Introduction
A recent judgment by the Court of Justice of the European (CJEU) (Second Chamber) [1] held that price parity clauses between hotel operators and online intermediary service providers for reservation of accommodation may hinder competition.
The Court held that such price parity clauses cannot in principle be classified as ‘ancillary restraints’ – those restrictions in commercial agreements that are deemed necessary for the implementation of a transaction which have a neutral or positive effects on competition.
While such agreements between accommodation operators and online travel agencies (OTA’s) such as Booking.com allow the former to enter into agreements with other intermediaries, price parity clauses prohibit establishments from offering lower prices than those offered on the partner site. These may be ‘wide parity clauses’ that prohibits the hotels and other accommodation establishments from offering lower prices on their own sales channels as well as other sales channels operated by third-parties or ‘narrow parity clauses’ whereby the prohibition on offering lower accommodation rates is restricted to the hoteliers’ own sales channels. ‘Wide parity clauses’ fell largely into disuse by 2015.
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Background and timeline of events leading to the preliminary reference before the CJEU
Booking.com BV was incorporated in the Netherlands in 1996 and operates through subsidiaries established in other EU Member States, including Germany, with the establishment of Booking.com (Deutschland) in 2006.
Booking.com and other OTA’s do not determine the classification and the pricing of accommodation on their platform as these are set by the accommodation establishments. The service offered by Booking.com and other OTA’s – connecting establishments and travellers through their platform/s – is free of charge for travellers while hoteliers pay a commission to the OTA when a customer makes a reservation through the platform and does not cancel.
Establishments are not restricted from selling directly to customers or entering into agreements with more OTA’s.
Upon entry into the German market in 2006, Booking.com (with other OTA’s following suit) inserted a ‘wide parity’ clause in its general terms and conditions of the agreements concluded with accommodation providers. As explained above, these clauses prohibit providers from offering lower prices than those offered on Booking.com. The restriction applies both to the provider’s own sales channels and to competing OTA’s.
In December 2013 while deciding on a case involving a competing OTA, the Federal Cartel Office in Germany concluded that the wide parity clause runs contrary to German and EU law on the prohibition of cartels. This led to an investigation by the German authority on the wide parity clause used by Booking.com (Deutschland). Meanwhile, the OTA concerned filed an appeal against the 2013 decision before the Regional Court of Dusseldorf. The appeal was dismissed in January 2015 and the original ruling became final.
In 2015, presumably in the wake of the judgment by the German Regional Court, Booking.com embarked on an exercise whereby it removed the wide parity clause from its general terms and conditions across most markets in the EU, substituting it with a ‘narrow parity clause’ which applies the restriction on hoteliers offering lower prices than those listed on Booking.com only to their own sales channels.
However, the narrow parity clause was also on the German Federal Cartel Office’s sights and in a ruling issued in December 2015 during which the regulator consulted the European Commission in terms Regulation 1/2003[2], it found that narrow parity clauses implemented by Booking.com restricted competition both on the market for the provision of accommodation services and on the market for the provision of online intermediation services.
The authority further found that the provisions relative to vertical agreements and concerted practices in terms of Regulation 330/2010[3] due to Booking.com’s large share of the market fulfill the criteria for exemptions applicable to these clauses in terms of Article 101(3) of the Treaty on the Functioning of the European Union (TFEU).
In January 2019, the Regional Court of Dusseldorf partially upheld an appeal lodged by Booking.com against the decision of the German regulator, holding that while the narrow parity clauses did restrict competition, it viewed it as a necessary ancillary restraint to enable Booking.com to receive fair remuneration for the provision of its services via the platform and as a safeguard to limit ‘free-riding’ – the practice whereby the hotel operators take advantage of the greater visibility offered by the online reservation platforms but then encourage customers to reserve directly with them by offering better rates.
The Federal Cartel Office appealed the decision and the dispute was examined by the Federal Court of Justice of Germany and in May 2021, the Federal Court annulled the decision of the Regional Court. It disagreed with the reasoning of the Regional Court and concurred with Cartel Office’s reasoning that the narrow parity clause was a restriction on both the market of hotel accommodation and the market for online reservation platforms. It further held that the ‘ancillary restraint’ was not applicable since it has not been established that in its absence, the profitability of Booking.com would be compromised.
In 2020, Hotelverband Deutschland, an association representing more than 2,600 hotels, filed an action for damages against Booking.com before the Berlin Regional Court claiming that its members suffered damages as a result of the price parity clauses.
