What You Need to Know

  • The concept of operating in a market “in Australia” is fundamental to whether Australian competition laws apply to the conduct of international corporations. A recent decision provides guidance on the factors that are relevant to determining whether overseas conduct is taking place in a market “in Australia”.
  • A market can be “in Australia” for the purpose of Australian competition laws even if it is not exclusively so. Whether a market is “in Australia” will be examined taking into account all aspects of the market. The physical location of suppliers and where substitution takes place will not be determinative in all cases.
  • Despite relatively recent changes to Australian cartel laws, this analysis remains relevant, given the concept of a market “in Australia” is a critical component of competition law analysis with respect to exclusionary conduct and general anti-competitive activity, as well as mergers.

Full Court Decision

The long running Air Cargo Cartel litigation has taken a further twist, with the Full Court of the Federal Court upholding an appeal brought by the Australian Competition and Consumer Commission (ACCC). The proceedings concerned alleged price-fixing and other anti-competitive conduct by airlines in relation to certain surcharges on international air cargo services flying to Australia out of Hong Kong, Singapore and Indonesia.

The Full Court overturned the first instance finding that the relevant markets were not markets “in Australia”. Although much of the competitive conduct in relation to the air cargo services (and all of the alleged collusive conduct) took place outside Australia, there were still various aspects of the markets that were in Australia, and this was enough to overturn the market finding and apply the Australian cartel laws to the conduct. 

Background

These proceedings have a long history, commencing in 2006 with regulator investigations in various countries. Between 2008 and 2013 the ACCC reached settlements with a dozen or so airlines in relation to the relevant conduct, producing pecuniary penalties totalling A$98.5 million. Only Air NZ and Garuda went on to defend the allegations at trial.

At trial, the alleged collusive conduct focused almost entirely on the imposition of fuel surcharges and insurance and security surcharges on air cargo services flown into Australia from Hong Kong, Singapore and Indonesia. The ACCC’s case alleged that numerous “understandings” were reached over time between airlines during, or as a result of, meetings of industry representative bodies known as “cargo sub-committees”. This led to the coordinated imposition of the surcharges by the airlines, in breach of the price-fixing provisions (sections 45 and 45A) of the Trade Practices Act 1974 (the Act)1.

Air NZ and Garuda each ran various defences in the primary case and the appeal, that included claims that the collusive conduct in Hong Kong and Indonesia was required under local law to obtain government approval for surcharge levels (this was not accepted). Some of these defences were accepted by the primary Judge in relation to certain conduct. However, he also found in many instances the collusive conduct had occurred. Had it not been for his finding with respect to the applicable markets, it is clear that the primary Judge would have found the airlines in breach of the Act.

Legal Test – Market “in Australia”        

Under s4E of the Act, a reference to a market in the Act means a market “in Australia”. As the applicable price-fixing provisions2 required the colluding parties to be in competition with each other in any market, the ACCC had to establish that the relevant markets for the provision of air cargo services from Hong Kong, Indonesia and Singapore to Australian ports were markets “in Australia”.

The Full Court relied on the following principles and factors in finding that the relevant markets were in fact markets in Australia:

  • Whether an identified market is “in Australia” is an evaluative exercise, which should take into account all aspects of the market, rather than fastening upon one particular component or dimension of the market that may take place outside of Australia;
  • A market can be “in Australia” while also being other jurisdictions. It is enough that part of the market is in Australia;
  • Although the physical location of suppliers and the giving effect to substitution decisions (in this case at the origin ports) are relevant factors in identifying the market, they alone are not determinative of its geographical dimension or whether the market is in Australia;   
  • The suite of air cargo services provided by Air NZ and Garuda to Australian ports, although commencing overseas, included important components in Australia required to satisfy demand (for example, delivery to Australian ports, airport ground handling services, enquiry services for tracing shipments, etc);
  • The key market participants were the airlines, freight forwarders and certain shippers (large importers in Australia and large exporters at origin). The services were marketed and supplied to the shippers in Australia, some of who dealt directly with airlines and made purchasing decisions with or independently of freight forwarders;
  • An evaluative conclusion that the markets were “in Australia” was consistent with the purpose of the Act, as well as aligning with the conclusions reached by New Zealand and European Courts based on similar facts.

Is “market definition” still relevant?

This case concerned the old price-fixing laws (s45A), which are now covered by the “cartel provisions” in Division 1 of Part IV of the CCA and do not include an express requirement for a market in Australia.3

However, what a “market in Australia” means remains critical for corporations defending or prosecuting claims (not cartel-related) under s45, arising from international conduct alleged to be exclusionary or to have the purpose or effect of substantially lessening competition. It is also potentially relevant for s50(6), which defines “market” for the purposes of merger analysis under the Act.

This decision shows that parties need to carefully consider whether conduct is or was in fact occurring in relation to a market in Australia. The consideration must take into account all aspects of the market and not be limited to issues such as the location of suppliers or substitution effects.

Input Prices – Still Price-Fixing

The Full Court decision also provides a useful reminder that arrangements or understandings which may only relate to a small component of a final price can still be a cartel offence.

The price-fixing prohibition requires an arrangement or understanding between competitors that has the purpose, effect or likely effect of “fixing, controlling or maintaining” the whole price of a relevant good or service. In this case, Air NZ argued that:

  • the collusive conduct only impacted upon a very small component of the overall price for air cargo services (being the relevant surcharges); and
  • there remained “fierce and unconstrained” competition amongst the airlines with respect to cargo rates (which made up the majority of the overall price).

As a result, it said there was a negligible effect (if any) on the overall price of the air cargo services and it could not be inferred that the purpose of the collusive conduct was to control the whole price.

This argument was rejected. Instead, the Full Court noted that given competition on cargo rates was fierce, there was a significant incentive for the airlines to increase their prices by the agreed surcharge amounts. As the majority stated “Even a small proportionate increase would represent increased revenue for the airlines without consequent loss of sales, if all airlines imposed the surcharge” and further “The obvious inference was that by moving together, each had the purpose of minimising risk of losing market share.

Johnson Winter & Slattery represented Qantas in relation to the air cargo cartel investigation and related penalty proceedings.