[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Notices]
[Pages 3801-3813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01197]
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FEDERAL TRADE COMMISSION
[File No. 112 3108]
Apple Inc.; Analysis of Proposed Consent Order To Aid Public
Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed Consent Agreement.
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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair or deceptive acts or
practices or unfair methods of competition. The attached Analysis of
Proposed Consent Order to Aid Public Comment describes both the
allegations in the draft complaint and the terms of the consent order--
embodied in the consent agreement--that would settle these allegations.
DATES: Comments must be received on or before February 14, 2014.
ADDRESSES: Interested parties may file a comment at https://ftcpublic.commentworks.com/ftc/appleconsent online or on paper, by
following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``Apple Inc.--Consent
Agreement; File No. 112 3108'' on your comment and file your comment
online at https://ftcpublic.commentworks.com/ftc/appleconsenthttps://ftcpublic.commentworks.com/ftc/fidelitynationalconsent by following the
instructions on the web-based form. If you prefer to file your comment
on paper, mail or deliver your comment to the following address:
Federal Trade Commission, Office of the Secretary, Room H-113 (Annex
D), 600 Pennsylvania Avenue NW, Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT: Duane Pozza, Bureau of Consumer
Protection, (202-326-2042), 600 Pennsylvania Avenue NW, Washington, DC
20580.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 2.34, 16 CFR 2.34,
notice is hereby given that the above-captioned consent agreement
containing consent order to cease and desist, having been filed with
and accepted, subject to final
[[Page 3802]]
approval, by the Commission, has been placed on the public record for a
period of thirty (30) days. The following Analysis to Aid Public
Comment describes the terms of the consent agreement, and the
allegations in the complaint. An electronic copy of the full text of
the consent agreement package can be obtained from the FTC Home Page
(for January 15, 2014), on the World Wide Web, at http://www.ftc.gov/os/actions.shtm. A paper copy can be obtained from the FTC Public
Reference Room, Room 130-H, 600 Pennsylvania Avenue NW, Washington, DC
20580, either in person or by calling (202) 326-2222.
You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before February 14,
2014. Write ``Apple Inc.--Consent Agreement; File No. 112 3108'' on
your comment. Your comment--including your name and your state--will be
placed on the public record of this proceeding, including, to the
extent practicable, on the public Commission Web site, at http://www.ftc.gov/os/publiccomments.shtm. As a matter of discretion, the
Commission tries to remove individuals' home contact information from
comments before placing them on the Commission Web site.
Because your comment will be made public, you are solely
responsible for making sure that your comment does not include any
sensitive personal information, like anyone's Social Security number,
date of birth, driver's license number or other state identification
number or foreign country equivalent, passport number, financial
account number, or credit or debit card number. You are also solely
responsible for making sure that your comment does not include any
sensitive health information, like medical records or other
individually identifiable health information. In addition, do not
include any ``[t]rade secret or any commercial or financial information
which . . . is privileged or confidential,'' as discussed in Section
6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR
4.10(a)(2). In particular, do not include competitively sensitive
information such as costs, sales statistics, inventories, formulas,
patterns, devices, manufacturing processes, or customer names.
If you want the Commission to give your comment confidential
treatment, you must file it in paper form, with a request for
confidential treatment, and you have to follow the procedure explained
in FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ Your comment will be kept
confidential only if the FTC General Counsel, in his or her sole
discretion, grants your request in accordance with the law and the
public interest.
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\1\ In particular, the written request for confidential
treatment that accompanies the comment must include the factual and
legal basis for the request, and must identify the specific portions
of the comment to be withheld from the public record. See FTC Rule
4.9(c), 16 CFR 4.9(c).
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Postal mail addressed to the Commission is subject to delay due to
heightened security screening. As a result, we encourage you to submit
your comments online. To make sure that the Commission considers your
online comment, you must file it at https://ftcpublic.commentworks.com/ftc/appleconsent by following the instructions on the web-based form.
If this Notice appears at http://www.regulations.gov/#!home, you also
may file a comment through that Web site.
If you file your comment on paper, write ``Apple Inc.--Consent
Agreement; File No. 112 3108'' on your comment and on the envelope, and
mail or deliver it to the following address: Federal Trade Commission,
Office of the Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue
NW, Washington, DC 20580. If possible, submit your paper comment to the
Commission by courier or overnight service.
Visit the Commission Web site at http://www.ftc.gov to read this
Notice and the news release describing it. The FTC Act and other laws
that the Commission administers permit the collection of public
comments to consider and use in this proceeding as appropriate. The
Commission will consider all timely and responsive public comments that
it receives on or before February 14, 2014. You can find more
information, including routine uses permitted by the Privacy Act, in
the Commission's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.
Analysis of Proposed Consent Order To Aid Public Comment
The Federal Trade Commission (``Commission'') has accepted, subject
to final approval, an agreement containing a consent order from Apple
Inc. (``Apple'').
The proposed consent order has been placed on the public record for
thirty (30) days for receipt of comments by interested persons.
Comments received during this period will become part of the public
record. After thirty (30) days, the Commission will again review the
agreement and the comments received, and will decide whether it should
withdraw from the agreement and take appropriate action or make final
the agreement's proposed order.
Apple bills consumers for charges related to activity within
software applications (``apps'') that consumers download to their
iPhone, iPod Touch, or iPad devices from Apple's App Store. This matter
concerns Apple's billing for charges incurred by children in apps that
are likely to be used by children without having obtained the account
holders' express informed consent.
The Commission's proposed complaint alleges that Apple offers
thousands of apps, including games that children are likely to play,
and that in many instances, children can obtain virtual items within a
game app that cost money. Apple bills parents and other adult account
holders for items that cost money within an app--``in-app charges.'' In
connection with billing for children's in-app charges, Apple sometimes
requests a parent's iTunes password. In many instances, Apple
``caches'' (that is, stores) the iTunes password for fifteen minutes
after it is entered. During this process, Apple in many instances has
not informed account holders that password entry will approve a charge
or initiate a fifteen-minute window during which children using the app
can incur charges without further action by the account holder. The
Commission's proposed complaint alleges that, through these practices,
Apple often fails to obtain parents' informed consent to charges
incurred by children, which constitutes an unfair practice under
Section 5 of the FTC Act.
The proposed order contains provisions designed to prevent Apple
from engaging in the same or similar acts or practices in the future.
Part I of the proposed order requires Apple to obtain express, informed
consent to in-app charges before billing for such charges, and to allow
consumers to revoke consent to prospective in-app charges at any time.
As defined in the proposed order, express, informed consent requires an
affirmative act communicating authorization of an in-app charge (such
as entering a password), made proximate to both an in-app activity for
which Apple is billing a charge and a clear and conspicuous disclosure
of material information about the charge. Under the definition, the act
and disclosure must be reasonably calculated to ensure that the person
providing consent is the account holder (as opposed to the child). The
proposed order would require the disclosure to appear at least once per
mobile device. Apple must come into compliance with the Part I
requirements by March 31, 2014.
[[Page 3803]]
Part II of the proposed order requires Apple to provide full
refunds to Apple account holders who have been billed by Apple for
unauthorized in-app charges incurred by minors. Apple will refund no
less than $32.5 million for these in-app charges in the year following
entry of the order, and if such refunds total less than $32.5 million,
Apple will remit any remaining balance to the Commission to be used for
informational remedies, further redress, or payment to the U.S.
Treasury as equitable disgorgement. To effectuate refunds, Apple must
send an electronic notice to its consumers that clearly and
conspicuously discloses the availability of refunds and instructions on
how to obtain such refunds. Within 30 days of the end of the one-year
redress period, Apple must provide the Commission with records of
refund requests, refunds paid, and any refunds denied.
Parts III through VII of the proposed order are reporting and
compliance provisions. Part III of the proposed order requires Apple to
maintain and upon request make available certain compliance-related
records, including certain consumer complaints and refund requests, for
a period of five years. Part IV is an order distribution provision that
requires Apple to provide the order to current and future principals,
officers, and corporate directors, as well as current and future
managers, employees, agents, and representatives who participate in
certain duties related to the subject matter of the proposed complaint
and order, and to secure statements acknowledging receipt of the order.
Part V requires Apple to notify the Commission of corporate changes
that may affect compliance obligations within 14 days of such a change.
Part VI requires Apple to submit a compliance report 90 days after
March 31, 2014, the date by which Apple is required to come into full
compliance with Part I of the order. It also requires Apple to submit
additional compliance reports within 10 business days of a written
request by the Commission. Part VII is a provision ``sunsetting'' the
order after twenty (20) years, with certain exceptions.
