Last Thursday Patently Apple posted a report titled "France's Competition Regulator is set to Fine Apple heavily on Monday for its anticompetitive behavior." On cue, Apple was hit with a hefty €1.1 billion or US$1.2 billion fine by France's Competition Regulator known as Autorité de la Concurrence. Our report covers the in-depth details behind their reasoning for handing down a record fine to Apple with one being the "practice of cartels."   

 

France's Competition Regulator published a press release that reads as follows (translated from French):

 

The Essentials

 

"Seized in 2012 by eBizcuss, distributor of high-end specialty Apple products (known as APR for Apple Premium Reseller), the Competition Authority sanctioned Apple to the tune of 1.1 billion euros, as well as wholesalers Tech Data and Ingram Micro to the tune 62.9 million and 76.1 million euros respectively. The sanction decision follows visitation and seizure operations at the headquarters of Apple and its wholesalers, whose litigation ended in December 2017.

 

In total, the penalties amount to 1.24 billion euros and are broken down as follows:

 

Apple: €$1,101,969,952

Tech Data: €76,107,989

Ingram Micro: €62,972,668

Total: €1,241,050,609

 

Isabelle de Silva, President of the Competition Authority said: "The Authority has deciphered, on the occasion of this case, the very specific practices that had been implemented by Apple for the distribution of its products in France (excluding iPhones), such as the iPad.

 

First, Apple and its two wholesalers agreed not to compete and prevent distributors from competing with each other, sterilizing the wholesale market for Apple products.

 

Second, so-called Premium distributors could not safely promote or lower prices, which led to an alignment of retail prices between Apple's integrated distributors and independent Premium distributors.

 

Finally, Apple has misused the economic dependence of these Premium distributors on them, subjecting them to unfair and unfavorable commercial conditions in relation to its network of integrated distributors. In view of the strong impact of these practices on competition in the distribution of Apple products via Apple premium resellers, the Authority imposes the highest penalty ever imposed in a case (1.24 billion euros).

 

It is also the heaviest sanction imposed on an economic player, in this case Apple (1.1 billion euros), whose extraordinary dimension has been duly taken into account.

 

Finally, the Authority found that, in this case, Apple had committed an abuse of economic dependence on its premium retailers, a practice which the Authority considers to be particularly serious."

 

Apple is accused of having implemented three anti-competitive practices in France within its electronics distribution network (excluding iPhone):

 

A distribution of products and customers between its two wholesalers Tech Data and Ingram Micro. The two wholesalers involved were also sanctioned to the tune of 139 million euros for accepting and implementing the product and customer allocation mechanisms developed and managed by Apple, instead of freely determining their policy (see details of sanctions in the summary table below).

 

These practices have somehow "sterilized" the wholesale market for Apple products, freezing market share and preventing competition between the various distribution channels of the Apple brand.

 

Selling prices imposed on Premium Retailers (RPOs) to apply the same prices as Apple itself, in Apple Stores and on its website.

 

This practice has resulted in end-users aligning the selling prices of Apple products with nearly half of the Apple retail market.

 

 

An abuse of economic dependence on premium resellers (mostly SMEs), which has manifested itself in particular by supply difficulties, discriminatory treatment, and instability of the remuneration conditions of their business (discounts and outstandings).

 

These practices consisted, in a context where distributor margins were extremely low, to keep distributors in extreme dependence on the reception of products, especially the most in-demand (new products).

 

The Authority found that, when new products were launched, RPOs were deprived of inventory so that they could not respond to orders made to them, while the network of Apple Stores and retailers was regularly supplied. This resulted in them losing customers, including regular customers. They have even sometimes been forced, in response to an order, to source themselves from other distribution channels, for example by ordering themselves directly from an Apple Store as a final customer would have done in order to supply their customers.

 

These practices have resulted in the weakening, and in some cases, the ouster of some of them, such as eBizcuss.

 

If a manufacturer is free to organize its distribution system as it sees fit, to delineate different sales channels, to choose wholesalers to supply certain retailers and to reserve the direct supply of other retailers, it must respect competition law, as long as the players in the distribution network are independent and are not part of the group.

 

In particular, it is prohibited for a network-head manufacturer to interfere with the competition that its wholesalers must engage in by pre-assigning customers, to agree with its distributors on retail prices for end-users, or to abuse the economic dependency situation in which its trading partners find themselves, in particular by putting them at a disadvantage compared to its own internal distribution network.

 

The Three Sanctioned Practices

 

#1 Wholesale Customer Restriction 

 

The Authority found that, from 2005 to March 2013, Apple had distributed products and customers between its two wholesalers, Tech Data and Ingram Micro. While these two wholesalers were independent companies.

 

Apple made a fine allocation of the distribution of its products, specifying to the two wholesalers the exact quantities of the different products to be delivered to each reseller. APR resellers were thus able to be held back in their commercial activity, being totally dependent on the stocks decided by Apple, both at the wholesale level and at their level.

