Jason Theuma and Paragon Skydive LLC v. State of Arizona - No. 16-19-16

FAA Docket No:

16-19-16

Author:

Shannetta R. Griffin, Associate Administrator for Airports

Complainant(s):

Respondent(s):

Airport(s):

Grand Canyon National Park Airport (GCN)

History:

Director’s Determination (01/21/2022)

Holding:

Abstract:

Complainant, a commercial aeronautical airport tenant and skydiving operation, alleged violations by the State of Arizona Department of Transportation (ADOT) of Grant Assurance 22, Economic Nondiscrimination, and Grant Assurance 23, Exclusive Rights, and the Anti-Head Tax in a lease by its imposition of various fees, conditions, and requirements such as requiring skydiving liability insurance that was not commercially available, or available at reasonable terms; restricting operations to only tandem skydives; refusing to lease additional space when the space sought was unoccupied; imposing a 10% gross receipts fee when similarly situated operators were charged 1.5% of their gross receipts; and imposing arbitrary and capricious parking fees. (Director’s Determination, p. 4.)

Respondent, ADOT, as airport authority, replied that Complainant was improperly using Part 16 to attempt avoiding its contractual obligations under its lease. (Director’s Determination, p. 4.)

The Director evaluated three issues, specifically whether ADOT violated: (1) Grant Assurance 23, Exclusive Rights, by offering similarly situated tenants at the airport more favorable rights and privileges than those offered to Complainant; (2) Grant Assurance 22, Economic Nondiscrimination, by imposing unjustly discriminatory lease terms on Complainant; and (3) the Anti-Head Tax Act by requiring payment of 5% of Paragon’s gross receipts of skydiving sales to the State.

The Director found no violation of Grant Assurance 23, Exclusive Rights, given that Complainant was still operating on the airport providing skydiving services and had been doing so since 2016. (Director’s Determination, pp. 8-9.) “[S]ince [Complainant] still has access at the Airport, the Director is unpersuaded there is any exclusive right violation based on Paragon’s claims; thus no violation of Grant Assurance 23.” (Director’s Determination, p. 9.)

Next, the Director considered whether Respondent violated Grant Assurance 22, Economic Nondiscrimination, by virtue of Respondent offering similarly situated tenants on the airport more favorable lease rights and privileges than those offered to Complainant. More specifically, Complainant argued that numerous terms of its lease imposed by Respondent the state transportation authority violated Grant Assurance 22, as follows:

• Complainant was required to obtain skydiving liability insurance that was not commercially available, or available at reasonable terms.

• Respondent required Complainant to obtain a high level of coverage of aviation general liability insurance on the order of $5 million when limits were more appropriately within the $1 million to $2 million aggregate range.

• Complainant was required to purchase and keep in force and effect “Products – Completed Operations” insurance with an aggregate of $5 million without offering any reason why this type of insurance was necessary.

• Respondent refused to negotiate or remove certain recitals in the applicable lease and sought to use the recitals to prevent Complainant from filing a Part 16 action or disputing any fees or eviction.

• Complainant was charged a fee of 10% of its gross receipts for all retail sales after federal, state, and local taxes, though other similarly situated operators were charged only 1.5%.

• Respondent unreasonably restricted Complainant’s skydiving operations only to tandem operations and prohibited solo skydives.

• Complainant was required to pay aircraft and parking fees when another aeronautical user paid no such fees.

• Complainant alleged that it was the only airport tenant required to report the hiring of a new employee within two hours.

• Complainant also alleged that it was charged a parking fee of $100 per month for its fuel truck in contrast to other aeronautical and non-aeronautical tenants.

According to the Director, the Respondent was not in violation of Grant Assurance 23, Exclusive Rights. However, the Director found the Respondent was in violation of Grant Assurance 22, Economic Discrimination:

• Respondent unjustly discriminated against Complainant by imposing unreasonable skydiving liability insurance. In fact, the Director noted the FAA ADO had earlier found against Respondent for requiring Complainant to obtain skydiving insurance. The FAA ADO had investigated three insurance carriers and found that it could not find a skydiving insurance policy that was in effect or reasonable at the time for that type of insurance. (Director’s Determination, p. 11.) Additionally, Complainant demonstrated no reasonable skydiving liability insurance was available. Therefore, requiring Complainant to obtain such insurance was an unreasonable term under Grant Assurance 22, according to the Director. (Director’s Determination, p. 12.) “The FAA has determined that the sponsor may not impose unreasonable insurance skydiving requirements on commercial operations seeking to provide skydiving at the airport.” (Director’s Determination, p. 11.)

