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Speaker 1: You're listening to the Bloomberg Law Podcast. Catch us weekdays

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Speaker 1: at ten pm Easter on Bloomberg dot Com, the iHeartRadio

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Speaker 1: app and the Bloomberg Business App, or listen on demand

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Speaker 1: wherever you get your podcasts.

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Speaker 2: Welcome to the Bloomberg Law Show. I'm Greg Store.

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Speaker 3: And I'm Kimberly Robinson. Jin Grasso was out this week ahead.

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Speaker 2: In this hour, a challenge should Jet Blues Spirit takeover,

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Speaker 2: could keep the merger from getting off the ground.

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Speaker 3: But first, a challenge to the SEC's long standing in

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Speaker 3: house tribunal system came before the Supreme Court last week.

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Speaker 4: That seems problematic to say the government can deprive you

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Speaker 4: of your property, your money, substantial sums in a tribunal

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Speaker 4: that is at least perceived as not being impartial.

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Speaker 3: That was just as Brett Cavanaugh during arguments November twenty ninth,

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Speaker 3: He and his conservative colleagues cast out on the SEC's

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Speaker 3: ability to extract civil penalties through in house action, instead

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Speaker 3: suggesting that those accused of securities fraud have a right

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Speaker 3: to have their cases heard in a federal court. With

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Speaker 3: a jerry.

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Speaker 2: To help us walk through this, we're joined by a

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Speaker 2: securities lawyer Susan Hurd of Austin and Bird. Let's start

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Speaker 2: where Justice Kavanaugh left off with the notion that SEC

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Speaker 2: administrative proceedings might not be impartial. So you're a defense lawyer.

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Speaker 2: From your standpoint, what is the problem with the SEC's

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Speaker 2: in house judicial system.

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Speaker 5: Well, the problem is, I guess, first of all, they

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Speaker 5: almost always win when there was an active use of

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Speaker 5: alj's for disputed securities fraud claims. I can't remember what

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Speaker 5: the statistic was because it's been several years ago, but

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Speaker 5: they almost always won, and they had a much lower

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Speaker 5: success rate bringing those same claims in federal court. You

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Speaker 5: also lose if you're a defendant, you know, defending yourself

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Speaker 5: and front of the administrative law judge, you lose the

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Speaker 5: jury trial. A lot of the rules of evidence don't

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Speaker 5: apply or sort of apply at the whim of the ALJ.

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Speaker 5: You don't have the same protections that you have to

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Speaker 5: pursue discovery. You know, your ability to take discovery on

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Speaker 5: what the SEC knows is truncated.

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Speaker 3: So there are a.

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Speaker 5: Lot of things where the DAX feels like it's stacked

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Speaker 5: against you. When you're actively fighting against fraud allegation in

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Speaker 5: front of the ALJ. And then you know, there's the

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Speaker 5: problem that you don't see a federal court judge and

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Speaker 5: you don't get the opportunity to have a Article three

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Speaker 5: judge review the SEC's decision. This used to be the

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Speaker 5: law without exhausting all your remedies through the SEC. So

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Speaker 5: you had the ALJ go through what was usually not

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Speaker 5: a quick process of reaching a determination. Then this then

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Speaker 5: the SEC looked at what the ALJ did, and you

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Speaker 5: had to wait for them to decide whether they were

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Speaker 5: going to approve what the ALJ you know, did. And

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Speaker 5: only when after you jumped through all of those who

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Speaker 5: and there was an adverse signing against you, did you

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Speaker 5: get access to a federal court, the Court of Appeals

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Speaker 5: to argue that the ALJ and the SEC got it

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Speaker 5: wrong and you really didn't violate the securities laws. There

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Speaker 5: are a lot of things about that that people didn't like.

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Speaker 3: So can we talk about the particular case that was

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Speaker 3: argued at the Supreme Court. The case started out as

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Speaker 3: an investigation into hedge fund fraud. How did it morph

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Speaker 3: into this major challenge to the SEC's enforcement power. Can

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Speaker 3: you tell us how all this started?

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Speaker 1: Yeah?

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Speaker 5: Yeah, So basically classic securities fraud claims were brought against

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Speaker 5: mister Jarticacy, and he tried to go to federal court. Well,

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Speaker 5: the SEF he chose to sue him UH in its

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Speaker 5: administrative proceedings. He tried to go to federal court to

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Speaker 5: stop the administrative proceedings because he felt like they were unconstitutional.

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Speaker 5: The issues that were argued yesterday before the Supreme Court,

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Speaker 5: and the Federal Court in that instance says that we

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Speaker 5: can't hear you right now. You've got to go through

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Speaker 5: the entire process with the sec in order to get

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Speaker 5: the right to come to us and complain later. So

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Speaker 5: this case has been kicking around for an incredibly long time.

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Speaker 5: Mister you know, Jargas had to fight against the claims

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Speaker 5: that he had made misrepresentations to investors about the funds

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Speaker 5: that he managed, and he had to lose both in

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Speaker 5: front of the alj and in front of the Commission

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Speaker 5: before he got to raise his issues with the Court

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Speaker 5: of Appeals, and the Court of Appeals agreed that the

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Speaker 5: entire process that he had been subjected to for years

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Speaker 5: was unconstitutional.

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Speaker 2: By the way, One thing that happened in the Supreme

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Speaker 2: Court argument that I know I appreciated is that mister

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Speaker 2: Jercracy's lawyer told us all how to correctly pronounce his

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Speaker 2: client's last name, so it is Jocracy. Yes, we're on

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Speaker 2: the same page.

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Speaker 6: There.

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Speaker 2: Give us a sense, Susan, if you would about what's

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Speaker 2: at stakes for the SEC. How many cases are we

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Speaker 2: talking about at the SEC that go through this in

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Speaker 2: house process every year?

