Hospitality + Leisure Trend Watch May 03, 2018

Competition Rules of the Road for Hospitality Companies

Competition Laws and Access to Marketplace Information

At all times, but especially during times of economic turmoil and change, our hospitality ­­­and leisure clients need access to the best possible marketplace information in order to remain competitive and make informed strategic decisions. Hospitality companies can obtain such marketplace information lawfully through multiple sources, including direct communications with guests, suppliers, and third-party industry experts as well as through recognized industry reports and trade association and benchmarking surveys conducted under the guidance of antitrust counsel.

What is generally not allowed, however, is for companies to attempt to obtain such marketplace information, particularly competitively sensitive information, directly from their competitors. Doing so would violate antitrust and competition laws and specifically Section 1 of the Sherman Act, which limits exchanges of competitively sensitive information between competitors, as well as Article 101 (and potentially Article 102) of the Treaty on the Functioning of the European Union, which prohibits agreements, decisions and concerted practices that have an effect on trade between European Union countries and restrict competition in the EU.[1] Common forms of competitively sensitive information that hospitality competitors typically should not share include:

  • Confidential pricing and discounts (e.g., nonpublic or future pricing)
  • Confidential output information (e.g., occupancy rates)
  • Competitive strategic information (e.g., future property expansion or amenity innovation plans)

To avoid running afoul of these prohibitions, it is imperative that hospitality companies do not discuss or exchange such information with their actual or potential competitors, absent prior direction from competition law counsel. Recently, antitrust and competition authorities have sanctioned companies for a wide range of impermissible information exchange, including:

  • “Call-around” exchanges, wherein employees for competitive hoteliers in close proximity would call one another to exchange competitively sensitive information about occupancy and room rates;
  • “Non-poaching” or no hiring pacts, where competitive hiring firms would discuss and exchange nonpublic information about employee salary, bonus and other terms of proffered compensation;
  • Travel companies making public comments about planned business activities, including future pricing and discount information, and then encouraging company employees to engage in direct communications with competitors on these subjects;
  • Sharing competitively sensitive information about the status of independent negotiations with a common supplier or customer; and,
  • Excessive “pre-merger” sharing of competitively sensitive information by competitors in anticipation of and prior to closing of a particular contemplated transaction.

Hospitality companies that share such competitively sensitive information with their competitors absent a reasonable legitimate purpose (e.g. sharing rate information via a third party consultant who anonymizes and aggregates the data appropriately for broader distribution) and without the advice of counsel create a clear risk of violating applicable antitrust laws. This is the case – particularly in Europe – even if there is no proven adverse competitive effect arising from the information exchange. As such, great care should be taken across organizations to prevent this type of conduct; if such sharing occurs nonetheless, counsel should be contacted immediately to discuss and weigh potential options for remediation.

Forming Agreements With Competitors That May Restrain Competition

When competitors share competitively sensitive information, there is the follow-on risk that such exchanges could form the basis for antitrust agreements between the competitors. Such agreements are serious violations of antitrust and competition law and can trigger significant fines and even criminal sanctions in the U.S., Europe, and elsewhere. It is therefore critical for companies to avoid situations where they might be considered to have formed agreements (direct or implied) between them without the advice of counsel.

This prohibition applies to agreements affecting price and other commercial terms and conditions of trade, but also applies to agreements affecting factors of output and innovation – even those agreements that otherwise might seem harmless. For example:

  • Competing hoteliers cannot agree on how to deal jointly with certain customers or groups of customers. A scenario occurred recently in the U.S. where a number of hospitality companies decided to end their discounting programs with members of the National Rifle Association. Although it is likely lawful for each company to choose to pursue such a policy change unilaterally, they could not agree amongst themselves to do so without running afoul of the antitrust laws.
  • Competing hospitality companies should not agree jointly on what amenities or facilities they should respectively offer at their hotels. Each must independently formulate their own future plans for facility expansion, growth or retrenchment.
  • Companies cannot agree with their competitors on the terms of credit or rewards/bonus programs that they are willing to extend to certain groups or individual customers. Each should establish their own promotional programs on an independent basis.

Practical Considerations for Mitigating Risk

In order to avoid violating these rules, hospitality companies should keep in mind a number of important actions that help mitigate this risk, and consult counsel when in doubt as to whether a planned action could run afoul of competition laws.

  • Any planned information exchange or agreement should be evaluated beforehand in conjunction with counsel and structured to minimize antitrust risk.
  • Hospitality companies and their employees should exercise caution at all times when interacting with competitors and specifically at common meeting places such as trade association meetings or informal gatherings. They should be advised in advance that if the discussions begin to address prohibited topics, they need to depart the gathering immediately, asking that their departure be noted in the minutes, and contact counsel.
  • Adopting robust training and compliance programs will minimize the antitrust and competition risk that can arise when interacting with competitors.

[1] 15 U.S.C. §1. Competition laws in many other jurisdictions place similar limitations on the exchange of competitively sensitive information between competitors. Both criminal and heavy civil sanctions can be imposed across jurisdictions for violations of these laws.