The purpose of this analysis is to aid public comment on the
proposed order. It is not intended to constitute an official
interpretation of the complaint or proposed order, or to modify in any
way the proposed order's terms.
By direction of the Commission, Commissioner Wright dissenting.
Donald S. Clark,
Secretary.
Statement of Chairwoman Edith Ramirez and Commissioner Julie Brill
The Commission has issued a complaint and proposed consent order to
resolve allegations that Apple Inc. unfairly failed to obtain informed
consent for charges incurred by children in connection with their use
of mobile apps on Apple devices in violation of Section 5 of the
Federal Trade Commission Act. Consistent with prior application of the
Commission's unfairness authority, our action today reaffirms that
companies may not charge consumers for purchases that are
unauthorized--a principle that applies regardless of whether consumers
are in a retail store, on a Web site accessed from a desktop computer,
or in a digital store using a mobile device.
As alleged in the Commission's complaint, Apple violated this basic
principle by failing to inform parents that, by entering a password,
they were permitting a charge for virtual goods or currency to be used
by their child in playing a children's app and at the same time
triggering a 15-minute window during which their child could make
unlimited additional purchases without further parental action. As a
consequence, at least tens of thousands of parents have incurred
millions of dollars in unauthorized charges that they could not readily
have avoided. Apple, however, could have prevented these unwanted
purchases by including a few words on an existing prompt, without
disrupting the in-app user experience. As explained below, we believe
the Commission's allegations are more than sufficient to satisfy the
standard governing the FTC Act's prohibition against ``unfair acts or
practices.''
I. Overview of In-App Purchases on Apple Mobile Devices
Apple distributes apps, including games, that are likely to be used
by children on Apple mobile devices through its iTunes App Store. While
playing these games, kids may incur charges for the purchase of virtual
items such as digital goods or currency (known as ``in-app charges'')
at prices ranging from $.99 to $99.99. These in-app charges are billed
to their parents' iTunes accounts. Apple retains thirty percent of the
revenues from in-app charges. As part of the in-app purchasing process,
Apple displays a general prompt that calls for entry of the password
for the iTunes account associated with the mobile device. Apple treats
this password entry as authorizing a specific transaction and
simultaneously allowing additional in-app purchases for 15 minutes.
While key aspects of the in-app purchasing sequence have changed
over time, as described in the Commission's complaint, one constant has
been that Apple does not explain to parents that entry of their
password authorizes an in-app purchase and also opens a 15-minute
window during which children are free to incur unlimited additional
charges. We allege that, since at least March 2011, tens of thousands
of consumers have complained about millions of dollars in unauthorized
in-app purchases by children, with many of them individually reporting
hundreds to thousands of dollars in such charges. As a result, we have
reason to believe, and have alleged in our complaint, that Apple's
failure to disclose the 15-minute window is an unfair practice that
violates Section 5 because it has caused or is likely to cause
substantial consumer injury that is neither reasonably avoidable by
consumers nor outweighed by countervailing benefits to consumers or
competition.\1\
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\1\ 15 U.S.C. 45(n).
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The proposed consent order resolves these allegations by requiring
Apple to obtain informed consent to in-app charges. The order also
requires Apple to provide full refunds, an amount no less than $32.5
million, to all of its account holders who have been billed for
unauthorized in-app charges incurred by minors.\2\
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\2\ Any sum below $32.5 million that is not returned to account
holders is to be paid to the FTC.
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II. Application of the Unfairness Standard
Importantly, the Commission does not challenge Apple's use of a 15-
minute purchasing window in apps used by kids. Rather, our charge is
that, even after receiving at least tens of thousands of complaints
about unauthorized charges relating to in-app purchases by kids, Apple
continued to fail to disclose to parents and other Apple account
holders that entry of a password in a children's app meant they were
approving a single in-app charge plus 15 minutes of further, unlimited
charges.
In asserting that Apple violated Section 5's prohibition against
unfair practices by failing to obtain express informed consent for in-
app charges incurred by kids, we follow a long line of FTC cases
establishing that the imposition of unauthorized charges is
[[Page 3804]]
an unfair act or practice.\3\ This basic tenet applies regardless of
the technology or platform used to bill consumers and regardless of
whether a company engages in deliberate fraud. Indeed, there is nothing
in the unfairness authority we have been granted by Congress or in the
Commission's Unfairness Policy Statement to suggest that our power is
in any way constrained or should be applied differently depending on
the technology or platform at issue, or the intentions of the accused
party.\4\
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\3\ See, e.g., FTC v. Willms, No. 2:11-CV-828 MJP, 2011 WL
4103542, at *9 (W.D. Wash. Sept. 13, 2011); FTC v. Inc21.com Corp.,
745 F. Supp. 2d 975 (N.D. Cal. 2010), aff'd, 475 Fed. Appx. 106 (9th
Cir. Mar. 30, 2012); FTC v. Crescent Publ'g Grp., Inc., 129 F. Supp.
2d 311, 322 (S.D.N.Y. 2001); see also Complaint, FTC v. Jesta
Digital, LLC, No. 1:13-cv-01272 (D.D.C. filed Aug. 20, 2013).
\4\ The FTC need not prove intent to establish a violation of
the FTC Act. See, e.g., Orkin Exterminating Co. v. FTC, 849 F. 2d
1354, 1368 (11th Cir. 1988); Federal Trade Commission Policy
Statement on Unfairness, appended to Int'l Harvester Co., 104 F.T.C.
949, 1070 (1984) (``FTC Unfairness Statement'').
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Our task here, as in all instances in which we assert jurisdiction
over unfair acts or practices, is to determine whether the alleged
unlawful conduct causes or is likely to cause substantial injury that
is not reasonably avoidable by consumers and is not outweighed by
countervailing benefits to consumers or competition. After a full
investigation, we have reason to believe that Apple's conduct
constitutes an unfair practice.
A. Substantial Injury to Consumers
We begin by addressing the issue of harm. It is well established
that substantial injury may be demonstrated by a showing of either
small harm to a large number of people or large harm in the
aggregate.\5\ Both are present here. As alleged in the complaint, in
many individual instances, Apple customers paid hundreds of dollars in
unauthorized charges while thousands of others incurred lower charges
that together totaled large sums. We allege that, in the aggregate, at
least tens of thousands of consumers have complained of millions of
dollars of unauthorized in-app charges by children. Moreover, we have
reason to believe that, for a variety of reasons, many more affected
customers never complained. Some, for example, were undoubtedly
deterred by Apple's stated policy that all App Store transactions are
final. Others who incurred low charges likely did not protest because
of the relatively small dollar value at issue. Indeed, extensive
Commission experience teaches that consumer complaints typically
represent only a small fraction of actual consumer injury.\6\
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\5\ See FTC v. Neovi, Inc., 604 F.3d 1150, 1157 (9th Cir. 2010),
amended, 2010 WL 2365956 (9th Cir. June 15, 2010); Orkin, 849 F.2d
at 1365; FTC Unfairness Statement n.12.
\6\ Likewise, there is research indicating consumers do not
register the vast majority of their complaints about problems with
goods and services. See Amy J. Schmitz, Access to Consumer Remedies
in the Squeaky Wheel System, 39 Pepp. L. Rev. 279, 286 (2012).
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In his dissent, Commissioner Wright expresses the view that the
harm alleged by the Commission involves ``a miniscule percentage of
consumers'' and is therefore insubstantial.\7\ We respectfully
disagree. We find it of little consequence that the number of
complainants is a small fraction of all app downloads, as Commissioner
Wright asserts.\8\ As an initial matter, our complaint focuses on
conduct affecting Apple account holders whose children may unwittingly
incur in-app charges in games likely to be played by kids. The
proportion of complaints about children's in-app purchases as compared
to total app downloads, revenue from the sale of Apple mobile devices,
or Apple's total sales revenue sheds no light on the extent of harm
alleged in this case. More fundamentally, the FTC Act does not give a
company with a vast user base and product offerings license to injure
large numbers of consumers or inflict millions of dollars of harm
merely because the injury affects a small percentage of its customers
or relates to a fraction of its product offerings.
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\7\ Dissenting Statement of Commissioner Joshua D. Wright
(``Wright Dissent'') at 1.
\8\ See id. at 6.
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It is also incorrect that ``in order to qualify as substantial, the
harm must be large compared to any offsetting benefits.'' \9\ This
conflates the third prong of the unfairness test, calling for a
weighing of countervailing benefits against the relevant harm, with the
substantial injury requirement. As shown above, the allegations in the
complaint are more than sufficient to establish substantial injury.\10\
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\9\ Id. (citation and internal quotation marks omitted).