 

If a supplier is free to organize its distribution network by distinguishing several channels and using wholesalers to approach certain retailers, while ensuring the direct supply of other retailers, it is provided that this division of tasks does not result in anti-competitive practice. As stand-alone economic operators in the market, wholesalers should have had the opportunity to freely determine their trade policy, including freely determining the products they wanted to distribute, and then how they would deliver their retail customers, without Apple's interference.

 

In this case, Apple has restricted the commercial freedom of its wholesalers, restricting them to the performance of the product allocations decided by Apple. They agreed to this policy by implementing the allocations decided by Apple. The resulting restriction of competition is all the more problematic since they happen to be in direct competition with Apple itself for the supply of a number of premium resellers, known as "direct" APR (resellers with a high turnover in Apple products and therefore chosen to purchase directly from Apple or from wholesalers).

 

This device has therefore resulted in distorting competition in the wholesale market by fully controlling sales made by wholesalers and allowing Apple to advantage its own distribution channel, controlling the way products are supplied on the one hand, direct resellers and, on the other hand, so-called "indirect" resellers (i.e. those who feed exclusively from wholesalers).

 

Thus, the competition that should in principle have existed in France for the sale of Apple-branded products between the various distribution channels - so-called "intra-brand" competition - has not been fully exercised in the wholesale market. The practice of cartels has also led to annihilation of competition between the two wholesalers themselves, as well as between wholesalers and Apple. It also limited competition between end-retailers by preventing them from competing with wholesalers upstream.

 

2. The Practice of Imposed Prices

 

The Authority also sanctioned Apple for strongly inciting APR resellers to charge the same prices as those charged in Apple Stores. In addition to communicating Prices, promotion control and price monitoring, the evidence on the record shows that Apple has developed a web of contractual clauses and implemented a set of behaviours that have left no room for manoeuvre for RPOs.

 

First, Apple distributed the prices of its Apple Retail Stores (presented as "advised" prices), on many media, including, on its website, accessible to end consumers.

 

Secondly, several very restrictive contractual clauses relating to the use of the brand in communication and marketing media strictly framed the conditions under which the RPOs could organise a promotional operation. These stipulations, which in particular required RPOs to use Apple-imposed media and equipment when implementing promotions, were likely to netract any initiative in this area, especially since their non-compliance was grounds for immediate and unanerate breach of APR's contract. In practice, RPOs did not offer many promotions, and were still under Apple's control.

 

Third, a price monitoring system also posed a risk of retaliation - in the form of a failure to deliver - in the event of promotions not authorized by Apple.

 

For example, RPA Youcast stated, "If we applied too systematic discounts and the salesperson in our sector knew, our competitors could be privileged in their deliveries."

 

Or, eBizcuss: "We see that Apple is doing a price policy to the consumer. If prices are lower than Apple's public prices, we are contacted by the Apple Sales Local Representatives to ask us to raise prices."

 

Finally, the investigation revealed that Apple - which had in-depth knowledge of the situation of RPOs and controlled their supply and the granting of the rebates to which they were entitled - was able to control their profitability. This lack of economic space and uncertainty have also played a major role in deterring RPOs from deviating from Apple's "advised" prices.

 

Corsidev's testimony in this regard states: "No room for manoeuvre is really possible. They wouldn't stop us from lowering prices but the margins are so low that it would be suicidal to do so."

 

Or that of Computer Science and Prevention, which stated: "For Apple products, our price repository is the matrix of Apple products with the associated price list: free for us to apply a discount depending on the competitive context, it is still complicated and dangerous to discount our sales given the weakness of our margin."

 

The retail distribution of Apple products in France now uses two separate channels: on the one hand, the "integrated" stores owned by Apple (Apple Store and the Internet) and on the other hand, some 2000 independent resellers (which are sourced through wholesalers or directly from Apple). These resellers are autonomous economic players and must therefore be able to freely determine their trade policy (choice of products and quantities ordered, choice of supplier, prices charged, promotions, etc.).

 

Heavily constrained, the RPOs admitted to practising the prices "advised" by Apple, which is further corroborated by the price statements on file. As a result, this practice has resulted in a perfect alignment of sales prices to end-users, for almost half of the retail market for Apple products (excluding iPhone).

 

By restricting the pricing freedom of RPOs, Apple has been able to limit not only the competition that can be exerted between the RPOs themselves but also the competition between them and its own (physical) distribution channels, when they were present in the same geographic area, or online (Apple Online Store). This practice has finally harmed consumers who have been deprived of real price competition across Apple product distribution channels.

 

3. Abuse of Economic Dependence

 

The evidence on the record highlights the fact that the RPOs were in a position of economic dependence on Apple and that Apple abused it. This situation, rarely observed in the decision-making practice of the Council and then of the Competition Authority3, the result of a complex tangle of multiple contractual clauses and practices.

 

APR's economic dependence on Apple

 

The Authority noted that the APR contracts required them to sell Apple products almost exclusively and prohibited them, for their duration, and up to six months after their term, from opening any store specializing in the exclusive sale of a brand competing across Europe. Moreover, the lack of an alternative to the distribution of Apple products was highlighted by the statements of the RPD: all stressed that their customers were strongly attached to the Apple brand and that the release of the Apple universe would result, for them, by the total loss of value of their trade funds, by unrecoverable investments, as well as by significant store redevelopment and staff training costs, which are impossible to achieve in the short term for operators in the already fragile situations.

