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Australia – A “Circumstance Of Aggravation” For The ACCC.

2 April, 2014

 

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

 

Flight Centre ordered to pay AUD 11m for attempted price-fixing conduct, but the ACCC’s failure to plead the “circumstance of aggravation” lowers the maximum available penalty
What You Need To Know

 

  • Flight Centre has been ordered to pay AUD 11m in damages for multiple attempted contraventions of the price-fixing prohibitions under the Competition and Consumer Act 2010 (Cth).
  • This is one of the largest penalties ever awarded for price-fixing conduct and is particularly notable in circumstances where the contraventions are “attempts”, and where the case raised unique issues regarding whether an agent can price-fix with its principal.
  • Because the ACCC failed to contend in its pleadings that Flight Centre derived a benefit from its contraventions the Federal Court calculated penalties by reference to a maximum penalty of AUD 10m for each contravention, as opposed to the higher amount of 10% of Flight Centre’s annual turnover for each contravention.
  • In light of the “novelty” of Justice Logan’s decision about the requirement for a “circumstance of aggravation” justifying a higher maximum penalty to be specifically pleaded, the ACCC may appeal the Penalty Judgment. Flight Centre has already announced that it will appeal the Liability Judgment.

The Liability Judgment
On 6 December 2013, the Federal Court handed down its decision in ACCC v Flight Centre Limited (No 2) [2013] FCA 1313 (Liability Judgment). Justice Logan found that Flight Centre Limited(Flight Centre) had, on six occasions between 2005 and 2009, attempted to induce one of Singapore Airlines, Malaysia Airlines and Emirates to enter into price fixing arrangements in contravention of section 45 of the Competition and Consumer Act 2010 (Cth) (CCAby operation of the (now repealed) section 45A of the Trade Practices Act 1974 (Cth) (TPA). 
The Penalty Judgment
On 28 March 2014 the Federal Court handed down its decision in Australian Competition and Consumer Commission v Flight Centre Limited (No 3) [2014] FCA 292 (Penalty Judgment), ordering Flight Centre to pay AUD 11m in penalties for five attempts to induce international airlines to enter into price-fixing arrangements in contravention of section 45 of the CCA. Flight Centre also offered an undertaking to not make or attempt to make any agreement with an international airline which contains a provision preventing the airline from offering international air travel services direct to the public at a lower price than the price which the airline offers the fare to Flight Centre. Flight Centre was also ordered to pay the ACCC’s costs of and incidental to bringing the proceedings.
This is one of the largest penalties ever awarded for price-fixing conduct and is particularly notable in circumstances where the contraventions are “attempts”, and where the case raised unique issues regarding whether an agent can price-fix with its principal.

 

The penalty was divided into:

 

  • AUD 2m for each of the second, third, fourth and fifth contraventions; and
  • AUD 3m for the sixth contravention, in which Mr Turner, a senior executive of Flight Centre, had personal involvement.

It was accepted by both Flight Centre and the ACCC that there was no availability for the Federal Court to order a penalty in respect of the first contravention, as the contravention occurred more than 6 years prior to the bringing of the application by the ACCC.
The Maximum Penalty Per Contravention
Justice Logan approached the calculation of penalties using the ‘French Factors’, being the accepted set of factors to be considered in determination of penalties in competition law cases.
Controversially, however, Justice Logan calculated the penalties on the basis that the maximum available penalty for each of the third, fourth, fifth and sixth contraventions was AUD 10m, not the higher 10% of annual turnover of the contravener that the ACCC submitted was the appropriate maximum penalty.
The Maximum Available Penalty Issue
Under section 76(1A) of the CCA the maximum available penalty for each contravention of the pricefixing prohibition is the greatest of:
(i) $10,000,000;
(ii) if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission–3 times the value of that benefit;
(iii) if the Court cannot determine the value of that benefit–10% of the annual turnover of the body corporate during the period (the turnover period ) of 12 months ending at the end of the month in which the act or omission occurred.
This section applied to the third, fourth, fifth and sixth contraventions by Flight Centre2. As evident from the section, if it can be proved that the contravener derived a benefit from the contravening conduct, then this exposes the contravener to a greater penalty being either 3 times the value of the benefit derived from the conduct, or 10% of the annual turnover of the contravener.
During the pleadings, the ACCC did not make any reference to a claim that Flight Centre obtained a benefit from its contraventions. Accordingly, Flight Centre was led to assume throughout the proceedings that the maximum penalty applicable to each contravention was AUD 10m. Flight Centre only received notice that the ACCC sought the imposition of penalties with a maximum of greater than AUD 10m per contravention on receipt of the ACCC’s written submissions in relation to penalty, at a time after findings of fact had been made in the primary liability judgement.
Flight Centre claimed that this was procedurally unfair, and that the ACCC had been required to plead the “circumstance of aggravation” in its pleadings. In essence, Flight Centre contended that whether or not it had derived a benefit from its conduct was a question of fact, which for reasons of procedural fairness it had been entitled to be aware of from the time of ACCC’s pleadings.
Flight Centre contended that the ACCC was required to plead the “circumstance of aggravation” on two alternate basis, both of which were accepted by Justice Logan.
Procedural Fairness Under The Federal Court Rules
Flight Centre contended that the ACCC was required to plead the “circumstance of aggravation” under the Federal Court Rules 2001 (Cth) (Rules), and that a failure to plead the “circumstance of aggravation” was fatal to recovery of a higher maximum penalty.
Flight Centre relied on rules 16.02 and 16.03 of the Rules which provide:

 

  • “A Pleading must…state the material facts on which a party relies that are necessary to give the opposing party fair notice of the case to be made against that party at trial… and… state the specific relief sought or claimed”;
  • “A party is not entitled to seek any additional relief to the relief that is claimed in theoriginating application”; and
  • “A party must plead a fact if… failure to plead the fact may take another party by surprise”.

