8 August, 2015
Flight Centre has successfully appealed against the Federal Court judgment finding it had engaged in price fixing in dealing with airlines. Before the same appeal Court, the ACCC has failed in its appeal against a decision dismissing price fixing allegations against ANZ in its dealings with mortgage brokers.
The appeals involved similar issues – the proper characterisation, for competition law purposes, of interactions between participants in the travel and mortgage loan sectors. Are those participants in the same market and are they supplying services in competition with each other?
What you need to know
- On 31 July 2015, the Full Court of the Federal Court allowed Flight Centre's appeal in Flight Centre v ACCC [2015] FCAFC 104. On the same day, the same appeal Court dismissed the ACCC's appeal in ACCC v ANZ [2015] FCAFC 103.
- In each of the appeal decisions, the Full Court found against the ACCC's theory of "vertical" price fixing, on the basis that Flight Centre and the airlines in one case, and ANZ and mortgage brokers in the other, did not supply services in the same market in competition with each other.
- The question whether a manufacturer and its distributors, resellers and agents are supplying products in competition with each other in the same market must be answered by reference to commercial reality. Separating "assistance", "arranging" or other ancillary services from the supply of the underlying product is likely to result in a contrived or artificial analysis of competition law risks.
- A multi-channel distribution model, including a mix of internal and external supply channels, does not raise any inherent competition law problem. A party acting as the agent of a business, selling goods on that business' behalf, is not in competition with that business (even if the business also sells directly to the same customers).
- But there is no general principle to the effect that manufacturers with their own internal distribution channel cannot ever be in competition with suppliers (including agents) involved in external distribution channels in the market for the supply of a common product. Rather, each case must be considered on its own facts and circumstances to determine whether such competition in fact exists.
- It remains very important in managing multi-channel distribution models to be very clear about the nature of the commercial relationships across the distribution system.
ANZ: A quick recap
In November 2013, in ACCC v ANZ [2013] FCA 1206, the Federal Court dismissed proceedings brought by the Australian Competition and Consumer Commission (ACCC) alleging that Australian and New Zealand Banking Group Limited (ANZ) had engaged in price fixing conduct in contravention of the then Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)).
The ACCC's allegations arose in the following circumstances:
- Mortgage Refunds advertised and promoted a "mortgage refund" offer involving the rebate to customers of part or all of the commissions paid by ANZ to the brokers.
- In March 2004, ANZ wrote to AFG seeking to prevent Mortgage Refunds advertising and promoting rebates on ANZ loans by cancelling the mortgage brokers' accreditation. Following negotiation between the parties, ANZ agreed to re-activate the accreditation provided Mortgage Refunds agreed that:
The maximum refund that can be provided to the customer in relation to an ANZ Loan Product is to be no greater than the amount of the Loan Approval Fee as determined by the ANZ Bank. The amount of this fee may be altered at any time and at the Bank’s sole discretion.
This would allow ANZ to match the rebate if it chose to waive its loan approval fee.
The ACCC alleged that this agreement as to the maximum refund to be offered to consumers, amounted to price fixing between competitors. The primary issue concerned whether ANZ branches and mortgage franchisees competed with Mortgage Refunds (or its brokers) for the supply of "loan arrangement services" to consumers. If the parties did not compete, the allegations of price fixing could not stand.
The Court at first instance held that ANZ did not participate in any market in which the brokers provided loan arrangement services to potential borrowers (rather, ANZ provided the actual loan), and that ANZ and Mortgage Refunds (or its brokers) were not competitors in relation to the supply of such arrangement services.
Read more about the ANZ decision at first instance here.
Flight Centre: A quick recap
In December 2013, in ACCC v Flight Centre Limited (No 2) [2013] FCA 1313, the Federal Court found that Flight Centre Limited (Flight Centre) had, on six occasions between 2005 and 2009, attempted to induce one of Singapore Airlines, Malaysia Airlines and Emirates to enter into price fixing arrangements.
The decision was based on the following findings:
- A relationship of principal and agent exists between Flight Centre and the relevant airlines in relation to the sale of air travel.
