AUGUST 2014
FTC Alleges Amazon Unlawfully Billed Parents for Millions of Dollars in Children’s Unauthorized In-App Charges
On July 10, the FTC filed a complaint in federal court charging Amazon with billing parents and other account holders for millions of dollars in unauthorized in-app charges unwittingly incurred by children. The FTC complaint seeks refunds for the unauthorized charges. According to the FTC, Amazon’s set up for kids’ games and other apps that appeal to children on the Kindle Fire, which did not require entry of a password before incurring charges, encouraged children to spend unlimited amounts of money to buy virtual goods, like coins, stars, and pet food, without the consent of their parents or other account holders. (Moreover, according to the complaint, kids’ games often encourage children to acquire virtual items in ways that blur the lines between what costs virtual currency and what costs real money.) Parents complained that they were unaware, and their children did not understand, that they could spend real money for these extras, from 99 cents to $99 each. According to the complaint, thousands of parents complained to Amazon about in-app charges their children incurred without their authorization, amounting to millions of dollars of charges. The FTC’s lawsuit seeks a court order requiring refunds to consumers for the unauthorized charges and permanently banning the company from billing parents and other account holders for in-app charges without their consent. According to the complaint, Amazon keeps 30 percent of all in-app charges. The Amazon lawsuit is the Commission’s second case relating to children’s in-app purchases; Apple, Inc. settled an FTC complaint concerning the issue earlier this year.
 For the past few years, with the explosive growth of mobile technologies in consumers’ lives, all things mobile – especially consumer protection challenges arising from mobile commerce and mobile payments – have been at the center of the FTC’s radar screen. Starting in 2012, the FTC sponsored Paper, Plastic… or Mobile? An FTC Workshop on Mobile Payments, to consider the issues key issues facing consumers and companies as they adopt mobile payment services. The FTC followed the workshop with a report in 2013, which outlined key recommendations to ensure that consumers are protected in the mobile marketplace. The report highlighted the then-growing problem of mobile “cramming,” which occurs when third parties place unauthorized charges onto consumers’ mobile phone bills. Since then, the agency has made a concerted effort to monitor developments in the mobile arena and target deceptive and unfair practices in this marketplace.
Following its 2013 mobile payments report, the FTC held a Mobile Cramming roundtable. The roundtable brought together consumer advocates, industry representatives, and government regulators to explore various issues, including how mobile cramming occurs and how to protect consumers from this practice. Since then, the FTC has brought multiple enforcement actions to deal with this issue, including five mobile cramming cases against merchants, resulting in substantial monetary judgments And, as detailed in the last issue of the FTC International Monthly, on July 1, the FTC filed a lawsuit against the telecommunications company, T-Mobile USA, Inc., charging it with placing millions of dollars of crammed charges on mobile phone bills.
The agency’s efforts in this area are ongoing. Just last week, the FTC issued a new staff report on mobile cramming, which contains recommendations for industry best practices, announced its latest enforcement action against a mobile cramming scheme, and testified before Congress on its work in this area. The FTC also released a staff report on mobile shopping apps, which contains recommendations for consumers and businesses. Following are details of the recent reports, Congressional testimony, and enforcement action.
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Mobile Cramming
FTC Report and Recommendations
 In a report issued July 28, the FTC staff recommends steps that mobile carriers and other companies should take to prevent consumers from being stuck with mobile cramming charges arising from carrier billing. The report includes five recommendations aimed at mobile carriers, merchants who offer goods and services charged directly to mobile phone bills, and billing intermediaries known as aggregators, who facilitate the placement of such charges on mobile phone bills. The recommendations are: giving consumers the right to block third-party charges; ensuring that advertising, marketing, and opt-in processes for charges are not deceptive; getting express, informed consent before charging consumers; clearly displaying third-party charges on bills; and creating an effective process for resolving disputes. In making these recommendations, the FTC considered the evolution of the mobile carrier billing industry from “Premium-SMS” payments, relying on text messages ostensibly sent to consumers to initiate charges, towards direct-carrier billing arrangements, in which charges can be placed on a consumer’s mobile bill through a mobile website or app. The report notes that the recommended consumer protections should apply to direct carrier billing or any other mechanism for placing third-party charges on mobile phone bills.
