On 26 July 2022, the Supreme Court recognised in a milestone decision the validity of the excessive pricing cause of action under competition law and determined the manner of its application in civil proceedings.
The matter in question is one of the most controversial topics in competition law and is the subject of a longstanding debate between scholars, experts, competition authorities and courts, both nationally and internationally.
In its judgment in The Central Bottling Company Ltd v Gafniel of 26 July 2022,(1) the Supreme Court affirmed the interpretative position of the Israel Competition Authority (ICA) from 2014 (which was later endorsed by the district courts), according to which the Economic Competition Law 1988 included a prohibition on charging of unfairly excessive prices by a monopoly.
At the same time, the Court observed the significant potential risks of extensive and imprudent utilisation of this cause of action, as well as the practical difficulty of its implementation, which warrants a cautious and restrained approach in its application.
Facts
The Competition Law prohibits a monopoly from abusing its market position “in a manner which may reduce competition in business or harm the public”.
Section 29A(b)(1) of the Competition Law prescribes that “setting of an unfair purchase or selling price for the monopoly asset or service” shall be deemed as an abuse of monopoly position.
Traditionally, there has been a consensus regarding the applicability of this prohibition with respect to monopolies setting unfairly low prices (predatory pricing) – whereby the dominant firm reduces its prices to a loss-making level in order to push its competitors out of the market with a view of recouping its losses after their exit (exclusionary conduct).
On the other hand, it remained debatable whether this prohibition applies to monopolies setting unfairly high prices (excessive pricing).
The complexity of the debate regarding the validity of the excessive pricing cause of action stemmed, among others, from the fact that contrary to most legal prohibitions on dominant firms (which are known in Israel as “monopolies”), the prohibition on setting excessive prices is not aimed at protecting the competitive dynamics of the market or at preventing its impediment by the monopoly, but rather at
safeguarding consumer welfare.
Moreover, underlying the opposition to recognition of the excessive pricing cause of action is the
assumption that artificial intervention in the monopoly’s pricing policy might impair long-term incentives for competition among all market actors.
This is on top of the theoretical and practical difficulties of identifying “unfairly” high prices and the enforcement challenges that such prohibition poses over time. For these reasons, for many years the ICA refrained from enforcement of the prohibition on excessive pricing by monopolies.
The turning point in the ICA’s policy occurred in April 2014 with the publication of the competition commissioner’s Opinion No. 1/14, which recognised for the first time that the prohibition from setting “unfair prices” by a monopoly also pertains to excessive pricing.
Although the opinion did not result in any enforcement measures taken by the ICA for excessive pricing, a “torrent” of motions to certify class actions soon appeared in its wake.
In certain cases, district courts expressly recognised the validity of this cause of action, while accepting the movants’ position and significantly mitigating the burden of proof imposed on them.
However, in February 2017, the newly appointed competition commissioner replaced Opinion No. 1/14 with Opinion No. 1/17 as a counterweight to this trend.
In this opinion, the Competition Commissioner stated her position that while the prohibition on excessive pricing by monopolies should be recognised, boundaries should be delineated due to the risks involved in its incautious application.
Decision
The judgment was granted in an application for leave to appeal the decision of the district court in class action 6179-08-16, which certified a class action against the Central Bottling Company (the local Coca-Cola franchisee), for abusing its monopolistic position by way of charging unfairly high prices for Coca-Cola drinks.
Judge Ofer Grosskopf of the district court adopted a broad approach to the excessive pricing cause of action, which essentially relied on a single test for its application – a “costs-based” test which examined whether the price was prima facie excessively higher than the costs.
The district court further determined that the greater the market power of the monopoly, the lower the gap that the movants must show according to the costs-based test in order to show that the prices are
excessive.
Further, the district court also decided that if the monopoly opts not to disclose its profitability data, the court may lower the burden of proof the plaintiff must meet in order to certify the class action.
As the district court decided to certify the class action, the Central Bottling Company requested leave to appeal to the Supreme Court against the decision, raising several principal arguments against the district court’s judgment.
Due to the principal issues reviewed in the appeal, the Supreme Court requested the attorney general’s attendance, whose position was submitted to the court in June 2020.
In this framework, the attorney general endorsed the position of the Competition Commissioner in Opinion 1/17 regarding the recognition of the prohibition on excessive pricing under Israeli law, as well as the need for a restrained and cautious approach in its application.
