Antitrust

Movement for Quality Government v. Prime Minister

Case/docket number: 
HCJ 4374/15
Date Decided: 
Sunday, March 27, 2016
Decision Type: 
Original
Abstract: 

[This abstract is not part of the Court's opinion and is provided for the reader's convenience. It has been translated from a Hebrew version prepared by Nevo Press Ltd. and is used with its kind permission.]

 

The Petitions disputed the legal validity of the Gas Outline adopted by the Government in the framework of Government Decision 432 in regard to the treatment of the gas reserves (hereinafter: the Gas Outline). The state and the gas companies holding the franchises defended the Gas Outline.

 

The Supreme Court, sitting as High Court of Justice (in an expanded bench of five justices) ruled as follows:

 

The Court majority (Deputy President E. Rubinstein, Justices S. Joubran, E. Hayut, and U. Vogelman concurring, Justice N. Sohlberg dissenting) held that the regulatory stability clause, as set out in sections 5 and 6 of Chap. J of the Gas Outline, could not stand. The clause bound the Government to the Outline – including in regard to legislative changes and opposition to legislative initiatives, and primarily in regard to regulatory changes in the areas of taxation, restrictive trade practices, and export caps – for a period of ten years. The Court held that the arrangement contravened a basic rule of administrative law in regard to prohibiting the restriction of an authority’s discretion. The Court explained that the Outline’s provisions not only bound the hands of the Government – and of future governments – but also of the legislature.

 

In light of the above, and in view of the Respondents’ declaration that the stability clause was a sine qua non, Deputy President E. Rubinstein and Justices S. Joubran and U. Vogelman were of the opinion that the entire Outline must be annulled. However, the state would be granted one year to rectify the matter in accordance with the Court’s decision. If the matter not be rectified, the Gas Outline would be annulled.

 

As opposed to this, Justice E. Hayut was of the opinion that the Court should strike down the stability clause alone. In her opinion, the gas companies should be left to decide whether or not they wish to cancel the Outline under the circumstances.

 

In this regard, the Deputy President explained, inter alia, that when an agency is granted authority by law, that authority also comprises a duty to exercise discretion. Simply put, the Government does not have the authority to decide not to decide and not to act. This is all the more the case when the issue is one that is the subject of real political debate, and where the executive branch apparently seeks to bind the discretion of its successors, whose composition and ideology may differ from those of the incumbent government. Pursuant to that, the Court held that the Government had unlawfully discarded its discretion, and in substance, even hobbled the Knesset’s discretion due to party discipline that is often invoked, particularly in regard to sensitive political issues. The issue was also examined in light of the administrative representation doctrine, that is, the government’s ability to make binding promises (even if they may be rescinded, with sanctions, in extreme cases), in light of the announcement by the Government and the gas companies that the Outline should be viewed as such. The Court held that the promise was ultra vires. I this regard, Justice Vogelman emphasized that the scope and term of the stability clause, as well as the “price tag” attendant to its anticipatory breach create, in practice, an unlawful restriction upon administrative discretion. However, in the opinion of Justice Vogelman, nothing would prevent the Knesset form adopting a legislative solution that would permit the Government to establish the three arrangements addressed by the stability clause for a defined term, whether by specific legislation or by legislation that would expressly enable the Government to do so.

 

Justice Hayut found, inter alia, that the restraining provisions in the Gas Outline are particularly far-reaching, inter alia, because they tie the hands and legs of the Government, which, in practice, controls the Knesset legislative process in regard to initiating legislation. Moreover, according to Justice Hayut, the Government’s active undertaking in the provisions of the stability clause to frustrate any legislative change that would be contrary to the Outline, if enacted by means of a private-members bill, crosses all the acceptable boundaries of parliamentary democracy, and renders the restraining provisions clearly and unequivocally unconstitutional. Justice Hayut further expressed the view that, in practice, and despite the rescission doctrine, the restraining provisions create a regulatory and legislative freeze by exposing the state to a suit for significant damages for an unknown amount by the gas companies in the case of extrication from the Outline or any part thereof.

 

In the opinion of Justice Sohlberg, although the regulatory stability clause restricts the administrative discretion of the Government, the clause could stand. There is no need for legislating the Gas Outline, and the Government’s decision, which was approved by the Knesset plenum, is sufficient. Therefore, in his opinion, the Petitions should be dismissed.

 

In the opinion of Justice Sohlberg, the stability clause does not restrict the Knesset’s legislative power, and the Knesset is sovereign to legislate as it sees fit. The stability clause restricts the discretion of the Government, and it is, indeed, exceptional in its term, scope and the expected economic consequences of its breach. However, even the combined force of those characteristics do not result in the absolute restriction of the Government’s discretion by the stability clause. A restriction of discretion is an inevitable consequence of the very existence of administrative contracts and promises, and the balance is expressed by the administrative rescission doctrine, and the possibility of withdrawing an administrative promise. Thus, the Government continues to enjoy a certain margin of future discretion, and in any case, a stability clause grounded in a governmental decision is more flexible than one grounded in a statute. The government has the authority and the professional tools for deciding upon the optimal approach to exploiting gas resources, which is a decision that requires establishing a multidimensional policy. The subject at hand is at the heart of administrative discretion. The Government is permitted to act in that regard in advancing legislation. The regulatory stability clause is part of a “package deal” that resulted from lengthy, complex professional negotiations conducted between the state and the gas companies. In the case of enormous investments of the type under concern, a ten-year undertaking is reasonable, and is required in order to establish policy and act for the realization of important long-term projects. Moreover, under the State Property Law, the Government can, in principle, sell the gas reserves in whole or in part, and such a sale would constitute an absolute restraint of future discretion. If the Government is authorized to do the maximum (to sell), it can certainly do a lesser part thereof (the Gas Outline, including its regulatory stability clause).

 

By a majority opinion of Justices E. Hayut, U. Vogelman, and N. Sohlberg, against the dissenting opinion of Deputy President E. Rubinstein and Justice S. Joubran, the Court held that the validity of the entire Outline (as opposed to the stability clause) is not contingent upon enacting primary legislation.

 

In this regard, in the opinion of the Deputy President and Justice S. Joubran, the Outline (as distinct from the stability clause) constitutes a primary arrangement that requires that it be grounded, in its entirety, in primary legislation rather than in a governmental decision. In the opinion of Justice Sohlberg, while it is a primary arrangement, the existing legislation suffices to empower the Government to decide upon the matter of the Gas Outline, and no further legislation is necessary. In the opinion of Justice Vogelman, even if it would be proper from a public perspective that the Outline be brought before the Knesset in the form of primary legislation, there is no legal obligation to do so under the circumstances. In the opinion of Justice Vogelman, the question of whether the Outline constitutes a primary arrangement must not be examined in accordance with the “overall picture” that arises therefrom, but rather with attention to its concrete details, while focusing upon the aspects that concern the structural changes that may be expected in the gas market and the promotion of competition. In this regard, Justice Vogelman was of the opinion that inasmuch as the Gas Outline is a framework that unites the activities of all the relevant regulators in the natural gas market, each in its area of expertise – in a sort of pooling of regulatory powers – it is legally possible to arrange it in the framework of a governmental decision. Moreover, Justice Vogelman was of the opinion that it is questionable whether the economic-market importance of the Outline and the public debate that accompanied it require, in and of themselves, a finding that the Outline constitutes a primary arrangement. In any case, even if we assume for the sake of argument that the Outline constitutes a primary arrangement, there is sufficient authority for it to be established without need for primary legislation. This authority derives from the combination of all the legal provisions that expressly authorize governmental agencies to make each and every one of the arrangements established in the Outline individually.

 

Under the circumstances, the Court – with the exception of certain comment by Justice Joubran – did not see any problem in the use made of sec. 52 of the Restrictive Trade Practices Law, which grants the Minister of the Economy authority to exempt a restrictive trade practice from the provisions of the Restrictive Trade Practices Law for foreign relations and security considerations. The Deputy President noted that this is also the case – although not unproblematically – in regard to the issues of taxation, price supervision, and export, each in its own right.

 

In regard to the use of the said sec. 52, the Deputy President explained, inter alia, that in such exceptional situations in which there are significant matters of security and state, those matters must be weighed – after determining the issue of authority – against the harm that may be caused to competition (which is the purpose of the Restrictive Trade Practices Law) by making recourse to the section. The issue that must be addressed is the public good. In other words, once the “bar of exceptions” has been successfully cleared in terms of authority, there is a sort of “parallelogram of force” between the interest in competition and the state and security interests. The greater the harm to competition, the greater the need for weighty state or security interests in order to justify recourse to sec. 52. Under the circumstances, and despite the significant harm to the interest in competition, the Court held that the state and security interests were significant, and it therefore cannot be said that recourse to the section was unreasonable. Although recourse to sec. 52 should be limited to exceptional circumstances, the matter before the Court fell within that scope.

 

In conclusion, the Court struck down the Gas Outline due to the stability clause (without finding cause for judicial intervention in any of the other issues), while holding its ruling in abeyance for a period of one year in order to allow time for rectifying the matter.

 

It should be noted that the Deputy President emphasized throughout his opinion that the Court would not examine the economic wisdom of the Outline, and would not express its opinion on the matter. The issue addressed by the Court was a legal one – the limits of governmental authority in a democratic regime, and the extent to which a government may stretch its residual authority – its general authority to act – in the absence of express authority granted by the legislature in regard to a matter of extraordinary, unprecedented economic consequences.

Voting Justices: 
Primary Author
majority opinion
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concurrence
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dissent
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concurrence
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concurrence
Full text of the opinion: 

The Supreme Court

 

High Court of Justice 4374/15, 7588/15, 8747/15, 262/16

 

The Movement for Quality Government v. The Prime Minister of Israel

 

Regarding the Gas Outline that was Prescribed in Government Decision 476

 

Summary of Judgment

 

Deputy President E. Rubinstein:

 

These petitions address felicitous discoveries of large natural gas reservoirs in Israel's exclusive economic zone, of which we have been informed in recent years. The petitions dispute the legal validity of an outline that was decided by the Government of Israel in the framework of Government Decision 476 regarding the Matter of Handling the Gas Reservoirs (hereinafter: the "Gas Outline"), and the State and the gas companies, the franchisees of the reservoirs, are defending the Outline. It shall at the outset be emphasized that throughout his opinion Deputy President E. Rubinstein emphasized that the Court is not requesting to examine the economic wisdom of the Outline and does not wish to express an opinion in this matter. The issue that is being examined thereby is a legal question – the limits of the government's power and authority in a democratic regime, and the extent to which its residual power and authority – its general power and authority to act – can be stretched, when the legislator did not explicitly authorize it and when the economic significance is so unprecedentedly immense.

 

The judgment primarily addresses three main issues that were raised in the petitions:

 

First, what are the circumstances in which Section 52 of the Antitrust Law, 5748-1988, which vests the Minister of Economy the power and authority to exempt a restrictive practice from the provisions of the Antitrust Law on grounds of foreign policy and security considerations, can be applied; and was the section applied with authority and in a reasonable manner in the case at hand – whereby the Prime Minister and the Minister of Economy (then as acting minister) relied on this section.

 

Second, was Chapter 10 of the Outline, which grants the gas companies a stable regulatory environment, and in other words, constitutes a Government undertaking not to change the Outline, including by legislative changes and objections to legislative initiatives, and which essentially serves as protection against regulatory changes in the fields of taxes, antitrust and export quotas, for the duration of a decade – prescribed with authority.

 

Third, does the Gas Outline, including all of its aspects, complexity and importance to the economy of Israel, not amount to a "primary regulation", which requires primary legislation, rather than a Government decision.

 

As to the application of Section 52: After examining the Petitioners' arguments relating to the matter of power and authority, the matter of exercising discretion and the issue of proper procedure, Justice Rubenstein reached the conclusion that Section 52 was applied on grounds of foreign policy and security in a reasonable manner and with authority. It was explained that in terms of authority, the Court was convinced that the foreign policy and security considerations are real considerations, which in the case at hand allow entering the scope of Section 52. This was in light of security opinions and opinions in the foreign policy field that were filed, as well as after hearing the position of senior government persons, including the Prime Minister. It was reasoned that in exceptional cases, in which there are significant security and foreign policy considerations, then, after examining the authority aspect, they should be weighed against the infringement that could be caused to competition (the purpose of the Antitrust Law) as a result of exercising the section; and the consideration is the public interest. In other words, once the "exceptionality threshold" has been overcome in terms of the authority aspect, there is the reasonableness aspect, creating a sort of "parallelogram of forces" between the interest of competition and the security-foreign policy interest. The greater the infringement of the competition interest, the stronger the security-foreign policy grounds will have to be, in order to exercise the section; and as mentioned, given these circumstances, despite the significant infringement of the competition interest, it was ruled that the security- foreign policy grounds bear heavy weight, and it follows that it cannot be said that the section was exercised in an unreasonable manner. All after having clarified that Section 52 shall only be exercised in unusual circumstances, but that the matter at hand falls within those grounds.

 

It was further found, although not without difficulty, that each of the taxation policy, the supervision of the prices and the export which appear in the Outline – in and of themselves – were prescribed with authority and in a reasonable manner, however this is not the case with respect to their aggregate impact. This shall be elaborated upon further on.

 

As to Chapter 10 which addresses a stable regulatory environment: Justice Rubenstein's position is that the stability clause in this chapter of the Outline, in which the Government commits to a decade during which it not only will not legislate but will also object to any legislation that is against the provisions of the Outline, was prescribed ultra-vires and is void. This is due to the fact that it was prescribed contrary to the basic administrative law rule regrading prohibiting restricting an authority's discretion. It was explained that when an authority is granted power and authority, the power and authority also create an obligation – the obligation of exercising discretion; simply put, the Government does not have the power and authority to decide not to decide or not to take action. It was emphasized that this is all the more relevant when at hand is a matter that is subject to real political dispute, and when the authority wishes to restrict the discretion of its successors, the composition of which and the ideology it may hold may be different than that of the present government. Furthermore, once it was decided in the Outline that the Government shall avoid regulatory changes in the fiscal field, the antitrust field, and the export quotas that had been prescribed in Government Decision 442, for a period of a decade, the Government has, unlawfully, relieved itself from its discretion. Furthermore, it was ruled that once the Outline which is the subject of this discussion, predetermines that the Government shall object to private bills in the said fields, also for a period of decade, then this, in effect, essentially even restricts the Knesset's discretion in light of the party discipline that is often exercised, especially when at hand are politically sensitive matters. The issue was also examined through the prism of the administrative promise doctrine, i.e. the Government's ability to give binding promises (even if in extreme cases, they can be cancelled with sanctions), this was in light of the notice by the State and the gas companies that the Outline should be viewed as such, and it was ruled that at hand is a promise that was given ultra vires.

 

As to the issue of the primary regulation: Following the above, Justice Rubinstein examined whether it as appropriate to regulate the issues addressed in the Outline by primary legislation, or whether one can suffice with the Government decision. After examining the justifications for all of the primary regulations – i.e. that matters of signal importance should be regulated by legislation – Justice Rubinstein reached the conclusion that the case at hand is a clear case, where the aggregate entirety of aspects which require to be regulated warrant that the matter be regulated by primary legislation, in an orderly and transparent process, which addresses the matter with the participation of the public and of the relevant entities, by the elected authority. It was emphasized that it is possible that with respect to each chapter of the Outline it could be argued that primary legislation is not required, however the essence is the overall impact, and at hand is a case where the whole is greater than the sum of its parts, since at hand is an almost primary regulation of the matter of producing and selling natural gas, and all its various aspects, that has huge economic implications, and which is the subject of deep public dispute. Thus, according to Justice Rubinstein, the Government deviated from the limits of its powers and authorities, when it desired – even if with good intentions – to regulate an important, sensitive, multi-dimensional systematic matter with enormous implications, not by way of legislation, and for this reason as well it was ruled that the Outline was prescribed ultra vires.

 

As to the relief – the operative outcome – according to Justice Rubinstein, in light of that stated above, the Outline should be ruled void, but the date of the voidness should be suspended. The State is given a period of a year during which it can act to regulate the matter of the natural gas. If at the end of a year from the date this judgment is given, there is no such, or other, regulation, the Gas Outline that was prescribed in Government Decision 476 shall be cancelled.

 

 

Justice S. Joubran

 

            Justice S. Joubran concurred with Deputy President E. Rubinstein's judgment and with the outcome he reached.

 

            In the matter of the primary regulation, Justice Joubran emphasized in his opinion that the primary nature of the Gas Outline should be examined in its entirety and not in accordance with the specific regulatory decisions of which it is comprised. This approach is based on the process in which the Outline was adopted by the Government and the Knesset, as a single arrangement that is not separated into parts; and based on its nature and essence as a comprehensive decision that regulates the natural gas market. Justice Joubran emphasized in his opinion that the Gas Outline is an entire policy decision that sets priorities among various interests which relate to the gas market, and he found that the specific regulatory decisions are only a tool to implement the entire Outline. Additionally, Justice Joubran noted the contractual nature of the Gas Outline, which is the outcome of negotiations between the State and the gas companies. In light of the importance of the Gas Outline, its economic implications and the public debate it raises, Justice Joubran joined the position of the Deputy President that the Gas Outline, in its entirety, is a primary regulation, and the regulating thereof by a Government decision requires authorization by primary legislation of the Knesset.

 

            Additionally, Justice Joubran joined the position of the Deputy President that the regulatory stability provisions prescribed in Chapter 10 of the Gas Outline were prescribed without authority, since the Government was not entitled to restrict its own discretion nor the discretion of the Knesset. Justice Joubran added that in his opinion there is a flaw in the sweeping wording of the stability provisions, which could compromise Israel's international standing, if the State were required to renege on undertakings it had previously given.

 

            Finally, Justice Joubran elaborated on flaws, which according to him, occurred in the exercise of Section 52 of the Antitrust Law. First, Justice Joubran found that the factual background, which served as the foundation for exercising Section 52 of the Antitrust Law, was lacking, due to the absence of an expert opinion examining the Gas Outline's impact on competition in the market. Second, Justice Joubran found that the timeframes which were given to the public to express its position regarding the Gas Outline in the framework of the public hearing were insufficient, such that the principle of public participation in the process of reaching the decisions, and of transparency in the political process, were compromised. However, Justice Joubran found that in light of the outcome he reached in the matter of the primary regulation, these matters would be addressed in the framework of the legislative procedure.

 

Justice N. Sohlberg:

 

According to Justice N. Sohlberg's opinion the Petitions should be dismissed, and he disagrees with the opinion of the Deputy President on both matters:

 

1.         The Regulatory Stability Clause – According to Justice Sohlberg the stability clause does not restrict the Knesset's legislative power, and the Knesset is sovereign to do as it wishes; the stability clause limits the Government's discretion, and it is indeed unusual: (a) in its duration – for many years; (b) in its scope – refraining from legislation and an undertaking to change contradicting legislation; (c) in the economic consequences that are expected to derive from the non-fulfillment thereof; However, even considering the accumulation of these characteristics, the stability clause does not constitute an absolute restriction of the Government's discretion. The restriction of discretion is a necessary consequence of the mere existence of administrative contracts and administrative promises, and the balance is expressed in the rules of rescission and in the possibility of withdrawing from an administrative promise. Thus, the Government is left with a certain room for discretion with an eye to the future, and in any event, a stability clause that is anchored in the Government decision, is more flexible than anchoring it in legislation.

 

            The Government is granted the power and authority and has the professional tools to decide on the optimal outline for utilizing the gas resource, a decision that requires prescribing a multi-dimensional policy. The matter at hand is at the core of the discretion of the administrative authority. The Government may act in the matter to promote legislation. The regulatory stability clause is part of an entire 'package deal', which is the result of long and complex professional negotiations that were conducted by the State vis-à-vis the gas companies. In investments of this kind, an undertaking for 10 years is acceptable, and is required in order to prescribe policy and act to realize it by executing long term important projects. It will certainly be very expensive if the Government shall decide in the future not to fulfill its undertaking under the Outline. This depends on the scope of the investments, the degree of deviation from the Outline, the timing thereof, but it still may be an "efficient breach", if the scope of the profit shall exceed the amount of compensation. We are dealing with a unique matter, of a completely different order of magnitude than that to which are accustomed. At hand is a huge economic investment on the part of the entrepreneurs, at a significant risk on their part; there is an economic, political and security need for the implementation of the Outline as quickly as possible; the regulatory stability clause has signal importance within the entirety of the matter and is essential for the gas companies, as a prerequisite for the engagement; and ultimately – the enormous financial consideration which we all hope will be given from the said investment, for the benefit of the entrepreneurs, the State and its citizens. It follows from all of the above that it is only reasonable that the State shall be forced to bear a significant monetary cost to rescind from the administrative promise that is embedded in the Outline, since the greater the reward, the greater the risk. The reasonableness of the restriction of the discretion should be examined through this prism. Furthermore, according to the State Assets Law, the Government, in principle, is entitled to sell all or part of the gas reservoirs, and the actual sale is an absolute restriction of its future discretion. If the Government is permitted to perform a greater act (of selling), then, a fortiori it is permitted to perform a lesser one (the Gas Outline, including its regulatory stability clause).

 

            Based on the grounds he states in paragraphs 8-39 of his opinion, Justice Sohlberg reached the conclusion that the regulatory stability clause is not illegal. The Government is authorized to restrict its discretion as it did, subject to the ability to rescind from the administrative promise.

 

2.         Anchoring the Gas Outline in a Government Decision or Knesset Legislation – the entirety of the Government decision – in the field of export of the gas, taxation, antitrust, along with the regulatory stability clause – creates a primary regulation. However, contrary to the opinion of the Deputy President, Justice Sohlberg is of the opinion that existing legislation, by virtue of which the Government is authorized to decide on the Gas Outline, is sufficient and that there is no need for additional legislation. Section 52 of the Antitrust Law is the source of authority to grant an exemption from the antitrust laws; Section 33(a) of the Oil Law is the source of authority regarding the matter of exporting the gas. Once Justice Sohlberg reached the conclusion that the various components of the Government's decision are properly anchored in authorizing legislation, he raised the difficult question as to how it is possible to prohibit the Government from acting by virtue of such authorizing legislation, due only to the appearance of the 'entirety' thereof? In any event, even if the explicit authorization in the relevant laws with respect to the parts of the Outline are not sufficient, there is also clear authorization with regard to its entirety, in Section 5(a) of the State Assets Law.

 

            The conclusion is that the Government is authorized by law to prescribe the Gas Outline as it did; although the regulatory stability clause indeed restricts the Government's administrative discretion, it is valid; there is no need for legislating the Gas Outline; legislative regulation is expected to encounter difficulties (paragraphs 64-66); a Government decision is sufficient. The natural gas is the property of the State. The Government – as the public's trustee for the State's assets – has the obligation to exercise its power and authority in the matter at hand, which is at the core of governmental actions, in order to preserve the proprietary rights of the State in and to the natural gas, in the optimal manner. Not only was the Government permitted to decide, act and do; it was obligated to do so. This is its responsibility and its duty.

 

Justice U. Vogelman:

 

            Justice U. Vogelman joined the greater part of Deputy President E. Rubinstein's opinion, to which Justice S. Joubran also joined, including the determination that the regulatory stability clause in its current format cannot remain intact. In this regard Justice Vogelman emphasized that the scope and duration of the stability clause, as well as the "price tag" that accompanies its anticipated breach, create a de facto prohibited restriction of administrative discretion. Justice Vogelman added: "I wish to emphasize that I am not in any way ignoring the economic logic underlying the investors' demand for regulatory stability. It is obvious that in consideration for the latter's huge investments, they expect to reduce their risks, in such a manner that will enable them to return their investment and even receive appropriate yield. This interest of the investors must be properly addressed. As my colleague, the Deputy President, clarified in his detailed opinion, there are various possible models to do so. However, as mentioned above, the specific stability clause at hand is not included among such models, in light of its said unique characteristics." Alongside that, according to Justice Vogelman, there is nothing to preclude the Knesset from formulating a legislative arrangement that would allow the Government to anchor the three arrangements which the stability clause addressed, for a defined period of time, either by legislating a designated regulation, or by legislating a provision that would explicitly authorize the Government to do so.

 

            On the other hand, Justice Vogelman did not join the position of the Deputy President and Justice S. Joubran that the Outline (apart from the stability clause) amounts to a primary regulation that warrants – in its entirety – being anchored by primary legislation. According to him, even if it would be appropriate, from a public aspect, that the Outline be brought before the Knesset as primary legislation, given the circumstances of the matter, there is no legal obligation to do so. According to Justice Vogelman's position, the question whether the Outline is a primary regulation should not be examined based on its "entirety" but rather considering its concrete specifics while focusing on the aspects that relate to the anticipated structural changes in the gas market and the promotion of competition. In this context, Justice Vogelman is of the opinion that since the Outline is a framework that consolidates all of the relevant regulators in the natural gas market, each one within his own scope of authority – as a pooling of regulatory forces – it is possible, from a legal perspective – to regulate it in the framework of a Government decision.

 

Furthermore, Justice Vogelman is of the opinion that it is doubtful whether the economic-market significance of the Outline and the public dispute that has accompanied its formulation, in and of themselves warrant the ruling that the Outline amounts to a primary regulation. In any event, even if it is assumed, for the sake of the discussion, that the Outline amounts to a primary regulation, there is sufficient authorization for it to be prescribed not by primary legislation. Such authorization derives from the combination of all of the legislation provisions that explicitly authorize the authorities to prescribe each and every one of the arrangements that were prescribed in the framework of the Outline.

 

As for the relief, Justice U. Vogelman joined the position of the Deputy President E. Rubinstein.

 

Justice E. Hayut

 

Justice E. Hayut is of the opinion that only the restrictive provisions in Chapter 10 of the Outline should be cancelled, and that as long as these provisions are removed from the Outline, there is no need to cancel the rest of its provisions.

 

In her opinion, Justice Hayut states that the Outline does not completely belong to one legal framework, and it in fact constitutes a combination of legal frameworks. It was approved by a Government decision that consolidates the entirety of regulatory aspects that required addressing at that stage and some of the relevant provisions in this context were even drafted in a manner that corresponds with the traditional unilateral and imposing regulation. In this sense it can be classified as an administrative promise and this is how the State and the gas companies chose to classify it in the discussion. However, Justice Hayut further states that throughout the Outline there are more than a few provisions that are drafted as conditions in a contract that are a result of a meeting of the minds between the regulatory entities and the gas companies, and from this aspect, the Outline bears characteristics of a regulatory contract which is a new model of administrative regulation that bases regulatory provisions in various fields on contractual relations and cooperation with the supervised entities.

 

Justice Hayut states that it is possible that the model of a regulatory contract requires certain modification of the traditional administrative law rules in relating to restricting discretion, and she states in this context a modern variation of a stability stipulation in the form of an "economic balancing stipulation" which does not restrict the regulator's discretion and instead prescribes a mechanism of agreed compensation for the commercial corporation for possible regulatory changes. According to Justice Hayut, had the entire Outline been expressed in a regulatory contract that included a provision regarding a known and limited agreed compensation instead of the restrictive provisions, it is possible that that would have managed to overcome the judicial review. However, when it was discovered that in the framework of the Outline, the State was forced to satisfy the gas companies' demand for stability in a different manner, and to include restrictive provisions that do not comply with administrative law criteria, one may wonder what legal advantage, if any, was achieved in choosing the said framework.

 

Justice Hayut ruled that the restrictive provisions are extremely far reaching, inter alia, since they restrict the arms and legs of the Government, as the one that de facto controls the legislative process in the Knesset, in initiating legislation. Additionally, Justice Hayut ruled that the active undertaking of the Government in the framework of the restrictive provisions to frustrate any change in a law that contradicts the Outline, if and to the extent such shall be legislated further to a private bill, crosses all permissible boundaries in a parliamentary democracy and renders the restrictive provisions as clearly and blatantly illegal. Justice Hayut is further of the opinion that de facto, and despite the rules of rescission, the restrictive provisions create a legislative and regulatory freeze due to the exposure to a significant damages claim on the part of the gas companies of an unknown scope, in the event of rescission from the Outline or a part thereof.

 

 Regarding the exercise of the power and authority of the Prime Minister and Substitute Minister of Economy, pursuant to Section 52 of the Antitrust Law, Justice Hayut states that giving the Antitrust Commissioner the chance to reach agreements with the gas companies in a path of an agreed order pursuant to the Antitrust Law, does not contradict the existence of considerations that relate to security and foreign policy, and she further states that it is possible that the period of time that was given to the Commissioner for the purpose of exhausting the said track was too extended and in hindsight it is definitely possible that had Section 52 been exercised earlier, it would have been possible to reach terms of agreement with the gas companies that may have been more convenient for the State in various aspects, and especially in terms of the restriction. However, once the Commissioner decided, after three years during which he negotiated with the gas companies, to renege from the agreement he had formulated therewith, and once he had decided not to present the drafting of the agreed order to be approved by the court, Justice Hayut is of the opinion that there is significant weight to the State's claim that at that stage, it had become urgent to reach understandings with the gas companies, inter alia, since the security and foreign policy considerations had not only not disappeared from the arena – but in certain aspects, it can be said that they became more pressing, and therefore Section 52 of the Antitrust Law was duly exercised at that stage.

 

In conclusion, Justice Hayut is of the opinion that only the restrictive provisions in Chapter 10 of the Outline, are to be cancelled, and that as long as they are removed from the Outline, it is inappropriate to cancel the rest of its provisions. Contrary to the opinion of Justice U. Vogelman, Justice Hayut is of the opinion that the Court should limit itself to the legal conclusion that derives from the analysis it conducted and that it is inappropriate to rush to the conclusion that once the stability clause was cancelled the entire Outline should be ruled void. According to her, the gas companies should be left to decide whether or not in these circumstances, they wish to cancel the Outline.

 

Epilog

 

A.        It was decided by a majority opinion (Deputy President E. Rubinstein and Justices S. Joubran, E. Hayut and U. Vogelman) and against the dissenting opinion of Justice N. Sohlberg, that the stability clause, as drafted in Sections 5 and 6 of Chapter 10 of the Gas Outline, which was prescribed by Government Decision 476 and which addresses "The Existence of a Stable Regulatory Environment" (tying the Government to the Outline, including not changing legislation and opposing legislative initiatives for a period of ten years) – cannot remain intact.

 

B.        Moreover, according to Deputy President E. Rubinstein and Justice S. Joubran and U. Vogelman, in light of that stated in paragraph A above, and in light of the Respondents' declaration that the stability clause is a conditio sine qua non, the entire Outline is to be cancelled; however the State should be given a period of a year during which it can act to regulate that which is required in accordance with our judgment. At the end of a year from the date of the judgment and if and to the extent there shall be no such regulation, the Gas Outline shall be cancelled. In that sense, the order has become absolute.

 

            In contrast, Justice E. Hayut is of the opinion that only the restrictive provisions that are in Chapter 10 of the Gas Outline should be ruled void.

 

C.        According to Justice N. Sohlberg although the regulatory stability clause does limit the Government's administrative discretion, it can remain intact; there is no need for legislating the Gas Outline and the Government decision which was approved by the Knesset plenum is sufficient. Therefore, according to him the Petitions should be denied.

 

D.        By a majority opinion of Justices E. Hayut, U. Vogelman and N. Sohlberg, and against the dissenting opinions of Deputy President E. Rubinstein and Justice S. Joubran, it was decided that the validity of the entire Outline (distinct from the stability clause) is not contingent upon being anchored by primary legislation.

                                      

E.         The Justices of the bench, with the exception of a certain remark by Justice Joubran, did not find flaw, in the circumstances at hand, in the exercise of Section 52 of the Antitrust Law, which exempts the provisions of such law on security and foreign policy grounds.

 

F.         The bottom line thus is as stated in sections (a) and (b) above: it was decided to cancel the Gas Outline due to the stability clause (without having found it appropriate to apply judicial intervention in other matters that were on addressed), while suspending the declaration of voidness for a year in order to allow regulation. 

Eurocom DBS v. Bezeq

Case/docket number: 
CA 2082/09
Date Decided: 
Thursday, August 20, 2009
Decision Type: 
Appellate
Abstract: 

 

Facts: Bezeq, the Israel Telecommunications Corporation Ltd., held 49.78% of the shares of “Yes” D.B.S. Satellite Services (1998) Ltd. Another 32.6% of the Yes shares are held by Eurocom D.B.S Ltd. Yes is one of only two providers in the multi-channel television broadcast infrastructure market and in the multi-channel television broadcasting market. The other multi-channel television provider in the market is “Hot”. Bezeq is a public company licensed to provide internal fixed line services, including fixed line telephony and Internet infrastructure. Bezeq also provides the public with a wide variety of communications services through its subsidiary and affiliated companies, including international telecommunications services and Internet service provision, cellular telephony, and endpoint equipment for telephony. On 27 June 1995, Bezeq was declared to be a monopoly in a number of communications markets, and on 10 November 2004, it was declared to be a monopoly in high-speed Internet service provision. On 2 August 2006, Bezeq and Yes submitted a notice of merger pursuant to the Restrictive Trade Practices Law, 1988, declaring Bezeq’s intention to exercise options that it held and that would give Bezeq 58.36% of the shares of Yes, making it the controlling shareholder of Yes. The General Director of the Israel Antitrust Authority objected to the merger as presenting a reasonable risk of significant harm to competition from both a horizontal and vertical perspective. Bezeq filed an appeal with the Antitrust Tribunal. Eurocom joined the proceedings in support of the General Director’s decision. The Tribunal overturned the decision of the General Director, ruling that the merger would be permitted subject to certain conditions. The General Director and Eurocom filed the current appeal against the decision of the tribunal. Bezeq filed a counter- appeal in regard to the amount of the bank guarantee that the tribunal required of it as one of the conditions for the merger.

 

Held: Justice E. Hayut (Deputy President E. Rivlin and Justice E. Rubinstein concurring) delivered the opinion of the Court. Companies may not merge without the consent of the General Director of the Antitrust Authority. The test for exercising the General Director’s authority under s. 21 of the Restrictive Trade Practices Law is the existence of a “reasonable risk” – i.e., estimation that there will be a significant damage to competition due to the proposed merger, or damage to the public with respect to one of the matters listed in the section. The basic assumption of the Law is that mergers are desirable, in that they increase business efficiency and benefit consumers. However, because mergers can harm competition due the increase in the power or market share of the merging companies, the legislature saw fit to review them, and in certain cases, even to limit them in order to protect the public against economic distortions resulting from excessive concentration of certain markets. Protection of competition in the communications industry is of special importance, as the media carries out an essential function for our existence as a democratic society, and serves to realize fundamental rights such as freedom of expression and the public’s right to know.

