M E M O R A N D U M

THIS DOCUMENT CONTAINS PRIVILEGED ATTORNEY WORK PRODUCT AND ATTORNEY-CLIENT COMMUNICATIONS.

TO: David Feldman, Esq.

City Attorney CITY OF HOUSTON FROM: Peter J. Kirsch

KAPLAN KIRSCH & ROCKWELL DATE: May 4, 2012 SUBJECT: City’s Obligation to Accommodate Southwest Airlines’ Needs at Hobby Airport ______________________________________________________________________________ At the request of the City Attorney’s office, Kaplan Kirsch & Rockwell has examined the Houston Airport System’s obligation to accommodate Southwest Airlines (Southwest) and its needs at William P. Hobby Airport (HOU). Specifically, Southwest has proposed to initiate international service and has requested that the City construct and fund additional passenger gates and a Federal Inspection Services (FIS) facility for its use. The question that we examined is whether the City is obligated to accommodate Southwest, and if so, to what extent.1

1. SUMMARY AND CONCLUSIONS

The City’s obligations with respect to Southwest’s proposal should be guided by the overarching legal principle that the City, as the proprietor of HOU, is legally obligated to provide access to the airport on reasonable terms and conditions without unjust discrimination. The interpretation of this principle is unusually complex in this instance because there is no controlling precedent either in case law or under regulations, policies or determinations issued by the Federal Aviation Administration (FAA) that are precisely applicable to the facts presented here. Notwithstanding this uncertainty, we have reached several legal conclusions (with the noted caveats):

1 We do not address other questions that have been raised concerning the proposal. First, we do not address whether the proposal is economically or financially wise, consistent with the City’s other policies or the applicable carrier use and lease agreements. Second, we do not address in detail the relationship between the Southwest proposal and the Houston Airport System’s long-term plans for its facilities. Third, we do not address the City’s litigation exposure to stakeholders or other interested parties other than FAA or Southwest. Finally, we do not provide specific advice on the position that the City should take in negotiations with Southwest. While all of those are undoubtedly relevant issues, the legal constraints under which the City operates its airports should help define the scope of the options available to the City.

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• Pursuant to federal law and the City’s contractual obligations to the federal government, as reflected in grant agreements, the City is legally obligated to accommodate the reasonable needs of Southwest.

• The City does not have policies in place today that provide a legally defensible legal basis upon which to prohibit Southwest from providing international service at HOU. While there are situations in which it would be legally appropriate for the City to divide types of traffic among the City’s airports, none of those situations applies to the present question.

• We have not been able to identify any compelling or even persuasive legal justification for the City unilaterally to prohibit international commercial air traffic to HOU, an airport that is already classified by the U.S. Customs and Border Protection (CBP) as an airport authorized to accept international traffic.

• In meeting its obligations to the federal government, the City is required to negotiate in good faith with Southwest to provide the space and/or the facilities that Southwest has requested to meet its needs for international service. The manner in which the City negotiates with Southwest is subject to considerably more discretion and is highly fact-specific.

• The City is not legally obligated to finance or build facilities to meet Southwest’s needs.

• If the City does not itself build a common-use FIS facility, the City cannot allow Southwest to fund and construct an FIS for its exclusive use in a manner that would discriminate against other users at HOU.

• Although it is not legally required to do so, the City may conclude that the best way to both satisfy the City’s legal obligations and minimize the risk of litigation is for the City to accommodate Southwest’s needs by negotiating with Southwest for the City’s financing and construction of an expanded FIS and related facilities at HOU.

Two points of caution are appropriate concerning the bases for our conclusions and the law upon which we rely. Most of the applicable law derives from the history of both formal and informal determinations by the FAA concerning airport proprietors’ compliance with applicable obligations to the federal government. There is remarkably little federal case law or formal regulatory standards to guide the City’s actions in this instance. The FAA—the principal agency responsible for enforcing applicable federal law and requirements—has, however, issued numerous informal guidance documents and internal orders that explain the agency’s policy on enforcement of federal law. While none of these documents has the force of law,2 these

2 Under an established rule of law, the courts will accord substantial deference to an agency’s formally issued rules or interpretations of its statutory authority. Chevron v. Natural Res. Def. Council, 467 U.S. 837 (1984); Air Transp. Ass’n of Am., Inc. v. FAA, 291 F.3d 49, 53 (D.C. Cir. 2002). Interpretations such as those in opinion letters, policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law, do not warrant Chevron-type deference but are entitled to judicial respect to the extent that the interpretation is persuasive. Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944); Christensen v. Harris County, 529 U.S. 576, 586–88 (2000). Because the FAA has issued relatively few formal rules but has accumulated a large body of more informal (and

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documents are enormously important in understanding the position that the FAA will take in the event of an allegation of a violation of applicable law and when making discretionary decisions whether to prosecute potential violations. Therefore, in the field of airport law, FAA Advisory Circulars, internal agency Orders, determinations by the Chief Counsel and administrative decisions resulting from Part 16 or Part 13 administrative proceedings3 are all treated as highly persuasive sources of federal law.

