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United Air Lines Inc. v. Civil Aeronautics Board

decided: July 3, 1985.


Petitions for review of Orders of the Civil Aeronautics Board.

Bauer and Posner, Circuit Judges, and Morton, Senior District Judge.*fn*

Author: Posner

POSNER, Circuit Judge.

We have consolidated petitions to review two rules (containing three contested regulations) issued by the Civil Aeronautics Board concerning the computerized reservation systems that several airlines provide to travel agencies. 14 C.F.R. Parts 255, 256. Although the Board has since gone out of business as a result of the deregulation of the airline industry, the authority under which these rules were issued survived the deregulation and has been transferred to the Department of Transportation, which will be administering the rules if we uphold them. (To simplify exposition, we shall refer to the regulatory agency throughout as the Board.) The petitions raise difficult questions of administrative law.

Since the mid-1970s several major airlines have created computerized reservation systems, each consisting of computer terminals and printers in travel agents' offices plus telecommunications hook-ups to the airline's master computer that enable the travel agents to send as well as receive. The terminal in the agent's office displays information about flights, including fares, departure and arrival times, and seat availability. The travel agent can use the equipment to book a flight for the customer and print out the ticket. Although each airline that developed a computerized reservation system did so as a marketing tool for its own flights, each system contains flight information for other airlines as well -- without which the system would have very limited value to the agent, since no airline serves all markets and few travel agents have more than one computerized reservation system. An airline that owns such a system will charge travel agents for the use of its system and will charge other airlines whatever they will pay to have their flights listed in the system. The charge to another airline generally is higher, the more competitive the other airline is with the airline owning the system.

There are six systems; five are owned by airlines. The largest system is American Airlines' -- 43 percent of all travel agencies in the United States (by revenue) use it. United's is the next largest, with 27 percent, followed by TWA with 10 and Eastern with 4. Delta and the one independent system have 2 percent each. Of all airline tickets sold, 57 percent (measured by revenues) are sold through computerized reservation systems. The Board's rules are limited to systems owned by airlines; it has no regulatory authority over the independent provider.

Besides the direct charges levied on travel agents and other airlines, airlines that own computerized reservation systems derive substantial revenue from the additional airline business that they get from "biasing" the system, that is, displaying flight information in a way that favors their own flights. The airline might for example impose a "penalty" in its computerized reservation system of 30 minutes on a competitor's flights. Suppose (to take a hypothetical case) United had a nonstop flight leaving Denver for New York at 12:25 p.m. and Frontier had an identical flight leaving at noon. If a customer phoned a travel agent who had United's computerized reservation system and said he wanted a flight from Denver to New York that was leaving around noon, and the travel agent punched this information into the computer, the computer would display United's flight first, ahead of Frontier's. The 30-minute penalty would have put Frontier's flight in second place, as if it really left after rather than before United's flight. Since the actual departure times appear on the screen, the moderately alert travel agent will not be fooled into thinking that United's flight really is more convenient for the customer than Frontier's. But many customers don't care much about the exact time of flight, and since the screen on the computer terminal has room for only eight flights, the devices (only one of which we have mentioned) that the system's owner uses to bias the display may push an otherwise more convenient flight onto the next screen, which will be displayed only if the travel agent presses a button. He may not press it if he doesn't think the customer has a strong preference for a particular departure or arrival time. Although the advantage that biasing confers on an owning airline would seem to be small, apparently it is big enough to generate millions of dollars in extra passenger revenues for such airlines.

The Board's first rule under attack in this case forbids airlines to bias their computerized reservation systems, except when the biasing is directed against certain foreign airlines, or to charge different prices to different airlines for listing in their systems (price discrimination). Other provisions of the rule are not challenged by anyone, so need not be discussed. In a separate rulemaking proceeding the Board issued a rule forbidding the deletion from the airlines' computerized reservation systems of information about connecting flights of two airlines listed under a single airline's code name. Sometimes two airlines will make an arrangement in which two connecting flights, one provided by each airline, are treated as far as possible as if they were connecting flights on the same airline (for example, by having the same or a close-by gate at the connecting terminal), and they are listed in the various computerized reservation systems under the name of the larger airline only. See Allegheny Substitute-Service Agreements, 80 C.A.B. 588, 592-94 (1979). United Air Lines announced that this was a deceptive practice and that it would delete information on such connecting flights from its computerized reservation system. The Board's rule forbids delisting, thus reserving to the Board the responsibility for preventing deception of airline passengers. Although prompted by United's announcement, the delisting rule, like the rule against biasing and price discrimination, applies to all airlines that own computerized reservation systems.

The history of these rulemaking proceedings has now to be described. In 1982 the Board, along with the Justice Department's Antitrust Division, had, at the request of a Congress besieged with complaints from travel agents and from airlines that do not own computerized reservation systems, begun to investigate biasing, price discrimination, and related practices. After completing its report to Congress, and after the Justice Department had completed its own investigation, which concluded (though the Department did not file an antitrust suit) that airlines which own computerized reservation systems use them to weaken competition from other airlines, the Board issued an advance notice of proposed rulemaking on September 9, 1983. The notice invited interested persons to submit written comments by October 17, but the deadline was later extended to November 7. Reply comments were due two weeks later, but this deadline was later extended to December 16. In March 1984 the Board issued a formal notice of proposed rulemaking with a comment and reply period that closed on May 11, and on July 27 the Board issued its final rule. The other rulemaking proceeding, which was limited to the matter of the delisting of connecting flights, proceeded similarly. In neither proceeding was there an evidentiary hearing, that is, a hearing in which witnesses testified "live" and were subject to cross-examination. United Air Lines -- the principal opponent of the proposed rules -- had requested that the proceedings be treated as adjudication rather than rulemaking, so that there would be such a hearing.

