The FTC’s unfairness Consent Decree with Apple

Some readers may have noticed Gordon Crovitz’s column in The Wall Street Journal a couple of weeks ago on the FTC’s Consent Decree with Apple dealing with Apple’s iTunes store. Under Apple’s policy, in order to purchase an app a consumer has to enter his password. Once the password was accepted a “window” opened, during which for the next 15 minutes it was not necessary to reenter one’s password to make additional purchases. The text of the proposed consent decree is available here; the Federal Register Notice that summarizes the consent order is available here.

The FTC alleged that this practice was “unfair” under the FTC’s standards because some consumers were harmed. The story basically was that a kid would be playing on dad’s phone and would want to make a purchase within a game. His dad would authorize the purchase by entering his password then give the iPhone back to the kid. The kid supposedly then would go on a shopping spree for the next 15 minutes racking up purchases without the parent’s knowledge. Under the proposed consent, Apple promises to refund no less than $32.5 million in alleged unauthorized charges that kids made. Moreover, going forward, Apple is required to do the following:

 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.

Now the peculiarity here, is that (as FTC Commissioner Josh Wright notes in his dissent) as a percentage matter, a very small percentage of purchases are made (1) by children, (2) without their parents’ permission.  Yet while the FTC’s requirements might prevent some of these particular unauthorized purchases by children, the FTC’s requirements will apply to purchases made by everyone. Thus, the FTC rule imposes new costs on everyone, in order to reduce the likelihood of unauthorized charges by a very small number of people. His dissent provides a graph that demonstrates how trivial the number of allegedly unauthorized purchases is relative to the massive number of purchases made every year. As he writes, “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.”

Thus, while the 15-minute window can result in a relatively small number of consumers suffering unauthorized downloads by their children, for the overwhelming number of consumers the 15-minute window is a feature not a bug of the system. Most consumers want the 15-minute window — which is precisely why Apple provides the policy. Instead, now every consumer will have to enter his password every time he wants to buy something in Farmville or a new song (whatever that might be — I don’t play any of these games so I’m not quite sure what you buy). While that may seem like a modest inconvenience, the truth is that if it really was trivial for consumers then Apple would have done it already, since its standing policy was already to refund charges that consumers claim were unauthorized. While it is true that a practice can be unfair if only a small number of people are harmed, traditional FTC practice has required the harm in that situation to be substantial. There is no evidence or allegation in this case that the action here resulted in very severe harm to those who made unauthorized practices.

Thus, as Wright notes, this case presents a largely unprecedented situation for FTC action: a situation in which the FTC is declaring a practice to be unfair even though it benefits far more consumers than it harms. “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.”  Moreover, the FTC does not (and could not seriously) argue that the purpose of Apple’s policy was to harm consumers — there is no claim that Apple created the 15-minute window in order to defraud consumers. Moreover, as he notes, an additional element of unfairness is that it must be shown that there was no reasonable way to avoid the alleged injury — about five paragraphs ago I’m sure most readers saw that there is a pretty easy way to avoid the alleged injury.

The FTC’s unfairness powers traditionally differ from deception in that unfairness requires a cost-benefit analysis, whereas deception does not. Nevertheless, the FTC in this case offered no cost-benefit analysis whatsoever. What is the basis for its decision then? According to the statement of Chairwoman Edith Ramirez and Commissioner Julie Brill, well, it isn’t really clear. It certainly isn’t economics. They simply assert (without supporting evidence) that the case presents an example of both small harm to a large number of people and large harm in the aggregate. They also make no effort to quantify any benefits to consumers or competition. In short, it appears to be their gut reaction that they don’t like what Apple did here, despite no allegation that Apple had any intent to harm or mislead consumers and they’ve conducted no serious effort to quantify the costs and benefits of their policy.

Put this all together and Wright frames the issue more broadly and pointedly, “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.” If the FTC’s unfairness power extends to anything a majority of commissioners feels rubs them the wrong way, without any evidence of fraudulent intent or effort to quantify the costs and benefits to consumers, then the economy and consumers are in for a bumpy ride.

Consider all of the decisions that retailers make every day, from changing their return policies, to store hours, to anything else. Consumers might get upset at those decisions and dislike the way in which the store balances the costs and benefits of the policy. But does the fact that consumers don’t like it mean that the policy is unfair and should give rise to liability? After all, that’s what the FTC effectively is doing here — although it has no evidence of net harm to consumers and no evidence that Apple sought to take advantage of consumers with its existing policy, it nevertheless must pay out $32.5 million to consumers and have its processes for purchases in the future dictated by the FTC. I don’t get it.

And did I mention that the consent decree will last for 20 years?

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Jim Lindgren · February 25, 2014