Second, the press of time did not give us the opportunity to research in detail the requirements of CBP and other related agencies that will also play an important role in the provision of services for international traffic at HOU. Therefore, we do not address the requirements that the applicable federal agencies may impose on whether, how and under what circumstances a facility for processing international traffic is built and operated at HOU.

2. BACKGROUND: HOUSTON’S LEGAL OBLIGATIONS UNDER FEDERAL GRANT ASSURANCES

The City has received federal Airport Improvement Program (AIP) grant finds for the development and improvement of HOU. As a condition of accepting AIP funds, each time it has accepted a grant, the City has entered into a statutorily mandated grant agreement with the FAA.4 That agreement includes 39 written contractual assurances to the federal government, known as Grant Assurances. Among the commitments in the Grant Assurances is the City’s commitment to “make the airport available as an airport for public use on reasonable terms and without unjust discrimination to all types, kinds and classes of aeronautical activities, including commercial aeronautical activities offering services to the public at the airport.”5

Like any other proprietor of a federally obligated airport, the City is required to make HOU available on reasonable terms to all qualified aeronautical users. This principle overlays all federal laws and regulations and defines the basic scope of the City’s legal obligations to all users, including Southwest. While there are narrow exceptions and limitations to this obligation, federal law prohibits the City from unreasonably denying access to HOU to any aeronautical user, including commercial passenger airlines. The City can lawfully deny access to HOU only if it has reasonable grounds to do so, those grounds are within the scope of permissible bases for restricting access,6 and any such restrictions are neither unjustly discriminatory nor unduly burdensome to interstate commerce.

generally consistent) guidance, the courts have generally found that the agency’s interpretations are authoritative. See Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). 3 14 C.F.R. Parts 13, 16. The FAA does not routinely publish or maintain a publically available digest of all such decisions, but most such decisions are available through on-line databases. 4 See FAA, Assurances, Airport Sponsors, Part C: Sponsor Certification, available at http://www.faa.gov/airports_airtraffic/airports/aip/grant_assurances/media/airport_sponsor_assurances.pdf (hereinafter, individual Grant Assurances are referred to as “Grant Assurance __.” Grant Assurances are mandated by federal law pursuant to which the City makes certain commitments in exchange for receipt of federal grant funds. See 49 U.S.C. § 47107 (statutory mandate for grant assurances). 5 Grant Assurance 22. 6 In all cases, the FAA will make the final determination of the reasonableness of any airport restrictions, which deny or restrict use of the airport. See FAA Order 5190.6B, Chapters 13, 14 (hereinafter, “Compliance Manual”).

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The remainder of this section explains in more detail the City’s obligations under four key Grant Assurances that are potentially applicable to the Southwest request for facilities to accommodate international service at HOU.

A. Grant Assurance 5 (Preserving Rights and Powers)

Grant Assurance 5 requires that the City preserve the rights and powers “necessary to perform any or all of the terms, conditions, and assurances in the grant agreement….7 This broad obligation prohibits the City from leasing property or otherwise entering into an arrangement with a user that would compromise the City’s ability to comply with federal law.

The practical effect of Grant Assurance 5 is that the City cannot enter into an agreement with or otherwise permit Southwest to operate in a manner that could compromise the City’s ability to comply with the Grant Assurances (especially those discussed below). For reasons that are discussed in more detail below, Grant Assurance 5 has the effect of prohibiting the City from delegating to Southwest “essential rights integral to the operation and development” of HOU.8 For example, that would mean that the FAA would be likely to conclude the City cannot permit Southwest to (a) develop its own exclusive use FIS and preclude other airport users from accessing it; or (b) limit access to an FIS in a manner that unjustly discriminates against other users at HOU.

Grant Assurance 5 is especially relevant to the question of whether, instead of building an FIS to accommodate Southwest, the City could allow Southwest to develop and pay for its own FIS to process international passengers. Since, as explained in more detail below, an FIS is a federal facility that generally is available to all airport users, the City would potentially violate Grant Assurance 5 if it were to allow Southwest itself to develop and pay for its own FIS facility. If an FIS were to be developed to accommodate Southwest, regardless of how the facility were funded, the City would have to maintain sufficient control over the facility to ensure that it would be available to all qualified airport users on a nondiscriminatory basis.

B. Grant Assurance 22 (Economic Nondiscrimination)

In many respects, Grant Assurance 22 is the key obligation applicable to the Southwest proposal. Under Grant Assurance 22, the City is required to “make the airport available as an airport for public use on reasonable terms and without unjust discrimination to all types, kinds and classes of aeronautical activities, including commercial aeronautical activities offering services to the public at the airport.”9 The FAA has issued numerous interpretations and has published guidance on actions that airport proprietors must take to comply with this obligation.

The City’s obligations to operate the airport for the public’s use and benefit is not satisfied merely by keeping the airfield open to all classes of aeronautical users. In particular, the City “may not deny an air carrier access solely based on the nonavailability of existing facilities. The

7 Grant Assurance 5. 8 Boston Air Charter v. Norwood Airport Comm’n, FAA Docket 16-07-03, 2008 WL 4186034 (Final Decision and Order, Aug. 14, 2008). 9 Grant Assurance 22.

