
finds it unreasonable to assume such a
notice would need to actually be sent by
a legal professional. While firms may
opt to use original language drafted by
an attorney to notify workers, the
Commission notes that the model
language satisfies the notification
requirement and therefore does not
include the cost of original language as
a regulatory cost estimate in the final
analysis. However, under these
assumptions, the cost of providing the
notice is estimated at $5.2 billion.
The Commission notes that
communication is conducted at the
establishment level and time costs do
not vary based on the number of
existing senior executives with non-
competes that the final rule does not
cover. While establishments with only
senior executives with non-competes
would not incur any notification costs
because the final rule does not cover
existing non-competes with senior
executives, without an estimate of the
percentage of firms for which this is
true, the Commission conservatively
assumes that all establishments
estimated to use non-competes engage
in this notification.
Legal and administrative costs are
summarized in Table 6. The
Commission notes that, since all costs
are assumed to be borne in the first year,
there is no discounting applied and
therefore only one estimate for each
analysis is presented.
TABLE 6
$ billions
Cost of modifying standard contract language/H.R. materials and manuals
Primary ......................................................................................................................................................................................... 	$0.5
Sensitivity analysis (outside counsel cost of $483) ..................................................................................................................... 	1.6
Cost of reviewing and revising contractual practices
Primary, four hours ...................................................................................................................................................................... 	1.6
Primary, eight hours .................................................................................................................................................................... 	3.1
Sensitivity analysis (four hours, outside counsel cost of $483) .................................................................................................. 	5.6
Sensitivity analysis (eight hours, outside counsel cost of $483) ................................................................................................ 	11.3
Administrative Costs for Notification Requirement
Primary ......................................................................................................................................................................................... 	0.09
c. Litigation Effects
Theoretically, under the final rule,
certain litigation costs may fall.
Litigation related to non-competes may
decrease because the final rule creates
bright line rules, reducing uncertainty
about the enforceability of non-
competes. On the other hand, litigation
costs may rise if firms turn to litigation
to protect trade secrets and if that
litigation is more expensive than
enforcing (or threatening to enforce)
non-competes, and/or if firms elect to
litigate over what constitutes a non-
compete.
The Commission finds there are
plausible but directionally opposite
theoretical outcomes for the different
types of litigation that may be affected
by the final rule. In fact, some recent
evidence suggests trade secret litigation
falls as a result of bans on non-competes
taking effect.1169 The Commission finds
no evidence increased litigation will
result in increased costs associated with
the final rule. The Commission cannot
quantify or monetize the overall effect
as a cost or benefit, but estimates the
magnitude of any change would be
sufficiently small as to be immaterial to
the Commission’s assessment of
whether the benefits of the rule justify
its costs.
8. Transfers
As discussed in Part X.F.6.a, some
portion of the earnings effect associated
with the final rule represents a transfer:
while workers may earn more with
greater productivity resulting from the
rule, some of their earnings increase
may result from enhanced bargaining
power, which constitutes a transfer from
firms to workers.
Similarly, some portion of the price
effects associated with the final rule
represents a transfer: while consumers
may achieve greater surplus with
increased competition, the price
decrease itself is partially a transfer
from firms to consumers.
9. Distributional Effects
The Commission finds several
distributional effects associated with the
final rule, including those associated
with firm expansion and formation,
distributional effects on workers, and
labor mobility, as summarized in Table
1 in Part X.E.
a. Firm Expansion and Formation
When non-competes are prohibited,
new firms may enter the market but
incumbent firms may opt to invest less
in capital, leaving the overall effect on
total capital investment unclear.
Similarly, while new firms may enter
the market, it is theoretically possible
that incumbent firms may exit the
market without the ability to use non-
competes (though no evidence of this
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38485	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1170 Jeffers, supra note 450; Johnson, Lipsitz, &
Pei, supra note 526.
1171 The increase, 7.9%, is calculated as 0.00317/
0.04, where 0.00317 is the reported coefficient
(Table 4, Panel A, Column 1), and 0.04 is the mean
investment per million dollars of assets ratio, across
all firms (Table 2, Panel C). Due to statistical
uncertainty, the estimate cannot rule out (with 95%
confidence) values ranging from a gain in capital
investment equal to 6.7% to a loss in capital
investment equal to 22.5% for the average firm. See
Jeffers, supra note 450.
1172 Shi, supra note 84.
1173 Jeffers, supra note 450. The estimate pertains
to firms in Technology and Professional, Scientific,
and Technical Services.
1174 Johnson, Lipsitz, & Pei, supra note 526. The
estimate pertains to firms classified as high-
technology by the National Science Foundation: see
https://nsf.gov/statistics/seind14/index.cfm/
chapter-8/tt08-a.htm.
1175 The two studies are otherwise identical in the
extent to which they satisfy the criteria for assessing
empirical research laid out in Part IV.A.2.
1176 Jeffers (supra note 450) does not report an
effect for the economy as a whole. However, Jeffers
reports coefficients of ¥0.103 for the effect of
increased non-compete enforceability on firms
founded per million people in knowledge-sector
industries and 0.008 for non-knowledge sector
industries, with respective sample sizes of 78,273
and 190,665 (Table 9, Panel A, Columns 1 and 2).
Using the sample sizes as weights, the Commission
estimates a weighted average of these coefficients of
¥0.024. Applying this estimate to the average
number of firms founded per million people (Table
2, Panel B) results in an estimated increase in new
firm formation of 2.7%. The Commission did not
calculate the effect for the economy as a whole in
the NPRM. The NPRM reported that increases in
non-compete enforceability decreased new firm
entry by ‘‘0.06 firms per million people (against a
mean of 0.38) for firms in the knowledge sector,’’
NPRM at 3526, which was consistent with the
version of the Jeffers study cited in the NPRM. The
final rule cites the updated version of the Jeffers
study, published in 2024. The Commission notes
that estimation of the uncertainty in the combined
estimate requires information on the covariance of
the estimated coefficients, which is not reported in
Jeffers’ study. See Jeffers, supra note 450.
1177 Johnson, Lipsitz, & Pei, supra note 526. The
estimate pertains to firms classified as high-
technology by the National Science Foundation: see
https://nsf.gov/statistics/seind14/index.cfm/
chapter-8/tt08-a.htm.
effect exists) or contract. Research finds
that decreased non-compete
enforceability increases new firm
formation by 2.7% and may have no
effect on capital investment or may
decrease capital investment at
incumbent firms by up to 7.9%. To the
extent there may be a decrease in capital
investment at incumbent firms as a
result of the final rule, it may represent
a shift in productive capacity from
incumbent firms to new firms. As
discussed in Part IV.D, another
purported justification for non-competes
is that they allow firms to protect trade
secrets, which in theory might allow
firms to share those trade secrets more
freely with workers, and so improve
productivity. However, no empirical
evidence substantiates this claim or
would allow quantification or
monetization of this effect.
Empirical evidence has studied parts,
but not all, of the contrasting effects on
capital investment and new firm
formation. Studies have examined
effects of non-competes on capital
investment by large, publicly traded
firms, who are likely incumbents.1170
However, no study examines the effect
of capital investment economy-wide,
nor does any study specifically examine
capital investment for new firms.
Similarly, studies have examined new
firm formation, but no studies look at
firm exit among incumbents.
It is thus not possible to measure the
benefit and costs of the full economy-
wide effects on firm expansion and
formation. The calculations that may be
performed using available data will
necessarily omit components of the
tradeoff. The final analysis therefore
quantifies the effects that the literature
has examined but does not monetize
those effects.
i. Capital Investment
Research finds that capital investment
for incumbent firms at the firm level
may decrease under the final rule for the
economy as a whole, though effects for
high-tech industries may be positive,
negative, or close to zero. The
Commission notes that the capital
investment discussed in this Part X.F.9
relates to tangible capital, does not
reflect capital investment by newly-
formed firms, and is distinct from R&D
spending, which is discussed in Part
X.F.6.b.
One estimate of the overall effect of
non-compete enforceability on capital
investment by incumbent firms, which
some commenters pointed to, is
estimated with substantial uncertainty
and is statistically indistinguishable
from zero (i.e., statistically
insignificant): a decline in capital
investment of 7.9% for the average
incumbent publicly-traded firm.1171
Another study finds no effect on capital
investment, but includes the use of non-
competes in its estimating procedure,
leading to concerns that the finding
does not support a causal interpretation,
as explained in Part IV.A.2.1172
The Commission notes two additional
estimates specific to high-tech or
knowledge firms: a decline in capital
investment among incumbent publicly-
traded firms of 34%–39% (an estimate
which corresponds to the estimate of a
decline of 7.9% when all publicly
traded firms are examined),1173 and an
increase in capital investment of 3.1%
for the average publicly-traded high-
tech firm (an estimate that is statistically
insignificant).1174 The Commission
notes the study finding an increase in
capital investment of 3.1% uses a more
granular measure of non-compete
enforceability than the study finding a
decrease of 34%–39%, and the
Commission therefore gives it more
weight. 1175
The Commission reiterates that any
change in investment at the firm level
does not necessarily mean investment
would change at the market level, since
increased firm entry may also increase
the employed capital stock and
investment in that capital stock, which
may offset any possible decreases in
investment for incumbent firms. These
potential positive offsetting effects are
not captured in the estimates herein.
ii. New Firm Formation
Research finds that new firm
formation increases by 2.7% across the
economy due to decreases in non-
compete enforceability.1176 The
Commission also notes an estimate
specific to high-tech industries: that
decreases in non-compete enforceability
led to a 3.2% increase in the
establishment entry rate. 1177
The benefits associated with new firm
entry may include added surplus for
consumers (e.g., from increased
competition) or workers (from expanded
labor demand). However, the
Commission is unable to quantify those
beneficial effects, though some may be
captured by the effect on prices
discussed in Part X.F.6.c. Nor is it able
to quantify whether existing firms might
exit or contract in response to this new
firm entry (i.e., whether the new firms’
output would be wholly additive or
crowd out some amount of existing
firms’ output). New firm entry may also
drive some of the innovative effects of
the final rule if new firms are engaging
in substantial innovation.
Overall, the Commission finds that
the rule will likely result in a 2.7%
increase in new firm formation and is
unable to quantify the net effects of this
on the productive capacity of the
economy. Benefits from new firm entry
and possible costs from decreased
capital investment may offset each other
but the degree to which this happens is
not quantifiable. The effect of the final
rule on firm expansion and formation
likely results in productive capacity
shifting from incumbent firms to new
firms. Consistent with findings in Part
IV.B.3.b.iii, productive capacity shifting
from incumbent to new firms may
decrease concentration, possibly
contributing to decreases in prices, as
discussed in Part X.F.6.c.
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38486 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1178 Johnson, Lavetti, & Lipsitz, supra note 388 at
38.
1179 Marx (2022), supra note 524 at 8.
1180 NPRM at 3531.
1181 Based on annual worker mobility rates
(separations divided by employment) in 2022 as
calculated using the Job Openings and Labor
Turnover Survey, conducted by BLS.
1182 Calculated as ¥e((¥0.241∂0.112)*0.081) ¥1),
where ¥0.241+0.112 represents the estimated effect
in Johnson, Lavetti, and Lipsitz (supra note 388) on
workers in high use industries. The corresponding
estimate for other industries is statistically
indistinguishable from zero and those industries are
therefore omitted from calculations. The multiplier
0.081 is the average magnitude change in non-
compete enforceability, as discussed in Part X.F.5.
1183 Calculated as the average usage rate in high-
use industries in Starr, Prescott & Bishara (supra
note 68).
1184 Based on data from BLS for industries
classified as high-use in Starr, Prescott & Bishara
(supra note 68), excluding CA, ND, OK, and MN.
See https://data.bls.gov/cew/apps/data_views/data_
views.htm#tab=Tables.
1185 See Pivateau, supra note 1090.
1186 Calculated as 49.4 million * 23.9%. 49.4
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
(https://data.bls.gov/cew/apps/data_views/data_
views.htm#tab=Tables). 23.9% is the average usage
rate in high-use industries in Starr, Prescott, &
Bishara (supra note 68).
1187 Though the estimated effect on earnings is
presented in dollars, the Commission considers this
value to be quantified, but not monetized, since
some part of the estimate may represent a transfer
and not a benefit.
b. Distributional Effects on Workers
The Commission finds that the final
rule may reduce gender and racial
earnings gaps, may especially encourage
entrepreneurship among women, and
may mitigate legal uncertainty for
workers, especially relatively low-paid
workers.
Specifically, the Commission finds
gender and racial wage gaps may close
significantly under a nationwide
prohibition on non-competes, according
to economic estimates.1178 Another
estimate indicates that the negative
effect of non-compete enforceability on
within-industry entrepreneurship is
significantly greater for women than for
men. 1179
The Commission finds the rule may
be especially helpful for relatively low-
paid workers, for whom access to legal
services may be prohibitively expensive.
Workers generally may not be willing to
file lawsuits against deep-pocketed
employers to challenge their non-
competes, even if they predict a high
probability of success. The Commission
finds that the bright-line prohibition in
the final rule, which the Commission
could enforce, may mitigate uncertainty
for workers.1180
c. Labor Mobility
The Commission finds the overall
effect of the final rule on turnover costs
due to increased labor mobility is
ambiguous and represents a
distributional effect of the rule. The
Commission finds turnover costs for
firms seeking new workers may fall with
a greater availability of experienced
labor. For firms losing workers newly
freed from non-competes, the
Commission estimates the effect of the
final rule to be $131 per worker with a
non-compete. The Commission
therefore finds the effect on turnover
costs represents a distributional effect of
the final rule because it costs firms that
use non-competes to constrain workers
and benefits firms that do not.
To calculate the potential $131
increase in turnover costs for workers
whose non-competes are no longer
enforceable after the rule, this final
analysis calculates:
Additional Turnover Cost per Worker
with a Non-compete = (Baseline
Turnover Rate) * (% Increase in
Turnover) * (Rate of Use of Non-
competes in Affected Industries) *
(Overall Earnings of Affected
Workers) * (Cost of Turnover as %
of Earnings)/(Number of Workers in
Affected Industries with Non-
competes)
The Commission estimates the
baseline turnover rate, i.e., the turnover
rate in the status quo, to be 47%
annually.1181 The estimated percent
increase in turnover from the final rule
is 1.0%. 1182 The estimated rate of use of
non-competes in affected industries is
23.9%.1183 Estimated overall earnings of
affected workers is $5.25 trillion.1184
The estimated cost of turnover as a
percentage of earnings is 25%.1185
Finally, the estimated number of
workers in affected industries with non-
competes is 11.8 million.1186
The annual estimated increase in
turnover costs per worker with a non-
compete is $131.
The Commission notes the actual
costs of turnover to businesses may be
substantially lower under the final rule
than this estimate reflects. This is
because the specific components of
turnover costs—finding a replacement,
training, and productivity—are likely to
be affected by the final rule. An
increased availability of experienced
workers results when non-competes no
longer constrain those workers, and
finding replacements will be less costly
to firms. Additionally, training should
not be counted in the costs of turnover
presented in this Part X.F.9.c, since it is
separately accounted for in Part X.F.7.a,
but is nevertheless included in the 25%
estimate used to arrive at the estimate of
$131 per worker with a non-compete,
since there is no reliable way to remove
training costs from that estimate; it is
thus double-counted. Finally, because
the Commission finds increased labor
mobility will likely increase worker
productivity due to better matching
between workers and firms, the cost of
lost productivity will be lower. The cost
of lost productivity will also be lessened
because the pool of workers available to
firms may be more talented or
experienced, since such workers would
no longer be bound by non-competes
(relative to new entrants to the
workforce, who are not experienced and
also are not bound by non-competes).
This would allow firms to recruit
workers who are more likely to be
highly productive upon entry at a new
job.
The Commission reiterates its finding
that the costs of turnover for many firms
may diminish due to a more plentiful
supply of available labor. Without
estimates of the effect of the final rule
on the cost of recruiting a worker, the
net effect of the final rule on turnover
costs is not quantified.
10. Break-Even Analysis
The Commission believes it has
quantified the effects of the final rule
that are likely to be the most significant
in magnitude, but data limitations make
it challenging to monetize all the
expected effects of the final rule, i.e., to
numerically estimate the impact of
particular effects on the economy as a
whole. Most of the estimated costs of
the final rule are monetized in Part
X.F.7. However, the Commission is
unable to monetize the estimated
benefits of the final rule without
additional assumptions. Two of the
major benefits—innovation and
earnings—are quantified but they are
not monetized because a particular
parameter or data point that would
allow the Commission to estimate their
effect in dollars is unavailable. For
earnings, this parameter is an estimate
of the percentage of the effect on
earnings that represents a benefit versus
a transfer.1187 For innovation, this
parameter is an estimate of the social
value of a patent. Making an assumption
about these parameters allows the
Commission to monetize the benefits
associated with the effect on earnings
and innovation. A break-even analysis
based on such assumptions confirms the
Commission’s finding that the benefits
of the rule clearly justify the costs.
The analysis in this Part X.F.10
calculates the sum of the monetizable
costs of the rule, separately under the
assumption that lost investment in
human capital is core training (in which
case monetizable costs are direct
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38487	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1188 Note that this calculation considers the net
cost of lost investment in human capital (i.e., the
cost of lost productivity, minus the savings on
direct outlays and gained output due to less time
spent training). The Commission reiterates that this
calculation assumes that lost human capital
investment is advanced, rather than core.
1189 This calculation assumes that updating
contractual practices takes, on average, eight hours
per firm.
1190 The estimates presented here conservatively
assume zero effect on R&D spending.
1191 The Commission points out that the
economic literature has not explored the social
value of a patent, but has explored the private value
of a patent, with highly varied conclusions (all
reported here adjusted to 2023 dollars). Serrano
estimates the average value of a patent (in terms of
its sale price at auction) to be between $234,399 and
$289,022. Pakes estimates the average value of a
patent (in terms of stock market reactions to
announcements) to be $5,865,833. Kogan et al.
estimate the average value of a patent (also in terms
of stock market reactions to announcements) to be
$32,459,680. Outside of the academic literature, a
Richardson Oliver Insights report notes that the
average sale price of U.S. issued patents on a
brokered market was $94,886. See Carlos J. Serrano,
Estimating the Gains from Trade in the Market for
Patent Rights, 59 Int’l Econ. Rev. 1877 (2018);
Pakes, supra note 1132; Kogan, et al., supra note
1131; Richardson Oliver Insights Report (2022):
https://www.roipatents.com/secondary-market-
report.
compliance costs and the cost of
updating contractual practices), and
under the assumption that lost
investment in human capital is
advanced training (in which case
monetizable costs are the net cost of lost
productivity from decreased human
capital investment, direct compliance
costs, and the cost of updating
contractual practices). The analysis
conservatively assumes that training for
all workers is affected (versus just those
in high-use occupations, as described in
Part X.F.7.a).
If the Commission assumes the
decrease in human capital investment is
a decrease in core training, the final rule
results in net benefits without
monetizing or counting any positive
effects on the economy from earnings or
innovation. The savings or benefit to the
economy from reduced core training
would be greater than the combined
monetized costs of the final rule in
X.F.7.b. In other words, even if the
benefit to the economy from earnings
and innovation were assumed to be zero
(an implausible and extremely
conservative assumption), the final rule
would be net beneficial under the
assumption that estimates of reduced
training reflect better matching of
workers and firms and therefore a
reduced need to provide workers with
core training.
Under the assumption that lost
human capital investment is advanced,
the Commission calculates values of the
social value of a patent and the benefit
percentage of the earnings effect that
would fully offset the net monetizable
costs of the final rule.
a. Estimate of Net Benefit Assuming
Lost Human Capital Investment Is Core
Training
Under the assumption that lost
human capital investment is core, the
sum of the present discounted value of
direct compliance costs and the cost of
contractual updating (the monetizable
costs of the rule), using a 3% discount
rate, is $3.7 billion. In this case, the
final rule is net beneficial even ignoring
the benefits associated with innovation
and earnings. This is because the net
monetized cost ($3.7 billion) is less than
the monetized benefit associated with
investment in human capital ($31
billion or $13.9 billion, when all
occupations are assumed to be affected
versus just high-use occupations,
respectively). The net monetizable
benefit of the final rule—even ignoring
benefits associated with innovation and
earnings—is therefore $27.3 billion or
$10.2 billion, respectively.
b. Estimate of Net Benefit Assuming
Lost Human Capital Investment Is
Advanced Training
In this Part X.F.10.b, the Commission
calculates the net monetizable costs and
benefits of the final rule assuming that
lost human capital investment is
advanced training, and under varying
assumptions about the values of the two
monetization parameters identified (the
social value of a patent and the
percentage of the earnings effect that
represents a benefit). Then, the
Commission calculates break-even
points: values for the monetization
parameters which would fully offset the
net monetizable costs of the final rule.
Break even points are calculated by
finding the values of the social value of
a patent and the benefit percent of the
earnings increase such that:
(Net Costs Associated with Investment
in Human Capital) + (Direct
Compliance Costs) + (Costs of
Updating Contracts) = (Earnings
Increase) * (Benefit % of Earnings
Increase) + (Patent Increase) *
(Social Value of Patent)
As calculated in Part X.F.7, assuming
a 3% discount rate, the net cost
associated with investment in human
capital is $39.0 billion.1188 Direct
compliance costs plus the cost of
updating contracts are estimated to be
$3.7 billion.1189 Net monetizable costs
therefore total $42.7 billion.
The estimated earnings increase of the
final rule over ten years, discounted at
3% is $468 billion. The estimated effect
of the rule on innovation (using the low
end of the primary estimate) ranges from
an additional 3,111 patents per year to
31,110 patents per year, increasing as
time goes on.1190
The Commission presents estimates
that demonstrate break-even points by
making an assumption for the value of
one of the two monetization parameters,
and calculating the value of the other
which implies equal monetized costs
and benefits. Based on estimates of the
private value of a patent, the
Commission separately assumes that the
social value of a patent is $94,886,
$234,399, $5,865,833, or
$32,459,680.1191 In addition to spanning
a wide range of possible valuations,
these values all represent the private
value of a patent to certain actors (e.g.,
the purchaser or seller of a patent, or
shareholders of a patenting company).
These values do not account for
innovative spillovers (e.g., follow-on
innovation) or product market spillovers
to competitors (who may lose business
to innovating firms), and therefore do
not necessarily represent the social
value of a patent. However, they serve
as benchmarks against which to assess
the breakeven points of the analysis of
the final rule.
No studies have assessed what
percentage of the earnings effect of non-
compete enforceability is a benefit
versus a transfer. The Commission
separately assumes that the percentage
is equal to 0%, 5%, 10%, and 25%.
The computed breakeven points are
reported in Table 7, under the
assumption that lost investment in
human capital is advanced. Panel A
reports necessary benefit percentages,
under each of the four assumed social
values of a patent, that would cause the
rule to result in zero net monetized
benefit. A reported value of 0%
indicates that the assumed value of a
patent itself covers the net monetized
costs of the final rule. Panel B reports
the necessary social value of a patent,
under each of the four assumed benefit
percentages, that would cause the rule
to result in zero net monetized benefit.
A reported value of $0 indicates that the
benefits associated with earnings cover
the net monetized costs of the final rule
on their own.
TABLE 7
Assumed social
value of a patent
Necessary benefit
percentage on
earnings
Panel A
$94,886 ........................... 	5.5
$234,399 ......................... 	1.7
$5,865,833 ...................... 	0.0
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1192 In particular, 0.75% represents the
percentage of employed individuals from 2017–21
ages 22–64, excluding residents of CA, ND, OK, and
MN, and excluding workers reporting working for
non-profits or the government, whose earnings are
above the inflation-adjusted threshold and who are
coded as having occupation ‘‘Top Executive.’’ The
Commission notes that this estimate may not
exactly match the definition in the final rule but the
Commission believes that this provides a reasonable
estimate.
1193 See Part IV.A.2 (explaining the Commission’s
concerns with these types of studies).
1194 Solomon Akrofi, Evaluating the Effects of
Executive Learning and Development on
Organisational Performance: Implications for
Developing Senior Manager and Executive
Capabilities, 20 Int’l. J. of Training and Dev. 177
(2016).
T ABLE 7—Continued
Assumed social
value of a patent
Necessary benefit
percentage on
earnings
$32,459,680 .................... 	0.0
Assumed benefit
percentage on earnings Necessary patent
value
Panel B
0% ................................... 	$297,144
5% ................................... 	134,202
10% ................................. 	0
25% ................................. 	0
Panel A shows that, even assuming a
value of patenting ($94,886) that is
substantially lower than the estimates in
the economic literature, only 5.5% of
the earnings effect must be an economic
benefit (as opposed to a transfer) for the
benefits associated with innovation and
earnings to outweigh the monetized
costs of the rule. Panel B shows that,
even if no part of the earnings effect of
the final rule reflects an economic
benefit (which the Commission finds to
be unlikely, in light of the evidence
discussed in Part IV.B.3.a.ii), the social
value of a patent would need to be only
$297,144 in order to cover the
monetized costs of the rule—well
within the range of (private) values of a
patent found in the literature.
The Commission additionally notes
that Table 7 omits other benefits of the
rule. The estimated benefits do not
include the benefits arising from
decreased consumer prices or increased
workforce output. The estimates also
omit possible changes in litigation costs
associated with the rule. The
Commission finds it likely that the
omitted benefits substantially exceed
the omitted costs, and additionally
reiterates that the estimated values in
Table 7 assume that lost investment in
human capital is fully advanced.
Therefore, the Commission views the
values reported in Table 7 as
conservative estimates of the breakeven
points of the rule under those scenarios.
11. Analysis of Alternative Related to
Senior Executives
The Commission elects to provide an
analysis of the effects of an alternative
with more limited coverage.
Specifically, the Commission provides
an analysis of a rule that would cover—
and therefore ban—non-competes with
all workers except senior executives. As
compared to the final rule, under this
alternative, it would not be an unfair
method of competition to enter into
non-competes with senior executives
after the effective date. The Commission
finds that excluding all non-competes
with senior executives from coverage
under the rule (as opposed to the final
rule, which excludes only existing non-
competes with senior executives) would
diminish both costs and benefits, but
would still result in substantial benefits
on net.
a. Analysis of Lost Benefits and Costs if
Senior Executives Are Excluded
Several costs and benefits may be
affected if senior executives are
excluded from coverage by the final
rule. The Commission now discusses
each of those costs and benefits relative
to the final rule.
The Commission finds that some
benefits related to labor market
competition and workers’ earnings
would be lost if senior executives were
entirely excluded from the final rule.
This is especially true because those
workers have high earnings, meaning
that a given percentage increase in their
earnings yields a greater overall effect
compared with relatively lower earning
individuals. However, those workers
make up a small portion of the
workforce—approximately 0.75% of the
workforce, based on data from the
American Community Survey.1192 The
overall change in the earnings benefit is
therefore limited, but would exceed
senior executives’ share of the
workforce. Support for this finding is
discussed in Part IV.C. Garmaise (2011)
finds that earnings of senior executives
are negatively affected by non-competes.
Countervailing evidence exists, but it is
based on evaluation of the use of non-
competes, which the Commission gives
less weight. 1193 The Commission notes
the definition of senior executive used
in Garmaise (2011) does not map
perfectly to the definition of senior
executives in this final rule, though
there is likely substantial overlap.
The Commission is unable to quantify
the lost benefits related to innovation if
senior executives were excluded from
coverage under the final rule but finds
their exclusion would diminish the
innovation benefits of the final rule.
Senior executives are involved in
determination of the strategic path of
the firm and its execution, which likely
has a substantial effect on innovation.
The Commission cannot quantify what
percentage of the innovation effect is
due to senior executives versus other
workers, though it is likely shared by
both groups.
The Commission finds that benefits
related to consumer prices would fall
significantly if senior executives were
excluded from coverage. By increasing
competition, increases in new firm
formation and increased ability to hire
talented workers may be key drivers of
the effect of the final rule on consumer
prices. As discussed in Part IV.C, senior
executives have the knowledge and
skills necessary to found new firms, or
to be key members of other firms.
Therefore, if senior executives are
excluded from the final rule, some
benefits associated with new firm
foundation and innovation would be
lost, though the exact proportion cannot
be estimated. The Commission notes
that benefits associated with lower
prices through increased competition
might also be lost but cannot be
quantified.
Turning to costs, the Commission
finds that costs associated with
investment in human capital may fall if
senior executives were excluded from
the rule. The productivity of senior
executives may benefit from investment
in their human capital.1194 The precise
monetary contribution of investment in
senior executives’ human capital to the
productivity of firms has not been
estimated, nor has the empirical
literature separately assessed the effect
of non-competes on human capital
investment for senior executives. If
senior executives benefit from
advanced, rather than core, training
investment (as described in Part
X.F.7.a), their exclusion will reduce
costs. Because senior executives are a
small part of the workforce and must be
highly skilled, locking them up with
non-competes could theoretically mean
that firms would need to invest in
relatively more core training for senior
executives if they were excluded from
the final rule.
The Commission finds that the direct
costs of compliance with the final rule
may be partially affected if senior
executives were categorically excluded.
The final rule allows employers to
enforce existing non-competes for senior
executives, so there are no notice and
re-negotiation costs for senior
executives. However, in this scenario,
costs associated with ensuring incoming
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38489	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1195 Lipsitz & Starr, supra note 72.
1196 Mueller, supra note 569.
senior executives’ contracts do not have
non-competes would be substantially
reduced. Because senior executives’
contracts are generally more complex
than other workers’ contracts, this
reduction may be relatively large, even
though there are relatively few senior
executives in the workforce
(approximately 0.75%). With respect to
the costs of updating contractual
practices, commenters noted the costs of
updating senior executives’ contracts
may be greater than for other workers
because of the complexity of their
contracts. Therefore, excluding senior
executives categorically might reduce
costs associated with updating
contractual practices substantially. At
the same time, senior executives’
contracts may already be bespoke and
individualized to such an extent that
removing a non-compete would not
considerably raise the costs associated
with revising contractual practices.
Moreover, these contracts may be even
more likely than other workers to
already include NDAs and other similar
provisions.
Finally, the Commission finds
exclusion of senior executives may
reduce litigation costs from the final
rule, though the overall effect is unclear.
Senior executives are highly likely to
have access to sensitive business
information. To the extent costs
associated with trade secret litigation or
litigation over other restrictive
covenants increase under the final rule,
though no evidence supports this
possibility, then exclusion of senior
executives may substantially reduce
these costs. Litigation related to whether
a worker meets the definition of a senior
executive may also increase if senior
executives are categorically excluded.
Overall, excluding senior executives
from the final rule would substantially
reduce the benefits of the rule—
especially those associated with new
firm formation, innovation, and prices—
but would also likely reduce costs,
especially those associated with
investment in human capital and
updating contractual practices. The
Commission finds that the benefits of a
rule excluding senior executives would
justify the costs of such a rule.
b. Analysis of Benefits and Costs to
Workers Other Than Senior Executives
Now, the Commission turns to an
analysis of the benefits and costs that
remain if senior executives are excluded
from the rule.
The Commission finds there would be
substantial benefits to labor market
competition and workers’ earnings even
if senior executives were categorically
excluded. The evidence on earnings
discussed in Part IV.B.3.a.ii does not
exclude senior executives, but based on
the percentage of the population that
represents senior executives, the
evidence largely pertains to workers
other than senior executives. Therefore,
while studies focused on senior
executives (largely) do not apply,
studies of the entire workforce mostly
reflect the effects of non-competes on
other workers. In addition to the broader
evidence on earnings discussed in Part
IV.B.3.a.ii, one study analyzes a
population exclusively comprised of
hourly workers, nearly all of whom are
highly likely not to be senior executives,
supporting the finding that even with
senior executives excluded from a rule,
there would be substantial benefits to
labor market competition and workers’
earnings.1195
The Commission is unable to quantify
to what extent the estimated effects on
innovation are driven by senior
executives versus other workers, but
still finds that a final rule excluding
these senior executives would result in
substantial benefits to innovation. First,
there is evidence that productivity of
inventors decreases when they take
career detours because of non-
competes.1196 Second, insofar as effects
on innovation are driven by increased
idea recombination, having access to
those ideas (which innovators actively
engaged in R&D must) implies that
moving to new firms would increase
innovation. Empirical studies have not
quantified the size of these effects
relative to the overall effect of banning
non-competes for workers including
senior executives on innovation,
however.
The Commission finds that a rule
excluding senior executives would still
yield substantial benefits with respect to
consumer prices. Many entrepreneurs
were not formerly senior executives,
meaning that encouraging
entrepreneurship among workers who
are not senior executives by prohibiting
non-competes will yield more business
formation. That business formation
increases competition, which may lead
to lower prices. Additionally, firms will
not be foreclosed access to talent (which
is likely important across the spectrum
of workers, though evidence only
specifically exists for senior executives),
which may also lead to lower prices. In
the absence of empirical evidence
demonstrating which workers’ non-
competes affect consumer prices, the
Commission cannot estimate how much
of the effect is due to coverage of which
workers.
The Commission finds that a rule
excluding senior executives would
result in decreased levels of investment
in workers’ human capital. The
empirical literature has not separately
assessed the effect of non-competes on
investment in human capital for senior
executives versus other workers, though
the study finding that training decreases
with greater non-compete enforceability
includes both workers who are and are
not senior executives. The Commission
therefore believes that some or much of
any cost or benefit of the rule from
changing investment in human capital
would pertain to workers who are not
senior executives. However, the
Commission notes that, as discussed in
Part X.F.7.a, if lost training under the
rule is lost ‘‘core’’ (as opposed to
‘‘advanced’’) training, then the final rule
will cause a cost savings for firms,
which will have greater access to
experienced workers and will therefore
spend less on ‘‘core’’ training.
The Commission finds that the direct
costs of compliance with the final rule
may be partially diminished if senior
executives were excluded. First, the
Commission reiterates that notice is not
required for senior executives under the
final rule. Therefore, that component of
the direct costs of compliance would
not be affected. However, even with
those senior executives excluded, costs
associated with ensuring incoming
workers’ contracts do not have non-
competes would still be present. Insofar
as senior executives’ contracts may be
more complex than other workers’
contracts, this cost may be substantially
diminished, however. Similarly, with
respect to the costs of updating
contractual practices, as noted by
commenters, these costs may be
substantially greater for the contracts of
senior executives due to the complexity
of their contracts and the sensitivity of
the information they possess. Therefore,
while some costs associated with
updating contractual practices would
survive if senior executives were
excluded, their exclusion may reduce
costs associated with the rule
disproportionately to their (relatively
low) share of the workforce.
Finally, some litigation costs may still
be present if senior executives are
excluded. Litigation costs associated
with non-competes would still likely
fall for workers other than senior
executives due to the bright-line
coverage in the rule. Costs associated
with litigation other than non-compete
litigation may rise if firms turn to those
methods, though no evidence suggests
they will.
Overall, a rule that excludes senior
executives will likely result in
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38490 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1197 5 U.S.C. 603–605.
1198 NPRM at 3531.
1199 FTC, Press Release, FTC Proposes Rule to Ban
Noncompete Clauses, Which Hurt Workers and
Harm Competition (Jan. 5, 2023), https://
www.ftc.gov/news-events/news/press-releases/2023/
01/ftc-proposes-rule-ban-noncompete-clauses-
which-hurt-workers-harm-competition.
1200 FTC, FTC Forum Examining Proposed Rule to
Ban Noncompete Clauses (Feb. 16, 2023), https://
www.ftc.gov/news-events/events/2023/02/ftc-forum-
examining-proposed-rule-ban-noncompete-clauses.
1201 Commission staff attended the February 28,
2023, roundtable. See also Comment from SBA Off.
of Advocacy, FTC–2023–0007–21110 at 2.
1202 Each year since FY2002, the Small Business
Administration (SBA) Office of the National
Ombudsman has rated the Federal Trade
Commission an ‘‘A’’ on its small business
compliance assistance work. See, e.g., SBA Office
of the Nat’l Ombudsman, 2021 Annual Report to
Congress at 47.
1203 The Commission received over 26,000
comment submissions in response to its NPRM. See
Regulations.gov, Non-Compete Clause Rule (Jan. 9,
2023), https://www.regulations.gov/document/FTC-
2023-0007-0001. To facilitate public access, 20,697
such comments have been posted publicly at
www.regulations.gov. Id. (noting posted comments).
Posted comment counts reflect the number of
comments that the agency has posted to
Regulations.gov to be publicly viewable. Agencies
may redact or withhold certain submissions (or
portions thereof) such as those containing private
or proprietary information, inappropriate language,
or duplicate/near duplicate examples of a mass-
mail campaign. Gen. Servs. Admin.,
Regulations.gov Frequently Asked Questions,
https://regulations.gov/faq.
1204 See Part IV.C.3.
1205 See Part IV.E.
1206 See Part V.A.
1207 SBA, A Guide for Government Agencies: How
to Comply With the Regulatory Flexibility Act, at 19
(Aug. 2017) https://advocacy.sba.gov/resources/the-
regulatory-flexibility-act/a-guide-for-government-
agencies-how-to-comply-with-the-regulatory-
flexibility-act/ (hereinafter ‘‘RFA Compliance
Guide’’).
1208 Ten workers is chosen as an illustrative
example. For this example, the Commission
calculates the cost of notification based on 10
workers and applies legal costs consistent with the
average per establishment cost calculated in X.F.7.
substantial benefits, as well as some
costs. While the Commission largely
cannot quantify the extent to which
benefits and costs would fall if senior
executives were excluded from coverage
under the rule, the Commission finds
that the benefits quantified and
monetized elsewhere in this impact
analysis would likely be diminished
relative to the final rule as adopted,
especially those associated with
innovation and prices, but costs would
also be diminished, especially those
associated with investment in human
capital and updating contractual
practices. The Commission finds that,
even in the absence of a full
monetization of all costs and benefits of
the final rule, the final rule has
substantial benefits that clearly justify
the costs, which remains true even if
senior executives were excluded from
coverage.
XI. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996, requires an agency
to provide an Initial Regulatory
Flexibility Analysis (‘‘IRFA’’) and Final
Regulatory Flexibility Analysis
(‘‘FRFA’’) of any final rule subject to
notice-and-comment requirements,
unless the agency head certifies that the
regulatory action will not have a
significant economic impact on a
substantial number of small entities.1197
In the NPRM, the Commission provided
an IRFA, stated its belief that the
proposal will not have a significant
economic impact on small entities, and
solicited comments on the burden on
any small entities that would be
covered. 1198 In addition to publishing
the NPRM in the Federal Register, the
Commission announced the proposed
rule through press and other
releases, 1199 as well as through other
outreach including hosting a public
forum on the proposed rule 1200 and
attending the U.S. Small Business
Administration Office of Advocacy’s
(‘‘SBA Advocacy’’) roundtable on the
proposed rule with small entities,1201 in
keeping with the Commission’s history
of small business guidance and
outreach.1202
The Commission thereafter received
over 26,000 public comments, many of
which identified themselves as being
from small businesses, industry
associations that represent small
businesses, and workers at small
businesses.1203 The Commission greatly
appreciates and thoroughly considered
the feedback it received from such
stakeholders in developing the final
rule. The Commission made changes
from the proposed rule in response to
such feedback and will continue to
engage with small business stakeholders
to facilitate implementation of the final
rule. Further, the Commission is
publishing compliance material to assist
small entities in complying with the
final rule.
Specifically, based on the
Commission’s expertise and after careful
review and consideration of the entire
rulemaking record—including empirical
research on how non-competes affect
competition and over 26,000 public
comments—the Commission adopts this
final rule, including with changes
relative to the proposal to reduce
compliance burdens on small business
and other entities. For example, the
Commission allows existing non-
competes with senior executives to
remain in force, 1204 amends the safe
harbor notice requirement to ease
compliance, 1205 removes the
requirement to rescind existing non-
competes, and removes the ownership
threshold from the sale of business
exception. 1206 In light of the comments,
the Commission has carefully
considered whether to certify that the
final rule will not have a significant
impact on a substantial number of small
entities. The Commission continues to
believe the final rule’s impact will not
be substantial in the case of most small
entities, and in many cases the final rule
will likely have a positive impact on
small businesses. However, the
Commission cannot fully quantify the
impact the final rule will have on such
entities. Therefore, in the interest of
thoroughness and an abundance of
caution, the Commission has prepared
the following FRFA with this final rule.
Although small entities across all
industrial classes—i.e., all NAICS
codes—would likely be affected, the
estimated impact on each entity would
be relatively small. The Small Business
Administration (‘‘SBA’’) states that, as a
rule of thumb, the impact of a rule could
be significant if the cost of the rule (a)
eliminates more than 10% of the
businesses’ profits; (b) exceeds 1% of
the gross revenues of the entities in a
particular sector; or (c) exceeds 5% of
the labor costs of the entities in the
sector. 1207 As calculated in Part XI.F,
the Commission estimates that legal and
administrative costs would result in
costs on average of $712.45 to $1,250.93
for single-establishment firms with 10
workers. 1208 These costs would exceed
the SBA’s recommended thresholds for
significant impact only if the average
profit of regulated entities with 10
workers is $7,125 to $12,509, average
revenue is $71,245 to $125,093, or
average labor costs are $14,249 to
$25,019, respectively. Furthermore,
while there are additional
nonmonetizable costs associated with
the final rule, there are also
nonmonetizable benefits which would
at least partially offset those costs, as
explained in Part X.F.6.
A. Reasons for the Rule
The Commission describes the
reasons for the final rule in Parts IV.B
and IV.C.
B. Statement of Objectives and Legal
Basis
The Commission describes the
objectives and legal basis for the final
rule in Part IV.B and IV.C and the legal
authority for the final rule in Part II.
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38491	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1209 The U.S. SBA publishes a Table of Small
Business Size Standards based on the North
American Industry Classification System (NAICS),
determining the maximum number of employees or
annual receipts allowed for a concern and its
affiliates to be considered small. 13 CFR 121.201;
see also Small Bus. Admin., Table of Size
Standards, https://www.sba.gov/document/support-
table-size-standards. Because commenters did not
provide their NAICS number or annual receipts,
and many did not provide the number of workers,
the Commission is unable to determine whether
each individual commenter meets the SBA’s
definition of a small business. Instead, for purposes
of considering comments from small businesses, the
Commission relies on the commenter’s self-
description of being a small business or start-up.
1210 This section captures comments related to the
potential benefits of the final rule for small
businesses. These comments do not directly address
the IRFA. Comments on the IRFA are captured in
Part XI.G. Many comments and issues concerning
small businesses are also discussed in Part
IV.B.3.b.i.
1211 See Part IV.B.3.b.i.
1212 Kang & Fleming, supra note 536.
1213 See Glasner, supra note 528.
1214 Sm. Bus. Majority, Opinion Poll, Small
Business Owners Support Banning Non-Compete
Agreements 2 (Apr. 13, 2023). The survey also finds
that 51% of small businesses that do not use non-
competes support the proposed ban.
1215 Id.
1216 Id.
1217 Id. at 3 (finding that 24% strongly agreed and
35% somewhat agreed).
1218 Id. at 2.
1219 See Part IV.B.3.b.i (summarizing these
comments).
1220 Id.
1221 Id.
1222 See also Marx (2022), supra note 519.
C. Issues Raised by Comments, the
Commission’s Assessment and
Response, and Any Changes Made as a
Result
1. Comments 1209 on Benefits to Small
Businesses and the Commission’s
Findings 1210
a. Comments
Numerous small businesses and small
business owners generally supported
the proposed rule and shared two
primary reasons, among others, that the
rule may uniquely benefit small
business owners. First, because non-
competes are expressly designed to
prevent workers from starting new
businesses within the industry and
geographic market that worker is
experienced in, commenters said non-
competes prevent new business
formation and threaten new small
businesses. Thus, consistent with the
empirical evidence, 1211 commenters
said a ban on non-competes will drive
small business creation as
entrepreneurial employees will be free
to compete against their former
employers. Second, commenters said
non-competes harm small businesses by
preventing them from hiring
experienced workers. The Commission
considered all comments related to
small businesses and addresses many of
them in Parts IV.B and IV.C and
throughout this document.
Many comments from small
businesses align with the findings in
Part IV.B.3.b.i, namely that non-
competes inhibit new business
formation. A vast majority of such new
businesses will be small businesses. For
example, Kang and Fleming find that
when Florida made non-competes more
enforceable, larger businesses entered
the State and increased employment
while small businesses entered less
frequently, and employment for them
did not change.1212 An economist stated
the NPRM’s findings show that non-
competes harm small business
formation and that firms struggle to hire
and grow in States that are more likely
to enforce non-competes. Another
commenter identified an additional
study showing that Hawaii’s ban on
non-competes in the technology
industry increased the number of
technology startups. 1213
Some commenters cited the Small
Business Majority’s polling data on non-
competes. The survey finds that 67% of
small businesses that currently use non-
competes support the proposed ban 1214
and 46% of small business owners have
been subject to a non-compete that
prevented them from starting or
expanding their own businesses.1215
Additionally, 35% of small business
respondents reported that they have
been prevented from hiring an employee
because of a non-compete.1216 The
survey also finds that of the 312 small
businesses that responded, 59%
expressed agreement that NDAs could
likely protect confidential information
or trade secrets as effectively as a non-
compete.1217 The online survey had a
small sample size of 312 small business
owners and decision-makers, and had a
margin of error of +/¥6%. 1218 An
economist commented that these survey
findings provide specific evidence
underlying the mechanisms identified
in the empirical studies finding that
non-competes decrease new business
formation and prevent new firms from
hiring and growing. While the survey
has too small of a sample size to be fully
representative of small businesses, the
survey illustrates that non-competes
have prevented or delayed small
businesses from starting or expanding.
Small businesses stated non-competes
hindered their small business, including
through costly lawsuits from former
employers. Many commenters said non-
competes were preventing them from
starting a business.1219 One technology
startup organization cited the thousands
of startups formed by alumni of five
leading tech companies as well as key
within-industry spinoffs in the
aerospace industry and suggested the
number of spinoffs could be greater with
a nationwide ban on non-competes. The
commenter stated that even delays in
founding a startup slow innovation. The
commenter looked at the employment
history of these aerospace startup
founders and stated that, while it could
not determine whether they had non-
competes, their work history suggested
they were not constrained in the labor
market.
Many small businesses commented
that non-competes prevented them from
hiring the right talent and harmed their
businesses, often because small
businesses could not afford a lawsuit or
even the legal costs of determining
whether a non-compete with a
perspective employee was
unenforceable. 1220 A technology startup
organization stated that startups are
much more likely to survive with
experienced counselors and
mentors. 1221 A policy organization
stated that non-competes favor
established and large companies,
because they can use non-compete
litigation strategically to chill movement
of experienced executives to startups
and smaller firms that lack the resources
to contest the non-competes in court.
The policy organization also stated
workers with non-competes often go to
an established competitor that has the
resources to protect them in case of a
suit rather than a small firm, meaning
small firms are disadvantaged in hiring.
Similarly, a law firm commenter stated
that small firms are less able to
compensate new hires who have
forfeiture-for-competition clauses
compared to larger firms.
Commenters made several other
arguments in favor of the rule covering
small businesses. Several commenters
pointed out that small businesses have
not struggled to thrive in States where
non-competes have long been
prohibited, including California,
Oklahoma, and North Dakota. A startup
organization agreed with data cited in
the NPRM indicating non-competes
disproportionately reduce
entrepreneurship for women, and
argued that disproportionate financial
challenges for women mean women
entrepreneurs have fewer resources to
withstand other harms from non-
competes, including lack of access to
talent. 1222 A law firm stated that a small
business exception to the rule would
lead to an inefficient ‘‘cliff’’ effect,
where small businesses who previously
fell within the exception would need to
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1223 See Part IV.B.3.b.i.
1224 This section captures comments that do not
directly address the IRFA but that are related to the
potential costs of the final rule for small businesses.
Comments directly addressing the IRFA are
captured in Part XI.G. Many comments concerning
small businesses are also discussed in Part
IV.B.3.b.i.
1225 See, e.g., SBA Off. of Advocacy, FTC–2023–
0007–21110 at 3.
1226 Id.
rescind their existing non-competes
after surpassing a threshold. Finally,
and importantly, numerous workers at
small businesses reported substantial
harms from non-competes consistent
with the harms cited in Part IV.B.2 and
IV.B.3.a, just as workers for large
employers did.
b. Responses to Comments
As the Commission explained in Parts
IV.B.3.b and IV.C.2.c, the weight of the
empirical evidence supports the
conclusion that non-competes inhibit
new business formation and foreclose
small and other businesses from
accessing the talent they need to grow
and succeed. Most new businesses are
small, and non-competes are expressly
designed to prevent workers from
starting new businesses in the fields
they know best. The Commission
appreciates the small businesses and
entrepreneurs who shared their
experiences in the comments. These
comments and the many comments
discussed in Parts IV.B.2 and IV.B.3
from small businesses align with and
bolster the empirical evidence. The
comments illustrate the real-world
impacts of non-competes on
entrepreneurs and would-be
entrepreneurs, both before and after
formation of a business. Moreover, the
labor market effects—including
reducing labor mobility and artificially
suppressing wages and job quality—are
not different or mitigated when a worker
works for a small business rather than
a large one. Studies finding harm from
non-competes examined both large and
small businesses, and the Commission
believes that small businesses’ use of
non-competes causes the same harms
set forth in Parts IV.B and IV.C,
including harm to other small
businesses.
Based on these and other comments,
the Commission believes that many
small businesses are blocked from
hiring workers that could help their
business grow and have fewer resources
than larger businesses to evaluate the
risk of hiring a worker subject to a non-
compete, to pay to ‘‘release’’ a worker
they want to hire from a non-compete,
such as a forfeiture-for-competition
clause, and defend themselves from a
non-compete suit.
In response to the comments on small
business successes in States where non-
competes are banned, the Commission
notes that it recognizes that there are
many successful small businesses in
States that ban non-competes, but is not
aware of any empirical evidence
considering success rates of small
businesses based on enforceability of
non-competes.
In response to the comment
discussing startups in the aerospace
industry, the Commission notes that the
conclusions of the commenter align
with the empirical evidence that the
most successful startups are within-
industry spinoffs.1223 However, the
Commission notes that according to the
data presented in the comment, some of
the founders the comment described as
being unrestrained in the labor market
have significant gaps in their work
history, though the Commission cannot
determine the cause of any gaps.
As explained in Part IV.C, the
Commission adopts a partial exception
in § 910.2(a)(2) for senior executives
under which their existing non-
competes—non-competes entered into
before the effective date—are not
covered by the final rule. Employers
cannot, however, enter into new non-
competes with senior executives as of
the effective date. The evidence and
comments describing the importance of
freeing senior executives from non-
competes with respect to founding and
supporting new and small businesses
contributed to the Commission’s
decision to ban future non-competes for
senior executives instead of excepting
senior executives entirely from the final
rule. The Commission is aware that
existing non-competes with senior
executives will reduce some of the
benefits for new and small businesses as
fewer senior executives will be free to
join or found those businesses
beginning on September 4, 2024.
However, senior executives are a small,
narrowly defined group, meaning there
will still be numerous experienced
workers freed from non-competes that
can found or support small businesses,
and senior executive non-competes will
eventually become phased out. In
addition, the Commission expects small
businesses to receive the other
anticipated benefits of the final rule.
2. Comments Arguing the Rule Will
Harm Small Businesses and the
Commission’s Findings 1224
a. Comments
Some small businesses and industry
groups stated they believe a ban on non-
competes would harm small businesses.
Several commenters requested an
exception for small businesses or certain
types of small businesses, such as
independent medical practices. The
Commission addresses these comments
in this Part XI.C.2 and addresses direct
potential costs in Part XI.E. The
Commission appreciates the small
businesses and entrepreneurs who
shared their experiences in the
comments.
Commenters raised concerns that
eliminating non-competes for all
businesses would allow larger
businesses and incumbents to easily
hire away talent from smaller
competitors and startups. Other small
businesses said they had been harmed
in the past by former workers competing
against them, including by recruiting
clients and other workers, or by large
competitors hiring their workers.
Similarly, some industry associations
and small businesses said non-competes
protect independent businesses,
including medical practices, from
dominant consolidators, as high
recruitment, retention, and other costs
may induce small businesses to sell
their business to consolidators.
Relatedly, some healthcare
organizations argued a ban that does not
cover nonprofit hospitals and health
systems would provide those large
nonprofits with an unfair advantage
over independent medical practices.
Some small businesses offered the
same justifications as other businesses
for using non-competes but emphasized
the heightened potential damage to
smaller businesses less able to bear
costs, including being forced to close or
sell. 1225 Many of these comments
asserted that small businesses relying on
legitimate trade secrets would be
especially harmed if a worker took that
information to a competitor or new
business, particularly because they
would be least equipped to detect theft
or retain sophisticated legal counsel to
litigate potential trade secrets or NDA
claims, thus reducing investment and
innovation. 1226 A law firm argued that
trade secrets litigation often costs
millions, and few attorneys are willing
to work on contingency, so startups
would struggle to litigate against larger
well-financed firms, especially as large
firms can drive costs up to force the
startup out of the litigation. SBA
Advocacy asserted that if competitive
information is not protected, some small
businesses could face a serious risk of
loss or potential closure and could not
afford alternative means of protection.
One industry organization stated more
generally that protecting information is
a high priority for emerging growth
companies. Some small businesses
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1227 Sections 7(j)(10) and 8(a) of the Small
Business Act (15 U.S.C. 636(j)(10) and 637(a))
authorize the SBA to establish a business
development program, which is known as the 8(a)
Business Development program. The 8(a) program
is a robust nine-year program created to help firms
owned and controlled by socially and economically
disadvantaged individuals. SBA, 8(a) Business
Development Program (last updated Jan. 25, 2024),
https://www.sba.gov/federal-contracting/
contracting-assistance-programs/8a-business-
development-program.
1228 SBA Off. of Advocacy, FTC–2023–0007–
21110 at 3.
1229 NPRM, proposed § 910.1(e).
1230 SBA Off. of Advocacy, FTC–2023–0007–
21110 at 3.
1231 Id.
1232 See Parts IV.B and IV.C.
1233 See id.
stated if non-competes are banned, they
might silo workers and information to
limit the potential harm from a worker
leaving for a larger competitor and
would harm the business. One business
stated that while banning non-competes
might allow more market entrants, those
new entrants will be more likely to fail
without the protection of non-competes
for worker retention and confidential
information. Some business associations
stated small business owners often rely
on independent contractors and sole
proprietors such as marketers to build
their businesses and share proprietary
information with them (meaning
contractors may have access to
information from multiple competitors)
and covering such groups under the rule
would harm their growth.
Small businesses also stated they use
non-competes to protect investments,
including in training, to prevent
workers from taking clients or
customers, and to increase retention and
stability. For example, some small
businesses shared that they started
using non-competes after workers they
had trained extensively went to a larger
competitor or started their own
business. One small business
organization stated the proposed
requirement to relate ‘‘costs incurred’’ to
TRAPs would be harder for small
businesses who are more likely to train
on the job. A physician practice stated
a partner leaving for a hospital would
destabilize and increase costs for the
practice, but a non-compete that is
bought out helps practices afford those
extra costs or otherwise prevents
destabilization.
Commenters provided additional
reasons small businesses use non-
competes. A business stated that they
could not afford to pay workers as much
as larger businesses, so will be unable
to find workers. A small business
association stated that banning non-
competes would exacerbate the labor
shortage for small businesses by
decreasing investment in training, when
there are already insufficient qualified
applicants. A commenter stated that the
NPRM did not provide any examples of
small businesses using non-competes in
an unfair way. SBA Advocacy also
stated that some small business
employment contracts compensate
workers for non-competes. One business
stated small businesses may not be able
to afford to fight larger businesses using
borderline de facto non-competes.
A banking association stated new
businesses that cannot protect their
business would be less able to attract
capital than more established
businesses, while a community bank
similarly said it may be unable to lend
to small businesses that cannot protect
their workers, customers, and
proprietary information with non-
competes. A small business stated that
NDAs and non-solicitation clauses were
too difficult to enforce, as it was told by
judges that in order to win a non-
solicitation suit against a former worker
who purportedly took clients, the
business would need to subpoena its
own former clients to testify, which
would damage the business’s
reputation.
A physician said they were able to
start an independent practice while
complying with a non-compete and hire
others in compliance with their non-
competes. One small business said they
were able to work out solutions when
hiring a worker subject to a non-
compete to avoid violating it.
SBA Advocacy relayed the concern of
one 8(a) 1227 small business that feared
if entities in the 8(a) business
development program cannot control
their talent, the money the Federal
government has spent helping these
companies would be wasted.
Accordingly, SBA Advocacy asserted
that the proposed rule conflicted with
the Congressional law creating the 8(a)
program. 1228
A small Federal contractor stated that
larger companies could poach workers
who are skilled and/or who are already
cleared by the government to work on
projects from small businesses,
potentially putting them out of business,
and would damage contractors’ ability
to provide stability to the agencies.
Some commenters expressed concern
that the proposed 25% threshold 1229 for
the sale of business exception would
cause small businesses to lose value
when acquired because owners and key
workers are critical contributors to the
business and non-competes are
intangible assets, making buyers less
likely to buy. Some commenters
requesting a small business exception
suggested various definitions of ‘‘small
business,’’ including based on the
number of employees.
Finally, SBA Advocacy encouraged
the Commission to adopt an approach
addressing the different concerns of
small entities and consider, analyze,
and tailor alternatives to the size and
type of entity to minimize adverse
impacts to small entities.1230 It stated
that a categorical ban was inappropriate
given the range of industries and nature
of economic impacts.1231 One business
requested an exception for highly paid
workers at small businesses, to create a
predictable bright-line rule while
leveling the playing field for small
businesses. An industry association
asked for an exception for newly formed
businesses to encourage capital
formation among start-up entities.
b. Responses to Comments
First and foremost, the Commission
finds, based on its expertise, the
empirical evidence, and the record
before it, that non-competes tend to
negatively affect competitive conditions
in both labor and product and service
markets, including by inhibiting new
business formation. 1232 The
Commission is not aware of any
empirical research on existing firm
closures—including small business
closures—being correlated with
decreased non-compete enforceability.
The Commission is also not aware of
empirical research on specific business
closure patterns. Rather, the empirical
evidence shows that non-competes
overall increase new business formation
and decrease concentration, indicating
that the final rule will likely increase
the overall number of small businesses.
The Commission is focused on the
aggregate effects of non-competes on
competitive conditions and here
considers the overall effect on small
businesses. While an individual small
business may benefit from prohibiting
one of its workers from joining a
competitor or from keeping a competitor
from entering the market, non-competes
have a substantial net negative aggregate
impact on competitive conditions in
both labor markets and product and
services markets, including negative
spillover effects on other small
businesses that do not use non-
competes.1233
The Commission has assessed the
evidence on protection of trade secrets
and proprietary information in Part IV.D
and finds that businesses have
sufficient, less restrictive alternatives to
protect such information. These options,
such as NDAs, protection under trade
secrets law, and importantly, competing
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1234 Greenwood, Kobayashi, & Starr, supra note
757. The Commission notes that this study
supplements—but is not necessary to support—its
finding that no evidence supports the conclusion
that litigation costs will increase under the final
rule. That finding is based on the Commission’s
expertise and the rulemaking record, including
relevant comments. This study was published after
the close of the comment period.
1235 See Parts IV.D and X.F.7.c.
1236 See Part II.F. 	1237 See Part X.F.9.a.
1238 See Part IV.D.2.
1239 See Part IV.B.3.b.
on the merits to retain workers, are also
accessible to small businesses. On the
latter, small businesses have potentially
distinct options from larger firms
because of their greater ability to be
flexible and responsive to their workers’
preferences. Moreover, the Commission
notes that no evidence exists to support
the hypothesis that trade secret
litigation will increase after the final
rule takes effect. Recent evidence
suggests trade secret litigation does not
increase following bans on non-
competes. 1234 With a bright-line rule
banning non-competes, small
businesses, like other business, will not
face or have to undertake litigation
related to non-competes, which may
partially offset other litigation costs if
firms do substitute other litigation. In
fact, the purported dynamic where
small firms are outspent and
outmatched by large firms that drive up
the cost of trade secrets litigation, is the
exact dynamic many small businesses
face when sued over a non-compete,
which can also force small businesses to
close. 1235 While the Commission does
not have data on the frequency of each
type of litigation or how often it forces
small businesses to close, these
comments indicate that this alleged
legal threat is already present in a
different form. Moreover, the
overbreadth of non-competes that
employers cite as the source of their
benefits for reducing litigation costs is
also the source of the negative effects of
non-competes on competitive
conditions, and pecuniary benefits to a
firm engaged in an anticompetitive
practice are not a cognizable
justification for an anticompetitive
practice. 1236
Additionally, the Commission is
unaware of any evidence that small
businesses in States where non-
competes are less enforceable are more
likely to experience trade secret
misappropriation, or evidence that
small businesses are at a distinct
disadvantage in these States. Finally,
the Commission notes that despite
claims that using non-competes to
protect trade secrets supports
innovation, the empirical evidence
shows increased enforceability of non-
competes on net in the aggregate harms
innovation. Again, the Commission
considers the overall effect on all
business, including small businesses,
and finds that the final rule will not
reduce innovation by small business.
In response to the comments that
businesses would limit sharing
confidential information with their
workers or that a small business’s
inability to protect confidential
information would cause new
businesses to fail, the Commission notes
that use of less restrictive alternatives,
including, for example, NDAs, fixed
term contracts, and worker retention
policies, would allow small businesses
to maintain the same or near same level
of protection for the confidential
information they might share and want
to protect. Accordingly, to the extent it
is productive for a small business to
protect such information or share it with
a worker, the firm would adopt these
alternatives and be able to continue to
operate with the same or similar use of
confidential information. Moreover, the
Commission is not aware of any
empirical evidence supporting the
conclusion that firms would share less
confidential information or be less able
to protect it. In fact, the evidence shows
that both within-industry and non-
within industry spinouts are better
quality, on average, when non-competes
are less enforceable, which reinforces
the conclusion that small businesses do
not rely on non-competes to thrive.1237
Indeed, no empirical evidence shows
new businesses fail at a higher rate
when (or because) non-competes are
less enforceable. To the extent some
businesses may choose to limit
information sharing (as some individual
comments suggest), the Commission
concludes that the benefits of the final
rule with respect to earnings, new
business formation, and innovation
justify any limited resulting negative
effect.
In Parts IV.D.1 and X.F.7.a, the
Commission examines the evidence on
human capital investment and other
investment and finds uncertainty
regarding whether the effects on training
and other investment will be benefits or
costs under the final rule. The
Commission distinguishes between core
training and advanced training, finding
that businesses may be able to spend
less on core training under the final rule
to the extent businesses are able to
better match workers with their needs.
The Commission similarly finds that
new business formation under the final
rule could result in an increase in
overall capital investment or serve to
offset any decreased capital investment
in incumbent firms. As noted in
comments from small businesses, non-
competes limit their ability to hire
experienced, productive workers. While
it may be true in some cases that large
businesses will be able to ‘‘poach’’
workers from smaller business, smaller
businesses would also be better able to
hire talent from large (or other)
businesses under the final rule. In fact,
theoretically, the final rule would be
more beneficial to smaller businesses
because they would no longer be
hamstrung by the threat of non-compete
litigation by large firms when hiring
experienced workers from those firms.
To the extent large firms can afford to
pay out a worker non-compete or to
litigate or threaten litigation to secure
talent they want from a small firm, a ban
on non-competes will better level the
playing field between small and large
firms competing for talent. While as
stated by one commenter, some small
businesses may be successful if they are
able to use non-competes, the empirical
evidence supports the conclusion that
new business formation will increase
overall under the final rule, and the
Commission is not aware of any
evidence of small business closure
patterns. Businesses also have other
alternatives to retain workers.1238
Finally, the empirical evidence
demonstrates ways in which non-
competes advantage large businesses
against smaller ones.1239
In response to comments that argued
non-competes were needed to promote
stability and worker retention, the
Commission notes there is no evidence
that stability and worker retention are
economically productive in and of
themselves. The overall evidence on the
harms from non-competes demonstrates
that retention of workers through non-
competes has considerable costs to both
labor markets and product and service
markets. Importantly, businesses also
have other, less restrictive alternatives—
that do not tend to negatively affect
competitive conditions—to retain
workers as discussed in this Part and in
Part IV.D.2. In response to the comment
that small businesses will be less likely
to afford retaining workers than large
businesses that can pay more, the
Commission notes that increases in
innovation are likely to make small
businesses more productive and
successful, allowing them to better
compete with their larger competitors.
Moreover, the Commission notes that, in
addition to those retention alternatives,
many workers commented that their
non-competes prevented them from
seeking jobs with better working
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38495	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1240 See Part IV.B.3.a.iii.
1241 See Part III.D.
1242 See Part II.F.
1243 See Part III.D.
1244 See Part II.F.
1245 RFA Compliance Guide, supra note 1207 at
14. One business suggested that the SBA definition
is prone to confusion and litigation but did not
provide any additional information to explain why
or how.
conditions, shorter commutes, more
flexible hours, or more career
advancement opportunities, among
others. 1240 Small businesses have ways
to compete for workers beyond wages
alone.
Many of the comments from small
businesses, as well as from other
commenters, appear to confuse non-
competes with other types of
agreements, such as non-solicitation
agreements or NDAs, and argue that
non-competes are needed to prevent
former workers from taking the
employer’s customers or clients or
disclosing confidential information. The
final rule does not ban non-solicitation
clauses unless they meet the definition
of non-compete clause. 1241 While one
commenter argued that non-solicitation
clauses may be more difficult to enforce
than non-competes, the Commission
weighs the cost of this potential
increased difficulty against the harms
from non-competes and finds that any
marginal benefit compared to a non-
solicitation clause does not justify the
costs of non-competes. And as
explained previously, pecuniary
benefits to a firm from an
anticompetitive practice are not a
cognizable defense. 1242
In response to comments that small
businesses are more reliant on
independent contractors and without
non-competes independent contractors
might have access to confidential
information for multiple competitors,
the Commission first notes that the final
rule does not prohibit agreements
preventing a worker from working for
two firms simultaneously.1243 Many
alternatives to non-competes allow
businesses working with independent
contracts to protect their confidential
information, including maintaining
security of confidential information as
well as NDAs and other such
agreements, as described in Part IV.D.
There is no evidence that independent
contractors are more likely to use or
share confidential business information
and, in fact, they are likely to be
working under an agreement detailing
their responsibilities and to be more
familiar with ways to assure clients that
any confidential business information
shared with them will remain
confidential.
In response to comments that banks
might decrease lending without non-
competes, the Commission notes that
there is no indication that small
businesses in States that have banned or
limited non-competes have been unable
to obtain financing and commenters
provide no related evidence. Again,
small businesses will have less
restrictive alternatives as a means of
protecting confidential information.
Moreover, with respect to new business
formation, workers seeking to start their
own businesses will be able to reassure
banks that their business will not face
the threat of litigation or a court
enjoining them from continuing with
their business because of a non-
compete.
In response to SBA Advocacy’s
comment on compensation for non-
competes, the Commission considered
this issue in Part IV.C. and decided to
allow existing non-competes with senior
executives, which the Commission finds
are most likely to have involved
consideration, to remain in force.
In response to the comment on the
8(a) business development program, the
Commission notes that there are likely
program participants in States where
non-competes are banned or partially
banned and, thus, are not able to use
non-competes. Moreover, the program
aims to help firms owned and
controlled by socially and economically
disadvantaged individuals with various
supports and assistance to improve their
success in securing government
contracts. There is no basis to believe
such assistance hinges on these small
businesses being able to use non-
competes with their workers. Like other
firms, program participants have viable,
less restrictive alternatives that do not
tend to negatively affect competitive
conditions. The evidence presented in
this Part shows that on the whole, small
businesses—including 8(a)
participants—are expected to benefit
from the ban on non-competes by, for
example, having a larger pool of talent
from which to hire workers.
In response to the comment that large
businesses may use borderline de facto
non-competes, the Commission notes
that it provides greater clarity on the
definition of non-compete clause in Part
III.D, which the Commission believes
will reduce both confusion and evasion.
To the extent the commenter is raising
the possibility that such other restrictive
employment terms may tend to
negatively affect competitive conditions,
the Commission notes that section 5 and
the other antitrust laws apply to those
terms and govern whether such terms
might be unlawful.
In response to comments on the
proposed sale of business threshold, as
explained in Part V.A, the Commission
is eliminating the 25% threshold,
meaning more small businesses will be
able to utilize non-competes for more
owners when they are selling their
business. While individual businesses
might see decreased value in a sale from
being unable to use non-competes for
workers, any decrease is justified by the
net aggregate benefits of freeing labor
markets and product and service
markets from non-competes. Again,
pecuniary benefits to a firm engaged in
an anticompetitive practice is not a
cognizable defense.1244
In response to the proposed
definitions of ‘‘small business,’’ first, as
explained in Part X.H, the Commission
declines to create an exception for small
businesses. Second, the SBA already
defines ‘‘small business’’ based on size
standards set forth in 13 CFR 121.201,
and agencies are prohibited from
deviating from this definition without
following the procedures set out in 13
CFR 121.903.1245
In response to the comments arguing
that the Commission’s jurisdiction does
not extend to tax-exempt nonprofit
hospitals and healthcare organizations
and that the final rule would, thus, give
large nonprofits an unfair advantage
over small practices, the Commission
addresses this question in Parts II.E.2
and V.D.4. In response to the comment
on difficulties in using TRAPs under the
proposed rule, the Commission notes
the final rule does not ban TRAPs, but
covers terms and conditions of
employment that meet the definition of
non-compete clause as delineated in
§ 910.1 and described in Part III.D.
The commenter asserting that the
final rule would exacerbate a labor
shortage for small businesses did not
provide evidence to support this claim.
The Commission, however, finds that a
ban on non-competes will increase labor
mobility and enable skilled workers
who are currently trapped by non-
competes to work for others in the
industry.
Finally, the Commission notes that
numerous workers at small businesses
have shared how non-competes have
harmed them.
The Commission has carefully
considered all of SBA Advocacy’s and
other stakeholders’ comments,
including those requesting a small
business exception. The Commission
has made the following changes, which
the Commission believes will benefit
small entities: adding an exception for
existing senior executive non-competes;
amending the notice requirement to ease
compliance; and eliminating the sale of
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1246 See generally Beck Reed Riden Chart, supra
note 1052. In 2023, Maryland increased its non-
compete compensation threshold to $19.88 per hour
and set a slightly lower threshold for small
employers at $19.20 per hour. Md. Lab. & Empl.
Code sec. 3–716.
1247 SBA Off. of Advocacy, FTC–2023–0007–
21110.
1248 See Colvin & Shierholz, supra note 65 at 5.
The Commission emphasizes that, since smaller
firms generally use non-competes at a lower rate,
based on the numbers reported in Table 1, the
estimate of the number of affected small entities is
likely larger than is true in practice.
1249 See Small Bus. Admin., Table of Size
Standards, https://www.sba.gov/document/support-
table-size-standards.
1250 The Commission uses the latest data available
from the Census Bureau’s Statistics of U.S.
Businesses database, available based on firm
revenue and firm size. Census Bureau, Statistics of
U.S. Businesses (SUSB) (last revised Nov. 17, 2023),
https://www.census.gov/programs-surveys/
susb.html. Values are deflated to current dollars
using https://www.bls.gov/data/inflation_
calculator.htm. As used in this analysis, per the
Census Bureau, ‘‘a firm is a business organization
consisting of one or more domestic establishments
in the same geographic area and industry that were
specified under common ownership or control.’’ On
the other hand, ‘‘an establishment is a single
physical location at which business is conducted or
services or industrial operations are performed.’’
See Census Bureau, Glossary, https://
www.census.gov/programs-surveys/susb/about/
glossary.html. The number of small firms calculated
here has decreased compared to the IRFA based on
the updated Census Bureau data and SBA size
standards.
1251 See Colvin & Shierholz, supra note 65. The
Commission notes that the estimated percentage of
firms which use non-competes is based on a survey
of businesses with employees. In addition, the
Small Business Majority’s recent survey of small
businesses finds that 48% of respondents use non-
competes. Sm. Bus. Majority Opinion Poll, supra
note 1214. The Commission does not find that this
survey has a sufficiently representative sample size
to be considered definitive but notes that it aligns
with the Colvin & Shierholz estimate.
1252 See Colvin & Shierholz, supra note 65.
1253 See generally id.
1254 Id.
business ownership threshold. The
Commission believes that the final rule
will benefit small businesses overall.
The Commission notes that no State has
exempted small businesses from any
State statutes regulating non-
competes. 1246 There is no empirical
evidence that a small business
exception is necessary or appropriate.
Further, the evidence indicating that a
ban on non-competes will benefit the
economy accounts for non-competes
used by both large and small businesses.
In sum, the evidence indicates the final
rule will, in the aggregate, benefit both
small businesses and workers who work
for small businesses—not to mention
the consumers who in turn benefit.
More small businesses are expected to
enter the market, and the final rule will
remove barriers to their growth.
D. Comments by the Chief Counsel for
Advocacy of the SBA, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
The Commission received and
carefully reviewed the comment from
the SBA. 1247 The issues raised by the
SBA and the Commission’s responses
are included in Parts XI.C and XI.F.
E. Description and Estimated Number of
Small Entities to Which the Rule Will
Apply
The final rule will impact all small
businesses, across all industry classes,
that use non-competes. It may also
impact some small businesses that do
not use non-competes but are impacted
by other businesses’ use of non-
competes. The Commission does not
expect that there are classes of
businesses which will face
disproportionate impacts from the final
rule.
For the vast majority of industries,
there is no nationwide granular data
regarding the percentage of firms that
use non-competes, which would
facilitate calculating the number of
small entities in a given industry using
non-competes. Because of this data
limitation and given the relatively stable
percentage of firms using non-competes
across the size distribution,1248 the
Commission estimates the total number
of small firms across all industries in
the U.S. economy. The Commission
then calculates the number of firms
estimated to use non-competes by
applying an estimate of the percentage
of firms using non-competes to that
total. Using the size standards set by the
SBA, 1249 the Commission calculates that
there are 5.25 million small firms and
5.48 million small establishments in the
U.S. 1250 Assuming that 49.4% of firms
or establishments use non-competes, 1251
an estimated 2.59 million small firms,
comprising 2.71 million small
establishments, would be affected by the
final rule. These calculations—the
counts of businesses and the percentage
of businesses that use non-competes—
are based on small businesses with
employees, since sole proprietorships
are unlikely to use non-competes. Since
the estimate cannot account for
differential use of non-competes across
industries, these firms span all
industries and various sizes below the
standards set in the SBA’s size
standards.
The Commission sought comments on
all aspects of the IRFA, including the
description and estimated number of
small entities to which the rule would
apply. A business association claimed
the IRFA estimated the number of small
businesses solely based on one
incomplete study, the Colvin and
Shierholz study, which it argued
counted only firms with no union
members who said all employees signed
non-competes, risking significantly
undercounting the number of impacted
businesses. This comment misreads the
study. The cited statement explained
that when tabulating the share of
businesses where all employees sign
non-competes, the study counted only
firms with no union members as it did
not have information on whether union
members signed non-competes.1252 That
does not mean that only firms with no
union members where all employees
signed non-competes were included in
the study. In fact, the study divided its
results between the share of workplaces
where all employees and only some
employees were subject to non-
competes. 1253 The comment cites to
only one component of the study
results. Moreover, the study states that
anecdotal evidence indicates it is rare
for unions to agree to non-competes,1254
and comments the Commission received
align with that anecdotal evidence.
F. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
To comply with the final rule, small
entities must do three things. First, to
comply with §§ 910.2(a)(1)(i) and
910.2(a)(2)(i), which state it is an unfair
method of competition to enter into a
non-compete with a worker, small
entities can no longer enter into new
non-competes with incoming workers,
including senior executives. This may
include revising human resources
materials and manuals and template or
form contracts to ensure they are not
misused on a forward-going basis, and
making strategic decisions regarding
workers’ employment terms. Second, to
comply with § 910.2(a)(1)(ii) and (iii),
small entities cannot enforce (or make
misrepresentations about) existing non-
competes for workers other than senior
executives after the effective date. That
is, businesses must refrain from suing or
threatening to sue workers other than
senior executives regarding a non-
compete after the effective date; but
formal contract rescission is not
required. Third, businesses must
provide notice to workers other than
senior executives that the worker’s non-
compete will not be enforced against the
worker. The Commission provides a safe
harbor notice that must be provided
only to workers with known contact
information. These foregoing steps
entail some potential legal and
administrative costs.
As calculated in Parts X.D.1.a and
X.D.2.a, the Commission estimates the
legal and administrative costs would
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1255 ‘‘Ten workers’’ is chosen as an illustrative
example.
1256 See Part X.F.7.b for a detailed description of
the calculation and assumptions. The Commission
notes that a typographical error in the IRFA resulted
in the Commission reporting preliminary figures
that were substantially larger than the comparable
calculations in the preliminary section 22 analysis,
which accounts for some of the differential between
the preliminarily reported figures in the IRFA and
the final estimates here.
1257 BLS, Occupational Outlook Handbook,
Lawyers (last modified Sept. 6, 2023), https://
www.bls.gov/ooh/legal/lawyers.htm (updated for
inflation to 2023 dollars and based on updated BLS
data). Assumed lost productivity is twice the
median wage.
1258 Balasubramanian, Starr, & Yamaguchi, supra
note 74. The value 97.5% is calculated as (1–0.6%/
24.2%), where 0.6% represents the proportion of
workers with only a non-compete, and no other
post-employment restriction, and 24.2% represents
the proportion of workers with a non-compete,
regardless of what other post-employment
restrictions they have.
1259 Colvin & Shierholz, supra note 65 at 1.
1260 Part X.F.7.b.i.
1261 These estimates are derived from outreach to
employment attorneys active in assisting firms in
writing their non-competes. Commenters did not
provide additional information or data that could be
used to update these estimates.
total $538.48 to $1,076.96 for each small
firm, plus an additional $155.85 for
each establishment owned by that firm,
plus an additional $1.81 per worker. A
single-establishment firm with 10
workers, for example, would bear
estimated costs of $712.45 to
$1,250.93. 1255 Only a small portion of
the average cost estimated for each
small firm—$155.85 per establishment,
plus $1.81 per worker—is required
under the rule. The remainder of the
estimated cost is attributable to legal
costs which firms may (but are not
required to) undertake to revise their
contractual practices. The FRFA
assumes that the value of human
resource professionals’ times and legal
professionals’ time is equal to twice
their average wages, which results in
updated estimates. 1256 In an abundance
of caution, the Commission has erred on
the side of overestimating costs.
As described in greater detail in Part
X.F.7.a, the Commission also finds that
firm investment in human capital may
increase or decrease under the final
rule, depending on the type of training
affected. Given the evidence available,
the Commission is unable to fully
monetize the estimates of firm
investment in human capital. It
concludes, however, that even in the
absence of a full monetization of all
costs and benefits of the final rule, the
final rule has substantial benefits that
clearly justify the costs.
1. Legal Costs
To ensure that incoming workers’
contracts do not include non-competes
and that they fully comply with the
final rule, firms may employ in-house
counsel, outside counsel, or human
resource specialists (depending on the
complexity of the relevant non-
compete). For many firms, this process
would likely be straightforward (i.e.,
simply not using non-competes or
removing one section from a boilerplate
contract). Other firms may have more
complex agreements or choose to use
more time. The Commission assumes
that, on average, ensuring that contracts
for incoming workers do not have non-
competes would take the equivalent of
one hour of a lawyer’s time (valued at
$134.62),1257 resulting in a total cost of
$134.62*2.71 million = $364.8 million.
There may be substantial heterogeneity
in the costs for individual firms;
however, the Commission believes this
number is conservative. For firms whose
costs of removing non-competes for
incoming workers is greater, the work of
ensuring that contracts comply with the
law would overlap substantially with
the costs of updating contractual
practices, described in Part X.F.7.b.
For each establishment of each firm,
estimated direct compliance costs total
$21.23 + $134.62 = $155.85, plus $1.81
per worker with a non-compete.
Some business commenters have
indicated that they may add or expand
the scope of NDAs or other contractual
provisions. This legal work is not
mandated or required by the rule; it
would be undertaken only by the subset
of firms and workers for whom firms
conclude that such alternatives would
be desirable. Additionally, such
adjustments are likely unnecessary for
senior executives whose non-competes
continue to be enforceable under the
final rule. Therefore, this component
additionally involves identifying senior
executives whose existing non-competes
are unaffected. For any such legal work,
firms may use in-house counsel or
outside counsel. To do so, firms may
use in-house counsel or outside counsel
to revise current contracts or enter into
new, different contracts with workers.
The Commission is not aware of
empirical evidence on how much it
costs firms to revise their contractual
practices when they can no longer use
non-competes, and commenters did not
provide evidence on costs. However,
there is evidence indicating that firms
that use non-competes are already using
other types of restrictive employment
provisions. Balasubramanian et al. find
that 95.6% of workers with non-
competes are also subject to an NDA,
97.5% of workers with non-competes
are also subject to a non-solicitation
agreement, NDA, or a non-recruitment
agreement, and that 74.7% of workers
with non-competes are also subject to
all three other types of provisions.1258
Firms that are already using multiple
restrictive covenants may not need to
expand the scope of existing restrictive
employment provisions or enter into
new ones.
Among the approximately one half of
firms that use non-competes,1259 the
Commission assumes that the average
firm employs the equivalent of four to
eight hours of a lawyer’s time to revise
its contractual practices.1260 The
Commission emphasizes that this is an
average to underline the fact that there
would likely be large differences in the
extent to which firms update their
contractual practices. Many firms,
including those that use non-competes
only with workers who do not have
access to sensitive information, or those
that are already using other types of
restrictive employment provisions to
protect sensitive information, may opt
to make no changes. Other firms may
employ several hours or multiple days
of lawyers’ time to arrive at a new
contract. 1261 The estimated range of four
to eight hours represents an average
taken across these different possibilities.
For example, if two-thirds of firms that
currently use non-competes opt to make
no changes to their contractual practices
(for example, because their workers are
among the 97.5% of workers that
already have other post-employment
restrictions, or because they will rely on
trade secret law in the future, or because
they are using non-competes with
workers who do not have access to
sensitive information), and one-third of
such firms spend (on average) the
equivalent of 1.5 to 3 working days of
an attorney’s time, this would result in
the estimate of 4–8 hours on average.
The Commission further emphasizes
this estimate is an average across all
employers that would be covered by the
final rule. There is likely substantial
heterogeneity in the amount of time
firms would use to revise contractual
practices; very large firms that use non-
competes extensively would likely incur
greater costs.
Under the assumption that the
average firm that uses a non-compete
employs the equivalent of four to eight
hours of a lawyer’s time, this analysis
calculates the total expenditure on
updating contractual practices to range
from $134.62*4*2.59 million = $1.4
billion to $134.62*8*2.59 million = $2.8
billion. Note that this assumes decisions
regarding protection of sensitive
information and contract updating are
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1262 See Part X.F.7.
1263 See BLS, Occupational Outlook Handbook,
Human Resources Specialists, https://www.bls.gov/
ooh/business-and-financial/human-resources-
specialists.htm (last modified Sept. 6, 2023)
(updated for inflation to 2023 dollars).
1264 The dataset is available at Census Bureau,
2021 SUSB Annual Data Tables by Establishment
Industry, Industry (Feb. 2022) (last revised Sept. 15,
2023), https://www.census.gov/data/tables/2021/
econ/susb/2021-susb-annual.html.
1265 Estimated as 80% * 18.1% * 66% *
(33,271,644–27,151,987), where 80% is the
percentage of covered workers (see Part X.F.4.a),
18.1% is the estimated percentage of workers with
non-competes (see Starr, Prescott, & Bishara, supra
note 68), 67% is the assumed percent of workers
without digital contact information, and 6,119,657
= 33,271,644–27,151,987 is the count of workers at
small businesses (see https://advocacy.sba.gov/wp-
content/uploads/2023/11/2023-Small-Business-
Economic-Profile-US.pdf).
1266 See NPRM at 3532.
1267 See id. at 3532–33.
1268 See id. at 3531.
made at the firm, rather than
establishment, level, since sensitive
information is likely shared across
business establishments of a firm.
For each affected small business, the
estimated cost of updating contractual
practices is $134.62*4 = $538.48 to
$134.62*8 = $1,076.96.
2. Administrative Costs for Notification
Requirements
To reduce compliance costs and
increase compliance certainty,
§ 910.2(b)(5) provides that an employer
complies with the notice requirement in
§ 910.2(b)(1) where it provides notice to
a worker pursuant to § 910.2(b)(4).
Furthermore, § 910.2(b)(4) includes
model language that constitutes notice
to the worker that the worker’s non-
compete is no longer in effect. The
Commission estimates that composing
and sending this message in a digital
format to all of a firm’s workers and
applicable former workers for whom
digital contact information is available
would take 20 minutes of a human
resources specialist’s time.1262
According to BLS, the median wage for
a human resources specialist was $31.85
per hour in 2023.1263 The cost of
compliance for currently employed
workers with digital contact information
available is therefore ($31.85*2)/3 =
$21.23 per establishment. As estimated
in Part XI.E, there are 2.59 million small
firms, comprising 2.71 million small
establishments, in the U.S. that use non-
competes.1264 Conservatively assuming
that each establishment must engage in
its own communication (i.e., that a
firm’s headquarters does not have the
ability to send a company-wide email,
for example), this means that the total
direct compliance cost for workers who
are already employed and for whom
digital contact information is available
is $21.23*2.71 million = $57.5 million.
Each small firm must additionally
mail notice to workers with non-
competes for whom a physical address
is available, but digital contact
information is not. The cost per notice
is estimated as 5 cents for one printed
page plus mailing cost of 70 cents plus
one minute of an HR professional’s
time, at $63.70 per hour, for a total of
$1.81 per notice. Given an estimated
count of affected workers with non-
competes at small businesses of
584,843, 1265 the overall cost of mailed
notice provision is therefore estimated
to be $1.1 million.
G. Comments and Responses to
Comments on the IRFA
The IRFA explained the
Commission’s preliminary assessment
of the direct compliance costs for
employers, both for rescinding non-
competes for workers who are already
employed as well as the costs of an
attorney to ensure contracts for
incoming workers do not have non-
competes. 1266 The IRFA also explained
the Commission’s assessment of the
costs of updating contractual practices,
if the employer seeks to do so, by
expanding the scope of other
contractual provisions to protect trade
secrets and other valuable
investments. 1267 The Commission
sought comment on all aspects of the
IRFA. 1268
In support of the proposed rule, one
employment law firm said there are no
significant recurring compliance costs to
the final rule that would create an
undue burden for small employers
compared to larger employers. The
Commission agrees. The final rule is
designed to require only a one-time
action and no recurring compliance
requirements in order to minimize
compliance costs for employers. A
technology startup organization said the
rule would save small businesses
significant legal costs from the complex
legal analysis currently necessary when
trying to hire a worker subject to a non-
compete, particularly when trying to
assess the patchwork of State laws,
‘‘reasonableness’’ tests, and choice-of-
law issues, which startups have few
resources to pay.
Some commenters raised concerns
about the preliminary assessment of
direct compliance costs, primarily
concerning unsubstantiated costs of
consulting with counsel. Some
commenters said small businesses
would need to consult with outside
counsel to ensure they properly comply
with the final rule, though they did not
explain why. Another business
association said most small businesses
do not have the organizational
development required to issue the
notice and would need to hire outside
counsel. A group of industry
associations said the estimated costs of
$317.68 to $563.84 were not realistic
and did not reflect the cost of
discussions with outside counsel on its
existing agreements and contracts and
its contract negotiation practices, but
the comment did not provide
information to support a different
estimate. Some commenters argued that
small businesses lacking internal
counsel or employment lawyers on
retainer would face substantial
unplanned expenses when seeking
outside counsel on whether other
restrictive covenants violated the
proposed de facto non-compete
provision. These commenters did not
provide cost estimates.
First, in response to the proposed
rule’s Preliminary Regulatory Impact
Analysis, commenters discussed that
the estimated compliance costs and
costs of contractual updating may
underestimate true costs for the broader
business community and provided
alternative estimates of the time
employers might spend complying with
the rule and updating contractual
practices, as well as the charged rates of
outside counsel. These comments are
addressed in the sensitivity analyses
presented in Part X.F.7. The
Commission has also updated the
estimated legal costs in this Part.
Commenters also argued that small
businesses would face greater costs
associated with the use of outside
counsel but did not quantify those costs
for small businesses. Again, the
Commission provides a sensitivity
analysis reflecting the cost of
experienced outside counsel for all
firms in Part X.F.7.b.i. Moreover, as the
Commission notes, the estimate reflects
significant heterogeneity, so that it is
likely that some firms will simply be
able to remove the paper or electronic
copy of the non-compete from their
website or workplace manual—
requiring no attorney time—while
others, like the commenter, may spend
more time consulting with counsel.
Second, in response to these and
other comments and as explained in
Part III.D, the definition of non-compete
clause has been revised to reduce
confusion and give employers and
workers a clearer understanding of what
is prohibited, which will in turn reduce
compliance costs. Third, the FRFA
includes updated compliance costs to
reflect any remaining need to assess
contracts under § 910.2(a). Fourth, the
Commission has made the notice
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1269 § 910.2(b)(2).
1270 § 910.2(b)(3).
1271 SBA Off. of Advocacy, FTC–2023–0007–
21110 at 3.
1272 Mid-Tex Elec. Co-op., Inc. v. FERC, 773 F.2d
327, 342 (D.C. Cir. 1985) (‘‘[I]t is clear that Congress
envisioned that the relevant ‘economic impact’ was
the impact of compliance with the proposed rule on
regulated small entities[,]’’ and the court inferred
that ‘‘Congress did not intend to require that every
agency consider every indirect effect that any
regulation might have on small businesses in any
stratum of the national economy.’’); see also RFA
Compliance Guide, supra note 1207 at 22–23, 64–
68.
1273 See Part X.F.9.
1274 See Part XI.C.2.b.
1275 See Part X.F.7.a.
1276 See Parts IV.D.3, X.F.5–6, II.F.
1277 See Part X.F.7.c.
1278 Rosemary Scott, FTC’s Non-Compete Law
Could Propel Rise in Trade Secrets Lawsuits,
Continued
requirement as simple as possible by
providing model language for the notice
in § 910.2(b)(4) and a safe harbor
allowing employers to use a last known
address and an exception for employers
who do not have a workers’ contact
information. Employers can provide the
notice by hand or through the mail,
email, or a text message,1269 and
employers are not required to provide
notice if they have no method of
contacting a worker by paper or digital
format. 1270 An employer is required
only to notify workers that existing non-
competes are no longer in effect and
refrain from including non-competes in
future contracts. This process is
designed to be as easy as possible for
employers. Employers should rarely
need to seek outside legal assistance for
complying with the notice requirement,
and commenters do not provide an
explanation of why legal assistance
would be a necessary part of this
process, though the cost of any such
legal assistance (to identify senior
executives for whom notice is not
required) is accounted for in Part XI.F.1.
Finally, the Commission will provide
guidance materials for small entities to
explain how to comply with the final
rule.
The estimated compliance costs do
not directly include any costs or savings
from the senior executive exception,
because the number of workers the
exception might apply to is such a small
portion of workers overall that any
effect is de minimis. At an individual
firm level, small businesses might not
be impacted by the exception (if no
workers earn above the total
compensation threshold). Others might
face increased compliance costs if they
choose to use the exception and need to
evaluate whether a worker meets the
definition of senior executive (as
accounted for in Part XI.F.1). However,
the total compensation threshold
included in the final rule’s definition of
‘‘senior executive’’ is designed to ensure
that employers and workers do not need
to conduct a job duties assessment for
every worker, only workers making
above the threshold. In addition, in
many cases it may be clear that a worker
does or does not meet the test for
whether a worker is a ‘‘senior
executive’’ without a detailed
assessment. For example, CEOs and
Presidents are presumed to be in a
policy-making position under § 910.1
and will not be otherwise subject to a
job duties test, while highly paid
workers in a non-executive role such as
many physicians will not. Other small
businesses might see decreased or
eliminated direct and indirect
compliance costs if they can maintain
existing senior executive non-competes.
Many commenters also stated there
are other indirect costs. SBA Advocacy
suggested that the IRFA did not account
for additional potential costs, including
the costs of services, including higher
legal fees to protect information,
potential increased training, hiring and
retention costs, and process changes.1271
Similarly, a business association argued
small businesses could face additional
costs for finding alternatives to protect
assets and to alter hiring, training, and
retention processes. Some business
associations argued that the cost of
updating contractual practices would be
higher because businesses would need
to consult counsel, and many small
businesses may be unable to afford to do
so. A business organization stated that
the Commission should consider the
costs from a small business diminishing
in value to potential buyers because it
cannot record the value of its non-
competes.
Another business organization said
costs to small businesses are not limited
to updating contractual agreements,
mentioning the use of non-competes to
protect assets and investments. A law
firm suggested that trade secrets
litigation often costs unspecified
millions in attorney and expert fees and
investigations costs. A business
association commented that the rule
would likely trigger additional litigation
costs for trade secret protection and
satisfying standards for injunctive relief,
as well as unspecified additional costs
related to lost business relationships
and ideas. The business association
cited an article from the biotech
industry as saying a ban will force
biotech companies to find other ways to
protect themselves, likely through
increased trade secret litigation, and
recognizing that non-competes are
critical to startups in the industry.
Two comments requested that the
Commission publish a supplemental
IRFA to account for the rule’s potential
impact.
The Commission notes that agencies
are generally not required to consider
indirect costs, though it is considered a
best practice. 1272 While commenters
raised categories of indirect costs that
may be implicated (and it is not clear
exactly what potential costs may fit into
those categories), commenters did not
provide any data or information that
could enable the Commission to
estimate any indirect costs. Some of
these costs are also attenuated and
speculative. Many of these concerns are
also addressed in Parts IV.D and XI.C.
The commenters also misunderstand the
calculations in the IRFA and RIA; the
estimates are an average across
employers using non-competes, and
there is likely to be substantial
heterogeneity. The calculations account
for the assumption that some firms may
spend more than this amount. In
response to comments on hiring costs,
some firms may save on hiring costs
from easier hiring, while others might
have increased turnover costs.1273
Businesses also have other options to
compete on the merits besides raising
wages, as many commenters indicated
they sought jobs with better hours, more
flexible schedules, shorter commutes,
career opportunities, and other
benefits.1274 Businesses will be better
able to hire workers experienced in their
field who require less training than
workers new to an industry.1275
Even if commenters’ unsupported
assertions that trade secret litigation and
NDA enforcement may be more costly
for businesses, including small
businesses, are correct, such costs are
justified by the benefits of the rule and
in any event pecuniary benefits to a firm
from an anticompetitive practice are not
a cognizable justification. 1276 The
Commission estimates that the final rule
may increase or decrease overall
litigation costs, and there is no evidence
in the literature to allow the
Commission to quantify those costs or
benefits. 1277
The comment citing an article on the
biotech industry overstates the article’s
statements. The article said the existing
increase in trade secrets litigation was
likely to continue if the rule were
adopted, did not cite any evidence for
this prediction other than that non-
competes are often used to protect trade
secrets, and noted that companies may
also use NDAs or restrict access to
sensitive information.1278 The article
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BioSpace (Feb. 8, 2023), https://www.biospace.com/
article/ftc-s-non-compete-law-could-propel-rise-in-
trade-secrets-lawsuits-/.
1279 Id.
1280 See § 910.3.
1281 5 U.S.C. 604(a)(6).
1282 See 5 U.S.C. 603(c)(1)–(4).
1283 See § 910.2(a)(1).
1284 See § 910.2(a)(2).
1285 See Part VIII.
1286 44 U.S.C. 3501 et seq.
1287 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
1288 44 U.S.C. 3506(c)(1)(B); 5 CFR 1320.5(a)(3).
1289 NPRM at 3533.
1290 Id. at 3534.
did not say that non-competes are
critical to biotech startups.1279
The commenter asking the
Commission to consider small business
valuation changes did not provide any
potential estimates of such a cost, nor
did the commenter demonstrate that
such costs exist. It is unclear whether
this commenter was referring to the
value of non-competes for owners or for
workers, but some such non-competes
may fall within the exceptions for
existing senior executive non-competes
or for owners in a sale of business.1280
To the extent there are any remaining
non-competes that increase the value of
a business in a sale, the Commission
finds that any marginal decrease is
justified by the substantial overall
benefits of the rule.
In response to the requests for a
supplemental IRFA, one is not required
by law, and this FRFA responds to all
comments on the IRFA. A supplemental
IRFA would not provide the public with
additional relevant information that the
IRFA did not.
H. Discussion of Significant Alternatives
The RFA requires that agencies
include a description of the steps the
agency has taken to minimize the
significant economic impact on small
entities consistent with the stated
objectives of applicable statutes,
including a statement of the factual,
policy, and legal reasons for selecting
the alternative adopted in the final rule
and why each one of the other
significant alternatives to the rule
considered by the agency which affect
the impact on small entities was
rejected.1281 Statutory examples of
‘‘significant alternatives’’ include
different requirements or timetables that
take into account the resources available
to small entities; the clarification,
consolidation, or simplification of
compliance and reporting requirements
under the rule for small entities; the use
of performance rather than design
standards; and an exemption from
coverage of the rule, or any part thereof,
for small entities. 1282
In Part IX, the Commission discusses
significant alternatives to the final rule.
Part IX also includes an assessment
determining that each of the significant
alternatives would not accomplish the
objectives of the final rule. The
Commission did incorporate some of the
alternatives proposed in the NPRM and
in comments into the final rule, namely
the exception for existing senior
executive non-competes, simplifying
notice requirements, eliminating
rescission requirements, and
eliminating the 25% threshold for the
sale of business exception. In addition,
the Commission’s analysis of benefits
and costs in Part X includes an
assessment of the benefits and costs of
excluding senior executives. The
Commission notes that it has designed
the final rule to minimize compliance
costs for all businesses and that the final
rule does not include any reporting
requirements. As stated in Part X.F.7.b,
the Commission estimates that direct
compliance costs and the costs of
updating contractual practices would
result in costs of $538.48 to $1,076.96
for each firm. As previously noted, the
Commission does not believe the final
rule imposes a significant economic
impact on a substantial number of small
entities. The Commission has also
described how the final rule will benefit
and increase the number of small
businesses.
After careful consideration, the
Commission is not creating an exception
for small entities or different regulatory
requirements for small entities. The
final rule provides that for workers
other than senior executives, it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete, enforce or attempt
to enforce a non-compete, or represent
that the worker is subject to a non-
compete. 1283 For senior executives, the
final rule provides that it is an unfair
method of competition for a person to
enter into or attempt to enter into a non-
compete, enforce or attempt to enforce
a non-compete entered into after the
effective date, or represent that the
worker is subject to a non-compete,
where the non-compete was entered
into after the effective date.1284 Based
on the available evidence, the
Commission does not believe that the
analysis in Parts IV.B and IV.C is
fundamentally different for non-
competes that are imposed by small
entities. For this reason, the
Commission is not creating an exception
for small entities or different regulatory
requirements for small entities.
The Commission is not delaying the
effective date of the final for small
entities. Under § 910.6, the final rule is
effective 120 days after publication in
the Federal Register on September 4,
2024. One small business asked that the
final rule’s effective date be delayed for
two years to give the business time to
silo its intellectual property and
implement safeguards to protect its
information. In the Commission’s view,
the rule’s effective date of September 4,
2024 will afford small entities a
sufficient period of time to comply with
the final rule, and commenters have not
provided evidence that more time is
necessary.1285
XII. Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (‘‘PRA’’),1286 Federal agencies
must obtain approval from the Office of
Management and Budget (‘‘OMB’’) for
each collection of information they
conduct or sponsor. The term
‘‘collection of information’’ includes
any requirement or request for persons
to obtain, maintain, retain, report, or
publicly disclose information. 1287
Under the PRA, the Commission may
not conduct or sponsor, and,
notwithstanding any other provision of
law, a person is not required to respond
to, an information collection unless the
information collection displays a valid
control number assigned by OMB.1288
A. The Proposed Rule
In the NPRM, the Commission stated
that it believed the proposed rule would
contain a disclosure requirement that
would constitute a collection of
information requiring OMB approval
under the PRA. The Commission stated
that this disclosure requirement was
proposed § 910.2(b)(2), which would
have required employers to provide
notice to a worker with an existing non-
compete—i.e., a non-compete that was
entered into prior to the effective date—
that the non-compete is no longer in
effect and may not be enforced against
the worker. 1289 Conservatively assuming
that each establishment must engage in
its own communication—i.e., a firm’s
headquarters does not have the ability to
send a company-wide email, for
example—the Commission estimated
that covered employers would incur an
estimated labor cost burden of 1,310,747
hours to comply with this requirement
(3,932,240 establishments × 20
minutes). The Commission estimated
the associated labor cost for notifying
affected workers who are already
employed is $9.98 × 7.96 million ×
0.494 = $39,243,755.1290
The Commission stated that the
proposed rule would impose only de
minimis capital and non-labor costs.
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38501	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
1291 Id.
1292 BLS, Occupational Outlook Handbook:
Human Resources Specialists, https://www.bls.gov/
ooh/business-and-financial/human-resources-
specialists.htm. The value in 2022 was $30.88,
which was updated to 2023 dollars.
1293 The lost productivity of workers is assumed
to be twice the median wage. See Part X.F.7.b.ii.
1294 Census Bureau, 2021 SUSB Annual Data
Tables by Establishment Industry (December 2023),
https://www.census.gov/data/tables/2021/econ/
susb/2021-susb-annual.html.
1295 See Colvin & Shierholz, supra note 65 at 4.
1296 See supra note 1165 (CMS Supporting
Statement assumes 66% of workers require mailed
notice from their health insurance companies).
The Commission anticipated that
covered employers would already have
in place existing systems to
communicate with and provide
employment-related disclosures to
workers. While the proposed rule would
require a one-time disclosure to some
workers subject to a rescinded non-
compete, the Commission anticipated
that this one-time disclosure would not
require substantial investments in new
systems or other non-labor costs. The
Commission noted that, moreover, many
establishments are likely to provide the
disclosure electronically, further
reducing total costs.1291
The Commission sought comment on
all aspects of its PRA analysis, including
(1) whether the proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information would have practical
utility; (2) the accuracy of the agency’s
estimate of the burden of the proposed
collection of information, including the
validity of the methodology and
assumptions used; (3) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (4)
ways to minimize the burden of these
information collections on respondents.
B. Comments Received
No commenters specifically addressed
the PRA analysis in the NPRM.
However, the Commission received
extensive comments on its Preliminary
Regulatory Impact Analysis and Initial
Regulatory Flexibility Act Analysis, and
many of these commenters addressed
the Commission’s estimates related to
the cost of compliance. These comments
are summarized in Parts X (the
Commission’s Final Regulatory
Analysis) and XI (the Commission’s
Final Regulatory Flexibility Act
Analysis). The Commission also
received comments on the proposed
notice requirement itself. These
comments are summarized in Part IV.E.
C. Final PRA Analysis
The Commission finalizes the
proposed rule’s notice requirement
largely as proposed, with some
adjustments to even further ease
compliance. In the final rule,
§ 910.2(a)(1)(ii) prohibits employers
from enforcing existing non-competes—
i.e., non-competes entered into prior to
the effective date—with respect to
workers other than senior executives.
Section 910.2(b)(1) as finalized states
further that for each existing non-
compete that it is an unfair method of
competition to enforce or attempt to
enforce under § 910.2(a)(1)(ii)—i.e., non-
competes entered into with workers
other than senior executives—the
person who entered into the non-
compete with the worker must provide
clear and conspicuous notice to the
worker by the effective date that the
worker’s non-compete will not be, and
cannot legally be, enforced against the
worker.
Pursuant to § 910.2(b)(2), the notice
must (i) identify the person who entered
into the non-compete with the worker
and (ii) be on paper delivered by hand
to the worker, or by mail at the worker’s
last known personal street address, or
by email at an email address belonging
to the worker, including the worker’s
current work email address or last
known personal email address, or by
text message at a mobile telephone
number belonging to the worker.
Section 910.2(b)(3) provides an
exception to the notice requirement in
§ 910.2(b)(1) where the person that
would otherwise be required to provide
the notice has no record of a street
address, email address, or mobile
telephone number.
Section 910.2(b)(4) provides model
language that employers may use to
comply with the notice requirement.
Section 910.2(b)(5) states that an
employer presumptively complies with
the notice requirement in § 910.2(b)(1)
where the employer provides a notice to
the worker pursuant to § 910.2(b)(4).
And § 910.2(b)(6) allows but does not
require employers, in addition to
providing the required notice in
English, to provide the notice in another
language (or languages). Section
910.2(b)(6) also permits employers to
use any Commission-provided
translation of the model language in
§ 910.2(b)(4).
The notice requirement has changed
in two important respects from the
proposed rule. First, employers are no
longer required to provide the notice to
senior executives with existing non-
competes. Second, as long as employers
provide the notice in English, they are
permitted to provide the notice in a
language other than English. However,
neither of these changes significantly
affects the burden of complying with the
notice. Senior executives are only
0.75% of workers, so the cost savings to
employers of not needing to provide the
notice to senior executives are minimal.
No employer is required to provide the
notice in a different language, so the
rule does not require employers to incur
any compliance costs for doing so.
The Commission estimates that
composing and sending the notice in a
digital format to workers for whom
digital contact information is available
would take 20 minutes of a human
resources specialist’s time. According to
BLS, the median wage for a human
resources specialist in 2022 was $31.85
per hour in 2023 dollars.1292 The cost of
compliance for currently employed
workers is therefore ($31.85*2)/
3=$21.23 per establishment.1293
According to the Census Bureau’s
Statistics of U.S. Businesses database, in
2021 (the most recent year for which
data are available), there were 5.91
million firms and 6.88 million
establishments in the U.S. 1294 The
Commission estimates the percentage of
firms using non-competes in the U.S. at
49.4%.1295 The Commission
conservatively assumes that each
establishment must engage in its own
communication—i.e., that a firm’s
headquarters does not have the ability to
send a company-wide email, for
example. This yields an estimated
3,397,545 covered establishments which
would incur an estimated labor cost
burden of 1,132,515 hours to comply
with this requirement (3,397,545
establishments × 20 minutes). The
Commission estimates the associated
labor cost for notifying affected workers
who are already employed and for
whom digital contact information is
available is $21.23 × 6.88 million ×
0.494 = $72,141,201.
Businesses may not have digital
contact information for workers. The
number of workers with non-competes
who must therefore receive physical
notice is the total number of covered
workers (101.1 million; see Part
X.F.7.a.i) times the percentage of
workers who have non-competes
(18.1%) times the percentage of workers
who require mailed notice (assumed to
be 66% of workers 1296), for a total of
12.1 million workers. The Commission
notes that the percentage of workers
who require mailed notice is likely a
substantial overestimate, since it is
estimated based on the percentage of
individuals who receive health
information digitally. The Commission
believes that employers are more likely
to have digital means of providing the
notice to their current workers
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38502 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
especially, but also to their former
workers. The Commission
conservatively adopts this estimate as
an upper bound. The cost of mailed
notice provision includes some capital
costs (the cost of postage and mailing
materials) and the cost of a human
resource professional’s time. The cost
per worker is estimated as 5 cents for
one printed page plus mailing cost of 70
cents plus the cost of one minute of an
HR professional’s time, at $63.70 per
hour, for a total of $1.81 per notice. The
overall cost of mailed notice provision
is therefore estimated to be $22 million.
As the Commission stated in the
proposed rule, the Commission
anticipates that covered employers
already have in place existing systems
to communicate with and provide
employment-related disclosures to
workers. While the final rule requires a
one-time disclosure to some workers,
the Commission anticipates this one-
time disclosure will not require
substantial investments in new systems
or other non-labor costs. Moreover,
many establishments are likely to
provide the disclosure electronically,
further reducing total costs.
XIII. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this final rule as a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 910
Antitrust.
■ For the reasons set forth above, and
under the authority of Sections 5 and
6(g) of the Federal Trade Commission
Act, the Federal Trade Commission
adds subchapter J, consisting of parts
910 and 912, to chapter I in title 16 of
the Code of Federal Regulations to read
as follows:
Subchapter J—Rules Concerning Unfair
Methods of Competition
PART 910—NON-COMPETE CLAUSES
PART 912—[RESERVED]
PART 910—NON-COMPETE CLAUSES
Sec.
910.1. Definitions.
910.2. Unfair methods of competition.
910.3. Exceptions.
910.4. Relation to State laws and
preservation of State authority and
private rights of action.
910.5. Severability.
910.6. Effective date.
Authority: 15 U.S.C. 45 and 46(g).
PART 910—NON-COMPETE CLAUSES
§ 910.1 Definitions.
As used in this part:
Business entity means a partnership,
corporation, association, limited
liability company, or other legal entity,
or a division or subsidiary thereof.
Employment means work for a person.
Non-compete clause means:
(1) A term or condition of
employment that prohibits a worker
from, penalizes a worker for, or
functions to prevent a worker from:
(i) Seeking or accepting work in the
United States with a different person
where such work would begin after the
conclusion of the employment that
includes the term or condition; or
(ii) Operating a business in the United
States after the conclusion of the
employment that includes the term or
condition.
(2) For the purposes of this part, term
or condition of employment includes,
but is not limited to, a contractual term
or workplace policy, whether written or
oral.
Officer means a president, vice
president, secretary, treasurer or
principal financial officer, comptroller
or principal accounting officer, and any
natural person routinely performing
corresponding functions with respect to
any business entity whether
incorporated or unincorporated.
Person means any natural person,
partnership, corporation, association, or
other legal entity within the
Commission’s jurisdiction, including
any person acting under color or
authority of State law.
Policy-making authority means final
authority to make policy decisions that
control significant aspects of a business
entity or common enterprise and does
not include authority limited to
advising or exerting influence over such
policy decisions or having final
authority to make policy decisions for
only a subsidiary of or affiliate of a
common enterprise.
Policy-making position means a
business entity’s president, chief
executive officer or the equivalent, any
other officer of a business entity who
has policy-making authority, or any
other natural person who has policy-
making authority for the business entity
similar to an officer with policy-making
authority. An officer of a subsidiary or
affiliate of a business entity that is part
of a common enterprise who has policy-
making authority for the common
enterprise may be deemed to have a
policy-making position for purposes of
this paragraph. A natural person who
does not have policy-making authority
over a common enterprise may not be
deemed to have a policy-making
position even if the person has policy-
making authority over a subsidiary or
affiliate of a business entity that is part
of the common enterprise.
Preceding year means a person’s
choice among the following time
periods: the most recent 52-week year,
the most recent calendar year, the most
recent fiscal year, or the most recent
anniversary of hire year.
Senior executive means a worker who:
(1) Was in a policy-making position;
and
(2) Received from a person for the
employment:
(i) Total annual compensation of at
least $151,164 in the preceding year; or
(ii) Total compensation of at least
$151,164 when annualized if the worker
was employed during only part of the
preceding year; or
(iii) Total compensation of at least
$151,164 when annualized in the
preceding year prior to the worker’s
departure if the worker departed from
employment prior to the preceding year
and the worker is subject to a non-
compete clause.
Total annual compensation is based
on the worker’s earnings over the
preceding year. Total annual
compensation may include salary,
commissions, nondiscretionary bonuses
and other nondiscretionary
compensation earned during that 52-
week period. Total annual
compensation does not include board,
lodging and other facilities as defined in
29 CFR 541.606, and does not include
payments for medical insurance,
payments for life insurance,
contributions to retirement plans and
the cost of other similar fringe benefits.
Worker means a natural person who
works or who previously worked,
whether paid or unpaid, without regard
to the worker’s title or the worker’s
status under any other State or Federal
laws, including, but not limited to,
whether the worker is an employee,
independent contractor, extern, intern,
volunteer, apprentice, or a sole
proprietor who provides a service to a
person. The term worker includes a
natural person who works for a
franchisee or franchisor, but does not
include a franchisee in the context of a
franchisee-franchisor relationship.
§ 910.2 Unfair methods of competition.
(a) Unfair methods of competition—
(1) Workers other than senior
executives. With respect to a worker
other than a senior executive, it is an
unfair method of competition for a
person:
(i) To enter into or attempt to enter
into a non-compete clause;
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(ii) To enforce or attempt to enforce a
non-compete clause; or
(iii) To represent that the worker is
subject to a non-compete clause.
(2) Senior executives. With respect to
a senior executive, it is an unfair
method of competition for a person:
(i) To enter into or attempt to enter
into a non-compete clause;
(ii) To enforce or attempt to enforce a
non-compete clause entered into after
the effective date; or
(iii) To represent that the senior
executive is subject to a non-compete
clause, where the non-compete clause
was entered into after the effective date.
(b) Notice requirement for existing
non-compete clauses—(1) Notice
required. For each existing non-compete
clause that it is an unfair method of
competition to enforce or attempt to
enforce under paragraph (a)(1)(ii) of this
section, the person who entered into the
non-compete clause with the worker
must provide clear and conspicuous
notice to the worker by the effective
date that the worker’s non-compete
clause will not be, and cannot legally
be, enforced against the worker.
(2) Form of notice. The notice to the
worker required by paragraph (b)(1) of
this section must:
(i) Identify the person who entered
into the non-compete clause with the
worker;
(ii) Be on paper delivered by hand to
the worker, or by mail at the worker’s
last known personal street address, or
by email at an email address belonging
to the worker, including the worker’s
current work email address or last
known personal email address, or by
text message at a mobile telephone
number belonging to the worker.
(3) Exception. If a person that is
required to provide notice under
paragraph (b)(1) of this section has no
record of a street address, email address,
or mobile telephone number, such
person is exempt from the notice
requirement in paragraph (b)(1) of this
section with respect to such worker.
(4) Model language. For purposes of
paragraph (b)(1) of this section, the
following model language constitutes
notice to the worker that the worker’s
non-compete clause cannot legally be
enforced and will not be enforced
against the worker.
BILLING CODE 6750–01–P
Figure 1 to Paragraph (b)(4)—Model
Language
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BILLING CODE 6750–01–C
(5) Safe harbor. A person complies
with the requirement in paragraph (b)(1)
of this section if the person provides
notice to a worker pursuant to
paragraph (b)(4) of this section.
(6) Optional notice in additional
languages. In addition to providing the
notice required in paragraph (b)(1) of
this section in English, a person is
permitted to provide such notice in a
language (or in languages) other than
English or to include internet links to
translations in additional languages. If
providing optional notice under this
paragraph (b)(6), a person may use any
Commission-provided translation of the
model language in paragraph (b)(4) of
this section.
§ 910.3 Exceptions.
(a) Bona fide sales of business. The
requirements of this part shall not apply
to a non-compete clause that is entered
into by a person pursuant to a bona fide
sale of a business entity, of the person’s
ownership interest in a business entity,
or of all or substantially all of a business
entity’s operating assets.
(b) Existing causes of action. The
requirements of this part do not apply
where a cause of action related to a non-
compete clause accrued prior to the
effective date.
(c) Good faith. It is not an unfair
method of competition to enforce or
attempt to enforce a non-compete clause
or to make representations about a non-
compete clause where a person has a
good-faith basis to believe that this part
is inapplicable.
§ 910.4 Relation to State laws and
preservation of State authority and private
rights of action.
(a) This part will not be construed to
annul, or exempt any person from
complying with any State statute,
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regulation, order, or interpretation
applicable to a non-compete clause,
including, but not limited to, State
antitrust and consumer protection laws
and State common law, except that this
part supersedes such laws to the extent,
and only to the extent, that such laws
would otherwise permit or authorize a
person to engage in conduct that is an
unfair method of competition under
§ 910.2(a) or conflict with the notice
requirement in § 910.2(b).
(b) Except with respect to laws
superseded under paragraph (a) of this
section, no provision of this part shall
be construed as altering, limiting, or
affecting the authority of a State
attorney general or any other regulatory
or enforcement agency or entity or the
rights of a person to bring a claim or
regulatory action arising under any State
statute, regulation, order, or
interpretation, including, but not
limited to, State antitrust and consumer
protection laws and State common law.
§ 910.5 Severability.
If any provision of this part is held to
be invalid or unenforceable by its terms,
or as applied to any person or
circumstance, or stayed pending further
agency action, the provision shall be
construed so as to continue to give the
maximum effect to the provision
permitted by law and such invalidity
shall not affect the application of the
provision to other persons or
circumstances or the validity or
application of other provisions. If any
provision or application of this part is
held to be invalid or unenforceable, the
provision or application shall be
severable from this part and shall not
affect the remainder thereof.
§ 910.6 Effective date.
This part is effective September 4,
2024.
PART 912—[RESERVED]
By direction of the Commission,
Commissioners Holyoak and Ferguson
dissenting.
April J. Tabor,
Secretary.
Note: The following appendix will not
appear in the Code of Federal
Regulations.
APPENDIX A—TABLE A.1
State Estimated
number of
covered workers
Estimated
increase in total
annual worker
earnings
Estimated
increase in
average annual
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
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38506 	Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
APPENDIX A—TABLE A.1—Continued
State Estimated
number of
covered workers
Estimated
increase in total
annual worker
earnings
Estimated
increase in
average annual
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
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47028 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
1 Am. Recovery and Reinvestment Act of 2009,
Public Law 111–5, 123 Stat. 115 (2009).
2 Health Ins. Portability and Accountability Act,
Public Law 104–191, 110 Stat. 1936 (1996).
3 42 U.S.C. 17937.
4 42 U.S.C. 17921(11).
5 74 FR 42962 (Aug. 25, 2009) (‘‘2009 Final
Rule’’).
6 The Recovery Act does not limit this notice to
particular types of media. Thus, an entity can
satisfy the requirement to notify ‘‘prominent media
outlets’’ by, for example, disseminating press
releases to a number of media outlets, including
internet media in appropriate circumstances, where
most of the residents of the relevant State or
jurisdiction get their news. This will be a fact-
specific inquiry that will depend on what media
outlets are ‘‘prominent’’ in the relevant jurisdiction.
74 FR 42974.
7 16 CFR 318.3, 318.5.
8 Id. § 318.3(b).
9 Id. § 318.4(a).
10 Id. § 318.5(c).
11 Fed. Trade Comm’n, Notice of Breach of Health
Information, https://www.ftc.gov/system/files/
documents/rules/health-breach-notification-rule/
health_breach_form.pdf.
12 Fed. Trade Comm’n, Notices Received by the
FTC Pursuant to the Health Breach Notification
Rule, https://www.ftc.gov/system/files/ftc_gov/pdf/
Health%20Breach%20Notices%20Received
%20by%20the%20FTC.pdf (last visited Dec. 2,
2022).
13 Per HHS guidance, electronic health
information is ‘‘secured’’ if it has been encrypted
according to certain specifications set forth by HHS,
or if the media on which electronic health
information has been stored or recorded is
destroyed according to HHS specifications. See 74
FR 19006; see also U.S. Dep’t of Health & Human
Servs., Guidance to Render Unsecured Protected
Health Information Unusable, Unreadable, or
Indecipherable to Unauthorized Individuals (July
26, 2013), https://www.hhs.gov/hipaa/for-
professionals/breach-notification/guidance/
index.html. PHR identifiable health information
would be considered ‘‘secured’’ if such information
is disclosed by, for example, a vendor of personal
health records, to a PHR related entity or a third
party service provider, in an encrypted format
meeting HHS specifications, and the PHR related
entity or third party service provider stores the data
in an encrypted format that meets HHS
specifications and also stores the encryption and/
or decryption tools on a device or at a location
separate from the data.
14 45 CFR 164.400 through 164.414.
FEDERAL TRADE COMMISSION
16 CFR Part 318
RIN 3084–AB56
Health Breach Notification Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is amending the Commission’s Health
Breach Notification Rule (the ‘‘HBN
Rule’’ or the ‘‘Rule’’). The HBN Rule
requires vendors of personal health
records (‘‘PHRs’’) and related entities
that are not covered by the Health
Insurance Portability and
Accountability Act (‘‘HIPAA’’) to notify
individuals, the FTC, and, in some
cases, the media of a breach of
unsecured personally identifiable health
data.
DATES : The amendments are effective
July 29, 2024.
ADDRESSES : Relevant portions of the
record of this proceeding, including this
document, are available at https://
www.ftc.gov and https://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Ryan Mehm, (202) 326–2918, rmehm@
ftc.gov, and Ronnie Solomon, (202) 326–
2098, rsolomon@ftc.gov, Bureau of
Consumer Protection, Federal Trade
Commission.
SUPPLEMENTARY INFORMATION : The
amendments: (1) clarify the Rule’s
scope, including its coverage of
developers of many health applications
(‘‘apps’’); (2) clarify what it means for a
vendor of personal health records to
draw PHR identifiable health
information from multiple sources; (3)
revise the definition of breach of
security to clarify that a breach of
security includes data security breaches
and unauthorized disclosures; (4) revise
the definition of PHR related entity; (5)
modernize the method of notice; (6)
expand the content of the notice; (7)
alter the Rule’s timing requirement for
notifying the FTC of a breach of
security; and (8) improve the Rule’s
readability by clarifying cross-references
and adding statutory citations,
consolidating notice and timing
requirements, articulating the penalties
for non-compliance, and incorporating a
small number of non-substantive
changes.
I. Background
Congress enacted the American
Recovery and Reinvestment Act of 2009
(‘‘Recovery Act’’ or ‘‘the Act’’),1 in part
to advance the use of health information
technology and, at the same time,
strengthen privacy and security
protections for health information.
Recognizing that certain entities that
hold or interact with consumers’
personal health records were not subject
to the privacy and security requirements
of HIPAA,2 Congress created
requirements for such entities to notify
individuals, the Commission, and, in
some cases, the media of the breach of
unsecured identifiable health
information from those records.
Specifically, section 13407 of the
Recovery Act created certain protections
for ‘‘personal health records’’ or
‘‘PHRs,’’ 3 electronic records of PHR
identifiable health information on an
individual that can be drawn from
multiple sources and that are managed,
shared, and controlled by or primarily
for the individual. 4 Congress recognized
that vendors of personal health records
and PHR related entities (i.e., companies
that offer products and services through
PHR websites or access information in
or send information to personal health
records) were collecting consumers’
health information but were not subject
to the privacy and security requirements
of HIPAA. Accordingly, the Recovery
Act directed the FTC to issue a rule
requiring these non-HIPAA covered
entities, and their third party service
providers, to provide notification of any
breach of unsecured PHR identifiable
health information. The Commission
issued its Rule implementing these
provisions in 2009.5 FTC enforcement of
the Rule began on February 22, 2010.
The Rule the Commission issued in
2009 (‘‘2009 Rule’’) requires vendors of
personal health records and PHR related
entities to provide: (1) notice to
consumers whose unsecured PHR
identifiable health information has been
breached; (2) notice to the Commission;
and (3) notice to prominent media
outlets 6 serving a State or jurisdiction,
in cases where 500 or more residents are
confirmed or reasonably believed to
have been affected by a breach.7 The
Rule also requires third party service
providers (i.e., those companies that
provide services such as billing, data
storage, attribution, or analytics) to
vendors of personal health records and
PHR related entities to provide
notification to such vendors and entities
following the discovery of a breach.8
The 2009 Rule requires notice to
individuals ‘‘without unreasonable
delay and in no case later than 60
calendar days’’ after discovery of a data
breach. 9 If the breach affects 500 or
more individuals, notice to the FTC
must be provided ‘‘as soon as possible
and in no case later than ten business
days’’ after discovery of the breach.10
The FTC makes available a standard
form for companies to use to notify the
Commission of a breach,11 and posts a
list of breaches involving 500 or more
individuals on its website.12
The 2009 Rule applies only to
breaches of ‘‘unsecured’’ health
information, which the Rule defines as
health information that is not secured
through technologies or methodologies
specified by the Department of Health
and Human Services (‘‘HHS’’). The Rule
does not apply to businesses or
organizations covered by HIPAA.13
HIPAA-covered entities and their
‘‘business associates’’ must instead
comply with HHS’s breach notification
rule.14
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47029	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
15 See, e.g., Kokou Adzo, App Development in
Healthcare: 12 Exciting Facts, TechnoChops (Jan. 3,
2023), https://www.technochops.com/
programming/4329/app-development-in-
healthcare/; Emily Olsen, Digital health apps
balloon to more than 350,000 available on the
market, according to IQVIA report,
MobiHealthNews (Aug. 4, 2021), https://
www.mobihealthnews.com/news/digital-health-
apps-balloon-more-350000-available-market-
according-iqvia-report; Elad Natanson, Healthcare
Apps: A Boon, Today and Tomorrow, Forbes (July
21, 2020), https://www.forbes.com/sites/
eladnatanson/2020/07/21/healthcare-apps-a-boon-
today-and-tomorrow/?sh=21df01ac1bb9.
16 See id. See also Lis Evenstad, Covid–19 has led
to a 25% increase in health app downloads,
research shows, ComputerWeekly.com (Jan. 12,
2021), https://www.computerweekly.com/news/
252494669/Covid-19-has-led-to-a-25-increase-in-
health-app-downloads-research-shows (finding that
COVID–19 has led to a 25% increase in health app
downloads); Jasmine Pennic, U.S. Telemedicine
App Downloads Spikes During COVID–19
Pandemic, HIT Consultant (Sept. 8, 2020), https://
hitconsultant.net/2020/09/08/u-s-telemedicine-app-
downloads-spikes-during-covid-19-pandemic/ (‘‘US
telemedicine app downloads see dramatic increases
during the COVID–19 pandemic, with some seeing
an 8,270% rise YoY.’’).
17 85 FR 31085 (May 22, 2020).
18 Comments are available at https://
www.regulations.gov/docket/FTC-2020-0045/
comments.
19 E.g., Am. Health Info. Mgmt. Ass’n (‘‘AHIMA’’)
at 2; Kaiser Permanente at 3; Allscripts at 3; Am.
Acad. of Ophthalmology at 2; All. for Nursing
Informatics (‘‘ANI’’) at 2; Am. Med. Ass’n (‘‘AMA’’)
at 4; Am. Coll. of Surgeons at 6; Physicians’ Elec.
Health Rec. Coal. (‘‘PEHRC’’) at 4 (‘‘Apps that
collect health information, regardless of whether or
not they connect to an EHR, must be regulated by
the FTC Health Breach Notification Rule to ensure
the safety and security of personal health
information.’’); Am.’s Health Ins. Plans (‘‘AHIP’’)
and Blue Cross Blue Shield Ass’n (‘‘BCBS’’) at 2;
The App Ass’n’s Connected Health Initiative
(‘‘CHI’’) at 3.
20 Kaiser Permanente at 7; The Light Collective at
2; Am. Acad. of Ophthalmology at 2; PEHRC at 2–
3.
21 Lisa McKeen at 2–3; Kaiser Permanente at 7–
8; AMA at 3; Off. of the Att’y Gen. for the State of
Cal. (‘‘OAG–CA’’) at 3–4; Healthcare Info. and
Mgmt. Sys. Soc’y (‘‘HIMSS’’) and Personal
Connected Health All. (‘‘PCH Alliance’’) at 4–5.
22 Georgia Morgan; Am. Acad. of Ophthalmology
at 2–3 (arguing that consumers do not know all the
ways their data is being used by third parties, and
the downstream consequences of data being used in
this way may ultimately erode a patient’s privacy
and willingness to disclose information to his or her
physician); Coll. of Healthcare Info. Mgmt. Exec.’s
(‘‘CHIME’’) at 3 (arguing that apps’ privacy practices
impact the patient-provider relationship because
providers do not know what technologies are
sufficiently trustworthy for their patients); AMA at
2–3 (expressing concern that patients share less
health data with health care providers, perhaps
because of ‘‘spillover from privacy and security
breaches’’).
23 Kaiser Permanente at 2, 4; Workgroup for Elec.
Data Interchange (‘‘WEDI’’) at 2; AHIP and BCBS at
3 (‘‘[HIPAA] covered entities, such as health plans,
that use or disclose protected health information
should not be subject to stricter notification
requirements than those imposed on vendors of
personal health records or other such entities.
Otherwise, the Federal government will be
providing market advantages to particular industry
segments with the effect of dampening competition
and harming consumers.’’).
24 Kaiser Permanente at 4; Fred Trotter at 1; Casey
Quinlan at 1; CARIN Alliance at 2. At the time of
this document’s publication, the Commission has
brought two enforcement actions under the Rule;
the first against digital health company GoodRx
Holdings, Inc., and the second against an ovulation-
tracking mobile app marketed under the name
‘‘Premom’’ and developed by Easy Healthcare, Inc.
United States v. GoodRx Holdings, Inc., No. 23–cv–
460 (N.D. Cal. Feb. 17, 2023), https://www.ftc.gov/
legal-library/browse/cases-proceedings/2023090-
goodrx-holdings-inc; United States v. Easy
Healthcare Corp., No. 1:23–cv–3107 (N.D. Ill. June
22, 2023), https://www.ftc.gov/legal-library/browse/
cases-proceedings/202-3186-easy-healthcare-
corporation-us-v.
25 Statement of the Commission on Breaches by
Health Apps and Other Connected Devices, Fed.
Trade Comm’n (Sept. 15, 2021), https://
www.ftc.gov/system/files/documents/public_
statements/1596364/statement_of_the_commission_
on_breaches_by_health_apps_and_other_
connected_devices.pdf (‘‘Policy Statement’’).
26 16 CFR 318.2.
27 Id. § 318.2, incorporating in part the definition
from section 1171(6) of the Social Security Act (42
U.S.C. 1320d(6)).
28 Id. § 318.2; 42 U.S.C. 1320d(6), d(3).
29 See Policy Statement at 1.
30 The Policy Statement provided this example:
‘‘[I]f 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.’’ Id. at 2.
31 16 CFR 318.2.
32 Policy Statement at 2. In the Statement of Basis
and Purpose to the 2009 Final Rule published in the
Continued
Since the Rule’s issuance, apps and
other direct-to-consumer health
technologies, such as fitness trackers
and wearable blood pressure monitors,
have become commonplace.15 Further,
as an outgrowth of the COVID–19
pandemic, consumer use of such health-
related technologies has increased
significantly. 16
In May 2020, the Commission
announced its regular, ten-year review
of the Rule and requested public
comment about potential Rule
changes.17 The Commission requested
comment on, among other things,
whether changes should be made to the
Rule in light of technological changes,
such as the proliferation of apps and
similar technologies. The Commission
received 26 public comments.18
Many of the commenters in 2020
encouraged the Commission to clarify
that the Rule applies to apps and similar
technologies. 19 In fact, no commenter
opposed this type of clarification
regarding the Rule’s coverage of health
apps. Several commenters pointed out
examples of health apps that have
abused users’ privacy, such as by
disclosing sensitive health information
without consent.20 Several commenters
noted the urgency of this issue, as
consumers have further embraced
digital health technologies during the
COVID–19 pandemic.21 Commenters
argued the Commission should take
additional steps to protect unsecured
PHR identifiable health information that
is not covered by HIPAA, both to
prevent harm to consumers 22 and to
level the competitive playing field
among companies dealing with the same
health information. 23 To that end,
commenters not only urged the
Commission to revise the Rule, but also
to increase its enforcement efforts.24
A. The Commission’s 2021 Policy
Statement
On September 15, 2021, the
Commission issued a Policy Statement
providing guidance on the scope of the
Rule. The Policy Statement clarified that
the Rule covers most health apps and
similar technologies that are not covered
by HIPAA.25 The Rule defines a
‘‘personal health record’’ as ‘‘an
electronic record of PHR identifiable
health information on an individual that
can be drawn from multiple sources and
that is managed, shared, and controlled
by or primarily for the individual.’’ 26 As
the Commission explained in the Policy
Statement, many makers and purveyors
of health apps and other connected
devices are vendors of personal health
records covered by the Rule because
their products are electronic records of
PHR identifiable health information.
The Commission explained that PHR
identifiable health information includes
individually identifiable health
information created or received by a
health care provider,27 and that ‘‘health
care providers’’ include any entities that
‘‘furnish[ ] health care services or
supplies.’’ 28 Because these health app
purveyors furnish health care services to
their users through the mobile
applications they provide, the
information held in the app is PHR
identifiable health information, and
therefore many health app purveyors
likely qualify as vendors of personal
health records.29
The Policy Statement further
explained that 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. 30 Accordingly,
health apps and similar technologies
likely qualify as personal health records
covered by the Rule if they are capable
of drawing information from multiple
sources. The Commission further
clarified that health apps and other
products experience a ‘‘breach of
security’’ under the Rule when they
disclose users’ sensitive health
information without authorization; 31 a
breach is ‘‘not limited to cybersecurity
intrusions or nefarious behavior.’’ 32
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47030 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
Federal Register (‘‘2009 Rule Commentary’’), the
Commission, in addressing questions about how the
extent of individual authorization should be
determined, stated data sharing to enhance
consumers’ experience with a PHR is authorized
only if such use is consistent with the entity’s
disclosures and individuals’ reasonable
expectations. For anything beyond such uses, the
Commission expects vendors of personal health
records and PHR related entities to limit the sharing
of consumers’ information, unless the consumers
exercise ‘‘meaningful choice’’ in allowing sharing.
The Commission believes burying disclosures in
lengthy privacy policies does not satisfy the
standard of ‘‘meaningful choice.’’ 74 FR 42967.
33 United States v. GoodRx Holdings, Inc., No.
23–cv–460 (N.D. Cal. Feb. 17, 2023), https://
www.ftc.gov/legal-library/browse/cases-
proceedings/2023090-goodrx-holdings-inc.
34 In addition, the Commission alleged GoodRx’s
data sharing practices were deceptive and unfair, in
violation of section 5 of the FTC Act.
35 United States v. Easy Healthcare Corporation,
No. 1:23–cv–3107 (N.D. Ill. June 22, 2023), https://
www.ftc.gov/legal-library/browse/cases-
proceedings/202-3186-easy-healthcare-corporation-
us-v.
36 88 FR 37819 (‘‘2023 NPRM’’).
37 16 CFR 313.3(b). The FTC’s Financial Privacy
Rule requires financial institutions to provide
particular notices and to comply with certain
limitations on disclosure of nonpublic personal
information. Using a comprehensive definition of
‘‘clear and conspicuous’’ based on the Financial
Privacy Rule definition aims to ensure consistency
across the Commission’s privacy-related rules.
B. Enforcement History
In 2023, the Commission brought its
first enforcement actions under the Rule
against vendors of personal health
records. In February 2023, the
Commission brought an enforcement
action alleging a violation of the Rule
against GoodRx Holdings, Inc.
(‘‘GoodRx’’), a digital health company
that sells health-related products and
services directly to consumers,
including prescription medication
discount products and telehealth
services through its website and mobile
applications. 33
In its complaint, the Commission
alleged that between 2017 and 2020,
GoodRx, as a vendor of personal health
records, disclosed more than 500
consumers’ unsecured PHR identifiable
health information to third party
advertising platforms like Facebook and
Google, without the authorization of
those consumers. As charged in the
complaint, these disclosures violated
explicit privacy promises the company
made to its users about its data sharing
practices (including about its sharing of
PHR identifiable health information).
The Commission alleged GoodRx broke
these promises and disclosed its users’
prescription medications and personal
health conditions, personal contact
information, and unique advertising and
persistent identifiers. The Commission
charged GoodRx with violating the Rule
by failing to provide the required
notifications, as prescribed by the Rule,
to (1) individuals whose unsecured PHR
identifiable health information was
acquired by an unauthorized person, (2)
the Federal Trade Commission, and (3)
media outlets. 16 CFR 318.3 through
318.6. The Commission entered into a
settlement that imposed injunctive relief
and required GoodRx to pay a $1.5
million civil penalty for its alleged
violation of the Rule.34
Similarly, on May 17, 2023, the
Commission brought its second
enforcement action under the Rule
against Easy Healthcare Corporation
(‘‘Easy Healthcare’’), a company that
publishes an ovulation and period
tracking mobile application called
Premom, which allows its users to input
and track various types of health and
other sensitive data. Similar to the
conduct alleged against GoodRx, Easy
Healthcare disclosed PHR identifiable
health information to third party
companies such as Google and
AppsFlyer, contrary to its privacy
promises, and did not comply with the
Rule’s notification requirements. The
Commission entered into a settlement
that imposed injunctive relief and
required Easy Healthcare to pay a
$100,000 civil penalty for its alleged
violation of the Rule.35
C. Notice of Proposed Rulemaking
Having considered the public
comments on the regulatory review
notification and its Policy Statement, on
June 9, 2023, the Commission issued a
notice of proposed rulemaking
(‘‘NPRM’’) 36 proposing to revise the
Rule, 16 CFR part 318, in seven ways:
• First, the Commission proposed to
revise several definitions in order to
clarify the Rule and better explain its
application to health apps and similar
technologies not covered by HIPAA.
Consistent with this objective, the
NPRM modified the definition of ‘‘PHR
identifiable health information’’ and
added two new definitions (‘‘health care
provider’’ and ‘‘health care services or
supplies’’). These proposed changes
were consistent with a number of public
comments supporting the Rule’s
coverage of these technologies.
• Second, the Commission proposed
to revise the definition of ‘‘breach of
security’’ to clarify that a breach of
security includes an unauthorized
acquisition of PHR identifiable health
information in a personal health record
that occurs as a result of a data security
breach or an unauthorized disclosure.
• Third, the Commission proposed to
revise the definition of ‘‘PHR related
entity’’ in two ways. Consistent with its
proposal to clarify that the Rule applies
to health apps, the Commission first
proposed clarifying the definition of
‘‘PHR related entity’’ to make clear that
the Rule covers entities that offer
products and services through the
online services, including mobile
applications, of vendors of personal
health records. In addition, the
Commission proposed revising the
definition of ‘‘PHR related entity’’ to
provide that entities that access or send
unsecured PHR identifiable health
information to a personal health
record—rather than entities that access
or send any information to a personal
health record—are PHR related entities.
• Fourth, the Commission proposed
to clarify what it means for a personal
health record to draw PHR identifiable
health information from multiple
sources.
• Fifth, in response to public
comments expressing concern that
mailed notice is costly and not
consistent with how consumers interact
with online technologies like health
apps, the Commission proposed to
revise the Rule to authorize electronic
notice in additional circumstances.
Specifically, the proposed Rule adjusted
the language in the ‘‘method of notice
section’’ and added a new definition of
the term ‘‘electronic mail.’’ The
proposed Rule also required that any
notice delivered by electronic mail be
‘‘clear and conspicuous,’’ a newly
defined term, which aligns closely with
the definition of ‘‘clear and
conspicuous’’ codified in the FTC’s
Financial Privacy Rule.37
• Sixth, the Commission proposed to
expand the required content of the
notice to individuals, to require that
consumers whose unsecured PHR
identifiable health information has been
breached receive additional important
information, including information
regarding the potential for harm from
the breach and protections that the
notifying entity is making available to
affected consumers. In addition, the
proposed Rule included exemplar
notices, which entities subject to the
Rule could use to notify consumers in
terms that are easy to understand.
• Seventh, in response to public
comments, the Commission proposed to
make a number of changes to improve
the Rule’s readability. Specifically, the
Commission proposed to include
explanatory parentheticals for internal
cross-references, add statutory citations
in relevant places, consolidate notice
and timing requirements in single
sections, respectively, of the Rule, and
add a new section that plainly states the
penalties for non-compliance.
The NPRM also included a section
discussing several alternatives the
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47031	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
38 Comments are available at https://
www.regulations.gov/document/FTC-2023-0037-
0001/comment.
39 See generally, Am. Acad. of Fam. Physicians
(‘‘AAFP’’); AHIP; AHIMA; Ass’n of Health Info.
Outsourcing Serv.’s (‘‘AHIOS’’); AMA; Am. Med.
Informatics Ass’n (‘‘AMIA’’); ANI; Anonymous 1;
Anonymous 2; Anonymous 3; Anonymous 4;
Anonymous 9; Anonymous 10; Anonymous 11 ;
Anonymous 14; Am. Osteopathic Ass’n (‘‘AOA’’);
Ella Balasa; Beth Barnett; Lauren Batchelor;
Bipartisan Pol’y Ctr. (‘‘BPC’’); Alan Brewington; Ctr.
for Democracy & Tech. (‘‘CDT’’); Ctr. for Digit.
Democracy (‘‘CDD’’); Confidentiality Coal.;
Consumer Rep.’s; Elec. Frontier Found. (‘‘EFF’’);
Elec. Priv. Info. Ctr. (‘‘EPIC’’); Dave K.; Members of
the House of Representatives; MRO Corp. (‘‘MRO’’);
Omada Health; Pharmed Out; Planned Parenthood
Federation of Amer. (‘‘Planned Parenthood’’); CB
Sanders; Robb Streicher; SYNGAP1 Foundation and
SYNGAP1 Foundation 2; Devin Thompson; Janice
Tufte; Michael Turner; U.S. Public Interest Research
Group (‘‘U.S. PIRG’’); UL Sol.’s; Grace Vinton;
WEDI; Anli Zhou. Some commenters elaborated on
the nature of the risks to consumers’ health data
and on the importance to consumers. Two
commenters, for example, described research they
had performed regarding mental health and/or
reproductive health apps’ disclosure of consumers’
health data to third parties. Mozilla at 3–4;
Consumer Reports at 2. Another commenter, a
public interest group and advocacy organization,
attached a petition containing 9,659 signatures
Continued
Commission considered but did not
propose. Although the Commission did
not put forth any proposed
modifications on those issues, the
Commission nonetheless sought public
comment on them.
The Commission received
approximately 120 comments in
response to the NPRM from a wide
spectrum of stakeholders, including
consumers, consumer groups, trade
associations, think tanks, policy
organizations, private sector entities,
and members of Congress.38 As
discussed in detail below, commenters
addressed the seven topics on which the
Commission proposed changes,
responded to particular points on which
the Commission requested comment,
offered additional comment on
alternatives that the Commission
considered but did not propose, and
provided comment on other topics. The
majority of commenters expressed
support for the Commission’s proposed
changes.
The Commission believes the
amendments are consistent with the
language and intent of the Recovery Act,
address the concerns raised by the
public comments in response to the
NPRM, and will ensure the Rule
remains current in the face of changing
business practices and technological
developments.
II. Analysis of the Final Rule
The following discussion analyzes the
amendments to the Rule.
A. Clarification of Entities Covered
1. The Commission’s Proposal To
Clarify the Entities Covered
The Commission proposed changes to
several definitions in § 318.2 to clarify
the Rule’s application to health apps
and similar technologies not covered by
HIPAA. First, the proposed Rule revised
the definition of ‘‘PHR identifiable
health information’’ to remove a cross-
reference and instead import language
from section 1171(6) of the Social
Security Act, 42 U.S.C. 1320d(6), which
is also referenced directly in section
13407 of the Recovery Act. The
proposed Rule defined ‘‘PHR
identifiable health information’’ as
information (1) that is provided by or on
behalf of the individual; (2) that
identifies the individual or with respect
to which there is a reasonable basis to
believe that the information can be used
to identify the individual; (3) relates to
the past, present, or future physical or
mental health or condition of an
individual, the provision of health care
to an individual, or the past, present, or
future payment for the provision of
health care to an individual; and (4) is
created or received by a health care
provider, health plan (as defined in 42
U.S.C. 1320d(5)), employer, or health
care clearinghouse (as defined in 42
U.S.C. 1320d(2)).
The Commission explained that this
proposed definition covers traditional
health information (such as diagnoses or
medications), health information
derived from consumers’ interactions
with apps and other online services
(such as health information generated
from tracking technologies employed on
websites or mobile applications or from
customized records of website or mobile
application interactions), as well as
emergent health data (such as health
information inferred from non-health-
related data points, such as location and
recent purchases). The Commission
sought comment as to whether any
further amendment of the definition was
needed to clarify the scope of data
covered.
Second, the NPRM proposed to define
the term ‘‘health care provider’’ that
appears in the proposed definition of
‘‘PHR identifiable health information’’
(‘‘is created or received by a health care
provider’’). The Commission proposed
to define this term in a manner similar
to the definition of ‘‘health care
provider’’ found in 42 U.S.C. 1320d(3)
(and referenced in 42 U.S.C. 1320d(6),
which is directly referenced in section
13407 of the Recovery Act), to mean a
provider of services (as defined in 42
U.S.C. 1395x(u)), a provider of medical
or other health services (as defined in 42
U.S.C. 1395x(s)), or any other entity
furnishing health care services or
supplies. The Commission observed that
this proposed definition, which is
consistent with the statutory scheme,
differs from, but does not contradict, the
definitions or interpretations adopted by
HHS. The Commission sought comment
on defining this term more broadly than
the term is used in other contexts.
Third, the NPRM proposed to define
‘‘health care services or supplies’’ (the
final term in the definition of ‘‘health
care provider’’) to include any online
service, such as a website, mobile
application, or internet-connected
device that provides mechanisms to
track diseases, health conditions,
diagnoses or diagnostic testing,
treatment, medications, vital signs,
symptoms, bodily functions, fitness,
fertility, sexual health, sleep, mental
health, genetic information, diet, or that
provides other health-related services or
tools. The Commission explained that
this change clarified that the Rule
applies generally to online services,
including websites, apps, and internet-
connected devices that provide health
care services or supplies, and clarified
that the Rule covers online services
related not only to medical issues (by
including in the definition terms such
as ‘‘diseases, diagnoses, treatment,
medications’’) but also wellness issues
(by including in the definition terms
such as ‘‘fitness, sleep, and diet’’).
The Commission explained that these
proposed changes to the definitions
clarified that developers of health apps
and similar technologies providing
‘‘health care services or supplies’’
qualify as ‘‘health care providers,’’ such
that any individually identifiable health
information these products collect or
use would constitute ‘‘PHR identifiable
health information’’ covered by the
Rule. The Commission explained that
these proposed changes further clarified
that a mobile health application can be
a ‘‘personal health record’’ covered by
the Rule and the developers of such
applications can be ‘‘vendors of
personal health records.’’
2. Public Comments Regarding the
Commission’s Proposal To Clarify the
Entities Covered
The Commission received numerous
comments on the application of the Rule
to health apps and similar technologies.
A substantial number of commenters
supported the Rule’s application to
health apps and similar technologies not
covered by HIPAA as necessary in light
of the explosion of health apps and the
associated dangers to the privacy and
security of consumers’ health
information.39 Notably, support for the
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47032 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
asking for strong rules to protect digital health
privacy. US PIRG at 5–230.
40 E.g., AAFP, AHIMA, AHIOS, AMA, AMIA,
AOA; Network Advert. Initiative (‘‘NAI’’).
41 E.g., Mozilla; MRO; Omada Health; UL Sol.’s.
42 See Members of the House of Representatives
(six members of Congress expressing support for the
proposed changes).
43 E.g., CDD; CDT; EFF; U.S. PIRG.
44 Ella Balasa; Beth Barnett; Lauren Batchelor;
Alan Brewington; Sean Castillo; Dave K.; CB
Sanders; Robb Streicher; Devin Thompson; Janice
Tufte; Michael Turner; Grace Vinton; Anli Zhou.
45 Anonymous 1; Anonymous 2; Anonymous 3;
Anonymous 4; Anonymous 5; Anonymous 6;
Anonymous 9; Anonymous 10; Anonymous 11;
Anonymous 14.
46 See, e.g., AAFP at 1–2; AHIMA at 2; AHIOS at
2; Anonymous 5 at 1; AOA at 1; Am. Speech-
Language-Hearing Ass’n (‘‘ASHA’’) at 1; Am.
Psychiatric Ass’n (‘‘APA’’) at 1; CDT at 3–4; CHIME
at 2; EFF at 1; Generation Patient at 1; HIMSS at
2; HIMSS Elec. Health Rec. Ass’n (‘‘HIMSS EHR
Ass’n’’) at 1; MRO at 1–2; Omada Health at 2;
PharmedOut at 1; Planned Parenthood at 2–3;
Michael Turner at 1; WEDI at 1–4.
47 AHIMA at 2; Anonymous 5 at 1; ASHA at 1;
EFF at 1; WEDI at 2. One commenter, a software
company that assists digital health companies with
legal compliance, argued that three factors, in
particular, support greater protection for digital
health data: (1) consumers mistakenly believe
HIPAA covers all health data; (2) there is a culture
within some digital health companies that favors
rapid adoption of products to secure venture capital
even when compliance infrastructure is lacking;
and (3) digital health products deal with sensitive
data and inherently present a greater privacy risk
given their heavy reliance on data and data
exchange compared to traditional medicine.
Tranquil Data at 1.
48 Confidentiality Coal. at 2; Consumer Rep.’s at
4.
49 See, e.g., AAFP at 2. One commenter, an
industry coalition focused on health IT and health
care information exchange, emphasized a
significant privacy problem adjacent to the Rule:
whether HIPAA covered entities should warn
patients about the privacy risks associated with
health apps and what the Federal government can
do to apply equal privacy protections to health data,
notwithstanding HIPAA’s limitations. See WEDI at
3. One commenter supported the proposed changes
but argued the Commission should work with
Congress to update antiquated terms like ‘‘personal
health record.’’ HIMSS at 3.
50 Ella Balasa at 2; PharmedOut at 1.
51 Light Collective at 5.
52 EFF at 2.
53 Texas Med. Ass’n (‘‘TMA’’) at 1–2.
54 See, e.g., Ass’n of Nat’l Advertisers, Inc.
(‘‘ANA’’) at 4–5; Comput. & Commc’n’s Indus. Ass’n
(‘‘CCIA’’) at 2–3; Chamber of Com. (‘‘Chamber’’) at
1–3; CHI at 2; Consumer Tech. Ass’n (‘‘CTA’’) at 2;
Lab’y Access and Benefits Coal. (‘‘LAB’’) at 1; Priv.
for Am. at 1–2; TechNet at 2.
55 Priv. for Am. at 2–3; Chamber at 6–7; Health
Innovation All. (‘‘HIA’’) at 1. See also Advanced
Med. Tech. Ass’n (‘‘AdvaMed’’) at 1 (recommending
the Commission adopt a privacy framework
pursuant to the advanced notice of proposed
rulemaking (R111004) regarding commercial
surveillance and data security (87 FR 51273, Aug.
22, 2022)).
56 CCIA at 4.
57 Am. Telemedicine Ass’n (‘‘ATA Action’’) at 1.
58 TechNet at 1–2; CTA at 5.
59 ANA at 3.
60 Priv. for Am. at 3.
61 E.g., ANA at 3; Priv. for Am. at 1, 3–4.
62 World Priv F. (‘‘WPF’’) at 4.
63 HIA at 2.
64 Consumer Rep.’s at 3.
65 Id.
66 BPC at 1–2; Planned Parenthood at 5.
67 Legal Action Ctr. & Opioid Pol’y Inst. at 1–2.
68 Soc’y for Clinical Rsch. Sites (‘‘SCRS’’) at 1.
69 Future of Priv. F. (‘‘FPF’’) at 3.
Commission’s proposals came from a
variety of commenters—industry
associations, 40 businesses, 41 members of
Congress, 42 consumer or patient
advocacy groups,43 individual
consumers,44 and anonymous sources.45
Many commenters argued that
safeguards for non-HIPAA covered
health data are essential,46 particularly
because consumers generally are not
aware of varying legal protections for
health data.47 Indeed, according to some
commenters, requiring notification to
consumers of the breach of health
information not protected by HIPAA is
precisely what Congress intended by
authorizing the FTC to issue this Rule;
the Commission’s proposed changes are,
therefore, consistent with the goals of
the Recovery Act.48 Some commenters
argued that Federal privacy legislation
is needed to protect non-HIPAA covered
health data, but, in the interim, the
Commission should strengthen its Rule
to protect consumer health data to the
extent possible. 49 Other commenters
urged the Commission to take even
broader measures in this Rule, such as
imposing breach prevention measures,50
banning health-based surveillance
technologies or targeted advertising,51
banning selling or sharing of health data
not necessary to provide patient care or
mandating data retention limits and
deletion,52 or requiring adherence to
standardized terms of service with
strong privacy protections.53
Although many commenters
expressed support for the proposed
changes, several business coalitions,
industry associations and individual
firms opposed the changes, which, they
argued, are inconsistent with Congress’s
intent in the Recovery Act to address a
narrow subset of ‘‘personal health
records’’ and therefore exceed the FTC’s
statutory authority.54 According to some
comments, Congress should address any
privacy issues that exceed the narrow
scope of the Recovery Act. These
commenters also contend that if the
Commission believes there has been a
violation of section 5, then the
Commission needs to engage in an FTC
Act section 18 rulemaking.55 One
commenter argued further that
consumers have different privacy
expectations for an electronic health
record offered by their physician versus
a fitness app (for example) that they
download themselves, and the
Commission’s Rule should respect those
differing expectations.56
Some commenters opposed to the
changes also argued that the revised
definitions would reduce choice and
access in the marketplace,57 stifle
innovation,58 or create disincentives for
advertising 59 because (1) firms would
risk initiating breaches by sharing user
data with their partners and (2) in
accepting data from health apps,
partners such as advertising and
analytics firms would risk being covered
by the Rule.60 According to some
commenters, placing such strictures on
the advertising and service provider
ecosystem would raise prices (by, for
example, undermining ad-supported
services) and thereby harm
competition. 61 One commenter argued
that while robust protections for
consumer health data are needed, the
Rule should not be a vehicle for such
protections, because it will result in
over-notification of consumers (who
have largely learned to disregard breach
notices) and be a barrier to legislative
change on privacy and data security
issues more generally.62 Another
commenter argued against a breach
notification rule altogether, asserting
that the Commission should instead
focus on requiring robust data security
practices to prevent breaches in the first
instance. 63
Some commenters specifically
addressed the proposed changes to the
definitions of ‘‘PHR identifiable health
information’’ and the new definitions of
‘‘health care provider’’ and ‘‘health care
services or supplies.’’ First, a number of
comments addressed the scope of ‘‘PHR
identifiable health information.’’ Some
commenters urged greater breadth,
arguing, for example, that the definition
of ‘‘PHR identifiable health
information’’ should be expanded to
include other types of data, such as data
about an individual—not just data
provided by or on behalf of an
individual.64 Other commenters urged
the Commission to state expressly that
its definition encompasses particular
types of information, such as unique
persistent identifiers 65 or information
about sexual health 66 or substance use
or treatment.67 By contrast, some
commenters urged the Commission to
narrow the definition or otherwise
clarify its limits, by, for example,
exempting data relating to clinical
research or trials 68 or data that has been
de-identified.69
Relatedly, some commenters urged
the Commission to create a definition of
or standard for ‘‘identifiable data,’’ ‘‘de-
identification’’ or ‘‘de-identified
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47033	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
70 SCRS at 2; Chamber at 7; EPIC at 7–9; FPF at
3–4, LAB at 2; MRO at 4; Network for Pub. Health
L. and Texas A&M Univ. (‘‘Network’’) at 3.
71 LAB at 2; Network at 3; SCRS at 2.
72 FPF at 3.
73 SCRS at 2.
74 FPF at 3; Network at 3–4.
75 Network at 3.
76 FPF at 3.
77 Chamber at 7.
78 CDT at 11.
79 Confidentiality Coal. at 3–4.
80 AAFP at 2–3; AdvaMed at 3–4; AHIP at 2; AMA
at 2–3; ATA Action at 1; CARIN Alliance at 2–3;
CCIA at 3; CTA at 4, 6–9; Datavant at 2; Invitae
Corp. (‘‘Invitae’’) at 4; NAI at 3–4; Software & Info.
Indus. Ass’n (‘‘SIIA’’) at 1–2; TechNet at 2; TMA at
2–3; WPF at 7.
81 ANA at 5; ATA Action at 1; Invitae at 4–5; Priv.
for Am. at 4.
82 Planned Parenthood at 6.
83 WPF at 7.
84 AHIP at 2.
85 AMA at 3.
86 AHIP at 2.
87 Datavant at 2.
88 AAFP at 2–3.
89 ANA at 7–8; CCIA at 4; CHI at 3–4; CTA at 7–
8; SIIA at 2.
90 ANA at 3; SIIA at 1.
91 AdvaMed at 4; CHI at 4; CTA at 9; TechNet at
2.
92 AdvaMed at 4.
93 CTA at 8–9.
94 EPIC at 2.
95 AdvaMed at 3 (urging the Commission to
define ‘‘health care’’ and ‘‘health care provider’’ as
in 45 CFR 160.103).
96 WPF at 10.
97 AdvaMed at 3; AAFP at 3; AHIP at 3; Priv. for
Am. at 6–7.
98 MRO at 2; WPF at 7–8.
99 WPF at 8.
100 NAI at 4.
101 EPIC at 4.
102 Legal Action Ctr. & Opioid Pol’y Inst. at 3.
data,’’ 70 such as by adopting HHS’s de-
identification standard,71 or by stating
that information is identifiable if it is
‘‘reasonably linkable to an identified or
identifiable individual.’’ 72 Commenters
argued that clarifying what constitutes
‘‘identifiable’’ data is necessary both
because of the increasing ability for de-
identified data to be re-identified 73 and
because the market needs clarity to
enable uninhibited flow of de-identified
health data for research, public health,
and commercial activities.74 Indeed,
according to one commenter, failure to
clarify the standard could complicate or
chill public health research and other
innovation. 75 One commenter argued
that an objective standard of
‘‘reasonable linkability’’ is better than
what the commenter described as the
Rule’s knowledge-based standard (i.e.,
whether the company has a reasonable
basis to believe it can be used to identify
an individual).76 One commenter urged
the Commission to issue a new notice of
proposed rulemaking on the issue of de-
identification alone.77
Second, many commenters
specifically addressed the Commission’s
proposed new definition of ‘‘health care
provider.’’ One commenter applauded
the Commission’s revised definition of
‘‘health care provider,’’ arguing that
taking a crabbed view of that or related
terms would lead to further
fragmentation of health data, which is
already fragmented by HIPAA’s limited
purview. 78 Another commenter noted
the Commission’s definition of ‘‘health
care provider’’ is simply a logical
outgrowth of how consumers interact
with health apps: consumers look to
health apps to provide health-related
services—the quintessential function of
a health care provider. 79
Other commenters, however, raised
concerns that the proposed definition of
‘‘health care provider’’ is confusing in
its departure from HIPAA’s terminology
or is otherwise overbroad.80 Some
commenters argued this departure from
the traditional meaning of the term is
not what Congress intended.81 A few
commenters suggested reducing the
confusion with the traditional term by
re-naming the definition. These
commenters suggested the Commission
instead use one of the following terms:
‘‘non-HIPAA-regulated health care
provider,’’ 82 ‘‘PHR provider,’’ 83
‘‘Health-related vendor,’’ 84 ‘‘HIPAA
covered entity,’’ 85 or ‘‘health-related
service provider.’’ 86 Another
commenter recommended eliminating
the confusion by stating within the
definition that it excludes HIPAA-
covered entities and their business
associates. 87 Another commenter urged
the Commission to affirm that its
definition would have no impact on the
term ‘‘health care provider’’ as used in
other regulations. 88
Several comments also expressed
concern with the final phrase of the
definition of ‘‘health care provider’’
(‘‘any other entity furnishing health care
services or supplies’’), as overly broad
and confusing. Commenters argued its
breadth (and the breadth of the
accompanying definition of ‘‘health care
services or supplies’’) would have
perverse results, turning retailers of
tennis shoes, shampoo, or vitamins into
entities covered by the Rule, which is
not what Congress intended.89
Moreover, it would result not only in
compliance burdens for companies
(with the downstream effect of raising
prices for consumers) but also in
massive over-notification of consumers,
who will become desensitized to the
onslaught of notices.90
Several commenters urged the
Commission to address this problem by
dropping the phrase ‘‘any other entity
furnishing health care services or
supplies’’ entirely—or at least excising
the word ‘‘supplies’’—from the
definition of ‘‘health care provider.’’ 91
One commenter recommended
replacing the phrase with a different
phrase: ‘‘any other person or
organization who furnishes, bills, or is
paid for health care in the normal
course of business.’’ 92 Another
commenter recommended expressly
excluding retailers.93 Commenters
requested further clarification of certain
terms within the definition of ‘‘health
care provider,’’ including the terms
‘‘furnishing’’ 94 and ‘‘health care.’’ 95
And another commenter argued a better
approach would be to jettison the
definitions of ‘‘health care provider’’
and ‘‘health care services and supplies’’
entirely and instead apply the Rule to
any entity that ‘‘promotes its offering as
addressing, improving, tracking or
informing matters about a consumer’s
health.’’ 96
Third, some commenters addressed
the proposed definition of ‘‘health care
services or supplies.’’ 97 Several
commenters requested more clarity as to
what constitutes an ‘‘online service,’’ 98
as nearly all commercial activities have
some online presence.99 Several
commenters recommended deleting the
final phrase of the definition (‘‘or that
provides other health-related services or
tools’’) to limit the definition’s
breadth. 100 Conversely, some
commenters urged the Commission to
reinforce its breadth, by expressly
stating that ‘‘health care services or
supplies’’ include services related to
‘‘wellness’’ 101 or to specific health
conditions, such as substance abuse
disorder diagnosis, treatment,
medication, recurrence of use
(‘‘relapse’’) and recovery. 102
3. The Commission Adopts the
Proposed Changes To Clarify the
Entities Covered
After considering the comments
received, the Commission adopts the
proposed changes to the Rule (with only
non-substantive, organizational
improvements noted below) to clarify
that the Rule applies to mobile health
applications and similar technologies.
The Commission agrees with the
substantial number of comments, from
many different types of entities and
individuals, who argued that such
clarification is necessary in light of
changing technology (i.e., the mass
adoption of health apps) and the privacy
and data security risks to consumer
health data collected by that technology.
The Commission also agrees with
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47034 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
103 In the 2009 Final Rule, the Commission
similarly underscored the importance of
maintaining protections for health information,
stating: ‘‘In addition, as noted in the NPRM, the
Commission expects entities that collect and store
unsecured PHR identifiable health information to
maintain reasonable security measures, including
breach detection measures, which should assist
them in discovering breaches in a timely manner.’’
74 FR 42971 n.93 (2009).
104 88 FR 37832 n.103. 	105 Consumer Rep.’s at 4. 	106 42 U.S.C. 17937(f)(2).
commenters who argued that the
proposed changes to the Rule are
consistent with the Recovery Act, which
was intended to bolster breach
notifications for consumer health data
that falls outside HIPAA. Although the
Commission agrees with commenters
who argue that consumer health data
should enjoy substantial and
unfragmented privacy protections, this
Rule addresses breach notification, not
omnibus privacy protections. While this
rulemaking does not address omnibus
privacy protections, the Commission
observes that companies collecting or
holding consumers’ sensitive health
data should engage in many of the
practices commenters described, such as
imposing data retention limits, enabling
deletion options, and preventing
breaches through robust privacy and
data security practices.103
The Commission is not persuaded
that applying the Rule to health apps
and similar technologies will have
deleterious consequences for individual
firms or competition or result in over-
notification of consumers. Importantly,
the only obligation the Rule imposes is
to notify the Commission, consumers,
and, in some cases, the media of a
breach of unsecured PHR identifiable
health information. As noted in the
NPRM, many State laws already impose
similar, or significantly broader, data
breach obligations. 104 Moreover, firms
can avoid notification costs entirely by
avoiding breaches—by reducing the
amount of unsecured PHR identifiable
health information they access and
maintain (which can be achieved by
securing PHR identifiable health
information), by de-identifying health
information, and by implementing other
privacy and data security measures
appropriate to the sensitivity of the data.
Congress intended for consumers to
learn of breaches of their unsecured
PHR identifiable health information that
fall outside HIPAA; the changes to the
Rule help ensure consumers will receive
the notification Congress intended.
The Commission carefully considered
the arguments commenters raised that
the definitional changes depart from the
language or spirit of the Recovery Act.
The Commission does not agree. The
definitions hew closely to the language
of the Recovery Act and to the
definitions directly referenced by the
Recovery Act in section 1171(6) of the
Social Security Act, 42 U.S.C. 1320d(6).
As many commenters noted, while
health apps did not exist when Congress
passed the Recovery Act, they function
in a similar manner to the personal
health records that existed at the time.
For these reasons, the Commission is
adopting the proposed definitions, with
minor clarifications. First, the
Commission has retained the definition
of ‘‘PHR identifiable health
information’’ as set out in the NPRM,
with non-substantive organizational
changes noted below. In response to
comments that the definition of ‘‘PHR
identifiable health information’’ should
be broader, the Commission notes the
definition, which closely follows the
statutory language, already encompasses
most of the categories of data that
commenters identified. For example,
unique, persistent identifiers (such as
unique device and mobile advertising
identifiers), when combined with health
information, constitute ‘‘PHR
identifiable health information,’’ if these
identifiers can be used to identify or re-
identify an individual. Moreover, ‘‘PHR
identifiable health information’’
encompasses information about sexual
health and substance abuse disorders,
because the information ‘‘relates to the
past, present, or future physical or
mental health or condition of an
individual, the provision of health care
to an individual, or the past, present, or
future payment for the provision of
health care to an individual.’’ The
Recovery Act states PHR identifiable
health information is information
provided ‘‘by or on behalf of the
individual,’’ so the Commission
declines to change this phrase to
‘‘about,’’ as one commenter
suggested. 105 The Commission notes,
however, that information provided ‘‘by
or on behalf of the individual’’ will
encompass much information ‘‘about’’
an individual, as the consumer is the
original source of most data; many
inferences ‘‘about’’ the individual
originate from information provided ‘‘by
or on behalf of the individual.’’
The Commission does not agree with
commenters who sought to narrow the
definition of PHR identifiable health
information out of concern for the
Rule’s overall breadth. The Commission
notes that liability under the Rule does
not arise from a single definition. While
data used for public health research, for
example, may, in some instances, meet
the definition of ‘‘PHR identifiable
health information,’’ the firm using that
data is subject to the Rule only if other
conditions are met (i.e., the firm is an
entity covered by the Rule).
The Commission declines to create a
new definition of ‘‘de-identified data’’
or another similar term, because the
definition of de-identification is already
embedded in the second part of the
definition of PHR identifiable health
information (‘‘that identifies the
individual or with respect to which
there is a reasonable basis to believe that
the information can be used to identify
the individual’’). Where there is no
‘‘reasonable basis to believe that the
information can be used to identify the
individual,’’ the information is not
identifiable; rather, it is de-identified. If
data has been de-identified according to
standards set forth by HHS, then there
is not a ‘‘reasonable basis to believe that
the information can be used to identify
the individual,’’ as the definition of PHR
identifiable health information requires.
Because the Commission’s standard is
consistent with HHS’s, the
Commission’s Rule poses no
impediment to health-related research
or other flows of de-identified data. The
Commission does not view the existing
language as a subjective standard that
turns on a company’s knowledge, as one
commenter suggested; by requiring a
‘‘reasonable basis to believe’’ that the
information is not identifiable, the Rule
creates an objective standard. Whether
such reasonable basis exists will depend
on whether the data can reasonably be
linked to an individual consumer. There
is no need for a supplemental notice of
proposed rulemaking on this issue, as
the Commission is not changing this
aspect of the Rule, which closely
follows the statute.106
Second, the Commission is modifying
the proposed definition of ‘‘health care
provider’’ to ‘‘covered health care
provider’’ to distinguish that term from
interpretations of the term ‘‘health care
provider’’ in other contexts, which may
be more limited in scope. As
commenters requested, the Commission
affirms its definition of ‘‘covered health
care provider’’ is unique to the Rule; it
does not bear on the meaning of ‘‘health
care provider’’ as used in other
regulations enforced by other
government agencies. The Commission
adopts this change merely to dispel
confusion in terminology; the
Commission is not making any
substantive change from the definition
as proposed. The Commission does not
need to state expressly, either in this
definition or elsewhere, that the Rule’s
notification requirements do not apply
to HIPAA-covered entities and their
business associates, as § 318.1 of the
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47035	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
107 The definition of ‘‘covered health care
provider’’ in § 318.2 substitutes ‘‘entity’’ for
‘‘person’’—i.e., ‘‘any other entity furnishing health
care services or supplies’’—because the rest of the
Rule speaks in terms of ‘‘entities,’’ but the
definition in § 318.2 is otherwise identical to the
statutory definition in 42 U.S.C. 1320d(3).
108 42 U.S.C. 17921(18); see also 42 U.S.C. 17937.
109 At least one commenter urged a somewhat
similar interpretation, contending that a relevant
inquiry in determining whether a service offers a
personal health record is ‘‘the terms under which
a product or service is offered to consumers. If an
entity promotes its offering as addressing,
improving, tracking, or informing matters about a
consumer’s health, then that entity’s offering would
be subject to the rule. Thus, any product or services
that tracks or addresses physical activity, blood
pressure, heart rate, digestion, strength, genetics,
sleep, weight, allergies, pain, and similar
characteristics would be subject to a PHR rule.’’ See
WPF at 10.
Rule already includes this proviso. The
Commission declines to remove the
phrase ‘‘any other entity furnishing
health care services or supplies’’ from
the definition of ‘‘health care provider,’’
because this phrase is nearly identical to
the language that appears in 42 U.S.C.
1320d(3), which is referenced in the
definition of individually identifiable
health information in 42 U.S.C.
1320d(6), which is in turn referenced in
the definition of PHR identifiable health
information in section 13407(f)(2) of the
Recovery Act, 42 U.S.C. 17937.107 The
Commission declines to define the
terms ‘‘furnish’’ and ‘‘health care’’ as the
Commission believes the plain meaning
of the term ‘‘furnish’’ (to supply
someone with something) is already
clear and adding a definition of ‘‘health
care’’ is unnecessary in light of the
definition of ‘‘covered health care
provider’’ and ‘‘health care services and
supplies.’’ Differences from HHS’s
regulations pursuant to HIPAA are
appropriate, as the Recovery Act differs
from HIPAA, and the Recovery Act’s
mandate is specifically to cover entities
not covered by HIPAA.
Third, the Commission is adopting
the proposed definition of ‘‘health care
services or supplies,’’ with one minor
modification: the Commission has
substituted the word ‘‘means’’ for
‘‘includes’’ to avoid implying greater
breadth than the Commission intends.
The Commission adopts this change
merely to dispel confusion about undue
breadth; the Commission does not
intend any substantive change from the
definition proposed. The Commission
otherwise affirms the proposed
definition without change. The
Commission believes the term ‘‘online
service’’ in the definition of ‘‘health care
services or supplies’’ is sufficiently clear
because of the examples of ‘‘online
services’’ given within the definition
itself: website, mobile application, or
internet-connected device. Providing an
exhaustive list of what constitutes an
online service would prevent the
definition from being sufficiently
flexible to account for future innovation
in types of online services. The
Commission also retains the catch-all
‘‘or that provides other health-related
services or tools’’ for the same reason:
to ensure the Rule’s language can
accommodate future changes in
technology. There is no undue breadth,
because that phrase’s meaning is in the
context of the preceding phrase
(‘‘provides mechanisms to track
diseases, health conditions, diagnoses or
diagnostic testing, treatment,
medications, vital signs, symptoms,
bodily functions, fitness, fertility, sexual
health, sleep, mental health, genetic
information, diet’’).
In response to some commenters’
concerns that the proposed Rule’s
definition of ‘‘health care provider’’ and
‘‘health care services or supplies’’
would impermissibly cause the Rule to
cover retailers of general-purpose items
like tennis shoes, shampoo, or vitamins,
the Commission disagrees this would
necessarily be the case. A threshold
inquiry under the Rule is whether an
entity is a ‘‘vendor of personal health
records,’’ which the Recovery Act
defines as ‘‘an entity . . . that offers or
maintains a personal health record.’’ 108
The Recovery Act usage of the term
‘‘vendor of’’ in connection with
‘‘personal health records’’ underscores
that entities that are not in the business
of offering or maintaining (e.g., selling,
marketing, providing, or promoting) a
health-related product or service are not
covered—in other words, they are not
‘‘vendors’’ of personal health records.
Thus, to be a vendor of personal health
records under the Rule, an app, website,
or online service must provide an
offering that relates more than
tangentially to health. 109
The Commission notes a general
retailer (one that sells food products,
children’s toys, garden supplies,
healthcare products (such as pregnancy
tests), or apparel (such as maternity
clothes)) offering consumers an app to
purchase and access purchases of these
products—by itself—would not make
the retailer a vendor of personal health
records. In this scenario, purchase
information relating to certain items—
such as a pregnancy test or maternity
clothes from a retailer—may reveal
information about that person’s health.
While this purchase information may be
PHR identifiable health information, the
retailer in this scenario is not a vendor
of personal health records because the
app is only tangentially related to
health. The Commission notes,
however, there may be scenarios where
a general-purpose retailer described
above may become a vendor of personal
health records under the Rule, such as
where the retailer offers an app with
features or functionalities that are sold,
marketed, or promoted as more than
tangentially relating to health.
In addition, the Commission reiterates
a personal health record must be an
electronic record of PHR identifiable
health information on an individual,
must have the technical capacity to
draw information from multiple
sources, and must be managed, shared,
and controlled by or primarily for the
individual. The Commission also notes
that purchases of items at a brick and
mortar retailer where there is no app,
website, or online service to access or
track that purchase information
electronically is not a personal health
record, because there is no electronic
record at issue. Contrary to the
assertions of some commenters, these
definitions do not result in undue
breadth, because they do not function in
isolation. The Commission provides the
following examples to illustrate the
interplay of these definitions with the
definition of ‘‘personal health record’’:
• Example 1: Health advice app or
website A, which is not covered by
HIPAA, provides information to
consumers about various medical
conditions. Its function is purely
informational; it does not provide any
mechanism through which the
consumer may track or record
information. Health advice app or
website A is not a personal health
record, because it is not an electronic
record of PHR identifiable health
information on an individual.
• Example 2: Health advice app or
website B, which is not covered by
HIPAA, provides information to
consumers about various medical
conditions and provides a symptom
tracker, available to consumers who log
into the site with a username and
password, in which consumers may
input symptoms and receive potential
diagnoses. Health advice app or website
B is an electronic record of PHR
identifiable health information on an
individual, because its information is
provided by the individual, it identifies
the individual (via username and
password), it relates to the individual’s
health conditions (the symptoms), and
is received by a health care provider
(i.e., the entity providing the site itself,
as that entity is furnishing the health
care service of an online service that
provides mechanisms to track
symptoms). However, health advice app
or website B is not a personal health
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47036 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
110 Policy Statement at 2.
111 Ella Balasa at 1; TMA at 4 (arguing that ‘‘PHRs
include applications with the technical capacity to
draw information from multiple sources, regardless
of the patient’s preference to activate the technical
capability.’’); Consumer Rep.’s at 6; AAFP at 3;
AHIMA at 4–5; AMA at 4; CHIME at 4; CDT at 13;
AOA at 3.
112 AHIMA at 4–5.
113 AAFP at 3.
record to the extent the site does not
have the technical capacity to draw
information from multiple sources (i.e.,
if the consumer is its only source of
information).
• Example 3: Health advice website
C, which is not covered by HIPAA,
functions in the same way as health
advice app or website B, except that it
collects geolocation data via an
application programming interface
(‘‘API’’). For the reasons stated in
Example 2, it is an electronic record of
PHR identifiable health information on
an individual. It also has the technical
capacity to draw information from
multiple sources (consumer inputs and
collection of geolocation data through
the API. It is managed primarily for the
individual (i.e., to provide the
individual health advice). Therefore,
health advice app or website C is a
personal health record.
• Example 4: Health advice app or
website D, which is not covered by
HIPAA, functions in the same way as
health advice app or website B, except
that it also draws information from a
data broker and connects that
information to some of its individual
users to provide them with more
accurate diagnostic suggestions. For the
reasons stated in Example 2, it is an
electronic record of PHR identifiable
health information on an individual. It
also has the technical capacity to draw
information from multiple sources (the
consumer and the data broker) and is
managed by or primarily for the
individual. Therefore, health advice app
or website D is a personal health record.
Whether a health app or other
electronic record constitutes a personal
health record (and is therefore subject to
the Rule) is a fact-intensive inquiry
whose outcome depends not only on the
nature of the information contained in
that record, but also on numerous other
factors, such as its ‘‘technical capacity,’’
its source(s) of information, and its
relationship to the individual.
Finally, the Commission notes a non-
substantive, organizational change
relating to the definition of ‘‘PHR
identifiable health information.’’ In the
2023 NPRM, the Commission proposed
revising ‘‘PHR identifiable health
information’’ by importing language
from section 1171(6) of the Social
Security Act, 42 U.S.C. 1320d(6), which
is referenced directly in section 13407
of the Recovery Act. To hew more
closely to the organization of the
Recovery Act, and to preserve the word
‘‘includes’’ in the phrase ‘‘includes
information that is provided by or on
behalf of the individual,’’ the
Commission revised slightly the order of
the elements in the definition of ‘‘PHR
identifiable health information.’’
B. Clarification of What It Means for a
Personal Health Record To Draw
Information From Multiple Sources
1. The Commission’s Proposal
Regarding What It Means for a Personal
Health Record To Draw Information
From Multiple Sources
The Commission proposed amending
the definition of the term ‘‘personal
health record’’ to clarify what it means
for a personal health record to draw
information from multiple sources.
Under the 2009 Rule, a personal health
record is defined as an electronic record
of PHR identifiable health information
that can be drawn from multiple sources
and that is managed, shared, and
controlled by or primarily for the
individual. Under the Commission’s
proposed definition, a ‘‘personal health
record’’ would be defined as an
electronic record of PHR identifiable
health information on an individual that
has the technical capacity to draw
information from multiple sources and
that is managed, shared, and controlled
by or primarily for the individual.
Changing the phrase ‘‘that can be
drawn from multiple sources’’ to ‘‘has
the technical capacity to draw
information from multiple sources’’
serves several purposes. First, it clarifies
a product is a personal health record if
it can draw information from multiple
sources, even if the consumer elects to
limit information to a single source
only, in a particular instance. For
example, a depression management app
that accepts consumer inputs of mental
health states and has the technical
capacity to sync with a wearable sleep
monitor is a personal health record,
even if some customers choose not to
sync a sleep monitor with the app.
Thus, whether an app qualifies as a
personal health record would not
depend on the prevalence of consumers’
use of a particular app feature, like sleep
monitor-syncing. Instead, the analysis of
the Rule’s application would be
straightforward: either the app has the
technical means (e.g., the application
programming interface or API) to draw
information from multiple sources, or it
does not. Next, adding the phrase
‘‘technical capacity to draw
information’’ clarifies a product is a
personal health record if it can draw any
information from multiple sources, even
if it only draws health information from
one source. This change further clarifies
the Commission’s interpretation of the
Recovery Act, as explained in the Policy
Statement.110
The Commission sought public
comment as to whether this revised
language sufficiently clarifies the Rule’s
application to developers and purveyors
of products that have the technical
capacity to draw information from more
than one source. The Commission
invited comment on its interpretation
that an app is a personal health record
because it has the technical capacity to
draw information from multiple
sources, even if particular users of the
app choose not to enable the syncing
features. The Commission also
requested comment about whether an
app (or other product) should be
considered a personal health record
even if it only draws health information
from one place (in addition to non-
health information drawn elsewhere); or
only draws identifiable health
information from one place (in addition
to non-identifiable health information
drawn elsewhere). The Commission
further requested comment about
whether the Commission’s bright-line
rule (apps with the ‘‘technical capacity
to draw information’’ are covered)
should be adjusted to take into account
consumer use, such as where no
consumers (or only a de minimis
number) use a feature, and about the
likelihood of such scenarios. For
example, the Commission offered an
example of an app that might have the
technical capacity to draw information
from multiple sources, but its API is
entirely or mostly unused, either
because it remains a Beta feature, has
not been publicized, or is not popular.
2. Public Comments Regarding What It
Means for a Personal Health Record To
Draw Information From Multiple
Sources
Many commenters supported the
Commission’s proposal amending the
definition of a ‘‘personal health
record.’’ 111 Commenters noted, for
instance, this change would help to
ensure that many services that collect
PHR identifiable health information are
covered by the Commission’s Rule,112
and would help to promote greater
privacy and security for health
information,113 while still ‘‘hewing to
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47037	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
114 Consumer Reports at 5–6.
115 AHIP at 2–3; CDT at 13 (arguing that changes
remove ‘‘incentives for companies to technically
design products and services to not trigger the
HBNR to avoid any need to provide consumer
notice.’’).
116 AHIOS at 4; CARIN Alliance at 4.
117 NAI at 6 (urging that the Commission make
clear that a personal health record is one that ‘‘not
only has the technical capacity to draw PHR
identifiable health information from multiple
sources, but that it also has the functionality and
actually does incorporate data from multiple
sources.’’); ANA at 7; ACLA at 1–2.
118 NAI at 6.
119 Chamber at 4–5; Priv. for Am. at 5–6; NAI at
6.
120 CCIA at 6.
121 CTA at 11; AdvaMed at 5; CHI at 5.
122 CHI at 5 (asking the Commission to clarify that
an ‘‘app having the ability to draw from multiple
sources with some changes to the app’s coding/APIs
is not within this definition’s threshold.’’); ACLA at
1 (arguing ‘‘[i]f a feature is unused by individuals
‘because it remains a Beta feature,’ then in fact it
does not have the ‘technical capacity’ to draw an
individual’s information from other sources, unless
and until its functionality has been enabled by the
vendor. The mere possibility that an application
vendor might sometime in the future enable that
functionality should not bring the electronic record
within the scope of the definition of ‘personal
health record.’ ’’) (emphasis in original); CTA at 11
(arguing Rule should instead have bright-line test
that assesses whether the app actually draws health
information from multiple sources); AdvaMed at 5
(arguing the Commission should decline to adopt
multiple sources changes because it could cause
confusion and potentially sweep in apps or services
with features that have not been made available to
consumers, such as APIs connected to the PHR that
have not been publicized).
123 WPF at 9.
124 Omada at 5; Datavant at 3.
125 HIMSS at 3 (urging the Commission to work
with Congress to craft a definition more consonant
with technological realities).
126 AHIOS at 4; MRO at 4.
127 NAI at 6.
128 NAI at 6.
129 See, e.g., 16 CFR 318.1(a) (Rule ‘‘does not
apply to HIPAA-covered entities, or to any other
entity to the extent that it engages in activities as
a business associate of a HIPAA-covered entity.’’);
see also 16 CFR 318.2 (exempting business
associates and HIPAA-covered entities from the
Rule’s definitions of ‘‘PHR related entity’’ and
‘‘vendor of personal health records.’’).
130 ACLA at 1–2; CTA at 11; AdvaMed at 5.
the limitations of the statute.’’ 114 Some
commenters noted without this change,
developers of personal health records
(such as app developers) might have
incentives to design their products in
ways that would intentionally skirt the
Rule’s requirements (such as by
restricting a consumer’s ability to
import data from other sources).115
Others noted the importance of the Rule
covering apps with the technical
capacity to draw information from
multiple sources even where such
capacity is not used by the consumer.116
Other commenters opposed this
proposal.117 Some argued the proposed
clarification regarding what drawing
information from multiple sources
means runs counter to Congress’s
statutory intent,118 because virtually
every app has some sort of integration
(e.g., for analytics) through which it
draws information other than from the
consumer. 119 One commenter asserted
the change would broaden the scope of
the Rule to the point that it would
sweep in online services that should not
be thought of as a personal health record
(such as email apps),120 or otherwise
create confusing standards for app
developers or reduce innovation.121 In
addition, commenters expressed
concern this change would sweep in
apps or online services that have the
technical capacity to draw from
multiple sources during the
development or testing phase of the
product, or would sweep in products
with unused, unavailable, or
unpublicized APIs or integrations that
count as a source.122 One commenter
expressed concern about lack of clarity,
such as in scenarios where a user is
required to pay for an upgrade to access
a feature or integration that draws
information from another source.123
Some commenters also expressed
concern that apps and online services
that are subject to HIPAA (i.e., HIPAA-
covered entities or business associates)
should be carved out of the definition of
a personal health record.124 Other
commenters expressed broader concern
with the definition of ‘‘personal health
record,’’ urging the Commission to, for
example, abandon the purportedly
outdated term in favor of a more modern
one. 125 For instance, some commenters
urged that the Commission abandon or
tweak the requirement that the personal
health record be ‘‘managed, shared, and
controlled by or primarily for the
individual.’’ 126
Another commenter expressed
concern the proposed change could
sweep in services that draw any
information from multiple sources,
regardless of whether that information is
identifiable health information.127
3. The Commission Adopts the
Proposed Changes Clarifying What It
Means for a Personal Health Record To
Draw Information From Multiple
Sources
After considering the comments
received, the Commission adopts the
proposed amendment without change.
This amendment will help clarify the
types of entities covered by the Rule.
The definition does not create undue
breadth or deviate from Congressional
intent; rather, the changes are consistent
with the language of the Recovery Act,
and only serve to give meaning to the
phrase ‘‘can be drawn’’ in the Recovery
Act in a way that is consistent with the
current state of technology. They are
also necessary to keep pace with
technological change, which has
enabled firms to offer consumers mobile
electronic records of their health
information that contain numerous
integrations. To illustrate the intended
meaning of the proposed revisions to
the term ‘‘personal health record,’’ the
Commission reiterates examples from
the 2023 NPRM of two non-HIPAA
covered diet and fitness apps available
for consumer download in an app store.
Under the amended Rule, each is a
personal health record.
• Example 1: Diet and fitness app Y
allows users to sync their app with
third-party wearable fitness trackers.
Diet and fitness app Y has the technical
capacity to draw identifiable health
information both from the user (e.g.,
name, weight, height, age) and the
fitness tracker (e.g., user’s name, miles
run, heart rate), even if some users elect
not to connect the fitness tracker.
• Example 2: Diet and fitness app Y
has the ability to pull information from
the user’s phone calendar via the
calendar API to suggest personalized
healthy eating options. Diet and fitness
app Y has the technical capacity to draw
identifiable health information from the
user (e.g., name, weight, height, age) and
non-health information (e.g., calendar
entry info, location, and time zone) from
the user’s calendar.
As these examples make clear, and in
response to one commenter’s concern
that the changes would sweep in
services that do not draw any health
information,128 the Commission notes
the Rule still requires drawing PHR
identifiable health information from at
least one source to count as a personal
health record.
The Commission declines to make
other requested changes to the
definition of personal health record.
First, the Commission declines to
include an express exemption for
HIPAA-covered entities within the
definition of personal health record
because § 318.1 of the Rule already
specifically exempts businesses or
organizations covered by HIPAA.129
Second, the Commission declines to
exempt apps and services where there
are available but unused or
unpublicized APIs or integrations.
Similarly, the Commission declines to
exempt apps and services from the
definition just because they are drawing
information from multiple sources
while undergoing product or beta
testing and are not yet in their final
form.130 The Commission notes a
product feature or integration that exists
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47038 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
131 Per HHS guidance, electronic health
information is ‘‘secured’’ if it has been encrypted
according to certain specifications set forth by HHS,
or if the media on which electronic health
information has been stored or recorded is
destroyed according to HHS specifications. See 74
FR 19006; see also U.S. Dep’t of Health & Human
Servs., Guidance to Render Unsecured Protected
Health Information Unusable, Unreadable, or
Indecipherable to Unauthorized Individuals (July
26, 2013), https://www.hhs.gov/hipaa/for-
professionals/breach-notification/guidance/
index.html. PHR identifiable health information
would be considered ‘‘secured’’ if such information
is disclosed by, for example, a vendor of personal
health records, to a PHR related entity or a third
party service provider, in an encrypted format
meeting HHS specifications, and the PHR related
entity or third party service provider stores the data
in an encrypted format that meets HHS
specifications and also stores the encryption and/
or decryption tools on a device or at a location
separate from the data.
132 CHI at 5 (asking the Commission to clarify that
an ‘‘app having the ability to draw from multiple
sources with some changes to the app’s coding/APIs
is not within this definition’s threshold.’’). 	133 42 U.S.C. 17921(11).
134 As noted in the 2023 NPRM, the Commission
considered defining ‘‘affirmative express consent’’
as any freely given, specific, informed, and
unambiguous indication of an individual’s wishes
demonstrating agreement by the individual, such as
by a clear affirmative action, following a clear and
conspicuous disclosure to the individual, apart
from any ‘‘privacy policy,’’ ‘‘terms of service,’’
‘‘terms of use,’’ or other similar document, of all
information material to the provision of consent.
Acceptance of a general or broad terms of use or
similar document that contains descriptions of
agreement by the individual along with other,
unrelated information, does not constitute
affirmative express consent. Hovering over, muting,
pausing, or closing a given piece of content does not
constitute affirmative consent. Likewise, agreement
obtained through use of user interface designed or
manipulated with the substantial effect of
subverting or impairing user autonomy, decision-
making, or choice, does not constitute affirmative
express consent. See 88 FR 37830 n.78.
and that is able to draw PHR identifiable
health information counts as a source
under the Rule. Exempting such
instances would be contrary to the
purpose of the Rule and would
impermissibly limit notification of
breaches just because a product feature
is not widely disseminated, used, or in
its final form. The Commission notes
under the Rule, a covered entity that
experienced a breach of security of
unsecured PHR identifiable health
information triggering the Rule would
not be exempt because the breach
occurred in the context of such
scenarios.
Further, and importantly, the Rule is
triggered only by breaches of unsecured
PHR identifiable health information and
does not apply to information that is
protected or ‘‘secured’’ through the use
of a technology or methodology
specified by the Secretary of Health and
Human Services in the guidance issued
under section 13402(h)(2) of the
American Reinvestment and Recovery
Act of 2009, 42 U.S.C. 17932(h)(2).131
The Rule, therefore, creates appropriate
incentives for product testing with de-
identified data or that secures
information through certain
specifications, such as through specified
encryption methods.
Third, the Commission declines, as
one commenter requested,132 to
expressly exempt scenarios where a
change is required to an app’s coding to
draw information from another source.
The Commission notes, however, it does
not intend to cover instances where an
app can draw from multiple sources
only through changes to the design or
underlying software code and where the
app developer does not implement
those changes.
In addition, the Commission declines
to remove from the definition of
personal health record the requirement
that it be ‘‘managed, shared, and
controlled by or primarily for the
individual.’’ This language mirrors the
Recovery Act’s statutory definition of
personal health record.133 Further, this
language provides a boundary to the
definition. Even if a website or app has
the technical capacity to draw
information from multiple sources (for
example, because it has integrations for
advertising or analytics), it must still be
‘‘managed, shared, and controlled by or
primarily for the individual’’ to be
covered by the Rule.
Generally, a personal health record is
an electronic record of an individual’s
health information by which the
individual maintains access to the
information and may have, for example,
the ability to manage, track, control, or
participate in his or her own health
care. If these elements are not present,
the website or app may not be
‘‘managed, shared, and controlled by or
primarily for the individual,’’ and
would not, therefore, constitute a
personal health record.
C. Clarification Regarding Types of
Breaches Subject to the Rule
1. The Commission’s Proposals
a. The Commission’s Proposal
Regarding ‘‘Breach of Security’’
The Commission proposed a
definitional change to clarify that a
breach of security under the Rule
encompasses unauthorized acquisitions
that occur as a result of a data breach
or an unauthorized disclosure. The
Commission’s proposal underscores that
a breach of security is not limited to
data exfiltration, and includes
unauthorized disclosures (such as, but
not limited to, a company’s
unauthorized sharing or selling of
consumers’ information to third parties
that is inconsistent with the company’s
representations to consumers). The Rule
previously defined ‘‘breach of security’’
as the acquisition of unsecured PHR
identifiable health information of an
individual in a personal health record
without the authorization of the
individual, which language mirrored the
definition of ‘‘breach of security’’ in
section 13407(f)(1) of the Recovery Act.
Accordingly, consistent with the
Recovery Act definition, the Policy
Statement, FTC enforcement actions
under the Rule, and public comments
received, the Commission proposed
amending the definition of ‘‘breach of
security’’ in § 318.2 by adding the
following sentence to the end of the
existing definition: ‘‘[a] breach of
security includes an unauthorized
acquisition of unsecured PHR
identifiable health information in a
personal health record that occurs as a
result of a data breach or an
unauthorized disclosure.’’ The change
was intended to make clear to the
marketplace that a breach includes an
unauthorized acquisition of identifiable
health information that occurs as a
result of a data breach or an
unauthorized disclosure, such as a
voluntary disclosure made by the PHR
vendor or PHR related entity where
such disclosure was not authorized by
the consumer.
The NPRM, like the 2009 Rule,
continued to include a rebuttable
presumption for unauthorized access to
an individual’s data; it stated when
there is unauthorized access to data,
unauthorized acquisition will be
presumed unless the entity that
experienced the breach ‘‘has reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.’’
b. The Commission’s Related Proposal
To Not Define the Term
‘‘Authorization’’ in the Rule
In the 2023 NPRM, the Commission
stated it had considered defining the
term ‘‘authorization,’’ which appears in
§ 318.2’s definition of ‘‘breach of
security,’’ but did not propose any such
change in the NPRM.
The Commission considered defining
‘‘authorization’’ to mean the affirmative
express consent of the individual and
then defining ‘‘affirmative express
consent’’ consistent with State laws that
define consent, such as the California
Consumer Privacy Rights Act, Cal. Civ.
Code 1798.140(h).134 Such changes
would have ensured notification is
required anytime there is acquisition of
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135 See, e.g., 74 FR 42967.
136 United States v. GoodRx Holdings, Inc., No.
23–cv–460 (N.D. Cal. 2023), https://www.ftc.gov/
legal-library/browse/cases-proceedings/2023090-
goodrx-holdings-inc; United States v. Easy
Healthcare Corp., No. 1:23–cv–3107 (N.D. Ill. 2023),
https://www.ftc.gov/legal-library/browse/cases-
proceedings/202-3186-easy-healthcare-corporation-
us-v.
137 For example, the Commission sought
comment about when a vendor of personal health
records or a PHR-related entity is sharing
information covered by the Rule, is it acceptable for
that entity to obtain the individual’s authorization
to share that information when an individual clicks
‘‘agree’’ or ‘‘accept’’ in connection with a pre-
checked box disclosing such sharing? Is it sufficient
if an individual agrees to terms and conditions
disclosing such sharing but that individual is not
required to review the terms and conditions? Or is
it sufficient if an individual uses a health app that
discloses in its privacy policy that such sharing
occurs, but the app knows via technical means that
the individual never interacts with the privacy
policy? See 88 FR 37832.
138 See, e.g., TMA at 3; U.S. PIRG at 2–3; AAFP
at 3; AHIMA at 3; AMA at 3–4; AMIA at 3; AOA
at 2–3; AHIOS at 3; CDT at 11–12; CHIME at 4; EPIC
at 5–6.
139 Consumer Rep.’s at 4.
140 CDT at 11–12; U.S. PIRG at 2–3.
141 AMA at 4; CDT at 11–12; EPIC at 5.
142 AAFP at 3; CDT at 11–12.
143 AOA at 2.
144 AHIMA at 3.
145 FPF at 12–15.
146 EPIC at 5–7; U.S. PIRG at 2–3.
147 Mozilla at 6–7.
148 Chamber at 6; Priv. for Am. at 2–5; ANA at
6–7.
149 SIIA at 3; CTA at 13–14.
150 CCIA at 4–5, 7 (arguing that requiring
notification for unauthorized disclosures could
cause consumers to worry in the absence of harm,
such as where it is ‘‘typical’’ to disclose such
information.)
151 CTA at 13–14.
152 Id. at 14–16.
153 TechNet at 3; Chamber at 7; CCIA at 5–6.
unsecured PHR identifiable health
information without the individual’s
affirmative express consent for that
acquisition—such as when an app
discloses unsecured PHR identifiable
health information to another company,
having obtained nominal ‘‘consent’’
from the individual by using a small,
greyed-out, pre-selected checkbox
following a page of dense legalese.
The Commission did not, however,
propose to define ‘‘authorization’’
because (1) the 2009 Rule Commentary
already provided guidance on the types
of disclosures the Commission
considers to be ‘‘unauthorized’’; 135 (2)
recent Commission orders, such as the
Commission’s enforcement actions
against GoodRx and Easy Healthcare, 136
also make clear that the use of ‘‘dark
patterns,’’ which have the effect of
manipulating or deceiving consumers,
including through use of user interfaces
designed with the substantial effect of
subverting or impairing user autonomy
and decision-making, do not satisfy the
standard of ‘‘meaningful choice’’; and
(3) Commission settlements establish
important guidelines involving
authorization (the Commission’s recent
settlement with GoodRx, alleging
violations of the Rule, highlights that
disclosures of PHR identifiable health
information inconsistent with a
company’s privacy promises constitute
an unauthorized disclosure).
The Commission sought public
comment about:
• Whether the commentary above and
FTC enforcement actions under the Rule
provide sufficient guidance to put
companies on notice about their
obligations for obtaining consumer
authorization for disclosures, or
whether defining the term
‘‘authorization’’ would better inform
companies of their compliance
obligations.
• To the extent that including such
definitions would be appropriate, the
definitions of ‘‘authorization’’ and
‘‘affirmative express consent,’’ as
described above, and the extent to
which such definitions are consistent
with the language and purpose of the
Recovery Act.
• What constitutes an acceptable
method of authorization, particularly
when unauthorized sharing is
occurring.137
• Whether there are certain types of
sharing for which authorization by
consumers is implied because such
sharing is expected and/or necessary to
provide a service to consumers.
2. Public Comments
a. Public Comments Regarding ‘‘Breach
of Security’’
Many commenters supported the
Commission’s proposed amendment to
the definition of ‘‘breach of
security.’’ 138 One commenter noted the
change is consistent with the broad
definition of ‘‘breach of security’’ in the
Recovery Act, which refers explicitly to
the acquisition of PHR identifiable
health information without the
authorization of an individual (rather
than the authorization of an entity
holding the data, as is the case where a
breach involves data theft or
exfiltration). 139 Commenters also noted
the amendment would ensure notice,
accountability, and regulatory oversight,
regardless of the underlying cause of the
unauthorized acquisition.140
Commenters noted that breaches
encompass more than just cybersecurity
intrusions.141 Commenters also argued
that a company’s voluntary
unauthorized disclosure can be just as
damaging as data theft.142 For instance,
a commenter noted that unauthorized
disclosures of health information may
cause embarrassment, perpetuate stigma
about patients’ conditions, deter
patients from seeking care, interfere in
the patient-physician relationship, or
impact patients’ employment.143
Moreover, voluntary, unauthorized
disclosures increase the risk of
additional unauthorized acquisition and
sharing of this information among bad
actors.144
Some commenters supported
expanding or changing the definition
further. Specifically, some commenters
urged the Commission to amend the
definition to encompass (1) exceeding
authorized access or use of PHR
identifiable health information, such as
where a company collects data for one
purpose, but later uses or discloses that
data for a second, undisclosed
purpose; 145 or (2) the collection or
retention of PHR identifiable health
information beyond what is necessary to
provide the associated service to an
individual consumer. 146 One
commenter asked the Commission to
clarify that the Rule would be triggered
by unauthorized use of or access to
information derived from PHR
identifiable health information, and to
define the phrase acquisition. 147
Some commenters, however, urged
the Commission to not amend the
definition at all. These commenters
expressed concern the amendment
would cause the Rule to exceed what
Congress intended in the Recovery Act
and transform the Rule into an opt-in
notice and consent privacy regime. 148
Commenters argued further the
proposed changes would cause
consumer notice fatigue,149 consumer
panic,150 or over-reporting by
companies.151 One commenter urged
the Commission to limit the definition
of ‘‘acquisition’’ to actual acquisition,
and exclude instances of access or
disclosure where the information was
not actually acquired by a third party.152
Commenters argued the proposed
definition would be burdensome and
force companies to limit certain
beneficial disclosures to certain third
parties, such as disclosures to support
internal operations, detect security
vulnerabilities or fraud, for law
enforcement, and other purposes.153
Some commenters also urged that the
Commission adopt carve-outs so that
certain conduct would not be deemed
breaches of security under the Rule.
Commenters requested exemptions
consistent with or found in HIPAA or
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154 CHI at 4 (stating the FTC ‘‘should explicitly
except the same situations from disclosure that are
excepted from HIPAA disclosures, and/or try to
align exceptions with those found in State privacy
statutes.’’); CTA at 16; HIA at 2; TechNet at 3
(arguing the Rule should adopt exemptions that
encompass ‘‘actions taken to prevent and detect
security incidents, to comply with a civil, criminal,
or regulatory inquiry or investigation, to cooperate
with law enforcement agencies concerning conduct
or activity that the data controller reasonably and
in good faith believes may be illegal, to perform
internal operations consistent with a consumer’s
expectations, and to provide a product or service
that a consumer requested.’’); CCIA at 5–6 (arguing
the Rule should exempt disclosures relating to a
host of purposes, including: preventing and
detecting security incidents and fraud, complying
with legal process, cooperating with law
enforcement, performing internal operations
consistent with consumer expectations, providing a
service requested by the consumer, protecting ‘‘the
vital interests of the consumer,’’ or processing data
relating to public health); Chamber at 7 (arguing if
the Commission does amend the definition of
breach of security, it ‘‘should provide exceptions for
legitimate and societally beneficial uses of data that
other privacy laws have for failure to honor opt-in
including but not limited to network security,
prevention and detection of fraud, protection of
health, network maintenance, and service/product
improvement.’’); LAB at 2.
155 DirectTrust at 1–2.
156 ATA Action at 2.
157 Network for Pub. Health L. and Texas A&M
Univ. at 1–2.
158 AHIP at 4; Light Collective at 4; MRO at 2–
3; Mozilla at 4; CARIN Alliance at 10; Consumer
Rep.’s at 9; see also PharmedOut at 3 (arguing that
defining ‘‘authorization’’ is crucial but urging the
Commission go further and place substantive
restrictions on what companies can do with
consumer health data.).
159 AdvaMed at 7 (arguing that any definition of
‘‘authorization’’ or ‘‘affirmative express consent’’
should take into account the necessity for medical
technologies and medical technology companies to
be able to operate and communicate under
standards consistent with those governing HIPAA
covered entities and others in the health care
ecosystem. These standards permit certain uses and
disclosures of individually identifiable health
information without express consent where
necessary for the provision of timely and effective
health care); MRO at 3; AHIMA at 7–8.
160 AHIOS at 3.
161 Consumer Rep.’s at 9.
162 HIA at 2 (arguing that ‘‘[r]outine disclosures of
data should be allowed in certain contexts without
additional need for authorizations’’); CTA at 16–17;
AdvaMed at 7–8; ACLA at 6; Confidentiality Coal.
at 4–5.
163 Confidentiality Coal. at 4–5.
164 CTA at 16–17 (arguing that the Rule does not
allow the Commission to impose ‘‘substantive
consent requirements’’ that would be burdensome
and ‘‘likely not administrable for many
companies.’’).
165 SIIA at 4.
166 CHI at 7.
167 FPF at 10 (arguing that ‘‘an organization may
share information with a service provider operating
on their behalf to provide storage; may share
information to protect the safety or vital interests
of an individual or react to a public health
emergency; or to protect themselves against security
incidents and fraud. In each of these situations, data
protection laws typically invoke a variety of non-
consent measures, including data minimization,
transparency, notice to the end-user or the
regulator, and opportunities to object.’’); Chamber at
7.
168 Confidentiality Coal. at 4–5; SIIA at 4; CHI at
7.
169 CTA at 17.
170 The Commission’s Policy Statement makes
clear that ‘‘[i]ncidents of unauthorized access,
including sharing of covered information without
an individual’s authorization, triggers notification
obligations under the Rule,’’ and that a breach ‘‘is
not limited to cybersecurity intrusions or nefarious
behavior.’’ Policy Statement at 2.
171 Consumer Rep.’s at 5 (noting ‘‘the Recovery
Act frames breaches of security in relation to
individuals, rather than to vendors of personal
health records or PHR related entities,’’ and defines
under State breach notification laws,
such as exemptions for disclosures to
certain types of entities or for certain
purposes, or where there is inadvertent
or unintentional access, use, or
disclosure. 154 Commenters also
proposed safe harbors for companies
that implement recognized security or
privacy safeguards; 155 and one
commenter proposed safe harbors that
would apply where data is shared with
‘‘affiliated businesses,’’ where there is
inadvertent but ‘‘good-faith’’ access by a
company employee, where a company
makes good faith efforts to inform
consumers of disclosures to third
parties, and where companies take steps
to contractually limit downstream uses
of the data.156 Other commenters
expressed support for exempting
disclosures of PHR identifiable health
information to public health authorities
for public health purposes, noting the
amended definition could discourage
such disclosures.157
b. Public Comments Regarding Defining
‘‘Authorization’’
Commenters were divided as to
whether the Commission should define
‘‘authorization.’’ Some commenters
supported defining ‘‘authorization’’ to
provide greater guidance to companies,
to promote transparency, and to
discourage buried or inconspicuous
disclosures relating to health
information, or approaches to consent
that are not meaningful because they are
confusing or coercive.158 To further
regulatory consistency, some
commenters supported adding a
definition of ‘‘authorization’’ that is
consistent with how that term is defined
in other health-related laws, such as
under HIPAA 159 or State health privacy
laws that define consent or
authorization (such as the California
Consumer Privacy Rights Act 160 or the
Washington My Health, My Data
Act).161
By contrast, some commenters
opposed defining the term—or opposed
a requirement under the Rule that
entities be required to get authorization
before disclosing PHR identifiable
health information. 162 Commenters
argued that Congress had not granted
the Commission the authority to define
‘‘authorization’’ in the Recovery Act,163
or that doing so would import a
substantive consent requirement that is
outside the scope of the Rule,
converting a breach notice Rule into an
opt-in privacy regime.164 Other
commenters noted that requiring a
specifically defined authorization
would create an inflexible standard that
would not evolve with changes in
technology.165 Other commenters
opposed a requirement that consumers
should be required to review terms
before agreeing to use a service,
contending that this would not increase
consumer understanding of terms.166
Some commenters endorsed other
approaches that would exempt from any
requirement of affirmative express
consent certain types of disclosures of
PHR identifiable health information,
such as to service providers, data
processors, and entities that assist with
combatting fraud and promoting
safety. 167 Some commenters urged a
disclosure be deemed authorized if the
disclosure is consistent with a
company’s privacy notices or policies or
where applicable State privacy laws
require affirmative consent or provide
for the right to opt-out, without the need
to define affirmative express consent
under the Rule.168 One commenter
argued that authorization should be met
when a consumer agrees to opt-in to
certain data sharing, such as by clicking
a box proximate to a disclosure of
material terms.169
3. The Commission Adopts the
Proposed Changes to the Definition of
‘‘Breach of Security’’
After carefully considering the public
comments, the Commission adopts the
proposed amendment without change.
The final rule definition is consistent
with the statutory definition in the
Recovery Act, the Policy Statement,170
and recent Commission enforcement
actions under the Rule. The
Commission notes the statutory
definition in the Recovery Act is
sufficiently broad to cover both
cybersecurity intrusions as well as a
company’s intentional but unauthorized
disclosures of consumers’ PHR
identifiable health information to third
party companies. In addition, the
Commission finds persuasive the
comment noting the Recovery Act’s
definition of ‘‘breach of security’’ refers
to the acquisition PHR identifiable
health information without the
authorization of an individual, rather
than the authorization of the entity
holding the data.171 The definition is
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breach of security as ‘‘acquisition of such
information without the authorization of the
individual.’’)
172 85 FR 31085 (May 22, 2020).
173 See Public Comments in response to May 2020
Request for Public Comments in connection with
regular, ten-year review of Rule: AMA at 5–6 (‘‘The
FTC should define ‘unauthorized access’ as
presumed when entities fail to disclose to
individuals how they access, use, process, and
disclose their data and for how long data are
retained. Specifically, an entity should disclose to
individuals exactly what data elements it is
collecting and the purpose for their collection’’;
‘‘[T]he FTC should define ‘unauthorized access’ as
presumed when an entity fails to disclose to an
individual the specific secondary recipients of the
individual’s data.’’); AMIA at 2 (recommending the
FTC ‘‘[e]xpand on the concept of ‘unauthorized
access’ under the definition of ‘Breach of security,’
to be presumed when a PHR or PHR related entity
fails to adequately disclose to individuals how user
data is accessed, processed, used, reused, and
disclosed.’’); OAG–CA at 5–6 (urging the FTC to
include ‘‘impermissible acquisition, access, use,
disclosure’’ under the definition of breach.). These
comments can be found at https://
www.regulations.gov/docket/FTC-2020-0045.
174 The 2009 Rule Commentary noted other
examples illustrating that unauthorized sharing or
transferring of information constitutes a breach of
security, including that the unauthorized
downloading or transfer of information by an
employee can constitute a breach of security; that
inadvertent access by an unauthorized employee
reading or sharing information triggers the Rule’s
notification obligations; and notes that given the
highly personal nature of health information, ‘‘the
Commission believes that consumers would want to
know if such information was read or shared
without authorization.’’ See 74 FR 42966–67.
175 42 U.S.C. 17921; see also U.S. Dep’t of Health
& Human Servs., Breach Notification (July 26,
2013), https://www.hhs.gov/hipaa/for-
professionals/breach-notification/index.html.
Under the Recovery Act’s definition of ‘‘breach of
security’’ for the Rule governing HIPAA-covered
entities and business associates, the statute
explicitly provides for three exceptions: (1)
unintentional acquisition, access, or use of
protected health information by a workforce
member or person acting under the authority of a
covered entity or business associate, if such
acquisition, access, or use was made in good faith
and within the scope of authority; (2) the
inadvertent disclosure of protected health
information by a person authorized to access
protected health information at a covered entity or
business associate to another person authorized to
access protected health information at the covered
entity or business associate, or organized health
care arrangement in which the covered entity
participates; and (3) if the covered entity or
business associate has a good faith belief that the
unauthorized person to whom the impermissible
disclosure was made, would not have been able to
retain the information. See 45 CFR 164.400 through
164.414. In the first two cases, the information
cannot be further used or disclosed in a manner not
permitted by the Privacy Rule. These exceptions are
not found in the provisions of the Recovery Act
authorizing the FTC’s Health Breach Notification
Rule; this makes sense, given there is no analogous
Privacy Rule, Security Rule, or required Business
Associate agreements outside the HIPAA sphere
governing entities covered by the FTC’s Health
Breach Notification Rule.
176 The Rule continues to provide that, when
there is unauthorized access to data, unauthorized
acquisition will be presumed unless the entity that
experienced the breach ‘‘has reliable evidence
showing that there has not been, or could not
reasonably have been, unauthorized acquisition of
such information.’’ As noted in the 2009 Rule
Commentary, the presumption was intended to
address the difficulty of determining whether
access to data (i.e., the opportunity to view the data)
did or did not lead to acquisition (i.e., the actual
viewing or reading of the data). In these situations,
the Commission stated that the entity that
experienced the breach is in the best position to
determine whether unauthorized acquisition has
taken place. In describing the rebuttable
presumption, the Commission provided several
examples. It noted that no breach of security has
occurred if an unauthorized employee inadvertently
accesses an individual’s PHR and logs off without
reading, using, or disclosing anything. If the
unauthorized employee read the data and/or shared
it, however, he or she ‘‘acquired’’ the information,
thus triggering the notification obligation in the
Rule. Similarly, the Commission provided an
example of a lost laptop: If an entity’s employee
loses a laptop in a public place, the information
would be accessible to unauthorized persons, giving
rise to a presumption that unauthorized acquisition
has occurred. The entity can rebut this presumption
by showing, for example, that the laptop was
recovered, and that forensic analysis revealed that
files were never opened, altered, transferred, or
otherwise compromised. See 74 FR 42966.
177 The 2009 Rule Commentary states: ‘‘[g]iven
the highly personal nature of health information,
the Commission believes that consumers would
want to know if such information was read or
shared without authorization.’’ It further states that
data sharing to enhance consumers’ experience
with a PHR is authorized only ‘‘as long as such use
is consistent with the entity’s disclosures and
individuals’ reasonable expectations’’ and that
‘‘[b]eyond such uses, the Commission expects that
vendors of personal health records and PHR related
entities would limit the sharing of consumers’
information, unless the consumers exercise
meaningful choice in consenting to such sharing.
Buried disclosures in lengthy privacy policies do
not satisfy the standard of ‘meaningful choice.’ ’’ 74
FR 42967.
178 TechNet at 4; Tranquil Data at 4.
also consistent with public comments
received by the Commission in 2020
(when the Commission announced its
regular, ten-year review of the Rule and
requested public comments about
potential Rule changes 172), which urged
the Commission to clarify what
constitutes an unauthorized acquisition
under the Rule. 173 Importantly, the
amendment to the definition of ‘‘breach
of security’’ in § 318.2 does not depart
from the 2009 Rule Commentary or the
Commission’s enforcement policy under
the Rule. Instead, it further underscores
the 2009 Rule Commentary and
subsequent Commission enforcement
actions that unauthorized disclosures
(i.e., sharing inconsistent with
consumer expectations) can be a
‘‘breach of security’’ that triggers the
Rule.174
The Commission declines to adopt
any specific exemptions or safe harbors
to the definition of breach of security.
Unlike the section of the Recovery Act
that governs breach notifications under
HIPAA, 175 Congress did not provide for
any specific, enumerated exemptions for
breaches under the Commission’s Rule.
Moreover, the Commission’s Rule
provides for a rebuttable presumption
for certain types of access: when there
is unauthorized access to data,
unauthorized acquisition will be
presumed unless the entity that
experienced the breach ‘‘has reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information.’’ That is, companies can
rebut the presumption of acquisition in
instances of unauthorized access by
providing reliable evidence disproving
acquisition. The Commission has
previously offered guidance on what
counts as unauthorized access and
reiterates that guidance here.176
4. The Commission Affirms Its Proposal
Not To Define ‘‘Authorization’’
After carefully considering the public
comments, the Commission declines to
define ‘‘authorization,’’ as that term
appears in § 318.2’s definition of
‘‘breach of security.’’ The Commission
finds persuasive the public comments
suggesting that imposing an affirmative
express consent requirement would not
be appropriate or warranted in all cases.
The Commission believes whether a
disclosure is authorized under the Rule
is a fact-specific inquiry that will
depend on the context of the
interactions between the consumer and
the company; the nature, recipients, and
purposes of those disclosures; the
company’s representations to
consumers; and other applicable laws.
The Commission reiterates the 2009
Rule Commentary, which states a use of
data is ‘‘authorized’’ only where it is
consistent with a company’s disclosures
and consumers’ reasonable expectations
and where there is meaningful choice in
consenting to sharing—buried
disclosures do not suffice.177
The Commission’s recent enforcement
actions alleging violations of the Rule
against GoodRx and Easy Healthcare
further highlight that disclosures of PHR
identifiable health information
inconsistent with a company’s privacy
promises constitute an unauthorized
disclosure. These recent Commission
orders also make clear that the use of
‘‘dark patterns,’’ which have the effect
of manipulating or deceiving
consumers, including through use of
user interfaces designed with the
substantial effect of subverting or
impairing user autonomy and decision-
making, undercut an entity’s assertion
that consumers exercised ‘‘meaningful
choice.’’
In response to public comments
seeking more guidance on what
constitutes an unauthorized disclosure
under the Rule, 178 the Commission
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47042 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
179 This would include an analytics provider
whose services are essential to the proper
functioning of the app and not tied to marketing or
advertising—this includes analytics tools to assist
with crash reporting or to assess usage patterns
(such as the frequency of use of certain features).
180 Fed. Trade Comm’n et al. v. Vizio, Inc. et al.,
No. 17–cv–00758 (D.N.J. 2017), https://www.ftc.gov/
legal-library/browse/cases-proceedings/162-3024-
vizio-inc-vizio-inscape-services-llc.
181 For example, Washington State’s My Health,
My Data Act permits sharing consumer health data
to the ‘‘extent necessary to provide a product or
service that the consumer to whom such consumer
health data relates has requested from such
regulated entity or small business.’’ See Revised
Code of Washington (RCW) 19.373.030 (1)(b)(ii).
offers the following, non-exhaustive
examples relating to authorization:
• Example 1—Unauthorized
Disclosure (Affirmative
Misrepresentation): A medication app
offers a personal health record (not
covered by HIPAA) which allows users
to track information about their
prescription medication history, such as
prescription names, dosages, pharmacy
and refill information, and the user’s
health conditions. The app voluntarily
discloses PHR identifiable health
information to third party companies for
advertising and advertising-related
analytics, in violation of the app’s
privacy representations to its users. The
third parties that receive the PHR
identifiable health information are able
to use the information for their own
business purposes, such as to improve
the third party’s own products and
services, to infer information about
consumers, or to compile profiles about
consumers to use for targeted
advertising. These disclosures are not
authorized under the Rule because they
are inconsistent with consumer
expectations—the disclosures violate
the app’s privacy representations, and
consumers would also not expect their
PHR identifiable health information
(which they input into the app to track
their medications and health
conditions) would be disclosed to, and
used by, third party companies that use
the data for their own economic benefit.
• By contrast, disclosures of PHR
identifiable health information by the
app in Example 1 would be authorized
if made to service providers in the
following circumstances: (1) the service
providers assist with functions that are
necessary to the operation and
functioning of the medication app, or
with services the consumer requested;
(2) the service providers are
contractually prohibited from using,
sharing, or disclosing the PHR
identifiable health information for any
purpose beyond providing services to
the medication app; and (3) the
medication app’s privacy notice clearly
and conspicuously discloses the specific
purposes for which it shares users’ PHR
identifiable health information with
these service providers. Such authorized
disclosures could include those to cloud
storage providers that host user data in
the health record in a secure fashion;
payment processors who process user
payments to the app; vendors that
facilitate refill reminders or other
communications from the app developer
that directly relate to the provision of
the personal health record or services
the consumer requested; analytics
providers that assist with tracking
analytics relating to the app’s
functionality; 179 or companies that help
to detect, prevent, or mitigate fraud or
security vulnerabilities. Such
disclosures are authorized because they
are consistent with consumer
expectations. Importantly, this sharing
is disclosed to consumers in a clear and
conspicuous manner, and is essential,
and limited to, sharing the PHR
identifiable health information with
service providers solely to provide users
with a safe and reliable personal health
record experience.
• Example 2—Unauthorized
Disclosure (Deceptive Omission). The
medication app from Example 1 shares
PHR identifiable health information
with a third party for purposes of
targeting consumers with ads. The app
does not disclose the sharing and also
fails to obtain affirmative express
consent from users whose information it
shares. The third party company can use
the PHR identifiable health information
to market and advertise—on behalf of
the medication app, on behalf of other
companies, or on behalf of itself. It can
also use the information to improve its
own products and services. Such
disclosures are not authorized because
they are not consistent with consumer
expectations (i.e., without disclosure
and without affirmative express
consent, consumers would not expect
that their PHR identifiable health
information would be shared, sold, or
otherwise exploited for a purpose other
than providing the user with a personal
health record, and are neither essential
nor limited to sharing the PHR
identifiable health information solely to
provide users with a safe and reliable
personal health record experience). This
conclusion is also consistent with
Commission enforcement actions
relating to the sharing of health
information (e.g., GoodRx and Easy
Healthcare), and those relating to the
sharing of other types of sensitive
information. 180
• Example 3—Authorized Disclosure
(Public Health Reporting): A COVID–19
contact tracing app not covered by
HIPAA allows users to self-report their
COVID–19 diagnosis, and to notify the
user’s contacts of their diagnosis, or
others with whom the individual may
have come into physical contact. PHR
identifiable health information about
the individual’s COVID–19 diagnosis is
transmitted to public health authorities
for public health-related purposes, such
as public health reporting and analysis
or to track areas where the virus is
spreading the most rapidly. The contact
tracing app discloses to users clearly
and conspicuously the specific purposes
for which it shares their PHR
identifiable health information with
public health authorities. These
disclosures are authorized, and
consistent with consumer expectations,
because they are consistent with the
company’s relationship with the
consumer (a PHR that allows a user to
report their COVID–19 diagnosis in
order to notify others) and are also
appropriately disclosed.
Examples 1 and 3 provide guidance
about scenarios in which limited
disclosures of PHR identifiable health
information are permitted without opt-
in consent because it is necessary to
provide a personal health record to a
consumer, is consistent with consumer
expectations, the sharing is disclosed to
consumers, and (in the case of Example
1) the sharing is subject to protections
like service provider agreements that
limit the use of the data only for the
purpose of providing that service to the
consumer. Examples 1 and 3 are also
consistent with HIPAA and State health
privacy laws.181 For instance, HIPAA
permits disclosures for treatment,
payment, and operations without
patient authorization.
The Commission notes ‘‘breach of
security’’ could cover more than just an
unauthorized disclosure to a third party.
For example, depending on the facts
and scope of the authorizations, such as
in the company’s promises and
disclosures to consumers, a ‘‘breach of
security’’ could include unauthorized
uses. There may be a ‘‘breach of
security’’ where an entity exceeds
authorized access to use PHR
identifiable health information, such as
where it obtains the data for one
legitimate purpose, but later uses that
data for a secondary purpose that was
not originally authorized by the
individual.
Finally, the Commission notes
unauthorized access or use of derived
PHR identifiable health information
may also constitute a breach of security.
The Commission noted in its 2023
NPRM that PHR identifiable health
information includes ‘‘health
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47043	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
182 88 FR 37823.
183 The proposed definition stated that a PHR
related entity is an entity, other than a HIPAA-
covered entity or an entity to the extent that it
engages in activities as a business associate of a
HIPAA-covered entity, that (1) offers products or
services through the website, including any online
service, of a vendor of personal health records; (2)
offers products or services through the websites,
including any online services, of HIPAA-covered
entities that offer individuals personal health
records; or (3) accesses unsecured PHR identifiable
health information in a personal health record or
sends unsecured PHR identifiable health
information to a personal health record. Although
the Rule is only triggered when there is a breach
of security involving unsecured PHR identifiable
health information, the Commission explained it
believed there is a benefit to revising the third
prong of PHR related entity to make clear that only
entities that access or send unsecured PHR
identifiable health information to a personal health
record—rather than entities that access or send any
information to a personal health record—are PHR
related entities. Otherwise, many entities could be
a PHR related entity under the definition’s third
prong and such entities would then, in the event
of a breach, need to analyze whether they
experienced a reportable breach under the Rule. If
an entity, per the proposed revision, does not
qualify as a PHR related entity in the first place,
there would be no need to consider whether it
experienced a reportable breach. 88 FR 37825 n.54.
184 The Commission explained, for example, the
maker of a wearable fitness tracker may be both a
vendor of personal health records (to the extent that
its tracker interfaces with its own app, which also
accepts consumer inputs) and a PHR related entity
(to the extent that it sends information to another
company’s health app). The Commission noted that
regardless of whether the maker of the fitness
tracker is a vendor of personal health records or a
PHR related entity, its notice obligations are the
same: it must notify individuals, the FTC, and in
some case, the media, of a breach. 16 CFR 318.3(a),
318.5(b). 88 FR 37825 n.55.
185 ANI at 1; AAFP at 3; AHIMA at 3; AHIOS at
4; AOA at 3; CARIN Alliance at 3; CDT at 12;
CHIME at 3; Confidentiality Coal. at 6; Consumer
Rep.’s at 6; CHI at 5; DirectTrust at 4; EFF at 2; EPIC
at 7.
186 NAI at 4–5.
187 Id. at 5.
188 Id. at 4.
information derived from consumers’
interactions with apps and other online
services (such as health information
generated from tracking technologies
employed on websites or mobile
applications or from customized records
of website or mobile application
interactions), as well as emergent health
data (such as health information
inferred from non-health-related data
points, such as location and recent
purchases).’’ 182
D. Clarification of What Constitutes a
‘‘PHR Related Entity’’
1. The Commission’s Proposal
Regarding ‘‘PHR Related Entity’’
The NPRM proposed to revise the
definition of ‘‘PHR related entity’’ in
two ways. Consistent with its
clarification that the Rule applies to
health apps, the Commission proposed
amending the definition of ‘‘PHR related
entity’’ to make clear the Rule covers
entities that offer products and services
through the online services, including
mobile applications, of vendors of
personal health records. In addition, the
Commission proposed revising the
definition of ‘‘PHR related entity’’ to
provide that entities that access or send
unsecured PHR identifiable health
information to a personal health
record—rather than entities that access
or send any information to a personal
health record—are PHR related entities.
The Commission explained the first
change (to cover online services) was
necessary as websites are no longer the
only means through which consumers
access health information online. The
Commission explained the second
change—narrowing the scope of ‘‘PHR
related entities’’ to entities that access or
send unsecured PHR identifiable health
information—was intended to eliminate
potential confusion about the Rule’s
breadth and promote compliance by
narrowing the scope of entities that
qualify as PHR related entities.183 The
Commission identified remote blood
pressure cuffs, connected blood glucose
monitors, and fitness trackers as
examples of internet-connected devices
that could qualify as a PHR related
entity when individuals sync them with
a personal health record (e.g., a health
app). 184 The Commission explained,
however, that a grocery delivery service
that sends information about food
purchases to a diet and fitness app
would not be a PHR related entity if it
does not access unsecured PHR
identifiable health information in a
personal health record or send
unsecured PHR identifiable health
information to a personal health record.
The proposed Rule also revised
§ 318.3(b) by adding language
establishing that a third party service
provider is not rendered a PHR related
entity when it accesses unsecured PHR
identifiable health information in the
course of providing services. The
Commission explained it did not intend
for any entity (such as a firm performing
attribution and analytics services for a
health app) to be considered both a PHR
related entity (to the extent it accesses
unsecured PHR identifiable health
information in a personal health record)
and a third party service provider,
which could create competing notice
obligations and confuse consumers with
notice from an unfamiliar company. The
Commission explained it considers such
firms to be third party service providers
that must notify the health app
developers for whom they provide
services, who in turn would notify
affected individuals.
The Commission explained that
distinguishing between third party
service providers and PHR related
entities would create incentives for
responsible data stewardship and for de-
identification because a firm would only
become an entity covered by the Rule in
relation to unsecured PHR identifiable
health information. To the extent that
firms must deal with unsecured PHR
identifiable health information, PHR
vendors would have incentives to select
and retain service providers capable of
treating data responsibly (e.g., by not
engaging in any onward disclosures of
data that could result in a reportable
breach) and incentives to oversee their
service providers to ensure ongoing
responsible data stewardship (which
would avoid a breach).
The Commission observed in most
cases, third party service providers are
likely to be non-consumer facing. The
Commission noted examples of PHR
related entities would include, as noted
above, makers of fitness trackers and
health monitors when consumers sync
their devices with a mobile health app.
The Commission noted further
examples of third party service
providers would include entities that
provide support or administrative
functions to vendors of personal health
records and PHR related entities.
2. Public Comments Regarding ‘‘PHR
Related Entity’’
The Commission received numerous
public comments about the changes to
the definition of PHR related entity.
Most commenters supported the
Commission’s approach.185 One
commenter, an industry association for
advertisers, noted that addition of the
term ‘‘unsecured’’ in the definition of
‘‘PHR related entity’’ created a
limitation on the definition’s scope that
counterbalances the breadth of
including ‘‘any online service’’ in the
definition. 186 Moreover, this commenter
noted, the addition of ‘‘unsecured’’
creates appropriate incentives for firms
to secure PHR identifiable health
information and to choose partners who
will be good data stewards.187 This
commenter noted that limiting the
definition to ‘‘unsecured’’ PHR
identifiable health information was
consistent with the original intent of the
Rule, to cover only the most sensitive
types of data not covered by HIPAA.188
A few commenters proposed changes
to the definition of ‘‘third party service
provider’’ to further distinguish the term
from ‘‘PHR related entity.’’ One
commenter recommended defining
‘‘third party service provider’’ as an
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47044 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
189 FPF at 10.
190 Id.
191 AdvaMed at 8.
192 SIIA at 3; CARIN Alliance at 4.
193 AHIMA at 3–4; AMIA at 3–4; CHI at 5; Direct
Trust at 1; Light Collective at 4–5.
194 SCRS at 1.
195 NAI at 5.
196 MRO at 3.
197 AdvaMed at 5.
198 NAI at 5; TMA at 3; Consumer Rep.’s at 11.
199 CCIA at 7–8; CTA at 9–10; SIIA at 3; Direct
Trust at 5.
200 CTA at 13.
201 Compl. at ¶ 21, In the Matter of Flo Health,
Inc., FTC File No. 1923133 (Jan. 13, 2021), https://
www.ftc.gov/legal-library/browse/cases-
proceedings/192-3133-flo-health-inc; Compl. at
¶ 14(d), In the Matter of UPromise, Inc., FTC File
No. 1023116 (Mar. 27, 2012), https://www.ftc.gov/
legal-library/browse/cases-proceedings/102-3116-c-
4351-upromise-inc; Cf. Compl. at ¶ 40, U.S. v. Easy
Healthcare Corporation, No. 1:23–cv–3107 (N.D. Ill.
2023), https://www.ftc.gov/legal-library/browse/
cases-proceedings/202-3186-easy-healthcare-
corporation-us-v (alleging that the defendant’s
disclosures of consumers’ health information
violated the policies of platforms to which it had
agreed).
entity that only processes data.189 This
commenter argued the Commission
could then impose liability on service
providers for further use, sale,
disclosure for incompatible purposes.190
Another commenter recommended
aligning the definition of ‘‘third party
service provider’’ with the definition of
‘‘business associate’’ under HIPAA.191
Some commenters raised concerns
that the Commission’s approach did not
provide sufficient clarity for companies
trying to understand their obligations as
either a third party service provider or
PHR related entity.192 Some
commenters requested more examples
of types of firms falling within each
definition (e.g., examples clearly
establishing the status of health data
brokers, health marketing firms, search
engines, email providers, cloud storage
providers) 193 —to facilitate
compliance,194 avoid overlapping notice
requirements 195 and to prevent a
loophole through which firms may
attempt to avoid obtaining consumers’
authorization for data disclosures and to
avoid providing breach notifications.196
One commenter urged the Commission
to exempt from the definition of ‘‘PHR
related entity’’ any firm that complies
with the privacy and data security
requirements of HIPAA. 197
In response to the Commission’s
request for comment on whether an
analytics firm would be a third party
service provider, many commenters
responded that an analytics firm should
fall within that definition 198 for the
reasons the Commission articulated: It
would be confusing to consumers to
receive a notice from a back-end service
provider rather than the firm with
whom the consumer has the
relationship, and categorizing analytics
firms (and firms that provide other
services) as service providers will create
incentives for PHR vendors and PHR
related entities to choose their service
providers with care. A few commenters,
however, expressed concern about
covering advertising, analytics, and
cloud firms—and health information
service providers (‘‘HISPs’’) more
generally—as they are unable to
determine whether the data they receive
contains unsecured PHR identifiable
health information; only the vendor of
the PHR knows what their data
transmissions contain. 199 One
commenter urged the Commission to
address the data recipient’s
unawareness of the content of the data
by creating a safe harbor that exempts
advertising, analytics and cloud
providers that contractually limit their
customers, vendors, or partners from
sharing health information with
them. 200
3. The Commission Adopts the
Proposed Changes to ‘‘PHR Related
Entity’’
After considering the comments
received, the Commission adopts the
proposed changes regarding ‘‘PHR
related entity’’ without further change.
The Commission affirms that (1) PHR
related entities include entities offering
products and services not only through
the websites of vendors of personal
health records, but also through any
online service, including mobile
applications; (2) PHR related entities
encompass only entities that access or
send unsecured PHR identifiable health
information to a personal health record;
and (3) while some third party service
providers may access unsecured PHR
identifiable health information in the
course of providing services, this does
not render the third party service
provider a PHR related entity.
In response to commenters who
expressed concern that certain data
recipients will not be able to understand
their obligations under the Rule because
they are unaware of the content of the
data transmissions they receive, the
Commission highlights § 318.3(b),
which states: ‘‘For purposes of ensuring
implementation of this requirement,
vendors of personal health records and
PHR related entities shall notify third
party service providers of their status as
vendors of personal health records or
PHR related entities subject to this
Part.’’ This requirement puts data
recipients on notice about the potential
content of the data transmissions they
receive.
Firms may also facilitate compliance
by stipulating by contract whether
transmissions of data will contain
unsecured PHR identifiable health
information. Both the sender and
recipient of the data can monitor for
compliance with those contractual
agreements through the use of
automated tools, internal auditing,
external auditing, or other mechanisms,
as appropriate to the size and
sophistication of the firms and the
sensitivity of the data. For example, a
large advertising platform that has
routinely received unsecured PHR
identifiable health information,
notwithstanding partners’ promises not
to send this information, may have
different obligations to monitor the data
it receives than small firms that do not
engage in high-risk activities where the
contract precludes sending such data
and there is no history of such
transmissions.
The Commission believes this
approach—notice to service providers
pursuant to § 318.3(b) coupled with
contracts and oversight—is more
appropriate than creating a safe harbor
in the Rule that exempts firms that enter
into contracts, as there is evidence from
FTC cases that firms do not always
abide by contractual obligations to
safeguard data.201
The Commission declines to change
the definition of ‘‘third party service
provider’’ to distinguish it further from
a ‘‘PHR related entity,’’ for two reasons.
First, the Commission notes the current
definitions of ‘‘third party service
provider’’ and ‘‘PHR related entity’’
align closely with the language
prescribed by section 13407 and section
13424(b)(1)(A) of the Recovery Act.
Jettisoning the current language entirely,
as some commenters suggested, would
not be consistent with the Recovery
Act’s requirements. Second, the
Commission believes the current
language, in conjunction with the
examples provided below, will provide
sufficient guidance to the market as to
which types of firms fit within each
definition.
In response to comments that
requested examples of the types of firms
that fall into the category of ‘‘third party
service provider’’ or ‘‘PHR related
entity,’’ the Commission provides the
following examples. The Commission
believes these examples, in conjunction
with the language in § 318.3(b), will
provide sufficient clarity about the
obligations of third party service
providers and PHR related entities to
promote compliance, avoid overlapping
notice, and prevent loopholes.
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47045	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
202 This model notice was attached as appendix
A to the NPRM. 88 FR 37837.
203 AHIP at 5; AAFP at 3; AHIMA at 5; AHIOS
at 3; Anonymous 3 at 1; Anonymous 10 at 1; Beth
Barnett; CARIN Alliance at 7; CHI at 5–6; CHIME
at 4; Consumer Reports at 8–9; CTA at 21; EPIC at
10; HIMSS at 4; George Mathew at 1; MRO at 3; NAI
at 7; Dharini Padmanabhan at 1; Nancy Piwowar at
1. One commenter also stated while there are clear
advantages to allowing increased use of electronic
notification of data breaches, this notification
method could also increase the likelihood that
breaches escape public scrutiny. Identity Theft Res.
Ctr. (‘‘ITRC’’) at 2.
204 AdvaMed at 5.
205 AAFP at 3; AHIMA at 5; Anonymous 3 at 1;
CARIN Alliance at 7; CHIME at 4; CCIA at 7; EPIC
at 10; NAI at 7.
206 ACLA at 5; Mass. Health Data Forum
(‘‘MHDF’’) at 9.
207 Consumer Rep.’s at 7–8; CTA at 22. Consumer
Reports further suggested the Commission clarify
that substitute notice may be effectuated under the
Rule via text message, in-app messaging, or
electronic banners for consumers that do not wish
to share a mailing or email address. Consumer
Rep.’s at 8.
• Example 1: Four separate firms
provide data security, cloud computing,
advertising and analytics services to a
health app (a personal health record), as
specified by their service provider
contracts, for the health app vendor’s
benefit. To perform the services
specified in their respective contracts,
the firms access unsecured PHR
identifiable health information. The
firms are ‘‘third party service providers’’
of the vendor of the personal health
record (the maker of the health app)
because they provide services to a
vendor of a personal health record (the
maker of the health app) in connection
with the offering or maintenance of the
app, and they access unsecured PHR
identifiable health information as a
result of these services. In the event of
a breach, they should abide by their
obligations as third party service
providers.
• Example 2: An analytics firm
provides analytics services to a health
app (a personal health record). The
analytics firm and health app vendor do
not have a customized service provider
contract, although the health app
vendor agrees to the analytics firm’s
standard terms of service. The analytics
firm accesses unsecured PHR
identifiable health information (device
identifier and whether the consumer has
paid for therapy). The analytics firm
uses that data both to provide analytics
services to the health app and for its
own benefit, for research and
development and product improvement.
The analytics firm is a third party
service provider to the extent that it
provides analytics services to the health
app for the health app’s benefit because
it is then providing services to a vendor
of a PHR in connection with the offering
of the PHR and accessing unsecured
PHR identifiable health information as a
result of such services. However, the
analytics firm is a PHR related entity,
rather than a third party service
provider, to the extent that it offers its
services through the health app for its
own purposes (i.e., for research and
development and product improvement)
rather than to provide the services. In
the event of a breach, the analytics firm
must fulfill its notification obligations
under the Rule according to which
function it was performing in
connection with the breach. If the
functions are indistinguishable, then,
pursuant to § 318.3(b), the Commission
will consider the firm a third party
service provider for policy reasons: a
firm that functions, at least in part, as
a service provider may not be consumer-
facing, such that the consumer may be
surprised by a breach notification from
that entity. As a policy matter, it is
better for the consumer to receive notice
from the health app with whom the
consumer directly interacts.
• Example 3: A health tracking
website (a personal health record)
integrates a search bar branded with its
maker’s logo, which enables its maker (a
search engine firm) to offer its services
through the website. The search engine
firm is a PHR related entity because it
offers its services through the website,
which is a personal health record. The
search bar branded with its maker’s logo
is consumer-facing, so the consumer
would not be surprised to receive a
notice from that company if it
experiences a reportable breach. By
contrast, if the health tracking website
had contracted with the search engine
firm to provide back-end search services
to the website (rather than offering its
own branded product or service through
the website), and the search engine firm
had accessed unsecured PHR
identifiable health information as a
result of such services, it would be a
third party service provider. In the event
of a breach, it should abide by its
obligations as a third party service
provider.
• Example 4: Digital readings from a
fitness tracker offered by Company A
can be integrated into a sleep app
offered by Company B (in which the
consumer may input other health
information). Company A is a PHR
related entity to the extent that it offers
its fitness tracker product through an
online service (Company B’s sleep app),
and to the extent that it sends unsecured
PHR identifiable health information
(fitness tracker readings) to a personal
health record (the sleep app).
E. Facilitating Greater Opportunity for
Electronic Notice
1. The Commission’s Proposal
Regarding Electronic Notice
The Commission proposed to
authorize expanded use of email and
other electronic means of providing
clear and effective notice of a breach to
consumers. In furtherance of this
objective, the Commission proposed to
update § 318.5 to specify that vendors of
personal health records or PHR related
entities that discover a breach of
security must provide written notice at
the last known contact information of
the individual. Such written notice may
be sent by electronic mail, if an
individual has specified electronic mail
as the primary contact method, or by
first-class mail. The Commission
proposed defining ‘‘electronic mail’’ in
§ 318.2 to mean email in combination
with one or more of the following: text
message, within-application messaging,
or electronic banner. The Commission
further specified that any notification
delivered via electronic mail should be
clear and conspicuous, and the
proposed Rule defined ‘‘clear and
conspicuous.’’ To assist entities that are
required to provide notice to
individuals under the Rule, the
Commission developed a model notice
for entities to use to notify
individuals.202
2. Public Comments Regarding
Electronic Notice
Nearly every comment submitted on
this proposed change supported the
Commission’s efforts to update the Rule
to allow for greater electronic notice.203
One commenter noted electronic notices
increase the likelihood that individuals
will receive the notice, may reduce the
time it takes for individuals to receive
notice, and reduce the burden on
entities providing notice. 204 Many
commenters also supported the
Commission’s efforts to provide notice
via more than one channel through the
new definition of ‘‘electronic mail.’’ 205
However, not all commenters agreed
with the Commission’s proposal and
some commenters offered other
suggestions. Some objected to defining
‘‘electronic mail’’ to mean anything
more than ‘‘email,’’ stating that
electronic mail is commonly understood
to mean email and nothing else.206 A
few commenters noted that defining
multiple forms of electronic notice
could result in entities collecting more
information than necessary (and
consumers having to provide more
information than needed) in order to
comply with the Rule.207 Others
preferred a single notice, arguing that
multiple forms of notice is burdensome
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208 AdvaMed at 6; ACLA at 5; AHIP at 5; CTA at
21–22;
209 AdvaMed at 6.
210 AHIMA at 5.
211 TechNet at 5.
212 MHDF at 10.
213 Id.
214 AHIP at 5.
215 CHI at 6.
216 AMA at 5; CHIME at 5; EPIC at 9.
217 TMA at 4.
218 NAI at 7.
219 AdvaMed at 6; AHIP at 6; AMA at 6; CCIA at
7; CHI at 6; Consumer Rep.’s at 8–9; NAI at 7–8.
One commenter stated that making the model
notice mandatory can lead to industry consistency
and it may be easier for consumers to understand
the message and the contents if they are familiar
with a uniform, standardized notice. AHIMA at 5.
While the Commission generally agrees that
uniform, consistent notices assist with consumer
comprehension, the Commission declines to make
the model notice compulsory because the facts and
circumstances of each breach will vary. Plus,
§ 318.6 sets forth certain required elements of the
content of the notice, so the presence of these
elements in all breach notices achieves some degree
of consistency across notices.
220 AHIP at 6.
221 The Commission disagrees with the
commenters who urged the Commission to avoid
defining ‘‘electronic mail’’ to mean anything more
than ‘‘email.’’ ACLA at 5; MHDF at 9. The
definition in § 318.2 is clear and unambiguous.
Plus, section 13402(e)(1) of the Recovery Act
requires that notification be provided via ‘‘written
notification by first-class mail’’ or ‘‘electronic
mail.’’ Accordingly, the Commission must use
‘‘electronic mail.’’
222 AAFP at 3–4 (noting AAFP appreciates ‘‘the
proposed structure of providing notice in two
different electronic formats to increase the
likelihood individuals will see them’’); CHIME at 5
(‘‘CHIME is supportive of the FTC’s approach to
revise the ‘‘method of notice section’’ and to
structure the breach notification in two parts in
order to increase the likelihood that consumers
encounter the notice.’’); EPIC at 10 (‘‘By requiring
email and an in-app or website notice option, the
expanded definition enables entities to have the
best chance at notifying consumers regardless of
whether they reliably check their email or continue
to use the entity’s app or website.’’). The
Commission also disagrees with the commenter
who recommended that the Commission abandon
the two-part notice and create a new definition of
‘‘electronic mail’’ where, for example, only a
website notice alone would satisfy the notice
requirement if such a notice was ‘‘reasonable and
appropriate.’’ AdvaMed at 6. The Commission
disagrees with this approach and declines to adopt
it.
223 See supra notes 210–213.
and could result in over-notification,
confusion, and notice fatigue among
consumers. 208 One commenter stated
the Commission should revise the
definition of ‘‘electronic mail’’ to mean
‘‘one or more of the following that is
reasonable and appropriate based on the
relationship between the individual and
the relevant vendor of personal health
records or PHR related entity: email,
text message, within-application
messaging, or electronic banner.’’ 209
Another commenter encouraged the
FTC to clarify the in-app messaging
method must include push notifications
in the event of a breach so consumers
are made aware of a breach as soon as
possible.210 One commenter urged the
Commission to specify in § 318.5(i) that
a banner notice in the affected app or a
website home page notice must be
posted for a period of 90 days.211
Another commenter noted that the
different mechanisms listed in the
proposed rule are not equivalent—this
commenter noted that some are push
notifications that a consumer is likely to
see without directly interacting with the
application, website, or device and
some require consumer interaction with
the application, website, or device in
order to see the notification.212 This
commenter recommended that the
requirement be selection of one push
notification but that additional options
like in-app notifications and website
banners be supported as additional,
secondary notice options.213 One
commenter stated the FTC may want to
consider adding a provision allowing an
individual to request a copy of the
notice in other accessible formats, such
as for hearing- or vision-impaired
people, or in a non-English language.214
Another commenter argued the
Commission should take into
consideration TCPA and CAN–SPAM
compliance regarding the delivery of
electronic notification. Another
commenter stated the Commission’s
proposal to require two contact methods
imposes a higher requirement than
HIPAA and State breach notification
laws. 215
Many commenters endorsed the
Commission’s proposal that any
notification delivered via electronic
mail should be ‘‘clear and
conspicuous,’’ a newly defined term in
the Rule.216 One commenter stated that
consistent with FTC’s desire for entities
to provide a clear and conspicuous
notice, the Commission should consider
requiring an email subject line that
starts with ‘‘Breach of Your Health
Information’’ so that attention is
appropriately drawn to the importance
of the message content. 217 One
commenter disagreed with the new
definition, arguing that the definition is
unnecessary and confusing, and urged
the Commission to insert the ‘‘clear and
conspicuous’’ definition directly into
§ 318.5 of the Rule. 218
Regarding the model notice, nearly all
who commented on this topic urged the
Commission to make the model notice
voluntary.219 One commenter suggested
that using the model should be a safe
harbor that shields entities from
enforcement.220
3. The Commission Adopts the
Proposed Changes Regarding Electronic
Notice
The Commission adopts without
change the modifications regarding
§ 318.5 involving electronic notice and
adopts without change the definition of
‘‘electronic mail’’ in § 318.2. The
Commission declines to make the other
changes commenters requested. First,
the Commission believes it is critical,
especially given how consumers are
accessing information today, to
modernize the methods of notice to
facilitate greater opportunities for
electronic notice. The Commission
believes the changes to § 318.5 and the
new definition of ‘‘electronic mail’’ 221
in § 318.2 accomplish this objective.
In response to concerns raised about
the two-part electronic notice, the
Commission agrees with commenters
who stated it increases the likelihood
that individuals will encounter such
notices.222 The Commission does not
agree that it is burdensome for entities
to comply with this requirement. For
example, an entity who complies with
the notice requirement by notifying
consumers via email plus posting a
website notice likely would not need to
expend significant additional time and
resources by issuing the second part of
the notice (i.e., the website notice), and
any ‘‘cost’’ of posting such a notice is
outweighed by the benefit to consumers
of learning of a breach involving their
health information. The Commission
also is not persuaded that consumers
who, for example, receive an email
about a breach coupled with an in-app
notice about the same breach will be
confused. The Commission believes
consumers will understand that such
notices relate to the same incident,
especially given the Rule’s requirement
that the notices be ‘‘clear and
conspicuous.’’ The Commission also
does not find it problematic that the
Rule requires notice effectuated via
‘‘electronic mail’’ to occur via two
methods while other breach notice laws
require one method. The Commission
also notes while these amendments are
intended to facilitate greater electronic
notice, the Rule still permits notice via
first-class mail. Accordingly, the
contention that this Rule requires two
methods of electronic notice is
incorrect.
The Commission also declines, in
response to public comments,223 to
mandate how notifications are
effectuated when sent via ‘‘electronic
mail,’’ as the Commission believes it is
important to not be overly prescriptive
given rapidly changing technologies.
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47047	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
224 CARIN Alliance at 6; EPIC at 10.
225 See supra note 214.
226 74 FR 42972.
227 AMA at 5.
228 See supra note 217.
229 The model notice is found in appendix A.
230 88 FR 37827.
231 AAFP at 4; AMA at 6; AOA at 5; Anonymous
3; AHIOS at 3; CARIN Alliance at 7–8; CHIME at
3, 6; Consumer Reports at 9–10; EFF at 2; EPIC at
10–11; HIMSS at 3–4; ITRC at 2; Members of the
House of Representatives at 1–2; Dharini
Padmanabhan at 1.
232 AMA at 6.
233 Consumer Rep.’s at 9–10; EPIC at 10–11.
234 MHDF at 10–11.
235 Id.
236 AdvaMed at 6–7; AHIP at 6; ACLA at 4–5;
Confidentiality Coal. at 7; CTA at 23–24; MHDF at
10; NAI at 9.
The Commission emphasizes though, as
described below, that the notice must
satisfy the Rule’s definition of ‘‘clear
and conspicuous.’’
Nor does the Commission believe, as
some commenters argued, the two-part
electronic notification will result in
additional collections of information by
notifying entities. The Commission
agrees with commenters who stated
entities are generally already collecting
the information needed for notice via
‘‘electronic mail’’ and a data
minimization issue does not exist.224
In response to the commenter who
suggested the FTC consider adding a
provision allowing an individual to
request a copy of the notice in other
accessible formats, such as for hearing-
or vision-impaired people, or in non-
English languages,225 the Commission
previously addressed a similar comment
in the 2009 Rule Commentary. There,
the Commission noted that section
13402(e)(l) of the Recovery Act requires
that notification be provided via
‘‘written notification by first-class mail’’
or ‘‘electronic mail.’’ The Commission
emphasized then, as we do today, that
the Rule does not preclude notifications
in accessible formats. The Commission
supports their use in appropriate
circumstances, in addition to the forms
of notice prescribed by the Rule.226
The Commission also adopts without
modification the definition of ‘‘clear and
conspicuous.’’ The Commission agrees
with the commenter who indicated it is
imperative that a breach notice be
reasonably understandable and call
attention to the significance of the
information that is included in the
notice. 227 The Commission believes its
definition of ‘‘clear and conspicuous’’
will assist in achieving this objective.
The Commission declines, however, to
mandate specific language for the email
subject line to satisfy the Rule’s ‘‘clear
and conspicuous’’ requirement, as one
commenter had suggested.228 The
Commission emphasizes, however, that
the clear and conspicuous requirement
would require a notifying entity to use
an email subject line that draws the
reader’s attention to the email notice.
The Commission also declines to adopt
the suggestion that the definition of
‘‘clear and conspicuous’’ be
incorporated directly into § 318.5. The
Commission believes the entities
seeking information on what ‘‘clear and
conspicuous’’ means will find it clearer
to consult the definition in § 318.2.
Turning to the model notice,229 as the
Commission noted in the NPRM, the
model was intended for entities to use,
in their discretion, to notify individuals,
and the Commission adopts the same
position here.230 The model is voluntary
and while the Commission believes it
represents a best practice, using the
model is not required to achieve
compliance with the Rule.
The Commission declines to adopt the
position that use of the model notice
provides a safe harbor, although the
Commission would take into
consideration in an enforcement action
an entity who follows the model notice.
Further, the Commission notes an entity
who follows the model notice can
nevertheless violate the Rule in other
ways. For example, an entity could
follow the model notice but fail to
provide timely notice. In such instances,
providing a safe harbor because the
entity utilized the model notice would
be inappropriate.
F. Revisions to the Required Content of
Notice
1. The Commission’s Proposal
Regarding Content of Notice
The Commission proposed five
changes to the content of the notice.
First, in § 318.6(a), as part of relaying
what happened regarding the breach,
the Commission proposed the notice to
individuals also include a brief
description of the potential harm that
may result from the breach, such as
medical or other identity theft. Second,
the Commission proposed to amend the
requirements for the notice under
§ 318.6(a) to include the full name,
website, and contact information (such
as a public email address or phone
number) of any third parties that
acquired unsecured PHR identifiable
health information as a result of a
breach of security, if this information is
known to the vendor of personal health
records or PHR related entity (such as
where the breach resulted from
disclosures of users’ sensitive health
information without authorization).
Third, the Commission proposed
modifications to § 318.6(b), which
requires that the notice include a
description of the types of unsecured
PHR identifiable health information that
were involved in the breach. The
Commission proposed this exemplar list
be expanded to include additional types
of PHR identifiable health information,
such as health diagnosis or condition,
lab results, medications, other treatment
information, the individual’s use of a
health-related mobile application, and
device identifier. Fourth, the
Commission proposed revising
§ 318.6(d) of the Rule to require the
notice to individuals include additional
information providing a brief
description of what the entity that
experienced the breach is doing to
protect affected individuals, such as
offering credit monitoring or other
services. Fifth, the Commission
proposed modifying § 318.6(e) so the
contact procedures specified by the
notifying entity must include two or
more of the following: toll-free
telephone number; email address;
website; within-application; or postal
address.
2. Public Comments Regarding Content
of Notice
a. Proposal That Notice Include
Description of Potential Harm That May
Result From a Breach
The Commission’s proposal to modify
§ 318.6(a) to include in the notice to
individuals a brief description of the
potential harm that may result from a
breach drew a wide range of comments.
On the one hand, many commenters
supported the Commission’s
proposal. 231 For example, one
commenter noted this proposal would
help individuals better understand the
connection between the information
breached and the potential harm that
could result from the breach of such
information.232 Other commenters
stated that providing the potential
harms from a breach better equips
consumers to address injuries and
mitigate harms from it.233 One
commenter stated including some
potential harms would be helpful, but
notifying entities should also include
language in the notice stating that other
harms may occur. 234 This same
commenter suggested the Commission
consider selecting the most common
types of breaches and listing some but
not all of the potential consequences
from each.235
On the other hand, many commenters
criticized this proposal.236 Some
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237 AdvaMed at 6–7; AHIP at 6; MHDF at 10; NAI
at 9.
238 ACLA at 4–5; AMIA at 5; NAI at 9.
239 MHDF at 10.
240 Id. at 10–11.
241 AAFP at 4; AHIMA at 5–6; AMA at 6; AMIA
at 5; AOA at 5; CARIN Alliance at 7; Consumer
Rep.’s at 9–10; EFF at 2; EPIC at 10–11; HIMSS at
3–4; ITRC at 2; Members of the House of
Representatives at 1–2.
242 ACLA at 4–5; AHIP at 6; CHI at 6;
Confidentiality Coalition at 7; CTA at 24.
243 ACLA at 4–5; Confidentiality Coal. at 7.
244 Confidentiality Coal. at 7.
245 CTA at 24.
246 AHIP at 6.
247 AAFP at 4; AHIMA at 6; AMA at 6; AOA at
5; CARIN Alliance at 7; Consumer Rep.’s at 9–10;
Ella Balasa at 2; HIMSS at 3–4; ITRC at 2; NAI at
9.
248 Light Collective at 2.
249 ITRC at 2.
250 AAFP at 4; AMA at 6; AOA at 4; CARIN
Alliance at 7–8; HIMSS at 3–4; ITRC at 2.
251 AMA at 6.
252 AHIMA at 5–6.
253 Consumer Rep.’s at 9–10.
254 Confidentiality Coal. at 7.
255 Light Collective at 6–7.
256 AAFP at 4; AHIMA at 6; AHIP at 5;
Anonymous 3 at 1; AOA at 5; CARIN Alliance at
8; Consumer Rep.’s at 9–10; EPIC at 9–10; HIMSS
at 3–4; ITRC at 2; Dharini Padmanabhan at 1.
257 AHIMA at 6.
258 AMA at 6.
259 AdvaMed at 6–7.
commenters argued this proposal will
result in notifying entities having to
speculate about potential harms that
may never occur or providing a list of
harms that may be incomplete.237
Others pointed out that notifying
individuals about potential harms could
cause consumer anxiety, consumer
confusion, and detract from actions the
individuals should take.238 One
commenter noted the Commission’s
proposal might lead consumers to
believe the harms listed in the notice are
the only possible harms from a breach,
when in fact consumers may suffer
other harms not disclosed in the
notice.239 This same commenter also
noted it is opposed to entities stating
there are no known harms that may
result from a breach solely because a
notifying entity is unaware of any
specific bad outcomes.240
b. Proposal That Notice Include Full
Name, Website and Contact Information
of Third Parties That Acquired
Unsecured PHR Identifiable Health
Information
Next, the Commission proposed to
amend the requirements for the notice
under § 318.6(a) to include the full
name, website, and contact information
(such as a public email address or
phone number) of any third parties that
acquired unsecured PHR identifiable
health information as a result of a
breach of security. Although several
commenters supported this proposal,241
many others pointed out it is
problematic in certain circumstances.242
A few commenters noted the proposal is
ill-suited for security breaches, such as
a hacking, where providing consumers
with the name and contact information
of an actor who committed a security
breach (e.g., a hacker) could result in
further malicious action against the
target entity.243 One commenter noted
for security breaches, the malicious
actor or hacker would not be responsive
to consumers. 244 Further, one
commenter noted this requirement
could hamper law enforcement
efforts. 245 One commenter also
indicated this requirement could
frustrate investigative efforts or have a
chilling effect on an inadvertent
recipient from reporting a wrongful
disclosure.246
c. Proposal That Notice Include
Description of Types of Unsecured PHR
Identifiable Health Information Involved
in a Breach
Third, the Commission proposed
modifications to § 318.6(b), which
requires the notice to individuals
include a description of the types of
unsecured PHR identifiable health
information that were involved in the
breach. The Commission proposed this
exemplar list be expanded to include
additional types of PHR identifiable
health information, such as health
diagnosis or condition, lab results,
medications, other treatment
information, the individual’s use of a
health-related mobile application, and
device identifier. Several commenters
supported this proposal. 247 One
commenter noted it is important for
consumers to receive notice of the
specific types of PHR identifiable health
information involved in a breach, given
that the exposure of health information
can lead to a wide spectrum of
harms.248 Another commenter stated
providing individuals with a more
expansive list of exposed data points
will also give them a more complete
picture of the risks they face.249
d. Proposal That Notice Include
Description of What Entity Is Doing To
Protect Affected Individuals
Fourth, the Commission proposed
revising § 318.6(d) of the Rule to require
that the notice to individuals include
additional information providing a brief
description of what the entity that
experienced the breach is doing to
protect affected individuals, such as
offering credit monitoring or other
services. This proposal attracted support
from multiple commenters. 250 One
commenter stated that informing
individuals about these steps is
important so that they know what
additional actions they should take to
protect themselves from potential
harm.251 Another similarly stated that
knowing what the notifying entity is
doing to protect affected individuals can
help consumers who are considering
making purchase decisions for fraud
detection or credit monitoring.252 One
commenter stated that requiring
notifying entities to share this
information will incentivize them to
take proactive measures to mitigate
harms to consumers. 253
Some commenters, however, raised
concerns about this proposal. For
instance, one commenter believed the
Rule already encompasses this
requirement and therefore the
Commission’s proposal could result in
duplicative information being provided
in the notice.254 Another commenter
stated the FTC needs to go further in
ensuring that notification requirements
help consumers understand what
remedies are available when their health
information is breached.255
e. Proposal That Notice Include Two or
More Contact Procedures
Fifth, the Commission proposed
amendments to § 318.6(e) so the contact
procedures specified by the notifying
entity in its breach notification must
include two or more of the following:
toll-free telephone number; email
address; website; within-application; or
postal address. Many commenters
expressed support for this proposal.256
One commenter noted multiple contact
options ensures that victims of all
backgrounds and technical capabilities
are able to contact the notifying entity
to learn more about how to protect
themselves after a breach.257 Another
commenter noted that providing
multiple contact options encourages and
facilitates communication between the
individual and the notifying entity.258
One commenter, however, expressed
concern the proposal is burdensome, the
HIPAA breach notice rule requires only
one method of contact, and HHS has not
identified any concerns with
individuals having difficulty obtaining
information from covered entities using
one contact method under HIPAA’s
breach notice rule.259
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260 MHDF at 10.
261 The Commission has updated the model
notice in appendix A to reflect this change.
262 The Commission has updated the model
notice in appendix A to reflect this change.
263 See supra note 247.
264 See supra note 248.
265 See supra note 249.
266 See supra note 250.
267 See supra note 251.
268 See supra note 252.
269 See supra note 253.
270 See supra note 254.
271 See supra note 255.
3. The Commission Changes Regarding
Content of Notice
a. The Commission Declines To Adopt
Proposal That Notice Include
Description of Potential Harm That May
Result From a Breach
The Commission believes, in light of
the public comments, that the
downsides of requiring in the notice a
description of the potential harms that
may result from a breach outweigh the
upsides. The Commission is concerned
about requiring a consumer notice to
include possible harms that may never
materialize. In such cases, consumers
may experience needless anxiety and
take actions that are not necessary,
leading to consumer frustration. The
Commission also is concerned this
proposal may result in entities
describing potential harms so
generically that the description provides
minimal value to consumers, or,
alternatively, that entities will provide a
laundry list of potential harms, making
such a list meaningless to consumers.
The Commission also agrees with one
commenter who noted this proposal
might lead consumers to believe the
harms listed in the notice are the only
possible harms from a breach, when in
fact consumers may suffer other harms
not disclosed in the notice.260
Accordingly, the Commission
declines to adopt this proposal.261 The
Commission believes the remaining
elements of the content of the notice
will supply individuals with sufficient
information about a breach, especially
given the other modifications to § 318.6.
The Commission also emphasizes in
certain cases where harms are concrete
and known, notifying entities should as
a best practice inform individuals about
those harms in the notice.
b. The Commission Modifies Proposal
That Notice Include Full Name,
Website, and Contact Information of
Third Parties That Acquired Unsecured
PHR Identifiable Health Information
In light of the public comments, the
Commission is modifying § 318.6(a) to
require notifying entities to provide the
full name or identity (or where
providing name or identity would pose
a risk to individuals or the entity
providing notice, a description) of the
third parties that acquired the PHR
identifiable health information as a
result of a breach of security.262 The
Commission believes it is important for
consumers to know who acquired their
PHR identifiable health information as a
result of a breach. At the same time, the
Commission acknowledges in some
scenarios it could be problematic to
require notifying entities to provide the
contact information of those who
acquired PHR identifiable health
information.
