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11 October 2012
The Antitrust Authority recently released its draft Antitrust Rules (Block Exemption for Non-horizontal Arrangements Without Price Restrictions) 2012. It is hoped that this draft exemption will herald a significant change in the way in which the Restrictive Trade Practices Law 1998 is enforced in relation to restrictive arrangements.
At present, most restrictive arrangements require a specific exemption from the antitrust commissioner, even if they do not substantially endanger competition. Under the draft exemption, some of those arrangements could instead be executed without delay and without the preliminary approval of the commissioner, based on reasoned expert opinion examining their potential competitive impact. The commissioner would maintain his or her ability to examine, ex post, restrictive arrangements and to inflict penalties (whether criminal or not), where such arrangements fall outside the block exemption or, in the commissioner's opinion, raise a significant concern for competition.
However, while the draft exemption shows great scope for the modernisation of antitrust enforcement in Israel, if interpreted incorrectly, its language could render this 'reform' meaningless and leave the current regulatory regime in place, without almost any changes.
For more than a decade, a broad consensus has existed among antitrust law experts, academics, judges and senior authority officials regarding the need to amend the regulatory regime that applies to restrictive arrangements. In particular, the consensus has been that there is a need to eliminate the prior approval requirement for vertical arrangements; such arrangements are generally efficient and the danger they present to competition is insignificant in most cases.
The block exemptions were enacted more than 10 years ago and were intended to exempt certain arrangements (ie, those covered by the broad definition of a 'restrictive arrangement' in the law) from supervision, where they did not present any danger to competition. However, the block exemptions have failed in realising this objective. These exemptions included many exceptions to their implementation and relied on quantitative-technical tests that did not allow for their application when the market share of the parties to the arrangement exceeded a certain threshold, even if under the circumstances they did not present any competitive danger.
The draft exemption instead establishes the key principle that a restrictive arrangement that is not a horizontal arrangement and that involves no price restraints is exempt from the approval requirement if it does not present any risk of substantial harm to competition.From now on, parties to a restrictive arrangement can rely on a professional self-assessment of the arrangement's effects on competition, to the extent that the conclusions of the self-assessment do not indicate any danger to competition.
Nevertheless, the authority will currently allow this course to apply only to a particular category of restrictive arrangements - that is, those that are not horizontal and which do not include any price restraints.
In relation to arrangements that are not horizontal, the draft exemption significantly expands the definition of the term 'competitor' and therefore significantly restricts the range of arrangements that can be covered by the new block exemption. All entities that at the time of the agreement (or during the five years preceding the agreement) had some kind of overlap in the supply or purchase of products will be considered to be competitors. This was not the case with previous block exceptions, which classified as competitors only firms which were in a competitive relationship during the two years preceding the arrangement.
'Overlap' is defined as the provision or purchase of identical or similar products, or products that are used for identical or similar purposes. The draft exemption clarifies that in such a situation, entities will be considered to be competitors even if they do not operate in the same relevant market. Under the draft exemption, potential competitors are also deemed competitors.
This definition of a 'competitive relationship' is much broader than the standard criteria used for identifying such a relationship under the antitrust laws and a simplistic interpretation thereof could frustrate the entire purpose of the block exemption.
The antitrust laws classify as 'competitors' firms that supply products between which there is a high degree of substitutability and which are therefore operating in the same relevant market. The existing block exemptions define competitors in the same way. In contrast, the draft exemption identifies as 'competitors' any parties that supply products which are used for identical or similar purposes, even if such products are not part of the same relevant market. Such a definition, interpreted literally, identifies a competitive relationship under circumstances in which there clearly is no such relationship and could therefore lead to a situation in which the exemption will not apply to cases where there is no justification for such exclusion.
Thus, for example, an argument could be raised that a party supplying dairy products and a supplier of salty snacks could be considered competitors according to the draft exemption, since both dairy products and salty snacks are used for the same purpose (human consumption). Similarly, an electronics store and a retail store could be considered competitors, since the same products are sold in both stores (electronic products). In these cases - and many like them - the parties to the arrangement are not competitors according to the standard antitrust definition.
