Germany’s Federal Court of Justice on price parity clauses: rechtswidrig!

Germany’s Federal Cartel Office won the battle over “parity” clauses: hotels should be allowed to offer prices on their own websites that are lower than the prices offered on the online booking platform, In this remarkable ruling, the Federal Court of Justice sided with the FCO and overturned a 2019 ruling in the platform's favour.

Naturally, the Federal Court of Justice’s judgment will discourage large online platforms from using price parity clauses in Germany. Elsewhere, competition specialists might be perplexed by such a ruling which holds also a “narrow” price parity clause illegal, because agreements of this kind are thought to be pro-competitive by preventing free riding. Some competition enforcers may find renewed inspiration in the judgment to take enforcement action against these clauses. In this post, we’ll look at how the ruling fits in the wider European legislative and enforcement landscape and what the future holds.

A free-for-all enforcement fairground rolled into town

Over the past decade, we have seen much antitrust enforcement of price parity clauses (sometimes referred to as “best-price” or “most favoured nation” clauses) used by digital platforms in contracts with merchants that use the platforms. In earlier blog posts, we have noted that enforcement and outcomes in this area were not always consistent.

  • Many cases were closed via settlements where the investigated platform agreed to remove a “wide” price parity clause from its contracts with merchants. The inclusion of such clauses essentially means that the merchant must offer the platform its best price across all distribution channels that the merchant uses. They are often assumed to reduce price competition and prospects for new entry. Recently, the UK’s Competition and Markets Authority fined an insurance price comparison website almost £18 million for using wide clauses in its contracts.
  • Cases involving “narrow” price parity clauses have been given more leeway. Those clauses essentially prohibit the merchant from offering better terms only on the merchant’s own website. They are often assumed to allow competition between different platforms and other distribution channels while, at the same time, serving as a check against free riding. For instance, in Hong Kong, South Korea and Sweden narrow price parity clauses were declared legal. Other countries (Austria, Belgium, France, Italy and Switzerland) have taken a more critical approach, but recognised that new strict legislation was necessary to ban such terms. And, likewise, the European Commission’s ongoing consultation on competition rules for distribution systems has floated the idea of a legislative change for stricter control of parity clauses.

The Federal Supreme Court’s judgment adds an unusual judicial dimension, in that few price parity cases have been litigated to the highest court in any jurisdiction. The judgment is also notable across the EU, since the Federal Supreme Court applied EU competition law in this case.

A not-so-free German roller-coaster ride for

The Federal Supreme Court settled any questions around the use of narrow parity clauses in hotel booking platform contracts. The full decision is yet to be published, but the court’s press announcement makes it clear that even the narrow parity clauses used by until 2016 restricted competition. Most importantly, the court took issue with a narrow parity clause preventing hotels from passing on (in the form of price reductions) part of the commission they would not have to pay to the platform, to customers that buy through the hotel’s own website.

In 2019, the Higher Regional Court Düsseldorf emphasised the pro-competitive effects of narrow parity clauses: the prevention of free riding which occurs when end customers use to find their preferred hotel, but ultimately book it through another channel. The Düsseldorf court held that the narrow clauses were ancillary restraints that ensured a fair and balanced exchange of services between the platform operators and hotels (in particular, a reasonable payment for platform operator’s services).

That is also the nub of the Federal Supreme Court’s disagreement with the lower court: it concluded that the parity clauses were not objectively necessary for the operation of contracts concerning online hotel room booking. While the Court did accept that a free riding problem might exist, the evidence was lacking in this case. Here, the FCO had demonstrated that had strengthened its market position also after 2016, when it stopped using narrow parity clauses. So those clauses could not be necessary to prevent free riding.

In addition, the Federal Supreme Court held that there was no place for a balancing exercise of pro- and anti-competitive effects of such parity clauses when determining whether they are objectively necessary for the operation of the underlying contract. That balancing exercise should only be carried out when determining whether a restrictive agreement qualifies for an individual exemption – and in this case, there was no room for exemption!

Prediction: the merry-go-round spins on …

The Federal Supreme Court’s judgment means that, for the moment, large platforms in Germany may have renewed difficulty in proposing narrow parity clauses. Internationally, the debate is not over, with enforcement agencies and legislators continuing to have diverging views and investigations ongoing in, for example, Australia and Japan. It also remains to be seen what the effects of free riding on the business model of online platforms really are and whether in other cases it might be possible to prove a free riding concern if a narrow parity clause is not allowed.

In the end, the judgment may be good news only for claimants in Germany. So far, already about 2,000 hotels in Germany are claiming damages from – and this is just for the use of wide parity clauses in the past. In addition, it is also highly disputed whether it is the hotels or their guests who suffer a loss arising from the platform’s use of price parity clauses. Coinciding with the Federal Supreme Court’s judgment was the Federation of German Consumer Organisations’ announcement that it will assess any future class actions by hotel guests.

For businesses, this should remain a key area to watch to ensure compliance with various and continuously changing legal positions across the world.