- ANZ sold loan products through a range of channels, including through the ANZ Mortgage Group. The ANZ Mortgage Group in turn used various distribution channels including ANZ branches, Mortgage Solution franchisees, brokers and specialised agencies.
- In 2001, ANZ appointed Australian Financial Group Limited (AFG) as an independent contractor to market and arrange certain ANZ loan products for customers.
- AFG subsequently appointed, as accredited officers under its contract with ANZ, certain mortgage brokers (operating under the "Mortgage Refunds" banner).
- Flight Centre attempted to induce airlines to make a contract, arrangement or understanding that any fare that the airline offered directly to customers would also be made available for purchase through Flight Centre, and would be sold by the airline at a total price no less than the amount that Flight Centre would be required to remit to the airline if Flight Centre sold the fare (ie the "nett price") plus a commission.
- There is a market for distribution and booking services in respect of available air travel, distinct from the supply of air travel itself. Flight Centre provided these services and so did the airlines themselves.
- Flight Centre competed with the airlines for the retail or distribution margin associated with each airfare, and that was the "price" that Flight Centre attempted to maintain through its communications with the airlines.
Read more about the Flight Centre decision on liability here. In April 2014, the Court imposed $11m in civil penalties1 on Flight Centre for this attempted price-fixing conduct. Read more about the penalty decision here.
Law in a state of flux
The Flight Centre decision had potentially broad reaching, and problematic, implications for businesses which sell directly to the public and also use agents or distributors to sell on their behalf. The apparent inconsistency between the outcomes in Flight Centre and ANZ further fuelled the uncertainty about the competition law risks associated with the agency and consignment business models.
The filing of appeals in both cases provided an opportunity for the Full Federal Court to address these issues and provide much-needed guidance in this area.
Outcome of the appeals
In each of the appeal decisions, the Full Court found against the ACCC's theory of "vertical" price fixing, on the basis that Flight Centre and the airlines in one case, and ANZ and mortgage brokers in the other, did not supply services in the same market in competition with each other.
The Full Court, however, expressed the view that there is no general principle to the effect that manufacturers with their own internal distribution channel cannot ever be in competition with suppliers (including agents) involved in external distribution channels in the market for the supply of a common product. Rather, each case must be considered on its own facts and circumstances to determine whether such competition in fact exists.
"…it is important to note that the Full Court observed that it is possible for internal and external distribution channels to be in competition, and that each case needs to be considered on its own facts and circumstances."
Rod Sims, Chairman of the ACCC
Flight Centre's appeal focussed on the primary Judge's finding that Flight Centre was in competition with the relevant airlines in the market for "distribution and booking services". Flight Centre's principal arguments were that:
- Flight Centre did not itself supply, and had no ability to itself supply, international air travel services;
- the relationship between Flight Centre and each of the airlines was that of principal and agent, which is not a relationship of competition; and
- there was no market for "distribution and booking services" in which Flight Centre was supplying services to both the airlines and passengers. Flight Centre was critical of the artificiality with which the ACCC had contended that there existed a market for the provision of distribution and booking services, separate to the market for the supply of the flight itself.
The Full Court agreed. The Full Court found that there was no separate market for the supply of "distribution and booking services" and that, as a result, the airlines and Flight Centre did not compete in any such market.
The Full Court also criticised the artificiality of defining any such market separately from international air travel itself. Rather, the Full Court found that 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 to consumers. This is the case whether that international air travel is supplied directly by the airlines or on the airlines behalf by an agent, such as Flight Centre.
In the relevant market, namely the market for international air travel, Flight Centre acted as agent for the airlines and had no capacity to supply the services themselves. In such circumstances, Flight Centre's conduct (although a clear expression of commercial concern as to the level of commission Flight Centre was able to earn) could not be construed as attempted price fixing conduct in contravention of the CCA.
The ANZ Appeal
The ACCC's appeal focussed on the finding at first instance that ANZ and Mortgage Refunds did not compete with each other in the market for the supply of loan arrangement services.
"Critical to the ACCC's case was the allegation that ANZ and Mortgage Refunds competed against each other, and other banks and brokers, in the market for the supply of loan arrangement services."