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Speaker 5: So when we're talking about classic securities fraud claims that

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Speaker 5: are disputed where the individual or the entity is fighting

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Speaker 5: the SEC on the allegation that they violated the securities

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Speaker 5: laws and in particular the fraud provisions of the security's laws,

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Speaker 5: there are literally no cases like that right now in

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Speaker 5: front of the administrative law judges. There used to be.

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Speaker 5: There used to be when mister Jargacy was originally pursued

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Speaker 5: by the SEC. But because of all these constitutional challenges

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Speaker 5: to the SEC's use of the ALJ that have been

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Speaker 5: floating around for years, the SEC said, you know what,

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Speaker 5: we're not going to fool with the ALJ process if

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Speaker 5: we've got an active disputed fraud claim. So they already

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Speaker 5: bring all those claims in federal court. So if the

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Speaker 5: Supreme Court agrees with mister Jargacy, that makes no difference

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Speaker 5: whatsoever to those types of claims and the SEC's current

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Speaker 5: processes associated with those claims.

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Speaker 3: Right, So, before we get to what impact that could have,

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Speaker 3: wondering if we can spend some time talking about what

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Speaker 3: the Justice has spent most of their time talking about,

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Speaker 3: which was this constitutional right to a jury. What's the

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Speaker 3: argument that's being made here.

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Speaker 5: First of all, there's just kind of a fundamental fairness

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Speaker 5: argument that's being made that it doesn't make sense for

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Speaker 5: the government to decide when somebody has a constitutional right

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Speaker 5: or not. That was the point that Chief Justice Roberts

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Speaker 5: made where he said, and I'm not quoting him, but

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Speaker 5: essentially what he said is it just doesn't feel right

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Speaker 5: to say that a defendant has a constitutional right up

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Speaker 5: to the point when the government decides they don't want

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Speaker 5: them to have that constitutional right. That just does That

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Speaker 5: feels wrong, that feels unfair. And so that seemed to

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Speaker 5: be the tenor of a lot of the questions and

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Speaker 5: a lot of the discussion that was happening, And that

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Speaker 5: kind of rings true to me personally, because if you're

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Speaker 5: looking at at what constitutional rights a defendant has, particularly

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Speaker 5: the jury trial right, it shouldn't matter whether they're being

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Speaker 5: sued by the government or they're being sued by a

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Speaker 5: private litigant. That constitutional right is as important, maybe even

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Speaker 5: more important, when the government is coming after you than

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Speaker 5: if a private litigan does.

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Speaker 2: There was justice barrit in particular, was making a distinction

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Speaker 2: between different types of claims that the SEC might press

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Speaker 2: civil penalties versus disgorgement, which is basically trying to give

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Speaker 2: money back to victims. Do you see coming out of

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Speaker 2: this a world where in some types of SEC cases

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Speaker 2: a defendant will have the right to go to federal

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Speaker 2: court and in other types here or she won't.

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Speaker 5: I think that's where some of the members of the

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Speaker 5: Court are trying to steer things. I think it's possible,

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Speaker 5: although no one can predict accurately what the Supreme Court

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Speaker 5: is going to do, it's possible that the Supreme Court

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Speaker 5: could uh pull together enough votes to say the particular

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Speaker 5: type of fraud claim that mister Jargacy faith has to

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Speaker 5: be brought in federal court and he has to have

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Speaker 5: the option of a jury trial. And the reason for

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Speaker 5: that is the type of claim and the and the

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Speaker 5: remedies that the SEC sought against mister Jargacy. They do

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Speaker 5: have an analogous provision at common law. A lot of

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Speaker 5: federal agencies pursue violations of the law that were unheard

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Speaker 5: of and undreamed of at the time the Seventh Amendment

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Speaker 5: was passed, but not the claim against mister Jargacy. He

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Speaker 5: was accused of fraud. And while there was some quibbling

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Speaker 5: about how a fraud claim has been tweaked in the

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Speaker 5: hands of the SEC, it has a common law brethren.

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Speaker 5: And that's what could potentially be the hook that allows

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Speaker 5: the Supreme Court to narrow its ruling to having an

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Speaker 5: impact on the SEC in this particular context and leave

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Speaker 5: untouched the other federal agencies that everybody seemed to agree

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Speaker 5: shouldn't have major changes and how they operate.

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Speaker 2: Susan, let's hold there for a moment. Coming up on

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Speaker 2: the program, we're going to talk more about the SEC's

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Speaker 2: enforcement power and potentially the impact on other agencies with

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Speaker 2: Susan Hurt. I'm Greg Storr and I'm Kimberley Robinson.

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Speaker 3: This is Bloomberg.

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Speaker 1: You're listening to the Bloomberg Law Podcast. That's the program

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Speaker 1: weekdays at ten pm Eastern on Bloomberg Radio. Tune it up,

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Speaker 1: Bloomberg dot Com and the Bloomberg Business app. You can

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Speaker 1: York station. Just say Alexa play Bloomberg eleven thirty.

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Speaker 3: I'm Greg Storr and I'm Kimberly Robinson in for June Grosso.

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Speaker 2: We're talking about the Supreme Court November twenty ninth argument

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Speaker 2: on the SEC's use of in house judges. Justice Elena

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Speaker 2: Kagan was incredulous when lawyer Michael McCulloch argued that Congress

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Speaker 2: might not have the power to let a federal agency

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Speaker 2: enforce a statute through its own administrative tribunals. She pointed

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Speaker 2: to a nineteen seventy seven president known as Atlas Roofing,

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Speaker 2: which involved enforcement of the Occupational Safety and Health Act.

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Speaker 4: That's settled. Well, it's settled only to the extent.

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Speaker 7: No one's brought it up and forced this issue.

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Speaker 1: Since Atlas Roofing h carea is contact. Nobody has had

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Speaker 1: the you know, kutzpa to quote my people to bring

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Speaker 1: it up since Atlas rufing.

