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Aerotec International, Inc. v. Honeywell International, Inc.

United States District Court, D. Arizona

March 17, 2014

Aerotec International, Inc., Plaintiff,
v.
Honeywell International, Inc., Defendant

Decided: March 14, 2014

[Re: Motions at Dockets 107 & 115].

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For Aerotec International Incorporated, an Arizona corporation, Plaintiff: Carson Thomas H Emmons, Craig Matthew LaChance, Daryl M Williams, Michael Chalmer Blair, LEAD ATTORNEYS, Baird Williams & Greer LLP, Phoenix, AZ.

For Honeywell International Incorporated, a Delaware corporation, Defendant: Eric Michael Fraser, LEAD ATTORNEY, Brett L Dunkelman, Chelsea Sage Durkin, Joseph Nathaniel Roth, William J Maledon, Osborn Maledon PA, Phoenix, AZ; Richard George Parker, Omelveny & Myers LLP, Washington, DC.

OPINION

JOHN W. SEDWICK, UNITED STATES DISTRICT JUDGE.

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AMENDED * ORDER AND OPINION

I. MOTIONS PRESENTED

At docket 107, Plaintiff Aerotec International, Inc. (" Aerotec" ) filed a motion for

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summary judgment on all of its claims against Defendant Honeywell International, Inc. (" Honeywell" ). Aerotec's supporting statement of facts is at docket 108. Honeywell filed its response at docket 122, along with its controverting statement of facts filed at docket 123. Aerotec's reply is at docket 130, and additional facts in support of the reply are at dockets 131 and 132.

At docket 115, Honeywell filed a motion for summary judgment on all claims. Its supporting statement of facts is at docket 116. Aerotec's response is at docket 137, and its controverting statement of facts is at docket 138. Honeywell's reply is at docket 142. All documents related to the summary judgment motions were filed under seal. Oral argument was heard on December 5, 2013.

II. BACKGROUND

The case at hand relates to competition in the repair market for auxiliary power units (" APUs" ). APUs are small engines in commercial aircraft that provide power needed for non-propulsion functions such as electric power for on-board electrical equipment and for air conditioning the cabin. Honeywell and Hamilton Sundstrand are the two major manufacturers of APUs, but Honeywell is the largest manufacturer of APUs for commercial aircraft. Honeywell manufactures and sells approximately a dozen different models of APUs.

APUs need routine maintenance, as well as repair and overhaul (" MRO" ) services. When an airline does not perform its own MRO services, it typically will solicit bids from MRO service providers for long-term contracts. An airline usually has more than one type of aircraft, and therefore has to arrange MRO services for different models of APUs. Consequently, an airline will often contract for MRO services with more than one provider.

The most common MRO service agreements are Maintenance Service Agreements (" MSAs" ) and Not-To-Exceed Agreements (" NTEs" ). Both types generally have terms of three to seven years. Under a standard MSA, an MRO service provider charges an airline a negotiated rate based on number of hours spent on repairs, and in exchange the airline agrees to send all APUs of the model covered under the MSA to the MRO service provider for repairs and overhaul for the duration of the agreement. An NTE agreement is a commitment to repair a certain APU model for a price that will not exceed a negotiated amount. That is, an airline will agree to a set rate for labor and parts, but the total charge for any given APU repair job cannot exceed the amount negotiated by the parties.

Honeywell provides MRO services for Honeywell APU models. Indeed, it is the largest provider of MRO services for Honeywell APUs. Honeywell uses NTE agreements most often. There are at least 49 other MRO service providers around the world that service Honeywell APUs. These include independent MRO service providers and airlines that service their own APUs and the APUs of other airlines.

APU component parts are often needed to complete an APU repair, and thus MRO service providers need to obtain component parts. Parts that come from the original APU manufacturer are known as " OEM parts." Honeywell sells Honeywell-branded OEM parts for its APUs. Other MRO service providers, airlines, brokers, and distributors purchase these parts to use or sell for Honeywell APU repairs. Thus, the independent MRO service providers that compete with Honeywell for repair contracts are also Honeywell's customers in the component parts market.

