US Airways $15 million antitrust verdict Is remanded by Second Circuit for reconsideration in the context of a two-sided market
In the first two-sided market case to be decided by a court of appeals since the Supreme Court issued its American Express ruling ("Amex") in June 2018, a Second Circuit Panel in September nixed a $15 million antitrust jury verdict in favor of US Airways against travel-planning giant Sabre Holdings Corp. ("Sabre"). The Panel also reversed the trial court’s early dismissal of US Airway’s claims under Section 2 of the Sherman Act. The Second Circuit recognized that the remand would uproot much of the jury’s and district court’s findings in the eight-year long case. Nevertheless, it determined it was "bound” to vacate and remand in the face of "shifting legal winds" in the wake of the Supreme Court’s determination in Amex that antitrust analysis of a "two-sided transaction market" required consideration of both sides as a whole.
Background: the District Court case
Sabre owns and operates a travel and technology platform known as a global distribution system ("GDS") – an electronic network connecting travel agents with airline services by providing a platform for travel agents to search for and book airline flights for their customers.[1] Since 2004, when the Department of Transportation deregulated the GDS industry, the number of independent GDS platforms decreased from four to three.[2] Sabre's GDS platform is currently the largest in the United States, with a market share of more than half.
In 2011, US Airways filed its complaint against Sabre, alleging that Sabre's contracts, which US Airways signed in 2006 and 2011, were unlawful restraints of trade in violation of Section 1 of the Sherman Act (Count 1). The disputed contract provisions are composed of four provisions, collectively referred to as the "full content" provisions and consist of essentially three Most Favored Nations ("MFN") provisions and one anti-steering provision. An MFN provision generally provides that the party obtaining it is entitled to at least as favorable terms as its competitors. An anti-steering provision prohibits a reseller from directing its customers to a supplier's competitors.
At the heart of US Airways' dispute are the following "full-content" provisions in Sabre's agreements with airlines, including US Airways: (1) the "No Better Benefits" provision, which requires the airline to provide all available fares to customers through the Sabre GDS (MFN); (2) the "No Discounts" provision, which requires that fares offered through the Sabre GDS be no more expensive (and no less comprehensive) than the airline's fares offered on another platform or forum (MFN); (3) the "No Direct Connects" provision, which prohibits the airline from requiring or inducing travel agents to book directly on the airline's website or through any other means than the Sabre GDS (anti-steering); and (4) the "No Surcharge" provision, which prevents the airline from charging higher fees to travel agents for booking through the Sabre GDS than for booking through other means (MFN).[3]
US Airways alleged that in 2005 it had attempted to avoid signing a contract with Sabre containing these full-content provisions, but testimony at trial revealed that US Airways had no choice but to sign in 2006 (and again in 2011) for fear of being removed from Sabre's GDS or other forms of retaliation such as "display biasing" – a situation in which Sabre could reorder search results in its system to disadvantage US Airways.
US Airways also alleged that Sabre violated Section 2 of the Sherman Act by monopolizing the distribution of system services to Sabre subscribers, and conspired to monopolize the market (Counts 2 and 3).[4] In its final Count, US Airways alleged that a horizontal agreement among Sabre and its GDS competitors violated Section 1 of the Sherman Act (Count 4).[5]
The district court granted Sabre's Rule 12(b)(6) motion to dismiss Counts 2 and 3 of the complaint claiming monopolization claims under Section 2 of the Sherman Act. The jury returned a verdict for Sabre on the horizontal conspiracy claim (Count 4) and for US Airways on its vertical claims under Section 1 of the Sherman Act (Count 1). The jury found that the market at issue was one-sided and awarded US Airways $5,000,000 in damages before trebling.[6]
Amex and its impact on the Sabre case
In 2010, the U.S. government brought a case against American Express challenging the credit-card's anti-steering provisions, which prohibited merchants from directing card holders towards using a lower fee-charging credit card. While the district court identified the credit card market for purposes of its antitrust analysis as two separate markets (one for cardholders and one for merchants), the Second Circuit reversed in September 2016, concluding that the credit card market at issue was a single, two-sided market. In May of 2018, the Supreme Court affirmed, holding that in a case brought under the Sherman Act which involves a two-sided instantaneous transaction platform, the relevant market for purposes of the court's analysis must include both sides of the platform. The majority further concluded that in order for a business to qualify as a transaction platform it must "(1) offer different products or services, (2) to different groups of customers, (3) whom the ‘platform' connects, (4) in simultaneous transactions."[7]
