Two recent cases – ACCC v ANZ and ACCC v Flight Centre – have examined the notion of competition between principals and agents.
The main issues in these cases were determining the relevant market and ascertaining whether there was competition between the parties in that market.
The cases highlight that, where agents and principals are found to be competing in the same market, both parties will need to ensure that their pricing arrangements are not seen to be reducing competition, or have the potential to reduce competition.
Businesses that enter into agency arrangements with their competitors must take care, and seek legal advice when proposing or reaching an understanding or agreement with the principal. Attention needs to be paid to the perceptions of the boundaries in the markets in which competition takes place, and the purpose underpinning pricing discussions.
Flight Centre accused of attempted price fixing
In the case of ACCC v Flight Centre, Flight Centre acted as agent for a number of airlines in distributing air travel services. The relevant airlines also distributed their air travel services through other travel agents and directly to customers through their own marketing.
On occasion, the relevant airlines would offer special discounted fares for sale on their website only. On a number of occasions, the discounted fares offered on the airlines’ websites were lower than the fares available to Flight Centre via the electronic reservation system known as a ‘global distribution system’ (GDS), at least on terms that enabled Flight Centre to earn the commission it ordinarily received.
Between 2005 and 2009, representatives of Flight Centre sent numerous emails to the relevant airlines requesting that any fare the airlines directly offered to customers would also be made available to purchase through Flight Centre. Flight Centre also sought to have the airlines agree that any fare sold by the airlines directly be sold at a total price that included the amount of commission Flight Centre would be entitled to if it had sold the fare.
In a number of these emails, Flight Centre also threatened the airlines that, if the price undercutting did not stop, Flight Centre may choose not to promote and distribute the airlines’ air travel to its customers.
The ACCC alleged that this conduct constituted attempted price fixing arrangements in contravention of section 45 of the Competition and Consumer Act (CCA). The ACCC alleged that Flight Centre was in competition with the relevant airlines for the supply of booking services to customers and distribution of services to the relevant airlines.
Implications for the principal-agent relationship
Flight Centre argued alternatively that the emails took place in the context of a principal-agent relationship.
Section 45 of the CCA only applies where the parties are in competition with each other in relation to the goods or services to which the alleged contract arrangement or understanding relates. Justice Logan found that the relationship between the parties was one of principal and agent. However, he concluded that Flight Centre was in competition for the supply of booking and distribution services in respect of international air travel, such competition existing as recognisable by an economist, as well as by Flight Centre’s internal corporate strategy documents.
In relation to the issue of ‘price fixing’ Justice Logan found that the relevant price was the retail distribution margin as between Flight Centre and the airlines.
Justice Logan found that commercial profit was the driver in Flight Centre’s contravening conduct, and imposed a penalty of $11 million – $2 million for each of the second, third, fourth and fifth contravention and $3 million for the sixth contravention. He noted that the penalty would have been greater had the conduct been more than an attempt to induce a contravention of the cartel conduct provisions of the CCA. Flight Centre has lodged an appeal against the penalties imposed. The ACCC will cross-appeal the penalty judgment on the basis that the penalty of $11 million does not provide adequate deterrence.
This case potentially expands the notion of competition between principals and agents and may have broad implications for any commercial scenario where a supplier distributes its goods or services both directly to customers and to the use of agents or distributors.
No competitive overlap for ANZ and distribution channels
The other case that recently examined competition between a principal and an agent was ACCC v ANZ. This case considered the arrangement between the Australian Financial Group Limited (AFG) and ANZ whereby, as an independent contractor to market, AFG arranged certain ANZ loan products for customers. Under this arrangement, AFG appointed a number of mortgage brokers operating under the Mortgage Refunds banner.
Mortgage Refunds advertised and promoted a mortgage refund offer that provided a rebate to customers of part or all of the commissions paid by ANZ to the brokers. In opposition to this rebate, ANZ initially cancelled the mortgage brokers’ accreditation under its contract with AFG but later reinstated the accreditation on one condition: that ANZ could match the mortgage refund if it chose to waive its loan approval fee.
The ACCC argued that ANZ’s distribution channels, which included its branches, franchisees, and brokers, should be treated as economic entities separate from ANZ mortgage group, all of which participated in the loans arrangement services market. As a result of this, the entities would be in competition with mortgage refunds, and thus this conduct would constitute price fixing under the CCA.
However the Federal Court held that neither the ANZ branches nor the franchisees participated in any market in which the brokers provided loan arrangement services. Rather, they supplied sale services to the ANZ mortgage group and ANZ. Therefore there was no relevant competitive overlap between what was being supplied by the parties, as the brokers were not lenders in their own rights and therefore could not compete as lenders against ANZ.
A word of caution
While the parties were not found to be competitors in this case, we believe this hinged on technicalities in the factual scenario, and does not negate the view that the ACCC has increased its focus on agreements between principals and agents.