The Israeli Restrictive Trade Practices Law prohibits parties from engaging in a restrictive trade arrangement in violation of the provisions of the law. Preferred customer clauses are being examined in Israel in light of the provisions of this law, and by the antitrust commissioner, who is empowered by virtue thereof.

On numerous occasions, the antitrust commissioner and the Antitrust Tribunal have engaged in analyses of preferred customer stipulations and the extent of their impact on the competition in the relevant market.

In the communications market, the commissioner was asked to examine an agreement signed between two cellular operators (Mirs Communications Ltd. and Pelephone Communications Ltd). This agreement prescribed, inter alia, that the terms and rates that Pelephone shall charge Mirs shall be those defined for Pelephone’s most preferred customer.

Referring to this agreement, the commissioner ruled that, by Pelephone promising to give the cheapest prices to Mirs, it is lowering its own incentives to grant its other customers terms that are more attractive than those it granted to its preferred customer (Mirs), and that the agreement impedes Pelephone’s maneuverability in its engagements with third parties.

The commissioner further ruled that when a supplier or manufacturer desires to grant a benefit to competitors of a preferred customer, it in essence sees a broader benefit that encompasses the preferred customer and therefore, is likely to refrain from granting or increasing benefits. Therefore, a preferred customer stipulation could impede competitors’ capabilities of competing against the preferred customer, could adversely affect the competition in the relevant market, and even anchor asymmetric competition in the suppliers’ market. In light of Mirs’ large share of the customer base, the commissioner refused to approve the agreement.

In the financial services sector, the commissioner scrutinized an agreement signed between one of the major banks in Israel (Mizrahi Tefahot Bank Ltd.) and provident fund management companies. The agreement prescribed, inter alia, that Mizrahi Tefahot would receive better terms and conditions for its customers than are offered to customers of other banks.

The commissioner stated that arrangements – whereby a supplier undertakes to not sell its products to the preferred customer’s competitors at a price that is lower than the price that the preferred customer received or under better terms and conditions than those granted to the preferred customer – are arrangements that restrict the competition between the preferred customer and its competitors, because the agreement may grant the preferred customer a competitive advantage not based on economic values. Thus, it prevents free competition among customers, causes asymmetric competition in the market and is liable to cause a ripple effect felt by consumers in the form of a hike in the price to consumers in Israel.

An analysis of additional rulings of the antitrust commissioner and the Antitrust Tribunal indicate that, when agreements include preferred customer stipulations, the market shares of the parties engaging in the agreement and the period of the agreement are taken into account.

Notwithstanding the economic rationale underlying the parties’ desire to engage in an agreement that includes a preferred customer stipulation, these stipulations could be interpreted as restrictive trade arrangements. Nevertheless, the antitrust commissioner’s rulings indicate that, in particular instances, an exemption from the requirement to refer to the Antitrust Tribunal may be obtained in Israel if the size of the market relevant to the parties to the agreement is immaterial, and the arrangement is limited to a relatively short period.

Note: even if one of the parties to an agreement that prescribes a preferred customer stipulation is a foreign company, this does not suffice to preclude application of the law. The antitrust commissioner’s position is that the Israeli Restrictive Trade Practices Law applies to any arrangement that results in harm to the competition in Israel.