26 May 2016

Is an agent in competition against its principal: The High Court to rule in the Flight Centre case

by Michael Corrigan

The implications of the ACCC winning its appeal in the Flight Centre price parity case could potentially outlaw price parity arrangements between principals and agents.

"Parity pricing" arrangements are commonplace in the travel industry between online travel agents and service providers. Both can sell travel packages online direct to consumers but they tend to need each other. Consequently agency contracts commonly include restrictions that one side will not undercut the other when selling direct.

Like competition agencies in the UK and Europe, the Australian Competition and Consumer Commission (ACCC) has been undertaking an investigation into the effects of parity arrangements in Australia since Expedia acquired Wotif in 2014. But the ACCC's pursuit of Flight Centre for attempted price fixing over an agents complaints about "undercutting" on fares by airlines has upped the stakes considerably.

The ACCC may be the only agency in the world which is trying to apply cartel laws to parity pricing arrangements. If successful the consequences will be very significant for agency arrangements generally, not only in the travel sector.

Why the Flight Centre case is so important - and not just for the travel industry

In March this year, the ACCC was granted leave to appeal to the High Court of Australia over the rejection of its case that Flight Centre was seeking to engage in cartel conduct.

This appeal will provide a forum for the ACCC to try to convince the High Court that travel agents should be regarded as competitors with travel providers who sell direct, and not mere agents. If accepted, this view could overturn the conventional view that an agent is not a competitor of its principal, and require wholesale changes to the arrangements by which an agent sells the principal's product and sets the price for it.

What the Flight Centre case is about

Flight Centre complained that various airlines' own web portals were undercutting Flight Centre's quoted travel rates ‒ which was costing Flight Centre money with its "best fares" guarantee.

The ACCC saw this as attempted price-fixing and succeeded at first instance.

The Full Federal Court of Australia emphatically ruled that Flight Centre was an agent and was not competing against the airlines whose flights it was offering.

In response the ACCC's appeal that travel agents are competitors rest on two main arguments:

  • The travel agent is a "competitor" because it is competing with the principal/travel provider to provide a "booking service" to the consumer.

What is this "booking service"? It is described as travel information and assistance provided by a travel agent about the range of flights available. It is said that each airline offers similar assistance and information about its own flights (only) which is a competing service. The ACCC"s case against Flight Centre has sought to define this separate booking service and to impute a "price" for it, which would be "fixed or controlled" by a price parity arrangement and, therefore, unlawful price fixing between competitors.

  • The alternative theory is that the travel agent is in a contractual sense a competing provider of the same air travel (and presumably, the same accommodation) as its service providers since the travel agent is in a position to provide a consumer with the same contractual rights to fly with the airline as the airline offers itself (or the same rights to stay in a hotel, as the hotel can directly). This arguments rests on the contractual rights purchased by the consumer, rather than the question of who actually physically supplies the service in question.

What the ACCC's view mean for the principal / agent relationship

The ACCC appeal is based on the idea (developed in the European Union) that an agent can be treated as separate from its principal and as a competitor in an economic sense, if the agreements between them confer upon the agent sufficient independence to allow it to accept the financial risk of selling the service or performance of the agreement with third parties, in particular by determining the price of which the service is to be purchased by the consumer. Those kinds of agents are sometimes described as the "merchant model".

However, the ACCC case does not go so far as to argue that a traditional agent which is paid by commission, and required to strictly follow pricing and product instructions given by the principal, will be a competitor of its principal.

One difficulty with the ACCC's position is that its theories of why agents may be a competitor of the service provider appear to apply equally to both commission or traditional agents as well as the "merchant agent" which has pricing freedom. In both cases, the alleged "competing booking service" is offered by the agent and the agent can provide the consumer the same contractual rights to receive the underlying product- air travel or accommodation as the principal.

Australian cartel law requires that to determine if two parties are competitors, one must disregard any contract or arrangement between them. That means, in order to work out if an airline is competing with its travel agents, you should disregard the agency agreement (which may control the fares which the agent is permitted to charge) On the ACCC's theory, that may mean even a traditional agent is a competitor with its principal and therefore could be guilty of collusion.

These arguments failed in the Federal Court. The Court rejected the idea that there was a separate and competing "booking service" offered by agents, as being an artificial construction. The court held, that any function involving the sale of a service inevitably involves some element of advice and assistance in order to make the sale occur. Those activities have never been used or regarded as a separate service of themselves. The ACCC recently lost a similar case against ANZ on similar reasoning in the mortgage refund case which concerned the question of whether the Bank was competing with a mortgage broker which could offer loans from the Bank. The ACCC chose not to appeal that loss..

Looking forward to the High Court decision

The High Court is yet to hear argument in the Flight Centre matter and so a decision is not expected until sometime in the next 12 months.

Until the Court rules on the issue, there is an element of uncertainty governing the price parity arrangements under Australian law in the travel industry, or whether form of price parity arrangement will survive the Flight Centre litigation.


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