Bell v. Cherokee Aviation Corp.

• Decision Date: 07 October 1981
• Docket Number: 79-1229,Nos. 79-1228,s. 79-1228
• Citation: 660 F.2d 1123
• Parties: 1981-2 Trade Cases 64,318 Sharon BELL, As Trustee in Bankruptcy of the Estate of Executive Airways, Inc., Bankrupt, Plaintiff-Appellee, Cross-Appellant, v. CHEROKEE AVIATION CORPORATION, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1123

660 F.2d 1123

1981-2 Trade Cases 64,318

Sharon BELL, As Trustee in Bankruptcy of the Estate of Executive Airways, Inc., Bankrupt Plaintiff-Appellee, Cross-Appellant, v. CHEROKEE AVIATION CORPORATION, Defendant-Appellant, Cross-Appellee.

Nos. 79-1228, 79-1229.

United States Court of Appeals Sixth Circuit.

Argued Oct. 23, 1980.

Decided Oct. 7, 1981.

Lawrence F. Giordano, Stone & Hines, Harold B. Stone, Knoxville, Tenn., for defendant-appellant, cross-appellee.

Norman H. Newton, Crawford & Crawford, David T. Black, Kizer & Black, Maryville, Tenn., for plaintiff-appellee, cross-appellant.

Before KEITH, MERRITT and JONES, Circuit Judges.

KEITH, Circuit Judge.

This case presents various issues regarding tying arrangements and Section 1 of the Sherman Antitrust Act. The defendant, Cherokee Aviation ("Cherokee") subleased space at the Knoxville, Tennessee airport to the plaintiff, Executive Aviation ("Executive"). In the lease agreement, Executive agreed to obtain certain goods and services only from Cherokee. The district court found that the lease provisions constituted a tying arrangement which violated Section 1 of the Sherman Antitrust Act. We agree and affirm Judge Robert Taylor's decision.

FACTS

Cherokee is a fixed base operator (FBO) in the Knoxville area. An FBO provides various services for aircraft. An FBO rents hangar (i. e. indoor parking) and outside "tie-down" space for airplanes. It also provides fuel and maintenance services to aircraft owners. In effect, an FBO is a combination parking garage and gas station for airplanes. Cherokee was one of two FBO's located at McGhee-Tyson Field, the only airport in the Knoxville area that serves commercial airlines and private planes.

Executive was a limited or special FBO, engaged primarily in pilot training, aircraft rental and aircraft sales. See 14 C.F.R. Part 35. Executive was organized in 1968 as a flying club and operated as such for five years. Throughout this period, it operated from Cherokee's facility pursuant to an informal oral agreement. In early 1973, Executive's president and founder, Richard Hash, decided to expand Executive into a limited FBO. Executive needed license authority, some office space and outdoor tie-down space for its aircraft before it could begin its expanded operations. On June 1, 1973, Executive and Cherokee entered into a written agreement. Cherokee granted Executive a sublicense to operate as a limited FBO ¹ and subleased office and tie-down space to Executive. In turn, Executive agreed to pay a rental fee ² for the use of Cherokee's facilities as well as a royalty of 5% of its gross receipts.

This litigation arose because the agreement contained an additional provision requiring Executive to purchase from Cherokee all fuel, maintenance and parts required by Executive's airplanes. This clause states:

Executive ... agrees specifically to have all maintenance on its aircraft performed by Cherokee with the understanding that Executive will be given the same consideration as all other Cherokee customers, and Executive agrees to purchase all needed fuel before each charter flight from Cherokee, emergency maintenance and emergency fueling, of course, being excepted.

Executive had financial difficulties and filed for bankruptcy. The trustee in bankruptcy filed this suit, contending that the above clause constituted an illegal tying arrangement in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, ³ and of Section 3 of the Clayton Antitrust Act, 15 U.S.C. § 14. ⁴

The case was referred to a magistrate for trial. In a comprehensive opinion, the magistrate found liability and awarded damages and attorney's fees. The district court adopted the magistrate's findings and conclusions. Thereafter, this appeal was brought. The defendant has appealed on several grounds. The plaintiff has cross-appealed seeking additional damages.

