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Flight Centre Ltd v ACCC

Note: in August 2015 the ACCC announced it was seeking special leave of the High Court to appeal the decision of the Full Federal Court. On 11 March 2016 the High Court granted special leave to appeal. The appeal was heard on 27 July 2016.

On 14 December 2016 the majority of the High Court (French CJ dissenting) upheld the ACCC's appeal. Some relevant extracts from the decision are provided below. See also my blog on this case for an overview of the findings and some comments.

 

Summary | Judgment at First Instance | Appeal (Full Crt) | Special Leave | Appeal (High Court) | Application to stay penalty |
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Summary

Background

Flight Centre provides travel agent services to customers, including booking international air travel as agents for certain airlines for which it received commissions. Customers could also purchase air travel directly from airlines. There was evidence that direct internet sales from airlines was rising during the relevant time period, but also that each of the relevant airlines sold approximately 80-85% of flight tickets through agents. The relationship between Flight Centre and the airlines was that of principal and agent (para 21 primary decision)

Airlines made published fares available to agents through an electronic reservation system - the Global Distribution System (GDS). Flight Centre would collect fares that it sold, remit the nett amount to the airline and retain the balance of the fare as commission. It was free to set the price at which it sold tickets to the consumer; it could, for example, sell at less than the published fare with the result that it would retain less commission (or even sell at a loss if it wished to do so) (para 17 appeal). Flight Centre could also derive additional ('back-end' commission) through 'preferred airline agreements' (typically incentive-based), which it entered into with each of the three relevant airlines - Singapore Airlines, Malaysia Airlines and Emirates. [para 18 appeal]

Not all seats were made available for sale by airlines, with some held back for promotions, and airlines could (and did) offer flights for sale directly at a price less than that published for agents on the GDS. The Full Court noted that it appeared this is what 'precipitated the actions of Flight Centre that were the subject of the alleged contraventions.' [para 24 appeal] In particular, as Flight Centre offered a 'price beat guarantee', pursuant to which it would better any advertised fare by $1 and give the passenger presenting evidence of the cheaper flight a $20 voucher, it would make a loss if airlines offered cheaper flights than the fares made available to agents via the GDS.

Claims

The ACCC alleged that Flight Centre attempted to induce three airlines (Singapore Airlines, Malaysia Airlines and Emirates) to enter into a contract, arrangement or understanding to fix, control or maintain prices for air travel and that this contravened s 45 with the aid of s 45A (which, at the time, deemed certain price fixing conduct between competitors to substantially lessen competition for purposes of s 45). This involved a series of emails whereby Flight Centre attempted to address problems it experienced associate with the airlines discounting their direct sales [para 28 appeal]

Flight Centre denied the claim, arguing 'that there can be no lessening or likely lessening of competition in circumstances where the provider of the air travel remains the same whether that travel is sold to a retail consumer directly by the airline or for that same airline via a travel agent such as Flight Centre' and that, 'in attempting to have the airlines concerned allow it to access international air travel fares at the same price as the airlines concerned sold such travel by direct retail sale, it was attempting to induce them not to lessen but to increase competition.' [para 7 trial judgment]

The details of the alleged attempts are set out from para 81 of the trial judgment. They essentially involved correspondence the ACCC alleged had the effect of proposing that the relevant airlines make an arrangement or understanding with Flight Centre that the airlines would make available any fare they offered online and that that fare would be no less than the nett fare plus the Commission Flight Centre would be entitled to receive if they had sold the fare [see para 87 trial judgment].

For example, in the first email considered, sent in response to a discount online promotion by Singapore Airlines, Flight Centre expressed concern at the discounting practice, noting that it resulted in significant losses because customers were requiring the discounted prices to be matched, and questioning why Singapore Airlines 'would want to undermine' Flight Centre's initiatives and asking about the Airlines' future intentions and commitment to the agency distribution network.

Trial decision and penalties

Justice Logan held that Flight Centre was in competition with airlines for distribution and booking services.

In addition, Flight Centre had attempted to induce the making of a contract, arrangement or understanding which would remove 'air fare differentiation so as to eliminate or reduce competition by a substitute, an airline, for the retail or distribution margin for distribution and booking services.' [para 197] In so doing, Flight Centre 'sought at least to maintain or control that margin and that was the likely effect of its attempts. Its conduct was an attempt to induce a contravention of s 45 of the TPA, as that section is read with s 45A' [para 197]

Flight Centre was ordered to pay $11m for six incidents of attempting to induce price fixing in contravention of s 45.

Appeal (Full Federal Court)

Flight Centre filed a notice of appeal on 17 April 2014 and the ACCC cross-appealed in relation to penalty on 8 May 2014.

On 31 July 2015 the Full Federal Court delivered judgment; Flight Centre was successful in its appeal and the ACCC ordered to pay costs. The decision was unanimous.

The Full Court found that there was no separate market for 'booking and distribution services to customers', with the result that Flight Centre did not compete with the airlines in that alleged market. The Full Court did, however, leave open the possibility that parties to an agency relationship may be found to be in competition in appropriate cases.

The ACCC's cross-appeal on penalties was dismissed.

Appeal (High Court)

On 11 March 2016 the High Court granted special leave to appeal. The hearing took place on 27 July 2016.

Judgment was delivered on 14 December 2016. By 4-1 majority (Chief Justice French dissenting) the Court allowed the appeal.

The majority considered that there was a market in which the parties competed, although different from the trial judge in their definition of that market. As a result, the requirements of s 45A (the relevant provision at the time) were satisfied and the agreements were deemed to substantially lessen competition in contravention of s 45.

 

Judgment at first instance

The market and competition

Note: as the relevant conduct pre-dated the changes to the cartel laws, the claims related to the Trade Practices Act ss 45 and the deeming provision, s 45A (relating to price fixing). However, issues relating to market, competitors etc remain relevant to the current provisions.


In brief

The core issue was whether airlines competed with travel agents in a relevant market. The ACCC alleged several alternative markets in which they alleged Flight Centre competed with airlines and other travel agents:

[para 4 appeal decision] the market for the supply of international air travel services, the market for the supply of distribution services to airlines by internal sales divisions of airlines and travel agents, and the market for the supply of booking services to customers by internal sales divisions of airlines and travel agents.

Justice Logan concluded that there was a 'market for distribution and booking services in respect of available international air travel' [para 137] and that Flight Centre competed with airlines in this market.

Preliminary

Justice Logan noted that 'international passenger air carriers' relied, in part, on travel agents to promote and deal with bookings for customers [para 21] and that:

[para 21] Characterisation of exactly what Flight Centre and the airlines "supply" and to whom and in what market are key issues in this case.

The ACCC alleged that these services should be described as 'distribution services'.

Flight Centre as international air travel intermediary

After describing the services provided by Flight Centre, Justice Logan noted that it 'performed the role of an international air travel intermediary'. In offering particular flights, it did so on behalf of the relevant airline; in booking the air travel it did so on behalf of the customer. [para 23] His Honour then set out extensive evidence of the operation of travel agents (including the way in which they access and publish fares provided to them by airlines) and the other means by which customers might purchase air travel, noting the 'discernible trend towards the ever greater use of the internet' (para 29). His Honour noted that airlines offered fares for purchase directly to customers through their websites and that often the fares they made available would include fares not available to travel agents; his Honour considered that the 'absence to travel agents of comprehensive availability during the material period is a crucial fact in the present case.' [para 37]

At para 105 Justice Logan noted that:

Flight Centre put forward (para 28, Defence) that the relevant market was the market for the supply of international air passenger services. That market was but one of a number of alternative markets postulated by the Commission. Others were a market for booking services in respect of air travel and a market for the distribution of air travel.

He then asked [para 106]

Was the market in which [the emails were sent], as Flight Centre’s contended, aptly described as "the market for the supply of international air passenger services"? Or was so to describe the market to conflate separate but closely inter-related markets, a market for the provision by air carriers of air travel itself, i.e. a flight between given destinations and a market for the distribution and a market for the distributing to the would-be passenger/consumer of the flights made available by air carriers and the booking of the same?

Definition of market in the Act

His Honour then discussed [para 108] the definition of Market in s 4E of the Act, endorsing the views expressed by Justice French in AGL and the Tribunal in Re Tooth and continued:

[para 109] Thus, a market is not an artificial economic construct but rather a place, actual or nominal but recognisable not just by economists but also by its participants, be they suppliers or consumers, in which forces of supply and demand interact in the conduct of trade, a profession or commerce.

Justice Logan then referred to evidence given by Dr Vincent Fitzgerald (the only economist whose evidence was tendered). Dr Fitzgerald opined that travel agents compete with airlines at the retail level of the international travel market (para 110). After spending some time cautioning about the use of 'economic' descriptions like 'horizontal' and 'vertical' (para's 111-112) his Honour made the following statement, which takes some effort to comprehend:

[para 114] ... I do not accept that the Commission has not established that Flight Centre did not propose a provision which would prevent the airlines concerned from selling their air fares below a specified floor. The repeated exhortation by Flight Centre in correspondence with the airlines not to “undercut” or “undermine” is pregnant with just such a provision. ...

Competitors in market for distribution and booking services

In assessing the market his Honour also held that the question of whether the parties were competitors was a question of fact:

[para 120] It was put on behalf of Flight Centre that whether Flight Centre and the airlines in question were in competition was a question of law and that, as a consequence, its subjective opinions were not relevant. I reject this submission. The meaning to give to “competition” as defined for the purposes of s 45 by s 45(3) of the TPA and, within that definition, to the term “market” as defined by s 4E of that Act is a question of law. Whether, as so construed, there is competition in any market entails findings of fact. In the making of those findings of fact, “[t]he views and practices of those within the industry can often be most instructive not only on the question of achieving a realistic definition of the market but also on the question of assessing the quality of particular competitive conduct in relation to the level of competition and the impact of its cessation”: Rural Press ...

Justice Logan held that there was a 'market for distribution and booking services in respect of available international air travel.' [para 137] and that Flight Centre was competing with airlines in this market:

[para 142] ... airlines could, and did, make the availability of air travel known directly, or they could, and did, avail themselves of the distribution network of third parties such as Flight Centre so as to make that air travel availability known to would-be passengers. When it is recalled that the s 4E definition of a "market" materially includes "services that are substitutable for, or otherwise competitive with, the firstmentioned … services" it can be seen that the existence of these alternatives highlights the accuracy of Flight Centre’s own in-house understanding, which was that the airlines also were its competitors. They were competitors not because Flight Centre was also a supplier of air travel but rather because an airline could, if it chose, make the knowledge of the availability of its flights known directly to would-be passengers and undertake directly with them the booking of those flights. These were services which were substitutable for those provided by a travel agent such as Flight Centre. ... When they engaged in this practice of substitution the airlines became competitors in "the downstream or distribution functional level of the overarching market for international travel and ancillary products". What the evidence also demonstrates is that the availability of the internet as a means of distribution and booking facilitated that substitution.

[para 144] ... If the supplier of goods or services has an ability to “cut out the middle man” and deal directly with a consumer of those goods or services, instead of that dealing being undertaken by that middle man, that supplier is, to the extent it avails itself of that ability, in competition with that middle man. ...

[para 146] ...Flight Centre and the airlines compete for "the retail or distribution margin". ...

Price fixing

The ACCC alleged that “Flight Centre attempted to induce Singapore Airlines, Malaysia Airlines and Emirates’ to make a contract, arrangement or understanding containing a price fixing provision (para 2 appeal decision).  In particular, they alleged that the provision would have stopped airlines offering flights to customers and prices “less than the nett fare that the airlines made the flights available to Flight Centre, plus Flight Centres’ commission or margin” (para 3 appeal decision).