Accordingly, this revised provision is
intended to still provide individuals
with information about who acquired
their health information. Under
§ 318.6(a), notifying entities are required
to provide the full name or identity of
the third parties that acquired the PHR
identifiable health information as a
result of a breach of security, except
where providing the full name or
identity of the third parties would pose
a risk to affected individuals or the
entity providing notice. In cases where
providing the name or identity of the
third parties that acquired the PHR
identifiable health information as a
result of a breach of security would pose
a risk to affected individuals or the
entity providing notice (e.g., providing
the name of hacker could subject
affected individuals or the entity
providing notice to further harm),
§ 318.6(a) permits notifying entities to
describe the type of third party (e.g.,
hacker) who acquired individuals’ PHR
identifiable health information.
c. The Commission Adopts Proposal
That Notice Include Description of
Types of Unsecured PHR Identifiable
Health Information Involved in a Breach
The Commission agrees with the
many public comments supporting this
proposal.263 The Commission concurs
with the commenter who noted it is
important for consumers to receive
notice of the specific types of PHR
identifiable health information involved
in a breach,264 and the commenter who
stated that providing affected
individuals with a more expansive list
of health data points implicated in a
breach will help them better understand
the risks they face.265 The Commission
adopts this proposal without
modification.
d. The Commission Adopts Proposal
That Notice Include Description of What
Entity Is Doing To Protect Affected
Individuals
Several commenters supported the
Commission proposal that the notice to
individuals include a description of
what the notifying entity is doing to
protect affected individuals. 266 The
Commission concurs with the
commenter who stated that informing
affected individuals about the steps
notifying entities are taking to protect
them is important so that affected
individuals know what additional
actions they should take to protect
themselves from potential harm.267 The
Commission similarly agrees with the
commenter who stated that knowing
what the notifying entity is doing to
protect affected individuals can help
consumers who are considering making
purchase decisions like fraud detection
or credit monitoring.268 The
Commission also agrees with the
commenter who stated that requiring
notifying entities to share information
about what they are doing to protect
affected individuals will incentivize
notifying entities to take proactive
measures to mitigate harms to
consumers.269
In response to the one commenter
who noted the 2009 Rule already
includes this proposed requirement, 270
the Commission notes § 318.6(d) from
the 2009 Rule requires notifying entities
to include in the notice to individuals
what the entity is doing to investigate
the breach, to mitigate any losses, and
to protect against any further breaches.
Accordingly, under the 2009 Rule, there
is no explicit requirement for the
notifying entity to state in the
individual notice what the entity is
doing to protect affected individuals.
Given this, the Commission does not
believe individuals will receive
duplicative information.
In response to the commenter who
argued the Commission needs to help
consumers understand post-breach
remedies,271 the Commission believes
this concern is addressed by the
combination of § 318.6(c), which
requires notifying entities to include in
the notice steps individuals should take
to protect themselves from potential
harm resulting from the breach, and
§ 318.6(d), which requires notifying
entities to include in the notice the
steps the notifying entity is taking to
protect affected individuals following
the breach.
The Commission adopts proposed
§ 318.6(d) without modification.
e. The Commission Adopts Proposal
That Notice Include Two or More
Contact Procedures
In response to the comment that
providing two or more contact
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272 See supra note 259.
273 Id.
274 See supra note 256.
275 See supra note 258.
276 See supra note 257.
277 AdvaMed at 9; AHIP at 7; ACLA at 3–4; ATA
Action at 2; CCIA at 8; CHI at 6; CTA at 20–21;
TechNet at 5.
278 AdvaMed at 9; ACLA at 3–4; AHIP at 7;
TechNet at 5–6.
279 ACLA at 3–4; CTA at 19–21.
280 45 CFR 164.400 through 414.
281 AdvaMed at 9; AHIP at 7; ACLA at 3; ATA
Action at 2; TechNet at 5–6.
282 ACLA at 3–4.
283 CTA at 19–21.
284 As the Commission stated in the 2009 Rule
Commentary, in some cases, it may be an
‘‘unreasonable delay’’ to wait until the 60th day to
provide notification. For example, if a vendor of
personal health records or PHR related entity learns
of a breach, gathers all necessary information, and
has systems in place to provide notification within
30 days, it would be unreasonable to wait until the
60th day to send the notice. Similarly, the
Commission noted there may be circumstances
where a vendor of personal health records discovers
that its third party service provider has suffered a
breach before the service provider notifies the
vendor that the breach has occurred. In such
circumstances, the vendor should begin taking steps
to address the breach immediately, and should not
wait until receiving notice from the service
provider. 74 FR 42971 n.94 (2009).
procedures in the notice is
burdensome, 272 the Commission
believes if this proposal results in any
burden to notifying entities, such
burden will be minimal given the ease
with which compliance with this
provision can be achieved, and
outweighed by the benefits to
consumers who will have increased
options to communicate with notifying
entities. Second, in response to the
comment that the HIPAA Breach
Notification Rule requires only one
contact method,273 the Commission
notes while there are many similarities
between the FTC’s and HHS’s respective
breach notification rules and the
agencies have consulted to harmonize
the two rules, there are differences
between them, and the Commission
believes it is important to update this
provision to reflect new modes of
communication and facilitate greater
opportunities for communication
between affected individuals and
notifying entities.
The Commission notes multiple
commenters supported this proposal.274
Specifically, the Commission agrees
with the commenter who stated
multiple contact procedures enables
greater opportunities for affected
individuals to communicate with
notifying entities.275 The Commission
also agrees with the commenter who
noted multiple contact options ensures
that affected individuals from all
backgrounds and technical capabilities
are able to contact the notifying entity
following a breach. 276 The Commission
therefore adopts proposed § 318.6(e)
without modification.
G. Timing of Notice to the FTC
1. The Commission’s Proposal
Regarding Timing of Notice
Although the Commission did not
propose any timing changes in the
NPRM, the Commission requested
comments on several issues related to
timing, including the timing of the
notification to the FTC. Regarding the
notification timeline to the FTC, the
Commission sought comment on
whether it should extend the timeline to
give entities more time to investigate
breaches and better ascertain the
number of affected individuals or
whether an extension would simply
facilitate dilatory action and minimize
the opportunity for an important
dialogue with Commission staff during
the fact-gathering stage immediately
following a breach.
2. Public Comments Regarding Timing
of Notice
Several commenters expressed
support for extending the notification
timeline to the FTC.277 Commenters
provided several reasons why the
existing requirement of notice to the
FTC ‘‘as soon as possible and in no case
later than ten business days following
the date of discovery of the breach’’ for
breaches involving 500 or more
individuals should be amended. For
example, commenters noted that ten
days does not provide entities with
sufficient time to adequately investigate
incidents and fully understand the facts,
possibly leading to notices that may be
incomplete and require amendment or
correction. 278 Others commented that
the existing requirement diverts key
resources from investigating potential
breaches, indicating when a breach is
suspected or has been discovered, the
target entity’s focus should be
responding to the incident, conducting
a thorough investigation of what may
have occurred, and addressing and
mitigating vulnerabilities to ensure
additional information is not
compromised. 279
Several commenters urged the FTC to
align the timeframe to notify the FTC
with the timing requirement under
HIPAA’s Health Breach Notification
Rule, 280 which requires notification to
the Secretary of HHS without
unreasonable delay and in no case later
than 60 calendar days following a
breach.281 One commenter, irrespective
of HIPAA, suggested the Commission
give entities up to 60 days to investigate
a breach and provide notification to the
Commission.282 One commenter
recommended the FTC adopt a ‘‘risk-
based’’ notification approach whereby
the agency could create a shorter
notification timeline for high-risk
incidents and a longer notification
timeline or even no notification for low-
risk incidents.283
3. The Commission Adopts Changes to
the Timing of Notice
Having considered the public
comments, the Commission agrees with
commenters who recommended that the
notification timeline to the FTC for
breaches of security involving 500 or
more individuals should be adjusted.
The Commission agrees that in certain
incidents, especially large, complex
breaches, it can be challenging for
entities to fully understand the scope of
a breach in ten business days, leading to
the possibility of incomplete breach
notices.
Accordingly, the Commission is
revising § 318.4(b) to read: ‘‘All
notifications required under § 318.5(c)
involving the unsecured PHR
identifiable health information of 500 or
more individuals shall be provided
contemporaneously with the notice
required by paragraph (a) of this
section.’’ This change requires entities,
for breaches involving 500 or more
individuals, to notify the FTC consistent
with the notice required by § 318.4(a)—
i.e., without unreasonable delay and in
no case later than 60 calendar days after
the discovery of a breach of security.
This change also requires the notice to
the FTC be sent at the same time as the
notice to the individuals. This
requirement thus ensures the notice to
the FTC includes all of the information
provided in the notice to the individual.
It also avoids a scenario where
individuals receive notice before the
FTC receives notice and affected
individuals contact the FTC about a
breach for which the Commission has
not been notified.
As a result of this change, the
Commission anticipates entities will
have sufficient time to provide complete
and fulsome notifications to the
Commission. The Commission
emphasizes, however, that notice to the
FTC should occur ‘‘without
unreasonable delay,’’ with 60 days
serving as the outer limit.284 The
Commission believes, consistent with
public comments, this change
effectively harmonizes the notification
timeline to the FTC with the notification
timeline to the Secretary of HHS under
the HIPAA Breach Notification Rule.
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47051	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
285 42 U.S.C. 17932(e)(3). Like the Department of
Health and Human Services previously concluded
with respect to notification to the Secretary under
the HIPAA Breach Notification Rule (74 FR 42753
(2009)), the Commission concludes this
interpretation satisfies the statutory requirement
that notifications of larger breaches be provided to
the FTC immediately as compared to the
notifications of smaller breaches (i.e., those
involving less than 500 individuals), which the
statute allows to be reported annually to the FTC.
286 74 FR 17918 (2009); 74 FR 42971 (2009).
287 AMA at 6; CARIN Alliance at 9.
288 AHIMA at 7; AMA at 6–7.
289 AHIMA at 7; AMA at 6–7; AHIOS at 5; MRO
at 4. As part of its comment, AMA recommended
the FTC, as Rule violations are filed, use actual
examples as case study models for future
educational resources. The Commission notes that
its existing enforcement actions under the Rule
already provide guidance for the marketplace and
the FTC also has issued business guidance
regarding the Rule. E.g., Fed. Trade Comm’n,
Collecting, Using, or Sharing Consumer Health
Information? Look to HIPAA, the FTC Act, and the
Health Breach Notification Rule (Sept. 2023),
https://www.ftc.gov/business-guidance/resources/
collecting-using-or-sharing-consumer-health-
information-look-hipaa-ftc-act-health-breach (last
visited Jan. 11, 2023); Fed. Trade Comm’n, Health
Breach Notification Rule: The Basics for Business
(Jan. 2022), https://www.ftc.gov/business-guidance/
resources/health-breach-notification-rule-basics-
business (last visited Jan. 11, 2024); Fed. Trade
Comm’n, Complying with FTC’s Health Breach
Notification Rule (Jan. 2022), https://www.ftc.gov/
business-guidance/resources/complying-ftcs-health-
breach-notification-rule-0 (last visited Jan. 11, 2024)
One commenter also asserted the Commission was
seeking to apply the NPRM’s proposed changes
retrospectively to breaches of security that were
discovered on or after September 24, 2009. This
commenter urged the Commission to modify § 318.8
so that the Rule would only apply to breaches of
security discovered at least 30 days after the
effective date of this final rule. TechNet at 5–6. The
2023 NPRM set out the entire part for the
convenience of commenters but did not propose
any changes to § 318.8. The Commission notes this
effective date section was codified in 2009 when
part 318 was added to the CFR and has been in
effect since September 24, 2009. As explained in
the 2009 Rule Commentary, ‘‘the Commission does
not have discretion to change the effective date of
the rule because the Recovery Act establishes the
effective date.’’ See 74 FR 42976; see also 42 U.S.C.
17937(g)(1) (‘‘The provisions of this section shall
apply to breaches of security that are discovered on
or after the date that is 30 days after the date of
publication of such interim final regulations.’’). The
Commission emphasizes that this final rule does
not apply retroactively.
290 Relatedly, the Commission also is making a
non-substantive grammatical change to
§ 318.5(a)(2)(ii), which involves substitute notice.
This provision currently states: ‘‘Such a notice in
media or web posting shall include a toll-free phone
number, which shall remain active for at least 90
days, where an individual can learn whether or not
the individual’s unsecured PHR identifiable health
information may be included in the breach.’’ The
Commission is revising § 318.5(a)(2)(ii) so it reads:
‘‘Such a notice in media or web posting shall
include a toll-free phone number, which shall
remain active for at least 90 days, where an
individual can learn if the individual’s unsecured
PHR identifiable health information may have been
included in the breach.’’ The Commission made
this grammatical change to improve the rule’s
readability; the change does not alter the
provision’s substantive meaning.
291 44 U.S.C. 3502(3)(A)(i).
292 See 44 U.S.C. 3502(3)(A)(i).
293 Third party service providers who experience
a breach are required to notify the vendor of
personal health records or PHR related entity,
which in turn is then required to notify consumers.
The Commission expects the cost of notification to
third party service providers would be small,
relative to the entities that have to notify
consumers. As part of the NPRM, the Commission
solicited public comment on this issue and data
that may be used to quantify the costs to third party
service providers. The Commission did not receive
any responsive submissions pertaining to this issue.
294 See App Store—Apple, https://
www.apple.com/app-store/.
295 See AppBrain: Number of Android Apps on
Google Play (Mar 2024), https://
www.appbrain.com/stats/number-of-android-apps.
296 See Business of Apps, ‘‘App Data Report: App
Store Stats, Downloads, Revenues and App
Rankings,’’ https://www.businessofapps.com/data/
report-app-data/ (reporting 90,913 apps in the
Apple iOS App Store and 102,402 apps in the
Google Play Store were categorized as ‘‘Health and
Continued
The Commission also believes this
notification timeline satisfies the
Recovery Act requirement that notice be
provided ‘‘immediately.’’ 285 The
Commission also notes this change does
not affect in any way the timing of the
notice to the FTC for breaches involving
less than 500 individuals.
Finally, a small number of
commenters addressed other issues
related to timing, such as the timeline
for providing notice to consumers or the
media. The Commission believes, for
the reasons stated in the commentary
accompanying the 2009 NPRM and the
2009 Rule Commentary, the current
timelines are appropriate to give
consumers and the media timely notice
without overburdening notifying
firms.286
H. Proposed Changes To Improve Rule’s
Readability
1. The Commission Proposed Changes
To Promote Readability
The Commission proposed several
changes to improve the Rule’s
readability. Specifically, the
Commission proposed to include
explanatory parentheticals for internal
cross-references, add statutory citations
in relevant places, consolidate notice
and timing requirements in single
sections, and revise the Enforcement
section to state more plainly the
penalties for non-compliance.
2. Public Comments Regarding
Readability
Commenters supported the
Commission’s proposed changes to
improve the Rule’s readability and
promote comprehension by including
explanatory parentheticals and statutory
citations. 287 Commenters also expressed
support for the proposed changes to
improve the Rule’s readability and
promote compliance by consolidating
into single sections, respectively, the
Rule’s breach notification and timing
requirements. 288 Commenters also
favored the proposal to modify § 318.7
to make plain that a violation of the
Rule constitutes a violation of a rule
promulgated under section 18 of the
FTC Act and is subject to civil penalties,
stating this clarification will decrease
the burden on the FTC in enforcement
actions and prevent unintended barriers
to enforcement.289
3. The Commission Adopts Changes
Regarding Readability
In light of support from commenters
and the Commission’s belief that these
proposed changes improve readability,
the Commission adopts these changes
without modification.290
III. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. chapter 35, requires
Federal agencies to seek and obtain
Office of Management and Budget
(‘‘OMB’’) approval before undertaking a
collection of information directed to ten
or more persons. 291 This final rule is
modifying an existing collection of
information,292 which OMB has
approved through July 31, 2025 (OMB
Control No. 3084–0150). As required by
the PRA, the Commission sought OMB
review of the modified information
collection requirement at the time of the
publication of the NPRM. OMB directed
the Commission to resubmit its request
at the time the final rule is published.
Accordingly, simultaneously with the
publication of this final rule, the
Commission is resubmitting its
clearance request to OMB. FTC staff has
estimated the burdens associated with
the amendments as set forth below.
FTC staff estimates the amendments
to 16 CFR part 318 will likely result in
more reportable breaches by covered
entities to the FTC. In the event of a
breach of security, the covered firms
will be required to investigate and, if
certain conditions are met, notify
consumers, the Commission, and, in
some cases, the media.293
Based on industry reports, FTC staff
estimates the amendments will cover
approximately 193,000 entities, which,
in the event they experience a breach,
may be required to notify consumers,
the Commission, and, in some cases, the
media. While there are approximately
1.8 million apps in the Apple App
Store 294 and 2.4 million apps in the
Google Play Store, 295 as of March 2024,
it appears that roughly 193,000 of the
apps offered in either store are
categorized as ‘‘Health and Fitness.’’ 296
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47052 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
Fitness’’). Together, this suggests there are
approximately 193,000 Health and Fitness apps.
This figure is likely both under- and over-inclusive
as a proxy for covered entities. For example, this
figure does not include apps categorized elsewhere
(i.e., outside ‘‘Health and Fitness’’) that may be
PHRs. However, at the same time, this figure also
overestimates the number of covered entities, since
many developers make more than one app and may
specialize in the Health and Fitness category.
297 See Chamber at 2; CHI at 6–7; CCIA at 8–9.
298 See section II.1.c.
299 Id.
300 Indeed, one of the commenters who argued the
Rule’s coverage is broader than projected in the
NPRM’s PRA analysis acknowledged that there has
been growth in the number of websites and apps
since the 2009 PRA analysis estimated 700 covered
entities to be covered by the Rule. Chamber at 2.
Further, the approximately 193,000 covered entities
may overestimate the number of covered entities, as
some apps or websites may not qualify as a covered
entity given the Rule’s boundaries. For example, a
website or app must have the technical capacity to
draw information from multiple sources and that
same website or app must still be ‘‘managed,
shared, and controlled by or primarily for the
individual’’ to be covered by the Rule.
301 FTC staff used information publicly available
from HHS on HIPAA related breaches because the
HIPAA Breach Notification Rule is similarly
constructed. However, while there are similarities
between HIPAA-covered entities and HBNR-
covered entities, it is not necessarily the case that
rates of breaches would follow the same pattern.
For instance, HIPAA-covered entities are generally
subject to stronger data security requirements under
HIPAA, but also may be more likely targets for
security incidents (e.g., ransomware attacks on
hospitals and other medical treatment centers
covered by HIPAA have increased dramatically in
recent years); thus, this number could be an under-
or overestimate of the number of potential breaches
per year.
302 According to HHS’s Office for Civil Rights
(‘‘OCR’’), the number of breaches per year grew
from 276 in 2013 to 739 breaches in 2023. See
Breach Portal, U.S. Dep’t of Health & Human Servs.,
Office for Civil Rights, https://ocrportal.hhs.gov/
ocr/breach/breach_report.jsf (last visited March 1,
2024). The data was downloaded on March 1, 2024,
resulting in limited data for 2024. Thus, breaches
from 2024 were excluded from the calculations.
However, breach investigations that remain open
(under investigation) from years prior to 2024 are
included in the count of yearly breaches.
303 See Breach Portal, U.S. Dep’t of Health &
Human Servs., Office for Civil Rights, https://
ocrportal.hhs.gov/ocr/breach/breach_report.jsf (last
visited March 1, 2024).
304 In a Federal Register publication titled
‘‘Proposed Modifications to the HIPAA Privacy
Rule to Support, and Remove Barriers to,
Coordinated Care and Individual Engagement’’,
OCR proposes increasing the number of covered
entities from 700,000 to 774,331. 86 FR 6446, 6497
(Jan. 21, 2021). For purposes of calculating the
annual breach incidence rate, FTC staff utilized
700,000 covered entities because the proposed
estimate of 774,331 covered entities represents a
projected increase that has not been finalized by
OCR. The OCR publication also lists the number of
covered Business Associates as 1,000,000. 86 FR
6528. FTC staff arrived at 1.7 million entities
subject to the HIPAA Breach Notification Rule by
adding 700,000 covered entities and 1,000,000
Business Associates.
305 One commenter argued that basing the
NPRM’s projection of the annual number of
breaches on the breach incidence rate for HIPAA-
covered entities is problematic because the NPRM’s
proposed definition of a breach of security ‘‘goes far
and beyond’’ the HIPAA definition of a breach.
CCIA at 8–9. To the extent the commenter is
referring to the fact that the Rule’s definition of
breach of security covers unauthorized disclosures,
the Commission notes the HIPAA Breach
Notification Rule similarly covers unauthorized
disclosures. See Breach Notification Rule, U.S.
Dep’t of Health & Human Servs., Office for Civil
Rights, https://www.hhs.gov/hipaa/for-
professionals/breach-notification/index.html (‘‘A
breach is, generally, an impermissible use or
disclosure under the Privacy Rule that compromises
the security or privacy of the protected health
information.’’).
306 This estimate is the sum of 40 hours of
marketing managerial time (at an average wage of
$76.10), 40 hours of computer programmer time
($49.42), 20 hours of legal staff ($78.74), and 50
hours of computer and information systems
managerial time ($83.49). See Occupational
Employment and Wage Statistics, U.S. Bureau of
Labor Statistics (May 2022), https://www.bls.gov/
oes/current/oes_nat.htm#00-0000.
307 This estimate is the sum of 40 hours of
forensic expert time at a cost of $500 per hour,
The Commission received three
comments in response to the NPRM
arguing the Rule’s scope is broader than
apps categorized as ‘‘Health and
Fitness’’ and the NPRM’s PRA analysis
therefore underestimated the number of
covered entities and the resulting
number of reportable breaches.297 As
discussed above,298 the Commission is
adopting these amendments to clarify
that the Rule applies to mobile health
applications and similar technologies.
The Commission also highlighted
several key limitations to the Rule’s
scope. 299 Thus, the 193,000 covered
entities is a rough proxy for all covered
PHRs, because it encompasses mobile
health applications categorized as
‘‘Health and Fitness.’’ Similar health
technologies are included in the roughly
193,000 covered entities because most
websites and connected health devices
that will be covered by the amendments
act in conjunction with an app.300
FTC staff estimates these entities will,
cumulatively, experience 82 breaches
per year for which notification may be
required. With the proviso that there is
insufficient data at this time about the
number and incidence rate of breaches
at entities covered by the amendments
(due to underreporting prior to issuance
of the Policy Statement), FTC staff
determined the number of estimated
breaches by calculating the breach
incidence rate for HIPAA-covered
entities, and then applied this rate to the
estimated total number of entities that
will be subject to the amendments.301
Additionally, as the number of breaches
per year has grown significantly in the
recent years,302 and FTC staff expects
this trend to continue, FTC staff relied
on the average number of breaches from
2021 through 2023 to estimate the
annual breach incidence rate for
HIPAA-covered entities.
Specifically, HHS’s OCR reported 715
breaches in 2021, 719 breaches in 2022,
and 733 breaches in 2023,303 which
results in an average of 722 breaches
between 2021 and 2023. Based on the
1.7 million entities that are covered by
the HIPAA Breach Notification Rule 304
and the average number of breaches for
2021–2023, FTC staff determined an
annual breach incidence rate of
0.000425 (722/1.7 million).
Accordingly, multiplying the breach
incidence rate (0.000425) by the
estimated number of entities covered by
the amendments (193,000) results in an
estimated 82 breaches per year.305
Costs
To determine the costs for purposes of
this analysis, FTC staff has developed
estimates for two categories of potential
costs: (1) the estimated annual burden
hours and labor cost of determining
what information has been breached,
identifying the affected customers,
preparing the breach notice, and making
the required report to the Commission;
and (2) the estimated capital and other
non-labor costs associated with
notifying consumers.
Estimated Annual Burden Hours:
12,300.
Estimated Annual Labor Cost:
$883,140.
First, to determine what information
has been breached, identify the affected
customers, prepare the breach notice,
and make the required report to the
Commission, FTC staff estimates
covered firms will require per breach,
on average, 150 hours of employee labor
at a cost of $10,770.306 This estimate
does not include the cost of equipment
or other tangible assets of the breached
firms because they likely will use the
equipment and other assets they have
for ordinary business purposes. Based
on the estimate that there will be 82
breaches per year the annual hours of
burden for affected entities will be
12,300 hours (150 hours × 82 breaches)
with an associated labor cost of
$883,140 (82 breaches × $10,770).
Estimated Capital and Other Non-
Labor Costs: $91,984,370.
The capital and non-labor costs
associated with breach notifications
depend upon the number of consumers
contacted and whether covered firms
are likely to retain the services of a
forensic expert. For breaches affecting
large numbers of consumers, covered
firms are likely to retain the services of
a forensic expert. FTC staff estimates,
for each breach requiring the services of
forensic experts, forensic experts will
spend approximately 40 hours to assist
in the response to the cybersecurity
intrusion, at an estimated cost of
$20,000.307 FTC staff estimates the
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which yields a total cost of $20,000 (40 hours ×
$500/hour).
308 HHS Breach Data, supra note 303. This
analysis uses the last six years of HHS breach data
to generate the average, in order to account for the
variation in number of individuals affected by
breaches observed in the HHS data over time.
309 See IBM Security, Costs of a Data Breach
Report 2023 (2023), https://www.ibm.com/reports/
data-breach (‘‘2023 IBM Security Report’’). The
research for the 2023 IBM Security Report is
conducted independently by the Ponemon Institute,
and the results are reported and published by IBM
Security. Figure 2 of the 2023 IBM Security Report
shows that cost per record of a breach was $165 per
record in 2023, $164 in 2022, and $161 in 2021,
resulting in an average cost of $163.33. Figure 5 of
the 2023 IBM Security Report shows that 8.3%
($0.37m/$4.45m) of the average cost of a data
breach are due to ‘‘Notification’’ costs. The fraction
of average breach costs due to ‘‘Notification’’ were
7.1% in 2022 and 6.4% in 2021 (IBM Security,
Costs of a Data Breach Reports 2022 and 2021).
Using the average of these numbers (7.27%), FTC
staff estimates that notification costs per record
across the three years are 7.27% × $163.33 = $11.87
per record.
310 See 2023 IBM Security Report at 72.
311 Many State data breach notification statutes
require notification when a breach occurs involving
certain health or medical information of individuals
in that State. See, e.g., Ala. Code 8–38–1 et seq.;
Alaska Stat. 45.48.010 et seq.; Ariz. Rev. Stat. 18–
551 et seq.; Ark. Code 4–110–101 et seq.; Cal. Civ.
Code 1798.80 et seq.; Cal. Health & Safety Code
1280.15; Colo. Rev. Stat. 6–1–716; Del. Code Ann.
tit. 6 12B–101 et seq.; D.C. Code 28–3851 et seq.;
Fla. Stat. 501.171; 815 Ill. Comp. Stat. 530/5 et seq.;
Md. Code Com. Law 14–3501 et seq; Mo. Rev. Stat.
407.1500; Nev. Rev. Stat. 603A.010 et seq.; N.H.
Rev. Stat. 359–C:19–C:21; N.H. Rev. Stat. 332–I:5;
N.D. Cent. Code 51–30–01–07; Or. Rev. Stat.
646A.600–646A.628; R.I. Gen. Laws 11–49.3–1—
11–49.3–6; SDCL 22–40–19—22–40–26; Tex. Bus. &
Com. Code 521.002, 521.053, 521.151–152; 9 V.S.A.
2430, 2435; Va. Code 18.2–186.6; Va. Code 32.1–
127.1:05; Va. Code 58.1–341.2; Wash. Rev. Code
19.255.010 et seq.
312 5 U.S.C. 601–612.
313 2017 SUSB Annual Data Tables by
Establishment Industry, U.S. Census Bureau (May
2021), https://www.census.gov/data/tables/2017/
econ/susb/2017-susb-annual.html, using ‘‘Data by
Enterprise Receipts Size.’’ The U.S. Small Business
Administration (‘‘SBA’’) categorizes Software
Publishers as a small business if the annual receipts
are less than $41.5 million; the 2017 data is the
most recent data available reporting receipts size.
services of forensic experts will be
required in 60% of the 82 breaches.
Based on the estimate that there will be
49 breaches per year requiring forensic
experts (60% × 82 breaches), the annual
hours burden for affected entities will
be 1,960 hours (49 breaches requiring
forensic experts × 40 hours) with an
associated cost of $980,000 (49 breaches
requiring forensic experts × $20,000).
Using the data on HIPAA-covered
breach notices available from HHS for
the years 2018–2023, FTC staff estimates
the average number of individuals
affected per breach is 93,497.308 Given
an estimated 82 breaches per year, FTC
staff estimates an average of 7,666,754
consumers per year will receive a
breach notification (82 breaches ×
93,497 individuals per breach).
Based on a recent study of data breach
costs, FTC staff estimates the cost of
providing notice to consumers to be
$11.87 per breached record.309 This
estimate includes the costs of electronic
notice, letters, outbound calls or general
notice to data subjects; and engagement
of outside experts. 310 Applied to the
above-stated estimate of 7,666,754
consumers per year receiving breach
notification yields an estimated total
annual cost for all forms of notice to
consumers of $91,004,370 (7,666,754
consumers × $11.87 per record).
Accordingly, the estimated capital and
non-labor costs total $91,984,370
($980,000 + $91,004,370).
FTC staff notes these estimates likely
overstate the costs imposed by the
amendments because FTC staff made
conservative assumptions in developing
many of the underlying estimates.
Moreover, many entities covered by the
amendments already have similar
notification obligations under State data
breach laws.311 In addition, the
Commission has taken several steps
designed to limit the potential burden
on covered entities that are required to
provide notice, including by providing
exemplar notices that entities may
choose to use if they are required to
provide notifications and expanding the
use of electronic notifications.
IV. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 312 requires that the Commission
provide an Initial Regulatory Flexibility
Analysis (‘‘IRFA’’) with a proposed rule
and a Final Regulatory Flexibility
Analysis (‘‘FRFA’’) with a final rule,
unless the Commission certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities. As discussed
in the IRFA, the Commission believes
the final rule will not have a significant
economic impact upon small entities.
In this document, the Commission
largely adopts the amendments
proposed in its NPRM. The Commission
believes the amendments will not have
a significant economic impact upon
small entities, although they may affect
a substantial number of small
businesses. Among other things, the
amendments clarify certain definitions,
revise the disclosures that must
accompany notice of a breach under the
Rule, and modernize the methods of
notice to allow additional use of
electronic notice such as email by
entities affected by a breach. In
addition, the amendments improve the
Rule’s readability by clarifying cross-
references and adding statutory
citations. The Commission does not
anticipate that these changes will add
significant additional costs for entities
covered by the Rule, and by authorizing
electronic notice in additional
circumstances, the amendments may
reduce costs for many entities covered
by the Rule. Therefore, the Commission
certifies that the amendments will not
have a significant economic impact on
a substantial number of small entities.
Although the Commission certifies
under the RFA that the Rule will not
have a significant impact on a
substantial number of small entities,
and hereby provides notice of that
certification to the Small Business
Administration (‘‘SBA’’), the
Commission has determined,
nonetheless, that it is appropriate to
publish an FRFA to inquire into the
impact of the proposed amendments on
small entities.
A. Need for and Objectives of the
Amendments
The objective of the amendments is to
clarify existing notice obligations for
entities covered by the Rule. The legal
basis for the amendments is section
13407 of the Recovery Act.
B. Significant Issues Raised in Public
Comments
Although the Commission received
several comments that argued that the
amendments would be burdensome for
businesses, none argued specifically
that smaller businesses in particular
would be subject to special burdens.
The Commission did not receive any
comments filed by the Chief Counsel for
Advocacy of the SBA.
C. Small Entities to Which the
Amendments Will Apply
The amendments, like the current
Rule, will apply to vendors of personal
health records, PHR related entities, and
third party service providers, including
developers and purveyors of health
apps, connected health devices, and
similar technologies. As discussed in
the Commission’s PRA estimates above,
FTC staff estimates the amendments
will apply to approximately 193,000
covered entities. The Commission
estimates that a substantial number of
these entities likely qualify as small
businesses. According to the Statistics
on Small Businesses Census data,
approximately 94% of ‘‘Software
Publishers’’ (the category to which
health and fitness apps belong) are
small businesses.313
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D. Projected Reporting, Recordkeeping,
and Other Compliance Requirements,
Including Classes of Covered Small
Entities and Professional Skills Needed
To Comply
The Recovery Act and the
amendments contain certain reporting
requirements. The amendments will
clarify which entities are subject to
those reporting requirements.
Specifically, the Act and amendments
require vendors of personal health
records and PHR related entities to
provide notice to consumers, the
Commission, and in some cases the
media in the event of a breach of
unsecured PHR identifiable health
information. The Act and amendments
also require third party service
providers to provide notice to vendors
of personal health records and PHR
related entities in the event of such a
breach. If a breach occurs, each entity
covered by the Act and amendments
will expend costs to determine the
extent of the breach and the individuals
affected. If the entity is a vendor of
personal health records or a PHR related
entity, additional costs will include the
costs of preparing a breach notice,
notifying the Commission, compiling a
list of consumers to whom a breach
notice must be sent, and sending a
breach notice. Such entities may incur
additional costs in locating consumers
who cannot be reached, and in certain
cases, posting a breach notice on a
website, notifying consumers through
media advertisements, or sending
breach notices through press releases to
media outlets.
In-house costs may include technical
costs to determine the extent of
breaches; investigative costs of
conducting interviews and gathering
information; administrative costs of
compiling address lists; professional/
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
a forensic expert. As discussed in the
context of the PRA, FTC staff estimates
that compliance with these
requirements will likely result in
$883,148 in labor costs and $91,984,370
in capital and other non-labor costs. The
estimated cost per covered entity is
$481 (the total labor, capital, and non-
labor costs of $92,867,518 divided by
193,000 covered entities). The SBA
categorizes Software Publishers with
annual receipts under $41.5 million as
a small business; the per entity cost of
$481 represents 0.0001% of this annual
receipts threshold.
E. Significant Alternatives to the
Amendments
In drafting the Rule, the Commission
has made every effort to avoid unduly
burdensome requirements for entities.
In particular, the Commission believes
that the changes to facilitate electronic
notice will assist small entities by
significantly reducing the costs of
sending breach notices. In addition, the
Commission is making available
exemplar notices that entities covered
by the Rule may use, in their discretion,
to notify individuals. The Commission
anticipates these exemplar notices will
further reduce the burden on entities
that are required to provide notice
under the Rule. The Commission is not
aware of alternative methods of
compliance that will reduce the impact
of the amendments on small entities,
while also comporting with the
Recovery Act. The statutory
requirements are specific as to the
timing, method, and content of notice.
V. Other Matters
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 318
Breach, Consumer protection, Health,
Privacy, Reporting and recordkeeping
requirements, Trade practices.
■ Accordingly, the Federal Trade
Commission revises and republishes 16
CFR part 318 to read as follows:
PART 318—HEALTH BREACH
NOTIFICATION RULE
Sec.
318.1 Purpose and scope.
318.2 Definitions.
318.3 Breach notification requirement.
318.4 Timeliness of notification.
318.5 Methods of notice.
318.6 Content of notice.
318.7 Enforcement.
318.8 Applicability date.
318.9 Sunset.
Authority: 42 U.S.C. 17937 and 17953.
§ 318.1 Purpose and scope.
(a) This part, which shall be called the
‘‘Health Breach Notification Rule,’’
implements section 13407 of the
American Recovery and Reinvestment
Act of 2009, 42 U.S.C. 17937. This part
applies to foreign and domestic vendors
of personal health records, PHR related
entities, and third party service
providers, irrespective of any
jurisdictional tests in the Federal Trade
Commission (FTC) Act, that maintain
information of U.S. citizens or residents.
This part does not apply to HIPAA-
covered entities, or to any other entity
to the extent that it engages in activities
as a business associate of a HIPAA-
covered entity.
(b) This part preempts State law as set
forth in section 13421 of the American
Recovery and Reinvestment Act of 2009,
42 U.S.C 17951.
§ 318.2 Definitions.
Breach of security means, with
respect to unsecured PHR identifiable
health information of an individual in a
personal health record, acquisition of
such information without the
authorization of the individual.
Unauthorized acquisition will be
presumed to include unauthorized
access to unsecured PHR identifiable
health information unless the vendor of
personal health records, PHR related
entity, or third party service provider
that experienced the breach has reliable
evidence showing that there has not
been, or could not reasonably have
been, unauthorized acquisition of such
information. A breach of security
includes an unauthorized acquisition of
unsecured PHR identifiable health
information in a personal health record
that occurs as a result of a data breach
or an unauthorized disclosure.
Business associate means a business
associate under the Health Insurance
Portability and Accountability Act,
Public Law 104–191, 110 Stat. 1936, as
defined in 45 CFR 160.103.
Clear and conspicuous means that a
notice is reasonably understandable and
designed to call attention to the nature
and significance of the information in
the notice.
(1) Reasonably understandable. You
make your notice reasonably
understandable if you:
(i) Present the information in the
notice in clear, concise sentences,
paragraphs, and sections;
(ii) Use short explanatory sentences or
bullet lists whenever possible;
(iii) Use definite, concrete, everyday
words and active voice whenever
possible;
(iv) Avoid multiple negatives;
(v) Avoid legal and highly technical
business terminology whenever
possible; and
(vi) Avoid explanations that are
imprecise and readily subject to
different interpretations.
(2) Designed to call attention. You
design your notice to call attention to
the nature and significance of the
information in it if you:
(i) Use a plain-language heading to
call attention to the notice;
(ii) Use a typeface and type size that
are easy to read;
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47055	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
(iii) Provide wide margins and ample
line spacing;
(iv) Use boldface or italics for key
words; and
(v) In a form that combines your
notice with other information, use
distinctive type size, style, and graphic
devices, such as shading or sidebars,
when you combine your notice with
other information. The notice should
stand out from any accompanying text
or other visual elements so that it is
easily noticed, read, and understood.
(3) Notices on websites or within-
application messaging. If you provide a
notice on a web page or using within-
application messaging, you design your
notice to call attention to the nature and
significance of the information in it if
you use text or visual cues to encourage
scrolling down the page if necessary to
view the entire notice and ensure that
other elements on the website or
software application (such as text,
graphics, hyperlinks, or sound) do not
distract attention from the notice, and
you either:
(i) Place the notice on a screen that
consumers frequently access, such as a
page on which transactions are
conducted; or
(ii) Place a link on a screen that
consumers frequently access, such as a
page on which transactions are
conducted, that connects directly to the
notice and is labeled appropriately to
convey the importance, nature and
relevance of the notice.
Covered health care provider means a
provider of services (as defined in 42
U.S.C. 1395x(u)), a provider of medical
or other health services (as defined in 42
U.S.C. 1395x(s)), or any other entity
furnishing health care services or
supplies.
Electronic mail means email in
combination with one or more of the
following: text message, within-
application messaging, or electronic
banner.
Health care services or supplies
means any online service such as a
website, mobile application, or internet-
connected device that provides
mechanisms to track diseases, health
conditions, diagnoses or diagnostic
testing, treatment, medications, vital
signs, symptoms, bodily functions,
fitness, fertility, sexual health, sleep,
mental health, genetic information, diet,
or that provides other health-related
services or tools.
HIPAA-covered entity means a
covered entity under the Health
Insurance Portability and
Accountability Act (HIPAA), Public Law
104–191, 110 Stat. 1936, as defined in
45 CFR 160.103.
Personal health record (PHR) means
an electronic record of PHR identifiable
health information on an individual that
has the technical capacity to draw
information from multiple sources and
that is managed, shared, and controlled
by or primarily for the individual.
PHR identifiable health information
means information that:
(1) Relates to the past, present, or
future physical or mental health or
condition of an individual, the
provision of health care to an
individual, or the past, present, or
future payment for the provision of
health care to an individual; and
(i) Identifies the individual; or
(ii) With respect to which there is a
reasonable basis to believe that the
information can be used to identify the
individual; and
(2) Is created or received by a:
(i) Covered health care provider;
(ii) Health plan (as defined in 42
U.S.C. 1320d(5));
(iii) Employer; or
(iv) Health care clearinghouse (as
defined in 42 U.S.C. 1320d(2)); and
(3) With respect to an individual,
includes information that is provided by
or on behalf of the individual.
PHR related entity means an entity,
other than a HIPAA-covered entity or an
entity to the extent that it engages in
activities as a business associate of a
HIPAA-covered entity, that:
(1) Offers products or services through
the website, including any online
service, of a vendor of personal health
records;
(2) Offers products or services through
the websites, including any online
service, of HIPAA-covered entities that
offer individuals personal health
records; or
(3) Accesses unsecured PHR
identifiable health information in a
personal health record or sends
unsecured PHR identifiable health
information to a personal health record.
State means any of the several States,
the District of Columbia, Puerto Rico,
the Virgin Islands, Guam, American
Samoa, and the Northern Mariana
Islands.
Third party service provider means an
entity that:
(1) Provides services to a vendor of
personal health records in connection
with the offering or maintenance of a
personal health record or to a PHR
related entity in connection with a
product or service offered by that entity;
and
(2) Accesses, maintains, retains,
modifies, records, stores, destroys, or
otherwise holds, uses, or discloses
unsecured PHR identifiable health
information as a result of such services.
Unsecured means PHR identifiable
information that is not protected
through the use of a technology or
methodology specified by the Secretary
of Health and Human Services in the
guidance issued under section
13402(h)(2) of the American
Reinvestment and Recovery Act of 2009,
42 U.S.C. 17932(h)(2).
Vendor of personal health records
means an entity, other than a HIPAA-
covered entity or an entity to the extent
that it engages in activities as a business
associate of a HIPAA-covered entity,
that offers or maintains a personal
health record.
§ 318.3 Breach notification requirement.
(a) In general. In accordance with
§§ 318.4 (regarding timeliness of
notification), 318.5 (regarding methods
of notice), and 318.6 (regarding content
of notice), each vendor of personal
health records, following the discovery
of a breach of security of unsecured PHR
identifiable health information that is in
a personal health record maintained or
offered by such vendor, and each PHR
related entity, following the discovery of
a breach of security of such information
that is obtained through a product or
service provided by such entity, shall:
(1) Notify each individual who is a
citizen or resident of the United States
whose unsecured PHR identifiable
health information was acquired by an
unauthorized person as a result of such
breach of security;
(2) Notify the Federal Trade
Commission; and
(3) Notify prominent media outlets
serving a State or jurisdiction, following
the discovery of a breach of security, if
the unsecured PHR identifiable health
information of 500 or more residents of
such State or jurisdiction is, or is
reasonably believed to have been,
acquired during such breach.
(b) Third party service providers. A
third party service provider shall,
following the discovery of a breach of
security, provide notice of the breach to
an official designated in a written
contract by the vendor of personal
health records or the PHR related entity
to receive such notices or, if such a
designation is not made, to a senior
official at the vendor of personal health
records or PHR related entity to which
it provides services, and obtain
acknowledgment from such official that
such notice was received. Such
notification shall include the
identification of each customer of the
vendor of personal health records or
PHR related entity whose unsecured
PHR identifiable health information has
been, or is reasonably believed to have
been, acquired during such breach. For
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47056 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
purposes of ensuring implementation of
this paragraph (b), vendors of personal
health records and PHR related entities
shall notify third party service providers
of their status as vendors of personal
health records or PHR related entities
subject to this part. While some third
party service providers may access
unsecured PHR identifiable health
information in the course of providing
services, this does not render the third
party service provider a PHR related
entity.
(c) Breaches treated as discovered. A
breach of security shall be treated as
discovered as of the first day on which
such breach is known or reasonably
should have been known to the vendor
of personal health records, PHR related
entity, or third party service provider,
respectively. Such vendor, entity, or
third party service provider shall be
deemed to have knowledge of a breach
if such breach is known, or reasonably
should have been known, to any person,
other than the person committing the
breach, who is an employee, officer, or
other agent of such vendor of personal
health records, PHR related entity, or
third party service provider.
§ 318.4 Timeliness of notification.
(a) In general. Except as provided in
paragraph (d) of this section (exception
for law enforcement), all notifications
required under § 318.3(a)(1) (required
notice to individuals), (a)(3) (required
notice to media), and (b) (required
notice by third party service providers),
shall be sent without unreasonable
delay and in no case later than 60
calendar days after the discovery of a
breach of security.
(b) Timing of notice to FTC. All
notifications required under § 318.5(c)
(regarding notice to FTC) involving the
unsecured PHR identifiable health
information of 500 or more individuals
shall be provided contemporaneously
with the notice required by paragraph
(a) of this section. All logged
notifications required under § 318.5(c)
(regarding notice to FTC) involving the
unsecured PHR identifiable health
information of fewer than 500
individuals may be sent annually to the
Federal Trade Commission no later than
60 calendar days following the end of
the calendar year.
(c) Burden of proof. The vendor of
personal health records, PHR related
entity, and third party service provider
involved shall have the burden of
demonstrating that all notifications were
made as required under this part,
including evidence demonstrating the
necessity of any delay.
(d) Law enforcement exception. If a
law enforcement official determines that
a notification, notice, or posting
required under this part would impede
a criminal investigation or cause
damage to national security, such
notification, notice, or posting shall be
delayed. This paragraph (d) shall be
implemented in the same manner as
provided under 45 CFR 164.528(a)(2), in
the case of a disclosure covered under
§ 164.528(a)(2).
§ 318.5 Methods of notice.
(a) Individual notice. A vendor of
personal health records or PHR related
entity that discovers a breach of security
shall provide notice of such breach to an
individual promptly, as described in
§ 318.4 (regarding timeliness of
notification), and in the following form:
(1) Written notice at the last known
address of the individual. Written notice
may be sent by electronic mail if the
individual has specified electronic mail
as the primary method of
communication. Any written notice sent
by electronic mail must be Clear and
Conspicuous. Where notice via
electronic mail is not available or the
individual has not specified electronic
mail as the primary method of
communication, a vendor of personal
health records or PHR related entity
may provide notice by first-class mail at
the last known address of the
individual. If the individual is deceased,
the vendor of personal health records or
PHR related entity that discovered the
breach must provide such notice to the
next of kin of the individual if the
individual had provided contact
information for his or her next of kin,
along with authorization to contact
them. The notice may be provided in
one or more mailings as information is
available.
(2) If, after making reasonable efforts
to contact all individuals to whom
notice is required under § 318.3(a),
through the means provided in
paragraph (a)(1) of this section, the
vendor of personal health records or
PHR related entity finds that contact
information for ten or more individuals
is insufficient or out-of-date, the vendor
of personal health records or PHR
related entity shall provide substitute
notice, which shall be reasonably
calculated to reach the individuals
affected by the breach, in the following
form:
(i) Through a conspicuous posting for
a period of 90 days on the home page
of its website; or
(ii) In major print or broadcast media,
including major media in geographic
areas where the individuals affected by
the breach likely reside. Such a notice
in media or web posting shall include
a toll-free phone number, which shall
remain active for at least 90 days, where
an individual can learn if the
individual’s unsecured PHR identifiable
health information may have been
included in the breach.
(3) In any case deemed by the vendor
of personal health records or PHR
related entity to require urgency because
of possible imminent misuse of
unsecured PHR identifiable health
information, that entity may provide
information to individuals by telephone
or other means, as appropriate, in
addition to notice provided under
paragraph (a)(1) of this section.
(b) Notice to media. As described in
§ 318.3(a)(3), a vendor of personal
health records or PHR related entity
shall provide notice to prominent media
outlets serving a State or jurisdiction,
following the discovery of a breach of
security, if the unsecured PHR
identifiable health information of 500 or
more residents of such State or
jurisdiction is, or is reasonably believed
to have been, acquired during such
breach.
(c) Notice to FTC. Vendors of personal
health records and PHR related entities
shall provide notice to the Federal
Trade Commission following the
discovery of a breach of security, as
described in § 318.4(b) (regarding timing
of notice to FTC). If the breach involves
the unsecured PHR identifiable health
information of fewer than 500
individuals, the vendor of personal
health records or PHR related entity
may maintain a log of any such breach
and submit such a log annually to the
Federal Trade Commission as described
in § 318.4(b) (regarding timing of notice
to FTC), documenting breaches from the
preceding calendar year. All notices
pursuant to this paragraph (c) shall be
provided according to instructions at
the Federal Trade Commission’s
website.
§ 318.6 Content of notice.
Regardless of the method by which
notice is provided to individuals under
§ 318.5 (regarding methods of notice),
notice of a breach of security shall be in
plain language and include, to the
extent possible, the following:
(a) A brief description of what
happened, including: the date of the
breach and the date of the discovery of
the breach, if known; and the full name
or identity (or, where providing the full
name or identity would pose a risk to
individuals or the entity providing
notice, a description) of any third
parties that acquired unsecured PHR
identifiable health information as a
result of a breach of security, if this
information is known to the vendor of
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47057	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
personal health records or PHR related
entity;
(b) A description of the types of
unsecured PHR identifiable health
information that were involved in the
breach (such as but not limited to full
name, Social Security number, date of
birth, home address, account number,
health diagnosis or condition, lab
results, medications, other treatment
information, the individual’s use of a
health-related mobile application, or
device identifier (in combination with
another data element));
(c) Steps individuals should take to
protect themselves from potential harm
resulting from the breach;
(d) A brief description of what the
entity that experienced the breach is
doing to investigate the breach, to
mitigate harm, to protect against any
further breaches, and to protect affected
individuals, such as offering credit
monitoring or other services; and
(e) Contact procedures for individuals
to ask questions or learn additional
information, which must include two or
more of the following: toll-free
telephone number; email address;
website; within-application; or postal
address.
§ 318.7 Enforcement.
Any violation of this part shall be
treated as a violation of a rule
promulgated under section 18 of the
Federal Trade Commission Act, 15
U.S.C. 57a, regarding unfair or deceptive
acts or practices, and thus subject to
civil penalties (as adjusted for inflation
pursuant to § 1.98 of this chapter), and
the Commission will enforce this part in
the same manner, by the same means,
and with the same jurisdiction, powers,
and duties as are available to it pursuant
to the Federal Trade Commission Act,
15 U.S.C. 41 et seq.
§ 318.8 Applicability date.
This part shall apply to breaches of
security that are discovered on or after
September 24, 2009.
§ 318.9 Sunset.
If new legislation is enacted
establishing requirements for
notification in the case of a breach of
security that apply to entities covered
by this part, the provisions of this part
shall not apply to breaches of security
discovered on or after the effective date
of regulations implementing such
legislation.
By direction of the Commission,
Commissioners Holyoak and Ferguson
dissenting.
April J. Tabor,
Secretary.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendix A—Health Breach
Notification Rule Exemplar Notices
The notices below are intended to be
examples of notifications that entities may
use, in their discretion, to notify individuals
of a breach of security pursuant to the Health
Breach Notification Rule. The examples
below are for illustrative purposes only. You
should tailor any notices to the particular
facts and circumstances of your breach.
While your notice must comply with the
Health Breach Notification Rule, you are not
required to use the notices below.
Mobile Text Message and In-App Message
Exemplars
Text Message Notification Exemplar 1
Due to a security breach on our system, the
health information you shared with us
through [name of product] is now in the
hands of unknown attackers. Visit [add non-
clickable URL] to learn what happened, how
it affects you, and what you can do to protect
your information. We also sent you an email
with additional information.
Text Message Notification Exemplar 2
You shared health information with us
when you used [product name]. We
discovered that we shared your health
information with third parties for [describe
why the company shared the info] without
your permission. Visit [add non-clickable
URL] to learn what happened, how it affects
you, and what you can do to protect your
information. We also sent you an email with
more information.
In-App Message Notification Exemplar 1
Due to a security breach on our system, the
health information you shared with us
through [name of product] is now in the
hands of unknown attackers. This could
include your [Add specifics—for example,
your name, email, address, blood pressure
data]. Visit [URL] to learn what happened,
how it affects you, and what you can do to
protect your information. We also sent you
an email with additional information.
In-App Message Notification Exemplar 2
You shared health information with us
when you used [product name]. We
discovered that we shared your health
information with third parties for [if known,
describe why the company shared the info]
without your permission. This could include
your [Add specifics—for example, your
name, email, address, blood pressure data].
Visit [URL] to learn what happened, how it
affects you, and what you can do to protect
your information. We also sent you an email
with additional information.
Web Banner Exemplars
Web Banner Notification Exemplar 1
Due to a security breach on our system, the
health information you shared with us
through [name of product] is now in the
hands of unknown attackers. This could
include your [Add specifics—for example,
your name, email, address, blood pressure
data]. Visit [URL] to learn what happened,
how it affects you, and what you can do to
protect your information.
• Recommend: Include clear ‘‘Take action’’
call to action button, such as the example
below:
Web Banner Notification Exemplar 2
You shared health information with us
when you used [product name]. We
discovered that we shared your health
information with third parties for [if known,
describe why the company shared the info]
without your permission. This could include
your [Add specifics—for example, your
name, email, address, blood pressure data].
Visit [URL] to learn what happened, how it
affects you, and what you can do to protect
your information.
• Recommend: Include clear ‘‘Take action’’
call to action button, such as the example
below:
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47058 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
Email Exemplars
Exemplar Email Notice 1
Email Sender: [Company] <company email>
Email Subject Line: [Company] Breach of
Your Health Information
Dear [Name],
We are contacting you because an attacker
recently gained unauthorized access to our
system and stole health information about
our customers, including you.
What happened and what it means for you
On [March 1, 2024], we learned that an
attacker had accessed a file containing our
customers’ health information on [February
28, 2024]. The file included your name, the
name of your health insurance company,
your date of birth, and your group or policy
number.
What you can do to protect yourself
You can take steps now to reduce the risk
of identity theft.
1. Review your medical records,
statements, and bills for signs that someone
is using your information. Under the health
privacy law known as HIPAA, you have the
right to access your medical records. Get your
records and review them for any treatments
or doctor visits you don’t recognize. If you
find any, report them to your healthcare
provider in writing. Then go to
www.IdentityTheft.gov/steps to see what
other steps you can take to limit the damage.
Also review the Explanation of Benefits
statement your insurer sends you when it
pays for medical care.
Some criminals wait before using stolen
information so keep monitoring your benefits
and bills.
2. Review your credit reports for errors.
You can get your free credit reports from the
three credit bureaus at
www.annualcreditreport.com or call 1–877–
322–8228. Look for medical billing errors,
like medical debt collection notices that you
don’t recognize. Report any medical billing
errors to all three credit bureaus by following
the ‘‘What To Do Next’’ steps on
www.IdentityTheft.gov.
3. Sign up for free credit monitoring to
detect suspicious activity. Credit monitoring
detects and alerts you about activity on your
credit reports. Activity you don’t recognize
could be a sign that someone stole your
identity. We’re offering free credit monitoring
for two years through [name of service].
Learn more and sign up at [URL].
4. Consider freezing your credit report or
placing a fraud alert on your credit report. A
credit report freeze means potential creditors
can’t get your credit report without your
permission. That makes it less likely that an
identity thief can open new accounts in your
name. A freeze remains in place until you ask
the credit bureau to temporarily lift it or
remove it.
A fraud alert will make it harder for
someone to open a new credit account in
your name. It tells creditors to contact you
before they open any new accounts in your
name or change your accounts. A fraud alert
lasts for one year. After a year, you can renew
it.
To freeze your credit report, contact each
of the three credit bureaus, Equifax,
Experian, and TransUnion.
To place a fraud alert, contact any one of
the three credit bureaus, Equifax, Experian,
and TransUnion. As soon as one credit
bureau confirms your fraud alert, the others
are notified to place fraud alerts on your
credit report.
Credit bureau contact information
Equifax, www.equifax.com/personal/credit-
report-services, 1–800–685–1111
Experian, www.experian.com/help, 1–888–
397–3742
TransUnion, www.transunion.com/credit-
help, 1–888–909–8872
Learn more about how credit report freezes
and fraud alerts can protect you from identity
theft or prevent further misuse of your
personal information at
www.consumer.ftc.gov/articles/what-know-
about-credit-freezes-and-fraud-alerts.
What we are doing in response
We hired security experts to secure our
system. We are working with law
enforcement to find the attacker. And we are
investigating whether we made mistakes that
made it possible for the attackers to get in.
Learn more about the breach.
Go to [URL] to learn more about what
happened and what you can do to protect
yourself. If we have any updates, we will
post them there.
If you have questions or concerns, call us
at [telephone number], email us at [address],
or go to [URL].
Sincerely,
First name Last Name
[Role], [Company]
Exemplar Email Notice 2
Email Sender: [Company] <company email>
Email Subject Line: Unauthorized disclosure
of your health informationby [Company]
Dear [Name],
We are contacting you because you use our
company’s app [name of app]. When you
downloaded our app, we promised to keep
your personal health information private.
Instead, we disclosed health information
about you without your approval.
What happened?
We told [insert Company name, identity,
or, where providing full name or identity
would pose a risk to individuals or the entity
providing notice, a description of type of
company] that you use our app, and between
[January 10, 2024] and [March 1, 2024], we
gave them your name and your email
address.
We gave [insert Company name, identity,
or where providing full name or identity
would pose a risk to individuals or the entity
providing notice, a description of type of
company] this information so they could use
it for advertising and marketing purposes.
For example, to target you for ads for cancer
drugs.
What we are doing in response
We will stop selling or sharing your health
information with other companies. We will
stop using your health information for
advertising or marketing purposes. We have
asked Company XYZ to delete your health
information, but it’s possible they could
continue to use it for advertising and
marketing.
What you can do
We made important changes to our app to
fix this problem. Download the latest updates
to our app then review your privacy settings.
You can also contact Company XYZ to
request that it delete your data.
Learn more
Learn more about our privacy and security
practices at [URL]. If we have any updates,
we will post them there.
If you have any questions or concerns, call
us at [telephone number] or email us at
[address].
Sincerely,
First name Last Name
[Role], [Company]
Exemplar Email Notice 3
Email Sender: [Company] <company email>
Email Subject Line: [Company] Breach of
Your Health Information
Dear [Name],
We are contacting you about a breach of
your health information collected through
the [product], a device sold by our company,
[Company].
What happened?
On [March 1, 2024], we discovered that our
employee had accidentally posted a database
online on [February 28, 2024]. That database
included your name, your credit or debit card
information, and your blood pressure
readings. We don’t know if anyone else
found the database and saw your
information. If someone found the database,
they could use personal information to steal
your identity or make unauthorized charges
in your name.
What you can do to protect yourself
You can take steps now to reduce the risk
of identity theft.
1. Get your free credit report and review it
for signs of identity theft. Order your free
credit report at www.annualcreditreport.com.
Review it for accounts and activity you don’t
recognize. Recheck your credit reports
periodically.
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47059	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
314 Am. Recovery and Reinvestment Act of 2009,
Public Law 111–5, 123 Stat. 115 (2009) at Sec.
13400 et seq.
315 Health Insurance Portability and
Accountability Act, Public Law 104–191, 110 Stat.
1936, 2022 (1996) at Sec. 1171, codified at 42 U.S.C.
1320d.
316 Health Information Technology for Economic
and Clinical Health Act, Public Law 111–5, Div. A,
Title XIII, Subtitle D, sections 13401 and 13404
(codified at 42 U.S.C. 17937(a))
317 Id. 13410(e).
318 Id. 13407(g)(1).
319 74 FR 42962 (Aug. 25, 2009).
320 Statement of the Commission on Breaches by
Health Apps and Other Connected Devices (Sept.
15, 2021), https://www.ftc.gov/system/files/
documents/public_statements/1596364/statement_
of_the_commission_on_breaches_by_health_apps_
and_other_connected_devices.pdf.
321 See, e.g., Fed. Trade Comm’n, FTC
Enforcement Action to Bar GoodRx from Sharing
Consumers’ Sensitive Health Info for Advertising
(Feb. 1, 2023), https://www.ftc.gov/news-events/
news/press-releases/2023/02/ftc-enforcement-
action-bar-goodrx-sharing-consumers-sensitive-
health-info-advertising; Fed. Trade Comm’n,
Ovulation Tracking App Premom Will be Barred
from Sharing Health Data for Advertising Under
Proposed FTC Order (May 17, 2023), https://
www.ftc.gov/news-events/news/press-releases/2023/
05/ovulation-tracking-app-premom-will-be-barred-
sharing-health-data-advertising-under-proposed-ftc.
322 Dissenting Statement of Comm’rs Melissa
Holyoak and Andrew Ferguson at 1 (Apr. 25, 2024)
(hereinafter ‘‘Dissent’’).
323 Health Information Technology for Economic
and Clinical Health Act, Public Law 111–5, Div. A,
Title XIII, Subtitle D, section 13407 (codified at 42
U.S.C. 17937(a)).
324 42 U.S.C. 17937(f)(2).
325 42 U.S.C. 1320d(6).
326 See 42 U.S.C. 1395x(u) (‘‘The term ‘‘provider
of services’’ means a hospital, critical access
hospital, rural emergency hospital, skilled nursing
facility, comprehensive outpatient rehabilitation
facility, home health agency, hospice program, or,
for purposes of section 1395f(g) and section
1395n(e) of this title, a fund.’’).
327 42 U.S.C. 1395x(s) (listing a vast array of
services, tests, supplies, and measurements,
comprising over 2000 words and 15 categories, one
of which has over 30 subcategories).
328 42 U.S.C. 1320d(3) (emphasis added).
329 HBNR Final Rule § 318.2(e).
330 Dissent at 2 (‘‘When a statute contains a list,
‘‘each word in that list presumptively has a ‘similar’
meaning’’ under the canon of noscitur a sociis. And
when a general term follows a list of specific terms,
the ejusdem generis canon teaches that the general
term ‘‘should usually be read in light of those
specific words to mean something ‘similar.’ ’’
Together, these canons instruct that the final
category of health care provider that includes the
general term ‘‘other person’’ must be similar to the
more specific terms that precede it.’’ (citations
omitted)).
331 Marx v. Gen. Revenue Corp., 568 U.S. 371, 386
(2013) (Thomas, J.) (‘‘Finally, the canon against
Continued
2. Consider freezing your credit report or
placing a fraud alert on your credit report. A
credit report freeze means potential creditors
can’t get your credit report without your
permission. That makes it less likely that an
identity thief can open new accounts in your
name. A freeze remains in place until you ask
the credit bureau to temporarily lift it or
remove it.
A fraud alert will make it harder for
someone to open a new credit account in
your name. It tells creditors to contact you
before they open any new accounts in your
name or change your accounts. A fraud alert
lasts for one year. After a year, you can renew
it.
To freeze your credit report, contact each
of the three credit bureaus, Equifax,
Experian, and TransUnion.
To place a fraud alert, contact any one of
the three credit bureaus, Equifax, Experian,
and TransUnion. As soon as one credit
bureau confirms your fraud alert, the others
are notified to place fraud alerts on your
credit report.
Credit bureau contact information
Equifax, www.equifax.com/personal/credit-
report-services, 1–800–685–1111
Experian, www.experian.com/help, 1–888–
397–3742
TransUnion, www.transunion.com/credit-
help, 1–888–909–8872
Learn more about how credit report freezes
and fraud alerts can protect you from identity
theft or prevent further misuse of your
personal information at
www.consumer.ftc.gov/articles/what-know-
about-credit-freezes-and-fraud-alerts.
3. Sign up for free credit monitoring to
detect suspicious activity. Credit monitoring
detects and alerts you about activity on your
credit reports. Activity you don’t recognize
could be a sign that someone stole your
identity. We’re offering free credit monitoring
for two years through [name of service].
Learn more and sign up at [URL].
What we are doing in response
We are investigating our mistakes. We
know the database shouldn’t have been
online and it should have been encrypted.
We are making changes to prevent this from
happening again.
We are working with experts to secure our
system. We are reviewing our databases to
make sure we store health information
securely.
Learn more about the breach.
Go to [URL] to learn more about what
happened and what you can do to protect
yourself. If we have any updates, we will
post them there.
If you have questions or concerns, call us
at [telephone number], email us at [address],
or go to [URL].
Sincerely,
First name Last Name
[Role], [Company]
Appendix B—Joint Statement by FTC
Chair and Commissioners
Joint Statement of Chair Lina M. Khan,
Commissioner Rebecca Kelly Slaughter, and
Commissioner Alvaro M. Bedoya
Today, the FTC finalizes an update to the
Health Breach Notification Rule (‘‘the Final
Rule’’) that ensures its protections keep pace
with the rapid proliferation of digital health
records. We do so to fulfill a clear statutory
directive given to us by Congress.
In 2009, as part of the American Recovery
and Reinvestment Act (‘‘ARRA’’), Congress
passed the Health Information Technology
for Economic and Clinical Health Act
(‘‘HITECH Act’’).314 Among other things, the
HITECH Act sought to fill the gaps left by the
privacy and security protections created
under the Health Insurance Portability and
Accountability Act (‘‘HIPAA’’), which was
passed more than a decade earlier.315
Specifically, it expanded the kinds of entities
subject to the privacy and security provisions
of HIPAA,316 gave state attorneys general
enforcement powers,317 and—most relevant
here—directed the Commission to issue a
rule requiring entities not covered by HIPAA
to provide notification of any breach of
unsecured health records.318 The
Commission issued the original rule in
2009. 319 In 2020, the Commission initiated
its regular decennial rule review and, in
2021, the Commission issued a policy
statement clarifying how the rule applies to
health apps and other connected devices. 320
In the years since, the Commission has
brought enforcement actions against health
apps alleging violations of the Health Breach
Notification Rule.321 Today’s issuance of the
Final Rule codifies this approach, honoring
the statutory directive that people must be
notified when their health records are
breached.
The dissent argues that the Commission’s
action ‘‘exceeds the Commission’s statutory
authority.’’ 322 But its analysis contravenes a
plain reading of the statute.
In the HITECH Act, Congress directed the
FTC to issue rules requiring vendors of
personal health records (‘‘PHR’’) to notify
consumers and the FTC following ‘‘a breach
of security of unsecured PHR identifiable
health information.’’ 323 The statute defines
the term ‘‘PHR identifiable health
information’’ as ‘‘individually identifiable
health information, as defined in section
1320d(6) of this title.’’ 324 Section 1320d(6),
a portion of the Social Security Act created
by HIPAA, defines ‘‘individually identifiable
health information’’ as ‘‘any information . . .
that is created or received by a health care
provider, health plan, employer, or health
care clearinghouse.’’ 325 Section 1320d(3),
another section of the Social Security Act
created by HIPAA, defines ‘‘health care
provider’’ as, first, ‘‘a provider of services’’ as
defined in section 1395x(u); 326 second, ‘‘a
provider of medical or other health services’’
as defined in section 1395x(s); 327 and, third,
‘‘any other person furnishing health care
services or supplies.’’ 328
The term ‘‘health care services or
supplies,’’ undefined in the statute, is
defined in the Final Rule as follows:
Health care services or supplies means any
online service such as a website, mobile
application, or internet-connected device that
provides mechanisms to track diseases,
health conditions, diagnoses or diagnostic
testing, treatment, medications, vital signs,
symptoms, bodily functions, fitness, fertility,
sexual health, sleep, mental health, genetic
information, diet, or that provides other
health-related services or tools.329
The dissent argues that this definition
violates certain canons of statutory
construction.330 But its effort to cabin the
third category of HIPAA’s ‘‘health care
provider’’ reads it out of existence, violating
the canon that holds interpretations giving
effect to every clause of a statute are superior
to those that render distinct clauses
superfluous. 331 Specifically, the second
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47060 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
surplusage is strongest when an interpretation
would render superfluous another part of the same
statutory scheme.’’).
332 42 U.S.C. 1320(d)(3) (citing 42 U.S.C.
1395x(u)).
333 42 U.S.C. 1320(d)(3).
334 Id.
335 See Southwest Airlines Co. v. Saxon, 596 U.S.
450, 458 (2022) (Thomas, J.) (‘‘Where a document
has used one term in one place, and a materially
different term in another, the presumption is that
the different term denotes a different idea’’ (cleaned
up)).
336 In addition to defining this term by identifying
specific services, the Final Rule actually also
narrowed the definition originally proposed in the
NPRM, by eliminating ‘‘includes’’ from the
definition. SBP at 27 (‘‘[T]he Commission has
substituted the word ‘means’ for ‘includes’ to avoid
implying greater breadth than the Commission
intends.’’).
337 Dissent at 3. This rejection of the text of the
statute, in favor of vague speculation about what
Congress intended, mirrors the argument advanced
by the Chamber of Commerce (‘‘the Chamber’’). The
Chamber purports to rely on a ‘‘plain text reading’’
of the statute but immediately switches—in the very
same sentence—to vague notions of Congressional
intent: ‘‘It is clear from a plain text reading of both
the HITECH Act and HIPPA [sic] that Congress
intended for the HBNR to cover health records more
aligned with the provision of health services
provided by traditional health providers at a time
when it was attempting to digitize traditional health
records.’’ Comment submitted by U.S. Chamber of
Com., Health Breach Notification Rule,
Regulations.gov (Aug. 8, 2023) at 3, https://
www.regulations.gov/comment/FTC-2023-0037-010.
337 Dissent at 3.
338 Dissent at 3.
339 That the HIPAA Privacy rule has a narrower
overall scope does not change this fact.
340 45 CFR 160.103.
341 Id. (emphasis added). The dissent asserts that
we ‘‘mischaracterize[] the HIPAA Privacy Rule,
which only applies to HIPAA ‘covered entities’ and
their ‘business associates,’—i.e., to traditional
health care providers, that do not include the broad
swath of app developers the Final Rule will
encompass.’’ Dissent at 4 n.24 (internal citations
omitted). It is not clear how this qualifies as a
mischaracterization. Indeed, this is precisely the
stated purpose of the Health Breach Notification
Rule: To cover entities that HIPAA does not. The
dissent also notes that we fail to recognize that HHS
provides two examples of ‘‘health care.’’ But, HHS
expressly states that the definition ‘‘includes, but is
not limited to’’ these categories. 45 CFR 160.103. In
any case, the breadth of these categories further
underscores the expansive scope of HHS’s
definition of health care. Id.
341 Dissent at 2.
342 Proposed Rule, Standards for Privacy of
Individually Identifiable Health Information, 64 FR
59918, 60049 (Nov. 3, 1999) (emphasis added).
343 65 FR 82462, 82477.
344 Id.
345 45 CFR 164.501.
346 Dissent at 2.
347 Dissent at 4.
348 SBP at 29–30.
349 The dissent’s argument anachronistically
assumes that Congress intended for the Rule to
cover some health apps, but not other health apps.
But, in fact, the Apple and Google app stores were
in their infancy when Congress drafted this
legislation in 2009, and so there is no indication
that Congress was thinking about specific health
apps at all. To the extent the dissent’s argument is
that Congress simply did not anticipate the vast
number of products that would end up covered by
the broad category of ‘‘supplies and services,’’ it is
not within the Commission’s authority to re-write
the statute based on the Commission’s belief of
what Congress would have wanted. MCI
Telecomms. Corp. v. Am. Telephone & Telegraph
Co., 512 U.S. 218, 229 (1994) (holding that FCC’s
authority to ‘‘modify’’ does not extend to
eliminating altogether a statutory requirement).
350 Press Release, Fed. Trade Comm’n, Ovulation
Tracking App Premom Will be Barred from Sharing
Health Data for Advertising Under Proposed FTC
Order (May 17, 2023), https://www.ftc.gov/news-
events/news/press-releases/2023/05/ovulation-
tracking-app-premom-will-be-barred-sharing-
health-data-advertising-under-proposed-ftc.
category of ‘‘health care provider’’ already
comprises a vast array of ‘‘provider[s] of
medical and other services.’’ 332 If the
Commission were to interpret the third
category as comprising, as the dissent
recommends, only ‘‘traditional forms of
health care providers,’’ this distinct provision
would be entirely redundant.
The dissent’s approach also fails to give
meaning to other textual differences between
the second and third category. The second
category in the definition of ‘‘health care
provider’’ discusses a ‘‘provider’’ and
‘‘medical’’ services.333 The third category, by
contrast, drops the terms ‘‘provider’’ in favor
of ‘‘person furnishing’’ and drops ‘‘medical’’
in favor of ‘‘health care.’’ 334 Honoring the
materially different words of the statute
requires us to read these two categories as
covering distinct, not entirely overlapping,
entities. 335 The Final Rule faithfully follows
these textual markers and identifies specific
services and tools that comprise ‘‘health care
services or supplies.’’ 336 Contrary to this
plain reading of the text, the dissent claims
that Congress must have meant for this
provision to apply only to ‘‘traditional forms
of health care providers.’’ 337 But we cannot
subordinate the text of the statute to
speculative accounts of what Congress
intended.
The dissent also notes that the Department
of Health and Human Services (‘‘HHS’’) ‘‘has
never interpreted the term ‘health care
provider’ to reach the expansive, creative
conclusion that the Commission does
today.’’ 338 HHS has, however, interpreted
‘‘health care provider,’’ and its interpretation
of this term is consistent with the
Commission’s definition. 339 In the HIPAA
Privacy Rule, HHS defines first two
categories of ‘‘health care provider’’ using the
same language as the statute, but the third
category is changed from ‘‘any other person
furnishing health care services or supplies’’
to ‘‘any other person or organization who
furnishes, bills, or is paid for health care in
the normal course of business.’’ 340 HHS also
defines ‘‘health care’’ broadly, as any ‘‘care,
services, or supplies related to the health of
an individual.’’ 341
Notably, in its 1999 Notice of Proposed
Rulemaking for the HIPAA Privacy Rule,
HHS originally had proposed to define the
term ‘‘health care’’ as constituting ‘‘the
provision of care, services, or
supplies. . . .’’ 342 But, in its final rule, HHS
eliminated the concept of ‘‘provision’’ in
order to distinguish the broader term of
‘‘health care’’ from the narrower term
‘‘treatment.’’ 343 HHS explained: ‘‘We delete
the term ‘providing’ from the definition [of
health care] to delineate more clearly the
relationship between ‘treatment,’ as the term
is defined in § 164.501, and ‘health care.’ ’’ 344
HHS defined ‘‘treatment,’’ in contrast to
‘‘health care,’’ as ‘‘the provision,
coordination, or management of health care
and related services.’’ 345 In short, HHS
defines ‘‘health care’’ broadly, covering all
aspects related to the health of an individual,
and defines ‘‘treatment’’ more narrowly,
referring to the provision of medical care to
an individual. The dissent’s proposal to
narrow the third category of ‘‘health care
provider’’ to ‘‘traditional forms of health care
providers’’ closely mirrors the approach that
HHS rejected when it defined this term. 346
The dissent also claims that changing the
phrase ‘‘can be drawn’’ to ‘‘has the technical
capacity to draw’’ violates the surplusage
canon because it renders the limitation
meaningless as to health apps, because
‘‘virtually every app has the technical
capacity to draw some information from
more than one source.’’ 347 This argument
fails for two reasons. First, as the Statement
of Basis and Purpose (‘‘SBP’’) explains, there
are products and services that do not satisfy
this requirement.348 Second, even if the
definition did reach every health app, that
would not itself suggest that the Final Rule’s
definition was wrongly crafted. Rather, it
would reflect the rapid growth in digital
applications and services related to
consumers’ health.349
The practical ramifications of the dissent’s
legal shortcomings are significant.
Just last year, the Commission brought an
action against Easy Healthcare Corporation,
alleging privacy violations by its fertility
tracking application Premom.350 As laid out
in the complaint, Premom—which
encourages users to provide information
about their menstrual cycles, fertility, and
pregnancy, as well as to import their data
from other services, such as Apple Health—
shared information with advertisers and
China-based companies through software
development kits (‘‘SDKs’’) embedded in the
application. The Commission’s eight-count
complaint against Easy Healthcare reflected
the seriousness of this misconduct, charging
the business with deceptive and unfair
practices, as well as a violation of the Health
Breach Notification Rule, which triggered
civil penalties.
Under the dissent’s analysis of health care
services or supplies, the developer of the
Premom application—Easy Healthcare—
would not be covered by the Health Breach
Notification Rule. This reading would mean
that when companies like Easy Healthcare
suffer a breach that may divulge health
information to companies located in China,
the Health Breach Notification Rule would
not require them to disclose the breach to its
users. It would also mean that when Easy
Healthcare broadcasts women’s sensitive
health data across the vast commercial
surveillance network propped up by SDKs
and ad networks, the Health Breach
Notification Rule would not require Easy
Healthcare to alert women. Today’s Final
Rule rejects this atextual and cramped
reading of the law, ensuring that businesses
that hold themselves out as health care
services companies—like Easy Healthcare—
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351 Press Release, Fed. Trade Comm’n, FTC
Enforcement Action to Bar GoodRx from Sharing
Consumers’ Sensitive Health Info for Advertising
(Feb. 1, 2023), https://www.ftc.gov/news-events/
news/press-releases/2023/02/ftc-enforcement-
action-bar-goodrx-sharing-consumers-sensitive-
health-info-advertising; See also, Concurring
Statement of Comm’r Christine S. Wilson, GoodRx
Holdings, Inc. (Feb. 1, 2023), https://www.ftc.gov/
system/files/ftc_gov/pdf/2023090_goodrx_final_
concurring_statement_wilson.pdf (‘‘Today’s
settlement marks the first enforcement matter in
which the FTC has invoked the HBNR. I
congratulate staff on this important step—the
agency rightly is focused on protecting the privacy
of sensitive health data and empowering consumers
to make informed choices about the goods and
services they use.’’); see also id. at 5 (describing the
GoodRx case as ‘‘an important milestone in the
Commission’s privacy work.’’). The dissent suggests
that Commissioners Holyoak and Ferguson would
have supported the application of HBNR to
GoodRx.
352 See GoodRx, GoodRx Response to FTC
Settlement (Feb. 1, 2023) (‘‘We believe this is a
novel application of the Health Breach Notification
Rule by the FTC. . . . We do not agree with the
assertion that this was a violation of the HBNR.’’).
353 The dissent concedes that it does support an
update to the rule that provides more clarity—and
specifically an update that provides clarity to show
that the rule covers GoodRx. Dissent at 7 (‘‘I would
support changes to the Rule that clarify the Rule’s
application to companies like GoodRx.’’). That is
precisely what today’s Final Rule does. Previously,
the rule did not define ‘‘health care services or
supplies,’’ and today’s Final Rule does. Previously,
health apps like GoodRx stated that it was unclear
whether the rule applies to them, and today’s Final
Rule makes clear that it does. This concession from
the dissent suggests a more modest disagreement
with the contours of how the Rule defines ‘‘health
care services or supplies,’’ though—notably—the
dissent does not provide an alternative definition.
354 See, e.g., Press Release, Fed. Trade Comm’n,
FTC Hits R360 and its Owner With $3.8 Million
Civil Penalty Judgment for Preying on People
Seeking Treatment for Addiction (May 17, 2022),
https://www.ftc.gov/news-events/news/press-
releases/2022/05/ftc-hits-r360-its-owner-38-million-
civil-penalty-judgment-preying-people-seeking-
treatment-addiction (the Commission’s first action
brought under the Opioid Addiction Recovery
Fraud Prevention Act); Harris Jewelry, Press
Release, Fed. Trade Comm’n, FTC and 18 States Sue
to Stop Harris Jewelry from Cheating Military
Families with Illegal Financing and Sales Tactics
(Jul. 20, 2022), https://www.ftc.gov/news-events/
news/press-releases/2022/07/ftc-18-states-sue-stop-
harris-jewelry-cheating-military-families-illegal-
financing-sales-tactics (the Commission’s first
action brought under the Military Lending Act);
Press Release, Fed. Trade Comm’n, Smart Home
Monitoring Company Vivint Will Pay $20 Million
to Settle FTC Charges That It Misused Consumer
Credit Reports (Apr. 29, 2021), https://www.ftc.gov/
news-events/news/press-releases/2021/04/smart-
home-monitoring-company-vivint-will-pay-20-
million-settle-ftc-charges-it-misused-consumer (the
Commission’s first action brought under the Red
Flags Rule, brought under Acting Chair Slaughter);
Press Release, Fed. Trade Comm’n, FTC Sues
Burger Franchise Company That Targets Veterans
and Others With False Promises and Misleading
Documents (Feb. 8, 2022), https://www.ftc.gov/
news-events/news/press-releases/2022/02/ftc-sues-
burger-franchise-company-targets-veterans-others-
false-promises-misleading-documents (the
Commission’s first action under the Franchise Rule
since 2007); Press Release, Fed. Trade Comm’n,
FTC Issues Rule to Deter Rampant Made in USA
Fraud (Jul. 1, 2021), https://www.ftc.gov/news-
events/news/press-releases/2021/07/ftc-issues-rule-
deter-rampant-made-usa-fraud (issuance of the
Made in the USA Rule, more than 25 years after
Congress authorized the Commission to promulgate
a rule).
1 Like the majority, and other Commissioners
before me, I support federal privacy legislation,
particularly where such legislation could address
gaps in sector-specific laws and level the playing
field for companies navigating a patchwork of laws.
And like the majority, and other Commissioners
before me, I care deeply about protecting the
privacy and security of consumers’ health
information, particularly where it falls outside the
bounds of the Health Insurance Portability and
Accountability Act (‘‘HIPAA’’). For more than two
decades, the FTC has been in a leader in protecting
consumers’ health information. See, e.g., Eli Lilly,
FTC File No. 0123214 (May 10, 2002), https://
www.ftc.gov/legal-library/browse/cases-
proceedings/012-3214-eli-lilly-company-matter. I
look forward to continuing the Commission’s
important work in this area.
2 See, e.g., Children’s Online Privacy Protection
Rule, 16 CFR part 312, as authorized by the
Children’s Online Privacy Protection Act of 1998,
15 U.S.C. 6501 et seq.
3 Joint Statement of Chair Lina M. Khan, Comm’r
Rebecca Kelly Slaughter, and Comm’r Alvaro M.
Bedoya at 2 (Apr. 24, 2024) (‘‘Majority Statement’’).
4 Am. Recovery and Reinvestment Act of 2009,
Public Law 111–5, 123 Stat. 115 (2009).
5 42 U.S.C. 17937(a), (g).
6 74 FR 42962 (Aug. 25, 2009).
7 85 FR 31085 (May 22, 2020).
8 See Statement of the Comm’n on Breaches by
Health Apps and Other Connected Devices (Sept.
15, 2021), https://www.ftc.gov/system/files/
documents/public_statements/1596364/statement_
of_the_commission_on_breaches_by_health_apps_
and_other_connected_devices.pdf (‘‘2021 Policy
Statement’’).
9 88 FR 37819 (June 9, 2023).
10 See Statement of Basis and Purpose (‘‘SBP’’)
accompanying the Final Rule, Section I
(summarizing procedural history).
11 See 2021 Policy Statement, supra note 8.
are considered ‘‘health care services’’
companies under the law.
Lastly, the dissent claims that the Final
Rule introduces ambiguity where previous
there was none. But GoodRx suggests
otherwise. In a unanimous action, the
Commission charged GoodRx with making
unauthorized disclosures of people’s health
data to Facebook and Google, among
others.351 GoodRx, meanwhile, disputed the
applicability of the HBNR to its practices,
calling it a ‘‘novel’’ application.352 By
codifying how HBNR applies to online
platforms and applications, today’s Final
Rule provides market participants with more
clarity about what entities are covered—
thereby providing greater certainty and
notice.353
GoodRx marked the first time the
Commission had ever enforced the Health
Breach Notification Rule. A top priority for
us at the Commission is ensuring we are
faithfully discharging our statutory duties,
rather than letting the authorities that
Congress has granted us sit dormant, and we
are proud of the work the Commission and
the staff are doing to take care that the full
set of laws assigned to the FTC are being
faithfully executed. 354 We agree with the
dissent that we must look out for the
institutional integrity of the Commission.
Failing to use the full scope of our statutory
tools to protect Americans—and failing to
update our application of these tools even as
technologies change—would undermine the
agency’s integrity and credibility alike.
We are deeply grateful to the Division of
Privacy and Identity Protection for leading
the Commission’s work to activate the Health
Breach Notification Rule and for finalizing
this Rule update. In an environment rife with
new and evolving threats to Americans’
health data, ensuring we are faithfully
harnessing all of our statutory tools to protect
people from data breaches is paramount.
Dissenting Statement of Commissioner
Melissa Holyoak, Joined by Commissioner
Andrew Ferguson
The Health Breach Notification Rule
(‘‘Final Rule’’) that the Commission adopts
today exceeds the Commission’s statutory
authority, puts companies at risk of perpetual
non-compliance, and opens the Commission
to legal challenge that could undermine its
institutional integrity. I share the majority’s
goal of protecting the privacy and security of
consumers’ identifiable health information,1
and I support vigorous enforcement of laws
protecting sensitive personal information
with which Congress has entrusted the FTC. 2
I would support finalizing a rule that extends
and clarifies the scope of the Commission’s
enforcement in this important area of
consumer protection if that rule were
consistent with our grant of authority from
Congress. But, no matter how the majority
attempts to shoehorn its desired policy goal
into a ‘‘plain reading’’ of the statute,3 I
cannot support a rule that exceeds the
bounds Congress clearly established. Indeed,
a core principle guiding my tenure at the
Commission will be that our rules must
effectuate the law as it is—not as the
Commission may wish it to be. For these
reasons, I respectfully dissent.
The American Recovery and Reinvestment
Act of 2009 (‘‘Recovery Act’’) 4 authorized the
Commission to issue a rule requiring vendors
of ‘‘personal health records’’ (‘‘PHRs’’) and
related entities that are not covered by
HIPAA to notify individuals and the FTC of
a ‘‘breach of security’’ of ‘‘unsecured PHR
identifiable health information.’’ 5 The
Commission issued the Health Breach
Notification Rule in 2009,6 initiated a routine
review of the Rule in 2020,7 issued a policy
statement re-interpreting the then-current
Rule in 2021 (‘‘2021 Policy Statement’’),8
issued a Notice of Proposed Rulemaking on
June 9, 2023 (‘‘NPRM’’),9 and today issues
the Final Rule.10
I am encouraged that today the
Commission is acting by rulemaking, as
authorized by statute and following a period
of notice and comment that elicited a range
of views, rather than acting by fiat in a policy
statement, as the Commission did in 2021.11
I cannot endorse any policy statement that
either displaces Congress’s authority to make
law or subverts the rulemaking process. The
2021 Policy Statement did both. The majority
clearly recognizes this overreach. After all, if
the 2021 Policy Statement had any force,
today’s rulemaking would be unnecessary.
Setting aside this troubling history, I turn
to the Final Rule itself, which, unfortunately,
I find equally troubling in its extension
beyond the parameters established by
Congress.
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12 42 U.S.C. 17937(f)(2).
13 42 U.S.C. 1320d(6).
14 Id. 1320d(3).
15 See Yates v. United States, 574 U.S. 528, 549–
51 (2015) (Alito, J., concurring); Antonin Scalia &
Bryan A. Garner, Reading Law: The Interpretation
of Legal Texts 195–196,199–200 (2012).
16 Yates, 574 U.S. at 549.
17 Id. at 550.
18 42 U.S.C. 1320d(3).
19 42 U.S.C. 1395x(u).
20 Id. 1395x(s).
21 Yates, 574 U.S. at 545 (internal quotation marks
omitted).
22 Majority Statement at 2.
23 Final Rule at 98.
24 The SBP explains that an app developer (or any
company ‘‘furnishing’’ a health app) would be
covered as a health care provider because its health
app is a health care service or supply. SBP at 7, 22–
28.
25 Majority Statement at 3.
26 See NPRM at 37823.
27 45 CFR 160.102 through 103.
28 Id. § 160.103.
29 Majority Statement at 3–4.
30 SBP at 26.
31 Id. at 13 (noting that HHS interprets these
provisions of the Social Security Act). Cf. City of
Arlington, Tex. v. F.C.C., 569 U.S. 290, 323 (2013)
(Roberts, C.J., dissenting) (‘‘When presented with an
agency’s interpretation of such a statute, a court
cannot simply ask whether the statute is one that
the agency administers; the question is whether
authority over the particular ambiguity at issue has
been delegated to the particular agency.’’).
Some background first. Under the Recovery
Act, PHR identifiable health information
means ‘‘individually identifiable health
information,’’ as defined by the Social
Security Act, 42 U.S.C. 1320d(6).12 The
Social Security Act defines ‘‘individually
identifiable health information’’ as
information that is ‘‘created or received by a
health care provider, health plan, employer,
or health care clearinghouse.’’ 13 The Social
Security Act then defines ‘‘health care
provider’’ to include three categories: ‘‘[1] a
provider of services (as defined in section
1395x(u) of this title), [2] a provider of
medical or other health services (as defined
in section 1395x(s) of this title), and [3] any
other person furnishing health care services
or supplies.’’ 14
The Commission takes liberties with the
final category in that definition (‘‘any other
person furnishing health care services or
supplies’’) to adopt a new, capacious
definition of ‘‘covered health care provider’’
and a new, similarly capacious definition of
‘‘health care services and supplies,’’ whose
joint effect is to sweep a large swath of apps
and app developers under the purview of the
Final Rule. These expansive definitions are
not consistent with the statute. Under
longstanding principles of statutory
interpretation, the final category of provider
(‘‘any other person . . .’’) must be
understood in relation to the first two
categories (‘‘provider of services’’ and
‘‘provider of medical or other health
services’’). 15 When a statute contains a list,
‘‘each word in that list presumptively has a
‘similar’ meaning’’ under the canon of
noscitur a sociis.16 And when a general term
follows a list of specific terms, the ejusdem
generis canon teaches that the general term
‘‘should usually be read in light of those
specific words to mean something
‘similar.’ ’’ 17 Together, these canons instruct
that the final category of health care provider
that includes the general term ‘‘other person’’
must be similar to the more specific terms
that precede it.
The first two categories of health care
provider incorporate the definitions of
sections 1395x(u) and 1395x(s) of the Social
Security Act, respectively.18 The first
category of provider includes ‘‘a hospital,
critical access hospital, rural emergency
hospital, skilled nursing facility,
comprehensive outpatient rehabilitation
facility, home health agency, hospice
program, or . . . a fund.’’ 19 The second
category of provider includes an extensive
list (section 1395x(s) includes 17 paragraphs
and over 35 subparagraphs) of medical
professionals including physicians,
physician assistants, nurse practitioners,
clinical psychologists, clinical social
workers, and others, and the specific services
administered by medical professionals.20
These two categories comprise traditional
forms of health care providers.
The final category, addressing ‘‘any other
person furnishing health care services or
supplies,’’ must therefore only include
persons that are ‘‘similar in nature’’ to these
first two categories.21 The majority argues
that my ‘‘effort to cabin the third category
. . . reads it out of existence, violating the
canon that holds interpretations giving effect
to every clause of a statute are superior to
those that render distinct clauses
superfluous.’’ 22 This application of the
canon is incorrect. Requiring similarity
among categories does not result in
superfluity; it merely prevents interpretations
that extend beyond what the text permits. A
catch-all’s limited application due to its
context is not a reason to expand that phrase
to encompass dissimilar applications.
The Final Rule’s definition of ‘‘covered
health care provider’’ is not remotely similar,
because it incorporates a new, astonishingly
broad definition of ‘‘health care services or
supplies,’’ which means ‘‘any online service
such as a website, mobile application, or
internet-connected device that provides
mechanisms to track diseases, health
conditions, diagnoses or diagnostic testing,
treatment, medications, vital signs,
symptoms, bodily functions, fitness, fertility,
sexual health, sleep, mental health, genetic
information, diet, or that provides other
health-related services or tools.’’ 23 Thus, the
Commission transforms ‘‘health care
provider,’’ which both under common usage
and in context of the statutory provision
means entities such as physicians and
hospitals, to now include any company
‘‘furnishing’’ a health-related app.24 As a
result, the Final Rule creates a tautology:
Health app developers may be ‘‘vendors of
personal health records’’ by offering an app
containing health information that has been
created or received by a health care provider,
where the health app developer is itself the
health care provider that creates or receives
that health information by virtue of offering
the app.
Notably, even though the Department of
Health and Human Services (‘‘HHS’’)
interprets this same provision of the Social
Security Act, HHS has—notwithstanding the
majority’s assertion to the contrary 25—never
interpreted the term ‘‘health care provider’’
to reach the expansive, creative conclusion
that the Commission does today.26 The
majority’s argument misstates the scope and
language of the HIPAA Privacy Rule, which
only applies to HIPAA ‘‘covered entities’’
and their ‘‘business associates,’’ 27 —i.e., to
traditional health care providers that do not
include the broad swath of app developers
the Final Rule will encompass. Significantly,
the majority omits from its characterization
of the term ‘‘health care’’ HHS’s own
illustrations of that term, which highlight the
proximity to traditional forms of health care
by different kinds of medical professionals:
(1) Preventive, diagnostic, therapeutic,
rehabilitative, maintenance, or palliative
care, and counseling, service, assessment, or
procedure with respect to the physical or
mental condition, or functional status, of an
individual or that affects the structure or
function of the body; and
(2) Sale or dispensing of a drug, device,
equipment, or other item in accordance with
a prescription.28
The Majority Statement repeatedly says
that HHS defines ‘‘health care’’ broadly,29 but
the language it cites provides no such
support.
Aware of this incongruency, the
Commission seeks to differentiate its use of
‘‘health care provider’’ from that of ‘‘other
government agencies.’’ 30 Yet the
Commission provides no explanation why its
definition should differ, particularly where it
is unclear whether the Commission has
interpretative authority over the Social
Security Act’s definition of health care
provider and where other agencies are
delegated such interpretative authority.31
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32 42 U.S.C. 17921(11).
33 Final Rule at 99.
34 See SBP at 32 (‘‘Next, adding the phrase
‘technical capacity to draw information’ clarifies
that a product is a personal health record if it can
draw any information from multiple sources, even
if it only draws health information from one
source.’’).
35 See id. at 34.
36 Scalia & Garner, supra note 15 at 174
(discussing surplusage canon).
37 SBP at 28.
38 See Nat’l Fed’n of Indep. Business v. Dep’t of
Labor, 595 U.S. 109, 117 (2022) (per curiam)
(‘‘Administrative agencies are creatures of statute.
They accordingly possess only the authority that
Congress has provided.’’).
39 The expansive coverage increases the
likelihood of creating unintended consequences.
Will the gas station decline to add over-the-counter
medicines to its inventory to avoid crossing the line
of ‘‘more than tangentially related to health’’? Will
the clothing retailer shy away from maternity
apparel? Will the e-commerce giant avoid selling
bandages and dandruff shampoo? These potentially
detrimental outcomes undermine a Rule intended
to benefit consumers.
40 See generally 44 U.S.C. 3501 et seq.; SBP at 86.
41 5 U.S.C. 601 through 612.
42 SBP at 86, 93.
43 This may have been a sensible requirement in
2009, when the scope of the Rule was much
narrower, but it has dramatic consequences in this
much-expanded Rule.
The Commission also takes troubling
liberties with the statute’s definition of
‘‘personal health record,’’ which are evident
from a side-by-side comparison of the statute
and the Final Rule:
Recovery act 	Final rule
‘‘an electronic record of PHR identifiable health information . . . on an
individual that can be drawn from multiple sources and is managed,
shared, and controlled by or primarily for the individual.’’ 32.
‘‘an electronic record of PHR identifiable health information on an indi-
vidual that has the technical capacity to draw information from mul-
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
actually draw health information from
multiple sources, as the statute contemplates
(because the statutory phrase ‘‘that can be
drawn’’ modifies its immediate antecedent,
‘‘health information’’). Rather, under the
Final Rule, a single source of health
information will render an app a PHR as long
as the ‘‘PHR’’ has the ‘‘technical capacity’’ to
draw some other information elsewhere.34
The implications of this change, in
conjunction with the expansion of ‘‘health
care provider,’’ are significant. Any retailer
that offers an app that tracks health-related
purchases (e.g., bandages, vitamins, dandruff
shampoo) may be a vendor of a PHR covered
by the Rule if the app draws health
information (e.g., purchasing information)
from the consumer and the app has the
‘‘technical capacity’’ to draw any information
from any other source. As the Statement of
Basis and Purpose notes, commenters warned
that virtually every app has the technical
capacity to draw some information from
more than one source.35 That expansive
scope could be appropriate if Congress’s
language permitted it. But the Commission’s
interpretation, which effectively renders the
Recovery Act’s ‘‘multiple sources’’
requirement meaningless, ignores
longstanding principles of statutory
interpretation that require each provision of
a statute to be given effect. 36
The Commission’s expansive definitions of
‘‘covered health care provider,’’ ‘‘health care
services and supplies,’’ and ‘‘personal health
record’’ have a profound effect on the scope
of the Rule: Most companies that offer or
disseminate health-related apps or similar
products would be treated as ‘‘covered health
care providers’’ that therefore hold ‘‘PHR
identifiable health information’’ in their apps
(i.e., PHRs), such that they are vendors of
PHRs—even if their app is merely health-
adjacent.
Remarkably, the Commission imposes no
limit on this extraordinary breadth in the
Rule itself. Rather, in a post-NPRM attempt
to check the scope, the Commission fashions
a limiting principle: Apps are covered only
if they are ‘‘more than tangentially relating to
health.’’ 37 This extra-statutory, extra-
regulatory limit has several significant
problems.
First, if the majority were correct, from
where would it draw the authority to impose
this ‘‘more than tangentially relating to
health’’ limitation? If Congress in fact
commanded us to cover all the apps the
majority claims, this extra-textual limitation
would be beyond our power to impose.38
Why, then, does the majority blink in the face
of what it understands Congress to have
required? There may be good policy reasons
not to follow Congress’s language—as the
majority understands it—wherever it leads,
but we do not have power to shortchange
Congress’s commands. That even the
majority feels compelled to adopt this extra-
textual limitation—again, as the majority
understands the text—on the statute’s reach
suggests that the language probably does not
mean what the majority says.
The second problem is substantive: What
does this language mean? When does an app
cross the line between tangentially related to
health and more than tangentially related? If
a gas station with a loyalty app sells Advil,
is the app only tangentially related to health
and outside the Final Rule’s purview? If the
gas station adds Robitussin and pregnancy
tests to its inventory, does it cross the line
to more than tangentially related to health?
If a clothing store with an e-commerce app
sells a handful of maternity shirts, is the app
only tangentially related to health? If the
store adds more maternity clothes, nursing
bras, and some anti-nausea ginger tea to its
in-app offerings, is the app more than
tangentially related to health? If vitamins,
over-the-counter medicines, acne creams,
bandages, and similar items comprise 0.1%
or 1% or 10% of a superstore’s inventory,
when is the retailer’s e-commerce app more
than tangentially related to health? I see no
clear answers to any of these hypotheticals in
today’s Final Rule, which suggests that the
marketplace will see no clear answers
either. 39
The third problem is procedural. The
Commission did not propose this ambiguous
but impactful limitation in a Notice of
Proposed Rulemaking—likely because there
is no statutory basis for this newly-created
language. Rather, it introduces this crucial
concept for the first time in a Statement of
Basis and Purpose (a purely interpretive
document) as a post hoc fix to the problem
the Commission itself created with its
expansive definitions. As a result, the
Commission did not provide notice or
receive public comment on the efficacy or
propriety of this limitation, depriving the
public of its opportunity to meaningfully
participate in the rulemaking process and
depriving itself of potentially valuable input
from commenters.
The final problem is that this post hoc,
extra-regulatory limitation renders the
Commission’s burden analysis inadequate.
The Paperwork Reduction Act (‘‘PRA’’)
requires the Commission to estimate the
reportable breaches by entities covered by the
Rule and compliance costs.40 The Regulatory
Flexibility Act (‘‘RFA’’) requires the
Commission to assess the economic impact
on small businesses. 41 Apparently relying on
the SBP’s ‘‘more than tangentially related to
health’’ limitation, the PRA and RFA
analyses only address breaches by apps
categorized as ‘‘Health and Fitness.’’ 42
Because the Rule itself contains no such
limitation, general retailers with e-commerce
apps, gas stations with loyalty apps, and
other similar generalists that sell any health-
related items do not factor into these
analyses. As a result, they likely dramatically
underestimate the numbers of regulated
entities, number of breaches, and costs to
businesses.
Perhaps the breath of the Final Rule would
be more of a theoretical than practical
concern to businesses, if they could adopt
practices sufficient to avoid any breach that
would trigger notice obligations under the
Final Rule, or, in the event of a breach, err
on the side of notification. But § 318.3(b) of
the Final Rule imposes affirmative
obligations on companies to notify their
service providers if they are covered by the
Final Rule, regardless of whether they
experience a breach.43 To comply with this
requirement, companies must know whether
they are covered by the Rule—that is, which
side of ‘‘more than tangentially relating to
health’’ they fall on. Without clarity on that
line, companies run the risk of being in
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47064 	Federal Register / Vol. 89, No. 105 / Thursday, May 30, 2024 / Rules and Regulations
44 Significantly, the Majority Statement is silent
as to the propriety and consequences of its
‘‘tangentially related’’ limiting principle, likely
because this approach is indefensible.
45 See Concurring Statement of Commissioner
Christine S. Wilson, GoodRx, Matter No. 2023090 1
n.2 (Feb. 1, 2023) (‘‘GoodRx has violated the HBNR
based on a plain reading of the text, setting aside
any gloss the Commission sought to add in its
September 2021 Statement on Breaches by Health
Apps and Other Connected Devices.’’), https://
www.ftc.gov/system/files/ftc_gov/pdf/2023090_
goodrx_final_concurring_statement_wilson.pdf.
46 Majority Statement at 5.
perpetual violation of the Final Rule and,
therefore, perpetually at the mercy of the
Commission’s enforcement discretion. The
Commission, at this moment, may not intend
to pursue such technical violations. But any
expression of intended restraint will be cold
comfort to companies that have seen the
Commission’s self-imposed restraint wax and
wane in other areas.44
I find the majority’s liberties with the
statute particularly troubling because they
are unnecessary to reach health apps. Indeed,
the Commission’s own recent enforcement
action against digital healthcare platform
GoodRx makes that clear. Only last year, a
bipartisan Commission applied the 2009 Rule
to GoodRx’s online platform and app because
the company received identifiable health
information on prescription medications
(among other things) from pharmacy benefit
managers and pharmacies, among other
sources, so that consumers could manage
their information. 45 The majority argues that
today’s changes are necessary to provide
clarity to the market about the Rule’s scope,46
but GoodRx has already done that—and I
would support changes to the Rule that are
consistent with the statute. In short, I agree
with the majority’s goals—safeguarding
consumers’ sensitive health information and
implementing a Congressional mandate to
put consumers on notice of the breach of that
data—but I believe that we must effectuate
those goals within the scope of the law as it
is, rather than legislating in the guise of
applying the law.
The FTC is a venerable institution that
does vital work to protect consumers and
promote competition, thanks to its
hardworking and devoted career staff. I
commend the staff attorneys, economists, and
technologists who worked on the rule for
their careful and thoughtful consideration of
difficult issues. Ultimately, while I am
sympathetic to the majority’s goal, I fear that
adopting a Final Rule that is irreconcilable
with the statute and that puts companies in
an untenable position puts the Commission
at risk. Legal challenges may undermine the
Commission’s institutional integrity, and
Congress may be reluctant to trust the
Commission with other authority—even the
much-needed authority to protect the privacy
of consumers’ sensitive personal information.
I therefore respectfully dissent.
[FR Doc. 2024–10855 Filed 5–29–24; 8:45 am]
BILLING CODE 6750–01–P
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60742 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
FEDERAL TRADE COMMISSION
16 CFR Part 456
RIN 3084–AB37
Ophthalmic Practice Rules (Eyeglass
Rule)
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is publishing a final rule to implement
amendments to the Ophthalmic Practice
Rules (‘‘Eyeglass Rule’’ or ‘‘Rule’’).
These amendments require that
prescribing eye care practitioners obtain
a signed confirmation after releasing an
eyeglass prescription to a patient and
maintain each such confirmation for a
period of not less than three years. The
Commission is permitting prescribers to
comply with automatic prescription
release via electronic delivery if they
first obtain verifiable affirmative
consent from the patient and maintain
a record of such consent for a period of
not less than three years. The
amendments further clarify that the
presentation of proof of insurance
coverage shall be deemed to be a
payment for the purpose of determining
when a prescription must be provided.
Finally, the Commission amends the
term ‘‘eye examination’’ to ‘‘refractive
eye examination’’ throughout the Rule.
DATES : This rule is effective September
24, 2024.
FOR FURTHER INFORMATION CONTACT:
Alysa S. Bernstein, Attorney, (202) 326–
3289; Sarah Botha, Attorney, (202) 326–
2036; or Paul Spelman, Attorney, (202)
326–2487, Division of Advertising
Practices, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Avenue NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
Statement of Basis and Purpose
Table of Contents
I. Background
A. Overview of the Eyeglass Rule
B. Background of Prescribers’ Failure To
Release Prescriptions and the
Commission’s Automatic-Release
Remedy
C. Evidentiary Standard for Promulgating
or Amending the Rule
D. The Current Eyeglass Rule Review
1. Advance Notice of Proposed Rulemaking
2. The Contact Lens Rule Review
3. The Notice of Proposed Rulemaking and
Eyeglass Rule Workshop
4. Overview of the Final Rule
5. The Eyeglass Marketplace
II. Final Rule Pertaining to the Automatic-
Prescription-Release Provision
A. Separation of Examination and
Dispensing
1. Comments and Evidence Regarding the
Automatic-Prescription-Release
Provision
a. Prescriber Compliance With Automatic
Release, and Consumer Receipt of Their
Prescriptions
b. Whether the Automatic-Release
Provision Is Still Necessary and
Beneficial for Consumers
2. Analysis of Evidence Regarding Failure
To Release Prescriptions
B. The Remedy for Failure To Release
Prescriptions Remains the Automatic-
Release Requirement
C. Commission Determination To Update
the Rule To Clarify Requirements for
Prescription Release
III. Final Rule Pertaining to Affirmative
Consent to Digital Delivery of Eyeglass
Prescriptions
A. Digital Delivery Option in the NPRM
and the Basis for Such Amendment
B. Comments on the NPRM and Discussion
at the Workshop Regarding the Proposal
To Permit Digital Delivery of the
Eyeglass Prescription With Patient’s
Affirmative Consent
1. Comments About the Benefits and
Burdens of the Proposed Affirmative
Consent to Digital Delivery Provision
2. Comments in Favor of Allowing
Prescribers To Choose Whether To Offer
Digital Delivery of Prescriptions
3. Comments Regarding Giving Patients a
True Choice as to How To Have Their
Prescription Delivered
C. Additional Discussion and Commission
Determination Regarding the Affirmative
Consent to Digital Delivery
1. Final Rule Determination To Add
Option for Digital Delivery of Eyeglass
Prescriptions
2. Final Rule Moves Requirement for
Obtaining Patient’s Verifiable
Affirmative Consent for Digital Delivery
to a New Section and Out of Definitions
3. Final Rule Adds Explicit Recognition of
the Ability To Obtain Affirmative
Consent on Paper or in a Digital Format
4. Final Rule Clarifies That Digital Delivery
Methods Identified in Affirmative
Consent Request Must in Fact Be Used
IV. Final Rule Pertaining to Confirmation of
Prescription Release
A. Proposed Confirmation Requirement in
the NPRM and the Basis for Such
Proposal
B. Comments on the NPRM and Discussion
at the Workshop Regarding Confirmation
of Prescription Release
1. Comments in Favor of Confirmation-of-
Prescription-Release Proposal
2. Comments Against the Confirmation-of-
Prescription-Release Proposal
3. Comments About the Exemption for
Prescribers Who Do Not Have a Direct or
Indirect Financial Interest in the Sale of
Eyeglasses
4. Comments About Alternatives to the
Confirmation-of-Prescription-Release
Proposal
C. Additional Discussion and Commission
Determination Regarding the
Confirmation-of-Prescription-Release
Proposal
1. Final Rule Determination To Amend the
Rule To Require Confirmation of
Prescription Release
a. Alternatives to Confirmation of
Prescription Release Not Adopted
b. The Burdens of the Confirmation of
Prescription Release Are Not Substantial
c. Exemption for Prescribers Who Do Not
Have a Direct or Indirect Financial
Interest in the Sale of Eyeglasses
2. Comments About Options for Obtaining
the Confirmation and Commission
Determination
a. Comments at the Eyeglass Rule
Workshop
b. Commission Determination Regarding
Options for Obtaining the Confirmation
3. Final Rule Modification To Add Explicit
Recognition of a Prescriber’s Ability To
Obtain a Confirmation on Paper or in a
Digital Format
V. Final Rule Pertaining to Proof of Insurance
Coverage as Payment
A. Proposed Requirement in the NPRM To
Treat Proof of Insurance Coverage as
Payment and the Basis for Such Proposal
B. Comments on NPRM and Discussion at
Workshop Regarding the Insurance
Coverage as Payment Proposal
C. Additional Discussion and Commission
Determination Regarding the Insurance
Coverage as Payment Proposal
VI. Final Rule Regarding ‘‘Eye Examination’’
Terminology
A. Proposed Revision in the NPRM To
Change ‘‘Eye Examination’’ Term to
‘‘Refractive Eye Examination’’ and the
Basis for Such Proposal
B. Comments on NPRM and Discussion at
Workshop Regarding the ‘‘Refractive Eye
Examination’’ Proposal
1. Comments About the Proposed
Terminology Change
2. Comments About the Need To Allow
Prescribers To Make a Medical Decision
To Withhold the Prescription, Where
Appropriate
3. Comments About the Permissibility To
Charge for the Refraction, as Opposed To
Charging for the Prescription Release
C. Additional Discussion and Commission
Determination Regarding the ‘‘Refractive
Eye Examination’’ Proposal
VII. Miscellaneous Issues Raised in
Comments
A. Pupillary Distance
1. Background and Comments
2. Pupillary Distance Requirement
Determination
B. Consumer and Business Education
VIII. Paperwork Reduction Act
A. Comments Regarding the NPRM
Estimate for the Confirmation-of-
Prescription-Release Requirement
B. Commission Estimate of the Total
Burden = 3,208,333 Hours
1. Estimated Hour Burden of 1,375,000
Hours for Prescribers To Release
Prescriptions
2. Estimated Hour Burden of Prescribers’
Staff To Obtain and Store Patient
Confirmation of Prescription Release =
1,375,000 Hours (343,750 Hours for
Patients To Read and Sign
Confirmations, 1,031,250 Hours for
Prescribers’ Offices To Scan and Store
Such Confirmations)
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60743	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
3. Estimated Hour Burden on Prescribers’
Offices To Obtain and Store Patient
Consents to Electronic Delivery =
458,333 Hours (114,583 Hours To Obtain
Signed Consents and 343,750 Hours To
Store Same)
C. Estimated Labor Cost
D. Capital and Other Non-Labor Costs
IX. Final Regulatory Analysis and Regulatory
Flexibility Act Analysis
A. Need for and Objectives of the Final
Rule
B. Significant Issues Raised by Public
Comments in Response to the IRFA and
the Agency’s Response, Including Any
Changes Made in the Final Rule
C. Description and Estimate of the Number
of Small Entities to Which the
Amendments Will Apply or Explanation
Why No Estimate Is Available
D. Description of the Projected Reporting,
Recordkeeping and Other Compliance
Requirements of the Amendments,
Including an Estimate of the Classes of
Small Entities That Will Be Subject to
the Requirement and the Type of
Professional Skills That Will Be
Necessary To Comply
E. Steps Taken To Minimize the Significant
Impact, if Any, of the Amendments,
Including Why Any Significant
Alternatives Were Not Adopted
X. Congressional Review Act
I. Background
A. Overview of the Eyeglass Rule
The Eyeglass Rule (16 CFR part 456)
declares it an unfair practice for an
optometrist or ophthalmologist to fail to
provide a patient with a copy of the
patient’s eyeglass prescription
immediately after an eye examination is
completed. 1 The prescriber may not
charge the patient any fee in addition to
the prescriber’s examination fee as a
condition of releasing the prescription
to the patient.2 The Rule defines a
prescription as the written
specifications for lenses for eyeglasses
which are derived from an eye
examination, including all of the
information specified by State law, if
any, necessary to obtain lenses for
eyeglasses.3
The Rule prohibits an optometrist or
ophthalmologist from conditioning the
availability of an eye examination on a
requirement that the patient agree to
purchase ophthalmic goods from the
ophthalmologist or optometrist. 4 The
Rule also prohibits the prescriber from
placing on the prescription, or requiring
the patient to sign, or deliver to the
patient, a waiver or disclaimer of
prescriber liability or responsibility for
the accuracy of the exam or the
ophthalmic goods and services
dispensed by another seller.5
The Rule was implemented after
findings that many consumers were
being deterred from comparison
shopping for eyeglasses because eye
care practitioners would not release
prescriptions, even when requested to
do so, or charged an additional fee for
release of the prescription. The Rule’s
operative provision, which requires
prescription release and prohibits fees
and waivers for prescription release, is
entitled ‘‘Separation of Examination and
Dispensing.’’ 6 Keeping the exam
process and prescription separate from
the retail sale of eyeglasses is the key
underpinning of the Rule.
B. Background of Prescribers’ Failure To
Release Prescriptions and the
Commission’s Automatic-Release
Remedy
The FTC has been regulating the
optical goods industry for more than six
decades, and this experience continues
to inform and guide the Rule. As early
as 1962, the Commission took steps to
protect consumers and competition by
adopting the ‘‘Guides for the Optical
Products Industry,’’ declaring it an
unfair practice to ‘‘tie in or condition’’
refraction services to eyeglass sales
when there was a ‘‘reasonable
probability’’ of harming competition. 7
However, the Guides were not binding,
the FTC never sought to enforce them,
and prescribers did not comply with
them.8 In light of such non-compliance,
on June 2, 1978, the Commission issued
the Advertising of Ophthalmic Goods
and Services Rule (the ‘‘Eyeglass I
Rule’’), which, among other things,
contained the provision ‘‘Separation of
Examination and Dispensing’’ requiring
prescribers to automatically release
prescriptions—regardless of whether or
not patients requested them—so as to
draw a line between exams and eyeglass
sales, and ensure consumers had
unconditional access to prescriptions.9
The Commission found that consumers
suffered substantial economic loss and
lost opportunity costs due to an
inability to comparison-shop for
glasses,10 and that such practices
offended public policy and inhibited
competition by denying consumers the
ability to use available information.11
The Commission explained that while it
considered requiring prescriptions be
released only upon request, it chose
‘‘automatic release’’ due to consumers’
lack of awareness of their prescription
rights, and to immunize such rights
from an ‘‘evidentiary squabble’’ over
whether a consumer did or did not
request their prescription.12
Upon issuance of the Eyeglass I Rule,
the American Optometric Association
(‘‘AOA’’) filed suit, and the D.C. Circuit
upheld the automatic-release
requirement, finding there was
‘‘extensive’’ evidence that withholding
prescriptions harmed consumers.13 The
court also noted there was considerable
evidence that prescribers used certain
practices ‘‘to frighten consumers’’ into
purchasing from the prescriber.14
In 1985, the Commission re-reviewed
the Rule and held public hearings, after
which FTC staff proposed changing to
release-upon-request, 15 due to what staff
perceived to be altered market
conditions and increased public
awareness, and the challenges staff
faced trying to enforce the automatic-
release provision. 16 According to staff at
that time, automatic release had not
prevented evidentiary squabbles,17 but
rather increased them, since whether a
prescriber released a prescription could
not, in most cases, be ascertained
without documentary evidence.18 In
contrast, the hearing officer
recommended the automatic-release
requirement remain in effect, since
prescribers were still not releasing
prescriptions to consumers.19 The
Commission sided with the presiding
officer’s recommendation and issued the
‘‘Eyeglass II Rule,’’ which preserved
automatic release. 20 The Rule was again
challenged in court and parts of it were
vacated, but not the automatic-release
component, which remained lawful and
in effect.21
In 1997, the Commission again sought
input on the Rule’s prescription-release
requirement but withheld taking action
while it evaluated whether contact
lenses should be covered by the Rule.22
That question was resolved by Congress,
which passed the Fairness to Contact
Lens Consumers Act (‘‘FCLCA’’), 23
directing the FTC to issue a separate
rule with automatic prescription-release
requirements for contact lenses that
were similar to those required by the
Eyeglass Rule.24
When the Commission looked again at
the Eyeglass Rule in 2004, it determined
that prescribers continued to withhold
prescriptions, and consumers were still
not sufficiently aware of their rights.25
The Commission felt that were it to
eliminate the automatic-release remedy,
even more prescribers might fail to
release prescriptions. Due to this, and
because the Commission found that
prescription-release enhanced consumer
choice at minimal cost, the Commission
opted to again retain the automatic-
release remedy.26 By retaining the
requirement, the Commission also
ensured that prescription-release
requirements for eyeglasses and contact
lenses would be largely aligned.27
C. Evidentiary Standard for
Promulgating or Amending the Rule
The Commission promulgated the
Eyeglass Rule under section 18 of the
FTC Act, which grants the Commission
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60744 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
the authority to adopt rules defining
unfair or deceptive acts or practices in
or affecting commerce.28 When
amending or repealing the Rule, the
Commission follows the same section 18
procedures governing the adoption of
rules 29 and, in doing so, engages in a
multi-step inquiry. To make a
determination that an act or practice is
unfair, the Commission evaluates the
following questions: (1) Does the act or
practice cause or is it likely to cause
substantial injury to consumers? (2) Is
the injury to consumers outweighed by
countervailing benefits that flow from
the act or practice at issue? and (3) Can
consumers reasonably avoid the
injury? 30
If an act or practice is deemed unfair,
the Commission may issue a notice of
proposed rulemaking under section 18
only where it has ‘‘reason to believe’’
that the unfair act or practice at issue is
‘‘prevalent.’’ 31 The Commission can
find prevalence where information
available to it indicates a widespread
pattern of conduct.32 The evidence
necessary to answer the aforementioned
questions will vary depending on the
circumstances of each rulemaking and
the characteristics of the industry
involved. 33 When inviting public
comment, the Commission requests that
commenters provide useful factual data,
and, in particular, empirical data such
as surveys or other methodologically
sound quantitative analyses.34 The
Commission may also consider other
reliable evidence and input from
experts. 35 Documentary and testimonial
evidence, and the absence of any
substantial or persuasive contrary
evidence, may also be considered. 36
Once the Commission finds that an
unfair act or practice is prevalent, the
Commission has wide latitude in
fashioning a remedy, and need only
show a ‘‘reasonable relationship’’
between the unfair act or practice and
the remedy.37
D. The Current Eyeglass Rule Review
1. Advance Notice of Proposed
Rulemaking
In 2015, as part of a periodic review
of its rules and regulations, the
Commission simultaneously published
notices in the Federal Register initiating
reviews of both the Eyeglass Rule and
the Contact Lens Rule. The Commission
published a request for comment
(‘‘RFC’’) seeking public input on the
efficiency, costs, benefits, and
regulatory impact of the Contact Lens
Rule, including its prescription release
requirement. 38 The Commission
published an advance notice of
proposed rulemaking (‘‘ANPR’’) for the
Eyeglass Rule inviting comments on,
among other things: the continuing need
for the Rule; the Rule’s economic impact
and benefits; and the effect on the Rule
of any technological, economic, or other
industry changes.39 The Commission
also sought comment on whether: the
definition of ‘‘prescription’’ should be
modified to include pupillary distance,
to require that a prescriber provide a
duplicate copy of a prescription to a
patient who does not have access to the
original, and to require that a prescriber
provide a copy to or verify a
prescription with third parties
authorized by the patient.40
In response to its Eyeglass Rule
ANPR, the Commission received and
considered 868 comments from a variety
of individuals and entities, including
ophthalmologists, optometrists,
opticians, trade associations, consumers
(and consumer-advocacy
representatives), and eyeglass sellers.41
Virtually all comments supported
retaining the Rule. Some commenters,
including trade associations
representing opticians and retailers who
employ optometrists and opticians,
stated that the Rule is needed because
some prescribers are still not
automatically releasing prescriptions,
and some consumers face resistance
when they try to obtain their
prescriptions. 42 The AOA, on the other
hand, questioned the continued need for
the Rule based on its view that
optometrists widely comply with the
Rule’s requirements, but also
commented that the Rule—as currently
codified—is not necessarily harmful.43
2. The Contact Lens Rule Review
The Commission focused on
finalizing changes to the Contact Lens
Rule (CLR) before considering
amendments to the Eyeglass Rule.
During its CLR review, the Commission
considered over 8,000 comments and
issued both a notice of proposed
rulemaking 44 and a supplemental
notice of proposed rulemaking 45
(‘‘SNPRM’’) before issuing a final rule
on August 17, 2020. 46 While the CLR
differs from the Eyeglass Rule in some
respects, many of the issues and
concerns regarding prescription release
and portability are the same, and
therefore, some of the comments and
data submitted during the CLR review
are pertinent to the Commission’s
review of the Eyeglass Rule.
In its CLR final rule, the Commission
determined that the evidentiary record,
as well as the Commission’s
enforcement and oversight experience,
demonstrated that prescriber
compliance with the automatic-
prescription-release requirement was
deficient, and as a result, millions of
consumers were not receiving their
contact lens prescriptions as required by
law.47 The Commission further found
that many consumers remained unaware
that they have a right to their
prescriptions. 48 To remedy this, the
Commission implemented a
confirmation-of-prescription-release
provision, requiring that prescribers
request that patients confirm receipt of
their contact lens prescription. 49
According to the Commission, the
patient confirmation requirement was
intended to, among other things,
increase the number of patients in
possession of their contact lens
prescription, improve flexibility and
choice for consumers, foster improved
competition in the market, and result in
lower prices and more efficient contact
lens sales for consumers.50 The
Commission noted that the requirement
would also increase the Commission’s
ability to enforce and assess the CLR.51
The final CLR included an additional
amendment addressing a concern
relevant to the Eyeglass Rule review, in
that the Commission recognized the
value in allowing prescribers to deliver
prescriptions to patients digitally, so
long as prescribers provide the
prescription in a format that can be
accessed, downloaded, and printed by
the patient, and the patient agrees to
receive their prescription in the format
identified by the prescriber.52 The final
CLR expressly made this permissible by
adding a definition of the term ‘‘provide
to the patient a copy’’ to allow the
prescriber to provide the patient with a
digital copy of the prescription in lieu
of a paper copy, so long as the
prescriber adheres to certain
requirements.53
3. The Notice of Proposed Rulemaking
and Eyeglass Rule Workshop
After the amended CLR final rule took
effect, the Commission resumed its
review of the Eyeglass Rule. Based on a
review of comments received in
response to the ANPR, a regulatory
review of the CLR, and the
Commission’s enforcement experience,
the Commission issued a notice of
proposed rulemaking (‘‘NPRM’’) on
January 3, 2023.54 In the NPRM, the
Commission proposed to: (1) require
that prescribers obtain a signed
confirmation after releasing an eyeglass
prescription to a patient, and maintain
each such confirmation for a period of
not less than three years; (2) permit
prescribers to comply with automatic
prescription release via electronic
delivery if the prescription is provided
in a digital format that can be accessed,
downloaded, and printed by the patient,
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60745	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
and if the prescriber obtains the
patient’s verifiable affirmative consent
to the electronic delivery method; (3)
clarify that the presentation of proof of
insurance coverage shall be deemed to
be a payment for the purpose of
determining when a prescription must
be provided; and (4) amend the term
‘‘eye examination’’ to ‘‘refractive eye
examination’’ throughout the Rule.
In response to the NPRM, the
Commission received 27 comments
from various individuals and entities,
including consumers, optometrists,
ophthalmologists, opticians, trade
associations, consumer advocates, and
eyeglass sellers.55 The Commission also
announced it would hold a public
workshop to consider: the proposed
confirmation-of-prescription-release
requirement for eyeglass prescriptions;
consumers’ and prescribers’ experiences
with the implementation of the similar
requirement for contact lens
prescriptions; other proposed changes to
the Rule; and other issues raised in
response to the NPRM.56 The workshop
notice invited interested parties to
request to participate as a panelist or to
file a comment.57 Staff convened the
workshop, titled ‘‘A Clear Look at the
Eyeglass Rule,’’ with three panels and a
total of 13 panelists in Washington, DC,
on May 18, 2023, and the discussion
was transcribed. 58 At the conclusion of
the workshop, panelists, audience
members, and the general public were
invited to share additional views, data,
and other information related to the
NPRM and the subjects discussed, after
which the Commission received an
additional 20 comments, providing
further perspectives from consumers,
prescribers, opticians, trade
associations, and retailers, as well as a
U.S. Congressman.59
4. Overview of the Final Rule
The Commission now issues this final
rule that largely adopts the amendments
proposed in the NPRM, with some
minor modifications based on public
comments and other considerations, as
discussed below. In issuing this final
rule, the Commission has relied on an
extensive record that includes
comments received in response to the
ANPR, the NPRM, and the workshop
notice. The Commission also relies on
the discussion at the May 2023
workshop, the Commission’s experience
enforcing the Eyeglass Rule and Contact
Lens Rule, and the rulemaking record
for the 2020 amendments to the CLR, to
the extent that such record is pertinent
to the Eyeglass Rule.60 The Commission
has also examined the current state of
the marketplace, and the content of
consumer complaints about prescriber
practices. Further, the Commission
remains cognizant of the lengthy
regulatory history and evidentiary
record pertaining to prescribers’ failure
to release prescriptions, and eyewear-
specific market incentives (such as that
many eye doctors sell the same items
that they prescribe) that provided the
initial impetus for both the Eyeglass
Rule and the CLR.
Based on the entirety of the record,
the Commission finds that prescribers’
failure to provide consumers with
prescriptions at the completion of an
eye exam—held to be an unfair act or
practice when the Eyeglass Rule was
enacted 61—remains prevalent, and tens
of millions of Americans every year are
not receiving their eyeglass
prescriptions as required. 62 The
Commission also finds that significant
harm to consumers continues to exist
and that, without the Rule’s
requirements, consumers could not
reasonably avoid the injury resulting
from the unfair acts and practices
prohibited by the Rule. The Commission
further determines that the Rule’s
automatic-release requirement remains
the best remedy for failure to release
prescriptions, and that documentation
of prescription release is necessary to
better effectuate and enforce this
remedy. Consequently, the Commission
is amending the Rule to implement a
confirmation-of-prescription-release
requirement similar to that already in
place under the amended CLR, albeit a
simpler version. 63 Pursuant to these
amendments, prescribers will be
required to do one of the following:
(i) If a paper copy of the prescription
was provided to the patient, request that
the patient acknowledge receipt of the
prescription by signing a separate
statement on paper or in a digital format
confirming receipt of the prescription;
or
(ii) If a digital copy of the prescription
was provided to the patient (via
methods including an online portal,
electronic mail, or text message), retain
evidence that such prescription was
sent, received, or made accessible,
downloadable, and printable.
As with the CLR provision, this final
rule provides sample language for the
confirmation option, but also allows
prescribers to craft their own
confirmation wording if they so desire.
As with the CLR’s confirmation
requirement, the requirement for
eyeglass prescriptions would apply only
to prescribers with a financial interest in
the sale of eyeglasses.
The Commission believes that
revising the automatic-release remedy to
require a confirmation of prescription
release will provide an educational
benefit to consumers and prevent
consumer harm. This amendment is
necessary due to demonstrated failures
of prescribers to comply with the
automatic-release remedy, and to ensure
the separation of eye examination and
eyeglass dispensing, which engenders a
competitive marketplace for eyeglasses.
The Commission is sensitive to any
additional burden that this rule change
imposes. However, it finds that this
amendment maximizes the benefits of
comparison-shopping while imposing a
relatively small cost. The potential
benefit of increasing the number of
patients in possession of their
prescriptions is substantial: namely,
increased flexibility and choice for
consumers; increased competition
among eyeglass sellers; a reduced
likelihood of errors associated with
incorrect, invalid, and expired
prescriptions, and consequently,
improved patient safety; and an
improved ability for the Commission to
enforce and monitor prescriber
compliance.
The confirmation requirement also
brings the prescription-release-related
provisions of the Rule into congruence
with those of the CLR, thereby reducing
the confusion and complexity that arise
for both consumers and prescribers from
having inconsistent requirements for
eyeglass and contact lens prescriptions.
In addition, because the CLR already
obligates ophthalmologists and
optometrists to obtain a confirmation
and maintain a record, their marginal
cost associated with the confirmation
requirement in the Eyeglass Rule should
be extremely low. Prescribers in
compliance with the CLR should
already have in place forms, systems,
and staff training for prescription
release, and should only need to make
minor adjustments for eyeglass
prescriptions.
The Commission is also amending the
Rule to permit prescribers to comply
with automatic prescription release via
electronic delivery in certain
circumstances. In order to do so, the
prescriber must identify the delivery
method to be used—such as portal, text,
or email—and the prescription must be
provided in a format that can be
accessed, downloaded, and printed by
the patient. Further, a prescriber may
only opt for digital delivery after
obtaining the patient’s verifiable
affirmative consent, and must maintain
evidence of that consent for a period of
not less than three years. The
Commission is also revising the Rule to
clarify that presentation of proof of
insurance coverage shall be deemed a
payment for the purpose of determining
when a prescription must be provided
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60746 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
under 16 CFR 456.2(a). Again, these
revisions harmonize the Eyeglass Rule
with the existing Contact Lens Rule,
which should reduce confusion and
complexity. And lastly, the Commission
is further clarifying that the term ‘‘eye
examination’’ in the Rule refers to a
refractive eye exam, and is amending
that term accordingly.
This final rule summarizes the public
comments the Commission received,
and explains why the Commission
continues to believe that the Rule and
its automatic-prescription-release
provision are necessary. It also explains
the Commission’s rationale for adopting
the amendments previously proposed in
the NPRM, with some minor
modifications. 64 Finally, this final rule
sets forth the Commission’s regulatory
burden analyses under the Regulatory
Flexibility and Paperwork Reduction
Acts, as well as the regulatory text of the
final rule.
5. The Eyeglass Marketplace
The retail vision care industry in the
United States consists of several types of
participants, namely ophthalmologists,
optometrists, opticians, and eyewear
retailers. The services provided by these
different participants often overlap, and
different participants often have
business affiliations with each other.
Ophthalmologists are medical doctors
who specialize in treating diseases of
the eye. They are the only eye care
professionals who can treat all eye and
vision-system diseases, perform eye
surgery, prescribe nearly all manner of
drugs, and use any treatment available
to licensed physicians.
Ophthalmologists can prescribe and sell
eyeglasses and contact lenses, and their
offices may be attached to an associated
optical dispensary. Ophthalmologists
have typically completed four years of
college, four years of medical school, a
year of general internship, and three
years of specialized hospital residency
training in ophthalmology. It is
estimated that there are approximately
18,000 active ophthalmologists in the
United States.65 Many
ophthalmologists, especially those who
specialize in surgery or particular eye
conditions, do not sell eyewear,
although some do.
Optometrists are doctors of
optometry. They have not completed
medical school, but have instead
completed four years of medical training
in optometry school, typically following
a four-year college degree. They are
trained and licensed to examine eyes,
diagnose refractive problems, prescribe
and dispense eyeglasses and contact
lenses, and detect eye disease.66 As with
ophthalmologists, optometrists can
prescribe and sell eyeglasses and
contact lenses, and their offices are
often attached to, or part of, an
associated optical dispensary. A
government estimate reports that in
2020 there were some 43,000 active
optometrists in the United States.67
While professional services—such as
eye health and refraction
examinations—generate significant
revenue for optometrists, the majority of
optometrists still derive a larger
percentage of their income from product
sales, including the sale of eyeglasses
and contact lenses.68 According to some
estimates, product sales typically
account for roughly 45 to 60% of
optometrist revenue. 69
Opticians, also known as dispensing
opticians or ophthalmic dispensers, act
primarily as retail providers of
eyeglasses and contact lenses. Opticians
fabricate, fit, adjust, and repair
eyeglasses, primarily on the basis of
prescriptions issued by optometrists and
ophthalmologists. Opticians typically
are not authorized to examine eyes to
determine prescriptions, but may
conduct pupillary distance
examinations in order to fit a pair of
eyeglasses to an individual. According
to one source, twenty-one States
currently require opticians to obtain
licenses, 70 usually through a State-
approved course of study and
completion of an exam. The remaining
States have no formal requirements for
practice, but many opticians in these
States complete some form of
apprenticeship or training. A 2020
estimate put the number of active
opticians in the United States at
approximately 73,000.71 Opticians
sometimes co-locate their optical
dispensaries with examination offices of
optometrists or ophthalmologists and,
sometimes, although not always, share
revenue from the sale of eyeglasses and
contact lenses.
Eyewear retailers are companies and
independent merchants that sell glasses.
They often are owned by, employ, or
associate themselves with,
ophthalmologists, optometrists, and
opticians. Some are considered
independent optical retailers (defined as
a retailer with three or fewer locations
that has either an ophthalmologist,
optometrist, optician, or optical retailer
on site 72), while others may be optical
chain stores, such as LensCrafters and
America’s Best, mass merchandisers,
such as Costco and Sam’s Club,
department stores, such as Macy’s, or
online entities, such as Zenni Optical
and GlassesUSA.com.
The overall retail eyeglass market
continues to grow in both the number of
eyeglass wearers as well as the number
of eyeglasses purchased. It is currently
estimated that approximately 165
million American adults regularly wear
prescription eyeglasses, representing
nearly two-thirds of the country’s adult
population,73 and the overall market for
eyeglass frames and lenses is estimated
at $35.6 billion.74 That represents an
18% increase in value from 2019.75
An industry report found that more
than half of Americans surveyed
between January 10 and March 19, 2023
had had an eye exam within the
previous twelve months, and of those
who had an eye exam in the previous
three months and use eyeglasses, 50%
purchased new eyewear.76 While online
eyeglass sales have increased
significantly (in just the four years of
2019–2022, online sales of frames and
lenses nearly doubled from $1.82 billion
to $3.24 billion), 77 roughly four out of
five eyeglass purchases still occur in
person. 78 Furthermore, of those who
have an eye exam and proceed to
purchase eyeglasses, the vast majority
purchase from their prescriber on the
day of the exam.79 This is often referred
to as a prescriber’s ‘‘capture rate,’’ 80 and
remains relatively high for a variety of
reasons, even though the average unit
price for frames and lenses in 2022 was
$360 from independent optical retailers
and prescribers compared to just $183
from online eyewear sellers.81 For many
consumers, the convenience of being
able to shop at the same location that
they have their exam makes it
worthwhile to buy glasses from their
prescriber, even if they are more
expensive. Many consumers also find it
advantageous to try on glasses in person
and have an expert tell them, based on
their prescription and physical
characteristics, the pros and cons of
particular eyewear.82 In-person optical
dispensaries can also perform precise
facial measurements to provide a more
personalized fit.83 Buying from one’s
prescriber can also make it simpler to
have glasses adjusted post-purchase, if
necessary.84 As discussed infra,
however, some consumers buy
eyeglasses from their prescriber because
they feel pressured or obligated to, or
are unaware that they can take their
prescription and shop elsewhere for
glasses.
Final Rule Pertaining to the Automatic-
Prescription-Release Provision
A. Separation of Examination and
Dispensing
Section 456.2(a) of the Eyeglass Rule
provides that it is an unfair act or
practice for a prescriber to fail to
provide to the patient one copy of the
patient’s prescription immediately after
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60747	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
the eye examination is completed. This
provision allows, however, that a
prescriber may refuse to give the patient
a copy of the patient’s prescription until
the patient has paid for the eye
examination, but only if that prescriber
would have required immediate
payment from that patient had the eye
examination revealed that no
ophthalmic goods were required.85
Sections 456.2(b) and (c) prohibit
prescribers from imposing conditions
for patients to receive eye examinations
and prescriptions. Section 456.2(b)
provides that it is an unfair act or
practice for a prescriber to condition the
availability of an eye examination on a
requirement that the patient agree to
purchase any ophthalmic goods from
the prescriber. Section 456.2(c) provides
that it is an unfair act or practice for a
prescriber to charge any fee in addition
to the examination fee as a condition for
releasing the prescription to the patient.
Section 456.2(d) provides that it is an
unfair act or practice for a prescriber to
waive or disclaim prescriber liability for
the accuracy of the eye examination or
the accuracy of the ophthalmic goods
and services dispensed by another
seller.
These provisions, often referred to as
the automatic-prescription-release
requirement (also referred to as the
required ‘‘separation of examination and
dispensing’’),86 were intended to make
it clear that the purchase of eyeglasses
is separate and distinct from the act of
obtaining an eye exam, and to ensure
consumers have possession of their
ophthalmic prescriptions so they are
able to ‘‘price shop’’ for eyeglasses.87
Absent physical possession of their
prescriptions, consumers do not have
the ability—and in some cases, the
knowledge—to buy eyeglasses wherever
they want. Consequently, there is less
comparison-shopping, and less
incentive for eyeglass sellers to
advertise or compete with each other on
price or service.88
1. Comments and Evidence Regarding
the Automatic-Prescription-Release
Provision
In response to the Commission’s
NPRM, and during and after the
Eyeglass Rule workshop, numerous
commenters addressed the Rule’s
automatic-prescription-release
provision, weighing in on whether (a)
prescribers comply with the
requirement and consumers receive
their prescriptions, and (b) compliance
is still necessary and beneficial for
consumers.
a. Prescriber Compliance With
Automatic Release, and Consumer
Receipt of Their Prescriptions
Several commenters stated that even
though the automatic-release provision
has been in effect for decades,
prescribers still do not adhere to this
requirement, and thus consumers often
do not receive a copy of their
prescription. Longtime eyewear
consumer and ER workshop panelist
Felecia Neilly, for instance, recounted
how she has visited various eye doctors
at least 50 times over the course of her
life, and yet has rarely been handed her
prescription without having to request
it.89 ‘‘It just always felt like there was a
reluctance [on the part of the prescriber]
in getting the complete information
needed to fill the prescription, always,’’
commented Neilly, adding that if the
Rule has been in effect since the ’70s, it
should be automatic. 90 Neilly added
that even when she did request her
prescription, she did not always receive
the complete copy, thus making it a
challenge for her to purchase eyewear.91
Likewise, the National Association of
Retail Optical Companies (‘‘NAROC’’),92
a trade association comprised of retail
optical companies with co-located eye
care services (such as LensCrafters,
Costco Optical, and Walmart Vision
Center), submitted a comment stating,
‘‘We have no evidence to contradict the
[previous Commission] finding that
prescribers’ failure to automatically
provide customers with prescriptions at
the completion of an eye exam—held to
be an unfair act or practice when the
Eyeglass Rule was enacted—remains
prevalent, and millions of Americans
every year are not receiving their
eyeglass prescriptions as required by
law.’’ 93 One Michigan optometrist, Dr.
David Durkee, commented that ‘‘the far
majority of my colleagues do not engage
in such practices [automatic release of
prescriptions] out of fear of losing
[retail] business.’’ 94
Other members of the ophthalmic
community, on the other hand, typically
felt that compliance with the automatic-
prescription-release provision is routine
and common practice. Workshop
panelist Dr. Jeffrey Michaels, a Virginia
optometrist, commented, ‘‘I think that
the automatic compliance with this
[prescription release] is so ingrained in
optometrists and ophthalmologists that
it’s just a normal part of their day.’’ 95
He noted that in his optometric office,
100% of prescriptions are automatically
uploaded to a patient portal ‘‘the very
second the prescription is finalized.’’ 96
The American Academy of
Ophthalmology (‘‘AAO’’) volunteered
that ophthalmology practices ‘‘have a
tremendous track record of compliance
with existing prescription release
requirements,’’ 97 and the Opticians
Association of America (‘‘OAA’’) and
American Optometric Association both
noted that online eyeglass sales have
been steadily increasing year over year,
which they believe indicates that
consumers have copies of their
prescriptions.98
The American Optometric
Association also pointed to the fact that,
over the past five years, there had been
fewer than fifty prescribers warned by
the FTC for potential violations of the
Eyeglass Rule (such as failure to release
prescriptions).99 The dearth of
complaints was also emphasized by
other optometrists, such as Dr.
Michaels,100 who said, ‘‘Well, we heard
that there were 30-some-odd letters
[relating to complaints of non-
compliance] out of 55,000 doctors who
prescribe,’’ and Dr. Scott Sanders, a
Mississippi optometrist, who
commented, ‘‘The FTC is trying to fix
something that is not broken . . .
Prescriber compliance is
99.99999%.’’ 101 Additionally, the
American Optometric Association cited
a consumer survey, performed at its
behest by NERA Economic Consulting,
which purportedly found that only 3 of
1072 eyeglass consumers polled
mentioned a possible Eyeglass Rule
automatic-release compliance issue, and
this, according to the American
Optometric Association, indicates that
non-compliance is not prevalent.102
However, the NERA survey did not
specifically address prescription-release
compliance, 103 did not directly ask
consumers whether they received their
prescription from their prescriber, and
did not ask consumers if they were
aware of their right to their
prescription.104 Rather, the survey
focused on where consumers purchased
their eyeglasses and contact lenses, and
why they purchased from that particular
location. When consumers were asked
to select the reasons that they purchased
from that location, none of the 17
options offered included the availability
or unavailability of their prescription
(such as ‘‘Because my prescriber didn’t
give me my prescription.’’). The only
way for survey respondents to reference
prescription availability or
unavailability was when asked open-
ended questions such as ‘‘In your own
words, why did you purchase glasses
from [the location that you did]?’’ and
‘‘Why did you ONLY consider
purchasing glasses from [the location
that you did]?’’ In response to these
questions, three consumers volunteered
that they either thought they were
required to buy from their doctor, or
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60748 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
that they bought from their doctor
because the prescriber would not
provide them with a copy of their
prescription. 105 Since only three
consumers mentioned the lack of
prescription release, the American
Optometric Association contends that
noncompliance must not be an issue.106
Though the NERA survey provides
some insights discussed later in this
document, the Commission does not
find the survey to be probative as to
whether prescribers are releasing
prescriptions (either automatically or on
request). The fact that only three
consumers 107 proactively mentioned
that prescribers had not provided them
with their prescriptions could, perhaps,
suggest that prescribers typically
comply, but cannot be accorded
significant evidentiary weight since
consumers were not actually asked
whether they received their
prescriptions.
The Commission also notes, as it has
repeatedly in the past, that the raw
number of consumer complaints about
prescriber non-compliance is an
unreliable barometer of prescriber
compliance. As discussed in some detail
during the Contact Lens Rule review,
the Commission’s experience has shown
that the vast majority of injured or
impacted consumers do not typically
register complaints with the
government, and even fewer are likely
to submit a complaint about an FTC rule
violation such as a prescriber’s failure to
release their prescription. 108 This is
especially true when—as will be
discussed later in this final rule—
evidence shows that many consumers
remain unaware that they have an
unconditional right to their prescription
and should be receiving them
automatically after each refractive exam.
As workshop panelist Neilly
commented, the lack of consumer
complaints may correlate to the lack of
knowledge about the prescription-
release requirement ‘‘because people
don’t even know there’s an Eyeglass
Rule.’’ 109 And even if consumers are
aware that they have a right to their
prescription and should have received
it, they might not know to whom to
complain in instances when it wasn’t
given to them.
Apart from the NERA survey, none of
the commenters to the NPRM or
Eyeglass Rule workshop supplied new
or updated empirical evidence. The
extensive evidentiary record, however,
includes two previously submitted
surveys that shed light on the
percentage of patients that do or do not
receive their prescriptions. A survey
conducted on behalf of Warby Parker by
the polling firm SurveyMonkey reported
that, of consumers who had purchased
eyeglasses within the last three years,
47% of those who saw optometrists and
31% of those who visited
ophthalmologists were not
automatically provided with a physical
copy of their eyeglass prescription.110
The survey also found that 14% of
consumers had to pay their prescriber
for a copy of their prescription when
they requested a copy at a later time.111
Another survey—conducted on behalf
of 1–800 CONTACTS by the polling
firm Survey Sampling International
(‘‘SSI’’)—found that only 34% of
eyeglass wearers automatically received
their prescriptions on the day of their
office visit, with another 19% receiving
it during their visit, but only after asking
for it. 112 According to the SSI survey,
some consumers were able to obtain
their prescription at a later point by
returning to their prescriber’s office, but
39% of consumers never received their
prescription at all. 113
It is important to note that these
surveys reveal more than simply that
many prescribers fail to always comply
with the automatic-release requirement.
The surveys reveal that, even if
prescribers will provide prescriptions
when asked, a significant percentage of
consumers leave their prescriber’s office
without their prescriptions. Which
means that, for the next year or two
(until their next eye exam), those
consumers might be unable to shop for
eyeglasses at an alternative location
without having to contact their
prescriber and ask for their prescription
(and possibly have to pay for it).
Although it is possible for other eyeglass
sellers to call prescribers’ offices and
request patient prescriptions, this can
lead to delays, and—in sharp contrast to
the Contact Lens Rule—there is no legal
requirement under the Eyeglass Rule
that prescribers comply with requests to
verify patient eyeglass prescriptions to
third-party sellers.
The two surveys cited herein have
been criticized by optometrists and the
American Optometric Association,
which contend the Commission should
disregard their results because the
surveys were submitted by retail
competitors with a financial stake in the
outcome of the rulemaking,114 and were
submitted as part of the FTC’s Contact
Lens Rule review, and the markets and
patient experiences for eyeglasses and
contact lenses are not the same.115 The
American Optometric Association cited
to NERA’s survey and comment for the
premise that ‘‘Commission conclusions
and decisions regarding regulation in
the contact lenses market cannot be
presumed to apply to the eyeglasses
market.’’ 116 As evidence of this
dissimilarity, AOA has pointed to the
NERA survey finding that eyeglass users
are more likely than contact lens users
to buy their corrective eyewear from
someone other than their prescriber.117
AOA also noted that because contact
lens fittings are not always complete in
office due to patients taking home trial
lenses to test, surveys of contact lens
users may produce imperfect results in
that consumers may report that they
didn’t receive their prescriptions at the
end of their exam when, in fact, their
contact lens fittings hadn’t been
finalized and so they weren’t actually
entitled to receive their prescriptions at
that point.118
With respect to AOA’s first argument,
the Commission acknowledges that both
Warby Parker and 1–800 CONTACTS
have a financial interest in the outcome
of the Rulemaking. The Commission
recognizes, however, that nearly all
commenters have some form of interest
in the outcome. And thus, as a general
practice, the Commission does not
simply disregard data or opinions
submitted by interested parties. Rather,
the Commission takes into account the
financial interests of submitting parties,
but also, when possible, examines the
underlying data and methodology
submitted to gauge a survey’s
usefulness, and considers factors such
as how many people are queried, how
the questions are phrased, and whether
the surveys are conducted in-house (by
the interested parties themselves) or by
independent and established third-party
polling firms. Lastly, the Commission
recognizes that all surveys are likely to
have some methodological limitations,
and thus the Commission will often
decide not to treat any single survey as
controlling or dispositive. The
Commission is also aware, however,
that multiple surveys conducted by
different sources at different times with
similar results tend to bolster the
credibility of each individual survey.119
In this case, the surveys submitted by
Warby Parker and 1–800 CONTACTS
are not flawless or immune to criticism,
but were performed by reputable third-
party polling firms and appear
sufficiently reliable based on an
examination of their questions and
methodology.
As for AOA’s assertion that the two
surveys were submitted during the
Contact Lens Rule review and thus are
not relevant to this Eyeglass Rule
review, the Commission cannot concur.
The contention that the SurveyMonkey
survey was submitted during the
Contact Lens Rule review is incorrect.
While the Survey Monkey data was
referenced during the Contact Lens Rule
review, it was submitted in response to
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60749	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
the Commission’s Eyeglass Rule
Advance Notice of Proposed
Rulemaking in 2015 and was a survey
of eyeglass wearers.120 As for the SSI
survey, that was indeed included as part
of a submission during the Contact Lens
Rule review, but that particular survey
polled both contact lens users and
eyeglass users about their experiences
with prescription release, and
distinguished between the two in its
results. The SSI results cited above—
showing that approximately only 34%
of eyeglass wearers automatically
received their prescriptions following
their refractive eye exam, and 39% did
not receive their prescription at all—are
results solely of eyeglass users’
experiences.121 Any impact or effect
caused by a dissimilarity in eyeglass
and contact lens markets or experiences
would not apply.122 Thus, criticism that
these surveys do not reflect the
appropriate target group or take into
account differences between eyeglass
and contact lens users is misdirected,
and these surveys merit the
Commission’s full consideration.
Moreover, the Commission cannot
agree that other surveys detailing how
contact lens users have not received
their prescriptions do not have
relevance in the context of the Eyeglass
Rule. As noted above, there are,
admittedly, differences in the
examination and prescription processes
for eyeglasses and contact lenses,123 but
the mandatory prescription-release
requirements are similar, and there is
little evidence to indicate that
prescribers release eyeglass
prescriptions in dramatically different
numbers than they release contact lens
prescriptions. And while the NERA
survey indicates that contact lens users
are less likely than eyeglass wearers to
purchase from someone other than their
prescriber, this has little or no bearing
on whether consumers are receiving
their prescriptions from their prescriber
(although it may have some bearing on
whether automatic release is necessary
or beneficial, as discussed below).
The Commission therefore views the
five additional consumer surveys
submitted and considered during the
CLR review—which found that between
21 and 34% of contact lens users did
not receive their prescriptions when
they were supposed to—as additional
indications that prescriber compliance
with prescription release, and overall
consumer receipt of their prescriptions
(whether contact lens prescription or
eyeglass prescription), is sub-optimal.124
Furthermore, the Commission notes,
as it did in the CLR final rule, that
despite multiple opportunities and
requests for comment since 2015, the
Commission has yet to locate or receive
any reliable consumer-survey data
rebutting or contradicting the
prescription-release data in the record
for either contact lens users or eyeglass
wearers, or establishing, other than
anecdotally, that consumers
consistently receive their prescriptions
from prescribers as they are supposed to
under the applicable FTC rule.125 Based
on the evidence in the record, it is thus
the conclusion of the Commission that
tens of millions of American consumers
in need of corrective vision wear are not
receiving their eyeglass prescriptions
after visiting their prescriber each
year.126
b. Whether the Automatic-Release
Provision is Still Necessary and
Beneficial for Consumers
Having determined that prescriber
compliance with the Rule’s automatic-
release provision is deficient, and that
many eyeglass consumers do not receive
their prescriptions, the Commission
next considers the impact of this
deficiency, and whether such failure
remains an unfair act or practice in need
of remedial action, as originally
determined by the FTC when it
formulated the Rule.127 Again, opinions
on the need for, and benefit from,
automatic prescription release, varied
significantly in the comments received
by the Commission. NAROC, for
instance, opined that the automatic-
release requirement—when complied
with—provides a substantial benefit to
consumers as it enables comparative
shopping, and added there is ‘‘no
evidence to support a conclusion that
the automatic release provision is no
longer needed; to the contrary, the
substantial expansion of consumer
choice in recent years is strong evidence
that this requirement has helped
consumers and that it is more necessary
than ever.’’ 128 In a subsequent
comment, the organization added,
‘‘There is widespread agreement that the
Commission should continue the
‘automatic-prescription-release
requirement’ for eyeglasses,’’ but
evidence demonstrates that not all
consumers are aware they should
receive their prescription automatically,
and some prescribers are not providing
it.129 Wallace Lovejoy from NAROC
opined during the workshop that, while
some people have their mind made up
before they go to the eye doctor, and
want to get an exam and buy glasses at
the same time and place, ‘‘there’s a
significant number of people who get an
eye exam and wait to shop and go
somewhere else. It’s useful to have the
prescription released and I would agree
that the automatic release seems to
make the most sense.’’ 130
Some other commenters endorsed this
view. 1–800 CONTACTS, for example,
stated, ‘‘automatic prescription release
is critical to promoting consumer choice
and competition in the market for
prescription eyewear,’’ and ‘‘prescribers
are unlikely to comply with their
automatic release obligations absent a
credible threat of enforcement and fines.
Prescribers have a strong financial
incentive to withhold a prescription to
discourage comparison shopping and
pressure patients to purchase lenses
inhouse.’’ 131 One anonymous
commenter submitted, ‘‘Being able to
have a prescription in your hands as
soon as your examination is done would
be very beneficial to a lot of people for
many reasons. This would allow people
to shop for different resources for their
lenses and find the best price for them.
It shouldn’t be a hassle for someone to
get their prescription . . .’’ 132 Likewise,
Sara Brown, from the advocacy
organization Prevent Blindness, stated
during the workshop, ‘‘I think not
having [automatic release] would make
a major impact on patient access.’’ 133
She noted that millions of Americans
have difficulty affording eyewear, and
not having information that makes it
easier for them to comparison-shop
would be detrimental.134
On the other hand, some commenters
felt that, irrespective of whether
prescribers automatically release
prescriptions, prescribers no longer
withhold prescriptions if directly asked
for them. Dr. Arlan Aceto, a Connecticut
Professor of Ophthalmic Design and
Dispensing, for example, said during the
workshop that he and his optician
colleagues have not had a problem
obtaining prescriptions from prescribers
in instances where the patients failed to
bring them,135 and panelist Dr. Artis
Beatty, a North Carolina optometrist,
commented that oftentimes patients are
issued a prescription but fail to have it
on hand when they need it.136 These
comments suggest there may be less
need for, and consequently less benefit
from, the automatic-release requirement.
The most extensive criticism of the
automatic-release requirement came
from workshop panelist and NERA
consultant Dr. Andrew Stivers,137 who
submitted a survey and lengthy
comment that challenged the underlying
basis for the requirement, noting, ‘‘It’s
not just how much compliance, it’s how
impactful that compliance or lack of
compliance is on consumers.’’ 138
According to Dr. Stivers, the relevant
issue is whether, and how much,
consumers have their eyeglass-shopping
options curtailed by failure of
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60750 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
prescribers to automatically provide
patients with their prescriptions, since
some consumers would not have
shopped elsewhere even if they had
received their prescriptions, and some
consumers might have been offered
their prescription and declined.139
Dr. Stivers argued that the Rule’s
automatic-release provision was meant
to address a lack of competition
resulting from market conditions that do
not exist in today’s ‘‘information rich,
dynamic market,’’ and thus the
Commission should reexamine whether
automatic release still benefits
consumers in light of two fundamental
changes that have occurred in the
market. 140 First, said Dr. Stivers, mass
merchandisers and wholesale clubs
have ‘‘transformed’’ the eyeglass
shopping experience, and second,
internet search and shopping has
created a new, competitive channel for
eyewear.141 The original rule’s finding
of unfairness, according to Dr. Stivers,
rested on a context of advertising
restrictions [of eyeglass sellers], State
restraints on trade, limited shopping
options for consumers, and overt
prescription-withholding behavior by
prescribers, that rarely exists today.142
Therefore, he contended, the
Commission’s ‘‘determination of
unfairness from 40 years ago cannot be
presumed to apply today and thus there
is no rationale or basis for new
regulation in the prescription eyeglass
market.’’ 143 Furthermore, Dr. Stivers
explained, ‘‘Today, consumers can
choose to shop before getting an exam,
which increases incentives to provide
information and increases competition
in ways that the Commission of 1978
could not imagine,’’ 144 and this change
has made automatic release less likely to
generate substantial benefit. And absent
such benefits, per Dr. Stivers, lack of
compliance with automatic release
cannot be the basis for a determination
of unfairness, or the proposed changes
to the Rule.145
As evidence of the altered market and
changed consumer behavior, both Dr.
Stivers and the American Optometric
Association pointed to the NERA
survey, which found, among other
things: that consumers have numerous
options for eyeglass purchases; that one
in three eyeglass purchasers consider
alternatives to where they ultimately
purchase; that consumers purchase
glasses from alternative channels such
as retail chains and online stores more
than 50% of the time; that consumers
choose purchasing locations for a
variety of reasons (including price,
service, familiarity, location), with
convenience valued over all others; and
that eyeglass purchasers are more likely
than contact lens users to know about
and consider alternative purchasing
channels.146 According to the American
Optometric Association, these results
demonstrate that consumers are aware
of, and utilize, their eyeglass-purchasing
options, and that there is a ‘‘well-
functioning and competitive market for
eyeglasses,147 thus calling into question
the ‘‘underlying premise that more must
be done to encourage competition and
choice in the eyeglass market.’’ 148 The
AOA further quoted Dr. Stivers’ NERA
report for the premise that the survey
results ‘‘do not support or uncover any
systemic market failures requiring
additional rulemaking that would
benefit consumers.’’ 149
2. Analysis of Evidence Regarding
Failure To Release Prescriptions
Having considered the evidence in the
record—including the written
submissions and workshop comments,
empirical surveys of prescription-
release and consumer knowledge,
ongoing and historical patterns of
consumer complaints and anecdotal
reports, and other relevant evidence
submitted during the CLR review (and
the Commission’s determinations in that
regard), along with the industry’s long-
documented history of failing to release
prescriptions in order to capture
consumer eyewear purchases in-
house—in context of the intent,
purpose, and history of the Eyeglass
Rule, the Commission finds that,
regardless of the increased information
and availability of purchasing
alternatives in today’s eyeglass
marketplace, it remains an unfair act or
practice for prescribers to fail to release
a prescription to consumers. The
practice denies consumers the ability to
effectively use the information
available, and continues to result in
substantial economic loss and lost
opportunity costs due to an impaired
ability to comparison-shop for
eyeglasses. The Commission finds that
such conduct remains pervasive, is
likely to cause consumers substantial
injury, is not outweighed by
countervailing benefits that flow from
such conduct, and cannot reasonably be
avoided by a substantial number of
consumers.
The Commission does not dispute
that mass merchandisers, wholesale
clubs, and internet search and shopping
have dramatically altered the overall
retail landscape for eyeglass shopping.
But these changes relate primarily to
aspects of eyeglass shopping that occur
once a consumer already has a
prescription in hand. The initial
experience of having an eye exam and
obtaining a prescription remains much
the same as it was when the Rule was
created in that a consumer still has to
be examined by an optometrist or
ophthalmologist in order to obtain a
prescription with which to buy
eyeglasses. While Dr. Stivers has
suggested that consumer emphasis on
convenience when deciding where to
buy glasses suggests they ‘‘likely
consider both where to get an exam and
where to shop for glasses ahead of time
for an efficient shopping
experience,’’ 150 the NERA survey does
not reveal to what extent this pre-exam
shopping occurs, and Dr. Stivers
acknowledged that he was unaware of
any survey evidence establishing that
many consumers comparison-shop
before choosing their eyecare
provider. 151 The Commission is not
aware of any empirical evidence
showing whether pre-exam shopping is
prevalent, nor—even if it is—whether
that means consumers no longer want or
need a copy of their prescriptions. It
also would not aid consumers who are
hesitant to ask for their prescription, or
feel pressured to buy glasses from their
prescriber—whom they may view as a
respected medical ‘‘authority
figure’’ 152 —even if consumers’ pre-
exam intention was to take their
prescription and buy glasses elsewhere.
Furthermore, even if consumers decide
pre-examination that they want to buy
glasses from their prescriber, and thus
do not need a copy of their prescription,
they could still be harmed by a
prescriber’s failure to release their
prescription if, at a later date, those
consumers want to purchase additional
or replacement eyeglasses, and lack a
copy of their prescription. In addition,
as Dr. Michaels noted during the
workshop, many consumers go in for an
eye exam every year without any
intention of buying glasses,153 only to
learn during their exam that they now
need vision correction, or that their
vision correction has changed.
Dr. Stivers is correct in that not all
consumers necessarily benefit from
receiving a copy of their prescription.
Some consumers prefer buying glasses
from their prescriber for convenience, or
trust the expertise of their prescriber’s
staff to help fit them with the most
appropriate eyewear. Some consumers
simply favor the prescriber’s frame
options. But in trying to calculate how
much consumer eyeglass-shopping
options are, or are not, curtailed by the
failure to receive their prescriptions, the
Commission faces a dilemma in that
consumer decisions and preferences
with respect to buying eyeglasses are
impacted by the fact that so many
consumers are not given a copy of their
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60751	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
prescription. Widespread lack of
automatic prescription-release renders it
difficult, if not impossible, to determine
what percentage of consumers opted to
buy glasses from their prescriber
because they favored the prescriber’s
convenience, selection, and expertise,
and what percentage opted to buy from
their prescriber because they did not
have a copy of their prescription, did
not feel comfortable asking for one, or
did not even know that they could. In
sum, it is unlikely that consumers’
current conduct and preferences
regarding where they purchase
eyeglasses can fully establish how much
is or is not to be gained from improving
compliance with the Rule’s automatic-
prescription-release requirement
because current consumer conduct and
preferences are colored (and perhaps
unfairly influenced) by current
prescriber non-compliance with
automatic prescription release.154
Ultimately, it is the Commission’s
view that, regardless of the widespread
availability of information and
alternative opportunities to buy
eyeglasses, not possessing a prescription
continues to impede consumer options
and comparison-shopping for
eyeglasses. By many accounts, the
Eyeglass Rule, and the removal of State
restrictions, have played a major role in
significantly altering and improving the
information and alternatives available to
eyeglass consumers. 155 But possession
of the prescription remains the key that
unlocks the door to this altered and
improved marketplace. As workshop
panelist Lovejoy commented, ‘‘[t]he
ability to advertise doesn’t matter if you
don’t get a copy of your
prescription.’’ 156 The Commission
noted this when promulgating the
Eyeglass I Rule, declaring that the injury
arising from failure to release
prescriptions is clear in that consumers
are denied ‘‘the ability to effectively use
available information, and inhibit the
functioning of the competitive market
model,’’ and therefore, the failure to
release prescriptions immediately after
the eye examination is completed is, in
and of itself, an unfair act or practice.157
This holds true irrespective of other
changes and improvements in the
eyeglass marketplace.
Furthermore, it remains evident that
many consumers are still not fully
knowledgeable about their
unconditional right to their
prescriptions, and thus their ability to
avoid or self-remedy harm arising from
not possessing their prescriptions.
While prescribers have often asserted
that consumers are well-aware of their
purchasing options, 158 the Commission
continues to receive communications
evidencing that some consumers do not
even realize they are entitled to their
prescriptions. 159 As workshop panelist
Brown noted, ‘‘there was a question that
was [asked] earlier about why don’t
patients ask for this information?
Because they don’t know.’’ 160
Indeed, some surveys have found that
consumer awareness of prescription
rights remains less than ideal.
According to a 2015 survey—performed
on behalf of 1–800 CONTACTS—49% of
prescription eyeglass wearers are not
aware that they have a right to receive
their eyeglass prescription, and 51% are
not aware that their eye exam provider
cannot charge for their eyeglass
prescription.161 Multiple consumer
surveys reviewed during the Contact
Lens Rule review reinforce this by
showing that a high percentage of
contact lens users (46 to 60%, according
to submitted data) still do not realize
they are entitled to receive their contact
lens prescription,162 and it is probable
that many of these consumers are also
unaware they are entitled to their
eyeglass prescription. The percentages
of consumers unaware of their rights
have been found to be even higher for
traditionally underserved groups such
as African Americans and Hispanics,163
and due to less English language
proficiency, non-native speakers may
also be less likely to speak up and
request their prescription—even if they
know they can—if it is not
automatically provided by their
prescriber. There are also significant
numbers of consumers each year who
are new to the need for corrective
eyewear, and thus have little experience
with eye examinations, including
whether they should receive a copy of
their prescription. Therefore, the
Commission concludes that while the
NERA survey may suggest that some
percentage of consumers is now aware
of their option to obtain eyeglasses from
a source other than their prescriber, the
number of consumers fully informed of
their prescription rights, and of their
ability to take their prescription and
shop elsewhere, remains sub-optimal.
Furthermore, as noted previously, the
Commission is also aware that some
consumers know they have the right to
their prescription but may feel pressure
to purchase from their prescriber, or feel
uncomfortable asking for their
prescriptions since it signals to the
prescriber that they plan to purchase
eyewear at a different location.164
Consumers often like and respect their
prescribers, and are hesitant to do
something that might be perceived as
disloyal.165 Other consumers may be
reluctant to acknowledge to their
prescriber that they are cost-conscious
and have concerns about their ability to
afford eyewear at the price charged by
their prescriber.166
After considering all of the evidence,
the Commission concludes that when
prescribers do not release prescriptions,
it still harms consumers and puts them
at a disadvantage in the marketplace,
and thus continues to require remedial
regulation.
B. The Remedy for Failure To Release
Prescriptions Remains the Automatic-
Release Requirement
In fashioning a remedy for an unfair
act or practice, the Commission has
wide latitude, and need only show a
‘‘reasonable relation’’ between the
unfair act or practice and the remedy.167
When, in the past, the Commission has
considered how to remedy failure to
release, it evaluated a variety of options,
including, among other things, release-
upon-request, offer-to-release, and
increased signage and consumer
education, and yet the Commission
repeatedly determined that the most
effective remedy is to require automatic
release of prescriptions regardless of
whether a consumer requests one
following an examination. The
Commission still finds this to be true
and concludes that automatic release as
a remedial measure continues to have a
reasonable relationship to the unfair act
or practice of withholding prescriptions.
The Commission continues to find that
automatic release remains the optimal
remedy for prescribers’ failure to release
prescriptions because absent the
requirement: (1) even more doctors
would not always provide patients with
their prescriptions, as demonstrated by
surveys indicating that they often do not
presently, even though required to do
so; (2) large numbers of patients would
not ask for their prescriptions due to a
lack of awareness of their unconditional
right to their prescription; (3) some
patients would be reluctant to ask for
their prescriptions (particularly
underserved groups); and (4) release-
upon-request would inappropriately
place the burden on the consumer.
Release-upon-request would also be
difficult for the Commission to enforce
because, absent documentary evidence,
it would likely turn into a debate as to
whether a patient did or did not ask for
their prescription.
While the Commission concludes that
automatic prescription release remains
the best remedy for the unfair practice
of failure to release, it is also evident
from the record that the remedy has not
fulfilled its potential. The remedy has
been in effect for over forty years, and
yet a significant number of consumers
are still not receiving their
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60752 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
prescriptions. The Commission
therefore turns next to examine ways to
improve the automatic-release remedy
via amendments and clarifications to
the Rule.
C. Commission Determination To
Update the Rule To Clarify
Requirements for Prescription Release
One prescription-release issue that is
periodically brought to the attention of
the Commission relates to the timing of
the Rule’s required automatic
prescription release—i.e., at what point
that release must occur during a
patient’s office visit to their prescriber.
The Rule, as presently written, states
that it must occur ‘‘immediately after’’
the eye examination is completed, but
that a prescriber may withhold the
prescription until the patient has paid
for the examination if the prescriber also
requires immediate payment from
patients for whom the examination
revealed that no ophthalmic goods were
required. 168 The words ‘‘immediately
after,’’ however, have not previously
been discussed or clarified in detail, and
some non-prescribing eyewear sellers
have raised concerns that prescribers
who also sell eyewear have a tendency
to lead patients into the prescriber-
owned optical dispensaries and offer to
sell them eyeglasses immediately
following an examination and before
providing their patients with their
prescriptions. 169 Some prescribers and
optometric consultants even
recommend such an approach as a way
of increasing customer ‘‘capture
rate.’’ 170 When this occurs, the
prescription copy is only released to the
patient after they have already shopped
for eyeglasses, when they are checking
out and paying their total bill (a bill that
would include the cost of the
examination, as well as the cost for new
glasses).
As noted during the Eyeglass Rule
workshop, the Commission believes that
prescribers holding onto a prescription
until after they have already made an
eyeglass sale runs contrary to both the
letter and purpose of the Rule.171 The
letter of the Rule is clear. The prescriber
must provide the prescription
‘‘immediately after the eye examination
is completed.’’ 172 The policy of the
Rule, as it relates to the timing of
prescription release, is also clear in
several ways. First, the regulatory
history makes evident that two of the
foundational purposes of the Rule have
been to (a) separate the eye examination
from the purchase of eyeglasses, and (b)
ensure that consumers have possession
of their ophthalmic prescriptions so
they are able to comparison-shop for
glasses.173 The singular fact that
eyeglass prescribers sell what they
prescribe 174 (a practice that some
members of Congress have called an
‘‘inherent conflict of interest’’) 175
already blurs the distinction between
eye examination and the purchase of
eyeglasses, and when a prescriber offers
to sell consumers glasses before
releasing their prescriptions, it blurs
that distinction even further.
Additionally, as noted at the time the
Commission first created the Rule, the
prescription itself is ‘‘the means by
which consumers can comparison
shop.’’ 176 Absent a prescription in
hand, (whether that be physically in
hand, or digitally uploaded to a patient
portal and readily accessible to the
consumer), consumers might not even
realize they have an option to
comparison-shop for their glasses. They
may be confused, or misled, into
thinking that the examination and
purchase of eyeglasses are part of a
unitary, or ‘‘total vision care’’ process, a
once-common practice in the
ophthalmic community in which the
sale of eyeglasses was tied to the
examination, and by scheduling an eye
exam, a patient was essentially
committing to purchase eyewear (if they
needed it) from the same location at
which they were examined. 177
While there is nothing inherently
wrong with consumers buying eyewear
from the prescriber who conducted their
refractive examination, and there may
be benefits to it, 178 the Eyeglass Rule
was created because the Commission
determined it was an unfair practice
when consumers did not at least have
the option to buy glasses from someone
other than their prescriber. The
Commission believes it is problematic if
patients are confused about whether
they have, or do not have, the option to
separate the examination process from
the commercial purchase of eyeglasses.
And even if patients recognize that by
coming for an examination they are not
committing to buy glasses from their
prescriber, they may feel pressure to do
so, a pressure heightened by the fact
that until they possess a copy of their
prescription, they cannot shop at any
other locations.
Lastly, the practice of not providing
prescriptions until after the patient has
selected eyeglasses can lead consumers
to believe that they are receiving their
prescription because it comes with the
eyeglasses, or to believe that what they
are paying for is their prescription copy,
when, in fact, they are paying for their
examination, and the prescription copy
is free per the Rule. The Commission
periodically receives complaints from
consumers who believe they were
charged for their prescription when, in
actuality, consumers were charged for
their examination, but the confusion
arose because the prescriptions were
only handed over after the consumers
paid.179
Ultimately, of course, the consumer is
free to buy eyeglasses from their
prescriber. Many consumers prefer to do
so, 180 and the Commission has no
interest in preventing this. But to fully
realize the intent and purpose of the
Rule, consumers must have the
unfettered option to buy from wherever
they choose, and must not be confused
or misled about their unconditional
prescription rights, and whether their
examination is connected to the
purchase of glasses. To achieve this,
consumers must have the prescription
in their possession—whether physically
or digitally—as soon as the prescription
is finalized and before they are offered
eyeglasses for sale.
For this reason, the Commission is
revising § 456.2 to clarify that the
prescription must be provided after the
refractive eye examination is completed
‘‘and before offering to sell the patient
ophthalmic goods.’’ This does not mean
that a patient is not permitted to walk
through a prescriber’s eyeglass
dispensary, or browse available eyeglass
frames, before receiving a copy of their
prescription. Nor does it cancel the Rule
provision that a prescriber may make
consumers pay for their exam before
releasing their prescriptions, so long as
that prescriber would have required
immediate payment from the patient
had the examination revealed that no
ophthalmic goods were required.181 But
it does mean that if a prescriber (or the
prescriber’s staff) is ready and willing to
sell that patient eyeglasses, the
prescriber must release a copy of the
prescription to the patient before
moving forward with any aspect of the
sale. If the prescription is released
electronically (with the patient’s
consent), it must be uploaded to a
patient portal or transmitted to the
patient via email or text, and thus fully
accessible to the patient before that
patient is offered an opportunity to
purchase eyewear. It also means that if
the prescriber makes a medical
determination to not write and release a
prescription to a patient,182 or
withholds a prescription pending
payment by the patient for the
examination, the prescriber may not
offer to sell that patient eyeglasses at
that time. 183 The prescriber may only
offer to sell the patient eyeglasses after
the prescription is released. 184
Furthermore, per the discussion above
regarding automatic prescription
release, the Commission still
concludes—as it concluded multiple
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60753	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
times in the past—that the burden of
ensuring prescriptions are released must
rest on the prescriber and not the
patient. 185 And thus automatic release
must occur regardless of whether or not
the prescription is requested by the
patient. This has always been the intent
of the Rule—and is already reflected in
the existing requirement that the
patient’s prescription must be provided
‘‘immediately’’ after the examination—
but, unlike with the Contact Lens Rule,
it has never been specifically stated in
the Rule text. To ensure that is clear,
and to bring the Eyeglass Rule
prescription-release requirement into
concordance with that of the Contact
Lens Rule, thereby simplifying
compliance, the Commission is further
revising § 456.2 to clarify that the
prescription must be provided ‘‘whether
or not the prescription is requested by
the patient.’’ This does not mean that a
prescriber must force the prescription
on a patient who does not want a copy.
The patient is always free to refuse a
copy, in which case the prescriber
should merely note that in their files.
But prescribers and their staff must at
least attempt to give the patient a copy
of the prescription, rather than merely
offer to provide a copy, or just wait and
see if the patient asks for it.
Neither of these clarifications alter the
burden on prescribers, they merely
make clearer what is already required by
the Rule, and what should already be
occurring in practice.
III. Final Rule Pertaining to Affirmative
Consent to Digital Delivery of Eyeglass
Prescriptions
A. Digital Delivery Option in the NPRM
and the Basis for Such Amendment
As discussed above, § 456.2(a) of the
Eyeglass Rule provides that it is an
unfair act or practice for a prescriber to
fail to provide to the patient one copy
of the patient’s prescription
immediately after the eye examination
is completed. The Rule, as currently
codified, does not expressly permit
electronic delivery of prescriptions as a
means for automatic prescription
release. In the NPRM, the Commission
considered technological advances,
such as the proliferation of patient
portals, along with prescriber-to-patient
communication via email or text, that
could facilitate the transmission of the
prescription to the patient once the eye
exam is completed, and thereby
enhance prescription portability.186 The
Commission opined that permitting
electronic delivery in certain
circumstances could provide benefits to
consumers, and proposed amending the
Rule to permit such delivery after the
prescriber obtains the patient’s
verifiable affirmative consent.187
To ensure that patients are able to
make an informed choice about whether
to agree to electronic delivery, the
proposal required that the prescriber
identify the particular delivery method
to be used, such as portal, text, or email,
and the prescription would need to be
provided in a digital format that can be
accessed, downloaded, and printed by
the patient.188 This could enable
patients to have easier access to and use
of a prescription, reduce requests for
additional copies and calls from sellers
to verify a prescription, and potentially
lower costs while providing flexibility
for prescribers and patients. To aid
Commission enforcement efforts to
monitor compliance with the Rule, the
Commission proposed that prescribers
be required to keep a record or evidence
of a patient’s affirmative consent for a
period of not less than three years.189
This proposed amendment to the
Eyeglass Rule mirrored a change made
to the CLR in 2020, allowing prescribers
to satisfy the CLR’s automatic-release
requirement by providing the patient
with a digital copy of his or her contact
lens prescription in lieu of a paper copy,
provided the prescriber first identified
the specific method of delivery to be
used and obtained the patient’s
verifiable affirmative consent to this
method of delivery.190 In the CLR
SNPRM, the Commission noted that
providing patients with an electronic
copy of their prescriptions could enable
patients to share prescriptions more
easily with sellers when purchasing
eyewear, and this in turn could
potentially reduce the number of patient
and seller requests for verification or
additional copies of the prescription. To
enhance portability, the Commission
noted that electronic delivery methods
should allow patients to download,
save, and print the prescription.191
B. Comments on the NPRM and
Discussion at the Workshop Regarding
the Proposal To Permit Digital Delivery
of the Eyeglass Prescription With
Patient’s Affirmative Consent
In addition to seeking general
comments on the benefits and burdens
of this proposed change, the
Commission invited public comment on
whether prescribers would choose to
satisfy the automatic-prescription-
release requirement through electronic
delivery if permitted by the Rule, and
whether patient portals, emails, or text
messages would be feasible methods for
the provision of digital prescription
copies. The Commission also asked
what other technologies are available
that could be implemented to improve
prescription portability, and thereby
increase benefits and decrease burdens
related to prescription release.
1. Comments About the Benefits and
Burdens of the Proposed Affirmative
Consent to Digital Delivery Provision
The Commission received generally
positive feedback on the proposed
digital delivery provision, with
commenters noting that it would allow
the Rule to keep pace with technology
and it would help patients understand
their rights under the Rule.192 The AOA
opined that this would be a
‘‘commonsense update’’ that would
‘‘ensure [ ] that the FTC’s regulatory
language is keeping pace with updates
in technology.’’ 193 NAROC suggested
that the ‘‘impact of allowing a prescriber
to release the [prescription] in digital
form will be to increase patient
understanding of their rights, because
every instance of receipt of a digital
copy of the prescription will require
affirmative consent to such delivery and
will help build an expectation on the
part of consumers that they are entitled
to the prescription.’’ 194
Other commenters who objected
generally to the burden of other
proposed changes, including the
proposed confirmation requirement,
pointed to the widespread transition to
electronic health records (‘‘EHRs’’) or
electronic medical records (‘‘EMRs’’)
and argued in favor of prescription
availability via a portal as being wholly
sufficient to address the FTC’s concerns
about prescription release, and ensure
patient access to their prescription.195
Another commenter, an ophthalmic
technician, expressed concerns over the
added recordkeeping burden from the
proposed confirmation requirement,
noting that their practice already has a
record of the prescription on file for the
patient and that most EHRs track when
prescriptions are printed out.196
Although having a prescription
available on file upon request (either in
a paper record or accessible through an
online portal) would not satisfy the
automatic-prescription-release
requirement, the Commission
considered the proliferation of patient
portals and EHR systems in the NPRM,
and discussed both the potential
benefits available to consumers,
prescribers, and sellers through the use
of such systems, as well as the possible
drawbacks. On the benefit side, a
patient using a portal could have direct
access to a current, exact copy of the
eyeglass prescription, reducing the
chance of errors caused by an inaccurate
or expired prescription, and the need for
follow-up corrections by prescribers.197
The use of health information
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technologies, such as patient portals,
could also reduce costs for prescribers,
patients, and sellers by making it easier
and more efficient for patients to obtain
and share eyeglass prescriptions, and by
reducing the number of requests placed
on prescribers to verify prescription
information or provide duplicate copies
of prescriptions. In addition, it is likely
that patient portals do not raise the
same privacy concerns expressed by
some prescribers about sharing patient
prescription information with third
parties because patient portals can
enable the secure sharing of such
information directly with the patients
themselves, who may then provide the
prescription to the third-party seller.198
The Commission is aware, however,
of potential drawbacks in relying on
electronic records exclusively for
prescription delivery. In the recent CLR
rulemaking, commenters expressed
concerns that: (1) online portals are not
widely used; (2) patients may not
always be aware of the portal or may
have difficulty accessing or printing
documents online; and (3) some
prescribers and patients prefer paper
copies.199
Recent data shows that the number of
prescribers offering patients access to
their health information through an EHR
system or patient portal has increased
significantly. A survey from 2022 found
that nearly 3 out of 5 U.S. adults
reported they were offered and accessed
their online medical record or patient
portal, which was a 50% increase since
2020. 200 Patients also increased their
use of apps to access online medical
records, and patients using apps to view
their online medical records accessed
them more frequently than those who
used only a web-based method.201
Available information suggests,
however, that disparities still exist in
the availability and use of patient
portals among some populations,
including older patients.202 A variety of
factors may influence the limited portal
use in such populations, including lack
of access to technology and personal
preference, and some groups (including
Black and Hispanic individuals) may be
less likely to report being offered access
to a portal in the first place, suggesting
a need for improvement in provider
communication and clinic practices.203
In addition, of those patients who access
their online medical records through an
app or web-based patient portal,
relatively low numbers are downloading
and transmitting their health
information, which ‘‘suggests a need for
further education of both individuals
and providers on these features,’’
according to the Office of the National
Coordinator for Health Information
Technology.204
2. Comments in Favor of Allowing
Prescribers to Choose Whether To Offer
Digital Delivery of Prescriptions
A number of commenters supported
making the decision to offer digital
prescription delivery—either at all or
using particular delivery methods—a
voluntary one on the part of
prescribers. 205 For example, NAROC
approved of not requiring prescribers to
provide prescriptions electronically, but
noted that some prescribers may already
be complying with the CLR
prescription-release requirement
through digital prescription delivery
and, for these prescribers, permitting
compliance with the Eyeglass Rule in
the same manner would create
efficiencies for prescribers’ offices.206
Some commenters also suggested that
compliance with the automatic-release
requirement is made easier by the
digital delivery option due to the ease
of emailing either the prescription itself
or a link to a portal on which the
prescription is available. 207
One anonymous commenter
questioned whether portals would need
to be configured to require a patient
signature whenever a patient accesses
the portal to print a prescription.208
Workshop panelist Dr. Michael Repka,
Medical Director for Governmental
Affairs at the AAO, described an
intricate process his office undertakes to
attempt to obtain a signature of
prescription-receipt from a patient who
accesses their contact lens prescription
via a portal. 209 The Commission,
however, notes that this represents a
misunderstanding of the CLR’s digital-
prescription-delivery provision, which
specifically removes the signature-
requirement when prescriptions are
digitally delivered, and likewise,
confirmation signatures would not be
required when prescriptions are
delivered digitally under the amended
Eyeglass Rule. Using a digital delivery
method to comply with § 456.2 would
relieve the prescriber of having to
collect a signature from the patient
confirming their receipt of the
prescription.210 Under the new
§ 456.4(a)(1)(ii), prescribers using a
digital delivery method would not need
to request that the patient sign a
separate statement confirming receipt of
the prescription.211 Instead, prescribers
would need merely to retain evidence
that the prescription was sent, received,
or made accessible, downloadable, and
printable, which commenters have
acknowledged EHRs generally are
configured to do. 212 Similarly, an
emailed or texted prescription should
create its own record of transmission,
and therefore involve minimal burden
to the prescriber.
Other commenters shared that the
existence of electronic health records in
a medical practice does not
automatically result in a patient having
access to their prescription on a
portal,213 and that some prescribers may
be using simplified websites to provide
prescription delivery without giving a
patient full access to all of their exam
information, in order to make access
simpler for patients.214 Some
prescribers may be hesitant to offer EHR
systems because of concerns about cost,
functionality, and data security.215 For
these reasons, the Commission believes
it is important to allow prescribers the
choice of whether to offer a digital
delivery method to comply with the
automatic-release requirement in the
Eyeglass Rule, rather than mandating
it. 216 The final rule neither compels
prescribers to offer prescription-release
by an electronic method nor requires
that patients accept their prescription by
electronic method when offered by the
prescriber.
3. Comments Regarding Giving Patients
a True Choice as to How To Have Their
Prescription Delivered
Some commenters expressed concerns
that not all patients may benefit from
electronic access to their prescription,
both as a result of limitations in
broadband capabilities and due to
differences in patient needs and health
literacy that might affect patients’ ability
to access their prescriptions online.217
Commenters asserted that patients must
retain the ability to receive a paper copy
of their prescription.218 The challenges
in educating patients on how to access
their prescription on a portal were also
noted by Workshop panelist Dr. Stephen
Montaquila, a Rhode Island optometrist,
who acknowledged that some patients
prefer a paper copy.219
Other commenters described their
experience with patients frequently
losing or forgetting their prescription
when going to order glasses. The
commenters pointed to the remedy of
having the prescription available on the
portal, or noted that the patient could
request a duplicate copy of the
prescription or the seller could call to
verify a prescription with the prescriber,
and argued that these solutions should
resolve concerns over prescription
access and portability. 220 The Eyeglass
Rule does not, however, require
prescribers to respond to seller
verification requests or provide
duplicate copies of prescriptions, as is
required by the CLR. The Commission
also remains concerned about the
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60755	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
ongoing lack of understanding and
limitations in patient access to portals
or other health technology, and
concludes that requiring all patients
agree to digital delivery is not
appropriate at this time.221
C. Additional Discussion and
Commission Determination Regarding
the Affirmative Consent to Digital
Delivery
1. Final Rule Determination To Add
Option for Digital Delivery of Eyeglass
Prescriptions
The Commission agrees with the
comments in favor of permitting, but not
requiring, electronic delivery of the
eyeglass prescription, provided
consumers are informed about, and
consent to, the delivery method. Based
on its review of the record, the
Commission is hereby modifying the
Rule to require that prescribers provide
patients with a copy of their
prescription either (a) on paper or (b)
after obtaining verifiable affirmative
consent to digital delivery, in a digital
format that can be accessed,
downloaded, and printed by the patient.
Obtaining such consent to digital
delivery will require the prescriber to
identify the specific method or methods
of electronic delivery that will be used,
and collect the patient’s affirmative
consent to the specified delivery
method in a way that is verifiable, i.e.,
can later be confirmed, such as through
a signed consent form or electronic
approval (as discussed below).
Prescribers must then keep evidence of
a patient’s affirmative consent for a
period of not less than three years.
Patients who decline to consent, for any
reason, must be given a paper copy of
their prescription. Likewise prescribers
who prefer to provide paper copies to
their patients need not offer an
electronic option.
Importantly, providing the option for
digital delivery does not alter the
prescriber’s obligation to automatically
provide the eyeglass prescription
regardless of whether a patient requests
it, but merely the method by which the
patient will receive the prescription. It
also does not impact the timing of
prescription delivery. Whether the
patient consents to digital delivery or
opts for a paper copy of the
prescription, prescribers must provide
the prescription immediately after the
eye examination is completed. As
discussed above, it is critical that the
patient be in receipt of their
prescription before a prescriber offers to
sell them eyeglasses, so as to ensure the
separation of examination and
dispensing under § 456.2, and to ensure
that patients are able to freely
comparison-shop for eyeglasses.222
Accordingly, if a patient consents to the
prescriber emailing or texting the
prescription, or placing it on a portal,
this method of delivery must take place
at the end of the examination, and
before the prescriber or prescriber’s staff
attempts to sell the patient eyeglasses.
The digital delivery option includes a
recordkeeping provision, but, as the
Commission concluded in the CLR final
rule, the burden of retaining a record of
patient consent should be minimal,
‘‘since prescribers who opt for
electronic delivery of prescriptions will,
in all likelihood, obtain and/or store
such consent electronically.’’ 223 As
detailed below, the Commission is
modifying the proposed rule text to
expressly recognize that consent to
digital delivery can be obtained either
on paper or in a digital format. In any
case, obtaining and storing a record of
patient consent should not take longer
than obtaining and storing a patient’s
confirmation of prescription release,224
and prescribers who use digital delivery
to provide the prescription would not
need to request that the patient
acknowledge receipt of the prescription
by signing a separate confirmation
statement. Finally, offering a
prescription in a digital format would be
an option for prescribers, but is not
mandatory, so prescribers can choose
not to offer electronic delivery of
prescriptions if they find the
recordkeeping provision overly
burdensome. 225
One related issue raised by some
commenters is whether prescribers
could obtain a patient’s consent to
digital delivery a single time rather than
at every visit, and only need to obtain
consent again if the prescriber changes
their digital-delivery policy, a practice
permitted by the Department of Health
and Human Services with regard to its
Notice of Privacy Practices signed-
acknowledgement requirement. 226 Dr.
Montaquila, for one, noted that allowing
prescribers to obtain consent just once,
when the patient first visits a practice,
would lessen the Rule’s burden for
prescribers and yet still allow for the
patient to be educated, opt-in
knowingly, and have the opportunity to
withdraw consent at a later time.227
The Commission notes that the Rule,
as proposed in the NPRM and hereby
adopted, does not specify that the
verifiable affirmative consent must be
obtained at every appointment. Instead,
it requires the prescriber to provide the
prescription on paper or ‘‘in a digital
format that can be accessed,
downloaded, and printed by the patient,
after obtaining verifiable affirmative
consent, pursuant to § 456.3.’’ The
Commission clarifies that if the
prescriber identifies the digital method
that will be used for prescription
delivery and allows the patient to
choose whether to consent to that
delivery method (rather than making it
the default), then allowing patients to
sign an authorization just once would
satisfy the Rule’s requirements. But as
noted by the commenters, if the
prescriber changes their digital delivery
policies (for example, by switching from
email delivery of prescriptions to access
on a portal), they would need to re-
obtain the patient’s digital delivery
consent. Additionally, prescribers
should allow a patient to revoke consent
at any time.
Further, the Commission believes that
prescribers could use a single document
to obtain verifiable consent to digital
delivery of both contact lens and
eyeglass prescriptions so long as it is
clear to consumers that they are
consenting to digital delivery for both.
Ensuring that patients are aware of
where to locate their prescriptions, and
how to access them, should be a priority
for prescribers, so regular re-education
on these points is appropriate.228
Furthermore, § 456.3(c) requires that
prescribers maintain records or
evidence of a patient’s affirmative
consent for a period of not less than
three years. It is important to note that
if a prescriber intends to provide digital
delivery to a patient for more than three
years following that patient’s signed
consent, they should not dispose of the
consent record after three years. Rather,
the prescriber should retain the patient’s
signed consent for as long as the
prescriber relies on it to authorize
digital delivery of the prescription, plus
another three years.229
2. Final Rule Moves Requirement for
Obtaining Patient’s Verifiable
Affirmative Consent for Digital Delivery
to a New Section and Out of Definitions
In the NPRM, the Commission
proposed adding the digital delivery
provision to the Rule as a new
definition of the phrase ‘‘provide to the
patient one copy’’ in § 456.1. 230 This
definition would have stated both the
option for the prescriber to offer the
patient a digital copy of their
prescription, and the requirements for
obtaining verifiable affirmative consent
to the digital delivery and maintaining
a record or evidence of the patient’s
affirmative consent for a period of not
less than three years. Adding this
definition to the Rule would have
mirrored the Commission’s amendment
of the CLR in 2020 to provide a similar
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option for digital prescription
delivery. 231
Upon further consideration, the
Commission has decided to move the
digital delivery provision out of the
definitions section and into § 456.2. By
moving this language to § 456.2, the
Commission seeks to ensure prescribers
do not overlook the requirements for
providing prescriptions digitally.
Moving the digital delivery provision to
this section may also make the
requirement more noticeable and
understandable to consumers. The FTC
is also cognizant that the preferred
drafting practice for regulations is to set
out requirements in the body of the rule,
rather than in the definitions.232
Accordingly, the Commission is
amending § 456.2(a), ‘‘Separation of
examination and dispensing,’’ to state
that the automatic prescription release
shall be provided on paper; or in a
digital format that can be accessed,
downloaded, and printed by the patient,
after obtaining verifiable affirmative
consent, pursuant to § 456.3. The
Commission is then adding a new
§ 456.3 to the Rule titled, ‘‘Verifiable
affirmative consent to providing the
prescription in a digital format.’’ 233
New § 456.3 sets out the remainder of
the text proposed in the NPRM as
§ 456.1(h)(2). It requires that when a
prescription copy is provided in a
digital format, the prescriber shall
inform the patient of the specific
method(s) of electronic delivery that
will be used; obtain, on paper or in a
digital format, the patient’s verifiable
affirmative consent to receive a digital
copy through the identified method or
methods; and maintain records or
evidence of a patient’s affirmative
consent for a period of not less than
three years, as specified in the new
§ 456.3.
Since the digital delivery provision,
as adopted herein as § 456.3, was clearly
proposed as § 456.1(h)(2) in the NPRM,
moving the requirement to a new
section in the Rule complies with the
rulemaking requirements of both the
Administrative Procedure Act and the
FTC Act, while ensuring that regulated
entities and the general public do not
overlook the requirements because they
were included in the definitions.234 The
Commission recognizes that the
placement of the digital delivery
provision in a new, dedicated section
differs from the CLR, where it appears
in the definitions. The requirements in
each rule, however, are effectively the
same. The Commission can amend the
CLR during the next periodic rule
review to mirror the Eyeglass Rule and,
in the meantime, can provide clarity to
prescribers through guidance materials.
3. Final Rule Adds Explicit Recognition
of the Ability To Obtain Affirmative
Consent on Paper or in a Digital Format
In this final rule, the Commission is
amending the Rule to explicitly permit
prescribers to obtain a patient’s
verifiable affirmative consent either ‘‘on
paper or in a digital format.’’ This
clarification comes in response to
comments relating to permitting digital
consent.
Participants at the workshop
discussed that some EHR companies
haven’t updated their systems in light of
the new CLR requirements to allow
prescribers to collect signatures
electronically, which would reduce the
record-keeping burden.235 Nevertheless,
commenters suggested that the Rule
should expressly permit prescribers to
obtain patient signatures digitally or on
paper. 236 For example, regarding the
confirmation of prescription release,
NAROC wrote, ‘‘[t]he Commission may
want to specifically allow for the
signature to be an electronic signature
by means of either a handwritten
signature input onto an electronic
signature pad or a handwritten signature
input on a display screen with a stylus
device. . . . While it is not clear to us
how many optometry or ophthalmology
offices use electronic signatures today,
this clarification may pave the way for
more offices to adopt this method of
collecting a signature, making the
confirmation process more efficient and
less reliant on paper receipts in the
future.’’ 237 Dr. Montaquila
acknowledged that some practices are
already using electronic methods to
capture patient signatures required by
the CLR. 238
Throughout the process of updating
the CLR to permit digital prescription
delivery and require confirmation of
prescription release, the Commission
acknowledged that prescribers may
obtain a patient’s signature either on
paper or digitally. In the NPRM for the
Contact Lens Rule review, the
Commission proposed, ‘‘[t]he
acknowledgment form shall be in a
format that allows either conventional
or electronic signatures. Prescribers may
maintain copies of the acknowledgment
forms in paper or electronically.’’ 239 In
the SNPRM for the CLR, the
Commission stated, ‘‘[t]he precise
wording of such confirmations would be
left to the prescriber’s discretion, but for
prescribers opting for (a), (b), or (c), a
patient’s written or electronic signature
would always be required.’’ 240
Similarly, when proposing changes to
the Eyeglass Rule in its NPRM, the
Commission noted the ‘‘recordkeeping
burden could be reduced to the extent
that prescribers have adopted electronic
medical record systems, especially those
where patient signatures can be
recorded electronically and inputted
automatically into the electronic
record.’’ 241
The Commission finds the Rule is
improved by explicitly permitting
prescribers to obtain a patient’s
verifiable affirmative consent either ‘‘on
paper or in a digital format.’’
Accordingly, §§ 456.3 and 456.4, setting
forth the requirement for obtaining a
patient signature confirming
prescription receipt, allow prescribers to
meet the requirements of these
provisions by obtaining the patients
signature either ‘‘on paper or in a digital
format.’’ 242 This will resolve prescriber
confusion regarding the need to print
out digital forms and collect wet
signatures that might then need to be
scanned and stored electronically in an
EHR system. Alleviating prescriber
misunderstanding regarding signature
collection should help reduce waste and
facilitate faster, more efficient Rule
compliance. 243
4. Final Rule Clarifies That Digital
Delivery Methods Identified in
Affirmative Consent Request Must in
Fact Be Used
The Commission recently sent cease
and desist letters to prescribers of
contact lens prescriptions and eyeglass
prescriptions in response to consumer
complaints that the prescribers did not
release their prescriptions at the end of
the contact lens fitting or eye
examination, or otherwise violated the
CLR or Eyeglass Rule.244 As discussed at
the workshop, in subsequent
communications with letter recipients,
Commission staff obtained samples of
forms some prescribers were using to
comply with the CLR consent-to-digital-
delivery and confirmation-of-
prescription-release requirements. Staff
noted, ‘‘[w]e’ve seen forms where
there’s not a separate signature about
digital consent. We’ve also seen forms
where the information is included in an
intake form among a lot of other
information that the patient may not
see. And in some cases, the specific
method of electronic delivery is not
necessarily identified. It may say, ‘We
will provide you with your prescription
digitally either by text, email, or
portal.’ ’’ 245
The Commission is concerned that
patients cannot provide informed
consent to digital delivery if prescribers
do not identify the delivery method that
will be used. Patients will not know
where to locate their prescription if they
are not told which delivery method the
prescriber plans to use. This can result
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in the patient effectively not receiving
the prescription, as required by the
Rule. Similarly, providing a disclosure
about digital delivery as part of a long
form containing unrelated information,
such as privacy practices and payment
policies, and then requesting one
signature at the end of the form might
not be an effective way of obtaining the
‘‘verifiable affirmative consent’’
required by the Rule. Dr. Beatty noted
that decoupling information during
intake related to patient consent may be
appropriate to ensure patients are
understanding and agreeing to digital
delivery. 246
In addition, providing a copy of the
prescription electronically by default
while notifying patients that they can
request a paper copy if they want one
undermines the automatic-prescription-
release requirement by converting it to
a release-upon-request model that the
Commission has rejected. 247 As an
example, one of the sample forms
shown at the workshop stated, ‘‘I
acknowledge the [Prescription Access]
policy and note I can (i) access my
eyeglass and contact lens prescriptions
digitally at [website redacted] or (ii)
obtain a paper copy at any time as
well.’’ 248 This language essentially
transforms it into a notice of digital
delivery rather than a true patient
consent to digital delivery. In satisfying
the Eyeglass Rule’s automatic-
prescription-release requirement, the
patient must be given an actual choice
to select an identified electronic
delivery method or to receive the
prescription on paper automatically.
Prescribers are free to also place
prescriptions on a portal, but this action
would not satisfy the requirements of
§ 456.2 if the patient did not opt-in to
the digital delivery option.
To provide clarity to prescribers, the
final rule, in § 456.3(a), states that the
prescriber shall, ‘‘identify to the patient
the specific method or methods of
electronic delivery that will be used,’’
rather than ‘‘to be used,’’ as was
proposed. 249 The digital delivery
method or methods the prescriber
identifies to the patient when seeking
consent should be the method the
prescriber actually uses. It would not be
appropriate, for example, for a consent
form to state, ‘‘I authorize my eye doctor
to provide me with a digital copy of my
prescription via email, text, and/or the
secure online patient portal at the
completion of my contact lens fitting
and/or refractive eye examination,’’
unless the prescriber did in fact deliver
the prescription using all of the
referenced methods.
IV. Final Rule Pertaining to
Confirmation of Prescription Release
A. Proposed Confirmation Requirement
in the NPRM and the Basis for Such
Proposal
After considering the evidence
discussed in sections I and II, supra,
including comments submitted in
response to the ANPR, the Commission
proposed in the NPRM to amend the
Rule to add a confirmation-of-
prescription-release requirement. In so
doing, the Commission stated its belief
that such confirmation would increase
the number of patients who receive their
prescriptions, inform patients of the
Rule and of their right to their
prescriptions, reduce the number of
seller requests to prescribers for eyeglass
prescriptions, improve the
Commission’s ability to monitor overall
compliance and target enforcement
actions, reduce evidentiary issues,
complaints and disputes between
prescribers and consumers, and bring
the Eyeglass Rule into congruence with
the confirmation-of-prescription-release
requirements of the Contact Lens
Rule.250
As a result, in the NPRM, the
Commission proposed a new § 456.3 251
to require that upon completion of a
refractive eye examination, and after
providing a copy of the prescription, the
prescriber shall do one of the following:
(i) Request that the patient
acknowledge receipt of the prescription
by signing a separate statement
confirming receipt of the prescription;
(ii) Request that the patient sign a
prescriber-retained copy of a
prescription that contains a statement
confirming receipt of the prescription;
(iii) Request that the patient sign a
prescriber-retained copy of the sales
receipt for the examination that contains
a statement confirming receipt of the
prescription; or
(iv) If a digital copy of the
prescription was provided to the patient
(via methods including an online portal,
electronic mail, or text message), retain
evidence that such prescription was
sent, received, or made accessible,
downloadable, and printable.
Proposed § 456.3 further provided
that if the prescriber elects to confirm
prescription release via paragraphs
(a)(i), (ii), or (iii), the prescriber may, but
is not required to, use the statement,
‘‘My eye care professional provided me
with a copy of my prescription at the
completion of my examination’’ to
satisfy the requirement. In the event the
patient declines to sign a confirmation
requested under paragraphs (a)(i), (ii), or
(iii), the prescriber shall note the
patient’s refusal on the document and
sign it. A prescriber shall maintain the
records or evidence of confirmation for
not less than three years. Such records
or evidence shall be available for
inspection by the Federal Trade
Commission, its employees, and its
representatives. The prescription
confirmation requirements shall not
apply to prescribers who do not have a
direct or indirect financial interest in
the sale of eye wear, including, but not
limited to, through an association,
affiliation, or co-location with an optical
dispenser.’’ 252
The Commission then sought public
comment on the benefits and burdens of
its confirmation-of-prescription-release
proposal.253 The Commission also
invited comment on whether the
proposed change would affect Rule
compliance, the Commission’s ability to
enforce the Rule, or patient’s
understanding of their rights under the
Rule.254
B. Comments on the NPRM and
Discussion at the Workshop Regarding
Confirmation of Prescription Release
1. Comments in Favor of Confirmation-
of-Prescription-Release Proposal
The record contains numerous
comments in support of the
confirmation-of-prescription-release
amendment, with these comments
detailing the need for, and benefits of,
the proposed amendment. Reasons
given in support of the amendment
include: that it will bring greater
awareness of a consumer’s right to their
prescription, greater compliance with
automatic prescription release,255 and a
greater ability for the Commission to
enforce the Rule; that the
acknowledgment will serve as evidence
of compliance for prescribers; and that
benefits flow from having the Eyeglass
Rule’s confirmation requirement match
that of the Contact Lens Rule. Other
commenters generally support the Rule,
but did not provide specific reasons for
their support.256
NAROC, calling the confirmation
proposal needed and simple,257 stated
that it would result in greater
compliance and wider consumer
understanding of their rights.258 In
addition, according to NAROC, the
proposal would allow all sellers in the
market for corrective eyeglasses to
participate. Specifically, NAROC stated
support for requiring confirmation since
‘‘evidence demonstrates that despite the
many years that the [automatic
prescription release] requirement has
been in effect, not all consumers are
aware that they should receive an
eyeglass prescription without requesting
it.’’ 259 Consumer Action, likewise,
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60758 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
called the confirmation proposal
‘‘consumer-friendly’’ and discussed it as
a way to remedy a lack of compliance,
a lack of consumers awareness of their
automatic right to a copy of a
prescription, a lack of competition, and
a reduced ability to shop around for
lower prices. 260
Other commenters reiterated that the
confirmation proposal would increase
compliance with automatic prescription
release. The advocacy organization
National Taxpayers Union supported
requiring confirmation to ‘‘strengthen
the process of providing consumers
with a copy of their eyeglass
prescription,’’ which will benefit
consumers.261 1–800 CONTACTS stated
the ‘‘confirmation proposal will bolster
prescription portability, promoting
consumer choice and competition in the
evolving market for prescription
eyewear.’’ 262
Commenters specifically spoke to the
proposed amendment’s ability to assist
the Commission in enforcing the Rule’s
automatic-release requirement. 1–800
CONTACTS stated its desire for greater
enforcement of the Rule and expressed
disappointment that the Commission
has only issued warning letters since
enacting a similar requirement for the
Contact Lens Rule in 2021.263 NAROC
commented that both the confirmation
of prescription release and the three-
year recordkeeping requirement will
make the Rule easier for the FTC to
enforce. The organization stated that
prescribers have a responsibility to
provide evidence that the patient
received a copy of the eyeglass
prescription at the end of the exam, and
that confirmations of prescription
release are helpful to prescribers to
show their compliance in instances
when patient complaints of non-
compliance are brought before them.264
At the workshop, Joseph Neville of
NAROC added that, if the FTC was
going to regularly enforce the Rule, the
prescriber needs proof they actually
complied, and the acknowledgment will
serve that purpose.265 NAROC likened
the confirmation proposal to prescribers
asking their patients to acknowledge
receipt of privacy practices, to give
consent to certain treatments or
procedures, and to allow providers to
share protected health information in
certain situations.266 According to
NAROC, such acknowledgments benefit
the prescriber by averting disputes as to
what the patient agreed.
At the workshop, Wallace Lovejoy
opined that it is appropriate to
encourage some sort of recordkeeping
that the prescription was in fact
delivered to the patient due to ‘‘the
unique nature of the market and a
significant amount of financial interest
on the part of prescribing and
dispensing optometrists’’ 267 Indeed,
NAROC commented that prescribers
have a powerful incentive to improve
the ‘‘capture rate’’ of in-office eyewear
sales to their patients since they still
make most of their revenue from selling
the eyewear that they prescribe.268
NAROC also stated that the significant
benefits of the proposed confirmation
would exceed the minimal burdens. Its
comment stated that the ‘‘amendments
should not have significant or
disproportionate impact on prescribers’
costs’’ and that its member experience
and observation indicates that
‘‘thousands of optometrists affiliated in
co-location with NAROC member
companies regularly comply with the
current Eyeglass Rule and the Contact
Lens Rule [which already contains a
confirmation-of-prescription-release
requirement] with little added cost or
other burden on the eye care
practice.’’ 269 NAROC said it has not
seen any credible evidence that the
requirement is overly burdensome or
will result in anything more than a
trivial expense. In response to requests
from their members for information as
to whether the added effort of
confirmations for contact lens
prescriptions was a problem, they heard
that compliance is occurring with little
or no disruption or expense.270
Pete Sepp, the president of the
National Taxpayers Union, said he
supports the Rule and the confirmation
proposal, but is very cognizant of
regulatory burdens imposed on
prescribers. He said the key question for
him is whether the extra burden the
confirmation brings is a problem, or
alternatively, whether the problem may
derive rather from the overall burden
from all regulations imposed on
prescribers.271
The National Taxpayers Union (NTU)
suggested that the Commission may
have underestimated the confirmation
burden, particularly the 10-second
estimate for how long it takes for
consumers to read and sign the
confirmation statement. 272 It also stated
it was likely the burden would have a
disproportionate impact on smaller, less
sophisticated, prescribers who lack
economies of scale and equipment, and
thus merely averaging the burden cost
among all of the nation’s eyecare
prescribers was an
‘‘oversimplification.’’ 273 According to
NTU’s estimate, a ‘‘modest optometry
establishment’’ performing 3,000
examinations a year would—based on
the Commission’s NPRM estimates for
time and labor—increase the paperwork
burden by 167 hours and incur an
additional labor compliance cost of
$4,123, ‘‘not an inconsiderable burden
for a small establishment.’’ 274 Sepp of
the NTU did suggest, however, that
compliance with the confirmation-of-
prescription-release proposal ‘‘might not
be quite as burdensome’’ when
comparing it to the overall regulatory
burdens on prescribers, and that
perhaps the real focus should be on
reducing overall burdens that hamper
small businesses. 275
One factor worth noting for the
confirmation proposal, according to
NAROC, is that having a similar
confirmation requirement for the
Eyeglass Rule, as already codified in the
Contact Lens Rule, should lessen the
additional incremental burden of the
proposed amendment to the Eyeglass
Rule, since most contact lens wearers
also receive eyeglass prescriptions and
should get them at the same time.276
NAROC also stated that the similar
requirement for the Eyeglass Rule
should ease issues with compliance and
staff training.277
2. Comments Against the Confirmation-
of-Prescription-Release Proposal
Some commenters, largely prescribers
and prescriber trade associations, were
critical of the confirmation-of-
prescription-release proposal, stating
that existing strong compliance with the
automatic-prescription-release
requirement of the Eyeglass Rule makes
the proposed confirmation requirement
unnecessary, and that the confirmation
proposal is burdensome.278
The American Optometric
Association opposed the proposed
confirmation requirement for a number
of reasons. As noted above in the
discussion regarding automatic-release
compliance, the AOA asserts that the
requirement is unnecessary because it
disputes that there is any issue with
prescription-release compliance.279 In
addition, the AOA asserted that a
confirmation requirement would not
have a significant and meaningful
impact on competition and choice and
in support cited the (previously
discussed) NERA survey for the
propositions that: (1) three in five
Americans do not believe that
additional paperwork requirements in
their doctor’s offices would make them
more aware of their rights; (2) nearly
half indicated the amount of paperwork
they currently do is overwhelming; (3)
41% indicated that the complexity of
the paperwork is overwhelming; and (4)
approximately 20% of those surveyed
did not even remember the purpose of
the paperwork they have to complete at
a doctor’s appointment. 280 Based on
these results, the AOA concluded that
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60759	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
‘‘it is inaccurate to say that a new
paperwork requirement for eyeglass
prescriptions can lead to increased
competition and choice.’’ 281
Further, the AOA expressed concern
that the confirmation requirement
would have a disproportionate burden
on small business, given the fact that
many of its members have a small staff,
high staff turnover, and face challenging
economic pressures, including
increased overhead and costs.282 In fact,
according to AOA, the NERA survey
data supports its position that the FTC
‘‘significantly underestimated’’ how
long it takes to confirm prescription
release. 283 According to the AOA, a
large percentage of its members report
that it takes 30 seconds or more to
obtain the patient’s signed confirmation
and ‘‘[e]ssentially, doctors of optometry
have reported that the time burden is at
least 3 times the FTC’s estimated
burden.’’ 284 (emphasis in original). The
AOA requested that the Commission
reconsider whether there is an urgent
need at this time for the confirmation-
of-prescription-release amendment. 285
Individual prescribers share some of
the same concerns voiced by the AOA.
At least two commenters stated that the
proposed confirmation is a burdensome
solution to a problem that does not
exist.286 A number of commenters, some
of whom commented anonymously,
stated that the confirmation is
unnecessary, costly, intrusive, and
would be time-consuming and take
away from patient care.287 Optometrist
Dr. David Durkee suggested that adding
the burden of another confirmation
requirement would be
counterproductive and likely just lead
to more prescriber non-compliance.288
At the workshop, Dr. Michaels stated
that there is a lot of time, effort, and
discussion required when prescribers
ask their patients to sign
confirmations.289 Dr. Montaquila
explained at the workshop that for
contact lens prescriptions, it takes his
‘‘very best staff about four minutes to
complete the [confirmation and
prescription release] process, from
explaining why we’re doing it to the
patient, providing them with their
prescription, making the copies,
providing their prescription back to
them, and ultimately storing it.’’ 290 He
stated that the office devotes about 1.5
full time employees to all of the office’s
compliance issues and that adding more
rules [to the Eyeglass Rule] will only
increase costs to the practice.291 Dr.
Montaquila also noted that the burden
is recurring (as opposed to a one-time
expense) since each time prescribers
provide a prescription, a confirmation
will be needed.292 Dr. Masoudi
questioned whether multiple
confirmations are needed when
multiple prescriptions are provided, and
claimed that that would also increase
the burden of compliance.293
The AAO also disagreed that the
burden would be minimal, noting that it
would particularly hit hard on small
practices that may not utilize electronic
health record systems. 294 AAO further
argued that, without better evidence of
non-compliance, the confirmation-of-
prescription-release amendment should
not be imposed, and asked the
Commission to identify alternative
mechanisms to address actions of
noncompliant prescribers.295 Dr. Repka
also noted at the workshop that he has
not seen a benefit for either the
prescriber or the consumer in the
contact lens space since enactment of
the confirmation requirement in the
Contact Lens Rule. 296
Some commenters pointed to
differences between the eyeglass and
contact lens markets to support their
position that the Eyeglass Rule should
not contain the same confirmation
requirement as exists in the Contact
Lens Rule. Dr. Montaquila argued that
there is a greater burden associated with
the Eyeglass Rule proposal due to the
greater volume of eyeglass wearers—165
million eyeglass wearers versus 45
million contact lens wearers.297 Dr.
Repka pointed out that the average
eyeglass wearer is much older than the
average contact lens wearer and that the
older population may be more easily
concerned about multiple signature
lines. 298
3. Comments About the Exemption for
Prescribers Who Do Not Have a Direct
or Indirect Financial Interest in the Sale
of Eyeglasses
In the NPRM, the Commission
proposed to exempt prescribers who do
not have a direct or indirect financial
interest in the sale of eyeglasses from
the proposed signed confirmation-of-
prescription-release requirement.299
Direct or indirect interest in the sale of
eyeglasses would include, but not be
limited to, an association, affiliation, or
co-location with prescription-eyewear
sellers.300 The Commission requested
input on the question, ‘‘Aside from
associations, affiliations, and co-
locations with prescription-eyewear
sellers, what other indirect financial
interests exist in the sale of prescription
eyewear that should disqualify a
prescriber from the proposed
exemption?’’ 301 There were no written
comments in response to the NPRM or
workshop on this point.302
At the workshop, Joseph Neville
floated the idea of applying the
exemption more broadly. Specifically,
he said that for the Contact Lens Rule,
NAOO, the predecessor to NAROC,
suggested that prescribers who were
affiliated in a co-location situation
should be exempt from the signed
acknowledgment requirement. 303 He
explained that when an optical
company leases space to a prescriber,
the prescriber does not sell the
eyeglasses, and thus, the exemption
should apply. Yet, he acknowledged
that the Commission previously rejected
that position and in concluding his
comments, he supported the
Commission’s proposal to limit the
exemption to those who are solely
involved in clinical and not connected
in any way with sales.304
4. Comments About Alternatives to the
Confirmation-of-Prescription-Release
Proposal
As possible alternatives to the signed
acknowledgement proposal,
commenters at the ANPR stage
recommended conspicuous signage
regarding consumers’ right to a copy of
their prescription, or an eye care
patients’ bill of rights, notifying
consumers of their rights under the
Rule.305 Some commenters seemed to
suggest that there is a greater need for
the FTC or prescribers to educate
consumers or to enforce the Rule as is,
as opposed to amending the Rule to
include a confirmation of prescription
release.306 For instance, the AOA
opposed the Commission’s NPRM
proposal, and asserted that the
Commission should focus its energies
on scrutinizing the sales of online
retailers, and advising the public about
‘‘risks’’ arising from purchasing glasses
online.307 Meanwhile optometrist David
Durkee recommended that instead of
adding the confirmation requirement,
the Commission should increase
enforcement through random audits,
inspections, fines, and increased
publicity about such penalties.308
C. Additional Discussion and
Commission Determination Regarding
the Confirmation-of-Prescription-
Release Proposal
1. Final Rule Determination To Amend
the Rule To Require Confirmation of
Prescription Release
The Commission has carefully
reviewed and analyzed all of the
evidence in the record, including the
868 comments submitted in response to
its ANPR, 27 comments submitted in
response to its NPRM, the discussion at
the 2023 Eyeglass Rule workshop, 20
comments after the workshop, and
when appropriate, the record from the
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60760 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
Commission’s recent review of the
Contact Lens Rule. This record, in
conjunction with the historical impetus
for the Rule and the Commission’s
enforcement and oversight experience,
has led to a Commission determination
to amend the Rule to add a
confirmation-of-prescription-release
requirement.
The evidence demonstrates that the
automatic-release requirement remains
the optimal remedy for prescribers’
continued failure to release
prescriptions, and yet lack of
compliance with the automatic-release
provision hampers the effectiveness of
this remedy. 309 The evidence also
demonstrates that consumers lack an
awareness of their rights to a copy of
their eyeglass prescription, and thus
may be unable to remedy a prescriber’s
failure to release prescriptions on their
own. 310 Having determined that it
would be beneficial to increase
compliance with, and awareness of, the
automatic-release provision, the
Commission has determined that the
best way to achieve this goal is to
amend the Rule to add a new
requirement to the existing automatic-
release remedy. By modifying and
improving the remedy for prescribers’
failure to release a prescription, it will
not only increase the number of patients
who receive their prescriptions and
learn of their right to possess their
prescriptions, but will also: reduce the
number of seller requests to prescribers
for eyeglass prescriptions, improve the
Commission’s ability to monitor overall
compliance and target enforcement
actions, reduce evidentiary issues,
complaints and disputes between
prescribers and patients, and
substantively bring the Eyeglass Rule
into congruence with the Contact Lens
Rule in terms of the confirmation-of-
prescription-release requirement.
This remedy also solves the
‘‘evidentiary squabbles’’ issue as to
whether a prescriber complied in a
specific instance, or complies routinely
with prescription release. As explained
in the NPRM, the absence of
documentation often makes it difficult
in an enforcement investigation to
determine whether, in any particular
case, a prescriber provided a patient
with a prescription. The lack of
documentation also makes it difficult to
determine how many times, or how
frequently, a particular noncompliant
prescriber has violated the Rule.311 In
fact, due in part to the difficulty of
ascertaining whether a prescriber
violated the Rule, the Commission has
only brought one enforcement action
against an eyeglass prescriber for failure
to comply with the automatic
prescription release.312 The
confirmation-of-prescription-release
requirement will improve and simplify
its ability to assess and verify
compliance with the Rule’s automatic
prescription release requirement. It will
also make it easier for prescribers to
prove that they did, in fact, provide
prescriptions to patients who claim
otherwise.
a. Alternatives to Confirmation of
Prescription Release Not Adopted
The Commission is not adopting the
alternative remedies proposed by some
commenters. First, as explained above,
no new comments or evidence was
submitted following the NPRM
regarding the proposal to require
conspicuous signage in prescribers’
offices stating consumers’ rights to their
prescriptions, and, likewise, no new
comments or evidence submitted with
respect to a consumer Bill of Rights.313
Since the Commission had previously
decided, for the reasons outlined in the
NPRM,314 not to adopt these measures,
the Commission has no reason to revisit
and alter its decision.
For a number of reasons, the
Commission also declines to adopt the
proposal that the Commission focus on
additional consumer education in lieu
of adopting the signed confirmation of
prescription release. First, relying on
such an approach would improperly
shift the burden of prescription-release
compliance and enforcement to the
consumer, an approach the Commission
has repeatedly rejected in the past.315
Second, the Commission resolves that
educating consumers at their
appointment about their right to their
prescription is more targeted and
impactful than other methods of
consumer education alone in which a
consumer is not asked to read and
provide a signature. Lastly, the AOA’s
suggestion in its NPRM comment to
educate consumers about the potential
risks from purchasing eyeglasses online
would do nothing to increase
prescription release. In fact, the
suggestion appears unrelated to the
issues under discussion in the NPRM or
this final rule.
Although the Commission declines
commenters’ suggestions that it rely on
greater consumer education in lieu of a
signed confirmation requirement, as
discussed in section IV.B.4, supra, the
Commission agrees there is a need to
bolster its existing guidance on the
Eyeglass Rule, as an added measure to
inform consumers of their rights, and
businesses of their obligations, under
the Rule.
As for the suggestion that the
Commission increase enforcement of the
existing automatic-release provision in
lieu of adding a confirmation
requirement, the Commission addressed
this in the NPRM, noting that the
Commission recognizes the need for
increased enforcement, but that the
absence of documentation often makes
it difficult in an enforcement
investigation to determine whether, in
any particular case, a prescriber
provided a patient with a
prescription. 316 The lack of
documentation also makes it difficult to
determine how many times, or how
frequently, a particular noncompliant
prescriber has violated the Rule.
Instead, allegations and denials of non-
compliance often become a matter of a
patient’s word against that of the
prescriber, making violations difficult to
prove.317
b. The Burdens of the Confirmation of
Prescription Release Are Not Substantial
The evidentiary record does not
establish that the burden of the
confirmation-of-prescription-release
requirement will have a substantial
financial impact on prescribers.
Prescribers already comply with a
similar requirement for contact lens
prescriptions, and it should require a
minimum of additional time, effort, and
training to include eyeglass
prescriptions. Some prescribers may
already be getting patient confirmations
for eyeglass prescriptions, since it does
not make much sense to obtain
confirmations for contact lenses but not
for eyeglasses, and the patient
confirmation provides the prescriber
with tangible proof that they complied
with the existing prescription-release
requirement. In its Paperwork
Reduction Act (‘‘PRA’’) analysis, the
Commission doubled the previously
estimated time it takes for prescribers’
offices to obtain a signed patient
confirmation, and yet even doubled, it
is still merely 20 seconds. In reality, it
may even take less, and some industry
estimates appear to be based on faulty
presumptions. 318 Furthermore, the
ongoing transition to digital
recordkeeping will continue to reduce
the burden, both in terms of record
preservation and obtaining patient
signatures. The final rule’s overall
estimated financial burden for the
confirmation-of-prescription-release
requirement of $38,389,993 amounts by
one estimate to approximately $629 in
additional annual administrative costs
per eye care provider.319
The Commission also does not find
the AOA’s paperwork survey,
summarized in its comment, as
compelling evidence for its position that
‘‘it is inaccurate to say that a new
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60761	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
paperwork requirement for eyeglass
prescriptions can lead to increased
competition and choice.’’ 320 A review
of appendix A attached to its comment
shows that the following survey
question was asked of 1,063
respondents: ‘‘Thinking about your
experience, both virtual and in-person,
with doctors in general, please select
your level of agreement with the
following statements.’’ The statements
included in the survey were: (1) ‘‘I
generally remember the purpose of the
paperwork I complete at a doctor’s
appointment’’; (2) ‘‘The amount of
paperwork I have to complete at a
doctor’s appointment is overwhelming’’;
(3) ‘‘The complexity of the paperwork I
have to complete at a doctor’s
appointment is overwhelming’’; and (4)
‘‘Having to sign more paperwork at a
doctor’s appointment would make me
more aware of my patient’s rights.’’ The
options provided to the respondents for
each statement are: ‘‘Completely agree,’’
‘‘Somewhat agree,’’ ‘‘Neutral,’’
‘‘Somewhat disagree,’’ and ‘‘Completely
disagree.’’ 321
These questions, and the extent to
which consumers agree or disagree with
them, may reveal the unsurprising fact
that most people do not appreciate
doing ‘‘paperwork,’’ but do not display
anything of import related to this
rulemaking. By asking generalized
questions about ‘‘paperwork’’—a term
with a negative connotation—and
‘‘patient’s rights,’’ without explaining to
respondents the context or what rights
they are referring to, the survey loses its
informational value. It does not reveal
what consumers think about a
confirmation-of-prescription-release
requirement, about whether they would
appreciate having a copy of their
prescription, about whether they
understand their right to their
prescription, or even about their
experiences with any particular
documents provided to them by eye care
prescribers.322
Aside from the fact that these survey
questions are too vague and generalized
to serve as a gauge as to the usefulness
of a confirmation-of-prescription-release
requirement, the survey questions may
even indicate that some paperwork can
serve a purpose. According to the
survey, 62% of Americans respond that
they generally remember the purpose of
the paperwork they complete at a
doctor’s appointment, with another 19%
remaining neutral on this question; and
40% agree with the statement, ‘‘having
to sign more paperwork at a doctor’s
appointment would make me more
aware of my patient rights,’’ with
another 30% responding neutrally.323
While these percentages do not reveal
anything about the confirmation-of-
prescription-release requirement, they
could, in fact, support the general
position that many Americans do
remember information from the
paperwork they fill out at their doctors’
offices, and that the paperwork can
serve to make them somewhat more
aware of their general rights. Of greater
significance for this rulemaking,
however, is the fact that the
confirmation-of-prescription-release
requirement is not solely intended to
educate consumers about their rights.
While that is one purpose, the
requirement is also intended to remind
prescribers’ offices to provide patients
with their prescriptions, and to create a
mechanism for prescription-release
verification and enforcement. Therefore,
the Commission finds that the signed
confirmation of prescription release (a
form of ‘‘paperwork’’) will increase
prescriber compliance, and that will
lead to increased competition that
benefits consumers.
The Commission also carefully
considered information and comments
on the record that question the
Commission’s estimate of time for
confirming prescription release,
including the separately conducted
AOA survey of its members submitted
in support of its statement that the FTC
‘‘significantly underestimated’’ the
length of time it would take for
prescribers to confirm prescription
release. As discussed more fully in the
Paperwork Reduction Act section
(section VIII of this SBP), the
Commission has decided to increase the
estimated time to obtain a patient
confirmation signature.324
Although the Commission does not
find the burdens of the confirmation of
prescription release to be substantial,
the Commission is sensitive to the
concerns raised by the AOA and others
regarding the burden on prescribers,
many of whom are small businesses. In
an attempt to minimize these burdens,
the Rule provides prescribers with both
digital and paper options for methods to
comply,325 and provides one-sentence
sample language that prescribers can
use when providing paper copies of
prescriptions should they wish to use it.
As for concerns that the burden is
ongoing since each time a prescriber
provides a prescription a confirmation
is needed, the Commission notes that
many prescribers may offer and
consumers may accept a digital delivery
of the prescription, and as previously
discussed, may not need to ask for
affirmative consent to digital delivery
for every new visit.326 As for paper
copies of prescriptions, over time
consumers should become more familiar
with the request for their signature to
confirm prescription receipt and thus,
the staff time to handle possible
questions or to otherwise comply with
the confirmation of prescription release
should decrease.327 The Rule also has
an exemption for those without a direct
or indirect financial interest in the sale
of eyeglasses. Moreover, this
amendment aligns with the prescription
release related provisions of the Contact
Lens Rule, thereby reducing the
confusion and complexity that might
arise for consumers and prescribers
from having different confirmation-of-
prescription-release requirements for
contact lens and eyeglass prescriptions.
In addition, the marginal cost of the
amendment to the Eyeglass Rule should
be relatively low because the CLR
already requires prescribers to obtain
confirmation of prescription release and
to maintain records of such. Some
prescribers likely have forms and
systems in place already, which may
need only minor adjustments to
accommodate confirmations for eyeglass
prescriptions. 328
c. Exemption for Prescribers Who Do
Not Have a Direct or Indirect Financial
Interest in the Sale of Eyeglasses
The Commission also adopts without
modification proposed § 456.3(c), which
provides an exemption to the
confirmation-of-prescription-release
requirements for prescribers who do not
have a direct or indirect financial
interest in the sale of eyeglasses.329
Direct or indirect financial interest in
the sale of eyeglasses includes, but is
not limited to, an association, affiliation,
or co-location with prescription-
eyewear sellers. 330 The Contact Lens
Rule contains a parallel exemption.331
The purpose of such an exemption is to
reduce the burden on prescribers who
do not sell lenses, and therefore, have
no incentive to withhold
prescriptions.332 Although Joseph
Neville of NAROC questioned whether
co-location arrangements should be
considered as having an interest in the
sale of eyeglasses, the Commission finds
that co-location arrangements could
create a financial incentive for
prescribers to withhold a prescription,
and thus, should be required to comply
with the confirmation requirement. If a
prescriber has uncertainty as to whether
the exemption applies, they should err
on the side of caution by complying
with the confirmation-of-prescription-
release requirement.333 Since there was
no opposition to the proposal relating to
the exemption, the Commission adopts
§ 456.3(c) as proposed. 334
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2. Comments About Options for
Obtaining the Confirmation and
Commission Determination
The Eyeglass Rule NPRM proposed in
§ 456.3(a) the same options to confirm
prescription release of eyeglass
prescriptions as the options available to
confirm prescription release of contact
lens prescriptions in the Contact Lens
Rule. They consist of: (i) a signed
statement confirming receipt of the
prescription; (ii) a prescriber-retained
copy of a contact lens prescription that
contains a statement confirming receipt
of the prescription; (iii) a prescriber-
retained copy of the receipt for the
examination containing a statement
confirming receipt of the prescription;
and (iv) if a digital copy of the
prescription was provided to the
patient, retain evidence that the
prescription was sent, received, or made
accessible, downloadable and
printable. 335 Workshop participants
discussed these options in the context of
the Contact Lens Rule in order to
recommend for or against their
inclusion in the Eyeglass Rule’s
confirmation requirement.
a. Comments at the Eyeglass Rule
Workshop
At the workshop, Dr. Montaquila
discussed the ‘‘range of approaches’’
prescribers use to comply with the
CLR’s confirmation-of-prescription-
release requirements and provided
concrete examples of the way some of
the options are currently in use. He
called option (a)(1)(i), the signed
statement option, a flexible option
currently in use. But, he stated that, for
some offices that have electronic health
records, offices must print the
prescription from the electronic health
records systems, request a signature,
scan or retain the prescription with the
acknowledgment, and store the
acknowledgment. 336 He provided an
example of a template form that he said
is in use by many offices.337 This form,
entitled ‘‘Contact Lens Prescription
Signed Acknowledgment Form’’ is
recommended by the AOA to its
members and is in its ‘‘Contact Lens
Rule Compliance Toolkit.’’ 338 The form
contains six paragraphs, with the first
stating, ‘‘Included below is important
information to review prior to receiving
your contact lens prescription.’’ The
middle three paragraphs consist of
advice, attributed to the Centers for
Disease Control and the Food and Drug
Administration, on healthy contact lens
wearing habits, and include
recommendations such as ‘‘Schedule a
visit with your eye doctor at least once
a year’’ and ‘‘Understand that eye
infections that go untreated can lead to
eye damage or even blindness,’’ among
others. The fifth paragraph presents five
bullet points listing common symptoms
of an eye infection, such as ‘‘Irritated,
red eyes,’’ ‘‘Light sensitivity,’’ and
‘‘Sudden blurry vision.’’ The last
paragraph, directly above a patient
signature and date line, states, ‘‘Sign
below to acknowledge that you were
provided with a copy of your contact
lens prescription at the completion of
your contact lens fitting.’’
As for proposed § 456.3(a)(1)(ii), in
which prescribers retain signed copies
of contact lens prescriptions that
contain a statement confirming receipt
of the prescriptions, Dr. Montaquila
stated that the AOA assists prescribers
who use this option by providing
carbon-copy prescription pads.339 With
this method, the prescriber writes the
prescription, the patient signs the
confirmation statement on the
prescription, and the patient and
prescriber each retain a copy. Dr.
Montaquila then implied that this paper
option was less convenient or accurate
because 88% of office-based physicians
have transitioned to EHRs.340 According
to Dr. Montaquila, some prescribers are
handwriting prescriptions after
generating a prescription in an
electronic health record, and this
duplication increases cost, time, and the
possibility for errors.341 In support of
his assertion about greater errors from
handwritten prescriptions, he cited to a
Weill Cornell Medical College study of
drug prescriptions finding error rates in
30 per 100 written prescriptions versus
seven per hundred in electronic
prescriptions.342 He stated that some
EHRs permit prescriptions containing
statements of confirmation to be
printed, but this creates a different
problem because once it is signed by the
patient, the office ‘‘needs to take that
prescription back, copy and perhaps
scan it and then retain that for three
years.’’ 343
Section 456.3(a)(1)(iii) of the NPRM
Eyeglass Rule confirmation proposal
(and existing Contact Lens Rule
confirmation requirement) allows
prescribers to retain a signed statement
confirming prescription receipt on a
copy of the examination payment
receipt. According to a 2023 AOA
survey of optometrists, about 15% of
prescribers said they use this method,344
but Dr. Montaquila stated that he had
not found that any of his colleagues had
a payment system in place that would
allow for the use of this method with
respect to the confirmation of contact
lens prescription release. 345
Dr. Montaquila also addressed the
digital release option, proposed
§ 456.3(a)(1)(iv), which allows a
prescriber, with the patient’s affirmative
consent, to release the prescription
digitally so long as they retain evidence
that the prescription was sent, received,
or made accessible, downloadable and
printable. In discussing this option, he
displayed a model consent form used by
many practices for contact lens
prescription release entitled
‘‘prescription access notice policy
statement.’’ The model form states that
access to prescriptions is available to
patients digitally and that physical
copies of prescriptions are available,
and provides a place for a patient
signature. He noted that the electronic
prescription-release approach can take
many forms depending on what’s
available to the practice, and that some
forms default to the patient agreeing to
receive the prescription digitally, with a
paper version available upon request.346
b. Commission Determination Regarding
Options for Obtaining the Confirmation
The final rule, § 456.4(a)(1), replaces
the four options from the NPRM with
two broader options in paragraphs
(a)(1)(i) and (ii) that encompass the
options proposed in the NPRM, but also
ensure prescribers have flexibility and
choice in how they obtain their
confirmations. The first option,
§ 456.4(a)(1)(i), covering instances
where prescribers provide a paper copy
of the prescription, provides that the
prescriber must request that the patient
acknowledge receipt of the prescription
by signing a separate statement
confirming receipt of the prescription.
Section 456.4(a)(1)(i) adopts the
proposed § 456.3(a)(1)(i) with
modifications so that it encompasses the
proposed § 456.3(a)(1)(ii) (where a
prescriber can retain a copy of a
prescription that contains a signed
statement confirming receipt of the
prescription) and proposed
§ 456.3(a)(1)(iii) (where a prescriber can
retain a signed copy of the sales receipt
for the examination that contains a
statement confirming receipt of the
prescription). The NPRM’s proposed
§ 456.3(a)(1)(ii) and (iii) are essentially
examples of documents—prescriptions
and sales receipts—that can contain
separate statements confirming receipt
of the prescription, and these methods
of obtaining confirmation continue to be
permitted under the final rule’s broader
option § 456.4(a)(1)(i).
The Commission adopts § 456.4(a),
which requires that the statement
confirming receipt be separate.
Prescribers should provide a signature
line that clearly and conspicuously
applies to a statement of confirmation
that the patient has received their
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60763	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
prescription. If instead it is part of a
multi-paragraph form containing
unrelated information, such as advice
about contact lens wear and care habits
or the symptoms of eye infections,
which then requests a signature at the
end of the form, it may not be a valid
method to request confirmation of
prescription release. While additional
information supplied on the model form
may be useful to patients, it can confuse
patients as to what it is they are signing
for, and add additional time to the
confirmation obligation. Indeed, as
discussed in this document’s PRA
analysis section, the use of a model
template from AOA containing several
additional paragraphs unrelated to the
confirmation requirement may well
contribute to some prescribers’ claims
that it takes more than 10 seconds to
obtain a contact lens prescription
confirmation from a patient.347
Section 456.4(a)(1)(ii) applies to
instances where the prescriber provides
a digital copy of the prescription to the
patient and is, with one minor
alteration, 348 the same as the NPRM’s
proposed § 456.3(a)(1)(iv). If a prescriber
provides the prescription digitally, after
obtaining verifiable affirmative consent,
the prescriber need not request the
patient sign a separate statement
confirming receipt. However, the
prescriber does need to retain evidence
that the prescription was sent, received,
or made accessible, downloadable, and
printable. In the final rule’s
§ 456.4(a)(1)(ii), that evidence serves as
the ‘‘confirmation of prescription
release.’’
The Commission recognizes that by
altering its NPRM proposal in this
manner, the options for obtaining
confirmation of prescription release in
the Eyeglass Rule will not precisely
mirror the language of the options
provided in the Contact Lens Rule, but
these are differences in textual language,
not the Rules’ policy or effects. The
obligations for prescribers with respect
to when and how to offer a prescription,
and how prescribers can obtain and
store a confirmation of receipt, are
essentially the same for contact lens and
eyeglass prescriptions. For clarity
purposes, the Commission may address
the language differences in the CLR’s
next periodic rule review. For these
reasons, the Commission adopts
§ 456.4(a) as set out in this final rule.
The full text of the Rule amendment
is located at the end of this document.
3. Final Rule Modification To Add
Explicit Recognition of a Prescriber’s
Ability To Obtain a Confirmation on
Paper or in a Digital Format
If the prescriber provides a paper
copy of the prescription to the patient,
the prescriber must request that the
patient acknowledge receipt by signing
a separate statement confirming receipt
of the prescription. As discussed above
with respect to obtaining signatures of
affirmative consent to digital delivery,
participants at the workshop discussed
that some EHR companies haven’t
updated their systems in light of the
new CLR requirements to allow
prescribers to collect signatures
electronically, which would reduce the
record-keeping burden, and suggested
that the Rule should expressly permit
prescribers to obtain patient signatures
digitally or on paper.349 Specifically, at
the workshop, Dr. Repka stated that the
electronic medical records of the future
will be able to accept electronic
signatures that will be stored in ways
other than on paper and says, ‘‘if there’s
an option to do that, it would be nice.
If you still needed it to be on a printable
PDF, then not as convenient.’’ 350
When proposing changes to the
Eyeglass Rule, the Commission noted
the ‘‘recordkeeping burden could be
reduced to the extent that prescribers
have adopted electronic medical records
systems, especially those where patient
signatures can be recorded
electronically and inputted
automatically into the electronic
record.’’ 351 The Commission resolves
therefore to change the Rule to
explicitly state that obtaining patient
signatures ‘‘on paper or in a digital
format’’ is permissible and complies
with the Rule. Accordingly, § 456.4 of
the final rule sets forth this language.
The Commission believes this will
resolve prescriber confusion regarding
the need to print out digital forms and
collect wet signatures that might then
need to be scanned and stored
electronically in an EHR system. As
with electronic collection of patient
consent to digital delivery, alleviating
prescriber misunderstanding regarding
signature collection should help reduce
waste and facilitate faster, more
efficient, Rule compliance. 352
V. Final Rule Pertaining to Proof of
Insurance Coverage as Payment
A. Proposed Requirement in the NPRM
To Treat Proof of Insurance Coverage as
Payment and the Basis for Such
Proposal
The Eyeglass Rule requires that
prescribers provide consumers with a
copy of their prescription immediately
after the eye examination is completed,
but also contains a long-standing
exception to allow a prescriber to refuse
to give the patient a copy of their
prescription until the patient has paid
for the eye examination, so long as the
prescriber would have required
immediate payment had the eye
examination revealed that no
ophthalmic goods were required.353 The
CLR contains a similar provision,
permitting the collection of fees for an
eye examination, fitting, and evaluation
before the release of a contact lens
prescription, but also provides
clarification that for purposes of this
exception, a patient’s presentation of
proof of insurance coverage for those
services shall be deemed to constitute a
payment. 354 The Eyeglass Rule does not
contain this insurance clarification, and
staff has received questions from the
public about this issue. The
Commission proposed that such a
proviso, which was initially formulated
by Congress in drafting the FCLCA,355
be added to the Eyeglass Rule, both
because it is appropriate that a patient’s
proof of insurance coverage equates to
payment, and to bring the two rules into
conformity and eliminate unnecessary
confusion. 356 Accordingly, in the NPRM
the Commission proposed to amend
§ 456.2(a) to add the sentence, ‘‘For
purposes of the preceding sentence, the
presentation of proof of insurance
coverage for that service shall be
deemed to be a payment.’’ 357 The
Commission invited public comment on
the potential benefits and burdens of
such an amendment.358
B. Comments on NPRM and Discussion
at Workshop Regarding the Insurance
Coverage as Payment Proposal
The Commission received a few
public comments addressing this
proposed amendment. NAROC
supported the Commission’s
clarification that proof of insurance
coverage shall be deemed to constitute
a payment under § 456.2(a), and opined
that this clarification will generally
increase compliance with the Rule’s
prescription release requirement.359 1–
800 CONTACTS also supported
‘‘amending the [Rule] to follow the CLR
in requiring that prescribers accept
proof of insurance coverage as payment
for purposes of automatic prescription
release.’’ 360
The AAO expressed concern that the
provision could create challenges for,
and ultimately result in financial
impacts to, ophthalmology practices,
such as instances where a patient has
already utilized their insurance benefit
and would thus be ineligible at the time
of the visit to be covered by
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60764 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
insurance. 361 Requiring the prescriber to
accept proof of insurance as payment in
such a situation would be problematic
for the prescriber, since the insurance
would not be obligated to pay anything.
The AAO noted that a ‘‘remedy for this
would be to instead allow for insurance
to be used as payment if the insurance
carrier confirms that the patient is
eligible for the benefit at the time of
their visit.’’ 362 An anonymous
commenter stated there can be a
problem with vision plans showing
authorizations for services but not
guaranteeing payment, which takes
advantage of the prescriber.363
C. Additional Discussion and
Commission Determination Regarding
the Insurance Coverage as Payment
Proposal
The Commission has decided that the
proposed clarification in the NPRM’s
§ 456.2(a) will aid prescribers’
compliance with the Rule and help
ensure that patients and prescribers
understand when a prescription should
be released. Accordingly, the
Commission is adopting the provision
as proposed in the NPRM as
§ 456.2(a)(2). Regarding the AAO’s
concern that prescribers should be
allowed to wait until an insurance
carrier confirms a patient’s eligibility for
a benefit at the time of service, the
Commission notes that this is, in fact,
what the provision would permit.
Section 456.2(a)(2) states that proof of
insurance coverage—not merely
possession of an optical or health
insurance policy—will be deemed to
constitute payment. For the anonymous
commenter who was concerned about
vision plans that show authorizations
for services but do not guarantee
payment, this prescriber could withhold
the prescription pending payment if
coverage cannot be conclusively
established. But in such a case, the
prescriber also could not offer to sell the
patient eyeglasses until after releasing
the prescription to the patient.364
Participants at the workshop
discussed that some patients may prefer
not to have to make two separate
payments—one for the examination fee,
prior to receiving the prescription, and
a separate one for the purchase of
eyeglasses, if they choose to purchase
from their prescriber’s office.365
Commission staff noted that the
Eyeglass Rule does not mandate when
prescribers collect payment for
examination fees or eyeglasses, but
instead merely requires that the
prescription be released immediately
after the exam and before offering to sell
the patient eyeglasses. 366 Prescribers
may decide to wait to collect the
examination fee until a purchase is
completed, if they believe their patients
have a strong preference for a single
transaction, so long as they already
released the prescription prior to
making that sale.367
VI. Final Rule Regarding ‘‘Eye
Examination’’ Terminology
A. Proposed Revision in the NPRM To
Change ‘‘Eye Examination’’ Term to
‘‘Refractive Eye Examination’’ and the
Basis for Such Proposal
The Rule defines an ‘‘eye
examination’’ as ‘‘the process of
determining the refractive condition of
a person’s eyes or the presence of any
visual anomaly by the use of objective
or subjective tests.’’ 368 As discussed
above, the Rule currently allows eye
care prescribers to refuse to provide the
patient with their prescription when the
patient has not paid for the ‘‘eye
examination’’—which refers back to the
definition describing the refraction—as
long as the prescriber does not have
different policies for those whose
examination revealed that no
ophthalmic goods were required.369 In
response to the ANPR, the AOA and
several individual prescribers requested
that the Commission modify the Rule to
change the term ‘‘eye examination’’ to
‘‘refraction.’’ 370 These commenters
stated that an eye examination
determines the health of the eye and
includes many components that are not
used to determine the refractive
condition. According to some
commenters, the Rule’s definition for,
and use of, the phrase ‘‘eye
examination’’ more accurately describes
refractive services rather than the full
scope of an eye examination.371
Commenters stated that the Rule should
reflect that a comprehensive eye
examination and a refraction are
separate services,372 and that while eye
health exams are typically covered by
Medicare, the testing required to
produce the refractive prescription may
not be a covered service under Medicare
or other insurance plans, and therefore
patients may be required to pay out of
pocket for the service. 373 The
commenters suggested that changing the
Rule to reflect the separate services and
payments involved would reduce
consumer confusion.
In the NPRM, the Commission
responded to the ANPR commenters by
proposing to replace the term ‘‘eye
examination’’ with ‘‘refractive eye
examination’’ throughout the Rule,
noting that the Eyeglass Rule’s purpose
is to ensure that prescribers provide
patients with a copy of their
prescription at the completion of an eye
examination determining the patient’s
refraction, and that this prescription
must be provided free of any additional
charge, without obligation, and without
a waiver.374 The Commission opined
that clarifying that the eye examination
referred to in the Rule is a refractive
examination would likely increase
consumer understanding of their rights
and prescriber compliance with the
Rule. The Commission invited further
public comment on the potential
benefits and burdens of such an
amendment; and asked whether the
current definition in the Rule is a clear
and accurate way of describing a
refractive eye examination, whether
using the term ‘‘refractive eye
examination’’ in place of ‘‘eye
examination’’ could help avoid
confusion over when the prescriber
must release the prescription, and
whether prescribers should be allowed
to withhold release of the prescription
subject to any charges other than the
one due for the refractive eye
examination. 375
B. Comments on NPRM and Discussion
at Workshop Regarding the ‘‘Refractive
Eye Examination’’ Proposal
1. Comments About the Proposed
Terminology Change
The FTC received some comments in
support of the proposed terminology
change. 1–800 CONTACTS agreed with
the Commission’s proposal to replace
the term ‘‘eye examination’’ with the
term ‘‘refractive eye examination’’
throughout the Rule. 376 The National
Taxpayers Union asserted that clarifying
that an ‘‘examination’’ triggering the
prescription release requirement is ‘‘one
involving a refractive diagnostic . . .
should provide some reduction in
overhead for providers, who might
otherwise spend time and effort
explaining to the consumer those
conditions under which a prescription
is not automatically furnished.’’ 377
NAROC stated that it was not aware of
compliance concerns arising from the
use of the term ‘‘eye examination’’
versus ‘‘refractive eye examination,’’
and had never heard the complaint that
a prescriber did not understand the
context of the prescription-release
requirement, but acknowledged that the
proposed change would eliminate the
issues described in the NPRM.378
NAROC further recognized that
prescribers also conduct examinations
that are not related to prescribing
corrective eyewear, and noted that the
proposed change might improve the
FTC’s ability to enforce the Rule, in that
the prescriber would not have the
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excuse that they did not understand
scope of the term.379
While not expressly taking a position
on the NPRM proposal to change the
terminology, the American Academy of
Ophthalmology did express concern—in
relation to insurance payments—that
many patients are confused as to the
difference between health exams that
are covered by insurance and refractive
exams which often are not.380 The
association said the Commission could
be ‘‘more proactive’’ in explaining that
eye health exams and exams that lead to
eyeglass prescriptions are not the same
services.381
AOA, while in favor of the proposed
change in 2015, noted that its position
had ‘‘evolved’’ since then,382 and
opined that the terminology change
‘‘may not truly address any confusion
that exists,’’ noting that the results of a
refractive examination do not
necessarily provide all the information
needed to determine and devise an
optical prescription. 383 The AOA asked
that if the FTC chooses to update the
language as proposed, it should clarify
that the update does not impact any
State or Federal definitions of a
comprehensive eye examination.384
At the workshop, Dr. Beatty echoed
the AOA’s concern that consumers
benefit most from a comprehensive eye
examination, and worried that labeling
the exam that results in a prescription
a ‘‘refractive exam’’ starts to ‘‘confuse
patients as to what the value is for
having a full eye exam, and can start to
make that feel the same as having some
exam that you are getting online without
the presence of the doctor.’’ 385 At the
same time, Dr. Beatty confirmed that the
definition in the Eyeglass Rule
accurately describes a refraction.386
2. Comments About the Need To Allow
Prescribers To Make a Medical Decision
To Withhold the Prescription, Where
Appropriate
Commenters also noted that while a
refraction may be provided to a patient
for the purpose of determining their
most current and appropriate eyeglass
prescription, it may also be ‘‘completed
as a ‘diagnostic tool’ to assist in the
determination of visual status when
there are comorbidities in the visual
system.’’ 387 In this case, the intent of
the refraction may not be to create and
provide a prescription for eyeglasses or
contact lenses, but rather to understand
how the patient’s refractive error may be
a factor in decreased vision, and to help
diagnose medical conditions in the eye,
such as macular degeneration or a
cataract. 388 In the latter scenario, the eye
care professional may even determine
that it is not appropriate to provide a
prescription for corrective eyewear, if
the refractive error is not the cause of
the decreased vision and comorbidities
are present. Commenters felt that the
eye care provider should, in their
discretion, be free to make the medical
decision of whether to dispense the
diagnostic refraction, and not be
required by the Rule to release a copy
of the prescription solely because they
had tested the patients’ refractive
error.389 Commenters also stated that
regardless of whether the provider
releases the prescription in that case,
they should be able to charge the patient
for the diagnostic examination that was
completed. 390
3. Comments About the Permissibility
To Charge for the Refraction, as
Opposed To Charging for the
Prescription Release
Although the Rule allows eye care
prescribers to withhold a patient’s
prescription until the patient has paid
for the ‘‘eye examination’’—so long as
the prescriber would have required
immediate payment even if the exam
had revealed that no ophthalmic goods
were required—the Rule also prohibits
prescribers from ‘‘charg[ing] the patient
any fee in addition to the
ophthalmologist’s or optometrist’s
examination fee as a condition to
releasing the prescription to the
patient.’’ 391 This provision is intended
to prevent a once-common practice
whereby prescribers would charge their
patients a separate fee for releasing the
prescription, which could, in turn,
dissuade patients from taking their
prescription to shop elsewhere for
eyeglasses. Some commenters discussed
that consumers can be confused about
whether a fee is being charged for the
exam or for the prescription, and that
the Rule language has resulted in some
patients believing that they do not have
to pay for the refractive exam.392
Commission staff noted, based on their
experience enforcing the Eyeglass Rule,
that some practices may tell patients
that there is a charge for the
prescription, without indicating that the
charge is actually for the refractive
exam, rather than for receiving the
prescription, and that this can lead to
consumer confusion about their rights
under the Rule. 393
C. Additional Discussion and
Commission Determination Regarding
the ‘‘Refractive Eye Examination’’
Proposal
After considering all of the comments
in the record on the question of the
appropriate terminology for the ‘‘eye
examination’’ definition, the
Commission has decided to amend this
term to ‘‘refractive eye examination’’
throughout the Rule.394 Both the
comments the Commission received in
2015 and the panel discussion at the
2023 workshop confirmed that the
definition in the Rule most accurately
describes a refraction. A refractive eye
examination can be a portion of a more
comprehensive exam, but by changing
the terminology, the Rule will provide
a clear indication to the consumer and
prescriber that if the refraction has been
completed, the prescription should be
provided, barring a medical decision by
the prescriber.
By making this change, the
Commission is not suggesting that
consumers would not benefit from a
comprehensive eye examination, or that
it would be preferable for consumers to
seek out solely a refraction in order to
obtain their prescription. But the
Commission is aware that a refraction
can be completed in a variety of
contexts, and wishes to clarify that
regardless of the purpose of the
examination, the prescription should
always be released whenever the
optometrist or ophthalmologist
determines the patient’s refractive
error.395 The Commission is mindful,
however, that in some cases in which
the refraction may be used as a
diagnostic tool, the provider may make
a medical decision that it would not be
appropriate for a patient to obtain
eyeglasses. The Commission does not
intend the Rule to override the
provider’s medical judgment in such
cases. If a prescriber determines it is not
medically appropriate for the results of
a refractive exam to result in a
prescription for a particular patient, the
prescriber may choose not to release the
prescription. But, in such cases, the
prescriber may not then offer to sell the
patient eyeglasses.396 Moreover, the
prescription should not be withheld
merely due to it being inconvenient for
the prescriber to provide it.
The Commission concludes that
changing the term to ‘‘refractive eye
examination’’ may help consumers
understand that they may be required to
pay for the refraction if it is not covered
by a vision plan or other health
insurance. Furthermore, this
terminology change will help
prescribers understand that while they
may withhold the prescription pending
receipt of payment for the refraction, it
is not appropriate to make prescription-
release contingent upon the payment for
any additional service.
The Commission plans to undertake
additional consumer education after the
Rule is amended to help patients
understand that they may be charged for
the exam, but not for the prescription
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itself. Revised business education
materials can also advise prescribers on
the types of fees that may be assessed as
a condition of prescription release, as
well as advise them to train staff to
communicate the purpose of fees to
patients.
VII. Miscellaneous Issues Raised in
Comments
A. Pupillary Distance
1. Background and Comments
In the NPRM, the Commission
explored whether to amend the Rule to
require the inclusion of pupillary
distance on eyeglass prescriptions.
Pupillary distance is the measurement
(in millimeters) of the distance between
the pupils of a person’s eyes and is
typically needed to properly fit a pair of
eyeglasses. 397 The Rule has historically
left it to the States to determine what
measurements constitute a complete
refractive prescription, and thus, it has
been up to the States to determine
whether pupillary distance is required
to be included on prescriptions.398 In
the NPRM, the Commission analyzed
comments received in response to the
ANPR in favor of and against adding a
pupillary distance requirement and
concluded that there was not adequate
evidence in the rulemaking record at
this time to determine that the failure to
provide a pupillary distance on a
prescription is an unfair practice.399 As
a result, in the NPRM the Commission
did not propose to require prescribers to
include the pupillary distance
measurement on prescriptions.400
However, since it had last invited
comment on the question of whether to
require the inclusion of pupillary
distance in a prescription in 2015, and
the market for optometry and eyeglasses
may have evolved since then, the
Commission, in the NPRM, again
invited comment on this issue.
Specifically, the Commission asked for
input and information about changes to
State regulation on the content of
prescriptions, or to changes in the
marketplace, or to changes in
technology, that might affect and alter
the Commission’s prior conclusion that
pupillary distance on prescriptions
should not be required by rule.401
In response, the Commission did not
receive any comments addressing
changes to State regulations on the
content of prescriptions, or changes in
the marketplace, or changes to
technology pertaining to pupillary
distance. Commenters in favor of and
against the inclusion of pupillary
distance on prescriptions largely
reiterated viewpoints previously
expressed in response to the ANPR.
The Commission received a number
of comments in favor of the
Commission’s NPRM determination not
to require the inclusion of pupillary
distance on prescriptions from
optometry, ophthalmology, and optician
trade groups (the AOA, AAO, and OAA,
respectively). The AOA, for instance,
agreed with the Commission’s concern,
as discussed in the NPRM, that
requiring pupillary distance
measurements on prescriptions could
place the patient in the optical
dispensary—where pupillary distance
measuring devices are typically located
and operated—prior to the patient
receiving their prescription, thereby
undercutting the Rule’s long-standing
principle (a foundation of the Rule) of
separating a patient’s eye examination
from the retail dispensing of eyeglasses.
The AOA and the OAA added further
that, historically, taking pupillary
distance measurements is not a standard
part of an eye examination by an
optometrist or ophthalmologist (it is
typically performed by an optical goods
dispenser, such as an optician, in the
dispensary after a patient decides to
purchase glasses), and stated that there
was no reason to require that
prescriptions from refractive eye exams,
written by optometrists and
ophthalmologists, should include
pupillary distance.402 The AOA also
pointed to Commission language in the
NPRM stating that there are zero-cost
and relatively-low-cost alternative
methods for consumers to obtain their
pupillary distance if they wish to shop
for glasses online. 403 The trade
association NAROC also agreed with the
Commission’s NPRM determination,
stating that if the pupillary distance
requirement was added, prescribers and
opticians might end up at odds over
whose pupillary distance measurement
should control.404
The OAA further expressed concern
that if pupillary distance is required on
prescriptions, opticians filling the
prescription would have to abide by the
exact measurements written on the
prescription by the prescriber,
regardless of the accuracy of the
information or their own measurement,
and stated that opticians—who have a
long history of performing pupillary
distance measuring tests—may consider
several factors such as: whether the
current pupillary distance measurement
matches the previous measurement,
changes that may have occurred since
the issuance of the prescription, and the
complexity of the prescription.405
The AAO also agreed with the
Commission’s decision not to mandate
the inclusion of pupillary distance
measurements on eyeglass
prescriptions. 406 The group said that
because many ophthalmologists do not
take this measurement, and not all
ophthalmic practices have an optician
on staff to perform these measurements,
if pupillary distance were required on
prescriptions, ophthalmologists would
be forced to make difficult practice
decisions over the hiring of additional
staff or the elimination of refractive
services.407
On the other hand, some sellers and
consumers said they would like the
Commission to reconsider its decision
and require prescribers to include
pupillary distance on prescriptions.
Online seller Eyeglasses.com stated that
it receives hundreds of prescriptions
from consumers each day and about half
of them do not include the pupillary
distance measurement, making it
challenging to provide them with
eyeglasses. 408 The seller contended that
the failure to provide pupillary distance
is an obstacle to consumer choice, and
expressed its belief that prescribers do
not add this measurement because they
either do not want to take the extra time
to take the measurement, or because
such prescribers sell eyeglasses
themselves, and withhold the
measurement to make it more difficult
for consumers to buy eyeglasses
elsewhere. According to Eyeglass.com,
consumers are frequently too
embarrassed to ask for the pupillary
distance measurement, and if they do
ask the prescriber, it gives the prescriber
an opportunity to discourage the patient
from buying online or elsewhere. The
seller also noted that some prescribers
charge a fee to measure the pupillary
distance, which is not prohibited by the
Rule.409
1–800 CONTACTS, which also sells
eyeglasses, reiterated the view that not
giving consumers their pupillary
distance measurement could discourage
online shopping and result in
diminished competition and less
consumer choice. 410 It opined that the
elements of unfairness are met when a
prescriber’s office takes the pupillary
distance measurement during the
patient’s visit but fails to automatically
provide that measurement to the
patient, and reiterated that patients may
not know to ask for their pupillary
distance, may not want to offend the
prescriber by asking for that
measurement, or may be refused or
charged for that measurement. 411
According to 1–800 CONTACTS,
obtaining the pupillary distance
measurement on their own may be a
costly or time-consuming hassle for
some consumers, and some consumers
may not be aware of the ways in which
they can obtain their pupillary distance
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60767	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
measurement. Moreover, in response to
the Commission’s stated concern that a
pupillary distance requirement could
have the unintended and undesirable
consequence of placing the patient in
the dispensary prior to them having
their prescription in hand, 1–800
CONTACTS proposed that the pupillary
distance measurement should be
released in some other format, separate
from the refractive prescription itself.412
For this scenario, the commenter
explained, the prescriber would release
the prescription prior to the patient
entering the dispensary, and the patient
would then automatically receive their
pupillary distance measurement
separately after having it measured in
the dispensary.413 1–800 CONTACTS
asserted that an appropriately tailored
amendment to automatically release a
pupillary distance measurement is
critical to creating prescription
portability and promoting competition
in the evolving market for prescription
eyewear. 414
Another commenter, a consumer,
stated that pupillary distance
measurements are needed to order
glasses online, where glasses are much
cheaper than in the optometrist’s
shop. 415 The commenter said that, when
they ask their prescriber for the
measurement, the prescriber does not
provide it, and instead tells them that
the measurement will be taken when
they buy eyeglasses. The commenter felt
this was a way to force consumers to
buy their eyeglasses at their prescriber’s
office, or at the least, discourage them
from buying glasses online.416
2. Pupillary Distance Requirement
Determination
After considering the comments and
evidence regarding pupillary distance,
the Commission does not disturb its
conclusion, reached in the NPRM and
previous Eyeglass Rule rulemakings, not
to mandate the inclusion of pupillary
distance on prescriptions in States that
do not otherwise include such a
requirement. To determine an act or
practice is unfair, the Commission must
find that the act or practice causes or is
likely to cause substantial injury to
consumers; the injury is not reasonably
avoidable by consumers themselves;
and, the injury is not outweighed by
countervailing benefits to consumers or
to competition.417 The comments
submitted in response to the NPRM did
not reveal any relevant changes in the
marketplace, technology, or State
regulations that sufficiently alter the
landscape such that not providing a
pupillary distance measurement is
generally unfair. The comments largely
raise the same points as those submitted
in response to the ANPR,418 indicating
that requiring the inclusion of pupillary
distance measurements on prescriptions
could potentially increase consumer
convenience and improve competition,
but could also impose burdens on
prescribers, hamstring opticians, and
undercut other pro-competitive aspects
of the Rule. On balance, upon review of
the record, the Commission finds again
that there is not sufficient evidence that
the practice of not providing pupillary
distance is an unfair act or practice.
Purchasing eyeglasses online can,
indeed, be more convenient and less
costly for consumers, and consumers
can find it more difficult to shop online
if their pupillary distance is not
provided by prescribers. But every State
determines what is required to be
included in an eyeglass prescription,
and only four require the inclusion of
pupillary distance measurements.
Based on the record developed, the
Commission concludes that preempting
these State determinations by imposing
a requirement to include pupillary
distance on the prescription may have a
detrimental overall effect for prescribers
and consumers. Some prescribers—
particularly ophthalmologists—would
be required to take a measurement they
do not ordinarily take, or might feel
obligated, for professional and liability
reasons, to hire new staff or acquire new
equipment to take this measurement,
which could result in higher costs
passed on to patients in the form of
higher prices.419 Particularly for smaller
practices, the costs to these providers
could be considerable.
In addition, imposing such a
requirement could undermine the pro-
competitive aim of the Rule. If the
Commission required the inclusion of
pupillary distance, some prescribers
might lead patients to the dispensary for
the measurement, instead of adding
expensive pupillary distance
measurement equipment to the exam
room. 420 As noted above, such a shift
would place the patient in the
dispensary prior to the patient receiving
their prescription, a result that would
blur the important distinction between
the clinical eye exam and the retail
dispensing process, a distinction that is
central to the Rule, and that the
Commission has consistently attempted
to preserve.
Although commenters point to
circumstances under which the act of
not providing a pupillary distance
measurement can be injurious,
consumers have alternative means to
obtain eyeglasses from a seller other
than their prescriber. Other methods are
available for consumers to obtain this
measurement, and many of these
methods—while possibly not as precise
as a measurement taken with expensive
equipment by an optician in a
dispensary—are low-cost or no-cost. For
instance, one seller stated that all you
need is a mirror and a printable ruler,421
and another provided instructions for
using their digital ruler.422 Consumers
can also obtain this measurement at an
in-person optical dispensary, though it
may come at a small cost if the
consumer is not purchasing eyeglasses
at that shop.423 Although some
consumers reported problems with their
vision when using eyeglasses made with
pupillary distances they measured
themselves using online tools,424
NAROC stated that many online sellers
have developed accurate alternative
ways to measure pupillary distance. 425
Moreover, a new pupillary distance
measurement does not have to be
obtained every year or office visit.
Obtaining it once is usually sufficient,
since for most people, the measurement
does not change significantly from one
year to the next. The widespread
availability of these alternative methods
make it difficult to conclude at this time
that the injury to consumers from
prescribers failing to take and provide
pupillary distance measurements is both
substantial and not reasonably
avoidable.
Importantly, the Commission’s
determination does not preclude States
from defining prescriptions to include
pupillary distance measurements.
Indeed, in the handful of States that
already do so, the Rule, by its operation,
requires dispensing of such
measurements. But the Commission is
mindful that the vast majority of States
have not required prescribers to include
pupillary distance measurements, and
the Commission is reluctant to override
the determinations of local jurisdictions
without a clearer record establishing
that the status quo is unfair.
For these reasons and others
described in the Commission’s
NPRM,426 the Commission has decided
at this time to retain its prior conclusion
not to amend the Rule to add a pupillary
distance requirement for
prescriptions.427
B. Consumer and Business Education
Commenters and workshop
participants stated that the Commission
should better educate consumers about
their rights to their prescription, or the
confirmation process. Dr. Masoudi
stated that consumers should be made
more aware of their rights before they
walk in the door.428 This point was
illustrated at the workshop by Felecia
Neilly, who stated that before she
became involved with this Rule review
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60768 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
process, she ‘‘wasn’t even aware of an
eyeglass rule’’ and did not know she
had the option to receive the
prescription. 429 As to the confirmation
requirement, Dr. Montaquila stated that
there is widespread confusion by his
patients as to why they are signing a
prescription.430 One anonymous
commenter stated that the burden
should be on the FTC to provide
education to the consumer.431 The AAO
added its concern that patients
misunderstand that services resulting in
a prescription, in addition to the
prescription, are to be provided free of
charge. 432
Some commenters also mentioned
that in addition to a need to educate
consumers, there is a need to educate
prescribers about their responsibilities
under the Rule. NAROC requested the
Commission work with industry to
develop useful guidance or templates
relating to patients’ rights and
prescribers’ responsibilities with respect
to eyewear prescription release.433
The Commission has existing
guidance on the Eyeglass Rule on its
website and has engaged in outreach to
both consumers and prescribers at
periodic intervals, including through
press releases, consumer alerts, and
business blogs announcing warning
letters to prescribers.434 Nevertheless, it
agrees it should bolster its existing
guidance on the Rule as an added
measure to inform consumers of their
rights, and businesses of their
obligations, especially given the
amendments to the Rule.
