ARC case ends up where it started after excursion through federal court

November 4, 2011

Airlines Reporting Corporation v. Sudbury Travel, Ltd. (E.D.V.A. Sept. 28, 2011).  In 2009, ARC initiated an arbitration before the Travel Agent Arbiter seeking amounts owed by accredited agent Sudbury Travel, Ltd.  Less than three weeks later, ARC withdrew its arbitration complaint.  In his dismissal notice, the Arbiter noted that the applicable rule allowed such withdrawal provided that its purpose “is not to litigate the identical claims in a state or federal court or before any other governmental body.”

Over a year later, ARC filed a Virginia state court complaint against Sudbury based on the same events but naming three additional defendants, “officer/director” Lee Goodstone and two other individuals.  The complaint, which sought damages in excess of $240,000, alleged three counts:  breach of contract against Sudbury only and conversion and breach of fiduciary duty against all four defendants.  ARC alleged three forms of conversion – conversion of ticket sales proceeds, conversion of funds in the agent’s bank account securing a letter of credit in ARC’s favor and conversion of ticket stock.  Goodstone removed the case to federal court and filed a counterclaim against ARC.

Six months and over 70 docket entries (including two amended complaints and numerous motions) later, ARC filed a motion to compel arbitration before the Arbiter.  ARC explained that it had withdrawn its previous arbitration complaint because “it appeared the process was getting no traction” with Sudbury.  Sudbury and Goodstone opposed the motion, which the court denied.

In July 2011, the parties filed cross motions for summary judgment.  In its order on the motions, the court first, citing the Arbiter’s 2009 dismissal notice regarding relitigation of identical claims in court, transferred ARC’s claims against Sudbury back to the Arbiter.

Next, the court rejected ARC’s conversion claims against Goodstone for the same reasons the same court rejected them ten years ago in Airlines Reporting Corporation v. Pishvaian, 155 F. Supp.2d 659 (E.D.V.A. 2001).  The court rejected ARC’s sales proceeds conversion claim because the Agent Reporting Agreement, while labeling such proceeds as “trust” funds, did not actually establish a trust relationship because it did not require that sales proceeds be segregated, i.e., it allowed such proceeds to be commingled with general agency assets.  The court rejected ARC’s conversion claim regarding the funds securing the letter of credit for the same reason.  The court rejected the travel documents conversion claim because the facts showed that Goodstone’s conduct, like that of the agency owner in Pishvaian, was only “supervisory and was not directed at the converted ticket stock.”

The court then rejected ARC’s breach of fiduciary duty cause of action as barred by Virginia’s two-year limitation period.  ARC alleged that the misdeeds occurred during a period ending in July 2008, but it filed its complaint in September 2010.

Finally, the court rejected Goodstone’s Fair Debt Collections Practices Act and Massachusetts General Laws Chapter 93A counterclaims because ARC was seeking to collect a business debt, not a consumer debt.

So, at the end of the day, ARC and Sudbury returned to the Arbiter and Goodstone was out of the case.  ARC filed a motion for a default judgment against the other two defendants, but the court has not ruled on it.

Note:  Now pending in the Eastern District of Virginia are four cases – ARC v. Sarrion Travel, Inc. ($152,000+ damages), ARC v. Mundo Travel Corp. ($80,000+ damages), ARC v. Academic Travel Services International ($87,000+ damages) and ARC v. Cartegena Travel and Tours, Inc. ($85,000+ damages) – in which ARC is alleging the same conversion claims against agency principals that were rejected in Sudbury and Pishvaian.  There must be a better way for ARC to pursue claims against agency principals than to be forced to rely on trust-based causes of action that have repeatedly come up short.  In September, ARC announced that it is embarking on an effort to modernize its agent accreditation procedures.  That effort should include modernization of the Agent Reporting Agreement as well.

First, to receive accreditation, an agency’s principals should be required to consent, in their personal capacities, to arbitration or litigation of ARC’s claims against them related to the ARA.  Agency owners might complain about the costs of defending against ARC’s claims, but a provision requiring that the losing party in the proceeding pay the winning party’s attorneys’ fees and expenses would resolve any costs objection.

Second, the ARA should require that agents segregate sales proceeds in a separate account and prohibit them from commingling such proceeds with other funds.  The ARA designates sales proceeds as trust funds – it provides that “[t]he Agent recognizes that the proceeds of the sales, less the Agent’s commissions, if any, on these ARC Traffic Documents are the property of the Carrier and shall be held in trust until accounted for to the Carrier” – so it stands to reason that agents should be required to treat such funds accordingly.  Without a segregation requirement, the ARA’s “trust” language will continue to fail ARC in its pursuit of tort claims arising under Virginia law, which governs the interpretation of the ARA.