Justice Logan found that the combined effect of the Rules was that the ACCC “ought to have pleaded the material facts, which it alleged attracted to the third,fourth, fifth and sixth contraventions, the higher maximum penalty for which s 76(1A) in its amended form provided”. Justice Logan went on to find that, procedurally, the failure by the ACCC to make theseappropriate pleadings denied Flight Centre the chance to make submissions in relation to this “circumstance of aggravation” and potentially defend itself from exposure to the higher maximum penalty. Accordingly, Justice Logan found on this basis that in relation to the third, fourth, fifth and sixth contraventions, that the ACCC’s failure to plead the “circumstance of aggravation” was fatal, and accordingly the lower maximum penalty of $10 million applied to each of these contraventions.
Procedural Fairness Requirements Arising By Drawing Analogy To The Criminal Law
Justice Logan noted that “it is a rule of practice in criminal jurisdiction pleading that a circumstance of aggravation must be specified in the indictment… this rule of practice extends to circumstances of aggravation which are not elements of an offence but go only as to the applicable penalty for an offence”Justice Logan found that because section 76(1A) specified a “circumstance of aggravation” that it was appropriate to apply the rule of pleading deriving from the criminal jurisdiction by analogy. Accordingly, Justice Logan found that the analogy supports the notion that “in absence of an express pleading, it was too late, after the findings of contravention had been published, for the [ACCC] to claim, over objection, a higher penalty or otherwise press for a finding that there was a circumstance of aggravation constituted by a benefit reasonably attributable to a contravention.”
Calculation Of The Penalty Amount
Flight Centre in its submissions contended that the Liability Judgment was novel in the sense that it was not widely accepted in the industry that a travel agent could compete with the airline whose fares it sold. Flight Centre contended that, because of this “novelty”, declaratory relief and a costs order against Flight Centre would be sufficient to serve the deterrent purpose of penalty.

 

Justice Logan disagreed that the finding in the Liability Judgment was novel. Justice Logan accepted there was a degree of novelty in the consideration of whether the “circumstance of aggravation” under section 76 had to be specifically pleaded, but did not accept that there was any novelty in the notion the Flight Centre competed with the international airlines.Justice Logan’s conclusion on this was based on Flight Centre’s own internal records, which specifically listed disintermediation as a competitive risk for Flight Centre.
Against this backdrop Justice Logan determined the quantum of penalty. As discussed, the penalty amount comprised:

 

  • AUD 2m for each of the second, third, fourth and fifth contraventions; and
  • AUD 3m for the sixth contravention, in which Mr Turner, a senior executive of Flight Centre, had personal involvement.

In arriving at this amount Justice Logan considered that the conduct was demonstrative of a “concerted pattern of reactive corporate conduct by Flight Centre, reactive to a threat it perceived to be presented by the direct retail offering by airlines of air travel at fares it could not offer to retail customers”. Justice Logan accordingly considered the conduct by Flight Centre to be “serious” even though the conduct was “attempts to induce” as opposed to actual inducement.
Justice Logan also specifically considered:

 

  • the “size of the contravener” by considering Flight Centre’s revenue and profits for the years in which there were contraventions;
  • Flight Centre’s market share at the time of the attempted inducements;
  • Flight Centre’s lack of contrition, which Justice Logan claimed was evident from Flight Centre’s announcement to the Australian Stock Exchange that it would appeal the Liability Judgment; and
  • Flight Centre’s level of co-operation, noting that while Flight Centre had co-operated in the conduct of the litigation, the co-operation was not of such a kind that it entitled Flight Centre to a “significant mitigating allowance” in penalty.

Taking all of the foregoing into account Justice Logan believed that a penalty of AUD 2m per contravention was appropriate, and AUD 3m in respect of the sixth contravention, recognising Mr Turner’s personal involvement in the contravention. Justice Logan then applied the totality principle, which considers whether the sum of the penalties for each of the individual contraventions is itself also appropriate, saying “I have reflected on whether the resultant total, AUD 11m, yields a total penalty which is disproportionate in respect of the course and essential character of contravening conduct, which is flagrant conduct by a major, profitable public company enjoying a significant market share. I do not consider that it does. But for the fact that the impugned conduct was an attempt, I should have imposed a greater total penalty. The total also reflects a degree of moderation having regard to Flight Centre’s exposure to costs.”
Implications Of The Judgment
The Penalty Judgment is now authority for the proposition that where a higher maximum penalty relies on a “circumstance of aggravation” which must be proved as a matter of fact, that fact must be pleaded for the higher maximum penalty to be applicable.
In light of the “novelty” of Justice Logan’s decision about the requirement for a “circumstance of aggravation” justifying a higher maximum penalty to be specifically pleaded, the ACCC may appeal the Penalty Judgment. Flight Centre has already announced that it will appeal the Liability Judgment.

 

End Notes:

 

Flight Centre Limited changed its name to Flight Centre Travel Group in November 2013.

2 In relation to the second contravention it was accepted by both parties that the maximum available penalty was $10 million, as the conduct occurred prior to the amendment of the section which allowed for a consideration of annual turnover.

Penalty Judgment, at 33

 

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For further information, please contact:

 

Liza Carver, Partner, Ashurst
[email protected]

 

Peter Armitage, Partner, Ashurst
[email protected]

 

Bill Reid, Partner, Ashurst
[email protected]

 

Ross Zaurrini, Partner, Ashurst
[email protected]

 

Alice Muhlebach, Partner, Ashurst
[email protected]

 

Darren Grondal, Partner, Ashurst
[email protected]

 

Alyssa Phillips, Ashurst
[email protected]

 

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