- By Sujjain Talwar, Aakanksha Joshi, Megha Agarwal
OYO has enjoyed an unprecedented success story –a humble startup six years ago, the current valuation of the company is now $10 billion. Globally, the third-largest hotel chain by room count, OYO has transformed the very paradigm of the hospitality industry. Undoubtedly, such kind of unparalleled success is bound to have its naysayers, as was recently witnessed, in a recent case before the Competition Commission of India (CCI).
RKG Hospitalities Private Limited (RKG), an entity which had entered into a marketing agreement with OYO (Agreement) for being listed on OYO’s platform submitted information against OYO to the CCI claiming that OYO had abused its dominant position by imposing unfair and discriminatory conditions on RKG.
Why did the dispute occur?
RKG contended before the CCI that OYO’s conduct was designed to eliminate competition from the market and alleged that the agreement contained terms which were one-sided, unfair and discriminatory. RKG further contended that such terms were imposed and unilaterally modified by OYO to put RKG at a disadvantage due to OYO’s dominant position in the relevant market. RKG substantiated these allegations by citing several issues, including, OYO’s unilateral rights to modify the structure of RKG’s hotel to meet OYO’s standards, put its signage with RKG’s hotel name, frame the policy for determination of the hotel’s ranking and performance and charge a platform fee.
RKG also brought up the restriction imposed on it by Oyo from entering into any agreement with online aggregators for selling, marketing or promoting rooms of its hotel for a specified period. OYO’s wider termination rights as compared to those of RKG’s was another grouse.
Expectedly, OYO refuted all allegations of anti-competitive conduct and defended itself on the grounds that the issues flagged by RKG are purely contractual and do not involve competition law. OYO contended that it competed with other hotel chains as it was not a hotel aggregator. This submission which is contrary to the general market perception would have a bearing on the determination of what the relevant market was.
In response to the submission made by RKG, the CCI, deliberated that the relevant market to determine whether or not OYO was in a dominant position in the market was the “Market for franchising services for budget hotels in India”. Observing that franchising is only one of the many business models under which a hotel can be operated and that it is still an emerging trend in India, the CCI noted that in a franchise model the commercial arrangement requires certain reciprocal obligations between the franchisor and the franchisee, which may have valid business justifications.
The CCI examined clauses of the Agreement such as those according to a revenue share to OYO, barring RKG from engaging with online aggregators and exclusively entitling OYO to modify the structure of the hotel and put its signage. In a positive decision for Oyo, the CCI held that there was a logical business justification, with respect to each such clause. In CCI’s view, these clauses were justified to align the partner hotels to OYO’s brand image, ensure that services offered are of a standard benchmark quality and ultimately guarantee customer satisfaction. CCI, therefore, held that the terms of the Agreement were not unfair, and OYO was not abusing its position in the market.
On the issue of dominance, the CCI assessed OYO’s position in the relevant market vis-a-vis its competitors such as Fab Hotels, Treebo and it finally noted that though, OYO was a significant market player (on account of the availability of vast number of budget rooms/ hotels in the space) it could not be unambiguously said to be dominant in the relevant market.
Most management agreements and franchise agreements in India have clauses similar to those in the agreement, which were contended to be unfair before the CCI. As noted by the CCI, owners of hotels prefer to obtain a franchise from a brand that is widely recognized. Therefore, the franchisor’s know-how (which is likely to have real efficiency benefits) needs to be given due consideration. Given this CCI’s view that one-sided terms in the agreement were not unfair because they aimed at guaranteeing consistent service of a high quality which would thereby enhance customer experience may go a long way in defining how such agreements are dealt with in the future.
The above matter can also be juxtaposed in a scenario involving large hotel chains and hotel owners. These hotel chains may be able to provide a logical justification to ensure that the services provided in the hotel meet the standards expected from a brand. However, it is important that we don’t lose sight of the owner’s capital and risk that is far larger. Further, expenses to meet changing brand standards should, therefore, go through the sieve of a cost-benefit analysis and an owner should not be made to swallow unilateral decisions of brands. A balancing act is key.
(Sujjain Talwar is Partner; Aakanksha Joshi is Partner, and Megha Agarwal is Senior Associate at Economic Laws Practice. Views expressed are the authors’ own. Economic Laws Practice did not represent either CCI or OYO in this particular matter.)