Hong Kong Competition Commission Consults on Proposed Commitments Offered by Online Travel Agents to Remove Parity Clauses from Agreements with Accommodation Providers

The Hong Kong Competition Commission (HKCC) has started a consultation on proposed commitments offered by three online travel agents (OTAs). Pursuant to the proposed commitments, the OTAs have promised to remove certain parity clauses (relating to price, conditions, and room availability) from their agreements with hotels and other accommodation providers. The HKCC considered these clauses likely soften competition among OTAs, and hinder entry and expansion by new or smaller OTAs, on the market in Hong Kong. The HKCC is minded to accept the commitments (in which case it will close its investigation and make the commitments binding for a period of five years) and invites comments from interested parties before taking a final decision. The deadline for comment is 14 April.

Facts

OTAs are internet-based platforms through which accommodation providers¹ advertise and sell accommodation options to consumers. They are an alternative sales channel to “brick-and-mortar” travel agents or to the accommodation providers’ own sales channels (including their website). OTAs enter into agreements with accommodation providers to list their accommodation options according to a number of criteria. Consumers may then browse, select, and book an accommodation directly with the OTA. OTAs generate revenues by charging a commission to the accommodation provider for each sale.

The HKCC found that the three OTAs in the case included “wide parity” (or most favoured nation—MFN) clauses in their agreements with accommodation providers, namely price parity, conditions parity, and room availability parity provisions. The HKCC describes these clauses as follows:²

• Wide price parity entails that the accommodation provider always has to give the OTA the same or a better price as the price it offers or applies across all other sales channels (including the accommodation provider’s own offline sales channels and other OTA platforms).
• Wide conditions parity entails that the accommodation provider always has to give the OTA the same or better terms and conditions as those it offers or applies across all other sales channels (including the accommodation provider’s own offline sales channels and other OTA platforms).
• Room availability parity entails that the accommodation provider always has to give the OTA the same or better room availability as that offered or applied across all other sales channels.

Wide-Parity Clauses Under Hong Kong Competition Law

In the Notice of consultation published with the commitments, the HKCC explains why the three types of wide parity clauses may contravene the First Conduct Rule (FCR) in the Competition Ordinance (CO). The FCR prohibits agreements and concerted practices if their object or effect is to prevent, restrict, or distort competition in Hong Kong. In the view of the HKCC, the three wide parity clauses at issue constitute vertical agreements for the purposes of the CO (i.e. agreements between companies at different levels of the supply chain).

In summary, the HKCC argues that the wide parity clauses may have the effect of softening competition between OTAs by reducing the competitive pressure between them. The HKCC considers that the arrangements involve a parallelism or alignment in price, conditions, or room availability offered to OTAs and advertised on their platforms. This would mean that accommodation providers cannot reward or play OTAs against each other in pursuit of a better deal by varying room price, conditions of trade, and room availability. Wide parity clauses therefore have the potential to lead to higher commission rates charged to accommodation providers by the OTAs and higher room prices for consumers, according to the HKCC. And any adjustment in room price from accommodation providers following a higher or lower commission granted by an OTA would need to be passed on to other OTAs under the parity agreements the HKCC maintains. The HKCC applies the same reasoning in respect of room availability parity clauses and conditions parity clauses. The HKCC explains that the absence of competition brought about by the clauses also means that new entry or growth by smaller OTAs is adversely impacted (for example, by their inability to offer lower commission rates with a view to growing market share).

However, the HKCC differentiates wide parity clauses from narrow parity clauses.³ It considers that the latter clauses do not contravene the FCR as they may avoid free-riding by accommodation providers on the investment made by OTAs in their platforms. The issue has been long debated in many other jurisdictions (see below).

Procedure Under the CO

The OTAs offered commitments to bring the investigation opened by the HKCC to a close. If the HKCC accepts the commitments, it will undertake not to continue its investigation or bring proceedings before the Hong Kong Competition Tribunal. Importantly for the OTAs, commitments do not constitute an admission of any contravention of the CO, and the HKCC would not make a finding of a contravention should it determine to accept the commitments and conclude its investigation. Commitments differ from other forms of settlement where parties to an investigation may have to sign a statement of facts admitting to a contravention of the law. Consequently, for the OTAs, bringing the case to a close through commitments avoids the possibility of being sued in damages by accommodation providers by way of a follow-on action (standalone actions are not available in Hong Kong under the CO).

