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Antitrust law in Israel has developed significantly in recent years. The Restrictive Trade Practices Law, 5748-1988 (the Law) and the regulations under it have been amended frequently, adding novel measures to the toolbox of the general director of the Israel Antitrust Authority (IAA), enhancing his power and increasing his influence.
For instance, in 2011, the general director acquired the authority to take broad and far-reaching actions against members of a ‘concentration group’ to prevent harm to competition or to increase competition. This innovative legislation regulates oligopolies and thus expands the scope of the Law, which previously had dealt principally with the ‘classic’ restraints of trade – restrictive arrangements, monopolies and mergers.
In 2012, the general director gained the authority to impose administrative monetary sanctions in response to certain violations of the Law. Consequently, violation of the Law is not only a civil wrong (and hence exposes the violator to lawsuits) and a criminal act (and hence exposes the violator to penalties), it also bears the risk of considerable administrative fees.
This amendment is significant: until recently, the general director employed criminal sanctions in cases of severe violations of the Law, while in cases of ‘moderate’ violations, the general director rarely imposed sanctions at all (and in any event, not substantial ones). Now, with the the authority to impose administrative fines, the general director is expected to utilise this new power with regard to a range of violations of the Law, and not only with respect to the most severe violations.
Moreover, two pieces of recently enacted legislation enhance the general director’s authorities and upgrade his status in other ways. The Law to Promote Competition and Reduce Concentration 5774-2013 (the Competition and Concentration Law) obligates the relevant regulator to take into account economy-wide concentrations and industry-wide competitiveness considerations, and to consult with the general director when awarding rights. The Advancement of Competition in the Food Sector Law 5774-2014 (the Food Sector Law) empowers the general director, in cases where retail markets are geographically concentrated, to order dominant retailers to divest or limit their natural expansion.
In accordance with recent legislative developments the IAA’s manpower and budget have grown significantly. Its investigations department has been enhanced and new departments have been opened, including a special economic department tasked with analysing and researching competition in markets that have been non-competitive on a routine basis. This initiative enables the IAA to deal proactively with matters that raise competition concerns, even before specific issues or complaints are brought before it.
A restrictive arrangement is defined as an arrangement between persons conducting business in which at least one of the parties restricts itself in a manner that is likely to eliminate or reduce competition (section 2(a) of the Law). The Law also provides conclusive presumptions that an arrangement involving a restraint will be deemed to be a restrictive arrangement if it relates to: price; profit; market allocation; quantity; quality or type of product or service (section 2(b) of the Law).
This definition is relatively broad since:
- it does not require an intention to restrict competition;
- a potential (rather than actual) harm to competition is sufficient; and
- the case-law has given a wide definition to the term ‘arrangement’.
This approach comports with the rationale underlying the Law: to identify as many potential threats to competition as possible, and then to allow those practices that do not pose true danger to competition.
A restrictive arrangement can also be created when a trade association determines or recommends to its members a course of action that is likely to eliminate or reduce competition. This also provides broad grounds for identifying a restrictive arrangement.
Prohibition of restrictive arrangements
As a general principle, a restrictive arrangement is prohibited unless it is permitted in accordance with one of the following options:
- Approved by the Antitrust Tribunal (the Tribunal). The Tribunal may approve a restrictive arrangement if it believes that the arrangement is in the public interest. The Tribunal may also stipulate conditions to its approval.
- Exempted by the general director (from requesting approval of the Tribunal). Upon the request of any party to a restrictive arrangement. and following consultation with the IAA’s exemptions and mergers committee, the general director may exempt a restrictive arrangement if he is persuaded that the restraints in the restrictive arrangement do not reduce competition in a considerable share of the market affected by the arrangement or that any such reduction does not result in substantial harm to competition in that market; and that the objective of the restrictive arrangement is not the reduction or elimination of competition and the restrictive arrangement does not include any restraints that are not necessary in order to fulfill its objectives. The general director may also stipulate conditions to the exemption.
- Exempted in accordance with one of the ‘block exemptions’. Block exemptions are regulations that provide exemption with respect to specific arrangements, including arrangements of minor importance (de minimis), joint ventures, franchising and distribution agreements, R&D arrangements and non-horizontal arrangements that do not include price restrictions. The last exemption came into force recently and significantly reformed the supervision of restrictive arrangements in Israel as it introduced a self-assessment mechanism for many restrictive arrangements that are not between competitors.
The Law also provides statutory exemptions and an arrangement that fits within these statutory exemptions is not considered to be a restrictive arrangement ab initio. These statutory exemptions cover:
- arrangements involving restraints that are mandated by law;
- arrangements involving restraints that relate to the rights to use intellectual property;
- certain arrangements relating to transfer of property rights;
- certain arrangements relating to the growing or marketing of domestic agricultural products;
- arrangements entered into by a company and its subsidiary; and
- certain other arrangements as specified in section 3 of the Law.
