Agent principal relationship in antitrust

Liability of Principal and Agent; Termination of Agency

agent principal relationship in antitrust

As a consequence, companies that operate through agency relationships in agency relationship meant that the agent was not in competition with its principal. The law of agency is an area of commercial law dealing with a set of contractual, agents and principals (internal relationship), known as the principal-agent .. of this investigation must be that these are commercial relationships in which. Jun 20, CPI Europe Column edited by Anna Tzanaki (Competition Policy . So when is the Principal-Agent relationship sufficiently analogous to a.

Whilst this question may seem like a rather esoteric and philosophic debate best left to academics, its conclusion has potentially far reaching consequences for the growth of online markets, online business models and how the MFNs are practically treated. For example, if Expedia is defined as a retailer, by not choosing its price itself and leaving the price decision to hotels, Expedia is now party to Retail Price Maintenance.

RPM is a hardcore infringement under Article 1 TFEU, assumed to be detrimental to competition and carrying with it substantial fines and public castigation — as the publishers and Apple have been forced to face. It also implies a fundamental revisit to their business model by the firms engaging in RPM practices.

Principal–agent problem

However, if Expedia were a genuine agent, then the fact that hotels choose price and not Expedia is no longer assessable under Article 1 — therefore there is no infringement, no fine, no public pillorying and most importantly, no need to change their business model.

With so much at stake, the legal community has refocused on this lesser known area of competition law — Agency agreements. In this paper we attempt to redress this balance by first, setting out some initial economic underpinnings for Genuine Agency law. Second, we use these underpinnings to provide insights into some of the key legal questions regarding what actually constitutes a Genuine Agent. The eminent economist Ronald Coase first posited that firms exist in order to minimise transaction costs, as the transaction costs of working outside of a firm structure increase, the internal structure of a firm becomes a more efficient way of organising labour and capital than the market.

For example, if a distribution agreement and full vertical integration have the same competitive outcome on the upstream and downstream markets, in general both should have identical intervention standards.

Online Platforms: Retailers, Genuine Agents or None of the Above?

Without such competitive neutrality, firms may choose to embark on less efficient firm structures simply to exploit the difference in treatment under competition law. This concept of organisational neutrality has been a driving force behind many of the reforms in competition policy over time — including the gradual convergence of the Non-Horizontal Merger Guidelines and the Guidelines on Vertical Restraints.

Over time there has been a concerted effort to ensure consistency across competition instruments precisely to prevent organisational arbitrage. This concept of organisational neutrality provides a rationale for the Genuine Agency exception. In order to appraise an Agency agreement, one could obviously look at all the specifics of the agreement to determine if each clause was pro- or anticompetitive. This would take time and may result in some clauses such as RPM being found infringing Article 1.

agent principal relationship in antitrust

Faced with risk that the entire agreement could be declared void, firms will have a strong incentive to vertically integrate. However, if it was known that the distribution agreement created a relationship that was truly analogous to a vertically integrated structure i. Provisions that only relate to the principal and agent, such as RPM, just as in a vertically integrated structure, would not fall within Article 1.

Such an analysis would fulfil the concept for organisational neutrality and provides a possible short-cut to the need to look at the individual clauses between the principal and the agent.

agent principal relationship in antitrust

This provides the economic rationale for the first limb of the legal test which states that where an agent, although having separate legal personality, does not independently determine his own conduct on the market, but carries out the instructions given to him by his principal, the prohibitions set out in Article 1 will not apply to the relationship between the agent and the principal.

From the Non-Horizontal Merger Guidelines it is clear that the creation of vertically integrated firms can cause harm — even if harm is much less likely than in horizontal mergers.

agent principal relationship in antitrust

Therefore, one will still want to examine whether there are restrictions, which have an impact outside of the vertically integrated structure. This suggests that a General Agency exception should be narrowly scoped. This provides the economic rationale for the second limb of test for Genuine Agent agreements, where provisions which concern the relationship between the principal and the agent may infringe Article 1 in so much as they either lead to foreclosure on the relevant market, or facilitate collusion — for example by collectively excluding others from using the same agents.

