28.05.2021

Free-riding allowed? - BGH declares Booking.com's ‘narrow most favored nation clause’ illegal

In a recent decision the German Federal Court of Justice (Bundesgerichtshof (BGH)) decided that the so-called ‘narrow most favored nation (MFN) clause’ of Booking.com violates antitrust law. According to the court, the narrow MFN clause restricts competition when offering hotel rooms (BGH, decision of 18 May 2021, KVR 54/20). Thus, the BGH confirmed the German Federal Cartel Office (FCO) and ruled against the court of 2nd instance. In June 2019, the Higher Regional Court of Düsseldorf (OLG Düsseldorf) had declared Booking.com's narrow MFN clause to be lawful, as it was considered necessary in particular to avoid ‘free-riding’ as an ancillary restraint to an agreement on the exchange of considerations that was neutral in terms of antitrust law (OLG Düsseldorf, decision of 4 June 2019, VI-Kart 2/16 (V) – Enge Bestpreisklausel II). In contrast, the BGH does not consider the narrow MFN clause as a strictly necessary (ancillary) restraint, because Booking.com had been able to strengthen its market position even without using the narrow MFN clause. In addition, the BGH judges that the free-riding problem does not represent a sufficiently serious threat to the efficiency of the platform offer, so that an individual exemption is not within reach. The BGH thus confirms once again that the individual exemption is subject to significant hurdles in practice. However, the BGH did not rule on the application of the vertical block exemption regulation (Reg. 330/2010 – V-BER), as this was out of the question due to the market share thresholds being exceeded. The community will eagerly await the developments on the reform of V-BER, which, according to the EU Commission, generally applies to MFN clauses. However, the Commission has raised the question whether this should be handled differently in the future, at least for wide MFN clauses.

Background

Hotel booking portals such as Booking.com offer hotel customers direct bookings. To this end, the hotel portal operators conclude contracts with the hotels for the brokerage of hotel bookings in return for payment of a success-based commission. The use of the portal platform is free of charge for the hotel customers. If the hotel customer finds the hotel via the online platform, but then books directly with the hotel, Booking.com misses out on the agency commission (so-called ‘free-riding problem’), even though the customer found the hotel via the platform.

At first the brokerage contracts between the hotel booking portals and the hotels included broad MFN clauses. They obliged the hotel to always offer the hotel portal operator the most favorable hotel prices and not to undercut these prices either in its own online sales or in other sales channels. In a decision of 9 January 2015, the OLG Düsseldorf ruled in proceedings against the hotel booking portal HRS that its broad MFN clause violated Section 1 of the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen (GWB)) and Article 101 TFEU (OLG Düsseldorf, decision of 9 January 2015, VI-Kart 1/14 (V) – Bestpreisklausel).

Between July 2015 and February 2016, Booking.com then used so-called ‘narrow most favored nation clauses’. That means the hotels may not offer their rooms on their own website at lower prices or better conditions than on the platform of Booking.com. However, hotels can offer hotel rooms at lower prices on other hotel portals or, provided that there is no advertising or publication online, "offline". In its decision of 22 December 2015, the FCO stated that the narrow MFN clauses also violated antitrust law and prohibited their further use.

The OLG Düsseldorf took a different view than the FCO. In June 2019, it ruled that Booking.com's narrow MFN clause affected competition by restricting the hotels' freedom to set prices (OLG Düsseldorf, decision of 4 June 2019, VI-Kart 2/16 (V) – Enge Bestpreisklausel II). However, it found the narrow MFN clause to be excluded from the prohibition as a necessary ancillary restraint of the hotel brokerage contract which is neutral under antitrust law. According to the OLG Düsseldorf it is necessary in order to guarantee a fair and balanced exchange of services between Booking.com as hotel portal operator and the hotels as purchasers of the brokerage service and does not go beyond what is necessary in terms of duration, geographic area or subject matter to achieve the objective. The narrow best price clause prevents in particular the free riding problem (OLG Düsseldorf, decision of 4 June 2019, VI-Kart 2/16 (V) – Enge Bestpreisklausel II, marginal no. 71 et seq.). 

The BGH’s decision

The BGH overturned the decision of the OLG Düsseldorf and dismissed Booking.com's appeal against the prohibition by the FCO.

According to the BGH, the narrow MFN clause restricts competition when offering hotel rooms. Since the hotels are not allowed to offer more favorable room rates and contract terms in their own online sales than on booking.com, they have in particular not the opportunity to pass on the saved brokerage commission in full or in part to customers in the form of price reductions and to thereby convince the customer to book.

The BGH rejects the view of the OLG Düsseldorf that the narrow MFN clause is a necessary ancillary restraint to an agreement on the exchange of considerations that is neutral under antitrust law and criticizes the systematic approach of the OLG Düsseldorf. A weighing of pro-competitive aspects, such as securing an appropriate remuneration for the platform service by solving the free-riding problem, could only take place when examining the requirements for an exemption from the cartel prohibition under Article 101 (3) TFEU. However, the narrow MFN clause was in the BGH’s view not objectively necessary as an ancillary restraint for the performance of the platform contract. According to the court, it is not a necessary ancillary restraint for the contractual purpose of the online brokerage of hotel rooms, because Booking.com has been able to further strengthen its market position in Germany, although Booking.com has no longer used the narrow MFN clause since February 2016. In contrast to that, the OLG Düsseldorf had found the circumstance that Booking.com had secured and expanded its market position since February 2016 even without the narrow MFN clause to be “without significance from the outset (...)" (OLG Düsseldorf, decision of 4 June 2019, VI-Kart 2/16 (V) – Enge Bestpreisklausel II, para. 70 - juris).

