On 20 December 2013, the German Federal Cartel Office (FCO) issued a decision finding that the parity clauses agreed between HRS-Hotel Reservation Service (HRS) and hotels in Germany were contrary to competition law and ordered HRS to remove them from their contracts by 1 March 2014.
HRS is a worldwide online hotel portal for business and leisure travellers which, together with Booking and Expedia, is one of the leading hotel portals in Germany. HRS provides brokerage services to hotels by offering hotel accommodation on its portal in exchange for a commission payable by the hotel to HRS on the value of rooms booked through HRS. The brokerage contracts concluded between HRS and hotels contained clauses which ensured that the price the hotel would offer through HRS for a room would never be higher than the price the hotel offered through other online distribution channels, i.e., through other hotel or travel portals or the hotel's own webpage. Furthermore, hotels guaranteed to treat HRS no less favourably than other online distribution channels in relation to room availability and other conditions. In the beginning of 2012, HRS introduced new contract clauses which increased the commission payable to HRS by the hotels and also extended the scope of the parity clauses to cover the prices and other conditions offered by hotels through all other distribution channels, including off-line channels.
The FCO found that such parity clauses infringe Section 1 of the German Act against Restraints of Competition (GWB) and Art. 101 (1) TFEU as they have the effect of significantly restricting competition. In the FCO's view, the clauses restrict the freedom of HRS' hotel partners to set their prices and conditions freely through online and other distribution channels as they may not offer there more favourable terms than those offered through HRS. According to the FCO, the clauses restrict competition between hotel portals as other portals do not have an economic incentive to offer lower commissions to the hotel partners of HRS in order to encourage those hotels to offer rooms at cheaper prices or on better conditions through them relative to HRS (as HRS will automatically benefit from the same terms through the operation of the parity clauses). The clauses therefore were regarded as having the same economic effect as direct collusion between the hotel portals to set a common minimum price for the brokerage service provided to hotels. The FCO also found that the parity clauses allowed HRS to increase the commission it charged hotels without having to fear that such increase would be passed on to hotel customers by hotels charging a higher price on sales through HRS than through HRS' competitors.
Furthermore, the FCO found that the clauses hindered market access. It referred to the concrete example of how HRS managed to prevent Unister, a German company operating and marketing web portals, from offering the "deal of the day" by threatening hotels to exclude them from the HRS booking system if they were not prepared to offer the same deal on sales through HRS. The FCO further mentioned the difficulties faced by mobile hotel portals, such as Just Book and BookitNow!.
In addition, according to the FCO, the parity clauses limit competition between hotels. The constraints imposed by these clauses restrain hotels from flexibly lowering their prices to reflect price savings based on lower commissions or in case they market rooms themselves. This limits the ability of hotels to freely compete by providing the best deal for similar hotel rooms.
The FCO found that the anti-competitive effects of HRS' parity clauses are reinforced by the fact that its competitors, Booking and Expedia, which together with HRS cover 90% of the German hotel portal market, also apply parity clauses.
The resulting restrictive effect on competition was considered to be appreciable. In this context, the FCO emphasised that the market share of HRS was more than 30% in 2012 and also the fact that HRS enforces the parity clauses by temporarily excluding offending hotels from its portal or by definitively terminating its contracts with them.
The FCO considered broker services by hotel portals for hotels located in Germany as the relevant market. Germany was regarded to be the relevant geographic market because the hotel portals which are important for the brokering of German hotels focus on Germany and German customers. The hotel portals were found to operate local websites with country- specific content and domain names. Furthermore, hotel portals were found to select commercial partners which advertise and provide a link to hotel portals on their webpages, such as airlines and railway companies, based on the country of their client-base. Furthermore, the FCO referred to the fact that German hotels are mainly booked by Germans.
The FCO held that the parity clauses could not benefit from an exemption pursuant to Section 2 (2) GWB and Article 101 (3) TFEU through the application of the Vertical Agreements Block Exemption Regulation (VBER) because HRS had a market share exceeding 30% on the German market (thus, not meeting one of the conditions of application of the VBER). It therefore did not decide whether this type of parity clause is to be regarded as an agreement that directly or indirectly has the object of setting a fixed or minimum resale price applicable to the buyer of goods or services, which would constitute a hardcore restriction within the meaning of Article 4 a) of the VBER and exclude the application of the exemption provided by the VBER.
The FCO found that the wording of the VBER is not well suited to be applied in the context of the relationship between hotels and hotel portals. If hotels were regarded as suppliers of hotel services and hotel portals as buyers pursuant to Article 1 h) of the VBER, the parity clause would not limit the price setting freedom of the buyer (the portal) but of the supplier (the hotel) which as a result would fall outside of the scope of Article 4 a) of the VBER. If, however, the portals were considered as suppliers of brokerage services and the hotels as buyers of these services, the buyers (the hotels) do not resell this service to customers which is key as Article 4 a) of the VBER only applies to restrictions on the resale prices of buyers. Nevertheless, the FCO held that the effects of the parity clauses are comparable to a hardcore restriction pursuant to Article 4 a) of the VBER.
The FCO also held that the parity clauses do not merit individual exemption pursuant to Section 2 (1) GWB and Article 101 (3) TFEU. The risk of free riding (through customers booking on webpages which have invested less in the quality of the service they provide) and billboard effects (through customers using the information on the hotel portals but booking on the hotels' own webpages) were regarded as insignificant in the present case. Therefore, no appreciable efficiencies were found and, in any event, the clauses were not regarded as necessary in order to achieve any efficiency gains and were considered to eliminate effective competition.
In addition, the FCO found that HRS abused its relative market power vis-à-vis dependent small and medium sized hotels pursuant to Section 20 (1) in connection with Section 19 (1), (2) No. 1 GWB. According to the FCO, despite the strong presence of Booking and Expedia in Germany, it was considered indispensable for a hotel to be listed on HRS' hotel portal to achieve effective capacity utilization in Germany. The parity clauses were regarded as limiting the competitive freedom of small and medium-sized companies to freely choose their distribution channels and therefore as an abuse.
It is reported that HRS has appealed the decision of the FCO. The FCO also opened proceedings against the hotel portals Booking and Expedia which apply similar parity clauses in Germany. The case is of note as it contains such an extensive analysis of the legal and economic effects of most favoured customer clauses, which were not addressed in the OFT's recent investigation into hotel portals (See, VBB on Competition Law, Volume 2014, No. 2, available at www.vbb.com) or the European Commission's ebooks investigation. The present decision of the FCO appears in line with an earlier decision of the Higher Regional Court of Düsseldorf which held in February 2012 that the parity clause used by an online hotel portal infringed Section 1 GWB because it limited the freedom of hotels when setting the price for hotel rooms and excluded almost completely competition between the portals.