The Computer Fraud and Abuse Act: revenue protection weapon for airlines

December 5, 2010

Note:  This post is an abridged version of the article I wrote for the Autumn 2010 issue of Issues in Aviation Law and Policy, which is published by the International Aviation Law Institute of DePaul University College of Law.  Click here for the full version.

Until the last few years, airlines sustained significant revenue losses from “bust-outs” by Airlines Reporting Corporation (ARC)-accredited travel agencies.  In a bust-out, an agency’s owners validate and sell vast numbers of tickets in a short period of time to individuals and other agencies, fail to report the sales to ARC, and disappear with the proceeds.  Due to technological innovations and aggressive enforcement activities, primarily driven by ARC, bust-outs are now comparatively rare.

Airlines still suffer revenue losses from ticket-related fraud, but now that type of fraud mostly results from online conduct by persons who are not affiliated with ARC agencies.  Online fraud, primarily the illicit sale of tickets purchased over the Internet by persons using stolen credit and debit card numbers, is a significant source of revenue loss for airlines.  This past summer, federal authorities charged 38 defendants “in a series of indictments that allege an extensive network of black market travel agents who used the stolen identities of thousands of victims as part of a multi-million dollar fraud scheme to purchase airline tickets for their customers.”  News Release, Office of the U.S. Attorney, W. District of Missouri, Black Market Travel Agents – 38 Defendants Indicted in Multi-Million Dollar Fraud (July 9, 2010).  Losses from this scheme allegedly exceeded $20 million.  According to one survey, airlines suffered losses of over $1.4 billion in 2008 due to online fraud.  Airlines Tackle $1.4 Billion Online Fraud Challenge, Cybersource (Mar. 16, 2009).

Airlines also sustain online-related revenue losses from fraud by frequent flyer mileage brokers and website abuse by “screen scraper” travel information providers.  Ironically, just as technology was instrumental in reducing the incidence of bust-outs, it is technology, mainly in the form of the Internet, which makes these other forms of fraud and abuse possible.

Alaska Airlines’s recent successful use of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, in federal court against a defiant, long-time frequent flyer mileage broker demonstrates that the Act can be effectively used to combat online fraud and abuse.  Having the CFAA as a gateway to federal court, through federal question jurisdiction under 28 U.S.C. § 1331, is particularly important for airlines because, in general, cases move more quickly, and summary judgment is more readily available, in federal district courts than in state courts.  Moreover, airlines can no longer depend as heavily as they once did on federal trademark infringement or other Lanham Act causes of action to obtain federal question jurisdiction, as mileage brokers appear to be lessening their use of airline logos, trade names, and other trademarks on their websites in an effort to avoid drawing airlines’ attention.

A CFAA cause of action can serve as a powerful weapon, but, in general, courts are cautious about using the CFAA in a civil setting and thoroughly scrutinize evidence offered by a plaintiff in support of its CFAA cause of action.  As a result, an airline must make sure that its website’s terms of use are correctly set up so they can help support a CFAA cause of action, and as soon as online-based fraud or abuse is detected, an airline needs to take steps to ensure that it will be able to prove the elements of a CFAA cause of action, particularly with respect to the “loss” element, which various federal courts have construed differently.  These protective measures are discussed in detail below.

Introduction to the Act

In the early 1980s, computer hackers began to penetrate government and private computer systems.  Gradually, the public began to become aware of these shadowy figures, who used a combination of telephones and “social engineering” (tricking people into disclosing information) to hack into computer systems and steal information or cause damage.

Oddly, Hollywood provided a major impetus for legislative change to address the hacker problem.  In 1983, the movie “WarGames” was released, and it dramatically increased the public’s – and Congress’ – awareness of computer hacking.  In the movie, a high school-age computer geek unknowingly hacks into a NORAD computer system using his personal computer and a telephone and nearly causes a global nuclear war.  Partly as a result of this movie, and its far-fetched premise that a teenage hacker could cause the launch of nuclear missiles, Congress enacted the CFAA, which was then called the “Counterfeit Access Device and Computer Fraud and Abuse Act of 1984.”  (For those who doubt that a movie featuring the escapades of Matthew Broderick and Ally Sheedy spurred the enactment of federal computer crime legislation, see H.R. Rep. No. 98-894, at 6 (1984), reprinted in 1984 U.S.C.C.A.N. 3689, 3695 (“For example, the motion picture ‘War Games’ showed a realistic representation of the automatic dialing and access capabilities of the personal computer.”).)

