Fachgruppentag DAJV 2014 ARIM Fachgruppe Bundeskartellamt 1 Parity Clauses between Hotels and Online Portals - The HRS Test Case in Germany- Christa Pfeil-Kammerer

Bundeskartellamt 2 Agenda 1.How did the case start off? 2.Why only HRS in 2010? 3.Scope and enforcement of parity clauses 4.Market definition 5.Theory of harm 6.Legal assessment: Art. 101 (1) TFEU and question of vertical block exemption 7.Conditions for withdrawing the benefits of the Vertical Block Exemption Regulation 8.State of play

Bundeskartellamt The HRS Test Case in Germany 1.How did the case start off? _____________________________________________________  In 2010, HRS extended the already existing parity obligations and the sanctions in case of non-compliance and at the same time HRS raised the commission for bookings from 13% to 15%.  Initially a single hotel complained about these changes, in the course of time others joined.  In 2011 a civil law suit was filed by a newcomer platform against the parity clauses - in 2012 this led to an interim injunction by the court obliging HRS to suspend the parity clauses for the duration of the proceedings.  HRS accepted a similar (informal) commitment vis à vis the Bundeskartellamt for the duration of the case. 3

The HRS Test Case in Germany 2. Why only HRS in 2010? ______________________________________________________  At the outset of the case HRS was by far the strongest online portal in Germany.  Even though all large portals (HRS, Booking, Expedia) have parity clauses hotels mainly complained about HRS since HRS very actively enforced these clauses.  As other portals have gained stronger market positions HRS is still the portal responsible for the largest number of online bookings for hotel rooms in Germany.  Dependency of hotels is still strong because of the overall market position and the HRS strategy to offer services to firms needing hotel rooms for their business travels. Bundeskartellamt

The HRS Test Case in Germany 3. Scope and enforcement of parity clauses _____________________________________________________ Scope  Price parity  Parity on conditions for booking and cancellation  Parity on room availability  Parity on all distribution channels including the hotel reception desk Enforcement  „Crawler“ for searching the internet for hotel price differences.  Hotels receive s with lists on price differences to the detriment of the online portal using parity clauses and hotels are advised to eliminate price differences.  Insistent telephone calls by hotel portal employees lead to hotels renouncing their price policy.  Contract terminations by hotel portals without any reasons being given Bundeskartellamt 5

Bundeskartellamt 6 The HRS Test Case in Germany 4. Market definition Product Market  Hotel portals combining the functionalities of searching, comparing and booking of hotel rooms in one hand. Geografic Market no larger than national:  National presence necessary in order to attract local/regional hotels and to maintain business relationships.  Portals invest stronlgly in national advertising.  Cooperation with nationally well-known marketing partners in the travel industry.  By far the largest group of customers booking hotel rooms in Germany are German residents.

Bundeskartellamt 7 The HRS Test Case in Germany 5. Theory of harm ____________________________________________  Parity clauses hinder competition among hotel portals for lower room prices to end customers and for lower commissions to hotels.  They impede market entry of new portals offering similar or innovative services (such as last minute offers via smartphone) as hotels cannot pass on lower commisssions to consumers.  Due to failing flexibility of hotels parity clauses also reduce competition among hotels.

Bundeskartellamt 8 The HRS Test Case in Germany 6. Legal assessment – Art. 101 (1) TFEU _________________________________________________  Competition law is applicable to contracts between portals and hotels because hotels do not instruct portals and portals take their own market decisions. Nevertheless, HRS is an agent, not a reseller.  Our view: Parity clauses are restrictions by object within the meaning of Art. 101 (1) TFEU. By their very nature they have the potential of restricting competition. However, we did not decide on this issue and showed the effects.  Our view: Taking the Vertical Block Exemption Regulation (VBER) literally, parity clauses are not a hardcore restriction within the meaning of Art. 4 a) VBER. However, the market effects of these clauses are very much comparable. We did not decide on this issue though and showed the effects.

The HRS Test Case in Germany (2013) 6. Legal assessment – question of vertical block exemption  Market Shares have to be calculated on the basis of market sales data.  Art. 3 (1) VBER: HRS exceeded the 30% („safe harbour“)- threshold in  As we were still waiting for data for 2012, we choose a twofold approach:  Individual exemption assessment in case HRS continued to exceed 30% in  Withdrawal of the benefits of the Block Exemption Regulation in case HRS fell beneath 30% in Bundeskartellamt

Bundeskartellamt 10 The HRS Test Case in Germany 7. Conditions for withdrawing the benefits of the Vertical Block Exemption Regulation  If the German Cartel Office intended to withdraw the benefits of the Block Exemption for HRS it would have to show the following:  The affected market is no larger than national in scope (Art. 29 [2] Reg 1/03).  Helpful (see Art. 6 VBER): Parity clauses form part of a network of similar vertical restraints [HRS, Booking and Expedia which all have parity clauses in hotel contracts cover about 90% of the German hotel portal market].  The exemption conditions in Art. 101 (3) TFEU are not fulfilled for HRS individually.

Bundeskartellamt 11 The HRS Test Case in Germany 8. State of play ______________________________________________________  Final decision HRS Dec. 20, declaring that the parity clauses [„best price clauses“] are not compatible with Art. 101 TFEU (and the relevant national law), - requesting HRS to delete the best price clauses in contracts between HRS and hotels in Germany as of 1st March 2014, - prohibiting the further application of the best price clauses by HRS. Since HRS exceeded the 30% VBER-threshold („safe harbour“) in 2012 we did not withdraw the benefits of the Vertical Block Exemption Regulation.  HRS: Appeal to the Court of Appeal in Düsseldorf on January 17, Start of proceedings against Booking and Expedia Dec. 19, 2013