Petition for Writ of Certiorari — Harrison Aire, Inc. v. Aerostar International, Inc. (No. 05-887)

The defendants in this case are a balloon

manufacturer (Raven) and the subsidiary company it

later created to conduct its balloon manufacturing

business (Acrostar). Raven attempted to preserve its

natural monopoly in the replacement fabric market by

inserting language into its balloon manuals which

required owners to use only Raven replacement fabric,

to obtain Raven’s written approval before replacing a

significant amount of envelope fabric, and to avoid

replacing more than 65% of the fabric under any

circumstances. As Raven intended, balloon owners

reasonably believed that FAA regulations required them

to adhere to these restrictions, because balloon manuals

do contain language that must be followed under federal

law. Raven deliberately reinforced this false impression

through its sales force and through its other

publications. Aerostar continued the scheme when it

took over Raven’s balloon business.

Because the barrier to entry into the replacement

fabric market is high, because Raven/Aerostar balloon

owners believed they were permitted to replace only

4(...continued)

sell the fabric. The licenses are type-specific; fabric

which has qualified for use on an Aerostar balloon, for

example, is not qualified for use on a Cameron balloon

unless and until the fabric manufacturer obtains a PMA

or an STC for the Cameron model.

limited portions of their envelopes, and because the

owners were convinced that they were required to use

Raven/Aerostar fabric to make these repairs,

competition in the replacement fabric market was

seriously restricted. Only two small companies

obtained FAA approval to sell replacement fabric for

Raven/Aerostar balloons. Raven z 1d Aerostar reached

an accommodation with one of them, and attempted to

put the other out of business through a variety of

methods.

Even the FAA was taken in by the

Raven/Aerostar anticompetitive scheme. On_ the

assumption that the restrictive language in the manuals

really was legally binding on owners, the FAA

prosecuted a balloon repair station which had used

replacement fabric sold by one of the two- small

competitors. Only after the administrative law judge

pointed out that the manual language was not legally

binding on owners did the FAA wake up. Once it had

realized its mistake, the FAA required Aerostar to

remove the language from its manuals.”

Harrison Aire, the plaintiff in this case, is a small

corporation which has operated a balloon ride business

since the 1970s. Its most profitable Acrostar balloon

ultimately required either a new envelope or significant

Sopra. ¢ j x °

fhis was the Braden’s case referred to in the

lower court opinions.

fabric replacement. Harrison Aire could not afford a

new envelope, nor could it afford Aerostar’s fabric,

although it could have afforded one of the competitors’.

Harrison Aire believed, on the basis of Aerostar’s ICA

language and on the basis of representations made to it

by Aerostar’s agents, that it was not permitted to use

non-Aerostar fabric. Consequently it could not repair

its balloon, and lost $182,835 of income which would

have been produced by that balloon over the 10-year

useful life offered by a repaired envelope.

ARGUMENT

The circuit court created a new barrier to victims of

anticompetitive activity in an aftermarket, by

requiring the victim to show “hard evidence

dissociating the competitive situation in the

aftermarket from activities occurring in the primary

market,” contrary to the express language of this

Court in Eastman Kodak Co. v. Image Technical

Services, Inc.

The circuit court’s opinion acknowledges that

Harrison Aire produced proof of anticompetitive

conduct by Raven and Aerostar, and that this

anticompetitive conduct caused antitrust injury.” The

circuit court also found that the relevant market was the

replacement fabric market for hot air balloons which

were manufactured by Raven and its successor,

Aerostar.’ The circuit court recognized that, because of

FAA requirements, Raven (and Aerostar) enjoyed a

"Appendix A at 23a-25a, 423 F.3d at 385-386.

“Appendix A at 18a, 423 F.3d at 383 (“Under this

framework, we believe the relevant market here ts that

for replacement fabric for Aerostar balloons”).

8

natural monopoly, in which only they were permitted to

sell replacement fabric until, and unless, third party

manufacturers could obtain FAA licenses to sell the

fabric.”

The circuit court then departed from traditional

antitrust analysis:

But Kodak does not transform every firm

with a dominant share of the relevant

aftermarket into a monopolist. To create a

triable question of aftermarket monopoly

power, the plaintiff must produce “hard

evidence dissociating the competitive

situation in the aftermarket from activities

occurring in the primary market.” SMS

[Systems Maintenance Services, Inc. vy.

Digital Equipment Corp.]|, 188 F.3d[11]at

17 (1st Cir.1999).”

‘Appendix A at 4a, 423 F.3d at 378 (“The FAA

authorizes third-party manufacturers to sell aftermarket

parts, including replacement fabric. provided they first

obtain FAA certification that the product is equal to or

better than the original”). |

"Appendix A at 17a, 423 F.3d at 383.

9

This was error. The requirement that an antitrust

plaintiff must provide “hard evidence” showing that

competition in the (replacement fabric) aftermarket,

where Raven/Aerostar held a natural monopoly, is

different from competition in the primary (hot air

balloon) market, which was competitive, not only does

not appear in Kodak, but was firmly rejected by this

Court in that case. It is a requirement for which the

First Circuit cited no authority in SMS, and which was

not supported by any additional authority in the circuit

court’s opinion.

The First Circuit’s opinion in SMS dealt with the

unusual claim that a manufacturer’s inclusion with its

computers ofa three-year warranty was anticompetitive.

The First Circuit concluded that “[i]n the last analysis,

SMS’s monopoly power hypothesis defies common

sense.” 188 F.3d 26. Unfortunately, in reaching this

conclusion the court of appeals added things to Kodak

that are just not there.

The First Circuit began:

Kodak, then, stands for the proposition

that the foremarket does not always exert

sufficient competitive pressure to insulate

the aftermarket from monopolistic

practices. It does not hold, as SMS

entreats, that the foremarket never exerts

sufficient competitive pressure to keep the

10

aftermarket pristine. And the fact that the

primary market at times may fail to

discipline a derivative market does not

mean that the latter necessarily constitutes

the relevant market for antitrust analysis.

Although this was a restrictive reading of Kodak,

it was literally true. However, the First Circuit

continued:

Rather, a litigant who envisions the

aftermarket as the relevant market must

advance hard evidence dissociating the

competitive situation in the aftermarket

from activities occurring in the primary

market. Cf id. at 477, 112 S.Ct. 2072

(noting that the plaintiff adduced evidence

that the defendants were able to--and

did--charge supracompetitive prices in the

aftermarket). Put another way, a court

may conclude that the aftermarket is the

relevant market for antitrust analysis only

if the evidence supports an inference of

monopoly power in the aftermarket that

competition in the primary market appears

unable to check. See id. at 481-82, 112

S.Ct. 2072; see also 10 Areeda &

Hovenkamp, supra, 4 1740, at 170-71.

1 |

This was a proclamation of an unsupported

conclusion. The “hard evidence” requirement simply

does not appear in Kodak. The “cf” citations to the

Kodak opinion lead nowhere; this Court said nothing of

such an additional burden. Indeed, Kodak stands very

much for the reverse proposition, that there is no

additional burden.

One of Kodak's principal holdings was that

“there is no immutable physical law - no ‘basic

economic reality’ - insisting that competition in the

equipment market cannot coexist with market power in

the aftermarkets.”'” It is not unreasonable to conclude

that a competitive primary market will not preclude

market power in the aftermarket. lor a variety of

reasons, consumers may simply choose not to base their

equipment purchase decision on aftermarket costs.'!

"Kodak, at 504 U.S. at 471. 112 S.Ct. at 2084.

Moreover, even if consumers were capable of

acquiring and processing the complex body of

information, they may choose not to do so. Acquiring

the information is expensive. If the costs of service are

small relative to the equipment price, or if consumers

are more concerned about equipment capabilities than

service costs, they may not find it cost efficient to

compile the information.” Kodak, at 504 U.S. at 474-

(continued...)

}?

—

Consequently, “it makes little sense to assume, in the

absence of any evidentiary support, that

equipment-purchasing decisions are based on an

accurate assessment of the total cost of equipment,

service, and parts over the lifetime of the machine.”'”

And once having purchased the equipment, an owner

may be “locked in” to that purchase if the cost of

switching is high."

Thus, this Court explicitly rejected the notion that

competition in the primary market forecloses market

power in the aftermarket. Moreover, it placed the

burden of proving such a link on the defendant. In the

absence of such proof (and none exists tn this case),

''( continued)

475, 112 S.Ct. at 2086. Emphasis added.

Kodak, at 504 U.S. at 475-476, 112 S.Ct. at

2087.

Kodak, at 504 U.S. at 476, 112 S.Ct. at 2087:

“A second factor undermining Kodak's claim that

supracompetitive prices in the service market lead to

ruinous losses in equipment sales ts the cost to current

owners of switching to a different product.....1f the cost

of switching 1s high, consumers who already have

purchased the equipment, and are thus “lockedi ,” will

tolerate some level of service-price increases before

changing equipment brands.

13

aftermarket antitrust issues are analyzed in exactly the

same manner as are primary market antitrust issues.

“Moreover, on the occasions when the Court has

considered tying in derivative aftermarkets by

‘manufacturers, it has not adopted any exception to the

usual antitrust analysis, treating derivative aftermarkets

as it has every other separate market.”'* In short, once

the relevant market has been determined - primary

market or aftermarket - the antitrust an» ysis is the

same. Imposing additional burdens on a plaintiff,

simply because the relevant market is an aftermarket, is

contrary to this Court’s holding in Kodak. It creates an

unsupported, and unfair, distinction which penalizes

victims of anticompetitive misconduct, based on

nothing more than their misfortune to be producers or

purchasers of a replacement part.

The circuit court sustained the district court’s

ruling strictly because of this additional burden: “Here,

in contrast, Harrison Aire has failed to meet it burden of

dissociating competition in the primary market from

e

°

conditions in the aftermarket....logether, these

Kodak, at 504 U.S. at 479, footnote 29, 112

S.Ct. at 2089.

14

evidentiary failures compel summary judgment for the

defendant.”

The circuit court’s decision is not simply a

misapplication of Kodak’s holding. It is a (perhaps

unintentional) repudiation of that holding. Where this

Court has held that there is no conceptual distinction

between anticompetitive conduct in a primary market,

and anticompetitive conduct in an aftermarket, the

circuit court has now held that there is a significant

distinction, and that the victim of misconduct in the

aftermarket is required to surmount a greater proof

barrier than the victim of misconduct in the primary

market.

This Court has already specifically disapproved

such a distinction, and should disapprove it here.

Competition rights are already expensive to enforce.

Requiring a_ plaintiff to produce proof of the

competitive states of two markets, without some

rational justification, only makes a heavy burden

heavier.

‘Appendix A at 19a, 423 F.3d at 384.

1S

The circuit court’s refusal to allow Plaintiff

favorable inferences on a summary judgment motion

introduced a special burden on plaintiffs facing

summary judgment in antitrust cases, contrary to

the express direction of this Court in Eastman Kodak

Co. v. Image Technical Services, Inc.

This case was decided on a summary judgment

motion. Both sides had submitted extensive evidence

in support of, and in opposition to, that motion.'® The

circuit court held that “{s]ignificantly, however,

‘antitrust law limits the range of permissible inferences’

that can be drawn ‘from ambiguous evidence.......To

avoid deterring pro-competitive behavior, ‘certain

inferences may not be drawn from circumstantial

evidence in an antitrust case."”'’ The circuit court then

viewed much of the evidence in a light more favorable

to the defendants than to the plaintiff. This was

contrary to this Court’s holding in Kodak, which

reaffirmed that traditional Rule 56 standards apply to

antitrust Cases.

The appendix in the Third Circuit was

composed of four volumes.

“Appendix A at 9a, 423 F.3d at 380.

16

The language quoted by the circuit court is

drawn from Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 588, 106 S.Ct. 1348, 89 L.Ed.2d

538 (1986). This Court, in Kodak, expressly limited

Matsushita’s language:

The Court's requirement in Matsushita that

the plaintiffs' claims make economic sense

did not introduce a special burden on

plaintiffs facing summary judgment in

antitrust cases. he Court did not hold

that if the moving party enunciates any

economic theory supporting its behavior,

regardless of its accuracy in reflecting the

actual market, it is entitled to summary

judgment. Matsushita demands only that

the nonmoving party's inferences be

reasonable in order to reach the jury, a

requirement that was not invented, but

merely articulated, in that decision. Ifthe

plaintiffs theory is economically

senseless, no reasonable jury could find in

its favor, and summary judgment should

be granted."*

504 U.S. at 468-469, 112 S.Ct. at 2083.

Emphasis added.

This simply restated traditional Rule 56 summary

judgment standards. The Court observed: “Kodak,

then, bears a substantial burden in showing that it is

entitled to summary judgment. It must show that

despite evidence of increased prices and excluded

competition, an inference of market power is

unreasonable.”

The circuit court therefore ignored the

appropriate standard in reviewing Defendants’ motion

for summary judgment. Consequently the circuit court

refused to draw the permissible inference that the high

prices of Raven/Aerostar replacement fabric supported

an inference of market power.’ Indeed, the circuit

court weighed the evidence before it, and drew the

504 U.S. at 469, 112 S.Ct. at 2083. Emphasis

added.

Pies

Harrison Aire contends Aerostar charged

supracompetitive prices for its fabric, based on the

uncontested fact that Aerostar’s fabric 1s more

expensive than that of its aftermarket competitors. But

this alone does not support a reasonable inference of

monopoly "ower. Competitive markets are

characterized by both price and quaiity competition, and

a firm's comparatively high price may simply reflect a

superior product.” Appendix A at 11a, 423 F.3d at 381.

Emphasis added.

1s

opposite inference, that the undisputed high price of

Raven/Aerostar fabric was due to its higher quality.”|

This was error. Harrison Aire was entitled to the

inference that the high price of Raven/Aerostar fabric at

“Appendix A at 12a, 423 F.3d at 381:

Here, the record ts clear that balloon fabric

is a heterogeneous product. Fabric is sold

in various weaves and grades, of differing

strength and durability. The record

demonstrates that Aerostar fabric is of

comparatively high quality. Although

Harrison considered purchasing fabric

from one of Aerostar's aftermarket

competitors, Custom Nine Designs, he

rejected the product because Custom Nine

“didn't prove to me that it wasn't a bogus

part.” Furthermore, Custom Nine's

president acknowledged that Aerostar's

“diamond weave” fabric was a superior

aftermarket product to his own. Because

it is undisputed that balloon fabric, and

particularly Aerostar fabric, is

differentiated by composition and quality,

Aerostar's comparatively high price does

not, by itself, support a reasonable

inference of monopoly power.

19

least was an indicator of market power. It was for the

jury, not for a panel of appellate judges, to resolve the

issue.

As with the previously-discussed aftermarket

burden issue, the circuit court has created a hurdle for

victims of anticompetitive misconduct that this Court

has expressly rejected. In the same manner that this

Court put an end to circuit court creation of “heightened

pleading standards” in $1983 civil’ rights cases,

Leatherman v. Tarrant County Narcotics Intelligence

and Coordination Unit, 507 U.S. 163, 168-169, 113

S.Ct. 1160, 122 L.Ed.2d 517 (1993), it should act now

to prevent similar judicial creation of heightened

summary judgment requirements in antitrust cases.

CONCLUSION

The circuit court’s decision creates a requirement

that a victim of anticompetitive activity in an

aftermarket must affirmatively show, “by hard

evidence,” that the competitive state of the aftermarket

is not the same as the competitive state of the primary

market. This Court has expressly rejected such an

expensive and irrational requirement. Certiorari should

be granted to prevent the hardship which will result, in

this case and in future cases, from the promulgation of

20

such a doctrine, in violation of this Court’s specific

direction.

The circuit court also refused to apply traditional

Rule 56 summary judgment principles to antitrust

matters. Again, this is against the express direction of

this Court. Certiorari should be granted to end this

practice of according more favorable treatment to

antitrust defendants than to defendants in all other

cases.

Respectfully submitted,

JOHN K. WESTON

Counsel of Record

Sacks & Weston

114 Old York Road

Jenkintown, PA 19046

(215) 925-8200

Counsel for Petitioner

APPENDICES

APPENDIX A

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 04-2904 & 04-3052

HARRISON AIRE, INC.,

Appellant in No. 04-2904

:

AEROSTAR INTERNATIONAL, INC.;

RAVEN INDUSTRIES, INC.,

Appellants in No. 04-3052

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

D.C. Civil Action No. 02-cv-01258

(Honorable Michael M. Baylson)

Argued March 7, 2005

Before: SCIRICA, Chief Judge,

ROTH and BECKER, Circuit Judges

(Filed September 16, 2005)

la

OPINION OF THE COURT

SCIRICA, Chief Judge.

In this antitrust action, we address allegations of

unlawful monopolization and tying in the aftermarket

for replacement hot air balloon fabric. The District

Court granted defendants’ motion for summary

judgment, finding no triable issue of monopoly power

in the relevant product market. We will affirm.

Harrison Aire, a hot air balloon ride operator, alleges

antitrust violations by Raven Industries and its

balloonmanufacturing subsidiary, Aerostar

International. Consistent with our standard of review on

summary judgment, we recount the facts in the light

most favorable to the non-moving party, appellant

Harrison Aire.

Terry Harrison, the sole owner and proprietor of

Harrison Aire, is an FAA-licensed pilot and aircraft

mechanic. After a twenty-three year career at Eastern

Airlines, he retired in 1973 to launch the Harrison Aire

enterprise from an airstrip in central New Jersey. The

company owns and operates several hot air balloons

which it charters for recreational day trips over the New

Jersey countryside. Since the mid 1990s, the business

has suffered cash-flow problems. Harrison Aire blames

its losses, in part, on the prohibitive expense of

replacement balloon fabric, which it contends is a result

of Raven/Aerostar’s monopolization of the relevant

balloon fabric aftermarket.

