In a landmark decision, the High Court has upheld an appeal by the ACCC to find that a travel agent, Flight Centre, engaged in attempted price fixing in contravention of the then Trade Practices Act 1974 (TPA) (now the Competition and Consumer Act 2010) when it attempted to stop a number of airlines from undercutting it on airfare prices.
The decision represents a departure from the traditional view that a principal and agent will not be in competition with each other for the purposes of competition law.
The decision has significant implications for companies that sell direct and also use agents as part of their distribution structure, particularly those in the travel industry. Depending on the degree of freedom and authority the agent has, it may be in competition with its principal for the purpose of Australian competition law and accordingly collaboration on matters such as price or customers may raise cartel issues.
Flight Centre, which carries on business as a travel agent, is authorised by airlines to sell international airline tickets to customers pursuant to a standard form agency agreement with the International Air Transport Association (IATA).
The ACCC brought proceedings against Flight Centre in March 2012, alleging that Flight Centre had attempted to enter into a price fixing contract, arrangement or understanding with Singapore Airlines, Malaysian Airlines and Emirates in contravention of the TPA when it sought agreement from the airlines that that they would not sell their international airline tickets for less than the fares published to travel agents.
At first instance, the Federal Court found that Flight Centre was in competition with the airlines and accordingly in seeking to reach an agreement with the airlines regarding their prices it had engaged in attempted price fixing in breach of the TPA. Flight Centre was ordered to pay a pecuniary penalty of $11 million.
Flight Centre successfully appealed to the Full Federal Court with the Full Court finding that Flight Centre was not in competition with its airline principals. The ACCC appealed to the High Court.
Are principals and their agents in competition with each other?
By a majority decision, the High Court held that Flight Centre and the airlines were in competition with each other for the supply of contractual rights, namely international airline tickets, notwithstanding that Flight Centre was acting as the agent of the airlines in selling the airline tickets.
In the leading judgment, Kiefel and Gageler JJ held an agency relationship is not inherently inconsistent with an agent and a principal being in competition with each other. Whether an agent and a principal will be in competition with each other will depend on the scope of the agent’s authority and the extent to which it is constrained by a duty of loyalty to the principal.
Accordingly, an agent that does not have the authority to negotiate with third parties would lack the means to compete with the principal. Similarly, an agent with a contractual or fiduciary duty to act in the interests of the principal would lack both the autonomy and incentive to be in competition with its principal.
In the case of Flight Centre, it had authority to decide whether or not to sell an airline’s tickets and to set its own price for those tickets. Further, there was no suggestion that Flight Centre had any duty to prefer the airlines’ interests to its own. Accordingly, Flight Centre was in competition with the airlines and its conduct in seeking to reach an agreement as to the airlines’ ticket prices constituted attempted price fixing in breach of the TPA.
The proceedings have been remitted to the Full Federal Court for the determination of penalty.
Implications of the judgment
The judgment will have significant ramifications for the travel industry, as well as more broadly for other industries that use agency structures as part of a dual distribution strategy.
ACCC Chairman, Rod Sims, has indicated that the ACCC will seek further information about situations where agents compete with their principals, noting in particular the accommodation industry where companies use online agents and also sell directly. Mr Sims indicated that the ACCC would be seeking voluntary change in the first instance but would not rule out further court action if required.
Businesses that adopt a dual distribution structure, selling to direct to customers as well as through agents will need to carefully consider the implications of this judgment. While not all agents will be in competition with their principals, the more freedom an agent has to determine prices and to act in its own interests, the more likely the agent will be a competitor of its principal for the purposes of Australian competition law.