Israeli Monopolists Barred from Granting Discriminatory Rebates

A few days ago, the Central District Court handed down its ruling in the lawsuit filed by Aviad Concrete and Clay Industries against Nesher Israel Cement Enterprises. The suit concerned Nesher’s rebate policy to its customers, which Aviad alleged was discriminatory and adversely impacted it.

In its decision, the court ruled that Nesher, which had a monopoly in the supply of cement at the relevant time, violated provisions of the Economic Competition Law. It did so when it gave its major customers significantly higher rebates than those it gave to its small customers. Nesher apparently did so in order to avoid a situation whereby its major customers would abandon it and begin importing cement themselves. The court subsequently ruled that, by taking such action, Nesher abused its monopolistic position and harmed competition.

This is a precedent-setting ruling. It comprehensively deliberates, for the first time, the scope of the prohibition imposed on monopolists from differentiating between competing customers, in order to prevent any harm to the competition between them.

Prohibition Imposed on Monopolists in the Competition Law

The law imposes unique prohibitions on monopolists that do not apply to other companies. Courts have also ruled, inter alia, that monopolists bear special responsibilities for avoiding harm to competition.

Inter alia, monopolists are subject to restrictions on their customer rebates policy. For example, monopolists may not give types of rebates to its customers that could bind them to it, thereby harming competition. Another prohibition, which is relevant to our case, prevents monopolists from granting preferred terms to particular customers for similar services or products that may give them an unfair advantage over their competitors.

Aviad’s Lawsuit

In April 2015, Aviad filed an ILS 127 million lawsuit against Nesher, from whom Aviad purchased cement for concrete manufacturing purposes. At that time, Nesher held a monopoly and controlled more than 90% of the cement market in Israel.

Aviad, represented by Adv. Gal Rozent and Adv. Ran Karmi of our firm (together with Adv. Dror Strum), argued that Nesher gave its major clients, Readymix and Hanson (Aviad’s direct competitors), significantly higher rebates than those offered to Aviad (and to other small concrete manufacturers), thereby impairing Aviad’s capability to compete for concrete customers. Aviad argued there were no legitimate grounds for granting dissimilar, higher rebates to its major competitors. Furthermore, by engaging in this conduct, Aviad argued, Nesher violated provisions of the Competition Law, which prohibit monopolists from granting customers dissimilar terms for similar transactions in a way that could give some customers an unfair competitive advantage. It also violated the general prohibition regarding abuse of monopolistic position.

The Court Ruling

In its ruling, the court accepted all of Aviad’s claims. This is a precedent-setting ruling, since it deliberates and adjudicates complex issues for the first time in Israel regarding the prohibition imposed on monopolies from discriminating between its customers. No less than ten experts opinions were submitted during the proceeding, including three economists specializing in competition law, a renowned competition expert from Europe, an international expert on cement trade, and more.

The Competition Law’s position with regard to volume rebates

The court rejected Nesher’s argument that it had given legitimate volume rebates that reflected the significantly larger volumes of cement purchased by Readymix and Hanson relative to Aviad and other small concrete manufacturers.

Although monopolies are also permitted to give customers volume rebates, the court ruled that, any differentiation between competing customers on the basis of volume must be based on savings in the monopoly’s direct costs as a result of supplying the larger volume.

The court ruled that the mere purchase of a significantly larger quantity by one customer does not permit the monopoly to give advantages to that customer relative to other customers, if it could harm competition.

Contrary to Nesher’s claims, the court ruled, the larger rebates its major customers received were not merely intended to reflect cost savings but were also “tailor-made” for Readymix and Hanson, in an attempt to dissuade them from discontinuing their cement purchases from Nesher and beginning to import cement independently. The court ruled that this is an illegitimate reason in terms of competition law. In effect, the court ruled that monopolies may not buy competition with money, by giving rebates to customers that could become competitors.

The court’s position with regard to “objective” rebates

The court ruled that monopolies must give customers rebates on an objective basis. It rejected Nesher’s claim that the rebates were “objective,” and that any concrete manufacturer that purchased volumes similar to those of Readymix and Hanson would have received a similar rebate. The court ruled that the rebates were “tailor-made” according to these customers’ previous purchasing volumes, and that the fact Nesher concealed its rebate policy and the scale of rebates (and failed to inform small concrete manufacturers, including Aviad, about this scale) refutes the claim of objective rebates.

The court further ruled that the fact Nesher gave rebates retroactively to its major concrete manufacturers (as soon as the concrete manufacturer’s purchasing volume rose to the next level in the scale of rebates, Nesher applied the rebate retroactively from the first ton purchased from it), also refutes its claims of objectivity and equality.

According to the ruling, Nesher also discriminated against wholesalers and denied them high rebates (according to Nesher’s scale of rebates) when they purchased very significant volumes that were consistent with the volumes purchased by the major customers. It did so in a way that prevented wholesalers from offering cement at lower prices to small concrete manufacturers, without any justification.

Even if a rebate policy serves a monopoly’s business interests, the court further ruled, this does not justify acting in a manner that could harm competition.

Accordingly, the court accepted Aviad’s argument that Nesher’s rebate policy actually prevented Aviad from competing effectively against the large concrete manufacturers, and that Nesher thereby violated the Competition Law.

The Ruling’s Implications

Although the ruling is based on the circumstances of the case at bar, it has broad implications regarding the obligations imposed on monopolies in Israel, particularly with regard to the legality of the rebate policies they implement.

Thus, contrary to common intuitions, the court ruled that the fact that one customer purchases even significantly larger volumes than another customer does not allow a monopoly to give it higher rebates, and a prerequisite for this differentiation is that the higher volume enables savings in marketing or supply costs.

Moreover, monopolies must conduct themselves according to the principle of competition and may not give particular customers an unfair advantage over their competitors. They must treat customers on an equal and objective basis and in a manner that does not harm competition between them.

Furthermore, monopolies may not use their own personal business justifications as cover when they discriminate between customers in a way that could harm competition.

Finally, this ruling is consistent with the line the Supreme Court drew in its ruling on the Ashdod Port case earlier this year. That ruling also intervened in a monopoly’s rebate policy that raised concerns of harm to competition. However, unlike in the Ashdod Port ruling, which deliberated concerns of harm to competition as a result of a monopoly excluding its competitors (through rebates that bound customers to the monopoly), the Aviad v Nesher case deliberated concerns of harm to competition in the downstream market, i.e., the market in which the monopoly’s customers operate.

Both of these rulings require monopolists (whether declared as such or not) to thoroughly examine their rebate policies and to ensure they do not raise competitive concerns, whether by excluding their competitors or by harming the competition between their customers. Monopolies that fail to conduct such a self-examination may face both enforcement measures by the Competition Authority and private lawsuits or class actions by injured parties.

Further Developments

The Central District Court determined that Nesher violated competition law, but its ruling does not address the question of the damage Nesher caused. The court will now clarify this question as the proceeding continues.

We note that after Aviad filed its lawsuit, a motion to certify a class action against Nesher was also filed, on similar grounds. The two actions were consolidated to discuss the question of Nesher’s liability for violating the law. The court decided the question of liability in relation to both actions, and will now deliberate the separate questions pertaining to each action. 

Nesher’s liability for violating the law. The court decided the question of liability in relation to both actions, and will now deliberate the separate questions pertaining to each action. 

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Adv. Gal Rozent, the head of Barnea Jaffa Lande’s Antitrust and Competition Department, and Adv. Ran Karmi are at your service to answer any questions about competition law in general and about monopolists’ conduct in particular.