Dual distribution models at a crossroad: where do the ANZ and Flight Centre cases leave us?
The recent decisions of the Federal Court in ACCC v Australian and New Zealand Banking Group Limited  FCA 1206 (ANZ case) andACCC v Flight Centre Limited (No 2)  FCA 1313 (Flight Centre case) both relate to very similar distribution arrangements and both involve allegations by the ACCC that, despite the seemingly vertical nature of the relationship between the parties involved, the parties were relevantly competitors with each other and, as a result, were capable of engaging in price fixing, per se unlawful under Australian competition law.
However, in these two cases involving broadly similar distribution models, different Federal Court Judges reached potentially irreconcilable conclusions. Dowsett J in the ANZ case found nocontravention was established because ANZ and mortgage brokers whodistributed ANZ mortgages as agents were not relevantly competitors and, therefore, were not capable of engaging in price fixing. In contrast, Logan J in the Flight Centre case found that Flight Centre and airlines, whose airfares Flight Centre distributed as their agent, were relevantly competitive and, as a result, that Flight Centre’s conduct did constitute an illegal attempt to engage in price fixing.
- Both cases, and particularly the Flight Centre case given the Court’s finding of contravention, represent a warning to suppliers that the ACCC considers that where a supplier sells goods or services direct to end customers and also uses distributors as agents and intermediaries, the supplier and its distributor may be competitors with each other even though the distributor is the supplier’s agent and not merely a resupplier. This risk also exists in relation to a supplier that sells direct and through third party resellers.
- As a result, suppliers employing such dual distribution models now need to take greater care to ensure that arrangements with their distributors regarding commissions, pricing and other supply terms, customer allocations and other aspects of their arrangements, do not constitute a cartel or exclusionary provision or give rise to an inference that such provisions exist.
- To do this, suppliers should try to ensure that all communications with their distributors occur in their capacity as “supplier” and not in their retailing capacity. Similarly for distributors, all communications with suppliers should be confined to matters related to the supplier/distributor relationship and not canvas matters related to the supplier’s capacity as a retailer.
From a legal perspective, we consider that the analysis by Dowsett J in the ANZ case is correct. As the warning above makes clear, the approach adopted in the Flight Centre case has potentially significant and unexpected implications for supplier/distributor interactions, in particular where the supplier and distributor are also principal and agent.Most importantly, because Logan J found that travel agents and airlines compete to earn the retail and distribution margin, which in the travel agent’s case is their commission, one of the potential paradoxical implications of the Flight Centre case is that an agreement of an agent’s commission may constitute a price fixing arrangement. Other consequences of the Flight Centre case include uncertainty as to:
- the extent to which suppliers and distributors can rely on the anti-overlap provision (for non-price conduct) given the uncertainty as to whether their arrangements can be characterised as exclusive dealing;
- whether third line forcing and resale price maintenance risks will now arise in principal/agent relationships because the agent could be characterised as being competitive with its principal rather than simply being its agent; and
- the enforceability of Most Favoured Nation (MFN) clauses.
- The full implications of both cases will not be known for some time as the ANZ case has already been appealed and an appeal in the Flight Centre case is likely. As a result, the circumstances in which a distributor will be regarded as a competitor to its supplier remain unclear in light of the apparent contrasts in the respective judgments. However, if the Flight Centre case is also appealed to the Full Federal Court, then the Court may resolve the conflicting approaches adopted in the two cases.
The anticompetitive conduct alleged by the ACCC
In both cases, the ACCC alleged that the supplier and distributor competed with each other in providing the relevant services to customers:
- in the ANZ case, the ACCC alleged that ANZ, via its branches (“in-house”) and other “tied” channels, provided “loan arrangement services” in competition with third party mortgage brokers who distributed ANZ mortgages as brokers; and
- in the Flight Centre case, the ACCC alleged that Flight Centre and the airlines it provided services to both supplied “booking and distribution services” to customers and competed with each other for the “retail or distribution margin”.
