The High Court today handed down its decision in the Flight Centre appeal. The five High Court judges produced four different sets of reasons. The majority of four-one (Chief Justice French dissenting) concluded that the ACCC’s appeal ought to be allowed. They reached this conclusion on substantially the same grounds.
The ACCC argued that Flight Centre had attempted to induce Singapore Airlines, Malaysia Airlines and Emirates not to discount the tickets they sold directly to customers, that Flight Centre was in competition with those airlines at the time and that, as a result, it contravened the prohibition against price fixing which applied at the time of the conduct (the conduct took place between 2005 and 2009, prior to the current cartel laws; the key issues relating to market definition and competition between agents remain applicable to the current cartel law).
The majority accepted this argument. In particular, on the crucial issue of whether Flight Centre was in competition with the airlines, with whom it was also in an agency arrangement, the majority concluded that it was in competition with the airlines in the market for the supply of international airline tickets.
The key facts
Flight Centre provides travel agent services to customers, including booking international air travel as agents for certain airlines for which it received commissions. Customers could also purchase air travel directly from airlines. There was evidence that direct internet sales from airlines was rising during the relevant time period, but also that each of the relevant airlines sold approximately 80-85% of flight tickets through agents.
Airlines made published fares available to agents through an electronic reservation system – the Global Distribution System (GDS). Flight Centre would collect fares that it sold, remit the nett amount to the airline and retain the balance of the fare as commission. It was free to set the price at which it sold tickets to the consumer; it could, for example, sell at less than the published fare with the result that it would retain less commission (or even sell at a loss if it wished to do so). Flight Centre could also derive additional (‘back-end’ commission) through ‘preferred airline agreements’ (typically incentive-based), which it entered into with each of the three relevant airlines – Singapore Airlines, Malaysia Airlines and Emirates.
Not all seats were made available for sale by airlines, with some held back for promotions, and airlines could (and did) offer flights for sale directly at a price less than that published for agents on the GDS. The Full Court noted that it appeared this is what ‘precipitated the actions of Flight Centre that were the subject of the alleged contraventions.’ [para 24 full court appeal] In particular, as Flight Centre offered a ‘price beat guarantee’, pursuant to which it would better any advertised fare by $1 and give the passenger presenting evidence of the cheaper flight a $20 voucher, it would make a loss if airlines offered cheaper flights than the fares made available to agents via the GDS.
In response, Flight Centre sent a series of emails to the airlines expressing opposition at discounted fares by the airlines and in some cases threatening to terminate their agreement if the airlines did not agree not to undercut Flight Centre in relation to online sales [full details can be found at para 81 trial judgment]
The earlier decisions
Trial (Justice Logan)
Justice Logan held that Flight Centre was in competition with airlines for distribution and booking services.
In addition, Flight Centre had attempted to induce the making of a contract, arrangement or understanding which would remove ‘air fare differentiation so as to eliminate or reduce competition by a substitute, an airline, for the retail or distribution margin for distribution and booking services.’ [para 197] In so doing, Flight Centre ‘sought at least to maintain or control that margin and that was the likely effect of its attempts. Its conduct was an attempt to induce a contravention of s 45 of the TPA, as that section is read with s 45A’ [para 197]
Flight Centre was ordered to pay $11m for six incidents of attempting to induce price fixing in contravention of s 45.
Full Federal Court
Flight Centre succeeded on appeal to the Full Federal Court. In a unanimous decision the Full Court (Chief Justice Allsop, Justice Davies and Justice Wigney) held that there was no separate market for ‘booking and distribution services to customers’, with the result that Flight Centre did not compete with the airlines in that alleged market. The Full Court did, however, leave open the possibility that parties to an agency relationship may be found to be in competition in appropriate cases.
