EU and UK competition law is an often underestimated and
misunderstood area of law. However, it very much applies to the
hotel sector which in recent years has been subject to increased
scrutiny. Businesses that fail to comply with these laws could face
significant fines, reputational damage and more, which is why being
able to spot the red flags is crucial. In this new three-part
series, we highlight some of the competition law issues applicable
to the hotel sector and how businesses can navigate these
hazards.
In this second alert for our readers, we turn to Information
Exchange, a particularly saliant issues for franchises, a business
model used widely in the hotel sector. The exchange of commercially
sensitive information between actual and potential competitors is
prohibited under Chapter I of the UK Competition Act and Article
101 TFEU. It can amount to a concerted practice and/or a cartel and
is dealt with utmost severity by competition authorities. This
article explores the application of competition law to the sharing
of information in the hospitality sector.
You can read part 1 in the series, which dealt with
anti-competitive agreements
here.
Information exchange
The exchange of competitively sensitive information between
competitors is an area of competition law the hotel sector needs to
be alert to. The thresholds for establishing anti-competitive
information exchange are low, and the fines imposed for this type
of contravention can be up to 10% of Global turnover.
What is commercially sensitive
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Although benchmarking against a hotel’s competitive set is
fundamental to the sector, this must always be done in compliance
with competition law. Information used to benchmark (such as
revenue per available room, average daily rate and occupancy rate)
is likely to be considered commercially sensitive under competition
law. This means that it is likely to be illegal for competitors to
exchange this information directly or, moreover, indirectly with
each other. Hotels should seek information only through legitimate
sources, which anonymise and aggregate the data. Though, overall,
the burden is on businesses to ensure their business practices are
compliant with competition law and ignorance of the law is not a
defence.
“Call-around” exchanges, whereby employees of nearby
hotels call one another to exchange information should be handled
very carefully if the information exchanged could be construed as
commercially sensitive, in which cases such calls are high-risk.
Hotels should also review the informal settings its employees
attend, such as networking events and industry conferences.
Experience shows that it is easy for seemingly innocent
conversations to ‘spill over’ into anticompetitive realms
without the participants immediately recognising they are in fact
exchanging commercially sensitive information. Not least,
information exchange can be perceived as being one way whereby a
business informs their competitors of their proposed actions on the
market, the legal presumption being that the information is then
accepted by the recipient (unless the recipient can prove they
‘distanced’ themselves from the receipt of that
information).
By way of example, in 2005, the French competition
authority imposed fines (amounting to EUR 709,000) on six
luxury hotels for the regular exchange of information on prices and
occupation. In 2007 the Danish authority also fined an association
of hostels and hotels for prohibiting its members from charging
prices below a minimum threshold defined by the association.
Competition law issues can even lurk beneath exchanges of
information that appear totally legitimate at first glance. A
consortium of hotels coming together to agree on common ESG
(environmental, social and governance) standards, such as frequency
of washing towels and use of recyclable toiletries, may appear to
be risk free. But an agreement between competitors with
cost-ramifications such as this may, in the eyes of the competition
authorities, give rise to cartel behaviour. It is therefore
important to ensure proper procedures, such as including robust
information barriers are in place in advance of any contemplated
coordination with competitors.
The ease with which commercially sensitive information can be
exchanged (particularly at after-dinner drinks, dinners etc) means
the need for a robust top-down competition compliance policy and
training programme is paramount. Helping employees spot where the
red flags are, understand what conversations they can legitimately
have and how to handle information they are not sure they should
have received means businesses are better able to mitigate their
exposure to serious competition law risk and its consequences.
1. Exchange of information between competing service
providers
Hotels may inadvertently become privy to the commercially
sensitive information of other service providers. Hotels should be
careful not to facilitate collusion between service providers by
passing information between them. In January 2021, the competition
authority of Hong Kong issued infringement notices to six hotel
groups for facilitating a cartel arrangement between two competing
travel service providers. This resulted in price fixing for tourist
attractions and transportation tickets. Even though the hotels did
not sell these services themselves, the passing of information
between the two providers contributed to the cartel behaviour. The
CMA has been very active in bringing proceedings against businesses
that facilitate anti-competitive behaviour.
2. Exchange of information within a hotel franchise
Exchange of information within a hotel franchise can be rife
with risk. Franchisors and franchisees are separate commercial
entities and franchisees should inherently be free to determine
their own commercial policy on the market. However, given the
specific nature of the franchise model it is recognised by the
competition authorities that an element of information sharing is
necessary for the proper functioning of the franchise network. The
most risk is often where: (i) the franchisor is also operating its
own down-stream business competing with its franchisees and has
information available to it that it would not normally have in the
ordinary course of business, and (ii) the franchisees exchange
information as part of the franchise system and the franchisor
‘facilitates’ this. It is therefore not uncommon for
exchanges of information to go beyond what is tolerated by
competition law. The new UK VABEO and EU VABER regimes have set out
new parameters for assessing where information can and cannot
legitimately be shared within the context of a franchise
network.
For instance, in order to benefit from the UK VABEO safe harbour
(the UK Order which guarantees compliance with competition law for
certain vertical agreements), the exchange of information between
the franchisor and franchisee should be strictly related to
the implementation of the franchising agreement.
Conversely, the EU VBER imposes an additional condition that the
exchange of information must be necessary to improve the
production or distribution of the services. In the event
that a franchisor competes with its own franchisees or if
franchisees compete with one another, the information exchange will
not benefit from the safe harbour.
These new regimes were only recently brought into effect (June
2022). It is highly likely that the CMA and/or EU Commission will
want to enforce their respective new regimes and make examples of
businesses that break the rules.