Raven Industries is a diversified manufacturing

company based in Sioux Falls, South Dakota. From the

1970s through 1986, it manufactured hot air balloons

and replacement balloon fabric. In 1986, Raven formed

Aerostar International as a wholly-owned subsidiary to

take over its balloon business. Aerostar International

manufactures and sells hot air balloons in a market of

at least five competitors and also produces and sells

replacement balloon fabric.

Hot air balloons are regulated from cradle to grave by

the Federal Aviation Administration. The FAA certifies

balloon design and manufacturing standards, 14 C.F.R.

§ 21.11-53, requires the manufacturer to provide a

maintenance manual along with its aircraft, id. § 21.50,

reviews the content of the manual, id. § 31.82, and

certifies replacement part designs for airworthiness, éd.

21.303. The KFAA’s “maintenance manual” and

“replacement part” regulations bear on this appeal.

~

oe

a

Balloon manufacturers are required to provide their

customers with a balloon maintenance manual, known

as an “ICA” (Instructions for Continued Airworthiness),

which sets forth recommended and_ required

maintenance procedures. The manual is in two parts.

The first, known as the “FAA accepted” section,

establishes manufacturer-recommended but not

FAArequired protocols. The second, known as the

“Airworthiness Limitation Section,” establishes FAA

requirements affecting flight safety.

Regulations also govern the manufacture and sale of

replacement balloon parts, including replacement

fabric. All replacement parts must be “of such a quality”

that the repaired balloon is “at least equal to its original

or properly altered condition.” 14 C.F.R. § 43.13(b).

The FAA authorizes third party manufacturers to sell

aftermarket parts, including replacement fabric,

provided they first obtain FAA certification that the

product is equal to or better than the original. /d. §

21.303.

Replacement fabric extends the service life of a hot air

balloon. The top half of the balloon “envelope”’—the

material encapsulating the hot air—tends to deteriorate

more rapidly than the bottom half. By replacing top-

half fabric after 300 to 500 hours of use, balloon

owners are able to extend the aircraft’s service life for

4a

an additional 200 to 300 hours. Generally, it is more

economical to replace fabric in this manner than to

purchase an entirely new envelope. Harrison Aire

followed this practice in maintaining its fleet of

Raven/Aerostar balloons.

Harrison Aire purchased its first Raven balloon in 1978.

The parties’ dispute over fabric replacement began

shortly thereafter. According to Terry Harrison, Raven

advised him that he could not purchase replacement

fabric from other manufacturers because installation of

third-party fabric would render the balloon unairworthy.

In 1982, Raven revised its balloon maintenance

manuals to make this policy explicit, warning Raven

balloon owners that “only fabric which has been tested

and approved according to Raven factory standards may

be used for repair of Raven envelopes. Failure to

comply with this requirement constitutes a departure

from type design and renders the balloon unairworthy.”

This language appeared in the FAA-approved, rather

than the FAA-required, section of Raven maintenance

manuals. Reading the manual in the light most

favorable to Harrison Aire, it warned that only Raven-

brand fabric should be used in Raven balloons.

Terry Harrison repeatedly complained to Raven,

believing its insertion of the “warning” into the balloon

manual transformed the fabric policy into an FAA

Sa

-

requirement that legally barred him from obtaining

cheaper fabric elsewhere. On_ several occasions

between 1982 and 1986, Harrison confronted Raven

representatives about the manual language, but was told

that no other aftermarket product was equal to or better

than Raven fabric, and that only Raven fabric was

consistent with airworthiness standards. Harrison

understood this as a representation that he was required

to purchase Raven fabric in order to comply with the

FAA’s “equal to or better” standard for replacement

parts. Harrison Aire contends that from 1978 to 1986,

Raven misled the company into believing the purchase

of Raven fabric was mandated by law, when in fact it

was merely recommended by the manufacturer.

In February 1986, Raven Industries formed Aerostar

International to take over its hot air balloon business.

Aerostar continued Raven’s balloon operation

essentially uninterrupted, and became the new focus of

Harrison Aire’s campaign to purchase fabric from

third-party sources. Shortly after Aerostar was

incorporated, Harrison registered several complaints

with Aerostar about “being forced” to use

Raven/Aerostar fabric. Nevertheless, despite its

understanding that Aerostar balloons required Acrostar

replacement fabric, Harrison Aire purchased a “big

ride” Aerostar balloon in 1986 that is the subject of this

litigation.

6a

By 1995, Harrison Aire’s “big ride” Aerostar balloon

required a major fabric replacement. By this time, two

other manufacturers had received FAA approval to

produce aftermarket fabric for Aerostar balloons. See

14 C.F.R. § 21.303 (authorizing the manufacture of

replacement balloon parts upon receipt of a “Parts

Manufacturer Approval” from the FAA). Harrison

investigated one of the approved sellers, Custom Nine

Designs, but decided against purchasing their fabric

because of concerns that it lacked quality. Harrison

never contacted the other approved supplier, Head

Balloons. Viewing Acrostar-brand fabric as its only

option and as prohibitively expensive, Harrison Aire

retired the “big ride” balloon in 1996 rather than

repairing itt.

Harrison eventually realized that installation of

thirdparty fabric was legally permissible. In July 2000,

following an administrative proceeding between the

FAA and a third-party balloon repair service, an

Administrative Law Judge concluded — the fabric

“warning” found in Aerostar’s maintenance manual

was not legally binding. /n re Braden’s Balloons Aloft,

Inc., FAA No. CP99SWO037 (July 26, 2000).

Harrison contends the Braden's decision provided him

notice, for the first time, that his company was not

required to purchase Aerostar-brand fabric.

7a

In March 2002, Harrison Aire filed suit in federal court,

alleging, inter alia, antitrust injury arising from

Raven/Aerostar’s monopolization of the aftermarket for

replacement Aerostar balloon fabric and from the

unlawful tying of Aerostar-brand fabric to Acrostar

balloons. But for Raven/Aerostar’s allegedly

misleading and exclusionary aftermarket fabric policy,

Harrison Aire contends that its “big ride” balloon would

have been repaired in 1996 and still operational. The

District Court granted summary judgment to

defendants, holding they lacked sufficient market power

in the relevant product market. //arrison Aire, Inc. v.

Aerostar Int'l, Inc., 316 F. Supp. 2d 186 (E.D. Pa.

2004). '

‘Harrison Aire's complaint included both federal

antitrust counts and supplemental claims under state

law. On May 3, 2004, the District Court granted

Raven/Aerostar's motion for summary judgment in part,

dismissing the antitrust counts and ordering trial on the

state law counts. The parties then stipulated to final

judgment with prejudice against Harrison Aire on the

surviving claims, in order to facilitate an immediate

appeal on the antitrust issues. Accordingly, the state

law claims are not at issue and our analysis is confined

to the federal antitrust claims.

Sa

The District Court had jurisdiction under the federal

antitrust laws, 15 U.S.C. § 15 (providing cause of action

and treble damage remedy), and 28 U.S.C. § 1331. We

have jurisdiction under 28 U.S.C. § 1291. Our

summary judgment standard of review ts plenary. /n re

Flat Glass Antitrust Litig., 385 F.3d 350, 357 (3d Cir.

2004) (drawing all reasonable inferences in favor of the

non-moving party).

Significantly, however, “antitrust law limits the range of

permissible inferences” that can be drawn “from

ambiguous evidence.” Matsushita Elec. Indus. Co. v.

Zenith Radio Corp., 475 U.S. 574, 588 (1986); see

also Monsanto Co. v. Spray-Rite Serv. Corp., 465 US.

752, 764 (1984). To avoid deterring procompetitive

behavior, “certain inferences may not be drawn from

circumstantial evidence in an antitrust case.” /n re Flat

Glass Antitrust Litig., 385 F.3d at 357 (quoting

Intervest, Inc. v. Bloomberg, L.P., 340 F.3d 144, 160

(3d Cir. 2003)).

To survive a motion for summary judgment, an antitrust

piaintiff must produce economically plausible evidence

supporting the elements of its claim. See Matsushita,

475 U.S. at 588; Ideal Dairy Farms v. John Labatt,

Lid., 90 F.3d 737, 748-50 (3d Cir. 1996) (applying

9a

Matsushita in section 2 action); Zenith Radio Corp. v.

Matsushita Elec. Indus. Co., 513 F. Supp. 1100, 1140

(E.D. Pa. 1981) (“It is now settled that summary

judgment is appropriate in those antitrust cases where

plaintiffs, after having engaged in extensive discovery,

fail to produce ‘significant probative evidence’ in

support of the allegations in weir complaint.” ) (citations

omitted). “If the plaintiff's theory is economically

senseless, no reasonable jury could find in its favor, and

summary judgment should be granted.” Eastman Kodak

Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 468-69

(1992).

We begin with Harrison Aire’s monopolization claim.

Under section 2 of the Sherman Act, monopolization

consists of: “(1) the possession of monopoly power in

the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from

growth or development as a consequence of a superior

product, business acumen, or historic accident.” United

States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966);

see also 15 U.S.C. § 2; LePage’s, Inc. v. 3M, 324 F.3d

141 (3d Cir. 2003) (en banc) (reviewing section 2 case

law and explaining the “willful acquisition or

maintenance” element).

Oa

Monopoly power is defined as “the power to control

prices or exclude competition.” United States v. E.1. du

Pont de Nemours & Co., 351 U.S. 377, 391 (1956).

More precisely, it is “the power to charge a price higher

than the competitive price without inducing so rapid

and great an expansion of output from competing firms

as to make the supracompetitive price untenable.” Am.

Academic Suppliers, Inc. v. Beckley-Cardy, Inc., 922

F.2d 1317, 1319 (7th Cir. 1991); see also United States

v. Dentsply Int'l Inc., 399 F.3d 181, 189 (3d Cir. 2005)

(emphasizing a monopolist’s power “to maintain market

share” (emphasis in original) (quoting United States v.

Svufy Enters., 903 F.2d 659, 665-66 (9th Cir. 1990)).

Monopoly power can be demonstrated with either direct

evidence of supracompetitive pricing and high barriers

to entry, see Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d

1421, 1434 (9" Cir. 1995), or with structural evidence

of a monopolized market. Because “direct proof is only

rarely available, courts more typically examine market

structure in search of circumstantial evidence of

monopoly power.” United States v. Microsoft, 253 F.3d

34, 51 (D.C. Cir. 2001) (en banc) (citations omitted).

A.

Harrison Aire contends Aerostar charged

supracompetitive prices for its fabric, based on the

lla

uncontested fact that Aerostar’s fabric is more

expensive than that of its aftermarket competitors. But

this alone does not support a reasonable inference of

monopoly power. Competitive markets are

characterized by both price and quality competition, and

a firm’s comparatively high price may simply reflect a

superior product. Blue Cross & Blue Shield United v.

Marshfield Clinic, 65 F.3d 1406, 1412 (7th Cir. 1995)

(“Generally you must pay more for higher quality.”).

Therefore, “when dealing with a heterogeneous product

or service . . . a reasonable finder of fact cannot infer

monopoly power just from higher prices.” /d. at 1411-

12.

Here, the record is clear that balloon fabric is a

heterogeneous product. Fabric is sold in various

weaves and grades, of differing strength and durability.

The record demonstrates that Aerostar fabric is of

comparatively high quality. Although Harrison

considered purchasing fabric from one of Aerostar’s

aftermarket competitors, Custom Nine Designs, he

rejected the product because Custom Nine “didn’t 12

prove to me that it wasn’t a bogus part.” Furthermore,

Custom Nine’s president acknowledged that Aerostar’ s

“diamond weave” fabric was a superior aftermarket

product to his own. Because it is undisputed that

balloon fabric, and particularly Acrostar fabric, is

differentiated by composition and quality, Acrostar’s

12a

comparatively high price does not, by itself, support a

reasonable inference of monopoly power.

B.

Turning to Harrison Aire’s circumstantial evidence of

monopoly power, we note the structural indicators of a

monopolized market. In a typical section 2 case,

monopoly power is “inferred from a firm’s possession

of a dominant share of a relevant market that is

protected by entry barriers.” Microsoft, 253 F.3d at 51;

see also Fineman v. Armstrong World Indus., Inc., 980

F.2d 171, 201-3 (3d Cir. 1992) (explaining market

share analysis). Plaintiffs relying on market share as a

proxy for monopoly power must plead and produce

evidence of a relevant product market, of the alleged

monopolist’s dominant share of that market, and of high

barriers to entry. Queen City Pizza, Inc. v. Domino's

Pizza, Inc., 124 F.3d 430, 436 (3d Cir. 1997) (market

-definition); Fineman, 980 F.2d at 201-03 (3d Cir. 1992)

(market share); Microsoft, 253 F.3d at 82 (barriers to

entry).

Additional factors are -relevant in the aftermarket

context. Aftermarket monopolization cases require a

more comprehensive analysis, because market share

data standing alone 1s not necessarily a reliable proxy

for monopoly power. SMS Syst. Maint. Servs. Inc. v.

I3a

Digital Equip. Corp., \88 F.3d 11, 16 (1st Cir. 1999).

Many firms supply unique and/or _ proprietary

aftermarket parts and services for their primary market

products. As a result, they “can be expected to have a

very high percentage” share of the relevant aftermarket.

Id. But high aftermarket share is not necessarily

indicative of monopoly power—i.e., the power to

charge and maintain a supracompetitive price-—because

aftermarket behavior generally is disciplined by

competition in the primary product market. If the

primary market is competitive, a firm exploiting its

aftermarket customers ordinarily is engaged in a short-

run game—for when buyers evaluate the “lifecycle”

cost of the product, the cost of the product over its full

service life, they will shop elsewhere. Eventually, the

aftermarket “monopolist” lacks customers to exploit.

See Parts & Elec. Motors, Inc. v. Sterling Elec., Inc.,

866 F.2d 228, 236 (7th Cir. 1988) (Posner, J.,

dissenting) (describing the exploitation of aftermarket

customers as a “suicidal” business practice); SMS, 188

F.3d at 16 (“firms concerned with the long term cannot

afford to bite the hands that feed them”).

This portrayal is conventional antitrust theory. See 2A

Philip E. Areeda & Herbert Fovenkamp, Antitrust Law

{ 564b, at 322-28 (2d ed. 2002). But as explained in

Kodak, it “may not accurately explain the behavior of

the primary and derivative markets for complex durable

i4a

goods” where “significant information and switching

costs” sever the usual link between the primary market

and the aftermarket. 504 U.S. at 473. Information costs

are barriers that prevent primary market consumers

from evaluating the lifecycle costs of a product. /d. at

473-74. For primary market competition to discipline

aftermarket behavior, consumers require information

on, among other things, the expected cost, quality and

availability of aftermarket products such as parts and

service. Perfect information is not required for the

primary market to check the aftermarket. See Jefferson

Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 27

(1984) (holding, in tying case, that imperfect

information does not necessarily “generate the kind of

monopoly power that justifies condemnation”); SMS,

188 F.3d at 19 n.3 (“perfect information about the

aftermarket is not required”). But sometimes lifecycle

pricing information is. particularly — difficult’ or

impossible for primary market customers to acquire, as

in the case of a unilateral change in aftermarket policy

targeting “locked in” customers. Kodak involved this

type of market failure. See Queen City Pizza, 124 F.3d

at 440 (“The Kodak case arose out of concerns about

unilateral changes in’ Kodak’s parts and repairs

policies.)

Kodak involved a primary market for photocopiers and

an aftermarket for Kodak parts and service. The

1Sa

primary market was competitive. But Kodak controlled

nearly 100% of the parts aftermarket, and 80% to 95%

of the service market. 504 U.S. at 480. Historically,

Kodak’s customers had been able to obtain copier

repair service from independent service organizations

that charged “substantially” less than Kodak. 504 15

U.S. at 457. Later, however, after customers were

locked in to. Kodak copiers, Kodak changed its

aftermarket policy to sell replacement parts only to

those customers who also purchased Kodak service or

who repaired their own machines. /d. at 458. This

policy change led to higher aftermarket prices. /d. at

465. In other words, Kodak used its power in the

replacement parts market to “squeeze the independent

service providers out of the repair market and to force

copier purchasers to obtain service directly from

Kodak, at higher cost.” Queen City Pizza, 124 F.3d at

440.

The Supreme Court held the independent service

organizations’ tying and monopolization claims against

Kodak could not be dismissed on summary judgment

following truncated discovery. Kodak, 504 U.S. at 486.

On the key question of monopoly power in the parts and

services aftermarket, the Court cited evidence of (1)

supracompetitive pricing, id. at 469; (2) Kodak’s

dominant share of the relevant aftermarket, id. at 480:

(3) significant information costs that prevented lifecycle

l6a

pricing by primary market customers, id. at 475; and

(4) high “switching costs” that served to “lock in”

Kodak’s aftermarket customers, id. at 477. Together,

this evidence supported a reasonable inference of

monopoly power in the relevant aftermarket, precluding

summary judgment.

In broad terms, Kodak stands for the proposition that

market reality is the touchstone of antitrust analysis.

Where the plaintiff comes forward with concrete

evidence of a monopolized market, the defendant “bears

a substantial burden in showing that it is entitled to

summary judgment.” 504 U.S. at 469. On the more

specific issue of aftermarket monopolization, Kodak

held that primary market competition does not

necessarily preclude monopoly power in the relevant

aftermarket where a unilateral policy change targets

“locked-in” customers.

But Kodak does not transform every firm with a

dominant share of the relevant aftermarket into a

monopolist. To create a triable question of aftermarket

monopoly power, the plaintiff must produce “hard

evidence dissociating the competitive situation in the

aftermarket from activities occurring in the primary

market.” SMS, 188 F.3d at 17 (Ist Cir. 1999).

17a

In considering the effect of primary market competition

on aftermarket behavior, we address at the outset the

relevant market definition. Some courts have viewed

the primary and aftermarket as comprising a single

relevant product market. See id.; PS] Repair Servs., Inc.

v. Honeywell, Inc., 104 F.3d 811, 820 (6th Cir. 1997).

