Apple Inc.; Analysis of Proposed Consent Order To Aid Public Comment, 3801-3813 [2014-01197]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 79, Number 15 (Thursday, January 23, 2014)]
[Notices]
[Pages 3801-3813]
From the Federal Register Online via the Government Printing 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 https://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 https://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 https://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 https://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 https://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 https://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 https://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\
---------------------------------------------------------------------------

    \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 https://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 https://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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \7\ FTC Policy Statement on Unfairness, appended to Int'l 
Harvester Co., 104 F.T.C. 949, 1070 (1984), available at https://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 https://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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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, https://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.'').
---------------------------------------------------------------------------

    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, https://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, https://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, https://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, https://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 https://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 https://
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\
---------------------------------------------------------------------------

    \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., https://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 https://www.apple.com/legal/internet-services/itunes/us/terms.html#SALE 
(Apple's current Terms and Conditions) and https://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 
https://support.apple.com/kb/HT1904 and https://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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
https://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 https://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