The BGH's position on the ancillary restraint had already been indicated in its decision of July 14 2020 concerning the appeal of the FCO. The BGH had pointed out that due to the outstanding importance of price as a parameter of competition, the narrow MFN clause was not qualitatively comparable with any of the examples of the immanence theory relied on by the OLG Düsseldorf and that price-related vertical restrictions of competition to solve free-riding problems had so far only been used in connection with the possibility of an individual exemption under Article 101 (3) TFEU or Section 2 GWB (BGH, decision of 14 July 2020, KVZ 56/19, marginal no. 9 f. - juris).

The BGH now also rejects an individual exemption pursuant to Article 101 (3) TFEU, because it finds that the requirement of an improvement in the production or distribution of goods or the promotion of technical or economic progress not to be met. The BGH decides that the narrow MFN clause leads to efficiency advantages, for example the extended customer reach of the hotel. However, the efficiencies do not require the narrow MFN clause. According to the BGH the free riding problem does not seriously jeopardize the efficiency of the platform offer, whereas the narrow MFN clause considerably hinders the online sales of the hotels outside the platform.

Conclusion

Since Booking.com no longer uses the narrow MFN clauses since February 2016, nothing changes for the hotels in the daily booking business.

However, in terms of legal policy and with a view to the future, the BGH ruling has more far-reaching consequences. The BGH's decision shows once again that outside the "safe harbor" of a block exemption, it is extremely difficult to justify a restriction of competition on the basis of efficiencies under Art. 101 (3) TFEU. The individual exemption, which systematically should stand alongside the block exemption as an exemption option, runs the risk of becoming a theoretical construct on which companies can hardly rely in practice. It is generally acknowledged that the free-riding problem is a typical case group that can justify such restrictions of competition. It is probably undisputed as well that the free-riding problem is present in platform cases and that at least narrow MFN clauses address this problem. However, according to the BGH, the individual exemption was out of the question because Booking.com had expanded its business despite using the clause had been prohibited. Does a company therefore have to tolerate free-riding as long as it is still successfully participating in business despite the free-riding? This seems questionable and devalues the significance of the free-riding problem in the context of Article 101 (3) TFEU.

Therefore, it will be all the more important to observe developments at EU level - namely the question of how such clauses will have to be assessed in future under Regulation (EU) No. 330/2010 (Vertical Block Exemption Regulation (V-BER)). The question of whether narrow MFN clauses can be exempted from the prohibition of Article 101 (1) TFEU pursuant to Article 2 (1) V-BER was not the subject of the decision. The BGH did not have to decide on this, because Booking.com has a market share of more than 30% on the relevant market of hotel booking platforms in Germany. Whether the BGH would affirm a block exemption pursuant to Article 2 (1) of the V-BER in the case of MFN clauses of hotel portals with a market share of less than 30% is questionable after its decision on the non-admission appeal of the FCO. The BGH had the opinion that the narrow MFN clause is a price-related agreement whose effect is comparable to a minimum price requirement that is qualified as a hardcore restriction (BGH, decision of 14 July 2020, KVZ 56/19, marginal no. 9 - juris). In the case of hardcore restrictions pursuant to Article 4 V-BER, a block exemption is excluded. However, the BGH's statements on the hardcore restriction qua "comparable effect" disregard the wording of the V-BER, according to which a hardcore restriction only exists if the buyer or the broker (cf. Articel 1h V-BER) is restricted in its pricing. This is not the case with MFN clauses that restrict the supplier (here: the hotels). Accordingly, the OLG Düsseldorf correctly decided in its Expedia decision that MFN clauses are exempt from the ban on cartels as a vertical restraint of competition (OLG Düsseldorf, decision of 4 December 2017, VI-U (Kart) 5/17, marginal no. 34 - juris). This is also the legal opinion of the EU Commission concerning the current V-BER. Companies should therefore also keep an eye on European developments in this context: The V-BER expires on 31 May 2022. As part of the reform process, the European Commission is currently weighing the question of whether and to what extent MFN clauses should continue (!) to be block exempted. In addition to a block exemption of MFN clauses, the inclusion of all or only the broad MFN clauses in the catalog of non-exempted restrictions of Article 5 V-BER is being considered (European Commission, Inception Impact Assessment of 23 October 2020, Ref. Ares (2020)5822391). As a consequence, these clauses would not prevent the block exemption of the entire agreement, but would have to be assessed on a case-by-case basis whether they actually restrict competition and whether they are block exempted. The prospects for a positive assessment do not look too good following the BGH ruling. A tightening of the rules in the V-BER would therefore be bad news for small platforms and new market actors, because they would be measured by the same strict standards as companies with market shares above 30%. The antitrust community is thus looking eagerly to Brussels: a first draft of the new V-BER is to be presented before the "summer break". 

Author
Dr Sebastian Felix Janka, LL.M. (Stellenbosch)

Dr Sebastian Felix Janka, LL.M. (Stellenbosch)
Partner
Munich
sebastian.janka@luther-lawfirm.com
+49 89 23714 10915

Anne Caroline Wegner, LL.M. (European University Institute)

Anne Caroline Wegner, LL.M. (European University Institute)
Partner
Dusseldorf
anne.wegner@luther-lawfirm.com
+49 211 5660 18742

Lara Paul

Lara Paul
Associate
Dusseldorf
lara.paul@luther-lawfirm.com
+49 211 5660 18764