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[City] must make some arrangements for accommodations if reasonably possible.”10 Grant Assurance 22 imposes an affirmative obligation on the City “to make available suitable areas or space on reasonable terms to those willing and qualified to offer aeronautical services to the public….”11 Furthermore, the City has essentially two choices in complying with this requirement: to “provide these services itself” or to “negotiate in good faith for the lease of premises” for such activities.12

It is important to recognize that the City could not lawfully decline to provide space or to allow a tenant to invest in facilities on the basis that the City believes that there is no business need for such facilities at HOU (for example, on the basis that similar or better facilities are available at Intercontinental Airport) or because the City would prefer that operations occur at another location or airport. In other words, the City cannot lawfully substitute its judgment for that of Southwest as to whether international services are needed at HOU.13

In this context, Grant Assurance 22 would not only require that the City negotiate in good faith to satisfy Southwest’s needs but also, in so doing, make reasonable accommodations to satisfy those needs. The FAA has not provided definitive guidance on what constitutes either good faith negotiations or reasonable accommodation but the substantial case law developed from FAA administrative enforcement actions makes it clear that both terms are highly fact-specific.

Not only does the City have to make a reasonable accommodation to meet Southwest’s needs, but it cannot do so in a manner that discriminates against other users of HOU. What this means is that the City cannot merely allow Southwest to develop its own FIS facility and exclude other users from the facility. If there is to be a new or expanded FIS developed at HOU, the City has an affirmative Grant Assurance obligation to ensure that access to that facility is provided to all qualified users without unjust discrimination.

10 Compliance Manual at ¶ 9.8(a) (emphasis added). 11 Id. at ¶ 9.7 (citing Grant Assurance 22). As described below, FAA takes the position that an FIS is a nonaeronautical facility. Nevertheless, Grant Assurance 22 requires that the City make HOU available to “all types, kinds and classes of aeronautical activities,” which would include Southwest’s proposed international service. See Grant Assurance 22(a). As described below, an airport that has international operations must have an adequate customs processing facility. Therefore, while an FIS is not itself an aeronautical facility, its function is essential for certain aeronautical activities. 12 Id. at ¶ 9.7. 13 Id. at ¶ 9.7(c). It is important here to distinguish between the provision of international commercial passenger service and the construction and operation of an FIS facility. The FAA has opined that it “interprets the willingness of a prospective provider to lease space and invest in facilities as sufficient evidence of a public need for those services” at the subject airport. Id. This principle only applies to aeronautical services. Furthermore, in the only administrative decision to address FIS facilities, the FAA has concluded that an FIS is not an aeronautical facility. Hill Air Co. v. Broward County Bd. of County Comm’rs, FAA Docket No. 13-93-7, 2006 WL 325373, at *28 (Record of Decision, Jan. 31, 2006). Therefore, the FAA is likely to take the position that Southwest’s wiliness to offer international passenger service is evidence of public need for those services, but the agency may not take a similar position vis-à-vis development of an FIS. That distinction may not be of any practical significance, however, since Southwest practically could not provide its proposed international service without at least some federal inspection services. Southwest would undoubtedly argue that even if an FIS is not an aeronautical facility, it cannot practically provide its aeronautical service without such a facility.

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C. Grant Assurance 23 (Exclusive Rights)

In order to ensure adequate competition among service providers at an airport, Grant Assurance 23 prohibits the City from granting what is known as an “exclusive right” to any service provider at the City’s airports. In practice, the FAA has interpreted this Grant Assurance requirement to include a prohibition on a wider range of actions (or inaction) that could promote a virtual or practical monopoly in the provision of aeronautical services.14

The FAA Chief Counsel has specifically opined that Grant Assurance 23 means that the unavailability of facilities is not a satisfactory basis upon which to deny an air carrier access to an airport.15 While the context of that FAA opinion was different from the present situation (i.e., the airport proprietor in that case was proposing to deny all carriers access to the airport), the principles underlying the FAA opinion are applicable here. In essence, the FAA views Grant Assurance 23 as requiring an airport proprietor to “make some arrangements for accommodations if reasonably possible.”16

The FAA has not defined either what arrangements or accommodations are required or what constitutes reasonable action to satisfy Grant Assurance 23, but it is clear that all of these terms are highly fact-specific. At the least, in the instance of a commercial carrier, a proprietor must offer to lease space as needed for the carrier’s operations. It is less clear that the proprietor is required to build new facilities to meet a carrier’s needs.17

The City would be in violation of Grant Assurance 23 if it were to allow a carrier exclusive access to certain airport facilities that are not available elsewhere at the airport. In this instance, it is important to distinguish an FIS facility from other airport facilities (such as gates) that are easily duplicated or are fungible. The FAA is likely to take a very practical view of an FIS facility and will recognize that, as a practical matter, the relevant federal agencies are likely to be willing to staff only a single FIS facility at an airport the size of HOU. Therefore, the FAA would be likely to find it to be a violation for the City to allow Southwest to build an exclusive use FIS if, in doing so, it practically forecloses other carriers from providing international passenger service at HOU.18 If Southwest builds the FIS, therefore, it would need to be a