Appeal to the High Court
The ACCC appealed to the High Court. The key question was whether the parties were competitors. The majority concluded that (para 26, reasons of Justices Kiefel and Gageler)
- ‘Flight Centre was in competition with each airline’;
- the relevant market in which they competed was the ‘market for the supply, to customers, of contractual rights to international air carriage’ and
- ‘competition existed in that market nothwithstanding that Flight Centre supplied in that market as agent for each airline’
The ACCC put forward the following arguments (referred to its primary and secondary cases). The primary argument had succeeded at trial; the secondary case was not argued on appeal. The ACCC revived the secondary argument on appeal to the High Court (objections by Flight Centre to this revival were rejected)
- The ACCC’s primary case ‘was that Flight Centre competed with each of the airlines in markets for the provision of distribution services to international airlines and for the provision of booking services to customers.’ (French CJ, para 7)
- The ACCC’s secondary case was that ‘Flight Centre was acting in competition with the airlines which had appointed it as their agent.’ (French CJ, para 8)
Flight Centre’s case
Flight Centre argued that ‘there can be no lessening or likely lessening of competition in circumstances where the provider of the air travel remains the same whether that travel is sold to a retail consumer directly by the airline or for that same airline via a travel agent such as Flight Centre’ and that, ‘in attempting to have the airlines concerned allow it to access international air travel fares at the same price as the airlines concerned sold such travel by direct retail sale, it was attempting to induce them not to lessen but to increase competition.’ [para 7 trial judgment]
High Court Judgment
The critical issue was whether or not Flight Centre was relevantly in competition with the airlines. Chief Justice French did not consider there was a relevant market in which the parties competed and therefore would have dismissed the appeal. The remainder of the Court, while rejecting the ACCC’s primary case, accepted the secondary case – that Flight Centre was in competition with the airlines in the market for international air tickets
The leading majority decision was penned by Justices Kiefel and Gageler; their proposed orders were accepted by Justices Nettle and Gordon who produced separate judgments.
The relevant market: general discussion
In their joint judgment Justices Kiefel and Gageler spent some time describing the market. They noted:
[para 66] ‘a metaphorical description of an area or space (which is not necessarily a place) for the occurrence of transactions. Competition in a market is rivalrous behaviour in respect of those transactions. A market for the supply of services is a market in which those services are supplied and in which other services that are substitutable for, or otherwise competitive with, those services also are actually or potentially supplied.
Their Honours set out the dimensions of the market and posed the question: ‘what, relevantly, do they supply, to whom, and at what price?’ (para 68), observing that the ‘question does not necessarily admit of a unique answer’. This is because:
“[t]he economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted” … Identifying a market and defining its dimensions is “a focusing process”, requiring selection of “what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law” … [para 68]
The relevant market – the primary case (distribution and booking services)
After setting out general principles, Justices Kiefel and Gageler turned their attention to the ACCC’s primary case in relation to market – that is, that the relevant market in which the parties competed was in relation to distribution and booking services. It concluded that the primary claim should fail because the description of the supply of services claimed ‘did not accord with commercial reality’. The problem, they noted, ‘is one of economic theory doing violence to commercial reality.’ (para 71)
Although it may be possible to describe Flight Centre as providing distribution services, it is artificial to describe the relevant airline as providing those services to itself when selling tickets directly to customers (para 73). Consequently, the ACCC’s primary case was ‘unsustainable because it rested on attributing to Flight Centre and to the airlines the making of supplies of services of a description which did not accord with commercial reality.’ (para 75)
Justice Nettle agreed with the reasoning and findings of Kiefel and Gageler JJ that such a market was ‘an artificial construct that does not truly engage the commercial reality of the relevant commercial relationship and dealings’. (para 123)
The relevant market – the secondary case (supply of airline tickets)
Justices Kiefel and Gageler observed that a contractual right is a service under the Act and conferring a contractual right constitutes supply under the Act (para 80), with the result that making a contract conferring the right to supply of a service (air travel) was a supply of a service. Their Honours further noted that it is not inconsistent with the Act for ‘an agent and a principal’ to both be ‘suppliers of contractual rights against the principal’ or for them to supply such rights in competition (para 82).