• According to the Director, Respondent also was in violation of Grant Assurance 22 by requiring $5 million “Products and Completed Operations” insurance. Respondent (correctly) noted that an airport sponsor may impose different terms and conditions upon aeronautical users of an airport under FAA Order 5190.B, Airport Compliance Manual, and Respondent’s rationale for the insurance was that its tenants (Complainant) might abandon the lease premises. (Director’s Determination, p. 14.) Additionally, Respondent claimed that such insurance was applicable to skydiving because it packs its parachutes. (Director’s Determination, p. 14.) However, the Director ruled that “there is no evidence or explanation why a lessee’s abandonment of the premises requires the $5 million policy at issue here and none is apparent. Therefore, requiring Paragon to carry this type and amount of insurance is unreasonable.” (Director’s Determination, p. 14.)

• As to restricting operations to solo skydiving operations, the Director noted that Respondent’s decision apparently was based exclusively upon Complainant’s lease and business plan. But its “decision that the lease alone justifies limiting Paragon, a commercial aeronautical operator, solely to tandem skydives constitutes an unreasonable restriction upon aeronautical activities and is inconsistent with ADOT’s obligations under Grant Assurance 22.” (Director’s Determination, p. 16.) (The record also showed that Respondent was willing to negotiate with Complainant to allow solo skydiving at the airport; thus, the Director ordered Respondent to make the necessary changes to the current lease to remove the unreasonable restriction on skydiving at the airport. (Director’s Determination, p. 16.))

• The Director also found impermissible the imposition of higher (10% gross receipts) fees on Paragon compared to the 1.5% fee imposed on similarly situated air tour operators. (Director’s Determination, p. 22.) Respondent claimed that the fees were based on the operator’s services of activity, and not on a lease. (Director’s Determination, p. 16.)

• Respondent also relied on the Arizona Administrative Code, which imposed a gross receipts tax on commercial operators at the airport. (Director’s Determination, p. 16.) But the gross receipts fee for “air tour flights” was 1.5% and the Director found that Complainant should have been taxed at that rate: “The 10% fee imposed on Paragon greatly exceeds the 1.5% fee charged air tour operators by over 600% … it is beyond the scope of this order to define exactly what comparable must be in every context, but here the Director holds that an otherwise unjustified difference of over 600% does not constitute a comparable rate.” (Director’s Determination, p. 18.)

The Director required further information as to the remaining allegations. That is, the Director ordered Respondent to submit additional information to demonstrate compliance regarding requirements for commercial general liability insurance; parking fees; gate access fees; additional space at the airport; and reporting of new employees. (Director’s Determination, p. 22.)

Appeal

ADOT raised four issues on Appeal corresponding to Allegations 1, 3, 6, and 7 under Issue 2 from the Director’s Determination, as follows:

[1.] Whether the Director erred when he indicated ADOT only provided one skydiving insurance provider and when he relied upon the Part 13 complaint finding and the unsworn statement of Ms. Amey to find the skydiving insurance requirement unreasonable (Allegation 1) and in violation of Grant Assurance 22.

[2.] Whether the Director erred when he determined the Products Completed Operation insurance requirement to be unreasonable (Allegation 2) and in violation of Grant Assurance 22 without considering ADOT’s primary reason for the insurance coverage.

[3.] Whether the Director erred when he found ADOT’s lease restriction on solo jumps (Allegation 6) a violation of Grant Assurance 22.

[4.] Whether the Director erred when he found Paragon similarly situated to air tour operators and determined the disparity in the fee on gross receipts unreasonable (Allegation 7) and in violation of Grant Assurance 22.

(Final Agency Decision, p. 7.)

The Associate Administrator partially upheld and partially overturned the Director’s Determination.

Specifically, the Associate Administrator found that the Director’s Determination in relation to Allegations 1 (skydiving liability insurance requirement), 3 (products completed operation insurance requirement), and 6 (limiting solo jumps) were supported by a preponderance of reliable, probative, and substantial evidence, and, therefore, affirmed the Director’s Determination which found the airport sponsor in violation of Grant Assurance 22.

Notwithstanding the above, the Associate Administrator overturned the Director’s Determination in regard to Allegation 7 (10% gross receipts fee versus a 1.5% fee on air tour operations), finding that the Complainant, Paragon, was not similarly situated to air tour operators and could be treated differently, therefore. (Final Agency Decision, p. 23.) In addition, the Associate Administrator found that the comparison of the 1.5% fee on air tour sales to a 10% fee on retail sales was misrepresented in the pleadings. (Final Agency Decision, p. 23.) A review of the Complainant’s lease indicated that it was charged a flat monthly rate for its skydiving sales and a 10% rate for its other sales. (Final Agency Decision, p. 23.) The flat rate equates to much lower than 10% based on its monthly skydiving sales. (Final Agency Decision, p. 23.) Further, two air tour operators had either a 10% fee on other retail sales or an additional fee on gift shop sales in addition to the 1.5% fee on air tour sales. (Final Agency Decision, p. 23.) This, the Associate Administrator observed, indicated that there was not a large discrepancy in the fees that would be considered unreasonable and inconsistent with Grant Assurance 22. (Final Agency Decision, p. 23.) Accordingly, the Associate Director overturned the Director’s Determination in regard to Allegation 7. (Final Agency Decision, p. 23.)

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