Horizontal and Vertical Restrictive Arrangements

Doron Afik, Esq.
October 28, 2015

A restrictive arrangements that was not preapproved by the Antitrust Tribunal is a criminal offense of all parties to the arrangement. Additionally, criminal liability is attached also to directors and officers of corporation who are parties to such arrangement. The Israeli Antitrust Law defines a restrictive arrangement very broadly to include any arrangement "entered into by persons conducting business, according to which at least one of the parties restricts itself in a manner liable to eliminate or reduce the business competition between it and the other parties to the arrangement, or any of them, or between it and a person not party to the arrangement." The term "arrangement" is also defined very broadly defined to include any arrangement " whether express or implied, whether written, oral or by behavior, whether or not legally binding." The Courts construed such definition to include any coordination between people whose purpose is to create a restriction on competition and as such does not require the showing of intention to agree or specificity as usually required to form a binding contract. Moreover, for a restrictive arrangement to exist only a very low level of coordination between the parties is required and there is no requirement for an explicit agreement. An arrangement imposed by one side on the other will be considered as a restrictive arrangement.

In case of Supersal the Supreme Court held in August, 2015, that a vertical arrangement (i.e. not "horizontal agreement" between competitors but an arrangement between two entities that are one above the other in the marketing chain, such as a supplier and a distributor) may be a restrictive arrangement. For example, an arrangement between a supplier and a distributor under which the distributor receives exclusivity or under which a minimum or a maximum price is dictated. The test is whether the restraint undertaken by the parties damages the competition, even if the damage is indirect, by binding a third party to the arrangement, even if such third party is not in the same market in which the parties to the arrangement are.

In the case of Supersal the Supreme Court considered whether there is a difference between a vertical restrictive arrangement and a horizontal one and held that Article 2(b) of the Antitrust Law specifically defines as a restrictive arrangement any arrangement involving a restraint relating the price to be demanded, offered or paid, the profit to be obtained, division of all or part of the market, according to the location of the business or according to the persons or type of persons with whom business is to be conducted or the quantity, quality or type of assets or services in the business. However, the Court held that these prohibitions shall apply only to horizontal arrangement and will not apply to vertical agreements.

Either way, a restrictive arrangement is not only unenforceable but also constitutes a criminal offense not only of the corporation but in certain caes also of its managers and therefore it is of high importance to be accompanied by an attorney who is knowledgeable in this area of law in order to avoid a situation where the other party is released from the agreement due to its illegality or a situation in which criminal liability of the corporation or its directors will be attached.