By Gil Rosenberg
Resale Price Maintenance
Arrangements which dictate prices constitute a vertical restriction (as opposed to coordination of prices among competitors, which is a horizontal restriction). These are arrangements in which a supplier/manufacturer/importer dictates to the retailer (or the distributor/marketer, etc.) the price at which the products which are the subject of the arrangement, shall be sold.
These arrangements are known as RPM (Resale Price Maintenance) arrangements and, as a rule, they are divided into three categories: Those that dictate fixed prices (RPM Fixed); those that dictate maximum prices (RPM Max) and those that dictate minimum prices.
Until the Shufersal case judgment which was delivered by the Supreme Court in 2015, any arrangement that dictated prices was considered a restrictive arrangement by virtue of the conclusive presumption that is provided in the Antitrust Law, and was therefore prohibited, unless permitted by one of the mechanisms prescribed in the Antitrust Law (a statutory exemption, a block exemption or a specific exemption issued by the Director General).
In light of the basic distinction between horizontal and vertical restrictive arrangements, in 2013 the previous Director General published a block exemption for vertical arrangements that do not restrict prices. In this framework, a distinction was made between the majority of the vertical restrictive arrangements (such as, for example, an exclusivity clause or a vertical non-competition clause) and RPM arrangements, excluding RPM Maximum arrangements, which as a rule are not considered to be arrangements that raise competitive concerns.
Meaning, exclusivity, vertical non-competition and RPM Max arrangements can fall within the block exemption (if the parties reach the conclusion, in the framework of a self-assessment regime, that they do not significantly undermine competition in the market), while, as a rule, RPM Fixed and RPM Minimum arrangements cannot benefit from the block exemption.
The Shufersal judgement set a precedential change and provided that in light of the benefits that could derive from vertical arrangements and the relatively small competitive concerns associated therewith, the question whether a vertical arrangement shall be deemed to be a restrictive arrangement and shall be examined in accordance with the criteria prescribed in Section 2(a) of the Antitrust Law – whether the arrangement "is liable to" harm competition (i.e., kind of "a rule of reason" criteria).
In fact, the Supreme Court ruled that a vertical arrangement shall not be examined in the framework of the conclusive presumptions prescribed in Section 2(b) of the Antitrust Law (i.e., kind of "per-se" prohibition criteria), and therefore shall not automatically be considered a prohibited restrictive arrangement, regardless of the extent it undermines competition.
This is the background upon which the Antitrust Authority published on January 11, 2017, a policy document regarding RPM restraints and the manner in which arrangements that vertically dictate prices (RPM Fixed or RPM Minimum) should be examined. The Antitrust Authority also presented the special circumstances in which these arrangements shall not be deemed restrictive arrangements.
According to the policy document, an arrangement between a supplier and a retailer that dictates a price shall not be deemed a restrictive arrangement, if the following two conditions are (cumulatively) met: (1) the arrangement does not raise a concern of undermining competition in the specific market; (2) the purpose of the arrangement is to achieve clear pro-competitive benefits. The draft specifies the cases in which both of the said conditions may be met, and specifying them herein exceeds the scope of this memo.
The said developments lead to an outcome that is similar to that which applies in the Unites States where the Supreme Court ruled, in 2007, that dictating a minimum price is also not per-se completely prohibited, but that it is rather necessary for it to be examined based on the reasonability rule, since it is possible that it may be pro-competitively economically justified.
We shall further mention that contrary to arrangements that vertically dictate prices, recommending prices ("recommended consumer price") is, in principle, permitted, however this, too, has qualifications, such as in situations in which the recommendation is somehow enforced – either by means of a reward mechanism or by a fine mechanism – or in certain markets, such as in the Promoting Competition in the Food Market Law, in which price recommendations by large suppliers to retailers was prohibited (unless the Director General issued the supplier an exemption).
Hence, parties to a vertical arrangement who wish to prescribe restrictions to the price at which the product shall be sold to the final customers in the framework of an agreement among themselves, must be aware on the one hand that the arrangement may be considered a restrictive arrangement that requires pre-approval by the antitrust administration, and on the other hand, that they are not currently necessarily required to receive such an approval (which involves time, expenses and uncertainty), and the recent changes in the field allow them to self-assess the arrangement's impact on competition, in reliance upon legal and economic opinions, in order to decide whether or not the arrangement warrants obtaining an exemption.
Enforcement Against Monopolies
On January 24, 2017, the Antitrust Authority held its annual conference, in the framework of which, Director General, Adv. Michal Halperin, stated that the Authority has set two main goals, the first of which is to increase enforcement against monopolies. According to her "This matter, which has been at the margins of the Antitrust Authority's activity, should take center stage. We have invested resources in building this force, and I believe that we will see results in 2017."
The Director General also added that the main enforcement in this field shall be administrative and not necessarily criminal, but that monetary sanctions of significant scopes of millions of Shekels are involved (in this context the Director General mentioned the US $2.5 million monetary sanction that was imposed upon the Ashdod Port due to abusing its monopoly power, in a case in which, for the first time, personal sanctions were also imposed on former senior officials in the port company). Exactly one year ago the former Director General informed of his intention to impose a US $3.5 million monetary sanction upon the Electricity Company, as well as personal sanctions upon officers of the company. The maximum monetary sanction that the Antitrust Authority is authorized to impose pursuant to the Antitrust Law is currently approximately US $ 6.5 million.
Such monetary sanctions shall be imposed upon monopolies for violating conduct – i.e., abusing monopoly power (such as charging excessive prices, predatory pricing, discriminating customers/suppliers, tying products, etc.) or unreasonable refusal to supply the monopolized product.
The difficulty is that according to Israeli law, a monopoly is not examined in accordance with the size of income or profits, nor even by its market force, as is customary in most Western World countries. The only criterion is a market share exceeding 50% in the relevant market.
The Director General's declaration of a body as a monopoly is also only declarative. A corporation that concentrates a large market share, even if it does not have such a market force and even if it is not listed among the largest corporations in the market, can find itself as one that is defined, retroactively, by the Antitrust Authority, as having abused its monopoly power, after having performed a practice that the Antitrust Law prohibits monopolies from performing.
Thus, the examination whether a corporation constitutes a monopoly pursuant to the definition in the Antitrust Law first and foremost requires an examination and definition of the markets that are relevant to its activity, and thereafter – requires measuring the corporation's market share in relation to the entire market. These are complex economic questions and public and/or clear data necessary to answer them, is not always available.
Alongside the said difficulties, an additional problem emerges in the form of a law memorandum that was published by the previous Director General, and the legislation of which by the Knesset is not unlikely to be promoted by the current Director General. According to the memorandum, in addition to the existing definition of a monopoly, which, as mentioned, is based on the market share, a definition of the market force will be added (in most advanced countries, this is the only definition). Meaning, if the Director General declared a corporation as a monopoly due to market force – in such case the declaration shall be necessary – it shall be deemed a monopoly, even if its market share is less than 50%.
In light of the above it is evident that in cases in which there is any doubt – particularly prior to the performance by a corporation that that is dominant in the market in which it operates, of practices that are prohibited to be performed by owners of monopolies – it is necessary to examine the corporation's status in the market and the possibility that it is a monopoly. A long list of actions that are permitted for any entity that is not a monopoly, are strictly prohibited, pursuant to the Antitrust Law, for monopoles, and the enforcement, as mentioned, may be severe and significant.
Gil Rosenberg is a partner at the Israeli firm Shibolet & Co. and heads its Antitrust and Competition practice. Mr. Rosenberg can be contacted at Gilr@shibolet.com or at +972-3-7778410