Flight Centre: Australian High Court finds agent competed with principal and breached cartel laws

(by Julie Clarke[1]) On 14 December 2016, Australia’s highest court (the High Court) determined, by majority, that Flight Centre, a travel agent, competed with airlines for the supply of airline tickets and that, as a result, its attempts to induce the airlines to lower their direct-to-public ticket sales constituted unlawful price fixing. Flight Centre markets itself as offering a ‘Lowest Airfare Guarantee’. In attempting to induce the airlines not to discount tickets sold direct to the public, it was found to be in competition with the airlines and therefore subject to a per se prohibition rather than a full effects analysis. The treatment of travel agents and other similar arrangements falls into somewhat of a grey area in Competition Law.  Are the agents competing horizontally with their suppliers in selling to consumers, or are they better seen as vertically related retailers, or even as de facto employees?  This is important because horizontal cartels are almost universally per se illegal, often with criminal sanctions, vertical price fixing (e.g. RPM) has a much more mixed and nuanced legal position, and employees are completely exempt (a firm is free to set prices that all its salesforce must implement). In Europe, genuine ‘agency agreements’ fall outside the scope of Article 101 TFEU, even though they may contain clauses that can produce anticompetitive effects, such as minimum pricing.[2] This blog analyses the significance of recent developments under Australian Competition Law.

Background

Flight Centre was considered at the same time as ACCC v Australia and New Zealand Banking Group Limited [2013] FCA 1206. Both involved consideration of the circumstances in which an agent might be in competition with its principal.  The ANZ case involved allegations by the Australian Competition and Consumer Commission (ACCC) that ANZ (a bank), had required one of its brokers to agree to limit the refund it could provide in respect of arranging ANZ home loans.  This was designed to ensure that the refund offered would not exceed that offered by ANZ branches in the form of loan establishment fee waivers.  The ACCC alleged that the parties were competitors in a ‘market for the provision of loan arrangement services’.  Justice Dowsett at first instance rejected this argument, observing that there was no ‘evidence of apparently rivalrous conduct’ between the parties (para 639) and there were significant distinctions between the services provided by ANZ as a ‘lender’ and those provided by the brokers. They were not substitutable to the level required for them to be considered in the same market (para 640).

The Flight Centre case presented a similar situation but yielded a different result.  As with the ANZ case, the relationship between Flight Centre and the airlines was essentially one of principal and agent; Flight Centre received commissions from the airlines for the sale of seats on their flights.  The trial judge in this case concluded that there was a market for ‘distribution and booking services’ in which the parties competed.  In particular, Justice Logan concluded that Flight Centre had attempted to induce the making of an agreement which would remove ‘air fare differentiation so as to eliminate or reduce competition by a substitute, an airline, for the retail or distribution margin for distribution and booking services.’ Flight Centre’s conduct therefore contravened the per se prohibition on price fixing.

Both matters were appealed to the Full Federal Court.  In each case the Court concluded the parties were not competitors in the markets alleged by the ACCC. The ACCC further appealed the Flight Centre case (but curiously not the ANZ case) to the High Court which delivered judgment in December.

The High Court Judgement

The majority concluded that Flight Centre was in competition with each airline, albeit in a different market than that which had been identified by the trial judge (the Court expressly rejected the claim that there was a market for distribution and booking services, which it considered ‘did not accord with commercial reality’ (para 75)).  The relevant market was identified as the ‘market for the supply, to customers, of contractual rights to international air carriage’ and the parties competed in this market ‘notwithstanding that Flight Centre supplied in that market as agent for each airline’ (para 26).  It was not inconsistent with the Act for an ‘an agent and a principal’ to both be ‘suppliers of contractual rights against the principal’ or for them to supply such rights in competition (para 82).  In this market Flight Centre and the airlines pursued separate marketing strategies and competed on price and the contractual right (or ticket) supplied by each were clearly substitutable.

In relation to arguments that  principals should not be considered in competition with their agents, Justice Gordon observed that ‘agent’ was an abused word and in this case masked the ‘proper identification of the rivalrous behaviours that occur at the point at which Flight Centre is dealing with its own customers … without reference to any interests of any airline’ (para’s 152-253).

