On restrictive arrangements and criminal liability of corporate officers

On restrictive arrangements and criminal liability of corporate officers

November 28, 2020

Companies enter into agreements as a matter of routine, whether orally or in writing, and often without thinking about the consequences involved. However, sometimes an agreement may jeopardize competition in a way that blocks the entry of new competitors into the market and in such a case the parties to the agreement, as well as their officers, may face criminal liability ...

Israeli law defines a restrictive arrangement in the broadest sense, insofar as it is an arrangement that results in harm to competition or a reduction in competition between parties to the arrangement or towards a third party. For example, an arrangement that binds a party to the price that will be required or when it comes to a contract between competitors for the joint sale, or joint purchase, of a service or goods. Under law the "Competition Authority" (formerly the "Antitrust Authority") was established, which role is to monitor competition in the market and has both the power to initiate criminal proceedings and the power to impose fines.

Not only are parties to a restrictive arrangement, unapproved by the Competition Authority, committing a criminal offense, but the law also requires active managers in the corporation (whether they are officers of the corporation or managers of the field in which the offense was committed) to supervise and do everything possible to prevent an offense under the law by the corporation or by an employee and imposes a penalty of up to one year imprisonment and a fine unless the officer can show that he has done everything possible to fulfill his duty. The Competition Commissioner has the authority to impose a financial sanction on a party to a restrictive arrangement in the amount of over ILS 1 million per person and in the case of a company with a turnover of over ILS 10 million, a fine of up to 8% of turnover.

Recent Court holdings indicate an increase in the use of the sanction of criminal liability in the context of restrictive arrangements, and in particular the sanction of imposing personal criminal liability on officers. For example, in a case decided in September 2020, the Jerusalem District Court convicted the taxi drivers' union and the union's chairman personally of being a party to a restrictive arrangement because they advised taxi drivers not to take passengers at the discount price offered by Ben Gurion Airport taxi tender winners. It was held that even a recommendation for a particular course of action, when it comes from a business association, is considered a restrictive arrangement. In another judgement from October, 2020, the Jerusalem District Court convicted distributors of school for creating a restrictive arrangement after they coordinated the submission of bids for a tender. In that case, personal criminal liability was imposed on officers even though in the end of the day the arrangement did not materialize.

Because the definition of a "restrictive arrangement" is broad, and because the consequences of entering into an agreement that is considered a restrictive arrangement include criminal punishment, it is very important to consult with an attorney with experience in the field of contracts and antitrust. In addition, in the case of a written agreement it is certainly important to consult a lawyer before signing such an agreement, as it is clear that any comma may have fatal consequences in the future, both for the company and its officers. In addition, as long as there is a concern that employees of the business will make restrictive arrangements or any other action that could harm competition, it is important to make sure that the company has an internal enforcement plan that guides employees how to act and also creates an oversight mechanism.