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DRMA

Apple Settles With FTC for $32.5 Million

4 Mar, 2014 By: Linda A. Goldstein


Last month, the Federal Trade Commission (FTC) announced a major settlement with Apple stemming from Apple’s practices of allowing minors to make purchases within the app (in-app purchases) and charge those purchases to the parent’s account. While at first blush, this settlement may seem irrelevant to direct response marketers, in fact there are several lessons be gleaned from it that are highly relevant to the DR community.

The FTC settlement calls for the payment of $32.5 million in restitution and injunctive relief designed to ensure that in the future there is clear affirmative consent for all in-app purchases.

The FTC’s case stemmed from billing practices that allowed users, and in particular kids, to incur charges for items purchased within the app. Essentially the way the billing practices worked when account holders entered their passwords in order to download apps opened a 15-minute window during which users could make unlimited purchases within the app without accountholders having to enter their passwords again. According to the FTC’s complaint, this resulted in a situation whereby kids were incurring substantial charges from purchases made within the app without the accountholder, i.e., the parent, having any idea or granting express consent.

The FTC complaint alleges that Apple received tens of thousands of complaints about unauthorized in-app purchases by children amounting to millions of dollars in unauthorized charges.

Under the terms of the settlement, Apple must modify its billing practices to ensure that Apple obtains the accountholder’s express informed consent prior to billing them for in-app purchases and, if the company gets the consumer’s consent for future charges, consumers must have the option to withdraw their consent at any time. Express informed consent as defined in the proposed order requires an affirmative act of communicating authorization of an in-app purchase (such as entering a password) and a clear and conspicuous disclosure of material information about the charge. The disclosure must appear at least once per mobile device.

In terms of monetary relief, the settlement requires Apple to provide full refunds totaling at least $32.5 million to consumers who were billed for in-app purchases that were incurred by children and were either accidental or not authorized by the accountholder.

The case is of interest to the DR community for a number of reasons. First, it highlights the FTC’s strong focus on ensuring that there is express affirmative consent for any charges that are incurred in a non-traditional manner. Whether the charges are incurred as part of a negative option/recurring billing model, or in some novel fashion such as through charges to a consumer’s telephone bill, the FTC’s view is that the marketer has an obligation to ensure that the consumer has provided express informed consent to the charge through a clear affirmative action.

Indeed, in its press release, the FTC reiterated that its action was “consistent with the fundamental principle that any commercial entity before billing customers has an obligation to notify such customer so what they may be charged for and when” — a principle that applies even to highly reputable and successful companies that offer many popular products or services. Thus this case serves as a reminder that ensuring that consumers provide “express informed consent” to a purchase remains a high priority for the FTC.

The magnitude of the settlement also highlights the FTC’s increasing demand for restitution to consumers even in the absence of actual fraud.

Finally, it is of interest that Commissioner Joshua Wright dissented from the other commissioners principally on the grounds that he did not believe the evidence in the record demonstrated an injury to a significant segment of consumers. Wright felt that the number of consumer complaints represented a small fraction of the total number of consumers who actually downloaded an app and that the small percentage of consumer complaints relative to total sales volume did not warrant forcing Apple to change its billing model.

While Wright was the lone dissenter in this case, this is not the first time in recent months that a commissioner has dissented from the majority on an important issue. It thus appears that for the first time in many years we may be faced with a Commission with decidedly different views on certain key enforcement principles. It will be interesting to see how this plays out in future enforcement actions and FTC rulemaking.

In the interim, direct response marketers who are engaged in any form of negative option marketing or novel billing arrangements would be well advised to look at the manner in which consumer consent is being obtained to ensure that it will meet the FTC’s increasingly stringent requirements for express informed consent.

Linda Goldstein is chair of the Advertising, Marketing and Media division of Manatt, Phelps & Phillips LLP, based in the firm’s New York office. She can be reached at lgoldstein@manatt.com.


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