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Speaker 2: Kegan in case it isn't clear, is Jewish.

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Speaker 3: We've been speaking with Susan Hurd about the Supreme Court

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Speaker 3: case that could upset a key enforcement tool used by

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Speaker 3: the Securities and Exchange Commission in enforcing the federal securities laws. Susan,

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Speaker 3: will the court have to overturn that nineteen seventy seven

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Speaker 3: President if they're going to rule in favor of the

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Speaker 3: challengers here, I.

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Speaker 5: Don't think they need to. And that was sort of

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Speaker 5: mister Jargaci's lawyer's point that prompted the comment you just played.

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Speaker 5: If you read the Atlas Roothka, it turned on the

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Speaker 5: fact that a federal statue created a new duty, and

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Speaker 5: it was you know, OSHA rules, and the fact that

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Speaker 5: before anybody was injured on a job site, Congress had

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Speaker 5: created a vehicle by which I think the term they

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Speaker 5: used was you could prophylactically address dangerous situations before somebody

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Speaker 5: was injured. So that was a new duty that had

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Speaker 5: not existed at the common law. So I think you

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Speaker 5: can distinguish between the particular type of securities fraud claim

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Speaker 5: that mister Jargacy faced, which isn't a new duty. You know,

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Speaker 5: back in seventeen ninety one, you had a duty not

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Speaker 5: to defraud people, not to misrepresent, and so it isn't

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Speaker 5: a new duty. Given the particular nature of the claim

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Speaker 5: that was being pursued against mister Jogacy. I think Kagan's

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Speaker 5: comment about gen nobody's raised this with us, so it

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Speaker 5: must be settled law again is kind of missing the point,

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Speaker 5: because the sec hasn't pursued these claims administratively in quite

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Speaker 5: a while because they didn't want to face these constitutional challenges.

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Speaker 5: So the only way this gets to the Supreme Court

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Speaker 5: is based on conduct from a while ago. That takes

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Speaker 5: that long period of time that we talked about to

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Speaker 5: percolate through the Commission and through the Court of Appeals

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Speaker 5: before it's even ripe to come to, you know, before

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Speaker 5: the Supreme Court. So I think the delay between the

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Speaker 5: Atlas Roofing case and the present appeal can be explained

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Speaker 5: to a certain extent by the fact that, you know, uh,

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Speaker 5: the SEC just isn't bringing these claims anymore, and you know,

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Speaker 5: I don't think they have to overrule Atlas of Roofing.

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Speaker 5: In fact, that was mister Jargracy's lawyer's point at the

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Speaker 5: oral argument. I think they're a way, there's a way

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Speaker 5: to distinguish.

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Speaker 2: That case, susan the other issues that the Justice has

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Speaker 2: spent very little time on. I want to know whether

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Speaker 2: you were surprised by that. Let's start with it was

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Speaker 2: actually the third issue in this case, the notion that

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Speaker 2: the SEC judges have an unconstitutional level of job protection.

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Speaker 5: Yes, I wasn't surprised that that didn't get more attention

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Speaker 5: because it's a very dry kind of academic constitutional challenge,

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Speaker 5: and you know, the Court has already kind of looked

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Speaker 5: at appointment procedures for Aljs and Lucia and it's kind

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Speaker 5: of a technicality. I think the seventh seventh Amendment issue

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Speaker 5: is sexier. It's more readily accessible, it's more compelling, and

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Speaker 5: the Court doesn't have to reach all three of the

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Speaker 5: issues on which the Fifth Circuit based it's ruling. All

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Speaker 5: it needs to do is find one constitutional violation and

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Speaker 5: they can they can reserve ruling on the other issues.

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Speaker 5: They don't have to take on all three. So I

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Speaker 5: wasn't surprised at all by the focus on the one

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Speaker 5: issue that, like I said, is just flat out sexier.

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Speaker 3: I'm not sure that I've ever heard the Seventh Amendment

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Speaker 3: referred to as sexy. But there was also this issue

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Speaker 3: that the SEC has too much discretion to decide which

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Speaker 3: cases go to court, which ones are going to be

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Speaker 3: happening before the administration. They didn't spend a lot of

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Speaker 3: time on that one either. Is this sort of what

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Speaker 3: you're talking about, They can sort of pick and choose

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Speaker 3: and this you know, any reason why this wasn't an

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Speaker 3: interest for them.

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Speaker 5: They didn't spend time on that. The particular way it

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Speaker 5: was brief The way it was briefed was this again

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Speaker 5: an academic kind of doctrine called the non delegation doctrine.

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Speaker 5: This issue about whether it's appropriate for the SEC to

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Speaker 5: control somebody's access to constitutional rights got discussed a lot,

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Speaker 5: but just in a different way. So you know what

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Speaker 5: had prompted I think mister Jargesi to say, this isn't

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Speaker 5: right for the SEC to get to choose where they

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Speaker 5: consume me that piece of it did get captured, and

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Speaker 5: yesterday's argument they just put it under what they thought

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Speaker 5: was the more compelling bucket, if you will, of a

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Speaker 5: well established constitutional right to a jury trial. So I

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Speaker 5: think that flavor was still there yesterday. They just felt

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Speaker 5: like that concept of fundamental unfairness that the SEC calls

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Speaker 5: all the shots that just got packaged under a different

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Speaker 5: constitutional doctrine.

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Speaker 2: Susan, what's your best guess as to how this case

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Speaker 2: comes out. It certainly seemed like mister Jarksey was going

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Speaker 2: to win. Did it seem to you like it was

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Speaker 2: going to be that relatively narrow possibility that you discussed

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Speaker 2: earlier where it may affect the SEC, but not necessarily

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Speaker 2: other federal agencies.