On the issue of whether or not the conduct fixed, controlled or maintained prices for purposes of s 45A:

[para 149] ... Any contract, arrangement or understanding which fixes, controls or maintains the fare for that air travel so that it is price neutral as between the fare obtainable by a would-be passenger via an intermediary and that available directly from the airline is inherently likely, given standing arrangements in relation to remission only of the nett fare to the airline, to fix, control or maintain that intermediary’s retail or distribution margin. It is that margin which, as I shall explain in more detail shortly, is the price for the distribution and booking service. Further, though Flight Centre does not supply air travel, the air fare price neutrality which I have mentioned does carry with it the aggravating, adverse consequence of denying to a would-be passenger that lower fare for the air travel which the airline supplies.

'Likely'

His Honour did not find it necessary to reach a concluded view on the meaning of 'likely' (because on any view it would be satisfied here) in ss 45 or 45A, but noted the following:

[para 150] I have used the word "likely" in the preceding paragraph advisedly, for it is a word that the TPA materially employs both within the definition of “exclusionary provision” in s 4D as well as within the text of s 45 and s 45A themselves. Quite what the word "likely" means in the TPA has been left an open question at intermediate appellate level for over 30 years, from Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 42 FLR 331 (Tillmanns Butcheries) to Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297. In AGL French J, at [342] to [348] reviewed the divergent views as to the meaning to be given to the word "likely" in the TPA and concluded that the weight of authority favoured construing it as meaning a "real chance" rather than "more likely than not". So much ... may be accepted but ... I do not consider it necessary in the circumstances of this case to express a concluded view as to the meaning of the word. That is because, even if it does mean "more likely than not" I consider that the inherent likelihood to which I have referred in the preceding paragraph obtains in this case.

'Price'

There was no issue that there was a relevant 'price' in this case - His Honour noted the following on the issue:

[para 151] The TPA defines (s 4) "price" in an inclusive way so as to include a charge of any description. Beyond that, it offers no assistance ... . In Australian Competition and Consumer Commission v Dell Computer Pty Ltd (2002) 126 FCR 170 Emmett J opined, at [64] that the "obvious purpose" of the inclusive reference in the definition of "price" in s 4 was "to make it clear that the word is to apply not only to a money consideration payable for a sale, or other supply, of goods, but also to a money consideration payable for the provision, or other supply, of services" (emphasis in original). ... It is not necessary in the circumstances of this case to consider whether "price" can embrace something other than money consideration for either goods or services. In this case, the money consideration was at the very least the retail or distribution margin retained by Flight Centre with the airline’s permission from the gross fare paid by the would-be passenger. That was the price the airline paid for the distribution and booking service provided by Flight Centre. That was a transactionally specific consideration for that service. In addition, in transactional aggregate, Flight Centre might also become entitled to other consideration from an airline under a preferred airline agreement."

Fixing, controlling or maintaining

[para 152] It would be sufficient, in order to engage this element of s 45A, that a contract, arrangement or understanding had the purpose or had or was likely to have the effect, as the case may be, of fixing, controlling or maintaining, or providing for the fixing, controlling or maintaining of, that transactionally specific retail or distribution margin. Even were the matter to be viewed in aggregate, the component of the overall money consideration paid by an airline represented by transactionally specific retail or distribution margins and thus the total consideration would at least be fixed, controlled or maintained or likely to be fixed, controlled or maintained by any contract, arrangement or understanding which fixed, controlled or maintained the fare for the air travel so that it is price neutral and thus fixed, controlled or maintained the retail or distribution margin able to be retained by Flight Centre.

Attempt to induce

Justice Logan noted that Flight Centre was not charged with making a contravening CAU, but only with attempting to induce each airline to enter into a CAU. He therefore considered what constituted an 'attempt to induce'. He noted that in Trade Practices Commission v Parkfield Operations Pty Ltd (1985) 7 FCR 534 at 539-540, the Full Court expressed the view that it was not 'necessary for any arrangement to be in place, or readily able to be effected, with the other retailers' for there to be an attempt to induce [para 154]. It is sufficient if there is one party seeks to persuade another into an agreement to increase prices. At para 155 his Honour also referred to the observations made by Justice Goldberg in ACCC v SIP Australia Pty Limited [2002] ATPR 41-877 at [112]:

An attempt to induce particular conduct can take a number of forms. As is made clear by s 76(1)(d) of the Act, an inducement may occur although no threat or promise is involved. Section 76(1)(d) of the Act empowers a court to impose a penalty where a person has induced or attempted to induce a person to contravene a provision of the Act "whether by threats or promises or otherwise". What is required for an inducement is that there be an affirmative or positive act or course of conduct directed to the person who is said to be the object of the inducement. Accordingly "mere persuasion, with no promise or threat, may well be an attempt to induce": The Heating Centre Pty Ltd v Trade Practices Commission (1986) 9 FCR 153 at 164. See also Yorke v Lucas (1983) 49 ALR 672, at 681-682 (affirmed on appeal (1985) 158 CLR 661).

Applied to this case, the email to Singapore Airlines:

[para 156] [The] email was directed to persuading Singapore Airlines no longer to "undermine" or "undercut" Flight Centre by offering lower air fares directly to the public than those available Flight Centre via the GDS. His reference to Singapore Airlines not being able to be both "friend and foe" is particularly telling. It is quite obvious from this reference to "foe" in the email that he viewed Singapore Airlines as a competitor of Flight Centre which, by undercutting or undermining by direct sale the fare for air travel which Flight Centre could otherwise sell on behalf of the airline at a higher fare, was eliminating or reducing Flight Centre’s retail or distribution margin income.

[para 157] [The email] was deliberately sent to the end of persuading Singapore Airlines to stop undercutting or undermining Flight Centre. That is the essence of what on behalf of Flight Centre Mr Burgess knowingly set out to achieve and in these circumstances it is nothing to the point that the email is lacking in fine detail. The latter is not required to establish an attempt to induce. In seeking to persuade Singapore Airlines to do this Mr Burgess was attempting to induce that airline at least to enter into an arrangement or understanding, if not a contract, to an end which would fix, control or maintain Flight Centre’s retail or distribution margin in the manner explained. That was his purpose and that was the likely effect of any such arrangement or understanding.

[para 158] ... There is merit in the Commission’s submission that the purpose or effect of what on behalf of Flight Centre, Mr Burgess attempted to induce Singapore Airlines to do was to put a floor under that margin. If the constituent elements of the expression are separately to be applied, then at the very least the purpose or likely effect of the arrangement or understanding proposed in this email was to “maintain” or alternatively to “control” Flight Centre’s retail or distribution margin, if not also to “fix” it. 159 Once the purpose or likely effect of this email is appreciated

Justice Logan therefore held that the email to Singapore Airlines did contravene s 45 because it carried with it '

[para 160] ... the invitation to reach an agreement or understanding in respect of air fares such that they:

(i) would also be made available to be purchased through Flight Centre (so Flight Centre could be "competitive"); and

(ii) would be sold by Singapore Airlines at a total price, including any charge for its booking services, of no less than the total of:

(a) the nett fare; plus

(b) the commission that Flight Centre would be entitled to be paid for its services if Flight Centre had sold that fare to a customer (so that there would be no undercutting and so as to maintain or control Flight Centre’s retail or distribution margin).

Such a provision is deemed, as a result of s 45A, to 'have the purpose, or to have or to be likely to have the effect, of substantially lessening competition' [para 161].

For similar reasons, other emails sent to Singapore and the other Airlines were also found to contravene s 45.

On the meaning of 'supply' and its application to air travel

Flight Centre claimed that its conduct could not amount to an attempt. Justice Logan responded:

[para 121] Notwithstanding its manifest, internal understanding that it was in competition with airlines such as Singapore Airlines, Malaysia Airlines and Emirates, Flight Centre submitted that its conduct could not amount to an attempt to induce a contravention of s 45 of the TPA (as construed and applied in light of s 45A of that Act). Behind this superficially startling submission lay the salutary reminder ... that the elements of the contravening conduct are those specified in the language employed by Parliament, not economic theorists or business analysts. This submission was well and attractively developed by its counsel, particularly by analogy with statements made in ... Castlemaine Tooheys ...

[para 122] In essence, the submission was that the Commission’s case was predicated upon an impermissible disaggregation of what was supplied. All that was supplied, so it was submitted, was the flight, the air travel. Services such as the notification via travel agents or otherwise of the availability (distribution) and the booking of that flight were, it was submitted, wholly ancillary and not susceptible of separate characterisation from the service to which they were ancillary. In short, there was but one market, that for international air travel; and the suppliers in that market were the airlines either directly or by their agents. In that market, so the submission went, Flight Centre was not a competitor, for how could it be when what its endeavours yielded was air travel supplied by its principal, the airline, not it? Further, it was submitted that the Commission’s case was predicated upon a fiction, which was that an airline, in selling directly, supplied to itself services such as distribution of available air travel and flight booking.

His Honour then discussed Castlemaine Tooheys in some detail (which his Honour distinguished from this case) and the meaning of 'supply' as it appears in the Act - including the following:

[para 131] ... it may readily be accepted that the inclusive qualities in the definition of the word "supply" confirm what its breadth of ordinary meaning would suggest, which is that it is not necessary for a person to be in a contractual relationship with a consumer in order for that person to be a supplier of a service to that consumer. ... [The authorities] do not, in my view, support a further extension of the embrace of the word "supply" such that, in the ... context of s 45 and s 45A of the TPA, where "supply" and "acquire" are not generally augmented by the adverbs, "directly or indirectly", procuration or facilitation by an agent of a service (the air travel) provided by that agent’s principal is also a “supply” of that service by the agent.

[para 133] ... I do not consider that there is open, from the limited use of the adverbial phrase “directly or indirectly” in s 45 and s 45A, to construe the words "supply" and "acquire" on the basis that there is a necessary implication that, where they appear in s 45(3), they carry with them that adverbial augmentation of meaning and application. Further, to construe the words "supply" and "acquire" as not implicitly extended by "directly or indirectly" does not render either s 45 or s 45A devoid of operation; much less render those provisions absurd.

[para 135] The long and the short of it is that, giving full voice to the breadth of meaning which the word "supply" carries, it is the airline, the operator of the aircraft which supplies air travel, not an agent such as Flight Centre. Flight Centre neither operates nor charters aircraft.

Conclusion

His Honour concluded:

[para 197] In summary, what is revealed is not an attempt induce the making of a contract, arrangement or understanding with respect to the supply of international air travel but rather one directed to the end removing air fare differentiation so as to eliminate or reduce competition by a substitute, an airline, for the retail or distribution margin for distribution and booking services. In this way, Flight Centre sought at least to maintain or control that margin and that was the likely effect of its attempts. Its conduct was an attempt to induce a contravention of s 45 of the TPA, as that section is read with s 45A.

Flight Centre was ordered to pay $11m for six incidents of attempting to induce price fixing in contravention of s 45 occurring between 2005 and 2009 (prior to the introduction of the new cartel laws). The penalty comprised 4 x $2m penalties and 1 x $3m penalties. In respect of the first contravention, Justice Logan held that, as it occurred more than six years prior to commencement of proceedings, no civil penalty was recoverable (s 77). The higher penalty for one of the contraventions recognised 'Mr Turner’s direct, personal involvement in that contravention.' (para 60)

Justice Logan also considered the fact that some contraventions occurred prior to the increase in civil penalties which came into force on 1 January 2007; however, procedural failures prevented higher penalties from being considered (at para 25) 'Neither as originally cast nor by permitted amendment did the [ACCC's] statement of claim contain an allegation of any material fact necessary to engage a maximum penalty greater than $10 million in respect of any of the alleged contraventions.'

