Insights

14/12/16

ACCC win against Flight Centre in High Court raises competition compliance risk for dual distribution models.

A majority of the High Court (French CJ dissenting) today has ruled against Flight Centre, finding that Flight Centre was in fact in competition with airlines for the purpose of the price-fixing provisions of the then Trade Practices Act.  The decision remains relevant for the current cartel provisions under the Competition and Consumer Act, today.  The ruling sets aside the Full Federal Court’s decision of 14 August 2015, and reinstates the trial judge’s decision of 6 December 2013 finding that Flight Centre engaged in attempted price fixing with certain airlines, subject to certain adjustments to reflect the High Court majority’s reasons.

The High Court found that where an agent exercises their own discretion in the pricing of the principal’s goods or services, and where the agent is not obliged to act in the interest of the principal, this may mean that the principal and agent are in competition with each other.  

The decision places into question the viability of dual distribution models (direct and indirect distribution) in a competition law context, which have long been employed by businesses.  Typically, such models have been considered as vertical arrangements, thus arrangements between suppliers and distributors where suppliers also distribute directly to end customers have not raised many competition concerns.  This decision broadens the scope of the relationship between suppliers and distributors to an extent that may see certain aspects of such relationships considered as horizontal in nature.

Despite setting aside the Full Court’s decision, the High Court agreed with the reasoning of the Full Court, in dismissing the trial judge’s characterisation of the market as a market for booking and distribution services, agreeing that this characterisation was an artificial construct (the ACCC’s primary case).   Instead, the High Court focussed on the principal and agent relationship between Flight Centre and the airlines (the ACCC’s secondary case), finding that they were in competition with each other for “the supply of contractual rights to international air carriage to customers” (that is, the market for international airline tickets). 

The High Court has remitted the matter back to the Federal Court for the determination of penalties, ordering each party pay its own costs. 

Need to know:

The key takeaways from the High Court’s decision are:

  • Careful management of dual distribution models is required.  Businesses employing a dual distribution model need to take care to ensure that arrangements with their distributors do not constitute cartel offences, or attempts to commit cartel offences.  In particular, commissions, pricing, supply terms and customer allocations should be examined to ensure such arrangements do not constitute price fixing.
  • Supplier and distributor communications should relate to the terms of supply.  The parties should act in their respective capacities of “supplier” and “distributor” rather than in their capacity as suppliers of goods and services to customers, because in this capacity they may be considered competitors.
  • Principals and agents may be competitors, depending on the degree of discretion of the agent. Where the agent has a significant amount of discretion over the terms of sale of the principal’s goods and services it may be considered to be in competition with the principal, and so prohibited from entering certain arrangements with each other, including in relation to price, capacity, customer and territorial allocations.

Background:

First Instance Decision

In 2013 the Federal Court handed down decisions in ACCC v Australian and New Zealand Banking Group Limited [2013] FCA 1206 and ACCC v Flight Centre Limited (No 2) [2013] FCA 1313. Both related to very similar distribution arrangements and both involved allegations by the ACCC that, despite the seemingly vertical nature of the relationship between the parties involved, the parties were relevantly competitors with each other and, as a result, were capable of engaging in price fixing, per se unlawful under Australian competition law. 

However, in these two cases involving broadly similar distribution models, different Federal Court Judges reached irreconcilable conclusions at first instance.  Dowsett J in the ANZ case found no contravention was established because ANZ and mortgage brokers who distributed ANZ mortgages as agents were not relevantly competitors and, therefore, were not capable of engaging in price fixing.  This decision was upheld on appeal to the Full Federal Court and the ACCC did not seek special leave to appeal the decision to the High Court. 

In contrast, Logan J in the Flight Centre case found that Flight Centre and the relevant airlines, whose airfares Flight Centre distributed as their agent, were relevantly competitive and, as a result, that Flight Centre’s conduct did constitute an illegal attempt to engage in price fixing.

We provided a detailed analysis of these irreconcilable decisions entitled “Dual distribution models at a crossroad: where do the ANZ and Flight Centre cases leave us?” available here.

Full Federal Court Decision

Following the first instance decisions, Flight Centre filed an appeal to the Full Federal Court disputing the finding of the Federal Court.

On 14 August 2015, the Full Federal Court, handed down its judgement in the Flight Centre case, finding that there was no separate market for booking and distribution services to consumers and, as a result, Flight Centre and the airlines did not compete in this market.  The Full Court found that the supply of booking and distribution services was an ancillary part of the supply of international passenger air travel, and that Flight Centre, acting as an agent for the airlines, was not a competitor.  However, the Full Court noted that the existence of an agency relationship does not always mean the parties cannot be in competition with one another, an issue which was ventilated on appeal to the High Court by the ACCC, and which has now subsequently been resolved through the High Court’s decision today.

In a separate judgment, the same Federal Court appellate bench also dismissed the ACCC’s appeal against a decision dismissing its allegations that ANZ had fixed prices with a mortgage broker that distributed ANZ home loans, finding that ANZ was not in competition with the mortgage broker.

We provided an update on these two decisions in its publication entitled “Federal Court green lights dual distribution models: wins for Flight Centre and ANZ against ACCC’s price fixing allegations” available here.

Insight By
-
Partner
+61 2 9263 4362
+61 411 314 505
CC
Partner
+61 2 9263 4019
+61 417 269 992
Picture of Genevieve Rahman
Lawyer
+61 2 9263 4194
+61 404 056 052

Share This

AddThis: