Q: Our agency plans to acquire a smaller, leisure-focused agency with a different GDS. The seller's GDS contract has no monthly or annual booking quota, but it requires that the agency produce at least 95% of its GDS segments on the vendor's system, with a penalty of $2.40 per segment for each segment on another GDS. If we purchase the assets of the agency, would we be bound by the 95% quota? If so, how can we avoid such liability?
All three GDS vendors in the U.S. have these kinds of percentage requirements, which I call "share quotas," in some but not most of their GDS contracts. Most of the time, share quotas take the place of an absolute monthly or annual quota, enabling the agency to book as few segments as it wishes without incurring a penalty, as long as it does not use a competing GDS.
To determine how the share quota would affect your agency as the buyer, you have to look at three things: 1) the exact language of the seller's GDS contract with respect not only to the share quota but also to selling the agency; 2) the terms of the acquisition; and 3) probably most importantly, the likelihood that the seller's GDS vendor would pursue a claim against your agency.
The standard Travelport contract that has a share quota provides, "In exchange for the benefits provided ... Subscriber agrees to generate 95% of its total travel reservations in the Travelport GDS in each Contract Year ('Annual Target'). If Subscriber does not achieve the Annual Target during the applicable Contract Year, Subscriber will pay to Travelport an amount equal to $2.40 ('Shortfall Fee') multiplied by the difference between the Annual Target and the actual number of Segments generated by Subscriber."
Although the second sentence of this clause is extremely unclear, what Travelport means is that, for example, if the agency has 100,000 annual segments and puts 10,000 of them on Sabre, then it will owe a penalty of 5,000 times $2.40. If it moves all segments to Sabre, then it will owe $2.40 times 95% of the segments moved.
Since the term "Travelport GDS" means either Apollo or Worldspan, there is no problem if the seller has one of those systems and you have the other. However, if you have Sabre or Amadeus, you need to consider the consequences of this clause before you buy that seller's assets.
The standard Travelport contract prohibits the agency from assigning the contract without Travelport's consent: "Subscriber may not assign or transfer this Agreement, or any part of this Agreement ... without the prior written consent of Travelport, which consent will not be unreasonably withheld."
If the contract is assigned to you, the share quota could arguably apply to all of your agency's business.
To get around this clause, the seller can sell without assigning the contract to you. The asset purchase agreement should so provide, and the buyer must be careful not to use the seller's system.
Even if the buyer uses the system and thereby arguably assumes the share quota, it is unlikely that the outgoing vendor will pursue the claim unless the loss is large enough to justify a lawsuit. In my experience, such a loss would need to be well over $50,000. Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at firstname.lastname@example.org.