French Competition Authority imposes record penalty on Apple

On 15 June 2020, The French Competition Authority (FCA) made available its decision to sanction Apple and two of its wholesalers, the day before the European Commission announced the opening of an antitrust investigation into Apple Pay practices.

On 16 March 2020, the FCA announced the imposition of fines totalling EUR 1.1bn on Apple for having implemented anticompetitive practices (between 2005 and spring 2013) within its distribution network for electronics in France (except iPhones). Apple was accused of organizing a cartel within its distribution network and abusing a situation of economic dependence in relation to its “premium” independent dealers. The two wholesalers, Tech Data and Ingram Micro, were also fined for their participation in the cartel practices.

The FCA sanctioned three anticompetitive practices: (i) the division of products and customers between the two wholesalers Tech Data and Ingram Micro, (ii) the imposing of selling prices on its Apple Premium Resellers (APRs) and (iii) the abuse of a situation of economic dependency on its APRs.

First of all, Apple and its two wholesalers agreed not to compete and to prevent other distributors from competing with each other. Although the wholesalers were independent undertakings, and therefore free in determining their business policy and in particular the products they wished to distribute and the quantity they would deliver to their retail costumers, Apple had carefully allocated products and customers between them, defining the exact quantities of different products to be delivered to each reseller. The resulting restriction on competition was particularly strong, as the wholesalers were in direct competition with Apple itself for the supply of APRs (resellers with a high turnover on Apple products that can choose to source their products directly from Apple or its wholesalers). APRs were prevented from operating freely, being totally dependent on Apple which allocated the stock at the wholesale and resale level. These practices weakened the competition and in some cases even led to the exclusion of APRs on the market.

Secondly, Apple imposed reselling prices on APRs. APRs had to charge the same prices as those charged by Apple itself in its Apple Stores or on its website. Apple enforced the price-fixing as follows: firstly, Apple published prices for its Apple Retail Stores presented as “suggested” prices in various media accessible to end costumers; secondly, several contractual clauses strictly regulated the possibility and the conditions under which APRs could organise promotions; and thirdly, a price monitoring system controlled charged prices and “punished” APRs with the non-delivery for promotions not authorised by Apple. This finally led to a uniform sales price for Apple products to end customers on almost half of the retail market for Apple products.

Finally, evidence showed, that the APRs were in the situation of economic dependency and that Apple deliberately abused the situation. APR contracts provided for exclusivity for Apple products and prohibited them during the term and up to six months after termination of the agreement to open any shop specialised in the sale of a competing brand throughout Europe. There was no alternative business for the APRs whose customers were strongly attached to the Apple brand. Therefore, leaving the brand would have meant the complete loss of value of their business, irrecoverable investments and significant costs for rebuilding stores and training staff. The FCA found, that Apple’s conduct constituted an abuse by restricting the commercial freedom of APRs in an extreme and excessive manner. The conduct consisted in particular of supply difficulties, discriminatory treatment and uncertain remuneration conditions for APR activity. Most APRs e.g. explained that they regularly faced delivery problems, especially during new product launches. APRs were not able to meet the orders placed by their customers while Apple Stores and “Retailers” were regularly supplied.

Key immediate comments / takeaways:

Challenges for structuring distribution networks

Sophistication and complexity are no commonplace to ensure control over distributors while remaining compliant with competition law.

Suppliers can freely organise and structure their distribution networks, but the FCA’s decision shows clear limits to the implementation of complex distribution networks.

If the structure of the distribution network, which Apple claimed to be neither selective, nor exclusive, did not raise any objection in itself as it has been established on objective and lawful criteria, a detailed analysis revealed that the complexity of this network including several levels (wholesalers and retailers) with different categories of operators actually resulted in cumulative and heavy constraints on the different operators that covered-up anticompetitive practices through the limitation of the commercial freedom of both wholesalers and retailers.

Consequently, companies operating such an extensive distribution network should make sure that their network meets the applicable standards (especially in case of selective or exclusive networks) and that no improper allocation of customers and/or markets occurs and that the distributors remain independent in their price-setting.

Vertical exchanges of information and “hub & spoke”

The FCA established that Apple’s wholesalers exchanged commercially sensitive information, consisting in detailed economic and commercial data about sales to the retailers, which exceeded what was legitimate, with Apple acting as an active intermediary.

