CONFLICTING DECISIONS ON THE NATURE OF MULTI-CHANNEL DISTRIBUTION MODELS – THE ANZ AND FLIGHT CENTRE CASES
Two recent Federal Court decisions provide contradictory and irreconcilable conclusions as to whether a supplier that supplies goods or services direct to customers is “in competition with” its own distributors or agents supplying the same goods and service to customers.
The answer is of utmost importance – if they are competitors, the supplier and its distributor/agent may risk engaging in criminal price fixing or cartel activity by entering seemingly ordinary industry arrangements. If not, such arrangements would only contravene competition laws if they have the purpose or effect of substantially lessening competition in a market – a much higher threshold.
In ACCC v ANZ, the Federal Court found that ANZ’s internal mortgage channels were not in competition with independent brokers in the provision of loan arrangement services on the basis that ANZ did not provide such services to customers. As a result, an agreement between ANZ and a broking firm, Mortgage Refunds, which fixed the level of rebate paid by Mortgage Refunds to its customers, did not amount to price fixing.
In ACCC v Flight Centre, the Federal Court held that international airlines competed with Flight Centre, a travel agent, in the provision of booking services to customers for air travel. Accordingly, communications from Flight Centre to the airlines to ensure that the airlines did not price below a certain amount were found to be attempts of price fixing.
While the ACCC has appealed the ANZ decision (and Flight Centre has announced it intends to do the same), the decisions leave the law, suppliers and their distributors/agents in limbo.
What you need to know
These cases were decided under the repealed price fixing provisions of the Trade Practices Act 1974. However, as similar provisions are contained in the cartel prohibitions under the Competition and Consumer Act 2010, the decisions are highly relevant going forward.
In light of the Flight Centre decision, there is a risk that an agreement between a supplier and its distributor/agent that fixes the commission payable to the distributor/agent will constitute price fixing on the basis that the parties are in competition with each other. This would appear to place every distribution arrangement, where a supplier provides a commission to its distributor/agent, in danger of being considered an illegal price-fix. This highlights the potential business compliance difficulties associated with following the decision.
Until the appeals are decided, suppliers that compete with their customers, distributors or agents should ensure that any discussions and agreements are made in the capacity of the “supplier-customer/distributor/agent” relationship and all documents should reflect this dynamic. This will minimise risks of price fixing and competition concerns should only arise if there is a substantial lessening of competition.
ACCC v ANZ
ANZ supplied mortgage products to customers who sought to acquire residential properties. ANZ used internal channels (branches, managers and specialist business units) and external channels, such as independent brokers, to market and distribute its mortgage products to customers.
Internal channels only distributed ANZ products to customers.
Brokers distributed mortgage products from a variety of lenders, including ANZ, and provided independent advice on which lenders’ products should be purchased. Brokers were accredited and trained by lenders about their products’ features and would receive a lender’s commission if a mortgage application introduced by the broker was approved.
Brokers had become increasingly important to lenders in the distribution of their products because customers preferred dealing with brokers and brokers could operate in areas where a lender did not have a physical presence.
Mortgage Refunds was an independent broking firm whose brokers were accredited to distribute ANZ mortgages. Mortgage Refunds gave customers part of its commission (a “refund”) if their mortgage applications were approved by ANZ. ANZ informed Mortgage Refunds that the refund was in breach of their agreement but agreed it could provide a refund not greater than the loan approval fee that ANZ internally charged customers for successful applications. ANZ considered that by matching the refund with its establishment fee (which it could waive), ANZ and Mortgage Refunds would be on a “level playing field” (the Agreement).
The ACCC’s case
The ACCC claimed that, ancillary to its supply of mortgage products to customers, ANZ supplied “loan arrangement services” to customers via its in-house channels. These services included advice on products such as availability, features and criteria for qualification as well as assistance in lodging applications.
The ACCC said that because brokers also provided loan arrangement services to customers, ANZ’s branches, managers and specialist business units were in competition with brokers in the market for the supply of loan arrangement services. In support of its claims, the ACCC relied on ANZ’s internal documents which referred to brokers as “competitors”; real examples of customers switching between lenders and brokers to arrange a loan; and ANZ’s desire to restrict business sourced via brokers.
In light of the above, the ACCC alleged that the Agreement involved price fixing between competitors because it fixed the level of rebate offered by Mortgage Refunds to customers.
ANZ argued that it competed (via its various channels) with other lenders in the market for the supply of mortgage products to customers but that it did not supply loan arrangement services in any market.
