Petition for Writ of Certiorari — Alaska Airlines, Inc. v. United Airlines, Inc.

Supreme Court brief1992

Ask Donna

What actually matters in this document.

Text

Bupreme Court, U.S.

Pg FILE

Sie l242

No. 91- | JAN 27 1992

ete CLERK |

IN THE

Supreme Court Of The Gnited States

October Term, 1991

ALASKA AIRLINES, INC. and

TRANSTAR AIRLINES CORPORATION,

Petitioners,

UNITED AIR LINES, INC.,

Respondent.

NORTHWEST AIRLINES, INC.,

Petitioner,

AMERICAN AIRLINES, INC.

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MAXWELL M. BLECHER

Counsel of Record

BLECHER & COLLINS

611 West Sixth Street

Twenty-Eighth Floor

Los Angeles, California 90017

(213) 622-4222

January 27, 1992 Attorneys for Petitioners

QUESTION PRESENTED FOR REVIEW

Whether the Court of Appeals erred in (a) creating a square

conflict with decisions in other Circuits by failing to follow this

Court’s interpretation of Section 2 of the Sherman Act in United

States v. Griffith, 334 U.S. 100 (1948), and Otter Tail Power

Co. v. United States, 410 U.S. 366 (1973), which provide for

liability when monopoly power in one market is used to produce

an anticompetitive effect, although falling short of actual or

attempted monopolization, in a second, vertically related market,

and (b) thus erroneously upholding summary judgment against

petitioners’ claims of violation of the “essential facilities” and

“monopoly leveraging” doctrines under Section 2 of the Sherman

Act.

PARTIES TO THE PROCEEDING

All parties to this proceeding are shown in the caption of

the case. Petitioner Alaska Airlines, Inc., an Alaska corporation,

is wholly owned by Alaska Air Group, Inc., a Delaware corpora-

tion. Petitioner TranStar Airlines Corporation, a Texas corpora-

tion, which is wholly owned by Southwest Airlines Co., a Texas

corporation, is a successor to Muse Air Corporation, which was

a plaintiff in the action below. Petitioner Northwest Airlines, Inc.,

a Minnesota corporation, is wholly owned by NWA, Inc., a

Delaware corporation. None of petitioners has a subsidiary other

than a wholly owned subsidiary. Midway Airlines, Inc., a

Delaware corporation currently in Chapter 7 bankruptcy, and a

plaintiff in the action below, has elected not to join this petition.

ili

TABLE OF CONTENTS

Page

QUESTION PRESENTED FOR REVIEW ........ i

PARTIES TO THE PROCEEDING ............ ii

TABLE OF CONTENTS .................. iii

TABLE OF AUTHORITIES ................ Vv

Prereeee LOW fe. 2

cE 2

STATUTORY PROVISIONS AND

REGULATIONS INVOLVED ............... 2

STATEMENT OF THECASE ............... 2

x ee 2

a The Decisions Below .............. 6

REASONS FOR GRANTING THE WRIT ........ ®

l. The Decision Below Creates a Con-

flict in the Circuits With Respect to the

Monopoly Leveraging Doctrine That

This Court Should Resolve .......... &

2. The Decision Below Creates a Con-

flict in the Circuits With Respect to the

Essential Facilities Doctrine That This

Court Should Resolve ............. 10

3. The Decision Below Conflicts With

the Settled Antitrust Precedent of This

a oe 12

4. The Decision Below Improperly

Affirmed Summary Judgment by

Resolving Fact Issues on the Basis of

eeomomic Theory ................ 16

a. The Decision Below Impermis-

sibly Overlooked American’s

and United’s Power to Eliminate

Competition Through a Price

Se eee es Oe a oak

b. The Decision Below Impermis-

sibly Assumed That an Airline

Can Withdraw FromaCRS .......

c. The Decision Below Impermis-

sibly Assumed That a Travel

Agency Can Change ltsCRS ......

d. The Decision Below Impermis-

sibly Relied on Market Share as

the Only Possible Indicator of

a ae ee

CRUE. 4-3-8 6 G6 he a ee oe re a

APPENDIX

Opinion of the Courtof Appeals ...........

Opinion of the District Court ............

Statutory Provisions and Regulations

re eae eee ae ee eee

Page

TABLE OF AUTHORITIES

Page(s)

Cases

Advanced Health-Care Servs. v. Radford Com-

munity Hosp., 910 F.2d 139 (4th Cir. 1990) .... 10

Association for Intercollegiate Athletics for

Women v. NCAA, 735 F.2d 577 (D.C. Cir. 1984) .. 10

Berkey Photo, Inc. v. Eastman Kodak Co., 603

F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S.

eee COD. 25 54 4b trace a we ae eee eee 8

Celotex Corp. v. Catrett, 477 U.S. 317 (1986) .... 19

City of Malden v. Union Elec. Co., 887 F.2d 157

ote a ne ere Nee aru rr rar err 1]

Copperweld Corp. v. Independence Tube Corp.,

GG Uhm. fae ties KA hoe ee ee ee 6, 15

Delaware & Hudson Ry. Co. v. Consolidated

Rail Corp., 902 F.2d 174 (2d Cir. 1990), cert.

denied, ___ ~ U.S. __., 111 S. Ct. 2041, 114

me boty) rere Perera gr mera 12

Directory Sales Mgt. Corp. v. Ohio Bell Tele-

phone Co., 833 F.2d 606 (6th Cir. 1987) ..... 1]

Fishman v. Estate of Wirtz, 807 F.2d 520 (7th Cir. ,

| Ser ee ie tr a mp ay aarti St tm nerd Ss | oe

Grand Light & Supply Co. v. Honeywell, Inc.,

T20 Vie OTR TTEED 88a ee 8 8 wee ee 9

Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C.

Cir. 1977), cert. denied, 436 U.S. 956 (1978) ... 10, 15

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466

ae Settee 4k eee eee ee 16

Page(s)

Kerasotes Mich. Theatres v. National Amuse-

ments, 854 F.2d 135 (6th Cir. 1988), cert. dis-

missed sub nom. G.K.C. Michigan Theatres,

Inc. v. National Amusements, Inc., 490 U. S.

OP EEOOD 6 vy oe ee ee )

Key Enterprises of Delaware, Inc. v. Venice

Hosp., 919 F.2d 1550 (11th Cir. 1990)... .. |. 10

Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574 (1986)... .......... 19

Northern Pacific Ry. Co. v. United States, 356

WE AEOOP: os 5 gt ee 16

Otter Tail Power Co. y. United States, 410 U.S.

iieihnniia A 14

Times-Picayune Publishing Co. v. United States,

345 U.S. 594 (1953)... 2. 16

Twin Laboratories, Inc. y. Weider Health & Fit-

ness, 900 F.2d 566 (2d Cir. See tate eee ae 1]

United Air Lines, Inc. v. Civil Aeronautics Board,

766 F.2d 1107 (7th Cir. Pee eae Rhee. 5

United States v. Aluminum Co. of America, 148

F.2d 416 (2d Cir. ine a ee ee ee 17

United States v. Griffith, 334 U.S. 100 (1986) 2... 13

United States v. Otter Tail Power Co., 331

F. Supp. 54 (D. Minn. yore) ys Vee 14

United States v. Terminal Railroad Assoc., 244

U.S. 383,411 (1912) 2... 12

Vil

Page(s)

Statutes

Sherman Act (15 U.S.C.):

Ps outa Sak a oe eee eae fetes 6, 16

Be ak ak eee ee passim

es ENE be area eae ee ee ee te 2

Oe BOE Se teas oh eee Oe 6

eS colt Rs MRR te eters Ac 5

Other

ee Oe 66 oo ae es eee ee 2,9

No. 91-

IN THE

Supreme Court Of The Anited States

October Term, 1991

ALASKA AIRLINES, INC. and

TRANSTAR AIRLINES CORPORATION,

Petitioners,

UNITED AIR LINES, INC.,

Respondent.

NORTHWEST AIRLINES, INC.,

Petitioner,

AMERICAN AIRLINES, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ALASKA AIRLINES, INC., TRANSTAR AIRLINES

CORPORATION, and NORTHWEST AIRLINES, INC. respect-

fully petition for a writ of certiorari to review the decision of the

United States Court of Appeals for the Ninth Circuit in this case.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Ninth Circuit (App. 1a-24a) is reported at 948 F.2d 536. The

opinion of the United States District Court for the Central District

of California (App. 25a-78a) is reported at 694 F. Supp. 1443.

JURISDICTION

The judgment of the Court of Appeals was entered on

October 29, 1991. The jurisdiction of this Court is invoked under

28 U.S.C. § 1254(1).

STATUTORY PROVISIONS AND REGULATIONS

INVOLVED -

Section 2 of the Sherman Act, 15 U.S.C. § 2, is set forth at

App. 79a and 14 C.F.R. § 255 is set forth at App. 79a-85a.

STATEMENT OF THE CASE

This case concerns the question whether a monopolist

should be permitted to abuse its power to the detriment of com-

petition and consumers so long as the monopolist’s pernicious

conduct causes a significant anticompetitive effect in a second,

related but not yet monopolized, market. The decisions of the

courts below, rendered as a matter of law on motion for summary

judgment—and based on improper judicial factfinding—accord

monopolists just such a license. We respectfully submit that the

decision of the Court of Appeals below, which squarely conflicts

with the settled rules adopted by other Circuits and with the

decisions of this Court, and which creates a safe harbor for

conduct that is anticompetitive and harmful to consumers, should

be reviewed and reversed.

1. Material Facts. Respondents American Airlines, Inc.

(“American”), and United Air Lines, Inc. (“United”), own air

passenger computer reservation systems (“CRSs”), named

SABRE and Apollo respectively. (App. 2a)!

A CRS is a computer system that provides travel agencies

with access to information on the availability and prices of seats

on airline flights, and provides a medium for booking seats and

issuing tickets on those flights. A travel agency subscribing to a

CRS leases computer terminals and printers from the CRS vendor

that are connected to the CRS vendor's computer system, thereby

giving the travel agency access to a database of information on

all “participating” airlines. There are currently four CRSs operat-

ing in the United States, of which SABRE and Apollo are the

largest. (App. 26a-27a)

CRSs were first introduced in the late 1970's. After attempts

to create an industry-wide CRS failed, following United's

withdrawal from the last such venture, American and United

introduced SABRE and Apollo. Respondents encouraged use of

their CRSs by persuading all major airlines to participate in

them—initially free or with minimal charge—and by offering

their CRSs to travel agencies at low—below cost—subscription

rates. (App. 28a, 55a)? The proliferation of flights and fares that

followed deregulation of airlines in 1978 rendered it difficult for

travel agencies to provide efficient service to their customers

without CRSs. (App. 2a-3a) About 95% of all travel agencies,

which account for approximately 80% of all domestic airline

ticket sales, are automated with a CRS. See United States Depart-

ment of Transportation: Secretary's Task Force on Competition

in the U.S. Domestic Airline Industry, Airline Marketing Prac-

tices: Travel Agencies, Frequent-Flyer Programs, and Computer

Reservation Systems 7, 21, 44 (1990) [hereinafter Secretary's

1 In 1988, United scld Apollo to Covia Partnership; United owns

approximately 50% of Covia and manages the Apollo CRS for Covia.