On appeal the ACCC argued these penalties were manifestly inadequate; however, the Full Federal Court upheld Flight Centre's appeal against the finding that they had contravened the Act, with the result that the ACCC's cross-appeal on penalties was dismissed

Penalties

Flight Centre was ordered to pay $11m for six incidents of attempting to induce price fixing in contravention of s 45 occurring between 2005 and 2009 (prior to the introduction of the new cartel laws). The penalty comprised 4 x $2m penalties and 1 x $3m penalties. In respect of the first contravention, Justice Logan held that, as it occurred more than six years prior to commencement of proceedings, no civil penalty was recoverable (s 77). The higher penalty for one of the contraventions recognised 'Mr Turner’s direct, personal involvement in that contravention.' (para 60)

Justice Logan also considered the fact that some contraventions occurred prior to the increase in civil penalties which came into force on 1 January 2007; however, procedural failures prevented higher penalties from being considered (at para 25) 'Neither as originally cast nor by permitted amendment did the [ACCC's] statement of claim contain an allegation of any material fact necessary to engage a maximum penalty greater than $10 million in respect of any of the alleged contraventions.'

On appeal the ACCC argued these penalties were manifestly inadequate; however, the Full Federal Court upheld Flight Centre's appeal against the finding that they had contravened the Act, with the result that the ACCC's cross-appeal on penalties was dismissed

 

Appeal (Full Court of the Federal Court)

The appeal

On 17 April 2014 Flight Centre lodged an appeal against the Federal Court's judgment in ACCC v Flight Centre Limited (No 2) [2013] FCA 1313 and against the penalties subsequently imposed. The grounds for appeal related to the 'the primary judge’s characterisation of the services supplied by the airlines and Flight Centre, and the finding that the airlines and Flight Centre competed in a market for the supply of distribution and booking services. In relation to penalty, Flight Centre’s sole appeal ground is that the pecuniary penalty imposed by the primary judge is manifestly excessive.' [para 6 appeal]

On 8 May 2014 the ACCC lodged a cross-appeal in relation to penalties, claiming the $11m penalty imposed on Flight Centre did not provide adequate deterrence.

On 31 July 2015 the Full Federal Court upheld Flight Centre's appeal and dismissed the ACCC's cross-appeal.

The decision

The Full Federal Court concluded:

[para 8] ... Flight Centre’s appeal should be allowed and the ACCC’s crossappeal should be dismissed. The primary judge erred in finding that Flight Centre and the airlines competed in a market for distribution and booking services. The impugned conduct in fact took place in the market for the supply of international passenger air travel, a market in which (as the primary judge found, and the ACCC does not dispute on appeal) Flight Centre acted as agent for, and not in competition with, the airlines.

Reasons

The Full Federal Court was required to consider both whether the parties competed in a relevant market (which was necessary in order to trigger the operation of the price fixing deeming provision in s 45A) and whether or not the conduct alleged amounted to price fixing (or attempted price fixing) pursuant to s 45A. At the relevant time s 45 prohibited contracts, arrangements or understandings having the purpose or effect of substantially lessening competition. Section 45A deemed certain price fixing arrangements between competitors to have the requisite purpose or effect.

Price fixing/anti-competitive conduct

The primary judge found that Flight Centre engaged in the alleged anti-competitive conduct in contravention of section 45. It was not necessary for the Full Court to consider this given their finding that the parties were not competitors in a relevant market.

Briefly, the Full Court observed that the:

ACCC’s pleaded case as to how the impugned conduct (the various proposed agreements with Singapore Airlines, Malaysia Airlines and Emirates), lessened or had the purpose or effect of lessening, competition in these alternative markets was equally [with respect to its pleadings on market] complex and convoluted [para 56]

The ACCC alleged that the agreements that Flight Centre had proposed in the email

[para 57] 'had the purpose, effect or likely effect of stopping the airlines from offering fares at a price less than the total of the nett fare (being the gross fare entered on GDS less the commission payable to an agent if the fare was sold at the gross fare) and the commission that Flight Centre would be entitled to be paid for its services if it sold the fare to a customer ... [and] that this would stop the airlines putting competitive pressure on, or enable Flight Centre to avoid having to discount, the price it charged for either its distribution and booking services or, in the alternative, the price it charged in respect of its supply or sale of international passenger air travel services. The ACCC alleged that in this way, the alleged agreements had the purpose or effect of either maintaining the price charged by Flight Centre for its distribution and booking services (in the alleged distribution and booking services market or markets) or fixing, controlling or maintaining the price charged by Flight Centre and the relevant airlines for the supply or sale of international passenger air travel services (in the alleged alternative markets).

Flight Centre admitted the emails were sent, but denied they had the purpose or effect contended (para 65).

The primary judge concluded that the emails revealed that Flight Centre wanted the airlines to stop undercutting the published fare on the GDS and that, as a result -

'the emails amounted to an attempt by Flight Centre to induct the airlines to enter into a contract, arrangement or understanding which would fix, control or maintain the fare or price for international air travel by the airlines. Because Flight Centre’s commission or margin depended on the price it was able to obtain from a customer for the flight, the purpose and effect of the proposed agreements was therefore also to fix, control or maintain Flight Centre’s retail or distribution margin ...' [para 73]

The findings of the trail judge in relation to the purpose and effect of the emails were not challenged on appeal (para 68).

The 'critical' issue - competition condition

The 'critical' issue at trial and on appeal was whether or not Flight Centre competed with airlines in a relevant market (see, eg, para 74). The primary judge found that the market was the 'market was the market for the supply of distribution and booking services in relation to available international passenger air travel' [para 5] and that Flight Centre and the airlines competed in this market.

The pleadings - ACCC

The Full Federal Court noted that the ACCC's pleading 'was complex and convoluted in the definition of the relevant market' (para 45), noting that three or four alternatives were alleged [emphasis added]:

  • [para 46] The first alleged market was the market for the supply of "distribution services" in Australia to international airlines by internal sales divisions of international airlines operating in Australia and travel agents ... Distribution services included the distribution of an airline’s international air transportation services, including the solicitation of customers, reservation, booking and ticketing services, and the collection of payment from customers ...

[para 47] The ACCC alleged that travel agents, including Flight Centre, competed with internal sales divisions of international airlines, including Singapore Airlines, Malaysia Airlines, and Emirates, in relation of the provision of such distribution services to international airlines ...

  • [para 50] The second market alleged by the ACCC was a market for the supply of "booking services" to customers by internal services divisions of international airlines and travel agents ... Booking services included advice to customers in relation to various aspects of international air transportation services, such as the availability and terms upon which such services could or would be provided by various airlines to various destinations, the preparation of itineraries and, perhaps most importantly, the reservation and booking of flights and the issuing of tickets.

[para 51] The ACCC alleged that the internal sales divisions of airlines competed with travel agents, including Flight Centre, in relation to the provision to customers of such booking services

  • [para 53] The third alleged market, pleaded in the alternative ... was the market for international passenger air travel services: in short, the market for international flights. The ACCC alleged that travel agents, including Flight Centre, sold international passenger air travel services of international airlines to customers ... It also alleged that some international airlines, including Singapore Airlines, Malaysia Airlines and Emirates, sold such services directly to customers ... Travel agents, including Flight Centre, were alleged to compete with international airlines, including Singapore Airlines, Malaysia Airlines and Emirates, in either the market for the supply of international passenger air travel services, or the market for the sale of such services ...
  • [para 55] The fourth alleged market, again pleaded in the alternative, was very similar to the third. The ACCC alleged that there was a wholesale market in which international airlines supplied international passenger air travel services to travel agents ... Travel agents then supplied international passenger air travel services to customers in a retail market for travel services ... In cases where international airlines, including Singapore Airlines, Malaysia Airlines and Emirates, also supplied international passenger air travel services directly to customers in a retail travel services market, they competed with travel agents, including Flight Centre, in that market ...

The pleadings - Flight Centre

Flight Centre denied that there was any market for distribution and booking services, instead contending there was 'a market for the supply of international passenger air travel services by airlines to customers' in which Flight Centre acted as agents for the airlines and that the 'sale of international passenger air travel services included incidental tasks, such as booking flights, issuing tickets and collecting payments from customers' [para 58]. Providing those incidental services, Flight Centre contended, did not occur in a separate market for supply and distribution of booking services. Flight Centre further argued that the internal sales divisions of airlines were not separate entities from the airlines themselves and that the airlines 'did not self-supply distribution services in competition with Flight Centre' (para 60).

In addition, Flight Centre denied there was a market, in which it competed with airlines, for the supply of booking services, although 'appeared to accept that there may have been a market for the provision of travel advisory services' in which travel agents competed with each other (para 61).

In brief:

[para 64] Flight Centre’s case was that, when it (or any other travel agent) sold international passenger air travel services to a customer as agent for and on behalf of an airline, it was simply providing agency or selling services to the airline, for which it received commission and other payments from the airline. It was not, in any sense, competing with the airline in a market for the supply of international passenger air travel services to customers. Nor was it competing with airlines in relation to the provision of agency or selling services. It was providing such services to the airline, not in competition with it.

The Court summarised ten grounds of appeal put by Flight Centre (para 99)

The first three grounds relating to the issue of whether the airlines and agents competed. The Court noted that the essence of those submissions (re competition) was 'that the rivalrous conduct or competition that the primary judge found to exist between Flight Centre and the airlines could not be competition for the purposes of s 45A of the Act.' (para 101) The relevant competition, they argued, was for the sale of international passenger air travel services and any competition between the airlines and its agents for these services was not competition for purposes of s 45A, because that section 'requires that the competition be competition between the parties to a contract, arrangement or understanding in respect of the particular supply of the services the price of which is said to have been fixed, controlled or maintained' (para 102) and the primary judge had held that the airlines did not compete with their agents for the supply of these services because only the airlines supplied those services; Flight Centre supplied them only as agent for the airlines (para 102).

The second three grounds (4-6) related to the finding that there was a market for distribution and booking services in which Flight Centre and the airlines competed. Flight Centre argued that no such market existed, with booking 'simply an essential and inseparable incident of the supply of international passenger air travel services' (para 10). Even if they could be considered separate, any distribution and booking services supplied by agents 'were significantly different to such services supplied by the airlines' with the result that there was no substitutability (para 106).

The third three grounds (7-9) related to the findings of the primary judge in relation to the fixing, controlling or maintaining of price.

The final ground (10) related to penalties - arguing the total penalty of $11m was manifestly excessive.

Decision of primary judge

In relation to the first and second alleged markets, the primary judge accepted that travel agents and the relevant airlines 'provided distribution and booking services in relation to international flights', but -

'characterised the provision of these services as occurring in a single market where intermediaries, such as Flight Centre and other travel agents, competed with international airlines in relation to the provision of such distribution and booking services. His Honour did not appear to accept that competition was between travel agents and the internal sales divisions of the airlines' [para 52]

The Full Federal Court noted that the primary judge also 'appeared to accept that there was a market for the supply of international passenger air travel services – flights – by international airlines to consumers. ...' (para 77). However, the primary judge also found that Flight Centre did not, itself, supply international passenger air travel services to consumers, with the result that it did not compete with airlines in this market. (para 79)

The primary judge instead identified Flight Centre as a 'travel intermediary' and found that, as such, it 'provided distribution and booking services' in relation to availability international travel to the airlines and to customers (para 82).

The Full Court noted that the primary judge appeared heavily influenced by expert economic evidence given by Dr FitzGerald, called by the ACCC; they summarised his opinion (accepted by the primary judge) as follows [para 89]:

... Dr FitzGerald’s opinion was that when travel agents and airlines sold flights to consumers in the retail market for international travel, they also simultaneously provided distribution and booking services to both the airlines and the customers. And those services were supplied in a market separate and distinct from the market for international travel itself.

