Israeli Competition Authority Taking Strict Position toward Vertical Price Maintenance Arrangements

Barnea Jaffa Lande & Co.
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A few days ago, the Israeli Competition Authority published for public comments draft public statement 1/22, presenting its position on vertical price maintenance arrangements. The final public statement 1/22 will replace the Competition Authority’s previous statement 2/17 published in 2018.

Background

The publication of the new draft statement comes in the wake of the amendment to the block exemption for non-horizontal arrangements a few months ago. As a result of that amendment, it is now also possible to shelter arrangements containing price restraints under the exemption. Such arrangements include vertical price-setting arrangements (resale price maintenance arrangements, or RPM arrangements).

These are arrangements in which a supplier dictates the resale price of its goods to a distributor or retailer in the next link in the supply chain. However, the application of the block exemption on any vertical arrangement is subject to the parties’ self-assessment to verify that (1) the arrangement will not significantly harm competition, and (2) its purpose is not to restrain or prevent competition, and the restraint is necessary to implement the legitimate arrangement between the parties (See our previous update on the subject here).

The new statement presents the Competition Authority’s position on how to perform self-assessments of RPM arrangements. It focuses mainly on minimum RPM arrangements and fixed RPM arrangements. The Competition Authority has clarified in the past and reiterates now that it is taking a stricter approach toward such RPM arrangements than other vertical arrangements. This is because the direct outcome of RPM arrangements is restraint of intra-brand price competition, as well as because such arrangements may raise other competitive concerns.

Adoption of a Strict Approach toward RPM Arrangements

The draft statement shows the Competition Authority is adopting an even stricter approach toward RPM arrangements than it did in the past.

Requirement for Intense Level of Competition

The authority’s position is that, as a rule, there is no reason to engage in RPM arrangements unless the market characteristics indicate an “intense level” of competition. This is a stricter requirement than in the original statement requiring an “adequate level” of competition. The authority is clarifying that competitive concerns increase when there are fewer competitors in a market and the intra-brand competition is weaker.

Raising the Standard for Pro-Competitive Benefits

The new statement takes a stricter approach to the condition the authority presented in its original statement, whereby the purpose of engaging in an RPM arrangement must be to achieve a clear pro-competitive benefit. The new statement requires the pro-competitive benefit to be significant and proven and to completely dispel any competitive concern arising from the arrangement.

One possible example of a pro-competitive benefit that may derive from an RPM arrangement is the launch of a new product on the market. In this situation, an RPM arrangement may incentivize retailers to incur the special outlays required to market the new product. Another example of a pro-competitive benefit deriving from an RPM arrangement is the resolution of the “free rider” problem. This is a situation whereby consumers benefit from a retailer’s pre-sale services, such as product demonstrations and sales promotions, but purchase the product from another retailer. The concern in this instance is that retailers will be less incentivized to invest in presale services, even when they benefit consumers and increase competition. In addition, the Competition Authority states that it will not tend to act against RPM arrangements concerning distinct luxury products. This is because the consumption characteristics of such products show that consumers are not sensitive to their prices, and even purchase them because of their high prices.

The Competition Authority emphasizes the necessity of concrete supporting evidence of a pro-competitive benefit. Parties to an RPM arrangement must prove the arrangement significantly improved or will actually improve the services accompanying sales of the product or other sales promotion activities.

The higher the competitive concerns arising from an RPM arrangement, the more significant must be the pro-competitive benefit, in order to be able to dispel those concerns. The draft statement clarifies that in the instance of a market with few competitors, it is highly unlikely benefits will be found that justify harming the competition.

Requirement of Necessity

The draft also specifies another requirement to show that the price dictation is needed to implement the purpose of the arrangement regarding a retailer’s marketing of the supplier’s products. In other words, the parties must prove that they cannot achieve the pro-competitive benefit deriving from the arrangement through other measures that would have less influence on the competition. According to the draft, suppliers are sometimes able to dictate requirements to retailers about how to sell their products or to participate in their expenses for selling and providing related services. In such instances, an RPM arrangement is unnecessary. Parties must also show that the terms of the RPM arrangement are not broader than necessary. They must also show that they are indeed secondary to the purpose of the arrangement.

RPM Arrangements between Suppliers and Agents

The draft statement addresses RPM arrangements made between suppliers and distributors or resellers that do not (or hardly) bear the risks associated with product marketing. These “agents” basically serve as the supplier’s representatives and are not meaningful competitive factors in the supply chain. The draft clarifies that RPM arrangements made between suppliers and agents will generally be considered legitimate arrangements.

Maximum RPM Arrangements and Recommended Prices

The draft statement also addresses maximum RPM arrangements and recommended prices. It states that recommended prices could also raise competitive concerns similar to those arising from RPM arrangements, even if at a lower intensity. In particular, recommended prices could become reference points for retailers and facilitate price coordination between the parties. Unlike RPM arrangements that may have pro-competitive benefits, for the most part, price recommendations do not promote competition or offer less pro-competitive benefits. That being the case, the draft statement prescribes that price recommendations may constitute a restrictive arrangement and need to be examined according to the conditions of the block exemption for non-horizontal arrangements.

Referring to maximum RPM arrangements, the draft states that, as a rule, they do not raise competitive concerns like those arising from minimum RPM or fixed RPM arrangements. This is provided that the price set in a maximum RPM arrangement does not actually serve as a reference point for pricing for retailers or suppliers and does not de facto turn it into a fixed RPM arrangement.

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The draft statement is available for public comments until February 10, 2022.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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