OST-98-4363 / Love Field / Petition of DFW / January 12, 1999

DFW Airport also requests that the Department reconsider its ruling that DFW Airport has not sufficiently identified the evidentiary material that the Department was asked to consider, in ruling

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on DFW Airport's positions and, in light of the explanation presented herein, act accordingly. Order 98-12-27, p. 20, n.4.

In support whereof DFW Airport states as follows:

By Order 98-12-27 the Department issued its interpretive ruling on these "federal law" questions concluding, inter alia, that (i) the 1968 Agreement and the Bond Ordinance could not be enforced to limit Love Field services authorized by federal law, and that Dallas' proprietary power cannot be used to restrict such Love Field services; (ii) the ability of Dallas to limit

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Love Field services was preempted by the Wright and Shelby Amendments; and (iii) the Wright and Shelby Amendments authorized unrestricted Love Field service with aircraft of 56 or fewer seats.

2. Prior to the Department's ruling the Texas state court granted summary judgment in the Fort Worth case in favor of Fort Worth, American, and DFW Airport, on those very issues. The summary judgment granted on October 15, 1998, was made final by order dated December 16, 1998 ("Final Judgment"). As set forth in the Final Judgment, Judge McCoy ruled as follows: ( 1) the 1968 Agreement between Dallas and Fort Worth and the Concurrent Bond Ordinance are not preempted by the ADA because they are a valid exercise of Dallas' proprietary rights; (2) Dallas, as owner of Love Field and co-owner of DFW Airport, is a multi-airport proprietor with proprietary rights to restrict Love Field service to Texas and the four contiguous states; and (3) the Wright and Shelby Amendments do not preempt enforcement of the Agreement and Concurrent Bond Ordinance to authorize thereby interstate service from Love Field to points beyond Texas and the four contiguous states. See Final Judgment attached hereto as Exhibit A.

3. DOT Declaratory Order 98-12-27, and the accompanying Procedural Order 98-12-28, each summarize briefly the Texas state court litigation and mention the state court's summary judgment decision in that case. However, neither order acknowledges or even mentions the fact that the state court already issued its Final Judgment in the action, making that summary judgment final. :Moreover, the Department's Declaratory Order totally ignores the substance of the state court's Final Judgment, even though the agency is required by federal statute and case law to give the same full faith and credit to the decision as would the Texas state courts. See paragraphs 5-9 below.

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4. Order 98-12-27 does not address the preclusive effect of Judge McCoy's decision or the application of the federal "full faith and credit" statute even though this issue was squarely presented by American Airlines' Motion for Leave to Supplement the Administrative Record dated December 18, 1998 which was accompanied by a copy of Judge McCoy's Final Judgment order. The Department's failure to squarely address these issues is inexplicable. Out of an abundance of caution on what would otherwise constitute clearly reversible error, the DFW Airport seeks reconsideration to avail the Department of the opportunity to comply with federal law and precedents applicable to this critical area of federal-state relations.

Curiously the Department admits in its Procedural Order 98-12-28, at pp.8-9, that "the Texas courts could decide the federal statutory issues raised by the Love Field dispute without any interpretation being issued by it [DOT]. . .," which is precisely what the Texas state court did in the Fort Worth case. The Department, however, appears to argue that the state court's decision upon these issues does not bind the DOT or affect its enforcement actions because the Department was not a party to the state court proceeding. (Order 98-12-28, pp. 8-9, & fn.2). The Department cites absolutely no statute or case law in support of this conclusion of law, which is not surprising, because a review of the applicable authorities, as discussed below, would lead the agency to a contrary result.

5. Section 1738 of 28 U.S.C. requires the judicial proceedings of a state to be given the scone full faith and credit in a federal court as they would be given by the courts of the state from which they were taken. Worded otherwise, the statute "directs all courts to treat a state

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court judgment: with the same respect that it would receive in the courts of the rendering state." Matsushita Elec.. Indus. Co. Ltd. v. Epstein, 516 U.S. 367, 373, 116 S.Ct. 873, 877 (1996).

6. In Town of Deerfield. N.Y. v. F.C.C., 992 F.2d 420, 429 (2d Cir. 1993), the Second Circuit applied this principle, holding that according full faith and credit to a state court judgment requires application of that state's principles of res judicata and collateral estoppel. The Deerfield court further held that a federal administrative agency could not simply ignore a federal court judgment, thereby refusing to give it full faith and credit. Id. at 428. Combining these two principles, the Deerfield court found that a federal agency, the Federal Communications Commission, could not disregard the prior ruling of a federal court, even though the federal court had simply given full faith and credit to a state court ruling on the involved federal law issue. Id. at 428-249. Thus, the federal agency was, in effect, required to give the state court ruling full faith and credit. Allowing an administrative agency to ignore a valid state court decision would transform the decision into nothing more than an advisory opinion to be disregarded at will by dissatisfied litigants.

