06 Aug 2015

Flight Centre and ANZ appeals answer price-fixing concerns in dual distribution models

by Michael Corrigan

If your business is an agent or sells through agents, you should check your arrangements on pricing for customers.

Flight Centre's and ANZ's wins on appeal have helped to clarify the law on price-fixing for any agent or distributor which offers and sells services similar to those offered direct to consumers by its principal (Flight Centre Limited v ACCC [2015] FCAFC 104 and ACCC v Australia and New Zealand Banking Group Limited [2015] FCAFC 103).

The decisions have important implications for price parity clauses in travel markets and for other services, including financial advice, broking, and insurance.

The impact on the dual distribution of goods and some other distribution models for services is, however, less clear, as it does leave open the possibility that agents can be found to be competitors of their principal in some circumstances.

Attempts to preserve channel margins

The ACCC alleged that Flight Centre had contravened the price-fixing provisions of the Competition and Consumer Act 2010 (Cth) by attempting to induce various airlines not to offer flights directly to customers at prices less than the net fare that Flight Centre could access from those airlines. The Federal Court agreed, imposing penalties of $11m.

The decision turned on the definition of price-fixing in the Act. Flight Centre isn’t a direct competitor of the airlines in one sense. Like any travel agent, Flight Centre doesn’t supply flights; it offers advice and can negotiate pricing and make the booking.

It was common ground that travel agents did not compete to provide passenger air travel to consumers and therefore did not compete in that market against the airlines. But the trial judge held that the airlines and Flight Centre did compete with each other in relation to providing "distribution and booking services". Flight Centre's conduct was found to be unlawful because it was trying to fix or maintain its agent's margin; it was concerned that its margin would fall, if it had to reduce fares to match a lower price offered by an airline selling directly to consumers.

The trial judge therefore found the "price" which Flight Centre wanted to fix was its agent's margin, not the fare. He inferred airlines themselves competed for this margin, using the ACCC's theory that airlines derive a similar internal margin or "price" when they quote fares direct. This finding was controversial because it depended on an inference that an airline itself provided distribution services to itself for a margin or cost, when it sold direct to the public.

Parallel proceedings were decided by the same bench on the same day in the ANZ case. This case involved a lender (ANZ) which sought to limit the amount of a payment that a mortgage broker could offer to borrowers if those borrowers successfully applied for an ANZ loan through the broker. The Court considered whether the bank and its brokers were competitors in relation to "loan arrangement services" and whether a limitation on rebating commissions, imposed by the bank on brokers amounted to price fixing. There was no dispute that brokers are not lenders in their own right and therefore do not compete as lenders against ANZ (the principal).

Actual, not artificial, markets and competition the focus in price-fixing cases

Ultimately, in neither the ANZ nor the Flight Centre appeals did the evidence support the existence of the particular market pleaded by the ACCC; nor could the ACCC establish competition between the principals and agents in the particular defined markets.

Flight Centre successfully argued on appeal that the ACCC's analysis was artificial, and it was not competing in any relevant sense against the airlines for its agent's margin:

"The primary judge erred because he transferred or transplanted the rivalry or competition that he found existed, in a broad sense, in the market for the supply of international passenger air travel services, into a non-existent market: a market for distribution and booking services. That supposed market was in fact an artificial construct that did not truly reflect the commercial reality of the relevant commercial relationship and dealings." [emphasis added]

The Full Court strongly emphasised the need to apply commercial reality to the arrangements. Market definitions must be based on, amongst other things, a careful evaluation of the evidence concerning the nature and character of the relevant goods or services, the circumstances in which they were supplied or acquired, and the interactions between, and the perceptions of, the relevant suppliers and acquirers of the product.

For example, consumers were not separately supplied with a booking service by Flight Centre when flights were booked booking services were merely an incidental part of buying the flight. It was artificial to find that, when selling flights directly, the airlines were supplying themselves internally with "distribution and booking" services, when there was no evidence of any separate function or recognition of that kind of internal structure within the airlines.

Very similarly, the critical question in the ANZ matter was whether ANZ and the relevant broker competed in a market for the supply of "loan arrangement services". As in Flight Centre, the Court found that it was contrived and artificial to characterise the provision of advice and assistance in relation to loan products as the provision of services in a market separate and distinct from the market for the supply of the loan products themselves.

Finally, the agent and principal must be offering competing services. A central issue was substitutability, in a real-world commercial sense. An airline only quotes its own fares. Flight Centre could quote and compare fares from a number of different airlines. ANZ only provided advice and assistance in respect of its own products. Brokers provided advice and assistance in relation to many different loan products from many different loan providers. The services provided by bank branches and airlines were therefore not considered to compete with the services provided by mortgage brokers and Flight Centre, respectively.

Agent / principal relationships and dual distribution models

Although the Flight Centre and ANZ cases turned on the pre-2009 form of the Act they are still relevant to the current law, particularly cartel law.

The new definition of price-fixing still requires that the parties to the alleged arrangement must be in competition with each other in relation to the supply of the services or product to which their price arrangement relates (but does not refer to any market).

These decisions emphasise that that competition must be real, and properly based, not an artificial or theoretical construct, when applying competition law to commercial arrangements.

For agent/principal relationships, whether an agent/intermediary is a competitor in its own right against its own supplier will turn on how the product or service is supplied and delivered. A distributor may well compete with its supplier, for example if the distributor is selling and delivering the same product to consumers and competing to make that sale. In that case, the distributor cannot agree pricing with its principal.

In this context, the Full Court said that there may be a case where a principal (which has its own distribution division) does compete in the sense required by the Act, with external distribution channels in the market for the supply of the particular product, and so, each case needs to be considered on its own facts.

Check any arrangements on pricing for customers

If your business is an agent or sells through agents, whether in the travel sector or elsewhere, you should check your arrangements on pricing for customers. If there are "most favoured customer"/"MFNs" or price parity clauses, or other obligations to ensure the agent offers the same price as the principal, these decisions prompt a need to review and make sure the arrangement is compliant.

Competition regulators around the world have been focusing in recent times on MFNs and other price parity understandings between agents, and their principals. The risks of getting it wrong are very serious, as this case demonstrates and notwithstanding Flight Centre's and ANZ's appeals were successful.

It remains to be seen whether the ACCC will seek special leave to appeal the Flight Centre decision to the High Court of Australia. If there is no appeal, changes to the Act would need to be made to reflect the ACCC's theory.


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