I. Preliminary Discussion

A tying arrangement or tie-in is an agreement by a seller to sell one product (the tying product), on the condition that a buyer also purchase a second product (the tied product) from the seller. In this case, the tying product is the sublease and sublicense for special FBO's. The tied products are fuel and aircraft parts and maintenance services. Simply stated, Cherokee conditioned the sublease of its property for Executive's special FBO services on Executive's purchase of fuel, maintenance and parts from Cherokee. ⁵

The Supreme Court has construed Section 1 of the Sherman Act to prohibit contracts or combinations that "unreasonably" restrain trade. Chicago Board of Trade v. United States, 246 U.S. 231, 38 S.Ct. 242, 62 L.Ed. 683 (1918). The Court has determined, however, that certain agreements are so harmful to competition that they are per se unreasonable. See Catalno v. Target Sales, Inc., 446 U.S. 643, 100 S.Ct. 1925, 64 L.Ed.2d 580 (1980) (an agreement to eliminate credit which amounted to price fixing); National Society of Professional Engineers v. United States, 435 U.S. 679, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978) (agreement among engineers not to discuss price with customers until engineers selected); United States v. Topco Associates, 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972) (horizontal market division among competitors); Albrecht v. Herald Co., 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998 (1968) (vertical price fixing); Klor's Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959) (group boycott).

One agreement which is per se unlawful is a tying arrangement. "(Tying arrangements) are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a 'not insubstantial' amount of interstate commerce is affected." Fortner Enterprises v. U.S. Steel, (Fortner I) 394 U.S. 495, 499, 89 S.Ct. 1252, 1256, 22 L.Ed.2d 495 (1969), citing Northern Pacific R. Co. v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). See United States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962); Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 613-14, 73 S.Ct. 872, 883, 97 L.Ed. 1277 (1953); International Salt Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947); Associated Press v. Taft-Ingalls Corp., 340 F.2d 753 (6th Cir.), cert. denied, 382 U.S. 820, 86 S.Ct. 47, 15 L.Ed.2d 66 (1965). The rationale for the per se rule is that "(tie-ins) deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price, but because of his power or leverage in another market. At the same time buyers are forced to forego their free choice between competing products." Fortner I, supra, 394 U.S. at 498-499, 89 S.Ct. at 1256, quoting Northern Pacific R. Co., supra, 356 U.S. at 6, 78 S.Ct. at 518. Applying a per se rule to tie-ins "avoids the necessity for an incredibly complicated and prolonged economic investigation ... in an effort to determine ... whether a particular restraint has been unreasonable ...." Northern Pacific R. Co., supra at 5, 78 S.Ct. at 518.

There are three core elements which make up a tie-in which is per se illegal: (1) there must be a tying arrangement between two distinct products or services; (2) the defendant must have sufficient economic power in the tying market to appreciably restrain competition in the tied product market; (3) the amount of commerce affected must be "not insubstantial". Fortner I, supra, 394 U.S. at 499, 89 S.Ct. at 1256; Northern Pacific R. Co., supra, 356 U.S. at 6, 78 S.Ct. at 518.

The magistrate concluded that all three elements were met by Cherokee's contractual requirement that Executive buy fuel, parts and maintenance from Cherokee. Accordingly, he found Cherokee liable. On appeal, Cherokee does not dispute the existence of the lease and license agreement between itself and Executive. Nor does it dispute that there was indeed a tying arrangement between two distinct products or services. Cherokee argues that it did not have sufficient economic power to effect a tying arrangement. It also claims that the amount of commerce affected by the tie-in was insubstantial. Cherokee also contends that the tie-in was not coerced, but was voluntarily chosen by Executive. Finally, both sides are unsatisfied with the magistrate's award of damages and attorney's fees. We shall discuss each of these claims.

II. "Sufficient Economic Power"

Cherokee's primary contention on appeal is that it did not have enough economic power to impose the tie-in. The standard for "sufficient economic power" has been stated in various ways:

The standard of "sufficient economic power" does not ... require that the defendant have a monopoly or even a dominant position throughout the market for the tying product. Our tie-in cases have made unmistakably clear that the economic power over the tying product can be sufficient even though the power falls far short of dominance and even though the power exists only with respect to some of the buyers in the market. (citations omitted) As we said in (United States v. Loew's, Inc., 371 U.S. 38, 45, 83 S.Ct. 97, 102, 9 L.Ed.2d 11 (1962)) "Even absent a showing of market dominance, the crucial economic power may be inferred from the tying product's desirability to consumers or from the uniqueness of its attributes." Fortner I, supra, at 502-03, 89 S.Ct. at 1258.

The Court also stated:

Accordingly, the proper focus of concern is whether the seller has the power to raise prices, or impose other burdensome terms such as a tie-in, with respect to any appreciable number of buyers within the market. Id. at 504, 89 S.Ct. at 1259.

In U.S. Steel Corp. v. Fortner Enterprises, 429 U.S. 610, 620, 97 S.Ct. 861, 867, 51 L.Ed.2d 80 (1977) (Fortner II ), the Court articulated the standard as "whether the seller...