The Law, by its nature, is of territorial scope. Thus, an arrangement would be considered restrictive according to the Law only if it affects the Israeli market. Nevertheless, under the effects doctrine adopted by the general director and the Israeli courts, an arrangement can be considered restrictive even if it is entered into between non-Israeli entities or outside Israel. Thus, the examination of the issue is substantive, rather than technical.
Merger of companies
Section 1 of the Law defines a merger of companies as:
including the acquisition of a company’s main assets by another company or the acquisition of shares in a company by another company by which the acquiring company is accorded more than a quarter of the nominal value of the issued share capital, or of the voting power, or the power to appoint more than a quarter of the directors, or participation in more than a quarter of the profits of such company; the acquisition may be direct or indirect or by way of rights accorded by contract
The Law seeks to include in the definition all transactions that give one company a substantial structural link to another company (or that strengthen an existing link in a manner that is not immaterial), whatever the formal structure of that transaction and whatever technique is used to create that link.
Mergers of companies that involve foreign entities: the Law will apply only if at least two of the parties to a merger transaction are deemed to be companies under the Law. Under the IAA’s ‘nexus test’ a non-Israeli party to a merger transaction will be considered a company under the Law if:
- the foreign company is registered in Israel;
- the foreign company is not registered in Israel but has a ‘merger affiliation’ with an Israeli company. A merger affiliation includes, inter alia, a situation in which the non-Israeli company:
- holds more than a quarter of an Israeli company’s issued capital stock;
- holds more than a quarter of the Israeli company’s voting power;
- has the right to appoint more than a quarter of the Israeli company’s directors; or
- has the right to receive more than a quarter of the Israeli company’s profits.
- a non-Israeli company maintains a place of business in Israel, which is deemed to be the case if it holds significant influence over the conduct of a local representative.
Mergers of companies that require filing
The Law requires parties to a ‘merger of companies’ to file a notification with the IAA when:
- as a result of the merger, the market share of the merging companies in the production, sale, marketing or purchase of a particular asset or in the provision of a particular service and a similar service, would exceed 50 per cent;
- the combined sales turnover of the merging companies in the financial year preceding the merger exceeds 150 million new Israeli shekels and at least each of two of the merging parties’ sales turnover for that year exceeds 10 million shekels;
- one of the merging companies is a monopoly (ie, it controls more than 50 per cent of either a certain product market or geographical market).
The requirements set forth above apply solely with respect to a company’s turnover in Israel and with respect to a company’s market share in Israel. Moreover, companies filing a notification with the IAA must take into account companies or persons controlling them, any entity controlled by them and any entity controlled by any of the foregoing. ‘Control’ is defined under the Law as:
Possession of more than half of one of the following means of control: (1) The right to vote at the general assembly of a company or the parallel body of another corporation; (2) The right to appoint the directors of a company.
When filing with the IAA is required, the merger transaction may not be consummated until the IAA approves it.
The merger evaluation process
Israeli law (similar to antitrust laws in Europe and in the US) distinguishes between three types of mergers:
- horizontal (mergers between competing companies);
- vertical (mergers between different stages of the supply chain); and
- ‘conglomerate’ (the residual group including all other mergers).
Each type of merger raises unique concerns and requires different information for evaluation.
The general director is mandated to object to a merger of companies, or to stipulate conditions for the merger, if he finds that there is reasonable likelihood that, as a result of the transaction, competition in the relevant sector would be significantly harmed or that the public would be harmed by:
- the high price level of an asset of a service;
- the low quality of an asset or of a service; or
- the available quantity of the asset, of the scope of the service supplied, or the constancy and conditions of supply.
The general director’s approval is granted only after consultation with the exemptions and mergers committee.
An entity is deemed a monopoly if it controls more than 50 per cent of either the relevant product market or geographical market. This test looks to market share rather than market power, hence this test is technical rather than substantive.
Relevant prohibitions on monopolies
The mere existence of a monopoly is not prohibited. However, a monopolist must abide by strict standards of conduct.
A monopolist may not unreasonably refuse to provide or purchase a product or service over which a monopoly exists. Furthermore, a monopolist may not abuse its dominant position in the market in a manner that could reduce business competition or injure the public. A monopolist will be deemed to abuse its dominant position if it:
- sets unfair prices;
- reduces or increases the quantity of products or the services that it offers outside a framework of fair competitive activity;
- applies different contractual conditions to similar transactions so that certain costumers or suppliers may have an unfair advantage over their competitors; or
- sets conditions in a contract that are unrelated to the subject matter of the contract.