\10\ See, e.g., Orkin, 849 F.2d at 1365 (substantial injury
demonstrated by small injury to large number of customers); FTC v.
Neovi, Inc., 598 F. Supp. 2d 1104, 1115 (S.D. Cal. 2008)
(substantial consumer injury resulted from unauthorized charges to
tens of thousands of consumers), aff'd, 604 F.3d 1150 (9th Cir.
2010); FTC v. Global Mktg. Group, Inc., 594 F. Supp. 2d 1281, 1288-
89 (M.D. Fla. 2008) (millions of dollars in unlawful charges
demonstrated substantial injury); FTC v. Windward Mktg., Inc., No.
1:96-CV-615F, 1997 WL 33642380, at *11 (N.D. Ga. Sept. 30, 1997)
(harm to large number of consumers sufficient to establish
substantial injury).
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B. Injury Not Reasonably Avoidable by Consumers
We also have reason to believe that consumers could not reasonably
avoid the alleged injury. An injury is not reasonably preventable by
consumers unless they had an opportunity to make a ``free and informed
choice'' to avoid the harm.\11\ Before billing parents for in-app
charges by children, Apple presented parents with a generic password
prompt devoid of any explanation that password entry approves a single
charge as well as all charges within the 15 minutes to follow. We do
not think parents acted unreasonably by not averting harm from a 15-
minute window that was not disclosed to them. Consumers cannot avoid or
protect themselves from a practice of which they are not made aware,
and companies like Apple cannot impose on consumers the responsibility
for ferreting out material aspects of payment systems, as FTC
enforcement actions in a variety of contexts make clear.\12\ Apple's
disclosure of the 15-minute window in its Terms and Conditions was not
sufficient to provide consumers with adequate notice.
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\11\ Neovi, 598 F. Supp. 2d at 1115.
\12\ See, e.g., Facebook, Inc., No. C-4365, at 4 (F.T.C. July
27, 2012) (consent order) (requiring ``clear and prominent''
disclosure of certain information material to privacy protections
``separate and apart from'' the detailed privacy policy or terms of
use); Google Inc., No.C-4336, at 3-4 (F.T.C. Oct. 13, 2011) (consent
order) (setting similar requirements).
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Over time, through experience, some parents may infer that entry of
a password opens a 15-minute window during which unlimited purchases
can be made. The receipt of an invoice with unauthorized charges may be
sufficient to alert some parents about the unwanted charges. But that
does not relieve Apple of the obligation to take reasonable steps to
inform consumers of the 15-minute window before the user opens that
window and before Apple places charges on a bill. In light of Apple's
failure to disclose the 15-minute purchasing window, it was reasonable
for parents not to expect that when they input their iTunes password
they were authorizing 15 minutes of unlimited purchases without the
child having to ask the parent to input the password again. There was
nothing to suggest this and thus no ``obligation for them to
investigate further'' as Commissioner Wright suggests.\13\
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\13\ Wright Dissent at 10.
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[[Page 3805]]
C. Injury Not Outweighed by Benefits to Consumers or Competition
Finally, we also have reason to believe that the harm alleged
outweighs any countervailing benefits to consumers or competition from
Apple's practices. This is not a case about Apple's ``choice to
integrate the fifteen-minute window into Apple users' experience on the
platform,'' as Commissioner Wright implies.\14\ What is at issue is
Apple's failure to disclose the 15-minute window to parents and other
account holders in connection with children's apps, not Apple's use of
a 15-minute window as part of the in-app purchasing sequence.
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\14\ Id. at 4.
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Under the proposed consent order, Apple is permitted to bill for
multiple charges within a 15-minute window upon password entry provided
it informs consumers what they are authorizing, allowing consumers to
make an informed choice about whether to open a period during which
additional charges can be incurred without further entry of a
password.\15\ The order gives Apple full discretion to determine how to
provide this disclosure. But we note that the information called for,
while important, can be conveyed through a few words on an existing
prompt. The burden, if any, to users who have never had unauthorized
charges for in-app purchases, or to Apple, from the provision of this
additional information is de minimis.\16\ Nor do we believe the
required disclosure would detract in any material way from a
streamlined and seamless user experience. In our view, the absence of
such minimal, though essential, information does not constitute an
offsetting benefit to Apple's users that even comes close to
outweighing the substantial injury the Commission has identified.
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\15\ See Proposed Order ]] 3, 5 (defining ``Clear and
Conspicuous'' and ``Express, Informed Consent'').
\16\ For this reason alone, it was unnecessary for the
Commission to undertake a study of how consumers react to different
disclosures before issuing its complaint against Apple, as
Commissioner Wright suggests. We also note that the Commission need
only determine that it has a ``reason to believe'' that there has
been an FTC Act violation in order to issue a complaint. 15 U.S.C.
Sec. 45(b).
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Moreover, we are confident that our action today fully preserves
the incentive to innovate and develop digital platforms that are user-
friendly and beneficial for consumers. In this respect, we emphasize
that we do not expect companies ``to anticipate all things that might
go wrong'' when designing a complicated platform or product.\17\ Our
action against Apple is based on its failure to provide any meaningful
disclosures about the 15-minute window in the purchase sequence,
despite receiving at least tens of thousands of complaints about
unauthorized in-app purchases by children and despite having the issue
flagged in high-profile media reports in late 2010 and early 2011.\18\
We recognize that Apple did make certain changes to its in-app purchase
sequence in an attempt to resolve the issue. Most notably, Apple added
a password prompt to the in-app purchase sequence in March 2011. But
for well over two-and-a-half years after that point, the password
prompt has lacked any information to signal that the account holder is
about to open a 15-minute window in which unlimited charges could be
made in a children's app.
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\17\ Wright Dissent at 15 (emphasis in original).
\18\ See, e.g., Cecilia Kang, In-app purchases in iPad, iPhone,
iPod kids' games touch off parental firestorm, Wash. Post, Feb. 8,
2011, available at http://www.washingtonpost.com/wp-dyn/content/article/2011/02/07/AR2011020706073.html; Associated Press, Apple App
Store: Catnip for Free-Spending Kids?, CBS News, Dec. 9, 2010,
available at http://www.cbsnews.com/news/apple-app-store-catnip-for-free-spending-kids/.
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The extent and duration of the unauthorized in-app charges alleged
in the complaint support our conclusion that, while Apple has strong
incentives to cultivate customer goodwill in order to encourage the
purchase of in-app goods and currency and promote the sale of its
mobile devices, these incentives may not be sufficient to produce the
necessary disclosures. Because customers are often unaware of the way
in-app charges work, let alone the possibility of Apple disclosing its
practices, we do not think that Commissioner Wright's belief that Apple
``has more than enough incentives to disclose'' \19\ is justified.
Indeed, his argument appears to presuppose that a sufficient number of
Apple customers will respond to the lack of adequate information by
leaving Apple for other companies. But customers cannot switch
suppliers easily or quickly. Mobile phone and data contracts typically
last two years, with a penalty for early termination. In addition, the
time and effort required to learn another company's operating system
and features, not to mention the general inertia often observed for
consumers with plans for cellular, data, and Internet services, could
very well mean that Apple customers may not be as responsive to Apple's
disclosure policies as seems to be envisioned by Commissioner Wright.
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\19\ Wright Dissent at 14.
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* * * * *
We applaud the innovation that is occurring in the mobile arena.
Today, parents have access to an enormous number and variety of apps
for use by their children. We firmly believe that technological
innovation and fundamental consumer protections can coexist and, in
fact, are mutually beneficial. Such innovation is enhanced, and will
only reach its full potential, if all marketplace participants abide by
the basic principle that they must obtain consumers' informed consent
to charges before they are imposed.
Statement of Commissioner Maureen K. Ohlhausen
I voted to accept for public comment the accompanying proposed
administrative complaint and consent order, settling allegations that
Apple Inc. engaged in unfair acts or practices by billing iTunes
account holders for charges incurred by children in apps that are
likely to be used by children without the account holders' express
informed consent.\1\ I write separately to emphasize that our action
today is consistent with the fundamental principle that any commercial
entity, before billing customers, has an obligation to notify such
customers of what they may be charged for and when, a principle that
applies even to reputable and highly successful companies that offer
many popular products and services.
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\1\ For the reasons given in the Statement of Chairwoman Ramirez
and Commissioner Brill, I believe the complaint meets the
requirements of 15 U.S.C. 45(n) and the Commission's Unfairness
Statement.
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In his dissent, Commissioner Wright lauds the iterative software
design process of rapid prototyping, release, and revision based on
market feedback; this approach has proven to be one of the most
successful methods for balancing design tradeoffs. He also notes that
it can be difficult to forecast problems that may arise with
complicated products across millions of users and expresses concern
that our decision today requires companies to anticipate and fix all
such problems in advance.
