A $12.5m civil penalty for attempted price fixing arising from accidental breaches of cartel laws will give the ACCC fresh impetus to examine customer pricing arrangements between principals and agents, such as price parity or "most favoured nation" clauses in vertical pricing arrangements, and given other developments, the fines could well be substantially larger.
The decision in Flight Centre Limited v Australian Competition and Consumer Commission (No 2) [2018] FCAFC 53 not only should encourage businesses using price parity or "most favoured nation" clauses (such as those in long-term supply contracts, or those underpinning financial advice, broking, insurance, price comparison sites and online marketplaces) to scrutinise their pricing arrangements, but should really serve as a warning to business to be careful about statements and conduct in commercial discussions without recognition of the possible legal consequences.
Accidental conduct characterised as an attempt to fix prices
Flight Centre sold three airlines' airfares based on prices provided to it as a travel agent; its prices also included a margin to reflect various components, including a commission. It also advertised a "price beat guarantee" that it would better the price for any airline ticket quoted, not only by another travel agent but by any airline.
The problem for Flight Centre was that the three airlines directly sold airfares to customers on their websites at prices lower than the prices quoted by Flight Centre. For Flight Centre to match or beat these prices, it needed to sell the airfare at a price which reduced its margin.
In response to this, Flight Centre attempted to persuade the airlines on six separate occasions to agree that any particular airfare they offered directly to customers:
- would also be made available through Flight Centre; and
- would not be sold at a total price less than the fare offered by Flight Centre.
Although Flight Centre's conduct was driven by a commercial intention to preserve its commissions and profit margin, and undertaken with the belief that the conduct was lawful, the Federal Court found that the conduct amounted to attempts to fix prices in breach of section 45(2)(a)(ii) of the Trade Practices Act 1976 (Cth) (now section 45(1)(a) the Competition and Consumer Act 2010 (Cth).
What factors did the Full Court consider to set the penalty?
The Full Court rejected any suggestion that even "if one reasonably misunderstands one’s liability position in circumstances that give rise to a civil penalty, one should be relieved of the penalty or one should receive a light penalty".
It considered that a significant penalty was appropriate in the circumstances, given that the conduct was an attempt to deny consumers access to lower fares. How it arrived at that significant penalty involved a number of considerations, both positive and negative. Importantly, the Court accepted that Flight Centre had a compliance policy and did not believe that it was contravening the Act by its conduct and simply thought it was trying to place commercial pressure on airlines as part of a principal/agent relationship.
The positive considerations included:
- the managing director involved in the attempted price fixing conduct did not believe that he or Flight Centre were contravening the Act and simply thought that he and Flight Centre were engaging in ordinary commercial conduct;
- the attempted conduct was out in the open and not covert; and
- Flight Centre had in place a compliance policy and so there was less need for the penalty to specifically deter Flight Centre from engaging in similar conduct again.
The negative considerations included:
- the purpose of the conduct was to seek to have the airlines deny to customers a price benefit in circumstances where Flight Centre was likely to benefit;
- despite its genuine belief that it was not contravening the Act, Flight Centre's attempted conduct was not strictly innocent as it would have known that its attempted conduct, if successfully carried out, was likely to prevent customers from receiving better prices;
- the penalty needed to generally deter other companies from engaging in similar conduct.
- one of the attempts involved the CEO of Flight Centre, and was made three times against the same airline.
The Court imposed a $12.5 million total penalty:
- $2.5 million for each of the second to fourth attempts, which was increased from $2 million because of the high volume of business (ie. over $200 million) the conduct could have potentially affected;
- $2 million for the fifth attempt, as this amount was not appealed;
- $3 million for the sixth attempt, which was increased from $2.5 million because the CEO was involved and the attempt was engaged in against one airline on three separate occasions.
The first attempt did not attract a penalty as it was time-barred by statute.
OECD finds Australian penalties are comparatively low
The Organisation for Economic Co-operation and Development (OECD)'s recent report on "Pecuniary Penalties for Competition Law Infringements in Australia" compared Australia's pecuniary penalty regime for competition law breaches with those in jurisdictions such as the EU, the US, Germany, Japan, Korea and the UK, and concluded that both the maximum and average penalties imposed in Australia are lower; it argues our penalties would have to be increased by 12.6 times to be comparable.
The OECD found that, despite Australia's competition laws being in line with international practices, its method for applying penalties is unique. In most jurisdictions civil penalties are determined by a detailed and public methodology which takes into account the sales of the infringing company's product. In comparison, the OECD described Australia's penalty method as an "instinctive synthesis" of various factors by the Federal Court. It was accepted that although Australia's method is unique, it does not prevent substantial civil penalties from being awarded in future cases.
ACCC Chairman Rod Sims has responded:
"we acknowledge the OECD’s comment that in the past we may not have given the size of the contravening corporation sufficient weight in our penalty submissions to the Court... the ACCC sees merit in considering the relevance of this baseline approach, noting that if it was applied in Australia, it would appear likely that firms with larger turnover would generally end up with much higher penalties.
We will reflect carefully on the report, including the OECD’s suggestion to consider developing penalty guidelines, similar to the approach taken by the other OECD jurisdictions.”
More conduct on the ACCC's radar, and higher penalties for it too
The Flight Centre decision serves as a reminder to senior management to be careful in the way they attempt to influence the way other parties, including principals, go to market or price their services to customers.
This behaviour is certainly on the ACCC's radar and, as the Flight Centre saga shows, even accidental conduct can be characterised, and penalised, as attempted price fixing.
That means business should be carefully scrutinising their pricing arrangements now, because there is a good chance the ACCC will. And if a penalty of $12.5m is not incentive enough to do this, the penalty could have been higher, and in future cases it may well be.
In this case, the ACCC sought penalties between $17m-$22m in total. It did not however claim and show that Flight Centre had made "gains" from the conduct in question. We think it is likely to do so as a matter of course in future cartel cases, and this would increase the penalty. That's because a gain would raise the maximum allowable penalty per contravention to 10% of the company’s annual turnover connected with Australia, rather than $10m. For most major Australian entities including Flight Centre, a $10m cap on penalty is likely to be lower than 10% of its annual Australian turnover.
Given the ACCC's push for higher penalties to achieve greater general deterrence, and its comments in response to the OECD report, penalties may be greater in the future if the ACCC implements the OECD's recommendations and changes the way it approaches penalty submissions (including using the turnover cap), as it has foreshadowed that it will.
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