In October 2013, the IAA published draft guidelines for the enforcement of excessive pricing, which reflects a new approach towards monopoly pricing. According to these guidelines, the prohibition in the Law on ‘unfair pricing’ does not apply only to predatory pricing, but also to excessive pricing. The guidelines include a ‘safe harbour’, whereby the IAA will not initiate enforcement actions against a monopoly that does not set its prices above 20 per cent of its manufacturing costs (ie, long run average incremental costs). Nevertheless, a company that the general director declares a monopoly, and that sets its prices higher than the ‘safe harbour’, could be subject to sanctions.
Finally, the general director has the authority to supervise and regulate monopolistic conduct. If the general director believes competition is being harmed (or at risk of being substantially harmed) as a result of the existence of a monopoly or the behavior of a monopolist, he may instruct the monopolist regarding the measures to be taken in order to prevent this harm.
The Law enables the general director the authority to determine that a concentration group exists if the following conditions are met:
- over 50 per cent of the market share is held by a small number of companies;
- a low degree of competition or conditions allowing for a low degree of competition exist between the companies or in the market in which they operate; and
- the directives that the general director is authorised to issue to the members of the concentration group may prevent harm or significant potential harm to competition, or may increase competition significantly or create conditions for the significant increase of competition.
Unlike monopolies, which are deemed to exist if they meet the definition in the Law (regardless of whether the general director declared their existence), the general director’s announcement of the existence of a concentration group is not merely declarative but rather is constitutive of their existence.
The general director’s authorities regarding concentration groups
After the general director determines that a concentration group exists, the general director is authorised to issue directives to the members of the group. The Law does not limit the scope of the directives or their content, but restricts only their purpose. The Law provides that the purpose of the directives must be:
- to prevent harm or significant potential harm to the public or to competition; or
- to increase competition significantly or to create conditions for the significant increase of competition.
The general director also is authorised to request the Tribunal to order members of concentration group to sell their holdings in each other’s businesses (cross holdings). The Tribunal may exercise this authority if it finds that doing so would prevent harm or significant potential harm to competition or would increase competition significantly or create conditions for the significant increase of competition.
The general director has significant criminal enforcement powers. According to the Law, the general director has the power to:
- initiate a criminal investigation;
- conduct the investigation;
- decide whether to prosecute; and
- handle the criminal proceedings.
As a general matter, any violation of the Law is a criminal offence. In addition, if an offence is committed by an entity, any person acting as an active director, a partner (other than a limited partner) or a senior management employee with responsibilities in the relevant field may be indicted for the offence, unless he can prove that the offence was committed without his knowledge and that he took all reasonable steps to ensure compliance with the Law.
In practice, and as mentioned above, the general director tends to reserve criminal sanctions for the most severe antitrust violations, particularly hard-core cartels. In other types of violations, the general director typically prefers to utilise the wide array of administrative tools in his toolbox.
Foreign entities and criminal enforcement
When the relevant parties to the violation are non-Israeli, the general director may be inclined, for practical reasons, to utilise administrative (rather than criminal) sanctions, even if the violation in question is severe. The general director has stated that conducting criminal proceedings against parties resident outside Israel requires resources that are far more costly than the resources required to conduct local criminal proceedings – and for this reason he may decide not to carry out a criminal investigation in such cases.
A person violating the Law is liable to three years imprisonment or a fine of approximately 2.26 million shekels and an additional fine of up to 14,000 shekels for each day the offence continues. In the case of a company, the fine or the additional fine is doubled.
Under ‘aggravated circumstances’, the maximum penalty increases to five years imprisonment (or the fines provided above). ‘Aggravated circumstances’ are likely to cause substantial damage to business competition because of one or more of the following factors:
- the share and position of the accused in the sector affected by the offence;
- the duration of the offence;
- the damage caused or expected to be caused to the public as a result of the offence; or
- the benefits obtained by the accused.
The IAA’s leniency programme was established in 2005. Under the programme, every person – including a company, director or employee – will be granted full immunity from criminal prosecution relating to a cartel offence (or a related offence) under the Law if it is the first party to come forward to the IAA and provide all the information it knows in connection with the restrictive arrangement. Although the programme provides leniency from criminal prosecution, it does not provide any guarantee or protection from administrative sanctions or from civil proceedings.
The IAA has repeatedly stated that it ascribes great importance to the programme and that in its view the programme constitutes a major component of the Israeli enforcement regime concerning cartels. However, according to a report published by the state comptroller as of August 2009, over four years after the establishment of the leniency programme, the IAA received two applications for inclusion in the leniency programme, and only two immunity agreements were signed. According to the Comptroller’s Report, one of the agreements did not result in the exposure of any cartels or in any indictment, while the other led to an active investigation.
As mentioned above, the IAA’s toolbox has significantly expanded with the introduction of the administrative fines that, since May 2012, the general director may impose through an administrative process, with reference to certain types of conduct.