VIII. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
Federal agencies to obtain Office of
Management and Budget (‘‘OMB’’)
approval before undertaking a collection
of information directed to ten or more
persons. Pursuant to the regulations
implementing the Paperwork Reduction
Act,435 an agency may not collect or
sponsor the collection of information,
nor may it impose an information
collection requirement unless it
displays a currently valid OMB control
number.
In this final rule, the Commission is
amending a rule that contains
recordkeeping and other collection of
information requirements as defined by
OMB regulations that implement the
PRA. First, the Commission is
modifying the Rule to require that: (i) if
a paper copy of the prescription was
provided to the patient, the prescriber
must request that the patient
acknowledge receipt of the prescription
by signing a separate statement on paper
or in a digital format confirming receipt
of the prescription, and retain the
confirmation for not less than three
years; or (ii) if a digital copy of the
prescription was provided to the patient
(via methods including an online portal,
electronic mail, or text message), the
prescriber must retain evidence that
such prescription was sent, received, or
made accessible, downloadable, and
printable.436
Section 456.4(a)(2) provides sample
language for option paragraph (a)(2)(i) in
that prescribers may use the single-
sentence statement, ‘‘My eye care
professional provided me with a copy of
my prescription at the completion of my
examination,’’ but also allows
prescribers to craft their own wording of
the signed confirmation if they so
desire. For prescribers who choose to
offer an electronic method of
prescription delivery, the Rule will
require that such prescribers identify
the specific method or methods to be
used and maintain records or evidence
of affirmative consent by patients to
such digital delivery for at least three
years. For instances where a consumer
refuses to sign the confirmation or
accept digital delivery of their
prescription, the Rule (§ 456.4(a)(3))
directs the prescriber to note the refusal
and preserve this record as evidence of
compliance. None of these new
requirements, however, would apply to
prescribers who do not have a direct or
indirect financial interest in the sale of
eyeglasses.
Below, the Commission describes and
discusses the changes between the
proposed rule regulatory text and this
final rule, the public comments received
relating to the collection of information
burden, and the Commission’s ultimate
determination of the burden generated
by the final rule.
A. Comments Regarding the NPRM
Estimate for the Confirmation-of-
Prescription-Release Requirement
In its NPRM, the Commission put
forth estimates for the burden on
individual prescribers’ offices to
generate and present to patients the
confirmations of prescription release,
and to collect and maintain the
confirmations of prescription release for
a period of not less than three years.
Based on an estimate that there are 165
million eyeglass wearers in the United
States, the Commission calculated the
total disclosure and recordkeeping
burden from the new requirement at
2,979,167 hours for prescribers and their
staff (1,375,000 disclosure hours +
1,604,167 recordkeeping hours).437
These totals were based on estimates
that it would take prescribers’ offices
one minute to hand out a prescription,
ten seconds for the patients to read and
sign a confirmation-of-prescription-
release statement or consent-to-
electronic-prescription-delivery, and
one minute for prescribers’ offices to
store (or scan and save) the signed
confirmation or consent in their files.438
The Commission’s time estimates were
based on previously-approved estimates
for a nearly identical confirmation-of-
prescription-release requirement added
to the Contact Lens Rule in 2020.439
In its NPRM, the Commission
requested comment on, among other
things, the accuracy of the FTC’s burden
estimates, including whether the
methodology and assumptions used
were valid.440 In response, the
Commission received various comments
from prescribers opining, among other
things, that a confirmation requirement
for eyeglass prescriptions would ‘‘take
an immense amount of time and take
away from patient care,’’ 441 be ‘‘very
time consuming,’’ 442 and ‘‘add a
significant burden to small business
optometry practices that already are
enduring financial challenges and
staffing issues.’’ 443 More specifically,
some commenters, such as the
American Optometric Association and
Eyeglass workshop panelist Dr. Jeffrey
Michaels stated that the Commission
had previously underestimated the time
it takes to perform the confirmation
requirement,444 and commenter Coast
Eyes Pllc suggested the paperwork cost
would be $18,000 per provider per
year.445 Another workshop panelist, Dr.
Stephen Montaquila concurred with Dr.
Michaels, commenting that it takes his
staff four minutes to complete the entire
Contact Lens Rule process of printing
out a patient’s prescription, handing it
to the patient, explaining why it needs
to be signed, having the patient sign it,
making a copy of it, and storing the
signed copy as a record.446 In addition,
the National Taxpayers Union
submitted a comment stating that while
it generally supports the confirmation
requirement, ‘‘[G]iven the various
reading speeds of customers who may
be elderly or have limited proficiency in
English, the 10-second estimate [to read
and sign the statement] could prove
low.’’ 447 As noted previously in the
discussion of the proposed confirmation
requirement, the NTU also suggested
that smaller optometry practices might
bear a disproportionate share of the
burden, which it estimated—based on
the NPRM proposal and the estimate
that that a ‘‘modest optometry
establishment’’ might perform 3000
examinations per year—at an additional
167 hours and $4,123 per year for such
an establishment. 448
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Some commenters, however,
disagreed that it would take a significant
amount of time to obtain a patient’s
signed confirmation. The NAROC
commented that thousands of
optometrists affiliated in co-location
with NAROC member companies
‘‘regularly comply with [Contact Lens
Rule confirmation-of-prescription-
release requirements, as well as other
requirements of the CLR and Eyeglass
Rule] with little or no added cost or
other burden on the eye care
practice.’’ 449 According to NAROC
representative and Eyeglass Rule
workshop panelist Joseph Neville, ‘‘I’ve
personally witnessed a couple of
situations where the process for contact
lenses seemed very easy. . . . the
prescription was handed over at the
front desk by the staff person, and the
staff person maybe a bit simplistically
said, ‘We’d like to ask you to sign this
receipt for your prescription. We’re
required to get your signature
acknowledging that you’ve received it.’
And a couple of people, and again,
anecdotes here that I witnessed on this,
just said, ‘Okay, fine, thank you.’ ’’ 450
All of the above comments, however,
are, as Mr. Neville acknowledged,
anecdotal in nature.451 The only new
empirical evidence that the Commission
is aware of regarding the time it will
take prescribers and their staff to
comply with a confirmation-of-
prescription-release requirement comes
from an American Optometric
Association submission filed in
response to a 2023 request for comment
about extending Office of Management
and Budget (‘‘OMB’’) clearance for the
information collection requirements of
the Contact Lens Rule.452 In that
submission, the AOA said that the
Commission ‘‘significantly
underestimated’’ how long it would take
prescribers to confirm prescription
release for the Contact Lens Rule
requirement, and cited a 2023 survey it
conducted of some of its member
optometrists which found that 84.8%
report it takes 30 seconds or more to
obtain the patient’s signed confirmation
for contact lens prescriptions, not
counting additional time necessary to
address patient questions about the form
they are signing, and 69.9% of
prescribers said patients ‘‘typically’’
have questions regarding the
acknowledgment. 453 Since the
confirmation-of-prescription-release
requirement adopted herein is very
similar to that for the Contact Lens Rule,
the Commission regards AOA’s
comment regarding the CLR’s burden as
on point.
The Commission cannot, however,
accord the AOA survey significant
weight. As explained in the
Commission’s notice responding to
public comments on extending OMB’s
approval for CLR collection of
information for another three years,454 it
is very likely the AOA survey
overestimates the average time
necessary to obtain a confirmation
because of the manner in which the
survey solicited prescribers to respond.
AOA emailed a newsletter to members
and included an invitation to ‘‘Voice
your concerns’’ about complying with
the Contact Lens Rule. A small number
of prescribers self-selected in response,
and took part in the survey. Because the
poll only included prescribers who
responded to this invitation, it is
questionable whether its findings are
truly representative of the average
prescriber.455 Furthermore, framing the
survey as an invitation for concerned
prescribers to air their grievances rather
than as a disinterested information-
gathering tool affects the objective
reliability of survey responses, making it
much harder for the Commission to
accord it significant weight.
The Commission also reiterates
concerns—previously detailed in the
Commission’s CLR PRA Notice 456 —that
the amount of time prescribers ascribe
to patients reading and signing that
Rule’s confirmation statement may, in
fact, be due largely to non-mandated
choices with respect to the design of the
statement. The Contact Lens Rule
requires that patients read and sign a
simple statement confirming receipt of
their prescription, and allows that the
one-sentence statement, ‘‘My eye care
professional provided me with a copy of
my contact lens prescription at the
completion of my contact lens fitting,’’
fully satisfies the requirement. However,
the Contact Lens Rule also permits
prescribers to design their own
confirmation form and statement, and
the survey did not specify or ask
prescribers what form or wording of the
confirmation statement that patients
were reading and signing, making it
difficult to determine a true average
time it would take to comply with the
requirements of the rule. Even more
concerning (from the standpoint of
assessing the burden) is that the AOA
has supplied its members with a model
template confirmation form that
includes several additional paragraphs
consisting of ‘‘important information to
review prior to receiving your contact
lens prescription.’’ 457 This information
includes various recommendations from
the Centers for Disease Control (‘‘CDC’’)
and the Food and Drug Administration
(‘‘FDA’’) about healthy contact lens use
(such as ‘‘Take out your contacts and
call your eye doctor if you have eye
pain, discomfort, redness, or blurry
vision’’) as well as five bullet points
listing some of the symptoms for an eye
infection (‘‘Irritated, red eyes, worsening
pain in or around the eyes,’’ etc.).458
While the template document is titled
‘‘Contact Lens Prescription
Acknowledgment Form,’’ only at the
very end is there a statement, ‘‘Sign
below to acknowledge that you were
provided a copy of your contact lens
prescription at the completion of your
contact lens fitting.’’ 459
According to workshop panelist Dr.
Montaquila, the AOA template is a
common form that eye doctors are using
to obtain patient confirmations. 460 If
this is indeed the case, it calls into
question the relevance of AOA’s survey
results finding that it takes patients 30
seconds or longer to comply with the
Contact Lens Rule requirements, since
the majority of those 30 seconds would
likely be taken up by patients reading
information that the rule does not
require, or even suggest, that they read.
Widespread use of AOA’s model
template confirmation form might also
account for why prescribers report that
patients have questions, or are confused,
as to why they need to sign a new form,
since patients are being asked not
merely to confirm they received their
prescription, but that they received
other information from the CDC and
FDA. 461 While the additional
information from these two Federal
agencies may very well be useful to
provide to patients, it is not required by
the FTC, and the time it takes patients
to read it is not part of the Rule’s burden
of compliance.
Despite the aforementioned concerns
about the reliability of the AOA’s survey
in establishing the time it takes for a
patient confirmation, the Commission
does not wholly discount the survey,
but rather views it as suggestive, and an
additional indication that many
prescribers sincerely believe the
Commission’s 10-second estimate does
not accurately reflect the time required
to obtain a patient’s signed
confirmation. The Commission has
therefore decided to increase its
estimate for the time required to obtain
a patient confirmation signature (and
the time to collect an affirmative
consent to electronic delivery, in
instances where the prescription is
provided digitally rather than in paper)
for the Eyeglass Rule from 10 seconds—
as proposed in the NPRM—to 20
seconds for this final rule. The
Commission concludes that 20 seconds
may better reflect the time required for
a patient to not just read a one-sentence
confirmation, but also to physically sign
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and return the document to prescriber’s
staff, and for any necessary staff
explanation as to why the patient’s
signature is required.462 The 20-second
estimate may also better align with the
original HIPAA estimate that was a basis
for the initial CLR confirmation
estimate, since the original HIPAA
proposal accorded 10 seconds to hand
out the acknowledgment and another 10
seconds to obtain a patient’s signature
and collect the document.463
The Commission hereby provides
PRA burden estimates, analysis, and
discussion for the existing Eyeglass Rule
burden of automatically releasing a
prescription at the completion of a
refractive eye exam, as well as the new
requirement to collect patient signatures
as confirmation of prescription release
or as consent to electronic prescription
delivery. The Commission estimates
these PRA burdens based on the
comments and submissions discussed
above, in conjunction with its long-
standing knowledge and experience
with the eye care industry. The
Commission is submitting these
amendments and a Supporting
Statement to OMB for review.
B. Commission Estimate of the Total
Burden = 3,208,333 Hours
1. Estimated Hour Burden of 1,375,000
Hours for Prescribers To Release
Prescriptions
The number of adult eyeglass wearers
in the United States is currently
estimated to be approximately 165
million. 464 Assuming a biennial
refractive eyeglass exam for each
eyeglass wearer,465 approximately 82.5
million people would receive a copy of
their eyeglass prescription every year.
Historically, the Commission has
estimated that it takes one minute to
provide the patient with a prescription
copy. 466 It is possible that one minute
is an overestimate of the amount of time
required, particularly as more doctors
move to digital delivery. As of now,
however, we have not seen sufficient
evidence to merit making a change to
the approach we have taken in the past.
We therefore estimate an annual
disclosure burden for prescribers to
formulate and release prescriptions of
approximately 1,375,000 hours (82.5
million annual exams × 1 min/60 mins).
2. Estimated Hour Burden of
Prescribers’ Staff To Obtain and Store
Patient Confirmation of Prescription
Release = 1,375,000 Hours (343,750
Hours for Patients To Read and Sign
Confirmations, 1,031,250 Hours for
Prescribers’ Offices To Scan and Store
Such Confirmations)
The requirement to generate and
present the confirmation of prescription
release will not require significant time
or effort. The requirement is flexible in
that it allows different modalities and
delivery methods at the discretion of the
prescriber. The requirement is also
flexible in that it does not dictate other
details, such as the precise content or
language of the patient confirmation. At
the same time, prescribers and their staff
would not be obligated to spend time
formulating their own content for the
confirmation, since the amended Rule
provides draft language that prescribers
are free to use, should they so desire.
Furthermore, prescribers likely have
forms and systems in place to maintain
confirmation records already, since they
already must comply with the similar
confirmation requirement of the Contact
Lens Rule, and may need make only
minor adjustments to accommodate
confirmations for eyeglasses
prescriptions. As a result, the marginal
cost of the Confirmation amendment to
the Eyeglass Rule should be extremely
low, possibly lower than that estimated
herein.
As noted above, the requirement of
§ 456.4(a)(1)(i) to collect a patient’s
signature on the confirmation of
prescription release and preserve it
constitutes a new information collection
as defined by OMB regulations that
implement the PRA. Nonetheless, the
Commission determines it will require
minimal time for a patient to read the
confirmation and provide a signature.
As noted above, the Commission
estimated in the Contact Lens Rule and
the NPRM that it would take patients 10
seconds to read the one-sentence
confirmation of prescription release and
provide a signature. 467 However, for the
reasons discussed above, the
Commission now believes that 20
seconds is an appropriate estimate for
this task.468
The second option, § 456.4(a)(1)(ii),
involves digital delivery of the
prescription and does not, in and of
itself, constitute an information
collection under the PRA, since no new
information that would not otherwise be
provided under the Rule is provided to
or requested from the patient.469
In its NPRM, the Commission
assumed that prescribers would elect
digital prescription delivery 25% of the
time, and thus would be required to
obtain a signed confirmation for the
other 75% of patients receiving
prescriptions.470 That assumption was
based on the premise that the NPRM
offered prescribers four options
(confirmation on a stand-alone
document, confirmation on a
prescription copy, confirmation on a
sales receipt, or digital delivery with no
confirmation required). With no specific
details that clearly show which option
prescribers would prefer, the
Commission employed the assumption
that prescribers would choose each of
four options in equal numbers.
The current Rule amendment has only
two options, paper delivery or digital
delivery, and thus if the Commission
used the same equal-share assumption it
followed in the NPRM, the percentage
attributed to digital delivery (and
thereby not implicating the burden of a
confirmation) for PRA purposes would
be 50%. However, based on
conversations with prescribers and the
industry, the Commission has reason to
believe that regardless of widespread
EHR adoption, many prescribers still do
not provide patient portals or deliver
prescriptions digitally to patients, and
thus it would not be correct to designate
50% of all prescription releases as
digital delivery. Further supporting this
view, the aforementioned AOA survey
found that only 35% of prescribers said
they provided prescriptions
electronically.471 Even that might
overcount the number of prescriptions
delivered digitally, since the prescribers
surveyed by AOA about their method
for either obtaining patient
confirmations and delivering
prescriptions were permitted to select
more than one option, so some of the
35% who chose digital delivery of
prescription (and thus no confirmation)
may also have responded that they use
other options, meaning that the overall
percentage of prescriptions released
electronically is actually less than
35%.472 Furthermore, as discussed
above, there are questions as to the
reliability of AOA’s survey findings, and
whether they are truly representative of
the average prescriber. Therefore, in
order to ensure that the PRA burden for
the Rule is not underestimated, the
Commission will retain the previously
used assumption that just 25% of
prescribers employ digital-prescription
delivery, and the other 75% of
approximately 82.5 million annual
prescription releases require a consumer
reading and signing a confirmation
statement. Thus, assuming twenty
seconds for each such release,
prescribers’ offices would devote
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60771	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
343,750 hours, cumulatively (75% ×
82.5 million prescriptions yearly × 20
seconds each/60 secs/60 mins) to
obtaining patient signatures as
confirmations of prescription release.473
Maintaining those signed
confirmations for a period of not less
than three years should not impose
substantial new burdens on individual
prescribers and office staff. Since the
Rule allows flexibility in how
prescribers craft the confirmation
statement, prescribers may add it to
documents that they would already be
saving, such as prescription copies (and
the majority of States already require
that optometrists keep records of eye
examinations for at least three years 474 )
or customer sales receipts (which are
normally preserved for financial
accounting and recordkeeping
purposes). Even if the prescriber
chooses to create and use a separate
confirmation statement, storing a one-
page document per patient per year
should not require more than a few
seconds, and an inconsequential, or de
minimis, amount of record space. Some
prescribers might also present the
confirmation of prescription release in
electronic form, enabling patients to
sign a computer screen or tablet
directly, and have their confirmation
immediately stored as an electronic
document.
For other prescribers, however, the
recordkeeping requirement would likely
require that office staff electronically
scan the signed confirmation and save it
as a digital document. For prescribers
who preserve the confirmation by
scanning it, Commission staff estimates
that preserving such a document would
consume approximately one minute of
staff time.
The Commission does not possess
information on the percentage of
prescribers’ offices that currently use
and maintain paper records versus
electronic records, or that scan paper
files and maintain them electronically.
Thus, for purposes of this PRA analysis,
and to again guard against possibly
underestimating the Rule’s burden, the
Commission will assume that all
prescriber offices who opt for
§ 456.4(a)(1)(i) (who do not dispense
prescriptions electronically) require a
full minute per confirmation statement
for storing such recordkeeping.
Assuming—as the Commission did
above—that 25% of prescriptions will
be delivered electronically, and thus
75% of prescriptions require a patient
confirmation that must be scanned and
saved, the recordkeeping burden for all
prescribers’ offices to scan and save
such confirmations amounts to
1,031,250 hours (75% × 82.5 million
prescriptions yearly × one minute for
scanning and storing/60 mins) per year.
3. Estimated Hour Burden on
Prescribers’ Offices To Obtain and Store
Patient Consents to Electronic Delivery
= 458,333 Hours (114,583 Hours To
Obtain Signed Consents and 343,750
Hours To Store Same)
As noted previously, § 456.4(a)(1)(ii),
the second option for satisfying the
confirmation-of-prescription-release
requirement, involves digital delivery of
prescriptions, and thus does not
necessitate that prescribers obtain or
maintain a record of the patient’s
signature confirming receipt of a
prescription. However, this option does
require that prescribers obtain and
maintain records or evidence of the
patients’ affirmative consent to
electronic delivery for three years.
Based on the previous estimate that
25% of patients will receive digital
delivery of their prescriptions, the
Commission will use the assumption
that consumers sign such consents for
electronic delivery for one quarter of the
82.5 million prescriptions released per
year, 475 and that this task would take
the same amount of time as to obtain
and preserve a signature of the patient’s
confirmation of prescription release.
Thus, the Commission will assign
114,583 hours for the time required for
prescribers’ offices to obtain patients’
affirmative consent to electronic
delivery of their prescriptions 476 and
343,750 hours for the time to store and
maintain such records.477
In total, the estimated incremental
PRA recordkeeping burden for
prescribers and their staff resulting from
adding the confirmation-of-prescription-
release requirement to the Rule amounts
to 1,833,333 total hours (343,750 and
114,583 hours, respectively, to obtain
signatures confirming release and
consenting to electronic delivery, plus
1,031,250 and 343,750 hours,
respectively, to maintain records of
confirmation and consent for three
years) for prescribers’ offices. Adding
this incremental PRA burden to the
1,375,000-hours burden resulting from
the existing prescription-release
requirement yields a total PRA
disclosure and recordkeeping burden
from the Rule of 3,208,333 hours for
prescribers and their staff.
C. Estimated Labor Cost
The Commission derives labor costs
by applying appropriate hourly-cost
figures to the burden hours described
above. Since prescribers conduct patient
examinations and formulate the
prescriptions, the time spent releasing
prescriptions to patients has
traditionally been attributed for PRA
purposes to prescribers, rather than
their office staff. As for the task of
obtaining patient confirmations and
consent to electronic delivery, this
could be performed by prescribers or
their support staff. In the past, the task
of collecting patient signatures was
attributed to prescribers, but based on
more recent conversations with
prescribers and others in the industry, it
has become evident that this task is
more appropriately designated as
performed by prescribers’ office staff.478
Therefore, the Commission will
continue to assume that prescribers
release prescriptions to patients, but
that prescribers’ office staff perform the
task of collecting patient signatures on
confirmations and digital-release
consents, as well as the labor pertaining
to printing, scanning, and storing of
both documents.
According to the U.S. Bureau of Labor
Statistics (‘‘BLS’’), general office clerks
earn an average wage of $20.94 per
hour, optometrists earn an average wage
of $68.75 per hour, and
ophthalmologists—which are listed by
BLS under ‘‘surgeons’’—earn an average
wage of $150.06 per hour.479 Using the
average wage for office clerks, and the
aforementioned estimate of 1,833,333
total hours for office staff to obtain
signed patient confirmations and
consents to digital prescription delivery
and to store such documents, the
Commission calculates an incremental
burden of $38,389,993 from adding the
confirmation of prescription release to
the Eyeglass Rule.480
Based on our knowledge of the
industry, we assume that of the
1,375,000 prescriber-labor hours relating
to the Rule’s requirement to release a
copy of the prescription to the patient,
optometrists are performing 85%
(1,168,750) of such hours and
ophthalmologists are performing the
remaining 15% (206,250) of such hours.
Applying this to the BLS wage figures
results in a prescriber-labor burden for
the existing burden of releasing
prescriptions of $111,301,438
($80,351,563 for optometrists +
$30,949,875 for ophthalmologists).
Adding the $38,389,993 staff burden
from the confirmation-of-prescription-
release requirement to the $111,301,438
prescriber burden from the automatic
prescription-release requirement already
in place yields a total estimated annual
labor cost burden for the Eyeglass Rule
of $149,691,431. While not
insubstantial, this amount constitutes
less than one half of one percent of the
estimated $35.6 billion retail market for
eyeglass sales in the United States in
2022. 481 Furthermore, the actual burden
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is likely to be less, because, as noted
supra, prescribers who do not have a
financial interest in the sale of eyewear
will not be required to obtain patient
confirmations, many prescribers’ offices
will require less than a minute to store
the confirmation form, prescribers can
use the same document to obtain
confirmations for eyeglass prescriptions
and contact lens prescriptions, and, as
digital prescription delivery increases
over time, the overall burden should
correspondingly decrease.
D. Capital and Other Non-Labor Costs
The recordkeeping requirements
detailed above regarding prescribers
impose negligible capital or other non-
labor costs, as prescribers likely have
already the necessary equipment and
supplies (e.g., prescription pads,
patients’ medical charts, scanning
devices, recordkeeping storage) to
perform those requirements.
IX. Final Regulatory Analysis and
Regulatory Flexibility Act Analysis
Under section 22 of the FTC Act, 15
U.S.C. 57b–3, the Commission must
issue a final regulatory analysis related
to a final rule only when it: (1) estimates
that the amendment will have an annual
effect on the national economy of
$100,000,000 or more; (2) estimates that
the amendments will cause a substantial
change in the cost or price of certain
categories of goods or services; or (3)
otherwise determines that the
amendments will have a significant
effect upon covered entities and upon
consumers. The Commission has
determined that this final rule will not
have such an annual effect on the
national economy, on the cost or prices
of goods or services, or on covered
businesses or consumers.
The amendments adopted in this final
rule require that prescribers obtain from
patients, and maintain for a period of no
less than three years, a signed
confirmation of prescription release
acknowledging that patients received
their eyeglass prescriptions at the
completion of their eye examination.
The amendments also require some
prescribers to obtain and maintain for
three years a patient’s consent to deliver
prescriptions electronically, but only for
prescribers who elect to offer this
method of delivery as an alternative to
providing prescriptions in paper, and
only if the patient agrees.
As discussed in the Paperwork
Reduction Act section of this document,
the Commission approximates that
collecting a patient’s signature on the
confirmation of prescription release
(giving time for the patient to read the
confirmation) in accordance with
§ 456.4 will take approximately 20
seconds. Providing the patient with the
confirmation of prescription release in
accordance with this provision will
require prescribers’ offices to present a
statement of prescription release and
request a patient signature. The
amendment provides prescribers with
language that they can use on a
confirmation form, which will relieve
prescribers of the burden of coming up
with such language. This requirement
may also involve some staff training,
which should be minimal, particularly
since prescribers’ staff will already be
trained in obtaining patient
confirmation of prescription releases
under the Contact Lens Rule.482 As a
result, complying with § 456.4(a) will
impose only minimal incremental costs
on prescribers’ offices.483
The PRA section of this document
also addresses the burden under
§ 456.4(b) for prescribers to maintain,
for at least three years, records
confirming their patients’ receipt of
prescriptions, and estimates it will take
one minute for prescribers’ staff to meet
their recordkeeping obligations. This
likely overstates the recordkeeping
burden, since, as noted above, storing a
one-page document per patient per year
should not require more than a few
seconds, and an inconsequential, or de
minimis, amount of record space.
Prescribers who decide to collect or
maintain signatures electronically may
already have electronic health records
in place. Some prescribers might also
present the confirmation of prescription
release in electronic form, enabling
patients to sign a computer screen or
tablet directly, and have their
confirmation immediately stored as an
electronic document.
As further noted in the Paperwork
Reduction Act section of this final rule,
the estimated cost to prescribers of
complying with all of the requirements
of the Eyeglass Rule is just .0042 of the
total retail market for prescription
eyeglass sales, with the cost of this final
rule representing less than a third of
that amount. In sum, the burdens
imposed on small entities are likely to
be relatively small.
The Regulatory Flexibility Act
(‘‘RFA’’), 5 U.S.C. 601–612, requires an
agency to provide an Initial Regulatory
Flexibility Analysis (‘‘IRFA’’) with a
proposed rule and a Final Regulatory
Flexibility Act (‘‘FRFA’’) with the final
rule, if any, unless the agency certifies
that the rule will not have a significant
impact on a substantial number of small
entities.
In the NPRM, the Commission
determined the proposed amendments
should not have a significant or
disproportionate impact on prescribers’
costs, and based on available
information, the Commission certified
that amending the Rule as proposed in
the NPRM, would not have a significant
impact on a substantial number of small
entities. Nonetheless, the Commission
determined that it was appropriate to
publish an IRFA to inquire into the
impact of the proposed rule on small
entities. Based on the IRFA set forth in
the Commission’s NPRM, a review of
the public comments submitted in
response to that notice and the
workshop notice, and the discussions
from the Workshop itself, the
Commission submits this FRFA. This
document serves as notice to the Small
Business Administration of the agency’s
certification of no significant impact.
A. Need for and Objectives of the Final
Rule
The Commission has concluded that
millions of American consumers in
need of corrective vision wear are not
receiving their eyeglass prescriptions
after visiting their prescriber. It has also
concluded that a rulemaking to add a
confirmation-of-prescription-release
requirement is necessary to increase the
number of patients who receive their
prescriptions, to inform patients of the
Rule and of their right to their
prescriptions, and to ensure the
separation of eye examination and
eyeglass dispensing, which fosters a
competitive marketplace for eyeglasses.
The Commission notes that prescribers
who currently comply with the
automatic-release provision of the Rule
may presently face a competitive
disadvantage because of widespread
non-compliance by other prescribers.
This creates an unlevel playing field
and undermines fair competition. In
addition, the Commission expects that
this final rule will: reduce the number
of seller requests to prescribers for
eyeglass prescriptions; improve the
Commission’s ability to monitor overall
compliance and target enforcement
actions; reduce evidentiary issues,
complaints, and disputes between
prescribers and consumers; and bring
the Eyeglass Rule into congruence with
the confirmation-of-prescription-release
requirements of the Contact Lens Rule,
reducing confusion for prescribers and
consumers, and easing compliance and
enforcement for both rules.
B. Significant Issues Raised by Public
Comments in Response to the IRFA and
the Agency’s Response, Including Any
Changes Made in the Final Rule
In crafting the final rule, the
Commission carefully considered the
comments received throughout the Rule
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review process. This document contains
a detailed discussion of the comments
received by the Commission and the
Commission’s response to those
comments. The Commission did not
receive any comment from the Chief
Counsel for Advocacy of the Small
Business Administration.
The Commission received 47
comments in response to the NPRM and
Workshop notices. Some of the
comments, from prescribers and
prescriber groups, strongly opposed the
confirmation-of-prescription-release
requirement indicating that such a
change was not needed or would be
burdensome to comply with.
Specifically, those commenters stated
that there was not a compliance
problem with the Eyeglass Rule’s
automatic-release provision and the
confirmation requirement was therefore
an attempt to ‘‘fix something that was
not broken.’’ Some also commented that
the Rule changes, if finalized, would
add a burden to small business
optometry practices that already are
enduring financial challenges and
staffing issues. A few commenters
contended that compliance with the
proposed amendments would take
longer than the Commission estimated
in its NPRM, as demonstrated by the
amount of time it currently takes
prescribers to comply with the existing
Contact Lens Rule requirements that are
similar to those proposed for the
Eyeglass Rule.
In contrast to the position expressed
above, commenters from NAROC said
that it is their understanding—based on
responses from their prescriber
members—that compliance with the
current Contact Lens Rule confirmation-
of-prescription-release requirement is
occurring with little or no disruption or
expense. 484 And as explained in the
PRA section of this document, the
Commission has concerns about the
reliability of some of the evidence, cited
by those critical of the Rule’s
confirmation proposal, as to the burden
of the existing contact lens confirmation
requirement. The Commission did not
ignore or dismiss any comments and
evidence outright, however, and
evaluated the evidentiary record as a
whole in making a final determination.
The Commission is sensitive to the
additional burden or cost that this final
rule imposes on businesses. However,
after weighing all of the comments and
evidence, it finds that this final rule will
provide many benefits with a relatively
small burden or cost. In particular, the
Commission determines that the
potential benefit of increasing the
number of patients in possession of
their eyeglass prescriptions is
substantial: namely, increased flexibility
and choice for consumers; increased
competition among eyeglass sellers; a
reduced likelihood of errors associated
with incorrect, invalid, and expired
prescriptions, and consequently,
improved patient safety; and an
improved ability for the Commission to
enforce and monitor prescriber
compliance with the Rule’s
prescription-release requirements. The
Commission concludes that revising the
existing remedy of automatic
prescription release by adding the
confirmation-of-prescription-release
mechanism is necessary and beneficial
due to demonstrated failures of
prescribers to comply with the
automatic-release remedy, and to ensure
the separation of eye examination and
eyeglass dispensing, which engenders a
competitive marketplace for eyeglasses.
As a result, this final rule adopts the
amendments proposed in the NPRM
with the modifications discussed in this
document.
In response to comments that the
Commission, in its NPRM,
underestimated the amount of time it
takes to comply with the CLR
confirmation-of-prescription-release
requirements, and for other reasons
noted in the PRA section of this
document, the Commission increased its
time estimate for complying with the
new requirements.485
C. Description and Estimate of the
Number of Small Entities to Which the
Amendments Will Apply or Explanation
Why No Estimate Is Available
This final rule applies to eyeglass
prescribers, and many prescribers will
fall into the category of small entities
(e.g., offices of optometrists with $9
million or less in annual receipts).486
Determining a precise estimate of the
number of small entities covered by the
Rule’s prescription release requirements
is not readily feasible because most
prescribers’ offices do not release the
underlying revenue information
necessary to make this determination. In
the NPRM, the Commission sought
comment on the number or nature of
small business entities for which the
proposed amendments would have a
significant impact. 487 In response, the
AOA commented that ‘‘doctors of
optometry reported collecting $826,612,
on average, in gross receipts in 2021.’’
The AOA also stated that 91.9% of
optometry practices have fewer than 25
employees. 488 Based on the AOA
comment, and staff’s knowledge of the
eye care industry, including meetings
with industry members and a review of
industry publications, staff expects that
a substantial number of these entities
likely qualify as small businesses.489
D. Description of the Projected
Reporting, Recordkeeping and Other
Compliance Requirements of the
Amendments, Including an Estimate of
the Classes of Small Entities That Will
Be Subject to the Requirement and the
Type of Professional Skills That Will Be
Necessary To Comply
The final rule will impose a
confirmation-of-prescription-release
requirement on all optometrists or
ophthalmologists who have a direct or
indirect financial interest in the sale of
eyewear. If a paper copy of the
prescription was provided to the
patient, the prescriber must request that
the patient acknowledge receipt of the
prescription by signing a separate
statement on paper or in a digital format
confirming receipt of the prescription. If
a digital copy of the prescription was
provided to the patient, the prescriber
must retain evidence that such
prescription was sent, received or made
accessible, downloadable, and printable.
Prescribers are required to maintain the
records or evidence associated with the
confirmation of prescription release, or
digital delivery of the prescription for at
least three years. In addition, if a
prescriber elects to provide a digital
copy of the prescription to comply with
the Rule, the prescriber is required to
identify to the patient the specific
method or methods of electronic
delivery that they will use and to obtain
the patient’s verifiable affirmative
consent to receive a digital copy through
the identified method or methods. The
prescriber must maintain records or
evidence of the patient’s affirmative
consent for at least three years.
As discussed in section C of section
IX., Final Regulatory Analysis and
Regulatory Flexibility Act Analysis, we
assume that many of the estimated
43,000 active optometrists and 18,000
active ophthalmologists fall within the
definition of a small entity. As
discussed in the PRA section of this
document, we estimate that prescribers’
office staff perform the task of collecting
patient signatures on confirmations and
digital-release consents, as well as the
labor pertaining to printing, scanning,
and storing of both documents.
Prescribers’ offices will have to train
staff on, and set up procedures for
complying with, the new requirements
of the Eyeglass Rule. However, as
discussed in the PRA section of this
document, prescribers likely have forms
and systems in place to maintain
confirmation records already, since they
already must comply with the similar
confirmation requirement of the Contact
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Lens Rule, and may need make only
minor adjustments to accommodate
confirmations for eyeglasses
prescriptions.
E. Steps Taken To Minimize the
Significant Impact, if Any, of the
Amendments, Including Why Any
Significant Alternatives Were Not
Adopted
Commenters at the ANPR stage
recommended, as alternatives to the
signed acknowledgment proposal,
conspicuous signage declaring
consumers’ right to a copy of their
prescription, or an eye care patients’ bill
of rights notifying consumers of their
rights under the Rule. As explained in
the NPRM, the Commission ultimately
decided against a signage provision,
after determining that the benefits were
limited and that requiring signage
would be significantly less effective at
ensuring contact lens prescription
release than requiring a written patient
confirmation. 490 As explained in the
NPRM, the Commission also decided
against another proposed alternative, an
eye care patients’ bill of rights, for
reasons including that the bill of rights
proposal does not require the type of
prescriber recordkeeping that would
allow for better Rule monitoring and
enforcement, and would not help
resolve disputes between patients and
prescribers over whether a prescription
had been released.491
In an attempt to minimize the burdens
associated with the confirmation-of-
prescription-release requirement, the
Rule provides prescribers with different
compliance options depending on
whether they release a paper or digital
copy of the prescription, and provides
one-sentence sample language that
prescribers can elect to use should they
release paper copies of prescriptions.
Moreover, this amendment aligns with
the prescription-release-related
provisions of the Contact Lens Rule,
thereby reducing the confusion and
complexity that might arise for
consumers and prescribers from having
different confirmation-of-prescription-
release requirements for contact lens
and eyeglass prescriptions. In addition,
the marginal cost of the amendment to
the Eyeglass Rule should be relatively
low because the Contact Lens Rule
already requires prescribers to obtain
confirmation of prescription release and
to maintain records of such. Some
prescribers likely have forms and
systems in place already, which may
need only minor adjustments to
accommodate confirmations for eyeglass
prescriptions.
The Commission also adopts the
proposed exemption to the
confirmation-of-prescription-release
requirements for prescribers who do not
have a direct or indirect financial
interest in the sale of eyeglasses as
§ 456.4(c).492 The purpose of such an
exemption is to reduce the burden on
prescribers who do not sell lenses.
X. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs
designated this final rule as not a ‘‘major
rule,’’ as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 456
Advertising, Medical devices,
Ophthalmic goods and services, Trade
practices.
For the reasons stated in the
preamble, the Federal Trade
Commission amends 16 CFR part 456 as
follows:
PART 456—OPHTHALMIC PRACTICE
RULES (EYEGLASS RULE)
■ 1. The authority citation for part 456
is revised to read as follows:
Authority: 15 U.S.C. 57a.
■ 2. Amend § 456.1 by revising
paragraphs (a), (b), (d), (e) and (g) to
read as follows:
§ 456.1 Definitions.
(a) A patient is any person who has
had a refractive eye examination.
(b) A refractive eye examination is the
process of determining the refractive
condition of a person’s eyes or the
presence of any visual anomaly by the
use of objective or subjective tests.
* 	* 	* 	* 	*
(d) Ophthalmic services are the
measuring, fitting, and adjusting of
ophthalmic goods subsequent to a
refractive eye examination.
(e) An ophthalmologist is any Doctor
of Medicine or Osteopathy who
performs refractive eye examinations.
* 	* 	* 	* 	*
(g) A prescription is the written
specifications for lenses for eyeglasses
which are derived from a refractive eye
examination, including all of the
information specified by State law, if
any, necessary to obtain lenses for
eyeglasses.
■ 3. Revise § 456.2 to read as follows:
§ 456.2 Separation of examination and
dispensing.
It is an unfair act or practice for an
ophthalmologist or optometrist to:
(a)(1) Fail to provide to the patient
one copy of the patient’s prescription
immediately after the refractive eye
examination is completed and before
offering to sell the patient ophthalmic
goods, whether or not the prescription
is requested by the patient. Such
prescription shall be provided:
(i) On paper; or
(ii) In a digital format that can be
accessed, downloaded, and printed by
the patient, after obtaining verifiable
affirmative consent, pursuant to § 456.3.
(2) Provided: An ophthalmologist or
optometrist may refuse to give the
patient a copy of the patient’s
prescription until the patient has paid
for the refractive eye examination, but
only if that ophthalmologist or
optometrist would have required
immediate payment from that patient
had the examination revealed that no
ophthalmic goods were required. For
purposes of the preceding sentence, the
presentation of proof of insurance
coverage for that service shall be
deemed to be a payment;
(b) Condition the availability of a
refractive eye examination to any person
on a requirement that the patient agree
to purchase any ophthalmic goods from
the ophthalmologist or optometrist;
(c) Charge the patient any fee in
addition to the ophthalmologist’s or
optometrist’s refractive eye examination
fee as a condition to releasing the
prescription to the patient. Provided: An
ophthalmologist or optometrist may
charge an additional fee for verifying
ophthalmic goods dispensed by another
seller when the additional fee is
imposed at the time the verification is
performed; or
(d) Place on the prescription, or
require the patient to sign, or deliver to
the patient a form or notice waiving or
disclaiming the liability or
responsibility of the ophthalmologist or
optometrist for the accuracy of the
refractive eye examination or the
accuracy of the ophthalmic goods and
services dispensed by another seller.
§§ 456.3 through 456.5 [Redesignated as
§§ 456.5 through 456.7]
■ 4. Redesignate §§ 456.3 through 456.5
as §§ 456.5 through 456.7, respectively.
■ 5. Add new § 456.3 to read as follows:
§ 456.3 Verifiable affirmative consent to
providing the prescription in a digital
format.
For a prescription copy provided in a
digital format, the prescriber shall:
(a) Identify to the patient the specific
method or methods of electronic
delivery that will be used, such as text
message, electronic mail, or an online
patient portal;
(b) Obtain, on paper or in a digital
format, the patient’s verifiable
affirmative consent to receive a digital
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60775	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
copy through the identified method or
methods; and
(c) Maintain records or evidence of a
patient’s affirmative consent for a period
of not less than three years. Such
records or evidence shall be available
for inspection by the Federal Trade
Commission, its employees, and its
representatives.
■ 6. Add new § 456.4 to read as follows:
§ 456.4 Confirmation of prescription
release.
(a)(1) Upon completion of a refractive
eye examination, and after providing a
copy of the prescription to the patient,
the prescriber shall do one of the
following:
(i) If a paper copy of the prescription
was provided to the patient, request that
the patient acknowledge receipt of the
prescription by signing a separate
statement on paper or in a digital format
confirming receipt of the prescription;
or
(ii) If a digital copy of the prescription
was provided to the patient (via
methods including an online portal,
electronic mail, or text message, and
pursuant to § 456.3), retain evidence
that such prescription was sent,
received, or made accessible,
downloadable, and printable.
(2) If the prescriber elects to confirm
prescription release via paragraph
(a)(1)(i) of this section, the prescriber
may, but is not required to, use the
statement, ‘‘My eye care professional
provided me with a copy of my
prescription at the completion of my
examination’’ to satisfy the requirement.
(3) In the event the patient declines to
sign a confirmation requested under
paragraph (a)(1)(i) of this section, the
prescriber shall note the patient’s
refusal on the document and sign it.
(b) A prescriber shall maintain the
records or evidence required under
paragraph (a) of this section for a period
of not less than three years. Such
records or evidence shall be available
for inspection by the Federal Trade
Commission, its employees, and its
representatives.
(c) Paragraphs (a) and (b) of this
section shall not apply to prescribers
who do not have a direct or indirect
financial interest in the sale of eye wear,
including, but not limited to, through an
association, affiliation, or co-location
with an optical dispenser.
* 	* 	* 	* 	*
By direction of the Commission.
April J. Tabor,
Secretary.
Endnotes
1 16 CFR 456.2(a). A prescriber may
withhold a patient’s prescription until the
patient has paid for the eye examination, but
only if the prescriber would have required
immediate payment if the examination had
revealed that no ophthalmic goods were
needed. Id. The Rule defines an ‘‘eye
examination’’ as ‘‘the process of determining
the refractive condition of a person’s eyes or
the presence of any visual anomaly by the
use of objective or subjective tests.’’ 16 CFR
456.1. The Commission is changing this term
in the final rule text to ‘‘refractive eye
examination,’’ in order to make it more
precise, and differentiate between eye health
exams and refractive exams. See infra section
VI, Final Rule Regarding ‘‘Eye Examination’’
Terminology. However, the meaning of the
defined term remains the same, and since it
has previously been referred to as ‘‘eye
exam’’ or ‘‘eye examination’’—including by
commenters—it is frequently referred to as
such throughout the SBP.
2 16 CFR 456.2(c).
3 16 CFR 456.1(g).
4 16 CFR 456.2(b). The Rule thereby also
prohibits conditioning the release of the
prescription on the requirement that the
patient purchase ophthalmic goods from the
ophthalmologist or optometrist.
5 16 CFR 456.2(d).
6 16 CFR 456.2.
7 16 CFR part 192 (rescinded); see also
‘‘Staff Report on Advertising of Ophthalmic
Goods and Services and Proposed Trade
Regulation Rule,’’ at 235–36 (May 1977),
https://www.ftc.gov/reports/staff-report-
advertising-ophthalmic-goods-services-
proposed-trade-regulation-rule-16-cfr-part-
456 [hereinafter Eyeglass I Report].
8 See Eyeglass I Report, supra note 7, at
240–48 (detailing myriad accounts of
prescribers refusing to release eyeglass
prescriptions to their patients); see also Final
Trade Regulation Rule, Advertising of
Ophthalmic Goods and Services, 43 FR
23992, 23998 (June 2, 1978) [hereinafter
Eyeglass I Rule] (finding that in nearly every
survey of practicing optometrists considered
in the rulemaking record, more than 50%
imposed a restriction on the availability of
eyeglass prescriptions to patients).
9 Eyeglass I Rule, 43 FR 23998, 24007–08.
10 Id. at 24003.
11 Id.
12 Id. at 23998.
13 Am. Optometric Ass’n v. FTC, 626 F.2d
896, 915 (D.C. Cir. 1980). The Court held that
the harm arose by making comparison-
shopping harder, removing seller incentives
to advertise, and reducing opticians’ ability
to compete. The Court overturned other
provisions of the Rule related to bans on
State advertising restrictions. Id. at 910–11.
14 Id. at 916. Following the court’s remand,
FTC staff conducted additional investigation
and recommended the Commission seek new
comment on whether to keep the automatic-
prescription-release requirement or change it
to release-upon-request. Fed. Trade Comm’n,
State Restrictions on Vision Care Providers:
The Effects on Consumers (1980), https://
www.ftc.gov/reports/state-restrictions-vision-
care-providers-effects-consumers-eyeglasses-
ii. The Commission then sponsored a
survey—commonly known as the ‘‘Market
Facts Study’’—to determine to what extent
prescribers were complying with the Rule.
The Study found that only a little more than
one-third of prescribers were in ‘‘technical
compliance’’ with the Rule’s prescription-
release requirement, and only 38% of
consumers knew they were entitled to
automatically receive their prescription. See
Fed. Trade Comm’n, Ophthalmic Practice
Rules: State Restrictions on Commercial
Practice at 256–58 (Oct. 1986), https://
www.ftc.gov/reports/ophthalmic-practice-
rules-state-restrictions-commercial-practice-
eyeglasses-ii-report-staff [hereinafter Eyeglass
II Report]. Following the Market Facts Study,
the Commission did not take any action to
revise the Rule.
15 Eyeglass II Report, supra note 14, at 249.
16 Id. at 249, 274–76.
17 Eyeglass I Rule, 43 FR 23992, 23998.
18 Eyeglass II Report, supra note 14, at 275–
76.
19 Report of the Presiding Officer on
Proposed Trade Regulation Rule: Ophthalmic
Practice Rules, Public Record No. 215–63
(1986), https://www.ftc.gov/reports/report-
presiding-officer-proposed-trade-regulation-
rule-ophthalmic-practice-rules-eyeglass-rule-
16 [hereinafter Presiding Officer’s Report].
20 Eyeglass II Rule, 54 FR 10285, 10286–87.
In addition to relying on the Market Facts
Study, hearing testimony, and the Presiding
Officer’s Report, the Commission also cited a
survey by the American Association of
Retired Persons, which found significant
non-compliance and continued lack of
consumer awareness of their rights,
particularly among older consumers. Id. at
10303 & nn.180 & 181; see also Eyeglass II
Report, supra note 14, at 263 n.682 (noting
that 32% of consumers who did not receive
a prescription stated that they did not know
to ask for one).
21 See Cal. State Bd. of Optometry v. FTC,
910 F.2d 976 (D.C. Cir. 1990). The court
overturned provisions related to certain State
laws of optometry, which the court found
could not be overridden by the FTC without
more explicit authority from Congress.
Following the court decision, in 1992, the
Commission reissued the Eyeglass Rule, but
without the portions declared invalid, and
with renumbered designations pertaining to
prescription release. See Final Trade
Regulation Rule, Ophthalmic Practice Rules,
57 FR 18822 (May 1, 1992).
22 Ophthalmic Practice Rules, Request for
Comments, 62 FR 15865, 15867 (Apr. 3,
1997).
23 15 U.S.C. 7601–7610 (Pub. L. 108–164).
24 Pursuant to the FCLCA, the Commission
promulgated the Contact Lens Rule (‘‘CLR’’)
on July 2, 2004. Contact Lens Rule, Final
Rule, 69 FR 40482 (July 2, 2004) (codified at
16 CFR part 315).
25 Ophthalmic Practice Rules, Final Rule,
69 FR 5451, 5453 (Feb. 4, 2004) (‘‘2004 ER’’).
The Commission also made findings that:
release of prescriptions enhances consumer
choice; no evidence had been submitted that
the Rule’s restrictions on disclaimers and
waivers were no longer needed; the
automatic-release provision imposed only a
minimal burden on prescribers; and retaining
automatic release would keep the Eyeglass
Rule consistent with the automatic-release
provision of the Contact Lens Rule, 16 CFR
part 315.
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26 2004 ER, 69 FR 5453.
27 Id.; see also Contact Lens Rule, Final
Rule, 69 FR 40482.
28 15 U.S.C. 57a(a)(1)(B).
29 15 U.S.C. 57a(d)(2)(B) (‘‘A substantive
amendment to, or repeal of, a rule
promulgated under subsection (a)(1)(B) shall
be prescribed, and subject to judicial review,
in the same manner as a rule prescribed
under such subsection.’’).
30 15 U.S.C. 45(n); see also Eyeglass II Rule,
54 FR 10285, 10287; Letter from the FTC to
Hon. Wendell Ford and Hon. John Danforth,
Committee on Commerce, Science and
Transportation, U.S. Senate, Commission
Statement of Policy on the Scope of
Consumer Unfairness Jurisdiction (Dec. 17,
1980), appended to Int’l Harvester Co., 104
F.T.C. 949, 1070, 1073 (1984) (also referred
to as ‘‘FTC Policy Statement on Unfairness’’:
https://www.ftc.gov/legal-library/browse/ftc-
policy-statement-unfairness).
31 15 U.S.C. 57a(b)(3).
32 15 U.S.C. 57a(b)(3)(B).
33 Ophthalmic Practice Rules, Final Trade
Regulation Rule, Statement of Basis and
Purpose, 54 FR 10285, 10288 (1989) (citing
Credit Practices Rule, Statement of Basis and
Purpose, 49 FR 7740, 7742 (1980)).
34 See Ophthalmic Practice Rules, Final
Trade Regulation Rule, Statement of Basis
and Purpose, 54 FR 10288.
35 Id.
36 Id.
37 Am. Fin. Servs. Ass’n v. FTC, 767 F.2d
957, 988 (D.C. Cir. 1985) (quoting Jacob
Siegel Co. v. FTC, 327 U.S. 608, 612–13
(1946)).
38 Contact Lens Rule, Request for
Comment, 80 FR 53272 (Sept. 3, 2015)
[hereinafter CLR RFC].
39 Ophthalmic Practice Rules (Eyeglass
Rule), Advance Notice of Proposed
Rulemaking; Request for Comment, 80 FR
53274 (Sept. 3, 2015) [hereinafter ANPR].
40 ANPR, 80 FR 53276.
41 The public comments responding to the
ANPR are posted on Regulations.gov at
https://www.regulations.gov/document/FTC-
2015-0095-0001 (ANPR Comments).
Regulations.gov has assigned each comment
an identification number appearing after the
name of the commenter. This final rule cites
comments using the last name of the
individual submitter, or the name of the
organization and the individual within the
organization who submitted the comment,
along with the last four digits of the comment
identification number assigned by
Regulations.gov. For instance, the full
comment number assigned by
Regulations.gov to the comment submitted by
an individual named Publi is FTC–2015–
0095–0040. In this document, that comment
is cited as ‘‘Publi (ANPR Comment #0040).’’
This SBP will use this same identification
method when discussing comments
submitted in response to other rulemaking
notices.
42 See, e.g., Opticians Association of
Virginia (ANPR Comment #0647 submitted
by Nelms) (stating that patients are led into
the dispensary before paying for their exam
and requesting the Rule be amended to
include language that the prescription be
given to the patient without additional sales
pressure or intimidation); Burchell (ANPR
Comment #0866); National Association of
Optometrists and Opticians (‘‘NAOO’’)
(ANPR Comment #0748 submitted by Cutler);
Professional Opticians of Florida (ANPR
Comment #0803 submitted by Couch). Other
commenters more generally stated their
support for the Rule. See Publi (ANPR
Comment #0040); Santini (ANPR Comment
#0047); Costa (ANPR Comment #0068); Ellis
(ANPR Comment #0189); Hildebrand (ANPR
Comment #0220); Prevent Blindness (ANPR
Comment #0385 submitted by Parry);
DiBlasio (ANPR Comment #0441); Pulido
(ANPR Comment #0019); Stuart (ANPR
Comment #0841).
43 AOA (ANPR Comment #0849 submitted
by Peele); see also Barnes (ANPR Comment
#0043) (stating she complies with the Rule
although it is unnecessary since any ethical
doctor will release a non-expired
prescription to a patient); Kanevsky (ANPR
Comment #0364) (optometrist states she and
the prescribers she knows comply with the
Rule).
44 Contact Lens Rule, Notice of Proposed
Rulemaking, 81 FR 88526 (Dec. 7, 2016)
[hereinafter CLR NPRM].
45 Contact Lens Rule, Supplemental Notice
of Proposed Rulemaking, 84 FR 24664 (May
28, 2019) [hereinafter CLR SNPRM].
46 Contact Lens Rule, Final Rule, 85 FR
50668 (Aug. 17, 2020) [hereinafter CLR Final
Rule].
47 Id. at 50687.
48 Id.
49 16 CFR 315.3(c).
50 CLR Final Rule, 85 FR 50687.
51 Id. at 50687–88.
52 CLR SNPRM, 84 FR 24668–69; CLR Final
Rule, 85 FR 50681–83.
53 CLR Final Rule, 85 FR 50717; 16 CFR
315.2.
54 Ophthalmic Practice Rules (Eyeglass
Rule), Notice of Proposed Rulemaking,
Request for Public Comment, 88 FR 248 (Jan.
3, 2023) [hereinafter NPRM].
55 The public comments submitted in
response to the NPRM are available on
Regulations.gov at https://
www.regulations.gov/document/FTC-2023-
0001-0001 (‘‘NPRM Comments’’). There are
47 comments available at this link. Twenty-
seven comments were received in response to
the Commission’s NPRM, and 20 comments
were submitted in response to a subsequent
public notice. See infra note 59.
56 Public Workshop Examining Proposed
Changes to the Ophthalmic Practice Rules
(Eyeglass Rule), Public Workshop and
Request for Public Comment, 88 FR 18266
(Mar. 28, 2023) [hereinafter WS Notice].
57 Id. at 18268.
58 The workshop transcript (along with the
agenda and a video recording) is available on
the FTC website at https://www.ftc.gov/news-
events/events/2023/05/clear-look-eyeglass-
rule [hereinafter WS Transcript].
59 The public comments submitted in
response to the WS Notice are available on
Regulations.gov at https://
www.regulations.gov/document/FTC-2023-
0001-0029 [hereinafter WS Comments]. There
are 47 comments available at this link.
Twenty-seven comments were received in
response to the Commission’s NPRM, and 20
comments were submitted in response to the
WS Notice.
60 The 2020 Contact Lens Rulemaking
record includes comments to the CLR RFC;
the CLR NPRM; the Public Workshop
Examining Contact Lens Marketplace and
Analyzing Proposed Changes to the Contact
Lens Rule, Public Workshop and Request for
Public Comment, 82 FR 57889 (Dec. 8, 2017)
[hereinafter CLR WS Notice]; and the CLR
SNPRM. Public comments received in
response to these notices are available on
Regulations.gov: https://
www.regulations.gov/document/FTC-2015-
0093-0001 (CLR RFC Comments); https://
www.regulations.gov/document/FTC-2016-
0098-0001 (CLR NPRM Comments); https://
www.regulations.gov/document/FTC-2017-
0099-0001 (CLR WS Comments); and https://
www.regulations.gov/document/FTC-2019-
0041-0001 (CLR SNPRM Comments).
Regulations.gov has assigned each comment
an identification number appearing after the
name of the commenter. This document cites
comments using the last name of the
individual submitter, or the name of the
organization and the individual within the
organization who submitted the comment,
along with the last four digits of the comment
identification number assigned by
Regulations.gov.
61 The Commission has determined not to
disturb that finding, even after analyzing
comments suggesting it should do so. See
section II.A, infra.
62 See section II.A.1.a, infra note 126 and
text, noting that two third-party surveys of
eyeglass wearers reveal that the number of
consumers not receiving their eyeglass
prescription automatically after a refractive
exam ranges from 25.6 million to 55.3
million a year (based on the Commission’s
estimate that 82.5 million consumers visit
their eye care prescriber for a refractive exam
each year). These figures are generally
consistent with multiple prior surveys of
contact lens users, which found significant
percentages of contact lens users were not
receiving their prescriptions from their
prescribers following their exams, and
provided an impetus for the adoption of a
confirmation-of-prescription-release
requirement in the CLR amendments of 2020.
See section II.A.1.a, infra note 124; see also
CLR Final Rule, 85 FR 50687.
63 See 16 CFR 315.3.
64 This final rule does not revisit some
amendments that the Commission previously
determined not to propose; namely,
amending the Rule to require prescribers
provide additional copies of eyeglass
prescriptions; to require that prescribers
respond to third-party seller requests for
copies of, or verification of, prescriptions; or
to set an expiration date for eyeglass
prescriptions. In the NPRM, the Commission
determined it did not need to seek further
comment on these issues, and explained its
rationale for not proposing these
amendments. See NPRM, 88 FR 266–67
(additional copy), 271–73 (third-party seller
requests), and 277–79 (expiration date).
65 American Academy of Ophthalmology
(‘‘AAO’’), ‘‘Eye Health Statistics,’’ https://
www.aao.org/newsroom/eye-health-statistics.
Estimates as to the number of
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ophthalmologists vary, with some putting the
number at closer to 17,000. Richard Edlow,
‘‘By the Numbers: How Many ODs Are
Actually Practicing Medical Eyecare,’’ Rev. of
Optm. Bus. (Nov. 3, 2021), https://
reviewob.com/by-the-numbers-how-many-
ods-are-actually-practicing-medical-eyecare/.
66 In some States, optometrists can
prescribe medicine and perform certain
surgeries. AOA, ‘‘What’s a doctor of
optometry?’’ https://www.aoa.org/healthy-
eyes/whats-a-doctor-of-optometry?
67 Bureau of Labor Statistics, U.S. Dep’t of
Labor, Occupational Outlook Handbook,
Optometrists, https://www.bls.gov/ooh/
healthcare/optometrists.htm. Estimates as to
the number of optometrists vary, with some
putting the number at closer to 48,000.
Edlow, supra note 65.
68 Management & Bus. Acad. for Eye Care
Prof’ls, ‘‘Best Practices of Spectacle Lens
Mgmt’’ 2 (2015) (estimating revenue from
prescription eyewear sales at 44% of total
practice revenue, with contact lens sales
revenue at 16%, eye exam revenue at 21%,
and medical eye care revenue at 17%),
https://files.optometrybusiness.com/Best%20
Practices%20Spectacle%20Lenses.pdf, see
also infra note 174, Lovejoy (WS Transcript
at 19) (noting that data he has seen over the
years shows that between 50–60% of gross
revenues for practitioners who dispense
eyewear is derived from product sales).
69 Id., see also Margery Weinstein, ‘‘Key
Practice Metrics: Numbers to Track & Grow
to Help Speed Practice Recovery,’’ Rev. of
Optm. Bus. (Aug. 5, 2020), https://
www.reviewob.com/key-practice-metrics-
numbers-to-track-grow-to-speed-practice-
recovery/ (noting that product sales in 2019
continued to account for the majority of gross
revenue (54%), with eyewear at 37%) (citing
Glimpse & Care Credit, ‘‘Independent
Optometry Key Performance Metrics: 2019
Trend Report’’ at 5, 9)).
70 OpticianEDU.org, ‘‘Optician
Certification,’’ https://www.opticianedu.org/
optician-certification/. The Commission has
not independently verified the precise
number of States that currently require
opticians to obtain licenses.
71 Bureau of Labor Statistics, U.S. Dep’t of
Labor, Occupational Outlook Handbook,
Opticians, https://www.bls.gov/ooh/
healthcare/opticians-dispensing.htm.
72 Vision Council, ‘‘VisionWatch—The
Vision Council Market Analysis Report,’’ at
17 (Dec. 2019) [hereinafter VisionWatch
Report].
73 Determining the precise number of
adults, and adult eyeglass wearers, in the
United States at any given time, is not
possible, and estimates will change every
year. According to the U.S. Census Bureau,
in 2020 there were 258.3 million adults in
the United States. ‘‘U.S. Census Bureau, Age
and Sex Composition: 2020,’’ 2020 Census
Briefs (2023), https://www2.census.gov/
library/publications/decennial/2020/census-
briefs/c2020br-06.pdf. Meanwhile, four
different surveys of U.S. residents in 2021
and 2022 by The Vision Council found that
61–65% of adults wear glasses, which
equates to approximately 158–168 million
adults who wear eyeglasses, based on the
2020 census. Vision Council Consumer
inSights reports 2022 Q1, Q2, Q3, Q4. In its
NPRM, the Commission used a prior Vision
Council estimate of 165 million adult
eyeglass wearers, NPRM, 88 FR 252, which
is within the 158–168 million range.
74 The Vision Council, Market inSights
2022.
75 The Vision Council, Market inSights
2019–2022.
76 Vision Council Consumer inSights
Report Q1 2023 at 23, 42.
77 See Opticians Association of America
(NPRM Comment #20) (noting that according
to Optics Magazine, the online eyewear
industry will continue to experience a
compound annual growth rate of 6.96%
between 2022 and 2027).
78 Vision Council Consumer inSights
Report Q2 2023 at 39, 42.
79 Vision Council Consumer inSights
Report Q2 2023 at 41.
80 See, e.g., Practice Tips by First Insight
Corporation, ‘‘How to Calculate and Increase
Your Optical Capture Rate,’’ (July 6, 2021),
https://www.first-insight.com/blog/calculate-
increase-optical-capture-rate/; Eric Rettig,
‘‘How We Increased Frame Capture Rate by
20% in 3 Years,’’ Rev. of Optm. Bus. (Sept.
7, 2022), https://reviewob.com/how-we-
increased-frame-capture-rate-20-in-3-years/.
81 Vision Council Market inSights 2022 at
11.
82 Catherine Roberts, ‘‘Get Great Glasses
For Way Less,’’ Consumer Reports, Oct. 2023,
at 36.
83 Id.
84 Id.
85 16 CFR 456.2(a).
86 16 CFR 456.2; see also Presiding
Officer’s Report, supra note 19, at 17–24, 206.
87 Eyeglass I Rule, 43 FR 23992; Eyeglass II,
54 FR 10302; see also Eyeglass I Report, 261,
265. (‘‘[W]ith prescription in hand,
consumers would be free to seek out the
price, quality and other features which best
suit their needs and capabilities.’’ The
ophthalmic prescription is ‘‘the means by
which consumers can comparison shop,’’ and
thus ‘‘[i]f the Commission does not act to
guarantee consumers their prescriptions,
consumers may be unable to take full
advantage of this competition.’’).
88 See 2004 ER, 69 FR 5453.
89 Neilly (WS Transcript at 4–5).
90 Id. at 5.
91 Id.
92 Formerly known as the National
Association of Optometrists and Opticians, or
NAOO.
93 NAROC (NPRM Comment #0024
submitted by Neville).
94 Durkee (NPRM Comment #0015).
95 Michaels (WS Transcript at 14).
96 Id. at 7; see also Cooper (NPMR
Comment #0009) (asserting that patients are
receiving their prescriptions, the problem lies
with inaccurate filling of these prescriptions
by ‘‘unlicensed, untrained people’’).
97 AAO (NPRM Comment #0027 submitted
by Repka).
98 OAA (NPRM Comment #0020 submitted
by Allen); AOA (WS Comment #0047
submitted by Benner).
99 AOA (NPRM Comment #0023 submitted
by Benner).
100 Michaels (WS Transcript at 11).
101 Sanders (WS Comment #0043) (Dr.
Sanders’ calculation is based on comparing
his assumptions about the number of
complaints received by the FTC to his
estimate that prescribers perform 236 million
refractions every year, an estimate the FTC
has not seen evidence supporting); see also
Coast Eyes Pllc (WS Comment #0046)
(‘‘Nothing is broken here. Patients get their
prescription without conflict. . . .
Prescribers are historically >99.9% compliant
in the market’s current state.’’) Coast Eyes
Pllc is operated by Dr. Sanders.
102 AOA (WS Comment #0047 submitted
by Benner).
103 While the ophthalmic community has
repeatedly stated that overall prescriber
compliance with prescription release is
extremely high, the community has not
offered the FTC a consumer survey on this
issue, despite repeated comments from the
Commission noting the absence of empirical
evidence to support their claim of substantial
compliance, or to rebut the multiple
consumer surveys in the record which show
prescriber non-compliance. See NPRM, 88 FR
260 (‘‘the Commission notes, as it did in the
CLR Final Rule, that despite multiple
opportunities and requests for comment
since 2015, the Commission has yet to find
or receive any reliable consumer-survey data
rebutting or contradicting the submitted
findings [showing compliance problems] for
either contact lens users or eyeglass wearers,
or establishing (other than anecdotally) that
consumers consistently receive their
prescriptions from prescribers.’’). Indeed,
when suggesting that the Commission
consider the NERA survey, the AOA
referenced the repeated comments from the
Commission about the lack of survey data
evidencing compliance. AOA (WS Comment
#0047 submitted by Benner).
104 AOA (WS Comment #0047 submitted
by Benner).
105 Id. According to Dr. Andrew Stivers
from NERA Consulting, the survey did not
specifically ask about compliance with the
Rule’s automatic-prescription-release
requirement because the survey was not
designed to examine compliance, but rather
to examine consumer conduct and shopping
habits for eyewear and, consequently,
explore the ongoing need for consumers to
possess a copy of their prescription.
According to Dr. Stivers, whether prescribers
are automatically providing patients with
their prescriptions is not as relevant if the
manner in which consumers purchase
eyewear indicates that they don’t suffer harm
(or as great a harm) from not having their
prescriptions released automatically. ‘‘I do
not address the Commission’s contention of
significant non-compliance with automatic
release, although the provided evidence
suggests a relatively limited problem, and
does not provide evidence linking such a
problem to harm today.’’ Stivers (NPRM
Comment #0018).
106 AOA (WS Comment #0047 submitted
by Benner).
107 It is also not certain that there were not
more than three respondents who mentioned
a prescriber’s failure to release their
prescription. According to NERA, due to
budgetary constraints, responses to open-
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ended questions were not formally coded and
reviewed. Rather, NERA searched all open-
ended responses for variations of the words
‘‘prescription,’’ ‘‘Rx,’’ ‘‘had to,’’ ‘‘forced,’’
‘‘made to,’’ ‘‘choice,’’ and ‘‘pressure.’’ AOA
(WS Comment #0047 submitted by Benner).
The three consumers who raised the issue of
failure to release the prescription were
identified via this search. It is possible,
however, that additional respondents may
have referenced a prescriber’s failure to
release prescriptions but used words or
phrases that did not show up during NERA’s
targeted search, and the Commission did not
receive the responses to the open-ended
questions. This adds to the challenge of
ascribing weight to, or drawing conclusions
from, responses (or the lack of responses) to
open-ended survey questions.
108 See CLR Final Rule, 85 FR 50676; CLR
SNPRM, 84 FR 24674–75. By some estimates,
less than 5% of actual fraud victims file
complaints, and for consumer complaints
about FTC rule violations the percentage
drops even further, perhaps because filing a
complaint requires that consumers know
what an FTC rule specifies, that it has been
violated, and how to complain to the FTC
about it. Id. It has generally been the
Commission’s experience that while a large
number of complaints can indicate a rule
compliance problem, a dearth of complaints
does not necessarily indicate that there isn’t
a rule compliance problem.
109 Neilly (WS Transcript at 16).
110 Warby Parker (ANPR Comment #0817
submitted by Kumar). The October 2015
SurveyMonkey online survey was comprised
of 1,329 respondents recruited from a sample
that was U.S. Census-balanced and
representative of the national distribution of
major demographic factors, including age,
gender, geography, and income. Respondents
were not informed of the identity of the
survey sponsor. Survey respondents who had
purchased eyeglasses within the last three
years (65% of the total respondents)
answered questions about prescription
information, purchase behavior, and
prescriber experience. Within the set of
respondents who had purchased within the
last three years, 54% had purchased within
the last 12 months. There were no significant
differences in responses regarding automatic
prescription release between those who had
purchased within the last year and those who
had purchased between one and three years
prior to the survey. The significant difference
in automatic-release compliance between
optometrists and ophthalmologists may be
due to the fact that fewer ophthalmologists
sell eyeglasses, and might thus have less
incentive to withhold a consumer’s
prescription, but the survey did not directly
explore this issue. See ER NPRM, 88 FR 260
note 174.
111 Id.
112 ‘‘FCLCA Study, Focus on Prescription
(Rx)’’ at 2, 9, attached as Exhibit B to 1–800
CONTACTS’s comment in response to the
FTC’s 2015 Request For Comment (CLR RFC
Comment #0555 submitted by Williams),
https://www.regulations.gov/comment/FTC-
2015-0093-0555, showing that of 303 eyeglass
wearers surveyed, only 61% reported
receiving a ‘‘hard copy’’ of their prescription
at their last eye exam. Of that 61% who
received a copy of the prescription, the poll
found that 55% were given the copy
automatically (in other words, approximately
34%—55% of 61%—of the total eyeglass
wearers surveyed were given a copy in full
compliance with the Rule), 31% of the 61%
were not given a copy automatically but
requested their prescription and were given
it immediately in response (19% of the total
surveyed), and 14% of the 61% were not
given a copy of their prescription, asked for
it, and were told to call the office or return
for it at a later time (8.5% of the total
surveyed). 39% of the total eyeglass users
surveyed were not given a copy and did not
ask for it, and thus never received a copy of
their prescription. The survey was sponsored
by 1–800 CONTACTS but conducted by an
independent third-party polling firm, SSI,
and respondents were not informed of the
identity of the survey sponsor. As explained
infra note 124, the Commission has
recognized some concerns about the
methodology used for this survey,
particularly the use of the word ‘‘hard copy,’’
and the lack of an ‘‘I don’t know’’ response
option for some questions, but believes that
the information remains strongly suggestive
of non-compliance, particularly when viewed
in conjunction with information from other
sources and the absence of contradictory
data.
113 Id.
114 See Coast Eyes Pllc (WS Comment
#0046) (‘‘The ‘data/surveys’ provided to the
FTC that they are guiding their decision on
come from online retailers who have a HUGE
conflict of interest.’’).
115 AOA (WS Comment #0047 submitted
by Benner) (‘‘We [ ] question the FTC
deriving much of its eyeglass rulemaking
from its rulemaking on contact lenses. The
eyeglass market and contact lens market have
unique characteristics.’’).
116 Id. (quoting NERA Report). It was also
noted that the median age of eyeglass
patients is likely to be higher than that for
contact lenses, and older patients are more
likely to be confused or bothered by the need
to sign a confirmation document. Repka (WS
Transcript at 38–39).
117 AOA (WS Comment #0047 submitted
by Benner) at 25 (‘‘[G]lasses purchasers are
10 percentage points more likely to consider
other options for where to purchase.’’).
118 Id. A primary difference between
eyeglass and contact lens examinations and
prescriptions is that contact lens exams
involve a lens ‘‘fitting,’’ in which consumers
try on the lenses, and prescriptions are only
provided after the fitting is complete. Fittings
can sometimes entail sending consumers
home with a set of lenses to try out for a few
days, and thus sometimes the prescriber will
not provide the prescription until after this
process. This can lead some consumers to
think they should have been provided their
prescriptions when, in fact, the fitting was
not yet complete. There is no such fitting for
eyeglass prescriptions. See also infra note
123 (discussing how the different processes
can affect survey results about prescription
release).
119 See CLR Final Rule, 85 FR 50675; CLR
SNPRM, 84 FR 24673.
120 Warby Parker (ANPR Comment #0817
submitted by Kumar).
121 ‘‘FCLCA Study, Focus on Prescription
(Rx)’’ at 2, 9, supra note 112.
122 In particular, these survey results could
not have been affected by some consumers
erroneously thinking they should have
received their prescriptions when, in fact,
their contact lens fitting had not been
finalized, since eyeglass prescriptions do not
entail a fitting, and there is little or no reason
for a consumer to think their eyeglass
prescription had been finalized when, in fact,
it hadn’t been.
123 See supra, note 118, explaining the
fitting process for contact lenses. In theory,
the differences between the contact lens
prescription process and the eyeglass
prescription process should mean that fewer
eyeglass patients are confused as to whether
they did or did not receive their prescriptions
when they were supposed to. The fact that
the percentage of eyeglass users surveyed
who said they did not receive their
prescriptions is similar, or even higher than
that of contact lens wearers surveyed adds
considerable credence to both types of
surveys, and provides further support for the
conclusion that a substantial number of
consumers are not automatically receiving
their prescriptions from prescribers as the
Eyeglass Rule requires.
124 The results from the individual
consumer contact lens surveys are as follows:
(1) June 2019 survey by Dynata (formerly
known as SSI) on behalf of 1–800
CONTACTS of 1,011 contact lens users found
that 21% said they never received their
prescriptions (1–800 CONTACTS (CLR
SNPRM Comment #0135 submitted by
Montclair)); (2) January 2017 survey by
Caravan ORC International on behalf of
Consumer Action of 2,018 adults found that
31% of contact lens users said that at their
last eye exam, their doctor did not provide
them with a paper copy of their prescription
(Consumer Action (CLR NPRM Comment
#2954 submitted by Sherry)); (3) December
2016 survey of 1,000 contact lens users by
SSI on behalf of 1–800 CONTACTS found
that 24% of consumer respondents said they
did not receive their prescription (1–800
CONTACTS (CLR NPRM Comment #2738
submitted by Williams)); (4) May 2015 SSI
survey of 2,000 contact lens wearers found
that 34% said they did not receive their
prescription (1–800 CONTACTS (CLR RFC
Comment #0555 submitted by Williams, Ex.
C)); and (5) November 2014 SSI survey of
2,000 contact lens wearers found that 34%
said they did not receive their prescription
(1–800 CONTACTS (CLR RFC Comment
#0555 submitted by Williams, Ex. C)). As
noted in the CLR SNPRM, the manner in
which a few of the questions were phrased
in the 2014 and 2015 surveys raised some
Commission concerns, since some questions
were leading, lacked an ‘‘I don’t know’’
response option, and used a term—‘‘hard
copy’’—which not all consumers may
understand. The more recent surveys
represented an improvement because they
included an option for respondents to
acknowledge that they do not recall whether
they received their prescriptions, and used
the term ‘‘paper copy’’ rather than ‘‘hard
copy.’’ CLR SNPRM, 84 FR 24672.
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125 See CLR Final Rule, 85 FR 50675.
126 See section I.D.4, supra note 62. Since
it is estimated that 165 million Americans
regularly wear prescription glasses, and that
each patient visits their eye care prescriber
every two years for a refractive exam, the
number of consumers not receiving their
prescription automatically could be as high
as 55.3 million a year, based on the Survey
Sampling International survey, or 25.6
million, based on the SurveyMonkey poll.
Multiple surveys in the record of contact lens
users find similar non-compliance with
prescription release requirements.
127 Eyeglass I Rule, 43 FR 24003 (‘‘[I]t is the
Commission’s finding that the failure to
release ophthalmic prescriptions and related
practices are unfair acts or practices,’’ and
such practices ‘‘offend public policy in that
they deny consumers the ability to effectively
use available information and inhibit the
functioning of the competitive market
model.’’).
128 NAROC (NPRM Comment #0024
submitted by Neville).
129 NAROC (WS Comment #0049
submitted by Neville).
130 Lovejoy (WS Transcript at 14).
131 1–800 CONTACTS (NPRM Comment
#0025 submitted by Montclair); see also
Durkee (NPRM Comment #15) (calling it a
‘‘borderline unethical practice’’ not to
automatically release prescriptions, and
favoring more robust enforcement of the
existing automatic-release requirement rather
than adding a confirmation requirement.)
132 Anonymous (WS Comment #0030).
133 Brown (WS Transcript at 13).
134 Id.
135 Aceto (WS Transcript at 45–46).
136 Beatty (WS Transcript at 46).
137 Dr. Stivers, a former Deputy Director for
Consumer Protection in the FTC’s Bureau of
Economics, now an economics consultant
with NERA, submitted a comment (NPRM
Comment #0018) in response to the NPRM.
That comment, and his research into
consumer experience with eyeglass
purchases, was sponsored by the American
Optometric Association. His appearance as a
workshop panelist, however, was on his own
behalf.
138 Stivers (WS Transcript at 17).
139 Id. at 18–19; see also Beatty (WS
Transcript at 46) (noting that many patients
are given a copy but do not still have it later
on when they need it. And therefore he
recommends merely ensuring that patients
can request a copy of their prescription and
access it electronically).
140 Stivers (WS Transcript at 10, 17);
Stivers (NPRM Comment #0018).
141 Stivers (NPRM Comment #0018).
142 Id.
143 Id.
144 Id; see also Stivers (WS Transcript at
12) (‘‘[T]he big thing that has really changed
is the ability of consumers to find prices, to
shop to find competitors, before they even
leave their house. Before the internet, before
good information availability, really the only
way to price compare, if there was also these
advertising restrictions was to actually go to
the establishment.’’); Montaquila (WS
Transcript at 32) (stating that people often
come to his office knowing beforehand where
they plan to purchase eyewear); Michaels
(WS Transcript at 14) (agreeing that most
patients today are evaluating their options
before they wind up in a brick-and-mortar
establishment). But see Michaels (WS
Transcript at 13) (noting that many patients
come in for an eye health examination even
if they do not think they need glasses, and
thus would not have decided beforehand
where to purchase).
145 Stivers (NPRM Comment #0018).
146 Id.
147 AOA (WS Comment #0047 submitted
by Benner) (quoting NERA report).
148 Id.
149 Id.
150 Id. (‘‘Consumer emphasis on
convenience suggests that consumers likely
consider both where to get an exam and
where they want to shop for glasses ahead of
time for an efficient shopping experience.’’)
(quoting NERA survey).
151 Stivers (WS Transcript at 20).
152 Some prescribers are known to engage
in a practice referred to as ‘‘prescribing from
the chair,’’ in which prescribers recommend
certain eyewear purchases to patients while
the patients are still in the exam room. This
is touted as a means of increasing prescribers’
eyewear-sale capture rate. See, e.g., Dr. Gayle
Karanges, ‘‘The 4 Most Powerful Ways I
Prescribe from the Chair and Contribute to an
82% Eyewear Capture Rate,’’ Rev.of Optm.
Bus. (Apr. 7, 2021) (‘‘Patients often view
doctors, including optometrists, as authority
figures. With that status, you have an
opportunity to influence patients in their
decision to follow your treatment plan and
purchase the eyewear you have prescribed.’’),
https://reviewob.com/the-4-most-powerful-
ways-i-prescribe-from-the-chair-contribute-
to-an-82-eyewear-capture-rate/; Practice Tips
by First Insight Corporation, ‘‘How to
Calculate and Increase Your Optical Capture
Rate,’’ Jul. 6, 2021 (describing how one
doctor ‘‘recommends and prescribes the
eyewear needs while the patient is still in the
exam chair . . . [and] then invites and guides
the patient to the optical department,
introducing the eyewear layout’’), https://
www.first-insight.com/blog/calculate-
increase-optical-capture-rate/. The FTC is
unaware how widespread this practice is, but
it has concerns that such practices can
further blur the line between medical
practice and retail sales, and increase the risk
that patients may feel undue pressure to
purchase eyewear from their prescriber.
153 Michaels (WS Transcript at 13).
154 As an example, surveys from The
Vision Council have found that 83% of
consumers who recently had an eye exam
and bought glasses said they purchased the
glasses from their prescriber. The Vision
Council, Consumer inSights Q1 2022. One
interpretation of this might be that only 17%
of consumers benefit from having a copy of
their prescription with which to shop
elsewhere. This seems supported by the
NERA survey showing convenience is the
most important factor in a consumer’s
decision as to where to buy glasses. On the
other hand, another interpretation is that
83% of consumers buy glasses from their
prescriber because many were not given their
prescription, and they either felt
uncomfortable demanding it or did not know
that they could. This interpretation could
also be supported by the NERA survey, since
the survey found that price is the second-
most important factor for consumers deciding
where to purchase glasses, and buying
glasses from a prescriber is often more
expensive than other options. Because so
many consumers do not currently receive
their prescription after each exam, looking to
their current conduct and behavior to
determine what would happen if they did
receive their prescription involves a great
degree of speculation.
155 See, e.g., Lovejoy (WS Transcript at 15);
National Taxpayers Union (NPRM Comment
#0028 submitted by Sepp) (stating that the
Eyeglass Rule has been a huge ‘‘boon’’ to
competition in the marketplace).
156 Lovejoy (WS Transcript at 15).
157 Eyeglass I Rule, 43 FR 24003 (declaring
that Rule § 456.7 (now § 456.2), which
provides it is an unfair act or practice for a
refractionist to fail to release a prescription
immediately after the eye examination is
completed, is justified ‘‘both as a specific
delineation of an unfair act or practice as
well as a remedy to implement the right to
advertise.’’).
158 See, e.g., Montaquila (WS Transcript at
32) (patients already understand what their
choices are before they even come in for an
exam); Michaels (WS Transcript at 14)
(noting that most patients seem to be
evaluating their purchase options before they
visit their prescriber).
159 See, e.g., Neilly (WS Transcript at 16)
(‘‘Before I got this notification [about the
Eyeglass Rule workshop], I wasn’t even
aware of an eyeglass rule.’’); Anonymous (WS
Comment #0030) (‘‘Being able to have a
prescription in your hands as soon as the
examination is done would be very
beneficial.’’).
160 Brown (WS Transcript at 17). Dr. Stivers
noted in a comment that a Commission-
sponsored survey in 1981 (the Market Facts
Survey) found that a significant percentage of
consumers, even then, were aware that they
did not have to buy eyeglasses from their
examining eye doctor and could ask for their
prescription. Stivers (NPRM Comment
#0018) at 9. This is not incorrect (the Market
Facts Survey results indicated that ‘‘a large
majority of consumers are knowledgeable
enough to request an eyeglass prescriptions
if they want one,’’ Eyeglass II Report, supra
note 14, at 262), but it should be noted that
another survey conducted around that time
(in 1985, by the American Association of
Retired People) found that 83% of
consumers—particularly the elderly—
remained unaware of their right to ask for
their prescription. Presiding Officer’s Report
at 22. It may also be worth noting that the
format and phrasing of the Market Facts
Survey questions may have been flawed (and
came under criticism) because consumers
were simply asked whether it was true or
false that ‘‘once a person decides where to
have his eye examined, he must purchase his
eyeglasses from his doctor,’’ creating the
possibility that some consumers answered
‘‘false’’ not because they understood they
were free to take their prescription and shop
elsewhere, but rather because they knew they
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could not be forced to buy eyeglasses if they
didn’t want to. Eyeglass II Report, supra note
14, at 259–61. The Commission, after
reviewing both the Market Facts and AARP
surveys, and other evidence in the record,
ultimately concluded at that time that ‘‘there
continues to be a lack of consumer awareness
about prescription rights.’’ Eyeglass II, 54 FR
10303. The two surveys are now roughly 40
years old, and more recent surveys show that
many consumers are not fully aware of their
prescription rights. See infra notes 161–163
and text.
161 As with the SSI survey referenced
above, the 2015 survey performed on behalf
of 1–800 CONTACTS was submitted during
the Contact Lens Rule review, but it was a
poll of eyeglass wearers and is therefore on
point. 1–800 CONTACTS (CLR NPRM
Comment #2738 submitted by Williams). As
noted during the Contact Lens Review, the
manner in which the consumer awareness
questions were phrased in the survey
submitted by 1–800 CONTACTS did raise
some concerns about the weight that should
be accorded to the results. In particular, the
questions were leading and used a term—
‘‘hard copy’’—that some consumers might
not understand. On the other hand, the
question’s phrasing may have led to under-
reporting by consumers who did not want to
acknowledge that they were unaware of their
rights under Federal law (this is known as
social-desirability bias). See Diamond,
Reference Guide on Survey Research, in
Reference Manual on Scientific Evidence,
2nd. ed., 248–64 (Federal Judicial Center
2000), https://wwws.law.northwestern.edu/
faculty/fulltime/diamond/papers/reference
guidesurveyresearch.pdf; Floyd Jackson
Fowler, Jr., How Unclear Terms Affect Survey
Data, The Public Opinion Quarterly (Summer
1992), https://www.jstor.org/stable/2749171;
see generally, Carl A. Latkin, et al., The
relationship between social desirability bias
and self-reports of health, substance use, and
social network factors among urban
substance users in Baltimore, Maryland, 73
Addictive Behaviors 133–36 (2017), https://
www.sciencedirect.com/science/article/abs/
pii/S0306460317301752?via%3Dihub (social
desirability bias is the tendency of survey
respondents to answer questions in a manner
that will be viewed favorably by others, and
can skew survey results by over-reporting
attitudes and behaviors that may be
considered desirable attributes, while
underreporting less desirable attributes).
Social-desirability bias in this instance likely
serves to artificially lower the number of
patients unaware of their right to their
prescription. In other words, the way the
question was phrased could lead to results
that make it appear that more patients are
aware of their rights than is, in fact, the case.
See ‘‘FCLCA Study, Focus on Prescription
(Rx),’’ attached as Exhibit B to 1–800
CONTACTS (CLR RFC Comment #0555
submitted by Williams) (One question was
phrased, ‘‘Are you aware that it is your right
under federal law, as a patient to receive a
hard copy of your contact lens/eye glasses
prescription from your eye exam provider?’’
and the other asked, ‘‘Are you aware of the
following . . .—Your eye exam provider
cannot charge you for an actual hard copy of
your prescription?’’).
162 CLR SNPRM, 84 FR 24675 (citing a
Caravan ORC International survey submitted
by Consumer Action (CLR NPRM Comment
#2954 submitted by Sherry) and SSI survey
submitted by 1–800 CONTACTS (CLR NPRM
Comment #2738 submitted by Williams)).
163 See Consumer Action (CLR NPRM
Comment #2954 submitted by Sherry) (noting
survey results showing that 65% of Hispanics
and 63% of African Americans were unaware
of their prescription rights, compared to 58%
of white Americans surveyed, and that
Hispanics were less likely to be given copies
of their prescriptions after their contact lens
exams); National Hispanic Med. Ass’n &
League of United Latin Am. Citizens (CLR
SNPRM Comment #0146 submitted by
Benavides) (‘‘Our community continually has
been victimized and denied their
prescriptions by prescribers and doctors at a
higher rate than most other Americans’’);
League of United Latin Am. Citizens (CLR
NPRM Comment #2336 submitted by Wilkes)
(noting that many ‘‘working families’’ take
time off from work to visit their eye doctor
because they believe their eye doctor is the
only place to buy eyewear).
164 CLR SNPRM, 84 FR 24675; see also
supra note 152 and text, noting that some
prescribers blur the separation between
exams and retail dispensing as a means of
improving their eyeglass sales ‘‘capture rate.’’
165 CLR SNPRM, 84 FR 24675.
166 Id.
167 Am. Fin. Servs. Ass’n v. FTC, 767 F.2d
957, 988 (D.C. Cir. 1985) (quoting Jacob
Siegel Co. v. FTC, 327 U.S. 608, 612–13
(1946)).
168 16 CFR 456.2.
169 See Aceto (WS Transcript at 52); Santini
(ANPR Comment #0047) (prescribers should
be required to provide a copy of the eyeglass
prescription before the consumer is led or
enters the prescriber’s optical dispensary);
Opticians Ass’n of VA (ANPR Comment
#0647 submitted by Nelms) (‘‘More often
than should be occurring, patients are led
into the dispensary before paying for the
exam, and shown their options for eyewear.
We would ask the Rule be amended to
include language that the prescription must
be given to the patient on completion of the
exam without additional sales pressure or
intimidation.’’).
170 See Practice Tips by First Insight
Corporation, ‘‘How to Calculate and Increase
Your Optical Capture Rate’’ (Jul. 6, 2021)
(describing how one doctor ‘‘recommends
and prescribes the eyewear needs while the
patient is still in the exam chair . . . [and]
then invites and guides the patient to the
optical department, introducing the eyewear
layout’’), https://www.first-insight.com/blog/
calculate-increase-optical-capture-rate/;
Nicole Lovato, ‘‘3 Things We Did to Increase
Capture Rate by 15%,’’ Rev. of Optm. Bus.
(Oct. 27, 2021) (describing how after each
exam visit, the doctor or a technician will
walk the patient to the optical dispensary to
try and sell them glasses, and ‘‘pulls out a
chair from the table and tells the patient,
‘Have a seat, someone will be right over to
get you finished up.’ It is important to state
it this way. If you say anything about
purchasing it gives the patient an
opportunity to say they are not interested.’’),
https://reviewob.com/3-things-we-did-to-
increase-capture-rate-by-15/. See also supra
notes 80, 152.
171 Botha (WS Transcript at 53).
172 16 CFR 456.2(a).
173 Eyeglass I Rule, 43 FR 23992. See
section I.B, supra (discussing the history and
purpose of the Rule).
174 In most medical fields, a prescriber is
prohibited from selling the product that they
prescribe so as to prevent potential conflicts
of interest. See generally Limitation on
Certain Physician Referrals (commonly
known as the ‘‘Stark Law’’) 42 U.S.C. 1395nn,
(prohibiting physician self-referral, including
for outpatient prescription medications);
Anti-Kickback Statute, 42 U.S.C. 1320a–7b(b)
(prohibiting physicians from receiving
compensation for a prescription referral).
While there are a few other medical
professions apart from eyecare—such as
veterinary care—in which the prescriber may
sell what they prescribe, the Commission is
unaware of another field in which prescribers
generate such a substantial share of their
income from commercial product sales. See
Lovejoy (WS Transcript at 19) (‘‘I do think
that optometry is unique among the
healthcare professions in the amount of
revenue, the percentage of the total revenue
that comes from product sales, the products
that they prescribe. The surveys that I’ve seen
and information over the years shows it
consistently staying over 50%, maybe as high
as 55 or 60% of gross revenues comes from
product sales in the practitioners that are
dispensing optometrists.’’); NAROC (WS
Comment #0049 submitted by Neville)
(‘‘Private dispensing optometrists today still
make most of their revenue from selling the
eyewear that they prescribe. These
optometrists have a strong incentive to
improve the ‘capture rate’ of in-office
eyewear sales to their patients.’’).
175 H.R. Rep. No. 108–318 at 5 (2003); see
also Letter from Senators Richard
Blumenthal and Orrin G. Hatch of the U.S.
Senate Regarding the Contact Lens Rule
Rulemaking Proceeding & the Proposed Rule
Set Forth in the Notice of Proposed
Rulemaking (Aug. 11, 2017), https://
www.ftc.gov/system/files/filings/initiatives/
677/public_comment_from_senators_
blumenthal_and_hatch_re_contact_lens_
rulemaking.pdf (these comments were made
in reference to the contact lens marketplace,
but the same potential conflict of interest
exists when eyeglass prescribers also sell
eyeglasses to their patients).
176 Eyeglass I Report, supra note 7, at 265.
177 The ophthalmic community and its
representative associations were once fervent
advocates for the ‘‘total vision care’’
approach to eyecare, and argued that patients
received the best care when they obtained
glasses and contacts from the same eye
doctor who examined them and determined
their prescription. See Eyeglass I Report at
236–39. While the AOA no longer publicly
advocates for ‘‘total vision care,’’ some
prescribers still occasionally comment to the
FTC that patients would be best served by a
total-vision-care approach.
178 See section I.D.5, supra, discussing the
benefits of in-person eyeglass fittings.
179 This is a different situation from
patients complaining that they did not
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60781	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
receive their prescription from their
prescriber even after paying for their exam,
or had to ask for their prescription in order
to get a copy. There is much less room for
consumer confusion with respect to those
types of complaints than for complaints that
consumers had to pay for their prescription.
180 The majority of patients who go in for
an eye exam and need new glasses do end
up purchasing them from their prescriber.
According to data from The Vision Council,
83% of consumers surveyed who recently
had an eye exam and bought glasses said they
purchased the eyewear from their prescriber.
The Vision Council, Consumer inSights Q1
2022. This is true even though, on average,
prescribers charge significantly higher prices
for eyeglasses than other alternatives such as
online eyeglass sellers. The Vision Council,
Market inSights 2019–2022.
181 16 CFR 456.2(a).
182 There are situations where a doctor may
conduct a refractive exam on a patient but
then use his or her professional judgment to
refrain from writing a prescription for
corrective eyewear. See Lovejoy (WS
Transcript at 56) (‘‘[C]onsumers may want a
prescription when they shouldn’t have one
[for medical reasons], and the potential
prescriber, the physician or optometrist,
ought to have the ability to say, ‘No, I’m not
prescribing eyewear for you for the following
reasons.’ And make a note of that in the
record.’’). In such situations, the prescriber
would have no reason to offer to sell the
patient eyewear and would be prohibited
from doing so under the Rule.
183 Panelists at the workshop discussed
whether greater clarity in the Rule could help
ensure that patients have their prescription
in hand before being invited to purchase
eyeglasses. See Aceto (WS Transcript at 52)
(‘‘That’s one concern that some of our
optician members have had some concerns
with, and that is at the end of the actual
doctor’s exam, oftentimes they’re directed to
the dispensary just as a matter of course, and
they purchase [eyeglasses] at the end of the
actual [exam]. And the copays, the exam fees,
the glasses are all taken [together]. Then they
said, here’s your eyeglass prescription. And
some of our members have asked, is there a
way that we could clarify that the
prescription should come to them at the end
of the doctor’s experience?’’).
184 The Commission realizes that some eye
care practices advertise a bundle where the
consumer pays a fixed price for an eye
examination and one or more pairs of frames,
or complete eyeglasses. Such an offer may
also be advertised as an opportunity to obtain
a free eye exam with the purchase of
eyeglasses. The amendment to the Rule’s
wording is not intended to change those
practices’ ability to make, and lawfully
deliver upon, such offers. However, the
prescriber must still provide the prescription
to the patient before offering to sell them
eyeglasses. By doing so, the patient should
have the choice to take advantage of the
advertised bundle, or to pay the practice’s
routine cost of an examination and walk
away with no eyeglasses, but with their
prescription. The exam cannot be contingent
on the purchase of eyeglasses, as stated in the
Rule. See 16 CFR 456.2. The Commission has
provided guidance with respect to the
Contact Lens Rule for similar bundles of eye
exams offered with contact lenses, instead of
eyeglasses. In that context, the Commission
has stated that a prescriber is not prohibited
from offering a bundled package of an eye
examination and contact lenses, provided
that consumers have an option to purchase
the eye examination separately and still
receive their prescription. Contact Lens Rule,
Final Rule, 69 FR 40482, 40494. A similar
result is appropriate here.
185 CLR SNPRM, 84 FR 24675; Eyeglass I
Rule, 43 FR 23998.
186 NPRM, 88 FR 268–69.
187 NPRM, 88 FR 268.
188 Id.
189 Id.
190 CLR Final Rule, 85 FR 50717; 16 CFR
315.2.
191 CLR SNPRM, 84 FR 24668.
192 OAA (NPRM Comment #0020
submitted by Allen) (‘‘OAA believes that this
revision ensures that the FTC’s regulatory
language is keeping pace with updates in
technology.’’); 1–800 CONTACTS (NPRM
Comment #0025 submitted by Montclair)
(‘‘1–800 also supports . . . allowing
prescribers to release a prescription in digital
format with a patient’s verifiable affirmative
consent to a specific method for digital
delivery.’’); Aceto (WS Transcript at 42)
(‘‘[F]rom the optician standpoint and those
who fill the prescription, it’s sort of brilliant.
Because again, we’re keeping up with our
current status of technology. It helps people,
it’s an all about an access type thing, and I
think that that’s a really, really good
option.’’).
193 AOA (NPRM Comment #0023
submitted by Benner).
194 NAROC (NPRM Comment #0024
submitted by Neville).
195 Anonymous (NPRM Comment #0007)
(‘‘Most practices have an EMR system that
also has a patient portal. Most of these
patient portals provide access to the eye glass
prescription. This new ‘rule’ is not necessary.
If there is ever a question, the EMR system
will always have a copy of the prescription
available for anyone that wants it.’’);
Anonymous (NPRM Comment #0011) (‘‘In
2009 The Hitech Act was passed which
assured the use of electronic medical records.
The EMR (The Electronic Medical Records
Mandate) requires healthcare providers to
convert all medical charts to a digital format.
Incurring more costs on businesses for
storage, paper, ink, private and government
payroll, etc., is not an [ ] economically
intelligent idea in a recession driven
economy.’’); Michaels (WS Transcript at 7)
(‘‘in my experience, 100% of the
prescriptions that are coming out of our
offices are automatically uploaded
electronically to a portal the very second that
the prescription is finalized. . . . That was
the most important piece of the MIPS
program that Medicare had. It mandated that
patients get access to their portals. And so,
in our experience, the vast majority of our
patients don’t want paper copies of the
prescription. They want electronic copies so
that they can have access in their phone and
access at 2:00 in the morning, whenever they
want it.’’).
196 Anonymous (NPRM Comment #0006).
See also Rosemore (WS Comment #0045)
(‘‘As an optometrist, the added requirements
would be a significant burden on my
practice. Requiring more paperwork,
consents, data storage, and time makes the
cost of doing business go up significantly.’’).
197 One workshop participant suggested
that prescribers who use electronic health
records should not be required to transcribe
an electronic prescription into a handwritten
one, as this could introduce errors into the
prescription. See Montaquila (WS Transcript
at 22) (‘‘Handwriting prescriptions after
generating one in an electronic format
increases time and cost, and is not risk-free.
Researchers at Weill Cornell Medical College
found error rates of 30 per 100 written
prescriptions, and only seven per 100
electronic prescriptions. Now, that of course
was from medications, but I would propose
that contact lenses are no less complex when
written on a sheet of paper.’’). The FTC’s
requirement that patients be given the option
to receive a paper copy would not necessitate
a prescription to be converted from an
electronic record to a handwritten one;
instead the prescription could be printed out
on paper, as was described by other
workshop participants. See Hyder (WS
Transcript at 53) (‘‘If it’s coming from the
EHMR, I tend to get that when I’m checking
out because it’s being printed someplace
other than the exam room.’’).
198 See, e.g., U.S. Dep’t of Health & Human
Servs., The Office of the National
Coordinator for Health Information
Technology (‘‘ONC’’), ‘‘Do I Need to Obtain
Consent From My Patients to Implement a
Patient Portal?,’’ https://www.healthit.gov/
faq/do-i-need-obtain-consent-my-patients-
implement-patient-portal (noting that the
Health Insurance Portability and
Accountability Act (‘‘HIPAA’’) permits the
disclosure of health information to the
patient without requiring the patient’s
express consent and that portals are ‘‘an
excellent way to afford patients access to
their own information and to encourage them
to be active partners in their health care.’’).
199 CLR SNPRM, 84 FR 24668.
200 U.S. Dep’t of Health & Human Servs.,
ONC, ‘‘Individuals’ Access and Use of Patient
Portals and Smartphone Health Apps, 2022,’’
Data Brief: 69 (2023), https://
www.healthit.gov/sites/default/files/2023-10/
DB69_IndividualsAccess-UsePatientPortals_
508.pdf.
201 Id.
202 National Institutes of Health, National
Cancer Institute, Health Information National
Trends Survey, Hints Brief Number 52,
‘‘Disparities in Patient Portal
Communication, Access, and Use’’ (2020),
https://hints.cancer.gov/docs/Briefs/HINTS_
Brief_52.pdf (‘‘[S]ignificant disparities exist
in patient portal use, with underserved
groups (including racial and ethnic
minorities, those with lower socioeconomic
status, older individuals, and persons with
disabilities) using these tools less often.’’).
203 Id.
204 U.S. Dep’t of Health & Human Servs.,
ONC, ‘‘Individuals’ Access and Use of Patient
Portals and Smartphone Health Apps, 2022,’’
supra note 200.
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205 See, e.g., Hyder (WS Transcript at 43)
(‘‘I would say that we’re supportive of giving
the option for digital prescriptions. But again,
we would agree with not mandating that
every type of digital option be available.’’);
Beatty (WS Transcript at 42) (‘‘I think we do
have to be careful with how we consider that
delivery though. Requirements for that
delivery to include all of the methods,
including SMS and MMS, would or could
actually produce new burden. Not everyone
who delivers these things electronically has
access to an SMS system or an MMS system.
And so we’d want to be able to provide the
possibility of delivering them electronically,
but also allow for the provider to have the
choice of how the electronic delivery would
occur.’’).
206 NAROC (NPRM Comment #0024
submitted by Neville) (‘‘We note with
approval that the prescriber will not be
required to offer a digital copy of the
prescription, which some prescribers may
not be able to offer. But we also suspect that
those prescribers using digital release for
contact lenses will likely use it for eyeglass
prescriptions as well, again, adding
efficiency to office operations.’’).
207 Lovejoy (WS Transcript at 45) (‘‘Well, I
do think it is easier . . . if a patient can get
a prescription through email either directly
of the prescription itself or to a link to a
website or a portal where they can obtain it.
And anecdotally I’ve heard reports of being
able to be standing at the office desk
checking out and having the prescription
emailed to you before you leave the office.
It’s in your iPad or your iPhone and ready
to be used wherever you might want to use
it.’’); Hyder (WS Transcript at 45) (‘‘I would
say that it gives providers more ability to
comply, but I can’t say that we have data to
show that it improves compliance.’’).
208 NPRM Comment #0006 (‘‘What
happens when they access their portal and
print the prescription off from there? Will our
portals have to update to require a signature
as well?’’).
209 Repka (WS Transcript at 26) (‘‘And then
if a patient gets it in the portal, which in our
portal is simple, they just go on if they have
it, they can download it. They don’t actually
need to provide a signature. So we send a
note asking for a signature, and we never get
those returned because the patient doesn’t
have to. And the modules aren’t set up in the
EMR to be compliant with that. So they get
a notification. If they happen to send it back,
of course they have to print it, sign it, scan
it, and then figure out how to upload it into
the portal. And then the staff have to actually
take it from the portal and put it into the
right record so that it can be retained.’’).
210 Prescribers are also not required to
obtain signed confirmations for contact lens
prescriptions that are delivered digitally,
provided the prescriber complied with the
CLR’s requirement for obtaining and storing
a record of a patient’s verifiable affirmative
consent to digital delivery. 16 CFR
315.3(c)(1)(i)(D). Instead, the prescriber need
only retain evidence that the prescription
was sent, received, or made accessible,
downloadable, and printable—evidence that
will typically be electronic and automatic via
the email, text, or portal method used by the
prescriber. Id.
211 See section III, infra.
212 Anonymous (NPRM Comment #0006)
(‘‘We already have a record of the
prescription on file for the patient and most
EHRs track when they are printed out.’’);
Lovejoy (WS Transcript at 10) (the
requirement, as proposed, ‘‘sounds like it
would not be difficult to have a record of the
patient receiving access to their prescription
through [the] portal, so that would not seem
like a significant burden.’’).
213 Lovejoy (WS Transcript at 10).
214 Beatty (WS Transcript at 43) (‘‘So if a
portal could possibly be confusing, having a
website where the patient can enter
rudimentary data and then get back just the
prescription information that they were
looking for should be acceptable too.’’).
215 Montaquila (WS Transcript at 23)
(‘‘[The electronic] approach is not without
challenges. The method requires many steps
and a secure system for data transmission.
Additionally, some electronic health record
systems cannot automatically transmit the
eyeglass or contact lens prescription to the
patient portal. So when a patient requests an
electronic copy of their prescription in those
scenarios, the doctor must first print the
prescription, attach it to an email, and then
send it to the patient. For storage, it is
possible to attach the information to the
patient’s medical record, but colleagues
report that some electronic health record
systems impose costs to store data over time.
So using this method for them would
increase the doctor’s cost in perpetuity.’’).
216 Through the 21st Century Cures Act,
Congress authorized HHS to take action to
promote the interoperability of health IT,
support the use, exchange, and access of
electronic health information, and limit
information blocking. 21st Century Cures
Act, Public Law 114–255, Title IV (2016).
The Cures Act Final Rule, promulgated by
the U.S. Dep’t of Health & Human Servs.,
ONC, requires healthcare providers to enable
patient access to enumerated classes of data
in their electronic health record systems.
ONC, 21st Century Cures Act:
Interoperability, Information Blocking, and
the ONC Health IT Certification Program,
Final Rule, 85 FR 25642 (May 1, 2020). These
data classes include providers’ clinical notes
and information on medications, and the
ONC noted in the latest update (Version 4
from July 2023) to the United States Core
Data for Interoperability (USCDI) that the
definition of ‘‘clinical tests’’ includes ‘‘visual
acuity exam.’’ ONC, HealthIT.gov,
Interoperability Standards Advisory (ISA),
Clinical Tests, USCDI V4, https://
www.healthit.gov/isa/uscdi-data-class/
clinical-tests#uscdi-v4. While this decision
may result in consumers having greater
access to their prescription information in
their EHRs, it does not directly impact
prescribers’ obligations for automatic
prescription release under the Eyeglass Rule.
217 Brown (WS Transcript at 7) (‘‘it is very
concerning that patients might not
understand how to access their prescriptions.
It’s wonderful that patients are . . .
requesting or desiring these prescriptions to
be available to them online. But from the
Prevent Blindness perspective and the
patient’s perspective, not every single patient
is the same. Not everybody has the same
access. Not everybody has the same
broadband capabilities, the same smartphone
technologies. And a lot of patients lack
health literacy that encourages us as a
completely available use to, or available
avenue for them to receive access to their
prescriptions.’’); Aceto (WS Transcript at 42)
(‘‘My only concern with [technology] is not
everybody, as we talked about with different
clientele and different patients and different
modalities, not everybody’s as well versed.’’);
Hyder (WS Transcript at 45)
(‘‘ophthalmology patients who are older[—for
the] digital option, they may not even want
or have any idea of how to access [it].’’).
218 Brown (WS Transcript at 7) (‘‘So it is
encouraging, but it seems [] that there’s a
missed opportunity if patients can access
their records digitally, but if they’re not also
given other means to access their
prescriptions.’’); Beatty (WS Transcript at 42)
(‘‘And so we’d want to be able to provide the
possibility of delivering [prescriptions]
electronically, but also allow for the provider
to have the choice of how the electronic
delivery would occur. And then the patient
to consent to whether they want that
electronic delivery or if they would prefer to
have a paper version.’’).
219 Montaquila (WS Transcript at 26) (Once
the prescription is on the portal, ‘‘we have to
then teach them, if they want to use the
portal, how to find it. They have to go in,
they have to log in, they have to download
it. It’s not that difficult to do, but they still
need the education as you would for any new
system you’d use. But then we have plenty
of patients who say, ‘I’m not electronic, just
give me a copy.’ ’’).
220 Aceto (WS Transcript at 45) (‘‘I will say
that a good amount of the time that we spend
oftentimes as opticians is sometimes calling
for verification. But I do worry that some of
these other burdensome regulations like the
affirmative consent, for example, isn’t going
to change that. Because if [patients] forget
[the prescription] at home, if they don’t have
it, we end up calling. And I don’t know that
it’s that much of a burden to [prescribers].
Because as we’ve called optometrist’s office
and ophthalmologist’s office, I will tell you
that without fail because of the great work of
the FTC since 1978, there hasn’t been as
much pushback as before those rules were
instigated.’’); Beatty (WS Transcript at 46) (‘‘I
think that the number of patients who are
issued a paper prescription only, to just not
have it when they need it is relatively high.
And so a simple request from the patient to
have a paper copy should they need one I
think is a really simple request on their side
and not really burdensome. I think that as
long as that prescription is issued at the
request and there’s an electronic version
available to that patient, then it should be
ample.’’).
221 The Commission notes that for some
telemedicine exams, digital delivery might be
the only practical way for a prescriber to
transmit the prescription immediately after
the exam; in such cases, medical practices
may need to obtain patient consent during
the intake process. If a patient is in a medical
office, however, and only the prescriber is
remote, the office could print a paper copy
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of the prescription for the patient. See
Lovejoy (WS Transcript at 45) (‘‘And more
and more we’re seeing some of those
prescriptions being written after a
telemedicine eye exam where the doctor and
the patient are in a real time communication,
but the doctor’s remote. And the only way for
the doctor to prescribe and get the
prescription to the patient is electronically. It
can be then printed out at the office and the
patient can use it either there at the location
or take it someplace else, but the patient then
has access to it electronically as well.’’).
222 See section II.C., supra.
223 CLR Final Rule, 85 FR 50683.
224 See section VIII.A, infra.
225 The digital delivery provision also does
not alter or pre-empt existing State and
Federal requirements pertaining to the
electronic delivery of records and consumer
consent, such as the Electronic Signatures in
Global and National Commerce Act, 15
U.S.C. 7001.
226 45 CFR 164.520; AOA (WS Comment
#0047 submitted by Benner) (‘‘Greater
analysis of the overall burden [of] regulations
on doctors would also be helpful to inform
how best to streamline rule changes and
explore alternative options, FTC could
consider mirroring some of the
acknowledgement requirements after the
Department of Health and Human Services
(HHS) Notice of Privacy Practices which does
not require acknowledgment to be obtained
at every visit. Seeking authorization to
provide a prescription electronically could
follow the same approach.’’).
227 Montaquila (WS Transcript at 35)
(Allowing the consent form to be signed once
‘‘would make it much easier for all of us to
implement because we could educate [the
patient] as to what the office policy is,
whether that’s paper or electronic or a
combination thereof. It could happen at the
outset when they first establish their
relationship with us and only if we change
policy or they make a request, because the
patients could understand, ‘I know your
policy and I’m happy with it.’ Or, ‘I’m not
happy with it, I want it done a different way.’
And that could all be documented when we
first meet them or at any time at [a] time [of]
their choosing. So putting it in the patient’s
hands to have control.’’).
228 See, e.g., 45 CFR 164.520(c)(1)(ii) (‘‘No
less frequently than once every three years,
the health plan must notify individuals then
covered by the plan of the availability of the
notice and how to obtain the notice.’’).
229 For example, consider an instance
where a prescriber obtains a patient’s
affirmative consent to digital prescription
delivery via email in September 2024, and
the prescriber relies on that consent to email
prescriptions until and including the
patient’s September 2028 appointment. In
2029 the prescriber changes the digital
delivery policy to delivery via patient portal,
and the consumer signs a new affirmative
consent during their annual 2029
appointment. The prescriber’s office should
retain the original affirmative consent to
email delivery at least through September
2031 (September 2028 appointment plus
three years), and should retain the 2029
consent to delivery via portal for three years,
or for as long as the prescriber relies on that
consent to provide prescriptions via portal,
plus another three years.
230 NPRM, 88 FR 268.
231 CLR Final Rule, 85 FR 50682–50684; 16
CFR 315.2.
232 See Office of the Federal Register,
Regulatory Drafting Guide, Definitions,
https://www.archives.gov/federal-register/
write/legal-docs/definitions.html (‘‘5. Do not
include a substantive rule within a
definition. A reader can easily miss a rule
placed within a definition.’’).
233 Old Rule §§ 456.3, 456.4, and 456.5 are
redesignated as new §§ 456.5, 456.6, and
456.7, respectively.
234 5 U.S.C. 553; 15 U.S.C. 57a(b)(1).
235 See WS Transcript at 27–28, 36; Repka
(WS Transcript at 28) (‘‘The question [ ] was
why the EMR companies haven’t followed?
Well, the new rule, it takes time to get a
consumer base or a user base that goes and
asks the big company to prioritize that
development over 500 other development
requests that they get. I think we clearly need
one because a signature pad or a checkoff
box, which just rolled out in Epic for
procedure consents would make this
easier.’’); Montaquila (WS Transcript at 36)
(‘‘You mentioned Epic. I worked with one of
the first Epic implementations in the country,
believe it or not, way back. And they have
a really good system with a signature pad.
The system I use now has an iPad. You can
open up, they can sign on the iPad. But I am
talking to other colleagues who say that their
EHR system has no option similar to this. All
of them are probably moving in the same
direction, right?’’).
236 See, e.g., Repka (WS Transcript at 36)
(‘‘it still seems to me that the EMRs of the
future will be able to accept this as an
electronic signature, that it will store in some
fashion other than necessarily on a paper that
says any of the three things that you’ve had
there. So that if there’s an option to do that,
it would be nice. If you still needed it to be
on a printable PDF, then not as
convenient.’’).
237 NAROC (NPRM Comment #0024
submitted by Neville). NAROC also requested
the Commission be open to petitions from
prescribers to allow additional digital
methods of verifications as technology
evolves and provided examples including the
use of a personal identification number by
the patient in an EHR, a fingerprint, a retinal
scan, voice recognition or other verifiable
consent documentation. WS Comment #0049
submitted by Neville. The FTC is open to
new digital methods of verifications such as
biometric data so long as the processes are
optional, secure, there are methods in place
to confirm and verify the identity of the
signatory, and the signatures are designed
such that they cannot be used by anyone
other than their genuine owners.
238 Montaquila (WS Transcript at 23) (‘‘For
the approach on screen, the consent is
obtained on paper, but then other practices
will use an electronic means to collect that
signature.’’).
239 CLR NPRM, 81 FR 88535.
240 CLR SNPRM, 84 FR 24667.
241 NPRM, 88 FR 265.
242 See sections I.D.4 supra, IV.C.3 infra.
243 Although prescribers may similarly
comply with the CLR by obtaining digital
signatures, the Commission recognizes that,
for the time being, the CLR will differ from
the Eyeglass Rule by not expressly permitting
signature collection in a digital format. The
Commission can amend the CLR to include
this express permission during its next rule
review and, in the meantime, can provide
clarity to prescribers through guidance
materials.
244 Press Release, Fed. Trade Comm’n, FTC
Sends Cease and Desist Letters to Prescribers
Regarding Potential Violations of the
Commission’s Contact Lens Rule (Feb. 21,
2023), https://www.ftc.gov/news-events/
news/press-releases/2023/02/ftc-sends-cease-
desist-letters-prescribers-regarding-potential-
violations-commissions-contact-lens; Press
Release, Fed. Trade Comm’n, FTC Sends 37
New Cease and Desist Letters Regarding
Agency’s Eyeglass Rule (Apr. 20, 2023),
https://www.ftc.gov/news-events/news/press-
releases/2023/04/ftc-sends-37-new-cease-
desist-letters-regarding-agencys-eyeglass-rule.
245 Botha (WS Transcript at 44).
246 Beatty (WS Transcript at 44) (‘‘While I
think there are things that can be coupled
together to decrease the amount of forms that
a patient is having to sign, I do think that
there are certain aspects of that intake
process that should be separate so that we
can make sure that the patient is
acknowledging things appropriately . . . in
this case, whether or not we separate the
acknowledgement for the availability of the
prescription.’’).
247 See section I.B, supra.
248 Montaquila presentation, FTC Eyeglass
Rule Workshop at 7, https://www.ftc.gov/
system/files/ftc_gov/pdf/Stephen-
Montaquila-OD-Presentation.pdf.
249 See NPRM, 88 FR 286 (previously
proposed as § 456.1(h)(2)).
250 NPRM, 88 FR 265.
251 The NPRM proposed to redesignate the
provisions currently codified at §§ 456.3
through 456.5 as §§ 456.4 through 456.6,
respectively, and add a new Section 456.3.
252 Id. at 266.
253 Id. at 280.
254 Id. at 280–81.
255 These comments are in addition to the
comments detailed above on the need for
automatic prescription release due to a lack
of compliance and patient awareness of their
rights to a prescription. See section II.A,
supra.
256 Williams (NPRM Comment #0002)
(‘‘This is a great idea and will protect
patients!’’); Wolin (NPRM Comment #0003)
(‘‘I support the proposed rule changes as a
smart and efficient update’’); Riffle (NPRM
Comment #0013) (‘‘I agree with the proposed
rule’’); Anonymous (NPRM Comment #0017)
(‘‘I support the proposal to require eye
doctors to obtain signed confirmation of
prescription release.’’).
257 NAROC also points out that more
prescriptions in the hands of consumers
might reduce the number of requests for
additional copies. NPRM Comment #0024
submitted by Neville; WS Comment #0049
submitted by Neville.
258 NAROC (NPRM Comment #0024
submitted by Neville; WS Comment #0049
submitted by Neville).
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259 NAROC (WS Comment #0049
submitted by Neville).
260 Consumer Action (NPRM Comment
#0026 submitted by McEldowney).
261 NPRM Comment #0028 submitted by
Sepp.
262 1–800 Contacts (NPRM Comment #0025
submitted by Montclair).
263 Id. Another commenter stated that he
approves of the Rule and hopes the Rule is
enforced. White (NPRM Comment #0022).
264 NAROC (NPRM Comment #0024
submitted by Neville). It encourages the
Commission to report on how its access to
prescribers’ confirmation of prescription
release has been used and whether it can
demonstrate that the cost to prescribers
associated with the confirmations is justified
by improved enforcement. Id.
265 WS Transcript at 32–33. See also
Consumer Action (NPRM Comment #0026
submitted by McEldowney) (‘‘In fact,
providers should welcome this record-
keeping as a way to prove that they are
following the law if challenged.’’).
266 NAROC (WS Comment #0049
submitted by Neville).
267 WS Transcript at 19.
268 WS Comment #0049 submitted by
Neville. See also supra note 174 (citing
Lovejoy (WS Transcript at 19) noting the high
percentage of optometrists’ gross revenue that
comes from the product sales)).
269 NAROC (WS Comment #0049
submitted by Neville). Consumer Action does
not believe it is a burden on prescribers to
obtain, document, and retain a consumer’s
affirmative receipt of their prescription.
NPRM Comment #0026 submitted by
McEldowney.
270 NAROC (WS Comment #0049
submitted by Neville). At the workshop,
Joseph Neville said that he’s been talking
over the last two years with their members
and they ‘‘said they’re not having problems
[complying] with the Contact Lens Rule.’’ WS
Transcript at 28.
271 WS Transcript at 31.
272 National Taxpayers Union (WS
Comment #0028).
273 Id.
274 Id. The Commission has not been able
to replicate NTU’s cost calculation. Based on
NTU’s estimate that a ‘‘modest optometry
establishment’’ might conduct 3000
examinations per year, and using the NPRM
burden estimate of 10 seconds to obtain a
patient’s confirmation and one minute to
store it, the requirement would impose an
additional paperwork burden on such a
practice of 58.3 hours per year (3,000 × 70
seconds ÷ 60 ÷ 60). Using the NPRM
estimated wage rates for optometrists and
office staff, such an additional burden would
amount to an incremental burden of
$1,439.88. However, staff does not know how
accurate NTU’s estimate for a ‘‘modest
optometry establishment’’ is, and does not
possess information about typical practices.
As explained in this document’s PRA
section, staff based its ultimate burden
calculations on the expected overall number
of refractive exams that would result in a
written prescription every year rather than
trying to determine a number for a typical
practice. See Paperwork Reduction Act,
section VIII, infra, for an updated estimate for
the amended Rule.
275 WS Transcript at 40.
276 NPRM Comment #0024 submitted by
Neville.
277 Id.
278 Some of these comments were
discussed above with respect to the
Commission’s determination that the failure
to provide a prescription continues to be an
unfair act or practice. See section II.A supra.
One other commenter expressed disfavor
with the proposal, but did not provide
specific reasons for the opposition.
Anonymous (NPRM Comment #0004).
279 AOA (WS Comment #0047 submitted
by Benner).
280 AOA (WS Comment #0047 submitted
by Benner). Appendix A to this comment
contains a summary it created of the
purported study results.
281 AOA (WS Comment #0047 submitted
by Benner). Similarly, at the workshop, Dr.
Stivers suggested that most consumers sign
papers at the doctor’s office without reading
them and questioned whether the
confirmation of prescription release
‘‘accomplish[es] anything in the broader
context of all of the information that the
patient is trying to absorb in that kind of
environment.’’ WS Transcript at 10.
282 See also Stivers, WS Transcript at 11
(noting that regulations like the Eyeglass Rule
require businesses to hire expensive
attorneys and consultants to advise them,
and the Commission should take into
account the burden placed on ‘‘the vast
majority of practitioners or businesses in
general that are absolutely law abiding.’’
283 See section VIII, infra.
284 During the pendency of the Eyeglass
Rulemaking, the American Optometric
Association filed a comment in response to
the Commission’s Paperwork Reduction Act
(‘‘PRA’’) notice for the Contact Lens Rule.
That comment, CLR PRA Comment #0007
(submitted by Benner), is available at: https://
www.regulations.gov/comment/FTC-2023-
0049-0007 (emphasis in original).
285 AOA (NPRM Comment #0023
submitted by Benner; WS Comment #0047
submitted by Benner).
286 Rosemore (WS Comment #0045) ‘‘As an
optometrist, the added requirements would
be a significant burden on my practice . . .
I’m not sure what sort of issue the
Commission believes it is solving here.’’ Dr.
Rosemore added, ‘‘I am disturbed that my
profession continues to get treated like a
punching bag. It appears to me that we are
viewed by some at the Commission as
predators to consumers instead of the doctors
we are to our patients. I did nothing to
deserve that treatment.’’ Coast Eyes Pllc (WS
Comment #0046) (‘‘Nothing is broken here.
Patients get their prescriptions without
conflict. The financial/time/paper (material)
burden on small business is not justified by
the number of complaints.)’’.
287 Anonymous (NPRM Comment #0006)
(‘‘something that would take an immense
amount of time and take away from patient
care.’’); Anonymous (NPRM Comment #0007)
(isn’t ‘‘necessary’’ and would be ‘‘very time
consuming.’’); Cooper (NPRM Comment
#0009) (‘‘yet another example of an
unnecessary, time consuming, and intrusive
requirement [that would] add to cost of doing
business which ultimately gets passed on to
the patient (consumer)’’); Anonymous
(NPRM Comment #0011) (costly, time
consuming, and redundant). WS Transcript
at 23–24.
288 Durkee (NPRM Comment #15).
289 WS Transcript at 9. Voicing a similar
concern, Dr. Montaquila said he’s seen
widespread confusion from patients as to
why they are signing a prescription or
confirmation of prescription release and he
states that ‘‘they don’t understand the
process.’’ WS Transcript at 24. Dr. Masoudi
raised communication issues surrounding the
form when language barriers exist between
the patient and staff. WS Transcript at 27.
290 WS Transcript at 23.
291 WS Transcript at 23–24.
292 WS Transcript at 29.
293 WS Transcript at 29.
294 AAO (NPRM Comment #27).
295 Id. The AAO recommended the
Commission exempt from the confirmation-
of-prescription-release amendment
ophthalmology practices with fewer than ten
full-time employees because they often
operate with limited administrative support
and may not use electronic health records. Id.
296 WS Transcript at 31. Dr. Montaquila
stated that he has not seen much difference
since the Contact Lens Rule confirmation
requirement was put in place andthat he’ll
give prescriptions whether or not there is a
confirmation requirement in place.
297 WS Transcript at 29.
298 WS Transcript at 37–38.
299 NPRM, 88 FR 287.
300 NPRM, 88 FR 287.
301 Id. at 281.
302 The Commission has determined not to
add an exemption for ophthalmology
practices with fewer than ten full-time
employees, as requested by the AAO. See
supra note 295. It is equally important for
patients at these practices to be aware of their
right to receive their prescriptions and
receive their prescriptions as it is for patients
at larger practices. If the practices sell
eyeglasses or have a direct or indirect
financial interest in the sale of eyeglasses,
they must comply with the confirmation-of-
prescription-release amendments.
303 WS Transcript at 34.
304 WS Transcript at 34.
305 Warby Parker (ANPR Comment #0817
submitted by Kumar) (bill of rights and
signage); Tedesco (ANPR Comment #0042)
(signage).
306 AOA (NPRM Comment #0023
submitted by Benner); Masoudi (WS
Transcript at 38) (suggesting that the FTC
should be more active in making consumers
more aware of their rights ‘‘before they even
walk in our door.’’). Other commenters
discussed a need for greater education
generally in this area. See section VII.B, infra.
307 NPRM Comment #0023 submitted by
Benner. According to the AOA, these
include: (1) online retailers cannot guarantee
the glasses purchased will meet the
consumers’ visual needs; (2) if the eyeglasses
do not fit well, the online retailer is not
required to adjust the glasses in person, but
will often instruct the consumer how to self-
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adjust the glasses; and (3) the online retailer
is not obligated to respond to any complaints
or issues surrounding the purchase. Id. See
also American Optometric Association,
‘‘AOA: No letting up on Eyeglass Rule
advocacy,’’ Nov. 2, 2023, https://
www.aoa.org/news/advocacy/federal-
advocacy/aoa-no-letting-up-on-eyeglass-rule-
advocacy.
308 Durkee (NPRM Comment #15). At the
workshop, panelist Pete Sepp of NTU
inquired about the FTC not enforcing the
Rule against prescribers who take actions
aimed at improving automatic prescription
release and suggested such actions be treated
as ‘‘safe harbors’’ from FTC enforcement. One
example he provided was for prescribers to
show a training video to their employees on
prescription release and retain evidence of
the training. WS Transcript at 33. As
explained in response, although every
instance where a prescription is not
automatically provided to a patient is a civil
penalty violation, the Commission is
generally not looking for one-off instances of
non-compliance in its enforcement actions.
See Bernstein (WS Transcript at 34).
Nevertheless, the Commission does not
believe expressly establishing ‘‘safe harbors’’
of the type described by Pete Sepp would
sufficiently counter the significant non-
compliance detailed elsewhere in this
document.
309 See section II, supra.
310 Id.
311 NPRM, 88 FR 263. This inquiry is
particularly relevant in that, as the
Commission has stated, it is primarily
interested in bringing actions against repeat
offenders, not prescribers who may make a
one-off mistake in forgetting to release a
prescription.
312 U.S. v. Doctors Eyecare Ctr., Inc., No.
3:96–cv–01224–D (N.D. Tex. June 24, 1996).
The complaint alleged that the eye care
center only released prescriptions when
patients asked for them, and included
waivers of liability on patients when doing
so. The prescriber paid a $10,000 civil
penalty and was enjoined from future
violations of the Eyeglass Rule. See Press
Release, Fed. Trade Comm’n, Dallas Eyecare
Center Agrees to Settle Charges That They
Failed to Give Consumers Copies of Their
Eyeglass Prescriptions (May 3, 1996), https://
www.ftc.gov/news-events/press-releases/
1996/05/dallas-eyecare-center-agrees-settle-
charges-they-failed-give.
313 NAROC’s comment mentions that,
while a requirement for signage in the office
was rejected as inadequate, industry
members might use the option of making
information easily available to customers in
other formats, such as websites or point of
sale handouts about patients’ rights or
prescriber responsibilities. NPRM Comment
#0024 submitted by Neville. NAROC
proffered these ideas as additive to, and not
instead of, the confirmation proposal, which
it supports. An anonymous commenter
suggests that the FTC should educate the
consumer and ‘‘[m]aybe provide a template
to the providers so that the consumer gets the
same info, presented the same way at every
provider?’’ WS Comment #0037. It is unclear
whether the commenter is suggesting this
action in addition to, or instead of, the signed
acknowledgment proposal. The Commission
discusses business and consumer education
as an additional method to increase business
and consumer awareness of responsibilities
and rights, respectively, in section VII.B,
infra.
314 NPRM, 88 FR 264 (signage), 263–64 (bill
of rights).
315 See CLR SNPRM, 84 FR 24675; Eyeglass
I Rule, 43 FR 23998.
316 NPRM, 88 FR 263.
317 Commission staff first identified this
issue in its Eyeglass II Report, where it
explained that the automatic release
requirement had not helped to prevent
‘‘evidentiary squabbles’’—as the Commission
had hoped it would—but instead had
increased them, because whether or not a
prescriber had released a prescription could
not, in most cases, be ascertained absent
documentary evidence. Eyeglass II Report,
supra note 14, at 275–76.
318 See sections IV.C.2.a and VIII.A, infra
(describing how many prescribers are using
confirmation forms that contain extraneous
information and thus, likely take far longer
to read and sign than actually required under
the rule).
319 This calculation is based on estimates
that there are 165 million eyeglass wearers
who get exams every other year, and that
there are 18,000 ophthalmologists and 43,000
optometrists in the United States. As
discussed above, section I.D.5, supra note 67,
this may undercount the number of
optometrists, which could mean the per-
provider burden is even less. On the other
hand, the burden may fall differently on
different providers (depending on their size,
or volume, or electronic-records adoption, for
instance), and at least one commenter, the
National Taxpayers Union, felt it might be
disproportionally felt by small providers. See
section IV.B, supra.
320 AOA (WS Comment #0047 submitted
by Benner).
321 Id.
322 AOA’s appendix A to its workshop
comment (WS Comment #0047 submitted by
Benner) does not contain information about
the methodology of the survey or the
representativeness of the surveyed
population. This analysis assumes the
methodology is sound and the population
surveyed is appropriately representative—
assumptions which may or may not be
correct.
323 Moreover, 28% of respondents disagree
with the statement that the amount of
paperwork they have to complete at a
doctor’s appointment is overwhelming (with
another 25% responding neutrally) and 34%
of respondents disagree with the statement
that the complexity of the paperwork they
have to complete at a doctor’s appointment
is overwhelming (with another 25%
responding neutrally).
324 However, the Commission notes that
some of the burden that commenters suggest
has resulted from the CLR confirmation-of-
prescription-release requirement appears to
be wrongfully attributed to that requirement.
See sections IV.C.2.a, infra, and section
VIII.A, infra (describing how in one form in
use by many prescribers’ offices, and
recommended in the AOA’s online toolkit for
complying with the CLR, five out of six
paragraphs are extraneous to the
confirmation-of-prescription-release
proposal).
325 These options include permitting
electronic delivery of eyeglass prescriptions,
in which case prescribers would not need to
request that the patient acknowledge receipt
of the prescription. Yet, flexibility exists for
prescribers who prefer to provide paper
copies to their patients, as they do not need
to offer an electronic option. See section III.C,
supra. For instances in which a patient
refuses to confirm prescription release, the
prescriber shall note the patient’s refusal on
the document and sign it.
326 See section III.C, supra.
327 If multiple eyeglass prescriptions are
provided on paper at the same time, the
prescriber can obtain confirmation of
prescription release with one signature, and
need not obtain separate signatures for each
prescription confirmation.
328 To reduce the burden associated with
prescription release, a prescriber could create
a document requesting a single signature to
confirm receipt of both an eyeglass and a
contact lens prescription (in cases where
both prescriptions are finalized at the same
time). Such a document could meet the
requirements of both rules so long as it is
clear and conspicuous what the patient is
signing for, and that the signature requested
confirms receipt of both the contact lens and
eyeglass prescriptions. Similarly, as
mentioned above, a prescriber could use one
document to obtain verifiable affirmative
consent to digital prescription release of both
contact lens and eyeglass prescriptions.
329 NPRM, 88 FR 287.
330 Id.
331 16 CFR 315.3(c)(3).
332 See NPRM, 88 FR 260–61. The same
purpose is stated for the exemption in the
Contact Lens Rule. CLR Final Rule, 85 FR
50687.
333 Current guidance issued by the
Commission in connection with the Contact
Lens Rule states the same. FTC, FAQs:
Complying with the Contact Lens Rule,
https://www.ftc.gov/business-guidance/
resources/faqs-complying-contact-lens-rule
(‘‘If you’re not sure if your interest qualifies,
err on the side of caution and ask your
patients to confirm receipt of their
prescriptions.’’).
334 One commenter requested an
exemption in long-term care settings for the
confirmation requirement, as well as for
affirmative consent for digital delivery. This
commenter said that, in the long-term care
setting, the parties responsible for the
patients are almost never present during the
exam and the patients themselves are not
able to give consent and as a result,
prescribers coordinate care with, and provide
prescriptions to, facility staff. Morer (NPRM
Comment #0021). In such situations, the
Commission recommends the prescriber note
in their records to whom the prescription
was provided (e.g., staff or caregiver), and
whether it was provided on paper, or made
available digitally and by what method. As
with the instance where a patient refuses a
copy of a prescription, see supra note 325,
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the prescriber could relay that information to
the Commission should questions about
compliance arise.
335 16 CFR 315.3(c)(1) (CLR); NPRM, 88 FR
266.
336 Montaquila (WS Transcript at 22). The
Commission notes that other offices using
EHRs could collect and store signatures
electronically, as Dr. Montaquila noted they
do for the consent to digital delivery. Id. at
23.
337 Montaquila presentation, FTC Eyeglass
Rule Workshop, https://www.ftc.gov/system/
files/ftc_gov/pdf/Stephen-Montaquila-OD-
Presentation.pdf.
338 AOA, Contact Lens Rule Compliance
Toolkit (July 2020), https://www.aoa.org/
AOA/Documents/doctor%20resources/
Contact-Lens-Rule-Compliance-Toolkit.pdf.
339 WS Transcript at 22. Dr. Montaquila
shared an example of a what the prescription
pad looks like. See Montaquila presentation,
FTC Eyeglass Rule Workshop, https://
www.ftc.gov/system/files/ftc_gov/pdf/
Stephen-Montaquila-OD-Presentation.pdf.
This pad is also shown in the AOA’s toolkit,
with a note that doctors should contact the
AOA Marketplace if interested in obtaining
the product. See AOA, Contact Lens Rule
Compliance Toolkit at 9 (July 2020), https://
www.aoa.org/AOA/Documents/doctor%20
resources/Contact-Lens-Rule-Compliance-
Toolkit.pdf. At the bottom of each
prescription sheet, after a statement in bright
blue declaring, ‘‘Contact lenses are medical
devices which require ongoing medical care
for optimal performance and safety. Please
contact our office if you experience any signs
of complications including pain, redness,
loss of vision,’’ there is a statement in black
for patients to ‘‘Sign below to indicate you
were provided a copy of your contact lens
prescription at the completion of your
contact lens fitting,’’ with a space for a
signature and the date.
340 WS Transcript at 22. Dr. Montaquila
referenced HealthIT.gov data, as of 2021. See
U.S. Dep’t of Health & Human Servs., ONC,
‘‘Office-based Physician Electronic Health
Record Adoption,’’ https://www.healthit.gov/
data/quickstats/office-based-physician-
electronic-health-record-adoption. The 88%
figure, however, pertains to U.S. office-based
physicians, but not specifically to
optometrists or ophthalmologists. Moreover,
this figure relates to adoption of EHR by
doctors for their recordkeeping, but does not
necessarily cover the use of EHR, and
specifically portal-use, by patients
themselves. There may be instances where
doctors retain their records in electronic
format but do not make them available via
portal for their patients to access. And even
when records are available electronically,
many patients may opt not to use prescriber
portals. See section III.B.1, supra (discussing
patient portal access and usage) and section
VIII.B.2, infra (discussing AOA survey of a
small sample of optometrists showing that
just 35% provided prescriptions
electronically).
341 WS Transcript at 22.
342 WS Transcript at 22. Dr. Montaquila did
not produce this study to staff. A news article
on the study is available at: Cornell
Chronicle, ‘‘Study: E-prescribing cuts
medication errors by seven-fold’’ (2010),
https://news.cornell.edu/stories/2010/03/e-
prescribing-cuts-medication-errors-seven-
fold.
343 WS Transcript at 22.
344 AOA (CLR PRA Comment #0007
submitted by Benner), https://
www.regulations.gov/comment/FTC-2023-
0049-0007 (filed in response to FTC Request
For Comment, 88 FR 55044 (Aug. 14, 2023),
https://www.regulations.gov/document/FTC-
2023-0049-0001). As discussed more fully in
the PRA section of this document (section
VIII, infra notes 452–55 and accompanying
text.), the Commission has doubts about the
methodology used for this survey,and does
not rely on it for any determinations.
345 WS Transcript at 22–23. Dr. Montaquila
stated that EHR or practice management
systems were not flexible enough to
accommodate this functionality. Id.
346 The Commission points out that if the
prescriber delivers the prescription digitally,
but the patient has not opted-in to the digital
delivery option, the prescriber has not
satisfied the requirements of § 456.2. See
section III.B.1, supra.
347 See Section VIII, infra.
348 Section 456.4(a)(1)(ii) relating to digital
prescription release, now cross references
§ 456.3, requiring verifiable affirmative
consent to providing the prescription in
digital format.
349 See section III.B, supra.
350 WS Transcript at 36.
351 NPRM, 88 FR 265. See section III.C.3,
supra notes 239–40 and text (citing
Commission language from the CLR NPRM
and CLR SNPRM supporting the position
that, for the CLR, prescribers may obtain a
patient’s signature either on paper or
digitally.).
352 Although prescribers may similarly
comply with the CLR by obtaining digital
signatures, the Commission recognizes that,
for the time being, the text of the CLR will
differ from that of the Eyeglass Rule by not
expressly permitting signature collection in a
digital format. The Commission can amend
the CLR to include this express permission
during its next rule review and, in the
meantime, can provide clarity to prescribers
through guidance materials.
353 16 CFR 456.2(a).
354 16 CFR 315.4.
355 15 U.S.C. 7602.
356 NPRM, 88 FR 271.
357 Id. at 286.
358 Id. at 281.
359 NAROC (NPRM Comment #0024
submitted by Neville); NAROC (WS
Comment #0049 submitted by Neville).
NAROC noted, however, that it was not
aware of significant instances in which
prescribers had refused to automatically
provide prescriptions until receiving
payment from the insurance company.
NAROC (NPRM Comment #0024 submitted
by Neville); Lovejoy (WS Transcript at 48).
360 NPRM Comment #0025 submitted by
Montclair.
361 NPRM Comment #0027 submitted by
Repka.
362 Id.
363 WS Comment #0039. See also Hyder
(WS Transcript at 47) (recommending that
the FTC clarify the difference between
covered services—such as eye health
exams—and non-covered services—such as
refractive exams—because ‘‘insurance is
complex and I think sometimes it can be a
challenge to confirm whether or not the
coverage is available for a patient.’’).
364 See section II.C, supra.
365 Beatty (WS Transcript at 52); Lovejoy
(WS Transcript at 52–53).
366 Botha (WS Transcript at 53).
367 However, prescribers who wait to
collect payment for the examination until the
eyeglass purchase is completed are precluded
from using a confirmation method in which
the statement confirming receipt of the
prescription is included on the sales receipt.
368 16 CFR 456.1(b).
369 16 CFR 456.2(a).
370 See AOA (ANPR Comment #0849
submitted by Peele); Brauer (ANPR Comment
#0045); Yadon (ANPR Comment #0046);
Bolenbaker (ANPR Comment #0633). Some of
these commenters also stated that the defined
term in the Rule is at odds with the
definition of eye examination in the
American Medical Association’s Current
Procedural Terminology codes to bill
outpatient and office procedures, because
that definition does not include a refraction.
AOA (ANPR Comment #0849 submitted by
Peele); Bolenbaker (ANPR Comment #0633).
371 AOA (ANPR Comment #0849 submitted
by Peele); Lunsford (ANPR Comment #0346);
Bolenbaker (ANPR Comment #0633).
372 Bolenbaker (ANPR Comment #0633).
373 Lehman (ANPR Comment #0610).
374 NPRM, 88 FR 279.
375 NPRM, 88 FR 281.
376 NPRM Comment #0025 submitted by
Montclair.
377 NPRM Comment #0028 submitted by
Sepp.
378 NPRM Comment #0024 submitted by
Neville.
379 Id.
380 AAO (WS Comment #0027).
381 Id.
382 AOA (WS Comment #0047).
383 NPRM Comment #0023 submitted by
Benner (‘‘The refractive error measured
should be analyzed with other testing data,
and an assessment of the patient’s visual
needs obtained during an in-person
examination. This information is used to
determine if, and in what amount, an optical
correction is needed to provide optimal
vision and comfort for all viewing
distances.’’); see also OAA (NPRM Comment
#0020 submitted by Allen) (‘‘A refraction
may include objective and subjective
assessment of the patient’s refractive status;
however, the results of a refraction do not
provide all the information needed to
determine an optical prescription.’’); AOA
(WS Comment #0047 submitted by Benner)
(‘‘we believe that the market has significantly
evolved . . . thereby negating the need for
any language adjustments in the rule. We
believe the original language should stand
without revision.’’).
384 AOA (WS Comment #0047 submitted
by Benner).
385 Beatty (WS Transcript at 54).
386 Id. at 55–56.
387 Boatner (WS Comment #0036); see also
Lovejoy (WS Transcript at 49) (describing a
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60787	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
scenario where an ophthalmologist may
‘‘want to do a measure of whether or not
there is a refractive error to help with the
medical diagnosis, but may not want to write
a prescription at the end of that because
that’s not what the chief complaint is about
and they don’t see a need for the patient to
have a prescription for corrective eyewear.’’).
388 Boatner (WS Comment #0036); Beatty
(WS Transcript at 49).
389 Boatner (WS Comment #0036); Lovejoy
(WS Transcript at 51, 56) (stating that an
exemption for use of medical judgment to
withhold the prescription should be written
into the Rule).
390 Boatner (WS Comment #0036); see also
Hyder (WS Transcript at 50).
391 16 CFR 456.2(c).
392 See Hyder (WS Transcript at 50) (noting
that some ophthalmologists have reported
having patients say, ‘‘you’re not allowed to
charge me for my refraction,’’ and opining,
‘‘there needs to be something that states in
the rule that refraction services are different
than the cost of a prescription.’’).
393 Botha (WS Transcript at 49).
394 The term has been revised in the
following sections of the final rule: (1)
Definitions, Section 456.1(a), (b), (d), (e) and
(g); (2) Separation of examination and
dispensing, § 456.2(a)(1) and (2) and (b)
through (d); and (3) Confirmation of
prescription release, § 456.4(a)(1).
395 The Commission also makes clear that
requirement to release prescriptions does not
depend on how prescribers label their exams,
and whether a prescriber charges a fee for
that particular practice. The definition for the
amended refractive eye exam terminology
remains ‘‘the process of determining the
refractive condition of a person’s eyes or the
presence of any visual anomaly by the use of
objective or subjective tests.’’ § 456.1(b). A
prescriber who charged a patient only one
fee—designated as for an eye health exam—
but also performed an exam that determined
the refractive condition of a person’s eyes or
the presence of any visual anomaly, is still
required to automatically release the
prescription upon completion of the exam. A
prescriber is only permitted to not release a
prescription automatically following a
refractive exam if the prescriber makes a
medical determination that the patient
should not be given a prescription for
eyeglasses.
396 Workshop panelists who spoke on this
issue were unanimous in agreeing that if a
prescriber decides not to provide the
prescription in their medical judgment, then
it is appropriate that they do not sell eyewear
to that patient. WS Transcript at 57.
397 See, e.g., ACLens, ‘‘Measuring Pupillary
Distance (PD),’’ https://www.aclens.com/
measuring-pupillary-distance.
398 The Rule, as amended, defines a
prescription as the ‘‘written specifications for
lenses for eyeglasses which are derived from
a refractive eye examination, including all of
the information specified by state law, if any,
necessary to obtain lenses for eyeglasses.’’ 16
CFR 456.1(g). As of the date of the NPRM,
only four States, Alaska, Kansas,
Massachusetts, and New Mexico, required
the inclusion of pupillary distance
measurements on prescriptions. NPRM, 88
FR 273.
399 NPRM, 88 FR 276–77.
400 NPRM, 88 FR 276–77.
401 NPRM, 88 FR 277.
402 OAA (NPRM Comment #0020
submitted by Allen); AOA (NPRM Comment
#0023 submitted by Benner).
403 AOA (NPRM Comment #0023
submitted by Benner); see NPRM, 88 FR 276.
404 NAROC (Comment #0024).
405 OAA (NPRM Comment #0020
submitted by Allen).
406 AAO (NPRM Comment #0027
submitted by Repka).
407 AAO (NPRM Comment #0027
submitted by Repka). Others also expressed
favor with the Commission’s decision not to
require pupillary distance on prescriptions.
Anonymous (NPRM Comment #0012) (the
only way to ensure accurate measurement is
by having the patient try on the desired frame
and it is impossible to determine segment
height and optical center without fitting the
frame on the patient’s face and marking the
lens center); Anonymous (WS Comment
#0034) (requiring pupillary distance on
prescriptions would be the ‘‘absolute death of
the optical industry’’ and it would be unfair
to ‘‘require people who properly train their
staff to freely give the expertise so the
consumer can go to another provider that has
no such staff and get glasses.’’).
408 Eyeglasses.com (WS Comment #0040).
409 Id. Eyeglasses.com also stated that, for
purchases of bifocal, trifocal, or progressive
lenses, a segment height is required and that
consumers should be able to get a segment
height measurement from an optical
professional so they can include it when
ordering eyeglasses online. Id.
410 1–800 CONTACTS (NPRM Comment
#0025 submitted by Montclair).
411 Id.
412 Id.
413 This commenter urged the Commission
to require prescribers to ask patients to
confirm receipt of the PD measurement, in
addition to receipt of the prescription. 1–800
CONTACTS (NPRM Comment #0025
submitted by Montclair).
414 Id.
415 Beckman (WS Comment #0041).
416 Id. An unidentified commenter agreed,
indicating that when the optometrist fails to
measure and include pupillary distance
measurements on the prescription, they are
preventing the consumer from shopping
around and discovering lower prices
elsewhere. Anonymous (NPRM Comment
#0010). Another consumer comment does not
explicitly mention pupillary distance, but
stated it is their right to receive all of their
personal medical information, and states they
have to go to other sellers to be able to afford
eyeglasses. Crete (WS Comment #0035).
417 See section I.C, supra.
418 See NPRM, 88 FR 274.
419 As explained in the NPRM, pupillary
distance measuring systems vary in cost and
precision, and ‘‘if the Commission required
prescribers to include pupillary distance
measurements on prescriptions, it is unlikely
that prescribers would use less expensive
rulers and the like, but instead—for
professional and liability reasons—would
select more technologically sophisticated
methods, such as a digital centration device,
to take the measurement. Such devices, and
the training, staff, and exam time necessary
to operate the devices, could be costly.’’ 88
FR 276.
420 The Commission recognizes that there
is a tension between the fact that there are
zero and low-cost methods to measure
pupillary distance and the fact that
prescribers claim providing the measurement
requires expensive equipment and potential
increases in staff. However, both things can
be true. Consumers are able to ascertain
serviceable pupillary distance measurements
without expensive training and equipment,
while medical professionals will likely
want—and perhaps even feel professionally
obligated—to provide a measurement that
meets higher standards of technical
precision.
421 EyeBuyDirect, ‘‘How to Measure
Pupillary Distance (PD),’’ https://
www.eyebuydirect.com/guides/how-to-
measure-your-pd.
422 Zenni, ‘‘Measure your pupillary
distance (PD),’’ https://
www.zennioptical.com/measuring-pd-
infographic. The Commission has not
analyzed whether the various methods
consumers may use to determine their
pupillary distance, or whether sellers
manufacturing eyeglasses in accordance with
self-measured pupillary distances, are
permitted in all jurisdictions. The
Commission noted this in the NPRM, 88 FR
274, but did not receive any comments on
this topic in response to the NPRM.
423 The FTC has heard from consumers that
they have been charged between $15 and $40
to obtain an in-person pupillary distance
measurement.
424 Bailer (ANPR Comment #0191);
Emanuel (ANPR Comment #0282); Land
(ANPR Comment #0311).
425 ANPR Comment #0748 submitted by
Cutler.
426 NPRM, 88 FR 276.
427 Because the Commission did not find
adequate evidence of unfairness, it need not
consider alternative ways to remedy that
unfairness. Thus, it does not address seller 1–
800 CONTACTS’ alternate methods for
providing pupillary distance to patients.
428 WS Transcript at 38.
429 WS Transcript at 4–6, 16.
430 WS Transcript at 23–24.
431 Anonymous (WS Comment #0037).
432 NPRM Comment #0027 submitted by
Repka.
433 NPRM Comment #0024 submitted by
Neville. In addition, at the workshop, Mr.
Lovejoy stated that the FTC should give
prescribers some guidance on how to educate
their own customers and make sure the
message is consistent throughout the
industry. WS Transcript at 58.
434 See, e.g., https://www.ftc.gov/business-
guidance/resources/complying-eyeglass-rule
(for prescribers); https://consumer.ftc.gov/
articles/buying-prescription-glasses-or-
contact-lenses-your-rights (for consumers);
https://www.ftc.gov/news-events/news/press-
releases/2020/12/ftc-sends-28-warning-
letters-regarding-agencys-eyeglass-rule (press
release); https://consumer.ftc.gov/consumer-
alerts/2020/12/ftc-warns-eye-care-
prescribers-follow-law-or-else (consumer
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60788 	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
alert); https://www.ftc.gov/business-
guidance/blog/2023/04/required-action-after-
refraction-ftc-staff-sends-cease-desist-letters-
about-eyeglass-rule-compliance (business
guidance).
435 5 CFR 1320.8(b)(3)(vi).
436 16 CFR 456.4(a)(1).
437 NPRM, 88 FR 283.
438 Id. at 282–83.
439 CLR Final Rule, 85 FR 50709. The
estimates for the Contact Lens Rule’s
confirmation requirement were, in turn,
based on a (1) survey of how long it took
consumers to read a proposed Contact Lens
Rule confirmation statement, and (2)
previously approved burden estimates for a
similar patient-acknowledgment requirement
under HIPAA rules, found at 45 CFR
164.520(c)(2)(ii).
440 88 FR 284.
441 Anonymous (NPRM Comment #0006).
442 Anonymous (NPRM Comment #0007).
443 AOA (NPRM Comment #0023). See also
Rep. Williams, House Committee on Small
Business (WS Comment #0044) (‘‘The
Committee fears that this rule will have a
disproportionate impact on small businesses
by adding redundant requirements to already
understaffed practices.’’).
444 Michaels (WS Transcript at 9) (‘‘I don’t
think that it’s a burden to provide the
prescription. Where I see the burden is to ask
for paperwork, to say, ‘Sign this piece of
paper acknowledging that we’ve already
given you a prescription.’ There’s a lot of
time, effort, discussion around that. I think
that that is something that is greatly
underestimated in terms of how long it
takes.’’); AOA (WS Comment #0047
submitted by Benner).
445 Coast Eyes Pllc (WS Comment #46).
446 Montaquila (WS Transcript at 23–24).
Dr. Montaquila did not break down his 4-
minute estimate by task, so it is unclear how
long he estimates it takes for a consumer to
simply read and sign the confirmation
statement, as opposed to the time it takes for
his staff to print out the prescription and
confirmation and store the patient
confirmation as a record. In its NPRM, the
Commission allowed a total of two minutes
and 10 seconds for the entire process (one
minute for prescribers to print out the
prescription, 10 seconds for the confirmation
signature, and an additional minute for staff
to store the signed confirmation.).
447 National Taxpayers Union (NPRM
Comment #0028 submitted by Sepp).
448 See section IV.B, supra note 274 and
text. As noted previously, the Commission
has not been able to replicate the NTU
estimate. Accepting NTU’s assumption that a
small practice performs 3000 refractive
eyeglass examinations per year, the
confirmation requirement would add a
paperwork burden of $1,439.88 for such a
practice based on the proposal and PRA
analysis applied in the NPRM, and an
increased paperwork burden of $1,318.73
based on the amendment and PRA analysis
of this Final Rule. While the AOA has stated
that approximately 92% of optometry
practices have fewer than 25 employees and
average $826,612 in gross receipts per annum
(AOA NPRM Comment #23), the Commission
does not have information detailing how
many refractive eyeglass examinations a
typical practice performs—or even what a
‘‘typical practice’’ is and whether it is
advisable to weigh the burden based on a
typical practice experience—and finds it
preferable to calculate the burden based on
the overall number of eyeglass wearers in the
United States, and the estimate that each
wearer obtains a refractive eye exam for
eyeglasses every two years.
449 NAROC (NPRM Comment #0024
submitted by Neville); see also Consumer
Action (NPRM Comment #0026 submitted by
McEldowney) (‘‘we do not believe it is a
burden on providers to obtain, document,
and retain a consumer’s affirmative receipt of
their prescription.’’).
450 Neville (WS Transcript at 28–29).
451 Coast Eyes Pllc did not provide any
evidence in support of its $18,000 estimate,
and it is not clear where this calculation
comes from.
452 AOA (CLR PRA Comment #0007
submitted by Benner), https://
www.regulations.gov/comment/FTC-2023-
0049-0007 (filed in response to FTC Request
For Comment, 88 FR 55044 (Aug. 14, 2023),
https://www.regulations.gov/document/FTC-
2023-0049-0001).
453 Id. According to the AOA, the survey
was conducted in-house by its Health Policy
Institute and Research Departments, and
distributed to member optometrists via
AOA’s weekly email newsletter with a link
and invite to the survey titled, ‘‘Voice your
concerns by Oct. 9: Complying with the FTC
Contact Lens Rule.’’ Of members who
responded to the AOA’s link request, 327
completed the survey.
454 FTC Notice, Proposed Collection, 88 FR
88076, 88079, Dec. 20, 2023 (‘‘2023 CLR
PRA’’). Following this notice and response to
commenters, on Jan. 26. 2024, OMB
approved the extension request for CLR
clearance. Notice of Office and Management
and Budget Action, OMB Control No. 3084–
0127.
455 The Commission notes that while the
AOA claims to represent some 50,000
optometric professionals, only 327 members
responded to the AOA’s invitation and
completed the survey, which could indicate
that many of those who self-selected and took
part in the survey were those who have
concerns about the confirmation
requirement, while most other AOA members
do not have such concerns. However, there
could be other reasons for the relatively small
number of prescribers (in proportion to the
total membership) who responded, so the
Commission will not draw inferences from
the low response rate.
456 2023 CLR PRA, 88 FR 88079.
457 See section IV.C.2.a, supra, discussing
the AOA model form exhibited by Dr.
Montaquila at the workshop. A copy of the
model form is available at https://
www.aoa.org/AOA/Documents/
doctor%20resources/Contact-Lens-Rule-
Compliance-Toolkit.pdf.
458 Id.
459 Id.
460 Montaquila (WS Transcript at 23).
461 The Commission has never subscribed
to the belief that consumers will be greatly
confused as to why they are signing a
straightforward confirmation statement such
as, ‘‘My eye care professional provided me
with a copy of my contact lens prescription
at the completion of my contact lens fitting.’’
The Commission’s understanding is based on
a common sense reading of the statement, but
is also supported by a survey submitted
during the Contact Lens Rule rulemaking
showing that 90% of consumers responded
they understood the proposed confirmation
statement, and 94% responded that they had
no follow-up questions. Laurence C. Baker,
‘‘Analysis of Costs and Benefits of the FTC
Proposed Patient Acknowledgment and
Recordkeeping Amendment to the Contact
Lens Rule,’’ 13 (2017), https://www.ftc.gov/
system/files/summaries/initiatives/677/
10192017_meeting_summary_from_mko_for_
the_contact_lens_rule_rulemaking_
proceeding.pdf.
462 The Commission recently made a
similar revision to its estimate of the time
required to obtain confirmation for the
Contact Lens Rule, and the revised burden
figures received clearance by the Office of
Management and Budget. See supra note 454.
463 Standards for Privacy of Individually
Identifiable Health Information, Final Rule,
67 FR 53182, 53261 (Aug. 14, 2002)
(implementing 45 CFR 164.520(c)(2)(ii)).
464 See section I.D.5, supra note 73.
465 The Commission relies on industry
sources for its estimate that eyeglass wearers
typically obtain one refractive eye exam
every two years. See, e.g., AOA, Excel and
Jobson Medical Information, The State of the
Optometric Profession: 2013, at 4, https://
www.reviewob.com/wp-content/uploads/
2016/11/8-21-13stateofoptometryreport.pdf
(showing an average interval between exams
of 25 months); AOA, Comprehensive Eye
Exams, https://www.aoa.org/healthy-eyes/
caring-for-your-eyes/eye-exams? (showing
recommended examination frequency for
adult patients 18–64 of ‘‘at least every two
years’’ for asymptomatic/low risk patients).
In contrast to the CLR, which establishes a
one-year minimum term for most contact lens
prescriptions (16 CFR 315.6(a)) (a term-length
mirrored by a majority of States, see CLR
NPRM, 81 FR 88545, n.245) the Eyeglass Rule
does not discuss or define prescription
expiration terms, and many States do not set
any limit for eyeglass prescriptions. Some
eyeglass wearers, therefore, can legally go
many years between refractive eye
examinations. But the Commission will use
two years as a basis for purposes of this
assessment, since that is recommended
interval for the majority of eyeglass wearers.
466 See, e.g., CLR SNPRM, 84 FR 24693
n.347.
467 CLR Final Rule, 85 FR 50709. This
estimate was based on responses to a
consumer survey regarding how long it
would take consumers to read the form, and
a prior PRA estimate for consumers to
complete a similar signed acknowledgment.
See CLR SNPRM, 84 FR 24693; NPRM, 88 FR
282.
468 See supra note 462–63 and
accompanying text.
469 In order to utilize § 456.4(a)(1)(ii)
however, a prescriber must obtain and
maintain records or evidence of affirmative
consent by patients to electronic delivery of
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60789	Federal Register / Vol. 89, No. 144 / Friday, July 26, 2024 / Rules and Regulations
their prescriptions. The burden to do so is
included in the recordkeeping burden
calculation of this PRA section.
470 NPRM, 88 FR 283.
471 AOA (CLR PRA Comment #0007
submitted by Benner).
472 The survey found that approximately
57% said they used a separate signed
confirmation form, 35% said they opted for
digital delivery, 15% used a confirmation
statement on a signed sales receipt, 27% used
a confirmation statement on a signed
prescription copy, and 9% selected ‘‘other.’’
As noted, prescribers were permitted to
choose more than one option, so these
percentages add up to more than 100%.
473 Section 456.3(a)(3) also requires that in
the event that a patient declines to sign a
confirmation requested under paragraph
(a)(1)(i) the prescriber must note the patient’s
refusal on the document and sign it.
However, the Commission has no reason to
believe that such notation should take any
longer than for the patient to read and sign
the document, so the Commission will
maintain its calculation as if all
confirmations requested under paragraph
(a)(1)(i) require the same amount of time. It
is worth noting that using the 82.5 million
figure here is an overestimate by the
Commission, since it does not deduct for the
number of patients who visit a prescriber
who does not have a direct or indirect
financial interest in the sale of eye wear and
would not be required to confirm receipt of
prescriptions under Rule amendment
§ 456.4(c). However, staff does not currently
possess information as to what number of
prescribers will qualify for the exception in
§ 456.4(c), and so has assumed that all
patients receiving a prescription will either
sign a confirmation of prescription release or
a consent to receive their prescription
electronically every year.
474 See, e.g., 246 Mass. Code Regs. § 3.02
(requiring optometrists to maintain patient
records for at least seven years); Wash.
Admin. Code § 246–851–290 (requiring
optometrists to maintain records of eye
exams and prescriptions for at least five
years); Iowa Admin. Code r. 645–182.2(2)
(requiring optometrists to maintain patient
records for at least five years).
475 20,625,000 prescriptions (82.5 million
prescriptions × 25%). As noted in section
III.C., supra, prescribers may not need to
obtain patient consents at every visit. But the
Commission does not have reliable
information as to the percentage of
consumers that are new to their prescribers
as opposed to being repeat visitors or how
often prescribers’ practices with digital
prescription delivery will change and require
new consents, and thus how many will or
will not have to sign a consent-to-electronic-
delivery. Thus, the Commission will assume,
for PRA calculation purposes, that every time
a consumer receives a digital prescription,
the prescriber’s staff has collected a signed
consent. This very likely results in a
significant overestimation of the consent
burden.
476 20,625,000 prescriptions yearly × 20
seconds/60 secs/60 mins.
477 20,625,000 affirmative consents × one
minute/60 mins) for storing such records.
478 This is further supported by comments
during the Eyeglass Rule Workshop, such as
that of panelist Dr. Montaquila, who noted
that his staff completes the process ‘‘from
explaining why we’re doing it to the patient,
providing them with their prescription,
making copies, providing their prescription
back to them, and ultimately storing it. . . .
Our staff has to explain, ‘You’re signing this
for this reason’ ’’ Montaquila (WS Transcript
at 22, 28). See also Neville (WS Transcript at
28) (commenting that he has observed
situations where the doctor pushed a button
to have the prescription printed out at the
front desk, the prescription was handed over
at the desk by the staff person, and the staff
person obtained the patient’s signature on the
confirmation); AOA Report for Complying
with the FTC Contact Lens Rule, (survey to
prescribers, Question 3, ‘‘Have you
experienced challenges in training staff on
the new requirements for the Contact Lens
Rule?’’; Question 9 ‘‘How much time per day
does your staff spend on addressing patient
questions with the acknowledgment form
and process?’’).
479 Bureau of Labor Statistics, U.S.
Department of Labor, Occupational
Employment Statistics, https://www.bls.gov/
news.release/ocwage.t01.htm.
480 Based on information that there are
approximately 61,000 optometrists and
ophthalmologists in the United States, this
averages to $629 per prescriber per year.
481 The Vision Council, Market inSights
2022. Total market value of eyeglass frames
and lenses. Does not include exams, reading
glasses, or contact lenses. The $149,691,431
cost of the Eyeglass Rule is 0.0042 of the total
$35.6 billion market value.
482 It is possible that bringing the
prescription confirmation requirements for
eyeglass prescriptions into conformity with
those for contact lenses will ease staff
training burdens rather than increase them,
since prescribers’ staff will not have to learn
to differentiate between the two types and
treat them differently for rule purposes.
483 As explained in the PRA Section, supra,
the Commission calculates an incremental
burden of $38,389,993 from adding the
confirmation of prescription release to the
Eyeglass Rule. The Commission need not
issue a final regulatory analysis under section
22 of the FTC Act because this amount does
not meet the threshold of an annual effect on
the national economy from the amendment of
$100 million or more or cause the other
changes or effects described in section
22(a)(1)(B) and (C). See 15 U.S.C. 57b–3.
484 NAROC (WS Comment #0049
submitted by Neville).
485 See section VIII, supra.
486 See 13 CFR 121.201 (Small Business
Size Regulations).
487 See NPRM, 88 FR 285.
488 AOA (NPRM Comment #0023
submitted by Benner).
489 According to one publication, 65% of
optometrists work in a practice owned by an
optometrist or ophthalmologist, practices that
are likely small businesses. See AOA, ‘‘An
Action-Oriented Analysis of the State of the
Optometric Profession: 2013,’’ at 7 https://
reviewob.com/wp-content/uploads/2016/11/
8-21-13stateofoptometryreport.pdf. This
publication also reported that although it
could not ascertain the precise number of
independent optometric practices, it
estimated that as of 2012, there were 14,000
to 16,000 optometric businesses with no
corporate or institutional affiliation. Id.
490 NPRM, 88 FR 264.
491 Id. at 263.
492 NPRM, 88 FR 287.
[FR Doc. 2024–15620 Filed 7–25–24; 8:45 am]
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68034 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
1 Fed. Trade Comm’n, Trade Regulation Rule on
the Use of Reviews and Endorsements, 87 FR 67424
(Nov. 8, 2022) [hereinafter ‘‘ANPR’’], https://
www.federalregister.gov/documents/2022/11/08/
2022-24139/trade-regulation-rule-on-the-use-of-
reviews-and-endorsements. The ANPR was entitled
‘‘Trade Regulation Rule Concerning Reviews and
Endorsements.’’ In order to better reflect its content,
the Commission subsequently decided to change
the name of the proposed rule to ‘‘Trade Regulation
Rule on the Use of Consumer Reviews and
Testimonials.’’
FEDERAL TRADE COMMISSION
16 CFR Part 465
RIN 3084–AB76
Trade Regulation Rule on the Use of
Consumer Reviews and Testimonials
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is issuing this final rule and Statement
of Basis and Purpose (‘‘SBP’’) relating to
certain specified unfair or deceptive acts
or practices involving consumer reviews
or testimonials. This final rule, among
other things, prohibits selling or
purchasing fake consumer reviews or
testimonials, buying positive or negative
consumer reviews, certain insiders
creating consumer reviews or
testimonials without clearly disclosing
their relationships, creating a company-
controlled review website that falsely
purports to provide independent
reviews, certain review suppression
practices, and selling or purchasing fake
indicators of social media influence.
DATES : This rule is effective October 21,
2024.
FOR FURTHER INFORMATION CONTACT:
Michael Ostheimer, (202) 326–2699,
Attorney, Division of Advertising
Practices, Bureau of Consumer
Protection, Federal Trade Commission,
Room CC–6316, 600 Pennsylvania
Avenue NW, Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
Table of Contents
I. Background
A. Advance Notice of Proposed
Rulemaking
B. Notice of Proposed Rulemaking
C. Notice of Informal Public Hearing
II. The Legal Standard for Promulgating the
Rule
A. Prevalence of Acts or Practices
Addressed by the Rule
B. Manner and Context in Which the Acts
or Practices Are Deceptive or Unfair
C. The Economic Effect of the Rule
III. Overview of the Comments
A. Furthering the Commission’s Goal
B. Adoption of the Proposed Rule as a
Final Rule
IV. Section-by-Section Analysis
A. § 465.1—Definitions
1. Overview
2. Definition-by-Definition Analysis
a. Business
b. Celebrity Testimonial
c. Clear and Conspicuous
d. Consumer Review
e. Consumer Testimonial
f. Indicators of Social Media Influence
g. Officers
h. Purchase a Consumer Review
i. Reviewer
j. Substantially Different Product
k. Testimonialist
l. Unjustified Legal Threat
3. Proposed Additional Definitions
a. Dissemination
b. Manager
c. Relative
d. Purchase or Procure Fake Indicators
e. Review Hosting
B. § 465.2—Fake or False Consumer
Reviews, Consumer Testimonials, or
Celebrity Testimonials
1. Common Language in § 465.2(a), (b), and
(c)
2. § 465.2(a)
3. § 465.2(b)
4. § 465.2(c)
5. § 465.2(d)
6. Knowledge Standard
7. Other Proposals
C. § 465.3—Consumer Review or
Testimonial Reuse or Repurposing
D. § 465.4—Buying Positive or Negative
Consumer Reviews
E. § 465.5—Insider Consumer Reviews and
Consumer Testimonials
1. Material Connections
2. Relatives
3. Agents
4. Scope
5. Knowledge Standard
6. Other Suggestions
F. § 465.6—Company-Controlled Review
Websites or Entities
G. § 465.7—Review Suppression
1. § 465.7(a)
2. § 465.7(b)
H. § 465.8—Misuse of Fake Indicators of
Social Media Influence
I. § 465.9—Severability
V. Final Rule
VI. Final Regulatory Analysis Under Section
22 of the FTC Act
A. Need for, and Objectives of the Final
Rule
B. Anticipated Costs and Benefits of the
Final Rule
1. Estimated Benefits of the Final Rule
a. Consumer Welfare Benefits From Better-
Informed Purchase Decisions
b. Consumer Time Savings From Increased
Reliability of Summary Ratings
c. Benefits Related to Competition
2. Estimated Costs of the Final Rule
a. Compliance Costs
b. Other Impacts of the Final Rule
C. Reasonable Alternatives and
Explanation of Why Particular
Alternative Chosen
VII. Paperwork Reduction Act
VIII. Regulatory Flexibility Act—Final
Regulatory Flexibility Analysis
A. Reasons for the Rule
B. Issues Raised by Comments, the
Commission’s Assessment and Response,
and Any Changes Made as a Result
C. Comments by the Chief Counsel for
Advocacy of the SBA, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
D. Description and Estimate of the Number
of Small Entities to Which the Rule Will
Apply
E. Description of the Projected Reporting,
Recordkeeping, and Other Compliance
Requirements
F. Description of Steps Taken To Minimize
Impact of the Rule on Small Entities
IX. Congressional Review Act
I. Background
A. Advance Notice of Proposed
Rulemaking
On November 8, 2022, the Federal
Trade Commission (‘‘Commission’’ or
‘‘FTC’’) published an advance notice of
proposed rulemaking (‘‘ANPR’’) to
address certain deceptive or unfair acts
or practices involving consumer reviews
or testimonials.1 Specifically, the ANPR
discussed: (1) reviews or endorsements
by people who do not exist, who did not
actually use or test the product or
service, or who were misrepresenting
their experience with it; (2) review
hijacking, where a seller steals or
repurposes reviews of another product;
(3) marketers offering compensation or
other incentives in exchange for, or
conditioned on, the writing of positive
or negative consumer reviews; (4)
owners, officers, or managers of a
company (a) writing reviews or
testimonials of their own products or
services, or publishing testimonials by
their employees or family members,
which fail to provide clear and
conspicuous disclosures of those
relationships, or (b) soliciting reviews
from employees or relatives without
instructing them to disclose their
relationships; (5) the creation or
operation of websites, organizations, or
entities that purportedly provide
independent reviews or opinions of
products or services but are, in fact,
created and controlled by the companies
offering the products or services; (6)
misrepresenting that the consumer
reviews displayed represent most or all
of the reviews submitted when, in fact,
reviews are being suppressed based
upon their negativity; (7) the
suppression of customer reviews by
physical threat or unjustified legal
threat; and (8) selling, distributing, or
buying followers, subscribers, views,
and other indicators of social media
influence. As part of the ANPR, the
Commission solicited public comment
on, among other things, whether such
practices are prevalent and, if so,
whether and how to proceed with a
notice of proposed rulemaking
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68035	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
2 See ANPR, 87 FR 67427.
3 The Commission also received six unresponsive
comments.
4 The comments are publicly available on this
rulemaking’s docket at https://www.regulations.gov/
docket/FTC-2022-0070/comments.
5 See Fed. Trade Comm’n, Trade Regulation Rule
on the Use of Consumer Reviews and Testimonials,
88 FR 49364 (July 31, 2023) [hereinafter ‘‘NPRM’’],
https://www.federalregister.gov/documents/2023/
07/31/2023-15581/trade-regulation-rule-on-the-use-
of-consumer-reviews-and-testimonials.
6 See id. at 49370–77.
7 Id. at 49377–81, 49389–90.
8 Id. at 49390–92.
9 The Commission also received sixteen
comments that were non-responsive and two that
were duplicates.
10 The comments are publicly available on this
rulemaking’s docket at https://www.regulations.gov/
document/FTC-2023-0047-0001/comment.
11 Fake Review Watch, Cmt. on NPRM at 4–5
(Aug. 8, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0015 (‘‘Fake Review
Watch Cmt.’’); Interactive Advertising Bureau, Cmt.
on NPRM at 14–15 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0101 (‘‘IAB Cmt.’’); Researchers at Brigham Young
University, Pennsylvania State University, and
Emory University, Cmt. on NPRM at 4 (Sept. 22,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0060 (‘‘The Researcher Cmt.’’).
12 Fed. Trade Comm’n, Trade Regulation Rule on
the Use of Consumer Reviews and Testimonials, 89
FR 2526 (Jan. 16, 2024) [hereinafter ‘‘Hearing
Notice’’], https://www.federalregister.gov/
documents/2024/01/16/2024-00678/rule-on-the-
use-of-consumer-reviews-and-testimonials.
13 The comments are publicly available on this
rulemaking’s docket at https://www.regulations.gov/
docket/FTC-2024-0004/comments.
14 Hearing Notice, 89 FR 2528.
15 Members of the public were able to watch the
informal hearing live on the Commission’s website,
https://www.ftc.gov.
16 A transcript of the February 13 hearing session
is available at https://www.ftc.gov/system/files/ftc_
gov/pdf/transcript-consumer-reviews-and-
testimonials-rule-informal-hearing-feb-13-2024.pdf
[hereinafter ‘‘February 13 Hearing Transcript’’].
17 IAB’s proposed disputed issues of material fact
were ‘‘whether the compliance costs for businesses
will be minimal, particularly if the ‘knew or should
have known’ standard is finalized’’ and ‘‘whether
the Commission finding that unattended
consequences from the NPRM are unlikely is
accurate.’’ February 13 Hearing Transcript at 9.
18 Order by Presiding Officer Foelak at 2 (Feb. 13,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
r311003aljorder20240213.pdf.
19 IAB ‘‘represents over 700 leading media
companies, brand marketers, agencies and
technology companies.’’ February 13 Hearing
Transcript at 6.
20 Letter Brief from Interactive Advertising
Bureau to Presiding Officer Foelak (Feb. 20, 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/
r311003iabsubmission20240220.pdf.
21 Order by Presiding Officer Foelak (Feb. 23,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
p311003aljorder20240226.pdf.
(‘‘NPRM’’). 2 The ANPR provided for a
60-day comment period, and the
Commission received 42 responsive
comments 3 from review platforms and
other businesses, trade associations,
consumer advocacy organizations,
entities dedicated to fighting fake
reviews, a public interest research
center, a think tank, academic
researchers, and individual consumers.4
Most commenters expressed support for
the Commission proceeding with the
rulemaking. Five comments expressed
the view that a rulemaking was
unnecessary, was premature, or should
not apply to the commenter’s
constituents, or expressed skepticism
about the utility of a rulemaking.
B. Notice of Proposed Rulemaking
Based on an extensive review of the
comments received in response to the
ANPR, the Commission’s own history of
enforcement, and other sources of
information, the Commission published
the NPRM on July 31, 2023.5 In the
NPRM, the Commission stated that it
has reason to believe that certain unfair
or deceptive acts or practices involving
consumer reviews or testimonials are
prevalent, including: (1) fake consumer
reviews and testimonials, as well as
reviews and testimonials that otherwise
misrepresent the experiences of the
reviewers and testimonialists; (2) the
unfair or deceptive reuse or repurposing
of consumer reviews; (3) the giving of
incentives for reviews conditioned on
the sentiment of the reviews; (4) the use
of consumer reviews and testimonials
written by company insiders without
disclosure of their relationships to the
company; (5) marketers setting up
purportedly independent websites,
organizations, or entities to review or
endorse their own products; (6) seller
websites representing that the consumer
reviews displayed represent most or all
of the reviews submitted when, in fact,
reviews are being suppressed based
upon their negativity; (7) review
suppression by unjustified legal threat
or physical threat; and (8) the sale and
misuse of fake indicators of social media
influence for commercial purposes.6
The Commission identified no disputed
issues of material fact; explained its
considerations in developing the
proposed rule; solicited additional
public comment thereon, including
specific questions designed to assist the
public in submitting comments; and
provided interested parties the
opportunity to request to present their
position orally at an informal hearing.7
Finally, the NPRM set out the
Commission’s proposed regulatory text.8
In response to the NPRM, the
Commission received 100 responsive
and non-duplicative comments 9 from
entities and individuals interested in
the proposed rule, 10 which are
discussed in sections III and IV.
Although some commenters raised
concerns and recommended specific
modifications or additions to the
Commission’s proposal, the majority of
commenters generally supported the
Commission’s proposal. Three
commenters submitted timely requests
to make oral statements at an informal
hearing (‘‘the hearing requesters’’).11
C. Notice of Informal Public Hearing
On January 16, 2024, the Commission
published an Initial Notice of Informal
Hearing, which also served as the Final
Notice of Informal Hearing.12 The
Notice designated the Honorable Carol
Fox Foelak, an Administrative Law
Judge for the Securities and Exchange
Commission, to serve as the presiding
officer for the informal hearing and
stated that the hearing requesters could
speak at the informal hearing, make
documentary submissions to be placed
on the public rulemaking record, or
both. Written submissions were due on
or before January 30, 2024. In response
to the Notice of Informal Hearing, the
Commission received seven
comments.13 The Notice also stated that
the Commission had decided not to
proceed with proposed § 465.3,14 which
pertained to the unfair or deceptive
reuse or repurposing of a consumer
review written or created for one
product so that it appears to have been
written or created for a substantially
different product.
As announced in the Notice of
Informal Hearing, the informal hearing
began as scheduled on February 13,
2024.15 Because the Commission had
not designated disputed issues of
material fact, the February 13 hearing
session included no cross-examination
or rebuttal submissions but did include
oral statements from the three hearing
requesters. 16 One of the hearing
requesters, the Interactive Advertising
Bureau (‘‘IAB’’), a trade association,
argued that there were two disputed
issues of material fact.17 The other two
hearing requesters discussed their
comments submitted pursuant to the
NPRM. At the conclusion of this hearing
session, the presiding officer issued an
order inviting further submissions,
including specific evidence, concerning
whether there were disputed issues of
material fact.18 IAB submitted a letter
that described the results from a survey
directed to its members—to which
eighteen unidentified members
responded 19 —regarding the impact of
the proposed rule, including their
estimated compliance costs.20
On February 23, 2024, the presiding
officer issued an order finding one
disputed issue of material fact, namely,
‘‘[w]hether the compliance costs for
businesses will be minimal.’’ 21
However, the February 23 order stated
that ‘‘[i]t can be argued that . . . even
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68036 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
22 Id.
23 Id.
24 Order by Presiding Officer Foelak (Feb. 28,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
r311003_alj_order_3_2024.02.28.pdf.
25 A transcript of the March 6 hearing session is
available at https://www.ftc.gov/system/files/ftc_
gov/pdf/r311003informalhearing03062024.pdf. See
also, Interactive Advertising Bureau’s Submission
of Exhibits (Mar. 5, 2024), https://www.ftc.gov/
system/files/ftc_gov/pdf/r311003iabsubmission
exhibits20240305.pdf.
26 The presiding officer stated that testimony by
the trade association’s ‘‘attorney about survey
responses is hearsay and will be weighed
accordingly.’’ Order by Presiding Officer Foelak
(Mar. 4. 2024), https://www.ftc.gov/system/files/ftc_
gov/pdf/r311003aljorder20240304-1.pdf.
27 IAB received eighteen responses to the first
survey and nineteen to the second. See Post-
Hearing Letter Brief from Interactive Advertising
Bureau to Presiding Officer Foelak (Mar. 13, 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/
r311003iabposthearingbrief20240313.pdf.
28 See Transcript of Informal Hearing on Proposed
Trade Regulation Rule on the Use of Consumer
Reviews and Testimonials (Mar. 6, 2024), https://
www.ftc.gov/system/files/ftc_gov/pdf/
r311003informalhearing03062024.pdf.
29 Order by Presiding Officer Foelak at 5 (May 8,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
r311003aljdecision20240508.pdf. The presiding
officer added that, ‘‘[u]nquestionably, there is
insufficient evidence in the record to make a
specific finding as to the size of the compliance
costs associated with the proposed rule.’’ Id. at 5
n.9.
30 Id. at 6.
31 See 15 U.S.C. 57a(a)(1)(B).
32 15 U.S.C. 57a(d)(1). In addition, section
22(b)(2) of the FTC Act requires the Commission to
prepare a final regulatory analysis. 15 U.S.C. 57b–
3(b)(2). The final regulatory analysis is in section
VI of this document.
33 ANPR, 87 FR 67425–26.
34 NPRM, 88 FR 49370–77.
35 Id. at 49370–72. AI tools make it easier for bad
actors to pollute the review ecosystem by
generating, quickly and cheaply, large numbers of
realistic but fake reviews that can then be
distributed widely across multiple platforms. AI-
generated reviews are covered by the final rule,
which the Commission hopes will deter the use of
AI for that illicit purpose.
36 NPRM, 88 FR 493720–73.
if the actual costs are more than double
what the FTC assumed, it would not
change the outcome of the rule, and
therefore, it is not a ‘disputed issue[ ] of
material fact necessary to be
resolved.’ ’’ 22 The order provided that
the presiding officer was nevertheless
scheduling an additional hearing
session for March 5, 2024, because ‘‘an
expert witness or proposed testimony
from affected firms’ compliance officers
or legal counsel’’ might ‘‘shed light on
what would be involved with
compliance review and
implementation’’ and ‘‘could give the
FTC a way of better quantifying cost.’’ 23
The March 5 hearing session was
subsequently moved to March 6, 2024 at
the trade association’s request.24
At the March 6 hearing session, the
trade association put on one witness: its
Executive Vice President for Public
Policy, an attorney, who testified about
the results of two limited surveys of its
members. 25 FTC staff conducted cross
examination. The attorney’s testimony
about the surveys 26 did not call the
Commission’s cost estimates into
legitimate question. Only a small
number of unidentified trade
association members completed the
surveys, and no evidence was submitted
to indicate that they were representative
of any group, much less all affected
businesses.27 Further, only a few of the
survey respondents gave compliance
cost estimates, none of which were
accompanied by explanation or
evidence of their factual bases, and all
of which could have been influenced by
the trade association’s misconceptions
about the law and the proposed rule.28
The presiding officer issued a
recommended decision on May 8, 2024,
stating that based on the evidence, ‘‘it
cannot be found whether or not the
proposed rule will have compliance
costs that will be minimal.’’ 29 Later in
the decision, the presiding officer
explained that the evidence ‘‘falls short
as the basis for a finding that
compliance costs would not be
minimal’’ because ‘‘a minute sample of
businesses that would be affected by the
proposed rule responded to the surveys,
and there is insufficient information
about the nature of those businesses,
how they calculated potential
compliance costs, and the methodology
of the surveys.’’ 30
In crafting the final rule, the
Commission has carefully considered
the comments received and the
rulemaking record as a whole, which
includes the oral statements made at
and documents submitted for the
informal hearing. As a result, the final
rule contains some changes from the
proposed rule. These modifications,
mostly clarifications and limitations,
discussed in detail in section IV of this
document, are based upon input from
commenters and careful consideration
of relevant law. Section IV also
discusses commenters’
recommendations that the Commission
declined to adopt, along with the
Commission’s reasons for rejecting
them. Accordingly, the Commission
adopts the proposed rule with limited
modifications as discussed below. The
rule will take effect October 21, 2024.
II. The Legal Standard for Promulgating
the Rule
The Commission is promulgating 16
CFR part 465 pursuant to section 18 of
the FTC Act, 15 U.S.C. 57a, which
authorizes the Commission to
promulgate, modify, and repeal trade
regulation rules that define with
specificity acts or practices in or
affecting commerce that are unfair or
deceptive within the meaning of section
5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1).31
Whenever the Commission
promulgates a rule under section
18(a)(1)(B), the rule must also include a
Statement of Basis and Purpose (‘‘SBP’’)
that addresses: (1) the prevalence of the
acts or practices addressed by the rule;
(2) the manner and context in which the
acts or practices are unfair or deceptive;
and (3) the economic effect of the rule,
taking into account the effect on small
businesses and consumers.32 In this
section of the preamble, the
Commission summarizes its findings
regarding each of these requirements.
A. Prevalence of Acts or Practices
Addressed by the Rule
In its ANPR, the Commission
described its enforcement record,
demonstrating the pervasiveness of the
deceptive or unfair commercial acts or
practices involving reviews or other
endorsements it was examining. 33 In the
NPRM, the Commission cited additional
enforcement evidence, including actions
brought by State Attorneys General
(‘‘AGs’’) and private lawsuits, as well as
international evidence, and also took
notice of additional indications of
prevalence that came from
commenters.34
In support of the finding that fake
reviews are prevalent, the NPRM cited
to (1) FTC, State, and private cases; (2)
statistics from review platforms, a
platform insider, academic and other
researchers, consumer surveys,
investigative journalists, and others
about the incidence of fake reviews; (3)
information about the pervasiveness of
consumer review rings that facilitate the
buying, selling, or exchange of fake
reviews; (4) the experiences of
regulators in other countries and of
international bodies; and (5) reporting
regarding the use of generative artificial
intelligence (‘‘AI’’) tools that make it
easier for bad actors to write fake
reviews.35 In support of the finding that
fake testimonials are prevalent, the
NPRM discussed relevant FTC cases, an
in-depth Better Business Bureau
investigative study that examined fake
celebrity endorsements, a celebrity
lawsuit involving the fraudulent use of
the celebrities’ names, and an FTC
consumer alert about fake Shark Tank
celebrity testimonials.36 In support of
the finding that misrepresentations of
endorsers’ experiences are prevalent,
the NPRM cited to FTC cases and a
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68037	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
37 Id. at 49373.
38 Id. at 49373–74.
39 Id. at 49374.
40 Id. at 49374–75.
41 Id. at 49375
42 Id. at 49376.
43 Id.
44 Id. at 49376–77.
45 ANPR, 87 FR 67426–27; NPRM, 88 FR 49387–
88.
46 See AMG Cap. Mgmt., LLC v. FTC, 593 U.S. 67,
82 (2021).
47 See 15 U.S.C. 57b(a)(1), (2); see also NPRM, 88
FR 49377–78 (discussing impact of AMG Cap.
Mgmt.).
48 When the rule has been violated, the
Commission can commence a Federal court action
and seek to recover money for consumers or obtain
an order imposing civil penalties. See 15 U.S.C.
57b(a)(1), 15 U.S.C. 45(m)(1)(A). Without the rule,
the path to monetary relief is longer and requires
the Commission to first conduct an administrative
proceeding to determine whether the respondent
violated the FTC Act; if the Commission finds that
the respondent did so, the Commission issues a
cease-and-desist order, which might not become
final until after the resolution of any resulting
appeal. Then, to recover money for consumers, the
Commission must prove in a separate Federal court
action that the violator engaged in fraudulent or
dishonest conduct. See 15 U.S.C. 57b(a)(2).
49 See section 5(m)(1)(A) of the FTC Act, 15
U.S.C. 45(m)(1)(A) (providing that violators of a
trade regulation rule ‘‘with actual knowledge or
knowledge fairly implied on the basis of objective
circumstances that such act is unfair or deceptive
and is prohibited by such rule’’ are liable for civil
penalties for each violation). In addition, any entity
or person who violates such a rule (irrespective of
the state of knowledge) is liable for any injury
caused to consumers by the rule violation. The
Commission may pursue such recovery in a suit
under section 19(a)(1) of the FTC Act, 15 U.S.C.
57b(a)(1).
50 NPRM, 88 FR 49382–85.
51 Id. at 49385–87; see infra sections VI and VIII
of this document.
52 Minor changes to formatting, grammar, and
punctuation have been made to some of the
comments quoted in this document. These changes
do not entail any substantive changes.
comment by the North American
Insulation Manufacturers Association
(‘‘NAIMA’’) asserting that testimonials
by those misrepresenting their
experiences with insulation products
are plentiful.37 The Commission
concluded that the unfair or deceptive
reuse or repurposing of consumer
reviews is prevalent, relying upon a
prior Commission case and numerous
news articles.38 To show how
commonly incentives are given in
exchange for reviews with the
incentives conditioned on the sentiment
of the reviews, the NPRM pointed to
FTC and private cases, analyses by
researchers of markets for procuring
reviews, and the experience of a small
business employee commenter who said
a competitor was providing incentives
for 5-star reviews.39 The Commission
found prevalence of unfair or deceptive
insider reviews and testimonials based
on its prior cases; a State AG action;
statistics from a review platform
commenter about how many reviews of
businesses were written by their
owners, officers, or employees, or their
family members; and an individual
commenter who relied upon insider
reviews in selecting an auto repair
shop. 40 The NPRM cited prior cases
regarding the prevalent practice of
marketers setting up purportedly
independent websites, organizations, or
entities to review or endorse their own
products. 41 The Commission found
prevalence of suppression of negative
reviews on retailer or business websites
based on a platform’s comment, a recent
FTC case, and what it learned in another
investigation about more than 4,500
merchants that were automatically
publishing only 4- or 5-star consumer
reviews.42 The NPRM relied upon
reports by platform and other
commenters, as well as FTC and State
AG cases, regarding review suppression
by unjustified legal threat or physical
threat.43 Finally, with respect to the
prevalence of sales and misuse of fake
indicators of social media influence for
commercial purposes, the NPRM
discussed cases brought by the FTC, a
State AG, and private parties, and
published reports on social media bots
and fake social media accounts.44
B. Manner and Context in Which the
Acts or Practices Are Deceptive or
Unfair
The rule is intended to curb certain
unfair or deceptive uses of consumer
reviews and testimonials. It contains
several provisions to promote accuracy
and truthfulness in reviews and
testimonials and, thus, will allow
American consumers to make better-
informed purchase decisions. The key
provisions of the rule prohibit conduct
that is inherently deceptive or unfair,
including creating, selling, and buying
fake or false reviews or testimonials;
buying reviews in exchange for, or
conditioned on, their sentiment; and
using reviews and testimonials from
company insiders that hide their
relationships to the company. The rule
also includes prohibitions against
misleading, company-controlled review
websites or entities; unfair or deceptive
review suppression practices; and the
misuse of fake indicators of social media
influence.
C. The Economic Effect of the Rule
As part of the rulemaking proceeding,
the Commission solicited public
comment and data (both qualitative and
quantitative) on the economic impact of
the proposed rule and its costs and
benefits. 45 In issuing the final rule, the
Commission has carefully considered
the comments received and the costs
and benefits of each provision, taking
into account the effect on small
businesses and consumers, as discussed
in more detail in sections VI and VIII of
this document. The record demonstrates
that the most significant anticipated
benefit of the final rule is increased
deterrence of clearly unfair or deceptive
acts or practices involving consumer
reviews or testimonials. Another
significant benefit is the expansion of
the remedies available to the
Commission, including the ability to
more effectively obtain monetary relief.
This is particularly critical given the
U.S. Supreme Court’s decision in AMG
Capital Management, LLC v. FTC, which
held that equitable monetary relief,
including consumer redress, is not
available under section 13(b) of the FTC
Act. 46 Post-AMG, the Commission’s
primary means for obtaining redress is
section 19 of the FTC Act. By issuing
the final rule, the Commission can
obtain such redress based on violations
of the rule in one proceeding under
section 19(a)(1), which will be
significantly faster than the two-step
process for obtaining redress under
section 19(a)(2).47 By allowing the
Commission to secure redress more
quickly and efficiently, this rule will
also allow the Commission to preserve
enforcement resources for other mission
priorities.48 As an additional benefit, the
rule will enable the Commission to seek
civil penalties against violators.49
Without an efficient way to seek civil
penalties, bad actors have little fear of
being penalized for using fraud and
deception in connection with reviews
and endorsements. Increased deterrence
will have consumer welfare benefits and
will benefit honest competition.50
Moreover, the final rule is likely to
impose relatively small compliance
costs on honest businesses.51
III. Overview of the Comments 52
The Commission received 100
responsive and non-duplicative
comments in response to the NPRM
from a diverse group of individuals
(including consumers and law
students), industry groups and trade
associations, review platforms, retailers,
and other businesses, consumer
advocacy organizations, and
government entities.
In the NPRM, the Commission invited
the public to comment on any issues or
concerns the public believed were
relevant or appropriate to the
Commission’s consideration of the
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68038 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
53 NPRM, 88 FR 49388.
54 Id. at 49388–89.
55 Id. at 49388. In addition to soliciting public
comment on the NPRM’s PRA and RFA analyses in
the PRA and RFA sections, the NPRM also posed
two specific questions related to the PRA and RFA
analyses. Question 4 inquired whether ‘‘the
proposed rule contains a collection of information,’’
and Question 5 asked, ‘‘Would the proposed rule,
if promulgated, have a significant economic impact
on a substantial number of small entities? If so, how
could it be modified to avoid a significant economic
impact on a substantial number of small entities?’’
Id. at 49381–86, 49388.
56 NPRM, 88 FR 49388.
57 Yelp Inc., Cmt. on NPRM at 3 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0088 (‘‘Yelp Cmt.’’); The Transparency
Company, Cmt. on NPRM at 1, 5 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0107 (‘‘Transparency Company Cmt.’’).
58 Trustpilot, Cmt. on NPRM at 2 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0084 (‘‘Trustpilot Cmt.’’).
59 Family First Life, LLC, Cmt. on NPRM at 2
(Sept. 29, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0104 (‘‘Family First Life
Cmt.’’).
60 Trustpilot Cmt. at 2–3; Family First Life Cmt.
at 2–3.
61 Consumer Reports, Cmt. on NPRM at 2–3 (Sept.
29, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0099 (‘‘Consumer Reports Cmt.’’).
62 NPRM, 88 FR 49388.
63 Transparency Company Cmt. at 6.
64 Trustpilot Cmt. at 3.
65 Amelia Markey, Cmt. on NPRM (July 31, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0003 (‘‘Markey Cmt.’’); Chris Hippensteel,
Cmt. on NPRM (Aug. 1, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0006 (‘‘Hippensteel Cmt.’’); Jeremy Anderson, Cmt.
on NPRM (Aug. 1, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0007 (‘‘Anderson Cmt.’’); Caroline Fribance, Cmt.
on NPRM (Aug. 11, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0017 (‘‘Fribance Cmt.’’); Pia Edborg, Cmt. on NPRM
(Aug. 17, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0027 (‘‘Edborg Cmt.’’);
Anonymous 1, Cmt. on NPRM (Aug. 20, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0031 (‘‘Anonymous 1 Cmt.’’); Jessica Ludlam,
Cmt. on NPRM (Aug. 24, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0036 (‘‘Ludlam Cmt.’’); SUPERGUEST, Cmt. on
NPRM (Sept. 8, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0046 (‘‘Superguest
Cmt.’’); Sean Poole, Cmt. on NPRM at 1–2 (Sept. 22,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0063 (‘‘Poole Cmt.’’); Artemio Magana,
Cmt. on NPRM (Sept. 28, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0079 (‘‘Magana Cmt.’’).
66 American Dental Association, Cmt. on NPRM
at 1 (Sept. 28, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0078 (‘‘ADA Cmt.’’);
Travel Technology Association, Cmt. on NPRM at
1, 4–5 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0097 (‘‘Travel Tech. Cmt.’’).
67 Coalition of Civil Society Organizations, Cmt.
on NPRM at 1–3 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0108; U.S. Public Interest Research Group
Education Fund, Cmt. on NPRM at 2 (Sept. 29,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0109 (‘‘US PIRG Cmt.’’).
68 Markey Cmt.
69 Anderson Cmt.
proposed rule.53 The NPRM also posed
twenty-three specific questions for the
public.54 The first two are broad
questions addressed in this section III,
which also discusses several issues or
concerns that commenters raised
generally without reference to particular
sections of the rule. Responses to the
more specific questions in the NPRM
are discussed in section IV of this
document, a section-by-section analysis
of the final rule. Questions relating to
the Paperwork Reduction Act (‘‘PRA’’)
and Regulatory Flexibility Act (‘‘RFA’’)
and are addressed in sections VII and
VIII of this document, respectively.55
A. Furthering the Commission’s Goal
In Question 1 of the NPRM, the
Commission asked whether its proposal
would further the Commission’s goal of
protecting consumers from clearly
unfair or deceptive acts or practices
involving consumer reviews and
testimonials.56
Several commenters expressly
addressed this question. A review
platform and a business that specializes
in identifying fake online reviews
submitted comments stating that the
proposed rule would further the
Commission’s goal of protecting
consumers from clearly unfair or
deceptive acts or practices involving
consumer reviews.57 Another review
platform commenter answered that
there are ‘‘numerous advantages of the
FTC’s proposed new Rule,’’ that it is
‘‘generally supportive of this
intervention overall,’’ and that the
proposed rule ‘‘will be helpful to set out
clear rules that expressly prohibit
practices like writing or purchasing fake
reviews, providing compensation or
incentives in exchange for reviews, and
certain acts of unfair review
suppression.’’ 58 A business commenter
similarly answered that the ‘‘Proposed
Rule addresses many concerns about
unfair or deceptive acts or practices
involving consumer reviews and
testimonials, such as false and biased
reviews.’’ 59 Both of these commenters
also noted areas in which they thought
certain provisions of the proposed rule
should be adjusted or clarified; those
issues are addressed below.60 A
consumer organization said that ‘‘[i]n
general, . . . the proposed Rule will
reduce the incentives for businesses to
purchase, disseminate, or sell fake
consumer reviews or testimonials,’’ but
thought that the proposed rule should
have placed explicit restrictions on
third-party review platforms.61 The
Commission notes that this topic is
beyond the scope of the rulemaking,
which focuses instead on those
responsible for inarguably unfair or
deceptive acts or practices regarding
reviews and testimonials.
B. Adoption of the Proposed Rule as a
Final Rule
In Question 2 of the NPRM, the
Commission inquired whether it should
finalize the proposed rule, the reasons
for why commenters were in favor of or
against the finalization of the proposed
rule, and whether the Commission
should make any changes to its original
proposal. 62
Only two commenters directly
addressed this question. A business
commenter agreed that the Commission
should finalize the proposed rule.63 A
review platform commenter said it
‘‘supports this Rule and would support
the Commission finalizing the Rule.64 It
also suggested adjustments to the
Commission’s proposal, which are
addressed below in this document.
Numerous individual commenters,65
trade associations,66 and consumer
organizations 67 expressed general
support for the proposed rule. For
example, an individual commenter
wrote, ‘‘I completely agree with the
proposal. . . . Because review sections
have become so untrustworthy (being
impossible to tell whether a company
has paid for positive reviews of its own
product, or for negative reviews on a
rival’s product), review sections have
become functionally useless for me.
This makes it difficult to purchase any
products online, since real consumer
feedback is one of the few ways to
determine whether I should buy the
product or service without first
examining it in person.’’ 68 Another
individual stated, ‘‘I support the rules as
specified, and applaud the FTC’s action
in this regard. It is extremely difficult
for the consumer to determine the
validity of online reviews—even within
specific retailers such as amazon. There
is little benefit for large online retailers
to ensure that reviews are accurate, and
this fact is evident in the large number
of bogus reviews found on amazon,
newegg, youtube and other sites.’’ 69 A
third individual wrote, ‘‘I strongly
support the rules against fake review
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70 Anonymous 1 Cmt.
71 Travel Tech. Cmt. at 1, 4.
72 US PIRG Cmt. at 2.
73 Michael Ravnitzky, Cmt. on NPRM at 1–2 (Aug.
6, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0013 (‘‘Ravnitzky Cmt.’’); Adam
Foster, Cmt. on NPRM at 1–2 (Sept. 21, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0052 (‘‘Foster Cmt.’’); Anonymous 2, Cmt. on
NPRM at 1, 4 (Sept. 22, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0065 (‘‘Anonymous 2 Cmt.’’); Anonymous 3, Cmt.
on NPRM (Sept. 27, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0069 (‘‘Anonymous 3 Cmt.’’).
74 Yelp Cmt. at 1, 5–8.
75 Strategic Marketing, Cmt. on NPRM (Aug. 7,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0014; PerfectRec Inc., Cmt. on NPRM at
1–3 (Aug. 23, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0035; Mozilla, Cmt. on
NPRM at 5–7 (Sept. 28, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0076 (‘‘Mozilla Cmt.’’); The Responsible Online
Commerce Coalition, Cmt. on NPRM at 2, 4–6 (Sept.
29, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0086.
76 Fake Review Watch Cmt. at 1–4; Truth in
Advertising, Inc., Cmt. on NPRM at 2, 4–11 (Sept.
29, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0083 (‘‘TINA Cmt.’’); National
Consumers League, Cmt. on NPRM at 2–9 (Sept. 29,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0096 (‘‘NCL Cmt.’’); Consumer Reports
Cmt. at 2–11.
77 Anonymous 3 Cmt.
78 Yelp Cmt. at 1, 4–8.
79 TINA Cmt. at 4, 6.
80 Anonymous 4, Cmt. on NPRM (Sept. 1, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0040 (‘‘Anonymous 4 Cmt.’’); Riley Albert,
Cmt. on NPRM at 3 (Sept. 21, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0053 (‘‘Albert Cmt.’’); Alyssa Frieling, Cmt. on
NPRM at 1–4 (Sept. 22, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0059 (‘‘Frieling Cmt.’’).
81 Hammacher, Schlemmer and Co., Inc., Cmt. on
NPRM at 1–7 (Aug. 21, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0032 (‘‘Hammacher Schlemmer Cmt.’’);
Amazon.com, Inc., Cmt. on NPRM at 5–13 (Sept.
29, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0085 (‘‘Amazon Cmt.’’); TechNet
Cmt. on NPRM at 2–4 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0089 (TechNet Cmt.’’); Family First Life Cmt. at 2–
16.
82 Anonymous 4 Cmt.
83 Frieling Cmt. at 1–4.
84 Hammacher Schlemmer Cmt. at 1.
85 Amazon Cmt. at 5.
86 TechNet Cmt. at 2–4.
87 Marc Slezak, Cmt. on NPRM at 1–5 (Sept. 22,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0054 (‘‘Slezak Cmt.’’); Sumner Camp-
Martin, Cmt. on NPRM at 1–5 (Sept. 22, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0056 (‘‘Camp-Martin Cmt.’’).
88 National Automobile Dealers Association, Cmt.
on NPRM at 1–2 (Sept. 28, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0077 (NADA Cmt.’’); Association of National
Advertisers, Cmt. on NPRM at 3–7 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0105 (‘‘ANA Cmt.’’).
89 Slezak Cmt. at 1–4.
90 Id. 3.
and testimonials and fines for
businesses and people who write them.
As a consumer, I often use reviews to
help determine whether a product or
service is reliable; the prevalence of fake
reviews makes this impossible.’’ 70 A
trade association commented, ‘‘The
NPRM proposes rules that are
appropriately scoped to target the bad
actors [who are] intent on committing
fraud through fake or deceptive
reviews. . . . The NPRM strikes the
appropriate balance between enhancing
the Commission’s tools to target bad
actors and preserving industry
flexibility to develop innovative and
effective solutions to maintain
consumer confidence in reviews.’’ 71 A
consumer organization stated, ‘‘The
Commission absolutely should finalize
the proposed rule to better protect
shoppers and hold businesses
accountable.’’ 72
A number of individual consumers, 73
a review platform,74 other industry
members, 75 and consumer
organizations 76 supported the
Commission’s proposal, but urged the
Commission to go further and impose
additional requirements, such as by
adding provisions that would apply to
third-party review platforms. As noted
above, such provisions would be
beyond the scope of the rulemaking.
Similarly beyond the scope of the
rulemaking is an individual’s suggestion
that the Commission should restrict the
highlighting of testimonials on websites
and prohibit payments for reviews.’’ 77
A review platform’s comment
‘‘applaud[ed] . . . the Commission . . .
for its extensive efforts to address the
problem of deceptive review practices,
as reflected in the Commission’s notice
of proposed rulemaking, and . . . fully
support[ed] and endorse[d] the
Commission’s proposed Rule.’’ 78 Its
suggestions for several provisions are
discussed below. A consumer group
stated that the proposed rule ‘‘is
needed’’ and ‘‘addresses an urgent
problem: fabricated and otherwise
deceptive reviews and ratings of
products and services,’’ but asked for
numerous modifications to strengthen
it.79 These proposals are discussed
below.
A few individual commenters 80 and
industry commenters 81 were supportive
of a rule but expressed the need for
clarifications or modifications. An
individual commenter wrote that ‘‘[a]ll
of the rules proposed . . . make
(common) sense’’ but identified ‘‘a few
scenarios that highlight that the
language in the proposed rules is a bit
ambiguous’’ and that with ‘‘steep
penalties like this, guidelines need to be
clear, concrete, AND simple so
businesses can understand.’’ 82 Another
individual commenter said that the
proposed rule ‘‘takes great strides,’’ but
that two proposed sections, 465.4 and
465.6, are too restrictive.83 A retailer
wrote, ‘‘On the whole, . . . the
Proposed Rule contains provisions that
are reasonable and would provide
additional protection to consumers’’ but
‘‘there are a few provisions . . . that are
not well drafted or that need additional
language.’’ 84 Another retailer said that it
‘‘supports a tailored rule that focuses on
the bad actors that harm consumers,’’
but that the proposed rule ‘‘sweeps
more broadly, extending to the activities
of legitimate businesses that do not
uncover abuses that they ‘should have’
identified, regardless of their good faith
efforts’’ and that ‘‘[s]uch an overbroad
rule would have significant unintended
negative consequences on legitimate
conduct.’’ 85 An industry organization
commented that the proposed rule ‘‘is
an important step, and we share the
Commission’s goal of improving
consumer confidence in reviews and
testimonials’’ but ‘‘strongly urge[d] the
Commission to reexamine . . . [four]
provisions’’ to address what it viewed as
First Amendment concerns and for
other reasons.86 The specific
suggestions or concerns raised by these
and other commenters are addressed
below. In particular, whether in the text
of the final rule or in the discussion
below, the Commission is clarifying the
scope or meaning of various rule
provisions to cover the specific
activities or conduct that harm
consumers and avoid ambiguity or
overbreadth.
Only four commenters, two
individual commenters 87 and two trade
associations, 88 said that the proposed
rule was unnecessary or unwarranted.
One of the individuals, wrote that ‘‘the
rule seems to be unnecessary as it is
unlikely to actually provide the benefit
to consumers of removing falsified
reviews’’ because it is difficult to
identify and trace fake reviews and
‘‘punish[ ] an offender’’ and that the
proposed rule ‘‘also has potential to
penalize non-offenders’’ when
competitors purchase ‘‘review
bombs.’’ 89 The commenter asserted that
the FTC’s estimated benefits are based
on faulty assumptions such as that ‘‘the
entirety of the loss’’ from false reviews
‘‘would be eliminated simply because
the rule is enacted.90 The commenter
said that the FTC should either maintain
the status quo or require websites with
consumer reviews to include a
disclosure that ‘‘some reviews may have
not been made by genuine customers,
may potentially have been paid
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91 Id. 4.
92 Camp-Martin Cmt. at 1–2. The commenter said,
‘‘In the alternative to the complete abandonment of
the proposed rule, Section 465.4 should be
amended’’ and broadened. Id. at 1.
93 NADA Cmt. at 1–2.
94 ANA Cmt. at 3–7.
95 The Commission is aware that a business could
attempt to damage a competitor’s reputation by
purchasing fake positive reviews for that competitor
and then reporting those reviews to the platform on
which they appear. In investigating a fake review
matter, FTC staff would take such a possibility into
account.
96 The Commission notes that many commenters
raised similar concerns or addressed overlapping
issues. To avoid repetition, the Commission has
endeavored to respond to issues raised in similar
comments together. Responses provided in any
given section apply equally to comments addressing
the same subject in the context of other sections.
Moreover, throughout the SBP, the Commission
discusses justifications for the final rule that are
informed by its careful consideration of all
comments received, even where that discussion is
not linked to a particular comment.
97 Because the Commission is adding additional
definitions and not including one proposed
definition, the definitions are renumbered in the
final rule.
98 National Federation of Independent
Businesses, Cmt. on NPRM at 2 (Sept. 12, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0047 (‘‘NFIB Cmt.’’).
99 Id.
100 TINA Cmt. at 6–7.
testimonials, etc.’’ 91 The other
individual commenter said that the
‘‘proposed rule is unnecessary because
all of the practices considered by the
rule ‘are already unlawful under Section
5 of the FTC Act,’ it has potentially
massive compliance costs for American
businesses’’ (citing the FTC’s estimated
cost), ‘‘and the better salutation [sic] is
to work with States and review
platforms to resolve the issue.’’ 92 One of
the trade associations stated that the
‘‘Proposed Rule is [u]nnecessary,’’ that
‘‘current FTC enforcement authority has
been effective in addressing such clearly
deceptive practices, and there is no
indication how or why a trade
regulation rule is needed, or how such
a rule would more effectively address
concerns about such deceptive
practices,’’ and that ‘‘a need to alleviate
the ‘difficulty’ of obtaining monetary
relief under the FTC Act where such
authority has never existed, does not
provide an adequate basis for the
issuance of a Magnuson-Moss
rulemaking.’’ 93 The other trade
association asserted that (1) it ‘‘does not
believe that rulemaking is warranted,
wise, or a balanced approach, in part
because it raises serious First
Amendment concerns;’’ (2) ‘‘a well-
designed rule would focus on a defined
trade’’ but the ‘‘record to date does not
establish that customer reviews, the use
of those reviews, or the dissemination of
those reviews by commercial platforms
is itself a defined trade;’’ (3) the ‘‘FTC
should not promulgate a rule solely
because the augmented penalties
attendant to a rule violation could
ostensibly advance a Commission goal
generally;’’ and (4) ‘‘the FTC fail[ed] to
show how enforcement actions, many of
which were settled by consent order,
translate into ‘prevalence.’ ’’ 94
The Commission disagrees with the
four commenters who said that the
proposed rule was unnecessary or
unwarranted. The Commission believes
that the status quo is inadequate to
address consumer harm and that the
rule will add deterrence and aid
enforcement even though the practices
covered by the rule are already unlawful
under section 5 of the FTC Act. Greater
deterrence and more effective
enforcement are legitimate reasons to
engage in a rulemaking, whereas
difficulties in enforcing a rule against
some violators are no reason to eschew
it. 95 Further, the compliance costs
estimated by the Commission are greatly
outweighed by the estimated benefits to
consumers and honest competition. The
Commission notes that the harm caused
by the acts and practices addressed cut
across multiple trades. The Commission
addresses potential First Amendment
concerns and arguments regarding
prevalence below.
IV. Section-by-Section Analysis
The following discussion provides a
section-by-section analysis of the
provisions proposed in the NPRM, and
discusses the comments received, the
Commission’s responses to the
comments, and the provisions adopted
in the final rule. 96
A. § 465.1—Definitions
1. Overview
The proposed rule included
definitions for the following terms:
‘‘business’’; ‘‘celebrity testimonial’’;
‘‘clear and conspicuous’’; ‘‘consumer
review’’; ‘‘consumer testimonial’’;
‘‘indicators of social media influence’’;
‘‘officers’’; ‘‘purchase a consumer
review’’; ‘‘reviewer’’; ‘‘substantially
different product’’; ‘‘testimonialist’’; and
‘‘unjustified legal threat.’’ In Question 6
of the NPRM, the Commission asked
whether the proposed definitions are
clear and what changes should be made
to any definitions. In Questions 11 and
21 of the NPRM, the Commission asked
specifically about the definitions of
‘‘substantially different product’’ and
‘‘unjustified legal threat,’’ respectively.
In the following definition-by-definition
analysis, the Commission discusses
each definition proposed in the NPRM,
relevant comments not otherwise
addressed in the discussion of the
corresponding substantive provisions of
the final rule, and the definitions that
the Commission is finalizing.97
2. Definition-by-Definition Analysis
a. Business
The proposed rule defined ‘‘business’’
as ‘‘an individual, partnership,
corporation, or any other commercial
entity that sells products or services.’’
This term appeared in the proposed
definitions of ‘‘celebrity testimonial,’’
‘‘consumer review,’’ ‘‘consumer
testimonial,’’ and ‘‘officers,’’ and in
every substantive section of the
proposed rule. For the following
reasons, the Commission adopts the
definition of ‘‘business’’ largely as
proposed, with a minor, non-substantive
clarification as described below.
A trade association commenter noted
correctly that the Commission’s
rulemaking authority is limited to acts
or practices ‘‘in or affecting
commerce.’’ 98 It recommended that the
Commission insert ‘‘in or affecting
commerce as defined in section 4 of the
Federal Trade Commission Act (15
U.S.C. 44)’’ in the definition of a
‘‘business.’’ 99 The Commission declines
to make this modification. An entity
that is selling products or services is
engaging in commerce and, even
without the commenter’s proposed
addition, the acts and practices covered
by the final rule are limited to
commercial practices.
A consumer advocacy organization
commenter argued that the definition of
a business potentially liable under the
proposed rule was unduly narrow and
should be expanded to include
‘‘advertisers,’’ ‘‘endorsers,’’ and
‘‘[a]dvertising agencies, public relations
firms, review brokers, reputation
management companies, and other
similar intermediaries.’’ 100 However,
advertisers, advertising agencies, public
relations firms, review brokers,
reputation management companies, and
other similar intermediaries all sell
products or services and are covered by
the Commission’s definition of
‘‘business.’’ To the extent that an
endorser is in the business of selling
reviews or testimonials, the endorser is
covered by the definition. The
Commission is therefore not making the
proposed change.
A review platform commenter
suggested that, to avoid ambiguity, the
Commission clarify that ‘‘sells products
or services’’ in the definition of
‘‘business’’ applies to each of the types
of entities listed in the definition, not
just to ‘‘any other commercial
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101 Yelp Cmt. at 3.
102 NADA Cmt. at 5.
103 Id.
104 IAB Cmt. at 14.
105 Id.
106 Family First Life Cmt. at 4–5.
107 Id. at 5. See Black’s Law Dictionary (11th ed.
2019).
108 Electronic Privacy Information Center, Cmt. on
NPRM at 3 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0111 (‘‘EPIC Cmt.’’).
109 See Fed. Trade Comm’n, Guides Concerning
Use of Endorsements and Testimonials in
Advertising (‘‘Endorsement Guides’’), 16 CFR 255.4.
110 The Commission is using the term
‘‘individual’’ in the context of this rule to mean a
single human being. See Individual (def. 1),
Dictionary.com, LLC, https://www.dictionary.com/
browse/individual (last visited July 5, 2024)
(defining ‘‘individual’’ as ‘‘a single human being, as
distinguished from a group’’). The Commission
notes that, in the context of a different rulemaking,
it has proposed defining ‘‘individual’’ to mean ‘‘a
person, entity, or party, whether real or fictitious,
other than those that constitute a business or
government’’ under 16 CFR 461. See Fed. Trade
Comm’n, Trade Regulation Rule on Impersonation
of Government and Businesses, 89 FR 15072, 15083
(Mar. 1, 2024).
111 NFIB Cmt. at 2.
entity.’’ 101 The Commission is adopting
this recommendation to clarify the
intended scope of the definition.
For the reasons explained in this
section, the Commission is finalizing
the definition of ‘‘business’’ to mean an
individual who sells products or
services, a partnership that sells
products or services, a corporation that
sells products or services, or any other
commercial entity that sells products or
services.
b. Celebrity Testimonial
The proposed rule defined ‘‘celebrity
testimonial’’ as ‘‘an advertising or
promotional message (including verbal
statements, demonstrations, or
depictions of the name, signature,
likeness, or other identifying personal
characteristics of an individual) that
consumers are likely to believe reflects
the opinions, beliefs, or experiences of
a well-known person who purchased,
used, or otherwise had experience with
a product, service, or business.’’ The
Commission is finalizing the definition
of this term—which is used in § 465.2,
Fake or False Consumer Reviews,
Consumer Testimonials, or Celebrity
Testimonials—with one modification.
A trade association commenter said
that the definition of a celebrity
endorsement should be clarified to
exclude ‘‘a situation where a celebrity or
celebrity likeness appears or is used by
a business as a promotion, without any
specific advertising or opinions
presented.’’ 102 The commenter gave the
example of an athlete who appears at a
business to sign autographs or simply
appears, without making any statements
or representations about the business.103
Such situations should not be excluded
from the scope of the definition because
a business’s use in advertising or
promotion of a celebrity or a celebrity’s
image can, even without any additional
statements, imply that the celebrity has
a positive opinion of the business or its
products or services and therefore
constitute a celebrity testimonial.
However, if consumers would not
interpret the celebrity’s appearance to
reflect the celebrity’s opinions of, beliefs
about, or experiences with, a business or
its products or services, then the
appearance is not a testimonial. That
issue is thus highly dependent on
specific facts. Further, to take the
commenter’s example, it is highly
unlikely that a celebrity who does
nothing more than sign autographs or
appear at a business could violate
§ 465.2, because such signings or
appearances alone would likely not
communicate anything to consumers
about the celebrity’s use or experience
with a product, service, or business.
A second trade association asserted
that the definition of a ‘‘celebrity
testimonial’’ does not give advertisers
adequate notice as to when a testimonial
is a ‘‘celebrity’’ testimonial or a
‘‘consumer’’ testimonial.104 The
commenter requested that the
Commission provide further guidance
on what constitutes a ‘‘well-known’’
individual. 105 Based upon common
usage, well-known individuals include
those famous in the areas of
entertainment, such as film, music,
writing, or sport, and those known to
the public for their positions or
successes in business, government,
politics, or religion. Individuals who
earn money through their work as
‘‘influencers’’ are also well known, as
are those who have been featured in the
news or media. More important,
whether someone is well known does
not matter for purposes of rule
interpretation and enforcement because
any provisions that apply to celebrity
testimonials also apply to consumer
testimonials.
A business commenter suggested
replacing ‘‘a well-known person’’ in the
definition with a ‘‘widely known all-
purpose public figure’’ or ‘‘widely
known public figure’’ for the purpose of
‘‘clarity.’’ 106 It said that Black’s Law
Dictionary defines the term ‘‘all-purpose
public figure’’ to mean ‘‘[s]omeone who
achieves such pervasive fame or
notoriety that he or she becomes a
public figure for all purposes and in all
contexts.’’ 107 To be ‘‘well known,’’ one
need not have such pervasive fame as to
be a public figure for all purposes and
in all contexts. For example, an
influencer may be well known to a
subset of individuals interested in a
particular subject. The commenter gave
no justification for narrowing the
definition of a ‘‘celebrity testimonial,’’
and the Commission declines to do so.
A public interest research center
commenter said that the definitions of
‘‘celebrity testimonials’’ and ‘‘consumer
testimonials’’ should ‘‘be broadened to
explicitly include non-natural persons,
such as businesses and public sector
entities.’’ 108 Although endorsements by
such organizations are addressed in the
Commission’s Endorsement Guides,109
the Commission did not intend for any
provision using the term ‘‘testimonials’’
to apply to endorsements by entities. To
clarify that the Commission does not
intend for any provision using the term
‘‘testimonials’’ to apply to endorsements
by entities, the Commission is
substituting the word ‘‘individual’’ for
the word ‘‘person’’ wherever the word
appeared in the Commission’s original
proposal.110 The only section of the rule
that applies to endorsements by entities
or purported entities is § 465.6, which
addresses company-controlled review
websites or entities. However, § 465.6
does not apply to consumer or celebrity
testimonials.
c. Clear and Conspicuous
The proposed rule defined ‘‘clear and
conspicuous’’ to mean ‘‘that a required
disclosure is easily noticeable (i.e.,
difficult to miss) and easily
understandable,’’ including in eight
enumerated ways, listing proposed
requirements for ‘‘any communication
that is solely visual or solely audible,’’
‘‘[a] visual disclosure,’’ ‘‘[a]n audible
disclosure,’’ and ‘‘any communication
using an interactive electronic
medium,’’ and providing, inter alia, that
such disclosures ‘‘must use diction and
syntax understandable to ordinary
consumers,’’ ‘‘must appear in each
language in which the representation
that requires the disclosure appears,’’
and ‘‘must not be contradicted or
mitigated by, or inconsistent with,
anything else in the communication.’’
Based on the following, the Commission
is finalizing the definition of this term—
which is used in § 465.5, Insider
Consumer Reviews and Consumer
Testimonials—with one modification.
A trade association commenter
suggested not using the terms ‘‘diction’’
and ‘‘syntax’’ in the definition because
many of those subject to the rule ‘‘may
not know the meaning of th[os]e
words.’’ 111 The commenter suggested
replacing them with ‘‘words’’ and
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112 Id.
113 See Diction (def. 2), Merriam-Webster.com
Dictionary, https://www.merriam-webster.com/
dictionary/diction (last visited July 5, 2024)
(defining ‘‘diction’’ as the ‘‘choice of words
especially with regard to correctness, clearness, or
effectiveness’’).
114 See Syntax (defs. 1a, 1b), Merriam-
Webster.com Dictionary, https://www.merriam-
webster.com/dictionary/syntax (last visited July 5,
2024) (defining ‘‘syntax’’ as the ‘‘the way in which
linguistic elements (such as words) are put together
to form constituents (such as phrases or clauses)’’
and as ‘‘the part of grammar dealing with this’’).
115 ANA Cmt. at 11.
116 IAB Cmt. at 14; U.S. Chamber of Commerce,
Cmt. on NPRM at 7–8 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0087 (‘‘Chamber of Commerce Cmt.’’); National
Retail Federation, Cmt. on NPRM at 10 (Sept. 29,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0090 (‘‘NRF Cmt.’’).
117 IAB Cmt. at 14; Chamber of Commerce Cmt.
at 8.
118 Id.
119 Fed. Trade Comm’n, .com Disclosures: How to
Make Effective Disclosures in Digital Advertising at
10 (Mar. 2013), https://www.ftc.gov/system/files/
documents/plain-language/bus41-dot-com-
disclosures-information-about-online-
advertising.pdf.
120 Id. at 11. (‘‘Although the label itself does not
need to contain the complete disclosure, it may be
necessary to incorporate part of the disclosure to
indicate the type and importance of the information
to which the link leads.’’)
121 See Press Release, Fed. Trade Comm’n, FTC
Looks to Modernize Its Guidance on Preventing
Digital Deception (June 3, 2022), https://
www.ftc.gov/news-events/news/press-releases/2022/
06/ftc-looks-modernize-its-guidance-preventing-
digital-deception.
122 Trustpilot Cmt. at 14. The same commenter
also raised concerns about the applicability of the
definition to ratings and aggregate ratings. Id. That
is issue is discussed below in the discussion of the
corresponding substantive rule provision. See infra
section IV.E.6 of this document.
123 NRF Cmt. at 10.
124 Id. at 11.
125 ANA Cmt. at 11.
126 IAB Cmt. at 14; NRF Cmt. at 11.
127 ANA Cmt. at 11.
‘‘grammar.’’ 112 ‘‘Diction’’ means the
choice and use of words.113 ‘‘Syntax’’
involves the arrangement of words and
phrases and is a subset of grammar.114
The Commission believes that the
meaning of ‘‘diction’’ and ‘‘syntax’’ are
sufficiently clear.
One trade association commenter
asserted that it is unnecessary to have a
definition of ‘‘clear and conspicuous’’
because the ‘‘phrase . . . has a meaning
under FTC jurisprudence.’’ 115 The
definition is based on that jurisprudence
and decades of Commission experience
policing deceptive and unfair conduct.
The Commission believes it is both
helpful and necessary that the rule
provides more explicit guidance on
what does and does not constitute a
clear and conspicuous disclosure.
Several commenters asserted that the
proposed definition was overly
prescriptive and not sufficiently
flexible. 116 The Commission disagrees
and reiterates that the definition
contains basic, common-sense
principles, such as requiring visual
disclosures in a size consumers can see
and audible disclosures at a volume
they can hear. The definition merely
provides a baseline and provides a great
deal of flexibility in what a disclosure
should say and how it appears. The
basic, enumerated requirements are
necessary for a disclosure to be
effective.
Two commenters objected to the
requirement that internet disclosures be
‘‘unavoidable,’’ an objective standard
that depends on whether consumers
could have avoided the disclosure,
which, per the definition is the case
when ‘‘a consumer must take any
action, such as clicking on a hyperlink
or hovering over an icon, to see’’ the
disclosure.117 The commenters do not
believe that a disclosure has to be
unavoidable for it to be effective; they
noted that a staff business guidance
document, issued in 2000 and updated
in 2013, allowed for the possibility that
avoidable disclosures, e.g., those
available through a hyperlink, could be
clear and conspicuous.118 The
Commission believes that a disclosure is
not effective when it is not seen or
heard, including when the reason for it
not being seen or heard is its
avoidability. The staff guidance said
that ‘‘[d]isclosures that are an integral
part of a claim or inseparable from it
should not be communicated through a
hyperlink,’’ and the purported
independence and objectivity of a
reviewer or testimonialist is often
integral.119 Further, some readers
misunderstood the staff guidance about
the necessity of properly labeling
hyperlinks to convey the ‘‘importance,
nature, and relevance of the
information’’ to which the hyperlinks
lead. The staff guidance said that, to be
effective, the label of the hyperlink
might need to give the essence of the
disclosure, with the hyperlink leading
to the details.120 Even had these
qualifications been absent, the
Commission is not bound by the 2013
staff business guidance, which is
currently under review in light of an
evolution of views over time regarding
online disclosures and avoidability.121
One commenter asked whether a
disclosure in the first line of a product
review would be considered
unavoidable.122 For the purposes of this
rule, the Commission would consider
such a disclosure to be unavoidable. A
different commenter expressed concern
that the requirement that a disclosure
‘‘stand out’’ would require new
formatting techniques for companies
hosting reviews and preclude a
disclosure from being in the review
itself.123 For the purposes of this rule,
the Commission would consider a
disclosure at the beginning of a text-
only consumer review to ‘‘stand out.’’
A trade association said that ‘‘the
average social media user is familiar
with where text is found in any given
social media post, and social media
platforms already make text visible
against a variety of backgrounds’’ so
‘‘[r]equiring the endorsement-disclosure
text to differ from other text is not only
impractical, but it could actually create
confusion for social media users who
have grown accustomed to viewing all
text related to a post in a certain
manner.’’ 124 The Commission
recognizes that, on a social media
platform that allows only uniform text,
it is not possible to have the text of a
disclosure appear in different text. As
with a text-only consumer review, the
Commission would consider a
disclosure at the beginning of such a
text-only testimonial to ‘‘stand out.’’ On
visual platforms with superimposed
text, it is quite possible and reasonable
to require that the text of a disclosure
‘‘stand out.’’
One commenter asserted that being
‘‘unavoidable’’ and being ‘‘easily
noticed’’ are ambiguous concepts.125
The Commission disagrees.
‘‘Unavoidable’’ means that a consumer
cannot avoid a disclosure such as by
failing to click on a link or by failing to
scroll. ‘‘Easily noticeable’’ is a simple
and objective standard evaluated from
the perspective of a reasonable
consumer.
Two commenters asserted that it
would be difficult to make clear and
conspicuous disclosures required by the
proposed rule on a small screen.126
They did not explain why that would be
the case, and the Commission does not
believe that compliance with the rule’s
disclosure requirement should be
difficult on handheld devices.
One commenter asserted that, because
of the proposed definition of clear and
conspicuous, ‘‘[t]here is no need for the
FTC to determine whether the resulting
speech is rendered deceptive, untrue, or
inaccurate.’’ 127 The Commission
disagrees. The only substantive
provision for which the definition is
relevant is § 465.5. A business would
not violate that provision merely by
having a disclosure that is not clear and
conspicuous. Rather, the business
would have to engage in conduct that
would be unfair or deceptive in the
absence of a clear and conspicuous
disclosure (e.g., a corporate officer
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128 See infra section IV.E.1 of this document.
129 Id.
130 16 CFR 255.0(g)(9) and (11).
131 16 CFR 255.0(g)(10).
132 Retail Industry Leaders Association, Cmt. on
NPRM at 5 (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0094 (‘‘RILA Cmt.’’).
133 NRF Cmt. at 10.
134 Id.
135 Fed. Trade Comm’n, Guides Concerning the
Use of Endorsements and Testimonials in
Advertising, 87 FR 44288, 44290 (July 26, 2022)
(proposing changes to guides and soliciting public
comment).
136 NRF Cmt. at 11.
137 Id.
138 RILA Cmt. at 5.
139 Id.
giving a consumer endorsement without
disclosing that they are an insider). As
discussed below, the Commission is
finalizing proposed § 465.5 with a
modification to clarify to clarify that the
provision is limited to conduct that
would violate section 5 of the FTC
Act. 128 The same commenter also
surmised, based on the similarity of the
definition of ‘‘clear and conspicuous’’ to
the definition of the same phrase in the
Endorsement Guides, that the
Commission intends that the examples
used in the Endorsement Guides would
also be examples of violative behavior
under the rule.129 That is not the case.
The Endorsement Guides address a
broader range of conduct than the rule.
Of the three examples in the
Endorsement Guides that illustrate
whether disclosures are clear and
conspicuous, two of them address
issues—the payment of influencers and
implied typicality—not covered by the
rule.130 The third example involves a
disclosure that individuals appearing in
a television ad and giving testimonials
are paid actors.131 Such conduct would
not be covered by the rule unless the
underlying testimonials were fake or
false.
One commenter, a trade association,
stated that it was ‘‘unclear if the
Commission has considered any social
media platform constraints with respect
to the length of posts (e.g., character and
time limits),’’ and asked (1) whether and
how hashtags can meet the ‘‘clear and
conspicuous’’ requirement, (2) whether
‘‘‘#Ad’ is a sufficient visual disclosure
of a material relationship,’’ and (3) that
the Commission ‘‘provide more
examples, including appropriate use of
hashtags in disclosures, in its final
rule.’’ 132 Another trade association
requested in its comment that the
Commission provide ‘‘visual examples
of ‘insider’ endorsement disclosures that
the Commission finds acceptable.’’ 133
The Commission believes it is not
difficult to comply with the rule’s
disclosure requirements in the social
media context. Depending upon their
wording and appearance, hashtags can
be clear and conspicuous for purposes
of the rule. In a social media post
promoting a brand, it might be sufficient
to prominently disclose an employee
relationship via a hashtag beginning
with the brand name and followed by
the word ‘‘employee.’’ Whether ‘‘#ad’’
would be an adequate disclosure would
depend on the specific context. It could
be adequate at the beginning of a social
media post by the testimonialist, but it
would likely be inadequate in a
television ad or magazine ad featuring
the testimonialist. Because the only
provision for which the definition is
relevant is § 465.5, which addresses the
failure to disclose insider relationships,
the disclosure could be as simple as the
testimonialist describing a product as
‘‘my company’s’’ or ‘‘my wife’s
company’s.’’
A commenter asserted that
disclosures ‘‘utilizing a social media
platform’s built-in disclosure tool
should be . . . at least sufficient enough
to avoid the risk of penalties under the
FTC’s rulemaking authority.’’ 134 As it
has previously said, the Commission
supports development of effective, built-
in disclosure tools but is concerned that
some of the existing tools lead to
inadequate disclosures that are too
poorly contrasting, fleeting, or small, or
may be placed in locations where they
do not catch the user’s attention.135
Whether a business could be subject to
civil penalties for social media posts by
insiders who utilized a social media
platform’s built-in disclosure tool would
depend on whether a court would find
that the business met the knowledge
standard of section 5(m)(1)(A) of the
FTC Act.
A trade association’s comment
expressed concerns about the proposed
requirement that ‘‘[i]n any
communication made through both
visual and audible means, such as a
television advertisement, the disclosure
must 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.’’ 136 The
commenter said that ‘‘it is unnecessary
and duplicative to require video
endorsements that include visual and
audio components to include both
visual and audio disclaimers,’’ and
‘‘requiring an additional visual
disclaimer, on top of a disclaimer that
an endorser may easily include via
audio, is cumbersome, and restricts
companies’ marketing capabilities.’’ 137
On reflection, in the context of this
rulemaking and as to the relationships
of company insiders, if a
communication makes an endorsement
in only its visual or audio portion, then
it should be sufficient for a disclosure
to appear in the same format as the
claim that requires the disclosure. On
the other hand, if an endorsement is
conveyed in both the audio and visual
portions of a communication, then the
disclosure should be made in both the
audio and visual portions. Consumers
can watch a video with the sound off or
listen to it without looking at the screen.
The Commission is changing the
relevant language to, ‘‘[i]n any
communication made through both
visual and audible means, such as a
television advertisement, the disclosure
must be presented in at least the same
means as the representation(s) requiring
the disclosure.’’ This change makes the
rule less restrictive while still
accomplishing the Commission’s goal of
ensuring that consumers are fully
informed. A different trade association
noted that the ‘‘simultaneous disclosure
requirement is confusing and would
benefit from examples of sufficient
simultaneous disclosure.’’ 138 Because
the Commission is not finalizing the
simultaneous disclosure requirement
contained in the proposed rule, it is not
providing further guidance on the
meaning of simultaneous.
The second trade association also
asked ‘‘if a social media influencer posts
a video and discloses verbally in the
video that they have a brand
ambassador relationship with the
retailer/brand, is it sufficient to display
in the text accompanying the posted
video some written disclosure’’ or
would the disclosure ‘‘need to be
embedded or flash across the video
itself.’’ 139 The rule does not address or
apply to an influencer’s disclosure of a
brand ambassador relationship. The
rule’s only disclosure requirements are
in § 465.5 and apply to company
insiders. Whether a testimonial in a
social media post by a company insider
requires a superimposed textual
disclosure depends on whether there is
an endorsement communicated by the
visual portion of the post. If there is an
endorsement in the visual portion, there
would need to be a disclosure in the
visual portion. If the endorsement is
communicated only in the audio portion
of the post, there would not need to be
a disclosure in the visual portion.
d. Consumer Review
The proposed rule defined ‘‘consumer
review’’ as ‘‘a consumer’s evaluation, or
a purported consumer’s evaluation, of a
product, service, or business that is
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68044 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
140 Trustpilot Cmt. at 8.
141 Anonymous 2 Cmt. at 1.
142 IAB Cmt. at 13–14.
143 Id.
144 TINA Cmt. at 7.
145 Id.
146 Id.
147 Id.
148 Yelp Cmt. at 3–4.
149 Id.
150 Id. at 4.
151 The Commission is making this change
throughout the rule, including in §§ 465.2(a), (b),
and (c), 465.4, 465.5(a), 465.6, 465.7, 465.8, and
465.9.
152 NFIB Cmt. at 2–3.
153 Id. at 4.
154 See Endorsement Guides, 16 CFR 255.0(g)(2).
155 See, e.g., Fed. Trade Comm’n, FTC Policy
Statement on Deception, 103 F.T.C. 174, 176–77
(1984) [hereinafter FTC Policy Statement on
Deception] (appended to In re Cliffdale Assocs.,
Inc., 103 F.T.C. 110 (1984)), available at https://
www.ftc.gov/system/files/documents/public_
statements/410531/831014deceptionstmt.pdf.
submitted by the consumer or purported
consumer and that is published to a
website or platform dedicated in whole
or in part to receiving and displaying
such evaluations.’’ The proposed
definition also noted that, for the
purposes of the rule, consumer reviews
include consumer ratings regardless of
whether they include any text or
narrative. The Commission has
determined to finalize the definition of
this term—which is used in §§ 465.2
through 465.6—with a minor, technical
change.
A comment from a review platform
supported the proposed definition,
calling it ‘‘particularly clear and
holistic.’’ 140
A comment from an individual
asserted that the ‘‘definition of
‘consumer’ implies an individual who
purchased the product for their own
use’’ and that when a ‘‘product is
provided by the company seeking a
review, for the purposes of it being
reviewed, the reviewer is arguably not a
consumer.’’ 141 The Commission
disagrees that a ‘‘consumer’’ is
necessarily a purchaser. For purposes of
the rule, a consumer is a person who
purchased, used, or otherwise had
experience with a product, service, or
business.
A trade association commenter
suggested deleting the definition’s
element that a consumer review be
‘‘published.’’ 142 It said that a
‘‘consumer review should still be
considered a ‘review’ before it is
publicly displayed by a website or
platform.’’ 143 Although that may be true
for some purposes, the Commission
declines to make that change. A
consumer review that is submitted to a
website or platform but never published
does not in and of itself deceive
consumers, although the failure to
publish a review may be deceptive
pursuant to paragraphs (a)(1) and (b) of
§ 465.7. Paragraphs (a)(1) and (b) of
§ 465.7 are worded in a way that does
not limit their application to published
reviews, because they relate to
suppressed reviews.
A comment from a consumer
advocacy organization suggested
deleting the portion of the definition
that refers to publication to a website or
platform ‘‘dedicated in whole or in part
to receiving and displaying such
evaluations.’’ 144 It asked whether the
definition would ‘‘only apply to reviews
on a website ‘dedicated’ to posting
reviews, such as Yelp’’ and whether ‘‘it
include[s] any website where reviews
are possibly posted, like Reddit?’’ 145
The commenter continued, ‘‘Would a
website be excluded if only a very small
portion of the website contained
consumer evaluations?’’ 146 The
commenter asserted that ‘‘[a]ll fake
reviews and ratings that are used to
market a product or service should be
captured in the . . . Rule—no matter
where they are posted.’’ 147 The
definition is not limited to consumer
reviews on websites that are dedicated
entirely to posting such reviews. It
would also cover reviews on a portion
of a website, no matter how small a
portion, that is dedicated to receiving
and displaying such reviews, such as a
reviews page or the review sections of
product pages on a retailer’s website.
The definition would not, however,
cover consumer statements about
products or services on a website or
portion of a website, such as Reddit,
that is not dedicated to receiving and
displaying reviews. Such free-floating
consumer statements are outside of the
generally understood context in which
content is submitted and published as
reviews. Under some circumstances,
such statements might be considered
‘‘consumer testimonials,’’ such as when
an advertiser has paid for them.
A comment from a review platform
raised two issues with the ‘‘consumer
review’’ definition.148 It said that ‘‘[b]are
ratings provide no context, making them
virtually useless for other consumers or
to businesses that might use consumer
feedback to improve their services’’ and
suggested that ‘‘the Commission
differentiate between reviews and
ratings.’’ 149 The fact that bare ratings do
not provide context does not mean that
consumers do not rely on them or on
aggregate ratings that include bare
ratings. The Commission does not see a
reason to distinguish between reviews
and ratings for the purposes of the rule,
and the commenter did not provide
such a reason. The same commenter
also expressed ‘‘concern[ ] with the
definition’s use of the word
‘purported[,]’ . . . which has a negative
connotation that feeds into the false
narrative that consumer reviews are
inherently unreliable’’ and suggested
replacing ‘‘purported’’ with different
language. 150 The definition simply
recognizes and accounts for the
undisputed fact that some reviews are
fake. Just because some reviews are
unreliable does not suggest that reviews
are generally unreliable. The
Commission declines to adopt this
recommendation.
To conform with the Office of the
Federal Register’s drafting requirements,
the Commission is changing a reference
to ‘‘this Rule’’ to ‘‘this part.’’ 151
e. Consumer Testimonial
The proposed rule defined ‘‘consumer
testimonial’’ as ‘‘an advertising or
promotional message (including verbal
statements, demonstrations, or
depictions of the name, signature,
likeness, or other identifying personal
characteristics of an individual) that
consumers are likely to believe reflects
the opinions, beliefs, or experiences of
a consumer who has purchased, used, or
otherwise had experience with a
product, service, or business.’’ The
Commission is finalizing the definition
of the term—which is used in §§ 465.2
and 465.5—as originally proposed.
A trade association commenter
expressed concern that consumers
seeing a clearly dramatized television
commercial might unreasonably believe
that the actors’ scripted lines actually
reflected their opinions, beliefs, or
experiences and could therefore be
considered consumer testimonials.152 It
suggested clarifying the definition by
inserting ‘‘reasonably in the
circumstances’’ after ‘‘that consumers
are likely to believe.’’ 153 The
Commission agrees that it would not be
reasonable for viewers to consider ‘‘an
obviously fictional dramatization’’ to be
an endorsement. 154 The Commission
does not, however, believe it is
necessary to modify the definition. The
concept of ‘‘reasonable consumers’’
from FTC jurisprudence 155 is
incorporated into the concept of
consumers being likely to believe
something.
The same public interest research
center that commented, as discussed
above, that the Commission should
broaden the definition of ‘‘celebrity
testimonials’’ to explicitly include non-
natural persons (such as businesses and
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156 See supra Section IV.A.2.b of this document.
157 EPIC Cmt. at 3.
158 NCL Cmt. at 3.
159 Id. at 3–6.
160 Id. at 6–8.
161 Yelp Cmt. at 4–5.
162 Id. at 5.
163 Trustpilot Cmt. at 12.
164 Id.
165 See infra Section IV.A.3.b of this document.
166 John Christofferson, Cmt. on NPRM (Aug. 16,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0025.
167 Yelp Cmt. at 5.
168 Id.
169 Id.
170 Trustpilot Cmt. at 8.
171 The Commission is also replacing the term
‘‘goods’’ with the word ‘‘products’’ in the final
definition of the phrase ‘‘purchase a consumer
review’’ (final § 465.1(m)).
public sector entities) 156 made the same
comment with respect to the definition
of ‘‘consumer testimonials.’’ 157 The
Commission declines to make that
change in the latter definition for the
same reason it declined to make it in the
former definition.
f. Indicators of Social Media Influence
The proposed rule defined ‘‘indicators
of social media influence’’ as ‘‘any
metrics used by the public to make
assessments of an individual’s or
entity’s social media influence, such as
followers, friends, connections,
subscribers, views, plays, likes, reposts,
and comments.’’ For the following
reasons, the Commission adopts the
definition of ‘‘indicators of social media
influence’’—a term which is used in
§ 465.8, Misuse of Fake Indicators of
Social Media Influence—largely as
proposed, with one modification
described below.
A comment from a consumer
advocacy organization suggested
explicitly including ‘‘Saves’’ and
‘‘Shares’’ within the definition of
indicators of social media
influence.’’ 158 The commenter
explained that the number of times that
social media posts are saved or shared
serves as indicators of social media
influence and that both ‘‘Saves’’ and
‘‘Shares’’ are offered for sale on the
internet. 159 Because the NPRM
proposed to define the term as ‘‘any
metrics used by the public to make
assessments of an individual’s or
entity’s social media influence,’’
‘‘Saves’’ and ‘‘Shares’’ were already
covered by the definition as originally
proposed. However, merely for the
purpose of clarification, the
Commission is adding them to the listed
examples of indicators. The same
commenter also suggested that the
Commission expand the definition to
include engagement metrics that are not
publicly visible but that are used to gain
an algorithmic advantage.160 Such non-
visible indicators are outside the scope
of this rulemaking, and the Commission
chooses not to address them at this time.
One review platform commenter
suggested that the Commission
‘‘simplify the definition to exhaustively
list the current metrics that are such
indicators.’’ 161 The commenter
continued that ‘‘whether a given metric
is ‘used by the public to make
assessments of an individual’s or
entity’s social media influence’ may
become the subject of substantial
dispute in future cases . . . in the
absence of an exhaustive, disjunctive
list of indicators.’’ 162 The Commission
intends the listed indicators to be
examples and non-exhaustive, a flexible
and efficient approach that avoids
having to modify the rule when such
metrics change. The Commission has no
reason to believe that its approach will
result in substantial disputes in its
cases.
For the reasons explained in this
section, the Commission is finalizing
the definition of ‘‘indicators of social
media influence’’ to mean any metrics
used by the public to make assessments
of an individual’s or entity’s social
media influence, such as followers,
friends, connections, subscribers, views,
plays, likes, saves, shares, reposts, and
comments.
g. Officers
The proposed rule defined ‘‘officers’’
as ‘‘including owners, executives, and
managing members of a business.’’ The
Commission is finalizing the definition
of this term—which is used in §§ 465.2
and 465.5.
A review platform commenter said
that including ‘‘managing members’’ in
the definition of ‘‘officers’’ ‘‘could
suggest that managers are officers.’’ 163
The commenter also suggested that the
definition of ‘‘officers’’ ‘‘should be
refined to only include ‘senior
management members’ of a business,’’
thereby creating ‘‘a clearer distinction
between those in a position of
leadership versus lower-level
employees, or staff that may have the
title ‘manager’ without any practical
level of control and power to exert
influence over others.’’ 164
Because a ‘‘managing member’’ is a
commonly understood term referring to
an owner and senior manager of a
limited liability company, and because
the term does not refer to all
‘‘managers’’ of a business, the
Commission declines to remove
‘‘managing members’’ from the
definition of ‘‘officer.’’ As discussed
below, the Commission continues to
believe it appropriate that §§ 465.2 and
465.5 apply to both officers and
managers and is therefore not limiting
the definition of ‘‘officers’’ to ‘‘senior
management members.’’ A new
definition of ‘‘managers’’ is discussed
below. 165
h. Purchase a Consumer Review
The proposed rule defined ‘‘purchase
a consumer review’’ as ‘‘provid[ing]
something of value, such as money,
goods, or another review, in exchange
for a consumer review.’’ For the
following reasons, the Commission
adopts the definition of ‘‘purchase a
consumer review’’—a term which is
used in § 465.2, Fake or False Consumer
Reviews, Consumer Testimonials, or
Celebrity Testimonials—largely as
proposed, with two modifications
described below.
An individual commenter wrote,
‘‘[r]egarding payment for reviews, the
use of . . . discounts on future
purchases from the business should be
specifically prohibited as well.’’ 166 A
review platform commenter suggested
‘‘that the Commission list additional
examples of . . . what the Commission
considers ‘value.’ ’’ 167 Specifically, it
suggested adding ‘‘gift certificates,’’
‘‘services,’’ ‘‘discounts,’’ ‘‘coupons,’’
and ‘‘contest entries.’’ 168 Such
examples of value were covered by the
proposed definition, which applies to
‘‘something of value’’ provided in
exchange for a consumer review’’ but,
for purposes of clarification, the
Commission is adding these examples of
value in the final definition. The review
platform commenter also suggested
adding ‘‘other incentives,’’ 169 which the
Commission thinks is unnecessary,
given that the list is only exemplary and
preceded by the words ‘‘such as.’’
Another review platform commenter
suggested using language explicitly
stating that the listed examples of
‘‘value’’ are not exhaustive.170 The
Commission believes that, because the
phrase ‘‘such as’’ precedes the list of
examples, this is already sufficiently
clear from the language of the
definition.
The proposed definition used the
term ‘‘goods.’’ To ensure that
terminology is used consistently
throughout the rule, the Commission is
replacing the term ‘‘goods’’ with the
synonymous word ‘‘products’’ in the
final definition. 171
For the reasons explained in this
section, the Commission is finalizing
the definition of ‘‘purchase a consumer
review’’ to mean to provide something
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172 Yelp Cmt. at 4.
173 See supra Section IV.A.2.d of this document.
174 Some commenters suggested edits to the
definition, such as removing ‘‘flavor’’ from the list
of attributes that might not be material, adding
other product attributes to that list, or adding
flexibility by removing the listed attributes
altogether. TINA Cmt. at 6; Amazon Cmt. at 9–10;
Chamber of Commerce Cmt. at 6–7; RILA Cmt. at
3; NRF Cmt. at 7–8; IAB Cmt. at 8.; ANA Cmt. at
15–16; NRF Cmt. at 8. Other commenters asked
questions about how the definition would apply to
an updated version of a product or to different
scenarios. Magana Cmt.; NADA Cmt. at 5.
175 Transparency Company Cmt. at 14.
176 NFIB Cmt. at 4.
177 State Attorneys General, Cmt. on NPRM at 2–
3 (Sept. 29, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0100 (‘‘State AGs Cmt.’’).
178 Id. at 2.
179 Id. at 3.
180 Yelp Cmt. at 5.
181 Consumer Review Fairness Act of 2016
§ 2(b)(1), 15 U.S.C. 45b(b)(1).
182 Consumer Reports Cmt. at 10.
183 Family First Life Cmt. at 16.
184 Id.
185 See Fed. R. Civ. P. 11(b)(2) and (3).
186 Trustpilot Cmt. at 17–18.
of value, such as money, gift certificates,
products, services, discounts, coupons,
contest entries, or another review, in
exchange for a consumer review.
i. Reviewer
The proposed rule defined ‘‘reviewer’’
as ‘‘the author or purported author of a
consumer review.’’ The Commission is
finalizing the definition of the term—
which is used in §§ 465.2 and 465.5—
as originally proposed.
One review platform commenter
objected to the use of the word
‘‘purported’’ in the definition of
‘‘reviewer,’’ just as it objected to that
word’s inclusion in the definition of
‘‘consumer review.’’ 172 The commenter
asserted that ‘‘purported’’ feeds into the
false narrative that consumer reviews
are inherently unreliable. As discussed
above, the use of the word ‘‘purported’’
simply recognizes and accounts for the
undisputed fact that some reviews are
fake.173 The Commission declines to
modify the definition of ‘‘reviewer.’’
j. Substantially Different Product
The proposed rule defined
‘‘substantially different product’’ as a
product that differs from another
product in one or more material
attributes other than color, size, count,
or flavor. The defined term appeared in
proposed § 465.3, Consumer Review or
Testimonial Reuse or Repurposing,
which the Commission is no longer
planning on finalizing.174 Given that the
Commission has decided not to proceed
with proposed § 465.3 at this time, it is
not including a definition of
‘‘substantially different product’’ in the
final rule.
k. Testimonialist
The proposed rule defined
‘‘testimonialist’’ as ‘‘the person giving or
purportedly giving a consumer
testimonial or celebrity testimonial.’’
None of the comments received
addressed the definition of
testimonialist. As already discussed in
section IV.A.2.b of this document, the
Commission is substituting the word
‘‘individual’’ for the word ‘‘person’’
wherever the word appeared in the
Commission’s original proposal. Aside
from this minor, clarifying modification,
the Commission has determined that it
will finalize the definition of the term—
which is used in §§ 465.2 and 465.5—
as originally proposed.
l. Unjustified Legal Threat
The proposed rule defined
‘‘unjustified legal threat’’ as ‘‘a threat to
initiate or file a baseless legal action,
such as an action for defamation that
challenges truthful speech or matters of
opinion.’’ For the following reasons, the
Commission adopts the definition—a
term which is used in § 465.7, Review
Suppression—largely as proposed, with
two modifications described below.
The NPRM asked whether ‘‘the
definition of ‘unjustified legal threat’ is
sufficiently clear.’’ One company’s
comment said that the proposed
definition was clear.175 A trade
association said ‘‘the term ‘unjustified’
is a vague standard that leaves unclear
what legal support a business must have
for its legal position before it warns the
creator of a review of possible legal
proceedings.’’ 176 A comment from State
Attorneys General suggested changing
‘‘unjustified’’ to ‘‘unfounded,
groundless, or unreasonable’’ in order to
provide a more objective legal standard
for evaluating the types of legal threats
that are not permitted.177 The
Commission agrees in part with this
recommendation. As a clarification of
what it intended, the Commission is
changing ‘‘unjustified’’ to ‘‘unfounded
or groundless.’’ Specifically, this change
avoids the unintended, potentially
broader scope of the term ‘‘unjustified,’’
which is also freighted with subjective
considerations, in favor of terms that
reflect objective legal standards. For
similar reasons, the Commission is not
adding ‘‘unreasonable,’’ a term which is
unnecessary and not as precise in this
particular situation as ‘‘unfounded or
groundless.’’
The State Attorneys General comment
also recommended that the definition
include ‘‘a threat to enforce an
agreement that is void, voidable, or
unenforceable.’’ 178 It said that the word
‘‘unjustified’’ may be insufficient to
address merchants arguing that their
legal threats were justified by their non-
disclosure agreements that limit
consumer reviews. 179 The change from
‘‘unjustified’’ to ‘‘unfounded or
groundless’’ addresses this concern. A
comment from a review platform
suggested that the Commission expand
the definition to include threats based
on form contracts that violate the
Consumer Review Fairness Act
(‘‘CRFA’’). 180 Given that such form
contracts are already prohibited by the
CRFA,181 the Commission declines to
address them in this rulemaking.
A consumer group’s comment
disagreed with the definition’s use of
the phrase ‘‘baseless legal action’’ on the
basis that it ‘‘open[s] just as many
questions as the underlying term it
attempts to define.’’ 182 A company’s
comment noted that the phrase ‘‘a
baseless legal action’’ is vague, and
recommend that the Commission
instead adopt language that is based
upon Rule 11(b)(2) of the Federal Rules
of Civil Procedure.183 Specifically, the
commenter recommended changing ‘‘a
baseless legal action’’ to ‘‘a legal action
that is not warranted by existing law or
a nonfrivolous argument for extending,
modifying, or reversing existing law or
establishing new law.’’ 184
The Commission is partially adopting
the commenter’s suggestion by adopting
language that is loosely based upon
Federal Rule of Civil Procedure 11(b)(2)
and (3). 185 However, the Commission is
not adopting the phrase ‘‘extending,
modifying, or reversing existing law or
establishing new law’’ because it is
highly doubtful that companies would
threaten consumers by asserting that,
while no lawsuit is warranted under
existing law, they will bring a lawsuit
anyway and try to change existing law.
Instead, the Commission chooses to
clarify the definition by changing
‘‘threat to file a baseless legal action’’ to
‘‘legal threat based on claims, defenses,
or other legal contentions unwarranted
by existing law or based on factual
contentions that have no evidentiary
support or will likely have no
evidentiary support after a reasonable
opportunity for further investigation or
discovery.’’
A review platform commenter was
concerned that the proposed definition’s
‘‘wording opens the door to bad actors
being able to claim defamation on
weakly justified grounds and to seek to
game the system by deliberately
constructing legal terms which can then
be deployed to suppress reviews.’’ 186
The Commission believes that the
revised definition addresses this
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68047	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
187 As discussed below in Section IV.H. of this
document, the Commission is adding definitions of
two phrases in response to concerns raised by
commenters: ‘‘fake indicators of social media
influence’’ and ‘‘distribute fake indicators of social
media influence.’’
188 NRF Cmt. at 3.
189 Id. at 3–4. The Commission elsewhere
addresses whether § 465.2 applies to a business
allowing reviews to be posted or published on its
web page or to retailers sharing reviews with third-
party platforms. See infra Section IV.B.5 of this
document.
190 See, e.g., Kouichi Taniguchi v. Kan Pac.
Saipan, Ltd., 566 U.S. 560, 566 (2012); Tanzin v.
Tanvir, 592 U.S. 43, 48 (2020) (‘‘Without a statutory
definition, we turn to the phrase’s plain meaning
at the time of enactment.’’); Lamar, Archer & Cofrin,
LLP v. Appling, 584 U.S. 709, 715 (2018) (‘‘Because
the Bankruptcy Code does not define the words
‘statement,’ ‘financial condition,’ or ‘respecting,’ we
look to their ordinary meanings.’’).
191 Disseminate, Dictionary.com, LLC, https://
www.dictionary.com/browse/disseminate (last
visited July 5, 2024) (defining ‘‘disseminate’’ as ‘‘to
scatter or spread widely, as though sowing seed;
promulgate extensively; broadcast; disperse’’);
Disseminate, Merriam-Webster.com Dictionary,
https://www.merriam-webster.com/dictionary/
disseminate (last visited July 5, 2024) (defining
‘‘disseminate’’ as ‘‘to spread abroad as though
sowing seed’’ or ‘‘to disperse throughout’’);
Disseminate, Cambridge Dictionary, https://
dictionary.cambridge.org/us/dictionary/english/
disseminate (last visited July 5, 2024) (defining
‘‘disseminate’’ as ‘‘to spread or give out something,
especially news, information, ideas, etc., to a lot of
people’’).
192 Transparency Company Cmt. at 13.
193 TechNet Cmt. at 3.
194 Trustpilot Cmt. at 9.
195 Id. at 12.
196 If the term were only to appear in § 465.2(c),
such a clarification would not be needed. This is
because § 465.2(c) also covers employees and
agents.
197 Family First Life Cmt. at 13.
concern, especially given its inclusion
of language from Federal Rule of Civil
Procedure 11(b)(2) and (3), which is
intended to avoid such misuse of the
court system. In any event, the
Commission is deleting ‘‘such as an
action for defamation that challenges
truthful speech or matters of opinion’’
because this example is unnecessary
and possibly confusing in this context.
For the reasons explained in this
section, the Commission is adopting the
proposed definition of an ‘‘unfounded
or groundless legal threat’’ with
clarifying changes. The final definition
provides that an ‘‘unfounded or
groundless legal threat’’ is a legal threat
based on claims, defenses, or other legal
contentions unwarranted by existing
law or based on factual contentions that
have no evidentiary support or will
likely have no evidentiary support after
a reasonable opportunity for further
investigation or discovery.
3. Proposed Additional Definitions
In Question 7 of the NPRM, the
Commission asked what additional
definitions, if any, are needed. In
Questions 14 and 18 of the NPRM, the
Commission asked whether it should
define the terms ‘‘managers’’ and
‘‘relatives,’’ respectively. As discussed
below, various commenters suggested
that the Commission define the
following terms and phrases that appear
in the proposed rule: ‘‘dissemination,’’
‘‘manager,’’ ‘‘relative,’’ and ‘‘purchase or
procure fake indicators.’’ One
commenter suggested that the
Commission define ‘‘review hosting’’
and exclude it from the scope of
§ 465.2.187
a. Dissemination
The term ‘‘disseminate’’ appears in
both proposed and final §§ 465.2 and
465.5. A comment from a trade
association stated that the Commission
should define ‘‘disseminate’’ ‘‘within
Proposed § 465.2(b) to include only the
affirmative posting or intentional
distribution of reviews, where a
company has actual knowledge that the
reviews are false or fraudulent in
nature.’’ 188 The commenter continued
by saying that ‘‘disseminate’’ should
‘‘not include passive actions such as
allowing a review to be posted or
published on a company’s web page,
unless the company has actual
knowledge that the review is false or
fraudulent in nature’’ or ‘‘retailers
sharing reviews with third-party
platforms such as Google.’’ 189 Within
both §§ 465.2 and 465.5, however,
‘‘disseminate’’ applies only to
testimonials, not to consumer reviews.
One of the basic canons of statutory and
regulatory construction is that words are
to be understood in their ordinary,
everyday meanings—unless the context
indicates that they bear a technical
sense.190 In §§ 465.2 and 465.5, the
Commission intended for the term to
have its ordinary, everyday meaning—
that is, to spread or to convey
something, rather than the proposed
definition.191 Accordingly, the
Commission declines to add the
proposed definition.
b. Manager
The term ‘‘manager’’ appeared in
proposed § 465.5, Insider Consumer
Reviews and Consumer Testimonials,
and was undefined. Due to the
clarifying changes to § 465.2 that are
discussed in further detail below, the
term is now included in both final
§ 465.5 and final § 465.2, Fake or False
Consumer Reviews, Consumer
Testimonials, or Celebrity Testimonials.
One business commenter noted that it
is unnecessary to define ‘‘manager.’’ 192
An industry organization wrote in its
comment that the failure to define the
term ‘‘manager’’ ‘‘raises concerns about
the number of a firm’s employees
impacted.’’ 193 A review platform
commenter said that using the term
‘‘manager’’ without any definition is
particularly problematic,194 noting that
someone ‘‘may have the title ‘manager’
without any practical level of control
and power to exert influence over
others. For example, it is possible in a
business for a person to have the title
‘manager’ while holding a relatively
junior position and without having any
employees that directly report to
them.’’ 195 Proposed and final § 465.5(c)
address ‘‘managers’’ soliciting or
demanding consumer reviews from
employees or agents. In this context, the
Commission’s intent was for the term
‘‘manager’’ to be limited to those who
supervise others. Thus, the Commission
is adopting a definition for the term
‘‘manager’’ to make this clarification,
which will ensure that § 465.5(c) is not
interpreted as more restrictive than the
Commission intended. 196
A business commenter that operates
in the insurance-marketing space
explained that independent-contractor
insurance agents who build their own
agencies are referred to as ‘‘managers’’
and asked that the definition of
‘‘managers’’ expressly carve out
‘‘managers in the insurance marketing
space’’ or at least clarify that managers
are those ‘‘who are employed by the
company.’’ 197 As similar situations may
arise in other contexts, the Commission
is adopting the commenter’s latter
recommendation, and clarifying that
managers are employees of the
businesses.
For the reasons explained in this
section, the final rule adopts a
definition for the term ‘‘manager.’’ The
final rule defines the term ‘‘manager’’ as
an employee of a business who
supervises other employees or agents
and who either holds the title of a
‘‘manager’’ or otherwise serves in a
managerial role.
c. Relative
The term ‘‘relative’’ appeared in
proposed § 465.5, Insider Consumer
Reviews and Consumer Testimonials. It
was undefined in the proposed rule.
Two commenters suggested that the
Commission define the term ‘‘relative.’’
A comment from a review platform said
that a plain reading of ‘‘relative’’ could
cover ‘‘an extremely broad range of
people’’ and ‘‘is likely to extend to
persons who may not be biased since
they are in reality not close to the
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198 Trustpilot Cmt. at 12.
199 Id.
200 Chamber of Commerce Cmt. at 7.
201 Id.
202 See infra Section IV.E.2 of this document.
203 Consumer Reports Cmt. at 4.
204 Commenters also expressed concern about or
sought guidance on the meaning of the term
‘‘procure’’ as used in proposed § 465.2(c), but they
did not expressly suggest that the Commission
define the term. The use of the term ‘‘procure’’ in
§ 465.2 is discussed below in the context of that
substantive provision. See infra Section IV.B.4 of
this document.
205 See Procure (def. 1), Merriam-Webster.com
Dictionary, https://www.merriam-webster.com/
dictionary/procure (last visited July 5, 2024)
(establishing that the word ‘‘procure’’ means,
among other things, ‘‘to get possession of
(something)’’ or ‘‘to obtain (something) by particular
care and effort’’).
206 Amazon Cmt. at 7. As discussed below, other
commenters also argued that § 465.2 should not
apply to merely hosting reviews. See infra section
IV.B.5 of this document.
207 Id. at 7.
208 See infra section IV.B.5 of this document.
209 See, e.g., William Hardy, Cmt. on NPRM (July
31, 2023), https://www.regulations.gov/comment/
FTC-2023-0047-0002; Eric Beback, Cmt. on NPRM
(Aug. 1, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0005 (‘‘Beback Cmt.’’);
Hippensteel Cmt.; Anderson Cmt.; Nathan Wilson,
Cmt. on NPRM (Aug. 2, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0008; fred foreman, Cmt. on NPRM (Aug. 6, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0012; Ravnitzky Cmt. at 1; Fribance Cmt.; Ian
wolk, Cmt. on NPRM (Aug. 15, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0020; Edborg Cmt.; Anonymous 5, Cmt. on NPRM
(Aug. 18, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0030; Anonymous 1 Cmt.;
Steven Osburn, Cmt. on NPRM (Aug. 22, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0033 (‘‘Osburn Cmt.’’); Ludlam Cmt.; Janette
Ponticello, Cmt. on NPRM (Sept. 5, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0042; Hannah Abbott, Cmt. on NPRM at 1 (Sept. 20,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0051 (Abbott Cmt.).
