Australia: High Court finds Flight Centre was in competition with the airlines

Background and initial decisions

In 2012, the ACCC commenced proceedings for the recovery of pecuniary penalties against Flight Centre, alleging that between 19 August 2005 and 16 May 2009 it had breached section 45(2)(ii) of the Trade Practices Act (the Act). This section prohibits a corporation from making a contract or arrangement, or arriving at an understanding, if a provision of the proposed contract, arrangement or understanding had the purpose, or would have or be likely to have the effect, of 'substantially lessening competition.'

Flight Centre had an agreement with Emirates, Malaysia Airlines and Singapore Airlines where it sold tickets and received a commission for each sale. The Airlines would electronically publish flight ticket prices for Flight Centre, who would then on-sell at a price that included a commission. The Airlines also maintained the ability to sell tickets directly to customers at prices less than the electronically published fare. This was problematic to Flight Centre, as it offered a 'price beat guarantee' where it offered to beat the price of any ticket quoted by an airline or travel agent by $1, and give the potential customer a $20 voucher.

Flight Centre approached the Airlines requesting them not to discount the price at which they offered international airline tickets directly to customers.

Flight Centre's principal contention was that it was an agent of the Airlines, and therefore could not be in competition with it for the purpose of the Act.

The primary judge found that Flight Centre and the Airlines were in competition, and that Flight Centre's conduct had contravened the Act (see related article).

On appeal, the Full Court held that the agreements to the Airlines proposed by Flight Centre did not occur in a market in which Flight Centre and the Airlines were in competition with each other (see related article). In its appeal by special leave, the ACCC argued that, in circumstances where Flight Centre sold as an agent for each airline, this did not disqualify Flight Centre's sale of tickets from being in market competition with the airline.

Issue for the High Court

The High Court had to look at the issue of whether the agent was in competition with the Airlines, and therefore in breach of section 45 of the Act (and the deeming provision section 45A relating to price fixing).

Findings of the High Court

By a 4-1 majority, the High Court allowed the appeal on the basis that there was a market in which the parties competed as a result of Flight Centre attempting to induce the Airlines to agree not to discount the price at which they offered international airline tickets direct to customers. Therefore Flight Centre had engaged in conduct in breach of section 45 of the Act.

The relevant market in which the competition was found to have occurred was the market for the supply, to customers, of contractual rights to international air carriage via the sale of airline tickets. This was different to the preliminary Judge's finding of the relevant market being the market for distribution and booking services.

Kiefel and Gageler JJ (with whom Nettle and Gordon JJ agreed) found that Flight Centre was in competition with each airline in the market for the supply, to customers, of contractual rights to international air carriage, notwithstanding that Flight Centre supplied in that market as agent for each airline. Of importance was the fact that Flight Centre was free to act in its own interests including to undercut the prices of not only travel agents but of the Airlines. This was summarised by their Honours at [90]: 'When Flight Centre sold an international airline ticket to a customer, the airline whose ticket was sold did not [sell the ticket].'

Nettle J found that 'an airline ticket sold by Flight Centre on behalf of an airline would be in most respects functionally identical to an airline ticket sold directly by an airline' (at [127]). This meant that Flight Centre and the Airlines were both in competition in the same market. Therefore, 'an arrangement between Flight Centre and the airlines to fix the prices at which the airlines were prepared to sell when dealing directly with customers would have had or been likely to have had the effect of reducing the level of competition between Flight Centre and the airlines in that market' (at [130]).

Gordon J found that the argument that Flight Centre was an agent of the Airlines was factually wrong and irrelevant for the purpose of section 45 of the Act.

French CJ alone dissented, finding that Flight Centre was not in competition with the Airlines as this was inconsistent with the law of agency in a sense relevant to the Act. His Honour noted:

It should be added that if an agent bears some financial risk associated with its activities and does not have an obligation to act generally in the interests of its principal, this does not establish that it is in competition with its principal when it comes to the supply to third parties of contractual rights to the principal's goods or services.

Importance of this decision

This decision is important as it highlights that two entities will not be precluded under the Act from being in competition with each other simply because an agency relationship exists between them. It will depend on the facts of each case. Where an entity acting as an agent is also free to act in its own interests as against the principal and in competition with the principal this conduct will be caught by the Act.

The real issues from this decision is that clients that use dual distribution models should not restrict the sale by a principal of its product at prices lower than that at which the agent may sell as this restriction would constitute a price fix.

Agency arrangements do not of themselves oust the application of competition laws.

Agency agreements that enable the agent to determine the agent's own sale price create competition between the principal and agent and therefore are subject to the criminal cartel provisions of the Competition and Consumer Act.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.

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