The FTC should reward, not penalize, companies that innovate in good faith

Yesterday, the Federal Trade Commission (FTC) announced that it has filed 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. Amazon has hotly contested the agency's allegation, and in a letter to the FTC, denied the charges and vowed to defend itself in court rather than agree to a settlement. Given the evidence to date, it appears Amazon is right to fight the FTC's actions.

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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 nonexistent 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 rulemaking 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 20-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 that 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 more than 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 were 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.

Castro is a senior analyst with the Information Technology and Innovation Foundation.