Businesses who use agents to sell their products or services are now at risk of prosecution for breaching competition law.  A recent High Court decision has confirmed that an agreement on price restrictions between agents and principals will breach Australia’s restrictive trade practices laws.

In vertical distribution arrangements, a business engages an agent to sell the products or services of that business often for a commission on sales or some other agency fee for their services. Depending on the agreement reached with the agent, the business may also sell directly to customers.

Australia prohibits restrictive trade practices between competitors in a market. This prohibition includes bid-rigging, cartel conduct, price fixing, private disclosure of pricing and collective boycotts. Until now, many principals and agents in vertical distribution arrangements have operated on the assumption that the prohibitions do not apply to them because they are not in competition with each other. The main reason for this assumption is that the agent is acting on behalf of the business. The High Court has called this assumption into serious doubt.

In the recent case, the Australian Competition and Consumer Commission (‘ACCC’) alleged Flight Centre engaged in price fixing. Flight Centre sells airline tickets as agent of several airlines in a vertical distribution model. The airlines also sell tickets directly to customers. From 2005 to 2009 Flight Centre sent a series of emails to airlines attempting to stop the airlines offering tickets directly to customers at prices lower than the fares privately published to travel agents. Despite acknowledging Flight Centre was acting as the airlines’ agent, the High Court held Flight Centre competed with the airlines and therefore engaged in illegal price fixing.

The decision means that agency does not prevent parties from being in competition with each other. Factors relevant in determining whether a business and its agent are in competition are:

• the commercial nature of the relationship;
• the terms and conditions of the agency agreement (particularly the agent’s ability to negotiate with third parties and whether the agent is obliged to ‘act in the interests’ of the business); and
• whether a prospective customer would consider the product or service offered by the business and agent as alternatives primarily differentiated by price.

The implications of this decision are significant and extend further than the travel industry. Many supply and distribution agreements include price parity clauses, which are likely now anti-competitive. Furthermore, in most agency relationships, there is at least some degree of cooperation between the business and the agent. This behaviour may also now be seen to be anti-competitive and prohibited.

If you are party to an agency arrangement (either as principal or agent) and there is a risk that the principal and agent are in competition for the relevant products or services, you should have those agreements reviewed as a matter of priority.

If you’d like to understand more about this significant change in the law and what it may mean for you, please contact one of our team.