Apple to refund at least $32.5M in case about kids' apps purchases

Federal Trade Commission (FTC) Chair Edith Ramirez pauses during a news conference at the FTC in Washington, Wednesday, Jan. 15, 2014, where she announced Apple will refund $32.5 million to consumers to settle a federal case involving purchases that kids made without their parents' permission while playing on mobile apps. (AP / Susan Walsh)

WASHINGTON -- Plenty of parents have been there -- handing over the iPhone or iPad to a child while waiting in the doctor's office, standing in line at Starbucks or sitting in the car for a long road trip with the family. The youngster is playing a game on a fun mobile app and then hands you the phone saying he needs your password. Next thing you know, there's a charge on your credit card from Apple.

Too often, parents were caught unaware that by entering their password they were authorizing purchases -- of virtual pet treats, coins or perhaps a way to advance to the game's next level, the Federal Trade Commission said Wednesday in announcing that Apple Inc. had agreed to refund at least $32.5 million to unsuspecting parents.

"You cannot charge consumers for purchases they did not authorize," said Edith Ramirez, the commission chairwoman.

The FTC received tens of thousands of consumer complaints. As part of the settlement, the FTC said Apple also must change its billing practices to make it more obvious that an actual purchase is taking place during the course of the game or app.

Apple CEO Tim Cook said the Cupertino, Calif.-based company relented to the FTC because the consent decree "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."

Apple has taken a series of steps in the past few years to ensure its app store is a "safe place for customers of all ages," he said in a memo sent to company employees Wednesday.

So how could a kid buy these things without Mom or Dad's knowledge and run up bills into the hundreds of dollars or more?

A game player wants to buy coins, a chest of gems or treats for a virtual pet. It takes a click, and then the app asks for a password. The child turns to a parent, who punches it in.

But according to the FTC complaint, Apple did not always make clear that they were buying something. Parents also were not told that entering the password started a 15-minute clock during which kids could make unlimited purchases without any further action by an adult, the agency said.

A single purchase generally can range from 99 cents to $99, the commission said.

One parent told the FTC her daughter had spent $2,600 in "Tap Pet Hotel," in which children can build their own pet lodging. The game is free to download and play, but it takes in-app purchases for bowls of treats and sacks of coins for the game.

Others consumers reported unauthorized purchases by children totalling more than $500 in the apps "Dragon Story" and "Tiny Zoo Friends."

Apple will have until March 31 to come up with a billing system that ensures the company obtains consumers' informed consent before billing them for in-app purchases.

The settlement involves all apps in which minors made unauthorized purchases.

It addresses the same issue raised in a class-action lawsuit that Apple resolved last year. In that case, Apple agreed to contact 28 million of its app customers to offer them a $5 store credit or a $30 cash refund if their children had spent at least that much money without parental consent. The deadline for filing a claim was Monday.

That settlement resulted in about 37,000 claims, according to Cook's memo to employees.

"It doesn't feel right for the FTC to sue over a case that had already been settled," Cook wrote. "To us, it smacked of double jeopardy."

Apple's app store is a gold mine for software developers and the company, which charges a 30 per cent commission on the transactions. Apple says its customers spent more than $10 billion on app transactions last year. That figure includes the price charged by some apps for the software, as well as revenue from purchases while playing a game or for some other extra service.

Children's applications sold in Apple's store generated about 44 per cent of its revenue from purchases made while using the software during November, according to the latest data from the research firm App Annie. The remaining revenue came from upfront fees required to download some children's apps from Apple's store.

In the FTC case, the $32.5 million payout is a minimum. As part of the settlement, Apple must pay full refunds to consumers for kids' unauthorized purchases, so that figure could climb. If it doesn't rise to $32.5 million, the difference would be paid to the FTC, Ramirez said.