The Report of the House Committee on the Judiciary summarized the need for the legislation as follows:  “The committee concluded that the law enforcement community, those who own and operate computers, as well as those who may be tempted to commit crimes by unauthorized access to them, require a clearer statement of proscribed activity.”

The goal of articulating a “clearer statement of proscribed activity” has been difficult for Congress to achieve, and, as a result, it has repeatedly amended the CFAA over the years.  The amendments have caused the Act’s reach to broaden substantially, just as the prevalence of computers themselves has increased.  For example, the CFAA initially was a criminal statute only.  In 1994, Congress amended the Act to add a civil cause of action, which is now codified at 18 U.S.C. § 1030(g), under which victims of computer fraud or abuse can assert claims against violators of the statute.  Also, the statute was originally intended to control interstate computer crime only, but, with the development of the Internet, virtually all computer use has become interstate use and thus subject to the Act.

The Act’s Civil Cause of Action

Although the CFAA prohibits seven separate types of activities, airline plaintiffs typically proceed against offenders under Section 1030(a)(4), which prohibits a person from “knowingly and with intent to defraud, access[ing] a protected computer without authorization, or exceed[ing] authorized access, and by means of such conduct further[ing] the intended fraud and obtain[ing] anything of value.”

The Act defines a “protected computer” as a computer “which is used in or affecting interstate or foreign commerce or communication.”  Thus, as noted above, the Act covers, in essence, any computer that is connected to the Internet, which means that it covers virtually all modern computers.  Certainly, any computer that hosts an airline’s website or frequent flyer mileage program constitutes a “protected computer” under the Act.

To prevail on a claim under Section 1030(a)(4), an airline plaintiff must prove that the defendant caused a “loss” to the airline “during any 1-year period . . . aggregating at least $5,000 in value.”  The Act defines the term “loss” as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.”  The “cost of responding to an offense” includes the “consequential” costs incurred in investigating an offense and taking remedial measures in response to it.

An airline plaintiff that has sustained a “loss” through violations of the Act is entitled to “maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other equitable relief.”  Actions must be brought within two years of the offensive conduct or the date of the discovery of the actionable damage.

History of Cases Brought by Airlines Under the Act

In court, airlines have had some successes with CFAA causes of action.  Although issues regarding whether defendants have accessed airline computers “without authorization” or have “exceed[ed] authorized access” have been litigated in several cases, the primary battleground has been the issue of whether the airline plaintiff has been able to prove that it sustained a “loss” within the meaning of Section 1030(c)(4)(A)(i)(I).

Southwest’s Cases

Of all airlines, Southwest Airlines has been, by far, the most active in bringing CFAA causes of action in court.  Southwest’s experiences in litigating the “loss” element of the CFAA cause of action in the three cases are instructive.

Southwest v. FareChase.  In 2003, Southwest sued a software company that developed and licensed software that had the ability to send out “a robot, spider, or other automated scraping device” via the Internet to obtain fare, route, and schedule information from southwest.com, as well as a company that was using such software, pursuant to a license, for use by its corporate traveler customers.  Southwest Airlines Co. v. FareChase, Inc., 318 F. Supp. 2d 435, 437 (N.D. Tex. 2004).  In its complaint, Southwest claimed that the defendants’ activities directed at southwest.com were unauthorized and were deceiving Southwest’s customers by providing them with incomplete and inaccurate information.  Southwest alleged 12 causes of action in its complaint, including a CFAA cause of action.

The defendant that had been using the software moved to dismiss, among other things, Southwest’s CFAA claim pursuant to Federal Rule of Civil Procedure 12(b)(6) because the complaint supposedly had failed to adequately allege “loss” and unauthorized access to southwest.com.  The court rejected both arguments.

As to the “loss” issue, the court held that, because the complaint alleged “loss” aggregating at least $5,000 pursuant to Section 1030(e)(11), Southwest did not need to also allege “damage” to its computer or data pursuant to Section 1030(e)(8), as the defendant had contended.  The court also held that Southwest had adequately alleged unauthorized access under the CFAA because southwest.com’s Use Agreement, which was accessible from all pages on the site, specifically informed users that the use of “automated scraper devices” on the site was prohibited.

Southwest v. BoardFirst.  In 2006, Southwest sued BoardFirst to prevent it from continuing to assist Southwest customers trying to obtain “A” boarding passes, which allow the holder to board flights earlier during the boarding process.  Southwest Airlines Co. v. BoardFirst, L.L.C., 2007 WL 4823761 (N.D. Tex. 2007).  Southwest customers would provide their name, flight confirmation number, and credit card information to BoardFirst.  BoardFirst personnel then would log onto Southwest’s website using the customer’s personal information and attempt to secure an “A” boarding pass.  If BoardFirst obtained an “A” pass, the customer would be charged a fee.

