IAA Advocates Major Overhaul of Restrictive Trade Practices Law

November 6th 2017

On October 30, 2017, the Israel Antitrust Authority (the “Authority”) published a draft amendment to the Restrictive Trade Practices Law, 5748-1988 (the “Amendment” and the “Law”) for public comments. The Amendment proposes a broad reform, relating to the fundamental sections of the Law: restrictive arrangements, monopolies and mergers. The Amendment also entails significant changes in the Authority’s enforcement powers, including the ability to impose much higher financial sanctions. The Authority explained that the amendments aim to decrease the regulatory burden that currently applies to legitimate and efficient practices, while strengthening the enforcement against anti-competitive conduct.

Notwithstanding the Authority’s declared purpose, a review of the proposed amendments reveals that the Amendment includes only limited and future-facing regulatory relief, while dramatically increasing the Authority’s enforcement powers, without providing appropriate checks and balances.

The following is a summary of the main proposed amendments to the Law:

Abolishing the Nexus requirement regarding foreign companies and partnerships: Currently, the merger control regime applies to foreign entities that are not registered in Israel, based on their local footprint in Israel. The current policy of the Authority requires that the foreign entity will either hold a significant shareholding in a local entity (generally more than 25%), hold a place of business in Israel or that it will have the ability to influence commercial decisions of a local representative. Direct sales to Israel are currently not enough to subject the foreign entity to the merger control regime, even if these sales exceed the turnover threshold that triggers merger filing. According to the Amendment, there will no longer be any need to establish a local footprint and the nexus requirement will be established by the mere fact that the foreign entity achieves sales that meet the turnover. In fact, merger control filing will be triggered even if the foreign entity does not have any sales in Israel, if any of the market shares threshold is met (e.g. if the target has a market share exceeding 50%).

The Amendment also proposes to subject not for profit associations to the merger control regime.

The amendment may have a significant effect on parties to cross border transactions.

Main amendments to the mergers chapter:

Turnover threshold revised: The Amendment proposes to increase the   turnover threshold, such that the joint sales turnover of the merging parties which triggers merger control will be increased from 150 million NIS to 360 million NIS (the requirement that the turnover of at least two of the merging parties will be at least 10 million NIS is unchanged). There are two other filing thresholds based on market shares, that will not change: (a) a merger that creates a market share exceeding 50%, or (b) if one of the parties to the merger already has more than 50% share in a relevant market.

Providing power to the Commissioner to extend the merger review period from 30 days to 150 days, by a reasoned administrative decision. Currently, the Commissioner must render a decision within 30 days, which can be extended only by a judicial decree or the consent of the parties.

Main amendments to the monopoly chapter: The definition of “monopoly” is   amended, such that in addition to the current market share monopoly presumption, there will be a market power test. Currently, a firm possessing more than a 50% market share is a monopoly. The Amendment stipulates that even firms with market shares below 50% will be deemed as monopolies if such firms hold significant market power which is not temporary in nature. This amendment will require many firms with a significant market position to reevaluate their business strategy, especially their pricing behavior.

A significant expansion of the self-assessment regime to horizontal agreements: currently, only certain types of vertical agreements are subject to substantive self-assessment. Other arrangements are subject to block exemptions that are invalidated if a certain market share threshold is exceeded. As part of the reform, the Commissioner published on October 31, 2017 draft amendments to three block exemptions: the block exemption for joint ventures, the block exemption for R&D agreements and the block exemption for ancillary restraints in mergers.

The suggested amendments reflect the ongoing trend in local antitrust law towards a substantive self-assessment regime. The suggested amendments may enable parties to apply the block exemptions even if they exceed the relevant market share boundaries, provided that all the following conditions are met: (i) the arrangement is not aimed at harming competition, (ii) the restraints included in the arrangement are necessary for fulfilling the purposes of the arrangement, and (iii) the arrangement will not result in a significant adverse effect on competition.

Amending the procedure for determining that a block exemption shall not apply to a restrictive arrangement: Currently, the Authority can only invalidate the application of a block exemption by way of a formal decision, which is subject to full blown appeal. The Amendment proposes that the Authority’s decision will only be subject to administrative review (which is much narrower). This change is needed in light of the Authority’s intention to expand the block exemptions’ reach, as mentioned above.

Expediting exemption decisions: currently, the Authority is granted 90 days to decide on applications for an exemption of a restrictive arrangement, which can be further extended by additional 60 days for reasons to be noted. The Amendment sets an initial 30 days period (as in merger decisions), with the power to extend the period to additional periods that do not jointly exceed 120 additional days. In practice, this change alone is unexpected to result in a meaningful decrease of the review period.

Annulment of the cap on monetary penalties for corporations: The Law currently allows the Authority to impose a monetary penalty on corporations for violations of the Law in a maximum amount of 8% of the violator’s sales turnover, provided the monetary penalty does not exceed a sum of 24,490,070 NIS (roughly USD 7M). The Amendment suggests cancelling the maximum sum limit, while leaving only the percentage of sales turnover limit. This amendment is aimed at increasing deterrence against large corporations, for which the current cap reflects a relatively small percentage share of their turnover.

This amendment paves the way for imposing monetary penalties in sums amounting to hundreds of millions of Shekels on large corporations. It may require review of the process by which such payments are imposed, as well as of the rules for calculating their amount. Foreign entities may be affected significantly, as the Law requires to account for their entire group’s turnover, which may be very significant.

Aggravating criminal sanctions: Currently the maximum penalty for antitrust offenses is three years imprisonment, and if made under aggravating circumstances, five years imprisonment. The Amendment proposes to impose a maximum penalty of five years imprisonment as the new standard for hard core cartel behavior, while other offenses (such as breach of Commissioner’s directives, abuse of dominant position with intent to harm competition, merger control violations, etc.) will be subject to a maximum penalty of three years imprisonment.

Expanding the Commissioner’s investigative powers in offenses concerning obstruction of justice: The current language of the Law may be interpreted as providing the Authority with power to investigate an obstruction offense only if the obstruction was made after the opening of an investigation under the Law. The Amendment clarifies that such investigative power arises whether the obstruction was made after the investigation has been opened or prior to the opening of the investigation.

The Amendment has been published for public comments until November 20, 2017. The draft block exemptions have been published for public comments until December 30, 2017.

This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. 

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