Massachusetts Federal Judge Finds That Joint Venture Between American Airlines and JetBlue Serving the Northeast Violates Antitrust Law
On Friday May 19, 2023, Massachusetts Federal District Judge Leo T. Sorokin found that the partnership between JetBlue and American Airlines (“American”), known as the “Northeast Alliance” or “NEA,” harmed competition in the airline industry in violation of Section 1 of the Sherman Antitrust Act. This decision represents a significant victory for the Department of Justice (“DOJ”) and the State Attorneys General who joined the suit, building much needed momentum as the DOJ turns its attention to its challenge of JetBlue’s proposed $3.8 billion merger with Spirit Airlines. While the DOJ hailed the decision as “a win for Americans who rely on competition between airlines,” JetBlue and American criticized Judge Sorokin’s opinion as “plainly incorrect and unprecedented for a joint venture like the [NEA].” In any event, the decision presents important lessons moving forward for Sherman Act Section 1 analysis of joint ventures.
Negotiated in early 2020 and taking effect in 2021, the NEA functioned as a pooling agreement whereby JetBlue and American shared ticketing codes and engaged in revenue sharing, joint scheduling, and gate pooling over many of the airlines’ flights in the Northeastern United States. The NEA covered flights to and from Boston’s Logan Airport, as well as three airports in the New York City area: John F. Kennedy, LaGuardia, and Newark Liberty. The NEA operated to split revenue according to the capacity provided by each airline, rather than the number of passengers carried, which was intended to make the airlines “metal neutral” about which airline passengers chose on those routes. It also meant that American and JetBlue essentially ended competition between the two airlines in the region, including competition for customers.
The crux of the Court’s decision centered around its rejection of the arguments by JetBlue and American that the NEA was necessary for both airlines to compete with Delta Air Lines (“Delta”) in the Northeast region. Judge Sorokin emphasized that “[f]ederal antitrust law is not concerned with making individual competitors larger or more powerful” but rather to “preserve the free functioning of markets and foster participation by a diverse array of competitors.” According to Judge Sorokin, JetBlue and American are two of the biggest airlines in the region, with nearly three-quarters of JetBlue’s overall operations coming in and out of the NEA. Further, American counts New York as one of its hubs (although it contended otherwise) and stands as the third largest carrier operating in Boston. Judge Sorokin recounted how prior to the NEA, JetBlue and American “vigorously competed on everything from fares to the features they offered customers,” but that “[t]he NEA change[d] all of that.” In a world with the NEA, the number of major competitors in the New York City area would be reduced from 4 to 3 and, even more importantly, the number of competitors in Boston would be reduced from 3 to 2. Even further, the Court referred several times to the “spirit of partnership” between American and JetBlue, noting the various ways that competition between them had diminished, which Judge Sorokin attributed in part to the spirit of partnership between them rather than as competitors, even on routes not covered by the NEA.
Importantly, because the NEA was a joint venture rather than a merger or an outright acquisition, the Court analyzed the NEA under Sherman Act Section 1 (which applies to agreements between competitors) rather than Clayton Act Section 7 (which applies to mergers and acquisitions). The parties and the Court agreed that the NEA should be analyzed under the rule of reason, although there was significant disagreement as to the “contours of that framework.” Generally, the rule of reason operates as a burden shifting framework, with plaintiffs bearing the first burden of showing anticompetitive effects, which then shifts to defendants to prove a procompetitive rationale for the agreement. If the defendant meets its standard, then the burden shifts back to plaintiffs to prove that the procompetitive rationale could have been achieved by less restrictive alternatives. The Court rejected the airlines’ argument that the DOJ must show identifiable anticompetitive harm and, instead, held that “proof of likely anticompetitive effects or harm to the competitive process itself” satisfies an antitrust plaintiff’s initial burden. Ultimately, the Court applied the rule of reason framework and found that the NEA causes “considerable and obvious” harms and that there was “no legitimate justification or cognizable benefits” from the NEA. As Judge Sorokin put it, “the central thrust of the NEA — to strengthen the defendants with respect to Delta and United [Airlines] — is anticompetitive for purposes of the Sherman Act.”
For practitioners, the case includes several cautions about the presentation of facts and expert witnesses. Judge Sorokin criticized American for taking positions contrary to its internal business records, including American’s contention that it did not have a hub in New York, even though it had moved to transfer another case to New York because it had a New York hub. Judge Sorokin also discredited the defendants’ experts, in part because they relied on assumptions provided by defendants’ counsel that the Judge said did not square with the facts. In particular, Judge Sorokin found the defense experts to be “tainted by bias” and emphasized that “each defense expert exhibited during his testimony, to varying degrees, the demeanor and tone of an advocate invested in the outcome of this case.” On the whole, due to consistent “misunderstandings,” “misapplications,” and “false assumptions,” as well as what Judge Sorokin found to be clear bias, all of the opinions and conclusions by the defense experts were rejected. It is essential when presenting these kinds of cases that counsel ensure that expert opinions are consistent with internal documents and that expert witnesses appropriately address the facts of any given situation, rather than attempting to construe every piece of evidence in favor of the party that hired them.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.