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In late July, the 2nd U.S. Circuit Court of Appeals handed down an opinion in Virgin Atlantic Airways Ltd. v. British Airways Plc, [FOOTNOTE 1] which denied Virgin’s appeal of the denial of a summary judgment motion. In the course of denying Virgin’s several antitrust claims, the court gave strong support to two long recognized tenets of antitrust law: 1) an antitrust plaintiff must demonstrate harm to consumers, not merely a competitor in order to prevail in a claim under the Sherman Act, and 2) even a monopolist is entitled to use legitimate economic advantages to exclude a competitor from the marketplace and does not run afoul of the antitrust laws by doing so. BACKGROUND British Airways, at the time of the litigation, controlled approximately 39 percent of all available runway slots at Heathrow Airport, which allowed British Airways to provide service to 45 percent of all Heathrow passengers. British Airways’ strong position in the runway slots translated into 54 routes originating at Heathrow for which it was the only or one of two route providers. [FOOTNOTE 2] When Virgin was established in 1984, it was limited to flying out of Gatwick, London’s less-desirable airport, due to a lack of available slots at Heathrow. By 1997, Virgin had established 10 routes between the U.K. and the U.S., six of which were based out of Heathrow, and had gained in total, approximately 2 percent of available Heathrow runway slots. [FOOTNOTE 3] As part of its sales program, British Airways offers incentive agreements to travel agents and corporations. These agreements amount to commissions and discounts that are awarded when purchases reach certain threshold levels. Rather than establishing purchasing targets on a route-by-route basis, British Airways “bundles” routes by setting targets on a regional group of routes. The incentive agreements are used by British Airways to sell its entire network rather than selling incentives for specific routes. The agreements require no mandatory minimum purchases by participants. PROCEDURAL HISTORY Virgin filed suit against British Airways in 1993 alleging, among other things, that British Airways’ incentive agreements violated ��1 and 2 of the Sherman Act. Virgin made two claims under �2. First, Virgin alleged that British Airways had engaged in attempted monopolization by using “predatory foreclosure and the bundling of ticket sales in an attempt to foreclose transatlantic competition by diverting passengers from Virgin and other airlines to itself.” [FOOTNOTE 4] Second, Virgin alleged that British Airways engaged in monopoly leveraging, arguing that “British Airways has used its monopoly power over flights originating from Heathrow and Gatwick to obtain an unfair advantage in the market for transatlantic airline passenger service.” [FOOTNOTE 5] According to Virgin, the result of this anticompetitive behavior by British Airways was to impede efforts by Virgin to expand its service from Heathrow to five markets in the United States. [FOOTNOTE 6] British Airways filed a motion to dismiss which was denied as to the antitrust claims in late 1994. [FOOTNOTE 7] Following discovery, British Airways moved for summary judgment. The district court granted summary judgment, largely based on the fact that Virgin had failed to provide sufficient evidence that the incentive agreements had an “actual adverse effect on competition.” Specifically, the district court refused to credit the testimony of Virgin’s economic expert. [FOOTNOTE 8] Virgin then appealed this decision to the 2nd Circuit, which affirmed the district court, finding both that Virgin had failed to demonstrate sufficient proof and that “Virgin failed to show how British Airways’ competition harmed consumers.” [FOOTNOTE 9] THE 2ND CIRCUIT OPINION Virgin faced an uphill battle in its attempt to get the summary judgment ruling overturned. In the opening paragraph of an opinion by Judge Cardamone, the court laid the framework upon which the decision would rest. Judge Cardamone explained that what the antitrust laws are “designed to protect is competitive conduct, not individual competitors.” [FOOTNOTE 10] Virgin would have to show that British Airways’ conduct did more than injure Virgin; Virgin would have to show that the conduct injured consumers as a whole. This was made difficult by the fact that the competitive conduct of which Virgin was complaining, i.e., the incentive agreements, on its face, translated into lower prices for consumers. Virgin would have to demonstrate that some greater harm would come to consumers as a result of such lower prices. VIRGIN’S �1 CLAIM Virgin had all but abandoned its �1 claim by the time the case reached the 2nd Circuit. Virgin’s appellate brief went so far as to acknowledge that the case