 

Historically, the Israeli multi-channel television industry has been characterized by a lack of direct, effective competition. In 2000, a satellite television company entered the market. The technological innovation changed the market from a monopoly to a duopoly. The current reality in the Israeli multi-channel TV broadcast industry is that there are only two players– Hot and Yes – in the infrastructure market and in the content market, and each of them maintains full vertical integration between the infrastructure and broadcasting levels. The merger under discussion is not a horizontal one because Bezeq itself is not currently a competitor in any of the markets that are relevant to this case (i.e., the infrastructure market or multi-channel TV broadcast the content market). Additionally, this is not a vertical merger between companies operating at different stages of production or marketing in the same industry, since Bezeq’s activity in the multi-channel TV broadcast industry consists only of holding of the Yes shares that it currently holds. This merger, which is neither vertical nor horizontal, can be referred to as a conglomerate merger. Conglomerate mergers are not infrequently considered to be mergers whose effect on competition is neutral, and occasionally, even beneficial, but there are a number of dangers to competition involved in a conglomerate merger. The doctrine that is relevant to this case is that of actual potential competition. This doctrine refers to future harm that will be caused to the market because a potential competitor will be removed from it as a result of the merger. In our case, the General Director based her objection to the merger on this actual potential merger doctrine, and the essence of her argument in this context is that without a merger, Bezeq can be expected to enter into the infrastructure market and the content market for multi-channel TV broadcasts as an independent competitor. Therefore, according to the General Director, the merger’s approval will lead to the loss of Bezeq as a potential competitor in these markets or in one of them, and will fix them as duopolistic markets.  The Court found that two of the key conditions for establishing the potential competitor doctrine are present here – there is a reasonable likelihood that Bezeq, as a potential competitor, will enter into the multi-channel television infrastructure market and will provide IPTV services, and it has been proven that it has the technological ability and the economic incentive to do so in the short term. Additionally, it appears that Bezeq’s entry into the multi-channel television infrastructure market presents considerable advantages over the situation that would develop in the market if the merger were approved.

 

The Tribunal, when adjudicating an appeal of a General Director’s decision, does not have absolute discretion to order as it wishes and it cannot stipulate conditions of a merger’s approval which, according to its own determination, does not give rise to reasonable risk of significant damage to competition in the relevant industry. The Tribunal therefore erred in subjecting merger to conditions after it found that the merger between Bezeq and Yes would not cause significant damage to competition. The Tribunal also erred in finding that the merger would not significantly damage competition. Such a risk does exist in this case. The main purpose achieved in preventing the merger is the addition of a competitor in the infrastructure market. This is a contribution to competition from a horizontal perspective through the weakening of the concentration in the existing duopolistic market, and it is hard to think of a structural condition in this case that would achieve this purpose. The behavioral conditions stipulated by the Tribunal cannot resolve the competition risk, because of the structural difficulty in ensuring such an arrangement where a single party (Bezeq) controls two out of three infrastructures in the market. The Court, therefore, cancelled the Tribunal’s decision and restored the General  Director’s original determination opposing the merger.

Voting Justices: 
Primary Author
majority opinion
concurrence
concurrence
Full text of the opinion: 

 

 

CA 2082//09 CA 2414//09

And counter-appeal

 

 

Appellant in CA 2082/09 (Respondent    2              in            CA 2414/09 and in the Counter

Appeal):              

 

Eurocom DBS Ltd.

v.

Respondent 1 in CA 2082/09 and in CA 2414/09 (and Counter- appellant in CA 2414/09): Bezeq   the         Israel                Telecommunications Corporation Ltd.

 

Respondent 2 in CA 2082/09 (and Appellant in CA 2414/09 and Respondent 1 in the Counter-appeal):    

General   Director   of   the   Israel   Antitrust Authority

 

 

The Supreme Court sitting as the Court of Civil Appeals [8 June 2009]

Before Deputy-President E. Rivlin and Justices E. Rubinstein, E. Hayut

 

 

Appeal of a ruling of the Antitrust Tribunal in Jerusalem in AT 706/07, issued on 3 February 2009 by the Honorable Judge  M. Mizrachi, Professor

R.            Horesh and Mr. N. Lisovsky

 

Facts: Bezeq, the Israel Telecommunications Corporation Ltd., held 49.78% of the shares of “Yes” D.B.S. Satellite Services (1998) Ltd. Another 32.6% of the Yes shares are held by Eurocom D.B.S Ltd. Yes is one of only two providers in the multi-channel television broadcast infrastructure market and in the multi-channel television broadcasting market. The other multi-channel

 

 

 

television provider in the market is “Hot”. Bezeq is a public company licensed to provide internal fixed line services, including fixed line telephony and Internet infrastructure. Bezeq also provides the public with a wide variety of communications services through its subsidiary and affiliated companies, including international telecommunications services and Internet service provision, cellular telephony, and endpoint equipment for telephony. On 27 June 1995, Bezeq was declared to be a monopoly in a number of communications markets, and on 10 November 2004, it was declared to be a monopoly in high-speed Internet service provision. On 2 August 2006, Bezeq and Yes submitted a notice of merger pursuant to the Restrictive Trade Practices Law, 1988, declaring Bezeq’s intention to exercise options that it held and that would give Bezeq 58.36% of the shares of Yes, making it the controlling shareholder of Yes. The General Director of the Israel Antitrust Authority objected to the merger as presenting a reasonable risk of significant harm to competition from both a horizontal and vertical perspective. Bezeq filed an appeal with the Antitrust Tribunal. Eurocom joined the proceedings in support of the General Director’s decision. The Tribunal overturned the decision of the General Director, ruling that the merger would be permitted subject to certain conditions. The General Director and Eurocom filed the current appeal against the decision of the tribunal. Bezeq filed a counter- appeal in regard to the amount of the bank guarantee that the tribunal required of it as one of the conditions for the merger.

 

Held: Justice E. Hayut (Deputy President E. Rivlin and Justice E. Rubinstein concurring) delivered the opinion of the Court. Companies may not merge without the consent of the General Director of the Antitrust Authority. The test for exercising the General Director’s authority under s. 21 of the Restrictive Trade Practices Law is the existence of a “reasonable risk” – i.e., estimation that there will be a significant damage to competition due to the proposed merger, or damage to the public with respect to one of the matters listed in the section. The basic assumption of the Law is that mergers are desirable, in that they increase business efficiency and benefit consumers. However, because mergers can harm competition due the increase in the power or market share of the merging companies, the legislature saw fit to review them, and in certain cases, even to limit them in order to protect the public against economic distortions resulting from excessive concentration of certain markets. Protection of competition in the communications industry is of special importance, as the media carries out an essential function for our existence as a democratic society, and serves to realize fundamental rights such as freedom of expression and the public’s right to know.

 

 

 

Historically, the Israeli multi-channel television industry has been characterized by a lack of direct, effective competition. In 2000, a satellite television company entered the market. The technological innovation changed the market from a monopoly to a duopoly. The current reality in the Israeli multi-channel TV broadcast industry is that there are only two players

–             Hot and Yes – in the infrastructure market and in the content market, and each of them maintains full vertical integration between the infrastructure and broadcasting levels. The merger under discussion is not a horizontal one because Bezeq itself is not currently a competitor in any of the markets that are relevant to this case (i.e., the infrastructure market or multi-channel TV broadcast the content market). Additionally, this is not a vertical merger between companies operating at different stages of production or marketing in the same industry, since Bezeq’s activity in the multi-channel TV broadcast industry consists only of holding of the Yes shares that it currently holds. This merger, which is neither vertical nor horizontal, can be referred to as a conglomerate merger. Conglomerate mergers are not infrequently considered to be mergers whose effect on competition is neutral, and occasionally, even beneficial, but there are a number of dangers to competition involved in a conglomerate merger. The doctrine that is relevant to this case is that of actual potential competition. This doctrine refers to future harm that will be caused to the market because a potential competitor will be removed from it as a result of the merger. In our case, the General Director based her objection to the merger on this actual potential merger doctrine, and the essence of her argument in this context is that without a merger, Bezeq can be expected to enter into the infrastructure market and the content market for multi-channel TV broadcasts as an independent competitor. Therefore, according to the General Director, the merger’s approval will lead to the loss of Bezeq as a potential competitor in these markets or in one of them, and will fix them as duopolistic markets.  The Court found that two of the key conditions for establishing the potential competitor doctrine are present here – there is a reasonable likelihood that Bezeq, as a potential competitor, will enter into the multi-channel television infrastructure market and will provide IPTV services, and it has been proven that it has the technological ability and the economic incentive to do so in the short term. Additionally, it appears that Bezeq’s entry into the multi-channel television infrastructure market presents considerable advantages over the situation that would develop in the market if the merger were approved.

The Tribunal, when adjudicating an appeal of a General Director’s decision, does not have absolute discretion to order as it wishes and it cannot

 

 

 

stipulate conditions of a merger’s approval which, according to its own determination, does not give rise to reasonable risk of significant damage to competition in the relevant industry. The Tribunal therefore erred in subjecting merger to conditions after it found that the merger between Bezeq and Yes would not cause significant damage to competition. The Tribunal also erred in finding that the merger would not significantly damage competition. Such a risk does exist in this case. The main purpose achieved in preventing the merger is the addition of a competitor in the infrastructure market. This is a contribution to competition from a horizontal perspective through the weakening of the concentration in the existing duopolistic market, and it is hard to think of a structural condition in this case that would achieve this purpose. The behavioral conditions stipulated by the Tribunal cannot resolve the competition risk, because of the structural difficulty in ensuring such an arrangement where a single party (Bezeq) controls two out of three infrastructures in the market. The Court, therefore, cancelled the Tribunal’s decision and restored the General  Director’s original determination opposing the merger.

 

 

 

 

Appeal allowed.

 

Legislation cited:

Restrictive Trade Practices Law , ss.21 (a) .

Insurance Contract Law, 5741-1981, chapter 1, article 6, ss. 33, 33-35, 35, 36.

 

Israeli Supreme Court cases cited:

[1]          CA 2247/95 General Director v. T’nuva [1998], IsrSC 42(5) 213.

[2]          CA 3398/06, Israel Antitrust Authority v. Dor Alon Energy Israel (1988) Ltd (2006)

[3]          FHC 4465/98 Tivol (1993) Ltd. v. Chef of the Sea (1994) Ltd., [2001] IsrSC 56(1) 56.

[4]          HCJ 7200/02 DBS Satellite Services (1998) Ltd. v. the Cable and Satellite Broadcasts Council, [2005] IsrSC 59 (6) 21

[5]          HCJ 508/98 Matav Cable Communications Systems v. Knesset, [2000] IsrSC 54(4) 577.

[6]          CFH 4465/98 Tivol v. Chef of the Sea (1998), IsrSc 46 (1) 56, [7]    CA 6222/97 Tivol v. Minister of Defense, ISRSC42(3), 145

 

 

 

[8 ]         LA 4224/04 Beit Sasson v. Shikun Ovdim (2004) IsrSc 59 (6) 625.

[9]          CA 8301/94,  Assessing Officer for Large Enterprises v. Pi Glilot

(unpublished)

[10]        CA 458/06 Stendahl v. Bezeq International Ltd. (unpublished)

 

District Court cases cited

[11] CA 1/00 (Jerusalem), Food Club Ltd. v. General Director (2003)

 

Antitrust Cases:

[12] AT 8006/03 Yehuda Pladot Ltd. v. General Director

 

American cases cited:

[13 ]FTC v. Procter & Gamble, Co., 386 U.S. (1967) 568.

[14 ]   United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973); [15]  United  States  v.  Marine  Bancorporation,  Inc.,  418  U.S.  602

(1974)

[16] Yamaha Motor Co., Ltd. v. FTC, 657 F.2d 971 (8th Cir. 1981);

[17] Tenneco, Inc. v. FTC, 689 F.2d 346 (2d Cir. 1982),Mizuho [18] Re El Paso Energy Corp., 131 F.T.C. 704 (2001);

[19] United States v. AT&T Corp. and MediaOne Group, Inc., Proposed Final Judgment and Competitive Impact Statement, 65 F.R. 38584 (2000);

[20]  In re Applications of NYNEX Corp. & Bell Atlantic Corp., 12 F.C.C.R.

19, 985 (1997)).

[21] BOC International, Ltd. v. FTC, 557 F.2d 24, 25 (2d Cir. 1977) [  ];

[22] FTC v. University Health, Inc., 938 F.2d 1206, 1222 (11th Cir. 1991)

[23] FTC v. Atlantic Richfield Co., 549 F.2d 289, (4th Cir. 1977)). [24] United States v. Siemens Corp., 621 F.2d 499 (2d Cir. 1980))

[25] Mercantile Tex. Corp. v. Bd. of Governors, 638 F.2d 1255, 1271- 1272 (5th Cir. 1981))

[ ] In the Matters of Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer to Peer Applications, 23 F.C.C. Rcd 13028 (2008)).

English Cases cited

[ ] Case T-5/02, Tetra Laval BV v. Comm'n, 2002 E.C.R. II-4381

 

JUDGMENT

 

Justice E. Hayut:

 

 

 

We have before us two appeals and a counter appeal regarding a ruling of the Antitrust Tribunal (the Honorable Judge M. Mizrachi, Prof. R. Horesh and Mr. N. Lisovsky) (hereinafter: “the Tribunal”), dated 3 February 2009, which had approved, subject to the conditions it established, the merger of Respondent 1, Bezeq, the Israel Telecommunications Corporation Ltd. (hereinafter: “Bezeq”) and D.B.S. Satellite Services (1998) Ltd. (hereinafter: “Yes”), through the exercise of Yes options held by Bezeq. In this ruling, the Tribunal granted Bezeq’s appeal against the decision of the General Director of the Israel Antitrust Authority (hereinafter: “the General Director”), dated 31 December 2006, disapproving the merger. (The grounds for the objection were published on 18 February 2007).

 

Background and the General Director’s decision

 

1.            Bezeq is a public company which, pursuant to the Communications Law (Telecommunications and Broadcasts), 1982 (hereinafter: “the Communications Law (Telecommunications and Broadcasts”)) is licensed to provide the public with internal fixed line services, including fixed line telephony and an Internet infrastructure, through a national system of telecommunications facilities (hereinafter: a public telecommunications network). Bezeq also provides the public with a wide variety of communications services through its subsidiary and affiliated companies, including international telecommunications services and Internet service provision (through Bezeq International Ltd.), cellular  telephony (through Pelephone Communications Ltd.), and endpoint equipment for telephony (through Bezeq Cal Ltd.). Further, on June 27, 1995, Bezeq was declared to be a monopoly in a number of communications markets and on November 10, 2004 it was declared to be a monopoly in high-speed Internet service provision. In the field of multi-channel television broadcasting, Bezeq currently holds 49.78% of the shares of Yes and 32.6% of the shares of Respondent 2, Eurocom D.B.S Ltd. (hereinafter: Eurocom). Yes is one of only two providers in the multi-channel television broadcast infrastructure market and in the multi-channel television broadcasting market, and it uses a satellite infrastructure. The other multi-channel television provider in the market is known to the public by the name “Hot,” and it includes “Hot – Communications Systems Ltd.” whose transmissions are provided through a cable infrastructure and “Hot Telecom Limited Partnership” (hereinafter,

 

 

jointly: Hot). Eurocom, which, as noted, holds 32.6% of the shares of Yes, is also involved in the communications field and provides telephony, data transmission and Internet services (through 012 Smile Communications Ltd.), and it also operates in the satellite infrastructure field with respect to multi- channel television broadcasts (through Spacecom Communications Company Ltd. - hereinafter: Spacecom Company), in the field of satellite services (through Satlink Communications Ltd. and Gilat Satcom Ltd.), and in the field of endpoint telephony equipment imports (the Nokia and Panasonic brands). It is also a partnership in portals and regional radio stations.

On 2 August 2006, Bezeq and Yes submitted a notice of merger to the General Director pursuant to the Restrictive Trade Practices Law - 1988 (hereinafter: Restrictive Trade Practices Law), with respect to a transaction (hereinafter: the merger) in which Bezeq seeks to exercise six options which it holds. The significance of the exercise of these options is that Bezeq would become the controlling shareholder of Yes and would hold 58.36% of the shares therein, as opposed to the 49.78% of the shares which it currently holds.

2.            On 31 December 2006, the General Director announced her objection to the merger transaction and on 18 February 2007 she published the grounds for her objections. In her decision, the General Director noted that that her objection was based on an analysis of the competition map in the multi- channel television broadcasting field in [both] the infrastructure market and in the content field, in light of the expected entry of a third and new broadcasting technology (in addition to the cable technology used by Hot and the satellite technology used by Yes) – i.e., the IPTV (Internet Protocol Television) technology. The General Director noted that she saw this merger as giving rise to a reasonable risk of significant damage to competition from both a horizontal and vertical perspective. From a horizontal perspective, the General Director noted that the merger is expected to significantly restrict the possibility that Bezeq would in the future enter the multi-channel television broadcasting market as a third player using IPTV technology, either as a player in the infrastructure field only or in the field of the provision of broadcasts as well. The General Director noted that “the expansion of Bezeq’s holding in the shares of the satellite company [Yes] up to the level of control, will inflict horizontal harm in two ways: first, it will exclude a potential significant competitor, such as Bezeq itself, from  the content market,   and   second   –   it   reduces   Bezeq’s   incentive   to   upgrade   its

 

infrastructure in order to support IPTV transmissions, and effectively delays the development of the infrastructure (development which would promote competition) in the coming years.” In terms of vertical harm, the General Director went on to determine, the merger gives rise to a risk that Bezeq will supply Yes, which it will control, with the IPTV infrastructure that it owns and will make it very difficult for other broadcasters to enter into the market. The General Director noted that an investigation had shown that there was a very high likelihood that Bezeq would develop the IPTV technology in the short term, and that this is not a theoretical matter but rather a “competitive development which will happen soon.” The General Director determined that the merger, “if it were to take place, would withhold another multi- channel television broadcasting platform from consumers and from the Israeli public.” The General Director emphasized that beyond the economic- consumption damage involved in the merger, it was also likely to lead to the denial of a public platform for the expression of views and for delivery of messages to the public. She added that a merger should not be approved if one of its results will be the preservation of the existing structural situation in which there are only two platforms for multi-channel television broadcasting and no real chance that in the foreseeable future either the public or the content producers will see a third competitor in the industry. Under these conditions, the General Director determined that the merger creates a reasonable risk of significant damage to competition and to the public, and, for this reason, as stated, she objected to it.

To complete the picture, we note that two years earlier, in July of 2004, a notice of a merger was submitted in which Bezeq had sought to exercise its options so that its holdings in Yes would amount to some 55% in the first stage and some 60% in the second stage. This merger was conditionally approved on January 2, 2005, with the main condition being a prohibition against the transfer of financing from Bezeq to Yes in a proportion exceeding Bezeq’s relative share in Yes, for a period of nine months. (Regarding this matter, see “Decision Regarding Conditional Approval of a Merger: Bezeq the Israeli Telecommunications Corporation Ltd. and DBS Satellite Services (1998) Ltd. (Decision 500045, dated 14 March 2005) (hereinafter: the 2005 Decision); Appeals 604/05, 605/05 and 606/05 which were filed against this decision were eventually withdrawn by the parties.) Bezeq was given a period of a year to complete the merger, but for its own reasons, it did not exercise the options at that stage.

The Antitrust Tribunal’s Ruling

 

 

3.            Bezeq filed an appeal against the General Director’s decision to oppose the merger to the Antitrust Tribunal on 15 May 2007, an appeal that was allowed on 3 February 2009. It should be noted that Eurocom also joined the proceeding before the Antitrust Tribunal, at its request, and supported the General Director’s position according to which the merger creates a reasonable risk of significant damage to competition.

In its ruling, the Antitrust Tribunal noted the fact that the multi-channel television market is composed of two markets – the broadcasting infrastructure market and the television broadcasts market, each of which are characterized by substantial barriers to entry (these barriers are even more significant in the infrastructure market). The Tribunal added that the two players currently operating in the multi-channel television market – Hot and Yes – both serve as broadcasters and as infrastructure providers. The Antitrust Tribunal further noted that Yes’ satellite infrastructure is limited compared with the cable infrastructure (and compared to the IPTV infrastructure) and it therefore cannot fully compete with them. The Tribunal stressed that the General Director’s position is based on the supposition that an additional platform for television broadcasts – with IPTV technology, to be established on Bezeq’s ADSL infrastructure – will be added during the coming years. The Tribunal noted that the assumption, from both a technological and a feasibility perspective, that Bezeq would enter into the multi-channel television broadcasts market, was based on a series of assumptions that have not yet become reality. In this context, the Tribunal found that it had not been presented with sufficient evidence to establish that Bezeq had made a business decision to make the investment required for a significant upgrading of its technology that would enable the provision of IPTV services. The Tribunal further held that even if the General Director’s assumption regarding Bezeq’s technological ability to construct an IPTV network in the near future is a realistic one (noting that “there is a certain distance that must still be travelled”), the technological perspective is not the only relevant one, and that it is necessary to examine the existing regulatory restrictions in the communications field as well as the economic feasibility of the construction of the infrastructure, from Bezeq’s perspective – particularly in light of its current holdings in Yes (49.78%).

The Tribunal rejected the General Director’s position that there are no substantial legal or regulatory barriers preventing the realization of the main part of the forecast on which her objection had been based, and it noted that

 

Bezeq is faced with a number  of legal restrictions, including the cross- ownership rules which prevent Bezeq from obtaining a broadcasting license in light of the size of its holdings in Yes. It further noted that each of Bezeq’s subsidiaries is also prohibited from obtaining a broadcasting license so long as Bezeq holds more than 24% of the means of control in Yes. The Tribunal also noted that the likelihood of a change in the statutory provisions regarding cross ownership is very low, and that the power that the law grants to the Minister of Communications (with the approval of the Cable and Satellite Broadcasts Council of the [Knesset] Finance Committee) to issue a broadcasting license to a Bezeq subsidiary – so long as such a move furthers competition and variety regarding the supply of broadcasts to subscribers – creates a hurdle which will not be easily removed. The Tribunal noted that it is hard to imagine that a reasonable regulator would allow the subsidiary of a company which is the largest shareholder in one of the competitors in the market to enter into the content field and thus to effectively control two out of three content platforms. Regarding the question of whether the completion of the infrastructure is economically viable for Bezeq, the Tribunal noted that the General Director’s position does not give appropriate weight to the fact that the critical starting point for the discussion is the situation regarding Bezeq’s current holdings in Yes. The Tribunal emphasized that it appears that Bezeq will indeed continue to develop the NGN (Next Generation Network – a generic term for communication networks based on Internet protocol technology, the main characteristic of which is the possibility of integrating different types of telephony, Internet, contractual, etc. services in one network – hereafter: NGN) but it cannot be assumed that it will do the necessary work which will enable [the provision of] IPTV services on this infrastructure – work which involves additional costs. This would be the case even if the General Director’s position that Bezeq’s investments in Yes are sunk investments and that Bezeq therefore developed interests following such investment, it is not likely – the Tribunal held - that economic feasibility considerations will lead Bezeq to complete the infrastructure [for IPTV]. The Tribunal further noted that the General Director had not submitted economic calculations which would support the claim that under current conditions, it is economically worthwhile for Bezeq to compete with its subsidiary (Yes) in the field of multi-channel television because of the benefit it would achieve from this by holding on to its telephony and Internet infrastructure customers. An additional factor that makes it doubtful that Bezeq would, in the Tribunal’s view, enter into the content market, is that the multi-channel television market is a saturated market and even if Bezeq could reduce the

 

 

infrastructure costs, the content costs are ongoing and it would need to reach a very large number of customers to reach a balance between ongoing expenses and incomes – something that would be very difficult for Bezeq to do. The Tribunal held, therefore, that it was likely that Bezeq did not have a real interest in entering the digital multi-channel television market in its current condition.

The Tribunal added that the General Director assumed that in the foreseeable future only one infrastructure – i.e., the IPTV – would be joining the multi-channel television market, but that it appears that in the more long- term future, additional technologies (Internet television, DTT and WIMAX) could also constitute alternatives to the existing technologies (although the Tribunal also noted that in the coming two or three years, none of these technologies could constitute a real alternative). It further noted that a not insignificant amount of time would be required even for the purpose of establishing a full IPTV technology. The Tribunal went on to reject the General Director’s position regarding the significance to be attributed to Bezeq’s acquisition of control in Yes as a result of the merger, noting that even though the General Director’s position that after the construction of the IPTV infrastructure Bezeq will (through the directors that it will appoint) raise the usage fees or the transfer fees that it will collect from Yes and from others even if open access conditions are established for the IPTV services (because in the case of Yes, the payment of such fees would be a transfer of funds from one pocket to the other) cannot be ruled out, this risk is not significant in light of the fact that raising such fees will not be worthwhile, and in light of the regulatory prohibition that the Tribunal had mentioned. The Tribunal further noted that this risk can be prevented through the drafting of conditions which would prevent Bezeq from having such a resolution adopted by the Yes board of directors, and which would impose controls on the prices that Bezeq will charge.

4.            The Tribunal reached the conclusion that the “General Director’s forecast according to which an independent competing infrastructure for television broadcasts will be established if the merger does not take place, is not sufficiently established.” In this context, the Tribunal referred to the provisions of s. 21 of the Restrictive Trade Practices Law -1988 (hereinafter: the Restrictive Trade Practices Law), and to the case law, which holds that only a reasonable risk of significant damage to competition or to the public will justify an objection to a merger, adding that in its view, the burden of

 

proof regarding the existence of such a risk is to be imposed on the General Director, although this issue had in the past been left unresolved as requiring a review of the Supreme Court’s rulings.  The Tribunal held that in this case, it was necessary to determine whether the data regarding the relevant market provide a basis for “a reasonable risk” according to the civil law standard of probability, such that the merger would lead to significant damage to competition. According to the Tribunal, the economic analysis on which the General Director had based her position assumes future developments regarding at least some of which there was only a low probability of less than 50% and it was therefore not possible to determine that there was a reasonable risk that the merger would do significant damage to competition. The Tribunal nevertheless pointed out that if Bezeq had sought approval for the merger without having existing holdings in Yes, it would not have approved the merger. This was, in the Tribunal’s view, due to the clear competitive advantages in Bezeq’s independent entry into the market. However, the Tribunal held, in light of the current size of Bezeq’s holding in Yes, that it is already not possible to ignore the level of Bezeq’s interest in Yes’ success and it is already difficult to imagine Bezeq acting as Yes’ competitor. Therefore, the Tribunal noted, the competitive difficulty in the multi-channel television market lies in the current situation, and even if the merger could sharpen the problem, it would not create it.

5.            The Tribunal further noted that even if it has not been proved that there is a reasonable risk of significant damage to competition, the occurrence of such damage cannot be ruled out given the fact that the increase in the size of Bezeq’s holding in Yes strengthens its interests in Yes and will also grant it control of the company. For this reason, and because of the importance of the construction of the IPTV infrastructure and of its being made available to other entities which will compete with Yes, the Tribunal saw fit to establish conditions for allowing the merger. In this context, the Tribunal noted that during the course of the deliberation, the parties were offered a settlement proposal regarding the conditional approval of the merger and that Bezeq did not raise any difficulty in terms of the Tribunal’s authority to order such and agreed that the  merger would be conditionally approved. (The General Director objected to this, and Eurocom believed that the merger could be approved with the conditions which it had specified, which were different than those proposed by the Tribunal). The Tribunal further noted that there was a basis for the concern raised by the General Director, according to which technological and economic considerations could lead Bezeq to prefer the IPTV infrastructure for Yes, if it is constructed, rather than the satellite

 

 

infrastructure, which could cause that infrastructure to atrophy. But according to the Tribunal’s view, this concern can be negated through the use of conditions which will inflict less damage on the primary property right involved in the exercise of the option. The Tribunal added that the conditions which it ordered are, primarily, behavioral conditions, which are directed at affecting the manner in which the relevant bodies operate, and not structural conditions. The imposition of structural conditions would not, the Tribunal stated, be proportionate, in light of the Tribunal’s determination regarding the absence of a reasonable risk of significant damage to competition. The Tribunal further noted that additional goals can be reached beyond the prevention of damage to competition, through the outlining of behavioral conditions. The primary one of these goals would be the securing of the construction – within a short time - of a third infrastructure for multi- channel television broadcasts. This infrastructure would be open, at a reasonable cost, for use by content providers who wish to use it, and it would be properly maintained. The Tribunal noted that the conditions it was establishing would not only reduce the damage to competition, they would also serve to remove part of the competitive difficulties existing in the market even without the merger, and would bring the “market’s condition to that of a market whose structure was good for competition.” The Tribunal stressed, in this context, that the conditions dealing with the improvement of competition are accompaniments to conditions that prevent damage to competition and that they are not the primary conditions. For this reason the General Director’s claim that the Tribunal acted without authority must be rejected. The Tribunal reasoned, with regard to the conditions to be attached to the merger, that Bezeq would have an interest in utilizing the IPTV technology it owned through granting usage rights for other broadcasters at a reasonable price which would take its investment [costs] into consideration. It is true, the Tribunal noted, that any such user would be a Yes competitor, but after the infrastructure is already constructed Bezeq would have an interest in taking advantage of it through the charging of usage fees. The Tribunal therefore believed that the imposition of a condition according to which the usage fees would be determined by a regulator would reduce the risk that as the party controlling the infrastructure, Bezeq would charge unreasonable prices. Nevertheless, the Tribunal added, Yes should be allowed to use the IPTV at the same price for the purpose of providing those services (such as VOD) which cannot be provided through a satellite, in order to allow it to

 

compete with the others.

These are, in the main, the conditions that the Tribunal ordered: giving Bezeq the option of choosing, within 90 days, whether it wishes to carry out the merger. If Bezeq were to choose that the merger be carried out, it would be required to establish the IPTV infrastructure in full, such that it would be available to 30% of the population within one year, to 50% of the population within two years and to 80% of the population within three years. Bezeq was also prohibited from transferring Yes programming to the IPTV infrastructure, other than for the purposes of providing services that cannot be provided through a satellite infrastructure. This condition is to apply for six years from the approval of the merger, unless there is an additional competitor in the market for the transmission of television programming is on the Bezeq network – and that competitor has, together or with others, at least 100,000 active subscribers or its income from its broadcasts amounts to NIS 10,000,000 per month for three continuous months. Bezeq was also required to allow other parties in the market open access to the IPTV infrastructure that it owns, in exchange for usage or transmission fees to be determined by the regulators. It was also required to properly maintain the infrastructure that is established. (The definition of the word “properly” is to be determined by the regulator). The Tribunal further ordered that Bezeq is not to supply or provide service or products to Yes or from it unless a resolution regarding the receipt or provision of such services or products has been adopted by at least a 75% majority  of the members of Yes’ board  of directors, and  that a structural separation between Bezeq and Yes be maintained in accordance with the currently established conditions. Finally, the Court ordered that if Yes was to transfer to broadcasting on the IPTV infrastructure and does not use the satellite infrastructure, Bezeq would be required, by virtue of its holdings in Yes, to cause that infrastructure to be leased out for satellite television broadcasts, and to maintain it at a price and in a manner to be determined by the regulator. (Bezeq would be entitled to ask the Tribunal to be released from the maintenance requirement if no new user is found). The Tribunal also ordered Bezeq to provide an irrevocable bank guarantee, to be approved by the General Director and to be provided to her, in the amount of NIS 200 million, in order to ensure the fulfillment of the conditions, until the end of the current agreement between Yes and Spacecom (with which Yes had contracted for the purpose of the Spacecom’s segments required for the maintenance of the satellite broadcasts), but for no longer than eight years.

For the reasons specified above, the Tribunal granted the appeal, cancelled the General Director’s ruling and approved the merger subject to

 

 

the conditions it had established.

6.            After the ruling was issued, the General Director, on 5 February 2009, filed a petition to stay  its implementation, but the Tribunal rejected the petition. In its ruling of 18 February 2009, the Tribunal noted, inter alia, that its key holding that the merger does not give rise to a reasonable risk of significant damage to competition had been based on considerations of logic and on the evidentiary material presented to it, and not on its position regarding the burden of proof. The Tribunal further noted that the granting of the petition for a delay in the implementation would damage the public interest in that it would delay the fulfillment of the conditions, which include the construction of the IPTV infrastructure, and the Tribunal believed that the delay of the exercise of the options held by Bezeq would cause financial damage to it. On 22 February 2009, even before filing this appeal, the General Director submitted an additional petition for a stay of implementation (Civil Petition 1665/09) to this Court. At the Court’s recommendation, the parties reached an agreement on 23 March 2009, which was given the force of a ruling, dealing with the delay of the implementation of the ruling, and on 3 May 2009, Bezeq gave notice, as required by the Tribunal’s ruling, that it intends to carry out the merger (although on its part, it had appealed the amount of the bank guarantee it had been required to provide).

The appeals before us were submitted by Eurocom (Civil Appeal 2082/09) and by the General Director (CA 2414/09) (hereinafter: the Eurocom appeal and the General Director’s appeal, respectively), and the counter-appeal filed by Bezeq refers, as noted, to the amount of the bank guarantee that the Tribunal had required that it provide (hereinafter: the Bezeq appeal). The deliberation of the appeals was combined in this Court’s ruling dated March 23, 2009 (CApp 1665/09).

The parties’ arguments

The General Director’s appeal

7.            The General Director argues that the Tribunal’s ruling denies the Israeli public a significant competition benefit with respect to the loss of a third infrastructure for the transmission of multi-channel television broadcasts and that the circumstances in which a company that has the ability to become the owner of a multi-channel infrastructure takes control of a company with a different multi-channel infrastructure, in a market in which there is only one additional infrastructure (the cable infrastructure) impairs

 

competition in a manner that cannot be negated by way of imposition of behavioral conditions. The General Director insists on the supremacy of “facility-based competition” as compared with “competition over the same infrastructures” in infrastructure based markets , and she further argues that competition between infrastructures gives rise to a substantial benefit for consumers, not only from the perspective of the price for consumers but also in terms of other perspectives such as the quality of the broadcasts, the variety thereof, the adoption of technological innovations and the correlation between consumer demand and supply - all of which are dependent on the infrastructure’s technology and on its capacity. The General Director believes that the solution proposed by the Tribunal – the opening of the IPTV infrastructure to competitors, which assumes that the competition that will develop between the broadcasters would be equal to the competition which would have developed between broadcasters with different infrastructures – is an artificial one that seeks to imitate free competition through regulation. The General Director further argues that the relevant considerations with respect to mergers are established in s. 21(a) of the Restrictive Trade Practices Law, which distinguishes between two types of mergers: mergers that raise a risk regarding competition, which can be made conditional or which can be opposed, and mergers that do not give rise to a competition risk, which are to be approved.  She notes that once the Tribunal determined

–             erroneously in her opinion, - that this merger does not give rise to a reasonable risk of significant damage to competition, then at all events it was not authorized to impose conditions on an approval of the merger, even if Bezeq had agreed to such. The General Director further stressed that the sole purpose for which, according to the Law, conditions may be imposed with respect to a merger is for the removal of a risk that the merger creates with respect to damage to competition, and the Tribunal is not authorized to set conditions for a merger only for the purpose of promoting industry-wide reforms, if it believes that no risk of damage to competition exists. The General Director stresses that there is no parallel within comparative law among merger review regimes to such a proceeding in the Tribunal, and it fundamentally changes  the set of balances established in the Restrictive Trade Practices Law and deviates from the Tribunal’s own previous rulings.