2 Once, however, American and United achieved market power by

placing their CRSs in approximately 40% and 30%, respectively, of travel

agencies, accounting for about half of the tickets written for airline passengers

nationwide, American and United were able to—and did—charge substantial

and discriminatory booking fees to the various participating airlines. (App. 28a,

43a)

=—-ss-'--'-'-eRereweeeee ee

Task Force]. In 1984, SABRE had approximately 40% of all CRS

installations in United States travel agencies; Apollo had approx-

imately 30%. (App. 49a n.11)

Few travel agencies subscribe to more than one CRS; from

the travel agency’s perspective, there is no need to do so because

all CRSs provide information about all major airlines. See

Secretary’s Task Force, at 44. Moreover, the contracts that

American and United impose on travel agencies Substantially and

deliberately inhibited them from changing CRSs or adding a

second CRS. The SABRE and Apollo subscriber contracts have

long contained terms that are designed and have operated to

discourage or prevent travel agencies from switching from one

CRS to another and from installing more than one system.

(App. 32a-33a)3

If an airline withdrew from SABRE, that airline would be

almost entirely foreclosed from Selling tickets on its flights

through the approximately 40% of travel agencies that are

automated with SABRE. Likewise, if an airline withdrew from

Apollo, the airline would be effectively foreclosed from selling

tickets on its flights through the approximately 30% of travel

agencies automated with Apollo. (App. 49a n.11) Petitioners,

whose business is characterized by very high fixed costs, could

not possibly afford to incur the immediate reduction in sales and

revenue that would ensue if they withdrew from either SABRE

or Apollo, much less both systems. SABRE and Apollo, therefore,

are firmly entrenched as essential elements in each airline's

ability to sell its air transportation services to passengers—

indeed, they are each essential to petitioners’ very survival.

From the inception of CRSs, American and United used

their systems to provide themselves with commercial advantages

in the market for air transportation services. Notably, American

and United “biased” the screen displays on their CRSs to favor

3 The contracts were (and still are) for long terms (five years or more),

and provide for automatic renewal whenever new equipment is installed and for

draconian liquidated damages in the event of withdrawal from SABRE or

Apollo

their own flights over those of their competitors. American and

United elevated their respective flights to positions of greatest

prominence on the CRS displays that they transmitted to travel

agencies using SABRE and Apollo. This practice diverted sales

to American and United from other airlines. (App. 27a)

In the early 1980's, Congress and federal regulators became

concerned about possible anticompetitive uses of CRSs. !n 1984,

after a series of reports and Congressional hearings, the Civil

Aeronautics Board promulgated rules governing the use of CRSs

operated by airlines, including rules prohibiting display bias and

discrimination in the fees charged to different carriers. See 14

C.F.R. § 255. The CRS rules were upheld by the United States

Court of Appeals for the Seventh Circuit when United challenged

their validity. See United Air Lines, Inc. v. Civil Aeronautics

Board, 766 F.2d 1107 (7th Cir. 1985).

Immediately after the federal CRS rules outlawing display

bias and price discrimination were promulgated in 1984, United

and American increased the fees they charged to certain airlines

by over 500%. Despite this enormous increase in the booking fees

charged by CRS vendors, not a single airline withdrew from any

CRS. (App. 28a, 43a)

In 1985, the present actions were commenced against

American and United. The cases were consolidated before the

United States District Court for the Central District of California,

which had jurisdiction under 15 U.S.C. § 2 and 28 U.S.C. § 1331.

Petitioners assertéd a number of claims under Section 2 of

the Sherman Act, including claims that SABRE and Apollo were

each “essential facilities” for the provision of air transportation

services and that American and United, through display bias and

discriminatory and excessive prices, had denied petitioners

reasonable access to those facilities. Further, petitioners claimed

that American and United had monopoly power in the markets for

the sale of SABRE and Apollo services, respectively, to airlines,

and had “leveraged” that power in order to impair competition in

the market for air transportation services. (App. 26a, 70a)

eee ET

2. The Decisions Below. Respondents moved for summary

judgment on petitioners’ essential facilities and monopoly

leveraging claims, among others. The District Court granted

Summary judgment against petitioners on both claims. First,

despite the summary judgment context, the District Court held

that neither SABRE nor Apollo was an essential facility.

(App. 35a-36a, 38a) Although the District Court found that

“American [and United] may be able to extract supracompetitive

booking fees in the CRS market, and such price increases do

create entry barriers in the air transportation market by raising

competitors’ costs”, the District Court held that there was no

danger of monopolization of that market and thus no Section 2

offense. (App. 36a) The District Court made a factual finding on

motion for summary judgment and impermissibly discounted

petitioners’ evidence to the contrary when it held, purportedly as

a matter of law, that there were constraints on American’s and

United's “ability to weaken competition”. (App. 38a-39a) Having

made this finding, the District Court then focused on market share

in the air transportation industry to hold that a reasonable jury

was precluded from finding monopolization. (App. 39a)

Second, the District Court flatly rejected the monopoly

leveraging doctrine, holding that “it does not appear that the

monopoly leveraging theory is consistent with the requirements

of Section 2 of the Sherman Act”, and granted summary judgment

to respondents. (App. 70a)

The United States Court of Appeals for the Ninth Circuit,

having jurisdiction under 28 U.S.C. § 1291, affirmed. Relying cn

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752

(1984) (which held that a wholly owned Subsidiary could not

conspire with its parent for the purposes of Section 1), the Court

of Appeals held that one of two standards of liability—a higher

standard for unilateral action cases and a lower standard for

concerted action cases—applied to all antitrust claims, including

claims under the essential facilities doctrine. (App. 7a-8a) The

Court of Appeals so held even though Copperweld did not address

the essential facilities doctrine and even though no court had ever

before applied such a distinction in the context of the essential

facilities doctrine.

The Court of Appeals then held that the standard of liability

for all unilateral action cases was whether competition, measured

by market share, was being eliminated. The Court of Appeals

held: “A facility that is controlled by a single firm will be con-

sidered ‘essential’ only if control of the facility carries with it the

power to eliminate competition in the downstream market.”

(App. 15a) (emphasis in original). The Court of Appeals further

declared that “[t}he power to eliminate competition must not be

momentary, but must be at least relatively permanent.” (App. 15a

n.11) (citations omitted)

The Court of Appeals found that neither SABRE nor Apollo

were essential facilities under this test. According to the Court of

Appeals: “Basic economic theory tells us that plaintiffs will

withdraw from SABRE or Apollo if the cost of using either CRS

causes the cost to the airline of providing a flight booked on a

CRS to exceed the revenue that the airline gains by providing the

flight.” (App. 15a) The Court of Appeals pointed out that

“[njeither United nor American have ever set this fec at a level

that would drive their competitors away.” (App. 16a) The Court

of Appeals then held as a matter of fact—despite a complete

absence of factual support in the record and despite petitioners’

entitlement, on motion for summary judgment, to have all infer-

ences drawn in their favor—that “it is unlikely that defendants

would set their fee at such a level, for, if they did, they would

destroy their CRSs rather than competition.” (App. 16a)

Having decided that there was no “essential facility” in this

case, the Court of Appeals proceeded to establish a new test for

liability, different from that which prevails in other Circuits.

According to the Court of Appeals, even if SABRE or Apollo

were an essential facility, the only use of such a facility that would

give rise to liability would be actual or attempted monopolization:

a firm must exclude “at least some of its competitors” from the

downstream market. (App. 17a)

Turning to the monopoly leveraging claim, the Court of

Appeals flatly rejected the law in other Circuits, including the

Second Circuit's decision in Berkey Photo, Inc. v. Eastman Kodak

Co., 603 F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S. 1093

(1980), stating: “We now reject Berkey’s monopoly leveraging

doctrine as an independent theory of liability under Section 2.”

(App. 19a) According to the Court of Appeals, using monopoly

power in one market in order to gain a competitive advantage in

a second market, however harmful to competition and consumers,

is “just one of a number of ways that a monopolist can permissibly

benefit from its position”, provided there is no actual or attempted

monopolization. (App. 22a-23a) Thus, under the rule adopted by

the Court of Appeals, a monopolist may lawfully leverage its

monopoly power to extract virtually unlimited competitive

advantages in a second market, so long as evidence of market

Share and the existence of other firms in the second market

insulate it from a finding of actual or attempted monopolization

of that market.

The Court of Appeals concluded that “the antitrust laws seek

to punish only the willful attainment and maintenance of a

monopoly, or the attempt to attain such a monopoly.” (App. 23a-

24a) Thus, the Court of Appeals held that standard monopo-

lization and attempted monopolization doctrine occupied the

entire field and rejected any separate monopoly leveraging

doctrine.

REASONS FOR GRANTING THE WRIT

1. The Decision Below Creates a Conflict in the Circuits

With Respect to the Monopoly Leveraging Doctrine That This

Court Should Resolve. The Court of Appeals could not have been

more explicit in creating a conflict in the Circuits than by its

express rejection of the Second Circuit’s decision in Berkey

Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979),

cert. denied, 444 U.S. 1093 (1980). The Ninth Circuit's holding

that the use of monopoly power in one market to gain a competi-

tive advantage in another only gives rise to liability if there is

monopolization or attempted monopolization of the second

market—measured by market share and the existence of other

firms—is flatly contradictory to Berkey and those cases following

it.

In Berkey, the Second Circuit held that “a firm violates § 2

by using its monopoly power in one market to gain a competitive

advantage in another, albeit without an attempt to monopolize the

second market”. /d. at 275 (emphasis added). The Berkey court

further held:

“We tolerate the existence of monopoly power . . . only

insofar as necessary to preserve competitive incentives and

to be fair to the firm that has attained its position innocently.

There is no reason to allow the exercise of such power to

the detriment of competition, in either the controlled market

or any other. That the competition in the leveraged market

may not be destroyed but merely distorted does not make it

more palatable.” /d.

