This post discusses the Israeli Antitrust Authority’s (“the IAA”) draft statement concerning its policy in relation to resale price maintenance arrangements (“RPM Arrangements”), and the methodology draft for the examination of economy-wide concentration, which will be implemented within the framework of the Committee for the Reduction of Concentration Activities. These references may serve as a guiding tool for companies which as part of their business activity encounter matters related to RPM Arrangements and the Law for the Promotion of Competition and the Reduction of Concentration, 5774-2013 (“the Concentration Law”), as will be described in greater detail below.
Draft Statement regarding RPM Arrangements
On January 11, 2017 the IAA published a draft statement, dealing with RPM arrangements (“the Draft Statement”). RPM Arrangements can set a maximum price (RPM Maximum), a minimum price (RPM Minimum) and a fixed price (RPM Fixed) (similar to the Draft Statement, the use of the term “RPM Arrangement” below refers to RPM arrangements relating to minimum price, and to RPM arrangements relating to fixed price).
The Draft Statement provides a response to the new legal situation that arose following the judgment that was rendered in the Shufersal case (Criminal Appeal 5823/14 Shufersal v. The State of Israel (published in Nevo, 10.08.2015) (“the Shufersal case”)). There, the Supreme Court held, for the first time that generally, vertical arrangements will not be considered as falling within the Per-Se presumptions under section 2(b) of the Restrictive Trade Practices Law, 5748-1988 (“the Law” or “the RTP Law”), but rather such arrangements will be examined based on their probable impact on competition (according to section 2(a) of the Law), similarly to the US “rule of reason” test.
Against this background, the IAA deemed it appropriate to present its policy, regarding the manner in which RPM Arrangements should be analysed. The IAA’s position is that such arrangements are perceived as more problematical from a competitive point of view, and will be examined by it more meticulously, than other vertical arrangements. The Draft Statement details the manner in which the IAA will examine the potential harm to competition that might arise as a result of RPM Arrangements, and the events in which such arrangements will be considered as liable to prevent or reduce business competition (in accordance with section 2(a) of the Law). In so doing, the IAA examined RPM Arrangements between a supplier and a retailer while distinguishing it from RPM Arrangements between a supplier and a distributor (viz., an entity that does not sell the supplier’s products directly to end customers), and emphasized that the main concern pertains only to the foregoing first type of arrangements.
Regarding RPM Arrangements between a supplier and a retailer, the IAA noted that generally, its position is that there is no room to enter into an RPM Arrangement concerning the retail segment, except when the following two criteria are met: firstly, the nature of the relevant market or the relevant market’s characteristics indicate sufficient competition. It goes without saying that examination of the market characteristics in which the arrangement exists is done with regard to the suppliers’ segment and the retail segment. This examination will include the feasibility of creating a coordinated balance in view of the degree of concentration in the relevant markets and segments, the rate of market coverage of the RPM Arrangements in each of the segments, the supplier’s market share and market power and the existence of market barriers. It was also noted that where there is a lower inter-brand competition—the arrangement could potentially harm competition and thus, will be deemed a restrictive arrangement.
The second criterion which should be examined is the existence (or absence) of a clear pro-competitive justification. For example – if the purpose of the arrangement is to encourage the retailer to invest in promoting the sale of a product or to provide ancillary services to a consumer and the like, or where it concerns the launch of a new product that is subject to a larger investment on the part of the retailer. The IAA clarified that the significance of this criterion rises insofar the market characteristics indicate a lesser degree of competition in it. Moreover it was emphasized that in order to justify the arrangement’s pro-competitive benefit, the IAA will not be satisfied with general statements of encouraging the retail link to provide better services or to increase its investments. In the absence of a clear and direct pro-competitive purpose, the IAA will regard such arrangement as a restrictive arrangement.
Regarding RPM Arrangements between a supplier and a distributor – their examination will depend on the nature of their relations, and particularly on the apportionment of risk between them. An RPM Arrangement between such parties will not be deemed as a restrictive one where the supplier is the one bearing the lion’s share of the risks associated with marketing the products, or if the distributor is acting as the “long arm” of the supplier, in the sense that it is not expected to initiate an inter-brand competition in the marketing segment, such as in cases where mutual exclusivity exists between the supplier and distributor in marketing, or where the exclusivity extends only to the distribution of product (and not to its marketing).
Coupled with the foregoing, it was clarified that the Draft Statement deals only with RPM vertical arrangements, and that arrangements which hold an aspect of horizontal collusion will not be deemed as vertical RPM Arrangements, but rather as horizontal arrangements under the guise of vertical ones (and thus the per-se presumptions entrenched in section 2(b) of the Law will apply to them).
Within the framework of the Draft Statement, the IAA made reference to additional two vertical pricing arrangements, which are recommended price arrangements and maximum RPM arrangements. As for recommended price arrangements, the IAA determined that as long as it will be found that the recommendation is “untarnished”; namely, a recommendation which the retailers or distributors can freely deviate from, without any expectation of them being prevented from doing so, no concern of harm to competition will arise. In the case of maximum RPM arrangements, the IAA determined that generally, arrangements of this nature will not give rise to a concern of harm to competition, except in the case where it appears that the maximum price has become a reference point for pricing for the retailers or for the suppliers (in other words, where a maximum price RPM arrangement turns into a fixed price arrangement).