But this may not always be the case. Relevant market

definition is a function of reasonably available product

substitutes. Du Pont, 351 U.S. at 395 (1956). Products

are included in a single relevant market when they

“have the ability—actual or potential—to take

significant amounts of business away from each other.”

Allen-Mvland, Inc. v. IBM Corp., 33 F.3d 194, 206 (3d

Cir. 1994) (quoting SmithKline Corp. v. Eli Lilly & Co.,

575 F.2d 1056, 1063 (3d Cir. 1978)); see also Rothery

Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d

210, 218 (D.C. Cir. 1986). Under this framework, we

believe the relevant market here 1s that for replacement

fabric for Aerostar balloons. The primary balloon

market is distinct from the fabric aftermarket because

fabric is a complement to, not a substitute for, the

primary good. Nevertheless, these complementary

products are linked by consumer demand such that

competition in the foremarket may discipline behavior

in the aftermarket. The proper inquiry, then, focuses on

the existence of monopoly power, i.e., “whether

competition in the equipment market will significantly

lXa

restrain power in the service and parts market.” Kodak,

504 U.S. at 470 n.15.

One important consideration is whether a unilateral

change in aftermarket policy exploits locked-in

customers. Queen City Pizza, 124 F.3d at 440 (3d Cir.

1997); SMS, 188 F.3d at 19 (Ist Cir. 1999); Alcatel

USA, Inc. v. DGI Tech., Inc., 166 F.3d 772, 783 (Sth

Cir. 1999); PSI, 104 F.3d at 820 (6th Cir. 1997). As the

Court of Appeals for the Seventh Circuit has explained:

“The Court did not doubt in Kodak that if spare parts

had been bundled with Kodak’s copiers from the outset,

or Kodak had informed customers about its policies

before they bought its machines, purchasers could have

shopped around for competitive lifecycle prices. The

material dispute that called for a trial was whether the

change in policy enabled Kodak to extract supra-

competitive prices from customers who had already

purchased its machines.” Digital Equip. Corp. v. Uniq

Digital Tech., Inc., 73 F.3d 756, 763 (7th Cir. 1996);

accord SMS, 188 F.3d at 17-19 (1st Cir. 1999); PS/, 104

F.3d at 820 (6th Cir. 1997).

We emphasize, however, that an “aftermarket policy

change” is not the sine gua non of a Kodak claim. An

aftermarket policy change is an important consideration,

but only one of several relevant factors. As noted, the

Kodak plaintiffs came forward with evidence of (1)

19a

supracompetitive pricing, (2) Kodak’s dominant share

of the relevant aftermarket, (3) significant information

costs that prevented lifecycle pricing, and (4) high

“switching costs” that served to “lock in” Kodak’s

aftermarket customers.

Hlere, in contrast, Harrison Aire has failed to meet its

burden of dissociating competition in the primary

market from conditions in the aftermarket. It is

undisputed that the primary balloon market is

competitive. And unlike the plaintiffs in Kodak,

Harrison Aire has failed to produce evidence of

supracompetitive pricing, of dominant aftermarket

share, of information costs preventing lifecycle pricing,

or of achange in aftermarket policy targeting locked-in

customers. Together, these evidentiary failures compel

summary judgment for the defendant.

Harrison Aire purchased its first Raven balloon in 1978.

From that time on, Terry Harrison believed that Raven

required him to use Raven-brand replacement fabric.

Harrison repeatedly complained about this policy.

From 1982, when Raven first published its allegedly

exclusionary “warning” about third-party replacement

fabric, and continuing through 1986, when Raven

formed Aerostar, Terry Harrison on several occasions

confronted Raven representatives about their restrictive

fabric policy. Similarly, immediately after Aecrostar’s

20a

incorporation in February, 1986, Harrison registered

several complaints about “being forced” to buy Aerostar

fabric. Yet knowing Raven/Aerostar’s restrictive fabric

policy, Harrison Aire entered the competitive primary

market in 1986 to purchase the “big ride” Aerostar

balloon that is the subject of this lawsuit.

The transparency of Raven/Aerostar’s aftermarket

fabric policy, and Harrison Aire’s undisputed

knowledge of it, cuts strongly against an inference of

monopoly power. SMS is instructive on this point. Like

Harrison Aire, the plaintiffs in SMS produced some

evidence of switching costs, 188 F.3d at 20, but failed

to come forward with sufficient evidence of

supracompetitive pricing, id. at 24, and significant

information barriers to lifecycle pricing, id. at 18-19, to

survive summary judgment on the issue of monopoly

power. In affirming summary judgment for the

defendant, the court in SMS engaged in a

comprehensive analysis under the relevant Kodak

factors. In particular, SMS emphasized the transparency

of the defendant’s aftermarket policy, explaining that

readily available aftermarket information allows

reasonably diligent primary market customers to

engage tn lifecycle pricing. /d. at 18-19. This, in turn,

checks aftermarket monopolization. See id. at 19

(“[T]Jhe transparency of [defendant's] allegedly

Jla

monopolistic policy represents 2 salient departure from

the Kodak scenario.” ).

Raven/Aerostar’s aftermarket policy was transparent

and known to Harrison Aire at all relevant times.

Neither information costs nor a unilateral change in

aftermarket policy prevented Harrison Aire from

shopping for competitive lifecycle balloon prices when

it purchased the “big ride” balloon at issue in 1986.

Furthermore, after full discovery, Harrison Aire has not

produced other evidence dissociating competitive

conditions in the primary balloon market from

conditions in the aftermarket for replacement fabric.

The record here is clear that Harrison Aire got

precisely the balloon and the aftermarket fabric that it

bargained for in the competitive primary market.

Lacking any evidence of significant information

barriers to lifecycle pricing, or any other evidence

dissociating competitive conditions in the primary

market and the aftermarket, summary judgment ts

proper on Harrison Aire’s monopolization claim.

IV.

Harrison Aire also alleges unlawful tying under section

1. The claim lacks merit. “Tying ts defined as selling

one good (the tying product) on the condition that the

22a

buyer also purchase another, separate good (the tied

product).” 7own Sound &Custom Tops, Inc. v. Chrvsler

Motors Corp., 959 F.2d 468, 475 (3d Cir. 1992) (en

banc). “The antitrust concern over tying arrangements

is limited to those situations in which the seller can

exploit its power in the market for the tying product to

force buyers to purchase the tied product when they

otherwise would not.” Queen City Pizza, 124 F.3d at

442-43 (quoting Town Sound, 959 F.2d at 475); see

also Microsoft, 253 F.3d at 84. Tying requires

“appreciable economic power” in the tying product

market. Kodak, 504 U.S. at 464; Brokerage Concepts v.

U.S. Healthcare, Inc., |\40 F.3d 494, 516-17 (3d Cir.

1998).

Harrison Aire contends Raven/Aerostar unlawfully tied

its hot air balloons (the tying product) to its replacement

fabric (the tied product), but fails to produce any

evidence of appreciable market power in the tying

product market. As noted, it is undisputed that the

primary market for hot air balloons is competitive.

Absent this essential element, we will affirm summary

judgment on the tying claim.

Lf

As an alternative holding, the District Court concluded

Harrison Aire failed to properly allege antitrust injury

23a

under Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,

429 U.S. 477 (1977). This was error. Brunswick held

the antitrust laws protect consumers, not competitors,

and that antitrust plaintiffs must show a causal

connection between the defendant’s anticompetitive

conduct and injury to consumers. /d. at 488-89.

Injury to competitors does not suffice. Here, Harrison

Aire is a consumer of balloon fabric, and it claims

antitrust injury in the form of business losses caused by

high fabric prices, which in turn allegedly were caused

by Raven/Aerostar’s exclusionary conduct in the

relevant fabric market. This type of

injury—prohibitively high consumer prices resulting

from allegedly monopolistic behavior—is the type the

antitrust laws are designed to redress. See Town Sound,

959 F.2d at 486 (3d Cir. 1992) (en banc) (explaining

antitrust injury); U.S. Gypsum Co. v. Ind. Gas Co., 350

F.3d 623, 626-28 (7th Cir. 2003) (same).

The District Court concluded that “[a]ny injuries that

Plaintiff suffered would have come from Defendants’

misrepresentations, not from any market power, abuse

of market power or other anticompetitive conduct.” 316

F.Supp.2d at 224. But these purported

misrepresentations are alleged to have had an

anticompetitive effect in the aftermarket—namely the

exclusion of more efficient competitors. Harrison Aire

24a

alleges that Acrostar used misleading manual language,

and the imprimatur of FAA acceptance, to consolidate

its position in the fabric aftermarket. This, in turn,

allegedly prevented Harrison and consumers like him

from purchasing lower-cost fabric from Aerostar’s

competitors. These allegations satisfy the antitrust

injury requirement.

The District Court found antitrust injury lacking

because the manual “did not forbid Plaintiff from

purchasing other manufacturers’ fabric and that a

reasonable investigation on thts point by Plaintiff would

have disclosed . . . that Plaintiff could buy replacement

fabric from anyone who manufactured [it] to the FAA

standards.” /d. at 217. In other words, the District

Court held that no injury to consumers could be shown

because no jury could find that Harrison Aire

reasonably relied on the manual.

It is true that further investigation by Harrison Aire

might have revealed that Aerostar’s replacement-fabric

instructions were not legally binding. But the record is

not clear that Harrison Aire’s reliance on the manual

was unreasonable. Indeed, itappears ‘at the FAA, like

Harrison Aire, viewed Acrostar’s manual as restricting

the use of non-Acrostar fabric in Acrostar balloons.

Not until the Braden’s decision in 2000 did the FAA

recognize the Aerostar manual as non-binding. Since

25a

the FAA itself interpreted Aerostar’s manual as

restricting the use of third-party fabric, the

reasonableness of Harrison Aire’s reliance on that

manual presents a jury question. A jury could have

found that Harrison reasonably believed that Aerostar’s

manuals prevented him from buying lower-priced fabric

from competitors. Because this alleged exclusion of

competitors, to the detriment of consumers, is the sort

of harm the antitrust laws are intended to prevent,

summary judgment was improper on the issue of

antitrust injury. While we hold Harrison Aire’s

antitrust claims ultimately fail for lack of

monopoly/market power in the relevant market, they are

not defective for failure to allege antitrust injury.

CONCLUSION

For the reasons set forth, we will affirm the judgment of

the District Court.

26a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF

PENNSYLVANIA

HARRISON AIRE, INC.

vi

AEROSTAR INTERNATIONAL, INC. and

RAVEN INDUSTRIES, INC.

No. 02-1258

MEMORANDUM

BAYLSON, District Judge.

{. Jurisdiction, Procedural Background, and

Summary

Plaintiff Harrison Aire, Inc., an owner and operator of

hot air balloons, filed this action on March 12, 2002,

alleging that Defendants Aerostar International, Inc.

and Raven Industries, Inc. (Acrostar's corporate parent)

operated their hot air balloon business in violation of

Sections | and 2 of the federal antitrust laws. 15 U.S.C.

27a

§$$1 & 2. Plaintiff also makes state law allegations of

fraud and negligence. This Court has jurisdiction over

Plaintiff's claims under 28 U.S.C. §$1331, 1332, and

1337 and 15 U.S.C. $15. Venue is proper under 28

U.S.C. §1391(b). Presently before the Court ts

Defendants’ Motion for Summary Judgment (Docket

No. 12). The Court held oral argument on January 27,

2004, and the parties submitted supplemental briefs on

April 2, 2004.

Defendants move for summary judgment on three

grounds. For the reasons which follow, Defendants’

motion will be granted, and the Court summarizes its

rulings as follows:

One: Defendants’ contention that Plaintiff's antitrust

claim is barred by the four-year statute of limitations

applicable to antitrust claims is rejected as presenting

an issue of fact. (See infra pp. 202-203.)

Two: Defendants claim that summary judgment is

warranted upon application of implied immunity to

Plaintiff's antitrust claims is rejected as a matter of law.

(See infra pp. 205-206.)

Three: Defendants argue that Plaintiff cannot succeed

in proving the requisite clements for tts antitrust, fraud,

or negligence claims, thus justifying summary judgment

28a

against Plaintiff. The Court concludes that Plaintiff has

not adduced sufficient facts to warrant a trial on its

antitrust claims and the Court will grant summary

judgment for Defendants, as to Counts I and HH. (See

infra pp. 213-224.)

Il. Factual Background

A. Description of Parties and Ballooning Industry’

Plaintiff Harrison Aire, Inc. isa New Jersey corporation

in the business of providing commercial balloon hot air

‘The record on Defendants’ Motion consists of

excerpts of depositions of Plaintiff's President,

Defendar s' employees, three Federal Aviation

Administration officials, and three other witnesses with

experience in the hot air balloon industry. Defendants

have submitted excerpts of their hot air balloon

maintenance manuals, some correspondence between

the FAA and a third party (Ronald DiGiovanni), a

recent company newsletter, and a letter subsequently

sent to the newsletter’'s mailing list that listed

corrections to the newsletter. Defendants also have

filed two affidavits both sworn by Mark West, President

of Aerostar. Plaintiff has submitted an actuarial-

economic consultants’ report. Plaintiff has not filed any

affidavit.

29a

rides, aircraft maintenance, and pilot training for hot air

balloons and fixed wing aircraft. (Defs.’ Undisputed

Facts 42.) Its sole owner and proprietor is Terry

Harrison.” Defendant Aerostar International, Inc. is a

hot air balloon manufacturer located in South Dakota.

Aerostar International is a wholly owned subsidiary of

Raven Industries.’ Raven Industries preceded Aerostar

*Mr. Harrison has been involved in aviation for

several decades. He holds a variety of licenses and

certifications qualifying him to fly hot air balloons and

fixed wing aircraft. Mr. Harrison is a former flight

engineer and co-pilot for Eastern Airlines. He 1s a

licensed FAA Airframe and Powerplant mechanic with

inspection authority. This certification authorizes him

to perform maintenance work on many types of aircraft,

including hot air balloons. He served ten years as an

accident prevention counselor and designated pilot

examiner. (Harrison Dep., Defs.’ Ex. B, at 12-16;

Defs.' Undisputed Facts 43.)

‘Although no suggestion has been made that

Aerostar and Raven have conspired to violate the

antiirust laws, the Court notes that a parent company

and its wholly owned subsidiary are incapable of

conspiring with each other for antitrust purposes.

Copperweld Corp. v. Independence Tube Corp., 467

(continued...)

30a

International in the manufacture of hot air balloons, but

formed Aerostar International in 1986 for the purposes

of undertaking the hot air balloon aspect of the

company's business. (/d. 4] 6.) Raven Industries has not

manufactured hot air balloons since February 1986;

rather, Aerostar International, as its wholly owned

subsidiary, has fulfilled that role. (Compl.§| 14.)

During the 1970s and 1980s, Harrison Aire purchased

hot air balloons for its flight operations from Raven

Industries, and subsequently from Aerostar Industries.

Hot air balloons are comprised of three principal

components: the basket (which contains the balloon's

instruments and occupants); the fuel and heater system

(which produces the hot air); and the envelope (which

contains the hot air). (Compl.{] 10.) With use and age,

balloon envelopes deteriorate, with the top hemisphere

of the envelope deteriorating much more quickly than

the lower hemisphere. (/d. {| 12.) After approximately

300-500 hours of use (actual mileage may vary),

because of this deterioration, at least the upper portion

of the envelope must be replaced in order to continue

piloting safely. (/d.) This replacement typically extends

the life of the envelope for another 200-300 hours. (/d.)

In general, replacement of the fabric in the upper

‘(...continued)

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

31a

hemisphere of the envelope is significantly less costly

than replacement of the entire envelope. Because of

design and wear patterns, replacement of up to 80% of

the envelope fabric (somewhat more thn the top half

ofthe envelope) is generally most practical and

economical. (/d. 4 13.)

B. Federal Regulations Applicable to Hot Air

Ballooning

At the heart of this case are issues regarding

replacement fabrics for the envelope for Raven/Aerostar

hot air balloons. Although these issues were present in

the 1980s, the present case centers on events beginning

in late 1995 or early 1996. Plaintiff needed to buy

replacement fabric for one of its Raven/Aerostar

balloons, and believed the balloon's accompanying

manual restricted its abilities to purchase replacement

fabric. The plaintiff contends that the defendants issued

fraudulent statements that purportedly required the

users and owners of Defendants’ hot air balloons to buy

replacement fabric from the defendants, whose fabric

was more expensive than third-party fabric. The

defendants, on the other hand, assert that federal

regulations did require that owners of Raven/Acrostar

hot air balloons had to purchase replacement fabric

from either Defendants or a limited number of entities

that made replacement fabric in satisfaction of

32a

Defendants’ standards. ‘Thus, in understanding the

regulatory parameters of this case, the Court first sets

out the federal regulations at issue.

1. Manufacturer-Provided Instructions for

Balloon Owners: Instructions for Continued

Airworthiness and Airworthiness Limitations

Section

Ballooning in the United States is regulated by the

Federal Aviation Administration, which has

promulgated regulations-the Federal Aviation

Regulations or the Federal Rules of Aviation (“FARs”)-

that apply inter alia to the replacement of balloon

envelope fabric. The regulations generally require that

major balloon repairs, such as the replacement of

significant areas of envelope fabric, be performed by a

repairman or mechanic certified by the FAA. Since

1980, FAA regulations require balloon manufacturers

to publish a maintenance manual for their product; this

manual is known as “Instructions for Continued

Airworthiness” (“ICA”). 14 C.F.R. § 31.82.7 Section

31.82 provides:

The applicant must prepare Instructions

‘The regulations cited within this section have

been in effect since 1980 or earlier.

33a

for Continued Airworthiness in

accordance with Appendix A to this part

that are acceptable to the Administrator.

The instructions may be incomplete at type

certification if a program exists to ensure

their completion prior to delivery of the

first balloon or issuance of a standard

certificate of airworthiness, whichever

occurs later.

