Apple to Refund Customers at Least $32.5 Million In Settlement With FTC

Apple agreed to give full refunds to all consumers affected, totaling at least $32.5 million, but “there is no maximum,” Ramirez said. If the company’s repayments don’t meet the $32.5 million floor, Apple will pay the balance to the FTC, which will put the remainder toward consumer education initiatives, under the settlement (http://1.usa.gov/1apEV8r). Apple also agreed to modify its notification practices for in-app purchases, Ramirez said. Consumers from March 2011 onward are entitled to refunds, because “as far as we are aware there are ongoing complaints,” Ramirez said. “In our view, the problem has not been fixed to date."

The complaint stems from a 15-minute window in which Apple failed to properly notify parents, Ramirez said. When making in-game purchases on apps bought through the Apple App Store, users are prompted to enter their Apple password. Once the password is entered, purchases can be made for 15 minutes without re-entering the password, Ramirez said. “Many parents handed the device back to the child to continue playing, unaware the child can rack up an unlimited amount of purchases for the next 15 minutes.” One girl spent $2,600 on Tap Pet Hotel, Ramirez said, and the FTC saw numerous other cases where children spent hundreds and thousands on games like Dragon Story and Tiny Zoo Friends.

Apple flagged the issue a few years ago and “moved quickly to make improvements,” Cook said in a letter to Apple employees (http://bit.ly/1hYwTrP). The company added “additional steps in the purchasing process” and “last year, we set out to refund any in-app purchase which may have been made without a parent’s permission,” he said. Apple sent emails to 28 million App Store customers and received 37,000 claims for refunds, Cook said. “We will be reimbursing each one as promised,” he said. Apple also faced a 2011 class-action suit on the issue, which it settled in February 2013 (http://bit.ly/1aHjQ9V). Customers had until Jan. 13, 2014, to file a claim for reimbursement (http://bit.ly/1fzapgN).

"Our proposed order is more robust than the class action settlement,” Ramirez said. The relief provided was “limited,” she said. “It did not require Apple to change its practices,” which the FTC’s settlement does, Ramirez said. “It also placed limits on the refunds consumers could obtain from Apple.” For instance, only apps with certain age ratings -- 4-plus, 9-plus and 12-plus -- qualified users for either iTunes credit. Cash refunds were available only if the customer no longer had an active iTunes account, or the claim exceeded $30, according to the settlement. Cook said the company was already meeting the FTC’s higher standard: “The consent decree the FTC proposed does not require us to do anything we weren’t already going to do, so we decided to accept it rather than take on a long and distracting legal fight."

Action Really Needed?

"It seems on its face this was a bit asked and answered,” Association for Competitive Technology Executive Director Morgan Reed told us. “It’s not as clear this action was needed to cause the industry to make corrective behavior.” ACT helps thousands of small- and medium-sized app developers to comply with federal regulations. Reed pointed to Moms with Apps, a group working with more than 150 companies developing apps to ensure there is parental control and transparency on in-app purchasing specifically. But Reed has met previously with the FTC to discuss in-app purchasing, so “I wasn’t surprised the FTC was looking at it,” he said. “The FTC always recognizes and believes in the power of its bully pulpit. It’s a fair question to ask whether or not today’s settlement was as much about exercising its bully pulpit” as it was about correcting “a specific company’s behavior,” he said.

The settlement “sheds light on a growing practice that poses risks to children and families,” said Center for Digital Democracy Executive Director Jeff Chester. “In-app purchasing is becoming the dominant business model in many online games and other children’s entertainment content on mobile phones, tablets and gaming devices.” Many in-app purchasing methods are “unfair and deceptive, taking advantage of children’s vulnerabilities,” he said. Chester encouraged the FTC to issue “industry-wide fair marketing guidelines,” for mobile apps.

"We need a comprehensive set of rules that take into account the cognitive and other developmental needs of children and their vulnerabilities in the digital marketplace,” said Kathryn Montgomery, founding director of American University’s Ph.D. program in communication. Montgomery helped push for the passage of the Children’s Online Privacy Protection Act. “Just as we have principles and rules for safeguarding children’s privacy online, we need a policy for protecting young people and their families from covert and manipulative in-app marketing practices,” she said.

"I commend the FTC for taking action to protect consumers and especially children, who have little understanding of the real-life monetary impact of virtual purchases,” said Sen. Ed Markey, D-Mass., who has introduced numerous bills related to children’s online privacy. Markey also sent a letter to the FTC in 2011 asking it to investigate industry practices for in-app purchasing (http://1.usa.gov/1cqplWH). He applauded Apple on the changes it has already made, while encouraging the FTC to continue its vigilance on mobile apps. “As the use of mobile apps continues to escalate, I encourage the Commission to continue to provide information to all consumers about the marketing and delivery of these applications, especially those targeted to children,” Markey said Wednesday.

The commission will accept public comments on the consent decree until Feb. 14, and Apple has until March to change its in-app purchasing practices, Ramirez said. Commissioners voted 3-1 on the decision, with Commissioner Josh Wright dissenting.