Are price clauses providing the lowest price legal?

The competition authorities are focusing on the legality of price clauses where a company undertakes always to provide the lowest price to the contractual party. The latest European development indicates that, in many cases, such clauses constitute an illegal restriction of competition.

Price clauses across businesses are also common, and these are called "most favoured nation" clauses, "most favoured customer" clauses or in Danish "mest begunstigende" klausuler. These are the names of contract clauses guaranteeing a distributor, the end-customer or another cooperation parter the best possible price from the supplier. The supplier is obligated to sell at the lowest price, including at a price matching the supplier's price to other parties. 

The clauses are often used in contracts between hotels and hotel booking portals, but also in contracts relating to products primarily sold or marketed on the Internet and, in particular, in distribution agreements on markets where the competition on visibility and having your products marketed with suppliers is intense. 

The cooperation partner achieving the lowest prices often has a good chance of supervising the competitors' prices thereby gaining good insight into the supplier's price agreements with e.g. competing suppliers. This has in several cases made the authorities consider how to assess these clauses in relation to the competition rules. 

The European Commission and the German competition authorities have concluded the first cases concerning price clauses. The decisions indicate that, also in other cases, the clauses will be considered anti-competitive agreements contrary to the prohibition in article 101 of the Treaty of the functionality of the European Union and section 6 of the Danish Competition Act. 

THE COMPETITIVE PROBLEM

The competitive problem of "most favoured customer" clauses primarily concerns two issues. The clauses may impede price competition, e.g. because they can take away the favoured company's incentive to innovate and develop its purchase and sales strategies as the company is guaranteed the lowest prices. The clauses also counter the company bound by the clauses offering lower prices to other parties meaning that the price to the favoured company must be lowered to the same level. If the clauses are generally applied in an industry, they may also imply that an identical market price is maintained thereby determining the market price.

The other problem is that the clauses may create entry barriers making it difficult to enter the market. This is due to the fact that a new company entering the market may gain a better price from the supplier by offering more favourable trade conditions than the company with whom the supplier has agreed on a "most favoured customer" clause.

THE CASE CONCERNING HOTEL RESERVATION SERVICE

A high-profile case is the German competition authorities versus Hotel Reservation Service (HRS). A ruling was delivered by the competition authorities (Bundeskartellamt) in December 2013 stating that HRS had violated the German competition act by including a clause concerning "best price guarantee" in its agreements with hotel partners. 

According to these "most favoured customer" clauses, the hotels are to guarantee that HRS always gets the lowest price for rooms and that this price is at least as low as the price of other booking portals. The hotels also undertake to ensure that this requirement is complied with by other portals selling bookings for the hotel, or that HRS gets a price matching the price at which the rooms are being offered through other platforms. HRS has systematically supervised the hotels' compliance with the agreement sanctioning non-compliance by way of deactivation of the hotel's booking through HRS' portal and termination of the agreement. 

The competition authorities found that the clauses constituted anti-competitive vertical agreements contrary to the German competition act and the Treaty of the functionality of the European Union as the clauses revoke price competition and lay down unfair entry barriers for companies entering the market. As HRS has a market share of more than 30 %, it was not decided whether the clauses may be exempted from under the vertical block exemption, or whether these constitute hardcore restrictions of competition. It is assessed, however, that the purpose of the clauses is to limit competition, which may speak in favour of a hardcore violation of the rules when assessing the question concerning exemption according to the vertical block exemption. The competition authorities ordered HRS to remove the clauses from the company's terms and to pay a penalty. HRS has appealed against the decision.

THE E-BOOK CASE

The Commission also conducted investigations within the book industry in 2012 and 2013 and has accepted a commitment in a case concerning price clauses and e-books. This case concerns a number of publishers' agency agreements with Apple Inc. containing price clauses. These clauses stipulated that the price of e-books at iBookstore was to match any lower prices for the same books at other internet distributors. This was a vertical agreement between the publishers and Apple Inc. The Commission's preliminary assessment was that it constituted an anti-competitive agreement for the purpose of restricting the price competition of e-books. The Commission's hesitations concerning the clauses were that it would result in lower earnings for the publishers if the e-books were sold at lower price by other distributors, and the clauses therefore provided an incentive to counter this. As the agreement was coordinated between the publishers, it was also a horizontal anti-competitive agreement, whose purpose, according to the Commission's preliminary assessment, was to increase or maintain the general market price of e-books, in particular to force the distributor Amazon to increase retail book prices. The publishers and Apple Inc. committed not to enter into any agreements with similar price clauses for the next five years. 

INCREASED FOCUS ON PRICE CLAUSES

In addition to the above, several national competition authorities and the Commission are investigating "most favoured customer" clauses in other cases. In Denmark, there is also focus on these clauses. According to an article in Børsen on 29 July 2013, Dansk Erhverv has on behalf of its members brought the the Danish Competition and Consumer Authority's attention to the booking portals' price clauses. So far, the Authority has contacted the booking portals, which indicates that the Authority is investigating the matter. 

We expect increased focus on "most favoured customer" clauses in the future. Based on the above cases, we recommend that suppliers and distributors with similar prices clauses contained in their distribution agreements or general terms consider whether these clauses may restrict competition or result in a market barrier contrary to the competition rules. 

contacts

Andreas Christensen

Partner

Marie Løvbjerg

Attorney