During the same year, Booking.com filed an action before the District Court of Amsterdam, the Netherlands, which stayed proceedings and referred the following questions to the Court of Justice:
- Do wide and narrow parity clauses constitute an ancillary restraint in the context of the application of Article 101(1) TFEU?
Considerations of the Court
After examining and ruling on the preliminary pleas on admissibility of the reference made by the referring court in Amsterdam, the Court considered the two questions referred.
Whether wide and narrow parity clauses constitute an ancillary restraint.
The Court had to establish whether the parity clauses in agreements between hoteliers and online reservation platforms were outside the scope of the prohibition of Article 101(1) TFEU on the ground that these clauses are ancillary to those agreements.
According to settled case law[4], a restriction on the commercial autonomy of one or more of the parties would not be covered by the prohibition in Article 101(1):
- If that restriction is objectively necessary to the implementation of that main operation and;
- The restriction is proportionate to the objectives pursued by it.
Upon examination of the facts at hand, the Court held that the provision of online hotel reservation services such as Booking.com has had a neutral or even positive effect on competition.
These services have led to “significant efficiency gains by enabling, on the one hand, consumers to have access to a wide range of accommodation offers and to compare those offers simply and quickly… and on the other hand, accommodation providers to acquire greater visibility and thereby increase the number of potential customers”[5].
However, the Court held that it has not been established that the price parity clauses are objectively necessary for the implementation of the main operation and, are proportionate to the objectives pursued by it.
On the wide parity clauses, apart from concluding that they do not appear as objectively necessary or proportionate, the Court further held that such clauses not only are liable to reduce competition between reservation platforms but they also carry the risk of “ousting small platforms and new entrants.[5]”
The Court considered the same to be applicable to narrow parity clauses. Although prima facie they appear less restrictive and are intended to lessen the risk of free-riding, the Court was not convinced that narrow parity clauses are objectively necessary to ensure the economic viability of Booking.com.
The Court noted that although wide and narrow parity clauses have been prohibited in a number of Member States, Booking.com’s provision of services “has not been compromised”[6].
In the light of the above, the Court concluded that parity clauses, both wide and narrow do not fall outside the scope of the prohibition of Article 101(1) TFEU.
Definition of relevant product market in terms of Regulation 330/2010
The Court was hereby asked by the referring Court to provide guidelines on the elements of interpretation to be taken into account when defining what is the relevant market.
This is of importance as the incorrect interpretation of what constitutes a relevant market may lead to unjust application or lack of application of the exemption of Article 101(3) TFEU as applied by the abovementioned Regulation[7].
The Court held that in a situation where an online hotel reservation platform acts as an intermediary to transaction to transactions between accommodation establishments the determination of the relevant market would require an examination of substitutability from a supply and demand point of view, between these intermediation services offered by OTA’s and other sales channels.
Conclusion
Although having already fallen into disuse as early as 2015, well before the Amsterdam Court made the preliminary reference, the CJEU has concluded that wide parity clauses could not be classified as ancillary restraints and therefore they fall within the scope of the prohibitions as set out in Article 101(1) TFEU. Furthermore, the wide parity clauses presented manifest restrictive effects and would have resulted in smaller and new OTA’s being forced out of the market.
While not viewed as restrictive as the wide parity clauses, the narrow parity clauses also failed the ancillary restraints criterion as it was not established that these clauses are necessary for the operation of the OTA’s. The Court in fact pointed out that insofar as Booking.com was concerned, the prohibition of the inclusion of parity clauses by a number of Member States, did not result in the company suffering a drop in its provision of services.
Footnotes
[1] C-264/2023 decided on 19/09/2024
[2] Article 11(5) of Regulation 1/2003
[3]Commission Regulation (EU) 330/2010 on the application of Article 101(3) TFEU (No longer in force as of 31/05/2022, replaced by Regulation EU 2022/720), also known as the Vertical Block Exemption Regulation (VBER)
[4] MasterCard & Others vs Commission (C-382/12), decided on 11/09/2014, F. Hoffman-La Roche and Others (C-179/16) decided on 23/01/2018 and EDP-Energias de Portugal and Others (C-331/21) decided on 26/10/2023
[4] Para.59 of the judgment under review.
[5] Ibid. para 62
[6] Ibid. para 74
[7] Art 2 of Regulation 330/2010 (exemption) and Art 3(1) of Regulation 330/2010 (30% threshold of share of the relevant market)
