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Focus: Agents, airlines, and ash – the ACCC's 'A'-list bring less than 'A'-grade results

12 December 2013

In brief: The ACCC has had mixed results with some recent judgments in high-profile competition cases. Partner Jacqueline Downes (view CV), Lawyer Emma Arbon and Knowledge Management Lawyer Julie Playfair report on the decisions, which have important implications for businesses with agency arrangements and substantial market power.

How does it affect you?

  • The different results in the ANZ and Flight Centre cases1 are a cause for concern for businesses with agency relationships, in particular where a supplier sells directly to consumers as well as distributing through an agent. Traditionally, principals and agents in such arrangements are not considered to be in competition with each other. The ANZ case agreed with this approach; however, the Flight Centre case found that they were in competition.
  • The Cement case2 was brought under the previous provisions of the Trade Practices Act 1974 (Cth) (the TPA) relating to misuse of market power before recent amendments broadened their scope. It should therefore be viewed with some caution but does reiterate that businesses with substantial market power can compete to retain their commercial competitiveness, provided that they do not use their market power to facilitate their competitive conduct and do not have a purpose of substantially lessening competition.
  • Although the Cement case saw mixed results for the ACCC, it demonstrates the ACCC's ongoing commitment to bringing actions in relation to perceived anti-competitive conduct, which has been reaffirmed by ACCC Chair Rod Sims.3

The ANZ case

Background

In August 2007, the ACCC instituted proceedings against ANZ Banking Group Limited alleging breaches of the price fixing provisions of the TPA, the precursor to the cartel provisions of the Competition and Consumer Act 2010 (Cth) (the CCA).4 These provisions provided that competitors could not enter into an arrangement or understanding to fix, control or maintain prices. The ACCC alleged that ANZ had attempted to limit the level of refunds that Mortgage Refunds, a mortgage broker services provider, could provide to customers for ANZ home loans.

Mortgage Refunds provided support services to individual brokers operating under its banner, including referring potential customers to those brokers. Once a potential customer applied for a loan, the customer entered an agreement with Mortgage Refunds that provided for a refund to that customer (being a portion of the commission it gained from banking institutions) while the individual broker dealt directly with the bank in relation to the loan application.

The ACCC alleged that ANZ cancelled Mortgage Refunds' accreditation to offer ANZ loans, and offered to enter a new agreement with Mortgage Refunds, under which it would reaccredit Mortgage Refunds on condition that the refund it provided would not exceed the maximum loan approval fee that ANZ might charge to customers via its branches and other internal channels that also offered home loans. This would allow ANZ to match the refund deal offered by Mortgage Refunds if it chose to waive the loan establishment fee.

The ACCC alleged that this condition contravened the price fixing provisions of the TPA. The ACCC also alleged that ANZ had contravened these provisions by giving effect to the agreement with Mortgage Refunds in accepting loan applications from Mortgage Refunds and/or its brokers and paying commissions.5

The decision

The crucial question for the court was whether ANZ and Mortgage Refunds competed with each other in the relevant market. The ACCC alleged that ANZ and Mortgage Refunds competed in the 'Australia-wide market for the supply of loan arrangement services to members of the public by loan providers, franchisees and brokers'6. ANZ disputed this on the basis that mortgage brokers do not offer to supply loans – rather, they provide broking services which primarily involve representing a home loan applicant in its dealings with credit providers such as ANZ, and ANZ, as the loan provider, does not compete with Mortgage Refunds in providing broking services or loan arrangement services.

Justice Dowsett rejected the majority of the ACCC's submissions7, finding that '... brokers met needs which in-house and tied channels did not, and could not, meet'.8 Justice Dowsett characterised the services supplied by those in-house and tied channels, such as ANZ branches and ANZ franchise operators, as providing sales services to ANZ rather than to potential borrowers, whereas the services provided by brokers were to both potential borrowers and to lenders9. His finding that ANZ branches and franchisees did not participate in any market in which brokers provided loan arrangement services to potential borrowers led to the conclusion that ANZ was not in competition with Mortgage Refunds, and that the ACCC's proceedings should be dismissed. The ACCC has appealed this decision.10

The Flight Centre case

Background

In March 2012, the ACCC instituted proceedings against Flight Centre Limited alleging that Flight Centre sought to induce various airlines to enter into price-fixing arrangements aimed at 'maintaining the level of Flight Centre's commissions' in contravention of the prohibition on price fixing in the TPA.

Flight Centre acts as an agent for various airlines, distributing and selling tickets on the airlines' behalf, as an 'international air travel intermediary'11. Agents are free to sell fares at whatever price they choose, provided that they remit the nett amount specified in the electronic reservation system (onto which airlines load their fares) to the airlines once they sell a fare. Flight Centre travel consultants were obliged to uphold the 'Price Beat Guarantee Policy' under which Flight Centre would better any quote obtained elsewhere provided that fare was (publicly) available. Flight Centre also had in place 'preferred airline agreements' with the relevant airlines, under which the airline would pay additional commission to it if it met certain revenue targets.