Their Honours then concluded as follows:
[para 89] Critical to the outcome of the ultimate question of whether Flight Centre sold international airline tickets to customers in a market in competition with the airlines are two considerations. The first is that Flight Centre’s authority under the Agency Agreement extended not only to deciding whether or not to sell an airline’s tickets but also to setting its own price for those tickets. The second is that there is no suggestion that Flight Centre was constrained in the exercise of that authority to prefer the interests of the airlines to its own.
[para 90] Flight Centre was free in law to act in its own interests in the sale of an airline’s tickets to customers. That is what Flight Centre did in fact: it set and pursued its own marketing strategy, which involved undercutting the prices not only of other travel agents but of the airlines whose tickets it sold. When Flight Centre sold an international airline ticket to a customer, the airline whose ticket was sold did not.
[para 91] The competition which the Full Court accepted to have occurred in fact was not, as Flight Centre seeks to put it, merely competition in relation to supplies in a market. It was competition between suppliers in a market.
[para 92] The outcome of the appeal does not turn on the precise dimensions of that market. The ACCC’s persistence in describing it as a market for international passenger air travel services nevertheless tends to blur the product and functional dimensions of the market in a way which obscures the point that the supplies for which Flight Centre and the airlines competed were not supplies of carriage services but rather supplies of contractual rights to carriage services. The market is better identified as having been a market for the supply of contractual rights to international air carriage to customers or, in short, as a market for international airline tickets.
Justice Nettle agreed that the parties were in competition for the sale of airline tickets. His Honour noted that although only airlines operated aircraft and supplied passenger services, ‘services’ and ‘supply’ are defined broadly in the Act (section 4) with the result that it ‘requires no extension of the natural and ordinary meaning of those words as defined to characterise the sale of an airline ticket by a travel agent, like Flight Centre, to a customer as a supply to that customer of the right, enforceable against the relevant airline, to be carried by that airline on the flight to which the ticket relates.’ (para 124)
After referring to the definition of market for goods and services in s 4E as a “market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services”, his Honour noted that:
[para 126] … Ultimately … the existence of a market for goods or services is determined by the extent of their substitutability. … The greater the degree of substitutability between goods or services, the greater the degree of competition between suppliers of those goods or services, and vice versa. A market for goods or services within the meaning of s 4E is taken to exist where there is such a degree of substitutability between the goods or services of suppliers in the same or a related geographic area, and thus such competition between them, that the market power of each is significantly constrained. [footnotes omitted]
In this case:
[para 127] From the point of view of a prospective customer, 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 the airline. … from the point of view of the prospective customer, the airline ticket sold by Flight Centre on behalf of an airline would be close to perfectly substitutable for the airline ticket sold directly by the airline; and, in terms of generally accepted competition principles, that means that the cross-price elasticity of demand as between an airline ticket sold by Flight Centre and an airline ticket sold directly by the airline would approach positive infinity. Other things being equal, that connotes a high degree of competition between airline tickets sold by Flight Centre on behalf of airlines and airline tickets sold directly by each airline and, therefore, the existence of a market for the sale of airline tickets in which both Flight Centre and the airlines competed. [footnotes omitted]
His Honour went on to note, in relation to the claimed market for airline tickets:
… Flight Centre’s ability to sell one airline’s tickets at prices satisfactory to Flight Centre was constrained almost as much by prices set by other airlines for the sale of their competing tickets as it was by the prices set by the subject airline for the sale of its tickets directly to customers [fn omitted]. The market in which Flight Centre was in competition with each of the airlines was, therefore, the market for airline tickets in respect of all airlines
In her separate judgment, Justice Gordon concluded that the airlines, Flight Centre and other travel agents compete to sell a ‘valid contract of carriage’ on an airline (a ticket) (para 169). A ticket, as a contractual right provided in trade or commerce, falls within the definition of services in the Act. In economic terms, her Honour noted (para 170) that:
The tickets supplied by the airlines and by Flight Centre were substitutable: in response to changing prices over a period of time, the tickets supplied by Flight Centre were substitutable for those supplied by the airlines when customers were given a sufficient price incentive. That is not surprising. They were supplying the same service – a ticket entitling the named holder to travel at a scheduled time on a scheduled date on an identified airline between identified places. [fn’s omitted]
Consequently, her Honour concluded that Flight Centre, other agents and airlines supplied a service by providing, granting or conferring a ticket to a customer (para 171).
