The Economic Competition Law 1988 (known as the Antitrust Law) forbids parties from entering into restrictive arrangements which are defined as arrangements made between persons conducting business, under which at least one of the parties restricts itself in a manner which may prevent or reduce business competition between it and the other parties to the arrangement, or some of them, or between it and a person who is not a party to the arrangement. More specifically the law deems an arrangement to be restrictive in case it includes, inter alia, the following: restrictions in respect of the price demanded, offered, or paid and\or the profit which will be derived; division of the market, in whole or in part, by business location or by the persons or types of persons with which business is to be done; the number of assets or services in the business, their quality, or type.
Despite the above broad definition, the Israeli legislator granted an exemption to franchise agreements (under the Economic Competition Rules (block exemption for franchise agreements) (Temporary Order), 2001, in force until September 15, 2026) (“Franchise Exemption”) from being defined as forbidden restrictive arrangements as long as the objective of the arrangement is not to reduce or eliminate competition, and the arrangement does not include any restraints which are not necessary to fulfil its objective.
The Franchise Exemption allows the parties to a franchise agreement to address the following aspects: (i) the franchise territory; (ii) the type and quality of product sold by the franchisee; (iii) the type of customers to whom the franchisee is allowed to sell the goods or services and the manner in which the sale should be performed including restrictions in respect of advertisement; (iv) the restricted use of the franchisor’s know-how by the franchisee (v) the quantity of products the franchisee is entitled to sell; (vi) the product price; and (vii) knowledge pertaining to the franchise.
The Franchise Exemption will not apply where: (i) the parties to the agreement are actual competitors; or (ii) a party has monopoly power in the relevant product market or in an adjacent market; or (iii) the agreement’s duration is 10 years or longer, or (iv) when the agreement includes restrictive stipulations, such as: (a) restriction of the franchisor from using licensed know-how after the term of the agreement, even when the know-how is in the public domain; or (b) prevention of the franchisee from initiating judicial review of the validity of the rights in know-how transferred from the franchisor to the franchisee or other intellectual property rights; or (c) prevention of the franchisee from selling or supplying goods to consumers outside the territory defined in the agreement; and\or (v) other restrictions that are only meant to reduce competition or are not necessary to fulfil its principal.
The Economic Competition Law deems arrangements whose restrictions involve the right to use a patent, trademark, copyright or proprietary right as not restrictive, provided that the arrangement is made between the owner of the right and the party who receives authorisation to use the right and where the right is subject to registration by law and is registered accordingly.
It has lately been published by the Economic Competition Authority that it intends to amend the Economic Competition Law by way of providing protection to parallel importation (which is allowed under the Israeli legal regime). This proposed amendment forbids official distributors or franchisees from taking measures, against parallel importers, when such measures might reduce or eliminate the competition, and which are not necessary for the sake of fulfilling their duties.
The Israel Competition Authority oversees enforcement of the law when it is violated. The enforcement proceedings begin with an investigation, which may lead to financial sanctions or criminal charges.
The franchise agreement should be carefully drafted to comply with the Franchise Exemption.