The High Court recently handed down a judgement finding that a flight booking agency was in breach of competition law, by attempting to engage in price fixing for ticket sales with airlines with whom it was in competition. In this article, Susan Moran, Principal of our dispute resolution team considers the importance of principals and agents structuring their activities and relationships so they either, (1) are not in competition with each other, or (2) if they are in competition, ensure they act independently to set prices for goods and services.
- On 14 December 2016 the High Court handed down a decision which found that Flight Centre Travel Group Ltd (Flight Centre) had attempted to induce Malaysian Airlines, Emirates and Singapore Airlines (the Airlines) to engage in price fixing.
- The case was brought by the Australian Competition and Consumer Commission (ACCC), who alleged that Flight Centre had breached the Trade Practices Act 1974 (Cth) (TPA), as it was then known. The relevant prohibitions and provisions remain in the Competition and Consumer Act 2010 (Cth) (CCA).
- Flight Centre sold fares of the Airlines to customers on the basis that the Airlines would make flights available for sale on an electronic booking system called the Global Distribution System (GDS).
- Flights on the GDS had a published net value. Flight Centre was free to determine the price at which it sold the fare to the customer, and would retain as commission the difference between the net value, and the price at which the fare was sold. The net value of the flight would be paid to the relevant airline. Accordingly, Flight Centre was free to sell flights at a loss.
- The Airlines were free to offer flights directly to customers at a price lower than that published on the GDS, and were not obliged to make all seats available on the GDS.
- Flight Centre also offered a ‘Price Beat Guarantee’ under which they would beat the price of any Australian travel agent, website or airline by $1 and give the customer a $20 voucher. As stated in the High Court judgement ‘The price beat guarantee made Flight Centre commercially vulnerable to an airline choosing to offer tickets directly to customers at a discount.’.
- Flight Centre sent emails to the Airlines over a period of time in which it sought confirmation that the Airlines would not sell fares directly to customers for a price that would ‘undercut’ Flight Centre in relation to its online ticket sales (the Emails). In some instances, Flight Centre threatened to stop selling the relevant Airline’s tickets if it did not do so.
- The ACCC alleged that, by sending the Emails, Flight Centre contravened provisions of the TPA by attempting to procure the Airlines to enter arrangements which had the purpose, or were likely to have the effect, of fixing the price for flights. The alleged price fixing was in breach of sections 45 and 45A of the TPA, which makes it an offence to propose an arrangement to fix prices with a competitor.
Were Flight Centre and the Airlines in competition?
The central question before the High Court was whether Flight Centre and the Airlines were in competition with each other, and what was the relevant market.
In answering this question, the High Court first examined the relationship between the Airlines and Flight Centre. Flight Centre had entered a separate agency agreement with each of the Airlines which established that Flight Centre was the agent of each of the Airlines, who each acted as principal.
Flight Centre argued that it could not be in competition with the Airlines due to this agency relationship, which allowed it to sell flights on behalf of the principal. The High Court rejected this argument holding that there is ‘potential for competition to exist between an agent and a principal’, and that this potential needs to be considered against the background of the general law of agency. The High Court discussed two factors of the general law of agency which are relevant to competition:
- Firstly, that the duty of loyalty which may be owed by an agent to a principal could see ‘an agent lacking authority to negotiate’ and thus be unable to engage in competition with the principal; and
- Secondly, an agent constrained by a contractual obligation to act only in the interests of the principal would ‘lack both the requisite autonomy and the requisite incentive’ to act in competition with the principal.
However, where an agent is free to exercise its discretion to act in its own interests, as Flight Centre was in the present case, the mere existence of an agency relationship does not preclude the agent from competing with the principal. The High Court held that as Flight Centre was able to determine the price at which they sold the Airline’s tickets, and were not required by contract to prefer the Airline’s interests, the relevant competition existed between the parties.
The High Court held that the market in which the competition existed was the ‘market for supply, to consumers, of contractual rights to international air carriage’, with Flight Centre and the Airlines competing with all sellers of these tickets, including other airlines and other travel agents.
Having established that the relevant element of competition was present, the High Court found that on the basis of the Emails, Flight Centre was in breach of sections 45 and 45A of the TPA, which prohibits proposing to enter an arrangement to fix prices with a competitor.
The implications of the High Court’s decision are significant for business, particularly those businesses who use a ‘dual distribution’ model, involving direct and indirect distribution of goods or services. There is a real risk that ‘principals’ and ‘agents’ in such a relationship may be found to be ‘competitors’, in which case they must be careful to ensure they do not engage in price fixing. It is therefore critical that the parties structure and manage the relationship so that:
- they are not in competition; or
- if they are in competition, they refrain from collaborating or engaging in any behaviour which could be construed as price fixing. They should ensure that they act and communicate as ‘supplier’ and ‘distributor’ and not as ‘suppliers of goods or services to customers’.
As reinforced by the High Court in this judgement, the terms of the contract between the ‘principal’ and ‘agent’ is important in determining whether the parties compete with each other within their given market, as is their actual conduct.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.