JetBlue-American Ruling Offers Fresh Angle On Antitrust Risk

01 June 2023 Law360 Publication
Author(s): Benjamin R. Dryden Elizabeth A. N. Haas

This article was originally published in Law360 on June 1, 2023, and is republished here with permission.

The U.S. District Court for the District of Massachusetts recently issued a long-anticipated ruling in an antitrust challenge to the so-called Northeast Alliance, or NEA, between American Airlines Group Inc. and JetBlue Airways Corp.

The partnership was established in 2020 as a virtual joint venture between American and JetBlue, and its vision was to largely combine the two airlines' operations for certain flights in and out of Boston, New York City and Newark, New Jersey — collectively, the Northeast.

The U.S. Department of Justice's Antitrust Division and a coalition of six U.S. states and the District of Columbia — collectively, the government — sued the airlines under Section 1 of the Sherman Act, alleging that the NEA constituted an unreasonable restraint of trade.

Following a monthlong bench trial, the court on May 19 ruled for the government, finding that the NEA violates the Sherman Act.

The court's decision stands as a reminder that collaborations between competitors can warrant close scrutiny under the antitrust laws — even if they create real, tangible benefits for consumers.

The Northeast Alliance

Announced in July 2020, the NEA was an effort by American and JetBlue to optimize their respective route networks in the Northeast region. The crux of the partnership was a commitment by the two airlines to pool the majority of their respective schedules, assets and operations in and out of Boston, New York City and Newark.

The two airlines agreed to coordinate their flight schedules across the Northeast to make the most efficient use of their respective fleets. The two airlines did not coordinate on prices; rather, each airline continued to set airfares independently of input from the other.

Instead, the airlines coordinated their schedules to avoid duplicative routes and optimize the utilization of their combined fleets. To achieve this goal, the airlines agreed to share their revenues from operations in the Northeast pursuant to a formula that, in the court's telling, made the airlines "indifferent to whether a passenger flies a particular [NEA] route on an American plane or a JetBlue plane."

Importantly, the NEA produced meaningful benefits, both for consumers and for the airlines. For instance, the airlines developed a shuttle bus to connect their respective terminals at John F. Kennedy International Airport, which allowed passengers to make connections between terminals without re-clearing security.

Similarly, as part of the NEA, American agreed to lease to JetBlue nearly 100 authorizations for takeoffs and landings at JFK and LaGuardia Airport. JetBlue used these authorizations to fly larger airplanes than the small regional jets that American had historically used, which meaningfully expanded capacity out of New York City.

The Government's Antitrust Challenge

Less than a year after the NEA took effect, the government brought a lawsuit challenging the partnership civilly under the antitrust laws. The government's complaint alleged that the NEA constituted the "modern-day version of a nineteenth-century business trust," in that it effectively merged the airlines' operations in the Northeast.

The government offered the opinion of an economist who believed that the partnership would create "upward pricing pressure" by eliminating the incentives for American and JetBlue to compete with each other within the NEA.

Notably, the government claimed that the competitive effects of the partnership were not limited to the Northeast. Instead, because the Northeast represents approximately two-thirds of JetBlue's total business, the government alleged that the NEA would also lessen JetBlue's incentives to compete with American in other markets around the country.

The airlines disputed the government's claims vigorously, arguing that the partnership was a pro-competitive collaboration that offered consumers a broader and deeper network, with more capacity, more amenities and a more efficient schedule.

The airlines also offered the opinions of multiple, well-respected economists, who believed that the NEA was not harming competition. Ultimately, the case went to a monthlong trial before a federal judge, with testimony from over two dozen witnesses and over a thousand exhibits.

The Court's Decision

Based on the record at trial, the court ruled that the partnership did harm competition in violation of Section 1 of the Sherman Act. The court prefaced its analysis by describing the three-step, burden-shifting framework for evaluating the government's claims:

Restraints arising in the context of joint ventures ordinarily are subject to the rule of reason, which involves some form of burden shifting but is not a rigid framework... . First, the plaintiff must make an initial showing that the challenged agreement has a substantial anticompetitive effect... . If the plaintiff succeeds, the burden shifts to the defendant to show a procompetitive rationale for the restraint... . Should the defendant satisfy its obligation, the ultimate burden returns to the plaintiff. A plaintiff can prevail at this point with proof that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means. Absent such proof, the plaintiff may alternatively seek to establish that, on balance, the restraint's anticompetitive effects outweigh any procompetitive benefits.

Following this burden-shifting framework, the court began its analysis by determining whether the NEA had a substantial anti-competitive effect.

The court found that the NEA harmed competition in at least four separate ways.

First, even though American and JetBlue did not coordinate on prices, the court found that in all other respects the partnership "replaced direct and aggressive competition ... with cooperation. This, in and of itself, is a fundamental assault on competition and an actual harm the Sherman Act is designed to prevent."