The Second Circuit reaffirmed Berkey in Grand Light &

Supply Co. v. Honeywell, Inc., 771 F.2d 672, 681 (1985):

‘A successful claim of monopoly leveraging requires proof

of at least three factors: monopoly power in one market,

‘“the use of [that] power, however lawfully acquired, to

foreclose competition, to gain a competitive advantage, or

to destroy a competitor”’ in another distinct market, and

injury caused by the challenged conduct.” (Citations

omitted) (emphasis added}.

The decision of the Ninth Circuit is also at odds with the

holding of the Sixth Circuit in Kerasotes Mich. Theatres v.

National Amusements, 854 F.2d 135 (6th Cir. 1988), cert. dis-

missed sub nom. G.K.C. Michigan Theatres, Inc. v. National

Amusements, Inc., 490 U.S. 1087 (1989). Following Berkey, the

Kerasotes court expressly rejected the requirement that the

monopolist use its power either to monopolize or attempt to

monopolize the second market. The court held that “[t]o run afoul

of the antitrust laws, it is not necessary that the party attempting

to leverage its monopoly power from a given market into a second

market possess monopoly power or dominant market position in

that second market”. Jd. at 137. The court found that the sole

purpose of the conduct at issue was “to extend a business’

dominance from one market into a second market, without having

to achieve that dominance in the second market by developing a

Superior product or as the result of other legitimate competitive

advantages” and that it was, therefore, unlawful. /d.

The Ninth Circuit’s rejection of petitioners’ monopoly

leveraging claims creates a clear conflict in the Circuits, which

this Court should resolve.4

2. The Decision Below Creates a Conflict in the Circuits

With Respect to the Essential Facilities Doctrine That This Court

Should Resolve. The Ninth Circuit’s decision is also in clear

conflict with the decisions of other Circuits with respect to the

essential facilities doctrine. The Court of Appeals below held that

a facility is not “essential” unless it can be used to “eliminate”

competition in the downstream market. (App. 15a) Moreover, the

Court of Appeals held that the essential facility must be used

actually to monopolize or attempt to monopolize. (App. 17a)

Other Circuits, however, have adopted less stringent tests, both

regarding what constitutes an essential facility and regarding

what constitutes forbidden anticompetitive behavior.

In Hecht v. Pro-Football, Inc., 570 F.2d 982, 992 (D.C. Cir.

1977), cert. denied, 436 U.S. 956 (1978), the D.C. Circuit held: .

“To be ‘essential’ a facility need not be indispensable; it is

sufficient if duplication of the facility would be economically

infeasible and if denial of its use inflicts a severe handicap on

potential market entrants.” (Footnote omitted). The D.C. Circuit's

4 Both the Fourth Circuit and the D.C. Circuit have expressly reserved

judgment on whether or not “monopoly leveraging” states a distinct antitrust

violation under Section 2. See Advanced Health-Care Servs. y. Radford Com-

munity Hosp., 910 F.2d 139, 149 n.17 (4th Cir. 1990); Association for Intercol-

legiate Athletics for Women v. NCAA, 735 F.2d 577, 586 n.14 (D.C. Cir. 1984).

See also Key Enterprises of Delaware, Inc. v. Venice Hosp., 919 F.2d 1550,

1567-68 (11th Cir. 1990) (not reaching question of whether monopoly leverag-

ing short of attempted monopolization violated Section 2 of Sherman Act).

Hecht standard, requiring far less of a showing for liability than

the Ninth Circuit now requires, has been followed by several

other Circuits.

Both the Sixth and Seventh Circuits have agreed with the

D.C. Circuit that to be essential a facility need not be “indispen-

sable” but rather so important and difficult to duplicate, that

competition is impaired. See Directory Sales Mgt. Corp. v. Ohio

Bell Telephone Co., 833 F.2d 606, 612 (6th Cir. 1987) (quoting

Hecht); Fishman v. Estate of Wirtz, 807 F.2d 520, 539 (7th Cir.

1986) (same).°

The Directory Sales and Fishman cases also adopt Hecht’s

“severe handicap” standard with regard to the anticompetitive

effect that must be shown. See Directory Sales, 833 F.2d at 612;

Fishman, 807 F.2d at 539. The Second Circuit adopted the same

standard in Twin Laboratories, Inc. v. Weider Health & Fitness,

900 F.2d 566, 569 (2d Cir. 1990), holding that “[a] successful

‘essential facilities’ plaintiff must prove that denial of access has

caused it ‘severe handicap.’” As the Second Circuit pointed out,

the policy behind the essential facilities doctrine “is to prevent a

monopolist in a given market. . . from using its power to inhibit

competition in another market”, not to prevent a monopolist from

foreclosing competition in the second market. /d. at 568 (empha-

sis added).°®

Shortly after the Twin Laboratories decision, the Second

Circuit again considered the essential facilities doctrine, in

5 Similarly, in City of Malden v. Union Elec. Co., 887 F.2d 157 (8th Cir.

1989), the Eighth Circuit implicitly rejected the elimination of competition

standard. The court approved the following jury instruction as appropriate in

essential facility cases: “Monopoly power, that is, the power to control prices or

the power to exclude or economically inhibit competitors, may be proven

through what is known as a bottleneck monopoly.” /d. at 163 n.6 (emphasis

added).

6 The Court of Appeals in the present case purported to rely ea the Twin

Laboratories decision. (App. 13a-14a) The Court of Appeals acknowledged that

Twin Laboratories turned on a “severe handicap” standard, but it still proceeded,

without explanation, to propound an elimination of competition standard

directly at odds with Twin Laboratories. (App. 14a-1Sa)

Delaware & Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d

174 (2d Cir. 1990), cert. denied, ___ ~ U.S. __, 111 S. Ct. 2041,

114 L. Ed. 2d 125 (1991), and expressly distinguished it from the

Separate offenses of monopolization and attempted monopo-

lization. Having dealt with plaintiff's claim of monopolization

the Court of Appeals continued, [w]e turn next to the question

whether the make or buy policy constituted denial of an essential

facility and, by implication, a violation of § 2”. /d. at 179. Only

after having separately addressed the essential facilities claim did

the Court of Appeals turn to the attempted monopolization claim.

In its discussion of the essential facilities doctrine in

Delaware & Hudson, the Second Circuit made no mention of

foreclosing or attempting to foreclose competition. Rather, the

Court of Appeals held that the essential facility owner must, to

the extent possible, treat its competitors on an equal basis with

itself, in order not to impair competition. “{T]here need not be an

outright refusal to deal in order to find that denial of an essential

facility occurred. It is sufficient if the terms of the offer to deal

are unreasonable.” /d. at 179-80. Further, the essential facility

owner has to ““‘place every such [user] company upon as nearly

an equal plane as may be with respect to expenses and charges as

that occupied by the proprietary [owner] companies.’” /d. at 180

(quoting United States v. Terminal Railroad Assoc., 224 U.S.

383, 411 (1912)).

Plainly, the Ninth Circuit’s application of traditional

monopolization and attempted monopolization standards to

essential facilities Claims is flatly at odds with the prior decisions

of the Second, Sixth, Seventh and D.C. Circuits—a second con-

flict in the Circuits that this Court should resolve.

3. The Decision Below Conflicts With the Settled Antitrust

Precedent of This Court. Both the essential facilities and

monopoly leveraging doctrines address a single issue: to what

extent may a monopolist lawfully use its monopoly power in one

market to gain a competitive advantage in another market? The

essential facilities doctrine is merely an instance of that overall

question. The Ninth Circuit's response is that, at least in the

context of a single firm monopolist, only actual or attempted

: 13

monopolization of the second market—which requires substan-

tial market share—is unlawful.’ Moreover, in the context of

essential facilities, no monopolization or attempted monopo-

lization claim will lie unless it is first established that the monop-

Olist has the ability to eliminate competition in the second market.

These novel standards ignore and distort the governing decisions

of this Court.

In United States v. Griffith, 334 U.S. 100, 107 (1948), this

Court held that: “the use of monopoly power, however lawfully

acquired, to foreclose competition, to gain a competitive ad-

vantage, or to destroy a competitor, is unlawful.” (Emphasis

added). In Griffith, theatre owners that held monopoly power in

certain towns were using that power to gain competitive advan-

tages in other towns, in which they had competitors. This Court

held that monopolists could not avoid liability merely by showing

that “no competitors were driven out of business”. Jd. at 109.

Thus, the Court overturned the District Court’s ruling that there

was no monopolization or attempted monopolization and

remanded the case.

The Court of Appeals below attempted to distinguish the

Griffith standard, stating “it is not controlling since it is a Sec-

tion | case involving concerted action”, (App. 19a n.16) That

distinction is unavailing. The paragraph quoted above is explicit-

ly addressed to—and indeed, confined to—Section 2. Moreover,

this Court expressly held, in Griffith, that, in the circumstances,

it did not matter whether the challenged conduct was that of a

single firm or concerted action:

“The consequence of such a use of monopoly power

is that films are licensed on a non-competitive basis in what

would otherwise be competitive situations. That is the effect

whether one exhibitor makes the bargain with the distributor

7 Under that test, the existence of competitors—evidenced by the fact

that, at the time of the District Court's opinion, American and United each had

only 12-14% shares of the market for air transportation services—was disposi-

tive for the District Court and Court of Appeals in granting summary judgment

against petitioners.

or whether two or more exhibitors lump together their

buying power, as appellees did here. It is in either case a

misuse of monopoly power under the Sherman Act.” 334

U.S. at 108 (emphasis added).

Griffith is the foundation of the monopoly leveraging

doctrine. Berkey was expressly based on the passage from Griffith

quoted above. See Berkey, 603 F.2d at 275. To ignore Berkey is

to ignore Griffith, and that the Ninth Circuit may not do.

Griffith is also the antecedent of Otter Tail Power Co. v.

United States, 410 U.S. 366 (1973), which the Court of Appeais

below recognized as the leading and controlling case with regard

to the essential facilities doctrine in the single firm context.

(App. 11a) In Otter Tail, defendant had monopoly power over the

“wholesale” distribution of electric power within a certain area,

and used that power to restrict competition in the market for the

“retail” distribution of electric power in that area. This Court

held: “The record makes abundantly clear that Otter Tail used its

monopoly power in the towns in its service area to foreclose

competition or gain a competitive advantage, or to destroy a

competitor, all in violation of the antitrust laws.” /d. at 377 (citing

Griffith, 334 U.S. at 107) (emphasis added).

