In a dramatic decision, three judges of the Israeli Supreme Court approved a jail sentence and unprecedented fines imposed on the former CEO of the largest retail chain in Israel - Shufersal.
The decision is a major precedent since it imposes a jail sentence for the violation of merger conditions and an attempt to reach a vertical agreement. But the decision also has a far-reaching "side effect" which seems to favor the private sector: it abolishes long-standing irrefutable presumptions of illegality as far as vertical restraints are concerned.
According to the new decision vertical restraints (between market participants on different levels of the production chain) are, in most cases, subject to a regime similar to the American "rule of reason." In other words, only vertical agreements that harm competition will be considered "restrictive arrangements" according to Israeli law. Below is an explanation and exploration of the decision and its legal consequences.
The Shufersal Decision – CA 5823/14 Shufersal et. al. v. State of Israel (10.8.2015)
Shufersal is the largest supermarket chain in Israel, and Mega the second largest. In December 2008, on the eve of Chanukah, Mega published ads promoting discounted items in its branches. In response to the ads, Shufersal's CEO called a number of prominent food suppliers, in an effort to convince them to act against Mega's sales. When the manufacturers refused, Shufersal's CEO and its VP Commerce and Marketing began removing products of these manufacturers from Shufersal's shelves. The Israeli Antitrust Authority ("IAA") filed criminal charges against Shufersal, its CEO and its VP Commerce and Marketing on two counts:
- Attempted "Restrictive Arrangement" according to sections 2(a) (general definition) and 2(b) (irrefutable presumptions of competitive harm) of the Restrictive Trade Practices Law, 1988 ("RTPL").
- The breach of former merger conditions imposed upon Shufersal in the past, forbidding it from asking a supplier to avoid supplying to a competing chain.
The Jerusalem district court found the CEO and the VP guilty on all charges. Both were sentenced to several months' imprisonment, part in jail and part in community service.
The Israeli Supreme Court upheld most of the Jerusalem District Court's decision. The Court reduced the sentence of Shufersal's VP Commerce and Marketing from a partial jail sentence to community service only (we should note that Mr. Gidor, Shufersal's VP Commerce and Marketing, was represented before the Supreme Court by Adv. Nati Simhoni and Yoav Sananes, members of the Litigation Department at HFN). The Court also delved deep into the "restrictive arrangements" chapter of the RTPL and came up with a clear, coherent interpretation of all components of the "restrictive arrangement" definition.
About Section 2(a) and 2(b) of the RTPL
Restrictive Arrangements Section 2(a) of the RTPL states as follows:
"A restrictive arrangement is an arrangement entered into by persons conducting business, according to which at least one of the parties restricts itself in a manner liable to eliminate or reduce the business competition between it and the other parties to the arrangement, or any of them, or between it and a person not party to the arrangement."
This definition has four main components: the "arrangement," the "persons conducting business" (constructed in the past to mean simply – business-people), the "restriction" (a party restricts itself) and the "likelihood of harm to competition" ("liable to eliminate or reduce the business competition...").
Following Section 2(a), Section 2(b) of the RTPL specifies a number of situations in which arrangements are presumed to be Restrictive Arrangements, since such arrangements are highly likely to harm competition. These include agreements relating to prices, profits, division of the market, quantities, quality and/or types of assets. Section 2(b)'s presumptions have been interpreted by the Supreme Court as irrefutable. That is, an agreement pertaining to price, for example, shall always be considered a restrictive arrangement.
Until now, there was no clear precedent concerning the application of section 2(b) to vertical arrangements (i.e. between entities acting on different levels of the production chain, such as supplier and customer or manufacturer and distributor), though there were attempts to exclude vertical arrangements from the irrefutable presumption of section 2(b). Therefore the assumption was that section 2(b) of the RTPL would apply and in fact was applied equally to horizontal restraints and vertical restraints alike.
For the many harmless and economically efficient agreements which fell under the "restrictive arrangement" definition, the RTPL established a wide system of judicial permits and administrative exemptions, including individual exemptions and block exemptions. There was even a general block exemption enacted in 2013 to cover vertical agreements.
The Supreme Court's decision on Vertical Agreements under section 2(a) and 2(b)
Justice Rubinstein, who delivered the main opinion of the Supreme Court, finally put to rest any doubts about the construction of section 2(a). Judge Rubinstein decided that vertical agreements are an everyday practice of business that mostly stem from natural and pro-competitive motives. Therefore, in most cases, the irrefutable presumptions set in section 2(b) shall not apply to vertical agreements.
This decision means that, from now on, a rule of reason-like analysis should be applied to vertical agreements. Such analysis will look to the competitive effect of an agreement rather than to its technical components. Judge Rubinstein did mention that market analysis will not always be required, however, since some agreements are evidently anti-competitive.
The court did leave one question undecided – the judges split over whether or not a narrow exception should be made, where the rebuttable presumptions should apply, for a few evidently harmful vertical restraints. We must note that this question should have very little practical implication. Agreements which are harmful to competition in and of themselves and lack redeeming virtue will likely come within the boundaries of section 2(a), with no irrefutable presumption needed to show this.
What does the future hold?
One of the things we love about antitrust is that the Israeli antitrust law is constantly developing and changing. Nonetheless, changes like this week's decision are rare. We believe the decision of the Supreme Court will have a dramatic impact on Israeli competition laws. Whereas the former interpretation of sections 2(a) and 2(b) meant that many agreements which were not harmful to competition were deemed "restrictive arrangements," under the Supreme Court's new decision – most of these will now be lawful, removing the need to resort to the complex and cumbersome exemption system.
How much of the exemption system will be rendered irrelevant for vertical agreements is a matter of future interpretation. The courts may eventually decide that there is still a small category of agreements that may pose a threat to competition, but the threat is not significant. In this case, exemptions may still be relevant and apply. We believe a purpose-oriented construction of section 2(a), as suggested by the Supreme Court, should minimize this category or even eliminate it altogether. But only time will tell if this is indeed what the IAA and the Israeli courts will do.
Finally, in this regard, Professor David Gilo, the departing commissioner, should be saluted. As a university professor, before his commission, Gilo promoted the concept that section 2(b) and its irrefutable presumptions should not apply to vertical agreements, and indeed, the Supreme Court mentions and relies on Gilo's essays in this regard. We imagine that this Shufersal decision by the Supreme Court was likely the finest farewell Gilo could have received.