At the time of the Sabre trial in October 2016, the Second Circuit's decision in Amex was just one-month old; while certiorari was ultimately granted nearly a year later in October 2017, it seemed inevitable that the Department of Justice would appeal the Second Circuit's ruling. In an attempt to avoid a retrial, and "in the interest of judicial efficiency", the district court in Sabre included hypothetical questions on the jury's verdict form taking into an account a scenario in which the jury determined the market to be two-sided, as a matter of fact, leading to an alternative verdict. Using this hypothetical verdict form, the jury concluded that even if the market were two-sided, Sabre still "unreasonably restrained trade," injuring US Airways which suffered damages in the amount of $5,000,000 before trebling (the same amount as in a one-sided market).[8]
Sabre filed a Rule 50 motion for judgment as a matter of law on Count 1, or in the alternative a new trial on Count 1 under Rule 59.[9] The district court denied the motion in its entirety. Sabre then filed a notice of appeal, and US Airways filed a notice of cross appeal.[10]
The Second Circuit Sabre ruling
On appeal, Sabre challenged the district court's denial of its motion for judgment as a matter of law, the denial of its motion for a new trial, and the district court's jury instructions. In its cross-appeal, US Airways argued that Counts 2 and 3 of its complaint were erroneously dismissed by the district court for failure to state a claim.
Were the jury instructions free of error?
Sabre claimed that the district court erred by allowing the jury to determine, as a matter of fact, that the relevant market was one-sided.[11] The Second Circuit agreed, holding that the jury's primary verdict – "that Sabre had unreasonably restrained trade" injuring US Airways in a one-sided market – was "erroneous" based on the Supreme Court's decision in Amex.[12] According to the Second Circuit, Sabre's GDS met the requirements of a two-sided transaction platform as defined by the Supreme Court in Amex: Sabre "offer[s] different services to different groups of customers—to airlines, access to travel agents; to travel agents, flight and pricing information—and they connect travel agents to airlines in simultaneous transactions."[13]
Further, the Second Circuit determined that when a two-sided transaction platform is at issue, the jury must be instructed to consider both sides of the platform. Accordingly, the relevant market should, as a matter of law, include both sides of Sabre's GDS platform.[14]
Was the hypothetical alternative verdict reliable?
The Second Circuit also found it troubling that the jury returned identical damage amounts in both its primary verdict based on the conclusion that the GDS market was one sided, and in its alternative verdict presuming that the market was two-sided. "Perhaps the jury was confused," noted the Panel, given that arguments were "impermissibly made, and instructions improperly given on the theory that the platform could have been one-sided," contrary to Amex's subsequent holding.[15] Because the market encompassed both sides of Sabre's two-sided platform, if prices charged to travel agents were less than those that would have been charged in a competitive market, that difference needed to be accounted for in determining US Airways' damages.[16] Additionally, the Second Circuit pointed out, payments made by Sabre to travel agents for use of Sabre's platform would necessarily reduce any damages that US Airways might receive. The Second Circuit concluded that the jury may have "glossed over the hypothetical questions it was given with respect to the alternative verdict"; its calculation of identical damage amounts in both a one-sided and two-sided market scenario "casts serious doubt on the reliability of the alternative verdict."[17]
Judgment as a matter of law or a new trial?
Although it adopted Sabre's argument that the jury's alternative verdict was unreliable, the Second Circuit decided to vacate and remand the case instead of entering judgment for Sabre as a matter of law. It concluded that had the case been tried "in accordance with the later-decided Amex" Supreme Court decision, a juror could have "reasonably concluded" that even when considering both sides of the platform, Sabre may have violated Section 1 of the Sherman Act through the full content provisions. Accordingly, a new trial was required.[18]
Did the District Court err in dismissing counts 2 and 3?
