Application of Australian competition laws to distribution and agency relationships: the Flight Centre and ANZ Bank full Federal Court appeals

12 August 2015

Kathryn Edghill

On 31 July 2015 two identically constituted full courts of the Federal Court found against the Australian competition regulator, the ACCC, in two appeals involving allegations in which the central issue in the determination of liability for price- fixing or attempted price-fixing was the identification of the relevant markets.  In doing so, the Federal Court has provided much anticipated clarification on the application of competition laws to arrangements between parties in which one party sells, or arranges the sale of the other party's products and services, including as distributors and agents.

The two cases concerned were ACCC V ANZ Banking Group Limited [2015] FCAFC 103 and Flight Centre Limited v ACCC [2015] FCAFC 104. 

The ANZ case

In the ANZ case, the ACCC appealed from a decision of the primary judge that an agreement between the ANZ Bank and a particular mortgage broker which contained a provision that restricted the maximum amount which the broker could offer to refund to a customer when that customer obtained a loan from the Bank, did not amount to price-fixing between competitors in the alleged market for the supply of loan assistance services to consumers.  The primary judge found that the Bank and external mortgage brokers did not compete in any such market.  His Honour found that while mortgage brokers did supply loan assistance services (in the form of identifying and assisting clients to obtain loans from a number of loan providers), the Bank did not do so, any such assistance it provided being merely ancillary to the provision of its loan product in the market for the supply of loan products.  The brokers themselves did not compete in that market for the supply of loan products. 

The Full Court dismissed the ACCC's appeal and upheld the primary judge's decision that no separate market existed in which the Bank and the mortgage broker competed for the provision of loan assistance services, and that the Bank's conduct occurred in the market for the supply of loan products in which the broker did not participate. In arriving at this finding the Full Federal Court noted that it appeared "to be somewhat contrived and artificial to characterise the provision of advice and assistance by bank officers in relation to loan products as the provision of services in a market separate and distinct from the market for the supply of the loan products themselves" .

The Flight Centre case

In the Flight Centre case, Flight Centre (a travel agency which sold international airline tickets as agent for various airlines) appealed from the decision of the primary judge that attempts by Flight Centre to induce those international airlines to stop selling airline tickets directly to the public through their websites  at prices which were less than the nett fare the airlines made available to Flight Centre (plus commission or margin), amounted to attempted price-fixing by Flight Centre in the market for the provision of booking and distribution services for international air travel.  His Honour found that Flight Centre (as a travel agent) competed with the airlines in that market. 

The Full Court upheld Flight Centre's appeal and found that no separate market existed for the supply of booking and distribution services.  It found that the only relevant market was the market for the supply of international airline services, a market in which Flight Centre participated only as agent for the airlines and did not, therefore, compete in its own right.

The appeal by the ACCC against the penalty awarded by the primary judge to Flight Centre was also dismissed.

The importance of the decisions - identifying the relevant market in which to assess the conduct

The conflicting decisions of the primary judges in the ANZ and Flight Centre cases had been cause for concern not just for those in the mortgage broking and travel agency businesses but also for any businesses which are involved in the sale and distribution of one party's products or services (whether as distributors, resellers or agents).  The Full Court decisions have removed the conflict and, in doing so, have provided useful guidance on market definition which is a crucial element in determining whether parties are in competition with one another and their conduct subject to the prohibitions on agreements between competitors which include cartel provisions (such as price-fixing and market sharing).

The identification of the relevant market(s) in which conduct occurs and the determination as to whether parties compete in those markets can be a vexed question, occupying much time and debate between  lawyers and economists.  The parameters of that debate, and the role of expert evidence, have been usefully set out in the two decisions of the Full Federal Court with a clear reminder that the question of market definition is ultimately a question of fact in every case and that artificial constructs which do not take into account commercial realities are not likely to be accepted by the courts.  Specifically, the Court has confirmed that:

  • in relation to the product dimension of a market, substitutability is critical – if products and services are not substitutable, they are not in the same market;
  • market definition is not an exact science but involves value judgments and room for differences of opinion;
  • a market isn't a feature of the real world but is a purposive, analytical tool devised by economists to deal with the particular issue to be resolved;
  • a market must "nonetheless have economic and commercial reality" and be based on findings of fact;
  • a market must "accurately and realistically describe and reflect the interactions between, and perceptions and actions of, the relevant commercial community"; and
  • economists "may also have a role in ordering, categorising and explaining the primary assumed facts if that is based on the use of the economist’s specialised technique of thinking" but there are "limits to the role in which an economist can properly or usefully play in relation to the primary or underlying facts. It is not for the economist to draw inferences or express conclusions about the primary facts if those inferences or conclusions are not based on his or her skill, background and expertise".

What do the decisions mean for arrangements between parties in which one party sells, or arranges the sale of the other party's products and services, including as distributors and agents

While the decisions have resolved the conflict between the findings of the two primary judges in the two cases at first instance, and have gone a long way to clarifying the application of competition law to arrangements between parties in which one party sells, or arranges the sale of the other party's products and services, including as distributors and agents, they should not be regarded as determining conclusively that parties in such "vertical" relationships can never be regarded as competitors and, therefore, that conduct between them, could never amount to illegal cartel conduct.  As the Court stated in the ANZ case:

"It does not necessarily follow that there can never be a case where a manufacturer (or product originator) which has its own distribution division (or separate economic unit) competes with external distribution channels in the market for the supply of the particular product. No such general principle can or should be extracted from the outcome of this matter, including this appeal. Each case needs to be considered on its own facts and circumstances."

Authors

Kathryn Edghill

Partner
Australia

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