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Speaker 5: That would be my guess. You'll recall there was some

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Speaker 5: frustration from certain members of the Court that what the

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Speaker 5: broad potential impact could be of some of these arguments

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Speaker 5: had not been fully briefed to their satisfaction. So I

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Speaker 5: think the Supreme Court is always going to try to

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Speaker 5: get away with the most narrow opinion they can, because

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Speaker 5: that's how you build consensus amongst the justices, that's how

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Speaker 5: you get the votes that you need. And also they

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Speaker 5: don't want to be causing unintended, potentially negative impacts to

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Speaker 5: players who really weren't in front of the court and

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Speaker 5: they didn't get the benefit of their viewpoints. So I

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Speaker 5: think they're always going to try to get the votes

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Speaker 5: and build a consensus on a narrow version of a ruling.

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Speaker 5: And I think the SEC. You know, they have this

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Speaker 5: unique situation that they brought a claim against mister Jargacy

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Speaker 5: that had a companion version at common law, and that

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Speaker 5: really sets the SEC's claim and the SEC's use of

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Speaker 5: an alj in contrast to what happens every day with

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Speaker 5: these other federal agencies. So I think it is possible

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Speaker 5: to thread the needle. And they're really smart people, and

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Speaker 5: if there's a will, there's a way, And I think

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Speaker 5: they could write an opinion that is confined to the

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Speaker 5: particular type of fraud claim that mister Jargacy was facing,

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Speaker 5: and they don't have to worry that they're opening the

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Speaker 5: floodgates to brand new securities federal court suits because they

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Speaker 5: already all happen in federal court anyway.

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Speaker 3: Susan, One thing I wanted to touch on before we

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Speaker 3: wrap up is that there's really seem to be a

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Speaker 3: lot of skepticism, particularly among the more conservative justices, about

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Speaker 3: the so called administrative state. We saw Chief Justice John

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Speaker 3: Roberts really noting that, you know, the impact on American's

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Speaker 3: daily lives from these agencies is quite different than it

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Speaker 3: was fifty years ago. So I'm wondering, how does that

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Speaker 3: factor into this case, and should it factor into this case?

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Speaker 5: Yes, So you know, Justice Thomas has written articles basically

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Speaker 5: saying that you know, this whole thing jumped the shark

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Speaker 5: many many years ago, and we should completely start over

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Speaker 5: when it comes to the administrative state. So there's definitely

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Speaker 5: sentiment on the Court that this whole administrative state has

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Speaker 5: morphed into something that no one intended. And there there

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Speaker 5: was certainly you know, I think it was Justice Gorschik

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Speaker 5: who said, it's not your father's SEC. So there is

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Speaker 5: a perception that we have to to take a look

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Speaker 5: at how the system is functioning currently. We can't have

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Speaker 5: blinders on. But they're they're going to want to stay

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Speaker 5: away from the appearance that they're making policy. They're going

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Speaker 5: to want to be deferential to Congress and the legislative branch,

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Speaker 5: and I think the way to do that is to

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Speaker 5: look at what was unique about the particular claims that

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Speaker 5: the sec be brought. You know, you can't, like I said,

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Speaker 5: you can't have blinders on and create a rule of

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Speaker 5: law that's going to be going to have negative consequences

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Speaker 5: and potentially rolled a constitutional value. But by the same token,

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Speaker 5: they can't they can't do what I think Justice Thomas

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Speaker 5: wants to do, which is just throw out the baby

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Speaker 5: with the bathwater and start over. Again that there won't

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Speaker 5: be the votes to do that. So they're mindful of

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Speaker 5: the current state of the administrative state, but they'll be

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Speaker 5: careful in their opinion to try to stay within the

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Speaker 5: role of what the judiciary is supposed to be doing

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Speaker 5: and leaving, you know, leaving matters that have been traditionally

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Speaker 5: a legislative function or an executive branch function to those

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Speaker 5: other branches. They'll be thoughtful about how they attack the issue. Well.

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Speaker 3: Our thanks to Alsin and Bird Susan Hurd. Coming up

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Speaker 3: on the Bloomberg Law Show, we'll talk about the government's

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Speaker 3: effort to block Jet Blue's three point eight billion dollar

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Speaker 3: takeover of Spirit Airlines. I'm Kimberly Robinson.

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Speaker 2: And I'm Greg Storre. This is Bloomberg.

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Speaker 1: You're listening to the Bloomberg Lawn Podcast. Catch us weekdays

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Speaker 1: at ten pm Easter on Bloomberg dot Com, the iHeartRadio app,

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Speaker 1: and the Bloomberg Business App, or listen on demand wherever

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Speaker 1: you get your podcasts.

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Speaker 3: I'm Greg Store and I'm Kimberly Robinson. In for June Grassow.

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Speaker 2: Trial is coming to a close in the Justice Department's

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Speaker 2: effort to block Jet Blue Airways from buying Spirit Airlines

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Speaker 2: for three point eight billion dollars. It's part of a

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Speaker 2: US crackdown on airline consolidation. Here's Jet Blue CEO Robin Hayes.

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Speaker 6: We agree with a lot of concerns that the partner

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Speaker 6: the Justice have expressed about airline competition. I've actually been

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Speaker 6: making comments on this for years and years and years.

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Speaker 6: We just believe the best thing that we can do

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Speaker 6: to make a more competitive industry is to enable a

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Speaker 6: bigger Jet Blue. When Jet Blue flies on the market,

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Speaker 6: fares come down and service improves.

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Speaker 2: He made those comments back in February, just before the

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Speaker 2: Justice Department filed suit. Join us to discuss the trial

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Speaker 2: is Bloomberg News anti trust reporter Leah Nylan. Can you

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Speaker 2: just talk about how this deal came about?

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Speaker 6: It?

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Speaker 2: It's been quite the saga, hasn't it.

