Competition Law: Massive Fines for Harming Parallel Imports
An amendment to Israel’s Economic Competition Law was approved recently. This amendment adds provisions prohibiting direct importers from harming parallel imports and personal imports. It also enables the imposition of heavy fines on importers who violate these provisions.
A few months ago, we published an update on the draft bill for this amendment, which will come into effect within three months.
Amendment Highlights – Direct Importers Prohibited from Harming Parallel Imports
A direct importer is one that import or distribute goods in Israel through an arrangement with a foreign manufacturer or that manufacture goods in Israel through an arrangement with a party abroad. The new amendment imposes various prohibitions on direct importers, regardless of their position in the relevant market. In other words, the prohibitions will also apply to direct importers of any product even if they hold minimal market shares or have little or no market power.
Inter alia, the following prohibitions will be imposed on direct importers:
- Direct importers in Israel may not carry out any act that could result in harm to “personal imports” (product imports by end consumers) or “parallel imports” (imports other than personal imports by any party that is not a direct importer), which could adversely affect competition in a sector.
- Direct importers may not carry out any act whose main objective is to prevent or reduce competition from parallel imports or personal imports, regardless of the act’s potential or actual outcome, and even if it caused no harm.
- Direct importers may not carry out any act that could prevent or reduce competition from parallel imports or personal imports, which is not essential for the direct importer to import its goods, even if its purpose is legitimate and is not intended to harm competition.
The definition of “act” direct importers are prohibited from carrying out is very broad. The definition includes:
- Engaging in an “arrangement,” as the Competition Law defines this term.
- Dictating or conditioning commercial terms.
- Changing commercial terms, whether consensually or unilaterally.
- Dictating to retailers about the mode of display or marking of goods originating from parallel imports in a way that differs from the direct importer’s goods.
- Refusing to supply an asset or service.
- Reporting about goods originating from parallel imports in a way that enables tracking of the goods’ supply chain (even partially).
- Altering the characteristics or properties of goods.
The explanatory notes to the draft bill clarify that a direct importer’s appeal to the various regulatory authorities, provided it is not a frivolous appeal, will not be deemed a prohibited act pursuant to the legislative amendment.
Violations of the New Provisions Expose Direct Importers to Heavy Fines
Although violations of the new provisions do not expose direct importers to criminal punishment, violations definitely expose them to administrative sanctions at enormous sums.
Corporations with a sales turnover exceeding ILS 10 million that violate these provisions will be subject to pecuniary sanctions of up to 8% of their sales turnover, up to a maximum sanction of ILS 111 million.
The pecuniary sanction can be as high as about ILS 1.1 million for individual violators.
Significance and Implications
The amendment to the Competition Law is part of the Israeli government’s efforts to bring down the cost of living by increasing competition in the import sector. The amendment also imposes significant restrictions on any direct importer, regardless of its position in the relevant market or the volume of products it imports. There is therefore concern that the amendment will be used against direct importers, even if their conduct has no impact on competition in the market.
The amendment also scrutinizes the purpose behind a direct importer’s conduct. A direct importer may face enforcement measures even if, in practice, there are no concerns about harm to competition as a result of its conduct.
The approved amendment imposes prohibitions on direct importers themselves, but not on other links in the supply chain (such as foreign manufacturers or retailers in Israel). Nevertheless, these prohibitions are likely to affect commercial engagements between direct importers and these other parties, and may obstruct actions and consents commonplace in these engagements prior to the enactment of the amendment.
For example, the amendment may prevent direct importers from constraining retailers’ ability to purchase products from any source, or from obligating foreign manufacturers to block parallel imports to Israel. Another example includes the prohibition that directly imposes reporting obligations on direct importers (under specific circumstances) to inform foreign manufacturers about goods originating from parallel imports.
Direct importers must now examine the legality of their actions on an ongoing basis. They must also adjust their current mode of conduct to comply with the amendment’s new provisions.
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Barnea Jaffa Lande’s Antitrust and Competition Department is at your service regarding contractual and other preparations for this amendmenturther inquiries, please contact Advs. Gal Rozent, Irit Brodsky or Ran Karmi.