The FTC Should Reward, Not Penalize, Companies Who Innovate in Good Faith

Last week various news outlets reported that the Federal Trade Commission (FTC) was drafting a lawsuit
against Amazon.com, alleging that the company had failed to set sufficiently tight controls for purchases
made by children while using mobile apps. In a letter to the FTC, Amazon fired back, denying the charges
and vowing to defend itself in court rather than agree to a settlement. While the FTC has still not
released the official details of its complaint, at least on its face, it appears Amazon is right to fight the
FTC’s actions.

Amazon’s 1-Click technology—the service that enables users to buy Amazon products with frictionless
ease—is by all accounts a great consumer experience. The ability for consumers to make their
transactions effortlessly with 1-Click was created and patented by Amazon, and is an integral part of the
company’s brand. Now Amazon is being bludgeoned by the FTC for trying to innovate by bringing 1-Click
technologies to app and in-app purchases.

It appears that Amazon has been acting in good faith. When it began allowing in-app purchases in late
2011, the company was faced with a growing number of user complaints that children were accidently
creating excess charges. In response the company put in place a number of controls to prevent this
activity. Not only did Amazon refund customers for unwanted purchases, they also added in-app
parental controls and a real-time notification system for all purchases, to reduce reoccurrences and
improve the overall customer experience. Amazon’s efforts to rapidly prototype and update its systems
based on consumer feedback is exactly what government regulators should like to see in a well-
functioning market.

As always, the FTC can and should investigate the business practices of a company if it discovers
legitimate consumer harms. What the FTC should not do is punish good actors for violating non-existent
rules. In cases like Amazon’s where the company is adapting to consumer needs and has caused little to
no real consumer harm, the FTC should not supplant a company’s judgment on how best to serve its
customers with its own.

The Amazon suit reflects an unfortunate trend of the FTC creating policy through punitive consent
decrees. In a similar case, the FTC brought suit against Apple for "inducing" children to spend their
parent’s money on in-app charges. In an effort to make mobile transactions more seamless, after
entering their password, Apple created a 15 minute window during which users could make additional
purchases without another password prompt. Some children inadvertently ran up hundreds of dollars of
spending and parents complained. In January 2014—almost three years after Apple removed this 15
minute window and one year after settling a related class action lawsuit—Apple settled with the FTC,
accepting a $32.5 million fine and a 20-year ban of the already-resolved issue.

By forcing companies into consent decrees, instead of using its own rule-making authority or waiting for
Congress to act, the FTC circumvents the democratic process, reduces transparency and limits public
participation. These agreements can end up serving as de facto policy which is a problem since they only
reflect the agreement of two parties, rather than all stakeholders. At times, consent decrees may even
be anti-competitive, by creating greater barriers for new entrants and entrenching established interests.
Rather than fostering disruptive innovation, these types of twenty-year agreements lock companies into
stagnant business practices and discourage companies from taking risks lest they be subject to the wrath
of the FTC. A better approach is for the FTC to take ambiguity out of the equation by establishing clear
rules and taking action against companies who knowingly violate them or by going after companies that
knowingly and willfully harm consumers, such as any app developers who try to exploit the in-app
payment system in apps directed at children.

This is what happened in the 90s in response to concerns that children were running up unauthorized
charges on their parents’ telephone bills by calling pay-per-call services. Responding to the call of
concerned parents, Congress passed the Telephone Disclosure and Dispute Resolution Act in 1992. This
act required the FTC to adopt rules governing the pay-per-call industry, which it did through its multi-
stakeholder process. The result was the 900-Number Rule—an unambiguous set of guidelines that still
governs the industry over 20 years later and offers consumers strong protections.

Finally, I’ll end with an analogy: Anyone getting pulled over for speeding knows they cannot escape the
ticket by saying they did not know the speed limit. As any police officer would tell you, “Ignorance of the
law is no excuse.” But what if there was no speed limit? Would it be fair to ticket someone driving 55
MPH instead of 45 MPH if there were no laws against it? Should the government ban this driver from
ever driving 55 MPH again, not knowing what the future holds in terms of road conditions, types of
vehicles, or societal norms? Of course not. Likewise, the FTC needs to give companies acting in good
faith the benefit of the doubt and not punish them for rules that do not exist.

Daniel Castro is a Senior Analyst with the Information Technology and Innovation Foundation.