The Israeli government recently announced its intention to continue amending the Economic Competition Law. The previous Knesset approved this amendment in a first reading and the current Knesset approved the continuation of the legislative process. The purpose of the amendment is to add provisions to the Competition Law prohibiting harm to parallel imports and personal imports and imposing heavy fines on violators.

Restrictions on Direct Importers

The proposed amendment imposes various prohibitions on direct importers. A direct importer is any party that imports or distributes goods in Israel through an arrangement with a foreign manufacturer or that manufactures goods in Israel through an arrangement with a party abroad, regardless of the direct importer’s position in the relevant market. The proposed prohibitions will apply to all direct importers, even those with little or no market power.

Inter alia, the following prohibitions will be imposed on direct importers:

1. Direct importers in Israel may not carry out any act that could result in harm to personal imports or to parallel imports in Israel. This prohibition aims to protect competition in these sectors.
2. Direct importers may not carry out any act whose main objective is preventing or reducing competition. This prohibition applies to parallel imports and personal imports, regardless of the act’s potential outcome.
3. 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 the products (i.e., even if its purpose is legitimate and is not intended to harm competition).

“Acts” that direct importers may not carry out are defined broadly. The definition includes, inter alia:

1. Engaging in an “arrangement,” as this term is defined in the Competition Law.
2. Changing commercial terms or making them conditional.
3. Refusing to supply an asset or service.
4. Reporting about goods originating from parallel imports in a way that enables manufacturers to track the goods’ supply chain (even partially), etc.

The explanatory notes to the draft bill clarify that an appeal to the various regulatory authorities, which is not a frivolous appeal, will not fall under the definition of “act” within the scope of the prohibitions imposed in the legislative amendment.

The proposed amendment imposes prohibitions on direct importers but not on the other links in the supply chain. Nevertheless, these prohibitions may affect commercial relationships between direct importers and parties such as manufacturers abroad or retailers in Israel. For example, the prohibition imposed on direct importers (under particular circumstances) against reporting to manufacturers about goods originating from parallel imports may affect the commercial arrangements between Israeli direct importers and foreign suppliers. Moreover, any party that engages in a commercial arrangement with a direct importer is already subject to all other provisions of the Competition Law. The Competition Law prohibits engagements in restrictive arrangements without prior approval or exemption, a prohibition that applies to both parties to the arrangement. The main criterion for classifying an arrangement between noncompeting parties as a “restrictive arrangement” is the question of whether the arrangement could prevent or reduce competition.

The proposed amendment authorizes the Competition Authority Director-General to impose pecuniary sanctions on direct importers. The fines can be as high as about ILS 1 million for individual violators. 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 100 million.

Significance and Implications

The continuing promotion of the proposed 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 segment. Another step in this direction is the plan to reduce concentration and increase competition in the food and toiletries market, which the Competition Authority and the Ministry of Finance are promoting (see update here).

The proposed amendment imposes significant restrictions on any direct importer, regardless of its position in the relevant market. The proposed amendment not only prohibits acts that could harm competition, but also scrutinizes the motives 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.

If passed, the proposed amendment is likely to have material repercussions on direct importers’ operating arena against parallel imports or personal imports. These repercussions will require direct importers to examine the legality of their actions on an ongoing basis.

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