7. Other cases clearly support the extension of Deerfield to the situation that exists here involving direct adherence to a state court decision by a federal agency. In Midgett v. U. S. . 603 F.2d 83 5, 845 (Ct. C1. 1979), for example, the Federal Court of Claims, in discussing the full faith and credit requirement of Section 173 8, held that "Administrative bodies of the United States as weld as courts are required to adhere to this requirement. " In U. S. v. ITT Ravonier, Inc., 627 F.2d 996 (9th Cir. 1980), when disputes arose over Rayonier's compliance with its water pollution discharge permit, the Ninth Circuit held that the EPA was bound, in a federal enforcement

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action alleging noncompliance with the terms of the federal permit, by the state court's earlier interpretation of a pertinent provision of the Rayonier's federal permit. /1

8. Once the Texas state court entered its valid Final Judgment in the Fort Worth case, that judgment was entitled to full faith and credit notwithstanding any appeals filed by other parties. An appeal merely suspends execution of the judgment, it does not vacate the judgment or in any other respect infringe upon its finality. Scurlock Oil Co. V. Smith, 725 4 S.W.2d 1, 5 (Text 1986). Texas follows the federal rule, adopted by a majority of states, that a trial court judgment has preclusive effect for res judicata and collateral estoppel purposes even though it remains subject to appeal. Id. at 6. Cf. In re Gen. Motors Corp. Prods. Liab. Litigation, 134 F.3d 133, 143 (3rd Cir. 1998).

9. DOT is bound to follow the state court ruling even though it did not participate in the state court proceeding. See, eg Deerfield, supra (FCC bound by New York state court decision as affirmed by the federal court even though FCC was not a party in prior lawsuits). " [T]he rule in Texas is that a judgment in favor of or against a municipal corporation, county, or state on a matter affecting the public interest binds all citizens and taxpayers even though they were not made parties to the suit." Superior Oil Co. v. Citv of Port Arthur, 726 F.2d 203 (5th Cir. 1984). Thus, the federal court found the Texas state court ruling on a federal constitutional issue in a quo

1/ Exceptions to this general rule have ordinarily been made only where the state court imposed a requirement that is contrary to important, well-established countervailing federal policy. Thus, for example, the courts have not required federal agencies under Section 1738 to give full faith and credit to a state court decision involving federal labor law or civil rights issues in employment discrimination cases. See, e.g., N.L.R.B. v. Yellow Freight Syst.. Inc., 930 F.2d 316, 320-21 (3rd Cir. 1991); U.S. v. ITT Rayonier, 627 F.2d 996, 1001-02 (9th Cir. 1980).

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warranto proceeding to have a preclusive effect on Superior Oil in a later federal court lawsuit filed against the City of Port Arthur challenging the constitutionality of the annexation, even though Superior Oil had not been a party to the earlier proceeding. The Texas state court's rulings in favor of the City of Fort Worth in the Fort Worth case similarly are matters of public interest that would have a preclusive effect in later proceedings.

Moreover, although DOT was not a party to the state court action, given the agency's rulings, these were precisely the arguments made by Legend, Continental and Dallas. On the three federal law issues decided by Judge McCoy, those parties took and vigorously asserted the arguments that DOT would have asserted given its ruling had it been a party thereto. Thus, the Department is bound by the decision notwithstanding its status as a non-party. U. S. v. ITT Rayonier. Inc., 627 F.2d 996, 1003 (9th Cir. 1980). To the extent that DOT wants to make the state court aware of its position on these issues, we respectfully suggest that DOT seek to participate as an arnicus in the appeal of the Fort Worth case before the Texas Court of Appeals.