 

Abuse

 

Article L. 420 2, paragraph 2 of the Code of Commerce, prohibits, as long as it is likely to affect the operation or structure of competition, the abusive exploitation by a company or group of enterprises of the state of economic dependence in which is a client or supplier company.

 

In this case, the Authority identified a set of rules and behaviors implemented by Apple that, taken together, constitute an abuse by abnormally and excessively restricting the commercial freedom of RPOs. These various factors have directly impacted the activity of RPOs beyond what an economic player can reasonably expect from a trading partner and have created an imbalance in their relationship with Apple.

 

Behaviors included supply difficulties, discriminatory treatment, unstable pay conditions for the APR business (remissions and outstandings), and discretionary implementation of certain rules.

 

Delays or lack of supply,resulting from Apple's allocation system and the disadvantage suffered by RPOs compared to Apple Stores and Apple's online sales site,which are still powered, on time, by Apple products.

 

Most APR resellers reported regular delivery problems, particularly when launching new products or at the end of the year. They faced supply restrictions as a result of Apple's customer allocation policy, either directly or through its wholesalers. Some references were found to be totally unavailable to RPOs.

 

In addition, when new products were launched, RPOs were often deprived of inventory so that they could not respond to orders made to them, while the Apple Stores network and Retailers were regularly Supplied.

 

The Authority has demonstrated that these delays or refusals of supply were not the result of stock outages, as they were available in Apple Stores, Apple Online Stores and Retailers.

 

This discriminatory treatment of RPOs was all the more serious given their particular situation with respect to the manufacturer. APR, on the one hand, is commercially independent, unlike Apple Stores, and must purchase the merchandise in order to carry out their distribution activity. On the other hand, they are forced to source Apple products (which must account for 70% of their sales in order to retain the status of APR reseller) and are placed under its economic dependence, unlike the "Retailers", who exercise general distribution activity and are not in a position of dependence on Apple.

 

Uncertainty over business conditions, given Apple's policy of rebates and outstandings Maintained in uncertainty about the volume of their supply, the RPOs were also concerned about the conditions of Apple's rebates. The system of remittances to RPOs was discretionary, so there was uncertainty about the amount of rebates paid to RPOs, which were compounded by uncertainty about their deliveries. Given the significant and growing weight of rebates in the profitability of RPOs and in their ability to achieve a positive margin, the unpredictability of the rebate system, arising from contractual clauses and their terms of implementation, is an abuse of economic dependence.

 

As an illustration, among the many testimonials of the RPOs, we can mention that of Acti Mac who stated: "Being regularly fed in a minimalist way, we cannot commit to deliver our customers who, weary of war, end up not even asking us by ordering us either on the Store or by going to the nearest ARS [Apple Store]."

 

An RPO also noted: "We never know when a new product is going to be launched, usually there are rumors (...). Apart from iPads and iPhones, product launches are not advertised. For other products there is no announcement, we are usually informed by the press, or we can deduce that there will be a product announcement when some APPLE STORE will announce a new product launch (...). For iPads we are not allowed to communicate around the launch."

 

The particular situation of the company eBizcuss demonstrates the concrete and effective impact of the abuse of dependence of the company Apple. Unable to receive the Apple products needed to satisfy the demand of its own customers or to be able to compete with Apple Stores by price or level of service, eBizcuss stores located in Paris or Lyon have been placed in a disadvantageous position compared to Apple Stores, which resulted in a 15% decrease in sales of these stores.

 

The president of the APR association also complained of a real "predatory strategy on the part of Apple" against the RPOs, as well as the company Alis Informatics which evokes a "chronicle of a planned death". You Cast blames its financial difficulties and liquidation procedure, in particular on its "cash lag concerns related to Apple product delivery problems."

 

When a manufacturer maintains its distributors in a position of dependence on them, it must be careful not to abuse them, i.e. not to limit their commercial freedom beyond tolerable limits and not to disadvantage them in relation to its internal distribution network.

 

Apple, along with the RPOs, benefited from a network whose obligations to the distributors were similar to those of franchisees, without being itself subject to the obligations of a franchisor, thus depriving them of the counterparties attached to this form of distribution. The establishment of this network exempted it from developing its own stores throughout France, which allowed it to concentrate the implementation of Apple Stores in the most profitable areas. With conditions comparable to that of an integrated operator, while having to assume the commercial and financial risks of an independent company, the RPOs allowed Apple to distribute its products throughout the country, without having to invest in its own stores and without the competition of its direct sales (online and in-store).

 

These practices have resulted in the weakening and, in a number of cases, the ouster of some RPOs, such as eBizcuss."

 

An Apple spokesman said: " The decision of the French Competition Authority is frustrating. It abandons the 30-year legal precedent that all French companies rely on. This order will cause confusion for companies in all industries. We strongly oppose, And plans to appeal. "