In September, the Ninth Circuit issued an opinion in Aerotec Int’l v. Honeywell Int’l that it dubbed “an antitrust primer for aftermarket issues,” in a case alleging a broad spectrum of aftermarket-related claims. No. 14-15562, slip op. (9th Cir. Sept. 9, 2016). The Aerotec opinion, authored by Judge Margaret McKeown, provides a framework for parties seeking to plead and prove antitrust claims arising out of aftermarket issues.
The case concerns the market for auxiliary power units, or “APUs”, which are responsible for powering aircraft functions such as electricity and temperature. Defendant Honeywell is a diversified manufacturer of aerospace products and dominates the market for the manufacture of APUs, with a 76-89% market share in various aircraft markets. Aerotec is a small business that provides maintenance, repair, and overhaul (“MRO”) services for Honeywell APUs. Aerotec is one of at least 50 MRO servicers who compete among themselves and also with Honeywell, who repairs as much as 54% of Honeywell-manufactured APUs. The majority of MRO servicers are Honeywell affiliates, and they operate under long-term contracts with Honeywell for parts. Aerotec, and a handful of others, operate independently. Finally, some airlines are self-servicing and provide their own repair and maintenance services internally.
MRO servicers like Aerotec rely on replacement parts, either from the original manufacturer—called “original equipment manufacturer,” or “OEM”, parts—or from secondary manufacturers, who make “parts manufacturer approval,” or “PMA” parts. OEM parts make up the vast majority of available APU components, and Honeywell, as the original manufacturer of its APUs, is the primary source for those parts. In selling these parts, Honeywell uses a tiered pricing structure, in which independent servicers pay more for OEM parts in spot orders than do self-servicing airlines and most Honeywell affiliates, who negotiate discounted prices as part of their long-term agreements. Aerotec and other independent servicers also have the option of using cheaper, non-proprietary PMA parts (to the extent available). Further, when supply shortages occur (as they did in the years prior to the litigation), Honeywell would usually provide parts to independent servicers last, choosing to fill orders from its affiliates and airlines with whom it had contracts first.
In 2009, Aerotec suffered a series of blows to its customer base that dramatically decreased its market share, as several of its clients left for either Honeywell or Honeywell-affiliated servicers. Aerotec blamed these losses on Honeywell’s actions with respect to pricing and supply of its parts and subsequently filed suit against Honeywell, alleging causes of action under: §§ 1 & 2 of the Sherman Act; the Robinson-Patman Act, 15 U.S.C. § 13(a); and Arizona state law. The gravamen of Aerotec’s case is that Honeywell used its dominant market position to control the parts market and push independent servicers like Aerotec out of business. According to Aerotec, it did this by, among other things, deliberately delaying shipment of OEM parts on the pretext of a supply shortage, offering favorable pricing to its contractual partners, and offering steeply discounted bundles of parts and repair services to airline clients. The District Court for the District of Arizona tossed the case on summary judgment, and Aerotec appealed.
In its opinion affirming summary judgment, the Ninth Circuit looked at six distinct claims: under Sherman Act § 1, tying and exclusive dealing claims; under Sherman Act § 2, allegations of refusal to deal, denial of access to essential facilities, and bundled discounting; and price discrimination under the Robinson Patman Act. The Ninth Circuit methodically walked through Aerotec’s claims and dismantled each one in turn, faulting Aerotec for failing to develop evidence in support of their claims and for stretching the law on tying beyond its logical limits.
Sherman Act § 1 – Tying
Aerotec alleged that Honeywell’s actions towards it—i.e., delay of parts and pricing decisions that favored its contractual partners—constituted a de facto condition on sale to airlines. The court noted that no express tying condition existed because airlines were free “to purchase parts and services in separate transactions from whichever supplier they please.” Slip op. at 13. The court also rejected Aerotec’s implied tying argument, which was grounded in Aerotec’s claim that Honeywell constrained the flow of parts to independent servicers, thus creating a de facto tie between the parts and service as airlines would realize that independent servicers could not provide a one-stop-shop for all parts and repair needs. The court found that “Aerotec’s chain of logic and evidence is too attenuated to support liability for tying under § 1.” Id. In the end, Aerotec’s failure to put on evidence that any airlines were forced to buy both parts and repair services from Honeywell, either on an express or de facto basis, was fatal to its claim.
Sherman Act § 1 – Exclusive Dealing
Next, Aerotec argued that Honeywell engaged in exclusive dealing through its contractual relationships with the airlines. But the court dismissed this argument based on a lack of evidence, noting that “[c]ontracts, simpliciter, are not illegal under the Sherman Act.” Id. at 17. The record was devoid of any representative contracts; instead, Aerotec relied on a declaration from itself stating that purchasers of repair services contracted from 3-7 years at a time, and deposition testimony from Honeywell that it gave customers a 15% discount on parts. Without more, the court could not determine whether these conditions harmed competition or prevented customers from giving business to other MRO servicers. With respect to a theory of de facto exclusive dealing, as has been recognized in the Third and Eleventh Circuits, the court noted Aerotec’s failure “to first show that express or implied contractual terms in fact substantially foreclosed dealing with a competitors for the same good or services.” Id. at 19. Without the factual predicate, the Ninth Circuit declined to reach the issue.
