Recently, the Italian daily newspaper Il Sole 24ore (at page 15) has reported rumors that an Italian initiative aimed at placing an absolute ban on price parity agreements (aka Most Favoured Nation clauses, or MFNs) between internet platforms providing travel services (aka Online Travel Agents, or OTAs) and hotels will be transposed in a formal legislative proposal to be submitted to the vote of the Parlamento in the next weeks. MFNs between OTAs and hotels have already been prohibited by law in France (Loi Macron); and have been deemed presumptively anticompetitive by the German competition authority in the (2013) HSR case (confirmed by the Higher Federal Court), which has so set a de facto absolute ban on such clauses in the German hotel industry.
My idea is that such a blank prohibition over MFNs is unnecessary and disproportionate to preserve competitiveness in the hotel industry, and is therefore contrary to Article 56 TFEU on the free circulation of services within the EU. Pursuant to Article 56 TFEU, public measures restricting that freedom are prohibited and, thus, unenforceable unless such restrictions are strictly necessary and proportionate to attain an intended objective of general interest.
The crux of the legal reasoning underpinning this thesis is that, particularly in light of the Cartes Bancaires judgment, MFNs cannot be regarded as agreements having an anticompetitive "object" (aka "by object" restrictions), i.e. hardcore restrictions of competition which can normally be presumed to have appreciable anticompetitive effects and are therefore almost always contrary to Article 101 TFEU on the prohibition of anticompetitive agreements. In any case, even though MFNs were to be characterized as by object restrictions, in several cases they may well deserve an individual exemption from that prohibition under Article 101(3) of the TFEU for generating substantial efficiencies, which benefit consumers too. Because a case-by-case effect-based approach is required to assess whether MFNs may significantly harm competition, an absolute ban provided for by law over MFNs is evidently disproportionate and unjustified vis-a-vis the objective of preserving the competitiveness of the hotel industry - and should thus be deemed void and unenforceable.
One must bear in mind that the EU competition and internal market rules and principles constitute overriding mandatory provisions which may prevent enforceability of national measures which run contrary to their prescriptions. This is the case where a national legislative provision capable of distorting competition or of limiting the free circulation of services within the Single Market is disproportionate or unfit to achieve an alleged objective of general interest.
The EU courts have interpreted the notion of “restriction” in relation to Article 56 TFEU broadly, so as to encompass national measures capable of impairing the conditions of competition in the provision of services across Member States. In particular, the Court of Justice has stated that “Articles [49 and 56 TFEU] preclude any national measure which, even though it is applicable without discrimination on grounds of nationality, is liable to prohibit, impede or render less attractive the exercise by community nationals of the freedom of establishment and the freedom to provide services guaranteed by those provisions of the Treaty” (Case C-376/08, Serrantoni Srl, at § 41).
Coming to the nature of MFNs, there is a large consensus among economists and competition law experts that such clauses cannot be characterized as by object restrictions (or anticompetitive per se, if one prefers the US terminology). The consensus over this stance is based on the on the fact that a deeper look into the structure of the market and the shares of the parties involved, the actual effects on potential competitors and end-users, and the risk of free-riding - which may seriously undermine the economic sustainability of OTAs' services - is necessary to assess whether MFNs are compatibile with Article 101 TFEU in a specific case (which is to say, using US terminology, that MFNs should be subject to a "rule of reason"). In addition, the Cartes Bancaires judgement, which sets a stricter standard to characterize a restrictive agreement as a by object restriction, requires to substantiate that, considering the overall legal and economic context, the restriction is prima facie capable of generating a "sufficient degree of harm" to competition and consumers: "[t]he concept of restriction of competition `by object’ can be applied only to certain types of coordination between undertakings which reveal a sufficient degree of harm to competition that it may be found that there is no need to examine their effects otherwise the Commission would be exempted from the obligation to prove the actual effects on the market of agreements which are in no way established to be, by their very nature, harmful to the proper functioning of normal competition" (Case C-67/13 P, Groupement des Cartes Bancaires, § 58).
MFNs can indeed be indispensable to run an OTA and often pro-competitive, particularly in the start-up phase, to launch a new platform in a certain market, or even afterwords to a certain extent. MFNs can even benefit end-users as long as they allow them to rely on a lowest guaranteed price without having to brows all over the internet to find better offers. At least, there may be well founded efficiency reasons to individually exempt certain MFNs from the prohibition of anticompetitive agreements in several circumstances.
This is confirmed by the solutions endorsed by the commitment decisions adopted in 2014 by competition authorities in Italy, France and Sweden (whose investigations have been coordinated by the European Commission), which have closed proceedings against Booking.com by accepting the undertaking to implement narrower MFN obligations in their agreements with hotels. Such "narrow" MFN clauses only prohibit hotels to quote lower fees over their own website, whilst do not prevent the hotels to quote lower fees on competing OTAs. These decisions confirm that a complete withdrawal of MFNs (including narrow MFNs) has not been deemed necessary to remove the anticompetitive effects of the clauses and, consequently, that MFNs (or at least narrow MFNs) cannot be regarded as anticompetitive by object (i.e. likely unfit for individual exemption). The HSR decision of the Bundeskartellamt does not clearly state the MFNs are by object restrictions, though it concludes that that they can be normally presumed to produce significant restrictive effects (or something like that), which is in practice equivalent as saying that they are by object restrictions.
If narrow MFNs are not contrary to Article 101 TFEU, as implicitly stated by several competition authorities within the EU as well as by the European Commission, it means that MFNs should be dealt with as "by effect" restrictions, i.e. as restrictions that are more likely to be exempted under Article 101(3) of the TFEU; and that therefore cannot be presumed of having anticompetitive effects. Nonetheless, even if MFNs were anticompetitive by object (i.e. normally anticompetitive and likely unfit for an individual exemption), imposing the absolute ban to the hotel industry only while permitting the use MFNs in other sectors would be inconsistent in any case.
Hence, my view is that a law providing for an absolute ban over MFNs (including narrow MFNs) cannot be deemed "proportionate" (i.e. strictly indispensable and adequate) to achieve the public objective of preserving the competitiveness of the hotel industry. There are for sure less restrictive measures to achieve that objective, as at least providing for a ban over broad MFNs only (which still may not be the least restrictive measure). This stance, which is supported by the investigations coordinated by the European Commission, should be sufficient in itself to conclude that a State measure providing for an absolute ban over MFNs infringes Article 56 TFUE on the ground that it makes disproportionally "less attractive" to provide OTAs' services in the Member State that enforces the ban. Perhaps, the same can be maintained in relation with an order of a national competition authority (guess which one) having an equivalent effect.
Enzo has acted for international clients before the Italian Competition Authority and the European Commission as well as before national and EU courts. He has experience within consumer affairs, data protection, trade and customs law, antidumping investigations, export control and sanctions to trade with third countries.
Enzo’s specialties include advising on multijurisdictional merger control; national and EU cartel proceedings; application for annulment of antitrust fines before national and EU courts; restrictive State measures; private antitrust litigation; abuse of dominance; unfair commercial practices; distribution and cooperation agreements; technology transfer and licensing; State aids; antitrust compliance programs and regulated activities, with a focus on financial services and TMT (EU and Italy).