A few months after the Supreme Court’s landmark decision in the Ashdod Port case, the District Court[1] recently ruled on the legality of discounts provided by Nesher Israeli Cement Enterprises (Nesher), which was a proclaimed monopoly at the time, to its major customers – concrete manufacturers Hanson and Readymix Industries, both vertically integrated into international cement-producing conglomerates. According to the Court’s decision, the discounts were intended to prevent these customers from importing cement, which would have created competition for Nesher.
While the Ashdod Port case dealt with the general prohibition against abuse of monopoly power, the current decision extensively analyzes the presumption in Section 29A(b)(3) of the Competition Law, which states that a monopoly is considered to abuse its position if it sets different terms for similar transactions, potentially giving certain customers or suppliers an unfair advantage over their competitors (the prohibition on discrimination).
The Court’s decision addressed issues that had not yet been examined in the limited case law on the prohibition of discrimination. Additionally, the Court’s interpretation of certain aspects of the Ashdod Port precedent may impact the legal analysis of incentive programs by dominant firms for their business customers.
The Court’s Decision
The Court ruled that the discounts offered by Nesher to its major customers violated the prohibition on discrimination as well as the general prohibition on abuse of monopoly power. The discounts’ purpose was to prevent potential competition from the major customers, which might have imported cement and sold it in the local market, in competition with Nesher.
The characteristics of the discounts – secrecy, retroactivity, term (entire year), tailored nature in certain instances, and the lack of any cost savings for the monopoly to justify the discount – led the Court to conclude that the presumption of legality established by the Supreme Court in the Ashdod Port case for quantity discounts did not apply. Given the importance of cement as a key input in concrete production and the significant discount differences between the major customers and smaller competing concrete producers, it was determined that the discounts provided the major customers an unfair competitive advantage.
Irrefutable Presumption?
Nesher did not dispute that the presumption in Section 29A(b)(3) is irrefutable. Accordingly, the court merely noted that recent Supreme Court rulings recognized that the presumptions stipulated in Section 29A(b) are indeed irrefutable, and the Court accepted this view. This means that proving the conditions of the presumption relieves the claimant from proving: (1) the element of abuse of dominance – i.e., deviation from competition on the merits, and (2) the element of likely harm – i.e., that the act of abuse is likely to reduce competition in business or harm the public.
Objective Justification Defense?
In light of Nesher’s claim that an objective justification defense is recognized in foreign law, the Court assumed, for the sake of argument, that the defense could be adopted but clarified that the justification must be objective and welfare enhancing. In this case, it was determined that Nesher lacked evidence to prove the existence of such an objective justification (in particular, the Court noted that the evidence should demonstrate the real-time considerations underlying the decisions regarding the discounts, rather than relying on justifications articulated in an economic opinion provided after the fact). Nevertheless, the decision indicates that even if the presumption of unlawful discrimination is established, there is a certain opening to assert the objective justification defense.
The Requirements for Establishing the Presumption
Proving the presumption requires establishing the following elements: similar transactions; different terms; the different terms may provide an advantage to the customer; the advantage is unfair; and the advantage is with respect to the customer’s competitors.
“Similar Transactions”
The Court clarified that different purchase quantities from the monopoly do not, by themselves, make the transactions dissimilar. To determine whether transactions are similar, the characteristics of the transactions must be examined. In this context, Nesher argued that transactions with “anchor” customers (Hanson and Readymix) were different from those with smaller customers because they allowed for long-term planning, covering a significant portion of the fixed costs (given the need to continuously operate production facilities), and maximizing production capacity. Additionally, Nesher argued that the anchor customers had the bargaining power to demand larger discounts. The Court rejected Nesher’s arguments, determining that these factors indicated differences in customers and their bargaining power, rather than in the transactions themselves.
Unfair Advantage
The Court stated that “even if quantity discounts provide an advantage to a customer purchasing a large quantity at a reduced price, it is far from being established that the advantage is “unfair” (otherwise, all quantity discounts would be considered as giving an unfair advantage). However, since a quantity discount might arise from another interest of the monopoly – to favor a large customer, the fairness of the advantage must be examined in the context of all circumstances.
The Court considered the following discount characteristics as indications of providing an unfair advantage: the secrecy of the discounts and their details, which the Court viewed as a basis to suspect ulterior motives beyond the ordinary and objective reasons underlying quantity discounts; retroactivity, since the discounts were given from the first ton based on an annual calculation; the different discount rates applied to different types of customers and the exclusion of certain customers from the discounts (a distinction that the Court found as also undermining the discounts’ objectivity), such that wholesalers received lower discounts for purchasing a similar quantity as the major customers; granting individual discounts to preferred customers in certain cases; significant discount gaps between Readymix and Hanson and other wholesalers and concrete manufacturers; and the lack of any connection between the discounts and cost savings.
Nesher did not argue that the quantity discounts were given by it due to, and in accordance with, cost savings resulting from the purchase of larger quantities of cement. Therefore, this issue played a significant role in the parties’ arguments and was extensively discussed in the judgment. The Court held that quantity discounts that are not based on cost savings do not lose their classification as quantity discounts. However, it was determined that such discounts do not benefit from the presumption of legitimacy established by the Supreme Court in the Ashdod Port case for quantity discounts, and therefore such discounts require thorough examination. The examination conducted in this case led to the conclusion that given the overall circumstances outlined above, the discounts provided an unfair advantage, in violation of Section 29a(b)(3) of the Law.
Conclusion
The Court’s decision presents another challenge for monopolies in relation to providing discounts to their customers in Israel. Additionally, the decision undermines legal certainty regarding discounts given uniformly based on objective criteria, which were previously sheltered by the presumption of legality according to the Supreme Court’s holding in the Ashdod Port case. The combination of rulings in the Nesher and Ashdod Port cases creates a pincer movement, which Israeli monopolies will need to account for when granting discounts to their business customers.
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