14 Compliance Manual at ¶ 8.2. The FAA has noted that the prohibition on exclusive rights is the oldest federal obligation affecting federally funded airports. See Civil Aeronautics Act of 1938, 49 U.S.C. § 40103(e). For a more general discussion of exclusive rights and how the FAA has implemented the prohibition, see FAA Advisory Circular 150/5190-6, Exclusive Rights at Federally Obligated Airports (2007). 15 Compliance Manual at ¶ 9.8(a) (citing Centennial Express Airlines v. Arapahoe County Pub. Airport Auth., FAA Docket No. 16-98-05 (Final Agency Decision, Feb. 18, 1999)). 16 Id. 17 We have not identified any cases in which the FAA ordered a proprietor to build a facility to meet a user’s needs. There may be instances that never reached the point of litigation but we are not aware of any such instances. 18 The FAA views “exclusive rights” in highly practical terms. If the practical effect of an airport’s actions (or inaction) is to create an exclusive right, the FAA is likely to find a Grant Assurance violation even if there are legal arguments that competition is theoretically possible. It is important to contrast the situation at HOU from one in which an airport can support multiple FIS facilities. At an airport like Intercontinental, the level of international traffic is likely sufficient to support multiple FIS facilities. Allowing a carrier to build its own exclusive use FIS at Intercontinental is far less likely to be found to be a violation of Grant Assurance 23 than an exclusive use facility at HOU.

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common-use facility unless the City could demonstrate that it is practical for other providers of international service to use other facilities at the airport.

D. Grant Assurance 39 (Competition)

Closely aligned with the requirements of Grant Assurance 23 is Grant Assurance 39 which requires operations at large- and medium-hub airports (like HOU) to report to the Secretary of Transportation any denial of a request by an air carrier for access to an airport.19 That report must explain why the proprietor was not able to accommodate the carrier’s request and, most importantly, provide a “time frame within which, if any, the airport will be able to accommodate” the request.20

Grant Assurance 39 reflects a Congressional mandate that the FAA and Department of Transportation take actions to promote competition among air carriers. Any action by the City which would appear to violate principles promoting competition could be subject to enforcement action by the FAA. Because the agency recognizes that issues related to ensuring competition (and the opposite issue, denying access) are complex, FAA policy requires the involvement of FAA Headquarters Compliance Division when there are allegations that the actions of an airport proprietor would deny access in a manner that would defeat federal policy that promotes competition.21

In the case of the Southwest proposal, there is a strong argument that allowing Southwest to provide international service at HOU would promote competition with the existing carriers operating at Intercontinental. Any action by the City that could be interpreted as foreclosing Southwest’s international service could, similarly, be interpreted by the FAA as anti-competitive behavior. Unlike many of the other Grant Assurances, however, Grant Assurance 39 does not prohibit the City from allowing anti-competitive behavior. The FAA has used Grant Assurance 23, however, as a tool to force airport proprietors to promote competition.

E. Airport Noise and Capacity Act

One question that has arisen is whether the City could prohibit Southwest from offering international service at HOU. The Airport Noise and Capacity Act of 199022 and the FAA regulations implementing that statute23 prohibit the City from restricting access to HOU except in compliance with complex procedural and substantive requirements and (in most instances) approval from the FAA. While the statute and regulations apply primarily to access restrictions based upon noise and related environmental concerns, the FAA has interpreted the statute to apply to a broader range of access restrictions.24

For example, if the City were formally or practically to deny Southwest access to international markets (by refusing to accommodate Southwest’s need for facilities that are essential for international service), Southwest could assert that such a refusal is tantamount to an access 19 Compliance Manual at ¶ 9.8(b); see 49 U.S.C. § 47102. 20 Grant Assurance 39. 21 See Compliance Manual at ¶ 9.8. 22 49 U.S.C. § 47521 et seq. 23 14 C.F.R. Part 161. 24 See Compliance Manual at ¶ 14.4.

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restriction. Although such an argument would be unprecedented, the FAA’s historically aggressive posture with respect to prohibiting any airport access restrictions could well mean that the agency would take the position that any City action that has the de facto effect of restricting Southwest’s ability to provide international service constitutes an access restriction subject to the strictures, and potentially in violation of, the Airport Noise and Capacity Act.25 FAA approval would be needed, and given the agency’s antipathy toward access restrictions, such approval is unlikely.

F. Houston’s Obligation to Negotiate in Good Faith

Notwithstanding the absence of case law precisely analogous to the present situation, there are several principles underlying compliance with Grant Assurance requirements that are instructive for the City’s obligations in responding to the Southwest proposal.

The most important of those principles, which the FAA has repeatedly recognized, is that the City has an affirmative obligation to negotiate in good faith to provide facilities to aeronautical users.26 Even though the FAA has not issued guidance to define the parameters of what is meant by “good faith” negotiations, past experience and FAA precedent suggest that the phrase should be read in the factual context of the proposal at issue. In this instance, the City could not lawfully impose conditions on Southwest access to facilities for international traffic that would implicitly be designed to make negotiations fail or that could violate the key Grant Assurances discussed above. For example, under federal law, the City cannot:

Impose operating lease conditions on a carrier (e.g., size of aircraft, times of operations, noise restrictions, etc.) that would otherwise violate federal law if such conditions were imposed by regulation.