The primary judge did not, however, accept the ACCC's contention the airlines' internal sales division supplied the distribution and booking services in competition with the travel agents; rather the airlines (as the only legal entities) supplied those services (para 95)

The primary judge also did not accept Flight Centre's contention that the relevant supply, when a customer purchased a ticket, involved only the air travel, with distribution and booking being merely incidental to the supply of the flight (para 97)

Full Court

The Full Court noted that:

[para 112] The resolution of the main issues raised in this appeal hinges on the proper characterisation of the service or services supplied by airlines and travel agents when an international “flight” (international passenger air travel service) is sold or supplied to a customer, either directly by the airline or through the airline’s agent. It is only when the relevant service or services are properly identified that it is possible to determine or define the relevant market or markets in which the airlines and travel agents operate. It is necessary to identify the relevant market in order to determine whether a provision of a proposed contract, arrangement or understanding between Flight Centre and the airlines had the purpose or effect of substantially lessening competition for the purposes of s 45 of the Act. And it is necessary to identify the relevant services, and the relevant market, to determine whether the deeming provision in s 45A of the Act is engaged, giving s 45 a per se operation.

The Court made reference to the decision in ACCC v ANZ [2015] FCAFC 103, summarising 'critical points' from that matter - which involved 'not dissimilar facts and considerations' - as follows:

[para 116] First, the parameters or boundaries of a market are generally described by reference to product (the nature and characteristics of the relevant goods or services), function (wholesale, retail or both) and geography (for example, national, state or local): Australian Gas Light Company v Australian Competition and Consumer Commission (No 3) (2003) 137 FCR 317 at [378]. Section 4E of the Act makes it plain that in relation to the product dimension, substitutability is critical. In simple terms, substitutability means that buyers and sellers will substitute one product for another in response to changes in prices. If the products are not substitutes in this respect, they are not in the same market.

[para 117] Second, market identification is not an exact science. It is rooted in the analysis of commerce as an aspect of human behaviour: ACCC v ANZ at [135]. It “involves value judgments about which there is some room for legitimate differences of opinion”: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Company Ltd (1989) 167 CLR 177 at 195-196.

[para 118] Third, a market is “not a feature of the real world” but rather “an analytical tool devised by economists”: Seven Network Ltd v News Ltd (2009) 182 FCR 160 at [827]. It is an instrumental concept which, in the context of Part IV of the Act, is adapted to analyse the asserted anticompetitive conduct in the commercial context the subject of analysis: Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd (2006) ATPR 42-123; FCA 826 at [429]. It follows that the identification of a market in any given case is generally therefore purposive and directed to the problem or issue at hand: ACCC v ANZ at [136].

[para 119] In the present context, the process of identifying or defining the relevant market or markets is undertaken in order to analyse and determine whether the asserted anti-competitive conduct (the proposed agreements between Flight Centre and the airlines) had the purpose or effect of fixing or controlling the price of any services that both Flight Centre and the airlines supplied in competition with each other in a market.

[para 120] Fourth, whilst a market is an economic analytical tool, it must nonetheless have economic and commercial reality. It must therefore be based on findings of fact: Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 174. It must accurately and realistically describe and reflect the interactions between, and perceptions and actions of, the relevant commercial community: ACCC v ANZ at [138]. This was recognised by the primary judge, who said the following concerning the identification of a market (at [108]):

Thus, a market is not an artificial economic construct but rather a place, actual or nominal but recognisable not just by economists but also by its participants, be they suppliers or consumers, in which forces of supply and demand interact in the conduct of trade, a profession or commerce.

This statement is correct insofar as it recognises that a market cannot be defined in artificial terms. A market serves little purpose as an economic analytical tool if it is contrived and does not reflect commercial reality. It is, however, an overstatement to suggest, at least in the present context, that a market must be an actual “place” or is something more than an economic concept.

[para 122] Fifth, it is not always useful to describe the relationships and arrangements in a market by reference to economic jargon that is not reflected in the language of the Act. That includes descriptions of arrangements or relationships as “horizontal” or “vertical”: Visy Paper Pty Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 1 at [23]-[26]. It might equally include expressions such as “upstream” and “downstream”. ... The primary judge accepted that the use of such terminology must be approached with caution (at [111]). It may obscure, rather than illuminate.

Did Flight Centre and the airlines compete in a market for the supply of distribution and booking services?

The Full Court had regard to the principles set out above to consider this key question. After noting that the primary judge classified the market as

  • the 'market for distribution and booking services in respect of available international air travel' and
  • the 'downstream or distribution functional level of the overarching market for international travel and ancillary products (para 124, citing para's 137 and 139 of the primary judgment respectively)

the Court made two observations:

  • The market definition adopted did not correspond with any pleased market - the pleading alleged separate markets for distribution and booking services (para 126)
  • Second, the definition 'lacks precision and clarity' (para 127) necessary for determining whether the relevant services provided by Flight Centre were substitutable for the services provided by the airlines (and vice-versa)

The Court noted that affixing labels like 'intermediary services' or 'booking and distribution services' obscures 'proper consideration and characterisation of the relevant supplies and the relevant market or markets'. Instead, it was 'necessary to consider closely and separately exactly what was said to have been supplied to the airlines and what was said to have been supplied to consumers' (para 129).

Supply of services to airlines

The Full Court observed that much of the reasoning of the primary judge concerned services agents supplied to airlines, described as 'bringing the availability of the airlines’ flights to the attention of the consumers, and booking and collecting the fares on the airlines’ behalf' (para 130), for which agents were remunerated in the form of a commission and other payments. The critical question was, then, whether 'airlines provided the same or similar (that is substitutable) services in competition with Flight Centre', the primary judge finding that they did, because airlines could choose to make 'availability of their flights directly known to would-be passengers and undertake directly with the passengers the booking of those flights' (cutting out the middle man) (para 132)

The Full Court had several problems with this conclusion and reasoning:

  • First, they considered it 'artificial to characterise the activities of an airline in selling a flight directly to a consumer (including ancillary activities such as making the flight known to the consumer, via its website or otherwise, and booking the flight) as the provision, by the airline, of a service to itself. ... First, 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. Second, the 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. And third, it is artificial to regard the offer, or provision, by an airline to itself, of any services as being rivalrous or competitive with the agency services that the airlines had retained its agents, such as Flight Centre, to provide.' (para 135)

The Court noted that there may 'be some circumstances or contexts where it is open and relevant to view a single legal entity as comprising separate economic units that are responsible for different stages in the production process.... The in-house producer might be included in the relevant market for that particular product, even though it only supplies to a separate unit of the same firm: ... But this was not such a case. The internal sales divisions contrived by the ACCC were artificial constructs that did not accurately reflect the commercial reality' (para 137)

  • Second, 'characterisation of distribution services relates to the finding that the airlines competed with their agents, including Flight Centre, in supplying distribution services to themselves. This involved a finding that the distribution services supplied "in-house" were substitutable for the agency services supplied by Flight Centre and the other agents. The primary judge based his finding of substitutability entirely on the fact that the airlines could, if they chose to do so, supply flights direct to the consumer rather than through its agents. Yet the mere fact that the airlines could choose to sell their flights directly rather than through agents says nothing about whether any "in-house" distribution services were similar to, or close substitutes for, the services provided by agents. A decision by an airline to sell flights directly to the public may have nothing whatsoever to do with the similarity or substitutability of Flight Centre’s agency services.' [para 138]

[para 139] 'The substitutability of different products is usually analysed by reference to the actions of consumers in response to price movements. Yet the primary judge did not approach the question of substitutability by reference to price. His Honour based his findings concerning substitutability on the fact that airlines could choose to "cut out the middle man", but gave no consideration to whether that choice was in any way driven or motivated by considerations relating to the “price" charged by the agents as opposed to the actual or notional price of the self-supply of distribution services. The primary judge found that the price for the agents’ supply of distribution services was the margin or commission retained by the agents after remitting the nett fare to the airlines. There was, however, no evidence that the airlines chose to self-supply (sell their flights directly) because of movements in the margin or commission earned by agents, such as Flight Centre. Nor was there any evidence or analysis of the price, if any, attributed by the airlines to their self-supply of distribution services. It seems simply to have been assumed by the primary judge that airlines chose to sell directly because they would then be able to retain the gross fare. It is at best unclear whether that assumption had any evidentiary foundation.

  • Third, the Full Court queried in 'what market or markets did the airlines offer and supply' the relevant distribution services? [para 140]. The primary judge identified a single market in which the airlines and travel agents competed for supply of distribution services; the Full Court concluded 'no such single market could exist' [para 141].

'The fundamental difficulty with this broad market definition is that, whereas Flight Centre, by reason of its agency agreements with the different airlines, could and did sell or supply flights offered by multiple airlines, the airlines could only, and did only, supply (self-supply) distribution services in respect of their own flights. Thus, the airlines could not sensibly be considered to compete with each other in relation to the supply of distribution services generally. For example, Singapore Airlines could not be considered to compete with Malaysia Airlines in relation to the supply of distribution services to Malaysia Airlines. Nor, for that matter, could Singapore Airlines, for example, sensibly be considered to compete with Flight Centre in relation to distribution services relating to Malaysia Airlines flights. If there was any competition between Flight Centre and Singapore Airlines in relation to distribution services, it could only have been in a market for distribution services relating to Singapore Airlines flights.' [para 142]

'It follows that even if travel agents such as Flight Centre and the airlines supplied distribution services, they did so in a number of separate and distinct markets. In this scenario, there would be separate markets for the supply of Singapore Airlines’ flight distribution services, Malaysia Airlines’ flight distribution services, Emirates’ flight distribution services and so on. There could be no single market for distribution services to airlines.' [para 143]

'This again reveals the artificiality and inherent lack of commercial reality in the market analysis by the primary judge. To use or adapt the words of the primary judge (at [108]), the existence of a series of such distribution services markets could be no more than an "artificial economic construct". Such markets would not be "place[s], actual or nominal … recognisable not just by economists but also by [their] participants, be they suppliers or consumers, in which forces of supply and demand interact in the conduct of trade, a profession or commerce" (at [108]). There is no evidence that Flight Centre or the airlines recognised the existence of separate markets for the distribution of each airline’s flights.' [para 144]

'There was some evidence that Flight Centre recognised the existence of some competitive or rivalrous aspects to their relationship with the airlines. But such rivalry or competitiveness that did exist was not rivalry in relation to any market for the supply of distribution services supplied by airlines and travel agents. Rather, it was rivalry in the context of the market for the supply of international passenger air travel services.' [para 145]

Supply of services to consumers

The Full Court next considered 'what services were supplied to consumers and by whom?' In particular, did Flight Centre and the airlines supply any services that could be properly characterised as booking services: 'There is no question that consumers were supplied with international passenger air travel services, but were they separately supplied with booking services?' [para 146]

The primary judge concluded agents and airlines competed for the supply of booking services to consumers - a service distinct from international air travel, and included providing information about available flights and best fare and then booking the desired flight. Their Honours considered that there were several problems with the 'analysis and conclusions of the primary judge in this respect' (para 148):

