Antitrust Commissioner's New Powers to Protect Parallel Imports

August 26th 2018

Dear Colleagues and Friends,

In recent years, parallel and private imports have become important factors in the public debate over the cost of living in Israel. Since Israel is a small economy, the concentration in the manufacturing level in many product markets is significant and therefore, the level of competition (and ultimately the prices) in these markets is heavily dependent on imports to Israel. Such imports will be executed predominantly through a local representative of a foreign supplier (an “official importer”). Official importers may have a dominant position themselves when competition from local manufacturers is limited and the importer exclusively represents a strong brand. In such cases, competition from parallel or private imports could be an important competitive constraint, without which prices of the product could hike.

The report of the Governmental Committee for the Increase of Competition and Removal of Import Barriers, published in November 2014, indicated that barriers on import –in particular barriers on parallel and private imports – contribute to the relatively higher prices of consumer products in Israel. Some of these barriers were attributed to inadequate regulation, while others were traced to anticompetitive practices adopted by some official importers for the purpose of forcing out parallel imports from the market.

The recent amendment to the Restrictive Trade Practices Law 5748-1988 (respectively, the “Amendment” and the “Antitrust Law”) is aimed to provide the Antitrust Commissioner with the authority to prevent any conduct by official importers that may hinder competition from parallel and private imports.

The Amendment in a Nutshell

On 17 July 2018, the Israeli parliament, the Knesset, passed the Amendment as a temporary order which is to automatically expire three years from the day it became effective. The Amendment provides the Antitrust Commissioner with the authority to issue directives to “direct importers.” A direct importer, previously referred to as an “official importer”, is any one of the following: (i) a person who imports goods based on an arrangement with a foreign manufacturer; (ii) a person who distributes goods imported under an agreement with the foreign manufacturer; (iii) a person who manufacturers goods in Israel under an arrangement with a foreign entity.

The Antitrust Commissioner can issue directives to direct importers if the following conditions are met:

  1. The direct importer’s market position or business conduct raises a concern that parallel or private imports may be harmed; and
  2. Such harm to parallel or private imports may result in significant harm to competition in the sector in which the direct importer operates.

The Antirust Commissioner possesses a similar authority to give specific instructions to monopolies, pursuant to Section 30 of the Antitrust Law. The provisions of Section 30(c) of the Antitrust Law, with regard to the activities which will be deemed as a harm to competition by a monopoly, are applicable to the business conduct of direct importers under the Amendment as well. The most important of these provisions in the current framework is probably subsection 30(c)(5) which infers that any activity resulting in “a barrier to entry to the sector or switching barrier within the sector” may be considered a harm to competition.

The Amendment also adopts the procedural rules governing the Commissioner’s authority under Section 30 of the Antitrust Law. Accordingly, the Antitrust Commissioner’s directives are subject to an appeals process and the exercise of this authority by the Antitrust Commissioner will be preceded by a hearing process.

Non-compliance with the Commissioner’s directives may expose the direct importer and its corporate officers to criminal or administrative fines.

Implications For the Activities of Existing Direct Importers

The Amendment does not impose any direct restrictions on the business conduct of direct importers, but merely provides the Commissioner with powers to intervene in order to prevent harm to competition from parallel or private imports. This is a rather significant change from the early intention of the lawmakers to explicitly prohibit certain practices by direct importers.

While it is difficult to predict the Israel Antitrust Authority (the “IAA“) enforcement policy with respect to its new powers, the following initial observations can be made:

  1. The purpose of the Amendment is to prevent harm to competition in a relevant market resulting from the exclusion of parallel or private imports. This scenario normally requires that the direct importer will have a meaningful market position. It is thus reasonable to assume that the Antitrust Commissioner will focus first and foremost on direct importers with market shares in the range of 30%-50% (firms below this threshold will normally lack market power and firms above this threshold are already subject to monopoly restrictions). However, this does not mean that the IAA will not exercise this authority with regard to direct importers who possess smaller market shares, since the assessment is always market specific.
  2. Practices that block parallel or private imports and are unlawful under the Antitrust Law will likely be enforced by way of administrative sanctions (or even criminal sanctions in exceptional circumstances). Therefore, direct importers who possess monopoly position or are party to arrangements restricting parallel or private imports should seek advice to assure compliance with the Antitrust Law.
  3. In recent years, the government promoted sector-specific regulation in several markets, which aim to facilitate competition from imports. These sectors are less likely to be impacted by the Amendment. In such markets, the need to apply the Commissioner’s powers seems more limited. Additionally, if the Commissioner is concerned that a currently legal practice in these sectors could hinder parallel or private imports, it may be more efficient to advocate changes to such regulations rather than to exercise the new powers with respect to all relevant importers.

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