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Illinois Corporate Travel Inc. v. American Airlines Inc.

decided: November 19, 1986.

ILLINOIS CORPORATE TRAVEL, INC., D/B/A MCTRAVEL TRAVEL SERVICES, PLAINTIFF-APPELLANT,
v.
AMERICAN AIRLINES, INC., DEFENDANT-APPELLEE



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 85 C 07079, Susan Getzendanner, Judge.

Author: Easterbrook

Before BAUER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge. American Airlines does not allow McTravel Travel Services to write tickets good for travel on American, because McTravel will not agree by contract not to advertise discounts. McTravel wants to let people know that it will rebate part of a travel agent's usual 10% commission. American's policy is functionally a price restriction. See United States v. Gasoline Retailers Ass'n, 285 F.2d 688 (7th Cir. 1961); cf. Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 649, 64 L. Ed. 2d 580, 100 S. Ct. 1925 (1980). This led to McTravel's claim that American has violated the per se prohibition against resale price maintenance established by Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 404-09, 55 L. Ed. 502, 31 S. Ct. 376 (1911), and reaffirmed in California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 102-03, 63 L. Ed. 2d 233, 100 S. Ct. 937 (1980). See also Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761 n.7, 79 L. Ed. 2d 775, 104 S. Ct. 1464 (1984).

The district court declined to issue a preliminary injunction, however, concluding that plaintiff McTravel and other "travel service companies" are genuine agents. Ever since United States v. General Electric Co., 272 U.S. 476, 71 L. Ed. 362, 47 S. Ct. 192 (1926), the agency relation has been outside the per se rule of Dr. Miles. The district court thought that General Electric doomed most of McTravel's antitrust arguments as a matter of law. The only possible exception, according to the district court, would arise if there had been "concerted action between American and some of its agents to put McTravel out of business." After reviewing evidence on this score, the district judge concluded that there was no direct support for a conspiracy; as for the inference of a conspiracy, the district court wrote: "The conspiracy evidence (on the present record) is weak." The court then concluded that McTravel would not suffer sufficient irreparable harm pending a trial on the merits to justify an injunction in the face of its "weak" case on the merits.

Because a district court has substantial discretion to evaluate the "equity" factors in passing on motions for preliminary injunctions, see Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429 (7th Cir. 1986); American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589 (7th Cir. 1986); McTravel has devoted most of its effort on appeal to an argument that the district court incorrectly assessed its probability of success on the merits. It seeks to brink the case within a rule of per se illegality. American does not deny that it has refused to allow McTravel to write tickets if it also advertises discounts. If this admitted policy is illegal per se, then the district judge surely abused her discretion in denying McTravel's request for preliminary relief. We therefore take up the argument that American's policy is unlawful per se. McTravel pursues its claim in three ways: arguing that Dr. Miles applies, that there was a conspiracy to evict McTravel from the market, and that American's program so obviously injures consumers that it should be deemed illegal per se even if Dr. Miles does not apply directly.

McTravel's principal argument is that General Electric died an unnatural death at the hands of Simpson v. Union Oil Co., 377 U.S. 13, 12 L. Ed. 2d 98, 84 S. Ct. 1051 (1964). Before the case was argued, however, we concluded in Morrison v. Murray Biscuit Co., 797 F.2d 1430 (7th Cir. 1986), that General Electric is healthy. Employment relations do not violate the antitrust laws; Sears may tell the managers of its stores at what price to sell lawn mowers. Morrison held that genuine agency relations should be treated like employment relations. The owner of a house may tell the real estate agent the minimum price the owner will accept without committing a per se offense. What Simpson held, we concluded, is that a manufacturer may not avoid Dr. Miles by giving the name "agent" to one who serves the same economic functions as an ordinary wholesaler or retailer. The appropriate inquiry, according to Morrison, is "whether the agency relationship has a function other than to circumvent the rule against price fixing." 797 F.2d at 1436.

Counsel for McTravel conceded at oral argument that if this language in Morrison establishes the legal test, then it loses on its per se argument. The concession was well advised, because the district judge's thorough findings demonstrate that the relation is a genuine agency. Travel service operators do not resell air travel. We set out some of the district court's findings.

An air carrier establishes and announces to the public a price for its service. The airline determines the number and destination of flights and the equipment to be used on each. A traveler may reserve seats directly from the airline or through a travel agent; in either case the reservation is likely to be made on a computer that records the number of seats remaining on a flight and the price of each. The travel agent must obtain the airline's clearance (by computer) to book a flight. The agent does not purchase a seat for resale and does not hold an inventory of seats. (Some seats are purchased for resale, usually on charter flights but increasingly on other flights. We do not deal with seats purchased outright by travel service operators.) The airline or any agent in the country can sell the same seat. It remains available until reserved - and sometimes even after, for air carriers "overbook" to deal with no-shows. The traveler with a ticket goes to the airport and is served directly by the airline. If the traveler does not show up, the seat may fly empty and the airline loses the sale. (Some tickets have cancellation charges, a detail that does not affect the analysis.) The travel service operator takes no risk of unfilled seats or of the many problems, from mechanical difficulties to weather, that may make the airline unable to deliver transportation as promised. The airline takes all credit risks on the credit cards it accepts. True, as McTravel argues, the travel agent loses its commission when the traveler does not show and has his ticket refunded, but this is true of any agent when a sale falls through. The relation of travel agent to airline is not substantially different from the relation of broker to real estate owner, of brokerage house to investor, or of travel agent to hotel, rental car company, or other provider of travel services.