The Court of Appeals below ignored this language and

distinguished Otter Tail as a case in which there was actual and

attempted monopolization. That reasoning is circular. There was

indeed a finding of actual and attempted monopolization in Otter

Tail, but plainly on a different standard from that espoused by the

Court of Appeals in this case. The proper standard to be applied

in essential facilities cases is the Griffith standard, as Otter Tail

made clear.

Mureover, the Court of Appeals below required that the

essential facility owner possess the power to eliminate competi-

tion, in square conflict with Otter Tail. Otter Tail did not have the

power to eliminate competition. Rather, “[i]ts control over trans-

mission facilities in much of its service area gives it substantial

effective control over potential competition from municipal

ownership.” United States v. Otter Tail Power Co., 331 F. Supp.

54, 61 (D. Minn. 1971) (emphasis added).® This Court expressly

acknowledged that Otter Tail’s inability to eliminate competition

was irrelevant, noting that “{t]he fact that three municipalities

which Otter Tail opposed finally got their municipal systems does

not excuse Otter Tail’s conduct.” 410 U.S. at 381. The

misinterpretation and rejection of Otter Tail’s clear language by

the Court of Appeals below is reversible error.

The heart of the decision below is a fundamental

misunderstanding of Copperweld Corp. v. Independence Tube

Corp., 467 U.S. 752 (1984). Copperweld did not define monop-

olization, but merely pointed out that monopolization is a higher

standard than unreasonable restraint of trade and that monopo-

lization is the proper standard to apply to cases involving

unilateral action. Copperweld did not immunize actions by a firm

with monopoly power in one market that have anticompetitive

effects in a second market merely because that firm’s actions are

effectively unilateral and do not actually eliminate competition

in the second market. Rather, Copperweld requires only that

where the challenged actions are properly regarded as the conduct

of a single firm—whether a parent and subsidiary acting together,

an essential facility owner or a monopolist trying to leverage its

market power from one market into another market—the legality

of that conduct must be analyzed under the Section 2 monopo-

lization standards appropriate to the circumstances.

Here, the conduct at issue is unilateral action by the CRS

owner that has effects in two markets: the market for providing

CRS services, in which the CRS owner has monopoly power, and

the air passenger transportation market, in which it does not. In

such a case, the applicable monopolization standards are those set

forth in Griffith and Otter Tail. The interpretation of Copperweld

Suggested by the court below would not merely rewrite Griffith

and Otter Tail; it would hold that Copperweld overruled both

8 This factual finding was relied upon by the D.C. Circuit in Hecht for

its determination that to be “essential” a facility need not be “indispensable”.

See Hecht, 570 F.2d at 992 n.40.

those decisions sub silentio. There is no basis for that

conclusion.?

4. The Decision Below Improperly A {firmed Summary Judg-

ment by Resolving Fact Issues on the Basis of Economic Theory.

The Court of Appeals below disguised the ultimate consequences

of its decision—the creation of an immunity for otherwise illegal

anticompetitive conduct in the airline industry—by making

impermissible and unwarranted factual findings that discount, or

disregard entirely, the anticompetitive effects of American's and

United's behavior. Those assumptions not only improperly

attempted to validate the unsupportable consequences of the

decision below, but also deprived petitioners of their ri ght to trial

and an opportunity to prove the harm of which they complain.

Each of these crucial findings of fact is either unsupported by the

record or is the subject of a genuine dispute.

a. The Decision Below Impermissibly Overlooked

American's and United's Power to Eliminate Competition

Through a Price Squeeze. The Court of Appeals “found” that

‘defendants’ control of their CRSs did not give them power to

eliminate competition in the downstream air transportation

market.” (App. 15a) The District Court, however, found that

American and United “may be able to extract supracompetitive

booking fees in the CRS market, and such price increases do

create entry barriers in the air transportation market by raising

competitors’ costs”. (App. 36a) Moreover, the Court of Appeals

9 Further, if the Court of Anpeals is correct, Copperweld also overruled

forty years of established tying law sub silentio. An illegal tying arrangement,

challenged under Section 1, is simply the unilateral exercise of market power in

the tying product market to impair competition in the tied product market—in

which the seller lacks market power. According to the decision below, Copper-

weld dictates that such an arrangement can only be illegal if competition is

eliminated. Thus, the Ninth Circuit held that Copperweld overruled sub silentio

such seminal tying cases as Times-Picayune Publishing Co. v. United States, 345

U.S. 594, 608-09 (1953), and Northern Pacific Ry. Co. v. United States, 356 U.S.

1 (1958), as well as Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2

(1984), decided only one month before Copperweld. No such revolution in the

law governing tying arrangements can be inferred from Copperweld.

Suggested that American and United could increase competitors’

costs, using their CRSs, as far as they chose and not cause

competitors to withdraw from those CRSs, provided that the cost

of “providing a flight booked on a CRS” did not “exceed the

revenue that the airline gains by providing the flight”. (App. 1Sa)

If that is true, then American and United can effect a “price

Squeeze” and can eliminate competition in the air transportation

market.!° There is no basis for the Court of Appeals’ finding that

they cannot.

b. The Decision Below Impermissibly Assumed That an

Airline Can Withdraw From a CRS. The Court of Appeals simply

and crucially assumed—as a matter of “[b]asic economic theory”

(App. 15a)—that an airline could withdraw from a CRS and still

survive commercially; if American or United prompted such a

withdrawal, “they would destroy their CRSs rather than their

competition.” (App. 16a) There is no basis whatsoever for that

assumption. It is contradicted by the undisputed fact that, despite

respondents’ massive increases in booking fees charged to air-

lines, no airline has withdrawn from any CRS. Moreover,

petitioners’ evidence at trial would have shown—contrary to the

Court of Appeals’ assumption—that withdrawal from either

SABRE or Apollo would swiftly have destroyed any airline that

tried it.

10 By raising competitors’ costs—in a manner unrestrained by market

forces—respondents can control, limit and ultimately, if they wish, destroy their

competitors’ ability to offer either price or service competition in the

downstream market for air transportation services. The illegality of such “price

squeezing” was made plain in United States v. Aluminum Co. of America, 148

F.2d 416, 436-38 (2d Cir. 1945) (L. Hand. J.). Alcoa had monopoly power in the

market for aluminum ingot, and was also a manufacturer of aluminum sheet.

which was made from that ingot. Alcoa used its monopoly power to keep the

price of ingot sufficiently high and the price of sheet sufficiently low to deprive

its competitors in the sheet market of “a living profit”. /d. at 437. Slowly, Alcoa’s

competitors were being driven out of business. Although Judge Hand recognized

that Alcoa's conduct “was not part of an attempt to monopolize the ‘sheet’

market’, he still held that it was an actionable abuse of monopoly power in the

ingot market: “That it is unlawful to set the price of ‘sheet’ so low and hold the

price of ingot so high, seems to us unquestionable.” /d. at 438.

c. The Decision Below Impermissibly Assumed That a

Travel Agency Can Change Its CRS. The finding of the Court of

Appeals that SABRE and Apollo were not “essential” rests heav-

ily on the theory that if an airline is unhappy with booking fees

charged by aCRS vendor, the airline can withdraw from the CRS,

and that travel agencies will not subscribe to the CRS if it does

not contain information about all the vendor’s competitors.!!

This theory in turn depends on the premise that “aside from

contractual limitations, travel agents can switch CRSs whenever

they desire”. (App. 16a n.12) (emphasis added). That gargantuan

“aside from” calls to mind the apocryphal question posed to

Mrs. Lincoln. A central contention of petitioners was that

respondents’ practices of using long-term contracts and onerous

liquidated damage provisions effectively prevented travel agen-

cies from switching CRSs. Petitioners presented substantial

evidence in support of that contention. The District Court

unabashedly and impermissibly weighed that evidence and found

that “[t]he significance of the entry barriers . . . are exaggerated

by plaintiffs.” (App. 35a) The Court of Appeals not only failed to

correct the District Court's usurpation of the role of trier of fact,

but repeated it; it too weighed the evidence of “contractual limita-

tions” (App. 15a-16a n.12) and rejected petitioners’ contention

that this evidence rebutted any presumption that airlines can

simply withdraw from a CRS, secure in the knowledge that travel

agencies will quickly abandon it. Petitioners showed that there

was a genuine issue of material fact, and summary judgment

should plainly have been denied.

d. The Decision Below Impermissibly Relied on Market

Share as the Only Possible Indicator of Market Power. The Court

of Appeals repeated the mistake of the District Court in simply

assuming that because respondents had shares of the air transpor-

tation market no greater than 12-14% (they now have substantially

11 This assumption by the Court of Appeals involves a sleight-of-hand:

even if a CRS would be unmarketable to travel agencies if there were no

information on it concerning any of the CRS vendor's competitors, it does not

follow that one individual airline can withdraw from a CRS, confident in the

belief that the absence of information about its flights will make the CRS

similarly unmarketable.

increased shares), they could not be Causing substantial harm—

t.e., they could not be monopolizing or attempting to monopolize

the market. (App. 16a) The fact. however, that respondents have

the power to increase petitioners’ costs to the level of marginal

revenue means, despite their seemingly small market shares, that

they can control or even eliminate competition, and thus can

cause substantial harm to consumers.

These assumptions of contested material facts in favor of

respondents allowed the District Court and the Court of Appeals

to make it appear that there would be no harmful consequences

to their decisions. That is not the case. Petitioners presented

evidence and economic analysis demonstrating the anticompeti-

tive nature of the conduct in question. The courts below did not

have the power to discount and reject that evidence and analysis.

In order to avoid summary judgment, petitioners had to

demonstrate that there is some evidence that would create a

genuine issue of material fact. See Celotex Corp. v. Catrett, 477

U.S. 317, 322-23 (1986). Petitioners came forward with evidence

that SABRE and Apollo are the only method of reaching travel

agencies that sell about half of all air transportation tickets, that

there is no practical alternative to membership in SABRE and

Apollo and that American and United were using their ownership

of SABRE and Apollo to restrict competition and control the costs

of competitors in the air transportation market—indeed, that they

had the power to entirely eliminate competition among airlines.

That showing, even under the improperly restrictive standards

adopted by the Court of Appeals, was sufficient to go to a jury.

The courts below, however, weighed petitioners’ evidence

and decided it was unpersuasive. That is not permissible. Indeed,

““{o]n summary judgment the inferences to be drawn from the

underlying facts . . . must be viewed in the light most favorable

to the party opposing the motion.’” Matsushita Elec. Indus. Co. v.

Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting United

States v. Diebold, Inc., 369 U.S. 654, 655 (1962)). The District

Court and the Court of Appeals completely reversed that

presumption and denied petitioners their right to trial. For that

reason alone, the decision below should be reversed.

CONCLUSION

For the foregoing reasons, the petition for a writ of certiorari

should be granted.

Respectfully submitted,

MAXWELL M. BLECHER

Counsel of Record

BLECHER & COLLINS

611 West Sixth Street

Twenty-Eighth Floor

Los Angeles, California 90017

(213) 622-4222

January 27, 1992 Attorneys for Petitioners

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 90-55162, 90-55163

ALASKA AIRLINES, INC.; MIDWAY AIRLINES;

MUSE AIR CORPORATION,

Plaintiffs-Appellants

UNITED AIR LINES, INC.,

Defendant-Appellee

ALASKA AIRLINES, INC.,

Plaintiff

and

NORTHWEST AIRLINES, INC.,

Plaintiff-Appellant

UNITED AIR LINES, INC.,

Defendant

and

AMERICAN AIRLINES. INC.,

Defendant-Appellee

Argued and Submitted April 5, 1991

Decided October 29, 199]

Before: NORRIS, HALL and TROTT,

Circuit Judges

OPINION OF THE COURT

CYNTHIA HOLCOMB HALL, Circuit Judge.

Alaska Airlines, Muse Air Corporation, Midway Airlines,

Inc., and Northwest Airlines, Inc. (collectively “plaintiffs”)

brought suit against their two largest competitors, United Airlines

and American Airlines (collectively “defendants”), alleging that

defendants had individually violated the Sherman Act in operat-

ing their proprietary computerized reservation systems (“CRS”).

Plaintiffs appeal the district court’s grant of summary judgment

against them on two of their three distinct claims under Section 2

of the Act. 15 U.S.C. § 2. The district court had jurisdiction under

15 U.S.C. § 2 and 28 U.S.C. § 1331. We have jurisdiction under

28 U.S.C. § 1291. We affirm.

In 1974, American Airlines obtained government approval

to attempt to persuade the other major airlines to pool their

resources and create a jointly-owned CRS. A CRS provides par-

ticipating travel agents with schedule, fare, and seat availability

information for every airline that subscribes to the CRS. Further,

a CRS allows travel agents to send and receive airline booking

data, book space on flights, and automatically prepare tickets and

advance boarding passes. The proposed joint CRS project col-

lapsed in 1976 due to insufficient funding. Three weeks later,

United Airlines announced that it would create a proprietary CRS

under the trade name of Apollo. American Airlines quickly

responded by announcing that it would create its own proprietary

CRS, under the trade name of SABRE. Other airlines also quickly

developed proprietary CRSs.! American’s SABRE soon became

the largest CRS. United’s Apollo was the second largest.

Shortly after SABRE and Apollo began operations,

Congress deregulated the airline industry. See The Airline

1 TWA began operating a CRS in 1976. Eastern Airlines and Delta

Airlines began operating CRSs in 198].

Deregulation Act of 1978 (“the Deregulation Act”), Pub.L.

No. 95-504, 92 Stat. 1705 (1978) (codified at 49 U.S.C. App.

§ 1301). Deregulation fueled demand for computerized fare and

flight availability information, and as a result a substantial per-

centage of total air passenger bookings were made through CRSs.

The CRS works as follows. The airlines pass flight infor-

mation to the CRSs, and the CRSs then provide this information

to their subscribers, the travel agents. The travel agents in turn

use the information to serve consumers, who naturally desire the

lowest airfares and the most convenient flights. The CRSs charge

travel agents only a nominal fee, or no fee, for the CRSs’ services.

In contrast, the CRSs charge airlines a substantial amount for such

services, in the form of a per booking fee. For example, since the

Civil Aeronautics Board (“the Board”) ruled in 1984 that each

CRS owner must charge its airline customers a uniform rate,

American has charged a uniform fee of $1.75 for each booking

made through SABRE.2

The CRS market's triangular structure makes the market

unusually resistant to normal disciplinary mechanisms. A CRS’s

market share (the proportion of flights that are booked through a

given CRS) might ordinarily be thought to depend on both how

many travel agents and how many airlines subscribe to the CRS.

However, because each and every airline subscribes to each and

every viable CRS, the market share of a given CRS depends solely

on the number of travel agents who subscribe to that CRS.

Airlines generally subscribe to every CRS because the CRSs

charge the airline per booking. The $1.75 fee to secure a booking

is of little consequence because a $300 or $400 fare may other-

wise be lost. This is not to say that a CRS can charge its airline

subscribers any fee that it desires, no matter how high. Basic

economic theory tells us that an airline will withdraw from the

CRS if the cost of using it causes the marginal cost of providing

a flight booked on the CRS to exceed the marginal revenue gained

2 The Deregulation Act eliminated both the Board itself and many of

its functions. See 49 U.S.C. § 1551. Most of the Board’s remaining functions

were transferred to the Department of Transportation. See id. at § 1551(a)(1)(E).

The CRS fee regulation remains in effect. See 14 C.ER. § 255.5(a).

by the booking. See generally M. Handler, H. Blake, R. Pitotsky,

H. Goldschmid, Trade Regulation App. B (2d ed. 1983)

(hereinafter “Trade Regulation”). However, since CRS fees are a

relatively small part of the total costs incurred by a “booked”

airline when it provides air transportation to a paying passenger,

the CRSs have leeway to charge substantial booking fees.

The plaintiffs, each previous subscribers to Apollo and

SABRE, were unhappy about the ability of their largest com-

petitors to extract substantial booking fees from them. Accord-

ingly, plaintiffs brought suit under the Sherman Act.? Plaintiffs

argued that United and American had individually violated Sec-

tion 2 of the Sherman Act by, among other things: (1) denying

plaintiffs reasonable access to their CRS services, which were

alleged to be “essential facilities;” and (2) “leveraging” their

dominance in the CRS market to gain a competitive advantage in

the downstream air transportation market. The district court

granted summary judgment in favor of defendants on both claims.

Plaintiffs have appealed.4

II.

The district court’s grant of summary judgment is reviewed

de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416,

1421 (9th Cir.1989), cert. denied, — U.S. —, 110 S.Ct. 3217, 110

L.Ed.2d 664 (1990). We must decide, viewing the evidence in the

light most favorable to the nonmoving party, whether there are

any genuine issues of material fact and whether the district court

3 At the conclusion of pretrial proceedings in September 1989, two

separate CRS cases were ready for trial: (1) a suit by Northwest Airlines against

American Airlines, and (2) a suit by Alaska Airlines, Midway Airlines, and Muse

Air Corporation (now part of Southwest Airlines) against United Airlines. The

district court consolidated these cases and tried both of them simultaneously, a

decision that has not been appealed.

4 Plaintiffs also asserted a third Section 2 claim, arguing that each

defendant had unlawfully acquired and then exercised monopoly power over

travel agents in the market for CRS services. This third claim was tried to a jury,

which returned a verdict in favor of each defendant. Plaintiffs do not appeal from

these jury verdicts.

correctly applied the relevant law. Tzung v. State Farm Fire and

Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989).,

ITT.

Defendants argue that the doctrine of res judicata bars

plaintiffs from pursuing their essential facilities and monopoly

leveraging claims in this court. “The concept of res judicata

embraces two doctrines, claim preclusion and issue preclusion (or

collateral estoppel), that bar, respectively, a subsequent action or

the subsequent litigation of a Particular issue because of the

adjudication of a prior action.” McClain vy, Apodaca, 793 F.2d

1031, 1033 (9th Cir. 1986). Defendants’ claim is meritless

because this is not a case where plaintiffs, unhappy with the

outcome of One action, institute an entirely separate action either

alleging grounds for relief which could have been raised in the

prior suit upon the same cause of action, or involving an issue

previously litigated in the prior action. Rather, plaintiffs are

merely appealing the district court’s award of summary judgment

in favor of defendants on two discreet issues alleged in the

complaint. The doctrine of res judicata prohibits repetitive litiga-

tion, not appellate review of claims rejected by the district court.

See McClain, 793 F.2d at 1032-33.

Defendants also contend that plaintiffs are judicially

estopped from denying that collateral estoppel bars their essential

facilities and monopoly leveraging claims. The doctrine of judi-

cial estoppel precludes a party from arguing inconsistent posi-

tions to gain an unfair advantage over its adversary. See Russell y,

Rolfs, 893 F.2d 1033, 1037-39 (9th Cir. 1990) (state may not

argue that appellant is procedurally barred from obtaining relief

in state court when it had previously persuaded district court to

deny appellate review because appellant had “adequate and avail-

able” state remedy), cert. denied, — U.S. —, 111 S.Ct. 2915, 115

L.Ed.2d 1078 (1991); Rockwell Int’! Corp. v. Hanford Atomic

Metal Trades Council, 851 F.2d 1208, 1210 (9th Cir. 1988),

Defendants’ argument is without merit because plaintiffs’

positions are not inconsistent. Prior to trial, defendants argued

that plaintiffs did not have standing to assert unlawful monopo-

lization of the market for CRS services to travel agents. In

response to defendants’ standing argument, plaintiffs asserted

that defendants had monopoly power over travel agents and that

defendants’ monopoly power affected plaintiffs as consumers in

that market.° Now, to support their monopoly leveraging and

essential facility claims, on which the district prevented trial by

granting summary judgment for defendants, plaintiffs say that

defendants have monopoly power over plaintiffs, and that this

factual question has not yet been determined. Plaintiffs’ positions

are not inconsistent because the argument that defendants had

monopoly power over travel agents does not preclude the pos-

sibility that they might also have such power over airlines. Nor

is it unfair for plaintiffs to press this argument on appeal because

plaintiffs clearly made the argument below; this is not a case

where a party creates a new theory to sustain its argument on

appeal.

We turn to the merits of plaintiffs’ antitrust claims. The

antitrust laws are designed to “safeguard general competitive

conditions, rather than to protect specific competitors.” Oahu Gas

Serv., Inc. v. Pacific Resources, Inc., 838 F.2d 360, 370

(9th Cir. 1988).

5 Defendants contend that, in response to the standing challenge, plain-

tiffs defined the relevant market as CRS services to both travel agents and

airlines. Defendants are incorrect. Plaintiffs argued that the market was identical

to the one approved by the district court in its summary judgment opinion, In re

Air Passenger Computer Reservations Systems Antitrust Litigation, 694 F.Supp.

