Aerotec Int'l, Inc. v. Honeywell Int'l, Inc.

• Decision Date: 09 September 2016
• Docket Number: No. 14-15562,14-15562
• Parties: Aerotec International, Inc., an Arizona corporation, Plaintiff-Appellant, v. Honeywell International, Inc., a Delaware corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

836 F.3d 1171

Aerotec International, Inc., an Arizona corporation, Plaintiff-Appellant,

v.Honeywell International, Inc., a Delaware corporation, Defendant-Appellee.

No. 14-15562

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 16, 2016, San Francisco, California

Filed September 9, 2016

Michael C. Blair (argued) and Craig M. LaChance, Baird, Williams & Greer, LLP, Phoenix, Arizona, for Plaintiff-Appellant.

William J. Maledon (argued), Brett L. Dunkelman, Joseph N. Roth, and Eric M. Fraser, Osborn Maledon, P.A., Phoenix, Arizona; Richard G. Parker, O'Melveny & Myers LLP, Washington, D.C.; for Defendant-Appellee.

Before: M. Margaret McKeown, Kim McLane Wardlaw, and Richard C. Tallman, Circuit Judges.

OPINION

McKEOWN

, Circuit Judge:

This case reads like an antitrust primer for aftermarket issues, with claims for exclusive dealing, tying, essential facilities, refusal to deal, price bundling, and price squeezing under Sections 1 and 2 of the Sherman Act and differential pricing/price discrimination under the Robinson-Patman Act. Honeywell International Inc. (“Honeywell”) is one of the world's two largest manufacturers of auxiliary power units (“APUs”), which power aircraft functions such as electricity and temperature. Aerotec International Inc. (“Aerotec”) is a small, independent company that provides maintenance, repair, and overhaul (“MRO”) services for Honeywell APUs. Aerotec argues that Honeywell leverages its monopoly power over the APU parts market to unfairly smother competition in the repair services market.

Aerotec's antitrust claims fail for lack of evidence to link Aerotec's misfortune to any cognizable basis for antitrust liability. This 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 bellwether of antitrust—is insufficient to defeat summary judgment. 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.” Spectrum Sports, Inc. v. McQuillan , 506 U.S. 447, 458, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993)

; see also

Cascade Health Sols. v. PeaceHealth , 515 F.3d 883, 901 (9th Cir. 2007) (reiterating that “antitrust laws protect the process of competition, and not the pursuits of any particular competitor”). We affirm the district court's grant of summary judgment in favor of Honeywell.

BACKGROUND

This case concerns the repair and maintenance market for APUs, which are small engines that provide aircraft with the electrical power needed to keep air conditioning running, cabin lights shining, and electric-powered instrumentation functioning. Without APUs, air travel would be neither comfortable nor safe. A malfunctioning APU requires that a plane be grounded until the problem is fixed—a situation that can cost airlines hundreds of thousands of dollars a day. In short, APUs are an essential cog in a smoothly functioning aviation industry.

Very few companies manufacture APUs. Honeywell, a diversified manufacturer of aerospace products, dominates the APU industry, with a 76 percent share of the manufacturing market for commercial aircraft, 89 percent for business planes, and 79 percent for military aircraft. The other major manufacturer is Hamilton Sundstrand.

Aerotec is a small APU shop that competes with Honeywell in the repair market. Aerotec's share of the repair market is about 1 percent, and it is one of the few firms that repairs APUs from both Honeywell and Hamilton Sundstrand. Aerotec shares the stage with at least 49 other MRO servicers, plus Honeywell, which alone repairs as much as 54 percent of Honeywell-manufactured APUs.

The lifeblood of the repair and maintenance market is a steady source of replacement parts. Because of the proprietary nature of the design, manufacturers naturally control most of the replacement parts market for APUs. The industry denotes replacement parts branded by the manufacturer as “original equipment manufacturer” (“OEM”) parts, in contrast with substitute parts, which are referred to as “parts manufacturing approval” (“PMA”) parts because they require regulatory certification by the Federal Aviation Administration (“FAA”). Almost all parts available on the market are OEM parts. PMAs cover mostly non-essential parts and are rarely available for the more important, and expensive, components of an APU, such as turbine blades.

Repair procedures are also critical to the repair and maintenance market, given the technical complexity of APUs. Although Honeywell closely guards its proprietary repair methods involving OEM parts, the aviation industry as a whole has developed substitute repair methods for Honeywell's APUs that both mimic and depart from Honeywell's protocols. These repair processes must be approved by a “designated engineering representative” (“DER”) approved by the FAA, and are referred to within the industry as “DER repairs.”

