On September 16, 2005, the Third Circuit affirmed a district court’s dismissal of a plaintiff’s antitrust case on summary judgment in Harrison Aire, Inc. v. Aerostar International, Inc., Nos. 04-2904 & 04-3052 (3d Cir. Sept. 16, 2005). The three judge panel unanimously concurred with the district court that Harrison Aire had failed to show that Aerostar International had illegally established a monopoly over the market for replacement fabric for Aerostar hot air balloons or had illegally tied its repair fabric to the purchase of the balloon. The Third Circuit did, however, decide that Harrison Aire had standing to raise antitrust claims.

The facts of the case are as follows: Terry Harrison founded Harrison Aire, which offered hot air balloon flights in New Jersey, after retiring from his position as a pilot with Eastern Airlines in 1973. Mr. Harrison purchased his first hot air balloon from Raven Industries, the predecessor of Aerostar, in 1978. After purchasing the balloon, Raven’s representative informed Mr. Harrison that he could only use Raven-made replacement fabric to repair the balloon, as other fabric would render the balloon “unairworthy.” Id. at 3-7.

According to the decision, Mr. Harrison complained about this restriction, as repairing a balloon generally increases the usable life by 50-100% and other manufacturers sold considerably cheaper fabrics. In 1982, Raven made the policy explicit by placing the language in its owner manual, although Raven placed the language in the FAA Approved section, as opposed to the FAA Required section. Mr. Harrison continued to complain, but the representatives continued to tell him that no other fabric was “equal to or better” than Raven Fabric. Because the FAA required that any replacement parts make the balloon “equal to or better” than the original, Mr. Harrison understood Raven’s answer to mean that his hot air balloons would no longer comply with FAA regulations if he repaired his balloon with non-Aerostar fabric. Id. at 6.

Aerostar, which purchased Raven in 1986, continued to refuse Mr. Harrison’s requests to use other manufacturers’ fabrics. Despite the refusals and his desire to find a better price for his replacement fabric, Mr. Harrison bought a “Big Ride” Aerostar balloon in 1986. In 1996, the balloon’s fabric needed replacing, and Mr. Harrison again asked Aerostar to allow him to use the fabric of either of the manufacturers who had received approval to produce fabric for Aerostar balloons. Again, Aerostar refused to allow him to use other fabrics and, after investigating one of the brands and finding it unsatisfactory, Mr. Harrison decided to retire the “Big Ride” balloon. Id. at 7.

In July 2000, Braden’s Balloons Aloft, Incorporated convinced an administrative law judge that Aerostar’s warning was not legally binding. After learning of the decision, Mr. Harrison decided in March 2002 to file suit against Aerostar, alleging that Raven’s and Aerostar’s policies had caused his cash flow problems stemming from the operation of the “Big Ride” balloon. Specifically, Mr. Harrison argued that Raven and Aerostar had attempted to monopolize the Aerostar Balloon replacement fabric aftermarket, that Aerostar had unlawfully tied the Aerostar-brand fabric to Aerostar balloons, and a number of state law claims. Id. at 7-8.

The district court granted Aerostar’s motion for summary judgment, holding that Mr. Harrison had failed to show that Aerostar had sufficient market power over the markets for either hot air balloons or replacement fabric, and that Mr. Harrison did not have antitrust standing, as he was injured by Raven’s and Aerostar’s purported misrepresentations, rather than any actual limitations. Mr. Harrison and Aerostar then agreed to dispose of the state law claims to facilitate appeal of the antitrust issues. Id. at 8, n. 1.

The Third Circuit affirmed the district court’s substantive antitrust decisions. The Third Circuit first defined the relevant product market as “replacement fabric for Aerostar balloons.” Id. at 16-17. The Third Circuit then looked to the Supreme Court’s Kodak decision to answer “whether competition in the equipment market will significantly restrain power in the service and parts market.” Id. at 17.

With regard to monopolization, the Third Circuit noted that usually competition in a primary market will discipline any attempt to monopolize the aftermarket, as customers, perceiving the higher prices in the aftermarket, will opt to purchase competitors’ products in the primary market. Primary market competition will not restrain aftermarket abuses, however, if there was a combination of 1) a policy change after the products were purchased, 2) supracompetitive pricing, 3) dominance of the relevant aftermarket, 4) significant information costs that prevent life cycle pricing, or 5) high switching costs that could lock in a customer. Id. at 17-18.

The Third Circuit held that Mr. Harrison failed to show that Aerostar dominated the primary market or that any of the Kodak factors indicated undue market power in the aftermarket. Id. at 18. The Third Circuit noted that despite being aware of the restrictive fabric policy and its implications, Mr. Harrison chose in 1986 to purchase the “Big Ride” balloon from Aerostar. Mr. Harrison had the benefit of a competitive primary market when he chose Aerostar in 1986 and therefore should have calculated the costs of repairing the balloon with Aerostar material at that point. “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 is proper on Harrison Aire’s monopolization claim.” Id. at 20.

The Third Circuit summarily dismissed the tying claim, holding that “the claim lacks merit.” Id. Mr. Harrison had alleged that Aerostar had tied its replacement fabric to its hot air balloons. The Third Circuit found that because “[t]ying requires ‘appreciable economic power’ in the tying product market,” Mr. Harrison’s failure to “produce any evidence of appreciable market power in the tying product market” doomed his claim. Id. at 20-21.

The Third Circuit did hold, however, that Mr. Harrison had standing to raise his substantive antitrust claims. According to the Third Circuit, a jury may have found that Mr. Harrison’s reliance on the manual’s restrictions was reasonable. The Third Circuit also noted that until the Braden’s case, the FAA had also thought that the Aerostar restrictions were binding. Thus, if Mr. Harrison had proven that Aerostar had prevented him from considering competitors, he would have suffered “the sort of harm the antitrust laws are intended to prevent.” Id. at 22-23.

Although Mr. Harrison had standing to allege his antitrust injuries, the Third Circuit held that because he could not show that Raven or Aerostar had power in the primary market for hot air balloons, both his monopolization and tying claims failed.

Authored by:
Christopher Bowen
202-772-5348
cbowen@sheppardmullin.com