210 Pasabi, Cmt. on NPRM at 2 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0103.
211 Mark Cuban, Cmt. on NPRM (Sept. 25, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0066.
212 Transparency Company Cmt. at 9.
213 See 15 U.S.C. 45(m)(1)(C).
business.’’ 198 The commenter suggested
that the prohibition in § 465.5(c) be
limited to close relatives such as
immediate family members.199 A
comment from a business organization
said that the term ‘‘relative’’ is too vague
and that ‘‘[i]t is unclear whether the rule
applies to third cousins, the spouses of
a stepbrother’s child from a previous
marriage, or friends that are considered
family.’’ 200 The commenter continued
that ‘‘[l]arge companies creating
monitoring programs for testimonials
need some clarity about what relatives
will be captured under the Rule.’’ 201
As discussed below, the Commission
believes that some rule provisions
should be limited to ‘‘immediate
relatives.’’ 202 The Commission is
adding a definition of an ‘‘immediate
relative,’’ which clarifies that the term
refers to a spouse, parent, child, or
sibling. In the final rule, the term
‘‘immediate relative’’ is used in
§§ 465.2(c) and 465.5(c).
d. Purchase or Procure Fake Indicators
The phrase ‘‘purchase or procure fake
indicators of social media influence’’ is
used in proposed and final § 465.8,
Misuse of Fake Indicators of Social
Media Influence. The phrase was
undefined in the proposed rule.
A consumer advocacy commenter
stated that leaving the terms ‘‘purchase’’
and ‘‘procure’’ undefined ‘‘leaves
ambiguity regarding which types of
incentives are restricted,’’ and suggested
defining the phrase ‘‘purchase or
procure fake indicators of social media
influence’’ to mean ‘‘to provide
something of value, such as money,
goods, or another indicator of social
media influence (i.e.[,] a ‘like’), in
exchange for a fake indicator of social
media influence.’’ 203 The Commission
declines to adopt the commenter’s
suggestion.204 The definition proposed
by the commenter would unnecessarily
narrow the types of actions that would
be covered by the rule to an exchange.
In the final rule, the Commission
intends for the term ‘‘procure’’ to bear
its ordinary, everyday meaning—that is,
to obtain something.205 Even if there is
any ambiguity in the term ‘‘purchase,’’
any exchange of value in order to obtain
fake indicators of social media influence
would be ‘‘procuring’’ the fake
indicators.
e. Review Hosting
A retailer submitted a comment
suggesting that ‘‘review hosting’’ be
defined and excluded from the scope of
§ 465.2.206 The commenter suggested
the following definition:
Review hosting includes but is not limited
to activity associated with maintaining a
repository of consumer reviews and
testimonials for display such as: offering
review submission functionality, collecting
and moderating reviews, organizing and
displaying reviews, aggregating reviews into
star ratings, and providing guidance to
consumers about how to leave reviews where
no incentive is offered.207
As discussed below, the Commission
did not intend for its proposal to apply
to simply hosting consumer reviews.208
The Commission is therefore, for the
purpose of clarification, adopting a
definition of the term ‘‘consumer review
hosting’’ in order to exclude mere
review hosting from certain provisions
of the rule. The Commission is not
adopting the commenter’s proposed
definition because it included activities
that go beyond the core of mere review
hosting and because it begins with the
phrase ‘‘include but is not limited to,’’
which would allow it to include an
unknown, larger category of activities.
The final rule defines ‘‘consumer review
hosting’’ as providing the technological
means by which a website or platform
allows consumers to see or hear the
consumer reviews that consumers have
submitted to the website or platform.
The exclusion of ‘‘consumer review
hosting’’ from certain sections of the
rule is discussed below.
B. § 465.2—Fake or False Consumer
Reviews, Consumer Testimonials, or
Celebrity Testimonials
Proposed § 465.2 addressed fake or
false consumer reviews, consumer
testimonials, and celebrity testimonials.
Based on the following, the Commission
has determined to finalize these
prohibitions, with a number of
revisions. The following paragraphs
discuss comments relating to (1)
proposed § 465.2 generally, (2) common
language in all three paragraphs, (3) the
individual paragraphs, 4) the knowledge
standard, and (5) other potential
requirements.
Numerous individual commenters
wrote about the importance of authentic
reviews or testimonials and that fake or
false ones should be prohibited.209 A
technology company commenter wrote
that it ‘‘would welcome rules to prohibit
fake reviews and place stronger
obligations on businesses who host
them to better protect consumers.’’ 210
A celebrity commenter wrote that he
had ‘‘received more than 100 emails
from consumers who have been induced
to purchase fake products through the
mis-use of . . . [his] image and the
images of other Shark Tank
‘sharks.’ ’’ 211
A business commenter suggested
explaining the ‘‘financial consequence
of fake reviews,’’ such as whether it is
‘‘∼$50,000 per fake review.’’ 212 The
maximum civil penalty is currently
$51,744 per violation, but courts must
take into account the statutory factors
set forth in section 5(m)(1)(C) of the FTC
Act and may impose much lower per-
violation penalties. 213 Ultimately, courts
will also decide how to calculate the
number of violations in a given case.
1. Common Language in § 465.2(a), (b),
and (c)
Proposed § 465.2 consisted of three
paragraphs, each of which sought to
address unfair or deceptive conduct by
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214 IAB Cmt. at 3.
215 Id.
216 Id. at 4 & n.12.
217 Complaint at 8–11, 17–18, FTC v. NextGen
Nutritionals, LLC, No. 8:17–cv–2807 (M.D. Fla. filed
Nov. 20, 2017) (testimonials in ads made specific
quantified claims of weight loss and blood pressure
reduction); In re Esrim Ve Sheva Holding Corp., 132
F.T.C. 736, 737 (2001) (testimonial made specific
quantified claims about increased mileage and
decreased harmful pollutants); In re Computer Bus.
Servs., Inc., 123 F.T.C. 75, 78 (1997) (endorsers
made specific quantified earnings claims); In re
Twin Star Prods., Inc., 113 F.T.C. 847, 849–51, 853–
54 (1990) (endorsements made regarding a weight-
loss product, a baldness treatment, and an
impotency treatment); In re National Sys. Corp., 93
F.T.C. 58, 61–62 (1979) (testimonials about jobs
obtained by graduates of respondents’ schools).
218 IAB Cmt. at 6; NRF Cmt. at 6.
219 NPRM, 88 FR 49373.
220 A virtual influencer is a computer-generated
fictional character that can be used for a variety of
marketing-related purposes, but most frequently for
social media marketing, in lieu of human
influencers. See, e.g., Koba Molenaar, Discover the
Top 12 Virtual Influencers for 2024—Listed and
Ranked!, Influencer MarketingHub (Mar. 29, 2024),
https://influencermarketinghub.com/virtual-
influencers/.
221 ANA Cmt. at 12.
222 Id.
223 Id.
224 Id.
225 Beback Cmt.
226 Id.
227 See Endorsement Guides, 16 CFR 255.1(g).
228 TINA Cmt. at 8.
prohibiting specified types of reviews or
testimonials: (1) by someone who ‘‘does
not exist,’’ (2) by someone ‘‘who did not
use or otherwise have experience with
the product, service, or business that is
the subject’’ of it, or (3) ‘‘that materially
misrepresents, expressly or by
implication, the [person’s] . . .
experience with the product, service, or
business.’’ For the purpose of the
following discussion, references to ‘‘fake
or false’’ reviews or testimonials cover
these three types of reviews or
testimonials.
A trade association asserted that the
Commission lacked sufficient evidence
of prevalence of reviews and
testimonials that ‘‘materially
misrepresent[ ] . . . the reviewer’s or
testimonialist’s experience.’’ 214 The
trade association asserted that some of
the cases cited by the Commission also
involved ‘‘actual fake reviews’’ and
therefore should not count as evidence
of prevalence.215 The Commission
disagrees: a fake or fabricated review
misrepresents the purported reviewer’s
experience (e.g., that the reviewer used
the product and what their experience
was). The commenter also asserted that
five of the cases cited by the
Commission to establish prevalence
‘‘provide no additional details about the
unfair or deceptive act or practice at
issue aside from bare allegations that the
consumer testimonials in the case
involved misrepresentations of the
consumer’s experience,’’ and therefore
are insufficient to establish
prevalence. 216 However, the quoted
representations in each of the
Commission’s complaints makes clear
the nature of the misrepresentations.217
Furthermore, even if a Commission
complaint does not provide all details
about a specific misrepresentation, that
does not mean that it cannot serve as
evidence of prevalence. The
Commission thus has a strong basis for
its conclusion that reviews and
testimonials misrepresenting the
experiences of the reviewers and
testimonialists are prevalent.
The same trade association and
another one expressed concern that the
‘‘prohibition on all reviews that are
authored by individuals that [sic] ‘do
not exist’ or have not used the product
would prohibit a wide swath of non-
deceptive speech, including for
example, any satirical reviews that a
business authors, creates, sells,
purchases, disseminates, or
procures.’’ 218 As discussed in the
NPRM, the Commission’s intent was to
prohibit misrepresentations resulting
from reviews or testimonials by
someone who does not exist or who did
not use or otherwise have experience
with the product, service, or
business. 219 The Commission is unsure
of the extent to which there are satirical
reviews that could run afoul of the
provision as proposed. Nonetheless,
upon a review of the comments, the
Commission now recognizes that absent
an express reference to material
misrepresentations, the provision could
be interpreted to prohibit other
potentially non-deceptive speech, such
as the use of virtual influencers.220 To
avoid this unintended consequence, the
Commission is clarifying that § 465.2 is
limited to prohibiting material
misrepresentations. As finalized, the
prohibitions in § 465.2 are expressly
limited to reviews and testimonials
‘‘materially misrepresent[ing], expressly
or by implication . . . that the reviewer
or testimonialist exists; . . . that the
reviewer or testimonialist used or had
experience with the product, service, or
business that is the subject of the review
or testimonial; or . . . the reviewer’s or
testimonialist’s experience with the
product, service, or business that is the
subject of the review or testimonial.’’
A different trade association raised
several concerns about the common
language of proposed § 465.2. It asserted
that the provision ‘‘would prohibit the
use of a dead person’s endorsement
because arguably that person does not
exist.’’ 221 The Commission does not
interpret a person who ‘‘does not exist’’
to include a person who died after
making an endorsement, but that
concern should be resolved by the new
language regarding material
misrepresentations. The commenter
went on to question ‘‘what constitutes
an ‘actual experience,’ ’’ asking whether
a person who saw a label had actual
experience with it and whether a person
who tasted an item purchased at a
restaurant but did not visit the
restaurant had actual experience.222 The
proposed provision did not use the term
‘‘actual experience,’’ and the persons in
the commenter’s posited hypotheticals
did have legitimate experience with the
product or service but should not
misrepresent that experience as more
than it was. The commenter also said
that ‘‘it is unclear if the . . . element—
materially misrepresenting the
experience with the product or
service—relates to the experience or an
opinion about the product or
service.’’ 223 It relates to the person’s
‘‘experience’’ with the product or
service, that is, what actually happened
when they used or otherwise
experienced it and not simply their
‘‘opinion’’ of it. The same commenter
asked whether ‘‘an actor portraying an
actual reviewer’’ is misrepresenting
their experience as long as it is ‘‘clear
that it is an actor portrayal.’’ 224 The
provision does not prohibit using an
actor to portray a real testimonialist.
An individual commenter who raised
the same concern about whether actors
could portray real testimonialists 225
went on to express concerns that the
actor ‘‘shouldn’t misrepresent who the
original person was,’’ such as by
misrepresenting ‘‘the effectiveness/
health benefits of [a] product by hiring
a very fit in shape person.’’ 226 The
Commission has issued guidance stating
that ‘‘use of an endorsement with the
image or likeness of a person other than
the actual endorser is deceptive if it
misrepresents a material attribute of the
endorser.’’ 227 Nevertheless, the
Commission does not intend for § 465.2
to address such misrepresentations.
A consumer organization’s comment
requested that the Commission
‘‘explicitly indicate that fake . . .
ratings are an independent and separate
violation from deceptive narrative
reviews.’’ 228 The Commission believes
that making this distinction is
unnecessary and declines to make this
change.
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229 Albert Cmt. at 3.
230 Id.
231 IAB Cmt. at 6.
232 Amazon Cmt. at 6.
233 Computer & Communications Industry
Association, Cmt. on NPRM at 3 (Sept. 29, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0110 (‘‘CCIA Cmt.’’).
234 Wilson Cmt.
235 Osburn Cmt.
236 See 15 U.S.C. 45(m)(1)(A) (establishing that
the recovery of civil penalties requires a showing
of ‘‘actual knowledge or knowledge fairly implied
on the basis of objective circumstances that such act
is unfair or deceptive and is prohibited by such
rule’’).
237 Slezak Cmt. at 1.
238 TINA Cmt. at 6 n.23.
239 NRF Cmt. at 5.
240 CCIA Cmt. at 3.
241 NRF Cmt. at 4; ANA Cmt. at 12; IAB Cmt. at
4; Amazon Cmt. at 7.
242 NRF Cmt. at 4.
2. § 465.2(a)
Proposed § 465.2(a) would have made
it a violation for a ‘‘business to write,
create, or sell a consumer review,
consumer testimonial, or celebrity
testimonial’’ that is fake or false.
An individual commenter noted that
the prohibition ‘‘is too specific and it
would be easy for a business to find an
alternative method not prohibited by the
rule.’’ 229 The commenter posited an
example: ‘‘a business could have
someone next to them tell them their
review and someone could transcribe it,
technically the business did not create,
make, or sell anything and thus would
not be in violation.’’ 230 If a business is
paying an individual to transcribe a fake
or false review, it is creating or making
the review, and would therefore have
violated § 465.2(a). Accordingly, the
Commission declines to modify the
prohibition in response to the
commenter’s concern.
A trade association submitted a
comment asking the Commission to
‘‘confirm that when a real consumer
authors the review, the business cannot
be said to have written or created it, and
thus . . . section [465.2(a)] could not
apply.’’ 231 The Commission is unsure
what the commenter means by a ‘‘real
consumer authors the review.’’ The
provision would apply if, for example,
a business employs a ‘‘real consumer’’
to write fifty reviews of a product under
different names.
A comment from a retailer that
publishes reviews said that ‘‘review
brokers and other bad actors . . .
coordinate the high-volume writing,
buying, and selling of fake reviews’’ and
that the rule should apply to those
‘‘approaching customers, instructing
them on how to create fake reviews and
avoid detection, and connecting them
with bad actors operating [fake]
accounts.’’ 232 Brokers of fake reviews
would generally fall under the
provision’s prohibition against selling a
consumer review, given that such
brokers are generally being paid to
provide fake reviews.
A trade association commenter
suggested clarifying that ‘‘business’’ in
§ 465.2(a) ‘‘refers to a business that
helps to create or sell reviews or
testimonials.’’ 233 Although the
paragraph does apply to such
businesses, it also applies to a business
that writes or creates fake reviews or
testimonials for its own products or
services. For this reason, the
Commission declines to adopt the
commenter’s suggestion.
An individual commenter asked
whether the prohibition covers ‘‘people
who leave reviews in good faith’’ if
‘‘they were getting paid for it.’’ 234
Neither § 465.2(a) nor any section of the
rule imposes liability on individual
consumers who write honest reviews,
even if they are paid for doing so.
Another individual commenter
requested that civil penalties be
imposed ‘‘on the company for soliciting
the reviews, rather than on the reviewer,
unless the reviewer knowingly is
leaving fake reviews.’’ 235 Under
§ 465.2(a), an individual who is in the
business of writing, creating, selling, or
brokering reviews could be liable for
creating consumer reviews that are fake
or false. That individual could only be
subject to civil penalties if they did so
with actual knowledge or knowledge
fairly implied on the basis of objective
circumstances that they were engaging
in an act or practice that is unfair or
deceptive and is prohibited by the
rule. 236
An individual commenter expressed
concern that ‘‘competing parties could
potentially create fake reviews on
another party in order to give the
impression that the party is in violation
of the’’ rule. 237 Although such
misconduct is possible, the target of
such misconduct would not be liable
under § 465.2(a), based on how it is
worded. For example, the target would
not have been the one who created,
wrote, or sold the review, nor would the
target have purchased the review. The
competitor who engaged in such
misconduct might be liable for
deceptive or unfair conduct under the
FTC Act.
3. § 465.2(b)
Proposed § 465.2(b) would have made
it a violation for a business to ‘‘purchase
a consumer review’’ or ‘‘disseminate or
cause the dissemination of a consumer
testimonial or celebrity testimonial’’
about ‘‘the business or one of its
products or services’’ which ‘‘the
business knew or should have known’’
was fake or false.
A consumer organization commented
that, by limiting § 465.2(b) to a business
posting reviews or disseminating or
causing the dissemination of
testimonials about ‘‘the business or one
of its products or services,’’ the
Commission’s proposal limits liability
to the business itself ‘‘instead of
including other . . . creators or
disseminators of deceptive reviews and
testimonials.’’ 238 In response to the
commenter’s concern, the Commission
notes that those creating or
disseminating deceptive reviews and
testimonials could be liable under
§ 465.2(a).
A trade association asked whether a
business ‘‘ ‘disseminates’ reviews for its
products merely by . . . placing them in
advertising/marketing materials.’’ 239
Section 465.2(b) applies only to the
dissemination of testimonials, but if a
business includes consumer reviews in
its advertising or marketing materials,
those reviews become ‘‘testimonials’’
and are covered.
Another commenter requested that
the Commission ‘‘clarify the limited
applicability of ‘to disseminate or cause
the dissemination’ in proposed
§ 465.2(b) so the definition does not
wrongly apply to third parties that host
or license reviews.’’ 240 The phrase ‘‘to
disseminate or cause the dissemination’’
applies only to testimonials and not to
consumer reviews, so it could not apply
to third parties that host or license
reviews. The only situation in which
§ 465.2(b) applies to consumer reviews
is when a business purchases a
consumer review.
4. § 465.2(c)
Proposed § 465.2(c) would have made
it a violation for a business to ‘‘procure
a consumer review for posting on a
third-party platform or website, about
the business or one of its products or
services,’’ which ‘‘the business knew or
should have known’’ was fake or false.
Several commenters questioned the
scope and ‘‘vagueness’’ of the undefined
term ‘‘procure’’ in proposed
§ 465.2(c). 241 A trade association wrote
that ‘‘the Commission should explain
that a retailer does not ‘procure a
consumer review for posting on a third-
party platform or website’ simply by
requesting that previous customers
submit reviews, and then allowing
submitted reviews to be posted on the
retailer’s own website or sharing
customer reviews with Google.’’ 242 The
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243 Id. at 5.
244 Id. at 5–6.
245 See §§ 465.5(a), (b), and (c), 465.6, and
465.7(b) of the rule.
246 One industry commenter expressed a general
concern that was not tied to a specific provision
‘‘that the Proposed Rule imposes liability on
companies for the dissemination and/or display of
fake reviews that clashes with Section 230 of the
Communications Decency Act.’’ TechNet Cmt. at 3.
As discussed below, the Commission is including
exemptions for mere consumer review hosting in
§§ 465.2 and 465.5. See infra section IV.B.5 of this
document.
247 See, e.g., NRF Cmt. at 5–6; IAB Cmt. at 6;
Amazon Cmt. at 7–9; CCIA Cmt. at 3; Abbott Cmt.
248 TechNet Cmt. at 2; IAB Cmt. at 5; NRF Cmt.
at 7. A trade association also requested a ‘‘safe
harbor’’ but did not tie it to any specific provision
of the proposed rule. NADA Cmt. at 4.
249 NRF Cmt. at 6.
250 IAB Cmt. at 4.
251 ANA Cmt. at 12–13.
252 Prompting the submission of consumer
reviews that must be positive in order to obtain an
incentive could violate § 465.4. Moderation of
consumer reviews that results in the suppression of
some of them based upon their ratings or their
negative sentiment could violate § 465.7(b).
Commission did not intend to cover
such activities. Instead, the Commission
intended to cover a much more limited
set of activities: the procurement of fake
and false reviews from company
insiders. The Commission is therefore
revising § 465.2(c) by limiting it to a
business procuring consumer reviews
‘‘from its officers, managers, employees,
or agents, or any of their immediate
relatives.’’
A trade association’s comment
questioned the phrase ‘‘its products or
services’’ in the context of what was
proposed § 465.2(c).243 It asked whether
the term would apply to all of the
products sold by a department store, an
online marketplace, or a consignment
business.244 The Commission recognizes
that the phrase ‘‘its products or
services’’ was ambiguous. In order to
address this inadvertent ambiguity, the
Commission is making clarifying
changes by replacing the phrase ‘‘its
products or services’’ with the phrase
‘‘the products or services it sells’’ in
§ 465.2(b) and (c), as well as in other
places where it appears in the rule.245
The revised language captures what the
Commission originally intended and
would apply to products sold by a
department store, an online
marketplace, or a consignment business.
5. § 465.2(d)
Upon consideration of the comments
received, the Commission is adding
paragraph (d) in § 465.2 to clarify the
scope of § 465.2(b) and (c). The
Commission recognizes that, when a
business sends a broad solicitation to
customers to post customer reviews, one
or more recipients might also be
employees of the business. If any such
employee then posts reviews, one might
consider those reviews to have been
‘‘procured’’ from the employee.
Similarly, the Commission recognizes
that broad, incentivized solicitations to
the general public or past customers to
post about a product on social media
could be considered ‘‘causing the
dissemination’’ of testimonials. It would
not be reasonable to expect a business
to know whether such resulting reviews
or testimonials were fake or false, and
the Commission did not intend to cover
those reviews in this section of the
proposed rule. Therefore, the
Commission is adding § 465.2(d)(1),
which clarifies that § 465.2(b) and (c) do
not apply to ‘‘generalized solicitations
to purchasers to post reviews or post
testimonials about their experiences
with the product, service, or business
that is the subject of the review or
testimonial.’’ By ‘‘generalized
solicitations,’’ the Commission means to
exempt from § 465.2(b) and (c)
solicitations sent to large groups of
customers, such as those who purchased
a particular item or who became
customers during a given time period,
where specific customers are not chosen
based on the likelihood that they will
express a particular sentiment. In
contrast, solicitations made only to
customers whom the business believes
to be happy customers would not be
‘‘generalized solicitations’’ and would
therefore be subject to § 465.2(b) and (c).
As the Commission said in the NPRM,
§ 465.2 does not ‘‘apply to any reviews
that a platform simply publishes and
that it did not purchase.’’ In other
words, the Commission did not intend
for § 465.2 to apply to platforms that
simply host third-party content and
does not believe that the section can be
interpreted otherwise. Nonetheless,
numerous commenters expressed
concern over whether the section
covered the mere hosting of third-party
content.246 A number of industry
commenters and an individual
commenter asked the Commission to
expressly exempt those who host
consumer reviews created by a third
party.247 Three industry comments
asked the Commission to create a safe
harbor for review hosting when the
company has reasonable processes in
place to identify and remove fake
reviews.248 Consistent with its
statement in the NPRM, the Commission
is adding § 465.2(d)(2) to provide an
explicit exemption for ‘‘merely engaging
in consumer review hosting’’ from the
scope of § 465.2(b) and (c).
A trade association noted that, in the
‘‘case of reviews being shared between
retailers and third-party platforms,’’ ‘‘it
would be unfair to immunize the search
platform from liability for the review
shared by the retailer, but not to
immunize the retailer for the review
created by the potential bad actor.’’ 249
However, a retailer or other entity will
not be liable for sharing consumer
reviews unless it would have been liable
for displaying those same reviews on its
own website.
Two comments raised the issue of
hosting both reviews and testimonials.
A trade association commenter
expressed concern that the Commission
should ‘‘avoid sweeping in companies
such as online retailers that host
consumer reviews and testimonials and
engage in activities such as organizing,
moderating, aggregating, and prompting
the submission of reviews and
testimonials.’’ 250 Another trade
association made a very similar
comment and ‘‘urge[d] the FTC to
confirm that liability under this section
would require the company to do more
than host reviews/testimonials.’’ 251 As
for reviews, § 465.2 will not prohibit an
online business that hosts reviews from
prompting the submission of reviews
from the general public or from
organizing, moderating, or aggregating
them. Nonetheless, certain unfair or
deceptive conduct that involves
prompting the submission of reviews or
moderation could violate § 465.4 or
§ 465.7(b), respectively.252 As for
testimonials, it is unclear what hosting
scenarios the commenters are
contemplating. The Commission is not
adding an exemption for ‘‘merely
hosting testimonials’’ because there is
no provision in the rule that applies to
testimonial hosting because testimonials
are, by definition, advertising or
promotional messages. A business that
puts testimonials on its own website is
‘‘disseminating’’ them and is not merely
‘‘hosting’’ them. When such
testimonials are fake or false, the
business should face potential liability
under this paragraph. On the other
hand, a business that has on its website
a community forum in which
consumers can comment about the
business and the products or services it
sells could be merely hosting the
community forum. A comment in the
community forum touting one of the
business’s products, which was posted
by a consumer who was not
incentivized to do so and who has no
other connection to the company, is not
a testimonial in the first place, so it
would not fall under § 465.2(b). The
same analysis would apply to a business
that hosted a section on its website
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253 Chamber of Commerce Cmt. at 4.
254 Id.
255 Id.
256 Transparency Company Cmt. at 11.
257 Poole Cmt. at 2.
258 IAB Cmt. at 5–6; NRF Cmt. at 2–5; NADA Cmt.
at 3–4; Chamber of Commerce Cmt. at 2–3; TechNet
Cmt. at 2.
259 TechNet Cmt. at 2.
260 Id.
261 Amazon Cmt. at 8; ANA Cmt. at 13; Trustpilot
Cmt. at 5, 8; NRF Cmt at 3; Family First Life Cmt.
at 5–8.
262 Amazon Cmt. at 7–8; ANA Cmt. at 12–13; NRF
Cmt. at 2–5. One trade association commenter
disagreed, asserting that the ‘‘knew or should have
known’’ standard the Commission proposed for
§ 465.2 will ‘‘not unduly burden review platforms.’’
Travel Tech Cmt. at 4.
263 NRF Cmt. at 3.
264 Amazon Cmt. at 9; IAB Cmt. at 5.
265 Amazon Cmt. at 9.
266 Id.
267 Poole Cmt. on at 1.
268 Albert Cmt. at 3.
where consumers could answer
questions posed by other consumers.
A business organization commenter
said the Commission should ‘‘make
clear [that] Section 465.2 does not apply
to platforms or retailers that display
ratings even if they prompt review
submissions or aggregate star ratings of
submitted reviews.’’ 253 Paragraphs (b)
and (c) of § 465.2 do not apply to mere
consumer review hosting, even if the
business prompts review submissions or
aggregates star ratings.
The commenter continued by saying
that ‘‘the Commission must clearly
indicate that the Rule provision would
not apply to any website displaying a
consumer review or testimonial that
they did not purchase or procure,’’
arguing that ‘‘Section 230 [of the
Communications Decency Act] . . .
broadly immunizes providers of an
interactive computer service from
liability for presenting third party
content.’’ 254 If a business creates fake or
false reviews or testimonials and
displays them on its website, it is not
presenting third-party content. It could
be liable for such reviews or
testimonials under § 465.2(a). The
commenter made a similar argument
with respect to the applicability of
§ 465.2(b) to a website that displays a
fake or false testimonial and thus causes
its dissemination. 255 Section 465.2(b)
does apply if such testimonials are
about the business or one of the
products or services it sells. Such
testimonials are advertising, not third-
party content covered by section 230 of
the Communications Decency Act (47
U.S.C. 230).
6. Knowledge Standard
Like proposed § 465.2(b) and (c), final
§ 465.2(b) and (c) are limited to
situations in which businesses ‘‘knew or
should have known’’ that they were
engaging in the conduct that was
prohibited. Commenters had varied
reactions to this standard, with some
finding it appropriate, others finding it
too high, and others finding it too low.
A corporate commenter noted that, for
the purpose of § 465.2(b) and (c),
‘‘‘[s]hould have known’ needs to be the
standard.’’ 256 Similarly, an individual
commenter recommended that the FTC
adopt the ‘‘knew or should have
known’’ standard for purposes of
§ 465.2(b) and (c):
because it: (1) sufficiently effectuates
consumers’ shared interest in reducing the
prevalence of unfair or deceptive online
consumer reviews and testimonials, (2)
avoids unfairly imposing liability on
unwitting, blameless business transgressors,
and (3) conveniently aligns with the FTC’s
existing ‘‘has good reason to believe’’
standard for similar purpose of application of
FTC Act Section 5 to the use of endorsements
and testimonials in advertising.257
However, several commenters
objected to the imposition of civil
penalties based upon a ‘‘should have
known’’ standard, believing that
standard would be too onerous.258 For
example, an industry organization said
that proposed § 465.2(b) and (c) are
‘‘problematic because [they] place[ ] the
onus on the business to have knowledge
of the author’s state of mind as to
whether their actual experience was
expressed. . . , an impossible task for
anyone but the’’ author.259 The industry
organization also claimed that the risk
of a civil penalty will ‘‘likely . . .
compel businesses to drastically limit
the consumer reviews or testimonials
they seek out or even allow on their
websites.’’ 260 Under section 5(m)(1)(A)
of the FTC Act, 15 U.S.C. 45(m)(1)(A),
however, the Commission can seek civil
penalties for a rule violation only by
showing that a defendant had ‘‘actual
knowledge or knowledge fairly implied
on the basis of objective circumstances
that such act is unfair or deceptive and
is prohibited by such rule’’ (hereinafter
shortened to ‘‘actual knowledge or
knowledge fairly implied’’). A lower
knowledge standard in a Commission
rule—such as the ‘‘knew or should have
known’’ standard found within certain
sections of the proposed rule—does not
override the higher standard found in
section 5(m)(1)(A) of the FTC Act. The
Commission has not suggested
otherwise in the course of this
rulemaking.
Other commenters objected similarly,
saying that ‘‘knew or should have
known’’ is too low as a knowledge
threshold and that the standard should
be actual knowledge, but did not tie
their concerns to the imposition of civil
penalties. 261 For example, some of the
comments expressing concern about a
‘‘knew or should have known’’ standard
appeared to focus primarily on the
standard’s supposed applicability to,
and harsh impact on, websites hosting
reviews.262 As another example, a trade
association commenter recommended
‘‘that the Commission define ‘knew,’ as
used in . . . § 465.2, as ‘having actual
knowledge,’ and remove the ‘should
have known’ language.’’ 263
Additionally, two commenters
advocated for a standard higher than
‘‘should have known’’ but lower than
actual knowledge. With respect to
activities such as ‘‘purchasing’’ a
review, they said that businesses should
be held responsible for ensuring the
reviews are authentic but recommended
a ‘‘knew or consciously avoided’’
standard. 264 One of the commenters
asserted that the proposed ‘‘should have
known’’ standard ‘‘is vague and does
not provide adequate specificity about
the sorts of actions businesses should
take to ensure that they will not be held
liable for not detecting that a review
they purchased was fake.’’ 265 The
commenter said a ‘‘consciously
avoided’’ knowing standard would
allow for liability when a business takes
no steps to respond to receiving
repeated complaints raising red flags
about the authenticity of a particular
purchased review. 266
As part of the NPRM, the Commission
also inquired whether, instead of the
‘‘should have known’’ standard, the
Commission should adopt a ‘‘knew or
could have known’’ standard. Only two
commenters addressed that proposed
standard. An individual commenter said
that such a standard would
‘‘ambiguously expand the proposed
Rule’s prosecutorial scope and possibly
open unsuspecting businesses to
financial penalties for violations they
had no inkling of having committed in
the moment.’’ 267 Another individual
commenter, who incorrectly thought the
proposed rule provided a private right
of action, said that such a standard
‘‘provides scienter never used in
consumer law’’ and the ‘‘courts could
potentially become overwhelmed with
an influx of claims.’’ 268
Other commenters advocated for a
lower standard than ‘‘knew or should
have known.’’ An individual commenter
did not think that ‘‘knew or should have
known’’ was appropriate because it
would make it ‘‘very difficult to prove’’
violations and recommended that the
Commission require ‘‘businesses to be
able to show they used reasonable
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269 Annie Horgan, Cmt. on NPRM at 1–2 (Sept. 22,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0058.
270 Consumer Reports Cmt. at 4.
271 Id. at 4–5. An individual commenter
disagreed, stating that ‘‘the complete removal of a
knowledge requirement in favor of a strict liability
approach would almost guarantee situations of
unwarranted punishment under the proposed rule.’’
Poole Cmt. at 3.
272 See supra section IV.B.5. of this document.
273 The final rule would therefore not require a
business that is merely hosting consumer reviews
on its platform to prove that the reviews it is
hosting are legitimate.
274 Other Commission rule provisions with a
‘‘knew or had reason to know’’ requirement include
§ 460.8 of Labeling and Advertising of Home
Insulation (commonly known as the R-Value Rule),
which prohibits non-manufacturers of home
insulation from relying on R-value data provided by
the manufacturer if they ‘‘know or should know’’
the data is false or not based on proper tests. 16 CFR
460.8; see also 16 CFR 460.19(e) (non-
manufacturers are liable only if they ‘‘know or
should know that the manufacturer does not have
a reasonable basis for the claim’’); 16 CFR 436.7(d)
(franchise sellers must notify prospective
franchisees of any material changes ‘‘that the seller
knows or should have known occurred’’).
275 IAB Cmt. at 5–6; ANA Cmt. at 13. An
individual commenter said that the Commission
should ‘‘provide some clear and objective criteria or
indicators for identifying fake reviews, such as the
use of bots, scripts, templates, or multiple accounts,
or the lack of verifiable purchase or experience, or
the inconsistency with other reviews or
information’’ and this ‘‘would help businesses and
consumers to distinguish between genuine and fake
reviews.’’ Ravnitzky Cmt. at 1.
276 IAB Cmt. at 5–6; ANA Cmt. at 13. As
explained above, these concerns are unwarranted
given that the ‘‘should have known’’ standard has
no bearing here on the imposition of civil penalties,
for which the Commission must prove that a
defendant met the higher knowledge standard of
section 5(m)(1)(A) of the FTC Act.
277 Taylor V, Cmt. on NPRM at 2 (Sept. 22, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0062 (‘‘Taylor V. Cmt.’’).
278 EPIC Cmt. at 3.
279 Consumer Reports Cmt. at 5.
280 Family First Life Cmt. at 6.
281 Paying for or giving other incentives in
exchange for consumer reviews expressing a
particular sentiment regarding the product, service,
or business that is the subject of the review would
violate § 465.4 of the rule.
diligence through policies and
procedures to prove that the[ ] reviews
are legitimate.’’ 269 A consumer
organization said in its comment that
‘‘there is no need for a knowledge or
intent requirement under this Rule’’ as
‘‘Section 5 of the FTC Act does not
otherwise require the Commission to
prove knowledge or intent when
enforcing against entities engaging in
deceptive practices.’’ 270 It continued
that ‘‘the Commission can and should
consider knowledge and intent in
deciding the equities of bringing any
enforcement action.’’ 271
After reviewing and considering the
comments received, the Commission
believes that the most appropriate
standard for imposing liability under
§ 465.2(b) and (c) is the ‘‘knew or should
have known standard.’’ As discussed
above, 272 those paragraphs were not
intended to apply to consumer review
hosting and § 465.2(d)(2) now contains
an explicit exemption for consumer
review hosting.273 Thus, the ‘‘knew or
should have known’’ language in
§ 465.2(b) and (c) will not have a harsh
impact on review platforms, as some of
the commenters suggested. Eliminating
the knowledge standard altogether,
however, may indeed have an overly
harsh impact on businesses in some
circumstances, and the idea garnered
almost no public support. For example,
it would be unreasonable to hold a
company liable for publishing a
testimonial when it had no reason to
know that the testimonial
misrepresented the testimonialist’s
experience. The Commission sees no
reason why the standard should be
higher than ‘‘knew or should have
known.’’ The ‘‘knew or should have
known’’ standard—which the
Commission has used in other
rules 274 —thus best achieves the
appropriate, equitable balance between
protecting consumers and holding
marketers accountable for deceptive
conduct while not overly burdening
marketers that engage in the responsible
use of reviews and testimonials.
Two trade associations’ comments
said that if ‘‘the Commission . . .
imposes a ‘should have known’
standard, the Commission must provide
greater clarity about what sorts of
indicators of inauthenticity would
provide companies with sufficient
notice to trigger liability.275 They both
said, ‘‘Without that guidance and faced
with the risk of significant civil penalty
exposure for failing to stop the actions
of undiscovered third parties, many
businesses would likely be deterred
from using consumer reviews or
testimonials at all.’’ 276 The Commission
has already addressed the knowledge
standard found in section 5(m)(1)(A),
which applies to the imposition of civil
penalties. In the discussion of § 465.2(b)
and (c) below, the Commission provides
further guidance as to what is intended
by ‘‘knew or should have known.’’
Several other commenters discussed
general views about the application of
the ‘‘knew or should have known’’
standard. For example, an individual
commenter said that ‘‘[a] business
cannot always reasonably know that a
testimonial contains testimony that is
fake or false, if the influencer expresses
to them that it is true.’’ 277 The
Commission agrees with this assertion.
A comment from a public interest
research center said that the ‘‘lack of an
adequate endorser oversight program
should be a per se violation of the ‘know
or should have known’ standard as that
is tantamount to the company
deliberately avoiding knowing.’’ 278 A
consumer organization commenter said
that the following actions should be
considered knowledge that a review is
fake or false: ‘‘failure to meaningfully
police’’ for suspicious review activity,
‘‘inducements to provide reviews
without clearly instructing the reviewer
to clearly disclose material conflicts,’’
‘‘materially incentivizing reviews where
it’s impossible to convey material
conflicts (e.g., providing a five-star
review with no accompanying narrative
on TripAdvisor),’’ and ‘‘failure to take
meaningful steps to confirm the
existence of the purported celebrity or
meaningfully document the celebrity’s
purported experience with the product
or service.’’ 279 The Commission
encourages businesses to have endorser
oversight programs, and whether a
company has and follows such a
program could impact the exercise of
prosecutorial discretion. The
Commission does not intend, however,
for companies to be liable under this
section of the rule based merely on the
absence of an oversight program or on
these other suggested bases.
A corporate commenter said that
‘‘how a business ‘should have known’
that a reviewer does not exist is not
apparent,’’ and posited that, under a
‘‘should have known’’ standard,
‘‘perhaps [a] business may be under a
duty to reach out to the reviewer, but it
is unclear how many resources the
business must expend to attempt to
contact the reviewer.’’ 280 First, as noted,
§ 465.2(d)(2) exempts businesses merely
engaging in consumer review hosting
from § 465.2(b) and (c). Another key
limitation here is the exemption for
generalized solicitations under
§ 465.2(d)(1). That exemption means
that businesses can send such
solicitations to their customers without
creating any investigative obligation for
resulting reviews under § 465.2(b) or (c),
even if such reviews have been
‘‘purchased.’’ 281
With respect to ‘‘purchased’’ reviews
under § 465.2(b)the rule’s ‘‘knew or
should have known’’ standard does not
impose a general duty to reach out to
the reviewers or investigate whether
each resulting review is fake or false.
While each case will depend on its
specific facts, it is possible that a
business may possess clear indications
that purchased reviews are likely to be
fake or false, in which case a failure to
investigate further may trigger liability
under the ‘‘should have known’’
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282 Transparency Company Cmt. at 11.
283 Trustpilot Cmt. at 10.
284 Complaint at 2–5, In re Google, LLC, Nos. C–
4783 and C–4784 (F.T.C. Feb. 8, 2023).
285 Trustpilot Cmt. at 9–10.
286 Id.
287 Anonymous 3 Cmt.
288 Foster Cmt. at 2.
289 Frieling Cmt. at 2; see also Anonymous 6,
Cmt. on NPRM (Sept. 29, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0082.
290 Wilhelmina Randtke, Cmt. on NPRM at 1
(Sept. 26, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0068.
291 Fake Review Watch Cmt. at 2–3.
292 Consumer Reports Cmt. at 3.
293 Trustpilot Cmt. at 3, 7.
294 ADA Cmt. at 2.
295 Albert Cmt. at 4; see also Yanni Kakouris,
Cmt. on NPRM at 1, 3 (Sept. 22, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0055. The commenter also expressed concerns that
‘‘violators are too difficult to track,’’ asserted that
civil penalties would somehow deter consumers
from posting honest, negative comments about a
business, and misunderstood the purpose and use
of civil penalties, thinking that a large portion of
civil penalties would go to businesses maligned by
false comments. Id. at 1–2. A review platform
commenter said that the proposed rule ‘‘upholds
legitimate consumer speech by ensuring that,
‘proposed § 465.2 does not limit legitimate reviews
to reviews by purchasers or verified purchasers’ ’’
and ‘‘by preserving anonymous reviews.’’
Tripadvisor LLC, Cmt. on NPRM at 4–5 (Sept. 29,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0092 (‘‘Tripadvisor Cmt.’’).
296 Taylor V. Cmt. at 2.
standard. For example, a business that
hires a third party to provide free
samples of its products to consumers in
order to generate reviews, without more,
may have no reason to investigate the
resulting reviews. However, a business
may be on notice that the resulting
reviews are likely fake or false if they
are submitted too quickly after purchase
or many of them are submitted in a very
short period of time or refer to the
wrong product. As for § 465.2(c), which
applies only to reviews by insiders, a
possible reason for knowing that such
reviews are likely fake or false could be
that an insider sent emails to a manager
over time that together showed that the
insider was using multiple accounts to
submit reviews to the same website.
A company that is in the business of
identifying fake consumer reviews
described ways that a business
purchasing or procuring a consumer
review should know that the review is
fake or false. These indications include
the named reviewer not being a
customer, the content of the review
being vague or odd, many reviews
arriving at once, and the use of
unnatural language or ‘‘keyword
stuffing.’’ 282 A review platform
commenter gave similar ways that a
business could identify fake reviews,
such as ‘‘the review text describes a
product or service that is not offered by
the business, the review clearly
references the wrong business name, or
perhaps if a review . . . acknowledges
that the reviewer has never shopped
there.’’ 283 Although, as previously
stated, each case depends on its specific
facts, these various indications may
indeed suggest that one or more
purchased or insider reviews are likely
fake or false, in which case a failure to
reasonably investigate them may trigger
liability under the ‘‘should have
known’’ standard.
With respect to testimonials, there
may be red flags that should indicate to
a business that a testimonial is likely
fake or false, and, thereby, would serve
as indicia of the fact that the business
should have known that the
testimonials that it disseminated were
fake or false. For example, the
Commission alleged that Google asked
iHeartMedia, Inc. radio personalities to
record product testimonials for a
smartphone using a standard script
written for Google and refused to
provide the radio personalities with the
product when requested. 284 If a business
provides the text for a testimonial, it
should have a reasonable basis to
conclude, based on inquiry or
otherwise, that the text is truthful for
the testimonialist. A testimonialist
asking for the product should cause a
business to question whether the
testimonialist used the product. If a
business knows that a testimonialist is
using a competing product, it should
inquire into whether a testimonial for its
own product is truthful. For example, a
business should investigate whether a
celebrity testimonial for its new
smartphone is false if the testimonial
claims the celebrity exclusively uses the
smartphone, but the social media post
containing the testimonial indicates that
the celebrity posted it using a competing
smartphone brand.
A review platform said in its
comment that, ‘‘if procuring fake
reviews is the action of a single, rogue
employee trying to help the business
they work for, on a practical level it may
be difficult for a business to have
knowledge of’’ it.285 The commenter
suggested that the Commission consider
‘‘whether it is in fact disproportionate
for knowledge and liability to be
attributed to a business because of the
actions of a well-intentioned rogue
employee.’’ 286 Whether a business will
be held responsible under the rule for a
rogue employee under a ‘‘knew or
should have known’’ standard will be a
fact-intensive inquiry. While a business
may not be aware of every employee’s
activities, it should be pay attention to
red flags. Assuming that the facts are
such that the business should have
known of the rogue employee’s actions,
whether the business would also be
subject to civil penalties would depend
on whether a court finds that the
business met the actual knowledge or
knowledge fairly implied standard of
section 5(m)(1)(A) of the FTC Act.
7. Other Proposals
Some commenters suggested that the
Commission impose additional
requirements. Many commenters
suggested that third-party platforms
featuring reviews should be held
responsible for certain conduct, such as
for: failing to report businesses that they
suspect are posting fake reviews,287 the
‘‘lack of identification verifications,’’ 288
not posting notices reminding
consumers that there is no guarantee of
the veracity or accuracy of customer
reviews,289 engaging in review
‘‘manipulation’’ for advertising
purposes,290 failing to disclose publicly
certain information about posted
reviews,291 or failing to employ
reasonable measures to root out fraud
and deceptive reviews.292 A review
platform suggested imposing
requirements on social media
companies and internet service
providers to address the sale of fake
reviews,293 and a trade association
proposed that the Commission require
reviewers to identify themselves and
that social media sites hosting reviews
verify reviewers’ identities.294 As
explained above, the Commission’s
intent from the outset of this rulemaking
was to focus on clearly unfair or
deceptive conduct involving reviews
and testimonials. This intent is reflected
in, as explained above, the addition of
a definition of the term ‘‘consumer
review hosting’’ and the explicit
exclusion of such mere hosting from the
coverage of certain rule provisions. This
focus should not be taken to signal that
third-party platforms do not bear
significant responsibility for combatting
fake reviews.
An individual commenter
recommended ‘‘requir[ing] proof of
purchase of [a] product for a consumer
to leave a review.’’ 295 Another
individual commenter would have the
Commission hold businesses that
recruit, direct, and compensate
influencers responsible for the
influencers’ false or fake testimonials. 296
A third commenter asked that the
Commission ‘‘ensure there is a way for
anyone who is believed to have violated
reviewing policies [to have] a chance to
reinstate their ability to leave
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68055	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
297 Osburn Cmt.
298 TINA Cmt. at 6.
299 Chamber of Commerce Cmt. at 2.
300 See, e.g., IAB Cmt. at 7–8; ANA Cmt. at 14;
Chamber of Commerce Cmt. at 5–6; Trustpilot Cmt.
at 10; Consumer Reports Cmt. at 5–6; Amazon Cmt.
at 10; CCIA Cmt. at 3; NRF Cmt. at 7–8; Ravnitzky
Cmt. at 2.
301 See supra sections I.C. and IV.A.2.j of this
document.
302 One minor modification is changing ‘‘Rule’’ to
‘‘part.’’
303 Amazon Cmt. at 6.
304 IAB Cmt. at 8.
305 Alex Rooker, Cmt. on NPRM (Aug. 15, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0019.
306 Frieling Cmt. at 2.
307 Anonymous 7, Cmt. on NPRM (Aug. 15, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0021.
308 NPRM, 87 FR 49389.
309 Transparency Company Cmt. at 12.
310 Family First Life Cmt. at 8–9.
311 Id. at 10–11.
312 In re AmeriFreight, Inc., 159 F.T.C. 1626,
1627–30 (2015).
reviews.’’ 297 A consumer organization
recommended making clear that ‘‘it is a
deceptive practice to aggregate fake
reviews in a product’s consumer rating’’
and that ‘‘reviews requiring a disclosure
should not be included in a product’s
rating.’’ 298 The Commission appreciates
these additional suggestions but
declines to add any of them to the rule.
The suggestions are beyond the scope of
the rulemaking, which focuses instead
on those responsible for clearly unfair or
deceptive acts or practices regarding
reviews and testimonials, and which is
limited to those acts or practices for
which the Commission has evidence of
prevalence.
In response to other commenters
suggesting that the Commission impose
liability on review sites and online
retailers, a trade association asked the
Commission to make clear that sections
5 and 18 of the FTC Act contain no
express authorization for assisting-and-
facilitating liability. 299 As this legal
issue goes beyond, the context of this
rulemaking, the Commission declines to
address it here.
C. § 465.3—Consumer Review or
Testimonial Reuse or Repurposing
Proposed § 465.3 sought to address a
business using or repurposing a
consumer review written or created for
one product so that it appears to have
been written or created for a
substantially different product. It also
sought to cover businesses that caused
such use or repurposing.
The Commission received varied
comments, both supportive and critical,
about this provision. 300 As described
above, some commenters also raised
concerns about the definition of
‘‘substantially different product,’’ a term
that appeared only in this provision and
is key to determining the circumstances
in which the provision would apply;
one of those commenters proposed a
disputed issue of material fact related to
that definition.301 The Commission
would need to address those concerns
before finalizing the provision. As it is
not able to resolve those concerns on the
current rulemaking record, the
Commission has decided not to finalize
the provision. If the Commission
chooses later to engage in further
rulemaking regarding the provision, it
will address the comments at that time.
D. § 465.4—Buying Positive or Negative
Consumer Reviews
Proposed § 465.4 sought to address
businesses providing ‘‘compensation or
other incentives in exchange for, or
conditioned on, the writing or creation
of consumer reviews expressing a
particular sentiment, whether positive
or negative, regarding the product,
service, or business that is the subject of
the review.’’ Based on the following, the
Commission has decided to finalize this
provision with two modifications.302
Comments from a retailer and a trade
association expressed that they found
the section important and useful. The
retailer said, ‘‘This section is important
to ensure that the rule covers bad actors
that seek inauthentic reviews reflecting
a particular predetermined
sentiment.’’ 303 The trade association
wrote, ‘‘Providing compensation in
exchange for reviews that must reflect a
particular sentiment is a deceptive
practice,’’ and expressed support for
‘‘the Commission’s goal of targeting and
eliminating this practice.’’ 304
Three individual commenters
mistakenly thought that proposed
§ 465.4 banned paid or incentivized
customer reviews and were opposed to
such a ban. One of them said the
proposed provision would ‘‘ban reviews
which are made by those who have been
provided an item,’’ that ‘‘[g]enerally the
writer includes a list of sponsors on, or
within, their blog/website,’’ and that
‘‘[i]f such sponsorship relationships are
eliminated . . ., the ability of writers to
review a variety of items will
disappear.’’ 305 The second one wrote,
‘‘Section 465.4 of the proposed rule
prohibits the incentivization of or
compensation on for the creation of
consumer reviews or testimonials. . . .
[I]t is unnecessarily restrictive.’’ 306 The
third commenter did not support the
provision ‘‘forbidding paying for
reviews’’ because the practice ‘‘does not
. . . deceive the public unless the paid
review service dictates that the review
must be positive.’’ 307 These
commenters misunderstand the nature
of § 465.4. First, § 465.4 does not apply
to testimonials, only to consumer
reviews, and then only to reviews that
appear on a website or portion of a
website dedicated to receiving and
displaying such reviews. A blogger’s
‘‘review’’ is not considered a consumer
review for purposes of the rule; if such
a review was incentivized, it would be
considered a testimonial. Second,
§ 465.4 does not prohibit paid or
incentivized consumer reviews. It only
prohibits paid or incentivized consumer
reviews when the business soliciting the
review provides compensation or an
incentive in exchange for a review
expressing a particular sentiment.
In Question 12 of the NPRM, the
Commission asked whether the
prohibition in § 465.4 should
‘‘distinguish in any way between an
explicit and implied condition that a
consumer review express a particular
sentiment.’’ 308
A business commenter responded,
‘‘Real consumers’ reviews often contain
multiple sentiments on what businesses
did right and what they did wrong. This
is helpful.’’ 309 The meaning of this
comment is unclear.
Another business commenter
responded to Question 12 of the NPRM
by stating that § 465.4 ‘‘should
unequivocally prohibit explicit
conditions only,’’ because this would
‘‘provide[ ] a clear standard for
businesses and reviewers to follow,’’
and ‘‘the lack of clarity in how the
Proposed Rule would prohibit ‘implied
conditions’ [would] stifle[ ] businesses’
ability to encourage and to entice
reviews in a legitimate manner.’’ 310 The
Commission disagrees and believes that
businesses are capable of soliciting and
encouraging reviews without suggesting
that the reviews must be positive to
obtain an incentive. The commenter
also asserted that the Commission ‘‘has
no experience bringing enforcement
actions against a business for allegedly
creating an implied condition that a
review or endorsement be positive,’’
referencing the cases the Commission
cited in the NPRM.311 That assertion is
incorrect. The respondent in
AmeriFreight, Inc. did not expressly
state that the reviews needed to be
positive but only implied it,
encouraging past customers to submit
reviews in order to be eligible for a $100
‘‘Best Monthly Review Award’’ given to
‘‘the review with the most captivating
subject line and best content.’’ 312 The
respondent also told past customers that
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313 Id. at 1628.
314 NRF Cmt. at 8.
315 ANA Cmt. at 8.
316 Id.
317 Consumer Reports Cmt. at 6.
318 TINA Cmt. at 10. An individual commenter
described the pressure they felt to leave a positive
review of a car dealership in order to receive a gift
card and said that proposed ‘‘§ 465.4 should . . .
address both explicit and implied conditions of
incentivization.’’ Anonymous 8, Cmt. on NPRM at
3–5 (Sept. 22, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0061.
319 As the Commission explained in the NPRM,
‘‘Review gating occurs when a business asks past
purchasers to provide feedback on a product and
then invites only those who provide positive
feedback to post online reviews on one or more
websites.’’ See NPRM, 88 FR 49379.
320 NRF Cmt. at 9. The commenter went on to ask
that ‘‘the Rule be revised to only prohibit
companies from ‘. . . provid[ing] compensation or
other incentives in exchange for . . . consumer
reviews explicitly required to express a particular
sentiment, whether positive or negative. . . .’ ’’
(emphasis in original). Id.
321 See Endorsement Guides, 16 CFR 255.2(d) and
(e)(11).
322 Trustpilot Cmt. at 11.
323 Frieling Cmt. at 3.
324 See FTC Policy Statement on Deception, 103
F.T.C. at 180 (‘‘[P]ro forma statements or
they should ‘‘be creative and try to make
your review stand out for viewers to
read.’’ 313
Two trade associations gave examples
of what they asserted were innocuous
requests for reviews that could be
considered as implying that reviews
need to be positive in order to receive
an incentive. One said that its members
will sometimes automatically contact
customers saying, ‘‘Tell us how much
you loved [product] for 10% off your
next purchase!’’ and that such a request
could ‘‘be read to violate this Section of
the Proposed Rule—even if a negative
review would still entitle the consumer
to the incentive or bonus.’’ 314 The other
commenter wrote that, if the
Commission says that ‘‘a business may
not implicitly seek positive reviews in
exchange for incentives, then the rule
could apply to such offers as, ‘Tell us
how much you loved your visit to John’s
Steakhouse and get a $5 coupon’ or ‘Tell
your friends about all the fun you had
at Jane’s Arcade for a chance to win
prizes,’ ’’ and asserted that such requests
are justified because businesses ‘‘prefer
to use these enthusiastic and positive
messages when seeking reviews, as
opposed to less inspiring messages like,
‘Write a review and save 10% next
time.’ ’’ 315 The problem with the
enthusiastic and positive messages
suggested by these commenters is that
consumers receiving them could
reasonably take the message that their
reviews must be positive and
enthusiastic in order to obtain the
reward. As the second commenter
noted, there are perfectly acceptable,
albeit less ‘‘inspiring,’’ alternatives. The
second commenter also said that ‘‘a
reasonable consumer would infer that a
business prefers positive reviews, and
so even a neutral request such as, ‘Write
a review and receive a discount off your
next purchase,’ might be construed as
impliedly requesting a positive
review.’’ 316 The Commission disagrees.
The fact that businesses prefer positive
reviews is not a basis on which to
conclude that consumers would
interpret any such ‘‘neutral request’’ as
containing an implied condition that
reviews must be positive to receive the
offered discount.
A consumer organization said in its
comment that, ‘‘[w]hen a reviewer feels
pressured to express a certain
sentiment, regardless of how that
pressure was generated, the net result is
a deceptive review,’’ and that there
should be ‘‘no distinction made between
explicitly and implicit conditioning of
compensation or other incentives.’’ 317 A
second consumer organization
commenter said that ‘‘[i]mplied
conditions may be just as salient as
express conditions’’ and quoting
Aronberg v. FTC, 132 F.2d 165, 167 (7th
Cir. 1942), said that, ‘‘[i]n interacting
with businesses, ‘[t]he ultimate
impression upon the mind of the reader
arises from the sum total of not only
what is said but also of all that is
reasonably implied.’ ’’ 318 The
Commission agrees with both of these
commenters.
Advocating for limiting the provision
to express conditions, a trade
association acknowledged that the
NPRM clarified that the provision does
not cover review gating,319 the mere
solicitation of positive reviews, or
incentivized reviews (except for those
required to express a particular
sentiment), but argued that,
‘‘[r]egardless, the Proposed Rule still
could be read to prohibit such
behavior—i.e., when a Company solicits
a review that it has reason to believe
will be positive.’’ 320 The Commission
does not consider this statement to be a
fair reading of the provision. Just
because a business engages in review
gating or otherwise expects reviews to
be positive does not mean there is either
an express or implied requirement that
reviews need be positive to obtain an
incentive. The Commission notes that,
although § 465.4 does not cover ‘‘review
gating,’’ review gating can nonetheless
violate section 5 of the FTC Act.321
A review platform commenter said
that prohibiting an ‘‘implied condition
to express a particular sentiment could
create a number of gray areas’’ and
‘‘encouraged the FTC to provide
guidance and examples to
businesses.’’ 322 The examples,
discussed above, by the trade
association asking consumers to say
how much they ‘‘love’’ something or
how much fun they had are excellent
examples of implied conditions.
The Commission has decided to
clarify that the rule prohibits businesses
from providing incentives conditioned
on the writing or creation of consumer
reviews expressing a particular
sentiment, regardless of whether the
conditional nature of the incentive is
express or implicit. For this purpose,
the Commission is adding the phrase
‘‘expressly or by implication’’ in § 465.4
to clarify that, although the incentive
needs to be conditioned on the writing
or creation of consumer reviews
expressing a particular sentiment in
order for conduct to violate § 465.4, the
condition may be implicit.
Three commenters argued that the
Commission should allow the
compensation or incentives addressed
in § 465.4 as long as they are disclosed
in the resulting reviews. For example,
the first commenter wrote, ‘‘A
reasonable consumer can easily
understand that when a reviewer is
incentivized or compensated, the
content they produce may be skewed in
a more positive light. A mere disclaimer
is sufficient to stave off
misrepresentation.’’ 323 This statement
may be correct for some incentivized
reviews when there is no express or
implied condition for those reviews to
express a particular sentiment. For such
reviews, an adequate disclosure that
incentives were provided in exchange
for the review may be able to cure a
misleading impression that the reviews
were independent and unbiased.
However, such a disclosure does not
reveal to consumers the requirement
that reviews be positive. In addition,
even if an individual review disclosed
that it resulted from incentives requiring
the review to be positive, such a
disclosure would not be effective in
instances where a consumer relies on
the overall average star rating and does
not read all individual reviews.
Furthermore, the Commission believes
that, if incentives are conditioned on
reviews expressing a particular
sentiment, many resulting reviews will
not be merely misleading but false. For
example, the offer of an incentive in
exchange for a positive review may lead
some reviewers to create positive
reviews even when they had a negative
experience with the product, service, or
business. No disclosure can adequately
cure a false review.324
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68057	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
disclaimers may not cure otherwise deceptive
messages’’); Removatron Int’l Corp. v. FTC, 884
F.2d 1489, 1497 (1st Cir. 1989) (‘‘Disclaimers or
qualifications in any particular ad are not adequate
to avoid liability unless they are sufficiently
prominent and unambiguous to change the
apparent meaning of the claims and to leave an
accurate impression. Anything less is only likely to
cause confusion by creating contradictory double
meanings.’’); Joint FCC/FTC Policy Statement for
the Advertising of Dial-Around and Other Long-
Distance Services to Consumers (Mar. 1, 2000),
https://www.ftc.gov/system/files/documents/
public_statements/297751/
000301jpsdeceptoveads.pdf (‘‘If a claim is false, a
disclosure that provides contradictory information
is unlikely to cure the deception.’’); FTC v. Direct
Marketing Concepts, Inc., 624 F.3d 1, 12 n.9 (1st
Cir. 2010) (‘‘A statement that studies prove a
product cures a certain disease, followed by a
disclaimer that the statement is opinion and the
product actually does not cure the disease, leaves
an overall impression of nonsense, not clarity.’’).
325 Endorsement Guides, 16 CFR 255.5(b)(2), (3),
(7), (8), (9), and (11).
326 Hammacher Schlemmer Cmt. at 3–4.
327 Endorsement Guides, 16 CFR 255.2(e)(9).
328 Id. (emphasis added).
329 ANA Cmt. at 8.
330 Anonymous 3 Cmt; Yelp Cmt. at 5–6.
331 Ravnitzky Cmt. at 1.
332 Endorsement Guides, 16 CFR 255.5(a) &
(b)(6)(ii).
333 Camp-Martin Cmt. at 4–5; Yelp Cmt. at 7.
334 Anonymous 4 Cmt.
335 Endorsement Guides, 16 CFR 255.2(d).
336 Due to an inadvertent drafting error, the
regulatory text of proposed § 465.5(a), which
addressed an officer or manager of a business
writing or creating a consumer review or consumer
testimonial about the business or its products or
services, only referenced disclosure of the officer’s
but not the manager’s relationship to the business.
The Commission clearly intended that proposed
§ 465.5(a) require disclosure of the manager’s
relationship as well. See NPRM, 88 FR 49379
(‘‘Proposed § 465.5(a) would prohibit an officer or
manager of a business from writing or creating a
consumer review or consumer testimonial about the
business or its products or services if the consumer
review or consumer testimonial does not have a
clear and conspicuous disclosure of the officer’s or
manager’s relationship to the business.’’).
The second commenter taking this
position pointed to examples in the
Endorsement Guides,325 claiming
inaccurately that they stand for the
proposition that businesses are allowed
to offer incentives in exchange for
positive reviews. 326 The Endorsement
Guides do contain an example involving
incentives for reviews conditioned on
the reviews being positive: ‘‘[a]
manufacturer offer[ing] to pay genuine
purchasers $20 each to write positive
reviews of its products on third-party
review websites.’’ 327 However,
consistent with the Commission’s
approach in this section, the Guides
provide that ‘‘[s]uch reviews are
deceptive even if the payment is
disclosed because their positive nature
is required by, rather than being merely
influenced by, the payment.’’ 328
The third commenter taking this
position suggested that it should be
acceptable to use a disclosure like, ‘‘We
asked customers to tell us how much
they loved their visit to John’s
Steakhouse, and here’s what some of
them said! (customers who submitted
reviews received a $5 coupon).’’ 329 The
scenario the commenter describes does
not involve consumer reviews. It
involves consumer testimonials, which
are not covered by § 465.4. Further, it is
unlikely that one could make such a
disclosure in the context of consumer
reviews, given how reviews are usually
presented on a business’s own website
and the lack of control over the way
they are presented on a third-party
website. In addition, the disclosure does
not communicate that the customers
had to ‘‘tell how much they loved their
visit in order to receive a $5 coupon.’’
Furthermore, as discussed above, many
incentivized reviews conditioned on
consumers saying how much they
‘‘loved their visit’’ are likely false
regardless of such a disclosure.
Two commenters, an individual and a
review platform, requested that § 465.4
go further and prohibit all incentives
given in exchange for reviews regardless
of any requirement to express a
particular sentiment.330 An individual
commenter would have the Commission
‘‘require businesses to disclose any form
of incentive that they provide or arrange
for reviewers.’’ 331 These requests are
beyond the scope of this rulemaking but
are addressed in the Endorsement
Guides, which provide that unexpected
material connections such as incentives
given in exchange for customer reviews
without any requirement as to the
sentiment of the reviews must be
disclosed clearly and conspicuously.332
The Commission continues to believe
that this principle from the
Endorsement Guides is an appropriate
expression of what incentivized review
practices would or would not violate
section 5 of the FTC Act. In any event,
there is no basis on the current
rulemaking record for the Commission
to conclude that all incentivized
reviews should be prohibited or that all
incentivized reviews should require a
disclosure.
Two commenters, an individual and a
review platform, recommended that
§ 465.4 also prohibit offering
compensation to remove or change
consumer reviews.333 Another
individual commenter inquired about
paid review removal without stating a
position on the topic. 334 The
Commission previously noted that, ‘‘[i]n
procuring [or] suppressing . . .
consumer reviews of their products,
advertisers should not take actions that
have the effect of distorting or otherwise
misrepresenting what consumers think
of their products.’’ 335 A product
marketer paying consumers to change or
remove truthful negative reviews may
be engaging in an unfair or deceptive act
or practice that has the effect of
distorting or otherwise misrepresenting
what consumers think of a marketer’s
products. Nevertheless, that act or
practice is beyond the scope of this
rulemaking.
E. § 465.5—Insider Consumer Reviews
and Consumer Testimonials
Proposed § 465.5 sought to prohibit
certain undisclosed insider reviews and
testimonials. It had three subparts.
Proposed § 465.5(a) would have
prohibited an officer or manager of a
business from writing or creating a
consumer review or consumer
testimonial about the business or one of
its products or services that failed to
have a clear and conspicuous disclosure
of the officer’s or manager’s relationship
to the business.336 Proposed § 465.5(b)
would have applied to testimonials, but
not consumer reviews. It would have
prohibited a business from
disseminating or causing the
dissemination of a consumer testimonial
about the business or one of the
products or services by one of its
officers, managers, employees, or agents,
or any of their relatives, if that
testimonial failed to have a clear and
conspicuous disclosure of the
testimonialist’s relationship to the
business or to the officer, manager,
employee, or agent, and if the business
knew or should have known of that
relationship. Proposed § 465.5(c) would
have applied to consumer reviews, but
not testimonials, and would have been
limited to when an officer or manager of
a business solicits or demands a
consumer review about the business or
one of its products or services from an
employee, an agent, or a relative of any
such officer, manager, employee, or
agent. Proposed § 465.5(c) would have
prohibited that conduct when (1) the
person requesting the review knew or
should have known the prospective
reviewer’s relationship to the business
(or to one of its officers, managers,
employees, or agents), (2) the request
resulted in a consumer review without
a disclosure, and (3) the person
requesting the review (a) did not
instruct the prospective reviewer to
disclose clearly and conspicuously that
relationship, (b) knew or should have
known that such a review appeared
without such a disclosure and failed to
take remedial steps, or (c) encouraged
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337 Proposed § 465.5(b) and (c) are being
renumbered as final § 465.5(b)(1) and (c)(1).
338 Anonymous 9, Cmt. on NPRM (Aug. 16, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0023.
339 Anonymous 5 Cmt.
340 Transparency Company Cmt. at 13.
341 Family First Life Cmt. at 13.
342 Id.
343 Id. at 3.
344 NRF Cmt. at 9.
345 Amazon Cmt. at 11.
346 Id.
347 IAB Cmt. at 9.
348 NRF Cmt. at 9.
349 Id. at 11; TechNet Cmt. at 3.
350 Trustpilot Cmt. at 5–6.
the prospective reviewer not to make
such a disclosure. The Commission has
determined to finalize proposed § 465.5
with a number of modifications.337
Two individual commenters shared
their experiences with insider reviews.
One individual commenter ‘‘made a
purchase based on a glowing review’’
but ‘‘later discovered that the person
who wrote the review was, in fact, a
salesperson for the same company,
receiving a commission based on my
purchase,’’ and the purchase turned out
to be ‘‘a fraudulent service.’’ 338 Another
individual commenter shared their
experience as an employee: ‘‘I was
asked to leave positive reviews in
Amazon . . . and in other sites to boost
the number of positive reviews for our
products. The CEO asked employees to
do this and include family members. In
fact, I found the immediate family and
friends of the CEO leaving glowing
reviews of the product.’’ 339
A business commenter said, ‘‘If you
allow insider reviews, disclosure [of the
reviewers’ relationship to the business]
should be mandatory.’’ 340 Another
business commenter wrote that
‘‘limiting . . . § 465.5(a)–(c) to
circumstances in which the requisite
disclosure is absent is a fair restriction
on businesses that would
simultaneously protect consumers all
while allowing businesses to effectively
advertise.’’ 341 The commenter noted
that the ‘‘requirement for clear-and-
conspicuous disclosure is used widely
throughout federal and state consumer
protection laws.’’ 342 The commenter
was also concerned that a rule might
‘‘infringe on the ability of employees
and independent contractor agents . . .
to inform others of their experiences
with an employer or principal.’’ 343 To
the extent that the commenter is
referring to review websites that
specialize in reviewing employers from
the perspective of employees, it is
obvious that the reviewers are
employees or former employees, and no
further disclosure appears necessary.
A trade association commented that it
‘‘understands the Commission’s concern
that in some cases, employees may have
an incentive to post positive reviews on
behalf of their company’s products,’’ but
the concern ‘‘is already addressed
through Section 5 and the Endorsement
Guides.’’ 344 The Commission continues
to believe that certain conduct should
be addressed by a trade regulation rule
even if it can also be addressed through
section 5 enforcement actions. Having
specific conduct addressed by a rule
provides the general public with further
clarity as to what steps are necessary to
conform its conduct to the requirements
of the law, deters prevalent unlawful
conduct, and allows the Commission to
bring enforcement actions more
efficiently and effectively.
A retailer recommended that the
provision ‘‘be revised to further
incorporate a requirement that the
‘insider’ review/testimonial be ‘fake’ or
‘false,’ in order to better target the
deceptive acts of bad actors that use
their employees to generate fake reviews
and testimonials that purport to be from
actual customers.’’ 345 The Commission
rejects that suggestion, as the intention
of § 465.5 is to address certain
inherently biased reviews and
testimonials. Fake and false reviews are
already addressed by § 465.2.
1. Material Connections
Commenters pointed out what they
saw as inconsistencies between
proposed § 465.5 and section 5 of the
FTC Act. A retailer commenter wrote
that proposed § 465.5 was ‘‘inconsistent
with the longstanding principles in the
Endorsement Guides . . . that
disclosures must be made when the
connection between a reviewer and the
sponsoring advertiser is material,
meaning it would affect the weight or
credibility that consumers give to the
endorsement.’’ 346 A trade association
noted in its comment that the section
‘‘seeks to impose liability for reviews
and testimonials authored by certain
employees or their relatives that lack
disclosures regardless of context, and
whether that connection is material
under the circumstances’’ and ‘‘would
impose civil penalties for reviews or
testimonials that are not even
deceptive.’’ 347 Another trade
association opined ‘‘that a reviewer’s
out-of-state second cousin [who] works
a minimum-wage job at a retailer would
(hopefully) not be a ‘material
connection’ requiring disclosure under
the Endorsement Guides, because such
connection would not bias the
reviewer’s review, and therefore would
not make the review misleading.’’ 348
The same trade association and a
business organization also commented
that the provision poses concerns under
the First Amendment by ‘‘broadly
prohibiting certain reviews or
testimonials by ‘insiders’ regardless of
whether that speech is deceptive in
context.’’ 349 The Commission intended
for § 465.5 to be limited to unfair or
deceptive failures to disclose material
connections, and is now clarifying this
intent. Specifically, in paragraphs (a)
through (c) of § 465.5, the Commission
is limiting the covered relationships to
‘‘material’’ relationships. In § 465.5(a)
and (b), the Commission is also
clarifying that, under certain
circumstances, the relationship of a
consumer testimonialist may be clear to
the audience without disclosure. For
example, the audience may already be
aware that an executive is associated
with a particular company, or the
context of an ad may otherwise
communicate a relationship with a
particular company. Specifically, in
§ 465.5(b), which applies only to
consumer testimonials, the Commission
is adding the requirement that ‘‘the
relationship is not otherwise clear to the
audience,’’ and in § 465.5(a), which
involves both consumer reviews and
testimonials, it is adding, ‘‘unless, in the
case of a consumer testimonial, the
relationship is otherwise clear to the
audience.’’ The Commission does not
believe that, absent a disclosure, a
relationship will ever be clear to
consumers in the context of an ordinary
consumer review.
2. Relatives
Proposed § 465.5(b) and (c) would
have required disclosures in some
circumstances involving consumer
testimonials or reviews from ‘‘relatives’’
of a company’s officers, managers,
employees, or agents. Some commenters
voiced concerns pertaining to these
requirements.
For example, a review platform,
explaining that it prohibits reviews
about a business or its products by
someone whose immediate family owns
or works for the business, asked how
businesses would ‘‘know whether
reviews have been submitted by the
extended family (such as the second
cousins) of their officers, managers,
employees, or agents,’’ questioned
whether it would be proportional to
seek penalties when extended family are
involved, and suggested ‘‘narrowing the
scope of the family requirement’’ to
‘‘immediate family.’’ 350 A trade
association said that ‘‘relatives can
include cousins, nieces/nephews, and
other more distant familial
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351 RILA Cmt. at 6.
352 Chamber of Commerce Cmt. at 7.
353 NRF Cmt. at 9.
354 IAB Cmt. at 10.
355 See infra section IV.E.4 and 5 of this
document.
356 NRF Cmt. at 10.
357 Amazon Cmt. at 11.
358 NRF Cmt. at 11; IAB Cmt. at 10; TechNet Cmt.
at 3.
359 Amazon Cmt. at 11.
360 IAB Cmt. at 9.
361 See NPRM, 88 FR 49374–75.
362 IAB Cmt. at 10.
relationships,’’ that ‘‘even immediate
family relationships (parents, children,
siblings) are not always closely held’’
because ‘‘adult siblings are not
necessarily in each other’s day-today
lives,’’ and that ‘‘it would be more
appropriate to substitute the term . . .
‘members of the same household’ as that
would suggest individuals that have
regular contact with an employee.’’ 351 A
business organization wrote in its
comment that the term ‘‘relative’’ is too
vague and that ‘‘[i]t is unclear whether
the rule applies to third cousins, the
spouses of a stepbrother’s child from a
previous marriage, or friends that are
considered family,’’ concluding that
‘‘[l]arge companies creating monitoring
programs for testimonials need some
clarity about what relatives will be
captured under the Rule.’’ 352 A second
trade association said in its comment
that ‘‘relatives’’ of ‘‘any company
employee should not be considered
‘insiders’’’ because ‘‘[i]n most cases,
such family members would have no
incentive to post a fake review.’’ 353
However, the Commission intended for
§ 465.5 to address biased reviews and
testimonials by insiders or their
relatives, not the writing of ‘‘fake [or
false] reviews,’’ which is addressed in
§ 465.2.
To reduce the compliance burden, the
Commission is removing relatives from
§ 465.5(b) and limiting what was
originally proposed as § 465.5(c)(1),
which is now split into three separate
prohibitions. One prohibition addresses
officers or managers soliciting or
demanding a consumer review from
‘‘any of their [own] immediate
relatives.’’ A second prohibition
addresses officers or managers soliciting
or demanding reviews from employees
or agents. A third prohibition addresses
solicitations or demands by officers or
managers that ‘‘employees or agents
seek such [consumer] reviews from their
relatives.’’ In such instances the request
will likely be a general one (such as
‘‘Ask your relatives to review us’’ or
‘‘Get three family members to review
us’’), although it could also be more
specific (such as ‘‘Get your spouse to
write us a review’’). As set forth in
§ 465.5(c)(1)(i), any reviews resulting
from demands that employees or agents
solicit their relatives would only be
violations if the resulting reviews were
written by immediate relatives of the
employees or agents.
3. Agents
A trade association objected to the
inclusion of the undefined term
‘‘agents’’ in proposed § 465.5(b) and (c)
and suggested its removal. The
commenter said that ‘‘it is not clear
what individuals would be considered
‘agents’ of the business’’ and the
meaning of the term ‘‘agent’’ could
‘‘dramatically expand the scope of the
compliance programs that businesses
will likely need to create in order to
mitigate their risks under this section’’
which ‘‘would be particularly important
for small businesses.’’ 354 The
Commission intends for the term
‘‘agents’’ in this rule to apply only to
those agents that promote the company
or its products, such as representatives
of advertising agencies, public relations
firms, and review management firms. As
discussed below, given the clarifications
of and limitations to § 465.5(b)(1) and
(c)(1), the Commission has no reason to
believe that the inclusion of ‘‘agents’’
will ‘‘dramatically expand the scope of
the compliance programs.’’ 355
4. Scope
Several comments addressed the
scope of proposed § 465.5, including the
scope of liability of businesses in the
context of insider reviews and
testimonials. For example, a trade
association asserted that § 465.5 should
‘‘be limited to the extent it references
employees (or agents) who are not
officers or managers, and who were not
instructed by their superiors to post
reviews.’’ 356 A retailer asked for a safe
harbor that would apply to employee
reviews and testimonials ‘‘if businesses
are not encouraging insider reviews and
testimonials.’’ 357 The Commission
intended for the provision to apply to
reviews or testimonials by employees or
agents who are not officers or managers
only when (1) the reviews are requested
or solicited by an officer or manager of
the business or (2) the testimonials
appear in advertising or promotional
messages actively disseminated by the
business. As discussed in this section,
the Commission’s clarifications and
limitations should resolve any concerns
arising from any broader interpretation.
Two trade associations and another
industry organization asserted in their
comments that § 465.5 ‘‘appears to
impose liability on businesses for
distributing the content of third parties,
even when they had no knowledge that
the content violated the proposed
rule.’’ 358 As the commenters used the
word ‘‘distributing,’’ the Commission
assumes that these comments pertain to
the liability of businesses under
§ 465.5(b), which prohibits businesses
from ‘‘disseminating or causing the
dissemination of consumer
testimonials’’ by insiders without
disclosures. The testimonials covered by
§ 465.5 are, by definition, a business’s
advertising or promotional messages, so
the Commission does not consider them
to be third-party content. The section
covers such testimonials when
disseminated by the business itself, by
its officers or managers, or in response
to solicitations or demands from its
officers or managers. With respect to the
commenters’ concern that businesses
will be liable even when they had no
knowledge that the content violated the
rule, the Commission discusses below
the appropriate application of the
‘‘knew or should have known’’
standard.
A retailer’s comment expressed
‘‘significant concerns with this section if
the FTC intends to apply it to
marketplace service providers with
hundreds of thousands of
employees.’’ 359 A trade association said
in its comment that, ‘‘to the extent the
Commission intends for this language to
apply to reviews or testimonials written
by employees of online retailers with
hundreds of thousands of employees,
the Commission has failed to
demonstrate that this is an unfair or
deceptive act or practice that is
prevalent’’ as ‘‘[n]one of the cases cited
in the NPRM involved this type of
company.’’ 360 With respect to
employees, the section applies only to
(1) testimonials by employees that the
company chooses to disseminate and (2)
reviews that are solicited or demanded
by company officers or managers.
Further, the Commission has sufficient
evidence of prevalence as to the use of
insider reviews and testimonials,361 and
that evidence need not specifically
include examples of companies of every
size, such as those ‘‘with hundreds of
thousands of employees.’’
A trade association’s comment
‘‘urge[d] the Commission to add a safe
harbor . . . that will assure businesses
acting in good faith that they will not
face civil penalty liability for the actions
of rogue individuals.’’ 362 Again,
whether a business will be subject to
civil penalties will depend on whether
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68060 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
363 See supra section IV.B.2 of this document.
364 NADA Cmt. at 6.
365 Trustpilot Cmt. at 13.
366 RILA Cmt. at 6.
367 The Commission has slightly modified this
clause, changing ‘‘did not instruct the prospective
reviewer to disclose clearly and conspicuously that
relationship’’ to ‘‘did not instruct that prospective
reviewers disclose clearly and conspicuously their
relationship to the business’’ for purposes of clarity.
368 See infra section IV.E.5 of this document.
369 TechNet Cmt. at 3.
370 Travel Tech Cmt. at 4.
371 Consumer Reports Cmt. at 8.
372 Trustpilot Cmt. at 5, 8.
373 NRF Cmt. at 9.
374 Family First Life Cmt. at 15.
375 NADA Cmt. at 3; Amazon Cmt. at 11.
376 Amazon Cmt. at 11.
377 Id.
the facts show that the business had
actual knowledge or knowledge fairly
implied of the violation. A business will
not violate the rule—much less be
subject to civil penalties—merely
because employees write consumer
reviews without disclosing their
relationship to the business, but it may
violate the rule when an officer or
manager of the company solicited or
demanded such reviews. A business
will also not be liable under § 465.5
simply because one of its employees
(other than an officer or manager) or
agents makes an unsolicited social
media post. However, as discussed
above, a business might be liable under
§ 465.2(a) for an employee posting fake
testimonials to social media on behalf of
the company. 363
Two commenters addressed general
review solicitations from businesses to
their customers. A trade association said
that ‘‘[b]usinesses which seek reviews
from their customers generally seek
reviews from all customers, and again,
do not currently monitor or screen for
potential relatives or agency
relationships.’’ 364 A review platform
operator wrote in its comment, ‘‘An
automated review invitation system can
operate via integration with, for
example, a C[ustomer] R[elationship]
M[anagement] platform where customer
details are automatically fed through to
generate review invitations following on
from purchases or experiences. The
information within the system could be
as minimal as a name and email
address. . . . It could therefore be
possible for businesses to inadvertently
invite persons that are related to an
officer, manager, employee, or agent
. . . . In practice, it will be difficult to
check whether any invitation recipients
could fall within the very wide group of
persons outlined at [§ ] 465.5(c), and it
will also be difficult to draw a firm line
between what types of indicators are
sufficient to warrant imputing
constructive knowledge.’’ 365 The
Commission did not intend for
§ 465.5(c) to cover such generalized
invitations to past purchasers to write
reviews. The Commission is therefore
adding language in § 465.5(c)(2) to
clarify that § 465.5(c)(1) ‘‘does not apply
to generalized review solicitations to
purchasers for them to post reviews
about their experiences with the
product, service, or business.’’ The
Commission is making a similar
clarification in § 465.5(b)(2)(i);
specifically, that § 465.5(b)(1) ‘‘does not
apply to generalized review solicitations
to purchasers for them to post
testimonials about their experiences
with the product, service, or business.’’
The Commission has also added
§ 465.5(b)(2)(ii), which exempts ‘‘merely
engaging in consumer review hosting’’
from § 465.5(b)(1). Thus, an unsolicited
employee review merely appearing on
the business’s website cannot violate the
provision against disseminating insider
testimonials.
A trade association noted that ‘‘[l]arge
national retail chains collectively
employ millions of workers who are
also their customers’’ and ‘‘[w]hile a
retailer may provide guidance on
disclosing their relationship, it should
not be liable for policing their customer
reviews for posts that may have been
submitted by any one of their thousands
or millions of employees—who in many
cases may be using ambiguous
screennames or not be readily
identifiable.’’ 366 The Commission
points out that only § 465.5(c) applies to
customer reviews by employees, and
that provision only applies to employee
reviews that an officer or manager has
solicited or demanded. If there are no
such solicitations or demands, then
§ 465.5 does not apply to employee
reviews. When an officer or manager
does solicit or demand a review, the
business would only be liable if the
officer or manager (1) ‘‘encouraged the
prospective reviewer not to make . . . a
disclosure,’’ (2) ‘‘did not instruct that
prospective reviewers disclose clearly
and conspicuously their relationship to
the business,’’ 367 or (3) ‘‘knew or should
have known that such a review
appeared without such a disclosure and
failed to take remedial steps.’’ It is only
under the last of the three clauses that
a business might be liable for any
‘‘policing’’ of reviews, and, as discussed
below, any such obligations should not
be unduly burdensome.368
An industry organization commenter
expressed concern that § 465.5 ‘‘would
require the disclosure of personally
identifying information’’ and impact
employees’ privacy.369 The Commission
does not see how the provision requires
the disclosure of personally identifying
information. Section 465.5 requires the
disclosure of unexpected material
connections but does not require that
employees identify themselves by name.
Testimonialists and reviewers could be
anonymous, or use pseudonyms, and
include general phrases indicating their
relationship to the business, such as
‘‘my employer’s product,’’ ‘‘my
company’s,’’ or ‘‘my spouse’s
company.’’
5. Knowledge Standard
A number of commenters discussed
the ‘‘knew or should have known’’
standard contained in § 465.5(b) and (c).
A trade association said that a ‘‘ ‘knew
or should have known’ standard . . .
[in] § 465.5 aptly reflects that the rule is
targeting bad actors that intend to
commit fraud through fake reviews.’’ 370
A consumer organization ‘‘advise[d] the
Commission against relying on
knowledge standards that will introduce
unnecessary evidentiary burdens in the
enforcement process’’ and against
making it ‘‘a condition of liability,’’
noting that instead ‘‘the Commission
can and should consider knowledge and
intent in deciding the equities of
bringing any enforcement action.’’ 371 A
review platform said ‘‘that ‘should have
known’ is too low as a knowledge
threshold and this should therefore be
limited to ‘knew’, i.e., actual
knowledge.’’ 372 A trade association
called the ‘‘should have known’’
standard ‘‘vague.’’ 373 A business
commenter also described ‘‘should have
known’’ as vague and suggested limiting
the knowledge standard to actual
knowledge.374 A trade association and a
retailer said that civil penalties should
not be based upon a ‘‘should have
known’’ standard.375 The retailer
continued, ‘‘In the alternative, if the
Commission refuses to elevate the
knowledge standard for this section, the
final rule must provide greater guidance
on the sorts of scenarios that would give
rise to liability.’’ 376 Specifically, the
retailer asserted that the Commission
would have to provide ‘‘additional
information about when a company or
officer/manager ‘should’ know that an
‘insider’ review or testimonial violates
the rule.’’ 377 A trade association wrote
in its comment that ‘‘the Commission
should raise the knowledge standard for
this section to actual knowledge,’’
which ‘‘would ensure that companies
that are actually complicit in the
proliferation of deceptive insider
reviews and testimonials are the targets
of this section, rather than well-meaning
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68061	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
378 IAB Cmt. at 9.
379 Id. at 10.
380 Anonymous 3 Cmt.
381 TINA Cmt. at 6 and 8.
382 Consumer Reports Cmt. at 7–8.
383 Two modifications are changing ‘‘Rule’’ to
‘‘part’’ and, as discussed above, changing ‘‘its
products or services’’ to ‘‘the products and services
it sells.’’ See supra section IV.B.4. of this document.
384 Chamber of Commerce Cmt. at 6; Amazon
Cmt. at 12; Trustpilot Cmt. at 4–5.
385 Chamber of Commerce Cmt. at 6.
386 Id.
businesses that fail to discover and
remedy reviews or testimonials by
employees, managers, officers, agents, or
any of those individuals’ relatives that
lack disclosures.’’ 378 The commenter
continued, ‘‘[r]egardless of the
knowledge standard the Commission
imposes, the final rule must provide
greater guidance on what sorts of
scenarios would give rise to liability
under this section.’’ 379
The Commission chooses to retain the
proposed ‘‘knew or should have
known’’ standard in § 465.5(b)(1) and
(c)(1)(ii)(c). First, the Commission notes
again that it cannot obtain civil
penalties under section 5(m)(1)(A) of the
FTC Act for a rule violation unless it
proves that a defendant had actual
knowledge or knowledge fairly implied
that the act or practice is unfair or
deceptive and is prohibited by the rule.
With respect to § 465.5(b)(1), the
provision applies only to testimonials
that the business disseminates or causes
to be disseminated, i.e., it applies to the
business’s own advertising and
promotional activities. As noted above,
§ 465.5(b)(1) does not apply to
unsolicited social media posts by
employees or to social media posts that
result from generalized solicitations.
The Commission does not expect that a
business will ask every potential
testimonialist whether they are an agent
of the business. There may be red flags,
however, that should cause a business
to realize that a prospective
testimonialist is likely an insider, such
as the testimonial featuring an image of
that person standing in front of the
company’s headquarters. If a business
routinely asks prospective
testimonialists how they became
interested in the business or its
products, it should not avoid looking at
answers that might indicate a covered
connection.
With respect to § 465.5(c)(1)(ii)(c), the
Commission believes that, if officers and
managers of a business request or
demand that the business’s employees
or agents write consumer reviews or
solicit or demand that such employees
or agents seek such reviews from their
relatives, it is more than reasonable to
have those officers and managers take
on certain responsibilities with respect
to those reviews. The employees, agents,
and relatives on the receiving end of
such requests or demands are likely to
assume that their reviews should be
positive, which gives such reviews an
inherent bias. Therefore, officers and
managers should instruct that
prospective reviewers make disclosures.
When they demand that employees or
agents seek reviews from their relatives,
the officers or managers should instruct
the employees or agents to ask their
immediate relatives to make disclosures.
The officers and managers should also
take remedial steps when they know or
should know that resulting insider
reviews appeared without a disclosure.
The Commission does not expect an
officer or manager to scour every review
of the business for possible insider
reviews appearing without a disclosure.
There may be red flags, however, that
should cause officers or managers to
inquire further. An example that is at
least applicable to smaller companies is
a review without a disclosure by
someone the soliciting officer or
manager recognizes as having the same
last name as an employee whom the
officer or manager told to obtain reviews
from relatives. Another example is an
employee sending a soliciting officer or
manager a link to the resulting review,
in which case the officer or manager
should take the time to see if that review
has a disclosure. By taking ‘‘remedial
steps,’’ the Commission means that the
officer or manager should request that
the reviewer delete the review or add a
clear and conspicuous disclosure to it.
6. Other Suggestions
Commenters recommended that the
Commission adopt a number of
additional requirements or prohibitions.
An individual commenter said that
insider reviews should be banned and
that disclosures are insufficient to cure
them. 380 One consumer group proposed
that (1) ‘‘non-disclosed insider ratings’’
should be ‘‘independent and separate
violation[s] from deceptive narrative
reviews;’’ (2) ‘‘symbolic ratings—both
independently and when aggregated—
should feature a clear and conspicuous
disclosure of necessary material
connections;’’ and (3) ‘‘reviews
requiring a disclosure should not be
included in a product’s aggregate rating
without a disclosure.’’ 381 Another
consumer group suggested the
following: (1) § ‘‘465.5(a) and (c) should
apply to all employees and board
members of a business;’’ (2) § 465.5(b)
and (c) be extended ‘‘to employees or
board members of other companies with
a material business relationship with
the first business;’’ (3) § 465.5(c) should
be extended ‘‘to include solicitations or
demands of employees of companies
with which the business conducts
material business;’’ (4) § 465.5(c) should
prohibit ‘‘any employee or board
member of a business to solicit or
demand from another employee or
board member (or relative of an
employee or board member) a consumer
review about the business or one of its
products or services;’’ and (5)
‘‘employees of a business should not be
permitted to provide star or numerical
reviews that count toward an aggregate
or average rating, even if their conflict
of interest is otherwise disclosed in an
accompanying narrative review.’’ 382
Some of these proposals go beyond the
scope of this rulemaking. Based on its
policy expertise, the Commission
declines to make any of these changes
at this time. The Commission notes,
however, that some may, in certain
situations, involve unfair or deceptive
acts or practices that violate section 5 of
the FTC Act.
F. § 465.6—Company-Controlled Review
Websites or Entities
Proposed § 465.6 sought to prohibit a
business from representing, expressly or
by implication, that a website,
organization, or entity that it controls,
owns, or operates provides independent
reviews or opinions about a category of
businesses, products, or services
including the business or one or more
of its products or services. Based on the
following, the Commission has
determined to finalize this provision
with two limiting modifications.383
A business organization, a retailer,
and a review platform submitted
comments supporting the intent of
proposed § 465.6. 384 For example, the
business organization noted that it ‘‘was
supportive of a . . . rule aimed at
addressing the practice of marketers
setting up purportedly independent
websites, organizations, or entities to
review or endorse their own
product.’’ 385
Some commenters argued that, as
drafted, the provision was overly broad
and would prohibit conduct that was
not deceptive or unfair. A business
organization said that, as drafted,
proposed § 465.6 ‘‘. . . could capture
retailers that sell their own house
brands’’ and ‘‘prevent media companies
from operating general review websites
that publish reviews by independent
critics and consumers about films or
television produced by affiliated studios
or divisions.’’ 386 A consumer
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68062 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
387 Consumer Reports Cmt. at 9.
388 Amazon Cmt. at 12. The commenter suggested
that the Commission ‘‘clarify the regulatory
language to make clear that it covers only reviews
authored by the owner company or its agents.’’ Id.
The Commission is not adopting this approach
because § 465.6 is not limited to websites with
reviews. It also applies to organizations or entities
that misrepresent that they provide independent
reviews or opinions (e.g., seals) about a category of
businesses, products, or services including the
business or one or more of the products or services
it sells.
389 NRF Cmt. at 11–12.
390 Hammacher Schlemmer Cmt. at 5.
391 Trustpilot Cmt. at 5.
392 RILA Cmt. at 7.
393 Hammacher Schlemmer Cmt. at 6–7
(proposing that the Commission adopt § 465.6 with
the addition of the following clause: ‘‘unless the
business discloses that there is a relationship or
affiliation between the business and the website,
organization, or entity that it controls, owns, or
operates and why the reviews or opinions are
‘independent’, including the steps that the business
takes to ensure objectivity or independence in
obtaining such reviews or opinions.’’ (emphasis
omitted)); Frieling Cmt. at 4.
394 CCIA Cmt. at 3.
395 NPRM, 88 FR 49375.
396 Id.
397 CCIA Cmt. at 3.
398 Chamber of Commerce Cmt. at 6.
399 ‘‘Endorsements by organizations, especially
expert ones, are viewed as representing the
judgment of a group whose collective experience
exceeds that of any individual member.’’
Endorsement Guides, 16 CFR 255.4(a).
400 One modification is changing ‘‘Rule’’ to
‘‘part.’’
401 Anonymous 10, Cmt. on NPRM (Aug. 3, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0009; TT in PA, Cmt. on NPRM (Aug. 9, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0016 (‘‘TT in PA Cmt.’’); Kurt Braun, Cmt. on
NPRM (Aug. 17, 2023), https://
www.regulations.gov/comment/FTC-2023-0047-
0026; Superguest Cmt.; Tripadvisor Cmt. at 5–6;
Consumer Reports Cmt. at 9–10; State AGs Cmt. at
2.
organization similarly said that, ‘‘as
written, . . . [proposed § 465.6] would
make it illegal for companies to host any
reviews whatsoever so long as some of
the reviews touch on a category of
business, products, or services the
company provides’’ and would prohibit
‘‘customer review forums on sites such
as Home Depot and Amazon.’’ 387 A
retailer said that ‘‘the plain text of . . .
[proposed § 465.6 would] sweep[ ] in
more conduct that is neither deceptive
nor unfair—for example, where
Company A provides customer reviews
authored by others to Company B,
without disclosing an ownership
relationship.’’ 388 A trade association
wrote that proposed § 465.6 ‘‘could be
applied to prohibit retailers from
representing that any consumer reviews
or opinions featured on their own
websites are independent, even if they
are.’’ 389 A retailer commented that
proposed § 465.6 is ‘‘overly broad and
would prohibit a business from using a
related entity from [sic] testing or
comparing products in good faith and
publishing those results, even if the
company clearly disclosed that the test
or comparison was done by an
affiliate.’’ 390 A review platform asked in
its comment that the Commission clarify
that the section would not
‘‘unintentionally lead[ ] to review sites
being unable to host reviews of their
own company or sector.’’ 391 The
Commission recognizes and agrees with
the above concerns and is making two
responsive modifications to narrow final
§ 465.6 in a way that better reflects the
Commission’s intent. The Commission
is excluding ‘‘consumer reviews’’ from
the scope of final § 465.6 and changing
the prohibition against ‘‘represent[ing]’’
to a prohibition against ‘‘materially
misrepresent[ing].’’
A trade association commented that
‘‘many retailers host product reviews on
their online shopping websites and
make no direct claims that the reviews
are independent’’ and asked the
Commission to ‘‘make clear that it is
permissible for retailers to host product
reviews on a site they control and
operate.’’ 392 Assuming that the
commenter is referring to retailers
hosting independent consumer reviews
on a site they operate or control, then
this is permissible under § 465.6. If the
retailer’s website misrepresents that it
provides independent reviews or
opinions by experts or organizations,
then the retailer could be liable under
§ 465.6.
Two commenters asked the
Commission to adopt a safe harbor
provision for disclosures of the
relationship between the business and
the provider of the purportedly
independent reviews or opinions.393
The Commission’s modifications
address this request effectively by
providing that businesses do not violate
§ 465.6 if they are not materially
misrepresenting independence. The
Commission believes that contradictory
disclosures cannot cure a false express
claim, such as a false express claim of
independence. If a false claim of
independence is merely implied,
whether a disclosure is adequate to cure
it will depend on the net impression of
the website or advertisement, i.e.,
whether it materially misrepresents
independence even with the disclosure.
A trade association commented that
‘‘[i]t would be helpful to make it clear
that . . . § 465.6 only applies to
websites or entities whose core service
is providing reviews or opinions.’’ 394
The term ‘‘core service’’ is ambiguous,
and it is not clear how one would
determine whether it applies to reviews
or opinions provided by a given website
or other entity. False material claims
that a website or entity provides
independent reviews or opinions would
still be deceptive even if such reviews
or opinions are not the website’s or
entity’s core service. The NPRM cited a
number of cases in which businesses
created purportedly independent seals
or badges that they then awarded to
their own products; the awarding of
such seals or badges was clearly not
their core business. 395 The NPRM also
cited cases involving purportedly
independent review websites, and,
although such review websites might
have appeared to be a ‘‘core service,’’
the true core business was selling the
respondent’s or defendant’s own
products.396 Focusing on the ambiguous
term ‘‘core services’’ would likely open
the door to manipulation and evasion of
the prohibition. The commenter further
noted that it would also be ‘‘useful to
clarify what ‘independent reviews or
opinions’ means.’’ 397 In this context,
the term ‘‘independent’’ merely refers to
explicit or implicit claims that reviews
or opinions are not coming from a
business that offers any of the products
or services being reviewed or evaluated.
A business organization commenter
suggested that the Commission not
finalize § 465.6 because ‘‘the fraudulent
nature of reviews on purportedly
independent websites would likely be
covered by . . . [§§ ] 465.2 and 465.5 of
the . . . Rule.’’ 398 Those sections are
limited to consumer reviews and
consumer or celebrity testimonials and
do not apply to reviews, seals, or other
opinions by purportedly independent
experts, organizations 399 or other
entities. Therefore, § 465.6 is not
duplicative of either § 465.2 or § 465.5.
G. § 465.7—Review Suppression
Proposed § 465.7 sought to prohibit
two different types of consumer review
suppression.
1. § 465.7(a)
Proposed § 465.7(a) sought to prohibit
anyone from using an unjustified legal
threat or a physical threat, intimidation,
or false accusation in an attempt to
prevent a consumer review or any
portion thereof from being written or
created or to cause a consumer review
or any portion thereof to be removed.
Based on the following, the Commission
is finalizing § 465.7(a) with several
revisions for the purpose of clarity.400
A number of commenters supported
the provision. 401 The NPRM asked
whether it is ‘‘appropriate that . . .
§ 465.7(a) focuses on the specific types
of listed threats or activities,’’ and two
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68063	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
402 Transparency Company Cmt. at 14; Family
First Life Cmt. at 15.
403 Family First Life Cmt. at 15.
404 See supra section IV.A.2.l of this document.
405 NFIB Cmt. at 4.
406 Trustpilot Cmt. at 17.
407 Consumer Reports Cmt. at 10.
408 See Intimidate (def. 3), Dictionary.com, LLC,
https://www.dictionary.com/browse/intimidate (last
visited July 5, 2024) (establishing that the word
‘‘intimidate’’ means, among other things, ‘‘to force
into or deter from some action by inducing fear’’).
409 Trustpilot Cmt. at 17.
410 NFIB Cmt. at 4.
411 Id. at 5.
412 ANA Cmt. at 10.
413 Id. at 9–10.
414 Id.
415 Yelp Cmt. at 7; CCIA Cmt. at 4.
416 NRF Cmt. at 12.
417 Id.
418 See Endorsement Guides, 16 CFR 255.2(d).
419 Consumer Reports Cmt. at 9. Although it does
not involve § 465.7(a), a business urged the
Commission to ‘‘deter meritless legal threats by
platforms against providers and users of pro-
consumer tools.’’ Mozilla Cmt. at 6. Such threats are
beyond the scope of this rulemaking.
business commenters responded that it
is. 402 One of the commenters said that
‘‘[t]his narrow approach protects
consumers, all while ensuring clarity for
businesses and avoiding the pitfall of
ambiguity in the . . . Rule.’’ 403
However, as already noted above, based
on the comments and on the proposed
definition for the phrase ‘‘unjustified
legal threat,’’ the Commission is
adopting a definition for the phrase
‘‘unfounded or groundless legal threat,’’
instead of a definition of the phrase
‘‘unjustified legal threat,’’ as originally
proposed. 404
A trade association commenter noted
that ‘‘ ‘intimidation’ means threat of the
use of force’’ so it ‘‘duplicates ‘physical
threat’ ’’ and should be deleted. 405 A
review platform commenter questioned
why the ‘‘proposed text is limited to
‘physical threats’ ’’ and said that non-
physical threats, such as verbal threats
in the form of abusive or coercive
language, should not be tolerated and
should be acted against.’’ 406 A
consumer group’s comment said that
‘‘[t]he term ‘intimidation’ seems
sufficiently broad to cover most types of
threats not otherwise covered by ‘legal’
or ‘physical’ threats.’’ 407 The
Commission disagrees with the first
commenter because, in this context,
‘‘intimidation’’ means things other than
legal or physical threats. Intimidation
can include abusive communications,
stalking, character assassination, and
sexual harassment when those things
are used to intimidate, that is to force
someone into or deter someone from
taking some action by inducing fear.408
Three commenters voiced concerns
about the fact that proposed § 465.7(a)
included ‘‘false accusation[s]’’ as a type
of conduct that could amount to review
suppression. A review platform noted
that the determination of whether an
accusation is false ‘‘introduces an
element of subjectivity,’’ and that it
would ‘‘be preferable to ground this in
a legal basis, such as defamation.’’ 409 A
trade association wrote that ‘‘a
statement by a business about a
consumer review or the consumer
making a review may sometimes be in
order,’’ and a prohibition on false
accusations should ‘‘allow breathing
room for First Amendment free speech
concerns, such as requiring a guilty
mental state from the maker of an
accusation before culpability
attaches.’’ 410 It recommended adding
‘‘knowing that it is false or with reckless
disregard as to its truth or falsity.’’ 411 A
second trade association asserted that
proposed § 465.7(a) was ‘‘not narrowly
tailored to serve a compelling state
interest because it applies regardless of
the magnitude of the alleged error or
intent or state of mind of the business
that makes the false statement.’’ 412 In
order to illustrate its point, the second
trade association also posited a scenario
involving false accusations by a
restaurant owner in a private
conversation with a disgruntled
patron.413 The owner in the
hypothetical did not know the
accusations were false and did not act
recklessly. In response to these
comments, final § 465.7(a) adopts the
phrase ‘‘a public false accusation in
response to a consumer review that is
made with the knowledge that the
accusation was false or made with
reckless disregard as to its truth or
falsity,’’ rather than the phrase ‘‘false
accusation,’’ as originally proposed.
This change resolves the commenters’
concerns regarding the accuser’s state of
mind, clarifies the Commission’s intent
that the provision applies only to public
accusations, and provides greater
clarity, thereby making compliance less
burdensome. In response to the concern
about subjectivity, the Commission
notes that courts can make objective
determinations of whether a given
accusation is false. One of these
commenters also asserted broadly that
§ 465.7(a) ‘‘regulates ‘pure speech,’ not
conduct, because it applies to the use of
words to convey a message’’ and that
speech is not commercial speech if it
does not propose a commercial
transaction.414 This assertion has no
basis in First Amendment law and is an
overly limited articulation of what
counts as commercial speech. When a
business makes a public false accusation
in response to a consumer review in an
attempt to cause the review to be
removed, the speech at issue is clearly
commercial speech because it is
intended to promote the product,
service, or business that was the subject
of the negative consumer review.
Two commenters, a review platform
and a trade association, said that the
provision should be strengthened by
also covering attempts to force a
consumer review or a portion thereof to
be changed or edited.415 Proposed
§ 465.7(a) would have prohibited certain
acts made in an attempt to, among other
things, ‘‘cause a consumer review or any
portion thereof to be removed.’’ The
Commission believes that, in most
cases, changing or editing a review
would necessarily require removing a
portion of it. Accordingly, the
Commission is clarifying that final
§ 465.7 applies to such modifications of
reviews by adding ‘‘whether or not that
review or a portion thereof is replaced
with other content,’’ immediately after
‘‘cause a consumer review or any
portion thereof to be removed.’’
A trade association’s comment asked
that the ‘‘Rule be clarified to emphasize
that it does not prohibit companies from
contacting customers who post negative
reviews to resolve the reported
issues.’’ 416 The commenter was
concerned that ‘‘sensitive customers
could argue that such communication
from the Company (no matter how
innocuous) amounts to
intimidation.’’ 417 The Commission does
not believe that a company engages in
intimidation by merely contacting
customers to resolve reported issues or
simply asking satisfied customers to
update their reviews. Specifying that a
consumer’s concerns will be addressed
only if the consumer changes or
removes a truthful negative review may
be an unfair or deceptive act or practice
that has the effect of distorting or
otherwise misrepresenting what
consumers think of a marketer’s
products, 418 but that issue is beyond the
scope of this rulemaking.
A consumer organization’s comment
said that, ‘‘[j]ust as businesses may use
threats or intimidation to prevent a
consumer from leaving a negative
review, they may use similar tactics to
ensure receipt of a positive review,’’
thus concluding that § 465.7(a)’s
‘‘prohibitions . . . should also apply to
compelled creation of positive
reviews.’’ 419 Although compelling the
creation of positive reviews through
threats or intimidation may be an unfair
or deceptive act or practice, the
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420 ADA Cmt. at 1.
421 Id. at 1–2.
422 One modification, discussed above, is
changing ‘‘its products or services’’ to ‘‘the products
and services it sells.’’ See supra section IV.B.4. of
this document. Another modification discussed
above is changing ‘‘person’’ to ‘‘individual.’’ See
supra section IV.A.2.b of this document. As it has
done elsewhere in the rule, the Commission is
limiting the misrepresentations prohibited to
‘‘material’’ misrepresentations. Nonetheless, in the
context of § 465.7(b), the Commission believes that
all such misrepresentations would likely always be
material.
423 Hippensteel Cmt.
424 Superguest Cmt.
425 Ravnitzky Cmt. at 2.
426 TT in PA Cmt.
427 State AGs Cmt. at 3.
428 Amazon Cmt. at 12.
429 Transparency Company Cmt. at 14.
430 IAB Cmt. at 11.
431 Id.
432 NPRM, 88 FR 49376.
433 Yelp Cmt. at 7–8.
434 Id.
Commission declines to address that
practice in this rulemaking at this time.
A dental trade association expressed
that, because Federal and State privacy
laws prohibit dentists and other health
care providers from disclosing patient
information, their ability to correct the
record when they are themselves a
target of deceptive or unfair reviews is
limited. 420 The commenter asked the
Commission to permit dentists and
other health care providers to disclose
patient information in response to a
review (limited to the scope of the
topics addressed in the review) without
violating any FTC privacy-based
prohibitions.421 This request is beyond
the scope of this rulemaking.
2. § 465.7(b)
Proposed § 465.7(b) sought to prohibit
a business from misrepresenting,
‘‘expressly or by implication, that the
consumer reviews of one or more of its
products or services displayed on its
website or platform represent most or all
the reviews submitted to the website or
platform when reviews are being
suppressed (i.e., not displayed) based
upon their ratings or their negativity.’’
Proposed § 465.7(b) enumerated reasons
for suppressing reviews that would not
be considered suppression based upon
their ratings or their negativity, so long
as the criteria for withholding reviews
are applied to all reviews submitted
without regard to the favorability of the
review. Proposed § 465.7(b) listed the
following valid reasons for review
suppression: (1) ‘‘the review contain[ed]
. . . [(a)] trade secrets or privileged or
confidential commercial or financial
information, . . . [(b)] libelous,
harassing, abusive, obscene, vulgar, or
sexually explicit content, . . . [(c)] the
personal information or likeness of
another person, . . . [(d)] content that is
discriminatory with respect to race,
gender, sexuality, ethnicity, or another
protected class, or . . . [(e)] content that
is clearly false or misleading;’’ (2) ‘‘the
seller reasonably believe[d] the review
is fake;’’ or (3) ‘‘the review is wholly
unrelated to the products or services
offered by or available at the website or
platform.’’ Based on the following, the
Commission has determined to finalize
this prohibition with some
modifications.422
Multiple commenters said that the
practice of product sellers suppressing
less favorable reviews was problematic.
One individual commenter said they
were ‘‘[d]isgusted by businesses who[ ]
filter/have control over their . . .
reviews.’’ 423 Another individual
commenter stated that ‘‘[t]he removal of
reviews that are critical, but accurate of
the service or good creates an illusion
and ultimately, defrauds the consumer
of their choice,’’ but also worried about
how ‘‘the FTC [will] catch companies
that delete negative reviews.’’ 424 A third
individual commenter said that the
‘‘Rule should prohibit businesses from
suppressing . . . honest negative
reviews.’’ 425 A fourth individual
commenter wrote that ‘‘[b]usiness
should be barred from misrepresenting
reviews on their websites and from
suppressing negative reviews.’’ 426 The
State Attorneys General said that, when
‘‘a merchant . . . only posts positive
consumer reviews on its website,
instead of both favorable and negative
reviews, [it] can potentially mislead
consumers into believing that such
reviews represent most or all of the
reviews submitted to the merchant’s
website.’’ 427 A retailer wrote that it
‘‘support[s] the goals of section
465.7[(b)], which prohibits sellers from
suppressing customer reviews based on
their negativity’’ and ‘‘believe[s] that it
is critically important that customers
not be deprived of useful, negative
feedback when deciding whether to
purchase a product.’’ 428
The NPRM asked whether ‘‘it [is]
appropriate that proposed § 465.7(b) is
limited to circumstances in which
reviews are being suppressed based on
rating or negativity,’’ and a business
commenter agreed that it was.429
A trade association commenter said
‘‘that the Commission has . . . failed to
satisfy the requirement that the specific
unfair or deceptive acts or practices
identified in the rule be prevalent.’’ 430
According to the commenter, ‘‘The
rulemaking record cites only one case,
one closing letter, and one comment in
support of the Commission’s conclusion
that review suppression is
prevalent.’’ 431 The commenter
understates the significance of the
evidence that the Commission
considered in finding that the
suppression of reviews based upon their
rating or sentiment is prevalent. The
closing letter to Yotpo, a company that
provided review management services,
is significant because the investigation
revealed that more than 4,500 Yotpo
merchant clients were automatically
publishing only 4- or 5-star reviews and
that most 1-star reviews and 2-star
reviews submitted to those merchants
were suppressed.432 The investigation of
Yotpo shows that there was widespread
suppression of negative reviews. The
Commission thus has a strong basis for
its conclusion that the suppression of
negative reviews on retailer or business
websites is prevalent.
A review platform’s comment
suggested changing ‘‘based upon their
ratings or their negativity’’ to ‘‘based
upon their ratings or their sentiment’’
because ‘‘reviews can be difficult to
categorize as wholly ‘negative’ or
‘positive.’ ’’ 433 The Commission
intended for the phrase ‘‘based upon
their ratings or their negativity’’ to refer
to the suppression of reviews based on
their ratings or their sentiment.
However, in light of the comment, the
Commission now realizes that the use of
the word ‘‘negativity’’ in this context
could be subject to misinterpretation
and be construed to imply that a review
must be wholly negative for its
suppression to be problematic.
Accordingly, the Commission is
clarifying its original intent by changing
‘‘their negativity’’ to ‘‘their negative
sentiment.’’ The commenter also said
that ‘‘consumer harm may result if
someone suppresses a review, regardless
of the sentiment expressed in the
review.’’ 434 The Commission is not
expanding the rule to address other
types of review suppression not based
on ratings or negative sentiment. There
are numerous legitimate reasons for
suppressing consumer reviews,
including those listed in § 465.7(b)(1),
(2), and (3). Furthermore, such an
expansion would be beyond the scope
of the rulemaking.
A trade association’s comment
requested that the Commission ‘‘carve
out the use of reviews in marketing
materials’’ because the provision ‘‘could
effectively prohibit retailers from
highlighting any customer reviews in
advertising—even though customers
understand that advertising normally
highlights particularly positive
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435 NRF Cmt. at 12.
436 An individual commenter said it would be
helpful to have rule language ‘‘around a business
being allowed to highlight specific testimonial
reviews on their website as long as there is a
disclaimer or prominent indication that the page
does not represent all reviews for the business.’’
Anonymous 3 Cmt. The rule does not prohibit such
‘‘highlighting’’ of specific reviews or testimonials,
but the creation of a safe harbor for such
highlighting is beyond the scope of the rule. In
addition, the Commission believes that the wording
of the proposed disclosure is likely inadequate.
437 IAB Cmt. at 11.
438 Id. at 11–12.
439 Id. at 12.
440 NRF Cmt. at 13.
441 IAB Cmt. at 11; Technet Cmt. at 3; Amazon
Cmt. at 12; NRF Cmt. at 13.
442 Amazon Cmt. at 12. A different commenter
gave the example of a snowstorm ‘‘obstruct[ing] the
delivery of a package to a buyer who could claim
failure to deliver on time.’’ TechNet Cmt. at 3. The
Commission does not agree that this is a legitimate
reason for suppressing consumer reviews.
443 IAB Cmt. at 12; Amazon Cmt. at 12; NRF Cmt.
at 13.
444 IAB Cmt. at 11; TechNet Cmt. at 3; Amazon
Cmt. at 12; NRF Cmt. at 12–13.
445 Anonymous 4 Cmt.
446 NFIB Cmt. at 5.
447 Trustpilot Cmt. at 18.
448 Madeline D’Entrmont, Cmt. on NPRM at 1
(Sept. 22, 2023), https://www.regulations.gov/
comment/FTC-2023-0047-0064.
449 Id.
450 See Consumer Review Fairness Act of 2016
§ 2(b)(2)(C)(i), 15 U.S.C. 45b(b)(2)(C)(i).
reviews.’’ 435 The Commission did not
intend for proposed § 465.7(b) to cover
the use of consumer reviews in
marketing materials. Specifically,
proposed § 465.7(b) was only intended
to cover misrepresentations about the
body of reviews in a ‘‘reviews’’ section
of a website or platform—that is, a
portion of a website or platform
dedicated in whole or in part to
receiving and displaying consumer
reviews—and not misrepresentations
about whether a highlighted review is
‘‘representative.’’ The Commission is
clarifying this by changing ‘‘displayed
on its website or platform’’ to
‘‘displayed in a portion of its website or
platform dedicated in whole or in part
to receiving and displaying consumer
reviews.’’ The Commission notes
however, that the use of non-
representative consumer reviews in
marketing could be deceptive in
violation of section 5 of the FTC Act.436
A trade association asked that the
Commission ‘‘clarify what it means for
a review to be ‘‘suppressed (i.e., not
displayed).’’ 437 The trade association
said that ‘‘[m]any businesses that
operate websites that display consumer
reviews will organize those reviews in
reasonable ways to help consumers
navigate what might be a large corpus of
varying consumer commentary’’ and
that, ‘‘[i]f a business takes reasonable
steps to organize their reviews, those
reviews should not be considered
‘suppressed.’ ’’ 438 The Commission
agrees that organizing reviews does not
qualify as suppressing reviews. The
Commission notes, however, that
organizing reviews in a way that makes
it difficult for consumers to know about
or find negative reviews could be an
unfair or deceptive act or practice in
violation of section 5 of the FTC Act.
The commenter also asked that the
Commission change ‘‘not displayed’’ to
‘‘not displayed or accessible.’’ 439 The
Commission is instead clarifying its
original intent by changing ‘‘not
displayed’’ to ‘‘not displayable,’’ so that
the provision only covers reviews that
consumers will be unable to view even
if they were to sort or filter the reviews
differently. Another trade association’s
comment said that ‘‘the Rule should
explicitly allow retailers to sort reviews
by objective measures unrelated to the
positivity of the review, where the
sorting method is disclosed.’’ 440 As
modified, § 465.7(b) does not prohibit
the sorting or organization of reviews, so
the proposed modification is
unnecessary.
Four industry commenters argued that
there are legitimate reasons for
suppressing consumer reviews beyond
those listed in proposed § 465.7(b).441
One of these commenters, a retailer,
gave examples of other legitimate
reasons for suppressing a review:
‘‘describing violence, encouraging
illegal activities or misuse of the
product, incorporating hyperlinks that
could jeopardize customer online safety,
or using a language not supported by the
website.’’ 442 Three of the industry
commenters said that, by limiting
review suppression to the listed reasons,
the provision violated the First
Amendment and section 230 of the
Communications Decency Act,443 and
all four asked the Commission to clarify
that the listed reasons are not
exhaustive.444 The Commission agrees
that there are legitimate reasons for
suppressing reviews beyond those listed
and is clarifying that the listed criteria
for review suppression are non-
exhaustive examples.
Proposed § 465.7(b) provided that
suppression was not violative ‘‘so long
as the criteria for withholding reviews
are applied to all reviews submitted
without regard to the favorability of the
review.’’ The Commission is clarifying
that the criteria must be applied to all
reviews equally. Additionally, to be
consistent with the above clarification
regarding sentiment, the Commission is
changing ‘‘without regard to the
favorability of the review’’ to ‘‘without
regard to sentiment.’’
An individual commenter asked
whether a company could ‘‘have a
policy of not posting reviews that
mention other products’’ or suppress a
review that is ‘‘patently false (wrong
company, wrong product, wrong
location, etc.).’’ 445 As long as the policy
is applied to all reviews equally, those
could be legitimate reasons for
suppressing reviews.
A trade association commented that
one of the listed, acceptable reasons for
suppressing reviews is too limited.
Specifically, it said that ‘‘libelous’’
reviews would not cover reviews with
an oral component that were
‘‘slanderous,’’ and it thus recommended
using the word ‘‘defamatory.’’ 446 The
Commission intended to cover all
defamatory consumer reviews, not just
written ones, and the Commission is
making that clarification.
Another one of the listed, acceptable
reasons for suppressing reviews was
that ‘‘the seller reasonably believes the
review is fake.’’ A review platform
commented that it is important that this
criteria ‘‘cannot be used by a business
to seek to censor consumer reviews
based on a valid experience’’ and said
that, without information about the
reviewer, the reviewer’s location, and
the reviewer’s other reviews, ‘‘it can be
difficult to accurately identify fake
reviews.’’ 447 One individual commenter
wrote that this ‘‘is overbroad and gives
sellers leeway to suppress reviews at
their discretion so long as they claim a
belief that said reviews were fake.’’ 448
The commenter recommended ‘‘revising
this provision to add specificity and
identify the parameters of what a fake
review looks like.’’ 449 A seller does not
risk liability if the suppression occurs
for a reason other than the review’s
rating or negative sentiment. The
provision’s phrase ‘‘such as’’ recognizes
that it is proper to suppress reviews for
legitimate reasons. For this specific
enumerated exception, ‘‘the seller [only
needs to] reasonabl[y] believe[ ] the
review . . . [to be] fake.’’ Thus, if there
are indicia that would lead a reasonable
person to believe that the review is fake,
the seller would meet this exception.
A different, listed acceptable reason
for suppressing reviews was ‘‘content
that is discriminatory with respect to
race, gender, sexuality, ethnicity, or
another protected class.’’ The
Commission is changing ‘‘protected
class’’ to ‘‘intrinsic characteristic’’ in
order to more closely echo the language
in the CRFA on which the reason is
based. 450
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68066 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
451 RILA Cmt. at 4.
452 Endorsement Guides, 16 CFR 255.2(e)(8)(ii).
453 Consumer Reports Cmt. at 10.
454 Id.
455 State AGs Cmt. at 4.
456 Id.
457 TechNet Cmt. at 3.
458 Superguest Cmt.
459 Ravnitzky Cmt. at 2.
460 Rob Levy, Cmt. on NPRM at 2 (Sept. 22, 2023),
https://www.regulations.gov/comment/FTC-2023-
0047-0057.
461 Trustpilot Cmt. at 18.
462 Consumer Reports Cmt. at 11.
463 Anonymous 11, Cmt. on NPRM (Aug. 16,
2023), https://www.regulations.gov/comment/FTC-
2023-0047-0022.
464 Anonymous 4 Cmt.
465 Endorsement Guides, 16 CFR 255.0(g)(1) and
255.1(b).
466 One modification is changing ‘‘Rule’’ to
‘‘part.’’ Another modification, discussed above, is
changing ‘‘persons’’ to ‘‘individuals.’’ See supra
section IV.A.2.b of this document.
A trade association noted that the
‘‘FTC should not prohibit sellers from
excluding reviews that solely discuss
service experience and do not include
comments on the product.’’ 451 The rule
as clarified does not prohibit
suppressing reviews that solely discuss
customer service as long as the criteria
is applied equally to all reviews. The
Commission notes, however, that it has
expressed the view that suppressing
customer reviews about a ‘‘particular
seller’s customer service, delivery,
returns, and exchanges’’ can be
deceptive in violation of section 5 of the
FTC Act.452
A consumer organization expressed
concern that proposed § 465.7(b)
‘‘allows businesses to suppress reviews
when they contain ‘harassing,’ ‘abusive,’
or ‘obscene’ content, which are highly
subjective terms likely to be interpreted
broadly by businesses that have a clear
interest in suppressing reviews that may
harm their public perception.’’ 453 The
commenter suggested that, ‘‘to preserve
the public benefit of reviews that
contain instances of objectionable
content,’’ the Commission could ‘‘allow
businesses to redact such content but
require them to leave the remainder of
the review along with any
corresponding score or numerical rating
available for public consumption.’’ 454
Appropriate redaction of portions of
consumer reviews may be difficult or
infeasible in some instances. The
Commission declines to impose such a
requirement at this time.
The State Attorneys General asked in
their comment that the Commission
‘‘delete[ ] the phrase ‘based upon their
ratings or their negativity’ at the end of
the first sentence.’’ 455 The State
Attorneys General’s reasoning for this
request was that the language is
unnecessarily limiting and superfluous’’
because ‘‘a company seeking to suppress
negative reviews could potentially
succeed by offering reasons that are
proxies for negativity’’ and ‘‘any
legitimate suppression should already
be sufficiently covered by the robust
carve-outs set forth in § 465.7(b)(1).’’ 456
The Commission declines to make that
change, as the enumerated ‘‘carve-outs’’
do not exhaustively identify every
legitimate reason for suppressing
reviews.
A business organization asserted that
proposed § 465.7(b) ‘‘implies a ‘gross
feedback score’ must be disclosed along
with the ‘net feedback score,’ which is
the actual number of reviews viewable
to a user.’’ 457 The commenter is
incorrect, as § 465.7(b) contains no such
disclosure requirements.
An individual commenter expressed
concern as to how the FTC will ‘‘catch
companies that delete negative reviews’’
and suggested offering rewards ‘‘for
individuals or organizations to help
address’’ the problem.458 The
Commission will use the investigative
and law enforcement tools at its
disposal to identify bad actors who
suppress reviews.
In connection with proposed
§ 465.7(b), several commenters
recommended that the Commission
impose additional consumer review-
related requirements. An individual
commenter asked the Commission to
‘‘require businesses to display consumer
reviews in a fair and transparent
manner, such as by allowing consumers
to choose how they want to sort or filter
reviews, and by disclosing any criteria
or algorithm that they use to rank or
highlight reviews.’’ 459 Another
individual commenter said that
‘‘companies . . . should be required to
maintain and periodically disclose
records of review suppression,’’ which
would, at a minimum, ‘‘contain the
number of reviews suppressed at each
rating level and an associated
justification.’’ 460 A review platform
recommended the Commission expand
the scope of the rule to (1) prevent
reviews from ‘‘being misquoted and
manipulated via quoting select parts of
reviews,’’ and (2) require that the
criteria on which consumer reviews are
selected for showcasing (e.g., on a
website carousel) be made clear. 461 A
consumer organization commented that
consumers should be able to assume
that the reviews that they see on a
business’s website are representative of
the reviews the business receives, and if
‘‘a business wishes to curate reviews,
the business should have the burden to
transparently communicate the fact and
nature of the curation to consumers.’’ 462
One individual commenter asked that
the proposed rule be ‘‘extended to
include penalties for Pay-to-Play
platforms that engage in practices such
as manipulating ratings and suppressing
negative reviews for businesses that
advertise on their websites,’’ 463 and
another commenter thought the rule
should cover ‘‘companies that profit
from shaming businesses by posting
negative reviews while unilaterally
determining positive reviews are
‘unverified’—effectively holding any
positive sentiment back until the
business subscribes to the platform.’’ 464
Some of these proposed requirements
are beyond the scope of this rulemaking,
although some of the acts and practices
described may be deceptive or unfair in
violation of section 5 of the FTC Act.
For example, misquoting reviews can be
deceptive 465 and showcasing or
curating reviews might deceptively
represent that the reviews presented are
representative or typical of the reviews
received. Based on its policy expertise,
the Commission declines to address any
of these practices in this rulemaking at
this time.
H. § 465.8—Misuse of Fake Indicators of
Social Media Influence
Proposed § 465.8(a) sought to prohibit
anyone from selling or distributing fake
indicators of social media influence that
can be used by persons or businesses to
misrepresent their influence or
importance for a commercial purpose.
Proposed § 465.8(b) sought to prohibit
anyone from purchasing or procuring
fake indicators of social media influence
to misrepresent their influence or
importance for a commercial purpose.
Based on the following, the Commission
has determined to finalize these
prohibitions with certain
modifications. 466
Several commenters raised concerns
about the meaning of the term ‘‘fake’’ in
the context of indicators of social media
influence. A trade association asked,
‘‘Does ‘fake’ only mean that the likes
and followers were created by bots or
through fake accounts? If a social media
influencer were to recommend that their
followers also follow another business’
social media account, would that also be
‘procuring’ of ‘fake’ indicators of social
media influence? . . . If the FTC means
to capture a specific category of ‘likes,’
‘follows,’ or other metrics that do not
reflect any real opinions, findings, or
experiences with the marketer or its
products or services, it should make that
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68067	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
467 ANA Cmt. at 17–18.
468 Amazon Cmt. at 13.
469 IAB Cmt. at 13.
470 Hammacher and Schlemmer Cmt. at 7.
471 Amazon Cmt. at 13.
472 IAB Cmt. at 13.
473 Id. at 12.
474 NRF Cmt. at 13.
475 Consumer Reports Cmt. at 11.
476 Id.
477 IAB Cmt. at 13; Amazon Cmt. at 13.
478 IAB Cmt. at 13.
intention more clear.’’ 467 A retailer
asked for ‘‘confirmation . . . that this
provision would not apply where
companies award legitimate indicators
of influence to certain users upon
satisfaction of objective criteria, even if
those individuals are later discovered to
have circumvented or abused those
criteria.’’ 468 A second trade association
said that, ‘‘[w]hen . . . indicators are
awarded based on legitimate criteria,
they serve this informative and non-
deceptive purpose’’ and the ‘‘innovative
companies that develop these indicators
of influence should not be punished if
bad actors try to abuse the processes,’’
so the Commission ‘‘should . . . clarify
that this section applies to true ‘fake’
indicators of social media
influence.’’ 469 In response to these
comments, the Commission is clarifying
what it intended as ‘‘fake indicators of
social media influence.’’ For this
purpose, the final rule includes a
definition of the phrase ‘‘fake indicators
of social media influence’’ in § 465.1(h),
which defines the phrase as indicators
of social media influence derived from
bots, purported individual accounts not
associated with a real individual,
accounts created with a real individual’s
personal information without their
consent, hijacked accounts, or that
otherwise do not reflect a real
individual’s or entity’s activities,
opinions, findings, or experiences. If a
social media influencer were to
recommend that their followers also
follow another social media account,
any resulting followers of the second
account would not be ‘‘fake.’’ If a
company awards legitimate indicators of
influence to certain users upon
satisfaction of objective criteria
reflecting the influence of the users, the
company would not be selling ‘‘fake’’
indicators, even if bad actors were able
to deceive the company.
Three commenters addressed the
section’s lack of a knowledge
requirement. A retailer commenter
wrote that ‘‘a business could be in
violation of this provision even if it
innocently sold or procured a fake
indicator, without knowledge or any
indication that the indicator was fake,’’
which it said ‘‘is patently
unreasonable.’’ 470 A second retailer
similarly ‘‘recommend[ed] that the rule
be revised so that it only applies when
the seller/buyer knows the indicators
are fake.’’ 471 A trade association
suggested ‘‘revising this section to
additionally require that the seller or
purchaser act ‘with knowledge that the
indicators of influence are fake.’ ’’ 472
The Commission recognizes that
someone could think that they were
paying for a promotional campaign to
increase their followers but,
unbeknownst to the purchaser, the
entity offering the campaign was lying
and just providing fake followers. It is
also possible that a company might
bestow a legitimate indicator of social
media influence, like a seal, that the
company does not know is based upon
or derived from fake indicators of social
media influence. The Commission is
therefore narrowing the provision by
adding ‘‘that they knew or should have
known to be fake’’ to both § 465.8(a) and
(b).
A trade association’s comment
asserted that ‘‘the Commission failed to
meet the prevalence requirement’’
because ‘‘the evidence the Commission
. . . cited in the NPRM . . . all relate[s]
to the use of actual ‘fake’ indicators of
influence that the seller or purchaser
knew were fake.’’ 473 The Commission
believes that, with the addition of the
definition of ‘‘fake indicators’’ and the
knowledge requirement, it has
sufficiently addressed the commenter’s
concerns.
A trade association expressed concern
that the provision would ‘‘hold[ ]
retailers vicariously liable for the
actions of independent endorsers,’’ that
is, the influencers and other endorsers
that they hire.474 That was not the
Commission’s intention. The
distribution of fake indicators of social
media influence was intended to mean
the distribution to individuals or
businesses who could use the indicators
to misrepresent their influence, not
causing the dissemination of social
media by users of such fake indicators,
e.g., by hiring influencers who happen
to have fake followers. The Commission
is clarifying this intent by adding a
definition of ‘‘distribute fake indicators
of social media influence’’ in § 465.1(g).
Although no commenter specifically
raised the issue in the context of § 465.8,
the Commission is adding the concept
of materiality to both § 465.8(a) and (b)
in terms of the scope of
misrepresentations covered therein, so
as to be consistent with other parts of
the rule.
A consumer organization said in its
comment that the Commission ‘‘should
clarify that ‘procure’ ’’ in § 465.8(b)
‘‘includes the creation of automated bot
or other fake accounts that ‘follow’ or
‘subscribe’ to an account, artificially
inflating the popularity of that
account.’’ 475 The Commission declines
to make this change. It is not the
creation of the bot or fake account,
itself, that the rule makes illegal, but the
use of the bot or fake account to follow
another user, watch another user’s
videos, or create other fake indicia of
social media influence. The same
commenter said the Commission should
‘‘remove the word ‘fake’ from the Rule
to clarify that it covers the purchase or
procurement of any social media
engagement . . . from both real and fake
accounts unless those incentives can be
disclosed to people who can view the
engagement.’’ 476 The use of
incentivized indicia of social media
influence is not necessarily deceptive in
all cases, and it is beyond the scope of
this rulemaking.
Finally, a trade association and a
retailer suggested changing the
prohibition in § 465.8(a) from selling or
distributing fake indicators that ‘‘can be
used’’ by persons to misrepresent their
influence to those that ‘‘are used’’ by
persons to misrepresent their
influence. 477 The trade association said
that ‘‘[a]pplying this section to
indicators of social media influence that
‘can be’ used for this purpose, but are
not, would mean that the rule prohibits
conduct that is not deceptive.’’ 478 Such
fake indicators are not physical
products that people collect and then
use later as desired. Instead, their
existence is premised on and limited to
situations in which they appear
deceptively on a social media site.
Therefore, any person or business that
obtains fake indicators of social media
influence is misrepresenting their social
media influence. While some
individuals may not be doing so for a
commercial purpose, those individuals
are excluded from the rule’s scope.
Further, a person or entity that is in the
business of selling or distributing fake
indicia of social media influence is
engaging in commerce, and it is
unreasonable to posit that no buyers
would use such indicia to misrepresent
their social media influence for a
commercial purpose. The Commission
therefore declines to make the suggested
modification.
I. § 465.9—Severability
Proposed § 465.9 provided that the
provisions of the rule are separate and
severable from one another and that, if
any provision is stayed or determined to
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479 NRF Cmt. at 2–3, 13–14; IAB Cmt. at 5, 15.
IAB also raised this issue in the context of the
informal hearing discussed above in section I of this
document. See, e.g., Petition by Interactive
Advertising Bureau to Designate Disputed Issues of
Material Fact (Feb. 12, 2024), https://www.ftc.gov/
system/files/ftc_gov/pdf/
r311003iabpetition20240212.pdf. As noted above,
the presiding officer at that hearing found that IAB
had not shown that compliance costs would be
more than minimal.
480 Camp-Martin Cmt. at 2–3.
481 Slezak Cmt. at 3. 	482 Transparency Company Cmt. at 6–9.
be invalid, the remaining provisions
shall continue in effect. The
Commission did not receive any
comments regarding proposed § 465.9.
The Commission is changing ‘‘shall
continue in effect’’ to ‘‘will continue in
effect’’ which is more precise. With that
clarification, the Commission is
finalizing § 465.9.
V. Final Rule
For the reasons described above, the
Commission has determined to adopt
the provisions of §§ 465.1, 465.2, and
465.4 through 465.9 with clarifying or
limiting modifications. The Commission
declines to finalize proposed § 465.3
regarding consumer review or
testimonial reuse or repurposing.
VI. Final Regulatory Analysis Under
Section 22 of the FTC Act
Under section 22 of the FTC Act, the
Commission, when it promulgates any
final rule for a ‘‘rule’’ as defined in
section 22(a)(1), must include a ‘‘final
regulatory analysis.’’ 15 U.S.C. 57b–
3(b)(2). The final regulatory analysis
must contain (1) a concise statement of
the need for, and objectives of, the final
rule; (2) a description of any alternatives
to the final rule which were considered
by the Commission; (3) an analysis of
the projected benefits, any adverse
economic effects, and any other effects
of the final rule; (4) an explanation of
the reasons for the determination of the
Commission that the final rule will
attain its objectives in a manner
consistent with applicable law and the
reasons the particular alternative was
chosen; and (5) a summary of any
significant issues raised by the
comments submitted during the public
comment period in response to the
preliminary regulatory analysis, and a
summary of the assessment by the
Commission of such issues. 15 U.S.C.
57b–3(b)(2)(A)–(E).
The Commission received several
comments that included elements that
the Commission identified as
specifically in response to the
preliminary regulatory analysis. Two
trade associations asserted that
compliance costs would be higher than
estimated by the Commission. These
associations stated that the risk of
statutory penalties would lead many of
their members to engage in compliance
activities beyond those assumed for the
high-cost compliance scenario in the
NPRM. 479 In the preliminary regulatory
analysis, the high-cost compliance
scenario assumed an average
compliance burden of 8 hours of
attorney time for firms with greater than
500 employees. This average is
consistent with some firms, especially
the largest ones in industries more
reliant on reviews and testimonials,
choosing to make more extensive
improvements to their compliance
programs. In addition, the Commission
has narrowed the rule and clarified the
rule requirements as described in
section IV of this document. For these
reasons, the Commission continues to
believe the high-cost scenario likely
overestimates compliance costs, and
chooses to not modify its estimate of
possible compliance costs for that
scenario, but it does present a
sensitivity analysis below that assesses
what effect systematic underestimation
of compliance costs would have on the
rule’s net benefits to the public.
One individual commenter asserted
that the benefits the Commission
estimated in the NPRM did not justify
the estimated compliance costs because
the same results could be obtained using
the FTC’s existing section 5
authority.480 As explained in detail in
this final regulatory analysis, the
Commission believes that the final rule
will increase deterrence of unfair or
deceptive acts or practices involving
consumer reviews and testimonials
relative to relying on its existing
authority and that the net benefits of the
rule justify its promulgation.
A second individual commenter
claimed that it was unreasonable to
assume that the rule would eliminate
the entire loss to consumers, in terms of
choosing products optimally, from the
impact of bad information in false
reviews. The commenter asserted that
deterrence would be only partial
because some circumstances would
make it difficult to identify such
reviews.481 The Commission believes
that its estimate of the benefits of
reducing manipulated reviews is
appropriate, as discussed further below.
However, the Commission presents
additional sensitivity analysis below
that assesses the effect of systematic
overestimation of the degree to which
the rule would fix review manipulation,
and determines that, even conceding
that point, the quantified net benefits
are highly positive.
Finally, a business offering third-party
review fraud detection tools offered
research that it claimed showed that the
rule would generate benefits of $180.83
billion and that the benefits would
outweigh the costs 100:1.482 These
estimates are similar to those of the
Commission.
A. Need for, and Objectives of the Final
Rule
The Commission believes that the
final rule will substantially improve its
ability to combat certain specified,
clearly unfair or deceptive acts or
practices involving consumer reviews or
testimonials. Although such unfair or
deceptive acts or practices are already
unlawful under section 5 of the FTC
Act, the rule will increase deterrence of
such conduct by allowing courts to
impose civil penalties against the
violators. In addition, the final rule will
allow the Commission to seek court
orders requiring violators to compensate
consumers for the harms caused by their
unlawful conduct. The Commission
believes that the rule will accomplish
these goals without significantly
burdening honest businesses and that
the rule will provide significant benefits
to consumers and honest competitors.
The final rule will allow courts to
impose civil penalties under section
5(m)(1)(A) of the FTC Act, 15 U.S.C.
45(m)(1)(A), against those who engage
in the deceptive or unfair conduct that
the final rule prohibits. The ability to
obtain civil penalties is important
because it can be difficult to quantify
consumer losses that stem from the use
of unfair or deceptive consumer reviews
and testimonials. Without civil
penalties, persons who engage in such
conduct might avoid monetary
consequences for their unlawful
conduct simply because there is
insufficient evidence to link their
unlawful conduct to quantifiable losses
suffered by consumers. And if there are
no monetary consequences, potential
wrongdoers have little incentive to
refrain from engaging in unlawful
practices. Because the final rule will
allow courts to impose civil penalties
for violations, it provides the deterrence
necessary to incentivize compliance
with the law, even in cases where it is
difficult to quantify consumer harm.
In addition, the final rule is necessary
to allow the Commission to recover
redress more efficiently to redress
consumer harm resulting from the
unfair or deceptive use of reviews or
testimonials. In 2021, the U.S. Supreme
Court in AMG Capital Management, LLC
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483 141 S. Ct. at 1352.
484 15 U.S.C. 53(b).
485 See ANPR, 87 FR at 67425, 67425 n.1
(discussing AMG Cap. Mgmt.).
486 See 15 U.S.C. 57b(a)(2) (‘‘If the Commission
satisfies the court that the act or practice to which
the cease-and-desist order relates is one which a
reasonable man would have known under the
circumstances was dishonest or fraudulent, the
court may grant relief.’’).
487 Certain statutes, such as the Restore Online
Shoppers’ Confidence Act, 15 U.S.C. 8401–05,
include provisions that treat violations of the
statute as a violation of a rule for purposes of
section 19(a)(1). See 15 U.S.C. 8404(a).
488 Fed. Trade Comm’n, Notice Announcing Ten-
Year Regulatory Review Schedule and Request for
Public Comment on the Federal Trade
Commission’s Regulatory Review Program, 76 FR
41150, 41150 (July 13, 2011), https://
www.govinfo.gov/content/pkg/FR-2011-07-13/pdf/
2011-17513.pdf (‘‘all rules and guides are scheduled
to be reviewed ten years after implementation and
ten years after completion of a regulatory review.’’)
v. FTC 483 ruled that section 13(b) of the
FTC Act 484 did not authorize the
Commission to seek court orders
requiring wrongdoers to return money
unlawfully taken from consumers
through unfair or deceptive acts or
practices or give up the unjust gains
they earned from engaging in such
unlawful conduct. The AMG ruling has
made it significantly more difficult for
the Commission to return money to
injured consumers, particularly in cases
that do not involve rule violations.485
Since AMG, the primary means for the
Commission to return money
unlawfully taken from consumers is
section 19 of the FTC Act, 15 U.S.C.
57b, which provides two paths for
consumer redress. The longer path,
under section 19(a)(2), typically requires
the Commission to first conduct an
administrative proceeding to determine
whether the respondent violated the
FTC Act; if the Commission finds that
the respondent did so, the Commission
issues a cease-and-desist order, which
might not become final until after the
resolution of any resulting appeal to a
Federal court of appeals. After the
conclusion of the administrative
proceeding (and any appeal), the
Commission must initiate an action in
Federal court to obtain monetary relief
under section 19 and, in that action, the
Commission must prove that the
violator engaged in objectively
fraudulent or dishonest conduct.486 In
effect, the section 19(a)(2) pathway
requires the Commission to file two
separate actions to obtain monetary
relief.
The more efficient path to monetary
relief is under section 19(a)(1), which
allows the Commission to recover
redress in one Federal court action for
violations of a Commission rule relating
to unfair or deceptive acts or
practices. 487 Only a small portion of the
Commission’s past cases challenging
unfair or deceptive consumer reviews or
testimonials involved rule violations
that would allow the Commission to
seek monetary relief under section
19(a)(1). With the final rule, however,
the Commission will be able to use
section 19(a)(1) to obtain redress for
consumer losses attributable to
violations of the rule.
Overall, outlawing egregious review
and testimonial practices in the final
rule expands the Commission’s
enforcement toolkit and allows it to
deliver on its mission by stopping and
deterring harmful conduct and, in some
cases, making American consumers
whole when they have been harmed.
The unfair or deceptive acts or practices
involving reviews and testimonials
encompassed by this final rule are
prevalent and harmful to consumers and
honest businesses. Thus, the unlocking
of additional remedies through this
rulemaking—particularly, the ability to
obtain civil penalties against violators
and redress for consumers or others
injured by the conduct—will allow the
Commission to more effectively police
and deter harmful review and
testimonial practices that plague
consumers and honest businesses.
B. Anticipated Costs and Benefits of the
Final Rule
As discussed below, the Commission
has determined that the rule’s benefits
greatly outweigh its costs. The rule
promotes accuracy in reviews and
testimonials by prohibiting certain
unfair or deceptive acts or practices
involving reviews and testimonials.
Thus, this rule will help the vast
majority of American consumers who
rely on such reviews and testimonials to
make better-informed purchase
decisions. The rule prohibits (1) the
creation, sale, purchasing, or
procurement from insiders of fake or
false reviews, and (2) buying of reviews
conditioned on the reviews expressing
particular sentiments. It also includes
prohibitions on fake or false consumer
or celebrity testimonials, certain insider
reviews without adequate disclosures,
misleading company-controlled review
websites or entities, certain review
suppression practices, and the misuse of
fake indicators of social media
influence.
In the analysis below, the
Commission describes the anticipated
impact of the rule. Where possible, the
Commission quantifies the benefits and
costs. If a benefit or cost is quantified,
the Commission indicates the sources of
the data relied upon. If an assumption
is needed, the analysis makes clear
which quantities are being assumed.
The Commission measures the benefits
and costs of the rule against a baseline
in which no rule has been promulgated
by the Commission. For the remainder
of section VI, and in the interest of
brevity, the term ‘‘reviews’’ collectively
refers to both reviews and testimonials.
Quantifiable benefits stem from
consumer welfare improvements and
consumer time savings. With the rule,
reviews will be more accurate overall,
leading consumers to purchase higher-
quality products or products that are
better-matched to their preferences. The
rule will also lead to more trustworthy
aggregate review ratings (e.g., star
ratings), leading some consumers to
spend less time scrutinizing reviews to
determine their validity. Quantifiable
costs primarily reflect the resources
spent by businesses to review the rule
and to take any preemptive or remedial
steps to comply with its provisions.
Because the rule is an application of
preexisting law under section 5 of the
FTC Act, the Commission expects these
compliance costs to be minimal.
A period of ten years is used in the
baseline scenario because FTC rules are
subject to review every ten years.488
Quantifiable aggregate benefits and costs
are summarized as the net present value
over this ten-year period in Table 1.1.
The discount rate reflects society’s
preference for receiving benefits earlier
rather than later; a higher discount rate
is associated with a greater preference
for benefits in the present. The present
value is obtained by multiplying each
year’s net benefit by a discount factor
raised to the power of the number of
years in the future the net benefit
accrues.
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68070 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
489 See, e.g., Dina Mayzlin, Promotional Chat on
the Internet, 25(2) Mktg. Sci., 155–63 (2006).
490 See, e.g., Chrysanthos Dellarocas, Strategic
Manipulation of Internet Opinion Forums:
Implications for Consumers and Firms, 52(10)
Mgmt. Sci., 1577–93 (2006), https://www.jstor.org/
stable/pdf/20110630.pdf; Michael Anderson &
Jeremy Magruder, Learning from the Crowd:
Regression Discontinuity Estimates of the Effects of
an Online Review Database, 122(563) Econ. J., 957–
89 (2012); Michael Luca & Georgios Zervas, Fake It
Till You Make It: Reputation, Competition, and
Yelp Review Fraud, 62(12) Mgmt. Sci., 3412–27
(2016), https://dash.harvard.edu/handle/1/
22836596; Jonathan Zinman & Eric Zitzewitz,
Wintertime for Deceptive Advertising?, 8(1) Am.
Econ. J. Applied, 177–92 (2016), https://
www.aeaweb.org/articles?id=10.1257/
app.20130346; Imke Reiners & Joel Waldfogel,
Digitization and Pre-purchase Information: The
Causal and Welfare Impacts of Reviews and Crowd
Ratings, 111(6) Am. Econ. Rev., 1944–71 (2021),
https://www.aeaweb.org/articles?id=10.1257/
aer.20200153.
491 In October 2021, the Commission authorized
a Notice of Penalty Offenses concerning
endorsement practices that the FTC determined to
be unfair or deceptive in prior administrative cases,
including falsely claiming an endorsement by a
third party; misrepresenting whether an endorser is
an actual, current, or recent user; and failing to
disclose an unexpected material connection with an
endorser. See, e.g., Press Release, Fed. Trade
Comm’n, FTC Puts Hundreds of Businesses on
Notice about Fake Reviews and Other Misleading
Endorsements (Oct. 13, 2021), https://www.ftc.gov/
news-events/news/press-releases/2021/10/ftc-puts-
hundreds-businesses-notice-about-fake-reviews-
other-misleading-endorsements. The notice allows
the agency to seek civil penalties pursuant to
section 5(m)(1)(B) of the FTC Act against a company
that received the notice and then engages in
conduct that the Commission previously
determined to be unfair or deceptive. 15 U.S.C.
45(m)(1)(B).
492 15 U.S.C. 57b(a)(2). Depending on the
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).
TABLE 1.1—PRESENT VALUE OF NET BENEFITS
[2024–2033 (in billions)]
Present value:
low-end estimate Present value:
high-end estimate
Total Benefits:
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
This section describes the beneficial
impact of the rule, provides quantitative
estimates where possible, and describes
benefits that are only assessed
qualitatively. The quantifiable estimates
reflect benefits stemming from the
decrease in online review manipulation
on third-party platforms or company
websites, which covers most of the
prohibitions contained in the rule. This
analysis does not calculate benefits from
the other aspects of the rule—that is, the
prohibitions on fake or false celebrity
testimonials, company-controlled
entities that deceptively purported to
provide independent opinions, review
suppression, and the misuse of fake
indicators of social media influence—
because of the limited quantitative
research in these areas. Some of these
benefits are likely to be substantial. The
quantified benefits are presented by
benefit category, rather than stemming
from a specific provision of the rule,
because the relevant provisions have the
same end goal—that is, to improve the
information available to consumers by
reducing the level of review
manipulation. Therefore, it is difficult to
disentangle the benefits stemming from
each provision.
Existing academic literature in
economics, marketing, computer
science, and other fields documents the
importance of online reviews;
specifically that the number of online
reviews and aggregate ratings are
extremely important for consumer
purchase decisions. It is widely
documented that the presence of online
reviews improves consumer welfare via
reductions in both search costs and the
level of information asymmetry that
exists prior to purchase.489
When making purchase decisions,
consumers typically have incomplete
information on product quality and
attributes. Searching for additional
information is costly. Consumers incur
costs—including time and effort costs—
to seek, evaluate, and integrate
incoming information. Online platforms
where past users share information
about their experiences can significantly
lower search costs.
Researchers have also demonstrated
that consumer reviews create value for
consumers beyond a reduction in search
costs. Consumers are better able to learn
of a product’s quality and attributes
when there is free-flowing, non-
manipulated commentary from past
consumers. Consumer reviews lead to
‘‘better’’ decisions by increasing the
level of information available prior to
purchase and reducing uncertainty. By
the same token, the academic literature
also documents that manipulated or
fake reviews lead to reductions in
consumer welfare by leading consumers
to buy low-quality products or
otherwise make suboptimal purchase
decisions. 490
A secondary benefit is deterrence of
the specified review practices. The rule
is essentially the only means for
imposing civil penalties in most cases
involving such practices. Civil penalties
are not available for conduct that
violates section 5(a)’s prohibition on
unfair or deceptive acts or practices—
rather, a violation of an FTC rule is
necessary to impose civil penalties
under section 5(m)(1)(a). Civil penalties
act as a deterrent to fraud and deception
in connection with reviews.491
To obtain redress without alleging a
rule violation, the Commission must
typically first determine in an
administrative proceeding that the
respondent violated the FTC Act,
successfully defend that determination
in any appeal to a Federal court of
appeals, and then initiate a second
action in Federal district court under
section 19(a)(2) in which the
Commission must prove that the
conduct at issue is ‘‘one which a
reasonable man would have known
under the circumstances was dishonest
or fraudulent.’’ 492 Although these
requirements are likely to be satisfied in
cases involving the conduct covered by
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68071	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
493 See, e.g., Press Release, Fed. Trade Comm’n,
Marketers of Ab Force Weight Loss Device Agree to
Pay $7 Million for Consumer Redress (Jan. 14,
2009), https://www.ftc.gov/news-events/news/press-
releases/2009/01/marketers-ab-force-weight-loss-
device-agree-pay-7-million-consumer-redress
(describing a 2009 settlement of a follow-on section
19(a)(2) action against Telebrands Corp. that was
brought after the conclusion of litigation over a
2003 administrative complaint alleging violations of
section 5).
494 See Jesper Akesson et al., The Impact of Fake
Reviews on Demand and Welfare, National Bureau
of Economic Research Working Paper 31836, Nov.
2023, https://www.nber.org/papers/w31836.
495 See U.S. Census Bureau, Quarterly Retail E-
Commerce Sales 4th Quarter 2023, Feb. 20, 2024,
https://www2.census.gov/retail/releases/historical/
ecomm/23q4.pdf.
496 U.S. Census Bureau, Service Annual Survey
(SAS), Jan. 30, 2024, https://www.census.gov/
programs-surveys/sas.html (listing total revenue of
$980,153,000,000 for NAICS Code 722 in 2022, the
most recent year with data).
497 See Michael Luca, Reviews, Reputation, and
Revenue: The Case of Yelp.com, Harvard Bus. Sch.
Working Paper 12–016 (2016).
498 Twenty-five percent is likely a reasonable
estimate based on the difference in revenues for
new restaurants and established restaurants. A
study conducted by Toast, Inc., found that new
restaurants earn approximately $112,000 in average
revenue per year. Justin Guinn, What is the Average
Restaurant Revenue for a New Restaurant?, https://
pos.toasttab.com/blog/on-the-line/average-
restaurant-revenue (last visited July 5, 2024). This
is approximately twenty-five percent of average
revenue for restaurants overall ($486,000, according
to the website Eat Pallet, see Shari Mason, How
Much Do Restaurants Make in a Day? Solved, May
24, 2024, https://eatpallet.com/how-much-do-
restaurants-make-in-a-day).
499 See U.S. Census Bureau, Service Annual
Survey (SAS), supra note 496 (listing total 2022
revenue of $316,350,000,000 for NAICS Code 721
and listing total 2022 revenue of $67,698,000,000
for NAICS Codes 812111 through 812199 and
NAICS Code 81291.
500 See Linchi Kwok, Will Business Travel
Spending Return to the Pre-Pandemic Level Soon?,
Hospitality Net, Sept. 22, 2022, https://
www.hospitalitynet.org/opinion/4112075.html.
501 These estimates range from the single digits to
over twenty percent. See Tripadvisor, 2023 Review
Transparency Report, https://www.tripadvisor.com/
TransparencyReport2023 (last visited July 5, 2024)
(finding that 4.4 percent of review submissions
were fraudulent); Trustpilot, Transparency Report
2024, https://assets.ctfassets.net/b7g9mrbfayuu/
7p63VLqZ9vmU2TB65dVdnF/6e47d9ee81c145b5
e3d1e16f81bba89a/Trustpilot_Transparency_
Report_2024.pdf (last visited July 5, 2024) (stating
that its software removed 6 percent of reviews due
to being fake); Yelp, 2023 Yelp Trust & Safety
Report (Feb 28, 2024), https://trust.yelp.com/trust-
and-safety-report/2023-report (stating that 16
percent of submitted reviews were marked as ‘‘not
recommended’’ by Yelp’s software); Devesh Raval,
Do Gatekeepers Develop Worse Products? Evidence
from Online Review Platforms, (Feb. 27, 2023),
https://deveshraval.github.io/reviews.pdf (Working
Paper) (finding that the share of hidden (likely fake)
Yelp reviews is as high as 47 percent).
the rule, it would take substantially
more time and resources, and would
significantly delay any redress to
consumers, compared to a single
Federal court action alleging a rule
violation, in which the court adjudicates
both whether the defendant violated the
rule and, if so, the appropriate amount
of monetary relief to award.493
Given the prevalence of unfair or
deceptive conduct involving reviews
and testimonials, the Commission will
have no shortage of bad actors to
investigate; it can invest the extra
resources freed up by the final rule into
more investigations and actions with
respect to consumer reviews or
testimonials. In sum, the potential
consumer-redress benefits of the rule are
significant: the Commission can put a
stop to more inarguably unfair or
deceptive consumer reviews, return
more money to consumers, and obtain
that redress more quickly.
a. Consumer Welfare Benefits From
Better-Informed Purchase Decisions
The study containing the most direct
estimate of welfare losses from review
manipulation finds that the presence of
fake reviews leads consumers to lose
$0.12 for every dollar spent in an
experimental setting.494 The study
considers a limited number of kinds of
review manipulation, which notably
does not include suppression of
negative reviews or misrepresenting the
independence of reviews, which might
mean that $0.12 is an underestimate of
the effect of the rule. However, the
study also measures the effect of
complete elimination of inflated star
ratings and false written narratives,
which might mean that $0.12 is an
overestimate of the effect of the rule.
Thus, the Commission believes that a
reasonable proxy for the effect of the
rule’s elimination of much review
manipulation is that consumers will
gain an estimated $0.12 for every dollar
spent on goods whose online reviews
included fake or false ones.
To estimate consumer welfare benefits
from better-informed purchase
decisions, the Commission first
estimates the total amount of sales for
which consumers consult online
reviews. U.S. e-commerce sales by retail
firms totaled $1.119 trillion in 2023.495
The Commission assumes that all online
retail sales had some form of user-
generated commentary (e.g., on third-
party review platforms or on company
websites), and that this commentary
factored into consumers’ purchase
decisions for these goods.
Online reviews are also important for
commerce that is not conducted online,
including for revenues earned by the
hospitality industry and by other
services. Sales for businesses classified
as ‘‘Food Services and Drinking Places’’
by the U.S. Census totaled $980.15
billion in 2022, which includes revenue
from restaurants and bars. 496 The
Commission assumes that consumers
rely on reviews for only a portion of
these sales. Some consumers—
particularly those living in rural parts of
the country and in smaller cities—may
have a small set of familiar food and
drink establishments available to them,
making online reviews less influential
to their decision to patronize a
particular one. Moreover, prior research
has found that online reviews do not
impact revenues of chain restaurants.497
Accordingly, the Commission assumes
that consumers rely on reviews for
twenty-five percent of the total revenue
generated in the food services and
drinking places sector (twenty-five
percent of $980.15 billion, or $245.04
billion).498
Online reviews are also important for
sales in other service sectors. In 2022,
total revenue was $316.35 billion for the
accommodations sector (which includes
hotels and vacation rentals), and total
revenue was $67.70 billion for personal
services (including beauty salons, barber
shops, health clubs, and non-veterinary
pet care), totaling $384.05 billion for
both sectors.499 About half of hotel
revenue is generated by business
travelers, who might rely less on online
reviews than leisure travelers do.500 In
addition, pre-paid hotel bookings and
vacation rentals booked online are
already accounted for in the e-
commerce sales figure described above.
Furthermore, some consumers may be
loyal customers of local salons and
other personal services, regardless of
these businesses’ online reputations. For
these reasons, the Commission assumes
that a subset of accommodation and
personal services revenues is affected by
consumer reviews. Similar to the
calculation for the food and drinking
places industry, the Commission
assumes that twenty-five percent of total
accommodation and personal care
services revenue is impacted by
consumer reviews (twenty-five percent
of $384.05 billion, or $96.01 billion).
The total estimated revenue for services
impacted by consumer reviews is
$341.05 billion (the sum of $245.04
billion and $96.01 billion). Combining
the revenue estimates described above
yields $1.461 trillion in estimated sales
of goods or services for which
consumers incorporate reviews into
their decision-making.
Quantitative estimates of the
incidence of fake or false reviews vary
by source.501 Nevertheless, at least three
prior studies examining the degree of
review manipulation as a proportion of
businesses or products (rather than as a
proportion of reviews) contain similar
findings. According to these studies,
approximately ten percent of products
or businesses have some manipulated
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68072 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
502 See Nan Hu et al., Manipulation of Online
Reviews: An Analysis of Ratings, Readability, and
Sentiments, 52(3) Decision Support Systems 674–84
(Feb. 2012) (finding that 10.3 percent of books sold
on Amazon had manipulated reviews); Luca, Fake
It Till You Make It: Reputation, Competition, and
Yelp Review Fraud, supra note 490 (finding that ten
percent of Boston restaurants had filtered 5-star
reviews on Yelp) (Table 3, row 4); Raval, Do
Gatekeepers Develop Worse Products? Evidence
from Online Review Platforms, supra note 501
(finding that 9.7 percent of businesses with reviews
or complaints with the Better Business Bureau are
of low quality, where fake reviews inflate ratings)
(Table III, column 3, row 1).
503 See, e.g., Sherry He et al., The Market for Fake
Reviews, 41(5) Mktg. Sci. 896 (2022), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3664992; Dina Mayzlin et al., Promotional
Reviews: An Empirical Investigation of Online
Review Manipulation, 104(8) Am. Econ. Rev. 2421–
55 (2014).
504 See Davide Proserpio et al., How Fake
Customer Reviews Do—and Don’t—Work, Harvard
Bus. Rev., Nov. 24, 2020, https://hbr.org/2020/11/
how-fake-customer-reviews-do-and-dont-work. The
authors find that products sold on Amazon with
manipulated reviews are typically in the $15 to $40
price range. The midpoint of this range ($27.50)
represents 19 percent of the average product’s price
($142.74, according to one study see Semrush Inc.,
Amazon Pricing Study: The Most Expensive
Products, Category Volatility, and Seasonal Price
Shifts, Mar. 22, 2022, https://www.semrush.com/
blog/amazon-pricing-study).
505 E-commerce sales increased by 7.6 percent
from 2022 to 2023. See U.S. Census Bureau,
Quarterly Retail E-Commerce Sales 4th Quarter
2023, supra note 495. Using growth in the past year
to predict future e-commerce sales results in a more
conservative estimate than using a longer time
frame. E-commerce sales experienced higher annual
growth rates prior to 2021 (14 percent from 2018
to 2019, 43 percent from 2019 to 2020, and 14
percent from 2020 to 2021) and grew 7.7 percent
from 2021 to 2022. This analysis does not project
revenues for non-e-commerce industries because
linear trends during recent years are unique to the
pandemic and are unlikely to be accurate for future
years.
506 See Pew Research Center, Online Shopping
and E-Commerce, Dec. 19, 2016, https://
www.pewresearch.org/internet/2016/12/19/online-
shopping-and-e-commerce.
507 See Int’l Post Corp., Cross-Border E-Commerce
Shopper Survey 2022, Jan. 2023, https://
www.ipc.be/-/media/documents/public/
publications/ipc-shoppers-survey/
onlineshoppersurvey2022.pdf.
508 See BrightLocal, Local Consumer Review
Survey 2019, Dec. 11, 2019, https://
www.brightlocal.com/research/local-consumer-
review-survey-2019.
consumer reviews.502 Thus, a basic
approximation of total e-commerce sales
involving some review manipulation is
ten percent of $1.119 trillion, or $111.9
billion. Similarly, a basic approximation
of review-dependent service industry
sales involving some review
manipulation is ten percent of $341.05
billion, or $34.1 billion.
Importantly, online businesses that
engage in review manipulation are
likely to earn less revenue than other e-
commerce companies. For example,
prior research has found that
independent firms and sellers offering
lower-quality products are more likely
to engage in review manipulation.503
Therefore, e-commerce sales affected by
review manipulation are likely to be
lower than the $111.9 billion in sales
described above. A more conservative
estimate of e-commerce sales involving
review manipulation can be obtained by
using price differentials of review-
manipulated products versus others.
Because products with online review
manipulation have price points that are
approximately 19 percent of the average
price of goods sold online (according to
research using data from Amazon),504 a
more conservative estimate of review-
manipulated products’ revenue is 1.9
percent (19 percent × 10 percent) of all
$1.119 trillion in e-commerce sales, or
$21.26 billion. Because the Commission
does not have data on the revenue or
quantities sold of review-manipulated
products, it assumes that revenue is
constant across price points and relies
solely on the price differential to
approximate revenue. The Commission
does not similarly adjust revenues for
non-e-commerce firms (e.g., restaurant
and hotels) because there is less
variation in prices in those industries.
The Commission estimates annual
welfare gains by applying the $0.12
estimate, described above, to the
estimated amount of U.S. sales that are
likely to have some manipulated
consumer reviews, yielding an annual
estimate of welfare gains in the range of
$6.64 billion (12 percent of $55.36
billion, the sum of $21.26 billion and
$34.1 billion) and $17.52 billion (12
percent of $146.0 billion, the sum of
$111.9 billion and $34.1 billion).
Assuming that e-commerce sales
increase linearly over the next ten years
at the same rate as they did in the past
year,505 the present value of consumer
welfare improvements from better-
informed purchasing decisions is
estimated to be between $57.03 and
$230.36 billion as described in Table
2.1.
TABLE 2.1—ESTIMATED BENEFITS FROM CONSUMER W ELFARE IMPROVEMENTS FROM P URCHASE DECISIONS
[2024–2033]
Percent of e-commerce revenue impacted
by review manipulation
Total annual
welfare improvements
from better-informed
purchase decisions
(in billions)
Total 10-year
(2024–2033)
welfare improvement,
3% discount rate
(in billions)
Total 10-year
(2024–2033)
welfare improvement,
7% discount rate
(in billions)
10 ................................................................................................. 	$17.52 	$230.36 	$196.91
1.9 ................................................................................................ 	6.64 	67.40 	57.03
b. Consumer Time Savings From
Increased Reliability of Summary
Ratings
The rule’s prohibitions against
deceptive and unfair consumer review
acts and practices would increase the
reliability of consumer reviews. The
Commission assumes that this
improvement in the dependability of
reviews will lead consumers to place
more trust in aggregate measures (e.g.,
aggregate star ratings), which many
review settings use to summarize
consumer reviews. This in turn will
lead some consumers to spend less time
scrutinizing individual reviews to detect
red flags commonly found in
manipulated reviews (e.g., spelling and
grammar mistakes, generic highly
positive or negative statements, and lack
of detail). Therefore, the rule is likely to
result in some amount of time savings
for consumers who consult online
reviews before making purchases.
Approximately eighty percent of
Americans are online shoppers.506 Of
those who shop online, fourteen percent
shop online more than once a week,
twenty percent shop online once a
week, twenty-three percent shop online
once every two weeks, twenty-five
percent shop online once a month, and
the remainder do so every few
months.507 Different age groups of
online shoppers spend various amounts
of time reading reviews before making a
purchase decision. On average, younger
consumers spend more time reading
reviews than older consumers.508 This
analysis does not incorporate time spent
by consumers researching reviews of
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68073	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
509 Bureau of Labor Statistics, May 2023 National
Occupational and Wage Estimates, Unites States,
https://www.bls.gov/oes/current/oes_nat.htm
(listing mean hourly wage of $31.48 for all
occupations).
510 See Daniel S. Hamermesh, What’s to Know
About Time Use?, 30 J. of Econ. Survs. 198–203
(2016), https://doi.org/10.1111/joes.12107.
511 See Luca, Reviews, Reputation, and Revenue:
The Case of Yelp.com, supra note 497 (finding that
chain restaurants have declined in market share as
Yelp penetration has increased); Gregory Lewis and
Georgios Zervas, The Welfare Impact of Consumer
Reviews: A Case Study of the Hotel Industry,
https://economics.sas.upenn.edu/sites/default/files/
filevault/u475/tawelfare.pdf (Working Paper)
(finding that demand for independent hotels is
more sensitive to reviews on Tripadvisor); Brett
Hollenbeck, Online Reputation Mechanisms and
the Decreasing Value of Chain Affiliation, 55(5) J.
of Mktg. Resch. 636–54 (2018), https://
www.jstor.org/stable/26966532 (finding that
branded, chain-affiliated hotels’ premiums over
independent hotels have declined substantially
largely due to online reputation mechanisms).
512 See Limin Fang, ‘‘The Effects of Online Review
Platforms on Restaurant Revenue, Consumer
Learning, and Welfare’’ 68(11) Mgmt. Sci. 7793–
8514 (2022).
513 See Theodoros Lappas et al., The Impact of
Fake Reviews on Online Visibility: A Vulnerability
Assessment of the Hotel Industry, 27(4) Inf. Sys.
Research 940–961 (2016), https://
pubsonline.informs.org/doi/abs/10.1287/
isre.2016.0674.
restaurants, hotels, and other goods and
services that are not purchased online
because of the limited amount of
information available regarding
consumers’ total time spent on such
activities.
According to the Bureau of Labor
Statistics, the average hourly wage in
2023 was $31.48.509 Recent research
suggests that individuals living in the
United States value their non-work time
at eighty-two percent of average hourly
earnings.510 Thus, Americans overall
value their non-work time at $25.81 per
hour on average.
The survey data does not specify
whether consumers were surveyed
regarding the time spent reading
reviews before the purchase of a single
product or whether the question
concerned the purchase of multiple
products. This analysis assumes that the
time listed in the survey results pertains
to the purchase of a single product. It
also assumes that the implementation of
the rule will reduce the time spent
reading reviews by ten percent.
Combining the above figures results in
$2.49 billion in consumer time savings
per year, or a present value of $33.53
billion to $39.19 billion over a 10-year
period, as described in Table 2.2.
In addition, there are likely to be
other utility-related benefits consumers
receive when reading nonmanipulated
online reviews or consulting more
accurate aggregate summary measures,
such as increased satisfaction (apart
from purchasing decisions) and
decreased frustration. The Commission
is not able to quantify these benefits.
Finally, some consumers may spend
more time reading reviews if reviews are
less likely to be fake or otherwise
manipulated. This increase in time
spent reading reviews may offset any
time savings from the increased
reliability of summary ratings.
Therefore, the Commission presents
another scenario in Table 2.2 where
consumers do not gain any benefits from
time savings. However, as before, there
are likely to be additional benefits that
are difficult to quantify (e.g., decreased
frustration) that result from reading
more accurate reviews, likely yielding
positive net benefits related to reading
reviews even when consumers spend
more time doing so.
T ABLE 2.2—ESTIMATED BENEFITS F ROM TIME SAVINGS
[2024–2033]
Scenario 1—Improved Reliability of Aggregate Measures Reduces Overall Time Spent Reading Reviews
Number of online shoppers, age 18–34 a ................................................................................................................................ 	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 35–54 a ................................................................................................................................ 	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
a 80% of age-specific total U.S. population (Source: Pew Research Center, U.S. Census).
b Adjusting for online shopping frequency (Source: International Post Corporation).
c. Benefits Related to Competition
Accurate online reviews have been
shown to improve competition. Several
studies have found that online reviews
are particularly important for
independent and newer firms.511
Ratings are more influential for these
firms because consumers do not have
strong prior beliefs as to their quality.
New entrants whose sales benefit from
online reviews typically offer higher
quality goods and services. On the other
hand, lower-quality firms often
experience revenue losses with more
online review activity.512
Relatedly, fake, false, and
manipulated online reviews allow
companies to surpass competitors. One
study found that it only takes 50 fake
reviews for a seller to pass any of its
competitors in terms of visibility (e.g.,
via rankings or search results).513 It
follows that by curbing the number of
fake, false, or manipulated reviews, the
rule would benefit consumers by
improving the competitive environment
for legitimate firms selling higher-
quality products (i.e., those who do not
rely on review manipulation to sell their
goods). While the benefits resulting
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68074 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
514 See U.S. Census Bureau, 2021 SUSB Annual
Data Tables by Establishment Industry, https://
www.census.gov/data/tables/2021/econ/susb/2021-
susb-annual.html (last visited July 5, 2024) (listing
6.29 million total firms with at least one paid
employee) and U.S. Census Bureau, Nonemployer
Statistics, https://www.census.gov/programs-
surveys/nonemployer-statistics.html (listing 28.48
million firms with no paid employees) (last visited
July 5, 2024).
515 Seventy-four percent of small businesses have
at least one Google review. See BrightLocal, Google
Reviews Study: How Many Reviews Do Local
Businesses Need?, Oct. 31, 2018, https://
www.brightlocal.com/research/google-reviews-
study/.
516 See Bureau of Labor Statistics, Occupational
Outlook Handbook: Lawyers, https://www.bls.gov/
ooh/legal/lawyers.htm (last visited July 5, 2024).
517 See Payscale, Average Small Business Owner
Salary, https://www.payscale.com/research/US/
Job=Small_Business_Owner/Salary (last visited July
5, 2024) (reporting median base salary of $69,648
for small business owners). We assume small
business owners work 2,080 hours per year.
from improvements in the competitive
environment are difficult to quantify,
the Commission believes they are likely
to be substantial.
2. Estimated Costs of the Final Rule
This section describes the costs
associated with the rule, provides
quantitative estimates where possible,
and describes costs that are only
assessed qualitatively. While the
Commission only quantifies benefits
from reduced review manipulation and
not the other rule provisions above, the
Commission quantifies compliance
costs for all aspects of the rule.
a. Compliance Costs
The acts and practices prohibited by
the rule are unfair or deceptive under
section 5 of the FTC Act. The rule
targets acts or practices that are clear
violations of section 5, and businesses
that are already compliant will not
experience any additional compliance
costs as a result of the rule. Moreover,
the FTC routinely provides guidance to
businesses on complying with FTC law,
which will make the implications of the
rule easy to understand for a wide range
of businesses. Finally, in response to the
comments, the Commission has both
narrowed and clarified the rule
requirements relative to the proposed
rule (see section IV of this document).
Accordingly, one of the scenarios
reflected in Table 3.1 assumes that
businesses will spend a de minimis
amount of time interpreting the rule and
make no changes to their current
policies.
However, because businesses now
face the potential for civil penalties if
they engage in conduct that violates the
final rule, businesses may choose to
incur additional administrative burdens
to ensure compliance. The Commission
presents another scenario in Table 3.1
where businesses notify their employees
of the rule, conduct a review of their
processes, and take any steps they deem
important to ensure compliance. For
firms that already comply with section
5 of the FTC Act, these steps might be
out of caution so as not to risk the
possibility of violating the rule. For
example, some sellers may currently
flag and remove reviews on their
websites that they reasonably believe
are fake. While this practice would not
amount to a violation of the relevant
rule provision (§ 465.7(b)), the rule may
lead some businesses to choose to take
extra steps to verify the inauthenticity of
such reviews before suppressing them.
A business may also decide to notify its
employees of the rule. For example, if
certain employees are responsible for
posting new product pages or managing
the company’s social media presence,
business owners may wish to notify
these employees to ensure compliance.
Although cautious firms may elect to
conduct additional compliance review,
the rule would not require any
additional recordkeeping or notices
beyond what is required by section 5 of
the FTC Act.
For the heightened compliance review
scenario in Table 3.1, the Commission
makes assumptions about the number of
businesses impacted and the number of
person-hours involved in compliance
activities. In 2021, there were
approximately 34.77 million total firms
in the United States. Of these firms,
19,688 had 500 or more employees
(‘‘large companies’’), and the remaining
34.75 million had fewer than 500
employees (‘‘small companies’’).514 The
Commission assumes that all 19,688
large companies had some form of
online consumer review presence (e.g.,
on third-party business platforms such
as Yelp or Google Reviews, or on their
own websites). It assumes that 74
percent of the 34.75 million small
companies (25.71 million companies)
had an online consumer review
presence.515
With heightened compliance review,
the Commission assumes that lawyers at
large companies, whose time is valued
at $70.08 per hour,516 will spend eight
hours conducting a one-time review of
the rule and notifying employees whose
role involves creating new product
pages, managing the company’s social
media presence, and any other relevant
practices covered by the rule. It assumes
that small company owners, whose time
is valued at $33.48,517 and are less
likely have formal compliance
programs, spend one hour doing the
same.
In addition, some companies may
spend time reviewing their automated
processes to ensure that they comply
with the rule. These costs, which
companies might incur just once or on
a recurring basis, are likely to be
minimal. The Commission does not
quantify these process-related costs
because, among other things, the
Commission does not know the number
of firms that might undertake such a
review.
The total estimated costs are tabulated
in Table 3.1.
TABLE 3.1—ESTIMATED COMPLIANCE COSTS
2024 Only
Scenario 1—No Review
No cost ........................................................................................................................................................................................... 	$0
Total cost ................................................................................................................................................................................ 	$0
Scenario 2—Heightened Compliance Review
Number of large companies (in thousands) .................................................................................................................................. 	19.69
Cost per hour of rule review and related activities ....................................................................................................................... 	$70.08
Number of hours of rule review and related activities .................................................................................................................. 	8
Subtotal (in millions) ...................................................................................................................................................................... 	$11.04
Number of small companies with online reviews (in thousands) .................................................................................................. 	25,715.23
Cost per hour of rule review and related activities ....................................................................................................................... 	$33.48
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68075	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
518 See Akesson, The Impact of Fake Reviews on
Demand and Welfare, supra note 494 (reviews for
inferior products that had inflated star ratings but
accurate written narratives caused consumers to
lose $0.04 in welfare for every dollar spent).
T ABLE 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
There are several other potential
effects from the rule. While the
proposed requirements are far from
onerous, there is the possibility that
some sellers may ‘‘overcorrect’’ in
response to the penalties available for
rule violations. For example, a firm may
encounter an excess of fake, negative
reviews from a competitor. While
§ 465.7(b) permits the suppression of
reviews that the seller reasonably
believes are fake, an overcautious seller
seeking to suppress fake reviews from
competitors may choose to display no
reviews whatsoever so as not to risk
violating the rule. Alternatively, such a
firm may take no action towards
suspected fake reviews to avoid a
possible rule violation. Both of these
hypothetical scenarios would likely hurt
the information environment for
consumers. The Commission believes
that such unintended consequences of
the rule are very unlikely, especially in
light of how the rule has been clarified
and narrowed in response to the
comments.
C. Reasonable Alternatives and
Explanation of Why Particular
Alternative Chosen
The Commission has attempted to
catalog and quantify the incremental
benefits and costs of the provisions
included in the final rule. Extrapolating
these benefits over the 10-year
assessment period and discounting to
the present provides an estimate of the
present value for total benefits and costs
of the rule, with the difference—net
benefits—providing one measure of the
value of regulation.
Using our low-end estimate above, the
present value of quantified benefits for
consumers from the rule’s requirements
over a 10-year period using a 7%
discount rate is estimated at $57.03
billion. The present value of quantified
costs for covered firms of complying
with the rule’s requirements over a 10-
year period using a 7% discount rate is
estimated at $0.83 billion. This
generates an estimate of the present
value of quantified net benefits equal to
$56.16 billion using a discount rate of
7%. Using the upper-end assumptions
discussed in the preceding analysis
results in net benefits of $230.44 billion
using a discount rate of 7%.
To examine the sensitivity of the net
benefits conclusions to the possibility of
systematic underestimating of
compliance costs, the Commission
calculates costs and benefits in a
scenario where all labor costs turn out
to be ten times larger than the parameter
values in the heightened compliance
review scenario. For both small and
large companies, the number of hours of
rule review and related activities are
increased by a factor of ten. All benefits
and other cost parameters are
unchanged in this analysis. With these
new parameters, compliance review will
cost $8.72 billion in 2024, and the
present value of quantified net benefits
will be equal to $48.31 billion using a
discount rate of 7%. Thus, while the
Commission believes compliance costs
in the heightened compliance scenario
are likely overestimates, even if they are
instead severe underestimates, the
quantified net benefits are highly
positive.
To examine the sensitivity of the net
benefits conclusions to the possibility of
systematic overestimating of the
effectiveness of deterrence, the
Commission calculates costs and
benefits in a scenario in which the rule
only partially eliminates the welfare
losses to consumers caused by the
various types of review manipulation
covered by the rule. For this scenario,
the Commission instead assumes that
consumers will gain an estimated $0.04,
rather than $0.12, for every dollar spent
on goods whose online reviews
included fake or false ones, the
minimum welfare improvement
reported for partial elimination of
review manipulation in the study on
which these estimates are based.518
Under this scenario, the present value of
quantified net benefits under a 7%
discount rate is $18.14 billion instead of
$56.16 billion. Combining the two
scenarios, if the Commission both
systematically underestimates
compliance costs and systematically
overestimates the effectiveness of the
rule in preventing review manipulation,
the present value of quantified net
benefits under a 7% discount rate is
$10.29 billion. Thus, even if the main
compliance cost estimates above are
underestimates and the main welfare
benefits above are overestimates, the
quantified net benefits are highly
positive.
One alternative to the final rule would
be to terminate the rulemaking and rely
instead on the existing tools that the
Commission currently possesses to
combat the specified review and
testimonial practices, such as consumer
education and enforcement actions
brought under sections 5 and 19 of the
FTC Act. Failing to strengthen the set of
tools available in support of the
Commission’s enforcement program
against unfair or deceptive consumer
reviews or testimonials would deprive it
of the net benefits outlined above.
The Commission expects
unquantified benefits to outweigh
unquantified costs for this rule. As
noted above, the benefits from several
rule provisions are unquantified, while
the compliance costs of all rule
provisions are quantified. Thus, the
quantified net benefits of $56.16 billion
above likely underestimate the benefits
to the public. Furthermore, these
estimates are robust to uncertainty. Even
assuming systematic underestimation of
compliance costs and systematic
overestimation of the rule effectiveness,
the quantified net benefits are large and
positive. Therefore, this regulatory
analysis indicates that adoption of the
rule will result in benefits to the public
that outweigh the costs.
VII. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
Federal agencies to seek and obtain
Office of Management and Budget
(‘‘OMB’’) approval before undertaking a
collection of information directed to ten
or more persons. As part of the NPRM,
the Commission noted that the proposed
rule did not contain an information
collection requirement. However, for the
purpose of confirmation, in Question 4
of the NPRM, the Commission
nonetheless asked commenters whether
the proposed rule contained a collection
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68076 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
519 NPRM, 88 FR 49388.
520 Transparency Company Cmt. at 10.
521 See 5 U.S.C. 605(b). 	522 See infra section VIII.F of this document.
523 Camp-Martin Cmt. at 2–3.
524 NPRM, 88 FR 49388.
525 IAB Cmt. at 1–15.
526 Id. at 2, 5–6, 8–9, 10.
of information. 519 One commenter
responded, ‘‘Yes, it does. It contains our
research and others’ research, as well as
valuable estimates to harm/costs for all
3 parties: consumers, businesses, and
government.’’ 520 The Commission
believes that this commenter was
addressing whether the NPRM was
collecting information, as opposed to
whether the proposed rule would
contain a collection of information
within the meaning of the PRA. No
other comments responding to the
NPRM or Notice of Hearing addressed
this question. While the Commission
finalizes the proposed rule with some
limiting modifications and clarifications
based on the comments it received, it
has not added any new requirements
that would collect information from the
public. Accordingly, the Commission
has determined that the final rule
neither includes a new collection of
information, nor modifies an existing
collection of information.
VIII. Regulatory Flexibility Act—Final
Regulatory Flexibility Analysis
The Regulatory Flexibility Act
(‘‘RFA’’), 5 U.S.C. 601 et seq., requires
an agency to provide an Initial
Regulatory Flexibility Analysis
(‘‘IRFA’’) with a proposed rule and a
Final Regulatory Flexibility Analysis
(‘‘FRFA’’) with a final rule, if any,
unless the Commission certifies that the
rule will not have a significant
economic impact on a substantial
number of small entities.521 The
purpose of a regulatory flexibility
analysis is to ensure that an agency
considers potential impacts on small
entities and examines regulatory
alternatives that could achieve the
regulatory purpose while minimizing
burdens on small entities.
In the NPRM, the Commission
provided an IRFA, stating its belief that
the proposal will not have a significant
economic impact on small entities, and
soliciting comments on its burden
estimate. In addition to publishing the
NPRM in the Federal Register, the
Commission announced the proposed
rule through press and other releases.
The Commission received comments
from small businesses and associations
that represent small businesses. In order
to reduce compliance burdens on small
businesses and other small entities, the
Commission finalizes the proposed rule
with some limiting modifications and
clarifications as described in section IV
of this document.
The Commission believes that the rule
will not have a significant economic
impact upon small entities, although it
may affect a substantial number of small
businesses. The rule primarily prohibits
certain unfair or deceptive acts or
practices involving consumer reviews or
testimonials and does not impose a
reporting or recordkeeping requirement
upon businesses. In addition, the
Commission does not anticipate these
changes will impose any additional
significant additional costs upon small
businesses. Specifically, as discussed in
further detail below, the Commission
anticipates than an average small
business will spend, at most, one hour
on compliance review, incurring a cost
of $33.48.522 Therefore, the rule imposes
no new significant burdens on law-
abiding small businesses. The
Commission has determined,
nonetheless, that it is appropriate to
publish an FRFA to identify the impact
of the rule on small entities. Therefore,
the Commission has prepared the
following analysis:
A. Reasons for the Rule
The Commission describes the
reasons for the rule in section VI.A. of
this document. The FTC’s law
enforcement, outreach, and other
engagement in this area indicate that
certain unfair or deceptive acts or
practices involving consumer reviews or
testimonials are prevalent. The rule will
benefit consumers and legitimate
businesses without imposing significant
burdens.
B. Statement of the Objectives of, and
Legal Basis for, the Rule
The Commission describes the
objectives for the rule in section VI.A of
this document. The legal basis for the
rule is section 18 of the FTC Act, 15
U.S.C. 57a, which authorizes the
Commission to promulgate, modify, and
repeal trade regulation rules that define
with specificity acts or practices in or
affecting commerce that are unfair or
deceptive within the meaning of section
5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1).
C. Issues Raised by Comments, the
Commission’s Assessment and
Response, and Any Changes Made as a
Result
One individual commenter accepted
the Commission’s estimated compliance
costs on small businesses but said it was
unfair that ‘‘small companies with
online reviews would bear almost all of
the [rule’s] estimated compliance
costs.’’ 523 As the Commission stated in
the NPRM, it is likely that only a
minority of small businesses would
elect to conduct optional compliance
review and the total compliance costs
for small businesses is likely to be
significantly lower than the
Commission’s estimate. 524
One trade association simply asserted
that certain provisions of the proposed
rule could be detrimental to small
businesses but did not specifically
address the IRFA.525 This commenter
expressed concern about: (1) civil
penalty exposure for failing to stop the
actions of undiscovered third parties
providing reviews and testimonials
appearing on a business’s website; (2) a
subsequent broadening of the proposed
rule to prohibit incentivized reviews
other than those required to express a
particular sentiment; and (3) potential
liability when an agent’s review or
testimonial appears without a
disclosure.526 The Commission
addresses these specific concerns in
section IV of this document and has
narrowed the rule or provided
clarification as appropriate.
The Commission does not believe that
it needs to make any changes to its IRFA
in response to these comments.
Section IV provides a section-by-
section analysis that discusses the
provisions proposed in the NPRM, the
comments received, the Commission’s
responses to the comments, and any
changes made by the Commission as a
result.
D. Comments by the Chief Counsel for
Advocacy of the SBA, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
The Commission did not receive any
comments from the Chief Counsel for
Advocacy of the SBA.
E. Description and Estimate of the
Number of Small Entities to Which the
Rule Will Apply
The final rule could impact small
entities that currently have, or might
potentially, solicit consumer reviews or
disseminate consumer testimonials. It
could also impact small entities that use
celebrity testimonials or have a social
media presence. It is likely that the rule
will primarily affect businesses that sell
products or services directly to
consumers. For example, the rule is less
likely to impact small entities that
manufacture niche raw materials for
other businesses or small agricultural
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68077	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
527 See supra note 515.
528 See Payscale, Average Small Business Owner
Salary, supra note 517.
firms that do not sell directly to
consumers. Nevertheless, for a
conservative estimate of total costs, the
Commission assumes that the rule will
impact all industry classes of small
entities.
As described in section VI.B.2 of this
document, there are approximately
34.75 million small businesses in the
United States. Prior research has found
that 74 percent of small businesses have
at least one Google review.527 On the
one hand, it is possible that, across all
platforms (beyond Google reviews), a
higher percentage of small businesses
have consumer reviews or testimonials,
celebrity testimonials, or a social media
presence. On the other hand, it is likely
that many of these firms do not interact
with reviews and such passive firms
would not be affected by the rule. The
Commission does not have the
appropriate data to refine this estimate.
Therefore, its best estimate is that no
more than 25.71 million (74 percent ×
34.75 million) small businesses will be
impacted by the rule.
F. Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements
The rule contains no reporting or
recordkeeping requirements. Therefore,
many law-abiding businesses are likely
to incur no additional compliance costs
with the rule.
As described in section VI.B.2 of this
document, a cautious firm may elect to
undertake additional compliance review
due to the potential for civil penalties
for rule violations. If every small
business impacted by the rule conducts
one hour of compliance review, each
firm would incur $33.48 of compliance
costs, which reflects the estimated
hourly earnings of a small business
owner.528 Therefore, under the
conservative estimate of heightened
compliance review for all small
businesses, costs to small businesses
would total $860.95 million (25.71
million × $33.48). Because it is likely
that only a minority of small businesses
will elect to conduct optional
compliance review, total compliance
costs for these entities are likely to be
significantly lower than this estimate.
G. Description of Steps Taken To
Minimize Impact of the Rule on Small
Entities
In response to comments, the
Commission has narrowed the rule and
clarified the rule requirements as
described in section IV of this
document, which should minimize
further any economic impact on small
entities. In its IRFA, the Commission
described an alternative to the proposed
rule, namely, to rely on the
Commission’s previously existing tools,
such as consumer education and
enforcement actions brought under
sections 5 and 19 of the FTC Act, to
combat the specified review and
testimonial practices. The Commission
believes that promulgation of the rule
will result in greater net benefits to the
marketplace while imposing no
additional burdens beyond what is
required by the FTC Act. As described
in further detail in section VI.B.1.c of
this document, the rule will not only
result in significant benefits to
consumers but also improve the
competitive environment, particularly
for small, independent, or new firms.
Therefore, the rule appears to be
superior to this alternative for small
entities.
IX. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has
designated this rule as a ‘‘major rule,’’
as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 465
Advertising.
■ For the reasons set forth above, the
Federal Trade Commission amends 16
CFR Chapter I by adding part 465 to
read as follows:
PART 465—RULE ON THE USE OF
CONSUMER REVIEWS AND
TESTIMONIALS
Sec.
465.1 Definitions.
465.2 Fake or false consumer reviews,
consumer testimonials, or celebrity
testimonials.
465.3 [Reserved]
465.4 Buying positive or negative consumer
reviews.
465.5 Insider consumer reviews and
consumer testimonials.
465.6 Company-controlled review websites
or entities.
465.7 Review suppression.
465.8 Misuse of fake indicators of social
media influence.
465.9 Severability
Authority: 15 U.S.C. 57a.
§ 465.1 Definitions.
(a) Business means an individual who
sells products or services, a partnership
that sells products or services, a
corporation that sells products or
services, or any other commercial entity
that sells products or services.
(b) Celebrity testimonial means an
advertising or promotional message
(including verbal statements,
demonstrations, or depictions of the
name, signature, likeness, or other
identifying personal characteristics of
an individual) that consumers are likely
to believe reflects the opinions, beliefs,
or experiences of a well-known
individual who purchased, used, or
otherwise had experience with a
product, service, or business.
(c) Clear and conspicuous means that
a required disclosure is easily noticeable
(i.e., difficult to miss) and easily
understandable by ordinary consumers,
including in all of the following ways:
(1) In any communication that is
solely visual or solely audible, the
disclosure must 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
must be presented in at least the same
means as the representation(s) requiring
the disclosure.
(2) A visual disclosure, by its size,
contrast, location, the length of time it
appears, and other characteristics, must
stand out from any accompanying text
or other visual elements so that it is
easily noticed, read, and understood.
(3) An audible disclosure, including
by telephone or streaming video, must
be delivered in a volume, speed, and
cadence sufficient for ordinary
consumers to easily hear and
understand it.
(4) In any communication using an
interactive electronic medium, such as
social media or the internet, the
disclosure must be unavoidable. A
disclosure is not clear and conspicuous
if a consumer must take any action,
such as clicking on a hyperlink or
hovering over an icon, to see it.
(5) The disclosure must use diction
and syntax understandable to ordinary
consumers and must appear in each
language in which the representation
that requires the disclosure appears.
(6) The disclosure must comply with
these requirements in each medium
through which it is received, including
all electronic devices and face-to-face
communications.
(7) The disclosure must not be
contradicted or mitigated by, or
inconsistent with, anything else in the
communication.
(8) When the representation or sales
practice targets a specific audience,
such as children, the elderly, or the
terminally ill, ‘‘ordinary consumers’’
includes members of that group.
(d) Consumer review means a
consumer’s evaluation, or a purported
consumer’s evaluation, of a product,
service, or business that is submitted by
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68078 	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
the consumer or purported consumer
and that is published to a website or
platform dedicated in whole or in part
to receiving and displaying such
evaluations. For the purposes of this
part, consumer reviews include
consumer ratings regardless of whether
they include any text or narrative.
(e) Consumer review hosting means
providing the technological means by
which a website or platform enables
consumers to see or hear the consumer
reviews that consumers have submitted
to the website or platform.
(f) Consumer testimonial means an
advertising or promotional message
(including verbal statements,
demonstrations, or depictions of the
name, signature, likeness, or other
identifying personal characteristics of
an individual) that consumers are likely
to believe reflects the opinions, beliefs,
or experiences of a consumer who has
purchased, used, or otherwise had
experience with a product, service, or
business.
(g) Distribute fake indicators of social
media influence means the distribution
of fake indicators of social media
influence to individuals or businesses
who could use the indicators to
misrepresent their influence.
(h) Fake indicators of social media
influence means indicators of social
media influence generated by bots,
purported individual accounts not
associated with a real individual,
accounts created with a real individual’s
personal information without their
consent, or hijacked accounts, or that
otherwise do not reflect a real
individual’s or entity’s activities,
opinions, findings, or experiences.
(i) Immediate Relative means a
spouse, parent, child, or sibling.
(j) Indicators of social media
influence means any metrics used by the
public to make assessments of an
individual’s or entity’s social media
influence, such as followers, friends,
connections, subscribers, views, plays,
likes, saves, shares, reposts, and
comments.
(k) Manager means an employee of a
business who supervises other
employees or agents and who either
holds the title of a ‘‘manager’’ or
otherwise serves in a managerial role.
(l) Officers include owners,
executives, and managing members of a
business.
(m) Purchase a consumer review
means to provide something of value,
such as money, gift certificates,
products, services, discounts, coupons,
contest entries, or another review, in
exchange for a consumer review.
(n) Reviewer means the author or
purported author of a consumer review.
(o) Testimonialist means the
individual giving or purportedly giving
a consumer testimonial or celebrity
testimonial.
(p) An unfounded or groundless legal
threat is a legal threat based on claims,
defenses, or other legal contentions
unwarranted by existing law or based on
factual contentions that have no
evidentiary support or will likely have
no evidentiary support after a
reasonable opportunity for further
investigation or discovery.
§ 465.2 Fake or false consumer reviews,
consumer testimonials, or celebrity
testimonials.
(a) It is an unfair or deceptive act or
practice and a violation of this part for
a business to write, create, or sell a
consumer review, consumer testimonial,
or celebrity testimonial that materially
misrepresents, expressly or by
implication:
(1) That the reviewer or testimonialist
exists;
(2) That the reviewer or testimonialist
used or otherwise had experience with
the product, service, or business that is
the subject of the review or testimonial;
or
(3) The reviewer’s or testimonialist’s
experience with the product, service, or
business that is the subject of the review
or testimonial.
(b) It is an unfair or deceptive act or
practice and a violation of this part for
a business to purchase a consumer
review, or to disseminate or cause the
dissemination of a consumer testimonial
or celebrity testimonial, about the
business or one of the products or
services it sells, which the business
knew or should have known materially
misrepresented, expressly or by
implication:
(1) That the reviewer or testimonialist
exists;
(2) That the reviewer or testimonialist
used or otherwise had experience with
the product, service, or business that is
the subject of the review or testimonial;
or
(3) The reviewer’s or testimonialist’s
experience with the product, service, or
business that is the subject of the review
or testimonial.
(c) It is an unfair or deceptive act or
practice and a violation of this part for
a business to procure a consumer review
from its officers, managers, employees,
or agents, or any of their immediate
relatives, for posting on a third-party
platform or website, when the review is
about the business or one of the
products or services it sells, and when
the business knew or should have
known that the review materially
misrepresented, expressly or by
implication:
(1) That the reviewer exists;
(2) That the reviewer used or
otherwise had experience with the
product, service, or business that is the
subject of the review; or
(3) The reviewer’s experience with the
product, service, or business that is the
subject of the review.
(d) However, paragraphs (b) and (c) of
this section do not apply to:
(1) Reviews or testimonials that
resulted from a business making
generalized solicitations to purchasers
to post reviews or testimonials about
their experiences with the product,
service, or business; or
(2) Reviews that appear on a website
or platform as a result of the business
merely engaging in consumer review
hosting.
§ 465.3 [Reserved]
§ 465.4 Buying positive or negative
consumer reviews.
It is an unfair or deceptive act or
practice and a violation of this part for
a business to provide compensation or
other incentives in exchange for, or
conditioned expressly or by implication
on, the writing or creation of consumer
reviews expressing a particular
sentiment, whether positive or negative,
regarding the product, service, or
business that is the subject of the
review.
§ 465.5 Insider consumer reviews and
consumer testimonials.
(a) It is an unfair or deceptive act or
practice and a violation of this part for
an officer or manager of a business to
write or create a consumer review or
consumer testimonial about the
business or one of the products or
services it sells that fails to have a clear
and conspicuous disclosure of the
officer’s or manager’s material
relationship to the business, unless, in
the case of a consumer testimonial, the
relationship is otherwise clear to the
audience.
(b)(1) It is an unfair or deceptive act
or practice and a violation of this part
for a business to disseminate or cause
the dissemination of a consumer
testimonial about the business or one of
the products or services it sells by one
of its officers, managers, employees, or
agents, which fails to have a clear and
conspicuous disclosure of the
testimonialist’s material relationship to
the business, when the relationship is
not otherwise clear to the audience and
the business knew or should have
known the testimonialist’s relationship
to the business.
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68079	Federal Register / Vol. 89, No. 163 / Thursday, August 22, 2024 / Rules and Regulations
(2) However, paragraph (b)(1) of this
section does not apply to:
(i) Generalized solicitations to
purchasers for them to post testimonials
about their experiences with the
product, service, or business, or
(ii) Merely engaging in consumer
review hosting.
(c)(1) It is an unfair or deceptive act
or practice and a violation of this part
for an officer or manager of a business
to solicit or demand a consumer review
about the business or one of the
products or services it sells from any of
their immediate relatives or from any
employee or agent of the business, or to
solicit or demand that such employees
or agents seek such reviews from their
relatives, when:
(i) The solicitation or demand results
in an officer’s or manager’s immediate
relatives, an employee or agent, or the
immediate relatives of an employee or
agent writing or creating such a review
without a disclosure of the reviewer’s
material relationship to the business,
and
(ii) The officer or manager:
(A) Encouraged the prospective
reviewer not to make such a disclosure,
(B) Did not instruct that prospective
reviewers disclose clearly and
conspicuously their relationship to the
business, or
(C) knew or should have known that
such a review appeared without such a
disclosure and failed to take remedial
steps.
(2) However, paragraph (c)(1) of this
section does not apply to generalized
solicitations to purchasers for them to
post reviews about their experiences
with the product, service, or business.
§ 465.6 Company-controlled review
websites or entities.
It is an unfair or deceptive act or
practice and a violation of this part for
a business to materially misrepresent,
expressly or by implication, that a
website, organization, or entity that it
controls, owns, or operates provides
independent reviews or opinions, other
than consumer reviews, about a category
of businesses, products, or services
including the business or one or more
of the products or services it sells.
§ 465.7 Review suppression.
It is an unfair or deceptive act or
practice and a violation of this part:
(a) For anyone to use an unfounded or
groundless legal threat, a physical
threat, intimidation, or a public false
accusation in response to a consumer
review that is made with the knowledge
that the accusation was false or made
with reckless disregard as to its truth or
falsity, in an attempt to:
(1) Prevent a review or any portion
thereof from being written or created, or
(2) Cause a review or any portion
thereof to be removed, whether or not
that review or a portion thereof is
replaced with other content, or
(b) For a business to materially
misrepresent, expressly or by
implication, that the consumer reviews
of one or more of the products or
services it sells displayed in a portion
of its website or platform dedicated in
whole or in part to receiving and
displaying consumer reviews represent
most or all the reviews submitted to the
website or platform when reviews are
being suppressed (i.e., not displayable)
based upon their ratings or their
negative sentiment. For purposes of this
paragraph, a review is not considered
suppressed based upon rating or
negative sentiment if the suppression
occurs based on criteria for withholding
reviews that are applied equally to all
reviews submitted without regard to
sentiment, such as when:
(1) The review contains:
(i) Trade secrets or privileged or
confidential commercial or financial
information,
(ii) Defamatory, harassing, abusive,
obscene, vulgar, or sexually explicit
content,
(iii) The personal information or
likeness of another individual,
(iv) Content that is discriminatory
with respect to race, gender, sexuality,
ethnicity, or another intrinsic
characteristic, or
(v) Content that is clearly false or
misleading;
(2) The seller reasonably believes the
review is fake; or
(3) The review is wholly unrelated to
the products or services offered by or
available at the website or platform.
§ 465.8 Misuse of fake indicators of social
media influence.
It is an unfair or deceptive act or
practice and a violation of this part for
anyone to:
(a) Sell or distribute fake indicators of
social media influence that they knew
or should have known to be fake and
that can be used by individuals or
businesses to materially misrepresent
their influence or importance for a
commercial purpose; or
(b) Purchase or procure fake
indicators of social media influence that
they knew or should have known to be
fake and that materially misrepresent
their influence or importance for a
commercial purpose.
§ 465.9 Severability.
The provisions of this part are
separate and severable from one
another. If any provision is stayed or
determined to be invalid, the remaining
provisions will continue in effect.
By direction of the Commission.
April J. Tabor,
Secretary.
[FR Doc. 2024–18519 Filed 8–21–24; 8:45 am]
BILLING CODE 6750–01–P
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90476 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
1 Save was defined in the proposed Rule to mean
an attempt by a seller to present any additional
offers, modifications to the existing agreement,
reasons to retain the existing offer, or similar
information when a consumer attempts to cancel a
negative option feature. Proposed Rule § 425.2(f).
2 See 16 CFR 1.11 (‘‘Commission’s Rules of
Practice’’ or ‘‘Commission Rules’’); cf.
Impersonation Rule, 89 FR 15072 (Feb. 29, 2024).
3 See 16 CFR 1.16.
FEDERAL TRADE COMMISSION
16 CFR Part 425
RIN 3084–AB60
Negative Option Rule
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
issues final amendments to the
Commission’s trade regulation ‘‘Rule
Concerning Use of Prenotification
Negative Option Plans,’’ retitled the
‘‘Rule Concerning Recurring
Subscriptions and Other Negative
Option Programs’’ (‘‘Rule,’’ ‘‘final Rule’’
or ‘‘Negative Option Rule’’). The final
Rule now applies to all negative option
programs in any media. This document
also contains the text of the final Rule,
the Rule’s Statement of Basis and
Purpose (‘‘SBP’’), and a final regulatory
analysis.
DATES :
Effective date: This rule is effective
January 14, 2025.
Compliance date: Regulated entities
have until May 14, 2025 to comply with
§§ 425.4 through 425.6.
ADDRESSES : Relevant portions of the
record of this proceeding, including this
document, are available at https://
www.ftc.gov.
FOR FURTHER INFORMATION CONTACT:
Katherine Johnson, Attorney, (202) 326–
2185, kjohnson3@ftc.gov, Division of
Enforcement, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Ave. NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION :
I. Overview
The Commission commenced this
proceeding because it had reason to
believe unfair and deceptive negative
option practices are widespread in the
marketplace. Negative option programs
can provide substantial benefits for
sellers and consumers. However,
consumers cannot realize these benefits
when sellers make material
misrepresentations to induce consumers
to enroll in such programs, fail to
provide important information, bill
consumers without their consent, or
make cancellation difficult or
impossible. Unfair and deceptive
negative option practices have been a
persistent source of consumer harm for
decades, saddling shoppers with
recurring payments for products and
services they never intended to
purchase nor wanted to continue
buying. In the past, the Commission
sought to address these practices
through individual law enforcement
actions and a patchwork of laws and
regulations. Nevertheless, problems
persist, as demonstrated by both a
steady stream of State and Federal law
enforcement actions and thousands of
consumer complaints each year. To
address these practices, the Commission
proposed amending the current
Negative Option Rule to establish clear,
enforceable performance-based
requirements for all negative option
features in all media. The Commission
solicited comments first in an advance
notice of proposed rulemaking
(‘‘ANPR’’) and then on proposed
amendments in a notice of proposed
rulemaking (‘‘NPRM’’). The Commission
designed these amendments to ensure
consumers understand what they are
purchasing and allow them to cancel
their participation without undue
burden.
Among other things, this final Rule (1)
prohibits misrepresentations of any
material fact made while marketing
using negative option features; (2)
requires sellers to provide important
information prior to obtaining
consumers’ billing information and
charging consumers; (3) requires sellers
to obtain consumers’ unambiguously
affirmative consent to the negative
option feature prior to charging them;
and (4) requires sellers to provide
consumers with simple cancellation
mechanisms to immediately halt all
recurring charges.
The Commission now promulgates a
final Rule. Pursuant to 15 U.S.C.
57a(a)(1)(B), the Rule, inter alia, defines
the following acts and practices as
unfair or deceptive within the meaning
of section 5 of the FTC Act:
• to misrepresent any material fact
made while marketing using a negative
option feature (§ 425.3);
• to fail to clearly and conspicuously
disclose material terms prior to
obtaining a consumer’s billing
information in connection with a
negative option feature (§ 425.4);
• to fail to obtain a consumer’s
express informed consent to the
negative option feature before charging
the consumer (§ 425.5); and
• to fail to provide a simple
mechanism to cancel the negative
option feature and immediately halt
charges (§ 425.6).
Further, the Rule, consistent with the
final sentence of 15 U.S.C. 57a(a)(1)(B)
includes requirements prescribed for the
purpose of preventing such acts or
practices.
The final Rule differs from the
proposed Rule in two significant ways.
First, the proposed Rule would have
required sellers to provide annual
reminders to consumers of the negative
option feature. Second, the proposed
Rule would have prohibited sellers from
forcing consumers to receive saves 1
without first obtaining consumers’
unambiguously affirmative consent. The
Commission has considered comments
both supporting and opposing these
proposed provisions. As explained in
the section-by-section analysis, the
Commission declines to adopt these
provisions of the proposed Rule at this
time. Instead, the Commission plans to
seek further comment through a
supplemental NPRM (‘‘SNPRM’’), and
therefore, keeps the record open on
these issues. 2
Finally, in response to the comments,
the Commission adds two definitions
and two provisions to the final Rule for
clarity. The final Rule explicitly defines
the terms ‘‘material’’ and ‘‘interactive
electronic medium’’ consistent with
how they were defined and discussed in
the NPRM. Additionally, the final Rule
includes a severability provision and a
provision allowing requests for
exemptions from the final Rule
consistent with the Commission’s Rules
of Practice.3
II. Background
A. Statutory Authority
The Commission promulgates the
final Negative Option Rule, 16 CFR part
425 pursuant to section 18 of the FTC
Act, 15 U.S.C. 57a, the Administrative
Procedure Act (‘‘APA’’), 5 U.S.C. 533;
and part 1, subpart B of the
Commission’s Rules of Practice, 16 CFR
1.7–1.20. Section 18 permits the
Commission to promulgate, amend, and
repeal trade regulation rules that define
with specificity acts or practices that are
unfair or deceptive within the meaning
of section 5(a)(1) of the FTC Act, 15
U.S.C. 45(a)(1); and allows the
Commission to prescribe requirements
for the purpose of preventing these
unfair or deceptive acts and practices.
B. Negative Option Marketing
1. Negative Option Programs
Negative option programs come in a
variety of forms, but all share a central
feature: each contain a term or condition
that allows a seller to interpret a
customer’s silence, or failure to take an
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90477	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
4 The Commission’s Telemarking Sales Rule
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 CFR
310.2(w).
5 See, e.g., United States v. Adobe, Inc., No. 5:24–
cv–03630 (N.D. Cal. 2024).
6 News/Media Alliance (‘‘N/MA’’), FTC–2023–
0033–0873; see also Association of National
Advertisers (‘‘ANA’’), FTC–2023–0033–1001;
National Retail Federation (‘‘NRF’’), FTC–2023–
0033–1005. Citations herein to comments are cited
as the name of commenter and unique identifier
(e.g., FTC–2023–0033–ll). Comments are
available online at regulations.gov, Negative Option
Rule (NPRM), FTC–2023–0033–0001, https://
www.regulations.gov/document/FTC-2023-0033-
0001.
7 N/MA, FTC–2023–0033–0873; Sirius XM Radio
Inc. (‘‘Sirius XM’’), FTC–2023–0033–0857; NCTA—
The Internet & Television Association (‘‘NCTA’’),
FTC–2023–0033–0858; Interactive Advertising
Bureau (‘‘IAB’’), FTC–2023–0033–1000.
8 See IAB, FTC–2023–0033–1000; Sirius XM,
FTC–2023–0033–0857; Joint Comment from
Entertainment Software Association, Digital Media
Association, and Motion Picture Association
(‘‘ESA’’), FTC–2023–0033–0867.
9 N/MA, FTC 2023–0033–0873; NRF, FTC–2023–
0033–1005; ANA, FTC–2023–0033–1001.
10 See, e.g., FTC v. FloatMe Corp., No. 5:24–cv–
00001 (W.D. Tex. 2024); United States v. Adobe,
Inc., No. 5:24–cv–03630 (N.D. Cal. 2024); FTC v.
WealthPress, Inc., No. 3:23–cv–00046 (M.D. Fla.
2023); FTC v. Bridge It, Inc., No. 1:23–cv–09651
(S.D.N.Y. 2023); FTC v. Amazon.com, Inc., No.
2:23–cv–0932 (W.D. Wash. 2023); see also n.60.
11 E.g., FTC v. Triangle Media Corp., No. 3:18–cv–
01388 (S.D. Cal. 2018); FTC v. Credit Bureau Ctr.,
LLC, No. 1:17–cv–00194 (N.D. Ill. 2017); FTC v. JDI
Dating, Ltd., No. 1:14–cv–08400 (N.D. Ill. 2014);
FTC v. One Techs., LP, No. 3:14–cv–05066 (N.D.
Cal. 2014); FTC v. Health Formulas, LLC, No. 2:14–
cv–01649 (D. Nev. 2014); FTC v. NutraClick, LLC,
No. 2:16–cv–06819 (C.D. Cal. 2016); FTC v. XXL
Impressions, LLC, No. 1:17–cv–00067 (D. Me. 2017);
FTC v. AAFE Prods. Corp., No. 3:17–cv–00575 (S.D.
Cal. 2017); FTC v. Pact, Inc., No. 2:17–cv–1429
(W.D. Wash. 2017); FTC v. Tarr, No. 3:17–cv–02024
(S.D. Cal. 2017); FTC v. AdoreMe, Inc., No. 1:17–
cv–09083 (S.D.N.Y. 2017); FTC v.
DOTAuthority.com, Inc., No. 0:16–cv–62186 (S.D.
Fla. 2016); FTC v. BunZai Media Grp., Inc., No.
2:15–cv–04527 (C.D. Cal. 2015); FTC v.
RevMountain, LLC, No. 2:17–cv–02000 (D. Nev.
2017).
affirmative action, as acceptance of an
offer. 4 Negative option programs
generally fall into four categories:
prenotification plans, continuity plans,
automatic renewals, and free trial (i.e.,
free-to-pay or nominal-fee-to-pay)
conversion offers.
Prenotification plans are the only
negative option practice currently
covered by the Commission’s current
Negative Option Rule, originally
promulgated in 1973. Under such plans
(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. In continuity
plans, consumers 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.
In automatic renewals, sellers (e.g., a
magazine publisher, credit monitoring
service provider, etc.) automatically
renew consumers’ subscriptions when
they expire, unless consumers
affirmatively cancel the subscriptions.
Finally, in free-to-pay plans, consumers
receive goods or services for free (or at
a nominal fee) for a trial period. After
the trial period, sellers automatically
begin charging a fee (or higher fee)
unless consumers affirmatively cancel
or return the goods or services.
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, e.g., when a consumer
completes a first transaction and then
receives a second solicitation for an
additional product or service. A
bundled offer occurs, e.g., when a seller
packages two or more products or
services together.
Importantly, negative option programs
are distinct from other continuing
agreements such as installment
contracts. In an installment contract,
consumers are obligated for the entire
contractual period for the entire
contract. A prime example of this type
of transaction is a contract for
purchasing a vehicle, which outlines
terms, such as price, interest rate, and
payment schedule. The contract thus
allows the consumer to pay the
purchase price of the vehicle over time.
Consumers’ failure to pay amounts due
under an installment agreement may
bring the total balance due, and may
trigger halting performance, or provide
the seller with other contractual rights.
A negative option, in contrast, merely
determines whether a seller may
continue to send, and charge for, goods
or provide services without the
consumer’s further action. Notably, a
contract could have both installment
and negative option features. Take, for
instance, a software license agreement.
A consumer may purchase a software
license for a year, in which the
consumer is obligated for the entire
year, payable monthly, to renew
automatically at the conclusion of the
year unless the consumer cancels the
agreement.5 Canceling the agreement
during the first year does not void a
consumer’s obligation to pay for the
whole first year, but it does terminate
the consumer’s responsibility for the
next year.
2. Prevalence of Deceptive or Unfair
Negative Option Acts and Practices
Negative option programs are
widespread in the marketplace and can
provide substantial benefits for sellers
and consumers. For businesses, the
benefits of negative option marketing
include ‘‘greater revenue predictability,
customer base continuity, and the
ability to better plan in advance.’’ 6 For
consumers, such benefits may include
opportunities to explore new products
prior to purchase (e.g., free trials),7
broader selections at lower prices and
transaction costs, 8 and the convenience
of uninterrupted products or services. 9
However, consumers cannot reap these
benefits when marketers misrepresent
material facts, fail to make adequate
disclosures, bill consumers without
their consent, or make cancellation
difficult or impossible. Over the years,
such problematic practices have
remained a persistent source of
consumer harm, saddling consumers
with recurring payments for products
and services they never intended to
purchase nor wanted to continue
buying.
The Commission tried to address
these practices through individual law
enforcement cases and a patchwork of
regulations (see discussion at sections
III–IV). Nevertheless, problems persist,
as demonstrated in part by the tens of
thousands of complaints consumers
submit about these practices to the FTC
each year. Moreover, the Commission
and States continue to regularly bring
cases challenging harmful negative
option practices, including more than
35 recent FTC cases.10 These matters
involved a range of deceptive or unfair
practices, including inadequate
disclosures for ‘‘free’’ offers and other
products or services, enrollment
without consumer consent, and
inadequate or overly burdensome
cancellation and refund procedures.11
As discussed further below, the
continuing stream of cases; the high
volume of ongoing complaints; and
comments on the record all demonstrate
prevalent unfair and deceptive practices
and unabated consumer harm.
III. The FTC’S Existing Regulatory
Scheme
A. The FTC’s Current Negative Option
Rule
The Commission first promulgated
the Rule in 1973 pursuant to the FTC
Act, 15 U.S.C. 41 et seq., finding some
negative option marketers committed
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12 The Rule defines ‘‘negative option plan’’
narrowly to apply only to prenotification plans. 16
CFR 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 FR 44555, 44561 (Aug. 20, 1998).
13 16 CFR 425.1(a)(1)(i)–(vii).
14 16 CFR 425.1(a)(2) and (3); id. 425.1(b).
15 Under the FTC Act, ‘‘unfair or deceptive acts
or practices’’ include acts or practices involving
foreign commerce that cause or are likely to cause
reasonably foreseeable injury within the United
States or involve material conduct occurring within
the United States. 15 U.S.C. 45(a)(4)(A). Section
5(n) of the FTC Act provides that ‘‘unfair’’ practices
are those that cause or are likely to cause
substantial injury to consumers which is not
reasonably avoidable by consumers themselves and
not outweighed by countervailing benefits to
consumers or to competition. 15 U.S.C. 45(n).
16 See Negative Options: A Report by the Staff of
the FTC’s Division of Enforcement, 26–29 (Jan.
2009) (‘‘Staff Report’’), https://www.ftc.gov/reports/
negative-options-federal-trade-commission-
workshop-analyzing-negative-option-marketing-
report-staff. In discussing the principal Section 5
requirements related to negative options, the report
cites the following pre-ROSCA cases, FTC v. JAB
Ventures, LLC, No. 2:08–cv–04648 (C.D. Cal. 2008);
FTC v. Complete Weightloss Ctr., No. 1:08–cv–
00053 (D.N.D. 2008); FTC v. Berkeley Premium
Nutraceuticals, No. 1:06–cv–00051 (S.D. Ohio
2006); FTC v. Think All Publ’g, LLC, No. 4:07–cv–
00011 (E.D. Tex. 2006); FTC v. HispaNexo, Inc., No.
1:06–cv–424 (E.D. Va. 2006); FTC v.
Consumerinfo.com, No. 8:05–cv–00801 (C.D. Cal.
2005); FTC v. Conversion Mktg., No. 8:04–cv–01264
(C.D. Cal. 2004); United States v. Mantra Films, Inc.,
No. 2:03–cv–9184 (C.D. Cal. 2003); FTC v. Preferred
Alliance, Inc., No. 1:03–cv–0405 (N.D. Ga. 2003);
United States v. Prochnow, No. 1:02–cv–917 (N.D.
Ga. 2002); FTC v. Ultralife Fitness, Inc., No. 2:08–
cv–07655 (C.D. Cal. 2008); In re America Isuzu
Motors, FTC Docket No. C–3712 (1996); FTC v.
Universal Premium Servs., No. 2:06–cv–00849 (C.D.
Cal. 2006); FTC v. Remote Response Corp., No.
1:06–cv–20168 (S.D. Fla. 2006). The report also
cited the FTC’s previously issued guidance, Dot
Com Disclosures (2002), archived at https://
www.ftc.gov/sites/default/files/attachments/press-
releases/ftc-staff-issues-guidelines-internet-
advertising/0005dotcomstaffreport.pdf. See also
nn.245–252.
17 Courts have found unauthorized billing to be
unfair under the FTC Act. See, 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. 2:14–cv–1038,
2016 WL 10654030, at *8 (W.D. Wash. Apr. 26,
2016); FTC v. Ideal Fin. Sols., Inc., No. 2:13–cv–
00143, 2015 WL 4032103, at *8 (D. Nev. June 30,
2015).
18 15 U.S.C. 8401–8405.
19 ROSCA, 15 U.S.C. 8403(1); see also In re
MoviePass, Inc., FTC Docket No. C–4751 (2021).
20 15 U.S.C. 8403. ROSCA incorporates the
definition of ‘‘negative option feature’’ from the
TSR, 16 CFR 310.2(w).
21 15 U.S.C. 8404 (citing section 18 of the FTC
Act, 15 U.S.C. 57a).
22 15 U.S.C. 45(m)(1)(A).
23 15 U.S.C. 53(b).
24 15 U.S.C. 57b(a)(1), (b).
unfair and deceptive practices that
violated section 5 of the Act, 15 U.S.C.
45. Based on practices at the time,
however, the Rule only applied to
prenotification plans for the sale of
goods, and therefore, does not reach the
vast majority of modern negative option
programs. 12
Specifically, the Rule required
prenotification plan sellers to disclose
their plans’ material terms clearly and
conspicuously before consumers
subscribe. To do so, it required sellers
to disclose seven material terms: (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.13 In addition,
sellers had to disclose the specific
periods during which they would 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.14
B. Other Current Regulatory
Requirements
Several other statutes and regulations
also address harmful negative option
practices. First, section 5 of the FTC Act
has served as the Commission’s primary
mechanism for addressing deceptive
negative option claims. Additionally,
the Restore Online Shoppers’
Confidence Act (‘‘ROSCA’’), 15 U.S.C.
8401–8405, the Telemarketing Sales
Rule (‘‘TSR’’), 16 CFR part 310, the
Postal Reorganization Act (i.e., the
Unordered Merchandise Statute), 39
U.S.C. 3009, and the Electronic Fund
Transfer Act (‘‘EFTA’’), 15 U.S.C. 1693–
1693r, all address various aspects of
negative option marketing. ROSCA,
however, is the only law primarily
designed to do so, but only for online
transactions.
1. Section 5 of the FTC Act
Section 5(a) of the FTC Act, 15 U.S.C.
45(a), is the core consumer protection
statute enforced by the Commission.
That statute broadly prohibits ‘‘unfair or
deceptive acts or practices’’ but does not
specifically address negative option
marketing.15 Therefore, in guidance and
cases, the FTC has highlighted six basic
requirements negative option marketing
must follow to avoid deceptive and
unfair practices.16 First, marketers must
disclose the material terms of a negative
option offer including, at a minimum:
the existence of the negative option
offer; the offer’s total cost; the transfer
of a consumer’s billing information to a
third party, if applicable; and how to
cancel the offer. Second, section 5
requires these disclosures to be clear
and conspicuous. Third, sellers must
disclose the material terms of the
negative option offer before consumers
agree to the purchase. Fourth, marketers
must obtain consumers’ consent to such
offers. Fifth, marketers must not impede
the effective operation of promised
cancellation procedures and must honor
cancellation requests that comply with
those procedures. Finally, marketers
cannot make any material
misrepresentation regarding any portion
of the transaction.
In addition to these deception-based
requirements, the Commission has
repeatedly stated billing consumers
without consumers’ express informed
consent is an unfair act under the FTC
Act.17
2. ROSCA
Enacted by Congress in 2010 to
address, in part, ongoing problems with
online negative option marketing,
ROSCA contains general provisions
related to disclosures, consent, and
cancellation.18 Specifically, ROSCA
prohibits charging or attempting to
charge consumers for goods or services
sold on the internet through any
negative option feature unless the
marketer: (1) clearly and conspicuously
discloses all material terms of the
transaction before obtaining the
consumer’s billing information,
regardless of whether a material term
directly relates to the terms of the
negative option offer; 19 (2) obtains a
consumer’s express informed consent
before charging the consumer’s account;
and (3) provides simple mechanisms for
the consumer to stop recurring
charges.20 ROSCA, however, does not
prescribe specific steps marketers must
follow to comply with these provisions
and is limited to online transactions.
Furthermore, pursuant to the statute,
a violation of ROSCA is treated as 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, damages, and other relief under
section 19 of the FTC Act.24
3. Telemarketing Sales Rule
The TSR prohibits deceptive
telemarketing acts or practices,
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25 16 CFR 310.3(a).
26 15 U.S.C. 1693–1693r.
27 39 U.S.C. 3009.
28 EFTA provides that the Commission shall
enforce its requirements, except to the extent that
enforcement is specifically committed to some
other Federal government agency, and that a
violation of any of its requirements shall be deemed
a violation of the FTC Act. Accordingly, the
Commission has authority to seek injunctive relief
for EFTA violations, just as it can seek injunctive
relief for other section 5 violations.
29 The Commission has authority to seek the same
remedies for violations of the Unordered
Merchandise Statute that it can seek for other
section 5 violations. The Commission can seek civil
penalties pursuant to section 5(m)(1)(B) of the FTC
Act from violators who have actual knowledge that
the Commission has found mailing unordered
merchandise unfair. 15 U.S.C. 45(m)(1)(B).
30 Indeed, the prenotification plans covered by
the Rule represent only a small fraction of negative
option marketing. In 2017, for instance, the
Commission estimated that fewer than 100 sellers
(‘‘clubs’’) were subject to the current Rule’s
requirements. 82 FR 38907, 38908 (Aug. 16, 2017).
31 See, e.g., In re Dun & Bradstreet, Inc., FTC
Docket No. C–4761 (2022); FTC v. Nobetes Corp.,
No. 2:18–cv–10068 (C.D. Cal. 2018); FTC v. Dill, No.
2:16–cv–00023 (D. Me. 2016); FTC v. Shopper Sys.,
LLC, No. 1:12–cv–23919 (S.D. Fla. 2012); FTC v.
XXL Impressions, LLC, No. 1:17–cv–00067 (D. Me.
2017); FTC v. Health Rsch. Labs., LLC, No. 2:17–cv–
00467 (D. Me. 2017); FTC v. Mktg. Architects, No.
2:18–cv–00050 (D. Me. 2018); see also Individual
commenter, FTC–2023–0033–0007 (discussing
deceptive and unfair negative option practices for
in-person enrollment); Individual commenter, FTC–
2023–0033–0129 (gym membership in-person
enrollment); Individual commenter, FTC–2023–
0033–0299 (same).
32 74 FR 22720 (May 14, 2009).
33 See Staff Report, n.16.
34 79 FR 44271 (July 31, 2014).
35 79 FR 44275. The Commission cited a number
of its law enforcement actions challenging negative
option marketing practices, including, for example,
FTC v. Process Am., Inc., No. 2:14–cv–00386 (C.D.
Cal. 2014) (processing of unauthorized charges
relating to negative option marketing); FTC v.
Willms, No. 2:11–cv–00828 (W.D. Wash. 2011)
(internet free trials and continuity plans); FTC v.
Moneymaker, No. 2:11–cv–00461 (D. Nev. 2011)
(internet trial offers and continuity programs); FTC
v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010)
(internet trial offers); and FTC v. John Beck
Amazing Profits, LLC, No. 2:09–cv–04719 (C.D. Cal.
2009) (infomercial and telemarketing trial offers and
continuity programs).
36 79 FR 44275–76.
37 See sections VI–VII of this SBP.
38 ANPR, 84 FR 52393 (Oct. 2, 2019).
39 Section 18 of the FTC Act authorizes the
Commission to promulgate rules that define with
specificity acts or practices in or affecting
commerce which are unfair or deceptive. 15 U.S.C.
57a(a)(1)(B). The Commission may issue regulations
‘‘where it has reason to believe that the unfair or
deceptive acts or practices which are the subject of
the proposed rulemaking are prevalent.’’ 15 U.S.C.
57a(b)(3). The Commission may make such a
prevalence finding if it has issued cease and desist
orders regarding such acts or practices, or any other
available information indicates a widespread
pattern of unfair or deceptive acts or practices.
Rules under section 18 ‘‘may include requirements
prescribed for the purpose of preventing such acts
or practices.’’
40 The comments are available online. See
Regulations.gov, Negative Option Rule (ANPR),
FTC–2019–0082, https://www.regulations.gov/
docket/FTC-2019-0082.
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. 25 The TSR, however,
only applies to negative option offers
made over the telephone.
4. Other Relevant Requirements
EFTA 26 and the Unordered
Merchandise Statute 27 also contain
provisions relevant to unfair and
deceptive negative option marketing.
EFTA prohibits sellers from imposing
recurring charges on a consumer’s debit
cards or bank accounts without written
authorization. 28 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.29
IV. Limitations of Existing Regulatory
Requirements
The existing patchwork of laws and
regulations does not provide industry
and consumers with a consistent legal
framework across media and offers. For
instance, as discussed above, the current
Rule does not cover common practices
such as continuity plans, automatic
renewals, and free-to-pay conversions.30
In addition, ROSCA and the TSR do not
address negative option programs in all
media. Yet, harmful negative option
practices that fall outside of ROSCA and
the TSR’s coverage still occur.31
Additionally, ROSCA lacks specificity
about cancellation procedures and the
placement, content, and timing of
cancellation-related disclosures.
Instead, the statute requires marketers to
provide ‘‘simple mechanisms’’ for the
consumer to stop recurring charges
without guidance about what is simple.
While the statute provides more than
adequate specificity to avoid blatant
violations, it makes law enforcement
actions much more difficult for closer
calls, even when these practices cause
significant harm.
V. Negative Option Rulemaking and
Enforcement Efforts
The Commission initiated its last
regulatory review of the Negative
Option Rule in 2009, 32 following a 2007
FTC workshop and subsequent Staff
Report.33 The Commission completed
the review in 2014.34 At the time, the
Commission found the comments
supporting the Rule’s expansion ‘‘argue
convincingly that unfair, deceptive, and
otherwise problematic negative option
marketing practices continue to cause
substantial consumer injury, despite
determined enforcement efforts by the
Commission and other law enforcement
agencies.’’ 35 It also noted practices not
covered by the Rule (e.g., trial
conversions and continuity plans)
accounted for most of the Commission’s
enforcement activity in this area.
Nevertheless, the Commission declined
to expand or modify the Rule because
the enforcement tools provided by the
TSR and, especially, ROSCA, which had
only recently become effective, might
prove adequate to address the extant
problems. The Commission emphasized,
however, if ROSCA and its other
enforcement tools failed to protect
consumers, the Commission would
consider whether and how to amend the
Rule.36 Since that review, the problems
with negative options have persisted.37
VI. Rule Review and Request for
Comment
A. 2019 Advance Notice of Proposed
Rulemaking
Given the persistence of unfair and
deceptive practices despite significant
law enforcement attention at both the
Federal and State level, the Commission
published its 2019 advance notice of
proposed rulemaking (‘‘ANPR’’) seeking
comments on the current Rule, as well
as possible new measures to reduce
consumer harm created by deceptive or
unfair negative option marketing.38
Specifically, the Commission sought
comment on various alternatives,
including amendments to existing rules
to further address disclosures, consumer
consent, and cancellation. The
Commission also requested input on
whether and how it should use its
authority under section 18 of the FTC
Act to expand the Negative Option Rule
to address prevalent unfair or deceptive
practices involving negative option
marketing.39 In response, the
Commission received 17 comments.40
B. 2021 Enforcement Policy Statement
On November 4, 2021, the
Commission published an ‘‘Enforcement
Policy Statement Regarding Negative
Option Marketing’’ (‘‘2021 Enforcement
Policy Statement’’ or ‘‘EPS’’) to provide
guidance regarding its enforcement of
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41 EPS, 86 FR 60822 (Nov. 4, 2021).
42 The Commission recently alleged a negative
option seller’s failure to disclose it was impeding
access to its movie subscription service violates
ROSCA. In re MoviePass, Inc., FTC Docket No. C–
4751 (2021).
43 The Commission proposed to issue such
amendments pursuant to section 18 of the FTC Act,
which authorizes it to promulgate rules specifying
acts or practices in or affecting commerce which are
unfair or deceptive. 15 U.S.C. 57a(a)(1)(B). Several
commenters raised concerns the Commission failed
to follow section 18’s procedures for two reasons.
First, commenters argued the Commission’s
proposed Rule went beyond the scope of the ANPR.
See, e.g., ESA, FTC–2023–0033–0867; USTelecom-
The Broadband Association (‘‘USTelecom’’), FTC–
2023–0033–0876; Retail Industry Leaders
Association (‘‘RILA’’), FTC–2023–0033–0883; U.S.
Chamber of Commerce (‘‘Chamber’’), FTC–2023–
0033–0885; The Computer & Communications
Industry Association (‘‘CCIA’’), FTC–2023–0033–
0984; IAB, FTC–2023–0033–1000; National Retail
Federation (‘‘NRF’’), FTC–2023–0033–1005).
Second, they argued the Commission’s proposed
Rule did not satisfy the specificity and prevalence
requirements of section 18. The Commission
addresses these comments in section VII.A.
44 NPRM, 88 FR 24730.
45 See NPRM, 88 FR 24728 (inviting comments on
free trials); id. at 24729 (requesting comments on
proposed annual reminder provision); id. at 24730
(inviting comments on conflicts with existing state
requirements; id. (seeking comments on proposed
material changes provision and exempted activities
or entities); id. (inviting submissions of ‘‘data,
views, and arguments on the proposed
amendments’’); id. at 24732–33 (inviting comments
on the impacts on small businesses, including any
modifications to reduce costs or burdens for small
entities); id. at 24734 (inviting comments on the
Paperwork Reduction Act analysis). See also id. at
24730 (NPRM section XIII, Request for Comments).
46 See 16 CFR 1.11(e).
47 Unique public comments to the NPRM are
available online. See regulations.gov, Negative
Option Rule (NPRM), FTC–2023–0033–0001,
https://www.regulations.gov/document/FTC-2023-
0033-0001. The Commission published 1,162
unique comments. As explained at regulations.gov,
agencies may withhold duplicate/near duplicate
examples of a mass-mail campaign. See Gen. Servs.
Admin., Regulations.gov Frequently Asked
Questions, Find Dockets, Documents, and
Comments FAQs, ‘‘How are comments counted and
posted to Regulations.gov?,’’ https://
www.regulations.gov/faq. The Commission cannot
quantify the number of individuals or entities
represented by the comments. The number of
comments undercounts the number of individuals
or entities represented by the comments because
many comments, including those from different
types of organizations, jointly represent the
opinions or interests of many. Overall, the
Commission received 16,612 comments. Of those,
15,449 were not posted online for various reasons
(i.e., 14 unrelated, 23 duplicates, and 15,412 that
appear to be non-unique responses to mass media
campaigns) and one comment was withdrawn. The
Commission has considered all timely and
responsive public comments it received in response
to its NPRM.
48 The FTC Act provides that ‘‘an interested
person is entitled to present his position orally or
by documentary submission (or both).’’ 15 U.S.C.
57a(c)(2)(A).
49 16 CFR 1.11(e).
50 The six requesters were (1) International
Franchise Association; (2) TechFreedom; (3)
Performance Driven Marketing Institute; (4)
NCTA—The Internet & Television Association; (5)
Frontdoor; and (6) Interactive Advertising Bureau.
All but one—TechFreedom—identified their
interest in the proceeding either as industry groups
or private companies.
51 See Notice of Informal Hearing (‘‘Hearing
Notice’’), 88 FR 85525, 85526 (Dec. 8, 2023).
52 88 FR 85526–27.
53 The Hearing Notice also allowed interested
persons to make additional written submissions.
The following interested parties timely filed
additional written submissions on December 22,
2023: (1) BSA—The Software Alliance; (2) PDMI;
(3) U.S. Chamber of Commerce; (4) IAB; (5) NCTA;
and two individuals. All filings related to the
Hearing Notice are available online at
regulations.gov at https://www.regulations.gov/
document/FTC-2023-0073-0001.
various statutes and FTC regulations.41
The 2021 Enforcement Policy Statement
enunciated various principles rooted in
FTC case law and restated previous
guidance related to the provision of
information to consumers, consent, and
cancellations. Among these principles,
the Statement emphasized ROSCA’s
requirement that sellers disclose all
material terms related to the underlying
product or service that are necessary to
prevent deception, regardless of
whether that term relates directly to the
terms of the negative option offer.42 In
addition, consistent with ROSCA,
judicial decisions applying section 5,
and cases brought by the Commission,
the 2021 Enforcement Policy Statement
reiterated sellers should obtain
consumers’ acceptance of the negative
option feature separately from any other
portion of the transaction. Finally, the
Statement explained sellers should
provide cancellation mechanisms at
least as easy to use as the method the
consumer employed to initiate the
negative option feature.
C. 2023 Notice of Proposed Rulemaking
After reviewing the comments
received in response to the ANPR and
issuing the 2021 Enforcement Policy
Statement, the Commission issued a
notice of proposed rulemaking
(‘‘NPRM’’) on April 23, 2023 (88 FR
24716). In the NPRM, the Commission
proposed amending the existing Rule to
prohibit material misrepresentations
and to require sellers to provide
important information to consumers,
obtain consumers’ express informed
consent, and ensure consumers can
easily cancel negative option programs
if they choose. All these proposed
changes would be applicable to all
forms of negative option marketing
across all media (e.g., telephone,
internet, traditional print media, and in-
person transactions).43
The Commission designed the
proposed amendments to curb deceptive
or unfair practices occurring in negative
option marketing. The Commission
sought public comment on ‘‘all aspects’’
of the proposal, ‘‘including the likely
effectiveness of the proposed Rule in
helping the Commission combat unfair
or deceptive practices in negative option
marketing.’’ 44 The Commission further
identified specific questions and areas
where it solicited available data and
evidence, including data and evidence
supporting alternatives to the proposed
regulations.45 The Commission did not
identify any disputed issues of material
fact that needed to be resolved at an
informal hearing. 46 The comment
period closed on June 23, 2023.
In response, the Commission received
more than 16,000 comments, and
published the 1,162 unique comments
from stakeholders representing a wide
range of viewpoints.47 Although some
commenters raised concerns and
recommended specific modifications or
additions to the proposed Rule (some of
which the Commission adopts as
discussed herein), the majority generally
supported the Rule. The Commission
discusses these comments in section VII
below.
D. Informal Hearing and Recommended
Decision
Section 18 of the Federal Trade
Commission Act, 15 U.S.C. 57a, and the
Commission’s Rules of Practice, 16 CFR
1.11(e), 48 provide interested persons the
opportunity to make an oral statement at
an informal hearing upon request.49 The
Commission received six 50 such
requests. Additionally, although the
Commission did not designate any
disputed issues of material fact in the
NPRM, two interested commenters, IAB
and NCTA, proposed the Commission
consider several potential disputed
issues of material fact.51
On December 8, 2023, the
Commission published an Initial Notice
of Informal Hearing (88 FR 85525,
‘‘Hearing Notice’’). The Hearing Notice
designated the Honorable Carol Fox
Foelak, Administrative Law Judge for
the Securities Exchange Commission, to
serve as the presiding officer of the
informal hearing and scheduled the
informal hearing for January 16, 2024. In
the Hearing Notice, the Commission
again did not designate any disputed
issues of material fact, finding the issues
raised by IAB and NCTA did not need
to be resolved at the informal hearing
through cross-examination. 52
On January 16, 2024, Judge Foelak
commenced the informal hearing, at
which IAB, NCTA, Performance Driven
Marketing Institute (‘‘PDMI’’),
TechFreedom, and the International
Franchise Association (‘‘IFA’’) appeared
and made oral submissions subject to
cross-examination. 53 Included in their
oral and written submissions, IAB and
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54 Subsequently, IFA also asserted there were
disputed issues of material fact regarding the
impact to both small businesses and their
consumers. IFA, FTC–2024–0001–0009.
55 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042.
56 15 U.S.C. 57a and 16 CFR 1.14(a)(1).
57 15 U.S.C. 57a(b)(3).
58 15 U.S.C. 57a(b)(3)(A)–(B); see also
Compassion Over Killing v. FDA, 849 F.3d 849, 855
(9th Cir. 2017).
59 NPRM, 88 FR 24725.
60 In the NPRM, the Commission cited a number
of its law enforcement actions challenging negative
option marketing practices, including, for example,
FTC v. Process Am., Inc., No. 1:14–cv–00386 (C.D.
Cal. 2014) (processing of unauthorized charges
relating to negative option marketing); FTC v.
Willms, No. 2:11–cv–00828 (W.D. Wash. 2011)
(internet free trials and continuity plans); FTC v.
Moneymaker, No. 2:11–cv–00461 (D. Nev. 2011)
(internet trial offers and continuity programs); FTC
v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010)
(internet trial offers); and FTC v. John Beck
Amazing Profits, LLC, No. 2:09–cv–04719 (C.D. Cal.
2009) (infomercial and telemarketing trial offers and
continuity programs). Further examples of these
matters include: FTC v. Triangle Media Corp., No.
3:18–cv–01388 (S.D. Cal. 2018); FTC v. Credit
Bureau Ctr., LLC, No. 1:17–cv–00194 (N.D. Ill.
2017); FTC v. JDI Dating, Ltd., No. 1:14–cv–08400
(N.D. Ill. 2014); FTC v. One Techs., LP, No. 3:14–
cv–05066 (N.D. Cal. 2014); FTC v. Health Formulas,
LLC, No. 2:14–cv–01649 (D. Nev. 2014); FTC v.
NutraClick, LLC, No. 2:16–cv–06819 (C.D. Cal.
2016); FTC v. XXL Impressions, LLC, No. 1:17–cv–
00067 (D. Me. 2017); FTC v. AAFE Prods. Corp., No.
3:17–cv–00575 (S.D. Cal. 2017); FTC v. Pact, Inc.,
No. 2:17–cv–1429 (W.D. Wash. 2017); FTC v. Tarr,
No. 3:17–cv–02024 (S.D. Cal. 2017); FTC v.
AdoreMe, Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017);
FTC v. DOTAuthority.com, Inc., No. 0:16–cv–62186
(S.D. Fla. 2016); FTC v. BunZai Media Grp., Inc.,
No. 2:15–cv–04527 (C.D. Cal. 2015); and FTC v.
RevMountain, LLC, No. 2:17–cv–02000 (D. Nev.
2017); see also FTC v. WealthPress, Inc., No. 3:23–
cv–00046 (M.D. Fla. 2023); FTC v. Bridge It, Inc.,
No. 1:23–cv–09651 (S.D.N.Y. 2023); FTC v.
Amazon.com, Inc., No. 2:23–cv–0932 (W.D. Wash.
2023); FTC v. FloatMe Corp., No. 5:24–cv–00001
(W.D. Tex. 2024); United States v. Adobe, Inc., No.
5:24–cv–03630 (N.D. Cal. 2024).
61 See, e.g., CFPB v. Transunion, No. 1:22–cv–
01880 (N.D. Ill. 2022); CFPB v. ACTIVE Network,
LLC, No. 4:22–cv–00898 (E.D. Tex. 2022); CFPB v.
Sterling Jewelers, Inc., No. 1:19–cv–00448 (S.D.N.Y.
2019); In re Equifax Inc., et al., CFPB No. 2017–
CFPB–0001, 2017 WL 1036710 (Jan. 3, 2017)
(consent order); CFPB v. Prime Mktg. Holdings, LLC,
No. 2:16–cv–07111 (C.D. Cal. 2016); In re
Transunion Interactive, Inc., et al., CFPB No. 2017–
CFPB–0002, 2017 WL 1036711 (Jan. 3, 2017)
(consent order); CFPB v. Student Financial Aid
Servs., Inc., No. 2:15–cv–00821 (E.D. Cal. 2015);
CFPB v. Affinion Group Holdings, Inc., No. 5:15–
cv–01005 (D. Conn. 2015); CFPB v. Intersections
Inc., No. 1:15–cv–835 (E.D. Va. 2015). Notably, the
CFPB has independent authority to enforce FTC
rules, and both agencies share some overlapping
jurisdiction. See 12 U.S.C. 5581(b)(5)(B)(ii).
62 TINA, FTC–2019–0082–0014 (cmt. to ANPR,
https://www.regulations.gov/comment/FTC-2019-
0082-0014) and FTC–2023–0033–1139 (cmt. to
NPRM).
NCTA renewed their requests to have
the presiding officer designate disputed
issues of material fact.54 Following the
hearing, Judge Foelak designated two
disputed issues: (1) will the proposed
rule have an annual effect on the
national economy of $100 million or
more?; and (2) what will the
recordkeeping and disclosure costs
associated with the proposed rule be?
Judge Foelak held subsequent hearings
on January 31, 2024, and February 14,
2024. She allowed post-hearing briefs
filed by February 22, and February 28,
2024, respectively, and issued her
recommended decision on April 12,
2024. Based on the evidence, the
presiding officer found: (1) the proposed
Rule will have an annual effect on the
national economy of $100 million or
more; and (2) there is insufficient
evidence to make a finding regarding
the size of the recordkeeping and
disclosure costs associated with the
proposed Rule.55
VII. Discussion of Final Rule
A. Legal Standard for Promulgating the
Final Rule
As explained above in section II, the
Commission promulgates the final Rule,
16 CFR part 425, pursuant to section 18
of the FTC Act, also known as
Magnuson-Moss rulemaking
(‘‘Magnuson-Moss’’). Under section 18
and the Commission Rules,56 to
promulgate a rule the Commission must:
(1) issue a SBP with statements
detailing: (a) the prevalence of the acts
or practices treated by the rule; (b) the
manner and context in which such acts
or practices are unfair or deceptive; and
(c) the economic effect of the rule,
taking into account the effect on small
business and consumers; and (2) ‘‘define
with specificity acts or practices which
are unfair or deceptive.’’ The
Commission addresses these
requirements in part A.1–2. In part A.3,
the Commission addresses additional
legal issues, including the ANPR’s scope
and the ‘‘major questions’’ doctrine.
1. Statements Required Under Section
18(d) of the FTC Act
(a) Statement Regarding Prevalence of
the Acts and Practices Treated by the
Rule
Under the Magnuson-Moss statute,
the Commission may promulgate rules if
it ‘‘has reason to believe that the unfair
or deceptive acts or practices which are
the subject of the proposed rulemaking
are prevalent.’’ 57 An act or practice is
‘‘prevalent’’ if the FTC has previously
issued cease and desist orders regarding
the act or practice, or if ‘‘any other
information available to the
Commission indicates a widespread
pattern of unfair or deceptive acts or
practices.’’ 58 Based on the rulemaking
record, the Commission has more than
sufficient reason to believe unfair or
deceptive acts and practices in the
negative option marketplace are
prevalent. These practices include: (1)
material misrepresentations made while
marketing using negative option features
to induce consumers to enter into
negative option programs; (2) failure to
provide important information about
material terms prior to billing
consumers; (3) lack of informed
consumer consent; and (4) failure to
provide consumers with a simple
cancellation method, including failure
to honor cancellation requests, refusal to
provide refunds to consumers who
unknowingly enrolled in programs,
denying consumers refunds, forcing
them to pay to return the unordered
goods, requiring consumers to cancel
using a more difficult method than the
one used to sign up for the program, and
forcing consumers to contend with
multiple upsells before allowing
cancellation.59 These practices cause
consumer harm by luring consumers
into purchasing goods and services they
do not want, or ensnaring consumers
into unwanted recurring payments that
are difficult or impossible to cancel.
The Commission relies on substantial
evidence in the record showing a
widespread pattern of unfair or
deceptive conduct in the negative
option marketplace. This evidence
generally falls into three categories:
State, private, and Federal actions
(including administrative and Federal
court FTC law enforcement actions);
consumer complaints and comments;
and studies. The Commission discusses
each in turn below.
Federal, State, and Private Actions.
As discussed in the ANPR and NPRM,
the volume of enforcement efforts in
recent years seeking to stem illegal
negative option marketing is significant.
These matters involve a range of
deceptive and unfair practices,
including: failure to adequately disclose
the existence of negative options,
including after the expiration of free
trials; enrollment without consumer
consent; and inadequate or
unnecessarily burdensome cancellation
and refund procedures. The FTC itself
has brought at least 35 such cases in the
years since ROSCA was enacted.60 The
Consumer Financial Protection Bureau
(‘‘CFPB’’) also has brought many of its
own negative option cases.61 Truth in
Advertising, Inc. (‘‘TINA’’),62 a
consumer advocacy organization, stated
in 2019 that more than 100 Federal class
actions involving various negative
option terms and conditions have been
filed since 2014. Notwithstanding these
actions, according to TINA, ‘‘the
incidence of deceptive negative option
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63 NPRM, 88 FR 24720.
64 TINA, FTC–2023–0033–1139.
65 Several State Attorneys General offered
comments to the ANPR (FTC–2019–0082–0012
(State Attorneys General cmt. to ANPR, https://
www.regulations.gov/comment/FTC-2019-0082-
0012)), and additionally 26 Attorneys General for
the States of Alabama, Arizona, California,
Colorado, Connecticut, Delaware, District of
Columbia, Hawaii, Illinois, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Nebraska,
Nevada, New Jersey, New York, North Carolina,
North Dakota, Oklahoma, Oregon, Pennsylvania,
Vermont, Washington, and Wisconsin (‘‘State AGs’’)
filed comments in response to the NPRM. See State
AGs, FTC–2023–0033–0886 (cmt. to NPRM).
66 NPRM, 88 FR 24720; State Attorneys General
(ANPR), FTC–2019–0082–0012. They further
explained the nature of the underlying products
often fails to alert consumers of their enrollment in
a negative option program. For instance, many
offers involve credit monitoring or anti-virus
computer programs costing less than $20 a month
and have no tangible presence for consumers. The
State AGs explained consumers are often unaware
of having ordered these products, never use them,
and never notice them on their bills. The State AGs
further explained these transactions often pull
consumers into a stream of recurring payments by
obtaining credit card information to ostensibly pay
for a small shipping charge. Consequently, they
commented many consumers have been billed for
such services for years before discovering the
unauthorized charges. Id.
67 NPRM, 88 FR 24721.
68 State Attorneys General (ANPR), FTC–2019–
0082–0012.
69 Id.
70 State AGs, FTC–2023–0033–0886.
71 See, e.g., Joint comment from Professor Kaitlin
Caruso (U. of Maine School of Law), Professor Jeff
Sovern (St. John’s U. School of Law), Professor Dee
Pridgen (U. of Wyoming College of Law), Professor
Chrystin Ondersma (Rutgers Law School), Professor
Vijay Raghavan (Brooklyn Law School), Professor
David Vladeck (Georgetown U. Law Center),
Professor Edward Janger (Brooklyn Law School),
and Professor Susan Block-Lieb (Fordham U.
School of Law) (collectively, ‘‘Law Professors’’),
FTC–2023–0033–0861.
72 See, e.g., PDMI, FTC–2023–0033–0864 (stating
over 27 states regulate negative option marketing);
N/MA, FTC–2023–0033–0873 (stating 35 states and
the District of Columbia now have automatic
renewal laws, and at least 20 address all forms of
automatic renewals); Service Contract Industry
Council (‘‘SCIC’’), FTC–2023–0033–0879 (noting
about half of U.S. states enacted auto-renewal laws);
NRF, FTC–2023–0033–1005 (stating at least half of
all states have statutes governing free-trial, negative-
option, and/or automatic-renewal programs); see
also Law Professors, FTC–2323–0033–0861 (stating
the ‘‘number of states that have recently adopted
specific laws targeting negative option marketing,
on top of their general prohibitions on unfair and
deceptive practices and ability to enforce ROSCA,
is particularly noteworthy.’’); IHRSA, The Global
Health & Fitness Association (‘‘IHRSA’’), FTC–
2023–0033–0863 (noting many states have laws on
negative options). But see The Center for Consumer
Law and Economic Justice at UC Berkeley School
of Law (‘‘Berkeley Consumer Law Center’’), FTC–
2023–0033–0855 (stating that ‘‘fewer than half the
states have a law specifically addressing negative
option marketing’’).
73 Law Professors, FTC–2023–0033–0861. This
group also points out that private industry, too, has
felt the need for more action in this area, noting that
VISA and Mastercard have their own requirements
for businesses that bill using a negative option
model.
74 See, e.g., United States v. Adobe, Inc., No.
5:24–cv–03630 (N.D. Cal. 2024) (ECF No. 40, Amd.
Compl.); FTC v. Amazon.com, Inc., No. 2:23–cv–
0932 (W.D. Wash. 2023) (ECF No. 67, Amd.
Compl.).
75 TINA, FTC–2023–0033–1139.
76 The term ‘‘dark patterns’’ has been used to
describe design practices that trick or manipulate
users into making choices they would not otherwise
have made and that may cause harm See Bringing
Dark Patterns to Light, FTC Staff Report (Sept.
2022), https://www.ftc.gov/system/files/ftc_gov/pdf/
P214800%20Dark%20Patterns%20Report%209.14.
2022%20-%20FINAL.pdf.
77 Berkeley Consumer Law Center, FTC–2023–
0033–0855.
78 Law Professors, FTC–2023–0033–0861.
79 NPRM, 88 FR 24720–21.
offers continues to rise.’’ 63 TINA also
reports that deceptive negative options
‘‘have only continued to grow’’ since its
2019 comment. 64
Several state Attorneys General 65 also
referenced dozens of enforcement
actions taken in recent years to address
the proliferation of deceptive negative
option practices they regularly
encounter, including the ‘‘lack of
informed consumer consent, lack of
clear and conspicuous disclosures,
failure to honor cancellation requests
and/or refusal to provide refunds to
consumers who unknowingly enrolled
in plans.’’ 66 These agencies explained
their actions ‘‘demonstrate that
problems persist in this area and that
additional regulatory action is
needed.’’ 67 For example, over the last
decade, New York alone has reached 23
negative option settlements involving a
variety of products and services such as
membership programs, credit
monitoring, dietary supplements, and
apparel.68 They also described several
multi- and individual state law
enforcement actions involving negative
option offers for products and services
such as satellite radio, social networking
services, language learning programs,
security monitoring, and dietary
supplements. They further recounted
numerous, illustrative complaints from
consumers who ordered what they
thought were free, no-obligation
samples but then found themselves
enrolled in costly continuity
programs.69
Additionally, the State AGs outlined
several ongoing investigations into
deceptive or unfair negative option
programs since 2019. These
investigations include allegations of
misrepresenting offers as free when they
were not; and failure to clearly and
conspicuously disclose negative option
features.70
Additionally, consumer advocacy
organizations and others explained that
the widespread prevalence of deceptive
acts and practices underscores the
‘‘ongoing need for [S]tate engagement to
limit negative option abuses.’’ 71 Several
commenters observed that more than
half of States specifically regulate some
aspect of negative option marketing.72 A
group of law professors explain this
‘‘ongoing engagement just shows that
unscrupulous negative-option business
models remain such a problem that
[S]tates increasingly find themselves
needing to step in.’’ 73
Consumer Complaints and
Comments. The FTC receives tens of
thousands of complaints about negative
options each year through its Sentinel
complaint database, and marketers
receive many more as demonstrated by
evidence in FTC cases.74 Additionally,
TINA explained that negative options
are one of its top complaint categories.
These complaints usually involve
consumers who unwittingly enroll in
programs and then find it difficult or
impossible to cancel.75
Moreover, hundreds of consumer
comments detailed specific practices
(discussed more thoroughly in
connection with the section-by-section
analysis below) demonstrating the
prevalence of unfair or deceptive
negative option practices. Likewise,
comments from public interest and
consumer advocacy groups further
describe existing deceptive or unfair
practices prevalent in the negative
option marketplace. For example,
Berkeley Consumer Law Center
explained businesses regularly use dark
patterns 76 to facilitate enrollment in
subscription-based products and inhibit
cancellation, and provided numerous
examples of these activities.77 A group
of law professors referenced the
burgeoning industry offering to help
consumers identify and cancel their
unwanted subscriptions. As they
explained: ‘‘One might expect that, if
consumers experienced the marketplace
as one in which they are adequately
informed of recurring payments and
readily able to cancel them, there would
not be an emerging industry to help
them do just that.’’ 78
Members of Congress also detailed
ongoing problems in this area. Citing the
increase in consumer complaints and
consumer harm in recent years,
Representative Takano stated,
‘‘deceptive online marketing and
unclear recurring payment plans are
leaving too many consumers on the
hook for products they may not want or
even know they purchased.’’ 79
Representatives Schiff and Norton noted
their constituents’ desire for greater
protections in the negative option
marketplace, stating the ‘‘proposed
updates will help put the consumers
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80 Schiff and Norton, FTC–2023–0033–0868.
81 NPRM, 88 FR 24725.
82 Steve Baker, Subscription Traps and Deceptive
Free Trials Scam Millions with Misleading Ads and
Fake Celebrity Endorsements, Better Business
Bureau (Dec. 2018), https://www.bbb.org/article/
investigations/18929-subscription-traps-and-
deceptive-free-trials-scammillions-with-misleading-
ads-and-fake-celebrity-endorsements.
83 Id.; see also Better Business Bureau, BBB
Investigation Update: Free Trial Offer Scams (Apr.
2020), https://www.bbb.org/article/news-releases/
22040-bbb-update-free-trial-offerscams (reporting
the total has risen to nearly $1.4 billion since the
2018 BBB study); id. (observing that while
celebrities, credit card companies and government
agencies have increased their efforts to fight
deceptive free trial offer scams, victims continue to
lose millions of dollars to fraudsters after the
release of a December 2018 BBB study about the
shady practices).
84 The six public interest and consumer advocacy
groups are: Consumer Action, Consumer Federation
of America, Demand Progress Education Fund,
National Association of Consumer Advocates,
Nation Consumer Law Center (on behalf of its low
income clients,) and National Consumers League
(‘‘NCL’’) (collectively, the ‘‘Public Interest
Groups’’).
85 Steve Baker, Subscription Traps and Deceptive
Free Trials Scam Millions with Misleading Ads and
Fake Celebrity Endorsements, Better Business
Bureau (Dec. 2018).
86 NPRM, 88 FR 24720 (citing Rebecca Lake,
‘‘Report: Hidden Fees Are #1 Consumer
Complaint,’’ mybanktracker.com (updated Oct. 16,
2018), https://www.mybanktracker.com/money-
tips/money/hidden-fees-consumercomplaint-
253387.)
87 NPRM, 88 FR 24721.
88 Bankrate, ‘‘Despite safety concerns, 64% of
U.S. debit or credit cardholders save their
information online’’ (Oct. 24, 2019), at https://
www.bankrate.com/pdfs/pr/20191024-online-
shopping-survey.pdf (as cited by Civil Society
Organizations, FTC–2023–0033–0870).
89 NPRM, 88 FR 24720.
90 Public Interest Groups, FTC–2023–0033–0880
(citing ‘‘Subscription Service Statistics and Costs,’’
C+R Research Blog (May 18, 2022)).
91 Public Interest Groups, FTC–2023–0033–0880
(citing Chase, ‘‘Survey from Chase Reveals That
Two-Thirds of Consumers Have Forgotten About At
Least One Recurring Payment In The Last Year’’
(Apr. 1, 2021), https://media.chase.com/news/
survey-from-chase-reveals).
92 State AGs, FTC–2023–0033–00866 (citing
Sarah Brady and Korrena Bailie, ‘‘5 Tools To Help
You Cancel Unwanted Subscriptions,’’ Forbes (July
13, 2022), https://www.forbes.com/advisor/
personal-finance/manage-subscriptions). See also
Einav, Liran, et al., ‘‘Selling Subscriptions’’ (Dec. 1,
2023), https://nmahoney.people.stanford.edu/sites/
g/files/sbiybj23976/files/media/file/mahoney_
subscriptions.pdf.
93 TINA, FTC–2023–0033–1139.
94 Id.
95 See n.91.
96 NCTA, FTC–2023–0033–0858; see also SCIC,
FTC–2023–0033–0879.
97 BSA, FTC–2023–0033–1015; see also
Anonymous commenter, FTC–2023–0033–1007;
NCTA, FTC–2023–0033–0858.
98 See sections VII.A.1.a–b and section II.A.1.b of
this SBP.
99 See generally 15 U.S.C. 57a.
back in control of their purchases and
subscriptions.’’ 80
Studies. Finally, ‘‘studies cited by
commenters confirm a pattern of
consumer ensnarement in unwanted
recurring payments.’’ 81 A Better
Business Bureau study of FTC data,
titled ‘‘Subscription Traps and
Deceptive Free Trials Scam Millions
with Misleading Ads and Fake Celebrity
Endorsements,’’ demonstrated
complaints about free trials doubled
between 2015 and 2017, with
complaints during the period reaching
nearly 37,000. 82 The BBB study shows
consumer losses in FTC ‘‘free trial offer’’
cases exceeded $1.3 billion (over the ten
years covered by the study).83 A group
of consumer and public interest
advocacy organizations, including the
National Consumers League 84 stated
that, according to the BBB, the average
consumer loss for a free trial is $186.85
Referring to another survey conducted
in 2016, TINA noted unwanted fees
associated with trial offers and
automatically renewing subscriptions
ranked as ‘‘the biggest financial
complaint of consumers.’’ 86 Similarly,
TINA noted the FBI’s internet Crime
Complaint Center recorded a rise in
complaints about free trial offers,
growing from 1,738 in 2015 to 2,486 in
2017.87 A 2019 Bankrate.com survey
cited by NCL found that 59% of
consumers have been signed up ‘‘against
their will’’ for ‘‘free trials’’ that
automatically converted into a recurring
payment.88
NCL and others also cited a 2017
national telephone survey
commissioned by CreditCards.com
finding 35% of U.S. consumers have
enrolled in at least one automatically
renewing contract without realizing it.89
In response to the NPRM, the Public
Interest Groups cited more recent
studies confirming the continued
prevalence of harms from deceptive and
unfair negative option practices. For
instance, consumer groups referenced a
2022 study, which concluded ‘‘on
average, consumers pay two-and-a-half
times what they originally estimated on
monthly subscriptions, likely due to the
lack of adequate notice from sellers.’’ 90
They also noted burdensome
cancellation procedures remain
rampant. ‘‘One survey found that more
than half of respondents reported it took
an average of three months to cancel
unwanted recurring payments.’’ 91 That
same study reported 71% of individuals
lost more than $50 a month in
unwanted subscriptions. Another study
concluded consumers underestimate
how much they pay to maintain their
subscriptions by an average of $133/
month (or $1,596 per year), and 42% of
the consumers had forgotten about a
subscription for which they continued
to pay.92
Finally, TINA also noted a consumer
survey by the Washington Attorney
General’s office finding ‘‘59% of
Washingtonians (3.5 million residents)
may have been unintentionally enrolled
in a subscription plan or service when
they thought they were making a one-
time purchase.’’ 93 TINA contended this
is ‘‘consistent with’’ the 2022 Bankrate
survey finding more than half of U.S.
adults experience unwanted charges
from a subscription or membership.94
These findings are further supported by
a Chase Bank study in 2021 finding
nearly three-quarters of Americans
waste more than $50 a month on
unwanted subscription fees.95
Despite the robust evidence that
unfair or deceptive practices are
exceedingly prevalent, several trade
organizations challenged the
Commission’s proposed prevalence
determination. However, their
arguments, as discussed below, are not
persuasive.
First, they argued the Commission
must show prevalence in a specific
industry in order to regulate negative
option practices in that industry, but the
Commission failed to do so. For
instance, NCTA asserted there is no
evidence of widespread deceptive
negative option practices in the
broadband, cable, or voice industries
warranting regulation.96 Other
commenters argued the Commission
must identify the prevalence of a
specific deceptive or unfair act to
warrant regulating that specific act or
practice under Section 18. For instance,
IAB, NCTA, TechNet, and TechFreedom
argued the Commission failed to show
prevalence of misrepresentations about
the underlying product or service in
connection with negative option
contracts. Similarly, three commenters
argued the Commission should limit the
scope of the Rule to business-to-
consumer transactions and exclude
business-to-business (‘‘B2B’’)
transactions, in part, because the
Commission failed to show ‘‘the
prevalence of harms created by
automatically-renewing subscriptions
entered into in the business-to-business
context.’’ 97
As demonstrated above, however,
there is ample evidence in the record
demonstrating the prevalence of the
specific unfair and deceptive practices
across numerous sectors of the
economy, which the Commission now
addresses in an industry-neutral
fashion. 98 Moreover, nothing in Section
18 requires the Commission to find
prevalence regarding a specific industry
or group.99 The Commission need only
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100 Pennsylvania Funeral Dirs. Ass’n, Inc. v. FTC,
41 F.3d 81, 87–88 (3d Cir. 1994) (holding the FTC
did not need ‘‘substantial, rigorous, quantitative
studies’’ or to show the practice occurs in a certain
percentage of transactions through the country to
find prevalence). ‘‘Further, even where there is a
limited record as to the prevalence of a practice on
a nationwide basis or where the data reviewed only
relates to a few states, the practice can be found to
be prevalent enough to warrant a regulation.’’ Id. at
87.
101 NCTA, FTC–2023–0073–0008.
102 CTA, FTC–2023–0033–0997. CTA reports that
a 2022 study found the global subscription e-
commerce market is expected to reach $904.2
billion by 2026, and between 2021 and 2022,
existing subscription brands grew their customer
bases by 31 percent.
103 According to a 2018 McKinsey & Company
study, the subscription e-commerce market
increased more than 100% over a five-year period
prior to the study’s publication. Tony Chen, Ken
Fenyo, Sylvia Yang, and Jessica Zhang, ‘‘Thinking
Inside the Subscription Box: New Research on E-
Commerce Consumers,’’ McKinsey & Company
(February 2018) (as cited by, e.g., TechNet, FTC–
2023–0033–0869 and Individual commenter, FTC–
2023–0033–0800). PDMI also observed that negative
options are offered in a wide array of product and
services from major brands including media
services, meal preparation kits, shaving and beauty
products, beer and wine, contacts and ordinary
household consumables. FTC–2023–0033–0864.
