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A class action can be held against a monopoly on grounds of excessive pricing

Client Updates / Dec 21, 2022

Written by Avraham Morel

In August 2016, a class action lawsuit was filed with the District Court against the Central Bottling Company Ltd. (Class Action 6179-08-16 Gafniel v. Central Bottling Company Ltd.), which, as is known, is engaged in the production, marketing and distribution of brands of the global Coca-Cola company. The claim involves the allegation that the company is abusing its position as a monopoly in the “cola” beverage market in Israel (also known as the “black carbonated beverages market”) by charging an excessive and unfair price for a 1.5 liter bottle of Coca-Cola, in violation of the provisions of the Economic Competition Law, 5748-1988, and considering that the Central Bottling Company does not sell the product directly to consumers, but through retailers such as marketing chains, supermarkets, etc., and therefore, the price paid by the consumer for the product includes a retail margin.

Section 29a(a) of the Economic Competition Law prohibits a monopoly from abusing its position in the market, in a way that may reduce competition in businesses or harm the public, while Section 29a(b)(1) of the Law establishes a presumption that determining the level of unfair buying or selling prices of the property or the service in the monopoly constitutes an abuse of the monopolistic position in the market.

The Central District Court (Judge O. Grosskopf, who was later appointed as a Supreme Court justice) certified the administration of the class action against the Central Bottling Company, stating that the threshold conditions for the administration of the action were met, since on April 8, 1998, the Commissioner of Competition announced that the Central Bottling Company held a monopoly in the cola beverage industry (regular and diet) within the borders of the State of Israel. The court also added that the Applicant was able to provide a prima facie evidentiary basis for the claim that the company charged an excessive price to its customers for a 1.5 liter bottle, taking into account two parameters: market power (the Central Bottling Company holds significant market power in the cola industry, and has maintained a stable market share of around 90% over the years) and the existence of prima facie evidence of pricing not based on costs (there are price differences compared to competitors that produce similar products, with no data to contradict this evidence).

Following the aforementioned decision, the Central Bottling Company appealed to the Supreme Court. The court heard the case and set forth, by majority opinion, the criteria for the application of the cause of action known as the “excessive price cause” in Israeli law. In doing so, it was determined that the firm having a monopoly in the relevant market, in accordance with the tests set forth in the Economic Competition Law, constitutes a threshold condition for the application of the cause of action. After that, a two-stage test based on economic considerations must be used. First, the degree of excessiveness of the monopolistic price in relation to the price that would have been charged under conditions of market competition is examined, using accepted auxiliary tests. If it is found that the monopolistic price is an excessive price, the court will move to the second stage, which is designed to prevent an arbitrary result, and to ensure that the economic benefit of interfering with the market price exceeds the damage and risks that may be involved. In the second stage, the monopoly must show that there are good reasons to determine that the price is fair.

The Supreme Court ruled that the ban on charging an excessive price is necessary in order to prevent exploitation of consumers, and for the purpose of dealing with the cost of living in Israel. However, the enforcement of the ban requires the court to retrospectively intervene in free market prices, and therefore, it must be handled with caution and restraint. Likewise, it is necessary to protect against interference that would harm free competition, which would ultimately harm the incentives of the firms operating in the market for efficiency and innovation. It is also important to avoid a scenario in which the court would become the “super adjuster” of prices in the Israeli economy.

As such, the Supreme Court ruled, in a precedent manner, that the prohibition applicable to the monopoly against setting an unfair price for an asset or service includes a prohibition on setting an excessive price. It was also determined that this prohibition can be enforced by conducting a class action. The Supreme Court ordered that the hearing in the Petition for Certification of a Class Action against the Central Bottling Company is remanded to the District Court in order for it to rule on the Petition for Certification in accordance with the criteria for applying the excessive pricing cause as established in the judgment.

In conclusion, businesses must exercise caution and plan their steps when marketing their merchandise, in order to avoid finding themselves facing complicated and lengthy legal proceedings, while defending against excessive pricing claims.