Distribution arrangements where principals sell direct in competition with agents should now be reviewed for potential breaches of the Competition and Consumer Act 2010.
An agent can be considered to be a competitor to its principal, depending on how the parties market their offers to consumers. That's the key lesson from the Federal Court's decision that Flight Centre (Australia's leading travel agent) attempted to enter into arrangements with airlines to eliminate price differences in air fares and fix, control or maintain Flight Centre's retail or distribution margin. (ACCC v Flight Centre Limited (No 2)  FCA 1313).
This applies not only to all players in the travel industry – including travel agents, airlines, hotel chains and tour operators – but also industries such as financial services and any distribution arrangements where principals sell direct in competition with agents, as for example through websites.
The wider message is that great care is needed in any agent/distributor context, if an agent, which competes with its principal in selling to common customers, reaches or proposes any understandings with the principal over pricing to customers.
The Court found that Flight Centre's conduct was attempted price fixing in contravention of section 45 of the Competition and Consumer Act 2010 (Cth), which prohibits making or giving effect to contracts, arrangements or understandings which have the purpose or likely effect of substantially lessening competition.
Flight Centre was found to have attempted to induce Singapore Airlines, Malaysian Airlines and Emirates to agree that any particular fare offered by the airlines directly to customers:
- would also be made available through Flight Centre; and
- would not be sold at a total price less than the net fare remitted by Flight Centre to the airline under its agency, plus Flight Centre's commission.
Was Flight Centre an agent or a competitor of the airlines?
The Court acknowledged the relationship between the airlines and Flight Centre to be one of principal and agent in the context of the supply of air travel to consumers. However, the Court concentrated on Flight Centre's role as a "travel intermediary", supplying booking and distribution services. It found that Flight Centre competed with the airlines in this context, because the services provided by Flight Centre were substitutable with direct booking on the airlines' websites.
Economic evidence (which the Court accepted) identified a single market in which travel agents and airlines compete to supply booking and distribution services and was consistent with evidence given by Flight Centre's competitors. Webjet and local travel agents saw themselves as competing in just such a market with direct sales offered by airlines in this market.
Internal documents revealed that Flight Centre saw the airlines as its competitors (its "foes" according a Flight Centre executive). Flight Centre lost money if passengers either did not deal with Flight Centre or dealt with it only pursuant to its "Price Beat Guarantee".
Substantial lessening of competition revealed in internal documents
Flight Centre 's repeated use, in emails to the airlines, of the words "undercut" and "undermine" in relation to price, by was held to be a "truly reliable, contemporary touchstone as to ... purpose."
The Court found, largely based on Flight Centre's emails with the airlines, that Flight Centre's aim was to remove air fare differentiation between direct airline sales and Flight Centre's travel agency sales in order to fix, control or maintain the retail or distribution margin which constituted Flight Centre's income.
The penalty hearing is set down for 19 December 2013, but Flight Centre has already announced its intention to appeal. One ground will likely be the characterisation of Flight Centre and the airlines as competitors. Flight Centre's consistent position is that it acts as an agent for, rather than a competitor of, the airlines.
This decision has significant repercussions for travel agents, airlines, hotel chains and tour operators. The Court's finding that the relevant market is not the underlying market for the supply of air travel or other travel products, but the market for booking and distribution services, is important. The case demonstrates how the definition of the relevant market is critical to the competition law assessment of distribution relationships.
A compliance difficulty for business is how to reconcile the Australian competition rules on distribution arrangements. In another recently decided case, the Federal Court held that a bank (ANZ), and an intermediary representative of mortgage brokers, were not competitors when a limit was put on rebates being offered to borrowers. In that case, ANZ (lender/principal) sought to limit the amount of discount or rebate that mortgage brokers (agents) could offer to borrowers out of the agents' commission. The Court found that brokers were not lenders in their own right and did not compete against ANZ to supply loan arrangement services. There is some tension between ANZ and Flight Centre. ANZ is also under appeal by the ACCC, which was unsuccessful in that case.
Given the findings in Flight Centre, and the potentially large penalties which could follow, we recommend that all companies which may compete against their own agents and distributors take care to learn the lessons from the Flight Centre decision.
Irrespective of the outcome of the appeal, the case indicates that there can be serious compliance risks if customer pricing is agreed or controlled in that context.
In the event of a complaint or challenge, a review of internal documents, emails and other correspondence with suppliers will be critical to assess competition law risk. Particular attention should be paid to perceptions (both within the company and in the industry) of the boundaries of the markets in which competition takes place, and the "purpose" underpinning dealings on customer prices with agents and distributors.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.