11 December, 2013

WHAT YOU NEED TO KNOW

• The ACCC has succeeded in establishing a novel theory of harm in relation to price-fixing allegations against Flight Centre.
• On 6 December 2013, the Federal Court found that Flight Centre had attempted to induce airlines to enter into price-fixing arrangements on six occasions (with the relevant airlines being Singapore Airlines, Malaysia Airlines and Emirates).
• In each case, Flight Centre was the agent for the airlines, and distributed the airlines’ fares on their behalf to customers. The Court found that the relevant “price” that Flight Centre attempted to “fix” was the retail distribution margin as between Flight Centre and the airlines.
• The Flight Centre decision may have broad implications for any commercial scenario where a supplier distributes its goods or services both (1) directly to customers (particularly through online sales); and (2) through use of agents and/or distributors.
• The ACCC’s victory comes only weeks after the Federal Court dismissed its price-fixing allegations against ANZ in similar proceedings. The need to reconcile these judgments leaves companies seeking to comply with their competition law obligations in an unsatisfactory position.

WHAT YOU NEED TO DO

• Carefully consider whether discussions with your suppliers and/or distributors about commissions, distribution fees or access to goods and services could constitute price-fixing under the reasoning in the Flight Centre judgment, and seek advice if you are unsure. The cartel prohibitions carry substantial potential penalties in the event they are contravened.

Introduction

On 6 December 2013, the Federal Court handed down its decision in ACCC v Flight Centre Limited (No 2) [2013] FCA 1313. Justice Logan found that Flight Centre Limited¹ (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in contravention of section 45 of the Competition and Consumer Act 2010 (Cth) (CCA) by operation of the (now repealed) section 45A of the Trade Practices Act 1974 (Cth) (TPA).

Background Facts

The essential facts of the case are as follows:

• Flight Centre is a leading travel agent. Flight Centre provides a range of travel agent services to its customers, including the booking of international passenger air travel services, and the receipt of payment for air fares that it books.
• Flight Centre distributes the air travel services of a large number of airlines, including Singapore Airlines, Malaysia Airlines and Emirates (the relevant airlines). Importantly, Flight Centre does so as agent for those airlines.
• Each of the relevant airlines also distributes its air travel services through other travel agents, and directly to customers through their own websites and, to varying degrees, call centres and/or shop fronts. On occasion, airlines will decide to only distribute certain air travel services through one route (eg special discounted fares for sale through their own website only).
• Airlines facilitate the distribution of their air travel services by placing air fares on an electronic reservation system known as a “Global Distribution System” (GDS). The GDS is accessible by various travel agents.
• In most cases, when travel agents make a booking for a customer, the travel agent becomes entitled to payment of a commission from the airline to whom the booking relates. Where the booking has been made through a GDS, the travel agent is generally entitled to retain the amount of its commission before remitting the balance of the payment received from the customer to the airline. The commission broadly represents the agent’s margin on the sale.

ACCC’s Allegations

The ACCC alleged that:

• Flight Centre was in competition with the relevant airlines (or, more precisely, with the “internal sales divisions” of the relevant airlines) for, among other things, the supply of booking services to customers and distribution services to the relevant airlines.
• Flight Centre became concerned about the relevant airlines offering lower air fares (or air fares with better benefits such as frequent flyer points) to customers through their own websites than Fight Centre was able to access through the GDS, at least on terms that enabled Flight Centre to earn the commission that it ordinarily received.
• As a result, between 2005 and 2009, representatives of Flight Centre sent various emails to the relevant airlines attempting to induce the airlines to agree that any fare that the airlines offered directly to their customers:

• would also be made available to be purchased through Flight Centre; and 
• would be sold by the airline at a total price, including booking fees, of no less than the total of the nett fare (being the amount Flight Centre must remit to the airline if Flight Centre sold the fare), and the commission that Flight Centre would be entitled to be paid for its services, if Flight Centre had sold the fare to the customer.

• Each of the above courses of conduct constituted attempted price-fixing arrangements in contravention of section 45 of the CCA (through the former section 45A of the TPA).

It was not alleged that the relevant airlines agreed, or were parties, to the arrangements.

Flight Centre’s Response

Flight Centre did not dispute that the alleged communications with airlines had occurred, but it proffered a substantially different interpretation of those communications.

Flight Centre’s position was that the communications took place in the context of a principal-agent relationship, in which Flight Centre (as the agent) was attempting to ensure that its principal:

• gave it access to the same products (ie air travel services) as were made available to other travel agents or sold directly by the principal to customers; and
• did so at a price that permitted Flight Centre to make a margin when booking those air travel services for customers on behalf of its principal.

Flight Centre submitted that emails from its representatives to airlines referring to instances where the airlines had “undercut” Fight Centre should be viewed against this background, and were primarily concerned with Flight Centre’s lack of access to certain fares through the GDS.

The Judgment

Were Flight Centre And The Airlines “In Competition” With Each Other?

The cartel provisions under the CCA only apply where the relevant parties are in competition with each other in relation to the goods or services to which the alleged contract, arrangement or understanding relates.

