Apple (AAPL) Fined Over iPhone Water Resistance Claims

Apple Inc. (AAPL) has been fined 10 million euros, the equivalent of roughly $12 million, by regulators in Italy who ruled that the company has engaged in "aggressive and misleading" sales practices regarding the water-resistant properties of its iPhones. The Italian Competition Authority, officially the Autorità Garante della Concorrenza e del Mercato (AGCM), levied the fine.   

The AGCM found that Apple's claims about the water-resistant properties of various iPhone models, from the iPhone 8 through the iPhone 11, only held true in certain controlled lab conditions. Moreover, the AGCM criticized Apple for making bold claims about water resistance in its marketing pitch for these iPhone models while disclaiming coverage for damage caused by water or other liquids in the fine print of its warranty and refusing to repair iPhones that had suffered water damage.   

Significance for Investors

Given that Apple has total annual net sales of $274.5 billion, the fine assessed by Italy's AGCM is easily absorbable by the company. However, there is a strong possibility that this will prove to be just the opening salvo in a series of regulatory and legal actions to be taken against the company in this matter by governments and consumers around the world. In that case, the potential cost to Apple could escalate rapidly.

For example, the AGCM also slapped Apple with a 10 million euro fine in 2018 over what has come to be known as "batterygate," in which Apple failed to inform consumers that its software updates were deliberately downgrading the performance of older iPhones with aging batteries. After a pair of large settlements in the United States in 2020, the total worldwide cost to Apple from "batterygate" currently is trending to be upwards of $600 million.

Moreover, the water-resistance matter represents yet another hit to the reputation of Apple, which is bound to have some, as yet indeterminate, negative impact on future sales. Apple already has become a prime target of politicians, regulators, and consumer advocates in the wake of "batterygate." The water-resistance matter is likely to provide yet more fodder for the company's critics.

Other Large European Fines for Apple

So far in 2020, French authorities have hit Apple with fines of 25 million euros (about $29.9 million) over "batterygate" and 1.1 billion euros (about $1.3 billion) over anti-competitive practices. "Apple and its two wholesalers agreed not to compete and prevent distributors from competing with each other, thereby sterilizing the wholesale market for Apple products," the president of the French Competition Authority stated in March 2020, regarding the latter case.

Those two Apple wholesalers were fined a combined 139 million euros (about $166.5 million) for price fixing. The collective fines assessed in this case, over 1.2 billion euros (more than $1.4 billion), were the largest ever levied in a single case, the French Competition Authority noted.

Looking Ahead

In the promotional materials for its recently introduced iPhone 12 models, Apple included improved water resistance among the key features. In the wake of the AGCM's findings, it is possible that yet other claims made by Apple about this product's features may be met with skepticism as well, at least until they can be confirmed by rigorous independent testing. That, in turn, may put a brake on sales. Indeed, it is possible that consumers' confidence in Apple's assertions about any of its products may be damaged as well.

Additionally, the tests conducted by the AGCM stopped with the iPhone 11. It remains to be seen whether the iPhone 12 measures up to Apple's claims about water resistance and, if not, whether additional fines may be forthcoming.