More on the issue of principal/agent
As noted above, Justices Kiefel and Gageler concluded that it is not inconsistent with the Act for ‘an agent and a principal’ to both be ‘suppliers of contractual rights against the principal’ or for them to supply such rights in competition (para 82). Consequently, any legal agency relationship between the parties did not preclude them competing in the same market.
Justice Gordon’s judgment was the most direct in relation to the issue of agents and principals competing. Her Honour first rejected any suggestion that the agency relationship that existed between the parties precluded a finding that the parties were in competition for purposes of the Act. In this case her Honour considered that when Flight Centre dealt with customers without reference to the interests of airlines its description as ‘agent’ should be considered factually wrong and, in any event, characterisation as agent was irrelevant for purposes of the relevant provisions of the Act (para’s 152-153)
On the issue of whether the parties were in competition in a relevant market Justice Gordon observed that the (para 173) ‘area of competition and rivalry between Flight Centre and each airline was close. The emails showed Flight Centre’s obvious concern that when an airline offered discounted prices for tickets, Flight Centre’s customers would stop buying tickets from Flight Centre and instead buy tickets from the airline. …’ Her Honour re-iterated her rejection of Flight Centre’s contention that there could be no competition between Flight Centre and the airlines because a principal cannot compete with its agent. Her Honour observed that ‘agent’ is an abused word and that, in dealing with customers, Flight Centre was effectively acting as principal in telling customers it would get them the best deal or best price, at which point it was in direct competition with airlines to sell a ticket. (para 175). Even if agent is a legally accurate, the description as agent:
masks the proper identification of the rivalrous behaviours that occur at the point at which Flight Centre is dealing with its own customers in its own right without reference to any interests of any airline. At that point, the description of Flight Centre as “agent” is simply wrong. At that point, Flight Centre in its own right was competing against all sellers of tickets, which includes the airlines and other travel agents. Flight Centre was not acting as agent. (para 175)
In relation to Flight Centre’s argument that ‘… because every sale made by Flight Centre as agent for an airline increased the airline’s sales generally, it was illogical to speak of the airlines being in competition with Flight Centre’ [para 129], Justice Nettle noted that the argument:
[para 130] ‘overlooks the fact that, although the airline’s interest in Flight Centre selling the airline’s tickets as an agent was to some extent informed by the number of tickets sold by Flight Centre, it was also affected by the amount of the commission which Flight Centre was paid for its services as agent. Contrary to Flight Centre’s submissions, it may be inferred from the fact that the airlines commenced to sell tickets directly to customers that, to the extent that each airline was able to sell tickets directly to customers rather than through Flight Centre as its agent, the airline preferred to do so because it avoided the need to pay commission on those sales. … Plainly enough, Flight Centre and the airlines were in competition for the sale of airline tickets, with the result that 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.
[para 132] …for Flight Centre to propose to the airlines that the airlines increase their prices for the purpose of direct sales was necessarily to propose a lessening of downward competitive pressure on prices and, consequently, a reduction in the level of competition between Flight Centre and the airlines for the sale of airline tickets.
Justice French dissented from the majority. His Honour noted that Flight Centre had no proprietary rights to the air tickets and could not modify or vary terms or conditions of the ticket, but could determine the price at which tickets were sold.