Demand lease payments which are unreasonable, as defined in the FAA’s established policies on airport rates and charges and the considerable case law under those policies.27

Extend negotiations indefinitely in a manner that becomes tantamount to denying access to the airport.28

Impose preconditions on negotiations that the City knows to be practically impossible for the carrier to meet.

It is important to recognize that federal law and FAA regulations do not require that negotiations with a prospective carrier be successful, but the legal burden on the City in the event of unsuccessful negotiations would be considerable: if an airport proprietor, such as the City, has

25 See Compliance Manual at ¶ 14.4(b). 26 See, e.g., Letter from Carol Key, Manager Seattle Airports District Office, Federal Aviation Administration to David Waggoner, Airport Director (June 4, 2008) (concerning the proprietor’s obligation to negotiate with a prospective carrier who would be the first to provide commercial service at a certificated airport). 27 See Policy Regarding Airport Rates and Charges, 61 Fed. Reg. 31994 (June 21, 1996), vacated in part Air Transport Ass’n of America v. DOT, 119 F.3d 38 as amended by 129 F.3d 625 (D.C. Cir. 1997); Notice of Amendment to Policy Statement, Policy Regarding Airport Rates and Charges, 73 Fed. Reg. 40430 (Jul. 14, 2008). 28 See City of Pompano Beach v. FAA, 774 F.2d 1529, 1537–38 (11th Cir. 1985); U.S. Construction Corp. v. City of Pompano Beach, FAA Docket No. 16-00-14, 2002 WL 34167573 (Final Agency Decision, Jul. 10, 2002).

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available property (as we understand to be the case at HOU); if the carrier is demonstrably willing and able to pay reasonable lease rates (i.e., if it is financially responsible); and if the carrier does not itself act unreasonably in its lease negotiations, the FAA will expect that the proprietor will negotiate in good faith. The FAA will not become involved in—or substitute its judgment about—the outcome of negotiations, but it will scrutinize the City’s behavior in negotiations if there is an allegation that the City has not been negotiating in good faith.

3. OTHER LEGAL OBLIGATIONS APPLICABLE TO SOUTHWEST’S PROPOSAL

A. FIS Issues

International air traffic is permitted at HOU today. HOU is already designated by CBP as a “landing rights airport,” which is an airport at which incoming international flights are allowed but must obtain prior permission to land.29 Intercontinental Airport has this same designation. HOU, moreover, has an additional classification: it is the only airport in the Houston area to carry CBP’s “designated airport” classification, which is an airport nearest a border or coastline crossing at which private flights originating from south of the United States border, including Mexico, must land.30 We understand that, as a CBP landing rights airport and designated airport, HOU has an existing, small customs facility used for general aviation purposes.31

Not all airports are required to have, nor is every proprietor required to construct, an FIS facility.32 While an airport is not required to have a specific FIS facility, an airport cannot accommodate international traffic without first providing space and facilities mandated for the various immigration, customs, agriculture and public health inspections of passengers, aircraft, crew members, baggage and cargo.33 CBP is primarily responsible for controlling the entry and clearance of aircraft arriving in and departing from the United States, including an aircraft’s crew, passengers, baggage and cargo.34 Requests to establish an FIS facility must be made in

29 See U.S. Customs and Border Protection Guide for Private Flyers, at 7, updated March 2008, available at http://www.cbp.gov/linkhandler/cgov/travel/pleasure_boats/private_flyers/private_flyers_guide.ctt/private_flyers_guide.pdf (hereinafter, Guide); see also FAA AC 150/5000-5C, ¶ 4(b) (hereinafter, Designated U.S. International Airports) (replaced by FAA AC 150/5000-16, which announces availability of the Guide). Landing rights airports include “many of the so-called major U.S. ‘international airports’ . . . . Customs officers may, at their discretion, grant blanket ‘landing rights’ to . . . companies at certain airports for a specific period of time, in which case only advance notice of arrival is required. This type of blanket permission is generally given for scheduled airline flights at busy landing rights airports.” Id. 30 Guide at 10; see also Designated U.S. International Airports, App. 1, at 5. Both HOU and Intercontinental are landing rights airports, but only HOU is a designated airport. See Guide at 10, App. 1, at 34; Designated U.S. International Airports, App. 1, at 5. 31 We have not investigated whether HOU has ever had international commercial service. For the purposes of this memorandum, we assume that such service does not exist today. 32 The FAA has found that “providing space for Federal agencies to operate a []FIS is not inherent to providing air transportation . . . . These [FIS] services do not involve, make possible, nor are they required for the operation of an aircraft nor contribute or required for the safety of such operations.” Hill Air Co., 2006 WL 325373, at *28. 33 AC 150/5360-13 Change 1, ¶ 91 (hereinafter, Planning and Design Guidelines). See also GAO Report to the Chairman, Subcommittee on Foreign Committee and Tourism, Committee on Commerce, Science and Transportation, U.S. Senate, International Trade, Easing Foreign Visitors’ Arrivals at U.S. Airports at 15 (March 1991). 34 Planning and Design Guidelines, Change 1, ¶ 92(b) (citing Tariff Act of 1930 and Federal Aviation Act of 1958).