The General Director emphasizes what she views as a logical defect in the Tribunal’s decision: The Tribunal held that it is not reasonable for Bezeq to construct an IPTV infrastructure when it is a minority shareholder in Yes, and it therefore allows Bezeq to acquire control of Yes; at the same time, the Tribunal chose to condition the merger on the implementation of that very

 

 

expensive and not worthwhile process, which in the Tribunal’s view, lacks competitive significance. In this connection, the General Director notes that the Tribunal went even further in the context of its decision regarding the application for a stay of the implementation of its ruling, in which it noted that a stay of its implementation would harm the public interest because of the delay it would cause in the construction of the IPTV infrastructure. But according to the General Director, the Tribunal did not derive the necessary conclusions from this with respect to the implications that the construction of this infrastructure would have for competition. The General Director also noted that accumulated experience indicates that new providers receive only minimal cooperation from infrastructure owners who are themselves service providers, and that in this case, and if the merger does take place, any additional broadcaster that uses the IPTV infrastructure will not only compete with Bezeq’s subsidiary, but will also threaten Bezeq’s monopoly in the areas of telephony and Internet. This is an especially bad starting point for implementation of an open access model such as the Tribunal had sought to design. The General Director further argues that the Tribunal  erred  in placing the burden of proof on her, since even though this Court has left this issue as one that requires further review, it has more than once noted that there are good reasons for imposing that burden on the parties seeking a merger. She also argues that, like any administrative authority, she enjoys a presumption of propriety regarding her actions.

8.            The General Director argues that in order to properly estimate the economic feasibility for Bezeq to construct the infrastructure, a broader picture needs to be examined. This would include a review of the variety of markets in which Bezeq competes with other communications groups, including the telephony and Internet markets, in which it is a declared monopoly. According to the General Director, the construction of an IPTV infrastructure constitutes, for Bezeq, a defensive strategy for the purpose of preventing the loss of Internet and telephony customers, and following the merger, Bezeq will be able to market “communications packages” to its customers – packages which also include multi-channel television broadcasts. The General Director further notes that even though the Tribunal accepted the main position that she presented in this context, it rejected her claims themselves, holding that they were not proven through appropriate economic calculations, an approach that testifies to a mistaken reversal of the burden of proof.     Essentially,  the  General  Director  argues  that  internal  Bezeq

 

documents were presented to the Tribunal which describe the process of the construction of the IPTV infrastructure as a “defensive process.” She claims that the Tribunal dismissed these documents rather casually, and she further argues that these documents prove that a financial consulting firm hired by Bezeq had presented Bezeq with only one option in the event of the merger not being approved –the construction of an IPTV infrastructure and entry into the content market. Under these circumstances, the General Director argues, it is unclear how the Tribunal reached the conclusion that the possibility of Bezeq competing with Yes is “one of a number of likely options” regarding which it had not been determined whether the investigation was complete. The General Director further claims that the Tribunal should have dealt with the objective economic feasibility of the construction of an IPTV infrastructure – a subject regarding which Bezeq brought no evidence – and should not have focused on the subjective question – i.e., the mode of action which Bezeq had decided or would decide to follow At any rate, [she argued,] and to the extent subjective evidence is required, the Court should have attributed significant weight to the fact that Bezeq itself, at the start of 2007, had submitted a position paper to the commission established by the Ministry of Communications (see: “Report Regarding the Formulation of Detailed Recommendations Regarding Israeli Competition Policy and Rules in the Field of Communications”, headed by Professor Reuven  Grunau, March 2008, hereafter: the Grunau Commission), in which Bezeq noted the significance of the construction of the IPTV infrastructure for competition, while relying on the position presented by the General Director to the Tribunal in this connection. The General Director further argued that Bezeq made a false  presentation regarding the technological ability of its infrastructure. She added that Bezeq is currently at the height of a significant and expensive process regarding the upgrading of its existing infrastructure into an advanced NGN type of infrastructure that can be used for the implementation of the IPTV technology after an additional investment is made, which is ten times smaller than the investment already made in that infrastructure. The General Director also notes that according to the case law of this Court, if there is a doubt regarding the damage that a merger will inflict on competition, the doubt is to be resolved in favor of competition and the public and against the merger, and she argues that the Tribunal ignored her supposition that if Bezeq is not allowed to exercise its options and purchase the control of Yes, another party will acquire such control – for example, Eurocom – which had even declared its wish to do so in the context of its petition to be joined in the proceeding.   The General Director also

 

 

argues that the Tribunal’s expert did not analyze the size of the investment involved in adjusting Bezeq’s network to the IPTV technology, and the Tribunal’s determination that this adjustment “involves a significant financial investment” has no foundation.

The General Director notes that the Tribunal’s position that the merger can be approved given the already difficult situation in the multi-channel television market is not consistent with the rule established by this Court in CA 2247/95 General Director v. T’nuva, [1], at 240-241 (hereinafter: General Director v. T’nuva), according to which an entity which is at any rate dominant in a particular field nevertheless does not enjoy immunity from the General Director’s control. Regarding the regulatory restrictions that the Tribunal noted in its finding that the likelihood of the damage to competition is low, the General Director argues that the Tribunal ignored the fact that in the infrastructure field, there is no regulatory restriction preventing Bezeq from establishing a third infrastructure. She further noted that regulation, by its nature, can be subject to frequent changes (especially, she claims, in the communications market), and she repeated that no change in the statutory situation is required for granting of a broadcasting license to a full Bezeq subsidiary as the matter is within the authority of the Minister of Communications in situations in which competition considerations justify it. Regarding the existence of additional alternative technologies other than the IPTV technology, the General Director argues that the Tribunal’s holding regarding the abilities of the DTT and Internet television technologies to constitute infrastructures for multi-channel television broadcasts is inconsistent with the findings of the Tribunal’s expert’s findings - and that at any rate, Internet television does not constitute an additional infrastructure for multi-channel television broadcasts, as these are broadcasts that are transmitted on one of the two currently existing broadband infrastructures. According to the General Director, there are also defects in the conditions stipulated by the Tribunal [for the merger], including the fact that these conditions lack a minimal specification regarding the manner in which the purpose for which they have been imposed will be achieved. The General Director further noted that in effect the Tribunal has removed its own discretion and transferred the main legal determination – the regulation of the establishment of  the  IPTV  infrastructure – to  the  Ministry  of Communications, which the Tribunal is not authorized to do and which should not be done in light of the fact that the Ministry of Communications

 

weighs other considerations in addition to that of guaranteeing competition in the economy. Finally, the General Director asks for the cancellation of the awarding of legal expenses of NIS 20,000 against her in the context of the petition for a stay of the ruling’s implementation.

Eurocom’s appeal

9.            Eurocom’s appeal is directed at the [Tribunal’s] failure, allegedly, to impose effective structural conditions for the approval of the merger. Eurocom argues that the ruling attributes a central place to Bezeq’s right to acquire the control of two out of the three multi-channel television infrastructures in Israel and it believes that in light of the concentration of control of competing infrastructures under a “single hand” as a result of the merger, the Tribunal should have given Bezeq the choice of either one of the infrastructures and should have then required it to abandon the other one. Eurocom argues that this merger has unique characteristics, including: Bezeq being the largest communications group in Israel, having been a declared monopoly in the field of telephony and Internet for many years; Yes, which broadcasts to more than 500,000 households in Israel, being the only company using a satellite broadcast infrastructure and being contractually bound to this technology until 2016; the fact that no additional competing infrastructures are expected to enter the market, other than the IPTV infrastructure which has special competitive abilities that the Grunau Commission recognized as “the most significant competitive threat to the multi-channel television companies”; and the fact that the Grunau Commission found that the level of competition in the multi-channel television market is unsatisfactory and that the market is not a sophisticated market, which is reflected in the price paid by the consumer and in the absence of competition between the content which is broadcast to the public. Eurocom emphasizes that an approval of the merger paves the way for Bezeq to obtain 100% control of Yes without requiring any additional approval from the General Director and that under these circumstances, the approval of the merger contains some degree of a direct and significant increase of the concentration in the infrastructure field, a raising of the barriers to entry into the multi-channel television market and likely significant damage to the potential competition between infrastructures. In this context, Eurocom notes that the ability not to develop a specific technology and, at the least, to use it to harm other competitors, constitutes control.

Eurocom  argues  that  the  behavioral  conditions  imposed  by  the Tribunal are ineffective since Bezeq has been given the ability to operate on

 

 

the basis of two infrastructures and to transfer between them as it wishes, that the obligation imposed on Bezeq to establish an IPTV infrastructure lacks specification regarding the required professional standards, and that the Tribunal left the work for the Ministry of Communications, which had not been a party to the proceeding, did not undertake to carry out this task and is also guided by different considerations than those by which the Tribunal is supposed to be guided. Eurocom also argues that these conditions are opposed to basic principles of antitrust law, that they enable Bezeq to carry out a “targeted killing” of the satellite infrastructure, that no substantive arrangements were established regarding enforcement and that the Tribunal limited itself to requiring that Bezeq post a bank guarantee, the size of which Bezeq is appealing to this Court. Eurocom emphasizes in its arguments that the fact that Bezeq is now “volunteering” to establish the IPTV infrastructure in accordance with the conditions established by the Tribunal – a measure which Bezeq had, during the deliberation before the Tribunal, termed an “hallucinatory scenario” on the part of the General Director – itself indicates that that merger involves a risk of damage to competition. Eurocom further argues that the construction of the infrastructure will continue for a number of years and that therefore the condition requiring that Bezeq itself can transmit on the IPTV infrastructure only six years from the approval of the merger by the Tribunal does not provide any protection to new competitors. According to Eurocom, this situation constitutes “competitive overlap” following a merger, and it necessitates the involvement of the competition authority through opposition to the merger or, as stated, through the imposition of a structural condition, such as a requirement that the merging companies sell one of the “overlapping” assets to a third party (divestiture). According to Eurocom, the imposition of a structural condition such as this is to be preferred to alternative behavioral conditions that are inferior in their nature and which cannot, under the circumstances, lead to a solution of the competitive difficulty. In its appeal, Eurocom therefore asks that the following structural conditions be imposed with regard to the merger’s approval: (1) Bezeq should be required to choose, before the merger takes place, between [a] obtaining full control over Yes and operating it on the basis of the satellite infrastructure or [b] operating as a broadcaster external to Yes, on the IPTV infrastructure, without being allowed to transfer between the two infrastructures; (2) the establishment of a significant “protective period” for new competitors in the market (longer than the six years set by

 

the Tribunal) which will apply only from the day that the IPTV network is fully launched.

10.          On its part, Bezeq supports the Tribunal’s ruling. According to Bezeq, the ruling is based on the evidence presented to it and on factual findings resulting from such evidence, and it stresses that even now it is the largest shareholder in Yes, noting that over the years it has transferred substantial capital to Yes even though Yes is not yet a profitable company, and under these circumstances it is clear that it has no interest in damaging Yes through the construction of a third multi-channel television infrastructure. Bezeq claims that the said merger is not a horizontal one between competitors, since as of now it is not a competitor either in the infrastructure field or in the programming field, and it is not a vertical merger between a party that sells infrastructure services and a broadcasting party, and it therefore gives rise to no competition risk. Bezeq argues that the Tribunal’s holding that there is a low probability that it will establish an IPTV infrastructure if the merger is not approved is one which is based on objective factual findings. These include the legal prohibition preventing Bezeq from being a multi-channel television broadcaster; the regulatory prohibition against a Bezeq subsidiary becoming a multi-channel television broadcaster; the additional investments that Bezeq would be required to carry out in order to establish the IPTV infrastructure; the lack of economic feasibility for its entry into a saturated market as an independent competitor alongside Yes; and the fact that none of the telecommunications companies that have, throughout the world, established such an infrastructure, have been prohibited from transmitting on it or from providing discounted “service packages” through such an infrastructure. Bezeq further points to the second factual finding on which the Tribunal based its ruling, according to which it can be estimated that within three years there will be additional platforms for multi-channel television other than the existing ones and the IPTV infrastructure, and it notes that this supposition is based on the Tribunal’s experts opinion, and it is to be expected in a dynamic market such as the communications market. Bezeq further argues that even on the assumption that it will establish an IPTV infrastructure in any case, it is not clear how the merger will damage competition – noting that at any rate there will not be any competition in the infrastructure area, as the satellite infrastructure serves Yes exclusively, and satellite infrastructure services cannot be sold to additional broadcasters. In the area of content, Bezeq argues that there will be no competition as it and its subsidiaries are prohibited from being a content provider and from broadcasting  and  even  the  General  Director  herself  had  argued,  in  her

 

 

objection to the merger, that so long as Bezeq has holdings in Yes, there will be no competition between infrastructures even if Bezeq chooses to develop an IPTV infrastructure. In this context, Bezeq further notes that a vertical merger is perceived, in the literature and in the case law, as a “desirable economic phenomenon” and that in any event, in light of the fact that the IPTV technology has no limit in terms  of capacity, once  the merger is approved and the said infrastructure is established, other competitors as well as Yes will be able to make use of it, without a risk that the market will be foreclosed. Bezeq also argues that there is no risk of an oligolopic coordination in this case, because the large disparity between the market share held by Hot - a declared monopoly in the area of multi-channel television and the holder of a small telephony market share - and the low market share held by Yes (and Bezeq) in multi-channel television along with Bezeq’s large market share in the field of telephony, negates (and at least significantly reduces) the risk of such coordination.

11.          Bezeq argues that the General Director’s sweeping objection relies entirely on the thesis of the potential competitor – an exceptional doctrine in antitrust law that has never been used in the manner that the General Director seeks to use it, and which has been rejected in Israel in the few cases in which it has been argued. Bezeq further argues that three days before the General Director’s announcement of her objection to the merger, the General Director sought an extension for the purpose of formulating conditions for the merger’s approval, and in this context, she pointed out that she intended to establish conditions that were similar to those that were eventually established by the Tribunal, and that it was only when Bezeq  objected to granting the requested extension that the General Director announced her objection to the merger. According to Bezeq, the General Director’s authority to condition the approval of a merger is left to discretion, and where the injured party agrees to the Tribunal’s imposition of the conditions, as it has, the question of the Tribunal’s authority to impose such conditions does not arise at all, and at the most, what is being discussed here is a mistake of law and not an ultra vires act [on the part of the Tribunal]. Alternatively, Bezeq argues that even if the Tribunal’s imposition of conditions is tainted as an ultra vires act, it is not necessary to strike the ruling for that reason, as the doctrine of relative invalidity can be implemented. Bezeq argues that its agreement to the merger being made conditional was given in order to have the matter concluded quickly, to ensure certainty and to lessen the General

 

Director’s concerns, and at any rate, in light of Bezeq’s being subject to a regulatory regime that applies to the entire industry, it is in any event obligated to carry out most of the conditions that were established. Bezeq further argues that an analysis of its interests in light of its existing holdings in Yes is one consideration out of several that were weighed by the Tribunal when it rejected the General Director’s position and in light of the stipulation reached at the Tribunal, according to which Bezeq’s holdings in Yes will not change even if the merger is not approved, the General Director was required to prove that in terms of the economic interests, of the regulations applying to it and of the future state of competition in the market, a situation in which Bezeq holds more than 49% of the shares in Yes is equal to a situation in which Bezeq holds no shares whatsoever in Yes, and the General Director would not have been able to prove this.

Bezeq also notes that its option rights regarding Yes shares will not expire even if the merger is not approved, and it will in any event be able to decide to whom to sell such rights. Bezeq points out that there is no global precedent for a situation in which a telecommunications company has been prohibited from using an IPTV infrastructure that it constructed to broadcast or to provide a “services package”; that the market shares held by IPTV throughout the world are minimal and that it is not clear how well it will succeed in Israel; and that factors relating to the Israeli economy such as the relatively small number of households, the especially high penetration of multi-channel television, the high degree of digitization, the especially high number of people per household and the high percentage of households with two television sets all serve to render the General Director’s claim that “Bezeq will in any event construct the IPTV infrastructure” completely erroneous. Bezeq further argues that it has been proven that there is no party in the Israeli market that is seeking to provide IPTV services and that the General Director did not question Bezeq’s witnesses regarding the “internal documents” on which she now wishes to base her appeal. According to Bezeq, the position paper that it submitted to the Grunau Commission conditions its willingness to establish an IPTV infrastructure on a series of conditions, including the cancellation of the regulatory restrictions and the exclusivity regarding use of the infrastructure and the provision of services – conditions which currently have not been met. Bezeq also argues that the presentations that were prepared at its request by an outside consultant do not constitute financial opinions, that one of them was never even presented to the company’s board of directors and that they never served as a basis for the adoption of any operative resolution – yet, nevertheless, the General Director

 

 

relied on these presentations, and did this only at the stage of presenting closing briefs to the Tribunal and primarily at the appeals stage.

Regarding the General Director’s argument that the Tribunal deviated from the rule of laid down in General Director v. T'nuva [1], Bezeq notes that unlike the situation in that case, the Tribunal here has not approved a small addition to the damage to competition that exists in any event – instead this is a situation in which the Tribunal has not been persuaded that there is any damage, large or small, which is being done to competition, in comparison to the situation without the merger. Bezeq further argues that there is no basis for the General Director’s claim that the Tribunal decided the appeal on the basis of burdens of proof, and Bezeq insists that this question is only relevant where the evidence produces a “tie” result – which did not happen here. Bezeq argues that the Tribunal’s holding relies on “a set of logical considerations and an examination of the reality in light of the evidentiary material” and not on burdens of proof, as the Tribunal itself noted in its decision of February 18, 2009 regarding the stay of implementation. Bezeq further argues that the Tribunal was aware of the fact that there are no regulatory restrictions on the establishment of an IPTV infrastructure, but according to Bezeq, the prohibition against broadcasting on the infrastructure undermines the rationale for constructing it, and an objection to a merger cannot be based on future scenarios that are conditional upon changes in the statutes and regulations, when the chances for those changes taking place are non-existent or at best, low. In this context, Bezeq argues that the General Director’s objection relies on a claim regarding a future change in the market’s structure - a change regarding which there is no indication of the likelihood of its occurrence - and that the Tribunal was persuaded that the choice it faced was between one inferior infrastructure (the satellite) and two infrastructures that are restricted by conditions, if the merger is approved.

12.          Bezeq further argues that additional technologies are expected to enter the market shortly and that all the parties and the Tribunal’s expert attributed some importance to these technologies as potential competitors.  Bezeq further argues that past experience shows that where it has been allowed to establish an infrastructure that is open to other users under open access conditions, competition is not damaged and that the General Director acknowledges that she did not carry out an economic analysis that indicated a vertical risk, which would not exist as Bezeq is not a monopoly regarding infrastructure for multi-channel television programming.  Bezeq argues that

 

the General Director does not clarify what “reform” the Tribunal was allegedly advancing through the conditions it imposed on Bezeq, and that the conditions are closely tied to the risks that the General Director had indicated: the risk of the non-construction of an IPTV infrastructure and the risk that the satellite infrastructure will “atrophy.” According to Bezeq, the General Director did not hesitate in the past to impose conditions that “promote competition” (in contrast to conditions that are meant to rectify damage done to competition) and according to Bezeq it is accepted in European antitrust law as well. Bezeq argues that there is no normative hierarchical ranking among different types of remedies and the matter is dependent on the facts and circumstances of the particular case. However, in Bezeq’s view, in light of their rigidity, structural conditions the last resort and behavioral conditions are to be preferred to them, to the extent possible. This is especially true, Bezeq claims, in a small economy such as Israel’s, which is any event characterized by massive industry regulation. Bezeq further points out that the principle of open access is an accepted one in the communications industry and has been recognized in this Court’s decisions, and that in the absence of an ability to ensure the construction of an additional infrastructure, the Grunau Commission also determined that the way to ensure competition is through [the preservation of] transmission rights on existing infrastructures. According to Bezeq, the significance of a delay in the merger until the completion of the construction of the infrastructure is that Yes and the entire multi-channel television industry will be left “hanging in the air” for a period of a number of years – and this is against the [recognized] interest in promoting certainty in the market. It also argues that the Tribunal had established the outline of the conditions and that it only left the determination of specific-professional details to the Ministry of Communications – details which at any rate are within the jurisdiction and expertise of that Ministry. Bezeq notes that the Tribunal even determined that if the Ministry of Communications does not establish such conditions, the General Director is to establish them. Bezeq notes that the General Director preferred not to assist with the drafting of the conditions and thus created great difficulty for the Tribunal in their formulation. Finally, Bezeq argues that the industry regulator’s involvement in the establishment of technical-professional conditions and in supervising their implementation presents many advantages in light of the regulator’s knowledge, experience and expertise in this area.

13.          Regarding Eurocom’s appeal, Bezeq argues that Eurocom’s position is flawed in the same way that the General Director’s is, and it further argues

 

 

that Eurocom joined the proceeding at a late stage, did not present evidence and did not question witnesses. Therefore, it does not have a right, at the appellate stage, to argue against factual findings determined by the Tribunal. According to Bezeq, no significance should be attributed in this context to the affidavit that Eurocom attached in the framework of the interim proceeding regarding its joining the appeal to the Tribunal as a party. Bezeq argues that Eurocom is attempting to bring about a situation in which Bezeq is required to engage in price negotiations regarding its shares in Yes, but Eurocom does not have a right to [force] such [negotiations], pursuant either to the Yes by-laws or the agreements between its shareholders. Bezeq also points to the fact that Eurocom is the controlling shareholder in the Spacecom Company, from which Yes leases the segments required for its satellite broadcasts, and that Eurocom therefore has a clear interest in Yes continuing to broadcast through a satellite infrastructure under any conditions and at any price – whether or not that is economically efficient. Bezeq also notes that in its notices of appeal, Eurocom asked to have Bezeq permanently prohibited from transmitting on the IPTV infrastructure (other than with respect to VOD services), but in its summary, it withdraws that request as well as the demand it made in the notice of appeal, to obligate Bezeq to train the employees of competing companies in the use of the IPTV infrastructure and to allow them access to the infrastructure in order to maintain it and repair it. Finally, Bezeq argues that the purpose of the six year restriction imposed on Yes regarding the use of the IPTV infrastructure is not to protect a new competitor in the market, and that it is [actually] intended to respond to the risk of the satellite’s infrastructure’s early erosion. According to Bezeq, the period established by the Tribunal ensures that Yes will remain committed to its existing agreements with the Spacecom Company, which will end in the year 2016 – agreements from which Yes cannot at any rate free itself without the consent of the Spacecom Company.

The Bezeq appeal

14.          Bezeq’s appeal is directed against the size of the bank guarantee (NIS 200 million) which it has been required to produce pursuant to the Tribunal’s ruling in order to ensure the fulfillment of the merger conditions. According to Bezeq, there is no need at all for a bank guarantee to ensure the fulfillment of the merger conditions, as their fulfillment can be ensured through remedies established in the penal code, in tort law and in administrative law, but in light of its agreement to provide such a guarantee it does not appeal the fact

 

that it is being required to provide a guarantee, but only the amount thereof, and it proposes to provide the guarantee for NIS 50 million. It argues that the amount established for the guarantee is not proportionate or reasonable, and that it ignores the variety of alternate means of enforcement that are available in this case, the ongoing cost of providing a guarantee of this amount, and the costs of the significant investments that Bezeq is required to make as part of the merger conditions – which could affect its ability to raise the required guarantee, in light of the Israeli banking system’s limitations. Bezeq further notes that it is required to provide a ten million dollar guarantee for the purpose of complying with the terms of its general license, that the merger of the cable companies which created a monopoly was conditioned on a bank guarantee of fifteen million dollars (and that after time the amount was reduced to two million dollars), and that under these circumstances the amount that was imposed on Bezeq is unprecedented. Finally, Bezeq proposes that if the NIS 200 million amount is left in place, that an alternative arrangement be established, such as [the deposit of] a company check or a promissory note – instead of the bank guarantee which it has been ordered to provide.

15.          The General Director, on her part, argues that Bezeq seeks to detract from the effect - limited as it is - of the mechanism established by the Tribunal in its holding. The General Director notes that the open access model established by the Tribunal does not constitute a solution to the horizontal risk that she had noted, which deals with the loss of a competing infrastructure, and only deals with the vertical risk - the risk that Bezeq, as the controlling shareholder of Yes, will use economic measures to block Yes’ competitors from making use of Bezeq’s new infrastructure. According to the General Director, the guarantee mechanism seeks to create a deterrence mechanism in the face of Bezeq’s large scale interests and ability to disrupt any attempt to compete with Yes, which Bezeq will control. In this context, the General Director argues that the control over the infrastructure creates an absolute and problematic dependence, for each of Yes’ future competitors, on Yes’ controlling shareholder. This will be due to Bezeq’s ability to damage the quality of their broadcasts through the infliction of damage to the infrastructure – which will lead to significant flaws in the product provided by the Yes competitors. The General Director notes that damage of this type is very difficult to locate and even took place recently in the United States. Nevertheless, the General Director believes that the guarantee mechanism which has been set up is significantly flawed in that it does not refer to the limitations  of  supervision  and,  primarily,  not  to  the  significant  costs  of

 

 

supervision created by the conditions established by the Tribunal; it does not provide a solution to the technical difficulties in locating the occurrence of a breach; and it ends specifically at the time at which Bezeq is expected to transfer Yes from the satellite infrastructure to the IPTV system.  The General Director also notes that in other circumstances, and as a product of a criminal investigation conducted against Bezeq, it has already been revealed that Bezeq has an organizational culture which is not sufficiently careful with respect to preventing improper harm to competitors that use its network. Under these circumstances, the General Director believes that if the appeal is denied, then at the least, the partial deterrence measure established by the Tribunal should be left in place.

16.          Eurocom claims that the character of the conditions that have been imposed on Bezeq – a complicated behavioral arrangement which requires long-term regulatory supervision requires an “appropriate deterrence incentive” and an immediate and significant sanction which is not dependent on a legal proceeding, which conforms to the scope of Bezeq’s obligations and the “cost of an error” that the public will pay if it transpires that Bezeq is not meeting those obligations. Eurocom further argues that the Tribunal chose one security for the fulfillment of the conditions – the presentation of a bank guarantee – and that in these circumstances the amount is reasonable and even necessary, as legal proceedings will not be able to lead to a rectification of [a breach] situation in real time, and Bezeq’s arguments in its appeal serve as a warning signal regarding the [potential for the] erosion of the Tribunal’s conditions. Eurocom also argues that the conditions established by the Tribunal constitute “a single block” and that not one of the conditions in this set should be changed without opening up the entire conditions framework. Finally, Eurocom argues that, without obtaining permission to do so, Bezeq included in its closing briefs several factual arguments regarding its contacts with various banks and that these arguments should be ignored.

Discussion

The normative framework: the Israeli regime of merger supervision

17.          Section 1 of the Restrictive Trade Practices Law defines a companies merger as follows:

“Companies Merger” - Including the acquisition of most of the assets of a company by another company or the acquisition of shares in a company by another company by

 

which the acquiring company is accorded more than a quarter of the nominal value of the issued share capital, or of the voting power, or the power to appoint more than a quarter of the directors, or participation in more than a quarter of the profits of such company; the acquisition may be direct or indirect or by way of rights accorded by contract;

It is undisputed that Bezeq’s exercise of the options in this case will constitute a “companies merger” in accordance with that term’s definition in the Restrictive Trade Practices Law, described above – since due to the said exercise, Bezeq, which currently holds 49.78% of the shares in Yes, will cross the line of 50% of the holdings in Yes and become the owner of 58.36% of the Yes shares. As an aside, we note that the Israel Antitrust Authority does not generally require a notice of merger from a party that holds more than half of the rights in a company and which seeks to increase its holdings of any right whatsoever to a level exceeding 75%. This is because the Restrictive Trade Practices Law will in any event view a firm and a person holding more than 50% of the rights in that firm as constituting a “single substantive entity,” which leads to the perception that in these circumstances there is no real change in the relationship between the decision making mechanisms of the parties involved in the transaction. (See:  The Antitrust General Director’s Instructions Regarding the Reporting and Review Processes for Companies Mergers pursuant to the Restrictive Trade Practices Law – 1988 (hereinafter: General Director’s Instructions)). Therefore, the crossing of the 50% line regarding the holdings in a company, as in our matter, is generally the last point of supervision in this area, in accordance with the General Director’s Instructions.

Chapter C of the Restrictive Trade Practices Law establishes the regulatory framework for merger review, and it applies only to companies mergers in which one of the conditions established in s. 17 of the Restrictive Trade Practices Law is present – conditions which relate primarily to the size of the merging companies’ sales turnovers; to the fact that one of them is a monopoly as defined in s.26 of the law; and to the creation of a monopoly as a result of the merger. (See also s.18 of the Law, which establishes conditions regarding a merger with a company that conducts business both in Israel and outside of Israel.) Section 19 of the Restrictive Trade Practices Law prohibits the implementation of a companies merger if the conditions listed in the above-mentioned s.17 are present, unless a notice of merger has been sent and the General Director’s consent has been obtained. The section provides as follows:

 

 

Companies may not merge unless a Merger Notice is issued and the consent of the General Director to the merger is obtained and, if such consent is conditional- in accordance with such conditions, all as provided in this section.

Section 21 of the Restrictive Trade Practices Law lists the situations in which the General Director will object to a merger or will condition its approval, and provides as follows:

 

„The General Director shall object to a merger or stipulate conditions for it, if he believes that there is a reasonable risk that, as a result of the merger as proposed, the competition in the relevant sector would be significantly damaged or that the public would be injured in one of the following regards:

(1)          The price level of an asset or a service;

(2)          Low quality of an asset or of a service;

(3)          The quantity of the asset or the scope of the service supplied, or the constancy and conditions of such supply.’

 

The test for exercising the General Director’s authority is thus the existence of a “reasonable risk” – i.e., an estimated likelihood, which is determined ex ante, that there will be significant damage to competition due to the proposed merger or damage to the public with respect to one of the matters listed in the section. (See CA 3398/06, Israel Antitrust Authority v. Dor Alon Energy Israel (1988) Ltd par. 30.[2] (hereinafter: Antitrust Authority v. Dor Alon) The examination of the merger is thus a two stage one: first, the market which is relevant to the matter under discussion must be identified and defined; second, it is necessary to determine whether there is a reasonable risk that the proposed merger will lead to significant damage to the public in that market or that it will lead to such damage to the public (General Director

v. Tenuva) [1] at 229.

This statutory arrangement for merger review is a late development in Israeli law (as in United States antitrust law and European Union competition law – see, regarding this matter, Y. Yagur, Antitrust Law, 411-412 (3rd ed., 2002) (hereinafter: Yagur). The Restrictive Trade Practices Law, 1959, in its original version, did not contain any provisions regarding company mergers, but during the first half of the 1970’s it became clear that the attempt to

 

encourage mergers through government incentives, together with the absence of a review mechanism, had led to a high level of concentration in many areas within the Israeli economy, and in 1975 a Committee For the Review of the Restrictive Trade Practices Law was established, headed by Professor Joseph Gross, whose recommendations were the basis for the enactment of the new Restrictive Trade Practices Law in 1988. (See: Barak Orbach, “Objectives of Antitrust Law: Practical Rules” Legal and Economic Analysis of the Business Antitrust Laws 83-85 (Vol. 1, Michal (Schitzer) Gal and Menachem Perlman, ed. 2008) (hereinafter: Legal and Economic Analysis of the Antitrust Laws); Report of the Committee on Mergers and Conglomerates, 6, (1978)). The basic assumption at the foundation of the new 1988 law was that mergers are primarily desirable, to the extent that they relate to business efficiency and benefits of size, and that they can have the effect of lowering prices for consumers. Nevertheless and because in certain circumstances mergers can lead to damage to competition as a result of the increase in the power or market share of the merging companies, the legislature saw fit to review them and in certain cases even to limit them. (See: Explanatory material for the Proposed Restrictive Trade Practices Law, 1983, Proposed Bill 1647, 39-40; General Director v. T’nuva [1 ], at 227; Antitrust v. Dor Alon [2] paras. 29-31). This review is intended to realize the objective that is the basis of the Restrictive Trade Practices Law, which is “protecting the general public against economic distortions the source of which is in excessive concentration in certain markets.” (General Director v. T’nuva [1], at 229). This is done through protecting and promoting competition in order for it to constitute an incentive for development and innovation and in order to increase the efficient use and utilization of resources and to secure the best quality product for the end consumer at the most reasonable price. Free competition, as a value which the Restrictive Trade Practices Law is intended to protect, is also perceived as “a foremost sign of the individual’s freedom to realize his autonomy,” (ibid, [1] at 229), which contributes to the dispersion of centers of power and decision-making, prevents excessive concentration of power in the hands of a few entities and protects additional fundamental rights including freedom of occupation (ibid. [1], 229-230; Antitrust Authority v. Dor Alon [1] para. 29); FHC 4465/98

Tivol (1993) Ltd. v. Chef of the Sea (1994) Ltd., [3] at 56, 79-80 (2001). In the communications industry, the protection of competition has special importance. It would appear that no one disputes the fact that in a free society, the media serves as a key platform for the expression of views and opinions  and  as  a  critical  tool  for  the  delivery  of  information  and  the

 

 

disclosure of details that are of public importance. In this way, the media carries out a function which is essential for our existence as a democratic society and serves to realize fundamental rights such as freedom of expression and the public’s right to know. (See HCJ 7200/02 DBS Satellite Services (1998) Ltd. v. the Cable and Satellite Broadcasts Council [4] (hereinafter: DBS Services v. Cable and Sattelite Broadcasts) at 34-35; Dafna Barak-Erez, “Freedom of Access to the Media Balancing of Interests in the Areas of the Right to Freedom of Expression,” Iyunei Mishpat 12, 183 (1987). The existence of competition in this industry thus contributes to the development of a varied and pluralistic public discourse and reduces the risk that information with public importance will remain undisclosed because of the economic or other interests of any party whatsoever.