Second, the court found that the NEA had weakened JetBlue's status as a disruptive so-called maverick in the industry, by aligning JetBlue's business incentives with American's — not only within the Northeast, but more broadly throughout the country.

Third, the court held that the so-called optimization of the two airlines' respective networks was in actuality more akin to a market allocation agreement, which courts typically find to be illegal per se.

Indeed, although the government had not alleged that the NEA was illegal per se, the court went out of its way to suggest that it might have credited a per se claim had the government brought one.

Finally, the court held that the government had shown a harm to competition through indirect, structural evidence, with evidence that American and JetBlue each have the power to set prices in the Northeast, and by showing that the Northeast is highly concentrated and has high barriers to entry.

Once the government made its required showing under the first step of the burden-shifting framework, the burden shifted to the airlines to show a pro-competitive reason for the NEA.

The court found that the primary purpose for the partnership was to strengthen the two airlines' competitive position against Delta — and, to a lesser extent, United — as Delta is the carrier with the largest market share in the Northeast.

In the court's view, this sort of defensive rationale "might be 'procompetitive' in the business sense of the word, but it is not on these facts 'procompetitive' under the law."

In a footnote, the court added that "Delta is entitled to the fruits of the success it has achieved by operating independently in the free market... . The principles underlying the Sherman Act ... are thwarted when less efficient competitors use their rival's success as an excuse to collaborate, rather than continue competing."

More broadly, the court found that the two airlines had not shown that they were combining "complementary" assets, such as "pooling resources to engage in research they could not independently fund ... [or] combining capital to fund the renovation and expansion of a terminal at an airport."

The court agreed that that sort of a joint venture "might justify ancillary restraints that otherwise appear anticompetitive."

But, the court held, the NEA "does none of these things. Its anticompetitive features are at its core, ancillary to no overarching legitimate objective." Accordingly, the court concluded that "the overarching purpose" of the partnership — the end of competition between American and JetBlue in the Northeast — was "a naked assault on competition" itself, which the airlines had failed to meet their "heavy" burden to justify.

Because the court found that the airlines had failed to carry their burden at the second step of the three-step, burden-shifting framework, the court's analysis could end at this second step. For completeness, however, the court also considered the final step of the burden-shifting framework, and held that the partnership's benefits were likely achievable through "less restrictive alternative arrangements."

In particular, the court found it significant that, on the West Coast, American has a West Coast International Alliance, or WCIA, in place with Alaska Airlines. The WCIA with Alaska Airlines is very different from the NEA with JetBlue.

The WCIA excludes any routes where both parties have competing direct flights, it does not involve coordination on capacity or scheduling, and it only involves revenue-sharing between certain of American's long-haul international flights and certain of Alaska's domestic flights — an arrangement the court called nonreciprocal revenue-sharing.

The court cited the WCIA as evidence that American and JetBlue could have achieved many of the same benefits that came from the NEA through a less-restrictive alternative.

The district court ordered American and JetBlue to end the NEA no later than June 18.

That said, the district court's ruling does not necessarily end the litigation. American has expressed an intent to appeal the decision to the U.S. Court of Appeals for the First Circuit. It is possible that the First Circuit might place a stay on the district court's order until the appeal can be fully briefed and decided.

Lessons From the Court's Decision

The district court's ruling represents a significant win for the Biden administration's DOJ Antitrust Division, as it comes on the heels of several DOJ losses in high-profile merger challenges and criminal prosecutions. In this respect, the DOJ will likely be buoyed not only by the victory itself, but also by the tenor and scope of the court's ruling.

For businesses, the court's ruling has two primary lessons. First, the ruling underscores that the DOJ and other antitrust enforcement agencies are increasingly wary of joint ventures, strategic affiliations or other collaborations that may have the effect of entangling competitors.

Deputy Assistant Attorney General Andrew Foreman said last year that companies "concerned about how their independent competitive decisions may be viewed by partners ... may be less likely to challenge a 'Frenemy' with disruptive pricing or new product innovations or expansions."[1]

Such collaborations not only eliminate competition with respect to the agreed-upon area of collaboration, but can also lead to spillover effects that reach areas of competition outside the narrow scope of the collaboration.

Recall, for example, that the district court found that the NEA had lessened JetBlue's incentives to compete with American not only in the Northeast, but in other markets as well.

Second, the court's ruling stands as a timely reminder that, to survive antitrust scrutiny, joint ventures, strategic affiliations and other collaborations between competitors should have a clear, pro-competitive purpose and effect.

For example, a good, pro-competitive reason for a collaboration would be to bring together two companies' complementary assets, to unlock a new capability that neither company would have either the means or incentive to achieve on its own.

But even this purpose might not, on its own, be enough to survive antitrust scrutiny. In addition, a collaboration must also be narrowly tailored, so that the pro-competitive benefits are achieved in such a way as to impose the least restrictive limitations on competition as practical.

Thus, if the benefits from a collaboration can be equally achieved through two different models, then businesses should choose the model that preserves the most competition between the parties.


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