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writing to the Commissioner of CBP.35 CBP’s regulations and guidance establish the requirements for the facilities that airports must provide in order for CBP to operate.36 CBP publishes a guidance document that contains the space and facility requirements for FIS facilities.37 Generally, the expected number of passengers-per-hour dictates the space and facility requirements for an airport’s FIS facility.38 If an airport desires to establish a dedicated FIS facility, it must be provided to the various federal agencies at no cost, but there is FAA authority suggesting that an airport tenant may bear some or all of the costs of constructing such a facility.39

In light of the role and importance of FIS facilities for international traffic, two apparently inconsistent principles need to be reconciled: the City is not legally obligated to construct an FIS at HOU, but, at the same time (as explained above), the City must make reasonable accommodations and must negotiate in good faith to meet the needs of Southwest to provide international service (which would include negotiating in good faith for—and making provision for—an FIS facility that could be used by Southwest passengers).

These principles place the City in a difficult dilemma. In this case, a tenant airline at HOU has identified a need for an FIS designed to accommodate international commercial service. The FAA will accept Southwest’s willingness to provide international service as an indication that there is a need for that service.40 In many situations, of course, user needs can be accommodated by simply making existing facilities or land available for lease to the tenant. That is not likely to be the case here. Given the differences (especially passenger counts) between Southwest’s proposed commercial international service and the existing general aviation international traffic at HOU, it is extremely unlikely the City could accommodate Southwest by merely making the existing customs facility available for use by Southwest and its passengers.

Therefore, the difficult legal question is how far the City must go to satisfy its obligation to reasonably accommodate Southwest. If the City were merely to make land available to Southwest for it to construct its own FIS facility as it sees fit, it could face serious jeopardy of violating Grant Assurances 5, 22 and 23 unless it also took affirmative steps to ensure that Southwest operates the FIS in a manner that essentially allows nondiscriminatory access to the

35 See CBP, How to get Customs and Border Protection and other federal services at port locations, https://help.cbp.gov/app/answers/detail/a_id/173/~/how-to-get-customs-and-border-protection-and-other-federal-services-at-port (last visited May 4, 2012) (hereinafter, How to get CBP at ports). “Generally, a civic or government organization” makes the request. Id. 36 Among other things, international airports must “provide, without cost to the Federal Government, proper office and other space for the sole use of Federal officials working at the airport.” 19 C.F.R. § 122.11(c). CBP’s regulations make distinctions among commercial aircraft, private aircraft, public aircraft and scheduled airlines. Id. at § 122.1. See also How to get CBP at ports (describing the minimum criteria for establishing a port of entry, exceptions for communities with airports and the facilities that must be provided to the federal government at no cost). 37 Planning and Design Guidelines, Change 1, ¶ 91, referring to the “Airports—U.S.A. and Preclearance Facilities—Guidelines for Federal Inspection Services” document that is available upon request from CBP. This document was unavailable to us in time to review for purposes of this memorandum. 38 Planning and Design Guidelines, Change 1, Chap. 6, Table 6-1. 39 See Hill Air Co., 2006 WL 325373, at *28 (where an FBO tenant was permitted to construct a general aviation FIS at the airport). 40 See Compliance Manual at ¶ 9.7(c).

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facility by all qualified airport tenants. Assuming that traffic levels at HOU will justify only a single FIS, this means that the City has an affirmative obligation to ensure that the FIS is common use.

We do not know whether, or under what circumstances, Southwest would be willing to build a common-use facility. There is nothing in applicable agency guidance that would preclude an FIS facility from being designed, financed and constructed by a tenant such as Southwest, so long as that facility were operated in a manner that did not create an exclusive right or unjustly discriminate against similarly situated users at the airport.41

This does not mean that the City must build the facility, but the City’s legal obligations should substantially affect the City’s practical position in negotiations with Southwest.42 Regardless of the business arrangements on the design, construction and operation of the facility, the City does have an affirmative obligation to ensure that any FIS facility to be constructed at HOU is a common-use facility available on a nonexclusive, nondiscriminatory basis to any qualified airport tenant. The extent to which best practices suggest that it would be prudent for the City to finance and build the FIS facility is essentially a litigation risk assessment and business judgment that we would be pleased to discuss with the City, but is beyond the scope of this memorandum.

B. Unique Options Available as the Operator of a Multi-Airport System

One additional issue has been raised in public discussions about the City’s posture as the operator of HOU and Intercontinental and Ellington Airports. There is an apparent misperception that the City can lawfully allocate traffic amongst the three airports in a manner that limits international service at HOU.