In its complaint, Southwest alleged, among other things, that BoardFirst’s conduct violated the CFAA, and Southwest moved for summary judgment on its claims.  The court held that Southwest was not entitled to summary judgment on its CFAA claim.  The court agreed with Southwest that, by logging on to southwest.com, BoardFirst had been “intentionally access[ing]” Southwest’s computer within the meaning of the CFAA.  However, the court asked the parties to provide additional briefing on the issue of whether BoardFirst had acted “without authorization” or had “exceed[ed] authorized access,” as well as whether the court should apply the “rule of lenity” in interpreting the CFAA in the context of the case.  The rule of lenity “counsels courts to construe ambiguities in a criminal statute, even when applied in a civil setting, in a narrow way.”

The court then addressed whether Southwest had satisfied the CFAA requirement that it show a “loss” of more than $5,000 in a one year period due to BoardFirst’s conduct.  To support its “loss” claim, Southwest had submitted the declaration of its corporate representative on damages, which stated that “Southwest spent at least $6,500 within a single one year period in investigating and responding to BoardFirst’s unauthorized access to Southwest’s computer system.”

The court ruled that, although “investigative and responsive costs fit within the concept of ‘loss’ as used in the CFAA,” the corporate representative’s declaration was “fairly conclusory,” and thus inadequate to establish “loss,” because the declarant had failed “to identify the precise steps taken by Southwest in ‘investigating and responding to’ BoardFirst’s unauthorized access.”  This failure, according to the court, prevented it from being able to determine if Southwest’s response costs were “reasonable,” as required by the Act’s definition of the term “loss.”  However, Southwest did succeed in shutting down BoardFirst’s operations; on the basis of Southwest’s breach of contract claim, the court permanently enjoined BoardFirst from continuing to use southwest.com to obtain boarding passes for its customers.

Southwest v. Harris.  In 2007, Southwest sued eight defendants, alleging that they had engaged in brokering of the airline’s Rapid Rewards frequent flyer plan miles and awards.  In its complaint, Southwest advanced a CFAA cause of action, its only federal cause of action, as well as numerous state statutory and common law causes of action.

The defendants moved to dismiss the complaint for lack of subject matter jurisdiction, alleging that they had not “accessed” Southwest’s computer system within the meaning of the CFAA.  Southwest focused its opposition solely on the “access” element of the CFAA because that is the only one that the defendants had disputed, but, in deciding the motion, the United States Magistrate Judge decided to analyze all the elements of the CFAA cause of action, including whether Southwest had sustained a “loss” within the meaning of Sections 1030(c)(4)(A)(i)(I) and (e)(11).  Southwest Airlines Co. v. Harris, 2007 WL 3285616 at *3-4 (N.D. Tex. 2007).

In his ruling, the Magistrate Judge noted that, under the Act, Southwest was required to show that it had sustained a “loss aggregating at least $5,000 in value over a one-year period.”  The Magistrate Judge also noted that, under Section 1030(e)(11), the Act defines the term “loss” as “any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.”

In its complaint, Southwest alleged that it had incurred a “loss” within the meaning of the Act because it had lost more than $5,000 in revenue in one year due to numerous passengers having traveled on its flights using awards that were void because defendants had brokered them in violation of the Rapid Rewards program’s terms.  Taking a narrow view of the Act’s definition of “loss,” the Magistrate Judge ruled that the form of loss alleged by Southwest did not fall under the definition set forth in Section 1030(e)(11) because the revenue at issue had not been lost “because of interruption of service.”  Accordingly, the Magistrate Judge recommended that the defendants’ motion to dismiss be granted, and the District Court accepted his recommendation.

The court in Harris is not alone in its view that lost revenue must result from a service interruption in order to constitute a “loss” within the meaning of Section 1030(e)(11).  In fact, this appears to be the majority view on this issue.  See Costar Realty Information, Inc. v. Field, 2010 WL 3369349 at *15 (D. Md. 2010).  However, some courts have ruled that lost revenue does constitute “loss” within the meaning of Section 1030(e)(11) even if it does not result from a service interruption.  See, e.g., Frees, Inc. v. McMillian, 2007 WL 2264457 at *6 (W.D. La. 2007).  This issue was recently addressed in a case brought by Alaska Airlines.

Alaska Airlines v. Carey

Brad Carey is no stranger to lawsuits brought against him by airlines seeking injunctive relief against, and damages arising from, his frequent flyer mileage brokering.  Northwest Airlines sued Carey for mileage brokering in 1991, and, the next year, the court granted the airline a permanent injunction and a stipulated judgment for $200,000.  United Airlines sued Carey for mileage brokering in 1992, and again in 2005 for violation of the permanent injunction entered against him in the first case in 1993.  In its summary judgment memorandum in the case discussed below, Alaska Airlines referred to Carey as “an incorrigible and devious scofflaw.”

