© 2013 The Texas Lawbook.
By Mark Curriden, JD
Senior Writer for The Texas Lawbook
(December 2) – Early next Monday morning, before the financial markets open for trading, senior officials and lawyers for American Airlines and US Airways will gather in the Dallas offices of Weil, Gotshal & Manges on the second floor of the Crescent Court to sign the “closing papers” officially merging the two companies and creating the world’s largest airline.
The closing, which will be more ceremonial than substantive, ends one of the most complex, expensive and successful corporate bankruptcies in U.S. history.
Tens of thousands of financial and legal records and memos document two years of contentious bankruptcy proceedings, the $16 billion merger agreement and subsequent antitrust legal battle with the federal government that nearly derailed the entire deal.
But lawyers for the airlines and the U.S. Department of Justice point to a confidential yet simple two-page letter written seven weeks ago that may have been the most important document of all.
The letter, which almost wasn’t written and that some airline executives initially didn’t want sent, caused some lawyers in the federal government to rethink their case and, for the first time, consider a possible settlement.
and AA Associate GC Bruce Wark.
This is the inside story of how the airlines settled the Justice Department’s lawsuit to block the merger – a lawsuit that the airlines, the federal government and nearly all legal experts said couldn’t be settled.
In the months following American Airlines and US Airways announced merger in February, DOJ officials set up three separate meetings in Washington, DC with the airlines to discuss details of the merger and the possible impact on consumers.
“DOJ kept its cards close to the chest,” says Bruce Wark, associate general counsel at American Airlines and an expert in antitrust law. “DOJ lawyers went out of their way to tell us that they had not made up their minds.”
But even in those early meetings, DOJ officials expressed concern about the merger’s impact on Washington, DC’s Reagan National Airport. US Airways, because of a deal with Delta Airlines in 2010, controlled by far the most gates at the strategically important airport – a deal that DOJ lawyers privately admit they almost sued to stop three years ago.
American controlled the second most gates with 104 takeoffs and landings at Reagan National. Combined, the new American would have 69 percent of all the arrivals and departures allowed at the airport.
During the meetings, which took place throughout July and early August, the airlines volunteered to give up about 30 slots at Reagan National if it would help convince DOJ to approve the merger – an offer that was greeted with silence.
“DOJ told us at the end of the last meeting [which took place Aug. 6] that they would get back to us quickly with their decision,” says Wark.
A week went by with no call.
“The longer it was taking, we felt that might be a bad sign,” he says.
On Aug. 13, the DOJ and six state attorneys general, including Texas AG Greg Abbott, filed a 56-page federal complaint seeking to stop American and US Airways from combining.
“We really miscalculated the seriousness of DOJ to challenge our deal,” says American Airlines General Counsel Gary Kennedy. “Looking back, I would have advocated much more aggressively that we put more DC-Reagan slots on the table earlier.”
Kennedy and most legal experts believed that a settlement of the government’s case was highly unlikely.
“Because of the broad sweeping nature of the [government’s] complaint, we thought that it would be difficult to settle with DOJ,” says Kennedy. “So, we started aggressively preparing for trial.”
For its part, Justice Department lawyers say they saw no meaningful interest by the airlines to resolve the case by giving up some of its precious assets, which were gates in Washington, DC, New York City and Los Angeles.
“We were in a stare down,” says Wark.
Meanwhile, Kennedy and Wark opened talks with the Texas attorney general’s office, reaching an agreement with Abbott on Oct. 1.
“Settling with Texas individually sent an indirect message to DOJ and the other states that we were open to settlement discussions,” says Kennedy.
Lawyers for the Justice Department say they joked about the Texas deal, because most of the concessions in the agreement were behavioral fixes that will be difficult to monitor and enforce in future market changes.
Behind the scenes, the airlines were struggling to develop a united legal front.
Kennedy and his team advocated offering a sweetened deal by proposing to give up additional gates at Reagan National, while the US Airways leadership was against conceding more than the 30 or so offered earlier.
