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TOWER AIR, INC. v. FEDERAL EXPRESS CORP.

October 15, 1996

TOWER AIR, INC., Plaintiff, against FEDERAL EXPRESS CORPORATION, Defendant.


The opinion of the court was delivered by: SEYBERT

 INTRODUCTION

 Plaintiff Tower Air, Inc. ("Tower") brings this action against defendant Federal Express Corporation ("Federal Express") asserting a number of causes of action arising from the participation of Tower Air and Federal Express in a joint venture to provide civilian air support to the Military Air Command ("MAC") in times of national emergency. Federal Express now moves to dismiss Tower's Claims XII through XV for failure to state a cause of action under the Sherman Act. Federal Express further moves to dismiss Claims I through XI of Tower's complaint on the basis of lack of subject matter jurisdiction, or in the alternative, that this Court should decline to extend supplemental jurisdiction over these claims. Finally, Federal Express also moves to dismiss Claims I through XI on the grounds that Tower failed to assert these claims as compulsory counterclaims in a prior related litigation instituted in Tennessee state court by Federal Express against Tower.

 For the following reasons, the Court hereby converts Federal Express's motion to dismiss as to Claims XII through XV into one for summary judgment and denies that motion. The Court further denies Federal Express's motion to dismiss as to Claims I through XI.

 FACTUAL BACKGROUND

 A. The CRAF Program and the MAC Contract

 The Government, in contracting for air support under the CRAF Program, engaged a number of contractors to provide these services. The government ordered service from all MAC airlift service contractors on an equitable pro rata basis, giving consideration, among other things, to each contractor's aircraft commitment to the requirements of the CRAF stage which had been activated. Once a contractor participated in the CRAF Program, it was then eligible to compete for MAC peacetime annual airlift services contracts. These peacetime flights were only offered to carriers that were CRAF participants or agreed to become CRAF participants.

 In 1989, the government issued a solicitation for bids on a MAC contract to provide private air service to the government for guaranteed fixed-schedule flights, CRAF activation and expansion-peacetime operations (the "MAC Contract"). As per the solicitation, otherwise known as a "Request for Proposal" or "RFP," prices to be paid for all fixed and expansion services would be determined at the MAC negotiated uniform rates and in accordance with a Memorandum of Understanding issued by the Air Force. The government intended the contract to be an award of a multi-year indefinite quantity fixed unit price contract.

 The RFP provided that joint ventures could participate as a single contractor to provide the air services required under the MAC Contract. Because the MAC Contract required both passenger and freighter air service, such joint ventures enabled carriers who provided primarily one type of service to join together and present a more attractive package to MAC. The MAC Contract required, however, that if a contractor was a joint venture, the terms of the joint venture agreements had to correspond to the terms of the MAC Contract and had to provide for one designated and authorized party to bind the joint venture in dealings with the government. In addition, the joint venture agreement had to provide for (1) joint and several liability among the members, (2) one member to act the sole payee for all revenues earned by members of the joint venture and (3) a statement of unity of purpose among the members. Moreover, the MAC Contract prohibited any member of a joint venture participating under the MAC Contract from competing on an individual basis for the same awards.

 In deciding whether or not to make an award under the MAC Contract, the government would consider: (1) the number of aircraft by type that the contractor was making available for CRAF activation purposes and (2) the mobilization value of the committed aircraft. As a separate incentive to induce airlines to participate in the CRAF Program, the DOD conferred mobilization value points ("MV Points") to each participant. These MV Points allowed airlines the opportunity to operate routine MAC operational and training flights during peacetime, for which the airlines earned agreed-upon revenues.

 B. The Joint Venture Agreement

 To be able to successfully compete for the MAC Contract, on May 10, 1989, Tower and Federal Express entered into a joint venture agreement (the "JV Agreement"), along with the Flying Tiger Line Inc., Northwest Airlines, Inc. ("Northwest"), United Parcel Service Co. and its parent United Parcel Service of America, Inc. (collectively, "UPS"), and Pan American World Airways, Inc. ("Pan Am"). The stated purpose of the JV Agreement was to form a joint venture: (1) to contract with MAC as a single entity in order to satisfy miliary requirements for CRAF participation, (2) to obtain eligibility for MAC fixed contract flights and (3) to obtain eligibility for peacetime expansion flights. JV Agreement, Exhibit A to Complaint, at 1.

 C. The Supplemental Agreements

 In addition, on May 10, 1989, Federal Express and Tower entered into a separate supplemental agreement to the JV Agreement. MAC would, from time to time, offer to the JV additional passenger flights not included in the fixed flights under the MAC Contract. These additional flights were termed "Expansion Flights." Under the Tower Supplemental Agreement, when either Federal Express or Northwest did not have aircraft available to meet MAC's needs for these Expansion Flights, Federal Express promised to refer the Expansion Flights to Tower. If Tower then operated these flights, it would pay Federal Express a 2 1/2% commission of the gross revenues payable by MAC.