Chief Justice French was the sole dissenter, finding that the proposals made by Flight Centre to the airlines were made merely as agent and not as competitor, focusing on the lack of proprietary rights to the tickets enjoyed by Flight Centre (para 21). His view is more in line with the position in EU Competition Law, where a genuine agency agreement (one where the agent does not bear any financial or commercial risk or responsibility for the products it negotiates to sell) will not generally be caught by Article 101 TFEU.[3]

Analysis

The difficulty in dealing with these arrangements has been demonstrated by the rather chaotic way in which European competition authorities have challenged online minimum pricing arrangements of websites like booking.com and expedia. Both the UK’s CMA and Germany’s Bundeskartellamt have used the threat of findings of per se prohibitions (on the grounds that they constituted vertical Minimum Resale Price Maintenance), to force the industry to abandon parity or minimum pricing practices. Similarly, the European Commission’s investigation into Apple e-books was closed after the parties offered commitments to terminate the agency agreements, even though Apple was fined $450m by the US. Uncertainty as to whether these constitute genuine agency agreements may explain why we have not seen more aggressive enforcement action in Europe.

In my view, the Australian High Court was right to treat the Flight Centre arrangement as a per se infringement. The nature of the relationship between the parties and the increasing tendency of customers to purchase directly from airlines, suggested an increasing level of competition for the sale of tickets existed between the parties. Indeed, the attempts by Flight Centre to induce the airlines to alter their direct pricing suggested it considered itself in competition with the airlines for the sale of airline tickets.

It is, however, less clear that agreements relating to price or other sales conditions between agent and principal should be subject to the per se cartel prohibitions, which are also now criminal offences in Australia.  The agency relationship, though not precluding competition between agents and principals in appropriate cases, is often an efficient one which has the capacity to enhance competition.  It should not, therefore, be treated as automatically harmful. In particular, where the agent is acting as an extension of the principal, or essentially as a de facto employee, it would not be sensible to make that relationship subject to competition law. Unfortunately agency agreements are not always straightforward. For example, agents often act on behalf of more than one principal – sometimes in competition with one another.

However, Australia appears to be moving towards a more nuanced position on agency agreements. Our  recent independent Competition Policy Review, conducted from 2014-2015, recognised that vertical trading restrictions may be pro-competitive or anti-competitive depending on the circumstances with the result that they should not fall within the scope of per se cartel prohibition (page 354). It  recommended (rec 27) that:

An exemption should be included for trading restrictions that are imposed by one firm on another in connection with the supply or acquisition of goods or services … such conduct will be prohibited by [other provisions] if it has the purpose, effect or likely effect of substantially lessening competition.

This  recommendation was accepted and forms part of an Exposure Draft Bill released in September 2016.  It is anticipated that a formal bill implementing the change will soon be introduced.. If passed, it will ensure vertical arrangements (including agency arrangements), which might also be classified as horizontal because some degree of competition in the supply of the goods or services exists between the parties, will be removed from per se cartel provisions and prohibited only if a full competition analysis confirms the conduct is anti-competitive. This will provide the flexibility needed to prohibit only harmful agency arrangements, but may possibly come at the cost of certainty, as the onus will still be on firms to determine whether there might be an anti-competitive effect.

As it currently stands, however, suppliers of goods or services in Australia, who also supply goods or services directly to customers (even if only to a limited degree online) must take care not to reach (or attempt to reach) agreements with their retailers in relation to price (in particular) or they will risk contravening the cartel laws.

[1] Associate Professor, Deakin University. Currently a visitor at the Centre for Competition Policy, University of East Anglia.

[2] See I Lianos, ‘Commercial Agency Agreements, Vertical Restraints, and the Limits of Article 81(1) EC: Between Hierarchies and Networks’ (2007) Journal of Competition Law and Economics 3(4).

[3] European Commission, Guidelines on Vertical Restraints (2010), at para 12.

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