I agree with Commissioner Wright that we should avoid actions that
would chill an iterative approach to software development or that would
unduly burden the creation of complex products by imposing an
obligation to foresee all problems that may arise in a
[[Page 3806]]
widely-used product.\2\ I do not believe, however, that today's action
implicates such concerns. First, Apple's iterative approach was not the
cause of the harm the complaint challenges. In fact, Apple's iterative
approach should have made it easier for the company to update its
design in the face of heavy consumer complaints. Second, we are not
penalizing Apple for failing to have anticipated every potential issue
in its complex platform.\3\ The complaint challenges only one billing
issue of which Apple became well aware but failed to address in
subsequent design iterations. By March 2011, consumers had submitted
more than ten thousand complaints to Apple stating that its billing
platform for in-app purchases for children's apps was failing to inform
them about what they were being billed for and when. Although Apple
adjusted certain screens in response and offered refunds, it still
failed to notify account holders that by entering their password they
were initiating a fifteen-minute window during which children using the
app could incur charges without further action by the account holder.
Even if Apple chose to forgo providing this information--the type of
information that is critical for any billing platform, no matter how
innovative, to provide--in favor of what it believed was a smoother
user experience for some users, the result was unfair to the thousands
of consumers who subsequently experienced unauthorized in-app charges
totaling millions of dollars.\4\
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\2\ I am concerned about any action that this agency takes that
is likely to have adverse effects on firms' incentives to innovate.
For example, in the antitrust context, I voted against the
Commission's complaints in Bosch and Google/MMI based in significant
part on my concern that those enforcement actions would hamper
intellectual property rights and innovation more generally. See In
re Motorola Mobility LLC & Google Inc., FTC File No. 121-0120,
Dissenting Statement of Commissioner Maureen K. Ohlhausen (Jan. 3,
2013), available at http://www.ftc.gov/sites/default/files/documents/cases/2013/01/130103googlemotorolaohlhausenstmt.pdf; In re
Robert Bosch GmbH, FTC File No. 121-0081, Statement of Commissioner
Maureen K. Ohlhausen (Nov. 26, 2012), available at http://www.ftc.gov/sites/default/files/documents/cases/2013/04/121126boschohlhausenstatement.pdf.
\3\ The complaint challenges harm that occurred since March
2011, after Apple changed its process to require the entry of the
account holder's iTunes password before incurring any in-app charges
immediately after installation. Previously, the entry of the
password to install an app also opened a fifteen-minute window
during which charges could be incurred without again entering a
password.
\4\ It is also important to note that the Commission's proposed
order does not prohibit the use of the fifteen-minute window nor
require that the account holder input a password for each purchase.
---------------------------------------------------------------------------
Commissioner Wright also argues that under our unfairness authority
``substantiality is analyzed relative to the magnitude of any
offsetting benefits,'' \5\ and concludes that compared to Apple's total
sales or in-app sales, injury was not substantial and that any injury
that did occur is outweighed by the benefits to consumers and
competition of Apple's overall platform. The relevant statutory
provision focuses on the substantial injury caused by an individual act
or practice, which we must then weigh against countervailing benefits
to consumers or competition from that act or practice.\6\ Thus, we
first examine whether the harm caused by the practice of not clearly
disclosing the fifteen-minute purchase window is substantial and then
compare that harm to any benefits from that particular practice, namely
the benefits to consumers and competition of not having a clear and
conspicuous disclosure of the fifteen-minute billing window. It is not
appropriate, however, to compare the injury caused by Apple's lack of
clear disclosure with the benefits of the entire Apple mobile device
ecosystem. To do so implies that all of the benefits of Apple products
are contingent on Apple's decision not to provide a clear disclosure of
the fifteen-minute purchase window for in-app purchases. Such an
approach would skew the balancing test for unfairness and improperly
compare injury ``oranges'' from an individual practice with overall
``Apple'' ecosystem benefits.
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\5\ Dissenting Statement of Commissioner Joshua D. Wright at 5.
\6\ ``The Commission shall have no authority under this section
or section 57a of this title to declare unlawful an act or practice
on the grounds that such act or practice is unfair unless the act or
practice causes or is 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.'' 15 U.S.C. 45(n).
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Dissenting Statement of Commissioner Joshua D. Wright
Today, through the issuance of an administrative complaint, the
Commission alleges that Apple, Inc. (``Apple'') has engaged in ``unfair
acts or practices'' by billing parents and other iTunes account holders
for the activities of children who were engaging with software
applications (``apps'') likely to be used by children that had been
downloaded onto Apple mobile devices.\1\ In particular, the Commission
takes issue with a product feature of Apple's platform that opens a
fifteen-minute period during which a user does not need to re-enter a
billing password after completing a first transaction with the
password.\2\ Because Apple does not expressly inform account holders
that the entry of a password upon the first transaction triggers the
fifteen-minute window during which users can make additional purchases
without once again entering the password, the Commission has charged
that Apple bills parents and other iTunes account holders for the
activities of children without obtaining express informed consent.\3\
---------------------------------------------------------------------------
\1\ Complaint, Apple, Inc., FTC File No. 1123108, at para. 28-30
(Jan. 15, 2014) [hereinafter Apple Complaint].
\2\ As indicated in the complaint, initially the fifteen-minute
window was triggered when an app was downloaded. Id. at para. 16.
Apple changed the interface in March 2011 and subsequently the
fifteen-minute window was triggered upon the first in-app purchase.
Id. at para. 17. See also infra note 13.
\3\ Apple Complaint, supra note 1, at para. 4, 20, 28.
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Today's action has been characterized as nothing more than a
reaffirmance of the concept that ``companies may not charge consumers
for purchases that are unauthorized.'' \4\ I respectfully disagree.
This is a case involving a miniscule percentage of consumers--the
parents of children who made purchases ostensibly without their
authorization or knowledge. There is no disagreement that the
overwhelming majority of consumers use the very same mechanism to make
purchases and that those charges are properly authorized. The injury in
this case is limited to an extremely small--and arguably, diminishing--
subset of consumers. The Commission, under the rubric of ``unfair acts
and practices,'' substitutes its own judgment for a private firm's
decisions as to how to design its product to satisfy as many users as
possible, and requires a company to revamp an otherwise indisputably
legitimate business practice. Given the apparent benefits to some
consumers and to competition from Apple's allegedly unfair practices, I
believe the Commission should have conducted a much more robust
analysis to determine whether the injury to this small group of
consumers justifies the finding of unfairness and the imposition of a
remedy.
---------------------------------------------------------------------------
\4\ Statement of Chairwoman Ramirez and Commissioner Brill at 1.
---------------------------------------------------------------------------
Section 5 of the FTC Act prohibits, in part, ``unfair . . . acts or
practices in or affecting commerce.'' \5\ As set forth in Section 5(n),
in order for an act or practice to be deemed unfair, it must ``cause[]
or [be] likely to cause substantial injury to consumers which is not
reasonably avoidable by consumers themselves and not outweighed by
countervailing benefits to consumers or competition.'' \6\
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\5\ 15 U.S.C. 45(a).
\6\ 15 U.S.C. 45(n).
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[[Page 3807]]
The test the Commission uses to evaluate whether an unfair act or
practice is unfair used to be different. Previously the Commission
considered: whether the practice injured consumers; whether it violated
established public policy; and whether it was unethical or
unscrupulous.\7\ Only after an aggressive enforcement initiative that
culminated in a temporary rulemaking suspension and Congressional
threats of stripping the Commission of its unfairness authority
altogether, was the current iteration of the unfairness test
reached.\8\ Importantly, this articulation, as set forth in the FTC
Policy Statement on Unfairness (``Unfairness Statement''), not only
requires that the alleged injury be substantial, it also includes the
critical requirements that such injury ``must not be outweighed by any
countervailing benefits to consumers or competition that the practice
produces'' and ``it must be an injury that consumers themselves could
not reasonably have avoided.'' \9\
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\7\ FTC Policy Statement on Unfairness, appended to Int'l
Harvester Co., 104 F.T.C. 949, 1070 (1984), available at http://www.ftc.gov/ftc-policy-statement-on-unfairness [hereinafter
Unfairness Statement].
\8\ ABA Section of Antitrust Law, Consumer Protection Law
Developments, 57-59 (2009); J. Howard Beales III, Director, Bureau
of Consumer Protection, Fed. Trade Comm'n, The FTC's Use of
Unfairness Authority: Its Rise, Fall, and Resurrection at 9 (May
2003), available at http://www.ftc.gov/public-statements/2003/05/ftcs-use-unfairness-authority-its-rise-fall-and-resurrection
[hereinafter Beales' Unfairness Speech].