In the ANZ case, the ACCC alleged that ANZ had negotiated an arrangement with the broking company Mortgage Refunds, such that Mortgage Refunds could not offer a discount on ANZ loan products any larger than the discount that ANZ itself could offer on ANZ loan products by waiving its Loan Approval Fee. The ACCC alleged that ANZ’s arrangement had the purpose, effect or likely effect of fixing, controlling, or maintaining a discount, allowance, rebate or credit in relation to the supply of loan arrangement services by Mortgage Refunds and/or its brokers.
In the Flight Centre case, the ACCC alleged that Flight Centre attempted to induce the relevant airlines to make a contract or arrangement or arrive at an understanding with Flight Centre containing a provision that any particular fare that the airline offered directly to customers via its website:
- would also be made available to be purchased through Flight Centre; and
would be sold by the airline at a total price, including any charge for its booking services, of no less than the total of:
- the nett fare (the amount Flight Centre was required to remit to the airline); plus
- the commission that Flight Centre would be entitled to be paid for its services.
The ACCC alleged that this provision had a substantial purpose and the likely effect that Flight Centre’s commission would be maintained and was, therefore, deemed by s 45A of the Trade Practices Act 1974 to constitute price fixing (price fixing constitutes per se prohibited cartel conduct under the current Competition and Consumer Act 2010(CCA)).
The contrasting decisions
In the ANZ case, Dowsett J found that ANZ did not compete in any market in which the brokers provided loan arrangement services to potential borrowers.1 Critical to this conclusion was the Court’s finding that brokers offered additional and different services from those offered by ANZ.
His Honour found that the ANZ branches were performing functions on behalf of ANZ, and only incidentally providing any services to borrowers. In contrast, the brokers were offering two distinct sets of services:
- loan advisory services to clients, where they offered advice and information concerning a wide range of products, supplied by a wide range of lenders (these services were not offered by ANZ); and
- once a client had chosen an ANZ loan, loan sales services to ANZ (assisting clients to prepare and submit loan applications).2
Further, Dowsett J distinguished the services offered by brokers as being independent from ANZ. The evidence demonstrated that brokers were more likely to have the interests of the borrower at heart than those of the lenders. Unlike branches and tied channels, brokers undertook to provide advice, information and assistance to the potential borrowers who consulted them.3
In the Flight Centre case, Logan J found that the relevant market was the “downstream or distribution functional level of the overarching market for international travel and ancillary products”. The relevant airlines and Flight Centre were found to be competitors in this market not because Flight Centre was also a supplier of air travel, but rather because they both provided booking and distribution services to customers and an airline could, if it chose, “cut out the middle man” and undertake directly with customers for the booking of flights via its website. Logan J considered that these airlines were, therefore, providing services which were substitutable for those provided by a travel agent such as Flight Centre.4 His Honour considered that it was the retail or distribution margin that was the price for the distribution and booking service.5
In making these findings, Logan J relied heavily on:
- the language used by Flight Centre in its emails to the relevant airlines, in particular, Flight Centre’s use of words such as “undercut” and “friend or foe”. The Court rejected Flight Centre’s contention that it was merely seeking access to the same fares; and
- the evidence of Dr Vincent Fitzgerald, an expert economist, who said that it was “very clear” that travel agents and airlines competed horizontally with each other “since if one makes the sale, the other does not. What they are competing for at this level, of course, is the retail or distribution margin”.
In light of these findings, Logan J formed the view that any contract, arrangement or understanding between an intermediary travel agent, such as Flight Centre, and an airline which fixed, controlled or maintained the airline’s fares so that they were price neutral with the intermediary’s fares, was inherently likely to fix, control or maintain that intermediary’s retail or distribution margin.6
After considering the evidence, in particular, emails from Flight Centre to the relevant airlines, Logan J went on to determine that Flight Centre’s conduct had the purpose and likely effect of maintaining its margin.
Reconciling the two decisions
As noted above, both cases involved allegations by the ACCC that, despite the seemingly vertical nature of the relationship between the suppliers and distributors involved, the parties were relevantly competitors with each other and, as a result, were capable of engaging in price fixing.
In our view, the two decisions are not reconcilable as a matter of law.