The Second Circuit also disagreed with the district court's decision to dismiss two US Airways antitrust claims on Sabre's Rule 12(b)(6) motion to dismiss – claims which revolved around Sabre's alleged monopoly on distribution services to its customers. The district court had ruled that monopolization of a market limited to Sabre's service was implausible. Relying on the Supreme Court's decision in Eastman Kodak Co. v. Image Tech. Services, Inc., the Second Circuit declared that "a single brand of a product or service" may "be a relevant market under the Sherman Act" when no substitute exists for the brand's products or services.[19]
Specifically, the Second Circuit noted four relevant allegations in the US Airways complaint that supported a submarket limited to Sabre's services: (1) alternative distribution services were not reasonably interchangeable with Sabre; (2) cross-elasticity of demand for Sabre GDS services and other alternatives was at or near zero; (3) travel agents using Sabre engage in single-homing, and almost all only use Sabre services, rarely switching to another GDS platform; and (4) Sabre's GDS system made it time-consuming for travel agents to learn to use the system, it was incompatible with other distribution systems, and it was expensive to switch to other systems.[20] Moreover, Sabre's payment structure incentivizes and solidifies travel agent loyalty because it sets a threshold number of required bookings and links the breadth of incentives to the volume of the travel agents' activity on Sabre's platform.[21] For example, agents must maintain a minimum requirement of monthly bookings or face "productivity pricing" which penalizes agencies that begin using other channels of booking.[22]
The Second Circuit noted that the question at issue in the motion to dismiss was merely whether US Airways had plausibly pleaded a Sabre-only market capable of being monopolized under Section 2 of the Sherman Act. Under this narrow issue, the Panel concluded that US Air had met the requirements of the Supreme Court's Image Tech. Services decision to plausibly allege a single brand market that could be monopolized.[23]
Takeaways
While the Supreme Court chose not to remand in Amex, the Second Circuit did in Sabre. The difference may be because Sabre was a jury trial and Amex was a bench trial. Sabre challenged the district court under Rule 50 and Rule 59 motions challenging rulings in a jury trial – both of which were unavailable in Amex, a bench trial. Thus, the Second Circuit in Sabre has provided the lower court an opportunity to right its wrongs, focusing on the fact that the jury was faced with hypothetical questions on the verdict form, as well as the shifting legal jurisprudence resulting from interim Amex rulings. It still remains unclear though why the Supreme Court in Amex axed the suit only because the government had failed to meet the first step of the three-step rule of reason analysis without providing the government the opportunity to restate its claim pursuant to a two-sided market analysis.
Nonetheless, because this is the first court of appeals decision applying the Supreme Court's ruling in Amex recognizing a two-sided "simultaneous transaction market," the Second Circuit's reasoning in its Sabre decision may provide guidance for future cases involving two-sided platforms.
Footnotes
[1] US Airways, Inc. v. Sabre Holdings Corp., 938 F.3d 43, 49 (2d Cir. 2019) (hereinafter "Sabre II").
[2] Id.
[3] Id. at 51.
[4] Id. at 49 – 51.
[5] Id. at 52.
[6] Id. at 53.
[7] Amex, 138 S. Ct. 2274, 2298 (2018) (Breyer, J., dissenting); see also id. at 2280 (the majority defined a transaction platform as covering a business that "offers different products or services to two different groups who both depend on the platform to intermediate between them," where the business "cannot make a sale to one side of the platform without simultaneously making a sale to the other" side of the platform).
[8] See US Airways, Inc. v. Sabre Holdings Corp., No. 11 Civ. 2725, 2017 WL 1064709, at *2 (S.D.N.Y. Mar. 21, 2017) (hereinafter "Sabre I").
[9] Sabre II, at 53.
[10] Id.
[11] Id. at 53.
[12] Sabre II, 938 F.3d at 58.
[13] Id. (emphasis added).
[14] Id.
[15] Id. at 59-60.
[16] Id. at 59.
[17] Id.
[18] Id. at 61.
[19] Id. at 65 (citing Eastman Kodak Co. v. Image Tech. Services, Inc., 504 U.S. 451, 481 (1992)).
[20] Id. at 65.
[21] Id.
[22] Id.
[23] Id. at 66-67.
*Jeanette Bayoumi is an Associate in the New York office.
