U.S. v. Amr Corp.

• Decision Date: 03 July 2003
• Docket Number: No. 01-3202.,01-3202.
• Citation: 335 F.3d 1109
• Parties: UNITED STATES of America, Plaintiff-Appellant, v. AMR CORPORATION; American Airlines, Inc.; AMR Eagle Holding Corporation, Defendants-Appellees, Vanguard Airlines, Inc., Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

335 F.3d 1109

UNITED STATES of America, Plaintiff-Appellant, v. AMR CORPORATION; American Airlines, Inc.; AMR Eagle Holding Corporation, Defendants-Appellees, Vanguard Airlines, Inc., Amicus Curiae.

No. 01-3202.

United States Court of Appeals, Tenth Circuit.

July 3, 2003.

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John P. Fonte, Attorney (R. Hewitt Pate, Deputy Assistant Attorney General, Donna Kooperstein, Renata B. Hesse, Robert D. Young, J. Richard Doidge, Nina B. Hale, Rebekah J. French, Karl D. Knutsen, Jennifer L. Cihon, Max R. Huffman, Mark J. Niefer, Catherine G. O'Sullivan, Robert B. Nicholson, David Seidman, Roger W. Fones, Craig W. Conrath, Attorneys, with him on the briefs), United States Department of Justice, Antitrust Division, Washington, DC, for the Plaintiff-Appellant.

Robert E. Cooper of Gibson, Dunn & Crutcher, LLP, (Mark E. Weber and Rodney J. Stone of Gibson, Dunn & Crutcher, LLP, Los Angeles, CA; Helene D. Jaffe and Debra J. Pearlstein of Weil, Gotshal & Manges, LLP, New York, NY; Stephen E. Robison of Fleeson, Gooing, Coulson & Kitch, L.L.C., Wichita, KS; William R. Sampson of Shook, Hardy & Bacon, LLP, Overland Park, KS, with him on the brief) for the Defendants-Appellees.

Robert Rowen and Rebecca Brock of Vanguard Airlines, Inc., Kansas City, MO, and Sarah A. Brown of Parkinson, Foth, Orrick & Brown, L.L.P., Lenexa, KS, filed a brief for the Amicus Curiae.

Before LUCERO, PORFILIO, and MURPHY, Circuit Judges.

LUCERO, Circuit Judge.

This case involves the nature of permissible competitive practices in the airline industry under the antitrust laws of this country, centered around the hub-and-spoke system of American Airlines. The United States brought this suit against AMR Corporation, American Airlines, Inc., and American Eagle Holding Corporation ("American"), alleging monopolization and attempted monopolization through predatory pricing in violation of § 2 of the Sherman Act, 15 U.S.C. § 2. In essence, the government alleges that American engaged in multiple episodes of price predation in four city-pair airline markets, all connected to American's hub at Dallas/Fort Worth International Airport ("DFW"), with the ultimate purpose of using the reputation for predatory pricing it earned in those four markets to defend a monopoly at its DFW hub.¹ At its root, the government's complaint alleges that American: (1) priced its product on the routes in question below cost; and (2) intended to recoup these losses by charging supracompetitive prices either on the four core routes themselves, or on those routes where it stands to exclude competition by means of its "reputation for predation." Finding that the government failed to demonstrate the existence of a genuine issue of material fact as to either of these allegations, the district court granted summary judgment in favor of American, from which the government now appeals. Because we agree that the record is void of evidence that rises to the level of a material conflict, we exercise jurisdiction pursuant to 15 U.S.C. § 29(a) and 28 U.S.C. § 1291, and affirm.

I

Airlines are predominantly organized in a hub-and-spoke system, with traffic routed such that passengers leave their origin city for an intermediate hub airport. Passengers traveling to a concentrated hub tend to pay higher average fares than those traveling on comparable routes that do not include a concentrated hub as an endpoint. This is known as the "hub premium" and a major airline's hub is often an important profit center. Entry of low cost carriers ("LCCs") into a hub market tends to drive down the fares charged by major carriers. Consequently, major carriers generally enjoy higher margins on routes where they do not face LCC competition.

