The Full Court of the Federal Court has upheld an appeal by Flight Centre against findings that it attempted to induce price fixing arrangements, and ordered that the penalty of $11 million be set aside.
Flight Centre acted as agent for three international airlines in distributing air travel services. These airlines also distributed their air travel services through other travel agents and directly to customers through their own marketing.
On occasion, the relevant airlines would offer special discounted fares for sale on their website only. Flight Centre became concerned that the airlines were offering lower air fares through their own websites than Flight Centre could offer and as such Flight Centre would lose their ability to draw customer traffic to their service.
Between 2005 and 2009, representatives of Flight Centre sent numerous emails to the relevant airlines requesting that any fare the airlines directly offered to customers would also be made available to purchase through Flight Centre. Flight Centre also sought to have the airlines agree that any fare sold by the airlines directly be sold at a total price that included the amount of commission Flight Centre would be entitled to if it had sold the fare.
In a number of these emails, Flight Centre also threatened the airlines that, if the price undercutting did not stop, Flight Centre might choose not to promote and distribute the airlines’ air travel to its customers.
The ACCC alleged that this conduct constituted attempted price fixing arrangements in contravention of section 45 of the Competition and Consumer Act (CCA).
First instance decision
In order to fall within the meaning of price fixing, the proposed arrangements had to relate to services supplied by both Flight Centre and the airlines and these two had to be in competition with each other.
At first instance, Justice Rangiah found that Flight Centre was in fact in competition with the airlines for the supply of distribution and booking services in relation to international passenger air travel.
The Full Court found that that Justice Rangiah was wrong in finding that there was a separate market for booking and distribution services to consumers. The Full Court found that Justice Rangiah’s market analysis was artificial and failed to consider the commercial reality of the relationships and dealings of the parties.
The first problem with Justice Rangian’s analysis was that airlines could only supply distribution services in relation to their own flights. They could not sensibly be treated as competing with each other in relation to the supply of distribution services generally. There was no single booking services market in which all of the airlines and travel agents competed.
The second and more fundamental problem was that services such as booking and ticketing were an ancillary part of the supply of international travel, which Flight Centre supplied on behalf of the airlines under agency agreements. As such, Flight Centre did not supply the services itself. Because the relationships were that of agent and principal, there could be no competition between Flight Centre and the airlines.
However, the Full Court cautioned that the mere existence of an agency agreement does not always mean two parties are not in competition with each other. There are a broad range of commercial relationships that are sometimes referred to as involving agency. Each case must be considered on its own facts, with the question of competition relying heavily on the defining of the relevant market.
Implications for agency and distribution agreements
The case has helped clarify the law on price fixing for any agent which offers and sells services similar to those offered direct to consumers by its principal.
Importantly, the Full Court indicated that if in reality the agent is no more than a distributor or re-seller of the manufacturer’s product, there may well be competition in relation to the supply of the product. The question of whether a manufacturer and its distributors, resellers and agents are supplying products in competition with each other in the same market must be answered by reference to commercial reality.
This case also highlights the difficulties faced when determining the correct characterisation of a market for the purposes of the cartel provisions. It is clear that the definition of the market is subject to subjective assumptions and views, which allows for the creation of multiple definitions of the potentially relevant market. This leads to uncertainty for those parties operating within such markets, as to where competition may arise between market players. As reiterated by the Full Court in this decision, the best option to create certainty when considering whether a party is competing in the same market for the purposes of the cartel provisions is to base market definitions on:
- a careful evaluation of the evidence concerning the nature and character of the relevant goods or services;
- the circumstances in which they were supplied or acquired; and
- the interactions between, and the perceptions of, the relevant suppliers and acquirers of the product.
If you have any questions in relation to the operation of the cartel provisions under the CCA or the implications of this case on your business or distribution agreements, please contact us.