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​FTC: Amazon cost parents millions in unauthorized app buys

The agency is asking the court to force Amazon to refund parents for virtual goods their kids bought before passwords were required.

The Amazon Appstore on a Kindle Fire. Screenshot by CNET

The Federal Trade Commision has filed suit against Amazon, alleging that the company illegally billed parents for "millions of dollars" in unauthorized in-app charges made by children through mobile devices.

The FTC's complaint, filed Thursday, asks the court to force Amazon to refund the money to those customers. In-app purchases typically involve virtual goods bought within an app, like extra coins or energy in a game, according to the FTC. Some bills totaled hundreds of dollars, and some virtual goods cost as much as $99.99.

When Amazon launched in-app purchases in late 2011, the store did not require password requirements for purchases, allowing kids to buy items without restraint, the agency said in a press release. Now, however, passwords are required.

"Amazon's in-app system allowed children to incur unlimited charges on their parents' accounts without permission," FTC Chairwoman Edith Ramirez said in the release. "Even Amazon's own employees recognized the serious problem its process created. We are seeking refunds for affected parents and a court order to ensure that Amazon gets parents' consent for in-app purchases."

When the FTC initially alerted Amazon to its allegations, the company said in a letter last week that it would fight the agency in court, saying, "We have consistently improved the customer experience in response" to consumer complaints over in-app purchases. Amazon said it was standing by the previous statements made in the letter.

The complaint argues that an Amazon employee noted this problem a month after the launch of in-app purchases, citing internal communications that said the lack of a password for the in-app purchases were "clearly causing problems for a large percentage of our customers."

Amazon did add some permissions to the system eventually, but the agency didn't find those practices sufficient or transparent. One complaint came from a parent who authorized one purchase, but didn't know the approval would also allow any other purchases for up to an hour after the approval. Amazon finally changed its in-app process to include informed consent in June, but the FTC is seeking refunds for the two-and-a-half year period prior to June.

On a call with reporters Thursday, FTC Consumer Protection Director Jessica Rich called the issues with in-app purchases a "house on fire" type of situation, citing the words of an Amazon employee from the internal communications surfaced in the FTC's investigations. Amazon's refund policy was not adequate, making it hard for "even a tenacious consumer" to get his or her money back, she said. She added that more complaints may surface while the case is in court. The proceeding will determine exactly how much Amazon may have to pay.

The suit is in response to Amazon's resistance to the agency's 20-year agreement to change policies around in-app purchases and accept associated fees. The FTC struck a similar deal with Apple earlier this year. Apple agreed to refund at least $32.5 million to customers as part of its settlement with the FTC.

The FTC said Amazon's games actually encouraged children to buy these items by making it difficult to tell when they were using real money or items used as virtual currency:

In the app "Ice Age Village," for example, the complaint noted that children can use "coins" and "acorns" to buy items in the game without a real-money charge. However, they can also purchase additional "coins" and "acorns" using real money on a screen that is visually similar to the one that has no real-money charge. The largest quantity purchase available in the app would cost $99.99.

US Sen. Deb Fischer (R-Neb.) came to Amazon's defense shortly after the FTC said it would file a suit against the company, saying that tech companies like Amazon have improved the country's economy.

"To pursue enforcement against these companies for specific policies in place at the market's nascent stage would constitute a de facto tax on innovation and threatens future growth and opportunity," she wrote in a letter to the FTC on July 9. "Moreover, I am concerned that pressuring companies into sweeping multi-decade consent orders reflects an attempt by the commission to gain by enforcement what has been withheld by Congress -- namely, unchecked regulatory control over the technology sector."

Update, 12:06 p.m. PT: Added more background and information from the press call.