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Speaker 7: Yes, So, Spirit Airways initially had a bid to be

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Speaker 7: bought by Frontier. Those are both you know, you probably

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Speaker 7: know them as very low cost airlines. They're the ones

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Speaker 7: who have unbundled pricing, meaning when you buy a ticket,

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Speaker 7: you're actually just buying a seat on the plane, sort

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Speaker 7: of like if you are buying a bus ticket, and

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Speaker 7: if you want to buy anything else, like if you

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Speaker 7: want to pick which seat you're setting in, if you

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Speaker 7: want to bring bags, even sometimes if you want water,

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Speaker 7: you have to pay for it separate. So those two

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Speaker 7: companies were considering a merger, and then Jet Blue got

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Speaker 7: a little bit jealous and made a counter offer. Spirit

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Speaker 7: Airways actually was not that thrilled with the counter offer

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Speaker 7: because they were worried about the anti trust concerns and

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Speaker 7: they had this big presentation that they gave to all

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Speaker 7: of their investors about how it would be like a

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Speaker 7: really big problem for anti trust. It was definitely going

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Speaker 7: to get challenged by the regulators. But then Jet Blue

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Speaker 7: offered them a lot of money to go through with

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Speaker 7: it anyway, So they ended up picking that deal over Frontier.

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Speaker 7: The Justice Department then did end up suing, and we've

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Speaker 7: been in trial since Halloween.

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Speaker 3: Sometimes you don't want to be right, right. So Jet

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Speaker 3: Blue and Spirit say the deal is necessary to compete

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Speaker 3: with the big four airlines American, Delta, United, and Southwest.

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Speaker 3: So why is the government trying to stop the deal.

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Speaker 7: Yeah, so the government doesn't necessarily want you to fly

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Speaker 7: Spirit Airlines. I mean, if you want to, they're cool

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Speaker 7: with that. But the thing that they found is that

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Speaker 7: when Spirit tends to start flying a route, it really

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Speaker 7: ends up reducing prices on all of the airlines. They

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Speaker 7: found that there's this thing called the Spirit effect, and

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Speaker 7: so when Spirit starts flying a route, it tends to

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Speaker 7: reduce the prices that are charged by the other airlines

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Speaker 7: as much as seventeen percent, and so it does have,

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Speaker 7: you know, a really big effect on everybody else. And

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Speaker 7: the government is worried that if Jet Blue ends up

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Speaker 7: taking Spirit out of the market, that this price lowering

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Speaker 7: effect is not going to happen for the other airlines.

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Speaker 7: Jet Blue, you know, says that it really needs to

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Speaker 7: bulk up to better compete with the big guys, but

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Speaker 7: it like freely admits that it's going to eliminate a

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Speaker 7: lot of seats on Spirit's planes. It also says it's

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Speaker 7: going to raise fairs by as much as thirty percent.

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Speaker 7: So it's not even like walking back from that idea.

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Speaker 7: It's just saying, you know, bigger is better in a

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Speaker 7: regulated industry like airlines.

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Speaker 2: So what kind of evidence did we see at this

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Speaker 2: very long trial what the government present?

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Speaker 7: I mean, they called Jet Blue CEO Robin Hayes, who

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Speaker 7: you know, freely admitted some of these plans that they

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Speaker 7: have to reduce the number of seats that they have

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Speaker 7: on flights and raise prices. There was another thing that

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Speaker 7: came out at the trial when Robin Hayes was there

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Speaker 7: that was pretty interesting. Jet Blue has had a lot

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Speaker 7: of anti trust problems lately. This is actually the second

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Speaker 7: anti trust trial they've had in the past year. Last year,

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Speaker 7: the Justice Department seed them over an alliance they had

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Speaker 7: with American Airlines, the largest airline to partner up in

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Speaker 7: the Northeast, so Boston, New York area. There was a

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Speaker 7: trial over that. A federal judge in Boston found that

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Speaker 7: it violated the antitrust laws and they had to unwind it.

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Speaker 7: But Jet Blue had this plan to sort of bulk

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Speaker 7: itself up. First it was going to pair up with American,

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Speaker 7: Then it was going to buy Spirit, then it was

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Speaker 7: going to buy Alaska.

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Speaker 2: Hayes the state of the airline.

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Speaker 7: This is not Donald Trump by in Greenland, this was

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Speaker 7: the airline. So they had these like plans to really

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Speaker 7: bulk up because they sort of decided that's the only

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Speaker 7: way that they're going to be able to compete. So

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Speaker 7: it was like what we call a roll up in motion.

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Speaker 7: So the Justice Department has focused a lot on that.

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Speaker 7: One of the ways that Spirit and Jet Blue have

438
00:28:17,960 --> 00:28:21,480
Speaker 7: tried to sort of remedy what the Justice Department says

439
00:28:21,560 --> 00:28:24,439
Speaker 7: is anti competitive is by saying, Okay, yeah, we do

440
00:28:24,520 --> 00:28:26,920
Speaker 7: have a lot of flights that overlap, but we'll sell

441
00:28:26,960 --> 00:28:29,359
Speaker 7: off some of the gates and such at some of

442
00:28:29,400 --> 00:28:32,600
Speaker 7: the slat constrained airports so that another airline can come

443
00:28:32,640 --> 00:28:35,040
Speaker 7: in and fly some of these routes. So they've come

444
00:28:35,119 --> 00:28:38,400
Speaker 7: up with a plan to sell some of those to Frontier,

445
00:28:38,440 --> 00:28:42,400
Speaker 7: an Allegiant some of the other low cost airlines. But

446
00:28:42,920 --> 00:28:46,200
Speaker 7: the problem with that is Frontier and Allegiant don't have

447
00:28:46,320 --> 00:28:49,800
Speaker 7: enough planes to actually fly all of these. And you

448
00:28:49,920 --> 00:28:51,320
Speaker 7: may have heard that there's a little bit of a

449
00:28:51,360 --> 00:28:54,240
Speaker 7: pilot shortage right now. There's also a little bit of

450
00:28:54,240 --> 00:28:58,120
Speaker 7: a plane shortage because so many of the airlines, you know,

451
00:28:58,160 --> 00:29:00,880
Speaker 7: sort of stop buying new planes during the pandemic and

452
00:29:00,920 --> 00:29:02,960
Speaker 7: now want to get them, and there's a little bit

453
00:29:03,000 --> 00:29:06,040
Speaker 7: of a backlog, sort of a supply chain crunch on everything. Still,

454
00:29:06,600 --> 00:29:10,040
Speaker 7: so it's not clear that Frontier or Allegiant would have

455
00:29:10,080 --> 00:29:13,120
Speaker 7: the pilots or the planes to actually pick up some

456
00:29:13,200 --> 00:29:14,400
Speaker 7: of these roots.