\9\ Unfairness Statement, supra note 7, at 1073.
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As set forth in more detail below, I do not believe the Commission
has met its burden to satisfy all three requirements in the unfairness
analysis. In particular, although Apple's allegedly unfair act or
practice has harmed some consumers, I do not believe the Commission has
demonstrated the injury is substantial. More importantly, any injury to
consumers flowing from Apple's choice of disclosure and billing
practices is outweighed considerably by the benefits to competition and
to consumers that flow from the same practice. Accordingly, I
respectfully dissent from the issuance of this administrative complaint
and consent order.
Introduction
This case requires the Commission to analyze consumer injury under
the unfairness theory in a novel context: an allegation of a failure to
disclose a product feature to consumers that results in some injury to
one group of consumers but that generates benefits for another group.
The circumstances surrounding Apple's decision to forgo disclosing
during the transaction the fifteen-minute window to its users--and
according to the Commission's complaint, thereby failing to obtain
express informed consent--are distinguishable from any other prior
Commission case alleging unfairness. The economic consequences of the
allegedly unfair act or practice in this case--a product design
decision that benefits some consumers and harms others--also differ
significantly from those in the Commission's previous unfairness cases.
The Commission commonly brings unfairness cases alleging failure to
obtain express informed consent. These cases invariably involve conduct
where the defendant has intentionally obscured the fact that consumers
would be billed. Many of these cases involve unauthorized billing or
cramming--the outright fraudulent use of payment information.\10\ Other
cases involve conduct just shy of complete fraud--the consumer may have
agreed to one transaction but the defendant charges the consumer for
additional, improperly disclosed items.\11\ Under this scenario, the
allegedly unfair act or practice injures consumers and does not provide
economic value to consumers or competition. In such cases, the
requirement to provide adequate disclosure itself does not cause
significant harmful effects and can be satisfied at low cost.
---------------------------------------------------------------------------
\10\ See, e.g., Complaint at 6, FTC v. Jesta Digital, LLC, Civ.
No. 1:13-cv-01272 (D.D.C. Aug. 20, 2013) (alleging that ``Jesta
charged consumers who did not click on the subscribe button and
charged consumers for products they did not order.''); Complaint,
FTC v. Wise Media, LLC, Civ. No. 1:13-CV-1234 (N.D. Ga. Apr. 16,
2013) (alleging that defendants charge consumers for purported
services without consumers ever knowingly signing up for such
services).
\11\ Complaint at 15-16, FTC v. JAB Ventures, LLC, Civ No. CV08-
04648 (RZx) (C.D. Cal. July 8, 2008) (alleging unauthorized billing
when defendants charged consumers who had cancelled their enrollment
or who had not been adequately informed about negative option
features); FTC v. Crescent Publ'g Group, Inc., 129 F. Supp. 2d 311
(S.D.N.Y. 2001) (pornography Web site failing to disclose the point
at which a ``free tour'' ended and a monthly membership would
begin).
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However, the particular facts of this case differ in several
respects from the above scenario. First, there is no evidence Apple
intended to harm consumers by not disclosing the fifteen-minute
window.\12\ For example, when Apple began receiving complaints about
children making unauthorized in-app purchases on their parents' iTunes
accounts, the company took steps to address the problem.\13\ In
addition, Apple has an established relationship with its customers and
its business model depends upon customer satisfaction and repeat
business.
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\12\ By distinguishing the facts of this case from other
unfairness cases brought by the Commission alleging the failure to
obtain express informed consent, I do not imply that intent is a
required element of the analysis. However, I think drawing the
distinction informs the discussion. Furthermore, I am unaware that
the Commission has ever exercised its unfairness authority where it
has alleged only that the defendant inadvertently charged consumers.
\13\ See Chris Foresman, Apple facing class-action lawsuit over
kids' in-app purchases, arstechnica, Apr. 15, 2011, http://arstechnica.com/apple/2011/04/apple-facing-class-action-lawsuit-over-kids-in-app-purchases/ (``After entering a password to purchase
an app from the App Store, the password now has to be reentered in
order to make any initial in-app purchases.'').
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Second, rather than an unscrupulous or questionable practice, the
nature of Apple's disclosures on its platform is an important attribute
of Apple's platform that affects the demand for and consumer benefits
derived from Apple devices and services. Disclosures made on the screen
while consumers interact with mobile devices are a fundamental part of
the user experience for products like mobile computing devices. It is
well known that Apple invests considerable resources in its product
design and functionality.\14\ In streamlining disclosures on its
platform and in its choice to integrate the fifteen-minute window into
Apple users' experience on the platform, Apple has apparently
determined that most consumers do not want to experience excessive
disclosures or to be inconvenienced by having to enter their passwords
every time they make a purchase.
---------------------------------------------------------------------------
\14\ Nigel Hollis, The Secret to Apple's Marketing Genius (Hint:
It's Not Marketing), The Atlantic, July 11, 2011, http://www.theatlantic.com/business/archive/2011/07/the-secret-to-apples-marketing-genius-hint-its-not-marketing/241724/(in discussing
Apple's functionality, ``[u]sing an Apple product feels so natural,
so intuitive, so transparent, that sometimes, even people paid to
know what makes products great completely miss the cause of their
addiction to Apple products. It's the natural, intuitive
transparency of the technology. The superlative product experience
comes from an unusual combination of human and technical
understanding, and it creates the foundation of all the other
positive aspects of the brand.''); Peter Eckert, Dollars And Sense:
The Business Case For Investing In UI Design, Fast Company, Mar. 15,
2012, http://www.fastcodesign.com/1669283/dollars-and-sense-the-business-case-for-investing-in-ui-design (``As we have seen with
Apple's success, creating products that offer as much simplicity as
functionality drives market share and premium pricing.''). See also
Neil Hughes, Apple's research & development costs ballooned 32% in
2013 to $4.5B, Apple Insider, Oct. 30, 2013, http://appleinsider.com/articles/13/10/30/apples-research-development-costs-ballooned-32-in-2013-to-45b; Cliff Kuang, The Six Pillars of
Steve Jobs' Design Philosophy, Fast Company, Nov. 7, 2011, http://www.fastcodesign.com/1665375/the-6-pillars-of-steve-jobss-design-philosophy.
---------------------------------------------------------------------------
The Commission has long recognized that in utilizing its authority
to deem an act or practice as ``unfair'' it must undertake a much more
rigorous
[[Page 3808]]
analysis than is necessary under a deception theory.\15\ As a former
Bureau Director has noted, ``the primary difference between full-blown
unfairness analysis and deception analysis is that deception does not
ask about offsetting benefits. Instead, it presumes that false or
misleading statements either have no benefits, or that the injury they
cause consumers can be avoided by the company at very low cost.'' \16\
It is also well established that one of the primary benefits of
performing a cost-benefit analysis is to ensure that government action
does more good than harm.\17\ The discussion below explains why I
believe the Commission's action today fails to satisfy the elements of
the unfairness framework and thereby conclude that placing Apple under
a twenty-year order in a marketplace in which consumer preferences and
technology are rapidly changing is very likely to do more harm to
consumers than it is to protect them.
---------------------------------------------------------------------------
\15\ Int'l Harvester Co., 104 F.T.C. 949, 1070 (1984); Beales'
Unfairness Speech, supra note 8, Sec. III.
\16\ Beales' Unfairness Speech, supra note 8, Sec. III.
\17\ Int'l Harvester, 104 F.T.C. at 1070.
---------------------------------------------------------------------------
I. The Evidence Does Not Support a Finding of Substantial Injury as
Required by the Unfairness Analysis
Apple's choice to include the fifteen-minute window in its platform
design, and its decision on how to disclose this window, resulted in
harm to a small fraction of consumers. Any consumer harm is limited to
parents who incurred in-app charges that would have been avoided had
Apple instead designed its platform to provide specific disclosures
about the fifteen-minute window for apps with in-app purchasing
capability that are likely to be used by children. That harm to some
consumers results from a design choice for a platform used by millions
of users with disparate preferences is not surprising. The failure to
provide perfect information to consumers will always result in ``some''
injury to consumers. The relevant inquiry is whether the injury to the
subset of consumers is ``substantial'' as contemplated by the
Commission's unfairness analysis. Consumer injury may be established by
demonstrating the allegedly unfair act or practice causes ``a very
severe harm to a small number'' \18\ of people or ``a small harm to a
large number of people.'' \19\ While it is possible to demonstrate
substantial injury occurred as a result of an act or practice causing a
small harm to a large number of consumers, substantiality is analyzed
relative to the magnitude of any offsetting benefits.\20\ This is
particularly critical when the allegedly unfair practice is not a
fraudulent activity such as unauthorized billing or cramming, where
there are no offsetting benefits.
