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Australia – ACCC Loses Contested Air Cargo Cartel Litigation Against Air New Zealand and Garuda.

13 November, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Competition & Antitrust

 

Overview

 

On 31 October 2014, the Federal Court handed down its judgment in the contested price fixing cases brought by the Australian Competition and Consumer Commission (ACCC) against P.T. Garuda Indonesia Ltd (Garuda) and Air New Zealand Ltd (Air New Zealand). While the Court found a number of price fixing agreements or understandings between the airlines with respect to air cargo services from Hong Kong, Singapore and Indonesia, Justice Perram ultimately found that there were no contraventions of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) (TPA) due to the absence of a relevant market in Australia.

 

The judgment marks the latest episode in the ongoing air cargo price fixing saga which has involved a large number of cases brought by regulators around the world against major international airlines. The ACCC has described its investigation as its biggest ever, having pursued 15 major international airlines. The Federal Court has imposed close to USD 100m in penalties to date, including a USD 20m penalty against Qantas. The proceedings against Garuda and Air New Zealand are the only proceedings remaining on foot – all of the others having been settled or are in the process of being settled.

 

It should be remembered that the case was brought under the provisions in the old TPA regime which have now been repealed. Unlike the previous law, the current cartel prohibitions may reach conduct outside of Australia without the need to establish a market in Australia. Although this is an element of the current law that has been earmarked for change by the draft recommendations of the Harper Review Panel.

 

The Allegations

 

The ACCC alleged that Garuda and Air New Zealand had been involved in the fixing of fuel and insurance surcharges and customs fees on the carriage of air cargo from Hong Kong, Singapore and Indonesia in contravention of sections 45 and 45A of the TPA. Both airlines were alleged to have colluded with a number of other international airlines – the so-called “air cargo cartel”.

 

In these proceedings, Garuda and Air New Zealand were alleged to have been engaged in collusive behaviour from 2001 to 2006 in the following ways:

 

  • in Hong Kong, a published index of fuel surcharges was allegedly used as a basis for making joint applications to the Civil Aviation Department (which was responsible for approving any surcharges on outbound flights from Hong Kong). The airlines had allegedly reached understandings in meetings of the Hong Kong Board of Airline Representatives Cargo Subcommittee,
  • in Singapore, Air New Zealand was alleged to have been party to a number of understandings reached amongst other airlines to fix or control fuel surcharges and also exchange in communicating future pricing intentions, and
  • in Indonesia, Garuda was alleged to have used the aforementioned index as a basis for determining surcharges and custom fees at meetings with other airlines.

 

The Key Question – Was There A Market In Australia?

 

Section 45 applies only to competition in a market in Australia. The ACCC’s case was limited (with one exception) to flights from airports outside Australia. The relevant surcharges and fees were imposed and collected at those airports rather than at the flight destinations in Australia. The airlines contended that the markets for airborne cargo out of Hong Kong, Singapore and Indonesia were not markets in Australia.

 

The key questions considered by Justice Perram were:

 

  • whether the fact that the airlines competed against each other in Australia in the provision of:
  • carriage through Australian airspace,
  • ground handling services in Australia, and
  • handling enquiries about lost and damaged cargo in Australia,

 

Was sufficient to locate the markets in Australia,

 

  • whether the fact that the source of some of the demand for the services was ultimately in Australia was sufficient to locate part of each market in Australia,
  • whether the market in Hong Kong, Singapore and Indonesia was constrained by the abilities of importers in downstream markets to switch to alternate sources of supply, and if so, whether it was appropriate to characterise the downstream markets as part of the upstream market, and
  • whether, in light of the above, the market was in Australia.1

 

The Court concluded that no market in Australia was involved. Justice Perram found that competition took place between the airlines at the ports of origin, that is, in markets in Hong Kong, Singapore and Indonesia. Any substitution – the critical consideration in market definition – could only take place at the origin airport in these markets, not in Australia.

 

Justice Perram acknowledged that, while the imposition of the surcharges and fees may well have affected prices in Australia, this does not mean that the relevant market in which airlines were competing was located in Australia.

 

The Findings

 

After rejecting a number of technical defences submitted by Garuda with the support of Air New Zealand, the Court was satisfied that:

 

  • in Hong Kong, both airlines were engaged in either reaching an agreement or giving effect to some or all of the understandings alleged by the ACCC,2
  • in Singapore, Air New Zealand was party to an understanding with other airlines in relation to an insurance surcharge rate, and3
  • in Indonesia, Garuda was a party to a number of agreements or understandings in relation to four different charges.4

 

In all three cases, the Court found that the conduct would have contravened the TPA but for the market issue.

 

The Implications

 

This case was decided under the TPA, which has now been replaced by theCompetition and Consumer Act 2010 (Cth) (CCA). The CCA includes the new cartel prohibitions5 introduced in July 2009, repealing the prohibition on price fixing in section 45A.

 

Significantly, under the new cartel prohibitions, there is no requirement for the parties to be in competition in a market in Australia.Thus, the current cartel prohibitions may not only reach conduct outside of Australia but may also apply without there being any effect on trade or commerce in Australia. Such an application was made in the only decision considering the operation of the prohibitions to date – Norcast v Bradken.In that case, the Court found that the cartel prohibitions were applicable to conduct relating to the sale of a foreign corporation in a foreign jurisdiction. The outcome of the Norcast v Bradken decision suggests that, if the conduct in the air cargo cartel cases were to take place today, the ACCC would have been successful in most of its allegations against the airlines in this case.

 

The Harper Panel is currently considering the extra-territorial reach of our cartel laws and has queried why the cartel prohibitions should differ from other prohibitions in the CCA. In its draft recommendations the Panel recommends that the cartel prohibitions be limited to conduct affecting goods or services supplied or acquired in Australian markets.8 This suggests that there may be changes to the current laws to bring a geographical link to the reframed cartel prohibitions akin to that under the previous law. This might suggest that if these reforms are implemented, the ACCC would once again be confronted by the need to establish a market in Australia. However, it remains to be seen whether the final recommendations of the Harper Panel adopt this approach. It is possible that the desire of the Panel to introduce a territorial limitation to the cartel laws can be achieved without making it necessary to prove a market in Australia – we will need to wait for the Panel’s final recommendations and the Government’s response to see how this ultimately plays out.

 

Given that this is such a significant case for the ACCC, the possibility of an appeal is not remote. It is rather ironic that Air New Zealand and Garuda have been successful in the air cargo cartel proceedings and that the ACCC failed in its case against them, in light of the fact that the ACCC has collected almost USD 100m in fines and has settled with a range of companies, including Qantas, Thai Airways and Cathay Pacific, on similar issues. Whilst the ACCC has not yet released a formal assessment on the decision, it has indicated that it will carefully consider the long and complex judgment. Watch this space!

 

End Notes:

 

  1. Australian Competition and Consumer Commission v Air New Zealand [2014] FCA 1157, at [311].
  2. Ibid, at [702]-[704].
  3. Ibid, at [1127].
  4. Ibid, at [1132].
  5. Competition and Consumer Act 2010 (Cth), Part IV, Division 1.
  6. Norcast S.ar.L v Bradken Ltd (No 2) [2013] FCA 235.
  7. Ibid.
  8. Commonwealth of Australia (2014), ‘Competition Policy Review-Draft Report’, September 2014, page 223.

 

herbert smith Freehills

 

For further information, please contact:

 

Chris Jose, Partner, Herbert Smith Freehills

chris.jose@hsf.com

 

Patrick Gay, Partner, Herbert Smith Freehills

patrick.gay@hsf.com

 

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