FTC Sues Amazon: Lessons for Startups Seeking to Monetize Through In-App Purchases

FTC Complaint

As has been widely reported, on July 10, the Federal Trade Commission filed suit against Amazon.com for allegedly failing to do enough to prevent unintentional in-app purchases by children.

Background on Consumer Protection by FTC

In its complaint, the FTC accuses Amazon of violating Section 5 of the FTC Act, which provides:

Unfair or deceptive acts or practices in or affecting commerce [ ] are [ ] unlawful.

The FTC Act defines “unfair” practices as acts that:

“cause[] or [are] likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition”

The FTC’s website refers to Section 5 as the FTC’s basic consumer protection statute.

The FTC’s recent actions with Apple, Google, and Amazon, show the FTC is primarily concerned with the following aspects of company’s seeking to monetize through in-app purchases when children may be using the app.

(1) making sure account holders understand the nature of in-app purchase and the full scope of what an account holder is agreeing to when they download an app and enable in-app purchases;

(2) technological restrictions imposed at the time of an in-app purchase to reasonably prevent a child from making a purchase the account holder does not intend to make (e.g., a second entry of a password, or having to enter credit card information); and

(3) the notice provided to the account holder when and in-app purchase is made.

FTC’s Complaint Against Amazon

According to the FTC’s Complaint, Amazon.com, billed parents and other account holders for children’s activities in apps that are likely to be used by children without having obtained the account holders’ express informed consent.

Some commentators believe the “express informed consent” standard is too rigid and deprives an app designer of the ability to make its own design choices in deciding how to fairly engage with consumers.

The FTC’s “Express Informed Consent” Standard

Some commentators believe the “express informed consent” standard is too rigid and deprives an app designer of the ability to make its own design choices in deciding how to fairly engage with consumers.

In its January settlement with Apple, the FTC defined “express informed consent” as requiring an affirmative act communicating informed authorization of in-app charges that:

(1) is made promptly in relation to in-app activity;

(2) discloses material information related to the billing, including:

  • for a specific in-app purchase: the activity related to the charges; the specific amount of the charge; and the account to be filled; and
  • for potential future in-app purchases: the scope of the charges (including duration and apps to which consent applies); the account to be billed; methods by which an account holder may revoke or modify the scope of consent

(3) takes reasonable steps to verify that the person providing consent is the account holder;

(4) for consent related to potential future purchases, consent must be obtained at least once for each mobile device.

Current Lessons for Startups Related to In-App Purchases

The following are take-aways from the FTC’s recent activity related to in-app purchase:

1) Stayed tuned and see if Amazon prevails.  Amazon believes the FTC’s requirements are too stringent.  If federal courts agree, then the FTC will have to revise its policies concerning in-app purchases.

2) Use your “Terms of Use” to provide clear notice to account holders about what in-app purchases are available and (if applicable) that such purchases can be made without re-entering credit card information.  A clear warning to parents should also be provided if the nature of the app is such that children are likely to use it.

3) Reasonable restrictions on in-app purchases should be imposed.  The restrictions must be balanced with reasonable design and business considerations.  Possible restrictions include: (i) re-entering a password in order to make an in-app purchase; (ii) entering a different password; (iii) having to re-enter at least a portion of credit card information;  or (iv) asking identifying questions or using recognition technology on phones.

4) Provide prompt notice to an account holder of an in-app purchase and/or provide some ability for account holders to stop or reverse a purchase.

5) If you do not intend for children to us the app, take steps to prevent them from doing so, and make this intent clear in your terms of use.