14 Dec 2016

Review price parity and principal / agent arrangements now following Flight Centre decision

Price parity or "most favoured nation" clauses in a vertical pricing arrangements could breach Australia's price-fixing laws following the Australian Competition and Consumer Commission's High Court victory this morning (Australian Competition and Consumer Commission v Flight Centre Travel [2016] HCA 49). 

The Court gave separate judgments, and the full impact of the decision on particular arrangements will require much analysis, but this much is clear: its impact goes far wider than the travel industry ‒  these clauses can be found in long-term supply contracts, or those underpinning financial advice, broking, insurance, price comparison sites and online marketplaces. 

And the Court's decision could also potentially affect many principal / agent relationships, as it has found that principals and agents can, in certain circumstances, be in competition against each other, which could mean wholesale changes to the arrangements by which an agent sells the principal's product and sets the price for it. 

The attempt at price parity between Flight Centre and airlines. 

Flight Centre entered into a standard form Passenger Sales Agency Agreement with the International Air Transport Association, which did so on behalf of its member airlines. 

Under this agreement Flight Centre was not required to sell any particular ticket, or even any tickets at all from any of the airlines. It could sell any tickets at any price it chose. The airlines also were not obliged to deal solely with Flight Centre; they could, and did, provide tickets to other travel agents or sell them directly to the public. 

Flight Centre offered customers a "price beat guarantee". Concerned that it was being undercut by the airlines which offered discount tickets directly to customers, and thus forced to sell tickets at a lower price which affected its profit margins, Flight Centre tried to get three airlines to agree to stop offering international airline tickets directly to customers at prices lower than the fares published to travel agents. 

The ACCC alleged that this contravened the ban on price-fixing in section 45A of the Trade Practices Act (now the Competition and Consumer Act 2010 (Cth)). The Federal Court agreed, imposing penalties of $11m, a decision that was then overturned on appeal. The High Court agreed with the trial judge, although on a different analysis of the market. 

Price fixing under the Australian Competition and Consumer Act (CCA) 

Under the CCA, a corporation is prohibited from making a contract or arrangement, or arriving at an understanding, if a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition in an Australian market. 

Under the law as it was at the time (before the 2009 cartel laws were introduced), any contract, arrangement or understanding between parties who were competitors which fixed or controlled prices charged to customers was deemed to be a contravention. 

The critical question in this case was whether Flight Centre was in competition with the airlines in offering airfares to Australian consumers, which meant considering what services were actually being offered and supplied. 

The High Court majority found: 

  • contrary to Flight Centre's arguments,  Flight Centre was in competition with airlines in the market for the supply of international airline tickets because the airlines sell their fares direct to the public; 
  • even if Flight Centre was the airlines' agent (and not all judges thought it was), the Act does not carve out principal / agent arrangements from its anti-competitive provisions. A principal and agent can be in competition with each other; and 
  • Flight Centre's attempt to get airlines' agreement to price parity, if successful, would have fixed or put an agreed floor under air fares, which was a contravention. 

How the Flight Centre will affect price parity / MFN clauses and principal / agent relationships generally 

As the High Court gave separate judgments, with slightly different analyses, its full impact will take some time to reveal itself. What we can say now is: 

  • any principal / agent relationship in which the parties could conceivably be in competition with each other; or 
  • any price parity or MFN clause; 

must be reviewed now.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.