Only United has challenged the Board's two rules in all the respects we have mentioned -- biasing, price discrimination, and delisting of certain connecting flights. Republic Airlines challenges the prohibition of price discrimination as having led to higher charges to Republic for listing its flights in computerized reservation systems, while British Airways makes a similar objection and also objects to one aspect of the exemption, in the anti-bias prohibition, regarding certain foreign airlines.

United challenges first of all the Board's power to issue rules, as distinct from cease and desist orders in adjudicative proceedings, to enforce the prohibition in section 411 of the Federal Aviation Act against "unfair or deceptive practices or unfair methods of competition in air transportation or the sale thereof." 49 U.S.C. § 1381. The provision of the Act that empowers the Board to make rules, section 204(a), 49 U.S.C. § 1324(a), empowers it to make only rules "pursuant to and consistent with the provisions of" the Act. Section 411 creates an adjudicative procedure for enforcing its substantive provisions. It authorizes the Board to "investigate and determine whether any air carrier . . . has been or is engaged in unfair or deceptive practices or unfair methods of competition . . . ." If the Board finds, "after notice and hearing, that such air carrier . . . is engaged in such unfair or deceptive practices or unfair methods of competition, it shall order such air carrier . . . to cease and desist from such" behavior. How, United asks, can a rule forbidding a deceptive practice or an unfair method of competition be pursuant to and consistent with section 411, when that section specifies cease-and-desist-order proceedings, traditionally akin to equity trials, for enforcing its prohibitions?

But a more natural reading of section 204(a) is that the Board can make only rules designed to carry out policies set forth elsewhere in the Act -- in section 411, for example. Section 411 announces a policy against unfair or deceptive practices and unfair methods of competition, and while at the same time it creates an adjudicative procedure for enforcing that policy, nothing in the Act indicates that it is the exclusive procedure. In this area, moreover, a page of history is worth a volume of textual explication. The Board has been issuing rules based on section 411 since 1960. See, e.g., National Airlines, Inc., Enforcement Proceeding, 31 C.A.B. 390, 392 (1960) (overbooking); 14 C.F.R. Part 250 (same); 14 C.F.R. Part 253 (notice of passenger contract terms); 14 C.F.R. Part 254 (liability for lost luggage). These rules are well known to every air traveler and no court has ever questioned the Board's authority to issue them. Nader v. Allegheny Airlines, Inc., 426 U.S. 290, 294-95, 303, 306-07, 48 L. Ed. 2d 643, 96 S. Ct. 1978 (1976), is illustrative of the many cases that assume the existence of such authority. A similar exercise of rulemaking authority by the Federal Trade Commission under section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, on which section 411 of the Federal Aviation Act was modeled (American Airlines, Inc. v. North American Airlines, Inc., 351 U.S. 79, 82, 100 L. Ed. 953, 76 S. Ct. 600 (1956)), was upheld in National Petroleum Refiners Ass'n v. FTC, 157 U.S. App. D.C. 83, 482 F.2d 672 (D.C. Cir. 1973), a case that has long been regarded as authoritative, and whose validity United does not challenge. Although the language of the corresponding section of the two statutes is not identical, none of the differences seem deliberate, let alone material.

It is true that the Trade Commission's exercise of what had been a dormant rulemaking power (other than to make rules of procedure) proved to be extremely controversial, with the result that in 1975, and again in 1980, Congress placed specific limitations on the use of the power to deal with unfair or deceptive practices. See Magnuson-Moss Act of 1975, adding 15 U.S.C. § 57a; Federal Trade Commission Improvements Act of 1980, amending 15 U.S.C. § 57a. But it was assumed that the Trade Commission had the power to issue substantive rules; Congress just wanted to limit the exercise of the power in particular ways. This hardly suggests either that the Civil Aeronautics Board lacks power to make rules to administer section 411 or that it must conform its rulemaking to procedures prescribed in amendments to the Federal Trade Commission Act. On the contrary, the legislative history of the 1984 "Sunset Act," which transferred the Board's rulemaking powers to the Department of Transportation upon the Board's demise, reveals that one reason why Congress refused to transfer those powers to the Federal Trade Commission instead of the Department of Transportation was "the prolonged rulemaking procedures which FTC is required to undertake under the Magnuson-Moss Act." H.R. Rep. No. 793, 98th Cong., 2d Sess. 6 (1984).

Congress, looking forward to the period after abolition of the Board, was very concerned to preserve (in the Department of Transportation) authority to enforce section 411. See Civil Aeronautics Board Sunset Act of 1984, Pub. L. 98-443, §§ 3, 7, 98 Stat. 1703, 1706 (Oct. 4, 1984); H.R. Rep. No. 793, supra, at 3-6; H.R. Conf. Rep. 1025, 98th Cong., 2d Sess. 14-15 (1984). And Congress was well aware that the Board had used rulemaking to enforce the section. See H.R. Rep. No. 793, supra, at 4. It is too late to inquire whether, as an original matter of interpretation of sections 204(a) and 411, rulemaking can be used to prevent unfair or ...

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