The law applicable to proprietors of so-called “multiple airport systems” is very precise. The FAA has opined that the proprietor of a multi-airport system has certain limited flexibility in operating its airports that the proprietor of a single airport would not have. Both the FAA and the courts have said that proprietors of multi-systems airports are permitted to allocate air traffic in their airport systems in order to manage ground congestion problems as part of their proprietary powers.43 FAA’s current guidance on this topic provides:

The operator of a system of airports may have some ability to accommodate operations at its other airports if those operations are restricted at one airport in the system. However, any access restrictions must still be fully justified, based on a safety or efficiency problem at the airport where the restrictions apply. Such restrictions must also comply with [the Airport Noise and Capacity Act]. The operator may not simply allocate classes or

41 See Hill Air Co., 2006 WL 325373, at *28; see Sections 2(a) and 2(b) above. 42 The City has not sought our advice on its business position in these negotiations. Consequently, we have avoided making conclusions in this memorandum that could undermine the City’s flexibility in conducting negotiations. 43 See Western Airlines v. Port Authority, 658 F.Supp. 952, 957–958 (S.D.N.Y. 1986), aff’d, 817 F.2d 222, 226 (2d Cir. 1987). Cf. City of Houston v. FAA, 679 F.2d 1184, 1196 (5th Cir. 1982) (upholding FAA’s rule prohibiting nonstop flights to Washington National from origins greater than 1,000 miles away).

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types of operations among airports based on preference for each airport’s function in the system.44

Current FAA policy is an outgrowth in part from disputes concerning efforts to allocate traffic among airports in the New York and Washington, D.C. areas.45 It is important to understand that the FAA has, as a matter of policy, attempted to narrow the principles articulated by the courts in those and subsequent cases concerning proprietors of multiple airport systems. The FAA view is that a proprietor can allocate traffic if necessary to address capacity and related system constraints.46 A multi-airport system airport proprietor such as the City is expressly prohibited from allocating “classes or types of operations among airports based on preference for each airport’s function in the system.”47 The FAA does recognize airport system planning as a valid tool and generally respects the outcome of thoughtful system planning. In the absence of physical constraints or an established system plan, however, the FAA is likely to find that a proprietor cannot justify an arbitrary or dispute-specific allocation of types of traffic within an airport system.48

Existing City policies do not support an assertion that the City could use the multi-airport system rules to restrict international service at HOU. First, HOU is currently designated by CPB to accept international traffic. Second, and perhaps more importantly, the City’s long-term vision for HOU has been articulated that this airport should be able to accommodate, “potentially short-haul international flights” and that “[u]ltimately, the market will determine how Hobby develops.”49 Consequently, even though it is the operator of several airports, and even if it could comply with the applicable regulatory requirements, the City’s existing, published and publicly available policies and practices would defeat an argument that it should today be able to prohibit international commercial service at HOU in favor of Intercontinental.

If the City were to attempt to implement a restriction on international service at HOU in response to the Southwest request, the FAA would rigorously scrutinize such an effort. Past experience suggests that the FAA may take the position that the City would need to comply with the procedural and substantive requirements of the Airport Noise and Capacity Act and also be 44 Compliance Manual at ¶ 14.4(b). This recent rule is narrower than the rule it replaced, which provided, “[w]here the volume of air traffic is approaching or exceeding the maximum practical capacity of an airport, an airport owner may designate a certain airport in a multiple airport system (under the same ownership and serving the same community) for use by a particular class or classes of aircraft. The owner must be in a position to assure that all classes of aeronautical needs can be fully accommodated within the system of airports under the owner’s control and without unreasonable penalties to any class and that the restriction is supportable as being beneficial to overall aviation system capacity.” FAA Order No. 5190.6A at ¶ 4-8(d) (superseded). 45 See Western Air Lines, Inc., v. Port Authority of New York and New Jersey, 817 F.2d 222 (2d Cir. 1987); City of Houston v. FAA, 679 F.2d 1184 (5th Cir. 1982). 46 Compliance Manual at ¶ 14.2. We would caution the City about making comparisons between the City’s airport system and the airports in the Dallas/Ft. Worth metroplex. First, DFW Airport is not owned or operated by the same proprietor as Dallas Love Field. Second, Love Field is subject to a complex series of unique federal statutes governing its role, statutes that supersede any more general FAA policies or Grant Assurances. Third, we are not aware that international service has been specifically proposed at Love Field so the question of whether the proprietor (City of Dallas, not the Dallas/Ft. Worth Airport Authority) can limit such service is purely hypothetical at this point. 47 See Compliance Manual at ¶ 14.4(b). 48 Compliance Manual at ¶ 14.4. 49 City of Houston, William P. Hobby Master Plan, Executive Summary, § 1.2 (2004).

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prepared to justify its action as the result of an identified safety or efficiency problem at the HOU. The FAA’s likely position would be that the only manner in which the multi-proprietor rule could justify imposing restrictions on international service at HOU is if there existed a specific safety or efficiency problem (such as ground congestion) which such a limitation would be designed to alleviate. Based on the information we have been provided, we understand no such safety of efficiency problem exists at HOU. Therefore, while there is neither case law nor precedent on point, we conclude that the FAA’s most likely position in the present context is that the multi-airport proprietor rule would not give the City the legal authority to deny international commercial service at HOU.

