Introduction
Draft guidelines on examining significant market power
Draft guidelines regarding considerations to determine financial penalties



Introduction

On 1 January 2019 Parliament passed a comprehensive amendment to the Economic Competition Law 1988 (the Competition Law). Among other things, the amendment introduced an alternative definition of 'monopoly' based on a market power test rather than market share and significantly increased the maximum cap of monetary administrative penalties on corporations (for further details please see "Major competition law reform comes into force").

To put these new rules into practice, the Israel Competition Authority (ICA) recently published draft guidelines on both matters. The first set of draft guidelines concern the definition of 'significant market power' in the context of the Monopoly Chapter, providing a list of indications for the existence of significant market power. The second set of draft guidelines concern the proposed revision of the ICA Guidelines 1/16 regarding the competition commissioner's considerations in determining the size of financial penalties.

Draft guidelines on examining significant market power

Under Israeli competition law, the term 'monopoly' roughly resembles the concept of a dominant undertaking under EU competition law. Prior to the recent amendment, the definition of a monopoly was exclusively based on market share threshold (ie, exceeding the threshold of 50% in a defined product market). Undertakings which met this threshold would be automatically subject to certain prohibitions on their business conduct and an obligatory merger control filing for any merger transactions. On the other hand, other undertakings active in the same product market were immune from the monopoly presumption and essentially free to engage in potentially anti-competitive unilateral conduct.

Following the amendment, the definition of a monopoly was broadened to include a market power test, such that an undertaking possessing significant market power in a defined product market will be deemed a monopoly, regardless of its market share. This change is of great significance to many businesses active in Israel, since its stated goal is to extend the grasp of the monopoly regulation rules to include undertakings which were previously exempt from restrictions on their unilateral conduct.

Given that the term 'significant market power' was not defined by the legislature prior to the amendment coming into force, the ICA announced its intention to provide the public with formal guidelines regarding its interpretation. It further announced that it would not initiate enforcement actions against dominant firms based on the new market power test until after such guidelines were published.

In the draft guidelines, published on 3 February 2019, the ICA referred to the traditional definition of 'significant market power' as an undertaking's ability to set or adjust commercial terms which are inferior to those that would have been set in a competitive market (ie, setting a market price which is significantly higher than the competitive market price). Such power can also be directed towards a specific type of customer or exercised in a specific geographic area.

According to the draft guidelines, the margin between the economic cost of the product or service in question and its price, as well as the firm's profitability, cannot serve as proof of the existence of significant market power. However, it may serve as a supplementary factor for the determination of market power.

In order to assess the existence of significant market power and its extent, the ICA will focus on the effectiveness of supply-side and demand-side restraints imposed on the undertaking in question by its customers and competitors. A company will be deemed to have significant market power only if it is not restrained by supply and demand.

When assessing the demand-side restraints, the ICA will examine if customers have substantive alternatives to the product or service provided by the undertaking in question. To this end, the ICA will examine, among other things:

  • the undertaking's actual market share;
  • the number of competitors active in the relevant product market and their position;
  • possible fluctuations in markets shares;
  • the differentiation and potential substitutability of the products or services offered by the various players in the relevant market; and
  • the existence and level of customer switching barriers.

When assessing the supply-side restraints, the ICA will examine if the undertaking in question is likely to be restrained by existing or potential competitors in a timely and sufficient manner. In this respect, the ICA will focus primarily on whether there are barriers to entry and expansion in the relevant sector and the level of such barriers. The ICA provides several factors which may negatively affect the ability of existing and potential competitors to commence or expand operations in the relevant product market. These include:

  • the economies of scale in the product market in question;
  • limited production capacity of competitors;
  • excess production capacity by current players, which may discourage market entry by new players;
  • high-entry costs;
  • burdensome regulation;
  • limited access to raw materials, technology or distribution channels;
  • potential decline in demand over time;
  • strong brand identity and customer loyalty;
  • benefits of vertical integration;
  • the ability of existing players to exercise market foreclosure against new entrants; and
  • the existence of large customers, which may support the entry of an alternative supplier.