---------------------------------------------------------------------------
\18\ Int'l Harvester, 104 F.T.C. at 1064.
\19\ Unfairness Statement, supra note 7, at n.12.
\20\ Beales' Unfairness Speech, supra note 8, Sec. III
(``relative to the benefits, the injury may still be substantial''
and ``[t]o qualify as substantial, an injury must be real, and it
must be large compared to any offsetting benefits.'').
---------------------------------------------------------------------------
By reasonable measures of the potential harms and benefits
available to the Commission, the injury is relatively small and not
necessarily substantial in this case. The complaint alleges Apple has
received ``at least tens of thousands of complaints related to
unauthorized in-app charges by children'' \21\ while playing games
acquired on Apple's platform, which supports all music, books, and
applications purchased for use with Apple mobile devices (e.g., iPhone,
iPad, iPod, hereinafter ``iDevices''). Although ``tens of thousands''
sounds like a large number, the unfairness inquiry requires this number
be evaluated in an appropriate context. Apple announced its 50
billionth app download in May 2013.\22\ Even 200,000 complaints in 50
billion downloads would represent only four complaints in a million,
which is quite a small fraction.
---------------------------------------------------------------------------
\21\ Apple Complaint, supra note 1, at para. 24.
\22\ Press Release, Apple, Inc., Apple's App Store Marks
Historic 50 Billionth Download (May 16, 2013), available at http://www.apple.com/pr/library/2013/05/16Apples-App-Store-Marks-Historic-50-Billionth-Download.html.
---------------------------------------------------------------------------
In addition, the complaint presents a few examples in which
children made unauthorized in-app purchases that were relatively large,
some greater than $500, and one bill as high as $2,600.\23\ There is
undoubtedly consumer harm in these instances, assuming the purchases
are correctly attributed to the alleged failure to disclose, but again,
in order to qualify as substantial, the harm ``must be large compared
to any offsetting benefits.'' \24\
---------------------------------------------------------------------------
\23\ Apple Complaint, supra note 1, at para. 25-26.
\24\ Beales' Unfairness Speech, supra note 8, Sec. III.
---------------------------------------------------------------------------
The relevant economic context required to understand substantiality
of injury in this case includes the proportions of populations
potentially harmed and benefitted by the failure to disclose product
features in this case. A measure of harm that gives weight to both the
number of consumers harmed and the size of the individual harms is the
ratio of the value of unauthorized purchases to the total sales
affected by the practice. We can construct such a measure as follows.
The $32.5 million in consumer refunds required by the consent decree
presumably relates in some way to the harm arising from Apple's
disclosure practices. Recognizing that monetary amounts emerging from
consent decrees are a product of compromise and an assessment of
litigation risk, suppose that the value of unauthorized purchases is
ten times higher than the negotiated settlement amount. This assumption
gives a conservatively high estimate of $325 million in unauthorized
purchases since the inception of the App Store. The total sales
affected by Apple's disclosure practices likely include not only the
sale of apps and in-app purchases, but also the sale of iDevices. This
is likely because the benefits from using apps and making in-app
purchases are components of the stream of benefits generated by
iDevices, and a customer's decision to purchase an iDevice will depend
upon the stream of benefits derived from the device. Indeed, the degree
of integration across all components of Apple's platform is remarkably
high, suggesting that Apple's disclosure practices may affect all
Apple's sales. For completeness, Charts 1 and 2 below measure the
estimated harm as a fraction of all three variants of Apple's sales--
App Store sales, iDevice sales, and total sales. These data are
available from Apple's Annual Reports and press releases.
Chart 1 shows that the estimated value of the harm is a miniscule
fraction of both Apple total sales (about six one-hundredths of one
percent) and iDevice sales (about eight one-hundredths of one percent)
over the five-year period from the inception of the App Store to
September 2013. This measure of harm, a conservatively high estimate,
is also a relatively small fraction of App Store sales (about 4.6
percent).
[[Page 3809]]
[GRAPHIC] [TIFF OMITTED] TN23JA14.060
Sources: Apple, Inc., Annual Reports for 2009-2013 (Form 10-K);
Marin Perez, Apple App Store A $1.2 Billion Business In 2009,
InformationWeek, June 11, 2008, available at http://
www.informationweek.com/mobile/mobile-devices/apple-app-store-a-$12-
billion-business-in-2009/d/d-id/1068794; Apple Complaint, supra note 1
(for the $32.5 million settlement amount).
Chart 2 illustrates the same relationship with respect to Apple
sales growth over the last 13 years.
[[Page 3810]]
[GRAPHIC] [TIFF OMITTED] TN23JA14.061
Sources: Same as Chart 1, plus Apple, Inc., Annual Reports for
2002-2008 (Form 10-K). Calculations assume the App Store sales and
estimated unauthorized purchases grew at a constant percentage growth
rate from 2009 through 2013.
Taking into account the full economic context of Apple's choice of
disclosures relating to the fifteen-minute window undermines the
conclusion that any consumer injury is substantial.
II. At Least Some of the Injury Could Be Reasonably Avoided by
Consumers
The Unfairness Statement provides that the ``injury must be one
which consumers could not reasonably have avoided.'' \25\ In explaining
that requirement the Commission noted, ``[i]n some senses any injury
can be avoided--for example, by hiring independent experts to test all
products in advance, or by private legal actions for damages--but these
courses may be too expensive to be practicable for individual consumers
to pursue.'' \26\ The complaint does not allege that the undisclosed
fifteen-minute window is an unfair practice as to any consumer other
than parents of children playing games likely to be played by children
that have in-app purchasing capability.\27\ In the instant case, it is
very likely that most parents were able to reasonably avoid the
potential for injury, and this avoidance required nothing as drastic as
hiring an independent expert, but rather common sense and a modicum of
diligence.
---------------------------------------------------------------------------
\25\ Unfairness Statement, supra note 7, at 1074.
\26\ Unfairness Statement, supra note 7, at n.19.
\27\ Indeed, there are many financial, banking, and retail apps
and Web sites that allow consumers to conduct a series of
transactions after entering a password only once. These services
usually only require re-entry of a password after a certain amount
of time has elapsed, or the session expires because of inactivity on
the user's part. It is doubtful that the Commission would bring an
unfairness case because these services do not disclose this window.
---------------------------------------------------------------------------
The harm to consumers contemplated in the complaint involves app
functionality that changed over time. In the earliest timeframe, the
harm occurred when a parent typed in their Apple password to download
an app with in-app purchase capability, handed the Apple device to
their child, and then unbeknownst to the parent, the child was able to
make in-app purchases by pressing the ``buy'' button during the
fifteen-minute window in which the password was cached. This was
apparently an oversight on Apple's part. When it came to the company's
attention, Apple implemented a password prompt for the first in-app
purchase after download.\28\
---------------------------------------------------------------------------
\28\ See Foresman, supra note 13.
---------------------------------------------------------------------------
During the later timeframe, after being handed the Apple device, a
child again would press the ``buy'' button to make an in-app purchase.
At this point, the child would have needed to turn the device back over
to the parent for entry of the password. Alternatively, some children
may have known their parent's password and entered it themselves. In
either case, the fifteen-minute window was opened and additional in-app
purchases could be made without further password prompts.
Under the first scenario, account holders received no password
prompt for the first in-app purchase and thus
[[Page 3811]]
the injury experienced by some consumers arguably may not have been
reasonably avoidable. Because the opening of the fifteen-minute window
in this context does not appear to be a product design feature, but
rather an unintended oversight, I will focus my attention upon the harm
experienced by consumers in the latter scenario and discuss their
ability to reasonably avoid it.
Irrespective of the existence of the fifteen-minute window, a user
can only make an in-app purchase by pressing a ``buy'' button while
engaging with the app. In other words, the user must decide to make an
in-app purchase. To execute the first in-app purchase, the user must
enter a password. The fifteen-minute window eliminates the second step
of verification--entering a password--only after the user has made the
first in-app purchase by clicking the ``buy'' button and entering the
password.
By entering their password into the Apple device--an action that is
performed in response to a request for permission--parents were
effectively put on notice that they were authorizing a transaction.\29\
Although the complaint alleges that the fifteen-minute window was not
expressly disclosed to parents, regular users of Apple's platform
become familiar with the opportunity to make purchases without entering
a password every time.\30\ Even if some parents were not familiar with
the fifteen-minute window, the requirement to re-enter their password
to authorize a transaction arguably triggered some obligation for them
to investigate further, rather than just to hand the device back to the
child without further inquiry.\31\
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\29\ Furthermore, Apple sends an email receipt to the iTunes
account holder after a purchase has been made in the either the
iTunes or App Store. See e.g., http://www.apple.com/privacy/.
