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Update to Block Exemptions for Joint Ventures and Restraints Ancillary to Mergers

Block exemptions are one of the main instruments the Israeli Antitrust Commissioner uses when exempting categories of prevalent commercial arrangements from the obligation to obtain a specific exemption or the approval of the Antitrust Tribunal. At issue are arrangements that do not give rise to a concern of any substantive harm to competition, even though they fall under the broad definition of a “restrictive arrangement” prescribed in section 2 of the Restrictive Trade Practices Law. Block exemptions are also a key tool used by the business community when devising various commercial arrangements, without having to obtain prior approval from the Israel Antitrust Authority (IAA).

 

Two important block exemptions have been updated recently: the exemption for joint ventures and the exemption for restraints ancillary to mergers. The amendments transfer the examination of the intensity of the harm to competition deriving from these arrangements from the IAA to the business sector, through the introduction of a self-assessment model.

 

Prior to the amendment, the “safe harbor” protection mechanism was used to ascertain whether it is necessary to apply to the IAA for its approval of the arrangement. The use of specific safe harbor provisions, in particular circumstances, requires the parties to apply to the Antitrust Commissioner to obtain a specific exemption, when the arrangement does not give rise to concern about material harm to the competition. The amendments made in the two block exemptions reflect the downtrend in the use of safe harbor protections and a transition to a material examination of the extent of the impact of the arrangment on competition. Essentially, subsequent to the amendment, the ball is relayed to the business sector.

 

Restrictive arrangements the block exemption addresses will be exempt from the obligation to obtain the Commissioner’s approval, even when they do not fall within the relevant safe harbor criteria, provided that they fulfill the following criteria cumulatively: (a) the objective of the arrangement is not to reduce or eliminate competition, (b) the arrangement does not contain restraints inessential to fulfilling the objective of the arrangement (i.e. not a naked restraint), and (c) the arrangement does not significantly harm competition in the market.

 

Within this context, one of the questions of interpretation the business sector must address is as follows: What interpretive weight should be given to the safe harbor provisions when examining the intensity of the harm to competition posed by the specific arrangement? For example, the safe harbor provisions in the block exemption for joint ventures prescribe threshold criteria regarding the market shares of the parties to the arrangement. Prior to the amendment, parties whose market shares exceeded 30% were specifically excluded from the safe harbor clauses of the exemption. But how do you implement the amendment to the block exemption when a monopoly (market share of at least 50%) is interested in becoming a party to a joint venture? How will the self-assessment competitive analysis be impacted by the fact that safe harbor protection clauses permit only arrangements involving significantly smaller market shares?

 

Another example relates to the time frames prescribed in the safe harbor provisions in the block exemption for restraints ancillary to mergers. The safe harbor provision in the block exemption prescribes that the exemption will apply to an ancillary restraint, such as a supply guarantee restraint, for example, if the restraint is for a period not exceeding three years. What will be the fate of similar restraint for a period of five years, when there is no significant harm to competition? Will it be possible to justify the restraint by virtue of the new provision, or does the safe harbor provision need to serve as a criterion for reasonability? Will a material deviation from said safe harbor provision disqualify the restraint from the exemption, even if it is possible to demonstrate under the self-assessment model that the intensity of the harm to competition is insignificant?

 

In addition to the amendments to the block exemptions, the IAA published Opinion 1/18, which addresses the interpretation of the phrase “the main objective of the arrangement is not to reduce or eliminate competition,” which appears in the Restrictive Trade Practices Law and in the block exemptions. In this Opinion, the Commissioner discusses the differentiation between “naked restraints” and ancillary restraints, and emphasizes that ancillary restraints are those that are considered vital to the operation of the arrangement. This means that a practical link is needed between the restraint and the legitimate business objective the arrangement is seeking to achieve. On the other hand, “naked restraints” are restraints whose sole business objective is expressly anticompetitive.

 

According to the Opinion, the arrangements deserving of an exemption are agreements in which the restraint on competition is a derivative, i.e. is secondary to the legitimate arrangement and is beneficial to businesses and to competition. According to the Opinion, a legitimate arrangement is a transaction involving the joining of business forces for the purposes of streamlining, increasing outputs, developing new products, and the like.

 

At the same time, the Opinion clarifies the tests of proportionality that must be performed on an ancillary arrangement to ensure the arrangement does not contain restraints inessential to the operation of the arrangement. For example, while a prevention of “free riding” could constitute a legitimate objective of the arrangement and may justify a non-compete restraint, the arrangement must be examined to ensure that it does not restrict  competition existing outside the arrangement. This differentiation is important in joint ventures in which the parties thereto often concurrently operate independent businesses.

 

As stated, the amendments to the block exemptions afford parties greater freedom in designing arrangements among themselves, without having to apply to the IAA for a specific exemption, but they also impose greater liability on the parties, in the event their self-assessment is erroneous.