Facebook may have known it was defrauding children and families through its online games

Internal documents appear to show that Facebook knew it was defrauding children and families through its ecosystem of online games as early as 2011. Employees even had a name for the practice, which they dubbed “friendly fraud,” or FF for short. More damning, related documents show that Facebook employees had found a way to stop the fraud from happening, but the social media giant prioritized revenue instead.

The documents were made public yesterday, in part due to the legal actions of journalists at Reveal, from The Center For Investigative Reporting. The documents themselves are part of a class action lawsuit filed in a federal court in Northern California’s Oakland division in April 2012.

In the amended complaint, plaintiffs allege that minors were duped into spending thousands of dollars on Ninja Saga. The game is available on Facebook as well as other platforms and was developed and published by Emagist Entertainment Limited. When these minors’ guardians attempted to secure refunds, they were hindered by “unintelligible, byzantine, and impossible-to-understand barriers” created by Facebook. Furthermore, plaintiffs allege that Facebook’s claims that “all sales are final” is against California law.

After six years of discovery and litigation, district judge Beth Labson Freeman finally ordered that Facebook’s internal documents be revealed to the public. They show that the company was fully aware that their business practices were anti-consumer.

An internal memo, labeled “Exhibit K,” is particularly damaging to Facebook’s reputation. It details an effort to educate developers on friendly fraud and why they should continue to enable the practice. While the content of the presentation itself is not available, talking points include “Friendly Fraud — what it is, why it’s challenging, and why you shouldn’t try to block it.”

Friendly fraud, in practice, is an all-too-common horror story circulated among Facebook-using parents around the world. Children acquire a credit cards for a single transaction related to a Facebook game, but the system retains the credit card information. Then kids click around in the game, unwittingly charging hundreds or thousands of dollars on the credit card. Parents are often unaware for weeks or months at a time, only learning of the expenses when the bills show up in the mail.

Enabling friendly fraud led to chargebacks, essentially parents asking their credit card companies to invalidate purchases their children had made. Internal Facebook documents reveal that the rate of chargebacks for certain games, including the megahit Angry Birds, was well above average. Employees experimented with ways to limit chargebacks by having kids re-enter a sequence of digits on the credit card that Facebook had previously stored. However, court documents show that the practice was not widely implemented because it would reduce revenue overall.

From a 2011 email sent by Danny Stein who, according to their profile on LinkedIn, worked on Facebook’s payment and risk team at the time:

In nearly all cases the parent knew their child was playing Angry Birds, but didn’t think the child would be allowed to buy anything without their password or authorization first (like in iOS). [...] The difficulty with friendly fraud is that we do not have a clear way to identify it at a purchase level because it looks like a good transaction and if we were to build risk models to reduce it, we would most likely block good [revenue].

I think we all agree that it is really important for Angry Birds to be a success story so if they are really concerned about the refund rate we can increase our focus on their transactions and our processes around them to try and lower their refund rate.

The court case is ongoing. If the plaintiffs are successful, the court could force Facebook to repay millions to customers who were impacted by friendly fraud over the last decade.