Free for Some, but Not Most: FTC Finds “Free” Claims Deceptive

Recently, an Administrative Law Judge for the Federal Trade Commission (“FTC”) ruled that Intuit Inc., the company behind the well-known TurboTax tax filing software, violated Section 5 of the FTC Act by engaging in deceptive advertising of “free” tax products and services, despite most consumers being ineligible for them. The decision results from the FTC’s administrative complaint filed against Intuit in March 2022 alleging that Intuit deceived consumers with “bogus advertisements pitching ‘free’ tax filing that millions of consumers could not use” and then “hitting them with charges when it’s time to file.” This recent decision illustrates the FTC’s interpretation of “free” claims as well as its enforcement against such claims.

The FTC has promulgated regulations as a guide for using the word “free” and similar representations (e.g., “Buy 1-Get 1 Free”, “2-for-1 Sale”). The FTC explains that “because the purchasing public continually searches for the best buy, and regards the offer of ‘Free’ merchandise or service to be a special bargain, all such offers must be made with extreme care so as to avoid any possibility that consumers will be misled or deceived.” Per the FTC’s regulations, when making “free” or similar offers, all the terms, conditions and obligations 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. It is not regarded as an adequate disclosure if the terms of the offer are set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer.

In its complaint against Intuit, the FTC highlighted Intuit’s advertisements touting Intuit’s “free” products—some of which consisted almost entirely of the word “free” (e.g., “TurboTax Free is free. Free free free free”). These advertisements did not contain all of the conditions upon which a consumer could receive the “free” products. For example, the FTC found that most tax filers could not use the company’s “free” product because it was not available to individuals who received a 1099 form for work in the gig economy or those who earned farm income, which excluded millions of taxpayers. In 2020, approximately two-thirds of tax filers would have been ineligible to use the free TurboTax product. As a result, the FTC found that Intuit’s “free” claims for this product misled consumers.

Under the terms of the Administrative Law Judge’s recent order, which Intuit has said it will appeal, Intuit is generally prohibited from engaging in deceptive practices in the future and specifically barred from representing that any good or service is free, unless it is free for all consumers or it clearly and conspicuously discloses any terms that would limit the offer and might be misunderstood by consumers. Further, if the good or service is not free to a majority of U.S. taxpayers, it must also disclose this in a clear and conspicuous manner at the outset. The order also prohibits specific misrepresentations by Intuit regarding its tax preparation and filing services and includes recordkeeping and reporting provisions to ensure compliance with the order.

In addition to the FTC Act, virtually every state has a law prohibiting various deceptive trade practices, and state attorneys general typically can bring actions to enforce these laws. In May 2022, a coalition of state attorneys general brought claims against Intuit regarding its advertisements of “free” products, claiming that Intuit steered at least 4.4 million customers, many with low incomes, into buying its tax preparation products despite the customers being eligible for free electronic filing through the Internal Revenue Service. These claims eventually settled for $141 million.

If you have any questions regarding the impact of the FTC’s ruling, claim substantiation, or other applicable advertising laws, please contact one of our Advertising, Promotions & Social Media attorneys.