In line with the approach adopted by the EU courts, a previous history of market foreclosure and other forms of abusive behaviour by the undertaking in question may serve as an indication of the existence of market power.

As a final note in the draft guidelines, the ICA also acknowledges the concept of 'collective dominance' for situations in which competitors consistently avoid competing with each other and take simultaneous actions which do not reflect a competitive market. This position, which was mentioned in the guidelines almost as a side note, may carry significant consequences for market participants operating in oligopolistic markets.

Draft guidelines regarding considerations to determine financial penalties

Since 2012 the competition commissioner's primary method of public enforcement has been administrative fines. The amendment quadrupled the maximum cap for administrative penalties for corporations from approximately NIS24.5 million (approximately €6 million) to NIS100 million (approximately €24.8 million).

Following this dramatic increase, on 20 February 2019 the ICA published draft guidelines on a revised methodology for determining the size of administrative fines. On completion of the public hearing, the new guidelines will replace the existing guidelines and methodology of October 2016.

The ICA draft guidelines set a seven-stage methodology for calculating the size of administrative fines:

  • Setting the benchmark amount of a fine – 8% of the sales turnover of the undertaking in the year preceding the infringement. This percentage will serve as the benchmark for any aggravating or mitigating circumstances to follow. The revised guidelines introduce two significant changes in this respect:
    • In contrast with the existing guidelines, the benchmark amount may be higher than the maximum cap. Thus, large corporations with significant turnover may find themselves subject to the maximum fine, even after significant reductions due to mitigating circumstances have been applied.
    • Infringing undertakings can indicate turnovers generated from activities not relevant to the infringement and request their exclusion from the calculation. Despite EU competition law being a major source of influence on the implementation of administrative fines in Israel, the ICA has adopted a broad definition of the term 'relevant turnover' that is not in line with the European Commission's approach. According to the ICA, a turnover will be deemed irrelevant only in cases where the infringing undertaking is able to convince the competition commissioner that such turnover is completely unrelated (ie, it has no "horizontal, vertical, complementary or other" relation) to the area of activity where the infringement occurred.
  • Setting the basic amount of the fine subject to considerations regarding the gravity of the infringement. The length of the infringement and the reduction of competition will generally serve as aggravating circumstances in this context. In the draft guidelines, the ICA provides for the first time a separate path for technical violations which do not result in harm to competition. The ICA limit such cases to the failure to notify in advance legitimate merger transactions and restrictive arrangements, which if reported properly would have been unconditionally cleared by the competition commissioner.
  • Aggravating or mitigating circumstances relating to the undertaking's behaviour concerning the infringement (ie, its role in the infringement and violation of firm-specific orders by the competition commissioner).
  • Aggravating or mitigating circumstances external to the infringement. The competition commissioner will consider, among other things:
    • the deterrence effect of the fine;
    • recidivism; and
    • the lack of prior infringements if applicable.
  • Additional considerations, including the time passed since the infringement and bone fide reliance on legal advice. The latter represents a change of approach by the ICA, given that its main approach was to disregard reliance on legal advice as a mitigating factor. The proposed draft guidelines reflect the ICA's tendency to reduce the level of fines in such circumstances, as manifested in a recent decision.
  • Adjusting the size of a fine to the maximum statutory cap of NIS100 million if the amount calculated up to that point exceeds this threshold or the minimum cap of NIS10,000 (approximately €2,500) if the application of mitigating factors resulted in a lower fine.
  • At the final stage, the ICA will consider further reducing the fine subject to the undertaking's cooperation and the actions that it has taken to stop the infringement and prevent its reoccurrence. The ICA will also consider the degree of risk that a fine will result in the infringing undertaking's insolvency to such an extent that it will cease operations.

The ICA is expected to publish the final guidelines following a call for public comment in the coming months.

For further information on this topic please contact Shai Bakal or Alexander Wolf at Tadmor & Co Yuval Levy & Co by telephone (+972 3 684 6000) or email ([email protected] or [email protected]). The Tadmor & Co Yuval Levy & Co website can be accessed at www.tadmor.com.