 Federal Express also entered into supplemental agreements with Northwest, UPS and Pan Am. On May 12, 1989, Federal Express and Northwest entered into an agreement supplemental to the JV Agreement and the JV Operating Agreement (the "Northwest Supplemental Agreement"). According to Tower, the terms of the Northwest Supplemental Agreement provided for:

 
(a) the division of the market for MAC Program flights for Category Y and B Passengers and Category B Cargo flights by allocating
 
(i) all Pacific Category Y passenger service flights and all North Atlantic Category Y passenger service flights originating in Boston, Detroit and Minneapolis to Northwest;
 
(ii) all North Atlantic Category Y passenger service flights except for those originating in Boston, Detroit and Minneapolis to other JV participants;
 
(iii) all Category B cargo flights to Federal Express;
 
(iv) Category B passenger service to Federal Express and Northwest according to an agreed upon formula, with Northwest having a right of first refusal on all Atlantic flights not flown by Federal Express and on all Expansion Flights not flown by Federal Express; and
 
(v) Category B passenger Expansion Flights not operated by Federal Express or Northwest to Tower Air.
 
(b) Division between Federal Express and Northwest of the JV participants entitlement benefits under the MAC Contract to fly the most desirable flights, i.e. fixed contract passenger and cargo flights, such that Federal Express received all of the entitlements of UPS and Tower Air, and Federal Express and Northwest split the entitlements of Pan Am.
 
(c) Allocation of commissions received from Tower Air and Pan Am to Federal Express and Northwest; and
 
(d) Covenants to take no action which could adversely affect the aforesaid division of the market and revenues therefrom.

 Complaint, P 89.

 On May 11, 1989, Federal Express and Pan Am entered into an agreement to supplement the JV Agreement and the JV Operating Agreement (the "Pan Am Supplemental Agreement"). According to Tower, this agreement provides for:

 
(a) the division of the market for MAC Program flights for Category Y and B Passenger flights and Category B Cargo flights by allocating
 
(i) all North Atlantic Category Y passenger service flights except for those originating in Boston, Detroit and Minneapolis to Pan Am;
 
(ii) all Pacific Category Y passenger service flights and all North Atlantic Category Y passenger service flights originating in Boston, Detroit and Minneapolis to Northwest;
 
(iv) Category B passenger service to Federal Express and Northwest, with some Category B Expansion Service to be assigned to Tower Air by Federal Express; and
 
(b) payment of commissions by Pan Am to Federal Express on compensation paid to Pan Am by MAC for Category Y passengers carried by Pan Am as a result of Pan Am's participation in the Joint Venture.

 Complaint, P 90.

 On May 12, 1989, Federal Express and UPS entered into a supplemental agreement to the JV Agreement (the "UPS Supplemental Agreement"), which provided that:

 
(a) Federal Express would pay UPS a fixed percentage of the value of the MAC Contract, paid monthly and a percentage of revenues received by Federal Express as a result of Northwest's, Pan Am's and Tower Air's participation in the Joint Venture:
 
(b) UPS would give Federal Express all of its entitlement flights and to undertake flights under the MAC Contract only if Federal Express was unable to do so.

 Complaint, P 91.

 In its complaint, Tower also claims that Federal Express made similar agreements with Delta Airlines ("Delta"), Trans World Airlines, Inc. ("TWA") and United Airlines, Inc. ("United"), who were not parties to the JV Agreement, under which Federal Express collected commissions for flights awarded by MAC to the joint venture. Complaint, P 92.

 D. The Gulf War

 MAC first made use of the services available under the JV Agreement beginning in 1990 with the outbreak of the war in the Persian Gulf. On August 17, 1990, MAC ordered a Stage I CRAF activation with the commencement of Operation Desert Shield. By January 17, 1991, MAC elevated its requirements to Stage II CRAF activation with the start of Operation Desert Storm. By May l7, 1991, MAC reclassified activation to Stage I, and by May 24, 1991, all activation stages were terminated.

 From January 1, 1990 to December 31, 1992, MAC dealt directly with Tower to arrange military flights on Tower's aircraft. Although payment was exchanged solely between Federal Express and MAC, MAC would communicate directly with each air carrier to schedule missions under the CRAF Program under MACR 55-8, Section 3-4. In accordance with the JV Agreement, Tower then billed MAC directly for services relating to the use of its aircraft. MAC then remitted payment to Federal Express for payment to Tower. Tower claims that Federal Express unjustly withheld $ 4,029,689 from the payment sent by MAC as a commission of 2 1/2% ...


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