  • First, artificiality. 'The services described as booking services were in reality no more than essential and inseparable incidents or actions involved in selling international passenger air travel services. Before a ticket on a flight is sold, the price and availability of the flight would almost of necessity be provided to the would-be purchaser. Equally, when a ticket is sold, the next necessary step is the issue of a ticket and the reservation or booking of the relevant flight, either immediately or in due course. It is entirely artificial to conceive of the airline separately providing a booking and ticketing service in these circumstances. The so-called booking services are simply part and parcel of the supply of the international air travel itself. Exactly the same applies when the flight is sold on the airlines behalf by an agent, such as Flight Centre. There is no separate supply of a booking service.' [para 149]
  • Second, 'the services which were described by the primary judge as "booking services" clearly fell within the terms of the standard form of agency agreement, the PSAA, to which Flight Centre and the airlines were parties. Clause 3 of that agreement, extracted earlier, clearly provided that the sale of air passenger transport by the agent (Flight Centre) on behalf of the principal (the airline) included issuing a valid document (ticket) and the collection of money. The agent was also authorised to supply "ancillary services" on behalf of the airline as part of the agency agreement. The booking of a flight that had been purchased could accurately be characterised as an ancillary service.' [para 152]

The Full Court considered there were two implications flowing from this:

  • 'First, booking and ticketing were plainly included in and were inseparable from the sale of the international passenger air travel services itself.' [para 153]
  • 'Second, those services, and any ancillary services, were supplied by agents, such as Flight Centre, for and on behalf of the airline. That means that when Flight Centre supplied booking, ticketing and other ancillary services to consumers, it did so on behalf of the airlines. It did not supply the services itself.' [para 153]

The Full Court noted:

'... the primary judge concluded that Flight Centre did not supply international passenger air travel services to consumers ... because, when it sold a flight, Flight Centre did so on behalf of the airlines. ... Flight Centre supplied such services on behalf of the airlines. It did not supply the services itself. It follows that there could be no relevant competition between Flight Centre and the airlines in relation to any booking services' [para 154]

Their Honours referred to Castlemaine Tooheys, relied upon by Flight Centre, to support his argument. The primary judge had distinguished this case. The Full Court, however, considered that the points of distinction identified by the primary judge did not answer the relevant question of whether Flight Centre supplied relevant services to consumers:

'Flight Centre provided all such services that may have constituted booking services to the airlines. Any such services provided to the consumers by Flight Centre were provided on behalf of the airlines. Therefore, there could be no market for the supply of booking services to consumers in which Flight Centre competed with the airlines. There was therefore no booking services market and no competition between Flight Centre and the airlines in relation to the supply of such services to consumers for the purposes of ss 45 and 45A of the Act.' [para 160]

Their Honours identified a further difficulty with defining a single 'booking services market':

'... It is similar to the problem identified in relation to the so-called distribution services market. Whilst Flight Centre could, by reason of its agency agreements with the airlines, supply booking services in respect of international passenger air travel services offered by numerous airlines, the airlines could only supply booking services in relation to their own flights. It follows, for example, that Singapore Airlines could not provide booking services for Malaysia Airlines or Emirates flights or vice versa. It follows that the airlines did not compete with each other in any single market for the supply of booking services in relation to available flights. Equally, when Flight Centre supplied booking services in respect of, for example, Singapore Airlines flights, it was not in any relevant sense competing with Malaysia Airlines in relation to the supply of booking services' [para 164]

'It follows that if there was any competition between Flight Centre and the airlines in relation to the supply of booking services, that competition occurred in a series of separate markets. There was no single booking services market in which all the airlines and all the travel agents relevantly competed.' [para 165]

Their Honours also also identified problems of substitutability associated with the primary judge's conclusions as to a booking services market:

'The primary judge gave no consideration to whether any booking services supplied by Flight Centre to consumers were similar to and close substitutes for booking services supplied by the airlines. The primary judge only considered substitutability in relation to the supply of distribution services to the airlines. Flight Centre was able to provide advice concerning the availability of flights from a broad range of airlines. The individual airlines could not. Likewise, Flight Centre could provide booking and ticketing services in relation to the flights offered by many airlines. Individual airlines could not. In these circumstances it is difficult to see how any booking services supplied by Flight Centre were close substitutes for booking services supplied by the airlines.' [para 166]

'The question of substitutability of any booking services supplied to consumers by Flight Centre with the booking services supplied by the airlines is also complicated by the fact that there was no analysis of whether changes in the price of booking services supplied by Flight Centre would cause consumers to purchase from the airlines. That is not surprising given that neither Flight Centre nor the airlines exacted any price from consumers in respect of so-called booking services. There was no basis for any finding of substitutability and therefore no basis for any finding that Flight Centre competed with the airlines in a market for the supply of booking services.' [para 167]

Agency relationships generally

The Full Court did note, however, that the mere fact an agency relationship exists does not mean those parties cannot be in competition with each other - each case will turn on its own facts:

'It is necessary to emphasise, however, that the existence of an agency relationship between two parties does not always mean that those two parties cannot be in competition with each other for the purposes of Part IV of the Act. Each case must be considered on its own facts. The precise nature of the agency relationship will no doubt be important, particularly given the broad range of commercial relationships that are sometimes referred to as involving agency.... If the so-called agent was in fact no more than a distributor or re-seller of the other party’s product, there may well be competition between parties to such an agreement in relation to the supply of the product. But the position is likely to be different where, as here, the agent has the power and authority (and accompanying legal and equitable duties) to contract – sell the product – for and on behalf of the principal. It is less likely that an agent, in that strict or core sense, can relevantly be considered to compete with its principal in relation to the supply of products within the scope of the agency agreement'. [para 164]

Conclusion

The Full Federal Court concluded that Flight Centre and the airlines did not compete in a market for booking and distribution services and the 'primary judge was wrong to conclude otherwise' (para 168). As a result, Flight Centre succeeded in relation to grounds 4, 5 and 6 of their appeal and this was determinative of the appeal. The Court did, however, give some consideration to the other grounds of appeal raised.

Was there relevant competition between Flight Centre and the Airlines for purposes of the provisions?

'The primary judge found that Flight Centre was competitive or rivalrous with the airlines' based, in part, on Flight Centre's own understanding reflected in various documents. (para 171)

The Court noted that there was no doubt that 'the views and practices of the relevant commercial community may be relevant to the analysis of competition and market definition' (para 172) but, in this case, it was necessary to consider 'whether any such rivalrous or competitive sentiment or action existed in a market in which both Flight Centre and the airlines supplied services' (para 172)

'Upon close consideration of the relevant primary facts, it is readily apparent that any rivalry that existed as between Flight Centre and the airlines was in respect of the market for the supply of international passenger air travel services. In that market, travel agents, such as Flight Centre, plainly wanted to sell as many flights as they could on behalf of the airlines. The more flights they sold, the more commission (and other incentive-based payments under preferred airline agreements) they earned.' [para 173]

'In this context, disintermediation, or cutting out the middle man, was no doubt a commercial concern, if not a threat, for Flight Centre. The more flights the airlines reserved for direct sale to the public at prices not made available to their agents via a GDS, the fewer agency sales Flight Centre was able to make and the less commission it was able to earn.' [para 174]

'It is not difficult to see how such commercial concerns or considerations could be construed as giving rise to rivalrous or competitive sentiment or action on the part of Flight Centre. But that rivalry or competition concerned the supply of international passenger air travel services to consumers, not the supply of distribution services to the airlines or booking services to consumers. The rivalry or competition that existed was not in a market in which both Flight Centre and the airlines supplied goods or services in competition with each other. That was because, as the primary judge found, only the airlines supplied international passenger air travel services. Flight Centre operated in the market for such services, but only as an agent for the airlines. [para 175]

'The primary judge erred because he transferred or transplanted the rivalry or competition that he found existed, in a broad sense, in the market for the supply of international passenger air travel services, into a non-existent market: a market for distribution and booking services. That supposed market was in fact an artificial construct that did not truly reflect the commercial reality of the relevant commercial relationship and dealings.' [para 176]

'The impugned conduct, the agreements proposed in Flight Centre’s emails to the airlines, did not occur in a market in which Flight Centre and the airlines both supplied services in competition with each other. It occurred in the market for the supply of international passenger air travel services: a market in which the primary judge correctly found (and the ACCC does not now dispute) Flight Centre was agent for, and did not relevantly compete with, the airlines. To the extent that the conduct involved the fixing of prices, it was not caught by the deeming provision in s 45A because it did not occur in a market in which Flight Centre and the airlines competed in respect of the supply of services, as required by s 45A of the Act. The primary judge erred in concluding otherwise.' [para 182]

Other grounds of appeal

The Full Court did not consider it necessary to consider appeal grounds 7, 8 or 9; nor did it consider ground 10, concerning penalties.

Conclusion

  • Flight Centre succeeded on grounds 1-6 of appeal
  • Appeal allowed with costs
  • Cross-appeal dismissed with costs.

 

Application to stay order imposing penalty

Flight Centre unsuccessfully attempted to stay orders for payment of $11 fine imposed by the Court in March (see judgment).

Justice Rangiah noted that the 'assumption that the Court should not deprive a litigant of the benefit of a judgment is not relevant where a stay is sought of an order imposing a pecuniary penalty' (para 10) because a pecuniary penalty order is not a 'benefit' tot he ACCC, but rather has the primary object of deterrence.

However, Rangiah J rejected the 'proposition that the mere commencement of an appeal against an order imposing a pecuniary penalty is, in the absence of prejudice to the respondent, enough to warrant a stay of the order pending the appeal.' (para 14)

His Honour concluded: 'The mere fact that Flight Centre was required to pay the pecuniary penalty in accordance with the order made by the primary judge was not enough, in my opinion, to warrant a stay. The position might have been different if Flight Centre had alleged and demonstrated some particular prejudice or difficulty in complying with the orders. It did not.' (para 19)

See Flight Centre Limited v Australian Competition & Consumer Commission [2014] FCA 658 (Justice Rangiah)

 

Application for Special Leave to Appeal to the High Court

On 11 March 2016 the High Court granted special leave to appeal. See

Mr Gleeson, for the ACCC, argued that the application

raises a very significant question about the application of market definition under the Trade Practices Act and now the Australian consumer and competition law and it arises from the conundrum which is posed by the Full Court’s judgment that there are concurrent findings of two independent, economic actors, Flight Centre on the one hand, airlines on the other hand, who are in rivalry and competition - that is established - and where one of those actors, Flight Centre, seeks to shut down that competition by attempting to induce the airlines to price fix and yet the Court says there is no market in which those economic actors are in competition.

Now, that conundrum is nowhere explained by the – or resolved by the Court or even addressed and the respondent does not address it. That is at the heart of our application, your Honour, that very important question of whether this can be a proper approach to market definition. That is the essence of it.

and in relation to Ground 3:

Ground 2 ... arises as a question of law. If one accepts the Full Court’s premise which we reject on ground 2 that the only market here is what I will call the “big market”, the market for the supply of international air passenger travel services, so if one takes that premise which we reject, there is an error of law seen most particularly in the last two sentences at paragraph 175 where the Court says:

That was because, as the primary judge found, only the airlines supplied international passenger air travel services. Flight Centre operated in the market for such services, but only as an agent for the airlines.

So, what has happened is the very same legal point which is whether the agency disqualifies competition in a market is the lynchpin of the court’s ruling. So, not only is a matter of law but the question that would be erased by it is the same legal question, namely, can you see there is rivalry and competition, can you find what you think is the relevant market and can you then say because of agency I ignore that rivalry and competition and instead I find that there are no competing supply of services. So, it is the very same legal error.

Mr Walker, for the respondents, argued (in part):

... it cannot be said that the Full Court was in error in proceeding upon the assertion by the regulator that Flight Centre and the airlines did not compete with each other, to adapt the language of the statutory definition, in a relevant market.

and

... The statutory provisions require there to be competition with each other in a specified market. As your Honours know, there has been toing-and-froing by the regulator as to where they would take their stand in this litigation as to what the market was. There is nothing wrong with alternative arguments. At least you can say about alternative arguments they are both presented but there was no presentation in the Full Court of an argument of a kind that they now seek special leave to run.