\30\ To the extent that users read the Apple Terms and
Conditions when they opened their iTunes accounts, consumer injury
would also have been avoided. The Terms and Conditions explain the
fifteen-minute window and other aspects of how Apple's platform
works, including the App Store. It appears that Apple has included
these explanations since at least June 2011. See http://www.apple.com/legal/internet-services/itunes/us/terms.html#SALE
(Apple's current Terms and Conditions) and http://www.proandcontracts.com/wp-content/uploads/2011/06/2011.06.09-iTunes-Terms-and-Conditions-June-2011-Update-with-Highlighting.pdf
(cached copy of what appears to be its Terms and Conditions as of
June 2011).
\31\ The Terms and Conditions also explain how to use the
parental control settings to control how the App Store works. See
http://support.apple.com/kb/HT1904 and http://support.apple.com/kb/HT4213. These parental control settings allow users to disable in-
app purchasing capability as well as establish settings that require
a password each time a purchase is made, thereby eliminating the
fifteen-minute window.
---------------------------------------------------------------------------
III. Any Consumer Injury Caused by Apple's Platform Is Outweighed by
Countervailing Benefits to Consumers and Competition
Assuming for the moment there is at least some harm that consumers
cannot reasonably avoid, the question turns to whether the harms are
substantial relative to any benefits to competition or consumers
attributable to the conduct. In performing this balancing, the
Commission must also take ``account of the various costs that a remedy
would entail. These include not only the costs to the parties directly
before the agency, but also the burdens on society in general in the
form of increased paperwork, increased regulatory burdens on the flow
of information, reduced incentives to innovation and capital formation,
and similar matters.'' \32\ I now turn to that question.
---------------------------------------------------------------------------
\32\ Unfairness Statement, supra note 7, at 1073-74.
---------------------------------------------------------------------------
A. Apple's Platform as a Benefit to Consumers and Competition
Unfairness analysis requires an evaluation and comparison of the
benefits and costs of Apple's decision not to increase or enhance its
disclosure of how Apple's platform works, including the fifteen-minute
window. The fifteen-minute window is a feature of Apple's platform that
applies to purchases of songs, books, apps, and in-app purchases. This
feature has long been a part of the iTunes Store for downloading music,
and regular users of iTunes apparently value it. In the context here,
disclosure is perhaps better thought of as a product attribute--
guidance--that Apple provides to the customer through on-screen and
other explanations of how to use Apple's platform.\33\
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\33\ Compare the disclosure contemplated here with disclosure in
the mortgage context, for example. Here, the disclosure itself--or
the guidance offered while the user is interacting with the
product--is an intrinsic part of the product's value. Indeed,
Apple's business model is built on offering an integrated platform
with a clean design that customers find intuitive and easy to use.
The way the platform is presented, including disclosures or guidance
offered during use, is a critically important component of value. In
the mortgage context, the disclosures signed at closing are not a
significant component of the value of the mortgage.
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In deciding what guidance to provide and how to provide it, firms
face two important issues. First, since it is generally not possible to
customize guidance for every individual customer, the optimal guidance
inevitably balances the needs of different customers. In drawing this
balance, the potential for harm from misinterpretation is likely
important in deciding which customer on the sophistication spectrum
might represent the least common denominator for directing the
guidance. For any given degree of guidance, some customers will get it
immediately, while others will have to work harder. If the potential
for harm is very large, e.g., harm from a drug overdose, then both the
firm and consumers want obvious, strong disclosures about dosage, and
perhaps other steps like childproof caps. If the potential for harm is
small, then strong guidance (or caps that are hard to open in the drug
context) may make it more costly for consumers to use the product.
Platform designers clearly face such tradeoffs in their decision-making
regarding guidance and disclosures. Apple clearly faces the same
tradeoff with respect to its decisions concerning the fifteen-minute
window. This tradeoff is relevant for evaluating the benefit-cost test
at the core of unfairness analysis.
Second, because it is difficult to anticipate the full set of
issues that might benefit from guidance of various types, the firm must
decide how much time to spend researching, discovering, and potentially
fixing possible issues ex ante versus finding and fixing issues as they
arise. With complex technology products such as computing platforms,
firms generally find and address numerous problems as experience is
gained with the product. Virtually all software evolves this way, for
example. This tradeoff--between time spent perfecting a platform up
front versus solving problems as they arise--is also relevant for
evaluating unfairness.
Apple presumably weighs the costs and benefits to Apple of
different ways to provide guidance. In doing so, Apple must consider:
(i) The benefit to Apple of greater sales of mobile devices, music,
books, apps, and in-app components to customers who benefit from the
additional guidance and make more purchases; (ii) the cost to Apple of
fewer sales of mobile devices, music, books, apps, and in-app
components by customers who find that more real-time guidance hampers
their experience; and (iii) the cost to Apple of developing and
implementing more guidance. In weighing (i) and (ii), Apple is
particularly concerned about the effects on the sales of mobile devices
that use Apple's platform, as they constitute the bulk of Apple's
business, as indicated in Charts 1 and 2.\34\
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\34\ In 2012, sales of the iPhone, iPad, and iPod accounted for
over 76 percent of Apple's $157 billion in sales. See Apple, Inc.,
Annual Report (Form 10-K), at 73 (Oct. 31, 2012), available at
http://files.shareholder.com/downloads/AAPL/2661211346x0xS1193125-12-444068/320193/filing.pdf.
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[[Page 3812]]
The relevant universe for assessing unfairness of Apple's guidance
provision, including disclosures relating to the fifteen-minute window,
is the set of users to whom the guidance is directed. This includes all
users of Apple's platform who might make online purchases through the
platform.
The ratio of estimated unauthorized purchases in this case to all
purchases made by users of Apple's platform is miniscule, as Charts 1
and 2 illustrate. This fact, by itself, does not establish that the
benefits of Apple's decision to forgo additional guidance of the type
required by the consent order outweigh its costs. However, the
remarkably low ratio does provide perspective on the following
question: How much would the average non-cancelling customer need to be
harmed by a requirement of additional guidance in order to outweigh the
benefit of preventing harm to other consumers? Suppose the fraction of
customers that would benefit from additional guidance is approximated
by the ratio of estimated unauthorized purchases to total sales of
iDevices. The analysis in Charts 1 and 2 indicates that estimated
unauthorized purchases have been about 0.08 percent of iDevice-related
sales since the App Store was launched. Suppose that customers that
make unauthorized purchases cancel them and seek a refund. Suppose also
that the time cost involved in seeking a refund return is $11.95.\35\
Then, if the average harm to non-cancelling customers from additional
guidance sufficient to prevent cancellations is more than about a penny
per transaction, the additional guidance will be counter-
productive.\36\x
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\35\ The $11.95 figure represents the seasonally adjust average
earnings per half hour across all employees on private nonfarm
payrolls, as reported by the Bureau of Labor and Statistics in May
2013. See http://www.bls.gov/news.release/empsit.t19.htm for the
most recent report. The assumption is that customers that asked for
returns were reimbursed for the charges as Apple attests, and that
obtaining a reimbursement takes half an hour.
\36\ Let Y be the harm to non-cancelling customers from
additional guidance sufficient to prevent cancellations. This harm
will just equal the benefit of avoiding cancellations if (%
Cancelling) x (Refund Time Cost) - (% Not Cancelling) x Y = 0.
Assuming (% Cancelling) is .0008, (Refund Time Cost) is $11.95, and
(% Not Cancelling) is .9992, solving for Y gives Y = $.009. In other
words, if the harm to non-cancelling customers from additional
guidance is more than roughly one cent for each transaction, then
then the costs of the additional guidance will outweigh the
benefits.