Does this merger give rise to a reasonable risk of significant damage to competition?

18.          Section 21 of the Restrictive Trade Practices Law which was cited above authorizes the General Director to object to a merger or to condition its approval if, in his opinion, there is a reasonable risk that the merger as proposed will significantly damage competition in that industry (market). A determination of the damage is carried out in relation to the relevant market – i.e., the market in which the control of a particular firm (according to the hypothetical monopoly test) can allow that firm to restrict production and raise the price beyond the marginal cost, while reaping a profit. (General Director v. T’nuva [1] at 232; M. Perlman, “Definition of Markets,” Legal and Economic Analysis of the Antitrust Laws, 167). The delineation of the relevant market at the first stage is therefore critical for the purpose of determining the existence of a reasonable risk of significant damage to competition, and we will now turn to this matter.

Definition of the relevant markets

19.          Two markets in the area of multi-channel television are relevant to our case: the infrastructures market (the technology through which content is transmitted) and the content market (the services and content transmitted on the infrastructure). These markets are part of the vertical chain in the field of multi-channel television, which is, according to the General Director’s definition, composed of four factors: (1)  the producers of content who create the broadcasted content and who contract for this purpose with relevant professionals and manage the production, (2) the producers of channels who construct a programming schedule, brand and market the channels (some of

 

whom also produce the content that they broadcast); (3) broadcasters who acquire the various channels, “package” them as broadcast packages, market the brand to end customers and who are responsible for providing the service to customers; and (4) the providers of the infrastructure on which the content is transmitted from the broadcasters’ base to the customers’ home.

Historically, the Israeli multi-channel television industry has been characterized by a lack of direct and effective competition, since for many years this industry was controlled by regional monopolies – cable companies

–             who had been given exclusive franchises to provide television broadcasts via cable in a specific geographic region. (See the Monopoly Declaration Pursuant to s.26 of the Restrictive Trade Practices Law, 1988 for the cable franchises in Israel, dated November 8, 1999). This exclusivity led to the fact that the competition in the market was limited to yardstick competition, which is characterized by the fact that a low price level and a high level of programming in a particular region can create public pressure on broadcasters in other regions. But this competition is, by its nature, limited, since the only risk from the perspective of the franchisees is that the consumer will stop consuming the product (a measure which will bear a cost from the perspective of the individual consumer) and there is no risk that the consumer will transfer to a different company (such a transfer would involve in a change of residence). During the second half of 2000, an additional player with national deployment entered the market – a satellite television company. The technological innovation led the market from a condition of perfect monopoly to a condition of a duopoly. The activity of the satellite television company required an amendment of the legislation and was even scrutinized by the Supreme Court. (See HCJ 508/98 Matav Cable Communications Systems v. Knesset [5] (hereinafter: Matav v. Knesset) at 577. The entry of this additional broadcasting platform was accompanied by beneficial competition effects and significant improvements regarding the offerings to consumers. In 2002 the regional cable companies applied to the General Director for approval of a merger, which was given subject to conditions that included the maintenance of a structural separation within the Hot company, between the infrastructure company (“Hot Telcom Limited Partnership”) and the broadcasting company (“Hot Cable Communications Systems  Ltd.”). Appeals filed against this ruling were primarily rejected by the Tribunal (See DBS Services v. Cable and Sattelite Broadcasts [4]) and the full merger of the cable companies was completed on December 31, 2006.

As a practical matter, the reality in the current Israeli multi-channel TV broadcast industry is that there are only two players  - Hot and Yes - in the

 

 

infrastructure market and in the content market, and each of them maintains full vertical integration between the infrastructure and broadcasting levels. (Hot holds between 55% and 65% of the market and was declared to be a monopoly in November of 1999. The rest of the market is held by Yes.) With respect to Hot, the Grunau Commission noted that despite the structural separation that Hot was required to create in the framework of the approval of the cable companies’ merger, in actuality, both Hot’s infrastructure company and its broadcasting company (the latter of which operates pursuant to a license given to it by virtue of Chapter B-1 of the Communications Law (Telecommunications and Broadcasting) are controlled by identical shareholders and they operate as a single commercial-financial entity (see the Grunau Commission Report, 110-111). Yes, as noted, holds and operates a satellite infrastructure (purchasing the space segments from the Spacecom Company controlled by Eurocom) and it also operates under a single corporate roof as the broadcaster on that infrastructure (by virtue of a license given to it for this purpose by Chapter B-2 of the Communications Law (Telecommunications and Broadcasting)).

20.          The market for the multi-channel TV broadcast infrastructure is characterized by high barriers to entry, of which the primary ones are: the especially high cost involved in establishing an infrastructure for a broadcast center; a distribution system; the provision of converters which decode the broadcast signal. In Israel there are two technologies through which multi- channel TV broadcasts are transmitted: an infrastructure based on satellite broadcasts and a cable line infrastructure. The technological abilities of these two technologies are not identical. The satellite broadcast method does not allow for broadcasted content to be differentiated in accordance with the geographical location of customers. Therefore, this technology does not support repeat channel broadcasts, which is an essential condition for the provision of video on demand (VOD) services – i.e., the broadcast of a dedicated channel according to the customer’s request, out of a store of programs that are maintained on the broadcast company’s servers. Yes, which operates on the satellite infrastructure, is therefore unable to offer VOD services and these are provided to the market only by Hot, which – as noted – operates on a cable infrastructure. (As an aside, we note that Yes is able to offer a similar service called Push-VOD, which is based on a converter with a given memory capacity). On the other hand, the satellite technology has its own advantages which include the relative ease with

 

which the satellite can broadcast to sparsely populated distant areas, without incurring the costs involved in laying a line-based infrastructure.

An additional technology which has been used throughout the world since 2004 for multi-channel TV broadcasts is the IPTV (Internet Protocol Television) technology, which has been mentioned above. This technology operates on the basis of a stationary network. The home viewer operates a converter through a remote control which connects to the IP address of the source of the broadcasts through a managed closed network. The technology allows for the transmission of a large number of channels on the infrastructure without a particular collection of channels being sent at the expense of a different collection (unlike the limited capacity that can be offered by the satellite or cable infrastructures), and it has the ability to block certain channels and to not broadcast the same signal to all subscribers. These advantages are made possible by the efficient utilization of a broadband access infrastructure on which differentiated broadcasts are transmitted to the customer, who watches them in accordance with his or her choice. In contrast, on the cable and satellite infrastructures, the same signal is broadcast at all times to all subscribers, and the channels that the customer cannot view are blocked by a conditional access management system. Worldwide, the IPTV services are supplied by telecommunications companies, in light of the deployment of the infrastructures they own, or through sub-operators who lease the infrastructure from the telephony companies. This technology does not currently exist nor is it currently operated in Israel.

21.          The content market is also characterized by barriers to entry, although these are significantly lower than those that characterize the infrastructure market. These include the need to establish a brand-name and to maintain it; the entry into  agreements with  content  [producing] parties in Israel  and abroad; the need to obtain a general broadcasting license and the regulatory rules that apply to this field. (See DBS Services v. Cable and Sattelite Broadcasts [4] at 37-38). As noted, there are only two players operating in the content market – Hot and Yes – and the full vertical integration that each of them maintains between the infrastructure and broadcasting levels makes the barriers to entry in the content market even higher. Note that the Communications Law (Telecommunications and Broadcasting) makes it possible to obtain a special license for cable broadcasts on the cable infrastructure for the purpose of transmitting single channels (through the open access method). But demand for such a license has been, until now, very limited, and there has been no successful business model in this field, in

 

 

light of the regulatory and technological restrictions that are imposed on such a broadcaster.

Damage to competition and the actual potential competitor doctrine

22.          The merger under discussion is not a horizontal one because Bezeq itself is not currently a competitor in any of the markets that are relevant to this case (i.e., the infrastructure market or multi-channel TV broadcast the content market). Additionally, this is not a vertical merger between companies operating at different stages of production or marketing in the same industry, since Bezeq’s activity in the multi-channel TV broadcast industry consists only of holding of the Yes shares that it currently holds. The merger under discussion involves the merger of six option warrants in Yes that Bezeq holds, upon the exercise of which Bezeq will increase its holdings in Yes from 49.78% today to 58.36%. This merger, which is neither vertical nor horizontal, can be referred to as a conglomerate merger. (In this context, see, DBS Services v. Cable and Sattelite Broadcasts [4] para. 12; CA 1/00 (Jerusalem District), Food Club Ltd. v. General Director [11], para. 71 (hereinafter: Food Club v. General Director). Regarding conglomerate mergers, see also FTC v. Procter & Gamble, Co. at 568, 578 (1967) [13] (hereinafter: FTC v.Procter & Gamble)). That is, it is a merger which relates to a party – in this case, Bezeq – which holds economic power and is composed of various business units that operate in a variety of markets and specialize in the production of products or the provision of services which do not necessarily have a common element and which are not similar or related to the acquiring company’s area of specialization. (See Food Food Club v. General Director [11] para. 72. See also Keith N. Hylton, Antitrust Law: Economic Theory And Common Law Evolution, 344 (Cambridge Univ. Press 2003) (hereinafter: Hylton, Antitrust Law)). There are a number of dangers to competition involved in a conglomerate merger. (See: Phillip Areeda & Donald F. Turner, Antitrust Law: An Analysis Of Antitrust Principles And Their Application, Vol. 5, s.1100 et Seq. (1980) (hereinafter: “Areeda & Turner, Antitrust Law”); Earl W. Kintner, Federal Antitrust Law, Vol. 4,

s.36.4 (1984)). Generally, the conglomerate structure enables each company in the group to benefit from the advantages of size and from convenient sources of financing. A conglomerate merger can therefore have pro- competition effects, such as the utilization of the conglomerate’s financial strength in order to prevent the elimination of an acquired company and to increase its efficiency, and thus to prevent its removal as a competitor from

 

the market. Conglomerate mergers are not infrequently considered to be mergers whose effect on competition is neutral and occasionally even beneficial. See Case T-5/02, Tetra Laval BV v. Comm'n, 2002 E.C.R. II-4381 [25] at para. 155; Food Club v. General Director [11]para. 73; but see Yagur, 502-503.)

23.A typical risk of damage to competition arising due to a conglomerate merger is the risk of damage caused by such a merger to potential competition. )See United States Department of Justice Non-Horizontal Merger Guidelines 1984, s.4, s.4.11 (hereinafter: U.S. Non-Horizontal Merger Guidelines)) American law distinguishes in this context between two doctrines: perceived potential competition and actual potential competition. Damage to perceived potential competition exists when the fact that a potential customer exists, even if it is not currently in the relevant market, restrains the market power of the firms that are active in that  market. Damage to perceived potential competition is, thus, damage which takes place in the present time and which results from the removal of the threat of the entry of the potential competitor into the market. In the absence of other potential competitors, the entry of such a potential competitor in the framework of a merger with a different company which is in the relevant market (rather than an entry as an independent competitor) can reduce the competitive pressure which the competitors that are active in the market feel due to this threat. (See Food Club v. General Director [11], para. 47; DBS , para. 13; U.S. Non-Horizontal Merger Guidelines, s.4.111; ABA Section of Antitrust Law, Antitrust Law Developments, 354 (5th Ed., 2002) (hereinafter: Antitrust Law Developments)). In order to establish the presence of perceived potential competition, it is necessary to prove that the existing competitors in the market do see the merging company as a potential competitor, and that its existence restrains their business behavior. (See Food Club v. General Director [11], para. 47; Areeda & Turner, Antitrust Law, at s.1116a).

In the case before us, no claim has been made regarding damage to perceived potential competition, and at any rate, no such claim has been proven. The doctrine which is relevant to our case is that of actual potential competition, and we will discuss it below.

24.          The actual potential competition doctrine deals with  competition which is likely to develop in the market in the absence of the merger’s occurrence, because one of the merging companies, which is not currently a competitor in the market, enters into the market, independently, in the future.

 

 

This doctrine therefore refers to future damage which will be caused to the relevant market because a potential competitor will be removed from it as a result of the merger.  The doctrine is recognized in the United States (See:

U.S. Non-Horizontal Merger Guidelines, s.4.112; United States v. Falstaff Brewing Corp [14] (hereinafter: U.S. v. Falstaff); United States v. Marine Bancorporation, Inc. [15](hereinafter: U.S. v Marine Bancorporation); Yamaha Motor Co., Ltd.  v.  FTC,  [16]  ;Tenneco, Inc. v. FTC, [17], and it has been used there by the Federal Trade Commission, the Department of Justice and the Federal Communications Commission, in accordance with the distribution of powers among them regarding the approval of mergers. (See, for example In re El Paso Energy Corp., [18]; United States v. AT&T Corp. and MediaOne Group, Inc., Proposed Final Judgment and Competitive Impact Statement, [19]; In re Applications of NYNEX Corp. & Bell Atlantic Corp., [20]). The question as to whether the actual potential competitor doctrine can be the sole ground for opposition to a merger has been left as a question for further review by the United States Supreme Court. (Falstaff [14] at 537; Marine Bancorporation [15] at 639).

The view that the loss of a potential competitor as a result of a merger constitutes damage to competition is also recognized in Canada (Canadian Competition Bureau Merger Enforcement Guidelines, part 2 (2004)) and in the European Union (EU Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings 2008/c 265/07, article 7 (2008); EU Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings 2004/c 31/3, articles 58-60 (2004)) and in Great Britain (Mergers: Substantive Assessment Guidelines, Enterprise Act 2002, article 4.8 (Office of Fair Trading 2003). (See also, Consultation Document, s.4.24, April 2009). The actual potential competition doctrine has been mentioned by the Antitrust Tribunal in Israel. (See Food Club v. General Director [11] paras. 49-51; DBS, paras. 14-15) and the Tribunal has recently even approved the General Director’s opposition to a horizontal merger because of, inter alia, grounds that were based on the doctrine by way of analogy. (AT 8006/03 Yehuda Pladot Ltd. v. General Director) [12] (hereinafter: Yehuda v. General  Director).  In relating to the doctrine and on the tests for its application, the Tribunal held there that:

 

In this situation, we believe that there is nothing to prevent the inclusion of a consideration of potential damage to competition as one of the considerations for opposing a merger. This can be compared, by way of analogy, to the potential damage to competition doctrine in non-horizontal mergers. The Tribunal has dealt with this doctrine in the past when separating between actual damage and potential damage to potential competition.

„[ . . . ] In our case, the relevant issue is damage to actual potential competition, i.e, the competition that would have developed in the market but for the merger, upon one of the merging companies entering into activity in the relevant market. In order to disqualify a merger on the basis of this doctrine, it is necessary to prove that a competitor that enters the market by way of a merger has the financial ability, interest and motivation and practical ability to enter into the market other than through the merger. It is necessary to present objective proof of such a possibility, and in addition to show that this possibility presents competition-related advantages as compared to the merger (Appeal 1/99 Food Club v. General Director [11] at s.49).

In accordance with our case, Hod is an actual potential competitor which sought to enter the market in the place of Mapam.’

(Paras. 60-61, emphases added).

25.          In the United States, the courts have pointed to a number of criteria in the presence of which the doctrine can be applied: first, the market in which the merger is taking place must have a concentrated structure. (See:BOC International, Ltd. v. FTC, 557 F.2d 24, 25 (2d Cir. 1977) [21]; Marine Bancorporation, 418 U.S. at 625 [15 ] Second, it must be shown that the company that is not in the industry has the characteristics, the ability and the economic motivation to enter into the industry by itself and not through the merger. (Marine Bancorporation, 418 U.S. at 633.) Third, it must be shown that the independent entry of the company which is not in the industry is expected to significantly reduce the concentration in the market or to lead to other significant pro-competition advantages as compared to the merger. (Ibid.) The  U.S. Non-Horizontal  Merger Guidelines add additional considerations, that are not unique to the above-mentioned doctrine, and they include the size of the barriers to entry into the relevant market, the number of additional potential competitors that are likely to enter into the market in

 

 

the future, and the acquired company’s market share. (Sections 4.132-4.134, and see also Areeda & Turner, Antitrust Law at s.1119c-f; Antitrust Law Developments, 355). An additional consideration which is relevant according to the U.S. Non-Horizontal Merger Guidelines which is also not unique to the above-mentioned doctrine examines the question of whether the efficiency involved in the merger exceeds the competition dangers that it presents. (s.4.135 of the U.S. Non-Horizontal Merger Guidelines; Revised s.4 Horizontal Merger Guidelines Issued by the U.S. Department of Justice and the Federal Trade Commission (April 8, 1997); FTC v. University Health, Inc., 938 F.2d 1206, 1222 (11th Cir. 1991) [22]; Yehuda Pladot [12], para. 64). In light of the requirements established in the United States for the application of the doctrine there are those who believe that this is an endangered doctrine which cannot be implemented. (See Herbert Hovenkamp, Federal Antitrust Policy: The Law Of Competition And Its Practice s. 13.4b (West Publishing Co. 1994); Andrew S. Joskow, Potential Competition: The Bell Atlantic/NYNEX Merger , Review of Industrial Organization, 185, 189 (2000); Darren Bush & Salvatore Massa, “Rethinking the Potential Competition Doctrine,” 2004 Wis. L. Rev. 1035, 1037 (2004) (hereinafter: Bush & Massa, Rethinking the Potential Competition Doctrine.)

26.          Indeed, it is a doctrine that if incautiously implemented could lead to damage to the efficiency achieved through mergers and in certain circumstances could even lead to damage to competition (to the extent that the analysis carried out regarding the independent  entry of the merging company in the market is erroneous). The use of the doctrine can increase the cost of entry into new markets (as independent entry is generally more expensive) and thus deter companies from attempting to enter them. The doctrine also has a significant ability to impose on companies in the market a positive obligation to “improve competition” as distinguished from an obligation to refrain from damaging competition, and this is a non-negligible expansion of the merger review regime. (See Hylton, Antitrust Law, p. 345- 346; Areeda & Turner, Antitrust Law at s. 1118).

In our case, the General Director based the grounds for her objection to the merger on this actual potential merger doctrine, and the essence of her argument in this context is that without a merger, Bezeq can be expected to enter into the infrastructure market and the content market for multi-channel TV broadcasts as an independent competitor.   Therefore, according to the

 

General Director, the merger’s approval will lead to the loss of Bezeq as a potential competitor in these markets or in one of them, and will fix them as duopolic markets. In referring to the General Director’s comments, the Tribunal did not examine the question of the conformity of the actual potential competitor doctrine to Israeli law and to the relevant provisions in the Restrictive Trade Practices Law relating to the approval of mergers. The Tribunal examined the application of the doctrine itself, and the lion’s share of its ruling is dedicated to an examination of the likelihood that Bezeq will enter into the infrastructure market or into the content market if the merger does not take place. For this reason, it can be assumed that it did not object to the principle of the approach presented by the General Director, according to which this doctrine should be adopted in the Israeli law. It seems to me that the assumption that the doctrine applies under Israeli law is not a trivial one, and that before we do so we should first examine whether it is consistent with the provisions and purpose of s.21 of the Restrictive Trade Practices Law, which establishes the criteria for the approval or disqualification of a merger to which Chapter C of the law applies. More specifically, it is necessary to determine whether the damage to competition or to the public discussed in the above-mentioned s.21 also refers to future damage in that industry, due to the loss of a potential competitor that would have entered the market but for the merger. Justice Naor, in her introduction to the first volume of the treatise Legal and Economic Analysis of the Antitrust Laws, edited by Michal Gal and Menachem Perlman, dealt with the need to adjust doctrines and rules taken from comparative law in the field of antitrust (and in general), before they can be adopted in Israeli law. She noted that a wealth of literature and many rulings can be found in comparative law relating to antitrust law, but she also added that “in seeking to implement in Israel what has been read and learned from American or European law, one necessarily encounters an barrier. The question necessarily arises as to whether the solution found in another location is appropriate for “the conditions in Israel and of its residents” and to the Israeli law?” (Ibid., 15).

The potential competitor doctrine and Israeli law

27.          In the Dor Alon [2] case, Justice Procacia noted that “given the purpose of the Restrictive Trade Practices Law to encourage competition and to protect the consumer, a substantial expectation of a future change in the relevant market should have some importance in the context of an estimation of the competitive nature of this market in the coming times.” (Dor Alon, para. 56). In that case, it was held that according to the market’s condition at the time of the petition’s adjudication, the horizontal merger that was under

 

 

discussion, between Dor Alon Energy in Israel (1988) Ltd. and Sonol Israel Ltd., presented a reasonable risk of significant damage to competition in the fuel industry (in markets that had been defined for this purpose). However, the companies seeking to merge made the argument that future developments (the privatization of the refineries) which were expected to take place in the fuel industry, having no connection to the merger, would be able to reduce this damage and even to eliminate it because of, inter alia, the benefit that the merger would create for them in terms of the ability to compete in an effective manner and for the consumer’s benefit against parties that were stronger than them, following the change that was expected to take place in the system of powers within the industry. The Court was ready to take these future changes into consideration as part of the necessary considerations for determining the damage to competition and the likelihood of its occurrence, but regarding the matter itself, the Court believed that these were changes regarding which there was uncertainty as to the fact of their occurrence, their size, and the range of time in which they would take place, and the Tribunal therefore believed that these changes were not sufficient to affect the conclusion regarding the existing reasonable risk regarding significant damage to competition, which justified the disqualification of the merger.

The argument made by the General Director in our case differs from the one made by the petitioning companies in the Dor Alon case. The main part of her argument is that future damage is expected to take place if the merger is approved, because of what she claims is the high probability that without the merger Bezeq will enter the multi-channel television broadcast infrastructure market and content market and that this will improve the competition in the industry. At the same time, I believe that s.21 of the Restrictive Trade Practices Law can, both in terms of its language and the goal that it seeks to achieve, be interpreted so as to make it possible to take into account the reasonable risk of future harm to competition, as stated. The common denominator between the claims raised by the General Director in this case and the claims raised by those seeking the merger in Antitrust v. Dor Alon [2] relates to the fact that in both cases, in order to achieve the purpose at the basis of the antitrust laws – encouragement of competition and protection of the consumer – future developments are taken into account, developments the probability of which can be estimated, and which impact on the General Director’s decision as to whether the merger should be approved or opposed.   (Regarding the estimation of future developments as

 

an integral part of the economic analysis of mergers and of the effects on competition that such developments involve, see and compare: Menachem Perlman “Merger Review in Israel: An Examination of the Dor-Alon –Sonol Decision,” Ta’agidim 5/2, 98, 105-107 (2008); Grounds for the General Director’s Objection to Merger Between Orlight Industries (1959) Ltd. – Inbar Reinforced Polyester Ltd., Chapter D.1 (November 9, 2006)). As we have now held that the actual potential competitor doctrine can be applied in Israeli antitrust law, we need to add that this should be done with the necessary caution, keeping in mind that this is a doctrine that expands the scope of the supervision of mergers and the damage to the fundamental rights of the merging entities, and further keeping in mind the local market conditions and the fact that the Israeli economy is primarily a small and concentrated one. In this type of economy, a too strict merger control may overshoot its purpose and lead to the loss of the efficiency benefits that can be inherent in mergers. (See, Michal S. Gal, Competition Policy For Small Market Economies 195 (Harvard Univ. Press 2003)).

28.          Because we cannot immediately reject the General Director’s reliance on the actual potential competitor doctrine, we will now examine whether the conditions for the application of the doctrine are present here in this case and whether they justify the disqualification of the merger, or whether, as the Tribunal saw, the existence of such conditions have not been proven and the merger should therefore be approved. (Later, we will refer to the fact that the Tribunal established conditions [for the merger] even though it concluded that there was no reasonable risk in this case of damage to competition, and to the difficulty presented by this establishment of conditions [for the merger]). But before we examine the existence of the conditions for the application of the doctrine in this case, we must first note that the condition relating to the company’s characteristics, ability and economic incentive to enter into the relevant market but for the merger is a condition that needs to be examined in accordance with objective evidence and an economic analysis of the company’s relevant conduct under market conditions. It is therefore unnecessary in this context to introduce the testimony of the company’s senior officials or its internal documents which indicate that it intends to enter the market as an independent competitor if the merger is not approved. At the same time, to the extent that such subjective evidence does exist, it can assist the Court in making a determination regarding this issue. (See: Bush & Massa, Rethinking the Potential Competition Doctrine, Wis. L. Rev. at 1069 (2004); FTC v. Atlantic Richfield Co. [23] at 297-298. We also need to point out that the probability that needs to be proven with respect to the firm’s

 

 

independent entry into the market must be at the level of a reasonable probability (see and compare, United States v. Siemens Corp. [24] at 506-

507 (2d Cir. 1980)), and in my view it is not necessary to use an insurmountable threshold, given that this is an estimation of future developments. The period of time in which, according to the estimation, the potential competitor could enter the market is another significant detail, which is derived to a substantial degree from the characteristics of the market under discussion. (See and compare: Orit Farkash-HaCohen “Technological Innovation Considerations in Examining Reviews according to the Antitrust Laws – the Bezeq-DBS Case,” Ta’agidim 5/3 135, 165 (2008) (hereinafter: Farkash-HaCohen)). Thus, for example, the United States Court of Appeals for the Fifth Circuit found that if it had been proven that a company seeking to merge would have been able to enter the market within a period of two to three years, the Court would have been willing to see it as an actual potential competitor (Mercantile Tex. Corp. v. Bd. of Governors , 638 F.2d 1271- 1272 (5th Cir. 1981) [25]). In another case, the United States Court of Appeals for the Fourth Circuit stated that the potential for entry into the market within a period of 10 to 19 years, did not, inter alia, transform a company into a potential competitor (FTC v. Atlantic Richfield Co) [23] at 295.

Finally, I will point out that I tend towards the view that a General Director who seeks to object to a merger because of a reasonable risk of damage to competition bears the burden of proof that such a risk does exist (see: Michal Halperin, “Dor Alon-Sonol Case – How Should a Litigation in the Antitrust Tribunal Appear” Ta’agidim 5/2, 60, 75-82 (2008); Shlomi Prizat, “The Dor-Alon Decision: The Right Result – Dangerous Rationale,” Ha’aretz (December 11, 2006)) It appears to me that this approach is appropriate and even more so when the General Director seeks to apply the actual potential competitor doctrine, which relates to future damage to competition. And note – in the Dor Alon case, the Court tended towards the approach that the burden of proof was imposed on the party seeking to the merger to show, through its estimations, that in light of the market’s future condition, the merger will benefit competition and this is a burden of proof of the positive estimations that support the position of the party seeking the merger. In contrast, in our case, the General Director claims that the disqualification of the merger will benefit competition in the future, and it appears to me that the burden of proving this claim is imposed on her. Either

 

way, this case, like its predecessors, does not justify a rigid determination of the matter of the burden of proof, which has more than once been held to be “a matter that goes both ways” (General Director v T’nuva [1] at 231; Antitrust Authority v. Dor-Alon [2] at para. 27), since, unlike the Tribunal’s holding and as shall be described below, the General Director did present sufficient evidence which establishes that, as she claims, there is a reasonable risk of damage to competition.

Can Bezeq be seen as an actual potential competitor in the multi-channel TV broadcast market?

29.          The Israeli multi-channel TV broadcast infrastructure market and content market are, as stated, duopolistic markets and in effect, Yes and Hot currently compete while each maintaining an integration between [their operations in] these two markets. In this situation, the markets are characterized by high barriers to entry and the Grunau Commission noted this as follows:

„The multi-channel TV broadcast sector is controlled by a duopoly. This control is reflected by high prices for service as compared to the rest of the world, and by barriers to entry faced by independent content providers

[ . . . ]

 

Consequently, the duopoly in the infrastructure area becomes a duopoly in the multi-channel TV broadcast area. The owner of the infrastructures determines not only the content of the channels that it produces, but can also impact on the content of independent producers while damaging the range of choice available to the consumer.’

(Grunau Commission, pp. 76, 103).

In the terms of the infrastructure market, Bezeq is currently the only company in the Israeli economy which has the ability to construct, within the foreseeable future, an additional infrastructure (in addition to the cable and satellite infrastructures) using Internet Protocol Television technology and using its fixed telephony network, which, because of the scope of that network’s deployment, gives Bezeq access to most households in Israel. Such an infrastructure requires the laying of copper and/or optic fiber cables reaching each household and it therefore constitutes a firm barrier to entry into the infrastructure market in the communications field. Bezeq does not face this barrier. In addition, Bezeq owns the longest public optic fiber

 

 

network in Israel and it has a customer base which already consists of almost a million customers who constitute two thirds of the subscribers to broadband access infrastructure services, which is used throughout the world for the transmission of IPTV broadcasts. Thus, Bezeq has unique starting data which allow it to advance the implementation of the IPTV technology. The Tribunal reached a similar conclusion, noting that “from a technological perspective, there is nothing preventing Bezeq from constructing a public broadband network which allows for the transmission of IPTV broadcasts or even the construction of a full IPTV infrastructure.” The expert appointed by the Tribunal, Engineer Daniel Rosen (hereinafter: Rosen), noted in this context, in his opinion dated May 27, 2008, that Bezeq can already enter the infrastructure market at the current time and provide IPTV services at Standard Definition (not High Definition) quality, along with high speed Internet access at the rate of 1.5 to 2 MB, although the provision of services at this quality will make it necessary to deal with the bandwidth limitations of the access network and with the fact that the network will be required to provide additional services that will weigh it down. The expert further noted that if Bezeq wishes to provide IPTV services based on Multicast at a significant level, together with high speed Internet access at the speed of 5 to

8 MB, Bezeq will need to make a certain investment in upgrading the infrastructure (including upgrading the network, construction of access networks, an appropriate core and attachments, and the establishment of service provision centers). And in contrast to Bezeq’s claim, Rosen noted in his opinion dated July 23, 2008, Bezeq had, in a notice which it delivered to the Israel Securities Authority on June 29, 2008 and in a press release dated June 20, 2008, stated that it had made a decision to continue with the NGN project, and this shows that Bezeq had made a strategic decision to “take the path of significant change in the access network, which will lead to a significant improvement in its operation, and not to take the path of small scale upgrades and improvements,” noting that it will be possible to use this network for the purpose of providing IPTV services. Rosen does not indicate an estimated date on which Bezeq is expected to be able to provide IPTV services in the context of this model, but his expert opinion [statement] indicates that this will be, at the latest, within a few years. This estimation is strengthened by the fact that according to the conditions established by the Tribunal in its ruling, Bezeq is required to construct an infrastructure that will make it possible to provide IPTV services to 80% of Israeli households

 

within three years, and Bezeq announced on May 3, 2009 that it accepts the conditions set by the Tribunal, including this one. This indicates that in terms of technology, Bezeq is able, within three  years, to construct the necessary infrastructure and to provide IPTV services at a level that covers most Israeli households. The Tribunal’s findings also indicate that within this time period, there will be no other technology which would be able to serve as a real alternative to the IPTV technology. As a side point, I note that I highly doubt that it would have been correct, to begin with, to define two out of the three additional technologies examined by the Tribunal in this context (DTT and Internet television) within the markets that are the subject of the merger ([i.e.,] paid multi-channel TV broadcasts).

Thus, Bezeq has the technological ability to provide IPTV services within three years, and there is no other party in the Israeli market that has the ability, within the said time period, to provide these services or other infrastructure services that can compete with cable or satellite infrastructures. Therefore, it is necessary to further examine, in terms of economic feasibility and of other matters, the likelihood that, but for the merger, Bezeq would constitute a potential competitor in the relevant markets. It is also necessary to determine whether Bezeq’s entry into these markets is expected to significantly reduce the concentration in those markets or to lead to other substantial pro-competition advantages, as compared to the merger.

30.          The Tribunal noted in its ruling that but for Bezeq’s holdings in Yes, there is no doubt that it would not have approved the merger, “even if the issue was [Bezeq’s] reaching a much lower share than 58% . . . a fortiori in a situation of acquiring control.” The Tribunal also noted that in a situation in which Bezeq would have  sought to first acquire  the shares  in Yes, the existence of an alternative buyer that is not the owner of an additional infrastructure, such as Eurocom which declared its interest in the context of the petition to join the proceeding that it filed on August 11, 2008, would have simplified the decision not to approve the merger because of the clear pro-competition effects of the control over Yes by a purchaser that does not own an additional infrastructure and without having the potential to construct such an infrastructure. Nevertheless, the Tribunal noted, this is not the case that was put before it when asked to deal with the merger under discussion. This is because the matter here is not, in the Tribunal’s words, an “ideal” one in which Bezeq seeks to acquire shares in Yes for the first time, but rather a situation in which Bezeq already has a serious interest in Yes. According to the Tribunal, “the competitive difficulty has already been planted in the current situation. Even if the merger increases the problem, it does not create

 

 

it.” Therefore, and even though it accepted the General Director’s key position that “such a control situation in a market of this type is worse, in terms of competition,” the Tribunal reasoned that the competition map described by the General Director without the merger is not a realistic one.

Indeed, the fact that Bezeq currently holds 49.78% of the shares in Yes creates a unique situation which is different than the regular case in which the actual potential competitor doctrine would apply. This is because even though Bezeq is not currently a competing party in the multi-channel television broadcasts infrastructure market or content market, the size of its current holdings in Yes certainly positions it, already, as an interested party in these markets. However, this fact does not, in my view, automatically negate the possibility of seeing Bezeq as a potential competitor in the markets in which we are dealing, nor does it justify the approval of the merger. This Court has, in the T’nuva case, rejected the view that in a market which is already defective in terms of competition, there is no ground for objecting to a merger, when it held as follows:

 

„The Tribunal held that in this case there has been no significant damage to competition because of, inter alia, the fact that the competition in the relevant industry is at any rate flawed and defective because of, inter alia, the respondent’s power and strength, and the proposed merger is therefore nothing more than a small addition of to a large degree of concentration. Such an addition, the Tribunal determined, does not constitute “significant damage” to free competition. We cannot accept his determination. Its practical significance would be that the controlling entity in a particular industry, or the entity which constitute a dominant component thereof, is “immune” from the General Director’s control because of the market power it holds. Such a conclusion is in absolute opposition to the goals of the antitrust laws, which we have noted above. Indeed, the General Director’s authority and the power granted to him do not refer only to the prevention of control in a particular industry as such, but also to the prevention of the strengthening of existing control, if such strengthening can lead to significant damage to competition. Thus, for example, it could be that  a  certain merger  will  not  bring  about  a  significant  increase  in  the

 

concentration in the relevant industry – because there is a significant level of concentration in that industry at any rate, prior to the merger – but it will nevertheless create significant damage to competition due to the existence and creation of significant barriers to entry for new competitors, barriers that will arise as a result of the strengthening of the dominant power in the market, and not necessarily only as a result of the creation of such a power.’