In 2007, Alaska Airlines filed a lawsuit in the United States District Court for the District of Washington against Carey, his wife, and Carey Travel, Inc. seeking damages and injunctive relief related to Carey’s brokering of frequent flyer miles and award tickets.  Like other frequent flyer programs, the terms of Alaska Airlines’s program, which is known as the “Mileage Plan,” prohibit its members from selling, purchasing, or bartering miles or award tickets, and stipulate that miles and award tickets “are void if transferred for cash or other consideration.”

In its amended complaint, Alaska Airlines set forth eight causes of action, but its CFAA cause of action was the only federal statutory cause of action in its pleading and, thus, the sole basis for the court’s subject matter jurisdiction under 28 U.S.C. § 1331.

According to Alaska Airlines, Carey operated the following scheme in violation of the CFAA.  Carey would solicit Mileage Plan members to sell their miles to him.  He would pay the members a set number of cents per mile, and the members would provide him with their online Mileage Plan username and password.  Carey would then be contacted by persons looking to buy an Alaska Airlines ticket, and he would agree to sell them a ticket.  Carey would then log on to Alaska Airlines’s website using a Mileage Plan member’s username and password and purchase the requested ticket in the name of the buyer.  Carey would then pass the electronic ticket information to the buyer, along with the instruction that, if asked, the buyer should explain that the award ticket was received “free, free, free” as a gift.

In the litigation before the District Court, Alaska Airlines claimed that Carey was violating the CFAA by, “with intent to defraud,” accessing its computer system “without authorization” by using others’ account information without the airline’s permission for the sole purpose of fraudulently causing the airline to issue tickets and provide transportation based on void miles and award tickets.

The District Court agreed with Alaska Airlines that Carey had violated the CFAA, and it entered summary judgment in its favor and a permanent injunction against the defendants.  The Ninth Circuit agreed as well, affirming the District Court’s rulings in all respects.  Alaska Airlines, Inc. v. Carey, 2009 WL 3633894 (W.D. Wash. 2009), amended, 2010 WL 2196446 (W.D. Wash. 2010), aff’d, 2010 WL 3677783 (9th Cir. 2010).  However, neither the District Court’s order granting summary judgment, its amended order granting summary judgment, nor the Ninth Circuit’s memorandum opinion affirming the District Court’s decision contains an extensive discussion of the CFAA cause of action.  Only the transcript of the District Court’s oral decision at the hearing on Alaska Airlines’s motion for summary judgment offers insight into either court’s thinking on the CFAA issues.

At the summary judgment hearing, the District Court ruled that Alaska Airlines had proven the elements of its CFAA cause of action.  As to the unauthorized access element, the court held that using a frequent flyer program member’s online username and password, even with the member’s permission, to perpetrate a fraud against the airline constitutes “access[ing] a protected computer without authorization” in violation of the CFAA.  In ruling in this manner, the court rejected Carey’s contention that his access was authorized because the selling Mileage Plan members had given him permission to use their website login information.  The court pointed out that the victim of Carey’s fraud was Alaska Airlines and that the airline owned and operated its site, solely determined authorized access to it, and had not given Carey the authority to use its site to perpetrate a fraud against it.

In addition, the court ruled at the summary judgment hearing that Alaska Airlines had proven the “loss” element of its CFAA cause of action:

The statutory dollar value, the Court is satisfied, is met in aggregating the cost of policing the system in order for Alaska Airlines to maintain the continued integrity and viability of its frequent flyer system.

The fact of damage here is not a close question in my judgment.  Not only do we have the in excess of $5,000 spent by Alaska Airlines to fulfill its business interest in maintaining the integrity of its mileage system, but as in the Texas case of Frequent Flyer Depot v. American Airlines, it is also clear to me that there has been a loss of goodwill.  Any time a valid frequent flyer mile customer does not have a seat available on a plane because of someone who improperly aggregated miles and obtained a travel award in violation of the terms and conditions, that results in a loss of goodwill, a loss of respect and confidence in the system that Alaska Airlines and, I might add, most other carriers have promoted and spent a goodly amount of money in advertising and promoting for their economic advantage.

The District Court was able to conclude that Alaska Airlines had incurred costs in excess of $5,000 in a one-year period responding to Carey’s offenses because the airline had submitted, in support of its summary judgment motion, the declaration of its Director, Customer Loyalty & Marketing Programs, in which he attested that the airline had expended over $5,000 in manpower in a one-year period while “tracking and attempting to curtail Defendants’ abuses of the system.”  The court relied on this declaration in ruling that Alaska Airlines had satisfied the “loss” element of its CFAA cause of action.

