Rate Parity Under Attack

Over the last decade, Online Travel Agents (“OTAs”), such as Expedia, Travelocity, and Booking.com, have gained enormous market power.  The OTAs have advertising budgets that dwarf those of most hotels, and they benefit from the increasing consumer preference for online booking, particularly among tech-savvy millennials.  Up to 50% of bookings in the United States originate from customers who find hotels through OTAs or aggregator search engines, and in Europe that number can be as great as 70%. 

Accompanying the rise of OTAs is the practice of rate parity agreements — contracts between hotels and OTAs that establish acceptable rates for room listings.  Now the industry standard, these agreements have been embraced by some hoteliers and despised by others.  Recently, rate parity agreements have come under attack through both legal challenges and erosion, as hoteliers exploit loopholes to offer lower rates without breaching the agreement terms.

The Pros and Cons of Rate Parity Agreements

The standard rate parity agreement between a hotel and an OTA contains two essential terms:  (1) a “rate parity” clause providing that the hotel will maintain parity with the minimum rates set by the hotel; and (2) a “most favored nation” clause providing that the lowest rate offered to the public via the hotel’s own website, or via competing OTAs, must also be made available to the OTA entering into the agreement. 

On the one hand, these rate parity agreements benefit hoteliers because they allow them to maintain control over pricing by setting a minimum rate for bookings, which prevents brand devaluation.  These agreements also allow hoteliers to take advantage of the large advertising budgets of the OTAs, assuring that the huge group of consumers who research bookings through OTAs will see their properties.

On the other hand, rate parity agreements can hurt hoteliers because OTAs typically receive a 15-20% commission on bookings, so hotels generate less profit than if guests had booked directly through the hotel websites.  Additionally, the most favored nation clause prevents hoteliers from offering lower prices on their own hotel websites, and it prevents them from freely negotiating other rates and terms with competing OTAs.

Legal Challenges to Rate Parity in the United States

In the United States, rate parity agreements came under heavy scrutiny last year.  Approximately 30 lawsuits were filed in multiple states against major hoteliers (including Choice Hotels International, Inc.; Intercontinental Hotels Group Resources, Inc.; Marriott International, Inc., and Starwood Hotels & Resorts Worldwide, Inc.) and many of the biggest OTAs (including Booking.com; Expedia, Inc.; Priceline.com Inc.; and Travelocity.com LP).  The lawsuits, which were consolidated in federal court,[1] alleged that rate parity agreements between OTAs and hotels violated antitrust laws as well as state consumer protection statutes.  The plaintiffs brought the lawsuit as a putative class action on behalf of all consumers in the United States who made online bookings with the defendant OTAs from 2003 through 2013, with certain limited exclusions. 

To understand the antitrust allegations asserted, it is important to note the difference between horizontal price maintenance agreements and vertical price maintenance agreements.  Horizontal price maintenance agreements are those between competing businesses at the same level of the supply chain (e.g., two competing hotels), and are considered “per se” antitrust violations – meaning they are typically considered to be illegal “price-fixing” agreements.  However, vertical price maintenance agreements are between businesses at different levels of the supply chain, and often arise when a manufacturer sets a minimum price at which its wholesale or retail partners may offer its products.  Vertical price maintenance agreements – which include rate parity agreements in the hotel industry – are not necessarily prohibited as anticompetitive conduct.  These vertical price maintenance agreements are instead examined according to the “rule of reason,” which essentially means that courts evaluate whether the challenged activity is harmful to competition on a case-by-case basis, looking to factors such as whether there was an actual agreement or conspiracy between defendants to set prices, the reason for the alleged restraint on competition, and its ultimate effect on the market.

The plaintiffs alleged that an actual conspiracy had been formed between the defendant hotels and OTAs to set booking prices.  The court agreed that there was an opportunity for a rate-fixing conspiracy, as many of the OTAs and hoteliers attended the same industry conferences, and rate parity was a frequent topic of discussion. However, the plaintiffs were unable to establish that there was an actual conspiracy between the defendants.  Instead, their decisions to enter into rate parity agreements were merely “consistent” with the alleged conspiracy, in light of the valid business reasons for both hotels and OTAs to form such agreements.  Given the plaintiffs’ failure to establish the existence of an actual conspiracy, the court dismissed their antitrust claims.