(General Director v. T’nuva [1] at 239-240. Emphasis in the original.)

 

The rationale at the basis of these remarks applies to our case as well. Nevertheless, the fact that Bezeq currently holds 49.78% of the Yes shares is certainly a significant detail for the purpose of analyzing the degree to which it would be economically worthwhile for Bezeq, absent the merger, to enter into the markets under discussion as an independent competitor, and we will discuss this below.

31.          The Tribunal’s holding that the competition map described by the General Director without the merger is unrealistic is based on two key foundations: one relating to the legal and regulatory prohibitions that apply to Bezeq in the content market, as a party holding shares in Yes, and to the view that Bezeq has no economic interest in constructing an IPTV infrastructure without the possibility of becoming a broadcaster. The other deals with the degree to which it is economically worthwhile for Bezeq, as a party holding shares in Yes, to establish an independent broadcasting arm or separate infrastructure. In this context, the Tribunal points out, inter alia, that Bezeq would need a critical mass of subscribers in order to justify direct competition with Yes, which is a difficult matter [to achieve] in the saturated Israeli market. The Tribunal further noted that the General Director did not present economic calculations which indicate that despite its current holdings in Yes, it would still be worthwhile for Bezeq to compete with Yes, even if one takes into consideration the incentives that Bezeq has, given its activities in additional markets (the telephony and Internet markets).

The Tribunal attributed significant weight to the existence of statutory and regulatory restrictions that apply to Bezeq in the content market in light of its holdings in Yes’ broadcasting platform, and noted the smalll probability that the statutory restrictions would change and that the ability to overcome the regulatory restrictions is unclear. I believe that in this regard,  the Tribunal  was  correct.    Indeed,  s.6H4(a)(2)  of  the  Communications  Law

 

 

(Telecommunications and Broadcasts) prohibits the granting of a general broadcasting license to a party that owns means of control in another broadcasting licensee:

„A general cable broadcasting license or a video on demand license will not be granted to a corporation regarding which one of the following is true, whether such condition is met directly or indirectly:

. . .

It is a corporation in which another broadcasting licensee holds any type of means of control, or which controls any type of means of control in another broadcasting licensee or in a newspaper.

A party owing means of control is defined at the definitions section of the Communications Law (Telecommunications and Broadcasts) as follows:

“means of control” in a corporation means any one of the following:

(1)          A right to vote in a company’s general meeting or in a comparable body in another type of corporation;

(2)          The right to appoint a director or general manager;

(3)          The right to participate in the corporation’s profits;

(4)          The right to share, at the time of the corporation’s dissolution, in the surplus of its assets after its debts have been discharged.’

This definition indicates that nowadays, and prior to the merger, Bezeq is an “owner of means of control” in Yes, which is a satellite broadcasting licensee by virtue of Chapter B-2 of the Communications Law (Telecommunications and Broadcasts), and under these circumstances, Bezeq is indeed prevented from obtaining a broadcasting license. The General Director claims that the many amendments (42 in all) that have been made to the Communications Law (Telecommunications and Broadcasts) since its enactment in 1982 show that a legislative amendment in this context cannot be ruled out even in the short term. . However, this approach is difficult to accept, especially in the short term in light of the absence of any indication whatsoever of an intention to make such an amendment. (See and compare the   Dor   Alon   [2]   case,   paras.   56-63).      Section   6H4(a)(5)   of   the

 

Communications Law (Telecommunications and Broadcasts) provides that the subsidiary of a company which is an interested party in another corporation which has obtained a broadcasting license is also prevented from obtaining an additional broadcasting license, but the Minister of Communications, with the consent of the Cable and Satellite Broadcasts Council and with the approval of the [Knesset] Finance Committee, may grant such a license if it is persuaded that [such a license] can benefit competition and the variety of the broadcasts offered to subscribers, in the following language:

 

„. . . A corporation that an interested party in which is also an interested party in another corporation which has obtained a general cable or video on demand broadcasting license, or regarding which a party holding more than 24% of any means of control whatsoever in it also holds more than 24% of any means of control in a corporation that has obtained a satellite television broadcasting license, unless the Minister has determined, with the consent of the Council, that it will benefit competition in the area of broadcasts and the variety of the broadcasts offered to subscribers, all in accordance with the provisions, conditions and restrictions established by the Minister after consulting with the Council and with the Committee’s approval.’

(Emphasis added.)

 

The General Director argues that the Tribunal erred in determining that it is unreasonable that the regulator in the field of communications would allow a Bezeq subsidiary, which is the largest shareholder in another company that has a broadcasting license, to enter into the content field and have substantive control over two out of three content platforms. According to her, the grant of a broadcast license to a Bezeq subsidiary does not involve a legislative amendment and such a grant is within the authority of the Minister of Communications, subject to the conditions established in the section. According to the General Director, there is thus no barrier blocking the receipt of such a broadcasting license, if the Minister of Communications is persuaded that this would mean the entry of a competitor into the content market, an entry which would be pro-competitive and would add to the variety of the broadcasts. Indeed, where the Minister of Communications is given  the  authority  to use  his  discretion  in  deviating  from the  statute’s

 

 

prohibition against granting a license to a subsidiary, with the approval of those bodies listed in the statutory section, it cannot be said that there is no probability that such a license will be given, but this is not sufficient for purposes of applying the actual potential competitor doctrine and it is necessary to show that there is a reasonably likelihood that such a license will be granted to a Bezeq subsidiary. Such a probability has not been proven in this case.

Thus, the Tribunal’s conclusion that there is only little likelihood that, due to the statutory and regulatory restrictions, Bezeq will, either itself or through a subsidiary, compete in the content market is a well-founded conclusion and we should not interfere with it.

32.          However, the General Director’s emphasis regarding the concern for competition is, to begin with, in the area of infrastructure. Mr. Roy Rosenberg, the deputy director of the Israel Antitrust Authority Economics Department noted this in his testimony:

„Q: In order for it, theoretically, to obtain a broadcasting company license, it is necessary to amend the law, correct?

A: Correct, but I would again state, the concern regarding competition is not from the content side, it comes from the side of the infrastructure for transmitting the content.’

(Transcript of the May 11, 2008 session, pp. 83-84. Emphases added.)

In the area of infrastructure construction, Bezeq is not subject to any statutory or regulatory restrictions. Therefore, it is necessary to determine whether, as the General Director argues, the Tribunal erred in holding that there is little likelihood , in terms of its economic feasibility, that Bezeq would compete in the infrastructure market, using the IPTV technology.

In making her arguments, the General Director points out that the degree to which it is worthwhile for Bezeq to compete in the infrastructure market results from, inter alia, the benefit that the construction of the IPTV infrastructure will give it in additional markets, such as the Internet and telephony markets, and she notes that it is worthwhile, in this context, to look at a broad picture which includes the varieties of markets in which Bezeq competes with other communications companies. According to the General Director, Bezeq’s most significant competitor is Hot, which offers its customers a “triple play package” of Internet, telephony and multi-channel

 

television broadcasts. This marketing option results from technological developments in the communications field as a consequence of which there has been a trend towards “product convergence” – i.e., the transmission of various products and services on infrastructure platforms which in the past had been dedicated to only a single product. This trend allows for the marketing of “packages” to consumers, and economic benefits to infrastructure owners because of the access to a variety of sources of income, while achieving benefits of scale and variety and savings in costs. The benefit that the market receives, from a competition perspective, results from the fact that the number of players operating in each branch can be increased and can lead to change in their relative weight.. This trend necessarily impacts on an analysis of the market in terms of competition, because of, inter alia, the increasingly significant importance attributed to business decisions made by players in the communications industry and to the impact of these decisions in a broader prism. (See, in this context: The 2005 Decision). In this context, it should be recalled that in the telephony and Internet field, Bezeq is a declared monopoly and the General Director believes that Hot’s increasing strength, which results primarily from its ability to offer the above-mentioned type of attractive “packages” comes, in these markets, at Bezeq’s expense, and Bezeq therefore needs a substantial television branch that it can control. The General Director also pointed to the additional incentives that Bezeq has for competing in the infrastructure market in this case. (For example, the differentiation offered through its infrastructure, as compared to the cable infrastructure). However, although the Tribunal accepted the General Director’s position in this matter at the level of principle, it found that “this claim was not proven through appropriate calculations or through an appropriate economic analysis.” The Tribunal therefore held that the “General Director has not carried the burden of proof on this topic.”

I cannot accept this conclusion. Indeed, the General Director did not present an economic analysis at the level of calculations and numbers regarding the economic feasibility for Bezeq of entering into the infrastructure market without the merger, given its holdings in Yes, and it may certainly be that if the General Director had not been able to present detailed subjective proof in this case showing Bezeq’s intentions in this context, it would not be possible to be satisfied with a general presentation of the benefits and economic incentives that Bezeq would receive from independent competition in the infrastructure market. But even if we start with the assumption that the burden of proof was on the General Director

 

 

(and as noted above, I tend towards accepting that view), it appears to me that the subjective proofs that the General Director did present in this case, along with her economic analysis, were sufficient to shift the tactical burden to Bezeq to show that despite such proof, it is not, in this case and in light of its holdings in Yes, have been economically worthwhile from Bezeq’s perspective to compete independently in the infrastructure market with the IPTV technology. In other words, the party that was required to present calculations and numbers regarding the lack of economic feasibility in this case was Bezeq, and it did not (present such calculations and numbers).

33.          The extent to which Bezeq is do so interested in entering the infrastructure market with the IPTV technology can be learned from the position paper that it presented to the Grunau Commission in March of 2007, and in which the following, inter alia, was stated by her:

Bezeq is prepared to be recruited to the cause of promoting the consumers’ benefit regarding this important subject as well, and to commit to and to invest the significant amounts required to establish the IPTV services. Bezeq is prepared to invest significant amounts in the construction of the IPTV system for the transmission of content to the customer’s home, including the hardware, and it will be willing to allow any content provider to transmit content on this platform on the basis of income sharing (or on any other transactional basis). . . .

Bezeq sees the investment in upgrading of its infrastructures and the expansion of its operations in the content area through the IPTV platform as an act that will expand the possibilities offered to the content and multi-channel television broadcasts consumer. In the presence of appropriate conditions for investment, Bezeq believes that the addition of a third  multi-channel television broadcast platform will help to significantly improve the Israeli consumer’s welfare, for the following reasons, inter alia:

„The IPTV technology has a technological advantage over the cable and satellite platforms in that it allows many content providing entities to offer their contents alongside each other on this infrastructure, with relative ease . . . their entry will contribute   to   increased   competition   in   the   multi-channel

 

television broadcast market and will lead to a reduction in the costs of the services that are currently offered in this market.

In addition, it is reasonable to assume that those providing content on the IPTV network will launch a wide variety of commercial offers and channel packages at varying prices. It is also reasonable to assume that the launching of the IPTV services in this spirit will force the existing competitors to respond and offer more “basic” packages of multi-channel television broadcast services . . .’

(Bezeq’s preliminary position regarding policy and competition rules in the field of Israeli communications, March 2007, pp. 170-18 (hereinafter: the Bezeq Grunau Commission position)).

 

Furthermore, Bezeq, for the purpose of presenting its position to the Grunau Commission, relied on the General Director’s approach in this context and noted the following:

 

"The Israeli Antitrust Authority [the IAA] has also recognized the importance of the IPTV platform for competition in the multi-channel television broadcast market in Israel, and has also recognized the fact that Bezeq is the only entity in Israel that has the ability to provide these services. This is also the ground on which the IAA based its objection to Bezeq’s application for an approval of a proposed merger with Yes, noting that this merger could affect the penetration of the IPTV services".

(Bezeq Grunau Commission position, p. 17)

 

Thus, Bezeq’s position to a government committee dealing with the communications market was that Bezeq would, without the merger, construct an IPTV network that would compete with the existing players in the market and would thus contribute to a reduction in prices, to an improvement of the variety and quality, and to the integration of additional players in the multi- channel television broadcast market. The conditions that Bezeq listed for this purpose in its position paper refer primarily to the regulatory horizon, but unlike its position before us today, the position paper does not mention the approval of the merger as a condition for the Bezeq’s construction and operation of the IPTV network.  To the contrary, its discussion there of the

 

 

General Director’s position, and its reliance on that position, indicates the opposite.  The Tribunal did not see fit to attribute any weight to this clear position taken by Bezeq before the Grunau Commission and was satisfied with finding that “there [when facing the Grunau Commission], Bezeq exalted the importance of the IPTV infrastructure’s implication for increasing competition in the multi-channel television broadcast field.”  It seems to me that the Tribunal erred in doing so and that in light of the correlation between the estimations presented by the General Director regarding the competition map without the merger and the position taken by Bezeq regarding this subject before the Grunau Commission, it was appropriate to attribute greater weight to these comments than the Tribunal did.   Similarly, and as noted above, Bezeq is already currently at the peak of an expensive upgrading process to the NGN network, without it having been promised the regulatory horizon which it sought to receive in the position paper that it had presented to the Grunau Commission.  Under these circumstances, I do not believe that Bezeq can rely on the conditions that it had presented to the commission (which, as stated do not include the approval of the merger) as the basis for an argument that it will not carry out another process that will put the NGN into use as an infrastructure for the provision of IPTV services as well.

34.          Additional subjective proofs that were presented, indicating that there is reasonable likelihood that Bezeq will compete in the infrastructure market by providing IPTV services without the merger, can be found in the two presentations made by the TASC consulting firm (hereinafter: the consulting firm), which summarize an economic paper that it prepared for Bezeq without any connection to the proceeding being conducted in the Tribunal. The presentations are dated May 2006 (a year before the submission of the position paper to the Grunau Commission and some three months before Bezeq’s application to the General Director for approval of the merger). The first presentation is entitled “Bezeq’s IPTV Strategy” (hereinafter: the "first presentation) and the second presentation is called “Bezeq and Yes: Future Ownership Alternatives (hereinafter: the  second presentation). The first presentation analyzes the share of paid multi-channel television broadcast in Israel compared with other markets in the communications field, and it notes that the trend in the market is beginning to indicate a turn in the direction of Hot. It also states that there is an urgent need to provide a solution to Hot’s abilities concerning VOD service, triple play service packages and content. The   presentation   further   indicates   that   many   fixed   communications

 

companies throughout the world have begun to enter into the multi-channel television broadcasts market through IPTV technology, primarily in order to protect their market share  in the  fields of telephony and Internet. The presentation describes Bezeq’s need to establish a television branch and Bezeq’s business possibilities in relation to Yes. The presentation reviews three possibilities in relation to Yes - the possibility of selling off the Yes holdings; the possibility of moving up to control of Yes; and the possibility of preserving the existing situation in the short run and taking action within a range of several years. In each model, the proposal is that Bezeq should establish an IPTV infrastructure and enter into the content field – either through the purchase of full control of Yes or through its independent entry into the market, in accordance with the strategy that Bezeq seeks to follow in relation to Yes. Regarding the last possibility - i.e., the preservation of Bezeq’s current holdings in Yes (the situation with is relevant for this matter in light of the stipulation reached by the parties regarding the possibility that the merger is not approved) - one option is presented, which is the establishment of an IPTV infrastructure along with independent entry into the content market with or without Yes – (“create retail TV operation (with or without) Yes.” The conclusion set out in the first presentation is that “a physical and commercial connection” between multi-channel television broadcasts and broadband services can improve and strengthen Bezeq’s share of the general market in the areas of its operation, and provide a solution to the encroaching of other communications companies on Bezeq’s market shares in telephony and Internet, even though the second presentation states that Bezeq’s activity in relation to its holdings in Yes will not have any impact on the telephony or Internet markets: “Under any of the options we don’t foresee a major impact to the telephony or broadband market share.” (Page 28 of the second presentation.) These documents, which were prepared for Bezeq from the strategic-economic perspective and not for the purpose of conducting the legal proceeding, can serve to indicate that according to the consulting firm, the logical economic option for Bezeq, if the merger is not approved, is to enter the field of multi-channel television broadcasts independently – both as the owner of the IPTV infrastructure and as a broadcaster.

 

The Tribunal did not attribute any evidentiary weight whatsoever to these presentations and noted: “We have not been persuaded that the presentations from Sh’chori (the CEO of the consulting firm) represent a decision made by Bezeq to do what is alleged, since   we have not been shown any  decision

 

 

made by the Bezeq board of directors as a consequence of the presentation.” It added: “It has not been clarified that from Bezeq’s perspective, Sh’chori was the party that exhausted the examination of economic feasibility, and that following his examination, a positive decision was made by the board of directors. As I noted above, this demand made by the Tribunal to find a “smoking gun” among the documents of the companies seeking to merge is unreasonable and unnecessary. There is no need and no obligation to show that the board of directors of a company seeking to merge has made a decision to carry out an independent competition move which was certainly not, at the stage of the submission of a notice of merger, its preferred option. There could be cases in which subjective evidence will not be found at all but it will still be possible to show, through objective proof, a reasonable likelihood of the existence of an actual potential competitor absent the merger. In the present  case, the presentations that were brought to the Tribunal – especially in light of the position taken by Bezeq regarding the same matter one year later before the Grunau commission – do indicate the fact that Bezeq carried out a serious economic analysis and examined, inter alia, the possibility of entering into the infrastructure market, and to the extent possible, into the content market as well, and it later on even adopted a position that promoted such a process, which it saw fit to present to the government commission dealing with the subject. (Regarding the existence of a serious examination of the possibility of entry into the market by an actual potential competitor as proof of the ability to apply the doctrine in a concrete case, see Areeda & Turner, Antitrust Law, s.1121b). In my view, all of these, along with Bezeq’s actions in promoting the construction of the NGN network, are enough to indicate a reasonable likelihood that without the merger, Bezeq is an actual potential competitor in the market of infrastructure for the provision of IPTV services, even given its current holdings in Yes. Since Bezeq did not, through any of its evidence, contradict the existence of this probability (and its general argument regarding the market’s being saturated is not sufficient for this purpose), the Tribunal should have held that such a likelihood did exist.

35.          An additional condition presented by the [application of the] actual potential competitor doctrine is that an alternative entry into the market, other than through the merger, is preferable to the merger from a competition perspective. In our case, the General Director indicated that Bezeq’s independent  entry   into  the  infrastructure   market   presents   remarkable

 

competition advantages: (a) it is expected to increase the number of the relevant players from two to three in the near future, and this is a real development in terms of reduction of concentration in this market, given that the entry of a different technology other than IPTV into the infrastructure market, in addition to cable and satellite, is not likely to happen in the short term; (b) in general, competition between infrastructures is preferable to competition on the infrastructures (even the Grunau Commission noted that this model naturally restricts the number of the relevant players to the number of infrastructure owners, and that in a saturated market characterized by a small number of competitors, it is not clear that this is the most effective model of competition, and according to the Commission the desirable solution in these markets is the development of a wholesale market in the context of which providers can lease or operate on other parties’ infrastructures – see: Grunau Commission Report, pages 5-6, 77; Rosen’s testimony on June 18, 2008, p. 58); (c) an additional independent infrastructure with new technology can contribute to the improved quality of the broadcasts (which is dependent on the capacity of the infrastructure and on the technology which it uses), improved variety of broadcasts (which is dependent on the capacity of the infrastructure and on the number of channels which it can bear), and the correlation between consumer demand and supply (uniform broadcasting, channel packages, a VOD channel, consumption of isolated channels, and more); (d) Bezeq’s independent entry into the infrastructure market only, using the IPTV technology, has advantages for the content market as well; to the extent that Bezeq will construe the IPTV network and will not be able to broadcast on it itself because of the statutory and regulatory restrictions discussed above, there is potential for an additional expansion of the number of broadcasters who can broadcast at the same time, in light of the technological abilities of the IPTV network, and this would reduce the barriers to entry into the content market; (e) Bezeq’s independent entry into the infrastructure field as a third and independent competitor can bring about a reduction in Hot’s and Yes’ market power in terms of purchasing contents from content and channel producers.

In contrast, if the merger is approved, Bezeq will become the controlling shareholder of Yes as the party holding 58.36% of the shares in it, and it will hold the right to appoint most of the members of the board of directors, compared to its current right as the owner of 49.78% of the shares to appoint only 5 out of 11 members of the board of directors. Bezeq’s crossing of the 50% holding line with respect to its holdings in Yes has a far- reaching significance in terms of its ability to steer Yes’ business’ program

 

 

and to make use of it as a tool for promoting its own interests, compared to the current situation in which Yes is free to be conducted according to its own economic interests, as distinct from Bezeq’s.

Section  278  of  the  Companies  Law,  1999,  provides  as  follows regarding this matter:

„(a) A director who has a personal interest in the approval of a transaction, other than a transaction as referred to in s.271, that is brought before the audit committee or the board of directors for approval, shall not be present during the deliberation and shall not take part in the voting of the audit committee and of the board of directors.

(b)          Notwithstanding the provisions of subsection (a), a director may be present at a deliberation of the audit committee and may take part in the voting if the majority of the members of the audit committee have a personal interest in the approval of the transaction; likewise, a director may be present at the deliberation of the board of directors and may take part in the voting if the majority of the directors of the company have a personal interest in the approval of the transaction.

(c)           Where the majority of the directors on the board of directors of a company have a personal interest in the approval of a transaction as aforesaid in subsection (a), the transaction shall also require the approval of the general meeting.’

 

Therefore, in the current situation, Bezeq’s directors [on the Yes board] could not take part in a vote relating to a transaction between Yes and Bezeq. However, an increase to control of beyond 50% of Yes and the appointment of the majority of the directors by Bezeq – upon the exercise of the options and the occurrence of the merger – would lead to a cancellation of the obligation to abstain pursuant to the above-mentioned s. 278 (b). It should be mentioned in this context that after the 50% holding line is crossed, Bezeq can increase up to a holding of 100% of Yes, apparently without an additional point of control on the part of the General Director (according to the guidelines that she follows). One possible scenario in this situation is that Bezeq will work to make the IPTV technology, instead of the satellite infrastructure, available to Yes. In terms of the relevant market, this does not

 

change the number of players in the market – the market in this situation was and will remain a duopoly, but instead of a satellite infrastructure, Yes will operate as a content brand on the IPTV infrastructure and this situation could lead to the atrophying of the satellite infrastructure. (Regarding this matter, see Farkash-Hacohen, 164-165). Even if it can be said that the exchange of one infrastructure (satellite) for a more advanced one (IPTV) has advantages in terms of the quality of the broadcasts and the level of customer service (a definite advantage is the possibility of adding VOD service on this infrastructure), the scenario described above will establish the current duopolostic structure of the market, as compared to the competition advantages that we noted above which the market will gain in the absence of the merger, upon Bezeq’s entry as an additional competitor with the IPTV technology.

An additional possible scenario that could take place if the merger is approved, which would have consequences from a vertical perspective (in contrast to the competition advantages we noted above regarding what would happen if the merger were not approved), deals with the foreclosure of content providers competing with Yes, who will seek to “ride” on Bezeq’s IPTV infrastructure. This would happen even if Bezeq were to open this infrastructure to third parties ([based on the] open access [model]) after the merger’s approval and the construction of the infrastructure. We refer here to substantive foreclosure in the form of damaging the quality of the broadcast (compare In the Matters of Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer to Peer Applications, 23 F.C.C. Rcd 13028 (2008)) or by way of the cost set for the service (a price squeeze) [- practices that Bezeq could adopt] in order to preserve the duopolistic structure of the multi-channel television broadcast market vis-à-vis the end consumer and in order to preserve the market power of Yes, which will be controlled by Bezeq following the merger, vis-à-vis the content producers and the independent channel producers. Although Bezeq already has an incentive for foreclosing the market given the size of its holdings in Yes, this risk will grow in the face of the proposed merger, which will give it control over Yes and will increase its ability and its interest in carrying out such a process.

To sum up: two of the key conditions for establishing the potential competitor doctrine are present here – there is a reasonable likelihood that Bezeq, as a potential competitor, will enter into the multi-channel television infrastructure market and will provide IPTV services, and it has been proven that it has the technological ability and the economic incentive to do so in the

 

 

short term. Additionally, it appears that Bezeq’s [independent] entry into the multi-channel television infrastructure market as stated presents considerable advantages over the situation that would develop in this market if the merger is approved.

We still need to examine whether such a similar result could be achieved through the approval of the merger with conditions. As may be recalled, the Tribunal stipulated conditions for the merger in this case, even though it believed that there had been no proof that there was a reasonable risk of significant damage to competition. The General Director and Eurocom as well both correctly noted in their appeals the difficulty that the ruling raises in this context, and I will discuss this below.

 

The Tribunal’s authority to stipulate conditions for a merger which does not create a reasonable risk of significant damage to competition

36.          The Tribunal, as stated, found that the merger under discussion does not give rise to a reasonable risk of significant damage to competition, as the Tribunal noted:

 

„After examining all the material before us, including the testimony of the expert Rosen, we have reached the conclusion that the General Director’s vision that if the merger is not approved, an independent competing television broadcast infrastructure will arise is insufficiently grounded . . .

The economic analysis at the basis of the General Director’s position assumes future developments for at least some of which there is only a low probability of their taking place. In our view, all together, even if it is possible to see a risk of significant damage to competition, it cannot be said that this is a risk for which the likelihood of its realization exceeds 50%. Therefore, we cannot agree with the General Director’s position that the merger will significantly damage competition.’

(Emphases added, paras. 9 and 11 of the decision.)

 

Nevertheless, the Tribunal saw fit to stipulate conditions for the merger’s approval, for a situation in which the assumptions that are at the basis of the General Director’s position are realized, even though, as stated, it found that

 

the  chance  that  these  assumptions  would  be  realized  is  low,  stating  as follows:

 

„We accept that increasing the percentage of Bezeq’s holding in Yes strengthens Bezeq’s interests in Yes, and we agree that it is important to first ensure the construction of the IPTV infrastructure, and if it is constructed, to ensure that it is made available to other entities that compete with Yes. Therefore, in the event that all suppositions at the basis of the General Director’s position – the probability of which we have held is low – are indeed realized, we have seen fit to establish conditions for the approval of the merger, based on our view that the significance of the process of Bezeq’s achievement of control over Yes can be significantly reduced. Furthermore, the appellant has agreed to the principle of their imposition, and has even agreed to several of them concretely.

. . .

At the basis of the conditions which we intend to stipulate for the merger is, therefore, our evaluation that even without the merger, there are competitive restrictions in the market with which we are dealing, due to Bezeq’s existing holdings in Yes. Therefore, the imposition of conditions – which is made possible by the fact that Bezeq and Yes need the Tribunal’s approval – makes it possible to prevent significant damage to competition, and even to improve competition in the market, even if, in the unlikely  event, all of the General Director’s concerns are realized.’

(Emphases added, paras. 11 and 69 of the Decision.)

 

The Tribunal was aware of s.21 of the Restrictive Trade Practices Law, which provides as follows:

 

"The General Director shall object to a merger or stipulate conditions for it, if he believes that there is a reasonable risk that, as a result of the merger as proposed, the competition in the relevant sector would be significantly damaged or that the public would be injured in one of the following regards:

 

 

(1)          The price level of an Asset or a Service;

(2)          Low quality of an Asset or of a Service;

(3)          The quantity of the Asset or the scope of the Service supplied, or the constancy and conditions of such supply".

 

Nevertheless, despite the section’s language, the Tribunal believed that it could impose conditions for the merger, for which it was necessary to presume “significant damage to competition for the purpose of imposing them.” It further believed that where the Tribunal does not completely rule out the possibility of the realization of risks that the General Director has pointed out, conditions can be presented for the merger’s approval which can promote a reform that benefits competition, provided that they “basically prevent the damage to competition.”

I believe that the Tribunal erred in doing this.

Section 21 of the Restrictive Trade Practices Law clearly distinguishes between a merger that does not raise a risk of significant damage to competition, which the General Director is required to approve and a merger that does raise a reasonable risk of significant damage to competition or to the public interest regarding one of the matters listed in the section, and in such a case, the General Director may act in one of two ways – she can approve the merger while stipulating conditions that remove the risk of significant damage to competition; and if such conditions cannot be established, the General Director must oppose the merger. Section 22(c) of the Restrictive Trade Practices Law provides that “the Tribunal may reaffirm the General Director’s decision, revoke it or amend it,” but its authority to do so is also subject to the provisions of s.21 of the Law and to the normative framework established there (see Yagur, 639). In other words, the Tribunal, when adjudicating an appeal of a General Director’s decision, does not have absolute discretion to order as it wishes and it cannot stipulate conditions of a merger’s approval which, according to its own determination, does not give rise to reasonable risk of significant damage to competition in the relevant industry. Any other approach changes the balances of clashing interests as established in the Restrictive Trade Practices Law that relates to them, and changes the statutory arrangement created in s.21 of the Law which expresses these balances. These interests are the encouragement of competition and the

 

protection of the consumer on the one hand, and the preservation of freedom of occupation and the property rights of companies seeking to merge, on the other hand. Bezeq’s agreement to the imposition of the conditions under the circumstances that developed is not sufficient to grant the Tribunal authority in a case in which it has not been given that authority. However, in light of the conclusion we have reached according to which, unlike the Tribunal’s determination, there is in this case a reasonable risk of significant damage to competition according to the actual potential competitor doctrine, I did not see a need to decide what would be the legal fate of the conditions established by the Tribunal if we had reached a different conclusion (given the fact that Bezeq has not filed an appeal against the stipulation of the conditions).

37.          The principle that we follow regarding the remedy was well defined by the Tribunal, by the honorable Judge M. Shidlovsky-Or in Yehuda Pladot

v. General Director [12] , in the following words: “It is necessary to exhaust the possibility of stipulating conditions for the merger before concluding that it should not be approved, by virtue of the principle of proportionate harm to basic rights – in this case, the [right to] freedom of occupation and freedom of property.” (Yehuda Pladot v. General Director [12] at para. 70.) Therefore, we need to examine whether it is possible to avoid the result of a merger disqualification through the imposition of conditions for its approval and we also need to examine whether, for this purpose, the conditions set by the Tribunal can be adopted. As a rule, there is a tendency among antitrust authorities throughout the world to prefer structural conditions over behavioral ones as a response to the risk of damage to competition. (See: UK Merger Remedies: Competition Commission Guidelines, para. 2.14 (Nov. 2008); EU Commission Notice on remedies acceptable under Council Regulation (EEC) No 4064/89 and under Commission Regulation (EC) No 447/98; U.S. Department of Justice Antitrust Division Policy Guide to Merger Remedies at III.A (2004)). But this is not a rigid rule. (See: Katri Paas, Implications of the Smallness of an Economy for Merger Rememdies, Juridica International XV (2008)). In the DBS v. Cable and Satellite Broadcasts Council [4], the Tribunal noted that the regulatory policy and the standard remedies in the communications industry are based on open access for independent content providers to subscribers, and on restrictions on the scale of ownership of channels, and not on absolute separation between transmission and content (DBS v. Cable and Satellite Broadcasts Council par. 60 [4]). In the case before us, the main purpose which is achieved in preventing the merger is the addition of a competitor in the infrastructure market.  This

 

 

is a contribution to competition from a horizontal perspective through the weakening of the concentration in the existing duopolistic market, and it is hard to think of a structural condition in this case that will achieve this purpose. The behavioral conditions imposed by the Tribunal in this case raise significant difficulties, and not only because they require continued supervision regarding the activities of the merging companies and because the supervisory mechanism established in these conditions is complex and inefficient and relies to a great degree on future regulatory determinations by “the parties authorized by the Communications Law” who are supposed to give it substance even though these parties were not at all involved in this proceeding and it is doubtful whether it is possible, in this way, to impose on them powers and duties to determine “regulatory conditions for an entity which is broadcasting television broadcasts to have open access to Bezeq’s infrastructure” and to determine “uniform and reasonable usage fees.” The General Director expressed her position to the Tribunal and before us, that under the circumstances of this case, the competition risk cannot be resolved through the imposition of behavioral conditions that seek to ensure open access, because of the structural difficulty in ensuring such an arrangement where a single party (Bezeq) controls two out of three infrastructures in the market ( the IPTV and the satellite infrastructures, following the merger and the purchase of control of Yes). After examining the conditions stipulated by the Tribunal and all the arguments made by the parties in this context, I have not been persuaded that we can avoid disqualifying the merger in this case through the imposition of conditions. I therefore propose to my colleagues that we grant the General Director’s appeal, order that the Tribunal’s decision be cancelled and restore the General Director’s determination opposing the merger. I also propose to cancel the order charging the General Director with expenses, which was included in the Tribunal’s ruling dated March 23, 2009 regarding the petition submitted by the General Director for a stay of the decision’s implementation. In light of the result that I have reached, Bezeq’s counter-appeal against the size of the bank guarantee it was charged to present as part of the Tribunal’s conditions has become irrelevant, and I recommend to my colleagues that we order its denial. Finally, I propose to my colleagues that we do not issue an order concerning expenses in this case.

 

 

Deputy President E. Rivlin

 

I join in the clear, comprehensive and thorough decision of my colleague, Justice E. Hayut. I also believe that once the Antitrust Tribunal found that the merger between Bezeq and Yes does not do significant damage to competition, it was not authorized to subject the merger to the conditions which it had stipulated.

I also believe that the Tribunal erred in its said conclusion that the merger does not significantly damage competition and I agree that for the purpose of determining this damage in this case, we need to take into consideration the potential competitor in the market doctrine.

Once we take into account the likely potential damage to competition due to the merger, we tend towards, in this case, a disapproval of the merger. It appears that the Israeli economy’s unique characteristics force us to add additional weights onto the scale – the scale that represents the burden of proof which is imposed, in my view, on the party seeking approval of an action which is suspected of causing damage to competition.

Indeed, certain mergers can contribute to a small-sized economy such as Israel’s, but it seems that specifically because of the harsh consequences involved in the reasonable possibility of damage to competition in such an economy, it is appropriate to increase the weight of the potential or actual damage to competition test, as an appropriate means of measurement with regard to an approval or disapproval of mergers. In this matter, I accept the position taken by the scholar Barak Orbach (“Practical Objectives of Antitrust Law” in Legal and Economic Analysis of the Business Antitrust Laws 84-85 (Vol. 1, M. Gal and M. Perlman, ed., Nevo 2008). The Restrictive Trade Practices Law of 1988 expressly adopted the business competition principle as a guiding criteria for examining company mergers (s.21 of the Law). Thus, alongside the damage to competition measurement, the Law also uses the damage to the public test, this damage being defined in the law as damage to price levels, product quality and the quantity of the asset or of the service provided – i.e., damage to specific competition characteristics. In this context of company mergers, the Restrictive Trade Practices Law did not adopt the economic efficiency measurement, and it is doubtful that it can be seen as a competing means of measurement as compared to the “membership principle”. (See B. Orbach, ibid., pp. 106- 107.)

