What you need to know

  • The High Court has clarified the circumstances in which suppliers and their distributors / agents will be taken to be actual or potential competitors for the purposes of Australian competition law. A majority concluded that Flight Centre was in competition with airlines for the supply of international airline tickets, despite the existence of an agency relationship.
  • As a result, businesses engaging in direct distribution as well as employing third party distributors (dual distribution) can no longer safely assume that where those distributors are agents, they cannot be competitors. A case-by-case examination is needed, with a focus on:
    • the degree of discretion available to the agent (including pricing flexibility); and
    • the scope of duties allocated to them.
  • Where an agent may compete with its principal, there is a high risk certain arrangements between them relating to end customers – such as pricing for end customers or the allocation of customers or territories – could constitute a cartel offence. Instead, communications between the parties should focus on the “vertical” nature of the supplier-distributor relationship and its terms and conditions.
  • Existing dealings where principal – agent competition is possible should be examined to identify risk areas. In particular, arrangements that might impact upon the agent’s pricing or supply to end customers should be scrutinised, such as price parity agreements, “most favoured nation” clauses, commission structures or customer allocations.

Background: The facts

Flight Centre, a travel agency, supplied customers with booking services for international air travel and collected payment for airfares on behalf of various airlines. When a booking was made, Flight Centre received a commission from the relevant airline. The relationship was seen as one of principal and agent.

With the advent of online sales, customers could choose to make bookings with an airline directly or through agents like Flight Centre. Flight Centre was able to determine the price at which it sold airfares to its customers and, during the relevant period, it advertised a “Price Beat Guarantee”. This meant it would better the price of any other airfare in the market shown to it by a customer.

The conduct in question arose because certain airlines1 (the Carriers) were offering airfares on their websites at prices lower than those offered by Flight Centre, which had adverse effects on Flight Centre’s sales and commission due to its “Price Beat Guarantee.” Flight Centre repeatedly suggested to the Carriers that it would be reluctant to sell their airfares and it may not renew its preferred agreements unless the Carriers stopped undercutting Flight Centre’s advertised prices on their websites.

The ACCC’s case theories

The ACCC alleged Flight Centre’s conduct amounted to attempted price-fixing, or a “contract, arrangement or understanding” between competitors that had the purpose, effect or likely effect of “fixing, controlling or maintaining” price.2 It offered two case theories in support of its allegations.

Primarily, the ACCC alleged that Flight Centre and the Carriers were in competition with each other in the supply of distribution and booking services for international travel. The ACCC argued that Flight Centre and the Carriers competed for retail commissions in this market and Flight Centre’s threats had the purpose or effect of attempting to “fix, control or maintain” the retail commissions Flight Centre earnt when selling the airfares of the Carriers (the ACCC primary case).

As an alternative, the ACCC argued that Flight Centre and the airlines competed in a market for the supply of international passenger air travel services, where the alleged price-fixing related to the price of airline tickets themselves (the ACCC secondary case).

First Instance Decision

In 2013 the Federal Court dismissed the ACCC secondary case, but held the Carriers and Flight Centre were in competition with one another as alleged in the ACCC primary case.3

Logan J concluded that as customers were able to book air travel with Flight Centre or the Carriers, the booking services being provided by each were substitutable and the parties were in competition with each other. The price of that service was reflected in the retail commission paid to travel agencies and by making the relevant communications, Flight Centre was seeking to ensure that the Carriers would only sell airfares to consumers at prices that preserved its commission.

Flight Centre’s conduct was found to be attempted price fixing and pecuniary penalties of $11 million were ordered against it.

This decision appeared to conflict with the concurrent analysis of a similar distribution model in ACCC v ANZ Banking Group Limited [2013] FCA 1206. Our analysis of these apparently contradictory decisions entitled “Two landmark cases but the jury is still out” is available here.

Full Federal Court Decision

Flight Centre appealed the primary judgment on various grounds, all of which related to characterisation of the relevant services and the finding that the Carriers and Flight Centre competed in a market for the supply of distribution and booking services.

In 2015 the Full Federal Court overturned the original decision and found that the primary judge erred in upholding the ACCC primary case.4 Instead, the contravening conduct occurred in a different market – the market for the supply of international passenger air travel services (as alleged in the ACCC secondary case). However, in this market Flight Centre acted as an agent for the Carriers and consequently, was not in competition with them.

The Full Court reached this conclusion for a number of reasons outlined in our article entitled “Who is your competitor? The Full Federal Court reconciles the conflicting decisions in ANZ and Flight Centre”, available here. Most importantly, these reasons include:

  • booking services were essential and inseparable incidents or actions involved in selling international passenger air travel services and there was no separate supply of a booking service;
  • it was artificial to regard offers or provisions of services by the Carriers as being competitive with agency services that the Carriers had retained its agents, such as Flight Centre, to provide; and
  • booking and ticketing services, including any ancillary services, were supplied by Flight Centre for and on behalf of the Carriers under their agency agreement.

High Court – ACCC’s Appeal

The key issue before the High Court was whether Flight Centre was “in competition with” the Carriers when it attempted to induce the Carriers not to discount the airline tickets they were offering directly to customers.

While High Court delivered separate judgments, the majority (with French CJ in dissent) upheld the ACCC’s appeal and concluded Flight Centre and the Carriers were in competition with one another in a market, in simple terms, for the supply of international airline tickets. In reaching this decision, the majority judges noted the following:

  • Market definition involves an analysis of competitive processes, which cannot be divorced from the conduct in question. An approach to market definition that attributes the supply of services to parties where that attribution does not accord with “commercial reality” is unsustainable.
  • Both Flight Centre and the Carriers operated in the market for the supply of international airline tickets, primarily because both offered the same service (i.e. selling tickets for travel). From a demand perspective, purchasing a ticket from Flight Centre or purchasing a ticket from a Carrier provided the customer with a contractual right to airline travel.
  • Both the competition law and the general law of agency are not inconsistent with the concept of competition between a principal and its agent.5 The relationship between the parties must be examined on a case by case basis, with a focus on:
    • the scope of authority conferred on the agent by the principal; and
    • the extent of any duty of loyalty constraining the agent’s use of that authority.
  • Circumstances where an agent exercises wide discretion in its pricing of the principal’s goods (for example setting its own prices, as was the case with Flight Centre) and where the agent is not required to act in the interests of the principal may mean that the principal and agent are rivals.

The matter has been remitted back to the Federal Court to determine pecuniary penalties.

Implications

  • Businesses that engage in dual distribution models, with direct supply to end customers alongside their third party distributors, can no longer safely assume that if their distributors are agents they cannot be competitors.
  • Instead, a case-by-case examination needs to be undertaken, with a focus on the degree of discretion available to the agent (including pricing flexibility) and the scope of duties allocated to them. Where it is possible the agent and principal compete, there is a high risk certain arrangements – such as with respect to customer pricing or allocation of customers or territories – may constitute a cartel offence.