CFAA Pointers

The CFAA is a potentially powerful weapon against mileage brokers, “screen scrapers” and others who threaten an airline’s revenues through conduct that involves accessing the airline’s computers.  But, in general, judges appear to be reluctant to award relief under the CFAA because the law is relatively new and it was originally enacted as a criminal statute designed to stop computer hackers, and a mileage broker is very different from a hacker.  This means that, knowingly or unknowingly, judges are likely to apply “the rule of lenity” in analyzing whether an airline has proven the elements of a CFAA claim.  However, if an airline takes the following steps, it can substantially increase the odds of obtaining favorable and relatively quick relief under the CFAA:

  • The frequent flyer program’s rules should contain a term that clearly states that a member is not authorized to allow a third party to use the member’s user identification or password in order to log in to the member’s account to perform any transaction that violates the program’s terms.  This term would make it difficult for a mileage broker to successfully argue, using an agency theory, that he did not violate the CFAA because the member had given him “authorization” to “access” the airline’s computer by using the member’s login information.
  • To combat automated “screen scraper” devices, the terms of use of an airline’s website should specifically prohibit such devices, and the terms of use should be accessible from all pages on the site.  This term would help an airline satisfy the requirement that it show that the CFAA offender had accessed the airline’s computer “without authorization.”
  • An airline should focus on proving its damages as soon as online fraud or abuse is detected.  At the outset in most fraud cases, the plaintiff’s focus is primarily on proving liability, and the computation of damages is often left for discovery or for an expert witness to handle at a later time.  However, to help prosecute a CFAA claim, an airline must prepare to prove its “loss” before the litigation and as soon as the offending conduct is identified.  If the defendant moves to dismiss a CFAA cause of action on the grounds that the airline has failed to properly plead a “loss” (i.e., the defendant makes a “factual attack” on subject matter jurisdiction grounds), the airline will be required to oppose the motion with admissible evidence.  Such evidence must be collected before the case is filed.
  • To ensure that an airline has sufficient evidence of “loss,” as soon as online fraud or abuse is detected, the airline personnel (or outside contractors) investigating and responding to the offending conduct should keep daily logs describing the tasks they have performed and the time spent performing them.  It is critically important that the logs (and the contractor invoices, if any) describe how the tasks performed were in direct response to the CFAA violations.  Otherwise, there is a substantial risk that a court will hold that the airline has failed to prove that the employee time, or other response costs incurred, constitute “reasonable” costs within the meaning of Section 1030(e)(11).
  • In the court complaint, in addition to alleging revenue and goodwill loss due to the defendant’s CFAA offenses, an airline should separately allege that, as “the cost of responding to” such offenses, it has incurred aggregated costs exceeding $5,000 in a one-year period.  “The cost of responding to an offense” is considered “loss” under the CFAA.  Courts have held that employee response time counts toward the $5,000 threshold.  Once the airline has its “foot in the door” as to the CFAA by proving that its response costs exceeded $5,000 in a one-year period, then it can seek to recover revenue under common law fraud and other causes of action that was lost for reasons other than an “interruption of service.”
  • If damages are relatively unimportant, difficult to prove, or likely to be impossible to recover, and an airline’s primary objective is to stop the defendant’s online fraud or abuse, then the airline should consider dismissing its damages request at some point, particularly where a state statute could provide a cause of action for attorneys’ fees and costs.  (In the Carey case, the court awarded Alaska Airlines attorneys’ fees of over $122,000 and litigation expenses of over $4,500 in connection with its successful claim that the defendants had violated the Washington Consumer Protection Act.)  Streamlining the case in this manner would increase the likelihood that an airline would be able to obtain a permanent injunction at the summary judgment stage and end the case without having to engage in potentially costly and time-consuming damages-related discovery.

Long-pending ARC case against agency’s principals headed to trial after parties fail to conclude it through “barrage of dispositive motions”

November 16, 2010

Airlines Reporting Corporation v. Belfon (D. Virgin Islands Sept. 16, 2010).  World Wide Travel was formed in 1985 and was converted from the Agent Reporting Plan to the ARC program in 1999.  In 2001, WWT began to report sales late, fail to report sales and to other otherwise breach its remittance-related obligations under the Agent Reporting Agreement.  WWT filed a Chapter 11 bankruptcy petition in 2002, and the case was subsequently converted to a Chapter 7 liquidation.  In 2003, ARC filed a proof of claim for over $600,000 in the bankruptcy case, and the bankruptcy court upheld the validity and amount of this claim in 2006.

