by Tamar Dolev-Green, Partner and Head of Competition Department
Price Discrimination by a Dominant Compay – Recent Ruling on Nesher
A recent decision by the Central District Court in the case of the cement manufacturer Nesher, addressed the legality of quantity discounts offered by a dominant company under the Economic Competition Law, 1988 (the “Law” or “Competition Law”), with a particular focus on discriminatory pricing. A few months ago, the Supreme Court issued its ruling in the Ashdod Port case, which discussed in-length discounts offered by a monopolist and focused on discounts based on individual targets. The Nesher ruling focuses on quantity discounts, which, on the face of them seem equal and uniform. These recent rulings seem to increase the challenges faced by dominant companies in respect of pricing.
Nature of the Claim:
The case involved a financial claim by a customer and a request to certify a class action against Nesher, the sole cement manufacturer in Israel during the relevant period. Nesher offered substantial discounts to the two largest cement consumers, ready-mix concrete manufacturers Readymix and Hanson, based on a quantity discounts table. It was argued that Nesher acted this way to prevent these customers from importing cement, which would increase competition and harm Nesher’s profits.
Legal Question:
Whether granting substantial discounts by a dominant company (referred to in the Law as “monopolist”) to its major customers to prevent them from switching to imports, constitutes prohibited discrimination against its smaller customers.
Decision:
Israeli Competition Law resembles Article 102 of the TFEU and the local case law relies to a large extent on the EU case law in this regard. The court found that by granting preferential conditions to the large concrete manufacturers, Nesher abused its market position in a manner likely to reduce competition or harm the public. Liability was established both under section 29A(b)(3) of the Competition Law, which prescribes an irrebuttable presumption of abuse of dominant position under certain circumstances, and under section 29A(a), which generally prohibits abuse of a dominant position likely to harm competition or the public. The ruling determined that the presumption of the legitimacy of quantity discounts is negated when the discounts are not uniformly and equitably granted to all customers of the monopolist or when the discount is not at least partially based on cost savings.
Expansion:
Section 29A(a) of the Competition Law stipulates that a monopolist must not exploit its market position in a way that is likely to reduce competition in business or harm the public. Section 29A(b) enumerates practices that establish an irrebuttable presumption of abuse of position in a manner that harms competition or the public. One of these practices – wrongful discrimination – is outlined in subparagraph (3):
“Setting different terms for similar transactions that may grant certain customers or suppliers an unfair advantage over their competitors.”
The court agreed that quantity discounts are generally permissible and sometimes recommended and that a monopolist may offer them. However, to establish the presumption of wrongful discrimination, the plaintiff must prove five elements: the transactions are similar; different terms of engagement; the different terms may grant an advantage to the customer; the advantage is towards the customer’s competitors; and the advantage is unfair. The court found all five elements were met:
1. “Similar Transactions” :
The sale of different quantities of the same product to different customers does not, by itself, negate the similarity of transactions.
2. “Different Terms of Engagement”:
There was a difference in the terms of engagement between Nesher and its smaller customers compared to its larger ones. Additionally, among the large customers, there was a difference between Nesher’s terms with cement consumers (concrete manufacturers) and wholesalers, reflected in cement prices and credit terms.
3. + 4. **Advantage to Customer over Competitors:
The issue of competitive advantage according to subparagraph (b)(3) is examined in the downstream market – the ready-mix concrete market. The question is whether certain customers of the monopolist received an unfair advantage over others. It was clarified that proof of a potential advantage is sufficient.
Nesher’s discount model included two cumulative components: (1) discounts set by the Price Control on Cement Order, which established quantity-based discounts of about 1% – 4%, without differentiating between cement consumers and wholesalers; (2) additional tiered discounts of about 5% – 13% (the Additional Discounts”). Smaller customers were not eligible for the Additional Discounts and wholesalers were explicitly excluded from these Additional Discounts. The disputed issues related only to the Additional Discounts. It was found, for example, that during most of the relevant period, the discounts for wholesalers amounted to a quarter to a third of the discount for Hanson, despite similar quantities.
The court concluded that the price differences between the larger customers and other customers favoured the formers in the ready-mix concrete market. This examination also included comparing Nesher’s cement transactions with large concrete manufacturers to those with wholesalers, as the transactions with wholesalers directly impacted the smaller manufacturers. If wholesalers received similar conditions to those of large manufacturers for similar quantities, smaller manufacturers could have purchased cement from wholesalers under closer terms to those given to large manufacturers. Given that the cost of cement in the cost of ready-mix concrete ranges from 35% to 50%, the discount on cement significantly impacted the price of ready-mix concrete.