As my colleague Justice E. Hayut wrote, there was sufficient evidence before the Tribunal to establish that the merger in this case could lead to future significant damage to competition, because it would take a potential

 

 

competitor out of the market as a result of the merger. The purpose of the merger here is suspect because of its potential for damage to competition and the burden which is imposed – in my view, on the appellant – to remove this reasonable suspicion has not been met. At any rate, as my colleague held, the positive evidence brought in this case proves the said likely damage – wherever the burden of proof is placed and however heavy it is. I agree, therefore, with the decision of my colleague Justice E. Hayut, that the IAA General Director’s decision should be re-instated.

Vice President

 

Justice E. Rubinstein

a.            After review, and not without some ambivalence, I join the comprehensive and scholarly opinion of my colleague Justice Hayut, both regarding the result that she reached and the main part of her reasoning, other than with regard to one subject which will be described below and which does not change the general picture. I wish to add several comments.

b.            As litigants who do their job, the parties did not leave any stone unturned, and for this purpose, freedom of expression, among other things, was recruited for the cause. I will first say that the subject before us is an economic one by nature - Bezeq’s efforts to earn profits, Eurocom’s efforts to make a claim for itself and the General Director’s efforts regarding the maintenance of competition so that the public can pay less. Not for nothing did my colleague Justice Naor write in the introduction to the book, Legal and Economic Analysis of the Business Antitrust Laws (Hebrew), Vol. A, 2008 at p. 15, that “in the field of antitrust, the legal analysis is entwined in the economic analysis, which will serve as a guide in examining the impact of business behavior on competition in the market, in light of the market’s structure and its conditions.” To the extent that we are dealing with economic entities, we are dealing with a war which although it does not involve a clash or swords, with the firing of shells, or the launching of fighter planes, it is nevertheless drenched in money, and it goes as a war does. The regulator’s function is not always a beloved one, and he is frequently presented as being heavy-handed, as placing burdens on businessmen, etc. However, it was the legislature that imposed on the regulator – in our case, the General Director – the job of the Flemish boy who put his finger in the dam – [i.e.,] the defense of the public interest, regarding either the area of

 

competition or the additional areas listed in s.21 of the Restrictive Trade Practices Law, 1988. As my colleague the Vice President noted, “the Israeli economy’s unique characteristics force us to add additional weights onto the scale – the scale that represents the burden of proof which is imposed, in my view, on the party seeking approval of an action which is suspected of causing damage to competition.” In using the phrase “the Israeli economy’s unique characteristics,” my colleague did not specify [the characteristics to which he referred], but as Justice Naor wrote, (ibid.) and as was also cited by Justice Hayut, we have to deal with “the conditions in Israel and of its residents.” “I sit among my people.” (Kings II, Chapter 4, Verse 13). “The conditions in Israel and of its residents” here mean that even if we do not use analyses from the social sciences, the Court must take a broad view regarding the public interest.

c.             My hesitation come from the fact that the lower Tribunal did very thorough work and gave detailed reasons for its decision, and the balancing effort it engaged in based on its belief that the setting of conditions for the merger and for Bezeq’s control of Yes would reduce the danger for competition, against which the Director was struggling, even though the Tribunal did not believe that a danger for competition had been sufficiently proven. I will note already here that in my view – and in this my view is different from my colleague’s, to a certain degree – the Tribunal could have established conditions such as this for the merger. In my view, sections 21 and 22 of the Law are to be interpreted broadly – i.e., where the Tribunal seeks to meet its responsibility regarding a doubt and to add an extra layer of security and thus to pacify the Director who believes there is a danger for competition, it should be allowed to do so, within the language of s.22(c): “The Tribunal may reaffirm the Director’s decision, revoke it or amend it.” We should recall that the Tribunal has acquired expertise over the years which could certainly constitute a legitimate and appropriate source for constructive changes in decisions, as needed. In my view, the decision in Director v. T’nuva [1] at 213 supports this (see the comments of President Barak at page 228); as may be recalled, in that case as well, the Tribunal also held that there was no significant damage to competition in the proposed merger, and the Tribunal nevertheless stipulated conditions and its decision was upheld. In this case, however, as we have found that there is a risk of damage to competition, it is not necessary to expand this point further, but I saw fit to note my opinion, and I believe that this does not contradict the position of the scholar Yitzchak (Tzachi) Yagur (Hebrew), in Antitrust Laws (Hebrew)(3rd ed. 2002), at 639, according to which it stands to reason that the

 

 

 

Tribunal should consider, in this context, those matters listed in s.21 of the Law.

d.            Why did I choose to join my colleague regarding the matter itself? Because of competition, in its purest form, the danger to which I do not believe the Tribunal’s decision sufficiently resolves.

e.            Indeed, different considerations are involved in the laws of mergers; see the recent discussion by Professor Michal (Shitzer) Gal of the substantive test for examining the approval of a merger, in her article, “Justinian’s Lesson: Required Reforms in the  Restrictive Trade Practices Law,” Hamishpat 13 (2009) (Hebrew), 67, at pages 83-87; the author supports (at pages 84-85) a broad interpretation regarding the subject of mergers, like the position taken by the Antitrust Tribunal as headed by Judge (previous title) Naor, in General Director v. T’nuva [1] . According to this approach, competition is not the only aspect [to be considered], and the General Director and the Tribunal may look at the economic advantages of the merger. In AT 2247/95, supra, this Court left this issue as requiring further review (at page 231 of the ruling). According to the author (at page 86), this interpretation should also be adopted in a statutory amendment. I mention this in order to point out the complexity in this matter. See as well, the words of the scholar B. Orbach, “Objectives of Antitrust Law: Practical Rules” in Legal and Economic Analysis of the Business Antitrust Laws  (Hebrew), supra, 63, 84-85, which my colleagues referred to, and his discussion (at page 79) of the report of the 1975 Commission on Mergers and Conglomerates, chaired by Prof. Joseph Gross, but it is clear that the Law’s main road, the first of its actions, and the core of the policy in these matters, is competition, and sometimes because of the public good, it is placed in preference to other subjects with important values. For example, I recall how, as Attorney General, I had great doubts in determining the State’s position in CFH 4465/98 Tivol v. Chef of the Sea  [6] at 56, when in my heart I began with the traditional values noted by Justice Tirkel in CA 6222/97 Tivol v. Minister of Defense, [6] at 167-68 - and see his comments in the rehearing at p. 112 - but I deferred to the principle that the legislature had preferred in this issue, that competition promotes the public good (and see the opinion of then Justice M. Cheshin in the majority opinion in the rehearing, at page 108 and at page 111.)

f.             And therefore, as the authors Gal and Menachem Perlman noted in their article “The Importance of Legal and Economic Analysis of the Restrictive Trade Practices Law,” in the book cited above, at page 22, “there

 

is no shortage of examples of the benefits of competition for the Israeli economy. Thus for example, when the international telephone service market opened to competition, Bezeq’s prices dropped by some 70% – Bezeq having been the only entity operating in the industry until competition opened up.” And see also the comments of President Barak in Civil Appeal 2247/95 supra, at page 231 (cited by the authors Gal and Perlman at page 26), that “free competition is a clear public interest . . .it is a cornerstone of the democratic legal system . . . antitrust laws are the „Magna Carta’ of consumer rights and free competition.” The standard of damage to competition was, at its core, adopted in the Law’s s.21, which placed this subject as the first and foremost matter to be considered in providing a ground for objecting to a merger, even though additional considerations were added such as damage to the public, which the author Gal proposes should be eliminated (“Justinian’s Lesson,” at page 86) as they are at any rate a part of damage to competition. In any event, the considerations involved in economic efficiency, which Professor Gal mentions in her article as part of the balancing picture, are not, at their core, relevant to this case. We are dealing with an issue of competition.

g.            In my view, as an end-of-the-day judicial policy, if there is a real risk of damage to competition, this must be expressed in the relevant decisions in order to be consistent with the legislative intent. And I dare to say that even where the scales are balanced or are close to being balanced – it could be that in this case they are close (given the lower’s court’s stipulated conditions but the risk nevertheless remains – the decision must be for the benefit of the interest of competition. Certainly, according to the actual potential competitor doctrine, which I will allow myself to join in supporting upon the fulfillment of its conditions, as my colleague wrote in paragraph 35 of her opinion, human nature does not change for the better, including when the matter under discussion is money. And we are dealing with a company, Bezeq, which has been declared a monopoly more than once – as my colleague described. I would add that in my view as well, the burden to prove that the merger will not benefit competition is imposed on the General Director, and in this case, the General Director has met that burden. I also do not believe that the expert opinion of Daniel Rosen contradicts this. I add a value-based perspective to this; even if we do not speak of the high value of freedom of expression and the impact on that value, it is easy for anyone with intelligence to see that the more competition there is, the better chance there is for freedom of expression to flourish.

h.            A key point of course in this matter is the construction of an IPTV

 

 

 

infrastructure. After reviewing the material, I believe that it is indeed of great importance that Bezeq enter the multi-channel television market through that infrastructure. I myself was persuaded that Bezeq’s position paper for the Grunau Commission (even if we do not attribute determinative weight to the presentation from the expert Sh’chori, although it should not be written off) speaks for itself. The position paper, as my colleague cited it, states that “Bezeq is prepared to be recruited to the cause of promoting the consumers’ benefit regarding this important subject as well, and to commit to and to invest the significant amounts required to establish the IPTV services. Bezeq is prepared to invest significant amounts in the construction of the IPTV system . . ..” Indeed, fairness requires us to point out it is also stated that there is a need for a “regulatory safety net” for this purpose – something which any cautious entity would have said, and which expresses a deep desire, if not an especially realistic one. However, I believe that the strength of the commitment regarding IPTV in the position paper certainly overcomes the reservation regarding the regulator, a reservation which is slightly similar to the “subject to the tender rules” language that we see in many advertisements regarding various different campaigns every day. I note that I have read the discussion of the Grunau Commission position paper in Bezeq’s closing briefs, including the explanation that Bezeq was caught between the hammer of one regulator and the hard place of another regulator; but I have not been persuaded that the position paper did not present a very serious commitment to the IPTV matter.

i.              I stress: I myself, here and in other cases, attribute great importance to the positions stated by the litigants. Indeed, the high and exalted words of recruitment to “the promotion of the consumer’s benefit” can be taken with a grain of salt. But the fact of the commitment creates, in my view, a sort of “judicial estoppel”; see LA 4224/04 Beit Sasson v. Shikun Ovdim [9]. Elsewhere (CA 8301/94, Assessing Officer for Large Enterprises v. Pi Glilot [10] I had the chance to say the following regarding a particular litigant:

 

„And it is therefore like the person who came to rent an apartment on Yarkon Street in Tel Aviv and asks the landlord, does the apartment get a sea breeze during the summer? And the landlord says: Certainly, here is the house and here is the sea, and then the renter asks, is there dampness in the winter from the sea? And the landlord responds: Of course not, where’s the house and where’s the sea? Similarly, the appellant holds both

 

ends of the rope as stated, and claims one thing and its opposite in different places . . . if we want, we have before us a judicial estoppel in full legal form.’

 

(See also my comments in CA 458/06 Stendahl v. Bezeq International Ltd

[10] (unpublished)

j.             In light of all these, I join in my colleague’s position (noting my above discussion regarding the interpretation of the Antitrust Tribunal’s powers regarding the stipulation of conditions).

Justice

 

 

Decided as stated in the ruling by Justice E. Hayut Given on August 20, 2009

 

Deputy President            Justice  Justice

 

 

Petition granted. 27 Elul 5768.

10 October 2007.

Full opinion: 

ACUM v. EMI

Case/docket number: 
CA 5365/11
Date Decided: 
Tuesday, September 3, 2013
Decision Type: 
Appellate
Abstract: 

[This abstract is not part of the Court's opinion and is provided for the reader's convenience. It has been translated from a Hebrew version prepared by Nevo Press Ltd. and is used with its kind permission.] 

 

In 2004 the Director-General of the Antitrust Authority determined that the activity of ACUM (a corporation that operates to manage its members’ copyrights in musical works in Israel) constitutes a monopoly on managing copyright over musical works. In 2011 the Antitrust Tribunal (“the Tribunal”) approved the activity of ACUM as a cartel, subject to a series of requirements (“the permanent requirements”), which would be in force for five years starting from the date of their approval. The disputes at the center of the appeals related to the requirement that at least a third of ACUM’s board of directors consist of external directors (the ACUM appeal) and the requirement regarding the exclusion of rights in a work from management by ACUM. It was argued that the mechanism was overly narrow, as consent of all joint owners of a work is necessary for exclusion, or for segmentation under the four specific categories that permit partial exclusion of the rights (the EMI Israel appeal).

 

The Supreme Court (opinion written by Justice D. Barak-Erez, Justice Z. Zylbertal and Justice E. Rubinstein concurring) dismissed both appeals on the following grounds –

 

The requirements for ACUM’s operation should balance the authors’ property rights in their works with the public interest in a market free of monopolistic effects, a unique interest when in the context of a market of works, which inherently must be accessible to the public (albeit for payment). The analysis focused on two issues: the requirement to appoint public directors and the scope of the rights exclusion mechanism. Both should be examined from the unique perspective that combines the purpose of copyright law with that of antitrust law, considering the balance that both fields of law must achieve between individual property rights and economic interests, on the one hand, and the general public interest, on the other hand.

 

Regarding the requirement that at least a third of appointed members to the board of directors be external public directors (the practical meaning of which was the appointment of a total of four such directors), ACUM failed in its challenges to both the requirement itself and the number of external directors it was obligated to appoint.

 

The appointment of public directors is one of the mechanisms that facilitates supervising a company’s conduct and that of its directors and controlling shareholders. It helps deal with the various representative problems associated with its activity. Their appointment also adds a professional dimension to the company that would increase its adequate management; the appointment of public directors to ACUM’s board is consistent with the purpose of the cartel’s approval. Although ACUM is not a public company, it effectively manages a resource that has clear public aspects, and in fact those aspects of ACUM’s activity are the basis for the cartel's approval. At the same time ACUM’s monopolistic characteristics and its status as a cartel in the copyright of musical works per se grant it a public dimension. The requirement to appoint public directors to provide another layer of supervision over ACUM’s activity is therefore warranted by and inherent to the rationale of the cartel’s approval from the point of view of protecting both authors and users. The Court added that making the cartel’s approval subject to the appointment of public directors, even when a public corporation in the ordinary sense is not involved, has already been done in the past, for example with respect to the recycling corporation. Moreover, the public directors might represent cross-group interests that carry broader considerations as to the general interest of artists as a whole, rather than representing the interest of certain artists groups, which may conflict. Moreover, without laying down rigid rules, there is prima facie basis for the argument that the importance of a public director is in fact greater in a corporation like ACUM, which is not led by a clear control group and has diverse ownership.

 

In fact, ACUM itself also acknowledged the advantages of appointing public directors, and the updated language in its articles of incorporation now requires the appointment of two public directors. The basic aspect of the dispute, which had to a certain extent become one of extent and degree, had thereby been somewhat resolved. In this respect, the Court believed that the proportion of directors that was fixed – one third of the total members of the board – was not excessive or unreasonable, considering the character of ACUM as a corporation with diverse ownership and especially in light of the concern for abuse that always exists regarding a cartel.

 

Under the circumstances, there is no need to rule on whether ACUM should be regarded as a hybrid entity, and in any event a complete discussion of the criteria for recognizing an entity as such is unnecessary.  However, it is not superfluous to note that ACUM’s activity does fit many of the factors mentioned in case law as indicative of a hybrid entity. Those factors, even if insufficient to categorize ACUM as a hybrid entity in the ordinary sense of the term, do shed further light on the basic justification of the Director-General’s requirement. Although the appointment of public directors is not ordinarily considered one of a hybrid entity’s duties, the fact that ACUM is an entity that owes important duties to the public can serve as a factor in how the Director-General of the Antitrust Authority exercises power when subjecting a cartel to requirements.

 

Two questions were at the root of the dispute regarding the requirements about the rights exclusion mechanism. First, whether the requirement for consent by all joint owners of a work in order to exclude it from ACUM’s catalog is justified or whether that power should be held individually by each of the artists; and secondly, how delicate and precise should the “segmentation” mechanism be in the scope of the exclusion ability, in light of distinctions between a work’s different types of use.

 

As a point of departure it can be assumed that works of the type that ACUM manages are often ones to which several artists share the rights. Conditioning exclusion upon the consent of all rights owners will undoubtedly burden the individual artist who seeks to exclude her own work. However, this is not an undue burden considering the purpose of the permanent permit.

 

The most important tool available to ACUM in the collective management of the rights is the grant of a sweeping license, known as a “blanket license,” which permits the licensee to use ACUM’s entire catalog. From the perspective of transaction costs, the advantages of a blanket license are the primary reason for ACUM’s activity, despite the conflicts with antitrust law. Given the typical ownership structure of a musical work, an exclusion ability that is not conditional upon the consent of other owners effectively means that a single author, regardless of their role in creating the work, may exclude the entire work from ACUM’s blanket license system.  Thus, a user who wishes to make lawful use of the work would have to negotiate with the excluding author in addition to acquiring the blanket license from ACUM.  Such a state of affairs would greatly limit the benefit the cartel provides the user public to the point that it is doubtful whether the cartel is indeed “in the public interest” in terms of section 9 of the Antitrust Law. Furthermore, accepting that consent by all joint owners of the work is not necessary in order to exclude it might also allow for some of the artists’ opportunistic exploitation of the exclusion, creating “extortion” or “free-riding” problems.

 

Ultimately, even in the narrow exclusion regime joint artists can contractually regulate the scope of the work’s exclusion from collective management in advance. Indeed, the narrow exclusion regime merely provides the default for the inclusion of a joint work in ACUM’s catalog. Insofar as the authors wish to regulate decision-making differently in managing joint works, they are at liberty to do so. Presumably such an arrangement, which would be made in a timely manner and before any of the parties is in a position to potentially exploit or become a free rider, would help to limit the coordination challenges in obtaining consent for excluding joint work, as detailed by EMI Israel and Anana. Therefore, the default prescribed – that in the absence of agreement to the contrary between owners of rights in a joint work, all of their consent is necessary in order to exclude it from management by ACUM – is a proper one.

 

Finally, the Court considered the rights exclusion mechanism that enables artists to exclude their rights in some – rather than all – uses but only in one of four specific alternatives – “exclusion packages” that make limited “segmentation” possible according to types of use. The dispute between the parties revolved around the precision of the necessary segmentation. While the current segmentation mechanism essentially distinguishes between audio and audio-visual uses, EMI Israel (supported by Anana) also wished to distinguish between use in “old media” – like television and radio – and use in “new media” – like Internet and cellular phone services.

 

Here, the Court held that the exclusion mechanism approved by the Tribunal should be upheld, subject to the question of excluding “new media” – on conditions and restraints – being comprehensively reviewed during the cartel approval’s renewal proceeding.

 

The distinction between “new” media and “old” media raises fundamental and practical difficulties. The issue is a developing one and more experience and study are necessary to achieve a proper balance. The world of communications is characterized by constant, rapid technological development. In light of this reality the distinction between “old media” and “new media” is not a binary dichotomy, nor is it permanent or stable.

 

Reviewing the implications of excluding “new media” shows that there is not necessarily any justification for completely prohibiting excluding works from “new media” uses. Nevertheless, there are clear indicators that the same applies only to a limited exclusion mechanism, which focuses on certain types of “new media” uses and strives to minimize harm to users. Such exclusion mechanisms cannot be based merely on the technological distinction between “old media” and “new media” and allow a sweeping exclusion of all uses of the latter, as EMI Israel and Anana propose. In any event, examining the possibility of another “new media” exclusion category and fashioning the boundaries of that category should be done with care after studying interested parties’ positions about the issue and all the relevant facts. As mentioned, this is a matter that the Antitrust Tribunal ought to consider when the extension of the cartel’s approval comes before it. This position is also supported by a factor that concerns the temporary nature of the approval – for only five years. At the end of that period (two years of which have already elapsed), the Tribunal will reconsider approving the cartel, at which time it can also reconsider the extent of the exclusion mechanism’s “segmentation,” in light of the five years’ experience gained with a “narrow” exclusion mechanism. International experience could also enrich the set of information available to the Tribunal.

 

In conclusion, the Court dismissed the appeals, deciding not to intervene in the requirements attached to the cartel’s approval. Currently, the requirements for the permanent permit, including those challenged in the appeals, are all necessary to dispel the concerns naturally raised by a cartel concerning the collective management of copyright. These conditions are necessary to ensure that the cartel’s benefit to the public does indeed exceed the harm perceived from it. At the same time, the possibility remains that the proper balance between the rights of authors and the general public interest might in the future dictate a result different from that reached by the Tribunal in terms of integrating the distinction between different types of “new media” and “old media” in the rights exclusion mechanism.

Voting Justices: 
Primary Author
majority opinion
majority opinion
Author
concurrence
Full text of the opinion: 

In the Supreme Court

Sitting As a Court of Civil Appeals

CA 5365/11

CA 5489/11

 

Before:

His Honor, Justice E. Rubinstein

His Honor, Justice Z. Zylbertal

Her Honor, Justice D. Barak-Erez

 

 

 

 

The Appellant in CA 5365/11 and the Ninth Respondent in CA 5489/11:

 

ACUM – The Association of Composers

 

 

v.

 

 

The Appellant in CA 5489/11 and the Ninth Respondent in CA 5365/11:

 

EMI Music Publishing Ltd

 

 

v.

 

 

The Respondents:

1. The Director-General of the Antitrust Authority

 

2. The Association of Restaurants in Israel

 

3. Partner Communications Company

 

4. The Association of Function Hall & Garden Owners

 

5. Golden Channels

 

6. Matav Cable Communication Systems

 

7. Tevel Israel International Communications

 

8. Anana Ltd

 

9. EMI Music Publishing Ltd

       

 

Appeals against the judgment of the Antitrust Tribunal in Jerusalem on June 2, 2011 in AC 513/04 by Her Honor Judge N. Ben-Or

 

Date of Session:

Nisan 3, 5773 (March 14, 2013)

 

 

On behalf of the Appellant in CA 5365/11 and the Ninth Respondent in CA 5489/11:

Adv. Uri Sorek, Adv. Assaf Neuman

 

 

On behalf of the Appellant in CA 5489/11 and the Ninth Respondent in CA 5365/11:

Adv. Michelle Keynes

 

 

 

 

 

On behalf of the First Respondent:

Adv. Uri Schwartz, Adv. Yael Sheinin, Adv. Elad Mekdasi

 

 

On behalf of the Third Respondent:

Adv. Eyal Sagi, Adv. Amir Vang

 

 

On behalf of the Fourth to Seventh Respondents:

Exempt from appearance and representation

 

 

On behalf of the Eighth Respondent:

Adv. Ronit Amir-Yaniv, Adv. Ido Hitman

 

 

 

JUDGMENT

 

Justice D. Barak-Erez

 

1.         Which principles should guide the activity of ACUM with regard to the management of copyright in musical works in Israel? This question has been presented to us in full force against the background of the finding by the Director-General of the Antitrust Authority that ACUM’s activity creates a cartel, in order to review the conditions prescribed for the approval of the cartel in a way that will balance the rights of authors with the general interest of works being used in public.

 

Background and Previous Proceedings

 

2.         “The Association of Composers, Authors and Publishers,” known as ACUM, is a corporation that operates in order to manage the copyright of its members – lyricists, composers, arrangers, translators, and others – in Israel. ACUM members transfer their rights in their works to it, whilst ACUM acts on their behalf in order to license the use of those works in consideration for royalties that it collects for its members. Ordinarily, the licenses that ACUM grants are sweeping licenses ("blanket licenses") that permit licensees to make use of the whole repertoire of works managed by ACUM (mainly by making them accessible to the public in various ways). In addition, ACUM is bound by agreements with foreign copyright collective management entities (hereinafter "affiliates"), by virtue of which it administers in Israel the rights that are managed by the affiliates abroad.

 

3.         On April 30, 2004 the Director-General of the Antitrust Authority (hereinafter "the Director-General") published a ruling pursuant to section 34(a)(1) of the Antitrust Law, 5748-1988 (hereinafter "the Antitrust Law" or "the Law") according to which ACUM’s activity involves the creation of cartels (both between ACUM members and between ACUM and the affiliates) and a declaration under section 26(a) of the Law that ACUM’s activity as a cartel creates a monopoly in the market of managing copyright in musical works (or more precisely, with regard to management of  broadcasting, public performance, copying, recording, and synchronization rights in those works). The decision was made by the then Director-General, Mr. Dror Strom. However, it also reflects the position of the officers who have succeeded him, Ms. Ronit Kan and currently, Prof. David Gilo, as detailed below. Reference to the position of the Antitrust Authority will henceforth be made without specifically referring to those successors, using the general title – the Director-General.

 

4.         At that stage, ACUM instigated legal proceedings before the Antitrust Tribunal (hereinafter "the Tribunal") – an appeal against the determination of the Director-General that its activity involves cartels (AT 512/04) or, alternatively, an application for the approval of a cartel in accordance with sections 7 and 9 of the Antitrust Law, on the grounds that the cartel's approval is necessary in the public interest (AT 513/04). Both proceedings were heard together. Subsequently, to ACUM’s request, the appeal it filed was withdrawn, leaving only its application for approval of the cartel. The Director-General did not oppose the cartel's approval considering the public importance involved in ACUM's activity, as explained below, but the Tribunal was moved to set conditions to the approval so as to protect not only the public interest but also the individual rights of authors.

 

5.         To make its continued activity possible until completion of the litigation, ACUM filed a request for a provisional permit for operation of the cartel. The Tribunal granted the request and on December 28, 2004 it granted a provisional permit for ACUM’s activity subject to certain conditions (hereinafter "the Provisional Permit"). As detailed below, those conditions regulated, inter alia, situations in which authors could exclude rights in certain works from ACUM’s management so that those authors, rather than ACUM, would themselves deal with granting licenses to exercise those rights (hereinafter "the Exclusion Mechanism"). Over the years the Provisional Permit was extended from time to time based on of the Director-General’s recommendation, various amendments and modifications introduced to its terms. The last of those provisional permits (before the Tribunal's judgment), granted on February 24, 2009, introduced several significant changes, including making the Exclusion Mechanism "tougher," as detailed below.

 

6.         In addition to the position of the Director-General, oppositions to the cartel's approval were filed to the Tribunal by several other entities, including the Association of Function Hall & Garden Owners, Partner Communications Company (hereinafter "Partner"), the Association of Restaurants in Israel, and several cable companies – Golden Channels, Matav and Tevel (hereinafter "the cable companies") (whose activity has since been consolidated).

 

7.         At a later stage, an application to join the proceedings was made by two publishers that represent authors, the publishers themselves being members of ACUM – Anana Ltd (hereinafter "Anana") and EMI Music Publishing (Israel) Ltd (hereinafter "EMI Israel"). Those applications, like the time when they were made, were explained by the changes that had been made to the Provisional Permit’s conditions on February 24, 2009 as regards the Exclusion Mechanism. On December 1, 2009, the Tribunal partially allowed the applicants to join the proceedings in the sense that it permitted each of the two applicants to file a brief document with reference to the conditions that were acceptable to them and to make summations without extending the existing factual basis of the discussion.

 

8.         In its decision of January 25, 2009, the Tribunal stated that by consent of the parties it would rule based on the parties’ summations and supplemental oral arguments, without hearing evidence. The decision further stated that all of the parties agreed to ACUM's approval as a cartel, and took issue merely with regard to the terms of that approval. Consequently, the conditions of the Provisional Permit of February 24, 2009 (hereinafter "the Provisional Conditions") would serve as point of reference for the parties' positions. Accordingly, each of the parties filed its reservations regarding the Provisional Conditions in such manner that enabled the Tribunal to decide which of the conditions would be adopted as is within the permanent conditions, and which would be modified.

 

9.         On June 2, 2011 the Tribunal approved ACUM’s activity as a cartel, subject to a series of conditions (hereinafter "the Permanent Conditions"), which would remain in force for five years from the date of their approval. The Tribunal stated that the basic premise for reviewing the parties' arguments with regard to the conditions was that the anticipated benefit from the cartel substantially exceeded the damage likely to be caused by it, as required by section 10 of the Antitrust Law. In this context, it was explained that ACUM’s activity benefited not only its members – copyright owners (hereinafter "the authors") but also the general public who uses the works it manages (hereinafter "the users"): on the one hand, the sweeping licenses permit the users to make use of the whole repertoire of works that ACUM holds, thereby sparing the public from having to locate the owners of various rights and to negotiate individually with each of them; on the other hand, the sweeping licenses also benefit the authors since they streamline (and, to a great extent, enable) collection of royalties and enforcement of their rights.

 

10.       Since all parties agreed on principle to the approval of the cartel, the Tribunal hearing focused on the nature of the conditions to which the approval should be subject in order to dispel concern as to its abuse with regard to authors or users. The point of departure for the hearing was, as aforesaid, the Provisional Conditions, some of which were agreed upon by all parties, whilst others were in dispute. The disputes on which the appeal before us focuses pertain to the conditions prescribing the extent of the duty owed by ACUM to appoint external directors and the extent of ACUM members’ ability to exclude their rights from its management, as detailed below.

 

11.       Other controversies, including those concerning the definition of acts that would be construed as an abuse of ACUM's position and the way in which ACUM should act in taking legal action against users, were ultimately not considered by us since only few of the arguments concerning them were raised within the written appeal, while the arguments before us did not in fact concentrate on them.

 

12.       The appointment of external directors – the position of the Director-General was that a condition should be added to the Permanent Conditions to the effect that ACUM should appoint external directors in a proportion of no less than one third of the total members of its board and those directors would be responsible for the internal plan to enforce antitrust law that ACUM is obliged to implement (in accordance with section 10 of the Provisional Conditions). ACUM objected to this requirement, on the grounds, inter alia, that it is not a public company where the appointment of external directors is necessary in order to protect minority rights, and in any event ACUM's articles of association ensure due representation for each category of its members, and even guarantee numerical balance between the categories.

 

13.       The Tribunal accepted the Director-General's position on this matter, noting that a corporation for the collective management of copyright naturally raises concern as to the abuse of power against the authors themselves. Appointing a substantial number of external directors and entrusting them with the internal enforcement plan, it was held, would help deal with that concern, especially considering the fact that the corporation's members are dispersed and lack management expertise. The Tribunal also attributed importance to the fact that from ACUM's position in the proceedings it appeared that ACUM itself acknowledged the need to appoint external directors and was willing to do so even before the Tribunal’s judgment in order to reinforce the "managerial, professional, economic character of ACUM's board of directors".

 

14.       The extent of ACUM members’ ability to exclude rights from ACUM’s management – the Provisional Permit that ACUM had originally obtained (in 2004) included, in section 2.3 of the Provisional Conditions, a mechanism permitting a member to give notice "at any time, of his desire to assume all or any of the copyright with regard to any of his works, with regard to all users or specific categories of users," such that the works included in the notice would cease to be part of ACUM's repertoire, and copyright ownership would revert to the notifying member (hereinafter "the broad exclusion mechanism"). Underlying this mechanism was the concept that a “liberal” option to exclude any right in a work, even specifically, would intensify competition and increase the authors' power against ACUM. Later on, based on the experience accrued from the implementation of this arrangement, the Antitrust Authority reached the conclusion that the broad exclusion mechanism was not yielding the anticipated results with regard to enhancing market competition, and in contrast was aggravating the concern for abuse of the exclusion ability. For example, it turned out, according to the Director-General, that the broad exclusion mechanism that enabled interested authors, inter alia, to exclude from ACUM's management merely the use of "new media" (such as mobile phones and the Internet) and to leave it with the power to grant sweeping licenses for broadcasting rights only in "traditional media" (like television and radio), might undermine the justification for ACUM's existence as a corporation whose purpose is to reduce the substantial transaction costs involved in individually contracting with each of the authors. Accordingly, in 2009 the exclusion mechanism in section 2.3 of the Provisional Conditions was limited in two ways: first, the Provisional Conditions provided that an exclusion notice could only be given with the consent of all joint authors in a collective work whose exclusion was sought (for example, the lyricist, the composer of the music, and the arranger); second, it was provided that partial exclusion, namely exclusion of some of the uses of the work, could only be done in accordance with four "exclusion baskets" concerning different categories of use (hereinafter "the narrow exclusion mechanism"): presentation of the work in an audio format (for example radio broadcasting); its presentation in an audio-visual format (for example in a television program); copying the work; and recording it. The narrow exclusion mechanism therefore did not permit the author to exclude the work in various formats at his discretion, as specifically chosen by him (for example, excluding the work's use only with regard to mobile phones).

 

15.       The Director-General's position, joined by ACUM, Partner, and the cable companies on this issue, was that the narrow exclusion mechanism should be included in the Permanent Conditions. In contrast, EMI Israel and Anana believed that the broad exclusion mechanism should be adopted with regard to both aspects that distinguish it from the narrow exclusion mechanism and they challenged both the requirement for unanimous consent of all authors of a joint work and the restriction of exclusion according to "exclusion baskets."

 

16.       EMI Israel pleaded that the narrow exclusion mechanism improperly infringed on the constitutional property rights of the authors it represented, both because the predefined "exclusion baskets" limit the prerogative of the right’s owner to permit or prohibit certain uses of his work, and because the vast majority of musical works managed by ACUM are jointly owned by several authors. Under these circumstances, it was argued, making the exclusion conditional upon the consent of the other owners in fact negates the ability of a given author to permit or prohibit the use of his work. EMI Israel further asserted that adopting the narrow exclusion mechanism would compromise the competition among ACUM's members in the sense that only large corporations would be able to afford managing rights outside of ACUM, while individual authors would not be able to bear the financial and logistical burden it involves.