1443 (1988). While the court in that opinion does use loose language suggesting

that the relevant market consists of CRS services to both travel agents and

airlines, in its decision on the standing motion, the district court explained that,

in its summary judgment opinion, “[it] undertook to analyze the relevant markets

to CRS services to travel agents and found that the plaintiff airlines were

consumers in that market for the purpose of establishing a Section 2 monopo-

lization claim.” (ER, vol. I, at 440). Thus, even if plaintiffs alleged that the

market included services to both airlines and travel agents, it is obvious that the

district court did not base its decision on this allegation.

The Sherman Act provides in relevant part:

[Section 1.] Every contract, combination in the form of

trust or otherwise, or conspiracy, in restraint of trade

or commerce among the several States, or with foreign

nations, is declared to be illegal.

[Section 2.] Every person who shall monopolize, or

attempt to monopolize, or combine or conspire with

any other person or persons, to monopolize any part of

the trade or commerce among the several States, or

with foreign nations, shall be deemed guilty of a

felony....

15 U.S.C. §§ 1, 2.6

The bare text of the Sherman Act indicates that Sections |

and 2 focus on different problems. Section 1 deals with concerted

activity, outlawing “combination[s] . . . in restraint of trade.” /d.

Section 2, on the other hand, concerns unilateral activity, punish-

ing “[e]very person who shall monopolize, or attempt to monop-

olize... ."1d.

The Supreme Court described the differing functions of

Sections 1 and 2 in Copperweld Corp. v. Independence Tube

Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984),?

The Court emphasized that the Act distinguishes between

unilateral and concerted conduct. While concerted conduct is

subject to sanction if it merely restrains trade, unilateral conduct

6 Private treble damage actions for violations of the Sherman Act are

authorized by Sections 4 and 5(a) of the Clayton Act. 15 U.S.C. §§ 15, 16.

7 In Copperweld the Court considered the validity of the “intra-

enterprise conspiracy” doctrine. The Court faced the question whether a whol-

ly-owned subsidiary corporation and its parent corporation could “conspire”

with each other for purposes of Section ! of the Sherman Act Copperweld, 467

U.S. at 767, 104 S. Ct. at 2739. It is apparent from the Copperweld opinion that

the Court relied heavily on its analysis of the relationship between sections |

and 2 of the Actin concluding that a wholly owned subsidiary cannot “conspire”

with its parent. See id. at 767-69, 774-77, 104S. Ct. at 2739-41, 2743-45.

is subject to sanction only if it either actually monopolizes or

threatens monopolization. The Copperweld Court said:

It is not enough that a single firm appears to “restrain

trade” unreasonably, for even a vigorous competitor

may leave that impression , . . . [B]ecause it is some-

times difficult to distinguish robust competition from

conduct with long-run anticompetitive effects, Con-

gress authorized Sherman Act scrutiny of single firms

only when they pose a danger of monopolization. Judg-

ing unilateral conduct in this manner reduces the risk

that the antitrust laws will dampen the competitive zeal

of a single aggressive entrepreneur .. . .

It cannot be denied that § 1's focus on concerted behav-

ior leaves a “gap” in the Act's proscription against

unreasonable restraints of trade. An unreasonable

restraint of trade may be effected not only by two

independent firm acting in concert; a single firm may

restrain trade to precisely the same extent if it alone

possesses the combined market power of those same

two firms. Because the Sherman Act does not prohibit

unreasonable restraints of trade as such—but only

restraints effected by a contract, combination, or con-

spiracy—it leaves untouched a single firm’s anticom-

petitive conduct (short of threatened monopolization)

that may be indistinguishable in economic effect from

the conduct of two firms subject to §1 liability ....

Moreover, whatever the wisdom of the distinction, the

Act's plain language leaves no doubt that Congress

made a purposeful choice to accord different treatment

to unilateral and concerted conduct. Had Congress

intended to outlaw unreasonable restraints of trade as

Such, § Is requirement of a contract, combination, or

conspiracy would be superfluous, as would the entirety

of § 2.

Id. at 767-69, 774-77, 104 S. Ct. at 2739-41, 2743-45.

The instant case is predicated on Section 2.8 We review the

two traditional grounds for relief under Section 2, monopo-

lization and attempted monopolization, before moving on to

consider plaintiffs’ less orthodox claims. The traditional claim for

monopolization has two elements: ““1) the possession of

monopoly power in the relevant market and (2) the willful acqui-

sition or maintenance of that power as distinguished from growth

or development as a consequence of a Superior product, business

acumen, or historic accident.’” Aspen Skiing Co. v. Aspen High-

lands Skiing Co., 472 U.S. 585, 596 n. 19, 105 S.Ct. 2847, 2854

n. 19, 86 L.Ed.2d 467 (1985) (quoting United States v. Grinnell

Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d

778 (1966)). The traditional claim for attempted monopolization

arises when the danger of monopolization is clear and present,

but before a full-blown monopolization has necessarily been

accomplished. Accordingly, the elements of attempted monopo-

lization, like the elements of monopolization, emphasize

monopoly power and the acquisition or perpetuation of this power

by illegitimate “predatory” practices. A claim for attempted

monopolization has three elements: 1) a specific intent to monop-

olize arelevant market; (2) predatory or anticompetitive conduct:

and (3) a dangerous probability of success. See Catlin v.

Washington Energy Co., 791 F.2d 1343, 1348 (9th Cir. 1986);

Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534,

543-44 (9th Cir. 1983), cert. denied, 465 U.S. 1038, 104 S.Ct.

1315, 79 L.Ed. 2d 712 (1984),

Plaintiffs claim that United and American individually vio-

lated Section 2 of the Sherman Act by denying Plaintiffs

reasonable access to Apollo and SABRE. They base their claim

8 Plaintiffs based their claims against defendants on Section 2 of the

Sherman Act in the district court, in their opening brief, and at oral argument.

Thus, we do not consider the viability of any claims that plaintiffs might have

had under Section | of the Act. See United States v. Munoz, 746 F.2d 1389, 1390

(9th Cir. 1984) (refusing to consider a tort theory not raised below in a contract

action).

10a

on the “essential facilities” doctrine.’ Stated most generally, the

essential facilities doctrine imposes liability when one firm,

which controls an essential facility, denies a second firm

reasonable access to a product or service that the second firm

must obtain in order to compete with the first. Plaintiffs propose

a broad view of the essential facilities doctrine, claiming that

defendants are liable under the doctrine even though defendants’

control of their respective CRS systems did not give them power

to eliminate competition in the downstream air transportation

market. We must consider whether the essential facilities doctrine

reaches that far.

In support of its broad view of the essential facilities

doctrine, plaintiffs mistakenly rely on three Supreme Court cases:

United States v. Griffith, 334 U.S. 100, 68 S.Ct. 941, 92 L.Ed.

1236 (1948) (holding invalid concerted action by a number of

movie distribution companies); Associated Press v. United

States, 326 U.S. 1, 65 S.Ct. 1416, 89 L.Ed. 2013 (1945) (ordering

Associated Press, which had created a pooled news service, not

to exclude prospective members merely because the prospective

members competed with existing members); United States v. Ter-

minal R.R. Ass'n, 224 U.S. 383, 397, 401, 411-12, 32 S.Ct. 507,

510, 512, 516, 56 L.Ed. 810 (1912) (holding that competitors had

to be admitted into a combination formed by several railroads that

had acquired control of all the passages into and out of St. Louis,

passages which were not amenable to duplication). Griffith, Asso-

ciated Press, and Terminal Railroad are of limited value because

each case involved a combination in restraint of trade, not single

firm conduct. Under the Sherman Act, combinations and indi-

vidual firms are treated quite differently. See Copperweld, 467

U.S. at 767-69, 774-77, 104 S.Ct. at 2739-41, 2743-45 (while a

combination may be liable for effecting a mere restraint of trade,

for a single firm to be liable there generally must be either

9 We considered the essential facilities doctrine only very briefly in

Ferguson v. Greater Pocatello Chamber of Commerce Inc., 848 F.2d 976, 983

(9th Cir.1988), before concluding it was inapplicable on the facts before us.

lla

monopolization or the threat of monopolization). Moreover, as

one commentator has noted:

[Associated Press| cannot automatically govern

unilateral denial of an essential facility for several

reasons. First, and most obvious, concerted action is

exceptional, whereas unilateral action is omnipresent.

Innumerable firms engage in unilateral action every

day. We have to be very wary about examining the

decisions of each of those firms in our economy .. . .

Second, concerted exclusion is much easier to remedy,

particularly when an outsider, who is willing to invest

on an equal basis, seeks admission at the time the joint

venture is created . . . . Third, admission to a joint

venture is a one-time remedy that does not require [the

exertion of] day-to-day control [by the courts].

Areeda, Essential Facilities: An Epithet In Need of Limiting

Principles, 58 Antitrust L.J. 841, 844-45 (1990) (emphasis

added).

A review of the cases in which the doctrine has been applied

to facilities controlled by single firms suggests that Section 2

does not prohibit the defendants’ unilateral conduct. The sole

Supreme Court case involving a single firm’s control of an

“essential facility” is Otter Tail Power Co. v. United States, 410

U.S. 366, 93 S.Ct. 1022, 35 L.Ed.2d 359 (1973). The Otter Tail

Power Company's general practice was to supply both

“wholesale” and “retail” electrical services in its operating area.

However, a number of municipalities decided that they would

prefer to supply the retail component of these electrical services

themselves, and sought to contract with Otter Tail Power for only

“wholesale” electrical services. Otter Tail Power, whose

wholesale, electrical services could not be duplicated feasibly,

refused to supply only wholesale electricity, thereby eliminating

the possibility of competition in the provision of “retail” electri-

cal services, Id. at 369-71, 376-79, 93 S.Ct. at 1025-27, 1028-30.

Otter Tail, the foundation of the essential facilities doctrine

in the single firm context, was an extreme case. Otter Tail Power.

12a

an “upstream” monopolist, baldly refused to deal with its poten-

tial “downstream” competitors. Given the difficulty of duplicat-

ing Otter Tail’s facilities, this refusal did more than merely

impose some handicap on potential competitors; it eliminated all

possibility of competition in the downstream market. As the

Supreme Court indicated, Otter Tail Power had both attempted to

monopolize and had succeeded in monopolizing the downstream

market for “retail” electric services. /d. at 377-79, 93 S.Ct. at

1029-30.

Two Seventh Circuit decisions suggest the limits of the

essential facilities doctrine in the single firm context. In MC/

Communications Co. v. AT&T, 708 F.2d 1081, 1133 (7th Cir.),

cert. denied, 464 U.S. 891, 104 S.Ct. 234, 78 L.Ed.2d 226 (1983),

the court held that AT&T violated Section 2 by refusing to con-

nect MCI to its network. MCI, like Otter Tail, involved a refusal

to grant access to a facility that could not be duplicated feasibly.