10. DFW Airport also seeks reconsideration of the Department's ruling that evidentiary material to be considered had not been sufficiently identified by the DFW Airport in its comments. Order 98-12-27, p. 2Q, fn.4. As stated in the Department's instituting Order 98-8-29, which identified this as an "Interpretation Proceeding," the Department stated its intention to rule on certain federal legal issues involving interpretation ofthe Wright and Shelby Amendments and the

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ADA's preemption provision. Order 98-8-29, p. 3. ("Whether Dallas' contractual commitments to Fort Worth allow Dallas to restrict service at Love Field...seems to depend primarily on the meaning of 49 U S.C. 41713(b). Id. at p. 4) Thus, the Department's apparent intent was solely to focus on issues of statutory/ construction and Congressional intent, not factual analysis. In Declaratory Order 98-12-27, however, the Department has improperly converted the case into an evidentiary proceeding dependent on proof by DFW Airport and others that their positions comport with the Department's newly-minted (and previously unknown) legal interpretations. As DFW Airport did not have notice of the Department's newly-developed standards for judging, for example, the validity of an airport owner's exercise of proprietor rights, DFW Airport did not select, submit or organize its evidentiary material with this objective in mind.

11. Nevertheless, DFW Airport continues to believe the evidentiary material already submitted supports the contention that enforcement of the Bond Ordinance is a valid exercise of Dallas' proprietary rights consistent with the test enunciated in British Airways Board v. Port Authority, 52;8 F.2d 75 (2d Cir. 1977). ("[T]he airport operator is circumscribed to the issuance of reasonable, nonarbitrary and nondiscriminatory rules that advance the local interest." Western Air Lines v. Port Auth.. of N.Y. and N.J., 658 F.Supp. 952, 958, aff'd 817 F.2d 222 (2nd Cir. 1987)). The local interest of the airport proprietor undergirding imposition of the Bond Ordinance perimeter We is the legitimate goal set out in the Bond Ordinance and other related documents entered into by the Cities. It was -- and continues to be -- to assure the economic success of the regional airport Dallas owns with Fort Worth, to assure an appropriate balance of flights between Love Field and DFW, to comply with the CAB's 1964 directive that the Dallas/Fort Worth area be served through

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a "single airport," and to honor Dallas' commitments to Fort Worth under the Bond Ordinance. See DFW Airport Reply Comments, p. 4. The legitimacy of this goal has not been eroded with the passage of time; it is as valid today as it was 30 years ago. Nor do changed regulatory circumstances or the DFW Airport's present success lessen the validity of the Cities' commitments or their continued legitimacy today as a valid exercise of Dallas' proprietor rights. Indeed the "movable" test enunciated by the Department with its reliance on "changed circumstances" establishes a bad precedent tor the airport bond financing and airline use agreements in place throughout the country. The evidence explaining and supporting the validity of Dallas' exercise of proprietary rights, should the Department desire to examine them, can be found among other places in DFW Airport Exhibits I (Contract and Agreement, specifically Us 1-9 ), 8 (Bond Ordinance, specifically pp. 2-54), 9 (Airport Master Plant specifically pp. 12-38), 5 (CAB Order No. E-21341, September 30, 1964), and 4 (Written Testimony of the Federal Aviation Agency, CAB Dkt. 13959 specifically pp. 1-5).

12. Similarly, if the Bond Ordinance is enforceable, then DFW Airport's use agreements -- now vitiated by the Department's view of preemption and proprietary rights -- are enforceable and should be enforced. Furthermore, as discussed in DFW Airport's Reply Comments, the enforceability of the use agreements is not dependent upon the validity of the Bond Ordinance. The Bond Ordinance was incorporated into the use agreements merely as a part of the contract, like any other term? and does not have "statute rank. " Craddock Internat'l Inc. v. WKP. Wilson & Son, Inc., 1 16 F.3d 1095, 1107-8(5th Cir. 1997); see DFW Airport's Reply Comments at pages 21-25.

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Doubts about the Bond Ordinance's status as a statute do not undermine the intention of the parties or the validity of the contract incorporating the ordinance. The Department should, therefore, reconsider its interpretations of contract law and the enforceability of the DFW Airport's use agreements.

13. Moreover, without conceding that the Department has applied the correct standard based on the court precedents, the evidence submitted by DFW Airport and others shows that allowing unfettered operations at Love Field under the Shelby Amendment would contribute to the degradation of DFW's role as the Dallas/Fort Worth area's dominant airport and threaten to fragment the hub operation at DFW. See Order 98-12-27, p. 39. DFW Airport respectfully suggests that the testimony of the expert witnesses who testified in the state court proceeding (submitted over three months ago with the DFW Airport's September 22, 1998 comments) should be carefully considered by the Department in its entirety. These experts testified concerning the nature and extent of the irreparable injury to DFW Airport if Continental Airlines -and other airlines making a competitive response -- began interstate flights from Love Field beyond the current restrictions of the Wright Amendment and without the constraints of the Bond Ordinance and the Use Agreement. The ramifications for DFW of such an increase, the evidence shows, is that DFW's growth would be sharply reduced and the DFW hub would be dramatically reduced in size and scope.

