Mr. Brewer III

Hospitality Law

Anti-Trust Issues - What Keeps Your Lawyer Up at Night

By William A. Brewer III, Co-Founding & Co-Managing Partner, Bickel & Brewer

Consolidation has been a growth strategy of the lodging industry for more than a decade and a half, and some analysts predict that mergers and acquisitions (M&A) will continue to make economic sense to industry executives for the foreseeable future. The question is: will continued consolidation make sense to the trustbusters, competitors or even business partners who may harbor an antitrust gripe?

The wave of M&A activity, fueled by record hotel profits, globalization and an influx of private equity money, is increasing the market power of the big industry players. Hotel giants have been accumulating multiple brands - either in multiple market sectors or in a single sector - and that trend is expected to continue. As a result, fewer competitors hold larger market shares with more control over the nature of competition in various market segments.

These industry trends can draw unwelcome attention from more than just the trustbusters. Competitors and business partners alike have significant incentives to engage in private antitrust litigation, and this only adds to the antitrust concerns that keep your lawyer up at night.

The Effect of Market Concentration

Federal antitrust enforcers are likely to view a merger or acquisition as creating or enhancing market power (or facilitating the exercise of such power) if the merger or acquisition significantly increases market concentration and results in a concentrated market. The federal Horizontal Merger Guidelines treat market concentration as a measure of the likely anticompetitive consequences of mergers and acquisitions. The Federal Trade Commission ("FTC") and the Department of Justice employ the Herfindahl-Hirschman Index ("HHI") to gauge the concentrating effect of M&A activity. The HHI is calculated by summing the squares of the individual market shares of all market participants, and the difference between the pre-merger HHI and post-merger HHI suggests the merger's likely effect on market concentration. An HHI level below 1000 creates a presumption that the market is un-concentrated, which is considered competitive. HHI levels between 1000 and 1800 indicate moderately concentrated markets, which may or may not raise competitive concerns. Markets with HHI levels over 1800 are highly concentrated and are more likely to pose competitive concerns.

Private Antitrust Litigation

The U.S. antitrust laws offer a number of incentives that may well make private antitrust litigation attractive not only to lodging industry competitors, but also to franchisees or hotel owners seeking to challenge M&A activity by franchisors or hotel management companies. Treble damages can be available to successful plaintiffs in certain circumstances, as well as injunctive relief to halt, prevent or modify mergers or acquisitions.

One impediment to such private litigation is the requirement that plaintiffs show they have suffered "antitrust injury," which gives them standing to sue under the antitrust laws. Although a showing of antitrust injury depends on the facts of each individual situation, court decisions dealing with this issue in the hotel industry and analogous business areas, such as fast food franchising, indicate that hotel franchisees and owners can show that they have standing to assert antitrust challenges to the mergers or acquisitions of franchisors or hotel managers.

New Antitrust Concerns

Mergers and acquisitions are not the only area where the lodging industry can run afoul of the antitrust laws. In addition to the traditional antitrust concerns (e.g., price fixing, market and customer allocation, boycotts and exclusions, tying arrangements, price discrimination, and monopoly offenses such as predatory pricing) there is a new area for potential concern to the lodging industry: e-commerce. The industry has joined the ranks of e-commerce at both the retail and wholesale level, and both can give rise to scrutiny by antitrust regulators.

Here too, consolidation may be an issue if authorities believe hotel owners or operators are using e-commerce sites to give improper preference to their own brands. For example, in 2006, Blackstone, through an affiliate, bought Travelport, which operates such online services as Orbitz and the Galileo global computer reservations system. Orbitz, which was formed by five airlines, was among the airline-owned reservations systems that came under intense antitrust scrutiny to determine if, among other things, its computerized flight selection recommendations and fare offerings were biased in favor of the owning airlines. Such online services could very well wind up in the regulators' sights again when operated by hotel owners or hotel investors.

Other e-commerce business models also may be subject to antitrust scrutiny. For example, in 2000, Marriott and Hyatt became the first major hospitality industry competitors to team up in a joint online procurement network to leverage their then-combined $5 billion a year in domestic purchases.

Some comentators, including federal appeals court Judge Richard Posner, believe antitrust regulators and the courts are ill-equipped to deal with such "new economy" ventures, but the past history of e-commerce antitrust regulation suggests that new e-commerce ventures will draw closer attention as the regulators strive to understand how such business models affect competition.

Such scrutiny may become even more likely if Congress heeds a suggestion from the Antitrust Modernization Commission. In its April 2007 report, following a three-year study of potential updates to the antitrust laws, the blue-ribbon panel suggested closer antitrust scrutiny of "new economy" industries and innovations.

Globalization

U.S. antitrust laws are not the only ones that should raise concerns among prudent executives and lawyers. Globalization is subjecting the lodging industry to increasing scrutiny in Europe and elsewhere, and the global antitrust landscape is complex.

At one end of the spectrum is the European Union (EU), which has a well-developed body of antitrust law. The EU, like the United States, requires prior approval of large mergers or acquisitions based on their potential effects on European competition - even if the M&A activity involves companies based outside the European Economic Area. Recent cases include the European Commission's review and approval of the Blackstone-Hilton acquisition, which included scrutiny of Blackstone's interests in Galileo and other e-commerce ventures.

Because of the obvious overlap between the M&A evaluations conducted by antitrust officials in the United States and Europe, an effort has been underway to coordinate those reviews. In June 2007, the US-EU Merger Working Group proposed a set of best practices for trans-Atlantic cooperation in merger investigations.

While the EU has a well-developed antitrust law and policy, China is at the other end of the spectrum. Both its market economy and antitrust law are in their infancy. So too is foreign hotel investment in China.

China's new antitrust law, approved in August 2007 and effective in August 2008, outlaws monopolistic behavior, such as price-fixing, and stiffens China's prior approval requirement - known as the economic security review - for hotel and other mergers and acquisitions. The new antitrust law comes just as China's hotel market is heating up, following the market's opening to foreign hotel investment at the end of 2005. China's hottest hotel M&A activity is in the economy sector - highlighted by the recent acquisition of local hotel chain Top Star by China's Home Inns & Hotels Management Inc. - and for that market segment, at least, China's antitrust policy may take the form of protectionism. The Chinese government reportedly is drafting rules to tighten controls on the economy hotel sector by raising the bar for new entrants. All in all, China's new antitrust regime is sure to create pitfalls for the unwary in the lodging industry.

Looking ahead, business trends in the lodging industry indicate that antitrust is a concern that will grow over time. And that concern will not focus solely on the potential for government enforcement activity. Equally or more important is the fact that private antitrust lawsuits are another arrow in the quivers of hotel industry competitors - and even business partners - seeking to challenge mergers, acquisitions or other business activity within the lodging industry.

William A. Brewer III is co-founding and co-managing partner of Bickel & Brewer, with offices in Dallas and New York. Under Mr. Brewer's direction, Bickel & Brewer has become renowned for its innovative handling of disputes within the hospitality industry. For the past decade, Bickel & Brewer has represented hotel franchisors, management companies, owners, developers and investors in the highest profile litigation in the hospitality industry. He is a member of various philanthropic organizations, including the New York City Partnership and the Board of Trustees of Albany Law School. Mr. Brewer III can be contacted at 214-653-4811 or wab@bickelbrewer.com Extended Bio...

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