31 July 2015

Full Federal Court allows Flight Centre’s appeal

This article was written by Stephen Ridgeway and Simon Cooke.

Flight Centre Travel Group Limited (Flight Centre) has successfully appealed a first-instance Federal Court decision that found it had attempted to induce anti-competitive arrangements with three international airlines.

The Full Court of the Federal Court of Australia has today unanimously[1]  allowed the appeal by Flight Centre against the finding that it had attempted to induce a contravention of the price fixing provisions of the Trade Practices Act 1974 (Act) [2], and determined that the order for Flight Centre to pay pecuniary penalties of $11 million be set aside.

As a consequence, the Full Court also dismissed the cross-appeal by the Australian Competition and Consumer Commission (ACCC) in relation to the size of the penalty originally ordered by the Federal Court.

In allowing the appeal, the Full Court found that the primary judge had erred in finding that there was a separate market for “booking and distribution services to consumers”. Noting that the market definition relied on at first instance ‘lacked precision and clarity’, and was “in fact an artificial construct that did not truly reflect the commercial reality of the relevant commercial relationship and dealings”, [3] the Full Court instead found that services such as booking and ticketing were an ancillary part of the supply of international passenger air travel, which Flight Centre supplied in its capacity as an agent for the airlines.

As a consequence of the Full Court’s findings about the relevant market definition, it concluded that there was no competition between the airlines and Flight Centre in respect of any of the relevant services of the kind required by the ‘per se’ price fixing provisions of the Act.

In particular, the Full Court concluded that the relevant airlines did not supply any distribution services to themselves in competition with Flight Centre, and nor did Flight Centre supply any booking services to consumers in competition with the airlines.

In arriving at its findings, the Full Court also agreed with Flight Centre’s submission that the High Court’s decision in High Court in Castlemaine Tooheys Limited v Williams and Hodgson Transport Pty Ltd [4] was applicable to Flight Centre’s role in the sale of air travel to customers as an agent of the relevant airline, noting as follows:

When Flight Centre sold a flight on behalf of one of the airlines, and provided ancillary services to the consumer, such as booking and ticketing, the ancillary services were, by reason of the agency relationship, supplied to the consumer by the airlines. Flight Centre may have physically provided the booking services and the consumer may have received the benefit of those services from Flight Centre. But those services were in law supplied by Flight Centre to the airlines under the agency agreement. [5]

In an important qualification however, the Full Court observed that although the nature of any agency relationship between two parties will be an important consideration, the mere existence of an agency arrangement does not mean that those two parties can never be in competition with each other for the purposes of Part IV of the Act, and that each such case must be considered on its own facts.

While the Full Court’s findings that no separate market for the supply of booking and distribution services existed were sufficient to decide the appeal, the Full Court also gave consideration to the broader question of the degree of competition between Flight Centre and the airlines, for the purposes of the Act.

The primary judge was heavily influenced by some of Flight Centre’s emails and internal documents, which used words such as “friend and foe” and “disintermediation”, to find that the necessary degree of competition existed.

Whilst the Full Court noted that such documents and language indicated a degree of commercial concerns (and potentially a threat to Flight Centre), it was “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 service”[6] , which was a market that Flight Centre did not, and could not compete with airlines in.

Accordingly, the Full Court concluded that the primary judge had 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[7]  (i.e. the market for distribution and booking services).

This decision, along with the Full Court’s decision to uphold the original decision in ACCC v Australia and New Zealand Banking Group Limited[8]  represents a significant and welcome clarification of the application of the competition laws (and particularly the laws relating to price fixing) to commercial relationships that involve the appointment of agents for the purposes of distributing products and services to consumers.

In responding to the decision, ACCC Chairman Rod Sims has said that ACCC would carefully consider it and the judgment in the ANZ case.

[1]Flight Centre Limited v Australian Competition and Consumer Commission [2015] FCAFC 104, per Allsop CJ, Davies J and Wigney J

[2]Now the Competition and Consumer Act 2010 (Cth)

[3][2015] FCAFC 104 at 176

[4](1986) 162 CLR 395

[5][2015] FCAFC 104 at [157]

[6][2015] FCAFC 104 at [173]

[7][2015] FCAFC 104 at [176]

[8][2015] FCAFC 103

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