Id. A hot air balloon manufacturer must provide this

model-specific ICA to each purchaser of its product. 14

The aircraft manufacturer holds the “type

certificate” for the aircraft, which constitutes the FAA's

approval of the design of the aircraft. (PI.'s Undisputed

Facts *| 49.) The FARs establish the procedure for

securing type certification for new aircraft designs,

from the manufacturer's own analysis and testing of the

design to the FAA's review of those engineering data

before determining airworthiness. 14C.F.R §§ 21.11-

21.53. “[E]very aircraft that's out there with an

airworthiness that's flying around needs to be type

certificated or receive a type certificate from the FAA,

essentially saying that the design complies with the

airworthiness regulation.” (Michalik Dep., Pl.'s Ex. D

& Defts.’ Ex. G, at 9.)

34a

C.F.R. § 21.50. Section 21.50 provides in pertinent

part:

(b) The holder of a design approval,

including either the type certificate or

supplemental type certificate for an

aircraft ... shall furnish at least one set of

complete Instructions for Continued

Airworthiness, prepared in accordance

with [§ 31.82] to the owner of each type

of aircraft ... upon its delivery, or upon

issuance of the first standard airworthiness

certificate for the affected aircraft,

whichever occurs later, and thereafter

make those instructions available to any

other person required by this chapter to

comply with any of the terms of these

instructions.

Id.

Generally, the maintenance standards and procedures

specified in the ICA are permissive in nature (“FAA

accepted }én that maintenance personnel may substitute

other “FAA accepted” maintenance standards and

procedures. 14C.F.R. § 43.13. Section 43.13 provides

in relevant part:

(a) Each person performing maintenance,

alteration, or preventive maintenance on

an aircraft, engine, propeller, or appliance

shall use the methods, techniques, and

practices prescribed in the current

manufacturer's maintenance manual or

Instructions for Continued Airworthiness

prepared by its manufacturer, or other

methods, techniques, and __ practices

acceptable to the Administrator, except as

noted in § 43.16...

(b) Each person maintaining or altering, or

performing preventive maintenance, shall

do that work in such a manner and use

materials of such a quality, that the

condition of the aircraft, airframe, aircraft

engine, propeller, or appliance worked on

will be at least equal to its original or

properly altered condition ....

Id. (emphasis added).

However, 1f a manufacturer or the FAA chooses to

require a particular maintenance standard or procedure,

that particular standard or procedure must be published

in a separate and distinct portion of the ICA, known as

the Airworthiness Limitations Section (“ALS”). Part

A31.4 of Appendix A to Part 31-Instructions for

36a

Continued Airworthiness defines the ALS portion and

specifies how the manufacturer should present the ALS

to the balloon owner. Part A31.4 reads:

The Instructions for Continued

Airworthiness must contain a section titled

Airworthiness Limitations that is

segregated and clearly distinguishable

from the rest of the document. This

section must set forth each mandatory

replacement time, structural inspection

interval, and related structural inspection

procedure, including envelope structural

integrity, required for type certification. If

the Instructions for Continued

Airworthiness consist of multiple

documents, the section required by this

paragraph must be included in_ the

principal manual. This section must

contain a legible statement in a prominent

location that reads: “The Airworthiness

Limitations section is FAA approved and

specifies maintenance required under § §

43.16 and 91.403 of the Federal Aviation

Regulations.”

Id. (emphasis added). In contrast to an ICA's

maintenance standards, which may be replaced by other

27a

“FAA accepted” maintenance procedures, maintenance

personnel are required to adhere strictly to the

provisions of an Airworthiness Limitations Section, if

one exists. 14 C.F.R. § 43.16. Section 43.16 states in

relevant part, “Each person performing an inspection or

other maintenance specified in an Atrworthiness

Limitations section of a manufacturer's maintenance

manual or Instructions for Continued Airworthiness

shall perform the inspection or other maintenance in

accordance with that section ....” /d.

2. Replacement Parts for Hot Air Balloons

The FAA also has instituted a regulatory scheme that

governs the manufacture and sale of replacement parts.

When the FAA approves an aircraft, it issues a type

certificate under Part 23 of its regulations. 14 C.F.R §

§ 21.11-21.53. For example, as a type certificate would

be for the whole aircraft (e.g., Waligunda Dep., PI.'s Ex.

F, at 21)°, Defendants would hold the type certificate

"Robert Waligunda was a distributor for

Defendants for a number of years. Defendants

terminated him allegedly because he “blew the whistle”

regarding Defendants’ purportedly deceptive manual.

(Waligunda Dep., PI.'s Ex. F, at 66.) Mr. Waligunda is

an experienced hot air balloonist, having been involved

(continued...)

38a

for each of their separate hot air balloon designs. The

FAA must also approve modifications to a particular

aircraft, whether designed by the original manufacturer

or a third-party, after which the FAA issues a

supplemental type certificate (“STC”). 14 C.F.R. §

21.113. An STC would enable its holder to manufacture

a component or a part for a balloon system, e.g., a

balloon envelope. (Waligunda Dep., PI.'s Ex. F, at 20;

DiGiovanni Dep., PI.’s Ex. B, at 26-27.) Any person, in

addition to the original manufacturer, may petition the

FAA for a Parts Manufacturer Approval (“PMA”),

which allows the holderio manufacture and sell specific

replacement parts directly to aircraft owners. 14C.F.R.

§21.303 (“[N]Jo person may produce a modification or

replacement part for sale for installation on a type

certificated product unless it is produced pursuant to a

Parts Manufacturer Approval ....”). A PMA covers a

part, such as the balloon fabric itself. (Waligunda Dep.,

Pl.’s Ex. F, at 21; DiGiovanni Dep., PI.’s Ex. C, at 27-

28.)

The Court concludes that the regulatory language

makes clear the FAA has created a mechanism by which

third-parties can be approved to manufacture and sell

"(...continued)

in the industry for thirty-five years and having logged

over 5000 hours in flight. (/d. at 19-20.)

Wa

replacement parts for hot air balloons. The FARs do

not mandate that replacement fabric has to be of the

same manufacture as the balloon, nor could any

manufacturer impose such a requirement in their ICAs,

given that the ICAs need not be followed strictly by

their owners. The Court presumes that were a hot air

balloon manufacturer to place such restrictions in its

ALS, which is not the case here, the balloon's owner

then would be obligated to follow that language.

In this case, Defendants’ ICA purportedly implied that

only replacement parts approved for use by

Raven/Aerostar could be used in_ repairing

Raven/Aecrostar hot air balloons.’ As stated above,

there is no requirement in the FARs that replacement

“Mr. Waligunda testified that sometime before

May 1982, concerned that its competitors would

produce replacement envelopes for Raven balloons,

Raven allegedly “made [its] manual stronger” by

seemingly telling Raven owners that they had to buy

Raven fabric exclusively. (Waligunda Dep., PI.’s Ex. F,

at 17-19.) Because only the manual's ICA portion was

changed-a non-mandatory section-Raven knew that its

customers would remain technically free to purchase

third-party parts; Raven allegedly hoped, though, that

the limitation would appear mandatory to the

uneducated person. (/d. at 24.)

40a

envelope material be tested in accorcance with the

manufacturer's standards. In fact, before Defendants

even published their ICA, the FAA already had set forth

its own standards for strength and safety, 14 C.F.R. § §

31.21-31.27, which must be met by all manufacturers

and replacement parts manufacturers, including holders

of STCs and PMAs. As the parties have not submitted

copies of Defendants’ ALS and as the parties have

focused their arguments on perceptions surrounding

Defendants’ ICA, the Court presumes that any and all

allegedly offensive, restrictive language is contained tn

the ICA and that there are no restrictions on third-party

fabric whatsoever in Defendants’ ALS.

C. Chronology of Events

1. Plaintiff's Business

Harrison Aire is a corporation which derives its income

from selling hot air balloon rides to members of the

general public. (Harrison Dep., Defs.’ Ex. B, at 28.) In

the late 1970s, Mr. Harrison purchased his first Raven-

made balloon. (Harrison Dep., Pl.'’s Ex. H, at 154.) In

1986, he purchased the “Big Ride” balloon from

Defendants. (Actuarial-Economic Consultants Report,

dla

Pl.'s Ex. A, at 2.)° Since 1986, Plaintiff has had five or

six conversations with Defendants’ agents about the

language in their ICAs restricting third-party fabric,

and each time Defendants responded with the same

“buy our fabric” answer. (Ilarrison Dep., PI.'s Ex. H, at

159-61.) In the late 1980s, having considered the

venture, Mr. Harrison decided not to enter the

replacement fabric business himself. (Harrison Dep.,

Defs.' Ex. D & PI.'s Ex. I, at 48-49.)

Plaintiffs “Big Ride” balloon needed repairs to its

envelope in 1995, which would have extended the life

expectancy of the balloon another ten years. (PI.'s

Undisputed Facts, 4 8; Defs.’ Undisputed Facts 4 8.)

Plaintiff earlier had stockpiled sufficient amounts of

Defendants’ balloon fabric (purchased at 50% of cost

from Raven/Aerostar distributors) for use when any of

his balloon envelopes became unairworthy (Defs.'

Undisputed Facts 4, 7), but had exhausted his stockpiled

resources when his “Big Ride” balloon required repairs.

(/d.% 8; Harrison Dep., Defs.’ Ex. B, at 112-13.)

‘The Court cites this expert report, which is not

sworn testimony but is undisputed in the record, to

connect Plaintiff's retired “Big Ride” balloon to

Defendants. The parties have not identified-and the

Court has not located-any sworn testimony that links

Plaintiff's balloon with Defendants.

4?a

Plaintiff claims it could not afford to purchase

Defendants’ fabric at this time, and instead investigated

buying less-expensive third-party parts. (Harrison

Dep., Defs.’ Ex. C, at 35; Harrison Dep., Defs.’ Ex. D,

at 67.) According to Robert Waligunda, a former

Raven/Aerostar distributor, Defendants’ fabric was

more expensive than any other fabric on the market.

(Waligunda Dep., PI.'s Ex. F, at 67.)

Plaintiff long had criticized Defendants’ ICA for

purportedly implying that only replacement parts

approved for use by Raven/Aerostar could be used in

repairing Raven/Aerostar hot air balloons. In meetings

with Defendants and their representatives, Mr. Harrison

frequently inquired whether this policy had changed

and was repeatedly informed that Defendants’ stance

remained firm. Regarding Plaintiff's interaction with

Raven in_ particular, Mr. Harrison's deposition

proceeded as follows:

Q. What was your particular complaint to Raven then if

you didn't believe it was misleading? What was your

particular complaint?

A. The complaint mwas if-if the manufacturer is

providing or a supplier ts providing the same materia!

to Raven, and it's available directly at half the cost to

someone else, same fabric, and the same factory is

saying, “We make it for Raven, and the same specs

43a

coming off the same mills, the same run, the same

colors and everything. We'll provide it to you directly.”

Q. Would it be - go ahead. You finish.

A. And Raven said, “No. You can't do that.”

Q. Did you ever get any resolution of that issue that you

took with Raven from Raven?

A. No.

(Harrison Dep., Pl.’s Ex. H, at 157-58.) Regarding

Plaintiff's interaction with Aerostar in particular, Mr.

Harrison's deposition proceeded as follows:

Q. When you received your first Aerostar manual, did

it have the same type of provision regarding

replacement fabric that you complained about with

Raven?

A. Yes

(. Do you remember what your specific complaint to

| Aerostar] was?

4. | had two or three items, maintenance items that |

wanted to discuss that | was having problems with.

(hen when I brought those items up, I just want to see

if their position was stil the same on the fabric.... So

there's probably been through the years five or six

conversations that | had over other things, and at the

44a

end | always said, “By the way, has your position on

fabrics changed?”

Q. And the answer was?

A. “As long as you buy the fabric, we don't care what

you do,” basically. The emphasis, “buy the fabric.”

Q. In any event, is it fair to say that you registered the

complaint with Aerostar at its inception or shortly

thereafter, within a year or two, that you did with Raven

and didn't get any change

A. Correct.

Q. Okay. And that particular complaint, and correct me

if I'm wrong, but the particular complaint was that the

manual required you to purchase fabric from Aerostar

or Raven before it and only Aerostar or Raven before

it?

A. Correct.

(/d. at 159-62.)

In 1995, there were only three possible purveyors for

fabric sales: Defendants (the manufacturer); Custom

Nine Designs, run by Ronald DiGiovanni;’ and Head

Balloons;'” these were the only lawful market options

available to Harrison Aire. (Dets.’ Undisputed Facts {|

* 9-10.) Mr. Harrison met with Mr. DiGiovanni in

1995 or 1996 to discuss purchasing replacement fabric

for Plaintiff's Raven/Aerostar balloons. (Ud. 11.)

Plaintiff decided not to purchase Mr. DiGiovarni's

fabric-which was “much cheaper” than Defendants’ own

(Waligunda Dep., PI's Ex. F, at 28)-concluding that any

purchase would conflict with the Defendants’ ICA

restrictions on third-party fabric, even though Plaintiff

knew the FAA had certified Mr. DiGiovanni to produce

and sell Raven/Aerostar fabric. (Defs.’ Undisputed

Facts 4 12-14; Harrison Dep., Dets.’ Ex. B, at 124-

“In 1994, Ron DiGiovanni started Custom Nine

Designs, a competitor of Defendants authorized by the

KAA to sell replacement fabric for certain balloons

manufactured by Defendants. (Waligunda Dep., PI.'s

Ex. F, at 26.) The record inciudes excerpts of Mr.

DiGiovanni's deposition.

Head Balloons joined the market — in

approximately 1984. (West Aff. of Nov. 2003 4 13.)

Hlead Balloons, run by Tarp Head and based in Georgia,

has an STC to produce replacement fabric. (Waligunda

Dep., Pl.’s kx. Fy at 21-22.) There ts no testimony tn the

record from Head Balloons.

tha

28.) Mr. Harrison provided two reasons for not

purchasing Mr. DiGiovanni's fabric, notwithstanding

Mr. DiGiovanni's apparent FAA authorization to sell

the replacement parts: One, that Mr. DiGiovanni could

not confirm that his fabric was “equal to or better” than

Defendants’ fabric, as Mr. Harrison — believed

Defendants’ manual required (Harrison Dep., Defs.’ Ex.

B, at 127); and two, that Mr. DiGiovanni was involved

in a “bait and switch” ruse in which he had secured

FAA approval with one product, but then switched the

product with a substandard “knock off,” selling the

shoddy substitute to unknowing, less discerning

customers (Harrison Dep., Defs.’ Ex. D, at 36-37).

Without replacement fabric, Plaintiff retired the “Big

Ride” balloon in 1996, never to use it again

commercially (Defs.' Undisputed Facts © 17), and

Plaintiff seeks damages for the alleged inability to use

it, due to Defendants’ misconduct.

In 2001 or 2002, Plaintiff noticed that the Defendants’

manual specifically allowed for third-party replacement

fabric, mentioning only that SEC holders (but not PMA

holders) may repair Raven/Acrostar hot air balloons.

(PI.'s Undisputed Facts 4 35.)"'

‘According to Plaintiffs Statement = of

(continued...)

2. Defendants' Business

Defendants manufacture and sell hot air balloons, cold

air inflatables, helium inflatables, remote control

blimps, inflatable costumes and mascots, and specialty

sewn products. http://www.aerostar.com. In 1981,

Raven first made replacement fabric specifically for a

competitor's balloon. (Waligunda Dep., PI.'s Ex. F, at

(continued)

Undisputed Facts, “{Mr.] Harrison has testified that he

did not realize that he was not required to use Aerostar

fabric until {Mr.} DiGiovanni told him about the result

in Braden's [Bailoons].” (ld.% 84.) Braden's Balloons

is discussed below at Section II.-C.3. However, the

Court notes that Plaintiff fails to cite any testimonial

evidence supporting this contention, and upon

independently reviewing the excerpts of Mr. Harrison's

depositions submitted to the Court, the Court concludes

that the record does not support this assertion.

Notwithstanding this discrepancy, the relevant date for

purposes of this Motion, as discussed below in the

“Statute of Limitations” section, is the date on which

Defendants removed their allegedly restrictive ICA

language and not the date on which Plaintiff actually

learned about third-party fabric alternatives.

48a

11.)'° In 1982, Raven introduced new language into its

balloon owners’ manual that required owners either to

buy replacement fabric from Raven itself or to secure

Raven's approval in advance if purchasing third-party

fabric. (Waligunda Dep., Pl.'s Ex. F, at 18-19.)

Plaintiff complained to Raven, some time before 1986,

about the ICA language. (Harrison Dep., P1.'s Ex. H, at

156-58.) Raven formed Acrostar International in 1986

for the purposes of taking over the hot air balloon

aspect of Raven's business. Raven Industries has not

manufactured hot air balloons since February 1986;

rather, Aerostar International, as its wholly owned

subsidiary, has fulfilled that role. (Compl.414.) After

the inception of Aerostar, the Defendants’ ICA language

read as follows:

WARNING

Only fabric which has been tested and

approved according to AEROSTAR

(Raven) factory standards may be used tor

repair of AEROSTAR (Raven) envelopes.

The parties dispute whether Raven's decision

conflicted witha gentlemen's agreement among balloon

manufacturers not to produce replacement parts for a

competitor’s product. (PL.’s Mem. at 5; Dets.’ Reply

Mem. at 4; see also Waligunda Dep., PL’s kx. FF, at 13.)

49a

Failure to comply with this requirement

constitutes a departure from type design

and renders the balloon unairworthy.

(Defs.' Supplemental Ex. B.)'’

In 1993, Defendants revised the language in their ICAs.

(West Aff. of Nov. 2003 49.) In 1993, the ICA

language read as follows, in pertinent part:

6.0 STANDARD PROCEDURES FOR

REPAIR AND REPLACEMENT

WARNING

Improper repairs will render the

aircraft unairworthy until repaired

properly.

