FTC’s Actions on In-App Purchases Reflect Chilling Move Toward “Mother-May-I” Paternalism

amazonFederal regulatory agencies routinely act as table-setters for the plaintiffs’ bar. Class-action lawsuits can require targets of federal enforcement actions, even after those actions end in settlement, to defend against the same allegations in court. A federal judge’s April 3, 2015 dismissal of a class action on the ground that the company had already entered into a settlement with the Federal Trade Commission (FTC), therefore, was a commendable outcome. The underlying FTC action that inspired the suit, however—an industry-wide investigation into companies’ in-app purchase procedures—is far less welcome. The Commission’s investigation is yet another example of government’s steady drift away from respecting permissionless innovation and toward “mother-may-I” paternalism.

FTC’s In-App Purchase Inquest. FTC initiated an investigation in 2011 of various companies’ mobile-app sales practices. The Commission had received complaints from parents that their children were making “unauthorized” purchases on mobile app stores. On January 15, 2014, Apple agreed to settle with FTC over charges that its in-app purchase process constituted an unfair business practice under § 5 of the FTC Act. On September 4, 2014, Google entered into a similar settlement. Both app sellers agreed to provide customers with refunds and alter their app sales practices.

In addition to Google and Apple, FTC also accused Amazon of unfair business practices for failing to prevent “unauthorized” in-app purchases.  Amazon, however, refused to settle the charges. The Commission filed suit on July 10, 2014 in the U.S. District Court for the Western District of Washington. On December 1, 2014, Judge John C. Coughenour denied Amazon’s motion to dismiss.

Plaintiffs’ Bar’s Piece of the Action? In March of 2014, an individual filed suit against Google on behalf of a purported class of plaintiffs, seeking damages and injunctive relief under California law. The plaintiff maintained the suit even after Google agreed in September to reimburse consumers for the allegedly unauthorized purchases and alter their app store purchasing process. Judge Ronald Whyte of the Northern District of California, thankfully, did not appreciate her persistence. He held that in light of the FTC action, the proposed class action failed the “superiority” and “adequacy” requirements of Federal Rule of Civil Procedure 23. The class action would be duplicative of the FTC settlement, Judge Whyte reasoned, wasting judicial resources and imposing needless costs on the defendant.

Regulators Stepping into the Shoes of Parents and App Designers. Google no doubt appreciated that Judge Whyte correctly relieved it of the need to incur duplicative costs on fending off a class action. But neither it, nor the other app-store owners, should have been forced to invest substantial resources on FTC’s investigation in the first place.

Parents are most directly responsible for managing their children’s access to mobile devices and their ability to make purchases. On most, if not all, devices, parents can set controls that prevent in-app purchases. Parents must typically supply a credit-card number to enable to purchases in the first place. If parents hand over devices to their kids with no conditions or controls, they essentially authorize their purchases, so it’s inaccurate for FTC to say that the in-app purchases were “unauthorized.” Also, companies that maintain app stores provide notice that in-app purchases can be made, and the method of making them, in readily-available terms of use. Financial loss from children’s unexpected in-app purchases are, in the words of FTC Act § 5, “reasonably avoidable by consumers,” and thus the companies’ purported failure to protect parents is not unlawfully “unfair.”

FTC is not only stepping into the shoes of parents, it is, as FTC Commissioner Joshua Wright stated in his dissent from the Commission’s complaint against Apple, “substitut[ing] its own judgment for a private firm’s decisions as to how to design its products to satisfy as many users as possible.” Firms such as Apple and Amazon made reasoned business decisions that numerous password requests or frequent disclosure screens would detract from most consumers’ enjoyment of an app. Because of the complex nature of the mobile apps at issue, those companies cannot cost-effectively test for or anticipate every possible problem. Rather than do that, and pass the costs onto consumers who are used to paying nothing or next-to-nothing for apps, Apple and others made the rational decision to fix problems as they arise, which the app-store creators in fact did with regard to children’s in-app purchases.

Under FTC Act § 5, the Commission must undertake a rigorous analysis that demonstrates a product’s alleged harms outweigh any countervailing benefits. FTC did not perform a sufficiently thorough cost-benefit analysis in the In re Apple, Inc. case (a conclusion Commissioner Wright reached in his In re Apple, Inc. dissent) or in the In re Google case (from which Commissioner Wright was recused).

A Chilling Approach. In a recent Wall Street Journal book review, Professor Richard Epstein wrote that with new technology, “The deep challenge for democracy is to develop legal rules, social practices and institutional arrangements that, at some reasonable cost, separate good from bad behavior.” FTC has not met that challenge in its in-app purchase inquest. Rather, the Commission posits a standard of “unfairness” that requires technology companies to anticipate—and preemptively correct—every possible problem that could occur. That halting approach would result in consumer harm, Commissioner Wright wrote in his In re Apple, Inc. dissent, “that is likely to dwarf the magnitude of consumer injury contemplated by the complaint.”

The Commission’s willingness to relieve parents of their responsibility over children’s use of devices also recalls the 1970s-era FTC, when many accused it of being a “national nanny.” A return to that type of “mother-may-I” paternalism would be disastrous for businesses large and small, and for consumers whose lives are enriched by fast-paced innovation.

Also published by Forbes.com on WLF’s contributor page

One thought on “FTC’s Actions on In-App Purchases Reflect Chilling Move Toward “Mother-May-I” Paternalism

  1. Pingback: Court’s “FTC v. Amazon” Decision Endorses Agency’s Disregard for Economic Analysis – The WLF Legal Pulse

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