The IAA and the Israeli Courts Seemingly March to Different Beats
Two years ago, the former Israeli Antitrust Commissioner, Prof. David Gilo, published Opinion 1/14 stating that monopolies are prohibited under Israeli law from charging excessive prices. Prof. Gilo published the opinion despite the fact that Israeli Restrictive Trade Practices Law, 1988 does not expressly refer to this matter and despite the fact that no binding precedent exists regarding such a "prohibition".
Two years have passed since the publication of Opinion 1/14. Since its publication, the Opinion inspired and served as basis to a series of class actions against monopolists, claiming they charged excessive prices.
In this update, we will review two recent decisions by the Israeli courts. In particular, we will refer to the recent decision from the District Court of the Central District-Lod, given a few days ago, to approve a class action claim for excessive pricing of cottage cheese by Israel's largest dairy product manufacturer.
We will also refer to criticism heard recently from Dr. Assaf Eilat, Chief Economist for the Israeli Antitrust Authority, in a conference on antitrust and competition law held at HFN on the subject of excessive pricing. Dr. Eilat mentioned that prohibiting excessive pricing "raises significant difficulties". Dr. Eilat's criticism raises significant doubts as to Opinion 1/14 and its status.
Restrictive Trade Practices Law, 1988 ("RTPL") prohibits a monopoly from abusing its position in the market in a manner liable to reduce business competition or injure the public. Among
other things, the RTPL states that establishing "unfair prices" will be seen as abuse of monopoly position.
Monopoly is defined rather technically as having a market share over 50%. Hence, the RTPL's monopoly definition may apply to an entity regardless of its market power.
The question therefore arises: what are unfair prices? Will excessive prices constitute "unfair prices"?
As only recently stated by the Israeli Supreme Court – no binding precedent was established in this regard.
Other legal systems, such as the American legal system, prohibit "monopolists" (normally defined by market power rather than market share) from exclusionary practices such as predatory pricing, which may exclude the monopolist's competitors from the market. Exploitative practices, such as excessive pricing, are not prohibited. This position results from the trust these systems put in the mechanisms of a free market: the ability to charge higher prices gives market participants the incentive to change, innovate and improve their products and services in order to become monopolists. High prices, in turn, will lead to the entry of new competitors into the market, and this new competition will decrease prices.
Moreover, it seems unreasonable that a monopolist would have to constantly walk a tightrope between two possible violations: to avoid excessive pricing on the one hand and predatory pricing or prohibited discounts on the other. Under said system, and considering the difficulties in defining and calculating excessive prices, a monopolist may be subject to claims of excessive prices from its customers, while at the same time face claims of predatory pricing practices from its competitors.
Despite the aforementioned approach which finds the prohibition on excessive pricing as undesirable, and despite there being no precedent on the subject, Prof. David Gilo, Israel's former Antitrust Commissioner, published, in April 2014, Opinion 1/14 (2014 IAA Website, 500603), stating that "the prohibition on charging an unfair level of pricing set by Section 29A(b)(1) of the Restrictive Trade Practices Law applies also to setting excessive pricing by a monopoly". Opinion 1/14 refers to the methods of application and enforcement of the prohibition, and particularly how to assess whether certain prices are "excessive". The Opinion
also sets a safe harbor stating that when the gap between a product's costs and its price is less than 20% the IAA will not take enforcement measures for excessive pricing.
In practice, however, the IAA never initiated any proceedings against monopolies which allegedly set excessive prices. Nonetheless, following Opinion 1/14, several motions were filed with Israeli district courts to approve excessive prices claims as class actions.1
The Cottage Cheese Class Action's Approval by the District Court
Among these claims was a claim against Israel's largest dairy product manufacturer, Tnuva, for cottage cheese prices. By way of reminder – the high prices of cottage cheese and the subsequent consumer boycott on Tnuva was one of the first events, some would even say the trigger, of the 2011 social protest (the so called "Cottage Cheese Protest"), which eventually led to many changes in Israeli law in general and in competition laws in particular.