Each airline also has its own internal sales divisions and websites and uses other small travel agents to sell its tickets. Airlines often offer fares directly through their websites that they do not make available to travel agents.

The ACCC claimed that on six separate occasions between 2005 and 2009, Flight Centre attempted to induce various airlines to enter into an agreement under which the airlines would make any fare the airlines offered directly to the public:

  • also available to Flight Centre to sell; and
  • for sale by the airline at a price no less than the total of the amount Flight Centre must remit to the airlines when it makes a sale plus the commission that Flight Centre would be entitled to if it had made that sale.

The ACCC argued that this conduct was aimed at preventing the airlines from offering prices below that of Flight Centre.

The decision

On 6 December 2013, Justice Logan found that the ACCC had established each of the six contraventions alleged.

In order for Flight Centre's conduct to constitute price-fixing behaviour, the ACCC needed to establish that Flight Centre competed with the airlines. Justice Logan found that Flight Centre competed with the airlines in relation to the distribution and booking of flights, its price being the 'margin' which formed part of the grossed-up fare paid when the flight was sold.12 Justice Logan relied upon the contention that where one party makes the sale, the other is necessarily deprived of the opportunity to make that sale as evidence that Flight Centre and the airlines were acting as competitors. In other words, Flight Centre and the airlines competed for the 'margin' and Flight Centre was attempting to fix, control or maintain that 'margin'.

Flight Centre has announced it will appeal this decision.

The Cement case

Background

In September 2008, the ACCC instituted proceedings against Cement Australia Pty Ltd, Pozzolanic Enterprises Pty Ltd (PE) and others in relation to alleged breaches of sections 45 and 46 of the TPA13. Section 45 of the TPA prohibits corporations from entering into, and giving effect to, contracts and arrangements that have the purpose or effect of substantially lessening competition. Section 46 of the TPA prohibits corporations with a substantial degree of market power from taking advantage of that power for anti-competitive purposes.

The allegations related to contracts entered into by the respondents with four power stations in South East Queensland between 2001 and 2006 for the supply of unprocessed flyash. Flyash is a by-product of coal-fired electricity generation that can be used as a cheap partial substitute for cement in ready-mix concrete. The ACCC alleged that Cement Australia and PE contravened ss 45 and 46 by entering into a contract to obtain a minimum supply of flyash from the power stations despite not having any commercial need for the product.

The decision

Misuse of market power

Justice Greenwood found two relevant markets: an upstream market for the supply of unprocessed flyash and a downstream market for concrete grade flyash14, and that Cement Australia and PE held a substantial degree of power in the downstream market.

Justice Greenwood stated that 'taking advantage of market power' involves a firm with market power engaging in anticompetitive conduct that would not be profitable for a firm without market power. He also confirmed that a firm may legitimately protect its market power without taking advantage of that power: rather the conduct must be materially facilitated by the firm's market power. As such, Justice Greenwood considered that if a profit-maximising firm operating in a workably competitive market could, in a commercial sense, profitably engage in the conduct in question, then it follows that the firm has not 'taken advantage' of its market power.

Justice Greenwood found that, although the purpose of the respondents in engaging in the conduct was to preserve market share and revenue margins, entry into the contracts was not materially facilitated by the respondents' existing market power, as it may have been profitable in a competitive market.

Substantial lessening of competition

Justice Greenwood noted that while s45 is concerned with the 'subjective' purpose of each party, the parties to an agreement did not all need to share a similar purpose. He also noted that the proscribed purpose must be a 'substantial' purpose of the decision maker, notwithstanding that there may also be other purposes involved.15

Justice Greenwood found that the respondents made and gave effect to a number of contractual arrangements that had the substantial purpose of foreclosing rival entry into the market and preventing rival access to the supply of flyash and included provisions that had the effect or likely effect of substantially lessening competition in contravention of s45.

Conclusion

The ACCC's failure to establish misuse of market power in the Cement case is likely to be closely examined in the upcoming 'root-and-branch' review of competition policy by the Coalition government. However, its implications should not be overestimated, given it was decided on the basis of the previous provisions of the TPA before they were expanded.

The Flight Centre and ANZ cases are difficult to reconcile and both are being appealed. We can expect the appeals will be watched with considerable interest, as the decisions mean that businesses will need to closely examine their agency and distribution dealings to ensure they do not breach the new cartel provisions, in particular where a company distributes its products or services through agents and also by direct engagement with customers.

Footnotes
  1. Australian Competition and Consumer Commission v Flight Centre (No 2) [2013] FCA 1313 and Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2013] FCA 1206.
  2. Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909.
  3. ACCC media release.
  4. ACCC media release, ACCC institutes against ANZ Bank over alleged price fixing arrangement.
  5. ANZ case, at [19].
  6. Ibid, at [31].
  7. Ibid, at [565] – [582].
  8. Ibid, at [582].
  9. Ibid, at [636].
  10. ACCC media release, ANZ appeals ANZ Bank decision.
  11. Flight Centre case, at [23].
  12. Ibid, at [112].
  13. Now sections 45 and 46 of the CCA respectively.
  14. Cement case, at [736]- [834].
  15. Ibid, at Pt 42.

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