The broad definition of the term 'competitor' is especially problematic in terms of the identification as competitors of those which purchase identical or similar inputs. Thus, for example, it is hard to imagine a business that does not purchase electricity as an input for its activity, such that a simplistic reading of the draft exemption would mean that almost any arrangement would be classified as one between competitors.
In order for an arrangement to be considered a 'horizontal arrangement', it is not sufficient that the parties are classified as competitors. According to the draft exemption, an arrangement between competitors will be considered a horizontal arrangement only if it deals with the goods that are the subject of the competition between the parties or 'tangible' goods (goods in an upstream or downstream market or goods that are provided with the competing goods as a bundle or are complementary goods). The general director has thus sought to enable the application of the exemption to arrangements that are made between competitors and which do not relate to the field in which they compete - for example, an arrangement between two food manufacturers for a joint investment in natural gas. This expansion of the exemption framework is useful and may remove transaction costs in many situations in which competitors enter into a joint venture that does not relate to the area in which they compete.
Nevertheless, it is important to understand that this does not sufficiently resolve the difficulties noted above, as in light of the definition of 'competitor', almost any arrangement may be deemed to relate to goods that are in competition with each other or which are in each other's tangent markets.
Arrangements that avoid the broad definition of a horizontal arrangement are still not covered by the new block exemption if they involve a 'price restraint', defined in the draft exemption as a restraint between a supplier of goods and a purchaser of those goods, which either directly or indirectly relates to one or more of the following:
The draft exemption therefore does not apply to resale price maintenance agreements. This exclusion of all such arrangements is arguably unjustified; it is inconsistent with the current trends in that area, especially in the United States.
When the arrangement is not defined as a horizontal arrangement and it does not include a price restraint, the draft exemption would apply, provided that both of the following conditions are met:
The conditions for the application of the exemption are taken almost word for word from Section 14 of the Antitrust Law, which defines the commissioner's authority to exempt an arrangement from requiring the approval of the Antitrust Tribunal. It thus appears that where an agreement is not horizontal, does not include a price restraint and has been exempted from the approval process in the past, the new block exemption allows the parties to the agreement to avoid the process of re-applying for an exemption in connection with its renewal, if there has been no change in the relevant circumstances since the time at which the commissioner made the original decision to exempt.
Amendment 13 to the law was enacted in May 2012. The amendment gave the commissioner the power to impose substantial fines on individuals or corporations for violating the law's provisions, without requiring prior judicial proceedings. The penalties established in Amendment 13 can total up to 8% of the turnover of a company on which the penalty is imposed, up to a ceiling of IS24 million. The maximum penalty for individuals, including directors, is a sizeable IS1 million; there is an express provision prohibiting corporations from insuring or indemnifying a director regarding this penalty.
After the amendment was enacted, the authority published detailed instructions regarding the type of arrangements for the monetary payment that would serve as the authority's main enforcement measure. These monetary payment instructions establish, among other things, that restrictive arrangements that are not horizontal and which do not involve any intention to do harm to competition will generally be handled through a monetary payment rather than through criminal enforcement.
As stated above, the commissioner has the ability after the fact to penalise, ex post, parties to an arrangement for which approval was not sought, if the commissioner believes that the parties have erred in assessing the anti-competitive potential of the arrangement between them and that the arrangement had the potential to do substantial harm to competition.
For cases in which such an error has been made regarding an arrangement that is not horizontal and did not involve an intention to do harm to competition, the administrative penalty will be the central enforcement tool used to handle violations of the law. However, the use of criminal penalties cannot be ruled out, particularly in cases in which the block exemption was applied on the basis of an unfounded legal interpretation and when a self-assessment was used regarding a horizontal arrangement or regarding an arrangement with a blunt anti-competitive effect. It is therefore recommended that a professional be consulted before the self-assessment route is chosen, if and when it enters into force.
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