Apple fined heavily by the French Competition Authority for infringing antitrust law
23 March 2020
On 16 March 2020, the French Competition Authority imposed a record EUR1.1. billion fine on Apple, alongside substantial fines on two of its wholesalers, for antitrust infringements involving restriction of intra-brand competition, resale price maintenance and the rarely-used French law concept of abuse of economic dependency. See our alert on the decision and its implications for the antitrust-compliant structuring of distribution networks.
Apple's French distribution network
The distribution of Apple products (excluding the iPhone) in France is organised at two levels. Upstream, Apple sells its products to two authorised wholesalers – Ingram Micro and Tech Data – which are world leaders in the electronics sector.
Downstream, the distribution of Apple products is carried out through a network of around 2,000 distributors. These can be divided into two main categories, depending on their size and activity:
- large generalist or specialised distributors, such as supermarkets and electronic goods retail chains, identified as “Retailers” by Apple. These Retailers are generally supplied directly by Apple; and
- specialised dealers, which are typically smaller electronic goods dealers and repairers, identified as “Resellers” by Apple. Most “Resellers” are authorised by Apple under two separate schemes:
- Apple Authorised Resellers (AARs), which have a “standard” distribution agreement with Apple.
- Apple Premium Resellers (APRs), which form part of Apple’s “premium network” if they specialise in the distribution of Apple products and agree to join an optional programme designed to promote a particular sales environment and provide a high-quality customer experience for consumers. It was an APR, eBizcuss, which lodged a complaint with the FCA against Apple in 2012.
In addition, Apple sells its products directly to consumers through its own distribution channels, namely Apple retail stores in large catchment areas and the Apple online store.
Restriction of intra-brand competition
The FCA found that Apple and its two wholesalers restricted intra-brand competition (i.e. competition for the sale of Apple products between the different distribution channels) from 2005 to 2013 by allocating products and customers between the wholesalers.
According to the FCA, Apple specified the exact quantities of the different Apple products to be delivered to each downstream distributor, and the wholesalers agreed to and implemented that scheme.
As a result, the FCA said that Apple was in a position to:
- suppress competition between the two wholesalers; and
- effectively allocate and control the stocks of products held by independent resellers – this impaired resellers’ commercial policy, limited competition between them and harmed their business.
Resale price maintenance
The FCA also found that Apple restricted price competition between the different resellers and limited competition between independent resellers (in particular APRs) and Apple’s own sales channels.
This was achieved through a series of practices, concluded the FCA, including the widespread communication of suggested prices through Apple’s own retail and online stores and contractual provisions limiting the use of the Apple trademark in promotional materials issued by resellers. Apple also operated a price monitoring system, which created a risk of retaliation against resellers in the form of reduced supplies for non-authorised promotions. And the FCA found that Apple was in a position to control the resellers’ profitability, due to its knowledge of and control over supplies and promotions.
The FCA concluded that, as a result of these practices, resellers lost their ability to freely determine their commercial policy and were effectively prevented from deviating from the retail prices set by Apple.
Abuse of economic dependency
Finally, the FCA relied on a specific provision of French law, rarely applied in practice, prohibiting the abuse of economic dependency.
A position of economic dependency (which is a concept close to but different from the ‘classic’ dominant position) is generally characterised by an imbalance between business partners, where one of them is the owner of a well-known brand and holds a significant market share. An entity is considered to be in a position of economic dependency vis-à vis another where it achieves an important part of its turnover with that other and is unable to find an alternative supplier (or customer/distributor, as the case may be) at reasonable conditions (including financial conditions and the time required to find an alternative counterparty). The creation of a position of economic dependency is not in itself illegal; only an abuse of such position (e.g., unreasonably restricting the commercial freedom of distributors and putting them at a disadvantage compared to an entity’s own distribution network) will fall foul of the rules.
The FCA first established that APRs were dependent on Apple. It found that provisions in the distribution agreements prohibited APRs from entering into similar distribution agreements with competing brands, or at least made it very difficult to do so.
In addition, the FCA concluded that resellers had built their businesses on selling Apple products, for which customer demand and loyalty are strong. APRs would therefore find it impossible in the short term to switch to the distribution of competing brands.
Second, the FCA found that Apple has abused its position by restricting the commercial freedom of APRs in an abnormal and excessive manner on various grounds. These included:
- APRs suffering delays or shortages due to Apple’s allocation system, in particular during the Christmas season and at the time of new product launches, whilst Apple’s own distribution channels were always properly supplied.
- A lack of transparency in the rebate and credit policies applied by Apple to APRs.
- APRs not being made aware of new product launches at the same time as other distribution channels.
The FCA concluded that Apple’s practices led to the weakening and, in a number of instances, the exclusion of certain APRs, such as the complainant.
The FCA’s decision is primarily a stark reminder of the basic obligations attached to the structuring of distribution networks. As emphasised in the FCA’s press release, whilst a manufacturer is free to organise its distribution system as it sees fit, and can designate different sales channels, choose wholesalers to supply certain retailers and reserve direct supply for other retailers, it must comply with antitrust law in its dealings with independent resellers. Following the FCA’s decision, this means manufacturers must not undermine competition between wholesalers by pre-allocating customers to them and must ensure that independent resellers have the means to conduct their own commercial policies, in particular with respect to prices. Any attempt to maintain minimum resale prices will likely constitute a serious infringement with high fines, such as in this case, a real possibility.
But the decision is also ground-breaking in that the FCA applies the notion of abuse of economic dependency which, as noted above, is a rarely used weapon in the French enforcer’s arsenal. The text of the decision, once published, will hopefully give a detailed insight into the FCA’s reasoning on this point, in particular on the conditions for finding a position of economic dependency (including whether the FCA has taken a more flexible approach than it has in previous cases). Understanding the boundaries set by the FCA will be critical for all manufacturers relying on a dual distribution system comprising both independent resellers and own distribution channels.