5. Unfair Advantage:
While the court ruled that a price gap alone was insufficient to determine that the advantage to the large customer was unfair, it found that several aspects of the Additional Discounts raised the suspicion that they were not “pure” quantity discounts, potentially disqualifying them from this category. The court stated that all examined factors led to the conclusion that the advantage given by the Additional Discounts to the large manufacturers was unfair: the secrecy of the benefits, the long-term and accumulative nature of the discounts, customer differentiation, the provision of additional negotiated discounts to the largest customers, lack of cost savings and significant price gaps.
a. Secrecy of Benefits: Revealing the details only to large (and perhaps medium-sized) customers but not to small ones undermined objectivity and granted an unfair advantage to informed customers.
b. Long-term Accumulative Discounts: Setting eligibility based on purchases over a long period (a year) and applying retroactively from the first tone could significantly impact competition. This issue wouldn’t exist if discounts were calculated per order or monthly (as specified in the Price Control Order).
c. Customer Differentiation: Discounts were not uniform for all customers based on purchased cement quantities. Wholesalers received much smaller discounts than warranted by the additional discounts table and their purchase volumes. This prevented small customers from buying cement from wholesalers at significantly lower prices, thus harming competition between large and small Nesher customers. In principle, quantity discounts should not differentiate between customers and should be based on set discount levels for specific purchase volumes. Differentiating between concrete manufacturers and wholesalers suggested motives beyond legitimate quantity discounts.
d. Additional Negotiated Discounts: Nesher granted further negotiated discounts to large manufacturers beyond the Additional Discounts’ price list, indicating unequal treatment. Although the discounts were small in absolute and percentage terms (less than 1%), given the large purchase volumes and the extended discount period, they amounted to millions of shekels. Uniform and equal treatment in granting quantity discounts is essential for their legitimacy. Unequal discounts undermine this presumption and render the discounts not only suspect but prohibited due to clear discrimination.
e. Cost Savings Basis: The discounts were not based on cost savings from large quantity purchases but on other considerations. Generally, quantity discounts are valid, desirable, and accepted. The burden of proving that a quantity-based discount practice is wrong lies with the claimant (Ashdod Port ruling). However, quantity discounts not based on cost savings do not lose their legitimacy and can still be considered fair if uniformly and equally applied. The question remains whether such discounts can lose their presumption of legitimacy if not based on cost savings. It was determined that if a monopolist wishes its quantity discounts to be considered legitimate, they should be based on cost savings. Without reflecting actual cost savings, these discounts may be viewed as discriminatory, granting an unfair advantage to recipients. Nesher did not claim that its quantity discounts were based on cost savings, thus they were scrutinised for fairness. Although it is not required that the whole discounts be explained by cost savings, at least some of them need to be based on cost saving – which was not the case here.
f. Significant Price Gaps: Large price gaps between cement sold to large and small customers, especially in a market where concrete manufacturers compete in tenders, with slight price differences potentially deciding outcomes, suggested an unfair advantage. The cost of cement impacting 35% – 50% of ready-mix concrete prices indicated that such gaps could significantly affect market shares. These gaps, alone or combined with other factors, demonstrated an unfair advantage to large manufacturers due to the discounts.
The “unfairness” condition under subparagraph (b)(3) was thus met. With all conditions fulfilled, there was an irrebuttable presumption that Nesher abused its position in a manner likely to reduce competition or harm the public.
Practical Note:
The ruling included a practical note suggesting Nesher could have considered reducing the gaps between discount tiers and/or discount rates. Hypothetically, and without making a definitive statement, it was possible to conclude that smaller gaps might not constitute discrimination warranting intervention.
Justifications:
It was determined that even if Israeli law follows EU law in recognising “objective” justifications as a possible defense against claims of abuse of dominant position, such justifications must enhance consumer welfare and be beneficial to the economy, competition, and the public.
Nesher argued that without the discounts, small customers would pay significantly higher cement prices due to having to bear Nesher’s fixed costs if its two largest customers switched to imports. The discounts allowed long-term planning, high production capacity, and distribution of fixed costs across more customers, increasing overall social welfare.
The court rejected Nesher’s justifications on both evidentiary grounds and their merits. The Court stated that Nesher’s argued justifications related to its position and therefore cannot be considered objective, and cannot enable Nesher to abuse its dominant position to discriminate between its customers.
