Amendment to Block Exemption for Non-Horizontal Arrangements with No Particular Price Restrictions Approved

An amendment to a block exemption for non-horizontal arrangements with no particular price restrictions was recently approved. Block exemptions are a key tool used by the Antitrust Authority to exempt parties to particular restrictive arrangements from the need to receive the approval of the Antitrust Tribunal. For the most part, at issue are arrangements that do not give rise to concerns about a substantive adverse impact on competition, even though they fall within the definition of a “restrictive arrangement” prescribed by law (i.e. an arrangement between business entities that harms competition in the economy or that gives rise to a concern of harm to business competition).

The original block exemption for non-horizontal arrangements was enacted in 2013 as part of a strategy striving to ease the supervision over vertical restrictive arrangements being made between various links in a production chain (usually between a supplier and a customer or distributor), which are perceived as having lower potential for harming competition than do horizontal restrictive arrangements being made between competitors.

For example, in the Shufersal case, the Supreme Court sought to differentiate between a “horizontal” restrictive arrangement and a “vertical” restrictive arrangement. The Supreme Court assumed that a “horizontal” arrangement (for example, when competitors coordinate prices between themselves) could potentially cause more harm to competition than price-setting within the framework of a “vertical” arrangement (for example, when a manufacturer dictates a price to a reseller or a distributor).

Highlights of the Amendment

The block exemption for non-horizontal arrangements, in its original version (before the amendment), applies to arrangements that cumulatively fulfill three threshold conditions: (1) the arrangement is not between competitors; (2) the arrangement contains no particular price restrictions; and (3) the main purpose of the arrangement is not to reduce or prevent competition, it contains no restrictions not essential to the arrangement and it causes no significant harm to competition in the relevant markets.

The amendment to the block exemption focuses on the first threshold condition, and its purpose is to clarify the term “competitors,” which was defined in a general and vague manner in the original block exemption, thus creating uncertainty among entities wanting to exercise it.

The definition of “competitors” in the amended version is, in essence, a closed and lean list of four alternatives:

1. Entities that are competing against each other during the period of the arrangement or who competed during the three years preceding the arrangement. For example, two suppliers may believe that they are not competing against each other because their products do not fall under the definition of “the same market” (e.g. if their products have different specifications or are used for different purposes). However, they will be deemed competitors according to the amended block exemption if, during the relevant period, they were competing against each other over supply of the product to the same customer.
2. Entities that supplied or purchased goods that are substitutes in the eyes of consumers during the period of the arrangement or during the three years preceding the arrangement. For example, entities that supplied or purchased white sugar or brown sugar will be deemed competitors.
3. Entities that potentially could compete against each other in the future (even if they are not actually competing against each other at the given time). This alternative seeks to ascertain whether the arrangement might motivate one party to the arrangement to begin competing, whether a party to the arrangement is capable of beginning to compete immediately, or whether a party to the arrangement intends to begin competing in the near future. For example, if one party to the arrangement is capable of converting existing production lines in order to produce goods that are identical to those of the other party to the arrangement.
4. Entities that believe there is a competitive threat from the other party to the arrangement. The purpose of the arrangement is to prevent this competitive threat, even in instances when, objectively, the parties are not competing against each other. It should be noted that there is no intention of preventing legitimate non-competition arrangements that often accompany vertical cooperation agreements between various links in the production and supply chain.

Within this context, the amended block exemption prescribes an exception whereby a supplier and distributor of a particular product will not be deemed competitors solely due to the fact that the supplier also serves as a distributor of the same product.

The original version of the amendment included additional relief in the threshold conditions by removing the second threshold condition, whereby a vertical arrangement between parties must not include price restrictions (e.g. a supplier that dictates a minimum price at which a retailer can sell a product to customers). However, the version of the amendment that was ultimately approved retained this threshold condition.

The Significance of the Amendment

An examination of the amendment indicates that the objective of removing the ambiguity in the definition of “competitors” was achieved only partially. On the one hand, the definition of the term “competitors” was indeed replaced with a more polished definition than the old version, but, on the other hand, particular aspects of this definition remain vague.

The amended version prescribes, inter alia, that parties that “held business competition between them” will be deemed competitors, however there is no orderly definition of the term “competition.” The absence of a definition of “competition” further contributes to the vagueness that existed from the outset in the original version.

Furthermore, the amended version states that, for the purposes of defining “competitors,” the definition of “substitute goods” prescribed in the restrictive trade rules (a limited group of goods that consumers perceive as being direct and significant substitutes for the product under examination) will not apply but, at the same time, the amendment does not provide an alternative definition. Thus, the term remains vague and open to interpretation by the parties, who are thereby required to assess by themselves whether they meet the threshold conditions of the block exemption.

Another interesting question is the relation between the amended block exemption and the rule set in the Shufersal case. Does the amended version restrict that ruling (whereby the conclusive presumptions prescribed in section 2(b) of the law will not apply as a rule in the context of “vertical arrangements”) and prescribe, in essence, that those arrangements deemed “vertical arrangements” are actually “horizontal arrangements” that must also be examined according to the conclusive presumptions in section 2(b) of the law?

And finally, the market expected more from the amendment, that was to shift the analysis of the competitive effects of “vertical arrangements” to a self-assessment regime. The draft of the amended exemption, which was promulgated a few months ago for public comments, eliminated the “price restriction” stipulation from the draft version altogether. Theoretically, according to the version promulgated for public comments, an arrangement between non-competitors that includes a price restriction would qualify for an exemption. However, the price restriction stipulation was reinstated in the final amended version, which means the exemption will apply to a more limited number of vertical arrangements.

Therefore, it is evident that the amendment does not release parties to an arrangement from performing a comprehensive legal and economic analysis in order to ascertain whether they fulfill the threshold conditions for the block exemption. In any event, the parties do not possess enough certainty, since the definition of the term “competitors” is still vague. Thus, it is doubtful if the parties will be able to assess with certainty and accuracy whether they fulfill the conditions for the block exemption, which is particularly essential to a self-assessment regime.

Application to International Arrangements

As a rule, Israeli antitrust laws have no extraterritorial application. However, antitrust laws apply to parties to an arrangement outside of Israel if the arrangement has an adverse impact on the Israeli market. For example, a restrictive arrangement between an Israeli manufacturer and a foreign distributor will also be examined according to the amended block exemption, insofar as the arrangement between them has an impact on the market in Israel.