The district court concluded from these facts that travel service operators are genuine agents within the meaning of General Electric. This conclusion is amply supported by the record. McTravel therefore sought at oral argument to persuade us to alter the standard articulated in Morrison. It contended that the standard makes liability turn on the intent of the parties adopting the arrangement. Counsel accurately observed that this court has been skeptical about "intent" tests in antitrust laws. E.g., Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370, 379-80 (7th Cir. 1986); Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325, 1338-39 (7th Cir. 1986). See also VII P. Areeda, Antitrust Law P1506 (1986). Intent is a slippery issue, because firms may "intend" to harm rivals or acquire monopolies even though their practices, objectively viewed, are beneficial to consumers, "whose interests the [Sherman Act] was especially intended to serve". Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 15, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984). We do not believe, however, that the standard in Morrison requires reference to the mental states of the parties. "The agency relationship has a function other than to circumvent the rule against price fixing" (797 F.2d at 1436) when, objectively viewed, the arrangement serves one of the economic functions of agencies in general, such as apportioning risk to the firm best able to bear risk, or lodging pricing decisions in the firm best able to gauge market conditions. In Morrison itself the court found that a food broker is an agent because the principal is in the best position to evaluate market conditions and decide on an optimal selling strategy, 797 F.2d at 1437-38, not because of subjective intent. The same objective approach here supports the district judge's conclusion that McTravel is an agent of airlines and not a reseller. This means that the per se rule of Dr. Miles does not apply. (Of course, conclusions that depend on the record compiled so far might be altered if additional facts adduced at trial show that the district court has mischaracterized the nature of the relation between airlines and travel service operators. Here and elsewhere, we speak only of the conclusions drawn on the basis of the existing record.)

McTravel's second argument in support of per se treatment is based on horizontal collusion among dealers, usually a firm footing for per se analysis. McTravel contends that American conspired with other travel agents to cut off competition from an upstart with a novel way of doing business. (McTravel does not allege that there is a conspiracy among airlines.) We agree with the district court that American and its agents are not the same firm for purposes of Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L. Ed. 2d 628, 104 S. Ct. 2731 (1984). Collaboration among dealers orchestrated through American therefore might establish a per se violation. The record does not contain an explicit agreement, however; it must be inferred, if it can be shown at all; the district court thought the evidence in support of such an inference "weak", and this is an appropriate characterization.

The Supreme Court held in Monsanto and reiterated in Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 1356-57, 89 L. Ed. 2d 538 (1986), that to show conspiracy indirectly the plaintiff must demonstrate that the firm is behaving in a way that is inconsistent with unilateral decisionmaking. See also, e.g., Garment District, Inc. v. Belk Stores Services, Inc., 799 F.2d 905, 908-11 (4th Cir. 1986); Souza v. Estate of Bishop, 799 F.2d 1327, 1329-30 (9th Cir. 1986). This means showing that the defendant acted in a way that, but for a hypothesis of joint action, would not be in its own interest. See also Morrison, 797 F.2d at 1439-40; Westman Commission Co. v. Hobart International, Inc., 796 F.2d 1216, 1222-25 (10th Cir. 1986); Business Electronics Corp. v. Sharp Electronics Corp., 780 F.2d 1212, 1217-18 (5th Cir. 1986); Liebeler, Intraband "Cartels" Under GTE Sylvania, 30 U.C.L.A. L. Rev. 1 (1982). If the evidence is consistent with the hypothesis that the firm at the top of the vertical chain designed the restrictions for its own purposes, an inference of conspiracy is inappropriate.

In any chain of distribution discussions of price will be frequent - and as Monsanto pointed out, beneficial too. 465 U.S. at 762-64. Concerns about free-riding by discount travel agents, which we discuss below, may have led American to adopt its policy no matter what the agents thought or wanted. Consequently, it cannot be thought "clearly erroneous" for the district court to conclude that McTravel is unlikely to establish conspiracy here. Evidence that American discussed both price and McTravel with other agents does not support an inference of conspiracy. The usual "conspiracy" argument in a vertical restraints case is that the manufacturer is a cat's paw of "full price" retailers trying to maintain their prices. In this case, by contrast, McTravel complains that American has snubbed it in order to please other big discounters among its agents. There is no plausible anti-consumer reason why American would promote some discounters over another. The district court was entitled to think McTravel unlikely to prevail, at least on the record developed so far.

Much of McTravel's remaining argument asks us to put aside formal labels and turn directly to what McTravel believes is the adverse effect of American's rule on consumers. This is the sort of short form or quick look Rule of Reason analysis endorsed by NCAA v. Board of Regents, 468 U.S. 85, 109-10 & n.42, 82 L. Ed. 2d 70, 104 S. Ct. 2948 (1984). See also VII Areeda at P1508. McTravel argues that American's demand that travel agents not advertise price reductions injures consumers by forcing them to pay higher prices. Because the antitrust laws are designed to assist consumers, see Olympia Equipment, 797 F.2d at 375 (collecting cases), Westman Commission, 796 F.2d at 1220, McTravel concludes that American's efforts to squelch the discounting should be forbidden.

This is a short-run view, however. Any form of vertical restrain affects prices, as the Supreme Court emphasized in Monsanto. The question is not whether the arrangement affects moment-to-moment rivalry in a way that raises today's prices, but whether this effect is associated with potential benefits to consumers that are worth the price. Higher quality may come with higher prices. The antitrust laws do not adopt a model of atomistic competition that condemns all organization; otherwise they would forbid Sears to tell the managers of its stores what prices to charge. Organization may be beneficial; there is little production in a world without organization. The question is how much organization is optimal from consumers' perspective, see Rothery Storage & Van ...


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