ACCC wins long-haul case against Flight Centre: has "competition" expanded to a new plane?

What you need to know

• The ACCC has won a High Court appeal in its case against Flight Centre, in a decision that will require a rethink of many agency and distribution arrangements, to determine whether those relationships are subject to Australia's cartel rules.
• A majority of the High Court (4:1) held that Flight Centre competed to sell international airline tickets with the airlines for which Flight Centre was an agent.  
• Where an airline could also sell a ticket directly to a customer, Flight Centre did not simply make sales on behalf of an airline – it also did so in competition with them.  Flight Centre was both agent and competitor to the airlines.  Accordingly, Flight Centre's efforts to persuade airlines to raise the price of tickets sold directly to customers was an unlawful attempt to fix prices with a competitor.
• The decision overturns a unanimous judgment of the Full Federal Court, and requires that the Federal Court now determine the penalty to be imposed on Flight Centre.

What you need to do

• Review any of your existing arrangements where one party supplies or distributes goods or services as an agent of the other, and the principal supplies the same goods or services directly to customers.  Carefully consider whether the terms of the agency arrangement leave the agent free to act in its own interests (rather than being constrained by contractual or fiduciary obligations to act only in the interests of its principal).
• If you are a party to any such agreements, it is possible that you are also "in competition" with your principal or agent (as applicable) for the purpose of the cartel prohibitions.  Substantial care must be taken not to enter into any contracts or agreements, or reach any understandings, with the other party that could amount to cartel conduct.  Examples may include agreeing on the price that one or both parties will charge customers for the goods or services subject to the agency arrangement, or the customers to which one or both parties will or will not market those products.
• Seek competition advice about these risks at an early stage if you are unsure whether the laws are likely to apply.

Introduction

On 14 December 2016, a majority of the High Court allowed an appeal by the Australian Competition and Consumer Commission (ACCC) from the Full Federal Court, finding that Flight Centre Limited (Flight Centre) attempted to induce each of Singapore Airlines, Malaysia Airlines and Emirates (the relevant airlines) to enter into price-fixing arrangements.

Although the decision concerned the operation of the (now repealed) section 45A of the Trade Practices Act 1974 (Cth), the principles considered by the Court will apply to the present cartel conduct rules in the Competition and Consumer Act 2010 (Cth) (CCA).

What makes this case so significant?

The resolution of the case before the High Court turned almost entirely on a single question: Did Flight Centre and the relevant airlines compete in a market for the supply of services?

In answering yes to this question, the High Court has found that an agent can compete with its principal in a market for the very goods or services which the agent was appointed to provide.  This finding is explained in more detail below.      

Recap: what did Flight Centre do?

The relationship between Flight Centre and the relevant airlines had the following important features: 

• Selling flights: Flight Centre was authorised to sell international air passenger transportation for each of the relevant airlines under an "Agency Agreement" in each case.  This included carrying out all activities necessary to provide a passenger with a valid contract of carriage, such as the issue of valid air tickets.  Kiefel and Gageler JJ stated that this "conduct…can be described, in practical and commercial terms, as selling international airline tickets to customers" (at paragraph 28).  The relevant airlines also sold international airline tickets for their flights directly to customers. 
• Pricing flights: Under the Agency Agreement, Flight Centre was free to determine the price at which it sold a ticket.  However, Flight Centre also separately advertised a "price beat" guarantee in which it promised to better prices quoted on other websites, including website prices offered directly to customers by the relevant airlines.
• Cost to Flight Centre: Once Flight Centre sold a ticket, it was obliged to pay the airline a standard fare published by the airline to all travel agents on a global distribution system (GDS), less an agreed agent commission (the nett price).  If Flight Centre sold a ticket for less than the nett price, it would make a loss on that sale.    
• The attempts: Between 2005 and 2009, Flight Centre sent a series of emails to the relevant airlines in an attempt to induce each airline not to offer tickets directly to customers at prices below those published to travel agents on the GDS.  The High Court accepted that Flight Centre sought by these emails, at least in part, to avoid having to "beat" website prices offered to the public by the relevant airlines, that were lower than the prices made available by the relevant airlines to Flight Centre.  

The case made its way to the High Court after the trial judge (see our 2013 alert) and the Full Federal Court (see our 2015 alert) took very different views of the relationship between Flight Centre and the relevant airlines.

What did the High Court decide?

The majority of the High Court (4:1, French CJ dissenting) held that Flight Centre and the relevant airlines competed in the market for the supply to customers of contractual rights to international air carriage (ie airline tickets).  