Likewise, repair/replacement

materials must be obtained

from Aerostar to. be

considered a “certified part”.

In the event that repair

materials are obtained, the

supplying company or the

repair station performing the

repair must act to “certify”

‘See supra text accompanying note 7

SOla

the material and part as equal

to or better than the original

equipment."

6.1.2 Fabric Repair and Replacement

WARNING

Only fabric which has been tested and

approved according to AEROSTAR

(Raven) factory standards may be used

for repair of AEROSTAR (Raven)

envelopes. Failure to comply with this

requirement constitutes a departure

It appears obvious that the two sentences in this

paragraph are contradictory. In 1995, the second

sentence of this paragraph was changed to read, “In the

event that non-Aerostar repair materials are obtained

elsewhere, the supplying company or the repair station

performing the repair must act to ‘certify’ the material

and part as equal to or better than the original

equipment.” (West Aff. of Nov. 20034 9 & Ex. B.)

Even with the correction, these two sentences reniain

contradictory.

from type design and renders the

balloon unairworthy.

Note

Fabric replacement is normally limited to

35% of the surface area of the envelope

within a period of 100 flight hours or one

year, (whichever comes first), except for

additional minor patches and _ repairs.

Deviation from this procedure up to 65%

total fabric replacement may be approved

after consultation with the AEROSTAR

(Raven) factory. Such extensive

replacement may only be undertaken if

approved in writing by AEROSTAR

(Raven). To protect the integrity of

manufacturers’ type designs, “100%

rebuilding” of balloon envelopes is

expressly prohibited according to FAR

43.13.

FOR APPROVAL TO REPLACE MORE

THAN 35% OF THE ENVELOPE

FABRIC, please contact:

Dee M. Rose

Aerostar International, Inc.

52a

Customer Service

1812 “kL” Avenue, PO Box 5057

Sioux Falls, SD 57117-5057

605/331-3500 Fax 605/331-2547

(Dets.’ Supplemental Ex. C.)

According to Plaintiff, Defendants again changed their

ICA language in 2001, removing the language that

required Defendants’ permission before replacing more

than 35% of the envelope fabric and the “WARNING”

that failure to use fabric which has been tested and

approved according to Aerostar factory standards would

make the balloon unairworthy. (PI.'s Mem. Opp'n

Summ. J. at 13.)

3. Braden's Balloons and Ronald DiGiovanni

In 1996, Braden’s Balloons Aloft, inc., an FAA-

approved repair station, replaced between 54% and 64%

of a Raven/Aerostar balloon's envelope fabric with

material from Custom Nine Designs without first

obtaining Defendants’ written permission. /n re

Braden's Balloons Aloft, Inc.. FAA Docket No.

CP99SWO037, at *1 (Wluly 26, 2000) (Defs." Ex. O)

[hereinafter Braden's Balloons}. The FAA prosecuted

Braden's in an administrative civil penalty action, on the

theory that Braden's had violated various regulations by

S3a

failing to follow Defendants’ ICA requirement that

maintenance personnel secure written permission betore

performing the replacement. Even though Mr.

DiGiovanni, President of Custom Nine Designs, has no

formal legal training, Mr. DiGiovanni represented

Braden’s in the administrative action.

The Administrative Law Judge dismissed the FAA's

complaint, concluding that the FAA had failed to allege

facts that, if proved, would have established the

elements of the violations of the FARs with which

Braden's had been cited. For example, the FAA

complained that Braden's failed to comply with

Defendants’ ICA by replacing the envelope fabric

without Defendants’ permission, but the FAA had failed

to allege that Braden's replaced the fabric in a manner

not otherwise acceptable to the FAA, a fatal pleading

detect considering that procedures listed in a balloon's

ICA (unlike those in the balloon's ALS) may be

substituted for other FAA-accepted methods. Braden's

Balloons, supra, at *6. In his opinion supporting

dismissal, the ALJ observed:

[ lhe Complaint lists an alleged violation

of FAR § 43.16. This section requires

that, if one performs an inspection or

maintenance specified in an Airworthiness

Limitations section of a manufacturer's

Sta

maintenance manual or Instructions for

Continued Airworthiness, such = an

inspection or maintenance must conform

to that Airworthiness Limitations section.

Thus, unless the requirement that Braden's

receive written permission for the

extensive envelope repair it performed on

N57199, is contained tn the Airworthiness

Limitations section of the maintenance

manual or Instructions Continued

Airworthiness promulgated by Acrostar

(Raven), Braden's would not be required

to comply with such a requirement.

The Complaint does not state whether or

not such a requirement ts contained in the

Airworthiness Limitations section of the

maintenance manual or the Instructions for

Continued Airworthiness. It merely states

that such a requirement is a part of the

Instructions for Continued Airworthiness,

without making clear, one way or another,

whether it is specifically located in the

Airworthiness Limitations Section. The

difference 1s important, as whether it 1s

required or not hinges on its location. If

located within the Airworthiness

Limitations section, it is approved by the

Administrator and a person performing an

SSa

inspection or maintenance must follow its

prescription. See 14 C.F.R. Part 31, App.

A, § <A31.4. However, if not located

within the Airworthiness Limitations’

section, the inspection and maintenance

information is only accepted by the

Administrator, and there is no requirement

to follow the manufacturer's instructions.

A deviation from those instructions will

not result ina violation in § 43.16 so long

as the inspection or maintenance falls

under the “other methods, techniques, and

practices acceptable to the Administrator”

language of FAR § 43.13(a). Because the

Complaint fails to specifically allege that

the requirement, that Braden's consult with

Aerostar (Raven) prior to performing the

fabric replacement, ts found in_ the

Airworthiness Limitations section of the

Aerostar (Raven) Instructions for

Continued Airworthiness, this claim must

also fail.

(Braden's

removed).

Balloons, supra, at *7-8) (emphasis

Defendants downplay the relevance and

applicability of Braden's Balloons to the instant case by

referring to Braden's Balloons as an “irrelevant,”

“unrelated, insignificant administrative action.” (Defs.’

S6a

Reply Br. at 5 & n. 2.) While the Court recognizes that

the ALJ dismissed the case for defects within the

pleadings, it is important to note the distinction which

the ALJ made between the mandatory Airworthiness

Limitations Section (ALS), and the Instructions for

Continued Airworthiness, which may be substituted by

alternate methods, techniques, and practices acceptable

te the Administrater. As explained below, this

distinction ts of great relevance to the claims and issues

presented in this case.

Mr. DiGiovanni had taken it upon himself to inform the

ballooning community of the case's result and of his

interpretation of the case's precedential value, most

notably through his privately maintained website, http:/

home.earthlink.net/~aironon, which chronicles the

Braden's Balloons saga. In a September 7, 2000

response to Mr. DiGiovanni's trumpeting, Defendants

made the following representation in a letter to

Raven/Acrostar owners:

We are extremely concerned with the

recent mailing which claims that the ruling

in FAA v. Bradens “effectively nullifies

the Aerostar Instructions for Continued

Airworthiness manual.” This is patently

false and seems to suggest ignoring the

Airworthiness Manual which would pose

S7a

possible significant risk to balloon owners,

operators and passengers. The ruling in

this case was, simply, that the FAA had

not met the correct technical pleading

requirements in its complaint and,

accordingly, the complaint was dismissed.

The ruling did not nullify the Aerostar

Instructions for Continued Airworthiness

manual and we urge you to follow the

procedures contained in the manual as

well as all applicable FAA rules and

directives. We have been in contact with

various offices within the FAA and have

heir full agreement, based on the FAR's

and the requirements within the FAA Type

Certificate Data Sheet that “all

inspections, repairs, and replacements

must be accomplished in accordance with

the latest issue of Aerostar Instructions for

Continued Airworthiness.”

(Pi.'.s Mem. Opp'n Summ. J. at 14-15, emphasis

removed; also available at

http://home.earthlink.net/~airoron/new page 8Q.htm.)

According to Plaintiff, Mr. Harrison has testified that he

did not realize he was not required to use Aerostar

S8a

fabric until Mr. DiGiovanni told him about the result in

Braden's Balloons. (P\.'s Undisputed Facts 4} 84.)'”

According to Plaintiff, Defendants changed their ICA

language in 2001, removing the language that required

Defendants’ permission before replacing more than 35%

ofthe envelope fabric and the “WARNING” that failure

to use fabric which has been tested and approved

according to Aerostar factory standards would make the

balloon unairworthy. (/d. at 13.) Plaintiff suggests that

Defendants undertook these revisions at the stern

request of the FAA, supposedly “stung by the result in

Braden's ” and “prodded unmercifully by Custom

Nine.” (/d., citing Michalik Dep., Pl.'s Ex. D, at 72.)

Il. Plaintiff's Allegations

Plaintiff brings four counts against Defendants

(Antitrust-Monopolization; Antitrust-Tying

Arrangement; Fraud; and Negligence). As stated

above, Plaintiff is a corporation that derives its income

from selling hot air balloon rides to the public. Plaintiff

alleges that Raven Industries consciously developed

and implemented severa! schemes to deceive balloon

owners and to convince them that federal law required

the exclusive use of Raven Industries fabric in the

Iso .

See supra text accompanying note 11.

59a

repair and replacement of hot air balloon envelopes

originally purchased from Raven. (Compl. 4 19; see

also Waligunda Dep., PI.'s Ex. F, at 24-25.) Plaintuff

alleges that after its incorporation, Aerostar

International assumed continued responsibility for

implementing and maintaining the original schemes,

with the full knowledge, participation, and consent of

the directors and officers of Raven, its parent

corporation. (Compl.§| 19.) Asa direct and proximate

result of Defendants’ behavior (to be detailed below),

Plaintiff claims it could not afford to purchase

replacement envelope fabric directly from Defendants

for one of its hot air balloons-its “big ride” balloon-and

was therefore unable to utilize that particular balloon

commercially after 1996. (/d. 4 28.) Plaintiff

apparently could have afforded to replace the envelope

fabric had Plaintiff thought it was permitted to use

third-party fabric, and Plaintiff contends that it would

have indeed purchased the third-party fabric if the

defendants had not implemented the scheme described

above. (/d. 4 29.) Plaintiff claims economic losses

totaling $35,000 per year (at least) from 1996

continuing through the present. (/d. 4 30; Actuarial-

Economic Consultants Report, Pl.'s Ex. A.)

60a

A. Defendants’ Alleged Schenies

In its complaint, Plaintiff describes three schemes

purportedly undertaken by Defendants that constitute a

violation of federal antitrust law.

1. Scheme One

According to Plaintiff, Raven Industries officers

expressed their interest and desire in controlling the

replacement fabric market at various meetings between

Raven Industries and its distributors during the 1980s.

At one meeting, shortly before Raven Industries created

Acrostar International, Raven Industries officers

allegedly advised the attendees, among whom was at

least one distributor, that its maintenance manual

(“Instructions for Continued Airworthiness” or “ICA”)

would be changed in order to control the replacement

fabric market. (Compl. | 20.B; see also Waligunda

Dep., Pl.'s Ex. F, at 14-19.)

Plaintiff avers that Raven Industries deliberately

inserted language into its ICA that appeared to require

balloon owners either to use only Raven/Aerostar

replacement fabric or to secure Raven/Aerostar

approval before obtaining replacement fabric elsewhere.

Plaintiff contends that at this meeting, at least one

distributor in attendance raised concerns that the

61a

proposed manual language would run afoul of federal

antitrust laws, and that Raven Industries officers replied

that the inserted language would simply “imply” that

federai regulations required the owners to use Raven

replacement fabric. (Compl. {| 20.C; see also

Waligunda Dep., PI.'’s ox. F, at 23-25.) These officers

allegedly told the attendees that because the inserted

language appeared tn the ICA (which would not require

strict compliance), and not in the Airworthiness

Limitations Section (which would have required strict

compliance), there would be no actual antitrust

violation. (/d.) Plaintiff claims that this scheme was

implemented in 1986, ten days after the incorporation

of Aerostar International.

As stated above, Section 43.13 of the FARs requires

that with limited exceptions, all repairs of any type be

performed consistent with the ICA. That ts, according

to this FAR, a hot air balloon repairman should follow

the methods listed in the manufacturer's ICA or an

alternative method acceptable to the FAA. 14 C.F.R.§

43.13. Furthermore, this FAR directs a hot air balloon

repairman to use materials that equal or surpass the

manufacturer-supplied originals in order to create a

(repaired) balloon that will be at least equal to its

original condition. /d.

62a

The parties do not dispute that the FAA has regulated

the repairs of hot air balloons. (Tr. at 18.) What the

parties do dispute, and what centrally defines Plaintiff's

action against Defendants, is whether Defendants acted

appropriately in 1993 and 1995 (see supra pp. 14-16

and notes 7 & 13) by inserting language that required

Raven/Aerostar balloon owners either to use

Defendants’ own fabric in repairs or to secure

Defendants’ written permission before using third-party

fabric. According to Plaintiff, nothing in the FARs

requires a balloon owner to use the manufacturer's own

fabric in repairs or to secure the manufacturer's written

approval before using third-party fabric. (Compl.

20.F.) Plaintiff criticizes Defendants’ WARNING

language, which specified that, under penalty of

unairworthiness, Raven/ Aerostar factory standards were

to be applied when testing third-party fabric, especially

since the FAA regulations provide separate standards

for strength and safety, 14 C.F.R. § § 31.21-31.27,

which must be met by all manufacturers and

replacement parts manufacturers, including holders of

STCs and PMAs.

Plaintiff further contends that Defendants inserted

language that appeared to require, at penalty of

violation of law, that owners get specific approval from

Defendants in advance before replacing more than 35°%

of envelope fabric, and which prohibited replacement of

63a

more than 65% of envelope fabric without the

defendants’ approval. (Compl.£20_E.) Plaintiff alleges

that Defendants had arranged the language in such a

manner, and with such authority, that it reasonably

appeared to balloon owners that federal law and

regulations required compliance with these restrictions

on envelope fabric replacement. (/d. 420.G.)

According to Plaintiff, Defendants purposely misled

Mr. Harrison-and, by implication, all other

Raven/Aerostar balloon owners (see, e.g., Waligunda

Dep., Pl.'s Ex. F, at 25)-regarding his nghts and

alternatives on the matter of repairing envelope fabric

for Raven/Aerostar balloons. Plaintiff contends that in

practice, and in furtherance of the foregoing scheme,

Defendants refused to approve any replacement that did

not utilize Raven/Aerostar fabric. (Compl 420.H.) In

order to reinforce its deception of fabric purchasers,

Defendants allegedly contacted FAA officials and

persuaded them to initiate the administrative

prosecution ofa certified repairman (Braden's Balloons

Aloft, Inc.), who had failed to obtain Defendants’ pre-

approval before replacing more than 35% of a balloon

envelope's fabric. (/d. 420.1.)

64a

2. Schemes Two and Three

Next, as Plaintiff contends, in order to deal with balloon

owners and repairmen not fooled by the foregoing

scheme, Defendants’ manuals required that third-party

fabric be subjected to highly-destructive “tear testing”

before the fabric could be used as replacement fabric on

Defendants’ balloons; this fabric was later subjected to

the same testing procedure annually. (/d. 4 20.J.)

Defendants allegedly did not require their own fabric to

undergo such testing until it had nearly reached the end

of its useful life. (/d.) Because the test procedure

required that relatively large pieces of fabric be

removed for testing and then replaced, both the labor

costs involved and the resulting unsightly patches in the

envelope deterred owners and repairmen from using

third-party fabric, and increased the probability that

Aerostar International fabric would be used in the

replacement process. (/d.)

Third, in order to discourage balloon owners from

purchasing third-party fabric, Defendants allegedly

defamed at least one third-party manufacturer (Custom

Nine Designs, Inc.) by publishing an article in their

newsletter reporting fabric strength tests purportedly

demonstrating that Custom Nine Designs fabric was

unsuitable for use in Raven/Acrostar envelopes. (/d. 4

20.K.) Plaintiff contends that Defendants knew their

65a

article was untrue and that Defendants refused to retract

or correct the story even when its falsity was brought to

their attention. (/d.)'°

The parties have not developed their contentions

regarding Schemes Two and Three in the summary

judgment context. Plaintiff does not even explain how

these acts would constitute antitrust violations.

Therefore, for purposes of this Memorandum, the Court

mentions these schemes in the interest of describing

Plaintiff's allegations in the entirety, but will focus

predominantly on Scheme One, finding that the parties

have largely ignored Schemes Two and Three.

In either 1999 or 2000, Defendants published

their testing standards for fabric in their manual. (West

Dep., Pl.'s Ex. G, at 131.) Defendants started subjecting

competitors’ fabric along with their own to these newly

announced testing standards, and published the results

in a newsletter mailed to Raven/Aerostar owners in

either 1999 or 2000. (/d.) A typo in the newsletter

misrepresented the results for fabric produced by Ron

DiGiovanni and Custom Nine Designs and indicated

that that fabric is unsafe for use with Raven/Aerostar

balloons. Defendants claims they corrected any error

by subsequently ma'!'ng a correction letter to the same

mailing list three r «» vas later. (West Aff. of Jan. 2004

4 5.)

66a

B. Plaintiff's Counts Against Defendants

1. Count One: Antitrust-Monopolization

Plaintiff asserts that Defendants possessed monopoly

power in the Raven/Aerostar hot air balloon

replacement fabric market in the United States.

(Comp!.432.) Inthe alternative, even if Defendants had

not actually possessed monopoly power tn the relevant

market, their acts were intended as an attempt to

monopolize the Raven/Aerostar envelope replacement

fabric market. (/d. 934.) Defendants’ alleged acts

supposediy constituted impermissible exclusionary

practices under Section 2 of the Sherman Act, practices

which were designed by Defendants to strengthen and

to perpetuate their monopoly position. According to

Plaintiff, Defendants’ acts directly and proximately

restrained trade, and directly and proximately caused

Plaintiff's damages.

