Agent v Principal? Agency in Australian Competition Law

A recent decision by the High Court of Australia found that an agent may be in competition with its principal where certain features arise, such as the agent having the freedom to set its own prices or prioritize its own interests over those of its principal. In the case of ACCC v Flight Centre Travel Group Ltd (2016) 339 ALR 242, the High Court found that Flight Centre Travel Group Ltd (Flight Centre) was in competition with airlines in the market to supply international airline tickets.

As a consequence, companies that operate through agency relationships in Australia should consider whether they may be seen to be in competition with their agent or principal, and whether, as a result, any of their current agency agreements or understandings could be seen to be anti-competitive.

Background

This case was brought by the Australian competition regulator, the Australian Competition and Consumer Commission (the ACCC), against Flight Centre.

Between August 2005 and May 2009, Flight Centre, a leading travel agency business listed on the Australian Stock Exchange, was authorized to sell tickets of various airlines (including Singapore Airlines, Malaysian Airlines and Emirates) under a Passenger Sales Agency Agreement (the PSAA). Under the PSAA, Flight Centre was authorized to sell international airline tickets, paying the airline a nett amount calculated by reference to a published amount which also included an allowance for the travel agent. But the travel agent was not bound to sell a ticket at the published rate – it could sell a ticket for more, or less. The higher above the nett amount that Flight Centre could sell a ticket for, the greater its profit, and vice versa. Relevantly, the PSAA did not exclude the airlines from also directly selling their own tickets.

Over the same period, Flight Centre offered a “price beat guarantee”, whereby Flight Centre would beat the price quoted for a ticket by another party, including by an airline on its Australian website.

This created commercial difficulties for Flight Centre when each of Singapore Airlines, Malaysian Airlines and Emirates sold tickets directly to customers at prices less than the nett amounts.

In response to the airlines’ prices, a series of emails were sent on behalf of Flight Centre attempting to stop the airlines selling tickets at the lower prices, threatening that Flight Centre would stop selling their tickets unless they complied.

The ACCC alleged that this behaviour contravened section 45(2)(a)(ii) of the Trade Practices Act 1974 (Cth)¹ (the Act), by proposing an arrangement or understanding containing a provision which had the purpose and/or was likely to have the effect of fixing or controlling or maintaining prices for the supply of the services which Flight Centre and the airlines were selling in competition with each other.

The most controversial element of the ACCC’s allegation was whether Flight Centre was actually in competition with the airlines, which turned on the following issues:

• market definition; and
• whether the agency relationship meant that the agent was not in competition with its principal.

The market

The ACCC put forward two alternative cases in relation to the market. First, that Flight Centre and the three airlines competed in a market for the provision of flight distribution and booking services, and secondly, that they competed in a market for international passenger air travel services.

At first instance, the Federal Court of Australia accepted the first proposition and rejected the second, saying that only the airlines supplied flights as they operated the aircraft.

Flight Centre successfully appealed to the Full Federal Court, where the ACCC’s alternative cases were both rejected.

But there was a reversal of fortune when the matter was taken to the last point of appeal, the High Court of Australia, which accepted the second of the ACCC’s alternative cases, albeit describing the market differently as the “supply of contractual rights to international air carriage to customers” (as opposed to the performance of that contractual right), or more simply, the supply for international airline tickets.

The first of the ACCC’s alternative cases was again dismissed, with the attempt to construct the fact that an airline sells tickets directly to its customers as the airline providing itself with a “distribution service” being described as “quite artificial”. The Court commented that the booking of a flight, the issuing of a ticket and the collecting of the fare could not be treated as separate elements when they were in fact inseparable elements of the sale of a ticket.

When will an agent be in competition with their principal?

The most contentious point of this case before the High Court was the interaction of the laws of agency and competition. As noted in Chief Justice French’s dissenting opinion, “the characterisation of Flight Centre as a competitor of the airlines… was necessary in order to establish the contraventions alleged”.

Justices Keifel and Gageler decided that notwithstanding the fact that Flight Centre was acting as the airlines’ agent, it was free to prefer its own interests over those of the airlines, to set its own price for the tickets, and to decide whether or not to sell the tickets at all. To the extent that the agent was free to act, and act in its own interest, they declared that “the mere existence of the agency relationship did not in law preclude the agent from competing with the principal for the supply of contractual rights against the principal”. In a separate judgment, Justice Gordon added that Flight Centre was engaging in rivalrous behaviours in its own right without reference to the interests of the airlines, thereby not acting as agent but as a competitor.

Thus, the majority decided that where certain factors were in play, such as the agent having freedom to set its own prices and prioritize its own interests over those of its principal, an agent can be in competition with its principal. In this case, they found that Flight Centre was in competition with the airlines in the market to supply international airline tickets.

Chief Justice French dissented, saying that the idea that Flight Centre and the airlines were competing “assumes a concept of competition under the Act which is in tension with that of an agency relationship at law”. He focussed on the legal concept of agency, quoting the maxim “he who does an act through another does it himself”. He acknowledged that in the trade and commerce context, the term “agent” may not mean an agent at law, but that this was not the case for Flight Centre – Flight Centre was not a broader, “commercial agent”, but a legal agent. Chief Justice French said that the relevant activity in this case, the sale of contractual rights to travel on the airlines, lay at the  “heart” of the agency arrangement in question. The Chief Justice concluded his dissent by noting that “in relation to the supply of contractual rights Flight Centre’s conduct is properly to be regarded as that of the airline”.

Commercial impact

The finding that an agent can be in competition with its principal (in certain circumstances), will mean that agents and principals in all industries may need to be more careful about their relationships and interactions. While the Flight Centre case focused on price fixing, agents and their principals could be found to engage in anti-competitive behaviour in other aspects of their relationship as well – for example, in relation to the allocation of distribution zones.

Furthermore, the circumstances in which an agent and principal are found to be competing may broaden in the future. In the Flight Centre case, the agent’s freedom to set prices was found to be a compelling factor in proving that the agent and principal were in competition. Even in more tightly contracted agency relationships, where an agent does not have the ability to set their own prices, other freedoms could potentially be used to demonstrate that an agent and its principal are in competition. For example, if the agent sells the principal’s service on a more advanced technological platform, this could be seen as evidence of their being in competition with their principal. This in turn may call into question restrictions that exist as part of the principal and agent’s commercial relationship, such as the arrangements in relation to price.

We reiterate that companies that operate through agency relationships in Australia should consider whether they may be seen to be in competition with their agent or principal, and whether, as a result, any of their current agency agreements or understandings could be seen to be anti-competitive.