 

17.       Anana pleaded that adopting the narrow exclusion mechanism would lead to infringement on its reliance interest, given the fact that, relying upon the wording of the broad exclusion mechanism, it had already excluded works it managed from ACUM's repertoire with regard to the use of "new media" that it would now have to restore. In addition, it made a series of arguments concerning the restrictions set forth in the narrow exclusion mechanism – a lack of distinction between authors whose contribution to a joint work was significant and authors whose contribution was negligible (who nevertheless obtain a de facto veto right to exclude the work); impairing the ability of authors to maximize their profits; as well as infringing on the moral aspect of the author’s right (in the sense that an author who wishes to preclude the use of his work for religious, image-related, or moral reasons would find it difficult to do so under the narrow exclusion regime). Anana further contended that making the exclusion conditional upon the consent of all joint authors effectively makes it a dead letter since joint authors would frustrate any attempt to reach the necessary agreements.

 

18.       The Tribunal held that the approval should be made conditional upon a narrow exclusion mechanism and in that respect it adopted the position of ACUM and the Director-General (joined by Partner and the cable companies). The Tribunal explained that such exclusion mechanism provided an appropriate answer to the necessary balance between enhancing market competition and protecting the individual author's proprietary right. The Tribunal went on to state that a corporation for the collective management of copyright is in any event not intended to enable its members to realize their rights in full. On the contrary, such arrangement is based upon a waiver of complete and total freedom with regard to the works in consideration for reducing the cost of managing and enforcing copyrights. EMI Israel and Anana, the Tribunal held, were in fact seeking to enjoy the benefits of belonging to a cartel without bearing the costs. The Tribunal further explained that copyright grants an author a monopoly that may harm the general public, a concern which is intensified when authors are incorporated in a cartel. Therefore, there is no reason to avoid subjecting the cartel's approval to conditions that restrict the individual author's proprietary right in his work.

 

19.       As aforesaid, the Tribunal ultimately approved ACUM's activity as a cartel, subject to a series of conditions, including those mentioned above. The two appeals before us – the appeal by ACUM and the appeal by EMI Israel – were filed against its said judgment – as detailed below.

 

The Appeals

                       

20.       ACUM's appeal (CA 5365/11) concerns, as aforesaid, only one aspect of the Tribunal's judgment – the condition regarding the duty to appoint external directors. Its arguments in this respect are directed both against the basic obligation to appoint external directors and against their number.

 

21.       EMI Israel’s appeal (CA 5489/11) originally revolved around several of the other conditions to which the Tribunal made the permanent permit subject, but at the hearing before us EMI Israel concentrated its arguments on the details of the condition regulating the rights exclusion mechanism. It should be noted that Anana, which did not appeal the Tribunal’s judgment, appeared at the hearing as a respondent and in that capacity it presented arguments in support of EMI Israel's basic position.

 

22.       Generally, EMI Israel believes that the narrow exclusion mechanism impairs the protection of the authors' rights and reinforces ACUM's monopoly. More specifically, EMI Israel pleads that implementing the narrow exclusion mechanism would lead to infringement on authors' proprietary rights and would impair the possibility of creating a competitive copyright market. According to EMI Israel, the protection of copyright necessitates both recognition of the power of each author to implement the exclusion mechanism with regard to a work he helped create, even without obtaining the other authors’ consent, as well as authors’ right to exclude their works outside of the "exclusion baskets" that necessitate "crude" and imprecise choices that do not express important distinctions, primarily the distinction between "old" media (like radio and television) and "new" media (such as mobile phones).

 

23.       On the other hand, the Director-General believes that both appeals should be dismissed. He supports the Tribunal’s judgment and emphasizes that the conditions it approved are required in order to protect authors and users against the monopolistic power of ACUM and in order to protect the public interest involved in the use of the works.

 

Our Ruling

 

24.       Having reviewed the parties' arguments we have reached the conclusion that both appeals should be dismissed. We are convinced that, at the moment, the Permanent Conditions, including the conditions against which the appeals have been addressed, are all necessary in order to dispel the concerns raised inherently by a cartel related to the collective management of copyright. These conditions are necessary in order to ensure that the cartel’s benefit to the public will exceed the perceived damage from it. Indeed, as detailed below, reviewing the parties' arguments has made it clear that the distinction between "new" and "old" media within the exclusion mechanism is an evolving issue, the regulation of which should be monitored. However, as noted, the approval and its conditions have been set for a period of five years, of which two have already passed (as the conditions relating to the narrow exclusion mechanism were approved by the Tribunal in June 2011). At the end of that period, it will be possible to revisit the conditions and the way they are being implemented in order to make decisions towards the future. In that sense, our ruling reflects the facts presented in the proceedings, including the experience accumulated in the Israeli market and its existing uses of copyright.

 

The Normative Framework: Between Copyright Law and Antitrust Law

 

25.       Two normative frameworks frame our discussion: copyright law – as a framework that seeks, inter alia, to balance the author's rights in his work and the public interest to enjoy the fruit of the work for the benefit of all, in order to promote culture and knowledge; and antitrust law – which recognizes, inter alia, the possibility of approving a cartel, subject to conditions aimed at protecting the public from the abuse of monopolistic power. Copyright law is currently governed by a relatively new statute – the Copyright Law, 5768-2007 (hereinafter "the Copyright Law"), which replaced the relevant British Mandate statute, while the issues concerning the activity of cartels are regulated by the Antitrust Law.

 

26.       The activity of ACUM should be evaluated and examined according to these two perspectives. As mentioned in the introduction to our judgment, ACUM was established for the collective management of copyright in musical works. From the perspective of copyright, that management should be for the benefit of authors and in the name of protecting their rights, but without neglecting the public's ability to enjoy the works; from the perspective of antitrust law, that management, which constitutes a cartel and monopoly, should be for the benefit of the public and should ensure that public access to the works is not unreasonably denied. More specifically, in order to comply with the provisions of sections 9 and 10 of the Antitrust Law with regard to the approval of a cartel, it has to be ensured that the benefit to the public from such collective management substantially exceeds the damages that it might cause to all or some of the public.

 

27.       In many ways, the controversies that have arisen before us pinpoint once again the dilemmas that underlie copyright law. Recognition of copyright is aimed at encouraging the creation and dissemination of expression but also at balancing this benefit against the costs of limiting access to protected works (cf: Guy Pesach, The Theoretical Basis for the Recognition of Copyright, 31 Mishpatim 359, 410 (2001)). In the words of Vice President (retired) S. Levin:

 

            "In Anglo-American law the basic justification for these laws is perceived as the desire to provide an incentive to the author in order to achieve maximum access to the work by the public at large. This is the heritage of Israeli copyright law" (CA 326/00 Holon Municipality v. NMC Music Ltd, PD 47(3) 658, 671 (2003)).

 

Copyright Management Corporations: ACUM as a Test Case

 

28.       The case before us should be examined not only in light of the general principles of copyright law, on the one hand, and antitrust law, on the other hand, but also in light of the experience accumulated from copyright management through corporations established for such purpose. ACUM is a local corporation that was established back in pre-state Israel (see: Michael Birnhack, Colonial Copyright: Intellectual Property in Mandate Palestine 185-186 (2012)). Nevertheless, more broadly speaking it is merely one of many examples of corporations known as "copyright collection societies" or collective management organizations" (hereinafter "collective management corporations"). Such corporations operate in many countries and thereby provide an answer to a genuine need of authors who cannot routinely manage the grant of licenses to use their works, collect royalties, and enforce copyright law on those who infringe their rights. These corporations manage the rights of many authors collectively and thereby contribute to reducing the costs of negotiating with users and reducing enforcement costs. At the same time, the mechanism of collective management also benefits the public who uses the works because it allows bringing these works to the public on a regular basis. The collective management corporation typically offers users "a blanket license" in relation to the corporation's whole repertoire, thereby saving them the need to negotiate individually with each of the authors of works included in the repertoire. Such users are for the most part broadcasting stations owners, producers, hall owners, and others, through whom the works are made accessible to the public at large (see: Ariel Katz, Monopoly and Competition in the Collective Management of Public Performing Rights, 2 Din Ve'Devarim 551 (2006); Guy Pesach, Associations for the Collective Management of Rights – Another Look at Effectiveness and Fairness, 2 Din Ve'Devarim 621 (2006) (hereinafter "Pesach"); Walter Arthur Copinger, Copinger on Copyright, pp 1790-1794 (16th ed., 2011) (hereinafter "Copinger")).

 

29.       Alongside recognizing the fact that collective management corporations are a well-known and widespread phenomenon, the concern that accompanies their activity is also acknowledged. Collective management of copyright involves a significant challenge from the perspective of antitrust law, considering the fact that it has centralized characteristics and therefore raises the concerns involved in the creation of a cartel, including the concern of acquiring and abusing monopolistic market power, either by demanding high royalties or in other ways. Against those disadvantages, we usually weigh the necessity of such activity for effectively managing copyright and it is therefore common to regard collective management corporations as "natural monopolies" (and, to a certain extent, something of a necessary evil) and to allow them to operate subject to supervisory mechanisms and regulation (see: Ariel Katz, The Potential Demise of Another Natural Monopoly: Rethinking the Collective Administration of Performing Rights, 1 J. Comp. L. & Econ. 541, 544-548, 551-553 (2005) (hereinafter "Katz"); Copinger, pp 1798-1800). It is along these lines that the activity of the two major collective management corporations in the U.S. – the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc (BMI) – is regulated by special judicial orders ("consent decrees") as part of antitrust law. These orders, whose conditions are revised from time to time, place collective management corporations under a host of constraints in order to ensure their compliance with the competition criteria set forth in antitrust law (for a discussion of the supervisory mechanisms of collective management corporations in the U.S., see: Stanley M. Besen, An Economic Analysis of Copyright Collectives, 78 Va. L. Rev. 383 (1992).) Similarly, collective management corporations that operate in Europe are under supervision, subject to the antitrust law of the European Union (see: Lucie Gaibault & Stef Van Gompe, Collective Management in the European Union, in Collective Management of Copyright and Related Rights 135 (2nd edition, Daniel Gervias ed. 2010); Copinger, pp 1801-1808).

 

The Conditions in Dispute: Public Directors and the Exclusion Mechanism

 

30.       As already mentioned, the controversy before us does not concern the basic authority for ACUM’s operation as a cartel but rather the conditions that have been prescribed for its activity, or, more precisely, two of these conditions. In that sense, the discussion is based on the accepted notion, explained above, which views collective management corporations as something of a "natural monopoly," the existence of which is essential but their activity necessitates supervision and restraint in order to protect the public from the potential negative effects of substantial market power being accumulated by a single entity. The conditions for ACUM’s operation should therefore express the balance between the proprietary right of authors and the public interest in a market free of monopolistic influences, which acquires a unique aspect with regard to the market of creative works that naturally need to be accessible to the public (albeit for a fee).

 

31.       Ultimately, the hearing in this case revolved around two matters: the requirement to appoint directors, and the scope of the rights exclusion mechanism. Both of these need to be examined from the unique point of view that combines the purposes of copyright law with those of antitrust law, paying attention to the balance that both those sets of laws seek to achieve between individual proprietary rights and economic interests, on the one hand, and the public interest, on the other hand.

 

The Appointment of Public Directors: Between the Public Interest and the Interest of the Rights Owners

 

32.       The first condition that was prescribed for the approval of the cartel was to appoint public directors who will constitute a third of the total number of board members (which in practice means appointing four such directors). As aforesaid, ACUM has objected to this condition both in principle and in practice.

 

33.       In principle, ACUM asserted that it is not a public company and therefore there is no justification to enforce on it a supervisory mechanism appropriate to public companies. In this context, it was further asserted that its board of directors includes a delicate balance between all the sectors ACUM represents, which in itself ensures protection of the public interest (article 30.2 of ACUM's current articles of association provides that the company's board of directors shall consist of nine members that include two lyricists, a writer, two easy listening composers, one composer of concert music, one publisher, and two external directors). ACUM also noted that its corporate governance is dispersed and therefore does not raise an "agency problem" of the type with which the mechanism of external directors is designed to deal. ACUM also asserted that in any event it has in place adequate mechanisms to resolve potential disputes and conflicts of interest, including an internal arbitration mechanism as well as the Permanent Conditions that prohibit ACUM from discriminating between its members. According to ACUM, the appointment of public directors would "dilute" the authors' control over their property rights. In practice, ACUM further noted the costs involved in the appointment of the requisite number of public directors, which lead ACUM to be willing to appoint no more than two public directors.

 

34.       According to the Director-General, the need to appoint public directors stems from two factors: first, it will help ensure that ACUM serves the interests of all its member authors, taking into account the interests of individual authors rather than only the group interests of certain categories of authors. Second, the appointments will ensure that at least some of the directors have professional skills in the area of corporate management.

 

35.       With regard to the proportion of public directors on the board, the Director-General's position is that the requirement that no less than a third of the board would be comprised of external directors is justified, since the need for external directors is specifically greater under ACUM’s circumstances, where the corporate structure is dispersed and lacks a distinct controlling shareholder. In this respect the Director-General went on to explain that, in his opinion, ACUM's members need even more protection than "ordinary" shareholders, considering the fact that their livelihood depends on the corporation and they cannot sell their shares to "realize their profits."

 

36.       Having reviewed all this, we have reached the overall conclusion that ACUM's case in this respect should be dismissed.

 

37.       The appointment of public directors – that is, directors who are not employees or shareholders of the company – is one mechanism which allows supervising the behavior of the company, its managers, and its controlling shareholders and helps dispel the various agency problems involved in its activity (see: Irit Haviv-Segal, Company Law, 429, 438 (2007) (hereinafter "Haviv-Segal")). It can be said that the essential contribution of the public director lies in the "external dimension" that he brings to the board's work – as someone who reviews matters referred to the board from a broad, objective, and balanced perspective that also takes into account the public implications of its activity. The provisions of section 240(a1)(1) of the Companies Law, 5759-1999 (hereinafter "the Companies Law"), according to which a public director shall have professional skills or accounting and financial expertise, ensure that his appointment will add a professional dimension to the company that will contribute to its satisfactory management (see: Joseph Gross, The New Companies Law, 386-387 (Fourth Edition, 2007) (hereinafter "Gross")).

 

38.       The mechanism of appointing public directors is typically operated in the context of the activity of public companies – section 239 of the Companies Law requires a public company to appoint at least two public directors, whilst sections 114 and 115(a) of that Law require a public company's board of directors to appoint an audit committee from amongst its members, on which all the public directors shall serve. In addition, there are laws that impose a duty to appoint public directors to serve on the board of certain corporations whose shares are not held by the public, but whose activity has other public importance. Thus, for example, a mutual fund must appoint at least five directors to serve on its board and the proportion of public directors is the same as required of a public company (see: section 16(a) of the Joint Investments Trust Law, 5754-1994); while an insurance company, as defined in the Control of Financial Services (Insurance) Law, 5741-1981, must appoint public directors who will constitute a third of the total members of its board (see: section 2(1) of the Control of Financial Services (Insurance) (Board of Directors and Its Committees) Regulations, 5767-2007). In addition, the board of directors of a company that manages provident funds is required to appoint an investment committee for each fund it manages, the majority of committee members being qualified to serve as public directors (see: section 11(a) of the Control of Financial Services (Provident Funds) Law, 5765-2005).

 

39.       Having reviewed the case, we are satisfied that the condition concerning the appointment of public directors to serve on ACUM's board is consistent with the purpose underlying the approval of the cartel. Although ACUM is not a public company, it does essentially manage a resource that has clear public aspects. From the point of view of the authors, ACUM provides an essential service, without which it would be difficult for them to produce financial benefit from their works. In many ways, that is also the case from the point of view of the public at large: the protected works belong to the authors (and to whoever has acquired rights in them) but it is important that they are used in such a way that will also benefit the general public. Indeed, these public aspects of ACUM's activity underlie its approval as a cartel. At the same time, ACUM's monopolistic characteristics and its status as a cartel in the domain of musical copyright grant it a public dimension in and of themselves. The requirement to appoint external directors to provide a further layer of supervision over ACUM's activity is therefore called for and inherent to the rationale of the cartel's approval in order to protect both authors and users. It should be noted that making the approval of a cartel conditional upon the appointment of external directors, even when the corporation in question is not a public corporation in the ordinary sense, is not unprecedented. Thus, for example, the approval as a cartel of the recycling corporation that was established as a joint venture of manufacturers and importers of soft drinks in Israel was made subject to a similar condition (see section 4 of the Conditions for the Operation of the Recycling Corporation, as approved in AT (J'lem) 4445/01 Shufersal Ltd v. The Director-General of the Antitrust Authority (November 5, 2001)). The same applies to the approval as cartels of two other collective management corporations: the Israeli Federation of Independent Record Producers Ltd. (hereinafter "PIL") (see section 11.3 of the Conditions for the Operation of the Israeli Federation of Independent Record Producers Ltd., as approved in AT (J'lem) 3574/00 The Israeli Federation of Independent Record Producers Ltd. v. The Director-General of the Antitrust Authority (April 29, 2004)), and the Israeli Federation for Records and Cassettes (hereinafter "IFPI") (see: section 13.3 of the Conditions for the Operation of the Israeli Federation for Records and Cassettes Ltd, as approved in AC (J'lem) 705/07 The Israeli Federation for Records and Cassettes Ltd. v. The Director-General of the Antitrust Authority (February 3, 2011).

 

40.       With regard to authors' protection, there appears to be grounds to the argument concerning the importance of protecting the common interests of ACUM's members, regardless of the “category” to which they belong. Public directors can express "cross-category" interests that concern the benefit of authors generally in their relationship with ACUM, as opposed to the benefit of particular categories of authors. Moreover, without laying out hard and fast rules, it can be said that there is prima facie grounds to the assertion that the importance of the public director institution is in fact greater in a corporation characterized by dispersed ownership, in the absence of controlling shareholders, as is the case with ACUM. The agency problem in companies of this type is characterized by interest gaps between management and shareholders (as opposed to interest gaps between the controlling shareholder and minority shareholders, which are typical of companies that have controlling shareholders). Some view the appointment of public directors as a central mechanism for dealing with such gaps (see Haviv-Segal, pp 438-439). Clear expression of this distinction can be found in the First Schedule to the Companies Law, which contains suggested provisions for the corporate governance of public companies. Paragraph 1 of the Schedule prescribes the recommended percentage of independent directors, distinguishing between companies that do and do not have controlling shareholders. With regard to the latter, the Schedule provides that a majority of the directors should be independent, whilst in the former it provides that it is sufficient for a third of the directors to be independent.

 

41.       Furthermore, even assuming that the present structure of ACUM's board of directors faithfully represents its member authors, that structure does not prima facie guarantee that the protection of authors will also take into account the public interest more broadly. Indeed, a public director's fiduciary duty to the company is no different than that of an ordinary director, in the sense that he too must act for the benefit of the company (see: Gross, p. 406; cf: CA 610/94 Buchbinder v. The Official Receiver, para. 43 (May 11, 2003)). However, the public director will presumably represent a broader, more objective point of view, cognizant of the public implications of the corporation's activity.

 

42.       Moreover, as already explained, the appointment of public directors also has great importance as regards guaranteeing a minimum number of directors with professional managerial skills. In fact, ACUM itself acknowledged the professional advantages of appointing public directors even before the Tribunal's judgment was handed off and the revised version of ACUM's articles of association now require the appointment of two such directors. The fundamental aspect of this controversy has thus somewhat eroded and it has become a matter of extent and degree. We believe that the proportion of directors set forth in the Permanent Conditions – a third of the board members – is not excessive or unreasonable, considering ACUM’s character as a corporation whose ownership is dispersed and especially given the lingering concern of abusing monopolistic power.

 

43.       This discussion, which is "internal" and concentrates on corporate and antitrust law, can be supplemented by an "external" discussion, based on the significance that entities with public aspects have from the perspective of public law. According to this Court's case law, a private corporation whose activity has clear public aspects might be regarded as a "hybrid" entity, which places it under additional duties over and above those it is subject to in accordance with private law. Care must be taken not to overextend the category of hybrid entities in order to avoid eroding the significance of acknowledging a public status and blurring the lines between the public and private spheres. Moreover, under the current circumstances, there is no need to rule on whether ACUM should be regarded as a hybrid entity and a complete discussion of the criteria for the recognition of an entity as hybrid is unnecessary. However, it should be noted that ACUM's activity does entail many of the criteria mentioned in previous case law as characterizing a hybrid entity. Thus, for example, in HCJ 731/86 Micro Daf v. Israel Electric Corporation Ltd PD 41(2) 449 (1987) (hereinafter "Micro Daf"), where the question of hybrid entities was discussed for the first time – in the context of the Electric Corporation's activity – the factors taken into account were the monopolistic aspect of the corporation's activity, the nature of the resource it manages, and the fact that statutory powers have been entrusted to it. These factors were not considered an "exhaustive list" and since then entities which lacked those characteristics, at least to the same extent, have also been recognized as hybrid (see: CA 294/91 Jerusalem Community Hevra Kadisha Burial Society v. Kastenbaum PD 46(2) 464 (1992)). For further discussion, see: Daphne Barak-Erez, Administrative Law vol. 3 - Economic Administrative Law 463-492 (2013)). With regard to ACUM, the monopolistic aspect of its activity is beyond dispute. In Israel, although there are other collective management corporations, including the abovementioned PIL and IFPI, the product they supply – licenses for the broadcasting and public playing of sound recordings – does not substitute the product ACUM supplies. As the Director-General stated in his declaration, ACUM has no direct competitors in its relevant market and although formally nothing stops authors from managing their works themselves, few of them find such course of action practical or worthwhile, so that in fact the vast majority of works for which royalties are paid in Israel are under the management of ACUM. The same applies to the implications that the resource managed by ACUM has on the general public. Although the licenses that ACUM offers are acquired by a relatively small category of users, those licenses feature the right to play the works in public (or make them otherwise available to the public). Hence, they have a very significant effect on public access to the works. In other words, the public aspect of ACUM's activity also derives from the fact that the product it supplies is not in fact the musical works themselves but rather the collective management mechanism, which facilitates (and to a great extent enables) playing those works in public and therefore constitutes a product of clear public importance. Finally, although ACUM does not exercise statutory powers, its approval as a cartel entrusts it with power that derives from a statutory decision established in the Antitrust Law. These characteristics, even if they are insufficient to define ACUM as a hybrid entity in the ordinary sense of the term (and, as aforesaid, we have no need to rule on this issue), do support the basic justification for the Director-General's requirement under the current circumstances. Indeed, the appointment of public directors is ordinarily not imposed on a hybrid entity. However, the fact that ACUM constitutes an entity that owes important duties to the public can serve as a factor in the Director-General's decision to subject a cartel to conditions.

 

The Rights Exclusion Mechanism

 

44.       The other condition at the center of the litigation before us concerns, as aforesaid, the rights exclusion mechanism. Underlying the controversy were two questions: first, is the requirement for the consent of all joint authors of a work in order to exclude it from ACUM's repertoire justified or should that power be held by each of the authors individually? Second, how delicate and precise should the "segmentation" mechanism be with regard to the exclusion ability, as regards the distinction between different types of uses? We shall clarify those questions below.

 

The Rights Exclusion Mechanism: the Consent of All Authors or a Personal Right?

 

45.       The requirement that the exclusion of the work should be conditional upon the agreement of all its authors prima facie imposes a constraint on the right of each of the authors to control the rewards of his work. For that reason it has been criticized by EMI Israel and Anana. In contrast, the position of the Director-General and ACUM is that making the exclusion conditional upon the consent of the other authors is essential to protect both users and authors. The main argument regarding the protection of users relates to the concern that a "liberal" exclusion mechanism that would give an independent exclusion right to each author would impair ACUM's ability to offer sweeping licenses and thereby undermine the basic justification for its existence from the perspective of public interest. With regard to the protection of authors, it is asserted that the ability to exclude rights without the agreement of the other authors would encourage abuse of that power by "powerful" authors at the expense of the other authors of the work. ACUM explained that if each author of a joint work could exclude his rights from ACUM’s repertoire without the agreement of the other authors, it would grant veto power to that author to prevent works from being used by those to whom other authors wish to grant permission. ACUM also emphasized that where the rights in a work are vested in several authors veto power will forever be involved and the remaining question is only which veto power is least damaging: that of an author wishing to prevent the work's exclusion and leave it with ACUM's repertoire, or that of the excluding author to prevent any use of a work contrary to the position of the other authors. According to ACUM, the former is infinitely preferable. Having reviewed the case, we have reached the overall conclusion that we accept the position of the Director-General and ACUM in this respect.

 

46.       We accept as a starting point for our discussion the (reasonable) assumption that the rights in the type of works that ACUM manages are often shared by several authors. This can be illustrated by the typical case of a song. According to copyright law, every song is made up of several independent works, the rights in each of which are vested in different authors – the words of the song are a literary work owned by the lyricist; the music is a musical work owned by the composer. Moreover, there are also cases in which several composers or lyricists collaborate in the process of creating a work and in such cases the circle of rights owners expands even further. Considering this situation, it is easy to understand EMI Israel and Anana's grievances: making the exclusion power conditional upon the agreement of all authors undoubtedly burdens the individual author who seeks to exclude his work. However, this does not suffice. The question before us is whether this burden is justified, considering the purpose of the permanent permit – and our answer to that question is in the affirmative.

 

47.       In order to discuss this question it is necessary to return to the original reasons that led to managing rights through a corporation like ACUM. The most important tool available to ACUM for the collective management of rights is the grant of a sweeping license known as a "blanket license," the advantages of which in terms of transaction costs constitute the basic reason that legitimates ACUM's activity, despite difficulties in terms of antitrust law. Extending the ability to exclude rights from ACUM's management will naturally impair its ability to offer blanket licenses and thereby reduce the public benefit from its operation as a cartel. Over-extending that possibility will impair the public benefit from ACUM’s activity to such extent that it will no longer be the case necessarily that the benefit substantially exceeds the potential damages to the public interest from the cartel's operation. Having considered matters, we are satisfied that the grant of a personal "exclusion right" to each author would amount to such over-extension. Considering the typical ownership structure of musical works, an exclusion mechanism that is not conditional upon the agreement of the other authors effectively means granting authority to a single author, regardless of his part in the work, to exclude the work as a whole from ACUM's blanket license regime. Thus, a user who wishes to make lawful use of the work would have to negotiate with the excluding author in addition to acquiring the sweeping license from ACUM. Such a state of affairs would greatly limit the benefit of the cartel for users to the point of raising doubts as to whether the cartel is indeed "in the public interest," as required by section 9 of the Antitrust Law whenever a cartel is approved.

 

48.       Furthermore – accepting the position whereby the consent of all the authors of a joint work is unnecessary to exclude it would also raise difficulties for the relationship between the authors themselves as it may enable some of the authors – usually the more "powerful" ones – to exploit their exclusion power at the expense of the other authors. This may occur in situations where the user has already acquired most of the rights to use the work by means of a blanket license and merely needs to "supplement" the excluded right. This may give rise to phenomena of "extortion" and "free-riding," so that the remaining owner of the right will demand exceptionally high license fees for his share. We have already discussed the problem of such a state of affairs from the user's point of view. However, in truth, the problem also exists from the perspective of the excluding author making excess profit at the expense of the other authors. This difficulty is intensified in light of the fact that the ability to exclude rights from ACUM's management – given the complexity involved in negotiating with users individually – would essentially be of benefit to powerful rights owners, like large publishers, as opposed to individual, independent authors.

 

49.       It should be noted that we have so far used the expression "joint authorship" in order to describe all the cases in which the rights in a particular song are shared by several authors, although in fact it is prima facie possible to distinguish between two models of joint authorship. One model, of "joint authorship in indefinite shares," relates to two or more authors who collaborated in such way that it is impossible to distinguish the share of each of them in the finished work. In such a case, the work is considered a "joint work" according to section 1 of the Copyright Law. The other model, of "joint authorship in definite shares," involves a finished product, like a song, which is made up of several units, each of which was created by a different author and is a protected work in itself (for example the words of the song, which were written by one author, constitute a literary work; while the music, which was composed by another author, constitutes a musical work). The authors in such a case are not regarded as joint authors according to the Copyright Law, despite the fact that their relationship is substantively founded upon sharing. It is interesting to note that the American copyright law does distinguish between works where the shares of the various authors are inseparable and works where the shares of the various authors are interdependent. Nevertheless, both situations are considered "joint work" (see: Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 6.4 (2002) (hereinafter "Nimmer"). In any event, for the purpose of the present discussion concerning the ability of authors to exclude rights from ACUM’s management we need not consider this distinction. In both cases, splitting the licensing authority would place practical obstacles for using the joint work.

 

50.       In fact, the controversy before us derives not only from the different interests that the various parties represent but also from the fact that the Copyright Law does not expressly regulate the issues to which joint authorship gives rise (see: Michael Birnhack, A Cultural Reading: the Law and the Creative Field, Authoring Rights: Readings in Copyright Law 83, 105-106 (Michael Birnhack & Guy Pesach, Editors, 2009) (hereinafter "Birnhack"); Gilad Wexelman, Corporate Creation and Cooperative Creation, Authoring Rights: Readings in Copyright Law, 167, 177-178 (2009) (hereinafter "Wexelman"). Cf  Margaret Chon, New Wine Bursting from Old Bottles, Collaborative Internet Art, Joint Works and Entrepreneurship, 75 Or. L. Rev. 257 (1996)). In fact, the only arrangement the Law establishes with regard to joint works (as defined in section 1) relates to the period of protection of the work, which is measured according to the age of the surviving joint author, plus 70 years (section 39 of the Copyright Law).

 

51.       Additionally, reference to comparative law does not yield an unequivocal answer, considering the numerous potential approaches to this issue. Thus, for example, subject to certain restrictions, the law in the U.S. vests each of the joint authors with an independent right to permit use of their work even without the consent of the other authors, provided that they are paid their proportional share of the profit produced from the work (see: Nimmer § 6.10; Russ VerSteeg, Intent, Originality, Creativity and Joint Authorship 68 Brooklyn L. Rev. 123, 149-150 (2002)). In contrast, according to the approach prevailing in English law, the agreement of all authors is necessary in order to permit use (see: Copyright, Design and Patents Act 1988, section 173(2). See also: Copinger, p 334.) For the purpose of the ruling before us, we must be cognizant of the fact that the variety of existing approaches regarding copyright management of joint works attests not only to the great complexity of the matter but also to the fact that recognizing authors' proprietary rights does not inherently dictate a particular result.

 

52.       Since there is no specific regulation of the issue of jointly owned copyright within the Copyright Law, we may turn to legislation in other contexts concerning the joint ownership of property rights. Detailed regulation of this sort exists regarding the joint ownership of land in sections 27 to 36 of the Land Law, 5729-1969 (hereinafter "the Land Law"). According to section 9(e) of the Movable Property Law, 5731-1971 (hereinafter "the Movable Property Law"), arrangements concerning joint ownership of land essentially apply to movable property too, "save as may be otherwise provided in a co-ownership agreement." By virtue of section 13(a) of the Movable Property Law, such arrangements also apply to joint ownership of "rights." Nevertheless, reference to the Land Law with regard to the legal regime governing joint authorship should be made with care. As Prof. Michael Birnhack has noted:

 

            "Even if a model of joint authorship is prescribed, the socio-legal institution can be designed in various ways, ranging from management based on the decisions of all owners, through consent-based management, to each author having freedom of use. Selecting the appropriate point on this range should be influenced by an understanding of the law concerning the creative process and the reciprocal relationship between joint authors, between each of them and the work, or anywhere else where the work and its significance are formed" (Birnhack, p 106).

 

Similarly, Dr. Gilad Wexelman has also written:

 

            "A joint work raises problems of a different type, when compared with the joint ownership of tangible resources and applying the doctrines that exist regarding joint ownership of tangible resources to joint authorship is therefore improper and inappropriate. These doctrines do not provide the necessary solutions for joint authorship. The inference deriving from this is that it is appropriate to adopt a broader, different conception of the joint authorship process, rather than a conception influenced by the private property model" (Wexelman, p 178).

 

53.       One way or the other, before we seek to draw an analogy based on the arrangements relating to joint ownership of land, it is important to emphasize that we need not consider the legal regime that governs the relationship between joint authors as an independent issue. The question of joint authorship should be analyzed in the case before us merely in the particular context of a joint work's management by a collective management corporation like ACUM – which naturally goes beyond the default rules that apply to joint authorship. In any case, under the circumstances,  reference to the existing legal arrangements regarding the management of joint rights should serve merely as a framework and a starting point for the discussion.

 

54.       The arrangement prescribed in the Land Law concerning joint ownership is based on a concept of management by majority decisions, except for matters that go beyond ordinary management and use, in which unanimous agreement is required. In this respect, section 30 of the Land Law provides:

 

            (a)       The owner of a majority of the shares in any joint property may determine all matters relating to the ordinary management and use of the property.

 

            (b)       A joint owner who considers himself aggrieved by a determination under subsection (a) may apply to the Court for directions and the Court shall decide as seems just and expedient under the circumstances of the case.

 

            (c)       Any matter outside the scope of ordinary management and use requires the consent of all the joint owners.

 

55.       The joint owners of a land can agree upon a different method for the management of their rights but, as provided in section 29 of the Land Law, this is the arrangement that applies "unless otherwise provided in a joint ownership agreement" (subsection (c)) (see also: CA 810/82 Zol Bo Ltd. v. Zeida PD 37(4) 737 (1983); CA 663/87 Nathan v. Greener PD 45(1) 104 (1990)).

 

56.       At the same time, section 31(a)(1) of the Land Law provides that each joint owner may, without the consent of the other joint owners, make reasonable use of the joint property, provided that he does not prevent another joint owner from conducting such use. In other words, none of the joint owners of land may stop his fellow owners from using the property, so long as it applies to reasonable use.

 

57.       What can be learned from these arrangements for the case in question? Applying the arrangement prescribed in section 30, mutatis mutandis, leads to the conclusion that the requirement of a "unanimous" decision is appropriate insofar as management or use out of the ordinary is involved. It can therefore be argued that the management of copyright through an entity like ACUM is the ordinary, accepted method worldwide for the management of individual authors' rights, and departing from that arrangement therefore constitutes an "extraordinary" decision outside the ordinary realm of rights management. It should therefore be made unanimously, exactly as provided by the conditions that have been approved.

 

58.       Indeed, as stated above, the considerations relevant to joint ownership of land are not necessarily apt with respect to joint authorship. Thus, for example, the arrangement contained in the Land Law can be seen as "hostile" to a state of joint ownership, recognizing that joint ownership of land may burden its efficient management. Section 37 of the Land Law therefore provides that "each joint owner of immovable property is entitled at any time to demand the dissolution of the joint ownership." Yet, joint authorship is not a "pathological" condition. On the contrary, the process of authorship frequently involves collaboration – either direct or indirect – between several authors and dissolving the joint authorship should not be regarded as socially desirable. It is also likely to be more difficult to appraise the value of the work for the purchase of one of the joint authors' shares than severing the joint ownership of land. Consequently, as already mentioned, the analogy from the Land Law should be drawn with all due care. However, even taking into account the difference between joint ownership of land and joint authorship, it does appear that the requirement of unanimous consent for the exclusion mechanism is proper. Particularly because joint authorship is a "natural" condition and typical of many works, it is appropriate to be apprehensive about an exclusion mechanism that is based on each of the authors having an individual right of action, reinforcing the status of strong authors and burdening public access to the works, as explained below.

