ECJ’s Preliminary Ruling: Booking.com’s parity clauses are not ancillary restraints

On 19 September 2024, the European Court of Justice ("ECJ" or the "Court") issued a preliminary ruling in response to a request from a Dutch court for clarification, inter alia, on whether wide and narrow price parity clauses in agreements between Booking.com and accommodation service providers constitute an ancillary restriction in the context of Article 101(1) (the "parity question"). In this context, a wide price parity clause restricts a hotel from offering better prices and terms on any other sales channels than it offers to Booking.com. A narrow price parity clause only restricts a hotel from offering better prices and terms on its own direct sales channel.

The ECJ held that price parity clauses in this context - both wide and narrow - are not "ancillary restraints" and therefore will not fall outside the scope of the prohibition against anticompetitive agreements set out in Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU"). In particular, the inclusion of a price parity provision in such agreements is not indispensable to the main operation of the agreement - i.e., the operation of Booking.com is not rendered "impossible" without inclusion of the price parity provision.

Key takeaways

• Consequently, any price parity provision in a Booking.com agreement must be individually assessed for compliance with Article 101(1). Price parity restrictions may still be compatible with EU competition rules if they either benefit from a safe harbour under the Vertical Agreements Block Exemption Regulation ("VBER") or qualify for individual exemption under Article 101(3). In practice, wide price parity provisions will not benefit from a safe harbour under the VBER (which treats wide parity restrictions as "excluded", meaning they require individual assessment), and the bar for demonstrating efficiencies under Article 101(3) is high.

• Additionally, in response to a second question from the referring court (the "market definition question"), the ECJ provided guidance on the approach to market definition in assessing the conduct of Booking.com

• The ruling represents an important development in the context of the assessment of price parity clauses under EU competition rules. The Court's decision does not mean all price parity provisions will infringe competition law, and any form of price parity could still comply, depending on the facts in each case.

Prior treatment of price parity clauses under EU competition rules

Under EU competition rules, a restriction imposed on parties to an agreement will fall outside Article 101(1) if the agreement is not anticompetitive and the restriction is ancillary to the main operation. For a restriction to be ancillary, it must be: (i) objectively necessary to the implementation of the main operation; and (ii) proportionate to the objectives underlying the operation (i.e., there are no less restrictive alternatives). If a restriction is not ancillary and falls within scope of Article 101(1), it may still be capable of qualifying for a block exemption or satisfying the requirements for an individual exemption under Article 101(3).

Booking.com began including price parity provisions in its agreements with accommodation providers in the mid-2000's. Booking.com has indicated that parity provisions were intended to address free-riding risk - i.e., that accommodation providers could use Booking.com to generate interest, but entice customers to book on another channel by offering cheaper rates. Price parity provisions came under scrutiny in several jurisdictions across Europe in the 2010s. In this context, competition authorities in different EU Member States often reached different outcomes, with some (e.g., Sweden) accepting commitments to allow narrow parity provisions to remain but removing wide parity provisions, while others (e.g., Austria, Belgium, France and Italy) passed legislation outlawing all forms of price parity in online hotel booking arrangements.

In Germany, a series of litigation challenges resulted in the courts ruling against both wide price parity clauses (in the final 2015 judgment against HRS) and narrow price parity clauses (in the final 2021 judgment against Booking.com, which overturned a lower court decision that classified such clauses as ancillary restraints). Before the final 2021 judgment was handed down, an association of hotels brought follow-on damages claims against Booking.com in Germany. In response, Booking.com approached a Dutch court to seek negative declaratory relief - a procedural manoeuvre to secure a request for a preliminary ruling (as the German court likely would have refused) - which was then met with counter-claims for damages by a number of German hotels. The Dutch court requested a preliminary ruling from the ECJ on the above two questions.

Parity question: Can wide and narrow price parity clauses constitute ancillary restraints?

Booking.com argued that the price parity clauses were objectively necessary to protect its business model and to prevent hotels from free-riding on its significant investments in the creation, development and promotion of demand for the accommodation services provided by the hotels. The counterclaiming hotels argued that the clauses at issue could not constitute ancillary restraints because they were not objectively necessary to Booking.com's viability, given that the clauses were introduced several years after its successful entry into Germany and that Booking.com continued to expand its market position even after the clauses were prohibited.