Allsop CJ, Davies J and Wigney J
In the absence of a finding that ANZ, through its internal distribution channels, did compete with Mortgage Refunds in a market for "loan arrangement services", the ACCC's price fixing case could not succeed – it cannot be said that ANZ and Mortgage Refunds compete in the market for the provision of the loan product itself, as Mortgage Refunds does not (and has no capacity to) provide loan products in its own right.
Consistent with its decision in Flight Centre, however, the Full Court preferred the view that the "loan arrangement services" ANZ provided in respect of its own loans, were an ancillary part of the provision of ANZ loan products, and not a distinct service provided in a separate market. Again, the Full Court criticised as "somewhat contrived and artificial", the ACCC's characterisation of advice and assistance by ANZ's 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 loans products themselves.
The Full Court concluded that:
"Once it is accepted that the ANZ branches did not supply loan arrangement services to prospective customers, but rather performed a sales or distribution service on behalf of ANZ Mortgage Group or ANZ in the market for the provision of loan products, it must follow that ANZ did not relevantly compete with independent mortgage brokers, including Mortgage Refunds. The ACCC's case, and therefore the appeal, must accordingly fail."
To illustrate its point, the Full Court drew the following illustrative analogy.
- A customer is considering purchasing a car from a car dealership. In selecting the car, the dealer provides advice about which car to buy, and the dealer may even assist the customer in filing out the necessary paperwork.
- If the customer walks away, the dealer gets nothing for his advice and assistance.
- Ashurst Competition Law News | 3 August 2015 Page 4
- If the customer purchases the car, the dealer receives a defined commission. The amount the dealer receives is not referable to the type, or quality, of assistance that the dealer has provided in helping the customer to select the vehicle.
- When the customer pays for the car, the payment is made for the supply of the vehicle in the motor vehicle supply market. The customer would consider any assistance received in respect of the sale as an ancillary part of that supply – there is no separate market for the provision of "car advisory or assistance services".
What next?
The ACCC has 28 days to consider seeking special leave to appeal to the High Court in one or both of the Flight Centre and ANZ cases.
Implications for businesses with internal and external supply channels – managing multi-channel distribution
- The Flight Centre and ANZ decisions resolve the uncertainty created by having divergent outcomes in two cases with similar fact scenarios. They clarify the way forward for businesses, legal practitioners and the regulator – the question whether a manufacturer and its distributors, resellers and agents are supplying products in competition with each other in the same market must be answered by reference to commercial reality. Separating "assistance", "arranging" or other ancillary services from the supply of the underlying product is likely to result in a contrived or artificial analysis of competition law risks.
- Many businesses employ a multi-channel distribution model, including a mix of internal and external supply channels. These appeal decisions confirm that such distribution models do not raise any inherent competition law problem. A party acting as the agent of a business, selling goods on that business' behalf, is not in competition with that business (even if the business also sells directly to the same customers).
- But there is no general principle to the effect that manufacturers with their own internal distribution channel cannot ever be in competition with suppliers (including agents) involved in external distribution channels in the market for the supply of a common product. Rather, each case must be considered on its own facts and circumstances to determine whether such competition in fact exists.
- It is possible that an agent can, as a matter of fact, also compete with its principal. For example, an agent may sell widgets on behalf of its principal but also independently sell widgets it manufactures itself or on behalf of others. In these circumstances, the principal and agent compete in the market for the sale of widgets and the principal must manage competition law risk when engaging with the agent.
- Similarly, even if termed an "agent", if one party is merely a reseller or distributor for a manufacturer, selling goods in its own right, and the manufacturer, also sells directly to the same prospective customers, the manufacturer and reseller/distributor are very likely to be in competition with each other.
- It remains very important in managing multi-channel distribution models to be very clear about the nature of the commercial relationships across the distribution system.
- o Consider whether you are dealing with a distributor, reseller or an agent. There are clear commercial trade-offs for each and each will have differing competition law implications.
- o Do not blur the lines between resellers/distributors, agents and your own direct sales force. Careful consideration is required in preparing written communications and other documents. Always use precise, correct terminology in documents to describe the nature of the relationship, the nature of any restriction to be imposed and what you are seeking to achieve.
For further information, please contact:
Ross Zaurrini, Partner, Ashurst
ross.zaurrini@ashurst.com