Plaintiffs also alleged that the “low rate guarantees” used as a marketing device by the defendants were unfairly deceptive, and violated approximately 40 state consumer protection laws.  The court agreed that promises to provide consumers with the “best” or “lowest” price were misleading, because they implied that consumers were receiving the lowest price available in a competitive market, when in fact the rate parity agreements ensured that it was simply the same rate offered elsewhere online.  Thus, promises to provide coupons or refunds if consumers found a lower rate elsewhere were illusory, as the defendants would never have to fulfil those promises.  However, the court further held that although the practice was deceptive, it did not actually harm consumers who would still have paid the same online price even without the misleading “price guarantee.”  Accordingly, because plaintiffs could not establish any actual injury, these claims were likewise dismissed.

Legal Challenges to Rate Parity in Europe, and Coming Changes

Although rate parity has thus far survived its legal challenges in the United States, European antitrust laws are stricter, and vertical price maintenance agreements are subjected to more scrutiny.  As a result, there has been heavy regulatory pressure on OTAs in Europe to loosen their rate parity restrictions, and OTAs are beginning to bend.

Booking.com announced in April of this year that it would transition to new, “narrow” parity agreements in Europe.  While these new agreements will still require rate parity with a hotel’s own website, they will no longer require parity with other OTAs.  Expedia has just followed suit, and recently announced that beginning on August 1, 2015, it will likewise amend its agreements with European hotels. 

Other OTAs are expected to follow in their footsteps, to head off further regulatory investigations and penalties.  Whether these changes will be enough to satisfy some of the regulatory agencies in Europe remains to be seen, and additional changes may still be required. 

Erosion of the Effectiveness of Rate Parity Agreements

As OTAs continue to struggle with these legal challenges, hoteliers have found ways to circumvent their existing rate parity agreements.  Many hotels want to have the freedom to set their own online rates without giving up the advantages of marketing through OTAs, so they have devised methods to drive bookings to their own websites without violating their agreement terms. 

These methods include:

  • Offering “packaged” room rates.  Because these are excluded from the scope of a typical rate parity agreement, hotels entice consumers to book through the hotel website by offering packages that includes other amenities, such as free wi-fi or complimentary breakfast.
  • Excluding certain room types entirely from OTA placement.  Consumers will still be able to locate the property through OTAs, but a review of the hotel brand website will reveal additional room types at rates not available via the OTAs.
  • Offering “private” rates to select groups of consumers, through hotel loyalty/rewards programs, or through selective email lists, such as TravelZoo.

However, hoteliers should be aware that ambiguity regarding the exclusions from a rate parity agreement can also be used to the OTAs’ advantage.  For example, reports surfaced late in 2014 that Expedia was offering package rates that undercut the rates offered by hotels.  However, its “packages” included flight or car rental components that had been separately booked up to six months before the hotel, and the flights had not necessarily been booked to the same location as the hotel.  While many hoteliers would not consider such widely-separated booking components to constitute a “package,” absent clear contractual terms as to the exclusion, it may not be clear whether the rate is permissible under a parity agreement.  When crafting rate parity agreements, care must be taken to specifically define what constitutes a “package” excluded from the agreement, including a clear definition stating that a package requires a simultaneous purchase of the qualifying components.

What Is the Future of Rate Parity?

As illustrated by Booking.com and Expedia’s new “narrow” rate party agreements, pricing restrictions in Europe are already loosening, and that is likely to have a follow-through impact on the U.S. market.  The United States could follow suit via legislative action.  Even if it does not, the increasing availability of different booking rates in Europe will at the very least train international travelers to use meta-search engines to locate and compare different OTA rates.  These travelers will soon want – and expect – to be able to employ the same type of online rate-shopping in the United States.  These changes may signal a relaxing of rate parity restrictions across the board, and decrease the OTAs’ strong market power overall.  Hoteliers should be prepared to take advantage of the changes in this evolving landscape.  In particular, in-house and outside legal counsel negotiating agreements with OTAs should be ready to flex their bargaining power, and negotiate for preferred marketing terms.


[1] In re: On-Line Travel Company (OTC) / Hotel Booking Antitrust Litigation, Case No. 3:12-cv-3515-B, Northern District of Texas.

 

Originally published in Hotel News Now – August 12, 2015.