Maintaining a competitive marketplace is one of the tenets for many regulators because it ensures consumers are not disadvantaged by a lack of choice. The travel industry is no exception and many travel businesses pride themselves on being able to give customers as much choice as possible, at the most competitive prices available.
There has long been friction between the restrictions that travel principals, such as airlines, hotels and tour operators, wish to impose on their agents and resellers, and vice versa, as a way to maintain control over sales channels. However, some of these restrictions, which usually relate to price but also cover territory and exclusivity, are not permitted by competition laws.
In Spring 2022, changes are coming at the UK and EU level. A failure to comply or not consider them could mean that contracts are unenforceable, affected parties could claim damages and the UK’s Competition and Markets Authority (CMA) and/or the European Commission could impose fines or bring investigations or take action to stamp out anti-competitive behaviour.
What’s happening?
Existing EU legislation, the Vertical Agreement Block Exemption Regulation (VABER) is due to expire in its current form in May 2022. The VABER is also retained law in the UK following Brexit.
As a general rule the VABER says that vertical agreements (i.e. agreements between businesses at different levels of the supply chain) do not breach competition laws. There are certain conditions to that general rule, the main ones being that each party to the agreement does not have more than a 30% market share and that the agreement does not contain any of the listed ‘hardcore’ restrictions.
The VABER is being shaken up to reflect the growth of online sales and the way consumers now buy goods and services. As the UK is no longer required to implement EU legislation, it will introduce its own legislation – the Vertical Agreement Block Exemption Order (VABEO) – the detail of which is being recommended by the CMA.
While the CMA has recommended that the VABEO reflects the VABER in many ways, it has proposed divergences in some areas. We may therefore see different restrictions for businesses selling into the UK versus those selling into Europe.
In this article we focus just on those areas of the new VABER and VABEO which are relevant to the travel industry. The final text of the new VABER is still being settled, and we have not yet seen the draft VABEO so the points raised in this article may still change, however we do not anticipate significant amendments to what has been published already.
The new regime
As with the current VABER, the new VABER will contain ‘hardcore’ restrictions which are not permitted in vertical agreements. If a hardcore restriction is included, that restriction will not be enforceable and the whole agreement will fall outside the VABER i.e it will be subject to, and caught by, competition law principles.
The points from the new VEBER and the VABEO that travel businesses should take notice of are as follows:
- Price parity/Most Favoured Nation (MFN) clauses: There has long been uncertainty over whether narrow or wide price parity clauses are permissible because of conflicting case law on the subject. These clauses are often found in agreements with online marketplaces.
Wide parity clauses stipulate that a product or service cannot be offered on better terms on any other sales channels, including the supplier’s own website and those of other agents or resellers. Online marketplaces often want to include this in their standard agreements with suppliers.
Narrow parity clauses usually focus the restriction just on the contracting party’s website/sales channels and specify that that party (the supplier) cannot offer for sale the same product or service on its own website at a better price than that at which, for example, the online marketplace can sell.
It should now finally be settled that:
- at both the EU and UK level, narrow price parity clauses will fall within the VABER and VABEO and are therefore exempt. This means they can be included in agreements.
- wide price parity clauses at the EU level will not automatically be permissible but neither will they be prohibited as a ‘hardcore’ restriction. Any wide price parity provisions will need to be assessed for their pro- and anti-competitive effect on a case-by-case basis.
- At the UK level, wide parity clauses will be treated differently. The CMA has said that wide price parity clauses will be a hardcore restriction and not permitted.
Travel businesses that deal with both UK and EU suppliers should now have certainty over what is permitted with MFN clauses. Companies on the receiving end of these provisions should also now be able to rebut with certainty any non-permitted price parity obligations that they don’t want to accept.
- Retail price maintenance (RPM): a principal or supplier should still not be able to specify a fixed or minimum resale price at which its agents or resellers must resell its products or packages. This will remain a hardcore restriction. Recommending a price or imposing a maximum retail price would still be permitted but other restrictions on resale prices would not.
- Restricting the use of price comparison websites: the EU considers price comparison websites as useful tools for consumers. Accordingly, if a supplier or principal tries to restrict an agent or reseller from using price comparison tools as an online advertising channel, this should now be a hardcore restriction and not permitted in agreements.
- Restricting the use of online marketplaces: some agreements prevent an agent or reseller selling through online marketplaces. An outright restriction on online sales will not be permitted but the EU does recognise there may be a need for businesses to protect the image and positioning of their brands. Accordingly, restrictions on selling through online marketplaces would generally be permitted.
- Dual pricing: this one may not be that relevant for travel but we include it because it could be. Dual pricing is the practice under which a supplier sets different wholesale prices depending on whether an agent or reseller sells online or in a bricks and mortar store. Under the current regime, a supplier cannot set different prices for on and offline sales; it is a hardcore restriction. This was due to online selling still being a new sales channel which needed protecting when the current VABER came into force in 2010.
The world has now changed, and a principal will be able to set different wholesale prices for agents and resellers making online and offline sales. We will see in time whether this is an incentive to bring customers back into high-street travel agents or allow online sales to flourish even more.
- Status of Online Intermediaries: under the current regime, online intermediaries which bring buyers and sellers of travel products and packages together are not classed as ‘suppliers’. Going forward, under the new VABER, online intermediaries would be classed as suppliers and subject to the same restrictions and exemptions as traditional suppliers.
One implication of this change would be that other suppliers who sell through an online intermediary platform would be classed as ‘buyers’ of those intermediation services. The platform will still be able to incentivise those buyers, but it would not be able to determine prices and the RPM rules mentioned above will apply.
What’s next?
The final text of the new VABER is still being settled across EU institutions and the final text of the new UK VABEO is expected in 2022 so changes may still occur. Both will come into force in June 2022. There will be a one-year transition period which will allow businesses time to consider their agreements and make changes to ensure compliance. The CMA will also publish accompanying guidance to the VABEO, a consultation on which is expected in early 2022.
What should you be doing now?
Start considering your agency and reseller agreements and your terms and conditions of business to assess whether you need to start making changes to bring them in line with these new rules. The CMA’s guidance early next year will shed further light on some areas and we will provide a further update once they have been released.