Different reasons for this decision were provided by Nettle J, Gordon J, and in the joint judgement of Gageler and Kiefel JJ.  The key points from the judgments were as follows: 

• Agents can compete: A relationship of agency between Flight Centre and the relevant airlines does not prevent them from being "in competition" with each other, under the cartel laws.  While some agents will lack the ability or incentive to compete with their principal, that was not the case here. Flight Centre was free to pursue its own interests in deciding whether or not to sell tickets and at what price.  According to Gordon J, the pursuit of those interests meant that it was, in fact, wrong to describe Flight Centre as a true "agent" for the relevant airlines when it dealt with customers in its own right.
• Rivalry for tickets: There was a functional rivalry between the sale of tickets by Flight Centre and the relevant airlines.  If Flight Centre sold a ticket to a customer, the airline did not.
• A "service" can be the right to a service: The rivalry between Flight Centre and the relevant airlines concerned the supply of tickets (ie a right to travel) rather than the travel itself (which Flight Centre could not supply since it did not operate aircraft).  This aspect of the High Court's reasoning implies that when customers take an international flight, they have been supplied with two separate "services" for competition law purposes – the sale of a ticket (for which airlines and travel agents compete) and the flight itself (for which only airlines compete amongst themselves).
• Rivalry was competition in a market: It follows from the findings above that Flight Centre and the relevant airlines competed in the same market.  The service they supplied was the same (ie a ticket entitling the holder to transport on a particular flight) and were clearly substitutable.  Flight Centre and the relevant airlines were therefore competing suppliers in the same market.

Chief Justice French dissented.  His Honour reasoned that because Flight Centre acted as agent in selling tickets, those sales should be "regarded as the action of the airline itself".  

The Chief Justice also observed that to characterise the supply of tickets by Flight Centre as competitive would "open the door to an operation of the [Australian competition law] which would seem to have little to do with the protection of competition".  

What does this mean?

The High Court's decision will have substantial implications for any business that is a party to a distribution arrangement in which one company (the principal) supplies goods or services directly to customers, and also appoints a third party as an agent to supply the same goods or services to customers.  Parties to such arrangements can no longer assume that they are not "in competition" for the purpose of the CCA – instead, it will be important to analyse the terms of the arrangement to determine whether the cartel rules may apply.      

As emphasised by the High Court, whether the cartel rules apply to a particular arrangement depends heavily on the relationship between the parties, and the nature of the services provided.  However, in very general terms, the case suggests that a supplier is more likely to be viewed as "in competition" with its agent/distributor if the answer to the following questions is "yes":

• Does the agent/distributor sell the same (or substitutable) goods or services as those sold directly to customers by the supplier? 
• Are the two parties operating within the same geographic market (ie is one party supplying the products through "bricks and mortar" retail stores, while the other is supplying to customers in the same region over the internet)?
• Is the agent/distributor able to determine the price at which it sells the goods or services?  
• In selling the goods or services, is the agent/distributor free to pursue its own commercial interest in making sales (ie it is not obliged to act in the interest of the supplier)?
• Does that commercial interest, or the incentives of the agent/distributor to sell the goods or services, conflict with those of the supplier so as to create some form of rivalry?
• Would a sale made by the agent/distributor deny the supplier an opportunity to make a sale of the same product?

The issues outlined above are merely a starting point for the complex analysis that businesses may have to undertake after the Flight Centre decision.  The simple question at the heart of any commercial activity – "who is my competitor?" – may prove surprisingly difficult to answer.

Parties to arrangements that meet the above criteria will need to take substantial care to comply with the CCA rules around cartel conduct in all of their dealings with their principal/agent and, if in doubt, should seek advice about the communications they can lawfully have with their new-found potential "competitors".  

Examples of communications that may be commonplace between a principal and its agent, but are prohibited between two "competitors", include agreeing on:

• the price that one or both parties will charge customers for the goods or services which they sell "in competition with each other";
• any discounts or rebates that may be offered to customers in relation to those products;
• the customers to which one or both parties will or will not market those products; and
• the volume of goods or services that either party intends to supply to customers, or planned restrictions in the supply chain for the relevant products.

The potential penalties for cartel conduct under the CCA are significant.  The trial judge who found in 2013 that Flight Centre had contravened the cartel laws ordered that Flight Centre pay $11 million in penalties (before that decision was reversed by the Full Court).  The Federal Court will now revisit the appropriate penalty amount in light of the High Court's conclusions.

What next?

The matter has been remitted to the Federal Court to determine the penalty to be imposed on Flight Centre.

More broadly, the ACCC is likely to consider the effect of the decision in its broader enforcement activities.  ACCC Chairman, Rod Sims, has already identified that the decision will be "particularly relevant when businesses make online sales in competition with their agents".