The attorney general recommended not to accept the costs-based test suggested by the district court, and further rejected the Court’s approach regarding the market power equation and disclosure of profitability data.
The Supreme Court’s judgment essentially accepted the attorney general’s position regarding the main issues under review. The Court recognised for the first time the applicability of the excessive price cause of action under Israeli law, which was even titled as “imperative”.
The Court further accepted the attorney general’s view that a cautious and restrained approach should be exercised in the actual application of the prohibition on excessive pricing, given the potential risks of intervention in pricing policies and the numerous difficulties involved in the assessment of the excessiveness of prices.
Regarding the manner of implementation of the excessive pricing cause of action, the Court adopted the two-stage test referring to the EU case law (the United Brands decision), which the attorney general also endorsed. At the first stage, it should be examined whether the prices charged by the monopoly were significantly higher than the prices that would have been charged under competitive terms.
The Supreme Court accepted three subtests to examine whether prices charged are above the competitive price:
The price-cost test – assessment of the gap between the price of the product and its cost of production;
The profitability test – analysis of the company’s profitability, as depicted in its financial data, which is then assessed against a relevant benchmark; and the comparison test – a comparison between:
the price charged by the monopolist and the price of the product in a different geographical market or at a different time period;
The prices charged from different customers; and the prices charged for competing products.
It was determined that generally, the Court’s conclusion regarding the excessiveness of the prices in questions should be is based on a combination of indications, and not rely solely on one subtest.
However, if in some cases one of the subtests lead to a clear conclusion, it may be sufficient to determine whether the prices are excessive.
At the second stage, after the Court reached the conclusion that the monopoly’s prices are indeed excessive, it should be examined whether the high prices are also unfair.
The Court stated that this is a more normative assessment, which depends on legal policy and should factor in several indications, such as:
the disparity of power between the monopolist and the consumer; the barriers of entry into the market;
demand side considerations; the differentiation level of the product; innovation; and
risk.
Obviously, movants must first prove that the respondent is in fact a monopoly, subject to the tests stipulated in section 26 of the Competition Law.
Parting from the attorney general’s position that the burden of proof lies with the movant at all stages, the Supreme Court decided that if the price was determined to be excessive at the first stage, the burden of proof switches in stage two to the respondent, who must persuade that the excessive price is “fair” based on the considerations mentioned above.
The Supreme Court clarified that in the certification process of an excessive pricing class action, the trial court must get into the details of the matter and assess the excessiveness of the prices according to the two-stage test as early as at the certification stage.
Further, the fact that there is an information gap between the movant and the respondent, and the possible lack of data does not exempt the court from this duty. Discovery proceedings are the tool to bridge the information gap, according to the decision.
The Court rejected the “formula” presented by the district court, according to which the monopoly has the option to refrain from disclosing documents and information, against which the plaintiff’s burden of proof is reduced to a minimum at the certification stage.
The Court determined that no choice should be made: the motion for discovery should be decided on its merits, and there is no room to “compensate” the plaintiff for non-disclosure of information by way of relief of the evidentiary burdens.
On the merits of this case, the Supreme Court granted the appeal as it found that factual and legal questions which are material for the decision were not duly clarified at the certification stage. In its judgment, the Court rejected the “parallelogram of forces” adopted by the trial court and sent the case back to the district court for completion of the discovery processes and for decision on the motion for
certification according to the criteria set in the judgment.
Comment
In recent years, Israel has witnessed an unparallel phenomenon of private enforcement based on the excessive pricing cause of action.
While some jurisdictions (eg, the United States) do not recognise the validity of the excessive pricing cause of action, in others it is only enforced by government authorities, based on a comprehensive economic and factual analysis, and only in exceptional circumstances.
In Israel, on the other hand, numerous class actions that alleged excessive pricing were filed by consumers, some of which were even certified by district courts, despite them relying on arguable evidentiary basis.
As a result of the Supreme Court’s ruling in The Central Bottling Company, there is now a more balanced regime for such class action lawsuits, and plaintiffs of such class actions will have to meet a more comprehensive burden of proof. However, the Court’s decision does not provide complete immunity for monopolies.
While it remains to be seen how the judgment will be implemented by the district courts, it seems likely that the wave of excessive pricing claims will subside or at least moderate.
For further information on this topic please contact Shai Bakal, Ayal HaCohen or Roi Krause at Yigal Arnon – Tadmor Levy.
