In January 2017 the Israel Antitrust Authority (IAA) published draft guidelines on resale price maintenance arrangements. The publication was prompted by a 2015 Supreme Court decision that fundamentally changed the legal standard applicable to vertical arrangements (for further information please see "Supreme Court renders milestone decision on vertical arrangements"). According to the decision, vertical arrangements, in most cases, are no longer subject to the per se presumptions that classify arrangements as 'restrictive arrangements', which include restrictions pertaining to prices, profits and market segmentation. The Shufersal decision determined that vertical arrangements should be evaluated primarily based on their probable effects on competition. Parties are now free to enter into such agreements based on a self-assessment rather than requesting a specific exemption from the commissioner or an approval from the Antitrust Tribunal.
Against this background, the IAA decided to provide guidance on the manner in which it will analyse resale price maintenance arrangements, which are generally held as potentially more harmful to competition than other forms of vertical arrangement. The IAA's draft guidelines focus on minimum and fixed resale price maintenance applied to retailers.
The draft guidelines survey:
- the main concerns arising from resale price maintenance arrangements;
- the competition benefits that they may produce; and
- the general methodology that should be used to analyse such arrangements.
Before the Supreme Court's decision in Shufersal, horizontal and vertical arrangements were subject to the per se presumptions of Section 2(b) of the Restrictive Trade Practices Law 1988 (the Antitrust Law), according to which arrangements containing restrictions pertaining to prices, profits and market segmentation, among others, constituted restrictive arrangements. Horizontal and vertical arrangements that did not include such restrictions were evaluated based on their probable effects on competition under Section 2(a) of the Antitrust Law. As a result, all arrangements falling within the scope of Section 2(b) constituted restricted arrangements and were thus prohibited unless they:
- were exempted under a block or statutory exemption;
- were approved by the Antitrust Tribunal; or
- received a specific exemption from the IAA commissioner from the need to seek the Antitrust Tribunal's approval.
In August 2015 the Supreme Court rendered its decision in Shufersal, overturning the long-standing and contentious precedent according to which both horizontal and vertical arrangements were subject to the per se presumptions of Section 2(b). Citing academic literature supporting a more nuanced and less sweeping rule, the Supreme Court determined that the per se presumptions of Section 2(b) no longer apply to vertical arrangements – rather, they are to be reviewed based on their probable effects on competition under Section 2(a) of the Antitrust Law. The court's decision left open the possible application of Section 2(b) on vertical arrangements in "rare circumstances".
Restrictions pertaining to price are among the various forms of vertical arrangement that are generally no longer subject to Section 2(b) of the Antitrust Law. In the draft guidelines, the IAA focused on minimum and fixed resale price maintenance arrangements – vertical arrangements that the IAA views as potentially posing a more significant degree of harm to competition.
In particular, the draft guidelines focus on resale price maintenance clauses applied to retailers. The IAA cites the following main concerns, among others, with regard to resale price maintenance in this context:
- Resale price maintenance may assist suppliers in reaching a collusive equilibrium price due to the transparency of the fixed price dictated at a retail level.
- Under certain circumstances, resale price maintenance may assist a dominant supplier in retaining market power by incentivising retailers to prefer the high margins from the dominant product under resale price maintenance rather than selling a new product, which would likely be sold at a lower and more competitive price (hence, smaller profit margins), thereby diverting sales from the more profitable dominant product.
- Retailers' incentive to mitigate the market power of a dominant supplier may be decreased. Without the ability to sell goods under resale price maintenance at a discount, retailers lack the incentive to seek a discount at the wholesale level. In this way, the supplier and its retailers continue to enjoy high profits at the expense of consumers.
- In certain cases, resale price maintenance may assist retailers in reaching an equilibrium price by means other than explicit collusion. The common supplier may act as an enforcer, detecting and enforcing deviations from the set price. Further, enforcement agencies may face difficulties in uncovering the source of the coordinated price, due to it being disguised as a legitimate arrangement when it actually lacks competitive merit.
Despite these concerns, the IAA acknowledges the potential competitive benefits of resale price maintenance arrangements, stating that the main benefit is the increase of inter-brand competition caused by strengthening the incentive for retailers to invest resources in selling the resale price maintenance product. By setting the retail price, thus limiting intra-brand competition, a supplier may increase the retailers' margins on the sale of its product. In certain circumstances, increasing retailers' margins in this way may create a situation in which it is economically worthwhile for retailers to invest in ancillary services required for the product to succeed, such as training sales staff, marketing and other services. Resale price maintenance may, under certain circumstances, also make it difficult for certain retailers to free ride on the investments of competing retailers by selling the relevant products at a lower price while relying on the ancillary services provided by competitors.
The IAA suggests that parties should consider entering resale price maintenance arrangements in the retail sector only if the following cumulative conditions are met:
- The arrangement does not relate to a market in which there is a low degree of competition or in which there is a concern over potential collusion between competitors. Generally, resale price maintenance in markets characterised by low levels of inter-brand competition are more likely to harm competition.
- The resale price maintenance arrangement is needed to promote a pro-competitive objective, in particular with regard to inter-brand competition. Pro-competitive objectives must be based on concrete explanations that support the use of resale price maintenance; general claims regarding the importance of incentivising retailers to invest in areas such as quality customer service and marketing are insufficient.
The draft guidelines focus on the use of resale price maintenance in the retail sector (ie, when the retail price paid by the consumer is under resale price maintenance), but also provide general guidance on the analysis of resale price maintenance in supplier-distributor relationships. The underlying principle in such situations is that since wholesale prices are generally not transparent, it is less likely that resale price maintenance can facilitate pricing.
When a resale price maintenance arrangement exists between a supplier and distributor (that does not make sales directly to end consumers), the manner in which the resale price maintenance arrangement is analysed is based largely on the nature of the relationship between the supplier and distributor.
First, the risk allocation between the two parties must be assessed. The greater the degree of risk assumed by the supplier (eg, in consignment agreements) the greater the tendency to view the supplier as having decision-making power over consumer prices, thereby diminishing the importance of the distributor in the supply chain. In general, the IAA will tend to view resale price maintenance arrangements as legitimate in situations in which a greater degree of risk is assumed by the supplier.
Second, it must be assessed whether the distributor can be seen as an extension of the supplier and thus not likely to introduce intra-brand competition in the distribution segment. Such a situation may occur when there is mutual exclusivity between the supplier and distributor or other situations in which intra-brand competition at the distribution segment is expected to be low. Assuming that the distributor is unlikely to drive intra-brand competition for reasons that do not harm competition, the IAA does not view a resale price maintenance arrangement in this context as harmful to competitive.
The IAA states that a resale price maintenance arrangement with a distributor that does not sell to end consumers generally does not constitute a restrictive arrangement in cases where the supplier assumes the majority of the risk and the distributor operates as an extension of the supplier.
The court's ruling in Shufersal introduced a momentous change to antitrust law and practice in Israel. The draft guidelines provide introductory guidance regarding only one form of vertical arrangement, mainly in the context of supplier-retailer relationships. There are many other forms of vertical arrangement that are now evaluated under Section 2(a) of the Antitrust Law rather than the per se presumptions of Section 2(b).
The draft guidelines are the first step in an ongoing discussion by Israel's antitrust community regarding the regulation of vertical arrangements.
For further information on this topic please contact Shai Bakal, Nava Karavany or Itai Cohen at Tadmor & Co Yuval Levy & Co by telephone (+972 3 684 6000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Tadmor & Co Yuval Levy & Co website can be accessed at www.tadmor.com.
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