457
00:29:14,720 --> 00:29:17,840
Speaker 3: I wonder how the deal is being received by other airlines.

458
00:29:17,840 --> 00:29:21,760
Speaker 3: Have we gotten any hint of how they view, you know,

459
00:29:21,880 --> 00:29:24,360
Speaker 3: sort of combining forces of Jet Blue and Spirit.

460
00:29:24,520 --> 00:29:27,240
Speaker 7: There's been a little bit you know, Spirit and Jet

461
00:29:27,240 --> 00:29:29,760
Speaker 7: Blue have called a number of the other airlines to

462
00:29:29,760 --> 00:29:33,920
Speaker 7: come testify. There was someone from United in addition to

463
00:29:33,960 --> 00:29:37,000
Speaker 7: someone from Frontier. You know, a lot of the airlines

464
00:29:37,080 --> 00:29:40,000
Speaker 7: have taken some cues from the way that Spirit flies.

465
00:29:40,520 --> 00:29:42,280
Speaker 7: You may have noticed that a lot of the big

466
00:29:42,320 --> 00:29:46,640
Speaker 7: airlines now have something called basic economy, in which, you know,

467
00:29:46,840 --> 00:29:49,440
Speaker 7: it's sort of the same idea, here's a seat, you

468
00:29:49,440 --> 00:29:52,920
Speaker 7: don't get anything else. That's sort of what they adopted

469
00:29:52,960 --> 00:29:56,720
Speaker 7: from the Spirit. But unlike Spirit, where everything on the

470
00:29:56,720 --> 00:30:00,760
Speaker 7: plane is this basic economy, a United or an American flight,

471
00:30:00,800 --> 00:30:03,040
Speaker 7: there's you know, maybe a handful of seats that are

472
00:30:03,080 --> 00:30:06,120
Speaker 7: basic economy. So while they've taken the idea, they're not

473
00:30:06,160 --> 00:30:08,200
Speaker 7: applying it to the whole plane because they still want

474
00:30:08,200 --> 00:30:11,960
Speaker 7: those lucrative business travelers upfront. The other thing that was

475
00:30:12,000 --> 00:30:14,760
Speaker 7: really interesting is it came out that there's this sort

476
00:30:14,800 --> 00:30:17,560
Speaker 7: of practice within the industry known as flashing. So all

477
00:30:17,600 --> 00:30:21,800
Speaker 7: of the airlines have to put the amount of money

478
00:30:21,800 --> 00:30:23,840
Speaker 7: that they're going to charge for a seat into this

479
00:30:24,160 --> 00:30:27,520
Speaker 7: computer system called APCO, and it turns out that they

480
00:30:27,560 --> 00:30:29,760
Speaker 7: sort of use this to signal each other a little

481
00:30:29,760 --> 00:30:31,200
Speaker 7: bit about how much they're going to price.

482
00:30:31,920 --> 00:30:32,959
Speaker 3: It sounds problematic.

483
00:30:33,080 --> 00:30:37,360
Speaker 7: It is a little bit problematic. You're not really supposed

484
00:30:37,400 --> 00:30:41,680
Speaker 7: to like tell all of your competitors what you're charging,

485
00:30:42,200 --> 00:30:44,800
Speaker 7: but they do this thing sometimes where if they notice

486
00:30:44,840 --> 00:30:47,560
Speaker 7: that somebody is charging a lot more or a lot less,

487
00:30:47,680 --> 00:30:51,560
Speaker 7: they'll send a sort of flash across the wire where

488
00:30:51,560 --> 00:30:55,040
Speaker 7: they're like they raise it really high for a minute

489
00:30:55,440 --> 00:30:57,440
Speaker 7: and then drop it back down to sort of send

490
00:30:57,440 --> 00:31:00,000
Speaker 7: a signal to everybody that someone is out of life.

491
00:31:01,200 --> 00:31:03,760
Speaker 7: And like some of the people who acknowledge that this

492
00:31:03,920 --> 00:31:06,719
Speaker 7: happens said, you know, we know, we're not really supposed

493
00:31:06,720 --> 00:31:10,680
Speaker 7: to do that, but it didn't seem to hurt anything.

494
00:31:10,920 --> 00:31:13,480
Speaker 2: Were the Justice Department lawyers taking a lot of notes

495
00:31:13,480 --> 00:31:15,640
Speaker 2: at that point, yeah, preparing for the next case.

496
00:31:15,760 --> 00:31:19,000
Speaker 7: The point of highlighting this is that, you know, the

497
00:31:19,040 --> 00:31:22,760
Speaker 7: airline industry is already really consolidated, and if there are

498
00:31:23,040 --> 00:31:26,080
Speaker 7: problems like this that already exist in the marketplace, if

499
00:31:26,120 --> 00:31:28,600
Speaker 7: we allow it to get more consolidated. This sort of

500
00:31:28,600 --> 00:31:31,080
Speaker 7: thing is only going to happen even more. That's sort

501
00:31:31,080 --> 00:31:33,360
Speaker 7: of the purpose of them raising that at the trial.

