On 8 September 2020, the European Commission (“Commission”) published its Staff Working Document (“Evaluation Document”) on the results of its evaluation of the EU Vertical Block Exemption Regulation (“VBER”) and the associated Commission’s Vertical Guidelines (“Vertical Guidelines”). The VBER creates a ‘block exemption’ or safe harbour, for common forms of distribution agreements from the cartel prohibition of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”).
Since the 2010 VBER and Vertical Guidelines will expire on 31 May 2022, the Commission evaluates in its Evaluation Document whether modifications of the existing competition law framework for distribution agreements are required. One of the key gaps in the current framework is the absence of guidance on how retail parity clauses (also known as most favoured nation clauses or MFN’s) should be assessed under Article 101 TFEU. Over the last decade this has proven to be a hot topic, particularly as a result of various investigations by national competition authorities in the EU (“NCAs”) into the use of retail price parity clauses by online hotel booking sites. In its Evaluation Document the Commission now confirms the need for more guidance on how such clauses should be analysed under the VBER in order to prevent the current divergent approach in this area by NCAs across Europe.
Background of retail parity clauses in the EU
There are different variations of retail parity clauses. They all have in common that a supplier agrees to treat a particular customer no worse than all other customers. They can be agreed at the wholesale or retail level and they can affect prices but also non-price conditions.
In the context of online platforms an important distinction in the competition law assessment is made between ‘‘wide’ and ‘narrow’ retail price parity clauses. ‘Wide’ retail price parity clauses typically require retailers (e.g. hotels) to publish on a price comparison tool or online marketplace (e.g. online hotel booking site) the same or better price and conditions as those published on any other sales channel. While ‘narrow’ retail price parity clauses typically require retailers to publish on a price comparison or online marketplace the same or better price and conditions as those published on its own (direct) website.
Recent decisions by the Commission and NCAs have scrutinised parity clauses both under Article 102 TFEU as a potential abuse by a company with a dominant position and under the cartel prohibition of Article 101 TFEU. With respect to the latter framework the Commission has considered in its earlier Staff Working Document supporting its e-commerce Report that parity clauses in vertical (distribution) agreements are covered by the VBER and exempted from Article 101(1) TFEU, provided that the market share of neither of the parties to the agreement exceeds the 30% VBER threshold and the agreement does not contain any hardcore restrictions of competition. However, some NCAs have in the past rejected arguments that wide retail price parity clauses could be block exempted from Article 101 TFEU under the VBER.
If a vertical agreement cannot profit from the block exemption of the VBER, Article 101(3) TFEU also provides for an individual exemption on the basis of an analysis of the competitive effects of the agreement which involves a balancing act of the pro- and anticompetitive effects of the relevant restrictions. In this respect there has especially been divergence within Europe as to how NCAs have assessed the efficiency benefits of narrow retail parity clauses. Generally, most NCAs appreciate the competitive benefits of narrow retail parity clauses, but in particular the German NCA departed from this general position in its decision against Booking.com in which it ordered Booking.com to delete these clauses from its contracts and general terms and conditions as far as they affected hotels in Germany.
On 4 June 2019 the Düsseldorf Higher Regional Court reversed the decision of the German NCA by ruling that while narrow clauses do restrict competition in principle, the clause used by Booking.com was not illegal because it is objectively necessary to ensure a fair and balanced relationship between the platform and hotel operators. According to the Court, the considerable investments in the online booking platform would be jeopardised if consumers would be able to find an attractive hotel via the platform and then book it at a lower price via the hotel’s own website. Although not in substance, as this ruling was not based on the exemption of Article 101(3) TFEU, this judgment at least in terms of outcome brings the approach in Germany (for now) in line with the other EU Member States.
The Commission’s findings with respect to parity clauses
In its Evaluation Document the Commission recognized the divergent approaches taken in relation to the treatment of narrow parity clauses in the hotel booking sector by, on the one hand, the German NCA and, on the other hand, the French, Italian and Swedish NCAs. Except from the German NCA, most NCAs decided not to act against narrow parity clauses used by online platforms, because they considered that they had only a low or no negative impact on competition as the hotels or restaurants were still able to offer lower prices on other online platforms. In its case against Booking.com, the German NCA found however that hotels would have no incentive to reduce prices on other platforms if they could not offer lower prices on their own (commission-free) sales channels.
This divergence in the application of the competition rules is all the more problematic as the Commission notes in its Evaluation Document that the use of retail parity clauses has significantly increased over the last ten years, especially in the hospitality sector and in mass markets (i.e. goods produced in large quantities that do not have the features of luxury products).
Many NCAs in Europe also indicated in response to the Commission’s evaluation that the VABER and Vertical Guidelines do not provide sufficient guidance on the legal qualification and assessment of retail parity clauses. And some NCAs took the view that this may explain the divergent approaches in different Member States.
The lack of consistency across the EU in the treatment of retail parity clauses in the e-commerce sector has led to significant costs for businesses in terms of adapting contracts and business models for individual Member States in which they operate. Furthermore, this also might have a possible chilling effect on pro-competitive conduct.
The German NCA appealed the judgment by the Düsseldorf Higher Regional Court in which its divergent approach in the Booking.com case with respect to narrow price parity clauses was reversed. This case is currently pending at Germany’s Federal Supreme Court. Furthermore, in its response to the Commission’s evaluation the German NCA argued that at least wide price parity clauses should not be able to qualify for block exemption under the VABER.
For now, we must wait for the judgment by the German Supreme Court in the Booking.com case. It will be interesting to see what guidance the Commission will provide with respect to the assessment of parity clauses under Article 101 TFEU. Any such clarifications may not be put in the VBER itself, but in the updated Commission’s Vertical Guidelines. Although the Vertical Guidelines are only self-binding on the Commission, they are in most cases followed by national courts and competition authorities.
For more information please contact Piet-Hein Eijssen and Manuela Cox.