The First Commitments Accepted by the Hong Kong Competition Commission

On 13 May 2020, following an extended consultation period, the Hong Kong Competition Commission (HKCC) accepted modified commitments (Final Commitments) from Booking.com, Expedia.com, and Trip.com (Major OTAs) in relation to an investigation into their suspected anti-competitive conduct.¹ This marks the first time since the Competition Ordinance (Cap. 619) (Competition Ordinance) came into effect four and a half years ago² that the HKCC has accepted commitments from persons under investigation.

Background

The HKCC commenced an investigation in relation to suspected anti-competitive conduct by the Major OTAs, relating to certain terms (Existing Terms) in their agreements (Existing Agreements) with accommodation providers in Hong Kong (Hotels).³ The Existing Terms required Hotels to always give the Major OTAs terms that are the same as or better than those they offer on all sales channels in respect of room prices, room conditions, and room availability. These are commonly referred to as wide “most-favoured-nation”/“parity” clauses (wide MFNs).

HKCC’s Competition Concerns

The HKCC’s concerns about the Existing Terms centred on the softening of competition in contravention of section 6 of the Competition Ordinance (First Conduct Rule), which prohibits agreements, concerted practices and decisions which have as their object or effect the prevention, restriction, or distortion of competition in Hong Kong. Specifically, the HKCC was concerned that the Existing Terms would: potentially hinder entry into the online travel agent (OTA) market by potential entrants, soften competition among OTAs, and reduce the competitive pressure placed by Hotels on the Major OTAs (Concerns).⁴

1. Hindering OTA Market Entry

A potential entrant could establish a presence in the OTA market by charging lower commission rates to Hotels, which could respond by providing more rooms at lower rates. Under the Existing Terms, however, Hotels have no profit maximisation incentive to offer lower room rates to new OTAs since any price reduction on one OTA platform would trigger wide MFNs, requiring Hotels to lower their room rates on all other OTA platforms with which they partner without the reward of a lower commission. Correspondingly, a small OTA platform has no incentive to charge a lower commission because Hotels would be unable to respond by offering more rooms at lower rates. Since Hotels have no incentive to offer lower room rates or provide more room availability on OTA platforms that charge lower commissions due to wide MFNs, such conditions may create a foreclosing effect on new or smaller platforms, whose main leverage against Major OTAs is lower commission rates.

2. Reducing Competition among Major OTAs

Absent wide MFNs, Hotels could reward OTA platforms that charge a lower commission with more room availability. However, as mentioned earlier, the Existing Terms provide no incentive for Hotels to offer more rooms on new or smaller platforms than on the Major OTAs. On the contrary, Hotels have a profit maximisation incentive to maintain the number of rooms across all OTA platforms they partner with. Imposing wide MFNs incentivises Hotels to hold room supply constant, indirectly leading to identical pricing across the Major OTAs over time. As between the Major OTAs, wide MFNs incentivise the Major OTAs to keep their commission rates constant since a reduction will not lead to better room conditions for a particular Major OTA. This would likely create the knock-on effect of restricting competition between OTAs based on commission rates. 

3. Reducing Competitive Pressure Placed by Hotels on Major OTAs

If a particular Major OTA raises its commission rates, the cost for Hotels to conduct business on that platform increases. However, under wide MFNs, Hotels cannot increase their room rates on the higher cost Major OTA alone, but must also raise their room rates on the other Major OTAs they partner with. Faced with such a prospect, Hotels are unlikely to increase their room rates for commercial reasons. Therefore, unless a Hotel is prepared to drop a particular Major OTA that has raised its commission rates, wide MFNs could soften competition by reducing the competitive pressure Hotels can place on the Major OTAs.

Consultation Process

On 31 March 2020, in accordance with section 2 of Schedule 2 of the Competition Ordinance, the HKCC published a notice regarding its proposal to accept commitments from the Major OTAs (Notice) and invited interested parties to make representations by 14 April 2020.⁵

Following a request to extend the consultation period by relevant stakeholders, the HKCC extended the deadline for interested parties to make representations to 23 April 2020.⁶

Stakeholder Representations

During the consultation process, the HKCC received representations from three stakeholders⁷ and the most prominent concerns were:

1. A request for Major OTAs to clarify the intra-group OTA brands that are subject to the commitments (First Representation);
2. A request for HKCC to bolster its enforcement of the commitments on the Major OTAs by continuously monitoring compliance (Second Representation);
3. A query about the exclusion of contractual clauses which allow a Hotel to offer the same or better terms on its other sales channels, such as its members’ loyalty programme, but not publicly or through its own website (narrow MFNs), from the scope of the commitments; and
4. A query about the lack of admission of contravention of any competition rule by the Major OTAs.

