The past year and a half witnessed important antitrust law developments for cases involving "two-sided" transaction markets, i.e., markets in which a sale on one side cannot be made without also making a sale on the other side of the market. Recently, the U.S. Court of Appeals for the Second Circuit issued a decision in US Airways v. Sabre Holdings, No. 17-960, 2019 WL 4281729 (2d Cir. Sept. 11, 2019) (US Airways), which is the next chapter in this evolving story.
The Second Circuit overturned a $15.3 million jury verdict secured by US Airways after a nine-week trial against the travel-planning firm Sabre Holdings and remanded the case to a district court for retrial. In doing so, the Second Circuit relied on last year's groundbreaking U.S. Supreme Court decision Ohio v. American Express, 138 S. Ct. 2274 (2018) (Amex), in which the court held that certain products that provide transaction services, such as credit cards, must (as a matter of law) be treated as two-sided markets for defining the relevant market for antitrust purposes—which an antitrust plaintiff must do under the "rule of reason" to establish a §1 claim under the Sherman Antitrust Act—and for calculating potential damages. The Second Circuit also reinstated US Airways'claims that Sabre was operating an illegal monopoly, despite the fact that Sabre's product was the only brand within that purported market.
There are several key takeaways from the US Airways decision: (1) practitioners and courts must be careful to distinguish between one-sided and two-sided markets, and in particular two-sided transaction markets; (2) counsel, expert witnesses, and clients must be mindful of the impact a twosided transaction market may have on the ability to show anticompetitive impact and on putative damages, as the impact of the allegedly anticompetitive conduct on the second side of the market may substantially reduce or even eliminate the alleged damages suffered by a plaintiff on the first side of the market; and (3) it is still possible to have a single-brand monopoly under the antitrust laws, proving yet again that the Supreme Court's 1992 holding in Eastman Kodak v. Image Tech. Servs., 504 U.S. 451 (1992) is alive and well.
Factual Overview of 'US Airways'
Sabre provides a travel technology platform known as a global distribution system (GDS). This computerized network allows travel agents to search for and book flights and permits airlines to list available flights and thereby access travel agents. Sabre collects booking fees from an airline whenever a travel agent uses Sabre's platform to book a ticket. Travel agents receive a payment from Sabre whenever they use Sabre's platform to book at ticket.
The Second Circuit overturned a $15.3 million jury verdict secured by US Airways after a nine-week trial against the travel-planning firm Sabre Holdings and remanded the case to a district court for retrial.
Sabre is one of only three GDS competitors and is by far the largest provider, controlling over half the market. Notably, no new GDS competitors have emerged since the 1980s. Sabre structures its contracts with travel agents to turn its GDS platform as a "single-home" for travel agents, i.e., travel agents are incentivized to only use Sabre's GDS platform. Sabre does this principally by requiring travel agents to meet a minimum volume of bookings in order to obtain incentive payments under the contract. These incentive payments can be lucrative. For example, Sabre paid more than $1.2 billion in such fees to travel agents between 2006 and 2012. Once the travel agents are locked into Sabre's GDS platform, the airlines are effectively required to use Sabre's GDS platform to reach Sabre's travel agent clients. Nearly 40 percent of US Airways revenues comes from bookings made through travel agents using Sabre's GDS platform. Sabre's contracts with US Airways contain "full content" provisions that prohibit the airline from financially incentivizing travel agents to bypass Sabre's GDS platform, such as through discounts offered through direct bookings on US Airways' website, and from otherwise encouraging travel agents to bypass Sabre's GDS platform.
The Lawsuit and Trial
In April 2011, US Airways sued Sabre in the U.S. District Court for the Southern District of New York. The airline alleged that the "full content" provisions in its contracts with Sabre constituted unlawful vertical restraints of trade and that Sabre had an unlawful horizontal agreement with its GDS competitors, all in violation of §1 of the Sherman Act. In addition, US Airways alleged that Sabre violated and conspired to violate §2 of the Sherman Act by monopolizing the distribution of GDS services to Sabre subscribers. The court dismissed US Airways' §2 claims before trial.
Section 1 of the Sherman Act prohibits unreasonable restraints of trade. Some restraints—such as anticompetitive horizontal agreements among competitors to fix prices—are per se unreasonable. See Bus. Elecs. v. Sharp Elecs., 485 U.S. 717, 723-24 (1988). US Airways did not allege that Sabre's contractual provisions fit into this category. Rather, the provisions were analyzed under the "rule of reason," a fact-specific analysis focusing on the restraint's harms and benefits to consumers. The first step of rule of reason analysis requires the plaintiff to identify consumers in the relevant market, i.e., the market in which the anticompetitive effects of the challenged restraint are to be measured for antitrust purposes. See Amex, 138 S. Ct. at 2284; Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., 996 F.2d 537, 543 (2d Cir. 1993). Hence, US Airways had to identify the market for Sabre's GDS platform. This brought to the fore whether the GDS market was, in the antitrust context, one-sided (from Sabre to US Airways), or two-sided (travel agents-Sabre-US Airways). (Application of the rule of reason involves a three-step burden-shifting analysis. Under this framework, the plaintiff has an initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market. If the plaintiff proves this, the burden shifts to the defendant to show a procompetitive rationale for the challenged restraint. If the defendant makes this showing, the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means. See Capital Imaging Assocs., 996 F.2d at 543.)
'US Airways' reaffirms that the Supreme Court's single-brand market theory in 'Eastman Kodak' is alive and well.
After over five years of litigation, the §1 claims were scheduled for trial in October 2016. The timing of the trial presented practical and legal challenges for the district court in light of the Second Circuit's Sept. 26, 2016 decision in the Amex case, which was being appealed to the Supreme Court while the US Airways case approached its Oct. 24, 2016 trial date.
In the appellate decision that preceded the Supreme Court's decision in Amex, the Second Circuit "addressed for the first time an issue that had become central to US Airways's action against Sabre: For purposes of an antitrust case, when the relevant market is to be considered 'two-sided,' i.e., when the effects of a challenged restraint on a market are to be judged by the net impact on customers on both sides, not either side, of a market." US Airways, 2019 WL 4281729, at *4. In that case, the Second Circuit held that the credit card market was two-sided, in that credit cards provided a service to cardholders on one side and to merchants on the other. In such two-sided markets, prices often cannot be raised on one side of the market without reducing overall demand for the product, a phenomenon economists refer to as "indirect network effects." Id. at *8. As such, in most (but not all) cases involving two-sided markets, courts must include both sides of the market in defining the market for antitrust purposes. Id. For example, where the impact of the "indirect network effects" are shown to be minor, the relevant market can be defined as one-sided for antitrust purposes even though there were two sides to the market out in the world. Id. This left open the possibility that the market at issue in US Airways could be defined as "one-sided" for antitrust purposes, which would permit the jury to only consider the impact of the alleged unlawful restraint on US Airways' side of the market.
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Originally Publish by New York Law Journal
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