 

59.       Examining the rule with regard to the reasonable use of jointly owned land also leads, prima facie, to a similar conclusion. By drawing an analogy based on section 31(a)(1) of the Land Law it can be inferred that leaving the work under the management of ACUM constitutes reasonable use, considering the fact that it is the typical, widespread method for the collection of royalties. According to this logic, there appears no justification for adopting an exclusion mechanism that enables a joint author, who so desires, to prevent his fellow author from making reasonable use of the work, by excluding it from the collectively managed repertoire.

 

60.       It should be noted that this Court has previously considered the question of collaboration between joint authors, in CA 1567/99 Sivan v. Sheffer PD 57(2) 913 (2003) (hereinafter "Sivan"). Under the circumstances of that case, we recognized the right of each of the joint authors to terminate a contract that had been made in connection with the use of the rights when the contract was breached. Can it therefore be inferred that it would be proper in the current case to permit each of the joint authors to individually decide on exclusion? Despite the apparent similarity between the situations, in fact they are quite different and the conclusion should therefore be different too. In Sivan the issue was the rescission of a contract due to its breach and ipso facto it was possible to rely on the principle that whosever right has been infringed on is not required to forgive the infringement. This result is supported by considerations deriving from the law of obligations and in particular from the issue of multiple creditors. In contrast, in the case at hand, the question is posed for the purpose of delineating the ordinary rules of management, in the absence of any alleged breach. The relevant considerations are thus different, and so is the result that they dictate. Indeed, in Sivan the Court has made a clear distinction between these two questions. In fact, it noted that it was not ruling on the question of unilateral exercise of copyright in a joint work, which is more similar to the present case, and it went on to state that section 31(a)(1) of the Land Law prima facie makes it possible to adopt a flexible approach in such cases (Sivan p 942).

 

61.       Taking a broader view, it appears that the position presented to us by EMI Israel and Anana does not give proper weight to the effect of high transaction costs and free-riding in the management of multiple ownership resources, a phenomenon referred to as "the tragedy of the anti-commons" alongside the better-known term "the tragedy of the common property" or "the tragedy of the commons" (see generally: Michael Heller, The Tragedy of the Anticommons: Property in the Transition from Marx to Markets, 111 Harv L. Rev 621 (1998); James Buchanan & Yong J. Yoon, Symmetric Tragedies: Commons and Anticommons, 43 J. L. & Econ. 1 (2000)). Indeed, the narrow exclusion mechanism that the Tribunal approved appears more suitable for dealing with these phenomena. In connection with joint authorship, “the tragedy of the anti-commons” is manifested in sub-optimal use of the work as a result of uncoordinated behavior by its owners. In a legal regime where a license to use a particular work necessitates the agreement of all its owners, each of the owners might act to maximize his own profits by claiming a high fee for agreeing to its use, without considering the negative externality that such behavior for the other owners. Ultimately many users will find it difficult to meet the overall price required of them and the work will be used to a lesser extent, thus harming both the joint authors and the public, whose access to the work has been limited. It is common to believe that the solution to this problem is one of the major advantages embodied in the activity of collective management corporations (see: Katz, p 561; Francesco Parisi & Ben Depoorter, The Market for Intellectual Property: the Case of Complementary Oligopoly in The Economics of Copyright 162, 168-169, Wendy J. Gordon & Richard Watt eds. 2003 (hereinafter "Parisi & Depoorter")). Since dealing with the market failings associated with joint authorship is one advantage that justifies the monopolistic activity of corporations like ACUM, great importance is attributed to the design of an exclusion mechanism that will not frustrate that advantage by vesting veto power in each joint author who wishes to preclude use of a joint work.

 

62.       Ultimately, even under the narrow exclusion regime joint authors can agree in advance, contractually, on the scope of their understandings with regard to the work's exclusion from collective management. In fact, the narrow exclusion regime merely provides the default with regard to the inclusion of a joint work in the repertoire managed by ACUM. Insofar as the authors wish to agree on a different decision-making mechanism with respect to the management of joint works, they are at liberty to do so. Presumably such an arrangement, made before any of the parties is in a position for extortion or "free-riding," will help limit the coordination difficulties asserted by EMI Israel and Anana with regard to obtaining the consents necessary for the exclusion of a joint work. In view of the aforesaid, the default mechanism prescribed – according to which in the absence of an agreement between the joint authors to the contrary, the consent of all authors is necessary to exclude the work from management by ACUM – is appropriate.

 

The Rights Exclusion Mechanism: the Degree of Segmentation and the Distinction between New and Old Media

 

63.       As mentioned above, the arguments by EMI Israel and Anana also revolved around the fact that the "exclusion packages" defined in the Permanent Conditions do not distinguish between uses for the purpose of "old media" and uses for the purpose of "new media." In this respect Anana reiterated the case that it made before the Tribunal concerning the impairment of authors' ability to exhaust the full financial potential embodied in their works by excluding the works from management by ACUM solely with regard to "new media," and concerning the damage caused to Anana itself, having prima facie relied upon the previous exclusion mechanism in excluding rights that it will now have to restore to ACUM’s management.

 

64.       In contrast, the Director-General and ACUM argued before us that categorizing the necessary permissions according to types of media will allow ACUM members to abuse their power against users by forcing them to purchase specific uses (for example using the work on a cellular platform) in addition to the general fee for the license awarded through ACUM. In addition, ACUM mentioned that the adoption of a "liberal" exclusion regime enabling a precise "segmentation" of the excluded uses of any work would involve a significant logistic and financial burden on its ability to manage copyright of its repertoire.

 

65.       Deciding between the conflicting positions in this respect has proven to be more complex than the parties' arguments revealed. In truth, as we explain below, both positions are extreme and fail to fully address the difficulties they entail. Consequently, at present, we believe that the exclusion mechanism approved by the Tribunal should be upheld, provided that the question of excluding "new media" – subject to conditions and constraints – will be comprehensively reviewed towards the renewal of the cartel’s approval. We shall explain our said position.

 

66.       The present exclusion mechanism, as expressed in section 2.3 of the Permanent Conditions, enables an author to exclude his rights completely, in respect of all their potential uses. Moreover, the mechanism allows excluding the rights in respect of some of the uses, yet solely in accordance with one of four alternatives – "the exclusion packages" that stand at the center of the discussion. Because of their importance, we shall lay them out in full below:           

 

            "2.3.1  Excluding the rights for audiovisual broadcasting, including synchronization and recording for the purposes of such broadcasting, and including the provision of interactive and/or on demand services and any similar service, including by television, Internet, telephony or mobile phone.

 

            2.3.2   Excluding the broadcasting rights by means of audio, including recording for the purposes of such broadcasting, and including the provision of interactive and/or on demand services and any similar service, including by television, Internet, telephony or mobile phone.

 

2.3.3   Excluding the right of copying. For the avoidance of doubt, it is clarified that excluding the right of copying does not include the right of copying for broadcasting purposes.

 

2.3.4   Excluding the right of imprinting and/or recording. For the avoidance of doubt, it is clarified that excluding the right of imprinting and/or recording does not include the right of imprinting and/or recording for broadcasting purposes".

 

67.       The alternatives at the center of the present controversy are the first and the second (and to a limited extent also the fourth, insofar as the exercise of the right of copying is aimed at integrating a musical work in the soundtrack of an audiovisual work). These alternatives deal with uses that make the work available to the general public – its broadcasting on television or radio, making it accessible by means of "streaming" technology, which enables viewing or listening to content through the Internet without copying it to the user's computer, and the like. The main distinction that the exclusion mechanism makes in this context is between presenting the work by audiovisual means and presenting it by audio only. Thus, for example, given the present situation, an author can be represented by ACUM for the purpose of playing songs on the radio but not for using them in the format of television content.

 

68.       Presumably, maximum protection of the author's rights and his financial interests should have enabled every author to make specific exclusion decisions as much as possible – even with reference to a specific work in a particular use. Along these lines, ACUM's present exclusion mechanism permits, as aforesaid, limited "segmentation" by types of use. However, it has been argued before us that this does not suffice. The dispute revolved around the degree of precision required by segmentation. While the present segmentation mechanism essentially distinguishes between audio and audiovisual uses, EMI Israel (supported by Anana) also wishes to distinguish between "old media" – like television and radio – and "new media" – such as the Internet and cellular phone services. This position was presented to us as warranted by technological progress and the launching of new channels to use works, as well as the protection of the author's prerogative to manage the works he owns. However, as we explain below, this position raises fundamental and practical difficulties and thus cannot be adopted in the format in which it was presented.

 

69.       It should be stated that the question of excluding "new media" should first be considered in light of the two perspectives that fashion the discussion as a whole – that of copyright law and that of antitrust law. However, in this context, it is important to bear in mind another point of view which relates to the interface between law and technology and focuses on the adaptation of the legal framework to technological developments as well as its implications to future technological development, for better or worse (see and compare: Dotan Oliar, The Copyright-Innovation Trade-Off: Property Rules, Liability Rules and Intentional Infliction of Harm, 64 Stan. L. Rev. 951 (2012)).

 

70.       At the outset, we should consider the fact that the ability to exclude "new media" that EMI Israel seeks to adopt relies primarily on a technological distinction between "old" and "new" communication platforms. This distinction is replete with difficulties. The world of communications is characterized by constant, rapid technological development. More importantly, the technological aspect of this area is characterized by a phenomenon sometimes called "technology collapse": with the development of technology the walls that separate various media platforms gradually collapse and different types of technology "collapse" into each other, creating new interfaces. Thus, for example, a movie that is distributed through the Internet is also available for viewing on a smartphone, while traditional radio stations also broadcast songs and programs by streaming technology over the Internet. Given this technological reality, the distinction between "old media" and "new media" is not dichotomous, nor is it permanent or stable. In fact, EMI Israel and Anana did not even explain how these categories should be defined in their view, and settled for giving clear-cut examples (such as using a song as a ringtone), which were insufficient to delineate the boundaries of the distinction. Their case therefore left many practical questions unanswered. For example, no explanation was given as to whether the transmission of television broadcasts through the Internet to be viewed on smartphones would, according to the proposed approach, require a license for "new media" or "old media" or in any event how would this example be classified to one category or the other. The rapid, constant development of new communication technology guarantees that questions of this type will not remain theoretical. In this context, we should note the interesting case of the American company MobiTV, which at the beginning of the 21st century developed technology that enabled receiving satellite or cable broadcasts and viewing them on mobile phones. A dispute (which gave rise to several legal proceedings) arose between MobiTV and ASCAP, one of the two largest collective management corporations in the U.S. The dispute concerned the purchase of a blanket license necessary to legitimate the transmissions, as a result, among other things, of MobiTV's objection to being charged a "new media" rate even though the content it offered its customers was the same as broadcast by traditional means (although ultimately the judgment did not rule on this question directly. See: United States v. ASCAP, 712 F. Supp. 2d 206 (SDNY 2010)). With regard to the controversy relating to the classification of MobiTV's services as "new media," see also its preliminary response in the legal proceeding it initiated (Applicant Mobitv, Inc's Pre-Trial Memorandum at 25, United States v. ASCAP, 712 F. Supp. 2d 206 (SDNY 2010)).

 

71.       Insofar as the distinction between "new media" and "old media" is intended to extend to situations in which the content of radio and television programs is transmitted through the Internet to computer screens or by cellular phone services to mobile phone screens, adopting this distinction is likely to have a "chilling effect" on the use of the works in "old media" too. This is because users would presumably refrain in advance from integrating excluded works in productions intended for "old media," if only given their concern of future marketing constraints in "new media." Thus, for example, when a television program is produced, certain songs might not be included in it – as a cautionary measure – so as not to impair the possibility of broadcasting the program over the Internet too. Such indirect implications are not always clear "in real time" to an author who wishes to exclude his work, but recognizing them might also be weighed against the distinction proposed by EMI Israel and Anana.

 

72.       Another aspect to be considered is the likely implications of the exclusion mechanism on cyberspace users. In their arguments before us EMI Israel and Anana concentrated on institutional and corporate users, such as large communications companies, thereby presenting only a partial perspective on the matter in dispute. However, the exclusion mechanism they sought to adopt is not intended to apply only to such users. In fact, a sweeping exclusion of "new media" uses is likely to lead, without distinction, to difficulties for small website operators, including, for example, Internet radio operators, for which the ability to contract with collective management corporations constitutes a lawful, practical way for making regular use of a wide variety of works (and indeed some believe that the activity of collective management corporations is of especial importance for authorized use of musical works over the Internet. See, for example: Daniel Gervais, The Landscape of Collective Management Schemes 34 COLUM. J. L. & ARTS 591, 601 (2011) (hereinafter "Gervais, Landscape"). For a discussion of the importance of collectively managing works in a digital environment, see also: Recommendation 2005/737/EC on collective cross-border management of copyright and related right for legitimate online music services [2005] OJ L276/54 (hereinafter "the 2005 EC recommendation"); Proposal for a Directive of the European Parliament and of the Council on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online uses in the internal market (July 11, 2012) (hereinafter "the 2012 proposed directive"). See also Copinger, pp 1816-1826).

 

73.       The effects of the requirement to distinguish the use of new technologies on making works accessible to the public should also be considered in view of past experience in similar contexts. Thus, for example, in New York Times Co. v. Tasini 533 US 483 (2001) (hereinafter "Tasini"), the US Supreme Court considered whether a newspaper (the New York Times) could upload articles by freelance writes to a computer database. After lengthy litigation, the US Supreme Court accepted the position of the writers who argued that the license previously given to the newspaper was merely for the purpose of printed publication, as opposed to electronic media. Following the judgment the newspaper had to acquire permission from the writers to publish their articles in the database. Yet, since the newspaper believed that taking such action would not be financially viable, the result in practice was the removal of the articles from the database, thereby denying public access to them. We do not need to go into the merits of the judicial ruling in Tasini insofar as it relates to the understandings between the newspaper and its writers at the relevant times. In fact, the ruling in Tasini is not directly relevant to the technological aspects of the publication format and is instead focused on whether uploading the articles to a general computerized database (of numerous articles from various newspapers and journals) could be construed as a newspaper publication (indeed, in another case of similar circumstances the Supreme Court of Canada held that a newspaper could copy articles published in its printed edition to digital CDs containing articles of that newspaper alone. See: Robertson v. Thomson Corp. 2006 SCC 43 (2006)). Nevertheless, the results of this case embody an important lesson. Taking the broader view it teaches us that an arrangement that does not take into account the dynamic nature of uses might prove to burden and damage the public interest. Taking a forward-looking view, it appears that experience teaches us that it is difficult to base licenses for use on a distinction between technologies as this might subsequently frustrate broad access to cultural assets (see also: Francesco Parisi & Catherine Sevcenko, Lessons from the Anticommons: The Economics of New York Times Co. v. Tasini, 90 Ky. L. J. 295 (2001-2002)).

 

74.       What is the experience of other legal systems regarding the exclusion of "new media"? On the face of it, this is an important question, considering the fact that the challenges of technology in the area of copyright are by no means unique to Israel. However, for the reasons detailed below, the benefit of a comparative study has proven limited at the present stage of developments in the area.

 

75.       Truth be told, reference to legal developments in Europe and the U.S. shows that the exclusion of "new media" is often recognized as possible. Presumably, this reinforces the position of EMI Israel and Anana. However, studying matters in depth indicates that this experience has limited application to the case before us, because, among other reasons, the issue under consideration here is still in the early stages of formulation, trial, and controversy in other systems too.

 

76.       The two major collective management corporations in the U.S. – BMI and ASCAP – recently permitted two of their members (including global EMI) to exclude the rights owned by them from collective management for the purpose of certain aspects of the works' use in "new media" (as detailed on their websites – http://www.bmi.com and http://www.ascap.com). Yet, it is important to note that the ability to do so is embodied in the decisions of the corporations themselves rather than the result of external regulation. Moreover, the American rights management corporations operate in a different way than ACUM in the sense that they manage only one type of rights – public performance rights, which concern the permission to perform the work in public, to broadcast it, or to make it available to the public (but not the permission to copy the works or integrate them in audiovisual productions). That is, the starting point for the exclusion is a market of rights that is more "split" than the market in which users and authors operate in Israel. This background is likely to influence the factors relating to the desirable exclusion mechanism. Subsequently, it should be noted that reference to the exclusion of "new media" from administration by collective management corporations in the U.S. is not made in "all or nothing" terms, and in fact includes certain restrictions. For example, BMI's most up to date announcement on the matter (as published on its website) has clarified that the ability to exclude "new media" is aimed at cases where the work's use necessitates more than one type of license, while ASCAP has emphasized in addition that exclusion is possible with regard to making works accessible to the public exclusively through "new media," and does not apply to users that are broadcasters. Finally, and this is a major point, it cannot be ignored that some of the decisions on these matters are very recent (for example, BMI's announcement, of February 11, 2013, was published long after the litigation between the parties before the Tribunal had ended). It is therefore difficult to draw inferences from other legal systems' sustainable experience in this area. In fact, it can be said that at this stage the secondary effects of the "shock waves" that the new reforms have created for users have not yet been fully clarified, although the existence of such "shock waves" is already apparent. For example, we may point to a new development – lawsuits brought by users against management corporations to reduce the fee charged for a "blanket license," since "the blanket" no longer covers "new media" too (for instance, the claim brought against ASCAP by a large Internet radio company called Pandora at the end of 2012, which is still pending. For reports in the media about the case, see, for example: Don Jeffrey, Pandora Media Sues ASCAP Seeking Lower Songwriter Fees (November 6, 2012, available at http://www.bloomberg.com/news/2012-11-05/pandora-media-sues-ascap-seekin... Ed Christman, Pandora Files Motion to Keep Low Publishing Rates (June 20, 2013) available at http://www.billboard.com/ biz/articles/news/digital-and-mobile/1567890/pandora-files-motion-to-keep-low-publi-shing-rates).

 

77.       In principle, European law permits a rights owner to join a collective management corporation even when he seeks to reserve the use of the rights on the Internet or through CDs (see: Commission Decision of August 6, 2002 in case COMP/C2/37.219 Banghalter/Homem Christo (Daft Punk) v. SACEM. See also: section 5(3) of the 2005 Commission recommendation and the 2012 proposed directive, mentioned above). Nevertheless, it is important to bear in mind that this arrangement is also the result of factors irrelevant to Israeli reality, primarily the desire to reach a standard, coordinated pan-European regulation where there are multiple collective management corporations.

 

78.       Another factor that should be mentioned parenthetically involves the broader context in which the exclusion mechanism is embodied, with regard to the acceptance of the Conditions towards authors' freedom of action and freedom of choice. In this context, for example, it is significant that the Permanent Conditions ensure the right of each of ACUM’s members to contract with users individually and to offer them individual licenses to use certain works alongside the management of those works by ACUM, without excluding them from its repertoire (section 2.4 of the Permanent Conditions). This is similar to the U.S. practice and different from the norm in Europe, where most collective management corporations require exclusivity from their members in respect of all rights in their work (see: Gervais, Landscape, p 598). Indeed, it is possible that this course of action will not be frequently used and it is likely to be significant mainly from the perspective of users who do not require blanket licenses but rather individual licenses for certain works. However, from a more general perspective, this mechanism creates something of a balancing effect on ACUM's coercive power (see also and compare: Parisi & Deporter, pp 170-172).

 

79.       More generally, it can be said that EMI Israel and Anana’s requirement to allow a sweeping exclusion of "new media" uses was based on the assumption that they are entitled to enjoy the fruits of the cartel while realizing the financial potential embodied in the works they manage to its fullest. That is a mistake. Indeed, once ACUM's activity was recognized as a cartel, which raises concern of abuse of monopolistic power against the public, it can no longer be said that ACUM members are entitled to fully exercise their proprietary rights while enjoying the benefits of the cartel. Although the cartel has been approved, its approval was made subject to conditions. Those conditions bear a price that ACUM and its member authors must pay in order to balance the excess benefits such membership confers and to ensure that the public is protected against the concerns involved in the cartel's activity. In fact, what we have previously stated regarding the exclusion of a work without the consent of all joint authors is also appropriate with regard to the issue of segmentation – the adoption of a segmentation mechanism that enables the exclusion of works based on a technological distinction between new and old media, without reservation, might reduce the benefit that ACUM’s activity yields for the public to such extent that may undermine the justification of its approval as a cartel.

 

80.       We can therefore sum up and say that even if the ability to exclude "new media" uses should not be outright dismissed, EMI Israel and Anana have at present failed to lay a substantial foundation for the considerations and details of the exclusion mechanism they wish to adopt, regarding, inter alia, the ability of such a mechanism to provide an answer to the concerns indicated above. For that reason, we cannot accept their position. We should parenthetically emphasize that we have not ignored the possibility that the ability of an author to manage his works independently in the realm of "new media" might prove to be significant for some authors, including "small" or independent ones. The Internet is a flexible technological platform that is far more accessible to private agents than traditional media. It allows direct, convenient, and relatively easy communication between the rights owner and the individual user and thereby yields more direct patterns of consumption, sometimes dramatically reducing transaction costs and thus enabling "small" authors to profit from their works without the assistance of collective management mechanisms (see: Casey Rae-Hunter, Better Mousetraps: Licensing, Access and Innovation in the New Music Marketplace, Journal of Business & Technology Law 7(1) 35, 39 (2012)). However, this is merely one of many considerations and it has not been argued before us. Thus, for example, in contrast, the ability to exclude "new media" might actually be damaging to small authors in particular given the "dilution" it would generate in the value of blanket licenses. Consequently, as a general rule and as already mentioned, the question of "new media" should be revisited comprehensively as part of the cartel's re-approval at the end of the five-year period allotted to it. This is based on the understanding that one cannot rule out in advance the possibility that a delineated and limited format of "new media" exclusion (insofar as such a format is proposed in the future) might enable interested authors greater independence in the management of their works, without impairing the interests of the public at large, to an extent that will undermine the reasons underlying the cartel's approval.

 

81.       In other words, the precise definition of the "exclusion category" sought in respect of "new media" is likely to have a decisive impact on whether the overall exclusion mechanism yields a balanced result. An important, albeit not the only, aspect of this definition relates to the phenomena of "technology collapse" and "content leakage" that we have already considered. As previously mentioned, a sweeping, generalized definition of "new media" regarding the exclusion ability would yield uncertainty in respect of the scope of the excluded uses, might lead to many users being charged double fees (not only by ACUM but also by authors themselves), and would create a "chilling effect" from the users’ perspective, as they might refrain from including an excluded work in productions intended for "old media" based on their concern that new media marketing will be limited in future. In contrast, a narrower definition of excludable uses, particularly a definition that focuses on uses designated for new media (for example the production of a ringtone based on an existing tune) would help reduce the awkwardness that numerous exclusion possibilities yield, moderate the negative effects of "content leakage" between different technological platforms from the users’ perspective, and reduce the damage caused to their financial interests. In this context, we may add that part of the negative experience accumulated from the operation of the broad exclusion mechanism (in the scope of the Provisional Conditions for ACUM’s activity before their 2009 amendment) resulted from the fact that it granted complete flexibility with regard to the exclusion format and did not consider the significance of the term "new media" nor did it regulate the boundaries of the exclusion options related to it.

 

82.       To complete the picture it should be noted that the issue of excluding rights in "new media" from collective management as part of a cartel's approval in Israel has not arisen for the first time in ACUM’s case. As already mentioned, the Tribunal had authorized in the past the activity of two other collective management corporations that were also considered a cartel – PIL and IFPI. In both cases the conditions for the approval regulate the corporation members’ ability to exclude rights from collective management in accordance with a predetermined "exclusion basket," and include several categories concerning various Internet and mobile phone uses (see: section 3.3 of the conditions for the operation of IFPI and section 2.2 of the conditions for the operation of PIL). Recognition of this is prima facie relevant to the discussion. However, we should consider the fact that both those entities deal with the management of producers rights (the owners of sound recordings), an area which is not identical to the area in which ACUM operates (management of composers, songwriters, and arrangers rights). We expected the parties before us to refer to this comparison – one way or the other – but they failed to do so. Each of them clung to the position of "all or nothing" and sided, respectively, either with a complete exclusion of "new media" or an absolute negation of the ability to exclude new media uses. Thus, the option of excluding "new media" and the conditions for it were not fully addressed.

 

83.       What emerges from all the aforementioned is this: reviewing the implications of excluding "new media" shows that it is not necessarily justified to completely negate the option to exclude works for the purposes of "new media." Nevertheless, there are clear indications that this applies only to a limited exclusion mechanism, which concentrates on certain types of "new media" uses and strives to minimize the harm caused to users. Such an exclusion mechanism cannot be based merely on a technological distinction between "old media" and "new media" which allows a sweeping exclusion of all uses of the latter type – as proposed by EMI Israel and Anana. In any event, examining the possibility of another exclusion category concerning "new media" and fashioning the boundaries of that category should be done with care after studying the positions of all interested parties and all the relevant facts. As aforesaid, this matter is for the Tribunal to consider when the extension of the cartel's approval arises. Our position is also supported by the temporary nature of the approval – for only five years. At the end of that period (two years of which have already passed), the Tribunal will revisit the approval of the cartel, at which time it can also reconsider the scope of the exclusion mechanism's "segmentation," on the basis of five years’ experience with the operation of a "narrow" exclusion mechanism. That experience will join with lessons already learned from the operation of an unlimited exclusion mechanism (as part of the Provisional Conditions) and will help the Tribunal evaluate the possibility of adopting a balanced, intermediate alternative that will permit the exclusion of limited uses for the purposes of "new media," without undermining ACUM’s purpose as a collective management corporation. Presumably, by the time the Tribunal considers the extension of the cartel's approval, international experience on this issue will also be established which will enrich the set of facts before the Tribunal.

 

84.       To sum up, our opinion is that the conditions for the permanent approval should be left as they are for the time being, including the issue of excluding works for the purposes of "new media," based on the assumption that the Tribunal will be able to revisit this issue when the current conditions expire. It should be emphasized that this does not express any substantive holding regarding the result to which the Tribunal should reach on this or any other issue, beyond the general statement that the possibility of permitting a limited, well-defined exclusion of "new media" uses should not be ruled out. On the basis of the up-to-date facts laid out before it, the Tribunal will presumably reach a correct decision regarding the proper and most effective way to do so, insofar as it deems fit to follow such path.

 

Conclusion

 

85.       The appeals before us revolved around ACUM’s activity, yet they necessitated a broad discussion with regard to the collective management of copyright, considering not only the complexity of jointly owned works that derive from the talents of several authors but also the complexity of the variety of uses in a constantly changing technological world. At the present time we have reached the overall view that according to the facts before us we should not intervene in the conditions attached to the cartel's approval – from the perspective of balancing the proprietary rights of all authors against the public interest of accessibility to works that are part of the general cultural repertoire and it is therefore important to avoid placing substantial barriers to their use. We have not ruled out the possibility that in future the proper balance between authors’ rights and the public interest might dictate a different result with respect to integrating the distinction between different types of "new media" and "old media" in the rights exclusion mechanism. To a great extent, this issue represents the challenge of collectively managing rights in the modern era with its changing technological and business environment, where the practice of collective management is more essential than ever but also raises more serious difficulties and complexities than ever. The answer to these challenges (both with regard to "the segmentation mechanism" and with regard to other matters discussed before us) lies in a delicate, changing balance between the relevant interests. As we have mentioned, this balance might be affected by changes in technological platforms and business practices, by studying new information, and by lessons derived from ACUM’s activity in Israel and the operation of collective management corporations worldwide.

 

86.       In conclusion, I would suggest to my fellow justices to dismiss both appeals. ACUM would bear the Director-General's costs in the amount of NIS 20,000. EMI Israel would bear the Director-General's costs in the amount of NIS 40,000 and Partner's costs in the amount of NIS 10,000.

Justice Z. Zylbertal

 

I concur.

 

Justice E. Rubinstein

 

A.        I concur with the comprehensive opinion of my colleague, Justice Barak-Erez.

 

B.        Without wishing to gild the lily, I would like to add brief remarks. We are dealing with ACUM, a special entity established in 1936, during the British Mandate, to protect the rights of authors and artists in their intellectual property and it is as though it has always been a fundamental Israeli institution. Indeed, perhaps if we could start over today it would have been possible to think of other ways of organization for this purpose, not necessarily a private company, but such is the situation we are facing, in which we are called upon to have our say. However, even given the current situation, the challenges of dealing with the rights of those in need of ACUM’s services are ever-changing, especially with the dynamic technology, and it is not without reason that my colleague qualified the second part of her opinion with regard to the exclusion mechanism, by looking to the future.

 

C.        With regard to public directors, the Tribunal was indeed right in its decision. In my opinion, the more the better, provided that these directors do their work faithfully as agents of the public and it is to be hoped that this is the norm, in which case the financial expense involved is justified. Regarding their duties, see Prof. J. Gross, Directors and Officers in the Era of Corporate Governance (Second Edition, 2011) Chapter I, p 1 et seq and the references there; and see also Amendment No. 8 to the Companies Law (2008) with regard to the possibility of appointing independent directors; I. Bahat, Companies, 12th edition, 5771-2011, 386. My colleague described in detail the circumstances of this case but also added notes drawn from general public law, namely when a particular entity appears to be hybrid, and as derived from this analysis – the fact that ACUM is similar to that model in view of its duties to the public, without deeming it necessary to rule that it is indeed a hybrid entity. I myself would tend to say that we are indeed dealing with a hybrid entity, whether we take a relatively narrow view of it, through the eyes of its direct beneficiaries, or a broader view of the general population of users; see also my comments in ALAA 1106/04 Haifa Local Planning and Building Committee v. The Electric Corporation (2006), paras. C and D.

 

D.        The author A. Harel in his work Hybrid Entities – Private Entities in Administrative Law (5768) enumerates (pp 118-125) criteria for analyzing the hybrid nature of an entity, including a vital public function, providing a service to the public, not-for-profit activity, a monopoly, the concentration of great power that might be abused, and functional public funding. When dealing with a monopoly, as in the case before us, although ACUM is incorporated as a private company, it is painted in bold colors of hybridity, in particular considering the narrow choice given to individuals (ibid, 115). Indeed, in a rapidly changing world of varied technological possibilities for using works, the interest of authors and artists, as well as the general public, is one of fairness towards everyone; see also D. Barak-Erez, Citizen, Subject, Consumer and Government in a Changing Country (2012), 119, 121, who characterizes an entity as hybrid, when, inter alia, it serves as an actual substitute for government involvement. In the case before us, as implied above, the matter could have presumably been dealt with through a regulatory framework and this component justifies, in my view, a thorough discussion of the issue of public representatives. Indeed, before us is a private company, yet this is merely its framework and shell while its content is significantly broader; even the name attests to its belonging to the public realm – the Association of Composers, Authors and Publishers. ACUM's articles of association (as last approved on July 21, 2013 according to its website) include external directors and the controversy consists merely of their number. According to its website, ACUM presently has approximately 7,500 author members; don’t they deserve extensive protection against a potential clash of interests between various groups within the company?

 

E.         Now a few words on the role of external directors, which is the current legal term, or public directors; as we know, the Companies Law, 5759-1999 refers to an external director (article five, sections 239 et seq) but the literature uses this expression interchangeably with public director, as it was termed in the Companies Ordinance (section 96(b)(c)). Indeed, according to the learned author J. Gross (Directors and Officers in the Era of Corporate Governance (2011) 92), the external director "does not represent the regulator or the general public. He owes a fiduciary duty to the company and to it alone and he only has to bear the interest of the company in mind"; and see also Dr. O. Haviv-Segal, Company Law (2007) 438. However, even if this narrow definition is correct in principle, without going into a comprehensive discussion, the current case involves a special instance of a "private-non-private" company, which does not strive to maximize its profits. In this context, see by analogy the statement by Haviv-Segal, ibid, about the external director’s function in restraining "opportunistic behavior" by a controlling shareholder or management: "in this respect the external director can be regarded as the representative of the public shareholders on the company's board of directors." We should also mention (Gross, p 93) that the external director "brings with him knowledge, experience, and objective judgment and might balance the various views within the company, especially when the board of directors is made up of several cohesive groups"; he is "removed from the shareholders' personal interests… can express objective opinions in cases where differences have arisen between various groups in the company and balance the different interests in the company…". By analogy, this statement is presumably consistent with the present case, despite ACUM's "private" corporate framework. Therefore, the external directors have a particularly important role from the broad, overall perspective of the interests of ACUM's members generally as well as the public at large; see also Hadara Bar-Mor, Corporate Law III (5769-2009) 307-309. Thus, we should not intervene in the ruling of the Tribunal on this matter.

 

Regarding my colleague's remarks concerning the rights exclusion mechanism and old and new media, what can be inferred from them is a lesson in complexity and arbiter humility. We are dealing with money and maximizing authors’ benefit but the question is whether the baby won’t be thrown out with the bathwater. My colleague pointed out the difficulties and her conclusion is that more experience and study is necessary in order to reach a proper balance (see para. 82). My sense is that this appears difficult and challenging; the technological means are constantly changing before our very eyes, along with their implications to the issue before us, and hence solutions are likely to be short-lived. The regulator, the Director-General of the Antitrust Authority, has an extremely important role in this respect since the Tribunal has only what its eyes can see, while the Director-General is equipped with available monitoring tools. Finally, this summer I have had the opportunity to serve as a "secondary partner" in three intellectual property decisions. Their common denominator is the complexity caused by time, complexity of different types, technological and economic. Studying the fascinating collection CopyrightReadings in Copyright Law (M. Birnhack & G. Pesach, 5769-2009) reveals a variety of insights that will concern us a great deal in the future. Apart from the need to plough through the specific material, the constant changes, perhaps more than in any other area of civil law, also place the courts, and equally so – the regulatory entities, under weighty responsibility. The tension between property and competition, and between the long, short and medium term, poses real challenges. The professionalism of the regulators – be it the Patent Office or, as aforesaid, the Director-General of the Antitrust Authority – helps courts in making their rulings but does not relieve them of their responsibility. In these matters comparative law may also be useful. The bottom line is that this judgment ought to be a starting point for lessons to be learned; over, but not done.

 

Held as per the opinion of Justice D. Barak-Erez

 

September 3, 2013 (Elul 28, 5773)

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