United States v. AMR Corporation
335 F.3d 1109, 2003 WL 21513205, 2003 U.S. App. LEXIS 13530 (2003)
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Rule of Law:
To establish predatory pricing under Section 2 of the Sherman Act, a plaintiff must demonstrate that the defendant priced its products below an appropriate measure of its costs and that it had a dangerous probability of recouping its investment in below-cost prices. Proxies for cost are only appropriate if they reliably measure incremental costs, like average variable cost, and are invalid if they are based on fully allocated costs or a 'profit sacrifice' theory.
Facts:
- American Airlines operated a major hub-and-spoke system at Dallas/Fort Worth International Airport (DFW).
- Between 1995 and 1997, several low-cost carriers (LCCs), including Vanguard, Western Pacific, and Sunjet, began offering service on routes connecting DFW to cities such as Kansas City, Wichita, Colorado Springs, and Long Beach.
- The LCCs offered significantly lower fares on these routes than American had previously charged.
- In response to the LCCs' entry, American matched their lower fares and significantly increased its own capacity by adding more flights or using larger aircraft.
- American's decision to increase capacity often went against its own internal profitability models for those routes.
- Following American's competitive response, the LCCs on each of the four routes ultimately failed to establish a presence and either moved their operations or ceased to exist.
- After the LCCs exited the markets, American generally reduced its flight capacity and increased its fares to levels comparable to those that existed before the LCCs' entry.
Procedural Posture:
- The United States filed suit against AMR Corporation (American Airlines) in the U.S. District Court for the District of Kansas.
- The lawsuit alleged monopolization and attempted monopolization through predatory pricing in violation of § 2 of the Sherman Act.
- After discovery, American filed a motion for summary judgment on all claims.
- The district court granted summary judgment in favor of American, concluding the government failed to raise a genuine issue of material fact on its claims.
- The United States, as appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Tenth Circuit.
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Issue:
Do an airline's actions of matching a competitor's low fares and increasing flight capacity constitute illegal predatory pricing under Section 2 of the Sherman Act when the plaintiff's evidence of below-cost pricing relies on internal cost-accounting tests that include allocated fixed costs or are based on short-run profit maximization theories?
Opinions:
Majority - Lucero, Circuit Judge.
No. An airline's competitive response of matching fares and adding capacity does not constitute predatory pricing where the plaintiff fails to prove that the airline priced below an appropriate measure of its incremental costs. The Supreme Court's two-part test for predatory pricing from Brooke Group requires a plaintiff to prove both (1) pricing below an appropriate measure of cost and (2) a dangerous probability of recouping the resulting losses. Here, the government failed to create a genuine issue of material fact on the first prong. While Average Variable Cost (AVC) is the most common proxy for marginal cost, the court is willing to consider other proxies so long as they are reliable and accurate. The four tests proposed by the government were legally invalid. Tests Two and Three improperly relied on a 'fully allocated' cost measure (FAUDNC) that included significant fixed costs, making them equivalent to an impermissible average total cost test. Test One was an invalid 'profit-sacrifice' test, as it condemned conduct that was still profitable simply because it did not maximize short-run profits on the route as a whole. Finally, Test Four failed because its cost measure (VAUDNC-AC) included arbitrarily allocated variable common costs, meaning it did not accurately measure only the avoidable or incremental costs of the specific capacity additions. Because all four of the government's proposed cost measures were fatally flawed, it failed to meet its burden of showing below-cost pricing, and summary judgment for American was appropriate.
Analysis:
This case reinforces the formidable evidentiary burden that plaintiffs face in predatory pricing cases under the standard set by Brooke Group. The court's detailed rejection of the government's novel cost-accounting tests signals judicial skepticism toward theories of predation that are not grounded in established economic concepts of marginal or average variable cost. By invalidating tests based on 'fully allocated costs' and 'profit sacrifice,' the decision provides a safe harbor for dominant firms to engage in aggressive price competition, so long as their prices remain above a valid measure of incremental cost. This ruling makes it more difficult for plaintiffs to prove predation by relying on a defendant's complex internal accounting data, pushing them to use more conventional and accepted proxies like AVC.
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