Australia: Online travel agents' discounts raise competition concerns for UK regulator - what about Australia?

Key Points:

Regulators globally are taking different views about the legality of online discounting, so businesses need to approach this carefully.

The UK Office of Fair Trading has recently expressed competition concerns about hotel chains restricting online travel agents offering discounts on accommodation bookings marketed on behalf of the hotels. The decision, which is not yet final, poses questions as to how such conduct might be viewed under Australian law.

What is the relationship between hotels and agents?

It is common for travel and accommodation services to be marketed online by agents, who take bookings on behalf of the provider. Usually the agents are not the contractual "suppliers" or "resellers" of the rooms – they act as agents only for the hotels. Often the consumers pay the hotels after the stay.

A conventional view is that a hotel chain principal who markets its rooms through an authorised agent in this way, and who remunerates the agent by commission, is the "supplier" to the buyer and therefore can control and set the minimum rates quoted or advertised by the online agents to consumers.

However in the recent UK decision, the Office of Fair Trading (OFT) expressed concerns about practices by hotels restricting the Online Travel Agents from funding promotions or discounts from their own margin or commission, in effect reducing the net rate quoted to consumers for the services provided.

The OFT noted most hotels also quote rates direct to consumers and therefore may be in competition with their agents.

The OFT understands these practices are widespread in the UK and expressed a view (without deciding) that the restrictions could be viewed as restrictions on discounting between competitors and therefore contrary to law.

At the same time, the OFT accepted that allowing hotels to control the minimum "headline" rates advertised for their room bookings may be of benefit to consumers – there is strong interbrand competiton between hotels, and hotels need to be able to manage their overall vacancy rates and yields to compete effectively. They would lose control of this ability to manage their business if online agents could discount without restriction or control by the hotels actually providing the rooms.

As a result the OFT opted for a compromise, suggesting voluntary commitments by hotels whereby online agents could to an extent not be restricted by hotels from offering discounts provided:

• the discounts are offered to "closed groups" such as membership or loyalty schemes; and
• the discounts could not exceed the agent's commission;
• the hotels would also adjust their most favoured nation pricing clauses to allow these discounts (MFN clauses provide that hotels commit to agents to provide them with room rates no higher than the lowest rate displayed by any other online agent).

How does this compare to the Australian situation?

The OFT approach seems to go further than Australian law, which prohibits:

• resale price maintenance, that is, conduct preventing a reseller from discounting the product or service when it is on-sold;
• agreements or arrangements which are likely in purpose or effect, to substantially lessen or restrict competition; and
• agreements or arrangements between parties in competition with each other which are likely in purpose or effect to fix or control prices.

The conventional view under Australian law is that the resale price maintenance laws do not apply to a properly established agency relationship since there is no "resupply" of the product by the agent.

A similar observation about agency was made in the recent Apple case in the United States concerning Apple's agency model for selling e-books on behalf of various publishers¹.

So in Australia the OFT approach raises the question: if a principal prohibits an agent from reducing the price of the services offered or sharing its discount or commission with customers, does this contravene other provisions of the law, such as section 45 or the cartel provisions of the Competition and Consumer Act 2010?

Are the hotel and online agent in competition with one another?

The cartel provisions may not apply. If an agent is only an authorised agent offering the product or services, it is not the supplier and therefore would not usually be regarded as a competitor of the principal, even though the principal might itself directly market its services to the same customer base as the agent.

However the recent Australia Competition and Consumer Commission (ACCC) action against Flight Centre is challenging that view.

In the ACCC's Flight Centre case (heard by the Federal Court of Australia in October 2012; judgment reserved), the ACCC argued that Flight Centre is a competitor of the airlines and in attempting to stop certain airlines from undercutting its own prices, it was in fact trying to fix prices with competitors.

However, Flight Centre contends that the ACCC has misunderstood its business model, arguing that it acts as an agent for, rather than a competitor of, the airlines.

The judgment in this case could have significant repercussions for the way sales and distribution in the online travel industry are generally structured.

Is there a legal solution?

There are a number of risks and options to be considered when engaging in or proposing to engage in conduct involving restrictions on online discounting, particularly given the global reach of online selling and likely differing views internationally as to how these restrictions would be viewed by regulators.

Companies in the online travel booking sector seeking to implement such restrictions lawfully, or companies faced with such restrictions, need to consider their business models and agreements to find a solution which is not only lawful in Australia (if available) but which also minimises exposure to risks overseas.

For example one of the key questions is that even if a legal solution is found in the Australian context for agents offering hotel room rates, would it take into account "subagents" located overseas and any risks which may arise from seeking to place restrictions on the overseas subagents?

The balancing of the competition risks and the implementation of a workable legal solution in Australia and/or globally is not straightforward. However it is critical for companies in the online travel booking sector to get it right, given the potentially large penalties which could follow if a breach is established.

Footnote

¹Judge Cote of the District Court in the Southern district of New York said "The Plaintiffs do not argue, and this Court has not found, that the agency model for distribution of content, or any one of the clauses included in the Agreements, or any of the identified negotiation tactics is inherently illegal. Indeed, entirely lawful contracts may include an MFN, price caps, or pricing tiers. Lawful distribution arrangements between suppliers and distributors certainly include agency arrangements."

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.