However, the FCA found that this practice did not restrict competition as Apple had already considerably reduced the freedom of wholesalers to determine their own commercial policy on the market. Consequently, the exchanges of information alone were not likely to reduce their autonomy.

The FCA had the opportunity to sanction for the first time in France a so-called “hub & spoke” practice, illustrating the difficulties to determine the horizontal or vertical nature of an anticompetitive agreement in relationships between suppliers and distributors.

The specificity of the practice in this case was that the information exchange mechanism was set up between wholesalers at the initiative of Apple. The fact that the wholesalers were to some extent forced to participate in this system may have been taken into account by the FCA.

In the context of the review of the Vertical Agreements Block Exemption Regulation, which raises a discussion about the lawfulness of exchanges of information between suppliers and distributors, the decision usefully reminds that such vertical exchanges, even where they involve very detailed commercial information, are legitimate provided that they are not communicated to the other members of the network.

Standard of proof of resale price maintenance practices

In order to demonstrate a vertical price agreement, the FCA has to demonstrate the existence of a “concurrence of wills” between the supplier and its resellers. Unless when there is a clear contractual clause or written exchanges on resale price, the FCA has developed a rather unique alternative standard of proof. The so-called “three-branch body of evidence” consists of showing that recommended resale prices have been communicated to the distributors and that price monitoring has been carried out to establish that the “recommended” prices were in fact fixed prices.

While this standard has been used in most decisions over the last decade, in this case, the FCA clarifies that the “three-branch body of evidence” is just one mode of proof of “concurrence of wills” between parties when it comes to demonstrating a vertical price agreement among others and that it is not required to bring together this body of evidence when there is other documentary or behavioural evidence establishing (i) the manufacturer's invitation and (ii) the distributors' acquiescence in the disputed practice.

By doing so, the FCA seems to be trying to depart from its traditional case law, probably to preserve its margin of appreciation and to be able to prove RPM practices without having to establish that the criteria of the body of evidence are met.

Fines with a greater deterrent effect

The FCA (i) determines the size of fines on the basis of the seriousness of the facts, the extent of the damage caused to the economy and the duration of the practices and (ii) then individualises the fine (i.e. adjust the fine in consideration with the individual situation of the undertaking or the group to which it belongs) which may lead to the determination of aggravating or mitigating circumstances and/or the adjustment of the amount of the penalty, either upwards or downwards.

In the present case, the value of products’ sales concerned was around 1% of the turnover, so the FCA took into account Apple’s significant overall size, economic strength and resources to increase by 90% the fine imposed on Apple.

This is an interesting evolution of the FCA practice regarding the determination of fines: during the first years of implementation of its notice on the method for determining financial penalties of 16 May 2011, it has applied fines increases from 10 to 25%. Since recently, we have seen a tendency of applying superior multiples to increase the fine (up to 65% or 70%) and now up to 90% with this decision.

This shows that the FCA, like other EU competition authorities (EU Commission with the Google Shopping decision in 2017, the Competition and Markets Authority in the Flynn/Pfizer case etc.) is increasingly inclined to use this criterion to ensure the deterrent effect of the fine, in particular with industrial or internet giants.

It remains to be seen whether this increase will be deemed proportionate by Paris Court of Appeal.

A rare illustration of conviction on the ground of abuse of economic dependency

The ground of abuse of economic dependence is very rarely used and/or qualified by the FCA but in the present case, the FCA found that Apple’s practices, among others, had conducted to place its distributors in a situation of “uncertainty” by depriving them of the commercial freedom conferred by their independent status.

If creating a situation of uncertainty for the distributors may lead to constitute an abuse of economic dependency, we may wonder what this could imply in terms of positive obligations in their relationships with the members of their network placed in such a situation of economic dependence. This could encourage suppliers to adopt clear and stable trade and pricing policies.

Apple has appealed the decision. The stakes are high in particular because of the size of the fine but also the likelihood of damage litigation from customers (both retailers, companies using Apple’s products and consumers).

¹ Decision No. 13-D-03 of 10 February 2013 for Bigard Group; Decision No. 14-D-05 of 13 June 2014 for SFR; Decision No. 14-D-06 of 8 July 2014 for Cegedim SA.
² Decision No 19-D-24 of 17 December 2019 on practices implemented in the fruit sector sold in cups and gourds ; Decision No. 17-D-25 of 20 December 2017 on practices implemented in the fentanyl transdermal device sector ; Decision No. 19-D-25 of December 17, 2019 on practices implemented in the restaurant voucher sector.