Insights

22/06/17

The long arm of Australian competition law: High Court unanimously dismisses Air Cargo appeals, holding airlines competed in a market in Australia

The High Court has held that the geographical location of the market is to be determined as a practical matter of business, and is not solely dictated by where substitution decisions occur.

On 14 June 2017, the High Court unanimously dismissed an appeal against a decision of the Full Federal Court that Air New Zealand and PT Garuda engaged in price fixing in a market in Australia in contravention of section 45 of the then Trade Practices Act 1974 (TPA) (now Competition and Consumer Act 2010 (Cth) (CCA)).  

The decision concerns the reach of the Australian competition law outside Australia, with respect to any prohibitions under the Australian statute that require there to be a purpose or effect or likely effect of substantially lessening competition in a market in Australia.

The key issue in the appeal was whether the price fixing between the airlines occurred in a market in Australia.  If so, the airlines were in breach of the price fixing provisions of the TPA.  If the geographic location of the market was defined as outside Australia, then the conduct would not be subject to the TPA.  

Rather than focusing on a traditional approach to geographic market definition – where the act of substitution between competing services took place (ie the location where the airlines’ services were contestable) – the High Court took an approach that focused on the geographical area in which the airlines competed.  While the choice between competing airlines was made at ports of origin outside Australia (in Hong Kong, Indonesia and Singapore), the High Court held that it did not follow that the geographic market was necessarily outside of Australia.  Rather, the market also included Australia because it was a significant source of demand for air cargo services, and the airlines “tussled” with each other to meet that demand, including by marketing their services directly to Australian customers. 

While affirming the decision of the Full Federal Court, the High Court placed less emphasis on the fact that some of the air cargo services were performed in Australia.  The key consideration for the High Court was that the airlines engaged in rivalry in Australia, in terms of competing for the business of Australian customers.

The High Court’s decision is consistent with a prior decision of the High Court of New Zealand, although the NZ Court placed greater emphasis on services provided in New Zealand. (see Commerce Commission v Air New Zealand [2012] NZHC 1285).

Earlier Decisions

This decision emanates from the long-running international air cargo cartel litigation commenced by the ACCC (and many competition regulators in other jurisdictions) against various airlines around the world.

Air New Zealand and PT Garuda supplied air cargo services from ports of origin in Hong Kong, Singapore and Indonesia to destination ports in Australia.  The ACCC commenced proceedings against the airlines, alleging that they had engaged in price fixing contrary to section 45 of the TPA by reaching understandings to impose various surcharges and fees on the supply of those air cargo services.

At first instance, the Federal Court (Perram J) found that the airlines had engaged in the alleged price fixing, but that they competed in markets in Hong Kong, Singapore and Indonesia, and not in a “market in Australia” as required by section 4E of the TPA as it then was, and therefore the conduct was not captured by the TPA.  According to Perram J, the market was the location where the substitution or “switching” decision – the choice of airline – was made, and in this case those decisions were all made outside Australia at the ports of origin.  A detailed analysis of the Federal Court’s decision is available here.

The ACCC appealed the Federal Court’s decision to the Full Federal Court and was successful.  The Full Court held by majority that substitutability is not the defining feature of the market, and that it is necessary to examine the market holistically having regard to all its dimensions and content.  Taking this approach, the Court found that the relevant market in which the airlines competed was a market in Australia.  A detailed analysis of the Full Federal Court’s decision is available here.

The High Court’s decision – there was a market in Australia

The airlines were granted special leave to appeal to the High Court on the central issue of whether the airlines competed to supply air cargo services in a market in Australia.  

The High Court unanimously held that the airlines competed in a market in Australia, and their conduct was therefore caught by the TPA.  According to Kiefel, Bell and Keane JJ, the task of attributing geographical boundaries to the concept of a “market” in section 4E is to be approached as a “practical matter of business”.  Their Honours explained that it is the geographical area of the rivalry between the airlines, in terms of the “interplay of supply and demand” for their services, that is critical in determining the location of the market.  In this context, the place where substitution or switching occurs (eg signing the contracts for supply) may be relevant but is not determinative.  As their Honours explained: “the place where the act of substitution occurs does not necessarily locate the geographical area of the rivalry which precedes the act of substitution”. 

Their Honours went on to find that the geographical area of the rivalry between the airlines included Australia because the airlines actively competed for the custom of Australian shippers who were a vital source of demand for air cargo services from the airlines.  The airlines “engaged in rivalrous behaviour seeking to match the supply of their services with that demand”, particularly in their marketing and sales strategies.  Hence as a practical matter of business, the airlines competed in a market which included Australia. 

Nettle J and Gordon J delivered judgments to similar effect.  Nettle J explained that while the decisions to substitute or “switch” between the airlines occurred outside Australia, those decisions were driven by the demands of Australian customers responding to the airlines’ marketing activities in Australia.  His Honour also observed that in international commerce, the place where switching decisions occur in a contractual sense “may be entirely fortuitous and, hence, essentially irrelevant to the location of the geographic market”.

Gordon J (with whom Nettle J agreed) observed that an exclusive focus on substitution can obscure the proper identification of the market.  Her Honour, taking a practical approach similar to the other judges, identified five reasons why the airlines competed in a market in Australia:

  • there was economically significant demand in Australia for the air cargo services supplied by the airlines;
  • the airlines met, negotiated and partnered directly with Australian shippers;
  • the airlines tracked the activities of Australian shippers for the purpose of providing them with air cargo services;
  • the airlines targeted large Australian importers in their marketing activities, regarding them as the ultimate source of their business; and
  • the airlines designed their products according to the particular demands of Australian shippers.

The airlines also contended that they were compelled by foreign laws to engage in the price fixing conduct, and that the price fixing prohibitions in the TPA were inconsistent with other Commonwealth laws concerning air navigation.  The High Court rejected these arguments.  The Court found that the airlines voluntarily engaged in the price fixing conduct, and that the alleged inconsistency did not arise.

Implications

This decision is of limited application to cartel conduct cases brought under the current Competition and Consumer Act 2010 (CCA) as the cartel provisions in the CCA, unlike the TPA, do not have the same requirement that the conduct must occur in relation to a market in Australia. 

Proposed changes to section 44ZZRD(4) in the Competition and Consumer Amendment (Competition Policy Review) Bill 2017 (currently before the House of Representatives) will limit the application of the cartel provisions with respect to cartels outside Australia.  The Bill proposes adding a note to section 44ZZRD(4) to specify that “trade or commerce” in section 4 means trade or commerce within Australia or between Australia and places outside Australia.

The High Court’s analysis makes clear that prohibitions that contain a requirement to prove a market in Australia may be established even though substitution between the relevant good or service occurs wholly outside Australia.  Prohibitions affected by the decision include anti-competitive agreements, exclusive dealing and mergers that are likely to substantially lessen competition.

The High Court’s decision indicates an expansive interpretation of the concept of a market, and suggests that the precise content and geographical boundaries of a market will depend on the facts of the case and how defendants engage with or target customers that are operating in Australia.

 

Many thanks to Claire Green for her assistance in preparing this Update.

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