502
00:31:34,040 --> 00:31:37,080
Speaker 2: Okay, so it's not sounding so good for the companies

503
00:31:37,080 --> 00:31:39,120
Speaker 2: at the moment. What is their defense, What is their

504
00:31:39,240 --> 00:31:42,640
Speaker 2: case that they are making in court for why, despite

505
00:31:42,640 --> 00:31:46,800
Speaker 2: everything you've been saying, this this merger is actually pro competitive?

506
00:31:47,000 --> 00:31:49,280
Speaker 7: Yeah, well, they say, you know, we do need to

507
00:31:49,360 --> 00:31:52,120
Speaker 7: compete against the Big four. You know, those are the

508
00:31:52,640 --> 00:31:56,480
Speaker 7: biggest airlines in the country. They often charge a lot

509
00:31:56,520 --> 00:31:59,040
Speaker 7: and we'll charge less. You know, we are still like

510
00:31:59,120 --> 00:32:02,000
Speaker 7: the lower cost case than somebody like American or Delta.

511
00:32:02,640 --> 00:32:04,520
Speaker 7: So you know, they say it would be good for

512
00:32:04,560 --> 00:32:07,920
Speaker 7: consumers because you will have this lower cost option. But

513
00:32:08,480 --> 00:32:10,440
Speaker 7: really a lot of people think the fact that this

514
00:32:10,520 --> 00:32:13,640
Speaker 7: went to trial at all is because jet Blue offered

515
00:32:13,840 --> 00:32:17,440
Speaker 7: Spirit a lot of money to let them go through

516
00:32:17,440 --> 00:32:21,400
Speaker 7: with this. So if the Justice Department wins at trial,

517
00:32:21,840 --> 00:32:25,440
Speaker 7: jet Blue has to pay Spirit seventy million dollars and

518
00:32:25,440 --> 00:32:28,880
Speaker 7: then Spirit shareholders four hundred million dollars, and you know,

519
00:32:29,240 --> 00:32:31,440
Speaker 7: that's a pretty good deal. All Spirit has to do

520
00:32:31,560 --> 00:32:34,600
Speaker 7: is sit there and like not along. Well, jet Blue

521
00:32:35,040 --> 00:32:37,440
Speaker 7: makes this case, and then they might get seventy million

522
00:32:37,480 --> 00:32:38,160
Speaker 7: dollars at the end.

523
00:32:39,120 --> 00:32:40,840
Speaker 3: So the trial's been going on for a while. Now

524
00:32:40,880 --> 00:32:41,960
Speaker 3: where does it stand.

525
00:32:42,240 --> 00:32:47,560
Speaker 7: Yeah, so the closing arguments are Tuesday, and then anti

526
00:32:47,600 --> 00:32:50,400
Speaker 7: trust trials are heard by a judge, not a jury,

527
00:32:50,480 --> 00:32:53,400
Speaker 7: So usually it takes somewhere between thirty and ninety days

528
00:32:53,440 --> 00:32:55,800
Speaker 7: before we get a decision. So we'll probably have a

529
00:32:55,800 --> 00:32:58,080
Speaker 7: decision out of the judge sometime early next year.

530
00:32:58,600 --> 00:33:01,400
Speaker 2: So Leah, has the judge in this case given any

531
00:33:01,440 --> 00:33:04,000
Speaker 2: indication of how long it will take for a ruling

532
00:33:04,000 --> 00:33:04,520
Speaker 2: to come down.

533
00:33:05,040 --> 00:33:09,360
Speaker 7: He hasn't. Really. In general, these sorts of cases take

534
00:33:09,440 --> 00:33:12,680
Speaker 7: a couple months afterwards, you know, the government is seeking

535
00:33:12,800 --> 00:33:16,880
Speaker 7: a permanent injunction and in general, like the because mergerers

536
00:33:16,920 --> 00:33:20,560
Speaker 7: have timelines, they try and get these things done quickly.

537
00:33:20,640 --> 00:33:23,800
Speaker 7: So usually it's thirty to ninety days after closings is

538
00:33:23,840 --> 00:33:28,160
Speaker 7: when judges normally issue things. The judge hasn't yet indicated

539
00:33:28,200 --> 00:33:30,560
Speaker 7: when he might rule. We're sort of expecting he might

540
00:33:30,560 --> 00:33:33,760
Speaker 7: say something at closings, but he has asked a lot

541
00:33:33,800 --> 00:33:37,360
Speaker 7: of questions about the proposed remedy. As I mentioned, you know,

542
00:33:37,560 --> 00:33:41,440
Speaker 7: both Jet Blue and Spirit plan to divest some of

543
00:33:41,480 --> 00:33:44,600
Speaker 7: their roots to Frontier and Allegian, and he has been

544
00:33:44,640 --> 00:33:48,480
Speaker 7: really interested in whether that's actually enough to resolve the competition.

545
00:33:49,320 --> 00:33:52,320
Speaker 7: And a lot of the previous airline mergerers that the

546
00:33:52,400 --> 00:33:56,640
Speaker 7: Justice Department had allowed in previous years, they did on

547
00:33:56,680 --> 00:34:01,040
Speaker 7: the condition that the airlines divest routes. So the most

548
00:34:01,040 --> 00:34:06,120
Speaker 7: recent one that you might remember is American Airlines US Airways,

549
00:34:06,160 --> 00:34:10,839
Speaker 7: which was the Obama administration mid twenty tens. The Justice

550
00:34:10,840 --> 00:34:14,240
Speaker 7: Department originally sued over that one, and then they agreed

551
00:34:14,280 --> 00:34:18,399
Speaker 7: to eventually allow it through after those airlines agreed to

552
00:34:18,440 --> 00:34:22,840
Speaker 7: divest some gates at Reagan National Airport and up in

553
00:34:22,920 --> 00:34:26,480
Speaker 7: New York at some of those airlines. But what the

554
00:34:26,560 --> 00:34:30,840
Speaker 7: Justice Department found is when the airlines sold those gates off,

555
00:34:31,200 --> 00:34:34,200
Speaker 7: the new airlines didn't always fly the same routes. So

556
00:34:34,560 --> 00:34:39,000
Speaker 7: American might have been flying, say DCA to Minneapolis, but

557
00:34:39,320 --> 00:34:43,239
Speaker 7: the new company that took over Frontier might fly DC

558
00:34:43,560 --> 00:34:47,720
Speaker 7: to Denver. And so even if you divest these gates,

559
00:34:47,960 --> 00:34:52,120
Speaker 7: you don't necessarily replace the competition that's lost because there's

560
00:34:52,120 --> 00:34:54,920
Speaker 7: no guarantee that the person who takes over is going

561
00:34:54,960 --> 00:34:55,839
Speaker 7: to fly the same thing.

