United Air Lines, Inc. v. Austin Travel Corp.

• Decision Date: 01 February 1989
• Docket Number: No. 166,D,166
• Citation: 867 F.2d 737
• Parties: 1989-1 Trade Cases 68,428 UNITED AIR LINES, INC., Plaintiff-Appellee, v. AUSTIN TRAVEL CORPORATION, Larry Austin, Jeffrey Austin, Defendants, Appeal of AUSTIN TRAVEL CORPORATION, Defendant-Appellant. ocket 88-7474.
• Court: U.S. Court of Appeals — Second Circuit

Page 737

867 F.2d 737

1989-1 Trade Cases 68,428

UNITED AIR LINES, INC., Plaintiff-Appellee, v. AUSTIN TRAVEL CORPORATION, Larry Austin, Jeffrey Austin, Defendants Appeal of AUSTIN TRAVEL CORPORATION, Defendant-Appellant.

No. 166, Docket 88-7474.

United States Court of Appeals Second Circuit.

Argued Oct. 31, 1988.

Decided Feb. 1, 1989.

David Boies (Cravath, Swaine & Moore, New York City, William F. Duker, David A. Barrett, Richard L. Crisona, Cliff B. Chenfeld, Duker & Barrett, New York City, of counsel), for defendant-appellant.

S. William Livingston, Jr., Roberts B. Owen, Carolyn F. Corwin (Covington & Burling, Washington, D.C., of counsel), for plaintiff-appellee.

Don M. Adams, Douglas L. Abramson, John J. Varley (Delta Air Lines, Inc., Atlanta Ga.), filed a brief for amicus curiae Delta Air Lines, Inc.

Before WINTER and MINER, Circuit Judges, and MUNSON, District Judge. ^*

MINER, Circuit Judge:

Defendant-appellant Austin Travel Corp. ("Austin") appeals from a summary judgment entered in the United States District Court for the Southern District of New York (Pollack, J.) awarding plaintiff-appellee United Air Lines, Inc. ("United") $408,375 in liquidated damages and unpaid debt plus interest and costs. United sued Austin to recover (i) damages for breach of leases obligating Austin to use a United computerized reservation system ("CRS") called Apollo and a United business and accounting system known as Apollo Business System ("ABS"), and (ii) unpaid accrued rentals. Austin claimed that the liquidated damages clauses of its Apollo contracts with United were unreasonable and unenforceable and that United's CRS practices violated federal and New York State antitrust laws.

The district court held that the liquidated damages clauses were reasonable and enforceable and that Austin could not prevail on claims of monopolization, attempted monopolization, restraint of trade and price discrimination. 681 F.Supp. 176 (S.D.N.Y.1988). On appeal, Austin reasserts its liquidated damages and antitrust claims. Because we hold that the liquidated damages provisions of the United-Austin contracts were at the time of execution a reasonable forecast of damages in case of breach and because there was no showing at the district court of any antitrust violation by United, we affirm the entry of summary judgment in United's favor.

BACKGROUND

United owns and markets to travel agents and others the Apollo CRS. A CRS provides subscribers access to a vast data bank through which they may make airline reservations, issue tickets, reserve car rentals and hotel rooms and perform other travel-related functions. By licensing this system, United earns income in two ways: First, the travel agent pays United a monthly subscription fee, either fixed or based on use, and second, each time the travel agent uses Apollo to book a flight on an airline other than United, United charges that airline a booking fee. United flights booked through Apollo do not generate booking fees. United's Apollo contracts require an agent to book a minimum of 50% of that agent's average monthly bookings through Apollo. United also markets its ABS, a back-office accounting and management system for travel agents.

Competing nationwide with Apollo are four other CRS systems, SystemOne, PARS, DATAS II and SABRE, each owned by separate air carriers. SABRE, owned by American Airlines, is used as a principal CRS by approximately 28% of the more than 28,000 travel agency locations across the country. SABRE also holds the largest share of CRS transactions nationally, more than 45% in the years 1983-1985. Nationally, Apollo is the second largest CRS, used by approximately 25% of travel agency locations in the United States, and, according to Austin, accounting for 31% of all CRS transactions in this country. On Long Island, New York, Apollo ranks fourth, used by 3% of Long Island travel agency locations and earning 8% of all Long Island CRS revenues.

Austin is a travel agency with thirteen offices on Long Island. Prior to mid-1985, Austin used a variety of CRSs, but it never used Apollo. In 1985, Austin acquired two smaller Long Island agencies, Karson Travel and Fantasy Adventures, both of which subscribed to Apollo. By separate agreements with United, Austin assumed Karson's ABS contract and Fantasy's Apollo contract. Austin then executed a five-year Apollo contract covering two of its other locations in Oceanside and Mitchell Field.

