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Advertising, Marketing & Promotions Alert >> Amazon Found Liable for Billing Parents for Children’s Unauthorized In-App Charges

May 4, 2016

A federal district court in Washington ruled that Amazon unlawfully billed parents for in-app purchases incurred by their children without express informed consent. According to the court, Amazon’s disclosures regarding in-app purchases for apps labeled “FREE” were not sufficient to inform consumers about the charges in violation of Section 5 of the Federal Trade Commission (FTC) Act.

Background
In 2014, the FTC sued Amazon, Apple and Google, claiming that the billing of parents for in-app purchases incurred by their children without their parents’ express informed consent violated Section 5 of the FTC Act. Apple and Google settled their respective lawsuits, with Apple agreeing to refund $32.5 million and Google agreeing to refund up to $19 million to customers whose children made purchases without parental consent. In contrast to Apple and Google, Amazon decided to litigate the charges.

Earlier this year, the FTC moved for summary judgment against Amazon, arguing that there was no genuine dispute of material fact as to whether Amazon’s billing practices for in-app purchases violated the FTC Act, and sought monetary and injunctive relief.

Amazon’s In-app Purchases
Amazon’s Appstore permits customers to view and download apps for use on Android mobile devices or Kindle Fire tablets. Many apps that are directed to children and are available in the Appstore are labeled “FREE” but offer in-app purchases starting at $0.99 and ranging up to $99.99. These apps – often referred to as “bait apps” – prompt children to pay real money in return for “virtual” currency in the form of doughnuts, stars and acorns that have no value outside the app.

According to the court, when Amazon’s Appstore first implemented in-app purchases in November 2011, the default setting did not require the customer’s approval prior to completion of an in-app purchase, such as by entering a PIN code or a password. Only if a customer previously had enabled parental controls would the in-app purchase require entry of a PIN code or password. The court found that Amazon had received complaints from parents who were surprised to find themselves charged for in-app purchases made by their children.

In March 2012, Amazon introduced a password prompt feature for in-app charges of $20 or more but the prompt did not include charges below $20. In May 2013, Amazon added a password requirement for all first-time in-app purchases on Kindle Fire tablets, and, in June 2014, Amazon refined its password prompt for first-time in-app purchases. Despite these changes, customers who continued to use Kindle’s “first-generation” devices (for which software updates are no longer available) could make in-app purchases of $1 or less without a password.

The Court’s Decision on Liability
In its decision, the court applied a three-part test to determine whether Amazon had committed an unfair practice under Section 5 of the FTC Act.

First, the court decided that Amazon’s billing practices for in-app purchases caused or were likely to cause substantial injury to consumers, reasoning that billing customers without permission caused injury for purposes of asserting a claim under Section 5. The court ruled that, given the design of the Appstore and procedures around in-app purchases, it was “reasonable to conclude that many customers were never aware that they had made an in-app purchase.” The court also determined that time consumers spent pursuing refunds constituted “additional injury” to them, noting that the harm did not need to be “monetary” to qualify as injury.

Second, the court determined that the injury suffered by consumers was not reasonably avoidable by them, rejecting Amazon’s contention that its customers could have avoided injury either before an in-app purchase through parental controls or afterwards by pursuing a refund. In the court’s view, it was unreasonable to expect customers to be familiar with the potential to accrue in-app charges while using apps labeled “FREE.” Moreover, the court found that many of Amazon’s arguments improperly assumed a familiarity with in-app purchases on the part of consumers – noting the differences between online shopping and the spending of real currency to obtain virtual items in a game. The court also observed that from 2011 until June 2013, the “only warning about in-app purchases” that customers would see during the download process on the Appstore was located towards the bottom of a long “description” note that a customer would have to scroll down to see, in the same size and color font as the rest of the text. The court also pointed out that, until Amazon began to introduce password prompts for in-app purchases in March 2012, no affirmative assent to charges – such as a check-box – was required.

Third, the court disagreed with Amazon that the injury to consumers was outweighed by countervailing benefits, such as the benefit of ensuring a streamlined experience. In the court’s view, a streamlined online experience was “not incompatible with the practice of affirmatively seeking a customer’s authorized consent to a charge.” In fact, it said, a “clear and conspicuous disclaimer” regarding in-app purchases and request for authorization on the front-end of a customer’s process actually could prove to better inform customers about their risk of accruing in-app charges and be “more seamless” than the “somewhat unpredictable password prompt formulas rolled out by Amazon.”

Accordingly, the court granted the FTC’s motion, finding that Amazon had violated Section 5 of the FTC Act.

Damages
The court ordered the parties to submit additional evidence regarding the damages that were payable by Amazon. The court determined that the scope of Amazon’s unfair billing practices pertains to all in-app purchases made by customers without express informed authorization. The court further concluded that Amazon’s injurious practices lasted up until customers were clearly informed of the existence of in-app charges and the scope of their consent as of June 3, 2014, thereby potentially amounting to millions of dollars in damages.

Denial of the Injunction
The court denied the FTC’s request for an injunction prohibiting Amazon’s illegal conduct, finding that the FTC had not demonstrated a danger of a recurring violation. The court reasoned that, given the changes Amazon had made to its in-app purchase prompt by June 2014, customers were “clearly informed” both about the existence of in-app charges and the scope of their consent.

According to the court, the only potential ongoing violation of the FTC Act alleged by the FTC was the fact that Amazon customers were still billed for in-app purchases under $1 without authorization on first-generation Kindle devices. The court noted, however, that the first-generation Kindle had not been sold since August 2012 and that it no longer received software updates. Although unauthorized billing of customers, “even for small purchases,” constituted part of the “substantial harm that Amazon caused customers, and for which monetary damages should be assessed,” the court said that this did not represent a cognizable danger of a recurring violation warranting an injunction.

Bottom Line

The court’s decision should serve as a reminder of the importance of ensuring clear and conspicuous disclosure of billing practices, particularly when the charges are incurred by children, and the importance of ensuring appropriate parental controls of in-app purchases directed to children. The FTC will continue to protect against the unauthorized billing of parents for in-app purchases made by their children, particularly now that a federal court has agreed that such conduct constitutes an unfair practice in violation of the law.