14. Mr. Daniel Kasper, who has thirty years of experience in airport and airline economic and financial analysis (Exhibit 24, RR 2:1 12-17, 121-22), testified that "if

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Continental does successfully enter Love Field, that will spur or encourage other airlines to seek rapidly to enter Love Field" (R 2:123). Mr. Kasper concluded:

… don't have any doubt that if Continental is permitted to serve Love Field, that there will be competitive response and competitive responses quickly to that, including efforts and, I suspect successful efforts to begin service at Love Field prior to the trial of this case on the merits later this year or early next year.

* * *

[American Airlines] knows how this game will play out, and they're not going to wait and let Northwest and Delta and USAir and others come in and start picking Their prime traveler market, and they're going to come in to Love Field in a big way.... So I think it is predictable to me that those three flights will certainly lead to that kind of response.*** I do know, with a high degree of comfort, that I believe that three flights is-it's not going to be limited to three. It's going to be more-it will either be zero or more than three by the end of the year. I am convinced of that.

[RR 2:1 54_56]2

Mr. Kasper is certain that other airlines could and would commence service into Love Field in the short term [RR 2:158-60]. He identified United, Delta, and Northwest as airlines with business reason for moving back to Love Field.

Mr. Jon Ash, an expert called by DFW Airport [Exhibit 24, RR 3:204-05] agreed with Mr. Kasper's assessment:

[I]f somebody starts, if that Cleveland service starts, I think we'll see others move. And I think we'll see them move quickly and aggressively. This is a very, very aggressive industry, and nobody is willing to forfeit their home market and particularly their high-yield home market.

[RR 3:2 11 -12].

2/ "RR" denotes record reference, followed by the volume number and then page numbers.

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Mr. Matthew Hardison, Continental's witness, agreed that it would be reasonable to expect that when one airline starts flying out of another airport and serving other destinations, competing airlines will "jump in on that" [RR 3 :297]. Mr. Daniel Akins, another witness for Continental, agreed that several airlines (including Delta, Air Canada, USAir and United) have 50-passenger regional jet aircraft similar to those Continental plans to fly between Love Field and Cleveland. [RR 3 :280-84]. Those jets could easily be diverted to interstate Love Field service.

The deposition testimony of Mr. Gary Kennedy, Vice President, Corporate Real Estate at American Airlines, was used by DFW Airport in the state court proceeding to prove that if Continental began its flights to Cleveland then American would respond by operating "extensively out of Love Field as quickly and efficiently as we can do so." [Exhibit 24, RR 3 :32]. Mr Kennedy confirmed that American will spend the necessary capital in order to fly interstate flights from Love Field if Continental undertakes such flights [RR 3 :13-14]. Mr. Kennedy also disclosed the after Dallas makes facilities available to American at Love Field, he could have those facilities "up and running to go easily within 30 days" [RR 3 :15].

15. Mr. Matthew Hardison, Continental's consultant, candidly testified that if American introduced a significant number of new operations at Love Field to counter Continental's competitive threat there, the short term impact would be "chaos" [Exhibit 24, TAR 3:299-300]. Continental's own internal planning documents (submitted as exhibits under seal in the state court proceeding, ostensibly because the documents contained proprietary planning information) contain similar statements about the destabilizing effect of Continental's commencement of interstate operations from Love Field.

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16. Mr. Kasper confirmed in his testimony that as airlines increase interstate service at Love Field, flights from DFW Airport will inevitably be reduced. More importantly, the effect on DFW Airport will not merely be a directly reciprocal reduction of flights (i.e., DFW losing one flight for every flight moving to Love Field); the loss of flights will be exponentially greater because DFW operates as a "hub." The entire hub concept is based upon connecting passengers from a point of origin to their ultimate destination' and reducing the number of connecting flights shrinks the hub's capacity, not unlike the injury to the heart when arteries begin to atrophy. Diverting local passengers to Love Field takes those passengers away from flights at DFW Airport and risks making some of those flights uneconomic [Exhibit 24, RR 2: 128- 134, 16265]. Mr. Kasper also points out that as the number of flights is decreased at DFW Airport the landing fees per flight will increase, thereby motivating airlines to use airports other than DFW Airport [RR 2:136-39].

