Most Favored Nation (MFN) clauses have been the subject of close scrutiny by EU competition authorities in the online hotel reservation industry. The Bundeskartellamt, as well as the competition authorities of France, Austria, Hungary, United Kingdom, Switzerland, Sweden, Ireland, Australia and the United States, have investigated or are currently investigating a number of number of online hotel reservation platforms due to the inclusion of these types of clauses in their contracts with hotels. This development in Europe indicates that MFN clauses can often be considered anti-competitive.
1. What is an MFN clause?
MFN clauses, which appear in vertical agreements between suppliers and distributors, generally consist of a commitment by the supplier to offer the distributor a price or tariff no higher than the lowest offered to other customers. In the online hotel reservation sector, an MFN clause obliges the hotel to always give the platform with which it signed the clause the best price for online hotel reservations, the greatest number of rooms available (maximum capacity ) and the most advantageous room reservation and cancellation conditions.
2. Are they legal or illegal?
Insofar as the clauses contained in vertical agreements (agreements between operators at different levels of the marketing chain), Regulation 330/2010 (the block exemption regulation) must be considered as falling within the scope of the European Union. Under this regulation, vertical agreements are exempt from the prohibition of anti-competitive practices agreements when the parties to them have a market share of less than 30% and provided that they do not contain certain types of unconditional restrictions set out in the regulation. If these conditions are not met, the agreement will not be exempted and its efficiency-enhancing effects and whether these outweigh the anti-competitive effects must be assessed.
In the online hotel reservation industry, MFN clauses can restrict competition in a number of ways:
- They raise barriers to the entry of new competitors to the extent that they prevent new platforms from offering hotel rooms at lower prices. This could dampen competition as it makes it difficult for new competitors to enter.
- The existence of several agreements with MFN clauses has the cumulative effect of aligning prices between competitors. The use of such clauses can encourage collusive actions by standardizing the prices and commercial conditions of the various online hotel reservation platforms.
- They restrict competition between online hotel reservation platforms to the extent that they prevent lower prices from being offered on other platforms.
- They discourage hotels from lowering their prices because discounts offered to a third party must also be offered to customers benefiting from the MFN clause.
- They strengthen market positions and can even lead to abuse of a dominant position, depending on the platform’s market share. The market power of the platform in question must therefore be taken into account in any assessment of possible anti-competitive effects.
However, MFN clauses can offer potentially positive effects: initially, these clauses seem to favor competition insofar as the end customer can be guaranteed the lowest possible price.
MFN agreements can also offer buyers some degree of protection against price increases and allow buyers to reduce negotiating costs as well as the costs of researching the market to see if they are getting the best possible price.
Parties to agreements containing MFN clauses should ensure that they are assessed from a competition law perspective, whether they are exempted under the Block Exemption Regulation or, if not, whether the gains the effectiveness of the agreement sufficiently outweigh the potential anti-competitive effects of the MFN clause. Agreements containing MFN clauses must therefore be assessed on a case-by-case basis upstream so that companies are not penalized by the competition authorities. The burden of proving that the positive effects of MFN clauses outweigh the restrictive effects lies with the contracting parties.
3. Recent European affairs concerning MFN clauses
3.1. HRS case1. MFN clauses in Germany: ban – no exemption possible.
On December 20, 2013, the Bundeskartellamt prohibited HRS (Hotel Reservation Service) from using MFN clauses and ordered it to remove these clauses from its contracts in order to remedy the restrictions on competition between online hotel booking sites. During the investigation, HRS proposed a series of commitments which were ultimately rejected as insufficient by the competition authority, which ended up banning such clauses.
According to Bundeskartellamt, MFN clauses constitute anti-competitive vertical agreements in violation of Article 1 of the German Competition Law (GWB) and Article 101 (1) of the Treaty on the Functioning of the European Union (TFEU)2 in the area of online hotel reservations, which in this case included all of Germany.
The Bundeskartellamt considered that, given that HRS’s market share in Germany had exceeded 30% since 2009, agreements between HRS and hotels could not benefit from the safe harbor provided for by the Block Exemption Regulation and that the gains effectiveness resulting from such agreements should be assessed to see whether they outweigh the restrictive effects of MFN clauses. This assessment led to the conclusion that the latter violated Article 101 (1) TFEU.
Indeed, according to the German competition authority, these types of clauses restrict competition between existing online sites because they dissuade them from offering lower prices or competing through marketing strategies, and also prevent entry into the market for new reservation platforms. They also restrict the ability of hotels to set their prices independently or to innovate with attractive offers such as, for example, last minute rates. Nor would the agreement have been exempted if HRS’s market share had been less than 30%, the MFN clause being an indisputable restriction due to its object and its anti-competitive effects, which exclude the application of the regulation. block exemption.
Following the Bundeskartellamt decision against HRS, investigations have been opened on other online booking platforms such as Booking.com and Expedia. In the Booking case, Germany also rejected the commitments offered by the company, deeming them insufficient to reverse the collusive effects of the clause.
3.2. RESERVECAS G. MFN clauses in France3, Sweden4 and Italy 5 : acceptance of commitments.
The European Commission has encouraged national competition authorities in member states to investigate the use of these clauses by online hotel booking platforms, with the EC leading the investigation. He coordinated three national surveys on Booking.com, but did not open his own.
Booking offered a number of commitments in the context of the surveys, namely the following:
- Abandonment of MFN clauses related to price parity, booking conditions and availability.
- A commitment not to implement equivalent measures.
- Preparation of a report for the competition authorities due by 1/7/2016, as to its respect for the above commitments.
Booking.com has finally committed to cease applying such clauses not only in these three countries but throughout the European Economic Area as of July 1, 2015 and for five years. Booking’s commitment not to apply these clauses will open up the market, giving hotels the ability to offer lower prices and different booking policies compared to other online booking platforms.
In view of the above, we recommend that the inclusion of this type of clause be analyzed from a competition law point of view in order to verify their validity or, if necessary, to adapt them in order to avoid any legal risk arising from competition authorities. ‘position. Violations of competition law not only invalidate and unenforce the clause in question, but can also lead to significant fines.