Price Parity Clauses and Online Platforms: Is There a New Way Forward?
For years, competition authorities and courts across the EU have been asked how to deal with price parity clauses used by online platforms (also called most favoured nation clauses or MFNs), in particular in the hotel booking sector. These clauses enable the platform to require that suppliers do not offer lower prices or better terms on other platforms or on their own websites. Price parity clauses can be “wide”, if they prevent the supplier from offering better terms on other sales channels or they can be “narrow” if they prohibit the supplier from offering better terms on its own website.
The way that competition enforcers in the EU have viewed the legality of these clauses has varied considerably and caused a degree of legal uncertainty for businesses. A recent judgment of the Higher Regional Court of Düsseldorf addressed this uncertainty, at least for Germany, when it held that "narrow" clauses do not infringe German or EU competition law.
This development has been seen to have major implications for digital platforms because it paves the way for them to use “narrow” price parity clauses to address free-riding. However, the story is not over as there are still diverging national precedents. And the EC's ongoing review of the Vertical Block Exemption Regulation and accompanying Guidelines must also be taken into account.
Price parity clauses and the restriction of competition
Many competition authorities in the EU have considered wide clauses as anti-competitive because:
- First, they limit price competition and make it difficult for market entrants to establish a market presence. Platforms looking to enter the market could attract hotels to their platform by offering a lower commission for intermediation services. However, hotels would not be able to pass this cost saving on to customers in the form of lower prices. This is because, if “wide” clauses were in place, hotels would be prohibited from offering a lower price on the new platform than the price offered on any established platforms where the hotel is listed. So there would be little incentive for hotels to secure a lower commission if it cannot be used to drive competition.
- Secondly, they restrict hotel operators from accessing different sales channels and offering different (lower) prices.
The position in relation to “narrow” clauses is less clear.
In Germany, “narrow” clauses were traditionally considered to have essentially the same anti-competitive effects as “wide” clauses. But, in its recent Booking.com judgment, the Higher Regional Court of Düsseldorf considered that while narrow clauses do restrict competition in principle, they are not illegal because they are objectively necessary to ensure a fair and balanced relationship between hotel platforms and hotel operators. Platforms invest considerably in the development and improvement of their websites in order to attract bookings. These investments would be jeopardised if consumers were able to search and find an attractive hotel via the platform and then book it at a lower price via the hotel’s own website. In the court’s view, there is no less restrictive measure to protect against free-riding.
It is reported that the German Federal Cartel Office has appealed the court’s judgment and so we eagerly await the judgment of Germany’s highest court on this issue.
Authorities in other EU Member States take diverging views as to whether “narrow” clauses are ok from a competition perspective or not. For example, in 2015, the French, Italian and Swedish authorities accepted that "narrow" clauses are permissible when they used commitments to achieve a market change from “wide” to “narrow” clauses. In Sweden, a patent court’s ruling to prohibit “narrow” clauses has since been quashed. In other Member States, both “wide” and “narrow” clauses have been expressly prohibited (Italy, France, Belgium and Austria).
In the UK, the Competition and Markets Authority accepted binding commitments in 2014 from Booking.com and Expedia, which permitted "narrow" clauses in agreements with International Hotels Group. The decision was later quashed on appeal on procedural grounds, and remitted back to the CMA. But, following EU-wide changes of “wide” to “narrow” clauses by Booking.com and Expedia, the CMA closed its investigation on the grounds of administrative priorities. In 2015, the CMA issued a private motor insurance market investigation order, banning “wide” price parity clauses.
Currently, the CMA is investigating the use of price parity clauses by a price comparison website in relation to home insurance products.
An optimistic view for the future?
The recent judgment in Germany does provide some good news for hotel booking platforms, other online marketplaces and price comparison websites who want to use "narrow" price parity clauses. But the debate across the EU is ongoing and so the position is far from settled.
In the EC’s Final Report on the e-commerce sector inquiry both “wide” and “narrow” clauses are considered unproblematic if the parties’ shares remain below 30% (para 621) and, exceeding this, require individual assessment. The current German approach to “narrow” clauses is notably not limited by these thresholds.
Price parity clauses are also an important issue in the EC's ongoing review of the Vertical Block Exemption Regulation. The EC recently published a summary of market responses to its consultation, which call for more certainty in this respect. More clarity on this issue, and others, is expected.