On March 29 2018 the Israel Antitrust Authority (IAA) published a draft amendment to the Antitrust Rules (Block Exemption for Non-Horizontal Arrangements Which Do Not Include Certain Price Restrictions) 2013 (also known as the Vertical Block Exemption) for public comment.
The amendment aims to expand the substantive self-assessment of vertical arrangements and was published as a response to Supreme Court rulings which called for a more lenient approach to vertical arrangements and practitioner criticism of the current Vertical Block Exemption.
The amendment reflects a more general trend in Israeli antitrust law towards a substantive self-assessment regime (for further details please see "Major overhaul of Restrictive Trade Practices Law proposed"). The broadening of the self-assessment regime is a positive development. It will allow the IAA to focus its resources on arrangements which raise serious competitive concerns, while reducing to a certain extent the regulatory burden imposed on private parties.
The IAA published the Vertical Block Exemption in 2013 to address the deficiencies of Israel's restrictive arrangement regime, which was based on a broad prohibition of business practices. For many years, there was no real distinction between vertical and horizontal arrangements; both were deemed illegal unless they met the formalistic market share-based block exemptions or were exempted by the antitrust commissioner. The Vertical Block Exemption provided the ability to apply a substantive self-assessment to certain types of vertical arrangement for the first time. The explanatory notes explained that the IAA sought to make Israeli antitrust law compliant with foreign antitrust regimes (mainly the EU and US regimes), where vertical arrangements are normally scrutinised under a self-assessment regime.
That said, the Vertical Block Exemption provided only a limited solution. The IAA intentionally omitted certain types of vertical arrangement (eg, dual distribution arrangements) and applied a broad definition for the term 'competitors', excluding many benign vertical arrangements from the self-assessment regime. The IAA reasoned that:
- the transition to a self-assessment regime should be gradual to avoid the misuse of the self-assessment regime; and
- it would be willing to broaden the scope of the Vertical Block Exemption in the future.
Since the Vertical Block Exemption's enactment, a self-assessment approach has been applied in various contexts (eg, in block exemptions applying to the aviation and liner shipping industries). More recently, the IAA suggested expanding the self-assessment approach to certain types of horizontal arrangement. Against this background, the IAA also proposed to amend the Vertical Block Exemption.
Prerequisites and suggested amendments
The main prerequisites for the Vertical Block Exemption and the suggested amendments thereto are as follows.
Arrangement is non-horizontal The Vertical Block Exemption defines a 'horizontal arrangement' as an arrangement between at least two competitors which concerns:
- a service or product for which they compete; or
- an investment by one competitor in another.
The definition of 'competitors' is broad and not confined to firms operating in the same product market. The Vertical Block Exemption defines parties as competitors if:
- they supply similar products to similar customers or purchase similar products from similar suppliers in the course of a horizontal arrangement or in the three years preceding the arrangement;
- absent the arrangement, they would have reasonably been competitors; and
- the arrangement aims to limit the competitive overlap between the parties (eg, non-compete clauses).
The broad definition of competitors leads to the exclusion of many non-horizontal arrangements because:
- the parties operate in adjacent product markets (eg, a bottled water supplier and an iced tea supplier may be regarded as competitors even if their products belong to different product markets);
- the parties compete downstream (ie, dual distribution arrangements); or
- other reasons apply.
The amendment suggests:
- modifying the definition of competitors; and
- applying a more economics-based approach (although not one that entirely overlaps with a market definition approach).
Further, the revised definition explicitly excludes dual distribution situations from the definition of horizontal arrangements. However, the revised definition is vague and inexhaustive, thereby imposing a great level of uncertainty on private parties. It can only be hoped that the IAA will issue detailed guidance to allow for a more reasoned implementation of the revised Vertical Block Exemption.
Arrangement excludes certain price restrictions The Vertical Block Exemption does not apply to vertical arrangements that contain certain price restrictions (mainly minimum resale price maintenance). The IAA's position was that vertical price restrictions raise a significant level of competitive suspicion and should thus be reviewed.
The amendment suggests cancelling this condition, so that the Vertical Block Exemption covers price restrictions (including minimum resale price maintenance), subject to a substantive self-assessment. The annulment of this condition conforms to the Supreme Court's 2015 Shufersal decision, according to which vertical restraints cannot automatically be presumed to harm competition and should be scrutinised under a substantive standard.
Agreement has no potentially significant anti-competitive effect This requirement is similar to the EU concept of self-assessment. It requires the parties to an agreement to conduct a comprehensive and fact-based economic market assessment of the agreement's potential impact on competition. This condition remains unchanged.
Restrictions are legitimate and not aimed at reducing competition This condition remains unchanged.
The proposed amendment has been published for public comment until May 29 2018.
For further information on this topic please contact Shai Bakal, Nava Karavany or Ram Yamin at Tadmor & Co Yuval Levy & Co by telephone (+972 3 684 6000) or email ([email protected], [email protected] or [email protected]). The Tadmor & Co Yuval Levy & Co website can be accessed at www.tadmor.com.
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