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To be clear, the sales of iDevices are not an estimate of consumer
benefits but rather they approximate the total universe of economic
activity implicated by the Commission's consent order. Similarly,
estimated unauthorized purchases merely approximate the total universe
of consumers potentially harmed by Apple's practices. The harm from
Apple's disclosure policy is limited to users that actually make
unauthorized purchases. However, the potential benefits from Apple's
disclosure choices are available to the entire set of iDevice users
because these are the consumers capable of purchasing apps and making
in-app purchases. The disparity in the relative magnitudes of these
universes of potential harms and benefits suggests, at a minimum, that
further analysis is required before the Commission can conclude that it
has satisfied its burden of demonstrating that any consumer injury
arising from Apple's allegedly unfair acts or practices exceeds the
countervailing benefits to consumers and competition.\37\
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\37\ Commissioner Ohlhausen suggests that our unfairness
analysis compares inappropriately the injury caused by Apple's lack
of clear disclosure with the benefits of Apple's disclosure policy
to the entire ecosystem. She argues that this approach ``skew[s] the
balancing test for unfairness and improperly compare[s] injury
`oranges' from an individual practice with overall `Apple' ecosystem
benefits.'' Statement of Commissioner Ohlhausen at 3. For the
reasons discussed, this analysis misses the point.
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Nonetheless, the Commission effectively rejects an analysis of
tradeoffs between the benefits of additional guidance and potential
harm to some consumers or to competition from mandating guidance by
assuming that ``the burden, if any, to users who have never had
unauthorized charges for in-app purchases, or to Apple, from the
provision of this additional information is de minimis'' and that any
mandated disclosure would not ``detract in any material way from a
streamlined and seamless user experience.'' I respectfully disagree.
These assumptions adopt too cramped a view of consumer benefits under
the Unfairness Statement and, without more rigorous analysis to justify
their application, are insufficient to establish the Commission's
burden.
B. The Costs and Benefits to Consumers and Competition of Apple's
Product Design and Disclosure Choices
To justify a finding of unfairness, the Commission must demonstrate
the allegedly unlawful conduct results in net consumer injury. This
requirement, in turn, logically implies the Commission must demonstrate
Apple's chosen levels of guidance are less than optimal because
consumers would benefit from additional disclosure. There is a
considerable economic literature on this subject that sheds light upon
the conditions under which one might reasonably expect private
disclosure levels to result in net consumer harm.\38\
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\38\ Disclosure in this context is analogous to a quality
decision that may affect different customers differently. A. Michael
Spence, Monopoly, Quality and Regulation, 6 Bell J. of Econ. 417-29
(1975); Eytan Sheshinski, Price, Quality and Quantity Regulation in
Monopoly Situations, 43 Economica 127-37 (1976). The analysis of
this issue is also explained in Jean Tirole, The Theory of
Industrial Organization Sec. 2.2.1 (MIT Press 1988).
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To support the complaint and consent order the Commission issues
today requires evidence sufficient to support a reason to believe that
Apple will undersupply guidance about its platform relative to the
socially optimal level. Economic theory teaches that such a showing
would require evidence that ``marginal'' customers--the marginal
consumer is the customer that is just indifferent between making the
purchase or not at the current price--would benefit less from the
consent order than the ``inframarginal'' customers who are willing to
pay significantly more for the product than the current price and
therefore would purchase the product irrespective of a small adjustment
in an attribute. Nobel Laureate Michael Spence points out in his
seminal work on the subject that this analysis generally requires
information on the valuations of inframarginal consumers.\39\ Here,
marginal consumers are those who would not have made in-app purchases
if Apple would have disclosed the fifteen-minute window. Inframarginal
consumers are those Apple customers who would not change their
purchasing behavior in response to a change in Apple's disclosures.
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\39\ Spence, supra note 38.
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Staff has not conducted a survey or any other analysis that might
ascertain the effects of the consent order upon consumers. The
Commission should not support a case that alleges that Apple has
underprovided disclosure without establishing this through rigorous
analysis demonstrating--whether qualitatively or quantitatively--that
the costs to consumers from Apple's disclosure decisions have
outweighed benefits to consumers and the competitive process. The
absence of this sort of rigorous analysis is made more troublesome in
the context of a platform with countless product attributes and where
significant consumer benefits are intuitively obvious and borne out by
data available to the Commission. We cannot say with certainty whether
the average consumer would benefit more or less than the marginal
consumer from additional disclosure without empirical evidence. This
evidence might come
[[Page 3813]]
from a study of how customers react to different disclosures. However,
given the likelihood that the average benefit of more disclosure to
unaffected customers is less than the benefit to affected customers who
are likely to be customers closer to the margin, I am inclined to
believe that Apple has more than enough incentive to disclose.\40\
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\40\ This argument does not, as Chairwoman Ramirez and
Commissioner Brill suggest, ``presuppose that a sufficient number of
Apple customers will respond to the lack of adequate information by
leaving Apple for other companies.'' Statement of Chairwoman Ramirez
and Commissioner Brill at 5-6. Nor does the economic logic require
any belief about the magnitude of switching costs. Rather, the
analysis relies only upon the standard economic assumption that
Apple chooses disclosure to maximize shareholder value, weighing how
customers react to different disclosure policies. If Apple behaves
this way, the average benefit of more disclosure to unaffected
customers is less than the benefit to affected customers, and
affected customers are more likely to be on the margin than
unaffected customers, then economic theory implies that Apple is
likely to have more than enough incentive to disclose.
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C. Other Considerations When Examining the Costs and Benefits of
Platforms and Other Multi-Attribute Products
Unfairness analysis also requires the Commission to consider the
impact of contemplated remedies or changes in the incentives to
innovate new product features upon consumers and competition.\41\ I
close by discussing some additional dimensions of an economic analysis
of the costs and benefits of product disclosures in the context of
complicated products and platforms with many attributes, like Apple's
platform, where such disclosures are a critical component of the user
experience and have considerable impact upon the value consumers derive
from the product.
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\41\ Unfairness Statement, supra note 7, at 1073-74.
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For complicated products--for example, a web-based platform for
purchasing and interacting with potentially millions of items using a
mobile device--there are many things that can negatively impact user
experience. The number of potential issues for products that involve
hardware, software, and a human interface is large. This is the nature
of technology. When designing a complex product, it is prohibitively
costly to try to anticipate all the things that might go wrong. Indeed,
it is very likely impossible. Even when potential problems are found,
it is sometimes hard to come up with solutions that one can be
confident will fix the problem. Sometimes proposed solutions make it
worse. In deciding how to allocate its scarce resources, the creator of
a complex product weighs the tradeoffs between (i) researching and
testing to identify and determine whether to fix potential problems in
advance, versus (ii) waiting to see what problems arise after the
product hits the marketplace and issuing desirable fixes on an ongoing
basis. We observe the latter strategy in action for virtually all
software.
The relevant analysis of benefits and costs for allegedly unfair
omissions requires weighing of the benefits and costs of discovering
and fixing the issue that arose in advance versus the benefits and
costs of finding the problem and fixing it ex post. These
considerations fit comfortably within the unfairness framework laid out
by the Commission.\42\ The Commission also takes account of the various
costs that a remedy would entail. These include not only the costs to
the parties directly before the agency, but also the burdens on society
in general in the form of increased regulatory burdens on the flow of
information, reduced incentives to innovate and invest capital, and
other social costs.\43\
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\42\ The Commission must take ``account of the various costs
that a remedy would entail'' including ``reduced incentives to
innovation and capital formation, and similar matters.'' Unfairness
Statement, supra note 7, at 1073-74.
\43\ Unfairness Statement, supra note 7, at 1073-74.
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Here, Apple did not anticipate the problems customers would have
with children making in-app purchases that parents did not expect. When
the problem arose in late 2010, press reports indicate that Apple
developed a strategy for addressing the problem in a way that it
believed made sense, and it also refunded customers that reported
unintended purchases.\44\ This is precisely the efficient strategy
described above when complex products like Apple's platform develop
problems that are difficult to anticipate and fix in advance.
Establishing that it is ``unfair'' unless a firm anticipates and fixes
such problems in advance--precisely what the Commission's complaint and
consent order establishes today--is likely to impose significant costs
in the context of complicated products with countless product
attributes. These costs will be passed on to consumers and threaten
consumer harm that is likely to dwarf the magnitude of consumer injury
contemplated by the complaint.
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\44\ See Foresman, supra note 13.
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This investigation began largely because of complaints that arose
when in-app purchases were first introduced into the marketplace and
Apple had not had enough experience with the platform to recognize how
parents and children would use the App Store. In late 2010, complaints
began to emerge. In March 2011, Apple first altered its platform to
address complaints about unauthorized in-app purchases. It is not
unreasonable to surmise that as Apple has modified its policies based
on experience, and customers have learned more about how to use the
platform, unauthorized in-app purchases by children have most likely
steadily declined.
The Commission has no foundation upon which to base a reasonable
belief that consumers would be made better off if Apple modified its
disclosures to confirm to the parameters of the consent order. Given
the absence of such evidence, enforcement action here is neither
warranted nor in consumers' best interest.
[FR Doc. 2014-01197 Filed 1-22-14; 8:45 am]
BILLING CODE 6750-01-P