They did not argue that the parties were in competition with each other for the supply of international air travel services. They avowedly withdrew that contention by the way they ran the appeal. There was no notice of contention to challenge the trial judge’s correct rejection of that proposition as well. It is for those reasons, in our submission, that it cannot realistically be said that error is committed by the Full Court of a kind which includes that as a critical step.

The whole argument against us, at least as it is adumbrated in writing at this stage, has as a critical step that there was an error in failing to find that these parties were in competition with each other in the market for the supply of international air travel services. ...

... Well, the question of course is what did the Full Court find and the Full Court did not find that there was competition with each other in a market in which they were both engaged because the sales by my client were sales on behalf of the airlines. Every sale by my client was a sale by the airlines. That is the whole point.

Justice Kiefel responded:

'There will be a grant of special leave on all grounds. ...'

The time estimate for the appeal is one day

 

Appeal (High Court)

In brief

On 11 March 2016 Special Leave to Appeal to the High Court was granted. Judgment was delivered on 14 December 2016, allowing the appeal (in part).

Full details can be found on the High Court case page. See also my blog on this case for an overview of the findings and some comments.

From the judgment summary:

Today the High Court allowed an appeal from the Full Court of the Federal Court of Australia. By majority, the High Court held that the respondent ("Flight Centre") was in competition with Singapore Airlines, Malaysia Airlines and Emirates ("the airlines") when it attempted to induce the airlines to agree not to discount the price at which they offered international airline tickets directly to customers, and therefore that Flight Centre had engaged in restrictive trade practices contrary to s 45(2)(a)(ii) of the Trade Practices Act 1974 (Cth) ("the Act").

...

A majority of the High Court held that Flight Centre was in competition with the airlines when it attempted to induce each airline to agree not to discount the price at which that airline offered international airline tickets directly to customers. The competition was in a market for the supply, to customers, of contractual rights to international air carriage via the sale of airline tickets. Flight Centre and the airlines competed in that market

The Court ordered that both the appeal and cross appeal be allowed in part. In particular, it declared that the declaration of the trial judge, Justice Logan, be varied to reflect the court's different view on the relevant market in which the parties were found to be in competition. In particular, they were not, as the trial judge concluded, competitors in any market for distribution and booking services; rather the relevant market was for the supply of contractual rights to international air carriage via airline ticket sales.

The matter is to be returned to the Federal Court for penalty.

Chief Justice French (dissenting)

Justice French dissented from the majority; his Honour observed that determination of whether there was a contravention of the Act turned 'critically upon whether or not the agent was, in any relevant sense, in competition with the three airlines, which were its principals at the time it made the proposals' (para 2).His Honour he did not consider there was a relevant market in which the parties competed and therefore would have dismissed the appeal.

After setting out the procedural background, his Honour set out the ACCC's primary and secondary cases on appeal as follows (para's 7-8):

  • The ACCC's primary case 'was that Flight Centre competed with each of the airlines in markets for the provision of distribution services to international airlines and for the provision of booking services to customers.' His Honour agreed with the reasons of Kiefel and Gageler JJ in rejecting this case; in particular, he considered 'it would be quite artificial to describe an airline selling directly to its customers as providing distribution services to itself in competition with distribution services provided to it by travel agents.'
  • The ACCC's secondary case' that 'Flight Centre sold international air tickets in competition with the airlines in a market for the supply of contractual rights to international air carriage to customers.' His Honour's reasons focused on this case

His Honour then set out the contractual arrangements between Flight Centre and the airlines, noting in particular (para's 10-11) that the Flight Centre had no proprietary rights to the air tickets and was not permitted to vary or modify the terms or conditions of any ticket, but could sell tickets at a price that it determined.

His Honour next considered the issue of agents and competition, observing that the 'proposition that an agent and a principal, both selling the services of the principal, compete with each other in a market for the sale of those services does not command ready assent.' (para 15) His Honour goes on to describe the legal and commercial nature of an 'agency' relationship. While noting that often commercial 'agency' arrangements extend beyond the scope of the 'legal' definition of agency, in this case the relevant conduct 'related to an activity by Flight Centre which lay at the heart of an agency relationship, namely the sale by Flight Centre or its airline principals of contractual rights to travel on those airlines.' (para 17)

His Honour considered that what Flight Centre was doing in selling air tickets 'was properly regarded as an action of the airline itself' and that there was no market 'for the supply of the tickets of a particular carrier' (para 21). His Honour acknowledged that 'the greater the number of consumers who chose to deal with an airline principal directly rather than with Flight Centre, the less the return to Flight Centre' and that, as a result, lower prices by the airlines 'had the potential to affect Flight Centre's economic interests by creating an economic incentive for consumers to deal with the airline rather than it' (para 23). The concerns so raised 'could be seen to be analogous to those of one competitor about the pricing practices of another' (para 23). Nevertheless, his Honour considered that in relation to the supply of contractual rights to flights, Flight Centre's conduct should be regarded as that of the airline (para 23). His Honour considered that a finding characterisation of Flight Centre's concerns about pricing in this case would create tension between the concept of competition an legal agency and would open 'the door to an operation of the Act which would seem to have little to do with the protection of competition' (para 23).

As a result his Honour concluded (para 24):

Flight Centre was not in competition, in any relevant market, with the airlines for which it sold tickets. Its proposals with respect to the pricing practices of its principals were not proposals offered by it as their competitor but as their agent. ...

[My emphasis throughout]

Justices Kiefel and Gageler

Key question, brief conclusion, facts and claims

After observing that the key question was whether the parties were competitors their Honours noted that the short answer as that (para 26):

  • 'Flight Centre was in competition with each airline';
  • the relevant market in which they competed was the 'market for the supply, to customers, of contractual rights to international air carriage' and
  • 'competition existed in that market nothwithstanding that Flight Centre supplied in that market as agent for each airline'

Their Honours went on to describe the agency arrangement between Flight Centre and the airlines; in particular that, while Flight Centre could not alter the terms and conditions associated with the ticket, they were free to set the price at which the ticket was sold. Their Honours then noted that Flight Centre's 'price beat guarantee' made the vulnerable to airlines selling discount fares direct to customers, which is what the airlines involved in this case chose to do (para 36). It was as a result of this that Flight Centre sent emails to the airlines attempting to get them to agree to sop offering tickets direct to customers at less than 'the fares published to travel agents'. (para 37)

Their Honours then set out the relevant law relating to price fixing at the time of this conduct, the ACCC's claims and the decisions of the primary judge and Full Court before summarising the parties' positions in relation to whether they compete as follows:

  • Flight Centre argued that an agent 'does not compete with the agent's principal for the supply of the principal's services' and compared the nature of Flight Centre's competition with the airlines with 'internal sales staff jostling each other to obtain sales commission: the competition related to supplies in a market, but was not competition between suppliers in that market' (para 63)
  • The ACCC argued that the fact that 'Flight Centre sold only as an agent for each airline .... did not disqualify' the sale of tickets from being in a market in which they competed with the Airline (para 61). The Full Federal Court, the ACCC claimed, failed to 'take a sufficiently functional approach to market definition' (para 64).

The market

Their Honours described a market as (emphasis added):

[para 66] 'a metaphorical description of an area or space (which is not necessarily a place) for the occurrence of transactions. Competition in a market is rivalrous behaviour in respect of those transactions. A market for the supply of services is a market in which those services are supplied and in which other services that are substitutable for, or otherwise competitive with, those services also are actually or potentially supplied.

[para 67] A market is commonly defined by reference to its dimensions. The dimensions of a market are commonly described in terms of product (the types of services supplied), function (the level within a supply chain at which those services are supplied) and geography (the physical area within which those services are supplied). A market might sometimes also usefully be described as having a temporal dimension (referring to the period within which the supplies occur).

Their Honours then posed the question: 'what, relevantly, do they supply, to whom, and at what price?' (para 68) and observed that the 'question does not necessarily admit of a unique answer'. This is because:

"[t]he economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted", the identification and definition of a market for particular services will often involve "value judgments about which there is some room for legitimate differences of opinion" [fn: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 196; [1989] HCA 6]. Identifying a market and defining its dimensions is "a focusing process", requiring selection of "what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law" [fn: Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 178]. The process is "to be undertaken with a view to assessing whether the substantive criteria for the particular contravention in issue are satisfied, in the commercial context the subject of analysis" [fn: Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 78 at 107 [137]]. "The elaborateness of the exercise should be tailored to the conduct at issue and the statutory terms governing breach" [fn: Brunt, "'Market Definition' Issues in Australian and New Zealand Trade Practices Litigation", (1990) 18 Australian Business Law Review 86 at 127]. Market definition is in that sense purposive or instrumental or functional.

[para 70] The functional approach to market definition is taken beyond its justification, however, when analysis of competitive processes is used to construct, or deconstruct and reconstruct, the supply of a service in a manner divorced from the commercial context of the putative contravention which precipitates the analysis. Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd [fn: (1986) 162 CLR 395; [1986] HCA 72] is an illustration. There a brewer supplied beer to retailers, offering retailers the choice of collecting the beer from the brewer's depot for one price or having the beer delivered to the retailer's premises for a higher price. The brewer contracted with a particular haulage contractor to make the deliveries. A rival haulage contractor claimed that the brewer was engaged in the practice of exclusive dealing in contravention of ss 47(1) and 47(6) of the Act, the claimed contravention being constituted by the brewer supplying beer to a retailer on condition that the retailer acquire haulage services from the preferred contractor. The claim failed on the basis that what the brewer supplied and what the retailer acquired was in reality nothing other than delivered beer. Wilson J explained [fn: (1986) 162 CLR 395 at 403]:

"Here the transactions under scrutiny encompassed no more than the supply of goods. The beer was to be supplied at the premises of the retailer. Each supply was a single transaction which could not be broken up into its several elements of sale and delivery without doing violence to the reality. Delivery to the premises was an essential and therefore inseparable concomitant of the supply of the beer. In different circumstances it might well be appropriate to characterize the delivery of the goods as the supply of a service. But not here. No question of supplying a service arises."

Their Honours then turned their attention to the ACCC's primary case in relation to market - that is, that the relevant market in which the parties competed was in relation to distribution and booking services. It concluded that the primary claim should fail because the description of the supply of services claimed 'did not accord with commercial reality'.

[para 71]: The ACCC's primary case encounters essentially the same problem as did the claim in Castlemaine Tooheys. The problem is one of economic theory doing violence to commercial reality.

[para 72] The ACCC attempts to map the processes of competition between Flight Centre and the airlines to the second condition of s 45A(1) by advancing as its primary case that the price fixed, controlled or maintained was Flight Centre's commission and that the services to which that price related were distribution services to international airlines and booking services to customers. Essential to that case was that Flight Centre supplied at least one of those services in a market in which the airline supplied the same services or services that were substitutable for, or otherwise competitive with, those services.

[para 73] There is no want of realism in describing Flight Centre as having provided distribution services to an airline when selling that airline's ticket to a customer in accordance with the Agency Agreement. It is quite artificial, however, to describe the same airline as having provided those services (or any other services) to the airline itself when selling a ticket directly to a customer. Booking the flight, issuing the ticket and collecting the fare were part and parcel of the airline making the sale. They were inseparable concomitants of that sale.

[para 74] Conversely, what a customer acquired when purchasing an international airline ticket could not realistically be described as more than the ticket. That was so whether the customer purchased from Flight Centre or directly from an airline. No doubt, an element of customer service was involved in making the sale. But that element of service was inseparable from the sale transaction. It was no different in kind, and little different in degree, from the attention to the requirements of the individual customer typically involved in the retail sale of a motor vehicle or of a pair of shoes.

