Easement of Vertical Arrangements – a new definition of "competitors"

On July 9, 2018, an amendment to the Antitrust Rules (Block Exemption for Non-Horizontal Arrangements That Do Not Include Certain Price Restrictions) (Temporary Order), 2018 (the "Block Exemption") was approved. The Block Exemption clarifies and hones the definition of "competitors", and extends its validity until 2021.

The Block Exemption was enacted in 2013 and was then considered one of the first signs of change in the Israel Antitrust Authority's (the "IAA") policy, leading towards a "self-assessment" regime. It was for this reason that the original version of the Block Exemption adopted a cautious and expansive approach with regard to the definition of "competitors" and which resulted in much criticism and considerable interpretive difficulties when applying the Block Exemption in day-to-day practice.

In light of the above, a need arose to amend the Block Exemption in a way that, on the one hand, would provide certainty and clarity to the private market, and on the other hand, would embody the practice and experience accumulated since its enactment. The amendment of the Block Exemption focuses on the definition of "competitors", and clarifies (and according to the IAA, also removes the ambiguity and complexity that characterized the definition of "competitors" prior to the amendment) the cases in which parties will be deemed "competitors" for application of the Block Exemption.

The amended Block Exemption now provides four alternatives as to who will be considered "competitors", thereby denying parties who fulfill even one of these alternatives to benefit from the Block Exemption.

First, parties will be deemed competitors if during the entire period of the arrangement or part thereof, or in the three years preceding such arrangement, business competition exists or, as applicable, existed between them. This is a factual examination, which is not necessarily consistent with economic market definitions, but asks the parties to examine whether during the aforesaid period there were actual competitive relations between them. For example, if the parties submitted competing bids for the same tender.

Second, parties will be deemed competitors in accordance with the Block Exemption, if during the entire period of the arrangement or part thereof, or in the three years preceding such arrangement, they supply or purchase or, as applicable, supplied or purchased, goods constituting substitute goods in the eyes of the consumer. This is an economic examination of substitutability (bearing in mind that the term "substitute goods", as defined in the relevant Israeli legislation, will not apply in this context and, therefore, will not be the accepted market definition from an antitrust perspective but, in fact, has a broader connotation).

With regard to these two alternatives, it was clarified that a supplier of goods and a marketer of those same goods, which were purchased from the supplier, will not be deemed "competitors" only because the supplier markets these goods himself. In other words, such dual distribution does not negate, in and of itself, the applicability of the Block Exemption to a distribution arrangement between these two parties.

Third, parties likely to be deemed competitors in accordance with either of the tests outlined above (the factual or economic test), were it not for the restrictive arrangement, or parties deemed potential competitors (namely, parties who are able to compete with one another immediately or parties showing an intent to compete by engaging in the necessary preparations for the manufacture or supply of goods which are substitute goods in the eyes of the consumer, or in some other way, or parties having a tendency to do so).

Fourth, parties for whom the restrictive arrangement is intended to limit them from being competitors, in accordance with the factual or economic test. However, as clarified by the IAA, this alternative does not derogate from legitimate ancillary non-compete provisions included in vertical cooperation agreements (such as a non-compete provision in a distribution agreement between a supplier and a distributor).

The amended version of the Block Exemption and the explanatory notes provided by the IAA can be found (in Hebrew) here.

This Memorandum is not a legal opinion, is not a substitute for legal advice, and is not intended for readers to rely on it as a legal opinion. In any case, you should seek professional legal advice.