09.26.2016

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Updates

In a precedent-setting opinion, the U.S. Court of Appeals for the Ninth Circuit in Aerotec International, Inc. v. Honeywell International, Inc., No. 14-15562, 2016 WL 4709868 (9th Cir. Sept. 9, 2016), affirmed the summary dismissal of a garden variety of antitrust claims brought by Aerotec.  A self-described “primer for aftermarket issues,” the Ninth Circuit opinion authored by Judge M. Margaret McKeown methodically dispatches claims brought under sections 1 and 2 of the Sherman Act, the Robinson-Patman Act and Arizona state law, finding no link between Aerotec’s competitive struggles and Honeywell’s actions.  This decision is likely to guide the Ninth Circuit’s treatment of aftermarket issues for many years.

Background

The case involves the airplane repair and maintenance industries, in particular those for auxiliary power units (APU).  An APU is a small motor on an airplane that provides energy for functions other than propulsion, such as electricity and temperature regulation.  Honeywell, the defendant-appellee, is one of the world’s two largest manufacturers of APUs, commanding over 75% market share.  In addition to manufacturing APUs, Honeywell is also a significant player in the APU repair market, repairing over half of the APUs they manufacture.  Plaintiff-appellant Aerotec is a small, independent company that competes with Honeywell in the APU repair market.

In the APU industry, repair parts and repair service procedures fall into two tiers.  First, there are parts and repair procedures that are branded and approved by the APU manufacturer (i.e., Honeywell).  The second tier of substitute APU parts and repair services are not proprietary to any manufacturer and so require approval by the Federal Aviation Administration (FAA).  Some repair servicers, like airlines who repair their own planes, sign long-term contracts with Honeywell in order to access their proprietary APU parts and repair procedures.  Other repair servicers, like Aerotec, operate without long-term contracts and often use cheaper, non-proprietary parts and procedures, or they pay higher prices for proprietary parts purchased on an ad hoc basis.

Aerotec brought a number of antitrust claims under sections 1 and 2 of the Sherman Act, the Robinson-Patman Act and Arizona state law, alleging that “Honeywell leverage[d] its monopoly power over the APU parts market to unfairly smother competition in the repair services market.”  Id. at 2 (emphasis added) (all page citations are to version of opinion linked above).  Aerotec’s factual allegations focused on Honeywell’s response to a 2007 worldwide APU parts shortage.  When this shortage hit, Honeywell prioritized parts orders for long-term Honeywell contract servicers above spot purchasers.  Independent servicers like Aerotec experienced significant delays in getting access to Honeywell proprietary parts ordered on an ad hoc basis.  Because of these delays, Aerotec had trouble satisfying its own repair contracts with airlines and other clients. 

Ninth Circuit Weighs In 

The Ninth Circuit affirmed the district court’s summary dismissal of all Aerotec’s varied antitrust claims, reasoning that the evidence in the record did not demonstrate a connection between Honeywell’s actions and harm to competition—“anecdotal speculation and supposition are not a substitute.”  Id. at 4.

Sherman Act § 1 – Tying.  Aerotec alleged Honeywell squeezed independent servicers out of the APU repair market by delaying and impeding their access to parts and that Honeywell’s conduct toward independent servicers acted as a de facto condition on sales to airlines.  The court held this claim was “too attenuated” because, at its most basic level, tying requires a “tying condition be embedded in a tying transaction.”  Id. at 13.  Because Aerotec presented no evidence suggesting Honeywell conditioned the sale of its APU parts on any agreement by the airlines not to deal with repair service providers, there was no evidence of a tie.        

Sherman Act § 1 – Exclusive Dealing.  Aerotec also alleged Honeywell’s long-term contracts with servicers constituted exclusive dealing.  The court emphasized that Aerotec had not presented any evidence showing these contracts foreclosed competition and in fact did not include any representative contracts in the record.  Aerotec’s declaration alleging that most contracts had a 3-7 year term and included a 15% discount for Honeywell parts was not enough.  “The record simply does not indicate what proportion of the market is bound up in long-term contracts at any particular point in time or to what effect…The speculation and innuendo offered by Aerotec cannot substitute for evidence.”  Id. at 18.  

Sherman Act § 2 – Refusal to Deal.  The court similarly dispatched Aerotec’s refusal to deal argument.  Aerotec claimed Honeywell’s business terms on its parts sales showed an intent to foreclose competition in the services market, creating a “de facto” refusal to deal.  The court reasoned Honeywell’s conduct did not fit into the narrow definition of refusal to deal outlined in the U.S. Supreme Court’s Aspen Skiing decision.  Aspen Skiing involved a flat out refusal to sell its lift tickets to its only competitor, whereas here, Honeywell’s terms, though certainly disliked by Aerotec, did not approach a refusal.  Emphasizing that there is no duty to deal under the terms favored by a competitor, the court rejected this claim.  Id. at 21-23.          

Sherman Act § 2 – Essential Facilities.  The essential facilities doctrine “imposes liability where competitors are denied access to an input deemed essential…to competition.”  Id. at 23.  Though the U.S. Supreme Court has never recognized the doctrine, the Ninth Circuit affirmed that they have continued to recognize the doctrine under Section 2.  Aerotec argued that the proprietary Honeywell APU parts were an essential facility.  The court reasoned that “a facility is only essential where it is otherwise unavailable.”  Id. at 24.  And here, Aerotec had access to the non-proprietary FAA-approved parts and the ability to purchase proprietary Honeywell parts from secondary sellers.  Accordingly, Aerotec’s essential facilities claim failed. 

Sherman Act § 2 – Bundled Discounts.  The court also rejected Aerotec’s bundled discounts theory.  Because Aerotec offered the same bundle of parts and services as   Honeywell, Aerotec could theoretically offer the same bundled discounts to its customers.  The court reasoned “[i]t is the fact that the bundling competitor has exclusive capacity to ‘bundle’ multiple products and absorb the cost of the total discount without experiencing a decline in profits that gives rise to the possibility that it could force out a ‘hypothetical equally efficient producer of the competitive product.’” Id. at 28 (citations omitted).  Thus, Aerotec could not apply the “discount attribution test” that Ninth Circuit   courts use to approximate whether the discounter is using a bundle to price below cost, and its bundled discounting claim failed.

Robinson-Patman Act – Price Discrimination.  Finally, the court dismissed Aerotec’s    price discrimination claim.  Here Aerotec alleged Honeywell gave greater discounts on parts to the servicers under contract than it did to independent servicers like Aerotec.  In rejecting this claim, the court sided with other jurisdictions, reasoning that the lower price Honeywell charges its affiliates is directly related to the benefits it receives by having a long-term agreement in place.  Accordingly, Honeywell was not unfairly discriminating against the independent servicers like Aerotec, who had not bargained for any contract.  Id. at 29-32.

Implications of Aerotec

This landmark case serves as a roadmap for analyzing aftermarket conduct.  It also serves as a reminder that plaintiffs must articulate and ultimately prove their case based upon evidence and not “anecdotal speculation and supposition.”  Id. at 4.  “As the Supreme Court reminds us, ‘[t]he law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.’”  Id. (quoting Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)).  

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