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Focus: Take care with agency arrangements – Flight Centre decision

14 December 2016

In brief: The High Court today handed down its decision in the high-profile ACCC proceedings against Flight Centre. The High Court allowed the ACCC's appeal from the Full Federal Court, finding that Flight Centre competed with airlines in the sale of international airline tickets and attempted to induce three major airlines to enter price-fixing arrangements. Partner Carolyn Oddie (view CV), Managing Associate Robert Walker (view CV) and Lawyer Darcy McLennan consider the implications.

 
 

How does it affect you?

  • The High Court has qualified the long-held belief that competition rules do not apply to dealings between a principal and its agent. The High Court has confirmed that whether a principal and agent should be treated as competitors for the purposes of the competition rules depends on the circumstances and the precise nature of their agency relationship.
  • The decision creates a degree of uncertainty for businesses in managing their distribution arrangements. Suppliers should be alert to the fact that they could compete with their agents and that the competition rules, specifically in relation to price-fixing, could apply to their dealings with agents. In particular, a principal may be found to compete with its agent where the agent is not constrained to prefer the interests of the principal above its own and where the agent is free to negotiate independently with third parties and to set its own prices.
  • This is a landmark decision in the application of competition rules to agency arrangements. ACCC Chairman Rod Sims has already commented that the decision 'is likely to be particularly relevant when businesses make online sales in competition with their agents'.

Background

Flight Centre sells airline tickets as agent for a large number of airlines and receives commission on these sales. The ACCC alleged that between 2005 and 2009 Flight Centre attempted to induce Singapore Airlines, Malaysian Airlines and Emirates to agree that any particular fare offered by the airlines directly to customers would also be made available to Flight Centre, and that the airlines would not undercut Flight Centre's prices.

On 11 March 2016, the High Court granted the ACCC special leave to appeal the finding of the Full Federal Court that Flight Centre did not compete with the airlines and therefore could not be found to have contravened the prohibition on price-fixing.

For further background please see our Focus on the decision of the Full Federal Court.

The High Court decision

The High Court held that the mere existence of an agency relationship at law does not mean that a principal and agent cannot be characterised as competitors for the purposes of Part IV of the Competition and Consumer Act 2010 (Cth). Rather, the 'factual reality and legal substance'1 of the relationship must be examined. Justices Kiefel and Gageler held that:

to the extent that an agent might be free to act, and to act in the agent's own interests, the mere existence of the agency relationship did not in law preclude the agent from competing with the principal for the supply of contractual rights against the principal. Whether or not competition might exist in fact then depended on the competitive forces at play2.

 

Flight Centre was found to be selling airline tickets in competition with the airlines as it:

  • was not required to prefer the interests of the airlines above its own;
  • was free to set its own prices when selling airline tickets; and
  • was able to negotiate with third parties and independently determine whether to sell tickets to particular customers.

The Full Federal Court found in Flight Centre's favour largely on the basis that there was no market for distribution and booking services in relation to international passenger air travel in which Flight Centre and the airlines competed. The High Court reaffirmed the Full Federal Court's decision that a separate market for booking and distribution services, in which airlines supply distribution services to themselves in competition with Flight Centre, is artificial. The High Court held that the relevant market was the market for the supply to customers of contractual rights to international air carriage3 in which ticketing services provided by Flight Centre and the airlines were substitutable.

Chief Justice French dissented, finding that Flight Centre, as agent, did not act in competition with the airlines.

Penalties will be determined by the Full Federal Court.

Key learnings

The facts of this case are quite specific as the relevant conduct involved the agent (Flight Centre) trying to influence the pricing decisions of its principals (airlines).

Nevertheless, suppliers should take care in managing their distribution arrangements, particularly where they might compete with their distributors (such as online).

Suppliers should review their distribution arrangements that involve agency in light of the decision.

In future, it will be important for suppliers to establish clear agency arrangements from the outset in order to avoid potential issues. In particular, suppliers may wish to consider establishing agency arrangements where:

  • the agent is constrained in the exercise of its authority to prefer the interests of the principal to its own;
  • the agent does not have the authority to set its own prices for goods or services supplied pursuant to the agency arrangement; and
  • the agent is required to follow the principal's directions in respect of whether or not to sell the goods or services to a particular customer.
Footnotes
  1. Australian Competition and Consumer Commission v Flight Centre Travel Group Limited [2016] HCA 49 at 147.
  2. Ibid at 84.
  3. Ibid at 26.

For further information, please contact:

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