ANZ said this was supported by the fact that customers went to brokers for advice in selecting a lender but went to lenders once that selection had already been made. That is, ANZ and brokers provided different services – brokers provided independent advice about products from many lenders and acted in the customer’s interests while ANZ only sought to sell its mortgage products. ANZ claimed that it had a “vertical” relationship with brokers and accredited and trained them to compete more vigorously in the lending market.
In light of the above, ANZ submitted it was not in competition with Mortgage Refunds and accordingly the Agreement could not constitute price fixing.
Dowsett J held that ANZ did not provide loan arrangement services in any market and only supplied mortgage products in competition with other lenders. Accordingly, ANZ and brokers such as Mortgage Refunds were not in competition with each in the supply of loan arrangement services and the ACCC’s claim of price fixing failed. There were several reasons for this conclusion.
Firstly, after a comprehensive analysis of the oral testimony and documentary evidence, Dowsett J stated that isolated references in documents and by witnesses that suggested brokers were “in competition with” lenders should be examined in the context of all of the evidence and ANZ’s business model.
The documents as a whole (board papers, business plans, annual report and other industry evidence) did not support a conclusion that ANZ competed with brokers to provide loan arrangement services. They only suggested that ANZ competed in the lending market. Moreover, they demonstrated that brokers treated other brokers as competitors, but not lenders. His Honour noted that there was no evidence of the rivalrous conduct expected if lenders and brokers were genuinely in competition with each other.
Secondly, Dowsett J found that lenders and brokers provided fundamentally different services. Customers went to brokers for independent advice when selecting a lender, but went to lenders once that decision was made. In respect of ANZ “arranging loans”, Dowsett J held that such activity was a part of ANZ’s internal administration and was better described as “sales assistance” related to the supply of mortgage products. This activity was not supplied in a separate market but was simply the interactive process between customer and lender (akin to pre-contractual negotiations relating to the supply of mortgage products). Neither party would have thought it was anything other than part of the supply of the mortgage.
Thirdly, Dowsett J found that lenders and brokers collaborated rather than competed, as evidenced from the accreditation and training of brokers by lenders. Indeed, it was important to ANZ that brokers viewed it favourably compared to other lenders. If ANZ and brokers were truly in competition, ANZ would ordinarily be better off if brokers could not compete. In this regard, ANZ could limit or cease accreditations but it did not because that would have damaged its share of the lending market.
Fourthly, while a multi-channel distribution model that is efficient and enables targeting of different customer bases may naturally result in channel conflict and cannibalisation, Dowsett J held this is not evidence that the channels are in competition with each other.
Fifthly, real life examples of customers switching between a lender and a broker did not necessarily mean the lender and broker were in competition with each other because the reasons for switching were not clear. Similarly, if one supplier gained market share at the expense of another, this did not automatically mean they were in competition with each other. Instead, relevant products will be substitutable where a customer switches between them in the face of appropriate economic incentives (such as an increase in the price or quality of one of the products). His Honour concluded it would be unlikely that a customer would switch from a lender to a broker if the bank’s application fee was increased by 5%.
ACCC v Flight Centre
Singapore Airlines (SQ), Malaysian Airlines (MAS) and Emirates (EK) (together, the Three Carriers) supplied international air passenger transport services (or air travel) to customers.
Customers could make bookings for air travel either directly with the Three Carriers or through travel agents such as Flight Centre (over 80% of the Three Carriers’ airfares were sold by travel agents). Flight Centre did not provide international air passenger transport services to customers, nor did it acquire the airfares for resupply to customers – it simply had access to them for the purpose of selling on behalf of the Three Carriers. However, Flight Centre was at liberty to determine the price at which it offered those airfares to the customers.
Flight Centre stood at the midpoint between airlines and customers. It supplied customers with booking services for international air travel and received payment from customers for airfares on behalf of the Three Carriers. It was also paid a commission by the Three Carriers for making a booking. It was held that the relationship between airline and travel agent was one of principal and agent.
At the time of the relevant conduct, Flight Centre:
- had “preferred airline agreements” with the Three Carriers pursuant to which Flight Centre would receive an additional commission payment if it achieved revenue targets within the year via sales of the airline’s airfares;
- advertised a “Price Beat Guarantee” which meant it would better the price of any other airfare in the market shown to it by customer; and
- staff were remunerated on a commission basis (depending on the margin made through a sale).
Accordingly, where a consultant was required to reduce price to beat a competing price in the market in line with the “Price Beat Guarantee”, his or her commission would be eroded and he or she would be less likely to sell that airline’s airfares. In such circumstances, Flight Centre would lose sales and was less likely to obtain its annual commission by not achieving its annual revenue targets.
