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Wake-up call – online hotel booking investigation: are you at risk?

12 August 2011
Wake-up call – online hotel booking investigation: are you at risk?

The Office of Fair Trading's investigation into online hotel booking practices could have far-reaching consequences. Neil Baylis, competition law specialist, explains the current position and what it means to your business

The problem
In early 2010, the Office of Fair Trading (OFT) started making inquiries into online hotel booking practices and launched a formal Competition Act investigation last September. The investigation could have far-reaching consequences for the hotel industry. Adopting a "wait and see" approach, while having the advantage of not upsetting commercial relationships, could ultimately turn out to be an expensive strategy given the OFT's significant fining powers.

What is the investigation about? The OFT is investigating whether major hotel chains and established hotel booking websites have agreed the price or a minimum price which consumers will pay for rooms across all websites - for example, a "rate parity" strategy. Such an arrangement could be analysed as "resale price maintenance" which would be in breach of UK and EU competition law.

What is resale price maintenance? A supplier stipulating to its distributor, customer or other reseller the resale price or the minimum resale price which the distributor or customer will charge its customers.

Initial indications are that pricing practices are fairly consistent across the sector. If an infringement has been committed, it would be no defence to argue that the conduct amounted to an established industry practice. By way of comparison, the OFT recently investigated widespread anti-competitive practices in the construction sector, which involved submitting cover bids - bids that were not intended to win the contract but to provide the appearance of competition - coming to a finding of infringement in relation to 103 companies.

Could a defence be available? One argument which the parties under investigation may seek to advance, is that there is an agency relationship between the hotel chains and all those reselling their rooms to consumers. If a relationship of genuine agency exists, such as that the commercial risk lies with the hotel and not the wholesaler or retailer, no infringement would have been committed.

An agency partnership would need to be established in relation to every relationship where the hotel is specifying a resale price, or refusing to supply unless a particular resale price is quoted. This is a formidable task, particularly where the "agents" are acting for multiple principals, and almost impossible where a wholesaler is purchasing rooms in bulk from the hotel and taking the risk of making onward sales.

Structure and timing of the investigation The OFT decided that this conduct merited the opening of a formal investigation and information is now being gathered. The next formal step would be for the OFT to issue a statement of objections (SO).

An SO sets out the OFT's provisional view that the conduct under investigation amounts to a legal infringement. It is issued to each party which the OFT intends to hold responsible for the infringement and allows them an opportunity to see the case against them and to respond before the OFT comes to its final decision.

There remains a possibility that the OFT will not proceed to issue an SO. However, it is worth bearing in mind that the OFT receives hundreds of complaints every year and prioritises only a handful by opening investigations.

Based on the OFT's previous practice, now that it has opened an investigation, the more likely outcome is that it will proceed to issue an SO and reach a finding of infringement.

There is no typical time-frame between opening a formal investigation and issuing an SO but, in practice, this period rarely lasts less than 18 months and can be much longer. Therefore, the earliest date we would expect to see the OFT issue an SO would be March 2012.

What should you do if you think your company could be at risk

â- If you identify an issue, consider whether you are in a position to change your practice or discuss an alternative approach with your trading partners.
â- Consider whether to approach the Office of Fair Trading or other competition authorities with a leniency application.
â- Seek legal advice - every situation is different and there can be no substitute for proper legal advice specific to your company.

The consequences of competition law infringement
If the Office of Fair Trading (OFT) finds that investigated parties have infringed competition law, the consequences include:
â- An order to bring the infringing conduct to an end.
â- A fine of up to 10% of each infringing company's worldwide turnover.
â- Directors within a company associated with the infringement may be disqualified for up to 15 years.
â- Damages actions brought by third parties.
â- Negative publicity and loss of consumer confidence.

The level of any fines imposed will depend on factors such as the infringing companies' turnover, their co-operation with the OFT's investigation, whether they continued the infringement after the start of the OFT's investigation and the extent to which they instigated and/or enforced the anti-competitive practice. By way of example, monitoring rates across websites and pushing hotels to enforce rate parity is likely to be seen as a strongly aggravating factor.

Neil Baylis is a partner at K&L Gatesneil.baylis@klgates.com

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