Q: Why do the major online travel agencies (OTAs) almost always have the same hotel rates, and why are those rates almost always the same as the chains' own website rates? Don't the OTAs get net rates from the chains and then mark them up for sale to the public? How, then, could all the marked-up rates legally all be the same? Are the OTAs conspiring with each other to fix their own marked-up prices? Are the major chains conspiring to prevent the OTAs from undercutting the chains' own rates?
A: Those alleged conspiracies were the subject of a major class-action suit filed last August in federal court in Dallas. Last month, the judge threw out the case, holding that the plaintiffs did not present a plausible case of any such conspiracies.
The judge explained how the OTAs legally offer the same hotel rates. Each chain offers each major OTA the same kind of agreement, and that agreement has two major aspects:
First, the OTA must generally offer rooms at rates no lower than the "best available rate" (BAR), which is an industry term that means the lowest, unrestricted, non-prepaid, nongroup rate for the general public at the time of booking.
Second, the chain agrees to refrain from authorizing any other OTA to sell at lower rates and to refrain from posting lower rates on its own website. This is generally called the "most favored nation" (MFN) clause.
These BAR and MFN rules apparently do not distinguish between the so-called merchant model, which means that the chains offer net rates to the OTAs, on the one hand, and the so-called agency model, which means that the OTAs get commissions, on the other hand. Under either model, the chains prohibit discounting below the BAR.
These chain-OTA agreements began in late 2003 or 2004, following a period when the OTAs were hurting the chains by undercutting them. One chain probably rolled out the BAR-plus-MFN model, and the others probably copied it.
As you probably already know from the airline industry, copying a competitor's rates or rules is not illegal price-fixing because it represents independent decision-making. The plaintiffs needed to show at least some evidence of a conspiracy among the chains to impose the BAR-plus-MFN model or a conspiracy among the OTAs to accept that model, but the judge ruled that that they failed to do so.
Sharp readers are by now wondering about the legality of the BAR-plus-MFN agreements themselves. With the so-called merchant model, in which the chains offer rooms at varying net rates to the OTAs, do the chains have the legal right to dictate the amount of the markup?
Yes, they do. As you already know, a supplier has the legal right to dictate its agents' sale prices (and to prohibit discounting or rebating), regardless of whether the agent obtains net rates and marks them up or merely receives a commission. The OTAs generally do not buy any inventory for their own accounts, so they are merely agents under either the merchant or commission model.
So if your agency's client thinks that he can find lower hotel rates on the Internet than you can through the GDS, you can show him a copy of the judge's decision, which you can find at www.pestronk.com/otacase.html.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].