Also in 2003, ARC sued Angela Belfon, Ronald Belfon and Verne David, three of WWT’s officers, alleging that they were personally liable for WWT’s debt under causes of action for breach of fiduciary duty, conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract.  After seven years of litigation, the parties filed what the court described as “a barrage of dispositive motions,” including Ronald Belfon’s motion to dismiss for lack of subject matter jurisdiction and motion for summary judgment and ARC’s motion for summary judgment on its breach of fiduciary duty, conversion and fraud causes of action.  In a 99-page opinion, the court denied Belfon’s motion to dismiss, granted a portion of his summary judgment motion, denied ARC’s motion and advised the parties “to begin trial preparation.”

Belfon’s motion to dismiss.  The court rejected Belfon’s arguments that ARC lacked standing to sue and that diversity jurisdiction did not exist.  As to the standing issue, the court held that, as the judgment creditor of an insolvent corporation, ARC had standing to pursue a breach of fiduciary duty claim against the agency’s officers.

ARC had more trouble with Belfon’s diversity jurisdiction argument.  The court held that ARC was not the “real and substantial party in interest” for purposes of determining diversity jurisdiction under 28 U.S.C. § 1332 because it was only acting as the representative of its airline owners and had no separate pecuniary interest in the outcome of the litigation.  Thus, the court ruled, the various citizenships of ARC’s owners controlled for diversity jurisdiction purposes.  Fortunately for ARC, none of its 15 airline owners had either a principal place of business or place of incorporation in the Virgin Islands, in which the defendants were citizens, which allowed the court to rule that complete diversity existed.

ARC’s summary judgment motion.  When much of a court’s 99-page opinion in a seven-year-old case deals with the plaintiff’s motion for summary judgment, one can be fairly certain that the judge will find some genuine issues as to material facts.  Although the court did find some genuine factual issues, it also confirmed some useful legal principles in its analysis.

First, the court held that, as soon as WWT became insolvent, the fiduciary duty owed by WWT’s officers and directors shifted so that they had an obligation to manage the corporation’s affairs for the benefit of its creditors.  As ARC pointed out in its brief, this duty requires that officers and directors “maximize the value of the assets for payment of unsecured creditors.”  Significantly, the court held that the existence of this particular fiduciary duty did not require any “showing of actual participation” by the officers and directors in the alleged wrongs at issue, i.e., the failure to remit trust funds to ARC.  ARC’s only burden was to prove that, while WWT was insolvent, the defendants failed to manage the corporation for the benefit of its creditors.  As the court noted, the defendants did not dispute ARC’s evidence that WWT was insolvent during the period at issue.

Second, the court held that the Agent Reporting Agreement between ARC and WWT formed an express trust under which WWT had a fiduciary duty to hold funds collected from ticket sales in trust for the airlines.  The court indicated that the defendants could be liable for WWT’s breach of fiduciary duty for failing to remit such funds if ARC could prove that they participated in the commission of such breach.

The court then analyzed the parties’ evidence, viewing it in a light most favorable to the defendants, to determine if ARC had satisfied the “lighter standard required to prove that the Defendants breached their fiduciary duties as directors/officers of an insolvent corporation” and the more demanding elements of the conversion cause of action.  The court held that, while ARC had offered “compelling evidence of Defendants’ liability,” the defendants had presented “substantial – if not as compelling – contrary evidence,” and that a jury, not the court, would have to make the credibility determinations needed to weigh the parties’ competing evidence.  Thus, the court held that genuine issues of material fact existed as to whether the defendants had breached their fiduciary duty to ARC and had personally participated in the conversion of the ticket sale proceeds.

Belfon’s summary judgment motion.  Consistent with its holding on ARC’s motion, the court denied Ronald Belfon’s motion for summary judgment as to ARC’s breach of fiduciary duty cause of action, holding that genuine issues of material fact existed as to whether Belfon had reason to know of “WWT’s misfeasances” but failed to take appropriate steps to correct them.  However, the court granted Belfon summary judgment as to ARC’s other causes of action against him, holding that ARC had failed to present evidence “beyond mere nonfeasance” showing that Belfon had actively participated in WWT’s wrongful conduct, which is an essential element of the conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract causes of action it had asserted against him.

