Regulatory & Compliance

The recent case of ACCC v Flight Centre [2016] HCA 49 raises important issues for business operating with dual distribution models; that is, businesses engaging in direct and indirect distribution of services. The case serves to highlight the potential for competition compliance risk meaning that businesses cannot now assume that the existence of an agency relationship will mean that distributors are not in competition with one another.

A. Facts of the Case

In providing travel agent services to customers, Flight Centre employed a marketing strategy that involved a ‘price beat guarantee’ that beat the price of any other advertised fare by $1. Between 2005 to 2009, Flight Centre sent emails to international airlines that sold tickets directly to customers at lower than published fares. The ACCC alleged breach of sections 45(2)(a)(ii) and 45A of the Trade Practices Act 1974 (Cth) (now replaced by the Competition and Consumer Act 2010 (Cth)) by their attempt to induce three other airlines to enter into a contract, arrangement or understanding to fix prices, preventing those airlines from discounting the tickets they sold. Flight Centre denied the claims of anti-competitive conduct on their part, arguing that the conduct did not substantially lessen competition.

B. Court Findings on Competition Compliance Risk

At trial, Justice Logan held breach and awarded penalties of $11 million. His Honour identified the relevant market as the market of ‘airline booking and distribution services to customers’. The Full Federal Court allowed an appeal on the basis that the characterisation of the market as a separate market was incorrect, and that Flight Centre and the other airlines were not competing in the same market.

This was appealed to the High Court. By a 4-1 majority, it was found that Flight Centre was in direct competition with the airlines in the market for the ‘supply, to customers, of contractual rights to international air carriage’ or, in other words, a market for ‘international airline tickets’. The court found competition existed regardless of the fact that Flight Centre sold as an agent in that market for each airline. With regards to the matter of agency, in agreeing with the majority Justice Nettle noted at paragraph 130:

‘…although the airline’s interest in Flight Centre selling the airline’s tickets as an agent was to some extent informed by the number of tickets sold by Flight Centre, it was also affected by the amount of the commission which Flight Centre was paid for its services as agent. Contrary to Flight Centre’s submissions, it may be inferred from the fact that the airlines commenced to sell tickets directly to customers that, to the extent that each airline was able to sell tickets directly to customers rather than through Flight Centre as its agent, the airline preferred to do so because it avoided the need to pay commission on those sales. … Plainly enough, Flight Centre and the airlines were in competition for the sale of airline tickets, with the result that an arrangement between Flight Centre and the airlines to fix the prices at which the airlines were prepared to sell when dealing directly with customers would have had or been likely to have had the effect of reducing the level of competition between Flight Centre and the airlines in that market.’

C. Implications for the Future of Competition Compliance Risk

The High Court decision reiterates the need for companies using these sorts of ‘dual channel’ distribution models to carefully consider their conduct under the framework of competition law. That is, it is integral for these businesses to consider if their behaviour may constitute cartel conduct, whether that be through price fixing or another method, such as the allocation of customers. This remains an issue notwithstanding the existence of an agency relationship.

Evidently the Flight Centre case delivers a strong message to businesses operating with a dual distribution model. Businesses should conduct themselves with care in their commercial dealings in order to evade the prospect of engaging in anti-competitive conduct through competition compliance risk.

To find out more about Regulation & Compliance check out our Resources Centre. If you need any further advice about competition compliance risk, please get in touch today.

This article was authorised by Warwick Heeson.

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