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Congressional Testimony
On July 30, FTC Commissioner Terrell McSweeny told the Senate Committee on Commerce, Science and Transportation, that the Commission believes mobile cramming is a significant consumer protection issue. According to the testimony, “Mobile cramming is a significant problem that threatens to undermine confidence in the developing payment method known as ‘carrier billing.’” The testimony further stated: “As stakeholders have noted, carrier billing of third-party charges may be particularly beneficial for unbanked and underbanked consumers. Additionally, consumers have used text messages to donate funds to a charitable organization, with the charge placed on their mobile phone account. As carrier billing has developed, however, fraud has become a significant problem for consumers.” The testimony summarized FTC efforts to combat both landline and wireless cramming and highlighted the recommendations the FTC has made for baseline consumer protections, including those contained in the latest staff report.
Enforcement Action
On July 29, the FTC announced it latest enforcement action against a mobile cramming scheme that deceptively charged over a million consumers more than $100 million on their mobile phone bills without their permission. The FTC’s complaint alleges that the defendants violated the FTC Act through their deceptive tactics and by unfairly billing consumers for unauthorized services. It seeks to permanently shutter the operation and recover money lost by consumers. The court issued a temporary restraining order against six companies and six individual defendants behind the scheme, halting their operations and freezing their assets pending litigation. The complaint charges that the defendants used deceptive practices, including fake websites with bogus offers of “freebies” or gift cards, to trick consumers into providing their mobile phone number. Then the defendants placed monthly subscription fees ranging from $9.99 to $14.99 per month for a variety of “services” on consumers’ mobile phone bills without their authorization. According to documents the FTC filed in court, the defendants continued cramming charges, using fake business names, even after wireless carriers terminated their billing privileges.
Mobile Shopping Apps
“What’s the Deal?” Staff Report On Mobile Shopping Apps Finds Disclosures to Consumers Are Lacking
 On August 1, the FTC announced a staff report that finds that many mobile shopping apps do not provide consumers with important information – such as how the apps manage payment-related disputes or handle consumer data – prior to download. If a shopping app passes charges through to a credit card, a consumer’s liability should be limited to $50. But transactions made using stored value on a card may lack the legal protections afforded by credit or debit card transactions. The report makes a number of recommendations to companies: apps should make clear consumers’ rights and liability limits for unauthorized, fraudulent, or erroneous transactions; apps should more clearly describe how they collect, use, and share consumer data; and companies should ensure that their data security promises translate into sound data security practices.
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Two Barcode Resellers Invited Competitors to Collude
Two Internet resellers of UPC barcodes used by retailers for price scanning and inventory management settled charges that they violated the FTC Act by inviting competitors to join a collusive scheme to raise prices charged for barcodes sold online. In connection with the settlement, the FTC brought separate complaints against Jacob J. Alifraghis and his company InstantUPCCodes.com and Philip B. Peretz and his company Nationwide Barcode. The proposed orders settling the complaints bar Instant and Nationwide from communicating with their competitors about barcode rates or prices; entering into, participating in, maintaining, organizing, implementing, enforcing, inviting, offering, or soliciting an agreement with any competitor to divide markets, allocate consumers, or fix prices; and urging any competitor to raise, fix, or maintain price or to limit or reduce the terms or levels of service they provide.
Valeant Pharmaceuticals’ Settles FTC Charges Regarding Proposed Acquisition of Precision Dermatology
The FTC settled charges that the proposed $475 million acquisition of Precision Dermatology by Valeant Pharmaceuticals International likely would reduce competition in the market for branded and generic single-agent topical tretinoins, and in the market for generic Retin-A. According to the FTC complaint, Valeant and Precision are the only two significant suppliers of branded single-agent topical tretinoins, and the proposed acquisition would eliminate current competition between them. The FTC also alleged that the proposed acquisition would give Valeant a monopoly in four of five versions of generic Retin-A and reduce competition in the remaining version. The proposed consent order requires Valeant to sell Precision’s assets related to Tretin-X, its branded single-agent topical tretinoin, to Actavis, Inc. The order also requires the sale of Precision’s assets related to generic Retin-A to Matawan Pharmaceuticals LLC. Both sales are to be completed within 10 days of consummating the transaction. In addition, the buyers are each to receive partial assignments of the manufacturing contracts for both Tretin-X and generic Retin-A. If the FTC finds that the buyers are not acceptable acquirers of the drugs, it can require Valeant to unwind the sales and divest the drugs to another FTC-approved buyer within six months.
Akorn, Inc. Settles FTC Charges Regarding Proposed Acquisition of VersaPharm Inc.