562
00:34:56,600 --> 00:34:59,200
Speaker 3: So, stepping back a little bit, under Joe Biden, the

563
00:34:59,239 --> 00:35:02,879
Speaker 3: government has really sought to crack down on airline consolidation

564
00:35:03,160 --> 00:35:07,640
Speaker 3: after really decades of approving deals with little resistance. Tell

565
00:35:07,680 --> 00:35:09,799
Speaker 3: me what does that look like in the current administration.

566
00:35:10,280 --> 00:35:13,319
Speaker 7: That has been very interesting. The Biden administration is very

567
00:35:13,320 --> 00:35:16,520
Speaker 7: focused on competition in a way that previous administrations were not.

568
00:35:17,000 --> 00:35:19,920
Speaker 7: And so the interesting thing about this one is not

569
00:35:19,960 --> 00:35:22,520
Speaker 7: only did the Justice Department challenge it, but the Department

570
00:35:22,520 --> 00:35:26,319
Speaker 7: of Transportation very vocally also says that it's opposed. So

571
00:35:26,960 --> 00:35:29,759
Speaker 7: on the same day that the Justice Department announced that

572
00:35:29,760 --> 00:35:32,680
Speaker 7: they were filing this lawsuit, the DOT said that they

573
00:35:32,719 --> 00:35:35,960
Speaker 7: are also concerned and while they're waiting to see what

574
00:35:36,000 --> 00:35:38,799
Speaker 7: the judge decides, even if he decides that it doesn't

575
00:35:38,840 --> 00:35:41,440
Speaker 7: violate the antitrust laws, they still might take some action

576
00:35:41,640 --> 00:35:45,359
Speaker 7: because in a case like this, the Department of Transportation

577
00:35:45,560 --> 00:35:48,480
Speaker 7: has to approve the transfer of some of the licenses

578
00:35:48,520 --> 00:35:51,520
Speaker 7: between the airlines, and so they have said that they

579
00:35:51,760 --> 00:35:56,440
Speaker 7: may end up having a long proceeding about whether to

580
00:35:56,520 --> 00:36:00,680
Speaker 7: actually transfer those licenses if the Justice appris doesn't block

581
00:36:00,760 --> 00:36:01,840
Speaker 7: this merger outright.

582
00:36:02,280 --> 00:36:04,439
Speaker 2: And is this approach from the Biden administration just about

583
00:36:04,440 --> 00:36:06,920
Speaker 2: airlines or are we seeing this in other industries as well,

584
00:36:06,920 --> 00:36:08,040
Speaker 2: concerned about consolidation.

585
00:36:08,239 --> 00:36:11,359
Speaker 7: The concern about consolidation is economy wide. I mean, one

586
00:36:11,440 --> 00:36:13,439
Speaker 7: of the things that Biden has said is that he's

587
00:36:13,840 --> 00:36:17,120
Speaker 7: very concerned about the number of industries that have become

588
00:36:17,239 --> 00:36:21,680
Speaker 7: very concentrated, particularly regulated ones like airlines, and that's why

589
00:36:22,280 --> 00:36:25,759
Speaker 7: he created an executive order in twenty twenty one that

590
00:36:26,080 --> 00:36:29,480
Speaker 7: ordered various federal government agencies to look into ways that

591
00:36:29,520 --> 00:36:32,600
Speaker 7: they could try and improve competition across the board, and

592
00:36:32,640 --> 00:36:36,880
Speaker 7: that has resulted in a lot of different initiatives. You know,

593
00:36:36,960 --> 00:36:41,680
Speaker 7: we've had this focus here on airlines, but there's been

594
00:36:42,440 --> 00:36:46,879
Speaker 7: focus also on pharmaceuticals, on meat packing because there are

595
00:36:46,920 --> 00:36:50,680
Speaker 7: only a few meat packers left out there actually, and

596
00:36:50,800 --> 00:36:53,160
Speaker 7: all sorts of different industries that you might never have

597
00:36:53,239 --> 00:36:55,760
Speaker 7: thought of. So yeah, I would say this definitely isn't

598
00:36:55,880 --> 00:37:00,239
Speaker 7: just airlines specific, but even the Service Transportation Board, where

599
00:37:00,320 --> 00:37:02,840
Speaker 7: railroads have been involved, has been getting in on this

600
00:37:02,880 --> 00:37:04,040
Speaker 7: competition side stuff.

601
00:37:04,320 --> 00:37:07,960
Speaker 2: That was Bloomberg News's Leah Nylan talking about the Justice

602
00:37:07,920 --> 00:37:10,799
Speaker 2: Sparatman challenge to Jeff Blue's attempt to take over of

603
00:37:10,840 --> 00:37:13,600
Speaker 2: Spirit Airlines. That does it for this edition of the

604
00:37:13,600 --> 00:37:16,040
Speaker 2: Bloomberg Law Show. I'm Greg Storr.

605
00:37:16,040 --> 00:37:18,719
Speaker 3: And I'm Kimberlee Robinson. This is Bloomberg