Digital Content Next (‘‘DCN’’), FTC–2023–0033–
0983, reports the United States had more than one
billion paid subscriptions in Q1 2023 across the
digital media landscape, indicating almost all
online U.S. households subscribe to one or more
digital media subscription services. See also, e.g.,
Individual commenter, FTC–2023–0033–0137
(detailing difficulty cancelling recurring
subscriptions for newspaper, mobile, and other
businesses); Individual commenter, FTC–2023–
0033–0217 (reported spending hours on the phone
and online to cancel mobile account); Individual
commenter, FTC–2023–0033–0465 (reported
difficulty cancelling rewards program subscription);
Individual commenter, FTC–2023–0033–0674
(complaint reporting difficulty canceling mobile
device protection subscription); Individual
commenter, FTC–2023–0033–0965 (trying to cancel
mobile phone service because they bill for different
amount every month); Individual commenter, FTC–
2023–0033–0003 (difficulty cancelling ‘‘home
warranty’’ subscription); Individual commenter,
FTC–2023–0033–0004 (full cost and refund policy
for gym contract not clearly disclosed); Individual
commenter, FTC–2023–0033–0006 (‘‘2 attempts and
far too much time’’ to cancel radio subscription);
Individual commenter, FTC–2023–0033–0008
(discussing how ‘‘subscription services in particular
pervade the market. Even long-standing ‘buy-it-
once’ products such as certain software suits have
moved to subscription models’’); Anonymous
commenter, FTC–2023–0033–0013 (difficulty
canceling home security monitoring contract,
including hearing unwanted upsells); Anonymous
commenter, FTC–2023–0033–0023 (webhosting
service); Anonymous commenter, FTC–2023–0033–
0024 (cable service); Individual commenter, FTC–
2023–0033–0039 (language learning app);
Anonymous commenter, FTC–2023–0033–0046
(software); Individual commenter, FTC–2023–0033–
0049 (cannot cancel streaming service); Individual
commenter, FTC–2023–0033–0050 (virus protection
software and charity); Individual commenter, FTC–
2023–0033–0052 (e-news service subscription);
Individual commenter, FTC–2023–0033–0057
(magazine subscription service); Individual
commenter, FTC–2023–00330061 (newspaper);
Individual commenter, FTC–2023–0033–0063 (big
box retailer membership); Individual commenter,
FTC–2023–0033–0064 (cosmetics); Anonymous
commenter, FTC–2023–0033–0066 (home warranty
service); Individual commenter, FTC–2023–0033–
0071 (lawncare service).
104 See Prof. Chris Jay Hoofnagle, UC Berkeley
(‘‘Hoofnagle’’), FTC–2023–0033–1137 (discussing
the subscription economy). See also nn.245–252,
collecting cases showing deceptive and unfair
negative option practices occur across a wide range
of industries and involve a variety of claims.
105 State AGs, FTC–2023–0033–0886 (consumer
paid for shipping on ‘‘free’’ gift only to have it
converted to a paid item because she retained the
item); id. (Money Map Press), FTC v. Triangle
Media Corp., No. 3:18–cv–01388 (S.D. Cal. 2018)
(consumers who clicked on ads for risk free trials,
paid for shipping and handling fees unwittingly
enrolled in negative option programs).
106 See nn.245–252 (collecting cases).
107 See State Attorneys General (ANPR), FTC–
2019–0082–0012 and State AGs, FTC–2023–0033–
0886; TINA, FTC–2019–0082–0014 and FTC–2023–
0033–1139.
108 See, e.g., id.; see also FTC v. Pact, Inc., No.
2:17–cv–1429 (W.D. Wash. 2017); United States v.
MyLife.com, Inc., No. 2:20–cv–6692 (C.D. Cal.
2020); FTC v. NutraClick, LLC, No. 2:20–cv–08612
(C.D. Cal. 2020); In re Dun & Bradstreet, Inc., FTC
Docket No. C–4761 (2022). See generally Staff
Report, n.16.
109 See, e.g., State Attorneys General (ANPR),
FTC–2019–0082–0012 and State AGs, FTC–2023–
0033–0886; FTC v. FloatMe Corp., No. 5:24–cv–
00001 (W.D. Tex. 2024); United States v. Cerebral,
Inc., No. 1:24–cv–21376 (S.D. Fla. 2024); FTC v.
Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y. 2023);
FTC v. Benefytt Techs., Inc., No. 8:22–cv–01794
(M.D. Fla. 2022); FTC v. First Am. Payment Sys.,
No. 4:22–cv–00654 (E.D. Tex. 2022); FTC v.
NutraClick, LLC, No. 2:20–cv–08612 (C.D. Cal.
2020); FTC v. F9 Advert., LLC, No. 3:19–cv–01174
(D.P.R. 2019); FTC v. Age of Learning, Inc., No.
2:20–cv–07996 (C.D. Cal. 2020); FTC v. NutraClick,
LLC, No. 2:16–cv–06819 (C.D. Cal. 2016); FTC v. AH
Media Grp., LLC, No. 3:19–cv–04022 (N.D. Cal.
2019); In re Urthbox, Inc., FTC Docket No. C–4676
(2019); FTC v. Health Rsch. Labs., LLC, No. 2:17–
cv–00467 (D. Me. 2017); FTC v HispaNexo, Inc., No.
1:06–cv–424 (E.D. Va. 2006).
110 See section VII.B.6.
111 Section VII.A.1.a.
find ‘‘some basis or evidence’’
demonstrating the practice the
Commission seeks to regulate ‘‘does
indeed occur.’’ 100 Such evidence exists
here in abundance. As NCTA itself
pointed out, individual consumers
complained of deceptive and unfair
practices in its members’ industries.101
Further, ‘‘consumer subscription models
are rapidly growing in popularity,’’ 102
and there is evidence of the
proliferation of negative option features
in virtually every industry.103 The
harms outlined here resulted from the
negative option transaction itself, and
many businesses, regardless of industry,
are incentivized to continue to leverage
negative options to the possible
detriment of consumers.104 The
Commission also declines to limit the
scope of the final Rule by excluding
business-to-business transactions. As
explained in Section VII.B.1, the
Commission has a long history of
protecting businesses, particularly small
business, in their role as consumers; the
practices and harms described here
impact these consumers, as well.
(b) The Manner and Context in Which
the Acts or Practices Are Unfair or
Deceptive
Pursuant to Section 18 and the
Commission’s Rules, the Commission
must also state the manner and context
in which the prevalent acts or practices
are unfair or deceptive. The record
demonstrates consumers are often lured
into enrolling in negative option
programs through seller
misrepresentations about material
facts—for instance, when a seller offers
a product for ‘‘free’’ when it is not.105
Additionally, sellers misrepresent other
aspects of the deal, such as product
features, processing or shipping fees,
billing information use, deadlines,
consumer authorization, refunds,
cancellations, among other facts.106
Sellers also often fail to disclose
important information about the offer
prior to billing the consumer. As
detailed in the comments from, inter
alia, State AGs and TINA, sellers fail to
disclose in a clear and conspicuous
manner the existence of the negative
option feature, refund and cancellation
deadlines, or other material terms of the
agreement, resulting in consumers
purchasing goods or services they do
not want.107 All of these unfair or
deceptive acts are further supported in
dozens of FTC, State AG, and class
action cases. 108
The record also demonstrates sellers
fail to obtain consumers’ express
informed consent to the negative option
feature before charging them. For
instance, as detailed in representative
consumer complaints from State AGs
and several FTC cases, consumers are
often unwittingly enrolled into
recurring subscriptions with promises of
no- or low-cost or discounted rates (not
knowing that agreeing will result in
subscription to a costly membership),
with consumers not realizing the
deceptive and unfair enrollment until
they see unexpected charges, often after
several billing cycles.109
Finally, substantial record evidence
shows sellers often fail to provide a
simple cancellation method. If
consumers cannot easily leave a
negative option program when they
wish, the negative option feature is
merely a means of charging consumers
for goods or services they no longer
want. Commission cases, the Sentinel
complaint database, and State Attorneys
General’s complaints all show sellers
often use difficult and cumbersome
cancellation mechanisms to prevent or
curtail cancellations. 110 This fact is
further corroborated by studies
discussed above. 111
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112 IAB, FTC–2023–0033–1000; Coalition
Comments from CCIA, Direct Selling Association,
Information Technology Industry Council, IAB,
Software & Information Industry Association, and
Chamber (‘‘Coalition’’), FTC–2023–0033–0884;
PDMI, FTC–2023–033–0864; TechNet, FTC–2023–
0033–0869; TechFreedom, FTC–2023–0033–0872;
ACT-The App Association (‘‘ACT App
Association’’), FTC–2023–0033–0874; USTelecom,
FTC–2023–0033–0876.
113 IAB, FTC–2023–0033–1000.
114 See Section I; Section VII.A, defining the acts
and practices covered in §§ 425.3 through 425.6 as
unfair or deceptive and a violation of the Rule. As
acknowledged by USTelecom, the ‘‘contours of the
‘specificity’ requirement have not been precisely
defined.’’ FTC–2023–0033–0876.
115 See SBP Section VII.B.3 discussing § 425.3.
116 Id. As explained in the Katharine Gibbs
School dissent, ‘‘Congress required specific
definitions of such practices so that a rule would
‘reasonably and fairly inform those within its ambit
of the obligation to be met and the activity to be
avoided.’ ’’ 612 F.2d 658, 672 (quoting H.R. Rep.
No.93–1107, 93d Cong., 2d Sess. 46 (1974),
reprinted in (1974) U.S.C.C.A.N., pp. 7702, 7727).
117 As discussed in Section VII.B.6, the
Commission removes the proposed save provision
from the final Rule.
118 As discussed in Section VII.B.7, the
Commission removes the proposed annual
reminder provision from the final Rule.
119 E.g., IAB, FTC–2023–0033–1000.
120 15 U.S.C. 57a(b)(2)(A). ‘‘The Advance Notice
[of Proposed Rulemaking] is a formal invitation to
participate in shaping the proposed rule and starts
the notice-and-comment process in motion.’’ Office
of the Federal Register, ‘‘A Guide to the Rulemaking
Process,’’ https://www.federalregister.gov/uploads/
2011/01/the_rulemaking_process.pdf.
121 ANPR, 84 FR 52393; see also id. 52396–8
(Request for Comments); Section VII.B.3.b.1
(discussing ANPR in context of § 425.3).
122 PDMI, FTC–2023–0033–0864; ACT App
Association, FTC–2023–0033–0874; Coalition,
FTC–2023–0033–0884; Chamber, FTC–2023–0033–
0885.
(c) Statement as to the Economic Effect
of the Rule
Finally, pursuant to section 18 and
the Commission’s Rules, the SBP must
include a statement regarding the
economic effect of the Rule. As part of
these rulemaking proceedings, the
Commission solicited and received
comments on the economic impact of
the proposed Rule. In issuing the final
Rule, the Commission has carefully
considered the comments and other
information received as well as the costs
and benefits of each provision, as
discussed in more detail in section X,
Final Regulatory Analysis. That analysis
demonstrates the benefits of the Rule far
exceed the costs. Benefits were
evaluated on a per-cancellation basis;
that is, the analysis assumes the primary
consumer benefit of the Rule will come
in the form of faster cancellations. Costs
were evaluated primarily to reflect
resources spent by businesses to review
and come into compliance with the
Rule. The overall net benefit of the Rule
is estimated to exceed $5.3B (and could
be as much as $49.2B) over the first 10
years (in 2023 dollars).
2. Magnuson-Moss Specificity
Requirement
Pursuant to Magnuson-Moss, the
Commission must also define with
specificity acts or practices which are
unfair or deceptive and either prohibit
those activities or establish rules to
prevent them. The Commission has
done just that, despite some
commenters’ arguments to the contrary.
Specifically, IAB and others 112 argue
the provision prohibiting material
misrepresentations fails to define claims
that fall within its scope, and therefore,
‘‘fails to identify covered acts with the
requisite level of specificity.’’ 113
First, section 18 does not require the
Commission to define claims with
specificity, only acts or practices. The
practice of misrepresenting the material
facts of a transaction, for instance, is a
deceptive practice, but could vary
depending on the transaction’s terms.
Requiring the Commission to identify
particular claims would make its rules
no better than a leaky sieve, unable to
effectively address consumer harm.
Second, the NPRM and the final Rule
do define with the requisite specificity
the unfair or deceptive negative option
acts and practices covered by the
Rule.114 While those critical of the
proposed Rule cite to Katharine Gibbs
School v. FTC, 612 F.2d 658 (2d Cir.
1979), this case is inapposite. In
Katharine Gibbs School, the Second
Circuit held the Commission failed to
connect elements of its trade regulation
rule to specifically defined unfair or
deceptive acts or practices. The opinion
held the Commission may not merely
set requirements and then define failure
to meet those requirements as unfair or
deceptive acts or practices. The
Commission must instead identify some
underlying deceptive or unfair conduct
and connect the rule requirements to
that conduct.
In contrast here, the Commission
specifically identified misrepresentation
of material facts as a deceptive practice,
and defined the term ‘‘material’’ with
the same meaning it has under Section
5 of the FTC Act.115 Moreover, the
misrepresentations provision goes
further, providing categories of
potentially material facts to assist the
marketplace in understanding the
provision and supporting those
examples with cases.116 Thus, the final
Rule’s prohibition against material
misrepresentations is not only
connected to underlying deceptive or
unfair conduct, but in fact prohibits that
very conduct.
3. Other Legal Issues
Several commenters raised additional
challenges to the Commission’s ability
to promulgate the Rule. These
challenges fall into two categories. First,
some commenters argued the
Commission failed to give adequate
notice of the scope of the proposed
amendments to the Rule in the ANPR in
accordance with Section 57a(b)(2)(A) of
the FTC Act. Second, four commenters
argued the Commission exceeded its
grant of Congressional authority under
the ‘‘major questions’’ doctrine. The
Commission addresses each argument
below.
(a) ANPR
Several commenters asserted the
ANPR, issued in 2019, failed to provide
adequate notice of the acts and practices
to be covered by the proposed Rule.
Specifically, ESA, USTelecom, RILA, a
coalition of trade associations, Chamber,
CCIA, IAB, and NRF argued the ANPR
failed to provide notice the proposed
Rule would cover misrepresentations of
all material facts; would require express
informed consent to opt-in to receive a
save; 117 and would require an annual
reminder. 118 Thus, according to these
commenters, including these provisions
in the final Rule would violate Section
18(b)(2)(A). They further argued the lack
of these topics’ inclusion in the ANPR
meant that affected entities had
inadequate opportunity to provide
input, leading to an inadequate
rulemaking record.119
These arguments, however, are
unpersuasive. Section 18 imposes no
requirement the ANPR have the level of
specificity the commenters demand. In
fact, the statute only says the ANPR
must include ‘‘a brief description of the
area of inquiry under consideration, the
objectives which the Commission seeks
to achieve, and possible regulatory
alternatives under consideration by the
Commission.’’ 120 The Commission
included a discussion of each of these
topics in the ANPR. 121 Moreover, the
affected entities have had the chance to
raise concerns with the Rule in their
comments to the NPRM, which the
Commission has considered and
responded to in this Statement of Basis
and Purpose.
(b) Major Questions Doctrine
Four commenters asserted the Rule
implicates the ‘‘major questions’’
doctrine. 122 According to the Supreme
Court, the major questions doctrine is
implicated in ‘‘extraordinary cases . . .
in which the history and the breadth of
the authority that the agency has
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123 West Virginia v. EPA, 597 U.S. 697, 721 (2022)
(internal quotations cleaned up). Accord Biden v.
Nebraska, 143 S. Ct. 2355, 2372 (2023).
124 Coalition, FTC–2023–0033–0884.
125 See, e.g., PDMI, FTC–2023–0033–0864.
126 15 U.S.C. 57a(a)(1)(B).
127 West Virginia v. EPA, 597 U.S. at 723 (cleaned
up).
128 The proposed Rule stated it applied to any
form of negative option plan. Because ‘‘negative
option plan’’ was a defined term in the old Rule
specifically referring to prenotification plans, the
Commission modifies the scope to apply to any
form of ‘‘negative option program.’’
129 Certain entities or activities are wholly or
partially exempt from FTC jurisdiction under the
FTC Act, including most depository institutions,
charities, transportation and communications
common carriers, and the business of insurance.
Under Sections 4 and 5 of the FTC Act, however,
the Commission’s jurisdiction extends to companies
organized to carry on business for their own profit
or that of their members, even if those companies
are organized under state law as a not-for-profit
entity. See California Dental Ass’n v. FTC, 526 U.S.
756 (1999). But see n.151.
130 Chamber, FTC–2023–0033–0885.
131 Id.
132 Individual commenter, FTC–2023–0033–1136.
133 Electronic Transactions Association (‘‘ETA’’),
FTC–2023–0033–1004.
134 Id.
135 Id.
136 Id. IHRSA noted health and fitness
membership charges are typically processed on a
monthly basis from the time of agreement, and in
many cases by a third-party service provider.
IHRSA, FTC–2023–0033–0863.
137 NCTA asserted, ‘‘The proposed rule also fails
to account for third-party sign-up arrangements. For
example, programmers have arrangements with
Roku, Amazon, Apple, and others that allow
consumers to sign up through these third parties for
their streaming services.’’ NCTA, FTC–2023–0033–
0858. N/MA suggested the Commission ‘‘should
make clear that when a sale with a negative option
feature is made through a third party that controls
the process of purchasing and/or cancelling a
subscription with a negative option feature, any
new requirements would apply to the third party
only, and not to the company that fulfills the
asserted, and the economic and political
significance of that assertion, provide a
reason to hesitate before concluding that
Congress meant to confer such
authority.’’ 123 Citing this authority, the
commenters argue Congress only
granted the FTC ‘‘limited and tailored
authorities to regulate certain mediums
and types of negative option marketing,
but not all mediums and types as the
NPRM encompasses.’’ 124 Further, they
assert Congress never intended for the
Commission to create a comprehensive
regulatory scheme for negative option
marketing that encompasses the variety
of requirements proposed in the NPRM.
Because negative option programs play
an ever-increasing role in the economy,
these commenters claim the proposed
Rule would ‘‘dramatically alter’’ how
companies structure their subscription
services.125 More specifically, they
assert the prohibition against
misrepresentations, together with the
ability to seek civil penalties in Federal
court, would expand the FTC’s
authority beyond that envisioned by
Congress.
However, far from exceeding
Congressional intent, the Rule merely
effectuates that intent in a way wholly
consistent with the specific
requirements set forth in Section 18 of
the FTC Act. Specifically, Congress
explicitly authorized the Commission to
prescribe ‘‘rules which define with
specificity acts or practices which are
unfair or deceptive acts or practices in
or affecting commerce (within the
meaning of such section 5(a)(1)),’’ which
‘‘may include requirements prescribed
for the purpose of preventing such acts
or practices.’’ 126 As demonstrated
below, each of the Rule’s provisions
identifies specific deceptive or unfair
acts or practices that are prevalent
throughout the marketplace and ties
each Rule provision tightly to those
findings.
As the Supreme Court explained,
courts use the ‘‘major questions
doctrine’’ when examining
‘‘extraordinary cases’’ where agency
action would ‘‘make a radical or
fundamental change’’ to a statutory
scheme and assert ‘‘extravagant’’
authority over the national economy
through ‘‘ambiguous statutory text,’’
citing ‘‘modest words,’’ ‘‘vague terms,’’
‘‘subtle device[s],’’ or ‘‘oblique or
elliptical language.’’ 127 Here, no such
extraordinary circumstance exists. The
prohibitions and disclosures in the Rule
do not effect a major change in the
economy. In fact, all the substantive
requirements in the Rule are already
extant under section 5 of the FTC Act,
ROSCA, or the TSR. Moreover, the
Rules’ terms, as explained below, are
neither vague, oblique, or elliptical—in
fact, if anything, they are clearer than
the legal authority just cited.
B. Discussion of Specific Rule
Provisions, Section-by-Section Analysis
Below, for each provision of the
proposed Rule, the Commission reviews
the provision, summarizes comments
received in response, and sets forth the
final Rule with an analysis of the
comments and other record evidence.
1. Proposed § 425.1 Scope
The Commission proposed
eliminating the old Rule’s prescriptive
requirements applicable to
prenotification plans and replacing
them with flexible, but enforceable,
standards. The proposed requirements
would apply to all forms of negative
option marketing, including
prenotification and continuity plans,
automatic renewals, and free trial
offers. 128 The expanded coverage would
establish a common set of requirements
applicable to all types of negative option
marketing. The proposed Rule would
cover offers made in all media,
including internet, telephone, in-person,
and printed material, and would apply
to all ‘‘negative option sellers.’’ With
certain exceptions, not applicable here,
the FTC Act provides the agency with
jurisdiction over nearly every economic
sector.129
(a) Negative Option Seller
(1) Comments
The scope of the proposed Rule
covered ‘‘negative option seller,’’
defined to mean ‘‘the person selling,
offering, promoting, charging for, or
otherwise marketing goods or services
with a negative option feature.’’ Several
commenters raised concerns regarding
the scope of this definition.
The Chamber, for example, suggested
the Commission delete the term
‘‘promoting’’ from the definition.130 It
cited a wide variety of actors who could
be swept in by the term, including
‘‘advertising companies, web designers,
[and] entities in the supply chain,’’ who
‘‘may not actually play an active role in
determining’’ what consumers see and
hear about negative option programs.131
An individual business commenter also
criticized the term, saying to include
‘‘promoting’’ ‘‘would potentially burden
our technicians and our business when
we provide service for equipment
manufacturers that have their own
service contract programs.’’ 132
ETA, representing the payments
industry, addressed the words ‘‘charging
for’’ in the definition. 133 ETA
interpreted those words not to cover
‘‘intermediaries, such as payment
processors, that merely effect the
transfer of funds from the consumer
buyer to the merchant seller resulting
from a negative option feature.’’ 134 ETA
noted that payment intermediaries
typically ‘‘do not control the terms of
the negative option feature and do not
control the interface with the consumer
buyer.’’ 135 ETA therefore suggested the
final Rule ‘‘include an express
exemption for payment processors and
other intermediaries.’’ 136
Other commenters, while not
specifically criticizing the definition of
negative option seller, raised concerns
about the scope of the proposed Rule
where third parties are involved in
marketing and cancellation. For
example, several suggested the Rule
exempt a seller who contracts with a
third party for subscription enrollment,
management, or cancellation
services.137 PDMI argued, ‘‘it is
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subscription.’’ N/MA, FTC–2023–0033–0873.
Marketplace Industry Association (‘‘MIA’’)
requested ‘‘the Commission clarify that where there
are third-party payment platforms managing
Subscriptions on behalf of businesses . . .
(collectively, ‘‘Third Party Subscription
Managers’’), that such Third Party Subscription
Managers be legally responsible and legally liable
for compliance with the proposed Rule. As is the
case with Third Party Subscription Managers,
businesses that offer Subscriptions have zero
control over such Subscriptions, including the
initiation of Subscriptions or the cancellation of
Subscriptions. Said another way, it is impossible for
businesses to comply with the proposed Rule where
there are Third Party Subscription Managers. As
such, the Association requests that the Commission
make clear that Third Party Subscription Managers
be responsible for compliance with the proposed
Rule, including any penalties for noncompliance.’’
MIA, FTC–2023–0033–1008.
138 PDMI, FTC–2023–003–0864.
139 NRF, FTC–2023–0033–1005.
140 See also Section VII.B.1; Section VIII.A.1.
141 Chamber, FTC–2023–0033–0885.
142 See, e.g., FTC v. LeadClick Media, LLC, 838
F.3d 158, 172 (2d Cir. 2016) (operator of affiliate
marketing network liable where it did not create ads
but ‘‘directly participat[ed] in the deceptive scheme
by recruiting, managing, and paying a network of
affiliates to generate consumer traffic through the
use of deceptive advertising and allowing the use
of deceptive advertising where it had the authority
to control the affiliates participating in its
network.’’).
143 15 U.S.C. 8403.
144 See FTC v. Apex Capital Grp., LLC, No. 2:18–
cv–09573 (C.D. Cal. 2018). In this ROSCA matter,
the Commission amended its complaint to add
payment intermediary defendants for their unlawful
conduct in connection with the scheme. However,
the Commission did not assert ROSCA claims
against the payment intermediary defendants,
instead asserting counts for credit card laundering
and manipulation of chargeback levels as Section 5
violations.
145 Id.; see FTC v. First Am. Payment Sys., No.
4:22–cv–00654 (E.D. Tex. 2022) (ROSCA case
against payment processor for its unlawful acts and
practices against its merchant customers).
146 E.g., FTC v. LeadClick Media, LLC, 838 F.3d
158, 170 (2d Cir. 2016) (‘‘A defendant may be held
liable for its own acts of deception under the FTC
Act, whether by directly participating in deception
or by allowing deceptive acts or practices to occur
that are within its control.’’); see also FTC v.
Inc21.com Corp., 688 F. Supp. 2d 927, 939 (N.D.
Cal. 2010) (‘‘Even if Inc21 did not approve of the
fraud (and it seems likely that it did approve), the
fact remains that Inc21 is responsible for organizing
this engine of fraud and reaping its profits. As such,
Inc21 may certainly be held accountable[.]’’)
(emphasis in original).
147 Asurion, FTC–2023–0033–0878; Florida
Service Agreement Association, FTC–2023–0033–
0882; American Property Casualty Insurance
Association (‘‘APCIA’’), FTC–2023–0033–0996;
National Association of Mutual Insurance
Companies (‘‘NAMIC’’), FTC–2023–0033–1143.
148 See 15 U.S.C. 1012; 16 CFR 429(a)(6).
149 NAMIC, FTC–2023–0033–1143.
150 SCIC, FTC–2023–0033–0879 (noting SCIC’s
comment to the ANPR stated most states have
substantial regulatory frameworks for service
contracts and that industry operates nationwide
consistent with the intent of the proposed Rule);
CTIA, FTC–2023–0033–0866 (noting service
contracts are typically regulated by state
departments of insurance and most states with
autorenewal laws, including California, New York,
and Oregon, provide an exemption for entities
regulated by the state department of insurance);
Frontdoor, Inc. (‘‘Frontdoor’’), FTC–2023–0033–
0862 (noting majority of states have rigorous laws
Continued
imperative that the Proposed Rule
exempt sellers from compliance with
those provisions that are not under their
direct control . . . [and] should also
exempt the seller from any
misrepresentations made by a third-
party platform.’’ 138 NRF expressed
concern a careful retailer could still
‘‘face steep financial penalties for
negligent misrepresentations
(concerning, e.g., product efficacy)
based on information provided by third-
party vendors.’’ 139
(2) Analysis
Based on the record, the Commission
revises the definition of ‘‘negative
option seller’’ to remove the word
‘‘promoting,’’ but declines to create
status-based exemptions.140 Moreover,
the Commission clarifies it will enforce
the final Rule in accordance with
established section 5 principles
regarding parties’ responsibilities for,
and involvement in, relevant activity.
This approach should fully address
commenters’ concerns while
maintaining the Rule’s consumer
protections.
As several commenters observed, a
wide variety of actors may have
secondary or tertiary roles in promoting
products or services with a negative
option feature. Further, as the Chamber
noted, ‘‘many of those participants . . .
may not actually play an active role in
determining how the negative option is
presented to the consumer.’’ 141
Similarly, participants in the promotion
process may have no role in
cancellation. Deleting the word
‘‘promoting’’ from the definition of
negative option seller addresses this
issue by ensuring those who have no
active participation in the negative
option feature are outside the Rule’s
coverage. However, this amendment
does not mean all actors involved in
promotion are exempt from the Rule. A
participant who promotes and takes on
a further role ‘‘selling, offering, charging
for, or otherwise marketing goods or
services with a negative option feature’’
remains subject to the final Rule,
including the provisions covering
‘‘promoting’’ such goods or services for
those who meet the negative option
seller definition.142
The Commission declines to adopt a
status-based exemption for payment
intermediaries. Such exemptions are
overbroad, excluding actors engaged in
the practices condemned by the Rule.
For example, a payment processor
selling its own services on a negative
option basis, as opposed to just
providing payment services for another
negative option seller, is no different
than any other business covered by the
Rule. Additionally, as ETA correctly
noted, the words ‘‘charging for’’ as used
in the Rule do not cover intermediaries
merely effecting the transfer of funds
from the consumer buyer to the
merchant seller. This is consistent with
the Commission’s interpretation of
ROSCA’s coverage of persons who
‘‘charge or attempt to charge any
consumer.’’ 143 Based on longstanding
section 5 principles, the Commission
has not enforced ROSCA against
payment intermediaries solely for their
conduct in effecting funds transfers.144
The Commission will apply the same
principles to the Rule.145
Similarly, the Commission will not
grant blanket exemptions to sellers who
contract with third parties while
offering subscription services. The
Commission expects negative option
sellers to evaluate their commercial
relationships with the Rule’s provisions
in mind. Even where a seller does not
directly manage its negative option
feature disclosures, consent, or
cancellation, it can satisfy its obligations
under the Rule by choosing to contract
with third parties who act in accordance
with the Rule and monitoring those
parties’ performance. An exemption for
all sellers who contract with third
parties to manage aspects of their
negative option programs would
effectively nullify the Rule by
incentivizing less than legitimate sellers
to contract with actors engaged in
deceptive practices to maximize
negative option enrollments and
frustrate cancellation with impunity. A
seller cannot evade its responsibility to
deal honestly with consumers by
contracting with a third party who does
not. 146
(b) Insurance
(1) Comments
Several commenters asked the
Commission to expressly exclude
insurance and State-regulated service
contracts from the Rule. 147 They argued
Congress prohibited the FTC from
regulating the ‘‘business of insurance’’
in section 2 of the McCarran-Ferguson
Act and the FTC exempted insurance
sales in its Cooling-Off Rule.148 They
also asserted, ‘‘State regulations in every
jurisdiction require an insurer to give
notice of a policy renewal,’’ and State
rules prohibit negative options.149 Other
commenters argued the Commission
should exempt all service contract
providers from the Rule due to existing
State laws and regulations,150 regardless
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for the offering, sale, and renewal of home service
contracts, including the use of automatic renewals
and applicable cancellation rights).
151 Nothing in this Rule, however, shall limit
another agency’s ability to enforce this Rule within
its own statutory authority, even if that authority is
different than the FTC’s authority. See, e.g., 12
U.S.C. 5581(b)(5)(B)(ii).
152 FTC v. IAB Mktg. Assocs. LP, 746 F.3d 1228,
1235 (11th Cir. 2014) (‘‘[T]he FTC Act applies to the
business of insurance only to the extent that such
business is not regulated by state law.’’).
153 The Supreme Court has explained that, under
the McCarran-Ferguson Act, a three-part factual
inquiry is necessary to evaluate whether any
particular activity constitutes the business of
insurance. See Union Labor Life Ins. Co. v. Pireno,
458 U.S. 119, 129 (1982). First, does the activity
have the effect of transferring or spreading a
policyholder’s risk; second, is the activity an
integral part of the policy relationship between the
insurer and the insured; and third, is the practice
limited to entities within the insurance industry. Id.
This inquiry requires a factual analysis of the
activities in question.
154 Moreover, service contract sellers, like other
interested persons, may seek full or partial
exemption from the final Rule. See Section VIII.A.1
(discussing new § 425.8, Exemptions provision).
155 BSA, FTC–2023–0033–1015 (B2B software
sellers); CTIA, FTC–2023–0033–0866 (wireless
communication industry); ETA, FTC–2023–0033–
1004 (payments industry); NCTA, FTC–2023–0033–
0858 (internet and television); USTelecom, FTC–
2023–0033–0876 (broadband). A sixth association,
the U.S. Chamber of Commerce, asked the
Commission to ensure that the scope of its cost-
benefit analysis includes business-to-business
transactions. FTC–2023–0033–0885.
156 Anonymous commenter, FTC–2023–0033–
1007; BSA, FTC–2023–0033–1015; CTIA, FTC–
2023–0033–0866; ETA, FTC–2023–0033–1004;
NCTA, FTC–2023–0033–0858; USTelecom, FTC–
2023–0033–0876; ZoomInfo, FTC–2023–0033–0865.
157 Individual commenter, FTC–2023–0033–0755;
Individual commenter, FTC–2023–0033–0042.
158 Anonymous commenter, FTC–2023–0033–
1007; CTIA, FTC–2023–0033–0866; NCTA, FTC–
2023–0033–0858; ZoomInfo, FTC–2023–0033–0865.
159 CTIA, FTC–2023–0033–0866; NCTA, FTC–
2023–0033–0858; USTelecom, FTC–2023–0033–
0876; ZoomInfo, FTC–2023–0033–0865.
160 ZoomInfo, FTC–2023–0033–0865.
161 NCTA, FTC–2023–0033–0858. NCTA
requested any final rule exclude individually
negotiated business-to-business contracts. FTC–
2023–0033–0858.
162 BSA, FTC–2023–0033–1015; NCTA, FTC–
2023–0033–0858. The Commission discusses the
subject of prevalence more broadly at Section VII.A.
163 Individual commenter, FTC–2023–0033–0755.
164 Anonymous commenter, FTC–2023–0033–
1007 (California); BSA, FTC–2023–0033–1015
(California, Colorado, Delaware); ZoomInfo, FTC–
2023–0033–0865 (California, Colorado,
Connecticut, Delaware, Hawaii, New York, Oregon,
Tennessee, Virginia).
165 Individual commenter, FTC–2023–0033–0042.
166 Id.
167 16 CFR 429.0–429.3.
168 USTelecom, FTC–2023–0033–0876.
169 Id.
of whether they are engaged in the
‘‘business of insurance’’ within the
meaning of the McCarran-Ferguson Act.
(2) Analysis
The Commission declines to exempt
insurance or service contracts from the
Rule. The final Rule can be enforced by
the Commission only against covered
persons and activities within the
Commission’s jurisdiction.151 Restating
or further specifying each jurisdictional
limit in the final Rule’s text, therefore,
is not necessary.
Additionally, the requested industry-
wide exemption is considerably broader
than the FTC’s jurisdictional
limitations. The McCarran-Ferguson Act
does not exempt entities engaged in the
business of insurance from the
Commission’s jurisdiction unless such
entities are subject to State
regulation. 152 Moreover, activities of
entities within the insurance industry
that are beyond the scope of the
‘‘business of insurance’’ are subject to
the Commission’s jurisdiction.153 No
commenter provided any compelling
reason to exempt these otherwise
covered activities from the Rule.
Finally, commenters’ citations to
existing State laws and regulations
governing service contract sellers
indicate these sellers already provide
disclosures and protections consistent
with the Rule. As a practical matter,
sellers who already provide consumers
the Rule’s protections should not be
burdened by its application.154
(c) Business-to-Business
(1) Comments
Nine commenters noted the NPRM
did not expressly address whether the
proposed Rule would apply to business-
to-business (‘‘B2B’’) transactions. Seven,
including five industry associations, 155
said it should not apply.156 Two
individuals disagreed.157
Commenters advocating against
including B2B sales in the Rule asserted
the Commission should presume
businesses are more sophisticated than
individual consumers,158 and
contended B2B contracts typically are
individually negotiated. 159 For example,
ZoomInfo maintained business
consumers are generally ‘‘more
sophisticated than individual
consumers,’’ explaining B2B contracts
‘‘are assumed to result from arm’s-
length negotiation and often benefit
from professional legal counsel.’’ 160
Similarly, NCTA, an organization
representing the internet and television
industry, characterized business
consumers as ‘‘typically sophisticated,’’
and said the Commission should not
intervene in transactions based on
‘‘[n]on-form contracts that are the
subject of extensive bargaining between
sophisticated companies.’’ 161
Seller and consumer commenters
differed on whether the harmful
negative option practices discussed in
the NPRM are extant for B2B
consumers. In support of excluding B2B
transactions, two commenters asserted
there is insufficient evidence of harm in
the B2B context to support a prevalence
finding.162 A B2B consumer, however,
noted individuals and small businesses
both suffer from the harms of deceptive
and unfair negative option practices.
‘‘As a small business owner,’’ the
individual wrote, ‘‘as well as a
consumer, I am especially aware of how
purposely difficult many companies
make it to cancel their services. From
telephone companies to travel channel
companies . . . to email targeting
campaigns . . . the cancelling process is
ridiculously complex and at times
hidden, if it exists at all on their
websites.’’ 163
Seller and consumer commenters also
differed on the significance of existing
State law B2B exclusions. Three B2B
sellers recommended the Commission
follow those States that exclude B2B
transactions.164 A consumer, however,
asserted such exclusions are why this
Rule is necessary.165 Specifically, the
commenter explained: ‘‘negative option
marketing also greatly affect[s] many
individual sellers and small
businesses,’’ but due to B2B exclusions,
‘‘some larger corporations or companies
are able to take advantage of that
loophole and use predatory negative
option practices against individual
sellers and small businesses.’’ 166
Some sellers also referred to other
Federal regulations to support excluding
businesses from the scope of the Rule.
For instance, ETA and NCTA each
noted the Commission excluded most
B2B transactions in the TSR. ETA made
the same observation about the Cooling
Off Rule.167 Both CTIA and USTelecom
approvingly cited the FCC’s approach.
USTelecom explained, ‘‘the FCC has
limited certain consumer protection
rules to ‘mass-market retail services’ ’’
that are ‘‘ ‘marketed and sold on a
standardized basis to residential
customers, small businesses, and other
end-user customers such as schools and
libraries.’ ’’ 168 USTelecom further
explained, ‘‘Mass-market retail services
stand in contrast to ‘customized or
individually negotiated arrangements’
that are typically offered to larger
organizations.’’ 169
ETA questioned whether the
Commission has authority to address
B2B transactions. ETA argued the
proposed Rule would let the
Commission ‘‘interpose regulatory
influence and law enforcement
authority in contractual arrangements
between businesses in a way that has
not been authorized by Congress or
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170 ETA, FTC–2023–0033–1004.
171 Id. (citing FTC v. First Am. Payment Sys., No.
4:22–cv–00654 (E.D. Tex. 2022)).
172 ZoomInfo, FTC–2023–0033–0865. ETA also
raised a concern about the definition of negative
option seller, addressed in Section VII.B.1.a.
173 15 U.S.C. 45(a).
174 See, e.g., Indep. Directory Corp. v. FTC, 188
F.2d 468 (2d Cir. 1951) (deceptive practices in
selling directory ads to businesses).
175 Indep. Directory Corp., 188 F.2d at 470
(applying Standard Educ. Soc.); see also, e.g., FTC
v. LoanPointe, LLC, 525 F. App’x 696, 701 (10th Cir.
2017) (FTC need only prove ‘‘the likelihood that a
consumer (here, employers)’’ would be deceived);
FTC v. Crittenden, 19 F.3d 26 (9th Cir. 1994) (Table)
(noting stipulated judgment with B2B office
supplier); FTC v. Inc21.com Corp., 688 F. Supp. 2d
927 (N.D. Cal. 2010) (preliminary injunction against
deceptive and unfair B2B billing scheme); FTC v.
IFC Credit Corp., 543 F. Supp. 2d 925, 934 (N.D.
Ill. 2008) (FTC Act applies to B2B sales).
176 See Fed. Trade Comm’n, ‘‘Protecting Small
Businesses: Cases,’’ https://www.ftc.gov/business-
guidance/small-businesses/protecting-small-
businesses-cases (last visited October 23, 2024);
Fed. Trade Comm’n, ‘‘Protecting Small Businesses,’’
https://www.ftc.gov/business-guidance/small-
businesses (last visited October 23, 2024); Fed.
Trade Comm’n, ‘‘Scams and Your Small Business:
A Guide For Business,’’ https://www.ftc.gov/
business-guidance/resources/scams-your-small-
business-guide-business (last visited October 23,
2024).
177 See Press Release, Fed. Trade Comm’n, ‘‘FTC,
BBB, and Law Enforcement Partners Announce
Results of Operation Main Street: Stopping Small
Business Scams Law Enforcement and Education
Initiative’’ (June 18, 2018), https://www.ftc.gov/
news-events/press-releases/2018/06/ftc-bbb-law-
enforcement-partners-announce-results-operation-
main (last visited October 23, 2024).
178 TSR, 89 FR 26760 (April 16, 2024).
179 FTC v. First Am. Payment Sys., No. 4:22–cv–
00654 (E.D. Tex. 2022).
180 In describing the basis for the
misrepresentations provision of the proposed Rule,
the NPRM cited (among other cases) First Am.
Payment Sys. NPRM, 88 FR 24726 n.65. See also
ETA, FTC–2023–0033–1004.
181 In re Dun & Bradstreet, Inc., FTC Docket No.
C–4761 (2022).
182 FTC v. Vonage Holdings Corp., No. 3:22–cv–
06435 (D.N.J. 2022).
183 The Adobe matter provides another recent
example of a matter alleging unlawful negative
option practices targeting both individual and
business consumers. United States v. Adobe, Inc.,
No. 5:24–cv–03630 (N.D. Cal. 2024).
184 See section VII.B.1.a.
185 See 16 CFR 2.3.
186 The Vonage order expressly exempts negative
option feature provisions in B2B contracts where
the defendants ‘‘possess evidence that consumers
negotiated significant terms of the negative option
feature that are only negotiable with business
consumers.’’ FTC v. Vonage Holdings Corp., No.
3:22–cv–06435 (D.N.J. 2022). The final Rule is less
prescriptive and more flexible than that order,
Continued
justified by the Commission’s own
rationale for the Proposed Rule.’’ 170
ETA cited the Commission’s use of
ROSCA in the First American Payment
Systems case to illustrate its view the
Rule’s application in the B2B context
would be impermissible regulation of
‘‘an automatic renewal clause in an
arm’s length commercial agreement.’’ 171
Finally, ETA and ZoomInfo argued
various provisions of the Rule, such as
the disclosure and notice requirements,
could present unusual implementation
problems in B2B transactions. For
instance, ETA asserted disclosure
requirements could result in operational
uncertainty because the Commission
did not consider all the typical terms
included in B2B agreements. Similarly,
ZoomInfo explained ‘‘B2B agreements
are often complex, involving multiple
decision-makers and points of contact,
who might rotate or leave their roles
over the course of a contract.’’ 172
(2) Analysis
The final Rule, like the proposed
Rule, covers B2B transactions. It has
been the Commission’s longstanding
view that section 5 of the FTC Act 173
protects business consumers as well as
individual consumers. Moreover,
commenters’ arguments that, under
section 5, all business consumers must
be held to a heightened standard of
sophistication are inconsistent with
settled law.
The Commission has long enforced
the FTC Act against those who deceive
and act unfairly to businesses and other
organizations.174 As the Supreme Court
explained in FTC v. Standard Educ.
Soc., 302 U.S. 112, 116 (1937), ‘‘Laws
are made to protect the trusting as well
as the suspicious.’’ This principle
applies no less to the business consumer
than to the individual.175 The
Commission maintains a decades-long
list of business protection cases on its
website and dedicates significant effort
to educate and protect small
businesses.176 Indeed, the Commission
has made protecting small businesses a
priority.177
Moreover, the TSR never exempted
B2B transactions entirely. Importantly,
the Commission recently amended the
TSR to cover a broader scope of B2B
activity. Specifically, in 2024, the
Commission expanded the TSR to
prohibit material misrepresentations
and false or misleading statements in
B2B calls due to the ongoing harm to
small businesses from such practices.178
Additionally, recent Commission
actions to protect small businesses
underscore the fact deceptive practices
pertaining to negative option features
occur in B2B transactions just as they do
with individual consumers. None of
these cases present the arms-length
negotiation of contracts by sophisticated
parties that commenters claim to be
universal. For example, in its 2022
action against First American Payment
Systems,179 the Commission alleged the
defendants violated section 5 and
ROSCA by making false claims about
fees and cost savings to persuade
merchants in small- and medium-sized
businesses, many of whom had limited
English proficiency, to enter into
payment processing agreements.180
Once enrolled, the defendants allegedly
withdrew funds from merchants’
accounts without consent, and made it
difficult and expensive to cancel the
service. Under a stipulated court order,
the defendants must (among other
things) make it easier for merchants to
cancel their services.
In the Commission’s 2022 Dun &
Bradstreet 181 matter, the complaint
alleged multiple deceptive practices
pertaining to products the defendant
marketed to small- and medium-sized
businesses, in violation of section 5. The
resulting consent order includes
substantial provisions pertaining to
negative option features.
The Commission’s 2022 action against
Vonage 182 also illustrates this point.
The complaint detailed the defendants’
deceptive and unfair practices targeting
both business and residential customers
and alleged those practices violated
section 5 and ROSCA.183 The stipulated
court order includes multiple provisions
relating to consent, cancellation, and
disclosures pertaining to both
individual and business consumers.
Nonetheless, two arguments for
excluding B2B transactions warrant
additional discussion. First, several
commenters elide the distinction
between B2B agreements generally and
individually negotiated B2B agreements.
It is neither the purpose nor the effect
of the final Rule to prevent businesses
from entering into agreements with
individually negotiated negative option
terms. By requiring the cancellation
mechanism to be ‘‘at least as easy to
use’’ as the consent mechanism, the
final Rule incorporates a symmetrical
standard that accounts for individually
negotiated B2B agreements. A B2B
consumer who consents to a negative
option feature through an individually
negotiated term of an agreement can
also individually negotiate the
cancellation mechanism. Moreover, as
the Commission noted above, it will
enforce this Rule in the same manner in
which it enforces section 5 of the FTC
Act. 184 The Commission has not used its
consumer protection authority in the
type of large individually negotiated
B2B transactions commenters are
worried about.185 Unsurprisingly, no
commenter cited any historical instance
to the contrary. Thus, the Rule preserves
the ability of sophisticated business
consumers to individually negotiate
B2B agreement terms.186
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thereby promoting more flexibility in the
marketplace.
187 Section II of this Notice contains descriptions
of these various plans.
188 Cal. Bus. & Prof. Code section 17601 and DC
Code section 28A–202.
189 See, e.g., BSA, FTC–2023–0033–1015
(material is not defined); Chamber, FTC–2023–
0033–0885 (same).
190 Center for Data Innovation (‘‘CDI’’), FTC–
2023–0033–0887; see also Act App Association,
FTC–2023–0033–0874; NRF, FTC–2023–0033–1005
(failed to defined ‘‘as simple as’’).
191 International Carwash Association, FTC–
2023–0033–1142.
192 See, e.g., Anonymous commenter, FTC–2023–
0033–1007; Zoominfo, FTC–2023–0033–0865;
CTIA, FTC–2023–0033–0866; BSA, FTC–2023–
0033–1015.
193 Individual commenter, FTC–2023–0033–0042.
194 See, e.g., Asurion, FTC–2023–0033–0878
(exempt service contracts); Chamber, FTC–2023–
0033–0885 (exclude promoting); ETA, FTC–2023–
0033–1004 (exclude ‘‘charging for’’). These requests
are more appropriately addressed in the scope and
requested exemptions, and the Commission does
not consider them here.
195 Save was defined in the proposed Rule as an
attempt by a seller to present any additional offers,
modifications to the existing agreement, reasons to
retain the existing offer, or similar information
when a consumer attempts to cancel a negative
option feature.
196 ESA, FTC–2023–0033–0867. PDMI argued
similarly as to the definition of save. FTC–2023–
0033–0864 (arguing sellers should be able to be able
to immediately discuss pause, skip or modification
options without having to ask for permission,
particularly because it is impossible to know which
customers prefer to cancel as opposed to merely
modify their current plan). Accord USTelecom,
FTC–2023–0033–0876 (definition of Save overly
broad); RILA, FTC–2023–0033–0883 (modify
definition of save to allow short clarification and
confirmation of intent follow-up communications);
Chamber, FTC–2023–0033–0885; CDI, FTC–2023–
0033–0887 (‘‘Commission should exclude
information about permanent, irreparable harms
that may result from cancellation, and is relevant
to the current subscription or product plan.’’);
CCIA, FTC–2023–0033–0984; IAB, FTC–2023–
0033–1000 (definition of save overly broad and
‘‘would prohibit the presentation of useful,
consumer-friendly details about a consumer’s
subscription before they cancel it.’’).
197 See, e.g., NCTA, FTC–2023–0033–0858
(definition does not take into account small
screens); Chamber, FTC–2023–0033–0885 (‘‘The
requirements that disclosure on the internet or
mobile applications be ‘unavoidable’ and
‘immediately adjacent’ rase practical concerns.’’);
CCIA, FTC–2023–0033–0984 (definition should
‘‘hew closely to the Commission’s guidance in its
.com Disclosures policy to ensure regulatory
consistency.’’).
198 NFIB, FTC–2023–0033–0789. Accord Kuehn,
FTC–2023–0033–0871 (proposed revised definition
of negative option feature); Chamber, FTC–2023–
0033–0885 (requests the definition of negative
option feature to be revised to exclude monthly
subscription services). See section VII.B.4 for
further discussion of proposed modifications. See
also ETA, FTC–2023–0033–1004 (clarify and
narrow ‘‘automatic renewal in the definition).
199 NFIB, FTC–2023–0033–0789 (requesting
specific examples of each type of program be
included in the definition of negative option
feature); see also IHRSA, FTC–2023–0033–0863
(observes the Commission does not define what
‘‘automatic renewal, continuity plan’’ and other
examples of negative option features mean).
Second, it appears several
commenters mistakenly thought the
required simple cancellation
mechanism would necessarily terminate
all aspects of any broader contract or
agreement. In fact, this provision only
pertains to cancellation of the negative
option feature. Complex commercial
agreements, such as those described by
ETA, will have numerous provisions
unrelated to negative option features.
Nothing in this Rule prohibits these
provisions from being subject to
separate cancellation and termination
terms.
2. Proposed § 425.2 Definitions
In the NPRM, the proposed Rule set
forth several definitions. For example,
the proposed Rule defined ‘‘negative
option feature’’ as a contract provision
under which the consumer’s silence or
failure to take affirmative action to reject
a good or service or to cancel an
agreement is interpreted by the negative
option seller as acceptance or
continuing acceptance of an offer. This
definition is consistent with the TSR
and ROSCA (which references the TSR’s
definition). The proposed term includes,
but is not limited to, automatic
renewals, continuity plans, free-to-pay
conversion or fee-to-pay conversions,
and pre-notification negative option
plans. 187
Additionally, the proposed Rule
defined ‘‘clear and conspicuous,’’
‘‘negative option seller,’’ and ‘‘save.’’ To
define ‘‘clear and conspicuous,’’ the
FTC imported its definition developed
through years of enforcement
experience. As explained in the NPRM,
the proposed definition substantially
overlaps with the concepts provided in
California and District of Columbia
negative option laws, 188 with one
exception. Specifically, the District of
Columbia definition requires
disclosures to be visually proximate to
any request for consumer consent. The
final Rule incorporates this requirement
in a separate consent section.
(a) Summary of Comments
The Commission did not receive any
comments specifically supporting any
proposed definition, though several
commenters generally supported the
concepts incorporated in the
definitions, such as ‘‘clear and
conspicuous disclosures.’’ Several
commenters critiqued the Commission’s
omission of certain definitions, such as
‘‘material’’ in connection with § 425.3
and § 425.4,189 ‘‘simple cancellation
mechanism,’’ 190 ‘‘practical,’’ and
‘‘normal business hours,’’ 191 because
these terms are used throughout the
Rule. Other commenters asked the
Commission to add a definition for
‘‘consumer’’ that excludes
businesses, 192 while another asked the
Commission to include small businesses
in that definition.193 Similarly, other
commenters asked the Commission to
‘‘exempt’’ certain industries from, or
otherwise alter the scope of, the
definition of ‘‘negative option
seller.’’ 194
Several commenters critiqued the
proposed definitions. For example, ESA
stated ‘‘the definition of ‘save’ 195 is
overly broad and would prohibit the
presentation of useful, consumer-
friendly details about a consumer’s
subscription before they cancel it.’’ 196
Other commenters questioned why the
‘‘clear and conspicuous’’ definitions
says a disclosure is not clear and
conspicuous, if a consumer must click
on a hyperlink to see it.197
Additionally, several commenters
requested the Commission revise certain
of its proposed definitions for clarity.
For instance, the National Federation of
Independent Businesses (‘‘NFIB’’) asked
the Commission to revise the definitions
for ‘‘clear and conspicuous’’ and
‘‘negative option feature’’ to ‘‘make their
meanings clearer’’ 198 by, for example,
using simpler words in the clear and
conspicuous definition (‘‘words and
grammar’’ versus ‘‘diction and syntax’’)
or by providing detailed examples of
each type of program covered in the
definition of negative option feature.
NFIB further explained ‘‘Those
regulated by and served by subsection
425.2(d) most likely would understand
the meaning of an automatic renewal,
but perhaps not the meaning of the
other examples.’’ 199
(b) Analysis
Based on the record, the Commission
makes several changes to the proposed
definitions. First, as explained in
sections VII.B.1.3 (material) and
VII.B.6.c.2.b.ii (interactive electronic
medium), it adds definitions of material
and interactive electronic medium for
clarity. Further, as discussed in section
VII.B.4, the Commission modifies the
definition of clear and conspicuous.
Second, the Commission removes the
definition of save. As discussed in
section VII.B.6.c the proposed saves
provision did not achieve the right
balance between protecting consumers
from unfair tactics and allowing sellers
to provide necessary and valuable
information about cancellation.
Therefore, the Commission declines to
include the NPRM’s proposed limitation
on saves, and instead will consider
issuing an SNPRM in the future for
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200 NFIB, FTC–2023–0033–0789.
201 Further, as explained in n.307, the
Commission also declines to revise the definition of
‘‘clear and conspicuous’’ to replace the words
‘‘diction and syntax’’ with ‘‘words and grammar.’’
202 NPRM, 88 FR 24734.
203 NPRM, 88 FR 24726.
204 Id. (citing e.g., FTC v. Tarr, No. 3:17–cv–02024
(S.D. Cal. 2017); FTC v. First Am. Payment Sys., No.
4:22–cv–00654 (E.D. Tex. 2022); FTC v. XXL
Impressions, LLC, No. 1:17–cv–00067 (D. Me. 2017);
United States v. MyLife.com, Inc., No. 2:20–cv–6692
(C.D. Cal. 2020); FTC v. Health Rsch. Labs., LLC,
No. 2:17–cv–00467 (D. Me. 2017); FTC v. Leanspa,
LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v.
WealthPress, Inc., No. 3:23–cv–00046 (M.D. Fla.
2023); FTC v. BunZai Media Grp., Inc., No. 2:15–
cv–04527 (C.D. Cal. 2015); FTC v. Willms, No. 2:11–
cv–00828 (W.D. Wash. 2011); FTC v. Universal
Premium Servs., No. 2:06–cv–00849 (C.D. Cal.
2006); FTC v. Remote Response Corp., No. 1:06–cv–
20168 (S.D. Fla. 2006); and FTC v. Johnson, No.
2:10–cv–02203 (D. Nev. 2016).
205 NPRM, 88 FR 24726.
206 State AGs, FTC–2023–0033–0886.
207 Id.
208 Law Professors, FTC–2023–0033–0861.
209 Id., citing Better Business Bureau, ‘‘BBB
Investigation Update: Free Trial Offer Scams’’ (Apr.
2020), https://www.bbb.org/article/news-releases/
22040-bbb-update-free-trial-offerscams; C. Steven
Baker & Better Business Bureau, ‘‘Subscription
Traps and Deceptive Free Trials Scam Millions with
Misleading Ads and Fake Celebrity Endorsements’’
(Dec. 2018), https://www.bbb.org/article/
investigations/18929-subscription-traps-and-
deceptive-free-trialsscam-millions-with-misleading-
ads-and-fake-celebrity-endorsements. The Law
professors further pointed to evidence found by
searching BBB’s ScamTracker for terms like
‘‘subscription.’’ See, e.g., Better Business Bureau,
ScamTracker, ID #720953, https://www.bbb.org/
scamtracker/lookupscam/720953. They
additionally cited Consumer Financial Protection
Bureau, ‘‘CFPB Charges TransUnion and Senior
Executive John Danaher with Violating Law
Enforcement Order’’ (Apr. 2022), https://
www.consumerfinance.gov/about-us/newsroom/
cfpb-charges-transunion-and-seniorexecutive-john-
danaher-with-violating-law-enforcement-order/;
David Pierson, ‘Santa Monica fitness brand
Beachbody is fined $3.6 million over automatic
renewals,’’ L.A. Times (Aug. 29, 2017), https://
www.latimes.com/business/la-fi-beachbody-
20170829-story.html; Bruce A. Craig, Negative-
Option Billing—Understanding the Stealth Scams
of the ‘90s, 7 Loy. Consumer L. Rev. 5 (1994).
210 Law Professors, FTC–2023–0033–0861.
211 Law Professors, FTC–2023–0033–0861.
212 CTA, FTC–2023–0033–0997; ESA, FTC–2023–
0033–0867; IAB, FTC–2023–0033–1000; N/MA,
FTC–2023–0033–0873; RILA, FTC–2023–0033–
0883; TechFreedom, FTC–2023–0033–0872. See
section VII.A for a discussion of prevalence
addressing these comments.
213 ANA, FTC–2023–0033–1001; CCIA, FTC–
2023–0033–0984; Coalition, FTC–2023–0033–0884;
ESA, FTC–2023–0033–0867; Frontdoor, FTC–2023–
0033–0862; IAB, FTC–2023–0033–1000; NRF, FTC–
2023–0033–1005; RILA, FTC–2023–0033–0883. See
section VII.A for a discussion addressing these
comments.
214 TechNet, FTC–2023–0033–0869.
further comment. Accordingly, without
the saves provision, the Commission
determines there is no need for a
defined term at this time.
Although several commenters
critiqued the lack of definitions for such
terms as ‘‘simple cancellation
mechanism,’’ ‘‘practical,’’ or ‘‘normal
business hours,’’ the Commission
addresses these concerns with further
clarification, rather than with formal
definitions, in the section-by-section
analysis below. As to commenter
requests for a definition of ‘‘consumer’’
expressly excluding (or including)
business-to-business transactions, the
Commission similarly addresses these
requests in the sections regarding scope
and requested exemptions, above.
Finally, NFIB asked the Commission
to add specific examples of each type of
negative option program to the text of
the Rule, stating those served by the
Rule would likely not understand these
‘‘terms of art.’’ 200 The Commission
discusses examples of each type of
negative option program in more detail
as part of the SBP at section II. Further,
the Commission typically engages in
robust consumer and business
education campaigns when
promulgating and issuing final rules and
will do so here. The Commission
therefore disagrees the Rule must
incorporate these examples into the
text. 201
3. Proposed § 425.3 Misrepresentations
Section 425.3 of the proposed Rule
prohibited sellers from misrepresenting
‘‘any material fact related to the
transaction, such as the negative option
feature, or any material fact related to
the underlying good or service.’’ 202 As
explained in the NPRM,
‘‘misrepresentations in negative option
marketing cases often involve deceptive
representations not only related to the
negative option feature but to the
underlying product (or service) or other
aspects of the transaction as well.’’ 203
These include ‘‘misrepresentations
related to costs, product efficacy, free
trial claims, processing or shipping fees,
billing information use, deadlines,
consumer authorization, refunds, [and]
cancellation.’’ 204
The FTC Act provides the legal basis
for the Commission to prevent and
remedy misrepresentations in the
negative option context. Specifically,
section 5(a)(1) of the FTC Act declares
unfair or deceptive acts or practices in
or affecting commerce to be unlawful.
Negative option sellers making material
misrepresentations are engaged in
deceptive practices. Addressing these
practices through the Rule prevents
deception by giving the Commission the
ability to seek civil penalties (where
appropriate under 5(m)(1)(a)), where
they are not already provided, thus
deterring misrepresentations, protecting
consumers, and leveling the playing
field for ‘‘honest sellers who must
compete with those who engage in
deception.’’ 205
(a) Summary of Comments
The State AGs strongly supported this
provision, stating, for example, it would
‘‘combat[ ] seller misrepresentations, by
providing the FTC with authority to
seek civil penalties and consumer
redress for material misrepresentations
in all types of media.’’ 206 Echoing the
NPRM, they explained, ‘‘[l]ike the FTC,
we have found that negative option
marketing cases ‘often involve deceptive
representations not only related to the
negative option feature but to the
underlying product (or service) or other
aspects of the transaction as well.’ ’’ 207
Law Professors further supported
prohibiting ‘‘material
misrepresentations . . . whether or not
the false claim is exclusively about the
negative option feature.’’ 208 They, too,
offered evidence of the prevalence of
misconduct, stating ‘‘entities like the
Better Business Bureau have long
reported, based on FTC and other data,
the prevalence of misrepresentation in
certain negative option arrangements,
and non-FTC enforcement efforts
confirm the problem.’’ 209 Citing
multiple sources, they argued the
‘‘Commission thus has more than ample
‘reason to believe that’ co-occurring
negative option violations and other
misrepresentations ‘are prevalent.’ ’’ 210
These commenters further argued the
Commission should not adopt a
narrower provision limited strictly to
the elements of a negative option feature
because, in their view, it would be
difficult ‘‘to fully separate
misrepresentations regarding the
negative option feature from all other
material misrepresentations.’’ 211
Several commenters, largely trade
groups and sellers, criticized the
proposed provision. As discussed in
section V.A, several questioned the
prevalence of misrepresentations 212 and
asserted the provision was not within
the scope of the ANPR.213 Additionally,
several commenters argued the
provision is overbroad, and suggested it
is unnecessary in light of existing law.
Finally, they proposed ways to narrow
the proposed provision.
Several commenters objected to the
scope of the proposed provision. Citing
Commissioner Wilson’s dissent to the
NPRM, TechNet noted the proposed
Rule ‘‘would capture alleged
misrepresentations regarding the
underlying product or service ‘wholly
unrelated’ to the negative option
feature.’’ 214 Three commenters asserted
no current trade regulation rule
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215 NCTA, FTC–2023–0033–0858; PDMI, FTC–
2023–0033–0864; TechFreedom, FTC–2023–0033–
0872.
216 For example, the Coalition and IAB both said,
‘‘The NPRM fails, however, to identify which
claims would constitute a material fact, and thus
fails to identify covered acts with the requisite level
of specificity.’’ Coalition, FTC–2023–0033–0884;
IAB, FTC–2023–0033–1000. PDMI similarly
claimed the proposed provision’s lack of specificity
‘‘renders [the proposed Rule] overly vague and
unlawful.’’ FTC–2023–0033–0864. See also ESA,
FTC–2023–0033–0867; TechFreedom, FTC–2023–
0033–0872; USTelecom, FTC–2023–0033–0876
(citing Katharine Gibbs School v. FTC, 612 F.2d 658
(2d Cir. 1979)).
217 ACT App Association, FTC–2023–0033–0874.
218 MIA, FTC–2023–0033–1008.
219 Chamber, FTC–2023–0033–0885. See also CDI,
FTC–2023–0033–0887 (‘‘consumers could argue
that the dish detergent they received through a
subscription service did not clean dishes as
advertised.’’).
220 TechNet, FTC–2023–0033–0869.
221 ESA, FTC–2023–0033–0867; see also IAB,
FTC–2023–0033–1000 (predicting ‘‘autorenewing
(sic) subscriptions will become less common and
significantly more costly because of the regulatory
risks’’ and ‘‘businesses and consumers will be
harmed by the loss of convenience and savings
offered by autorenewal arrangements.’’); Chamber,
FTC–2023–0033–0885 (contending ‘‘many entities
may forgo negative options altogether. This
decreases consumer choice in the marketplace
given the clear popularity and use of negative
option features across the economy.’’).
222 ANA, FTC–2023–0033–1001; Consumer
Technology Association (‘‘CTA’’), FTC–2023–0033–
0997; N/MA, FTC–2023–0033–0873.
223 NRF, FTC–2023–0033–1005; RILA, FTC–
2023–0033–0883; SFE Energy, Inc. (‘‘SFE’’), FTC–
2023–0033–1151.
224 NRF, FTC–2023–0033–1005.
225 PDMI, FTC–2023–003–0864.
226 IAB, FTC–2023–0033–1000.
227 BSA, FTC–2023–0033–1015; see also
Chamber, FTC–2023–0033–0885 (noting
‘‘materiality’’ not defined in NPRM).
228 RILA, FTC–2023–0033–0883.
229 BSA, FTC–2023–0033–1015.
230 CCIA, FTC–2023–0033–0984; CDI, FTC–2023–
0033–0887; see also TechFreedom, FTC–2023–
0033–0872.
231 15 U.S.C. 57a(b)(2).
prohibits misrepresentations so
broadly. 215
Similarly on scope, some commenters
also argued the proposed language
lacked the specificity necessary to give
sellers notice of what conduct would
violate the Rule. 216 For example, ACT
App Association asserted,
‘‘Notwithstanding best efforts, tech
startups’ ability to flawlessly adhere to
the vague and broad language used in
this rule is unrealistic.’’ 217
A few commenters provided
hypotheticals or asked rhetorical
questions to illustrate concerns about
the proposal’s breadth. MIA, for
example, stated, ‘‘if a streaming service
advertises, ‘movies that you will love,’
but you do not ‘love’ them, is that a
violation of this rule subject to
penalties? If a housekeeping service
claims, ‘great cleaning every time,’ but
the resulting cleanliness is not up to the
consumer’s ‘standards,’ will that trigger
this provision and any resulting
penalties?’’ 218 The Chamber asked,
‘‘[c]ould a privacy policy, for example,
be considered a material representation
covered under this requirement?’’ 219
Many of these commenters argued the
reach of the proposed Rule would
negatively impact consumers by
discouraging negative option offerings.
TechNet said, ‘‘[f]or a variety of
subscription services, the main drivers
of consumer engagement are the
subscription services’ ability to provide
financial savings, convenience, and
access to premium services. . . .
Unfortunately, the NPRM ignores these
benefits and would discourage the
offering of subscription services
altogether.’’ 220 ESA feared ‘‘this section
will discourage industry members from
developing and offering innovative
negative option plans that consumers
will enjoy.’’ 221
Several commenters asserted existing
laws and regulations make the proposed
provision unnecessary. Some argued
section 5’s prohibition against deceptive
practices already provides the
Commission sufficient authority on this
issue.222 Others asserted State laws and
regulations prohibiting
misrepresentations are sufficient to
protect the public.223
Commenters were divided on
ROSCA’s coverage. NRF, for example,
said ‘‘[i]n light of the Commission’s
decision that ROSCA already prohibits
deceptive statements made in
connection with a subscription, even if
not directly related to subscription
terms, many of the proposed
amendments are unnecessary.’’ 224 In
contrast, PDMI said while MoviePass
‘‘perhaps reflects a colorable approach,’’
the application of ROSCA there
‘‘exceeded Congress’ intent.’’ 225
Similarly, IAB asserted the proposed
Rule would break new ground by
‘‘grant[ing] the Commission authority to
seek monetary remedies against a first-
time offender for misrepresentations
that would not give rise to monetary
relief if made outside the context of an
autorenewal agreement.’’ 226
Several commenters recommended
changes if the proposed provision
remains in the Rule. BSA, for example,
suggested the Commission should
define the term ‘‘material,’’ citing the
TSR and the FTC Policy Statement on
Deception as examples.227 Separately,
RILA urged the Commission ‘‘to include
clear language stating a ‘reasonable
person standard’ will apply to
determinations of ‘material facts’ related
to products.’’ 228
Several commenters suggested the
Commission limit the misrepresentation
provision to the terms of the negative
option feature. For instance, BSA
advocated for limiting the provision ‘‘to
facts relating to the transaction and not
every material fact relating to the
underlying good or service.’’ 229 CCIA
and CDI agreed, stating the final phrase
should instead cover only those material
facts related to the underlying negative
option feature and exclude ‘‘any
material fact related to the underlying
good or service.’’ 230
(b) Analysis
Based on the record, the Commission
adopts a clarified version of the material
misrepresentation section and adds a
definition for further clarification.
Specifically, the final Rule omits the
proposed language referring to ‘‘any
material fact related to the transaction,
such as the negative option feature, or
any material fact related to the
underlying good or service’’ and instead
prohibits misrepresentation of ‘‘any
material fact,’’ and defines ‘‘material’’
consistent with the TSR and section 5
of the FTC Act. Further, to enhance
clarity and specificity, the text lists
several examples of potentially material
fact categories, taken from Commission
precedent.
As further explained below: (1)
despite commenters’ concerns to the
contrary, this provision is consistent
with the ANPR and prevalence
requirements of section 18 of the FTC
Act; (2) consistent with ROSCA, the
final provision is not limited to material
misrepresentations about the negative
option feature itself; (3) the Commission
declines to exclude any subset of
material misrepresentations from the
scope of the Rule; and (4) for clarity, the
Commission adds a definition of
‘‘material’’ consistent with established
law of section 5 and other Commission
Rules.
(1) Adoption of a prohibition against
misrepresentations is consistent with
the ANPR and is appropriate to address
prevalent unfair or deceptive acts or
practices.
Prior to the publication of any notice
of proposed rulemaking promulgated
under the Magnuson Moss Act, the
Commission must publish an advance
notice of proposed rulemaking
(ANPR). 231 That notice must contain a
‘‘brief description of the area of inquiry
under consideration, the objectives
which the Commission seeks to achieve,
and possible regulatory alternatives
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232 15 U.S.C. (b)(2)(A)(i).
233 Section 425.3 is the only remaining section as
to which commenters made this ANPR argument.
234 See section VII.1.a. In the cited Commission
law enforcement matters, the Commission has
applied its established materiality standard,
limiting its actions to misrepresentations that are
likely to affect consumers’ choice of, or conduct
regarding, goods or services. In re Cliffdale Assocs.,
Inc., 103 F.T.C. 110 (1984). That is to say, in the
cited matters the Commission alleged defendants
made misrepresentations to induce consumers to
enter into negative option programs.
235 15 U.S.C. 57a(a)(1)(B).
236 15 U.S.C. 8403(1).
237 Chamber, FTC–2023–0033–0885.
238 16 CFR 310.2(t) (TSR); 16 CFR 461.1
(Impersonation Rule); Policy Statement on
Deception (Oct. 14, 1983) (appended to In re
Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)). See
also BSA, FTC–2023–0033–1015 (requesting
definition of material consistent with TSR and
Policy Statement); Chamber, FTC–2023–0033–0885
(criticizing the proposed Rule for not defining
materiality).
239 E.g., ESA, FTC–2023–0033–0867; NFIB, FTC–
2023–0033–0789; TechFreedom, FTC–2023–0033–
0872.
240 15 U.S.C. 8401(2).
241 IAB, FTC–2023–0033–1000.
242 TechNet, FTC–2023–0033–0869.
243 Policy Statement on Deception (Oct. 14, 1983)
(appended to In re Cliffdale Assocs., Inc., 103 F.T.C.
110 (1984)) (describing and citing materiality of
purpose, safety, efficacy, and cost); In re Thompson
Medical Co., Inc., 104 F.T.C. 648, 816–17 (1984)
(listing cost, purpose, efficacy, and safety as
presumptively material characteristics).
244 In the negative option context, material cost
misrepresentations may include any cost (and total
Continued
under consideration by the
Commission.’’ 232 The ANPR in this case
meets this standard. Specifically, in the
ANPR, the Commission stated the
objective of the Rule was to prevent
deceptive or unfair practices in the
marketing of products and services with
negative option features. Several
industry associations submitted
comments in response to the ANPR,
illustrating the effectiveness of the
ANPR in soliciting views of the
interested public and affected industry
before issuing the NPRM.233 Moreover,
as detailed herein, the Commission has
reviewed and carefully considered the
views of the public and industry as
expressed in response to both the ANPR
and NPRM.
The record demonstrates
misrepresentations made to induce
consumers to enter into negative option
programs are prevalent. Specifically, the
Commission’s enforcement experience
(including consumer complaints,
matters cited in the NPRM, and matters
cited in this Statement of Basis and
Purpose) as well as the experiences of
the State AGs, the information cited by
the Law Professors, and comments by
consumer commenters all support this
conclusion. 234
As several commenters critical of the
proposed provision correctly note,
misrepresentations to induce consumers
to join negative option programs are
already unlawful under section 5, as
well as under other State and Federal
laws and regulations, depending on
(among other things) media used and
jurisdiction. This fact, however, does
not undermine the need for the Rule
provision. By definition, a section 18
trade regulation rule addresses conduct
that is already prohibited under section
5. With such prohibited conduct
defined, the trade regulation rule may
also more broadly ‘‘include
requirements prescribed for the purpose
of preventing such acts or practices,’’
but the core of a trade regulation rule is
the description of acts or practices
already violative of section 5.235 The
misrepresentations section of the Rule is
narrower than the full scope of tools
available under section 18. It simply
prohibits conduct that is already
deceptive. Such a provision promotes
clarity and confidence in the
marketplace and provides for more
effective remedies (i.e., civil penalties,
where appropriate) against wrongdoers.
Moreover, the fact that ROSCA’s
disclosure requirement 236 already
essentially prohibits material
misrepresentations about online
negative option transactions, means
much of the rhetoric predicting the
downfall of negative option marketing
simply is ill-founded. Indeed, the
Chamber pointed to the ‘‘clear
popularity and use of negative option
features across the economy’’ even as
ROSCA has been law for over a
decade.237 Far from undermining
legitimate business, the Rule’s express
prohibition on misrepresenting material
facts in connection with promoting or
offering for sale a negative option
feature should increase consumer
confidence in negative option
marketing, thus making it easier for
legitimate businesses to market their
products.
(2) Prohibiting misrepresentation of
any material facts, not just those
pertaining to the negative option
feature, promotes clarity consistent with
ROSCA and Commission precedent.
The final Rule prohibits
misrepresentation of ‘‘any material
fact.’’ In doing so, it provides a non-
exhaustive list of categories of
potentially material facts (including
transaction terms) and adds a definition
of ‘‘material,’’ consistent with section 5
and the TSR. Specifically, consistent
with section 5, ‘‘material’’ means ‘‘likely
to affect a person’s choice of, or conduct
regarding, goods or services.’’ 238 This
approach both clarifies the terms most
at issue and ensures the Rule accords
with longstanding section 5 precedent.
The Commission declines to limit the
misrepresentations prohibition solely to
elements of the negative option
feature. 239 First, the Commission finds
imposing such a narrow restriction
would be inconsistent with existing
protections. Pursuant to ROSCA section
8403, sellers must ‘‘clearly and
conspicuously disclose all material
terms of the transaction before obtaining
the consumer’s billing information.’’ As
Congress has explained, a healthy
marketplace ‘‘must provide consumers
with clear, accurate information and
give sellers an opportunity to fairly
compete with one another for
consumers’ business.’’ 240 Limiting a
misrepresentations prohibition solely to
misrepresentations about the negative
option feature itself would fall well
short of the scope of ROSCA and the
Commission’s responsibility to protect
the public.
Moreover, seller commenters
themselves highlighted transaction
elements other than negative option
terms as critical to inducing consumers
to choose negative option features. IAB,
for example, pointed to the promise of
‘‘broader selection and lower prices’’ or
‘‘convenience and savings.’’ 241
Similarly, TechNet identified the
‘‘ability to provide financial savings,
convenience, and access to premium
services’’ as ‘‘the main drivers’’ of
varied subscriptions. 242
Furthermore, such a distinction may
invite dishonest actors to misrepresent
material facts about a transaction so
long as they felt they could evade
monetary liability for such
misrepresentations. Moreover, simply
refraining from making material
misrepresentations is hardly a
significant burden given the fact that
such misrepresentations are already
illegal under section 5 of the FTC Act,
and subject to civil penalties when
made on the internet and over the
telephone pursuant to ROSCA and the
TSR, respectively.
(3) The Commission declines to
exclude any material facts from the
scope of the provision.
To further promote clarity, the
Commission includes a list of non-
exclusive examples in the text of
§ 425.3. In addition to the negative
option feature itself, the examples
include certain characteristics the
Commission has identified as
presumptively material for more than 40
years 243 and which have in fact
appeared as the subject of material
misrepresentations in Commission
negative option cases—cost,244 purpose
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costs) from inception through the course of the
commercial relationship, including
misrepresentations as to recurring costs and refunds
or guarantees. See, e.g., FTC v. FloatMe Corp., No.
5:24–cv–00001 (W.D. Tex. 2024); United States v.
Cerebral, Inc., No. 1:24–cv–21376 (S.D. Fla. 2024);
FTC v. Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y.
2023); FTC v. Benefytt Techs., Inc., No. 8:22–cv–
01794 (M.D. Fla. 2022); FTC v. First Am. Payment
Sys., No. 4:22–cv–00654 (E.D. Tex. 2022); FTC v.
XXL Impressions, LLC, No. 1:17–cv–00067 (D. Me.
2017); FTC v. Cardiff, No. 5:18–cv–02104 (C.D. Cal.
2018); FTC v. Health Rsch. Labs., LLC, No. 2:17–cv–
00467 (D. Me. 2017); FTC v. Tarr, No. 3:17–cv–
02024 (S.D. Cal. 2017); FTC v. AdoreMe, Inc., No.
1:17–cv–09083 (S.D.N.Y. 2017); FTC v. Pact, Inc.,
No. 2:17–cv–1429 (W.D. Wash. 2017); FTC v.
Leanspa, LLC, No. 3:11–cv–01715 (D. Conn. 2011);
FTC v. Willms, No. 2:11–cv–00828 (W.D. Wash.
2011); FTC v. Universal Premium Servs., No. 2:06–
cv–00849 (C.D. Cal. 2006).
245 See, e.g., FTC v. FloatMe Corp., No. 5:24–cv–
00001 (W.D. Tex. 2024); United States v. Cerebral,
Inc., No. 1:24–cv–21376 (S.D. Fla. 2024); FTC v.
NGL Labs, LLC, No. 2:24–cv–05753 (C.D. Cal. 2024);
FTC v. Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y.
2023); FTC v. WealthPress, Inc., No. 3:23–cv–00046
(M.D. Fla. 2023); In re Dun & Bradstreet, Inc., FTC
Docket No. C–4761 (2022); FTC v. First Am.
Payment Sys., No. 4:22–cv–00654 (E.D. Tex. 2022);
In re MoviePass, Inc., FTC Docket No. C–4751
(2021); United States v. MyLife.com, Inc., No. 2:20–
cv–6692 (C.D. Cal. 2020); FTC v. RagingBull.com,
LLC, No. 1:20–cv–03538 (D. Md. 2020); FTC v.
Match Grp., Inc., No. 3:19–cv–02281 (N.D. Tex.
2019); FTC v. XXL Impressions, LLC, No. 1:17–cv–
00067 (D. Me. 2017); FTC v. Cardiff, No. 5:18–cv–
02104 (C.D. Cal. 2018); FTC v. JDI Dating, Ltd., No.
1:14–cv–08400 (N.D. Ill. 2014); FTC v. Credit
Bureau Ctr., LLC, No. 1:17–cv–00194 (N.D. Ill.
2017); FTC v. Health Rsch. Labs., LLC, No. 2:17–cv–
00467 (D. Me. 2017); FTC v. Health Formulas, LLC,
No. 2:14–cv–01649 (D. Nev. 2014); FTC v. Leanspa,
LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v.
Willms, No. 2:11–cv–00828 (W.D. Wash. 2011); FTC
v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010); FTC
v. Remote Response Corp., No. 1:06–cv–20168 (S.D.
Fla. 2006).
246 See, e.g., FTC v. XXL Impressions, LLC, No.
1:17–cv–00067 (D. Me. 2017); FTC v. Cardiff, No.
5:18–cv–02104 (C.D. Cal. 2018); FTC v. Health
Rsch. Labs., LLC, No. 2:17–cv–00467 (D. Me. 2017);
FTC v. Health Formulas, LLC, No. 2:14–cv–01649
(D. Nev. 2014); FTC v. Leanspa, LLC, No. 3:11–cv–
01715 (D. Conn. 2011); FTC v. Willms, No. 2:11–cv–
00828 (W.D. Wash. 2011).
247 E.g., FTC v. Elite IT Partners, Inc., No. 2:19–
cv–00125 (D. Utah 2019) (affiliation with well-
known companies); In re Urthbox, Inc., FTC Docket
No. C–4676 (2019) (independence of reviews); FTC
v. BunZai Media Grp., Inc., No. 2:15–cv–04527
(C.D. Cal. 2015) (BBB accreditation and ratings);
FTC v. DOTAuthority.com, Inc., No. 0:16–cv–62186
(S.D. Fla. 2016) (ratings); FTC v. FTN Promotions,
Inc., No. 8:07–cv–1279 (M.D. Fla. 2007) (affiliation
with consumer’s bank).
248 E.g., FTC v. XXL Impressions, LLC, No. 1:17–
cv–00067 (D. Me. 2017) (radio news show); FTC v.
Leanspa, LLC, No. 3:11–cv–01715 (D. Conn. 2011)
(news reports).
249 E.g., In re Dun & Bradstreet, Inc., FTC Docket
No. C–4761 (2022) (charging for same product
consumer previously purchased); FTC v. Benefytt
Techs., Inc., No. 8:22–cv–01794 (M.D. Fla. 2022)
(charging for authorized products); FTC v. Triangle
Media Corp., No. 3:18–cv–01388 (S.D. Cal. 2018)
(completeness of order); FTC v. Apex Capital Grp.,
LLC, No. 2:18–cv–09573 (C.D. Cal. 2018)
(completeness of order); FTC v. Moneymaker, No.
2:11–cv–00461 (D. Nev. 2011) (purpose of
authorization).
250 E.g., United States v. Cerebral, Inc., No. 1:24–
cv–21376 (S.D. Fla. 2024) (data security and
privacy); In re MoviePass, Inc., FTC Docket No. C–
4751 (2021) (data security).
251 E.g., FTC v. XXL Impressions, LLC, No. 1:17–
cv–00067 (D. Me. 2017); FTC v. Cardiff, No. 5:18–
cv–02104 (C.D. Cal. 2018); FTC v. Willms, No. 2:11–
cv–00828 (W.D. Wash. 2011).
252 15 U.S.C. 57a(a)(1)(B).
253 PDMI, FTC–2023–003–0864 (contrasting the
proposed Rule language with Business Opportunity
Rule language, saying ‘‘The Business Opportunity
Rule does not prohibit any misrepresentation in
connection with business opportunities. It prohibits
specific misrepresentations about earnings
claims.’’); TechFreedom, FTC–2023–0033–0872
(‘‘For example, the Business Opportunity Rule
prohibits no fewer than 21 different kinds of
misrepresentation regarding business opportunities.
This specificity is typical of trade regulation
rules.’’) (footnotes omitted).
254 15 U.S.C. 57a(a)(1)(B).
255 16 CFR 437.6(i).
256 See, e.g., FTC v. FloatMe Corp., No. 5:24–cv–
00001 (W.D. Tex. 2024); United States v. Cerebral,
Inc., No. 1:24–cv–21376 (S.D. Fla. 2024); FTC v.
NGL Labs, LLC, No. 2:24–cv–05753 (C.D. Cal. 2024);
FTC v. Bridge It, Inc., No. 1:23–cv–09651 (S.D.N.Y.
2023); FTC v. WealthPress, Inc., No. 3:23–cv–00046
(M.D. Fla. 2023); FTC v. Benefytt Techs., Inc., No.
8:22–cv–01794 (M.D. Fla. 2022); In re Dun &
Bradstreet, Inc., FTC Docket No. C–4761 (2022);
FTC v. First Am. Payment Sys., No. 4:22–cv–00654
(E.D. Tex. 2022); In re MoviePass, Inc., FTC Docket
No. C–4751 (2021); United States v. MyLife.com,
Inc., No. 2:20–cv–6692 (C.D. Cal. 2020); FTC v.
RagingBull.com, LLC, No. 1:20–cv–03538 (D. Md.
2020); FTC v. Match Grp., Inc., No. 3:19–cv–02281
(N.D. Tex. 2019); FTC v. Elite IT Partners, Inc., No.
2:19–cv–00125 (D. Utah 2019); In re Urthbox, Inc.,
FTC Docket No. C–4676 (2019); FTC v. Triangle
Media Corp., No. 3:18–cv–01388 (S.D. Cal. 2018);
FTC v. Apex Capital Grp., LLC, No. 2:18–cv–09573
(C.D. Cal. 2018); FTC v. XXL Impressions, LLC, No.
1:17–cv–00067 (D. Me. 2017); FTC v. Cardiff, No.
5:18–cv–02104 (C.D. Cal. 2018); FTC v. JDI Dating,
Ltd., No. 1:14–cv–08400 (N.D. Ill. 2014); FTC v.
Credit Bureau Ctr., LLC, No. 1:17–cv–00194 (N.D.
Ill. 2017); FTC v. BunZai Media Grp., Inc., No. 2:15–
cv–04527 (C.D. Cal. 2015); FTC v.
DOTAuthority.com, Inc., No. 0:16–cv–62186 (S.D.
Fla. 2016); FTC v. Health Rsch. Labs., LLC, No.
2:17–cv–00467 (D. Me. 2017); FTC v. Tarr, No.
3:17–cv–02024 (S.D. Cal. 2017); FTC v. AdoreMe,
Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017); FTC v.
Pact, Inc., No. 2:17–cv–1429 (W.D. Wash. 2017);
FTC v. RevMountain, LLC, No. 2:17–cv–02000 (D.
Nev. 2017); FTC v. AAFE Prods. Corp., No. 3:17–
cv–00575 (S.D. Cal. 2017); FTC v. Health Formulas,
LLC, No. 2:14–cv–01649 (D. Nev. 2014); FTC v. Dill,
No. 2:16–cv–00023 (D. Me. 2016); FTC v. Leanspa,
LLC, No. 3:11–cv–01715 (D. Conn. 2011); FTC v.
Willms, No. 2:11–cv–00828 (W.D. Wash. 2011); FTC
v. Moneymaker, No. 2:11–cv–00461 (D. Nev. 2011);
FTC v. Johnson, No. 2:10–cv–02203 (D. Nev. 2010);
FTC v. Inc21.com Corp., 745 F. Supp. 2d 975 (N.D.
Cal. 2010); FTC v. JAB Ventures, LLC, No. 2:08–cv–
04648 (C.D. Cal. 2008); FTC v. Ultralife Fitness, Inc.,
No. 2:08–cv–07655 (C.D. Cal. 2008); FTC v. FTN
Promotions, Inc., No. 8:07–cv–1279 (M.D. Fla.
2007); FTC v. Think All Publ’g, LLC, No. 4:07–cv–
00011 (E.D. Tex. 2007); FTC v HispaNexo, Inc., No.
1:06–cv–424 (E.D. Va. 2006); FTC v. Universal
Premium Servs., No. 2:06–cv–00849 (C.D. Cal.
or efficacy,245 and health or safety.246
The record demonstrates the list must
be non-exclusive because the
Commission has observed the use of
material misrepresentations other than
those enumerated to induce consumers
to enter into transactions with negative
option features, including, for example,
characteristics of the seller,247 the
format of the ad or other sales
communication, 248 consumer
authorization,249 consumer privacy or
data security,250 and endorsements or
testimonials. 251 The Commission cannot
predict what other material
misrepresentations dishonest actors may
employ in the future.
Some commenters asserted section 18
does not authorize the Commission to
prohibit material misrepresentations in
a given area of commerce. Section 18,
however, permits the FTC to promulgate
‘‘rules which define with specificity acts
or practices which are unfair or
deceptive acts or practices in or
affecting commerce (within the meaning
of [section 5(a)(1)]) . . . [and] may
include requirements prescribed for the
purpose of preventing such acts or
practices.’’ 252 It places no additional
restrictions on the scope of this
rulemaking.
Several commenters appear to think
section 18 requires the Commission to
define specific claims as deceptive; for
example, two commenters cited the
Business Opportunity Rule’s treatment
of misrepresentations. 253 While the
cited Rules show one way to meet the
statute’s specificity requirements, the
statute does not require the Commission
to define claims with specificity, but
instead acts or practices.254 For
example, in the Business Opportunity
Rule, the practice of misrepresenting
‘‘any material aspect of any assistance
offered to a prospective purchaser’’ in a
business opportunity transaction is a
specific type of deceptive practice in or
affecting commerce. 255 By the same
token, the practice of misrepresenting
material facts to induce consumers to
consent to negative option features
constitutes a specific type of deceptive
practice.
The record, including the submissions
of many industry commenters, shows
negative option features are found
across industries, but are consistently
distinguishable as a subset of general
commercial practices. As commenters
point out, negative option features offer
many distinct benefits to consumers and
sellers. These benefits do not lose their
distinct character merely because they
occur across different kinds of goods
and services sold across different
channels. While the record shows this
practice offers distinct benefits, it also
shows the practice is plagued by
distinct abuse. This is not a hypothetical
statement; the Commission is not
promulgating the final Rule because
negative option features may engender
deception, whether relating to the
feature itself or to other material facts,
but rather because the record shows
they have.256 Just as with the benefits of
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2006); FTC v. Remote Response Corp., No. 1:06–cv–
20168 (S.D. Fla. 2006).
257 Policy Statement on Deception (Oct. 14, 1983)
(appended to In re Cliffdale Assocs., Inc., 103 F.T.C.
110 (1984)).
258 See n.257.
259 16 CFR 310.2(t); In re Cliffdale Assocs., Inc.,
103 F.T.C. 110 (1984).
260 See FTC v. Direct Mktg. Concepts, Inc., 624
F.3d 1, 11 (1st Cir. 2010) (‘‘Where a claim is merely
‘exaggerated advertising, blustering, and boasting
upon which no reasonable buyer would rely,’ it
may be un-actionable puffery.’’).
261 The Commission declines to add language
defining a ‘‘reasonable person standard’’ as
suggested by RILA, and refers instead to the
discussion of reasonableness set forth in the
Commission’s Policy Statement on Deception (Oct.
14, 1983) (appended to In re Cliffdale Assocs., Inc.,
103 F.T.C. 110 (1984)).
262 NPRM, 88 FR 24727.
263 NPRM, 88 FR 24726–27.
264 NPRM, 88 FR 24726.
265 NPRM, 88 FR 24727.
negative option marketing, these
problems do not lose their distinct
character, in other words they are
distinct practices, even though they
appear in a variety of contexts.
In addressing this deceptive practice,
the Commission remains guided by core
principles articulated in its 1983
Deception Policy Statement. As the
Commission explained, in considering
whether to act against a deceptive
practice, the Commission will observe
the extent to which consumers
themselves have been able to police and
generate consequences for seller
deception.
Finally, as a matter of policy, when
consumers can easily evaluate the product or
service, it is inexpensive, and it is frequently
purchased, the Commission will examine the
practice closely before issuing a complaint
based on deception. There is little incentive
for sellers to misrepresent (either by an
explicit false statement or a deliberate false
implied statement) in these circumstances
since they normally would seek to encourage
repeat purchases. Where, as here, market
incentives place strong constraints on the
likelihood of deception, the Commission will
examine a practice closely before
proceeding.257
The record shows the practice of
misrepresenting material facts to induce
consent to negative option features has
created distinct issues consumers have
not been able to address themselves,
enabling sellers to collect numerous
recurring payments before consumers
detect the misrepresentation and act to
stop the charges. This problem is not
confined to a particular subset of
industries or misrepresentations but
instead is a too-frequent practice
throughout negative option
marketing. 258 Specifically, when a
consumer makes a series of purchases
from the same seller in ordinary
circumstances (rather than through a
negative option), each purchase requires
the consumer to actively, even if only
briefly, re-evaluate the transaction and
affirmatively consent. Dishonest
negative option sellers too easily bypass
these typical guardrails of ‘‘repeat
purchases.’’ Thus, up-front
misrepresentations can induce
consumers into recurring transactions
lacking ordinary sales’ built-in
interruptions for re-evaluation and
renewed consent. As with other areas
where consumers have limited
opportunities for critical up-front
evaluation (for example, consumers
cannot easily evaluate medical claims
about dietary supplements), so too, here,
the Commission finds additional
protection warranted.
The Commission has considered
commenters’ section 18 specificity
concerns pertaining to material
misrepresentations and finds them
unsupported by the record. These
commenters suggest a hypothetical
world where negative option features
provide distinguishable commercial
benefits without presenting
distinguishable material
misrepresentation challenges. The
reality is otherwise. Thus, the final Rule
prohibits the specific practice of sellers
misrepresenting material terms or facts
in connection with negative option
sales.
(4) For clarity, the final Rule adds a
definition of ‘‘material’’ consistent with
precedent.
As noted above, and as suggested by
commenters, the Commission defines
‘‘material’’ in the final Rule. This
definition adds clarity and addresses the
rhetorical questions raised by
commenters regarding scope.
Specifically, consistent with section 5,
the TSR, and longstanding Commission
policy and case law, the final Rule
defines the term to mean likely to affect
a person’s choice of, or conduct
regarding, goods or services.259 Thus,
mere puffery is not material.260
The hypotheticals posed by MIA—
‘‘movies that you will love’’ or ‘‘great
cleaning every time’’—are classic
examples of puffery, and thus, are not
within the scope of materiality.261 The
response to the question posed by the
Chamber—whether misrepresentation of
a privacy policy would be covered—
depends, as it always has, on whether
the seller misrepresents its privacy
policy in a way likely to affect consumer
choice or conduct.
4. Proposed § 425.4 Important
Information
Section 425.4 of the proposed Rule
prohibited sellers from failing to
disclose ‘‘any material conditions
related to the underlying product or
service that is necessary to prevent
deception, regardless of whether that
term directly relates to the terms of the
negative option offer.’’ 262 As explained
in the NPRM, the Commission drafted
this provision because ‘‘many sellers fail
to provide adequate disclosures, thereby
luring consumers into purchasing goods
or services they do not want.’’ 263 To
address this issue, the proposed Rule
required sellers to provide the following
important information prior to obtaining
a consumer’s billing information: ‘‘(1)
that consumers’ payments will be
recurring, if applicable; (2) the deadline
by which consumers must act to stop
charges; (3) the amount or ranges of
costs consumers may incur; (4) the date
the charge will be submitted for
payment; and (5) information about the
mechanism consumers may use to
cancel the recurring payments.’’ 264
The Commission also proposed
requirements regarding the form and
location of this important information,
as its ‘‘law enforcement experience and
consumer complaints are replete with
examples of hidden disclosures,
including those in fine print, buried in
paragraphs of legalese and sales pitches,
and accessible only through
hyperlinks.’’ 265 Thus, under the
proposed Rule, information ‘‘directly
related to the negative option feature
. . . must appear immediately adjacent
to the means of recording the
consumer’s consent for the negative
option feature.’’ Information ‘‘not
directly related to the negative option
feature . . . must appear before
consumers make a decision to buy (e.g.,
before they ‘add to shopping cart’).’’
Further, the proposal stated all
disclosures must be clear and
conspicuous as defined in § 425.2(c).
Among other elements of the clear and
conspicuous definition, the proposed
Rule specified that in any
communication using an interactive
electronic medium, such as the internet,
mobile application, or software, the
disclosure must be unavoidable. The
proposed Rule also specified that a
disclosure is not clear and conspicuous
if a consumer ‘‘must take any action,
such as clicking on a hyperlink or
hovering over an icon, to see it.’’
Finally, the proposed Rule prohibited
sellers from including any information
that interferes with, detracts from,
contradicts, or otherwise undermines
the ability of consumers to read, hear,
see, or otherwise understand the
required disclosures. The final clause of
this prohibition ‘‘includ[ed] any
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266 NPRM, 88 FR 24727.
267 Thousands of consumers submitted the
following identical comment in their own names:
‘‘It’s critically important that companies make it
explicitly clear what consumers are signing up for
and to make canceling fast and easy. If you signed
up online, you should be able to cancel online. If
it took one click to join, it should take one click
to cancel. Implementing this consumer protection
rule has the potential to save American consumers
millions of dollars and I hope it is implemented as
soon as possible.’’ While apparently a response to
a mass solicitation, many consumers further
personalized their submission by adding their
unique experiences and desire for the Rule. See,
e.g., Individual commenter, FTC–2023–0033–0161;
–0163; –0164; 0198; –0204; –0545; 0658.
268 Individual commenter, FTC–2023–0033–0268.
Similarly, another individual commenter said,
‘‘Businesses should not present agreements in tiny
print on an agent’s tablet for the customer to sign.
I can’t read the print.’’ Individual commenter, FTC–
2023–0033–0349.
269 Individual commenter, FTC–2023–0033–0345.
270 Individual commenter, FTC–2023–0033–0781.
271 Individual commenter, FTC–2023–0033–0031.
Accord Individual commenter, 0196 (‘‘I have had to
get to the point of not subscribing to any online
offers, as far too many times I have found it nearly
impossible to unsubscribe’’); Individual commenter,
FTC–2023–0033–0306 (‘‘you could win over more
subscribers to your services if you took away the
fear and doubts of the public that they will probably
be hooked into something that would be more
troublesome to get out of . . . I can tell you that
I have passed over many opportunities that I was
interested in for this very reason.’’); Individual
commenter, FTC–2023–0033–0333 (‘‘I’ve had some
difficulty in the past cancelling enrollments or
subscriptions, so that now I’ve become very wary
of products or services I would otherwise
appreciate having. Implementing this consumer
protection rule would help me feel more confident
again.’’).
272 Berkeley Consumer Law Center, FTC–2023–
0033–0855. Similarly, for the same reasons they
provided in connection with the misrepresentations
provision, the Law Professors encouraged the
Commission to maintain the proposed disclosure
provision’s coverage of material terms necessary to
prevent deception, regardless of whether such terms
are exclusively about the negative option feature.
Law Professors, FTC–2023–0033–0861.
273 Public Interest Groups, FTC–2023–0033–0880.
274 State AGs, FTC–2023–0033–0886.
275 Id.
276 CART, FTC–2023–0033–0698.
277 Id.
278 Not all industry groups criticized the
provision. Specifically, MIA wrote, ‘‘The
Association agrees with the important information
requirement under the proposed Rule.’’ MIA, FTC–
2023–0033–1008.
279 In addition, some commenters cited industry-
specific laws and regulations pertaining to
disclosures as rendering the proposed provision
unnecessary or counterproductive. ACA Connects-
America’s Communications Association (‘‘ACA’’),
FTC–2023–0033–0881; NCTA, FTC–2023–0033–
0858; SFE, FTC–2023–0033–1151; USTelecom,
FTC–2023–0033–0876.
280 ANA, FTC–2023–0033–1001; CCIA, FTC–
2023–0033–0984; Coalition, FTC–2023–0033–0884;
ESA, FTC–2023–0033–0867; IAB, FTC–2023–0033–
1000; NCTA, FTC–2023–0033–0858; Chamber,
FTC–2023–0033–0885. NFIB suggested the
Commission strike the provision ‘‘The disclosure
must use diction and syntax understandable to
ordinary consumers’’ and replace it with ‘‘ ‘The
disclosure must use words and grammar that
ordinary consumers would likely understand.’ ’’
FTC–2023–0033–0789.
281 ACT App Association, FTC–2023–0033–0874;
ANA, FTC–2023–0033–1001; BSA, FTC–2023–
0033–1015; CCIA, FTC–2023–0033–0984; NCTA,
FTC–2023–0033–0858; NFIB, FTC–2023–0033–
0789; NRF, FTC–2023–0033–1005; PDMI, FTC–
2023–003–0864; Sirius XM, FTC–2023–0033–0857;
Chamber, FTC–2023–0033–0885.
information not directly related to the
material terms and conditions of any
negative option feature.’’
Through these provisions, the
Commission sought to prevent
deception by businesses taking
advantage of the gray areas in current
law, to deter fraudulent actors through
the possibility of monetary relief, and to
‘‘level the playing field for legitimate
businesses, freeing them from having to
compete against those employing
deception.’’ 266
(a) Summary of Comments
Thousands of commenters supported
the important information requirement,
stating it is ‘‘critically important that
companies make it explicitly clear what
consumers are signing up for.’’ 267
Consumers identified problematic
practices the provision would address,
including insufficient and unclear
disclosures in small print or those
appearing too late in the transaction. For
example, an individual commenter said,
‘‘[t]oo many [sellers] hide these details
in extra fine print, and increasingly text
is in a very light gray color, making it
even harder to read.’’ 268 Another
individual commenter noted, ‘‘I ordered
skin care from a tv infomercial only to
find out it was a subscription thing
though none of this was disclosed by
famous actresses on the
promotion. . . . I went back to my
receipt of what I originally ordered and
in fine print saw that I had been
duped!’’ 269
Several individual commenters
indicated clear upfront disclosures
would help them make informed
choices and improve their willingness
to try negative option offerings,
particularly if the disclosure provided
an easy cancellation mechanism. As one
put it, ‘‘I am much more like[ly] to try—
and buy—a new service if I know there
is an easy way to cancel online.’’ 270
Another said, ‘‘I actually subscribe to far
fewer services than I would if I knew
that I could easily cancel once I had
tried a sample.’’ 271
Public advocacy commenters also
supported the provision. The Berkeley
Consumer Law Center said, ‘‘the
requirement of ‘clear and conspicuous’
disclosures of ‘any material term related
to the underlying goods or services that
is necessary to prevent deception’ will
help prevent cancellation terms from
being shrouded in mystery through
complicated terms and conditions,
while also blocking the practice of
hiding subscription services that are
needed to fully use a product.’’ 272
Similarly, a coalition of consumer and
public interest advocacy organizations
asserted the proposed disclosure
requirement ‘‘will clearly inform
consumers of the terms of the contract
and how they may terminate the
agreement.’’ 273
Law enforcement commenters
likewise supported the important
information requirements. The State
AGs said they would ‘‘repel the abusive
practices of hidden disclosures,
‘including those in fine print, buried in
paragraphs of legalese and sales pitches,
and accessible only through
hyperlinks.’ ’’ 274 They particularly
emphasized their support for ‘‘the
required disclosure of ‘the information
necessary for the consumer to cancel the
negative option feature.’ ’’ 275 The
California Auto-Renew Task Force
(‘‘CART’’), a group of Southern
California prosecutors, supported
disclosures appearing ‘‘immediately
adjacent to the means of recording the
consumer’s consent for the negative
option feature.’’ 276 CART asserted this
provision, together with others, ‘‘will
greatly minimize consumer deception
and ensure that consumers fully
understand—and agree to—the nature of
the transaction under consideration.’’ 277
Other commenters, mostly industry
groups,278 expressed several concerns
with the proposed requirements,
specifically with the definition of ‘‘clear
and conspicuous,’’ the scope and timing
of the material terms to be disclosed,
specific disclosure requirements,
placement, and treatment of other
information. 279
Multiple commenters claimed the
requirement that disclosures using an
interactive electronic medium must be
‘‘unavoidable’’ would be unworkable
given the additional provision that a
‘‘disclosure is not clear and conspicuous
if a consumer must take any action,
such as clicking on a hyperlink or
hovering over an icon, to see it.’’ 280
Commenters noted it would be difficult
or impossible to implement this
requirement on small screens (such as
mobile phones), and it may reduce
rather than improve clarity.
Several commenters also objected to
the requirement sellers disclose material
terms other than those pertaining
exclusively to the negative option
feature, asserting this would be
overbroad. 281 Additionally, commenters
questioned how the Commission would
enforce a requirement to disclose
material terms before obtaining a
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282 CTA, FTC–2023–0033–0997; ESA, FTC–2023–
0033–0867; IAB, FTC–2023–0033–1000; NRF, FTC–
2023–0033–1005; RILA, FTC–2023–0033–0883.
Sirius XM asserted this requirement could be
interpreted to mean every advertisement must
contain disclosure of all material terms. FTC–2023–
0033–0857.
283 Rebecca Kuehn (‘‘Kuehn’’), FTC–2023–0033–
0871; NRF, FTC–2023–0033–1005.
284 CCIA, FTC–2023–0033–0984; CTA, FTC–
2023–0033–0997; ESA, FTC–2023–0033–0867; IAB,
FTC–2023–0033–1000; NRF, FTC–2023–0033–1005;
RILA, FTC–2023–0033–0883; Sirius XM, FTC–
2023–0033–0857.
285 IAB, FTC–2023–0033–1000 (deadlines);
Comment from Kelley Drye & Warren LLP on behalf
of certain direct marketing companies (‘‘Direct
Marketing Companies’’), FTC–2023–0033–1016
(deadlines); NRF, FTC–2023–0033–1005 (amount or
range of costs); Sirius XM, FTC–2023–0033–0857
(amount or range of costs).
286 Direct Marketing Companies, FTC–2023–
0033–1016.
287 CCIA, FTC–2023–0033–0984; ESA, FTC–
2023–0033–0867; IAB, FTC–2023–0033–1000; NRF,
FTC–2023–0033–1005.
288 IAB, FTC–2023–0033–1000.
289 ANA, FTC–2023–0033–1001; CCIA, FTC–
2023–0033–0984; Coalition, FTC–2023–0033–0884;
CTA, FTC–2023–0033–0997; ESA, FTC–2023–
0033–0867; IAB, FTC–2023–0033–1000; Direct
Marketing Companies, FTC–2023–0033–1016; NRF,
FTC–2023–0033–1005; SFE, FTC–2023–0033–1151;
Sirius XM, FTC–2023–0033–0857; Chamber, FTC–
2023–0033–0885.
290 Individual commenter, FTC–2023–0033–0552.
291 NRF, FTC–2023–0033–1005.
292 Coalition, FTC–2023–0033–0884; Chamber,
FTC–2023–0033–0885.
293 NRF, FTC–2023–0033–1005 (emphasis in
comment); see also Chamber, FTC–2023–0033–0885
(‘‘[T]he [disclosure] requirement is also ambiguous
considering it does not clearly outline the specific
material terms that need to be disclosed, which is
particularly important considering the requirement
applies not just to the negative option feature, but
all terms in the transaction.’’).
294 State AGs, FTC–2023–0033–0886.
295 See., e.g., In re MoviePass, Inc., FTC Docket
No. C–4751 (2021).
296 15 U.S.C. 57a(a)(1)(B).
297 Additionally, the Commission changes ‘‘any’’
to ‘‘all’’ material terms, and deletes the phrase
‘‘related to the underlying good or service that is
necessary to prevent deception’’ for clarity.
Specifically, the Commission makes clear that
sellers are required to disclose all material terms,
consistent with the requirements of ROSCA.
298 See In re Cliffdale Associates, Inc., 103 F.T.C.
110, 165 (1984) (misleading impression created by
a solicitation is material if it ‘‘involves information
that is important to consumers and, hence, likely
Continued
consumer’s billing information,
especially where a consumer previously
elected to save billing information with
the seller.282 Commenters also found the
requirement that material terms ‘‘not
directly related to the negative option
feature . . . must appear before
consumers make a decision to buy’’ to
be vague. 283
Several commenters took issue with
the five specific disclosures in the
proposed Rule. For example, the
requirement to disclose ‘‘the date (or
dates) each charge will be submitted for
payment’’ drew substantial criticism,
with several commenters asserting
appropriate disclosures regarding
frequency should suffice.284
Commenters also criticized the
requirements to disclose deadlines to
act and the amount or range of costs.285
A group of direct marketers asserted, for
example, ‘‘the Proposed Rule goes too
far in appearing to require a specific
date by which consumers must act to
stop charges when certain negative
option plans are inherently more
flexible and allow consumers to cancel
anytime.’’ 286 Commenters also found
the requirement to disclose ‘‘the
information necessary for the consumer
to cancel the negative option feature’’
was vague and impractical. They
contended the requirement would result
in unnecessary details crowding out
other disclosures. 287 IAB contended ‘‘[a]
more effective strategy [regarding
cancellation disclosures] would be to
make clear but concise disclosures of
where that information can be
found.’’ 288
Additionally, multiple commenters
criticized the provision requiring the
placement of material terms ‘‘directly
related to the negative option feature’’
. . . ‘‘immediately adjacent’’ to
recording the consumer’s consent.289
Commenters asserted having numerous
disclosures in a constrained space
would impair consumers’ ability to
make informed choices. As an
individual commenter explained, ‘‘this
important information may still become
overwhelming to a user, or challenge the
integrity of other disclosures if it must
compete for space (especially because
this disclosure must be placed
immediately adjacent to where a user
will consent to the negative option
feature).’’ 290 NRF found unclear the
distinction between which terms are or
are not ‘‘directly related to the negative
option feature.’’ 291 Other commenters
noted the ‘‘immediately adjacent’’
requirement may not be appropriate for
voice transactions.292
Finally, one commenter expressed
uncertainty about the meaning of the
‘‘other information’’ provision. NRF said
it ‘‘asks companies to walk a tight rope
between ensuring they contain all
material terms, while risking liability if
they include ‘any information not
directly related to the material
terms.’ ’’ 293
The State AGs also recommended
three amendments to this proposal.
First, they recommended requiring
sellers to ‘‘disclose all material policies
concerning cancellation.’’ Second, they
recommended ‘‘sellers be required to
disclose ‘all the information necessary
for the consumer to effectively cancel
the negative option feature.’ ’’ (Emphasis
in comment.) They explained,
‘‘[d]isclosures in the form of ‘click-here-
to-cancel’ icons, which lead to terms
and conditions pages, confusing
cancellation flows, or do not otherwise
explain how to cancel online, should
not be permitted.’’ Third, they
recommended ‘‘the FTC amend this
provision to require that the important
information identified by this proposed
Rule be provided to the consumer in a
manner that is capable of being retained
by the consumer.’’ 294
(b) Analysis
Based on the record, the Commission
retains proposed § 425.4 with several
clarifications. First, as explained in
section VII.B.3 of this SBP, the
Commission adds a definition of
‘‘material’’ at § 425.2(e). Second, in
§ 425.4(a), the Commission clarifies
three of the listed types of important
information sellers must provide and
omits one to address commenters’
concerns. Third, as explained in section
VII.B.4.b.2 of this SBP, the Commission
revises the definition of ‘‘clear and
conspicuous’’ in § 425.2(c). Fourth, in
§ 425.4(b)(2) the Commission clarifies
language regarding ‘‘placement’’ of
disclosures. Finally, the Commission
clarifies the language prohibiting sellers
from including ‘‘any other information’’
that ‘‘interferes with, detracts from,
contradicts, or otherwise undermines’’
consumers’ abilities to read, hear, see, or
understand the required disclosures.
(1) The Commission declines to limit
the required important information
under § 425.4(a).
The Commission declines to limit the
scope of the required information under
this provision to only information
related to the negative option feature.
Section 425.4(a)’s requirement that
sellers disclose ‘‘all material terms’’
prior to obtaining the consumer’s billing
information is consistent with ROSCA
and section 5 of the FTC Act. Moreover,
in the Commission’s law enforcement
experience such a provision is necessary
to prevent deception. 295 Therefore,
extending this requirement is well
within the Commission’s rulemaking
authority.296
To address commenters’ concerns
about clarity, however, § 425.2(e) adds a
definition of ‘‘material;’’ specifically,
material means ‘‘likely to affect a
person’s choice of, or conduct regarding,
goods or services.’’ 297 This definition is
consistent with longstanding section 5
case law and other Commission rules
defining ‘‘material.’’ 298
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90498 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
to affect their choice of, or conduct regarding, a
product.’’); see also FTC v. Cyberspace.com, LLC,
453 F.3d 1196, 1201 (9th Cir. 2006); 16 CFR 310.2(t)
(TSR); 16 CFR 461.1 (Impersonation Rule); Policy
Statement on Deception (Oct. 14, 1983) (appended
to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174
(1984)).
299 In the misrepresentations provision (§ 425.3),
the final Rule uses the term ‘‘including’’ to provide
examples of categories of potentially material facts.
In the disclosures provision, the final Rule retains
the proposed Rule’s use of ‘‘and including’’ (rather
than just ‘‘including’’) to establish all of the
specifically listed disclosures as being always
material.
300 NPRM, 88 FR 24735 (proposed 425.4).
301 The final Rule requires sellers to disclose ‘‘The
amount (or range of costs) the consumer will be
Charged and, if applicable, the frequency of the
Charges a consumer will incur unless the consumer
takes timely steps to prevent or stop those Charges.’’
302 For example, IAB suggested the Commission
should require sellers ‘‘to make clear but concise
disclosures of where [cancellation] information can
be found, so consumers can find that information
if and when it is relevant to them.’’ IAB, FTC–2023–
0033–1000.
303 The Commission declines to adopt the State
AGs three suggestions to supplement this section.
The Commission expects the final Rule will address
two of those suggestions (disclosure of ‘‘all material
policies concerning cancellation’’ and of ‘‘all the
information necessary for the consumer to
effectively cancel the negative option feature’’)
through the requirement that sellers disclose all
material terms (§ 425.4), the prohibition of
misrepresentations of material facts or terms
including those pertaining to cancellation (§ 425.3),
and the requirement of a simple cancellation
mechanism (§ 425.6). The Commission expects to
address the concerns underlying their third
suggestion (‘‘to require that the important
information identified by this proposed Rule be
provided to the consumer in a manner that is
capable of being retained by the consumer’’),
through its further development of the reminders
requirement. In the interim, the Commission
expects the Rule provisions as adopted will
encourage sellers to make important information
easy to find and easy to retain.
304 It is a violation of section 5 for a seller to
retain and use a consumer’s payment information
without the consumer’s consent. E.g., FTC v. Classic
Closeouts LLC, No. 2:09–cv–2692 (E.D.N.Y. 2009).
305 See FTC v. Amazon.com, Inc., No. 2:23–cv–
00932, 2024 WL 2723812, at *11 (W.D. Wash. May
28, 2024) (‘‘Nothing in ROSCA says that companies
. . . may not give consumers the option to autofill
the billing information already on file or simply to
provide billing information after the disclosures,
but ROSCA requires that consumers be given that
choice after the disclosures.’’) (emphasis in
original).
Additionally, the Commission
modifies the proposed list of important
information. 299 The Commission retains
the first proposed requirement that
sellers must disclose ‘‘[t]hat consumers
will be Charged 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.’’ 300 The Commission
continues to find this requirement
appropriate to combat deception.
The Commission revises the second
proposed disclosure, that sellers provide
‘‘the deadline (by date or frequency) by
which the consumer must act in order
to stop all charges.’’ As revised, this
provision requires sellers to disclose
‘‘each deadline (by date or frequency)
by which the consumer must act to
prevent or stop the Charges.’’ This
change clarifies there may not be a
single ‘‘deadline’’ by which a consumer
must act to ‘‘stop all charges.’’ A single
seller, for example, may offer a single
consumer multiple goods or services,
and the consumer may wish to stop
some charges without terminating the
entire relationship. The Commission
also clarifies that ‘‘frequency’’ as used in
the final Rule includes a description of
an irregular frequency (e.g., within a
certain period after the seller notifies
the consumer a new item in a series has
become available) as well as a regular
one (e.g., the 15th of each month).
The Commission also clarifies the
third proposed disclosure. The
proposed Rule required sellers to
disclose ‘‘[t]he amount (or range of
costs) the consumer will be charged,
and, if applicable, the frequency of such
charges a consumer will incur unless
the consumer takes timely steps to
prevent or stop those charges’’).301 The
record suggests, however, that in some
circumstances, the amounts to be
charged may be inexact before the seller
obtains the consumer’s billing
information. For example, taxes or
delivery fees may depend in part on the
billing information the consumer
provides. Thus, the Commission
clarifies under the final Rule as adopted,
the ‘‘amount (or range of costs)’’ need
not be exact if an exact figure is
impossible, but the seller must give a
reasonable approximation. For example,
it is within the meaning of ‘‘amount (or
range of costs)’’ for a seller to disclose
an amount ‘‘plus tax’’ where the seller
requires billing information to
determine the actual amount of tax.
However, a ‘‘plus shipping’’ disclosure
may not be sufficient if the amount of
shipping is beyond what a consumer
would reasonably expect or is greater
than the amount a seller would
reasonably incur for shipping. In such a
circumstance, the seller would need to
provide an estimate of shipping costs.
These clarifications should address
commenters’ concerns about having to
disclose an exact cost when doing so is
not possible.
The final Rule omits the proposed
fourth disclosure: the date (or dates)
each charge will be submitted for
payment. The Commission is persuaded
by commenters’ concern that a specific
date or dates may be cumbersome or
impossible to calculate. For example, if
the seller will submit a charge when it
ships a new item in a series, the seller
may not be able to predict the specific
dates it will submit the charge in the
future. In addition, in light of the
change to the placement requirements of
§ 425.4(b)(2)(i), discussed below,
including these dates could reduce the
clarity and conspicuousness of higher
priority adjacent disclosures (especially
cancellation deadlines, which will often
occur before dates of charges). If,
however, disclosure of the date (or
dates) each charge will be submitted for
payment is necessary to prevent
deception in individual cases, such
disclosure is required under § 425.4(a).
However, its placement is governed by
revised § 425.4(b)(2)(ii) rather than
§ 425.4(b)(2)(i).
Finally, the Commission clarifies the
fifth proposed mandatory disclosure
(the fourth in the final Rule). The
proposed Rule required sellers to
disclose ‘‘[t]he information necessary for
the consumer to cancel the negative
option feature’’. In contrast, the final
Rule requires sellers to disclose ‘‘The
information necessary for the consumer
to find the simple cancellation
mechanism required pursuant to
§ 425.6’’. This change addresses
commenters’ concern the language of
the proposed Rule, combined with the
placement requirements of
§ 425.4(b)(2)(i), would result in detailed
cancellation disclosures crowding out
other important required disclosures.302
This new language should provide
consumers with concise critical upfront
information about how to cancel, while
offering sellers flexibility to avoid
obscuring other important
information.303
Some sellers expressed concern
regarding the timing of disclosures
where a consumer previously elected to
save billing information with the seller.
To address this concern the Commission
now clarifies that, where a consumer
has previously provided account
information to the seller and expressly
allowed the seller to store that
information, 304 the seller must make the
required disclosures prior to obtaining
the consumer’s consent to use saved
account information.305
(2) The Commission modifies the
requirements of § 425.4(b) to promote
clarity.
Section 425.4(b)(1) provides, ‘‘[e]ach
disclosure required by paragraph (a) of
this section must be clear and
conspicuous.’’ The Commission retains
this requirement but revises the
definition of clear and conspicuous at
§ 425.2(c) to address commenters’
concerns regarding space-constrained
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306 The Commission declines to adopt NFIB’s
suggested change to strike the provision ‘‘The
disclosure must use diction and syntax
understandable to ordinary consumers’’ and replace
it with ‘‘ ‘The disclosure must use words and
grammar that ordinary consumers would likely
understand.’ ’’ Particularly in the context of audio
disclosures, the terms ‘‘diction and syntax’’ provide
clearer requirements than the terms ‘‘words and
grammar.’’ NFIB, FTC–2023–0033–0789.
307 NRF, FTC–2023–0033–1005; Law Professors,
FTC–2023–0033–0861.
308 Coalition, FTC–2023–0033–0884; Chamber,
FTC–2023–0033–0885.
309 Kuehn, FTC–2023–0033–0871; NRF, FTC–
2023–0033–1005.
310 See, e.g., FTC v. RevMountain, LLC, No. 2:17–
cv–02000 (D. Nev. 2017); FTC v. Cyberspace.com,
LLC, 453 F.3d 1196 (9th Cir. 2006); United States
v. Mantra Films, Inc., No. 2:03–cv–9184 (C.D. Cal.
2003); FTC v. Crescent Publ’g Grp., Inc., 129 F.
Supp. 2d 311 (S.D.N.Y. 2001).
disclosures. 306 Specifically, the
Commission deletes the sentence, ‘‘A
disclosure is not Clear and Conspicuous
if a consumer must take any action,
such as clicking on a hyperlink or
hovering over an icon, to see it.’’ This
prohibition would have made effective
space-constrained disclosures of the
terms required by the final Rule difficult
if not impossible. However, a clear and
conspicuous disclosure still must be
‘‘unavoidable.’’ By this requirement,
consumers are protected from buried or
inconspicuous disclosures. Sellers, on
the other hand, can make disclosures
‘‘unavoidable’’ even if the consumer
must take some action to see it.
Specifically, the seller could make it
impossible for the consumer to consent
to a transaction or feature unless and
until the consumer has seen the
disclosure. For example, a seller dealing
with space constraints on a mobile
device might not display a consent
button until after the consumer has
scrolled down to a clear disclosure and
then clicked a button indicating they
have seen the disclosure.
Section 425.4(b)(2) (‘‘Placement’’)
retains the proposed Rule’s structure
requiring a subset of disclosures to
‘‘appear immediately adjacent to the
means of recording the consumer’s
consent for the negative option feature,’’
while setting a more general timing
requirement regarding other disclosures.
However, the Commission has revised
some terms to promote clarity.
Specifically, final § 425.4(b)(2)(i)
requires only the four specific
mandatory disclosures listed in
§ 425.4(a) to appear ‘‘immediately
adjacent to the means of recording the
consumer’s consent.’’ The Commission
is persuaded by commenters’ concerns
that requiring market participants to
determine which required disclosures
are ‘‘directly related to the negative
option feature,’’ and which are not, is
too great a burden and could lead to
consumer confusion.307 Thus, rather
than define ‘‘directly related to the
negative option feature,’’ the
Commission removes this phrasing and
confines the ‘‘immediately adjacent’’
requirement to a specific, narrow list of
disclosures. This change provides
clarity and improves predictability for
consumers, and should prevent
disclosure overload.
Several commenters requested
clarification of the ‘‘immediately
adjacent’’ requirement in the context of
voice transactions.308 In response, the
Commission clarifies to comply with
this requirement, a voice transaction
seller must make the required
disclosures immediately before
requesting and recording the consumer’s
consent to the negative option feature.
Two commenters expressed concern
that requiring sellers to make
disclosures ‘‘before consumers make a
decision to buy’’ creates uncertainty
because it is unclear when that
triggering event occurs.309 The
Commission agrees. Therefore, it revises
§ 425.4(b)(2)(ii) to provide generally for
all required disclosures to appear before
the seller obtains consumer consent to
the transaction pursuant to § 425.5. This
amended language provides a triggering
event based on a clear point in the
process. Additionally, the Commission
revises § 425.4(b)(2)(ii) to remove the
phrase ‘‘not directly related to the
negative option feature,’’ doing so for
the same clarity reasons described above
for removing the phrase ‘‘directly
related to the negative option feature’’
from § 425.4(b)(2)(i).
Finally, the Commission adopts a
clarified version of § 425.4(b)(3) (‘‘Other
information’’). The Commission retains
the proposed Rule’s requirement that
sellers not employ ‘‘other information
that interferes with, detracts from,
contradicts, or otherwise undermines
the ability of consumers to read, hear,
see, or otherwise understand the
disclosures.’’ However, the Commission
finds the final clause in the proposed
Rule (‘‘including any information not
directly related to the material terms
and conditions of any negative option
feature’’) could be read to contradict
other requirements of the Rule.
Specifically, there may be necessary
material disclosures not directly related
to the terms and conditions of a negative
option feature, and it is illogical to
simultaneously require these
disclosures (through §§ 425.4(a) and
(b)(2)) and prohibit them (through
§ 425.4(b)(3)). The Commission
therefore omits the clause from the final
Rule. This revision does not alter the
requirement of § 425.4(b)(2)(i) that
certain specific disclosures be made
clearly and conspicuously immediately
adjacent to the means of recording the
consumer’s consent. A seller who makes
additional disclosures immediately
adjacent to the means of recording the
consumer’s consent in a manner
undermining the clarity and
conspicuousness of the required
§ 425.4(b)(2)(i) disclosures violates
§ 425.4(b)(2)(i) and § 425.4(b)(3).
5. Proposed § 425.5 Consent
Section 425.5(a) of the proposed Rule
prohibited sellers from charging
consumers before obtaining their
express informed consent to the
negative option feature. This provision
mirrors 15 U.S.C. 8403(2) (ROSCA), but
provided specificity for sellers covered
by the Rule and to prevent unfair and
deceptive practices. Specifically, the
provision addressed one of the most
pervasive problems of negative option
marketing: sellers employing inadequate
consent procedures to increase
enrollment. Even for marketers trying to
comply with the law, negative option
programs present unique challenges.
Specifically, consumers often focus on
the aspects of an offer that mirror the
offers they regularly encounter (e.g., the
quality, functionality, and one-time
price of the item) and think they are
consenting to these core attributes while
missing the negative option feature.
To address this problem, § 425.5(a)(1)
of the proposed Rule required sellers to
obtain a consumer’s unambiguously
affirmative consent to the feature
separately from any other portion of the
transaction. Section 425.5(a)(2) of the
proposed Rule further required the
seller to exclude any information that
‘‘interferes with, detracts from,
contradicts, or otherwise undermines’’
the consumer’s ability to provide
express informed consent to the
negative option feature. This prohibition
is consistent with longstanding
Commission precedent that consent can
be subverted, including by so-called
‘‘dark patterns,’’ sophisticated design
practices used to manipulate users into
making choices they would not
otherwise have made.310
Additionally, under § 425.5(a)(3) of
the proposed Rule, sellers had to obtain
consumers’ unambiguously affirmative
consent to the rest of the transaction to
ensure consumers agreed to all elements
of the agreement, even those not
specifically related to the negative
option feature. Further, § 425.5(a)(4) of
the proposed Rule required sellers to
obtain and maintain (for three years or
a year after cancellation, whichever is
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311 NPRM, FR 88 24727 n.70; see also id. at
24734.
312 To avoid potential conflict with EFTA, this
proposed provision does not apply to transactions
covered by the preauthorized transfer provision of
that Act, 15 U.S.C. 1693e, and Regulation E, 12 CFR
1005.10. Those EFTA provisions, which apply to a
range of preauthorized transfers include some used
for negative options, contain various prescriptive
requirements (e.g., written consumer signatures that
comply with E-Sign, 15 U.S.C. 7001–7006, evidence
of consumer identity and assent, the inclusion of
terms in the consumer authorization, and the
provision of a copy of the authorization to the
consumer) beyond the measures identified in the
proposed Rule. Consequently, compliance with the
proposed Rule would not necessarily ensure
compliance with Regulation E. For example, use of
a check box for consent without additional
measures may not comply with Regulation E’s more
specific authorization requirements.
313 NPRM, 88 FR 24728.
314 See, e.g., State Attorneys General (ANPR),
FTC–2019–0082–0012; State AGs, FTC–2023–0033–
0886 (citing cases); FTC v. Amazon.com, Inc., No.
2:23–cv–0932 (W.D. Wash. 2023); see also n.109.
315 See, e.g., Anonymous commenter, FTC–2023–
0033–0799 (automatically enrolled in program
without consent); Individual commenter, FTC–
2023–0033–0039 (free-trial conversion to one year
plan without consent); Individual commenter-FTC–
2023–0033–0052 (discount to full-price conversion
without consent); Individual commenter, FTC–
2023–0033–1119 (cancelled, then automatically re-
enrolled without consent); Individual commenter,
FTC–2023–0033–0079 (automatically re-enrolled
without consent); Individual commenter, FTC–
2023–0033–0083 (no disclosure account would be
automatically renewed); FTC–2023–0033–0138
(charged after cancellation); Individual commenter,
FTC–2023–0033–0275 (no affirmative consent to
monthly charge).
316 Sirius XM, FTC–2023–0033–0857 (businesses
should be required to obtain express informed
consent to the negative option feature at the point
of sale); PDMI, FTC–2023–0033–0864 (no objection
to the general requirement that sellers obtain a
consumer’s consent to a transaction containing a
negative option feature); MIA, FTC–2023–0033–
1008 (agreeing with the consent requirement under
the proposed Rule).
317 Berkely Consumer Law Center, FTC–2023–
0033–0855; State AGs, FTC–2023–0033–0886
(noting State Attorneys General support the FTC’s
proposed consent requirements and agree this
provision is necessary given how easily marketers
can enroll consumers in negative option programs
without actual consent.). One individual consumer
generally supported the separate consent
requirements of the proposed Rule, but asked that
the regulation prevent businesses from only offering
goods and services through auto-renewal and
subscription programs, i.e., consumers should have
the option to purchase a good or service a la carte
and not only on a recurring basis. Individual
commenter, FTC–2023–0033–0026.
318 Sirius XM, FTC–2023–0033–0857 (requiring
an additional consent will only result in consumer
confusion); NCTA, FTC–2023–0033–0858
(‘‘requiring two consents could lead to consumer
confusion (to say nothing of their exasperation at
being forced to read and provide consent to a
plethora of successive and largely duplicative
documents). They may wonder why they are being
asked to consent twice to a single transaction. And
might worry that they have somehow
misunderstood one or both of the consent notices’’);
PDMI, FTC–2023–003–0864 (anecdotal evidence
received from several PDMI members demonstrates
that any time an additional choice or check box is
offered to a consumer during a single transaction,
such extra steps are likely to cause consumer
confusion); N/MA, FTC–2023–0033–0873
(‘‘Requiring sellers to separate a single unified offer
into separate components is not only unnecessary,
it risks creating consumer confusion and fatigue’’
and consumers may ‘‘simply abandon the
transaction’’); RILA, FTC–2023–0033–0883
(‘‘requirement for two distinct consents . . . may be
confusing and not helpful to consumers.’’); DCN,
FTC–2023–0033–0983 (‘‘We are concerned that
requiring a separate consent would be confusing for
the consumer who may not have the details of the
entire contract readily available in the mandated
separate context. For example, most consumers
would likely want to review all of the benefits they
would receive as part of a subscription including
any discounts when deciding on whether to choose
the option of automatic renewal.’’); APCIA, FTC–
2023–0033–0996 (‘‘Requiring a separate consent for
a feature that is inherent in service contracts—
continuous coverage—seems unnecessary and
detrimental to consumers.’’).
319 IAB, FTC–2023–0033–1000 (‘‘Furthermore,
consumers are familiar with subscription sign-up
experiences and do not expect to have to consent
a second time once they choose to purchase an
autorenewal plan.’’). One individual consumer
confirmed the comment. Individual commenter,
FTC–2023–0033–0552 (‘‘The rule specifically
prescribes that users must affirmatively assent
specifically to the negative option feature, but in
cases where a user is only purchasing a negative
option product, how should other disclosures be
presented?’’)
320 NCTA, FTC–2023–0033–0858; Sonsini Alarm
Clients, FTC–2023–0033–0860 (‘‘could lead to
consumers inadvertently failing to consent to auto-
renewal (because they did not notice the second
check box) and having an unintended lapse in
home security system coverage.’’); Asurion, FTC–
2023–0033–0878 (‘‘many consumers who want and
could benefit from auto-renewal protection
provisions will neglect to make the requisite two
separate affirmative consents and suffer real
consequences when they find themselves with a
broken device during a gap in coverage’’); APCIA,
FTC–2023–0033–0996 (‘‘A consumer who wants a
service contract but then inadvertently fails to
check a box indicating separate consent for the
negative option feature could find that they no
longer have coverage at the time they most need
it.’’).
321 See, e.g., DCN, FTC–2023–0033–0983 (could
lead to over-notification); CCIA, FTC–2023–0033–
0984 (‘‘Adding too much additional information or
too many required actions in a purchase cart has
diminishing returns for consumer comprehension
and attention, and can increase the cognitive load
for consumers to the point that they simply stop
reading or give up on the purchase.’’); ANA, FTC–
2023–0033–1001.
322 NCTA, FTC–2023–0033–0858 (‘‘would require
companies to change their current customer sign-up
flows, at significant cost, without providing
consumers with any additional benefits’’); PDMI,
FTC–2023–003–0864 (‘‘requiring merchants to
implement a double opt-in would impose an
extraordinary financial and resource burden on
sellers.’’); id. (double opt-in requirements ‘‘makes
absolutely no sense, where, as is often the case,
there is no transaction separate from the negative
option transaction’’); SCIC, FTC–2023–0033–0879;
Chamber, FTC–2023–0033–0885 (little to no
evidence that double opt-in will create any
longer) verification of the consumer’s
consent. The Commission specifically
sought comment on the appropriate
recordkeeping period.311
To maintain consistency with the
TSR, § 425.5(b) contained a cross-
reference to 16 CFR part 310 so sellers
subject to the TSR know they must
comply with all applicable provisions of
that Rule, including those related to pre-
acquired account information and free-
to-pay conversions.
Proposed § 425.5(c) provided an
exemplar consent mechanism for those
making written offers (including those
on the internet) to illustrate how sellers
could obtain consumers’ unambiguously
affirmative consent to the negative
option feature. Specifically, this
provision stated for all written offers,
sellers may obtain such consent through
a check box, signature, or other
substantially similar method, which the
consumer must affirmatively select or
sign to accept the negative option
feature. This consent had to be
independent from any other portion of
the offer.312
Finally, the Commission invited
comments on whether sellers offering
free trials should be required to obtain
an additional round of consent before
charging a consumer at the end of a free
trial.313
(a) Summary of Comments
Consistent with the Commission’s and
States’ enforcement experience,314
individual consumers’ comments
confirm the need for clear,
unambiguous, affirmative consent to a
negative option feature. These
comments identify numerous examples
of consumers’ unwitting enrollment in
negative option programs.315
Sellers and trade groups also
supported the requirement,316 as did
consumer groups.317 However, sellers
and trade groups expressed concern
about the requirement that sellers obtain
separate, unambiguously affirmative
consent to the ‘‘rest of the transaction,’’
as opposed to the ‘‘negative option
feature’’ itself. Specifically, these
commenters asserted consumers may be
confused where the product or service
itself is only offered as a negative
option, such as with streaming services
or periodicals. 318 As explained by one
commenter, in these situations a second
consent is likely unanticipated, and
thus, could be confusing.319
Other groups asserted if consumers
are confused, they may not affirmatively
consent to the rest of the transaction,
which could cause uncertainty about
the existence of the contract.320
Commenters also noted too many
required actions during the purchasing
process may lead to ‘‘fatigue’’ and
‘‘cognitive overload,’’ causing
consumers to abandon transactions they
may have otherwise wanted.321 Finally,
several commenters complained the
separate consent requirements would be
difficult (and costly) to implement, but
without any benefit to consumers.322
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consumer benefit, instead will increase consumer
fatigue); see also IAB, FTC–2023–0033–1000
(double opt-in could be especially burdensome for
bundled services, requiring consumers to check an
additional box for each service, without added
benefit to clarity or disclosure); ICA, 2023–0033–
1142 (‘‘requiring recording keeping of ‘‘express
informed consent’’ potentially expressed through
verbal, digital, or written records for multiple years
will be an onerous and expensive requirement for
small business owners to fulfill.’’).
323 Chamber, FTC–2023–0033–0885 (‘‘unless
there is a negative promotional option, service
providers should not be required to have a separate
consent for monthly billing and the underlying
transaction when the underlying transaction is for
a monthly service.’’); see also MIA, FTC–2023–
0033–1008 (‘‘an additional consent to initiate a
Subscription is unnecessary and superfluous’’).
324 See, e.g., Direct Marketing Companies, FTC–
2023–0033–1016.
325 Kuehn, FTC–2023–0033–0871; RILA, FTC–
2023–0033–0883.
326 Kuehn, FTC–2023–0033–0871.
327 Direct Marketing Companies, FTC–2023–
0033–1016 (‘‘the Commission provides no evidence
or rationale that a robust, clear and conspicuous
disclosure proximate to the consumer’s consent
would be insufficient to prevent deception and
remedy allegedly prevalent unfair or deceptive acts
and practices’’).
328 CTA, FTC–2023–0033–0997.
329 PDMI, FTC–2023–003–0864; Sirius XM, FTC–
2023–0033–0857 (‘‘Businesses should be able to
obtain such consent in conjunction with the other
terms of an offer,[ ] as long as they clearly and
conspicuously disclose the negative option features
and the other material terms of the offer and refrain
from ‘‘includ[ing] any information that ‘interferes
with, detracts from, contradicts, or otherwise
undermines’’ the negative option terms.’’).
330 PDMI, FTC–2023–003–0864.
331 NRF, FTC–2023–0033–1005 (citing Meyer v.
Uber Techs., Inc., 868 F.3d 66, 79 (2d Cir. 2017)).
It is unclear from NRF’s comment whether it
questioned separate consent generally, or the
guidance on a check box.
332 Direct Marketing Companies, FTC–2023–
0033–1016.
333 ANA, FTC–2023–0033–1001; see also BSA,
FTC–2023–0033–1015 (‘‘the current language could
be read to require a company to retain for three
years the records of a customer who signed up for
a free trial but cancelled before the trial ended—and
was therefore never a paying customer.’’).
334 APCIA, FTC–2023–0033–0996; IAB, FTC–
2023–0033–1000 (‘‘this requirement will be
significantly costly, as subscription businesses will
need to overhaul their sign-up processes to comply
with this requirement. Businesses seeking to offset
this increased cost will be forced to pass this cost
to consumers or avoid offering subscriptions at
all’’).
335 NCTA, FTC–2023–0033–0858 (‘‘The proposal
fails to account for the immense burden the
proposal would impose on companies using
alternative means to sell their products and services
by requiring them to create and implement ways to
capture and store duplicative layers of consumer
consent.’’).
336 CCIA, FTC–2023–0033–0984 (‘‘This record
retention rule also seems to be at odds with key
principles of consumer privacy, namely the need to
minimize the amount of consumer data that
businesses hold and to enable customers to request
deletion of any data in possession of a third party.
A shorter mandatory retention period is more
appropriate for both businesses and consumers.’’);
NCTA, FTC–2023–0033–0858 (‘‘Not only is it
expensive to maintain these records, it does not
comport with privacy best practices.’’).
337 ICA, 2023–0033–1142 (‘‘Decrease the duration
of the record-keeping requirement to six months
after the business and the consumer enters into the
agreement.’’); see also Direct Marketing Companies,
FTC–2023–0033–1016 (change recordkeeping
requirement to keep or maintain records ‘‘for at
least one year if the consumer is charged at least
twice within six months after the initial charge; or
for at least three years if the consumer is not
charged at least twice within six months after the
initial charge.’’).
Thus, these commenters asked the
Commission to exclude transactions
where the negative option feature is not
independent of the good or service
being sold, i.e., where the good or
service is itself only offered as a
negative option,323 or to delete the
requirement that sellers obtain separate,
unambiguous, affirmative consent ‘‘to
the rest of the transaction.’’ 324
Two commenters asked the
Commission to modify the proposed
provision by merging consent to the
transaction and the negative option
feature. These commenters suggested a
separate consent should only be
necessary where there are two
independent portions of the transaction:
one related to the negative option
feature and a second for the sale of a
separate good or service (including a
free trial). 325 Without this change,
commenter Kuehn suggested ‘‘the
proposed Rule could have the
unintended result of diminishing the
efficacy of other important terms of the
contract.’’ Accordingly, Kuehn
suggested the Commission revise the
definition of negative option feature to
encompass the entire contract (rather
than a provision of the contract).326 This
alteration, along with changing ‘‘rest of
the transaction’’ to ‘‘the sale of another
good or service,’’ would make it clear
separate consent is only required where
the seller has both an auto renewal
agreement and the sale of another good
or service.
IAB, DCN, CTA, and several direct
marketing companies asserted the
Commission could achieve the same
outcome—informed consent—through
less restrictive means, e.g., by requiring
a clearer disclosure of the negative
option feature. 327 For example, CTA
posited: ‘‘[a]lternatively, to advance the
same goal, and because the Proposed
Rule already requires clear and
conspicuous disclosure of material
terms, the FTC could instead require
subscription service providers to
prominently disclose subscription terms
in a manner that differentiates them
from other disclosures, such as in
bolded or underlined font, in the course
of obtaining consumer consent to the
transaction.’’ 328 Additionally, several
commenters questioned ‘‘why a seller
should be precluded from including
other material terms of the transaction
in obtaining a single consent.’’ 329
Some commenters raised additional
concerns. For instance, several
commenters challenged the
Commission’s statement that a separate
check box or similar method could be
used to record a consumer’s
unambiguously affirmative consent.
Specifically, PDMI contended the check
box, signature, or ‘‘substantially
similar’’ method of consent could
quickly become obsolete and ‘‘replaced
by far more effective and consumer
friendly mechanisms.’’ 330 Another,
NRF, argued courts routinely hold a
separate check box is not required for
consumers to manifest asset to terms
and conditions of the agreement, so long
as the terms are reasonably
conspicuous.331 Finally, a group of
direct marketing companies, argued
standalone consent is not necessary or
reasonable, and other methods could
suffice. They suggested the Commission
include language that it ‘‘shall be a
question of fact’’ whether the seller
obtained consent through another
means.332
Additionally, several trade groups and
sellers expressed concern about the
NPRM’s proposed recordkeeping
requirements. For instance, one trade
group explained the proposed
requirements ‘‘would require sellers to
maintain records of consumer consent
for at least three years, even for
consumers who signed up for a free trial
and cancelled it before being charged.
As drafted, the proposed amendments
would also require sellers to maintain
records of consumer consent for eleven
years for individuals who continuously
subscribe to negative option features for
at least ten years.’’ 333
Numerous commenters asserted these
recordkeeping requirements would
increase costs, which could ultimately
be passed onto consumers,334 or small
businesses, especially with respect to
in-person and telephone transactions.335
Others raised concern the proposed
recordkeeping requirement could
conflict with best privacy practices. For
example, commenters noted the
retention period is at odds with the
need to minimize the amount of
consumer data that businesses hold and
to enable customers to request deletion
of their data.336 Commenters also
suggested the Commission reduce the
length of the recordkeeping
requirement, e.g., to six months,337 or
revise the proposal to eliminate the
requirement for those who do not allow
customers to purchase without
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338 PDMI, FTC–2023–003–0864; Chamber, FTC–
2023–0033–0885.
339 Law Professors, FTC–2023–0033–0861.
340 Individual commenter, FTC–2023–0033–0843
(‘‘In addition to making it easy to cancel an online
subscription, it should be illegal for companies
offering a ‘free trial’ to bill for any term of
subscription without an opt-in step. If they really
believe trying their product will prompt me to keep
using it, then it needs to be a 2-step process in
which at the end of the trial period they must ask
for and receive an opt in before they place a charge
on my card.’’); Individual commenter, FTC–2023–
0033–0615 (‘‘Rather than automatic renewals, I
think subscriptions should only be renewed
following consumer approval. For example, after a
14-day trial of an app, consumers should be asked
if they approve a purchase to continue. If approval
isn’t given, the default should be that the
subscription expired and the consumer isn’t
charged.’’); Individual commenter, FTC–2023–
0033–0993 (‘‘If it’s a trial subscription the company
should notify you that your trial is over and affirm
your desire to continue.’’).
341 Individual commenter, FTC–2023–0033–0026;
see also Individual commenter, FTC–2023–0033–
0583 (‘‘Require that any entity not require a credit
card on file for a trial, or any free period.’’);
Individual commenter, FTC–2023–0033–0641
(‘‘Consumers shouldn’t have to be required to
submit credit/debit card information for a trial
usage. And, consumers shouldn’t be automatically
charged the day after the trial expires.’’); Individual
commenter, FTC–2023–0033–1069 (‘‘A free trial
should not create an automatic subscription!’’);
Individual commenter, FTC–2023–0033–0607 (‘‘A
‘trial offer’ should be just that—a ONE-TIME
purchase.’’).
342 State AGs, FTC–2023–0033–0886 (‘‘the State
Attorneys General again respectfully encourage the
FTC to require sellers offering free trials to obtain
an additional round of consent before charging a
consumer at the completion of the free trial.’’); Law
Professors, FTC–2023–0033–0861 (‘‘we ask that the
Commission require additional consent from the
consumer before a business may convert a free (or
nominal-fee) trial into an expensive subscription.
Indeed, it seems that Congress, in adopting ROSCA,
validated consumer expectations that they would
‘‘have an opportunity to accept or reject [a]
membership club offer at the end of [a] trial
period.’’); TINA, FTC–2023–0033–1139 (‘‘Such
consumer complaints are consistent with survey
data showing that 42 percent of consumers forget
they are still paying for a subscription they no
longer use.[ ] ‘Many of those happen after you get
enticed by a free trial for an online streaming
service or a monthly subscription service for clothes
or personal items, and then you forget to cancel it
after that trial is over.’ ’’).
343 Sirius XM, FTC–2023–0033–0857 (‘‘As long as
consumers are clearly informed about the terms of
a free trial offer and evince affirmative consent, no
further consumer consent should be required when
the free trial period expires.’’).
344 CCIA, FTC–2023–0033–0984; Chamber, FTC–
2023–0033–0885.
345 This change will not affect a seller’s obligation
to maintain appropriate records under other
regulations, e.g., the TSR.
346 See section VII.B.7.
347 Section 425.5(a)(1).
348 Section 425.5(c) allows sellers to comply with
the requirement to obtain unambiguously
affirmative consent to the negative option feature
through a check box, signature, or other
substantially similar method.
349 See Rule § 425.4(a)(1)–(4).
350 The Commission further notes because the
seller is obtaining express informed consent to the
negative option feature separately from the rest of
the transaction, consumers are, in effect, agreeing to
both the negative option feature and the sale of the
good or service separately.
accepting the terms of the negative
option feature.338
Two consumer groups supported the
consent provision but asked the
Commission to add clarifying language.
Specifically, Berkeley Consumer Law
Center asked the Commission to state
the Rule strictly prohibits the use of
dark patterns to obtain consent and that
consent cannot be given through
silence. A group of professors asked the
Commission to clarify that disclosures
‘‘appear in each language in which the
representation that requires the
disclosure appears.’’ 339
Finally, commenters split on whether
the Rule should require separate
affirmative consent for free-trial offers.
Several consumers supported requiring
separate consent at the conclusion of a
free-trial period,340 with one consumer
suggesting the Commission ban free-trial
offers that require the prepurchase of
the good or service. 341 Other consumer
interest and public advocacy groups
reiterated consumers often forget, or are
unaware they have signed up for, a
negative option feature in connection
with a free trial offer.342 Sellers and
trade groups disagreed, specifically
noting the Commission’s own analysis
indicating a separate consent may not be
necessary given the other requirements
of the Rule 343 and existing State
laws. 344
(b) Analysis
Based on the record, the Commission
removes the proposed requirement that
sellers obtain separate consent to ‘‘the
rest of the transaction’’ under
§ 425.5(a)(3). Further, the Commission
modifies the recordkeeping requirement
to require sellers to maintain records
only for three years from the date of
consent. Alternatively, if sellers can
show by a preponderance of the
evidence they use processes that make
it technologically impossible for a
consumer to purchase the good or
service without consent, sellers need
not retain such records. 345 Finally, the
Commission declines to modify the
consent provisions to require separate
consent for free-trial offers. However,
should the Commission seek additional
comments about a provision to require
annual reminders, 346 it will consider
addressing such offers at that time.
Prior to addressing each of the issues
listed above, it is important to clarify
one point. A negative option feature is
not itself a product or service—it is
simply a mechanism for repeatedly
consenting to the extension of a contract
through silence. Thus, there are not
situations in which the negative option
feature is the product, as some
commenters suggested. In the example
provided above, a subscription to a
streaming entertainment service can be
offered with (e.g., the offer renews each
month until cancellation) or without
(e.g., the subscription lasts one year and
then must be affirmatively renewed, or
it cancels) a negative option feature.
There are situations in which sellers
only offer products or services on a
negative option basis; however, doing so
does not lessen the need to ensure
consumers consent to the negative
option mechanism within the
agreement. Therefore, the analysis
below does not separately address this
issue.
(1) The Commission does not adopt a
requirement for separate consent to ‘‘the
rest of the transaction’’ because it is
unnecessary, confusing, and hard to
implement.
Based on the comments, the
Commission finds requiring consumer
consent to ‘‘the rest of the transaction’’
apart from the negative option feature is
unnecessary, potentially confusing, and
may be hard to implement. First, even
without the separate consent
requirement, the proposed Rule
contained several elements that work
together to ensure consumers know they
are agreeing to a negative option feature.
Specifically, the proposed Rule required
sellers to obtain the consumer’s
unambiguously affirmative consent to
the negative option feature separately
from any other portion of the
transaction 347 through, for example, a
separately presented check box.348 It
also required sellers to clearly and
conspicuously provide important
information immediately adjacent to the
request for consumer consent, including
that the charge will be recurring, the
deadline to act to stop charges, the
amount of the charges, and information
necessary to cancel.349 Further, the
proposed Rule stated the seller cannot
include any information or employ any
techniques that interfere with the
consumer’s ability to understand these
important disclosures and provide
unambiguously affirmative consent to
the negative option feature.
Given these protections, a separate
consent requirement is not necessary.350
Second, the Commission agrees the
separate consent requirement could
cause consumer confusion. Moreover,
compliance with the Rule’s required
disclosure and consent provisions
should address the concerns
commenters raised regarding deception.
Finally, several sellers suggested, and
there is no evidence to the contrary, that
seeking consent to both the negative
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351 See § 425.5(a)(3).
352 NCTA, FTC–2023–0033–0858 (citing FTC,
‘‘Protecting Consumer Privacy in an Era of Rapid
Change’’ (2012) at 28, www.ftc.gov/reports/
protecting-consumer-privacy-era-rapid-change-
recommnedations-businessespolicymakers).
353 ANA, FTC–2023–0033–1001; ESA, FTC–
2023–0033–0867 (for purchases that cannot be
completed without a consumer’s consent, a
business will be deemed compliant with any
recordkeeping requirement and is not required to
maintain an individual record of consent).
354 Importantly, if the seller does not maintain
records and cannot satisfy the technological
exemption, the seller has violated the Rule.
355 Direct Marketing Companies, FTC–2023–
0033–1016.
option feature and the rest of the
transaction could be hard to implement
for many sellers. Thus, the final Rule
does not contain the separate consent
requirement. 351
(2) The Commission modifies the
recordkeeping requirements to address
legitimate privacy concerns and reduce
undue burden on small businesses.
Section 425.5(a)(4) of the proposed
Rule required sellers to obtain and
maintain (for three years or a year after
cancellation, whichever was longer)
verification of the consumer’s consent to
the negative option feature.
Implementation of this requirement
would undoubtably enhance the FTC’s
ability to enforce the Rule. However, the
Commission agrees the proposal creates
privacy concerns. The Commission has
long recommended companies employ
data retention policies that ‘‘dispose of
data once it has outlived the legitimate
purpose for which it was collected.’’ 352
Therefore, the Rule’s data retention
requirement, could, in some instances,
be at odds with this guidance. Further,
several commenters asserted a longer
recordkeeping requirement will be
burdensome, particularly for small
businesses.
Balancing the Commission’s interest
in robust Rule enforcement against
privacy and burden concerns, the
Commission modifies the proposed
Rule. Specifically, § 425.5(a)(3) of the
final Rule requires sellers to keep or
maintain verification of the consumer’s
consent for a period of three years from
the date of consent (rather than three
years or a year after cancellation,
whichever is longer). Removing the
requirement that sellers keep records
until one year after cancellation
prevents the retention of records for
very long periods of time while the
contract is still in force. Moreover, as
some commenters stated,353 sellers can
employ technological processes for
online consent that could alter the
balance of concerns. Specifically, it is
technologically feasible to make it
impossible for customers to enroll
without providing unambiguously
affirmative consent. The Commission
therefore further modifies the
recordkeeping requirement to eliminate
the requirement entirely if a seller can
demonstrate it meets this threshold. The
final provision will allow sellers to
destroy consumer records more quickly,
while accomplishing the same goal.354
Finally, the Commission clarifies
maintaining copies of advertisements or
telephone scripts documenting the
disclosures provided in general does not
meet this requirement. Such
information is easily manipulated by
deceptive sellers and cannot show any
particular consumer received the
disclosures prior to giving consent.
Therefore, sellers must either maintain
records of each consumer’s
unambiguously affirmative consent or
demonstrate they satisfy the
technological exemption provision.
(3) Other concerns raised by
commenters do not warrant
modifications to the rule.
As noted above, a few commenters
questioned the Commission’s proposed
exemplar consent mechanism under
§ 425.5(c). This proposed provision
states for written offers, a check box,
signature, or ‘‘substantially similar’’
method can be used to obtain a
consumer’s unambiguously affirmative
consent. The Commission notes the
mechanism applies to the negative
option feature only, and thus corrects
the cross-reference contained in this
provision from (a)(3) to (a)(1).
The Commission further notes this
provision does not require a check box
or signature. The Commission offered
these methods only as examples a seller
can use to obtain unambiguously
affirmative consent, not the only ways
to do so. Thus, the exemplar does not
conflict with caselaw holding that a
check box is not required to manifest
consent. The Commission also declines
to include language in the final Rule, as
one commenter suggested,355 stating
whether a seller has complied with this
provision is a question of fact. This is
unnecessary because the Commission
always evaluates sellers’ practices on a
case-by-case basis to determine whether
they comply with the law.
The Commission further declines to
remove this provision’s reference to
‘‘substantially similar’’ methods as some
commenters requested. The language is
intended to cover any method that
affords consumers all the same
protections as a check box or signature.
The phrase ‘‘substantially similar’’
performs this function while allowing
for technological advancement,
innovation, and adaption without tying
sellers to specific mechanism that may
become obsolete.
Further, the Commission declines to
modify the final Rule to allow sellers to
obtain express informed consent by
merely ‘‘disclosing’’ the negative option
more clearly through, e.g., bolded or
underlined font, rather than obtaining
expressed informed consent separately
for the negative option feature.
Although this change would be ‘‘less
restrictive,’’ it would not adequately
protect consumers from unknowingly
enrolling in negative option programs.
In the NPRM, the Commission balanced
the need for clear, unavoidable
disclosure of, inter alia, the negative
option feature with the need for
flexibility to allow sellers to best
communicate their entire message to
consumers. The proposed Rule strikes
the right balance. As discussed above,
proposed § 425.4 (Important
Information), required sellers to clearly
and conspicuously disclose important
information about the negative option
feature, immediately adjacent to the
means of recording consent to the
feature, and, under § 425.5 (Consent),
separately from any other portion of the
transaction. The Commission did not
specify exact placement, language, or
font size because doing so would have
diminished flexibility without a
sufficient corresponding benefit.
While this balance is appropriate, the
required disclosure of important
information under § 425.4 does not
replace the requirement that sellers
obtain consumers’ express informed
consent. To avoid harm from unfair and
deceptive practices, it is imperative
consumers unequivocally understand
they are agreeing to enrollment in a
negative option program and
demonstrate their agreement.
The Commission also declines to add
language stating (1) the Rule strictly
prohibits the use of dark patterns to
obtain consent and (2) consent cannot
be given through silence. The Rule
already addresses both concerns. First,
the Rule bars any information that
‘‘interferes with, detracts from,
contradicts, or otherwise undermines’’
the consumer’s ability to provide
express informed consent. To the extent
dark patterns run afoul of any of these
requirements, they are prohibited. To
the extent they do not, consumers’
express informed consent as required by
the Rule is not implicated. Second,
under § 425.5, consumers already must
give affirmative consent.
Finally, the Commission does not
need to clarify, as some commenters
suggested, that required consents
‘‘appear in each language in which the
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356 Law Professors, FTC–2023–0033–0861.
357 Rule § 425.2(c)(6).
358 Deceptive sellers also commonly delay
shipment of goods or services until close to the end
of the trial period, giving consumers little time to
stop the charge or cancel the negative option. See,
e.g., Individual commenter, FTC–2023–0033–0085.
359 NPRM, 88 FR 24729; see ANPR, 84 FR 52395
(discussing general requirements for nondeceptive
negative options); id. at 52396 (discussing the
ongoing problems in the marketplace including
inadequate or overly burdensome cancellation
procedures).
360 NPRM, 88 FR 24729.
361 Individual commenter FTC–2023–0033–0029
(‘‘Please implement this necessary rule to protect
consumers and save us hours on the phone
cancelling services we signed up for with one click
online.’’); Individual commenter, FTC–2023–0033–
0072 (‘‘I have had issues with some online
subscriptions which were entered into purely
online, but to cancel I had to call a phone number
open only during certain business hours. I would
like a rule that requires all subscriptions to be
available to cancel through the same means as they
were initiated, whether that is online, in person,
phone, mail, or chat. I believe that would be fair
to people of all technological levels while allowing
businesses to conduct business how they feel
comfortable without allowing them to create
unnecessary hurdles for customers looking to end
their service.’’).
362 Individual commenter, FTC–2023–0033–0111.
Thousands of individual consumers repeated this
phrase through a mass media campaign. See, e.g.,
Anonymous commenter, FTC–2023–0033–0013;
Individual commenter, FTC–2023–0033–0016 (‘‘If I
can subscribe in one click, I should be able to
unsubscribe in one click.’’); Individual commenter,
FTC–2023–0033–0017 (‘‘It should be as easy as one
click to cancel an online account.’’); Individual
commenter, FTC–2023–0033–0068 (‘‘Being able to
go online and with a simple click be able to cancel
a subscription would be a dream.’’); see also
Individual commenter, FTC–2023–0033–0015
(‘‘Ending a subscription should be as easy as it was
to sign up. it makes no sense how hard it is to close
out an account with some places.’’); Individual
commenter, FTC–2023–0033–0020 (‘‘The time has
come to make it as easy for consumers to cancel
subscriptions as it has been to start them.’’);
Individual commenter, FTC–2023–0033–0087 (‘‘I
think any offer you can buy with a click should also
be an offer to unsubscribe with a click.’’).
363 Individual commenter, FTC–2023–0033–0003;
see also Individual commenter, FTC–2023–0033–
0010 (‘‘I for one would be for the Easing of
subscription cancellation. Having it be much harder
to cancel a subscription than start it simply
shouldn’t be.’’); Anonymous commenter, FTC–
2023–0033–0024 (‘‘It should be no harder for
consumers to stop giving a company their money
than it is for them to start giving it to them.’’);
Individual commenter, FTC–2023–0033–0025 (‘‘In
fact, it should be as easy to cancel as it is to sign
up.’’).
364 Individual commenter, FTC–2023–0033–0231;
Individual commenter, FTC–2023–0033–0109.
365 Individual commenter, FTC–2023–0033–0403.
366 ‘‘Unsubscribing should be easier than
subscribing.’’ Individual commenter, FTC–2023–
0033–0005. Accord Individual commenter, FTC–
2023–0033–0021 (same); Anonymous commenter,
FTC–2023–0033–0040 (‘‘I am in favor of making it
easier to discontinue services.’’); Individual
commenter, FTC–2023–0033–0107 (‘‘Canceling a
subscription should be easier that setting up the
subscription.’’).
367 Individual commenter, FTC–2023–0011 (‘‘It
should be very easy to cancel a subscription,
artificially creating difficulty or hurdles only serves
to hurt the consumer of a service as well as a
company’s image and deplete trust in a brand or
service.’’); Individual commenter, FTC–2023–0033–
0036 (‘‘It should be very easy to cancel a
subscription!!!!!’’).
368 Individual commenter, FTC–2023–0033–0030;
Individual commenter, FTC–2023–0033–0035; see
also Individual commenter, FTC–2023–0033–0188
(‘‘If you sign up online, you should be able to
cancel online. If it took one click to join, it should
take one click to cancel. Kind of like
‘unsubscribing’ from an email newsletter you don’t
want to get anymore.’’); Individual commenter,
FTC–2023–0033–0236 (‘‘When I get an email from
a politician I’m not interested in there is always an
unsubscribe button. Why can’t paid subscriptions
be the same?’’).
369 Controlling the Assault of Non-Solicited
Pornography and Marketing Act of 2003 (‘‘CAN–
SPAM Act’’), 15 U.S.C. 7701–7713; 16 CFR part
316.
representation . . . appears.’’ 356 To
obtain a consumer’s express informed
consent, each disclosure must be clear
and conspicuous and immediately
adject to the means of recording the
consumer’s consent. To meet the clear
and conspicuous standard as defined in
the Rule, the disclosure must, among
other things, ‘‘appear in each language
in which the representation that
requires the disclosure appears.’’ 357
(4) The Commission does not modify
the Rule to require separate consent for
free trial offers.
In the NPRM, the Commission invited
comments on whether the Rule should
require an additional (or alternative)
round of consent after the end of a free
trial offer. As explained in the NPRM,
if the seller follows the proposed Rule’s
disclosure and consent requirements,
consumers should understand they are
enrolled in, and will be charged for, the
negative option feature once the free
trial ends. As discussed above, however,
several commenters explained with
enough time between initial enrollment
and charge after conversion, consumers
are primed to forget the negative option
feature.358 The Commission agrees this
an important issue; however, clear
upfront disclosures lessen the chance a
negative option feature may be unfair or
deceptive. Specifically, clear, accurate
upfront disclosures reduce the risk of
deception, and the potential harms
caused are more likely to be reasonably
avoidable (i.e., the consumer can simply
refuse to enter into the contract). That
said, taking advantage of consumers’
‘‘forgetfulness’’ is extremely troubling
and thus ripe to be addressed by other
means.
6. Proposed § 425.6 Simple Cancellation
(‘‘Click to Cancel’’)
Section 425.6 of the proposed Rule
contains several requirements to ensure
consumers can easily cancel negative
option features. As explained in the
NPRM, ‘‘easy cancellation is an
essential feature of a fair and non-
deceptive negative option program,’’ but
one that has become ‘‘far too often
illusory.’’ 359 ‘‘If consumers cannot
easily leave a negative option program,
the negative option feature is little more
than a means of charging consumers for
goods and services they no longer
want.’’ 360
To prevent unfairly trapping
consumers in a transaction they do not
want, the proposed Rule directed sellers
to provide a cancellation mechanism
that (1) immediately halts recurring
charges; (2) is as simple to use as the
mechanism the consumer used to
consent to the negative option feature;
and (3) is readily accessible through the
same medium the consumer used to
provide that consent. The Commission
intended these requirements to erect
clear guardrails, while providing sellers
with the flexibility to innovate.
Therefore, rather than propose specific
prohibitions, which may lose utility
over time, or inadvertently provide a
roadmap for deception, the proposed
Rule outlined a performance-based
standard mapping the contours of what
constitutes a simple mechanism,
without overly prescriptive
requirements.
(a) § 425.6(a) and (b) Simple Mechanism
Required for Cancellation; and Simple
Mechanism at Least as Simple as
Initiation
(1) Summary of Comments
Proposed § 425.5(a) and (b) required a
fast and easy cancellation mechanism
that, at minimum, allows the consumer
to cancel as easily as they enrolled in
the program. The Commission received
thousands of comments in support of
this provision, with individual
consumers uniformly expressing their
desire for a simple easy to use
cancellation mechanism.361 Such
comments included: ‘‘If you signed up
online, you should be able to cancel
online. If it took one click to join, it
should take one click to cancel;’’ 362 ‘‘I
would like the option to cancel my
subscriptions, [and] offers online just as
easily as it was to sign up;’’ 363 ‘‘As more
and more services enter online use, it is
ridiculous that consumers have to jump
through so many hoops to cancel
services when it is so easy to sign up for
them;’’ 364 and ‘‘Consumers need the
one-click option.’’ 365
Some commenters suggested
unsubscribing should be easier than
enrolling,366 and others, ‘‘very easy.’’ 367
Indeed, several advocated for an
‘‘Unsubscribe link,’’ 368 similar to those
available under the CAN–SPAM Act.369
Numerous commenters complained they
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370 See, e.g., Individual commenter, FTC–2023–
0033–0068; Individual commenter, FTC–2023–
0033–0086; Individual commenter, FTC–2023–
0033–0203 (‘‘Recently, I had to start a dispute case
with my credit card company because I had
subscribed to a service and there was no way to
cancel that service.’’); Individual commenter, FTC
2023–0033–0211; Individual commenter, FTC–
2023–0033–0225 (had new card issued); Individual
commenter, FTC–2023–0033–0275 (disputed the
charge and cancelled card); Individual commenter,
FTC–2023–0033–0311 (cancelled credit card);
Individual commenter, FTC–2023–0033–0320
(disputed charge); Individual commenter, FTC–
2023–0033–0501 (terminated credit card);
Individual commenter, FTC–2023–0033–1134
(cancelled credit card).
371 See, e.g., Individual commenter, FTC–2023–
0033–0256; Individual commenter, FTC–2023–
0033–0408 (‘‘common sense’’); Individual
commenter, FTC–2023–0033–0431 (‘‘no brainer’’);
Individual commenter, FTC–2023–0033–0586 (‘‘no
brainer’’).
372 Individual commenter, FTC–2023–0033–0232;
Individual commenter, FTC–2023–0033–0459 (‘‘I
once lost hundreds of dollars because I could not
find how to cancel.’’); Individual commenter, FTC–
2023–0033–0509; Individual commenter, FTC–
2023–0033–0232 (‘‘I’m currently trapped in at least
three subscriptions that are nearly impossible to
cancel, costing me hundreds of dollars per year.’’);
Individual commenter, FTC–2023–0033–0509;
Individual commenter, FTC–2023–0033–0825 (‘‘I
have wasted hundreds of dollars for things that
automatically renewed as a result of not being able
to figure out easily how to cancel.’’); Individual
commenter, FTC–2023–0033–0572; Individual
commenter, FTC–2023–0033–0697 (‘‘I have been
caught up in just this very unfair practice where
I’ve been lured in and can’t get out—to the tune of
hundreds of dollars that I don’t have.’’); see also
Public Interest Groups, FTC–2023–0033–0880.
373 See, e.g., Individual commenter, FTC–2023–
0033–029 (‘‘Please implement this necessary rule to
protect consumers and save us hours on the phone
cancelling services we signed up for with one click
online.’’); Anonymous commenter, FTC–2023–
0033–0040 (‘‘My negative experience was that it
was a simple ‘click’ on-line to sign up for a service
but to cancel same service it took three phone calls
and hours of my time.); Individual commenter,
FTC–2023–0033–0084 (‘‘I spent over two hours of
my time trying to cancel the subscription.’’);
Individual commenter, FTC–2023–0033–0106 (‘‘I’ve
definitely lost at least 30 hours of my life dealing
with insufferable ‘retention specialists,’ all of whom
should be ashamed of what they do.’’); Individual
commenter, FTC–2023–0033–0431; Individual
commenter, FTC–2023–0033–0385 (‘‘This is not a
bot generating a letter; it’s an actual person, and I
want to register strong support for the one Click
rule you are considering. I have wasted hours trying
to deal with customer service, whose only goal is
to keep me on board.’’); Individual commenter,
FTC–2023–0033–0672 (‘‘It’s about time! Trying to
unsubscribe can waste many hours, induce stress,
result in unwanted subscription or cancellation
fees, and leave personal data subject to abuse.’’);
Individual commenter, FTC–2023–0033–0642
(‘‘There needs to be a substantial penalty when a
service is requested to be cancelled, but the charges
continue. I dropped my TV service from Comcast
3 months ago and they continue to charge me. Every
time I need to re-contact them I waste an hour.’’).
374 Individual commenter, FTC–2023–0033–0422
(‘‘Implementing this consumer-protection rule has
the potential to save American consumers millions
of dollars, and prevent unscrupulous companies
from using byzantine cancellation procedures to
squeeze unwarranted funds out of their
customers.’’); Individual commenter, FTC–2023–
0033–0233 (‘‘I had to navigate an endless labyrinth
of dark-patterned links in order to cancel an
Amazon Prime subscription that took me one click
to sign up for.’’); Individual commenter, FTC–2023–
0033–0482 (‘‘They make it a labyrinth of obscure
phrases and if you don’t know to click on just the
right one, you’ll never be able to cancel.’’).
375 Law Professors, FTC–2023–0033–0861; see
also State AGs, FTC–2023–0033–0886 (‘‘state
attorneys general strongly endorse the FTC’s efforts
to ensure that consumers enrolled in subscription
services or other negative option plans are
continuing to pay for those plans because they want
to maintain their subscriptions, and not because it
is too much trouble to cancel.’’).
376 PDMI, FTC–2023–003–0864; ACT App
Association, FTC–2023–0033–0874 (elusive
language); IAB, FTC–2023–0033–1000 (unclear how
to measure simplicity).
377 Chamber, FTC–2023–0033–0885 (‘‘ambiguous
and hard to implement requirement); NRF, FTC–
2023–0033–1005 (as simple as not defined and no
examples).
378 ACT App Association, FTC–2023–0033–0874.
The Commission does indeed define ‘‘simple
mechanism’’ through the requirements of § 425.6, as
well as through existing caselaw and the 2021
Enforcement Policy Statement. See n.385.
379 ESA, FTC–2023–0033–0867; IHRSA, FTC–
2023–0033–0863; Chamber, FTC–2023–0033–0885;
BSA, FTC–2023–0033–1015.
380 IAB, FTC–2023–0033–1000. The Commission
addresses IAB’s prevalence assertions elsewhere.
See section VII.A.
381 Beyond the near universal support by
consumers and consumer advocacy groups, some
trade groups also supported the goal of ensuring
consumers have a quick and easy mechanism to
cancel. RILA, FTC–2023–0033–0883; see also Sirius
XM, FTC–2023–0033–0857 (‘‘All parties want an
easy-to-use and an accessible method of
cancellation’’); ZoomInfo, FTC–2023–0033–0865
(‘‘We concur with the FTC’s recognition that
negative option terms, often concealed in ‘fine
print’, can be difficult for consumers to negotiate or
even to comprehend fully, and that canceling these
contracts can be unfairly burdensome.’’).
382 Some commenters asked for clarification
regarding whether the requirement under § 425.6(a)
would also immediately cancel the entire contract.
See, e.g., N/MA (‘‘The FTC should also clarify that
the ‘‘Click to Cancel’’ proposal applies only to the
negative option portion of a subscription and not
to the entire subscription.’’). The language of the
Rule is clear—cancellation under the Rule applies
only to the negative option portion of the contract,
and not the entire contract. Section 425.6 (‘‘it is
violation of this Rule . . . for the negative option
seller to fail to provide a simple mechanism for a
consumer to cancel the negative option feature’’).
Thus, when a consumer cancels, all terms and
conditions continue until the expiration of the
contract or agreement.
383 BSA specifically requested the Commission
revise subsection (a) to the following: ‘‘We suggest
revising this language to clarify the intended result
by stating the obligation is ‘to cancel the negative
option feature and immediately stop any recurring
charges for the good or service.’ ’’ BSA, FTC–2023–
0033–1015. However, this change could create
ambiguity regarding application of the subsection to
the initiation of charges under free- and fee-to-paid
conversions. Accordingly, the Commission will not
incorporate the suggested change.
384 See, e.g., EPS, 86 FR 60822; FTC v. FloatMe
Corp., No. 5:24–cv–00001 (W.D. Tex. 2024); United
States v. Cerebral, Inc., No. 1:24–cv–21376 (S.D.
Fla. 2024); FTC v. Bridge It, Inc., No. 1:23–cv–09651
(S.D.N.Y. 2023); FTC v. Vonage Holdings Corp., No.
3:22–cv–06435 (D.N.J. 2022); FTC v. Benefytt
Techs., Inc., No. 8:22–cv–01794 (M.D. Fla. 2022);
FTC v. First Am. Payment Sys., No. 4:22–cv–00654
(E.D. Tex. 2022); United States v. MyLife.com, Inc.,
No. 2:20–cv–6692 (C.D. Cal. 2020); FTC v.
RagingBull.com, LLC, No. 1:20–cv–03538 (D. Md.
2020); FTC v. Age of Learning, Inc., No. 2:20–cv–
07996 (C.D. Cal 2020); FTC v. Match Grp., Inc., No.
3:19–cv–02281 (N.D. Tex. 2019); FTC v. Cardiff, No.
5:18–cv–02104 (C.D. Cal. 2018); FTC v. AdoreMe,
Continued
often have to resort to disputing the
charge with credit card companies (or
cancelling the card altogether) because
cancellation is so difficult or
impossible. 370 Additionally,
commenters described the simple
cancellation mechanism requirements
as a ‘‘no brainer,’’ ‘‘common sense,’’ and
‘‘only fair’’ to consumers.371 These and
others commenters complained of the
hundreds of dollars 372 and hours 373
wasted on unused and unwanted
products and services they were not
effectively able to cancel due to
byzantine cancellation procedures.374
As summarized by the Berkeley
Consumer Law Center, ‘‘requiring the
mechanism of cancellation be as simple
as enrollment’’ will minimize ‘‘overly
complex cancellation processes with
multiple steps,’’ and prevent sellers
‘‘from trapping consumers in
automatically renewing subscriptions
through obstacles created by tedious
processes or confusion.’’ 375
Sellers and trade organizations argued
the proposed requirements were ‘‘too
vague.’’ 376 For instance, PDMI asserted
the requirement that the simple
cancellation mechanism be as easy to
use as the one used to initiate the
transaction provides no clear guidance
on when a transaction is ‘‘initiated.’’
Several industry and trade groups
echoed this comment, contending ‘‘as
easy as’’ is a difficult, and often
subjective, standard. 377 Other
businesses complained the proposed
Rule fails to define ‘‘simple
mechanism’’ 378 and making
cancellation as easy as enrollment was
not possible because they serve different
purposes. 379 IAB asserted the proposed
requirements were overbroad in relation
to the prevalent acts or practices the
Commission identified.380
(2) Analysis
Considering the overwhelming
support for a simple cancellation 381
mechanism that immediately halts
charges, 382 and given substantial
evidence supporting the need for such
mechanism to prevent unfair and
deceptive acts and practices, the
Commission retains proposed § 425.6(a)
and (b).383 The Commission disagrees
with commenters’ argument that the ‘‘as
easy as’’ standard is vague. The
Commission has provided considerable
guidance on what constitutes a simple
or ‘‘easy’’ cancellation mechanism
through numerous cases and its 2021
Enforcement Policy Statement. 384
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Inc., No. 1:17–cv–09083 (S.D.N.Y. 2017); FTC v.
AAFE Prods. Corp., No. 3:17–cv–00575 (S.D. Cal.
2017); FTC v. JDI Dating, Ltd., No. 1:14–cv–08400
(N.D. Ill. 2014).
385 Some commenters raised the concern that
sellers might create complicated signup procedures
to justify complex cancellation mechanisms. ESA,
FTC–2023–0033–0867; State AGs, FTC–2023–0033–
0886; IAB, FTC–2023–0033–1000. As pointed out
by the State AGs sellers must comply with all
requirements of a simple cancellation mechanism,
including that consumers can promptly effectuate
cancellation through an accessible means.
386 Commenters insisted that reasonable
authentication and verification procedures be
allowed prior to cancellation to ensure that only
authorized persons are making changes to an
account. NFIB, FTC–2023–0033–0789; IHRSA,
FTC–2023–0033–0863; ESA, FTC–2023–0033–0867;
N/MA, FTC–20230033–0873; RILA, FTC–2023–
0033–0883; ANA, FTC–2023–0033–1001.
387 See, e.g., MIA, FTC–2023–0033–1008.
388 Berkeley Consumer Law Center, FTC–2023–
0033–0855; RocketMoney, FTC–2023–0033–0998;
Anonymous commenter, FTC–2023–0033–0024;
Individual commenter, FTC–2023–0033–0411;
Individual commenter, FTC–2023–0033–0850;
Individual commenter, FTC–2023–0033–0861;
Individual commenter, FTC–2023–0033–0888;
Anonymous commenter; FTC–2023–0033–0134;
Individual commenter, FTC–2023–0033–0326;
Individual commenter, FTC–2023–0033–0778.
389 See, e.g., Cal. Bus. & Prof. Code § 17602(d)(3);
Colo. Rev. Stat. § 6–1–732(2)(d)(I)(B).
390 USTelecom, FTC–2023–0033–0876
(‘‘expressly allow’’ business to engage in privacy
and data security measures prior to cancellation);
ANA, FTC–2023–0033–1001.
391 For online cancellation, § 425.6(c)(1) of the
proposed Rule required sellers to provide a simple
cancellation mechanism through the same medium
consumers used ‘‘to purchase the negative option
feature.’’
392 The Commission also will make a conforming
change to add ‘‘consent’’ in section 425.6(c)(1).
393 See, e.g., Individual commenter, FTC–2023–
0033–0072 (‘‘I would like a rule that requires all
subscriptions to be available to cancel through the
same means as they were initiated, whether that is
online, in person, phone, mail, or chat.’’);
Individual commenter, FTC–2023–0033–0252 (‘‘the
method provided for signing up for a service must
also be provided for cancelling the same service, be
just as easy to find, and require no more steps than
it took to sign up.’’).
394 See, e.g., NCTA, FTC–2023–0033–0858; PDMI,
FTC–2023–0033–0864; CTA, FTC–2023–0033–
0997; ANA, FTC–2023–0033–1001. See also Wilson
Sonsini Goodrich & Rosati on behalf of certain of
its alarm company clients (‘‘Sonsini Alarm
Clients’’), FTC–2023–0033–0860 (alarm companies
should be able to speak to the customers to verify
identity and confirm cancellation intent); N/MA–
FTC–2023–0033–0873 (A ‘‘one click’’ cancellation
requirement for an entire subscription, especially
absent some form of authentication, could also lead
to accidental and/or malicious cancellations.); NRF,
FTC–2023–0033–1005 (data suggests that one-click-
cancellation functions frequently cause accidental
cancellations).
395 See, e.g., Sirius XM, FTC–2023–0033–0857; N/
MA, FTC–2023–0033–0873; State AGs, FTC–2023–
0033–0886.
396 State AGs, FTC–2023–0033–0886.
397 Id.
398 CDI, FTC–2023–0033–0887.
399 CTA, FTC–2023–0033–0997; IAB, FTC–2023–
0033–1000.
400 IAB, FTC–2023–0033–1000.
Moreover, the ‘‘as easy as’’ standard is
even clearer in context, i.e., a flexible
measure that ensures consumers have
similar cancellation and consent
experiences in terms of time, burden,
expense, and ease of use, among other
things. 385 The Commission is aware
these experiences may not always be
perfectly symmetrical. Consumers may
have to verify or authenticate their
identity, for instance,386 or they may be
asked to confirm their intent to
cancel.387 However, reasonable
verification, authentication, or
confirmation procedures should not
create distinctly asymmetrical
experiences, particularly if the
cancellation mechanism is located
within account or user settings secured
by authentication requirements for
access. Any authentication, verification,
or confirmation procedure that creates
unreasonable asymmetry runs afoul of
section 5 of the FTC Act and the Rule.
Moreover, given the extensive record
and the Commission’s experience with
sellers using verification and
authentication tools to thwart or delay
cancellation, 388 the Commission
declines to create a safe harbor for these
activities as some States have 389 and as
some commenters requested.390
Nevertheless, as some commenters
point out, the proposed initiation or
purchase date trigger may provide
insufficient clarity.391 Not all negative
option features begin with a purchase
(e.g., free trials), and when a transaction
is initiated is subject to interpretation or
possible manipulation. Given this
ambiguity, businesses attempting to
comply with the proposed Rule may
have difficulty, and those attempting to
evade the proposed Rule may find
loopholes with the proposed initiation
or purchase date trigger. Thus, the
Commission revises § 425.6(b) 392 to
require the simple cancellation
mechanism be ‘‘as easy as’’ the
mechanism the consumer used ‘‘to
consent’’ to the negative option feature,
rather than ‘‘initiate’’ or ‘‘purchase’’ the
feature. The moment of consent avoids
the lack of clarity the terms ‘‘purchase’’
and ‘‘initiate’’ introduce and clarifies
the action to which the cancellation
must be compared.
(b) Proposed § 425.6(c) Minimum
Requirements for Simple Mechanisms
(1) Summary of Comments
The proposed Rule required sellers to
provide a simple cancellation
mechanism through the same medium
(internet, phone, in-person) the
consumer used to consent to the
negative option feature. Almost
uniformly, consumers supported this
requirement. 393 However, a number of a
trade groups disagreed, arguing, as
explained below, the requirement is too
prescriptive, or could lead to accidental
or inadvertent cancellation.394 Instead,
these commenters suggested the
Commission allow consumers to choose
their cancellation medium (e.g., based
on ‘‘consumer expectations,’’
convenience, or common use by the
seller). 395
Consumer groups and law
enforcement asked the Commission to
add minimum requirements to the
simple cancellation mechanism. For
instance, the State AGs asked the
Commission to include the various
requirements stated in the 2021
Enforcement Policy Statement, e.g.,
require negative option sellers ‘‘not [to]
erect unreasonable barriers to
cancellation or impede the effective
operation of promised cancellation
procedures, and must honor
cancellation requests that comply with
such procedures.’’ 396 They also urged
the Commission to adopt language from
New York’s statute, which provides
simple cancellation mechanisms must
be ‘‘cost effective, timely, and easy to
use.’’ 397 Additionally, the Center for
Data Innovation asked the Commission
to create a working group to define
simple mechanism further, including
best practices for businesses. 398
Finally, some commenters suggested
the record lacks evidence that it would
be unfair or harmful to consumers to
have a cancellation process different
from the sign-up process. 399
Accordingly, they argued promulgating
a trade regulation rule requiring such
symmetry is beyond the Commission’s
authority. Further, IAB argued the
Commission cannot create new
requirements defining simple
cancellation methods beyond ROSCA’s
simplicity standard, i.e., that sellers
provide simple mechanisms to stop
recurring charges, because Congress
already decided the appropriate
standard. 400
(a) Proposed § 425.6(c)(1): Online
Cancellation
Section 425.6(c)(1) of the proposed
Rule specifically addressed online
cancellation, requiring sellers to provide
a cancellation mechanism over the same
website or web-based application the
consumer used to consent. Thousands
of commenters repeated the mantra: ‘‘If
you signed up online, you should be
able to cancel online,’’ noting they often
face hurdles finding a cancellation
mechanism, and then must call and
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401 Individual commenter, FTC–2023–0033–0215
(‘‘If you signed up online, you should be able to
cancel online. If it took one click to join, it should
take one click to cancel.’’); Individual commenter,
FTC–2023–0033–0847; Anonymous commenter,
FTC–2023–0033–0040 (‘‘My negative experience
was that it was a simple ‘click’ on-line to sign up
for a service but to cancel same service it took three
phone calls and hours of my time. If I can sign up
with a ‘click’ then I SHOULD be able to cancel with
a ‘click.’ ’’).
402 RILA, FTC–2023–0033–0883.
403 ESA, FTC–2023–0033–0867; ANA, FTC–
2023–0033–1001.
404 NCTA, FTC–2023–0033–0858; PDMI, FTC–
2023–0033–0864; CTA, FTC–2023–0033–0997;
ANA, FTC–2023–0033–1001.
405 See, e.g., ESA, FTC–2023–0033–0867; IAB,
FTC–2023–0033–1000.
406 See, e.g., IAB, FTC–2023–0033–1000; MIA,
FTC–2023–0033–1008; see also RILA, FTC–2023–
0033–0883 (enrollment online, e.g., internet-based
mobile applications, should be allowed through
seller’s website).
407 See, e.g., ESA, FTC–2023–0033–0867.
408 USTelecom, FTC–2023–0033–0876; CTIA,
FTC–2023–0033–0866 (‘‘imperative that businesses
are able to have a live representative speak with a
customer seeking to cancel, regardless of the
medium used to sign up’’); NCTA, FTC–2023–
0033–0858; (‘‘Whatever these consumers’ reasons
for seeking to cancel or modify services, in most
instances they are best served by speaking with a
live agent, even if they enrolled online.’’); see also
Chamber, FTC–2023–0033–0885 (subscriptions to
multiple products or services ‘‘require[ ] more time
and personal assistance to address when a customer
seeks to cancel only one of such related products
or services’’).
409 Sonsini Alarm Clients, FTC–2023–0033–0860;
see also Joint Alarm Industry Comments—ESA,
TMA, SIA and AICC, FTC–2023–0033–1014 (asking
for clarification that alarm companies can require
written or verbal confirmation of online
cancellation requests). The concerns raised by these
industries are likely an artifact of the Saves
provision, which, as proposed, could be interpreted
to prevent verification procedures and cancellation
intent. The Commission addresses these concerns
in section VII.B.6.c.
410 N/MA, FTC–2023–0033–0873.
411 Law Professors, FTC–2023–0033–0861.
412 State AGs, FTC–2023–0033–0886.
413 Individual commenter, FTC–2023–0033–0399
(‘‘Even if I didn’t sign up online, terminating, a
membership in person isn’t always possible. Lock
down during Covid being a prime example.’’).
414 Individual commenter, FTC–2023–0033–0677
(‘‘Companies are absolutely being deceptive about
their practices when it comes to canceling a service,
including their initial pitch to ‘Cancel anytime!’
only for you to find out that canceling requires you
to go in person to a business in a place you might
not even live anymore’’).
415 Individual commenter, FTC–2023–0033–0741
(‘‘[m]any places . . . require you to go in person to
cancel—they won’t even let you do it over the
phone! This harms anyone that may have trouble
leaving the house regularly, including disabled
folks and parents of small children and those caring
for older or ailing family members.’’). See also
TechFreedom, FTC–2023–0033–0872 (‘‘Returning
to the in-person venue where the initial sale
occurred may be inconvenient, or even impossible,
for the consumer.’’); Individual commenter, FTC–
202–0033–1141 (‘‘Sometimes an unexpected move
or unforeseen circumstances make it impossible to
cancel in person. I would like to see an option to
be able to cancel remotely, even if the subscription
was purchased on site.’’).
spend significant time on the telephone
to cancel their subscriptions.401
In contrast, RILA suggested
consumers would not always expect to
find a cancellation function through the
same online medium the consumer used
to enroll. ‘‘For example, contracts are
. . . increasingly concluded online
through third parties or via social media
apps. Regardless of how a customer
initially signs up, once she/he
establishes a purchasing arrangement
with a seller, the customer will logically
look to the seller to cancel.’’ 402 Several
commenters agreed, stating where a
consumer enrolls through a third party,
or through an IoT device, the consumer
may naturally look to the seller with
whom the consumer has the
agreement. 403
Similarly, trade groups, such as NCTA
and PDMI, argued mandating consumer
cancellation through the same website
or web-based application the consumer
used to initiate the transaction is too
prescriptive. 404 Several of these
commenters asserted the proposed
requirement is unnecessary and
contrary to consumer expectations.405
They further contended when
consumers enroll online, any online
cancellation mechanism should be
adequate.406 Further, these commenters
suggested it may not be possible to offer
the same website or web-based
application due to contractual
obligations and limitations imposed by
third parties.407
Additionally, broadband, wireless,
and streaming groups, such as NCTA
and USTelecom, suggested the same-
medium requirement is particularly
troublesome for their industries because
consumers often subscribe to multiple,
or bundled, services, rendering
cancellation online through a single
click difficult or impossible. These
industries posited consumers often do
not, in fact, want to cancel, but rather
seek to downgrade or modify services.
Therefore, requiring a consumer to
speak to a live agent best accomplishes
this goal, regardless of how the
consumer enrolled.408
Alarm companies raised a similar
concern, i.e., there are no safeguards to
ensure the consumer intended to cancel
(rather than, e.g., unsubscribe from
marketing emails) when cancelling
online. They also emphasized the
importance of verifying a consumer’s
identity prior to cancellation. As
explained by a commenter representing
various alarm company clients, alarm
companies’ ‘‘cancellation procedures
are designed to prevent inadvertent or
malicious disabling of alarm monitoring
services, often by directing consumers
to call trained customer support
representatives who can verify the
consumer’s identity via their secure
passcode and ensure any changes made
to the account are intentional and fully
informed.’’ 409
(b) Proposed § 425.6(c)(2): Telephone
Cancellation
Proposed § 425.6(c)(2) addressed
situations in which sellers obtain
consumer consent by telephone. In
these situations, the proposed Rule
required sellers to provide a telephone
number to consumers and ‘‘assure’’ all
calls are answered promptly during
‘‘normal business hours’’ and are no
more costly than the call to enroll.
Several commenters asked the
Commission to modify this section.
Specifically, N/MA asked that sellers be
allowed to confirm telephone
cancellations through email
verification.410 A group of law
professors asked the Commission to
require sellers to answer cancellation
calls in ‘‘comparable timeframe to sign-
up calls.’’ 411 They also suggested
telephone answering systems should not
be limited to normal business hours if
they are entirely automated. The State
AGs further asked the Commission to
incorporate the guidance for telephone
cancellation from the 2021 Enforcement
Policy statement, for example, ensuring
‘‘the calls are not lengthier or otherwise
more burdensome than the telephone
call the consumer used to consent to the
negative option feature,’’ and
prohibiting sellers from ‘‘hang[ing] up
on consumers who call to cancel;
plac[ing] them on hold for an
unreasonably long time; provid[ing]
false information about how to cancel;
or misrepresent[ing] the reasons for
delays in processing consumers’
cancellation requests.’’ 412
(c) Proposed § 425.6(c)(3): In-person
Cancellation
For in-person sales, proposed
§ 425.6(c)(3) required sellers to offer
online or telephone call cancellation
mechanisms in addition to the same in-
person mechanism, where practical. The
proposed Rule further required sellers
not make telephone cancellation more
costly than the method used to consent
to the negative option feature.
Individual consumers identified the
many ways in which demanding in-
person cancellation is unfair. For
instance, they observed it may not
always be possible to cancel in person,
as was true during the COVID
pandemic,413 after a consumer moves
from the area,414 or for people with
young children or who have difficulty
leaving their home.415 Others
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416 See, e.g., Individual commenter, FTC–2023–
0033–0510 (‘‘I had to go in person 3 different times
because the manager wasn’t there so to cancel it’’).
417 Individual commenter, FTC–2023–0033–0007
(‘‘I work dispute resolutions for a bank. I see so
many cases where someone is trying to cancel
something like a gym membership and, while they
can sign up in person, they for some reason have
to mail a certified letter to the [company’s] home
office. That has always seemed unreasonable and
deliberately contrived.’’).
418 ICA, FTC–2023–0033–1142. ICA’s comment
seems to suggest a misunderstanding that the Rule
would require both telephone and online
cancellation for in-person consent. It does not. A
business may elect either online or telephone (or
both), but there must be at least one mechanism in
addition to in-person cancellation.
419 EPS, 86 FR 60823; see also NPRM, 88 FR
24728 (explaining the simple cancellation
mechanism proposed in the Rule should remove
barriers, such as unreasonable hold times or
verification requirements).
420 See, e.g., N/MA, FTC–2023–0033–0873
(subscribers should be allowed to choose method
most convenient; subscribers who sign up by mail
may prefer to cancel online or by telephone, and
consumers who subscribed by telephone may prefer
to cancel online); Sirius XM, FTC–2023–0033–0857
(‘‘For example, requiring a customer to use direct
mail to cancel if the customer used direct mail to
accept a subscription offer would be inconvenient
for the customer and not the customer’s expected
or desired means for cancellation. Instead, the
cancellation method should be an easy-to-use
mechanism for a consumer to stop recurring charge
which would closely track consumer expectations
and allow for changes in technology.’’); State AGs,
FTC–2023–0033–0886 (‘‘We respectfully suggest
requiring sellers to allow all consumers to cancel
through any medium that the seller uses to sell
subscriptions or memberships, regardless of the
medium through which that particular consumer
signed up.’’).
421 See generally section VII.A.
422 15 U.S.C. 57a(a)(1)(B).
423 NPRM, 88 FR 24716 n.9. Although, as stated
in the NPRM, Congress did not direct the FTC to
promulgate implementing regulations, it certainly
did not preclude them, and the language contained
in ROSCA confirms the FTC’s authority to do so.
15 U.S.C. 8404(a) (‘‘Violation of this chapter or any
regulation prescribed under this chapter shall be
treated as a violation of a rule. . . .’’); see also id.
8404(b) (‘‘Any person who violates this chapter or
any regulation prescribed under this chapter’’ shall
be subject to penalties); id. 8404(c) (‘‘Nothing in this
section shall be construed to limit the authority of
the Commission under any other provision of
law.’’).
424 Individual commenter, FTC–2023–0033–0003
(‘‘When signing up, I didnt talk to a single
individual. So its fair that when cancelling, I should
not have to talk to a single individual.’’); Individual
commenter, FTC–2023–0033–0006 (was forced to
call ‘‘and speak with several agents’’ because unable
to cancel online); Anonymous commenter, FTC–
2023–0033–0044 (shouldn’t be forced to make a
phone call and sit on hold for hours if signed up
online); Individual commenter, FTC–2023–0033–
0072 (fair to consumers to allow consumers to
cancel through same means as they were initiated);
Individual commenter, FTC–2023–0033–0087 (‘‘I
think any offer you can buy with a click should also
be an offer to unsubscribe with a click’’; having to
call instead is a scam); Anonymous commenter,
FTC–2023–0033–0095 (‘‘I would like to specify that
[company] did not allow to terminate the account
online. They specifically requested a phone call,
which they then ignored for as long as possible.
This practice is unfair and deceptive and needs to
be outlawed.’’); Anonymous commenter; FTC–
2023–0033–0097 (FTC should ban practice of
companies only offering cancellation via phone
call, despite not requiring a phone call for signup);
Individual commenter, FTC–2023–0033–0274
(‘‘having to call the company to cancel when the
party clicked on the website is forced verbal
speech’’); Individual commenter, FTC–2023–0033–
0356 (‘‘If you signed up online, you should be able
to cancel online. If it took one click to join, it
should take one click to cancel. I am tried [sic] of
calling some call center, waiting on hold, and then
having someone go through a long script about why
I should not cancel. Generally make it as easy to
cancel as to sign up.’’); Individual commenter,
FTC–2023–0033–0379 (‘‘I have now been charged
for a full month because I have to call and speak
complained they showed up numerous
times in person, only to be told they
could not cancel because the manager
was not available.416 One commenter
complained sellers demanded
consumers cancel by certified mail if
they originally consented in person.417
In contrast, two trade associations
requested the Commission allow sellers
to require consumers to cancel in person
if they signed up in person. These
commenters argued such a limitation is
appropriate due to the unique
challenges of their industries. For
example, IHRSA, which represents the
health and fitness industry, stated, ‘‘it is
appropriate for a brick-and-mortar
business’’ to require customers to cancel
in person ‘‘to verify their identity.’’ The
International Carwash Association
(‘‘ICA’’) stated some of its members sell
products and services exclusively in
person; therefore, it asked the
Commission to not ‘‘force’’ these small
business owners ‘‘to set up an online
marketplace’’ to process cancellations if
the seller does not already have an
online presence.418
(2) Analysis
(a) The Commission retains the
general ‘‘same medium’’ requirements
of § 425.6(c).
Based on the record, the final Rule
retains the general requirements
proposed in § 425.6(c); specifically, the
negative option seller must provide a
simple cancellation mechanism through
the same medium (such as internet,
telephone, mail, or in-person) the
consumer used to consent to the
negative option feature. Further, the
final Rule retains § 425.6(a) that requires
sellers to provide consumers with a
simple mechanism to immediately stop
charges that is cost-effective, timely, and
easy to use. Such a mechanism cannot
include ‘‘unreasonable barriers to
cancellation or impede the effective
operation of promised cancellation
procedures.’’ 419 This provision makes
adding language from the 2021
Enforcement Policy Statement or the
New York statute unnecessary because
the simple mechanism provision
already includes it. Further, several
commenters asked the Commission to
allow consumers to choose additional,
alternate means of cancellation.420 This
modification, however, is also
unnecessary. The ‘‘same medium’’
requirement presents a floor, not a
ceiling. That is, it only requires
businesses to offer consumers the ability
to cancel in the manner they were able
to sign up. Sellers are free to provide
additional cancellation mechanisms,
giving consumers choices.
Moreover, despite some commenters’
assertions to the contrary, the
Commission has clear authority to issue
a rule requiring sellers to offer
cancellation through the same medium
as enrollment. As detailed in section
VII.A, there is a substantial record
demonstrating the negative option
practices covered by this Rule are unfair
or deceptive, prevalent, and have
caused significant consumer harm.421
Moreover, Magnuson-Moss empowers
the Commission to promulgate
requirements designed to prevent any
unfair or deceptive practice it identifies
with specificity.422 By promulgating a
rule that prevents sellers from making
cancellation unreasonably difficult, the
Commission has done so here. Further,
while ROSCA does not provide for APA
rulemaking, it does not limit the
Commission’s authority to issue a trade
regulation rule. 423 In fact, the
Commission’s Negative Option Rule
predates ROSCA, and the statute does
not rescind that Rule.
(b) The Commission modifies the
requirements of § 425.6(c)(1): Online
Cancellation.
In response to comments, the
Commission makes several changes to
clarify the online cancellation
mechanism requirements. First, it
removes the requirement that, for
website or web-based applications,
cancellation must be afforded through
the same precise means as consent.
Instead, the final Rule provides the
simple cancellation must be easy to
find. Second, the revised provision
incorporates a definition of ‘‘interactive
electronic medium’’ in place of
‘‘internet.’’ Third, the Commission
excludes cancellation mechanisms
requiring interaction with a live or
virtual agent, unless the consumer
consented to the negative option feature
through such mechanism. Each
modification is discussed below.
(i) The simple cancellation
mechanism must be easy to find.
Consumers uniformly opposed having
to engage with a representative to cancel
when they could simply click a button
to enroll.424 They also expressed deep
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to a representative instead of clicking to cancel.’’);
Individual commenter, FTC–2023–0033–0443 (‘‘If
the public is allowed to set up an account online
we should be allowed to cancel online without ever
making a phone call. The consumer should have
more rights than corporations.’’); Individual
commenter, FTC–2023–0033–0617 (‘‘It is truly
obnoxious to be able to click to join but have to
research to find the way to cancel, often involving
making a phone call and being left on hold.’’);
Individual commenter, FTC–2023–0033–0716 (‘‘We
shouldn’t have to call the company to cancel!’’);
Individual commenter, FTC–2023–0033–0788
(requiring a call when enrolled online is ‘‘coercive
and unfair’’); Individual commenter, FTC–2023–
0033–0822 (‘‘I am sick of having to call a phone
number to cancel something I signed up for on line,
and often speaking to someone who is snide,
sarcastic, or downright rude!’’).
425 Individual commenter, FTC–2023–0033–0065
(‘‘Often a company makes it significantly more
difficult to even find out where or how to cancel
a subscription.’’); Individual commenter, FTC–
2023–0033–0024 (‘‘It took a Google search to find
the right Customer Service number because it was
hidden or unavailable on the website.’’); Individual
commenter, FTC–2023–0033–0084 (finally found
corporate number to cancel trampoline park after
scouring website for a membership enrolled online);
see also Individual commenter, FTC–2023–0033–
0067 (‘‘why are they allowed to sign you up for
automatic renewal with no way to cancel nothing
on their web page in order to cancel a
subscription’’); Individual commenter, FTC–2023–
0033–0071 (biggest annoyance is that subscriptions
can be signed up for so easily with a few buttons
on the remote but nearly impossible to cancel);
Anonymous commenter, FTC–2023–0033–0108 (‘‘I
certainly hope this goes through. These companies
make it incredibly difficult to even find the cancel
or opt out option.’’); Anonymous commenter, FTC–
2023–0033–0123 (‘‘Straight forward plain language
cancelation instructions that are easy to locate
should be required.’’); Individual commenter, FTC–
2023–0033–0124 (‘‘Clearly there should be an easy
way to unsubscribe that is easy to find.’’);
Individual commenter, FTC–2023–0033–0560
(cancellation page should be easy to find);
Individual commenter, FTC–2023–0033–0642 (‘‘If
you signed up online, you should be able to cancel
online. If it took one click to join, it should take
one click to cancel. I have had trouble finding
where to cancel on multiple subscription services.
Often, they are confusing on purpose to keep
customers like me trapped in the payment cycle.
Some require an email or phone call to a separate
customer service representative. Cancelling should
not be harder than signing up for their service.’’);
Individual commenter, FTC–2023–0033–0685 (‘‘I
am tired of having to screen grab the fine print to
figure out my options for cancelling subscriptions-
it just shouldn’t be this hard!?!’’); Ashley Sheil on
behalf of Maynooth University and in collaboration
with Radboud University, FTC–2023–0033–1006
(observing that companies may take advantage of
the ‘‘as easy as’’ requirement, and recommending
any termination button should be highlighted and
in an obvious location).
426 See n.385 (citing simple cancellation cases).
427 NPRM, 88 FR 24728 (‘‘On the internet, this
‘Click to Cancel’ provision requires sellers, at a
minimum, to provide an accessible cancellation
mechanism on the same website or web-based
application used for sign-up.’’).
428 See, e.g., ESA, FTC–2023–0033–0867 (‘‘Such a
requirement would not be helpful for players
seeking to cancel a subscription, as in-game is not
the place that most players would expect to find a
cancellation ingress.’’); RILA, FTC–2023–0033–
0883 (‘‘The method that a consumer uses for initial
sign-up may not be the place where that consumer
would expect to find a simple cancellation
function. For example, contracts are also
increasingly concluded online through third parties
or via social media apps. Regardless of how a
customer initially signs up, once she/he establishes
a purchasing arrangement with a seller, the
customer will logically look to the seller to cancel
the arrangement.’’).
429 The Chamber asked the Commission to clarify
that web-based chat is an appropriate cancellation
where a consumer signs up online. As is clear from
the record, unless the seller required the consumer
to engage with an agent through a web-based chat
to enroll, the Rule will preclude requiring the
consumer to do so to cancel. There is substantial
evidence this asymmetrical practice of requiring
consumers to engage with agents (live or virtual) for
cancellation but not enrollment is one of the
principal methods sellers use to create unfair and
deceptive cancellation procedures. Accordingly, it
is appropriate to include limitations within the
Rule to prevent unscrupulous sellers from using
such practices.
430 Individual commenter, FTC–2023–0033–0124
(‘‘Clearly there should be an easy way to
unsubscribe that is easy to find.’’); Individual
commenter, FTC–2023–0033–0252 (‘‘I had been
thinking of contacting my Governor to suggest just
such a rule that the method provided for signing up
for a service must also be provided for cancelling
the same service, be just as easy to find, and require
no more steps than it took to sign up.’’); Individual
commenter, FTC–2023–0033–0560 (‘‘And ensure
the bill is explicit with requirement to make it
EASY TO FIND HOW TO REACH the company or
cancellation page.’’); Individual commenter, FTC–
2023–0033–0640 (‘‘The Federal Trade Commission
needs to make it mandatory for companies to have
an easy to find button to cancel a subscriptions
-online-.’’); Individual commenter, FTC–2023–
0033–0784 (‘‘And the cancel button should be easy
to find and as attractively marketed as an
opportunity to extend a subscription (font size,
colors, etc.).’’); Individual commenter, FTC–2023–
0033–1006 (cancellation should be highlighted and
in an obvious location).
431 See, e.g., Cal. Bus. & Prof. Code
§ 1702(d)(1)(A); Conn. Gen. Stat. Ann. § 42–158ff
(d)(1)(A); N.J. Stat. Ann. § 56:8–42.1.a.
432 See, e.g., Individual commenter, FTC–2023–
0033–0022 (‘‘Note that subscriptions are by their
very nature long lasting in time, therefor
requirements should not just emphasize some fine
print disclosure at the time of sign up but also it
should be easy to check back with the company or
their many layers of subcontractors to cancel at
anytime in the future.’’).
433 State AGs, FTC–2023–0033–0886.
434 Id.
frustration over having to hunt to find
cancellation mechanisms, usually
buried deep within a website or in fine
print on a bill or other
correspondence. 425 The Commission
has brought numerous cases alleging
these practices are unfair or
deceptive.426 The proposed Rule sought
to prevent these unfair and deceptive
practices by requiring sellers to provide
an easily accessible online cancellation
mechanism to consumers who enrolled
online.427 As several commenters
rightly noted, however, consumers may
not always expect (and it may not
always be possible) to use the same
precise means for both enrollment and
cancellation.428
Accordingly, to clarify the intent of
the original language and to better
match consumer expectation with actual
cancellation procedures, the
Commission now clarifies that where a
consumer enrolls online, whether
through a website, a mobile application,
chat, email, or messaging, consumers
must be afforded an equally simple
online cancellation experience, i.e., one
that allows them easily to find and use
the cancellation mechanism. 429
Many commenters agreed consumers
would consider a link or button located
on a website or within a user’s account
or device settings to be ‘‘easy to
find.’’ 430 Providing a clearly-labeled
cancellation button in a consumer’s
account or user settings is, thus, one
example of a simple online cancellation
mechanism. 431 The Commission
cautions, however, while such a
mechanism need not be exactly the
same as the consent mechanism, the
seller cannot make it more difficult to
use or find than the consent mechanism.
For example, the seller cannot
prominently label the mechanism
within the account settings but make it
difficult for consumers to find the
account settings in the first instance.
Further, the Commission emphasizes
that the cancellation mechanism must
be easy to find at the time the consumer
decides to cancel. Providing an easy-to-
find mechanism at consent does not
mean the mechanism will be easy to
find later when the consumer wants to
cancel, and therefore will not prevent
unreasonable barriers to cancellation.
Thus, providing the information
necessary to find the cancellation
mechanism at enrollment (as required
under § 425.4) does not discharge the
seller’s obligation to ensure cancellation
is easy to find when most relevant to the
consumer.432
(ii) ‘‘Interactive electronic medium’’ is
broadly defined to include all methods
of electronic communication.
The State AGs asked the Commission
specifically to address the requirements
for cancellation by chat, text messaging,
and email. The State AGs explained that
although chat and text are increasingly
common cancellation mechanisms, they
share some of the same qualities and
potential problems as telephone
cancellation because they require
interaction with a live or virtual
customer representative.433 Further, the
State AGs suggested email should not be
an acceptable cancellation medium for
online consent. 434
To address these concerns, the
Commission revises the proposed
provision to refer to ‘‘interactive
electronic medium’’ rather than
‘‘internet.’’ This change clearly includes
text, chat, and email within the scope of
online cancellation mechanisms.
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435 See, e.g., Cal. Bus. & Prof. Code § 17602 (‘‘The
business shall provide a method of termination that
is online in the form of either of the following: By
an immediately accessible termination email
formatted and provided by the business that a
consumer can send to the business without
additional information.’’); Conn. Gen. Stat. Ann.
§ 42–158ff (an electronic mail message from the
business to the consumer, which is immediately
accessible by the consumer and to which the
consumer may reply without obtaining any
additional information); N.J. Stat. Ann. § 56:8–42.1
(a termination email formatted and provided by the
subscription service provider that a consumer can
email to the subscription service provider without
being required to provide any additional
information).
436 See nn.362–369; see also vlogbrothers, Why
isn’t this Illegal?, https://www.youtube.com/
watch?v=FjAw1LMShIA&
pp=ygUMdmxvZ2Jyb3RoZXJz (last visited Aug. 25,
2024).
437 See, e.g., Anonymous commenter, FTC–2023–
0033–0024 (could not cancel online even though
consumer could upgrade online and via TV);
Individual commenter, FTC–2023–0033–0137 (‘‘3
months to cancel, 3 minutes to sign-up.
Seriously?’’); Individual commenter, FTC–2023–
0033–0252 (detailing three instances where
consumer signed up online with a few clicks but
was required to call to cancel, concluding ‘‘the
method provided for signing up for a service must
also be provided for cancelling the same service, be
just as easy to find, and require no more steps than
it took to sign up.’’); Individual commenter, FTC–
2023–0033–0457 (‘‘If I enrolled in a subscription
online, there are no good reasons why I can’t
disenroll that way as well. Forcing me to call a
number to unsubscribe, which is only staffed
during ‘normal business hours,’ unnecessarily
complicates the process’’); Anonymous commenter,
FTC–2023–0033–0802 (this practice of making
someone call or chat to someone to cancel a
membership is predatory).
438 The Chamber asked the Commission to ‘‘make
clear that a web-based chat qualifies as an
appropriate cancellation mechanism where a
customer signed up for a service online.’’ FTC–
2023–0033–0885. The Commission reiterates that a
web-based chat cancellation mechanism may be
appropriate, but only if the consumer enrolled
through a virtual or live agent.
439 NCTA, FTC–2023–0033–0858; CTIA, FTC–
2023–0033–0866.
440 Id.
441 Id.
442 NCTA, FTC–2023–0073–0008.
Specifically, the phrase ‘‘interactive
electronic medium’’ used in the ‘‘clear
and conspicuous’’ definition includes
all media that involve electronic
communications (except telephone
calls), whether or not they strictly use
the internet (and thus would otherwise
be ‘‘online’’). Consumers may not know
whether a text or chat is MMS (online)
or SMS (offline), for example. This
broader definition should provide
flexibility to sellers while continuing to
require parallel cancellation and sign-up
procedures to meet consumers
expectations.
Although the State AGs suggested
prohibiting the use of email as a
cancellation mechanism, the record
provides no basis for doing so. Further,
consistent with the Commission’s
definition of interactive electronic
medium, several States specifically
allow sellers to use email as an online
cancellation method.435 Thus, the final
Rule does not bar the use of email to
effectuate online cancellation.
(iii) No interaction with
representatives for online cancellation.
The State AGs noted, and consumer
comments further support, the fact that
sellers have often used chat, text, and
messaging to perpetrate the same abuses
documented for telephone cancellation.
The Commission, therefore, reiterates all
cancellation mechanisms, including
chat, text, messaging, and email, are
subject to the same ‘‘simple’’
requirements, i.e., sellers may not erect
unreasonable barriers or prevent
consumers from immediately halting
charges. Cancellation mechanisms must
be as easy to use as the mechanism the
consumer used to sign up, in terms of
time, expense, burden, and ease of use;
and the mechanism must be as readily
accessible as the means the consumer
used to consent in the first place.
Consumer comments, as well as the
Commission’s and State AGs’
enforcement experience demonstrate
asymmetrical enrollment and
cancellation experiences, such as
requiring telephone cancellation when
consumers can easily sign up online
without speaking with an agent, are
unfair. Specifically, this asymmetry
creates unreasonable barriers to
cancellation, such as unreasonable hold
times, unreasonable verification
requirements, and aggressive save
tactics. Moreover, comments and the
Commission’s enforcement experience
indicate consumers likely understand a
simple online enrollment experience as
an implied claim that the cancellation
experience also will be simple.436 As
consumers themselves explain, they do
not anticipate engaging with a customer
service representative (whether by
phone, or through a web-based chat or
messaging) if they did not do so to sign
up for the negative option feature.437
Thus, the Commission further clarifies,
for online consent, the seller cannot
require the consumer to engage with an
agent or customer service representative
to cancel unless the consumer did so at
enrollment. 438
Finally, the Commission declines to
exclude industries providing bundled
services from the same medium
requirement. NCTA and other industries
with such services insisted their
customers are better served by speaking
with a live representative, even when
they enroll online. 439 They expressed
concern these sellers cannot confirm a
consumer’s cancellation intent
(consumers may want to modify or
renegotiate services) or apprise
consumers of any negative
consequences of cancellation (loss of
access to emergency services, for
example) without a live discussion.440
They further assert providing this
information online could be
complicated and expensive for the seller
and not what the consumer would
prefer.441 NCTA noted only 30% of its
members’ customers sign up online,
with the remaining 70% enrolling in
person or over the phone.442
NCTA’s comment seems to suggest
the simple cancellation mechanism
requirement demands a certain
asymmetry—specifically, no matter how
complex online enrollment is, the
proposed Rule would require a simple
‘‘one click’’ cancellation mechanism,
which could preclude the seller from
confirming cancellation intent or
apprising consumers of negative
consequences of cancellation. The
Commission reiterates the simple
cancellation requirement requires
symmetry in terms of, inter alia, time,
burden, expense, and ease of use. It does
not require use of the exact same
mechanism.
Further, existing verification
procedures, such as two-factor
authentication, are routinely used to
ensure a consumer’s identity in highly
sensitive situations. Thus, they are more
than sufficient to ensure the correct
person is cancelling and do not require
the use of a cancellation mechanism
different than enrollment. Moreover, at
this juncture, the Commission has
removed the proposed ‘‘saves’’
provision from the final Rule, making
communication regarding material
consequences of cancelling easier to
convey (so long as communicating
through the same medium).
(c) The Commission adopts
§ 425.6(c)(2): Telephone Cancellation as
proposed, with one exception.
The Commission adopts the telephone
cancellation provision as proposed,
except the final Rule removes the
requirement sellers must assure all calls
are answered during normal business
hours. Instead, the final Rule requires
sellers to promptly effectuate
cancellation requests by consumers via
a telephone number that is answered or
records messages during normal
business hours.
Several commenters suggested
specific changes were necessary to
enhance the proposed telephone
medium requirements. For instance, the
State AGs asked the Commission to
include the various requirements
detailed in the 2021 Enforcement Policy
Statement, e.g., require negative option
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443 E.g., the requirements that all cancellation
mechanisms be simple and easy to use (§ 425.6),
and the seller disclose where to find the
cancellation mechanism prior to the sale (§ 425.4).
444 Cf. United States v. Adobe, Inc., No. 5:24–cv–
03630 (N.D. Cal. 2024) (cancellation fees plead as
a failure to disclose and failure to obtain consent
to charge in violation of ROSCA); FTC v. FloatMe
Corp., No. 5:24–cv–00001 (W.D. Tex. 2024) (extra
cost in relation to timing of receipt of product
deceptive in violation of section 5); United States
v. Cerebral, Inc., No. 1:24–cv–21376 (S.D. Fla. 2024)
(delays in cancellation deceptive and injured
consumers in violation of section 5); FTC v. Bridge
It, Inc., No. 1:23–cv–09651 (S.D.N.Y. 2023) (claims
to cancel at any time without paying any fees,
interest, or other charges deceptive); FTC v. Vonage
Holdings Corp., No. 3:22–cv–06435 (D.N.J. 2022)
(requiring phone cancellation with roadblocks
including long hold times, frequent disconnects,
endless loops, and early termination fee unfair
under section 5); FTC v. Benefytt Techs., Inc., No.
8:22–cv–01794 (M.D. Fla. 2022) (unexpected cost
for additional product is deceptive and unfair); In
re Dun & Bradstreet, Inc., FTC Docket No. C–4761
(2022) (renewal practices, including at end of
designated time periods, deceptive); FTC v. First
Am. Payment Sys., No. 4:22–cv–00654 (E.D. Tex.
2022) (misrepresentations in cancellation and
unfair debiting); United States v. MyLife.com, Inc.,
No. 2:20–cv–6692 (C.D. Cal. 2020) (cancellation by
phone discouraged or prevented by unavailable or
uncooperative agents specified as a violation of
ROSCA); FTC v. Match Grp., Inc., No. 3:19–cv–
02281 (N.D. Tex. 2019) (pleading cancellation
difficulties in violation of ROSCA); In re Urthbox,
Inc., FTC Docket No. C–4676 (2019) (unexpected
charges, including for a full 6 months following the
first month of free trial, are a failures to disclose in
violation of section 5); FTC v. Cardiff, No. 5:18–cv–
02104 (C.D. Cal. 2018) (unexpected charges a
section 5 misrepresentation and unfair charging);
FTC v. BunZai Media Grp., Inc., No. 2:15–cv–04527
(C.D. Cal. 2015) (failure to disclose charge as
deceptive and unfair); FTC v. Tarr, No. 3:17–cv–
02024 (S.D. Cal. 2017) (failure to disclose material
terms deceptive and unfair); FTC v. AdoreMe, Inc.,
No. 1:17–cv–09083 (S.D.N.Y. 2017) (cancelling
made difficult by phone, contributing to
misrepresentations regarding store credit); FTC v.
RevMountain, LLC, No. 2:17–cv–02000 (D. Nev.
2017) (unexpected product deceptive); FTC v.
AAFE Prods. Corp., No. 3:17–cv–00575 (S.D. Cal.
2017); FTC v. Health Formulas, LLC, No. 2:14–cv–
01649 (D. Nev. 2014) (deceptive costs).
445 N/MA suggested there may be instances where
the original method of consent is no longer
available. FTC–2023–0033–0873. For example, if
the person signed up a trade show in person,
returning to the in-person venue may be impossible.
The Commission notes the in-person method only
must be made available, ‘‘where practical.’’
446 NPRM, 88 FR 24729.
447 See, e.g., Individual commenter, FTC–2023–
0033–0006 (‘‘Last year I had the pleasure of trying
to cancel a radio subscription which took 2
attempts and far too much time to accomplish.
Unable to cancel online, I was forced to call and
speak with several agents trying to convince me to
keep their service. After nearly a half hour of
insisting I wanted to cancel, they simply hung up
on me which forced me to start the cancellation
process all over again from the beginning.’’);
Anonymous commenter, FTC–2023–0033–0024
(able to cancel only after listening to a ‘‘long sale
pitch about why he shouldn’t’’); Anonymous
commenter, FTC–2023–0033–0066 (when you
request a cancellation, will pass your call on to a
more ‘‘experienced representative’’ in an attempt to
convince you to keep your service. They do not
listen to your concerns, instead make you jump
through hoops for a cancellation which makes me
not want to be one of their customers even more);
Individual commenter, FTC–2023–0033–0071 (call
to cancel and they repeatedly said ‘‘well let’s just
see how we can save you money’’ instead of
canceling); Individual commenter, FTC–2023–
0033–0082 (‘‘You have to call them and endure a
high pressure pitch to renew . . . . It wastes time
and minutes on your phone bill’’); Anonymous
commenter, FTC–2023–0033–0097 (the only way to
cancel a service is to call them on the phone,
intended to allow for sales reps to make a pitch);
Individual commenter, FTC–2023–0033–0120
(‘‘However, when you attempt to cancel a
continuous subscription you are told you cannot do
that and you must call the provided phone number.
You are connected to a sales person who then will
negotiate with you to continue at a lower rate.’’);
Individual commenter, FTC–2023–0033–0125
(‘‘The only way for me to cancel this service was
to CALL THEM DIRECTLY, whereupon they spent
nearly half an hour trying to upsell me into a two
year subscription.’’); Individual commenter, FTC–
2023–0033–0130 (‘‘It should not be required to call
(and sit on hold forever), only to have to sit through
a diatribe of hard-sell techniques to try to convince
Continued
sellers ‘‘not [to] erect unreasonable
barriers to cancellation or impede the
effective operation of promised
cancellation procedures, and . . . honor
cancellation requests that comply with
such procedures.’’ However, the
proposed provisions already include
these requirements.443
Nonetheless, several commenters
correctly pointed out requiring sellers to
answer cancellation calls during normal
business hours could create
considerable costs for small businesses
while not directly addressing the core
problem identified by the
Commission—the unreasonable delay of
cancellation requests. To address these
concerns, the Commission first clarifies
normal business hours are those hours
in which the business would normally
engage with its customers. A seller,
however, cannot make telephone
cancellation available only at times that
are so inconvenient they erect a barrier
to cancellation. For instance, it would
be improper to limit cancellation calls
to only between midnight and 3 a.m.,
regardless of whether these are the
seller’s normal business hours.
Importantly, however, the final Rule
does not require a seller to physically
answer the telephone call (a task that
could be difficult for, e.g., a sole
proprietorship). An answering machine
that clearly provides for cancellation
(e.g., a message stating: if you want to
cancel your subscription please identify
that subscription, and leave identifying
information) would comply with this
provision of the Rule. To effectuate the
provision’s intent, the final Rule states
sellers, whether answering the
cancellation call in person or not, must
effectuate that cancellation promptly.
Thus, a seller could not, for example,
have an answering machine it does not
regularly monitor or for which it does
not promptly effectuate cancellation
requests.
Notably, the final Rule retains the
requirement that, for the mechanism to
be at least as simple as the one used to
initiate the recurring charge, any
cancellation call cannot be more
expensive than the call used to enroll
(e.g., if the sign-up call is toll free, the
cancellation call must also be toll free).
Consumers would not expect such fees,
rendering them unfair or deceptive.444
(d) The Commission adopts
§ 425.6(c)(3): In-Person Cancellation as
proposed.
Based on the Commission’s
experience and that of other States, as
well as many comments in the record,
requiring in-person cancellation
presents significant opportunities for
unfair and deceptive practices. To
prevent such practices, the final Rule
adopts provision 425.6(c)(3) essentially
as proposed. Thus, the provision
continues to require in-person sellers to
provide alternatives to in-person
cancellation, either online or by phone,
at the seller’s choice. The Commission,
however, corrects the requirement that
if the alternative is a telephone call, the
call cannot be more costly than the in-
person consent. That proposal
connected two unrelated costs and thus
did not make logical sense. To effectuate
the purpose of this provision, however,
the Commission adds language stating
the call cannot impose any cost that
creates an unreasonable barrier to
cancellation, including by making the
call unreasonably expensive.445
To address ICA’s concerns, the
Commission clarifies the Rule does not
require sellers who sell in-person to
maintain an alternative online presence
to process cancellations. Sellers who
have no such presence can allow
cancellations by phone if they comply
with the simple telephone cancellation
requirements detailed above.
(c) § 425.6(d) Saves
(1) Summary of Comments
Proposed § 425.6(d) would have
required sellers to immediately
effectuate cancellation unless they
obtained the consumer’s unambiguously
affirmative consent to receive a save
prior to cancellation. The Commission
explained the record shows many
businesses have created unnecessary
and burdensome obstacles to
cancellation, including forcing
uninterested consumers to sit through
multiple upsells before allowing them to
cancel.446 Individual consumer
commenters corroborated the pervasive
use of such unfair tactics to thwart
cancellation.447
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one not to cancel.’’); Individual commenter, FTC–
2023–0033–0233 (‘‘I had to wait on hold and then
get sales pitch after sales pitch after sales pitch to
cancel a digital-only [newspaper] subscription that
I signed up for online.’’); Individual commenter,
FTC–2023–0033–0228 (had difficulty canceling a
newspaper subscription of all things as it required
consumer to call an 800 number during the day and
then had to listen to multiple sales pitches and
saying ‘‘No! What part of ‘no’ don’t you
understand’’ to cancel); Individual commenter,
FTC–2023–0033–0312 (‘‘I and members of my
family have had to use valuable time to call
corporations to cancel subscriptions, each time
getting a long pitch to keep the subscription. If I
wanted to keep it, I would not be calling to cancel
it.’’); Individual commenter, FTC–2023–0033–0356
(‘‘If it took one click to join, it should take one click
to cancel. I am tired of calling some call center,
waiting on hold, and then having someone go
through a long script about why I should not
cancel.’’); Individual commenter, FTC–2023–0033–
0457 (Forcing me to call a number to unsubscribe,
which is only staffed during ‘‘normal business
hours,’’ unnecessarily complicates the process for
the provider’s benefit: I don’t need to give
opportunity to upsell or persuade me to continue
at a reduced price.); Individual commenter, FTC–
2023–0033–0491 (‘‘Some have even required me to
make a phone call and listen to a hard sell before
they will cancel the service.’’); Individual
commenter, FTC–2023–0033–0597 (have to sit and
turn down multiple offers to cancel); FTC–2023–
0033–0677 (sit and ‘‘suffer through a long sales
pitch’’ to cancel); Individual commenter, FTC–
2023–0033–0784 (‘‘I suggest limiting the seller’s
efforts to pitch additional offers & modifications
when trying to cancel . . . . no one wants to wade
through too many of screens until the cancel
‘finally’ appears.’’); Anonymous commenter, FTC–
2023–0033–0785 (person being ‘‘penalized by
losing time waiting to speak to a customer service
rep, having to decline further sales, or being stuck
with recurring charges they don’t want’’);
Individual commenter, FTC–2023–0033–0798
(difficult to cancel subscriptions, including by
repeatedly forcing the customer to turn down
‘‘special offers’’ to entice the customer not to
cancel); Individual commenter, FTC–2023–0033–
0815 (No reason to have to call customer service
reps who will keep trying to prevent me from
canceling); Individual commenter, FTC–2023–
0033–0835; Individual commenter, FTC–2023–
0033–0850 (Have to make a long awkward phone
call and wait on hold or long repetitive live chat);
Individual commenter, FTC–2023–0033–0913 (‘‘I’ve
experienced having to call to cancel a subscription
only to be forced to listen to a sales spiel in order
to do so.’’); Individual commenter, FTC–2023–
0033–0967 (‘‘Some have even required me to make
a phone call and listen to a hard sell before they
will cancel the service.’’); Individual commenter,
FTC–2023–0033–0999 (Consumers should have an
on-line option to cancel. A national media company
ONLY provides a cancel option with a call to
customer service. When doing so, you are met with
a CS rep that will not accept your request to cancel,
talks over you, continued harassment, making offer
after offer. We must stop this deceptive practice.);
Individual commenter, FTC–2023–0033–1063
(‘‘Now I’m about to cancel my [company name]
account. If it’s anything like the last time when I
moved, I expect to spend several hours dealing with
multiple levels of salespeople, trying to convince
me to stay.’’); Individual commenter, FTC–2023–
0033–1099 (Once customer service is contacted, it
should not take more than about 90 seconds to
cancel a subscription instead of the endless
questions of why you want to cancel. Then try to
keep you by offering a discounted rate on yet
another year of useless service. Please make this
end.); Individual commenter, FTC–2023–0033–1138
(The agent, made multiple attempts to sell me the
service, disregarding my many direct statements
that I just wanted to cancel.); Individual
commenter, FTC–2023–0033–1150 (They make you
call their company so that sales retention can try
to talk you into staying with freebies etc.);
Individual commenter, FTC–2023–0033–1153
(There is no reason a person should be subjected
to 20 minutes or repeated drilling if they say
upfront that they want to cancel service.).
448 NCTA, FTC–2023–0033–0858; PDMI, FTC–
2023–0033–0864; Chamber, FTC–2023–0033–0885.
449 Id.
450 See, e.g., PDMI, FTC–2023–0033–0864; ANA,
FTC–2023–0033–1001; CTIA, FTC–2023–0033–
0866.
451 See, e.g., CCIA, FTC–2023–0033–0984. Some
commenters also argued the saves provision
violates the First Amendment. E.g., PDMI, FTC–
2023–0033–0864; Chamber, FTC–2023–0033–0885;
ACT App Association, FTC–2023–0033–0874. The
Commission rejects this proposition. See
Mainstream Mktg. Servs., Inc. v. FTC, 358 F.3d 1228
(10th Cir. 2004).
452 See nn.447–448.
453 See nn.449–452.
454 See, e.g., United States v. Adobe, Inc., No.
5:24–cv–03630 (N.D. Cal. 2024); FTC v.
Amazon.com, Inc., No. 2:23–cv–0932 (W.D. Wash.
2023).
455 NPRM, 88 FR 24729, citing FTC Policy
Statement on Unfairness, appended to In re
International Harvester Co., 104 F.T.C. 949 (1984).
‘‘To justify a finding of unfairness the injury must
satisfy three tests. It must be substantial; it must not
be outweighed by any countervailing benefits to
consumers or competition that the practice
produces; and it must be an injury that consumers
themselves could not reasonably have avoided.’’ Id.;
see also 15 U.S.C. 45(n) (Commission has no
authority to declare a practice unfair ‘‘unless the act
or practice causes or is likely to cause substantial
injury to consumers which is not reasonably
avoidable by consumers themselves and not
However, other commenters
explained some of the ‘‘barriers’’
consumers complained about are
necessary to prevent harm, at least in
certain situations. Specifically,
commenters noted consumers might not
understand the negative consequences
of cancellation, 448 and the provision
might prevent consumers from taking
advantage of money-saving offers prior
to cancellation. 449 Some commenters
also expressed confusion regarding
whether verification or authentication
procedures, or discussion of consumers’
attempts to pause or modify their
existing offers, would violate the
Rule. 450 Finally, commenters noted the
proposed provision requiring consumers
to opt-in to saves could interfere with
the simplicity of a cancellation
mechanism. 451
(2) Analysis
Based on the record, the Commission
determines revisions to this proposed
provision are necessary, for which the
Commission would need to seek
additional comment. Therefore, the
Commission does not adopt this
provision in the final Rule at this time.
On one hand, the record demonstrates
saves are often used simply as a barrier
to prevent cancellations. 452 On the
other, the proposed opt-in save
provision could have unintended
consequences.453 Specifically, the
provision may thwart attempts to
confirm consumers’ intent or apprise
consumers of any negative
consequences of cancellation (e.g.,
losing data). Moreover, the opt-in save
provision may prevent consumers from
obtaining valuable concessions (e.g.,
lower prices), which they would
otherwise want.
Consequently, the proposed saves
provision did not achieve the right
balance between protecting consumers
from unfair tactics and allowing sellers
to provide necessary and valuable
information about cancellation.
Therefore, the Commission will
consider issuing an SNPRM in the
future seeking a better solution to this
difficult problem.
However, the Commission notes the
removal of the saves proposal is not a
license to erect unreasonable and
unnecessary barriers to cancellation.
The final Rule requires sellers to
provide a simple, easy to use
cancellation mechanism. Save attempts
that interfere with this mandate by
requiring consumers to navigate through
upsells, jump through unreasonable
hoops, or wait unreasonable amounts of
time to cancel are neither simple nor
easy.454
7. Proposed § 425.7 	Annual Reminders
In the NPRM, the Commission
proposed requiring sellers to provide an
annual reminder to consumers for non-
physical goods sold with a negative
option feature. Under this proposal,
reminders would have needed to
identify the product or service, the
frequency and amount of charges, and
the means to cancel. Additionally, the
proposal required Negative Option
Sellers to provide the reminders through
the same medium the consumer used to
consent to the negative option feature.
The Commission opined the delivery of
physical goods may remind consumers
they enrolled in a negative option
feature. Therefore, these consumers
effectively already receive reminders
and can reasonably avoid further
payments by canceling their
subscription. For services lacking a
regular, tangible presence (e.g., data
security monitoring or subscriptions for
online services), however, many
consumers may reasonably forget they
enrolled and, consequently, incur
charges for services they do not want or
use. Thus, the Commission concluded,
the failure to provide reminders for such
contracts would meet all elements of
unfairness. 455 The Commission sought
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90513	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
outweighed by countervailing benefits to consumers
or to competition’’).
456 NPRM, 88 FR 24729; see also id. at section
XIII, Request for Comments (‘‘The Commission
seeks any suggestions or alternative methods for
improving current requirements.’’).
457 The Commission received comments from,
inter alia, individual consumers; cable/broadband/
communications industry groups; public interest
and consumer advocacy groups; various trade
associations representing traditional and digital
marketing, technology, news and magazine media,
gaming and entertainment, and retail industries;
academic and public policy groups; and service
contract and alarm company industries.
458 State AGs, FTC–2023–00330–0886.
459 Public Interest Groups, FTC–2023–0033–0880.
460 NCTA, FTC–2023–0033–0858.
461 IAB, FTC–2023–0033–1000.
462 ESA, FTC–2023–0033–0867; NCTA, FTC–
2023–0033–0858.
463 See, e.g., Sirius XM, FTC–2023–0033–0857
(asking Commission not to mandate exactly how
renewal notices must be sent); N/MA, FTC–2023–
0033–0873 (allow sellers to obtain consent to
provide notice through alternate means); Chamber,
FTC–2023–0033–0885 (proposed revisions); DCN,
FTC–2023–0033–0983 (make annual notice an
option company could comply with to provide
adequate notice of obligations); ACT App
Association, FTC–2023–0033–0874 (adopt a less
prescriptive approach so same medium can be used
to comply with State and Federal requirements).
464 CTA, FTC–2023–0033–0997 (no basis to
conclude different medium is unfair, or that lack of
reminders is unfair).
465 NCTA, FTC–2023–0033–0858 (lack of notice
for ‘‘always on’’ services not unfair, injury
reasonably avoidable); USTelecom, FTC–2023–
0033–0876 (same).
466 See, e.g., CTIA, FTC–2023–0033–0866
(exempt mobile services offered on a month-to-
month basis); USTelecom, FTC–2023–0033–0876
(exempt broadband and communication services).
The Commission addresses exemptions elsewhere
in the SBP at sections VII.B.1 and VIII.
467 See, e.g., Chamber, FTC–2023–0033–0885.
468 Sirius XM, FTC–2023–0033–0857; Kuehn,
FTC–2023–0033–0871; N/MA, FTC–2023–0033–
0873; Act App Association, FTC–2023–0033–0874;
CTA, FTC–2023–0033–0997; Chamber, FTC–2023–
0033–0885; ANA, FTC–2023–0033–1001.
469 Sirius XM, FTC–2023–0033–0857; Kuehn,
FTC–2023–0033–0871; N/MA, FTC–2023–0033–
0873; Chamber, FTC–2023–0033–0885; SCIC, FTC–
2023–0033–0879.
470 Sirius XM, FTC–2023–0033–0857; Kuehn,
FTC–2023–0033–0871; Chamber, FTC–2023–0033–
0885; Public Interest Groups, FTC–2023–0033–
0880.
471 State AGs, FTC–2023–0033–0886.
472 Individual commenter, FTC–2023–0033–0026;
TINA, FTC–2023–0033–1139.
473 NCTA, FTC–2023–0033–0858; ESA, FTC–
2023–0033–0867; IAB, FTC–2023–0033–1000; ACT
App Association, FTC–2023–0033–0874.
474 Hoofnagle, FTC–2023–0033–1137.
475 Individual commenter, FTC–2023–0033–0039
(not reminded ‘‘that the free trial was up’’);
Individual commenter, FTC–2023–0033–0045
(‘‘consumer should get an email reminder their free
period is about to end’’); Individual commenter,
FTC–2023–0033–0050 (businesses should ‘‘be
required to provide advance notice that the free trial
is about to expire.’’); TINA, FTC–2023–0033–1139;
ACT App Association, FTC–2023–0033–0874
(provide less prescriptive process).
comment on this proposal, including
whether it should narrow the coverage
of the proposed language, for example,
by types of covered services or the
duration between reminders.456
(a) Summary of Comments
The Commission received 32
comments in response.457 Consumers,
public interest and consumer advocacy
groups, and academics, among others,
generally supported the reminder
requirement, observing, for example,
that ‘‘subscription-based products and
services have become so widespread
that consumers are having difficulty
keeping track of them all.’’ 458 The
commenters asserted the proposed
‘‘annual notice will clearly inform
consumers of the terms of the contract
and how they may terminate the
agreement.’’ 459 Despite this support,
virtually every group of commenters—
individuals, consumer advocates, trade
organizations, and industry groups—
suggested the Commission modify or
clarify its proposal.
Only three commenters specifically
requested the Commission jettison a
reminder provision altogether.
Specifically, ESA argued the
requirement (1) would impose a
significant burden on businesses
because several State laws already
require reminders or notices; (2) would
be improper because the Commission
did not raise reminders in the ANPR;
and (3) would increase the overall
number of notices consumers receive,
which could result in consumers
ignoring reminders, thus benefiting bad
actors. NCTA suggested the Commission
should instead ‘‘allow businesses
flexibility to determine whether to
provide reminders.’’ 460 IAB also
‘‘recommend[ed] that the Commission
remove this requirement for several
reasons.’’ 461 Both ESA and NCTA
conceded, however, the Commission
could adopt the provision with
additional modifications, such as
making the reminders optional (NCTA)
or offering consumers the ability to opt-
out of subscription reminders (ESA).462
Other commenters agreed, asking for
‘‘less prescriptive’’ requirements that
would allow businesses more
flexibility.463
Several commenters, while not urging
the Commission to reject the reminder
requirement, suggested the NPRM
proposal did not satisfy the unfairness
test. For instance, CTA, a technology
trade association, questioned whether
there was sufficient basis to find a lack
of annual reminder is an unfair practice
or causes consumer harm.464 Similarly,
two other commenters from the
communications industry questioned
whether a lack of annual reminder
would be unfair in the specific context
of services that are ‘‘always on,’’ such as
cable or wireless services.465
A few commenters asked to be
exempted from the reminder
requirement based on the nature of their
industries or the frequency of existing
notices. 466 For instance, cable/
broadband/wireless/streaming industry
groups suggested they should be exempt
for the same reasons they argued the
unfairness test did not render the lack
of reminders illegal in their industries.
Similarly, these and other sellers, such
as service contract providers, suggested
consumers who receive monthly bills
are already effectively receiving
reminders, and therefore, these
transactions should be exempt.467
Several commenters questioned the
proposed requirement that sellers
provide the annual reminder through
the same medium the consumer used to
consent to the negative option
feature. 468 For example, several
commenters observed that requiring
reminders through a telephone call
could violate the TCPA, the TSR, or at
minimum, be a nuisance, and thus
ignored by consumers.469 Many of these
commenters advocated for letting
consumers choose how they want to
receive annual reminders,470 or
allowing sellers to provide reminders
through any medium they typically use
to communicate with consumers.471
Additionally, several commenters
disagreed with the Commission’s
observation that agreements involving
delivery of physical goods inherently
create a ‘‘regular, tangible presence’’
that serves as a reminder of the
contract. 472 For example, they noted
some companies charge a monthly fee,
but only deliver physical goods at the
consumer’s request.
Some commenters stated that, without
Federal preemption, the annual
reminder requirement would create
another layer of regulatory complexity
because several State laws already
require reminders or notices.473 In
contrast, Professor Hoofnagle stated
many ‘‘credit card processing service’’
providers likely afford a simple and
inexpensive means for sellers to comply
with State and Federal mandates
‘‘because policy changes can be made
programmatically in dashboards.’’ 474
Several commenters suggested the
Commission amend the proposal. For
instance, TINA and several individual
consumers recommended the
Commission require reminders at the
end of a free trial period. 475 Others
suggested the Commission require more
frequent reminders, such as every six
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476 Public Interest Groups, FTC–2023–0033–0880
(‘‘consumers deserve to know when they are about
to be charged automatically, with a chance to opt
out’’); State AGs, FTC–2023–0033–0886; MIA, FTC–
2023–0033–1008; Individual commenter, FTC–
2023–0033–0026 (notification within one month of
renewal, stating specific renewal date); Individual
commenter, FTC–2023–0033–0708 (commenting
that companies do not provide reminders before
being charged, possibly overdrawing an account).
477 See, e.g., Public Interest Groups, FTC–2023–
0033–0880.
478 Law Professors, FTC–2023–0033–0861.
479 NCTA, FTC–2023–0033–0858; USTelecom,
FTC–2023–0033–0876; CCIA, FTC–2023–0033–
0985 (recommending a biannual reminder for
longer subscriptions); and Coalition, FTC–2023–
0033–0884; see also DCN, FTC–2023–0033–0983
(incorrectly states the current proposed rule would
require monthly notice for month-to-month
renewals).
480 NCTA, FTC–2023–0033–0858 (opt in); ESA,
FTC–2023–0033–0867 (opt out); Chamber, FTC–
2023–0033–0885 (opt in); DCN, FTC–2023–0033–
0983 (opt out); Public Interest Groups, FTC–2023–
0033–0880 (opt out).
481 NCTA, FTC–2023–0033–0858; ESA, FTC–
2023–0033–0867; DCN, FTC–2023–0033–0983.
482 ANA, FTC–2023–0033–1001 (same medium);
Law Professors, FTC–2023–0033–0861 (adequate
phone reminder).
483 Sirius XM, FTC–2023–0033–0857; NFIB, FTC–
2023–0033–0789.
484 ACT App Association, FTC–2023–0033–0874.
485 State AGs, FTC–2023–0033–0886
(‘‘Subscription management has become an entire
industry; consumers can choose from a variety of
companies that offer to monitor their recurring
subscriptions. We believe that consumers should
not have to sign up for yet another service—one that
comes with privacy and security risks, as
subscription monitoring services require sharing
financial account and other sensitive information—
in order to effectively manage their subscriptions.’’).
486 See proposed § 425.8.
487 ANA, FTC–2023–0033–1001.
488 NCTA, FTC–2023–0033–0858; PDMI, FTC–
2023–0033–0864; CCIA, FTC–2023–0033–0984;
ESA, FTC–2023–0033–0867; IAB, FTC–2023–0033–
1000.
489 NCTA, FTC–2023–0033–0858; see also
Chamber, FTC–2023–0033–0885 (‘‘A floor just
creates an increased [F]ederal burden without
actually ensuring consistency of overall regulation
on entities in the different [S]tates.’’).
490 IHRSA, FTC–2023–0033–0863 (national
standard).
491 CTA, FTC–2023–0033–0997; see also Sirius
XM, FTC–2023–0033–0857; DCN, FTC–2023–0033–
0983.
492 Coalition, FTC–2023–0033–0884; CCIA, FTC–
2023–0033–0984.
493 NRF, FTC–2023–0033–1005.
494 Id.
months, or before each charge.476 They
noted that under an annual notice
requirement, a consumer could be
charged up to 12 times before
discovering a negative option feature.477
One commenter asked the Commission
to require a reminder for so-called
‘‘zombie’’ agreements, ones that have
long periods, e.g., 24 months, of
inactivity.478
In contrast, other commenters noted
consumers may suffer from ‘‘notice
fatigue’’ given the increasing popularity
of subscription services. 479 Some argued
there is no evidence of tangible
consumer benefit from additional
notices, and consumers should be given
a choice whether to opt-in to receive
annual reminders (or more frequent
reminders), or to opt-out.480 Three
commenters suggested sending annual
reminder notices could increase
opportunities for phishing and other
deceptive practices. 481
Finally, several commenters asked the
Commission to clarify certain aspects of
the reminder requirement. For instance,
ANA asked the Commission to explain
what constitutes the ‘‘same medium,’’
and a group of law professors asked for
more detail about what constitutes an
adequate telephone reminder.482
Additionally, some commenters asked
the Commission to clarify that sellers
can rely on contact information
provided by the consumer at the time of
consent, 483 or to provide that abiding by
State reminder requirements satisfies a
seller’s obligations under this
provision.484
(b) Analysis
After reviewing these comments, the
Commission determines it needs
additional information on the scope and
particularities of the proposed annual
reminder requirement. The record
suggests, given the proliferation of
subscription and auto-renewal services,
consumers have difficulty tracking all
the negative option services and
products in which they may be
enrolled—so much so that there are now
companies claiming to help consumers
keep track of these services for a fee. As
one commenter noted, consumers
should not have to sign up for yet
another service to manage all their
subscriptions. 485 Thus, limiting the
reminder provision to just non-physical
goods, and only annually, may not
adequately mitigate the harm caused by
negative option practices in the
marketplace.
Additionally, the Commission shares
some commenters’ concerns that
consumers may ignore these reminder
calls. Further, as some commenters
noted, the proposed provision does not
specify the timing for these reminders
(e.g., should sellers issue reminders
annually from the date of initial
purchase and a specific number of days
before the charge?). Accordingly, the
Commission will consider issuing a
SNPRM seeking additional comment on
these issues at a later date.
8. Proposed § 425.8 	Relation to State
Laws
In its NPRM, the Commission
proposed that amendments to the Rule
would not affect State laws, regulations,
orders, or interpretations relating to
negative options, except to the extent
they are inconsistent with the final
Rule, and then only to the extent of the
inconsistency. A State provision would
not be ‘‘inconsistent’’ with the proposed
Rule if it affords any consumer greater
protection than the Rule.486
The Commission received a range of
comments in response. On one end, a
commenter opined the ‘‘FTC cannot
preempt existing [State] laws,’’ so it
should instead strive for
‘‘harmonization and consistency with
existing laws.’’ 487 At the other end,
multiple industry groups said the
Commission should completely preempt
State laws in this area.488 These
commenters argued having both State
and Federal standards may confuse
consumers and create financial and
operational burdens for sellers, thus
raising consumer prices. For example,
NCTA asserted that, without
preemption, the proposed Rule ‘‘would
encourage the enactment of new [S]tate
laws with differing standards.’’ 489
Another industry commenter suggested
the Commission should work with
lawmakers on one national standard.490
Other industry groups and individual
businesses supported preemption in
various ways. For example, CTA argued
the Rule should ‘‘preempt [S]tate laws
with differing requirements.’’ 491 Two
additional commenters, including a
mixed group of industry associations,
asserted the Rule should set the ceiling
and preempt any State provision that is
more stringent.492
NRF said the Rule should ‘‘preempt
any [S]tate law requirements that
contradict or are inconsistent with the
Rule . . . to the extent of the
inconsistency.’’ 493 To effectuate this
change, NRF suggested the Commission
adopt language from California’s
Automatic Renewal Law, which it said
other States have copied. NRF proposed
State laws be deemed inconsistent if
they require disclosures or actions ‘‘that
contradict . . . the [final rule],’’ and
requirements be deemed contradictory if
they use the same terms differently from
the final rule or require ‘‘using a term
different from the one required in the
[final rule] to describe the same
item.’’ 494
Several industry groups expressed
concern regarding potential confusion
about preemption. For example, ACA
Connects asserted it ‘‘may be unclear
whether and to what extent [a particular
State law offers] ‘greater’ or ‘lesser’
protection than [the proposed Rule]’’
and asked for more guidance generally
or for a process that lets interested
parties ask the Commission if a
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495 ACA, FTC–2023–0033–0881 (greater or lesser);
NRF, FTC–2023–0033–1005 (more guidance); DCN,
FTC–2023–0033–0983 (more guidance).
496 NRF, FTC–2023–0033–1005.
497 Law Professors, FTC–2023–0033–0861.
498 Id.
499 See, e.g., Am. Fin. Servs. Ass’n v. FTC, 767
F.2d 957, 989 (D.C. Cir. 1985).
500 Preemption would occur where there is an
actual conflict between the two schemes of
regulation such that both cannot stand in the same
area. Fla. Lime & Avocado Growers, Inc. v. Paul,
373 U.S. 132, 141 (1963); see also Am. Fin. Servs.
Ass’n v. FTC, 767 F.2d 957 (D.C. Cir. 1985) (Credit
Practices Rule); Harry & Bryant Co. v. FTC, 726 F.2d
993 (4th Cir. 1984) (Funeral Rule); Am. Optometric
Ass’n v. FTC, 626 F.2d 896 (D.C. Cir. 1980)
(Ophthalmic Practices Rule).
501 See, e.g., 16 CFR 437.9(b) (Business
Opportunity Rule); id. 435.3(b) (Merchandise Rule);
id. 436.10 (Franchise Rule); id. 429.2 (Cooling-Off
Rule).
502 See, e.g., NPRM, 88 FR 24730.
503 Categories of products and services for which
commenters sought exemptions include: alarm
companies (FTC–2023–0033–0860; FTC–2023–
0033–1001); wireless carriers (FTC–2023–0033–
0866); telecommunication providers (FTC–2023–
0033–0876; FTC–2023–0033–0881); service
contracts (FTC–2023–0033–0877; FTC–2023–0033–
0879; FTC–2023–0033–0882; FTC–2023–0033–
0996; FTC–2023–0033–1136; FTC–2023–0033–
1143); insurance agreements, service contracts on
consumer goods, and cancellable month-to-month
agreements (FTC–2023–0033–0878); and retail
energy service (FTC–2023–0033–1151). Some of
these and others sought to exclude B2B agreements.
See section VII.B.1.c.
504 See 16 CFR 1.25, 1.31; see also 86 FR 59851
(Oct. 29, 2021) (amending Commission procedures
and rules on the petition exemption process).
505 NFIB, FTC–2023–0033–0789.
506 This provision is comparable to the
severability provision in other Commission Rules.
See 16 CFR 437.10 (Business Opportunity Rule); 16
CFR 455.7 (Used Motor Vehicle Rule); 16 CFR
436.11 (Franchising Rule); 16 CFR 453.8 (Funeral
Industry Rule); 16 CFR 310.9 (TSR).
507 NPRM, 88 FR 24730.
508 NPRM, 88 FR 24724.
509 Those States include Virginia, California, and
Oregon. NPRM, 88 FR 24724.
510 ESA, FTC–2023–0033–0867; USTelecom,
FTC–2023–0033–0876; ACA, FTC–2023–0033–
0881; IAB, FTC–2023–0033–1000; and TINA, FTC–
2023–0033–1139.
particular State law is inconsistent.495
NRF noted such a system has worked
well with gift card laws, explaining the
CARD Act (Pub. L. 111–24, 124 Stat.
2385) preempts less restrictive State
laws.496
Finally, a group of law professors
supported the Commission’s proposed
Rule. They noted ‘‘more than half of
[S]tates . . . regulate some negative
option marketing practices,’’ and said
the Commission ‘‘does not occupy the
field or displace non-conflicting [S]tate
[laws].’’ 497 The professors added States
‘‘can often move more nimbly to address
problematic elements and evolving
business models’’ and should retain the
ability to do so.498
Having considered the foregoing
comments, the Commission will
streamline the text of the final Rule for
clarity and efficiency, while
maintaining the substance of the
proposed Rule’s proposed preemption
language (renumbered in the final Rule
as § 425.7). The FTC Act does not
expressly preempt State law, and the
legislative history of the FTC Act
indicates Congress did not intend the
FTC to occupy the consumer protection
regulation field.499 Therefore, any
preemptive effect of the Rule must be
limited to instances where it is not
possible to comply with both State law
and the Rule, or where application of
State law would frustrate the purposes
of the Rule. 500 This approach preserves
States’ ability to continue to act as
laboratories to handle new and changing
business models. This approach is
consistent with other Commission
Rules.501
Therefore, § 425.7 of the final Rule
specifies the Rule does not supersede,
alter, or affect State statutes, regulations,
orders, or interpretations relating to
negative option marketing, except to the
extent a State statute, regulation, order,
or interpretation is inconsistent with the
Rule. The final language also continues
to make clear State requirements are not
inconsistent with the Rule to the extent
they afford greater protection to any
consumer. The manners in which a
State law may provide greater protection
are many. For example, a State law that
requires sellers to remind consumers at
the end of a free trial that they are about
to be billed would provide greater
protection to consumers and not be
inconsistent with the Rule.
VIII. Modifications, Alternatives
Considered
A. New Provisions in Final Rule for
Clarification
1. New § 425.8 	Exemptions
The NPRM sought comment on
whether the Rule should exempt any
entities or activities that are otherwise
subject to the Commission’s authority
under the FTC Act.502 Several
commenters requested Rule exemption
for their business or industry.503 These
commenters made various arguments
based on the law and facts in their
particular circumstances. For example,
some argued existing State licensing and
other requirements that already apply to
their activities adequately address the
problems identified in the NPRM and
additional rules would only interfere
with the existing regulatory structure.
Because such decisions are highly fact
dependent, the Commission must
consider exemptions, even of larger
groups, on an individualized basis
pursuant to the FTC’s Rules of
Practice.504 Pursuant to these rules,
interested persons may file petitions for
exemption with relevant evidence and
data. If the Commission deems the
petition sufficient to warrant further
consideration, it will follow the
procedures outlined in § 1.31 of its
rules.
The Commission adopts a new
section, § 425.8. Pursuant to this
provision, and consistent with the
Commission’s Rules of Practice, sellers
and other covered persons may seek full
or partial exemptions if they can
demonstrate application of the Rule’s
requirements to a particular product or
service, or class of product or service, is
not necessary to prevent the acts or
practices to which the Rule relates.
2. New § 425.9 	Severability
One commenter, NFIB, asked the
Commission to address severability in
the Rule.505 Specifically, NFIB proposed
a provision stating if a court finds any
part of the Rule to be invalid, then the
remainder of the Rule remains in force.
The Commission agrees with this
proposal. It is the Commission’s intent
that the provisions of the final Rule are
separate and severable from one
another; therefore, if any provision is
stayed or determined to be invalid, the
remaining provisions shall continue in
effect. Thus, the final Rule includes this
language in a new section, § 425.9.506
B. Notice of Material Changes
In the NPRM, the Commission sought
comment on whether and how sellers
should notify consumers when they
make material changes to contracts with
a negative option.507 As discussed in the
NPRM, several commenters responding
to the ANPR recommended the
Commission require sellers to send
consumers notices of such changes.
TINA, for example, asserted the
Commission should require such notice
and provide consumers an opportunity
to cancel before the terms become
effective.508 Several States require
similar notices.509 The Commission,
however, did not require notice of
material changes in the proposed Rule.
As it explained at the time, whether a
seller’s failure to provide such notice is
unfair or deceptive is a highly fact-
specific inquiry that must be
determined on a case-by-case basis.
Given the importance of the issue,
however, the Commission requested
further comment.
1. Summary of Comments
Five commenters responded.510 TINA
reiterated sellers should provide
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511 TINA, FTC–2023–0033–1139.
512 Id.
513 Id.
514 IAB, FTC–2023–0033–1000; ESA, FTC–2023–
0033–0867.
515 USTelecom, FTC–2023–0033–0876.
516 ACA, FTC–2023–0033–0881.
517 See NPRM. 88 FR 24730; NFIB, FTC–2023–
0033–0789 (requesting a business education
enforcement provision); Hoofnagle, FTC–2023–
0033–1137 (consumer and business education
probably uneconomical intervention).
518 IAB, FTC–2023–0033–1000 (at least 12
months); ESA, FTC–2023–0033–0867 (12–18
months); Kuehn, FTC–2023–0033–0871 (12–18
months).
519 Chamber, FTC–2023–0033–0885.
520 Individual commenter, FTC–2023–0033–0257;
Individual commenter, FTC–2023–0033–0685.
521 ACA, FTC–2023–0033–0881; SCIC, FTC–
2023–0033–0879 (noting many States require
service contract forms be filed with State regulators
for approval); ANA, FTC–2023–0033–1001; NCTA,
FTC–2023–0033–0858.
522 NCTA, FTC–2023–0033–0858.
523 E.g., 38 FR 33766 (Dec. 7, 1973) (original
Negative Option Rule, 6-month grace period); 60 FR
43842 (Aug. 23, 1995) (TSR. 4-month grace period);
89 FR 26767 (Apr. 16, 2024) (TSR amendment, 180-
day grace period); 79 FR 55615 (Sept. 17, 2014)
(Merchandise Rule amendments, 3-month grace
period).
524 Similarly, the various procedural sections of
the Rule, e.g., § 425.1 (Scope), § 425.2 (Definitions);
§ 425.7 (Relation to State Laws), § 425.8
(Exemptions), and § 425.9 (Severability) are also
operative 60 days after publication.
consumers with notice of material
changes to subscription terms.511
Further, it asserted the Commission’s
reasoning is at odds with State laws and
the Commission’s longstanding position
on material terms, i.e., that they be
‘‘clearly and conspicuously disclosed
when relevant to the marketing being
presented.’’ 512 TINA further argued
allowing businesses to ‘‘hide’’ material
changes to these contracts is likely to
cause injury because consumers ‘‘do not
read these contracts (let alone monitor
them for changes) and a significant
minority of consumers are not even
aware they are bound by these
subscription contracts.’’ 513
In contrast, ESA, USTelecom, ACA,
and IAB supported the Commission’s
proposal. IAB and ESA said it is
‘‘industry practice for subscription-
based services and products to have
regular price increases over time,’’ and
consumers expect it.514 USTelecom
agreed with the Commission’s rationale
that ‘‘whether such a practice is unfair
or deceptive depends heavily on the
facts presented in each case.’’ 515 ACA,
a telecommunications trade association,
noted the FCC and States already have
notice requirements for contract term
changes.516
2. Analysis
Based on the record, the Commission
does not require notice of material
changes to contract conditions in the
final Rule. The final Rule requires the
seller disclose important information
prior to charging the consumer. Such
information includes all material terms,
including, e.g., the range of costs the
consumer will be charged and the
frequency of charges that will incur
unless the consumer takes timely steps
to prevent or stop them. The seller’s
failure to disclose such information
upfront, clearly and conspicuously,
violates the Rule.
Moreover, State laws have different
predicate requirements (e.g., less robust
initial disclosures) and, importantly, are
often based on different legal authority.
Additionally, the Commission’s final
Rule does not conflict with its
longstanding advice on clear upfront
disclosure. The final Rule requires just
such disclosure, § 425.4; and the
Commission has never required after
sale disclosure based on its section 5
authority.
Finally, as the Commission explained
in the NPRM, whether a seller’s failure
to notify a consumer of material changes
is unfair or deceptive could be heavily
dependent on the particular facts and
circumstances, such as the seller’s
upfront marketing claims. For example,
based on a clear upfront agreement to
allow periodic price increases,
consumers may understand that firms
can make small price increases over
long periods of time. On the other hand,
significant unilateral changes to the
terms of the agreement, such as huge
prices increases over short periods of
time would probably be inconsistent
with reasonable consumer expectation,
and therefore, deceptive or unfair.
Because the determination of whether a
practice runs afoul of section 5 in this
context is highly fact dependent, the
Commission declines to address it at
this time. Nevertheless, the Commission
will continue to monitor the need for
such a requirement and will continue to
bring enforcement actions when
appropriate.
C. Consumer Education
The Commission solicited comments
on alternative approaches such as
additional consumer and business
education, and received two comments
in response.517 The Commission plans
to continue its efforts to provide
information to help consumers with
their purchasing decisions and avoid
ensnarement in unwanted recurring
payment programs. However, consumer
education is not a substitute for
improving existing regulatory
provisions. Consumer education is
likely to have a limited benefit where
sellers lure consumers into an
agreement without consumers’
knowledge, particularly with the use of
dark patterns.
D. Implementation Date
Several industry groups and one
individual commenter asked the
Commission to delay the final Rule’s
effective date. Three commenters sought
a delay of at least 12 months or up to
18 months, citing generalized concerns
that changes can take time ‘‘given the
complexities’’ of the proposed Rule.518
The Chamber asked for a two-year
period ‘‘depending on the scope and
specific requirements of the final
rule.’’ 519 By contrast, consumers
generally encouraged the Commission to
enact the Rule without delay.520
None of the commenters identified a
precise period it would take to comply
with a specific provision or otherwise
detailed what would necessitate a
particular length of time.521 They did,
however, detail the general actions they
would need to take. For example, NCTA
explained, ‘‘this proposal would require
companies to change and update their
customer processes and user interfaces
to provide the mandated notices, obtain
additional consent, and implement
cancellation mechanisms,’’ as well as
troubleshoot those changes in a careful
way to avoid ‘‘glitches and issues that
would affect service and frustrate and
harm consumers.’’ 522
The Commission recognizes changes
to processes and disclosures typically
require some time to address and has
regularly provided a grace period for
implementation of its rules.523 Small
businesses in particular may require
time to ensure their modified processes
conform to the Rule. To address these
concerns, the final Rule provides 180
days from the date the final Rule is
published to come into full compliance.
However, sellers must comply with
§ 425.3 60 days after publication of the
Rule, consistent with 5 U.S.C. 801(a)(3).
This section prohibits
misrepresentations in connection with a
negative option feature. Existing law
already requires sellers not to make
misrepresentations. Therefore, this
provision should not impose an added
time or cost burden on businesses
operating lawfully.524
The Commission recognizes the
remainder of the final Rule may require
some businesses to implement or
modify systems, software, or
procedures. As detailed in the NPRM,
however, the existing legal landscape
already includes a patchwork of
relevant Federal laws and regulations in
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525 NPRM, 88 FR 24716–18.
526 See EPS, 86 FR 60822; Staff Report, https://
www.ftc.gov/sites/default/files/documents/reports/
negative-options-federal-tradecommission-
workshop-analyzing-negative-optionmarketing-
report-staff/p064202negativeoptionreport.pdf {last
visited on Aug. 26, 2024}.
527 See sections VII.B.6 (saves) and VII.B.7
(reminders).
528 See § 425.5(a)(4).
529 See § 425.4.
530 Law Professors, FTC–2023–0033–0861.
531 Id.
532 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042.
533 Where specific components of the Rule, as
anticipated when the NPRM was published, were
discussed, commenters combined them, such that
the concerns expressed cannot readily be separated
to reflect what remains in the final Rule. For
example, NCTA claims that ‘‘(t)he rigid ‘Click-to-
Cancel’ requirements and limits on ‘saves’ will
harm consumers,’’ but addresses these harms only
in combined and qualitative ways. FTC–2023–
0073–0008.
534 15 U.S.C. 57a(a)(1)(B).
addition to State laws to address sellers’
negative option practices.525 The
Commission has also issued guidance to
businesses on the basic requirements
that negative option marketers must
follow to avoid deception.526
Compliance with these statutes and
regulations should mean sellers have a
significant head start on their
compliance efforts.
Moreover, the Commission has
streamlined the final Rule, significantly
reducing the compliance burdens.
Specifically, for reasons detailed in
section VII, above, the final Rule omits
or modifies proposed requirements that
gave some commenters particular
concern. Most notably, the Commission
omitted the entire annual reminder and
saves requirements. As commenters
pointed out, these two sections imposed
the greatest compliance burdens on
sellers. 527 Their removal, therefore,
should substantially reduce the time
and expense needed to ensure processes
comply.
Similarly, other modifications should
clarify and streamline requirements,
making compliance easier. For example,
the final Rule eliminates certain
recordkeeping requirements.528
Additionally, the final Rule narrows the
required disclosures.529 These changes
combined with existing law obviate the
need for a lengthy grace period.
E. Anti-Abuse Provision
The Law Professors suggested the
Commission include an ‘‘anti-abuse’’
provision to provide a mechanism for
enforcement against sellers’ attempts to
evade the Rule. 530 Such a provision
would make it an ‘‘unfair or deceptive
act or practice’’ for a seller to, for
example, set up a facially complicated
sign-up process to allow for a similarly
complicated cancellation process, but in
practice to simplify the sign-up process
to maximize enrollment.531 As the Law
Professors acknowledge, such attempts
to evade the Rule already violate the
Rule, and the record does not suggest a
need for such an additional anti-abuse
provision.
IX. Congressional Review Act
Pursuant to the Congressional Review
Act, 5 U.S.C. 801 et seq., we anticipate
the Office of Information and Regulatory
Affairs will designate the final Rule as
a ‘‘major rule,’’ as defined by 5 U.S.C.
804(2).
X. Final Regulatory Analysis
Under section 22(a) of the FTC Act, 15
U.S.C. 57b–3(a), the Commission must
issue a preliminary regulatory analysis
for a proceeding to amend a rule if the
Commission: (1) estimates that the
amendment will have an annual effect
on the national economy of $100
million or more; (2) estimates that the
amendment will cause a substantial
change in the cost or price of certain
categories of goods or services; or (3)
otherwise determines that the
amendment will have a significant effect
upon covered entities or upon
consumers. Although the Commission
preliminarily determined the proposed
amendments to the Rule would not have
such effects on the national economy;
on the cost of goods and services offered
for sale by mail, telephone, or over the
internet; or on covered parties or
consumers, several commenters raised
concerns with the Commission’s
preliminary determination. Ultimately,
the presiding officer determined, after
receiving additional comments from
interested stakeholders, the proposed
amendments would have such effect.532
In accordance with section 22, the
Commission therefore issues its final
regulatory analysis below.