Both the ECJ and Advocate General Collins found that, while Booking.com has clearly had a positive impact on competition between hotels, the price parity clauses were not objectively necessary or proportionate to the implementation of the platform. Per MasterCard, the test for 'objective necessity' is strict: it is not sufficient that the platform is more difficult to implement or less profitable without the price parity clause. Rather, it must be "impossible" for Booking.com to provide its online booking service without the restriction. The Court found no intrinsic link between the continued provision of the online booking accommodation services and the implementation of price parity clauses, which the Court indicated had appreciable restrictive effects.

The ECJ - echoing AG Collins - cautioned against obscuring the 'objective necessity' condition of the ancillary restraint test and the 'indispensability' criterion for an individual exemption under Article 101(3), stating that the former is "relatively general and abstract in nature" and "does not require a purely factual assessment". In particular, the AG stressed that, even if a restriction does not qualify as an ancillary restraint, this should not prejudice the analysis of the same restriction under Article 101(3). This aligns with the Guidelines to the 2022 VBER which state that "[w]here retail parity obligations produce appreciable restrictive effects, possible efficiency justifications need to be assessed under Article 101(3)" and that the most common justification for use of such obligations by online intermediation services is to prevent free-riding. For the purposes of the ancillary restraints assessment, it is not a question of whether the price parity clauses are required to enable efficiencies or to ensure the commercial success of Booking.com by preventing free-riding - which could be assessed under Article 101(3) - but rather whether they are indispensable to the implementation of the service.

Market definition question: How to define the relevant market that includes the services of Booking.com?

A restriction that is not ancillary may nevertheless be exempted from Article 101(1) if it meets the conditions either under a block exemption regulation or for an individual exemption under Article 101(3). To benefit from the VBER (both the 2010 Regulation, which was assessed by the Court, and the current 2022 Regulation), neither the supplier's nor the distributor's market share can exceed 30% of their respective relevant markets. The second question sought to clarify the methodology for determining the relevant market in the context of the hotel booking services provided by Booking.com.

In its ruling, the ECJ declined to define the relevant market and stressed that it is for the referring court to conduct a rigorous factual investigation of the market. However, the ECJ shed some light on the approach to be taken by the referring court. Referencing the revised Market Definition Notice, the ECJ noted that multi-sided platforms could either be defined in a way that encompassed all products and user groups of the platform, or as separate but interrelated markets capturing either side of the platform. In this case, the referring court should consider whether other types of intermediation services and other sales channels are substitutable for Booking.com's services from the point of view of hotel providers and end customers, regardless of whether those other channels have different characteristics or functionalities.

Conclusion

The ECJ's ruling generally affirms the position taken by the Commission and under established case law, in particular reflecting the positions taken in the 2022 (current) VBER, its Guidelines and the revised Market Definition Notice. The ancillary restraints test is a high bar to meet, and a price parity clause will generally need to be assessed under Article 101(1) unless the party can prove that it would be impossible to operate its business without it.

Despite the ruling, the treatment of price parity clauses remains fragmented across national competition authorities and the Commission. Some Member States have adopted a blanket prohibition of all price parity clauses, while others have reached similar conclusions through litigation. These outcomes do not fully align with the Commission's position that, other than wide price parity clauses used by online intermediation services, all other parity clauses can be exempted under the VBER (if the appropriate conditions are satisfied). The rules change again for companies such as Booking.com that have been designated as a 'gatekeeper' under the DMA, which prohibits the use of both wide and narrow price parity clauses under Article 5(3). In the UK, the picture is similarly complicated. The UK's equivalent block exemption order adopts a stricter approach than the EU and classifies all wide price parity obligations as 'hardcore restrictions', but this has since been called into question by the Competition Appeal Tribunal in BGL v. CMA, where it held that wide price parity obligations cannot be presumed to restrict competition.

Moving forward, companies seeking to adopt or enforce price parity clauses will need to consider carefully the current state of the law in any applicable jurisdictions and the strengths of its justifications for such provisions.

Public link

Please use the above public link if you want to share this noodl on another website.