In a surprise decision in the case of ACCC v Flight Centre,1 the High Court found last week that, where an agent is free to exercise discretion in the pricing of a principal’s goods or services and is not obliged to act in the interest of the principal, the agent may be ‘in competition’ with its principal. This is a landmark case that challenges previous understandings of the law of agency and means that, for the first time:
- An arrangement between principal and agent about the price at which either can sell the principal’s products could constitute price fixing; and
- An arrangement with an agent about which customers to supply could be an illegal market sharing agreement.
Rod Sims, the ACCC Chairman, summarised the High Court finding as follows:2
“If you or another organisation are selling something to consumers on the basis that if one of you makes a sale, the other one does not, it doesn’t matter what you call yourself – you are competitors”
The Flight Centre decision has far reaching implications for any company that sells products both directly and through agents. Any company that uses a ‘dual channel’ distribution strategy of this type should review its agency arrangements in light of the High Court’s decision and consider whether any pricing or distribution controls need to be amended – particularly if those arrangements include provisions requiring price parity.
Background
Flight Centre sells airfares as the agent of a range of airlines. Between 2005 and 2009, Emirates, Singapore Airlines and Malaysia Airlines sold airfares on their websites for less than the fares they made available to Flight Centre. Flight Centre objected to this and responded by trying to stop those airlines from advertising fares on their own websites for less than the fares they made available through Flight Centre. This demand constituted attempted price fixing if it related to services that Flight Centre supplied ‘in competition with’ those airlines.
It may also be that Flight Centre’s conduct amounted to a misuse of market power and an attempt to reach an agreement with a purpose or likely effect of substantially lessening competition, but the ACCC did not plead these potential contraventions.
The ACCC alleged that Flight Centre competed with the airlines in two markets. Firstly, the ACCC alleged that Flight Centre supplied booking and distribution services airlines and that, in so doing, it competed with the airlines’ internal distribution channels. The Federal Court accepted this argument at first instance and reasoned that Flight Centre’s ‘price’ for these distribution services was its retail or distribution margin (ie, its commission). By trying to agree with airlines to eliminate differences in air fares, the Federal Court held that Flight Centre was effectively trying to maintain the price it received for providing these distribution services in competition with the airlines’ internal distribution channels.
On appeal, the Full Federal Court overturned this finding on the basis that it was artificial. In particular, the Full Federal Court found that what the ACCC chose to describe as booking services were, in reality, no more than an essential and inseparable part of selling a ticket to a customer, and an airline selling a ticket directly to a customer could not realistically be described as supplying a distribution service to itself. These conclusions were upheld by the High Court. Justices Kiefel and Gageler described the problem with the ACCC’s attempt to divide the sale process into separate ‘markets’ as “one of economic theory doing violence to commercial reality”.
The ACCC’s second argument was that Flight Centre competed with airlines in a market for supply of international passenger air travel services. The Federal Court initially rejected this argument on the basis that only airlines operated aircraft and carried passengers and travel agents could therefore only offer air travel services as agents for the airlines. The ACCC did not challenge this finding in the Full Federal Court, but sought to revisit the argument in its appeal to the High Court.
In a majority decision (Chief Justice French dissenting), the High Court found that principals and agents may be competitors, depending on the degree of discretion of the agent. Where the agent has significant discretion over the terms of sale of the principal’s goods and services, it may be considered to be selling those goods or services in competition with the principal. The High Court found that this was the case with Flight Centre and the airlines, and that Flight Centre and the airlines competed with each other for “the supply of contractual rights to international air carriage to customers” (that is, a market for international airline tickets). The attempt by Flight Centre to stop the airlines from offering discounted fares on their websites was, therefore, an attempt to control the prices offered by a ‘competitor’, and therefore amounted to an attempted price fix.
The High Court has remitted the matter to the Federal Court for the imposition of penalties.
This finding creates a number of questions, including the following:
- The High Court seems to distinguish between the supply of international air carriage (which the parties accepted could only be provided by airlines) and provision of “rights to” those services (ie, tickets). It would appear the Court is therefore saying that the supply of tickets occurs in a separate market to the supply of the air travel itself. This seems at odds with the Court’s comments about the ACCC’s first market pleading being ‘artificial’ and ‘doing violence to commercial reality’;
- It is unclear how Flight Centre supplies rights to air travel in its own right when it is not a party in its own right to any agreement that confers rights to air travel on the passenger and could not be sued as a supplier if the air travel were ultimately not supplied; and
- One basis on which the High Court found that Flight Centre was a competitor to the airlines was that Flight Centre was free to decide the price at which it would sell air tickets. On that basis, should a clause in an agency agreement that sets a limit on an agent’s pricing discretion be regarded as a price fixing clause, or evidence that the principal and agent do not compete? Similarly, should a clause that sets limits on the customers an agent may approach be regarded as evidence of an agency in which the agent does not compete (on the basis that it constrains the ability of the agent to act against the interests of the principal) or is such a clause to be treated as an illegal market sharing arrangement?
Although the High Court’s decision creates considerable uncertainty, parties to agency arrangements who wish to minimise risk may wish to consider the following:
- In its negotiations with online travel agents, the ACCC has focussed on price parity clauses imposed by agents on the principal (ie, clauses which effectively prevent the principal from discounting below prices made available through the agent). In light of the High Court decision in Flight Centre, there is a high risk that such clauses constitute price fixing;
- The joint judgment of Justices Kiefel and Gageler placed weight on the absence of traditional indicia of agency in the airlines’ relationship with Flight Centre, such as control over pricing and a requirement for the agent to prefer the interests of the principal to its own.3 Traditional ‘narrow’ agency agreements where an agent is given little or no commercial discretion and must not act against the interests of the principal are therefore likely to create less risk than agency arrangements where agents are giving a high degree of autonomy. The irony is that the ACCC’s action against Flight Centre may therefore ultimately result in agents being given less pricing discretion, leading to a less competition in markets rather than more;
- Restrictions imposed by an agent on the principal appear more likely to raise concerns than restrictions running the other way (ie, imposed by the principal on the agent); and
- Until the law is further clarified, the safest position, if it is possible, will be to simply not employ dual distribution channel strategies where a supplier and its agent are both able to sell goods or services in the market at the same time.
Initial indications are that the ACCC intends to pursue further cases on the strength of this judgment. Those cases may have to make their way through the courts before it will be entirely clear exactly what is and isn’t now permitted in an agency arrangement without contravening cartel laws. In the interim, both agents and principals involved in dual channel distribution models should review their arrangements to ensure they do not become the star of the next test case.
1 Australian Competition and Consumer Commission v Flight Centre Travel [2016] HCA 49.
2 Rod Sims says Flight Centre win has ‘wider implications for other sectors’; Australian Financial Review 14 December 2016.
3 Nettle J in fact found that Flight Centre was not an agent and was selling in its own right (see para 152). This makes more sense of the finding that Flight Centre was competing with the airlines, but was not the case pleaded by the ACCC.