This situation came to a head in relation to the Three Carriers because each was offering airfares on its website at prices lower than what Flight Centre was offering to customers. In light of this, on six separate occasions between 2005 and 2009, Flight Centre communicated its displeasure with the pricing the Three Carriers were adopting on their respective websites.
In essence, Flight Centre told the Three Carriers that its staff would be reluctant to sell their airfares and it may not renew its preferred agreements unless the Three Carriers only offered airfares on their websites at a price that included the amount Flight Centre remitted to them from a sale plus Flight Centre’s commission. The effect of this proposal was that the Three Carriers could not undercut Flight Centre’s advertised prices and Flight Centre’s commission would be preserved. Flight Centre also wanted the airfares sold by the Three Carriers on their websites to be made available to it for sale to customers.
The ACCC’s case
The ACCC alleged that Flight Centre and the Three Carriers were in competition with each other in the supply of booking services for international air travel. It argued that Flight Centre and the Three Carriers competed for the retail commission paid to Flight Centre because Flight Centre would obtain the commission if it made a sale, whereas the Three Carriers would keep the commission if they made the sale.
The ACCC claimed that Flight Centre’s threats not to sell the airfares of, or enter preferred agreements with, the Three Carriers, unless it ceased “undercutting” Flight Centre’s prices amounted to attempts to make price fixing agreements. This was because those threats had the purpose or effect of fixing, controlling or maintaining Flight Centre’s commissions when selling airfares of the Three Carriers.
Flight Centre’s defence
Flight Centre argued that the only relevant market was the market for international passenger air transport services in which airlines were suppliers. It said customers only paid for air travel not booking services. As Flight Centre did not operate aircraft, it did not operate in the market for international passenger air transport services and could not be said to be in competition with the Three Carriers.
As the Three Carriers and Flight Centre were principal and agent, there was no separate market for the supply booking services for air travel. Flight Centre said that it was impermissible to disaggregate air travel into separate components (such as bookings and notifications) and to consider each a distinct service supplied in its own market.
Flight Centre also argued that it did not seek to restrict the pricing of the Three Carriers in any way – rather, as the agent for its principal, it simply wanted access to the airfares the Three Carriers were offering directly to customers.
Logan J found that the Three Carriers supplied booking services for international air travel in competition with Flight Centre.
His Honour stated that while there was a market for the supply of international passenger air transport services, the existence of such a market said nothing about how that supply was made known to consumers. As customers could book air travel with either airlines direct or via travel agents, Logan J held that the booking services provided by each were substitutable. His Honour stated that where a supplier cuts out the “middle man” and supplies direct, it is in competition with the middle man.
Logan J relied upon oral evidence provided by two other travel agents which considered themselves to be in competition with airlines in relation to the booking of international air travel. His Honour also relied upon phrases in Flight Centre’s internal documents such as “internet level playing field”; “consumers bring internet fares to us to match”; “supplier competition”; and “major suppliers are also competitors” as well as Flight Centre’s practice of monitoring direct sales made by the Three Carriers.
Logan J concluded that the competition between the Three Carriers and Flight Centre related to the retail commission offered to agents. By making the relevant communications to the Three Carriers, Flight Centre was seeking to ensure that the Three Carriers would only sell airfares to customers at prices that preserved Flight Centre’s commission.
In light of the above, Flight Centre’s conduct amounted to attempted price fixing with the Three Carriers as Flight Centre was attempting to fix, control or maintain its margins (i.e. the commission), where this was the source of competition. Accordingly, competition was reduced as customers would be denied the ability to purchase lower fares.
The problems with the Flight Centre decision
In our view, the ANZ decision represents the preferred legal approach and better reflects business reality. The decision in Flight Centre however leaves many questions unanswered. For example:
- If the Three Carriers and Flight Centre were genuine competitors, why would the Three Carriers allow Flight Centre to sell up to 80% of their airfares?
- How do two parties “compete” (in the competition law sense) to supply services to a customer where the payment for those services is not determined by the acquiring customer but is the subject of a pre-existing agreement between the parties pursuant to which one party pays (or does not pay) the other?
- Would a customer switch from an airline to a travel agent for the booking of an airfare on the basis of an increase in booking fee or would the customer consider the increase related to the overall cost of the airfare supplied by the airline?
- What do the annual reports and business plans of airlines (i.e. the Three Carriers) say about competing in a booking services market and competing against travel agents such as Flight Centre?
- What price did the Three Carriers charge for booking services?
While it may be that evidence was not led on these issues, it is our view that answers to these questions may result in a different decision.