Agency arrangements alright - ANZ and Flight Centre succeed in appeals

In brief

The Full Federal Court today handed down its decisions in two high-profile appeals in relation to ANZ and Flight Centre. Both cases dealt with the issue of distribution arrangements and price fixing. Partner Carolyn Oddie and Associate Theodore Souris look at the implications for business.

The irreconcilable first instance judgments in ANZ and Flight Centre

Previously, the Federal Court had found that ANZ had not contravened the price fixing provisions of the Trade Practices Act 1974, now the Competition and Consumer Act 2010 (the CCA), when it sought to limit the level of refunds that Mortgage Refunds, a mortgage broker services provider, could provide to customers for ANZ home loans. The court held, at that time, that Mortgage Refunds did not compete with ANZ in providing broking services or loan arrangement services.

In contrast, the Federal Court had previously held that Flight Centre had engaged in attempted price fixing, for which it awarded a penalty of $11 million, when on six occasions it attempted to induce various airlines to only supply air fares at a price that:

• it had also offered Flight Centre to sell; and
• was not less than the airfare plus the commission that Flight Centre would be entitled to if it had made that sale.

Flight Centre was particularly incentivised to do this because it was obliged to uphold its 'Price Beat Guarantee' offer under which Flight Centre would better any quote obtained elsewhere.

These cases were virtually irreconcilable, in that while the situations appeared similar, the results were divergent. The Flight Centre case left businesses with significant uncertainty about the scope and limits associated with common agency arrangements. Both cases were appealed to the Full Federal Court and heard by the same panel of judges.

The appeals – did the supplier compete with its agent or distributor?

The key issue in each appeal was whether the supplier, through its internal sales division, was competing with its agents or independent distributors. This was in circumstances where the supplier sold products directly to customers at the same time as selling its products through an agent or independent distributor.

The Full Court of the Federal Court (Chief Justice Allsop and Justices Davies and Wigney):

• allowed Flight Centre's appeal, ordering that the ACCC's application be dismissed; and
• dismissed the ACCC's appeal of the decision in ANZ, confirming the primary judgment.

In the Flight Centre appeal, the Full Court found 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 Full Court found:

…it is artificial to disaggregate or split the direct supply of a flight by an airline into two supplies: the supply of the flight to the consumer and the supply to the airline, by the airline, of a selling or distribution service. …[T]he very notion of self-supply in these particular circumstances is artificial and lacks commercial reality. That is particularly so given the absence of any finding that the airlines had separate or discrete internal divisions that supplied such services.¹

The primary judge erred because he transferred or transplanted the rivalry or competition that he found existed, in a broad sense, into a non-existent market for distribution and booking services. The references to 'friend' and 'foe', which indicated a competitive sentiment, involved rivalry in respect of the market for the supply of international air passenger travel services. Travel agents wanted to sell as many flights as they could on behalf of the airlines to obtain more commission, and the airlines had a natural interest in avoiding this. However, this was not competition in a market in which Flight Centre and the airlines competed.

The Full Court noted that there was a lack of substitutability between any booking services that Flight Centre might provide and any booking services supplied by the airlines. For example, Flight Centre was able to provide advice concerning the availability of flights, ticketing and booking services for a range of airlines, whereas individual airlines could not.

In the ANZ appeal, the Full Court confirmed that ANZ branches did not supply loan arrangement services. Rather, the branches performed a sales or distribution service on behalf of ANZ in the market for the provision of loan products. In addition, the Full Court commented that it was open to the primary judge to conclude that the services provided by brokers and bank branches were not close substitutes. The evidence in relation to 'competition' referred to competition between the distribution channels to be the one to lodge the loan applications on behalf of borrowers, but this competition occurred in the market for the supply of loan products.

A general principle?

Despite these welcome findings, there was a reminder in these judgments that businesses should not be complacent about distribution arrangements.

In both appeal judgments, the Full Court emphasised that the decisions do not establish a general principle that parties in an agency relationship can never be in competition for the purposes of Part IV of the CCA.

The Full Court in the Flight Centre appeal noted that it is possible for a single legal entity to comprise separate economic units that are responsible for different stages of the production process. However, there was no evidence of any internal separation of the distribution and sales function within the airlines.

Therefore, businesses should still be alert to the fact that they could be in competition with their distributors in some circumstances, despite the existence of an agency relationship. These could include:

• where they have a significant separate economic unit that performs similar functions to the agent;
• where several different product markets are involved and the manufacturer competes with the agent in respect of some, but not other, products; or
• where the agent supplies the principal's products and its own house brands that are different to those that it supplies as agent.

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