Apple, FTC Reach $32.5 Million Settlement To Refund Parents Of Unauthorized In-App Purchases Made By Kids

Parents around the country were outraged when they saw unauthorized charges for in-app purchases from their children’s iPhone and iPad games, or at least they thought the charges were unauthorized. In a clause obfuscated by Apple (NASDAQ:AAPL), parents would agree to a one-time in-app purchase and their children would get a 15-minute window of unlimited spending. Now Apple is having to pay refunds of at least $32.5 million as it settles a Federal Trade Commission (FTC) complaint.

“This settlement is a victory for consumers harmed by Apple’s unfair billing, and a signal to the business community: Whether you’re doing business in the mobile arena or the mall down the street, fundamental consumer protections apply,” said FTC Chairwoman Edith Ramirez. “You cannot charge consumers for purchases they did not authorize.”

The original FTC complaint alleged that Apple’s billing procedures violated the FTC Act by failing to inform parents of the 15-minute unlimited spending window. Developers depend on in-app purchases to generate revenue, charging from as little as $0.99 to $99.99 for digital content like virtual currency or game specific items. When a parent agreed to a single purchase, kids could go on a spree and spend hundreds of dollars on other items.

In a statement by Apple’s CEO, Tim Cook, to his team, Cook admits that he knew about the 15-minute window. “When in-app purchases were enabled and a password was entered to download an app, the App Store allowed purchases for 15 minutes without requiring a password. The 15-minute window had been there since the launch of the App Store in 2008 and was aimed at making the App Store easy to use, but some younger customers discovered that it also allowed them to make in-app purchases without a parent’s approval,” stated Cook.

However, he reiterates Apple’s commitment to not only providing an easy environment to get desired content, but also a safe environment for customers of all ages. “From the very beginning, protecting children has been a top priority for the App Store team and everyone at Apple,” said Cook.

The settlement requires Apple to change its billing practices and to get informed consent for all purchases made in-app or on the App Store. It also requires Apple to give customers “the option to withdraw their consent at any time.”

Changes must be made before March 31, 2014. The FTC requires Apple to pay the minimum of $32.5 million to customers within the year. Apple customers must request the refund for authorized or unauthorized purchases, and if the minimum is not met by the year’s end, the remaining balance will be paid to the FTC.

The full text from the FTC can be found here. Tim Cook’s letter, originally obtained by 9to5Mac, can be found below.

Team,

I want to let you know that Apple has entered into a consent decree with the U.S. Federal Trade Commission. We have been negotiating with the FTC for several months over disclosures about the in-app purchase feature of the App Store, because younger customers have sometimes been able to make purchases without their parents’ consent. I know this announcement will come as a surprise to many of you since Apple has led the industry by making the App Store a safe place for customers of all ages.

From the very beginning, protecting children has been a top priority for the App Store team and everyone at Apple. The store is thoughtfully curated, and we hold app developers to Apple’s own high standards of security, privacy, usefulness and decency, among others. The parental controls in iOS are strong, intuitive and customizable, and we’ve continued to add ways for parents to protect their children. These controls go far beyond the features of other mobile device and OS makers, most of whom don’t even review the apps they sell to children.

When we introduced in-app purchases in 2009, we proactively offered parents a way to disable the function with a single switch. When in-app purchases were enabled and a password was entered to download an app, the App Store allowed purchases for 15 minutes without requiring a password. The 15-minute window had been there since the launch of the App Store in 2008 and was aimed at making the App Store easy to use, but some younger customers discovered that it also allowed them to make in-app purchases without a parent’s approval.

We heard from some customers with children that it was too easy to make in-app purchases, so we moved quickly to make improvements. We even created additional steps in the purchasing process, because these steps are so helpful to parents.

Last year, we set out to refund any in-app purchase which may have been made without a parent’s permission. We wanted to reach every customer who might have been affected, so we sent emails to 28 million App Store customers – anyone who had made an in-app purchase in a game designed for kids. When some emails bounced, we mailed the parents postcards. In all, we received 37,000 claims and we will be reimbursing each one as promised.

A federal judge agreed with our actions as a full settlement and we felt we had made things right for everyone. Then, the FTC got involved and we faced the prospect of a second lawsuit over the very same issue.

It doesn’t feel right for the FTC to sue over a case that had already been settled. To us, it smacked of double jeopardy. However, the consent decree the FTC proposed does not require us to do anything we weren’t already going to do, so we decided to accept it rather than take on a long and distracting legal fight.

The App Store is one of Apple’s most important innovations, and it’s wildly popular with our customers around the world because they know they can trust Apple. You and your co-workers have helped Apple earn that trust, which we value and respect above all else.

Apple is a company full of disruptive ideas and innovative people, who are also committed to upholding the highest moral, legal and ethical standards in everything we do. As I’ve said before, we believe technology can serve humankind’s deepest values and highest aspirations. As Apple continues to grow, there will inevitably be scrutiny and criticism along our journey. We don’t shy away from these kinds of questions, because we are confident in the integrity of our company and our co-workers.

Thank you for the hard work you do to delight our customers, and for showing them at every turn that Apple is worthy of their trust.

Tim