Open all hours: Competition law and the hotel sector (part 2)

EU and UK competition law is an often underestimated and misunderstood area of law. However, it very much applies to the hotel sector which in recent years has been subject to increased scrutiny. Businesses that fail to comply with these laws could face significant fines, reputational damage and more, which is why being able to spot the red flags is crucial. In this new three-part series, we highlight some of the competition law issues applicable to the hotel sector and how businesses can navigate these hazards.

In this second alert for our readers, we turn to Information Exchange, a particularly saliant issues for franchises, a business model used widely in the hotel sector. The exchange of commercially sensitive information between actual and potential competitors is prohibited under Chapter I of the UK Competition Act and Article 101 TFEU. It can amount to a concerted practice and/or a cartel and is dealt with utmost severity by competition authorities. This article explores the application of competition law to the sharing of information in the hospitality sector.

You can read part 1 in the series, which dealt with anti-competitive agreements here.

Information exchange

The exchange of competitively sensitive information between competitors is an area of competition law the hotel sector needs to be alert to. The thresholds for establishing anti-competitive information exchange are low, and the fines imposed for this type of contravention can be up to 10% of Global turnover.

What is commercially sensitive Information?

 

It includes any information that could reduce or remove uncertainty between businesses and is usually not in the public domain (such as the timing, extent, and details of a company’s future market plans) or strategic information (such as prices, discounts, rebates, costs, capacity, customer lists, turnover, sales or marketing plans, for example).

 

 

Although benchmarking against a hotel’s competitive set is fundamental to the sector, this must always be done in compliance with competition law. Information used to benchmark (such as revenue per available room, average daily rate and occupancy rate) is likely to be considered commercially sensitive under competition law. This means that it is likely to be illegal for competitors to exchange this information directly or, moreover, indirectly with each other. Hotels should seek information only through legitimate sources, which anonymise and aggregate the data. Though, overall, the burden is on businesses to ensure their business practices are compliant with competition law and ignorance of the law is not a defence.

“Call-around” exchanges, whereby employees of nearby hotels call one another to exchange information should be handled very carefully if the information exchanged could be construed as commercially sensitive, in which cases such calls are high-risk. Hotels should also review the informal settings its employees attend, such as networking events and industry conferences. Experience shows that it is easy for seemingly innocent conversations to ‘spill over’ into anticompetitive realms without the participants immediately recognising they are in fact exchanging commercially sensitive information. Not least, information exchange can be perceived as being one way whereby a business informs their competitors of their proposed actions on the market, the legal presumption being that the information is then accepted by the recipient (unless the recipient can prove they ‘distanced’ themselves from the receipt of that information).

By way of example, in 2005, the French competition authority imposed fines (amounting to EUR 709,000) on six luxury hotels for the regular exchange of information on prices and occupation. In 2007 the Danish authority also fined an association of hostels and hotels for prohibiting its members from charging prices below a minimum threshold defined by the association.

Competition law issues can even lurk beneath exchanges of information that appear totally legitimate at first glance. A consortium of hotels coming together to agree on common ESG (environmental, social and governance) standards, such as frequency of washing towels and use of recyclable toiletries, may appear to be risk free. But an agreement between competitors with cost-ramifications such as this may, in the eyes of the competition authorities, give rise to cartel behaviour. It is therefore important to ensure proper procedures, such as including robust information barriers are in place in advance of any contemplated coordination with competitors.

The ease with which commercially sensitive information can be exchanged (particularly at after-dinner drinks, dinners etc) means the need for a robust top-down competition compliance policy and training programme is paramount. Helping employees spot where the red flags are, understand what conversations they can legitimately have and how to handle information they are not sure they should have received means businesses are better able to mitigate their exposure to serious competition law risk and its consequences.

  1. Exchange of information between competing service providers

    Hotels may inadvertently become privy to the commercially sensitive information of other service providers. Hotels should be careful not to facilitate collusion between service providers by passing information between them. In January 2021, the competition authority of Hong Kong issued infringement notices to six hotel groups for facilitating a cartel arrangement between two competing travel service providers. This resulted in price fixing for tourist attractions and transportation tickets. Even though the hotels did not sell these services themselves, the passing of information between the two providers contributed to the cartel behaviour. The CMA has been very active in bringing proceedings against businesses that facilitate anti-competitive behaviour.

  2. Exchange of information within a hotel franchise

Exchange of information within a hotel franchise can be rife with risk.  Franchisors and franchisees are separate commercial entities and franchisees should inherently be free to determine their own commercial policy on the market. However, given the specific nature of the franchise model it is recognised by the competition authorities that an element of information sharing is necessary for the proper functioning of the franchise network. The most risk is often where: (i) the franchisor is also operating its own down-stream business competing with its franchisees and has information available to it that it would not normally have in the ordinary course of business, and (ii) the franchisees exchange information as part of the franchise system and the franchisor ‘facilitates’ this. It is therefore not uncommon for exchanges of information to go beyond what is tolerated by competition law. The new UK VABEO and EU VABER regimes have set out new parameters for assessing where information can and cannot legitimately be shared within the context of a franchise network.

For instance, in order to benefit from the UK VABEO safe harbour (the UK Order which guarantees compliance with competition law for certain vertical agreements), the exchange of information between the franchisor and franchisee should be strictly related to the implementation of the franchising agreement. Conversely, the EU VBER imposes an additional condition that the exchange of information must be necessary to improve the production or distribution of the services. In the event that a franchisor competes with its own franchisees or if franchisees compete with one another, the information exchange will not benefit from the safe harbour.

These new regimes were only recently brought into effect (June 2022). It is highly likely that the CMA and/or EU Commission will want to enforce their respective new regimes and make examples of businesses that break the rules.

 

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