Apple's loss of a small legal battle in China might spell big trouble

People wearing face masks following the Covid-19 outbreak are seen at an Apple store as the new iPhone SE goes on sale, in Hangzhou, Zhejiang province, China on April 24, 2020.
PHOTO: Reuters file

China’s Supreme Court has made a civil ruling in favour of a consumer versus the China subsidiary of Apple, in a legal development lawyers say could open the gates for more consumers in the country to file similar complaints against the iPhone maker in local courts.

In a decision last month the Supreme People’s Court in China ruled that a lawsuit filed by a Chinese consumer against Apple’s China entity on antitrust grounds could proceed in a Shanghai court, rejecting Apple’s plea that its China entity, which mainly distributes Apple’s products in China, should not be sued over issues related to App Store operations.

The case involves Jin Xin, who is demanding Apple stop charging 30 per cent commission on purchases in the China App Store, and to allow Chinese consumers to make payments through wallets other than Apple Pay, to provide 100,000 yuan (S$21,100) in compensation and to issue a public apology.

The Shanghai Intellectual Property Court has yet to make a ruling over whether the person’s demands should be met.

But the decision by China’s top court to allow the lawsuit to be considered by the Shanghai court could signal more trouble ahead for Apple in China, which now accounts for a fifth of its iPhone sales.

Wang Qiongfei, Jin’s attorney, told the South China Morning Post in a telephone interview that a hearing is expected to take place in Shanghai next January.

Apple CEO Tim Cook unveils the new iPhone 13 during a special event at Apple Park in Cupertino, California broadcast on Sept 14, 2021. PHOTO: Brooks Kraft/Apple Inc/Handout via Reuters

“This is a case where Chinese consumers are standing up for their rights against an international business giant,” said Wang, who is also the founder of KinDing, a Hangzhou-based law firm.

He said the case will serve as a milestone for Chinese consumers to demand better protection from big companies like Apple.

Apple declined to comment.

Jin filed his lawsuit against Apple Computer Trading Shanghai Co in February after he came to the decision that Apple was potentially abusing its market dominance by charging “an Apple tax” on apps, and was excluding other payment services such as Alipay and WeChat Pay, both of which are widely used in China.

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Alipay is affiliated with Alibaba, owner of the South China Morning Post.

Apple has, for many years, taken a 30 per cent commission for all in-app purchases downloaded from its App Store.

In response to mounting global scrutiny in recent months, it has lowered the fee this year to 15 per cent for developers who produce less than US$1 million (S$1.4 million) in annual revenue from their apps and those that are new to the store.

In June, Apple announced that the App Store ecosystem produced US$643 billion in billings and sales in 2020.

China accounted for 47 per cent of this, according to research firm Analysis Group, while the US accounted for 27 per cent.

Apple has prided itself on having a closed, secure ecosystem but legal pressure from consumers and peers is now leading to cracks in Apple’s “walled garden”.

The Apple Inc logo is seen at the entrance to the Apple store in Brussels, Belgium July 2, 2021. REUTERS/Yves Herman
The Apple Inc logo is seen at the entrance to the Apple store in Brussels, Belgium on July 2, 2021. PHOTO: Reuters file 

In August, South Korea’s parliament approved a bill that bans app store operators, including Apple and Google, from forcing software developers to use their payment systems, effectively prohibiting them from charging commissions on in-app purchases.

Last month, a landmark case between Apple and Epic Games in the US – concerning similar issues connected to Apple’s platform commission and closed payment system – came to a close with Apple deemed to have engaged in anticompetitive conduct.

The tech giant was allowed to keep its payment system, though.

In its ruling published last Monday, China’s top court said Apple had potentially abused its market position and undermined competition – that is why the case can be heard.

In his lawsuit Jin alleges that the prices of in-app services offered by apps in Apple’s App Store, including video app iQiyi, podcast app Himalaya, and music app NetEase Music, are higher than in Android app stores – possibly as a result of Apple’s 30 per cent App store commission.

Jin also cites China’s Anti-Monopoly Law in accusing Apple of “anticompetitive” practices.

You Yunting, a senior partner at Shanghai Debund Law Firm, said that the top court’s ruling could have a far-reaching impact.

“I think this case has established a new principle namely that antitrust cases are also rights infringement cases and thus can be adjudicated by local courts.

"So this means that the victims in antitrust cases, for example the competitors of the monopolistic company or consumers, may very likely go to their local court for legal actions,” You said.

Software distribution platforms such as Steam, PlayStation Store and Nintendo eShop all require varying levels of commissions.

Rich Bishop, chief executive of app publisher AppInChina, said that the Android app market in China is distinctly different from the rest of the world because Google Play is not available in the country.

While Google Play features a similar commission fee structure to Apple’s App Store, China’s domestic Android app stores typically charge zero commissions to non-gaming apps while charging a hefty 50 per cent cut from gaming apps.

According to a recent probe by the Consumer Council at the Minhang District in Shanghai, apps including Bilibili, iQiyi and Mango TV charge a higher fee for their membership on iOS platforms than on Android or PC.

In some cases, the price difference for an annual membership package can reach 100 yuan. These price differences between membership on iOS and Android have sparked public controversy over the years.

This article was first published in South China Morning Post.