Id. Moreover, this refusal eliminated competition, rather than

merely impeding it. Thus, like Otter Tail Power, AT&T had the

power to eliminate competition in a downstream market, exer-

cised this power, and thereby monopolized the market.

In sharp contrast to MCI is Olympia Equip. Leasing v.

Western Union Tel. Co., 797 F.2d 370 (7th Cir. 1986), cert.

denied, 480 U.S. 934, 107 S.Ct. 1574, 94 L.Ed.2d 765 (1987).

Western Union, which had for years dominated the businesses of

providing telex services and leasing telex machines, decided to

quit the telex leasing business. Since the firm had a large stock

of telex machines that it needed to dispose of, it converted its

leasing agents into a sales force. Jd at 372-73. In an effort to help

open the telex machine supply market to competition, Western

Union instructed this newly formed sales force to pitch not only

Western Union's telex machines, but also the machines of new

entrants into the telex machine supply business. However, when

the sales of Western Union’s own telex machines did notmeet

expectations, the firm ordered its salespeople to stop mentioning

the products of competing vendors. /d. Olympia, one of Western

Union’s rivals in the Telex machine supply business, brought suit

under Section 2. Olympia claimed that Western Union's sales

13a

force was a facility “essential” to participation in the telex

machine supply market, and asserted a right to nondiscriminatory

access. /d. at 376-77.

The Seventh Circuit rejected Olympia’s claim, holding that

Olympia had no right of access to the trail that Western Union

had already blazed. Even though Western Union’s sizable sales

force provided a considerable advantage and would require great

effort to duplicate, Olympia must-blaze its own trail to consumers.

Judge Posner, for the court, stated: “Olympia had no right under

antitrust law to take a free ride on its competitor’s sales force.

You cannot conscript your competitor's salesmen to sell your

product even if the competitor has monopoly power and you are

a Struggling new entrant.” /d. at 377-78.

Moreover, Western Union’s sales force was not an “essen-

tial” facility because the sales force’s withdrawal did not

eliminate the potential for competition:

All Western Union did in this case to “obstruct” Olym-

pia from competing with it in the sale or lease of telex

terminal equipment was to stop making referrals to

Olympia. That was not [sufficient] obstruction . . .. for

Olympia remained free to compete by sending sales-

men to call on Western Union's subscribers. This was

not an illusory freedom. Firms better established than

Olympia—firms that had their own sales forces—

weathered the withdrawal of the vendor list.

Id. at 378-79.

The Second Circuit considered the reach of the essential

facilities doctrine in Twin Laboratories, Inc. v. Weider Health

Fitness, 900 F.2d 566 (2d Cir. 1990). In that case, the court

affirmed the district court’s grant of Summary judgment in favor

of Weider on the essential facilities claim. /d. at 569. Weider sold

nutritional supplements and published the most widely read

magazines catering to those interested in body building. Twin

Labs competed with Weider in the market for nutritional supple-

ments, and advertised its products in Weider’s magazines. Weider

aia iis

l4a

then changed its policies and refused to include Twin Labs’

advertisements in its magazines. Twin Labs sued, arguing that

Weider’s magazines amounted to an essential facility for com-

petition in the nutritional supplement market, and that Weider’s

exclusion of Twin Labs therefore violated Section 2. /d. at

567-68.

The Second Circuit held that, as a matter of law, ““Weider’s

conduct did not amount to an antitrust violation.” /d. at 569. Twin

Labs failed to demonstrate a “severe handicap” as a result of

Weider’s denial of access, a necessary element of a successful

essential facilities claim. The opinion turns on the court's view

that Weider’s power to exclude advertising from its magazine did

not amount to the power to eliminate competition in the

downstream nutritional supplements market. /d. at 569-70. While

Weider did have power to impose some handicap on his competi-

tion, this limited power was insufficient to establish that Weider’s

facility was “essential.” The court said:

A successful “essential facilities” plaintiff must prove

that denial of access has caused it “severe handicap.”

... Twinlab’s own expert, Dr. Overstreet, stated that,

six months after Weider’s advertising ban, Twinlab’s

nutritional supplements were not only continuing to

grow more profitable but were continuing to increase

their market share relative to Weider’s products. While

Dr. Overstreet stated that in his opinion Twinlab’s

growth would have been even more rapid but for the

advertising ban, this hardly constitutes a showing of

severe hardship ....

[A]s the word “essential” indicates, a plaintff must

show more than inconvenience, or even some

economic loss; he must show that an alternative to the

facility is not feasible.

Id. at 569-70 (citations omitted).!°

10 As the Weider court noted, some commentators have suggested that

the essential facilities doctrine be applied only to facilities that are “‘natural

ae i

lSa

Weider, Olympia, and MCI share a concern that transcends

their fact-based differences. A facility that is controlled by a

single firm will be considered “essential” only if control of the

facility carries with it the power to eliminate competition in the

downstream market.!!

In the instant case, it is clear that defendants’ control of their

CRSs did not give them power to eliminate competition in the

downstream air transportation market.!2 Basic economic theory

tells us that plaintiffs will withdraw from SABRE or Apollo if the

cost of using either CRS causes the cost to the airline of providing

a flight booked on a CRS to exceed the revenue that the airline

monopolies}, facilities whose duplication is forbidden by law, and perhaps

those that are publicly subsidized and thus could not practicably be built

privately.’ Jd. at 569 (quoting P. Areeda & H. Hovenkamp, Antitrust Law

{ 736.2 at 680-81 (1988 Supp.)). The reason for such a limitation is that contro!

of a natural monopoly facility gives the facility holder a power to eliminate

downstream competition that is permanent even in theory, as well as in practice.

See 3 P. Areeda & D. Turner, Antitrust Law 47-48 (1978). Such a strict limitation

goes further than Weider, and perhaps Olympia.

11 The cases also seem to contemplate a second condition that must be

satisfied for a facility to be considered “essential” in addition to the power to

eliminate competition: The power to eliminate competition must not be momen-

tary, but must be at least relatively permanent. See MCI, 708 F.2d at 1133

(discussing virtual impossibility of duplicating AT & T’s local distribution

facilities); Olympia, 797 F.2d at 379 (discussing possibility that Olympia

“remained free to compete by sending salesmen to call on Western Union’s

subscribers.”). In the instant case we need not decide whether defendants’

control of their respective CRSs gave them power that was of sufficient per-

manence for the CRSs to qualify as essential facilities. For we conclude that the

extent of the power bestowed on defendants by Apollo and SABRE, quite apart

from the duration of this power, was insufficient.

12 Monopoly control of the upstream market is a necessary element of

essential facility and monopoly leveraging claims. Defendants contend that

plaintiffs’ claims fail as a matter of law because the jury has decided that

defendants do not have monopoly control in the upstream CRS market.

However, the jury did not directly consider whether defendants had

monopoly power in the CRS market for services to airlines. The jury was

specifically instructed to consider only whether defendants possessed monopoly

power over the travel agent participants in the CRS market. Since jurors are

presumed to follow the instructions given, see United States v. Escalante. 637

F.2d 1197, 1202 (9th Cir.), cert. denied, 449 U.S. 856, 101 S.Ct. 154, 66 L.Ed.2d

gains by providing the flight. See Trade Regulation App. B;

E. Sullivan & J. Harrison, Understanding Antitrust and its

Economic Implications 22 (1988). It is difficult to imagine that a

travel agent would subscribe to a CRS if it only contained infor-

mation about 12-14% of available flights. Because the parties

agree that neither United nor American controlled more than

12-14% of the air transportation market, SABRE and Apollo

would contain information concerning approximately 12-14% of

available flights if competitors withdrew from either SABRE and

Apollo. Thus, the ability of United or American to abuse their

downstream competitors by manipulating their CRSs is severely

limited.

Moreover, United and American have never refused any of

the plaintiffs access to their respective CRSs.!3 See Otter Tail,

410 U.S. at 378,93 S.Ct. at 1030 (outright refusal); MC/, 708 F.2d

at 1132 (same). Rather, United and American have always given

all of their competitors in the air transportation market such

access for a fee. Neither United nor American have ever set this

fee at a level that would drive their competitors away. As noted

above, it is unlikely that defendants would set their fee at such a

71 (1980), we reject defendants’ contention that the jury directly considered the

extent of defendants’ monopoly power over plaintiffs.

Neither did the jury implicitly decide that defendants lacked monopoly

power over plainuffs. See In re Westgate-Cal. Corp., 642 F.2d 1174, 1176

(9th Cir.1981) (holding that collateral estoppel barred plaintiff's claim because

the jury's previous decision that plaintiff had engaged in fraud effectively

resolved the newly presented question whether plaintiff had acted inequitably).

Plaintuffs and the travel agent participants in the CRS market are not similarly

situated. Plaintiffs alleged that they had no real alternative to membership in

either SABRE or Apollo because withdrawal would result in a business loss of

such magnitude that no member airline could withstand it. In contrast, aside from

contractual limitations, travel agents can switch CRSs whenever they desire. A

travel agent must belong to only one CRS to obtain the information that she

needs to operate her business, and there are a number of CRSs to which the travel

agent may subscribe. This factual difference indicates that the jury’s decision

could not have included a finding that the defendants had monopoly power over

plaintiffs.

13 We do not reach the question of whether at some level, charging a

price may be the same as an outright refusal to deal.

17a

level, for, if they did, they would destroy their CRSs rather than

their competition.

Plaintiffs claim that each defendant's CRS was an “essen-

tial” facility because each defendant's control of its CRS gave it

power to redistribute a portion of its rivals’ revenues to itself.

Plaintiffs make this claim even though they concede that each

defendant's control of its CRS did not create a dangerous prob-

ability that the defendants would monopolize the downstream air

transportation market. Although each defendant may have gained

some leverage over its competitors through control of its CRS,

each defendant's power fell far short of the power to eliminate

competition seen in Otter Tail and MCI. At most, defendants

gained a monetary profit at their rivals’ expense. The exercise of

this limited power is not actionable under Section 2.!4

Our view of the essential facilities doctrine does not render

the doctrine superfluous or otherwise inappropriately curtail its

reach. When a firm's power to exclude rivals from a facility gives

the firm the power to eliminate competition in a market

downstream from the facility, and the firm excludes at least some

of its competitors, the danger that the firm will monopolize the

downstream market is clear. In this circumstance, a finding of

monopolization, or at least attempted monopolization, is appro-

priate, and there is little need to engage in the usual lengthy

analysis of factors such as intent. Cf Catlin, 791 F.2d at 1348

(specifying the elements of a claim for attempted monopo-

lization). We hold that neither defendant denied plaintiffs an

essential facility in violation of the antitrust laws.