Mr. Kasper also opined, based on his training and experience, that with the reopening of Love Field, airline executives will have less incentive to approve capital spending projects at DFW Airport [REt 2: 139-40]. Referring to numerous studies, Mr. Kasper concluded that capital investment and expansion at an airport like DFW Airport has a positive economic impact throughout the immediate area around the airport and that shifting interstate air traffic to Love Field will adversely affect Fort Worth and Tarrant County [RR 2: 140-142]. Similarly, fewer flight options and reduced traffic at DFW Airport will produce a direct and significant harm to Fort Worth and its citizens [RR2:151-53; 2:180-82].

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DFW Airport's expert witness, Mr. Jon Ash, provided extensive testimony about the intricate operations of hub airports, and DFW Airport, again, respectfully requests that the Department consider the entirely to Mr. Ash's testimony on this subject. Mr. Ash is the managing director of Global Aviation Associates, Ltd., an aviation consulting firm; he is a former TWA employee with over 30 years experience in the aviation industry. [Exhibit 24, RR 3 :204-240]. Mr. Ash explained that once an airport loses local passengers, that airport will lack sufficient demand to sustain the hub operation and will inevitably downgrade service. As he graphically explains: a hub "starts to unravel itself' [RR 3-217]. According to this noted expert in the field of hub operations, Continental's reinstituting long-haul service from Love Field could lead to "fragmentation of the DFW hub" [RR 3:224].

DFW Exhibit 147 in the state court proceedings (to which reference is made throughout Mr. Ash's testimony) studies the effects on DFW Airport if unrestricted interstate service using 56 seat airplanes is allowed at Love Field. That study concluded that even with the constraints imposed by the availability of aircraft and gates at Love Field, DFW Airport could lose over 8,000 passengers and 109 flights per day. [DFW Exh. 147 at 25]. The study predicts the loss of over 4,500 jobs at DFW Airport. [Id. at 11]. The study further concluded that the reopening of Love Field to operations like Continental's flights to Cleveland would weaken DFW competitively vis-a-vis nearby hubs such as Houston Intercontinental, make DFW a less attractive international hub, reduce DFW service levels and place a great financial and overhead burden on the remaining service at DFW. [Id. at 12].

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Fir. Joe Lopano, DFW's Managing Director of Air Service Development, testified that reopening Love Field would be similar to the opening of a new airport, which would be Pa very destabilizing event" in the local market [Exhibit 24, RR 3:1 16-1 17, 189-90]. He feared that such a destabilizing event might cause Delta to abandon its hub operations at DFW Airport [RR 3: 127-18], and that splintering local traffic between DFW and Love Field would reduce international flights from DFN;V Airport [RR 3:130-1341, thereby eliminating the non-stop flights that now exist to smaller markets (such as Bakersfield, California) [RR 3:134-35]. Mr. Lopano's testimony also confirms one obvious and fearful truth: once service is lost from an airport, it is very difficult to get it back [RR 3: 197].

When reviewing the testimony from the state court proceeding, the DFW Airport would also respectfully request that the Department consider the testimony of James Crites7 Deputy Executive Director for Operations at DFW Airport, concerning the Department's 1992 study of the effect on DFW Airport of increased operations at Love Field. [Exhibit 24, RR 3:76-79] (pointing out that it is "a very dated study").

In surrey, the optimal development of DFW Airport contemplated by the Bond Ordinance would be undermined; DFW's role as the principal airport for serving the Dallas/Fort Worth area degraded; and DFW's long-term viability as an engine for growth for the whole Dallas/Fort Worth area needlessly placed in jeopardy.

WHEREFORE, the DFW Airport respectfully requests that the Department grant this Petition for Reconsideration of Order 98-12-27, and on reconsideration vacate sub-rulings (i), (ii), and (iii) in its Concluding Paragraph 1, at pages 61-62 of the Declaratory Order. Further the

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Department should take into account the evidentiary material referenced herein, and on reconsideration find that imposition of the Bond Ordinance perimeter rule is a valid exercise of Dallas' proprietary rights, and that the DFW Airport Use Agreement is valid and enforceable.

Respectfully submitted,

Michael F. Goldman

Claire L. Shapiro

Bagileo, Silverberg & Goldman, L.L.P.

1101 30th St., N.W., Suite 120

Washington, DC 20007

R.H. Wallace, Jr.

Jonathan G. Kerr

Shannon, Gracey, Ratliff& Miller, L.L.P.

1600 Bank One Tower

500 Throckrnorton

Fort Worth, TX 76102

Counsel for the DallasiFort Worth International Airport Board

January 12, 1999