No bad Apple here: Competition Bureau ends two-year investigation into iPhone contracts

The Competition Bureau (the Bureau) recently announced the discontinuance of its investigation into whether Apple Inc. and Apple Canada Inc. contravened the abuse of dominance provisions under the Competition Act (the Act) (see here). After an investigation spanning over two years, the Bureau was unable to find sufficient evidence that Apple’s conduct substantially lessened competition, a necessary element for finding abuse of dominance under Section 79 of the Act.

The issues

In 2014 (way back in the iPhone 5 and 6 era), the Bureau received a marketplace complaint prompting an investigation into contracts between Apple and Canadian wireless carriers concerning the sale and marketing of iPhones. In particular, the Bureau was concerned about contracts Apple had with wireless carriers containing clauses that provided for:

• minimum order quantities or other volume commitments;
• “most‑favoured nation” or any other term that required preferential or parity treatment; and
• up‑front retail subsidy requirements.

The Bureau generally considers clauses of this nature to be vertical restraints that may impair competition. The Bureau’s concern was that such clauses may have the effect of increasing the price of rival handsets, increasing the price of wireless service to rival handsets, and/or otherwise discouraging wireless carriers from stocking or selling rival handsets.

The law

The statutory test for abuse of dominance under Section 79 of the Act has three elements:

• one or more persons must substantially control a class or species of business;
• that person must engage in a practice of anti-competitive acts; and
• the practice must be likely to have the effect of lessening competition substantially in a market.

The Bureau bears the burden of collecting sufficient evidence to prove each of these elements.

The investigation and its conclusions

The Bureau’s investigation took advantage of every fact-gathering process it had at its disposal. This included gathering information through industry participants on a voluntary basis, compelling Apple and wireless providers to produce information through the Bureau’s statutory powers, and cooperating with foreign competition law enforcement agencies conducting similar investigations.

This investigation was enough to satisfy the Bureau that Apple “has market power, due largely to its market position, the profitability of the iPhone, and the iPhone’s ʽmust‑have’ nature for wireless carriers” (see here). The key issue then became whether the effect of Apple’s contracts with wireless carriers on competitors as well as evidence of anti-competitive motive on Apple’s part.

The Bureau determined there was an impact on carrier decision-making “at the margins,” but this was not sufficient for the Bureau to conclude there would be a “meaningful impact” on competitors or consumers.  For this reason it discontinued the investigation.  While the Bureau is free to resume the investigation should new evidence come to light, this remains a significant victory for Apple.

Key takeaways

The Bureau’s position statement in this matter contains some interesting comments on Bureau investigations in the context of volatile and innovative markets. The Bureau noted that the smartphone industry is dynamic, with significant changes in technology as well as market participants over the course of the investigation. While this might suggest the industry is competitive, the Bureau clarified that:

[…] as a general principle, a finding that a market is innovative and dynamic does not necessarily preclude a finding that conduct has reduced competition, insofar that a market may be more competitive in the absence of that conduct.

This is the latest in a long history of battles between Apple and competition regulators around the world as they grapple with the success of a number of companies in the ever-growing and lucrative consumer electronics industry. The Bureau noted that 73 per cent of Canadian adults owned a smartphone in 2015, up from 24 per cent in 2010 and that promoting competition and innovation in the digital economy is a Bureau priority. In this case, despite the Bureau’s close scrutiny over the industry, Apple tallied a major victory.