did not involve a conspiracy, but rather unilateral conduct by British Airways. [FOOTNOTE 11] As concerted action is a prerequisite for a successful �1 claim, [FOOTNOTE 12] the court might have stopped its analysis there. However, the opinion went on to state that even if Virgin had been able to demonstrate concerted action, its claim would fail. Judge Cardamone explained that Virgin had failed to demonstrate an “actual adverse effect on competition.” [FOOTNOTE 13] It was not enough for Virgin to demonstrate that British Airways actions prevented it from entering the market. Even if it could so demonstrate, British Airways was then entitled to demonstrate a pro-competitive justification for its incentive agreement. Virgin would then have to prove that the pro-competitive effect could be achieved by a less-restrictive means. In other words, the court held that Virgin would be successful “only if it were ultimately to show that British Airways’ action had a ‘competition-reducing’ effect, harming consumers.” [FOOTNOTE 14] Such a showing may be made by pointing to factors such as reduced output, increased prices, and decreased quality, as demonstrated by actual market data. [FOOTNOTE 15] Judge Cardamone found that, on balance, while the incentive agreements may have had the effect of excluding Virgin from the market, Virgin nonetheless failed to prove that British Airways’ incentive agreements created a harm for consumers. The judge acknowledged that service to customers improved after Virgin’s eventual entry into the market. However, he shared the district court’s finding that Virgin did not present compelling data relating to alleged decreases in price following Virgin’s entry which would have suggested that Virgin’s previous exclusion from the market caused consumer harm. Furthermore, and most importantly, British Airways was able to present a clear and obvious pro-competitive benefit to consumers from the incentive agreements. The incentive agreements rewarded loyal customers, which “promotes competition on the merits.” [FOOTNOTE 16] Virgin failed to present an alternative program which would achieve the same pro-competitive benefits. As a result, the court held that even if Virgin had successfully demonstrated concerted action, its �1 claim would fail. [FOOTNOTE 17] VIRGIN’S ATTEMPTED MONOPOLIZATION CLAIM The Court next went on to address Virgin’s claim that British Airways engaged in predatory foreclosure and bundled ticket sales in order to foreclose competition on transatlantic flights. [FOOTNOTE 18] According to Virgin’s theory, British Airways was using a type of predatory pricing in order to keep Virgin out of the market for transatlantic flights. To be successful on such a claim, Virgin needed to show that British Airways was pricing below its cost and that there was a dangerous probability that British Airways would recoup its below-cost pricing investment through monopoly pricing. [FOOTNOTE 19] Generally, such a claim posits that the predatory rival will recoup its costs sometime in the future, but in this case, Virgin was alleging that the recoupment was simultaneous through British Airways’ bundling of ticket sales. In order to prove below cost pricing, Virgin alleged that those passengers who would not have traveled on British Airways but for the incentive agreements were being charged an amount that was below British Airways’ cost for those trips. Virgin then argued that British Airways was simultaneously recouping those costs by “bundling” together the incentivized flights with those flights originating at Heathrow over which British Airways had a monopoly. In this way, Virgin argued, British Airways created disincentives for consumers to use Virgin’s transatlantic services and therefore foreclosed Virgin from the market. In addition, Virgin argued, customers were paying monopoly prices for the bundled fares. Once again, Virgin faced a difficult road in proving its case. In laying out his framework for analysis, Judge Cardamone issued the reminder that “even with monopoly power, a business entity is not guilty of predatory conduct through excluding its competitors from the market when it is simply exploiting competitive advantages legitimately available to it.” [FOOTNOTE 20] In addition, the judge explained that predatory pricing claims have been met with some skepticism by the Supreme Court. [FOOTNOTE 21] The court determined that Virgin failed to demonstrate that the incentive agreements amounted to below cost pricing. In addition, the court pointed out that since British Airways maintained its incentive program even after Virgin’s entry into the market, the agreements are a rational business practice, independent of any alleged anti-competitive motive. [FOOTNOTE 22] In spite of the fact that British Airways may be a monopolist, barring