While Justice Logan found that the relationship between Flight Centre and each of the relevant airlines was that of principal and agent,² he nonetheless concluded that Flight Centre was in competition with the relevant airlines for the supply of booking and distribution services in respect of available international air travel.³ Justice Logan considered that Flight Centre was an intermediary in this market:

They were competitors not because Flight Centre was also a supplier of air travel but rather because an airline could, if it chose, make the knowledge of the availability of its flights known directly to would-be passengers and undertake directly with them the booking of those flights. These were services which were substitutable for those provided by a travel agent such as Flight Centre…

….If the supplier of goods or services has an ability to “cut out the middle man” and deal directly with a consumer of those goods or services, instead of that dealing being undertaken by the middle man, that supplier is, to the extent it avails itself of that ability, in competition with that middle man.⁴

In making this finding, his Honour took a broad view of the meaning of “supply” in the CCA, and found “most instructive” Flight Centre internal communications which indicated that Flight Centre considered itself to be subject to competition from the airlines through their direct sales.⁵

What Was The Relevant “Price”?

Section 45A of the TPA relevantly provided that a provision of an arrangement would be deemed to have the purpose or likely effect of substantially lessening competition if the provision had the purpose or likely effect of fixing, controlling or maintaining the price for goods or services supplied or acquired by the parties to the arrangement in competition with each other.

Justice Logan accepted that since Flight Centre does not itself supply air travel to customers, the relevant “price” could not be the fare payable by a passenger for air travel. Instead, his Honour considered that Flight Centre competed with the relevant airlines “for the custom of a would-be customer”, and that when the customer decided to make a booking directly with an airline through its website, what Flight Centre lost was “the retail or distribution margin”.⁶

Did Flight Centre Attempt To Fix, Control Or Maintain The Relevant Price?

Justice Logan accepted that the emails from Flight Centre to the relevant airlines involved requests for access to fares being sold by the airlines that were not available to Flight Centre. However, his Honour also considered that the emails were an attempt to persuade the airlines not to “undercut” Flight Centre, and to instead achieve “price neutrality” in relation to air fares obtained either directly from an airline or from Flight Centre:

Flight Centre is endeavouring to persuade [the airlines] to eliminate air fare differentiation so as to retain its role as intermediary and so as to fix, control or maintain its reward for so acting, the retail or distribution margin. Further, the likely effect of any arrangement or understanding or [sic] as proposed would have been just that.⁷

As a result, Justice Logan found that the ACCC had proved each of the six contraventions it alleged. The Court will consider the question of penalties at a further hearing on 19 December 2013.

Implications Of The Judgment

Although the ACCC’s case against Flight Centre was brought under the previous price-fixing provisions in the TPA (which was in force at the time of the relevant conduct), the general principles to be applied under the now current Competition and Consumer Act 2010 (Cth) are the same. This means that the Flight Centre decision may have substantial implications for any company operating in a supply chain (whether selling to distributors, or appointing distribution agents on its behalf) where the company also sells directly to customers, particularly through online sales (which are becoming increasingly popular), and/or where one or both parties engages in “price match” behaviour (as Flight Centre does).

The following question indicates the sorts of issues that the business community will have to consider in light of the Flight Centre judgment:

• Would it be price-fixing if a travel agent said to an airline, “Please increase my commission by 2% next year”? This would similarly appear to be an attempt by the travel agent to have the airline agree to fix, control, or maintain the agent’s distribution margin. If this sort of conduct is impermissible, that would call into question virtually any distribution arrangement where the supplier also sells directly to consumers.

The fact that Justice Logan did not consider the existence of a principal-agent relationship to be an answer to price-fixing allegations also calls into question the previous orthodoxy that a principal is entitled to set the price at which an agent sells its products (including complementary services from the agent) to customers, since those contracts must be contracts between the principal and the customer, in law.

These are the sorts of issues that could usefully be considered on appeal, if Flight Centre decides to appeal against Justice Logan’s findings.

Two final points are relevant to note:

1. This decision highlights, once again, the importance of careful consideration in preparing internal documents dealing with market dynamics, competitors, market share data etc. The ACCC can, and will, use such information in proceedings under the CCA, sometimes to great advantage (as evidenced by the Flight Centre judgment).

2. The Flight Centre judgment was released only weeks after the Federal Court (also in the Brisbane registry) dismissed allegations by the ACCC that ANZ Bank had engaged in price-fixing with certain of its mortgage brokers.⁸ That case had strong parallels with, but a different result to, the Flight Centre proceedings. The ANZ case involved competition for customers between different mortgage product distribution channels – directly and via brokers. preparing and submitting loan applications.

It is difficult to draw a clear distinction between the facts in the ANZ and Flight Centre cases that justifies the divergent outcomes reached by the same Court at nearly the same time.

In our view, this leaves the business community with the challenging task of reconciling the two decisions, so as to identify a safe line to walk in communications between suppliers and their distribution agents about price, commissions, margins and other commercially sensitive information (since the cartel prohibitions are not restricted to agreements between competitors on price).

End Notes:

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

2 [2013] FCA 1313 at [21]
3 [2013] FCA 1313 at [141 – 143]

4 [2013] FCA 1313 at [142] – [144]
5 [2013] FCA 1313 at [120]
6 [2013] FCA 1313 at [119]

7 [2013] FCA 1313 at [177]

8 ACCC v ANZ [2013] FCA 1206

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]

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