A few days ago, the District Court for the Central-Lod District approved the claim as class action. The District Court expressly stated its position that the law recognizes a claim based on monopoly abuse by excessive pricing. The decision is based, among other things, on Opinion 1/14. The District Court's main arguments stated that the language of unfair pricing did not exclude excessive pricing; that excessive pricing claims exist under section 102 of the Treaty on the Functioning of the European Union, after which the RTPL's monopoly abuse section was fashioned; and the existence of Opinion 1/14 which, according to the court "as the official position of the relevant regulator has weight and importance in interpreting the subject-matter of the regulation".
Under Israeli law, the District Court's decision does not constitute binding precedent. However, it may persuade other courts to follow suit.
The Cream and Soft Cheese Interim Decision by the Supreme Court
Another claim against Tnuva, which enjoys great public attention in Israel, is a class action by Israel's former accountant general (in his role as a consumer) for excessively pricing soft cheese and cream. In an interim decision, the District Court of Jerusalem ordered Tnuva to
1 In Israel, before a claim is approved as class action it must undergo a procedure to prove its suitability to this procedure, including showing the existence of a legal claim.
disclose some documents to allow the court to determine Tnuva's profitability with regard to such products. Tnuva appealed this interim decision to the Israeli Supreme Court, which very recently ruled that Tnuva will have to disclose the documents, pending the trial court's advance scrutiny of the documents, and the signing of a non-disclosure agreement by the class action plaintiff's attorneys.
According to the Supreme Court's decision, Tnuva argued, inter alia, that since the question of excessive pricing was undecided in precedent, there should not be disclosure in such proceedings. The Supreme Court rejected this argument, suggesting that it would result in the dismissal of all excessive pricing lawsuits. Said result would seem unreasonable since the excessive pricing claim has not been rejected by case-law, and it also seems undesirable in light of the Commissioner's Opinion 1/14.
The IAA's Position – Is a Change Coming?
As mentioned, it seems that Opinion 1/14 carries considerable weight with the courts, and features prominently in their decisions.
However, in a conference on competition and antitrust held in HFN's offices on March 30 2016, the IAA's chief Economist, Dr. Assaf Eilat, sharply criticized Opinion 1/14.
Dr. Eilat stated that Opinion 1/14 "raises significant difficulties”. He explained that the Opinion sets forth three tests to recognize excessive pricing: the cost test – which considers the gap between the product's price and its cost of production; the profitability test; and a test to compare the price of the product in question to the prices of similar products. Dr. Eilat mentioned that "The last two tests – profitability and comparison - will be very hard to ever implement, in my opinion”.
As to the cost test, Dr. Eilat thinks it too will be "very hard to implement", especially considering a firm which has more than one product as well as costs common to several products. Considering the various accounting rules, the question will be, how to create a test that will be clear and transparent. In addition, once the profit has been calculated, there remains the moral question – what profit is said monopoly allowed to make?
As to the safe harbor in the Opinion, Dr. Eilat added that "what actually happened was that the safe-harbor became the norm, and it can be seen in the courts' decisions – once there is a
number – 20%, then this is what is permitted. What we wanted to show was that under 20%
- it is safe, and above – we do not know". In other words – the safe harbor mechanism set by the Opinion has failed to serve its proper purpose, and may have done some harm.
Dr. Eilat mentioned that the opinions he expressed were solely his own, but that he has expressed his opinions to the new Commissioner, the recently appointed Ms. Michal Halperin, who, in her former private practice, was known to oppose Opinion 1/14.
Since the 2011 social protest, monopoly owners in Israel stand in the limelight. In its recent decision, the District Court of the Central District-Lod, to approve a class action based on the notion of excessive pricing by a monopoly, the court established for the first time a possible claim for excessive pricing. It would therefore seem that monopolies operating in Israel are, for the moment, exposed to class actions claiming excessive pricing, inter alia in light of Opinion 1/14 published by Prof. Gilo as Commissioner.
Nonetheless, it should be remembered, that the controversy around excessive pricing is still far from resolution. The IAA itself has not taken any enforcement measures against the charging of excessive prices and, in light of Dr. Eilat's words, we doubt that the IAA will take any such measures in the foreseeable future.
We are here for any questions you may have.
The Antitrust & Competition Team Herzog Fox & Neeman
Head of Antitrust and Competition Department
Tel: +(972) 3 692 5960
Antitrust and Competition Department Tel: +(972) 3 692 5960