FTC to Intuit: Free” Not Free for Most Taxpayers

If you follow the FTC, you likely saw its widely-covered filing this week alleging that Intuit, the marketer of TurboTax, has deceptively claimed for years that its online tax preparation services are free,” when they’re free for only a subset of taxpayers. The FTC’s case parallels two class actions already underway; some state AGs are reportedly investigating the company as well.

The FTC timed its case strategically – two weeks before taxes are due – and is pursuing its case in an administrative proceeding while simultaneously seeking a temporary restraining order (TRO) to halt the conduct in federal district court. Unlike most of the consumer protection matters filed since Chair Khan joined the agency, Intuit has chosen to fight the FTC’s charges, forcing the agency to test its legal theories in court. (Home Advisor recently did the same.)

Brief summary of the allegations

The FTC’s various filings (which are partially redacted) allege that Intuit made prominent claims in its ads and on its website that its commercial (“freemium”) tax services were free,” while only disclosing in fine print that this offer was limited to simple returns” filed by a fraction of taxpayers (1/3 in 2020). The FTC further alleges that Intuit deliberately created confusion between its commercial services and the truly free” services offered to low- and middle-income consumers through the IRS Free File Program. (Intuit participated in this program until 2021.)

In addition, consumers with more complex returns allegedly learned that the services weren’t free only after they visited the website and invested time and effort in creating accounts and inputting personal data. For example, if they input income from certain types of 1099s, pop-ups (called Hard Stops”) would appear, informing them that they needed to upgrade to a paid service option to accurately report that income. In a nutshell, according to the FTC, Intuit drew consumers in with its free” offer and then used Hard Stops” to funnel consumers into paid options.

The case raises many interesting issues that bear mentioning here:

Deceptive door openers, net impressions, and dark patterns

At times, the FTC characterizes Intuit’s claims as deceptive door openers” that can’t be cured through later disclosures. At other times, it alleges that consumers’ experience on Intuit’s site created a net impression” that the services were free to everyone when they were only free for a subset of taxpayers. Although the FTC doesn’t use the term dark patterns,” many of the facts alleged echo its policy statements on this issue. For example, in addition to the attempts to confuse consumers (noted above), Intuit allegedly used search optimization to route consumers to its commercial (non-IRS) site.

In evaluating the FTC’s claims, the ALJ and the court will need to determine if Intuit’s claims indeed conveyed the message that the service is free to everyone, whether as a deceptive door opener” or a matter of net impression.” One issue they are likely to examine closely is whether the Hard Stops” that the FTC alleges were deceptive and coercive actually served to alert users to potential costs, mitigating the alleged deception of the free” claims.

3-1 Commission vote

The case drew a majority vote in a deeply divided Commission, with Commissioner Wilson voting to approve the complaint. Commissioner Phillips dissented, but doesn’t appear to have issued a dissenting statement (perhaps because such statements have in the past proved to be fodder for defendants and FTC critics).

Two-pronged administrative and federal court enforcement

In the wake of the AMG decision holding that the FTC can’t obtain consumer redress under Section 13(b), the FTC is pursuing the two-pronged strategy for obtaining redress under Section 19 – i.e., filing an administrative action to obtain a cease and desist order, which paves the way for a later federal court action seeking redress. At the same time, the FTC is seeking a TRO in federal district court to halt the alleged deception immediately. This process is well established and has been used in the past, but is being re-invigorated post-AMG. One key question is whether the administrative case will be caught in a backlog, since the FTC has recently filed several cases before its one ALJ. (The FTC is apparently trying to hire another one.)

Recurring harm?

In its TRO brief, the FTC argues that, although Intuit has claimed that it is pulling its free ads off TV, the conduct is likely to recur because (1) it’s not clear whether Intuit has followed through on its pledges; (2) Intuit has been noncommittal as to whether it will pull its free” claims off its website and social media; and (3) Intuit’s actions, if any, only occurred after it was on the brink of litigation.” Overall, the FTC’s case for recurrence seems somewhat vague and uncertain, suggesting that there may be more to the story. Whether or not the conduct is continuing could prove decisive in the FTC’s quest for preliminary relief.

Harm to competition

Consistent with Chair Khan’s statements that the FTC will consider competition and consumer protection in tandem, the FTC includes a short section in its brief discussing Injury to Honest Market Participants.” While the new headline here is noticeable, the FTC has long considered injury to honest businesses as a core justification for challenging deceptive claims. (See for example footnote 58 of the FTC’s Deception Policy Statement.)

Notice of contemplated relief

Per FTC rules, the administrative complaint provides notice of the relief the FTC is seeking, and it’s very broad indeed. It would apply to all goods and services marketed by the company and would (1) ban any representations that a good or service is free” and (2) ban any representations of material fact, unless the total costs, refund policy, and all other material terms, conditions, and characteristics are disclosed.

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We will learn soon enough what the federal judge thinks about the FTC’s allegations, at least for purposes of granting preliminary injunctive relief. Of note, the federal judge assigned to the case (Charles Breyer) is the same judge overseeing one of the class actions – and he’s already made some rulings there that are adverse to Intuit. In the meantime, this case (like Home Advisor) may be a sign that companies are starting to resist FTC settlement demands and that more litigation will follow.