The Law provides a maximum fine of 8 per cent of a company’s total sales turnover in the year prior to the violation, not to exceed a total of 24 million shekels. For individuals or companies that, in the year prior to the violation, had sales turnover of less than 10 million shekels, the Law sets a maximum fine of 1 million shekels.
All offences with respect to which the general director may impose administrative fines are also subject to criminal enforcement, as well as other administrative measures. Accordingly, following the amendment, the IAA adopted accompanying guidelines to address the types of violations subject to administrative fines. In general terms, according to these guidelines, administrative fines may be applied, inter alia, in cases of:
- non-horizontal restrictive arrangements;
- information exchanges;
- certain joint ventures;
- certain cases of minority holdings between competitors;
- certain restrictive arrangements ancillary to merger transactions;
- non-horizontal mergers;
- abuses of dominant position;
- certain cases of violations of consent decrees; and
- failure to comply with information requests.
However, these guidelines also provide that they are subject to the IAA’s review of the particular circumstances of each case, which may lead to a deviation from the general rules set forth therein, in relevant cases.
The IAA also adopted a separate set of guidelines concerning the criteria for determining the level of monetary sanctions imposed. The criteria include, inter alia:
- the duration of the violation;
- the potential harm the violation may cause to competition or to the public;
- the role of the violator in the violation;
- prior violations;
- actions taken by the violator to stop the violation or prevent its repetition; and
- the violator’s financial status.
The general director may also issue an administrative determination that a certain violation has occurred (such as a merger that was consummated unlawfully, or a restrictive arrangement in a particular market).
An administrative determination constitutes prima facie evidence in judicial proceedings and shifts the burden of proof. As a result, it can increase the exposure of the violators to civil lawsuits, including class actions. Often, one of the primary goals of a determination is to encourage and support the private enforcement of the Law. In practice, published determinations are often followed by lawsuits and class actions that are based on the content of the determination.
For example, in September 2013, the general director published a determination declaring that a global cartel existed in the electricity infrastructure sector. Two class actions were filed immediately following this determination, as well as a private lawsuit by the Israel Electric Corporation Ltd. Our firm represents one of the cartel members subject to these lawsuits.
The Law authorises the general director and parties to certain antitrust violations to agree to a consent decree that provides, inter alia, for money to be paid to the state in lieu of criminal proceedings or an administrative determination. The consent decree may include a statement that the parties do not acknowledge any breach of the Law.
Under the Law, an act or omission contrary to the Law constitutes a tort, which allows the injured party to file a lawsuit against the violator. Additionally, under the Class Actions Law, 5766-2006, a lawsuit may be filed on the grounds of a violation of the Law.
While theoretically these options are independent of the IAA’s enforcement activities, in practice they are closely connected. IAA actions – including issuing a summons for a hearing, filing indictments and the publication of administrative determinations – can be a trigger for private lawsuits, as such actions by the IAA indicate substantial grounds to believe that the Law was violated.
Recent years have witnessed an increase in private enforcement of antitrust law in Israel. The private sector has become increasingly aware of the importance of antitrust violations and is less hesitant to reach out to the courts for recovery. The increase in class actions filed against parties to global cartels that allegedly affected the Israeli market has been notable. In the past year, four class actions were filed in Israel further to criminal proceedings around the world regarding alleged global cartels (two in the GIS industry, one in the air cargo shipping industry and one in the production of panels for LCD screens). Our firm represents defendants in each of these cases.
The IAA is naturally interested in encouraging private enforcement. The purpose of some of its enforcement tools (eg, the administrative determination) is to initiate and support private enforcement. It is not surprising, then, that the IAA supports a new legislative proposal that would grant courts the power to award treble damages (damages up to three times the actual proven damages) and thereby potentially enhance the power of private enforcement.
Fischer Behar Chen Well Orion & Co
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Tel Aviv 6473104,
FBC, founded in 1958, is one of Israel’s premier full-service law firms. FBC offers its clients professional excellence and personal attention across the spectrum of multidisciplinary business legal services, and is involved in a wide range of representations at the forefront of Israel’s legal-economic agenda.
Since 2000, FBC has been Israel’s fastest growing and most dynamic law firm, and is repeatedly ranked by international and domestic indices among Israel’s leading law firms.
FBC has Israel’s leading and largest Competition & Antitrust practice. It represents companies on the full spectrum of criminal, administrative and civil antitrust matters, including merger control, abusive behavior, restrictive arrangements and regulation of cartels, monopolies and oligopolies.
FBC's Competition team provides ongoing advice on antitrust compliance and represents multinational and local companies in commercial transactions, as well as class actions and complex litigation before civil courts, criminal courts, the Antitrust Tribunal and the Israel Antitrust Authority.
FBC has been ranked consistently by the Global Competition Review as one of the world’s 100 leading competition practices and as Israel’s premier antitrust firm.
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