Virginia ruling returns to haunt ARC’s collection efforts against agency owner in California

Airlines Reporting Corporation v. Commercial Travel Corporation (S.D. Cal. Aug. 1, 2008).  In 2004, ARC was pursuing two separate lawsuits in the U.S. District Court for the Eastern District of Virginia in which Mario Renda was a defendant, ARC v. Uniglobe Fairway Travel, Inc. and ARC v. Commercial Travel Corporation.  In both cases, ARC alleged that Renda, as an owner and officer of the defendant travel agencies, was personally liable for the agencies’ failure to remit the proceeds from airline ticket sales.

In the Commercial Travel case in Virginia, a magistrate judge issued a report and recommendation in 2004 recommending that the court enter a default judgment against Renda.  The magistrate judge did not analyze whether the court had personal jurisdiction over Renda, a California resident; he simply concluded that, “based on the allegations and facts contained in [ARC’s] Complaint, personal jurisdiction over the Defendants is appropriate pursuant to Va. Code § 8.01-328.1.”  In 2007, after the case had been resolved with respect to the other defendants, the court adopted the report and recommendation and entered a default judgment against Renda for $701,942.

In the Uniglobe case, a different magistrate judge issued a report and recommendation in March 2005 analyzing the court’s personal jurisdiction over Renda in detail and recommending that the court dismiss the case as to Renda on the grounds that it lacked personal jurisdiction over him.  That same month, the court adopted the report and recommendation and issued an order dismissing the Uniglobe case as to Renda.

In February 2008, ARC registered the Commercial Travel default judgment against Renda in the U.S. District Court for the Southern District of California.  Renda moved to vacate the default judgment under FRCP 60 on the grounds that it was void because the Virginia court lacked personal jurisdiction over him.  Renda argued that the Virginia court’s 2005 order as to personal jurisdiction in the Uniglobe case had the effect of collaterally estopping ARC from relitigating the personal jurisdiction issue in the Commercial Travel case before the California court.

The California court agreed with Renda.  It found that Renda had proved the applicability of the collateral estoppel doctrine by showing that (i) both ARC and Renda were parties to the Uniglobe case, (ii) the court in that case actually heard and decided the question of its personal jurisdiction over Renda, and (iii) the court’s ruling was essential to its dismissal of the case as against Renda.  Accordingly, the California court held that it could rely on the Uniglobe ruling as a basis for holding that the default judgment against Renda in the case before it was void.  The court then granted Renda’s motion and vacated the default judgment.

Update:  After the court entered its order vacating the default judgment, Renda moved for an award of attorneys’ fees and costs totaling over $37,000 against ARC under the Agent Reporting Agreement’s fee-shifting clause.  On September 23, 2008, the court denied Renda’s motion.  It ruled that, under the ARA, fees and costs are only recoverable by an “Agent” within the meaning of the ARA and that Renda, as he himself persuasively argued in his motion to vacate, never was an “Agent” under the ARA.

ATPCO not liable to Alitalia for fare coding mistake

Alitalia Linee Aeree Italiane, S.p.A. v. Airline Tariff Publishing Company (S.D.N.Y. Sept. 5, 2008).  ATPCO serves airlines by collecting and distributing their fare data.  Over 500 airlines throughout the world send fare data to ATPCO, which electronically distributes such data to global distribution systems (such as Sabre, Amadeus/System One, Worldspan and Galileo) and computer reservation systems.  ATPCO is owned by 24 domestic and foreign airlines and the company and its predecessor entities have been in existence since 1945.

In 1986, Alitalia and ATPCO entered into a written agreement that governed ATPCO’s provision of fare data services to the airline.  That agreement contained a clause in which ATPCO disclaimed liability for consequential damages resulting from any error made in incorporating or distributing Alitalia’s fare data.  The agreement also contained ATPCO’s agreement to act as Alitalia’s “agent” for purposes of incorporating and distributing the airline’s fare data.

Early in February 2004, Alitalia sent a fax to ATPCO setting forth instructions for reducing fares during the airline’s “low season” (February 21 through April 4).  In entering the fare information into ATPCO’s database, an ATPCO employee made a coding mistake (typing the number “41” rather than “40” into a certain field) that resulted in the reduced fares being entered without any date restriction.  ATPCO then distributed the erroneous fare data to the participating global distribution systems and computer reservation systems.  Three days later, the mistake was caught and corrected, but not before numerous happy customers had bought Alitalia tickets at heavily, and mistakenly, discounted fares.

Alitalia sued ATPCO, alleging causes of action for breach of contract, breach of fiduciary duty, negligence and gross negligence.  Alitalia alleged that ATPCO’s conduct had caused the airline to lose over $3.7 million in revenue.