Logan J’s reasoning in the Flight Centre case is, essentially, that airlines provide a service that is distinct from and additional to their supply of international air travel – a booking and distribution service, the price for which is the airline’s retail or distribution margin. In contrast, in the ANZ case, the Court rejected the ACCC’s allegation that the banks provided “loan arrangement services” in competition with mortgage brokers. Dowsett J did not consider that banks provided this type of distinct service in addition to the loan products they supplied nor that brokers supplied these services to their clients.
In the Flight Centre case, despite finding that a distinct booking and distribution service existed, Logan J did not explain:
- why, commercially, an airline would rationally enter into an arrangement with a travel agent if it was in competition with it. While there may be certain benefits to a supplier in intrabrand competition, the evidence of Dr Fitzgerald relied on by Logan J does not suggest that the competition between the airlines and travel agents is intrabrand competition. Moreover, the Flight Centre decision would suggest that that restrictions on intrabrand competition are unlawful, contrary to mainstream competition policy; or
- how to determine the airline’s price for the booking and distribution service separately from its price for the international air travel product itself.
Some implications for suppliers and distributors
Until each case is finally determined, suppliers who sell directly to market and indirectly via distributors (particularly in relation to agency models) are likely to face ongoing uncertainty about the characterisation of their arrangements with their distributors, including where the distributor acts as the supplier’s agent.
While there has always been a compliance risk in the scenario where a supplier’s “customer” is also its competitor, the decision in the Flight Centre case significantly increases this risk by broadening the scope of the relationship that might be considered competitive rather than vertical and applying the per se cartel offences to aspects of the supplier-distributor relationship that typically have been considered vertical. It is the broadening of this scope to include where a distributor is a supplier’s agent and not just a resupplier that raises new uncertainty.
The level of risk will be particularly high when the supplier and distributor are negotiating and implementing changes to their arrangements in relation to commission levels. This is because the Flight Centre case found that that travel agents and airlines compete to earn the retail and distribution margin, which in the travel agent’s case is their commission. As a result, one of the potential paradoxical implications of the Flight Centre case is that an agreement of an agent’s commission may constitute a price fixing arrangement.
Other legal implications that arise from the Flight Centre case include:
- the extent to which suppliers and distributors can now rely on the anti-overlap provision given the uncertainty as to whether their (non-price) arrangements can be characterised as exclusive dealing within the scope of s 47 of the CCA;
- whether third line forcing and other conduct risks will now arise in principal/agent relationships because the agent could be considered competitive with the principal; and
- the enforceability of MFN clauses.
In these circumstances, inferences of anticompetitive arrangements are likely to arise when communications between a supplier and distributor are not worded appropriately. As a result, greater diligence will be needed on behalf of suppliers and distributors when communicating with each other. While it is not risk free in light of the Flight Centre case, suppliers and distributors should still ensure that their communications are in their respective capacities of “supplier” and “distributor” rather than in their capacity as suppliers of goods and services to customers.This difference was critical in the Flight Centre case, where the Court rejected Flight Centre’s evidence that it was merely seeking equal access to fares available via the direct channel, since communications revealed that Flight Centre was seeking to prevent airlines in the direct channel from undercutting Flight Centre.
However, given the frequency and number of staff who may be involved in the supplier/distributor relationship, corporations are likely to face significant practical difficulties in monitoring the appropriateness of these exchanges from a compliance perspective.
Potential implications for the ACCC?
The circumstances of the Flight Centre case and the ANZ case raise new questions about when a per se offence may occur. In our view, the more appropriate contravention that should be pleaded in cases such as ANZ and Flight Centre which involve a supplier with multiple distribution channels would be that the arrangement had the purpose or likely effect of substantially lessening competition – not that the conduct constituted per se price fixing.
It will be interesting to see if the Full Federal Court considers the circumstances in which it is appropriate for the ACCC to allege that a per se cartel offence has occurred.
The significant uncertainty and risk created by the Flight Centre case may mean that the scope of the price fixing and other cartel offences should be subject to the upcoming “root and branch” review.