These conclusions are especially important in this instance because we understand that some arguments have been offered in public meetings that accommodating international service at HOU would in some manner undermine the City’s investment in Intercontinental. Regardless of whether such statements are true or have political attractiveness, we would caution that federal law does not allow the City to deny access for Southwest to provide international service in the absence of a clearly articulated system plan that justifies limiting investments at HOU in favor of investments in international service at Intercontinental. The previous discussion should make it clear that we have not been made aware of any such plan and that statements in the context of the Southwest proposal do not appear to provide a sufficient legal basis for allocating international traffic to other airports.

4. CONSEQUENCES OF VIOLATING LEGAL OBLIGATIONS

A detailed discussion of the legal mechanisms for enforcement of the City’s obligations under federal law and the FAA Grant Assurances is beyond the scope of this memorandum. Several points are noteworthy, however, and should enter into the City’s consideration of whether it is legally or practically required to: (1) accommodate Southwest’s request to permit international service, and (2) build an FIS and related facilities at HOU.

Violation (or even the potential violation) of the City’s Grant Assurance obligations is a very serious matter. We would recommend that the City exercise great caution in taking any action that has the potential to trigger litigation over compliance with the Grant Assurances. The FAA has a long record of enforcing airports’ Grant Assurance obligations in the face of perceived threats to the national air transportation system. The agency has authority to initiate enforcement action unilaterally.50 If the FAA believes that a proprietor is acting to impose a use restriction that restricts access to its airport, the agency is not timid about pursuing whatever administrative or judicial remedies are available to ensure appropriate access to airports. Even beyond the agency’s enforcement authority, airport users and industry groups have proven equally aggressive in attacking airport sponsors whom they believe to be improperly or unreasonably limiting access to their airport or otherwise not complying with federal obligations.51

50 14 C.F.R. § 16.101. 51 Three well-known cases illustrate this point. When the City of Naples Airport Authority attempted to ban noisy jet aircraft from the Naples Municipal Airport in 1999, the FAA, airport industry groups and individual airport users filed multiple lawsuits—in state court, in federal court and in administrative forums—to stop the airport’s actions. See, e.g., City of Naples Airport Auth. v. FAA, 409 F.3d 431 (D.C. Cir. 2005); Nat’l Bus. Aviation Ass’n v. City of Naples Airport Auth., 162 F. Supp. 2d 1343 (M.D. Fla. 2001). While the Airport Authority ultimately was

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Several legal challenges and remedies are available to the FAA or other interested parties if they believe that the City has violated its federal obligations:

The FAA has the authority to initiate an administrative proceeding52 to enforce an airport’s legal obligations under the Grant Assurances. In such a proceeding, the FAA exercises considerable discretion. If the FAA finds that the airport proprietor is violating its obligations, the agency can (a) withhold payment under existing grants; (b) suspend or terminate eligibility to receive further grants; and (c) seek injunctive relief in court.53

The FAA can seek an injunction from federal district court to prevent violation of an airport’s obligations. A court can impose the same remedies as can the FAA in its administrative proceedings and can issue an injunction that requires compliance with federal legal obligations.54

In civil litigation, an aggrieved party could seek not only an injunction but also damages.

Finally, even greater than the threat of litigation over compliance with its obligations, is the potential loss of discretionary grants from the FAA. The City has received tens of millions of dollars in FAA funding over the past years for both HOU and Intercontinental Airport. Most FAA grants for airports like those operated by the City are discretionary; the City risks loss of these discretionary grants if the agency does not believe that the City is appropriately accommodating Southwest’s needs at HOU. Past experience demonstrates that the FAA will not await the outcome of litigation to exercise its discretion to discontinue grants (or, more informally, “pocket veto” grant applications) if it is unsatisfied with the City’s approach.

successful in all of the litigation, the cost (in excess of $5 million) and the effort were considerable. The Arapahoe County Public Airport Authority’s decision to ban all scheduled passenger service at the Centennial Airport in Colorado was also met with fervent opposition, which ultimately required federal legislation to overcome. See Arapahoe County Pub. Airport Auth. v. FAA, 242 F.3d 1213 (10th Cir. 2001); see also 49 U.S.C. § 47107(q) (legislative resolution to dispute). Finally, the City of Santa Monica, California attempted to limit the size of aircraft that can use the Santa Monica Airport on safety grounds. The FAA and industry groups have opposed that effort and the FAA initiated enforcement action in administrative and judicial forums to stop the City’s actions. See In the Matter of Compliance with Federal Obligations by the City of Santa Monica, FAA Docket No. 16-02-08 (Director’s Determination, May 27, 2008). Our firm has represented all three airport proprietors. 52 14 C.F.R. § 16.101. 53 See 49 U.S.C. §§ 47111(d), 47106(d), and 47111(f). 54 See Mineta v. County of Delaware, No. 05-CV-0297, 2006 WL 2711559, at *7 (N.D. Okla. Sept. 19, 2006) (“The FAA has been given legislative authority to protect federal grant funds and property interests, which provides a basis for the FAA to seek equitable relief in this case. The FAA could ask the Court for monetary damages, but federal legislation provides the FAA a variety of remedies to choose from when monitoring the use of federal funding.”).