Competition Law Insight

Authors: Edward S. Miller Marjorie C. Holmes

Type: Articles Published

The UK Office of Fair Trading (OFT) has announced that it intends to accept commitments from Booking.com, Expedia, InterContinental Hotels and others and to close its investigation into online hotel room price-fixing without a finding of infringement or the imposition of any fine.

The OFT suspected that competition in the sale of hotel rooms by online travel agents (OTAs) was being restricted by agency agreements between the hotels and the websites:

  • containing MFN (room rate most favoured nation) or rate parity clauses by which the hotels agreed with the websites not to make rooms available more cheaply themselves or via other sellers; and
  • under which the websites were prevented from sacrificing commission to give discounts to customers.

The decision bears striking similarities to the decisions of the European Commission in relation to the sale of ebooks which was also resolved by commitments.

What has been agreed

In the hotel rooms case, the parties have agreed that:

  • the OTAs will now be able to discount room rates supplied by the hotels by an amount not exceeding the OTA’s commission, either on a deal-by-deal basis, or alternatively up to an aggregate maximum equal to the aggregate commission on all sales by the OTA of rooms in a particular hotel over a year (or such shorter period as the OTA may choose);
  • the hotels can make the OTAs restrict the availability and publication of discounts to closed group members – that is, a group which consumers who have made at least one previous purchase have chosen to join by supplying their customer profile, and which operates through a password-protected online or mobile interface; and
  • the commitments cover sales to UK residents of all EU hotel rooms for a period of three years.

Notably, the OFT has not (unlike the European Commission and the US Department of Justice in the ebooks case) required the deletion of the MFN or rate parity clauses.

The investigated parties seem to have persuaded the OFT in principle that a totally free market with no restriction on discounting by OTAs would not be in consumers’ interests. The OFT recognises efficiency reasons advanced by the investigated parties to justify the (significant) restrictions which remain. A free-for-all would prejudice the hotels’ ability to alter rates in line with demand and room availability; compromise the fact that room rates act as an indicator of quality to the consumer; and cannibalise sales through the hotels’ own sites.

Consequences

Subject to the OFT changing its mind following consultation on the proposed commitments (which ends on 13 September), significant implications of the implementation of the commitments include the following

All hotels will need to agree amended terms of business with the investigated OTAs in line with the commitments. This is because the commitments given by the OTAs are not restricted to dealings with the investigated hotels.

The investigation relates solely to room-only sales. It therefore has no implications for package deals sold by tour operators. Tour operators tend to sell packages as a reseller rather than as agent, as is normally the case for room-only sales, and therefore cannot be lawfully restricted regarding any notional resale price of the room as part of the package.

OTAs may request providers of other services that they sell as agent (for example, cruises) to agree to similar terms for the sale of those services. Although the investigation related only to hotel rooms, a request to apply the commitments to any structure where an OTA does not resell a service but sells it on commission as agent for the service provider would seem very difficult to resist.

A consequence of the decision by the OFT to pursue resolution of the case by acceptance of commitments will be the absence of a reasoned decision explaining the basis for the finding of an infringement. The hotel rooms and ebooks cases raise issues both about the legality of the use of an agency model and of MFN clauses, together or separately, as a means of fixing price to the downstream buyer. These issues are very significant in the context of online selling in general (for example, on 20 February 2013, the German Federal Cartel Office launched an investigation into the price parity clause used by Amazon.de for Amazon Marketplace), and in the sale of digital content rights.

Existence of a conspiracy

However, these issues are not new. Back in 1987, the European Court of Justice was called upon to consider, in a preliminary reference from the Brussels Commercial Court, the legality of measures preventing Flemish travel agents from using their commission to grant rebates to customers. The Court had no difficulty finding that such measurers constituted an infringement. The key fact in the Flemish travel agents case was not, however, that the agents were prevented from sacrificing commission, but that there was a multiparty network of agreements and trade association and legislative rules through which all the travel agents accepted a mutual obligation not to discount. In other words, although the case did concern vertical agreements between tour operators and agents preventing discounting, the infringement was in fact constituted by horizontal agreements between agents and between tour operators that there would be no discounting.

An updated version of the same point is made by Judge Cote in the US ebooks case (see para 157 of the opinion): “If Apple is suggesting that an adverse ruling necessarily implies that agency agreements, pricing tiers with caps, MFN clauses or simultaneous negotiations with suppliers are improper, it is wrong. As explained above, the plaintiffs have not argued and this court has not found that any of these or other such components of Apple’s entry into the market were wrongful, either alone or in combination. What was wrongful was the use of those components to facilitate a conspiracy with the publisher defendants.” The existence of a conspiracy is the linchpin of the case.

The crux of both the US and EU ebooks cases – and of the Flemish travel agents decision – was the finding of a horizontal conspiracy. (There was also a clear horizontal element in the Hollywood film studios case.) It may be that the demands of proving that such a conspiracy might exist acted as motivator for the OFT to pursue resolution of the case by commitments, avoiding the need to prove an infringement.

References

http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/news-and-updates/press/2013/59-13 

Commission Decision of 12 December 2012 at eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:073:0017:01:EN:HTML   

For the opinion of District Judge Cote in the US Department of Justice ebooks case against Apple in the US District Court, Southern District of New York, see www.justice.gov/atr/cases/f299200/299275.pdf. In that case, District Judge Cote held that “the MFN was the term that effectively forced the publisher defendants to eliminate retail price competition”

bundeskartellamt.de/wEnglisch/News/press/2013_02_20.php  

Hollywood film studios case – Commission press release IP/04/2004 of 26 October 2004 at http://europa.eu/rapid/press-release_IP-04-1314_en.htm  

Flemish travel agents case: judgment of 1 October 1987 at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61985CJ0311:EN:HTML