The Federal Court of Australia has dismissed the court action brought by the Australian Competition and Consumer Commission (ACCC) relating to air cargo price fixing. The lawsuit was commenced against 15 international airlines, but ultimately pursued against just two airlines, Air New Zealand and Garuda. These two airlines chose to defend the allegations that they had colluded with other airlines to fix fees and surcharges for air cargo in contravention of the Trade Practices Act 1974 (Cth), now called theCompetition and Consumer Act 2010 (Cth) (the Act). The trial lasted over six months.

The 31 October 2014 decision concluded that, while a number of collusive arrangements were made out, the conduct did not take place in a "market in Australia" as required by the prohibitions in the Act.

International cartel

This price fixing cartel was the subject of an extensive, internationally-coordinated investigation by multiple competition law enforcement agencies. The total criminal fines imposed by the U.S. Department of Justice (where 22 airlines and 21 executives were charged) exceeded US $1.8 billion, with four executives (including one executive of Qantas) serving jail time. The European Commission fined 11 air cargo carriers just under €800 million (US $1 billion). Eight carriers plead guilty in the Federal Court of Canada to participating in air cargo cartels affecting Canada, with fines in the Canadian Competition Bureau's investigation totalling more than CAD $25 million (US $22 million). The Korea Fair Trade Commission fined nineteen companies over ₩124 billion (US $114 million) and issued warnings to two other companies.

In New Zealand, fines of NZ $42.5 million (US $32 million) were imposed for price-fixing in breach of the New Zealand Competition Statute, including NZ $7.5 million (US $6 million) paid by Air New Zealand, which admitted liability. In Australia, the ACCC's action was resolved by court-ordered civil penalties totalling AUD $98.5 million (US $86 million) and a class action was settled earlier this year for AUD $38 million (US $33 million). In Australia, this represents the highest fines ordered to date for a single cartel.

Allegations

The ACCC alleged that airline competitors in Hong Kong, Singapore, and Indonesia engaged in unlawful collusion regarding transport of cargo by air to Australia between 2001 and 2006. In particular, the ACCC alleged that international airlines entered into anticompetitive agreements to fix prices for fuel surcharges, insurance and security surcharges, customs fees, and freight rates for cargo flown to Australia from Hong Kong, Singapore, and Indonesia.

The ACCC alleged that the conduct was facilitated through geographically-based industry associations, which had been established initially to respond to fluctuations in fuel prices and provided a means for airlines to agree on surcharges imposed for higher fuel and insurance costs.

Regulations in Hong Kong required notification to the government in order to impose a surcharge. The airlines had jointly notified the surcharges published by an industry association. The ACCC alleged that this amounted to an agreement between the airlines to fix the surcharge fees. The respondents submitted that they were required to do this by regulation. Similarly, in Indonesia, Garuda contended that its actions were required by Indonesia regulation.

Australian law

The new Australian law on relating to cartels came into effect in 2010. Before then, cartel agreements between competitors generally were prohibited only when they gave rise to a substantial lessening of competition in a market in Australia, but price fixing was automatically or "per se" illegal. The ACCC's allegations, relating to the 2001-2006 agreements, were pursued as both price fixing arrangements and arrangements affecting competition.

Similar conduct today likely would be pursued under statutory provisions that authorize criminal or civil prosecution of cartel agreements, which include provisions that affect prices, restrict output, share or divide market, or rig bids.

"Market in Australia"

A central issue to the ACCC's case was establishing that there was a market in Australia. The court undertook a systematic approach to market definition, employing well-established methodologies to arrive at its definition of the relevant market, ultimately identifying that no market in Australia was involved in the collusion between the airlines. 

Simply stated, the court rested its definition of the geographic market upon the location at which a customer would decide what airline to hire for cargo transportation. The court reasoned:

"The range of choices from amongst which a person might choose an airline to fly cargo from Hong Kong to Sydney is inherently limited to those firms having operations in Hong Kong. Even if there were a supply side substitute it would still have to be provided in Hong Kong."

and

"The evidence showed that the surcharges were imposed and collected at the origin airports. The competition which occurred between the airlines and which the surcharges interfered with was competition in markets in Hong Kong, Singapore and Indonesia and not competition in any market in Australia. Prices may well have been affected in Australia by the conduct but that does not mean the market in which the airlines were competing was located here."

The court noted that the law remains unsettled on whether markets must be wholly in Australia, but that was of little matter in this case as there was no aspect of a market in Australia.

The court accepted that markets existed for the carriage of cargo between Hong Kong, Singapore, and Indonesia and each airport in Australia and that part of that service was provided in Australia (such as carriage through Australian airspace, ground handling services at destination airports, and handling of lost or damaged cargo). However, despite that services were provided in Australia and increases in freight rates might have effected cost of imported goods in Australia, the court determined that the geographic dimension of the affected competition was in Hong Kong, Singapore and Indonesia. At best, the court opined, there was an Australian dimension to the arrangements but they did not rise to establishing a market (a fact he noted might not be similarly established if the assessment was undertaken in the context of a merger). Therefore, the court held, because the ACCC's case was "limited (in all but one minor case) to flights from airports outside Australia into airports inside Australia, I have concluded that no market in Australia was involved."

Accordingly, while prices in Australia were affected by the agreements, this did not suffice to extend the markets to Australia. The court concluded that the airlines were not competing in Australia. The court noted, in this regard, that the requirement that the market be a "market in Australia" contemplates a much narrower scope of jurisdiction than in the U.S. (Under U.S. law, the Sherman Act applies to conduct taken entirely outside the United States, if it has a foreseeable and substantial effect on U.S. commerce. Although it has been controversial for the U.S. to extend its competition law to extraterritorial conduct, this firmly remains the U.S. rule.)

Implications

The ACCC's media release unsurprisingly advises that it is carefully considering the judgment to decide if it will appeal. In our view there is an even chance that the ACCC will file an appeal. Changes in the law and tight budgets may cause the ACCC to decide not to appeal. Price fixing and other arrangements between competitors now are pursued criminally as well as civilly under the "new" cartel offences sections. The ACCC already has extracted significant penalties, and the law to be gained from an appeal may be of very limited utility. This is a significant decision, but not one that is critical to the ACCC's enforcement program today.

The court's 31 October decision can be found on the Federal Court of Australia's web site