Apple to refund $32.5M worth of purchases made by kids

Jan. 15, 2014: Federal Trade Commission (FTC) Chair Edith Ramirez speaks at the FTC in Washington, 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 Photo/Susan Walsh)

WASHINGTON – Jackie Nussbaum knew her son liked playing DragonVale on the family iPad -- a colorful game with soothing music and chirping birds where kids raise adorable baby dragons. What she didn't realize was that he was buying virtual gems -- with real money -- to build his dragon park as part of the game.

When she opened her credit card statement, she saw a slew of charges from Apple, totaling $600 in one day.

"I thought it was a mistake, that someone had stolen my credit card," said Nussbaum, a mother of two children in Westerville, Ohio. Apple told her the charges were valid purchases from the game DragonVale.

"I almost choked," she said in an interview. "It was shocking."

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Tens of thousands of people who received similar shocks complained to the Federal Trade Commission, and the agency on Wednesday announced that Apple 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.

Too often, the FTC said, parents were caught unaware that in-app purchases were being made and Apple didn't do enough to make it clear children were buying gems, coins, or treats for their virtual pets. Parents also were not told that entering their password for a single-app purchase started a 15-minute clock during which kids could make unlimited purchases without any further action by an adult, the agency said.

As part of the settlement, Apple also must change its billing practices to make it more obvious that a 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 recent 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.

In Nussbaum's case, she called Apple right away and the company refunded her the $600 that her son, Andrew, had racked up. Nussbaum said Andrew, who was 10 at the time, had no idea he was buying gems with "real money." He felt so bad, she said, he was going to sell his old toys to pay her back. The refund spared him that.

Nussbaum also said Apple walked her through setting up password protections for in-app purchases and she hasn't had a problem since.

Others haven't been so lucky. 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 totaling more than $500 in the apps "Dragon Story" and "Tiny Zoo Friends."

The FTC settlement 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 percent 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 percent 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.