Apart from Honeywell, APU repairs are undertaken directly by the airlines (“self-servicing airlines”), Honeywell affiliates, and independent operators. Participants in this market typically bundle parts and repairs in an effort to woo the airlines into long-term repair and maintenance agreements.

The majority of Honeywell MRO servicers, known as Honeywell affiliates, operate under long-term contracts with Honeywell for parts. Under these agreements, a servicer typically agrees to certain obligations and royalty fees in exchange for discounts on Honeywell OEM parts, priority in allocation of parts in shortages, and a license to use Honeywell's intellectual property for APU repairs. At least five of the MRO servicers, including Aerotec, are independent companies without any manufacturer affiliation. These independent servicers typically obtain the necessary parts for repairs by submitting purchase orders for parts on an as-needed basis through spot contracts with Honeywell. Under Honeywell's tiered pricing structure, independent servicers pay more for OEM parts in spot orders than do self-servicing airlines, and typically pay more than Honeywell affiliates who negotiate prices as part of their long-term agreements. Facing these pricing differentials, independent servicers use cheaper PMA parts and DER repair methods when they are available, which is partly how they are able to compete in the volatile and competitive repair and maintenance market. Despite claimed barriers, Aerotec touts that its prices are 20 percent lower than its competitors on average.

Although Aerotec traditionally controlled less than one percent of the Honeywell APU repair and maintenance market, beginning around 2006, after emerging from a second bankruptcy, Aerotec made a push to increase its market share and profitability. The company branded itself as a “fierce low cost” competitor to Honeywell. Aerotec wrangled major MRO deals away from Honeywell, including one with Saudi Arabian Airlines (“Saudia”) in 2007 and another with Air India in 2009. The deal with Saudia was not easily won, and it was precarious from the get-go: Aerotec “openly discussed its financial limitations” with Saudia and contracted for a “ ‘fixed monthly payment’ plan ... to ensure a steady cash flow,” despite the fact that Saudia's prior deal with Honeywell had gone sour because of Saudia's late payments. Aerotec's sales director noted that carrying customer debt of $500,000 to $1,500,000 “would put [Aerotec] out of business.” But for a time Aerotec's profits soared.

Aerotec's upward trajectory did not last. Beginning in 2007, a well-documented worldwide parts shortage for the Honeywell Model 331-500 APU used in Saudia's fleet of Boeing 777s hampered Honeywell's ability to follow through on commitments to purchasers of parts, including Aerotec. Because Honeywell's parts allocation system put independent MROs at the bottom of the priority list, Aerotec experienced delays in the delivery of parts. Aerotec's lack of a preexisting inventory of parts exacerbated the problem. As a result of the unavailability of parts, Aerotec began having trouble fulfilling its contracts with Saudia and other clients. For its part, Saudia continued its pattern of late payments, leaving Aerotec stranded on a “continuous financial roller-coaster” with millions of dollars of customer debt. Honeywell continued to sell parts to Aerotec, and, even when Aerotec could not financially cover its demand, extended credit lines. But the credit came at the cost of further de-prioritization of shipments and additional layers of review for parts orders. As a result of these difficulties, Aerotec suffered a series of major bidding losses: Saudia left Aerotec in 2009, opting instead for a Honeywell affiliate; Air India left for Honeywell; and Air China chose Honeywell in a hotly contested bidding process.

In the face of its dwindling market share, Aerotec turned to federal court and filed a complaint alleging causes of action under §§ 1 & 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1

, 2, the Robinson-Patman Act, 15 U.S.C. § 13(a), and Arizona state law. Aerotec takes issue with Honeywell's claims that its hands were tied by a parts shortage. Instead, Aerotec views the parts shortage as a pretext—part of what Aerotec alleges to be Honeywell's thinly-veiled, multi-pronged plan to leverage its control over the parts market to pull business from independent servicers to itself and its affiliates.

In addition to the allegedly deliberate shipment delays, Aerotec alleges that Honeywell maintained an overly burdensome ordering process, held Aerotec to stringent payment terms at the same time that it failed to deliver parts, withheld needed technical information that previously had been provided as a matter of course, lured airline clients away from independent servicers by offering steeply discounted bundles of parts and repair services, and imposed a pricing penalty on independent servicers...