Two Modifications

In response to the First Representation, the HKCC modified the commitments proposed by the Major OTAs to include a requirement in respect of each commitment for each Major OTA to clarify the intra-group OTA brands that are subject to the Final Commitments.⁸

With regards to the Second Representation, the HKCC added a requirement for each Major OTA to submit an annual compliance statement, signed by an authorised officer, confirming to his or her best knowledge, that the Major OTA in question continues to comply with its obligations under the Final Commitments in relation to the Existing Terms. This requirement is in addition to the initial report to be submitted by each Major OTA to the HKCC within 120 days after HKCC’s acceptance of the Final Commitments, which must detail how Existing Agreements and new agreements between Major OTAs and Hotels have been amended by each Major OTA to address the HKCC’s Concerns.⁹

HKCC’s Acceptance of Final Commitments

Having considered the stakeholder representations and the two modifications, the HKCC accepted the Final Commitments on 13 May 2020 (Acceptance Date), stating that they “are appropriate to address its concerns about a possible Contravention of the First Conduct Rule.”¹⁰ The Final Commitments by the Major OTAs preclude them from entering into or enforcing wide MFNs for a period of five years starting from the date of implementation.¹¹

Notably, in relation to narrow MFNs, the HKCC has mentioned that it considers narrow MFNs “may have legitimate pro-competitive efficiencies, as they could prevent accommodation providers from ‘free-riding’ on the OTA’s advertising of their accommodation, only for the accommodation provider to then obtain the sale themselves by offering the accommodation for a lower price on their own website.”¹²

By accepting the Final Commitments, the HKCC will not “continue its investigation or bring proceedings in the Tribunal against the OTA brands covered by the Commitments.”¹³ The Major OTAs have 90 days from the Acceptance Date to amend their Existing Agreements and new agreements with Hotels in accordance with the Final Commitments.

Outstanding Concerns

The HKCC’s approach may leave some questions during the implementation period.

Firstly, Hong Kong competition law only provides for a follow-on right of action under section 110 of the Competition Ordinance (Section 110). This means that there must first be a determination that an act has contravened a conduct rule under the Competition Ordinance before an aggrieved party can bring an action against a person who has contravened or is contravening and has been or is involved in the contravention of a conduct rule.¹⁴ Since the commitments procedure under section 60 of the Competition Ordinance does not require an admission of contravention and indeed the Major OTAs have made no such admission in the Final Commitments,¹⁵ there has been no determination that the Existing Terms constitute a contravention of the First Conduct Rule. Consequently, parties aggrieved by the Existing Terms will not have a follow-on right of action under Section 110 against the Major OTAs.

Secondly, the Final Commitments specifies a self-reporting method of compliance by the Major OTAs, as mentioned in the “Two Modifications” section above. Since the burden of reporting compliance will fall on the Major OTAs, interested parties should be vigilant in forensically assessing whether the Major OTAs are complying with the Final Commitments in practice.

Next Steps

Although the issue of wide MFNs is relatively new in Hong Kong, European national competition authorities (NCAs) have been investigating them for over a decade, most notably in the case of Booking.com. In those cases, Booking.com proposed to abandon its wide MFNs in respect of price, availability, and booking conditions and retain narrow MFNs (Booking.com’s Commitments).¹⁶ Looking at how circumstances evolved in certain European jurisdictions after accepting Booking.com’s Commitments may provide some insight as to the future development in Hong Kong after HKCC’s acceptance of the Final Commitments.

Sweden’s approach is ripe for comparison with Hong Kong’s because the commitments accepted by the Swedish NCA are similar to those accepted by HKCC, including:

1. The removal of wide MFNs with respect to price, booking conditions, and room availability from Booking.com’s agreements with hotels in Sweden;
2. The exclusion of narrow MFNs from the ban on wide MFNs in Booking.com’s agreements;
3. Booking.com’s Commitments specified to apply for a period of five years that expires on 1 July, 2020.¹⁷

In contrast to Section 110 in Hong Kong’s Competition Ordinance, however, the Swedish NCA’s acceptance of Booking.com’s Commitments did not preclude claims by aggrieved parties against Booking.com in Sweden. Thereafter, proceedings were brought against Booking.com, in which a Swedish court banned all MFNs,¹⁸ but this decision was reversed on appeal.¹⁹ Sweden’s example shows that MFNs, whether wide or narrow, are controversial.

The HKCC has stated that its acceptance of the Final Commitments “reflects the specific circumstances of the case and relevant market context” and does not bind it “in other cases or market contexts.”²⁰ By adopting a cautious, “wait and see” approach, it seems that the HKCC will be monitoring the implementation and competitive effects of the Final Commitments and does not rule out taking any future action should it consider market circumstances to have changed. If the empirical data on Hotel room rates and booking patterns collected during the five-year period do not show greater variation than that preceding the five-year period, one should not be surprised if the HKCC takes further action, which could take the form of extending the effective period of the Final Commitments or commencing an investigation in relation to narrow MFNs.

Please feel free to contact the authors if you would like to discuss any part of this legal update.