2. Count Two: Antitrust-Tying Arrangement

According to Plaintifi, Defendants possessed monopoly

power in the market for the tying product (1.¢., hot air

balloons) and used this moncpoly power to restrain

trade in the tied product (i.e., replacement fabric for

balloon envelopes). (CompI.438.) This alleged tying

67a

arrangement supposedly substantially affected-and

continues to affect-interstate commerce. (/d. 439.)

Defendants’ acts, as alleged, directly and proximately

restrained trade, and directly and proximately caused

Plaintiff's damages. (/d. { 940, 42.)

3. Count Three: Fraud

Defendants allegedly intended that Plaintiff and all

other Aerostar International balloon owners rely upon

these supposed misrepresentations. (Compl.4/44.)

Plaintiff contends that it justifiably relied upon these

misrepresentations, and that its damages were a direct

and proximate result of its ‘ustifiable reliance upon the

misrepresentations. (/d. 4 445-46.) Additionally, as

represented by Plaintiff, Defendants’ conduct was

outrageous and warrants the imposition of punitive

damages. (/d. $47 )

4. Count Four: Negligence

Plaintiff alleges that Defendants’ conduct was negligent

and that its damages were a direct and proximate result

of said negligence, (Compl.4| £49-50.)

6Xa

IV. Defendants’ Motion for Summary Judgment

Defendants have moved for summary judgment.

Summary judgment is appropriate “if the pleadings,

depositions, answers to interrogatories, and admissions

on file, together with the affidavits, if any, show that

there is no genuine tssue as to any material fact and that

the moving party is entitled to a judgment as a matter of

law.” FED. R. CIV. P. 56(c). An issue ts “genuine” if

the evidence ts such that a reasonable jury could return

a verdict for the non-moving party. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91

L.Ed.2d 202 (1986). A factual dispute is “material” if

it might affect the outcome of the case under governing

law. dd.

A party seeking summary judgment always bears the

initial responsibility for informing the district court of

the basis for its motion and identifying those portions of

the record tha it believes demonstrate th. absence of a

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

477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265

(1986). Where the non-moving party bears the burden

of proof on a particular issue at trial, the moving party's

initial burden can be met simply by “pointing out to the

district court that there is an absence of evidence to

support the non-moving party's case.” /d. at 325, 106

69a

S.Ct. 2548. After the moving party has met its initial

burden, “the adverse party's response, by affidavits or as

otherwise provided in this rule, must set forth specific

facts showing that there is a genuine issue for trial.”

FED. R. CIV. P. 56(e). Summary judgment is

appropriate if the non-moving party fails to rebut by

making a factual showing “sufficient to establish the

existence of an element essential to that party's case,

and on which that party will bear the burden of proof at

trial.” Celotex, 477 U.S. at 322, 106 S.Ct. 2548. Under

Rule 56, the Court must view the evidence presented on

the motion in the light most favorable to the opposing

party. Anderson, 477 U.S. at 255, 106 S.Ct. 2505.

Defendants move for summary judgment on three

grounds. One: Defendants contend that Plaintiff's

antitrust claim is barred by the four-year statute of

limitations applicable to antitrust claims. Two:

Defendants claim that summary judgment is warranted

upon application of implied immunity to Plaintiff's

antitrust claims. Three: Defendants argue that Plaintiff

cannot succeed in proving the requisite elements for its

antitrust, fraud, or negligence claims, thus justifying

summary judgment against Plaintiff. The Court will

discuss these arguments seriatim.

70a

A. First Argument: Statute of Limitations

1. Parties' Contentions

A plaintiff's claim 1s viable under the federal antitrust

provisions only if suit is “commenced within four years

after the cause of action accrued,” 15 U.S.C. § 15(b),

plus any additional number of years during which the

statute of limitations is tolled. Zenith Radio Corp. v.

Hazeltine Research, Inc., 401 U.S. 321, 338, 91 S.Ct.

795, 28 L.Ed.2d 77 (1971). Generally, a cause of action

accrues and the statute begins to run when a defendant

commits an act that injures a plaintiff's business. /d.

According to Defendants, the four-year limitations

period commenced in 1996 when Plaintiff's “big ride”

balloon was no longer in service and its commercial

losses began to accrue.

Defendants note that Plaintiff did not file its complaint

until March 2002, almost six years beyond the time

Plaintiff claims to have first suffered a loss. Moreover,

Defendants contend that Plaintiff's actual knowledge

about the source of any losses-i.c., the “restrictive”

manual-well predated the retirement of the big ride

balloon. Defendants state that Mr. Harrison repeatedly

expressed his complaints about the Raven/Aerostar

ianguage in the 1970s, 1980s, and 1990s, and contend

that Mr. Harrison should not now be heard regarding -

Tla

damages that would have begun accruing in 1995 and

1996. Further, Defendants argue that given his 1995-

1996 visit with its competitor for replacement fabric,

Custom Nine Designs, Inc. and Mr. Harrison's general

familiarity with the FARs, Plaintiff clearly knew or

should have known its legal avenues for fabric

replacement as set forth within the FARs.

Defendants emphasize that Mr. Harrison testified that in

the late 1980s, he contemplated going into business as

a manufacturer of replacement fabric, but did not do so,

at least in part duc to the allegedly restrictive language

within Defendants' ICA. Mr. Harrison opted not to

pursue that venture believing that he could not

effectively compete with Defendants for business.

(Harrison Dep., Defs.’ Ex. D & PI.'s Ex. I, at 48-49.)

With Mr. Harrison's longstanding knowledge of

Defendants’ stance on replacement fabric, Defendants

contend that Plaintiff's Complaint-filed more than six

years after the retirement of the big ride balloon and

decades after his complaints and aborted enterprise-

must be dismissed as untimely. Moreover, Mr.

Harrison conceded that certain language in Aerostar's

ICA indicates that balloon owners could purchase

replacement fabric from third-party sources provided

that the third-party held an STC or a PMA," and Mr.

Harrison testified that such language would imply that

third-party fabric, if so certified, was acceptable.

(Harrison Dep., Defs.’ Ex. B & PI.'s Ex. H, at 164-65.)

While Mr. Harrison stated that he did not first notice

this language until 2003, Defendants argue that such

language had been printed tn their ICA as early as 1993,

thus placing Mr. Harrison on constructive notice since

that time. Defendants conclude that Mr. Harrison had

everything necessary to pursue his claim in 1996.

Plaintiff alleges that Defendants engaged in fraudulent

misrepresentation; to succeed on this claim, Plaintiff

must demonstrate that Defendants fraudulently

concealed their own unlawful activities and that

Plaintiff did not discover these facts despite the exercise

of due diligence. E.g., /n re Linerboard Antitrust Litig.,

203 F.R.D. 197 (E.D.Pa.2001). Plaintiff claims that

equitable tolling applies and would have extended

'"As explained above at pages 7-8, a hot'air

balloon envelope can only be repaired with FAA

approved replacement parts (fabric falls under the

category of “parts”) from either: (a) the manufacturer

of the product; (b) the holder of a Supplemental Type

Certificate (“STC”); or (c) an entity with Parts

Manufacturing Approval (“PMA”). 14 C.F.R. §

21.303.

73a

Plaintiff's deacline for suit past its original date.

Defendants disagree, arguing that Plaintiff's pre-

existing knowledge of the allegedly wrongful conduc!

defeats its attempt to establish equitable tolling.

Defendants also emphasize that Plaintiff failed to

exercise any form of due diligence to pursue the alleged

wrong. Plaintiff supposedly did nothing between 1996

and 2002 to pursue its legal remedies following the loss

of use of his “big ride” balloon and his alleged inability

to have it repai~ed, notwithstanding his longstanding

complaints about the manufacturers’ language,

notwithstanding changes in the Aerostar ICA which

alerted the owner to the validity of other replacements,

and notwithstanding Mr. Harrison's knowledge of, and

access to, the federal regulations that govern this field.

Defendants claim there were no efforts to seek redress

with calls to the manufacturer, no calls to the FAA, no

independent research, no calls for any form of legal

representation or advice. Defendants also argue that

Plaintiff cannot display any active conduct by the

Defendants which would reveal fraudulent concealment

or an intention to mislead. Defendants contend that

Plaintiff cannot cite one conversation with the

defendants, one passage of deposition testimony, one

documert, or any other evidence that bespeaks

fraudulent intentions.

74a

2. Analysis

Generally, a cause of action accrues-and the statute of

limitations begins to run-when a defendant commits an

act that injures a plaintiff. In the context of a

continuing antitrust violation, each time a plaintiff is

injured by the act of the defendant, a cause of action

accrues to the plaintiff to recover damages caused by

that act.

However, a suit may be brought more than

four years after the events that initially

created the cause of action if the defendant

commits “an act that by its very nature

constitutes a ‘continuing antitrust

violation.’ ” Zenith Radio Corp. v.

Hazeltine Research, Inc., 401 U.S. 321,

338 n. 2, 91 S.Ct. 795, 28 L.Ed.2d T7

(1971). An act constitutes a “continuing

antitrust violation” if it injures the plaintiff

over a period of time. See Hanover Shoe,

Inc. v. United Shoe Machinery Corp., 392

U.S. 481, 502 n. 5, 88 S.Ct. 2224, 20

L.Ed.2d 1231 (1968). Antitrust law

provides that in the case of a continuing

antitrust violation each overt act that 1s

part of the violation and that injures the

plaintiff, “starts the statutory period

\

75a

running again, regardless of the plaintiff's

kr . ‘edge of the alleged illegality at

mu... earlier times.” Klehr v. A.O. Smith

Corp., 521 U.S. 179, 189, 117 S.Ct. 1984,

138 L.Ed.2d 373 (1997); see also

Hanover Shoe, 392 U.S. at 502, 88 S.Ct.

2224.

In re Linerboard Antitrust Litig., MDL No. 1261, 2000

WL 1475559, at *4, 2000 U.S. Dist. LEXIS 14433, at

*16-17 (E.D.Pa. Oct. 5, 2000).

[A] new cause of action may arise from

later overt acts in furtherance of a

challenged conspiracy or from each injury

resulting from a continuing violation.

However, to trigger a new cycle of the

limitations period, the overt act must

specifically affect the plaintiff and not be

merely a continuation of the conspiracy. If

the plaintiff suffered injury at the

beginning of the continuing conspiracy but

not thereaiter, the plaintiff may not enjoy

the benefits of an extended limitations

period.

76a

ABASECTION OF ANTITRUST LAW, ANTITRUST

LAW DEVELOPMENTS 893-94 (Sth ed.2002)

(footnotes omitted) [hereinafter ABA ANTITRUST].

Defendants thoroughly chronicle Plaintiff's actions

since the 1970s that potentially indicate Plaintiff's

longstanding awareness of any allegedly offensive

behavior, and Defendants essentially argue that

Plaintiffs claim should not be considered timely

considering its decades-old knowledge of the offending

behavior and overall inactivity until only recently.

(Harrison Dep., Defs.’ Ex. B & PI.'s Ex. H, at 150-54,

156-58, 159-62; Harrison Dep., Defs.' Ex. D & PI.'s Ex.

I, at 43-44, 46, 47-48.) Defendants claim that in 1993,

their ICA first alerted balloon owners that they could

purchase third-party replacement fabric instead of

directly from Raven/Aerostar. Therefore, even though

Mr. Harrison testified that he had not read this language

until 2003, Defendants argue that Plaintiff had been on

notice of its expanded alternatives for nearly ten years

before filing this suit. In 1993, a portion of the relevant

ICA language read, “[R]epair/replacement materials

must be obtatned from Aerostar to be considered a

‘certified part’. In the event the: repair materials are

obtained, the supplying company or the repair station

performing the repair must act to ‘certify’ the material

and part as equal to or better than the original

equipment.” (Defs.’ Supplemental Ex. C.) The Court

cannot conclude that this language necessarily placed

Raven/Aerostar balloon owners on notice that they

could purchase third-party replacement fabric, given

that the first and second sentences appear to contradict

each other. As Defendants point out, balloon owners

are notified that third-party fabric must be certified

before use, thus indicating that third-party fabric is

acceptable material; however, the preceding sentence

states that only materials supplied by Defendants are

considered certified. Given that the Court must give the

benefit of the doubt to Plaintiff, as the non-moving

party, the Court cannot conclude as a matier of law that

this language placed Plaintiff and other Raven/Acrostar

balloon owners on notice regarding their ability to

purchase third-party fabric.

Here, Plaintiff has presented facts that Defendants’

predatory acts continued unabated through 2001, at

which time Defendants changed the ICA language.

According to Plaintiff, it has been harmed by

Defendants’ antitrust activity continuously until the ICA

change, because the company has lost income which it

otherwise would have earned had Plaintiff repaired its

most profitable balloon.'* It is undisputed between the

“Had Plaintiff repaired its “big ride” balloon, the

balloon would have remained aloft and commercially

(continued...)

78a

parties that the written change allegedly removing the

language offensive to Plaintiff occurred in 2001. Given

that Plaintiff filed the instant suit less than four years

following Defendants’ rewriting of the ICA, there is an

issue of fact for trial as to whether the applicable statute

of limitations had expired.

In light of case law such as Linerboard and Klehr,

supra, which held that, in the context of a continuing

antitrust violation, each overt act starts the statutory

period running again “regardless of the plaintiff's

knowledge of the alleged illegality at much earlier

times,” Linerboard, 2000 WL 1475559, at *4, 2000

U.S. Dist. LEXIS 14433, at *17, even though Plaintiff

might have realized that it suffered injury each year,

assuming Plaintiff filed this case within four years of its

last alleged injury, its case is timely and the statute of

limitations will not bar these claims from continuing.

The Court cannot resolve this issue as a matter of law at

this time. Thus, summary judgment will be denied on

these grounds.

'X(...continued) ;

viable until 2006, its next anticipated repair date.

Plaintiff has submitted 2a expert report that details the

company's economic losses following the retirement of

its “big ride” balloon. (Actuarial-Economic

Consultants Report, Pl.'s Ex. A.)

79a

B. Second Argument: Implied Immunity

1. Parties' Contentions

The doctrine of implied immunity arises where an

alleged violator of the law has acted pursuant to

congressional or regulatory authority that conflicts with

conduct alleged to be in violation of the antitrust laws.

See generally ABA ANTITRUST, supra, at 1238-40.

Because the hot air balloon industry is heavily

regulated, Defendants argue that their actions and

activities undertaken pursuant to congressional or

regulatory authority should be entitled to implied

immunity from the federal antitrust laws. Defendants

‘assert they developed their ICAs jointly with the FAA,

as they were obligated to do by operation of FAA

guidelines, and each successive year after this initial

acceptance by the FAA, the ICA remained subject to

FAA oversight.

In developing and maintaining their ICAs pursuant to

the direct obligation imposed by the FAA, and having

worked both with and under the direction of the FAA in

creating their ICAs, Defendants contend that they

cannot now be held liable in antitrust. At a minimum,

Defendants claim they had a reasonable belief that their

actions vis-a-vis Plaintiff were appropriate if not

80a

necessary in complying with regulatory and

administrative mandates, confirmed by the FAA itself.

According to Defendants, to hold them accountable in

antitrust would subject them to severe liability for

conduct they took in order to ensure aviation safety for

hot air ballooning.

2. Analysis

This case features the friction that occasionally arises

when Congress establishes a regulatory regime which

appears inconsistent with the vigorous competition also

mandated by Congressional statutes. An express

exemption to antitrust liability exists wherever

Congress explicitly states that the antitrust laws will not

apply to the conduct authorized by the legislation, either

in general, or under the specific circumstances

enumerated in the legislation. See generally ABA

ANTITRUST, supra, at 1238. By contrast, where a

Congressional statute mandates certain behavior, but

omits to exempt the behavior expressly from the

purview of the antitrust laws, an exemption might need

to be implied in order to preserve Congress's regulatory

intentions. /d. In this case, where the relevant statutes

contain no express exemption, Defendants argue that

this Court should find that the regulations that

Sla

mandated their conduct, now challenged by Plaintiff

contain an implied exemption that would insulate

Defendants’ behavior from antitrust liability.

Defendants have a heavy burden to prove an implied

immunity. “Implied antitrust immunity is not favored,

and can be justified only by a convincing showing of

clear repugnancy betw en the antitrust laws and the

regulatory system.” United States v. Nat'l Ass'n of Sec.

Dealers, Inc., 422 U.S. 694, 719, 95 S.Ct. 2427, 45

LL.Ed.2d 486 (1975): see also United States v. Phila.

Nat'l Bank, 374 U.S. 321, 348, 83 S.Ct. 1715, 10

L..Fd.2d 915 (1963). Implied antitrust immunity ts

restricted only to the activity challenged, and will not

extend to conduct otherwise overseen by the regulatory

agency. See generally ABA ANTITRUST, supra, at

1238. In conformance with these principles, while the

Supreme Court has recognized implied immunity from

certain prosecutions under the antitrust laws, the Court

has steadfastly held that the Federal Aviation Act does

not completely displace the antitrust laws. /Zughes Tool

Co. v. Trans World Airlines, Inc., 409 U.S. 363, 387, 93

S.Ct. 647, 34 L.Ed.2d 577 (1973); Pan Am. World

Airways, Inc. v. United States, 371 U.S. 296, 305, 83

S.Ct. 476, 9 L.Ed.2d 325 (1963).