Plaintiffs next allege that each defendant violated Section 2

by “leveraging” its monopoly power over its competitors in the

14 We highlight that this is not a case in which a facility holder has the

power to eliminate competition in a downstream market, but has as yet exercised

its power to only a limited extent. The essential facilities doctrine, consistent

with principles underlying section 2, might well reach such conduct, because in

that situation, the danger of monopolization may be immediate enough to satisfy

the Act.

18a

CRS market to gain a competitive advantage over these airlines

in the downstream air transportation market.!> Plaintiffs admit

that, because there was no dangerous probability that either

defendant would monopolize the downstream air transportation

market, they have no claim under the traditional Section 2

doctrine of attempted monopolization. This circuit expressly

declined to decide whether “monopoly leveraging is a distinct

Section 2 violation” in Catlin v. Washington Energy Co., 791 F.2d

1343, 1348 (9th Cir.1986).

The origin of the notion that a single firm may be liable for

“monopoly leveraging,” even in the absence of a threat that the

“leveraged” market will be monopolized, is Berkey Photo, Inc. v.

Eastman Kodak Co., 603 F.2d 263 (2d Cir.1979), cert. denied,

444 U.S. 1093, 100 S.Ct. 1061, 62 L.Ed.2d 783 (1980). In Berkey

Photo, Kodak possessed a monopoly in the film and camera

markets. Berkey Photo argued that Kodak had “leveraged” its

dominant position in these areas to gain a “competitive ad-

vantage” in the photofinishing equipment and services markets.

Berkey Photo conceded that there was no dangerous probability

that Kodak could monopolize either of these markets. /d. at 275.

The Berkey Photo court announced and applied the rule that

“a firm violates § 2 by using its monopoly power in one market

to gain a competitive advantage in another, albeit without an

15 Defendants claim that plaintiffs waived their monopoly leveraging

claim by failing to raise the claim in the district court. It is well established that

an appellate court will not reverse a district court on the basis of a theory that

was not raised below. See Image Technical Service, Inc. v. Eastman Kodak, 903

F.2d 612, 615 n. 1 (9th Cir.1990) (holding that plaintiff's failure to raise an issue

in Opposition to a defendant’s motion for summary judgment waived the issue),

cert. granted, ae US: ene S.Ct. 2823, 115 L.Ed.2d 994 (1991): Munoz,

746 F.2d at 1390 (refusing to consider a tort theory not raised in contract action

below). However, there is no factual basis supporting defendants’ contention.

First, plaintiffs raised the monopoly leveraging claim at the outset cf their action.

Second, although plaintiffs emphasized the essential facilities theory in their

response to defendants’ motion for summary judgment, they also discussed

Griffith, a monopoly leveraging case, and mentioned the monopoly leveraging

doctrine. Most importantly, the district court discussed the theory at length. See

In Re Air Passenger Computer Reservation System Antitrust Litigation, 694

F.Supp. at 1472-75. Thus, we reject defendants’ waiver argument.

19a

attempt to monopolize the second market.” /d. In contrast to the

traditional actions for monopoly and attempted monopoly, Berkey

Photo's “monopoly leveraging” doctrine has Only two rather

loose elements: 1) there must be monopoly power in some

market, and 2) such power must be “exercise[d] .. . to the detri-

ment of competition” in another market. The Berkey Photo court

slighted the functions performed by the elements of the traditional

Section 2 offenses, stating: “There is no reason to allow the

exercise of [monopoly] power to the detriment of competition, in

either the controlled market or any other. That the competition in

the leveraged market may not be destroyed but merely distorted

does not make it more palatable.” /d. at 275.

We now reject Berkey’s monopoly leveraging doctrine as an

independent theory of liability under Section 2. Even in the two-

market situation, a plaintiff cannot establish a violation of Sec-

tion 2 without proving that the defendant used its monopoly

power in one market to obtain, or attempt to attain, a monopoly

in the downstream, or leveraged, market. We believe that Berkey

Photo misapplied the elements of Section 2 by concluding that a

firm violates Section 2 merely by obtaining a competitive advan-

tage in the second market, even in the absence of an attempt to

monopolize the leveraged market. !6

16 Plaintiffs also rely on two other cases, neither of which need be

addressed at length. First, although United States vy. Griffith, 334 U.S. 100, 68

S.Ct. 941, 92 L.Ed. 1236 (1948), does contain some broad language, it is not

controlling since it is a Section | case involving concerted action. See Copper-

weld, 467 U.S. at 774-77, 104 S.Ct. at 2743-45 (noting the difference between

Section 1's focus on concerted activity and Section 2’s focus on unilateral

activity).

Plaintiffs also cite Kerasotes Mich. Theatres, Inc. v. National Amuse-

ments, Inc., 854 F.2d 135 (6th Cir.1988), cert. dismissed sub nom.. G.K.C. Mich.

Theatres, Inc. v. National Amusements, Inc., 490 U.S. 1087, 109 S.Ct. 2461, 104

L.Ed.2d 982 (1989). In Kerasotes, the Sixth Circuit held that the use of monopo-

ly power in one market to gain a competitive advantage in a second market is

forbidden, even when there is no danger of monopolization in the seeond market.

Id. at 137-38. Kerasotes is in error for the same reasons that Berkey Photo is in

error.

20a

As traditionally interpreted, the Sherman Act punishes any

individual or entity that uses “predatory” means to attain a

monopoly, or to perpetuate a monopoly after the competitive

Superiority that originally gave rise to the monopoly has faded.

See Aspen Skiing Co., 472 U.S. at 602, 610-11, 105 S.Ct. at 2857,

2861-62 (upholding liability of a monopolist that had used

predatory conduct to attain or preserve monopoly power); Grin-

nell Corp., 384 U.S. at 570-71, 86 S.Ct. at 1703-04. A monopoly

attained or perpetuated by such means unnecessarily raises the

cost of the relevant product or service, with the ultimate victim

being the consumer. See United States v. Syufy Enterprises, 903

F.2d 659, 663 (9th Cir. 1990); United States v. Aluminum Co. of

Am., 148 F.2d 416, 427 (2d Cir.1945).

However, the Sherman Act does not attack every monopoly.

See Aspen Skiing Co., 472 U.S. at 602, 105 S.Ct. at 2857 (holding

that predatory conduct to attain or preserve a monopoly is a

prerequisite to a finding of monopolization or attempted monop-

olization); Syufy Enterprises, 903 F.2d at 668 (stating that

“| while the successful competitor should not be raised above the

law, neither should he be held down by law”); Olympia, 797 F.2d

at 375-76 (“[T]he lawful monopolist should be free to compete

like everyone else; otherwise the antitrust laws would be holding

an umbrella over inefficient competitors.”); Foremost, 703 F.2d

at 543-44 (“[Tjhe Sherman Act... does not render unlawful all

monopolies. ... A monopolist, no less than any other competitor,

is permitted and indeed encouraged to compete aggressively on

the merits.”). A firm may acquire a monopoly simply by virtue of

being a better competitor. For example, a firm may have better

production methods or be more innovative than its past and

prospective competitors. Aspen Skiing Co., 472 U.S. at 604, 105

S.Ct. at 2858; Grinnell Corp., 384 U.S. at 570-71, 86 S.Ct. at

1703-04; Syufy Enterprises, 903 F.2d at 668; Aluminum Co. of

Am., 148 F.2d at 430. This kind of monopoly, absent “predatory”

practices to maintain it, will continue only so long as the monop-

Olist sustains a level of efficiency or innovation such that its rivals

cannot effectively compete. Because this type of monopolist

21a

behaves in an economically efficient manner, the antitrust laws

do not stand as an obstacle to its existence. See Syufy Enterprises,

903 F.2d at 668; Olympia, 797 F.2d at 375-76; Foremost, 703 F.2d

at 544; see also P. Areeda & D. Turner, Antitrust Law, at 41-42,

60-63, 68-71 (1978).

There is also at least one other type of lawful monopoly—

the natural monopoly. Such a monopoly occurs whea:

There may not be room enough in the market for more

than one firm. . . . In that case, demand is “too thin” to

Support two surviving firms. Monopoly is inev-

itable .... [For example, t]he entire natural gas con-

sumption of a region of the country may be insufficient

to support a second pipeline from a remote producing

region. Demand may total millions of dollars annually

and yet be “too thin” relative to the minimum efficient

scale of a long-distance natural gas pipeline, a

hydroelectric power generator, or a fully automated

machine-tool production line. In these cases, demand

mfight} be sufficient at some price fixed by law... .,

but the cost of production will be Significantly lower

with a single producer. Ip that event, one producer can

earn larger profits by charging less [than a number of

producers of inefficient scale would be able to charge]

in order to win a larger volume of business that will

permit him to produce at lower unit costs. Local public

utilities supplying electricity, gas, water, and telephone

Service are usually regarded as classic examples...

P. Areeda & D. Turner, supra, at 47-48.

The antitrust laws tolerate both efficient monopolies ard

natural monopolies. See Foremost, 703 F.2d at 543. The Sherman

Act has not been interpreted to penalize efficient monopolies

because they meet consumer demand without raising the price

and gaining a monopoly profit. Syufy Enterprises, 903 F.2d at

668; see also Berkey, 603 F.2d at 294. The Sherman Act also has

not been interpreted to penalize natural monopolies. A firm that

creates a valued service or product should not be punished with

22a

treble damages and criminal sanctions merely because the firm

finds itself to be the holder of a natural monopoly. Aluminum Co.

of Am., 148 F.2d at 429-30 (reasoning that those who find thein-

selves holders of a natural monopoly should not be subject to

Sherman Act sanctions). Government regulation, as opposed to

treble damages and criminal liability under the Sherman Act, is

generally thought to be the appropriate remedy for the difficulties

posed by natural monopolies. See Jones, Government Price Con-

trols and Inflation: A Prognosis Based on the Impact of Controls

in the Regulated Industries, 65 Cornell L.Rev. 303, 304 (1980).

“| Jjudicial oversight of pricing policies would place the courts in

a role akin to that of a public regulatory commission. We would

be wise to decline that function unless Congress clearly bestows

it upon us.” Berkey Photo, 603 F.2d at 294 (citations omitted);