[para 75] Whatever other difficulties the ACCC's primary case might encounter, it was unsustainable because it rested on attributing to Flight Centre and to the airlines the making of supplies of services of a description which did not accord with commercial reality. The Full Court's rejection of the primary case was for that reason correct.

Their Honours then considered the nature of agency and competition. They acknowledged that the potential for competition between principal and agent 'needs to be considered against that background of the general law of agency' (para 79)

Their Honours observed that, under the CCA, 'a contractual right met the definition of service' and 'conferral of a contractual right met the definition of supply' (para 80). Consequently, making a contract which conferred the right to supply of a service (in this case air travel) 'was itself a supply of a service', whether resulting from the conduct of principal or agent (para 80). Although s 84(2) of the CCA deems conduct of an agent to have been engaged in by the corporate Principal, it does not deem conduct not to have been engaged in by an agent. Consequently, it is not inconsistent with the Act for 'an agent and a principal' to both be 'suppliers of contractual rights against the principal' or for them to supply such rights in competition (para 82).

Their Honours discussed the position in Europe and the US in relation to agent and principal and the circumstances in which they will be considered a single economic entity.

Their Honours then observed:

[para 89] Critical to the outcome of the ultimate question of whether Flight Centre sold international airline tickets to customers in a market in competition with the airlines are two considerations. The first is that Flight Centre's authority under the Agency Agreement extended not only to deciding whether or not to sell an airline's tickets but also to setting its own price for those tickets. The second is that there is no suggestion that Flight Centre was constrained in the exercise of that authority to prefer the interests of the airlines to its own.

[para 90] Flight Centre was free in law to act in its own interests in the sale of an airline's tickets to customers. That is what Flight Centre did in fact: it set and pursued its own marketing strategy, which involved undercutting the prices not only of other travel agents but of the airlines whose tickets it sold. When Flight Centre sold an international airline ticket to a customer, the airline whose ticket was sold did not.

[para 91] The competition which the Full Court accepted to have occurred in fact was not, as Flight Centre seeks to put it, merely competition in relation to supplies in a market. It was competition between suppliers in a market.

[para 92] The outcome of the appeal does not turn on the precise dimensions of that market. The ACCC's persistence in describing it as a market for international passenger air travel services nevertheless tends to blur the product and functional dimensions of the market in a way which obscures the point that the supplies for which Flight Centre and the airlines competed were not supplies of carriage services but rather supplies of contractual rights to carriage services. The market is better identified as having been a market for the supply of contractual rights to international air carriage to customers or, in short, as a market for international airline tickets.

Conclusion

Their Honours concluded (at para 93) that the appeal should be allowed and the primary judge's declarations of contravention should stand, but should be adjusted to reflect the fact that it succeeded on the basis of the secondary case rather than the primary case. Because that secondary case was not pursued in the Full Court their Honours did not consider the ACCC should be awarded costs of appeal.

[My emphasis throughout]

Justice Nettle

Justice Nettle began by briefly setting out the history of the proceedings and the primary and secondary cases put by the ACCC. His Honour noted he accepted the secondary - or alternative - case and therefore the appeal should be allowed.

His Honour then set out the facts. He noted evidence given at trial from two other market participants (travel agencies) that they considered themselves in competition with the airlines and also evidence of the only expert called, Dr FitzGerald, who opined (reproduced at para 107):

"travel agents do compete – horizontally – with international airlines at the retail level of the international travel market. This is very clearly so, since if one makes the sale, the other does not. What they are competing for at this level, of course, is the retail or distribution margin". (emphasis in original, footnote omitted)

His Honour then noted that Dr FitzGerald considered the relevant market was 'the downstream or distribution functional level of the single overarching market in which travel agents compete with airlines for the supply of booking and distribution services' (para 108). He then observed:

Expert evidence may provide a measure of assistance in appreciating the applicable economic principles but, ultimately, it is for the court to discern and define the relevant market as a question of fact [fn: Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299 at 316] [para 109]

His Honour then discussed the relevant legislation before running through the arguments and decisions at trial and on appeal to the Full Federal Court. He then proceeded to discuss the arguments on appeal, beginning with the question of whether the ACCC should be permitted to argue its secondary case having not argued it on appeal to the Full Federal Court (but having argued it at trial). His Honour considered there was no procedural issue with them raising it again on appeal to the High Court because 'this is not a case where this Court has been deprived of the advantage of the court below's consideration of the response to an argument' (para 121).

Market - distribution and booking services

His Honour then moved onto the substantive arguments in relation to market. In relation to the claimed market for the 'provision of booking and distribution services', his Honour agreed with the reasoning and findings of Kiefel and Gageler JJ that such a market was 'an artificial construct that does not truly engage the commercial reality of the relevant commercial relationship and dealings'. Consequently, his Honour agreed that 'Flight Centre and the airlines were not in competition with each other in any such market.' (para 123)

Market - for the sale of airline tickets

His Honour considered the parties were in competition for the sale of airline tickets.

His Honour noted that although only airlines operated aircraft and supplied passenger services, 'services' and 'supply' are defined broadly in the Act (section 4) with the result that it 'requires no extension of the natural and ordinary meaning of those words as defined to characterise the sale of an airline ticket by a travel agent, like Flight Centre, to a customer as a supply to that customer of the right, enforceable against the relevant airline, to be carried by that airline on the flight to which the ticket relates.' (para 124)

In addition, while Flight Centre sold airline tickets as agent for the airlines, 'to say that Flight Centre acted as the agent of the airline means no more than that Flight Centre was endowed by the relevant airline with authority to create in favour of the customer the right to be carried by the airline on the flight for which the airline ticket was provided.' (para 125)

His Honour referred to the definition of market for goods and services in s 4E as a "market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services".

[para 126] ... Ultimately, therefore, the existence of a market for goods or services is determined by the extent of their substitutability. Substitutability is, however, a matter of degree. The greater the degree of substitutability between goods or services, the greater the degree of competition between suppliers of those goods or services, and vice versa [fn: Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313 at 331-332]. A market for goods or services within the meaning of s 4E is taken to exist where there is such a degree of substitutability between the goods or services of suppliers in the same or a related geographic area, and thus such competition between them, that the market power of each is significantly constrained [fn: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 187-189 per Mason CJ and Wilson J, 196 per Deane J; [1989] HCA 6; Singapore Airlines Ltd v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 178 per French J, citing Areeda and Kaplow, Antitrust Analysis, 4th ed (1988) at 572; Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110 at 144 [135]-[136] per Tamberlin J.].

His Honour continued [para 127]:

From the point of view of a prospective customer, an airline ticket sold by Flight Centre on behalf of an airline would be in most respects functionally identical to an airline ticket sold directly by the airline. Apart, perhaps, from the prospective customer's perception of extra sales service and purchasing convenience, the only difference between the two offerings would be price. Consequently, from the point of view of the prospective customer, the airline ticket sold by Flight Centre on behalf of an airline would be close to perfectly substitutable for the airline ticket sold directly by the airline; and, in terms of generally accepted competition principles [fn: Ruffin, Modern Price Theory, (1988) at 114-115; Call and Holahan, Microeconomics, 2nd ed (1983) at 67], that means that the cross-price elasticity of demand as between an airline ticket sold by Flight Centre and an airline ticket sold directly by the airline would approach positive infinity. Other things being equal, that connotes a high degree of competition between airline tickets sold by Flight Centre on behalf of airlines and airline tickets sold directly by each airline [fn: Ruffin, Modern Price Theory, (1988) at 114-115. See also Wold, Demand Analysis, (1953)] and, therefore, the existence of a market for the sale of airline tickets in which both Flight Centre and the airlines competed.

His Honour went on to note, in relation to the claimed market for airline tickets:

... Flight Centre's ability to sell one airline's tickets at prices satisfactory to Flight Centre was constrained almost as much by prices set by other airlines for the sale of their competing tickets as it was by the prices set by the subject airline for the sale of its tickets directly to customers [fn omitted]. The market in which Flight Centre was in competition with each of the airlines was, therefore, the market for airline tickets in respect of all airlines

The agency issue

His Honour rejected the argument that:

[para 129] ... because every sale made by Flight Centre as agent for an airline increased the airline's sales generally, it was illogical to speak of the airlines being in competition with Flight Centre.

His Honour noted that this argument:

[para 130] 'overlooks the fact that, 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.

Unlike the position with internal sales-persons competing for commissions, which counsel for Flight Centre argued was analogous, his Honour noted that Flight Centre had a contractual right to charge the price of its choosing and, as a result:

[para 132] ...for Flight Centre to propose to the airlines that the airlines increase their prices for the purpose of direct sales was necessarily to propose a lessening of downward competitive pressure on prices and, consequently, a reduction in the level of competition between Flight Centre and the airlines for the sale of airline tickets.

His Honour then ran through some international precedent which had been relied upon by Flight Centre's counsel and rejected its relevance to the present case (see from para 133). His Honour similarly rejected the attempt to rely on Castlemaine Tooheys as suggesting that the agent and principal were effectively one entity for the purposes of selling airline tickets (para 144).

[para 147] ... in a case like Castlemaine Tooheys, where the agent never had any dealings with the purchaser and thus the agent acted in fact and law solely on behalf of the principal, what was supplied to the purchaser was supplied by the principal, albeit through the agency of another. But where, as here, there had developed over time a practice of the agent having the principal's authority to supply customers with the principal's services at prices determined by the agent, the factual reality and legal substance of the matter was that it was the agent that supplied the services to the customer, albeit as the agent of the principal

Conclusion

His Honour agreed with Justices Kiefel and Gageler and concluded that:

[para 148] ... Flight Centre's conduct in attempting to persuade the airlines to increase the prices at which they sold airline tickets directly to customers was an attempt to enter into a contract, arrangement or understanding which had or was likely to have the effect of fixing, controlling or maintaining the price for airline tickets in the market for the sale of airline tickets in which both Flight Centre and the airlines competed.

[emphasis added]

Justice Gordon

Justice Gordon noted the 'analysis of the decisions below, the bases of the appeal to this Court and the limits of the functional approach in defining a market' that were set out in the reasons of Kiefel and Gageler JJ and adopted them (para 150). Her Honour also agreed with the proposed orders of Kiefel and Gageler JJ.

Agency issue

Her Honour rejected any suggestion that the agency relationship that existed between the parties precluded a finding that the parties were in competition for purposes of the Act.

[para 152] Flight Centre's principal contention was that, because it was the "agent" of each airline, it was not, and could not be, "in competition with" each airline for the purposes of s 45A(1) of the TPA. That contention fails at the first hurdle. At the point at which Flight Centre was dealing with its own customers in its own right without reference to any interests of any airline, the description of Flight Centre as "agent" is wrong factually. Flight Centre, in its own right, was competing against all sellers of tickets, which included the airlines and other travel agents. Flight Centre was not acting as agent.

[para 153] Further, the description of Flight Centre as "agent" is irrelevant for the purposes of the applicable provisions of the TPA. Section 45A is concerned with proscribing various practices in respect of pricing that are "restrictive". It is concerned with competition. Whether Flight Centre was, at some stage of the transaction, to be labelled or characterised as "agent" of the airlines was not the statutory question and does not resolve the appeal.

Facts and law

Her Honour then set out the facts of the case and the relevant legal provisions

Market

Noting the definition of market in the Act, her Honour concluded:

[para 169] Here, the relevant market in Australia is the market in which Flight Centre, every other travel agent and every IATA member airline compete to sell to a customer a "valid contract of carriage" on an airline – a ticket. A ticket is a contractual "right", enforceable by customers against an airline, "provided, granted or conferred in trade or commerce", and thus falls within the statutory definition of "services" [fn: s 4(1) of the TPA].

