United States: Amazon's Liability For In-App Buys Weighs In FTC's Favor

Last Updated: May 3 2016
Article by David O. Klein

A federal judge on Tuesday sided with the Federal Trade Commission in finding Amazon liable for charging many customers for unauthorized in-app purchases made by their children, providing a significant boost to the commission's ability to police data collection and privacy practices that it deems to be unfair.

In his ruling, U.S. District Judge John Coughenour rejected Amazon.com Inc.'s argument that the FTC was applying the incorrect legal test in asserting that the online retail giant's billing of parents and other account holders for in-app purchases made without permission by children violated the unfairness prong of Section 5 of the FTC Act.

Instead, the judge backed the FTC's ability to broadly wield arguably the most vital statute in its arsenal in concluding that even though Amazon had provided generous refunds to its customers, they still suffered harm within the meaning of Section 5 because it was "reasonable to conclude" that many of them were never aware that they had made an in-app purchase while using apps that were labeled as "free."

"The ruling affirms the broad scope and strength of the commission's Section 5 authority that covers unfair and deceptive practices, and really drives home the critical importance of consent for any type of online charging practice, particularly when children are involved," Ballard Spahr LLP partner Edward McAndrew said.

The ruling on liability is the culmination of a gamble that Amazon elected to take in 2014, when it chose to fight the commission's ability to characterize its billing practices as unfair rather than take the more common route and settle its claims.

The company's bold move stood out from the decision of two of its main rivals, Apple Inc. and Google Inc., to take the opposite course. Just months before the FTC sued Amazon, Apple agreed to pay $32.5 million to settle similar claims that it allowed kids to run up millions of dollars in in-app purchases without their parents' knowledge, and Google signed a $19 million settlement with the regulator to resolve claims that it unfairly billed customers millions of dollars for in-app purchases made by children using Android mobile devices less than two months after the agency took Amazon to court.

"Google and Apple are likely breathing a sigh of relief now," Davis & Gilbert LLP partner Allison Fitzpatrick said. "In light of the Amazon court's decision, Apple and Google saved themselves many years of legal fees by settling early in their respective case."

Besides providing support for the fellow app providers' decision to settle rather than fight, Judge Coughenour's ruling also guarantees that companies won't see any lull in the FTC's crusade to weed out unfair practices that it views as harmful to a broad swath of consumers, attorneys say.

While Amazon set itself apart from its app-store rivals in pushing back against the commission's unfairness claims, the company wasn't the first to challenge the authority. That distinction goes to Wyndham Worldwide Corp., which in 2012 elected to fight the regulator's allegations that the hotel chain violated the unfairness prong of Section 5 by failing to maintain reasonable and appropriate security measures to safeguard guests' personal data.

Like Amazon, Wyndham argued that the FTC was stretching its unfairness authority too far and had failed to adequately show how the company's data security failures had harmed consumers. But also like Amazon, the hotel chain's efforts were thwarted, first by the district court and finally by the Third Circuit, which ruled in August that the commission's actions were warranted.

"The Amazon ruling, coupled with the prior decision in the Wyndham case, ought to be the final lesson to these companies that the agency's unfairness jurisdiction has teeth and can't just simply be avoided by saying, 'We didn't mean any real harm or have bad intentions, so we're not liable,'" said David Vladeck, who was the director of the FTC's Consumer Protection Bureau from 2009 to 2013 and is now a professor at the Georgetown University Law Center.

With the FTC further emboldened by Tuesday's ruling, companies that are in the business of providing services to customers in the mobile world need to take a close look at their practices, with a special focus on making their disclosures as clear and conspicuous as possible, attorneys say.

When considering how pricing options are presented, companies would be wise to avoid using the blanket "free" label if there is any chance that consumers could incur a charge during their interaction with the app or service being offered, according to attorneys.

Burying disclosures in general terms and services won't fly either, according to Klein Moynihan Turco LLP managing partner David O. Klein. Instead, he advises his clients to clearly present and obtain consent for charges that can be incurred through the app at the outset of their relationship with the customer, and have a mechanism that either reminds them of these charges or prompts them to enter some additional information when a charge is about to be assessed.

"Clients may not like having to take these steps, but that's the gold standard and what is likely to keep them out of trouble," Klein said.

Setting up mechanisms to track consumers' experiences and quickly respond to their complaints can also help reduce backlash, according to attorneys.

"In the consumer protection area, there are many areas without blackletter law," Kelley Drye & Warren LLP partner Alysa Hutnik said. "But many issues can be spotted and addressed with good judgment and a balanced pro-consumer perspective."

However, as the Amazon decision illustrates, companies shouldn't believe that they can escape liability for inadequate disclosures simply by handling consumers' complaints well, according to attorneys.

"The Amazon case offers a number of lessons in consumer protection ... [including that] the word 'free' is a powerful word and any 'free' offer should be made clearly and in close proximity with the word, and a liberal refund policy does not rectify a practice that the FTC determines to be harmful," Fitzpatrick said.

However, despite the blow dealt to Amazon by Tuesday's ruling, the retailer did dodge the commission's bid for an injunction to address potential future violations, with Judge Coughenour ruling that he didn't see "a cognizable danger of a recurring violation" that would warrant the issuance of the requested relief.

While that ruling struck many as surprising — Vladeck said he's been involved in "hundreds of these kinds of cases, and this is the first time I've seen a judge not grant injunctive relief" — the judge's willingness to forgo binding Amazon to continuous monitoring by the court for a practice that it had taken steps to fix and primarily affected users of a Kindle product that has not been sold since 2012 offers some measure of hope to future FTC targets, attorneys said.

"If you can convince the court that you have altered your practices and there is no real concern or substantial likelihood of recurring harm, you may be able to avoid injunctive relief, which is important because that essentially means a company remains under the jurisdiction of the court and can be held in contempt if it violates the terms of the order," McAndrew said. "So not being left under court supervision is a substantial victory for Amazon."

With the ruling on liability and injunctive relief behind them, the parties now turn to the question of how much Amazon should be on the hook for, and whether or not the sum will be on par with what Apple and Google had to pay to resolve their disputes with the commission.

Fitzpatrick pointed out that the number "could be very large," since damages will be calculated based on all in-app charges made by account users without express informed authorization during the period between when Amazon introduced in-app charges and when it moved to obtain account holders' informed consent for these purchases, a gap that the FTC complaint says lasted from 2011 to 2014.

But regardless what final price tag is put on the case, Tuesday's ruling has already sent a clear message about pricing and billing practices to companies that could easily find themselves in the same boat as Amazon, according to attorneys.

"The case is consistent with the FTC's edict and recent actions," Klein said. "It highlights that the agency has moved on from the Internet and into mobile, and that it's policing the industry to make sure that their marketing and disclosures are adequate and that consumers are not hit with charges that they don't intend to incur."

The FTC is represented by Jason Adler, Heather Allen, Jane Ricci, Miya Tandon, Katharine Roller, Helen Wong and Laura Solis.

Amazon is represented by Harry Schneider Jr., David Burman and Jeffrey Hanson of Perkins Coie LLP and J. Douglas Baldridge and Danielle Foley of Venable LLP.

The case is Federal Trade Commission v. Amazon.com Inc., case number 2:14-cv-01038, in the U.S. District Court for the Western District of Washington.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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