On the issue of agents and competition his Honour observed that the ‘proposition that an agent and a principal, both selling the services of the principal, compete with each other in a market for the sale of those services does not command ready assent.’ (para 15) In this case, his Honour held that the relevant conduct ‘related to an activity by Flight Centre which lay at the heart of an agency relationship, namely the sale by Flight Centre or its airline principals of contractual rights to travel on those airlines.’ (para 17)
His Honour therefore considered that Flight Centre’s acts in selling air tickets ‘was properly regarded as an action of the airline itself’ and that there was no market ‘for the supply of the tickets of a particular carrier’ (para 21). As a result his Honour concluded (para 24):
Flight Centre was not in competition, in any relevant market, with the airlines for which it sold tickets. Its proposals with respect to the pricing practices of its principals were not proposals offered by it as their competitor but as their agent. …
Although this decision related to the former s 45A, which deemed certain price fixing conduct to substantially lessen competition for purposes of s 45, it is equally applicable to the current cartel laws.
The decision removes any doubt that agents can be considered in competition with each other for purposes of the CCA. Suppliers of goods or services who also supply goods or services directly to customers (even if only to a limited degree online) must take care not to reach (or attempt to reach) agreements with their retailers in relation to price (in particular) or they will risk contravening the cartel laws. Agency relationships will not always be caught, but particularly where an agent is free to set its own price and/or conditions, there is a good chance they will be considered in competition in a relevant market with their principal.
The implications of the decision for principals and agents who also compete may, however, be short-lived. The Harper Report recommended an exemption to the cartel prohibitions for (recommendation 27) certain supply arrangements – in particular:
An exemption should be included for trading restrictions that are imposed by one firm on another in connection with the supply or acquisition of goods or services (including intellectual property licensing), recognising that such conduct will be prohibited by section 45 of the CCA (or section 47 if retained) if it has the purpose, effect or likely effect of substantially lessening competition.
Page 364 of the Harper Report explains the proposed exemption in relation to vertical supply agreements:
Restrictions imposed in connection with the supply or acquisition of goods or services are common and may be pro-competitive or anti-competitive depending on the circumstances. For example, a franchisor may require its franchisees to confine their trading to a particular geographic region. Provided the products supplied by the franchise compete with a wide range of other products, the geographic restriction may increase competition by encouraging franchisees to invest in their designated business area. For that reason, vertical supply restrictions are usually only prohibited if they have the purpose, effect or likely effect of substantially lessening competition.
Although opposed by the ACCC, this exemption accepted by the Government and formed part of the Exposure Draft Bill released by the Government in September. The relevant proposed provision is s 44ZZRS (although this is also proposed to be renumbered to s 45AR)
44ZZRS Restrictions on supplies and acquisitions
(1) Sections 44ZZRF, 44ZZRG, 44ZZRJ and 44ZZRK do not apply in relation to making, or giving effect to, a contract, arrangement or understanding that contains a cartel provision to the extent that the cartel provision:
(a) imposes, on a party to the contract, arrangement or understanding (the acquirer) acquiring goods or services from another party to the contract, arrangement or understanding, an obligation that relates to:
(i) the acquisition by the acquirer of the goods or services; or
(ii) the acquisition by the acquirer, from any person, of other goods or services that are substitutable for, or otherwise competitive with, the goods or services; or
(iii) the supply by the acquirer of the goods or services or of other goods or services that are substitutable for, or otherwise competitive with, the goods or services; or
(b) imposes, on a party to the contract, arrangement or understanding (the supplier) supplying goods or services to another party to the contract, arrangement or understanding, an obligation that relates to:
(i) the supply by the supplier of the goods or services; or
(ii) the supply by the supplier, to any person, of other goods or services that are substitutable for, or otherwise competitive with, the goods or services.
Note: A defendant bears an evidential burden in relation to the matter in subsection (1) (see subsection 13.3(3) of the Criminal Code and subsection (2) of this section).
(2) A person who wishes to rely on subsection (1) in relation to a contravention of section 44ZZRJ or 44ZZRK bears an evidential burden in relation to that matter.
(3) This section does not affect the operation of section 45 or 47.
Presuming it forms part of the reform bill, expected early 2017, this will ensure agents and principals in supply agreements will be subject to a competition test rather than per se prohibition in relation to any agreements regarding price.
My Flight Centre page (more extracts and links to relevant case summaries and academic articles on the judgment)