[para 170] If a travel agent or an airline sells a ticket, the others do not. Flight Centre and the airlines are supplying the same service – a ticket entitling the named holder to travel at a scheduled time on a scheduled date on an identified airline between identified places. The tickets supplied by the airlines and by Flight Centre were substitutable: in response to changing prices over a period of time, the tickets supplied by Flight Centre were substitutable for those supplied by the airlines when customers were given a sufficient price incentive [fn: See Re Queensland Co-operative Milling Association Ltd – Proposed Merger (1976) 8 ALR 481 at 517 cited in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 188; [1989] HCA 6]. That is not surprising. They were supplying the same service – a ticket entitling the named holder to travel at a scheduled time on a scheduled date on an identified airline between identified places

[para 171] For the purposes of the TPA, Flight Centre, each other travel agent and each airline "supply" a service as they relevantly provide, grant or confer the ticket to a customer [fn: See par (b) of the definition of "supply" in s 4(1) of the TPA].

[para 172] The matter may be tested this way. For the purposes of the TPA, "supply" and "acquire" are words of wide import that are inter-related or symmetrical. "Supply" is the counterpart of "acquire". In relation to services, "acquire" is defined as including "accept". Even without that inclusive statutory language, "acquire" in its ordinary and natural meaning would include the receipt or acceptance of a service, here a ticket. From the perspective of the customer, who acquires the service by "accepting" the ticket, it is the fact that Flight Centre is to provide, grant or confer the ticket that is important, not whether it does so as the so-called "agent" for an airline [fn's omitted]

Competition

On the issue of competition her Honour observed that:

[para 173] The area of competition and rivalry between Flight Centre and each airline was close. The emails showed Flight Centre's obvious concern that when an airline offered discounted prices for tickets, Flight Centre's customers would stop buying tickets from Flight Centre and instead buy tickets from the airline. The emails indicated that, in circumstances where an airline was selling discounted tickets, Flight Centre (a) saw itself as "faced with being uncompetitive"; (b) considered those tickets as "eat[ing] into the available market"; (c) regarded the airline as undercutting it and damaging its brand; and (d) experienced difficulties in retaining, and feared it would lose, its customers, who would move to buying a ticket directly from an airline.

Her Honour noted Flight Centre's contention that there 'was and could be no competition between it and each of the airlines'; that 'a principal cannot be in competition with its "agent" because, under the law of agency, the "agent" supplies the good or service on behalf of the "principal".' [para 174] In response to these claims, her Honour observed that 'agent' is 'one of the most "commonly and constantly abused" words' and that 'Flight Centre's focus on the fact that it is identified as the "Agent"' in their supply agreement is too narrow. [para 175; footnote omitted] In particular, her Honour noted that:

[para 175] ... 'in its dealings with customers, Flight Centre began by acting as principal – just like each airline and each other travel agent. It acted as principal in telling the customer that "I will get you a deal", "I will sell you a ticket at the best price". At that point, Flight Centre and each airline were in direct competition – to sell a ticket.'

[para 176] ...'Second, under the PSAA, Flight Centre is the agent for more than one airline, and it is the rivalry between Flight Centre and its many principals that creates one aspect of the market and the competition.'

As a result, her Honour concluded that Flight Centre was in competition with each airline for purposes of the Act.

[para 177] The description of Flight Centre as "principal" or "agent" at various stages of the transaction of selling a ticket to a customer may be legally accurate, but it masks the proper identification of the rivalrous behaviours that occur at the point at which Flight Centre is dealing with its own customers in its own right without reference to any interests of any airline. At that point, the description of Flight Centre as "agent" is simply wrong. At that point, Flight Centre in its own right was competing against all sellers of tickets, which includes the airlines and other travel agents. Flight Centre was not acting as agent.

Purpose of contract, arrangement or understanding

As the airlines had not agreed to a contract, arrangement or understanding contravening s 45, the relevant prohibition was on Flight Centre attempting to induce the airlines to do so. Her Honour noted (para 181) that whether 'the proposed contract, arrangement or understanding had the prohibited purpose of fixing, controlling or maintaining the price for a ticket is to be determined subjectively' having regard to the "end [the parties] had in view" [fn: News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 at 573 [18]; [2003] HCA 45]'. Her Honour continued:

[para 181] ... Flight Centre's conduct shows that its end view was for the airlines to stop selling tickets online at prices less than those published to Flight Centre through the GDS. Although Flight Centre could sell the ticket at whatever price it chose, the airlines set the price of the ticket by publishing the fare through the GDS. The published fare was essentially a recommended retail price. The purpose of Flight Centre's proposed contract, arrangement or understanding was to fix the price of the airlines' online tickets so that they were at least the same as the recommended retail prices published through the GDS'

[para 183] Absent the proposed contract, arrangement or understanding, Flight Centre would have continued to compete with the airlines in the market for the sale of tickets to customers, with neither party constrained as to the prices at which they could offer to sell a ticket. Conversely, if the airlines were to implement Flight Centre's proposal, the airlines would no longer be free to fix and charge their own prices independently of Flight Centre, and there would be no or at least less competition or rivalry between Flight Centre and the airlines for the sale of tickets to customers. Accordingly, the future state of competition in the market for the sale of tickets would have been substantially lessened if Flight Centre's proposed contract, arrangement or understanding had been implemented.

 

Further reading: media and commentary

ACCC and party comments

Journal articles and academic comment

On the High Court decision

On the decision at first instance

  • Andrew Christopher, 'Case note: Flight Centre Limited v Australian Competition and Consumer Commission' (2015) 31(7) Competition and Consumer Law News 93
  • Andrew Christopher and Thea Fabricius, 'In competition with each other? Implications of the apparently divergent outcomes in Flight Centre and ANZ' (2015) 23(1) Australian Journal of Competition and Consumer Law 6
  • External linkStephen Corones, 'Agents as intermediaries: when to do they compete with their suppliers?' (2014) 42(1) ABLR 50-55
  • John Duns, 'Penalty problems in Flight Centre' (2014) 22(4) AJCCL 282
  • Jennifer Hambleton and Raymond Roca, 'Price-fixing in distribution relationships: ACCC v Flight Centre Ltd' (2014) 22 Australian Journal of Competition and Consumer Law 146
  • Nick McHugh, Claire Forster and Charlotte Minogue, 'Legitimate price management within a distribution channel, or cartel conduct? An important question posed by the Federal Court’s decision in ACCC v Flight Centre (No 2)' (2014) 30(1) Competition and Consumer Law News 6
  • Alexandra Merrett, 'ACCC opts for the long haul in Flight Centre but not ANZ' (2015) 31(8) Competition and Consumer Law News 98
  • Alexandra Merrett, 'The Flight Centre saga continues' (2014) 30(6) Competition and Consumer Law News 73
  • Peter Sise, 'Australian Competition Consumer Commission (ACCC) v Flight Centre Ltd (No 2): Implications for setting commissions and allocating geographic areas for selling agents' (2014) 30(7) Competition and Consumer Law News 88
  • Rachel Trindade, Alexandra Merrett and Rhonda Smith, '2013: the year of waiting patiently' (The State of Competition, Issue 15 (Dec 2013))

Firm commentary

On High Court judgment

Gilbert + Tobin

Client update, ACCC win against Flight Centre in High Court (14 December 2016)

Minter Ellison

Australian Competitive Edge | High Court upholds price fixing judgment against Flight Centre (14 December 2016)

On High Court special leave decision

DLA Piper LLP

DLA Piper, 'High Court to hear ACCC appeal of Flight Centre decision regarding carrier agent discussions (Australian Competition Law Update for the Aviation Industry)

Gilbert + Tobin

High Court says ACCC case still has wings (18 March 2016)

Herbert Smith Freehills

High Court to determine scope of cartel prohibitions in Flight Centre case (21 March 2016)

On Federal Court appeal decision

Ashurst

Ross Zaurrini, Alyssa Phillips and Mandy Bendelstein, 'Vertical price fixing? ACCC arguments in Flight Centre and ANZ grounded by Full Court' (Ashurst, Competition Law News, 3 August 2015) (PDF)

Chapman Tripp

Chapman Tripp, 'Court takes ACCC back to basics' (Brief Counsel, 4 August 2015)

Gilbert + Tobin

Gilbert+Tobin, 'Federal Court green lights dual distribution models: wins for Flight Centre and ANZ against ACCC price fixing allegations' (31 July 2015)

HopgoodGanim

ACCC to seek leave to appeal Flight Centre decision to High Court (9 September 2015)

King & Wood Mallesons

Stephen Ridgeway and Simon Cooke, 'Full Federal Court allows Flight Centre’s appeal' (King&Wood Mallesons, 31 July 2015)

On decision at first instance and the penalty decision

Clayton Utz

Michael Corrigan, Ian Reynolds and Shameela Karunakaran, 'Federal Court extends the notion of competition between principals and agents' (Clayton Utz Insights, 19 December 2014)

Aman Saxena and Kirsten Webb, 'The lesser of two evils for Flight Centre - Court hands down penalties' (Clayton Utz, 4 April 2014)

Gilbert + Tobin

Luke Woodward, Elizabeth Avery, Simon Snow, Charles Coorey and Genevieve Rahman, 'Dual distribution models at a crossroad: where do the ANZ and Flight Centre cases leave us?' (Glibert + Tobin update, December 2013)

Johnson Winter & Slattery Lawyers

Sar Katdare, Two landmark cases but the jury is still out (Johnson Winter & Slattery Lawyers) (PDF)

Marque Lawyers

Michael Bradley and Kiran Bath, 'So that’s how they guarantee lowest fares: Flight Centre cops $11 million fine for attempted price fixing' (Marque Update, 10 April 2014)

Media

On the High Court judgment

On the High Court appeal

On the Federal Court appeal

On decision at first instance and the penalty decision

 

Case links

Appeal (High Court)

  High Court case page
ACCC v Flight Centre Travel Group Limited [2016] HCA 49 (14 December 2016)
(High Court Judgment) (AustLII)
  ACCC v Flight Centre Travel Group Limited [2016] HCA 49 (14 December 2016)
(High Court Judgment) (Jade)
  ACCC v Flight Centre Travel Group Limited [2016] HCA 49 (14 December 2016)
(High Court Judgment) (High Court Page)
ACCC v Flight Centre Travel Group Limited [2016] HCATrans 167 (27 July 2016)
(transcript of HC Appeal) (AustLII)
  ACCC v Flight Centre Travel Group Limited [2016] HCATrans 167 (27 July 2016)
(transcript of HC Appeal) (Jade)
ACCC v Flight Centre Travel Group Limited [2016] HCATrans 59 (11 March 2016)
(transcript of special leave application) (AustLII)
  ACCC v Flight Centre Travel Group Limited [2016] HCATrans 59 (11 March 2016)
(transcript of special leave application) (Jade)

 

Appeal (Full Federal Court)

  Flight Centre Limited v ACCC [2015] FCAFC 104 (31 July 2015) (Federal Court)
Flight Centre Limited v ACCC [2015] FCAFC 104 (31 July 2015) (AustLII)
  Flight Centre Limited v ACCC [2015] FCAFC 104 (31 July 2015) (Jade)

 

Decision at first instance

ACCC v Flight Centre Limited (No 2) [2013] FCA 1313 (6 December 2013) (AustLII)
  ACCC v Flight Centre Limited (No 2) [2013] FCA 1313 (6 December 2013) (Jade)

 

Decision at first instance - penalty decision

ACCC v Flight Centre Limited (No 3) [2014] FCA 292 (28 March 2014) (AustLII)
  ACCC v Flight Centre Limited (No 3) [2014] FCA 292 (28 March 2014) (Jade)
   

 

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