Under the proposed commitments, the OTAs undertake not to enforce or enter into agreements with accommodation providers containing the impugned wide parity clauses.⁴ They also agree not to enforce or include clauses restricting the terms and conditions, including room rates, that accommodation providers are able to offer through their own offline sales channels.⁵

The HKCC says the commitments remedy its competition concerns and it proposes to accept them. But before it does (and subsequently closes the investigation), the HKCC is legally obligated to consult interested third parties. Written representations must reach the HKCC no later than 6pm on 14 April 2020.⁶ As a matter of law, the HKCC must consider all representations received by the deadline.

Parity Clauses Under Other Competition Law Regimes

Many regulators around the world have investigated parity or MFN clauses. In the EU, there is generally a regulatory consensus that parity clauses (at least wide parity clauses) infringe the competition rules. In 2015, Booking.com offered commitments to the French, Italian, and Swedish regulators to remove wide parity clauses in its agreements with hotels.⁷ Several other European regulators—including in Germany, Greece, Poland, Sweden, and the UK—have also investigated the legality of parity clauses. This led Booking.com to remove parity clauses from their agreements with all hotels within the European Economic Area. Looking at price parity only, a few countries have gone so far as to ban such practices, whether wide or narrow (e.g. Austria, Belgium, France, Italy, and Switzerland). The legality of narrow parity clauses has been debated, however. In a recent judgment, the Higher Regional Court in Düsseldorf in Germany overturned the settled German position⁸ on the unlawfulness of narrow parity clauses. The Court held that narrow parity clauses were permissible because they were objectively necessary for OTAs to avoid free-riding.⁹ In its staff working document accompanying the 2017 e-commerce sector inquiry report, the European Commission also noted that parity clauses are lawful when the parties’ market shares do not exceed 30%.¹⁰

In the APAC region, parity clauses have also attracted scrutiny. The Japan FTC started an investigation into the parity clauses of OTAs in April 2019. In that case, one of the OTAs, Rakuten, offered commitments to the JFTC to remove the clauses (for three years), which the JFTC accepted. It has also been reported that the Korea FTC is conducting an investigation after it unearthed parity clauses in agreements with accommodation providers. Similarly, in 2016, the Australia Competition and Consumer Authority accepted commitments from OTAs to remove broad price and availability parity clauses from agreements with accommodation providers.

Key Takeaways

First, assuming the HKCC accepts the commitments from the OTAs, this case will be the first in which the HKCC has used the commitments procedure under s.60 CO. As noted above, commitments may be an attractive option for companies looking to end an investigation in so far as there is no requirement to admit liability.

Second, as the alleged contraventions have already been investigated and remedied in several other jurisdictions, the case demonstrates that the HKCC is aligned with other regulators in it terms of its enforcement practices and approach.

Third, by choosing to investigate multinational corporations, the HKCC demonstrates that it is willing to enforce the CO against companies active globally notwithstanding that other regulators might already have investigated the same conduct. Commentators have noted in the past that several of the HKCC’s cases concerned local businesses (e.g. in the construction and renovation sector).

¹ “Accommodation providers” include hotels, guest-houses, bed and breakfast operators, or any other type of accommodation service provider that supplies rooms in Hong Kong and enters into a contract with an OTA.

² See HKCC’s Q&A document in particular.

³ A narrow price parity clause only requires the accommodation providers to always give the OTA the same or a better price as the price the accommodation provider offers through their own online sales channels.

⁴ The proposed commitments are available online on the HKCC’s website.

⁵ The commitments do not apply to managed bookings (as part of a managed travel services umbrella agreement), opaque bookings (where the identity of the accommodation provider and the precise location of the accommodation remains hidden to the customer until after the purchase is completed) or package bookings (combined with one or more other types of travel product).

⁶ Representations should be sent to the HKCC preferably by email, with the case reference number EC/02NJ quoted in the subject line of the email; or by fax to +852 2522 4997; or by post to Representations on Case EC/02NJ Competition Commission 19/F South Island Place, 8 Wong Chuk Hang Road, Wong Chuk Hang, Hong Kong.

⁷ The commitments were accepted by the authorities. See the joint statement of the authorities for further information.

⁸ See the Bundeskartellamt press release of 2015.

⁹ Higher Regional Court in Düsseldorf, case VI Kart 2/16, 4 June 2019.

¹⁰ Parity clauses would be covered by the Vertical Block Exemption Regulation, and in particular Article 4, provided the vertical agreement does not contain hardcore clauses (e.g. resale price maintenance).