Whether Defendants are entitled to implied antitrust

immunity because they developed, drafted, and

Ra

promulgated their ICAs in conjunction with the FAA

appears to be a matter of first impression. Only where

Congress has invested pervasive supervisory authority

in a regulatory agency should a court conclude that

Congress intended to ease liability under the Sherman

Act. See, e.g., Nat'l Ass'n, supra. The Court concludes

that Defendants have not established a sufficiently

coherent and pervasive theory of regulation, nor do they

document any congressional intent that companies in

the balloon industry are immune from. antitrust

litigation by virtue of collaboration with the FAA in

drafting and promulgating their ICAs.

a. Federal Regulations Applicable to Hot Air

Ballooning

As discussed above in Section I1.B, there are numerous

federal regulations that apply inter alia to the

manufacture and sale of both hot air balloons and

replacement _ parts. To summarize, balloon

manufacturers are required to distribute to their

customers ICAs, which are model-specific maintenance

manuals that detail standards and procedures to be used

during maintenance, alteration; or preventive

maintenance of the aircraft. These methods or practices

gencrally may be substituted by other maintenance

methods or practices acceptable to the FAA. The ICA

83a

might contain a segregated section of additional

techniques, known as the ALS, from which

maintenance personnel may not deviate. Replacement

parts may be manufactured and sold by the aircraft's

original manufacturer or by a third-party that holds

either an STC or PMA, documents which indicate that

the FAA has approved the third-party's product.

However, these regulations did not require the conduct

which Plaintiff contends violated the antitrust laws: for

example, no federal regulation requires that a hot air

balloon owner first secure the original manufacturer's

permission to use third-party fabric before repairing the

balloon envelope.

It appears clear from the record that although

Defendants’ ICA implied that only Defendants-

approved replacement parts could be used, there is no

requirement in the ARs that replacement envelope

material be tested in accordance with the

manufacturer's standards. In fact, the FAA has set forth

its own standards for strength and safety, 14 C.F.R. § §

31.21-31.27, which must be met by all manufacturers

and replacement parts manufacturers, including holders

of STCs and PMAs. Thus the Court concludes that both

Plaintiffand Defendants have overstated the case. The

regulations do not require the defendants to do what

they did, and what Plaintiffclaims is unlawful under the

84a

antitrust laws. Nonetheless, the Court will review the

applicable case law.

b. Relevant Case Law

The starting point in the case law on implied immunity

are two Supreme Court opinions that hold that implied

immunity from the antitrust laws is to be sparingly

inferred from the enactment ofa regulatory statute: Pan

American World Airways v. United States, supra, and

Hughes Tool Co. v. Trans World Airlines, supra. The

Court notes that neither Pan American nor Hughes Tool

Co. give Defendants any specific support regarding

ICAs and implied immunity.

In Pan American, supra, the United States brought a

civil antitrust action against Pan American World

Airways, W.R. Grace & Company, and their jointly-

owned subsidiary, Pan American-Grace Airways

(“Panagra”). When Pan American and Grace organized

Panagra, the companies agreed that Panagra and Pan

American would not parallel each other's air routes, a

combination and conspiracy allegedly in restraint of

trade and monopolization and_ attempted

monopolization of air transportation between the United

States and South America. The United States further

alleged that Pan American had used its control over

Panagra to prevent it from obtaining authority from the

Civil Acronautics Board to extend its route from the

S6a

Canal Zone to the United States. The district court

dismissed the case against Grace and Panagra, finding

that none of their practices violated the Sherman Act.

Regarding Pan American, however, the lower court

concluded that by suppressing Panagra's efforts to

extend its route from the Canal Zone to the United

States, Pan American had violated the Sherman Act,

and ordered Pan American to divest itself of its stock in

Panagra.

On direct appeal to the Supreme Court, the Court held

that the issues presented had been congressionally

entrusted to the Civil Aeronautics Board for resolution,

and dismissed the complaint in its entirety. Finding that

the limitation of routes and divisions of territories, and

the relation of common carriers to air carriers, were

fundamental to the regulatory scheme developed by

Congress, the Court held that the antitrust violations

charged in the complaint had been reserved for the

Board's authority “in granting, qualifying, or denying

certificates to air carriers, in modifying, suspending, or

revoking them, and in allowing or disallowing

affiliations between common carriers and air carriers.”

Pan American, 371 U.S. at 305, 83 S.Ct. 476. While

the Court accordingly ordered the dismissal of all

claims against all defendants, the Court was careful to

stress the narrowness ofits holding; that is, the Federal

Aviation Act does not completely displace the antitrust

87a

laws, but only those segments necessarily implicated by

the particular regulatory scheme enacted by Congress.

The Court held, “While the Board is empowered to deal

with numerous aspects of what are normally thought of

as antitrust problems, those expressly entrusted to it

encompass only a fraction of the total.” /d.

In Hughes Tool Co., supra, Trans World Airlines

(“TWA”) brought an antitrust action against Hughes

Tool Company (“Toolco”) that challenged Toolco's

ability, in exercise of its controlling interest in TWA, to

control and dictate how TWA acquired and financed

aircraft. Toolco had defended itself claiming that its

challenged transactions were under the control and

surveillance of the Civil Aeronautics Board (“CAB”)

and subsequently immune from the antitrust laws by

virtue of the Federal Aviation Act of 1958. The district

court had entered a default judgment against Toolco,

which the Second Circuit Court of Appeals upheld. The

Second Circuit had distinguished Pan American,

concluding that the continuing supervision of the CAB

over the Toolcc- TWA relationship was general and not

related to any specific conduct that would have

constituted an antitrust violation. Hughes Tool Co., 409

U.S. at 378, 93 S.Ct. 647. The Supreme Court

disagreed and found Pan American applicable to the

case, especially in consideration of the relevant statute

and the several opinions and orders issued by the CAB

regarding the Toolco-TWA relationship.

[F]jrom 1944 through 1960 every

acquisition or lease of aircraft by TWA

from Toolco and each financing of TWA

by Toolco required Board approval. Each

transaction was approved by the Board

and each approval was an order under §

408, for the Board regarded its

transactional orders as modifications or

interpretations of its antecedent control

order. Each of the modification orders

recited a finding of the Board that the

transactions were “just and reasonable and

in the public interest.”

409 U.S. at 379, 93 S.Ct. 647. Toolco was forbidden

from acquiring control of TWA without CAB approval;

under the Federal Aviation Act, the CAB only could

have approved the acquisition if it vere found

consistent with the public interest, id. at 381, 93 S.Ct.

647, and the CAB could not have approved Toolco's

actions had there been the possibility of a resultant

monopoly which could have restrained competition or

jeopardized another air carrier. /d. at 384,93 S.Ct. 647.

As in Pan American, the Court in Hughes Tool Co.

emphasized the narrowness of its holding, nam “y that

89a

while the defendant was entitled to antitrust immunity

in this case, the Federal Aviation Act overall does not

completely displace the antitrust laws. /d. at 389, 93

S.Ct. 647.

According to Defendants, Scroggins v. Air Cargo, Inc.,

534 F.2d 1124 (Sth Cir.1976), supports their argument

for implied immunity in this case,"” that Plaintiff's

action should be dismissed considering the FAA's

participation in the initial draiing of the challenged

ICA's and its continued involvement throughout

Defendants’ revisions thereof. In Scroggins, several

airlines contractually created a _ jointly-owned

transportation arrangement agency, which was entrusted

with such powers as the ability to negotiate contracts

with third parties for the pick-up and delivery of air

cargo. 534 F.2d at 1126-27. The Civil Aeronautics Act

of 1938 required the airlines to submit these contracts

for the approval of the CAB. /d. at 1127. The Board

expressly found that the agreement was not contrary to

the public interest, but also announced an intention to

Regarding Defendants' implied immunity

defense, the parties have not cited any Third Circuit

precedent, as the Third Circuit has apparently not yet

addressed under what circumstances in the aviation

context a defendant would be entitled’ to implied

immunity from the federal antitrust laws.

90a

reexamine the arrangement if future circumstances so

required. /d. Plaintiff was the trustee in bankruptcy for

a trucking company which had requested an increase in

the rates under its contract with the agency; the agency

responded by diverting its business to another trucking

company.

The court in Scroggins held that the defendant's conduct

was immunized from antitrust liability because “(a) the

actions complained of were within the contemplation of

prior CAB orders which specifically considered effects

upon future competition and (b) the CAB has retained

an active supervisory jurisdiction to correct anti-

competitive developments as they arise.” 534 F.2d at

1132. Concerning the involvement of the regulatory

agency in the formulation and oversight of the air cargo

contracts, the court in Scroggins found it persuasive

that the CAB continued to subject contractual

amendments to scrutiny in order to determine whether

the amendments furthered the public interest. The CAB

had been exercising continuing jurisdiction over the

affected area of operations, and only approved the

revised contracts when found not to be adverse to the

public. /d. at 1131-32. The court wrote, “The CAB has

continued to scrutinize every amendment to the contract

which defines ACI's rights and duties, and has approved

the revise [d] contracts only when found not to be

adverse to the public interest.... The Board also

Yla

announced that it would reconsider its approval if the

future development of ACT should so warrant.” /d. at

1132.

c. Implied Immunity Does Not Apply in This Case

The Court concludes as a matter of law that Defendants

are not entitled either to express or to implied immunity

from antitrust prosecution. Defendants contend that

they could not have promulgated their ICAs had the

FAA not first participated in the drafting and revision of

the language and then later approved the language.

Defendants suggest that because they have acted in

obedience to a regulatory authority, they are impliedly

immune from Plaintiff's subsequent charges that their

conduct violated the antitrust laws.

The Court rejects Defendants’ contentions for two

reasons. First, as noted above, Defendants have

overstated the thrust of the FAA regulations. Second,

Defendants’ argument that those industry actors who

adhere to a regulatory agency's regulations are

thereafter insulated from antitrust liability is incorrect

in its breadth. Even if Defendants’ theory were

generally correct, Supreme Court precedent firmly

establishes that the Federal Aviation Act, which created

the regulatory agency at issue in this case, does not

Qa

completely displace the antitrust laws. Pan American,

371 U.S. at 305, 83 S.Ct. 476; Hughes Tool Co., 409

U.S. at 389, 93 S.Ct. 647. The major theme of those

cases is that immunity is implied only where the

challenged conduct is subject to a regulatory scheme

that expressly directs the agency to consider antitrust

policies in the context of the regulated industry. There

is no evidence to this effect in this case.

Defendants correctly contend that the overriding federal

interest in aviation safety compels them to adhere to the

guidelines and requirements of the regulatory body.

But compliance with safety regulations does not lead to

antitrust immunity from the antitrust laws. Defendants’

overstatement is argued in their reply brief,

When companies stray from the mandates

and requirements of governmental

regulation, people get hurt, people even

dic. One need go no further than a daily

newspaper to recognized [sic] this fact,

with commonplace examples such as

polluters bypassing regulation by

discharging harmful agents into ‘the

environment and businesses violating fire

codes. So too with the aviation industry.

(Defs.' Reply Br. at 9.) While this Court certainly

93a

cannot question the importance of compliance with

federal regulations where aviation safety is concerned,

the Court notes that Defendants’ argument does not

support its implied immunity claims. That is,

Defendants would have this Court find them impliedly

immune from antitrust litigation because the FAA

concluded that Defendants’ manual-written

collaboratively by Defendants and the FAA-would be

effective in promoting and guaranteeing hot air balloon

safety. The disconnect is obvious.

What Defendants neglect to show, with any evidence,

is that the FAA, in collaborating with Defendants,

specifically considered the potential alleged

anticompetitive consequences of the ICA = and

nonetheless approved or accepted the language.

Defendants have only presented evidence that the

primary concern of the FAA was aviation safety, which

this Court obviously should not question or second-

guess. In a December 1998 letter to Mr. DiGiovanni,

submitted to the Court by Defendants, Ava L. Mims of

the FAA stated, “/t is not the responsibility of the FAA

to monitor antitrust issues, which are a matter for the

civil courts.” (Defs.’ Ex. K.) Mark West, President of

Aerostar International, Inc., stressed that the Defendants

and the FAA were cooperating with aviation safety (and

not the anticompetitive consequence) as their chief

consideration, stating that:

94a

The overall goal of both Raven and the

FAA was to promote aviation safety

through language which instructed the

aircraft owner as to how and when the

aircraft would no longer be airworthy, i.e.,

when and how repairs were required so

that the aircraft could be legally, and

safely, flown.

(West Aff. of Nov. 2003 4 7; see also id. 44 4, 8.)

Demonstrating further that the Defendants and the FAA

were primarily concerned with fostering and ensuring

aviation safety, Mr. West also stated, “The language of

the ICA was not the product of any effort by defendants

to limit or restrict the market, rather, it was a function of

Raven and Acrostar's compliance with the Federal laws

and the Federal Agency empowered to enforce those

laws 1n the interest of aviation safety.” (/d. 4] 11.) That

the FAA had not considered the anticompetitive

consequences of Defendants’ ICA is no surprise,

especially upon consideration that nothing in the ICA

outright forbids the use of third-party replacement

fabric.

llowever, under Pan American and Hughes Tool Co., tt

is clear that a defendant wishing to invoke implied

antitrust immunity must demonstrate that the regulatory

agency was authorized by Congress to consider the

QSa

anticompetitive implications of its actions and enact

regulations that essentially “trumped” the antitrust laws.

Under those circumstances, Congress intended the

regulatory scheme to operate as a more refined, but

functionally equivalent, substitute for the standard

antitrust regime, and that to penalize the challenged

conduct would be an invasion of the regulatory agency's

competence. The Court in Pan American, supra,

concluded that the plaintiff's complaint should have

been dismissed because the relevant statute explicitly

gave the regulatory agency broad power to investigate

and halt unfair practices and unfair methods of

complaint-including those alleged in the complaint-and

because if the courts later were to intrude, imposing

their own interpretation of the antitrust laws, the two

regimes potentially would collide. Similarly in Hughes

Tool Co., supra, the Court concluded that the defense of

implied immunity was applicable because the regulatory

agency, pursuant to statutes that empowered it to permit

only those acquisitions of control that were not

inconsistent with the public interest and that would not

have resulted in a monopoly, had considered the

anticompetitive consequences of the defendant's every

acquisition and lease of aircraft. Along these lines, the

court in Scroggins, supra, held that the detendant’s

conduct was immunized from antitrust liability because

“(a) the actions complained of were within the

contemplation of prior CAB orders which specifically

96a

considered effects upon future competition and (b) the

CAB has retained an active supervisory jurisdiction to

correct anti-competitive developments as ey arise.’

534 F.2d at 1132.

d. The Evidence in This Case Does Not Show FAA

~ Consideration of Anticompetitive Consequences

The deposition testimony in evidence shows that the

FAA reviewed Defendants’ ICAs in order to promote

and preserve aviation safety. There is nothing in the

record demonstrating that the KAA considered the

antitrust laws and weighed the anticompetitive effects,

if any, of its approval of Defendants’ ICA language.

Gregory Michalik is the FAA Senior Aerospace

Engineer and Program Manager in charge of FAA

oversight for the Aerostar program on behalf of the

FAA, and it is on his testimony Defendants rely for

their contention that the relationship between

Defendants and the FAA ts a formal, collaborative

process to ensure aviation safety from which

Defendants may not deviate. The Court finds that Mr.

Michalik's testimony demonstrates the overarching

safety concern in drafting the ICAs. When asked

whether he knew the purpose of the particular provision

97a

that required approval to replace up to the maximum 65

percent of the hot air balloon envelope, Mr. Michalik

testified, “My understanding is to maintain. the

structural integrity of the envelope and so it would be a

safe vehicle to fly.” (Michalik Dep., Defs.’ Ex. G, at 38;

see also id. at 42-43.) Mr. Michalik's deposition

proceeded as follows in pertinent part:

[Defense Counsel]: What were you conveying to Mr.

DiGiovanni in [a letter addressed to him], what were

you telling him’?

[Mr. Michalik]: It was that if you need to replace more

than 35 percent of your fabric that a request should be

sent to Aerostar. Aerostar will then evaluate the

request, see where the damage is, help them with

putting together a repair, and provide them with the

necessary instructions and documents in order to

complete that repair.

Q: Is the reason for that because that's what the ICA

said?

A: Yes.

Q: And on behalf of the FAA you were making it your

position that the ICA's instructions were to be followed

by the balloon owner, correct?

A: Yes.

Q: What would be the underlying purpose of that

instruction?

QSa

A: To insure that the repaired balloon would be in a

safe condition for flight.

(/d. at 55-56.) Mr. Michalik stated that in drafting the

ICA language alongside Defendants, the predominant

consideration of the parties was aviation safety (see,

e.g., id. at 46), and nowhere does Mr. Michalik even

hint that the FAA contemplated the anticompetitive

consequences of its collaboration with Defendants. In

addition to Mr. Michalik, Michael Gallagher and

William Timberlake-FAA Small Plane Directorate

Manager and FAA Manager, respectively-also testified

that FAA acceptance of ICA language is a formal,

safety-driven process undertaken by all manufacturers

before they can place their aircraft and parts on the

market. (Gallagher Dep., Defs.' Ex. I, at 32;-

Timberlake Dep., Defs.’ Ex. J, at 82-83.)

Defendants have not argued that the FAA considered

the anticompetitive ramifications of its approval or

acceptance of their ICA language, nor does the

evidence of record support this Court independently

finding as a matter of law that the FAA had actually

contemplated and condoned, as was its administrative

prerogative, the effects of its imprimatur on competition

within the hot air balloon industry. Instead, in their

papers and arguments submitted to the Court,

Defendants consistently have contended that the FAA

99a

approved or accepted their manuals in the interest of

aviation safety, and not in the interests of promoting

competition within the industry. Defendants argued

that “[a]t all times, the defendants operated within the

strictures of a statutory scheme developed and

maintained by the FAA for the primary purpose of

ensuring air safety.” (Defs.' Mem. Supp. Mot. Summ.

J. at 31) (emphasis added).

As Defendants stated in their reply brief, “each FAA

representative has testified that these considerations are

grounded in safety considerations, the FAA's primary

charge to the ‘public, implemented by regulating

manufacturers in the market ....” (Defs.’ Reply Br. at 9)

(emphasis added).

The Court cannot conclude as a matter of law that

exposing Defendants to antitrust liability stemming

from a_ challenged safety manual written’ in

collaboration with a regulatory agency would interpose

a second, potentially adverse construction of the

antitrust laws, as proscribed by Pan American and

[lughes Tool Co., where the regulatory agency at issue

is not demonstrated to have authorized (or ever

considered) the possible anticompetitive consequences,

nor even alleged to have such regulatory power.

