Background to the referral
On 19 September, the Court of Justice ("CJEU") handed down its judgment in Booking.com BV and Booking.com (Deutschland) GmbH v 25hours Hotel Company Berlin GmbH and Others. This case made its way to the CJEU as a reference for preliminary ruling from the Amsterdam District Court connected to a private dispute between Booking.com and a number of providers of accommodation services in Germany.
The case has a long history dating back to Booking.com's entry into the German market in 2006 – at which time Booking.com inserted a "wide" parity or "Most Favoured Nation" ("MFN") clause into its standard terms with accommodation providers. This clause prevented accommodation service providers from offering, through any other sales channel, a price for rooms which was lower than that offered on Booking.com. In 2013, the German Federal Cartel Office ("FCO") found that a similar wide parity clause contained within contracts used by a competitor of Booking.com in Germany was anti-competitive, and opened an investigation into Booking.com along similar lines.
During the summer of 2015, Booking.com removed the wide clause from its general terms and conditions and replaced it with a "narrow" parity clause. Under this clause, the accommodation services provider was prohibited from offering rooms at better prices through its own sales channels only, and not those of other third parties. It did this following a consultation process with the French, Italian and Swedish competition authorities.
In December 2015, the FCO found that the narrow parity clause Booking.com was using was also restricting competition and ordered Booking.com to cease using it. It is notable that such narrow parity clauses can, in certain circumstances, be automatically exempted from the application of competition law under the EU Vertical Agreements Block Exemption Regulation ("VBER") (the UK equivalent being the Vertical Agreements Block Exemption Order ("VABEO")) without detailed consideration of their effects. The FCO was of the view that, because of Booking.com's large market share in relevant markets, it could not benefit from this exemption.
Booking.com appealed this decision and while the first instance found that the narrow parity clause did restrict competition, it may be deemed to be necessary (or, in competition law, an ancillary restraint) to enable Booking.com to receive fair remuneration for its services, in the sense that it prevented accommodation services providers from freeriding on Booking.com's investments and efforts, and is therefore lawful. This judgment was appealed and was annulled in 2021 – the Federal Court of Justice in Germany took the opposite view, that the narrow parity clause could not be an ancillary restraint.
In 2020, an association representing more than 2,600 hotels brought a damages action against Booking.com seeking compensation for damage resulting from the wide and narrow parity clauses in Germany. In response, Booking.com brought a case before the Amsterdam District Court to seek a declaration that the parity clauses it had employed did not violate competition law, and that the claimants seeking compensation had not suffered any loss as a result of the clauses. The Amsterdam District Court referred a number of questions to the CJEU to assist it in connection with this matter.
The questions referred to the CJEU were as follows:
- If VBER applies to the parity clauses, how should the relevant
market be defined, in order to decide on market share and therefore
the application on VBER, when transactions are mediated by an OTA
on which accommodation establishments can offer rooms and get in
touch with travellers who can book a room through the platform?
This question will be referred to as the "Market
Definition Question".
- Do wide and narrow parity clauses constitute an ancillary restraint in the context of the application of Article 101(1) TFEU? This question will be referred to as the "Ancillary Restraints Question".
The CJEU's judgment
As regards the Market Definition Question, the CJEU's finding was a simple one. While there are a number of complicating factors impacting market definition exercises for multi-sided platform markets, it was for the referring court to determine what the relevant market is, by reference to actual substitutability between online intermediation services and other sales channels.
As regards the Ancillary Restraints Question, the CJEU reiterated the circumstances in which a provision could be deemed to be "ancillary" to a main non-restrictive transaction (such as the operation of an online intermediation service to hotels). Being, in particular:
- whether the implementation of the potential ancillary restraint
is "objectively necessary" to the main
transaction, in the sense that it would be impossible for the main
transaction to go ahead in the absence of it; and
- whether the restriction is "proportionate" to the objectives underlying the main transaction, in the sense that there should be no less restrictive means by which to achieve the main transaction.
The CJEU determined that the wide parity clauses do not appear to be objectively necessary or proportionate to the objective of providing online hotel reservation services. It commented that there is 'no intrinsic link between the continued existence of the main activity of the hotel reservation platform and the imposition of such clauses', and they also risk reducing competition between existing hotels and new entrants to the market.
The CJEU considered that the same was true of narrow parity clauses. While the CJEU noted that these clauses are less restrictive and designed to prevent accommodation providers from free riding off the Booking.com platform, it deemed that they are still not objectively necessary to ensure the economic viability of Booking.com. The court acknowledged that there were benefits to the clauses, but noted that the question was not whether the restriction is beneficial to the platform's commercial success, but whether it is indispensable to the implementation of the platform itself.
When considering if viable alternative options for ensuring the viability of Booking.com existed, the CJEU highlighted the fact that Booking.com's services have not been compromised in other Member States where price parity clauses are entirely banned.
What does this mean for price parity clauses?
The question as to how parity clauses will be dealt with under the law surrounding ancillary restraints has been an open question in competition law for some time, and practitioners have been waiting to see how courts and regulators will grapple with the question. In our view, it appears from the CJEU's judgment that it will now be difficult for either wide or narrow price parity clauses to qualify as ancillary restraints for the purposes of competition law, though this will remain a fact specific assessment. In other words, the judgment reduces the grounds on which these clauses can likely avoid competition law scrutiny and sanction.
This does not mean, however, that there are no circumstances in which the implementation of price parity clauses will be lawful under relevant competition laws. In particular:
- Where an agreement qualifies for exemption under VBER or VABEO,
narrow price parity clauses which form part of that agreement will
benefit from that exemption and can be implemented.
- Wide price parity clauses, where they fall outside the scope of
the relevant block exemption, will not be automatically unlawful
– rather it needs to be shown that the clause in fact has an
anticompetitive object or effect.
- Even if found anticompetitive, in certain exceptional circumstances and with appropriate evidence, these clauses could benefit from an individual exemption from the application of competition law on the basis that they generate efficiencies to the benefit of consumers.
Retail price parity clauses, particularly those applying to all distribution channels/online platforms, still need to be treated with caution – but the specific circumstances (and market shares) of the companies involved will determine the level of competition law concerns they are likely to raise.
This analysis is complicated by the fact that different regulators take slightly different approaches to these clauses. Under VBER in the EU, certain platform MFNs constitute “excluded” restrictions, requiring a self-assessment. Whereas, in the UK under VABEO, all wide retail parity clauses are deemed to be hardcore restrictions, meaning that the inclusion of a wide parity clause in an agreement will mean that the entire agreement loses the exemption, not just the clause itself. It is also worth keeping in mind that the EU Digital Markets Act ("DMA") prohibits the use of both wide and narrow parity clauses by those designated as "gatekeepers". This means that for those powerful digital firms which are designated under the DMA (of which Booking.com is one), it will not be lawful to enter into such parity clauses in any circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