Sherman Act § 2 – Refusal to Deal
Aerotec’s Section 2 claims fared no better. Aerotec alleged a de facto refusal to deal based on its desire for different business terms from Honeywell; in fact, Aerotec’s requested remedy was simply, for the court to “order Honeywell to provide parts, data, and prices like it did before 2007,” when Honeywell was not experiencing a parts shortage. Id. at 22. The court declined to force Honeywell to artificially create certain market conditions, finding that a defendant is not required to deal on terms favored by its rivals. Rather, “there is only a duty not to refrain from dealing where the only conceivable rationale or purpose is ‘to sacrifice short-term benefits in order to obtain higher profits in the long run from the exclusion of competition’….” Id. at 23 (quoting MetroNet Servs. Corp. v. Qwest Corp., 383 F.3d 1124, 1132 (9th Cir. 2004)). Here, no such rationale was shown. Similarly, Aerotec’s argument that intent to foreclose competition by itself is enough to establish § 2 liability failed without a further showing of actual anti-competitive conduct or harm.
Sherman Act § 2 – Essential Facilities
Next, Aerotec turned to the essential facilities doctrine, which “imposes liability where competitor are denied access to an input that is deemed essential, or critical, to competition.” Slip op. at 23. But the court pointed out that a facility can only be essential when it is otherwise unavailable, and yet here, Aerotec had access to both PMA parts and as well as OEM aftermarket parts acquired from other servicers. Id. at 24-25. Without evidence that Aerotec had been “frozen out” or even faced a major obstacle in accessing the supply chain, its essential facilities claim failed. Id. at 25.
Sherman Act § 2 – Bundled Discounts
For its final Section 2 claim, Aerotec claimed that Honeywell’s discounting of bundled parts and services was anticompetitive in nature. First, it argued that Honeywell engaged in predatory activity in pricing repair services below cost. But the evidence contradicted this argument, as Honeywell showed that it achieved positive revenues on the contracts challenged by Aerotec. Id. at 27. Failing that, Aerotec relied on a “discount attribution test” under the Ninth Circuit’s Cascade Health decision, which held that “the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products’ and the ‘resulting price of the competitive product of products’ is compared to the ‘defendant’s incremental cost to produce them.” Id. (quoting Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 906 (9th Cir. 2007)). But that test does not apply here, where both parties offer the same bundle of goods—parts and repair services. Thus, the court affirmed dismissal of this last Section 2 claim, as well.
Robinson-Patman Act – Price Discrimination
Finally, the court examined Aerotec’s allegations that Honeywell gave greater discounts to its affiliates with which it had a contractual relationship than it provided to Aerotec and other independent servicers. But, the court found, each affiliate had contractual obligations—for example, “payment of license/royalty fees, maintenance of insurance, exclusive use of Honeywell parts, and compliance with policies, regulations, and procedures promulgated by Honeywell,” slip op. at 31-31—for which price discrimination can reasonably be explained. And Aerotec did not provide examples of spot sales analogous to its own sales that could support a price discrimination claim. Without such a comparison, the claim failed.
Lessons from Aerotec
The allegations in Aerotec ran the gamut of aftermarket antitrust claims, providing attorneys with a comprehensive framework for analyzing a potential case. The Ninth Circuit’s methodical exposition of each claim, along with its detailed explanation of the type of evidence that could give rise to each claim, can serve as a checklist to determine whether the harm alleged constitutes a viable antitrust injury. Aerotec highlights the importance of concrete evidence of competitive harm—whether through testimony of a purchaser who perceives an effective tying relationship (for a Section 1 tying claim), or through presentation of contracts with steep market share requirements (in the case of Section 1 exclusive dealing), or actual evidence of pricing below cost (for a Section 2 bundling claim)—over the type of “speculation and innuendo” the Ninth Circuit castigated in its opinion.
In particular, attorneys investigating aftermarket cases must be cognizant of distinguishing between harm to a competitor and harm to competition. As courts have repeatedly made clear, it is not enough that the challenged conduct causes harm to a competitor—even to such an extent as to put the competitor out of business—but rather, as the Ninth Circuit quoted the Supreme Court: “[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. at 4 (quoting Spectrum Sports, Inc. v. McQuillan, 506 U.S. 477, 458 (1993)). The Ninth Circuit’s decision in Aerotec is an important reminder of this lesson.