Each of the Apollo contracts that Austin signed provided for payment of liquidated damages upon premature termination of the contract. In the contract for the Oceanside and Mitchell Field locations, the liquidated damages consist of: (i) 80% of the remaining monthly fees due under the contract, (ii) 80% of variable charges, accrued by generation of tickets and itineraries, for the month preceding termination, multiplied by the number of months remaining in the contract term and (iii) 50% of the average monthly booking fee revenues, using the first six months of the contract as a basis for calculation, multiplied by the number of months remaining in the contract term. In the contract assuming Fantasy's Apollo obligation, only the first two elements are used to define liquidated damages. The contracts specify that Illinois law governs disputes; for the contract issues raised by this case, the law of Illinois is the same as that of New York, the state where the claim arose, and virtually all other states.

Austin then moved the SABRE CRS into its three locations covered by Apollo, using the two systems side by side at each location. Austin later notified United that it wished to discontinue use of the ABS system at the Karson Travel location. United agreed to the discontinuance and to forego the $90,511.43 in liquidated damages Austin owed under the Karson ABS agreement provided that Austin continue to use Apollo until November 30, 1989. Austin accepted the condition and discontinued use of ABS.

Thereafter, representatives of the rival SystemOne CRS, owned and operated by Texas Air Corp., offered Austin indemnity against any damages incurred for breach of the existing Apollo agreements if Austin would contract for use of SystemOne. In June 1986, Austin adopted the SystemOne CRS at Mitchell Field, its principal Apollo location, and abandoned all of its Apollo obligations before the expiration of the term of the contracts. At Austin's request, United removed all Apollo equipment from Austin premises. Austin had never paid United for the use of Apollo equipment and services provided by the contracts.

United brought this breach of contract action on the two Apollo contracts and the ABS agreement. Austin defended and counterclaimed on two grounds relevant to this appeal: first, that the liquidated damages clauses included in the Apollo contracts were unenforceable penalties; and second, that United's actions violated federal antitrust laws--namely, sections 1 and 2 of the Sherman Act and sections 2 and 3 of the Clayton Act, as amended by the Robinson-Patman Act--and New York antitrust law. After United moved for summary judgment, the district court held an evidentiary hearing pursuant to Fed.R.Civ.P. 43(e), because of the difficulty it cited in excavating for pertinent facts among the mountains of documents submitted by Austin in opposition to the motion.

The district court rejected Austin's defenses and counterclaims. It held that the liquidated damages clauses were reasonable and enforceable. As to the antitrust defenses and counterclaims, the district court found no monopolization, because United did not have a dominant position in the relevant geographical market of Long Island, or elsewhere. As well, the court could discern no attempt by United to monopolize, partly because Austin's expert conceded that there was no reasonable or realistic possibility that United could achieve a monopoly in the New York City/Long Island area. The court further found that United simply lacked market power and that there had been no showing of either unreasonable restraint of competition or of exclusive dealing. Finally, the court rejected Austin's counterclaim of price discrimination because there was no evidence of a possibility of injury to competition.

On appeal, Austin argues that the district court erred by enforcing liquidated damages that are penalties, improperly defined the relevant market for antitrust purposes as Long Island and abused summary judgment standards by deciding in plaintiff's favor issues of fact that should have been submitted to a jury.

DISCUSSION

A. Liquidated Damages

It is commonplace for contracting parties to determine in advance the amount of compensation due in case of a breach of contract. 5 Corbin on Contracts Sec. 1054, at 319 (1964). A liquidated damages clause generally will be upheld by a court, unless the liquidated amount is a penalty because it is plainly or grossly disproportionate to the probable loss anticipated when the contract was executed. Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289-90 (7th Cir.1985) (applying Illinois law); Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 424, 361 N.E.2d 1015, 1018, 393 N.Y.S.2d 365, 369 (1977). Liquidated damages are not penalties if they bear a "reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation." Leasing Service Corp. v. Justice, 673 F.2d 70, 73 (2d Cir.1982).

The liquidated damages fixed in the Apollo contracts ¹ were, as the district court found, reasonable at the time the contracts were executed. Most of United's costs when providing Apollo service are either fixed or determined in the early stages of the contractual relationship. The few costs that United would avoid by an early termination of an Apollo contract are estimated to be "less than 20 percent of the amount of revenue from the monthly fixed usage fees and variable charges." 681 F.Supp. at...