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Some MRO service providers have contractual arrangements with Honeywell for technical support and/or component parts. In addition to straightforward supply agreements for component parts, these agreements take the form of storefront agreements and authorized service center (" ASC" ) agreements. If an MRO service provider has a storefront agreement with Honeywell, Honeywell will consign certain OEM parts at the provider's store for the provider's use, but Honeywell owns the inventory until the MRO service provider needs the inventory for an APU repair job. Honeywell is cutting back on storefront agreements. More common is an ASC agreement. An MRO service provider with an ASC agreement with Honeywell means that the provider is an authorized service center for selected models of Honeywell APUs. The ASC agreements are negotiated between the parties and can vary, but generally, as part of these ASC agreements, the MRO service provider receives some benefits for entering into such an agreement: discounts for the purchase of certain OEM parts, priority of OEM parts allocation, and a license to use Honeywell's intellectual property regarding the repair of APUs. In return, the ASC agreements typically impose certain obligations on the MRO service provider, such as requiring the provider to pay royalty fees to Honeywell, to use only Honeywell OEM parts for repairs of the APU models covered by the agreement, to maintain minimum inventory levels of OEM parts, and to use certain quality control measures.

MRO service providers that do no have agreements with Honeywell can buy OEM parts directly from Honeywell or from brokers, distributors, and others who have surplus parts to sell. They can also buy aftermarket substitute parts, which are APU parts that have been reverse engineered to replicate Honeywell-branded OEM parts. The suppliers go through a process known as " parts manufacturing authority" to obtain approval of these substitute parts; these parts are commonly referred to as " PMA" parts. PMA parts are less expensive than OEM parts but are less common and more difficult to obtain for certain Honeywell APU models. Typically, however, the aftermarket will have more PMA parts as well as more surplus OEM parts available for a certain APU model as that model ages and is installed in aircraft more frequently.

In order to compete with Honeywell, which is both the supplier of component parts and a large competitor for MRO service contracts, MRO providers promote their quick turn around time for repairs and availability of spare APUs for the customer's use as benefits of their services over Honeywell's services. Additionally, the independent MRO service providers that are not contractually obligated to use Honeywell parts can use PMA parts as a way to reduce costs; although, as discussed above, PMA parts are not always readily available.

Aerotec is an independent MRO service provider for several APU models, including both Honeywell APUs and Hamilton Sundstrand APUs. Aerotec competes with Honeywell in the MRO service market. Aerotec controls a small share of the market, with less than 1.0% of the Honeywell APUs in existence under contract for repair services. Aerotec is also a customer of Honeywell in the component parts market, buying Honeywell-branded OEM parts that it uses to perform MRO services on Honeywell APUs. It does not have a contractual agreement with Honeywell and thus buys parts on a purchase order to purchase order basis. The record reflects that in addition to Aerotec there are at least four other completely independent MRO service providers; that is, service

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providers who do not have any storefront or ACS agreements with Honeywell.

Aerotec filed a complaint against Honeywell, arguing that Honeywell has used its position as the predominant APU manufacturer and component parts supplier to behave in an anticompetitive manner in the MRO service market in violation of antitrust laws and price discrimination laws. Aerotec's first claim alleges that Honeywell engaged in illegal tying in violation of Section 1 of the Sherman Act by using its power in the market for Honeywell APU component parts to tie sales of such parts to the sale of Honeywell's MRO services. Aerotec's second claim alleges Honeywell engaged in exclusive dealing and bundled pricing in violation of Section 1 of the Sherman Act by using " exclusive dealing agreements with APU repair customers to foreclose a substantial portion of the APU repair market from rival repair providers" and imposing " a severe pricing penalty if customers do not commit to using Honeywell repair services." Aerotec's third claim and forth claim for relief allege that Honeywell engaged in monopolization and attempted monopolization, respectively, in violation of Section 2 of the Sherman Act by effectively refusing to deal with Aerotec, failing to provide Aerotec reasonable access to facilities that are essential for it to compete in the repair market, using bundled pricing, and requiring exclusive dealing arrangements with repair customers. The fifth ...


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