This current legal situation is different than the one prevailed in the past, whereby RPM Arrangements were automatically viewed as restrictive. In the framework of the post-Shufersal case era, and in light of the Draft Statement, RPM arrangements are no longer considered to be per-se prohibited and parties to such arrangements should assess by themselves the fulfilment of the abovementioned criteria, in relation to their specific arrangement. This view can be seen as standing in line with the IAA’s general new approach to move forward towards a self-assessment regime in relation to vertical agreements. However, the content of the Draft Statement may be seen as a somewhat narrowing of the Supreme Court’s ruling in the Shufersal case, since unlike it, the IAA found it appropriate to treat RPM Arrangements gravely, and to distinguish them from other types of vertical arrangements. This approach to RPM Arrangements could be seen as creating a kind of a hybrid creature—an interim step on the scale measuring the potential harm to competition, between horizontal arrangements and vertical arrangements that are not RPM Arrangements.
It should be emphasized that the foregoing concerns a draft that is still subject to public opinion and comments. It will therefore need to be examined how things will be expressed in the final version that will be crystallized by the IAA. Likewise, it should be clarified that the Draft Statement concerns the classification of an arrangement as being “restrictive” or as being exempt from the applicability of the Law, and does not directly concern the possibility of exempting the arrangement by filing a specific exemption application to the IAA. It should be further noted that the Draft Statement is not intended to serve as a reference on the position of resale price arrangements according to the Israeli Promotion of Competition in the Food Sector Law, 5774-2014, or to derogate from its applicability.
Methodology Draft of the Committee for the Reduction of Concentration for Economy-Wide Concentration
On January 17, 2017 the Committee for the Reduction of Concentration (“the Committee”) published a draft for a public hearing, presenting the manner in which the concerns arising from increasing an entity’s economy-wide concentration will be examined (“the Methodology Draft” and “the Methodology”, respectively). The Methodology Draft also indicates the circumstances according to which the Committee will advise the regulator in allocation of rights in essential infrastructures to a concentrated entity.
As may be recalled, the Concentration Law imposes in this context a duty on the regulator to consult the Committee and to take into account economy-wide concentration considerations, prior the allocation of rights in essential infrastructures to an entity determined by the Committee as a concentrated entity. Allocating of such right to a concentrated entity will only be possible if no significant harm is caused to consumer welfare. The Methodology Draft is aimed to serve as a guiding tool, enabling the Committee to exercise discretion whenever it is required to consult the regulator in the allocation of rights. The laying out of the Methodology is also intended to ensure that appropriate decisions were taken in view of the purposes and spirit of the Concentration Law, as well as to increase the certainty and transparency with regard to the considerations guiding the Committee, as required by the principles of administrative law. The Methodology is based on the arguments detailed by the Committee on Increasing Competitiveness in the Economy recommendation draft, explanatory notes to the Concentration Law, decisions taken by the Committee up to this date and academic writing in the relevant fields. In this connection the Committee remarked that upon it accumulating additional experience on the subject, it will be possible to update and develop the proposed Methodology accordingly.
The Methodology proposed by the Committee comprises of two stages. In the first stage, the bargaining power given to a player contending the allocation of a right, which constitutes as a proxy to economy-wide concentration rate, will be evaluated through three variables. Firstly, the essential fields of activity held by such player will be examined. The assumption is that insofar as the field of activity is more essential for the economy, the player holding it will have greater bargaining power towards the policy maker. In this manner, the competitive status of the player holding an essential infrastructure will also be examined, as well as the percentage of holdings held by it in other essential infrastructures in the economy. The Committee even listed of what it considers to be the most essential fields in the Israeli economy (namely: electricity, supply of drinking water and sewage services, fuel products, natural gas and wired telephony services (including internet)), as well a lesser extent of additional high essential areas of activities (cellular telephone, transport infrastructures that control the entry into and exit from Israel and city and inter-city train and bus public transportation services in the metropolitan area). Secondly, the macro-economic data activity of the player in the economy will be examined. In this context, there will be taken into account details regarding the size of the player, the importance of its activity to other branches of the economy and the scope of its business therein. At last, the features allowing the player to obtain regulatory influence will be examined, by establishing the existence of the player’s frequent interface with the regulator, interface vis-à-vis policy makers, the policy maker’s reliance on the player and its holdings in communications media.
These three variable groups will be used by the Committee to evaluate the scope of bargaining power of the concentrated entity, both prior to the allocation of the right and thereafter it. The Committee clarified in this context that a static evaluation of the increase of concentration stemming from the allocation, will not suffice. Therefore it will be necessary to carry out a dynamic and detailed examination of the allocation’s influence on the ability of a concentrated entity to exercise bargaining power in the relevant markets, including by referring to the features of these markets.
In the second stage, the Committee will turn to examine whether the economy-wide concentration is accompanied by significant consumer benefits that could justify the potential harm it can cause. Consumer welfare will be examined broadly, and will refer to price levels, technological improvements, innovation, diversity and the like. This examination will bear in mind the benefits arising from the entrance of a specific concentrated entity to a certain area of activity, as well as to the fact that damage to consumer welfare might find expression within the competitive process of granting permits (reducing the number of contenders and removing ones with significant value). It was further clarified that it will be required to prove a greater harm to consumer welfare insofar the concern for increasing the economy-wide concentration rises, and vice versa. In any event, the Committee advised that it has the power to recommend a conditional allocation of rights to the concentrated entity.
It should be emphasized also in this context, that the Methodology Draft is still subject to public comments, and it will need to be examined how its content will be expressed in the final version that will be embedded by the Committee. It should be further clarified that although the allocation of a right in an essential infrastructure to concentrated entities might give rise to concerns of harm to sectorial competition in the sector of which the allocation is made, as well as a concern of competitive harm stemming from inter-market interface, these will be taken into account by the Controller of Restrictive Trade Practices within the framework of evaluating sectorial competition in the allocation of rights process, as stated in the Concentration Law.