A. Introduction
Under section 22 of the FTC Act, 15
U.S.C. 57b–3, the final regulatory
analysis must contain (1) a concise
statement of the need for, and objectives
of, the final rule; (2) a description of any
alternatives to the final rule which were
considered by the Commission; (3) an
analysis of the projected benefits, any
adverse economic effects, and any other
effects of the final rule; (4) an
explanation of the reasons for the
determination of the Commission that
the final rule will attain its objectives in
a manner consistent with applicable law
and the reasons the particular
alternative was chosen; and (5) a
summary of any significant issues raised
by the comments submitted during the
public comment period in response to
the preliminary regulatory analysis, and
a summary of the assessment by the
Commission of such issues.
The Commission received comments
from trade associations regarding the
preliminary regulatory analysis in the
NPRM, and three presented testimony
and expert reports at the informal
hearing. Comments and testimony,
including reports submitted by experts,
were largely conclusory in nature.533
The general theme of the comments and
testimony, however, was that the
compliance costs would be higher than
those estimated in the NPRM’s
preliminary analysis, and the
Commission herewith presents revised
estimates of those compliance costs.
B. Regulatory Analysis
1. Concise statement of the need for,
and the objectives of, the final Rule.
As discussed previously, the objective
of the proposed amendments is to curb
deceptive or unfair negative option
practices . The legal basis for the
proposed amendments is section
18(a)(1)(B) of the FTC Act, which
provides the Commission with authority
to issue ‘‘rules which define with
specificity acts or practices which are
unfair or deceptive acts or practices in
or affecting commerce.’’ 534
As described in this SBP, the
amendments address unfair or deceptive
negative option practices. The FTC,
other Federal agencies, and State
attorneys general have brought multiple
administrative and judicial actions to
stop and remedy harmful negative
option practices. The record
demonstrates, however, that existing
legal authorities fall short because they
leave consumers unprotected from
certain practices and constrain the relief
the Commission may obtain for law
violations to redress consumers and
deter future unlawful activity. In the
ANPR and NPRM, the Commission
explained it receives thousands of
consumer complaints a year related to
negative option marketing.
As discussed above in sections III–VII,
the final Rule clarifies existing
requirements regarding negative option
marketing currently dispersed in other
rules and statutes administered by the
FTC and provides a consistent legal
framework across media and offers. It
also consolidates all requirements, such
as those in the TSR and ROSCA,
specifically applicable to negative
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535 As explained in section III of the SBP, several
other statutes and regulations address harmful
negative option practices. Section 5 of the FTC Act,
which prohibits unfair or deceptive acts or
practices, has traditionally served as the
Commission’s primary mechanism for addressing
deceptive negative option claims. ROSCA, the TSR,
1the Unordered Merchandise Statute, and EFTA all
address various aspects of negative option
marketing.
536 The final Rule also requires that specific
disclosures relating to negative option features be
provided separately to consumers before consent is
obtained, whereas the existing regulatory
framework requires that all material terms of a
negative option contract be disclosed in a clear and
conspicuous manner. The new disclosure
requirements will aid consumers in understanding
both that they are entering a negative option
contract and the terms and conditions of that
contract, especially how they can cancel the
contract and when such cancellation must occur to
avoid future charges. No consumer testing of the
final Rule’s disclosure requirements, relative to a
‘‘control’’ of ‘‘clear and conspicuous’’ disclosure
requirements under the existing regulatory baseline,
has been done. Accordingly, it is not possible to
quantify any incremental consumer comprehension
of a negative option plan at the time a consumer
provides consent to that plan that may result from
the final Rule’s disclosure requirements. Moreover,
some academic studies claim that ‘‘[n]ot only do
consumers have a tendency to forget, but also a
tendency to forget that they forget,’’ suggesting that
any gain in comprehension of the negative option
features of an agreement that might be measured
under consumer testing might not be durable. See
Sophia Wang, ‘‘One Size Does Not Fit All: The
Shortcomings of Current Negative Option
Legislation,’’ 26 Cornell J. of L. & Pub. Policy, 197,
212 n.135 (2016) citing Keith M. Marzilli Ericson,
‘‘Forgetting We Forget: Overconfidence and
Memory,’’ 9 J. Eur. Econ. Assoc. 43 (2011).
Additionally, if the disclosures required by the final
Rule come to be viewed as ‘‘boilerplate’’ language
that consumers rush through, or consumers
consider those disclosures to be less salient than
other aspects of the transaction, such as acquiring
a free trial of a product or service, the final Rule’s
disclosures may not offer any incremental benefit
over existing ‘‘clear and conspicuous’’ because
‘‘people have limited attentional resources and will
overlook non-salient features of any transaction.’’
See Tess Wilkinson-Ryan, ‘‘A Psychological
Account of Consent to Fine Print,’’ 99 Iowa L. Rev.
1745 (2014). Concerns such as these are consistent
with some consumer advocacy groups seeking
amendments that would require a second round of
consent to be obtained at the end of a free trial and
before any recurring charges could be initiated in
addition to routine reminders of recurring charges.
See, e.g., TINA, FTC–2019–0082–0014 (seeking
amendments to require notice and re-affirmance of
consumer consent, prior to being charged because
consumers may forget about the trial and incur
unwanted charges or enrollments at the end of the
offer, particularly with long trial periods).
537 The Unordered Merchandise Statute and
EFTA also address various aspects of negative
option marketing, but violations of those laws in
relation to negative option marketing are typically
pleaded in conjunction with violations of other
laws; without loss of generality, the regulatory
analysis expressly considers only ROSCA, the TSR,
and section 5 as the regulatory baseline against
which incremental benefits and costs from the final
Rule are measured.
option marketing. The final Rule also
provides clarity about how to avoid
deceptive negative option disclosures
and procedures. For example, ROSCA
lacks specificity about cancellation
procedures and the placement, content,
and timing of cancellation-related
disclosures. The final Rule now
provides clear standards for sellers
about, inter alia, the content and timing
of important information disclosures
and what constitute ‘‘simple
mechanisms’’ for the consumer to stop
recurring charges. Further, the Rule
allows the Commission to seek civil
penalties and consumer redress under
section 19(a)(1) of the FTC Act in
contexts where such remedies are
currently unavailable, such as deceptive
or unfair practices involving negative
options in print materials and face-to-
face transactions (i.e., in media not
covered by ROSCA or the TSR).
2. A description of any alternatives to
the final Rule which the Commission
considered.
In formulating the final Rule, the
Commission makes every effort to avoid
imposing unduly burdensome
requirements on sellers. To that end, the
Commission avoids, where possible,
proposing specific, prescriptive
requirements that could stifle marketing
innovation or otherwise limit seller
options in using new technologies. In
the NPRM, the Commission sought
comments on several alternatives,
including provisions related to consent
requirements (additional consent for
free trials) and reminder requirements
(narrowing the scope of product types
requiring reminders). The Commission
also sought comments on how it could
modify the proposed amendments to
reduce costs or burdens for small
entities. In response to the comments,
and as discussed in the section-by-
section analysis, the Commission
determines not to finalize the proposed
Rule in its entirety. Instead, the
Commission finalizes a Rule that limits
the material terms to be disclosed
immediately adjacent to consent for the
negative option feature; removes the
limitation on saves and the
accompanying recordkeeping
requirement; removes the annual
reminder provision; and modifies the
length of the recordkeeping requirement
for verification of consent to three years
and provides an alternative method of
compliance.
One alternative to the final Rule
would be to terminate the rulemaking
and rely instead on the existing legal
framework to combat unfair or
deceptive negative option practices.
Another alternative would be to limit
the scope of the final Rule to just those
negative option plans that are marketed
in person or through the mail and
therefore, currently, are covered only by
section 5 of the FTC Act and not by
ROSCA or the TSR. However, failing to
proceed in accordance with the final
Rule would substantially reduce or
eliminate the benefits of the Rule,
including clarifying the requirements
currently spread throughout statutes
and regulations and covering negative
options in media not subject to the TSR
or ROSCA.
Given that the Commission expects
the unquantified benefits and
unquantified costs of the final Rule to be
small, and that there is considerable
scope for the net benefits to remain
positive and large even if compliance
costs have been substantially
underestimated, this regulatory analysis
indicates that adoption of the Rule will
result in benefits to the public that
outweigh the costs.
3. An analysis of the projected
benefits and any adverse economic
effects and any other effects of the final
Rule.
(a) Summary of Benefits and Costs
The primary consumer benefits of the
final Rule, relative to the existing
regulatory baseline,535 come in the form
of faster cancellations when consumers
wish to cancel subscriptions. 536
The final Rule requires negative
option sellers to provide cancellation
mechanisms that are at least as easy to
use as the mechanisms by which
consumers consent to negative option
plans. For negative option sales made
online or over the telephone, ‘‘at least as
easy to use’’ requires that the
cancellation mechanism operate in the
same medium and take no more time or
effort than the consumer used when
enrolling in the negative option plan.
For negative option sales that are made
in-person or through the mail, the final
Rule requires that, in addition to
offering cancellation through the
specific method used for enrollment, the
seller must also offer at least one
alternate cancellation mechanism that
can be used remotely, e.g., cancellation
via a website, email, or a toll-free
telephone number and, again, that the
consumer can cancel the negative
option contract at least as quickly as he
or she completed enrollment in the
negative option plan.
In the following analysis, the
Commission describes the anticipated
effects of the final Rule. Where possible,
it quantifies the benefits and costs. If a
benefit or cost is quantified, it indicates
the sources of the data relied upon. If an
assumption is needed, the text makes
clear which quantities are being
assumed. The Commission measures the
benefits and costs of the Rule against the
existing regulatory baseline that consists
primarily of ROSCA, the TSR, and
section 5 enforcement. 537
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538 One survey found that consumers without
subscriptions were much more pessimistic about
the ability to cancel subscriptions than were
consumers who had subscriptions. See Jabil,
‘‘Connected Packaging Perceptions and Attitudes: A
Consumer Insights Survey’’ (July 2021), https://
www.jabil.com/dam/jcr:ecdb74e6-c34f-4c30-aa34-
c10269617db6/2021-connected-packaging-
survey.pdf#page=3. Another recent study finds that
consumers are aware that they may be inattentive
in future and not cancel subscriptions that they no
longer desire, and so are less likely to sign up for
negative-option subscriptions. See Klaus Miller, et
al., ‘‘Sophisticated Consumers with Inertia: Long-
Term Implications from a Large-Scale Field
Experiment’’ (2023), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4065098.
539 A large literature in economics has
documented that consumers face switching costs
and/or psychological biases towards inertia. See,
e.g., Brigitte Madrian & Dennis Shea, ‘‘The Power
of Suggestion: Inertia in 401(k) Participation and
Savings Behavior,’’ 116 Quarterly J. of Econ. 1149
(2001); William Samuelson and Richard
Zeckhauser, ‘‘Status Quo Bias in Decision Making,’’
1 J. of Risk & Uncertainty 7 (1988). Research has
found that many consumers do not cancel
subscriptions due to such inertia effects. See, e.g.,
Miller, et al. (2023); Liran Einav, et al., ‘‘Selling
Subscriptions’’ (2023), https://harris.uchicago.edu/
sites/default/files/mahoney_ppe_seminar_paper_9-
26-23_0.pdf.
540 See U.K. Department for Business and Trade,
‘‘Impact Assessment—Digital Markets, Competition
and Consumers Bill: Subscription Measures,’’ at 3
(Apr. 20, 2023), https://publications.parliament.uk/
pa/bills/cbill/58-03/0294/ImpactAssessment
Annex2.pdf.
541 In some instances, an online cancellation
completed at, say, 11:59 p.m., compared to a
counterfactual in which a call center closed at, say,
8 p.m., could result in sparing a consumer from a
recurring charge that would take effect the next day,
and such instances would result in actual monetary
Continued
First, the likely per-cancellation
benefits of the final Rule in relation to
four scenarios under the existing
regulatory baseline are considered.
Next, the number of transactions
relevant to each scenario are estimated.
The product of average benefits-per-
cancellation in each scenario multiplied
by the likely number of consumer
cancellation transactions for each
scenario, summed across all scenarios,
provides an estimate of the aggregate,
quantifiable, consumer benefits
produced by marketers’ compliance
with the final Rule’s cancellation
requirements. Quantifiable costs
primarily reflect the resources spent by
businesses to review the Rule and to
take any preemptive or remedial steps to
comply with its provisions, including,
when and as needed, making changes to
the manner they receive and process
cancellation requests from consumers.
The Commission estimates the
present discounted value of quantified
benefits over ten years, using a 2 percent
discount rate, will range between $6.1
and $49.3 billion. Annualized over 10
years, the Commission estimates the
quantified benefits will range between
$682.8 million and $5.5 billion per year.
The Commission estimates the present
discounted value of quantified costs
over ten years, using a 2 percent
discount rate, will range between $100.9
and $826.2 million. Annualized over ten
years, the Commission estimates the
quantified costs will range between
$11.2 and $92.0 million per year. These
estimates are presented in Table 1
below.
T ABLE 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
This section describes the beneficial
impacts of the Rule, provides
quantitative estimates where possible,
and describes benefits that are only
assessed qualitatively.
The quantifiable estimates reflect
benefits stemming from the decreased
amount of time and effort consumers
will need to expend cancelling
subscriptions, and in contexts where
data are available, welfare gains from
avoided expenditure for unwanted
subscriptions, under the final Rule
relative to marketers’ compliance with
the existing regulatory baseline. This
section first estimates per-consumer
savings from cancellation mechanisms
that would become at least as easy to
use as the mechanisms through which
consent to the negative option
transactions was given and then
estimates the number of cancellation
transactions to which those benefits
apply.
In addition to these quantified
benefits, there are several benefits we do
not quantify. First, marketers’
compliance with the final Rule is likely
to improve consumer confidence in
using subscriptions 538 and increase the
number of consumers who are willing to
subscribe and obtain the convenience,
and often cost savings, that
subscriptions can provide. Second,
research in economics and psychology
finds the perceived monetary and
psychological costs from switching
products or services can lead consumers
to make sub-optimal decisions. The
final Rule, by reducing these costs
through simpler cancellation methods,
may improve consumer decision-
making by reducing enrollments in
subscriptions that consumers do not
value and increasing enrollments in
subscriptions that they do value.539
Marketers’ compliance with the final
Rule, and the consumer confidence that
compliance inspires, may also ‘‘exert
additional competitive pressures on
businesses who offer subscription
contracts (and) could increase
productivity in the sector.’’ 540
Compliance with the final Rule may
also result in some allocative effects
when consumers can cancel online
instead of by telephone. In such cases,
consumers will be able to cancel
subscriptions at times of the day that
may be more convenient to them than
the hours that subscription sellers staff
their telephone lines and from devices
that they find more convenient to use
than telephones.541
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90520 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
savings to consumers, but we are unable to estimate
the frequency of such occurrences or the monetary
savings they would engender.
542 See Michelle Hawley and Shane O’Neill, ‘‘21
Important Call Center Statistics to Know About,’’
(Apr. 3, 2024), https://www.cmswire.com/contact-
center/16-important-call-center-statistics-to-know-
about. We use this proxy for the time a ROSCA-
compliant telephonic cancellation takes only for the
express purpose of estimating the incremental
benefits to consumers of a final Rule-compliant
cancellation replacing a ROSCA-compliant
telephonic cancellation. ‘‘Average handle time’’ has
not been used as a standard for ROSCA enforcement
and is not intended to set a standard here.
543 The Commission uses a mean hourly wage rate
of $31.48; see Bureau of Labor Statistics, ‘‘May 2023
National Occupational and Wage Estimates, Unites
States,’’ https://www.bls.gov/oes/current/oes_
nat.htm. A meta-analysis of studies on how
consumers value time used in traveling (an area in
which ‘‘a huge literature has arisen’’) has
determined that consumers value time used in that
matter at 82% of their wage rate. See Daniel S.
Hamermesh, ‘‘What’s to Know About Time Use?,’’
30 J. Econ. Surv. 1, 198–203 (2015). The
Commission assumes for the purpose of the final
Rule consumers value transaction costs savings in
the same way that they value travel time.
544 See Caroline Sinders, ‘‘How Companies Make
It Difficult to Unsubscribe,’’ https://pudding.cool/
2023/05/dark-patterns. Among the obstacles noted
for otherwise seemingly simple online cancellations
were that some websites did not use straight
forward terms, such as ‘‘unsubscribe’’ or ‘‘cancel,’’
and instead put the cancellation path under titles
such as ‘‘auto-renew’’ or ‘‘edit plan.’’
545 The researcher reported the aggregate time
expended to cancel all 16 subscriptions was 57
minutes and 31 seconds. Of the three subscriptions
that required telephonic cancellations, one call took
17 minutes and 36 seconds, one took seven
minutes, and the time to cancel the third one was
not reported (apart from explaining that it was
necessary to call three times due to the seller’s
‘‘technical difficulties’’). The Commission replaces
this missing value with the average handle time
found by Hawley/O’Neill (2024) of six minutes and
three seconds. The Commission therefore
subtracted 30 minutes and 39 seconds from the
aggregate cancellation time of 57 minutes and 31
seconds; measured in seconds, this becomes
3,451¥1,839 = 1,612. Dividing this result by 13
equals 124 seconds, or two minutes and 4 seconds.
The Commission notes this average cancellation
time, though relevant for this regulatory analysis,
has not been used as a standard for ROSCA
enforcement and is not intended to set a standard
here. Moreover, while we have calculated this
average, the study notes cancellation took under
one minute for three large sellers of digital
entertainment subscriptions. Last, the Commission
notes one commenter opined, ‘‘(f)or the most part,’’
companies offer convenient, no-hassle, cancellation
options that probably take about five clicks on
average, though the commenter did not indicate a
time duration. See Individual commenter, FTC–
2023–0033–0780.
Finally, the Commission’s estimates
of quantified benefits are based on
reductions in time and effort from
cancelling subscriptions to non-business
consumers. The Commission expects
small businesses may also benefit in
similar ways from less costly
cancellations, but it does not quantify
such benefits due to lack of data on
business cancellation transactions.
The following subsections then
estimate the quantified benefits from
reductions in time and effort from
cancelling subscriptions. First, in
subsection (1), the Commission
estimates the per-cancellation benefit
relative to the regulatory baseline for (i)
online cancellation when only ROSCA-
compliant telephonic cancellation was
available, (ii) simpler online
cancellation when only ROSCA-
compliant online cancellation was
available, (iii) simpler telephone
cancellation when only TSR-compliant
cancellation was available, and (iv)
online or telephone cancellation when
only in-person or mail cancellation was
available. The Commission then
estimates the number of cancellation
transactions in subsection (2), and
finally calculates benefits as the per-
cancellation benefit in each scenario
multiplied by the number of affected
transactions in subsection (3).
(1) Estimating Per-Cancellation Benefits
For each of the four scenarios below,
the Commission estimates a range of
benefits that a consumer will gain each
time they cancel a negative option
subscription. In these scenarios, the
Commission assumes a final Rule-
compliant online cancellation should
take no more than 30 seconds to one
minute, based on the Commission’s
experience that the average time for
consumers to read required disclosures
and provide consent to a negative
option plan online is 30 seconds to one
minute. For telephone cancellations
under the final Rule, the Commission
assumes that a rule-compliant
cancellation should take no more than
one to two minutes, based on the
assumption it takes a telemarketer twice
as long to read required disclosures to
a consumer as it would take a consumer
to read such disclosures to his or herself
online.
(a) Estimated Per-Cancellation Benefit
Relative to ROSCA-Compliant
Telephonic Cancellation
For consumers enrolling in negative
option plans online, the existing
regulatory baseline, ROSCA, requires
marketers to provide ‘‘simple’’
cancellation mechanisms. A facially
ROSCA-compliant, ‘‘simple’’ telephonic
cancellation may, nonetheless, require
more time and effort from consumers
than was expended when enrolling in
the negative option plan. Online
subscription sellers’ compliance with
the final Rule will save consumers that
extra measure of time and effort.
To estimate the average time savings
to consumers of a final Rule-compliant
‘‘click-to-cancel’’ mechanism compared
to a ROSCA-compliant simple
telephonic cancellation, this analysis
first assumes that ROSCA-compliant
simple telephonic cancellations take no
more time than the ‘‘average handle
time’’ for all customer service requests
made to call centers, which an industry
source indicates is six minutes and
three seconds.542 As discussed at the
beginning of this subsection, the
Commission assumes a final Rule-
compliant cancellation should take no
more than 30 seconds to one minute,
saving consumers between five minutes
and three seconds and five minutes and
33 seconds per cancellation relative to
a simple telephonic cancellation.
The Commission then assumes
consumers, on average, value their non-
work time at 82% of the mean hourly
wage of $31.48, or $25.81 (i.e., .82 ×
$31.48) per hour.543 Accordingly, the
Commission estimates the faster online
cancellations the final Rule will
provide, relative to ROSCA-compliant
telephonic cancellations, will be valued
at between $2.17 (i.e., 5:03 minutes ×
$25.81/hour) and $2.39 (i.e., 5:33
minutes × $25.81/hour).
(b) Estimated Per-Cancellation Benefit
Relative to ROSCA-Compliant Online
Cancellation
For online cancellations of online-
entered subscriptions, the Commission
lacks a source of average cancellation
times presumed to be ROSCA-compliant
that is as comprehensive as that used for
the average handle times of call centers.
The Commission relies, instead, on an
experiment that involved signing up for
16 online subscriptions between August
2 to October 4, 2022, then canceling
each one, and recording the time it took
to cancel, as well as the variety of other
obstacles faced in canceling.544 To
estimate the average time for online
cancellations, the Commission subtracts
the time incurred in canceling the three
subscriptions that required telephonic
cancellation from the aggregate time
reported to cancel all 16 subscriptions.
This yields an average of two minutes
and 4 seconds per online
cancellation. 545
Based on the Commission staff’s
experience, the average time needed to
read the required disclosures and
provide consent to a negative option
feature is 30 seconds to one minute. An
online cancellation that took no longer
than the provision of online consent
would therefore save the consumer
between one minute and four seconds
and one minute and 34 seconds.
Valuing consumers’ time at $25.81 per
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546 At the seller’s choice, an online cancellation
method may be through a website or via email.
547 IHRSA, The Global Health & Fitness
Association, commenting on behalf of itself and the
industry (see FTC–2023–0033–0863) claimed there
were clear distinctions between in-person, brick
and-mortar health and fitness businesses and online
subscription services, explaining a month-to-month
contract is a very different risk to consumers than
a long-term contract that begins after a free trial or
auto-renews without notice. IHRSA further claims
short-term (e.g., month-to-month) continuous
service agreements should be distinguished from
purely online subscription services targeted by the
rule. IHRSA further (mis-) characterizes the Rule as
appearing to be concerned with paid contracts that
initiate automatically after a free trial period or
auto-renew without notice after a long, pre-paid
initial term. IHRSA notes consumers with
membership agreements with firms in its industry
are on notice of the recurring cost because of the
monthly charge and have the option to cancel each
month under the terms of their contract. The
Commission disagrees with IHRSA’s
characterization of the Rule; the Rule is not
intended to exclusively, or even primarily, address
online subscription services or long-term contracts
that begin after a free trial or auto-renew without
notice, but to address all recurring charge plans
where the consumer’s silence or failure to cancel is
interpreted as consent to recurring charges.
Accordingly, consumer memberships with firms in
IHRSA’s industry where consumers have the option
to cancel each month squarely fit within the Rule’s
coverage of negative option plans.
548 Individual commenter, FTC–2023–0033–0233.
549 The International Carwash Association
(‘‘ICA’’), however, commented many of its 60,000
U.S. members offer carwash subscriptions that offer
a reduced price for carwashes to subscribers and
strengthen the relationship with customers and
reduce dependence on cash transactions for these
businesses. See FTC–2023–0033–1142. These
subscriptions may be purchased in person, on the
world wide web, via a mobile app, or at an
automated teller, which indicates at least some of
those subscriptions are covered by ROSCA. ICA
asserts cancellation through a means other than in
person may be burdensome to the generally small
businesses that operate carwashes. Id. Although
commenter Rocket Money, FTC–2023–0033–0998,
mentioned ‘‘car wash chains that require consumers
to visit a specific location to cancel their
membership as an example of draconian
cancellation requirements they experienced
working with consumers, no individual consumer
commenter mentioned difficulties with carwash
subscriptions. Because no consumer commenter
provided any other indication of the number of
carwash subscriptions purchased or the costs of
cancelling such subscriptions, even anecdotally,
they are excluded from the analysis. The estimate
of the consumer benefits that would flow from the
final Rule’s provision that an extra, remote,
cancellation mechanism be required of marketers
who currently offer only in person or mail
cancellation mechanisms may therefore be an
under-estimate of such benefits.
550 FTC–2023–0033–0863.
hour, as assumed above, the final Rule
would therefore save consumers who
enroll online and cancel online time
that they value at between $0.46 (i.e.,
1:04 seconds × $25.81/hour) and $0.67
(i.e., 1:34 minutes × $25.81/hour).
(c) Average Per-Cancellation Benefit
Relative to TSR-Compliant Cancellation
For consumers enrolling in negative
option plans via telemarketing, the
existing regulatory baseline is the TSR.
The TSR does not specify a performance
standard specific to negative option
cancellations. Although egregious
cancellation delays can be pleaded
against telemarketers under
§ 310.3(a)(1)(vii) (requiring disclosure of
all material terms and conditions of the
negative option feature) or
§ 310.3(a)(2)(ix) (prohibiting
misrepresentation directly or by
implication of any material aspect of a
negative option feature), the final Rule’s
requirement that the cancellation
mechanism be at least as easy to use as
the consent mechanism provides
cancellation-specificity to negative
options sold through telemarketing that
is lacking under the existing regulatory
baseline. Because telemarketers have
substantial discretion in designing and
implementing consent processes
specific to their programs, telemarketers
will have a clear benchmark for the
speed with which they must complete a
final Rule-compliant cancellation.
As described at the beginning of this
subsection, the Commission assumes it
takes telemarketers between one and
two minutes to read the required
disclosures to consumers and receive
their consent for enrollment in a
negative option plan. Using the same
average handle time measure of six
minutes and three seconds used a
previous scenario to proxy for baseline
time spent for a telephonic cancellation,
the Commission assumes the final Rule
will save consumers who consent to a
negative option sale via telemarketing,
and cancel in the same manner, between
four minutes and three seconds and five
minutes and three seconds. Evaluating
that time saving in the same manner as
above, compliance with the final Rule
results in a per-cancellation time saving
that is worth between $1.74 (i.e., 4:03
minutes × $25.81/hour) and $2.17 (i.e.,
5:03 minutes × $25.81/hour).
(d) Estimated Per-Cancellation Benefit
Related to In-Person Enrollments
Some sellers market negative option
plans in ways that are not covered by
ROSCA or the TSR. Those that involve
in-person enrollment and only offer in-
person or mail cancellation, in
particular, may be highly burdensome to
consumers. The final Rule requires
sellers who offer in-person enrollment
to offer at least one alternate
cancellation method that consumers
may use remotely, e.g., online 546 or via
telephone.
Providing consumers with an
alternative to in-person cancellations
will give consumers a faster route to
cancel a subscription and may also
spare some consumers from incurring
additional recurring charges which
might accrue during the pendency of a
slow cancellation mechanism, enabling
consumers to reallocate their spending
power in directions of greater utility,
resulting in allocative efficiencies.
Unlike negative option transactions
entered into online (ROSCA) or by
telephone (TSR), the Commission lacks
comprehensive experience with
negative option plans that require
cancellation in person or through the
mail. However, because many gym/
fitness center/health studio
memberships (hereafter, ‘‘gym
memberships’’) are sold via negative
options 547 and may require cancellation
via certified mail or in person
(sometimes even when consumers can
enroll online 548), the Commission
proxies the per-cancellation benefits of
an additional, remote, method of
cancellation by looking at those benefits
in the context of gym memberships.549
As noted in the comment submitted
by comment filed by IHRSA,550 The
Global Health & Fitness Association,
‘‘many (fitness club) operations allow
several options for agreement
termination through simple online
solutions including online account
management, email cancellation
requests, and specific online
cancellation buttons or forms’’ and
‘‘[m]any of these options are currently
available for members who have
purchased their membership either
online or in person.’’ IHRSA did not
quantify the share of their member
organizations that provide such
cancellation opportunities or the
number or share of consumer
cancellation transactions in which
online cancellation is available.
Accordingly, the Commission assumes
the low-end of the range of quantifiable
benefits to consumers who purchased
negative option plans in person, but
could currently cancel online is the
same as the same the low-end of the
range for consumers who purchased
negative option plans online and had
access to online cancellations: $0.46 per
cancellation.
Notwithstanding IHRSA’s assertion
that many fitness clubs offer online
cancellation, at least 25 individual
consumers submitted comments
attesting to the difficulties of canceling
gym memberships. Some wrote in
general terms of the difficulties
consumers experience in canceling such
memberships as something that
contributed to their support for the
Rule.
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551 Individual commenter, FTC–2023–0033–0780.
552 Individual commenter, FTC–2023–0033–0007.
553 Individual commenter, FTC–2023–0033–1046.
554 Individual commenter, FTC–2023–0033–0741.
555 Individual commenter, FTC–2023–0033–0233.
556 Individual commenter, FTC–2023–0033–1076.
557 Individual commenter, FTC–2023–0033–0510.
558 Individual commenter, FTC–2023–0033–0968.
559 Individual commenter, FTC–2023–0033–0387.
560 Individual commenter, FTC–2023–0033–0572.
561 Individual commenter, FTC–2023–0033–0299.
562 Individual commenter, FTC–2023–0033–1163.
563 Individual commenter, FTC–2023–0033–0545.
564 See Dana George, ‘‘This Is How Much the
Average American Really Spends on Gym
Memberships,’’ Jan. 7, 2024, https://www.fool.com/
the-ascent/personal-finance/articles/this-is-how-
much-the-average-american-really-spends-on-gym-
memberships. Because this report is from January
2024, the Commission assumes it measured gym
membership costs in 2023 dollars.
565 Note the avoided recurring payments
associated with delayed cancellations may overstate
the amount of consumer surplus gained attributable
to the final Rule if consumers continue to use their
gym membership during that period of delayed
cancellation. However, it is difficult to estimate the
extent to which that occurs due to lack of data. A
part of those gains may also be transfers of producer
surplus from firms to consumers.
566 Other cancellation methods gyms may
currently offer, such as in-person visits that succeed
in cancellation and cancellation via certified mail,
would fall in between these low/high endpoints, as
would the benefits to consumers if those methods
were augmented under the final Rule not with
online cancellations but with telephonic
cancellations.
• ‘‘What seems more troublesome
tend to be stuff like gym
memberships.’’ 551
• ‘‘I work dispute resolutions for a
bank. I see so many cases where
someone is trying to cancel something
like a gym membership and, while they
can sign up in person, they for some
reason have to mail a certified letter to
the companies (sic) home office.’’ 552
• ‘‘I have experienced so much
frustration ending memberships with
gyms, online subscriptions, etc. over
many years and welcome help in this
matter. So many friends I speak to share
similar stories of how they were roped
into paying for longer memberships and
subscriptions that they no longer
wanted.’’ 553
• ‘‘Many places, like [specific fitness
center chain], require you to go in
person to cancel—they won’t even let
you do it over the phone! This harms
anyone that may have trouble leaving
the house regularly, including disabled
folks and parents of small children and
those caring for older or ailing family
members, not to mention being horribly
inconvenient for everyone else.’’ 554
Many others conveyed personal
experiences with burdensome gym
membership cancellation. The
Commission relies upon these
comments to estimate the high-end of
the range of quantifiable benefits that
the final Rule will provide to consumers
who purchase negative option plans in-
person. Examples of these include:
• ‘‘I had to write a letter and
physically mail it to cancel a gym
membership I singed [sic] up for on an
iPad.’’ 555
• ‘‘Recently it took me three days and
several hours to cancel a gym
membership (that) had taken less than
20 minutes to join, on line [sic].’’ 556
• ‘‘I had to go in person 3 different
times because the manager wasn’t there
so [sic] to cancel it.’’ This consumer
attached a screen shot of the gym’s
cancellation policy, which read, in part,
‘‘There is no contract and you are free
to cancel your Direct Debit at any time.
If you do decide to cancel your
membership, you must allow at least 7
days before the fifth of the month to
ensure your payment is cancelled and
advise Reception of the cancellation.’’
Both ‘‘(a)t least 7 days before the fifth
of the month,’’ and the failure to specify
whether ‘‘7 days’’ is seven business days
or seven calendar days introduce
considerable uncertainty as to when,
precisely, the consumer must tender a
cancellation to avoid the next recurring
payment.557
• ‘‘Years ago, I had signed up for a
gym membership, and after a change in
job situation, was no longer able to
make use of it. Repeated attempts to
reach the gym membership department
and cancel my membership went
unheeded—a [sic] got a classic
runaround, and as often forwarded to
unattended phone numbers—and I kept
racking up monthly bills for a
membership I didn’t want . . . . It was
only through a personal relationship
with someone who worked in the
corporate office that I was finally able to
get past their automatic renewals and
effect a cancellation.’’ 558
• ‘‘We wanted to cancel the [gym]
membership, but when we called and
emailed, we were told we couldn’t
cancel that way. We had to send a
certified letter or go in person. We have
gone in person twice to try to cancel or
[sic] membership and it has been a
nightmare.’’ 559
• ‘‘Personally, I have been impacted
by my local gym’s undisclosed policies
and shady cancelation policies that have
costed me hundreds of dollars.’’ 560
• ‘‘They bill you monthly for your
gym membership but when you want to
cancel your membership that’s when the
problems arise. You cannot do it over
phone or on their website. You have to
go into the gym personally to cancel
said membership. Not only that I was
told that I’d have to go to the gym [home
gym] where I signed up in order to
cancel membership. I could only
imagine what this would be like had I
moved out of the state. Please help us
stop these practices.’’ 561
• ‘‘I am currently trying to cancel a
gym membership and have been
overwhelmed by how difficult it has
been . . . . I just called my gym . . .
and the pre-recorded automated
answering message literally says there is
no direct line to the gym! That’s
outrageous!!!’’ 562
• ‘‘My personal experience is with
my gym membership . . . . Getting out
of it was terrible, and I’d hate to see it
happen to anyone else.’’ 563
Based on these comments, the
Commission makes the simplifying
assumption that the worst gym
membership cancellation experiences
involve three failed attempts at
cancellation, each costing one hour of
time, and that, because of those
cancellation failures, three unwanted
monthly charges were processed. The
Commission assumes a fourth
cancellation attempt, also costing one
hour of time, succeeds in halting the
recurring payments.
As above, the Commission values
consumers’ time at $25.81/hour. The
typical gym membership costs between
$40 and $70 a month.564 The
Commission therefore assumes, at the
high-end, consumers incur gym
membership cancellation costs of
$313.25 (i.e., (4 × $25.81) + (3 × $70))
in the absence of this Rule.565 As stated
previously, the Commission assumes a
final Rule-compliant cancellation
should take no more one minute at the
high end, which has a value of
consumers’ non-market time of $0.43.
Then, to estimate the high-end avoided
burden that such consumers would
experience under the final Rule, the
Commission takes the difference
between the high-end cancellation costs
in the absence of this Rule ($313.25) and
the high-end final Rule-compliant
cancellation costs ($0.43), which
equates to $312.82. Accordingly, the
low-to-high range of benefits provided
by the final Rule to consumers who
purchase negative option plans in
person or through the mail ranges from
$0.46 to $312.78.566
(e) Summary of Per-Cancellation
Benefits
Table 2 presents a summary of the
per-cancellation benefit the Commission
estimates would result from this final
Rule. For subscriptions that are
currently cancelled over the phone but
would be cancelled online under this
final Rule, the Commission estimates
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567 Although this final Rule also benefits small
businesses that purchase negative option plans, the
Commission does not have sufficient data to
quantify those effects in this analysis.
568 See U.S. Census, ‘‘Demographic Turning
Points for the United States: Population Projections
for 2020 to 2060: Population Estimates and
Projections,’’ Feb. 2020, https://www.census.gov/
library/publications/2020/demo/p25-1144.html.
The Commission linearly extrapolated between the
report’s figures for the population over the age of
18 in 2020 and its estimates of the same population
in 2030 to estimate the number of consumers in
years 2025 through 2029. Similarly, the
Commission linearly extrapolated between the
report’s estimates of the over age 18 population in
2030 and 2040 to estimate the over age 18
population in the years 2031 through 2034.
569 See Julia Stoll, ‘‘SVOD service user shares in
the U.S. 2015–2023’’ (Sept. 7, 2023) (noting 83
percent of U.S. consumers used a subscription
video-on-demand service in 2023), https://
www.statista.com/statistics/318778/subscription-
based-video-streaming-services-usage-usa.
570 Bango, ‘‘Subscription Wars: Super Bundling
Awakens,’’ at 4 (2024) (based on data from 5,000
U.S. subscribers), https://bango.com/resources/
subscription-wars-super-bundling-awakens.
571 See Stripe, ‘‘Subscription churn 101: A
complete guide for businesses’’ (Jan. 23, 2024),
https://stripe.com/resources/more/subscription-
churn-101.
572 Id. (noting the choice often depends on your
business cycle and how often you want to assess
your performance).
573 Some consumers may welcome an
‘‘involuntary’’ cancellation of a subscription, and
other cancellations that payment processors
perceive as ‘‘involuntary’’ may reflect consumers’
deliberate cancellation of a credit card as a means
of escaping a subscription that was difficult to
cancel. The Commission’s analysis nonetheless uses
only the reported ‘‘voluntary’’ churn rate to avoid
the possibility of over-estimating the consumer
benefits of the final Rule.
574 Recurly, a subscription management platform
used across multiple industries, reports an overall
churn rate of 4.1% per month and parses this rate
into that arising from voluntary cancellations, 3%,
and involuntary cancellations, 1%, with,
presumably, 0.1% lost to rounding. Recurly
explains its methodology in producing these
estimates is based on a sample of over 1,200
subscription sites on the Recurly platform over 12
months (January to December 2023); its churn rates
are monthly, calculated by dividing the number of
subscribers who churn during the month by the
total number of subscribers and uses median, 25th,
and 75th percentile values to eliminate outliers and
provide a more accurate representation of the data
in its view. See Recurly, ‘‘What is a good churn
rate?,’’ https://recurly.com/research/churn-rate-
benchmarks. Other payment processors report
similar churn rates but provide fewer details on the
Continued
consumers would experience a benefit
of between $2.17 and $2.39 per
cancellation. For subscriptions that are
currently cancelled online and would
move to a simpler online cancellation
under this Rule, the Commission
estimates consumers would experience
a benefit of between $0.46 and $0.67 per
cancellation. For subscriptions that are
currently cancelled over the phone and
would move to a simpler telephone
cancellation under this Rule, the
Commission estimates consumers
would experience a benefit of between
$1.74 and $2.17 per cancellation. For
subscriptions enrolled in person that
would be required to provide online or
telephone cancellation under this Rule,
the Commission estimates consumers
would experience a benefit of between
$0.46 and $312.82 per cancellation.
T ABLE 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
Cancellation Transactions
(a) Baseline Number of Subscriptions
The Commission regards
‘‘consumers’’ for the purposes of this
analysis as the U.S. population over the
age of 18; 567 this is estimated to be 269
million in 2025,568 the first year in the
ten-year period over which the
Commission estimates the benefits and
costs of the final Rule (‘‘Year 1’’).
Because negative option sales are a
form of marketing of goods and services,
and not an industry or type of output,
and because no occupational category is
uniquely associated with negative
option marketing, no publicly produced
data source, such as the Economic
Census, tracks the use of negative option
marketing in the United States.
Accordingly, the Commission must look
to other data sources, to estimate the
number of subscription cancellations
and the channels through which
consumer consent was obtained and
cancellation mechanisms provided.
To estimate the aggregate number of
consumer cancellation transactions, the
Commission relies upon a credible
source that found that, as of mid-2023,
83% of American consumers had at
least one subscription.569 The
Commission assumes, for the purposes
of this analysis, that the percentage of
American consumers with at least one
subscription remains constant over ten
years. Accordingly, in Year 1 the
Commission assumes 223.27 million
consumers (i.e., .83 × 269 million) have
at least one subscription.
To estimate the total number of
subscriptions held by U.S. consumers
the Commission looks to data on the
average number of subscriptions per
subscriber. One source, relying upon a
large sample of U.S. consumers
conducted in late 2023 and early 2024,
reported, ‘‘[t]he average subscriber now
has 4.5 subscriptions.’’ 570 The
Commission therefore applies a
multiplier of 4.5 to the number of
consumers estimated to have at least
one subscription to estimate the
aggregate number of subscriptions held
by consumers in each year. Continuing
with the Year 1 example from above, the
Commission assumes the 223.27 million
U.S. consumers who have subscriptions
collectively hold 1,004,715
subscriptions (i.e., 223.27 million × 4.5).
The Commission acknowledges some
uncertainty in these estimates which
could lead to overestimation since
subscriptions may be held by
households of multiple individual
consumers or underestimation due to
potential growth in subscription-based
goods and services.
(b) Baseline Number of Cancellations
The Commission next considers how
many subscriptions consumers may
want to cancel. To do so, we look to
subscription ‘‘churn,’’ or cancellation,
rate data. Churn rates can reflect
intentional cancellations as when a
consumer completes a merchant’s
cancellation process, but can also reflect
involuntary or passive cancellations,
which occur when the payment
mechanism the consumer has on file
with the merchant is unable to be
processed by the merchant.571 Churn
rates may be calculated on a monthly,
quarterly, or annual basis,572 and some
rates do not disclose a time dimension;
mischaracterizing a monthly churn rate
as an annual churn rate could vastly
underestimate the volume of annual
cancellations.
One source reports an aggregate
measure of voluntary 573 churn of 3%
per month.574 The Commission assumes
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90524 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
data underlying their churn rate estimates or do not
distinguish voluntary from involuntary churn rates.
575 Because consumers may cancel a subscription
and then enroll in a different subscription (or even
re-enroll in a recently canceled subscription), the
Commission assumes average, aggregate, monthly
voluntary churn rates are additive across months
and that the number of consumers with
subscriptions do not ‘‘decay’’ at a rate of 3% per
month. Indeed, another report found one-quarter of
U.S. consumers cancelled a streaming video service
in the past 12 months and resubscribed to the same
service, with younger generations significantly
more likely to return. See Deloitte, Digital Media
Trends Survey: 16th Edition (2022), https://
www2.deloitte.com/us/en/insights/industry/
technology/digital-media-trends-consumption-
habits-survey/summary.html. The Deloitte report
also notes the average churn cancellation rate has
remained consistent since 2020 at about 37% across
all paid streaming video on demand services.
Similarly, a comment from NCTA, FTC–2023–
0073–0008, quotes Congressional testimony from
Consumer Reports that 36% of consumers who
subscribed to streaming services, switched and
resubscribed multiple times over a period of 12
months.
576 The Commission is aware a recent survey of
U.S. subscribers found 75% identified one
subscription as one they will never cancel or even
pause. See Bango (2024) at 8. The Commission
assumes no adjustment is needed to the reported
‘‘churn’’ rate in light of this finding as subscriptions
with such loyalty are already reflected in the
denominator of the reported churn rate.
577 See ‘‘28 Gym Membership Statistics: Average
Cost of Memberships,’’ Renew Bariatrics (Jan. 4,
2024), https://renewbariatrics.com/gym-
membership-statistics/.
578 See ‘‘Why Health Club Retention Requires a
Technology Solution,’’ IHRSA (May 20, 2019),
https://www.healthandfitness.org/improve-your-
club/why-health-club-retention-requires-a-
technology-solution/#:∼:text=
Acquiring%20a%20new%20customer
%20is%20five%20times,rates
%20by%205%%20increases%20profits
%20from%2025%%2D95%.
579 This tally does not include ongoing matters or
matters that obtained ‘‘fencing-in’’ relief
encompassing the sale of negative options without
expressly pleading complaint counts related to
cancellation mechanisms.
580 In many instances, ROSCA and TSR counts
were cross-pled as section 5 counts; in parsing
cancellation transactions by their enrollment
methods, we use ‘‘section 5’’ to refer to instances
in which neither ROSCA nor TSR violations were
pled.
581 For ease, the Commission includes in this tally
two negative option plans that enrolled consumers
via phone apps. Similarly, the Commission regards
matters involving online marketing of negative
options that were resolved before the passage of
ROSCA (and some others that were resolved after
the passage of ROSCA, but addressed online
this rate is constant from month to
month and from year to year and
therefore assume that the average
annual churn rate across all
subscriptions is 36%.575 This churn
rate, multiplied by the number of
subscriptions held by consumers each
year, provides the yearly estimate of
how many subscriptions are cancelled
by consumers.576 Continuing with the
Year 1 example from above, the
Commission therefore estimates 361.70
million cancellations (i.e.,.36 × 1,004.72
million) will occur in Year 1 of the
analysis and that this number will
increase to 384.82 million by Year 10.
Table 3 presents the number of
subscriptions and total number of
cancellations expected in each year.
TABLE 3—NUMBER OF SUBSCRIPTIONS
AND TOTAL CANCELLATIONS PER Y EAR
[In millions]
Year 	Subscriptions 	Cancellations
1 ................ 	1,004.72 	361.70
2 ................ 	1,012.48 	364.49
3 ................ 	1,020.25 	367.29
4 ................ 	1,028.02 	370.09
5 ................ 	1,035.79 	372.88
6 ................ 	1,043.56 	375.68
7 ................ 	1,049.91 	377.97
8 ................ 	1,056.26 	380.25
9 ................ 	1,062.61 	382.54
10 .............. 	1,068.96 	384.82
(c) Number of Cancellations by
Enrollment and Baseline Cancellation
Method
As discussed in the estimates of per-
cancellation benefits, the estimated per-
cancellation benefits stemming from the
final Rule depend on the regulatory
baseline cancellation methods relative
to those that would be made available
under the final Rule. To determine the
number of cancellations for which the
four categories of per-cancellation
benefits estimates would apply, the
Commission uses data on its
enforcement experience to determine
the share of cancellations likely to occur
through online and telephone methods.
For cancellations of subscriptions that
are enrolled in person, the Commission
uses data on gym membership
cancellations as a proxy.
(i) In-Person Subscriptions
As a proxy for the number of
subscriptions entered into in person, the
Commission uses a report from Renew
Bariatrics that claims 19 percent of the
U.S. population are members of gyms or
health clubs.577 The Commission
assumes gym members are uniformly
distributed by age and multiplies the
U.S. adult population by 19 percent to
estimate that 51.11 million adults will
have active gym membership
subscriptions when this final Rule goes
into effect. An IHRSA article from 2019
stated the average health club has an
annual attrition rate of 28.6 percent. 578
Interpreting this to mean 28.6 percent of
all adult gym members cancel their
memberships each year, the
Commission estimates 14.62 million
gym membership subscriptions will be
cancelled in the first year of this Rule.
In Year 10, the Commission estimates
15.55 million gym membership
subscriptions will be cancelled. The
Commission uses these estimates as a
proxy for the total number of
subscriptions that are entered into in
person and cancelled each year.
The Commission acknowledges
several limitations with this proxy. To
begin, there are likely many other types
of businesses, such as car washes, lawn
care, pest control, and personal care and
grooming establishments, that may offer
in-person subscription enrollment. To
the extent these subscriptions are not
included in the count, the estimates
may be understated. Further, the source
that states 19 percent of the population
are members of gyms does not specify
the age distribution of the gym
members. The Commission has assumed
children and adults are distributed
uniformly across that 19 percent;
however, if adults are more likely to
have gym memberships than children,
the estimates of gym memberships and
cancellations among adults will be
understated. On the other hand, gym
memberships are not always individual
memberships; multiple family members
may share a single-family membership.
In estimating the number of gym
memberships and cancellations, the
Commission has assumed each adult
gym member has their own
subscription, which may overestimate
the number of subscriptions and
cancellations.
(ii) Online and Telephone Subscriptions
The Commission assumes all
subscriptions that are not entered into
in person are instead entered into either
online or over the phone. Subtracting
the in-person subscription, as proxied
by gym membership cancellations, from
the total number of cancellations, the
Commission estimates 347.08 million
subscriptions entered into either online
or over the phone will be canceled in
the first year of this Rule. This number
would increase to 369.27 million
cancellations in Year 10.
To estimate the distribution of
cancellation methods for these
subscriptions that are entered into
online and over the phone, the
Commission reviewed matters it has
brought and resolved 579 in which
complaints specifically alleged negative
option cancellation mechanisms that
violated ROSCA, the TSR, or section
5. 580 The Commission found 54 matters
met these criteria.
Online 581 enrollment was possible in
42 of 54 matters that met the review
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90525	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
marketers’ conduct that occurred prior to the
passage of ROSCA), as ROSCA matters for the
purposes of assessing the incremental benefits of
the final Rule relative a regulatory baseline of
ROSCA’s simple cancellation mechanism.
582 In a few of these matters, online cancellation
was offered in addition to telephonic cancellation,
and to simplify the analysis, the Commission
attributed half to the measure of telephonic
cancellations and half to the measure of online
cancellations. In a few other instances the
Commission’s designation of ‘‘online’’ cancellation
includes cancellation by email or within the
marketer’s app.
583 In contrast, other evidence indicated that
81.25% of U.S. online marketers offered online
cancellation. See, e.g., Sinders (2023). Different
research looked at nine U.S. news media publishers
that sold subscriptions online. When two
‘‘personas’’ created by the researchers subscribed to
each of the nine publications, and then attempted
to cancel, 17 of the 18 subscriptions could be
canceled online; one publication permitted only the
California resident persona to cancel online and
offered only telephonic cancellation to the persona
posing as a Texas resident. See Ashley Sheil, et al.,
‘‘Staying at the Roach Motel: Cross-Country
Analysis of Manipulative Subscription and
Cancellation Flows,’’ in Mueller, F.F. (ed.), CHI ‘24:
Proceedings of the CHI Conference on Human
Factors in Computing Systems (May 11–16, 2024),
https://repository.ubn.ru.nl/handle/2066/30690.
584 In some of the 36 matters, no cancellation
method was disclosed by the seller, and in a few
other matters consumers were required to return
merchandise through the mail to prevent a free trial
from rolling over into a subscription or to obtain a
refund for merchandise that was shipped to a
consumer, and for which the consumer was
charged. Such instances generally occurred before
the passage of ROSCA, and it is highly unlikely that
an online marketer who offered only a mailed-in
cancellation could be in compliance with ROSCA’s
requirement that cancellation mechanisms be
‘‘simple.’’ Without loss of generality, the
Commission therefore treats instances in which
online cancellation was not offered as instances in
which only telephonic cancellation was offered to
consumers.
585 Some required the return of merchandise
through the mail if consumers wanted refunds. In
two matters, no cancellation mechanism was
revealed. Without loss of generality, we assume that
cancellation could take place telephonically.
criteria. In the remaining 12 matters,
enrollment occurred over the phone.
Among the 42 matters in which online
enrollment was possible, only six firms
offered online 582 cancellation, 583 and
the remaining 36 firms offered only
telephonic cancellation.584 Among the
12 matters in which enrollment
occurred over the telephone; none of the
firms offered online cancellation,
therefore, the Commission treats these
12 matters as if only telephone
cancellation was available.585 To
summarize, the Commission finds that,
among subscriptions that are entered
into online and over the phone, 66.7
percent (i.e., 36/54) offered online
enrollment and only telephone
cancellation, 11.1 percent (i.e., 6/54)
offered online enrollment and online
cancellation, and 22.2 percent (i.e., 12/
54) offered telephone enrollment and
telephone cancellation. Extrapolating
the baseline cancellation methods from
enforcement matters may weight the
online enrollment/telephone
cancellation subscriptions and the
telephone enrollment/telephone
cancellation subscriptions more heavily
than is currently experienced in the
market. It also assumes that there are no
subscriptions offered in the baseline
with cancellation methods that are
already compliant with the provisions
of this Rule. The Commission explores
the impacts of these limitations in a
sensitivity analysis in section (d).
Multiplying the distribution of
cancellation methods for subscriptions
entered into online and over the phone
by the total number of cancellations of
online and telephone subscriptions, the
Commission estimates the annual
number of cancellations that fall into
each of these categories. In Year 1, the
Commission estimates that, in the
absence of this final Rule, there would
be 231.39 million cancellations by
telephone of subscriptions entered into
online, 38.56 million online
cancellations of subscriptions entered
into online, and 77.13 million telephone
cancellations of subscriptions entered
into over the phone.
(iii) Summary of Subscription
Cancellations by Enrollment and
Baseline Cancellation Method
Table 4 provides the number of
subscription cancellations each year
distributed across the four enrollment
and regulatory baseline cancellation
method categories: online enrollment
and telephone cancellation; online
enrollment and online cancellation;
telephone enrollment and telephone
cancellation; and in-person enrollment.
TABLE 4—CANCELLATIONS BY ENROLLMENT AND B ASELINE CANCELLATION METHOD
[In millions]
Year
Online
enrollment,
telephone
cancellation
Online
enrollment,
online
cancellation
Telephone
enrollment,
telephone
cancellation
In-person
enrollment
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
To estimate total benefits from this
final Rule, the Commission first matches
the enrollment and baseline
cancellation method categories from the
previous section to the four scenarios
used to estimate the per-cancellation
benefit. The Commission assumes that,
under this final Rule, subscriptions
enrolled online and cancelled over the
phone in the baseline would move to
online cancellations; subscriptions
enrolled online and cancelled online
would move to simpler online
cancellation; subscriptions enrolled
over the phone and cancelled over the
phone would move to simpler telephone
cancellation; and subscriptions enrolled
in person would allow online or phone
cancellation.
Next, the Commission multiplies the
number of cancellations in each
baseline category by the matched per-
cancellation benefit on the low- and the
high-end and then sums across all four
categories to obtain total benefits each
year. Those totals are presented in Table
5. In the first year following
implementation of the final Rule, the
Commission estimates the benefits will
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90526 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
586 For example, NCTA, FTC–2023–0073–0008,
indicated some major cable operators estimate it
could cost $12–$25 million per company and take
2–3 years to rebuild their systems and one of its
members thought annual costs could be 15–20% of
the implementation costs (an industry rule of
thumb). This comment does not itemize costs across
different elements of the specific rules adopted.
Additionally, estimates of the annual costs of
maintaining systems may be blanket costs that
include a host of programming maintenance
features that are unrelated to the specific
disclosures and ‘‘click to cancel’’ features of the
final Rule. Moreover, NCTA’s comment indicated
customers of top cable operators enrolled over the
phone (43%), online (30%), and in person (24%)
and calls to customer service are answered within
30 seconds and lines are available 24 hours a day,
7 days a week. Accordingly, no extra compliance
steps may be necessary with respect to offering final
Rule-compliant cancellations for enrollments made
by telephone, and compliance with the final Rule’s
requirement that firms offer an extra cancellation
mechanism for in-person enrollments likely could
be met through reliance on these firms’ existing
telephonic cancellation capabilities. Accordingly,
the provision of an online cancellation mechanism
will be required only for the 43% of their
consumers who presently enroll online, and NCTA
has not provided estimates of compliance costs that
are specifically tailored to that segment of their
consumer base. Because NCTA members who enroll
consumers online already, clearly, have websites,
the Commission rejects the notion that adding
‘‘click to cancel’’ functionality to websites that
already include an order path for enrolling, and
likely also include functionality for registering a
payment mechanism for automated billing, would
cost $12–$25 million, particularly in light of
NCTA’s discussion of compliance with the 2019
Television Viewer Protection Act (‘‘TVPA’’) which,
NCTA claims, already regulates the very same
practices the FTC is attempting to regulate here.
NCTA further claims major cable operators estimate
that it cost approximately $2.5 to 4 million per
company and took about one year for TVPA
compliance. However, having already incurred the
costs to comply with ‘‘the very same practices’’ the
final Rule addresses in the course of complying
with the TVPA, there would appear to be no
incremental costs to comply with the final Rule.
Therefore, because the final Rule is narrower in
scope than as proposed in the NPRM and because
it offers firms the opportunity to apply to be
excluded, the Commission rejects NCTA’s claim
compliance with the Rule would be multiples of
TVPA compliance costs and require building online
cancellation systems virtually from the ground up
and expensive ongoing recordkeeping requirements
across all services. Accordingly, the Commission
does not include in the estimates of compliance
costs the aggregate, non-specific, and possibly
idiosyncratic compliance costs NCTA cites.
Similarly, an expert’s survey submitted by IAB
(attachment B to FTC–2024–0001–0010) found only
six respondents (out of more than 100,000
companies subject to the proposed Rule) indicated
the annual cost of compliance would be a total of
$50 million, but provided no itemization of these
costs, such that they cannot be disaggregated to
comport with the narrower scope of the final Rule.
587 For example, an expert report (Christopher
Carrigan and Scott Walster, FTC–2024–0001–0026)
filed by IAB concluded the effects of the proposed
Rule, if finalized, on the U.S. economy would
surpass $100 million annually. The Commission
agrees with this conclusion. The Commission
disagrees, however, with both the initial and on-
going compliance costs used by Carrigan-Walster;
both were liberally based on replicating
assumptions made in the preliminary regulatory
analysis in the NPRM. Further, their assumptions
are inappropriate to this cost analysis because they
fail to account for the fact firms subject to the final
Rule, unlike firms subject to the proposed Unfair or
Deceptive Fees Rule, are already required to
provide clear and conspicuous disclosures of all
material facts relating to the sale of negative option
contracts under the totality of ROSCA, the TSR, and
section 5 of the FTC Act, and to provide simple
cancellation mechanisms under ROSCA for those
firms covered by ROSCA. In addition, firms subject
to the final Rule are also required to comply with
a variety of other laws relating to negative option
sales, including the current Prenotification Rule,
EFTA, the Unordered Merchandise Statute,
numerous State laws, various laws and regulations
that effect specific industries, such as the
Television Viewer Protection Act of 2019 (TVPA),
other FCC regulations, and, for multi-national
entities, various foreign laws. Accordingly, the
units of specialized labor, e.g., lawyer, web
developer, and business analyst time, that Carrigan-
Walster adopt from the Unfair or Deceptive Fees
NPRM are not valid representations of the usage of
such inputs that are incremental to compliance
range between $661.52 million and
$5.32 billion. In Year 10, the
Commission estimates the benefits will
range between $703.82 million and
$5.66 billion. Using a 2 percent discount
rate, the Commission estimates the
present discounted value of benefits
over 10 years to range between $6.13
and $49.32 billion. Annualized over 10
years using a 2 percent discount rate,
the Commission estimates the benefits
to range between $682.83 million and
$5.49 billion per year.
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
This section describes the costs
associated with firms coming into
compliance with the final Rule,
provides quantitative estimates where
possible, and describes costs that are
only assessed qualitatively. Whereas
benefits were estimated based on
cancellation transactions, compliance
costs are estimated on the basis of firms
covered by the final Rule. The
Commission first examines the
comment record on compliance costs
and then estimates the compliance costs
for the initial year and subsequent nine
years following implementation of the
final Rule.
(1) The Comment Record
The comment record has not provided
specific data useful to the estimation of
the costs of compliance with the
disclosure, cancellation, and
recordkeeping requirements of the final
Rule.
Some industry commenters addressed
compliance costs by providing broad,
aggregate, conclusory cost estimates;
because those costs were not itemized
by specific features of the Rule as
proposed in the NPRM, the Commission
is unable to use those comments to
estimate compliance costs relevant to
the substantially narrowed scope of the
final Rule in comparison to the Rule
proposed in the NPRM.586 The same is
generally true of testimony and expert
reports submitted in conjunction with
the informal hearing. Those materials
did not focus on providing specific,
relevant, data that would permit
estimating compliance costs of the final
Rule. 587
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90527	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
with the final Rule relative to its existing regulatory
baseline.
588 See IFA, FTC–2024–0001–0001.
589 IFA provided an extreme example relevant to
what it identified as a preventative healthcare
franchise system without disclosing how many
individual firms belonged to that system. In the
context of that system, IFA stated it would take
thousands of hours to access if modifications are
necessary to existing contracts, marketing, and
operational processes and implement any
requirements, costing hundreds of thousands of
dollars. IFA did not, however, provide detailed,
itemized, estimates of compliance costs that relate
to the specific features of the final Rule, which has
been substantially streamlined relative to what was
proposed in the NPRM, making IFA’s highly
aggregated notion of compliance costs for one
particular group system’ inapplicable to the current
cost analysis. The same lack of specificity is present
in IFA’s discussion of ‘‘Fitness franchise systems.’’
With somewhat greater specificity, IFA estimates
costs to comply with disclosure and recordkeeping
requirements are 24 hours annually, but IFA did not
disclose what type of labor inputs are involved in
those tasks nor the number of fitness facilities that
will incur these costs. Moreover, IFA reveals its
members estimate the impact to member lifetime
value will exceed $100,000 per fitness center and
lost revenue is expected to be nearly $40,000
annually per fitness center, but these figures cannot
properly be considered compliance costs as they
may, in fact, represent benefits consumers receive
from speedier exits from fitness club memberships
that are no longer wanted by consumers.
590 Some of its members may offer yearly
contracts that do not auto-renew, but that apportion
payments over 12 months for the convenience of
consumers. Such contracts are installment plans,
and not negative option plans. Others may conduct
business on a pay-as-you-go basis.
591 As explained in the NPRM, this estimate is
based primarily on data from the U.S. Census North
American Industry Classification System (NAICS)
for firms and establishments in industry categories
wherein some sellers offer free trials, automatic
renewal, prenotification plans, and continuity
plans. Based on NAICS information as well as
Commission staff’s own research and industry
knowledge, the Commission identified an estimated
total of 530,000 firms involved in such industries.
However, the Commission estimates only a fraction
of the total firms in these industry categories offer
negative option features to consumers. For example,
few grocery stores and clothing retailers, which
account for approximately a third of the of the total
estimate from all industry categories, are likely to
regularly offer negative option features. In addition,
some entities included in the total may be exempt
from the Commission’s authority. Accordingly, the
Commission estimates approximately 106,000
business entities (20%) offer negative option
features to consumers. See 88 FR 24733. Although
no commenter proposed a different number, ETA,
FTC–2023–0033–1004, challenged the
Commission’s estimated number of firms selling
negative option plans on the basis that it did not
account for ‘‘the many providers of goods and
services to business where automatic renewal
clauses are used.’’
592 See U.K. ‘‘Impact Assessment’’ (2023) at 26.
While the U.K.’s rule may not be directly analogous
to the final Rule, it addresses similar problems
associated with consent and cancellation associated
with negative option practices. Therefore, the
burden the U.K.’s rule places upon subscription
sellers, in terms of executive and staff resources to
read and understand the rule and assess whether
existing procedures are in compliance or need to be
revised, may be highly similar to the familiarization
steps that U.S. businesses will need to undertake.
593 The mean hourly wage for lawyers in 2023
was $84.84; see Bureau of Labor Statistics,
‘‘Occupational Employment and Wages, May 2023,
23–1011 Lawyers,’’ https://www.bls.gov/oes/
current/oes231011.htm.
594 The Commission uses a mean hourly wage for
sales personnel of $25.62; see Bureau of Labor
Statistics, ‘‘Occupational Employment and Wages,
May 2023, 41–0000 Sales and Related Occupations
(Major Group),’’ https://www.bls.gov/oes/currenT/
oes410000.htm. The Commission uses a mean
hourly wage for clerical workers of $20.94, see
Bureau of Labor Statistics, ‘‘Occupational
Employment and Wages, May 2023, 43–9061 Office
Clerks, General,’’ https://www.bls.gov/oes/currenT/
oes439061.htm. The average of these two mean
wage rates is $23.27.
Another commenter addressed the
Paperwork Reduction Act cost estimate
in the NPRM in a way that conflated it
with the totality of compliance costs.
IFA, which represents firms, including
small firms, in the fitness, preventative
healthcare, personal wellness or
children’s extracurricular activities
industries, commented, ‘‘the FTC’s
estimate (in the NPRM) that it will cost
companies merely three hours annually
at $22.15/hr to comply is grossly
understated for IFA’s members.’’ 588 The
Commission agrees the final Rule’s
compliance costs will exceed the
Paperwork Reduction Act costs
discussed in the NPRM because the
Paperwork Reduction Act costs only
include burden associated with
information collection requirements,
such as recordkeeping and disclosure
costs, while the total compliance costs
include those costs as well as costs of
familiarization with the Rule and costs
to bring cancellation mechanisms into
compliance. IFA did not, however,
provide a sufficiently detailed
alternative estimate of annual or
ongoing general compliance or
recordkeeping costs for its members.589
Similarly, IFA provided no information
on the enrollment mechanisms used by
its members nor an estimate of what
share of its members offer negative
option plans.590
IFA did, however, comment that
many of its members already offer
consumers the ability to pause or
‘‘freeze’’ memberships, noting,
‘‘consumers take advantage of
alternatives to membership cancellation
at rates of 10% to 40%, with many
consumers electing to reactivate their
memberships, saving thousands of
dollars annually in increased
membership rates and additional
initiation fees.’’ While pause/freeze
capabilities are indeed beneficial to
consumers, they do not relieve a firm
from an obligation to offer a cancellation
mechanism. IFA did not provide similar
data on what percentage of its member
firms’ consumers are dissatisfied with
pause/freeze opportunities and seek
authentic cancellations or what
cancellation mechanisms its member
firms make available to consumers.
The technological capability to pause
or freeze subscriptions suggests the
presence of software architecture
‘‘scaffolding’’ upon which a cancellation
mechanism could be built at a modest
incremental cost. Alternatively, the
offering of subscription pauses or
freezes by some IFA members may
suggest those members use the services
of third-party e-commerce hosting
platforms or payment processors who
routinely provide consumer
subscription account management tools
relied on by businesses, including small
businesses. As discussed, below,
existing software scaffolding and the
utilization of third-party consumer
subscription management tools can
facilitate low- (and even no-) cost
compliance with some of the final
Rule’s requirements.
(2) Initial Compliance Costs
The Commission has previously
estimated that 106,000 firms offer
negative option plans. 591 The
Commission assumes that to come into
compliance with the final Rule, all
106,000 firms selling negative option
plans will need to expend some
resources to familiarize themselves with
the final Rule and some firms will incur
costs related to improvements in their
pre-consent disclosures and
cancellation mechanisms.
Familiarization costs: No commenters
presented estimates expressly related to
the costs of legal and managerial review
of the final Rule and front-line staff
training needed to come into
compliance. The U.K. ‘‘Impact
Assessment,’’ using surveys and
interviews with managers of firms that
sold goods and services via negative
options, found that firms would need
between four and 16 hours of ‘‘senior
staff’’ time, depending upon the size of
the firm, to gain familiarization with
their proposed rule, and between zero
and 80 hours of ‘‘service staff’’ time,
again depending upon the size of the
firm. 592 The Commission assumes that
similarities between American and
British firms are such that the same
units of time are relevant for American
firms to gain familiarity with the final
Rule. In the American context, the
Commission assumes ‘‘senior staff time’’
is proxied by ‘‘attorney time,’’ and uses
the mean hourly wage for attorneys,
$84.84 per hour, to estimate those
costs.593 Similarly, the Commission
assumes ‘‘service staff time’’ is proxied
by the average of mean wages for
salespersons and clerical workers,
which is $23.27.594 Accordingly, the
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90528 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
595 The final Rule requires disclosure of: the fact
consumers will be charged; the amount(s) they will
be charged; when the consumer must act (by
deadline or frequency) to prevent or stop charges;
and the information needed for the consumer to
find the simple cancellation mechanism.
596 See Bureau of Labor Statistics, ‘‘Occupational
Employment and Wages, May 2023, 15–1254 Web
Developers,’’ https://www.bls.gov/oes/2023/may/
oes151254.htm.
597 This is consistent with the approach taken in
the expert report submitted by IAB. See Carrigan-
Walster, FTC–2024–0001–0026 (noting many firms
using negative option marketing present offers
through the internet and, for firms presenting offers
through other means, web developer time is used
as a proxy for worker time to create the presentation
of the offers).
598 The assumed range of one to 10 hours is
consistent with the time estimate used for
compliance checks and minor modifications of
websites in the Unfair or Deceptive Fees NPRM. See
88 FR 77420 (Nov. 9, 2023).
599 Trade association commenters who addressed
cancellation mechanisms used by their members,
and whether those mechanisms were or were not
symmetric with enrollment mechanism or as easy
to use as enrollment mechanisms did so only in a
very general manner. For example, NCTA (FTC–
2024–0001–0011) commented that, in 2021 and
2022, customers of top cable operators enrolled over
the phone (43%), online (30%), and in person
(24%)’’ but provided no information on available
cancellation mechanisms. Additionally, NCTA
stated its analysis shows complaints received about
cancellation are very limited (approximately
0.017% of cancellations) out of the approximately
14 million customers who cancelled some or all of
their services from NCTA’s largest cable operator
members in 2022. Anecdotes such as these, about
‘‘top’’ or ‘‘largest’’ companies do not provide
sufficiently reliable data for the instant analysis.
Similarly, IHRSA’s comment about ‘‘many’’ fitness
club operations allowing options to cancel by
simple online solutions is not specific enough to be
helpful (see FTC–2023–0033–0863).
600 See Sinders (2023).
601 The Commission located subscriber estimates
for seven (Amazon, Ancestry, Hulu, Netflix,
Paramount+, The Boston Globe, and The New York
Times) of the 16 firms included in the research. The
number of U.S. subscribers to Amazon Prime is
estimated to reach 171.8 million in 2024. See
https://www.yaguara.co/amazon-prime-statistics.
At year-end 2023, Ancestry.com had over 3 million
subscribers. See https://www.ancestry.com/
corporate/newsroom/press-releases/ancestry-
releases-2023-annual-impact-report--underscoring-
corpor. As of the second quarter of 2024, Hulu had
50.2 million paid U.S. subscribers. See https://
www.statista.com/statistics/258014/number-of-
hulus-paying-subscribers). Also as of the second
quarter of 2024, Netflix had 84.11 million
subscribers in the U.S. and Canada. See https://
www.statista.com/statistics/483112/netflix-
subscribers. Even if the Commission makes the
extreme assumption that every Canadian held a
Netflix subscription, that would still leave
approximately 50 million U.S. subscribers.
Paramount+ had over 71 million subscribers as of
the first quarter of 2024. See https://
www.theverge.com/2024/4/29/24144766/
paramount-plus-now-has-over-71-million-
subscribers). The Boston Globe had 260,000 (mostly
digital) subscribers in 2023. See https://
pressgazette.co.uk/north-america/us-local-news-
Commission estimates the aggregate
initial year familiarization costs as
ranging between $35.97 million and
$341.22 million.
Disclosures: Clear and conspicuous
disclosures are already required by the
existing regulatory baseline;
§ 425.4(a)(1)–(4) of the final Rule adds
specificity to those disclosures, albeit in
a flexible way. 595 As estimated below,
the Commission assumes some
marketers are already in compliance
with the disclosure requirements of the
final Rule; for these marketers, there are
no incremental costs of compliance with
the disclosure requirements of the final
Rule.
For online marketers, the current
regulatory baseline is ROSCA, which
requires marketers to clearly and
conspicuously disclose all material
terms of the transaction before obtaining
the consumer’s billing information. To
the extent ROSCA-covered marketers’
current disclosures lack the specificity
required by the final Rule, the
Commission estimates changes will be
needed only to textual elements of such
marketers’ websites and that no changes
to the underlying website architecture
will be needed. The Commission further
assumes any such changes, if needed,
will be made by website developers,
whose mean hourly wage is $45.95.596
Similarly, some telemarketers and in-
person negative option marketers may
need to modify their sales agents’ scripts
to incorporate the disclosures required
by the final Rule. Without loss of
generality, the Commission assumes the
mean wage rates of marketers’ staff who
will make such script changes is
proxied by the mean wage rates of web
developers. 597 Although in the
Commission’s experience these changes
should take very little time, perhaps as
little as one hour, the Commission
adopts a range of one to 10 hours to
complete this task.598
Accordingly, the Commission
estimates that for those marketers whose
disclosures are not already in
compliance with the requirements of the
final Rule, disclosure compliance costs
will range between $45.95 and $459.50.
Cancellation mechanisms: Section
425.6 of the final Rule requires negative
option marketers to provide a simple
cancellation mechanism that is in the
same medium, and at least as simple for
the consumer to use, as the mechanism
by which the consumer provided
consent to the negative option plan.
Additional requirements are medium-
specific. For example, when consent is
provided through an interactive
electronic medium, the cancellation
mechanism (also provided through an
interactive electronic medium) must be
easy for the consumer to find when the
consumer seeks cancellation
information (for example, on a website,
the cancellation mechanism cannot be
hidden in ‘‘terms and conditions’’ or
otherwise difficult to find) and cannot
require interactions with live or virtual
representatives (such as chatbots) if no
such interactions were required when
the consumer consented.
When consent is provided over the
telephone, the final Rule requires that
telephonic cancellation must be
available during normal business hours
and not be more costly for the consumer
to use than the telephone call the
consumer used to consent to the
negative option feature.
When consumer consent to a negative
option plan is provided via an in-person
method, the marketer must offer
cancellation opportunities, where
practical, in a like manner. In addition,
the marketer must offer an alternative
simple cancellation mechanism through
an interactive electronic medium or by
providing a telephone number that
satisfies all final Rule requirements
related to use of those cancellation
media.
The costs negative option sellers will
incur in the initial year following
implementation of the final Rule to
bring their cancellation mechanisms
into compliance with the final Rule will
depend upon their pre-existing
cancellation mechanisms. No
commenter provided research or data on
the frequency of use of different
cancellation mechanisms across
negative option marketers or on the
incremental costs to make the existing
cancellation mechanism compliant with
the requirements of the final Rule.599
Because the comment record has not
provided sufficient data to estimate the
costs of compliance with the final Rule’s
cancellation requirements, the
Commission turns to data from the
U.K.’s ‘‘Impact Assessment’’ on
regulating subscriptions there. Based on
these sources, the Commission finds
some sellers of negative option plans are
already in compliance with the
cancellation requirements of the final
Rule, and many others will incur only
minimal costs to make their cancellation
flows compliant with the final Rule.
The relevant experimental research
looked at the cancellation practices of
16 online subscription sellers, many of
them large and well-known firms, and
noted the cancellation mechanisms
made available to consumers and how
easy those mechanisms were for
consumers to locate and use.600
Although the number of firms sampled
in this research was small, publicly
available data on total enrollments,
located for just seven of the 16 firms,
collectively numbered over 350
million,601 which may lend significance
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90529	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
subscribers-ranking. As of mid-year 2024, the New
York Times had 10.8 million subscribers. See
https://www.nytimes.com/2024/08/07/business/
media/new-york-times-earnings.html. The
Commission was unable to locate subscriber data
for some of the other firms sampled (e.g., Savage
Fenty, Daily Harvest, Deliveroo) and in some other
instances found subscriber data reported only on a
global basis (e.g., Google One, Adobe).
602 In the researcher’s view, this kind of naming
is confusing and adds unnecessary friction to the
cancellation process. See Sinders (2023). 	603 U.K. ‘‘Impact Assessment’’ (2023) at 26.
604 U.K. ‘‘Impact Assessment’’ (2023) at 27 (citing
a report from 2022).
605 See Bureau of Labor Statistics, ‘‘CPI Inflation
Calculator,’’ https://www.bls.gov/data/inflation_
calculator.htm. We note that this amount is equal
to 10.25 hours of computer programmer time valued
at a mean hourly wage rate of $51.90; see Bureau
of Labor Statistics, ‘‘Occupational Employment and
Wages, May 2023, 15–1251 Computer
Programmers,’’ https://www.bls.gov/oes/current/
oes151251.htm. As such, this is consistent with the
outcome of the approach used by Carrigan-Walster,
FTC–2024–0001–0026, in proxying the first-year
costs of compliance costs with each of the six
provisions of the Rule proposed in the NPRM
(which differed, substantially, from the narrowed
final Rule, although not with respect to ‘‘click to
cancel’’ provisions). That approach made the ad hoc
assumption that technological changes required by
the Rule would require the same labor inputs as
similar requirements in the NPRM for the FTC’s
Rule on Unfair or Deceptive Fees, notwithstanding
the two rules differ substantially in their regulatory
baselines. See 88 FR 77420.
606 To the extent that a marketer uses the easy
subscription account management and cancellation
tools offered by hosting platforms or payment
processors and the presence of such tools reduces
consumers’ perception of the risks of entering into
a subscription agreement with the marketer, the
marketer’s sales may increase along with any
payments to the platform or processor that are
based on the number of transactions or aggregate
sales.
607 See, for example, Shopify’s help page at
https://help.shopify.com/en/manual/products/
purchase-options/shopify-subscriptions/customer-
experience#subscription-management-for-
customers, ‘‘Shopify Subscriptions displays
subscription information to customers in the
checkout. For example, when buying a subscription
product, the order frequency and discount amount
for the subscription is displayed in the order
summary . . . . During checkout, your customer
needs to agree to the cancellation policy terms to
confirm that they understand they’re purchasing a
subscription. They can’t complete their purchase
without agreeing to this policy . . . . Customers
can log in to their customer account to view and
manage their subscription orders. Customers can
resume, skip, and cancel their subscriptions, and
manage their payment methods and shipping
address.’’ Moreover, Shopify offers a variety of
consumer subscription management tools to
merchants that use Shopify for payment processing
(‘‘checkout’’) or website hosting at no incremental
cost to merchants See https://apps.shopify.com/
categories/selling-products-purchase-options-
subscriptions. The fees Shopify charges merchants
varies with a number of merchant-specific features,
including website design elements, whether
merchants want ‘‘Shopify checkout’’ to work on
Continued
to this research beyond what might
otherwise be associated with a sample
size of 16 firms. Moreover, the
methodology of the study suggests that
the researcher’s experiences with
enrollment and cancellation likely
would be typical of any consumer
undertaking the same enrollment and
cancellation tasks with those firms.
The experimental research found that
18.75% (i.e., 100 × 3/16) of the online
marketers studied offered online
cancellations in a straightforward, easy
to use manner such that it took the
researcher less than one minute to
complete a subscription cancellation.
The Commission therefore assumes that
18.75% of online sellers of negative
option plans will not need to change
their websites to come into compliance
with the cancellation requirements of
the final Rule. Although this research
did not specifically measure the
adequacy of pre-consent disclosures, the
Commission assumes that companies
who make cancellation so easy for
consumers perform equally well in
making disclosures. Accordingly, the
Commission assumes that the 18.75% of
online firms selling negative options
that will not incur incremental costs to
comply with the final Rule’s
cancellation requirements also will not
incur any incremental costs to comply
with the final Rule’s disclosure
requirements. The Commission assumes
that the remaining 81.25% of online
negative option sellers that lacked such
easy-to-use cancellation mechanisms
also performed less well in making the
disclosures required by the final Rule,
such that they would incur initial year
compliance costs of improving their
disclosures as indicated by the range
estimated above.
The same research found that 62.5%
(i.e., 100 × 10/16) of sampled online
negative option sellers had cancellation
paths that took longer for consumers to
complete as a result of nomenclature,
not website architecture. These sites,
rather than using straightforward terms
such as ‘‘unsubscribe’’ or ‘‘cancel,’’ put
the cancellation path under titles such
as ‘‘auto-renew’’ or ‘‘edit plan,’’ 602 and
locating the cancellation mechanism
delayed the researcher in completing
the cancellation task because of the non-
intuitive labeling of the entry point into
the cancellation mechanism. In such
instances, more intuitive, consumer-
friendly labeling of the existing
cancellation architecture is assumed to
be what is needed for these sites to
come into compliance with the
cancellation requirements of the final
Rule. The Commission assumes such
relabeling will not require any
additional programming or changes to
the underlying website architecture. In
the Commission’s experience, such
‘‘cosmetic’’ changes can be made
quickly and inexpensively, possibly in
as little as one hour of a website
developer’s time. The Commission
notes, however, that the U.K. ‘‘Impact
Assessment,’’ in considering ‘‘general
updates to websites such as reflecting
the clearer communication on contract
conditions and updating cancellation
options,’’ estimated that such changes
would ‘‘require eight hours’ work from
an IT professional and that these costs
are uncorrelated with the size of the
business.’’ 603 The website changes
contemplated in that assessment likely
exceed those required to merely relabel
consumer-facing elements of an existing
cancellation architecture. Out of an
abundance of caution, however, the
Commission uses the U.K.’s estimate of
eight hours as an upper bound on the
time required to make the needed
changes and further assumes that the
relevant ‘‘IT professionals’’ are website
developers, which, as noted previously,
have a mean wage rate of $45.95.
Accordingly, the Commission assumes
each firm that needs to relabel existing
cancellation mechanisms to make those
mechanisms easy for consumers to
locate and use will spend between
$45.95 (i.e., 1 × $45.95) and $367.60
(i.e., 8 × $45.95) to come into
compliance with the final Rule’s
cancellation requirements.
Lastly, the aforementioned research
found that 18.75% (i.e., 100 × 3/16) of
online negative option sellers offered
only telephonic cancellation. Such
firms, because they were online sellers,
clearly had online ordering and
payment website architecture in place,
and so had ‘‘scaffolding’’ upon which
online cancellation architecture could
be built. No commenter provided
relevant data on the costs of building-
out a ‘‘click-to-cancel’’ mechanism in
such instances, and the U.K ‘‘Impact
Assessment’’ indicated it ‘‘lacked high
quality evidence on the costs businesses
would incur’’ to integrate ‘‘easy exiting
mechanisms into websites.’’ As a result,
the ‘‘Impact Assessment’’ turned to
‘‘external estimates’’ from ‘‘[t]he U.S.
eCommerce agency OuterBox [which]
indicates a possible range of costs. It
suggests that integrating simple tools
into an existing eCommerce platform
would cost most businesses
approximately $500’’ in 2022.604 In
2023 dollars, that amount is $532.05.605
The Commission notes, however, that
many payment processors and website
hosting platforms used by many
businesses, particularly small and
medium-sized businesses, provide
marketers with consumer subscription
account management tools that provide
consumers with ‘‘click-to-cancel’’
functionality at no direct 606 incremental
cost to marketers. 607 As no commenter
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90530 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
social media platforms in addition to the
merchant’s own website, how many of the
merchant’s employees will have the ability to log-
in to the merchant’s Shopify account, etc. (see
https://aureatelabs.com/blog/shopify-website-
development-cost). So, although what merchants
pay to use Shopify may vary across firms, the
incremental cost of using Shopify for consumer
subscription account management is assumed to be
zero. See also Hoofnagle, FTC–2023–0033–1137
(‘‘There are scores of companies like Chargebee that
help companies manage subscriptions . . . .
Compliance with new rules is inexpensive because
policy changes can be made programmatically in
dashboards’’ provided by entities such as
Chargebee.’’).
608 No commenter to the ANPR or NPRM, and no
comment, expert report, or testimony in relation to
the informal hearing provided estimates of
compliance costs firms would incur that were
specific to the features of the Rule as then-proposed
that remain in the final Rule.
609 See NPRM, 88 FR 24733.
610 Because telemarketing firms are such a small
share of all firms that will be covered by the final
Rule, the Commission does not expect this
treatment of telemarketers (or, indeed, even a total
exclusion of telemarketers from the analysis) to
impart a significant bias.
611 Three trade associations, who have some
members who either sell or offer cancellation
mechanisms in-person, submitted comments that
were not sufficiently detailed to permit Commission
staff to estimate the number of firms that both sell
and cancel in-person or through the mail. For
example, IHRSA (FTC–2023–0033–0863)
commented many of its members allow several
options for agreement termination through simple
online solutions including online account
management, email cancellation requests, and
specific online cancellation buttons or forms,
adding many of these options are currently
available for members who have purchased their
membership either online or in person. The
International Carwash Association (‘‘ICA’’), FTC–
2023–0033–1142, commented on subscription-
related revenues of member firms (noting more than
half, and sometimes more than 80%, of store
revenues can be attributable to subscription sales),
but not on the number of firms that sell
subscriptions or how many subscriptions they sell.
Similarly, although it commented subscriptions
could be purchased in person, on the world wide
web, via a mobile app, or at an automated teller,
it provided no data on the relative shares of
subscription purchases through these channels or
the cancellation mechanisms made available to
consumers. The objections ICA raised to a Rule
requiring its members to offer cancellation by any
method other than in-person strongly suggests that
most member firms currently only offer cancellation
that way, suggesting that those who sell on the
internet, via a mobile app and (possibly) at an
automated teller may already be in violation of
ROSCA if in-person cancellations are a violation of
ROSCA’s ‘‘simple cancellation mechanism’’
requirement. IFA (FTC–2023–0033–0856) provided
data from its database on the number of franchisees
operating fitness establishments, spa/massage
studios, entertainment facilities, and preventative
healthcare facilities in the U.S., but provided no
information on what share of firms sold
subscriptions or the media through which consent
was obtained or cancellation mechanisms were
offered. In a later comment (FTC–2024–0001–0009),
IFA noted consumers of member firms used the
alternative of ‘‘freezing’’ their memberships at rates
of 10%–40% but did not provide information on
what the ‘‘freezing’’ mechanism was or what
cancellation mechanisms were available to
consumers.
612 See Carrigan-Walster, FTC–2024–0001–0026
(employing a similar assumption: ‘‘Many firms
using negative option marketing present their offers
through the web. For those firms that present offers
through other means, web developer time is used
as a proxy for worker time to create the presentation
of the offers.’’).
provided information on (1) how many
negative option sellers comply with
ROSCA by offering only telephonic
cancellation, (2) what specific costs they
would face to provide an online
cancellation mechanism, or (3) whether
they would build such functionality
themselves or use a third-party payment
processor or hosting platform to provide
it for them, we estimate such costs to
range between $0 and $532.05 per firm.
Accordingly, the Commission
assumes that most online marketers of
negative option plans will face minimal
IT costs of coming into compliance with
the cancellation requirements of the
final Rule.608
As noted previously, telemarketers
have substantial control over both how
long the consent process takes and how
long it takes a consumer to complete a
cancellation over the telephone. If
compliance with the final Rule
expedites the cancellation process over
the phone, telemarketers may
experience cost-savings associated with
such resources. Furthermore, no
telemarketers or call centers that
provide services to telemarketers
submitted comments relating to what
costs telemarketers would incur to bring
cancellation mechanisms into
compliance with the final Rule. Because
of this, and because the Commission has
previously found that only 2,000 609 of
106,000 firms selling negative options
were telemarketers (and no commenter
has disputed this finding), the
Commission proceeds as if
telemarketers face no incremental costs
in complying with the final Rule’s
cancellation requirements. However, to
reduce any potential downward bias 610
this might introduce into the
compliance cost estimate, the
Commission does not subtract the
estimated number of telemarketers
(2,000) from the total estimated number
of online negative option marketers in
its calculations of costs. Similarly, the
Commission lacks data on how many of
the 106,000 firms selling negative
option plans currently offer only in-
person or by-mail cancellations.611 The
final Rule requires such firms to add a
cancellation mechanism that consumers
can easily use in a remote manner, e.g.,
through interactive electronic media or
by telephone.
Lastly, the Commission considers the
initial year recordkeeping costs required
by the Rule, which are estimated in
section XIII to be $6.54 million when
aggregated across all 106,000 firms.
Because of the aforementioned data
limitations emerging from the comment
record, the Commission applies the
findings of the experimental research
above, which looked only at online
sellers, to the full number of firms,
106,000, that it has previously estimated
to be marketers of negative option plans.
This approach comports with a general
proposition made by the report
submitted by IAB.612
Accordingly, the Commission makes
the following estimates of initial year
compliance costs.
Familiarization costs: All 106,000
firms selling negative options will
collectively incur final Rule
familiarization costs of between $35.97
million and $341.22 million.
Disclosure costs: 19,875 firms (i.e.,
.1875 × 106,000) will incur no costs in
bringing their disclosures into
compliance with the requirements of the
final Rule because their disclosures are
already compliant. The remaining
86,125 firms will collectively incur
costs of between $3.96 million (i.e.,
$45.95 × 86,125) and $39.58 million
(i.e., $459.50 × 86,125) to make their
disclosures compliant with the final
Rule.
Cancellation costs: 19,875 firms (i.e.,
.1875 × 106,000) will incur no costs in
bringing their cancellation mechanisms
into compliance with the final Rule.
66,250 firms (i.e., .625 × 106,000)
collectively will incur costs of between
$3.04 million (i.e., 1 × $45.95 × 66,250)
and $24.35 million (i.e., 8 × $45.95 ×
66,250) to bring their online
cancellation mechanisms into
compliance with the final Rule by
relabeling consumer-facing elements of
their existing cancellation architecture.
19,875 firms (i.e., .1875 × 106,000)
collectively will incur costs of between
$0 and $10.57 million (i.e., 19,875 ×
$532.05) to bring their telephonic
cancellation mechanisms into
compliance with the final Rule.
The Commission notes that this
analysis does not quantify costs for the
firms selling negative option plans that
offer only in-person or by-mail
cancellation. The Commission assumes
that, in complying with this final Rule,
these firms will choose to provide the
alternative cancellation method (by
phone, online, or both) that makes the
most economic sense. The Commission
also assumes that the cost of processing
a cancellation over the phone should be
similar to or less than the cost of
processing a cancellation in person or
by-mail for these firms. Therefore, the
Commission assumes that these firms
will not incur significant compliance
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613 U.K. ‘‘Impact Assessment’’ (2023) at 30.
614 ‘‘We note for example, that Ofcom assessed
. . . the business costs of providing customers with
notifications at the end of their contracts. These
involved possible ongoing costs related to
identifying customers that needed notifications on
an ongoing basis and providing them with the
notification. After consultation with stakeholders,
Ofcom only estimated the costs of providing
consumers with letters, on the basis that only this
medium had significant ongoing costs.’’ Id.
615 See discussion in section VII.B.1.a.2 of this
SBP and n.146.
costs to provide an alternative
cancellation method.
Recordkeeping costs: Collectively,
firms will incur recordkeeping costs of
$6.54 million annually.
Total Initial Year Costs: Summing
costs enumerated above, the
Commission estimates the costs of the
Rule in the first year will range between
$49.52 and $422.26 million. These costs
are presented in Table 6. The
Commission assumes that these costs
will be incurred by the end of the initial
year following the Rule’s
implementation.
T ABLE 6—TOTAL INITIAL YEAR COMPLIANCE COSTS
[In millions, 2023 dollars]
Low 	High
Familiarization Costs ............................................................................................................................................... 	$35.97 	$341.22
Disclosure Costs ...................................................................................................................................................... 	3.96 	39.57
Cancellation Mechanisms Costs ............................................................................................................................. 	3.04 	34.93
Recordkeeping Costs .............................................................................................................................................. 	6.54 	6.54
Total Initial Year Costs ..................................................................................................................................... 	49.52 	422.26
(3) Ongoing Compliance Costs, Years 2
Through 10
Compliant disclosures, cancellation
paths, and consumer-facing information
about cancellation mechanisms will
form a ‘‘template’’ that can be used
without any incremental compliance
costs as new subscription products are
added to a marketer’s retinue of
products offered for sale via a negative
option plan. The information relevant to
the sale of a new product may be
‘‘dropped’’ into the template in a fill-in-
the-blank way. The Commission
assumes marketers, in the ordinary
course of business, know what is
required for the disclosures (e.g., the
amounts consumers will be charged,
when, by date or frequency, such
charges will occur, when consumers
must act to stop recurring charges, etc.)
and consider the costs of entering this
information into established disclosure
templates to be a routine cost of doing
business, not an incremental cost
required by compliance with the final
Rule. The same will also be true for
negative option plans that are
telemarketed or sold in person; once a
telemarketing script or an in-person
sales disclosure form is developed in
the initial year of compliance, it
becomes a template that readily can be
used as new subscription products are
offered over time. Accordingly, once a
marketer comes into compliance with
the final Rule there should be no
incremental costs of ongoing
compliance with respect to disclosures
and cancellation mechanisms, and the
costs of adding, changing, or deleting
products the marketer offers for sale via
negative option will be no different from
what they would have been absent the
final Rule.
The Commission can seek redress or
civil penalties for violations of the final
Rule. Absent the final Rule, enforcement
actions against unfair or deceptive
negative option practices would be
brought under section 5 where civil
penalties are not available and where,
post-AMG, it is difficult to obtain
redress. Accordingly, some negative
option marketers may pay closer
attention to underlying claims made for
products marketed using negative
option sales because of the monetary
relief available for violations of the final
Rule relative to a section 5 enforcement
action. This, however, is no different
than what any firm should do to assure
that it is not in violation of section 5,
and the Commission considers the costs
of attentiveness to section 5 compliance
as part of the existing regulatory
baseline, not as costs that are
incremental to complying with the final
Rule.
The U.K.’s ‘‘Impact Assessment’’ of its
regulatory treatment of subscription
plans did not estimate ongoing
compliance costs because ‘‘the size of
these costs . . . are likely small in
comparison to the one-off cost and
benefits.’’ 613 In further support of this,
the ‘‘Impact Assessment’’ cited a report
that found that on-going costs were
meaningful only in relation to sending
reminders to consumers about their
subscriptions, and only for firms that
used postal mail delivery and not
electronically delivered reminders.614
The final Rule does not contain a
‘‘reminder’’ requirement, and so the
ongoing costs of sending reminders to
consumers, small though they may be,
are not ongoing costs of compliance
with the final Rule.
The experts’ report submitted by IAB
estimated 10 hours of attorney time for
annual compliance checks for the Rule
proposed in the NPRM. Because the
final Rule has removed the most
complex (and, therefore, costly) features
of the proposed Rule (e.g., double
consent, the treatment of ‘‘saves’’ in
cancellation flows, and the issuance of
annual ‘‘reminders’’ for some
subscriptions), the Commission assumes
half of the annual compliance check
hours assumed in IAB’s experts’ report,
five hours, is an upper bound on
attorney hours needed for annual
compliance checks. Moreover, the
Commission assumes that some firms
will incur no incremental annual
compliance check costs, either because
their pre-existing business practices
followed what the final Rule requires or
because the platforms or payment
processors they use provide compliant
disclosures and cancellation flows.615
Accordingly, the Commission
estimates the aggregate annual costs of
compliance checks to range between $0
and $44.97 million (i.e., 106,000 × 5
hours × $84.84/hour). Inclusive of
recordkeeping costs, total ongoing costs
range between $6.54 million (i.e., $0 +
$6.54 million) and $51.51 million (i.e.,
$44.97 million + $6.54 million).
(4) Summary of Total Costs
Table 7 presents the initial and
recurring costs of this Rule in each year,
as well as the present discounted value
and annualized costs over 10 years
using a 2 percent discount rate. The
Commission estimates that in Year 1,
the initial costs will range between
$49.52 and $422.26 million. In each of
the following years, the Commission
estimates that the recurring costs will
range between $6.54 and $51.51 million.
The Commission estimates that the
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90532 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
616 See NPRM, 88 FR 24733.
617 The Commission acknowledges this excludes
subscriptions that are enrolled by mail, likely
resulting in an overestimate of the number of
subscriptions enrolled online.
618 See Sinders (2023). Among the obstacles noted
for otherwise seemingly simple online cancellations
were that some websites did not use straight
forward terms, such as ‘‘unsubscribe’’ or ‘‘cancel,’’
and instead put the cancellation path under titles
such as ‘‘auto-renew’’ or ‘‘edit plan.’’
present discounted value of costs over
ten years, using a 2 percent discount
rate, will range between $100.89 and
$826.15 million. The Commission
estimates that these costs, annualized
over ten years using a 2 percent
discount rate, would range between
$11.23 and $91.97 million per year.
TABLE 7—TOTAL Q UANTIFIED 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
As a sensitivity analysis, the
Commission considers an alternative
method that does not rely on data from
historical enforcement matters for
distributing subscription cancellations
across the baseline cancellation
methods used to estimate quantified
benefits. This alternative method
assumes the majority of subscriptions
are enrolled online and can be cancelled
online in the baseline; whereas, in the
main analysis, the majority of
subscriptions are enrolled online and
can only be cancelled by phone in the
baseline. Compared with the main
analysis, this alternative method
produces lower total quantified benefits
by $419.77 to $449.53 million
annualized per year, yet the estimated
range of quantified benefits still exceeds
the estimated range of quantified costs.
(1) Number of Cancellations by
Enrollment and Baseline Cancellation
Method
Under this sensitivity analysis, the
Commission assumes that the baseline
number of subscriptions and
cancellations is the same as in the main
analysis. The Commission also assumes
the number of in-person subscriptions,
as proxied for by gym memberships, is
the same as in the main analysis. What
differs here is the approach for
determining the share of cancellations
likely to occur through online and
telephone methods.
The main analysis uses enforcement
data to determine the share of
cancellations likely to occur through
online and telephone methods. This
data may suffer from selection bias if,
among other factors, only the more
egregious violations are pursued
through enforcement methods. This
approach also assumes no marketers of
negative option plans comply with this
Rule in the baseline. Further, because
the data only include resolved cases and
resolved cases tend to be older, they are
less likely to reflect the current state of
the market.
In this alternative analysis, the
Commission uses statistics discussed in
the NPRM—that 106,000 firms offer
negative option plans and 2,000 of those
firms are telemarketers.616 Based on
that, the Commission assumes 1.9
percent (i.e., 2,000/106,000) of
subscriptions and cancellations are
enrolled and cancelled over the phone
in the baseline. The Commission then
assumes the remaining cancellations of
subscriptions that were not enrolled
over the phone or in person were
instead enrolled online.617
To estimate the distribution of
baseline cancellation methods of
subscriptions enrolled online, the
Commission uses the results from an
experiment in which a researcher
consented to 16 online subscriptions
between August 2 to October 4, 2022
and then canceled each one, recording
the time it took to cancel along with a
variety of other obstacles faced in
cancelling.618 Of the 16 online
subscriptions, three were found to be
easy to cancel online, indicating they
are likely in compliance with this Rule;
three required phone calls to cancel;
and the remaining 10 had a non-
straightforward online cancellation
method. Based on these results, the
Commission assumes 18.75 percent (i.e.,
3/16) of online subscriptions have Rule-
compliant cancellation methods in the
baseline; 18.75 percent (i.e., 3/16) of
online subscriptions require telephone
cancellation in the baseline; and 62.5
percent (i.e., 10/16) of online
subscription offer non-Rule-compliant
online cancellations in the baseline.
Table 8 provides the number of
subscription cancellations each year
distributed across the enrollment and
regulatory baseline cancellation
methods: online enrollment and
telephone cancellation; online
enrollment and non-Rule-compliant
online cancellation; online enrollment
and Rule-compliant online cancellation;
telephone enrollment and telephone
cancellation; and in-person enrollment.
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90533	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
TABLE 8—SENSITIVITY ANALYSIS : CANCELLATIONS BY ENROLLMENT AND BASELINE CANCELLATION METHOD
[In millions]
Year
Online
enrollment,
telephone
cancellation
Online
enrollment,
non-compliant
online
cancellation
Online
enrollment,
compliant
online
cancellation
Telephone
enrollment,
telephone
cancellation
In-person
enrollment
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
To estimate total quantified benefits
under this sensitivity analysis, the
Commission uses the same matching of
enrollment and baseline cancellation
methods to per-cancellation benefit
estimates as in the main analysis. The
only difference here is that the
Commission assumes consumers who
experience Rule-compliant online
cancellations in the baseline will not see
any additional benefit as a result of this
final Rule.
As in the main analysis, the
Commission multiplies the number of
cancellations in each category by the
matched per-cancellation benefit on the
low- and the high-end and then sums
across all five categories to obtain total
quantified benefits each year. Those
totals are presented in Table 9 below. In
the first year following implementation
of the final Rule, the Commission
estimates the benefits under this
sensitivity analysis will range between
$254.85 million and $4.88 billion. In
Year 10, the Commission estimates the
benefits will range between $271.15
million and $5.20 billion. Using a 2
percent discount rate, the Commission
estimates the present discounted value
of benefits over 10 years to range
between $2.36 and $45.28 billion.
Annualized over 10 years using a 2
percent discount rate, the Commission
estimates the benefits to range between
$263.06 million and $5.04 billion per
year. These annualized benefits
estimates are between $419.77 and
$449.53 million less per year than 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
4. An explanation of the reasons for
the determination of the Commission
that the final Rule will attain its
objectives in a manner consistent with
applicable law and the reasons the
particular alternative was chosen.
As discussed above in sections I, II,
and VII.A, the Commission determines
the following deceptive or unfair
practices are widespread in the negative
option marketplace and cause consumer
harm: (1) material misrepresentations
made while marketing goods or services
with negative option features; (2) failure
to provide important information about
material terms prior to obtaining
consumers’ billing information and
charging consumers; (3) lack of
informed consumer consent; and (4)
failure to provide consumers with a
simple cancellation method, including
failure to honor cancellation requests,
refusal to provide refunds to consumers
who unknowingly enrolled in programs,
denying consumers refunds and forcing
them to pay to return the unordered
goods, and requiring consumers to
cancel using a different method than the
one used to sign up for the program.
The final Rule amendments prohibit
sellers from misrepresenting material
facts in connection with promoting or
offering for sale a good or service with
a negative option feature, require
negative option sellers to disclose
certain important information about
negative option features, obtain a
consumer’s express informed consent
and maintain records of consumer
consent for three years after the initial
transaction (unless the seller satisfies
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619 NCTA, FTC–2023–0033–0858; IAB, FTC–
2023–0033–1000. See also IFA, FTC–2023–0033–
0856; USTelecom, FTC–2023–0033–0876; RILA,
FTC–2023–0033–0883; Coalition, FTC–2023–0033–
0884; Chamber, FTC–2023–0033–0885 (urging the
Commission to refine its cost benefit analysis).
620 FTC–2024–0001–0011; see also Asurion, FTC–
2023–0033–0878 (stating the Commission’s
estimated annual labor costs are understated, and
projecting the costs to Asurion and its clients would
be millions of dollars); SCIC, FTC–2023–0033–0879
(cost of compliance for the service contract industry
would be substantially higher than cost of
compliance for unregulated entities, and
disproportionately borne by small businesses;
APCIA, FTC–2023–0033–0996 (same).
621 See 5 U.S.C. 603–605.
622 5 U.S.C. 605.
623 NFIB, FTC–2023–0033–0789.
624 IFA, FTC–2023–0033–0856; IHRSA, FTC–
2023–0033–0863.
625 IHRSA, FTC–2023–0033–0863.
626 ACT App Association, FTC–2023–0033–0874.
627 PDMI, FTC–2023–0033–0864; ESA, FTC–
2023–0033–0867; Joint Small Business Digital
Economy Innovators, FTC–2023–0033–0875; ICA,
FTC–2023–0033–1142.
628 https://www.ftc.gov/business-guidance.
the technological exemption), and
provide consumers a simple mechanism
for cancellation. In promulgating the
final Rule, the Commission sought to
enhance consumer protections while
avoiding detailed, prescriptive
requirements that would impede
innovation.
5. A summary of any significant
issues raised by the comments
submitted during the public comment
period in response to the preliminary
regulatory analysis and a summary of
the assessment by the Commission of
such issues.
Several commenters (e.g., NCTA, IAB)
raised concerns over the Commission’s
conclusions regarding the economic
effect of the proposed Rule. NCTA
asserted the NPRM lacked any
meaningful cost-benefit analysis,
suggesting compliance with the
proposed Rule would result in
significant costs to its members.619
Among other things, NCTA said its
members would be required to
implement changes to their existing
customer processes, review and revise
existing disclosures, and revamp
recordkeeping systems. During the
informal hearing process, NCTA further
argued it could cost major cable
operator members between $12–25
million to comply with the proposed
Rule.620 Additional commenters also
suggested compliance with the
proposed Rule would cost more than
what the Commission estimated. None
of them, however, offered any empirical
analysis of the issue. In response to
these comments, and following the
presiding officer’s recommended
decision, the Commission provides the
detailed cost-benefit analysis above in
Section X.B.3.
XI. Final Regulatory Flexibility Act
Analysis
The Regulatory Flexibility Act
(‘‘RFA’’), 5 U.S.C. 601–612, requires the
Commission to conduct an Initial
Regulatory Flexibility Analysis
(‘‘IRFA’’) with a proposed rule and a
Final Regulatory Flexibility Analysis
(‘‘FRFA’’), if any, with a final rule,
unless the Commission certifies the rule
will not have a significant economic
impact on a substantial number of small
entities.621 The Regulatory Flexibility
Act further states the required elements
of the FRFA may be performed in
conjunction with or as part of any other
agenda or analysis required by any other
law if such other analysis satisfies the
provisions of the FRFA.622
In the NPRM, the Commission
provided an IRFA, stating its belief that
the proposal will not have a significant
economic impact on small entities, and
solicited comments on the burden on
any small entities that would be
covered. Specifically, the Commission
acknowledged it did not have sufficient
empirical data to determine whether the
proposed amendments may affect a
substantial number of small entities;
therefore, the Commission sought
comment on the percentage of affected
companies that qualify as small
businesses.
The Commission reviewed and
considered the comments in response to
the NPRM and determined, as an
alternative to finalizing the proposed
Rule in its entirety, to modify the Rule.
In particular, the Commission decided
to limit the material terms to be
disclosed immediately adjacent to
consent for the negative option feature;
remove the limitation on saves and the
accompanying recordkeeping
requirement; remove the annual
reminder provision; and modify the
length of the recordkeeping requirement
for verification of consent by fixing it to
three years and provide an alternative
method of compliance. After careful
consideration of the comments and
following the Commission’s
determination not to finalize the
proposed Rule in its entirety, the
Commission certifies that the final Rule
will not have a significant economic
impact on a substantial number of small
entities. Nevertheless, because the
Commission included an IFRA in the
NPRM, the Commission has also
performed an FRFA below, and
comments to the IFRA are discussed
below.
A. A statement of the need for, and
objectives of, the Rule.
The Commission describes the need
for and the objectives of the final Rule
in section X.B.1 to the Final Regulatory
Analysis.
B. A statement of the significant
issues raised by the public comments in
response to the Initial Regulatory
Flexibility Analysis, a statement of the
assessment of the agency of such issues,
and a statement of any changes made in
the proposed Rule as a result of such
comments.
Several commenters raised issues
about the proposed Rule’s economic
impact on small businesses. For
instance, NFIB asked the Commission to
adopt a special provision that would
limit enforcement of the Rule against
small businesses (fewer than 50
employees) to instances of willful or
repeated violations, and set up a
program for education on
compliance. 623 IFA and IHRSA
encouraged the Commission to conduct
a ‘‘Small Business Regulatory Impact
Analysis’’ to determine how the
proposal will impact small
businesses.624 IHRSA stated that small
businesses in the health and fitness
industry operate at ‘‘much different
capacity’’ than larger industries, noting
44% of U.S. small businesses have less
than three months of cash reserves,
making them more vulnerable to
disruptions.625 Similarly, ACT App
Association noted that roughly 20% of
small business startups fail in the first
year due to scarcity in financial
resources.626
Other commenters, including PDMI,
ESA, Joint Small Business Digital
Economy Innovators, and ICA, generally
stated the proposed Rule would impose
unnecessary and undue burdens on
small businesses, but did not offer any
detailed empirical data for the
Commission to consider. 627
In response, the Commission first
notes its sensitivity to small businesses’
concerns. It provides numerous free
resources through the Bureau of
Consumer Protection Business Center
web page 628 to assist businesses of all
sizes in complying with the law and
will engage in consumer and business
education campaigns about this Rule.
Second, in consideration of comments
regarding regulatory burden, the
Commission clarifies or modifies the
Rule in several significant ways: (1) it
defines ‘‘material’’ and provides several
concrete categories of material facts to
ensure businesses have a clear
understanding of how it will interpret
materiality under the Rule; (2) it limits
the number of terms that must
mandatorily appear ‘‘immediately
adjacent’’ to the request for consent to
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90535	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
629 Rule § 425.2(g).
631 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042 (emphasis in original).
the negative option feature; (3) it
removes the requirement to obtain
separate affirmative consent to ‘‘the rest
of the transaction’’ and modifies the
recordkeeping requirement; (4) it
removes the saves and annual reminder
requirements, which also should reduce
recordkeeping and compliance burdens.
Additionally, the Commission delays
the effective date of the final Rule for
180 days to allow time for
implementation (except for the
provisions related to misrepresentations
and other procedural requirements,
which should not be an added burden
for businesses already complying with
the law and which take effect 60 days
after publication of the final Rule).
C. The response of the agency to any
comments filed by the Chief Counsel for
Advocacy of the Small Business
Administration in response to the
proposed Rule, and a detailed statement
of any change made to the proposed
rule in the final Rule as a result of the
comments.
The Small Business Administration
did not file comments in response to the
proposed Rule.
D. A description of and an estimate of
the number of small entities to which
the Rule will apply or an explanation of
why no such estimate is available.
The final Rule affects sellers,
regardless of industry, engaged in
making negative option offers, defined
by the final Rule to mean any person
‘‘selling, offering, charging for, or
otherwise marketing goods or services
with a Negative Option Feature.’’ 629
Small entities in potentially any
industry could incorporate a negative
option feature into a sales
transaction. 630 The Commission is
unaware, however, of any source of data
identifying across every industry the
number of small entities that routinely
utilize negative option features.
Although the NPRM requested
comments on the percentage of affected
companies that qualify as small
businesses, and some trade association
commenters indicated that some of their
members were small businesses, these
comments did not identify either the
number or share of their small business
members that sold negative option
contracts.
E. A description of the projected
reporting, recordkeeping, and other
compliance requirements of the Rule,
including an estimate of the classes of
small entities which will be subject to
the requirement and the type of
professional skills necessary for
preparation of the report or record.
The estimates of the recordkeeping
requirements under the final Rule are
set out within the Paperwork Reduction
Act analysis in section XII below. As
mentioned above, the Commission
preliminarily determined the impact of
the proposed requirements on small
entities is most likely not significant.
The small entities potentially covered
by these amendments will include all
such entities subject to the Rule (e.g., all
entities selling goods or services
through negative option programs). The
professional skills necessary for
compliance with the proposed
amendments would include sales and
clerical personnel. The Commission
requested comment on these issues.
In the NPRM, The FTC estimated the
majority of firms subject to the
recordkeeping requirements already
retained these types of records in the
normal course of business. The FTC
anticipated many transactions subject to
the final Rule would be conducted via
the internet, minimizing burdens
associated with compliance.
Additionally, most entities subject to
the final Rule were likely to store data
though automated means, which
reduces compliance burdens associated
with record retention. Furthermore,
regarding the disclosure requirements,
the Commission stated it was likely the
substantial majority of sellers routinely
provide these disclosures in the
ordinary course as a matter of good
business practice. Moreover, many State
laws already require the same or similar
disclosures as the Rule would mandate.
Finally, some negative option sellers are
already covered by ROSCA and the TSR
and thus subject to similar disclosure
requirements.
Commenters provided additional
comments, suggesting small businesses
will be significantly impacted, and the
Commission underestimated the
burdens. Recordkeeping and disclosure
costs associated with the Rule became
one of the issues designated for the
informal hearing, after which the
presiding officer determined ‘‘the issue
is not genuinely disputed,’’ noting the
failure of interested parties to ‘‘provide
any evidence to establish what the costs
would be,’’ as opposed to generalized
complaints ‘‘costs will be higher than
the NPRM’s estimates.’’ 631 As explained
in the Paperwork Reduction Act
estimates below and elsewhere in this
SBP, the Commission made changes to
the Rule based on the record.
Specifically, the Commission
determined to specify and thereby limit
the types of disclosures required,
narrow the scope of entities covered (by
excluding those solely involved in
‘‘promoting’’ negative option plans),
curtail the length of time for retaining
records (to only three years), and
establish an option for sellers to
eliminate having to keep records of
consent if they have the requisite
processes in place. Because neither the
Commission nor the presiding officer at
the informal hearing received evidence
to dispute the recordkeeping and
disclosure costs figures in the NPRM,
the Commission adopts the NPRM’s
analysis. Given the narrower scope of
the final Rule, that analysis should be
more conservative and tend to overstate
the burden.
F. A description of the steps the
agency has taken to minimize the
significant economic impact on small
entities consistent with the stated
objectives of applicable statutes,
including a statement of the factual,
policy, and legal reasons for selecting
the alternative adopted in the final Rule
and why each one of the other
significant alternatives to the Rule
considered by the agency which affect
the impact on small entities was
rejected.
In formulating the proposed
amendments, the Commission made
every effort to avoid imposing unduly
burdensome requirements on sellers. To
that end, the Commission avoided,
where possible, proposing specific,
prescriptive requirements that could
stifle marketing innovation or otherwise
limit seller options in using new
technologies.
As explained above, in response to
comments regarding regulatory burden,
the Commission clarifies or modifies the
Rule in several significant ways: (1) it
defines ‘‘material’’ and provides several
concrete categories of material facts to
ensure businesses have a clear
understanding of how it will interpret
materiality under the Rule; (2) it limits
the number of terms that must
mandatorily appear ‘‘immediately
adjacent’’ to the request for consent to
the negative option feature; (3) it
removes the requirement to obtain
separate affirmative consent to ‘‘the rest
of the transaction’’ and modifies the
recordkeeping requirement; (4) it
removes the saves and annual reminder
requirements, which also should reduce
recordkeeping and compliance burdens.
Additionally, the Commission delays
the effective date of the final Rule for
180 days to allow time for
implementation (except for the
provisions related to misrepresentations
and other procedural requirements,
which should not be an added burden
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90536 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
632 The PRA analysis for this rulemaking focuses
strictly on the information collection requirements
created by and/or otherwise affected by the
amendments.
633 88 FR 24734.
634 Examples of these industries include sellers of
software, streaming media, social media services,
financial monitoring, computer security, fitness
services, groceries and meal kits, dietary
supplements, sporting goods, home service
contracts, home security systems, office supplies,
pet food, computer supplies, cleaning supplies,
home/lawn maintenance services, personal care
products, clothing sales, energy providers,
newspapers, magazines, and books. The NAICS
does not provide estimates for all of these
categories. Where such data is unavailable, the staff
has used its own estimates based on its knowledge
of these industry categories.
635 Under the PRA, the time, effort, and financial
resources necessary to comply with the collection
of information that would be incurred by persons
in the normal course of their activities (e.g., in
compiling and maintaining business records) does
not constitute a burden under the Rule where the
associated recordkeeping is a usual and customary
part of business activities. 5 CFR 1320.3(b)(2).
636 This figure is derived from the mean hourly
wage shown for Information and Record Clerks. See
Bureau of Labor Statistics, ‘‘Occupational
Employment and Wages—May 2021,’’ at Table 1
(Mar. 31, 2022) (National employment and wage
data from the Occupational Employment Statistics
survey by occupation, May 2021), https://
www.bls.gov/news.release/pdf/ocwage.pdf.
637 This figure is derived from the mean hourly
wage shown for Sales and related occupations. See
id.
638 88 FR 24730.
for businesses already complying with
the law and which take effect 60 days
after publication of the final Rule).
XII. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501 et seq., requires
Federal agencies to obtain Office of
Management and Budget (‘‘OMB’’)
approval before collecting information
directed to ten or more persons. The
current Rule contains various provisions
that constitute information collection as
defined by 5 CFR 1320.3(c), the OMB
regulations implementing the PRA. In
January 2024, OMB approved
continuation of the Rule’s existing
information collection (OMB Control
No. 3084–0104). The final Rule makes
changes in the Rule’s recordkeeping and
disclosure requirements that will
increase the PRA burden as detailed
below. Accordingly, the Commission is
submitting the final Rule and a
Supplemental Supporting Statement to
OMB for review under the PRA.632 The
associated burden analysis follows.
A. The Proposed Rule
In the NPRM, the Commission
provided time and cost estimates for the
proposed Rule’s recordkeeping and
disclosure requirements, and solicited
comments about their associated costs,
including on: (1) whether the
disclosure, recordkeeping, and reporting
requirements are necessary, including
whether the resulting information will
be practically useful; (2) the accuracy of
our burden estimates, including
whether the methodology and
assumptions used are valid; (3) how to
improve the quality, utility, and clarity
of the disclosure requirements; and (4)
how to minimize the burden of
providing the required information to
consumers. 633
The NPRM also included staff’s
estimate that the burden for
recordkeeping compliance would be
53,000 hours and the estimated burden
for disclosures would be 212,000 hours,
for a total of 265,000 hours. These
estimates are explained below.
Number of Respondents. FTC staff
estimated there are 106,000 entities
offering negative option features to
consumers. This estimate is based
primarily on data from the U.S. Census
North American Industry Classification
System (NAICS) for firms and
establishments in industry categories
wherein some sellers offer free trials,
automatic renewal, prenotification
plans, and continuity plans. Based on
NAICS information as well as its own
research and industry knowledge, FTC
staff identified an estimated total of
530,000 firms involved in such
industries.634 However, FTC staff
estimated that only a fraction of the total
firms in these industry categories offer
negative option features to consumers.
For example, few grocery stores and
clothing retailers, which account for
approximately a third of the of the total
estimate from all industry categories, are
likely to regularly offer negative option
features. In addition, some entities
included in the total may qualify as
common carriers, exempt from the
Commission’s authority under the FTC
Act. Accordingly, the Commission
estimated approximately 106,000
business entities (20%) offer negative
option features to consumers.
Recordkeeping Hours. FTC staff
estimated the majority of firms subject
to the Rule already retain the types of
records in the normal course of business
that would be required by the proposed
Rule. Under such conditions, the time
and financial resources needed to
comply with disclosure requirements do
not constitute ‘‘burden’’ under the
PRA.635 Moreover, staff anticipated that
many transactions subject to the Rule
are conducted via the internet and most
entities subject to the Rule are likely to
store data though automated means,
which reduces compliance burdens
associated with record retention.
Accordingly, staff estimated that 53,000
entities subject to the Rule will require
approximately one hour per year to
comply with the Rule’s recordkeeping
requirements, for an annual total of
53,000 burden hours.
Disclosure Hours. Staff anticipated
that the substantial majority of sellers
already routinely provide the
disclosures that would be required by
the proposed Rule. For these sellers, the
time and financial resources associated
with making these disclosures do not
constitute a ‘‘burden’’ under the PRA
because they are a usual and customary
part of regular business practice. 5 CFR
1320.3(b)(2). Moreover, many State laws
require the same or similar disclosures
as the Rule mandates. In addition,
approximately 2,000 negative option
sellers are already covered by the TSR
and subject to its disclosure
requirements. Accordingly, FTC
estimated the disclosure burden
required by the Rule will be, on average,
two hours each year for each seller
subject estimated to be subject the Rule,
for a total estimated annual burden of
212,000 hours.
Estimated Annual Labor Cost. To
estimate labor costs for recordkeeping
requirements, staff multiplied the
53,000 hours to comply with the
proposed Rule’s recordkeeping
provisions by a clerical wage rate of
$18.75/hour.636 The result is an annual
cost of approximately $993,750.
To estimate annual labor costs for
disclosures for all entities, staff
multiplied the 212,000 hours to comply
with the proposed Rule’s disclosure
provisions by a sales personnel wage
rate of $22.15/hour.637 The result is an
annual cost of approximately
$4,695,800.
Thus, the estimated annual labor costs
were $5,689,550 [($993,750
recordkeeping) + ($4,695,800
disclosure)].
Estimated Annual Non-Labor Cost.
The NPRM stated capital and start-up
costs associated with the Rule’s
recordkeeping provisions are de
minimis. Any disclosure or
recordkeeping capital costs involved
with the Rule, such as equipment and
office supplies, would be costs borne by
sellers in the normal course of business.
B. Comments Received and Informal
Hearing
The NPRM sought comments on the
PRA analysis and stated, ‘‘comments
should provide any available evidence
and data that supports their position,
such as empirical data.’’ 638 The
Commission did not receive such
evidence. A few commenters from
businesses and industry groups,
however, raised generalized concerns
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90537	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
639 Sirius XM, FTC–2023–0033–0857; SCIC, FTC–
2023–0033–0879; Coalition, FTC–2023–0033–0884;
ETA, FTC–2023–0033–1004; Direct Marketing
Companies, FTC–2023–0033–1016. In addition, one
commenter seemingly confused PRA-related costs
with full implementation of the Rule, but still
offered only generalized points. See Asurion, FTC–
2023–0033–0878. Another commenter queried
whether the Commission’s estimate of the number
of firms offering negative option features include
B2B sales with automatic renewal clauses. ETA,
FTC–2023–0033–1004. The staff estimate did not
seek to exclude such sellers.
640 Hr’g Notice, 88 FR 85525.
641 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042.
642 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042.
643 Recommended Decision by Presiding Officer,
https://www.regulations.gov/comment/FTC-2024-
0001-0042.
644 Under the PRA, the time, effort, and financial
resources necessary to comply with the collection
of information that would be incurred by persons
in the normal course of their activities (e.g., in
compiling and maintaining business records) does
not constitute a burden under the Rule where the
associated recordkeeping is a usual and customary
part of business activities. 5 CFR 1320.3(b)(2).
645 This figure is derived from the mean hourly
wage shown for Information and Record Clerks. See
Bureau of Labor Statistics, ‘‘Occupational
Employment and Wages, May 2023, 43–9061 Office
Clerks, General,’’ https://www.bls.gov/oes/currenT/
oes439061.htm.
646 This figure is derived from the mean hourly
wage shown for Sales and related occupations. See
id.
that the NPRM underestimated PRA-
related costs.639
As noted earlier, the Commission set
an informal hearing, at the request of
interested parties, and appointed
Administrative Law Judge Carol Fox
Foelak as the presiding officer.640 Based
on submissions by interested parties,
and other information in the record, the
presiding officer designated two
disputed issues of material fact,
including, ‘‘What will the recordkeeping
and disclosure costs associated with the
proposed rule be?’’ 641
Based on the record, the presiding
officer concluded, ‘‘There is insufficient
evidence to make a finding concerning
the . . . recordkeeping and disclosure
costs associated with the proposed
rule,’’ and ‘‘in the absence of evidence,
the issue is not genuinely disputed.’’ 642
The presiding officer further explained:
‘‘IAB made a well-reasoned argument
that the costs will be higher than the
NPRM’s estimates, generalizing from
limited estimates that it, IFA, and NCTA
provided. However, it did not provide
any evidence to establish what the costs
would be.’’ 643
C. Final PRA Analysis
As previously discussed, the
Commission made changes to the Rule
based on the record. Some of these
changes, in turn, affect the PRA
analysis. Specifically, the Commission
determined to specify and thereby limit
the types of disclosures required,
narrow the scope of entities covered (by
excluding those solely involved in
‘‘promoting’’ negative option plans),
curtail the length of time for retaining
records (to only three years), and
establish an option for sellers to
eliminate having to keep records of
consent if they have the requisite
processes in place. Neither the
Commission nor the presiding officer at
the informal hearing received evidence
to dispute the specific PRA-related
figures in the NPRM. For the final Rule,
the Commission adopts the following
PRA analysis.
Number of Respondents. The
Commission received no evidence to
dispute the NPRM’s statements on the
number of entities offering negative
option features to consumers, so the
Commission adopts the NPRM estimate
that there are 106,000 such entities.
Although the final Rule is narrower in
that it excludes the term ‘‘promote’’
from its scope, the Commission retains
the estimate of 106,000 entities for the
purposes of this analysis, which would
be more conservative and tend to
overstate the burden.
Recordkeeping Hours. The
Commission received no evidence to
dispute the NPRM’s statements on
recordkeeping under the PRA. As the
final Rule is narrower, the time and
financial resources needed to comply
with disclosure requirements still do
not constitute ‘‘burden’’ under the
PRA.644 Accordingly, the Commission
adopts the NPRM estimate that 53,000
entities subject to the Rule will require
approximately one hour per year to
comply with the Rule’s recordkeeping
requirements, for an annual total of
53,000 burden hours.
Disclosure Hours. Similarly, the
Commission received no evidence to
dispute the NPRM’s statements on
disclosure hours under the PRA. As the
final Rule narrowed and delineated the
types of disclosures required, the time
and financial resources associated with
making these disclosures is even less
than under the proposed Rule, which
also did not constitute a ‘‘burden’’
under the PRA because they are a usual
and customary part of regular business
practice. 5 CFR 1320.3(b)(2).
Accordingly, the Commission adopts
the NPRM estimate that the disclosure
burden required by the Rule will be, on
average, two hours each year for each
seller subject estimated to be subject the
Rule, for a total estimated annual
burden of 212,000 hours.
Estimated Annual Labor Cost. The
Commission received no evidence to
dispute the NPRM’s statements on labor
costs under the PRA. For the final Rule,
the Commission updates its labor cost
estimates by using more recent wage
data. For recordkeeping, staff multiplied
the 53,000 estimated hours to comply
with the Rule’s recordkeeping
provisions by a clerical wage rate of
$20.94/hour,645 to yield an annual cost
of approximately $1,109,820. For
disclosure compliance, staff multiplied
the 212,000 estimated hours by an
hourly wage rate for sales personnel of
$25.62,646 to yield an annual cost of
$5,431,440. Thus, the estimated total
annual labor costs are $6,541,260
[($1,109,820 recordkeeping) +
($5,431,440 disclosure)].
Estimated Annual Non-Labor Cost.
The Commission received no evidence
to dispute the NPRM’s statements that
capital and start-up costs associated
with the Rule’s recordkeeping
provisions are de minimis under the
PRA. The Commission adopts those
findings.
List of Subjects in 16 CFR Part 425
Advertising, Consumer protection,
Trade practices.
■ For the reasons stated in the preamble,
the Federal Trade Commission revises
16 CFR part 425 to read as follows:
PART 425—RULE CONCERNING
RECURRING SUBSCRIPTIONS AND
OTHER NEGATIVE OPTION
PROGRAMS
Sec.
425.1 Scope.
425.2 Definitions.
425.3 Misrepresentations.
425.4 Important information.
425.5 Consent.
425.6 Simple cancellation (‘‘Click to
Cancel’’).
425.7 Relation to State laws.
425.8 Exemptions.
425.9 Severability.
Authority: 15 U.S.C. 41 through 58.
§ 425.1 Scope.
This Rule contains requirements
related to any form of negative option
program in any media, including, but
not limited to, Interactive Electronic
Media, telephone, print, and in-person
transactions.
§ 425.2 Definitions.
Billing Information means any data
that enables any person to access a
consumer’s account, such as a credit
card, checking, savings, share or similar
account, utility bill, mortgage loan
account, or debit card.
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Charge, Charged, or Charging 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.
Clear and Conspicuous means that a
required disclosure is easily noticeable
(i.e., difficult to miss) and easily
understandable by ordinary consumers,
including in all of the following ways:
(1) In any communication that is
solely visual or solely audible, the
disclosure must 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
must 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.
(2) A visual disclosure, by its size,
contrast, location, the length of time it
appears, and other characteristics, must
stand out from any accompanying text
or other visual elements so that it is
easily noticed, read, and understood.
(3) An audible disclosure, including
by telephone or streaming video, must
be delivered in a volume, speed, and
cadence sufficient for ordinary
consumers to easily hear and
understand it.
(4) In any communication using an
Interactive Electronic Medium, such as
the internet, mobile application, or
software, the disclosure must be
unavoidable.
(5) The disclosure must use diction
and syntax understandable to ordinary
consumers and must appear in each
language in which the representation
that requires the disclosure appears.
(6) The disclosure must comply with
these requirements in each medium
through which it is received, including
all electronic devices and face-to-face
communications.
(7) The disclosure must not be
contradicted or mitigated by, or
inconsistent with, anything else in the
communication.
(8) When the representation or sales
practice targets a specific audience,
such as children, older adults, or the
terminally ill, ‘‘ordinary consumers’’
includes members of that group.
Interactive Electronic Medium is any
electronic means of communicating
(except via telephone calls), including
internet, mobile application, text, chat,
instant message, email, software, or any
online service.
Material means likely to affect a
person’s choice of, or conduct regarding,
goods or services.
Negative Option Feature is a
provision of a contract under which the
consumer’s silence or failure to take
affirmative action to reject a good or
service or to cancel the agreement is
interpreted by the negative option seller
as acceptance or continuing acceptance
of the offer, including, but not limited
to:
(1) An automatic renewal;
(2) A continuity plan;
(3) A free-to-pay conversion or fee-to-
pay conversion; or
(4) A pre-notification negative option
plan.
Negative Option Seller means the
person selling, offering, charging for, or
otherwise marketing a good or service
with a Negative Option Feature.
§ 425.3 Misrepresentations.
In connection with promoting or
offering for sale any good or service
with a Negative Option Feature, it is a
violation of this part and an unfair or
deceptive act or practice in violation of
section 5 of the Federal Trade
Commission Act (‘‘FTC Act’’) for any
Negative Option Seller to misrepresent,
expressly or by implication, any
Material fact, including any of the
following:
(a) The Negative Option Feature or
any term of the Negative Option
Feature, including consumer consent,
any deadline to prevent or stop a
Charge, or the cancellation of the
Negative Option Feature;
(b) Cost;
(c) Purpose or efficacy of the
underlying good or service;
(d) Health or safety; or
(e) Any other Material fact.
§ 425.4 Important information.
(a) Disclosures. In connection with
promoting or offering for sale any good
or service with a Negative Option
Feature, it is a violation of this part and
an unfair or deceptive act or practice in
violation of section 5 of the FTC Act for
a Negative Option Seller to fail to
disclose to a consumer, prior to
obtaining the consumer’s Billing
Information, all Material terms,
regardless of whether those terms
directly relate to the Negative Option
Feature, and including but not limited
to:
(1) That consumers will be Charged
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;
(2) Each deadline (by date or
frequency) by which the consumer must
act to prevent or stop the Charges;
(3) The amount (or range of costs) the
consumer will be Charged and, if
applicable, the frequency of the Charges
a consumer will incur unless the
consumer takes timely steps to prevent
or stop those Charges; and
(4) The information necessary for the
consumer to find the simple
cancellation mechanism required
pursuant to § 425.6.
(b) Form and content of required
information. (1) Clear and Conspicuous:
Each disclosure required by paragraph
(a) of this section must be Clear and
Conspicuous.
(2) Placement:
(i) The disclosures required by
paragraphs (a)(1) through (4) of this
section must appear immediately
adjacent to the means of recording the
consumer’s consent for the Negative
Option Feature; and
(ii) The disclosures required by
paragraph (a) of this section (including,
but not limited to, the disclosures
required by paragraphs (a)(1) through (4)
of this section) must appear before
obtaining the consent required pursuant
to § 425.5.
(3) Other Information: All
communications, regardless of media,
must not contain any other information
that interferes with, detracts from,
contradicts, or otherwise undermines
the ability of consumers to read, hear,
see, or otherwise understand the
disclosures required by paragraph (a) of
this section.
§ 425.5 Consent.
(a) Express informed consent. In
connection with promoting or offering
for sale any good or service with a
Negative Option Feature, it is a violation
of this part and an unfair or deceptive
act or practice in violation of section 5
of the FTC Act for a Negative Option
Seller to fail to obtain the consumer’s
express informed consent before
Charging the consumer. In obtaining
such expressed informed consent, the
Negative Option Seller must:
(1) Obtain the consumer’s
unambiguously affirmative consent to
the Negative Option Feature offer
separately from any other portion of the
transaction;
(2) 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; and
(3) Keep or maintain verification of
the consumer’s consent for at least three
years. However, if the seller can
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90539	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
1 See Negative Option Rule, 88 FR 24716, 24736
(proposed Apr. 24, 2023) (‘‘Annual reminders for
negative option features not involving physical
goods.’’) (to be codified at 16 CFR 425.7), https://
www.federalbregister.gov/documents/2023/04/24/
2023-07035/negative-option-rule.
demonstrate by a preponderance of the
evidence that it uses processes ensuring
no consumer can technologically
complete the transaction without
consent, such seller does not have to
maintain these records for such
transactions.
(b) Requirements for Negative Option
Features covered in the Telemarketing
Sales Rule. Negative Option Sellers
covered by the Telemarketing Sales Rule
must comply with all applicable
requirements provided in 16 CFR part
310, including, for transactions
involving preacquired account
information and a free-to-pay–
conversion feature, obtaining from the
customer, at a minimum, the last four
(4) digits of the account number to be
charged and making and maintaining an
audio recording of the entire
telemarketing transaction as required by
16 CFR part 310.
(c) Documentation of unambiguously
affirmative consent for written offers.
Except for transactions covered by the
preauthorized transfer provisions of the
Electronic Fund Transfer Act (15 U.S.C.
1693e) and Regulation E (12 CFR
1005.10), a Negative Option Seller will
be deemed in compliance with the
requirements of paragraph (a)(1) of this
section for all written offers (including
over the internet or phone applications),
if that seller obtains the required
consent through a check box, signature,
or other substantially similar method,
which the consumer must affirmatively
select or sign to accept the Negative
Option Feature and no other portion of
the transaction. The consent request
must be presented in a manner and
format that is clear, unambiguous, non-
deceptive, and free of any information
not directly related to the consumer’s
acceptance of the Negative Option
Feature.
§ 425.6 Simple cancellation (‘‘Click to
Cancel’’).
(a) Simple mechanism required for
cancellation. In connection with
promoting or offering for sale any good
or service with a Negative Option
Feature, it is a violation of this Rule and
an unfair or deceptive act or practice in
violation of section 5 of the FTC Act for
the Negative Option Seller to fail to
provide a simple mechanism for a
consumer to cancel the Negative Option
Feature; avoid being Charged, or
Charged an increased amount, for the
good or service; and immediately stop
any recurring Charges.
(b) Simple mechanism at least as
simple as consent. The simple
mechanism required by paragraph (a) of
this section must be at least as easy to
use as the mechanism the consumer
used to consent to the Negative Option
Feature.
(c) Minimum requirements for simple
mechanism. At a minimum, the
Negative Option Seller must provide the
simple mechanism required by
paragraphs (a) and (b) of this section
through the same medium the consumer
used to consent to the Negative Option
Feature, and:
(1) For cancellation by Interactive
Electronic Medium, the simple
cancellation mechanism must be easy to
find when the consumer seeks to cancel.
Compliance with the disclosure
required under § 425.4(a)(4) does not
discharge this obligation. In no event
shall a consumer be required to interact
with a live or virtual representative
(such as a chatbot) to cancel if the
consumer did not do so to consent to
the Negative Option Feature.
(2) For cancellation by telephone call,
the Negative Option Seller must
promptly effectuate cancellations
requested by the consumer via a
telephone number that is answered or
records messages, made available during
normal business hours, and not more
costly to use than the telephone call the
consumer used to consent to the
Negative Option Feature.
(3) For cancellation of consent
obtained in person, in addition to
offering cancellation, where practical,
via an in-person method similar to that
the consumer used to consent to the
Negative Option Feature, the Negative
Option Seller must offer the simple
mechanism through an Interactive
Electronic Medium or by providing a
telephone number. The alternate simple
mechanism required by this paragraph
must satisfy all requirements of
paragraphs (c)(1) and (2) of this section,
as applicable. If the Negative Option
Seller offers the alternate mechanism by
providing a telephone number, the
seller shall not erect a cost-barrier to
cancellation by imposing any
unnecessary or unreasonable cost for the
cancellation call.
§ 425.7 Relation to State laws.
(a) In general. This part shall not be
construed as superseding, altering, or
affecting any State statute, regulation,
order, or interpretation relating to
negative option requirements, except to
the extent it is inconsistent with the
provisions of this part, and then only to
the extent of the inconsistency.
(b) Greater protection under State law.
For purposes of this section, a State
statute, regulation, order, or
interpretation is not inconsistent with
the provisions of this part if it affords
any consumer greater protection than
provided under this part.
§ 425.8 Exemptions.
Any person to whom this part applies
may petition the Commission for a
partial or full exemption. The
Commission may, in response to
petitions or on its own authority, issue
partial or full exemptions from this part
if the Commission finds application of
this part’s requirements is not necessary
to prevent the acts or practices to which
this part relates. The Commission shall
resolve petitions using the procedures
provided in 16 CFR 1.31. If appropriate,
the Commission may condition such
exemptions on compliance with
alternative standards or requirements to
be prescribed by the Commission.
§ 425.9 Severability.
The provisions of this part are
separate and severable from one
another. If any provision is stayed or
determined to be invalid, the remaining
provisions shall continue in effect.
By direction of the Commission,
Commissioners Holyoak and Ferguson
dissenting.
April J. Tabor,
Secretary.
Note: The following statements will not
appear in the Code of Federal Regulations.
Statement of Commissioner Rebecca
Kelly Slaughter
As is common in rulemaking proceedings,
this Final Rule that the Commission
promulgates is somewhat different from what
it originally proposed—clarified, narrowed,
and ultimately improved by the process of
grappling with the substantial record of
comments submitted by the public. I extend
my heartfelt thanks to everyone who
submitted comments; to the talented staff in
our Division of Enforcement and the East
Central Regional Office who diligently
shepherded this proceeding, thoroughly
considered all those comments, and
recommended thoughtful revisions; and to
my colleagues for their deep engagement
with this issue of great importance, including
former Chairman Joe Simons, under whose
leadership the Commission initiated this
rulemaking proceeding.
I write separately to draw attention to the
comment record about a provision that the
Commission proposed but ultimately does
not finalize, proposed § 425.7, which would
have required annual reminders of
subscriptions that do not involve the delivery
of physical goods.1 Americans understand
the importance and value of such a
requirement; many have discovered that they
or their parents had been paying for years or
even decades for a service wholly unused,
such as a dial-up internet service from the
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90540 	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
2 See, e.g., Cmt. of the Attorneys General of New
York, Pennsylvania, Alabama, Arizona, California,
Colorado, Connecticut, Delaware, District of
Columbia, Hawaii, Illinois, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Nebraska,
Nevada, New Jersey, North Carolina, North Dakota,
Oklahoma, Oregon, Vermont, Washington, and
Wisconsin (June 23, 2023), at 15 (‘‘Subscription
management has become an entire industry;
consumers can choose from a variety of companies
that offer to monitor their recurring subscriptions.
We believe that consumers should not have to sign
up for yet another service—one that comes with
privacy and security risks, as subscription
monitoring services require sharing financial
account and other sensitive information—in order
to effectively manage their subscriptions.’’), https://
www.regulations.gov/comment/FTC-2023-0033-
0886; Cmt. of Consumer Action, Consumer
Federation of America, Demand Progress Education
Fund, National Association of Consumer
Advocates, National Consumer Law Center (on
behalf of its low-income clients), and National
Consumer League (June 23, 2023), at 7 (‘‘Consumers
deserve to know when they are about to be charged
automatically, with a chance to opt out.’’), https://
www.regulations.gov/comment/FTC-2023-0033-
0880; Cmt. of Profs. Caruso, Raghavan, Sovern,
Vladeck, Pridgen, Janger, Ondersma, and Block-Lieb
(June 23, 2023), at 7–8 (encouraging the
Commission to adopt the reminder requirement
without narrowing it), https://www.regulations.gov/
comment/FTC-2023-0033-0861.
3 See Fed. Trade Comm’n, Negative Option Rule,
Final Rule Statement of Basis and Purpose (Oct. 16,
2024) (draft as submitted to the Office of the Federal
Register), at 138–44.
4 See 2024 Va. Acts, H. 744, Apr. 4, 2024 (to be
codified at section 59.1–207.46(E)), https://
legacylis.virginia.gov/cgi-bin/legp604.exe?241+
ful+CHAP0452+pdf.
1 Dissenting Statement of Comm’r Melissa
Holyoak, Joined by Comm’r Andrew N. Ferguson,
In the Matter of the Non-Compete Clause Rule, FTC
Matter No. P201200, at 1 (June 28, 2024) (quoting
U.S. Const. Art. I and W. Virginia v. EPA, 597 U.S.
697, 737–38 (2022) (Gorsuch, J., concurring))
(cleaned up), https://www.ftc.gov/system/files/ftc_
gov/pdf/2024-6-28-commissioner-holyoak-nc.pdf.
2 15 U.S.C. 57a.
3 Cf. Dissenting Statement of Comm’r Melissa
Holyoak, Joined by Comm’r Andrew N. Ferguson,
supra note 1, at 2 (‘‘My dissent should not,
however, be interpreted to mean that I endorse all
non-compete agreements. To the contrary, I would
support the Commission’s prosecution of anti-
competitive non-compete agreements, where the
facts and law support such enforcement. That is
why I am particularly disappointed that the
Commission dedicated the Commission’s limited
resources to a broad rulemaking that exceeds
congressional authorization and will likely not
survive legal challenge.’’) (citation omitted).
4 See, e.g., A New Way Forward for the Middle
Class: A Plan to Lower Costs and Create an
Opportunity Economy, KamalaHarris.com, at 33
(Sept. 2024) (‘‘Under her leadership as Vice
President, the Administration has launched a
historic effort to crack down on junk fees and save
consumers time and money. This includes [a rule]
to . . . make it as easy to cancel a subscription as
it is to subscribe. . . . A Harris-Walz
Administration will . . . continue to take on the
everyday hassles that waste Americans’ time and
money, [including] subscriptions. . . .’’) (citing
FTC press release), https://kamalaharris.com/wp-
content/uploads/2024/09/Policy-Book-Economic-
Opportunity.pdf.
5 15 U.S.C. 8401–8405.
6 16 CFR part 310.
7 12 CFR 1005.10.
8 15 U.S.C. 57a.
9 See generally Dissenting Statement of Comm’r
Melissa Holyoak, Joined by Comm’r Andrew N.
Ferguson, supra note 1.
1990s.2 The reason that the Commission
declines to finalize this proposal is not that
it lacks policy merit but that the record in
total does not support its inclusion in the
Final Rule as proposed. 3 Of course, we are
always mindful that our authority under the
FTC Act to issue rules under section 18 has
limits; sometimes, as here, those limits
prevent us from codifying in a rule practices
that we might, as a matter of policy, prefer
to require explicitly.
Congress and State legislatures, by
contrast, have plenary authority to require
such a reminder. This spring, for example, in
a show of bipartisanship, Virginia Governor
Glenn Youngkin signed into law legislation
sponsored by Delegate Michelle Lopes
Maldonado, H.B. 744, which requires that
subscriptions that renew annually provide to
the consumer a notice of the upcoming
renewal and the opportunity to cancel via
between 30 and 60 days before the consumer
is charged for the renewal.4 The comment
record compiled in this rulemaking
proceeding strongly supports the wisdom of
Federal and State legislators’ carefully
considering adopting such a law, and the
Final Rule’s omission of such a provision
should be understood only as a reflection of
the Commission’s cautious approach to its
jurisdictional limits and not as related to the
merits of a policy that requires annual
reminders for subscription services.
Dissenting Statement of Commissioner
Melissa Holyoak
‘‘Article I of the Constitution vests ‘all
legislative Powers herein granted’ in
Congress. ‘By vesting the lawmaking power
in the people’s elected representatives, the
Constitution sought to ensure not only that
all power would be derived from the people,
but also that those entrusted with it should
be kept in dependence on the people.’ ’’ 1
Whenever we engage in rulemaking, the
Commission should recall that Article I of the
Constitution vests legislative powers in
Congress, not with agencies. Because of that,
it is elected officials that delineate the
boundaries, and set the requirements, that we
as Commissioners must adhere to. I believe
the Commission exceeds those boundaries
and requirements in amendments to the
Negative Option Rule, 16 CFR part 425,
(‘‘Rule’’) it finalizes today. Instead of
pursuing targeted enforcement efforts or
finalizing a rule consistent with the
Commission’s authority under section 18 of
the FTC Act,2 the Commission has used its
limited resources to promulgate a broader
regulation that may not survive legal
challenge.3
The likely unlawful character of the rule is
compounded by the Majority’s race to cross
the finish line. Why the rush? There is a
simple explanation. Less than a month from
election day, the Chair is hurrying to finish
a rule that follows through on a campaign
pledge made by the Chair’s favored
presidential candidate.4
The Majority votes today to approve a final
trade regulation rule amendment to the
existing negative option rule. This
amendment greatly expands the prior rule,
which had covered now-rare prenotification
plans (e.g., book-of-the-month clubs)—and
goes well beyond what existing laws, such as
the Restore Online Shoppers’ Confidence Act
(‘‘ROSCA’’),5 Telemarketing Sales Rule
(‘‘TSR’’),6 or Regulation E,7 require. The now-
capacious Rule creates potential civil penalty
liability for: any misrepresentation of
material fact made in connection with the
marketing of a product or service that has a
negative option feature (§ 425.3); failure to
disclose all material terms before obtaining
billing information in connection with a
negative option (§ 425.4); failure to obtain
express informed consent before charging in
connection with a negative option (§ 425.5);
and failure to provide a simple mechanism
for cancelling a negative option (§ 425.6). The
Rule also preempts inconsistent State laws
(§ 425.7).
I respectfully dissent for three reasons.
First, this rulemaking did not follow the FTC
Act’s section 18 requirements for rulemaking
because: (1) the Rule is much broader than
the ‘‘area of inquiry’’ proposed by the
advance notice of proposed rulemaking
(‘‘ANPR’’); (2) the Rule fails to define with
specificity acts or practices that are unfair or
deceptive, improperly generalizing from
narrow industry-specific complaints and
evidence to the entire American economy;
and (3) the Rule fails to demonstrate that the
unfair or deceptive acts or practices related
to negative option billing are ‘‘prevalent.’’ 8
Second, the Rule’s breadth incentivizes
companies to avoid negative option features
that honest businesses and consumers find
valuable. Third, the Rule represents a missed
opportunity to make useful amendments to
the preexisting negative option rule within
the scope of the Commission’s authority.
Such amendments could have provided
greater clarity to businesses about the
patchwork of Federal laws pertaining to
negative options and lawfully used our
section 18 rulemaking authority to fill
potential gaps including, for example,
cancellation requirements. Indeed, I am very
concerned that consumers are sometimes
misled by companies using deceptive
negative option features. The Rule represents
a missed opportunity to devote scarce staff
resources to bringing enforcement actions
related to negative option features using the
clear tools that Congress gave us, rather than
conducting an overbroad rulemaking that
cost years of staff time to propose and
finalize, but will likely not survive legal
challenge.
Today’s rulemaking did not need to end
this way. Had political leadership at the
Commission taken more time to engage with
other Commissioners to refine and improve
the Rule, my vote and statement would look
very different. Instead, less than a month
from November 5, the Chair has put political
expediency over getting things right.
Unfortunately, pushing politically motivated
rulemakings has not been the exception with
the Majority. 9 Today, I believe we are seeing
another low in our abuse and misuse of the
tools Congress has given us. Rather than
engage in blatant electioneering to advance
political ends, the Commission should have
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90541	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
10 Magnuson-Moss Warranty Act of 1975, Public
Law 93–637, 88 Stat. 2183.
11 See J. Howard Beales III, The Fed. Trade
Comm’n’s Use of Unfairness Authority: Its Rise,
Fall, and Resurrection, 22 J. of Pub. Pol’y & Mktg.
192, 193 (2003) (citing FTC Staff Report on
Television Advertising to Children (Feb. 1978);
Notice of Proposed Rulemaking on Television
Advertising to Children, 43 FR 17967 (Apr. 27,
1978)). In the 1970s, the Commission aggressively
used its rulemaking authority—so aggressively that
it has been called the ‘‘second most powerful
legislature in America.’’ Timothy J. Muris, The
Consumer Protection Mission: Guiding Principles
and Future Direction, 51 Antitrust L.J. 625, 625
(1982). The approach of today’s Majority threatens
to turn back the clock to this earlier, ill-advised
approach.
12 Id. at 193.
13 Id.
14 S. Rep. No. 96–500, at 3 (1979).
15 Federal Trade Commission Improvements Act
of 1980, Public Law 96–252, 94 Stat. 374.
16 Id.
17 Jeffrey S. Lubbers, It’s Time To Remove the
‘‘Mossified’’ Procedures for Removing FTC
Rulemaking, 83 Geo. Wash. L. Rev. 1979, 1997
(2015).
18 Press Release, Fed. Trade Comm’n, FTC Votes
to Update Rulemaking Procedures, Sets Stage for
Stronger Deterrence of Corporate Misconduct (July
1, 2021), https://www.ftc.gov/news-events/news/
press-releases/2021/07/ftc-votes-update-
rulemaking-procedures-sets-stage-stronger-
deterrence-corporate-misconduct.
19 See Dissenting Statement of Comm’rs Christine
S. Wilson and Noah Joshua Phillips, Regarding the
Comm’n Statement On the Adoption of Revised
Section 18 Rulemaking Procedures (July 9, 2021),
https://www.ftc.gov/system/files/documents/
public_statements/1591702/p210100_
wilsonphillips_joint_statement_-_rules_of_
practice.pdf.
20 Id. at 3–5.
21 Id. at 3.
22 See generally Betsy Klein et al., Biden Cracks
Down on ‘‘Junk Fees’’ in New Economic Focus
Ahead of Midterms, CNN (Oct. 26, 2022), https://
www.cnn.com/2022/10/26/politics/biden-bank-fees-
speech/index.html.
23 See, e.g., Biden-Harris Administration
Announces Broad New Actions to Protect
Consumers from Billions in Junk Fees, The White
House (Oct. 11, 2023) (‘‘The FTC proposed a ‘click
to cancel’ rule in March of 2023, that, if finalized
as proposed, would require sellers to make it as
easy for consumers to cancel their enrollment as it
was to sign up. This rule would rescue consumers
from seemingly never-ending struggles to cancel
unwanted subscription payment plans for
everything from cosmetics to gym memberships.’’),
https://www.whitehouse.gov/briefing-room/
statements-releases/2023/10/11/biden-harris-
administration-announces-broad-new-actions-to-
protect-consumers-from-billions-in-junk-fees/.
24 See, e.g., A New Way Forward,
KamalaHarris.com, supra note 4.
25 See, e.g., President Biden (@POTUS), X.com
(Aug. 12, 2024) (‘‘We’re making it easier to cancel
subscriptions and memberships. You shouldn’t
have to navigate a maze just to cancel unwanted
subscriptions and recurring payments. The FTC is
hard at work finalizing its ‘Click to Cancel’ rule that
it proposed to make this process a requirement.’’),
https://x.com/POTUS/status/
1823037212885414107; see also FACT SHEET:
Biden-Harris Administration Launches New Effort
to Crack Down on Everyday Headaches and Hassles
That Waste Americans’ Time and Money, The
White House (Aug. 12, 2024) (‘‘Today, President
Biden and Vice President Harris are launching
‘Time Is Money,’ a new governmentwide effort to
crack down on all the ways that corporations . . .
add unnecessary headaches and hassles to people’s
days and degrade their quality of life. . . . The
Federal Trade Commission (FTC) has proposed a
rule that, if finalized as proposed, would require
companies to make it as easy to cancel a
subscription or service as it was to sign up for one.
The agency is currently reviewing public comments
about its proposal.’’), https://www.whitehouse.gov/
briefing-room/statements-releases/2024/08/12/fact-
sheet-biden-harris-administration-launches-new-
effort-to-crack-down-on-everyday-headaches-and-
hassles-that-waste-americans-time-and-money/.
instead focused on stewarding its resources
effectively and in ways that restore our
institutional legitimacy, not further
undermine it.
I. The historical context surrounding
Congress’s enactment of rulemaking
requirements in section 18 of the FTC Act is
important. Congress passed the Magnuson-
Moss Warranty Act in 1975, which imposed
exacting requirements and limitations on
rulemaking regarding unfair or deceptive acts
or practices.10 In the 1970s, the Commission
tried to use its rulemaking and unfairness
authority aggressively—for example, ‘‘to ban
all advertising directed to children on the
grounds that it was ‘immoral, unscrupulous,
and unethical’ and based on generalized
public policies to protect children.’’ 11 In
response, Congress refused to fund the
Commission, shutting it down for several
days. 12 Even this harsh rebuff did not
completely cool Congressional ire with the
‘‘National Nanny’’ (as the Washington Post—
no bastion of conservative thought—
facetiously dubbed the Commission).13 A
1979 Senate Report found that the agency’s
rulemaking efforts were filled with
‘‘excessive ambiguity, confusion, and
uncertainty.’’ 14 In 1980, Congress legislated
to limit the Commission’s authority, by
imposing additional procedural obligations
on section 18 rulemaking.15 Among other
things, Congress created additional
procedural rights, well beyond the
Administrative Procedure Act’s baseline
procedural requirements, such as requiring
the FTC to issue an ANPR with numerous
specific requirements, which the
Commission must submit to Congress, for
each rulemaking. 16
Congress’ harsh reaction to the FTC’s
overreach only makes sense if we understand
that section 18 was created and then
expanded not to give the Commission free-
ranging rulemaking authority, but to curb it.
We should be exacting in following the
requirements of section 18, lest we risk
repeating history—drawing Congressional ire
that that could further limit our authority and
budget. Indeed, section 18’s rulemaking
requirements, while demanding, are the
means of assuring that we act within the
parameters established by Congress.
As an initial matter, this Rule’s procedural
irregularities begin with how the Rule was
finalized in a compressed time frame. Given
the rigorous demands of section 18
rulemaking, historically, it has taken the
Commission, on average, 5.57 years to issue
a rule after the Magnuson-Moss procedures
were enacted.17 That, apparently, was too
much time and procedure for the Majority. In
2021, during the pendency of this
rulemaking, the Commission made changes
to its rules of practice,18 over objections from
the Commissioners in the Minority, to limit
the efficacy of section 18’s procedural
safeguards and compress rulemaking
timeframes.19 Among other things, the
Commission revised the Rules of Practice so
as to remove selection of the Presiding
Officer from an independent judge and assign
that role to the Chair; strip the Presiding
Officer of significant control over the hearing
process; and narrow opportunities for the
public to help determine which factual issues
are in dispute.20 Then-Commissioners
Phillips and Wilson dissented, noting: ‘‘What
the[se] changes—adopted without public
input—in fact do is fast-track regulation at
the expense of public input, objectivity, and
a full evidentiary record.’’ 21
Apparently not content with even these
procedural shortcuts and compressed
timeframe, political leadership now speeds to
the finish line with minimal opportunity for
Commissioner engagement on the final Rule.
There should be ample opportunity for
robust consideration and dialogue leading up
to a Commission vote on any regulation, and
especially for a highly consequential rule.
Such opportunity for dialogue may assuage
concerns, produce constructive changes, and
ultimately lead to a better result. Indeed, in
the past where political leadership has been
willing to engage and make needed
modifications preceding votes, that
consideration and engagement have been
very valuable and led to bipartisan support
for Commission actions.
Here, however, the time period for me to
review this economy-wide Rule was a matter
of weeks. Those weeks were also packed with
dozens of cases, one other rulemaking, and
other policy matters. (Remarkably, the Chair
had this draft final Rule for some time before
it was circulated to the other
Commissioners.) Reviewing the NPRM was
no substitute for robust discussion and
negotiation related to the final Rule’s
language and statement of basis and purpose,
as the final Rule differs in important ways
from the rule as proposed. The push to
finalize is inexcusable, particularly because it
is a discretionary rulemaking with no due
date (imposed by Congress or otherwise). For
those tracking the Rule and national politics
closely, this rush to the finish line (and less
than a month from a Presidential election) is
no surprise. This Rule is connected to the
current administration’s efforts relating to so-
called junk fees (which are beginning to
make a regular appearance before
elections 22 ), and it has been in the spotlight
for some time, including at the White
House 23 and now on the campaign trail.24
But elevating political goals comes at a
high price, harms policy efforts that might
otherwise benefit consumers, and
undermines the Commission’s legitimacy.
Publicly appearing to refuse to keep an open
mind on a final rule or to prejudge complex
policy questions, along with an apparent
unwillingness to reconsider various aspects
of a rulemaking may create PR buzz for the
campaign trail and score political points. But
that posture creates real legal risk for the
Rule. Statements from the White House 25
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26 See, e.g., Lina Khan (@linakhanFTC), X.com
(Aug. 12, 2024) (‘‘As @POTUS notes, @FTC’s
proposal would require that firms make it as easy
to cancel a subscription as it is to sign up. Too often
people have to jump through endless hoops—or end
up stuck paying for services they don’t want. Our
rule would end this tax on your time & money.’’),
https://x.com/linakhanFTC/status/
1823094653962289640. That Tweet came in
response to the President unequivocally saying,
‘‘[w]e’re making it easier to cancel subscriptions
and memberships,’’ and signaling the proposal
would be finalized consistent with the NPRM. See
President Biden (@POTUS), supra note 25. Other
statements are similarly probative of apparent
conclusions being reached about the contours of the
final rule. See, e.g., Chair Lina M. Khan, Remarks
at Center for American Progress, at 3–4 (Sept. 25,
2024) (‘‘We’ve also unfortunately seen a rise in
subscription traps. We’ve all been there. Every
month, you’re paying for that gym membership you
don’t really use, or streaming services you never
signed up for in the first place. But it’s absurdly
difficult to actually cancel these services. You have
to call customer service and spend an hour on the
phone with a bot before you finally get through to
a human being. Customer Service then transfers you
to Memberships. They transfer you to Cancellations.
And then suddenly the call drops and you have to
do it all over again. It can feel like you’re stuck in
some type of endless doom loop. And many people
understandably just give up—and pay dozens if not
hundreds of dollars for subscriptions they don’t
want or need. And of course, that’s kind of the
point: to wear you down and keep taking your
money, month after month. I’m excited that the
Commission will be considering finalization of a
‘click to cancel’ rule that would require companies
to make it just as easy to cancel a subscription as
it is to sign up for one.’’), https://www.ftc.gov/
system/files/ftc_gov/pdf/20240925-remarks-chair-
khan-center-for-american-progress.pdf; see also
Chair Lina M. Khan, Remarks at Strike Force on
Unfair and Illegal Pricing Public Convening, at 2
(Aug. 1, 2024) (‘‘We’re currently working toward
finalizing our ‘click to cancel’ rule. Too often,
businesses require people to jump through endless
hoops just to cancel a subscription. Customers end
up paying dozens if not hundreds of dollars a
month in subscriptions they want to escape. Our
proposed rule would require that companies make
it as easy to cancel a subscription as it is to sign
up for one—ending this tax on people’s time and
money.’’), https://www.ftc.gov/system/files/ftc_gov/
pdf/2024.08.01-remarks-chair-khan-strike-force-
public-convening.pdf. In light of such statements
unambiguously reflecting a firm belief in the need
for regulatory action—and all but committing to the
proposed solution—it is risible to suggest this rule
was not effectively baked well before the
Commission’s vote.
27 See, e.g., Talmon Joseph Smith, Lina Khan
Ends FTC Term. What’s Next for Her?, Seattle
Times (Oct. 1, 2024) (‘‘Q: You’ve not gotten any
whispers, any word that you will not be wanted in
a Harris administration? A. No, I think to the
contrary.’’), https://www.seattletimes.com/business/
lina-khan-ends-ftc-term-whats-next-for-her/; see
generally Ben Brody, Lina Khan Hits the Road with
Democrats Ahead of Election, Punchbowl News
(Oct. 2, 2024), https://punchbowl.news/article/
campaigns/ftc-lina-khan-campaigns-with-
democrats/; cf. Letter from James Comer, Chair,
Committee on Oversight and Accountability to Lina
Khan, Chair, Fed. Trade Comm’n, at 1 (Oct. 8, 2024)
(‘‘During this election season, you have engaged in
partisan political activities with numerous
Democrat congressional candidates, undermining
the FTC’s independence and its mission to protect
American consumers regardless of partisan
affiliation’’), https://oversight.house.gov/wp-
content/uploads/2024/10/FTC-re-Chair-Khan-
Campaign-Season-Events_10.8.202423.pdf.
28 See generally 15 U.S.C. 57a(b)(1); 5 U.S.C.
553(c); cf. Air Transport Ass’n of Am. Inc. v. Nat’
Mediation Bd., 663 F.3d 476 (D.C. Cir. 2011); Int’l
Snowmobile Mfrs. Ass’n v. Norton, 340 F. Supp. 2d
1249 (D. Wyo. 2004); Nehemiah Corp. of Am. v.
Jackson, 546 F. Supp. 2d 830 (E.D. Cal. 2008). The
Chair’s approach is highly unusual, given this legal
risk and the Commission’s responsibility to keep an
open mind—which is why, typically,
Commissioners do not comment on pending
rulemakings.
29 15 U.S.C. 57a(b)(2)(A).
30 Fed. Trade Comm’n, Press Release, FTC Seeks
Public Comment on Ways to Improve Current
Requirements for Negative Option Marketing (Sept.
25, 2019), https://www.ftc.gov/news-events/news/
press-releases/2019/09/ftc-seeks-public-comment-
ways-improve-current-requirements-negative-
option-marketing.
31 84 FR 52393, 52394 (Oct. 2, 2019) (‘‘The
Commission seeks comments on ways to improve
its existing regulations for negative option
marketing, a common form of marketing where the
absence of affirmative consumer action constitutes
assent to be charged for goods or services. Negative
option offers are widespread in the marketplace and
can provide substantial benefits for sellers and
consumers. However, consumers cannot reap such
benefits when marketers fail to make adequate
disclosures, bill consumers without their consent,
or make cancellation difficult or impossible. Over
the years, such problematic negative option
practices have remained a persistent source of
consumer harm, often saddling consumers with
recurring payments for products and programs they
did not intend to purchase or did not want. In the
past, the Commission has sought to address such
practices through individual law enforcement cases
and a patchwork of regulations. Nevertheless,
problems persist, and consumers continue to
submit thousands of complaints to the FTC each
year about negative option marketing. To address
these concerns, the Commission seeks comments on
ways to improve existing regulatory requirements,
including whether it should use its rulemaking
authority under the FTC Act to expand the scope
and coverage of the existing Negative Option
Rule.’’).
32 Id. at 52395.
33 Id. at 52396.
34 Fed. Trade Comm’n, Press Release, FTC To
Ramp Up Enforcement Against Illegal Dark Patterns
that Trick or Trap Consumers Into Subscriptions
(Oct. 28, 2021), https://www.ftc.gov/news-events/
news/press-releases/2021/10/ftc-ramp-enforcement-
against-illegal-dark-patterns-trick-or-trap-
consumers-subscriptions.
35 Fed. Trade Comm’n, Press Release, Federal
Trade Comm’n Proposes Rule Provision Making It
Easier for Consumers to ‘‘Click to Cancel’’ Recurring
Subscriptions and Memberships (Mar. 23, 2023),
https://www.ftc.gov/news-events/news/press-
releases/2023/03/federal-trade-commission-
proposes-rule-provision-making-it-easier-
consumers-click-cancel-recurring.
36 Dissenting Statement of Comm’r Christine S.
Wilson, Notice of Proposed Rulemaking, Negative
Option Rule, at 3 (Mar. 23, 2023), https://
www.ftc.gov/system/files/ftc_gov/pdf/p064202_
commissioner_wilson_dissent_negative_option_
rule_finalrevd_0.pdf.
and related statements from the Chair 26
concerning this rule—and other matters
related to her tenure or connected to her
party’s campaign efforts 27—raise the
possibility that foreordained outcomes and
political goals curtailed considering the
rulemaking record with an open mind and
without prejudgment, as law requires.28
Today’s sprint to the finish line has
shortchanged the kind of deliberation and
thoughtful engagement Congress deemed
appropriate when it established rulemaking
requirements under the Magnuson-Moss Act.
In addition to my concern about these
irregularities, I am convinced that this
rulemaking has failed to satisfy section 18’s
requirements for rulemaking in three ways.
First, the Commission is issuing a broad final
rule even though the ANPR was far narrower.
This mismatch means that the Commission
failed to provide in its ANPR the ‘‘brief
description of the area of inquiry under
consideration, the objectives which the
Commission seeks to achieve, and possible
regulatory alternatives under consideration
by the Commission’’ that section 18
requires.29 The mismatch is the result of
leadership changes and priorities. The ANPR
was voted out in 2019 by a bipartisan
Commission under then-Chair Joseph J.
Simons.30 It sought public comments about
centralizing existing legal requirements
regarding negative options and filling gaps
via section 18 rulemaking related to
disclosures, consent, and cancellation.31 The
current Majority took the bipartisan ANPR
and politically supercharged it.
Importantly, the ANPR did not
contemplate broader regulation prohibiting
all misrepresentations of material fact related
to products that have negative option
features. The ANPR tailored its inquiry by
‘‘. . . highlighting five basic section 5
requirements that negative option marketing
must follow to avoid deception’’: (1)
disclosure of material terms of a negative
option offer; (2) clear and conspicuous
disclosures; (3) pre-purchase disclosures; (4)
consent; (5) cancellation.32 Absent from this
list is anything about prohibiting all
misrepresentations of material fact related to
any product that happens to have a negative
option feature. Similarly, when the ANPR
stated that the Commission was seeking
comment ‘‘to reduce consumer harm created
by deceptive or unfair negative option
marketing,’’ it specified the Commission’s
interest pertained to ‘‘disclosures, consumer
consent, and cancellation.’’ 33 Again, absent
from that list was anything about prohibiting
all misrepresentations of material fact related
to marketing of any product that has a
negative option feature.
When Commission leadership changed in
2021, the ‘‘area of inquiry’’ changed as well.
Almost immediately, the Commission under
Chair Khan disrupted this particular
rulemaking process to issue an Enforcement
Policy Statement Regarding Negative Option
Marketing 34 —sub-regulatory guidance on the
very same topic as the rulemaking itself. The
Commission then issued a Notice of
Proposed Rulemaking (‘‘NPRM’’) in 2023 that
introduced into the rulemaking—for the first
time—the notion of prohibiting
misrepresentations related to marketing of
products with negative option features.35
Former Commissioner Christine S. Wilson
dissented from the issuance of the NPRM for
this (among other) reasons. In her dissenting
statement, Commissioner Wilson explained:
‘‘Importantly, we did not seek comment in
the ANPR about whether an expanded
negative option rule should address general
misrepresentations; no comments are cited in
the NPRM to support the inclusion of these
provisions.’’ 36
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37 SBP at 37–38.
38 15 U.S.C. 57a(b)(2)(A)(ii).
39 See Regulations.gov, Negative Option Rule
(ANPR), FTC–2019–0082, https://
www.regulations.gov/docket/FTC-2019-0082.
40 The Commission published 1,162 unique
comments. SBP at 18. See Regulations.gov, Negative
Option Rule (NPRM), FTC–2023–0033–0001,
https://www.regulations.gov/document/FTC-2023-
0033-0001.
41 15 U.S.C. 57a(b)(2)(A) (‘‘Prior to the publication
of any notice of proposed rulemaking pursuant to
paragraph (1)(A), the Commission shall publish an
advance notice of proposed rulemaking in the
Federal Register.’’).
42 Cf. Dissenting Statement of Comm’r Andrew N.
Ferguson, Joined by Comm’r Melissa Holyoak, In re
Non-Compete Clause Rule, FTC Matter No.
P201200, at 20–22 (June 28, 2024), https://
www.ftc.gov/system/files/ftc_gov/pdf/ferguson-
noncompete-dissent.pdf (describing nondelegation
doctrine).
43 15 U.S.C. 57a(a)(1)(B).
44 S. Rep. No. 93–1408 at 7702, 7755, 7763 (1974)
(Conf. Rep.).
45 15 U.S.C. 45(n).
46 Cf. Katharine Gibbs School (Inc.) v. FTC, 612
F.2d 658, 661–62 (2d Cir. 1979) (setting aside FTC
rule under section 18 that did not, among other
things, define unfair practices with sufficient
specificity).
47 See, e.g., id. at 663 (‘‘When Congress provided
that the Commission’s rules must define unfair and
deceptive acts with specificity, it clearly intended
that the Commission’s definition would be subject
to judicial review.’’).
48 AMG Capital Mgmt., LLC v. FTC, 593 U.S. 67,
70 (2021).
49 15 U.S.C. 57b(a)(1).
50 Id. 57a(b)(3).
51 Id.
52 SBP at 8.
53 See Clark v. Martinez, 543 U.S. 371, 381 (2005)
(describing the canon of constitutional avoidance as
‘‘resting on the reasonable presumption that
Congress did not intend the alternative which raises
serious constitutional doubts’’); see also Adrian
Vermeule, Saving Constructions, 85 Geo. L. J. 1945,
1949 (1997) (providing examples of cases in which
the Supreme Court construed a statute so as to
avoid a constitutional question).
The Statement of Basis and Purpose
(‘‘SBP’’) accompanying the final Rule
cursorily dismisses concerns about the
ANPR’s adequacy, dubiously arguing that
section 18 requires no such ‘‘specificity’’ in
describing the area of inquiry.37 But the
whole purpose of section 18’s requirement of
a description of what the Commission aims
to do is to elicit public comment to inform
the Commission about its choices. Indeed,
section 18 requires an ANPR to invite
interested parties to provide ‘‘suggestions or
alternative methods for achieving such
objectives.’’ 38 Parties cannot possibly
include alternative methods if the ANPR
wholly fails to identify the objective, i.e.,
regulating misrepresentations in marketing of
products with negative option features.
It is telling that the ANPR here only
elicited 17 comments,39 while the NPRM
(which made clear that the Commission was
significantly expanding its focus) elicited
16,000 comments.40 The narrowness of the
ANPR meant the Commission could not,
consistent with section 18, proceed to a
much broader NPRM. 41 In choosing to
interpret the ANPR (and the 17 comments it
elicited) as sufficient predicate for the much-
expanded NPRM, the Commission cut itself
off from valuable public comments at
important early stages (especially as to
regulatory alternatives) and ignored the
rulemaking guardrails that Congress carefully
established to forestall nondelegation
concerns that might otherwise exist.42
The second procedural failing lies in the
Commission’s failure to ‘‘prescribe . . . rules
which define with specificity acts or
practices which are unfair or deceptive acts
or practices’’ as Section 18 requires.43
‘‘Because the prohibitions of section 5 of the
Act are quite broad, trade regulation rules are
needed to define with specificity conduct
that violates the statute and to establish
requirements to prevent unlawful
conduct.’’ 44 Section 425.3 of the Rule fails
Section 18’s specificity requirements. Section
425.3 prohibits any misrepresentation of
material fact made in connection with the
sale or promotion of a product that has a
negative option feature.
Unfairness explicitly requires a cost-benefit
analysis relating to the practices at issue.45
Meanwhile, deception is a subset of the
broader unfairness authority. With its focus
on reasonableness and materiality, no cost-
benefit analysis is required because the
Commission has historically argued that
deceptive practices are always harmful. So
far, so good. But both unfairness, and
particularly deception, require the
Commission to provide sufficient evidence
for a reviewing court to evaluate whether the
Commission has met the legal predicate for
either theory (particularly as it relates to
reasonableness and materiality). While the
Rule provides examples of material
misrepresentations, those are merely
examples. Indeed, the Commission ignores
the specificity requirement by generalizing
from poorly sampled past agency cases.
Whatever the merits of the past cases, the
Majority does not remotely come close to
explaining how the evidence in those limited
cases is similar to the myriad contexts an
economy-wide rule would inevitably apply
to.
Indeed, the Rule is not limited to
misrepresentations relating to deceptive
terms of negative option features (or some
other specific, deceptive conduct), but
instead, applies broadly to any material fact.
Nor does the Rule require that the consumer
actually use the negative option feature; the
mere presence of a negative option feature
would render any misrepresentation of
material fact subject to the Rule. Taken
together, the Rule is nothing more than a
back-door effort at obtaining civil penalties in
any industry where negative option is a
method to secure payment. The Rule’s
application to any misrepresentation
therefore fails to meet Section 18’s
‘‘specificity’’ requirement,46 and will no
doubt invite serious legal challenge on this
basis. 47
The Supreme Court’s decision in AMG,
which held the language of Section 13(b)
does not authorize the Commission to obtain
equitable monetary relief,48 limited the
Commission’s ability to seek money for first-
time violations of the FTC Act. The
Commission is still able, however, to seek
monetary remedies for violation of rules
issued under Section 18.49 Here, the Final
Rule effectively transforms Section 5’s broad
prohibition on unfair or deceptive practices
into a Section 18 rule, allowing the
Commission to expand its ability to seek
money. Indeed, because negative option
features are widely used in a variety of
industries, the Rule greatly expands that
ability. While I generally support legislation
that would grant the FTC authority under
Section 13(b) to obtain court orders for
redress or disgorgement (with whatever
guardrails Congress deems fit), the
Commission should not circumvent
legislative prerogative via improper Section
18 rulemaking.
The third significant procedural flaw in
this rulemaking is that the Commission failed
to appropriately establish the ‘‘prevalence’’ of
unfair and deceptive practices related to all
negative option features for all products in all
markets and all media (i.e., with respect to
the scope of this rule). According to Section
18, the Commission may issue an NPRM
‘‘only where it has reason to believe that the
unfair or deceptive acts or practices which
are the subject of the proposed rulemaking
are prevalent.’’ 50 Section 18 further provides:
The Commission shall make a
determination that unfair or deceptive acts or
practices are prevalent under this paragraph
only if—
(A) it has issued cease and desist orders
regarding such acts or practices, or
(B) any other information available to the
Commission indicates a widespread pattern
of unfair or deceptive acts or practices.51
In the SBP, the Commission argues that it
has satisfied this standard for its economy-
wide rulemaking because it has issued more
than 35 cases ‘‘challenging harmful negative
option practices’’ and has received ‘‘tens of
thousands of consumers complaints.’’ 52 This
evidence may well suggest that some unfair
and deceptive acts related to negative option
offers are indeed prevalent. But these
statistics do not establish prevalence of
misrepresentations of material fact related to
products with negative option features, any
more than the number of FTC cases and
consumer complaints involving the internet
means that the entire internet should be the
subject of a Section 18 rulemaking
prohibiting misrepresentations.
If similarity among complaints and cases
only at the highest level of generality
constitutes the ‘‘prevalence’’ sufficient to
ground an economy-wide rulemaking, then a
‘‘prevalence’’ determination is in fact no
meaningful guardrail on the Commission’s
conduct at all, creating precisely the type of
non-delegation concerns that Section 18’s
guardrails were meant to prevent. Canons of
‘‘avoidance’’ warn us to avoid adopting
interpretations that would render statutes
unconstitutional.53 To avoid precisely that
fate, ‘‘prevalence’’ must require more than
what the Commission has shown here.
A final concern here. The Rule’s failure to
define with specificity the acts or practices
which are unfair or deceptive, combined
with the rule’s preemption of inconsistent
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54 16 CFR 425.7(a) (‘‘Relation to State Laws’’) (‘‘In
General. This part shall not be construed as
superseding, altering, or affecting any State statute,
regulation, order, or interpretation relating to
negative option requirements, except to the extent
it is inconsistent with the provisions of this part,
and then only to the extent of the inconsistency.’’).
55 See Katharine Gibbs School, 612 F.2d at 667.
56 See, e.g., SBP at 145–46, 214.
57 Cf. Statement of Comm’r Christine S. Wilson
Concurring In Part and Dissenting In Part, FTC v.
Neurometrix, Inc., FTC Matter No. 1723130 (Feb.
28, 2020), (disagreeing with the majority of the
Commission on claim interpretation and
substantiation for certain claims), https://
www.ftc.gov/system/files/ftc_gov/pdf/2024.08.01-
remarks-chair-khan-strike-force-public-
convening.pdf.
58 Some businesses were already subject to
disclosure requirements under existing laws such as
ROSCA and the TSR. But those laws are more
limited. For example, ROSCA section 8403 states
that for goods or services sold through a negative
option feature, the seller must ‘‘clearly and
conspicuously disclose all material terms of the
transaction before obtaining the consumer’s billing
information.’’ 15 U.S.C. 8403.
59 Concurring and Dissenting Statement of
Comm’r Melissa Holyoak, Social Media and Video
Streaming Services Staff Report, FTC Matter No.
P205402, at 18–19 (Sept. 19, 2024) (‘‘The core of
this agency’s mission is to protect consumers.
Unfortunately, recent years have seen some
Commissioners take a narrow view of that mission
and where harms emanate from . . . . [W]e should
also protect the American people from harms that
follow when we fail to robustly and
comprehensively scrutinize our own policy efforts
and advocacy, including for economic effects, and
to anticipate potential unintended consequence.’’),
https://www.ftc.gov/system/files/ftc_gov/pdf/
commissioner-holyoak-statement-social-media-
6b.pdf; cf. Dissenting Statement of Comm’r Melissa
Holyoak, Joined by Comm’r Andrew N. Ferguson,
In re Rytr, LLC, FTC Matter No. 2323052, at 5 (Sept.
25, 2024) (‘‘We must protect consumers through
robust enforcement. Indeed, the Commission is at
its best when it does so. But we must also think
carefully about the potential harms to consumers
and innovation that attend misguided enforcement.
Today’s misguided complaint and its erroneous
application of section 5 will likely undermine
innovation in the AI space. I therefore respectfully
dissent.’’), https://www.ftc.gov/system/files/ftc_gov/
pdf/holyoak-rytr-statement.pdf.
60 16 CFR 1.25, 1.31.
61 16 CFR 425.8.
62 Id.
63 To be clear, my concern is not with the
exemption process itself (or its inclusion in the
Rule), but with the enormous work it must do to
compensate for the overbreadth of the provision
regarding misrepresentations.
64 See, e.g., SBP at 171 (‘‘Notwithstanding
IHRSA’s assertion that many fitness clubs offer
online cancellation, at least 25 individual
consumers submitted comments attesting to the
difficulties of canceling gym memberships.’’).
65 Id. at 173 (‘‘Based on these comments, the
Commission makes the simplifying assumption that
the worst gym membership cancellation
experiences involve three failed attempts at
cancellation, each costing one hour of time, and
that, because of those cancellation failures, three
unwanted monthly charges were processed.’’); see
id. at 169–70 (explaining how, in its economic
analysis for the Rule, ‘‘the Commission proxies the
per-cancellation benefits of an additional, remote,
method of cancellation by looking at those benefits
in the context of gym memberships’’).
66 See id. at 171.
State laws,54 seems likely to create confusion
and, ultimately, may harm consumers. The
Second Circuit rebuked the Commission for
a similar approach in a prior rulemaking after
the Commission had ‘‘fail[ed] . . . to define
with specificity the acts or practices which
are unfair or deceptive.’’ 55 Absent ‘‘a
specification of the acts or practices which
the Commission deems deceptive,’’ the Court
explained that ‘‘the breadth of the
preemption provision is such that it places in
issue an indefinite variety of [S]tate laws and
regulations’’ that were relevant to the
underlying contractual relationships.
Similarly, here, State laws govern the types
of conduct today’s Rule attempts to
regulate. 56 One risk of misguided Federal
regulation is that it can confuse or jeopardize
State laws and enforcement. Given the Rule’s
lack of specificity, it raises that concern.
II. The Rule is troubling not only
procedurally but also substantively. By
singling out representations made in
connection with negative option billing
models and subjecting these representations
to civil penalties or other monetary relief, it
tilts the playing field in ways that are likely
to pervert business incentives. For example,
businesses may avoid using negative option
billing models, even when businesses and
consumers could derive significant value
from them.
One might argue that no shift in incentives
will happen for honest businesses because
the Rule only addresses misrepresentations
of material fact. In other words, all an honest
business needs to do to avoid civil penalties
is to tell the truth about products and
services that involve negative option billing.
But what constitutes a misrepresentation can
sometimes be in the eye of the beholder (that
is, a Commissioner).57 Even honest
businesses will have reason to reconsider the
use of negative option billing now that it
means subjecting themselves to potential
civil penalties for misreading Commission
tea leaves.58 And businesses will also need
to factor in the compliance costs associated
with implementing this Rule’s disclosure,
consent, and cancellation requirements—
prescriptive requirements that are absent for
other billing models or less prescriptive
under existing law, such as ROSCA.
These shifting incentives matter to
consumers because the reason that honest
businesses adopt negative option billing is to
lower transaction costs between consumers
and firms. For example, say I want to watch
a particular streaming service at my
convenience. I don’t want to be bothered
with signing up and paying a fee each month
that I log on; I want negative option billing—
a subscription—to reduce the friction in my
streaming experience. Raising the transaction
costs will reduce a business’s sales and the
utility consumers derive from these services.
In other words, in our good intentions, we
may harm the consumers and competition we
are supposed to protect. 59
The Rule purports to address any
overbreadth by including, consistent with the
Commission’s Rules of Practice,60 an
‘‘Exemptions’’ provision, which provides:
‘‘Any person to whom this Rule applies may
petition the Commission for a partial or full
exemption.’’ 61 In response to such petition,
‘‘[t]he Commission may . . . issue partial or
full exemptions from this part if the
Commission finds application of the Rule’s
requirements is not necessary to prevent the
acts or practices to which the Rule relates.’’ 62
But the ‘‘Exemptions’’ provision does
nothing to reduce the burden on firms from
the overbreadth of the Rule’s coverage of all
misrepresentations of material fact. Rather,
taken together, they effectively shift the
burden of crafting a tailored rule to regulated
entities. And, once again, it appears that the
Commission is tilting the playing field in a
manner that is likely to harm both consumers
and competition. Small businesses and new
market entrants are less likely to be able to
afford the potentially costly legal fees needed
to petition the Commission to obtain an
exemption. Even for businesses that can
afford to use the exemption process, this
process will impose costs on businesses, who
will pass on those costs to consumers.
Raising potential costs for consumers through
an improperly promulgated rule is not a
desirable outcome at any time, but especially
not in an inflationary economy. Businesses
and consumers will not be alone in bearing
increased costs. Conducting the exemption
process will continue to drain FTC staff
resources—reducing the time that our
talented staff could devote to enforcing the
clear authorities Congress has given us, such
as ROSCA.63
A final point here. I also have concerns
about the Commission’s economic analysis of
the quantifiable benefits that may result from
the Rule’s substantive requirements. For
example, the Commission’s estimate related
to the upper bound of the Rule’s benefits for
consumers who cancel subscriptions with in-
person enrollment is based in part on the
complaints of 25 individual consumers in a
single industry, 64 and a number of other
simplifying assumptions. 65 But this self-
selected group of 25 consumers does not
comprise a random sample, even among
people who were not able to cancel
subscriptions with in-person enrollment on
their first attempt. 66 It is at least possible that
other individuals who cancelled
subscriptions in person had different
experiences or expectations than these
particular consumers—and therefore did not
voice any complaint. Indeed, given that
consumer experiences and expectations may
vary significantly across industries and
products, there is no reason to believe that
balancing of harms and benefits of these
consumers can be appropriately extrapolated
to the entire economy. Thus, the
Commission’s estimated benefits are not
based on what could be characterized as a
representative sample. Without knowing the
frequency of consumers having significant
difficulty cancelling in-person subscriptions,
it is not possible to assess how much weight
to place on the estimate of the high end of
the range of benefits from the proposed rule.
Most of the difference between the low-end
and high-end estimates of benefits is driven
by the estimate of the high end of the benefits
for in-person subscriptions.
III. This Rule is particularly disappointing
because it represents two missed
opportunities. In 2019, a bipartisan
Commission unanimously voted in favor of
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90545	Federal Register / Vol. 89, No. 221 / Friday, November 15, 2024 / Rules and Regulations
67 84 FR 52393, 52394.
68 FTC v. NGL Labs, LLC, No. 2:24–cv–5753 (C.D.
Cal.), https://www.ftc.gov/legal-library/browse/
cases-proceedings/ngl.
69 FTC v. Care.com, Inc., No. 1:24–cv–987 (W.D.
Tex.), https://www.ftc.gov/legal-library/browse/
cases-proceedings/carecom-inc-ftc-v.
70 FTC v. Legion Media LLC, FTC Matter No.
2423034, https://www.ftc.gov/legal-library/browse/
cases-proceedings/242-3034-legion-media-llc-et-al-
ftc-v.
71 FTC v. Career Step, LLC, FTC Matter No.
2323019, https://www.ftc.gov/legal-library/browse/
cases-proceedings/232-3019-career-step-llc-ftc-v.
72 FTC v. NRRM, LLC, FTC Matter No. 2223031,
https://www.ftc.gov/legal-library/browse/cases-
proceedings/2223031-carshield.
73 FTC v. Panda Benefit Servs., LLC, FTC Matter
No. 2423041, https://www.ftc.gov/legal-library/
browse/cases-proceedings/2423041-panda-benefit-
services-llc-ftc-v.
74 Prepared Statement of Comm’r Melissa
Holyoak, Fed. Trade Comm’n, Before the Subcomm.
on Innovation, Data, and Commerce of the Energy
and Commerce Comm., U.S. House of
Representatives, Concerning ‘‘The Fiscal Year 2025
Federal Trade Commission Budget,’’ at 2–4 (July 9,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
commissioner-holyoak-testimony-7-5-24.pdf.
75 Id.
issuing the ANPR, which was intended to (1)
consolidate the requirements from various
laws the FTC enforces, providing businesses
who have to navigate this patchwork with
greater clarity, thereby benefiting both
consumers and businesses; and (2) explore
whether a Section 18 rule should fill any
gaps ‘‘when marketers fail to make adequate
disclosures, bill consumers without their
consent, or make cancellation difficult or
impossible.’’ 67 Today’s final Rule could have
stayed that prudent course rather than
expanding in scope and complexity as it has
under this Commission.
The second missed opportunity has taken
place every day since the Commission
expanded the scope of the rulemaking. This
Commission chose to devote scarce staff
resources to this overbroad rulemaking—one
that seems likely to be challenged in court,
which will lead to even more taxpayer-
funded expenses—rather than direct our
talented staff to draft a rule within the scope
of our authority or bring enforcement actions
using clear legal authorities like ROSCA and
TSR. In my time at the Commission, I have
voted in support of numerous ROSCA cases,
including NGL,68 Care.com,69 and Legion
Media,70 and numerous TSR cases, including
Career Step,71 Carshield,72 and Panda Benefit
Services.73 As I have said elsewhere, I believe
the Commission is at its best when it focuses
on enforcing the law, not writing it.74 But I
am not reflexively opposed to rulemaking
where Congress has delegated the
Commission relevant authority and we act
consistent with that authority.75
Unfortunately, that is not what today’s Rule
is. Instead, we have an ill-disguised political
maneuver from the Majority in the form of a
rule, one rushed to publication to advance
the prospects of the Chair’s preferred
presidential candidate.
I dissent.
[FR Doc. 2024–25534 Filed 11–14–24; 8:45 am]
BILLING CODE 6750–01–P
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2066 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
FEDERAL TRADE COMMISSION
16 CFR Part 464
RIN 3084–AB77
Trade Regulation Rule on Unfair or
Deceptive Fees
AGENCY : Federal Trade Commission.
ACTION : Final rule.
SUMMARY : The Federal Trade
Commission (‘‘FTC’’ or ‘‘Commission’’)
is issuing a final trade regulation rule
entitled ‘‘Rule on Unfair or Deceptive
Fees’’ (‘‘rule’’ or ‘‘final rule’’) and
Statement of Basis and Purpose
addressing certain unfair or deceptive
practices involving fees or charges for
live-event tickets and short-term
lodging: bait-and-switch pricing that
hides the total price by omitting
mandatory fees and charges from
advertised prices; and misrepresenting
the nature, purpose, amount, and
refundability of fees or charges. The
final rule specifies that it is an unfair
and deceptive practice for businesses to
offer, display, or advertise any price of
live-event tickets or short-term lodging
without clearly, conspicuously and
prominently disclosing the total price.
The rule also requires businesses to
clearly and conspicuously make certain
disclosures before a consumer consents
to pay. The rule further specifies that it
is an unfair and deceptive practice for
businesses to misrepresent any fee or
charge in any offer, display, or
advertisement for live-event tickets or
short-term lodging.
DATES : This rule is effective May 12,
2025.
ADDRESSES : Copies of this document are
available on the Commission’s website,
www.ftc.gov.
FOR FURTHER INFORMATION CONTACT :
Janice Kopec or Annette Soberats,
Division of Advertising Practices,
Bureau of Consumer Protection, Federal
Trade Commission, 202–326–2550
(Kopec), 202–326–2921 (Soberats),
jkopec@ftc.gov, asoberats@ftc.gov.
SUPPLEMENTARY INFORMATION :
Statement of Basis and Purpose
Table of Contents
I. Background
A. Advance Notice of Proposed
Rulemaking
B. Notice of Proposed Rulemaking
C. Informal Public Hearing
II. The Legal Standard for Promulgating the
Rule
A. Prevalence of Acts or Practices
Addressed by the Rule
B. Manner and Context in Which the Acts
or Practices Are Deceptive or Unfair
C. The Economic Effect of the Rule
III. Section-by-Section Analysis
A. § 464.1: Definitions
1. Ancillary Good or Service
2. Business
3. Clear(ly) and Conspicuous(ly)
4. Covered Good or Service
5. Government Charges
6. Pricing Information
7. Shipping Charges
8. Total Price
(a) Mandatory Fees
(b) Maximum Total
(c) Itemization
(d) Exclusions From Total Price
(e) Intersection With IRS Requirements
B. § 464.2 Hidden Fees Prohibited
1. § 464.2(a)
(a) Contingent Fees
(b) Ticket Service Fees
(c) Credit Card and Other Payment
Processing Surcharges
(d) Dynamic Pricing and National
Advertising
(e) Rebates, Bundled Pricing, and Other
Discounts: Compliance When
Promotional Pricing Models Have
Different Fees
(f) Online Marketplaces
2. § 464.2(b)
3. § 464.2(c)
C. § 464.3 Misleading Fees Prohibited
D. § 464.4 Relation to State Laws
E. § 464.5 Severability
IV. Challenges to the FTC’s Legal Authority
To Promulgate the Rule
A. Major Questions Doctrine
1. The Rule Does Not Address a Major
Question
(a) The Commission Has a Long History of
Addressing Unfair or Deceptive Acts or
Practices Related to Pricing Information
(b) Commenters’ Claims About the Scope
of the Acts or Practices Covered by the
Rule Are Inapplicable or Overstated
2. Congress Provided the Commission With
a Clear Grant of Authority To Promulgate
This Rule
B. Non-Delegation Doctrine
C. First Amendment
1. Comments
2. Legal Standard
3. The Rule’s Disclosure Requirements Are
Constitutional Under Zauderer
4. The Rule Does Not Prohibit Truthful
Speech
5. The Rule’s Treatment of Credit Card
Fees and Government Charges Does Not
Violate the First Amendment
D. Commission Structure
E. Administrative Procedure Act
V. Final Regulatory Analysis Under Section
22 of the FTC Act
A. Concise Statement of the Need for, and
Objectives of, the Final Rule
B. Alternatives to the Final Rule the
Commission Considered, Reasons for the
Commission’s Determination That the
Final Rule Will Attain Its Objectives in
a Manner Consistent With Applicable
Law, and the Reasons the Particular
Alternative Was Chosen
C. The NPRM’s Preliminary Regulatory
Analysis
D. Significant Issues Raised by Comments,
the Commission’s Assessment and
Response, and Any Changes Made as a
Result
1. Comments on Costs
(a) Public Comments: Estimated Costs Are
Too Low
(b) Public Comments: Unquantified Costs
to Firms
(c) Public Comments: Unquantified Costs
to Consumers
(d) Public Comments: Unquantified Costs
to Third Parties
(e) Public Comments: Costs From
Incorporating Contingent Fees Into Total
Price
2. Comments on Benefits
(a) Public Comments: Benefits Are Too
High
(b) Public Comments: Unquantified
Benefits
3. Comments on the Economy-Wide Break-
Even Analysis
(a) Public Comments: Break-Even Analysis
Has Incorrect Assumptions or Contains
Errors
(b) Public Comments: Break-Even Analysis
Is Not Enough To Justify an Economy-
Wide Rule
(c) Public Comments: Break-Even Analysis
Is Satisfactory
E. Economic Regulatory Analysis of the
Final Rule’s Costs and Benefits
1. Economic Rationale for the Final Rule
(a) Shrouded Pricing as a Cause of Market
Failure
(b) Shrouded Pricing as a Source of Biased
Expectations
2. Economic Effects of the Final Rule
(a) General Benefits of the Final Rule
i. Reductions in Search Costs
ii. Reductions in Deadweight Loss
(b) Welfare Transfers
(c) General Costs of the Final Rule
3. Quantified Welfare Effects
(a) Quantified Compliance Costs
(b) Break-Even Analysis
i. Sensitivity Analysis: Assume Higher
Wage Rates
(c) Quantified Benefits and Costs: Live-
Event Ticketing Industry
i. Live-Event Ticketing: Estimated Benefits
of the Final Rule
(a) Consumer Time Savings When
Shopping for Live-Event Tickets
(b) Additional Unquantified Benefits:
Reductions in Deadweight Loss and
Abandoned Transactions
ii. Live-Event Ticketing: Estimated Costs of
the Final Rule
iii. Live-Event Ticketing: Net Benefits
iv. Live-Event Ticketing: Uncertainties
(d) Quantified Benefits and Costs: Short-
Term Lodging Industry
i. Short-Term Lodging: Estimated Benefits
of the Final Rule
(a) Search Statistics
(b) U.S. Hotels and Home Shares
(c) Foreign Hotels and Home Shares With
U.S.-Facing websites
(d) All Hotels and Home Shares
(e) Additional Unquantified Benefits:
Reductions In Deadweight Loss and
Abandoned Transactions
ii. Short-Term Lodging: Estimated Costs of
the Final Rule
(a) Panel A: U.S. Hotels and Home Share
Hosts
(b) Panel B: Foreign Hotels and Home
Share Hosts
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2067	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
1 FTC–2023–0064–0886 (Individual Commenter).
2 FTC–2023–0064–1576 (Individual Commenter).
(c) Panel C: All Hotels and Home Share
Hosts (US + Foreign)
iii. Short-Term Lodging: Net Benefits
iv. Short-Term Lodging: Uncertainties
4. Economic Evaluation of Alternatives
5. Summary of Results
6. Appendix A: Model of Market Distortion
Caused by Drip Pricing
7. Appendix B: Short-Term Lodging
Industry Minutes per Listing
Calculations
(a) Low-End Estimate of Minutes per
Listing Calculation
(b) High-End Estimate of Minutes per
Listing Calculation
VI. Paperwork Reduction Act
A. Disclosures Related to Final § 464.2(a)
Through (c)
1. Number of Respondents
2. Estimated One-Time Hour Burden
3. Estimated One-Time Labor Costs
4. Estimated One-Time Non-Labor Costs
5. Projected Labor Costs Likely
Overestimated
B. Prohibited Misrepresentations Under
Final § 464.3
VII. Regulatory Flexibility Act—Final
Regulatory Flexibility Analysis
A. Statement of the Need for, and
Objectives of, the Rule
B. Significant Issues Raised by Comments,
the Commission’s Assessment and
Response, and Any Changes Made as a
Result
C. Comment by the Small Business
Administration, Office of Advocacy, the
Commission’s Assessment and Response,
and Any Changes Made as a Result
D. Description and Estimate of the Number
of Small Entities To Which the Rule Will
Apply
E. Description of the Projected Reporting,
Recordkeeping, and Other Compliance
Requirements
F. Discussion of Significant Alternatives
the Commission Considered That Would
Accomplish the Stated Objectives of the
Final Rule and That Would Minimize
Any Significant Economic Impact of the
Final Rule on Small Entities
VIII. Congressional Review Act
I. Background
When shopping for a good or service,
consumers want to know: how much? It
is a bedrock principle of FTC law that
price is material to a consumer’s
decision about whether to purchase a
good or service. Consumers look for
prices to comparison shop and to weigh
what a good or service might be worth.
Most consumers also rely on price to
answer critical budgeting questions
such as: Can I afford this hotel or short-
term rental for my upcoming vacation?
Can I afford these concert tickets?
Unfortunately, consumers face
widespread and growing unfair and
deceptive fee practices that make it
much harder to find out: how much will
this cost?
There is nothing new about
businesses using bait-and-switch tactics
to reel in and deceive consumers. The
Commission has a long history of
bringing enforcement actions against
these unfair and deceptive practices.
Quoting a misleading, artificially low
price and then adding in mandatory fees
and other charges throughout the buying
process—a practice known today as drip
pricing—is a quintessential example of
bait-and-switch pricing and is a practice
that falls squarely within the scope of
the Commission’s long history of work
to protect consumers. While today this
practice goes by a different name, the
playbook has not changed: lure in
consumers with a low price, then hit
them with a higher price after they have
invested in the transaction and sunk
time and effort into trying to buy a good
or service for an illusory price.
Behavioral and economic research
explains that piecemeal numbers and
explanations cannot cure the deception
or mitigate the harms to consumers
when businesses employ these pricing
tactics. Often consumers finish the
transaction without an accurate
understanding of the total price of goods
or services.
In recent years, bait-and-switch
pricing has garnered widespread public
attention. Consumers have cried foul
when they discovered the cost of their
hotel stays were significantly higher
than expected due to a mandatory,
hidden ‘‘resort fee,’’ typically charged
for services that consumers expected to
be a part of staying in a hotel.
Consumers have also complained when
they tried to purchase tickets to a live
event, only to find out that the quoted
ticket price almost doubled by the time
they reached the final checkout page.
Consumers have confronted a host of
mysterious, mandatory, ‘‘convenience,’’
‘‘processing,’’ or ‘‘service’’ charges that
are either non-descript or otherwise
misleading. These practices are
frustrating for consumers when they
shop for travel and entertainment
especially because these purchases can
be significant expenditures. This
rulemaking record is replete with
individual stories of consumers
inundated by bait-and-switch pricing
and misleading fees and charges.
For example, an individual
commenter lamented the pervasiveness
of bait-and-switch pricing tactics across
everyday purchases:
Like almost every American consumer, I
have had to pay these ‘‘junk fees’’ in various
circumstances. I consider myself reasonably
well informed, yet have been surprised by
them, because they keep [c]ropping up in
unexpected places. Like many, I’ve
experienced them in hotels, with car rentals
and telecom providers. In these instances, the
consumer has no real recourse, as the
bargaining power is wholly unequal.
However, these fees are now impacting every
aspect of commerce. ‘‘Convenience’’ fees
have impacted me with food service.
‘‘Facility’’ fees charges at fitness facilities.
Credit card fees in excess of the actual
interchange fees being charged at restaurants.
It’s endless, ubiquitous and makes it
extremely difficult for consumers to make
informed decisions.1
As another individual commenter
aptly put it, ‘‘It’s one thing to be on
guard when walking down a dark alley,
but being on guard every time you want
to take a vacation, go to a concert, fly
home to see a sick loved one—that’s just
not fair.’’ 2
It is no surprise that, once bait-and-
switch pricing tactics are used by some
businesses to obscure the cost of a good
or service, they tend to spread.
Businesses that want to compete on the
true price of their offering are undercut
by businesses that use hidden or
misleading fees to display an artificially
low price. As studies confirm, in such
instances, consumers cannot shop for
price effectively. This forces businesses
into a race to the bottom and results in
more and more businesses using hidden
and misleading fees to remain
competitive. When these types of fees
are eventually revealed, consumers are
left frustrated with a new and
unexpected higher price and misleading
fees and charges that prevent them from
having a real understanding of what
they are getting in return for these
additional fees.
The Rule on Unfair or Deceptive Fees
addresses these problems directly in the
live-event ticketing industry and the
short-term lodging industry, which
includes temporary sleeping
accommodations at a hotel, motel, inn,
short-term rental, vacation rental, or
other place of lodging. These two
industries have engaged in bait-and-
switch pricing tactics for years. The rule
ensures that when businesses advertise
a price for live-event tickets or short-
term lodging, it is the total price, and
when they explain a fee or charge, the
description is truthful. In simple terms:
tell consumers the real price and do not
lie about the fees or charges. The final
rule does this by addressing two specific
and prevalent unfair and deceptive
practices: (1) bait-and-switch pricing
that hides the total price of live-event
tickets and short-term lodging by
omitting mandatory fees and charges
from advertised prices, including
through drip pricing, and (2)
misrepresenting the nature, purpose,
amount, and refundability of fees or
charges. The rule has two main
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2068 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
3 Advance notice of proposed rulemaking; request
for public comment: Unfair or Deceptive Fees Trade
Regulation Rule Commission Matter No. R207011,
87 FR 67413 (Nov. 8, 2022). The ANPR and other
documents pertaining to this rulemaking are
available on the FTC web page, Rulemaking: Unfair
or Deceptive Fees, https://www.ftc.gov/legal-library/
browse/rules/rulemaking-unfair-or-deceptive-fees.
4 15 U.S.C. 57a(b)(2). Section 18 authorizes the
Commission to promulgate, modify, or repeal trade
regulation rules that define with specificity acts or
practices that are unfair or deceptive in or affecting
commerce within the meaning of section 5(a)(1) of
the FTC Act, 15 U.S.C. 45(a)(1).
5 Notice; extension of public comment period:
Unfair or Deceptive Fees Trade Regulation Rule, 88
FR 4796 (Jan. 25, 2023).
6 Publicly posted comments are available to view
through Regulations.gov under Docket ID FTC–
2022–0069 at https://www.regulations.gov/docket/
FTC-2022-0069/comments.
7 Notice of proposed rulemaking; request for
public comment: Trade Regulation Rule on Unfair
or Deceptive Fees, 88 FR 77420 (Nov. 9, 2023). In
accordance with section 18(b)(2)(C) of the FTC Act,
15 U.S.C. 57a(b)(2)(C), on October 10, 2023, the
Commission sent notices to the House Committee
on Energy and Commerce and the Senate
Committee on Commerce, Science and
Transportation seeking comment concerning the
utility and scope of the trade regulation rule
proposed in the NPRM and including the full text
of the NPRM.
8 NPRM, 88 FR 77483.
9 Notice of proposed rulemaking; extension of
public comment period: Trade Regulation Rule on
Unfair or Deceptive Fees, 89 FR 38 (Jan. 2, 2024).
10 Publicly available comments are available to
view through Regulations.gov under Docket ID
FTC–2023–0064 at https://www.regulations.gov/
document/FTC-2023-0064-0001/comment. As noted
on Regulations.gov, not every comment is made
publicly available. For example, ‘‘[a]gencies may
redact or withhold certain Comment Submissions
. . . , such as those containing . . . duplicate/near
duplicate examples of a mass-mail campaign.
Therefore, the total in the Number of Comments
Posted Box may be lower than the total in the
Comments Received Box.’’ See https://
www.regulations.gov/faq, Frequently Asked
Questions, General FAQs, Find Dockets,
Documents, and Comments FAQs, answer to How
are Comments counted and posted to
Regulations.gov?. In this rulemaking,
Regulations.gov identified ten mass-mail campaigns
as part of the total number of comments received
components. First, the final rule
requires businesses that offer a price for
live-event tickets or short-term lodging
to disclose the total price, inclusive of
most mandatory charges, and to make
sure that the total price is disclosed
more prominently than other pricing
information, except the final amount of
payment. Second, the final rule
prohibits misrepresentations about fees
or charges in any offer, display, or
advertisement for live-event tickets and
short-term lodging.
The final rule is tailored to target
these specific unfair and deceptive
pricing practices, while preserving
flexibility for live-event ticket and short-
term lodging businesses. The rule does
not prohibit any one type of fee, nor
does it prohibit specific pricing
practices such as itemization of fees or
dynamic pricing. The rule does not
require that all fees be included when
offering a price—just mandatory ones.
The rule gives businesses discretion to
list optional fees selected by the
consumer and government and shipping
charges separately. The discretion to set
prices remains squarely with
businesses; the rule simply requires that
they tell consumers the truth about
prices for live-event tickets and short-
term lodging.
A. Advance Notice of Proposed
Rulemaking
The Commission published, on
November 8, 2022, an advance notice of
proposed rulemaking (‘‘ANPR’’) 3 under
the authority of section 18 of the Federal
Trade Commission Act (‘‘FTC Act’’) 4 to
address certain unfair or deceptive acts
or practices involving fees. The ANPR
described the Commission’s history of
taking law enforcement action against,
and educating consumers about, unfair
or deceptive practices relating to fees,
and it asked a series of questions to help
inform the Commission about whether
such practices are prevalent and, if so,
whether and how to proceed with a
notice of proposed rulemaking
(‘‘NPRM’’). The Commission was
particularly interested in the following
practices that it identified as the
subjects of investigations, enforcement
actions, workshops, research, and
consumer education: (a)
misrepresenting or failing to disclose
clearly and conspicuously, on any
advertisement or in any marketing, the
total price of any good or service for
sale; (b) misrepresenting or failing to
disclose clearly and conspicuously, on
any advertisement or in any marketing,
the existence of any fees, interest,
charges, or other costs that are not
reasonably avoidable for any good or
service; (c) misrepresenting or failing to
disclose clearly and conspicuously
whether fees, interest, charges,
products, or services are optional or
required; (d) misrepresenting or failing
to disclose clearly and conspicuously
any material restriction, limitation, or
condition concerning any good or
service that may result in a mandatory
charge in addition to the cost of the
good or service or that may diminish the
consumer’s use of the good or service,
including the amount the consumer
receives; (e) misrepresenting that a
consumer owes payments for any
product or service the consumer did not
agree to purchase; (f) billing or charging
consumers for fees, interest, goods,
services, or programs without express
and informed consent; (g) billing or
charging consumers for fees, interest,
goods, services, or programs that have
little or no added value to the consumer
or that consumers would reasonably
assume to be included within the
overall advertised price; and (h)
misrepresenting or failing to disclose
clearly and conspicuously, on any
advertisement or in any marketing, the
nature or purpose of any fees, interest,
charges, or other costs.
The Commission specifically sought
public comment on the prevalence of
such practices and the costs and
benefits of a rule that would require
upfront inclusion of mandatory fees
whenever consumers are quoted a price,
including by asking a series of questions
to solicit data and commentary. The
Commission took comments for sixty
days, extended the comment period by
an additional thirty days,5 and carefully
considered the more than 12,000
comments received. 6
B. Notice of Proposed Rulemaking
Based on the substance of the
comments received in response to the
ANPR, as well as the Commission’s
history of enforcement and other
information, on November 9, 2023, the
Commission published an NPRM,
which proposed an industry-neutral
rule that would prohibit
misrepresenting the total price of goods
or services by omitting mandatory fees
from advertised prices and
misrepresenting the nature and purpose
of fees.7 The NPRM described the
comments received in response to the
ANPR and examined the Commission’s
prior enforcement actions and other
responses concerning unfair and
deceptive fees. In the NPRM, the
Commission stated that it has reason to
believe that certain unfair or deceptive
acts or practices involving fees are
prevalent, specifically: (1)
misrepresenting the total price of goods
and services by omitting mandatory fees
from advertised prices and (2)
misrepresenting the nature and purpose
of fees. After discussing the comments
and explaining its considerations in
developing a proposed rule, the
Commission also posed specific
questions for comment and provided
explanation of the proposed rule text.
Finally, the NPRM set out the
Commission’s proposed regulatory text. 8
The Commission took public comments
for sixty days, and extended the
comment period for an additional thirty
days.9
In response to the NPRM, the
Commission received over 60,800
comments from stakeholders
representing a wide range of viewpoints
and industries. 10 These stakeholders
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of over 60,800. One mass-mail campaign alone
accounted for close to 48,200 comments, and all
mass-mail campaigns combined accounted for more
than 57,400 comments. Because comments within
each mass-mail campaign are highly similar, only
representative comments of each mass-mail
campaign are publicly posted on Regulations.gov.
In addition to representative mass-mail comments,
the more than 3,300 comments that Regulations.gov
did not identify as belonging to a mass-mail
campaign are publicly posted. The Commission
received and considered all filed comments,
including all mass-mail comments.
11 See, e.g., FTC–2023–0064–3135 (U.S. Senate,
Sen. Robert P. Casey, Jr.); FTC–2023–0064–3271
(U.S. Senate, Sen. Amy Klobuchar); FTC–2023–
0064–2858 (U.S. House of Representatives, Rep.
Maxwell Alejandro Frost, Rep. Jimmy Gomez, Rep.
Barbara Lee, Rep. Rashida Tlaib, Rep. Kevin Mullin,
Rep. Dwight Evans, Rep. Judy Chu, Rep. Greg Casar,
Rep. Dan Goldman, Rep. Salud Carbajal).
12 See, e.g., FTC–2023–0064–1411 (Arizona
House of Representatives, Rep. Analise Ortiz); FTC–
2023–0064–2938 (Colorado House of
Representatives, Rep. Naquetta Ricks); FTC–2023–
0064–2926 (Florida House of Representatives, Rep.
Rita Harris); FTC–2023–0064–3081 (Florida House
of Representatives, Rep. Anna V. Eskamani); FTC–
2023–0064–3103 (Florida House of Representatives,
Rep. Angela Nixon); FTC–2023–0064–3117
(Maryland House of Delegates, Del. Julie Palakovich
Carr); FTC–2023–0064–2341 (Massachusetts House
of Representatives, Rep. Lindsay Sabadosa); FTC–
2023–0064–3072 (Michigan Senate and House of
Representatives, Sen. Darrin Camilleri, Sen. Mary
Cavanagh, and Rep. Betsy Coffia); FTC–2023–0064–
3079 (Montana State Senate, Senate Democratic
Caucus, Sen. Pat Flowers, Sen. Susan Webber, Sen.
Andrea Olsen, Sen. Edie McClafferty, Sen. Jen
Gross, Sen. Janet Ellis, Sen. Shane Morigeau, Sen.
Ellie Boldman, Sen. Ryan Lynch, Sen. Christopher
Pope, Sen. Mike Fox, Sen. Denise Hayman, Sen.
Willis Curdy, and Sen. Mary Ann Dunwell); FTC–
2023–0064–3184 (New York Senate, Sen. Michael
Gianaris); FTC–2023–0064–3123 (Syracuse, New
York, City Auditor Alexander Marion); FTC–2023–
0064–3149 (North Carolina House of
Representatives, Rep. Julie von Haefen); FTC–2023–
0064–3237 (North Carolina House of
Representatives, Rep. Pricey Harrison).
13 See, e.g., FTC–2023–0064–3150 (Attorney
General of the State of California); FTC–2023–0064–
3215 (Attorneys General of the States of North
Carolina and Pennsylvania, along with Attorneys
General of the States or Territories of Arizona,
Colorado, Connecticut, Delaware, District of
Columbia, Hawaii, Illinois, Maine, Michigan,
Minnesota, New Jersey, New York, Oklahoma,
Oregon, Vermont, Washington, and Wisconsin).
14 See, e.g., FTC–2023–0064–3134 (U.S.
Department of Transportation, Federal Motor
Carrier Safety Administration); FTC–2023–0064–
3187 (U.S. Department of Justice, Antitrust
Division).
15 See, e.g., FTC–2023–0064–1519 (New York City
Department of Consumer and Worker Protection);
FTC–2023–0064–2883 (District of Columbia, Office
of the People’s Counsel); FTC–2023–0064–3196
(South Carolina Department of Consumer Affairs).
16 See, e.g., FTC–2023–0064–1028 (Complex
Trauma Project); FTC–2023–0064–2885 (AARP);
FTC–2023–0064–3104 (Truth in Advertising, Inc.);
FTC–2023–0064–3160 (Consumer Federation of
America on behalf of itself and 51 other national
and State consumer advocacy groups, authored by
American Economic Liberties Project, Consumer
Action, Consumer Federation of America, National
Association of Consumer Advocates, National
Consumer Law Center, National Consumers League,
U.S. Public Interest Research Group); FTC–2023–
0064–3162 (BBB National Programs, Inc.); FTC–
2023–0064–3191 (Community Catalyst and 32 other
organizations focused on health care and consumer
protection issues); FTC–2023–0064–3205
(Consumer Reports); FTC–2023–0064–3216
(Demand Progress Education Fund); FTC–2023–
0064–3218 (National Consumer Law Center); FTC–
2023–0064–3242 (William E. Morris Institute for
Justice); FTC–2023–0064–3246 (Coalition for App
Fairness); FTC–2023–0064–3248 (DC Jobs With
Justice on behalf of Fair Price, Fair Wage Coalition);
FTC–2023–0064–3259 (National Women’s Law
Center); FTC–2023–0064–3270 (Consumer
Federation of America, National Consumer Law
Center, and National Association of Consumer
Advocates); FTC–2023–0064–3290 (U.S. Public
Interest Research Group Education Fund); FTC–
2023–0064–3302 (Public Citizen).
17 See, e.g., FTC–2023–0064–1431 (McPherson
Housing Coalition); FTC–2023–0064–2851 (Housing
Action Illinois); FTC–2023–0064–3102 (Corporation
for Supportive Housing); FTC–2023–0064–3235
(National Housing Law Project).
18 See, e.g., FTC–2023–0064–2915 (Voice of the
Experienced); FTC–2023–0064–2696 (Safe Return
Project); FTC–2023–0064–3253 (Fortune Society);
FTC–2023–0064–3260 (Formerly Incarcerated,
Convicted People & Families Movement, in
collaboration with the Partnership for Just
Housing); FTC–2023–0064–3283 (National
Consumer Law Center, Prison Policy Initiative, and
advocate Stephen Raher).
19 See, e.g., FTC–2023–0064–1939 (Tzedek DC,
David A. Clarke School of Law, University of the
District of Columbia); FTC–2023–0064–2888
(Housing Policy Clinic, University of Texas School
of Law); FTC–2023–0064–3146 (Institute for Policy
Integrity, New York University School of Law);
FTC–2023–0064–3255 (Carrie Floyd, Clinical
Teaching Fellow, Veterans Legal Clinic, and Mira
Edmonds, Clinical Assistant Professor of Law, Civil-
Criminal Litigation Clinic, University of Michigan
Law School); FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice,
University of California, Berkeley School of Law,
and Consumer Law Advocates, Scholars & Students
Network); FTC–2023–0064–3268 (Housing &
Eviction Defense Clinic, University of Connecticut
School of Law).
20 See, e.g., FTC–2023–0064–1294 (James J.
Angel, Ph.D., CFP, CFA, Professor, Georgetown
University, McDonough School of Business); FTC–
2023–0064–1467 (Richard J. Peltz-Steele,
Chancellor Professor, University of Massachusetts
Law School).
21 See, e.g., FTC–2023–0064–2862 (Legal Aid
Foundation of Los Angeles); FTC–2023–0064–2892
(Community Legal Services of Philadelphia); FTC–
2023–0064–2920 (Colorado Poverty Law Project);
FTC–2023–0064–3090 (Atlanta Legal Aid Society,
Inc.); FTC–2023–0064–3225 (CED Law); FTC–2023–
0064–3278 (Southeast Louisiana Legal Services).
22 See, e.g., FTC–2023–0064–2840 (Indie Sellers
Guild); FTC–2023–0064–2901 (E-Merchants Trade
Council, Inc.).
23 See, e.g., FTC–2023–0064–2856 (National
Football League); FTC–2023–0064–3108 (Christian
L. Castle, Esq.; Mala Sharma, President, Georgia
Music Partners; and Dr. David C. Lowery, founder
of musical groups Cracker and Camper Van
Beethoven, and a lecturer at the University of
Georgia Terry College of Business); FTC–2023–
0064–3122 (Vivid Seats); FTC–2023–0064–3195
(League of American Orchestras on behalf of itself
and Association of Performing Arts Professionals,
Carnegie Hall, Dance/USA, Folk Alliance
International, Future of Music Coalition, National
Performance Network, OPERA America, PAVA—
Performing Arts Venues Alliance, Performing Arts
Alliance, and Theatre Communications Group);
FTC–2023–0064–3212 (TickPick, LLC); FTC–2023–
0064–3230 (Future of Music Coalition); FTC–2023–
0064–3250 (National Independent Talent
Organization); FTC–2023–0064–3266 (StubHub,
Inc.); FTC–2023–0064–3292 (National Association
of Theatre Owners); FTC–2023–0064–3304
(Recording Academy); FTC–2023–0064–3306 (Live
Nation Entertainment and its subsidiary
Ticketmaster North America); FTC–2023–0064–
3105 (Charleston Symphony); FTC–2023–0064–
3241 (National Association of Ticket Brokers).
24 See, e.g., FTC–2023–0064–3077 (Far Horizons
Travel); FTC–2023–0064–3094 (American Hotel &
Lodging Association); FTC–2023–0064–3106
(American Society of Travel Advisors, Inc.); FTC–
2023–0064–3204 (Expedia Group); FTC–2023–
0064–3244 (Vacation Rental Management
Association).
included numerous individual
consumers and consumer groups who
described examples and experiences
with the unfair and deceptive fee
practices identified by the Commission.
Commenters also included a range of
business owners, trade associations, and
other industry groups; academics; and
government officials and agencies from
all levels of government. While some
commenters raised concerns and
recommended specific modifications to,
or exemptions from, the Commission’s
proposal, the overwhelming majority of
commenters strongly supported the
Commission’s proposed rule.
The proposed rule received
widespread support in comments from
Federal, 11 State, and local 12 elected
officials; State Attorneys General; 13
Federal, 14 State, and local 15 government
agencies; public policy and consumer
advocates, 16 including housing
advocates 17 and advocates for the
incarcerated or formerly incarcerated; 18
university public policy advocates and
clinics; 19 academics; 20 legal services
providers; 21 and industry members
from a broad range of market sectors,
including online merchants,22 live-
event ticketing, 23 and hotels and other
short-term lodging.24 These commenters
supporting the rule confirmed the
prevalence of hidden and
misrepresented fees throughout the
economy, across large and small
industries subject to the Commission’s
jurisdiction, ranging, for example, from
travel, live events, restaurants, delivery,
rental housing, and correctional services
to carpet cleaning, dietary supplements,
moving companies, and gyms. These
commenters supported the rule for its
benefits to both consumers and honest
businesses.
Individual consumers
overwhelmingly supported the rule. Out
of 60,853 total comments received, a
mass mailing of close to 48,186
consumer commenters stated that they
supported ‘‘the FTC’s efforts to protect
American consumers and crack down
on unscrupulous businesses that tack on
junk fees at the end of the purchasing
process,’’ and urged the Commission ‘‘to
pass this rule to not only save
consumers tens of billions of dollars
each year, but to level the playing field
for honest businesses who are
transparent about their costs and
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25 See, e.g., FTC–2023–0064–0962, FTC–2023–
0064–1186, FTC–2023–0064–1219, FTC–2023–
0064–1230, FTC–2023–0064–1826, FTC–2023–
0064–1827, FTC–2023–0064–1933, FTC–2023–
0064–1946.
26 See, e.g., FTC–2023–0064–2290.
27 See, e.g., FTC–2023–0064–3156.
28 See, e.g., FTC–2023–0064–2962.
29 See, e.g., FTC–2023–0064–2964.
30 U.S. Small Bus. Admin., Office of Advocacy,
Re: Trade Regulation Rule on Unfair or Deceptive
Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
31 See, e.g., FTC–2023–0064–2367 (Small
Business Majority); FTC–2023–0064–2887
(Progressive Policy Institute); FTC–2023–0064–2919
(National Automatic Merchandising Association);
FTC–2023–0064–3028 (Competitive Enterprise
Institute); FTC–2023–0064–3016 (National
Federation of Independent Business, Inc.); FTC–
2023–0064–3127 (U.S. Chamber of Commerce);
FTC–2023–0064–3128 (Merchants Payments
Coalition); FTC–2023–0064–3137 (Chamber of
Progress); FTC–2023–0064–3140 (Merchant
Advisory Group); FTC–2023–0064–3145
(Association of National Advertisers, Inc.); FTC–
2023–0064–3147 (American Land Title
Association); FTC–2023–0064–3173 (Center for
Individual Freedom); FTC–2023–0064–3186
(National LGBT Chamber of Commerce and
National Asian/Pacific Islander American Chamber
of Commerce & Entrepreneurship); FTC–2023–
0064–3208 (FreedomWorks); FTC–2023–0064–3267
(National Retail Federation).
32 See, e.g., FTC–2023–0064–3100 (Civitas
Advisors, Inc.); FTC–2023–0064–3126 (Tax
Foundation); FTC–2023–0064–3258 (National
Taxpayers Union Foundation).
33 See, e.g., FTC–2023–0064–2891 (Mary
Sullivan, George Washington University, Regulatory
Studies Center); FTC–2023–0064–3264 (Mark J.
Perry, Ph.D., Professor Emeritus of Economics at
University of Michigan-Flint and Senior Fellow
Emeritus at the American Enterprise Institute).
34 See, e.g., FTC–2023–0064–3121 (National
Independent Automobile Dealers Association);
FTC–2023–0064–3189 (National Automobile
Dealers Association); FTC–2023–0064–3206 (Motor
Vehicle Protection Products Association,
Guaranteed Asset Protection Alliance, and Service
Contract Industry Council); FTC–2023–0064–3276
(Automotive Service Association).
35 See, e.g., FTC–2023–0064–3263 (Flex
Association); FTC–2023–0064–3202 (TechNet).
36 See, e.g., FTC–2023–0064–1425 (Iowa Bankers
Association); FTC–2023–0064–1941 (Independent
Bankers Association of Texas); FTC–2023–0064–
2574 (BattleLine LLC via Investor Protection
Initiative); FTC–2023–0064–2893 (America’s Credit
Unions); FTC–2023–0064–3119 (Money Services
Business Association, Inc.); FTC–2023–0064–3138
(Independent Community Bankers of America);
FTC–2023–0064–3139 (American Bankers
Association and Consumer Bankers Association);
FTC–2023–0064–3142 (American Escrow
Association); FTC–2023–0064–3144 (Mortgage
Bankers Association); FTC–2023–0064–3168
(American Financial Services Association); FTC–
2023–0064–3182 (Massachusetts Bankers
Association).
37 See, e.g., FTC–2023–0064–3141 (Coalition of
Franchisee Associations); FTC–2023–0064–3211
(American Association of Franchisees & Dealers);
FTC–2023–0064–3294 (International Franchise
Association).
38 See, e.g., FTC–2023–0064–3066 (Norhart, Inc.);
FTC–2023–0064–3115 (National Association of
Residential Property Managers); FTC–2023–0064–
3116 (Manufactured Housing Institute); FTC–2023–
0064–3133 (National Multifamily Housing Council
and National Apartment Association); FTC–2023–
0064–3152 (Building Owners & Managers
Association, Council for Affordable & Rural
Housing, Housing Advisory Group, Institute of Real
Estate Management, Manufactured Housing
Institute, National Apartment Association, National
Association of Home Builders, National Association
of Residential Property Managers, National Leased
Housing Association, National Multifamily Housing
Council, and Real Estate Roundtable).
39 See, e.g., FTC–2023–0064–2981 (Apartment &
Office Building Association of Metropolitan
Washington); FTC–2023–0064–3042 (Nevada State
Apartment Association); FTC–2023–0064–3044
(San Angelo Apartment Association); FTC–2023–
0064–3045 (Chicagoland Apartment Association);
FTC–2023–0064–3089 (Apartment Association of
Northeast Wisconsin and Fox Valley Apartment
Association); FTC–2023–0064–3111 (Houston
Apartment Association); FTC–2023–0064–3172
(New Jersey Apartment Association); FTC–2023–
0064–3296 (Bay Area Apartment Association);
FTC–2023–0064–3311 (Greater Cincinnati Northern
Kentucky Apartment Association); FTC–2023–
0064–3312 (Tulsa Apartment Association); FTC–
2023–0064–3313 (Property Management
Association of Michigan).
40 FTC–2023–0064–3289 (Zillow Group).
41 See, e.g., FTC–2023–0064–3262 (Skyscanner);
FTC–2023–0064–3293 (Travel Technology
Association).
42 See, e.g., FTC–2023–0064–2918 (Elite Catering
+ Event Professionals); FTC–2023–0064–3078
(Washington Hospitality Association); FTC–2023–
0064–3080 (UNITE HERE); FTC–2023–0064–3101
(High Road Restaurants); FTC–2023–0064–3180
(Independent Restaurant Coalition); FTC–2023–
0064–3197 (American Beverage Licensees); FTC–
2023–0064–3203 (American Pizza Community);
FTC–2023–0064–3219 (Georgia Restaurant
Association); FTC–2023–0064–3300 (National
Restaurant Association).
43 See, e.g., FTC–2023–0064–3065 (Carriage
Services, Inc.); FTC–2023–0064–3130 (International
Cemetery, Cremation & Funeral Association); FTC–
2023–0064–3210 (Service Corporation
International).
44 See, e.g., FTC–2023–0064–2886 (American
Gaming Association); FTC–2023–0064–3120
(Arizona Indian Gaming Association).
45 See, e.g., FTC–2023–0064–3261 (National
Association of Broadcasters); FTC–2023–0064–2884
(NTCA—The Rural Broadband Association); FTC–
2023–0064–3143 (ACA Connects—America’s
Communications Association); FTC–2023–0064–
3233 (NCTA—The internet & Television
Association); FTC–2023–0064–3234 (CTIA—The
Wireless Association); FTC–2023–0064–3295
(USTelecom—The Broadband Association).
46 See, e.g., FTC–2023–0064–3033 (The Rebel
Lounge, Lucky Man Concerts LLC, PHX Fest,
RelentlessBeats LLC).
47 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
48 See, e.g., FTC–2023–0064–3236 (NCIC Inmate
Communications); FTC–2023–0064–3284 (Global
Tel*link Corporation d/b/a ViaPath Technologies).
49 See, e.g., FTC–2023–0064–2906 (National
Association of College & University Business
Officers, American Council on Education); FTC–
2023–0064–3217 (Bowling Proprietors’ Association
of America); FTC–2023–0064–3249 (Marine
Retailers Association of the Americas); FTC–2023–
0064–3251 (National RV Dealers Association); FTC–
2023–0064–3269 (IHRSA—The Health & Fitness
Association). Towing & Recovery Association of
America, Inc. submitted a late comment, which the
Commission considered in its discretion and makes
available at https://www.ftc.gov/system/files/ftc_
gov/pdf/R207011TRAAComment.pdf.
fees.’’ 25 Other mass mailings contained
similar comments in support. In a mass
mailing of about 344 comments,
consumer commenters made near-
identical statements to the
aforementioned mass mailing and
added: ‘‘Junk fees are monies a business
tacks on at the end of the purchasing
process instead of being transparent
about the full price upfront. These fees
are common when people are
purchasing airline and concert tickets,
booking hotel rooms, paying utility
bills, and renting apartments.’’ 26 A mass
mailing submitted by about 315
consumer commenters stated, ‘‘I support
cracking down on hidden junk fees that
cost Americans billions of dollars each
year.’’ 27 A mass mailing by about
nineteen consumer commenters stated,
‘‘For too long, individuals have been
subjected to misleading practices, such
as the omission of mandatory fees from
advertised prices and misrepresentation
of the nature and purpose of fees. These
practices not only erode trust but also
hinder informed decision-making by
consumers.’’ 28 A mass mailing by about
thirteen consumer commenters simply
urged: ‘‘Stop junk fees!’’ 29 Additional
comments from individual consumers
also supported the rule.
Other commenters opposed the rule,
sought exemptions from the rule, or
expressed concern about the rule’s
definitions or application to specific
pricing scenarios. They included a
Federal government agency; 30 national
business groups and public policy
advocates,31 including tax groups and
advisors; 32 academics; 33
representatives from auto dealers and
service providers; 34 app-based delivery
platforms; 35 financial and real estate
settlement services; 36 franchised
businesses; 37 representatives of housing
providers,38 including apartment
associations 39 and a housing
advertising platform; 40 hospitality
groups, including hotel 41 and restaurant
associations; 42 funeral and cemetery
providers; 43 gaming associations; 44
telecommunications providers; 45 live-
event venues; 46 a law firm; 47 providers
of communications services to
incarcerated people; 48 and other
sectors. 49 The commenters argued that
the FTC failed to establish the
prevalence of the defined unfair and
deceptive practices and failed to
conduct an adequate cost-benefit
analysis, and that the proposed rule
would interfere with established pricing
models, could not be applied to all
pricing scenarios, would overlap with
other laws and regulations, or would
exceed the FTC’s rulemaking authority
or jurisdiction.
Members of the restaurant industry
voiced opposition to the proposal. A
mass mailing from about 4,650
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50 See, e.g., FTC–2023–0064–2953, FTC–2023–
0064–2961, FTC–2023–0064–2972; FTC–2023–
0064–2971.
51 Initial notice of informal hearing; final notice
of informal hearing; list of Hearing Participants;
requests for submissions from Hearing Participants:
Trade Regulation Rule on Unfair or Deceptive Fees,
89 FR 21216 (Mar. 27, 2024).
52 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–3143 (ACA
Connects); FTC–2023–0064–3139 (American
Bankers Association and Consumer Bankers
Association); FTC–2023–0064–3294 (International
Franchise Association); FTC–2023–0064–3233
(NCTA—The internet & Television Association).
53 The interested parties were: ACA Connects—
America’s Communication Association; American
Bankers Association and Consumer Bankers
Association; U.S. Chamber of Commerce; NCTA—
The internet & Television Association; International
Franchise Association; BattleLine LLC; IHRSA—
The Global Health & Fitness Association; National
Taxpayers Union Foundation; Consumer Federation
of America, representing a coalition of 52 national
and state consumer advocacy groups; Consumer
Federation of America with National Consumer
Law Center and National Association of Consumer
Advocates; Community Catalyst, representing a
coalition of 33 health and consumer protection
advocacy groups; National Housing Law Project,
representing a coalition of 39 housing justice
advocacy organizations; National Consumer Law
Center, Prison Policy Initiative, and Stephen Raher;
Formerly Incarcerated, Convicted People & Families
Movement; Truth in Advertising, Inc.; National
Consumer Law Center; and Fair Price, Fair Wage
Coalition.
54 The interested parties that made documentary
submissions in connection with the informal
hearing were: National Taxpayers Union
Foundation; Community Catalyst; National Housing
Law Project; Consumer Federation of America; U.S.
Chamber of Commerce; and NCTA—The internet &
Television Association. Each of the documentary
submissions is posted in the Informal Hearing
Documents folder available at https://www.ftc.gov/
legal-library/browse/rules/rulemaking-unfair-or-
deceptive-fees.
55 Transcript, Informal Hearing on Proposed
Trade Regulation Rule on Unfair or Deceptive Fees
(Apr. 24, 2024), https://www.ftc.gov/system/files/
ftc_gov/pdf/transcript-deceptive-fees.pdf.
56 American Bankers Association and Consumer
Bankers Association and the U.S. Chamber of
Commerce did not appear at the Informal Hearing
despite being given the opportunity to do so.
57 See 15 U.S.C. 57a(a)(1)(B).
58 15 U.S.C. 57a(b)(3). In addition, section 22(b)(2)
of the FTC Act, 15 U.S.C. 57b–3(b)(2), requires the
Commission to prepare a final regulatory analysis,
which it discusses in section V.
restaurant owners criticized the rule as
a one-size-fits-all approach that would
be unworkable for the restaurant
industry. In addition, members of the
rental housing industry also submitted
comments in opposition to the proposed
rule. A mass mailing from about 3,781
members of the rental housing industry
stated that it is virtually impossible to
predict and disclose in advertisements
total prices that include all mandatory
fees that residents could incur during
lease terms. The Commission does not
address the specific issues raised by
these industries and others that fall
outside the scope of this final rule.50
C. Informal Public Hearing
On March 27, 2024, the Commission
published an initial notice of informal
hearing, which also served as the final
notice of informal hearing (‘‘Informal
Hearing Notice’’). 51 The Informal
Hearing Notice was published in
accordance with section 18(b)(1) of the
FTC Act, 15 U.S.C. 57a(b)(1), which
requires the Commission to provide an
opportunity for an informal hearing in
section 18 rulemaking proceedings. The
Informal Hearing Notice identified eight
commenters to the NPRM that requested
an informal hearing in accordance with
the requirements of 16 CFR 1.11(e), as
well as nine additional commenters that
requested the opportunity to make an
oral presentation if the Commission was
to hold an informal hearing at others’
requests. A number of commenters,
including several who requested an
informal hearing, proposed potential
disputed issues of material fact for the
Commission’s consideration.52 The
Commission reviewed these potential
issues and concluded in its Informal
Hearing Notice that there were no
disputed issues of material fact to
resolve at the hearing.
On April 24, 2024, the Commission
conducted an informal public hearing.
In the Informal Hearing Notice, which
was formally approved by vote of the
Commission, the Commission’s Chief
Presiding Officer, the Chair, designated
the Honorable Jay L. Himes, an
Administrative Law Judge for the
Federal Trade Commission, to serve as
the presiding officer of the informal
hearing. Seventeen interested parties
were identified in the Informal Hearing
Notice,53 and six of them made
documentary submissions in support of
their hearing testimony.54 Fifteen
interested parties made presentations, 55
and two did not appear at the hearing.56
The majority of interested parties that
appeared spoke in support of the
proposed rule. However, several voiced
opposition to the rule, explained
perceived problems with the proposed
rule text, or argued that the Commission
incorrectly concluded that there were
no disputed issues of material fact
raised in response to the NPRM.
II. The Legal Standard for Promulgating
the Rule
The Commission is promulgating 16
CFR part 464 (‘‘final rule’’ or ‘‘rule’’)
pursuant to section 18 of the FTC Act,
15 U.S.C. 57a, which authorizes the
Commission to promulgate, modify, and
repeal trade regulation rules that define
with specificity acts or practices in or
affecting commerce that are unfair or
deceptive within the meaning of section
5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1).57 Whenever the Commission
promulgates a rule under section
18(a)(1)(B), the rule must include a
Statement of Basis and Purpose (‘‘SBP’’)
that addresses: (1) the prevalence of the
acts or practices addressed by the rule;
(2) the manner and context in which the
acts or practices are unfair or deceptive;
and (3) the economic effect of the rule,
taking into account the effect on small
businesses and consumers.58 The
Commission summarizes in this section
its findings regarding each of these
requirements.
Substantial evidence exists
supporting the prevalence of bait-and-
switch pricing and misleading fees and
charges economy-wide as well as in the
live-event ticketing and short-term
lodging industries. As documented by
the rulemaking record, the
Commission’s work on these pricing
issues for over a decade, and the
complementary actions of the
Commission’s local, State, and
international counterparts, these
specific practices are widespread across
the economy and are harmful to
consumers and honest businesses.
Nevertheless, the Commission has
decided, in its discretion, to focus this
final rule on the industries in which the
Commission first evaluated drip
pricing—live-event ticketing and short-
term lodging—and have a long history
of harming consumers and honest
competitors.
The Commission notes that the harms
of bait-and-switch pricing and the
misrepresentation of fees and charges
are particularly pronounced in
industries such as these, in which most
transactions occur online. Consumers
trying to comparison shop across
multiple websites, or even on the same
website, when deciding what tickets to
purchase or where to travel are unable
to do so effectively because some
businesses hide the true total price and
instead force consumers to go to
different sites and click through
multiple web pages for each offer to
learn the true total price.
Consumer harm is also pronounced in
these industries because the offered
goods and services are often identical
(as is the case with live-event tickets),
or nearly identical (as is the case with
competing short-term lodging offers in a
particular destination and for a
particular star rating), and the most
salient feature is the total price, which
is shrouded from consumers. Indeed, for
some consumers, hotel rooms are
interchangeable so long as the location,
star rating, and reviews are similar
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59 15 U.S.C. 57a(b)(3).
60 NPRM, 88 FR 77435; see also, e.g., FTC–2022–
0069–6099 (ANPR) (Consumer Reports discussed its
WTFee?! Survey, 2018 Nationally-Representative
Multi-Mode Survey of hidden fees in multiple
sectors of the economy and the prevalence of unfair
or deceptive fees practices.); FTC–2022–0069–6095
(ANPR) (Consumer Federation of America noted
that the Washington Attorney General’s Hidden Fee
Survey showed that consumers experienced
unexpected fees in a wide range of industries.);
FTC–2022–0069–6113 (ANPR) (UnidosUS cited
surveys or studies by itself, the Financial Health
Network, and the Center for Responsible Lending
that documented the impact of fees related to
financial services products.).
61 See, e.g., Complaint ¶¶ 4–5, 106–14, FTC v.
Invitation Homes, Inc., No. 24–cv–04280 (N.D. Ga.
Sept. 24, 2024) (alleging that defendant, among
other deceptive and unfair practices, deceptively
advertised monthly home rental prices that omitted
and used confusing and buried language about
mandatory fees); Complaint ¶¶ 39–46, FTC v.
Vonage Holdings Corp., No. 3:22–cv–6435 (D.N.J.
Nov. 3, 2022) (alleging in part that defendant
charged undisclosed large cancellation fees);
Complaint ¶¶ 42–44, 50, United States v. Funeral
Cremation Grp. of N. Am., LLC (‘‘Legacy Cremation
Servs.’’), No. 0:22–cv–60779 (S.D. Fla. Apr. 22,
2022) (alleging defendants advertised artificially
low prices for cremation services which ultimately
included undisclosed additional charges and, in
some cases where consumers contested these
charges, defendants refused to return remains);
Complaint ¶ 9, FTC v. Liberty Chevrolet, Inc.
(‘‘Bronx Honda’’), No. 1:20–cv–03945 (S.D.N.Y.
May 21, 2020) (alleging defendants advertised low
sales prices but later told consumers they were
required to pay additional charges including
certification charges); Complaint ¶ 13, FTC v.
NetSpend Corp., No. 1:16–cv–04203 (N.D. Ga. Apr.
11, 2017) (alleging in part that defendant charged
maintenance and usage fees to consumers who were
unable to use all, or even a portion of, the funds
of their prepaid debit cards); see also Complaint
¶¶ 24–25, 29, 40–42, FTC v. AT&T Mobility LLC,
No. 3:14–cv–04785 (N.D. Cal. Oct. 28, 2014)
(alleging defendant did not adequately disclose the
limitations of defendant’s data plan offerings and
subsequently charged high cancellation fees for
consumers who chose to end their contracts);
Complaint ¶¶ 1, 26, 39–40, FTC v. Millennium
Telecard, Inc., No. 2:11–cv–02479 (D.N.J. May 2,
2011) (alleging defendants deceptively marketed
prepaid credit calling cards by failing to adequately
disclose fees that substantially limited the number
of minutes consumers had purchased); Complaint
¶ 15, FTC v. CompuCredit Corp., No. 1:08–cv–
01976 (N.D. Ga. June 10, 2008) (alleging in part that
defendants misrepresented the credit limits on
various credit cards and failed to disclose fees
charged upfront).
62 See, e.g., Complaint ¶¶ 4–5, 106–14, 118–23,
Invitation Homes, Inc., No. 24–cv–04280 (alleging
that defendant, among other deceptive and unfair
practices, misled consumers about fees by using
confusing and buried language); Complaint ¶¶ 39–
46, Vonage Holdings Corp., No. 3:22–cv–6435;
Complaint ¶¶ 61–63, FTC v. Benefytt Techs., Inc.,
No. 8:22–cv–1794 (M.D. Fla. Aug. 8, 2022) (alleging
in part that defendants bundled and charged fees
for unwanted products with sham health insurance
plans); Complaint ¶¶ 17–20, FTC v. Passport Auto
Grp., Inc., No. 8:22–cv–02670 (D. Md. Oct. 18, 2022)
(alleging in part that defendants advertised vehicle
prices that did not include redundant fees ranging
from hundreds to thousands of dollars for
inspection, reconditioning, preparation, and
certification); Complaint ¶¶ 3, 33, 41, FTC v. N. Am.
Auto. Serv., Inc. (‘‘Napleton Auto’’), No. 1:22–cv–
01690 (E.D. Ill. Mar. 31, 2022) (alleging defendants
charged consumers for additional products and
services without their consent and misrepresented
the fees as mandatory, resulting in artificially low
advertised prices); Complaint ¶¶ 50–51,
Amazon.com, Inc. (‘‘Amazon Flex’’), No. C–4746
(FTC June 9, 2021) (alleging respondents falsely
represented that 100% of tips would go to the
driver in addition to the pay respondents offered
drivers); Complaint ¶¶ 37–39, FTC v. Lead Express,
Inc., No. 2:20–cv–00840 (D. Nev. May 11, 2020)
(alleging in part that defendants did not clearly and
conspicuously disclose material information related
to the total amount of payments related to loans and
also withdrew significantly more than the stated
total cost of the loan from consumers’ accounts);
Complaint ¶¶ 9–10, FTC v. FleetCor Techs, Inc., No.
1:19–cv–05727, 2019 WL 13081514 (N.D. Ga. Dec.
20, 2019) (alleging defendants charged consumers
arbitrary and unexpected fees related to pre-paid
fuel cards without consumers’ consent); Complaint
¶¶ 4, 30–32, 36–37, FTC v. BCO Consulting Servs.,
Inc., No. 8:23–cv–00699 (C.D. Cal. Apr. 24, 2023)
(alleging defendants enticed consumers with false
promises to alleviate student loan debt despite not
applying any payments to the student loan balances
and collecting illegal advance fees without
providing any services); Complaint ¶¶ 31–36, FTC
v. OMICS Grp. Inc., No. 2:16–cv–02022 (D. Nev.
Aug. 25, 2016) (alleging in part defendants
misrepresented the publishing process of academic
papers and only disclosed large publishing fees
after notifying consumers that their papers had been
approved for publication); Complaint ¶¶ 12, 23–25,
FTC v. Lending Club Corp., No. 3:18–cv–02454
(N.D. Cal. Apr. 25, 2018) (alleging defendant
charged consumers an upfront fee based on a
percentage of the loan requested that was not
clearly and conspicuously disclosed; this hidden
fee caused loans received to be substantially smaller
than advertised); Complaint ¶ 37, FTC v. T-Mobile
USA, Inc., No. 2:14–cv–00967 (W.D. Wash. July 1,
2014) (alleging defendant added unauthorized
third-party charges to the telephone bills of
consumers); Amended Complaint ¶¶ 21–22, FTC v.
Websource Media, LLC, No. 4:06–cv–01980 (S.D.
Tex. June 21, 2006) (alleging defendants placed
charges on consumer telephone bills despite
representations that there would be no charges or
across offers, and what matters most is
the total price.
In the future, the Commission may
address these unfair and deceptive
practices across industries as discussed
in the NPRM. For now, however, the
Commission will address unfair and
deceptive pricing practices in other
industries using its existing section 5
authority.
A. Prevalence of Acts or Practices
Addressed by the Rule
As discussed herein, and in the
NPRM, the Commission finds that
unfair or deceptive pricing practices
involving bait-and-switch pricing and
misleading fees or charges are prevalent
throughout the economy and affect, or
have the potential to affect, virtually
every purchasing transaction a
consumer undertakes, including
decisions about basic goods or services;
where to live, dine, stay, or travel; and
what events to attend. Specifically, the
Commission finds that the following
unfair or deceptive practices relating to
fees are prevalent generally throughout
the economy and specifically in the
live-event ticketing and short-term
lodging industries: (1) bait-and-switch
pricing practices that hide the total
price of goods or services by omitting
mandatory fees and charges from
advertised prices, including through
drip pricing, and (2) misrepresenting the
nature, purpose, amount, and
refundability of fees or charges.
Section 18 of the FTC Act instructs
that the Commission may determine
that unfair or deceptive acts or practices
are prevalent if: ‘‘it has issued cease and
desist orders regarding such acts or
practices’’ or ‘‘any other information
available to the Commission indicates a
widespread pattern of unfair or
deceptive acts or practices.’’ 59 In
support of its preliminary finding that
these practices are prevalent, the NPRM
cited enforcement evidence, including
prior work by the Commission,
complementary actions by State
Attorneys General, private lawsuits, and
international actions to address unfair
or deceptive pricing practices, as well as
comments received in response to the
ANPR. 60 The NPRM also described
legislative and regulatory action taken
by multiple States to address unfair or
deceptive fees.
To support its prevalence
determination herein as to the economy
generally, and as to the live-event
ticketing and short-term lodging
industries specifically, the Commission
reiterates that it has a long history of
enforcement actions, as well as a
plethora of other information, indicating
a widespread pattern of bait-and-switch
pricing practices, including drip pricing
and misleading fees or charges. In
addition, the Commission’s prevalence
determination is further supported by
the Commission’s workshops and
warning letters relating to bait-and-
switch pricing and misleading fees or
charges; the behavioral and economic
research documenting consumer harm
from these practices; and consumer
surveys and reports. The Commission
also relies on the great majority of the
more than 60,800 comments filed in
response to the NPRM—one of the
largest number of comments filed in any
Commission rulemaking to date—
including comments by consumers,
consumer groups, academics,
businesses, and government officials
highlighting the prevalence of these
unfair and deceptive practices and
urging the Commission to promulgate a
final rule to combat them.
As explained in the NPRM, the
Commission has a long history of
enforcement actions targeting unfair and
deceptive bait-and-switch pricing tactics
concerning hidden fees 61 and
misrepresentations regarding the nature
and purpose of fees. 62 The takeaway
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obligations); FTC v. Mercury Mktg. of Del., Inc., No.
00–cv–3281, 2004 WL 2677177, *1 (E.D. Pa. Nov.
22, 2004) (finding defendants billed consumers
without their consent after misleading consumers
about introductory internet packages); Complaint
¶¶ 25–27, FTC v. Stewart Fin. Co., No. 1:03–cv–
02648 (N.D. Ga. Sept. 4, 2003) (alleging in part that
defendants package undisclosed add-on products
with consumer loans and in some cases describe
those add-on products as mandatory); Complaint
¶¶ 19–21, 24, FTC v. Hold Billing Serv., Ltd., No.
SA–98–CA–0629–FB (W.D. Tex. July 16, 1998)
(alleging defendants had previously added third-
party charges to consumers’ phone bills without
permission by using sweepstakes entry forms as
contracts to authorize charges); Complaint ¶¶ 18,
33, 56–58, FTC v. Lake, No. 8:15–cv–00585–CJC–
JPR (C.D. Cal. Apr. 14, 2015) (alleging defendants
misrepresented that trial loan payments or
reinstatement fee payments would be held in
escrow and refunded to the consumer if the loan
modification was not approved); FTC v. Hope for
Car Owners, LLC, No. 2:12–CV–778–GEB–EFB,
2013 WL 322895, at *3–4 (E.D. Cal. Jan. 24, 2013)
(finding that the FTC sufficiently stated a claim for
misrepresentation of the refundability of vehicle
loan modification fees and entering default
judgment); Amended Complaint ¶¶ 38–39, 58–60,
FTC v. U.S. Mortg. Funding, Inc., No. 9:11–cv–
80155–JIC (S.D. Fla. July 26, 2011) (alleging
defendants misrepresented that an upfront loan
modification fee was refundable); FTC v. Nat’l Bus.
Consultants, Inc., 781 F. Supp. 1136, 1143 (E.D. La.
1991) (finding that ‘‘defendants’ misrepresentations
regarding the ease with which the ‘performance
deposit’ could be refunded composed a large part
of the various and sundry misrepresentations’’).
63 Compare 15 U.S.C. 45(m) (excluding consent
orders from the type of cease and desist orders that
could support an action for civil penalties under 15
U.S.C. 45(m)(1)(B)) and 108 Stat. 1691 (1994)
(amending 15 U.S.C. 45(m) to add ‘‘other than a
consent order’’ after the term ‘‘cease and desist
order’’) with 15 U.S.C. 57a(b)(3) (stating that the
Commission may make a determination of
prevalence if ‘‘it has issued cease and desist orders
regarding such acts or practices or any other
information available to the Commission
indicat[ing] a widespread pattern of unfair or
deceptive acts or practices’’). Even if consent orders
and the investigations that lead up to them are not
‘‘cease and desist orders,’’ in making a
determination of prevalence, the Commission can
still rely upon them as ‘‘other information.’’
64 Fed. Trade Comm’n, The Economics of Drip
Pricing (May 21, 2012), https://www.ftc.gov/news-
events/events/2012/05/economics-drip-pricing.
65 See, e.g., Fed. Trade Comm’n, The Economics
of Drip Pricing: Conference Transcript 76–111 (May
21, 2012), https://www.ftc.gov/sites/default/files/
documents/public_events/economics-drip-pricing/
transcript.pdf.
66 Press Release, Fed. Trade Comm’n, FTC Warns
Hotel Operators that Price Quotes that Exclude
‘‘Resort Fees’’ and Other Mandatory Surcharges
May Be Deceptive (Nov. 28, 2012), https://
www.ftc.gov/news-events/news/press-releases/2012/
11/ftc-warns-hotel-operators-price-quotes-exclude-
resort-fees-other-mandatory-surcharges-may-be.
67 Mary Sullivan, Fed. Trade Comm’n, Economic
Analysis of Hotel Resort Fees 4 (2017), https://
www.ftc.gov/system/files/documents/reports/
economic-analysis-hotel-resort-fees/p115503_hotel_
resort_fees_economic_issues_paper.pdf.
68 Id.
69 Id.
70 Id.
71 Id.
72 Fed. Trade Comm’n, ‘‘That’s the Ticket’’
Workshop: Staff Perspective 4 (May 2020), https://
www.ftc.gov/system/files/documents/reports/thats-
ticket-workshop-staff-perspective/staffperspective_
tickets_final-508.pdf.
73 Id.
74 Id.
from this enforcement history is clear—
businesses cannot hide or misrepresent
the true cost of a good or service or
mislead consumers about the nature,
purpose, amount, or refundability of
fees or charges. Some commenters
suggested consent orders are not cease-
and-desist orders that the Commission
can rely upon to support a finding of
prevalence, but that is incorrect. The
FTC Act makes clear when it intends to
exclude consent orders from the ambit
of ‘‘cease and desist orders,’’ and does
not do so in section 18.63
In addition to the Commission’s
enforcement actions, for more than a
decade, the Commission has engaged
with the public and issued guidance to
industry on issues related to bait-and-
switch tactics, including drip pricing,
and the misrepresentation of fees or
charges. The Commission first engaged
with the public on the concept of drip
pricing in 2012 by convening a
conference, titled ‘‘The Economics of
Drip Pricing,’’ to bring together
economists and marketing academics to
‘‘examine the theoretical motivation for
drip pricing and its impact on
consumers, empirical studies, and
policy issues pertaining to drip
pricing.’’ 64 Several psychological
theories were discussed at this
conference, and these theories explain
why consumers cannot reasonably avoid
making errors when the total price is not
revealed upfront.65 Following the
workshop, Commission staff sent
warning letters to hotels and online
travel agents that were not adequately
disclosing resort fees or including those
fees in the total price.66 These hotels
and online travel agents were employing
drip pricing tactics as well as another
bait-and-switch pricing tactic,
partitioned pricing, to inadequately
disclose resort fees and hide the total
price of a hotel stay. Partitioned pricing
consists of dividing a price into
multiple components without ever
disclosing the total and leaving
consumers to figure out the true total
price on their own. Hotels, for example,
might separately list the room rate and
‘‘resort fee’’ but never add them up and
quote an all-inclusive total price. In
2017, the Commission’s Bureau of
Economics published a report that
reviewed the existing literature on drip
pricing and partitioned pricing and
examined the costs and benefits of
disclosing hotel resort fees. 67 The report
found that ‘‘[u]nless the total price is
disclosed up front, separating resort fees
from the room rate is unlikely to result
in benefits that offset the likely harm to
consumers.’’ 68 Specifically,
separating mandatory resort fees from posted
room rates without first disclosing the total
price is likely to harm consumers by
increasing the search costs and cognitive
costs of finding and choosing hotel
accommodations. Forcing consumers to click
through additional web pages to see a hotel’s
resort fee increases the cost of learning the
hotel’s price. Separating the room rate from
the resort fee increases the cognitive costs of
remembering the hotel’s price. When it
becomes more costly to search and evaluate
an additional hotel, a consumer’s choice is
either to incur higher total search and
cognitive costs or to make an incomplete, less
informed decision that may result in a more
costly room, or both.69
The report observed that hotels could
eliminate these costs to consumers by
including the resort fee in the advertised
price; bundling the same resort services
with the room and charging the same
total price; listing the components of the
total price separately, as long as the total
price is the most prominently disclosed
price; or changing to unbundled,
optional resort services which would
not be included in the advertised
price. 70 Finally, the report did not find
‘‘any benefits to consumers from
separately-disclosed mandatory resort
fees that could not be achieved by first
listing the total price and then
disclosing the resort fee.’’ 71
In 2019, the Commission hosted a
workshop and issued a staff perspective
report that examined pricing and fees in
the live-event tickets market. 72 The
report observed,
On most primary and resale
platforms, the ticket price a consumer
first sees is not what the consumer will
pay. Mandatory fees, such as ‘venue’
and ‘ticket processing’ fees, bulk up the
price–often by as much as thirty percent
. . . . The late disclosure of fees
increases search costs for consumers
and makes it harder to comparison
shop.73
The report remarked that ‘‘[a]ll of the
workshop panelists who discussed the
fees issue, including each participating
ticket seller that does not currently
provide upfront all-in pricing, favored
requiring all-in pricing through federal
legislation or rulemaking.’’ 74
The Commission’s finding of
prevalence is further supported by the
complementary enforcement actions
brought by its law enforcement partners,
most of which have resulted in orders
prohibiting bait-and-switch pricing and
misrepresenting fees and charges in the
short-term lodging, live-event ticketing,
delivery services, rental cars, travel, and
tax filing preparation services
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75 See, e.g., Complaint ¶ 3, Rhode Island v. UPP
Global, LLC, No. PC–2024–04453 (R.I. Super. Ct.
Aug. 13, 2024) (alleging in part that defendant
charges a fee as a tax, fails to disclose prices until
after consumers have elected to use defendant’s
service, and advertises hourly prices and then
requires consumers to pay for multiple hours at a
minimum); Complaint ¶¶ 3–4, District of Columbia
v. StubHub, Inc., No. 2024–CAB–004794 (D.C.
Super. Ct. July 31, 2024) (alleging defendant uses
drip pricing and entices consumers to shop for
tickets by displaying artificially low prices and
revealing mandatory fees later in the checkout
process which defendant also misrepresents the
purpose of); Consent Decree ¶¶ 10–24, Arizona v.
Cox Enterprises, Inc., No. CV–2023–019752 (Ariz.
Sup. Ct. Jan. 2, 2024) (alleging defendants failed to
disclose additional fees to consumers who
purchased services through long-term contracts
based on ‘‘price-lock’’ guarantee); Assurance of
Voluntary Compliance ¶ 2, Texas v. Marriott Int’l,
Inc., No. 2023–CI09717 (Tex. Dist. Ct. May 16,
2023) (alleging defendant misrepresented various
fees, including resort fees, and did not include all
mandatory fees in the advertised room rate in
violation of the Texas Deceptive Trade Practices
Act); Plaintiff’s Original Pet. ¶ 1, Texas v. Hyatt
Hotels Corp., No. C2023–0884D (TX. Dist. Ct. May
15, 2023) (alleging defendant did not include
mandatory fees in advertised room rates in violation
of the Texas Deceptive Trade Practices Act);
Consent Order ¶ 20, District of Columbia v.
Grubhub Holdings, Inc., No. 2022 CA 001199 B
(D.C. Super. Ct. Jan. 4, 2023) (alleging in part that
defendants misrepresented menu prices to
consumers and deceptively advertised that
consumers could ‘‘order online for free’’);
Assurance of Voluntary Compliance ¶ 4,
Commonwealth v. Omni Hotels Mgmt., GD–23–
013056 (Pa. Commw. Ct. Nov. 9, 2023) (alleging
defendants failed to advertise room prices including
mandatory fees, misleading consumers); Assurance
of Voluntary Compliance ¶ 2, Commonwealth v.
Choice Hotels Intl., Inc., GD–23–011023 (Pa.
Commw. Ct. Sept. 21, 2023) (alleging defendants
failed to advertise room prices including mandatory
fees misleading consumers); Assurance of
Voluntary Compliance ¶¶ 1–5, Commonwealth v.
RYADD, Inc., No. 2022–07262 (Pa. Commw. Ct.
Sept. 8, 2022) (alleging defendants failed to
advertise ticket prices including service fees and
failed to clearly disclose an itemization of the total
cost); Complaint ¶ 1, Commonwealth v. Mariner
Finance, LLC, No. 2:22–cv–03235–MAK (E.D. Pa.
Sept. 6, 2022) (alleging defendant charged
consumers for hidden add-on products without
consumer knowledge and in some cases after
explicit rejection); Consent Order ¶ 6, District of
Columbia v. Maplebear, Inc., No. 2020 CA 003777B
(D.C. Super. Ct. Aug. 19, 2022) (prohibiting
defendant from misrepresenting the nature and
purpose of fees applied to consumers’ orders);
Assurance of Voluntary Compliance ¶ 2,
Commonwealth v. Marriott Int’l, Inc., No. GD–21–
014016 (Pa. Ct. C.P. Nov. 16, 2021) (alleging
defendant misrepresented its room rates by failing
to include items such as mandatory fees in its
pricing); Consent Order ¶ 3.1–3.18, Drivo LLC, N.J.
Div. Consumer Aff. (Sept. 16, 2020) (prohibiting
unfair and deceptive practices relating to damage
fees and third party reservation fees for rental
vehicles); Press Release, Off. Minn. Att’y Gen.,
Attorney General Ellison Obtains Relief for More
than 30,000 Comcast/Xfinity Customers (Jan. 15,
2020) (alleging in part that defendants
misrepresented prices for their services and added
services without consumer consent), https://
www.ag.state.mn.us/Office/Communications/2020/
01/15_ComcastXfinity.asp; Press Release, Off.
Minn. Att’y Gen., Attorney General Ellison Obtains
Nearly $9 Million Settlement with CenturyLink for
Overcharging Minnesota Customers (Jan. 8, 2020)
(alleging defendant misrepresented the price of its
services and used a complex pricing scheme to
mislead consumers), https://www.ag.state.mn.us/
Office/Communications/2020/01/08_
CenturyLinkSettlement.asp.; Assurance of
Voluntary Compliance ¶¶ 1–12, Commonwealth v.
Event Ticket Sales, LLC, No. 201101873 (Pa.
Commw. Ct. Nov. 19, 2020) (alleging defendants
failed to advertise ticket prices including service
fees and failed to clearly disclose an itemization of
the total cost); Assurance of Voluntary Compliance
¶ 7, CenturyLink, Inc., No. 19–CV–56401 (Or. Cir.
Ct., 2019) (alleging defendants charged undisclosed
fees and failing to disclose all mandatory fees and
charges); Agreed Final J. ¶ 8, Texas v. Guided
Tourist, LLC, No. D–1–GN–19–001618 (Tex. Dist.
Ct. Mar. 26, 2019) (enjoining defendant from
advertising ticket prices other than the total ticket
price, including all mandatory fees); Settlement
Agreement ¶ 8(b)–(c), Florida v. Dollar Thrifty Auto.
Grp., Inc., No. 16–2018–cv–005938 (Fla. Cir. Ct.,
Jan. 14, 2019) (alleging in part that defendant
misrepresented optional charges as mandatory and
did not sufficiently disclose toll-related fees).
Additionally, Intuit recently entered a multistate
settlement of allegations that it misrepresented its
tax filing products would come at no cost.
Assurance of Voluntary Compliance,
Commonwealth v. Intuit Inc., No. 220500324 (Pa.
Ct. C.P. May 4, 2022).
76 FTC–2023–0064–3215 (Attorneys General of
the States of North Carolina and Pennsylvania,
along with Attorneys General of the States or
Territories of Arizona, Colorado, Connecticut,
Delaware, District of Columbia, Hawaii, Illinois,
Maine, Michigan, Minnesota, New Jersey, New
York, Oklahoma, Oregon, Vermont, Washington,
and Wisconsin). The Attorneys General also
pointed to prevalence of these practices in
residential leasing, payday lending, internet
applications, online shopping, automobile rentals,
carpet cleaners, dietary supplement sellers, moving
companies, gyms, travel companies, outlet stores,
and online auctions.
77 Id. (The Attorneys General highlighted actions
each has taken in their own states to address
financial services fees, hotel fees, live-event ticket
fees, rental housing fees, auto rental fees, and
telecommunication fees.)
78 Id.
79 Id.
80 N.Y. Arts & Cult. Aff. Law sec. 25.01–25.33
(McKinney 2023) (Effective Jun. 30, 2022) (requiring
that the sellers and resellers of live-event tickets
disclose the total cost of a ticket, upfront, and
clearly and conspicuously disclose the amount of
the price that is made up of fees and other charges);
An Act Ensuring Transparent Ticket Pricing, H.
259, 193rd Gen. Court (Mass. 2023) (proposed
legislation requiring in part that the sellers and
resellers of live-event tickets disclose the total cost
inclusive of all ancillary fees that must be paid and
the portion of the ticket price that represents a
service charge or any other fee or surcharge); H.B.
714 (2023–2024 Session) (N.C. 2023) (proposed
legislation that requires, among other things, that
providers of short-term lodging and live-event
ticketing clearly display the total price of goods and
services inclusive of mandatory fees a consumer
would incur during a transaction); see also 2023
Minn. H.B. 3438 (Enacted May 20, 2024) (stating
that it is a deceptive trade practice for a business
to not include all mandatory fees or surcharges
when advertising, displaying or offering a price for
goods or services); Cal. S.B. 478 (2023–2024 Regular
Session) (Enacted Oct. 7, 2023) (amending the
California Consumer Legal Remedies Act to state
that it is unlawful to advertise, display, or offer a
price for a good or service that does not include all
mandatory fees or charges other than taxes or fees
imposed by a government on the transaction); Cal.
S.B. 1524 (2023–2024 Regular Session) (clarifying
and amending S.B. 478 to include that additional
fees such as service charges for food services
businesses including bars and restaurants could
appear separately so long as they were displayed on
the menu); H.B. 636 (2023–2024) (Pa. 2023)
(Engrossed Oct. 19, 2023) (proposed legislation
amending the Pennsylvania Unfair Trade Practices
and Consumer Protection Law to require the
disclosure of all mandatory fees and charges
included in the advertised and displayed price of
any good or service); Conn. Gen. Stat. sec. 53–289a
(2023) (requiring conspicuous disclosure in the
advertisement of total price of live-event tickets
including service charges); Conn. Gen. Stat. sec. 53–
289a (2023) (requiring conspicuous disclosure in
the advertisement of total price of live-event tickets
including service charges); SB 329 (2024 Reg. Sess.)
(Md.) (requiring all-in pricing throughout the
purchase process of a live-event ticket); SB 329
(2024 Reg. Sess.) (Md.) (requiring all-in pricing
throughout the purchase process of a live-event
ticket); 1510 Mass. Reg. 5 (Dec. 8, 2023) (Proposed
Regulations 940 C.M.R. 38.00: Unfair and Deceptive
Fees) (proposed regulation stating that it is an
unfair and deceptive practice to misrepresent or fail
to disclose at the time of initial presentation of the
price of any product the total price of that product
inclusive of all fees, interest, charges, or other
expenses necessary or required in order to complete
the transaction).