The key economic question is whether the agent will make the same decision as the principal, or whether it will make its own, possibly diverging set of decisions independently of the principal. RPM in a standard wholesaler relationship splits the incentives of retailer and manufacturer.

agent principal relationship in antitrust

The retailer has ownership of the good, but it is the manufacturer who controls the price — thus creating the scope for divergence of incentives between the parties. However, in a Genuine Agency agreement situation, both ownership of the product and control of the price remains with the principal.

However, although ownership is key to the question of Genuine Agency, it is not, as we discuss below, the only factor considered. Impact of Risk on Genuine Agency Risk has long played a key role in the question of Genuine Agency, unsurprisingly given its close correspondence with the concepts of ownership and control.

Without corresponding control, ownership of a product is a cost with a significant risk if it cannot be sold. Conversely, if the agent is compensated for any risks that it undertakes on behalf of the principal, it will not have the incentive to take independent decisions from the principal. For example, the principal may want the agent to lavishly promote its product, by providing and training knowledgeable sales staff.

But providing such sales support is inherently risky — the agent needs to sell enough of the product in question and make enough money on those sales to ensure that it can provide such service profitably. Indeed even if ex post the agent makes money on the product, this does not necessarily mean that there was no risk at the time of the initial decision.

The key is whether the agent at the time would have made a different decision regarding the optimal level of sales support than the principal. Impact of multiple principal-agent relationships on Genuine Agency The same analysis can be used regarding the question of whether an agent who has relationships with multiple agents can truly be a Genuine Agent. This is an area, which is particularly opaque in EU competition law given the potentially conflicting views between the Commission and the Courts.

When a firm acts as an agent to multiple, competing principals, it will be difficult to perfectly satisfy all their wishes simultaneously. By the same reasoning as before, if the agent is making such independent decisions, then, absent other factors, it will be more difficult to argue it will act as a single economic unit with the principal and hence is a Genuine Agent.

Bargaining Power One interesting question is whether one can look at the bargaining power, and therefore the types of conditions that the agent can impose on the principal, as relevant to the question of whether it is a Genuine Agent.

In this regard the downstream party may well be in a stronger bargaining position before entering into the agreement and therefore may be able to extract concessions from the principal in return for becoming its agent.

Agent v Principal? Agency in Australian Competition Law | Global Law Firm | Norton Rose Fulbright

However, once the conditions have been decided and the agent has entered into the arrangement, the agent may well act as a single economic unit with the principal and hence constitute a Genuine Agent. Therefore, in considering bargaining power one must be careful not to conflate any bargaining power before the agreement with the ability to act independently once the agreement has been entered into. So far so good, whilst the case law and policy are somewhat opaque, there seems to be a clear economic underpinning for the Genuine Agency exception to Article 1.

Nonetheless, a difficulty arises when one starts to attempt to widen the Genuine Agency analysis outside of standard retailers and into the realm of distribution platforms. With the advent of the Internet we have seen the significant growth of the business model in which disparate buyers and sellers are brought together on a common platform.

In this sense the platform is not a typical retailer or seller whom the Genuine Agency analysis has historically considered. As a result, an overly narrow interpretation of the Genuine Agency analysis may well suggest that these platforms are not Genuine Agents and therefore should not be exempt from Article 1. This is not just relevant for online platforms and indeed one can illustrate the concern with a simple example taken from the traditional world of bricks and mortar.

Consider the application of the Genuine Agency test to a shopping mall. 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.

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. Commercial impact The finding that an agent can be in competition with its principal in certain circumstanceswill 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.

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. 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.

The Act has since been renamed the Competition and Consumer Act the Actwith section 45A 1 repealed and replaced with specific prohibitions in relation to cartel provisions which are to similar effect but carry with them more severe potential consequences, including imprisonment.