U.S. District Judge in Texas dismisses class action lawsuit against conspiracy by online travel agencies and hotels to fix the price of hotel rooms
by Gabriele Accardo
On 18 February 2014, U.S. District Judge Jane Boyle of the Northern District of Texas Dallas Division dismissed a class action lawsuit that online travel discount company Skoosh had filed against 12 dominant hotel chains in the United States (the “Hotel Defendants”) and nine online travel agencies (the “OTAs Defendants”), including Expedia, Hotels.com, Travelocity.com and Orbitz. Skoosh had alleged that the hotels and travel agencies (collectively the “Defendants”) had unfairly shut Skoosh out of the market and violated antitrust laws by agreeing to fix hotels room prices.
There were four claims that were filed against the Defendants’: per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; agreements unreasonably restraining trade (under the rule of reason or “quick look” test) in violation of Section 1 of the Sherman Act; violation of state antitrust laws; and violation of state consumer protection laws.
The class action lawsuit was consolidated with another antitrust lawsuit that alleged that the Defendants entered into an industry-wide conspiracy to impose “rate parity” across hotel room booking websites as early as 2003. In essence, according to the plaintiffs the conspiracy involved “an express or tacit agreement” among all Defendants. Within this broad conspiracy, the plaintiff claimed there were two sub-agreements: first, the OTA Defendants entered into a horizontal agreement not to compete with each other, apparently formed in the same sort of express or tacit way as the larger conspiracy; second, each Hotel Defendant signed vertical written contracts known as resale price maintenance (“RPM”) agreements with each OTA Defendant.
A typical RPM agreement between each OTA-Hotel Defendant pair provided at least two restrictive terms. The first term mandated that the hotel would establish and publish the “Best Available Rate or “Lowest Rate” for a non-packaged room and that the published rate was the price the OTA could use when selling rooms to consumers. The second relevant term, the so-called the most favored nation (“MFN”) clause, provided that the published rates offered by the OTA would be as favorable as the published rate offered to i) any OTA competitor and ii) the rates published on the Internet site operated by the hotel itself. In essence, each RPM agreement ensured first, that each OTA would not discount below each hotel website’s published rate, and second, that each hotel was providing each OTA with its lowest online rate.
However, Plaintiffs clarified that their antitrust claims were based on an industry-wide conspiracy, rather than either of the two individual sub-agreements holding the broader scheme together.
Accordingly, in dismissing the lawsuit, the judge agreed with the defendants that “Plaintiffs’ antitrust claims rest entirely on the circumstantial facts purportedly showing that Defendants entered into an ‘express or tacit’ industry-wide conspiracy not to compete” and that “Plaintiffs certainly may rely on circumstantial facts to establish the first element of their claim … but these facts must be enough to surmount the pleading bar set by the Supreme Court.”
In other words, the complaint failed to provide any “further circumstances pointing toward a meeting of the minds,” or “further factual enhancements that pushed the allegations out of “neutral territory.” Such “factual enhancements” in this context, according to the Court, may consist of “parallel behavior that would probably not result” absent an agreement or “complex and historically unprecedented changes in pricing structure made at the very same time by multiple competitors, and made for no other discernible reason.”
The judge noted that “parallel conduct” in the form of same prices of hotel rooms between online travel agencies and agreements made to protect room prices in the online marketplace did not amount to evidence of the existence of a conspiracy. Rather, the judge held that “[T]he real ‘nub’ of the Complaint in this case is Defendants’ parallel business behavior—the adoption of similar [resale price maintenance] agreements seen across pairs of [online travel agencies] and Hotel Defendants … Defendants’ parallel adoption of similar business strategies is not suspicious or suggestive of an agreement. On the contrary, common economic experience and the Complaint itself offer a natural or ‘obvious’ explanation for why the Hotel Defendants on one side, and [online travel agency] Defendants on the other, individually entered into the same two-term [resale price maintenance] agreements.”
In fact, according to the Court, for the Hotel Defendants, an RPM agreement allowing them to control the prices at which their rooms were sold online made perfect economic sense. As a general matter, it is quite natural for a seller to want to control the online price of its product. This natural desire to control online pricing is even more apparent in the hotel industry. A fancy hotel, for example, may value the ability to control online pricing to protect its brand’s high-end image. More generally, hotels across the industry may find that controlling minimum resale prices is the “only feasible” way to implement a profitable price discrimination strategy—that is, a strategy to “sell the same product [i.e., hotel room], costing the same to make and sell, at different prices to different consumers.
For OTA Defendants, the reason they would individually seek out the two-term RPM agreements on an individual basis is more obvious, the Court stated. Having given up the right to discount prices below each Hotel Defendant’s published rate, each OTA Defendant would naturally want an assurance that competitors will also be prohibited from offering a lower price than the published rate.
Besides, according to the Court, while both the Hotel and OTA Defendants would benefit from the elimination of price competition in the sale of hotel rooms online, these “common motives” just as well explain why the Hotel Defendants (because each wanted to control online prices for its own rooms) and the OTA Defendants (because each wanted an assurance the minimum price it must publish would not be undercut) individually entered into RPM agreements. In essence, just because Defendants’ rational business interests can be recast in a suspicious light does not mean the allegations actually suggest a conspiracy was formed, the Court stated.
Interestingly, with regards to the possibility of whether certain circumstances may enhance a finding of a Section 1 conspiracy, the Court noted that a government investigation or finding of wrongdoing may be inference of conspiracy where the investigation or related case involves violations of the same laws and/or the same conduct in issue in the Section 1 claim. However, allegations of anticompetitive wrongdoing in Europe or some other foreign nation, absent any evidence of linkage between such foreign conduct and conduct at issue, is not relevant to the question of whether a Section 1 conspiracy has been properly alleged. The Court noted that the government investigations cited in the complaint involve European laws, which may prohibit conduct that is lawful under Section 1. Thus the Court observed that: “[T]he [UK Office of Fair Trading] does not apply the rule of reason to vertical price agreements as required under U.S. law. Instead, it follows the rigid European precedent of subjecting vertical price agreements to ‘de facto per se illegality.”
Judge Boyle dismissed the claim without prejudice, thereby allowing plaintiffs to file a second consolidated amended complaint in an effort to overcome the deficiencies warranting dismissal.