The parties filed cross-motions for summary judgment on the issue of ATPCO’s liability.  Alitalia argued that ATPCO’s error constituted a breach of the parties’ agreement, a breach of ATPCO’s independent fiduciary duty to Alitalia and, because ATPCO allegedly had a history of similar fare coding mistakes yet had failed to take adequate steps to prevent more mistakes from occurring, gross negligence.  Understandably, ATPCO stood behind the limitation of liability clause, arguing that the court should make Alitalia “lie in the bed it made more than 20 years ago” when it, a sophisticated commercial entity, agreed to the limitation of liability clause as part of the agreement.

The court granted summary judgment in favor of ATPCO.  The court held that the limitation of liability clause applied to ATPCO’s error and precluded Alitalia from recovering its lost revenue consequential damages from ATPCO.  The court also held that even though ATPCO had been acting as Alitalia’s “agent,” Alitalia’s breach of fiduciary duty cause of action was also subject to the contract’s limitation of liability clause.  Finally, the court rejected Alitalia’s negligence and gross negligence causes of action because all of the parties’ duties to each were set forth in their agreement, and ATPCO had no data input duties to the airline that were separate from those set forth in the agreement.  Thus, the court held, all of Alitalia’s claims against ATPCO were contractual in nature, and Alitalia had contracted away its ability to recover consequential damages arising from any ATPCO mistake in incorporating or distributing the airline’s fare data.

Note:  This case did not progress far enough so that damages issues were litigated.  If it had, would Alitalia have been able to prove that, for each ticket sold at an incorrect fare, its damages consisted of the difference between the incorrect and correct fares?  ATPCO probably would have contended that, to recover such damages, Alitalia bore the burden of proving that the customers who bought tickets at the lower, incorrect fares would have purchased tickets at the substantially more costly correct fares or that passengers holding the incorrectly-fared tickets occupied seats that would otherwise have been occupied by passengers who paid the correct fare amounts.  Perhaps the answer to this question would have been found in the frequent flyer mileage brokering opinions of the early 1990’s, including the opinion in American Airlines v. Christensen in which the Tenth Circuit held that the airline was entitled to full fare damages against the mileage brokers.

Another issue, which ATPCO apparently anticipated via the mitigation of damages affirmative defense it asserted, is whether Alitalia had a duty to mitigate its damages by rescinding the incorrectly-fared tickets under the unilateral mistake doctrine described in Restatement (Second) of Contracts § 153.  Unless Alitalia appeals the court’s decision (which seems unlikely given that the airline recently filed for bankruptcy protection and that it has been losing $3 million a day), and wins on appeal (which is even more unlikely), we will never know the answers to these questions.

Passenger ground delay case is trimmed but survives

Ray v. American Airlines, Inc. (W.D. Ark. Aug. 22, 2008).  The passenger’s December 2007 flight on American from Oakland to Dallas was diverted to Austin due to weather conditions.  The passenger claims that she was confined to the aircraft in Austin against her will and that she endured “deplorable conditions” during the 11-hour ground delay.

The passenger filed a lawsuit against American, alleging causes of action for false imprisonment, intentional infliction of emotional distress, negligence, breach of contract and fraud.  American moved to dismiss the passenger’s claims on the grounds that they are preempted by the federal Airline Deregulation Act and the Federal Aviation Act and that, moreover, she failed to allege sufficient facts to state a claim under her various state common law causes of action.

The court rejected most of American’s preemption arguments.  As to the Airline Deregulation Act, the court reasoned that while an “affirmative regulation” that impacts an airline’s “business functions” would be preempted by the ADA, the passenger’s tort claims were not preempted because “allowing an individual to recover for injuries tortiously caused by a carrier does not create any such regulation.”  The court did find, however, that the ADA preempted the passenger’s claims for compensation for lodging, meals and ground transportation, since the U.S. Department of Transportation has implemented regulations requiring such compensation when flights are overbooked but not when flights are canceled for weather-related reasons.  The court also held that the ADA preempted the passenger’s breach of the implied covenant of good faith and fair dealing claim to the extent that it sought to enlarge the scope of the airline’s specific contractual obligations.

As to the Federal Aviation Act, which preempts the field of passenger health and safety on commercial aircraft, the court held that this statute preempted the passenger’s claims regarding the airline’s decision to divert her flight due to safety concerns but that it did not preempt her claims that are based on the airline’s conduct after the flight was diverted and on the ground in Austin.

Next, the court considered whether the passenger had stated a claim under her various state common law tort causes of action.  The court held that the passenger had properly stated claims for false imprisonment, intentional infliction of emotional distress and negligence but that she had failed to state claims for breach of contract and fraud.  The court granted the passenger leave to file a second amended complaint in which she could allege additional facts to remedy the defects in her first amended complaint and add additional claims.

Note:  The court’s preemption rulings in this case are very similar to those that a California federal district court made in April 2008 in Hanni v. American Airlines, Inc.  The Hanni case involves a passenger’s claims regarding a ground delay during a December 2006 flight from San Francisco to Mobile, Alabama.  As a result of her experience, Ms. Hanni not only sued but also founded the Coalition for an Airline Passengers’ Bill of Rights, which operates www.flyersrights.com.