Both American and Delta Airlines ("Delta") maintain hubs at DFW, though Delta's presence is considerably smaller than American's. As of May 2000, American's share of passengers boarded at DFW was 70.2%, Delta's share was roughly 18%, and LCC share was 2.4%. As of mid-2000, there were seven low-cost airlines serving DFW. In the period between 1997 to 2000, five new low-cost airlines entered DFW: American Trans Air, Frontier, National, Sun Country, and Ozark. DFW has more low-fare airlines than any other hub airport and the number of passengers carried by low-fare airlines increased by over 30% from May 1999 to May 2000. Nevertheless, LCCs have a significantly higher market share in some other major U.S. hubs.²

LCCs generally enjoy the advantage of having lower costs than major carriers, allowing them to offer lower fares than their major-airline competitors.³ During the period between 1995 and 1997, a number of LCCs, including Vanguard, Western Pacific, and Sunjet, began to take advantage of these lower costs by entering certain city-pair routes serving DFW and charging lower fares than American. The instant case primarily involves DFW-Kansas City, DFW-Wichita, DFW-Colorado Springs, and DFW-Long Beach.

American responded to lower LCC fares on these routes with changes in: (1) pricing (matching LCC prices); (2) capacity (adding flights or switching to larger planes); and (3) yield management (making more seats available at the new, lower prices). By increasing capacity, American overrode its own internal capacity-planning models for each route, which had previously indicated that such increases would be unprofitable. In each instance, American's response produced the same result: the competing LCC failed to establish a presence, moved its operations, or ceased its separate existence entirely. Once the LCC ceased or moved its operations, American generally resumed its prior marketing strategy, reducing flights and raising prices to levels roughly comparable to those prior to the period of low-fare competition. Capacity was reduced after LCC exit, but usually remained higher than prior to the alleged episode of predatory activity.⁴

The government filed suit on May 13, 1999, alleging that American participated in a scheme of predatory pricing in violation of § 2 of the Sherman Act. In the government's view, American's combined response of lowering prices, increasing capacity, and altering yield management in response to LCC competition constituted an unlawful, anticompetitive response. After reviewing a voluminous record and receiving extensive briefs the district court granted American's motion for summary judgment on all antitrust claims, concluding that the government failed to demonstrate the existence of a genuine issue of material fact as to (1) whether American had priced below cost and (2) whether American had a dangerous probability of recouping its alleged investment in below-cost prices.

II

We review the grant of summary judgment de novo, applying the same legal standard used by the district court under Fed.R.Civ.P. 56(c), viewing the evidence in the light most favorable to the nonmoving party. Applied Genetics Int'l, Inc. v. First Affiliated Secs., Inc., 912 F.2d 1238, 1241 (10th Cir.1990). Summary judgment is appropriate only if American can show the absence of genuine issues of material fact and its entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Although no special burden is imposed on a plaintiff opposing summary judgment in an antitrust case, see Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 468, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992), in order to establish a "genuine issue" that entitles it to reach trial on its attempted monopolization claim premised on predatory pricing, the government "must present more than a scintilla of evidence that the alleged predatory conduct makes economic sense," Advo, Inc. v. Phila. Newspapers, Inc., 51 F.3d 1191, 1197 (3d Cir.1995). American need not disprove the government's claim; it need only establish that the proffered facts have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir.1987).

Monopolization claims under § 2 of the Sherman Act require proof: (1) that a firm has monopoly power in a properly defined relevant market; and (2) that it willfully acquired or maintained this power by means of anticompetitive conduct. TV Communications Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022, 1025 (10th Cir.1992). This is to be distinguished from a business that acquired monopoly power by greater skill, efficiency, or by "building a better mousetrap." Claims of attempted monopolization under § 2 of the Sherman Act require four elements of proof: (1) a relevant geographic and product market; (2) specific intent to monopolize the market; (3) anticompetitive conduct in furtherance of the attempt; and (4) a dangerous probability that the firm will succeed in the attempt. Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal and Prof'l Publ'ns, Inc., 63 F.3d 1540, 1550 (10th Cir.1995).

In the instant case, the anticompetitive conduct at issue is predatory pricing. The crux of the government's argument is that the "incremental" revenues and costs specifically associated with American's capacity additions show a loss. Because American spent more to add capacity than the revenues generated by the capacity additions, such capacity additions made no economic sense unless American intended to drive LCCs out of the market. Under the government's theory, American attempted to monopolize the four city-pair routes in question in order to develop a reputation as an exceedingly aggressive competitor and set an example to all potential competitors. Fearing American's predatory response, the theory goes, future potential competitors will decline to enter other DFW market routes and compete. If American succeeds in preventing or at least forestalling the formation of an LCC hub at DFW, it will then be able to charge higher prices on other DFW routes and thereby recoup the losses it incurred from its "capacity dumping" on the four core routes....