On August 4, the FTC announced that pharmaceutical company Akorn, Inc. has agreed to sell its rights to develop, manufacture, and market the generic injectable tuberculosis drug, rifampin, to settle FTC charges that Akorn’s proposed acquisition of VersaPharm Inc. and its parent company, VPI Holdings Corp., would likely be anticompetitive. Akorn proposes to acquire VersaPharm for approximately $324 million. The proposed settlement requires Akorn to divest its pending FDA application regarding generic injectable rifampin to Watson Laboratories, Inc. According to the FTC’s complaint, only VersaPharm and two other firms currently have FDA approval to sell generic injectable rifampin. There are no viable substitutes for rifampin as a course of treatment for tuberculosis. Absent the acquisition, Akorn likely would have entered the market for generic injectable rifampin in the near future, resulting in a significant price reduction for the drug. According to the FTC’s complaint, if Akorn were to consummate its acquisition of VersaPharm, as originally proposed, the combined company would likely forego or delay the introduction of Akorn’s generic injectable rifampin. More information about the market for this drug and the consent agreement can be found in the analysis to aid public comment on the FTC’s website.
FTC Testifies to Congress on Professional Licensing and Regulation
In testimony before Congress on July 16, Andrew I. Gavil, Director of the FTC’s Office of Policy Planning, described how the FTC evaluates the potential competitive effects of regulations on occupations, trades, and professions. He also described the agency’s efforts to promote competition among professionals. According to Gavil, for some occupations, licensure may be an appropriate policy response to identified consumer protection or safety concerns. However, to address concerns that some licensure regulations can impede competition while offering few, if any, significant consumer benefits, the FTC selectively responds to calls for public comment and invitations from legislators and regulators to identify and analyze specific licensure restrictions. The agency urges federal, state and local policy makers, as well as private, self-regulatory authorities, to consider whether a particular licensure regulation is likely to have a significant and adverse effect on competition, is targeted to address actual risks of harm to consumers, and is tailored to minimize any burden on competition, or whether less restrictive alternatives are available.
FTC staff have submitted hundreds of comments and amicus briefs to state and self-regulatory entities and courts on competition policy and antitrust law issues. The testimony also noted that the FTC has used its enforcement authority to challenge anticompetitive behavior by independent boards of occupational regulators, as well as private actors who restrain competition.
FTC Seeks Public Comment on Its Telemarketing Sales Rule
On July 31, the FTC announced that it is seeking comment on its Telemarketing Sales Rule. The FTC relies on public comments in considering whether and how to amend and improve the TSR and other rules. The Federal Register notice announcing the rule review explains specific changes in the marketplace and legal landscape since the Commission last amended the TSR. These include use and sharing of pre-acquired account information in telemarketing, and use of negative-option and free-trial offers in combination with general media ads designed to generate inbound telemarketing calls from consumers. In addition, the notice seeks suggestions for specific changes to the rule that will reduce Do Not Call enforcement obstacles encountered when trying to obtain call records from telemarketers. Written comments must be received by October 14. Information about how to submit comments can be found in the Request for Comments section of the Supplementary Information in the Federal Register notice. Comments also can be submitted electronically.
FTC Will Keep Negative Option Rule In Its Current Form
The FTC has completed its review of the Negative Option Rule, which requires sellers to clearly disclose the terms of any such negative option plan for the sale of goods before consumers subscribe. It has announced it will retain the Rule in its current form. Under plans covered by the Negative Option Rule, consumers are notified of upcoming merchandise shipments and have a set period to decline the shipment. Sellers interpret a customer’s silence, or failure to take an affirmative action, as acceptance of an offer. Although the comments received by the Commission presented some evidence of concerns with negative option marketing beyond the prenotification offers currently covered by the Rule, newer developments, such as the Restore Online Shoppers’ Confidence Act (2010) and the Commission’s proposed amendments to the Telemarketing Sales Rule, will likely address many of those concerns.
FTC Renews Partnership with Saskatchewan Law Enforcement Agencies to Fight Cross-Border Fraud
The FTC has renewed its partnership with law enforcement agencies in Saskatchewan, Canada, through December 31, 2018. The Partnership is one of six regional partnerships between U.S. and Canadian law enforcers that combat fraudulent cross-border marketing practices. The partnerships arise out of a 1995 agreement between the FTC and its Canadian counterparts that has facilitated investigative assistance, including information sharing, intelligence gathering, cooperation on parallel files, and training on deceptive marketing and fraud.
FTC and DOJ Extend Public Comment Period for Workshop on Conditional Pricing Practices through September 22, 2014
The FTC and the Department of Justice (DOJ) have extended the deadline for submitting comments on their recent Conditional Pricing Practices Workshop to September 22, 2014. The workshop, held June 23, 2014, explored the economics and legal policy implications of certain pricing practices, such as loyalty and bundled pricing. Interested parties may submit public comments online. Submitted comments and additional information can be found on the FTC and DOJ websites.
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