a demonstration that the prices charged in the incentive agreements are below predatory levels, such low prices are a pro-competitive benefit to consumers and therefore encouraged by the antitrust laws. The court also found that Virgin failed to demonstrate that British Airways recouped its “losses.” While Judge Cardamone acknowledged that there is support in the case law for a �2 claim based on bundling, [FOOTNOTE 23] he explained that Virgin put forth no evidence to suggest that the incentive agreements amounted to coercion in relation to the five transatlantic flights identified by Virgin. [FOOTNOTE 24] Specifically, although Virgin was able to show that certain travel agents steered customers toward British Airway’s flights, Virgin failed to link this evidence specifically to the incentive agreements. In addition, Virgin failed to prove that British Airways reaped sufficient profits on the bundled flights to make up for the alleged losses on the incentivized transatlantic flights. Without proof of such recoupment, Judge Cardamone found Virgin’s predatory foreclose theory to be unpersuasive. [FOOTNOTE 25] VIRGIN’S MONOPOLY LEVERAGING CLAIM Judge Cardamone met Virgin’s monopoly leveraging claim with skepticism. Judge Cardamone noted that the use of monopoly power in one market to gain monopoly share in another market clearly runs afoul of �2. [FOOTNOTE 26] Under this test, Virgin would have to prove that British Airways possessed monopoly power in both the leveraged market, that of their control of landing slots at Heathrow, as well as in a second market, that of transatlantic flights. However, in Berkey Photo, Inc. v. Eastman Kodak Co., [FOOTNOTE 27] the 2nd Circuit arguably set a less-stringent standard requiring that leveraging be proven by a “competitive advantage” in a second market in which the defendant may not have had monopoly power. Judge Cardamone expressed his view that subsequent cases have questioned the Berkey Photo leveraging test, [FOOTNOTE 28] but found it unnecessary to clarify Berkey. Instead, the court relied on its earlier finding that Virgin failed to prove the exercise of monopoly power by British Airways in any market and affirmed summary judgment on this claim as well. [FOOTNOTE 29] CONCLUSION The antitrust laws are designed to protect robust competition that results in among other things, low prices for consumers. For this reason, when a plaintiff brings an antitrust case based on low prices offered by a competitor, courts will look on such a claim with great skepticism, even if that competitor may be considered a monopolist. Equally important, the Virgin Atlantic case confirmed that, no matter what the defendants’ alleged anticompetitive intent, the antitrust laws simply do not come into play absent concrete proof of harm to consumers. Neal R. Stoll and Shepard Goldfein are partners at Skadden, Arps, Slate, Meagher & Flom. Neil Sirota, an associate of the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 257 F.3d 256 (2d Cir. 2001). FN2 Id. at 261. FN3 Id. FN4 Id. at 265. FN5 Virgin Atl. Airways Ltd. v. British Airways Plc, 871 F.Supp 52, 59 (S.D.N.Y. 1994). FN6 Virgin Atl. Airways Ltd., 257 F.3d at 259. These five markets included New York (John F. Kennedy airport); Los Angeles; Chicago; San Francisco; and Washington, D.C. FN7 Virgin Atl. Airways Ltd. v. British Airways Plc, 871 F.Supp 52 (S.D.N.Y. 1994). FN8 Id. at 580. FN9 Virgin Atl. Airways Ltd., 257 F.3d at 259. FN10 Id. The Supreme Court has given its blessing to such an approach, which has become a basic concept underlying the application of antitrust laws. See Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986); Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990) FN11 Id. at 263. FN12 See, e.g. Retina Assocs., P.A. v. Southern Baptist Hosp. of Florida, Inc., 105 F.3d 376, 1380 (11th Cir. 1997). FN13 Virgin Atl. Airways Ltd., 257 F.3d at 264 (citation omitted). FN14 Id. (citation omitted). FN15 Id. FN16 Id. at 265. FN17 Id. FN18 Id. FN19 Id. at 266 (citation omitted) FN20 Virgin Atl. Airways Ltd., 257 F.3d at 266 (citation omitted). FN21 Id., citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). FN22 Id. FN23 See e.g., SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir. 1978); Ortho Diagnostic Sys., Inc. v. Abbott Labs., Inc., 920 F.Supp. 455 (S.D.N.Y. 1996). FN24 See Virgin Atl. Airways Ltd., 257 F.3d at 270. FN25 Id. at 269-72. FN26 Id., citing Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451(1992) FN27 603 F.2d 263 (2d Cir. 1979). FN28 Judge Cardamone cited Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459 (1993), where the Supreme Court stated that �2 “makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so.” FN29 Virgin Atl. Airways Ltd., 257 F.3d at 272-73.

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