United States: Ninth Circuit Grounds Aftermarket Claims, Refusing To Stretch Antitrust Theories And Reminding Plaintiffs That Allegations Must Be Supported By Evidence Of Anti-Competitive Harm

Last Updated: September 14 2016
Article by Antitrust Watch

Article by Howard Ullman and David Goldstein

Last week, the Ninth Circuit affirmed a summary judgment disposing of numerous antitrust claims brought by an independent servicer against a manufacturer of systems and parts that also provides service. The court emphasized that "[t]his case serves as a reminder that anecdotal speculation and supposition are not a substitute for evidence, and that evidence decoupled from harm to competition—the bellweather of antitrust—is insufficient to defeat summary judgment." Aerotec Int'l, Inc. v. Honeywell Int'l, Inc., No. 14-15562 (9th Cir. Sept. 9, 2016).

Auxiliary Power Units ("APUs") power an airplane's air conditioning, cabin lights and instrumentation. Aerotec International, Inc. ("Aerotec'), a small servicer of APUs, including those manufactured by Honeywell International, Inc. ("Honeywell"), complained that Honeywell had stalled Aerotec's sales efforts and prevented it from reaching cruising altitude through a variety of alleged anticompetitive conduct.

Honeywell has above a 70% share of the APU market, which includes just one other major manufacturer. Honeywell sells both APUs, APU parts, and APU service. Aerotec's share of the repair market—which includes dozens of other firms—is about 1%. Some airlines also undertake their own APU servicing. Honeywell has a tiered pricing structure for its APU parts: Honeywell "affiliates" get the best pricing for and priority access to parts under long-term agreements that impose obligations on the affiliates. Airlines pay more than affiliates, and independent servicers—like Aerotec—pay even more on the spot market for Honeywell's OEM parts. Those servicers, including Aerotec, can and do buy third-party parts approved by the FAA. Using such parts, Aerotec touted that its prices were 20% lower than its competitors on average.

Although Aerotec had some success as an APU servicer for a time, it claimed that its business was hurt when it had difficulty obtaining parts from Honeywell during what Honeywell deemed a parts shortage (which Aerotec alleged was pretextual). Aerotec also alleged that Honeywell maintained an overly burdensome ordering process, held Aerotec to stringent payment terms, withheld technical information, offered steeply discounted bundles of parts and repair services, and engaged in price discrimination against Aerotec and other independent servicers.

The Ninth Circuit had no difficulty in grounding Aerotec's Sherman Act Section 1 and Section 2 claims and its Robinson-Patman Act claim. Aerotec advanced two Section 1 claims. First, it argued that Honeywell had unlawfully tied APU parts to service. This claim foundered because Aerotec presented no evidence of a tie, i.e., evidence that Honeywell either required customers to purchase Honeywell service if they wanted to buy APU parts or that Honeywell required customers not to purchaser service from others. The Ninth Circuit refused to stretch tying law to reach parts delays, pricing decisions, and removal of technical data. Those behaviors were directed not at a customer but at a competitor (Aerotec), distinguishing the situation from that in Eastman Kodak Co. v. Image Technical Servs. Inc., 504 U.S. 451 (1992). The court rejected Aerotec's arguments that Honeywell "created an implied tie by making the purchase of Honeywell's services an economic imperative." Aerotec's chain of logic and evidence – that airlines learned the "game" that to get parts, they should buy Honeywell service to avoid the complications or difficulties associated with using Aerotec—was "too attenuated to support liability" under Section 1. "[A]rguably manipulative tactics imposed on a third-party competitor are [not] sufficient by themselves to create a tie with respect to a separate buyer simply because they make it less desirable to purchase from the third party."

Aerotec also argued that Honeywell violated Section 1 through exclusive dealing arrangements with customers. However, Aerotec did not present a global agreement by Honeywell with its customers. Other than submitting some evidence that purchasers of repair services contract for 3-7 years at a time, Aerotec failed to specify the amount or duration of foreclosure from any of Honeywell's particular customer contracts. Aerotec's "speculation and innuendo . . . cannot substitute for evidence." The Ninth Circuit also declined to decide whether a substantial discount could amount to a de facto exclusive agreement. Even if it can, there was no evidence of any exclusive requirements on which the discounts were conditioned. The de facto theory did not "provide Aerotec an end run around the obligation to first show that express or implied contractual terms in fact substantially foreclosed dealing with a competitor for the same good or service."

As to the Section 2 claim, Aerotec first argued that Honeywell had engaged in an unlawful refusal to deal with a competitor. This claim failed because even a monopolist has no general duty to deal, and Aerotec's allegations did not fit within the "narrow exception" recognized in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). Aerotec "simply did not like the business terms offered by Honeywell, especially after things began to change in 2007. But this 'business pattern' can hardly be characterized as so onerous as to be tantamount to the conduct in Aspen Skiing." Aerotec's "vague requested remedy" that the court order Honeywell to provide parts, data and prices like it did before 2007 "reveal[ed] the problem with Aerotec's refusal to deal claim: providing any meaningful guidance to Honeywell and ordering it to artificially create pre-2007 market conditions would require the courts to play precisely the kind of 'central plan[ing]' role that courts are 'ill suited' to play."

Aerotec also argued that it had presented sufficient evidence of a Section 2 essential facilities claim, reasoning that APU parts are an essential facility without which repairs are impossible. The Ninth Circuit explained that it has treated essential facilities as a basis for a Section 2 claim even though the Supreme Court has never recognized the doctrine. Even so, the court said that this claim failed for an "obvious" reason—a facility is only "essential" where it is otherwise unavailable. The evidence showed that Aerotec had access to parts from sources other than Honeywell itself.

Aerotec's bundled discount claim under Section 2 also failed because of a lack of credible evidence that Honeywell priced repair services below cost. Emphasizing that low prices benefit consumers regardless of how they are set, the Ninth Circuit refused to apply the discount attribution test of Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008), because that test does not apply where the parties offer the same bundle of good and services, and Aerotec offered both APU parts and services (just like Honeywell). On a bundle-to-bundle comparison, Aerotec could provide services more efficiently than Honeywell, which would enable it to avoid selling parts at cost. Aerotec's argument that Honeywell was unlawfully charging it high wholesale prices for APU parts while it was charging low (but above-cost) prices for repair bundles was foreclosed by the Supreme Court's decision in Pacific Bell Tel. Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009), which held that "price-squeeze" claims are not actionable.

Finally, the Ninth Circuit affirmed the summary judgment for Honeywell on Aerotec's Robinson-Patman Act price discrimination claim. While Honeywell gave its affiliates with long-term contracts better pricing, Honeywell received benefits under those long-term arrangements, including substantial obligations imposed on affiliates such as payment of license/royalty fees, maintenance of insurance, exclusive use of Honeywell parts, and compliance with policies, regulations, and procedures promulgated by Honeywell. These obligations made spot sales to Aerotec and affiliate sales not comparable for Robinson-Patman purposes. Cf. our recent blog posts on Robinson-Patman Act issues.

Aerotec stands as a further reminder that antitrust law is designed to protect competition, not competitors. If a plaintiff fails to marshal evidence of anticompetitive harm, and instead relies on generalizations and speculation and attempts to stretch existing antitrust categories beyond their limits, the plaintiff's claims should and likely will fail.

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