81 FTC–2023–0064–3271 (U.S. Senate, Sen. Amy
Klobuchar).
industries. 75 Indeed, a group of State 	Attorneys General wrote in support of a
finding of prevalence of these practices
across industries, including event ticket
sellers, and hotels and other short-term
lodging providers. 76 They have
attempted to address some, but not all,
of these fees in their own States.77 The
State Attorneys General cited a number
of cases across industries demonstrating
that bait-and-switch pricing and
misleading fees are ‘‘a chronic, prolific
problem confronting many consumers
across numerous sectors of the
economy.’’ 78 Further, they agreed with
the Commission’s assertion that
‘‘charges that misrepresent their nature
and purpose are unfair and deceptive
because they mislead consumers and
make it more difficult for truthful
businesses to compete on price.’’ 79 The
Commission takes note of legislative
and regulatory efforts in Minnesota,
California, Pennsylvania, New York,
Massachusetts, and North Carolina to
combat hidden and misleading fees 80
which further support its finding of
prevalence.
Comments submitted by Federal and
State elected officials echoing the
widespread practice of misleading
consumers about total prices and fees or
charges further strengthen the
Commission’s prevalence finding. For
example, U.S. Senator Amy Klobuchar
stated that she held a hearing focusing
on the lack of transparency in the live-
event ticketing industry as well as a
hearing on fees in the rental housing
market that prevent renters from having
meaningful opportunities to compare
prices.81 U.S. Senator Robert Casey
discussed a report released on January
24, 2024, ‘‘Additional Charges May
Apply: How Big Corporations Use
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2075	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
82 FTC–2023–0064–3135 (U.S. Senate, Sen.
Robert P. Casey, Jr. noted that his report ‘‘details
how corporations use hidden fees to deceive
consumers and increase corporate profits, which
leaves families paying more than they should and
puts honest businesses at a disadvantage.’’) The
report is available at https://www.casey.senate.gov/
imo/media/doc/greedflation_junk_fees3.pdf.
83 FTC–2023–0064–2858 (U.S. House of
Representatives, Rep. Maxwell Alejandro Frost,
Rep. Jimmy Gomez, Rep. Barbara Lee, Rep. Rashida
Tlaib, Rep. Kevin Mullin, Rep. Dwight Evans, Rep.
Judy Chu, Rep. Greg Casar, Rep. Dan Goldman, and
Rep. Salud Carbajal stated that the rule would help
eliminate some of the barriers to those seeking
rental housing as renters ‘‘often face ambiguous or
misleading fees’’ and ‘‘bring much needed
transparency to the rental housing market.’’).
84 FTC–2023–0064–2341 (Massachusetts House of
Representatives, Rep. Lindsay Sabadosa); FTC–
2023–0064–1411 (Arizona House of
Representatives, Rep. Analise Ortiz); FTC–2023–
0064–3072 (Michigan Senate and House of
Representatives, Sen. Darrin Camilleri, Sen. Mary
Cavanagh, and Rep. Betsy Coffia); FTC–2023–0064–
3079 (Montana State Senate, Senate Democratic
Caucus, Sen. Pat Flowers, Sen. Susan Webber, Sen.
Andrea Olsen, Sen. Edie McClafferty, Sen. Jen
Gross, Sen. Janet Ellis, Sen. Shane Morigeau, Sen.
Ellie Boldman, Sen. Ryan Lynch, Sen. Christopher
Pope, Sen. Mike Fox, Sen. Denise Hayman, Sen.
Willis Curdy, and Sen. Mary Ann Dunwell); FTC–
2023–0064–3103 (Florida House of Representatives,
Rep. Angela Nixon); FTC–2023–0064–3123
(Syracuse, New York, City Auditor Alexander
Marion); FTC–2023–0064–3117 (Maryland House of
Delegates, Del. Julie Palakovich Carr); FTC–2023–
0064–3149 (North Carolina House of
Representatives, Rep. Julie von Haefen); FTC–2023–
0064–3237 (North Carolina House of
Representatives, Rep. Pricey Harrison).
85 See, e.g., Transparency In Charges for Key
Events Ticketing Act (‘‘TICKET Act’’), H.R. 3950,
sec. 2, 118th Cong. (as engrossed in the House, May
15, 2024) (among other provisions, requiring ticket
sellers, including secondary markets and
exchanges, to clearly and conspicuously disclose
the total ticket price for an event in any
advertisement and each time the ticket is displayed
in the purchasing process, and to provide an
itemized list of the base ticket price and each fee
or charge prior to completion of the purchase;
violations of the TICKET Act would be treated as
violation of a rule defining an unfair or deceptive
act or practice under section 18(a)(1)(B) of the FTC
Act); No Hidden Fees on Extra Expenses for Stays
Act of 2023 (‘‘No Hidden FEES Act of 2023’’), H.R.
6543, sec. 2(a), 118th Cong. (as engrossed in the
House, June 11, 2024) (among other provisions,
prohibiting providers of short-term lodging,
including providers of a website or other
centralized platform that advertises or otherwise
offers the price of a reservation for short-term
lodging, from advertising, displaying, marketing, or
otherwise offering for sale, including through a
direct offering, third-party distribution, or
metasearch referral, a price of a reservation that
does not include each mandatory fee; violations of
sec. 2(a) would be treated as violation of a rule
defining an unfair or deceptive act or practice under
section 18(a)(1)(B) of the FTC Act).
86 Competition Act, R.S.C., 1985, c. C–34,
¶ 74.01(1.1) (Can.) (providing with respect to ‘‘drip
pricing’’ that ‘‘the making of a representation of a
price that is not attainable due to fixed obligatory
charges or fees constitutes a false or misleading
representation’’), https://laws.justice.gc.ca/eng/acts/
C-34/FullText.html.
87 Competition and Consumer Act 2010, Vol. 4,
Sched. 2, Ch. 3, P. 3–1, Sec. 48, Ch. 4, P. 4–1, Sec.
166 (Austl.) (prohibiting ‘‘mak[ing] a representation
with respect to an amount that, if paid, would
constitute a part of the consideration for the supply
of the goods or services unless the person also
specifies, in a prominent way and as a single figure,
the single price for the goods or services’’), https://
www.legislation.gov.au/C2004A00109/latest/text.
88 Directive 2005/29/EC of the European
Parliament and of the Council of 11 May 2005
concerning unfair business-to-consumer
commercial practices in the internal market, art. 7,
2005 O.J. (L 149) (providing that it is a misleading
commercial practice to engage in ‘‘bait advertising’’
or offering products at a specified price if not able
to provide the products at that price for a period
and in quantities reasonable with regard to the
product, the scale of advertising of the product and
the price offered), https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=celex%3A32005L0029; see
also Directive 2011/83/EU of the European
Parliament and of the Council of 25 October 2011
on consumer rights, art. 5 and art. 6, 2011 O.J. (L
304), https://eur-lex.europa.eu/legal-content/EN/
TXT/?uri=CELEX%3A32011L0083&
qid=1726109600968. Additionally, a 1998 Directive
required that the selling price should be indicated
for all products referred to in the Article, which
means a price that is the final price for a unit of
the product including VAT and all other taxes. See
Directive 98/6/EC of the European Parliament and
of the Council of 16 February 1998 on consumer
protection in the indication of the prices of
products offered to consumers, 1998 O.J. (L 80),
https://eur-lex.europa.eu/legal-content/EN/TXT/
?uri=CELEX%3A31998L0006&qid=1726109951386.
89 Digital Markets, Competition and Consumers
Act 2024, c. 13, sec. 230 (providing that an
invitation to purchase omits material information if
it omits the total price of the product or, if the
nature of the product prevents all or a part of the
total price from reasonably being calculated in
advance, how the price (or that part of it) will be
calculated), https://www.legislation.gov.uk/ukpga/
2024/13/section/230. Reports preceding this
legislation included: UK Department for Business &
Trade, Estimating the Prevalence and Impact of
Online Drip Pricing (2023), https://assets.
publishing.service.gov.uk/media/64f1ebd7a78c5
f000dc6f448/estimating-the-prevalence-and-impact-
of-online-drip-pricing.pdf; and UK Department for
Business & Trade, Government response to
consultation on ‘‘Smarter Regulation: Consultation
on Improving Price Transparency and Product
Information for Consumers’’ (2023), https://
www.gov.uk/government/consultations/smarter-
regulation-improving-price-transparency-and-
product-information-for-consumers/outcome/
government-response-to-consultation-on-smarter-
regulation-improving-consumer-price-transparency-
and-product-information-for-
consumers#introduction.
90 See, e.g., Class Action Complaint ¶¶ 2–3,
Abdelsayed v. Marriot Int’l, Inc., No. 3:21–cv–
00402–JLS–AHG (S.D. Cal. Mar. 5, 2021) (alleging
defendant misled consumers into believing that
hotel rooms were cheaper that they actually were
by engaging in drip pricing that baited consumers
with lower prices and adding charges, such as
resort fees, amenity fees, and destination fees,
throughout the vending process); Complaint ¶¶ 1,
3–5, Travelers United v. MGM Resorts Int’l, Inc., No.
2021–CA–00477–B (D.C. Super. Ct. Feb. 18, 2021)
(alleging defendant misled consumers into
believing hotel rooms were cheaper that they
actually were by using drip pricing that hid resort
fees from advertised daily room rates); Class Action
Complaint ¶¶ 18, 31, 43, 69–71, Lee v. Ticketmaster
LLC, No. 3:18–cv–05987–VC (N.D. Cal. Sept. 28,
2018) (alleging, in part, that defendants were
unjustly enriched through service charges added to
resale tickets); Second Amended Class Action
Complaint ¶¶ 1–2, Wang v. StubHub, Inc., No.
CGC–18564120 (Cal. Super. Ct. Feb. 25, 2019)
(alleging defendant intentionally hid additional fees
in order to advertise artificially low-ticket prices);
Class Action Complaint ¶¶ 1–3, 33–34, Holl v.
United Parcel Service, Inc., No. 4:16–cv–05856–
HSG (N.D. Cal., Oct. 11, 2016) (alleging defendant
created a bait and switch by falsely advertising low
published rates that were later inflated); (Truth in
Advertising, Inc., submitted information about its
tracking of class action cases related to unfair and
deceptive fees, including cases involving event
ticket sellers charging and misrepresenting the
purpose of ‘‘junk fees’’ and hotels advertising a low
base rate for rooms and then charging consumers
more than the advertised rate by imposing
additional fees.); see also Second Amended Class
Action Complaint ¶¶ 5–7, Hecox v. DoorDash, Inc.,
No. 1:23–cv–01006–JRR (D. Md. Sept. 5, 2023)
(alleging in part that defendant employed
deceptively named fees misleading consumers to
believe the fees were for delivery personnel or for
government imposed fees); Class Action Complaint
¶¶ 7–16, Ramirez v. Bank of Am., N.A., No. 4:22–
cv–00859–YGR (N.D. Cal., Feb. 10, 2022) (alleging
misrepresentations about the refundability of fees);
Class Action Complaint ¶¶ 27, 36, 46–51, Cross v.
Point and Pay LLC, No. 6:16–cv–01182 (M.D. Fla.,
June 29, 2016) (alleging defendant made
representations about its services and fees that
contained false, misleading, and deceptive and
unfair statements and omissions about fees for
online payment processing services); Class Action
Complaint ¶¶ 1–2, 9–12, DeSimone v. LOOK
Brands, LLC, No. 23–cv–11144 (S.D.N.Y. Dec. 22,
2023) (alleging defendant failed to disclose the total
cost of movie ticket prices, inclusive of all fees, in
violation of New York state law); Class Action
Complaint ¶¶ 1–2, 9–15, Jones v. Regal Cinemas,
Inc., No. 23–CV–11145 (S.D.N.Y. Dec. 22, 2023)
(alleging defendant failed to disclose total cost of
movie ticket prices, inclusive of all fees, in
violation of New York state law); see also FTC–
2022–0069–6042 (ANPR).
Hidden Fees to Nickel, Dime, and
Deceive American Families,’’ tracking
the variety of junk fees facing
Pennsylvania families, including in the
short-term lodging industry. 82 A group
of Congressional representatives raised
concerns regarding misleading fees and
a lack of price transparency in the rental
housing market. 83 Concerns over unfair
and deceptive pricing were also raised
by a variety of State legislators and
officials.84 There has also been
significant bipartisan interest in passing
legislation targeting fees in the live-
event ticketing and short-term lodging
industries.85
The Commission also takes notice of
the work of its international
counterparts, as well as private lawsuits
in the United States concerning unfair
and deceptive fee practices. Regulatory
actions in Canada, Australia, the
European Union, and the United
Kingdom with respect to such conduct
include paragraph 74.01(1.1) of the
Canadian Competition Act,86 the
Australian Competition and Consumer
Protection Act of 2010, 87 EU Directive
2005/29/EC of the European Parliament
and of the Council,88 and the UK Digital
Markets, Competition and Consumers
Act 2024.89 In addition, private lawsuits
filed against businesses in the live-event
ticketing, short-term lodging, banking,
and delivery service industries
challenging these practices lend further
support to the Commission’s prevalence
determination.90
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2076 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
91 See, e.g., FTC–2023–0064–3216 (Demand
Progress Education Fund noted that consumers face
surprise or ‘‘bogus’’ fees across industries,
including rental housing, cell phone service,
utilities, and ticketing, and cited a Consumer
Reports study finding that 85% of Americans have
dealt with fees of this nature.).
92 FTC–2023–0064–3205 (Consumer Reports
noted the prevalence of unexpected fees in live
entertainment or sporting events, hotels,
telecommunication services, gas or electric utilities,
air travel, credit cards, auto loans and purchases,
and personal banking services.).
93 FTC–2023–0064–3160 (Consumer Federation of
America submitted the compilation as Appendix B
to its comment.).
94 FTC–2023–0064–3104 (Truth in Advertising,
Inc.).
95 FTC–2023–0064–3302 (Public Citizen).
96 FTC–2023–0064–2885 (AARP argued these fees
are not well understood by potential residents and
that renters are charged ‘‘many superfluous fees,
including application fees, credit check fees, pet
fees, excessive late fees, utility-related fees, mail
sorting fees, inspection fees, convenience fees,
common area fees, guest fees, trash fees, notice fees,
security deposit fees, check cashing fees, cleaning
or repair fees, and other mandatory fees for services
that a renter does not need or want.’’).
97 See, e.g., FTC–2023–0064–3290 (U.S. Public
Interest Research Group Education Fund
commented that consumers have faced more unfair
and deceptive fees as consumers ‘‘have become
accustomed to online transactions.’’); FTC–2023–
0064–3090 (Atlanta Legal Aid Society, Inc. noted
the ubiquity of unfair and deceptive fees and that
these types of fees in the rental housing context
have been steadily rising for years.).
98 FTC–2023–0064–3106 (American Society of
Travel Advisors stated that resort fees are disclosed
in a highly inconsistent manner, even between
hotels doing business under the same brand name.);
FTC–2023–0064–3293 (Travel Technology
Association commented that hotels have been
known to surprise guests at check-in with these fees
and ‘‘guests have no reasonable recourse but to pay
them.’’); FTC–2023–0064–3077 (Far Horizons
Travel, by its owner, a travel agent of almost 40
years, called hotel fees ‘‘out of control’’ and stated:
‘‘I am appalled by these fees and how much they
have risen over the years. . . . They say it’s for
extra amenities but that is not always the case and
more often not the case at all.’’).
99 FTC–2023–0064–3212 (TickPick, LLC); FTC–
2023–0064–3137 (Chamber of Progress); FTC–2023–
0064–3230 (Future of Music Coalition); FTC–2023–
0064–3105 (Charleston Symphony).
100 FTC–2023–0064–3143 (ACA Connects—
America’s Communication Association argued that
the NPRM contained no meaningful discussion of
prevalence of unfair or deceptive pricing
disclosures with respect to communication
services.); FTC–2023–0064–3186 (National LGBT
Chamber of Commerce and the National Asian/
Pacific Islander American Chamber of Commerce &
Entrepreneurship argued that ‘‘prepared food and
grocery delivery applications . . . have
demonstrated transparency and accessibility,
providing clear explanations about fees.’’); FTC–
2023–0064–3292 (National Association of Theatre
Owners argued that the NPRM failed to demonstrate
prevalence with respect to the theatre industry,
identifying only fifty comments received in
response to the ANPR that reference movie theatre
convenience fees.); FTC–2023–0064–3238 (Gibson,
Dunn & Crutcher LLP argued that the Commission
has failed to reliably demonstrate the prevalence of
unfair or deceptive fees across any industry or
sector.); FTC–2023–0064–3233 (NCTA—The
Internet & Television Association argued that the
only mention of telecommunication fees is
anecdotal, and the Commission has failed to show
prevalence with respect to any NCTA member.);
FTC–2023–0064–3263 (Flex Association stated that
‘‘[t]he Commission has not pointed to evidence of
any prevalent consumer harm that justifies
imposing new pricing and disclosure rules on app-
based delivery platforms.’’); FTC–2023–0064–3130
(International Cemetery, Cremation & Funeral
Association argued that over the last several
reviews of the Funeral Rule the Commission has not
found evidence of widespread consumer abuse
among cemeteries or third-party suppliers.).
101 FTC–2023–0064–3258 (National Taxpayers
Union Foundation); FTC–2023–0064–3173 (Center
for Individual Freedom argued that the Commission
was overly reliant on lodging, ticketing, and
restaurants in justifying an economy-wide rule.);
FTC–2023–0064–3251 (National RV Dealers
Association argued the proposed rule ‘‘is an
overextension from this drip pricing concern, and
not only strays from the FTC’s traditional areas of
concern but also risks impeding the normal
business operations and innovation across a
multitude of sectors.’’).
102 Pa. Funeral Dirs. Ass’n. v. FTC, 41 F.3d 81, 87
(3d Cir. 1994).
The Commission takes notice of
additional indications of prevalence
identified in response to the NPRM.
Commenters to the NPRM noted that
unfair or deceptive pricing practices
exist economy-wide. 91 For instance,
Consumer Reports conducted a
nationally representative survey and
found that many consumers
experienced unexpected fees in a
variety of industries and that more than
two-thirds of Americans report paying
more in hidden fees now than they did
five years ago.92 Similarly, Consumer
Federation of American submitted an
extensive compilation of stories from
consumers about their experiences with
junk fees that recounted hidden and
misleading fees being applied across a
wide range of industries. 93 Truth in
Advertising, Inc. provided a sampling of
consumer complaints it had received
over the years and noted the
pervasiveness of hidden and misleading
fees in multiple industries, including
event ticket sales, hotel and travel
companies, short-term lodging, internet
apps, automobile rentals,
communication services, carpet
cleaning, auto/truck sales, dietary
supplement orders, food services,
airlines, moving services, credit unions
and banks, payday lending services,
gym memberships, outlet stores, sports
betting, and online auctions.94 Public
Citizen commented about ‘‘the
widespread use of the deceptive
practice of charging undisclosed fees by
major industries . . . including
communication carriers, air carriers,
ticket sales, auto dealers, credit card
companies, cable giants, and property
owners,’’ as well as ‘‘event ticketing,
hotels, funeral homes,’’ and other
industries.95 Additionally, AARP
pointed to a myriad of confusing fees
charged by assisted living facilities.96
Commenters also noted that instances of
unfair and deceptive fees or charges
have increased over time. 97
Commenters also raised concerns
about the prevalence of hidden fees in
specific industries such as live-event
ticketing and short-term lodging. The
American Society of Travel Advisors,
Travel Technology Association, and a
travel agent observed that, despite
increased scrutiny over hotel resort fees,
there remains little uniformity in
pricing practices, and bait-and-switch
pricing remains an issue. 98 Multiple
commenters raised continued concerns
over hidden fee pricing practices in the
live-event ticketing market. TickPick,
LLC observed the ‘‘widespread’’
deceptive practice of bait-and-switch
pricing rampant in this industry.
Chamber of Progress noted that
deceptive and unfair fees are ‘‘rampant
in some industries and pose clear
threats to consumers,’’ including ‘‘hotel
stays, live sports or concert tickets, and
airline tickets.’’ Future of Music
Coalition commented that they have
worked to ‘‘deal[ ] with the scourge of
junk fees in various parts of the
economy,’’ including live touring. The
Charleston Symphony affirmed that
‘‘requiring sellers to disclose the total
price clearly and conspicuously[ ]
addresses a pressing issue in the
nonprofit performing arts sector.’’ 99
Despite the overwhelming evidence
supporting the prevalence of bait-and-
switch pricing and misleading fee
practices economy-wide, a minority of
commenters argued that the
Commission has failed to meet its
burden of establishing prevalence. Some
commenters contended that the
Commission’s evidence focuses on a
small number of problematic industries
and does not demonstrate prevalence in
every single industry across the
economy. 100 Some commenters
similarly contended that the proposed
rule was an attempt to impose a ‘‘one-
size-fits-all’’ solution on distinct
industries, not all of which are engaging
in unfair or deceptive practices, and
thus the proposed rule is overbroad and
not supported by the requisite evidence
of prevalence.101
First, the Commission disagrees that it
must find that the unfair or deceptive
act or practice is widespread within
every individual context or industry to
issue a rule targeting a specific practice
across industries. To begin with, the
Commission’s prevalence findings need
only have ‘‘some basis or evidence’’ to
show ‘‘the practice the FTC rule seeks
to regulate does indeed occur.’’ 102
While many trade regulation rules
promulgated under section 18 focus on
a particular industry, as discussed in
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103 16 CFR part 429; 16 CFR part 433; 16 CFR part
424; 16 CFR part 435; 16 CFR part 425; 16 CFR part
461; 16 CFR part 465.
104 FTC–2023–0064–3127 (U.S. Chamber of
Commerce argued the NPRM failed to cite any cases
holding that late in time fee disclosures are unfair
or deceptive and the settlements described by the
Commission only raised the failure of companies to
disclose certain applicable fees prior to purchase or
at all.).
105 Id.
106 FTC–2023–0064–3152 (Building Owners &
Managers Association et al. commented that the
proposed rule ‘‘lacks any reasonable factual
underpinning as applied to the rental housing
industry because it is not based on any statistical
data relevant to the industry,’’ but is ‘‘based solely
upon anecdotal, conclusory, and non-representative
justification.’’); FTC–2023–0064–3172 (New Jersey
Apartment Association stated that the NPRM lacked
‘‘statistical basis’’ for claims that unfair and
deceptive fees were an issue in the rental housing
context and that the Commission relied on
anecdotal evidence.).
107 See, e.g., supra notes 66, 67, 72, 75, 80, 85,
90 (detailing the Commission’s enforcement history,
workshops, and reports, class action lawsuits, state
and local enforcement and regulations, and other
efforts to curb unfair or deceptive pricing practices
in the live-event ticket and short-term lodging
industries). The Commission also received
thousands of comments from individual consumers
detailing bait-and-switch pricing and deceptive fees
in the live-event ticket and short-term lodging
industries in response to the ANPR and the NPRM.
See, e.g., FTC–2023–0064–0820 (Individual
Commenter stated ‘‘I was just considering buying
some event tickets on Vivid Seats and was shocked
to see that they add a full 33% in bogus fees.’’);
FTC–2023–0064–0058 (Individual Commenter
stated: ‘‘The worst offenders are ticket sellers/
resellers, who advertise baseline ticket prices in
their search engines and then include some
unknown amount of fees when it’s time to pay.’’);
FTC–2023–0064–0102 (Individual Commenter
stated: ‘‘I recently went to a MLB game and the fees
were $21 for a $75 ticket or greater than 20%. I went
to a concert and the tickets were $55 but the fees
brought the price to over $100. On both cases, the
fees were not disclosed until the payment screen.’’);
FTC–2023–0064–0145 (Individual Commenter
described purchasing tickets to a musical: ‘‘Nearly
20% of the total cost was for fees that were not
disclosed until I was at the payment step ($119
ticket + $4.55 order processing fee + $4.00 facility
charge + $20.50 service fee). I don’t understand
what any of those fees are actually for.’’); FTC–
2023–0064–0040 (Individual Commenter described
hotel resort fees as ‘‘egregious and opaque’’ and
stated they learned of an additional $50 per night
resort fee upon check-in: ‘‘I asked what the purpose
of the fee was and was told by the staff person, ‘I’m
not really sure.’ ’’); FTC–2023–0064–1462
(Individual Commenter stated: ‘‘Recently I found an
‘‘affordable’’ hotel in a city and booked a 4 night
stay, but was not informed until after I checked in
that parking cost extra each day . . . . which made
the hotel no longer affordable for me’’); FTC–2023–
0064–0977 (Individual Commenter described
spending hours trying to book a hotel to face
‘‘mandatory hotel fees for a pool, a gym and 24 hour
security totalled $50/night’’); FTC–2023–0064–0152
(Individual Commenter stated that fees through
services including Airbnb and VRBO are ‘‘often
vague and undefined’’ and described fees including
a ‘‘host fee,’’ ‘‘booking fee,’’ ‘‘safety fee,’’ and
‘‘resort fee’’).
section IV.A.1, others apply to specific
practices across industries regardless of
product or service, such as the Cooling-
Off Period for Door-to-Door Sales Rule
(the ‘‘Cooling-Off Rule’’), the Rule on
the Preservation of Consumers’ Claims
and Defenses (the ‘‘Holder Rule’’), the
Rule on Retail Food Store Advertising
and Marketing Practices (the
‘‘Unavailability Rule’’), the mail,
Internet, or Telephone Order
Merchandise Rule (the ‘‘Mail Order
Rule’’), the Rule on the Use of
Prenotification Negative Option Plans
(the ‘‘Negative Option Rule’’), the Rule
on Impersonation of Government and
Businesses (the ‘‘Impersonator Rule’’),
and the Rule on the Use of Consumer
Reviews and Testimonials. 103 While the
Commission agrees that minimal
evidence of a practice would be
insufficient to meet the prevalence
standard, section 18 did not require the
Commission to find for its economy-
wide rulemakings that every industry
engaged in sales made at a consumer’s
home or at certain other locations
(Cooling-Off Rule), used credit contracts
(Holder Rule), offered products at an
advertised price when they did not have
the advertised products in stock
(Unavailability Rule), or had a robust
mail, internet or telephone order
business (Mail Order Rule); or that every
industry used negative options
(Negative Option Rule), had an issue
with impersonating government
agencies or businesses (Impersonator
Rule), or used and abused reviews (Rule
on the Use of Consumer Reviews and
Testimonials). Imposing such a standard
would artificially limit the
Commission’s rulemaking authority
under section 18 in a way that does not
align with the Commission’s mandate or
the text of the statute, which focuses on
acts or practices generally and never
mentions the need to define markets or
industries. As explained herein and in
the NPRM, the information evidencing
prevalence of bait-and-switch pricing
and misleading fees more than meets
section 18’s standard for prevalence for
the economy generally, and for the live-
event ticketing and short-term lodging
industries, specifically, by
demonstrating that the practices are
widespread and, further, that such
practices are occurring across a wide
range of industries.
Second, the Commission notes that,
even when commenters challenged the
application of the rule to specific
pricing scenarios or to their own
industries, they also appeared to
concede that advertising a base price to
which mandatory fees are added later is
a frequent practice even in their own
industries. While some commenters
raised genuine challenges or questions
about the application of the rule, others
attempted to conflate such genuine
challenges with their desire to continue
to use drip or partition pricing.
As discussed in section III.B.1,
commenters from some ticket sellers did
not contest that their advertised prices
failed to include all mandatory fees and
to provide the total price of goods or
services. Instead, they attempted to
explain why they engaged in those
practices.
Finally, some commenters from
industries other than live-event
ticketing and short-term lodging argued
that the Commission’s NPRM failed to
establish prevalence because of the
following reasons: the cited cases
focused on inapplicable fact patterns or
resulted in settlement; the cited
conferences called for additional
research rather than regulatory strategy,
or were narrow in scope as to the
industries covered; and the resort fee
warning letters failed to result in
enforcement action.104 Commenters
such as the U.S. Chamber of Commerce
argued that the enforcement record
should rely only on cease-and-desist
orders or ‘‘extensive empirical
research.’’ 105 Other commenters also
raised concerns about a lack of
empirical research. 106 These
commenters overlook section 18’s clear
instruction that the Commission’s
prevalence determination can be based
on ‘‘any other information available to
the Commission’’ that indicates a
widespread pattern, which the
Commission thoroughly laid out in the
NPRM and expands upon herein.
In sum, the Commission’s
enforcement history, workshops, and
reports, together with the record of this
rulemaking and the enforcement cases
brought by the Commission’s local,
State, and international enforcement
counterparts fully support a finding that
bait-and-switch pricing that hides the
total price of goods or services and
misrepresenting the nature, purpose,
amount, and refundability of fees or
charges are prevalent across the
economy, including in the live-event
ticketing and short-term lodging
industries. 107 Despite the evidence that
these specific practices are prevalent
economy wide, the Commission will
first focus its rulemaking authority on
combatting these practices in the live-
event ticketing and short-term lodging
industries, the two industries in which
the Commission first began evaluating
drip pricing more than a decade ago and
for which there is a long history of
consumer harm.
B. Manner and Context in Which the
Acts or Practices Are Deceptive or
Unfair
The final rule curbs certain unfair or
deceptive pricing practices by requiring
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2078 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
108 See Fed. Trade Comm’n, FTC Policy Statement
on Deception, 103 F.T.C. 174, 175 (1984) (appended
to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174
(1984) (hereinafter ‘‘Deception Policy Statement’’),
https://www.ftc.gov/sites/default/files/documents/
commission_decision_volumes/volume-103/ftc_
volume_decision_103_january_-_june_1984pages_
103-203.pdf.
109 Deception Policy Statement, 103 F.T.C. at
182–83 (listing claims or omissions involving cost
among those that are presumptively material); see
also, e.g., FTC v. FleetCor Techs., Inc., 620 F. Supp.
3d 1268, 1303–04, 1311 (N.D. Ga. 2022) (finding
that representations about discounts and
transaction fees were material).
110 Deception Policy Statement, 103 F.T.C. at 175
(listing ‘‘misleading price claims’’ among those
claims that the FTC has found to be deceptive); see
also, e.g., In re Resort Car Rental Sys., Inc., 83
F.T.C. 234, 281–82, 300 (1973), https://www.ftc.gov/
system/files/ftc_gov/pdf/Resort%20Car%20
Rental%20System%2C%20Inc.%2083%20FTC
%20234%20%281973%29.pdf (finding that using
the name ‘‘Dollar-A-Day’’ misrepresented the price
of car rentals in violation of section 5 of the FTC
Act where a rental could not be attained for one
dollar per day due to mileage, insurance, and other
mandatory charges), aff’d sub. nom. Resort Car
Rental Sys., Inc. v. FTC, 518 F.2d 962, 964 (9th Cir.
1975).
111 See, e.g., Opinion of the Commission at 37–
40, 47–50, In re Intuit Inc., No. 9408 (FTC Jan. 22,
2024), https://www.ftc.gov/system/files/ftc_gov/pdf/
d09408_commission_opinion_redacted_public.pdf
(finding that under the legal doctrine known as the
first-contact or deceptive door-opener rule,
respondent’s first contact with consumers was
deceptive because its advertising falsely claimed
that consumers can file their taxes for free with
TurboTax and that later disclosures did not cure the
deception); Complaint ¶¶ 12, 46–49, In re LCA-
Vision, No. C–4789 (FTC Mar. 13, 2023) (alleging
respondent’s advertisements misrepresented the
price of surgery and failed to disclose eligibility
limitations for a promotional price); Complaint
¶¶ 8–10, In re Progressive Chevrolet Company, No.
C–4578 (FTC Jun. 16, 2016) (alleging that
respondents represented that consumers could lease
vehicles at advertised down payment and monthly
payment amounts, and deceptively failed to
disclose a material condition that meant few
consumers would qualify for the advertised terms);
Resort Car Rental Sys., 518 F.2d at 964 (upholding
the Commission’s order finding that the name
‘‘Dollar-A-Day’’ was deceptive when charges adding
up to more than one dollar per day were disclosed
later).
112 E.g., In re Giant Food, Inc., 61 F.T.C. 326, 341–
42, 361 (1962), https://www.ftc.gov/sites/default/
files/documents/commission_decision_volumes/
volume-61/ftcd-vol61july-december1962pages306-
404.pdf (finding that comparative-price advertising
of household goods and appliances created false,
misleading, and deceptive impressions that induced
consumers to make purchases based on mistaken
beliefs); In re George’s Radio & Television Co., 60
F.T.C. 179, 193–94, 196 (1962), https://www.ftc.gov/
sites/default/files/documents/commission_
decision_volumes/volume-60/ftcd-vol60january-
june1962pages107-211.pdf (collecting cases and
finding that advertisements including
manufacturer’s suggested list prices that were
higher than the customary retail prices were
deceptive).
113 See, e.g., In re Filderman Corp., 64 F.T.C. 427,
442–43, 461 (1964), https://www.ftc.gov/sites/
default/files/documents/commission_decision_
volumes/volume-64/ftcd-vol64january-march
1964pages409-511.pdf (finding, among other things,
that respondents unlawfully advertised prices that
were later inflated with mandatory service charges);
In re Resort Car Rental Sys., 83 F.T.C. at 281–82,
300; Opinion of the Commission at 37–40, 47–50,
In re Intuit Inc., No. 9408 (finding that respondent’s
advertising that falsely claimed that consumers can
file their taxes for free with TurboTax was
deceptive); Complaint ¶¶ 12, 46–49, In re LCA-
Vision, No. C–4789 (alleging respondent’s
advertisements misrepresented the price of surgery
and failed to disclose eligibility limitations for a
promotional price). See also cases cited supra note
61 (collecting FTC enforcement actions alleging that
bait-and-switch pricing tactics concerning hidden
fees violated section 5).
114 In re Filderman Corp., 64 F.T.C. at 461
(ordering respondents to stop ‘‘[r]epresenting,
directly or by implication: That any amount is the
price of merchandise when an additional amount is
required to be paid before the merchandise will be
sold.’’)
115 Fed. Trade Comm’n, Enforcement Policy
Statement on Deceptively Formatted
Advertisements 7 n.25 (2015), https://www.ftc.gov/
system/files/documents/public_statements/896923/
151222deceptiveenforcement.pdf; see also Opinion
of the Commission at 28–30, In re Intuit Inc., No.
9408, https://www.ftc.gov/system/files/ftc_gov/pdf/
d09408_commission_opinion_redacted_public.pdf
(finding that disclosures on Intuit’s websites were
‘‘inadequate to cure a misimpression for Intuit’s
ads,’’ which used ‘‘false claims to engage consumers
and induce them to further interact with the
company’’); Resort Car Rental Sys, 518 F.2d at 964
(‘‘The Federal Trade [Commission] Act is violated
if it induces first contact through deception, even
if the buyer later becomes fully informed before
entering the contract.’’) (bracketed text added);
Exposition Press, Inc. v. FTC, 295 F.2d 869 (2d Cir.
1961) (‘‘The law is violated if the first contact is
secured by deception, even though the true facts are
made known to the buyer before he enters into the
contract of purchase.’’ (citations omitted)); FTC v.
City W. Advantage, Inc., No. 2:08–cv–00609–BES–
GWF, 2008 WL 2844696, at *3 (D. Nev., 123 July
22, 2008) (finding defendant likely employed
‘‘deceptive door openers . . . to induce consumers
to stay on the line’’).
116 15 U.S.C. 45(n).
truthfulness and transparency in pricing
for live-event ticketing and short-term
lodging. Truthful, timely, and
transparent pricing, including the
nature, purpose, and amount of any fees
or charges imposed, is critical for
consumers—and also for honest
businesses. The legal underpinning of
the rule, or the manner and context in
which the acts or practices defined by
the rule are unfair or deceptive, is not
complex. By identifying and targeting
pricing tactics that hide the true price of
live-event tickets and short-term lodging
from consumers, the rule’s central
provisions prohibit conduct that is
inherently deceptive or unfair,
including: (1) offering prices that do not
include all mandatory fees or charges
and (2) misrepresenting the nature,
purpose, amount, and refundability of
fees or charges, and the identity of the
good or service for which the fees or
charges are imposed. Thus, the final
rule will allow American consumers to
make better-informed purchasing
decisions when purchasing live-event
tickets or deciding where to stay on a
short-term basis and level the playing
field for honest businesses in these
industries that truthfully, timely, and
transparently disclose their pricing
information.
A representation, omission, or
practice is deceptive under section 5 of
the FTC Act if it is likely to mislead
consumers acting reasonably under the
circumstances and is material to
consumers—that is, it would likely
affect the consumer’s conduct or
decisions with regard to a good or
service. 108 Price is a material term.109 It
is a deceptive practice to misrepresent
the price of a good or service,110
including through a deceptive first
contact.111 Through its false savings
cases, the Commission repeatedly found
that it was deceptive under section 5 to
present an inflated list price or
comparison price, from which
consumers were misled to believe that
the business offered a lower-than-
normal price.112 The inverse—luring
consumers to a good or service with a
false low price—is also deceptive. 113
For example, in In re Filderman Corp.,
64 F.T.C. 427 (1964), the Commission
found that the defendant violated
section 5 both when it displayed
misleading list prices and when it later
imposed mandatory service charges on
top of the advertised price.114 Once a
consumer has been lured in by
deception, including about the cost of
the good or service, it is well established
that a later disclosure cannot cure that
deception.115 Thus, bait-and-switch
pricing, where the initial contact with a
consumer shows a lower or partial price
without including mandatory fees,
violates the FTC Act even if the total
price is later disclosed.
A practice is considered unfair under
section 5 if: (1) it causes, or is likely to
cause, substantial injury; (2) the injury
is not reasonably avoidable by
consumers; and (3) the injury is not
outweighed by benefits to consumers or
competition.116 Pricing that is not
truthful or transparent causes or is
likely to cause substantial injury; such
injury is not reasonably avoidable by
consumers or outweighed by benefits to
consumers or competition.
Drip pricing and other bait-and-
switch tactics that hide the true price
cause substantial injury, as the
Commission discusses in detail in
section V.E, by leading consumers to
buy more goods or services, pay more
for those goods or services, and incur
higher search costs than they otherwise
would have if they had been presented
with the true price upfront. Studies
have shown that consumers spend more
money on the same goods when faced
with drip pricing, i.e., when they are not
shown the total price upfront, but
instead are shown a base price, with
mandatory fees or charges added later
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2079	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
117 Alexander Rasch et al., Drip Pricing and its
Regulation: Experimental Evidence, 176 J. Econ.
Behav. & Org. 353 (2020) (‘‘[E]xperimental evidence
suggests that consumers indeed strongly and
systematically underestimate the total price under
drip pricing, and that they make mistakes when
searching’’); Shelle Santana et al., Consumer
Reactions to Drip Pricing, 39 Mktg. Sci. 188 (2020)
(‘‘Across six studies, we find that drip pricing
(versus nondrip pricing) increases the likelihood
that consumers will both initially and ultimately
select a lower base price option, even though the
surcharges for optional add-ons cause this base
price to balloon—making the lower base fare option
more expensive than the alternative’’); Tom Blake
et al., Price Salience and Product Choice, 40 Mktg.
Sci. 619 (2021); Steffen Huck et al., The Impact of
Price Frames on Consumer Decision Making:
Experimental Evidence (2015); Meghan R. Busse &
Jorge M. Silva-Risso, ‘‘One Discriminatory Rent’’ or
‘‘Double Jeopardy’’: Multi-component Negotiation
for New Car Purchases, 100 a.m. Econ. Rev. 470
(2010); Raj Chetty et al., Salience and Taxation:
Theory and Evidence, 99 a.m. Econ. Rev. 1145
(2009) (‘‘[C]ommodity taxes that are included in
posted prices reduce demand significantly more
than taxes that are not included in posted prices.’’);
see also FTC–2023–0064–3247 (Private Law Clinic
at Yale Law School).
118 Sullivan, supra note 67, at 4; FTC–2023–0064–
3271 (U.S. Senate, Sen. Amy Klobuchar).
119 Sullivan, supra note 67, at 22–24; Vicki G.
Morowitz et al., Divide and Prosper: Consumers’
Reactions to Partitioned Prices, 35 J. Mktg. Rsch.
453 (1998) (subjects exposed to partitioned prices
recalled significantly lower total product costs than
subjects exposed to combined prices).
120 Sullivan, supra note 67, at 4; Fed. Trade
Comm’n, ‘‘That’s the Ticket’’ Workshop: Staff
Perspective 4 (May 2020), https://www.ftc.gov/
system/files/documents/reports/thats-ticket-
workshop-staff-perspective/staffperspective_tickets_
final-508.pdf; see also Han Hong et al., Using Price
Distributions to Estimate Search Costs, 37 RAND J.
Econ. 257 (2006) (describing methods of estimating
search costs).
121 NPRM, 88 FR 77433 n.170.
122 FTC–2023–0064–3212 (TickPick, LLC) (‘‘[On]
StubHub’s website, for example, a consumer can be
required to click 12 times after being shown the first
price before being shown the total price they will
pay.’’)
123 See, e.g., Decision & Order at 3–4, In re LCA-
Vision, No. C–4789 (FTC Mar. 13, 2023) (settling
allegations that deceptive advertising caused
consumers to ‘‘waste[ ] 90 minutes to two hours of
their time’’ responding to a deceptive promotion,
Complaint ¶ 35, and prohibiting misrepresentations
of price and requiring disclosure of price or
discount qualification requirements), https://
www.ftc.gov/system/files/ftc_gov/pdf/1923157-lca-
vision-consent-package.pdf; Decision & Order at 2–
3, In re Credit Karma, LLC, No. C–4781 (FTC, Jan.
19, 2023) (settling allegations that deceptive
advertising caused consumers to waste significant
time in applying for ‘‘pre-approved’’ offers that
were denied, Complaint ¶ 13, and requiring Credit
Karma to pay $3 million in monetary relief), https://
www.ftc.gov/system/files/ftc_gov/pdf/2023138-
credit-karma-combined-final-consent-without-
signatures.pdf; FTC v. Amazon.com, Inc., No. C14–
1038–JCC, 2016 U.S. Dist. LEXIS 55569, at *17
(W.D. Wash., Apr. 26, 2016) (finding consumer
injury included ‘‘time spent pursuing those
refunds’’); FTC v. Neovi, Inc., 598 F. Supp. 2d 1104,
1115 (S.D. Cal. 2008) (finding ‘‘no genuine issue of
material fact that consumers suffered substantial
injury’’ based on ‘‘considerable amount of time’’
spent by consumers); FTC v. Accusearch, Inc., No.
06–cv–105–D, 2007 U.S. Dist. LEXIS 74905, at *22–
23 (D. Wyo., Sept. 28, 2007) (granting summary
judgment in favor of FTC based in part on finding
of consumer injury for ‘‘lost time and
productivity’’).
124 FTC–2023–0064–3212 (TickPick, LLC).
125 Id.
126 NPRM, 88 FR 77434 (discussing various
cognitive biases that contribute to the
unavoidability of consumer injury, including the
anchoring theory, the endowment theory, and the
sunken cost fallacy).
127 Inst. for Policy Integrity, Pet. for Rulemaking
Concerning Drip Pricing 18 (2021), https://policy
integrity.org/documents/Petition_for_Rulemaking_
Concerning_Drip_Pricing.pdf.
128 Steffen Huck et al., The Impact of Price
Frames on Consumer Decision Making:
Experimental Evidence (2015).
129 David A. Friedman, Regulating Drip Pricing,
31 Stan. L. & Pol’y Rev. 51, 55 n.13 (2020).
130 See NPRM, 88 FR 77447 (discussing
reductions in search costs from the proposed rule).
throughout the buying process. 117
Where mandatory fees or charges are
disclosed at the same time as, but
separately from, the base price,
consumers are still harmed. The
practice of dividing the price into
multiple components without disclosing
the total, generally referred to as
partitioned pricing, distorts consumer
choice. 118 Consumers confronted with
partitioned pricing, on average,
underestimate the total price of the good
or service, likely because they use
mental shortcuts to estimate price that
do not fully account for each
component.119
In addition, consumers who wish to
compare prices incur additional search
costs to make direct comparisons of
goods or services when the full price is
not disclosed upfront. 120 For example,
in an online transaction to book a hotel
room, consumers cannot simply view
the first price displayed on each
website, but instead need to navigate to
subsequent pages or even enter all their
payment information and reach the
checkout page for each website to
determine the true total price of their
hotel stay.121 The same is true on live-
event ticketing websites. As TickPick,
LLC noted, ‘‘[m]ajor ticketing
marketplaces often require consumers to
enter their credit card or other payment
information prior to disclosing
mandatory fees. On these marketplaces,
the full purchase price is only disclosed
after payment information is
collected.’’ 122 Under such
circumstances, consumers waste time
and effort pursuing an offer that is not
actually available at the promised price.
Such search costs that result from unfair
or deceptive practices are legally
cognizable injuries under the FTC
Act. 123
Misrepresented fees also cause or are
likely to cause substantial injury—they
harm consumers as well as businesses
that do not engage in these practices.
For example, as discussed in section
III.C, a hotel might charge a resort fee
when only typical and ordinary
accommodations and amenities are
offered, an environmental fee that serves
no environmental purpose, or a fee
misrepresented as a government charge.
As TickPick, LLC put it, misrepresented
fees trick consumers into paying more
and ultimately inhibit competition by
providing an unfair advantage to
businesses that misrepresent their
fees. 124 Likewise, when businesses
misrepresent fees, consumers are unable
to make informed choices about the
value of the fee or charge, or the good
or service it represents, because their
understanding of the fee or charge is
predicated on false, vague, or otherwise
misleading information. As such,
consumers are unable to understand
what they have purchased, or to which
charges they have consented.125
Consumers cannot reasonably avoid
these harms. As explained in the NPRM,
studies suggest that cognitive bias may
prevent consumers from reasonably
avoiding injury caused by unfair and
deceptive pricing practices. 126 Several
behavioral studies explain why
consumers cannot reasonably avoid
making errors when the true price is not
displayed upfront. Behavioral research
shows that consumers who first learn of
a lower price do not properly adjust
their calculations when additional fees
are added, thereby underestimating the
total price.127 It also shows that
consumers attach value to things they
perceive to be theirs and, once
consumers begin the purchase process,
their perception shifts so that stopping
the transaction feels like a loss. 128 The
research shows that consumers who
already have invested in an endeavor,
such as by taking time to make
selections on a travel or live-event ticket
website, continue that endeavor even if
they would pay less if they began again
elsewhere. 129 Lastly, consumers
necessarily incur search costs when
mandatory fees are obscured because it
takes them longer to discover the full
price within a single transaction and to
comparison shop across transactions.130
Notably, it is unlikely that the market
can correct for these injuries because
once the practice of displaying
incomplete initial prices takes hold,
honest businesses will struggle to
compete. For example, as noted in the
NPRM, one market participant in the
live-event ticketing industry, StubHub,
unilaterally adopted all-in pricing in
2014 but soon reverted back to its
original model after it lost significant
market share when customers
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2080 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
131 See NPRM, 88 FR 77434 (quoting Fed. Trade
Comm’n, ‘‘That’s the Ticket’’ Workshop: Staff
Perspective 4 (May 2020), https://www.ftc.gov/
system/files/documents/reports/thats-ticket-
workshop-staff-perspective/staffperspective_tickets_
final-508.pdf.). See also, e.g., https://www.contact
lensking.com/faq.aspx (describing a contact lens
company’s decrease in traffic and total orders when
it displayed a total price while competitors
implemented ‘‘processing’’ fees).
132 FTC–2023–0064–3187 (U.S. Department of
Justice, Antitrust Division, observed that ‘‘[w]hen
consumers lack choice and information, and are
saddled with mandatory hidden fees, the benefits
of the competitive process break down.’’); see also
FTC–2023–0064–3106 (American Society of Travel
Advisors); FTC–2023–0064–3184 (New York State
Sen. Michael Gianaris); FTC–2023–0064–1294
(James J. Angel, Ph.D., CFP, CFA, Professor,
Georgetown University, McDonough School of
Business).
133 FTC–2023–0064–3212 (TickPick, LLC).
134 FTC–2023–0064–3106 (American Society of
Travel Advisors).
135 FTC–2023–0064–3028 (Competitive Enterprise
Institute argued that consumers already bear a
search cost merely by looking for a product, and
that any advertisement that includes some, but not
all, pricing information, benefits the searching
consumer if the information is accurate and non-
deceptive.).
136 Id.
137 FTC–2023–0064–2886.
138 FTC–2023–0064–3127 (U.S. Chamber of
Commerce noted that, among these pricing
practices, dynamic pricing strategies provide these
benefits to consumers and this was ignored in the
conclusions of the NPRM.).
139 Deception Policy Statement, 103 F.T.C. at
182–183, 183 n.55 (listing claims or omissions
involving cost among those that are presumptively
material); see also, e.g., FleetCor Techs., Inc., 620
F. Supp. 3d at 1303–04, 1311 (finding that
representations about discounts and transaction
fees were material); FTC v. Windward Marketing,
Inc., No. 1:96–CV–615F, 1997 WL–33642380, at *10
(N.D. Ga., Sept. 30, 1997) (‘‘[A]ny representations
concerning the price of a product or service are
presumptively material’’).
140 Deception Policy Statement, 103 F.T.C. at 175
(listing ‘‘misleading price claims’’ among those
claims that the FTC has found to be deceptive); see
also, e.g., Resort Car Rental Sys., 518 F.2d at 964
(upholding the Commission’s order finding that
using the name ‘‘Dollar-A-Day’’ misrepresented the
price of car rentals in violation of section 5 of the
FTC Act).
141 See, e.g., FTC–2023–0064–3162 (BBB National
Programs Inc. stated that BBB National Advertising
Division ‘‘precedent is clear that the advertised
price for a product or service is among one of the
most material terms to a consumer’s purchasing
decision.’’).
incorrectly perceived StubHub’s prices
to be higher.131
The consumer injury caused by these
bait-and-switch pricing practices is not
outweighed by any benefits to
consumers or competition. Consumers
receive no benefit from businesses that
use drip pricing, partitioned pricing, or
misleading price presentation while
they obscure the total price. To the
extent that consumers could benefit
from itemized information about price
components, such itemization can be
done in conjunction with clear total
price information. Consumers receive
no benefit from businesses partitioning
or breaking up mandatory price
components while they obscuring the
total price.
Likewise, as discussed in section V.E,
there is no benefit to competition, as
honest businesses that disclose all-
inclusive total prices lose market share
to businesses that do not. Bait-and-
switch pricing and misleading fees
undermine the ability of honest
businesses to compete on price and
therefore diminish the competitive
pressure in a market that pushes prices
downward. As a result, these practices
lead to higher prices than would be
supported in a competitive marketplace.
The Antitrust Division of the U.S.
Department of Justice noted that
‘‘companies that impose mandatory
hidden fees’’ have ‘‘an unfair advantage
over honest brokers’’ and interfere with
consumers’ ability to ‘‘choose between
competitors based on the important
considerations of price and what,
exactly, the consumer is
purchasing.’’ 132 Some commenters,
including those from the live-event
ticketing and short-term lodging
industries, noted that bait-and-switch
pricing not only confuses consumers,
but harms honest businesses that offer
truthful, timely, and transparent pricing
because their prices initially may seem
higher than competitors that use bait-
and-switch pricing and misleading fees.
For example, TickPick, LLC
commended the Commission for
proposing to curb the widespread
practice of bait-and-switch pricing and
observed that ‘‘the proposed rule would
significantly benefit consumers and
competition in the live-event ticketing
industry.’’ 133 The American Society of
Travel Advisors argued that, in addition
to consumer harm, ‘‘the imposition of
undisclosed fees also unfairly places
honest retailers—those that do disclose
the full, all-in price upfront—at a
competitive disadvantage relative to
those that do not.’’ 134
A minority of commenters stated that
hidden and misleading fees do not harm
consumers. For instance, the
Competitive Enterprise Institute argued
that consumers’ search costs do not
increase when advertisements lack a
single total price, as the consumer is
better informed after watching the
advertisement despite the omission.135
While the commenter conceded that
consumers may benefit more if a total
price is disclosed, the commenter
argued that any harm could be easily
avoidable by consumers calculating the
total themselves.136 Some commenters
also argued that these types of fees often
benefit consumers and are openly
disclosed. 137 Indeed, the American
Gaming Association stated that resort
fees enhance a consumer’s stay,
distinguish resorts from more standard
lodging offerings, are openly disclosed
to consumers, and often appear several
times throughout the search and
purchasing process. As the Commission
already noted, drip and partitioned
pricing and other bait-and-switch
pricing harm consumers for numerous
reasons, including because consumers
underestimate the total price of a good
or service, overconsume, overpay, and
waste time. The U.S. Chamber of
Commerce argued that there are pro-
consumer and pro-competitive
justifications for this type of pricing,
including allowing for dynamic pricing
strategies and preventing consumers
from paying for services that they do not
use.138 The rule, however, does not
prohibit the use of dynamic pricing
strategies, itemization, or offering
optional goods or services for
consumers to select; it simply prohibits
offering a price that is not inclusive of
all mandatory fees and charges, as well
as prohibiting misrepresented fees and
charges.
As stated herein, the Commission and
courts have previously recognized that
price is a material term 139 and that it is
a violation of section 5 of the FTC Act
to misrepresent the price of a good or
service. 140 Commenters emphasized the
materiality of price to consumers.141
The commenters who argue that bait-
and-switch pricing does not harm
consumers ignore the large body of
literature demonstrating that drip
pricing and partitioned pricing have a
negative impact on consumers and
competition. The economic analysis in
Section V provides additional
discussion regarding the economic
harms from bait-and-switch pricing
tactics, including drip pricing and
partitioned pricing in the live-event and
short-term lodging industries.
C. The Economic Effect of the Rule
As part of the rulemaking proceeding,
the Commission solicited public
comment and data (both qualitative and
quantitative) on the economic impact of
the proposed rule and its costs and
benefits. In issuing this final rule, the
Commission has carefully considered
the comments received and the costs
and benefits of each provision, taking
into account the effects on small
businesses and consumers, as discussed
in more detail in sections V and VII.
The record demonstrates that the most
significant anticipated benefits of the
final rule are promoting transparent
pricing, facilitating comparison
shopping for consumers, and leveling
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2081	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
142 The relationship between social trust and
market outcomes is well established. See, e.g., Paul
J. Zak & Stephen Knack, Trust and growth. 111
Econ. J., 470 (Mar. 2001), https://doi.org/10.1111/
1468-0297.00609; Philip Keefer & Stephen Knack,
Does Social Capital Have an Economic Payoff? A
Cross-Country Investigation, 112 Q.J. Econ. 4 (Nov.
1997), https://doi.org/10.1162/003355300555475.
Social trust is particularly necessary for
participation in financial markets. See Jesse Bricker
& Geng Li, Fed. Reserve Bd., Credit Scores, Social
Trust, and Stock Market Participation, Finance and
Economics Discussion Series 2017–008r1, https://
doi.org/10.17016/FEDS.2017.008r1; Luigi Guiso,
Paola Sapienza, & Luigi Zingales, Trust the Stock
Market, 63 J. Fin. (Dec. 2008), https://www.jstor.org/
stable/20487944?seq=1.
143 Ginny Seung Choi & Virgil Henry Storr,
Market interactions, trust and reciprocity, 15 PLOS
One 5 (May 7, 2020), https://doi.org/10.1371/
journal.pone.0232704.
144 Joshua Kleinfeld & Hadar Dancig-Rosenberg,
Social Trust in Criminal Justice: A Metric, 98 Notre
Dame L. Rev. 815 (2022), https://
scholarship.law.nd.edu/ndlr/vol98/iss2/6.
145 AMG Cap. Mgmt., 593 U.S. at 82.
146 See 15 U.S.C. 57b(a)(1) and (2); see also
NPRM, 88 FR 77438 (discussing impact of AMG
Cap. Mgmt.). When the Commission has reason to
believe that the rule has been violated, the
Commission can commence a Federal court action
to ask a Federal judge to determine liability and, if
proven, require violators to provide redress. See 15
U.S.C. 57b(a)(1), (b). Without the rule, the path to
court-ordered redress is longer. The Commission
must first conduct an administrative proceeding to
determine whether the respondent engaged in
unfair or deceptive acts or practices in violation of
section 5(a) of the FTC Act. If the Commission finds
that the respondent did so, the Commission issues
a cease-and-desist order, which might not become
final until after the resolution of any resulting
appeal to a Federal court of appeals. Then, to obtain
redress, the Commission must initiate a second
action in Federal district court, in which it must
prove that the violator engaged in objectively
fraudulent or dishonest conduct in order to obtain
court-ordered redress. See 15 U.S.C. 57b(a)(2), (b).
147 See section 5(m)(1)(A) of the FTC Act, 15
U.S.C. 45(m)(1)(A) (providing that those who
violate a trade regulation rule ‘‘with actual
knowledge or knowledge fairly implied on the basis
of objective circumstances that such act is unfair or
deceptive and is prohibited by such rule’’ are liable
for civil penalties for each violation). In addition,
any entity or person who violates such a rule
(irrespective of the state of knowledge) is liable for
any injury caused to consumers by the rule
violation. The Commission may pursue such
recovery in a suit under section 19(a)(1) of the FTC
Act, 15 U.S.C. 57b(a)(1).
148 NPRM, 88 FR 77447–48.
the playing field for businesses in the
live-event ticketing and short-term
lodging industries. By prohibiting drip
pricing, the final rule also will promote
social trust, which is a necessary
component of successful market
interactions. 142 Most participants in a
market transaction do not have prior
experience with one another and
consumers must rely on some degree of
trust that the business will provide the
good or service in question, at the stated
price and quality level. Without social
trust, it would be costlier for both
consumers and businesses to acquire all
the necessary information to participate
in the market. While there has been less
research on the relationship between
social trust and previous market
interactions, there is some evidence that
bad market experiences can reduce
social trust.143 Thus, prohibiting these
types of deceptive and unfair practices
will promote social trust, which can be
a measure of a well-functioning
market. 144
Another beneficial consequence
would be the expansion of the remedies
available for violations of the final rule,
including the ability to more effectively
obtain monetary relief for consumers
who have been deceived about the true
total price of live-event tickets or short-
term lodging. This is particularly critical
given the U.S. Supreme Court’s decision
in AMG Capital Mgmt., LLC v. FTC, 593
U.S. 67 (2021), which held that
equitable monetary relief, including
consumer redress, is not available under
section 13(b) of the FTC Act.145 Under
the final rule, the Commission will now
be able to seek court-ordered consumer
redress in one Federal district court
action brought under section 19(a)(1),
rather than the longer, less efficient,
two-step process for obtaining redress
under section 19(a)(2).146 By allowing
the Commission to secure redress more
efficiently, this rule will also allow the
Commission to conserve its limited
enforcement resources for other mission
priorities.
As an additional benefit, the rule will
enable the Commission to seek civil
penalties against violators. The FTC Act
generally does not allow the
Commission to obtain civil penalties
against those who engage in unfair or
deceptive acts or practice in violation of
section 5(a) of the FTC Act. Section
5(m)(1)(A) of the FTC Act does,
however, authorize the Commission to
seek civil penalties in court for
violations of trade regulation rules, such
as the final rule here.147 The ability to
obtain civil penalties provides two
benefits. First, court-ordered civil
penalties give the Commission the
ability to ensure that violators do not
retain the profits they earn by engaging
in the unfair or deceptive pricing
practices prohibited by the rule. Second,
the potential for civil penalties will
deter violations and provide a strong
incentive for businesses providing live-
event tickets and short-term lodging to
provide truthful and transparent pricing
information in compliance with the
rule, which will have consumer welfare
benefits and will benefit honest
competition.148
When promulgating a final rule, the
Commission must prepare a final
regulatory analysis, which is contained
in section V. The final regulatory
analysis contains an estimated cost-
benefit analysis of the final rule, as well
as a more in-depth discussion of the
comments the Commission received in
response to the NPRM. In addition, the
Commission’s final regulatory flexibility
analysis, which is contained in section
VII, discusses the final rule’s economic
impact on small entities.
III. Section-by-Section Analysis
The Commission has carefully
considered the rulemaking’s extensive
comment record. It has weighed
considerations raised by individual
consumers, businesses (including small
businesses), industry advocates,
consumer advocates, labor
representatives, academics, and other
law enforcement bodies. After
considering these comments, the
Commission finalizes this rule to
address a subset of the specific unfair
and deceptive practices identified in the
NPRM. The rule will help ensure that
consumers shopping for live-event
tickets and short-term lodging see
advertised prices that include all
mandatory fees, can obtain such goods
or services at those prices, and know
what they are paying for. The rule
promotes honest and transparent pricing
for consumers and a level playing field
for businesses.
Numerous public comments in
support of and in opposition to the rule
included discussions of the definitions
and substantive provisions of the
proposed rule, and made various
recommendations. The Commission
considered comments pointing out
confusion about specific phrases in the
proposed rule, particularly phrases that
commenters found vague or overbroad.
The Commission also took notice of
comments that suggested some entities
or transactions would be subject to
overlapping Federal regulations
regarding pricing disclosures that could
result in confusion to consumers or
businesses. In addition, the Commission
appreciated comments from industry
that identified potential gaps in how the
proposed rule would interact with
certain types of pricing practices.
The Commission makes a number of
changes to the final rule. Notably, the
Commission narrows the application of
the final rule to offers, displays, or
advertisements of a covered good or
service—i.e., live-event tickets or short-
term lodging. The Commission
recognizes that many comments to the
proposed rule focused on the
application of the rule to specific
industries or pricing scenarios. As a
result of the Commission’s decision to
limit this final rule to live-event
ticketing and short-term lodging, the
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2082 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
149 FTC–2023–0064–3191 (Community Catalyst et
al.); FTC–2023–0064–3283 (National Consumer Law
Center, Prison Policy Initiative, and advocate
Stephen Raher).
150 FTC–2023–0064–3268 (Housing & Eviction
Defense Clinic, University of Connecticut School of
Law, commented ‘‘the definition of an ‘Ancillary
Good or Service’ should be amended to include all
fees that are not reasonably avoidable and all fees
or charges for goods or services that a reasonable
consumer would expect to be included with the
purchase.’’); FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.
recommended the definition of ‘‘Ancillary Good or
Service’’ be revised ‘‘to mean ‘any optional,
additional good(s) or service(s), offered to a
consumer as part of the same transaction, that a
reasonable consumer would not expect to be
included with the purchase of the advertised good
or service.’’); FTC–2023–0064–3160 (Consumer
Federation of America et al. proposed the definition
of ‘‘Ancillary Good or Service’’ be modified to ‘‘any
optional, additional good(s) or service(s), offered to
a consumer as part of the same transaction, that a
reasonable consumer would not expect to be
included with the purchase of the advertised good
or service.’’).
151 Deception Policy Statement, 103 F.T.C. at 175,
177–82; see also FTC v. Cantkier, 767 F. Supp. 2d
147, 151–52 (D.D.C. 2011) (applying deception
standard set forth in the Deception Policy
Statement); POM Wonderful, LLC v. FTC, 777 F.3d
478, 490, 500 (D.C. Cir. 2015) (applying deception
standard set forth in the Deception Policy Statement
and upholding administrative law judge
determination that ‘‘ ‘a significant minority’ of
‘reasonable’ consumers ‘would interpret [the ad] to
be claiming that drinking eight ounces of POM Juice
daily prevents or reduces the risk of heart
disease.’ ’’); FTC v. World Travel Vacation Brokers,
Inc., 861 F.2d 1020, 1029 (7th Cir. 1988) (upholding
lower court’s determination that ‘‘ ‘the $29 airfare
promotion constituted the type of misrepresentation
upon which a reasonably prudent person would
rely’ ’’); Fed. Trade Comm’n, FTC Policy Statement
on Unfairness (appended to In re Int’l Harvester Co.,
104 F.T.C. 949, 1070, 1073 (1984), (hereinafter
‘‘Unfairness Policy Statement’’), https://
www.ftc.gov/sites/default/files/documents/
commission_decision_volumes/volume-104/ftc_
volume_decision_104__july_-_december_
1984pages949_-_1088.pdf (‘‘To justify a finding of
unfairness the [consumer] injury must . . . be an
injury that consumers themselves could not
reasonably have avoided.’’).
152 Deception Policy Statement, 103 F.T.C. at 175,
179 (‘‘For instance, if a company markets a cure to
the terminally ill, the practice will be evaluated
from the perspective of how it affects the ordinary
member of that group.’’).
153 FTC–2023–0064–3292 (National Association
of Theatre Owners).
154 FTC–2023–0064–3206 (Motor Vehicle
Protection Products Association et al.).
Commission need not respond to each
of these comments at this time.
In addition, wherever possible, the
Commission works to reduce burden on,
and maintain pricing flexibility for,
businesses. Finally, the Commission
provides guidance and explanation to
respond to specific questions and
hypotheticals posed by commenters to
help give additional clarity to
businesses. The following discussion
provides a section-by-section analysis of
the NPRM’s proposed provisions and
the provisions adopted in the final rule,
as well as a discussion of the comments
received and the Commission’s
responses.
A. § 464.1 	Definitions
Proposed § 464.1 contained
definitions for the following terms:
‘‘ancillary good or service’’; ‘‘business’’;
‘‘clear(ly) and conspicuous(ly)’’;
‘‘government charges’’; ‘‘pricing
information’’; ‘‘shipping charges’’; and
‘‘total price.’’ The Commission received
various comments with respect to these
definitions, including particular
industries’ requests for exemption from
the definition of ‘‘business’’ and other
suggestions. Section 464.1 of the final
rule adopts these definitions, in some
instances with minor modifications for
clarification, and adds a definition for
‘‘covered good or service.’’ In the
definition-by-definition analysis, the
Commission discusses each definition
proposed in the NPRM, any changes to
the definition’s text, the added
definition, and other comments relevant
to the definitions section that are not
otherwise addressed in the discussion of
the final rule’s substantive provisions.
1. Ancillary Good or Service
Proposed § 464.1(a) in the NPRM
defined ‘‘ancillary good or service’’ as
‘‘any additional good(s) or service(s)
offered to a consumer as part of the
same transaction.’’ This definition was
relevant to the definition of ‘‘total
price,’’ in proposed § 464.1(g), which
specified that any mandatory fees or
charges for such goods or services
would be included in total price.
Commenters proposed modifications to
the definition of ‘‘ancillary good or
service’’ but, following review of those
comments and as discussed in this
section, the Commission declines to
adopt the suggested modifications. Final
§ 464.1 adopts the definition of
‘‘ancillary good or service’’ without
modification.
Several commenters recommended
that the Commission modify the
definition of ‘‘ancillary good or service’’
to state that fees charged by a third party
must be included in total price if those
fees are part of the same transaction.149
As stated in the NPRM, if a business
advertises a price for a good or service
that requires an ancillary good or
service provided by another entity, the
charge for the mandatory ancillary good
or service must be included in total
price. Additionally, the NPRM made
clear that the definition includes goods
and services (whether from the seller or
third parties) offered as part of the same
transaction, because it included
examples of mandatory ancillary goods
or services that may be offered by third-
party providers but are part of the same
transaction, such as a payment
processing fee for an online transaction.
Accordingly, the Commission does not
believe that it is necessary to modify the
definition of ‘‘ancillary good or service’’
to clarify that fees charged by a third
party must be included in total price if
those fees are part of the same
transaction.
Several commenters also suggested
that the Commission add language
referring to a reasonable consumer in
the definition of ‘‘ancillary good or
service,’’ to clarify that only goods or
services that a ‘‘reasonable consumer’’
would expect to be included must be
included in total price.150 The
Commission does not believe that
adding ‘‘reasonable consumer’’ to the
definition of ‘‘ancillary good or service’’
is necessary, as the reasonable consumer
standard is implicit in the rule text.
Under longstanding precedent, the
Commission examines conduct from the
perspective of a consumer acting
reasonably under the circumstances. 151
If a representation or practice affects or
is directed primarily to a particular
group, the Commission examines
reasonableness from the perspective of
an ordinary member of that group. 152
Accordingly, the Commission does not
believe it is necessary to modify the
definition of ‘‘ancillary good or service’’
to refer to a reasonable consumer.
One commenter argued, in the context
of online movie ticket purchases, that
online convenience fees are reasonably
avoidable because consumers can
purchase tickets in-person at a theater
without incurring the fees. 153 Although
a movie ticket is not a covered good or
service, similar convenience fees are
common in the live-event ticketing
industry. The Commission disagrees
with the commenter that online
convenience fees are reasonably
avoidable: If a consumer must pay a
service or other fee in order to purchase
tickets online (i.e., as part of the same
transaction), then such a fee must be
included in total price when it appears
online. In addition, using vague fee
descriptions, such as an unspecified
‘‘convenience’’ fee, may violate
§§ 464.2(c) and 464.3 by failing to
disclose clearly and conspicuously, and
by misrepresenting, the nature or
purpose of fees or the identity of the
good or service for which fees or charges
are imposed.
Another commenter argued that the
definition of ‘‘ancillary good or service’’
should ‘‘not turn on whether the good
or service is ‘offered’ to a consumer but
whether it is ‘required to be purchased’
by the consumer.’’ 154 The commenter
proposed that the Commission
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2083	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
155 See infra section III.A.8.a.
156 The Commission notes that several
commenters misinterpreted the definition of
‘‘Ancillary Good or Service’’ as necessarily being
optional. See, e.g., FTC–2023–0064–3145
(Association of National Advertisers, Inc. stated that
‘‘Ancillary fees, by definition, are not ‘mandatory’
and should not be characterized as ‘mandatory’ fees
subject to the proposed disclosure requirements.’’);
FTC–2023–0064–1425 (Iowa Bankers Association
stated, ‘‘While the definition of Total Price includes
‘mandatory’ Ancillary Goods or Services, the actual
definition [of Ancillary Good or Service] seems to
speak to the discretionary aspect of this term.’’).
The Commission reiterates that the rule text is clear:
Ancillary Goods or Services may be mandatory or
optional, depending on the facts of a particular
transaction.
157 FTC–2023–0064–3172 (New Jersey Apartment
Association); FTC–2023–0064–3296 (Bay Area
Apartment Association).
158 FTC–2023–0064–3206 (Motor Vehicle
Protection Products Association et al.).
159 16 CFR part 463.
160 See, e.g., FTC–2023–0064–2887 (Progressive
Policy Institute); FTC–2023–0064–3160 (Consumer
Federation of America et al.); FTC–2023–0064–3275
(Berkeley Center for Consumer Law & Economic
Justice et al.).
161 E.g., FTC–2023–0064–3276 (Automotive
Service Association); FTC–2023–0064–3206 (Motor
Vehicle Protection Products Association et al.);
FTC–2023–0064–3189 (National Automobile
Dealers Association); FTC–2023–0064–3121
(National Independent Automobile Dealers
Association).
162 E.g., FTC–2023–0064–3263 (Flex Association);
FTC–2023–0064–3202 (TechNet); FTC–2023–0064–
3238 (Gibson, Dunn & Crutcher LLP).
incorporate the word ‘‘mandatory’’ into
the definition of ‘‘ancillary good or
service.’’ The Commission disagrees
with this proposed modification. As
discussed in the NPRM, an ancillary
good or service may be mandatory or
optional. Whether the cost of the
ancillary good or service must be
incorporated into total price turns on
whether the good or service is
mandatory, which depends on the facts
of a transaction.155 For example, if a
hotel offers a consumer the option to
purchase or decline a trip protection
plan with a room reservation, the plan
would be an optional ancillary good or
service because the consumer has the
option to decline the trip insurance.
Conversely, a hotel may require all
guests to purchase a daily breakfast
voucher. In this case, the hotel guest
cannot avoid being charged for the
voucher, and it is a mandatory ancillary
good or service. If a business charges
payment processing fees that the
consumer cannot reasonably avoid, such
fees would be for a mandatory ancillary
good or service.
It is also possible that a good or
service may be mandatory in one
transaction but optional in another.156
For example, if a hotel allows a guest to
purchase amenities such as bottled
water or pool towels for an additional
fee but permits each guest to supply
their own water or pool towels, such
amenities would be optional ancillary
goods or services. If, however, the hotel
requires all patrons to use the hotel-
provided amenities for a fee, then the
amenities would be mandatory ancillary
goods or services. Because ancillary
goods or services may be either
mandatory or optional, the Commission
declines to add the word ‘‘mandatory’’
into the definition of ‘‘ancillary good or
service.’’
Some commenters also asked the
Commission for additional guidance as
to when a good or service might be
considered ancillary, particularly if a
good or service includes variable
costs.157 The Commission addresses
pricing scenarios, including those
pertaining to contingent or variable fees,
in section III.B.1.a. Another commenter
stated that the use of the word ancillary
was unclear, because it ‘‘implies a
relationship between a primary object
and the ancillary object’’ and does not
include guidance concerning the
primary object.158 The Commission
cannot identify in every possible
situation which good or service would
be the ‘‘primary object’’ versus an
ancillary good or service because such
a determination is fact-specific and will
depend on the goods or services offered
by individual businesses.
For the foregoing reasons, and based
on its review of the comments received,
the Commission adopts the definition of
‘‘ancillary good or service’’ set forth in
the NPRM. As discussed in section
III.A.8, to address comments and clarify
the rule, the Commission modifies the
definition of total price to further clarify
that under final § 464.2(a), Businesses
may exclude from total price fees or
charges for any optional ancillary good
or service.
2. Business
Proposed § 464.1(b) defined
‘‘business’’ as ‘‘an individual,
corporation, partnership, association, or
any other entity that offers goods or
services, including, but not limited to,
online, in mobile applications, and in
physical locations.’’ As part of the
NPRM, the Commission also proposed a
carve-out for certain motor vehicle
dealers required to comply with the
Combating Auto Retail Scams Trade
Regulation Rule (‘‘CARS Rule’’), 159 and
for the carve-out to become effective
upon the CARS Rule’s effective date.
The CARS Rule provides for certain
pricing disclosure requirements and
prohibits misrepresentations. Final
§ 464.1 adopts the first sentence of the
proposed definition of ‘‘business,’’ but
removes the carve-out for motor
vehicles required to comply with the
CARS Rule because of the final rule’s
narrowed scope.
In the NPRM, the Commission sought
input as to whether it should modify the
proposed definition of ‘‘business’’ to
exclude certain businesses, or whether
it should add a definition of ‘‘covered
business’’ to narrow the businesses
subject to the rule. The NPRM also
included several questions concerning
how to define ‘‘covered business’’ in the
event the Commission opted to adopt
such a definition. The Commission
received broad support for an industry-
neutral rule from individual
commenters, consumer groups, and
industry organizations. Commenters
cited the prevalence of hidden and
deceptive fees across a variety of
industries and argued that broad
exemptions would create an uneven
economic playing field and confuse
consumers by creating unpredictability
across industries.160 Conversely, the
Commission received numerous
comments asking that it narrow the rule
to specific industries, including, for
example, live-event ticketing and short-
term lodging. Several commenters also
urged the Commission to exempt certain
industries, arguing that the rule would
pose challenges for those industries or
that those industries are already subject
to existing regulations.
Following its review of the comments,
the Commission narrows application of
the final rule to covered goods or
services, those involving live-event
tickets or short-term lodging. While the
comments demonstrated that bait-and-
switch pricing and misleading fees and
charges inflict harms on consumers
across the economy, the rulemaking
record reveals longstanding concerns
with these unfair and deceptive
practices within the live-event ticketing
and short-term lodging industries in
particular. The final rule addresses
these industries first. The Commission
addresses the definition of ‘‘covered
good or service’’ in section III.A.4.
The Commission received comments
requesting modifications to various
definitions, including the definition of
‘‘business,’’ or wholesale exemptions
from the proposed rule’s coverage
related to issues in particular industries,
including auto dealers and service
providers, 161 app-based delivery
platforms,162 financial services
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163 E.g., FTC–2023–0064–3139 (American
Bankers Association and Consumer Bankers
Association); FTC–2023–0064–2893 (America’s
Credit Unions); FTC–2023–0064–3168 (American
Financial Services Association); FTC–2023–0064–
3147 (American Land Title Association); FTC–
2023–0064–1425 (Iowa Bankers Association); FTC–
2023–0064–1941 (Independent Bankers Association
of Texas); FTC–2023–0064–3182 (Massachusetts
Bankers Association); FTC–2023–0064–3119
(Money Services Business Association, Inc.); FTC–
2023–0064–3144 (Mortgage Bankers Association);
FTC–2023–0064–3127 (U.S. Chamber of
Commerce).
164 E.g., FTC–2023–0064–3294 (International
Franchise Association); FTC–2023–0064–3141
(Coalition of Franchisee Associations); FTC–2023–
0064–3211 (American Association of Franchisees &
Dealers).
165 E.g., FTC–2023–0064–3210 (Service
Corporation International); FTC–2023–0064–3065
(Carriage Services, Inc.); FTC–2023–0064–3130
(International Cemetery, Cremation & Funeral
Association).
166 E.g., FTC–2023–0064–3152 (Building Owners
& Managers Association et al.); FTC–2023–0064–
3116 (Manufactured Housing Institute); FTC–2023–
0064–3133 (National Multifamily Housing Council
and National Apartment Association); FTC–2023–
0064–3172 (New Jersey Apartment Association);
FTC–2023–0064–3289 (Zillow Group). As
explained in section III.A.4, the Commission does
not intend to cover rental housing providers in its
definition of ‘‘Covered Good or Service’’ at this
time.
167 E.g., FTC–2023–0064–0264 (Individual
Commenter); FTC–2023–0064–2953 (Individual
Commenter); FTC–2023–0064–2124 (Individual
Commenter); FTC–2023–0064–3022 (Individual
Commenter); FTC–2023–0064–3021 (Individual
Commenter); FTC–2023–0064–3300 (National
Restaurant Association); FTC–2023–0064–3219
(Georgia Restaurant Association); FTC–2023–0064–
3180 (Independent Restaurant Coalition); FTC–
2023–0064–3078 (Washington Hospitality
Association); FTC–2023–0064–3080 (UNITE HERE);
FTC–2023–0064–2918 (Elite Catering + Event
Professionals).
168 E.g., FTC–2023–0064–3234 (CTIA—The
Wireless Association); FTC–2023–0064–3295
(USTelecom—The Broadband Association); FTC–
2023–0064–2884 (NTCA—The Rural Broadband
Association); FTC–2023–0064–3143 (ACA
Connects).
169 E.g., FTC–2023–0064–2919 (National
Automatic Merchandising Association).
170 E.g., FTC–2023–0064–3292 (National
Association of Theatre Owners).
171 E.g., FTC–2023–0064–3269 (IHRSA—The
Health & Fitness Association).
172 E.g., FTC–2023–0064–2906 (National
Association of College & University Business
Officers et al.).
173 E.g., FTC–2023–0064–3249 (Marine Retailers
Association of the Americas); FTC–2023–0064–
3251 (National RV Dealers Association).
174 Towing & Recovery Association of America,
Inc. submitted a late comment, which the
Commission considered in its discretion and makes
available at https://www.ftc.gov/system/files/ftc_
gov/pdf/R207011TRAAComment.pdf.
175 FTC–2023–0064–3106 (American Society of
Travel Advisors).
176 See, e.g., FTC–2023–0064–3293 (Travel
Technology Association); FTC–2023–0064–3262
(Skyscanner).
177 FTC–2023–0064–3120 (Arizona Indian
Gaming Association).
178 Id.
179 See Fed. Power Comm’n v. Tuscarora Indian
Nation, 362 U.S. 99, 116–17 (1960) (examining case
law supporting the conclusion that ‘‘a general
statute in terms applying to all persons includes
Indians and their property interests’’); FTC v. AMG
Servs., Inc., No. 2:12–CV–00536–GMN, 2013 WL
7870795, at * 16–21 (D. Nev. July 16, 2013), R. &
R. adopted, 2014 WL 910302 (D. Nev. Mar. 7, 2014)
(discussing the FTC Act’s applicability to Federally
recognized Tribes and Tribal businesses).
180 See, e.g., AMG Servs., 2013 WL 7870795, at
* 22–23 (holding there was a genuine dispute of
material fact barring summary judgment on
question of whether Tribal chartered corporations
were for-profit corporations under the FTC Act).
providers, 163 franchised businesses, 164
funeral service providers,165 rental
housing,166 restaurants and other food
and beverage service providers,167
telecommunications providers,168
vending machine retailers,169 movie
theaters,170 health and fitness
centers,171 higher education
institutions,172 recreational vehicles and
marine crafts,173 and towing
companies. 174 The Commission’s
decision to narrow the final rule to
covered goods or services renders these
requests inapplicable, and as such, the
Commission does not address them at
this time.
The Commission received comments
from various third-party travel service
providers, including online travel
agencies and travel advisors, arguing
that third-party travel intermediaries
and advisors are situated differently
from underlying travel service providers
and may be subject to existing
Department of Transportation (‘‘DOT’’)
regulations. Online travel agencies and
travel advisors routinely offer, display,
or advertise prices of covered goods or
services to consumers, including
businesses, which is conduct covered by
the final rule. One industry group
representing travel advisors argued that
travel advisors do not set the price of
underlying travel products and rely on
the sellers of such products to provide
accurate pricing information.175 The
commenter requested that the
Commission include a ‘‘safe harbor
mechanism’’ to protect travel advisors
who may rely on inaccurate pricing
information provided by sellers. The
Commission declines to exclude travel
advisors from the rule or to provide
them with a safe harbor. The
Commission addresses in section
III.B.1.f requests for immunity for third-
party intermediaries.
The Commission also received
comments from online travel agencies
seeking an exemption from the rule for
airfare or bundled products that include
airfare, arguing that the FTC Act does
not confer jurisdiction over airlines and,
further, that DOT’s Full Fare
Advertising Rule requires certain
pricing disclosures for airfare.176 As
noted in the NPRM, the Commission’s
enforcement of its rule is subject to all
existing limitations of the law and the
Commission cannot bring a complaint to
enforce its rule if doing so would exceed
the Commission’s jurisdiction or
constitutional limitations. The
Commission declines to exempt online
travel agencies from the rule. However,
the Commission notes that, where there
is overlap between this rule and the
DOT’s Full Fare Advertising Rule on the
treatment of government charges (i.e., in
the context of bundled travel packages,
such as for airfare and hotels, the Full
Fare Advertising Rule requires the
inclusion of government taxes and fees
in the total price), complying with both
rules is feasible. While this rule permits
businesses to exclude government
charges from total price, it does not
require them to do so.
The Commission received a comment
from a gaming association seeking an
exemption for Federally recognized
Indian Tribes and Tribal entities as
governments that act for the benefit of
their tribal citizens.177 The commenter
asserted that the Commission does not
generally exercise regulatory authority
over such entities. The comment
focused on Tribal government casinos
and explained that Tribal casino
revenues are used for essential Tribal
government services and community
development, including education,
healthcare services, housing, and
infrastructure development.178
The Commission recognizes that some
Tribal Government casinos and other
businesses may operate as hotels or live-
event venues, or may otherwise offer
goods or services that fit within the
definition of covered good or service.
Nevertheless, the Commission declines
to exempt Federally recognized Indian
Tribes and Tribal entities from coverage
under the final rule. The FTC Act is a
law of general applicability that applies
to such entities, as well as individual
members thereof.179 The Commission
recognizes that, in some instances, these
entities may be organized in such a way
that they are outside FTC jurisdiction,
but whether a given Tribe or Tribal
business is a corporation within the
scope of the FTC Act is a fact-dependent
inquiry. 180 The Commission is not
aware of any evidence to suggest that
the final rule would disproportionately
impact such entities or that it would
have any impact on their ability to
continue to use revenues for
government services or community
development.
The Commission received a comment
seeking an exemption for all franchised
businesses. The commenter raised
concerns that franchised businesses may
lose out on the benefit of national
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181 FTC–2023–0064–3294 (International
Franchise Association).
182 Id.
183 Id.
184 FTC–2023–0064–3141 (Coalition of
Franchisee Associations); FTC–2023–0064–3211
(American Association of Franchisees & Dealers).
185 16 CFR 436.5; see also Fed. Trade Comm’n,
Staff Guidance on the Unlawfulness of Undisclosed
Fees Imposed on Franchisees (July 2024), https://
www.ftc.gov/system/files?file=ftc_gov/pdf/
Franchise-Staff-Guidance.pdf.
186 FTC–2023–0064–3189 (National Automobile
Dealers Association).
187 FTC–2023–0064–3294 (International
Franchise Association).
188 See Promulgation of Trade Regulation Rule
and Statement of Basis and Purpose: Rule
Concerning Recurring Subscriptions and Other
Negative Option Programs, 89 FR 90476 (Nov. 15,
2024), https://www.federalregister.gov/documents/
2024/11/15/2024-25534/negative-option-rule
(amending 16 CFR 425.4); 16 CFR part 465;
Promulgation of Trade Regulation Rule and
Statement of Basis and Purpose: Rule on the Use of
Consumer Reviews and Testimonials, 89 FR 68034
(Oct. 22, 2024), https://www.federalregister.gov/
documents/2024/08/22/2024-18519/trade-
regulation-rule-on-the-use-of-consumer-reviews-
and-testimonials; Guides Concerning Use of
Endorsements and Testimonials in Advertising, 16
CFR 255.0(f). The Commission notes that it declines
to adopt every modification adopted in the finalized
Rule on the Use of Consumer Reviews and
Testimonials, based on the goals of each rule and
the comment record.
189 See Deception Policy Statement, 103 F.T.C. at
175, 177–82; Unfairness Policy Statement, 104
F.T.C. at 1073; and other sources cited supra notes
151–52.
advertising campaigns, asserting that
‘‘[u]nder the Proposed Rule, national
marketing campaigns are only workable
if all franchised businesses in a
franchise system adhere to the same
pricing regime (including pass-through
fees), regardless of the economic
demands of the market in which they
operate.’’ 181 The commenter also raised
concerns particular to restaurant
franchises. 182
The Commission declines to exclude
franchised businesses from the final
rule. As the commenter notes,
franchised businesses include hotels,
restaurants, and fitness centers, among
other businesses. The Commission’s
addition of the ‘‘covered good or
service’’ definition narrows the rule’s
application to businesses that make
available live-event tickets or short-term
lodging and moots the commenter’s
concerns regarding restaurants or other
franchises. Further, the final rule
applies equally to franchised and non-
franchised businesses, including hotels.
The commenter has not provided any
evidence to suggest that the rule will
disproportionately impact franchised
businesses. As to the commenter’s
contention that application of the rule
will negatively impact franchised
businesses’ ability to benefit from
national advertising campaigns, the
Commission addresses commenters’
questions and concerns about national
advertising campaigns in section
III.B.1.d.
The commenter also urged the
Commission to exclude from the rule
sellers of franchises (‘‘franchisors’’)
subject to the FTC’s Disclosure
Requirements and Prohibitions
Concerning Franchising Rule
(‘‘Franchise Rule’’), arguing that the
rule’s total price requirement would
undermine the Franchise Rule’s
requirement to itemize specific fees. 183
Two commenters representing
franchised businesses (‘‘franchisees’’),
however, urged the Commission to
address ‘‘the types of fees that are
charged to franchisees by franchisors,’’
which are not subject to the Franchise
Rule.184
The Franchise Rule, 16 CFR part 436,
requires franchisors, in connection with
the offer or sale of a franchise, to
provide prospective franchisees with
specific information about the fees and
charges necessary to begin operation of
the franchised business, including the
estimated initial investment, expected
fees, and other expenses.185 Because the
final rule is limited to prices for covered
goods or services and ancillary goods or
services offered as part of the same
transaction, it would not apply to an
offer or sale of a franchise, including a
hotel franchise. However, the
Commission reiterates that franchised
businesses must comply with the final
rule in its entirety when selling covered
goods or services.
One industry group recommended
that the definition of ‘‘business’’ be
limited to ‘‘an individual, corporation,
partnership, association, or any other
entity that offers goods or services to
consumers,’’ with the purpose of
exempting business-to-business
transactions from the scope of the final
rule. 186 Another industry group
similarly requested that the Commission
exempt business-to-business
transactions from the scope of the final
rule.187 As set forth in section III.B.1.f,
the Commission believes that
application of the rule to business-to-
business transactions is appropriate and
necessary to provide the Commission
with the tools necessary to seek redress
from businesses that violate the law.
The final rule covers both business-to-
consumer transactions and business-to-
business transactions, so no
modification to the definition of
‘‘business’’ is required.
3. Clear(ly) and Conspicuous(ly)
Proposed § 464.1(c) in the NPRM
defined ‘‘clear(ly) and conspicuous(ly),’’
consistent with longstanding FTC
practice, as ‘‘a required disclosure that
is difficult to miss (i.e., easily
noticeable) and easily understandable,’’
and listed proposed specifications for
‘‘visual disclosure[s],’’ ‘‘audible
disclosure[s],’’ and ‘‘any communication
using an interactive electronic
medium.’’ Among other specifications,
the definition explained that the
disclosure ‘‘must be made through the
same means through which the
communication is presented.’’ The
proposed definition also provided that
disclosures ‘‘must use diction and
syntax understandable to ordinary
consumers and must appear in each
language in which the representation
that requires disclosure appears’’ and
‘‘must not be contradicted or mitigated
by, or inconsistent with, anything else
in the communication.’’ The proposed
definition further made clear that for
‘‘representations or sales practice[s]’’
targeting specific audiences, ‘‘such as
children, older adults, or the terminally
ill, ‘ordinary consumers’ includes
reasonable members of that group.’’ The
Commission finalizes the definition of
‘‘clear(ly) and conspicuous(ly)’’
proposed in § 464.1(c) with minor
clarifications to harmonize the language
and terminology used in this provision
with the terminology used in recent
rulemakings and agency guidance.
Specifically, proposed § 464.1(c)
provided that a required disclosure
must be ‘‘difficult to miss (i.e., easily
noticeable).’’ Final § 464.1 reverses the
order of the phrases ‘‘easily noticeable’’
and ‘‘difficult to miss,’’ and, thus,
provides that a required disclosure must
be ‘‘easily noticeable (i.e., difficult to
miss).’’ Additionally, in final § 464.1,
the Commission adds language to clarify
that required disclosures must be
‘‘easily understandable by ordinary
consumers.’’ In final § 464.1, the
Commission deletes reference to
‘‘reasonable’’ members of a specifically
targeted group. Each of these
modifications is to comport with the
Commission’s recently finalized Trade
Regulation Rule on the Use of Consumer
Reviews and Testimonials and the
Negative Option Rule, as well as the
Commission’s Endorsement Guides.188
Moreover, as noted in section II.B., the
Commission examines conduct from the
perspective of a consumer acting
reasonably under the circumstances,
and if a representation or practice
affects or is directed primarily to a
particular group, the Commission
examines reasonableness from the
perspective of an ordinary member of
that group. 189 In final § 464.1, the
Commission also includes ‘‘mobile
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190 FTC–2023–0064–3160 (Consumer Federation
of America et al.).
191 Id.
192 Id.
193 FTC–2023–0064–3206 (Motor Vehicle
Protection Products Association et al.).
194 FTC–2023–0064–1425 (Iowa Bankers
Association).
195 FTC–2023–0064–3145 (Association of
National Advertisers, Inc.).
196 Id.
197 FTC–2023–0064–3263 (Flex Association).
198 See Fed. Trade Comm’n, Bureau of Consumer
Protection Business Guidance, .com Disclosures:
How to Make Effective Disclosures in Digital
Advertising 7, 18 (Mar. 2013), https://www.ftc.gov/
system/files/documents/plain-language/bus41-dot-
com-disclosures-information-about-online-
advertising.pdf.
199 NPRM, 88 FR 77481, Question 14.
applications’’ within the definition of
‘‘clear(ly) and conspicuous(ly).’’ This
addition clarifies that ‘‘mobile
applications’’ constitute interactive
media devices under item (4) of the
definition. The Commission does not
believe that these modifications
substantively alter the definition of
‘‘clear(ly) and conspicuous(ly).’’
The Commission declines to adopt
several modifications to the definition
of ‘‘clear(ly) and conspicuous(ly)’’
proposed by a consumer group. First,
the commenter suggested that the
Commission add ‘‘limited English
proficient consumers’’ to the list of
specific audience-types that a
representation or sales practices may
target in proposed § 464.1(c)(8) to make
clear that disclosures are
understandable for both English and
limited-English speakers. 190 The
Commission does not believe such a
modification is necessary. While the
definition includes examples of specific
audiences who may be targeted by
particular sales practices or
representations, the use of ‘‘such as’’ is
intended to make clear these are
examples, rather than an exhaustive list
of categories of consumers who may be
targeted. The Commission further notes
that final § 464.1 requires that the
disclosures ‘‘must appear in each
language in which the representation
that requires the disclosure appears.’’
The commenter also suggested that
the Commission add language to require
that disclosures on interactive electronic
media ‘‘be capable of being printed and
saved in an easily readable format.’’ 191
The Commission does not believe such
a modification is necessary. The
definition considers the various types of
media through which consumers and
businesses transact and, for all types of
media, the definition requires the
disclosures to be ‘‘easily noticeable (i.e.,
difficult to miss).’’ Thus, the
Commission believes that the definition
provides businesses with flexibility to
continue transacting effectively and
efficiently through different media,
while ensuring sufficient consumer
understanding of required disclosures.
The commenter further proposed that
the rule clarify that disclosures must be
concise to discourage businesses from
‘‘listing hundreds of optional fees,
identifying fees that would not be
applicable to the consumer, providing a
description that uses complex jargon,
[or is] unnecessarily lengthy.’’ 192 The
definition already addresses these
concerns by setting forth what ‘‘clear(ly)
and conspicuous(ly)’’ means: using
simple terms that provide sufficient
information about how businesses can
formulate disclosures that are easily
understandable and noticeable to
consumers. The definition provides that
disclosures ‘‘must stand out from any
accompanying text or other visual
elements’’ to be ‘‘easily noticed, read,
and understood.’’
An automobile industry group urged
the Commission to remove ‘‘required
disclosure’’ from the definition of
‘‘clear(ly) and conspicuous(ly),’’ arguing
that ‘‘the NPRM is silent on what those
required disclosures actually are.’’ 193
The Commission disagrees and notes
that the final rule modifies § 464.2(a)
through (c) to provide greater clarity
concerning what needs to be disclosed,
including total price and other
information related to fees or charges
that were excluded from total price, and
the nature, timing, and prominence of
those disclosures. Those modifications
are discussed in detail in section III.B.
One commenter on behalf of members
in the financial services industry
asserted that the definition of ‘‘clear(ly)
and conspicuous(ly)’’ may conflict with
requirements of certain financial
services regulations, which do not
generally require a certain text size or
placement, but do require that certain
disclosures be made with ‘‘equal
prominence and in close proximity to
certain trigger terms.’’ 194 The
Commission does not believe that
financial services regulations are
implicated by the final rule’s more
narrow application to covered goods or
services. Nonetheless, the Commission
notes that the definition does not
require a particular text size or
placement; the definition states that
‘‘clear(ly) and conspicuous(ly)’’ requires
a visual disclosure to ‘‘stand out from
any accompanying text or other visual
elements so that it is easily noticed,
read, and understood.’’
A commenter on behalf of marketing
and advertising businesses criticized the
proposed definition of ‘‘clear(ly) and
conspicuous(ly)’’ as imposing
‘‘prescriptive visual and audio
disclosure[s] . . . that may not cleanly
map onto all advertising mediums’’ and
argued that a business’s compliance
obligations may not be clear if the
business relies on advertising mediums
not mentioned in the definition. 195 The
commenter urged the Commission to
allow for sufficient flexibility ‘‘to better
accommodate current and future
advertising mediums that may not allow
for the contemplated disclosures,’’ in
particular to make it easier for small
businesses to comply with the rule.196
The commenter did not provide any
examples of advertising media that
would make it difficult to comply with
the rule and did not suggest alternative
language. Similarly, a commenter
representing app-based delivery
platforms noted the limited space for
disclosures on delivery platforms and
asserted that the rule lacked clarity as to
how such platforms should comply. 197
The Commission believes that the
definition of ‘‘clear(ly) and
conspicuous(ly)’’ provides basic,
common-sense, and flexible principles
to address current and future
advertising media. For example, the
definition requires that visual
disclosures be in a size and font that
consumers will easily notice and not be
obscured by other text and that audible
disclosures be at a volume, speed, and
cadence that consumers will easily
understand. In keeping with
longstanding Commission interpretation
and guidance, the definition does not
mandate specific fonts, text-size, or
volume, or otherwise impose a one-size-
fits-all approach. Instead, it provides
substantial flexibility to businesses in
meeting the rule’s disclosure
requirements so long as consumers take
away an accurate understanding of the
disclosure. The Commission has
published multiple resources to assist
businesses in ensuring that disclosures
are clear and conspicuous, including a
guide specifically geared toward digital
and mobile advertising.198
4. Covered Good or Service
In the NPRM, the Commission
solicited comment on whether it should
narrow the businesses covered by the
rule to particular industries or to
covered businesses, and if so, how to
define covered businesses. 199 The final
rule includes a definition for ‘‘covered
good or service’’ to include: (1) Live-
event tickets; or (2) Short-term lodging,
including temporary sleeping
accommodations at a hotel, motel, inn,
short-term rental, vacation rental or
other place of lodging. Under § 464.2(a),
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200 FTC–2023–0064–2887 (Progressive Policy
Institute).
201 FTC–2023–0064–1519 (NYC Consumer and
Worker Protection argued that ‘‘[c]onsumers
deserve every business to be transparent and fair
about prices.’’); FTC–2023–0064 (Berkeley Law
stated that ‘‘[r]estricting the Rule to particular
industries would exclude some of the most critical
sectors that low-income people especially rely on,’’
including ‘‘the rental housing market, tax
preparation services, payday lenders, and gift card
merchants’’); FTC–2023–0064–3282 (NCLC
highlighted hidden or deceptive fees in ‘‘businesses
that offer credit, lease, or savings products’’)
202 See, e.g., FTC–2023–0064–3160 (Consumer
Federation of America et al.); FTC–2023–0064–3270
(Consumer Federation of America, National
Consumer Law Center, National Association of
Consumer Advocates); see also FTC–2023–0064–
2853 (Performance Auto Inc., an individual car
dealership, supported application of the rule to car
dealers.).
203 See, e.g., FTC–2023–0064–1939 (Tzedek DC).
204 See, e.g., FTC–2023–0064–3160 (Consumer
Federation of America et al.); FTC–2023–0064–3275
(Berkeley Center for Consumer Law & Economic
Justice et al.); see also FTC–2023–0064–0199 (‘‘I
don’t understand why I have to pay to have my
credit card bill mailed to me . . . .’’); FTC–2023–
0064–0258 (‘‘I checked our account and discovered
that they had charged $10.00 for maintenance
fees.’’); FTC–2023–0064–0418 (‘‘Even credit unions
are charging insane fees it is bleeding us dry if we
are broke already why are we getting hit with fees
for being poor’’); FTC–2023–0064–0396 (‘‘My son is
on SSI, and his bank charges him fees when his
account goes below $100! . . . How does this make
sense? Banks should not have fees like this. It [is]
penalizing the poorest people!’’); FTC–2023–0064–
0425 (‘‘What bothers me is that my bank charges me
$35 for every overdraft!! I find that excessive! It’s
a lot of money, especially when you don’t have
enough in the first place. It’s like being punished
for being poor.’’); FTC–2023–0064–0762 (‘‘We have
and continue to pay unnecessary costs for services
especially personal loans and credit card debt. This
makes payments for these loans much more of a
hardship than the initial being in need of the card
or loans was in the first place.’’).
205 See, e.g., FTC–2023–0064–3248 (DC Jobs With
Justice on behalf of Fair Price, Fair Wage Coalition
encouraged the Commission to maintain an
industry-neutral rule applicable to the restaurant
industry); FTC–2023–0064–2885 (AARP
commented that many consumers ‘‘feel deceived
when faced with an unexpected mandatory charge,’’
such as ‘‘service fees,’’ ‘‘living wage fees,’’ or
‘‘kitchen fees,’’ and ‘‘would prefer these costs be
incorporated into the price of food so that they
better understand restaurants’ costs upfront.’’);
FTC–2023–0064–0103 (Individual Commenter
stated: ‘‘[R]estaurants are adding surcharges [for]
providing health insurance, or to make sure that
kitchen crew receives a tip. But these are existing
operating costs that can and should be factored into
the price. . . . On at least a couple occasions, the
add-on fee wasn’t even disclosed until the check.’’);
FTC–2023–0064–0119 (Individual Commenter
stated: ‘‘Fees of approximately 5–20% are often
added to restaurant bills. . . . They are often
written in small font in inconspicuous places on the
menu or past blank space on websites. It’s often
unclear where these additional fees are going and
should be simply incorporated into the menu
prices.’’); FTC–2023–0064–0120 (Individual
Commenter stated: ‘‘Now restaurants are adding
service fees instead of increasing food price. I want
to buy goods and services, I want to know the full
price, with all the extra fees and taxes before, not
after selecting a goods or service.’’); FTC–2023–
0064–0152) (Individual Commenter stated:
‘‘Tipping since covid is crazy now too—and now
these add on fees appear to be creeping into
restaurants. A local pizza restaurant added a 20%
‘gratuity fee’ on the bill—this was not a tip but an
additional charge for ‘business costs’ and does not
go to employees.’’); FTC–2023–0064–0065
(Individual Commenter stated: ‘‘A number of
restaurants here in Chicago are now adding
surcharges that are only disclosed after you get the
check, or they are disclosed in small print on the
menu, which effectively makes the prices displayed
on the menu deceptive.’’); FTC–2023–0064–0052
(Individual Commenter stated: ‘‘Small businesses,
particularly restaurants, have grown their use of the
type of non-transparent pricing practices that this
rule aims to address . . ., such as the inclusion in
bills of various fees that cannot be avoided (and that
therefore should be part of the total price)’’).
206 See, e.g., FTC–2026–0064–1303 (Individual
Commenter stated: ‘‘Just last night I tried to buy
movie tickets (from the movie theater’s own app no
less!) but the fees added 25% more to the cost of
the ticket! Ten dollars in fees on an app that the
big movie chain runs on its own!’’); FTC–2023–
0064–1469 (Individual Commenter stated: ‘‘I’m sick
of paying for ‘convenience fees’ when purchasing
tickets online (to live events and even the local
movie theater), even though there is no other way
to purchase them.’’); see also FTC–2023–0064–3104
(Truth in Advertising, Inc.) (highlighting class
action lawsuits alleging failure to disclose the total
cost of movie ticket prices, inclusive of fees, in
violation of New York State law).
207 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.).
208 See, e.g., FTC–2023–0064–3191 (Community
Catalyst et al.).
209 FTC–2023–0064–2888 (Housing Policy Clinic,
University of Texas School of Law stated, ‘‘it is
essential for the rule to cover the rental housing
industry in order to mitigate the harmful impacts
of unfair and deceptive fees on renters.’’); FTC–
2023–0064–2858 (U.S. House of Representatives,
Rep. Maxwell Alejandro Frost, Rep. Jimmy Gomez,
Rep. Barbara Lee, Rep. Rashida Tlaib, Rep. Kevin
Mullin, Rep. Dwight Evans, Rep. Judy Chu, Rep.
Greg Casar, Rep. Dan Goldman, and Rep. Salud
Carbajal encouraged an industry-neutral rule but
urged the Commission at minimum to include live-
event ticketing, short-term lodging, and the rental
housing industries in the final rule.); FTC–2023–
0064–3275 (Berkeley Center for Consumer Law &
Economic Justice et al. commented that:
‘‘Exempting landlords from the Rule as other
commenters have proposed would deprive the
Commission of a critical tool to challenge purveyors
of junk fees charged in connection with a basic
necessity of life, one that is disproportionately
relevant to low-income consumers.’’).
210 See, e.g., FTC–2023–0064–3218 (National
Consumer Law Center collected consumer
comments highlighting: ‘‘a ‘technology fee’
addendum that adds 1% fee of total rent on top of
rental cost’’; ‘‘an extra $255 in mandatory fees, for
services I don’t even want’’; and ‘‘water, sewer, and
garbage fees would be charged over and above the
base rent we agreed to . . . [that] could add as
much as $250 extra per month to our rent.’’); FTC–
2023–0064–3271 (U.S. Senator Amy Klobuchar
commented discussing a hearing conducted
concerning rental housing competition and noting
that: ‘‘[R]enters are often hit with numerous junk
fees that are only disclosed to them when signing
a lease—frequently after the renter has already
given notice to end a prior lease. . . . As a result,
renters struggle to meaningfully compare the cost of
various housing options.’’); FTC–2023–0064–2888
(Housing Policy Clinic, University of Texas School
of Law commented: ‘‘This lack of transparency robs
tenants of their opportunity to fairly participate in
comparison shopping in the rental housing market
and can seriously disrupt their financial well-being
and housing stability.’’); FTC–2023–0064–3218
(National Consumer Law Center commented: ‘‘With
respect to the rental housing market, the proposed
rule would benefit consumers and competition. By
requiring disclosure of the actual cost of an
apartment, the rule would help renters to
comparison shop and enable them to find housing
that fits their budget.’’); FTC–2023–0064–3225 (CED
Law described undisclosed fees experienced by its
clients and stated: ‘‘Up front disclosure of all
mandatory fees and accurate representation of all
fees charged would go a long way towards ensuring
low income renters like those we represent in
Colorado understand what their monthly housing
Continued
the final rule requires businesses that
offer, display, or advertise any price of
a covered good or service to clearly and
conspicuously disclose the total price.
In addition, § 464.3 of the final rule
prohibits businesses that offer, display,
or advertise a covered good or service
from misrepresenting any fees or
charges.
The Commission received comments
encouraging it to adopt an industry-
neutral rule and urging it not to limit
the rule’s application to particular
industries, as well as comments
conversely urging it to limit the rule to
live-event ticketing and short-term
lodging industries. One advocacy group
argued that narrowing application of the
final rule to a subset of industries would
‘‘create an unlevel playing field’’ and
alter competitive incentives. 200 Other
commenters argued that hidden or
deceptive fees are present across
industries and often impact vulnerable
populations.201 Several commenters did
not specifically address the
Commission’s question regarding
whether to add a definition of ‘‘covered
business’’ or how to define ‘‘covered
business,’’ but instead submitted
comments highlighting unfair and
deceptive pricing practices in certain
industries, and encouraging the
Commission to adopt a final rule
applicable to those industries. Those
included comments concerning the
motor vehicle industry; 202 delivery
applications; 203 the financial services
industry; 204 the restaurant industry; 205
the movie theater industry; 206 tax
preparation services; 207 and the health
care industry.208
Several commenters specifically
urged the Commission to ensure that the
rental housing industry would be
subject to the final rule, including in
any definition of ‘‘covered business,’’ to
mitigate unfair or deceptive fees
imposed on renters.209 The Commission
also received numerous comments from
individual consumers, consumer and
policy organizations, elected officials,
legal service providers, and housing
advocates highlighting unfair and
deceptive fees in the rental housing
industry.210 Conversely, advocates from
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expenses will be before being locked into a lease
agreement.’’); FTC–2023–0064–0146 (Individual
Commenter stated they pay fees including for trash,
electricity, and ‘‘some other junk fees’’ and argued
that rental providers ‘‘should be forced to disclose
all fees before lease signing and never be able to add
fees after the lease has been signed.’’); FTC–2023–
0064–0157 (Individual Commenter highlighted
mandatory added fees and charges not disclosed in
listed rental prices and stated: ‘‘Landlords should
not be allowed to force tenants into paying these
fees with no opt out or if the fees are allowed, then
the landlord must add that to the total monthly rent
in advertisements so prospective tenants have an
accurate scope of what the real monthly costs are.’’);
FTC–2023–0064–0229 (Individual Commenter
described an apartment company with fees:
‘‘[I]ncluding a $20 mos. fee for package delivery. It’s
a mandatory add-on. Many people do not get
packages. Including myself.’’); FTC–2023–0064–
0923 (Individual Commenter stated their rental
‘‘requires a number of fixed, non-negotiable
mandatory fees. . . . In my opinion, these fees
allow the company to advertise a lower monthly
rental rate, intentionally making it difficult for a
prospective tenant to comparison shop and
compare rents from different organizations.’’).
211 See, e.g., FTC–2023–0064–3172 (New Jersey
Apartment Association supported the rule’s
inclusion of a definition of Covered Business and
asked that rental housing providers be excluded
from the scope of Covered Business); see also FTC–
2023–0064–3133 (National Multifamily Housing
Council and National Apartment Association).
212 FTC–2023–0064–3289 (Zillow Group).
213 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–2891 (Mary
Sullivan, George Washington University, Regulatory
Studies Center); FTC–2023–0064–3233 (NCTA—
The internet & Television Association); see also
FTC–2023–0064–3300 (National Restaurant
Association urged the Commission to exclude small
restaurants from a definition of ‘‘Covered
Business’’).
214 FTC–2023–0064–3127 (U.S. Chamber of
Commerce).
215 FTC–2023–0064–2891 (Mary Sullivan, George
Washington University, Regulatory Studies Center
also stated that a rule focused on the short-term
lodging and live-event ticketing industries would
‘‘increase the chance of [the rule’s] success’’ and
provide well-defined limits for those Covered
Businesses.)
216 See, e.g., FTC–2023–0064–3212 (TickPick,
LLC stated that it ‘‘supports the Commission using
its authority under Section 18 of the FTC Act to
address unfair and deceptive acts or practices
involving hidden and misleading fees.’’); FTC–
2023–0064–3266 (StubHub, Inc. commented that it
‘‘strongly supports efforts to increase price
transparency for consumers nationwide with the
federal adoption of all-in pricing.’’); FTC–2023–
0064–3105 (Charleston Symphony commented:
‘‘[R]equiring sellers to disclose the total price
clearly and conspicuously[ ] addresses a pressing
issue. . . . Predatory practices in the secondary
ticket sales market pose a significant threat to
artists, venues, audiences, and the future of
nonprofit arts organizations, impacting the integrity
of the ticket-buying process and eroding audience
confidence.’’); FTC–2023–0064–3122 (Vivid Seats
stated that it ‘‘supports additional consumer
disclosures, including all-in pricing,’’ but the rule
should ‘‘apply equally across all parts of the live-
events ticketing industry,’’ so consumers can
compare prices and businesses that display total
prices will not be at a competitive disadvantage.);
FTC–2023–0064–3241 (National Association of
Ticket Brokers submitted a comment supporting all-
in pricing, but noting that it would only work if ‘‘(i)
it was required of every ticket seller and (ii) there
was rigorous and expeditious enforcement.’’); FTC–
2023–0064–3306 (Live Nation Entertainment and its
subsidiary Ticketmaster North America commented
that they ‘‘support[ ] a definition of all-in pricing
that requires the first price for a live-event ticket
shown to consumers to be the price ultimately
charged at checkout (exclusive of state and local
taxes and optional add-ons).’’); see also FTC–2023–
0064–3264 (Mark J. Perry, Ph.D., Professor Emeritus
of Economics at University of Michigan-Flint and
Senior Fellow Emeritus at the American Enterprise
Institute, ‘‘urge[d] the FTC to ensure that any rule
requiring all-in pricing in live events apply equally
to all market participants.’’). The Commission
addresses other comments and factual scenarios
raised by commenters concerning live-event
ticketing, including those concerning ticket service
fees, in section III.B.1.b.
217 FTC–2023–0064–3212 (TickPick, LLC).
218 FTC–2023–0064–3212 (StubHub).
219 FTC–2023–0064–3306 (Live Nation
Entertainment).
220 Id.
221 FTC–2023–0064–3106 (American Society of
Travel Advisors).
222 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
223 FTC–2023–0064–2886 (American Gaming
Association). As discussed in section II, bait-and-
switch pricing, including drip pricing, harms
consumers even when charges are subsequently
disclosed.
the rental housing industry urged the
Commission to exempt rental housing
providers from any definition of
‘‘covered business.’’ 211 A rental housing
advertising platform urged the
Commission to adopt a definition of
‘‘covered business’’ that excludes third-
party advertising platforms, arguing that
third-party platforms do not direct
pricing and ‘‘are not best positioned to
meet the requirements of the proposed
rule.’’ 212
On the other hand, the Commission
also received comments in support of a
narrow definition of ‘‘covered business’’
limited to the live-event ticketing and
short-term lodging industries, including
from members of those industries.213
The U.S. Chamber of Commerce
recommended limiting the definition of
covered businesses to ‘‘the live-event
ticketing and/or short-term lodging
industries,’’ arguing that unique aspects
of these markets, including a robust
secondary market for live-event tickets
and pressures on third-party lodging
intermediaries ‘‘to advertise the lowest
price to consumers to optimize search
outcomes,’’ have shaped FTC research
on all-in pricing and appropriate
remedies.214 One academic commenter
likewise recommended a definition of
‘‘covered business’’ limited to live-event
ticketing and short-term lodging, stating
that these industries have been subject
to extensive research showing ‘‘their use
of across-the-board drip pricing to be
harmful.’’ 215
Commenters from the live-event
ticketing industry supported a rule
applicable to their industry,
emphasizing that a total price
requirement will aid consumers and
businesses alike if applied across the
entire industry.216 For example,
TickPick, a secondary ticket
marketplace, commented that it already
provides consumers with all-in pricing
and supports ‘‘eliminating drip pricing
from the live-event ticketing industry,’’
arguing that ‘‘widespread use of hidden
and/or misleading fees harms
consumers and market competition.’’ 217
StubHub similarly commented that it
‘‘strongly supports efforts to increase
price transparency for consumers
nationwide with the federal adoption of
all-in pricing’’ in the live-event ticketing
industry. According to StubHub, in
2014, it decided to display the all-in
price to consumers in the hopes of
encouraging the remainder of the
industry to follow suit; however, it ‘‘had
no choice but to revert to its former
pricing display,’’ which used dripped
fees, because other platforms continued
to rely on drip pricing, making
StubHub’s all-in prices appear higher
than other platforms.218 Live Nation and
its subsidiary, Ticketmaster North
America, likewise expressed concern
that, absent a nationwide rulemaking to
implement all-in pricing, ‘‘the current
market realities present barriers to
implementing all-in pricing,’’ because
adopting all-in pricing ‘‘absent a
mandate creates a first-mover
disadvantage.’’ 219 Live Nation stated
that the rule would ‘‘increase pricing
transparency for fans and support
competition in the ticketing
industry.’’ 220
The Commission also received
support from the representatives of the
short-term lodging industry for the
rule’s application to that industry. The
American Society of Travel Advisors
commented that ‘‘the rule as proposed
would greatly benefit consumers of
hotel and other short-term lodging
services’’ and applauded the proposed
rule’s prohibition on misleading fees.221
The American Hotel & Lodging
Association also expressed support for
implementation of clear total price
requirements and encouraged the
Commission to ‘‘ensure that any final
rule it promulgates . . . apply broadly
to all industry participants,’’ including
intermediaries such as online travel
agencies, short-term rental platforms,
and metasearch sites.222 The American
Gaming Association, a trade group
representing the casino industry,
contended that fees are adequately
disclosed and provide value to
consumers, but stated that, if applied to
the lodging industry, the rule should be
applied ‘‘equitably across the
industry. . . . including search engines,
online travel agencies, and other third-
party vendors.’’ 223
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224 See, e.g., FTC–2023–0064–3212 (TickPick,
LLC); FTC–2023–0064–3106 (American Society of
Travel Advisors).
225 See, e.g., FTC–2023–0064–2886 (American
Gaming Association); FTC–2023–0064–3106
(American Society of Travel Advisors); FTC–2023–
0064–3266 (StubHub, Inc.); FTC–2023–0064–3264
(Mark J. Perry, Ph.D., Professor Emeritus of
Economics at University of Michigan-Flint and
Senior Fellow Emeritus at the American Enterprise
Institute); FTC–2023–0064–3162 (BBB National
Programs, Inc.); FTC–2023–0064–1000 (Individual
Commenter).
226 NPRM, 88 FR 77481, Question 14(a)(i)
(proposing to define Businesses in the live-event
ticketing as ‘‘any Business that makes live-event
ticketing available, directly or indirectly, to the
general public’’); Question 14(a)(ii) (proposing to
define Business in the short-term lodging industry
as ‘‘any Business that makes temporary sleeping
accommodations available, directly or indirectly, to
the general public’’).
227 FTC–2023–0064–3212 (TickPick, LLC).
228 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
229 FTC–2023–0064–3296 (Bay Area Apartment
Association).
230 FTC–2023–0064–3133 (National Multifamily
Housing Council and National Apartment
Association).
231 FTC–2023–0064–3290 (U.S. Public Interest
Research Group Education Fund).
As described in section II, the
Commission has determined, in its
discretion, to focus this final rule on the
live-event ticketing and short-term
lodging industries. The Commission
recognizes that substantial evidence
exists to support a finding of the
prevalence of bait-and-switch pricing
and misleading fees throughout the
economy; nevertheless, the Commission
elects to use its rulemaking authority
incrementally by first combatting these
unfair and deceptive practices in the
two industries in which the
Commission first began evaluating drip
pricing and that have a history of bait-
and-switch pricing tactics and
misleading fees. Indeed, commenters
representing the live-event ticket and
short-term lodging industries recognized
the need for the Commission’s
rulemaking and generally supported the
rule’s application to those industries.
As described in this section, the
Commission received comments
supporting a definition of ‘‘covered
business’’ that is limited to the live-
event ticketing and short-term lodging
industries. 224 The Commission also
received comments emphasizing the
need for a level playing field among
businesses and allowing consumers to
comparison shop.225 For reasons
described herein, the final rule applies
to a defined set of covered goods or
services, rather than to covered
businesses. Because some businesses in
the live-event ticketing and short-term
lodging industries provide goods or
services outside of those industries, a
narrowing of the businesses covered by
the rule rather than a narrowing of the
goods or services covered by the rule,
might unintentionally create an uneven
playing field. As a result, the
Commission instead narrows the rule to
the defined covered goods and services
of live-event tickets and short-term
lodging. The Commission notes that the
rule also applies to ancillary goods or
services, defined as additional goods or
services offered to consumers as part of
the same transaction.
The NPRM also solicited comment as
to how to define businesses that offer
either live-event ticketing or short-term
lodging, if the final rule were narrowed
to covered businesses. 226 A third-party
ticketing marketplace commented that it
‘‘supports inclusion of the live-event
ticketing industry as a ‘covered
business’ and is comfortable with the
proposed definition of ‘businesses in the
live-event ticketing industry . . . .’ ’’ 227
The final rule’s inclusion of live-event
tickets in the definition of ‘‘covered
good or service’’ is consistent with the
proposed definition of covered business
in the NPRM.
With respect to the proposed
definition of the short-term lodging
industry, the American Hotel & Lodging
Association commented that the
Commission should define short-term
lodging as: ‘‘a hotel, motel, inn, short-
term rental, or other place of lodging
that advertises at a price that is a
nightly, hourly, or weekly rate.’’ 228 One
commenter representing the rental
housing industry expressed concern that
the proposed definition of short-term
lodging ‘‘could mean different things to
different people, and that could be
(mis)applied to rental housing
industry,’’ including, for example,
where an apartment community
provides temporary corporate housing
subject to the same leasing agreements
as longer-term tenants or where a
resident extends a lease agreement for a
few weeks or months.229 Conversely,
another commenter representing the
rental housing industry explained that
for rental housing, ‘‘the landlord-tenant
relationship involves an ongoing
contractual relationship, typically at
least a year-long commitment.’’ 230
The final rule incorporates portions of
the American Hotel & Lodging
Association’s suggested definition of
short-term lodging and the Commission
modifies the rule text proposed in the
NPRM to refer to hotels, motels, inns,
short-term rentals, vacation rentals, or
other places of lodging. The
Commission declines to limit the
definition of short-term lodging based
on the advertised payment period or
length of stay. In some instances, short-
term lodging may include home shares
and vacation rentals, such as through
platforms like Airbnb or VRBO, that
offer short-term rental accommodations
for durations as long as several months.
The Commission clarifies that, with the
addition of a definition for ‘‘covered
good or service,’’ it does not intend to
cover rental housing providers at this
time. When a rental housing provider
offers a short-term extension on a lease,
the extension typically would not be
considered short-term lodging under the
rule. Similarly, an apartment
community that offers temporary
corporate housing subject to the same
conditions as its long-term leases
typically would not be considered short-
term lodging under the rule. On the
other hand, a hotel that offers
discounted extended stays typically
would be considered short-term lodging
under the rule. Whether any particular
good or service is short-term lodging
within the rule’s definition of ‘‘covered
good or service’’ will depend on the
specific factual circumstances. In
addition, the Commission may provide
additional business guidance to address
nuanced pricing scenarios that may
arise.
5. Government Charges
Proposed § 464.1(d) in the NPRM
defined ‘‘government charges’’ as ‘‘all
fees or charges imposed on consumers
by a Federal, State, or local government
agency, unit, or department,’’ and
specified that government charges did
not encompass fees or charges that the
government imposes on a business and
that a business chooses to pass on to
consumers. The proposed rule
permitted businesses to exclude
government charges from total price.
The Commission received comments
supporting and critiquing the proposed
rule’s treatment of government charges.
Final § 464.1 adopts this provision with
minor modifications to add ‘‘Tribal’’
fees and charges and to clarify that the
definition of ‘‘government charges’’
includes ‘‘the fees or charges imposed
on the transaction by a Federal, State,
Tribal, or local government agency, unit,
or department.’’
One consumer group supported the
NPRM’s exclusion of fees or charges that
businesses choose to pass onto
consumers from the definition of
‘‘government charges’’ (thus requiring
their inclusion in total price), and
expressed concern that businesses may
inflate such fees to pad profits, rather
than accurately reflect amounts paid in
fees or charges to the government.231
Two academic commenters similarly
supported the distinction between fees
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232 FTC–2023–0064–1467 (Richard J. Peltz-Steele,
Chancellor Professor, University of Massachusetts
Law School); FTC–2023–0064–1294 (James J. Angel,
Ph.D., CFP, CFA, Professor, Georgetown University,
McDonough School of Business).
233 FTC–2023–0064–3126 (Tax Foundation stated:
‘‘In several states, at least including Alabama,
Arizona, Hawaii, and New Mexico, and possibly
California, the state sales tax would not meet the
Rule’s definition of a government charge, since its
legal incidence (per statute, regulation, or court
determination) is on the seller.’’); FTC–2023–0064–
3258 (National Taxpayers Union Foundation
commented: ‘‘Arizona, California, Hawaii, and New
Mexico structure their sales taxes as taxes on the
business, as measured by its gross receipts.’’).
234 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–3258 (National
Taxpayers Union Foundation stated, ‘‘[n]early all
states with sales tax prohibit retailers from
including sales taxes, including taxes collected
from both suppliers and consumers, in the sales
price,’’ and cited to states including Alabama,
Florida, Georgia, Indiana, Maryland, Massachusetts,
Oklahoma, Pennsylvania, and others.); FTC–2023–
0064–3126 (Tax Foundation stated, ‘‘many states
prohibit sales tax-inclusive pricing,’’ highlighting
Alabama as a State in which the legal incidence of
sales tax on the seller may ‘‘obligate a vendor, per
the proposed Rule, to list the sales tax-inclusive
price if selling to an Alabama resident—which not
only presupposes advance knowledge of the
consumer’s location, but forces the vendor to
disregard Alabama’s requirement that the list price
not include sales tax.’’).
235 FTC–2023–0064–3258 (National Taxpayers
Union Foundation).
236 Id.
237 See, e.g., FTC–2023–0064–3100 (Civitas
Advisors, Inc.); FTC–2023–0064–3217 (Bowling
Proprietors’ Association of America); FTC–2023–
0064–3127 (U.S. Chamber of Commerce); FTC–
2023–0064–3233 (NCTA—The internet & Television
Association).
238 FTC–2023–0064–3234 (CTIA—The Wireless
Association).
239 See, e.g., id.; FTC–2023–0064–3217 (Bowling
Proprietors’ Association of America); FTC–2023–
0064–3295 (USTelecom—The Broadband
Association).
240 FTC–2023–0064–3233 (NCTA—The internet &
Television Association); FTC–2023–0064–3127
(U.S. Chamber of Commerce).
241 FTC–2023–0064–3204 (Expedia Group).
242 FTC–2023–0064–3120 (Arizona Indian
Gaming Association).
or charges imposed on consumers and
those that a business chooses to pass
onto consumers, stating that the latter
should be incorporated into total price
to avoid creating a loophole that would
undermine the rule.232
On the other hand, the Commission
received several comments expressing
concern over the NPRM’s definition of
‘‘government charges’’ as including only
those charges ‘‘imposed on consumers.’’
Two commenters argued that the
proposed definition failed to consider
nuances in tax law across States and
localities. They pointed out, for
example, that several State laws
formally impose sales tax on businesses,
rather than on consumers. 233 Under the
proposed definition, sales tax in those
States would need to be included in
total price, while sales tax in other
States could be excluded from total
price. These and other commenters also
noted that many States prohibit the
inclusion of sales tax in total price,
which would result in direct conflict
between the proposed rule and State
laws that formally impose sales tax on
businesses. 234 Relatedly, one tax policy
organization noted variation in how
State laws treat hotel occupancy taxes,
with most State laws defining hotel
occupancy taxes as imposed on the
hotel operator and just six States
defining hotel occupancy taxes as
imposed on the consumer. Under the
proposed definition of ‘‘government
charges,’’ the commenter stated, hotel
operators in all but six States would be
required to include occupancy taxes in
total price.235 As such, these
commenters argued that the proposed
definition is unworkable and noted that
businesses will spend considerable time
and resources in understanding the legal
incidence of Federal, State, and local
taxes. 236
Industry groups also urged the
Commission to modify the definition of
‘‘government charges’’ to include
charges and fees that the government
expressly permits, and sometimes
requires, businesses to pass through to
consumers. 237 One commenter noted
that businesses may be required to
‘‘unfairly absorb’’ the cost of these
government charges.238 Commenters
also expressed concern that
incorporating pass-through taxes that
consumers understand and have come
to expect into total price would obscure
government fees, resulting in less
pricing transparency, because
consumers will not understand that the
additional costs stem from the
imposition of government fees. 239
Relatedly, two industry groups argued
that consumers should be made aware
through transparent pricing that
additional costs stem from government
taxes and fees, rather than requiring
businesses to include them in total
price. 240
After considering the comments, the
Commission modifies the definition of
‘‘government charges’’ from those fees
or charges ‘‘imposed on consumers’’ to
those ‘‘imposed on the transaction.’’ As
such, it eliminates the potential
distinction between fees and charges for
the transaction a government imposes
directly on consumers and those
imposed on businesses. Businesses may
not exclude from total price fees and
charges that are wholly distinct from the
relevant transaction, such as a
proportional share of a business’s
income or property taxes, because they
would not be government charges that
were ‘‘imposed on the transaction by a
Federal, State, Tribal, or local
government agency, unit, or
department.’’
An online travel agency submitted a
comment identifying concerns about a
potential conflict between the definition
of ‘‘government charges’’ and DOT’s
Full Fare Advertising Rule, 14 CFR
399.84, which requires tax-inclusive
pricing for certain travel products,
including airline tickets and bundled
vacation packages (e.g., airline tickets
and hotel stays purchased together).241
Specifically, the commenter asserted
that the final rule should require that
hotels and short-term lodging providers
incorporate government charges into
total price because, otherwise,
consumers shopping for bundled
vacation packages—which are subject to
the Full Fare Advertising Rule—could
see different prices from consumers who
shop separately for flights and lodging.
The commenter also argued that the rule
should require that taxes and
government-imposed fees be included
in advertised lodging prices, consistent
with DOT’s Full Fare Advertising Rule.
The Commission declines to require
only short-term lodging providers, as
opposed to live-event ticket sellers and
other businesses covered by the rule, to
incorporate government charges into
total price. However, the Commission
notes that while the final rule provides
that businesses ‘‘may’’ exclude
government charges from total price,
nothing in the rule prevents businesses
from advertising prices inclusive of
those charges, as required by DOT’s Full
Fare Advertising Rule.
Finally, an industry group
representing certain Federally
recognized Arizona Indian Tribes that
operate gaming entities urged the
Commission to include fees or charges
imposed on consumers by ‘‘tribal’’
agencies, units, or departments in the
definition of ‘‘government charges,’’ to
recognize taxes or fees that Tribes might
impose.242 The Commission agrees and
adds the word ‘‘Tribal’’ to the definition
of ‘‘government charges’’ to clarify that
businesses may exclude from total price
fees or charges imposed on a transaction
by a Tribal government.
The Commission notes that the
modifications in the final rule to the
definition of ‘‘government charges’’
represent a narrowing of the final rule.
businesses must still make the
disclosures required by § 464.2(c) in
connection with government charges
and are prohibited by § 464.3 from
misrepresenting the nature, purpose,
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243 FTC–2023–0064–1425 (Iowa Bankers
Association argued that the definition of ‘‘Pricing
Information’’ is inappropriate for ‘‘standard bank
products’’ and products earning interest).
244 FTC–2023–0064–3267 (National Retail
Federation).
245 Id.; FTC–2023–0064–2901 (E-Merchants Trade
Council).
246 FTC–2023–0064–3266 (StubHub, Inc.).
247 Id.
248 See, e.g., FTC–2023–0064–3263 (Flex
Association); FTC–2023–0064–3137 (Chamber of
Progress); FTC–2023–0064–3186 (National LGBT
Chamber of Commerce and National Asian/Pacific
Islander American Chamber of Commerce &
Entrepreneurship); FTC–2023–0064–3238 (Gibson,
Dunn & Crutcher LLP); FTC–2023–0064–3267
(National Retail Federation).
249 See, e.g., FTC–2023–0064–3146 (Institute for
Policy Integrity, New York University School of
Law); FTC–2023–0064–1294 (James J. Angel, Ph.D.,
CFP, CFA, Professor, Georgetown University,
McDonough School of Business).
250 FTC–2023–0064–3146 (Institute for Policy
Integrity, New York University School of Law);
FTC–2023–0064–1294 (James J. Angel, Ph.D., CFP,
CFA, Professor, Georgetown University,
McDonough School of Business); FTC–2023–0064–
3267 (National Retail Federation).
amount, or refundability of government
charges.
6. Pricing Information
Proposed § 464.1(e) in the NPRM
defined ‘‘pricing information’’ as ‘‘any
information relating to any amount a
consumer may pay.’’ The final rule
references pricing information in one
provision: § 464.2(b). As discussed in
section III.B.2, final § 464.2(b) is limited
to covered goods or services and
requires that, in any offer, display, or
advertisement that represents any price
of a covered good or service, a business
disclose the total price more
prominently than any other pricing
information. However, where the final
amount of payment for the transaction
is displayed, the final amount of
payment must be disclosed more
prominently than, or as prominently as,
the total price.
A commenter from the financial
services industry asserted that the
proposed definition of ‘‘pricing
information’’ would be inappropriate for
‘‘standard bank products, such as
checking, savings, CDs, consumer loans,
etc.’’ and failed to address the treatment
of interest rates for products and
services governed by existing financial
regulations. 243 The commenter’s
concerns about the definition of
‘‘pricing information’’ are inapplicable
because the final rule, including
§ 464.2(b), is limited to covered goods or
services. Accordingly, the final rule
adopts the proposed definition of
‘‘pricing information’’ at § 464.1 without
modification.
7. Shipping Charges
Proposed § 464.1(f) in the NPRM
defined ‘‘shipping charges’’ as ‘‘the fees
or charges that reasonably reflect the
amount a business incurs to send
physical goods to a consumer through
the mail, including private mail
services.’’ The NPRM made clear that
businesses are not permitted to
artificially inflate the cost of shipping,
and, instead, shipping charges must
reasonably reflect the cost incurred to
send goods to consumers. Final § 464.1
adopts the proposed definition of
‘‘shipping charges,’’ with a minor
modification to clarify that shipping
charges incurred through private mail
and shipping services such as FedEx
and UPS, or by freight, fall within the
definition.
One trade association raised
numerous concerns about the proposed
definition of ‘‘shipping charges.’’ First,
the commenter argued that the proposed
definition fails to consider the
unpredictability of shipping fees, noting
that precise costs are difficult for
retailers to determine because shipping
costs are frequently based on quotes or
estimates subject to change based on the
carrier.244 The commenter noted that
businesses may face challenges using
certain shipping methods, including
consolidating shipment of multiple
orders or using rail service for partial
shipment, which it argued can be
particularly difficult to predict. Second,
the commenter asked that the
Commission modify the definition of
‘‘shipping charges’’ to explicitly permit
the use of flat rate shipping, explaining
that many businesses have existing
agreements with major freight carriers to
provide flat rate shipping. For example,
the commenter asked whether the use of
flat rate shipping charges would be
considered unlawful if the business
shipped a small, lightweight item for
which the actual shipping costs are less
than the flat rate to ship. Finally, the
commenter argued that the use of the
phrase ‘‘reasonably reflect’’ in the
definition is ambiguous and asked that
the Commission clarify whether the
definition includes a scienter
requirement. Two commenters also
asserted that the rule would ‘‘force’’
businesses to disclose proprietary
shipping calculations in a threat to free
market competition.245
The Commission’s use of the phrase
‘‘reasonably reflect’’ is intended to allow
for flexibility in determining shipping
costs. The Commission recognizes that
precise shipping costs may not be
knowable until the end of a transaction,
and, for that reason, the final rule
permits businesses to exclude shipping
charges from total price. The rule does
not require that the cost of shipping
reflect an exact certainty. Moreover, the
rule does not require businesses to
disclose proprietary information
pertaining to relationships with freight
or shipping providers because the rule
does not require that shipping charges
be excluded from total price; instead,
the rule permits businesses to exclude
shipping charges from total price if they
choose. The final rule does not prohibit
businesses from incorporating the cost
of shipping into total price and thereby
providing shipping to consumers at no
additional charge. Nor does the final
rule prohibit the use of flat rate shipping
or shipping costs based on national
averages. Instead, the language is
intended to prevent businesses from
inappropriately excluding from total
price costs unrelated to shipping.
One live-event ticket platform
supported the proposed rule’s exclusion
of certain shipping costs from total
price, noting that the cost to ship
physical tickets may vary based on
factors determined later in the
transaction, such as the location of the
buyer.246 The commenter also noted
that a variety of delivery and shipping
methods may be available to consumers
purchasing live-event tickets, some of
which may be mandatory and therefore
included in total price.247 The
Commission emphasizes that certain
fees do not fall within the definition of
‘‘shipping charges,’’ including online
‘‘convenience’’ or other fees charged, for
example, by online ticket agencies to
electronically ‘‘deliver’’ tickets or other
processing fees associated with certain
online purchases. The Commission
further notes that an online convenience
or other fee for electronic delivery of a
ticket should be included in total price
if a consumer cannot obtain the ticket as
part of the same transaction (i.e., online)
without incurring a fee. While the
Commission received comments raising
concerns about incorporating the cost of
delivery, as opposed to shipping, into
total price, 248 the Commission is not
aware of any evidence that such
concerns would apply to sales of live-
event tickets or short-term lodging.
Finally, the Commission also received
a range of comments regarding handling
costs. Some commenters urged the
Commission to amend the definition of
‘‘shipping charges’’ to clarify that
internal handling costs do not constitute
shipping costs and therefore must be
included in total price. 249 The
comments related to handling costs
involving goods or services covered by
the broader proposed rule in the
NPRM. 250 While the Commission has
not received any evidence that the
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251 Although one commenter expressed concern
that businesses would use different terms for Total
Price, and thereby create confusion, the rule does
not mandate that Businesses use the term Total
Price. See FTC–2023–0064–3290 (U.S. Public
Interest Research Group Education Fund).
252 See, e.g., FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3134
(U.S. Department of Transportation, Federal Motor
Carrier Safety Administration); FTC–2023–0064–
3145 (Association of National Advertisers, Inc.).
253 See, e.g., FTC–2023–0064–2888 (Housing
Policy Clinic, University of Texas School of Law).
254 See, e.g., FTC–2023–0064–3267 (National
Retail Federation).
255 See, e.g., FTC–2023–0064–3160 (Consumer
Federation of America et al.); FTC–2023–0064–3258
(National Taxpayers Union Foundation); FTC–
2023–0064–3275 (Berkeley Center for Consumer
Law & Economic Justice et al.).
256 NPRM, 88 FR 77482, Question 19.
257 See, e.g., FTC–2023–0064–3134 (U.S.
Department of Transportation, Federal Motor
Carrier Safety Administration); FTC–2023–0064–
3160 (Consumer Federation of America et al.); FTC–
2023–0064–3196 (South Carolina Department of
Consumer Affairs); FTC–2023–0064–3248 (DC Jobs
With Justice on behalf of Fair Price, Fair Wage
Coalition); FTC–2023–0064–3146 (Institute for
Policy Integrity, New York University School of
Law).
258 See, e.g., FTC–2023–0064–3233 (NCTA—The
internet & Television Association); FTC–2023–
0064–3172 (New Jersey Apartment Association).
concerns raised in these comments
would impact covered goods or services,
the Commission clarifies that internal
handling costs must be included in total
price. The Commission does not believe
that a modification to the ‘‘shipping
charges’’ definition is necessary,
however, because the definition
specifically states that shipping charges
include only those costs that reasonably
reflect the cost to ‘‘send physical goods’’
to consumers. The Commission does not
believe that handling charges, like the
cost to store goods or labor costs
associated with preparing items for
shipment, reflect the costs to ‘‘send
physical goods’’ to consumers.
Accordingly, handling charges are not
shipping charges and must be included
in total price.
8. Total Price
Proposed § 464.1(g) in the NPRM
defined ‘‘total price’’ as ‘‘the maximum
total of all fees or charges a consumer
must pay for a good or service and any
mandatory ancillary good or service,
except that shipping charges and
government charges may be excluded.’’
Although some commenters stated that
the proposed definition was not flexible
enough to account for all pricing
models, the Commission believes the
modified definition of ‘‘total price’’ is
narrowly tailored to protect consumers
by addressing the identified unfair and
deceptive practice of hiding costs by
omitting mandatory fees from advertised
prices for covered goods or services.
Consumers must be able to purchase
and use goods or services at the
advertised total price.
Final § 464.1 differs from the
proposed definition of ‘‘total price’’ 251
to the extent the definitions of
‘‘government charges’’ and ‘‘shipping
charges,’’ as discussed in section III at
A.5 and A.7, are modified. In addition,
the Commission clarifies in final § 464.1
that businesses also may exclude from
total price any fees or charges for
optional ancillary goods or services.
Further, the Commission notes herein
that the rule does not directly address
concerns that fees imposed in
connection with covered goods or
services are ‘‘excessive’’; the rule does
not cap, ban, or prohibit the charging of
any fees, but requires certain disclosures
and prohibits misrepresentations to
prevent unfair or deceptive pricing
practices.
As detailed herein, the Commission
declines to accept commenters’
recommendations to define
‘‘mandatory,’’ to exclude ancillary goods
or services from the ‘‘total price’’
definition, to modify the ‘‘maximum
total’’ requirement, or to require the
inclusion of shipping charges and
government charges in total price.
However, the Commission clarifies in
final § 464.2(c) that businesses must
disclose the final amount of payment for
the transaction before a consumer
consents to pay.
(a) Mandatory Fees
Commenters noted that the rule does
not define ‘‘mandatory,’’ and expressed
concern about identifying mandatory
fees to be included in total price.252
Some commenters recommended that
the Commission clarify the distinction
between ‘‘core’’ goods and services and
ancillary goods or services,253 provide
guidance as to which ancillary goods or
services are mandatory, 254 and modify
the ‘‘total price’’ definition to exclude
the reference to mandatory ancillary
goods or services.255
The Commission has considered these
comments and declines to accept these
proposed modifications to the definition
of ‘‘total price.’’ The definition of ‘‘total
price’’ specifies that it includes the cost
of the goods and services being offered
and any mandatory ancillary goods or
services, subject to certain exceptions.
The Commission retains in the
definition of ‘‘total price’’ fees and
charges for ‘‘any mandatory ancillary
good or service’’ as necessary to protect
consumers from the identified unfair
and deceptive practice of hidden fees.
The Commission also declines to
modify the rule to add a definition of
‘‘mandatory fees.’’ The Commission
cannot identify in advance a definitive
list of mandatory fees because whether
a particular fee will be mandatory or
optional will depend on the specific
facts of an individual business
transaction, as described in section
III.A.1.
Ancillary goods or services can be
either optional or mandatory depending
on whether businesses require
consumers to purchase them or if they
are necessary to make the principal
goods or services fit for their intended
purpose. If businesses offer ancillary
goods or services and require consumers
to purchase them to complete
transactions for or to use the covered
goods or services being offered, the
ancillary goods or services are
mandatory and their cost must be
included in total price.
In the NPRM, the Commission sought
comment on whether it was clear that
the reference in the definition of ‘‘total
price’’ to ‘‘all fees or charges a consumer
must pay for a good or service and any
mandatory ancillary good or service’’
includes (1) all fees or charges that are
not reasonably avoidable and (2) all fees
or charges for goods or services that a
reasonable consumer would expect to be
included with the purchase.256
Commenters disagreed on whether the
rule text is clear that ‘‘total price’’
includes unavoidable fees and fees
based on consumer expectations, and
recommended clarifying the definition
of ‘‘total price’’ in this regard or adding
a definition of mandatory fees. 257 Other
commenters argued that the two types of
fees described are themselves vague and
unclear.258
Businesses should consider, in the
context of their specific business
practices, the Commission’s guidance
that mandatory fees include charges that
consumers cannot reasonably avoid and
charges for goods or services that a
reasonable consumer would expect to be
included with the purchase because
they are necessary to make primary
goods or services fit for their intended
purpose. The Commission reiterates the
guidance about total price that it
provided in the NPRM: It is well
established that it is deceptive to offer
goods or services that are not fit for the
purpose for which they are sold. By
offering goods or services, businesses
impliedly represent that the goods or
services are fit for their intended
purpose; reasonable consumers would
expect that, when they purchase a good
or service, they will be able to use it for
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259 NPRM, 88 FR 77432.
260 See, e.g., FTC–2023–0064–2891 (Mary
Sullivan, George Washington University, Regulatory
Studies Center, noted that ‘‘purely optional’’
subscription services, such ‘‘optional features that
are installed in automobiles, like satellite radio’’ are
‘‘not deceptive and unfair’’ but are instead efficient.
She further contended that the proposed rule lacks
specificity as to these types of ‘‘purely optional’’
services.)
261 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.);
FTC–2023–0064–3160 (Consumer Federation of
America et al.); FTC–2023–0064–3248 (DC Jobs
With Justice on behalf of Fair Price, Fair Wage
Coalition); FTC–2023–0064–0915 (Individual
Commenter noted that businesses may misrepresent
optional fees as mandatory and ‘‘[t]he consumer
may not realize they are optional when receiving a
bill and may not realize they can be removed.’’).
262 See discussion infra section III.C and note 349.
263 See, e.g., FTC–2023–0064–3293 (Travel
Technology Association); FTC–2023–0064–3233
(NCTA—The internet & Television Association).
264 See, e.g., FTC–2023–0064–3116
(Manufactured Housing Institute); FTC–2023–0064–
3172 (New Jersey Apartment Association); FTC–
2023–0064–3121 (National Independent
Automobile Dealers Association); FTC–2023–0064–
1425 (Iowa Bankers Association).
265 See, e.g., FTC–2023–0064–3289 (Zillow Group
stated that ‘‘rental housing market fees are distinct
from fees in other economic sectors’’ because they
are not charged in ‘‘click-to-purchase’’ transactions,
but involve an ‘‘interactive process’’ over a ‘‘much
longer period of time’’ and involved ‘‘written
agreements that include all relevant binding terms
and conditions, including the total price.’’); FTC–
2023–0064–3269 (IHRSA—The Health & Fitness
Association).
266 NPRM, 88 FR 77439.
267 See, e.g., FTC–2023–0064–3162 (BBB National
Programs, Inc. commented that the definition of
‘‘Total Price’’ does not specifically address ‘‘how
advertisers should disclose material limitations to
obtaining an advertised price.’’); FTC–2023–0064–
1294 (James J. Angel, Ph.D., CFP, CFA, Professor,
Georgetown University, McDonough School of
Business, commented that ‘‘[i]f there are any
restrictions, they must be as clear and conspicuous
as the price.’’).
268 See, e.g., supra note 111.
269 See, e.g., FTC–2023–0064–3293 (Travel
Technology Association ‘‘recommends that any
final rule refrain from imposing an obligation to
itemize mandatory fees.’’).
270 See, e.g., FTC–2023–0064–3173 (Center for
Individual Freedom); FTC–2023–0064–3137
(Chamber of Progress); FTC–2023–0064–3208
Continued
that purpose. 259 It is therefore deceptive
to advertise a total price for a primary
good or service that does not include
fees for additional purchases that are
necessary to render the primary good or
service fit for its intended purpose.
Further, businesses cannot treat
additional purchases that are necessary
to render covered goods or services fit
for their intended purpose as optional
and exclude the costs of these
additional purchases from total price.
For example, businesses cannot treat
credit card surcharges or processing fees
as optional and exclude them from total
price if they do not provide consumers
with other payment options. The rule
does not require, as some commenters
suggested, the inclusion of fees for truly
optional ancillary goods or services in
total price. 260 Nonetheless, such fees
and their nature, purpose, and amount
still must be clearly and conspicuously
disclosed before the consumer consents
to pay and cannot be misrepresented.
Commenters expressed the concern
that businesses could misrepresent
mandatory fees as optional, for example,
by including them by default in bills,
requiring consumers to opt out from
them, or using other deceptive practices,
and recommended that the Commission
include safeguards in the rule to prevent
these practices. 261 The Commission
determines that the rule adequately
protects consumers from the posited
scenarios without modification.
businesses cannot characterize fees as
optional and exclude them from total
price when businesses require
consumers to purchase the good or
service for which the fees are charged
and employ practices, such as default
billing or opt-out provisions, that
effectively take away consumers’ ability
to consent to the fees. For example, a
previously undisclosed resort fee that a
hotel discloses at check-in is not an
optional fee if the hotel will charge the
fee unless the guest challenges the fee.
Final § 464.3 prohibits misrepresenting
the nature, purpose, amount, and
refundability of fees, including
misrepresenting mandatory fees as
optional fees from which consumers
must opt out.262
Whether fees for ancillary goods or
services must be included in total price
will depend on the specific factual
circumstances. The inclusion of the
defined term ‘‘ancillary good or service’’
in the definition of ‘‘total price’’ clarifies
that total price includes ‘‘additional
good(s) or service(s) offered to a
consumer as part of the same
transaction.’’ Businesses cannot exclude
mandatory fees from total price simply
by characterizing them as not part of the
same transaction if, in fact, they are.
(b) Maximum Total
The rule provides that ‘‘total price’’ is
the ‘‘maximum total’’ of all mandatory
fees except identified permissible
exclusions. Some commenters objected
to defining ‘‘total price’’ as the
maximum total, arguing that it could
discourage advertising discounted rates
or misrepresent actual costs and
interfere with comparison shopping. 263
Other commenters suggested that the
reference to maximum total would
require businesses that enter into
continuous service contracts with
consumers (e.g., subscriptions) to
include in total price all mandatory fees
that might arise over the duration of a
contract, which they argued would be
difficult to determine at the time the
rule requires a total price disclosure.264
Some commenters argued that
continuous service contracts that reflect
negotiated transactions do not raise
‘‘bait and switch’’ concerns and that
total price is adequately disclosed in
such contracts. 265
The Commission has considered
comments relating to the ‘‘maximum
total’’ requirement and retains that
language in the definition of ‘‘total
price.’’ The Commission determines that
such language is necessary to protect
consumers from advertised total prices
that are deceptively lower than what
businesses actually charge. As the
Commission noted in the NPRM, ‘‘[t]he
use of the phrase ‘maximum total’
would allow businesses to apply
discounts and rebates after disclosing
total price.’’ 266 Since all businesses are
subject to the maximum total
requirement for covered goods or
services, the resulting level playing field
would allow for comparison shopping.
The Commission does not agree that
disclosures in contracts or agreements
adequately protect consumers from
deceptive advertising that omits
mandatory fees.
Commenters questioned how
businesses should handle conditions or
limitations on advertised prices.267
Businesses must comply with the rule
and other disclosure requirements,
including those related to material
conditions or limitations.268 Businesses
that advertise prices that are not
attainable by consumers because the
prices are conditioned on undisclosed
material conditions, restrictions, or
limitations may fail to disclose and
misrepresent total price.
(c) Itemization
The rule neither requires, nor
prohibits, the itemization of mandatory
fees that must be included in total price.
The Commission notes that final
§ 464.2(c) requires disclosure of the
nature, purpose, and amount of fees or
charges imposed on the transaction that
have been excluded from total price but
declines to modify the regulatory text
proposed in the NPRM to otherwise
require or prohibit the itemization of
fees.
Some commenters recommended that
the rule not require itemization.269
Other commenters stated that including
mandatory fees in total price would
obscure the nature and purpose of the
fees and provide less information to
consumers,270 while others
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(FreedomWorks); FTC–2023–0064–3263 (Flex
Association); FTC–2023–0064–3258 (National
Taxpayers Union Foundation).
271 See, e.g., FTC–2023–0064–3304 (Recording
Academy stated: ‘‘Price itemization is the only way
to ensure pricing is transparent and that all parties
involved in setting the ticket’s total price are held
accountable for what they charge.’’); FTC–2023–
0064–3230 (Future of Music Coalition); FTC–2023–
0064–3250 (National Independent Talent
Organization); FTC–2023–0064–3283 (National
Consumer Law Center, Prison Policy Initiative, and
advocate Stephen Raher stated that itemization is
necessary to clarify opaque charges in the context
of consumer correctional services.); FTC–2023–
0064–3290 (U.S. Public Interest Research Group
Education Fund).
272 See, e.g., FTC–2023–0064–3212 (TickPick,
LLC).
273 FTC–2023–0064–3195 (League of American
Orchestras et al.).
recommended that the rule require
itemization to provide more information
to consumers and to protect other
transaction participants by disclosing
where mandatory fees go.271 Other
commenters recommended that the rule
prohibit itemization because fees could
be arbitrary or invented by businesses
and itemizing them could misrepresent
their nature and purpose. 272
The Commission has considered the
comments and declines to require or
prohibit the itemization of mandatory
fees, except as provided by § 464.2(c).
Section 464.2 of the rule permits, but
does not require, itemization of the
components of total price, and therefore
allows businesses to break out
transaction inputs, consistent with laws
that require itemization. When
businesses choose to itemize mandatory
fees that are a part of total price or
itemize fees pursuant to § 464.2(c), total
price must be displayed more
prominently than itemized fees. Further,
§ 464.3 prohibits misrepresenting
itemized fees.
(d) Exclusions From Total Price
The definition of ‘‘total price’’ in final
§ 464.1 is modified from the proposed
definition to the extent that the
definitions of ‘‘government charges’’
and ‘‘shipping charges’’ are modified, as
discussed in section III at A.5 and A.7.
Finally, the definition of ‘‘total price’’
clarifies that businesses may exclude
fees or charges for optional ancillary
goods or services.
(e) Intersection With IRS Requirements
One commenter sought clarification
as to the intersection of the total price
requirements with Internal Revenue
Service (‘‘IRS’’) requirements regarding
charitable gifts. 273 The commenter
specifically highlighted a scenario in
which charitable contributions are made
concurrent with ticket sales. The
Commission is not aware of—and
indeed, the commenter did not cite to—
any specific conflict with the final rule.
Instead, the commenter asked about the
rule’s intersection with the IRS’s
Substantiation and Disclosure
Requirements. Based on the
Commission’s review, the IRS
Substantiation and Disclosure
Requirements pertain to substantiation
requirements for donors who contribute
to charitable organizations or causes,
and disclosure requirements for
charitable organizations that provide
goods or services to donors for certain
contributions. The Commission’s rule
has no bearing on, and does not change
or impact, any of these IRS
requirements. The commenter also
stated that ‘‘the concept of
‘refundability’’’ is ‘‘not common in
charitable giving.’’ As set forth in
section III.B.3, the Commission
eliminates the requirement that
businesses affirmatively disclose the
refundability of each fee or charge
imposed; however, § 464.3 still
prohibits businesses from
misrepresenting a fee’s refundability.
B. § 464.2 Hidden Fees Prohibited
Proposed § 464.2(a) and (b) in the
NPRM provided, respectively, that it
would be a violation of the rule for a
business to ‘‘offer, display, or advertise
an amount a consumer may pay without
clearly and conspicuously disclosing
total price’’ and that ‘‘[i]n any such
offer, display, or advertisement that
contains an amount a consumer may
pay, a business must display total price
more prominently than any other
pricing information.’’ As discussed
herein, final § 464.2 makes certain
modifications to proposed § 464.2(a)
and (b) and consolidates all provisions
related to disclosures by relocating
proposed § 464.3(b), with certain
modifications, to final § 464.2(c).
As discussed in section III.B.1 and
III.B.2, to address commenter concerns
that ‘‘an amount a consumer may pay’’
is vague and overbroad, the Commission
modifies final § 464.2(a) and (b) as
compared to the NPRM proposals to
focus their required disclosures on
offers, displays, or advertisements that
include ‘‘any price of a covered good or
service.’’ Final § 464.2(b) also clarifies
that, in any offer, display, or
advertisement that represents any price
of a covered good or service, total price
must be more prominent than other
pricing information, except if the final
amount of payment for a transaction is
displayed, the final amount of payment
must be more prominent than, or as
prominent as, total price.
As discussed in section III.B.3, the
Commission also consolidates all
provisions related to required
disclosures under § 464.2 of the rule
and, therefore, codifies proposed
§ 464.3(b) with certain modifications at
final § 464.2(c). Proposed § 464.3(b)
specified that businesses must disclose
clearly and conspicuously, and before
the consumer consents to pay, the
nature and purpose of any amount a
consumer may pay that is excluded
from total price. The Commission
clarifies that, in line with the narrower
scope of the rule, the trigger requiring
disclosures in final § 464.2(c) is ‘‘before
the consumer consents to pay for any
covered good or service.’’ As with final
§ 464.2(a) and (b), final § 464.2(c) also
eliminates the reference to ‘‘any amount
a consumer may pay’’ to narrow the
focus of the disclosures required by
§ 464.2(c)(1) to ‘‘any fee or charge
imposed on the transaction that has
been excluded from total price.’’
Final § 464.2(c) also differs from the
NPRM proposal in that it explicitly
requires disclosure of the amount,
nature, and purpose of any fees or
charges imposed on the transaction that
have been excluded from total price and
the identity of the good or service for
which the fees or charge is imposed, as
well as the final amount of payment for
the transaction. Importantly, to preserve
choice and control for businesses,
§ 464.2(c)’s disclosures with respect to
government charges and shipping
charges are only required if a business
elects to permissibly exclude such
charges from total price. Similarly,
§ 464.2(c)’s disclosures with respect to
fees for optional ancillary goods or
services are only required if the
consumer has elected to purchase such
goods or services as part of the same
transaction and the business has
excluded their fees from total price.
Nothing in the final rule requires a
business to disclose commercially
sensitive information regarding the
components of its total price.
The Commission discusses herein
changes to the text of the proposed
provisions and addresses substantive
comments about these provisions,
including how § 464.2 would apply to
specific pricing scenarios discussed in
the comment record.
1. § 464.2(a)
Proposed § 464.2(a) in the NPRM
provided that it would be a violation of
the rule for a business to ‘‘offer, display,
or advertise an amount a consumer may
pay without clearly and conspicuously
disclosing total price,’’ which was
defined in proposed § 464.1(g) as ‘‘the
maximum total of all fees or charges a
consumer must pay for a good or service
and any mandatory ancillary good or
service, except that shipping charges
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274 See, e.g., FTC–2023–0064–3206 (Motor
Vehicle Protection Products Association et al.
commented that proposed § 464.3, in referring to
any amount a consumer may pay, goes ‘‘far broader
than ‘fees’’’ and ‘‘the use of the verb ‘may’ suggests
that even offers of goods or services—or, frankly,
even goods or services that ‘may be’ available but
not actually offered—impermissibly and
imprudently stretches this section.’’).
275 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce stated that variable fees should be
excluded from Total Price because: fees that ‘‘vary
based on volume, transaction type, and region’’
cannot be assessed until consumers take some
action; requiring their inclusion in Total Price
‘‘could less efficiently spread costs, undermine
consumer choice, and eliminate price competition
on certain cost inputs’’; and ‘‘[t]he NPRM also
provides no reason to think that variable or
dynamic pricing is necessarily deceptive or unfair
across all industries and sectors of the economy.’’);
FTC–2023–0064–3137 (Chamber of Progress
expressed concern about the rule’s impact on
variable pricing models, including delivery
platforms, where ‘‘the prices for delivery or other
services increase as the size of the order increases,’’
which it asserts is ‘‘a more efficient way of
distributing costs than flat rates’’ and asserted it is
not clear how such platforms would comply with
the rule ‘‘without creating confusion for customers
or misrepresenting prices.’’); FTC–2023–0064–3173
(Center for Individual Freedom argued that:
‘‘Acknowledging the distinct roles and objectives of
both flat and variable fees in different industries is
crucial, and the proposed rule’s failure to recognize
the benefits of variable pricing structures, which
allow fees to scale based on the nature of the items
or services purchased, is a significant oversight.’’);
FTC–2023–0064–3258 (National Taxpayers Union
Foundation stated that under the rule, ‘‘it will be
nearly impossible for businesses using variable
prices to display the Total Price at all times,
because businesses are unable to predict
consumer’s choices.’’); FTC–2023–0064–3202
(TechNet urged the Commission to exclude from
Total Price ‘‘fees that are variable or unknowable,’’
such as in e-commerce marketplaces, or the rule
‘‘would complicate the communication of pricing in
situations where the ‘total price cannot practically
be determined’ in advance.’’); FTC–2023–0064–
3263 (Flex Association commented that app-based
delivery platforms could be ‘‘forced to change the
way they price entirely—moving from variable . . .
to static fees . . . that would not benefit
consumers’’); FTC–2023–0064–3238 (Gibson, Dunn
& Crutcher LLP commented that the proposed rule
failed to consider reliance on dynamic pricing that
depends on consumer choices throughout the
buying process).
276 See, e.g., FTC–2023–0064–3134 (U.S.
Department of Transportation, Federal Motor
Carrier Safety Administration recommended that
the rule prohibit ‘‘charging variable mandatory
ancillary fees if the full amount of such variable
fees cannot be calculated in the upfront price.’’);
FTC–2023–0064–3275 (Berkeley Center for
Consumer Law & Economic Justice et al. asserted
that concerns ‘‘that it is impossible to accurately
estimate all fees in advance of providing a complex
service’’ or fees dependent on consumer choice, are
‘‘easily resolvable with minimal effort and
creativity on the part of vendors.’’).
277 See, e.g., FTC–2023–0064–3233 (NCTA—The
internet & Television Association commented that
the definition of ‘‘Total Price’’ is ambiguous as ‘‘it
does not clearly address fees that are contingent on
later actions by particular consumers . . . such as
for unreturned equipment or late payment of the
consumer’s bill’’ and encouraged the Commission
to ‘‘resolve the ambiguity by, among other things,
making clear in the rule itself that contingent or
avoidable fees are to be excluded from the Total
Price.’’).
278 See, e.g., FTC–2023–0064–3195 (League of
American Orchestras et al. requested the
Commission’s ‘‘consideration for season-based and
flexible ticket packages in which multiple and
variable options are available to ticket-buyers, and
the total price will vary based on selection.’’).
and government charges may be
excluded.’’ In final § 464.2(a), the
Commission changes the reference to
‘‘an amount a consumer may pay’’ to the
more limited ‘‘any price of a covered
good or service.’’ Final § 464.2(a) also
further clarifies that businesses may
exclude from total price fees or charges
for any optional ancillary good or
service. The Commission makes these
modifications to address NPRM
comments and to clarify the rule. The
comments relating to the exclusion from
total price of charges for any optional
ancillary good or service, and the
Commission’s reasons for allowing these
exclusions, are discussed in section III
at A.1 and A.8.
Commenters argued that the reference
to ‘‘an amount a consumer may pay’’ in
proposed § 464.2(a) and in other
sections (i.e., proposed §§ 464.2(b) and
464.3(b)) was overbroad and that the
Commission failed to consider its
application to various pricing
scenarios. 274 In response to these
comments, the Commission finalizes
§ 464.2(a) with modification to limit the
total price disclosure requirement from
each time businesses ‘‘offer, display, or
advertise an amount a consumer may
pay’’ to only when they ‘‘offer, display,
or advertise any price of a covered good
or service.’’ The Commission also
provides guidance regarding the
application of § 464.2(a) to various types
of fees and pricing scenarios, including:
contingent fees; ticket service fees;
credit card surcharges; dynamic pricing
and national advertising; rebates,
bundled pricing, and discounts; and
online marketplaces in section III.B.1.a
through f.
(a) Contingent Fees
Under certain circumstances
discussed herein, total price can
exclude certain fees that businesses
cannot calculate in advance because
they necessarily are contingent on
consumer behavior or choice; unknown,
external factors; or pricing models that
include variable fees. The Commission
notes that whether certain contingent
fees cannot be calculated and are truly
unknown at the time the rule requires
disclosures may depend on the specific
factual circumstances. The Commission
is not persuaded by the comments to
change the rule as it applies to
contingent fees.
Certain commenters remarked that, in
some instances, businesses cannot quote
an all-inclusive price due to unknown
fees arising from consumer behavior and
choices during and after the purchasing
process; unknown, external factors; or
pricing models that have variable rates
such as hourly rates or rates based on
guest count and consumption. Indeed,
some commenters argued that the
Commission’s failure to recognize the
existence of variable marketplace fees is
a significant oversight of the proposed
rule.275 Other commenters observed that
concerns about variable marketplace
fees are overblown and stated that the
Commission should prohibit charging
such fees if the full amount of such fees
cannot be calculated in the upfront
price.276
The Commission finds that, to the
extent that certain fees are contingent on
later conduct or choices by a consumer
after purchase (e.g., pet fees, fees for late
payments, fees for property damage at a
rental accommodation, or smoking in a
non-smoking hotel room), these fees are
not mandatory for purposes of the
transaction, and as such, do not need to
be included in total price.277 The
Commission notes that fees that are
unavoidable by the consumer,
regardless of conduct or choices, are not
contingent. Ultimately, if a business
cannot ascertain whether certain fees or
charges apply until after concluding a
purchase or transaction, the business
need not include such fees or charges in
total price. Whether mandatory fees are
truly unknown due to reasons beyond a
business’s control will depend on
specific factual circumstances.
Businesses should include in total
price other fees that may vary
depending on a consumer’s choices
during the purchase process or
transaction as soon as consumers
provide the business with the
information needed to determine the
applicability or amount of those fees.
Indeed, some commenters discussed
different scenarios in which total price
depends on a consumer’s choices while
buying a good or service, such as season
and flexible ticket packages for the
arts.278 According to some commenters,
consumers expect fees arising from their
personal choices and customizations to
be disclosed only after providing
additional information to, or negotiating
with, sellers. Businesses can include in
their advertisements ‘‘starting at’’ or
base prices to deal with situations in
which ultimate price may depend on a
consumer’s selection of various
ticketing and lodging options, but only
if consumers can in fact obtain the
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279 In some instances, advertising prices as a base
or starting price can be deceptive, depending on the
relevant limiting or qualifying criteria. In such
instances, the material terms, conditions and
obligations upon which receipt and retention of the
base or starting price are contingent should be set
forth clearly and conspicuously at the outset of the
offer so as to leave no reasonable probability that
the terms of the offer might be misunderstood.
280 See, e.g., FTC–2023–0064–3266 (StubHub, Inc.
submitted a comment supporting nationwide all-in
pricing and including Total Price in every
advertisement to consumers and throughout the
transaction.); FTC–2023–0064–3105 (Charleston
Symphony commented: ‘‘[R]equiring sellers to
disclose the total price clearly and conspicuously[ ]
addresses a pressing issue. . . . Predatory practices
in the secondary ticket sales market pose a
significant threat to artists, venues, audiences, and
the future of nonprofit arts organizations, impacting
the integrity of the ticket-buying process and
eroding audience confidence.’’); FTC–2023–0064–
3122 (Vivid Seats stated that it ‘‘supports additional
consumer disclosures, including all-in pricing,’’ but
the rule should ‘‘apply equally across all parts of
the live-events ticketing industry,’’ so consumers
can compare prices and businesses that display
total prices will not be at a competitive
disadvantage.); FTC–2023–0064–3241 (National
Association of Ticket Brokers submitted a comment
supporting all-in pricing, but noting that it would
only work if ‘‘(i) it was required of every ticket
seller and (ii) there was rigorous and expeditious
enforcement.’’); FTC–2023–0064–3306 (Live Nation
Entertainment and its subsidiary Ticketmaster
North America commented that they ‘‘support[ ] a
definition of all-in pricing that requires the first
price for a live-event ticket shown to consumers to
be the price ultimately charged at checkout
(exclusive of state and local taxes and optional add-
ons).’’); see also FTC–2023–0064–3264 (Mark J.
Perry, Ph.D., Professor Emeritus of Economics at
University of Michigan-Flint and Senior Fellow
Emeritus at the American Enterprise Institute,
‘‘urge[d] the FTC to ensure that any rule requiring
all-in pricing in live events apply equally to all
market participants.’’); FTC–2023–0064–2856
(National Football League stated that if the live-
event ticket industry is included in the rule’s
coverage, the Commission must ‘‘include all sellers
of live-event tickets to prevent inconsistencies in its
application.’’).
281 See, e.g., FTC–2023–0064–3122 (Vivid Seats
commented that service fees ‘‘are the TRM’s [ticket
resale marketplace’s] sole source of revenue and
provide the capital necessary to operate the TRM.’’);
FTC–2023–0064–3306 (Live Nation Entertainment
and its subsidiary Ticketmaster North America
commented that a ticket service charge
‘‘compensates the venue for hosting the event and
the ticketing company for distributing tickets and
related services—important since venues and
ticketing companies typically do not share in
revenues attributable to a ticket’s face value.’’).
282 See, e.g., FTC–2023–0064–3122 (Vivid Seats
commented that delivery fees cover costs associated
with delivering a ticket.); FTC–2023–0064–3306
(Live Nation Entertainment and its subsidiary
Ticketmaster North America); FTC–2023–0064–
3292 (National Association of Theatre Owners
commented: ‘‘These fees allow moviegoers to
purchase tickets and select their seats from home,
and this service requires ongoing support and
management, entailing operational costs that are
offset by convenience fees. At the same time
customers can avoid the convenience fee altogether
by purchasing directly at the box office.’’) FTC–
2023–0064–3264 (Mark J. Perry, Ph.D., Professor
Emeritus of Economics at University of Michigan-
Flint and Senior Fellow Emeritus at the American
Enterprise Institute, commented that ticket resale
marketplaces offer numerous valuable services to
ticket sellers and buyers that a single seller or buyer
could not access otherwise, including access to
buyers or tickets, inventory management, seller and
customer support, secure financial transactions, and
guarantees.’’).
283 FTC–2023–0064–3306 (Live Nation
Entertainment and its subsidiary Ticketmaster
North America commented: ‘‘Because the practice
of adding these charges to the ticket’s face value has
been so longstanding, consumers have come to
expect service fees when purchasing a ticket to a
live entertainment event—but it is impossible for
consumers to anticipate the amount of applicable
fees because those rates are set by hundreds of
different venues and can vary accordingly.’’ The
commenter continued, ‘‘Consumers therefore need
clear disclosures about the true price of a ticket,
including the elements that constitute the all-in
price.’’).
284 FTC–2023–0064–3266 (StubHub, Inc.
supported the exclusion of ‘‘fees for optional add-
on features selected at the discretion of the
consumer.’’ As an example, the commenter stated,
‘‘[I]n some instances, consumers may not have a
choice on delivery method. In those cases, delivery
fees are mandatory and should be included in the
[Total Price] because the consumer has no
discretion to choose. In other instances, consumers
have multiple delivery options at different price
points.’’).
285 See, e.g., FTC–2023–0064–3230 (Future of
Music Coalition commented that ‘‘adopting all in
pricing without itemization [of the base ticket price
or face value and of fee amounts] would be a gift
to . . . predatory resellers.’’); FTC–2023–0064–3250
(National Independent Talent Organization stressed
‘‘the need for an itemized breakdown of ticket fees’’
and called for ‘‘fees to be clearly itemized
throughout the purchasing process.’’); FTC–2023–
0064–3304 (Recording Academy commented: ‘‘Price
itemization is the only way to effectively regulate
transparent pricing in a manner that truly informs
the consumer about how their dollar is being spent
. . . . Additionally, price itemization is the only
way to effectively hold third party fees and charges
in check.’’). But see FTC–2023–0064–3212
(TickPick, LLC commented that the rule ‘‘must
prohibit the itemization of fees and charges that
make up the Total Price (other than breaking out
government taxes and shipping fees) in order to
prevent harm from hidden and/or misleading fees.’’
The commenter stated concerns that such fees were
‘‘arbitrary’’ and ‘‘any secondary ticketing
marketplace that itemizes mandatory fees and
charges is arguably misrepresenting the ‘nature and
purpose of any amount a consumer may pay.’ ’’).
advertised ticket or lodging for the
‘‘starting at’’ or base price.279
Businesses still must clearly and
conspicuously disclose the nature,
purpose, and amount of such fees or
charges and the identity of the good or
service for which they are imposed, and
the final amount of payment, before a
consumer consents to pay or, if the
applicability of a fee or charge is
contingent on later conduct or choices
by a consumer after purchase, as soon
as such circumstances arise. Businesses
also must not mispresent those or other
fees or charges, including total price.
(b) Ticket Service Fees
Businesses operating in the live-event
ticketing industry, including venues,
ticket sellers, and ticket resellers,
historically have imposed on consumers
a host of charges in addition to the
ticket’s face value that are dripped in
throughout the purchasing process. One
of the rule’s principal purposes is to
give consumers upfront knowledge of
the true cost of a good or service,
including mandatory charges, without
being forced to navigate through a time-
intensive search and transaction. A
broad swath of industry members
supported a nationwide total price
requirement for ticket pricing,280
although some industry commenters
expressed concerns with certain aspects
of the rule. The Commission addresses
commenters’ concerns herein.
Some industry members emphasized
that the added fees are their primary
source of revenue, since they typically
do not share in the revenue from the
ticket’s face value. 281 Industry members
and an academic commenter also stated
that certain added fees pay for valuable
services such as delivery and the
convenience of selecting a seat from
home.282 An industry member
emphasized, however, that although
consumers do expect additional fees,
businesses nonetheless should clearly
disclose a ticket’s true, all-in price (i.e.,
total price).283 Another industry
member commented that unless an
added fee is truly optional, it should be
included in total price.284 The
Commission reiterates that businesses
are not prohibited from charging fees;
instead § 464.2(a) requires the
disclosure of total price, including fees
for mandatory ancillary goods or
services, when a price for a good or
service is displayed, while § 464.2(c)
requires disclosures about fees being
imposed on the transaction that have
been permissibly excluded from total
price, including for optional ancillary
goods or services, before a consumer
consents to pay for a covered good or
service. The Commission further
reiterates that, in an online transaction,
fees such as for payment processing,
electronic ticket ‘‘delivery,’’
‘‘convenience,’’ or similar add-on
ticketing fees are mandatory and must
be included in total price if a consumer
cannot obtain the covered good or
service as part of the same transaction
(e.g., online) without incurring the fee.
Final § 464.3 also prohibits businesses
from misrepresenting the nature or
purpose, or the identity of the good or
service for which fees are imposed.
Some industry members expressed
concern that the rule would prohibit
itemization of fees in addition to total
price, while others argued that it should
prohibit such itemization. 285 The
Commission clarifies that, so long as
total price is displayed clearly and
conspicuously, and more prominently
than any itemized fees, the rule does not
prohibit businesses from itemizing the
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286 See, e.g., FTC–2023–0064–3217 (Bowling
Proprietors’ Association of America); FTC–2023–
0064–2755 (Caffe! Caffe!); FTC–2023–0064–3114
(Shine Beer Sanctuary); FTC–2023–0064–1456
(MED Murphy St. Enterprise); see also, e.g., FTC–
2023–0064–2953; FTC–2023–0064–2972 (Over
4,600 comments submitted through a National
Restaurant Association mass mailing campaign
misinterpreted the rule as ‘‘eliminating the use of
fees and surcharges.’’).
287 See, e.g., FTC–2023–0064–3300 (National
Restaurant Association); FTC–2023–0064–3128
(Merchants Payments Coalition); FTC–2023–0064–
3219 (Georgia Restaurant Association); FTC–2023–
0064–3180 (Independent Restaurant Coalition).
288 See, e.g., FTC–2023–0064–3180 (Independent
Restaurant Coalition commented: ‘‘Clearly and
prominently displaying any fees promotes
transparency and fairness as well as allowing
restaurants to meet the needs of their workers and
customers.’’); FTC–2023–0064–2891 (Mary
Sullivan, George Washington University, Regulatory
Studies Center).
289 See, e.g., FTC–2023–0064–3128 (Merchants
Payments Coalition); FTC–2023–0064–3140
(Merchant Advisory Group stated: ‘‘When
appropriately disclosed, consumers can typically
avoid these fees by simply choosing lower-cost
forms of payment, and this could help keep prices
down for consumers overall.’’); FTC–2023–0064–
3300 (National Restaurant Association commented:
‘‘When a credit card surcharge is properly disclosed
via in-store signage, on the menu, and on the
receipt, customers have a clear understanding that
the fee is a product of the card companies, not the
restaurant.’’).
290 FTC–2023–0064–2891 (Mary Sullivan, George
Washington University, Regulatory Studies Center).
291 FTC–2023–0064–3268 (Housing & Eviction
Defense Clinic, University of Connecticut School of
Law).
292 FTC–2023–0064–1294 (James J. Angel, Ph.D.,
CFP, CFA, Professor, Georgetown University,
McDonough School of Business).
293 This approach is consistent with the
Telemarketing Sales Rule, which requires sellers
and telemarketers to disclose, in a clear and
conspicuous manner, the total cost of a good or
service, which would include any applicable credit
card or other payment processing charges, before a
consumer consents to pay for that good or service.
16 CFR 310.3(a)(1)(i) and (a)(2)(i).
294 See, e.g., FTC–2023–0064–3195 (League of
American Orchestras et al. observed: ‘‘It would be
harmful to paint all dynamic pricing strategies as
‘unfair.’ Nonprofit performing arts organizations
often use variable pricing strategies to both
maximize the earned revenue that supports the
nonprofit performing arts workforce, as well as to
offer reduced or free-of-charge ticketing options for
community-based partners.’’); FTC–2023–0064–
3230 (Future of Music Coalition stated that dynamic
pricing ‘‘can certainly be used in ways that frustrate
consumers’’ but ‘‘can also solve practical
problems.’’ It is ‘‘often used by nonprofit arts
presenters in non-problematic ways.’’ The
commenter noted, however, that ‘‘disclosure of
specific dynamic pricing strategies and tools,
whether manual or algorithmic[,] will only help
Continued
charges imposed on a transaction.
However, any such itemization must not
misrepresent the nature, purpose,
amount, or refundability of the itemized
fees, including the identity of the goods
or services for which they are being
charged.
(c) Credit Card and Other Payment
Processing Surcharges
The rule requires businesses to
include credit card surcharges or
processing fees in total price only if they
choose to make payment by credit card
mandatory. If, on the other hand, credit
card use is optional because consumers
can use multiple payment options, those
fees do not need to be included in total
price. If the consumer chooses to use a
credit card, businesses must clearly and
conspicuously disclose the nature,
purpose, and amount of any credit card
surcharge before the consumer consents
to pay. Some commenters expressed
concern about the rule’s application to
credit card fees but, as discussed herein,
the Commission was not persuaded by
the comments to change the proposed
rule as it applies to such fees.
Many commenters expressed concern
that the rule would require total price to
include credit card processing fees or
prohibit businesses from passing
through such fees to consumers. This
was of particular concern to small
businesses. 286 Numerous industry
members also commented that requiring
such fees to be part of total price would
reduce price transparency and penalize
customers who want or need to pay
with cash.287
Various commenters suggested that if
businesses properly disclose credit card
processing charges and provide
alternate payment methods, both
consumers and businesses would
benefit.288 Commenters noted that,
when appropriately disclosed,
consumers can avoid such fees by
choosing another form of payment.289
An academic commenter suggested that
prominent disclosure of a credit card
surcharge in advance, so consumers can
avoid it, would benefit consumers and
reduce business costs more than
requiring such charges to be included in
total price.290 A tenant advocacy legal
clinic that generally supported requiring
credit card processing charges to be
included in total price, suggested that
such charges might be reasonably
avoidable if disclosed in advance to let
consumers use a different payment
method. 291 Another academic
commenter recommended that the
Commission clarify that, while credit
card surcharges need not be included in
total price, a business can only pass
through the actual amount of the charge
and must clearly and conspicuously
disclose any markup it imposes.292
The Commission notes that the rule
does not prohibit a business from
charging or passing through credit card
fees if otherwise allowed by law. The
rule does not affect State laws that
prohibit credit card surcharges. Whether
credit card charges must be included in
total price, however, depends on
whether a business makes such fees
mandatory, for example, by not
providing any other payment option for
the transaction. For example, if a
consumer is purchasing a ticket online,
there must be another online payment
option that does not require a fee, not
merely an option to go in person to the
box office to purchase the ticket with
cash for no additional fee.
In other words, if there is no other
payment option for an offered
transaction, or if every payment option
requires a fee or charge, such fees are
mandatory and must be included in
total price.293 But, if a business offers
consumers multiple viable payment
options for the offered transaction, so
that paying with a credit card is
optional, then credit card fees need not
be included in total price. The same is
true for debit card surcharges and other
payment processing fees.
A business that provides at least one
viable method to pay for the offered
transaction without a fee, chooses to
pass through payment processing fees to
consumers, and excludes such fees from
total price would have to clearly and
conspicuously disclose the nature,
purpose, and amount of the processing
fees before a consumer consents to pay.
In addition, nothing in the rule
prohibits businesses that accept
multiple viable forms of payment from
advertising two prices, one that includes
credit card or other payment processing
fees and one that does not. It is the
Commission’s understanding that some
businesses already do this, and such a
strategy is consistent with the rule.
In addition, under final § 464.3, a
business that offers, displays, or
advertises a covered good or service
cannot misrepresent the nature,
purpose, amount, or refundability of
credit card or other fees. Since the rule
does not prohibit itemization, a business
may choose to also itemize mandatory
credit card fees so long as they are
included in total price and total price is
displayed more prominently. The
voluntary itemization of mandatory
credit card fees addresses commenters’
concerns that consumers will not
understand the different costs affecting
businesses.
(d) Dynamic Pricing and National
Advertising
Some commenters expressed concern
that the total price requirements will
interfere with dynamic pricing strategies
where total price is not fixed but
changes based on supply, demand, or
other factors. 294 The rule does not bar
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2098 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
predatory resellers make purchasing decisions and
maximize their extraction of value.’’).
295 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce commented that the Total Price
requirements ‘‘may eliminate the opportunity for
national advertising campaigns’’ because
‘‘[m]andatory fees [such as regional sports fees] may
vary by location or tie to specific franchisee costs.’’
The commenter recommended that the FTC
‘‘consider revising the definition of ‘Total Price’ to
exclude all charges that vary based on geographic
region.’’); FTC–2023–0064–3294 (International
Franchise Association commented: ‘‘Under the
Proposed Rule, national marketing campaigns are
only workable if all franchised businesses in a
franchise system adhere to the same pricing regime
(including pass-through fees), regardless of the
economic demands of the markets in which they
operate.’’); FTC–2023–0064–3300 (National
Restaurant Association commented: ‘‘Like
‘Shipping Charges,’ delivery fees should be
excluded from the ‘Total Price’ requirement since
local or national advertising may feature the cost of
the food item but cannot reasonably predict how
regional market conditions will alter the price of
delivery.’’).
296 See, e.g., FTC–2023–0064–3233 (NCTA—The
Internet & Television Association stated that the
rule would interfere with ‘‘efforts to advertise
pricing nationwide or to a broad audience’’ and
would require impractical and technically
challenging geo-targeted advertising. The
commenter further stated that businesses may be
incentivized to ‘‘‘‘advertis[e] a Total Price for a
particular service option that overstates the price
that most consumers would actually end up paying
at their service location (i.e., the Total Price would
be the maximum price that any potential customer
in the provider’s footprint would have to pay for
the service),’’ which would ‘‘confuse consumers
and undermine the type of comparison-shopping
the FTC is aiming to facilitate. Bundled pricing
would be even more challenging to calculate and
represent in advertising, given that each bundled
service could have multiple different applicable
taxes or surcharges.’’).
297 Id.
298 See, e.g., FTC–2023–0064–2919 (National
Automatic Merchandising Association) (expressing
concern that the rule would ban offering cash
discounts); see also, FTC–2023–0064–3217
(Bowling Proprietors’ Association of America)
(stating that requiring businesses to consolidate
‘‘diverse pricing models into a single displayed
price could lead to significant consumer confusion
and dissatisfaction.’’).
299 FTC–2023–0064–3263 (Flex Association
commented that some fees cannot be calculated at
the start of a transaction, including for discounts
and special offers: ‘‘For example, a ‘two-for-one’
offer cannot be activated until two eligible items are
added to a shopping cart.’’); FTC–2023–0064–3137
(Chamber of Progress commented that sellers may
abandon discounts on bundles of goods or bulk
orders, because ‘‘the total price of each good could
vary depending on the other items in the customer’s
cart.’’).
300 FTC–2023–0064–2887 (Progressive Policy
Institute commented, ‘‘the proposed disclosure
requirements may interfere with the use of different
pricing models that provide value to consumers and
are the basis upon which some firms compete,’’
such as unbundled pricing models when ‘‘the total
price may not be known until the consumer
completes the purchase process,’’ and therefore, a
‘‘requirement to display prices before the purchase
. . . may mislead consumers and distort
competition.’’).
301 FTC–2023–0064–3187 (U.S. Department of
Justice, Antitrust Division).
302 Id.
303 Id.
businesses from engaging in dynamic
pricing, but adjusted prices must
include all known mandatory fees and
the advertised good or service must be
actually available to consumers at the
quoted price. The Commission’s review
of the comments did not identify any
persuasive reason to change the rule as
it applies to dynamic pricing.
A few commenters noted that the rule
could interfere with businesses’ ability
to engage in national advertising or to
advertise to a broad audience because
mandatory fees may vary by location, as
is often the case with franchisee costs
and delivery costs.295 One commenter
argued that the rule would require
either impractical and challenging geo-
targeted advertising or advertising a
‘‘maximum total price’’ to any potential
consumer in the businesses’ footprint,
which would overstate the price that
most consumers need to pay and defeat
comparison shopping.296 The
commenter also noted that
‘‘[a]lternatively, companies might
respond to the proposed rule by
omitting pricing from advertising
altogether, an option that would defeat
the [Commission’s] goal of ensuring
consumers have access to accurate and
reliable cost information as they shop
for services.’’297
The Commission determines that
shipping charges may be excluded from
total price. As to other charges that may
vary by time or location, businesses can
comply with the rule by advertising a
maximum total price either by region or
nationwide. The Commission
understands that many businesses
already engage in regional or geo-
targeted advertising that enables
flexibility for pricing by time and
locality. Since the rule applies to all
businesses offering covered goods or
services, it levels the playing field and
preserves comparison-shopping even
when advertised prices are maximum
totals.
(e) Rebates, Bundled Pricing, and Other
Discounts: Compliance When
Promotional Pricing Models Have
Different Fees
Promotional pricing models, such as
two-for-one deals, bulk or bundled
pricing, unbundled or a la carte pricing,
rebates, or other discounts, can change
the price a consumer ultimately may
pay. Section 464.2(a)’s total price
disclosure requirement applies whether
a consumer is purchasing a single
covered good or service, multiple
covered goods or services, or covered
goods or services combined with
ancillary goods or services, as well as
when a discount or other promotion
affects the final amount of payment. If
a consumer applies a discount or
otherwise qualifies for a promotional
price, the business can update the total
price displayed. The Commission
provides clarification herein to address
commenter concerns about the rule as it
applies to promotional pricing models.
Some commenters expressed concern
that the rule’s total price requirement
would prohibit or discourage businesses
from offering promotional prices to
consumers.298 Two industry groups
commented that the potential difficulty
of incorporating promotions into total
price might discourage businesses from
offering them.299 A competition policy
group agreed and suggested
modifications might be ‘‘necessary to
ensure that the proposed rules do not
interfere with such pricing models.’’ 300
The Antitrust Division of the U.S.
Department of Justice commented that
‘‘[c]ompetition between companies that
offer bundled and unbundled pricing for
core products and value-added features
can play an important role in preserving
consumer choice . . . and unbundled
pricing can empower consumers who
prefer to pay only for what they
value.’’ 301 The Antitrust Division
further commented that the proposed
rule ‘‘does not affect companies’ ability
to offer consumers a choice whether to
buy unbundled features that do not
impose mandatory fees.’’ 302 However, it
asserted that ‘‘[w]hen companies use
unbundled offerings to disguise
mandatory fees, they undermine the
value to competition of that unbundled
option.’’ 303
The rule does not prohibit businesses
from using bundled, discount, or similar
pricing models if, when the business
advertises any price of a covered good
or service, it discloses the total price the
consumer must pay for the good or
service. The rule also does not require
businesses to incorporate different
pricing models into a single price;
rather, under the rule, businesses
advertising any price of a covered good
or service must only display the
maximum total price. For example, a
hotel can display a regular total price
and a loyalty program member total
price. Businesses also can display total
price under a promotional pricing
model, such as a bundled price or a
promotion advertising, ‘‘stay three
nights, get one night free,’’ when and to
the extent that model applies. The
Commission notes that offering,
displaying, or advertising a general [x]%
or $[y] discount, without displaying the
price of a covered good or service, does
not require the disclosure of total price
under the rule.
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304 See, e.g., FTC–2023–0064–3258 (National
Taxpayers Union Foundation stated that Total Price
may be difficult or impossible to implement with
third-party marketplaces because ‘‘while the
platform may control the display of prices, it is
sellers and not the platform that sets [sic] the
prices.’’); FTC–2023–0064–3293 (Travel Technology
Association stated that intermediaries may be
‘‘similarly situated to consumers in that they are
also dependent on Travel Service Providers such as
hotels to provide accurate, complete, and timely
information before booking.’’); FTC–2023–0064–
3262 (Skyscanner Ltd. highlighted ‘‘the numerous
and complex ways in which metasearch sites
receive pricing information directly from hotels and
other short-term lodging providers’’).
305 FTC–2023–0064–3293 (Travel Technology
Association).
306 Id.
307 Id.
308 FTC–2023–0064–3293 (Travel Technology
Association); FTC–2023–0064–3262 (Skyscanner
Limited).
309 Id.
310 FTC–2023–0064–3293 (Travel Technology
Association).
311 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
312 Id.
313 FTC–2023–0064–3294 (International
Franchise Association).
314 Id.
315 See, e.g., Complaint ¶¶ 1–7, 13–87, FTC v.
Arise Virtual Solutions, Inc., No. 24–cv–61152 (S.D.
Fla. July 2, 2024), https://www.ftc.gov/system/files/
ftc_gov/pdf/arise_complaint.pdf (alleging
Continued
(f) Online Marketplaces
The rule covers sellers and online
marketplace platforms or other
intermediaries in the same manner as
other businesses that offer covered
goods or services. Various commenters,
however, highlighted the challenges
some businesses may face in
implementing the rule if it is applied
equally to all online marketplace
stakeholders. The Commission’s review
of the comments, as discussed herein,
did not identify any persuasive reason
to change the rule as it applies to online
marketplaces for covered goods or
services.
Some commenters stated that certain
businesses offering, displaying, or
advertising goods and services in an
online marketplace often must rely on
other entities for accurate information
about pricing and expressed concern
about liability under the rule if they
receive inaccurate pricing information.
This concern arose both from
intermediaries that display prices
provided by sellers and from sellers
who offer their goods or services
through an intermediary. Intermediaries
are concerned about facing liability if
they post prices that are inaccurate
because the seller of the good or service
did not provide complete and accurate
pricing information. Commenters also
expressed concern about liability when
sellers list their good or service for sale
on a platform but are not in control of
how the platform displays information
about pricing. 304
Travel Technology Association
(‘‘Travel Tech’’), for instance, observed
the complex and multi-layered
information flow from travel service
providers, such as hotels, motels, inns,
vacation rentals, and other short-term
lodging providers, to different types of
intermediaries which operate either as
business-to-business, consumer-facing,
or both, and include online travel
agents, metasearch engines, global
distribution systems, travel management
companies, short-term rental platforms,
‘‘brick-and-mortar’’ or offline travel
agents, tour operators, and
wholesalers.305 Travel Tech explained
that travel service providers determine
the rates, terms, and mandatory fees,
including resort fees, applicable to their
travel services, and that only travel
service providers know whether the
nature and purpose of any fee they
impose is accurate.306 Travel Tech
members, which consist of the
aforementioned intermediaries, use the
information provided to them directly
from travel service providers, or
indirectly through other intermediaries,
to aggregate, sort, and display offers on
their sites and applications, and
consumers in turn use this information
to compare offers and make informed
choices.307 Travel Tech and one of its
members, Skyscanner, a metasearch
engine, suggested that the rule should
immunize intermediaries from liability
if travel service providers or other
upstream distributors ‘‘fail to provide
accurate, complete, and timely pricing
information and such downstream
[i]ntermediaries have made reasonable
efforts to receive such information.’’ 308
Both commenters further requested that
the Commission make clear that travel
service providers would be engaging in
an unfair or deceptive practice if they
provide inaccurate, incomplete, or
untimely pricing information to
intermediaries or seek remuneration
from intermediaries for information
necessary for them to comply with any
final rule. 309 Finally, Travel Tech
further requested that the Commission
clarify that the rule applies to any
business that supplies or advertises
pricing to consumers so all are held to
the same standard. 310
The American Hotel & Lodging
Association, a national association
representing all segments of the U.S.
lodging industry, including hotel
owners, beds & breakfasts, State hotel
associations, and industry suppliers,
also stressed that a final rule must apply
broadly to all industry participants,
including online travel agencies, short-
term rental platforms, and metasearch
sites. 311 The commenter noted that the
industry broadly is moving to
implement the clear publishing of total
price (including all mandatory, non-
government fees) for lodging, so that
consumers can more easily navigate the
myriad of choices they have when it
comes to places to stay.312
The Commission declines to adopt
blanket immunity from the rule for
intermediaries that depend on providers
of live-event tickets and short-term
lodging for accurate pricing information.
The Commission, clarifies, however,
that the final rule applies to business-to-
business (‘‘B2B’’) transactions as well as
business-to-consumer transactions.
Businesses such as travel service
providers that sell or advertise through
intermediaries must provide such
entities with accurate pricing
information (including about total price,
as well as mandatory and optional fees).
Platforms and other intermediaries that
offer, display, or advertise covered
goods or services and ancillary goods or
services or allow third party sellers to
do so must disclose the total price of the
goods and services, including all
mandatory and optional fees and, if
applicable, provide third-party sellers
with all necessary information to
calculate the total price. The rule’s
coverage of B2B transactions in this
manner protects not only individual
consumers from hidden and misleading
fees, but also businesses.
The Commission also notes that at
least one commenter, the International
Franchise Association, argued that the
rule should exempt B2B transactions,
without providing any compelling
justification for why bait-and-switch
pricing, including drip pricing, and the
misrepresentation of fees and charges
should be allowed in transactions
involving businesses. 313 This
commenter noted that, for example,
‘‘[f]ranchised hotels advertise large
event spaces for consumers’ weddings
and business conventions’’ and the rule
‘‘could be applied against these
businesses if they fail to display total
price even though no consumer is ever
misled or deceived.’’ 314 The prohibition
in section 5 of the FTC Act against
unfair or deceptive acts or practices
does not include any limitation on the
‘‘consumers’’ who can be injured.
Relying on this authority, the
Commission has long interpreted the
FTC Act to apply to cases where the
harmed consumers are businesses,
particularly small- and medium-sized
businesses. 315
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defendants made misleading and unsubstantiated
earnings claims in selling its Arise business
opportunity to gig worker consumers seeking to
work from home in customer service and failed to
provide the disclosures required by the Business
Opportunity Rule); Complaint ¶¶ 7–51, In re
Amazon.com, Inc., 171 F.T.C. 860, 861–71 (2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/
DV171.pdf (alleging defendants deceptively
claimed they would give their Amazon Flex drivers
100% of consumer tips when in fact they withheld
nearly a third of the tips from their drivers);
Complaint ¶¶ 13–65, FTC v. First American
Payment Systems, LLC, No. 4:22–cv–00654 (E.D. TX
July 29, 2022), https://www.ftc.gov/system/files/ftc_
gov/pdf/Complaint%20%28file%20stamped%29_
0.pdf (alleging defendants made false claims about
their payment processing services, including about
total monthly fees, savings opportunities, and the
ease of cancelling automatically-renewing accounts,
to small business consumers such as restaurants,
nail salons, or small retail businesses); Complaint
¶¶ 12–50, FTC v. Yellowstone Capital LLC, No.
1:20–cv–06023 (S.D.N.Y. Aug. 3, 2020), https://
www.ftc.gov/system/files/documents/cases/
1823202yellowstonecomplaint.pdf (alleging
defendants engaged in a pattern of deceptive and
unfair conduct involving their ‘‘merchant cash
advances’’ to small business consumers and made
excess, unauthorized withdrawals from consumers’
accounts after consumers already repaid the full
amount they owed); Complaint ¶¶ 9–104, FTC v.
Fleetcor Technologies, Inc., No. 1:19–cv–05727–
ELR (N.D. Ga. December 20, 2019), https://
www.ftc.gov/system/files/documents/cases/fleetcor_
complaint_with_exhibits_002.pdf (alleging
defendants marketed fuel cards to business
consumers that operate vehicle fleets, including
many small businesses and made false claims about
the fuel card’s savings, fraud controls, and lack of
set-up, transaction, and membership fees, instead
charging these businesses hundreds of millions of
dollars in unexpected fees); see also Fed. Trade
Comm’n, Policy Statement on Enforcement Related
to Gig Work (2022), https://www.ftc.gov/system/
files/ftc_gov/pdf/Matter%20No.%20P227600
%20Gig%20Policy%20Statement.pdf (noting that
protecting gig workers ‘‘from unfair, deceptive, and
anticompetitive practices is a priority,’’ and the FTC
‘‘will use its full authority to do so’’).
316 See, e.g., FTC–2023–0064–3202 (TechNet
stated: ‘‘The FTC’s proposed rule also poses
significant harm to online marketplaces by
potentially creating liability for platforms that
merely display pricing advertised by others. As
publishers, such platforms are likely protected from
such responsibility by Section 230 of the
Communications Decency Act of 1996.’’).
317 See, e.g., Fed. Trade Comm’n, Bureau of
Consumer Protection Business Guidance, FTC
Safeguards Rule: What Your Business Needs to
Know (May 2022), https://www.ftc.gov/business-
guidance/resources/ftc-safeguards-rule-what-your-
business-needs-know; Fed. Trade Comm’n, Bureau
of Consumer Protection Business Guidance, FAQs:
Complying with the Contact Lens Rule (June 2020),
https://www.ftc.gov/business-guidance/resources/
faqs-complying-contact-lens-rule; Fed. Trade
Comm’n, Bureau of Consumer Protection Business
Guidance, Complying with the Funeral Rule (Aug.
2012), https://www.ftc.gov/business-guidance/
resources/complying-funeral-rule.
318 See, e.g., FTC–2023–0064–3266 (StubHub, Inc.
agreed with the FTC’s proposal to require Total
Price in every offer, display, or advertisement
presented to consumers and that Total Price must
be consistently displayed throughout the
transaction); FTC–2023–0064–3306 (Live Nation
Entertainment and its subsidiary Ticketmaster
North America supported ‘‘requir[ing] the first price
for a live-event ticket shown to consumers to be the
price ultimately charged at checkout (exclusive of
state and local taxes and optional add-ons). This
price should be clearly displayed on the initial
landing page and easily discernible.’’ The
commenter proposed adding the phrase, ‘‘from the
first instance a consumer sees a price for a good or
service’’ to the end of proposed § 464.2(a) and
moving the phrase, ‘‘as soon as pricing information
is provided to the consumer’’ before ‘‘more
prominently than any other Pricing Information’’ in
proposed § 464.2(b).); FTC–2023–0064–3290 (U.S.
Public Interest Research Group Education Fund
commented: ‘‘[T]he Total Price should be provided
first and with the most prominence. Businesses
must not be allowed to confuse consumers with a
barrage of numbers.’’); FTC–2023–0064–1939
(Tzedek DC).
319 See, e.g., FTC–2023–0064–3290 (U.S. Public
Interest Research Group Education Fund); FTC–
2023–0064–1939 (Tzedek DC commented that
proposed § 464.2(b) ‘‘will prevent companies from
hiding the real cost of goods and services in fine
print or making the total cost difficult to find.’’).
320 See, e.g., FTC–2023–0064–3196 (South
Carolina Department of Consumer Affairs
commented: ‘‘Guidance on how the business can
simultaneously comply with the ‘Clearly and
Conspicuously’ requirement and the prominence
requirement may help with business
comprehension and compliance.’’ The commenter
suggested adding ‘‘a definition addressing the
different mediums by which the offer, display or
advertisement may be relayed to a consumer
(visual, audio, print, online)’’ and providing
‘‘examples of compliance with the requirement of
prominent display’’ such as ‘‘in a visual disclosure
presentation of the Total Price in bolded typeface
at least two points larger than any other Pricing
Information or 14-point font, whichever is larger,
satisfies the prominence requirement.’’).
321 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.
suggested modifying proposed § 464.2(b) to include:
‘‘[A] Business must not automatically include
Ancillary Goods or Services in the Total Price or
automatically select Ancillary Goods or Services for
purchase on behalf of the consumer.’’); FTC–2023–
0064–3160 (Consumer Federation of America et al.
made a similar suggestion and stated it would
‘‘ensure that ‘must pay’ is interpreted to include
The Commission clarifies that it does
not intend to treat intermediaries as the
publisher or speaker of information
about pricing or as controlling the
manner of its display where the
intermediary is not responsible, in
whole or in part, for such content or
display. 316 However, if intermediaries
are responsible, in whole or in part, for
offering, displaying, or advertising any
price, including any portion thereof, of
a covered good or service, then within
the scope of that responsibility, they
must give sellers the information
necessary to calculate total price and,
when uniquely situated to do so, such
intermediaries must ensure that they
display total price. For example, if an
intermediary charges a fee for access to
its platform and the seller passes the fee
through to consumers, the intermediary
must provide the seller with accurate
information about the fee’s amount so
the seller can accurately calculate total
price, or otherwise ensure that the total
price is displayed. Travel service
providers and other sellers, by the same
token, must provide intermediaries with
accurate price information.
Whether an intermediary, seller, or
other business is responsible for
offering, displaying, or advertising a
price of a covered good or service, may
be a fact- and law-specific
determination in which the Commission
can consider issues of participation in,
and control of, unfair or deceptive
practices, as well as contractual
obligations between sellers and
platforms and other intermediaries, and
the applicability of other Federal laws.
The Commission will consider issuing
and updating business guidance to
address particular or nuanced scenarios,
as it has done as a complement to other
rulemakings.317
2. § 464.2(b)
Proposed § 464.2(b) in the NPRM
required businesses to display total
price more prominently than any other
pricing information in any offer,
display, or advertisement that contains
an amount a consumer may pay.
Following review of the comments, the
Commission finalizes § 464.2(b) with
three modifications. First, as already
discussed in this section, the
Commission limits the requirements of
§ 464.2, including § 464.2(b), to covered
goods or services. Second, as discussed
in section III.B.1, the Commission
narrows the disclosure trigger in
§ 464.2(a) and (b) to ‘‘an offer, display,
or advertisement that represents any
price of a covered good or service.’’
Third, as discussed herein, final
§ 464.2(b) clarifies the prominence
requirement with respect to the final
amount of payment for a transaction.
Final § 464.2(b) thus provides that, in
any offer, display, or advertisement that
represents any price of a covered good
or service, a business must disclose the
total price more prominently than any
other pricing information. However,
where the final amount of payment for
the transaction is displayed, the final
amount of payment must be disclosed
more prominently than, or as
prominently as, the total price.
Various commenters voiced support
for proposed § 464.2(b)’s requirement
that total price must be displayed more
prominently than other pricing
information.318 Certain commenters
stated that the prominence requirement
will prevent consumer confusion as to
the true price of a good or service.319
Some commenters suggested
strengthening the prominence
requirement or adding guidance about
it. 320 Other commenters also suggested
clarifying that the phrase ‘‘an amount a
consumer may pay’’ refers only to truly
mandatory ancillary goods or
services. 321 On the other hand, some
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2101	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
any fee or charge that is included by default and
that the consumer must pay unless they take
affirmative action to opt-out or avoid it.’’ The
commenter proposed adding guidance that: ‘‘A
consumer must pay a fee or charge if the fee or
charge is not reasonably avoidable or if the
consumer must pay the fee or charge unless they
take affirmative action to avoid it. An ancillary good
or service is mandatory if a reasonable consumer
would expect the good or service to be included
with the purchase.’’).
322 See, e.g., FTC–2023–0064–3293 (Travel
Technology Association commented that if Total
Price is ‘‘clearly and conspicuously’’ displayed, a
prominence requirement is unnecessary and
‘‘discounts would have to be less prominent than
the Total Price, potentially leading to a consumer
missing out on a deal that may have saved them
money or led to a more enjoyable vacation.’’ The
commenter suggested that the rule be more flexible
‘‘so that Intermediaries can use their expertise to
relay the most appropriate information to
consumers.’’); FTC–2023–0064–3296 (Bay Area
Apartment Association commented that the
prominence requirement could have a ‘‘chilling
effect on the content of commercial speech,’’ with
some rental housing providers choosing ‘‘not to
include pricing information in their advertisements,
and instead invite prospective residents to learn
about pricing on their website or to call their
leasing office,’’ thereby ‘‘undermining a key
objective (better consumer awareness of the price of
goods and service[s]) the rule is intended to
accomplish.’’).
323 See also Bates v. State Bar of Ariz., 433 U.S.
350, 383–84 (1977) (‘‘Since the advertiser knows his
product and has a commercial interest in its
dissemination, we have little worry that regulation
to assure truthfulness will discourage protected
speech.’’) (citing Va. State Bd. of Pharm. v. Va.
Citizens Consumer Council, Inc., 425 U.S. 748, 771–
772, 771 n. 24 (1976)).
324 FTC–2023–0064–3283 (National Consumer
Law Center, Prison Policy Initiative, and advocate
Stephen Raher).
325 See, e.g., FTC–2023–0064–3094 (American
Hotel & Lodging Association asserted: ‘‘The
language of the proposed rule is vague, overbroad,
and not sufficiently specific to provide notice of
what types of fees businesses are required to
display . . . . Businesses could reasonably differ in
their approaches to disclosing the ‘nature and
purpose’ or ‘identity’ of such fees.’’); FTC–2023–
0064–3133 (National Multifamily Housing Council
and National Apartment Association commented
that disclosing the nature and purpose of fees is
‘‘impracticable’’ and requiring rental housing
providers to furnish prospective tenants ‘‘with any
fee or charge excluded from the total price that the
customer may (or may not) have to pay at some
point during the lease practically means housing
providers will need to disclose all possible fees.’’);
FTC–2023–0064–3263 (Flex Association asserted
that the ‘‘requirement to disclose the ‘nature and
purpose’ of a fee is vague’’ and ‘‘provide[s] no
material benefit to consumers.’’); see also, FTC–
2023–0064–2981 (Apartment & Office Building
Association of Metropolitan Washington); FTC–
2023–0064–3042 (Nevada State Apartment
Association); FTC–2023–0064–3044 (San Angelo
Apartment Association); FTC–2023–0064–3045
(Chicagoland Apartment Association); FTC–2023–
0064–3111 (Houston Apartment Association); FTC–
2023–0064–3116 (Manufactured Housing Institute);
FTC–2023–0064–3233 (NCTA—The internet &
Television Association); FTC–2023–0064–3296 (Bay
Area Apartment Association); FTC–2023–0064–
3311 (Greater Cincinnati Northern Kentucky
Apartment Association).
326 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
327 See, e.g., FTC–2023–0064–1425 (Iowa Bankers
Association); FTC–2023–0064–3263 (Flex
Association asserted that ‘‘[i]t appears that the
Commission seeks to require disclosure of the
business rationale for imposing a fee and the
specific uses to which proceeds of a given fee will
go,’’ which would require businesses to ‘‘divulge
commercially sensitive information that could
seriously alter competition in a given
marketplace.’’).
328 See, e.g., FTC–2023–0064–2888 (Housing
Policy Clinic, University of Texas School of Law).
329 See, e.g., Id.; FTC–2023–0064–2883 (District of
Columbia, Office of the People’s Counsel); FTC–
2023–0064–3146 (Institute for Policy Integrity, New
York University School of Law).
industry commenters stated that the
prominence requirement may have
unintended consequences that could
harm consumers, such as consumers not
noticing an offered discount or a
business deciding not to provide any
pricing information. 322 As noted in
section III.B.1.e, nothing in the rule
prohibits a business from adjusting total
price to account for any applied
discounts or other promotional pricing
and, given strong market incentives, the
Commission disagrees with comments
that the rule’s prohibitions against
hidden and misleading fees will deter
businesses from advertising prices. 323
Final § 464.2(b) also clarifies how the
prominence requirement applies to the
final amount of payment for a
transaction. The Commission recognizes
that the final amount of payment, now
an explicitly required disclosure under
final § 464.2(c), may differ from total
price due to various factors, such as the
exclusion from total price of certain fees
or charges, including for any optional
ancillary good or service, or the
application of promotional pricing
models. The Commission determines
that both total price and the final
amount of payment are material to
consumers. The Commission therefore
clarifies that, when the final amount of
payment is displayed, it must be
displayed as prominently as, or more
prominently than, total price. The
modification avoids a potential
unintended consequence of the rule,
which may have been read to require
total price to obscure the final amount
of payment.
The Commission determines that,
with these modifications, § 464.2(b)’s
prominence requirement is clear,
understandable, and unambiguous.
3. § 464.2(c)
In final § 464.2, the Commission
consolidates all proposed disclosure
requirements; therefore, proposed
§ 464.3(b) is codified at final § 464.2(c).
Proposed § 464.3(b) would have
required businesses to disclose clearly
and conspicuously, before the consumer
consents to pay, the nature and purpose
of any amount a consumer may pay that
is excluded from total price, including
the fee’s refundability and the identity
of the good or service for which the fee
is charged. Final § 464.2(c) largely
adopts the disclosure requirements of
proposed § 464.3(b), with certain
modifications. Specifically, final
§ 464.2(c) requires businesses to
disclose clearly and conspicuously,
before the consumer consents to pay for
any covered good or service: The nature,
purpose, and amount of any fee or
charge imposed on the transaction that
has been excluded from total price and
the identity of the good or service for
which the fee or charge is imposed, but
not the fee’s refundability; and the final
amount of payment for the transaction.
The Commission makes these
modifications, as discussed herein, in
response to the comments and to
address related concerns. One
commenter recommended that the
Commission provide greater specificity
about which fees excluded from total
price must be disclosed under this
provision, and require the itemized
disclosure of such fees.324 Some
commenters argued that the provision
was vague and overbroad, and that its
application to ‘‘any amount a consumer
may pay’’ would make complying with
the provision impracticable and result
in excessive disclosures that would
confuse consumers into believing that
all disclosed fees apply to them when
they might not. 325 One commenter
recommended that the rule allow the
required disclosures to be made at the
time goods or services are selected.326
Commenters argued that requiring
businesses to explain how fees will be
used is not reasonable and may require
the disclosure of confidential,
proprietary, or commercially sensitive
information, such as the business
rationale for imposing fees and the
specific uses to which businesses put
fees. 327 Other commenters
recommended that the rule require the
disclosure of the optional nature of
optional fees 328 and regulate opt-in and
opt-out procedures for fees.329
The Commission modifies the NPRM
proposal so that final § 464.2(c) requires
businesses to disclose separately the
amount, as well as the nature and
purpose, of each fee or charge imposed
on the transaction for the covered good
or service that is excluded from total
price, and the final amount of payment,
before the consumer consents to pay.
The Commission determines that these
modifications are necessary for price
transparency and to protect consumers
who would reasonably expect to know
the nature, purpose, and amount of fees
they will have to pay, as well as the
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330 FTC–2023–0064–3160 (Consumer Federation
of America et al.).
331 See, e.g., FTC–2023–0064–3160 (Consumer
Federation of America et al.); FTC–2023–0064–3146
(Institute for Policy Integrity, New York University
School of Law); FTC–2023–0064–3283 (National
Consumer Law Center, Prison Policy Initiative, and
advocate Stephen Raher); FTC–2023–0064–3191
(Community Catalyst et al.).
332 As noted supra section III.B, the Commission
redesignates proposed § 464.3(b) as final § 464.2(c)
to consolidate all provisions related to disclosures
in final § 464.2.
333 FTC–2023–0064–3215 (Attorneys General of
the States of North Carolina and Pennsylvania,
along with Attorneys General of the States or
Territories of Arizona, Colorado, Connecticut,
Delaware, District of Columbia, Hawaii, Illinois,
Maine, Michigan, Minnesota, New Jersey, New
York, Oklahoma, Oregon, Vermont, Washington,
and Wisconsin stated: ‘‘[C]harges that misrepresent
their nature and purpose are unfair and deceptive
because they mislead consumers and make it more
difficult for truthful businesses to compete on
price.’’ The Attorneys General asserted that ‘‘this
provision is another straightforward, commonsense
approach that should not significantly burden
businesses.’’).
334 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.
asserted: ‘‘Prohibiting misrepresentation of the
final amount of payment, before they
consent to pay.
To provide clarification and address
commenter concerns about potential
overbreadth and vagueness, the
Commission narrows the NPRM
proposal so that final § 464.2(c) requires
the disclosures in connection with ‘‘any
fee or charge imposed on the transaction
that has been excluded from total price’’
instead of ‘‘any amount a consumer may
pay.’’ The provision therefore requires
the disclosure, before the consumer
consents to pay, of the nature, purpose,
and amount of government charges,
shipping charges, and any other fee or
charge, such as for optional ancillary
goods or services, that permissibly were
excluded from total price but are being
imposed on the transaction.
Final § 464.2(c) also explicitly
requires disclosure of ‘‘the final amount
of payment for the transaction,’’ as that
amount may differ from total price due
to, for example, the application of
promotional pricing or the addition of
any fees or charges permissibly
excluded from total price, including for
any optional ancillary goods or services.
Where the final amount of payment is
displayed, as discussed in section
III.B.2, final § 464.2(b) requires it to be
at least as prominent as, or more
prominent than, total price.
In most instances, the disclosure
about the nature, purpose, and amount
of the excluded charge or fee will be
minimal. For example, using the
defined term ‘‘shipping charges’’ is
likely to convey the nature and purpose
of such charges. For government
charges, a phrase like ‘‘sales tax’’ or
‘‘hotel occupancy tax’’ would convey
the nature and purpose of an imposed
sales tax or hotel occupancy tax.
Similarly, in most instances, simply
identifying the ancillary good or service
for which a charge applies, such as
‘‘valet parking,’’ will sufficiently convey
the nature and purpose of the charge.
Some commenters observed that the
timing of ‘‘before the consumer consents
to pay’’ is unclear. One commenter
cautioned that the language of the rule
may open the door to the types of bait-
and-switch pricing that the total price
disclosure requirement is meant to
prevent. 330 Other commenters
recommended that the Commission
clarify the meaning of the phrase
‘‘before the consumer consents to pay’’
and the timing of the required
disclosures, for example, by specifying
that it means before businesses obtain
consumers’ billing information.331
The Commission clarifies that,
although when a consumer consents to
pay may depend on the facts and
circumstances surrounding the
transaction, § 464.2(c) requires
businesses to clearly and conspicuously
disclose the nature, purpose, and
amount of any fees or charges imposed
on the transaction that have been
excluded from total price and the
identity of the good or service for which
the fee or charge is imposed, as well as
the final amount of payment for the
transaction, before consumers are
required to pay cash or provide their
payment information. The Commission
notes that a default setting that
automatically opts-in consumers to pay
for goods or services does not constitute
consent to pay nor does it satisfy
§ 464.2(c)’s disclosure requirements.
As part of final § 464.2(c), the
Commission does not adopt the NPRM’s
proposed requirement to affirmatively
disclose each fee’s refundability. The
Commission determines that requiring
clear and conspicuous disclosure of
each fee’s refundability may be
impractical for businesses and
confusing to consumers due to extensive
qualifications or other requirements for
refunds. Such extensive, itemized
disclosures may impede the
Commission’s goal of ensuring
consumers receive clear and accurate
pricing information. However, the
Commission finalizes § 464.3’s
prohibition on misrepresenting a fee’s
refundability.
C. § 464.3 	Misleading Fees Prohibited
Both practices that the Commission
identified in the NPRM as unfair or
deceptive involve misleading practices:
(1) bait-and-switch pricing that hides
the total price of goods or services by
omitting mandatory fees from advertised
prices, including through drip pricing,
and (2) misrepresenting the nature,
purpose, amount, and refundability of
fees or charges. Proposed § 464.3(a)
would have prohibited any business
from misrepresenting the nature and
purpose of any amount a consumer may
pay, including the refundability of such
fees and the identity of any good or
service for which fees are charged.332
The Commission finalizes proposed
§ 464.3(a) in § 464.3 with some
modifications. Specifically, final § 464.3
prohibits any business, in any offer,
display, or advertisement for a covered
good or service, from misrepresenting
any fee or charge, including its nature,
purpose, amount or refundability, and
the identity of the good or service for
which it is imposed. The Commission
adds the phrase ‘‘covered goods or
services’’ to reflect the narrower scope
of the final rule. The Commission also
adds ‘‘amount’’ to ‘‘nature’’ and
‘‘purpose,’’ and clarifies that the
prohibited misrepresentations concern
‘‘any fee or charge’’ instead of ‘‘any
amount a consumer may pay.’’ This
modified provision makes plain that, in
connection with covered goods or
services, businesses cannot
misrepresent the nature, purpose,
amount, or refundability of any fee or
charge, including government charges,
shipping charges, any fees or charges for
optional ancillary goods or services, or
any mandatory fees or charges. In
making these modifications, the
Commission has considered
recommendations and alternatives
suggested in NPRM comments,
discussed herein.
The Commission noted in the NPRM
that it had received comments in
response to the ANPR stating that sellers
often misrepresent the nature or
purpose of fees, leaving consumers
wondering what they are paying for,
believing fees are arbitrary, or
concerned that they are getting nothing
for the fees charged. The Commission
received similar comments in response
to the NPRM.
The Attorneys General of nineteen
States and the District of Columbia
commented that fee misrepresentations
‘‘mislead consumers and make it more
difficult for truthful businesses to
compete on price.’’ 333 Commenters
supported prohibiting fee
misrepresentations because truthful
information benefits both consumers
and businesses. 334 A commenter
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2103	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
identity and nature of fees further serves the
Commission’s mandate to promote fair business
practices and competition.’’); FTC–2023–0064–2892
(Community Legal Services of Philadelphia stated
that the rule’s ‘‘prohibition on misrepresentation
regarding the nature and cost of fees would also be
extremely beneficial for low-income renters, who
often face inflated fees that can contribute to
housing insecurity.’’); FTC–2023–0064–3268
(Housing and Eviction Defense Clinic, University of
Connecticut School of Law stated: ‘‘Prohibiting
misleading fees will not only properly inform the
tenants of the charges but also hold the landlords
accountable for their fees.’’).
335 FTC–2023–0064–3283 (National Consumer
Law Center, Prison Policy Initiative, and advocate
Stephen Raher stated that § 464.3(a) should make
clear that it prohibits misrepresentations regarding
any amount included in Total Price as well as any
other fee or charge the consumer may pay,
including ‘‘Shipping Charges, Government Charges,
fines, penalties, optional charges, voluntary
gratuities, and invitations to tip,’’ and proposed
adding specific text to that effect.).
336 See, e.g., FTC–2023–0064–3268 (Housing &
Eviction Defense Clinic, University of Connecticut
School of Law stated that rental fees may be ‘‘for
something the landlord/property manager cannot
explain.’’); FTC–2023–0064–3283 (National
Consumer Law Center, Prison Policy Initiative, and
advocate Stephen Raher stated the rule should
clarify that descriptions of fees which are not
understandable to reasonable consumers
misrepresent their nature and purpose.); FTC–
2023–0064–3275 (Berkeley Center for Consumer
Law & Economic Justice et al. cited research
showing that ‘‘many businesses characterize their
hidden and unexpected fees using vague or
anodyne language that fails to succinctly explain to
the consumer exactly what the fee is for.’’).
337 See, e.g., FTC–2023–0064–1939 (Tzedek DC
expressed support for the misleading fees provision
because it ‘‘will prevent companies from making
misleading claims about a fee, in example, a
company charging a ‘staff service fee’ that does not
go to employees.’’); FTC–2023–0064–3106
(American Society of Travel Advisors noted:
‘‘While admittedly there is no universally accepted
industry definition of what constitutes a ‘resort,’
hotels offering only typical or ordinary
accommodations and/or amenities but nevertheless
characteriz[ing] their fees as such misrepresent the
nature of the property being booked.’’); FTC–2023–
0064–3275 (Berkeley Center for Consumer Law &
Economic Justice et al. identified ‘‘environmental
fees’’ as one example of fees that may ‘‘serve[ ] no
apparent environmental sustainability or
conservation purpose.’’).
338 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.
stated that ‘‘environmental’’ fees ‘‘are likely
designed to trick consumers into thinking that the
added cost is either a government-imposed tax to
protect the environment, or a salutary contribution
to somehow ‘offset’ any negative environmental
impact caused by the good or service’’ when they
may be ‘‘charged simply to boost a business’s
profits.’’); FTC–2023–0064–3106 (American Society
of Travel Advisors noted that ‘‘use of terms such as
‘destination fee’ . . . will inevitably mislead many
consumers into mistakenly believing that it
represents a tax or government surcharge that must
be collected from the consumer and passed on to
a local jurisdiction.’’).
339 See, e.g., FTC–2023–0064–3275 (Berkeley
Center for Consumer Law & Economic Justice et al.
argued that the rule could be strengthened by
clarifying that the misleading fees provision applies
to mandatory and optional fees.); FTC–2023–0064–
3160 (Consumer Federation of America et al. stated
that the FTC should make clear that the misleading
fees provision applies to mandatory and optional
fees.).
340 FTC–2023–0064–3212 (TickPick, LLC argued:
‘‘Due to the arbitrary nature of the components that
make up the Total Price of a ticket, any secondary
ticketing marketplace that itemizes mandatory fees
and charges is arguably misrepresenting the ‘nature
and purpose of any amount a consumer may pay.’ ’’
The commenter proposed that the Commission
‘‘define any breakdown of the amounts that a
consumer may pay as a representation that requires
adequate substantiation.’’).
341 See, e.g., FTC–2023–0064–3102 (Corporation
for Supportive Housing noted that landlords and
property managers may collect ‘‘fees for services
that were not performed (e.g., running a background
check, credit check), [and] charg[e] fees in excess
of the actual amount to perform the service/run the
check to generate profit.’’); FTC–2023–0064–3278
(Southeast Louisiana Legal Services noted that low-
income renters face unfair and deceptive fees
during residential leases that are ‘‘frequently for
services not rendered.’’ The commenter further
noted: ‘‘Without any restrictions on hidden or
misleading fees, landlords are free to use rental
applications as an independent source of profit for
which there may be no real service provided.’’);
FTC–2023–0064–1431 (McPherson Housing
Coalition stated that rental housing applicants who
pay application fees and do not get approved lose
their money.); FTC–2023–0064–2862 (Legal Aid
Foundation of Los Angeles gave as examples of
misleading fees a repairs fee when the landlord is
legally obligated to provide the repairs and a
parking fee when the tenant does not have or park
a car.); FTC–2023–0064–2920 (Colorado Poverty
Law Clinic stated, ‘‘we often see fees added for
services that the tenant does not receive, or that are
basic services that should only reasonably be
included in the tenant’s monthly rent,’’ such as for
common area maintenance or utilities.); FTC–2023–
0064–3242 (William E. Morris Institute for Justice
expressed concern that ‘‘housing providers and
landlords are charging junk fees untethered to any
real cost or business expense . . . or to any value
or benefit delivered to rental housing applicants.’’).
342 See, e.g., FTC–2023–0064–3106 (American
Society of Travel Advisors noted that ‘‘even where
use of the term ‘resort’ to describe the property may
be warranted, often the amount of the fee collected
appears arbitrary and bears no relationship to the
value of the services purportedly being provided.’’);
FTC–2023–0064–3278 (Southeast Louisiana Legal
Services commented that rental housing providers
charge misleading fees when ‘‘they do not appear
to correspond to the cost of service provided’’ or are
vaguely identified, such as an ‘‘administrative fee’’
that causes ‘‘confusion for tenants who believe it to
be a security deposit.’’); FTC–2023–0064–3253
(Fortune Society commented that ‘‘application fees
often do not reflect the actual costs of submitting
a rental application.’’).
343 See, e.g., FTC–2023–0064–3094 (American
Hotel & Lodging Association).
344 Given the prevalence of the defined unfair or
deceptive practices regarding the misrepresentation
Continued
recommended that the Commission
clarify that the provision includes
misrepresentations about fees included
in total price and fees excluded from
total price. 335
Commenters stated that businesses
misrepresent fees by using language that
is vague and not understandable to
consumers,336 and provided examples
of various types of misrepresentations
about the nature and purpose of fees,
such as ‘‘service’’ fees that may not go
to service employees, ‘‘environmental’’
fees that may not have an environmental
purpose, ‘‘resort’’ fees for ordinary
accommodations or amenities,337 and
fees misrepresented as government
charges.338 Commenters also stated that
businesses may misrepresent the
mandatory or optional nature of fees, or
their amount, and recommended that
the Commission clarify that prohibiting
misrepresentations about the nature and
purpose of fees includes
misrepresentations about their
mandatory or optional nature.339
Another commenter argued that
businesses can misrepresent fees when
they itemize mandatory fees that are
arbitrary and are not for identified goods
or services, and recommended that the
Commission clarify that businesses
must have adequate substantiation for
itemized fees. 340 Commenters also
argued that businesses misrepresent fees
when they do not provide the goods or
services for which fees are charged or
provide nothing of value, 341 and when
fees fail to reflect the cost of the goods
or services provided.342
The American Hotel & Lodging
Association and other commenters
described the misleading fees provision
as unnecessary given the Commission’s
existing authority under section 5 of the
FTC Act to police misleading fees. 343 It
is true that section 5, which prohibits
unfair or deceptive practices, has long
been used to protect against
misrepresentations regarding material
terms of a transaction, including price.
False claims about fees or charges, as
well as those claims that lack a
reasonable basis, are inherently likely to
mislead. However, the Commission
disagrees with commenters’ contentions
that the rule’s prohibitions on
misrepresentations are unnecessary
given the existing section 5 authority.
As explained in section V, the final rule
is necessary to: (1) ensure all businesses
offering covered goods or services are
held to the same standard so that
consumers can effectively comparison
shop; (2) level the playing field for these
businesses so that they can compete
based on truthful pricing information;
and (3) increase deterrence by allowing
courts to impose civil penalties and
enabling the Commission to more
readily obtain redress and damages for
consumers through section 19(b) of the
FTC Act. As it has become increasingly
common for businesses offering covered
goods or services to charge or itemize
discrete fees over the course of a
transaction, a specific prohibition on
pricing misrepresentations is necessary
to ensure consumers receive truthful
information about the charges and fees
they incur, and businesses are able to
compete based on truthful
information. 344
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2104 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
of total costs and the nature and purpose of fees,
the Commission finds that it is necessary to require
both affirmative disclosures and a prohibition of
misrepresentations, instead of limiting the rule to
prohibiting misrepresentations. See supra Parts II.A
and II.B.
345 See, e.g., FTC–2023–0064–3094 (American
Hotel & Lodging Association); FTC–2023–0064–
3206 (Motor Vehicle Protection Products
Association et al.).
346 NPRM, 88 FR 77434.
347 NPRM, 88 FR 77432; Deception Policy
Statement, 103 F.T.C. 110, 175, 182–183, 183 n.55
(listing, respectively, ‘‘misleading price claims’’
among those that the FTC has found to be
deceptive, and claims or omissions involving cost
among those that are presumptively material); see
also FTC v. FleetCor Techs, Inc., 620 F. Supp. 3d
1268, 1303–04 (N.D. Ga. 2022) (finding that
representations about transaction fees and
discounts were material).
348 As the Commission noted in the NPRM, if a
delivery application includes an invitation to tip a
delivery driver without disclosing that a portion of
the tip is allocated to offset the delivery driver’s
base wages or benefits, it would violate § 464.3 in
addition to other laws or regulations relating to the
distribution of tips. See Complaint ¶¶ 50–51, In re
Amazon.com, Inc. (‘‘Amazon Flex’’), No. C–4746
(FTC June 9, 2021) (alleging respondents falsely
represented that 100% of tips would go to the
driver in addition to the pay respondents offered
drivers).
349 See discussion of optional and mandatory fees
supra Parts III.A.1 and III.A.8.a; see also, e.g., Fed.
Trade Comm’n, Bringing Dark Patterns to Light:
Staff Report 9, 15, 15 n.122, 22 (stating ‘‘companies
must not mislead consumers to believe that fees are
mandatory when they are not’’ and describing the
use of pre-selected checkboxes as a dark pattern
that tricks consumers into buying unwanted goods
and services) (Sept. 2022), https://www.ftc.gov/
system/files/ftc_gov/pdf/P214800%20Dark%
20Patterns%20Report%209.14.2022%20-
%20FINAL.pdf; Stipulated Order for Permanent
Injunction, Monetary Judgment, and Other Relief as
to Defendants Rhinelander Auto Grp. LLC, et al.,
FTC v. Rhinelander Auto Ctr., Inc., No. 3:23–cv–
00737–wmc (W.D. Wis. Nov. 6, 2023) (settling
allegations that defendants misrepresented that
consumers were required to purchase add-on
products to purchase, lease, or finance a vehicle
and, among other provisions, enjoining defendants
from misrepresenting whether charges, products, or
services are optional or required), https://
www.ftc.gov/system/files/ftc_gov/pdf/18-
ConsentJudgmentEnteredastoRAGRMGand
Towne.pdf.
350 See, e.g., cases cited supra note 111.
351 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
352 FTC–2023–0064–3293 (Travel Technology
Association).
353 FTC–2023–0064–3108 (Christian L. Castle,
Esq.; Mala Sharma, President, Georgia Music
Partners; and Dr. David C. Lowery, founder of
musical groups Cracker and Camper Van
Other commenters described the
misrepresentations provision as vague
and overbroad. 345 The Commission
carefully considered comments that
suggested the language proposed in the
NPRM prohibiting misrepresentations
lacked specificity and was vague or
overbroad, particularly the phrase ‘‘any
amount a consumer may pay.’’ In final
§ 464.3, the Commission modifies the
NPRM proposal to replace ‘‘any amount
a consumer may pay’’ with a reference
to ‘‘any fee or charge.’’ In the NPRM, the
Commission stated that ‘‘[o]ther
characteristics included in the nature
and purpose of a charge, such as the
amount of the charge and whether it is
refundable, are also material.’’ 346 To
elaborate on this point in the final rule
text, the Commission specifies that the
‘‘amount’’ of any fee or charge cannot be
misrepresented. Taken together, these
modifications provide clarity to
businesses that they cannot
misrepresent the nature, purpose,
amount, or refundability of any fee or
charge excluded from total price,
including government charges, shipping
charges, any fees or charges for optional
ancillary goods or services, or any other
itemized or totaled fee or charge,
including total price and the final
amount of payment.
Final § 464.3 prohibits
misrepresentations about material
pricing terms of a transaction. The
nature, purpose, amount, and
refundability of fees or charges and the
identity of the good or service for which
they are imposed are material
characteristics that affect the value to
consumers of the covered goods or
services being offered and businesses’
ability to compete on price. As the
Commission noted in the NPRM,
whether a consumer is required to pay
a charge, the amount of the charge, and
what goods or services they will receive
in exchange for the charge, is
necessarily material information that
affects a consumer’s choice about
whether to consent to a charge. 347 Other
characteristics included in the nature,
purpose, and amount of a charge, such
as whether it is refundable, are also
material.
Under final § 464.3, businesses cannot
misrepresent the nature, purpose,
amount, or refundability of fees or
charges and the identity of the goods or
services for which they are imposed.348
For example, it would be a
misrepresentation to characterize fees as
mandatory when they are optional, or to
characterize fees as optional when they
are mandatory or consumers are
automatically opted-in to pay them. 349
Representations that fees are for
identified goods or services when those
goods or services are not provided
would also be a misrepresentation.
Further, although the rule does not
govern how businesses set their prices,
if a business represents that it is
charging a fee for a specific good or
service, but the amount of the fee does
not reflect the cost of that good or
service, that may be evidence that the
business has misrepresented the nature
or purpose of the fee.
Misrepresentations can result from
failing to disclose material conditions or
limitations relating to fees and charges,
for example, material conditions or
limitations that would affect consumers’
ability to purchase covered goods or
services at advertised prices.350
Describing a good or service as fully
refundable without disclosing material
limitations on refundability (e.g.,
refunds are only accepted for a specified
amount of time) would also be
misleading.
The American Hotel & Lodging
Association expressed the concern that
businesses may use inconsistent
descriptions of similar fees and confuse
consumers in disclosing the nature and
purpose of fees or the identity of the
goods or services for which fees are
imposed. 351 Using vague language or fee
descriptions (e.g., unspecified service or
convenience fees) that do not accurately
inform consumers of the nature or
purpose of fees or charges or the
identity of the good or service for which
the fee or charge is imposed
misrepresents those fees. In addition, it
would be misleading if a business
conflates fees so that consumers are
unable to determine their nature,
purpose, or the identity of the goods or
services for which the fees are charged.
Whether fee descriptions are adequate
to avoid misrepresenting their nature,
purpose, or the identity of goods or
services for which they are charged will
be case specific and may depend on the
context.
Another commenter argued that the
rule would unfairly hold online travel
agencies and other intermediaries liable
for fee misrepresentations when only
travel service providers can know
whether representations about the
nature and purpose of fees are
accurate.352 As discussed in section
III.B.1.f, complying with the rule would
require businesses that sell or advertise
covered goods or services through
platforms to provide the platforms with
accurate pricing information.
Contractual relationships and the rule’s
application to B2B transactions should
ensure that businesses that rely on other
parties for pricing information receive
accurate pricing information.
One commenter argued that charging
consumers for ‘‘speculative tickets’’ in
the live-event sector is deceptive
because it is tantamount to ‘‘charging
consumers for something that doesn’t
exist,’’ and suggested the rule should
‘‘prohibit sellers or resellers from
charging the consumer for buying
something the seller doesn’t own, or
that does not even exist.’’ 353 The
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2105	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
Beethoven, and a lecturer at the University of
Georgia Terry College of Business).
354 See, e.g., FTC–2023–0064–2918 (Elite Catering
+ Event Professionals opposed the
misrepresentations provision for private food
services contracts because ‘‘[t]hroughout the
contracting process, there are ample opportunities
for the customer to seek clarification or negotiate
the applicability of the price and fees.’’).
355 FTC–2023–0064–3016 (National Federation of
Independent Business proposed modifying the rule
as follows: ‘‘(a) . . . [I]t is an unfair and deceptive
practice . . . for a Business to: (i) misrepresent the
total cost of a good or service by omitting a
mandatory fee from the advertised price of the good
or service; or (ii) misrepresent the nature and
purpose of such a mandatory fee.’’ The commenter
also proposed exempting any business from that
requirement if it discloses the fee clearly and
conspicuously ‘‘before a consumer becomes
obligated to pay the fee’’ and ‘‘either makes no
statement about the nature and purpose of the fee
or makes an accurate statement of the nature and
purpose of the fee.’’).
356 16 CFR part 437.
357 12 CFR part 1014.
358 12 CFR part 1015.
359 Promulgation of Trade Regulation Rule and
Statement of Basis and Purpose: Rule Concerning
Recurring Subscriptions and Other Negative Option
Programs, 89 FR 90476 (Nov. 15, 2024), https://
www.federalregister.gov/documents/2024/11/15/
2024-25534/negative-option-rule.
360 16 CFR part 310.
361 In addition, the added definition of ‘‘Covered
Goods or Services’’ removes any potential overlap
between the final rule and Regulations N and O.
362 See, e.g., FTC–2023–0064–3150 (Attorney
General of the State of California ‘‘appreciate[d] that
the FTC’s rule respects the states’ role in protecting
consumers from deceptive price advertising, and
the rule’s clear intent to create a federal floor, rather
than a ceiling, for consumer protection.’’); FTC–
2023–0064–3212 (TickPick, LLC).
363 See, e.g., Cong. Rsch. Serv., R45825, Federal
Preemption: A Legal Primer 23 (2023), https://
crsreports.congress.gov/product/pdf/R/R45825/3.
364 Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta,
458 U.S. 141, 153 (1982).
365 Many FTC regulations, including regulations
promulgated under section 18 of the FTC Act,
include provisions addressing State laws and
preemption. See, e.g., Funeral Rule, 16 CFR 453.9
(exempting from preemption State laws that
‘‘afford[ ] an overall level of protection [that] is as
great as, or greater than, the protection afforded by’’
the FTC’s Rule); Rule Concerning Cooling Off
Period for Sales Made at Homes or at Certain Other
Locations, 16 CFR 429.2(b) (exempting laws and
ordinances that provide ‘‘a right to cancel a door-
to-door sale that is substantially the same or greater
than that provided in this part’’); Business
Opportunity Rule, 16 CFR 437.9(b) (‘‘The FTC does
not intend to preempt the business opportunity
sales practices laws of any state or local
government, except to the extent of any conflict
with this part. A law is not in conflict with this
Rule if it affords prospective purchasers equal or
greater protection . . . .’’); Mail, Internet, or
Telephone Order Merchandise Rule, 16 CFR
435.3(b) (‘‘This part does supersede those
provisions of any State law, municipal ordinance,
or other local regulation which are inconsistent
with this part to the extent that those provisions do
not provide a buyer with rights which are equal to
or greater than those rights granted a buyer by this
part.’’); Franchise Rule, 16 CFR 436.10(b) (‘‘The
FTC does not intend to preempt the franchise
practices laws of any state or local government,
except to the extent of any inconsistency with part
436. A law is not inconsistent with part 436 if it
affords prospective franchisees equal or greater
protection . . . .’’); Labeling and Advertising of
Home Insulation, 16 CFR 460.24(b) (preemption of
‘‘State and local laws and regulations that are
inconsistent with, or frustrate the purposes of, this
regulation’’).
366 See, e.g., FTC–2023–0064–3150 (Attorney
General of the State of California commented that
consumer protection is also a state concern, so, ‘‘it
is appropriate, then, that the rule does not preempt
a state law unless the rule and the state law conflict
and then only to the extent of the inconsistency.’’);
FTC–2023–0064–3215 (Attorneys General of the
States of North Carolina and Pennsylvania, along
with Attorneys General of the States or Territories
of Arizona, Colorado, Connecticut, Delaware,
District of Columbia, Hawaii, Illinois, Maine,
Michigan, Minnesota, New Jersey, New York,
Oklahoma, Oregon, Vermont, Washington, and
Wisconsin, supported the rule’s preemption
provision because it ‘‘recognizes and preserves the
interest that individual states have in combatting
unfair or deceptive acts or practices committed in
our respective jurisdictions.’’); FTC–2023–0064–
3275 (Berkeley Center for Consumer Law and
Continued
Commission notes that the final rule
does not directly address the sale of
speculative tickets. However, a business
that represents that tickets are in fact
available when they are not may violate
§§ 464.2(c) and 464.3 by failing to
disclose clearly and conspicuously, and
by misrepresenting, the identity of the
good or service for which fees or charges
are imposed.
Commenters opposed the
misrepresentation provision in the
context of negotiated contracts because
negotiations arguably allow consumers
to seek clarification about fees.354 The
Commission, however, has not
identified any justification for excluding
contracts from the misleading fees
provision. Truthful fee disclosures in
contract negotiations are material to
consumers. One commenter
recommended providing a safe harbor
from the misleading fees provision if
businesses clearly and conspicuously
disclose fees and make either no
statement or an accurate statement
about the nature and purpose of fees.355
The Commission declines to grant a safe
harbor from the misleading fees
provision when businesses make
affirmative disclosures. Whether
disclosures are adequate, clear and
conspicuous, and not misleading are
issues that may depend on the specific
facts and circumstances of the
transaction.
The NPRM identified and sought
comment on the proposed rule’s
intersection with existing Federal rules
and regulations containing prohibitions
on misrepresentations: the Business
Opportunity Rule,356 the Mortgage Acts
and Practices Advertising Rule
(Regulation N), 357 the Mortgage
Assistance Relief Services Rule
(Regulation O), 358 the amendments to
the Negative Option Rule,359 and the
Telemarketing Sales Rule. 360 The
Commission did not receive substantive
comments about overlap or conflict with
these rules.361 The Commission is not
aware of any evidence that there is a
conflict between these rules and the
final rule. The Commission believes it is
possible for businesses to comply with
each of them, as applicable.
D. § 464.4 	Relation to State laws
Proposed § 464.4 addressed
preemption and the proposed rule’s
relation to State statutes, regulations,
orders, or interpretations, including
State common law (hereinafter ‘‘State
law’’). Proposed § 464.4(a) provided that
the rule would not supersede or
otherwise affect any State law unless the
State law is inconsistent with the rule,
and then only to the extent of the
inconsistency. Proposed § 464.4(b)
specified that a State law providing
consumers with greater protections than
the rule does not, solely for that reason,
make the State law inconsistent with the
rule. When a State law offers greater (or,
in some circumstances, even lesser)
protection than the rule, if businesses
can comply with both, they are not
inconsistent. Thus, as commenters
noted, the rule would establish a
regulatory floor rather than a ceiling. 362
After reviewing the comments, the
Commission adopts the provision as
proposed in the NPRM.
The Commission finds it has the
authority to promulgate regulations that
preempt inconsistent State laws under
section 5 of the FTC Act. Even without
an express preemption provision,
Federal statutes and regulations
preempt conflicting State laws. Under
the Supreme Court’s conflict
preemption doctrine, a Federal statute
or regulation impliedly preempts State
law when it is impossible for the
regulated parties to comply with both
the Federal and the State law, or when
a State law is an obstacle to achieving
the full purposes and objectives of the
Federal law. 363 ‘‘Federal regulations
have no less pre-emptive effect than
[F]ederal statutes.’’ 364 Accordingly, the
rule preempts a State law only to the
extent it is inconsistent with the rule
and compliance with both is impossible,
or it is an obstacle to achieving the full
purposes and objectives of the rule. To
provide a clear explanation of the
Commission’s intent and the rule’s
scope of preemption, the rule includes
an express preemption provision at
§ 464.4.365
Numerous commenters supported
proposed § 464.4(b)’s targeted approach
of preempting only inconsistent parts of
State laws.366 Some commenters,
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Economic Justice et al. commented that the rule is
‘‘an invaluable complement to state and private
actions to challenge hidden and deceptive pricing
practices.’’); FTC–2023–0064–3293 (Travel
Technology Association); FTC–2023–0064–3262
(Skyscanner); FTC–2023–0064–3266 (StubHub,
Inc.); FTC–2023–0064–3212 (TickPick, LLC); FTC–
2023–0064–3267 (National Retail Federation).
367 See, e.g., FTC–2023–0064–2886 (American
Gaming Association); FTC–2023–0064–3094
(American Hotel & Lodging Association); FTC–
2023–0064–3122 (Vivid Seats); FTC–2023–0064–
3204 (Expedia Group); FTC–2023–0064–3137
(Chamber of Progress); FTC–2023–0064–3127 (U.S.
Chamber of Commerce); FTC–2023–0064–3233
(NCTA—The Internet & Television Association);
FTC–2023–0064–3238 (Gibson, Dunn & Crutcher
LLP); FTC–2023–0064–2856 (National Football
League).
368 See, e.g., FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–3238 (Gibson,
Dunn & Crutcher LLP).
369 FTC–2023–0064–3137 (Chamber of Progress).
370 See, e.g., FTC–2023–0064–3244 (Vacation
Rental Management Association); FTC–2023–0064–
3206 (Motor Vehicle Protection Products
Association et al.); FTC–2023–0064–3143 (ACA
Connects—America’s Communications
Association).
371 See, e.g., FTC–2023–0064–3152 (Building
Owners & Managers Association et al.); FTC–2023–
0064–3133 (National Multifamily Housing Council
and the National Apartment Association); FTC–
2023–0064–3115 (National Association of
Residential Property Managers); FTC–2023–0064–
3116 (Manufactured Housing Institute); FTC–2023–
0064–3172 (New Jersey Apartment Association);
FTC–2023–0064–3289 (Zillow Group).
372 The Commission has made similar findings in
previous regulations. See, e.g., Final rule: Non-
Compete Clause Rule, 89 FR 38342, 38453–54 (May
7, 2024) (finding that the Non-Complete Clause
Rule sets a Federal floor that will reduce the
variations in a patchwork of State regulations);
Promulgation of Trade Regulation Rule and
Statement of Its Basis and Purpose: Cooling-Off
Period for Door-to-Door Sales, 37 FR 22934, 22958
(Oct. 26, 1972) (finding that, when State laws ‘‘give
the consumer greater benefit and protection . . .,
there seems to be no reason to deprive the affected
consumers of these additional benefits,’’ but when
State laws do not, ‘‘the rule would supply the
needed protection or be construed to supersede the
weak statute to the extent necessary to give the
consumer the desired protection.’’).
373 See, e.g., Final Trade Regulation Rule: Trade
Regulation Rule; Funeral Industry Practices, 47 FR
42260, 42287 (Sept. 24, 1982) (codified at 16 CFR
part 453) (noting the purpose of the rule’s provision
addressing relation of the rule to State law is ‘‘to
encourage federal-state cooperation by permitting
appropriate state agencies to enforce their own state
laws that are equal to or more stringent than the
trade regulation rule’’).
however, stated that the rule should
completely preempt all State laws to
provide greater consistency and clarity
and to lower compliance costs,367
particularly when State laws provide
greater protections.368 However, if a
business subject to both the rule and a
State law that imposes greater
protections does not want to use
different practices for that State versus
the rest of the country, it can choose to
comply with both by using a single set
of practices consistent with the greater
protections afforded under the
applicable State law. Nothing in the rule
prohibits businesses from giving
consumers greater protections than the
rule requires. Another commenter
expressed concern that some State laws
create loopholes that allow businesses
to mischaracterize fees as government
charges that they then can exclude from
total price. 369 The Commission
discusses issues related to the rule’s
treatment of government charges in
section III.A.5 and notes here that final
§ 464.3 would prohibit misrepresenting
that a fee is a Government Charge, or
otherwise misrepresenting the nature,
purpose, amount, or refundability of any
fee or charge.
Other commenters suggested that the
Commission provide compliance
guidance that addresses when State law
differs from the rule and identify which
State laws are not preempted. 370 Some
commenters suggested that existing
State and local industry regulations can
make the rule unnecessary, duplicative,
and confusing due to conflicting
requirements.371 The Commission
reiterates that a State law is preempted
only to the extent it conflicts with the
rule’s requirements and complying with
both is impossible, or it is an obstacle
to achieving the full purposes and
objectives of the rule. A State law can
provide greater protections and, solely
for that reason, will not be inconsistent
with the rule; a business can comply
with both. A business also can comply
with both when the State law provides
lesser protections, although businesses
still would have to comply with the
greater protections of the rule. Only if a
State law provides conflicting
requirements, and a business cannot
comply with both, or it is an obstacle to
achieving the full purposes and
objectives of the rule, will the State law
be preempted, and then only to the
extent of that conflict or obstacle.
Moreover, preemption furthers a
primary goal of the final rule, discussed
in section V.A: to provide a uniform,
minimum standard for pricing
disclosures for covered goods or
services that is easy for businesses and
consumers to understand. The
Commission also determines, as
discussed in section V.B, that declining
to issue this final rule and continuing to
rely solely on State laws and piecemeal
adjudication would be less effective.
The Commission believes the final
rule’s establishment of nationwide
minimum standard will functionally
reduce many variations among State
laws,372 because businesses will have to
conform their practices to meet the
rule’s standards for covered goods or
services to the extent those standards
exceed or directly conflict with State
law requirements. Moreover, to the
extent State law is not inconsistent with
the final rule, additional State authority
and resources will only serve to further
protect consumers and competition. To
that end, the Commission will continue
to work with its State law enforcement
partners in battling unfair and deceptive
pricing disclosure practices.373 For the
reasons stated herein, the Commission
adopts § 464.4 as proposed.
E. § 464.5 	Severability
The Commission includes a
severability clause at final § 464.5,
which provides that, if any provision of
the final rule is held to be invalid or
unenforceable either by its terms, or as
applied to any person, industry, or
circumstance, or stayed pending further
agency action, the provision shall be
construed to continue to give the
maximum effect to the provision
permitted by law. It further provides
that any such invalidity shall not affect
the application of the provision to other
persons, industries, or circumstances, or
the validity or application of other
provisions. Final § 464.5 also states that,
if any provision or application of the
final rule is held to be invalid or
unenforceable, the provision or
application shall be severable from the
final rule and shall not affect the
remainder thereof. This provision
confirms the Commission’s intent, as
discussed herein, that the final rule be
given the maximum effect permitted by
law even if a reviewing court stays or
invalidates any provision, any
component of any provision, or any
application of the rule, in whole or in
part, to any person, industry, or
circumstance.
In issuing this final rule, as discussed
in section II.A and II.B, the Commission
finds bait-and-switch pricing tactics and
misleading fee practices to be unfair and
deceptive because they deceive
consumers about the true cost of goods
and services, prevent price comparison,
and harm competitors that do accurately
disclose true cost. The Commission also
finds such practices to be widespread
and to affect many types of consumer
purchasing transactions, particularly
with respect to covered goods or
services. The Commission adopts this
rule to comprehensively address the
practices and to provide a consistent,
administrable standard with respect to
covered goods or services. The
Commission finds in section V.E that,
for covered goods or services, the
benefits of the rule exceed its costs.
At the same time, the Commission
finds that each of the provisions,
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374 See, e.g., In re Filderman Corp., 64 F.T.C. 427,
442–43, 461 (1964), https://www.ftc.gov/sites/
default/files/documents/commission_decision_
volumes/volume-64/ftcd-vol64january-
march1964pages409-511.pdf; In re Resort Car
Rental Sys., Inc., 83 F.T.C. 234, 281–82, 300 (1973),
https://www.ftc.gov/system/files/ftc_gov/pdf/Resort
%20Car%20Rental%20System%2C%20Inc.
%2083%20FTC%20234%20%281973%29.pdf,
aff’d sub. nom. Resort Car Rental Sys., Inc. v. FTC,
518 F.2d 962, 964 (9th Cir. 1975); Opinion of the
Commission at 28–30, 47–50, In re Intuit Inc., No.
9408 (FTC Jan. 22, 2024), https://www.ftc.gov/
system/files/ftc_gov/pdf/d09408_commission_
opinion_redacted_public.pdf; In re George’s Radio
& Television Co., 60 F.T.C. 179, 193–94 (1962),
https://www.ftc.gov/sites/default/files/documents/
commission_decision_volumes/volume-60/ftcd-
vol60january-june1962pages107-211.pdf (collecting
cases involving false savings claims); cases cited
supra notes 61–62 (collecting FTC enforcement
actions alleging, respectively, that bait-and-switch
pricing tactics concerning hidden fees and
misrepresentations regarding the nature and
purpose of fees violated section 5); NPRM, 88 FR
77435–37 (section III.C (‘‘Law Enforcement Actions
and Other Responses’’)). See also supra note 115
(collecting cases holding that later disclosures
cannot cure deceptive door openers).
375 See, e.g., FTC–2023–0064–2883 (District of
Columbia, Office of the People’s Counsel); FTC–
2023–0064–3104 (Truth in Advertising, Inc.); see
also FTC–2022–0069–6077 (ANPR) (Institute for
Policy Integrity, New York University School of
Law).
376 FTC–2023–0064–3127 (U.S. Chamber of
Commerce); FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3152
(Building Owners & Managers Association et al.);
FTC–2023–0064–3202 (TechNet); FTC–2023–0064–
3238 (Gibson, Dunn & Crutcher LLP); FTC–2023–
0064–3251 (National RV Dealers Association); FTC–
2023–0064–3263 (Flex Association); FTC–2023–
0064–3294 (International Franchise Association).
377 FTC–2023–0064–3233 (NCTA—The internet &
Television Association); FTC–2023–0064–3238
(Gibson, Dunn & Crutcher LLP); FTC–2023–0064–
3294 (International Franchise Association).
378 FTC–2023–0064–3016 (National Federation of
Independent Business, Inc.); FTC–2023–0064–3028
(Competitive Enterprise Institute); FTC–2023–0064–
3233 (NCTA—The internet & Television
Association); FTC–2023–0064–3238 (Gibson, Dunn
& Crutcher LLP); FTC–2023–0064–3267 (National
Retail Federation).
components of the provisions, and
applications of the final rule operate
independently, and that the evidence
and findings supporting each stand
independent of one another. The
Commission finds that realizing the
benefits of the rule does not require the
joint adoption or operation of each
provision. In addition, while the
Commission believes applying the same
restrictions to all pricing representations
would provide even greater overall
benefits, as explained in Parts II.B and
V.B, the Commission finds the benefits
of the final rule exceed the costs as to
covered goods or services, both overall
and with respect to each substantive
provision of the rule. For covered goods
or services, as discussed in section V.E,
ample data show the rule would have
positive quantified net benefits,
including by reducing search costs, as
well as unquantified reductions in
deadweight loss and consumer
frustration. Similarly, consumers would
benefit from the misleading fees
prohibition even if the requirement to
disclose total price were stayed or
invalidated. The benefits would also
justify the costs if the total price
provision were further limited to either
just the live-event ticketing or just the
short-term lodging industry.
Based on the available data, the
Commission concludes that, even if the
rule were more limited in scope or if it
applied to a more limited set of
transactions, such as to a single industry
or to particular circumstances, it would
still achieve some of the Commission’s
objectives and the benefits of the rule
would still exceed the costs. Although
a more limited scope or application
would change the magnitude of the
overall benefit of the final rule, it would
not undermine the valid and measurable
benefit of, and justification for, the
remaining provisions or applications of
the final rule. Thus, were a court to stay
or invalidate any provision, any
component of any provision, or any
application of the rule, the Commission
intends the remainder of the rule to
remain in force.
As described in section V.B, the
Commission considered alternatives to
the final rule that would have applied
the rule to other transactions or
industries or expanded it to all goods
and services within the Commission’s
jurisdiction. The Commission finds that
each such alternative would be an
appropriate exercise of the
Commission’s authority under sections
5 and 18 of the FTC Act as stand-alone
regulations because disclosure of total
price in any type of transaction or
industry—whether or not the same is
required in other transactions or
industries—mitigates the harms caused
by the unfair or deceptive pricing tactics
in those transactions or industries to
which the rule does apply. At the same
time, as discussed in parts I and II.A,
the Commission finds bait-and-switch
pricing tactics and misleading fee
practices are widespread and potentially
growing. As a result, the Commission
may later find that a rule of expanded
or even general applicability, to the
extent of its jurisdiction, would be
appropriate and would result in benefits
to consumers and competition that are
greater in magnitude than a rule with
more limited applicability. However,
such findings do not invalidate this
final rule’s quantifiable positive
benefits, in whole or in part.
Accordingly, the Commission
considers and intends each of the
provisions adopted in the final rule to
be severable, within each provision,
from other provisions in Part 464, and
as applied to different persons,
industries, or circumstances. In the
event of a stay or invalidation of any
provision, any component of any
provision, or of any provision as it
applies to certain persons, conduct, or
industry, the Commission’s intent is to
otherwise preserve and enforce the final
rule to the fullest possible extent.
Therefore, if a reviewing court were to
stay or invalidate a particular
application of the final rule, or a
provision thereof, as to certain persons,
industries, or circumstances, other
businesses that remain covered by the
rule should be required to comply with
the applicable provisions of the final
rule that remain in effect.
IV. Challenges to the FTC’s Legal
Authority To Promulgate the Rule
As explained in the NPRM and
section II, this rule is consistent with
decades of FTC adjudications and
enforcement actions addressing the
standards governing unfair or deceptive
pricing practices.374 The Commission
issues this rule to prevent prevalent
unfair or deceptive acts or practices and
to promote compliance in a manner that
accounts for and balances the needs of
consumers and regulated entities. The
rule falls squarely within the
Commission’s legal authority, is based
on substantial evidence in the
rulemaking record, and clearly defines
specific unfair and deceptive practices
regarding fees or charges.
The Commission received comments
supporting, discussing, or questioning
its authority to promulgate the final
rule. Commenters supporting the
Commission’s authority noted the rule
falls squarely within the Commission’s
mandate to prevent unfair and deceptive
acts and practices through rulemaking
under sections 5 and 18 of the FTC
Act. 375 Commenters questioning the
Commission’s rulemaking authority
typically advanced one of three
arguments. First, some commenters
argued that requiring disclosures related
to pricing is a major question that
Congress has not given the Commission
authority to address.376 Second, some
commenters argued that if the rule was
in fact consistent with the Commission’s
authority under sections 5 and 18 of the
FTC Act, Congress had impermissibly
delegated this authority to the
Commission.377 Third, some
commenters argued that the disclosures
required by the rule violate the First
Amendment.378 In addition to these
arguments, one commenter asserted that
the rule is invalid because the
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379 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
380 See, e.g., id.; FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3152
(Building Owners & Managers Association et al.);
FTC–2023–0064–3263 (Flex Association); FTC–
2023–0064–3294 (International Franchise
Association).
381 The International Franchise Association,
which represents franchised businesses offering
short-term lodging, raised challenges to the
Commission’s authority to promulgate the rule.
IFA’s comment, however, primarily focused on the
NPRM’s industry-neutral scope and its implications
for franchised businesses that do not offer Covered
Goods or Services. Regarding the short-term lodging
industry specifically, IFA’s comment challenged
certain aspects of the Commission’s estimate of
compliance costs, which are addressed in section V.
See FTC–2023–0064–3294 (International Franchise
Association).
382 See, e.g., FTC–2023–0064–3263 (Flex
Association); FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–3152 (Building
Owners & Managers Association et al.); FTC–2023–
0064–3202 (TechNet); FTC–2023–0064–3133
(National Multifamily Housing Council and
National Apartment Association); FTC–2023–0064–
3238 (Gibson, Dunn & Crutcher LLP). While
commenters suggested that the rule would have
‘‘political and economic significance,’’ no
commenters pointed to any specific political
significance.
383 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP); FTC–2023–0064–3127 (U.S.
Chamber of Commerce).
384 FTC–2023–0064–3127 (U.S. Chamber of
Commerce); FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP); FTC–2023–0064–3152 (Building
Owners & Managers Association et al.); FTC–2023–
0064–3202 (TechNet); FTC–2023–0064–3133
(National Multifamily Housing Council and
National Apartment Association).
385 West Virginia v. EPA, 597 U.S. at 721 (quoting
FDA v. Brown & Williamson Tobacco Corp., 529
U.S. 120, 159–60 (2000)).
386 Id. at 723–24 (quoting Util. Air Regulatory
Group v. EPA, 573 U.S. 302, 324 (2014).
387 See generally supra section II.B; NPRM, 88 FR
77432, 77434.
388 Cf. NLRB v. Bell Aerospace Co., 416 U.S. 267,
294 (1974) (holding that ‘‘the Board is not
precluded from announcing new principles in an
adjudicative proceeding,’’ that ‘‘the choice between
rulemaking and adjudication lies in the first
instance within the Board’s discretion,’’ and that
the agency’s choice between adjudication and
rulemaking was ‘‘entitled to great weight’’); SEC v.
Chenery Corp., 332 U.S. 194, 203 (1947) (‘‘[T]he
choice made between proceeding by general rule or
by individual, ad hoc litigation is one that lies
primarily in the informed discretion of the
administrative agency.’’).
389 Congress added section 18, 15 U.S.C. 57a, to
the FTC Act in 1975, and that section provides the
process the Commission must follow to promulgate
rules defining unfair or deceptive acts or practices.
See Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, Public Law 93–637,
sec. 202, § 18, 88 Stat. 2183, 2193 (1975)
(hereinafter ‘‘Magnuson-Moss Warranty Act’’); see
also Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957,
967 (D.C. Cir. 1985) (summarizing the historical
backdrop to the Commission’s authority to prevent
unfair or deceptive acts or practices including the
adoption of the Magnuson-Moss Warranty Act,
which codified section 18 of the FTC Act and
confirmed the Commission’s authority to
promulgate rules defining acts or practices that are
unfair or deceptive).
390 See, e.g., Franchise Rule, 16 CFR 436.2(a),
436.5(e) and (f) (defining as an unfair or deceptive
act or practice to fail to provide prospective
franchisees with the franchisor’s disclosure
document, which includes, among other things,
disclosure of ‘‘initial fees’’—i.e., ‘‘all fees and
payments, or commitments to pay . . . whether
payable in lump sum or installments’’ and of ‘‘all
other fees that the franchisee must pay to the
franchisor or its affiliates’’); Business Opportunity
Rule, 16 CFR 437.4(d) (defining as an unfair or
deceptive act or practice to ‘‘[f]ail to notify any
prospective purchaser in writing of any material
changes affecting the relevance or reliability of the
information contained in an earnings claim
statement before the prospective purchaser . . .
makes a payment’’); Business Opportunity Rule, 16
CFR 437.6(h) (defining as an unfair or deceptive act
Commission is unconstitutionally
structured. 379 Finally, some commenters
asserted the Commission has not
complied with the Administrative
Procedure Act (‘‘APA’’).380
Most of the commenters challenging
the Commission’s authority represent
businesses that offer goods or services
other than covered goods or services.
Thus, the concerns raised by these
commenters may not be relevant to the
narrowed scope of the final rule.
Further, the NPRM’s industry-neutral
approach was central to nearly all of the
critiques of the rule that raised
questions regarding the Commission’s
authority to promulgate the rule; while
the Commission disagrees with such
critiques, they are not applicable to this
final rule, which focuses on two
industries, live-event tickets and short-
term lodging. Notably, the vast majority
of comments from businesses offering
live-event tickets and short-term lodging
and their direct representatives did not
raise challenges to the Commission’s
authority to promulgate the rule. 381
Nevertheless, the Commission has
considered the comments challenging
its authority and explains in this section
why it disagrees with those.
A. Major Questions Doctrine
Some commenters invoked the major
questions doctrine to argue that the
Commission lacks authority to adopt the
rule. Commenters argued the rule raises
a major question because addressing
consumer fees and pricing across
industries is of vast political and
economic significance.382 Some
commenters also argued that the rule is
broader than the agency’s prior rules,
based on the assertion that the rule
regulates pricing. 383 Commenters
concluded that Congress has not
authorized the Commission to
promulgate the rule. 384
The major questions doctrine, as the
Supreme Court recently explained in
West Virginia v. EPA, 597 U.S. 697
(2022), applies to ‘‘ ‘extraordinary cases’
. . . in which the ‘history and the
breadth of the authority that [the
agency] has asserted,’ and the ‘economic
and political significance’ of that
assertion, provide a ‘reason to hesitate
before concluding that Congress’ meant
to confer such authority.’’ 385 When an
agency claims a ‘‘ ‘transformative
expansion in [its] regulatory
authority,’ ’’ it ‘‘must point to ‘clear
congressional authorization’ for the
power it claims.’’ 386
Having considered the factors that the
Supreme Court has used to identify
major questions, the Commission, as
discussed herein, concludes that the
final rule does not implicate the major
questions doctrine. The FTC does not
claim a transformative change in its
rulemaking authority. The final rule
comports with the history and breadth
of prior rules that the FTC has
promulgated pursuant to its existing
rulemaking authority, which Congress
conferred to allow the Commission to
address prevalent unfair or deceptive
practices. Even if the major questions
doctrine did apply, the Commission
concludes that Congress provided clear
authorization for the Commission to
promulgate this rule.
1. The Rule Does Not Address a Major
Question
(a) The Commission Has a Long History
of Addressing Unfair or Deceptive Acts
or Practices Related to Pricing
Information
Identifying unfair or deceptive acts or
practices related to the disclosure of the
price and purpose of goods and services
is at the core of the Commission’s
mandate under section 5. 387 The
Commission has the authority to
address these unfair or deceptive acts or
practices both through case-by-case
enforcement, either administratively or
in Federal court, or through rulemaking
if the unfair or deceptive practices are
prevalent as established by the
rulemaking record. The Commission
may choose case-by-case adjudication or
rulemaking at its discretion. 388
The Commission’s authority to
promulgate rules to define with
specificity unfair or deceptive acts or
practices under section 18 of the FTC
Act, 15 U.S.C. 57a, is not extraordinary
and is undisputed, resting on firm
historical footing. 389 Indeed, when
consumers have faced bait-and-switch
tactics in the past, including being
unable to get accurate material
information about what they must pay
and what they will receive in return, the
Commission has repeatedly issued rules
that define unfair or deceptive acts or
practices related to the disclosure of that
material information. 390 For example,
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or practice to ‘‘[m]ispresent the cost . . . of the
business opportunity or the goods or services
offered to a prospective purchaser’’); Funeral Rule,
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
purchaser for each of the specific funeral goods and
funeral services used in connection with the
disposition of deceased human bodies’’ and
requiring funeral providers to provide specific price
lists in writing).