“Antitrust immunity 1s not conferred by the bare fact

100a

that defendants’ activities might be controlled by an

agency having broad powers over their conduct.”

Phonetele, Inc. v. AT & T Co., 664 F.2d 716, 729 (9th

Cir.1981)..

The Court concludes that Defendants have not satisfied

their burden to succeed on this argument of their motion

for summary judgment.

C. Third Argument: Whether Plaintiff Has

Presented Sufficient Facts to Prove a Prima Facie

Case

1.§ 2 Monopoly Claim

a. Parties' Contentions

Count I of Plaintiff's complaint charges monopolization

and aitempted monopolization, and alleges that the

relevant product market is “the Raven/Aerostar balloon

replacement fabric market in the U.S.” (Compl.{| 32.)

Defendants argue again, as an alternative to immunity,

not only that Plaintiff cannot demonstrate that their

conduct was anticompetitive, (because their actions in

formulating and maintaining their ICAs were taken

while acting pursuant to a regulatory system that

obligated them to take the very actions at issue in this

lOla

case), but also, that Plaintiff can display nothing other

than a highly subjective, personal opinion that the

defendants’ conduct was anticompetitive. According to

Defendants, all the objective evidence-as derived from

other parties, from the ICAs and FARs, and from the

FAA itself, through the testimony of Mr. Mickalik-

indicates that Defendants were acting under the

auspices of the FAA and the FARs, and solely in the

interest of promulgating air safety for hot air balloonists

within the confines of a regulatory system.

Defendants also argue that the evidence of record does

not indicate any anticompetitive activity by them.

According to Defendants, the evidence reveals that even

if they are not immune, the market for replacement

fabric is a function of the extreme regulatory measures

placed upon any person or entity wishing to participate

in the market. As Defendants emphasize, until the mid-

1980s, Raven/Aerostar was the only participant in this

market and has only since been joined by two other

companies able to secure regulatory preapproval. (West

Aff. of Nov. 2003 4 13.) Defendants argue that their

standing in the market is not a function of

anticompetitive activity, but of natural market forces

within a highly regulated industry. (/d.)

102a

b. Analysis

Plaintiff acknowledges that Defendants’ early

prominence in the market largely was due to FAA

regulations and prerequisites no other company had

satisfied. (PI.'s Mem. at 32.) Plaintiff argues that after

attaining such status, Defendants took full advantage of

its monopoly position to discourage any competition by

implying through its ICAs, as discussed above, that use

of any other company's fabric would render the balloons

“unairworthy”. Defendants allegedly placed further

restrictions upon how much fabric could be replaced

without first obtaining its permission to make the repair,

and informed all owners and repairmen that these

restrictions were “expressly” authorized by law.”

The most notable example of this behavior was

the September 7, 2000 letter Defendants mailed to their

hot air balloon customers in the wake of the Braden's

Balloons \itigation, in which Defendants wrote, in

pertinent part:

We have been in contact with various

offices within the FAA and have their full

agreement, based on the FAR's and the

requirements within the FAA’ Type

Certificate Data Sheet that “all

(continued...)

103a

The Court requested both parties to submit

supplemental briefs on the leading Supreme Court

decision on the interplay between the antitrust laws and

replacement products, Eastman Kodak Co. v. Image

Technical Services, Inc., 504 U.S. 451, 112 S.Ct. 2072,

119 L.Ed.2d 265 (1992). In this case, the district court

had granted summary judgment for Kodak on

allegations that Kodak unlawfully monopolized and

attempted to monopolize the sale of service and parts

for copy and micro-graphic equipment manufactured by

Kodak and had also engaged in an alleged tying

arrangement. The plaintiffs were independent service

organizations (ISO's) which asserted that Kodak's

policies to limit the availability of replacement parts for

its equipment to ISO's, and to make it more difficult for

ISO's to compete with Kodak in servicing such

equipment, violated the antitrust laws. The Ninth

Circuit had reversed the summary judgment for Kodak

“°C. continued)

Inspections, repairs, and replacements

must be accomplished in accordance with

the latest issue of Aerostar Instructions for

Continued Airworthiness.”

(Pl.'s Mem. Opp'n Summ. J. at 15, emphasis removed;

see also supra p. 198.)

and the Supreme Court affirmed.

The Court will follow the order ‘established by

Plaintiff's Complaint and first consider Plaintiff's claims

under Section 2. The Supreme Court has defined

monopoly as follows:

The offense of monopoly under § 2 of the

Sherman Act has two elements: (1) the

possession of monopoly power in the

relevant market and (2) the willful

acquisition Or maintenance of that power

as distinguished from growth = or

development as a consequence of a

superior product, business acumen, or

historic accident.

Kodak, 504 U.S. at 481, 112 S.Ct. 2072 (quoting United

States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct.

1698, 16 L.Ed.2d 778 (1966)).°'

*'Plaintiff also alleges attempted monopolization.

In order to prevail on an attempted monopolization

claim under the Sherman Act, a plainti{f{must prove that

the defendant (1) engaged in_ predatory” or

anticompetitive conduct with (2) specific intent to

monopolize and with (3) a dangerous probability of

(continued...)

1OSa

In Kodak, the Supreme Court, in an opinion by Justice

Blackmun, rejected Kodak's contention that as a matter

of law, there could not be a separate product market for

the replacement parts of one manufacturer. In Kodak,

the Supreme Court held that although there was

evidence that there was substantial competition in the

sale of copiers, there could be relevant markets

confined to the servicing of Kodak copiers (as opposed

to servicing of all copiers) and confined to the sale of

Kodak's spare parts, because there were facts in the

record to support the ISOs’ contention that the parts and

"I(__.continued)

achieving monopoly power. See, e.g., Armstrong

Surgical Ctr., Inc. v. Armstrong County Mem'l Hosp.,

185 F.3d 154, 157 (3d Cir.1999). In order to determine

whether there exists a dangerous probability of

achieving monopoly power, a court must inquire “into

the relevant product and geographic market and the

defendant's economic power in that market.” Queen

City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430,

442 (3d Cir.1997) (quoting Spectrum Sports, Inc. v.

McQuillan, 506 U.S. 447, 459, 113 S.Ct. 884, 122

L.Ed.2d 247 (1993)). In light of the Court's disposition

of Plaintiff's monopolization claim, the Court need not

separately consider the claim of attempted

monopolization.

106a

servicing of Kodak copiers were unique. See 504 U.S.

at 481-82, 112 S.Ct. 2072.”

“There are many cases in which other district

courts have found replacement markets limited to the

products of a single supplier where they are unique and

have no reasonably interchangeable substitutes. See,

e.g., U.S. Anchor Mfg., Inc. v. Rule Indus., 7 F.3d 986,

997-98 (11th Cir.1993) (considerably more expensive

anchor excluded from broader market of functionally

interchangeable but up to 50% less expensive anchors),

cert. denied, 512 U.S. 1221, 114 S.Ct. 2710, 129

L.Ed.2d 837 (1994); Woods Exploration & Producing

Co. v. Aluminum Co. of Am., 438 F.2d 1286, 1305-07

(5th Cir.1971) (concluding that single natural gas field

constituted relevant market), cert. denied, 404 U.S.

1047, 92 S.Ct. 701, 30 L.Ed.2d 736 (1972); Hewlett-

Packard Co. v. Arch Assocs. Corp., 908 F.Supp. 265,

270 (E.D.Pa.1995) (complaint adequately pleaded

relevant product market, ever’ where market limited to

distribution of Hewlett-Packard computer printers);

Nat'l Communications Ass'n, Inc. v. AT & T Co., 808

F.Supp. 1131, 1135(S.D.N.Y.1992) (denying motion to

dismiss because “a monopolist, or person attempting to

monopolize, can be found liable in regard to

distribution of its own product if it is (1) illegally

attempting to destroy competition by refusing to deal or

(continued...)

107a

In Plaintiff's submission on Kodak, as to the claim of

monopolization, Plaintiff asserts that Kodak squarely

rejects any concept that a defendant with a natural

monopoly cannot be guilty of monopolization.

However, Plaintiff goes on to argue that the Defendants’

marketing strategy was similar to Kodak's and that

Defendants used their control over the contents of their

air worthiness manuals (the ICAs) to expand their

control into the replacement fabric market, and that

Defendants, as Kodak, utilized the monopoly they

initially enjoyed as a result of having created a new

product in order to perpetuate their monopoly

improperly and to destroy competition.

Plaintiff also asserts that the testimony of Mr.

Waligunda (PI.'s Ex. F, at 17-19, 23-25) establishes that

Defendants intended to utilize its market power to gain

a competitive advantage and to destroy a competitor.

Plaintiff argues that the Kodak decision requires this

Court to defer to a jury trial for resolution of

Defendants’ assertion that their exclusionary practices

were necessary to maintain service for sophisticated

equipment, and to ensure safety of balloon owners and

riders.

*°(...continued)

(2) controlling an essential service or bottleneck”).

lO8a

eatin

-ER {4 2006

No. 05-887

Spee HE CLERK CC

SUPREME COURT, U.S.

IN THE

Supreme Court of the United States

HARRISON AIRE, INC.,

Petitioner,

V:

AEROSTAR INTERNATIONAL, INC., et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

Unitep STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

BRIEF IN OPPOSITION

Georce R. HARDIN

Counsel of Record

Jerrrey A. OSHIN

HARDIN, KUNDLA, MCKFON

& POLETTO

673 Morris Avenue

Springfield, NJ 07081

(973) 912-5222

Counsel for Respondents

1994340 ce

QUESTION PRESENTED FOR REVIEW

The only question presented by this case, one which is

inappropriate for granting Certiorari by this Court, is whether

the Third Circuit Court of Appeals properly utilized existing

antitrust law and established precedent in affirming the

dismissal of plaintiff's antitrust claim upon Petitioner's

failure to present a triable issue of fact.

ii

PARTIES TO THE PROCEEDING

Harrison Aire, Inc.:

Plaintiff in the District Court for the Eastern District of

Pennsylvania and Appellant in the United States Court of

Appeals for the Third Circuit; Petitioner before this Court.

Aerostar International, Inc.:

Defendant in the District Court for the Eastern District

of Pennsylvania and Appellant in the United States Court of

Appeals for the Third Circuit; Respondent before this Court.

Raven Industries, Inc.:

Defendant in the District Court for the Eastern District

of Pennsylvania and Appeilant in the United States Court of

‘Appeals for the Third Circuit; Respondent before this Court.

CORPORATE DISCLOSURE STATEMENT

PURSUANT TO SUPREME COURT RULE 29.6

Aerostar International, Inc. is a wholly owned subsidiary

of Raven Industries, Inc.

Raven Industries has no parent corporation, nor does any

publicly held company own 10% or more of its stock.

TT

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW .......

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

CORPORATE DISCLOSURE STATEMENT

PURSUANT TO SUPREME COURT

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REASONS FOR DENYING THE PETITION .....

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Page

ii

il

iv

TABLE OF CITED AUTHORITIES

Page

Cases:

Eastman Kodak Co. v. Image Technical services, Inc,

Pe SCOOT LE OPE) 6 cc aie ea Ge Ue ee » Ay

First Circuit’s opinion in Systems Maintenance

Services, Inc. v. Digital Equipment Corp., 188 F.3d

Sa ey FEE 6s CN ERA ee eer 7-8

Frosty Bites, Inc. v. Dippin’ Dots, Inc., No. 3-01-

CV-1532-M, 2003 U.S. Dist. LEXIS 8472 (N.D.

SOEs Dee FF Be 6a ee aR CS eee 4

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

Ole es OPH ER ie Kos tc ca Nea Eee hae 7

McKnight v. School District of Philadelphia,

171 FSupp. 2d 446 (E.D. Pa. 2001) ........... 4

Regulations:

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ok yt Me TM. SAeene es annereny: ah Une a eae yay 3

SAR SRE CE eae Kees bree 4

INTRODUCTION

Plaintiff-Petitioner Harrison Aire, Inc. (“Harrison Aire”)

commenced the within litigation with the filing of a complaint

ostensibly sounding in antitrust, alleging, inter alia, illegal

antitrust activities by the defendants within the replacement

fabric aftermarket for hot air balloons. More particularly,

Harrison Aire was a New Jersey based purveyor of hot air

balloon rides, who asserted a claim for damages in the form

of business losses due to defendants’ alleged monopolization

and unlawful tying.

On motion for summary judgment wherein defendants

challenged the sufficiency of plaintiffs’ evidence, the District

Court appropriately considered the facts in the light most

favorable to the Petitioner. In thorough and detailed fashion,

the District Court granted defendants’ motion for summary

judgment, finding a dearth of evidence which would bespeak

any antitrust violation on the part of the defendants sufficient

to raise a triable issue of fact.

Plaintiff appealed the grant of summary judgment to the

Third Circuit Court of Appeals. The Third Circuit reiterated

the appropriate standard of review, i.e. that in considering

the case, all due inferences were afforded to the Petitioner.

Upon consideration of the briefs and following oral argument,

the Third Circuit Court of Appeals affirmed the District

Court's finding that the Petitioner lacked sufficient evidence

to create a triable issue of fact. As did the District Court, the

Third Circuit provided a studied, detailed analysis of both

the facts and applicable antitrust law, and reached the proper

conclusion. The Court did not, as Petitioner suggests, stray

from precedent or create a heightened burden of proof

compelling Supreme Court review.

2

STATEMENT OF THE CASE

This matter involves allegations by plaintiff Harrison

Aire against defendants Raven Industries, Inc. (“Raven”) and

Aerostar International, Inc. (“Aerostar”), claiming that

defendants committed antitrust violations resulting in

business losses to the Petitioner. Defendants successfully

challenged the sufficiency of plaintiff's evidence on motion

for summary judgment, which decision was affirmed on

appeal. The Courts below made their determinations on the

following facts.

Petitioner Harrison Aire is a New Jersey company

engaged in the business of, inter alia, providing commercial

balloon rides to its customers. It is owned and operated by

its sole proprietor, Terry Harrison (“Harrison.”) Commencing

in the late 1970’s, Harrison Aire purchased hot-air balloons

from Raven and Aerostar, and Harrison, a well-qualified

mechanic, maintained his fleet himself. In part, Harrison

maintained his aircraft by replacing the fabric in the worn

top portion of his balloon envelopes, providing added life to

the balloon system, a procedure which he undertook several

times.

In 1996, Harrison Aire’s large ride balloon had reached

the end of its life expectancy and required major fabric

replacement for the envelope, and Harrison explored his

repair options. An experienced mechanic, he well recognized

that the Federal Aviation Regulations (“FAR’s”) provide

limited market options for hot-air balloon owners seeking to

purchase replacement fabric, as by law, a hot-air balloon

envelope can only be repaired with FAA approved parts

(fabric is an aircraft “part”) from either a) the manufacturer

of the product, b) the holder of a Supplemental Type

3

Certificate (STC), or c) an entity with Parts Manufacturing

Approval (PMA). 14 C.F.R. 21.303.

It was undisputed that Harrison’s options for fabric repair

were not only limited by the FAR’s, but by the fact that in

1995, there were only three FAA-qualified purveyors for

replacement fabric, Aerostar (the manufacturer),

Ron DiGiovanni (doing business as Custom Nine Designs

out of New York), and Head Balloons, located in Georgia.

Understanding that his options were thus limited, Harrison

visited DiGiovanni in late 1995 or early 1996. Harrison had

long known that Custom Nine had sold replacement fabric

for hot air balloons. Custom Nine attempted to sell him fabric

under a PMA which it held, advising Harrison that the

Custom Nine had the legal authority to make the sale.

Harrison, however, was not convinced that the fabric was of

sufficient quality to use, claiming that he relied upon

Aerostar’s and the FAA’s criteria to make this judgment.

Despite the fact that the FAR’s gave Custom Nine the

authority to sell fabric, and despite Custom Nine’s express

representation to this effect, Harrison rejected the Custom

Nine fabric and Custom Nine’s (STC) replacement envelope.

Harrison also expressed concern over the possibility that

Custom Nine would sell “bogus parts.” Harrison knew of

Head Balloons at that time, but failed to discover that they

were STC purveyors of repiacement fabric and did not pursue

that option. Rather, he did nothing, and his balloon remained

in a State of disrepair.

Despite his wealth of industry knowledge relative to his

fabric repair options, and despite assurances by Custom Nine,

plaintiff claimed through the lawsuit that defendants deceived

him into believing he had no options other than to obtain

repairs through the defendants. Petitioner averred that

4

defendants’ Instructions for Continued Airworthiness

(hereinafter “ICA’s”)' left him without any market options

other than the manufacturer. In reality, he neglected or

rejected other commercial options and ignored his wealth of

FAA knowledge. He did nothing, and years later, through

this litigation, alleged that the ICA language was misleading,

anticompetitive, and violative of the antitrust laws.

The claims of monopolization, however, were not

supported by any market analysis, expert or otherwise,

delineating monopoly power, monopolization, market share,

or any other activity or circumstance supportive of

Petitioner's claim. While Petitioner proffered an expert on

damages, there was no palpable relation to antitrust injury.

Ostensibly, the plaintiff's case rested on Terry Harrison's

highly subjective, questionable, and legally-irrelevant view

that he had been misled by defendants’ literature. Frosty

Bites. Inc. v. Dippin’ Dots, Inc., No. 3-01-CV-1532-M, 2003

U.S. Dist. LEXIS 8472, at *8 (N.D. Tex. May 19, 2003);

McKnight v. School District of Philadelphia, 171 F.Supp.

2d 446, 448 (E.D. Pa. 2001).

The District Court found several flaws in Petitioners’

legal theories. Particularly, the District Court found that the

evidence did not display the existence of the requisite market.

(Appendix A at 110a). Moreover, the District Court

determined that there was insufficient evidence in the record

to show that defendants

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