District Court Rules for the FTC in “Unfairness” Action Against Amazon Regarding In-app Purchasing Controls

On April 26, the US District Court in Seattle granted the FTC’s motion for summary judgment against Amazon for providing allegedly inadequate parental controls to limit their children’s in-app purchases. Case No. C14-1038-JCC.  The FTC alleged that the company’s failure to require more robust password re-entry meant that many in-app purchases by children resulted in unauthorized charges to the parents.

Specifically, the FTC claimed “that the billing of parents and other account holders for in-app purchases incurred by children ‘without having obtained the account holders’ express informed consent’ is unlawful under Section 5 of the FTC Act, 15 U.S.C. § 45(n).”  In other words, billing without adequate authorization was “unfair” because it harmed consumers and violated the statute’s cost-benefit standard – namely, the authorization/billing practices in question caused substantial injury to consumers, that they could not reasonably avoid, and was not outweighed by countervailing benefits to consumers or competition.  The court will next consider the parties’ submissions on what consumer redress (i.e., consumers’ net losses) may be recovered by the FTC.  The court did rule for Amazon, however, on the question of injunctive relief. Amazon won summary judgment against a permanent injunction because the court found that the company had already taken steps to require greater parental authorization, and thus, there was no “cognizable danger of a recurring violation.”

This decision upholding FTC unfairness authority regarding how companies design their online billing interface follows the agency’s prior consent settlements with Apple and Google. Citing the Third Circuit’s decision in FTC v. Wyndham, 799 F.3d 235, 244 (3d Cir. 2015), the court rejected the argument that “unfairness” requires evidence of deceit, or of unethical or unscrupulous behavior.  Instead, the decision turned on judicial precedents holding that “billing customers without permission causes injury for purposes of asserting a claim under Section 5.”   The court’s decision is potentially significant because it rejected arguments that parents could exercise supervision, and thereby avoid the putative injury altogether, or that Amazon’s liberal refund policy would obviate any injury.

The court found that consumers could not reasonably avoid the injury if consumers were not sufficiently aware of the relevant practices to anticipate the harm and pursue potential avenues to mitigate it.  The opinion states that “Amazon’s arguments improperly assume a familiarity with in-app purchases on the part of consumers” and that “a reasonable consumer unaware of the possibility of in-app purchases would not assume [he or] she was authorizing unforeseen charges.”

Also significant was the court’s treatment of the time consumers spent seeking refunds as an additional injury.  Quoting FTC v. Neovi, Inc., 604 F.3d 1150, 1157 (9th Cir. 2010), the court noted that “‘harm need not be monetary to qualify as injury’ and found that time consumers spent contesting unauthorized checks and ‘attempting to get their money back’ contributed to substantial injury.”

Without citing or acknowledging former FTC Commissioner Joshua Wright’s dissent in the agency’s earlier settlement with Apple, the court rejected Amazon’s contention that the “seamless, efficient mobile experience” the company had designed to please consumers was a countervailing benefit requiring consideration under Section 5’s cost-benefit test.  The court dismissed this point by finding that even if a streamlined experience were a “benefit” (the court used the word in quotes), providing a streamlined experience was not incompatible with the practice of seeking affirmative customer authorization.  “Amazon,” it wrote, “has not provided evidence of any customers who reported being upset or harmed by the existence of a password prompt.”

In his Apple dissent, Commissioner Wright had admonished the FTC for failing to credit and defer to the company’s design of a user-pleasing purchasing interface, and consider the impacts on technological innovation:

[T]he nature of Apple’s disclosures on its platform is an important attribute of Apple’s platform that affects the demand for and consumer benefits derived from Apple devices and services. Disclosures made on the screen while consumers interact with mobile devices are a fundamental part of the user experience for products like mobile computing devices. It is well known that Apple invests considerable resources in its product design and functionality. In streamlining disclosures on its platform and in its choice to integrate the fifteen-minute window into Apple users’ experience on the platform, Apple has apparently determined that most consumers do not want to experience excessive disclosures or to be inconvenienced by having to enter their passwords every time they make a purchase.  … Unfairness analysis also requires the Commission to consider the impact of contemplated remedies or changes in the incentives to innovate new product features upon consumers and competition. … [And] discussing some additional dimensions of an economic analysis of the costs and benefits of product disclosures in the context of complicated products and platforms with many attributes, like Apple’s platform, where such disclosures are a critical component of the user experience and have considerable impact upon the value consumers derive from the product.

Dissenting Statement of Commissioner Joshua D. Wright In the Matter of Apple, Inc. FTC File No. 1123108 January 15, 2014 (emphasis added).

In the Amazon decision, like the FTC’s in-app settlements before it, the court the court said the company’s “argument about stifling innovation is too vague . . . to create a genuine issue with respect to this cost-benefit analysis.”

These cases collectively reveal that tech companies have more work to do in persuading decision-makers how impacts on innovation, and the all-important online user experience, should be construed when applying Section 5’s cost-benefit test to allegedly unfair tech practices.