Joe Sims, an antitrust lawyer at Jones Day who represents American Airlines, says certain conflicts or differences between the two airlines was to be expected because the two general counsels, Kennedy for American and Steve Johnson for US Airways, “had different missions” or goals to accomplish.
“Kennedy’s mandate was to get the deal done,” says Sims. “Johnson’s mandate was to manage the process and keep as many assets as possible in place.”
Following the Texas settlement and as depositions in the federal lawsuit were underway, Kennedy pushed again to make a more enhanced settlement offer by putting more gates at Reagan National on the table.
Kennedy wanted to offer 104 slots right away, but US Airways balked and wanted to take a harder line in negotiations.
“These are very valuable assets,” says Kennedy. “We wanted to make a meaningful proposal, but we also knew the DOJ would come back and ask for more.”
The week of October 7, the airlines finally agreed to make an opening offer. In a two-page letter signed by American’s outside counsel, the airlines informed DOJ of its interest in negotiations and said it would give up 48 slots at the Washington, DC airport as part of an initial proposal.
“It was the first meaningful offer. It caused us to think that the airlines were finally ready to discuss substantive structural remedies,” according to a senior DOJ lawyer directly involved in the case. “Without that letter, we would probably be in trial right now and there would be no deal closing next Monday.”
Later that week, a Justice Department lawyer, during a break at a deposition of one of the airlines’ economic experts, told a lawyer for the airlines, “That was a very constructive proposal.”
“That was the first sign of some light or possibility of an opening,” says Kennedy.
Two weeks later, in a conference call, Justice Department lawyers made it clear that they were not going to approve any merger that allowed US Airways and American to expand at Reagan National and that any deal would require American to divest of its 104 slots.
“Why should we let US Airways get even one more slot at DCA?” Deputy Assistant U.S. Attorney General Renata Hesse asked during the call.
“That was the defining moment,” says Kennedy.
Lawyers representing the airlines that that non-lawyer “business side folks,” especially on the US Airways side, remained resistant to concede the gates at Reagan National.
The business executives “were very confident that the government would eventually recognize the weakness in their case and the benefits of the merger,” says Sims – a position he says is common among non-lawyers involved in many high stakes commercial lawsuits but that ignores the risks in court cases that can be financially devastating.
“All litigation is a crap shoot,” he says. “We had a strong case and we were confident that we had a two out of three chance that we would prevail, but there was that slim chance that we might not.”
Sims, Kennedy and others say that if the airlines had lost the trial, the merger would have almost certainly died because it would have been too difficult to hold together during a lengthy appeal.
“DOJ said that offering the 104 slots was the price for looking behind the curtain at the rest of their demands,” says Wark. “They made it a gateway issue.”
On Sunday, Nov. 3, two-dozen lawyers, including Kennedy, Wark, Sims and Johnson met with Hesse and several other DOJ lawyers at the Paul Hastings law firm’s offices in Washington, DC.
“It was easier to get into the law firm building during a weekend than it was to get into a federal building,” says Wark.
Kennedy and his team prepared for the worst. But the meeting lasted only an hour, during which the Justice Department laid out all of its demands, which included forfeiting 34 slots at New York’s LaGuardia Airport and two gates at Los Angeles International Airport.
A deal that just seven weeks earlier had seemed so impossible was essentially done.
Nine days later, the Justice Department and the airlines announced the official settlement agreement. Lawyers at DOJ say the settlement actually accomplishes more of their goal of providing more choices for consumers and better competition than had the government won at trial.
Kennedy, who is spending this week packing his office after three decades as a lawyer at American Airlines, says the lawyer fees in the bankruptcy, merger and antitrust matters are likely to reach $275 million.
“Knowing what I know now, I think I would have filed for bankruptcy in Fort Worth instead of New York,” he says. “It would have given us more control of the case, would have saved us a lot of time and energy traveling back and forth to New York. And it would have forced all the New York folks to come here.”
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