Parents’ Lawsuit Against Apple for In-App Purchases by Minor Children Moves Forward — In re Apple In-App Purchase Litigation

[Post by Venkat Balasubramani]

In re Apple In-App Purchase Litigation, 5:11-CV-1758 (N.D. Cal.; Mar. 31, 2012)

Facebook recently dealt with a class action over sponsored stories where minors asserted violations of their publicity rights. The court enforced the Facebook terms of service and transferred the dispute to California. (“Facebook’s “Browsewrap” Enforced Against Kids–EKD v. Facebook.”) Apple is grappling with a lawsuit also involving minors, where parents of minor children argued that Apple’s practice of distributing free apps was misleading because minor children could purchase “game currency” for a short duration after the parents had logged in. The court denies Apple’s motion to dismiss the lawsuit.

The factual allegations are somewhat interesting, and I have to give credit to the plaintiffs’ counsel for their creativity. Plaintiffs argued that Apple distributed free apps, and users of the apps could purchase in-app virtual currency for a short duration (15 minutes) after the password authentication process. Parents supposedly downloaded apps, gave them to their kids, and in this fifteen minute duration, the kids allegedly rang up bills (ranging from $99.99 to $338.72 “at a time”).

Voidability of the contract: Apple argued that although the minors purchased the apps, the relevant contract was the terms of service in place between the parents and Apple and this was a binding, enforceable agreement. The terms of service placed responsibility for unauthorized use of log-in credentials on the end user; therefore, Apple argued it was not responsible for the in-app purchases. The parents argued that each in-app purchase was a separate and voidable contract that may be disaffirmed by the parent or guardian. The court punts on the issue and says that at the pleading stage, the plaintiffs’ arguments should be allowed to proceed. The court footnotes an interesting contract law issue, noting Apple’s argument that a contract cannot exist where an offer is made to one party (the parents) but is accepted by another party (their children) and the consideration is supplied by the original offeree (the parents). Disappointingly for afficianados of contract law, the court does not resolve this issue.

Consumer Legal Remedies Act claim: The Consumer Legal Remedies Act statute prohibits unfair or deceptive acts or practices and looks to what is likely to “mislead a reasonable consumer.” The key question was whether Apple concealed or omitted facts that it had a duty to disclose. Citing to advertising from Apple that billed the “bait Apps” as “’free’ or nominal,” the court says that plaintiffs alleged the requisite misrepresentation by Apple. Two of the plaintiffs testified that they downloaded apps because they were free and gave them to their kids, only to find out later that for fifteen minutes after they had entered their iTunes passwords, their kids could make purchases from within the apps. These allegations were sufficient at the pleading stage.

Unfair Competition Law: Finally, the court also finds that plaintiffs adequately state a claim under California’s unfair competition statute. Plaintiffs’ allegation that Apple violated their CLRA rights independently states a cause of action under the UCL statute. The court also finds that plaintiffs plausibly state a claim under the substantial injury/benefit test: plaintiffs alleged substantial harm with no countervailing benefit to Apple from Apple’s unfair practices.

Duty of Good Faith/Restitution: Apple gets a mixed result on these two claims. The good faith and fair dealing claim is dismissed because there is no allegation that Apple lacked subjective good faith or that it intended to frustrate the common purpose of the agreement. The restitution claim moves forward, but piggybacks on the contract, CLRA, and UCL claims.

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Forming online contracts with minors always struck me as a tricky issue. While most sites get by with a provision in the agreement that the minor has obtained the consent of his or her parent or guardian, as noted in E.K.D. v. Facebook, there’s a potential disaffirmance problem. As Eric mentions in his post on E.K.D., resolution of this issue may depend on whether the benefit has already been conferred on the minor, in which case the minor can’t disaffirm the contract. (See A.V. v. iParadigms, discussed in Eric’s post here: “Clickthrough Agreement Binding Against Minors–A.V. v. iParadigms“.) So what happens if the minor disaffirms? Can the site cease the allegedly improper conduct on a prospective basis and avoid liability? In this case, the minors surely enjoyed the benefits of their purchases (“game currencies!”); so in order to disaffirm the agreement, they should have to return the currency, which may pose a problem for the parents. (For this reason, my instinct tells me that Apple has the better argument on the disaffirmance issue, but this is just a gut feeling.)

As always, in these cases where plaintiffs challenge Apple’s conduct in the app store, I wonder about the viability of a Section 230 defense. It doesn’t seem as viable in this case as in the typical case since plaintiffs are alleging that Apple made statements that were misleading, but the court doesn’t delve into the details on these statements so it’s tough to tell. Apple’s statements may be fairly narrow and not sufficient to get around a Section 230 defense. In any event, I’m curious about Apple’s reasons for not asserting a Section 230 defense.

One thing is for sure. The knives of plaintiffs’ lawyers are sharpened when it comes to online litigation. I can see Apple defeating this lawsuit eventually, but the claims themselves surprised me from a factual standpoint. I doubt Apple could have anticipated something like this.

Added: Rebecca Tushnet comments: “What, exactly, was not easy to anticipate about what would happen with “free” games suitable for kids allowing easy in-app purchases (when the phone’s been handed over to the kid)?”

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