Open all hours: Competition law and the hotel sector (part 1)

In this first alert for our readers, we provide an overview of the common restrictions captured by the prohibition of anticompetitive agreements set out in Chapter 1 of Competition Act 1998 and Art 101 TFEU. The second alert will take a close look at information exchange and, lastly, we will turn to the prohibition of abuse of dominance set out in Chapter 2 of the Competition Act 1998.

Anti-competitive agreements

1. Most favoured nation (MFN)/retail parity clauses in agreements with Online Travel Agencies (OTAs)

Much of the competition case law around hotels in the past few years has been in relation to MFN clauses, which are in essence retail parity clauses contained in agreements with OTAs.

Theoretically, both parties to the clause are liable for a fine even if the inclusion of the clause is at the request of the OTA or features in the OTAs standard terms.

Despite growing doubts about the legality of these clauses, their use remains widespread. In the UK, there have been investigations into and legislation dealing with the use of MFN clauses.

• Following a 2015 Competition and Markets Authority (CMA) investigation into the hotel online booking sector, two OTAs gave binding commitments not to enforce wide MFN clauses until 1 July 2020. Both companies have since confirmed that they will continue their non-enforcement of such clauses.
• The UK’s Vertical Agreement Block Exemption Order (VABEO), which came into force in May 2022, now designates wide MFN clauses as a ‘hardcore’ restriction. The implication of this includes potential enforcement actions and the invalidation of entire agreements. You can read our in-depth article on the new regime and MFNs here.

In the EU, the EU Vertical Block Exemption Regulation (VBER) treats both narrow and wide MFN clauses as excluded restrictions. This means that they are not considered hardcore and do not bring the entire agreement out of the safe harbour. However, they are subject to an individual assessment based on their effects to assess their legitimacy. This is a more lenient position than under UK law. Having said that, their legal status is far from settled. Narrow MFN clauses are specifically outlawed in some EU jurisdictions such as Italy, Austria and Belgium. In Germany, the Federal Court of Justice ruled in May 2021 that narrow MFN clauses infringe on local competition law. In November 2022, a Dutch court referred to the CJEU the question of whether wide or narrow MFN clauses in contracts with OTAs can be justified under EU competition law (this has not yet been settled). It is therefore advisable to take legal advice on an agreement containing an MFN clause given the evolving legal landscape across the EU and UK.

2. Exclusive dealing agreements between hotels and travel agencies

An agreement between a hotel and travel agency to deal exclusively with one another could infringe competition law if it forecloses competition in relation to other competitors, usually for a long period of time. Businesses have in the past been fined for this sort of behaviour in other jurisdictions.

Equally, a hotel may use competition law as a basis to resist pressure from tour operators to restrict dealings with other tour operators. In 2005, the German competition authority initiated investigations against TUI following a complaint by competing tour operator Holiday Jack. It was suspected that TUI employees across many resorts had put pressure on local hoteliers not to conclude contracts with Holiday Jack. TUI agreed to ask its employees in writing to refrain from any anti-competitive behaviour and communicate to hoteliers that they were free to conclude contracts with competitors of TUI.

3. Geographical restrictions in agreements with tour operators

Agreements between hotels and tour operators should not restrict the ability of consumers to shop around for the best hotel deal across Europe, regardless of their country of residence. Any agreement restricting the free flow of goods and services across the single market is liable to infringe EU competition law.

4. Hotel management agreement (HMA)

Most HMAs are made between a hotel owner and a hotel operator which are distinct entities and not part of the same organisation. An HMA may contain a non-compete clause, under which the operator agrees that a competing hotel – for example bearing one or more of its group’s brands will not be opened in close proximity. Such a clause may raise competition law issues, particularly if the agreement is between actual or potential competitors and should be considered carefully both by hotel owners and operators before inclusion in an agreement. Non-compete clauses with long durations (between 5-10 years) can also have what are known as exclusionary effects. This can mean competitors are effectively excluded from the market and so competition is reduced.

In addition, a hotel owner should not assume that a hotel operator will assume sole liability for a breach of competition law by virtue of an HMA. As an example, in 2019, the Singaporean competition authority found a hotel owner and hotel operator to constitute a single economic entity (i.e. part of the same group), as the operator worked for the benefit of and carried out the instructions of its owner. The consequence of this was that the hotel owner also incurred a fine of approx. EUR 654,983.82. Since competition law fines are calculated according to annual group turnover, any finding that the owner and the operator comprise a single economic entity may have significant ramifications for the level of a fine.

5. Price restrictions in hotel franchise agreements

Hotel franchise agreements should not include any terms imposing fixed or minimum prices at which franchisees must sell services to customers. This is one of the most serious competition law infringements and is easy for competition authorities to establish. Franchisors can publish recommended retail prices or impose maximum resale prices, if in practice they do not amount to fixed prices. It is important to remember that competition law infringements can also be achieved through indirect means. You can read more on the competition rules applicable to franchises here.

6. Restrictions on brand bidding

Agreements with OTAs or other stakeholders may contain a clause whereby each party agrees not to bid on the other’s advertising keywords, and/or to add the other’s keywords to their negative keyword list; this is sometimes referred to as “brand bidding” restrictions. These actions remove the possibility of the hotel appearing in the results of a search on the OTA’s keyword, for example. This is highly problematic and could amount to a hardcore restriction or alternatively a cartel.

Coming up in Part 2:

We will be diving into to knotty issue of information exchange, a particularly saliant issue for franchises. and the red flags companies involved in the hospitality need to be aware of.

Authors: Ariane Le Strat, Saskia King, Karen Friebe, Tenisha Burslem Rotheroe, Sean Bullock