Recently the Antitrust Authority has published a draft opinion concerning the examination of vertical price settings. The intention is to provide examples of the incidents in which the supplier will be permitted to set for its distributor the product's specific sale price. In the draft opinion, the Authority divides the tests according to which price agreements may be prohibited or legal.
A price setting between competitors is considered under the provisions of the Antitrust Law as prohibited in the nature of things. Such an agreement is automatically deemed to be a restrictive trade practice which is 'likely to harm competition'. Accordingly, in the past, even a vertical price setting (between those who are not competitors, but are located in the manufacturing and distribution chain) was automatically deemed prohibited.
However, the decision of the Supreme Court which was handed down in the Supersol matter in 2015, substantially changed the legal order concerning vertical arrangements. The court found that vertical arrangements which concern price, quantity or quality (by contrast with horizontal arrangements) are likely in certain circumstances to contribute to competition and the public benefit. Therefore, the court decided that these arrangements will not be automatically considered as prohibited restrictive trade practices – but rather their impact on competition should be examined in detail. Vertical arrangements concerning prices will be regarded as prohibited restrictive practices if they create a risk for competition (likely to damage competition). This is a difficult economic and legal test. His Honor Mr. Justice Rubinstein even asked to add an additional test to it, namely, whether there is a prima facie pro-competitive justification for the restriction.
Currently, the Antitrust Authority is seeking in its draft opinion to set out the tests and criteria according by terms of which each case should be examined individually to determine whether the arrangement is allowed or is prohibited (criminal).
Arrangements where the supplier/manufacturer sets the price to its retailers, wholesalers or distributors are known as 'Resale Price Maintenance or 'RPM' arrangements. The draft opinion addresses primarily those situations in which the supplier or manufacturer asks to determine (fix) a specific price or a minimum price (and from which the distributor can only increase the price).
The Authority in its draft distinguishes between two types of RPM arrangements: one, arrangements concerning the retail sector (the essence of which is to fix the price for the end consumer); and the second, the arrangements which do not directly concern the retail sector (where the arrangement does not concern itself with the party selling directly to the end consumer).
With respect to arrangements concerning the retail sector, the Authority has provided a threshold test and a list of aspects which need to be examined before deciding whether the arrangement is legal. In the threshold test (in a manner similar to the test which was outlined by His Honor Mr. Justice Rubinstein), the Authority asks the parties to prove that there is a clear and direct pro-competitive purpose for fixing the price. Namely, that there is justification for fixing the price in addition to the desire of the supplier or manufacture to ensure that the price of the product will not fall below the limit it set. Take for example, the case where the supplier asks to support the retailer in investing in the penetration of a new product by means of supporting services (such as samples, presentation, advertising, etc). In these circumstances often the supplier asks to prevent a 'hitchhiking effect' (distributors which do not invest and seek to benefit from the investment of competitors) and the 'agent problem' effect (which is created as a result of the gap in the interests between the supplier to retailers or distributors. For example, when the manufacturer has an interest to build a brand while the interest of the agent is to realize it without investing in maximizing the sales).
In the list of competitive aspects which should be examined within the substantive-competition test, the Authority list general outlines for examination. The Authority requires that two sectors be examined: the sector in which the supplier competes and the sector in which the retailers which distribute the supplier's products compete. With respect to both these sectors, the Authority has asked that the influence of the RPM arrangement on the probability of the existence and maintenance of the appropriate balance. As an example, the retention of a high price in a market with few competitors. As part of this the Authority asks the supplier to examine the number of competitors in each sector, their quality, the rate of concentration, the 'rate of coverage' of the arrangement within the market, the barriers to entering the market, the barriers to the existing competitors in the market. In effect, the Authority requires the supplier to track its influence on the market, its power in the market and the scope of the arrangement such supplier has fixed will impact on the relevant market. Within this the Authority has identified a number of concerns according to which such arrangements are likely to give rise to in certain circumstances: the ease the appropriate balance in the supplier's chain; the retain the existing market power in the hands of the dominant supplier; the narrowing of the incentive of the retailers to restrain the market power of the dominant supplier; to ease the appropriate in the retailer sector; to damage the competitiveness of efficient retailers.
With respect to the examination of RPM arrangements which do not relate to the retail sector, but to arrangements between the supplier and the effective party in the supply chain, but which does not sell directly to the end customer, the Authority states that the manner of analyzing the arrangement depends on the nature of the relationship between the supplier and the distributor. Such that, the examination of the nature of the relationship between supplier and distributor should be done in two main ways: first, the distribution of risk between the supplier and the distributor (an RPM arrangement will be considered as legitimate as the supplier is the one that carries the lion's share of risks associated with the marketing of products). The second relates to activities of the distributor as the 'long arm' of the supplier (so long as the distributor works exclusively with supplier in marketing and distribution, it is not expected to have a negative impact on competitiveness).
The draft opinion which the Authority has published provides a preliminary sketch of the self-examination of the parties to see whether the vertical price arrangement which they wish to provide for is legal or not. This draft does not provide clear measures and does not provide any 'safe harbor' that those standing by it would be protected against enforcement (whether criminal, administrative or civil). The Authority has invited those interested to respond to the draft (and our office will of course be responding to this draft).
Reference: the Antitrust Authority 'Draft Policy Document: Setting a Minimum Price will be Considered a Restrictive Trade Practice if there is no Competitive Justification' (11.1.17)