391 Statement of Basis and Purpose: Retail Food
Store Advertising and Marketing Practices, 36 FR
8777, 8777–78 (May 13, 1971) (citing a Bureau of
Economics staff report titled ‘‘Economic Report on
Food Chain Selling Practices in the District of
Columbia and San Francisco’’). Similarly, when the
Commission later amended the Unavailability Rule,
it again stressed that food retailers must not engage
in bait and switch advertising—where the seller
advertises an unavailable good at a low price to get
the consumer in the door—or deception regarding
availability of advertised goods. Final amendments
to trade regulation rule: Amendment to Trade
Regulation Rule Concerning Retail Food Store
Advertising and Marketing Practices, 54 FR 35456,
35462–63 (Aug. 28, 1989).
392 E.g., In re Filderman Corp., 64 F.T.C. 427,
442–43, 461 (1964); Resort Car Rental Sys., 83
F.T.C. at 281–82, 300 (1973); Complaint ¶¶ 12, 46–
49, In re LCA-Vision, No. C–4789 (FTC Mar. 13,
2023); Opinion of the Commission at 37–40, 47–50,
In re Intuit Inc., No. 9408 (FTC Jan. 22, 2024). See
generally supra section I.A.–I.C (discussing the
comment and hearing record in response to the
ANPR and NPRM); section II.A (discussing the
prevalence of the practices that the rule addresses).
393 See, e.g., FTC–2023–0064–3263 (Flex
Association); FTC–2023–0064–3127 (U.S. Chamber
of Commerce); FTC–2023–0064–3152 (Building
Owners & Managers Association et al.); FTC–2023–
0064–3202 (TechNet); FTC–2023–0064–3133
(National Multifamily Housing Council and
National Apartment Association).
394 15 U.S.C. 45.
395 Commenters did not argue or provide
substantive support for any argument that a major
question was raised by proposed § 464.3(a), which
would have prohibited any Business from
misrepresenting the nature and purpose of any
amount a consumer may pay, including its
refundability and the identity of any good or service
for which it is charged. The Commission is
finalizing § 464.3 more narrowly to prohibit any
Business, in any offer, display, or advertisement for
a Covered Good or Service, from misrepresenting
any fee or charge, including its nature, purpose,
amount, or refundability, and the identity of the
good or service for which it is imposed.
396 See supra section I (‘‘The discretion to set
prices remains squarely with businesses; the rule
simply requires that they tell consumers the truth
about those prices.’’).
397 See supra section III.A.8.c (‘‘The rule neither
requires, nor prohibits, the itemization of
mandatory fees that must be included in Total
Price.’’); section III.B.1.d–e (responding to
comments about dynamic pricing, rebates, bundled
pricing, and other discounts).
398 West Virginia v. EPA, 597 U.S. at 716, 723
(quoting Util. Air, 573 U.S. at 324).
399 15 U.S.C. 45, 57a.
400 See S. Rep. No. 75–221, at 2 (1937) (report on
Amendments to the Federal Trade Commission Act
(S.1077), explaining Congress’s reasoning in
granting the Commission authority in 1914 to
define specific unfair methods of competition, and
then applying the same reasoning to the proposed
grant of authority to prohibit unfair or deceptive
acts or practices: ‘‘The committee gave careful
consideration to the question as to whether it would
attempt to define the many and variable unfair
practices . . . or whether it would by a general
declaration . . . condemn[ ] unfair practices,
leav[ing] it to the Commission to determine what
practices were unfair.’’ The Committee ‘‘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.’’); see also H.R. Rep. No. 93–1606, at H
12060 (1974) (Conf. Rep.) (report on Consumer
Product Warranty and Federal Trade Commission
Improvement Act, stating: ‘‘[section 18] is an
important power by which the Commission can
fairly and efficiently pursue its important statutory
mission.’’ Further, ‘‘[b]ecause the prohibitions of
section 5 of the Act are quite broad, trade regulation
rules are needed to define with specificity conduct
that violates the statute and to establish
requirements to prevent unlawful conduct.’’).
the Commission initiated the
rulemaking resulting in the Rule on
Retail Food Store Advertising and
Marketing Practices (the ‘‘Unavailability
Rule’’), 16 CFR part 424, based in part
on findings in a Commission report that
items priced at or below the advertised
price were frequently unavailable and
that in ‘‘a very substantial majority of
the instances of the deviations, the
prices marked on the items were higher
than the advertised price.’’ 391
As discussed in parts I and II, there
is nothing new about businesses using
bait-and-switch tactics to reel in and
deceive consumers, just as there is
nothing new about the Commission
exercising its authority to limit such
tactics and the harms they cause.392
This rule is tailored to address practices
squarely within the scope of the
Commission’s core work to protect
consumers: bait-and-switch pricing
tactics, including drip pricing, and
misrepresentations regarding a material
term. As described in section II.A and
II.B, the Commission adopts this rule
now because bait-and-switch tactics,
including drip pricing, and
misrepresentations as to the nature and
purpose of fees and charges are
prevalent and continue to harm
consumers. This is precisely what
section 18 of the FTC Act envisions and
is consistent with the Commission’s
exercise of the same authority in the
past.
(b) Commenters’ Claims About the
Scope of the Acts or Practices Covered
by the Rule Are Inapplicable or
Overstated
Commenters suggested that the major
questions doctrine is implicated simply
because the rule proposed by the NPRM
was industry-neutral. 393 The
Commission disagrees. Congress
authorized the Commission to prevent
unfair or deceptive practices in or
affecting commerce across the economy
while specifying a limited number of
industries, activities, or entities that are
exempt. 394 These comments are
inapposite, however, because the final
rule is limited to covered goods or
services: live-event ticketing and short-
term lodging.
Commenters also contended that the
rule implicates a major question because
it regulates pricing practices broadly or
supposedly will have effects on a wide
array of pricing strategies.395 The
Commission disagrees. The rule focuses
on hidden mandatory fees or charges
that obscure the total price of a covered
good or service and misrepresentations
about the nature, purpose, amount, and
refundability of fees or charges. The rule
has no effect on many pricing practices
and strategies, including a business’s
fundamental decision about what price
to charge consumers for its goods or
services. 396 Nor does the rule affect a
business’s ability to use dynamic
pricing, to offer or use sales, discounts,
rebates, or special offers, or to truthfully
itemize fees and costs so long as the
business accurately describes the total
price upfront.397 With respect to
mandatory fees, the rule does not
prevent businesses from continuing to
charge such fees as a pricing strategy,
itemizing them in addition to stating the
total price, or from providing non-
misleading information about those fees.
Indeed, a number of commenters have
misunderstood the rule to act as a
prohibition or limitation on itemization;
as explained in section III, truthful
itemization is not prohibited.
In sum, the rule does not address a
major question because it focuses on
traditional types of unfair or deceptive
acts or practices that have long been the
subject of Commission rulemaking and
enforcement activity and targets only
those acts or practices.
2. Congress Provided the Commission
With a Clear Grant of Authority To
Promulgate This Rule
Even if the final rule did present a
major question, the FTC Act provides
clear authorization for the rule. In cases
involving major questions, courts expect
Congress to ‘‘speak clearly’’ if it wishes
to assign the disputed power.398 In the
FTC Act, Congress vested the
Commission with enforcement powers
and the authority to promulgate rules to
carry out the Commission’s mandate to
prevent unfair or deceptive acts or
practices.399 Rather than trying to define
all unfair or deceptive acts and
practices, Congress empowered the
Commission to respond to changing
market conditions and to identify
conduct that is unfair or deceptive.400
When the Commission was created by
the FTC Act in 1914, the Act prohibited
‘‘unfair methods of competition’’ in
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401 Federal Trade Commission Act, Public Law
63–203, secs. 5, 6(g), 38 Stat. 717, 719, 722 (1914).
402 FTC v. Raladam Co., 283 U.S. 643, 647–49
(1931) (‘‘The paramount aim of the [FTC] act is the
protection of the public from the evils likely to
result from the destruction of competition or the
restriction of it in a substantial degree. . . . Unfair
trade methods are not per se unfair methods of
competition.’’).
403 Federal Trade Commission Act Amendments
of 1938 (Wheeler-Lea Act), Public Law 75–447, sec.
3, sec. 5, 52 Stat. 111, 111 (1938).
404 Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, Public Law 93–637,
sec. 202, sec. 18, 88 Stat. 2183, 2193 (1975)
(codified at 15 U.S.C. 57a).
405 Promulgation of Trade Regulation Rule and
Statement of Basis and Purpose: Preservation of
Consumers’ Claims and Defenses (Holder Rule), 40
FR 53506 (Nov. 18, 1975).
406 Promulgation of Trade Regulation Rule and
Statement of Basis and Purpose: Mail Order
Merchandise, 40 FR 51582 (Nov. 5, 1975).
407 Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, Public Law 93–637,
sec. 202, sec. 18(c)(1), 88 Stat. 2183, 2198 (1975)
(Specifically, section 18(c)(1) provided that ‘‘[a]ny
proposed rule under section 6(g)’’ with certain
components that were ‘‘substantially completed
before’’ section 18’s enactment ‘‘may be
promulgated in the same manner and with the same
validity as such rule could have been promulgated
had this section not been enacted.’’).
408 Federal Trade Commission Improvements Act
of 1980, Public Law 96–252, sec. 15, sec. 22, 94
Stat. 374, 388 (1980) (codified at 15 U.S.C. 57b–3).
409 15 U.S.C. 57b–3(b).
581 15 U.S.C. 57b–3(a).
411 See, e.g., Franchise Rule, 16 CFR part 436;
Business Opportunity Rule, 16 CFR part 437;
Funeral Rule, 16 CFR part 453; Negative Option
Rule, 16 CFR part 425; Cooling Off Rule, 16 CFR
part 429; see also discussion supra section IV.1.a.
412 See, e.g., 16 CFR 437.6(d), (h), (i) (The
Business Opportunity Rule provides that it is an
‘‘unfair or deceptive act or practice’’ to
misrepresent, among other information, ‘‘the
amount of sales, or gross or net income or profits
a prospective purchaser may earn’’; ‘‘the cost, or the
performance, efficacy, nature, or central
characteristics of the business opportunity or the
goods or services offered’’; or ‘‘any material aspect
of any assistance offered to a prospective
purchaser’’); 16 CFR 436.9(a) and (c) (The Franchise
Rule provides that it is an ‘‘unfair or deceptive act
or practice’’ to ‘‘[m]ake any claim or representation
. . . that contradicts’’ the required disclosures,
which include certain pricing information and fees,
or to ‘‘[d]isseminate any financial performance
representations to prospective franchisees unless
the franchisor has a reasonable basis and written
substantiation for the representation[.]’’).
413 See, e.g., Harry & Bryant Co. v. FTC, 726 F.2d
993, 999–1001 (4th Cir. 1984) (holding that
petitioners challenging Funeral Rule were not
denied procedural due process, and that the rule
was within the Commission’s statutory authority
and supported by substantial evidence); Am. Fin.
Servs. Ass’n v. FTC, 767 F.2d 957, 983–88, 991 (D.C.
Cir. 1985) (holding that the FTC did not exceed its
authority when promulgating the Trade Regulation
Rule on Credit Practices under sections 5 and 18 of
the FTC Act, and that the rule was supported by
substantial evidence and not arbitrary, capricious,
or an abuse of discretion); Consumers Union of
U.S., Inc. v. FTC, 801 F.2d 417, 422, 426 (D.C. Cir.
1986) (denying petition for review of FTC Used Car
Rule and holding that Commission’s decision to
omit a proposed disclosure requirement from the
rule had evidentiary support under both the FTC’s
substantial evidence test and the APA’s arbitrary
and capricious test, which are one and the same as
to the requisite degree of evidence); Pa. Funeral
Dirs. Ass’n v. FTC, 41 F.3d 81, 92 (3d Cir. 1994)
(denying petition for review of Funeral Rule and
finding that Commission decision to regulate casket
handling fees was not arbitrary or capricious and
was supported by substantial evidence).
414 West Virginia v. EPA, 597 U.S. at 724.
415 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
section 5 and granted the Commission
authority to promulgate rules to
effectuate the Act’s provisions in section
6(g), including the prohibition on unfair
methods of competition. 401 The Act did
not expressly prohibit deception. While
deception could qualify as an unfair
method of competition, courts required
the Commission to show harm to
competition or rivals in each instance;
harm to consumers alone was
insufficient to meet the standard.402 In
response, Congress amended the FTC
Act in 1938 to include a prohibition, not
just against unfair methods of
competition, but against unfair or
deceptive acts or practices as well.403
Congress affirmed the Commission’s
authority to issue rules like the one here
through amendments to the FTC Act in
1975 and 1980. First, in the Magnuson-
Moss Warranty Act of 1975, Congress
added section 18 of the FTC Act, 15
U.S.C. 57a, confirming the
Commission’s authority to issue rules
that ‘‘define with specificity acts or
practices which are unfair or deceptive
acts or practices,’’ and requiring the
Commission to follow specific
procedures for promulgating rules. 404
Among the substantially completed
rules at the time were the Rule on the
Preservation of Consumers’ Claims and
Defenses 405 and the Mail Order Rule,406
which proposed to define as an unfair
or deceptive act—and upon
promulgation did so define—certain
conduct that the rulemaking record
showed was causing harm across
various industries. As Congress added
procedural requirements to the
Commission’s rulemaking authority
through section 18, Congress did not
limit these existing cross-industry rules
targeting unfair or deceptive acts or
practices, but instead created an
exception under which the Commission
could finalize them without following
section 18’s procedural requirements.407
Congress again confirmed the
Commission’s authority to promulgate
rules defining unfair and deceptive acts
or practices in 1980 when it enacted
section 22 of the FTC Act, 15 U.S.C.
57b–3(b), as part of the Federal Trade
Commission Improvements Act of
1980.408 Section 22 imposes certain
additional procedural requirements the
Commission must follow when it
promulgates any ‘‘rule,’’ including rules
promulgated under section 18. Section
22(b) contemplates the FTC’s authority
to promulgate rules that are substantive
and economically significant by
requiring, for example, that the
Commission conduct a cost-benefit
analysis.409 In addition, section 22(a)
imposes the same requirements on
amendments to existing rules if they
may ‘‘have an annual effect on the
national economy of $100,000,000 or
more,’’ ‘‘cause a substantial change in
the cost or price of goods or services,’’
or ‘‘have a significant impact upon’’
persons and consumers.410 Thus,
Congress explicitly authorized the
Commission to issue rules and
amendments that address major
economic questions, so long as the
rulemaking complies with section 22.
The Commission has exercised its
authority to promulgate numerous rules
and rule amendments defining unfair or
deceptive acts or practices pursuant to
sections 18 and 22.411 Central to many
of these rules is a rulemaking record
establishing that businesses
misrepresent or fail to disclose certain
material terms in a transaction,
including information related to price,
and that these practices are unfair or
deceptive. 412 Unlike in West Virginia v.
EPA, courts have upheld Commission
rules similar to the one here—that
prohibit misrepresentations, define
unfair or deceptive conduct, and require
specific disclosures to avoid
deception—against a myriad of legal
challenges.413
In sum, this is a far cry from a
situation where Congress
‘‘conspicuously and repeatedly’’
declined to grant the agency the claimed
power. 414 Quite the opposite—Congress
has conspicuously and repeatedly
confirmed that promulgating a rule like
this final rule is precisely how Congress
expects the Commission to use its
rulemaking authority. For these reasons,
even if the final rule involves a major
question, Congress has clearly delegated
to the Commission the authority to
address that question.
B. Non-Delegation Doctrine
One commenter contended that the
Commission’s issuance of the rule
violates the non-delegation doctrine.415
The commenter argued that, given the
rule’s breadth, section 5 lacks an
intelligible principle if it authorizes the
Commission to promulgate the rule. The
commenter asserted that the rule
regulates pricing economy-wide and
that Congress has not made ‘‘the
necessary fundamental policy-decision’’
underlying the rule. The commenter
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416 Id. (citing Gundy, 588 U.S. at 159 (Gorsuch, J.,
dissenting, joined by Roberts, C.J. and Thomas, J.)).
417 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
418 Gundy, 588 U.S. at 130 (plurality op.) (quoting
Mistretta v. United States, 488 U.S. 361, 373 n.3
(1989)).
419 U.S. Const. art. I, sec. 1; see also, e.g.,
Mistretta, 488 U.S. at 372.
420 Gundy, 588 U.S. at 146.
421 Id. at 135 (quoting Mistretta, 488 U.S. at 372).
422 Id. (quoting J.W. Hampton, Jr., & Co. v. United
States, 276 U.S. 394, 409 (1928)) (brackets in
original).
423 A.L.A. Schechter, 295 U.S. at 532–33. In so
holding, the Supreme Court in A.L.A. Schechter
referred to cases in which both unfair and deceptive
practices were determined to be unfair methods of
competition. 295 U.S. at 532–33 (citing FTC v. R.F.
Keppel, 291 U.S. 304 (1934) and FTC v. Algoma
Lumber Co., 291 U.S. 67 (1934)). Congress later
clarified in the Wheeler-Lea Act of 1938 that unfair
and deceptive practices are unlawful under the FTC
Act independent of any effect they may have on
competition. 52 Stat. 111. Accordingly, the A.L.A.
Schechter Court’s conclusion that Congress’s grant
of authority to the Commission is guided by
intelligible principles applies equally to the
Commission’s authority to identify unfair or
deceptive acts or practices and to the Commission’s
authority to identify unfair methods of competition.
424 A.L.A. Schechter, 295 U.S. at 533–36.
425 15 U.S.C. 57a(b)(1)–(2). Section 18 requires
both an advance notice of proposed rulemaking and
a notice of proposed rulemaking to engage with and
solicit comment from interested parties.
426 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 681–83 (D.C. Cir. 1973).
427 15 U.S.C. 45(n).
428 Fed. Trade Comm’n, FTC Policy Statement on
Deception, 103 F.T.C. 174, 175 (1984) (sent by letter
to Congress on October 14, 1983 and appended to
In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174
(1984) (hereinafter ‘‘Deception Policy Statement’’),
https://www.ftc.gov/system/files/ftc_gov/pdf/
Cliffdale-Assocs-103-FTC-110.pdf.
429 FTC v. Colgate-Palmolive Co., 380 U.S. 374,
387 (1965); Zauderer v. Office of Disciplinary
Counsel, 471 U.S. 626, 645–46 (1985).
also asserted that the Commission’s
authority to promulgate the rule is an
unconstitutional delegation under a
‘‘history and tradition test,’’ citing to a
dissenting opinion in Gundy v. United
States, 588 U.S. 128 (2019).416 The
Commission disagrees. The Commission
notes that this commenter’s argument
that the proposed rule violated the non-
delegation doctrine was predicated on
its assertion that the proposed rule
regulated ‘‘the disclosing and collecting
[of] consumer fees for all
businesses.’’ 417 Since the focus of the
final rule is narrowed to covered goods
or services, the comment may not be
relevant to the final rule. Nevertheless,
the Commission addresses the
arguments herein.
‘‘Only twice in this country’s history
has the Court found a delegation
excessive, in each case because
‘Congress had failed to articulate any
policy or standard’ to confine
discretion.’’ 418 Article I of the
Constitution vests the Federal
government’s legislative powers in
Congress, and Congress may not
delegate those powers to an executive
agency absent an intelligible principle
to guide the exercise of discretion. 419
The ‘‘intelligible principle’’ standard is
‘‘not demanding.’’ 420 This is because of
the practical understanding that ‘‘ ‘in
our increasingly complex society,
replete with ever changing and more
technical problems,’ . . . ‘Congress
simply cannot do its job absent an
ability to delegate power under broad
general directives.’ ’’ 421 For that reason,
the Supreme Court has repeatedly held
that ‘‘a statutory delegation is
constitutional as long as Congress ‘lay[s]
down by legislative act an intelligible
principle to which the person or body
authorized to [exercise the delegated
authority] is directed to conform.’ ’’ 422
As described throughout section IV.A,
Congress, the Commission, and the
courts have long understood the
Commission’s mandate to prevent both
unfair and deceptive acts or practices as
providing intelligible principles to
guide the exercise of the Commission’s
discretion. In A.L.A. Schechter Poultry
Corp. v. United States, 295 U.S. 495
(1935), the Court observed that conduct
that fell within the ambit of section 5 of
the FTC Act was ‘‘to be determined in
particular instances, upon evidence, in
the light of particular competitive
conditions and of what is found to be a
specific and substantial public
interest.’’ 423 The Court ultimately
concluded that Congress properly
delegated authority to the FTC under
the FTC Act based, among other things,
on the subject matter and procedural
requirements Congress placed on the
Commission—which involves ‘‘notice
and hearing,’’ ‘‘appropriate findings of
fact supported by adequate evidence,’’
and ‘‘judicial review.’’ 424
FTC rulemaking under section 18
features similar procedural safeguards to
FTC adjudication and thus comports
with the nondelegation doctrine for the
same reasons. For example, section 18’s
rulemaking process requires the
Commission to: (1) notify Congress; (2)
publish multiple public notices of the
proposed rulemaking; (3) provide all
interested persons the opportunity to
‘‘submi[t] . . . written data, views, or
arguments’’; (4) consider all
submissions; (5) provide the
opportunity for an informal hearing; (6)
determine, based on all available
information, that the unfair or deceptive
acts or practices are prevalent; and (7)
determine, based on the rulemaking
record, that the final rule is appropriate.
In addition, once the rule is finalized, it
is subject to judicial review in a court
of appeals. 425 The rulemaking process
thus ‘‘may actually be fairer to regulated
parties than total reliance on case-by-
case adjudication’’ because the process
allows all interested parties the
opportunity to weigh in by submitting
data, views, and arguments and by
participating in a hearing. 426 In this
rulemaking, interested parties had
numerous opportunities to be heard by
the Commission, including through
ninety-day public comment periods on
both an advance notice of proposed
rulemaking and a notice of proposed
rulemaking, as well as an informal
hearing. These procedures helped to
ensure that the Commission properly
applied its statutory mandate when
adopting the rule to prevent prevalent
unfair and deceptive practices
concerning hidden and misleading fees.
Like the FTC’s Act’s procedural
requirements, the subject matter
requirements that apply to the FTC’s
statutory authority are well established.
With respect to unfairness, Congress
articulated in section 5(n) of the FTC
Act the factors the Commission must
apply.427 For deception, virtually all
courts have adopted the three-part test
put forward by the Commission in its
Deception Policy Statement: (1) there is
a representation, omission, or practice
that (2) is likely to mislead consumers
acting reasonably under the
circumstances, and (3) the
representation, omission, or practice is
material.428 For decades, courts have
reviewed and upheld the Commission’s
application of unfairness and deception
authority in enforcement actions and
rules. Moreover, the Supreme Court has
recognized the ability of regulators,
courts, and regulated entities to
distinguish deceptive from
nondeceptive claims or advertisements
under section 5 of the FTC Act.429 In
sum, the subject matter requirements of
the FTC Act’s statutory authority as to
unfair and deceptive practices are well
settled.
Finally, the Supreme Court has not
adopted the commenter’s suggested
‘‘history and tradition test’’ as the
applicable standard for determining
whether congressional delegation of
authority is constitutional. The
intelligible principle test is binding
precedent on that question, and the final
rule complies with the intelligible
principle test.
C. First Amendment
Some commenters argued that § 464.2
impermissibly prohibits and compels
speech in violation of the First
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430 See, e.g., FTC–2023–0064–3028 (Competitive
Enterprise Institute); FTC–2023–0064–3238
(Gibson, Dunn & Crutcher LLP); FTC–2023–0064–
3233 (NCTA—The internet and Television
Association); FTC–2023–0064–3016 (National
Federation of Independent Business). In opposing
§ 464.2, the commenters did not argue that § 464.3,
which simply prohibits misrepresentations related
to prices and fees, implicates the First Amendment.
431 E.g., FTC–2023–0064–3028 (Competitive
Enterprise Institute provided examples of pricing
information it argued was not unfair or deceptive
that involve drip pricing with disclaimers,
contingent pricing, and partition pricing.) The
Commission addresses in section III.B.1 when and
to what extent the rule covers these types of
information and also explains why the omission of
Total Price is unfair and deceptive in those
circumstances.
432 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
433 FTC–2023–0064–3275 (Berkeley Law Center
for Consumer Law & Economic Justice et al.).
434 FTC–2023–0064–3028 (Competitive Enterprise
Institute); FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
435 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
436 FTC–2023–0064–3016 (National Federation of
Independent Business).
437 FTC–2023–0064–3028 (Competitive Enterprise
Institute).
438 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
439 FTC–2023–0064–3128 (Merchants Payments
Coalition).
440 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP); FTC–2023–0064–3233 (NCTA—The
Internet & Television Association).
441 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP ‘‘assume[d]’’ that in allowing
government charges to be excluded from Total
Price, the Commission aims to ‘‘rais[e] tax
revenues’’ because the Commission believes
‘‘disclosing a tax upfront will lead to fewer people
making purchases, resulting in a decline in
revenue’’). The commenter did not address the fact
that the Commission does not have authority over
taxation, or whether the commenter’s proposed
alternative of raising marginal tax rates would fulfill
the Commission’s goal in this rulemaking of
preventing unfair or deceptive conduct related to
mandatory fees and charges. The Commission finds
that marginally raising the tax rate is not a viable
alternative because the Commission does not have
taxing authority and raising the tax rate would not
achieve the Commission’s stated goal of preventing
unfair or deceptive conduct.
442 FTC–2023–0064–3016 (National Federation of
Independent Business); FTC–2023–0064–3028
(Competitive Enterprise Institute).
443 Cent. Hudson Gas & Elec. Corp., 447 U.S. at
564.
444 Bd. of Trs. of State Univ. of N.Y. v. Fox, 492
U.S. 469, 480 (1989) (internal citations omitted).
445 Zauderer, 471 U.S. at 650–53; Nat’l Inst. of
Family & Life Advocates v. Becerra (‘‘NIFLA’’), 585
Amendment. 430 The Commission
disagrees. The rule addresses unfair and
deceptive conduct and does not
otherwise affect businesses’ ability to
express truthful and accurate price
information.
1. Comments
Some commenters argued the rule’s
disclosure requirements compel speech
in violation of the First Amendment.
Some commenters also contended that
§ 464.2 would prohibit businesses from
advertising aspects or parts of truthful
and accurate price information. They
argued that conditioning the ability to
provide some truthful information—
such as a partial price without including
certain fees—on total price being
disclosed violates the First
Amendment.431 Commenters asserted
that consumers are not injured where a
business presents a price that omits fees
or fails to add up the fees for the
consumer. They argued that this type of
price information is useful and truthful
even if it is only partial. A commenter
argued that how the price of goods and
services is displayed is a message under
the First Amendment and the rule’s
requirement that total price be
displayed clearly and conspicuously is
unconstitutional compelled speech.432
One academic commenter supported the
rule and argued it does not
unconstitutionally compel speech
because it only requires disclosure of
factual, non-controversial information,
without which the prices disclosed or
advertised would be misleading. 433
Some commenters argued the
requirement to disclose total price
clearly and conspicuously should be
subject to strict scrutiny,434 while others
argued it should be reviewed under a
heightened scrutiny standard 435 or
intermediate scrutiny. 436 One
commenter argued that the rule is a
content-based regulation subject to strict
scrutiny because, where a business
presents any type of price information,
it is required to display total price and
in a particular way—i.e., clearly,
conspicuously, and prominently. 437 The
commenter argued that the Commission
failed to demonstrate the rule directly
advances any compelling government
interest. Another commenter argued that
price information is commercial speech
subject to intermediate scrutiny and that
the rule fails to meet the standard
because, even if some price displays
without total price are deceptive, not all
such displays are deceptive.438
Some commenters asserted that the
rule’s application to credit card
surcharges and government charges
violated the First Amendment. An
industry commenter interpreted the rule
to require all credit card surcharges to
be included in total price. The
commenter argued that this amounts to
a ban on presenting credit card
surcharges to consumers, which is
regulation of commercial speech that
violates merchants’ First Amendment
rights. The commenter cited to several
State laws banning credit card
surcharges or fees, but allowing cash
discounts, that were struck down by
Federal courts of appeals.439 Two
commenters argued that the rule’s
allowance for government charges to be
excluded from total price—while other
fees or charges cannot be excluded—
amounts to content-based regulation of
speech that provides preferential
treatment to the government. 440 One
commenter argued that the rule would
allow businesses to conceal government
charges and shows favoritism for
government speech to assist it in raising
tax revenues; the commenter proposed
the alternative of marginally raising the
tax rate. 441 The commenter also argued
that the rule is underinclusive because
total price does not include government
charges, arguing that consumers suffer
the same harm of being surprised by
government fees as with non-
government charges required to be
included in total price. Finally, other
commenters recommended that the
Commission adopt a rule that only
prohibits deceptive conduct without
requiring specific affirmative
disclosures. 442
2. Legal Standard
The Commission finds that
businesses’ First Amendment rights are
adequately protected because § 464.2’s
compelled disclosures are in a
commercial context and meet the
longstanding legal standards governing
commercial speech. Courts apply one of
two standards in the context of
commercial speech. In Cent. Hudson
Gas & Electric Corp. v. Pub. Serv.
Comm’n of N.Y., 447 U.S. 557, 563–64
(1980), the Supreme Court established
the analytical framework for
determining the constitutionality of a
regulation of commercial speech that is
not misleading and does not involve
illegal activity. Under that framework,
described as intermediate scrutiny, the
regulation must: (1) serve a substantial
governmental interest; (2) directly
advance this interest; and (3) not be
more extensive than necessary to serve
the government’s interests. 443 The third
prong does not require the government
to adopt the least restrictive means.
Instead, it simply calls for a ‘‘ ‘fit’
between the legislature’s ends and the
means chosen to accomplish those ends
. . . a fit that is not necessarily perfect,
but reasonable.’’ 444
The Supreme Court’s ‘‘precedents
have applied a lower level of scrutiny to
laws that compel disclosures in certain
contexts,’’ such as in commercial
speech, as set forth in Zauderer v. Office
of Disciplinary Counsel, 471 U.S. 626
(1985). 445 Contrary to commenters’
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U.S. 755, 768 (2018); see also Milavetz, Gallop &
Milavetz P.A. v. United States, 559 U.S. 229, 249–
50 (2010) (applying ‘‘the less exacting scrutiny
described in Zauderer’’ and upholding a
requirement that advertisements include a
disclosure ‘‘intended to combat the problem of
inherently misleading commercial
advertisements’’).
446 Zauderer, 471 U.S. at 653; see also Am. Meat
Inst. v. USDA, 760 F.3d 18, 22–23 (D.C. Cir. 2014)
(en banc) (holding Zauderer applies to compelled
commercial speech in service of government
interests in addition to preventing and correcting
deception); CTIA—The Wireless Ass’n v. City of
Berkeley, 928 F.3d 832, 844 (9th Cir. 2019) (holding
Zauderer applies to compelled commercial health
and safety disclosures if they further a substantial
government interest) (citing Central Hudson Gas &
Elec. Corp., 447 U.S. at 564; NIFLA, 585 U.S. at 768,
775)); Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d
294, 310, 310 n.8 (1st Cir. 2005) (clarifying that the
application of Zauderer is not limited to cases in
which the compelled disclosure prevents deception
and upholding compelled commercial disclosures
based on government interests in preventing
deception and ‘‘increasing public access to
prescription drugs’’); Nat’l Elec. Mfrs. Ass’n v.
Sorrell, 272 F.3d 104, 116 (2d Cir. 2001) (applying
Zauderer to compelled commercial disclosure even
though it ‘‘was not intended to prevent ‘consumer
confusion or deception’ per se, . . . but rather to
better inform consumers about the products they
purchase’’) (internal citation and quotation marks
omitted) (citing Zauderer, 471 U.S. at 651).
447 See Expressions Hair Design v. Schneiderman,
581 U.S. 37, 48 (2017) (reviewing State law
regulating disclosure of differentiation of prices for
credit card versus other types of payment and
remanding for determination of whether the statute
‘‘is a valid commercial speech’’ regulation); City of
Cincinnati v. Discovery Network, Inc., 507 U.S. 410,
422 (1993) (‘‘Most of the appellee’s mailings
consisted primarily of price and quantity
information, and thus fell within the core notion of
commercial speech—speech which does ‘no more
than propose a commercial transaction.’’’) (cleaned
up) (citing Bolger v. Young’s Prods. Corp., 463 U.S.
60, 66 (1983)); see generally Cent. Hudson Gas &
Elec. Corp., 447 U.S. at 561 (referring to commercial
speech as ‘‘expression related solely to the
economic interests of the speaker and its
audience’’); Va. State Bd. of Pharmacy v. Va.
Citizens Consumer Council, Inc., 425 U.S. 748, 762
(1976) (commercial speech includes speech that
does ‘‘no more than propose a commercial
transaction’’ (internal citations omitted)); see also
Bates v. State Bar of Ariz., 433 U.S. 350, 383 (1977)
(‘‘the advertiser knows his product and has a
commercial interest in its dissemination’’; ‘‘any
concern that strict requirements for truthfulness
will undesirably inhibit spontaneity seems
inapplicable because commercial speech generally
is calculated. Indeed, the public and private
benefits from commercial speech derive from
confidence in its accuracy and reliability.’’).
448 Zauderer, 471 U.S. at 651–53; see also NIFLA,
585 U.S. at 768–69 (restating the Zauderer standard,
noting that ‘‘purely factual and uncontroversial
information about the terms under which . . .
services will be available . . . should be upheld
unless they are unjustified or unduly burdensome’’
(internal citations omitted)).
449 Zauderer, 471 U.S. at 651.
450 Id. at 653.
451 Id. at 650–51 (internal quotation omitted).
452 15 U.S.C. 45, 57a.
453 Zauderer, 471 U.S. at 650.
454 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
455 303 Creative, 600 U.S. at 587–88.
assertions, compelled speech in the
commercial context is neither
unequivocally prohibited nor subject to
strict scrutiny under the First
Amendment. Rather, the First
Amendment permits required
disclosures that are: (1) factual and
uncontroversial; (2) reasonably related
to the government’s interest—here,
preventing unfair and deceptive
commercial practices that harm
consumers; and (3) not ‘‘unjustified or
unduly burdensome.’’ 446 The final
rule’s disclosure requirements satisfy
these parameters.
3. The Rule’s Disclosure Requirements
Are Constitutional Under Zauderer
Section 464.2 applies to speech that
is, at its core, commercial—the
disclosure and advertising of the price
for goods and services.447 It requires
precisely the type of disclosure the
Supreme Court has confirmed is
constitutional under Zauderer.448 In
Zauderer, the Supreme Court
considered a challenge to government-
compelled commercial speech in an
advertisement by an attorney. The
advertisement stated that certain types
of cases were handled on a contingent
fee basis for which the client owed no
legal fees if the lawsuit was
unsuccessful. The State required such
advertisements to disclose that clients
may be liable for litigation costs even if
their lawsuit is unsuccessful. The
attorney argued such a requirement was
compelled speech in violation of the
First Amendment. The Supreme Court
disagreed. Noting that the disclosure
applied to commercial advertising, the
Court held that an advertiser’s
‘‘constitutionally protected interest in
not providing any particular factual
information in his advertising is
minimal.’’ 449 The Court concluded,
‘‘The State’s position that it is deceptive
to employ advertising that refers to
contingent-fee arrangements without
mentioning the client’s liability for costs
is reasonable enough to support a
requirement that information regarding
the client’s liability for costs be
disclosed.’’ 450 The Court also noted that
attorneys were not prevented from
conveying information to the public—
they were merely required ‘‘to provide
somewhat more information than they
might otherwise be inclined to present
. . . in order to dissipate the possibility
of consumer confusion or
deception.’’ 451
Section 464.2 satisfies all prongs of
Zauderer. First, § 464.2 only requires
businesses to disclose factual and
noncontroversial pricing information,
by incorporating known mandatory fees
or charges into total price, with
exceptions, and by disclosing certain
other customary pricing information
before a consumer consents to pay. As
described in section II.B, the purpose of
the rule is to ensure that consumers
know the total amount they will have to
pay because this information is material
to consumer decision making.
Second, parts II.B and III lay out in
detail how the rule is reasonably related
to—and, in fact, directly advances—the
government’s interest in preventing
unfairness and deception in the
marketplace. Preventing unfair and
deceptive conduct is the Commission’s
mandate under sections 5 and 18 of the
FTC Act.452 And based on voluminous
comments from the public as well as
significant empirical evidence, the
Commission finds that consumers
seeking to purchase covered goods or
services are likely to be deceived and
harmed if the required disclosures are
not made.
Finally, § 464.2 is neither unduly
burdensome nor unjustified. The
Commission set forth the justification
for the required disclosures in parts II
and III, including the harms to
consumers and to competition from drip
or partitioned pricing. Further, the rule
does not impose an undue burden;
businesses offering covered goods or
services are simply required ‘‘to provide
somewhat more information than they
might otherwise be inclined to
present.’’ 453 The rule merely requires
clear and conspicuous display of total
price if other pricing information is
displayed, and requires certain pricing
and informational disclosures before the
consumer consents to pay. As described
in detail in section III, the final rule
permits businesses to exclude from total
price certain mandatory fees or charges
that industry commenters stated would
be impractical or burdensome for
inclusion in total price.
The Commission disagrees with a
commenter who seemed to argue that
because the rule imposes disclosure
requirements as to ‘‘how’’ total price is
displayed, the rule ‘‘offends the First
Amendment’’ by compelling speech. 454
In so arguing, the commenter cited to
303 Creative, LLC v. Elenis, 600 U.S. 570
(2023). The Supreme Court in 303
Creative considered an as-applied
challenge to the Colorado Anti-
Discrimination Act (‘‘CAD’’) by a sole
proprietor who designed individualized
websites the Court concluded ‘‘qualify
as pure speech,’’ with each website
being an ‘‘original, customized
creation.’’ 455 While the Court in that
case held that the CAD violated the First
Amendment as applied to the plaintiff,
the rule here is distinguishable from the
facts of 303 Creative. First, both price
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2114 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
456 See cases cited supra note 447 (defining
commercial speech).
457 303 Creative, 600 U.S. at 593–94.
458 Zauderer, 471 U.S. at 650.
459 Of course, Businesses offering, displaying, or
advertising a Covered Good or Service cannot
misrepresent the nature, purpose, amount, or
refundability of any fee or charge under § 464.3; this
requirement is consistent with the First
Amendment. See Ibanez v. Fla. Dep’t of Bus. &
Prof’l. Regul., 512 U.S. 136, 142 (1994) (‘‘false,
deceptive, or misleading commercial speech may be
banned’’ (citations omitted)). Commenters did not
argue § 464.3 violates the First Amendment.
460 Zauderer, 471 U.S. at 650.
461 Indeed, the Zauderer Court noted that
‘‘because disclosure requirements trench much
more narrowly on an advertiser’s interests than do
flat prohibitions on speech, ‘warning[s] or
disclaimer[s] might be appropriately required . . .
in order to dissipate the possibility of consumer
confusion or deception.’ ’’ Id. at 651 (citation
omitted).
462 Cent. Hudson Gas & Elec. Corp., 447 U.S. at
566.
463 See id. at 570–71 (‘‘To further its policy of
conservation, the Commission could attempt to
restrict the format and content of Central Hudson’s
advertising. It might, for example, require that the
advertisements include information about the
relative efficiency and expense of the offered
service, both under current conditions and for the
foreseeable future.’’).
464 Zauderer, 471 U.S. at 652–53.
and how price is displayed (here, how
total price is displayed) relate solely to
proposing a commercial transaction and
to the economic interests of the speaker
and its audience.456 Second, the Court
based its decision in 303 Creative on the
unique nature of the plaintiff’s work,
noting the plaintiff ‘‘does not seek to
sell an ordinary commercial good.’’ 457
In comparison, the rule merely requires
the display of the total price of a
covered good or service—live-event
tickets and short-term lodging—which
is core commercial speech.
Therefore, the Commission finds that
the disclosure requirements are
consistent with the compelled speech
analysis under Zauderer. Clear,
conspicuous, and prominent disclosure
of total price in advertisements,
displays, or offers, and the disclosure of
complete pricing information of covered
goods or services before the consumer
consents to pay, directly advance the
Commission’s interest in preventing
deception and harm. The rule’s
requirements enable consumers to
receive the information they need to
make informed purchasing decisions
about live-event tickets and short-term
lodging based on complete and truthful
information.
4. The Rule Does Not Prohibit Truthful
Speech
Commenters asserted that the rule
amounts to a prohibition on the display
of truthful price information in violation
of the First Amendment because the
rule prohibits certain information (like
partial prices without mandatory fees)
from being displayed without
displaying total price. Commenters also
asserted that, because the rule prohibits
certain displays of price, like parts of
prices without fees, it should be
evaluated under Central Hudson. The
Commission disagrees. First, the
commenters ‘‘overlook[ ] material
differences between disclosure
requirements and outright prohibitions
on speech.’’ 458 The rule does not
prevent businesses from conveying
information to the public and, in
particular, it does not prohibit the
disclosure of the components of total
price. Businesses remain free to
describe, disclose, or convey price, fee,
and charge information.459 Put
differently, the rule permits any truthful
pricing claims an advertiser wants to
make; what it forbids is half-truths that
omit total price.
Section 464.2 does require a business
that displays certain pricing information
about covered goods or services to also
provide factual and non-controversial
information in the form of total price.
Although total price may be ‘‘somewhat
more information than they might be
otherwise inclined to present,’’ such a
requirement is allowed by Zauderer.460
With the rule’s requirement that total
price be clear, conspicuous, and
prominent, the Commission balances
industry commenters’ stated desire to
display other price information with its
finding that total price is a necessary
piece of price information for
consumers if any other price
information is displayed.461
Because the rule does not restrict
truthful speech, and because the
conduct the rule addresses (advertising
prices without mandatory fees) is
deceptive, the Commission need not
apply the Central Hudson factors.
Nevertheless, the rule would meet them.
Under Central Hudson, the regulation
must serve a substantial governmental
interest, must directly advance that
interest, and must not be more extensive
than necessary to serve the
government’s interest. 462 As outlined in
parts II and III, the rule serves the
substantial governmental interest of
providing material price information to
consumers purchasing live-event tickets
and short-term lodging to allow them to
make accurate price comparisons and
informed purchasing decisions, and to
allow businesses to compete on price in
a level playing field. And consistent
with the third prong of Central Hudson,
the rule is no more extensive than
necessary to serve the government’s
interests in preventing unfairness,
deception, and harm, as the rule simply
requires clear, conspicuous, and
prominent display of total price. Central
Hudson acknowledges that the
government can regulate the format of
advertising, including by requiring a
disclosure. 463
The Commission also disagrees with
commenters arguing the rule violates is
overinclusive and would prohibit some
displays of partial price that are not
deceptive or unfair without the display
of total price. Again, because truthful
itemization of price components is not
prohibited by the rule, commenters’
contention that the rule is a prohibition
on speech misses the mark. The
Commission finds, however, that the
display of the price of a good or service
without disclosing total price clearly,
conspicuously, and prominently is
unfair and deceptive and harms
consumers and honest competitors.
Because the third prong of Central
Hudson does not require the
government to use the least restrictive
means necessary to advance its interest,
the rule would be constitutional even if
it prohibited displaying partial price in
instances that, in isolation, may not be
unfair or deceptive. The same is true
under Zauderer, where the Court held
that the State’s ‘‘assumption that
substantial numbers of potential clients
would be . . . misled’’ about the
possibility that they would be
responsible for litigation costs—in
contrast to proving that all potential
clients would be misled—was sufficient
to meet the standard.464
The Commission addresses in section
III commenters who argued that it
should adopt alternative policies, such
as prohibiting misrepresentations and
allowing businesses to disclose amounts
or fees as they wish. As relevant here,
commenters argued that the
Commission should adopt those
alternatives because they would not
violate the First Amendment. The
Commission finds that the rule,
including § 464.2, does not violate the
First Amendment. Given the
Commission’s finding that failure to
disclose total price is unfair and
deceptive, the rule’s affirmative
disclosure requirements are needed to
achieve the Commission’s goal of
preventing this unfair and deceptive
conduct.
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465 The Commission modifies the definition of
‘‘Government Charges’’ from those fees or charges
‘‘imposed on consumers’’ to those ‘‘imposed on the
transaction’’ to limit the potential distinction
between fees and charges imposed directly on
consumers and those imposed on Businesses. See
supra section III.A.5.
466 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
467 Id.
468 Humphrey’s Executor, 295 U.S. at 624–32.
469 See FTC v. Am. Nat’l Cellular, Inc., 810 F.2d
1511, 1513–14 (9th Cir. 1987) (enactment of section
13(b) of the FTC Act did not render Humphrey’s
Executor inapposite).
470 Humphrey’s Executor, 295 U.S. at 625.
471 See Collins v. Yellen, 594 U.S. 220, 250 n.18
(2021); Wiener v. United States, 357 U.S. 349, 353
(1958).
472 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
473 Press Release, Fed. Trade Comm’n, FTC
Announces Appointment of Jay L. Himes as New
Administrative Law Judge (Mar. 12, 2024), https://
www.ftc.gov/news-events/news/press-releases/2024/
03/ftc-announces-appointment-jay-l-himes-new-
administrative-law-judge.
474 Initial notice of informal hearing; final notice
of informal hearing; list of Hearing Participants;
requests for submissions from Hearing Participants:
Trade Regulation Rule on Unfair or Deceptive Fees,
89 FR 21216 (Mar. 27, 2024); see also 16 CFR 0.8,
1.13.
5. The Rule’s Treatment of Credit Card
Fees and Government Charges Does Not
Violate the First Amendment
The rule does not violate the First
Amendment in its treatment of credit
card fees and government charges. First,
as noted in section III.B.1.c, the rule
does not prohibit a business from
charging or passing through credit card
fees if otherwise allowed by law. The
rule also does not affect State laws that
prohibit credit card surcharges. Whether
credit card charges must be included in
total price depends on whether a
business makes such fees mandatory. If
a business offers consumers multiple
viable payment methods for the offered
transaction, so that paying with a credit
card is optional, then credit card fees
are not for a ‘‘mandatory ancillary good
or service’’ under the rule and need not
be included in total price. In addition,
where credit card fees are mandatory,
the rule does not prohibit businesses
from itemizing them as long as they are
also included in total price.
Accordingly, there is no merit to
commenters’ concerns that consumers
will not understand the impact of costs
affecting businesses, since businesses
can itemize those costs under the rule.
The Commission also disagrees with
commenters’ argument that § 464.2
violates the First Amendment as a
content-based regulation because it does
not require businesses to include
government charges in total price. One
commenter, who argued the point in
detail, relied on Barr v. American Ass’n
of Political Consultants, Inc., 591 U.S.
610 (2020), in which the Supreme Court
held that an exclusion for collectors of
government debt from the Telephone
Consumer Protection Act (‘‘TCPA’’),
which generally prohibits robocalls,
violated the First Amendment. A
majority agreed that the exclusion for
collectors of government debt was
severable—the prohibition on robocalls
was upheld.
The exclusion provision in the TCPA
addressed in Barr is distinguishable
from the final rule in several ways. At
the outset, the rule does not favor
government charges unequivocally.
While the rule allows businesses to
exclude government charges from total
price, it does not require businesses to
do so. Businesses have a choice—they
may include government charges in
total price. Second, the commenter
makes specific and erroneous
assumptions about the Commission’s
reasoning for excluding government
charges from total price, such as that the
Commission’s interest in adopting the
rule includes favoring taxes and
increasing tax revenue. Tax revenues
have no bearing on the Commission’s
decision to adopt this rule. As noted in
section III.A.5, consumers have come to
understand and expect sales tax to be
added at the end of a purchase, and
there are other Federal, State, and local
laws that have specific requirements
about disclosing taxes and other
government charges. In addition, in
many online transactions, businesses
are unable to fully calculate certain
components of government charges
until a consumer provides their location
information. Thus, the Commission has
good reason to allow businesses to
exclude government charges from total
price if they choose.465
D. Commission Structure
One commenter argued the
Commission is unconstitutionally
structured because the Commissioners
are shielded from removal and asserts
that Humphrey’s Executor v. United
States, 295 U.S. 602 (1935), either no
longer applies or was wrongly decided
by the Supreme Court.466 The same
commenter asserted that the
Commission’s administrative law judges
are unconstitutionally appointed by the
Commission Chair and are
unconstitutionally shielded from
removal. 467 The Commission disagrees.
In Humphrey’s Executor, the Supreme
Court addressed the crux of the
commenter’s first argument and
concluded that the Commission’s
structure is constitutional. In that case,
President Roosevelt sought to remove a
Commissioner without cause. The Court
held that the FTC Act authorized
removal of Commissioners only on the
grounds specified in the statute
(‘‘inefficiency, neglect of duty, or
malfeasance in office’’) and that this
limitation on the President’s removal
power was constitutional given the
‘‘character of the [C]ommission and the
legislative history which accompanied
and preceded the passage of the act.’’ 468
The commenter’s arguments that
Humphrey’s Executor is no longer
applicable are unavailing. The Supreme
Court’s decision is not rendered any less
binding because Congress has refined
the Commission’s authorities during the
course of its more than 100-year
tenure.469 The key policy rationale
underlying Humphrey’s Executor
remains valid today. The
Commissioners collectively act as an
adjudicatory body, and the for-cause
removal standard ensures that they are
free from ‘‘suspicion of partisan
direction’’ or ‘‘political domination or
control.’’ 470 Congress has similarly
provided for-cause removal standards
for the members of many other non-
Article III tribunals composed of
multiple members who perform
adjudicatory functions as an expert
body within a specific area of the
law. 471
Next, the commenter incorrectly
asserted that administrative law judges
are appointed by the Chair and are
unconstitutionally shielded from
removal. The commenter argued that
under Free Enter. Fund v. Pub. Co.
Accounting Oversight Bd., 561 U.S. 477
(2010), administrative law judges must
be appointed by the full Commission
and that the appointment process for
administrative law judges at the FTC is
unconstitutional because administrative
law judges are appointed by the
Commission Chair alone. 472 The
commenter is mistaken. The
Commission voted in December 2023 to
approve the appointment of
Administrative Law Judge Jay L.
Himes.473 The Chief Presiding Officer—
here, the Chair pursuant to 16 CFR 0.8—
then selected Judge Himes to be the
presiding officer for this rulemaking,
and Judge Himes was properly
designated as the presiding officer in the
Commission’s notice of informal
hearing.474
In response to the commenter’s
contention that the removal protections
for the Commission’s administrative law
judges are unconstitutional, the
Commission notes that the Supreme
Court has recognized in recent decisions
that Congress may constitutionally
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475 See, e.g., Decker Coal Co. v. Pehringer, 8 F.4th
1123, 1133–36 (9th Cir. 2021) (holding that
administrative law judge removal protections are
constitutional).
476 Collins, 594 U.S. at 250–51 (discussing Seila
Law LLC v. CFPB, 591 U.S. 197 (2020)).
477 Seila Law, 591 U.S. at 217–18.
478 Free Enter. Fund, 561 U.S. at 507 n.10.
479 15 U.S.C. 57a(c)(1)(B); 16 CFR 1.13.
480 Lucia v. SEC, 585 U.S. 237, 245 (2018) (in the
‘‘Court’s basic framework for distinguishing
between officers and employees[,] . . . an
individual must occupy a ‘continuing’ position
established by law to qualify as an officer . . . [and]
‘exercise[ ] significant authority pursuant to the
laws of the United States’ ’’ (citations omitted)).
481 15 U.S.C. 57a; 16 CFR 0.14.
482 16 CFR 1.13.
483 16 CFR 1.9, 16 CFR 1.13(i), 16 CFR 1.14, 16
CFR 1.25, 16 CFR 1.26(d).
484 15 U.S.C. 57a(c).
485 16 CFR 1.13(a)(2)(ii).
486 16 CFR 1.13.
487 FTC–2023–0064–3133 (National Multifamily
Housing Council and National Apartment
Association); FTC–2023–0064–3152 (Building
Owners & Managers Association et al.); FTC–2023–
0064–3238 (Gibson, Dunn & Crutcher LLP); FTC–
2023–0064–3263 (Flex Association); FTC–2023–
0064–3294 (International Franchise Association).
488 Motor Vehicle Mfrs. Ass’n v. State Farm Mut.
Auto Ins., 463 U.S. 29, 43 (1983) (holding that an
agency must articulate a satisfactory explanation for
its action including a ‘‘rational connection between
the facts found and the choices made.’’ (citing
Burlington Truck Lines, Inc. v. United States, 371
U.S. 156, 168 (1962))).
489 See, e.g., FTC–2023–0064–3294 (International
Franchise Association); FTC–2023–0064–3133
(National Multifamily Housing Council and
National Apartment Association); FTC–2023–0064–
3152 (Building Owners & Managers Association et
al.); FTC–2023–0064–3263 (Flex Association).
490 See, e.g., FTC–2023–0064–3294 (International
Franchise Association); FTC–2023–0064–3133
(National Multifamily Housing Council and
National Apartment Association); FTC–2023–0064–
3152 (Building Owners & Managers Association et
al.); FTC–2023–0064–3263 (Flex Association).
491 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
492 Id.
restrict the President’s at-will removal
power with regard to inferior officers.475
In Collins v. Yellen, 594 U.S. 220 (2021),
for example, the Court declined to
‘‘revisit . . . prior decisions allowing
certain limitations on the President’s
removal power,’’ 476 which include the
‘‘good cause’’ protections for inferior
officers ‘‘with limited duties and no
policymaking or administrative
authority’’ described by the Court in
Seila Law LLC v. CFPB, 591 U.S. 197
(2020).477 In Free Enter. Fund, the Court
held removal protections for Public
Company Accounting Oversight Board
members unconstitutional and
contrasted the duties of those members
with the lesser duties of administrative
law judges: ‘‘[U]nlike members of the
[Public Company Accounting Oversight]
Board,’’ administrative law judges (1)
‘‘perform adjudicative rather than
enforcement or policy making
functions,’’ or (2) ‘‘possess purely
recommendatory powers.’’ 478 The
FTC’s administrative law judges fit
squarely within both of those
descriptions.
Even if the appointment procedures
and removal protections of
administrative law judges were
unconstitutional because of their role as
inferior officers under Article II, the
constitutionality of the rule would not
be in question because presiding officers
under section 18 are not ‘‘officers’’
under Article II. Notably, while the
presiding officer in the Informal Hearing
for this rulemaking happened to be an
administrative law judge, neither
section 18(c)(1)(B) nor the Commission’s
rules implementing that provision
require an administrative law judge to
preside over section 18 informal
hearings.479
Instead, the presiding officer is a
specific, temporary designation made
under section 18(c) and its
implementing rules, 16 CFR 1.11
through 1.13. The Supreme Court’s
framework for distinguishing between
officers and employees asks whether an
individual ‘‘exercise[s] significant
authority pursuant to the laws of the
United States’’ and occupies a position
that is ‘‘continu[ous] and
permanent.’’ 480 For presiding officers,
neither is true. As relevant here, the role
of the presiding officer in section 18
rulemakings—assisting in the collection
of necessary information for the
rulemaking to proceed, ensuring
hearings proceed methodically, and
maintaining the rulemaking record 481—
is not policymaking; that role is
reserved for the Commission.482
Moreover, an administrative law judge,
whether or not he or she is serving as
a presiding officer, cannot initiate a
rulemaking, decide its subject, decide
whether a rule should issue, or establish
its content. The Commission performs
all of these functions. 483
As an initial matter, the Commission
determines whether an informal hearing
will be conducted; presiding officers do
not have discretion over whether the
hearing will occur. The presiding officer
simply ‘‘presides over the rulemaking
proceedings’’ and, when appropriate,
makes a ‘‘recommended decision based
upon the findings and conclusions of
such officer.’’ 484 The presiding officer’s
powers in the conduct of the hearing are
also limited. For example, the officer
may not extend the time allotted for the
informal hearing beyond a certain
period ‘‘unless the Commission, upon a
showing of good cause, extends the
number of days for the hearing.’’ 485 The
commenter is correct that the presiding
officer is initially chosen by the ‘‘chief
presiding officer,’’ who is the Chair of
the FTC under 16 CFR 0.8. However, the
formal assignment of that presiding
officer to a particular hearing is in the
initial notice of informal hearing, which
is issued by vote of the Commission.
Although the presiding officer reports to
the chief presiding officer, again, the
powers of the two together amount to no
more than conducting the informal
hearing and making a recommended
decision based on the presiding officer’s
findings to the Commission. 486 All
substantive decisions are made by the
Commission. These are temporary
assignments that begin and end with the
informal hearing process.
Accordingly, neither the
Commission’s structure nor the role of
the presiding officer in section 18
violates the Constitution.
E. Administrative Procedure Act
Several commenters asserted the
Commission has not complied with the
APA.487 The Commission disagrees. The
Commission complies with the APA’s
requirements, including by explaining
the rule’s relationship to the unfair and
deceptive conduct the Commission
seeks to prevent and by responding to
all significant comments.488 As
explained herein, the Commission also
complies with the additional
requirements of sections 18 and 22 of
the FTC Act.
Commenters claimed that the rule is
arbitrary and capricious because it is not
based on sufficient facts or data, and
lacks a rational connection between the
facts and the regulatory choices.489
These commenters argued that the
factual record does not support the
Commission’s decision to promulgate an
industry-neutral rule or to apply the
rule to particular industries.490 One
commenter criticized various
substantive aspects of the rule including
its breadth, consideration of
alternatives, and costs. 491 The
commenter also argued that the rule is
duplicative and could lead to regulatory
confusion.492
The Commission has carefully
reviewed and considered the comments
and information it received in this
rulemaking. As a preliminary matter,
the NPRM engaged in extensive
discussion concerning the comments
received in response to the ANPR and
followed up with additional questions
and requests for empirical data and
proposed rule text. Likewise, the
analysis contained throughout this SBP,
particularly Parts III–VII, similarly
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2117	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
engages with and considers the
additional significant comments and
information received in response to the
NPRM. Commenters raising questions
regarding APA compliance primarily
critiqued the industry-neutral nature of
the proposal advanced in the NPRM.
The Commission disagrees with these
critiques. The Commission, however,
has determined to limit this final rule to
covered goods or services and need not
address arguments regarding the
application of the rule to a wide range
of industries at this time. Further, both
the NPRM and this SBP explain in
detail the factual record and its
relationship to the provisions finalized
in the rule. While empirical data is not
required, the Commission in section V
presents an analysis for the final rule,
identifying benefits, such as reductions
in consumer search cost time and
deadweight loss, and quantifying
compliance costs. Finally, in section
V.E.2.d, the Commission finds that the
rule’s benefits to the public will exceed
its costs.
V. Final Regulatory Analysis Under
Section 22 of the FTC Act
Under section 22 of the FTC Act,
when the Commission promulgates any
final rule as a ‘‘rule’’ as defined in
section 22(a)(1), it must include a ‘‘final
regulatory analysis.’’ 15 U.S.C. 57b–
3(b)(2). The final regulatory analysis
must contain: (1) a concise statement of
the need for, and objectives of, the final
rule; (2) a description of any alternatives
to the final rule that were considered by
the Commission; (3) an explanation of
the reasons for the Commission’s
determination that the final rule will
attain its objectives in a manner
consistent with applicable law and the
reasons the particular alternative was
chosen; (4) an analysis of the projected
benefits, any adverse economic effects,
and any other effects of the final rule;
and (5) a summary of any significant
issues raised by the comments
submitted during the public comment
period in response to the Preliminary
Regulatory Analysis, and the
Commission’s assessment of such
issues. 15 U.S.C. 57b–3(b)(2)(A) through
(E). The Commission analyzes each of
these components in the following final
regulatory analysis.
The Commission has the authority to
promulgate this rule under section 18 of
the FTC Act, 15 U.S.C. 57a, which
authorizes the Commission to
promulgate, modify, and repeal trade
regulation rules that define with
specificity acts or practices in or
affecting commerce that are unfair or
deceptive within the meaning of section
5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1). In explaining the need for, and
objectives of, the rule, the Commission
observes that a clear rule is the best way
to accomplish its goals of: (1) ensuring
that consumers receive truthful, timely,
and transparent information about price
to permit them to comparison shop
effectively and (2) leveling the playing
field for honest competitors. In addition,
a clear rule would deter the defined
unfair or deceptive pricing practices by
enabling the Commission to more
readily obtain monetary relief and civil
penalties. The Commission carefully
considered several alternatives to the
rule, including terminating the
rulemaking and pursuing a broader,
industry-neutral alternative. The
Commission determined that the
alternative of terminating the
rulemaking would not accomplish these
objectives. As explained in section II,
the Commission finds that bait-and-
switch pricing and misleading fees and
charges are prevalent economy-wide,
but chooses to begin by tackling these
practices in the live-event ticketing and
short-term lodging industries, where the
Commission first began evaluating drip
pricing more than a decade ago and
which have a long history of harming
consumers and businesses. The final
rule will attain its objectives of
promoting truthful, timely, and
transparent pricing, comparison
shopping, and fair competition in the
live-event ticketing and short-term
lodging industries in a manner
consistent with applicable law. The
Commission will rely on its existing
section 5 authority in pursuing case-by-
case enforcement actions against
businesses in other industries that
engage in the specific unfair and
deceptive pricing practices that are the
subject of the industry-specific coverage
in this rule.
The Commission’s final regulatory
analysis indicates that adoption of the
rule will result in benefits to the public
that exceed the costs. As described
further herein, the rule will not only
result in significant benefits to
consumers but also improve the
competitive environment in the live-
event ticketing and short-term lodging
industries, particularly for small,
independent, or new firms. One such
benefit is that the final rule will reduce
deadweight loss. ‘‘Deadweight loss’’ is a
term used to describe the loss of
efficiency or economic welfare, a cost to
society, that occurs when resources are
not used as efficiently as possible. At a
competitive equilibrium, in which the
marginal benefit for consumers equals
the marginal cost for firms, there is no
deadweight loss. When firms, including
those in the live-event ticketing and
short-term lodging industries, engage in
bait-and-switch tactics, consumers
purchase more goods and services than
they would otherwise because they do
not understand the full price. In other
words, in such cases, consumers
overconsume beyond the quantity
necessary for competitive equilibrium.
This overconsumption is a deadweight
loss because, if they had full
information, consumers would shift
their spending toward more beneficial
and efficient spending patterns that
reflect their true preferences.
Deadweight loss is discussed more fully
in section V.E.2.a.ii.
The rule provides a net benefit to
society if its benefits exceed its costs.
The Commission quantifies the
incremental benefits for the live-event
ticketing and short-term lodging
industries and shows that the rule’s
benefits exceed the costs in these
industries.
The Commission reviewed the
comments relating to its Preliminary
Regulatory Analysis, some of which
challenged the Commission’s estimation
of the rule’s potential costs and benefits.
In response to these comments, the
Commission herein clarifies its analysis
and adds a sensitivity analysis to the
baseline estimation. The Commission
concludes that these comments do not
affect the Commission’s finding that the
potential benefits of the rule exceed the
potential costs.
A. Concise Statement of the Need for,
and Objectives of, the Final Rule
The Commission believes the final
rule is needed to ensure that consumers
receive truthful, timely, and transparent
information about the total price of
goods or services, including the nature,
purpose, and amount of any fees or
charges imposed on the transaction, so
that they can effectively comparison
shop and budget their spending dollars
when deciding what live-event tickets to
purchase or where to stay when
traveling. Although bait-and-switch
pricing and misleading fees are already
unlawful unfair or deceptive acts or
practices under section 5 of the FTC
Act, the Commission concludes that a
clear rule is the best way to accomplish
its goal of preventing the rule’s defined,
specific unfair and deceptive pricing
practices in the live-event ticketing and
short-term lodging industries while
fostering a level playing field for honest
competitors to be able to compete
truthfully and fairly based on price. In
addition, the final rule aims to increase
deterrence of the defined unfair or
deceptive pricing practices in these
industries by enabling the Commission
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2118 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
493 15 U.S.C. 53(b).
494 See NPRM, 88 FR 77436–38, nn.122, 211, 232
(discussing AMG).
495 See 15 U.S.C. 57b(a)(2) (‘‘If the Commission
satisfies the court that the act or practice to which
the cease and desist order relates is one which a
reasonable man would have known under the
circumstances was dishonest or fraudulent, the
court may grant relief under subsection (b) of this
section.’’).
496 Certain statutes, such as the Restore Online
Shoppers’ Confidence Act, 15 U.S.C. 8401 through
8405, include provisions that treat violations of the
statute as a violation of a rule for purposes of
section 19(a)(1). See, e.g., 15 U.S.C. 8404(a).
to more readily obtain redress for injury
to consumers through section 19(a)(1) of
the FTC Act, 15 U.S.C. 57b(a)(1), and by
allowing courts to impose civil penalties
where appropriate. The Commission
believes that the rule will accomplish
these goals without significantly
burdening businesses and will provide
significant benefits to consumers and
honest competitors.
The record of this rulemaking is
replete with comments from consumers,
consumer groups, industry members,
academics, and policy organizations, as
well as officials and agencies across all
levels of government, emphasizing the
importance of consumers’ ability to
effectively comparison shop and
businesses’ ability to honestly compete
against each other based on price.
Regardless of industry, consumers want
to comparison shop when deciding
where to purchase their goods or
services from among various competing
offers. In many instances, consumers
have found it increasingly difficult, if
not impossible, to effectively
comparison shop because businesses
fail to provide the total price when they
display a purported amount a consumer
will pay for a good or service.
Consumers are also misled as to the
nature, purpose, amount, and
refundability of fees and charges, and
are unable to make informed choices
about the value of the fee or charge, or
the good or service it represents,
because their understanding of the fee
or charge is predicated on deceptive
omissions or false or misleading
information. As a result, consumers are
harmed because they consume more
goods or services, pay more for a good
or service, and incur higher search costs
than they otherwise would have if they
had been presented with the total price
upfront and truthful, timely, and
transparent information regarding fees
and charges. Businesses that honestly
present the total price of a good or
service and accurately disclose the
nature, purpose, and amount of fees and
charges are at a competitive
disadvantage to those that mislead
consumers by presenting purportedly
lower prices and inaccurate information
about fees and charges. As explained in
section II, the record, as well as the
Commission’s law enforcement actions,
outreach, and other engagement with
businesses and consumers, support a
finding that these practices pervade the
economy across industries.
Fundamentally, the rule will help
consumers make informed decisions
when comparison shopping and level
the playing field for honest businesses
in the live-event ticketing and short-
term lodging industries, two industries
that have a long history of bait-and-
switch pricing and misrepresentations
regarding fees and charges.
In addition, the final rule is necessary
to allow the Commission to recover
redress more efficiently in cases where
there is quantifiable consumer harm
resulting from bait-and-switch pricing
and misleading fees and charges. The
final rule will also deter live-event
ticketing and short-term lodging
businesses from engaging in these
practices by allowing for the imposition
of monetary relief in the form of
consumer redress and civil penalties.
In 2021, the Supreme Court in AMG
Capital Mgmt., LLC v. FTC, 593 U.S. 67,
82 (2021), held that section 13(b) of the
FTC Act 493 did not authorize the
Commission to seek, or a court to order,
equitable monetary relief for consumers
such as restitution or disgorgement. The
AMG ruling has made it significantly
more difficult for the Commission to
return money to injured consumers,
particularly in cases that do not involve
rule violations.494
Since AMG, the primary means for the
Commission to return money
unlawfully taken from consumers has
been through section 19 of the FTC Act,
15 U.S.C. 57b, which provides two
paths for consumer redress. One path,
under section 19(a)(2), typically requires
the Commission to first conduct an
administrative proceeding to determine
whether the respondent violated the
FTC Act; if the Commission finds that
the respondent did so, the Commission
can issue a cease-and-desist order,
which might not become final until after
the resolution of any appeals. To obtain
monetary relief, the Commission then
must initiate a separate action in
Federal court under section 19 and, in
that action, the Commission must prove
that the violator in the administrative
action engaged in objectively fraudulent
or dishonest conduct.495
The more efficient path to monetary
relief is under section 19(a)(1), which
allows the Commission to recover
redress in a single Federal court action
for violations of a Commission rule
relating to unfair or deceptive acts or
practices. 496 Under the rule, the
Commission will now be able to use the
section 19(a)(1) pathway to obtain
redress for losses attributable to the
specific unfair or deceptive practices the
rule defines and prohibits.
In addition, the final rule will allow
courts to impose civil penalties under
section 5(m)(1)(A) of the FTC Act, 15
U.S.C. 45(m)(1)(A). Civil penalties will
provide the deterrence necessary to
incentivize compliance with the law,
even in cases when it is difficult to
quantify consumer harm.
Overall, the rule’s prohibition of bait-
and-switch pricing tactics, including
drip pricing, and misleading fees in the
live-event ticketing and short-term
lodging industries expands the
Commission’s enforcement toolkit and
allows it to deliver on its consumer
protection mission by stopping and
deterring harmful conduct in these
industries and making consumers whole
when they have been harmed. The
unfair or deceptive acts or practices
involving bait-and-switch pricing and
misleading fees encompassed by this
final rule are prevalent and harmful to
consumers and honest competitors.
Thus, the unlocking of additional
remedies through this rulemaking—
particularly, the ability to obtain redress
for consumers injured by misconduct
and civil penalties against violators,
where appropriate—will allow the
Commission to more effectively police
and deter unfair or deceptive pricing
practices in these industries.
B. Alternatives to the Final Rule the
Commission Considered, Reasons for
the Commission’s Determination That
the Final Rule Will Attain Its Objectives
in a Manner Consistent With Applicable
Law, and the Reasons the Particular
Alternative Was Chosen
In analyzing the potential costs and
benefits of the proposed rule, the
Commission considered several
alternatives, including terminating the
rulemaking and a broader rule
alternative. As the Commission
observed in the NPRM, one potential
alternative is to terminate the
rulemaking and rely instead on the
Commission’s existing tools to combat
unfair or deceptive practices relating to
pricing, such as consumer education
and enforcement actions brought under
sections 5 and 19(a)(2) of the FTC Act.
However, terminating the rulemaking
would deprive consumers of live-event
tickets and short-term lodging of
quantifiable time savings, and
unquantifiable benefits including
reduced frustration, less consumer
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2119	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
497 FTC–2023–0064–3302 (Public Citizen). 	498 Id.
stress, and improved economic
efficiency through a reduction of
deadweight loss, as outlined in section
V. Implementation of the rule also
strengthens the Commission’s
enforcement program against unfair or
deceptive pricing practices in the live-
event ticketing and short-term lodging
industries.
As noted in the NPRM, given the
strong indicators that bait-and-switch
pricing, including drip pricing, and
misleading fees and charges are
prevalent and worsening across
industries, the Commission considered
adopting a final rule that would have
applied to all industries nationwide.
The Commission declines to adopt such
an industry-neutral rule at this time and
instead chooses, in its discretion, to use
its rulemaking authority incrementally.
The Commission’s rule first targets the
two industries where the Commission
first began evaluating drip pricing more
than a decade ago and where consumer
harm has been longstanding and
continues to be pronounced. As noted
in section II, most transactions in the
live-event ticketing and short-term
lodging industries occur online, where
bait-and-switch pricing and misleading
fees and charges have the highest
potential to thwart the rule’s stated
objectives, namely price transparency
and timeliness, as well as comparison
shopping. In addition, consumers are
often presented with identical offers (as
is the case with live-event ticketing) or
near-identical offers (as is the case with
short-term lodging), and as such, price
is the most salient feature for consumers
in these transactions.
The NPRM also discussed, and the
Commission also considered, a small
business exemption. Small businesses,
which may have smaller profit margins,
may be disproportionately affected by
initial compliance costs associated with
§ 464.2’s disclosure requirements. On
the other hand, a rule exempting small
businesses would fail to accomplish the
rule’s core objectives of transparency in
pricing and facilitating comparison
shopping because consumers would
continue to be subject to a mix of
pricing disclosures in the live-event
ticketing and short-term lodging
industries that could include bait-and-
switch pricing and misleading fees. As
one commenter noted, ‘‘Small
businesses will benefit from the rule
because it eliminates the deceptive
practices that keep consumers from
being able to comparison shop.’’ 497 The
commenter also stated that a small
business ‘‘exception will undermine the
ability of consumers to make purchasing
decisions based on transparent and
honest information.’’ 498 A small
business exemption could also reduce
consumer benefits arising from
increased price transparency across
markets and lower consumer confidence
regarding whether the rule applies to
specific purchases.
Excluding small businesses could also
harm honest competition because such
an exemption might impose more
uncertainty and compliance costs for
businesses to determine whether the
rule applies to them. In addition, as
noted in section III, some industry
commenters favored a rule that applied
equally to all industry members, to
facilitate comparison shopping and
avoid the creation of competitive
advantages.
Some commenters, as noted in section
III, expressed frustration with fees or
charges they described as ‘‘excessive’’ or
‘‘worthless.’’ As discussed in the NPRM,
an alternative to the final rule could be
to explicitly prohibit excessive or
worthless fees or charges in the live-
event ticketing and short-term lodging
industries. This alternative may benefit
consumers who pay excessive amounts
for goods or services in these industries
or for fees or charges that provide them
little to no value, allowing them instead
to save their money or spend it
elsewhere.
The Commission declines to adopt an
alternative rule prohibiting worthless or
excessive fees or charges, because doing
so may raise additional questions for
these industries and for the Commission
regarding how to assess the value of fees
or charges. In addition, the final rule
may already accomplish some of the
benefits of such an alternative. For
example, the final rule requires total
price to include all mandatory fees or
charges (with limited exceptions for
government charges and shipping
charges). Transparency and competition
on price could then disincentivize live-
event ticketing and short-term lodging
businesses from incorporating such fees
into their pricing schemes altogether. In
addition, consumer confusion related to
the purpose or value of fees or charges
would be addressed by the final rule’s
requirement to disclose the nature,
purpose, and amount of any fees or
charges lawfully excluded from total
price, as well as the prohibition against
misrepresenting any fees or charges.
In sum, the rule accomplishes the
Commission’s objectives in the areas of
live-event ticketing and short-term
lodging consistent with applicable law,
while providing the Commission
additional time to consider further
action. As explained in section V.E, the
Commission believes the rule’s benefits
exceed the costs of the rule. Notably, the
Commission believes, as detailed in
Parts II, III, and V, that the rule also will
result in additional tangible benefits
from consumers’ ability to accurately
comparison shop for live-event tickets
and short-term lodging. Therefore, the
Commission finds in this final
regulatory analysis that adoption of the
rule will result in benefits to the public
that exceed the costs.
C. The NPRM’s Preliminary Regulatory
Analysis
In the Economic Analysis of Costs and
Benefits of the Proposed Rule in section
VII.C of the NPRM (hereafter,
‘‘Preliminary Regulatory Analysis’’), the
Commission described the anticipated
effects of the proposed rule and
quantified the expected benefits and
costs to the extent possible. For each
benefit or cost quantified, the analysis
identified the data sources relied upon
and, where relevant, the quantitative
assumptions made. The Preliminary
Regulatory Analysis measured the
benefits and costs of the proposed rule
against a baseline in which the
Commission did not promulgate a rule
addressing the unfair or deceptive
practices of presenting incomplete or
inaccurate pricing information that
obscures total price and misrepresenting
the nature and purpose of fees. Several
of the benefits and costs were
quantifiable for specific industries, but
the Commission found that benefits at
the economy-wide level were not
quantifiable. The Preliminary
Regulatory Analysis discussed the bases
for uncertainty in the estimates.
In the Preliminary Regulatory
Analysis, the Commission performed a
break-even analysis under various
assumptions to determine the required
benefits necessary to justify the
estimated costs. Under the assumptions
of high-end compliance costs and a 7%
discount rate, the Commission found
that if the average benefit to consumers
from the proposed rule exceeded $6.65
per year over ten years, then the
proposed rule’s benefits would exceed
its quantified economy-wide
compliance costs. The expected benefit
could be a result of reduced consumer
search time, of increased consumer
surplus from more efficient purchasing
decisions, or a combination of the two.
The Commission found in the
Preliminary Regulatory Analysis that if
the proposed rule resulted in savings
from reduced search time that exceeded
15.82 minutes per consumer per year
over ten years, then the benefits from
reduced search time alone would
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499 FTC–2023–0064–2856 (National Football
League); FTC–2023–0064–3127 (U.S. Chamber of
Commerce); FTC–2023–0064–3238 (Gibson, Dunn,
& Crutcher LLP); FTC–2023–0064–3122 (Vivid
Seats); FTC–2023–0064–3094 (American Hotel &
Lodging Association); FTC–2023–0064–3292
(National Association of Theatre Owners); FTC–
2023–0064–3293 (Travel Technology Association);
FTC–2023–0064–3294 (International Franchise
Association).
500 FTC–2023–0064–3263 (Flex Association);
FTC–2023–0064–3300 (National Restaurant
Association); FTC–2023–0064–3217 (Bowling
Proprietors’ Association of America); FTC–2023–
0064–3233 (NCTA—The internet & Television
Association).
501 FTC–2023–0064–3122 (Vivid Seats).
502 FTC–2023–0064–3212 (TickPick, LLC).
503 FTC–2023–0064–3300 (National Restaurant
Association).
504 See, e.g., id. (National Restaurant Association
commented that there are ‘‘common supply chain
issues that may cause certain food items to increase
or decrease in price’’ and ‘‘thousands of restaurants
. . . offer varying seasonal menus with completely
different offerings’’); FTC–2023–0064–2992
(Individual Commenter who owns a restaurant
commented that complying with the rule would not
be complex for restaurants because ‘‘[t]hey reprice
and change dishes frequently’’); FTC–2023–0064–
3219 (Georgia Restaurant Association also referred
to ‘‘rising food costs [and] supply chain
disruptions’’); FTC–2023–0064–3180 (Independent
Restaurant Coalition commented about ‘‘increasing
food costs’’); FTC–2023–0064–3078 (Washington
Hospitality Association referred to supply chain
issues, inflation, and other rising costs).
505 U.S. Small Bus. Admin., Office of Advocacy,
Re: Trade Regulation Rule on Unfair or Deceptive
Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
506 See, e.g., id.; FTC–2023–0064–3127 (U.S.
Chamber of Commerce).
507 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
exceed quantified compliance costs
under the assumption of high-end costs
and a 7% discount rate.
D. Significant Issues Raised by
Comments, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
In this section, the Commission
summarizes its assessment of, and
response to, the major concerns,
comments, and suggestions raised by
commenters about the Preliminary
Regulatory Analysis. The Commission
received comments about the
Preliminary Regulatory Analysis from
industry groups, law firms, consumer
advocacy groups, think tanks,
consumers, and business owners.
Section V.D.1 addresses comments
about the Commission’s cost estimates,
section V.D.2 addresses comments about
the Commission’s the benefits estimates,
and section V.D.3 addresses comments
specific to the economy-wide break-
even analysis.
1. Comments on Costs
In section V.D.1.a through d, the
Commission addresses four major
comments regarding the NPRM’s cost
estimates: (a) the estimated costs are too
low; (b) there are unquantified costs to
firms; (c) there are unquantified costs to
consumers; and (d) there are
unquantified costs to third parties.
Section V.D.1.e addresses commenter
concerns about costs that may stem from
applying the rule to variable, dynamic,
or contingent fees.
(a) Public Comments: Estimated Costs
Are Too Low
Commenters from members and
representatives of the live-event
ticketing and short-term lodging
industries, among others, argued that
estimated costs in the NPRM were too
low because the analysis
underestimated the number of attorney,
data scientist, and web developer hours
needed to comply with the proposed
rule. 499 These commenters contended
that some businesses will require more
time than the assumed average estimates
of labor hours used in the Preliminary
Regulatory Analysis. The Commission
acknowledges the possibility that some
businesses will incur a greater number
of hours to comply with the final rule,
but notes that this is consistent with the
Preliminary Regulatory Analysis
because the employee hour estimates
used represent averages. These
estimates capture the fact that some
businesses will require more time than
the average and some will require less.
The Commission received additional
comments with similar concerns about
the Commission’s compliance hours
estimates as they apply to other specific
industries such as movie theater
ticketing, delivery apps, restaurants,
bowling, and cable and broadband,
which are no longer subject to the final
rule.500 However, the Commission’s
argument that the compliance hours
represent averages holds more broadly.
Two commenters in the live-event
ticketing industry provided alternative
estimates of average employee hours
necessary to comply with the rule. Vivid
Seats stated that, from its experience
implementing upfront pricing as a ticket
seller in three states, the Commission
underestimated the employee hours
needed for live-event ticket sellers by at
least a factor of five.501 Conversely,
another live-event ticket seller,
TickPick, commented that, for the most
part, live-event ticketing companies
would incur an immaterial cost to
implement all-in pricing because ‘‘the
technology already exists within
ticketing platforms to eliminate drip
pricing and would simply need to be
applied to events in the U.S.’’ 502 Again,
the Commission notes that the estimated
employee hours reflect an average and,
as these commenters stated, it is
possible that firms like Vivid Seats may
require more hours, while others, like
TickPick, may require fewer.
The National Restaurant Association
stated that it would take restaurants at
least twenty hours a year to reoptimize
menu prices because the Commission’s
estimates did not account for supply
chain issues that may change prices or
consider that some restaurants may offer
seasonal menus. 503 The Preliminary
Regulatory Analysis omitted these costs
because they are not a result of the rule;
restaurants will face supply chain
fluctuations and seasonal changes to
their menus regardless of the rule. 504
However, this is no longer a concern in
the final rule, which does not apply to
restaurants.
The Office of Advocacy of the United
States Small Business Administration
(‘‘SBA Office of Advocacy’’) argued that
costs estimated in the Preliminary
Regulatory Analysis are too low because
data scientist and web developer hours
should be ongoing costs, rather than
one-time costs. 505 It argued that ‘‘the
FTC should assume a percentage of
firms that in the previous year were in
compliance will not be the following
year.’’ The Commission does not believe
that these ongoing costs are attributable
to the rule. Once firms have adjusted to
the rule, making sure new pricing
strategies comply with the rule is
considered a part of the normal course
of business, as is ensuring compliance
with other existing laws and
regulations.
Some commenters identified
purported costs that were either already
captured in the economic analysis or
would not be affected by the rule. The
U.S. Chamber of Commerce and SBA
Office of Advocacy argued that the
Preliminary Regulatory Analysis did not
account for the time needed to train staff
to provide new upfront prices to
customers for in-person, online, and
phone sales. 506 The Commission
believes training time, to the extent that
it exists, is already captured in the
assumed range of data scientist and web
developer hours, which the Commission
has noted serves as a proxy for any rule-
associated costs from adjusting pricing
strategies and displaying prices to
consumers. Another commenter argued
that businesses would need to ‘‘hire
graphic designers to make
advertisements look appealing and web
designers or software engineers to
rebuild entire websites.’’ 507 In addition,
it argued that the Preliminary
Regulatory Analysis did not account for
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508 Id.; U.S. Small Bus. Admin., Office of
Advocacy, Re: Trade Regulation Rule on Unfair or
Deceptive Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
509 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
510 FTC–2023–0064–3300 (National Restaurant
Association); FTC–2023–0064–3202 (TechNet).
511 FTC–2023–0064–2891 (Mary Sullivan, George
Washington University, Regulatory Studies Center).
512 FTC–2023–0064–2856 (National Football
League); FTC–2023–0064–2887 (Progressive Policy
Institute); FTC–2023–0064–3122 (Vivid Seats);
FTC–2023–0064–3127 (U.S. Chamber of
Commerce); FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3143
(ACA Connects—America’s Communications
Association); FTC–2023–0064–3233 (NCTA—The
internet & Television Association); FTC–2023–
0064–3238 (Gibson, Dunn & Crutcher LLP); FTC–
2023–0064–3258 (National Taxpayers Union
Foundation).
513 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
514 FTC–2023–0064–2884 (NTCA—The Rural
Broadband Association); FTC–2023–0064–3143
(ACA Connects—America’s Communications
Association); FTC–2023–0064–3233 (NCTA—The
Continued
costs needed to replace physical ads,
subway ads, and billboards and
speculated that would take ‘‘thousands
of hours.’’ The final rule has no bearing
on a firm’s decision to engage graphic
designers to ensure its advertisements
are ‘‘appealing,’’ and the Commission
does not believe—and commenters have
failed to cite evidence demonstrating—
that the need to update prices will
require rebuilding entire websites.
Moreover, as discussed in more detail in
section V.E.3.a, the estimated range of
web developer time is a proxy for any
costs associated with changing price
displays to comply with the rule.
Two commenters argued that the
Preliminary Regulatory Analysis
underestimated costs because the wage
rates for attorneys and data scientists
were too low and were not the same as,
for example, attorneys fees.508 One
commenter stated that the estimated
wages did not account for overhead
costs or reflect the higher costs of hiring
outside counsel and data scientists and
suggested using $306 in attorney wages
and $59 in data scientist wages to reflect
these higher costs. 509 In response to
these suggestions, the Commission
conducted a sensitivity analysis that
multiplied wage rates by two to reflect
overhead and hiring costs for the short-
term lodging and live-event ticket
industries. The results of the sensitivity
analysis are provided in section
V.E.3.b.i and do not impact the
Commission’s assessment that the
benefits exceed the costs. The
Commission received two additional
comments with similar concerns about
the Commission’s wage estimates as
they apply to the restaurant industry
and the innovation economy, which are
no longer subject to the final rule.510
(b) Public Comments: Unquantified
Costs to Firms
The NPRM noted that there are
unquantified costs of the rule, primarily
in the form of unintended consequences
to consumers as they adjust to upfront
pricing. In addition, commenters
identified additional types of
unquantified costs to firms.
An academic commenter argued that
there may be unintended consequences
to firms from partial compliance.511 The
commenter stated that no firm would
want to be the first in its market to
comply, and the resulting ‘‘partial or
uneven compliance would cause
compliant firms to lose business to firms
that ignored the rule. Implementing
coordinated compliance for the entire
economy would be difficult with the
[Commission’s] limited resources.’’ The
Commission believes that the partial
compliance described by this
commenter is the current status quo in
the absence of a rule. Currently, some
firms impose drip pricing, and these
firms may have a competitive advantage
over those that do not impose drip
pricing. Under the rule, the Commission
expects all firms in the short-term
lodging and live-event ticket industries
to provide total price, which is an
improvement relative to the status quo.
If, as the commenter argues, some
degree of partial compliance remains,
the potential competitive advantage
from non-compliance would be similar
to the status quo, with the additional
risk to non-compliant firms of law
enforcement actions with potential
exposure to consumer redress and
penalties. In other words, even with
some degree of partial compliance after
the final rule, such an equilibrium
would still result in more benefits for
consumers than a world without the
final rule. The commenter’s concern
that implementing coordinated
compliance for the whole economy may
be difficult is mitigated in the final rule,
which only applies to two industries. In
addition, while the Commission may
have limited enforcement resources, it
expects consumer behavior regarding
fees to adjust over time due to the final
rule. Once upfront pricing becomes the
new norm, consumers will expect to see
total prices displayed upfront and will
be more likely to punish firms that
ignore the rule by taking their business
elsewhere. Therefore, any partial
compliance is likely to be temporary.
Nine commenters stated the NPRM’s
assertion that the rule will provide a
harmonized legal framework for all
States is incorrect because, as discussed
in section III, the rule only preempts
State laws if they are inconsistent with
the rule. 512 Commenters noted that an
added layer of regulation is an
additional cost for businesses as they
determine whether they are compliant
with the various rules to which they are
subject. The Commission updates the
final regulatory analysis to reflect this
concern as it applies to covered goods
or services, but notes that the cost was
already captured by the assumption that
all firms within the live-event ticketing
and short-term lodging industries will
spend on average one hour to determine
whether the rule applies to them.
One commenter asserted that ‘‘[t]he
Commission erroneously disclaims the
possibility of losses to producer
surplus.’’ 513 The commenter argued that
the Commission’s statement that
consumer surplus is reduced due to
consumer search costs under drip
pricing ignores the countervailing
increase of producer surplus. The
commenter further contended that the
Preliminary Regulatory Analysis omits
that, under drip pricing, consumers
purchase more expensive products,
which amounts, in part, to a transfer of
surplus from consumers to sellers. The
Commission acknowledges the transfer
of surplus due to higher prices.
However, the commenter incorrectly
assumes that the movement of surplus
from consumers to producers will be a
one-to-one transfer and presupposes
that there will be no increase in
consumer search time or deadweight
loss. As is discussed in section V.E.2.a.i,
the increased, unnecessary consumer
search time due to drip pricing results
in a net cost to society—no one benefits
from the additional hours consumers
collectively spend searching for price
information and then being surprised
with a higher final amount at the time
of purchase. In addition, as is discussed
in section V.E.2.a.ii, inefficient
overconsumption under drip pricing
generates a deadweight loss.
Inefficiently high spending under drip
pricing thus results in a cost to society
in the form of higher search costs and
a deadweight loss in addition to a
transfer of surplus from consumers to
sellers in the form of higher seller
revenue. Overall, this results in a net
loss to society.
Lastly, some commenters representing
the communications services industry
noted that there are unquantified costs
to cable, broadband, and wireless
providers due to similar upfront pricing
requirements from the FCC. 514 The
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internet & Television Association); FTC–2023–
0064–3234 (CTIA—The Wireless Association).
515 FTC–2023–0064–3127 (U.S. Chamber of
Commerce).
516 FTC–2023–0064–3143 (ACA Connects—
America’s Communication Association; FTC–2023–
0064–3296 (Bay Area Apartment Association).
517 FTC–2023–0064–3127 (U.S. Chamber of
Commerce); FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
518 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
519 FTC–2023–0064–3293 (Travel Technology
Association).
520 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
521 Tom Blake et al., Price Salience and Product
Choice, 40 Mktg. Sci. 619 (2021), https://doi.org/
10.1287/mksc.2020.1261; Michael R. Baye et al.,
Search Costs, Hassle Costs, and Drip Pricing:
Equilibria with Rational Consumers and Firms
(Nash-Equilibrium.com Working Paper, 2019),
http://nash-equilibrium.com/PDFs/Drip.pdf;
Alexander Rasch et al., Drip Pricing and its
Regulation: Experimental Evidence, 176 J. Econ.
Behav. & Org. 353 (2020), https://doi.org/10.1016/
j.jebo.2020.04.007.
522 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP, discussing Blake, supra note 521).
Commission’s decision to narrow the
final rule to covered goods or services
renders these comments inapplicable.
(c) Public Comments: Unquantified
Costs to Consumers
The NPRM noted that there may be
unquantified costs of the rule in the
form of consumer confusion as
consumers adjust to upfront pricing.
Commenters argued there were several
additional unquantified costs to
consumers. One commenter suggested
that consumers would experience
higher search time if companies limit or
eliminate price advertising to avoid the
regulatory risk of providing an
inaccurate total price. 515 The
Commission reiterates that the rule does
not require firms to eliminate price
advertising; rather the rule requires
covered firms to present total price to
consumers whenever businesses offer,
display, or advertise any price of a
covered good or service. The
Commission believes that unnecessarily
high consumer search time and
anticompetitive effects resulting from
different pricing strategies are already a
problem absent the rule, where firms
advertise a mix of dripped prices,
upfront prices, and no prices. The
commenter did not provide evidence for
why, under the rule, some firms are, or
would be, unable to advertise total price
or why it would result in higher search
time and a less competitive equilibrium
than the status quo. The Commission
received two additional comments with
similar concerns as they apply to the
telecommunications and rental housing
industries, which are no longer subject
to the final rule.516
Two commenters also suggested there
might be potentially higher consumer
search time if businesses unbundle
previously bundled options in an effort
to reduce the advertised price in
response to the rule, stating that hotels,
for example, may make amenities such
as wi-fi, gym access, and parking pay-
per-use.517 The Commission
acknowledges that some businesses may
unbundle previously bundled options
but reiterates that the rule prohibits
businesses from treating features as
optional if they are necessary to render
the good or service fit for its intended
use. The Commission also notes that
consumers are likely to punish firms
that unbundle features that they expect
to be included in total price by taking
their business elsewhere. A commenter
also speculated that there may be an
increase in deadweight loss if
businesses set inefficiently high prices
as they reoptimize prices or seek to cut
costs by reducing the quality of goods
and services.518 The Commission
believes this is unlikely. Under the rule,
there will be competitive pressure to
adjust both price and product quality to
more efficient levels when firms must
present total price. As discussed in
section V.E.1.b, drip pricing sometimes
leads consumers to underestimate the
total price of a good or service. The
result is that consumers start
transactions not understanding that the
final amount of payment will be higher
than what they are willing or able to
pay. For example, consumers may book
premium seats to a concert believing
they could afford the purchase, only to
realize afterward that the total price was
understated. Had they understood the
final amount of payment, they would
have selected seats at a lower price
point or skipped the concert altogether.
The final rule will help ensure that
consumers’ preferences, both in terms of
cost and quality, can be realized.
One industry group argued that
because intermediary travel websites
rely on short-term lodging firms for
accurate price information, the
proposed rule may incentivize these
firms to charge intermediaries a
premium for accurate pricing
information, ‘‘knowing that the
intermediaries face significant
regulatory risk without access to such
information.’’ 519 The commenter
suggested that these additional costs
could be passed onto consumers
without adding any value. As explained
in section III, the Commission reiterates
that the rule requires businesses that
sell or advertise through intermediaries
to provide the intermediaries with
accurate pricing information (including
about mandatory and optional fees). The
rule’s coverage of business-to-business
transactions protects consumers when
they purchase goods or services, the
sellers that do business with
intermediaries, and the intermediaries
themselves. The Commission further
notes that hotels are already free to
charge travel websites and
intermediaries money in exchange for
pricing information, yet they do not
because these travel websites and
intermediaries allow the hotels to reach
more consumers. In addition, under the
status quo, intermediaries already
contend with different fee practices
across short-term lodging firms and are
required to ensure they consistently
disclose pricing information to
consumers; the final rule should obviate
the need for intermediaries to deal with
inconsistent fee practices moving
forward. Therefore, the final rule should
not change any incentives relative to the
status quo, and it is unlikely that hotels
will change their behavior in this
respect as a result of the rule.
A commenter disagreed with the
Commission’s statement that consumer
confusion will be a temporary cost as
prices adjust.520 The commenter also
argued that consumers may inefficiently
under-consume when confronted with
higher upfront prices. The Commission
believes that consumers who may
inefficiently under-consume due to the
rule because they are anticipating
hidden fees are the same consumers
who are accurately accounting for
hidden fees and efficiently consuming
under the status quo. The percentage of
consumers who expect and anticipate
hidden fees is likely to be very small
because, as discussed in the NPRM,
empirical and theoretical models
consistently show that consumers
strongly and systematically
underestimate the full price they will
pay when faced with drip pricing, and
they pay more than they otherwise
would in a transparent marketplace. 521
Therefore, if these consumers are savvy
enough to adjust their expectations and
accurately account for hidden fees
under the status quo, then it is likely
that they will quickly adjust their
expectations after the final rule becomes
effective and any under-consumption
will be temporary.
The commenter also misinterpreted
the results of a study conducted in the
live-event ticketing market, Blake et al.
(2021) (the ‘‘Blake Study’’), in an effort
to support the claim that seeing total
price will deter consumers from making
efficient and economically desirable
purchases.522 The Blake Study found
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523 Blake, supra note 521.
524 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP); FTC–2023–0064–3033 (The Rebel
Lounge et al.).
525 FTC–2023–0064–3028 (Competitive Enterprise
Institute); FTC–2023–0064–3208 (FreedomWorks).
526 FTC–2023–0064–3127 (U.S. Chamber of
Commerce).
527 Vicki G. Morwitz et al., Divide and Prosper:
Consumers’ Reactions to Partitioned Prices, 35 J.
Mktg. Rsch. 453 (1998), https://doi.org/10.1177/
002224379803500404.
528 FTC–2023–0064–3028 (Competitive Enterprise
Institute).
529 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
530 See, e.g., id.; FTC–2023–0064–3140 (Merchant
Advisory Group); FTC–2023–0064–3180
(Independent Restaurant Coalition); FTC–2023–
0064–3300 (National Restaurant Association); FTC–
2023–0064–3202 (TechNet); FTC–2023–0064–3127
(U.S. Chamber of Commerce); FTC–2023–0064–
3173 (Center for Individual Freedom); FTC–2023–
0064–3258 (National Taxpayers Union Foundation);
FTC–2023–0064–2891 (Mary Sullivan, George
Washington University, Regulatory Studies Center);
FTC–2023–0064–3293 (Travel Technology
Association); FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3296
(Bay Area Apartment Association).
531 FTC–2023–0064–3028 (Competitive Enterprise
Institute).
532 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
533 Daniel S. Hamermesh, What’s to Know About
Time Use?, 30 J. Econ. Surv. 198 (2016), https://
doi.org/10.1111/joes.12107.
534 Id.
that providing an upfront total price
reduces both the quantity and quality of
purchases relative to the inefficiently
high levels of quantity and quality
purchased under dripped prices. In
other words, when consumers do not
have truthful, timely, and transparent
information about the final price, they
purchase goods of higher quality and
make more purchases than they would
if they had full information. The
commenter incorrectly implied that this
reduction amounts to inefficient
underconsumption when, in fact, it
represents a return to an efficient level
and quality of consumption compared
to drip pricing. The authors explicitly
concluded: ‘‘Our empirical results
support our hypotheses: price
obfuscation distorts both quality and
quantity decisions.’’ 523
Five industry groups identified what
they incorrectly labeled as three
additional types of unquantified costs
for consumers. The ‘‘costs’’ identified
actually are either transfers from
consumers to producers (resulting in no
net loss for society) or reflect
misunderstandings of the rule. These
commenters claimed that prices would
increase as businesses pass compliance
costs onto consumers,524 that
prohibiting businesses from displaying
partitioned pricing would decrease
transparency for consumers,525 and that
forcing businesses to display all
optional fees upfront would overload
and confuse consumers with often
irrelevant information.526 None of these
are true costs resulting from the final
rule. First, increased prices that result
from the sellers’ increased compliance
costs are a transfer of consumer surplus
to producer surplus and do not result in
a cost to society. Second, the rule does
not prohibit itemization. As long as total
price is clear and conspicuous and most
prominent, businesses are free to
display the components of total price if
they so choose. Finally, the rule does
not require businesses to display all
optional fees upfront. Rather, businesses
must disclose clearly and
conspicuously, before the consumer
consents to pay, the nature, purpose,
and amount of any fee or charge
imposed on the transaction that been
excluded from total price.
One policy organization commented
on the study 527 cited in the NPRM that
shows partitioned pricing decreases
consumers’ ability to accurately recall
total costs and increases their
demand. 528 The commenter argued that
the conclusion cited in the NPRM does
not follow from the study because
participants who recalled a lower price
could have known the total cost but
misunderstood the question to be asking
for the base price excluding the fees.
This interpretation is incorrect because
there was no ambiguity in the study
question at issue; it explicitly asked for
the total cost inclusive of all fees.
(d) Public Comments: Unquantified
Costs to Third Parties
One commenter argued that, as
consumer expectations adjust to upfront
prices, inefficiently low spending may
affect other businesses in the supply
chain such as manufacturers, packagers,
shippers, and warehouses.529 The
commenter also argued that lower
spending may affect live-event venues
and ticket resellers due to decreased
sales in food, drinks, and merchandise.
In addition, the commenter claimed that
lower spending will lead to lower sales
tax revenue for State and local
governments, causing them to borrow
more money at high interest rates, raise
taxes, or eliminate services. As
discussed in detail in section V.E.2.c,
the Commission believes that any
inefficient underconsumption due to
consumer confusion is likely to be
temporary, as are any resulting costs to
third parties.
(e) Public Comments: Costs From
Incorporating Contingent Fees Into Total
Price
Several commenters, including
industry groups, policy organizations,
and an academic, expressed concern
that it would be difficult for firms to
display total price in cases where total
price is unknown because it depends on
consumer conduct or choices.530 In
cases where price is determined through
customization, total price may not be
known until after consumers have
finalized their selection of options. The
Commission addresses contingent fees
in section III.
2. Comments on Benefits
Section V.D.2.a addresses the concern
of some commenters that the NPRM’s
benefit calculations are too high, and
section V.D.2.b outlines several
unquantified benefits identified by
commenters.
(a) Public Comments: Benefits Are Too
High
One commenter argued that benefits
are too high because the Preliminary
Regulatory Analysis overestimated
consumer search costs that result from
drip pricing.531 It argued that consumers
benefit from seeing an advertisement
with dripped fees compared to their
position before seeing any
advertisement. The Commission
believes this is not the correct
comparison to make when determining
whether consumer search time will
change as a result of the rule; a more apt
comparison considers consumer benefit
when faced with total price versus drip
pricing. The Commission expects that
the rule will decrease consumer search
time, because consumers will spend less
time searching for total price under the
rule’s framework versus a dripped
pricing framework.
A commenter argued that the rule’s
estimated benefits are too high because
the value-of-time estimate of $24.40 is
too high. 532 The $24.40 figure is
calculated by taking 82% of the 2022
mean hourly wage from the Bureau of
Labor Statistics. A meta-analysis of
eleven studies conducted between
2004–2015 finds that the value of time
as a percentage of mean wage is about
82% in the United States. 533 In
addition, previous studies indicate that,
over time, people’s time has become
more valuable as a fraction of what they
earn.534 So, it is possible that the
current percentage in 2024 may actually
be higher than 82%. The final regulatory
analysis in section V.E updates the
value of time using the same method but
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535 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
536 Id.
537 FTC–2023–0064–3127 (U.S. Chamber of
Commerce).
538 FTC–2023–0064–2883 (District of Columbia,
Office of the People’s Counsel).
539 FTC–2023–0064–3283 (National Consumer
Law Center, Prison Policy Initiative, and advocate
Stephen Raher).
540 FTC–2023–0064–3248 (DC Jobs With Justice
on behalf of Fair Price, Fair Wage Coalition).
541 FTC–2023–0064–3146 (Institute for Policy
Integrity, New York University School of Law).
542 FTC–2023–0064–3233 (NCTA—The Internet &
Television Association); FTC–2023–0064–3238
(Gibson, Dunn & Crutcher LLP); FTC–2023–0064–
3294 (International Franchise Association).
with the more recent 2023 mean hourly
wage.
The commenter further asserted that it
would be more accurate to calculate the
value of time as a percentage of the
median hourly wage instead of the mean
hourly wage, stating that ‘‘the mean
wage is driven by a few outliers.’’ 535
Relying on the median hourly wage,
however, would be incorrect and
reflects a misunderstanding of how the
value of time is calculated. The value of
time initially was calculated as an
absolute dollar amount per hour in the
studies reviewed by the Hamermesh
(2016) paper, and then expressed as a
percentage of the mean hourly wage at
that time. That percentage can be
applied to the current mean hourly
wage to calculate an updated value of
time. If the Commission expressed the
value of time as a percentage of the
median wage, this would not be a ‘‘more
accurate’’ calculation of the value of
time as the commenter suggests, but
simply a different way of expressing the
same value of time estimated by
Hamermesh (2016).
The commenter also argued that the
Commission’s valuation of time estimate
is inaccurate because some consumers
may have lower valuations of time, such
as consumers who earn no wages or
lower wages, and consumers who
‘‘enjoy shopping’’ and may not believe
they incur costs from searching. 536
These concerns are consistent with the
Commission’s estimated value of time,
which captures an average of a
representative group of American
consumers across eleven studies; some
individuals will have lower valuations
of time, and some will have higher.
Furthermore, the Commission
distinguishes between efficient and
inefficient searching by consumers.
Consumers, based on their preferences,
may find some amount of search, or
comparison shopping, to be beneficial to
their consumption choices. A consumer
will naturally choose an efficient level
of search such that the marginal benefit
of discovering an additional different
price or comparable good equals the
marginal cost of the time and effort to
perform the additional search. The
Commission recognizes the purpose of
this efficient level of search and does
not count it as a harm. When consumers
face drip pricing, they must spend
additional time and effort to acquire full
pricing information allowing them to
properly comparison shop. This
additional time and effort results in an
inefficient level of search that harms
consumers with no countervailing
benefit. In the Commission’s final
regulatory analysis, the estimate of cost
savings through reduced search time is
based on the estimated difference
between consumer search time under
drip pricing and consumer search time
under upfront pricing; that is, the
estimate is based solely on the estimate
of the inefficient level of search.
Finally, another commenter argued
that benefits are too high in the short-
term lodging calculation because the
Preliminary Regulatory Analysis
estimated the reduction in listings
viewed as a result of the proposed rule
using data from a study done in the live-
event ticketing market.537 However, the
Commission’s base number of listings
viewed under the status quo was taken
from studies conducted in the short-
term lodging industry. The live-event
ticketing study provided a scaling factor
that the Commission used to estimate a
percentage reduction in listings viewed
in response to the rule. The commenter
neither demonstrated why the
Commission’s method overestimated the
reduction in listings viewed nor
provided the Commission with
additional data.
(b) Public Comments: Unquantified
Benefits
The NPRM identified the rule’s
unquantified benefits, primarily a
reduction in deadweight loss as
consumers make more efficient
purchasing decisions. Several comments
from consumer and worker protection
groups identified additional
unquantified benefits of the rule to low-
income households,538 incarcerated
people and their families, 539 and to
restaurant workers. 540 Although these
comments no longer apply to the final
rule, the Commission acknowledges that
the broader rule was likely to positively
impact some vulnerable populations
like those discussed in the comments
and may have had second-order effects
on housing security and the labor
market.
One commenter also recommended
that the Commission further explain or
quantify why the rule would result in
enforcement resource savings as stated
in the NPRM.541 The Commission does
not quantify the net effect of the rule on
enforcement resources due to a lack of
data, but discusses in detail the rule’s
enforcement benefits in section V.A.
Based on its experience, the
Commission finds that the resources it
needs to expend under the two-step
pathway pursuant to section 19(a)(2) are
typically greater because the
Commission needs to initiate two
separate proceedings.
3. Comments on the Economy-Wide
Break-Even Analysis
In this section, the Commission
addresses comments specific to the
economy-wide break-even analysis of
the Preliminary Regulatory Analysis.
Section V.D.3.a addresses comments
that argued the Commission’s break-
even analysis contained incorrect
assumptions or errors; section V.D.3.b
addresses comments that claimed a
break-even analysis is not enough to
justify an economy-wide rule; and
section V.D.3.c addresses a comment
that argued the break-even analysis is
satisfactory and recommended further
analysis to strengthen it.
(a) Public Comments: Break-Even
Analysis Has Incorrect Assumptions or
Contains Errors
Three commenters argued that the
Commission’s assumption that 90% of
firms are already in compliance with the
proposed rule was inaccurate.542 This
comment does not apply to the final
rule, which no longer contains an
economy-wide analysis. However, the
Commission reaffirms its break-even
calculation in the Preliminary
Regulatory Analysis, and acknowledges
uncertainty regarding the number of
firms in the economy that currently
employ unfair or deceptive fees or
charges and that would need to incur
additional costs to comply with the rule.
To address the uncertainty, the
Preliminary Regulatory Analysis
provided both the break-even benefits
required if 90% of firms in the economy
are already compliant with the rule, as
well as the break-even benefits required
if 50% of the firms were already
compliant with the rule.
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2125	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
543 FTC–2023–0064–3238 (Gibson, Dunn &
Crutcher LLP).
544 Id.
545 See, e.g., id.; FTC–2023–0064–3127 (U.S.
Chamber of Commerce); FTC–2023–0064–2891
(Mary Sullivan, George Washington University,
Regulatory Studies Center); FTC–2023–0064–3173
(Center for Individual Freedom); FTC–2023–0064–
3208 (FreedomWorks); FTC–2023–0064–3143 (ACA
Connects—America’s Communications
Association); FTC–2023–0064–3258 (National
Taxpayers Union Foundation).
546 See, e.g., FTC–2023–0064–3133 (National
Multifamily Housing Council and National
Apartment Association); FTC–2023–0064–3143
(ACA Connects—America’s Communications
Association); FTC–2023–0064–3258 (National
Taxpayers Union Foundation); FTC–2023–0064–
3197 (American Beverage Licensees).
547 Office of Mgmt. & Budget, Circular A–4 (Sep.
17, 2003) (hereinafter, OMB Circular A–4), https://
obamawhitehouse.archives.gov/omb/circulars_
a004_a-4/.
548 FTC–2023–0064–3146 (Institute for Policy
Integrity, New York University School of Law).
One commenter also argued that the
$6.65 average annual per-consumer
benefit number in the Preliminary
Regulatory Analysis is too low because
the Commission calculated the
necessary break-even benefit level by
dividing estimated costs by all U.S.
adults, rather than only consumers who
make live-event ticket and short-term
lodging purchases. 543 The Commission
emphasizes that the $6.65 figure from
the Preliminary Regulatory Analysis is
an average per-person benefit. In the
same way that the estimated attorney
hours assumes that some small
businesses will not hire an attorney to
ensure compliance, the benefit per
consumer figure reflects the fact that
some adults will not encounter dripped
fees. The Commission does not dispute
that some consumers will see much
higher benefits than others. The same
argument applies to the final rule,
where the Commission recalculates the
average annual per-consumer break-
even benefit level using only the costs
from covered goods or services.
Finally, the same commenter
contended that both the one-time and
annual costs for the high-end estimates
in table 2 of the Preliminary Regulatory
Analysis were calculated incorrectly. 544
This comment no longer applies to the
final rule, which does not contain an
economy-wide break-even analysis.
(b) Public Comments: Break-Even
Analysis Is Not Enough To Justify an
Economy-Wide Rule
Some commenters disagreed that the
rule should apply to the whole economy
when the Preliminary Regulatory
Analysis quantifies a net benefit for two
industries and relies on a break-even
analysis for the remainder of the
economy.545 Other commenters
similarly stated that the Preliminary
Regulatory Analysis should include an
industry-by-industry cost-benefit
analysis.546 The final rule is limited to
only covered goods or services, which
are offered by the live-event ticketing
and short-term lodging industries.
The Commission emphasizes that a
break-even analysis is encouraged by
OMB Circular A–4 when there are
unquantifiable costs or benefits, and
affirms that its break-even analysis in
the Preliminary Regulatory Analysis is
consistent with OMB guidance.547 In the
final regulatory analysis, the
Commission identifies some of the
unquantified benefits to the rule and
provides a similar break-even analysis
for the live-event ticketing and short-
term lodging industries. The
Commission also provides benefit-cost
analyses demonstrating that the
quantified benefits exceed the
quantified costs.
(c) Public Comments: Break-Even
Analysis Is Satisfactory
Conversely, another commenter noted
that the Commission’s break-even
analysis is satisfactory and suggested
the Commission provide further
analysis to support the conclusion that
time savings resulting from the rule are
likely to exceed the break-even
threshold. 548 Although this comment no
longer applies to the final rule, which
focuses on addressing hidden and
misleading fees in the live-event
ticketing and short-term lodging
industries, the Commission
acknowledges that there is economic
support for a broader rule.
E. Economic Regulatory Analysis of the
Final Rule’s Costs and Benefits
The Commission has narrowed the
application of the final rule to a limited
set of covered goods or services, which
comprise live-event ticketing and short-
term lodging. This in turn necessitates
revisions to the Preliminary Regulatory
Analysis. The final regulatory analysis
no longer includes the economy-wide
break-even analysis. The Commission
provides the per-consumer break-even
benefit levels for the live-event ticketing
and short-term lodging industries, as
well as quantified benefits and costs for
these industries. After incorporating
these revisions and updating numbers
based on recent data releases, the
Commission confirms in the final
regulatory analysis that the benefits of
the rule exceed the costs. Specifically,
the Commission estimates that the
quantified benefits of the rule will
exceed its quantified costs, and the
Commission believes that the total
benefits of the rule (quantified and
unquantified) will outweigh its total
costs (quantified and unquantified).
The Commission discusses in the
final regulatory analysis the projected
impact of the rule’s prohibition on
offering, displaying, or advertising any
price of a covered good or service
without clearly and conspicuously
disclosing total price, as well as the
rule’s prohibition on misrepresentations
regarding any fee or charge, including
the nature, purpose, amount, or
refundability of any fee or charge, and
the identity of the good or service for
which the fee or charge is imposed. The
Commission’s analysis also assesses the
impact of the rule’s required disclosures
of the nature, purpose, and amount of
any fee or charge imposed on the
transaction that has been lawfully
excluded from total price, the identity of
the good or service for which the fee or
charge is imposed, and the final amount
of payment. When possible, the
Commission quantifies the benefits and
costs and notes where some potential
benefits and costs are unquantified. If a
benefit or cost is quantified, the sources
of the data relied upon are indicated. If
an assumption is needed, the
Commission makes clear which
quantities are being assumed.
The Commission uses ten years for
the time period of analysis because the
Commission’s trade regulation rules are
subject to review every ten years. Tables
1 and 2 summarize the main findings of
the final regulatory analysis. Table 1
presents the potential costs, benefits,
and resulting net benefits for the live-
event ticketing and short-term lodging
industries. Quantified benefits in these
industries derive from time savings
consumers would experience due to
greater price transparency, leading to
more efficient shopping processes.
Quantified costs derive from the costs
firms would incur to comply with the
rule.
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2126 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
549 We use 3% and 7% for the discount rate,
consistent with Office of Management and Budget’s
guidance. OMB Circular A–4, supra note 547.
The quantified net benefits for the
live-event ticketing and short-term
lodging industries are positive. There
are also unquantified benefits, which
may arise from a reduction in
deadweight loss as consumers
experience greater price transparency
and make fewer mistake purchases.
Unquantified costs may stem from
potential adjustment costs or consumer
confusion as expectations adjust under
the rule.
For both quantified benefits and costs,
the final regulatory analysis provides a
range representing the set of
assumptions that result in a ‘‘low-end’’
or ‘‘high-end’’ estimate. These estimates
are calculated as present values over a
ten-year period. Benefits and costs are
more valuable to society the sooner they
occur. A discount rate (3% or 7%) is
used to adjust estimated benefits and
costs for differences in timing; a higher
discount rate is associated with a greater
value for benefits and costs in the
present.549
BILLING CODE 6750–01–P
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2128 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
550 Howard A. Shelanski et al., Economics at the
FTC: Drug and PBM Mergers and Drip Pricing, 41
Rev. Indus. Org. 303 (2012), https://doi.org/
10.1007/s11151-012-9360-x.
551 White House, How Junk Fees Distort
Competition (Mar. 21, 2023), https://
www.whitehouse.gov/cea/written-materials/2023/
03/21/how-junk-fees-distort-competition/; Brian
Deese et al., White House, The President’s Initiative
on Junk Fees and Related Pricing Practice (Oct. 26,
2022), https://www.whitehouse.gov/briefing-room/
blog/2022/10/26/the-presidents-initiative-on-junk-
fees-and-related-pricing-practices/; Glenn Ellison, A
BILLING CODE 6750–01–C
As discussed in more detail in section
V.E.3, the Commission only quantifies
benefits from reductions in consumer
search costs. However, the Commission
notes there are likely additional
consumer benefits in the form of
reduced deadweight loss. Since the
Commission is unable to quantify all of
the final rule’s potential benefits, the
final regulatory analysis instead
calculates the minimum value for the
average consumer that the final rule
would need to generate in order for its
benefits to outweigh its quantified costs.
Table 2 presents low-end and high-end
estimates of the total quantified costs
and the necessary ‘‘break-even benefit’’
per consumer. Under the high-end cost
assumptions with a 7% discount rate,
the Commission’s analysis finds that
each consumer would need to
experience a benefit of $0.33 per year
over ten years for the rule’s benefits to
exceed its quantified compliance costs.
Under the low-end cost assumptions
with a 3% discount rate, that per-
consumer amount is $0.08 per year over
ten years. As noted, the Commission
believes that the necessary break-even
benefit per consumer is likely between
$0.08 and $0.33 per year over ten years,
depending on which set of assumptions
is used.
1. Economic Rationale for the Final Rule
The final rule addresses the economic
problem of incomplete and insufficient
price information by businesses that
shroud the full price from the consumer
during parts of the purchasing process,
which harms both consumers and
honest competitors. Not including
mandatory fees in the full price when
consumers start the purchasing process
for a good or service may result in a
market failure. Firms may shroud the
full price to the consumer through the
practice of ‘‘drip pricing,’’ which is ‘‘a
pricing technique in which firms
advertise only part of a product’s price
and reveal other charges later as the
customer goes through the buying
process.’’ 550 Discovering the lowest full
price prior to a final purchase by going
through the checkout process with
multiple firms is inefficient and
involves additional consumer search
costs. In some cases, taking the time to
search for the full price from one firm
may result in the consumer losing the
opportunity to purchase the product
from another firm. Drip pricing and the
resulting imposition of additional
search costs make it more difficult for
consumers to compare prices across
platforms, which may soften price
competition in the market.551
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Model of Add-On Pricing, 120 Q.J. Econ. 585 (2005),
https://www.jstor.org/stable/25098747.
552 Morwitz, supra note 527.
553 Baye, supra note 521.
554 These assumptions are made for exposition
purposes to abstract from the issues of market
power in pricing and strategic interactions between
firms. The general ideas from this simple
framework extend to differentiated products and
strategic interactions between a smaller number of
firms.
A market failure may also occur when
firms shroud full price through non-
aggregated partitioned pricing, in which
all of the components of the full price
(base price, fees, etc.) are presented to
consumers without the full price
itself. 552 Non-aggregated partitioned
pricing, like drip pricing, imposes costs
on consumers by requiring them to
spend additional time to calculate the
full price for themselves. Consumers
tend to underestimate the full price
when faced with partitioned pricing,
and this underestimation leads to an
increase in demand. The increased
demand from erroneous price
calculations, in turn, leads to inefficient
overconsumption by consumers.
(a) Shrouded Pricing as a Cause of
Market Failure
A well-functioning market depends,
in part, on consumers having accurate
information regarding the price, and
other attributes, of the goods or services
being offered. Firms that engage in drip
pricing or employ partitioned pricing
create a friction in the operation of the
market by imposing costs on consumers
to acquire price information. Several
economic harms may arise from this
friction. First, holding consumer choices
and prices fixed, the added search cost
to acquire price information harms
consumers with no countervailing
benefit to firms. Second, because
shrouded prices make comparison
shopping more difficult, consumers
might make suboptimal consumption
decisions. In fact, consumers may find
it too costly to search for full and
accurate price information for some or
all goods or services under
consideration. The lack of full price
information may lead consumer demand
to become less sensitive, i.e., less
elastic, to changes in price, and
consumers will accept higher (quality-
adjusted) prices than they would if they
were fully informed with clear and
upfront pricing. This, in turn, leads to
a third effect: since shrouded prices
make it harder for consumers to
compare prices, some firms may gain
market power that allows them to raise
prices or decrease quality.553 Firms may
further distort the market outcome by
changing the products they offer to
consumers relative to a market where
prices are transparent.
The Commission discusses further the
first of these effects, the added search
costs incurred by consumers to acquire
complete price information, in section
V.E.2.a.i and quantifies these costs in
the live-event ticketing and short-term
lodging industries in section V.E.3.c and
V.E.3.d. The Commission discusses the
welfare impact of the second of these
effects, the distortion of consumers’
decisions due to lack of full
information, in this section. The third
effect, firms increasing their market
power in response to increases in search
costs, would exacerbate any welfare
losses caused by the distortion of
consumers’ decisions due to the lack of
full price information. However, the
Commission lacks the data to quantify
or distinguish their effects on
deadweight loss.
The distortion of consumers’
decisions due to the lack of full price
information, the second effect discussed
in the previous paragraph, can be
illustrated through a simple model of
supply and demand. For simplicity of
exposition, the analysis assumes that
there are many firms, each selling a
homogeneous product (i.e., good or
service). The analysis further assumes
that firms can adjust their prices and
pricing strategies, but that the quality of
the product is fixed. 554
A useful starting point is to consider
the baseline market outcome where
consumers are fully informed; that is,
consumers know the full price upfront
(either because firms state the full price
upfront or because consumers can fully
and correctly predict any add-on
prices). Since all firms sell the same
product, competition will lead all firms
to set equal prices at marginal cost.
Figure 1 illustrates the baseline market
outcome. The curve Dupfront represents
consumers’ demand when they are fully
informed. The supply curve S
represents the marginal cost to firms of
producing a given quantity of the
product. The intersection of Dupfront with
S, denoted by point A, at quantity
Qupfront and price Pupfront, represents the
outcome. The analysis will refer to this
as the ‘‘fully informed outcome.’’ At
point A, the marginal benefit to
consumers from consuming one
additional unit is equal to the marginal
cost to firms from the production of one
more unit of the product.
As long as there are no externalities
(i.e., impacts on third parties beyond the
consumers and firms under
consideration) from the consumption of
the product, this outcome is efficient;
that is, point A represents the
consumption level of the product that
provides the greatest benefit to society.
The benefit to society is measured by
the sum of the benefit to consumers,
called consumer surplus, and the
benefit to firms, called producer surplus
or profit. Consumer surplus is the net
benefit consumers experience from
consuming the product after accounting
for their expenditure on the product.
Consumer surplus is given by the
difference between the area of trapezoid
ACFG, the value to consumers from
consuming Qupfront units of the product,
and the area of rectangle ABFG, the total
expenditure on the product (Pupfront *
Qupfront); thus, consumer surplus is given
by the area of triangle ABC. Producer
surplus is the net benefit to firms from
selling the product after accounting for
their costs to provide the product.
Producer surplus is given by the
difference between rectangle ABFG, the
total revenue from the product, and the
area of trapezoid AEFG, the cost to firms
from producing Qupfront units of the
product; thus, producer surplus is given
by the area of triangle ABE. The net
benefit to society is then given by the
area of triangle ACE.
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2130 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
555 Blake, supra note 521; Raj Chetty et al.,
Salience and Taxation: Theory and Evidence, 99
Am. Econ. Rev. 1145 (2009), https://doi.org/
10.1257/aer.99.4.1145.
556 For simplicity of exposition, the analysis
assumes that all firms follow the same shrouding
strategy and set the same t.
557 This shift is entirely analogous to the shift that
would occur from a government subsidy. When a
subsidy is provided, the price consumers pay is
lower than the price charged by firms.
As previously discussed, shrouded
pricing makes it more difficult for
consumers to ascertain the full price of
the product. In the case of drip pricing,
consumers will see the base price before
seeing additional mandatory price
components such as convenience fees.
Consumers may or may not be unaware
of the additional fees at the time they
make a purchase decision. If consumers
are fully aware of the additional fees, or
anticipate them correctly, the outcome
remains point A, which is efficient.
However, there is evidence that
consumers respond differently to a
change in the base price offered upfront
than to changes in the fees disclosed
separately from the base price.
Specifically, economic studies provide
evidence that consumers react less to
price changes through fees than they do
to price changes through the base
price. 555 That is, consumer demand is
less elastic to the fee component of the
full price than it is to the base price.
One possible rationale for this
phenomenon is that consumers are fully
aware of base prices but are not, or only
partially, aware of fees.
The Commission analyzes the impact
drip pricing has on market outcomes in
the previous framework in two stages.
The analysis starts by examining the
case where consumers are completely
unaware of the additional fees, namely,
they assume that the base price offered
upfront is the full price. The analysis
then examines the case where
consumers are aware that a fee might be
added later but do not correctly estimate
the size of this fee. Note that this case
may arise under a variety of
circumstances. For example, all
consumers could be partially aware of
the fees, some consumers could be fully
aware of the fees while others are totally
unaware, or there could be a mixture of
consumers exhibiting different degrees
of awareness.
In the first stage of the analysis,
Pbase,unaware denotes the base prices firms
offer upfront, and Ptotal,unaware denotes
the full price firms charge, which is
equal to the base price plus t, the sum
of mandatory per unit fees not included
in the base price: Ptotal,unaware =
Pbase,unaware + t.556 Consumers determine
their consumption according to
Pbase,unaware, unaware that they are
actually going to pay Ptotal,unaware. This
difference between the price consumers
believe they are paying and the price
firms are actually charging leads to an
expansion in consumer demand relative
to demand when consumers are fully
informed. Specifically, as illustrated by
Figure 2, the firms’ deception causes an
upward shift in demand equal to the
price difference, t, from Dupfront to
Dunaware. The intersection of Dunaware
with S, illustrated by point J, at quantity
Qunaware and price Ptotal,unaware,represents
the outcome when consumers are
unaware of the fee and only observe the
base price. 557
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2131	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
558 Blake, supra note 521; Chetty, supra note 555.
559 This phenomenon has been observed, for
example, in the live-event ticketing industry. See
Blake, supra note 521.
Consumer surplus is now equal to the
area of triangle CHI minus the area of
triangle IJK. Relative to the fully
informed outcome, consumer surplus
decreases by the area of trapezoid ABHI,
the decrease in consumer surplus due to
the price increase, and the area of
triangle IJK, the decrease in consumer
surplus due to the deceptive pricing
strategy. Producer surplus is now equal
to the area of triangle EHJ. It increases,
relative to the fully informed outcome,
by the area of trapezoid ABHJ. This
trapezoid illustrates the transfer of
surplus from consumers to firms due to
the deceptive practice of shrouded
pricing. The net effect on society is now
the area of triangle ACE minus the area
of triangle AJK. Relative to the fully
informed outcome, the benefit to society
decreases by the area of triangle AJK (the
combined change in consumer and
producer surplus). This decrease in
social surplus is the harm, also referred
to as deadweight loss, caused by the full
shrouding of the fee.
The analysis now turns to the case
where consumers are aware of the
possibility of additional fees but do not
fully anticipate their magnitude. As
previously discussed, academic research
suggests that this might be the case.558
This reduced salience would increase
quantity demanded and incur a
deadweight loss compared to the fully
informed outcome (illustrated in Figure
1), although both the increase in
quantity demanded and the deadweight
loss would be smaller than in the case
where consumers were fully unaware of
the fees (illustrated in Figure 2).
Essentially, the aggregate demand curve
will lie somewhere between the upfront
demand curve in Figure 1 and the fully
shrouded demand in Figure 2. This
aggregate demand can come from (the
same) partial awareness by all
consumers or a mixture of different
degrees of awareness by different
consumers. A technical appendix in
section V.E.6 provides a more detailed
model of the impact of consumers’
partial awareness.
In summary, the shrouding of prices
distorts the market outcome by leading
consumers to consume more than they
would if they were fully aware of the
full price. The overconsumption by
consumers leads to a social cost in the
form of deadweight loss because the
resources used to produce the product
would have been put to better use if
consumer demand had not been
distorted in this manner. The
deadweight loss from the inefficient
consumption level is one component of
the welfare loss generated by drip
pricing, in addition to the increase in
consumer search costs and the possible
shift in pricing and product offerings
due to increased market power.
Collectively, these effects represent a
market failure.
Shrouded pricing likely cannot be
mitigated by competitive forces alone
once it has become pervasive in a
market. Although consumers would
prefer upfront full prices, it is unlikely
that an individual firm in a market with
shrouded prices could increase its
market share by providing its full price
upfront. Under the expectation of
shrouded prices, consumers may
inadvertently interpret such a firm’s
upfront full price as a higher base price,
with fees added separately, leading the
firm to lose, rather than gain, business.
The distortion of consumer expectations
caused by shrouded pricing thus
prevents a shift to upfront pricing
through competition.
In many markets, goods and services
are differentiated, with higher quality
items selling at higher prices. In such
markets, drip pricing may lead to
outcomes characterized by inefficiently
high qualities in addition to the
inefficiently high quantities previously
discussed.559 Consumers may respond
to fully disclosed prices in these
markets by purchasing goods or services
of lower, more efficient quality in
addition to purchasing lower, more
efficient quantities of goods or services.
(b) Shrouded Pricing as a Source of
Biased Expectations
As explained in section V.E.1.a, firms
have incentives to distort consumer
demand toward an inefficient
equilibrium. This inefficiency may also
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2132 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
560 David Laibson, Harvard U., Drip Pricing: A
Behavioral Economics Perspective, Address at the
FTC (May 21, 2012), https://www.ftc.gov/sites/
default/files/documents/public_events/economics-
drip-pricing/dlaibson.pdf.
561 Morwitz, supra note 527.
562 Shelle Santana et al., Consumer Reactions to
Drip Pricing, 39 Mktg. Sci. 188 (2020), https://
doi.org/10.1287/mksc.2019.1207.
563 Rasch, supra note 521.
564 Chetty, supra note 555. 	565 See Blake, supra note 521.
arise in a behavioral context.560 By
shrouding full prices through drip or
partitioned pricing, a firm may bias its
consumers’ price expectations. For
example, consumers may respond to
dripped prices by anchoring their
beliefs on the base price and, thus,
systematically underestimate the price
of the good or service.561 This
underestimation, whether by all
consumers, or a subset of consumers,
leads to a similarly inefficient
equilibrium in which the good or
service is overconsumed and society
suffers a deadweight loss.
Several studies show how consumer
behavior changes because of drip
pricing. One study found that when
optional surcharges are dripped,
individuals are more likely to select a
more expensive option (after including
surcharges) than what they would have
chosen under upfront pricing.562 Even
when the participants became aware of
the additional fees, they were reluctant
to restart the purchase process because
they perceived high search costs from
doing so and inaccurately assumed that
all firms charge the same fees. A
different economics experiment found
that consumers encountering drip
pricing are more likely to make
purchasing mistakes if they are
uncertain about the extent of the drip
pricing. 563
Another prominent study looked at
how consumers respond to the salience
of sales tax on goods, which affects the
full price of a product. 564 In this study,
when the grocery store displayed the
full price of each item on shelves as part
of a field experiment, people purchased
fewer goods relative to the control
scenario in which sales tax was added
at checkout, despite knowing that the
final price being charged had not
changed. In 2014, StubHub conducted
an experiment in which some
consumers were presented with upfront
prices inclusive of fees while other
consumers were presented a base price
upfront with fees hidden until checkout.
This experiment revealed that
presenting consumers with full prices
upfront reduced both the quantity and
quality of tickets purchased relative to
presenting consumers with dripped
prices.565
2. Economic Effects of the Final Rule
The model of incomplete price
information, described in section
V.E.1.a, provides a framework for
assessing the potential costs, benefits,
and transfers associated with the final
rule in the live-event ticketing and
short-term lodging industries. The rule
will result in positive net benefits if it
allows consumers to learn total price
more easily, improves consumer
comprehension of fees and charges as
they relate to total price, facilitates
comparison shopping, reduces search
costs, or otherwise allows consumers to
make choices that increase net welfare.
The Commission believes the rule will
accomplish these goals in the live-event
ticketing and short-term lodging
industries.
The Commission finds in section
V.E.1 that consumer demand in the live-
event ticketing and short-term lodging
industries is distorted by incomplete
price information—in simple terms,
consumers respond to lower base prices
even if fees are revealed or added up
later in a transaction. Thus, if a seller in
these industries uses hidden fees, that
seller may acquire a larger market share
by advertising lower initial prices than
other sellers not using hidden fees.
Absent the rule, competitive forces will
drive other firms in these industries to
also use hidden fees, as has become
evident as noted in section II.B. If firms
do not use hidden fees, they may have
to accept a lower market share, even
though their full prices to consumers are
similar to (or lower than) their
competitors. Thus, the Commission
finds that with the final rule, firms that
currently do not use drip pricing will no
longer face the competitive pressure to
employ hidden fees and may experience
higher revenue if consumers can more
easily compare prices across firms. The
Commission also finds that the rule will
generate costs as firms that currently
employ hidden or misleading fees adjust
how they convey prices to consumers.
Overall, the Commission expects the
rule will increase economic efficiency
through improved consumer price
calculations, resulting in reduced
deadweight loss and reduced consumer
search time that exceeds the costs to
firms of providing more transparent
pricing. It may also facilitate price
comparison by consumers, increase
competition among sellers, and put
downward pressure on prices. Due to a
lack of data, it is difficult to fully
quantify all the potential effects of the
final rule. Where there may be impacts
that the Commission is unable to
quantify, it provides a qualitative
description.
(a) General Benefits of the Final Rule
Consumers will benefit from the rule
in several ways. In addition to
reductions in search costs and
deadweight loss, which are described in
greater detail herein, the Commission
expects there to be unquantified benefits
for consumers from the rule, including
reduced frustration and consumer stress
associated with surprise fees that distort
the purchasing process.
i. Reductions in Search Costs
Consumers will save time searching
for the total price of live-event tickets
and short-term lodging as a result of the
rule. In a well-functioning market,
consumers find it beneficial to
comparison shop for low prices. When
mandatory fees are obscured or
misrepresented, however, consumers
learn the full price at the end of the
process and may need to re-assess
whether they wish to purchase at a
higher price than originally expected or
to look for other options. Consumers
incur longer search times to discover
full prices and make informed
purchasing decisions. The final rule will
eliminate the need for additional,
inefficient amounts of time to determine
total price from sellers that do not
already provide total price upfront. The
Commission quantifies the reduction in
search costs in the live-event ticketing
and short-term lodging industries.
ii. Reductions in Deadweight Loss
As discussed in section V.E.1.a,
incomplete pricing information may
distort consumer demand. This
distortion will lead to an inefficient
market equilibrium and generate
deadweight loss, which results from
consumers purchasing higher quantities
of the good or service than they would
if fully informed. Under the final rule,
consumers will learn total price upfront.
Thus, the rule will likely mitigate
distorted consumer demand and prevent
welfare-reducing transactions.
Resources supporting overconsumption
will become available for better societal
use, and the deadweight loss will be
reduced or eliminated.
The disclosure of total price may also
reduce mistake purchases with respect
to product quality. Drip pricing can lead
consumers to purchase goods of
inefficient quality; the final rule will
allow consumers to choose more
efficient levels of quality. The
Commission does not quantify the
reduction in deadweight loss but finds
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2133	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
566 See OMB Circular A–4, supra note 547
(‘‘Transfer payments are monetary payments from
one group to another that do not affect total
resources available to society. A regulation that
restricts the supply of a good, causing its price to
rise, produces a transfer from buyers to sellers.’’
Even though a ‘‘net reduction in the total surplus
(consumer plus producer) is a real cost to society,
[ ] the transfer from buyers to sellers resulting from
a higher price is not a real cost since the net
reduction automatically accounts for the transfer
from buyers to sellers.’’).
567 This basic regulatory review also captures the
time it takes for firms to determine how a
nationwide rule interacts with any state-level
regulations to which they are already subject.
568 The Commission requested additional
information on potential compliance hours in the
NPRM, but it did not receive consistent data.
Therefore, the Commission uses the same set of
assumptions on hours as used in the NPRM but
notes that the live-event ticketing and short-term
lodging industries are likely to have already
established systems necessary to comply with the
final rule due to operating in jurisdictions with
similar regulations.
569 It is possible that presently compliant firms
would also need to reoptimize prices in response
to shifts in market equilibria. That is, the shift in
an industry’s equilibrium resulting from the rule
could be significant enough that all firms in the
industry, compliant or not, would need to adjust
prices. Firms regularly reoptimize prices in
response to market shifts, but it is possible that this
price adjustment would require already compliant
firms to incur additional costs. The Commission
solicited, but did not receive, the data necessary to
quantify this potential cost to firms.
that it is a positive benefit to the final
rule.
(b) Welfare Transfers
The Commission expects that prices
in the live-event ticketing and short-
term lodging industries will adjust in
response to the transparency facilitated
by the rule. These price adjustments
transfer welfare from one side of the
market to the other; consumer welfare
will increase, and producer profits will
decrease by the same amount. Typically,
transfers of welfare from one set of
people in the economy to another are
documented in a regulatory analysis,
but do not change net social welfare.566
Consequently, while it is likely that the
rule will result in transfers of welfare,
the Commission does not attempt to
estimate these transfers.
(c) General Costs of the Final Rule
Firms in the live-event ticketing and
short-term lodging industries will likely
do a basic regulatory review to
determine how the rule applies to
them.567 Firms that are not already in
compliance with the rule may incur
additional costs to re-optimize the price
of goods and services. These firms may
also incur costs to adjust how they
display pricing information to disclose
total price whenever the price of a good
or service is displayed. For example,
firms may need to update websites or
reprint advertisements to comply with
the rule.
In addition, the Commission notes
that there may be other indirect short-
term costs that the Commission cannot
quantify. For instance, consumers who
are used to an existing pricing structure
that separately discloses mandatory fees
at the end of the purchase process may
mistakenly make inefficient purchases
while adjusting to the new regime of
upfront total price. Specifically,
consumers accustomed to dripped live-
event ticketing fees may initially under-
consume when shopping for tickets
with upfront total price. The societal
cost of such inefficiencies would be
temporary and decrease as consumers
adjust to the truthful, timely, and
transparent pricing required by the rule.
While the rule allows businesses to
exclude shipping charges from total
price until the point at which a
consumer may consent to pay, the rule
requires any internal handling costs that
were previously disclosed at the end of
the purchase process to be incorporated
in total price. Since shipping and
handling charges are sometimes
combined, businesses may have to
change how they account for handling
costs and how they advertise shipping
and handling costs to comply with this
provision.
3. Quantified Welfare Effects
This section quantifies the potential
benefits and costs of the final rule for
the live-event ticketing industry and the
short-term lodging industry. The
Commission provides quantitative
estimates where possible for these
industries, and it describes benefits and
costs that can only be assessed
qualitatively. The Commission estimates
that the quantified benefits will exceed
the quantified costs, and the
Commission believes that the total
benefits (quantified and unquantified)
will outweigh the total costs (quantified
and unquantified) of the rule.
(a) Quantified Compliance Costs
The Commission quantifies the
compliance costs for both industries
utilizing assumptions about the number
of hours required to determine and, if
necessary, come into compliance with
the final rule. The Commission expects
that, in response to the final rule, firms
will initially determine whether and
how the rule applies to their current
pricing and fee disclosure practices. The
Commission assumes firms with current
practices that align with the final rule
will incur, at most, one hour of lawyer
time to confirm compliance. This hour
of lawyer time is a proxy for the average
amount of time firms will need to
determine whether the final rule applies
to them. For example, some firms may
not employ an attorney at all but may
instead have a staff member review the
rule.
The Commission does not have data
on the exact costs noncompliant firms
will incur to comply with the final rule.
Some firms already may have developed
tools to comply with the rule because
they operate in jurisdictions, such as
California, with existing similar all-in
pricing requirements. Coming into
compliance with the rule should be
relatively easy for these firms. For other
firms, complying with the final rule may
require additional time and costs. To
capture both the variation and
uncertainty of costs across the two
industries, the analysis includes a series
of low- and high-end assumptions about
the number of hours required to comply
with the rule.568 For example, the
Commission’s analysis assumes that
firms not presently compliant will
employ a low end of five hours and a
high end of ten hours of lawyer time to
determine necessary steps to comply
with the rule. While some firms may
forgo legal advice, this range of lawyer
time serves as a proxy for any costs
associated with understanding and
preparing to comply with the rule.
The final rule’s requirement to
display total price may lead to shifts in
consumer demand and, consequently,
market equilibria. In response, firms
transitioning away from drip pricing
may need to determine new optimal
prices. The Commission’s analysis
assumes that these price re-
optimizations will require firms to incur
a one-time, upfront cost of data scientist
time to perform this work. The analysis
assumes firms not presently compliant
will employ a low-end of forty hours
and a high-end of eighty hours of data
scientist time. Similar to the use of
lawyer hours in estimating compliance
costs, this range of data scientist time
serves as a proxy for any costs
associated with adjusting pricing
strategies in response to the rule.569
The Commission expects that the drip
pricing employed by firms not presently
compliant with the rule is, in many
cases, manifested in online sales. In
such cases, firms also will need to
adjust advertised prices as well as
purchase processes for online sales, and
the analysis assumes these adjustments
require firms to incur a one-time,
upfront cost of web developer time. The
analysis assumes firms not presently
compliant will employ a low end of
forty hours and a high end of eighty
hours of web developer time to become
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2134 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
570 The U.S. Department of Transportation also
uses an assumption of 80 hours of time to
reprogram flight quotation websites for the
Enhancing Airline Passenger Protections II rule.
U.S. Dep’t Transp., Preliminary Regulatory
Analysis: Enhancing Airline Passenger Protections
II (May 24, 2010), https://www.regulations.gov/
document/DOT-OST-2010-0140-0003 (‘‘Consumer
Rule II’’).
571 U.S. Bureau Lab. Stat., Occupational
Employment and Wage Statistics, May 2023
National Occupational Employment and Wage
Estimates United States (May 2023), https://
www.bls.gov/oes/current/oes_nat.htm (‘‘OEWS
National’’); U.S. Bureau Lab. Stat., Occupational
Employment and Wage Statistics, Occupational
Employment and Wages, May 2023: 15–2051 Data
Scientists (May 2023), https://www.bls.gov/oes/
current/oes152051.htm (‘‘OEWS Data Scientists’’)
(providing the hourly wages for data scientists);
U.S. Bureau Lab. Stat., Occupational Employment
and Wage Statistics, Occupational Employment and
Wages, May 20231: 15–1254 Web Developers (May
2023), https://www.bls.gov/oes/current/
oes151254.htm (‘‘OEWS Web Developers’’)
(providing the hourly wages for web developers);
U.S. Bureau Lab. Stat., Occupational Employment
and Wage Statistics, Occupational Employment and
Wages, May 2023: 23–1011 Lawyers (May 2023),
https://www.bls.gov/oes/current/oes231011.htm
(‘‘OEWS Lawyers’’) (providing the hourly wages for
lawyers). This assumption is valid if hours spent in
compliance activities would otherwise be spent in
other productive work-related activities, the social
value of which is summarized by the employee’s
wage. To the extent that these activities can be
accomplished using time during which employees
would otherwise be idle in the absence of a rule,
our estimates will overstate the welfare costs of the
final rule.
compliant with the final rule.570 Once
firms are compliant with the rule, any
future changes to pricing displays or
purchasing systems are not a direct
consequence of the rule. Since the rule
will not take effect for four months,
some of these pricing display and
advertising updates may come at no
additional cost to certain firms. Many
firms regularly update their pricing
displays and advertisements. Any firms
that would, in their normal course of
business, update their displays and
advertising during the four month
window prior to the rule taking effect
would not incur the additional one-time
cost of updating their displays and
advertisements in response to the rule.
Because the Commission lacks data on
these business practices, the
Commission conservatively assumes
that all firms not presently compliant
with the rule will incur these costs. As
such, the Commission’s analysis likely
represents an overestimate of
compliance costs.
It may be the case that once the firm
incurs the one-time transition costs,
there are no additional costs. For a low-
end estimate of costs, the Commission’s
analysis assumes annual costs are $0
because there are zero additional hours
of labor. However, it may be the case
that, as firms transition into compliance
with the final rule, firms need to
reevaluate their pricing policies to
ensure continued compliance by
employing additional lawyer time on an
annual basis. Available data do not
allow the Commission to estimate the
exact annual compliance costs firms
may incur as various industries adapt to
the final rule. For the high-end cost
estimate, the Commission’s analysis
assumes firms require an average of ten
hours of lawyer time for annual
compliance checks. The Commission
recognizes some firms may not utilize
lawyer time but may delegate
compliance to non-attorney employees
and still incur annual compliance costs.
Data on non-lawyer compliance costs
are not available, and these potential
annual compliance costs are proxied
with lawyer time with the implicit
assumption that non-attorney employee
hourly wages are lower than lawyer
wages.
Table 3 presents the total compliance
costs as the sum of the industry-specific
compliance costs described in more
detail in section V.E.3.c and V.E.3.d.
The cost of employee time is monetized
using wages obtained from the Bureau
of Labor Statistics’ May 2023 National
Occupational Employment and Wage
Estimates for the live-event ticketing
industry.571 For the short-term lodging
industry, the analysis uses industry-
specific wages associated with the North
American Industry Classification
System (‘‘NAICS’’) codes.
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2135	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
Table 4 presents the ten-year per-firm
annualized compliance costs for the
live-event ticketing and short-term
lodging industries, separated by firms
already in compliance, which incur a
one-time compliance check, and firms
not presently in compliance, which
incur both one-time and recurring costs.
Compliance costs for the short-term
lodging industry are further
disaggregated into costs for U.S. hotels
and U.S. home share hosts. Costs to
foreign hotels and home share hosts are
discussed in section V.E.3.d.ii.
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572 In section V.E.3.c and V.E.3.d, the
Commission quantifies the final rule’s net social
benefits for the live-event ticketing and short-term
lodging industries.
573 For purposes of discounting and annualizing
costs, the analysis assumes that firms incur one-
time costs immediately, at the beginning of year 1,
and potential costs of annual compliance checks at
the end of each year.
574 Benefits to consumers, such as reductions in
search costs, will accrue continually over time. For
simplicity, the break-even analysis assumes that
annualized benefits accrue all at once at the end of
each year. As such, the break-even analysis may
overestimate the benefits required to outweigh
costs.
575 While total costs are higher with a smaller
discount rate, annualized costs are higher with a
larger discount rate due to higher upfront costs and
lower recurring costs.
576 See OEWS National, supra note 571
(providing the mean hourly wage); Hamermesh,
(b) Break-Even Analysis
To have a positive net benefit, the
final rule’s benefits must outweigh its
costs. The Commission calculates the
break-even benefit per consumer based
on the quantified costs presented in
section V.E.3.b. 572 That is, the
Commission determines the minimum
value the final rule would need to
generate for the average consumer for its
total benefits to outweigh its quantified
costs. The rule’s benefits may include
reduced search costs, reduced
deadweight loss, and reduced
psychological distress or frustration
from surprise fees. For this analysis, the
Commission considers costs in
annualized terms—the average
discounted cost of compliance per year
over 10 years. 573 As such, the analysis
expresses the break-even benefit as an
average benefit per consumer per year
over ten years.574
From Table 3, under the assumption
that firms and consumers discount
future years at 3%, the Commission’s
analysis estimates that the final rule
may result in costs as high as $644
million over 10 years. Assuming instead
a discount rate of 7% for future years,
the analysis estimates that the final rule
may result in costs as high as $603
million over ten years. To determine the
break-even benefit, the Commission’s
analysis begins with the total present
value of total costs and calculates the
annualized total costs across both
industries. 575 Next, the Commission
calculates what the break-even benefit
would be per consumer, according to
the following formula:
Per Consumer Annualized Benefits ≥
(Annualized Quantified
Compliance Costs/Population)
Table 5 presents the results of this
break-even analysis. According to the
2020 Census, there are 258,343,281
adults living in the United States. Thus,
the analysis divides the estimates of
annualized costs by the number of U.S.
adults to find the average consumer
benefit per year for 10 years required to
exceed quantified compliance costs. For
example, if the final rule results in an
average benefit to consumers that
exceeds $0.33 per year over ten years,
then the final rule’s benefits exceed its
quantified compliance costs under the
high-end assumption and an assumed
7% discount rate.
Table 5 also provides the break-even
benefit per consumer in terms of
minutes saved as a result of the final
rule. According to the Bureau of Labor
Statistics’ Occupational Employment
Statistics, the average hourly wage of
U.S. workers in 2023 was $31.48, and
recent research suggests that individuals
living in the U.S. value their non-work
time at 82% of average hourly earnings.
Thus, the value of non-work time for the
average U.S. worker would be $25.81
per hour.576 If the analysis divides the
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2137	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
supra note 533 (providing the value of consumer
time).
577 Assuming a 3% discount rate and the high-
end assumptions, the break-even time saved per
consumer per year would be 0.68 minutes.
578 See sources cited supra note 571, including
OEWS National (providing the mean hourly wage);
OEWS Data Scientists (providing the hourly wages
for data scientists); OEWS Web Developers
(providing the hourly wages for web developers);
and OEWS Lawyers (providing the hourly wages for
lawyers).
579 Wages are doubled in this sensitivity analysis,
but the break-even benefit per consumer does not
exactly double because not all costs depend on
wages. One component of the cost calculation in the
short-term lodging industry is the cost to home
share hosts of re-optimizing prices. This cost is
evaluated using an estimate of hosts’ hourly value
of time rather than wages, which is not doubled.
Therefore, the break-even benefits per consumer
presented in Table 6 are slightly less than double
those in Table 5.
break-even dollar benefit per consumer,
using the high-end assumptions and a
discount rate of 7% ($0.33), by the value
of saved search time ($25.81/hour) and
converts to minutes, the break-even
saved search time per consumer is 0.77
minutes. That is, if the final rule results
in savings from reduced search time that
exceed 0.77 minutes per consumer per
year over ten years, then the benefits
solely from reduced search time will
exceed quantified compliance costs.577
Although the Commission
acknowledges that benefits of the final
rule may vary across consumers, as
some consumers may be more likely
than others to consume live-event
tickets and/or short-term lodging, the
Commission finds it highly likely that
consumers would experience average
search time savings of this amount.
There are a few important caveats to
this break-even analysis. This analysis
may overestimate the number of
noncompliant firms in the live-event
ticketing and short-term lodging
industries. In that case, this assumption
leads to an overestimate of both costs
and necessary break-even benefits. On
the other hand, there may be more firms
not already in compliance with the final
rule, in which case this assumption
results in an underestimate of both costs
and break-even benefits.
The Commission cannot forecast all
potential consequences and costs. This
break-even analysis does not account for
any unquantified benefits or costs due
to unintended consequences. However,
if the benefits from reduced deadweight
loss caused by consumers’ incomplete
price information, reduced search time,
and beneficial unintended
consequences outweigh the costs from
compliance and harmful unintended
consequences, then the rule results in
positive net social benefits. The
Commission believes benefits will
exceed the costs.
i. Sensitivity Analysis: Assume Higher
Wage Rates
The Commission received comments
regarding the wage rates used in the cost
estimation. To address these comments,
this section provides the break-even
analysis described in section V.E.3.b
using rates that are double the average
wage rate obtained from the Bureau of
Labor Statistics May 2023 National
Occupational Employment and Wage
Estimates.578 Specifically, the wage
rates used for this analysis are $169.68
for lawyer time to review compliance,
$114.46 for data scientist time to re-
optimize pricing, and $91.90 for web
developer time. Using these higher wage
rates, the break-even benefit required to
exceed quantified compliance costs is
provided in Table 6.579
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2138 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
580 E.g., White House, How Junk Fees Distort
Competition, supra note 551.
581 Michal Dalal, Online Event Ticket Sales in the
US, IBIS World (May 2023) (‘‘Ticket Sales Industry
Report’’).
582 Id.
583 Numerous commenters from the live-event
ticketing industry recognized the pervasiveness of
various ticketing fees. See, e.g., FTC–2023–0064–
3212 (TickPick, LLC observed the ‘‘widespread’’
deceptive practice of bait-and-switch pricing); FTC–
2023–0064–3230 (Future of Music Coalition
commented that they have worked to ‘‘deal[ ] with
the scourge of junk fees in various parts of the
economy,’’ including live touring); FTC–2023–
0064–3105 (Charleston Symphony affirmed that
‘‘requiring sellers to disclose the total price clearly
and conspicuously[ ] addresses a pressing issue in
the nonprofit performing arts sector’’).
584 U.S. Gov’t Accountability Office, Event Ticket
Sales: Market Characteristics and Consumer
Protection Issues, (Apr. 12, 2018), (‘‘GAO Report’’),
https://www.gao.gov/products/gao-18-347.
585 See, e.g., White House, President Biden
Recognizes Actions by Private Sector Ticketing and
Travel Companies to Eliminate Hidden Junk Fees
and Provide Millions of Customers with
Transparent Pricing (Jun. 15, 2023) https://
www.whitehouse.gov/briefing-room/statements-
releases/2023/06/15/president-biden-recognizes-
actions-by-private-sector-ticketing-and-travel-
companies-to-eliminate-hidden-junk-fees-and-
provide-millions-of-customers-with-transparent-
pricing/. Some ticket sellers, such as TickPick, LLC,
have never used hidden fees; S. Comm. on
Commerce, Sci., & Transp., TICKET Act, https://
www.commerce.senate.gov/services/files/
071401A3-D280-414C-AEDB-A9B57F276067.
586 FTC–2022–0069–6089 (ANPR) (National
Association of Ticket Brokers); FTC–2022–0069–
6079 (ANPR) (StubHub, Inc.).
The break-even analysis under the
assumption of doubled wages implies
that if the final rule results in an average
benefit to consumers that exceeds $0.59
per year over ten years, then the final
rule’s benefits exceed its quantified
compliance costs under the high-end
assumption and an assumed 7%
discount rate. In terms of minutes saved
per consumer, the high-end cost
assumptions with doubled wages and a
7% discount rate imply that if the final
rule results in savings from reduced
search time that exceed 1.36 minutes
per consumer per year over ten years,
then the benefits solely from reduced
search time will exceed quantified
compliance costs.
(c) Quantified Benefits and Costs: Live-
Event Ticketing Industry
This section analyzes the final rule’s
quantified benefits and costs in the live-
event ticketing industry. Quantified
benefits are limited to the expected
reductions in search costs to consumers.
Since there is an additional,
unquantified benefit of reduced
deadweight loss, which is discussed
conceptually in section V.E.2.a.ii, the
net benefit estimated in the following
analysis is conservative. The
Commission finds that the quantified
benefits and costs indicate that the rule
will have a positive net benefit, even
without accounting for the unquantified
benefit of reducing deadweight loss.
Consumers in the live-event ticketing
industry are often surprised by
mandatory fees at the end of the
purchase process. 580 In 2022, online
event ticket sales were reported to be
$8.1 billion. 581 Live events include
concerts (30.3%), sporting events (33%),
and dance, opera, and theater
productions (12.4%). 582 For many
consumers, there are no close
substitutes for the specific product that
they wish to purchase: a ticket to attend
a live event. Thus, when consumers are
presented with surprise mandatory fees,
the consumer either pays the full price
including the fees, spends time
searching for a new option such as a
different seat or a different seller, or
forgoes the purchase entirely.
The live-event ticketing industry is
unique relative to other industries
because there is a large and robust
secondary market. A given ticket to an
event may be sold in the primary
market, and then resold multiple times
in the secondary market. It is difficult to
fully quantify how many live-event
ticket purchases are made in the U.S.,
how many involve mandatory fees, and
the typical amount of the fee. Many live-
event ticket sellers appear to include
some kind of fee, although the size and
type of the fees vary across sellers. 583 In
a non-generalizable sample, the GAO
found live-event ticketing fees in
primary and secondary ticket markets
averaged 27% and 31% of the ticket’s
price, respectively. 584
Following White House and
Congressional calls for disclosure of
hidden fees, and after the ANPR was
announced, some ticket sellers pledged
to show all-in prices when the
consumer begins the purchase
process.585 However, absent the final
rule, market forces would likely return
to the equilibrium of hidden mandatory
fees. In fact, the National Association of
Ticket Brokers and StubHub, Inc.
submitted comments to the ANPR in
support of a rule requiring all-in pricing,
but commented that such a rule would
only be effective if applied to all ticket
sellers and rigorously enforced.586 As
discussed in section III.B.1.b, the
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2139	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
587 Blake, supra note 521.
588 Ticketmaster states that the amount of time it
imposes varies by event but references a five-
minute purchasing period. FAQ’s: Why does
Ticketmaster enforce a time limit when making
purchases online?, Ticketmaster.com.au, https://
www.ticketmaster.com.au/h/faq.html. Based on a
small, non-representative sample of ticket purchase
attempts, StubHub appears to generally offer ten
minutes to complete a ticket purchase.
589 See also Consumer Rule II, supra note 570, at
39. The Preliminary Regulatory Impact Analysis for
Consumer Rule II assumed airfare consumers would
save five minutes of search and estimation time if
all websites provided full-fare information upfront.
590 Live Nation Entm’t Inc., Annual Report (Form
10–K) (Feb. 22, 2024) (‘‘Live Nation 10–K’’), https://
investors.livenationentertainment.com/sec-filings/
annual-reports/content/0001335258-24-000017/
0001335258-24-000017.pdf.
591 U.S. GDP in 2023 was estimated to be $27.36
trillion and GDP for North America was estimated
to be $31.4 trillion. IMF DataMapper United States
Datasets, IMF.org, https://www.imf.org/external/
datamapper/profile/USA; IMF DataMapper North
America Datasets, IMF.org, https://www.imf.org/
external/datamapper/profile/NMQ. The
Commission’s analysis adjusts North American
tickets (221 million) by 87% to estimate the number
of tickets sold in the United States, resulting in 192
million.
592 See Christine A. Varney, Assistant Attorney
General, Antitrust Division, U.S. Dep’t of Justice,
Remarks at the South by Southwest Conference:
The TicketMaster/Live Nation Merger Review and
Consent Decree in Perspective (Mar. 18, 2010),
https://www.justice.gov/atr/speech/ticket
masterlive-nation-merger-review-and-consent-
decree-perspective.
593 The Live Nation 10–K, supra note 590, does
not separate out tickets sold by Ticketmaster in the
primary versus secondary markets. Ticketmaster
now sells tickets on the secondary market, which
includes several other sellers such as StubHub, Inc.,
Vivid Seats, TickPick, LLC, Ace Ticket, Alliance
Tickets, Coast to Coast Tickets, and others.
Commission received similar comments
in response to the NPRM emphasizing
that the benefit of the rule requires
industry-wide coverage so that no single
seller is allowed to charge surprise fees
at the end of the transaction. If any
seller utilizes hidden fees, they may
capture a larger market share by
advertising lower initial prices. Absent
a Federal rule applying to all sellers,
competitive forces might drive ticket
sellers to return to the use of hidden
fees. Thus, the Commission’s analysis
quantifies benefits and costs relative to
the baseline equilibrium where sellers
do not disclose total price upfront.
In this final live-event ticketing net
benefit analysis, the Commission
updates firm counts, wage rates, any
inflation-adjusted values, value of time,
and 10–K live-event ticket revenue
information to reflect the most recent
available data. The Commission was
unable to update any numbers from
IBISWorld Reports.
i. Live-Event Ticketing: Estimated
Benefits of the Final Rule
(a) Consumer Time Savings When
Shopping for Live-Event Tickets
The final rule requires disclosure of
total price inclusive of all fees or
charges that a consumer must pay in
order to use the good or service for its
intended purpose. Required disclosure
of total price and prohibitions on
misrepresentations save consumers time
when shopping for a live-event ticket by
requiring the provision of salient,
material information upfront and
eliminating time spent pursuing ticket
offers priced above the amount the
consumer is willing to spend, also
known as the consumer’s reservation
price.
The Commission’s analysis assumes
that, as a result of the rule, the total time
spent by a consumer conducting the
transaction will decrease, because some
consumers will reduce the number of
ticket listings they view prior to making
a ticket purchase. For example, the
Blake Study examined an experiment on
StubHub where fees were presented
upfront to some consumers and at the
end of the purchase to others.587 The
experiment found that the percentage of
consumers who only view one listing is
74% when fees are presented at the end
of the transaction versus 83% when fees
are presented upfront. Using the
distribution of listings viewed by
consumers as reported in the Blake
Study, the analysis calculates that the
reduction in the average number of
listings a consumer views when fees are
displayed upfront is 0.1525 listings.
To calculate the reduction in
consumer search time resulting from
upfront pricing, the Commission
requires information on the length of
time a consumer spends viewing a
single listing. The Commission is not
aware of any data available on this.
However, many ticket sellers utilize a
‘‘countdown clock’’ where the selected
tickets in the consumer’s shopping cart
expire and are returned to the
marketplace. During this countdown
clock, a consumer who was unhappy
with the revealed total price could
search for another ticket without losing
the original ticket. The Commission
uses this range of countdown clock time
as a proxy for a low-end and high-end
estimate of the time spent viewing a
listing. These countdown clocks range
from five to ten minutes per ticket
transaction.588 Multiplying the assumed
length of a ticket transaction of five or
ten minutes by the estimated reduction
in viewed listings from the Blake Study
results in a search time savings of
0.7625 to 1.525 minutes per consumer
transaction.589
Next, the Commission’s analysis
estimates the number of consumer
purchases of live-event tickets. Live
Nation (which owns Ticketmaster)
reported selling over 329 million fee-
bearing tickets in the primary and
secondary markets using the
Ticketmaster system in its 2023 10–K
SEC filing. 590 However, this figure
combines North American and
international ticket sales. Live Nation
also reported that slightly more than
two-thirds of concert events were in
North America, so the analysis applies
that proportion to the total combined
ticket sales and assumes that
Ticketmaster sold more than 221
million tickets in North America. To
estimate the number of tickets sold
solely in the U.S., the analysis then also
adjusts the number of tickets by the
share of North American GDP
attributable to the U.S. (0.87 in 2023),
which results in an estimated 192
million tickets sold in the primary and
secondary markets by Ticketmaster in
the U.S. 591
To find the total number of tickets
sold in the U.S. by all live-event ticket
sellers, the Commission’s analysis
extrapolates from Ticketmaster’s ticket
sales using its market share. However,
Ticketmaster’s market share is
uncertain. In 2010, the Department of
Justice found that Ticketmaster had
maintained a market share of more than
80% for the previous fifteen years.592 If
the Commission’s analysis assumes that
Ticketmaster still has an 80% share of
the live-event ticket market (which
includes both primary and secondary
ticket markets), it can estimate the total
number of tickets sold in the U.S. by
dividing Ticketmaster’s ticket sales in
the U.S. by 80%. This provides a low-
end estimate of the number of tickets
sold in the U.S. of 240 million tickets.
However, Ticketmaster did not begin
selling in the secondary market until
after it merged with Live Nation. Based
on publicly available information, the
Commission is uncertain of
Ticketmaster’s market share in the
secondary market for tickets. 593 If
Ticketmaster does not have 80% of the
ticket market (both primary and
secondary), the number of tickets sold
in the U.S. would exceed the low-end
estimate of 240 million tickets. To
generate a high-end estimate of the total
number of tickets sold in the U.S., the
Commission’s analysis uses the reported
revenue for the full online ticket sales
industry provided by the private
research firm IBISWorld and calculates
Ticketmaster’s revenue share of the
industry. IBISWorld reports the online
ticket sales industry, including both
primary ticket sellers and ticket
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2140 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
594 See https://www.ibisworld.com/industry-
statistics/market-size/online-event-ticket-sales-
united-states/.
595 Assuming Ticketmaster’s market share is
equivalent to its revenue share (of the primary and
secondary markets) also assumes that the average
price of a ticket sold by Ticketmaster is the same
as (or lower than) the average price of a ticket sold
by the rest of the industry. If, however, the average
price of a ticket sold by Ticketmaster is higher than
average prices in the rest of the industry, then
Ticketmaster’s revenue share is higher than its
ticket share, and the extrapolation understates the
total number of tickets sold in the U.S.
596 The Commission does not currently have
information on the average number of tickets
purchased in a transaction. However, there is
reason to believe the average would be greater than
one because most venues limit the number of
tickets that can be purchased in a given transaction,
suggesting that there is consumer demand for
purchases of more than a single ticket. The limit is
dependent on the event. Ticketmaster, Why is there
a ticket limit?, https://help.ticketmaster.com/hc/en-
us/articles/9781245025937-Why-is-there-a-ticket-
limit.
resellers, earned $12.5 billion in
revenue in 2023.594 The Live Nation 10–
K reported ticketing revenue of $3
billion in 2023, which suggests that
Ticketmaster has a 24% revenue share
of the online ticketing industry.595 The
Commission’s analysis extrapolates a
high-end estimate of the total number of
tickets sold in the U.S. by dividing
Ticketmaster ticket sales in the U.S. by
24%, which results in an estimate of
801 million live-event tickets sold in the
U.S.
Lastly, the reduction in search time of
0.7625 to 1.525 minutes is per consumer
purchase, not per ticket purchase. The
Commission’s analysis assumes that the
average consumer purchase is between
1.5 and 3 tickets.596 Thus, the total
number of tickets sold is divided by 1.5
or 3 to arrive at an estimated range for
the number of consumer purchases. The
analysis estimates the range of live
event consumer purchases in the U.S. to
be 80 million on the low end and 534
million on the high end.
When multiplied by the number of
transactions per year, the reduction in
minutes spent viewing ticket listings
will generate a total time savings of 1.02
million to 13.6 million hours per year.
Using the value of non-work time for the
average U.S. worker of $25.81 per hour,
the Commission’s analysis estimates
that the total benefit from time savings
for completed transactions is roughly
$26.3 million to $350.6 million per year,
depending on how conservative its
assumptions are. Table 7 presents the
expected benefits of time savings over
the next ten years in present value.
BILLING CODE 6750–01–P
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2141	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
597 Live Nation 10–K, supra note 590.
598 OEWS National, supra note 571; Hamermesh,
supra note 533.
599 Blake, supra note 521. Live-event tickets are
an example of a differentiated product; there are
higher quality tickets (e.g., better views, more
comfortable seats, cover from the elements) that are
associated with higher price tiers. Blake et al. find
that consumers who face drip pricing purchase
more expensive, higher quality tickets than they
would if provided with upfront pricing.
BILLING CODE 6750–01–C
(b) Additional Unquantified Benefits:
Reductions in Deadweight Loss and
Abandoned Transactions
Due to the incomplete price
information problem described in
section V.E.1, the final rule requiring
ticket sellers to show total price of
tickets upfront will likely result in a
reduction of deadweight loss. Recent
research suggests that when consumers
know total prices for tickets upfront,
consumers are better able to find the
tickets that match their desired quantity
and quality (seat type or location).599
The analysis does not quantify the
reduction in deadweight loss, but such
a reduction is a positive benefit of the
rule.
Another unquantified benefit to the
final rule is a potential decrease in
abandoned transactions. For example, in
some cases, once the additional
information impacting full price is
revealed, consumers may fully abandon
the transaction (i.e., not purchase any
ticket). Although the Commission
solicited comment in the NPRM on the
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2142 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
600 OEWS National, supra note 571.
601 NAICS code 561599 ‘‘comprises
establishments (except travel agencies, tour
operators, and convention and visitors bureaus)
primarily engaged in providing travel arrangement
and reservation services.’’ U.S. Census Bureau,
North American Industry Classification System,
561599 All Other Travel Arrangement and
Reservation Services (2022), https://
www.census.gov/naics/?input=561599&year=
2022&details=561599.
602 U.S. Census Bureau, 2021 SUSB Annual
Datasets by Establishment Industry (Dec. 2023),
https://www.census.gov/data/datasets/2021/econ/
susb/2021-susb.html.
603 Id.
604 Note that some live-event ticket sellers may be
organized as non-profit entities and thus could fall
outside of the Commission’s jurisdiction. The
Commission did not find data on the proportion of
ticket sellers that are non-profits and thus uses the
full number of firms. If a non-trivial number of
ticket sellers are outside the jurisdiction of the
Commission and not subject to the provisions of the
rule, then the total costs to ticket sellers is
overestimated.
605 Ticket Sales Industry Report, supra note 581.
606 FTC–2023–0064–3212 (TickPick, LLC
commented: ‘‘For the most part, ticketing
marketplaces would incur an immaterial cost to
implement all-in pricing. Internationally, major
ticket marketplaces are already required to comply
with true all-in pricing in Canada and the United
Kingdom. The technology to display tickets
inclusive of fees in the form of a toggle is a widely
available functionality. Put differently, the
technology already exists within ticketing platforms
to eliminate drip pricing and would simply need to
be applied to events in the U.S.’’).
607 FTC–2023–0064–3122 (Vivid Seats
commented: ‘‘We believe that the FTC is
underestimating the amount of employee time
required by at least a factor of five.’’). The
Commission notes that other commenters stated the
transition to upfront pricing for ticket sellers would
be as simple as a toggle switch and that most ticket
sellers already have the capability to provide Total
Price due to existing regulations in other countries.
See, e.g., FTC–2023–0064–3212 (TickPick, LLC);
FTC–2023–0064–0132 (Individual Commenter who
purchased tickets from GameStop and StubHub
noted that ‘‘on all of these sites the fees are not
explained until the final page unless you go find the
toggle to include fees as you are looking for
tickets’’); FTC–2023–0064–3207 (Consumer Reports
noted a consumer who commented: ‘‘While I
appreciate that TM [Ticketmaster] now has the
option to view all your fees up front as part of the
price if you toggle that option, its totally insane that
fees can be 25% of the cost at LEAST.’’); FTC–
2022–0069–6162 (ANPR) (Recording Academy
noted that ‘‘StubHub allows the consumer to toggle
‘Show prices with estimated fees’ filter during the
ticket search’’). The Commission did not receive
any definitive data on the number of hours this
change would take and thus retains the low-end
and high-end hours estimates presented in the
NPRM.
frequency of, and the reasons for,
abandoned transactions in the live-event
ticket market to help quantify this
benefit, it did not receive this data and
cannot determine the quantity of such
abandoned transactions and the amount
of time spent pursuing them. As a
result, this benefit is unquantified.
ii. Live-Event Ticketing: Estimated Costs
of the Final Rule
This section describes the potential
costs of the final rule’s provisions and
provides quantitative estimates where
possible. For live-event ticketing, the
cost of employee time is again
monetized using wages obtained from
the Bureau of Labor Statistics’ May 2023
National Occupational Employment and
Wage Estimates. 600 Because live-event
ticketing is not associated with a
specific NAICS code, the Commission
uses wages at the national level rather
than the industry-specific wages that are
used to calculate costs for the short-term
lodging industry.
The costs to sellers from the rule
include a review of whether the rule
applies, and, if the firm is not currently
compliant with the rule, one-time costs
to comply with the rule, as well as
recurring annual costs to review and
ensure ongoing compliance. The
Commission’s analysis presents two cost
scenarios corresponding to different
assumptions of how many hours are
required to comply with the rule and
how many firms would be affected by
the rule. The analysis presents these as
low-end and high-end cost scenarios.
To estimate costs for the entire live-
event ticket-selling industry, the
Commission’s analysis calculates the
cost per seller and multiplies that by the
number of sellers in the industry. There
is some uncertainty about the number of
live-event ticket sellers that would be
affected by the rule because, while the
NAICS classification system does not
define a classification solely for ticket
sellers, two different NAICS codes
might include ticket sellers. The GAO
Report used the NAICS code 561599,
which is ‘‘All Other Travel Arrangement
and Reservation Services.’’ 601 This
NAICS category includes 1,442 firms;
some live-event ticket sellers, such as
Tickets.com and Vivid Seats, use this
classification. 602 Other live-event ticket
sellers, such as Ticketmaster and
StubHub, however, are classified as
NAICS code 7113, which is ‘‘Promoters
of Performing Arts, Sports, and Similar
Events,’’ and includes 7,998 firms.603 As
a high-end estimate of the number of
live-event ticket sellers, the
Commission’s analysis uses the sum of
the firms within these two NAICS code
and assumes there are 9,440 firms
potentially impacted by the final
rule.604
The 9,440 figure is potentially over-
inclusive, as many firms within NAICS
code 561599 and 7113 do not directly
sell tickets or charge mandatory fees,
and thus would not be impacted by the
final rule. The private research firm
IBISWorld estimated that the number of
firms in the online live-event ticket
selling industry was 3,326. 605 The
Commission’s analysis uses the 3,326
figure as a low-end estimate of the
number of firms.
Next, the Commission’s analysis
estimates the number of hours a firm
would spend complying with the rule.
As with assumptions regarding the
number of firms, the following
estimation utilizes low-end and high-
end values for the number of hours
necessary for compliance. Because
many ticket sellers operate in other
countries that currently have
requirements similar to the final rule
(Canada, Australia, the United
Kingdom, and the European Union
member states), ticket sellers already
may have incorporated any changes
required by the final rule to their
operating practices. The websites
already may be programmed; the
lawyers already may be prepared to
advise on compliance with the rule; and
the data scientists already may have
determined the optimal pricing strategy.
Thus, sellers would have relatively low
costs to transition to all-in pricing in the
U.S.606
In this low-end cost scenario, because
live-event ticket sellers already are
prepared to advertise total prices to
consumers, the one-time, upfront cost of
determining optimal prices and
updating the purchase systems in terms
of the number of required hours is
negligible. The Commission’s analysis
assumes five hours of lawyer time to
determine if the rule applies, forty hours
of data scientist time to re-optimize
pricing strategy, and forty hours of web
developer time to edit and reprogram
the website to display upfront prices.
For the low-end cost scenario, the
analysis also assumes there are no
annual costs after the firm has incurred
the one-time transition costs.
In the high-end cost scenario, the
Commission’s analysis assumes that
ticket sellers have not laid the
groundwork to comply with the rule.
The high-end cost scenario assumes
sellers require twice the number of
hours to determine optimal prices, re-
program the website to include total
price, and review and confirm
compliance. Thus, the one-time costs
include 10 hours of lawyer time, 80
hours of data scientist time, and eighty
hours of web developer time. For the
high-end cost estimate, the analysis
assumes there are recurring annual costs
of ten hours of lawyer time per year to
review and confirm compliance. 607
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608 U.S. Census Bureau, 2021 SUSB Annual
Datasets by Establishment Industry, supra note 602.
Hourly wages are from the Bureau of Labor
Statistics. See sources cited supra note 571,
including OEWS Data Scientists (providing the
hourly wages for data scientists); OEWS Web
Developers (providing the hourly wages for web
developers); and OEWS Lawyers (providing the
hourly wages for lawyers).
iii. Live-Event Ticketing: Net Benefits
In Table 9, the Commission’s analysis
presents net benefits using the
quantified benefits and costs discussed
in section V.E.3.c.i and V.E.3.c.ii. To
calculate the low-end of the range for
net benefits, the analysis subtracts the
total quantified costs using the high-end
cost assumptions from the total
quantified benefits using the low-end
benefit assumptions. For the high-end of
the range for net benefits, the analysis
subtracts the low-end estimate of total
quantified costs from the high-end
estimate of total quantified benefits.
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Using various assumptions, the
quantified benefits and costs imply that
the rule will have a positive net benefit,
even without accounting for the
additional benefit of reducing
deadweight loss.
iv. Live-Event Ticketing: Uncertainties
The Commission’s ability to precisely
estimate benefits and costs is limited
due to uncertainties in key parameters.
The quantified benefits and costs for the
live-event ticketing industry rely on a
set of assumptions, based on the best
available public information. When the
data are unclear, the analysis relies on
assumptions that generate a range of
low-end and high-end estimates. In
Table 10, the analysis summarizes those
key assumptions and their effect on the
resulting estimate of quantified benefits
and costs.
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609 Throughout this section, we use ‘‘hotel’’ as an
umbrella term for hotels, motels, inns, short-term
rentals, vacation rentals, traditional bed and
breakfasts, hostels, and other places of lodging.
610 Shelanski, supra note 550.
611 Mary Sullivan, Fed. Trade Comm’n, Economic
Analysis of Hotel Resort Fees 4 (2017), https://
www.ftc.gov/system/files/documents/reports/
economic-analysis-hotel-resort-fees/p115503_hotel_
resort_fees_economic_issues_paper.pdf.
612 FTC–2023–0064–3094 (American Hotel &
Lodging Association); Bjorn Hanson, U.S. Lodging
Industry Fees and Surcharges Forecast to Increase
to a New Record Level in 2018—$2.93 Billion, and
Another Record Anticipated for 2019—the Newest
Emerging Category is ‘‘Resort Fees’’ for Urban
Luxury and Full Service Hotels (Aug. 27, 2018),
https://bjornhansonhospitality.com/fees-%26-
surcharges.
613 Sally French & Sam Kemmis, How to Avoid
Hotel Resort Fees (and Which Brands Are the
Worst), NerdWallet (updated Aug. 1, 2024, 11:53
a.m. PDT), https://www.nerdwallet.com/article/
travel/hotel-resort-fees.
614 In this final short-term lodging net benefit
analysis, the Commission updates firm counts,
wage rates, any inflation-adjusted values, value of
time, and 10–K hotel revenue information to reflect
the most recent available data. The Commission
was unable to update any numbers from IBISWorld
Reports.
615 The drip pricing literature suggests that,
because time to view one listing is lower under
upfront pricing, a subset of consumers may view
more listings rather than fewer because the cost of
viewing an additional listing has decreased.
Sullivan, supra note 611. It is unclear how this
affects total search time. If the higher number of
listings viewed is offset by the lower time it takes
to view each listing, the total search time will be
lower under upfront pricing for this subset of
consumers. If total time increases, it can be
classified as ‘‘good’’ search time for this subset of
consumers because it results in consumers
purchasing their preferred hotel room.
Alternatively, another group of consumers could
view fewer listings because upfront prices allow
consumers to compare rooms more easily and select
their preferred hotel room more quickly. Blake,
supra note 521. The total search time for these
consumers will decrease. The Commission’s
analysis focuses on the latter group of consumers
because the change in their search time represents
a decrease in ‘‘bad’’ or unnecessary searches caused
by drip pricing.
616 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
617 Chris Anderson & Saram Han, The Billboard
Effect: Still Alive and Well, 17 Cornell Hosp. Rpt.
1 (2017), https://hdl.handle.net/1813/70982. The
Commission calculates the average number of
websites visited by summing the average number of
(d) Quantified Benefits and Costs: Short-
Term Lodging Industry
Businesses in the short-term lodging
industry, which include both traditional
hotels 609 as well as home share options
like Airbnb and VRBO, often charge a
variety of mandatory add-on fees. These
fees are typically either disclosed
upfront but separately from the base
price (a practice known as partitioned
pricing), or revealed just before
payment, after the consumer has clicked
through multiple pages of a listing (a
practice known as drip pricing).
Sometimes, these fees are not disclosed
at all or are disclosed only when a
consumer checks out at the conclusion
of their stay. These fees may include
mandatory surcharges referred to by
hotels as ‘‘resort fees,’’ ‘‘amenity fees,’’
or ‘‘destination fees.’’ Hotels often
justify charging these fees as necessary
to cover the costs of amenities that are
not reflected in the base rate, such as
Wi-Fi, pool and gym access, towels,
parking, or shuttle services. Home share
websites like Airbnb and VRBO may
include mandatory fees such as
‘‘cleaning fees,’’ ‘‘service fees,’’ or ‘‘host
fees.’’ These fees are mandatory and do
not depend on the consumer’s use of the
amenities or services.
Consumer behavior studies have
shown that both partitioned pricing and
drip pricing cause consumers to
underestimate the full price of the
product, even when all components of
the price are disclosed upfront. 610 As a
result, disclosing mandatory surcharges
separately from the room rate without
more prominently disclosing total price
is likely to harm consumers by
increasing search costs and reducing
consumer surplus.611 These fees may
reduce consumer surplus if consumers
respond by booking a room that is more
expensive than the room they would
have chosen under upfront total pricing.
Partitioned pricing and drip pricing may
also increase search costs if consumers
spend more time looking at additional
listings in search of a cheaper hotel.
One industry group states that 6% of
U.S. hotels charge mandatory fees,
which amounts to over $2.5 billion paid
in resort fees annually by U.S.
consumers. 612 This number
underestimates how much U.S.
consumers pay in mandatory fees
because it does not include fees from
finding accommodations on the home
share market through websites like
Airbnb and VRBO, or fees incurred from
booking at foreign hotels with U.S.-
facing websites. Resort fees in the U.S.
average 3.9% of the per-night cost of a
room, and can exceed 20% of the per-
night cost, especially at lower cost
hotels.613
This section analyzes the final rule’s
quantified benefits and costs in the
short-term lodging industry. Quantified
benefits are limited to the expected
reductions in search costs to consumers.
Since there is an additional,
unquantified benefit of reduced
deadweight loss, which is discussed
conceptually in section V.E.2.a.ii, the
net benefit estimated in the following
analysis is conservative. The
Commission finds that the quantified
benefits and costs indicate that the rule
will have a positive net benefit, even
without accounting for the unquantified
benefit of reducing deadweight loss. 614
i. Short-Term Lodging: Estimated
Benefits of the Final Rule
As a result of the final rule, the
Commission expects that the time
consumers spend searching for short-
term lodging will decrease because
prices will be easier to compare within
and across websites. Some consumers
will reduce the number of short-term
lodging listings they view prior to
booking or spend less time
understanding and assessing the full
price.615 In its analysis, the Commission
makes the conservative and simpler
assumption that the time spent viewing
a listing remains the same, and that
consumers reduce the number of listings
they view. Table 11 quantifies the
benefits of such time savings and
provides low- and high-end estimates to
account for uncertainty in the available
statistics.
The Commission’s analysis focuses on
the benefits that accrue to consumers
who book rooms from within the United
States on any U.S.-facing website, which
can include bookings at both domestic
and foreign short-term lodgings. Short-
term lodgings include both traditional
hotels as well as rooms booked through
home share websites like Airbnb and
VRBO. In this section, the Commission
outlines how it calculates the benefits
listed in Table 11 as well as the
assumptions made. The table reports a
set of basic search statistics used in the
calculation, the savings per year for
consumers who book at U.S. short-term
lodgings, the savings per year for
consumers who book at foreign short-
term lodgings with U.S.-facing websites,
and the combined total savings for all
U.S. consumers per year.
Although not all short-term lodgings
charge resort fees, the lack of a unified
standard of upfront pricing across
listings makes comparing prices
difficult and time consuming for
consumers. Even a single short-term
lodging website can vary in whether
listings have hidden fees. Different hotel
brands belonging to the same larger
hotel company may impose hidden fees
for listings in some cities but not in
others. Some listings may note whether
resort fees are included in the base
price, but in very fine print under the
listed price. Some listings may not say
anything, requiring consumers to click
through the listing to learn whether
there are hidden fees at the end of the
booking process. Given that a minimum
of 6% of hotels 616 impose drip or
partitioned pricing, and the average
hotel shopper visits seventeen travel
websites before booking,617 consumers
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OTAs, Hotel Sites, TripAdvisor, and Other Meta
websites visited sixty days prior to reserving a
room.
618 Andrey Fradkin, Search, Matching, and the
Role of Digital Marketplace Design in Enabling
Trade: Evidence from Airbnb (MIT Initiative on the
Digit. Econ., Working Paper, 2017), https://
ide.mit.edu/wp-content/uploads/2017/07/Search
MatchingEfficiency.pdf.
619 Yuxin Chen & Song Yao, Sequential Search
with Refinement: Model and Application with
Click-Stream Data, 63 Mgmt. Sci. 4345 (2016),
https://doi.org/10.1287/mnsc.2016.2557.
620 Blake, supra note 521.
621 Although the Commission is basing its
estimate about reduction in listings on data that
comes from the ticketing industry, this method
results in the most conservative reduction of
viewed listings compared to other methods. The
most relevant study from the hotel search cost
literature estimates that improvements in hotel
rankings (which may be loosely comparable to
removing drip pricing) reduces search costs by
$11.50. See Raluca M. Ursu, The Power of Rankings:
Quantifying the Effect of Rankings on Online
Consumer Search and Purchase Decisions, 37 Mktg.
Sci. 530 (2018), https://doi.org/10.1287/
mksc.2017.1072. Given the Commission’s estimates
of the time to view one listing (between 9.48 and
14.18 minutes), this suggests an average reduction
of between 2.95 and 1.95 listings viewed, which is
implausible given that various papers find the
average number of listings viewed at baseline to be
between 2 and 3. Thus, while some papers find
substantially higher search costs than the
Commission’s method, these findings reinforce that,
if anything, the benefits estimates presented here
are likely conservative.
622 See Anderson & Han, supra note 800. It is
unclear whether the relationship between websites
viewed and time saved is linear, as consumers may
save less time on the fifteenth website they view
than they do on the first. As such, it is difficult to
extrapolate from the Commission’s estimates to the
total time saved for consumers who view multiple
websites. Therefore, to remain conservative in its
estimate of benefits, the Commission’s analysis
assumes that consumers visit only one website.
623 Revenue equals about $192.23 billion. Alexia
Moreno Zambrano, Hotels & Motels in the US,
IBISWorld (Jan. 2023) (‘‘Hotels & Motels Industry
Report’’); Thi Le, Bed & Breakfast & Hostel
Accommodations in the US, IBISWorld (Jan. 2023)
(‘‘Bed & Breakfast Industry Report’’). The ADR is
about $149. STR: U.S. hotel ADR and RevPAR
reached record highs in 2022, STR (Jan. 20, 2023),
https://str.com/press-release/str-us-hotel-adr-and-
revpar-reached-record-highs-2022.
624 Consumers book on average 1.8 nights per
booking. Jordan Hollander, 75+ Hospitality
Statistics You Should Know (2024), Hotel Tech
Report (updated July 9, 2024), https://hoteltech
report.com/news/hospitality-statistics.
625 How much do U.S. hotels depend on
international guest stays?, CBRE Econometric
Advisors’ Blog (Oct. 10, 2017), https://www.cbre-
ea.com/public-home/deconstructing-cre/2017/10/
10/how-much-do-u.s.-hotels-depend-on-
international-guest-stays.
626 Adrian, U.S. Travel & Tourism Statistics 2020–
2021, Tourism Academy Blog (Sep. 15, 2021
12:39:18 p.m.), https://blog.tourismacademy.org/us-
tourism-travel-statistics-2020–2021.
are likely to encounter at least one
website that imposes dripped or
partitioned pricing in their search for a
hotel. Even if consumers complete their
whole search and booking process
without visiting any websites that
impose hidden resort fees, the fact that
there could be hidden fees creates
uncertainty and may cause consumers
to click through more listings than they
otherwise would have to learn if the
initial price is truly the final price.
Therefore, the Commission quantifies
the benefits for all U.S. consumers who
book a room in a given year, regardless
of whether they interacted with a
website that imposed dripped or
partitioned pricing.
(a) Search Statistics
The Commission uses two different
studies to calculate low- and high-end
estimates for the average number of
minutes it takes to view one listing. On
the low end, the analysis uses statistics
on Airbnb user search behavior
collected by Fradkin (2017) to calculate
that consumers spend 9.48 minutes to
view one listing.618 On the high end, the
analysis uses a hotel search cost model
developed by Chen and Yao (2016) to
calculate the average search cost per
listing.619 Using this average search
cost, the Commission estimates that
consumers spend 14.18 minutes
viewing one listing. Appendix B in
section V.E.7 contains calculation
details for both estimates. Using the
estimates from each study as low- and
high-end estimates ensures that the
analysis captures user search behavior
when shopping on home share websites
like Airbnb and when shopping for a
traditional hotel.
To estimate the reduction in average
listings viewed due to dripped or
partitioned pricing, the Commission’s
analysis uses results on the average
reduction in listings viewed under
upfront pricing from an experiment in
the live-event ticket industry.620 That
study found that the average reduction
in listings viewed under upfront pricing
was 10.6% of the mean listings viewed
under drip pricing. For the low-end
estimate, the analysis applies the same
proportion to the mean listings viewed
by Airbnb users in Fradkin (2017) (2.367
listings, proxied by number of contacts)
and finds a reduction of 0.25 listings.
On the high end, the Commission
applies this to the mean listings viewed
by hotel searchers in Chen and Yao
(2016), 2.3 listings, and finds a
reduction of 0.24 listings.621
Multiplying these numbers by the
minutes to view one listing results in
2.39 to 3.47 minutes saved per
transaction. These are likely
conservative estimates, given that they
assume consumers only view one
website before booking a room. As
previously stated, one study suggested
that consumers visit an average of
seventeen websites before booking. 622
The average reduction in listings viewed
may also underestimate benefits from
eliminating dripped and partitioned
pricing because it is more difficult to
adapt to the wide variability of fees in
the short-term lodging industry than it
is in the live-event ticketing industry,
where listings have the same percentage
fee. Short-term lodgings have different
fees, and the number of lodgings with
such fees will vary across markets.
Finally, as is described in detail in
section V.E.3.b, the Commission’s
analysis uses $25.81 as the value of one
hour work time.
(b) U.S. Hotels and Home Shares
Next, the Commission calculates the
total savings per year for U.S.
consumers who book at U.S. short-term
lodgings, which includes both U.S.
hotels and home shares. The
Commission’s analysis finds the total
number of nights booked in the U.S. in
2022 by dividing the total revenue the
U.S. short-term lodgings industry
earned from rooms by the average daily
rate (‘‘ADR’’).623 The ADR is the average
revenue per room-night booked in the
U.S. The total number of nights booked
in the U.S. in 2022 that would
potentially be affected by this rule is
about 1.29 billion.
Dividing the total number of nights
booked by the average number of nights
per booking gives 715 million total
bookings. 624 About 91.8%, or 657
million, of these bookings are made by
U.S. consumers.625 Finally, the
Commission calculates the total savings
for U.S. consumers per year by
multiplying the number of bookings
made by U.S. consumers by the minutes
saved per transaction and the value of
time for consumers. This results in total
savings ranging from about $674 million
to $980.3 million.
(c) Foreign Hotels and Home Shares
with U.S.-Facing websites
To estimate the number of foreign
short-term lodging bookings made by
U.S. consumers, the Commission uses
the fact that 96% of all trips taken by
U.S. consumers are domestic. 626
Multiplying the number of bookings
made by U.S. consumers by ((1¥0.96)/
0.96)) gives 27.4 million foreign
bookings. The total savings for this
category ranges from about $28.1 to
$40.8 million.
(d) All Hotels and Home Shares
Together, U.S. and foreign bookings
amount to about 683.9 million bookings
per year. This corresponds to between
27.2 and 39.6 million hours saved by
U.S. consumers per year, and between
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627 OEWS National, supra note 571; Hamermesh,
supra note 533.
628 Hollander, supra note 624.
$702.1 million and $1.02 billion total
savings per year. Table 11 presents the
expected benefits of time savings over
the next ten years in present value.
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629 U.S. Bureau Lab. Stat., Occupational
Employment and Wage Statistics, May 2023
National Industry-Specific Occupational
Employment and Wage Estimates: NAICS 721100—
Traveler Accommodation (May 2023), https://
www.bls.gov/oes/current/naics4_721100.htm
(‘‘OEWS Traveler Accommodation’’).
630 NAICS code 721100 does not capture
intermediary travel websites, which display pricing
information and offer booking options for various
short-term lodging firms. Because these
intermediaries constantly update pricing
information obtained directly from short-term
lodging firms (see, e.g., FTC–2023–0064–3293,
Travel Technology Association), and do not need to
reoptimize prices or drastically change displays
themselves, the Commission believes that
intermediary firms will not face additional
compliance costs from the rule.
631 The Commission’s analysis includes costs to
foreign hotels with U.S.-facing websites because
complying with the rule may cause them to pass
through some costs to U.S. hotel shoppers. The
Commission is unable to quantify what percentage
of costs will be passed through; to be conservative,
the analysis includes all costs to foreign hotels and
home share hosts.
632 In 2021, Marriott agreed to a settlement with
the Commonwealth of Pennsylvania, Office of the
Attorney General, in which Marriott agreed to
include mandatory resort fees in the base rate of its
hotel rooms on the first page of the booking process.
Assurance of Voluntary Compliance,
Commonwealth v. Marriott Int’l, Inc., No. GD–21–
014016 (Pa. Ct. C.P. Nov. 16, 2021). In 2023 and
2024, Marriott entered into similar settlements with
the Offices of the Attorney General in both the State
of Nebraska and the State of Texas. Assurance of
Voluntary Compliance, Texas v. Marriott Int’l, Inc.,
No. 2023–CI09717 (Tex. Dist. Ct. May 16, 2023);
Order Approving Assurance of Voluntary
Compliance, Nebraska v. Marriott Int’l, Inc., No. CI
23–3860 (Neb. Dist. Ct. Jan. 18, 2024). In 2023,
Omni and Choice Hotels both agreed to similar
multi-state settlements with the Offices of the
Attorney General in the State of Colorado, the
Commonwealth of Pennsylvania, and the State of
Nebraska. See, e.g., Assurance of Discontinuance, In
re Choice Hotels Int’l Inc. Resort Fees (Colo. Sept.
21, 2023); Assurance of Discontinuance, In re Omni
Hotels Mgmt. Corp. Resort Fees (Colo. Nov 9, 2023);
Assurance of Voluntary Compliance,
Commonwealth v. Omni Hotels Mgmt., GD–23–
013056 (Pa. Commw. Ct. Nov. 9, 2023); Assurance
of Voluntary Compliance, Commonwealth v. Choice
Hotels Intl., Inc., GD–23–011023 (Pa. Commw. Ct.
Sept. 21, 2023); Order Approving Assurance of
Voluntary Compliance, Nebraska v. Choice Hotels
Int’l, Inc., No. CI 23–3269 (Neb. Dist. Ct. Sept. 27,
2023); Order Approving Assurance of Voluntary
Compliance, Nebraska v. Omni Hotels Mgmt. Corp.,
No. CI 23–3641 (Neb. Dist. Ct. Oct. 27, 2023).
Choice Hotels agreed to an additional settlement
with the Oregon Department of Justice. Assurance
of Voluntary Compliance, In re Choice Hotels, Int’l,
Inc., No. 23–CV–39128 (Or. Cir. Ct. Sept. 21, 2023).
In 2024, Hilton Hotels agreed to a settlement with
the State of Nebraska, Office of the Attorney
General. Final Consent Judgment, Nebraska v.
Hilton Dopco, Inc., No. CI 19–2366 (Neb. Dist. Ct.
Jan. 29, 2024). Finally, Hyatt Hotels faces an
ongoing lawsuit filed in 2023 by the State of Texas,
Office of the Attorney General, which seeks to
require Hyatt to display full prices in the initial
advertised price of any hotel room. Plaintiff’s
Original Pet., Texas v. Hyatt Hotels Corp., No.
C2023–0884D (Tex. Dist. Ct. May 15, 2023).
(e) Additional Unquantified Benefits:
Reductions in Deadweight Loss and
Abandoned Transactions
As is discussed in section V.E.2.a.ii,
the final rule requiring short-term
lodgings to display total price of rooms
will likely result in a reduction of
deadweight loss. When consumers are
not provided total price at the beginning
of the booking process, sellers likely are
able to charge higher prices than under
the final rule. The rule’s total price
requirement may provide consumers
with more complete pricing information
so that they can make informed
decisions about short-term lodging
reservations, thus reducing deadweight
loss. The Commission does not quantify
the reduction in deadweight loss but
acknowledges that it is a positive benefit
to the final rule.
In some cases, once total price is
provided, consumers may fully abandon
the transaction (i.e., not book any room).
Since lodging cost is only a part of
overall trip cost, abandoning a
transaction may be less likely for short-
term lodging than other industries. In
that case, the unquantified benefit is
likely to be small. The Commission
solicited comment in the NPRM on the
frequency of, and reasons for,
abandoned transactions in the short-
term lodging industry to help quantify
this benefit, but did not receive
adequate information in response, so
this benefit remains unquantified.
ii. Short-Term Lodging: Estimated Costs
of the Final Rule
The Commission herein describes the
final rule’s potential costs to the short-
term lodging industry and, where
possible, provides quantitative estimates
of those costs. The costs to hotels from
the final rule include a review of
whether the rule applies and, in cases
of noncompliance with the final rule,
one-time costs to come into compliance
and recurring annual costs to ensure
ongoing compliance. The cost of
employee time is monetized using
wages obtained from the Bureau of
Labor Statistics’ National Industry-
Specific Occupational Employment and
Wage Estimates. 629 The Commission
uses wages specific to the Traveler
Accommodation industry (associated
with NAICS code 721100). This
industry includes traditional hotels and
motels, casino hotels, bed and breakfast
inns, hostels, and home share
platforms. 630 The Commission also
quantifies the cost to individual home
share hosts in the form of a one-time
cost to adjust prices on home share
listings.
Table 12 outlines the estimated costs
of the final rule. Panel A shows the
costs for U.S. hotels and home share
hosts; Panel B shows the costs for
foreign hotels and home share hosts
who post listings on U.S.-facing
websites; 631 and Panel C shows the total
combined costs for both groups.
(a) Panel A: U.S. Hotels and Home Share
Hosts
There are 49,216 U.S. hotels
associated with the ‘‘Traveler
Accommodation’’ NAICS code. Of these
firms, 6% impose resort fees, bringing
the high-end number of U.S. firms
affected to 2,953. The low-end number
of firms affected is 2,948 after removing
Marriott International, Inc., Omni Hotels
Management Corporation, Choice Hotels
International, Inc., Hilton Worldwide
Inc., and Hyatt Hotels Corporation to
account for the possibility that these
hotels will eliminate dripped and
partitioned pricing from their websites
regardless of this rule to comply with
any existing or forthcoming settlements
with various State Attorneys General. 632
Next, the Commission’s analysis
estimates the number of hours a U.S.
hotel would spend complying with the
final rule. The analysis assumes all
hotels that do not impose dripped or
partitioned pricing will spend one hour
of lawyer time determining if the final
rule requires any changes to their
advertising. Hotels that are not presently
compliant with the rule will incur
additional costs to come into
compliance. In the low-end estimate,
the analysis assumes that, because many
hotels have websites facing other
countries that already have similar
requirements to the final rule (e.g.,
Canada, Australia, and the European
Union member states), hotels already
may have the experience and
infrastructure required to incorporate
the necessary changes to their operating
practices. In this scenario, hotels have
relatively low costs to transition to all-
in pricing for their U.S.-facing websites.
The analysis assumes five hours of
lawyer time to determine how the final
rule applies to the firm, forty hours of
data scientist time to re-optimize the
pricing strategy, and forty hours of web
developer time to edit the website to
display total prices and make other
requisite disclosures.
In addition to hotels, the final rule
also would affect individuals who
participate in the home share market by
listing their properties for short-term
rentals on websites like Airbnb and
VRBO. The Commission’s analysis
estimates the total number of home
share hosts in the U.S. by starting with
the number of Airbnb hosts in the U.S.
who post home share listings (not
including larger bed and breakfast or
hostel establishments) and extrapolating
to the full U.S. market using Airbnb’s
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633 See Clark Shultz, Airbnb increases market
share in latest read from M Science, Seeking Alpha
(June 6, 2022 1:32 p.m. ET), https://seeking
alpha.com/news/3846023-airbnb-increases-market-
share-in-latest-read-from-m-science (providing
Airbnb’s market share); Thibault Masson, Airbnb
Host Data: Who are Airbnb hosts? Why are
individual hosts more important than professional
ones?, Rental Scale-Up (updated Dec. 19, 2020),
https://www.rentalscaleup.com/airbnb-host-data-
who-are-airbnb-hosts-why-are-individual-hosts-
more-important-than-professional-ones/ (providing
the statistics used to estimate the number of Airbnb
home share hosts in the U.S.). The estimated total
number of home share hosts in the U.S. is 675,603,
which is calculated as 504,000/.746, where 504,000
is the number of Airbnb home share hosts in the
U.S. and .746 is Airbnb’s U.S. market share. The
number of Airbnb home share hosts is calculated
as 560,000 * .9 = 504,000, where 560,000 is the
number of Airbnb hosts in the U.S., and 90% of
these hosts are individual hosts (people who rent
individual rooms or entire primary homes rather
than traditional bed and breakfasts or hostels;
traditional bed and breakfasts or hostels are already
captured in the hotel firms defined by Traveler
Accommodation NAICS code 721100).
634 The average number of listings per host is
calculated from the total number of U.S. listings
and the total number of U.S. hosts. Steve Deane,
2022 Airbnb Statistics: Usage, Demographics, and
Revenue Growth, Stratos Jet Charters, Inc. Blog (Jan.
4, 2022), https://www.stratosjets.com/blog/airbnb-
statistics/ [https://web.archive.org/web/
20220219093345/https://www.stratosjets.com/blog/
airbnb-statistics/] (providing the total number of
U.S. listings); Masson, supra note 633 (providing
the total number of U.S. hosts).
635 Since home share hosts are not operating
large, sophisticated firms and will likely not spend
additional time ensuring compliance beyond year
one, the analysis assumes home share hosts do not
incur annual costs due to the rule.
636 The U.S. hotel industry’s global market share
in 2022 is calculated by adding the revenues
reported in the IBISWorld Reports for ‘‘Hotels and
Motels in the US,’’ ‘‘Casino Hotels in the US,’’ and
‘‘Bed and Breakfast and Hostel Accommodations in
the US,’’ and dividing it by the global revenue
found in IBISWorld Global Hotels & Resorts
Industry Report. Hotels & Motels Industry Report,
supra note 623; Bed & Breakfast Industry Report,
supra note 623; Demetrios Berdousis, Casino Hotels
in the US, IBISWorld (Jan. 2023).
637 Airbnb, Inc., Annual Report (Form 10–K) (Feb.
16, 2024) (‘‘Airbnb 10–K’’), https://investors.airbnb.
com/financials/sec-filings/sec-filings-details/
default.aspx?FilingId=17283799.
U.S. market share.633 On the low-end,
the analysis assumes that each host will
take one hour to reprice each listing.
Hosts have, on average, 1.18 listings,
resulting in 1.18 hours of time per
host.634 The value of time comes from
the same source as in Table 11.
In the high-end cost scenario, the
Commission’s analysis assumes that
hotels have not laid the groundwork for
upfront pricing. The analysis assumes
under this scenario that hotels require
twice the number of hours to determine
optimal prices, re-program the website
to include total price, and review and
confirm compliance. Thus, the one-time
costs for hotels include ten hours of
lawyer time, eighty hours of data
scientist time, and eighty hours of web
developer time. The analysis further
assumes home share hosts spend three
hours repricing each listing, resulting in
3.5 hours per host.
In addition to the one-time costs, the
Commission’s analysis also assumes
hotels incur annual costs of between
zero to ten hours of lawyer time per year
to review and confirm compliance with
the final rule.635 The total costs, which
include both the one-time fixed cost and
the annual costs for the next ten years
in present value, range from $35.9
million to $107.8 million using a 7%
discount rate, and from $35.9 million to
$112 million using a 3% discount rate.
The Commission also finds that the per
firm annualized cost to U.S. hotels that
are not presently compliant with the
rule ranges from $527 to $2,011 using a
7% discount rate, and from $434 to
$1,825 using a 3% discount rate. Home
share hosts in the U.S. incur an average
one-time cost between $30.42 to $91.27.
All ranges of lawyer, data scientist,
web developer, and home share host
time used in the analysis serve as
proxies for any costs associated with
reviewing and ensuring compliance,
adjusting pricing strategies, ensuring
consumers are presented with total
price, and re-evaluating home share
listings, respectively, in response to the
final rule.
(b) Panel B: Foreign Hotels and Home
Share Hosts
The Commission acknowledges that
non-U.S. firms and home share hosts
with U.S.-facing websites may bear
compliance costs from the final rule that
may be passed on to consumers.
Therefore, the Commission estimates
these costs using the best available data.
Estimating costs for foreign hotels and
home share hosts using the same
method in Panel A would be difficult
because there are no reliable estimates
for the number of foreign hotels and
home share hosts or for the relevant
international wage rate for lawyers, data
scientists, and web developers. The
Commission’s analysis instead estimates
foreign costs by extrapolating from the
estimated U.S. costs in Panel A. Since
the U.S. hotel industry’s global market
share is about 14.5%,636 the one-time
and annual costs for foreign hotels each
can be calculated by multiplying the
one-time and annual costs for U.S.
hotels by (1¥0.145)/0.145. This method
captures the cost of all foreign hotels,
including ones that will not be subject
to the final rule because they do not
have U.S.-facing advertising. Therefore,
the costs to foreign hotels may be
overestimated.
The Commission’s analysis uses the
percentage of Airbnb’s U.S. revenue
(43%) 637 as a proxy for the U.S. home
share market’s global market share.
Using this proxy, the analysis estimates
the one-time cost for foreign home share
hosts to be equal to the total one-time
cost for U.S. home share hosts
multiplied by (1¥0.43)/0.43. The total
one-time and annual foreign hotel and
home-share costs for the next ten years
in present value range from $117.4
million to $352.8 million using a 7%
discount rate, and from $117.4 million
to $377.9 million using a 3% discount
rate. The Commission is unable to
provide the per firm annualized cost for
foreign hotels and non-U.S. home share
hosts because the number of foreign
hotels and home share hosts is not
known.
(c) Panel C: All Hotels and Home Share
Hosts (US + Foreign)
The total cost for all affected hotels
and home share hosts over ten years in
present value is estimated to be from
$153.3 million to $460.6 million using
a 7% discount rate and from $153.3
million to $489.9 million using a 3%
discount rate.
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638 U.S. Census Bureau, 2021 SUSB Annual
Datasets by Establishment Industry, supra note 602.
639 FTC–2023–0064–3094 (American Hotel &
Lodging Association).
640 OEWS Traveler Accommodation, supra note
629.
641 See OEWS National, supra note 571
(providing the mean hourly wage); Hamermesh,
supra note 533 (providing the value of time).
642 See infra section V.E.3.d.ii.b (describing the
calculations).
643 Airbnb 10–K, supra note 637.
BILLING CODE 6750–01–C
iii. Short-Term Lodging: Net Benefits
Table 13 presents the net benefits of
the final rule in the short-term lodging
industry using the quantified benefits
and costs discussed in section V.E.3.d.i
and V.E.3.d.ii. To calculate the low-end
of the range for net benefits, the
Commission’s analysis subtracts the
total costs using the high-end cost
assumptions from the total benefits
using the low-end benefit assumptions.
For the high-end of the range for net
benefits, the analysis subtracts the total
costs using the low-end cost
assumptions from the total benefits
using the high-end benefit assumptions.
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The quantified benefits and costs
imply that the final rule will have a
positive net benefit, even without
accounting for the unquantified benefit
of reducing deadweight loss.
iv. Short-Term Lodging: Uncertainties
The Commission’s ability to precisely
estimate benefits and costs is limited
due to uncertainties in key parameters.
The quantified benefits and costs for the
short-term lodging industry rely on a set
of assumptions based on the best
available public information. When the
data are unclear, the analysis uses sets
of assumptions that would generate a
range of low- and high-end estimates.
Table 14 summarizes the key
assumptions and how they may affect
the resulting estimate of quantified
benefits and costs. When possible, the
analysis underestimates benefits and
overestimates costs in order to
conservatively estimate net benefits.
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2155	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
644 The break-even analysis provided in the
Preliminary Regulatory Analysis utilized the same
set of assumptions regarding the high-end and low-
end numbers of hours required for firms to comply
with the proposed economy-wide rule. The
preliminary break-even analysis also made a set of
assumptions about what proportion of the economy
currently complied with the provisions of the
proposed rule.
BILLING CODE 6750–01–C
4. Economic Evaluation of Alternatives
As an alternative to the rule, the
Commission considered not pursuing
rulemaking and instead relying on its
existing tools of enforcement actions
and consumer education. This approach
is equivalent to a no-action baseline and
would result in no incremental benefits
or costs. The prevalence of drip pricing
and hidden mandatory fees would
persist.
The Commission also alternatively
considered, as discussed in the
Preliminary Regulatory Analysis,
promulgating an industry-neutral
version of the rule. The Commission
was unable to quantify economy-wide
benefits and provided a break-even
analysis using quantified compliance
costs for the entire economy.644 The
economy-wide break-even analysis
implied there would be positive net
benefits to the rule if the benefit per
consumer was at least $6.65 per
consumer per year over a ten-year
period assuming a 7% discount rate or
at least $5.95 assuming a 3% discount
rate. The Commission estimated that per
firm annualized costs for an economy-
wide rule would be between $691 and
$2,010 assuming a 7% discount rate and
between $569 and $1,803 assuming a
3% discount rate.
The Commission sets forth additional
alternatives to the final rule that it
considered in section V.B but does not
have sufficient data to prepare a
quantitative analysis of those
alternatives.
5. Summary of Results
The Commission’s final regulatory
analysis catalogs and, where possible,
quantifies the incremental benefits and
costs of the final rule for the live-event
ticketing and short-term lodging
industries. The Commission estimates
that the quantified benefits of the rule
will exceed its quantified costs, and the
Commission believes that the total
benefits of the rule (quantified and
unquantified) will outweigh the total
costs (quantified and unquantified). The
Commission estimates that the benefits
of the final rule over the next ten years
accruing solely from reduced consumer
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2156 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
645 Chetty, supra note 555.
search costs in the live-event ticketing
industry range from $184 million to
$2.46 billion under an assumed 7%
discount rate, and $224 million to $2.99
billion using an assumed 3% discount
rate. The Commission estimates
compliance costs for live-event ticketing
firms over the ten-year period to be
between $15 million and $142 million
using a 7% discount rate, and between
$15 million and $154 million using a
3% discount rate.
For the short-term lodging industry,
the Commission estimates ten-year
benefits to consumers from reduced
search costs to range from $4.93 billion
to $7.17 billion using a 7% discount
rate, and between $5.99 billion and
$8.71 billion using a 3% discount rate.
The Commission estimates compliance
costs for short-term lodging firms for the
ten-year period to be between $153
million and $461 million using a 7%
discount rate and between $153 million
and $490 million using a 3% discount
rate.
The Commission also provides a
break-even analysis using quantified
compliance costs that are aggregated for
the live-event ticketing and short-term
lodging industries. The break-even
analysis demonstrates that there are
positive net benefits to the rule if the
benefit per consumer is at least $0.33
per consumer per year over a ten-year
period using a 7% discount rate. The
break-even analysis does not account for
costs from unintended consequences of
the rule or the potential benefits from
reducing deadweight loss by providing
consumers with full information.
6. Appendix A: Model of Market
Distortion Caused by Drip Pricing
Measuring the deadweight loss, the
surplus transfer from consumers to
firms, and the shift in quantity
demanded requires a quantification of
consumers’ aggregate level of awareness.
Academic research provides a model
that relates consumers’ partial
awareness to the resulting shift in
aggregate demand.645 Specifically, the
model assumes, based on empirical
evidence, the elasticity of demand with
respect to the fee equals the elasticity of
demand with respect to the base price
scaled by a factor of q, where 0 < q <
1. This factor, q, serves as a measure of
consumers’ awareness of the fee. When
consumers are fully aware of the fee, q
= 1; when consumers are completely
unaware, q = 0. As a working example,
if demand is given by the equation
Q(Pbase,t) = a + bPbase + ct, where a, b,
and c are constants, the previous
assumption implies that c = qb. At q =
1, shrouding the fee has no effect, and
the demand function simplifies to
Q(Ptotal, t) = a + bPtotal. At q = 0,
shrouding the fee leaves consumers
completely unaware of it, and demand
is solely a function of the base price:
Q(Pbase, t) = a + bPbase. Assuming 0 < q
< 1, instead, one may note that, for any
given change in the base price and the
corresponding change to the quantity
demanded, a larger change in the fee
would be needed to effect the same
change in quantity, reflecting
consumers’ partial awareness of, and
decreased sensitivity to, the fee.
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BILLING CODE 6750–01–C
Figure 4 illustrates how consumers’
partial awareness of fees impacts the
effect of shrouded pricing on consumer
and producer surplus. The intersection
of Dpartial with S, illustrated by point R,
at quantity Qpartial and price Ptotal,partial,
represents the outcome when
consumers are partially aware of the fee.
In this figure, Dfee,Pbase,partial (not shown)
would go through point U (equivalent to
point A in Figure 3) and point R
(equivalent to point B in Figure 3). For
comparison, in the case of complete
unawareness (q = 0), Dfee,Pbase,unaware (not
shown) would go vertically through
point K (equivalent to point A in Figure
3) and point J (equivalent to point B in
Figure 3). As illustrated in Figure 4, the
more consumers are aware of the fee,
i.e., the larger the q, the smaller the
market clearing full price and, hence,
the base price, must be. As an additional
example, when consumers are fully
aware of the fee (q = 1), the market
clearing full price under shrouded
pricing equals the market clearing price
under upfront pricing, Pupfront, and the
base price, Pbase,aware (not shown), is
lower than Pbase,partial.
Consumer surplus is now equal to the
area of triangle CMN minus the area of
triangle NRT. Producer surplus is now
equal to the area of triangle EMR. The
deceptive shrouding of the price leads
to a transfer of surplus from consumers
to firms equal to the area of trapezoid
ABMR as well as an additional decrease
in consumer surplus not captured by
firms, the deadweight loss, equal to the
area of triangle ART. The surplus
transfer from consumers to firms and
the deadweight loss are both smaller in
this case of partial awareness relative to
the case where consumers are
completely unaware of the fee. That is,
the harm caused by the firms’ deception
is mitigated by the extent to which
consumers are aware of and account for
the fee.
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2159	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
646 Andrey Fradkin, Search, Matching, and the
Role of Digital Marketplace Design in Enabling
Trade: Evidence from Airbnb, (MIT Initiative on the
Digit. Econ., Working Paper, 2017), https://
ide.mit.edu/wp-content/uploads/2017/07/Search
MatchingEfficiency.pdf.
7. Appendix B: Short-Term Lodging
Industry Minutes per Listing
Calculations
(a) Low-End Estimate of Minutes per
Listing Calculation
The Commission’s analysis uses the
Airbnb user search statistics reported in
Fradkin (2017) 646 to obtain a low-end
time estimate to view one listing after
clicking on it. The paper provides data
on a random sample of users who
searched for short-term rentals on
Airbnb in a large U.S. city. It reports
search behavior separately for all
searchers and for searchers who
contacted the host, either to inquire
about a listing or to book it. The analysis
uses those numbers to calculate search
behavior for the group of searchers who
did not send a contact. The relevant
statistics for these three groups are
summarized in Table B.1.
‘‘Average unique listings seen’’
includes all listings users see on a
search result page, including listings
users do not click on. ‘‘Average time
spent browsing’’ includes entering
search parameters, scrolling through
results, and viewing listings after
clicking on them. ‘‘Average number of
contacts’’ is the average number of times
searchers contacted a host for a listing.
Since contacting the host requires users
to click on the listing, the analysis uses
this as a proxy for number of clicked-
on listings.
From the third column, we calculate:
Time to view each listing without clicks
= Average time spent browsing/
Average unique listings seen =
23.253/57.61 = .40 minutes per
listing.
Because the average time spent
browsing for the group in column (2) is
inclusive of the amount of time spent
sending contacts, not just viewing
listings that were not contacted, we use
the preceding value calculated from the
group in column (3) to estimate the
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647 The numerator of ‘‘Time per listing’’ is an
underestimate because ‘‘Time spent browsing
without clicks’’ may capture some time spent
viewing clicked-on listings that did not result in a
contact. The denominator of ‘‘Time per listing’’ is
also an underestimate because the number of
listings clicked on is proxied using the number of
listings users inquire about or book. Users may click
on more listings than just the ones they want to
inquire about or book. The two values are related.
If the true denominator is higher than estimated,
then the true numerator also will be higher. Higher
listing clicks beyond those that resulted in a contact
means more time spent viewing clicked-on listings
that did not result in a contact. The ratio should
remain about the same.
648 Yuxin Chen & Song Yao, Sequential Search
with Refinement: Model and Application with
Click-Stream Data, 63 Mgmt. Sci. 4345 (2016),
https://doi.org/10.1287/mnsc.2016.2557.
649 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
650 5 CFR 1320.8(a)(4).
651 See Office of Info. and Regul. Aff., Office of
Mgmt. and Budget, OMB Control Number History
for OMB Control Number 3084–0176, https://
www.reginfo.gov/public/do/PRAOMB
History?ombControlNumber=3084-0176#.
following that applies to searchers in
column 2:
Time spent viewing listings without
clicks = Time to view each listing
without clicks * Average unique
listings seen = .40 * 87.812 = 35.44
minutes
and
Average total time viewing listings after
clicking = Average time spent
browsing¥Time spent viewing
listings without clicks =
57.874¥35.44 = 22.43 minutes.
Finally, we calculate time to view one
listing:
Time per listing = Average total time
viewing listings after clicking/
Average number of contacts =
22.43/2.367 = 9.48 minutes per
listing. 647
(b) High-End Estimate of Minutes per
Listing Calculation
The Commission’s analysis uses the
hotel search cost model developed by
Chen and Yao (2016) 648 to calculate a
high-end estimate of minutes to view
one listing. The paper uses data from
consumer search behavior when
booking hotels in four major
international cities on an anonymous
major U.S. online travel website.
A search is defined as a listing click-
through, and the search cost for a listing
is specified as:
Cij = Ci (TimeConstrainti, Slotj) = exp(gi0
+ gi1TimeConstrainti + gi2Slotj) =
exp(3.07 ¥ .05 * TimeConstrainti +
.01 * Slotj)
where TimeConstrainti is the number of
days between consumer i’s search and
her check-in. Slotj is the slot position of
the j-th search. The exponential operator
ensures that the costs are positive. The
gammas are mean levels of cost
coefficients.
Using this formula, the analysis can
find that the mean search cost per
listing when 30 days in advance (the
sample average) is exp(3.07 ¥ (.05*30))
= $4.81 per listing. The inflation
adjusted value is $6.10.
The resulting total search cost is then
$6.10 per listing * 2.3 searches on
average = $14.04. This total cost can be
conceptualized as the number of
minutes of viewing listings multiplied
by the consumer’s value of time. Using
$25.81 per hour as the value of time, the
time spent viewing listings is ($14.04/
$25.81 per hour) * 60 minutes per hour
= 32.62 minutes.
The minutes to view one listing is
then calculated as 32.62 minutes/2.3
searches = 14.18 minutes per listing.
VI. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’), 44 U.S.C. 3501–3520, requires
Federal agencies to seek and obtain
OMB approval before collecting
information directed to ten or more
persons. The term ‘‘collection of
information,’’ as used in the PRA,
includes any requirement or request for
persons to obtain, maintain, retain,
report, or publicly disclose
information.649 The PRA analysis
requires an estimate of the burden
associated with a collection of
information.650
Upon publication of the NPRM, the
Commission submitted an associated
clearance request with a Supporting
Statement to OMB for review under the
PRA. In response, OMB filed a comment
on December 11, 2023 (OMB Control
No. 3084–0176), requesting that the
Commission resubmit the clearance
request upon the finalization of the
proposed rule. 651 Accordingly,
simultaneously with the publication of
this final rule, the Commission is
resubmitting its clearance request and a
Supplemental Supporting Statement to
OMB for review under the PRA. For the
reasons discussed below, the
Commission has made adjustments to
its initial burden analysis. The
Commission’s updated burden analysis
follows.
A. Disclosures Related to Final
§ 464.2(a) Through (c)
Final § 464.2(a) through (c) provide
clarity as to how businesses should
disclose total price, optional exclusions
from total price, and the final amount of
payment. This information is readily
available to businesses, and many
businesses already disclose this
information in the course of their
regular business activities. However, the
Commission is aware that in some
instances the requirements in final
§ 464.2(a) through (c) may require some
businesses to display readily available
information more clearly. OMB
guidance is unclear regarding whether,
and to what extent, requiring displays of
information to be clearer amounts to a
collection of information. The
Commission is of the view that the
rule’s requirements regarding disclosure
of total price, exclusions from total price
and the final amount of payment are
unlikely to qualify as collections of
information. Nevertheless, the
Commission includes this analysis out
of an abundance of caution and not
because it concedes that such standard
pricing disclosures constitute
collections of information.
Final § 464.2(a) provides it is an
unfair and deceptive practice for a
business to offer, display, or advertise
any price of a covered good or service
without clearly and conspicuously
disclosing total price, which is defined
in final § 464.1 to permit the exclusion
of government charges, shipping
charges, and fees or charges for any
optional ancillary good or service.
While businesses may exclude these
charges from total price in offers,
displays, and advertisements, final
§ 464.2(c) provides that, before a
consumer consents to pay for any
covered good or service, a business must
disclose clearly and conspicuously: The
nature, purpose, and amount of any fee
or charge imposed on the transaction
that has been excluded from total price
and the identity of the good or service
for which the fee or charge is imposed;
and the final amount of payment for the
transaction. Final § 464.2(b) relatedly
provides that in any offer, display, or
advertisement that represents any price
of a covered good or service, total price
must be disclosed more prominently
than any other pricing information;
however, where the final amount of
payment for the transaction is
displayed, it must be more prominent
than, or as prominent as, total price. As
discussed in section III, the Commission
is not finalizing the proposed
affirmative refundability disclosure
requirement.
As part of the NPRM, the Commission
assumed that, except for the proposed
affirmative refundability disclosure
requirement, the Commission’s proposal
was limited to disclosure activities that
businesses already perform in the
course of their regular business
activities. However, following its review
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652 See, e.g., FTC–2023–0064–3238 (Gibson, Dunn
& Crutcher LLP argued that businesses would need
to hire, among other professionals, web designers or
software engineers ‘‘to rebuild entire websites.’’ In
addition, it argued that the Preliminary Regulatory
Analysis did not account for costs needed to replace
physical ads, subway ads, and billboards and
speculated that would take ‘‘thousands of hours.’’);
FTC–2023–0064–2856 (National Football League
called on the Commission to reexamine the
estimated compliance costs because it did not
adequately take into account ‘‘the additional legal,
developer, and data personnel time that would be
required from live-event industry participants—and
especially industry participants dealing in large
volumes of live-event ticket sales in complying with
a final rule.’’); FTC–2023–0064–3122 (Vivid Seats
commented: ‘‘We believe that the FTC is
underestimating the amount of employee time
required by at least a factor of five.’’).
653 Brick-and-mortar firms that do not currently
comply with the rule would update the price
presentation and purchase process by printing new
price displays, revising advertising campaigns,
adding required disclosures, and potentially
updating websites. The Commission uses web
developer hours as a proxy for any costs associated
with updating the price presentation and purchase
process to become compliant with the final rule.
654 The estimated mean hourly wages for a web
developer are $45.95. OEWS Web Developers, supra
note 571.
655 The estimated mean hourly wages for a web
developer are $39.31 in the short-term lodging
industry. OEWS Web Developers, supra note 571.
656 See, e.g., N.Y. Arts & Cult. Aff. Law sec. 25.01–
25.33 (McKinney 2023) (Effective Jun. 30, 2022); An
Act Ensuring Transparent Ticket Pricing, H. 259,
193rd Gen. Court (Mass. 2023); S. 607 (2023–2024
Session) (N.C. 2023) (Enacted July 9, 2024); 2023
Minn. H.B. 3438 (Enacted May 20, 2024) (Minn.);
H.B. 1231 (113th G.A.) (Tenn.) (Enacted May 24,
2023); Conn. Gen. Stat. § 53–289a (2023); S.B. 329
(2024 Reg. Sess.) (Md.); S.B. 329 (2024 Reg. Sess.)
(Md.) (Enacted May, 9, 2024); H.B. 23–1378 (2024
Reg. Sess.) (Colo.) (Enacted June 5, 2024).
of the comments,652 the Commission
determines that, although many
businesses already make the disclosures
required by final § 464.2(a) through (c)
in the usual course of their regular
business activities, it is possible that
some businesses in the live-event
ticketing and short-term lodging
industries may nonetheless incur
incremental labor costs in ensuring that
their disclosure activities are fully
aligned with the requirements that are
set forth in final § 464.2(a) through (c).
As a result, out of an abundance of
caution, the Commission updates its
burden analysis in recognition of these
comments. As described in section
VI.A.5, however, the estimated costs
may be overestimated.
1. Number of Respondents
The Commission estimates that there
are 12,393 entities that may incur
additional incremental labor costs to
refine their disclosure activities so that
they are fully compliant with final
§ 464.2. This estimate of 12,393 entities
takes the high-end estimate of the
number of firms in the United States in
the live-event ticketing industry (9,440
firms) and the number of firms in the
United States in the short-term lodging
industry (2,953) that will incur
additional compliance costs related to
disclosure activities.
2. Estimated One-Time Hour Burden
In section V.E.3, the Commission
estimates the cost of adjusting the
presentation of advertised prices and
the purchase process for online sales.
The final regulatory analysis in section
V assumes live-event ticketing and
short-term lodging firms not presently
compliant with the final rule will
employ a low end of forty hours and a
high end of eighty hours of web
developer time to become compliant
with the final rule. For purposes of this
PRA analysis, the Commission uses the
midpoint of the range of web developer
hours presented in section V.E.3; that is,
the Commission assumes sixty hours of
web developer time will be necessary to
adjust advertised prices and purchase
processes to comply with final § 464.2’s
disclosure requirements.653 Once firms
adjust advertised prices and purchase
process displays to be compliant with
the final rule, any future changes to
pricing displays or purchasing systems
are part of the regular course of business
and are not a direct consequence of the
rule. The Commission finds that any
ongoing additional costs associated with
these activities are de minimis. Thus,
the Commission estimates the total web
developer hours to adjust price displays
and purchase processes is 743,580 hours
(12,393 firms × 60 web developer hours
per firm).
3. Estimated One-Time Labor Costs
The estimated one-time labor cost that
live-event ticketing and short-term
lodging firms may incur to comply with
final § 464.2’s disclosure requirements
is $32,990,931. This total is calculated
by summing the labor costs for the live-
event ticketing and short-term lodging
industries. The labor cost for the live-
event ticketing industry is calculated by
applying the hourly wage for web
developer time in the live-event
ticketing industry of $45.95 to the
estimate of 60 hours of web developer
time multiplied by the number of U.S.
firms in the live-event ticketing industry
that incur additional compliance costs
($45.95/hour × 60 hours per firm × 9,440
firms) resulting in $26,026,080.654 The
labor cost for the short-term lodging
industry is calculated by applying the
hourly wage for web developer time in
the short-term lodging industry of
$39.31 to the estimate of sixty hours of
web developer time multiplied by the
number of U.S. firms in the short-term
lodging industry that incur additional
compliance costs ($39.31/hour × 60
hours per firm × 2,953 firms) resulting
in $6,964,851. 655 The total for the two
industries is $32,990,931 ($26,026,080 +
$6,964,851).
4. Estimated One-Time Non-Labor Costs
The capital and start-up costs
associated with the final rule’s
disclosure are de minimis. Any
disclosure capital costs involved with
the final rule, such as equipment and
office supplies, would be costs borne by
businesses in the normal course of
business.
5. Projected Labor Costs Likely
Overestimated
In preparing its burden estimate for
compliance with final § 464.2(a) through
(c), the Commission considered
comments noting that some businesses
may incur incremental labor costs to
come into compliance with the rule,
though commenters did not submit
specific data for the Commission to
evaluate this contention. As a result, the
Commission’s updated burden
calculation relies in part on cost
assumptions from its final regulatory
analysis in section V. Applying these
cost assumptions as one-time fixed costs
in this burden analysis likely generates
an overestimate of incremental labor
costs for a number of reasons. First, the
number of respondents that will have to
make changes to their price displays
and offers is likely to be significantly
inflated. Since the Commission
announced its NPRM, California’s
Honest Pricing Law, SB 478, which was
amended by SB 1524, went into effect,
making it illegal for businesses to
advertise or list prices that do not
include all mandatory fees or charges
other than certain government taxes and
shipping costs. As such, many national
firms doing business in California,
including live-event ticketing and short-
term lodging firms, will already have
incurred costs to develop the
capabilities to comply with the
Commission’s rule even if they are
currently only fully deploying such
capabilities in California. Similar
legislative and regulatory efforts have
been enacted in New York,
Massachusetts, North Carolina,
Minnesota, Tennessee, Connecticut,
Maryland, and Colorado. 656 Second, to
the extent that live-event ticketing and
short-term lodging firms opt to present
all-inclusive total prices that obviate the
need for the disclosures set forth in final
§ 464.2(b) through (c), such firms will
require less web developer time to
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657 See 5 CFR 1320.3(c) (definition of the term
‘‘collection of information’’).
658 See NPRM, 88 FR 77478.
659 5 U.S.C. 603–605.
660 NPRM, 88 FR 77479–80.
661 See, e.g., FTC–2023–0064–3251 (National RV
Dealers Association); FTC–2023–0064–2367 (Small
Business Majority). The Small Business
Administration, Office of Advocacy raised similar
criticisms of the proposed rule. See U.S. Small Bus.
Admin., Office of Advocacy, Re: Trade Regulation
Rule on Unfair or Deceptive Fees FTC–2023–0064–
0001, https://advocacy.sba.gov/wp-content/
uploads/2024/03/Comment-Letter-Trade-
Regulation-Rule-on-Unfair-or-Deceptive-Fees.pdf.
The Commission addresses that comment infra
section VII.C.
662 FTC–2023–0064–3269 (IHRSA—The Health &
Fitness Association); FTC–2023–0064–3294
(International Franchise Association). The
Commission notes that the final rule is limited to
Covered Good or Services, which does not include
the health and fitness industry.
663 A 120-day compliance date after publication
in the Federal Register complies with the
requirements of the Congressional Review Act that
a ‘‘major rule’’ may not take effect fewer than sixty
days after the rule is published in the Federal
Register. 5 U.S.C. 801(a)(1)(3).
664 FTC–2023–0064–3251 (National RV Dealers
Association); FTC–2023–0064–2367 (Small
Business Majority).
665 The number of firms used in the NPRM was
provided by the United States Census Bureau’s
Statistics of United States Businesses. U.S. Census
Bureau, 2020 SUSB Annual Datasets by
Establishment Industry (Mar. 2023), https://
www.census.gov/data/datasets/2020/econ/susb/
2020-susb.html.
comply, and the Commission is likely
overestimating total labor hours.
B. Prohibited Misrepresentations Under
Final § 464.3
Final § 464.3, which the Commission
proposed in similar form as § 464.3(a),
sets forth that in any offer, display, or
advertisement for a covered good or
service, it is an unfair and deceptive
practice for a business to misrepresent
any fee or charge, including its nature,
purpose, amount, or refundability, and
the identity of the good or service for
which the fee or charge is imposed.
Consistent with the NPRM’s discussion
of proposed § 464.3(a), the Commission
notes that final § 464.3 does not impose
any information collection requirement
for the purpose of the PRA. Rather than
imposing any affirmative disclosure,
reporting, or recordkeeping
obligations, 657 final § 464.3 merely
prohibits businesses from making
certain misrepresentations that are
already prohibited under section 5 of
the FTC Act. As noted in the NPRM, any
additional costs that might be associated
with these prohibitions are de
minimis.658
VII. Regulatory Flexibility Act—Final
Regulatory Flexibility Analysis
The Regulatory Flexibility Act
(‘‘RFA’’), as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996, requires an agency
to provide an Initial Regulatory
Flexibility Analysis (‘‘IRFA’’) and Final
Regulatory Flexibility Analysis
(‘‘FRFA’’) of any final rule subject to
notice-and-comment requirements,
unless the agency head certifies that the
regulatory action will not have a
significant economic impact on a
substantial number of small entities. 659
In developing the final rule, the
Commission carefully considered
whether the rule would have a
significant impact on a substantial
number of small entities. The
Commission continues to believe that
the final rule’s impact will not be
substantial for most small entities and,
in many cases, will likely positively
impact small businesses by enabling
them to compete fairly in the
marketplace with larger players.
However, the Commission cannot fully
quantify the impact the final rule will
have on such entities. Therefore, in the
interest of thoroughness and an
abundance of caution, the Commission
has prepared the following FRFA for
this final rule.
In the NPRM, the Commission
provided an IRFA and solicited
comments on the burden on any small
entities that would be covered.660 The
Commission received comments in
response to the IRFA.661 The
Commission received comments from
two industry groups requesting that the
Commission conduct a Small Business
Regulatory Impact Analysis to analyze
the impact of small businesses in
particular industries. 662 The
Commission also received comments
from small business owners and
industry groups in support of the rule
and its impact on small businesses, as
well as from commenters concerned
about potential costs to small
businesses. Consistent with the
requirements of the FRFA, the
Commission has considered the
comments received, and the final rule’s
impact on small entities, including
alternatives to the final rule.
The Commission thoroughly
considered the feedback it received from
the SBA Office of Advocacy, the Small
Business Majority, and other
commenters in developing the final
rule. The Commission modifies the
proposed rule in response, in part, to
such feedback. The Commission will
continue to engage with small business
stakeholders to facilitate
implementation of, and compliance
with, the final rule and other guidance
as necessary to assist small entities in
complying with the rule.
Based on the Commission’s expertise,
and after careful review and
consideration of the entire rulemaking
record—including the more than 60,800
comments the Commission received in
response to the NPRM, empirical
research on how bait-and-switch pricing
tactics, including drip pricing and
partitioned pricing, harm consumers
and honest competitors, and the
Commission’s Final Regulatory Analysis
in section V—the Commission adopts
this final rule focused on covered goods
or services with certain additional
revisions to reduce compliance burdens
on small businesses and other entities.
To begin with, because this final rule is
limited to covered goods or services,
many industries that have significant
small business participants are no
longer covered. Second, the
Commission adopts an extended
compliance date—120 days—to ensure
that small businesses have adequate
time to come into compliance with the
rule’s requirements. 663 Third, as
discussed in section III, in response to
feedback from commenters representing
the interests of small businesses, the
Commission clarifies in this SBP that
businesses may exclude from total price
pass-through credit card or other
payment processing fees if they give
consumers a viable payment alternative
without a fee (e.g., cash is accepted). In
addition, as discussed in section III, the
final rule adopts definitions of
government charges to increase
flexibility for businesses, including
small businesses.
A. Statement of the Need for, and
Objectives of, the Rule
The Commission describes the need
for, and objectives of, the rule in section
V.A. The legal basis for the rule is
section 18 of the FTC Act, 15 U.S.C. 57a,
which authorizes the Commission to
promulgate, modify, and repeal trade
regulation rules that define with
specificity acts or practices in or
affecting commerce that are unfair or
deceptive within the meaning of section
5(a)(1) of the FTC Act, 15 U.S.C.
45(a)(1).
B. Significant Issues Raised by
Comments, the Commission’s
Assessment and Response, and Any
Changes Made as a Result
Commenters, including the Small
Business Majority, argued that the IRFA
failed to appropriately assess the impact
of the proposed rule on small
businesses. 664 The NPRM assumed that
of the total estimated firms in the
United States (6,140,612),665 only a
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666 FTC–2023–0064–3251 (National RV Dealers
Association); FTC–2023–0064–2367 (Small
Business Majority).
667 FTC–2023–0064–3251 (National RV Dealers
Association); FTC–2023–0064–2367 (Small
Business Majority).
668 FTC–2023–0064–3251 (National RV Dealers
Association); FTC–2023–0064–2367 (Small
Business Majority).
669 FTC–2023–0064–2367 (Small Business
Majority).
670 Id.; see also U.S. Small Bus. Admin., Office of
Advocacy, Re: Trade Regulation Rule on Unfair or
Deceptive Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
671 See, e.g., FTC–2023–0064–3033 (The Rebel
Lounge et al.); FTC–2023–0064–3078 (Washington
Hospitality Association); FTC–2023–0064–2367
(Small Business Majority).
672 FTC–2023–0064–3292 (National Association
of Theater Owners).
673 FTC–2023–0064–2840 (Indie Sellers Guild);
FTC–2023–0064–2341 (New Hampshire State
Representative Lindsay Sabadosa); FTC–2023–
0064–3302 (Public Citizen); FTC–2023–0064–3160
(Consumer Federation of America); FTC–2023–
0064–3141 (Coalition of Franchisee Associations).
674 FTC–2023–0064–2341 (New Hampshire State
Representative Lindsay Sabadosa).
675 FTC–2023–0064–3302 (Public Citizen); FTC–
2023–0064–3160 (Consumer Federation of
America).
small fraction (818,178 or about 13%)
would incur additional costs beyond the
initial one-hour compliance review to
comply fully with the proposed rule.
Commenters, including the Small
Business Majority, argued that the IRFA
failed to appropriately assess the impact
of the proposed rule on small
businesses. 666 For the purpose of the
IRFA, the Commission concluded that
the proposed rule would not have a
significant economic impact on a
substantial number of small entities and
solicited comment on its analysis,
including the submission of supporting
or contradictory empirical data. The
Commission did not receive any data or
other evidence to suggest that the
number of firms incurring additional
costs should be higher. The Commission
anticipates that modifications made in
the final rule will reduce the number of
businesses that are likely to incur
additional costs.
These commenters further asserted
the rule’s proposed economic analysis
underestimated the cost of attorneys’
fees and ongoing costs to comply with
the rule.667 The Commission addresses
comments and concerns related to its
economic analysis in section V,
including estimates for attorneys’ fees
and ongoing compliance costs.
The same commenters also noted that
the Commission’s IRFA failed to
appropriately consider alternatives to
the proposed rule for small
businesses. 668 The Commission
disagrees. The NPRM stated that the
Commission had considered
alternatives, including: (1) a rule that
would exempt small businesses from
the proposed rule; (2) a rule that would
apply to online-only businesses; (3)
alternatives that would otherwise
narrow the scope of the proposed rule,
including limiting application of the
rule to Covered Businesses as defined in
the NPRM; or (4) terminating the
rulemaking entirely. Consistent with the
NPRM, the Commission declines to
exempt small businesses, including
those that offer live-event ticketing and
short-term lodging, from the rule to
avoid creating uncertainty across
businesses as to whether the rule
applies to them, to avoid creating unfair
competitive advantages for those
businesses that engage in bait-and-
switch pricing and misrepresent fees,
and to ensure maximum consumer
benefits from increased price
transparency. The NPRM also invited
comment on questions and concerns
related to small businesses, including
the estimated number of small
businesses and the impact on those
businesses, as well as alternatives to the
rule for small businesses. The
Commission’s FRFA includes further
discussion of the alternatives
considered in section V.B.
The Small Business Majority noted
that many small businesses lack access
to legal staff and ‘‘run the risk of
occupying a substantial amount of time
to understand how exactly they need to
adjust their pricing models to comply
with the new rule.’’ 669 As a result, the
Small Business Majority encouraged the
Commission to provide guidance to
small businesses, including through
outreach, education, and compliance
guidance, as well as working directly
with small businesses, to help small
businesses comply with the final
rule. 670 The Commission highlights and
discusses herein that, in response to the
comments, the final rule both narrows
the NPRM proposal as well as clarifies
it in certain respects, thereby decreasing
the burden on small businesses. The
SBP also discusses various pricing
scenarios raised by commenters, and the
Commission believes that such
discussion will aid businesses,
including small businesses, in
complying with the final rule. Finally,
the Commission routinely provides
guidance and conducts outreach to
businesses on complying with the FTC
Act and regulations that it enforces and,
as required by law, the Commission will
publish a small entity compliance guide
to assist small businesses in complying
with the rule.
The Commission received numerous
comments from industry groups and
individual small business owners,
including comments highlighting the
benefits of the proposed rule on small
businesses, as well as comments
identifying certain concerns about
application of the proposed rule to
small businesses. The Commission
addresses many of these comments in
other parts of the SBP, including section
III, and accordingly incorporates that
analysis into its FRFA, and addresses
the remainder of these comments
herein.
Some commenters argued that fees
help small businesses offset rising costs
and staff salaries and benefits,
especially for small businesses
operating on thin margins.671 One
industry group argued that the rule
might place small businesses at a
competitive disadvantage compared to
larger businesses. 672 As discussed in
Parts III and V, the Commission narrows
the scope of the rule to address concerns
affecting small businesses by, for
example, modifying the definition of
government charges and addressing
factual scenarios and questions
concerning application of the rule to
small businesses, including related to
credit card surcharges and contingent
fees. In making these clarifications and
modifications, the Commission narrows
the total price requirement for, and
thereby reduces the compliance burden
on businesses, including small
businesses, offering covered goods or
services. As discussed in section VII.C,
the Commission is also adopting an
extended 120-day compliance date to
allow more time for businesses,
including small businesses, to assess
and come into compliance with the final
rule.
Conversely, other commenters noted
that bait-and-switch practices and
misleading fees harm small businesses,
and that the rule will help small
businesses. 673 One State representative
asserted that the final rule would help
small businesses because small
businesses that advertise the entire price
of their goods and services are at a
competitive disadvantage compared to
larger businesses that advertise lower
prices and only disclose fees at the end
of a transaction.674 Consumer advocacy
groups urged the Commission not to
exempt small businesses, arguing that
consumers and small businesses alike
will benefit from greater pricing
transparency and a prohibition on
deceptive pricing.675 The Commission
also received numerous individual
comments, including from small
business owners, expressing support for
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676 See, e.g., FTC–2023–0064–0105 (Individual
Commenter); FTC–2023–0064–2422 (Individual
Commenter); FTC–2023–0064–2697 (Individual
Commenter).
677 U.S. Small Bus. Admin., Office of Advocacy,
Re: Trade Regulation Rule on Unfair or Deceptive
Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
678 Id.
679 Id.
680 Id.
681 Id.
682 See, e.g., id. (SBA urged the Commission to
consider ‘‘allowing small businesses more time to
comply with the rule’’ and to provide clear
compliance guidance); FTC–2023–0064–2367
(Small Business Majority urged the Commission to
issue comprehensive guidance and commented:
‘‘[M]any small businesses do not have access to
legal staff or consultants, and without clear and
specific disclosure requirements provided by
industry, small businesses run the risk of occupying
a substantial amount of time to understand how
exactly they need to adjust their pricing models to
comply with the new rule.’’).
683 U.S. Small Bus. Admin., Office of Advocacy,
Re: Trade Regulation Rule on Unfair or Deceptive
Fees FTC–2023–0064–0001, https://
advocacy.sba.gov/wp-content/uploads/2024/03/
Comment-Letter-Trade-Regulation-Rule-on-Unfair-
or-Deceptive-Fees.pdf.
684 15 U.S.C. 45(a)(2). The Commission herein
focuses on coverage of ‘‘corporations.’’
685 15 U.S.C. 44.
686 In re Coll. Football Ass’n, 117 F.T.C. 971, 994
(1994).
687 Cal. Dental Ass’n v. FTC, 526 U.S. 756, 766–
67 (1999); Cmty. Blood Bank of Kansas City Area,
Inc. v. FTC, 405 F.2d 1011, 1019 (8th Cir. 1969);
FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 (11th
Cir. 1991).
688 The Commission has determined that
‘‘[r]ulings of the Internal Revenue Service are not
binding upon the Commission, . . . but a
determination by another Federal agency that a
respondent is or is not organized and operated
exclusively for eleemosynary purposes should not
be disregarded.’’ In re Am. Med. Ass’n, 94 F.T.C.
701, 990 (1979) (citing In re Ohio Christian Coll.,
80 F.T.C. 815, 848 (1972)).
689 Cmty. Blood Bank, 405 F.2d at 1018; see also,
e.g., FTC v. Nat’l Comm’n on Egg Nutrition, 517
F.2d 485, 488 (7th Cir. 1975); In re Coll. Football
Ass’n, 117 F.T.C. at 998.
the rule, because it would benefit small
businesses. 676
The Commission notes that the final
rule does not prohibit any business
offering live-event ticketing or short-
term lodging from charging consumers
fees or raising prices to support
necessary operating costs, such as labor
costs or rising expenses. The final rule
instead requires that such charges and
fees be incorporated in total price and
that they not be misleading.
C. Comment by the Small Business
Administration, Office of Advocacy, the
Commission’s Assessment and
Response, and Any Changes Made as a
Result
The SBA Office of Advocacy filed a
comment requesting that the
Commission ‘‘prepare a supplemental
initial regulatory flexibility analysis that
fully considers the economic impact of
the proposed rulemaking on small
entities and alternatives that may reduce
that burden,’’ as well as ‘‘clarify that
this rulemaking will not apply to small
non-profit organizations.’’ 677 The SBA
Office of Advocacy argues that the
Commission’s IRFA did not comply
with the requirements of the Regulatory
Flexibility Act because it ‘‘fail[ed] to
provide an accurate description of the
small entities to which the proposed
rule will apply,’’ and failed to provide
‘‘an accurate description of the costs
associated with the compliance
requirements.’’ 678 According to the SBA
Office of Advocacy, the Commission
also ‘‘failed to consider significant
alternatives that would minimize any
significant economic impact of the
proposed rule on small businesses.’’ 679
The Commission has considered this
comment, which it further summarizes
herein, and responds as follows.
The SBA Office of Advocacy
recommended that the Commission
count small businesses using NAICS-
code specific thresholds defined by the
SBA, rather than using a threshold of
500 employees. 680 In response to this
comment, the Commission now uses the
NAICS-code specific thresholds set by
the SBA to determine the number of
small businesses in the Final Regulatory
Flexibility Analysis contained in section
VII.D.
The comment further contended that
‘‘there are other alternatives that the
FTC should have considered in its
IRFA,’’ such as ‘‘exempting certain
sectors of small businesses or imposing
a limit on certain fees’’ and ‘‘allowing
businesses more time to comply with
the rule.681 The Commission did
consider such alternatives and narrows
the scope of the final rule to covered
goods or services, thereby limiting the
rule’s application to only those
businesses, including small businesses,
that offer, display, or advertise such
goods or services. The Commission
declines, however, to impose a limit on
the amount of fees, so long as they are
disclosed and not misleading in
accordance with the rule’s
requirements, including as discussed in
section III.
As to the suggestion to give
businesses more time to comply with
the rule, the Commission adopts a
compliance date of 120 days after
publication of the final rule in the
Federal Register. The final rule will go
into effect, and compliance with the
final rule will be required, on that date.
This extended timeline considers
comments received from the SBA Office
of Advocacy and small businesses,
underscoring the time it might take to
come into compliance with the final
rule. For example, some small
businesses may decide to seek outside
guidance about whether they need to
make adjustments to come into
compliance, while others will conduct
their own compliance review. 682 The
Commission finds 120 days should be
enough time even for small businesses
conducting their own compliance
review, and that a 120-day period
between publication in the Federal
Register and the rule’s compliance date
appropriately balances the interests of
small businesses with the interests of
protecting consumers. Further, in
addition to guidance in this SBP, the
Commission also will publish a small
entity compliance guide to assist small
businesses in complying with the rule.
Finally, the SBA Office of Advocacy
‘‘encourages the FTC to clarify that this
rulemaking will not apply to non-
profits.’’ 683 The final rule can be
enforced to the full scope of the
Commission’s jurisdiction. Congress
empowered the Commission to ‘‘prevent
persons, partnerships, or corporations’’
from engaging in ‘‘unfair or deceptive
acts or practices in or affecting
commerce.’’ 684 To fall within the
definition of ‘‘corporation’’ under the
FTC Act, an entity must be ‘‘organized
to carry on business for its own profit
or that of its members.’’ 685 These FTC
Act provisions, taken together, have
been interpreted in Commission
precedent 686 and judicial decisions 687
to mean that the Commission lacks
jurisdiction to prevent section 5
violations by a corporation not
organized to carry on business for its
own profit or that of its members. The
Commission stresses, however, that both
judicial decisions and Commission
precedent recognize that not all entities
claiming tax-exempt status as non-
profits fall outside the Commission’s
jurisdiction.688 ‘‘Congress took pains in
drafting § 4 [15 U.S.C. 44] to authorize
the Commission to regulate so-called
nonprofit corporations, associations and
all other entities if they are in fact
profit-making enterprises.’’ 689
D. Description and Estimate of the
Number of Small Entities To Which the
Rule Will Apply
The final rule covers businesses that
offer short-term lodging and live-event
tickets. Small businesses that currently
comply with the final rule will have a
relatively trivial cost of assessing
whether they are currently in
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2165	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
690 See U.S. Small Bus. Admin., Table of Small
Bus. Size Standards, https://www.sba.gov/
document/support-table-size-standards.
691 The Commission uses the latest data available
from the Census Bureau’s Statistics of U.S.
Businesses database, available based on firm
revenue and firm size. U.S. Census Bureau, Stat. of
U.S. Bus. (last revised July 9, 2024), https://
www.census.gov/programs-surveys/susb.html. The
calculation of 9,034 live-event ticketing firms is
likely an overestimate of the number of small
businesses due to data incompatibility and the use
of the high-end assumption regarding how live-
event ticketing firms are categorized using NAICS
codes. The U.S. SBA sets different revenue
thresholds for different NAICS codes. However, the
Statistics of U.S. Businesses does not necessarily
report the number of firms with earnings under
those particular thresholds. Therefore, the
Commission calculates there may be as many as
3,094 firms in NAICS code 711310 with receipts
under the SBA threshold of $40 million, 4,358 firms
in NAICS code 711320 with receipts under $25
million (an overestimate given the SBA threshold
of $22 million for NAICS code 711320), and 1,582
firms in NAICS code 561599 with receipts under
$35 million (an overestimate given the SBA
threshold of $32.5 million for NAICS code 561599).
692 Id. The calculation of 2,798 small hotels firms
is likely an overestimate of the number of small
businesses due to data incompatibility. The U.S.
SBA sets a revenue threshold of $9 million for
NAICS code 721191 and NAICS code 721199.
However, the Statistics of U.S. Businesses does not
report number of firms for those particular
thresholds. Therefore, the Commission calculates
there are as many as 42,186 firms in NAICS code
721110 with receipts under the SBA threshold of
$40 million, 101 firms in NAICS code 721120 with
receipts under the SBA threshold of $40 million,
2,960 firms in NAICS code 7211191 with receipts
under $10 million (an overestimate given the SBA
threshold), and 1,384 firms with receipts under $10
million (an overestimate given the SBA threshold).
693 5 U.S.C. 604(a)(6).
694 See 5 U.S.C. 603(c).
695 NPRM, 88 FR 77479–83.
696 Id.
compliance, and the Commission
assumes these firms will require at most
one hour of lawyer time to confirm
compliance. Small businesses that offer
covered goods or services and currently
do not disclose total price will incur
additional costs to adjust advertised
prices, their marketing campaigns, and
the consumer purchase process to
comply with the rule.
Using the size standards set by the
SBA, 690 the Commission calculates that
there are potentially as many as 9,034
small firms in the U.S that may sell
tickets for live events.691 For the
economic regulatory analysis in section
V, the Commission assumes all live-
event ticketing firms will incur
additional costs to adjust advertised
prices, their marketing campaigns, and
the consumer purchase process to
comply with the rule. The Commission
notes that there may be some live-event
ticket sellers that are currently in
compliance and will therefore have a
trivial cost of compliance with the final
rule.
For the short-term lodging industry,
the Commission separately estimates
there are as many as 675,603 home
share hosts in the U.S. The Commission
assumes that these home share hosts are
all considered small entities. Using the
NAICS-code specific thresholds set by
the SBA, the Commission calculates that
there are potentially as many as 2,798
small firms within NAICS code 7211
(‘‘Accommodation’’). 692
E. Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements
The final rule contains no reporting or
recordkeeping requirements; however,
the final rule imposes disclosure
obligations. Only small entities that
offer, display, or advertise covered
goods or services must comply with the
rule and, therefore, will incur
compliance costs. To comply with the
final rule, small entities that offer,
display, or advertise any price of a
covered good or service are required to
disclose the total price clearly and
conspicuously and, generally, more
prominently than any other pricing
information. Small entities must also
disclose other imposed fees and charges
before a consumer consents to pay and
must not misrepresent any fee or charge.
For firms that already comply with the
final rule, the one-time indirect cost per
firm is assumed to be, at most, one hour
of lawyer time for regulatory
familiarization. This cost is excluded
from the Regulatory Flexibility Analysis
since such familiarization is not a
compliance requirement.
For small businesses subject to the
rule that are not currently in compliance
with the rule’s requirements, the
Commission has determined that firms
will need to adjust advertised prices,
marketing campaigns, and the purchase
process to comply with the rule. These
firms may also incur recurring annual
costs of additional lawyer time to assess
and confirm annual compliance. As
discussed in more detail in section V,
the Commission estimates that direct
compliance costs in the live-event
ticketing industry, over a ten-year
period, would result in annualized costs
of $648–$2,144 per firm assuming a 7%
discount rate or $534–$1,916 per firm
assuming a 3% discount rate. U.S. home
share hosts would incur one-time costs
re-optimizing prices of $30.42–$91.27.
The Commission also estimates direct
compliance costs for U.S. hotels, over a
ten-year period, would result in
annualized costs of $527–$2,011 per
firm assuming a 7% discount rate or
$434–$1,825 per firm assuming a 3%
discount rate. These estimates, however,
are for firms of all sizes; the
Commission has not separately
estimated the costs for small businesses
specifically.
F. Discussion of Significant Alternatives
the Commission Considered That Would
Accomplish the Stated Objectives of the
Final Rule and That Would Minimize
Any Significant Economic Impact of the
Final Rule on Small Entities
The Regulatory Flexibility Act
requires that agencies include a
description of the steps the agency has
taken to minimize the significant
economic impact on small entities
consistent with the stated objectives of
applicable statutes, including a
statement of the factual, policy, and
legal reasons for selecting the alternative
adopted in the final rule and the other
significant alternatives to the rule
considered by the agency which affect
the impact on small entities was
rejected.693 Statutory examples of
‘‘significant alternatives’’ include
different requirements or timetables that
take into account the resources available
to small entities; the clarification,
consolidation, or simplification of
compliance and reporting requirements
under the rule for small entities; the use
of performance rather than design
standards; and an exemption from
coverage of the rule, or any part thereof,
for small entities.694
In the NPRM, the Commission sought
comment on various potential
alternatives to the proposed rule,
including alternatives that were tailored
to the needs of small businesses and
that addressed the impact (including
costs) that would be incurred by
businesses to comply with the proposed
rule. 695 Specifically, the Commission
sought comment on the estimated
number and the nature of small business
entities for which the proposed rule
would have a significant economic
impact, whether the proposed rule
would have a significant economic
impact on a substantial number of small
entities, and if so, how it could be
modified to avoid such an impact, as
well as whether the proposed definition
for ‘‘business’’ should exclude certain
businesses, including small businesses
meeting the SBA’s definition of a ‘‘small
business concern’’ and the SBA’s Table
of Size Standards, or simply certain
limited-service and full-service
restaurants meeting such
requirements. 696 The Commission also
inquired as to whether the ‘‘total price’’
definition should exclude mandatory
charges by restaurants for service
performed for the customer in lieu of
tips, as defined by the Department of
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2166 	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
697 Id., 88 FR 77481.
Labor. 697 The Commission also
considered alternatives that would
otherwise narrow the scope of the
proposed rule, including limiting
application of the rule to ‘‘Covered
Businesses’’ as defined in the NPRM,
ultimately adopting a variation of this
approach in the final rule.
The Commission requested this
information to minimize the final rule’s
burden on all businesses, including
small entities. As explained through this
SBP, the Commission has considered
the comments and alternatives proposed
by the commenters, including the SBA
Office of Advocacy, and finds that the
final rule will not create a significant
impact on small entities. Indeed, the
type of deception that will be unlawful
under the final rule is already unlawful
under the FTC Act, but the final rule
would allow the Commission to obtain
monetary relief more efficiently than it
could solely under section 19(a)(2) of
the FTC Act (i.e., without a rule
violation), thereby deterring current and
would be violators of the FTC Act.
In its Preliminary Regulatory
Analysis, the Commission described an
alternative to the proposed rule, namely,
to terminate the rulemaking and rely
instead on the Commission’s previously
existing tools, such as consumer
education and enforcement actions
brought under sections 5 and 19 of the
FTC Act, to combat the specified unfair
or deceptive pricing practices. The
Commission believes that promulgation
of the rule will result in greater net
benefits to the marketplace while
imposing no additional burdens beyond
what is required by the FTC Act. As the
Commission describes further in section
V, the rule will not only result in
significant benefits to consumers but
also improve the competitive
environment, particularly for small,
independent, or new firms. Therefore,
the rule appears to be superior to this
alternative for small entities.
As discussed herein, the Commission
narrows the rule by adding a definition
for ‘‘covered good or service’’ that is
limited to Live-event tickets or Short-
term lodging. The Commission also
modifies the definition of government
charges to replace the language that
included only those government charges
levied ‘‘on consumers,’’ with language
clarifying that any government charge
‘‘imposed on the transaction’’ may be
excluded from total price. Finally, the
Commission addresses in section III
how the rule would apply to credit card
processing fees and contingent fees
charged by small businesses.
The Commission notes that it has
designed the final rule to minimize
compliance costs for all businesses. As
stated in section V, the Commission
estimates that direct compliance costs in
the live-event ticketing industry, over a
ten-year period, would result in
annualized costs of $648–$2,144 per
firm assuming a 7% discount rate or
$534–$1,916 per firm assuming a 3%
discount rate. U.S. home share hosts
would incur one-time costs re-
optimizing prices of $30.42–$91.27. The
Commission also estimates direct
compliance costs for U.S. hotels, over a
ten-year period, would result in
annualized costs of $527–$2,011 per
firm assuming a 7% discount rate or
$434–$1,825 per firm assuming a 3%
discount rate. Based on the available
evidence, the Commission does not
believe that the analysis in section V is
fundamentally different for small
entities. For this reason, the
Commission is not creating an exception
for small entities or creating different
regulatory requirements for small
entities.
The Commission also is not delaying
the effective date of the final rule solely
for small entities. The final rule’s
effective date is 120 days after
publication in the Federal Register on
May 9, 2025. In the Commission’s view,
the rule’s effective date of May 9, 2025
will afford small entities sufficient time
to comply with the final rule, and
commenters have not provided evidence
that more time is necessary. The
Commission declines to set different
effective dates for small businesses and
larger businesses because the final rule’s
core objectives include promoting
comparison shopping for consumers
and leveling the playing field for honest
competitors. For all of the reasons
stated, these objectives would be
thwarted in a marketplace where certain
businesses must comply with the rule’s
requirements for a period of time while
others have more time to continue
engaging in unfair or deceptive pricing
practices.
VIII. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs has
designated this rule as a ‘‘major rule,’’
as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 464
Advertising, Consumer protection,
Trade practices.
■ For the reasons set forth above, the
Federal Trade Commission adds part
464 to chapter I of title 16 of the Code
of Federal Regulations to read as
follows:
PART 464—RULE ON UNFAIR OR
DECEPTIVE FEES
Sec.
464.1 Definitions.
464.2 Hidden fees prohibited.
464.3 Misleading fees prohibited.
464.4 Relation to State laws.
464.5 Severability.
Authority: 15 U.S.C. 41 through 58.
§ 464.1 Definitions.
Ancillary good or service means any
additional good(s) or service(s) offered
to a consumer as part of the same
transaction.
Business means an individual,
corporation, partnership, association, or
any other entity that offers goods or
services, including, but not limited to,
online, in mobile applications, and in
physical locations.
Clear(ly) and conspicuous(ly) means a
required disclosure that is easily
noticeable (i.e., difficult to miss) and
easily understandable by ordinary
consumers, including in all of the
following ways:
(1) In any communication that is
solely visual or solely audible, the
disclosure must 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
must 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.
(2) A visual disclosure, by its size,
contrast, location, the length of time it
appears, and other characteristics, must
stand out from any accompanying text
or other visual elements so that it is
easily noticed, read, and understood.
(3) An audible disclosure, including
by telephone or streaming video, must
be delivered in a volume, speed, and
cadence sufficient for ordinary
consumers to easily hear and
understand it.
(4) In any communication using an
interactive electronic medium, such as
the internet, a mobile application, or
software, the disclosure must be
unavoidable.
(5) The disclosure must use diction
and syntax understandable to ordinary
consumers and must appear in each
language in which the representation
that requires the disclosure appears.
(6) The disclosure must comply with
these requirements in each medium
through which it is received, including
all electronic devices and face-to-face
communications.
(7) The disclosure must not be
contradicted or mitigated by, or
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2167	Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules and Regulations
inconsistent with, anything else in the
communication.
(8) When the representation or sales
practice targets a specific audience,
such as children, older adults, or the
terminally ill, ‘‘ordinary consumers’’
includes members of that group.
Covered good or service means:
(1) Live-event tickets; or
(2) Short-term lodging, including
temporary sleeping accommodations at
a hotel, motel, inn, short-term rental,
vacation rental, or other place of
lodging.
Government charges means the fees or
charges imposed on the transaction by
a Federal, State, Tribal, or local
government agency, unit, or department.
Pricing information means any
information relating to an amount a
consumer may pay.
Shipping charges means the fees or
charges that reasonably reflect the
amount a business incurs to send
physical goods to a consumer, including
through the mail, private mail and
shipping services, or by freight.
Total price means the maximum total
of all fees or charges a consumer must
pay for any good(s) or service(s) and any
mandatory ancillary good or service,
except that government charges,
shipping charges, and fees or charges for
any optional ancillary good or service
may be excluded.
§ 464.2 Hidden fees prohibited.
(a) It is an unfair and deceptive
practice and a violation of this part for
any business to offer, display, or
advertise any price of a covered good or
service without clearly and
conspicuously disclosing the total price.
(b) In any offer, display, or
advertisement that represents any price
of a covered good or service, a business
must disclose the total price more
prominently than any other pricing
information. However, where the final
amount of payment for the transaction
is displayed, the final amount of
payment must be disclosed more
prominently than, or as prominently as,
the total price.
(c) A business must disclose clearly
and conspicuously, before the consumer
consents to pay for any covered good or
service:
(1) The nature, purpose, and amount
of any fee or charge imposed on the
transaction that has been excluded from
total price and the identity of the good
or service for which the fee or charge is
imposed; and
(2) The final amount of payment for
the transaction.
§ 464.3 	Misleading fees prohibited.
In any offer, display, or advertisement
for a covered good or service it is an
unfair and deceptive practice and a
violation of this part for any business to
misrepresent any fee or charge,
including: the nature, purpose, amount,
or refundability of any fee or charge;
and the identity of the good or service
for which the fee or charge is imposed.
§ 464.4 	Relation to State laws.
(a) In general. This part will not be
construed as superseding, altering, or
affecting any State statute, regulation,
order, or interpretation relating to unfair
or deceptive fees or charges, except to
the extent that such statute, regulation,
order, or interpretation is inconsistent
with the provisions of this part, and
then only to the extent of the
inconsistency.
(b) Greater protection under State law.
For purposes of this section, a State
statute, regulation, order, or
interpretation is not inconsistent with
the provisions of this part if the
protection such statute, regulation,
order, or interpretation affords any
consumer is greater than the protection
provided under this part.
§ 464.5 Severability.
If any provision of this part is held to
be invalid or unenforceable by its terms,
or as applied to any person, industry, or
circumstance, or stayed pending further
agency action, the provision shall be
construed so as to continue to give the
maximum effect to the provision
permitted by law and such invalidity
shall not affect the application of the
provision to other persons, industries,
or circumstances or the validity or
application of other provisions. If any
provision or application of this part is
held to be invalid or unenforceable, the
provision or application shall be
severable from this part and shall not
affect the remainder thereof.
By direction of the Commission,
Commissioner Ferguson dissenting.
Joel Christie,
Acting Secretary.
[FR Doc. 2024–30293 Filed 1–8–25; 8:45 am]
BILLING CODE 6750–01–P
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Federal Trade Commission
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