The Economic Competition Law, Restrictive Arrangements and Prison Sentences

The Economic Competition Law, Restrictive Arrangements and Prison Sentences

Doron Afik, Esq.
February 9, 2019

A software company develops a successful product that allows easy payment by credit card and offers it to business owners. The provider of the accounting system to such businesses, however, in an attempt to prevent the software company from penetrating the market, makes it clear to the business owners that if they work with that new competitor, they will disconnect them from their accounting system. Can they make such a threat? Do business owners who submit to the threat by themselves commit a criminal offense?

A case discussed in 2018 dealt with an arrangement between competitors to divide the market between them. The Supreme Court justices emphasized that the purpose of the antitrust legislation is to protect the existence of free competition in recognition of its crucial importance for promoting the market and the economy, its contribution to efficiency and innovation, lowering prices, improving products and services and even ensuring equal opportunity to compete in the market in a way that promotes the constitutional freedom of occupation. For this reason, there is a prohibition on the existence of a restrictive arrangement that may harm free competition.

Similarly, on January 1, 2019, the Israeli legislator decided that the name of the Israeli Antitrust Law would be changed and that it would henceforth be called the "Economic Competition Law." The Antitrust Authority was renamed to now be called “the Competition Authority.” The law, as construed by the Courts, establishes a prohibition on any restrictive arrangement, which is broadly defined as to include any coordination with the aim of creating a restriction on competition, even if it is not an explicit agreement. An arrangement imposed by one party over the other will also be considered a restrictive arrangement. The law does not require any actual damage to competition or monetary damage, but only the potential for harm to competition. A restrictive arrangement that was not pre-approved by the Competition Tribunal constitutes a criminal offense not only of all the parties to the arrangement, but also directors and officers, where the party to the restrictive arrangement is a company. Moreover, the Supreme Court made it clear that the penalties imposed in the case of restrictive arrangements are to be increased and actual prison sentences are to be imposed on officers, all in order to create effective deterrence against such offenses. In the case of a restrictive arrangement, the law allows punishment of up to 5 years in prison and large fines, and in the case of officers, imprisonment of up to one year in addition to fines.

In a criminal proceeding initiated against a chain of supermarkets, the Supreme Court held that when an arrangement exists under which a retailer (or distributor, marketer, etc.) attempts to cause the termination of the contract between a supplier (or an importer, a manufacturer etc.) and a competing retailer, it is a forbidden arrangement and a criminal offence. In another case, the restrictions imposed by car importers on car purchasers required them to service the cars only in certified garages in order for the guarantee to apply, and at the same time obligated certified garages to purchase and use only spare parts imported by the vehicle importers. The Court held that an arrangement of this kind is intended to exclude competitors from the market and therefore is a prohibited restrictive arrangement.

Thus, a supplier acting to prevent a customer from using in parallel products of others probably commits a serious criminal offense of restricting arrangement. A customer who submits to such a demand by the supplier is actually a partner to such offense. Thus, in any such, it is advisable to immediately seek legal advice to ensure that no criminal liability is created, including personal responsibility for managers.