Note:  This case is a vestige of the bygone era in which agencies would report sales to ARC manually, through weekly bundles of ticket sales reports and auditors’ coupons, and ARC auditors would conduct tedious on-site investigations of paper records.  Ironically, WWT apparently switched to electronic reporting in 1999 (ARC had started its electronic Interactive Agent Reporting system in 1997) but returned to manual reporting after several months.  However, lest one think that lawsuits by ARC asserting tort claims against an agency’s principals for unreported sales are also part of history, ARC recently filed three such lawsuits.  See Airlines Reporting Corporation v. Sudbury Travel, Ltd., Janet Monahan, Joan Goodstone and Lee Goodstone, E.D.V.A. No. 1:10-cv-1195 (filed Oct. 20, 2010); Airlines Reporting Corporation v. A-K Travel Network, Inc., Syed Khalid Saghir and Wasim Khan, E.D.V.A. No. 1:10-cv-1121 (filed Oct. 6, 2010); Airlines Reporting Corporation v. Mundo Travel Corporation, Erik Vallejo-Balboa and Ivan Vallejo; E.D.V.A. No. 1:10-cv-1119 (filed Oct. 6, 2010).


Appeals court upholds temporary injunction against frequent flyer mileage brokers

March 8, 2009

Frequent Flyer Depot, Inc., George Pirkle and Robert Pirkle v. American Airlines, Inc. (Tex. Ct. App. Feb. 26, 2009).  American’s AAdvantage frequent flyer program prohibits the purchase or sale of the program’s mileage credit or award tickets and makes such mileage or tickets void if transferred for cash or other consideration.  American sued Frequent Flyer Depot, and its owners, George and Robert Pirkle, for brokering AAdvantage mileage credit and award tickets.  In its petition, American stated causes of action for tortious interference with contract, tortious interference with prospective relations, fraud and misappropriation.

In September 2008, the trial court granted the airline’s request for a temporary injunction and issued an order enjoining the brokers from purchasing, brokering, bartering, selling, offering for sale or soliciting AAdvantage mileage credit or award tickets through the completion of the trial.  The brokers appealed the temporary injunction order, disputing its imposition for seven separate reasons:  “the underlying suit is pre-empted by federal law; the injunction does not preserve the status quo; there is no enforceable contract between American and its AAdvantage® members prohibiting members from selling their rewards points to third parties; the hearing on the temporary injunction should have been continued for appellants to obtain discovery on their antitrust-related counterclaims; American failed to show an imminent injury; American has an adequate remedy; and principles of equity bar the imposition of an injunction.”

The appeals court rejected all of the brokers’ arguments.  Most notably, the court held that American’s contract with its AAdvantage members is based on mutuality of obligation and thus is enforceable.  The brokers contended that the contract lacks mutuality of obligation, and thus is unenforceable, because it allows American to unilaterally change the terms of the program with or without notice and to terminate the program with six months notice.  The brokers argued that if the contract is not enforceable, then the airline cannot state a cause of action for interfering with that contract.  The court disagreed, noting that the contract does impose sufficient obligations on American to support a finding of mutuality, including the obligations to provide customers with mileage credit when certain conditions are met and to issue award tickets in exchange for such credit.

The court’s other noteworthy ruling is that American was able to prove irreparable injury by showing that the brokers’ conduct disrupted the airline’s business by forcing it to divert personnel resources to deal with void brokered tickets and that the airline was not required to provide evidence that use of award tickets brokered by the defendants actually resulted in the displacement of fare-paying passengers from specific flights.

Note:  In May 2008, the federal district court in Alaska Airlines v. Carey, which is pending in the state of Washington, rejected a similar mutuality of obligation argument that had been made by the frequent flyer mileage brokers in that case.

Update:  On December 30, 2009, Frequent Flyer Depot and the Pirkles filed a petition for a writ of certiorari with the U.S. Supreme Court, which denied the petition on March 29, 2010.


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

September 21, 2008

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.


Airline battles frequent flyer mileage brokers in federal court

May 26, 2008

Alaska Airlines, Inc. v. Carey (W.D. Wash. Apr. 15, 2008).  The terms and conditions Alaska Airlines’ frequent flyer program, known as the Mileage Plan, prohibit its members from selling, purchasing or bartering miles or award tickets, and they state that miles and award tickets “are void if transferred for cash or other consideration.”

In 2007, Alaska Airlines filed a lawsuit against Bradley and Celeste Carey and their company, Carey Travel, Inc., seeking damages arising from, and injunctive relief against, the defendants’ brokering of plan miles and award tickets.  According to the airline, the defendants have operated a scheme in which they buy miles from plan members (which renders the miles void), redeem the miles for award tickets and then sell those tickets to their customers, who use them to travel on the airline’s flights.  In essence, according to the airline, the defendants have tortiously induced plan members to violate the plan and have fraudulently caused the airline to issue tickets and provide transportation based on void miles and award tickets.

In response, the defendants made a novel argument.  They moved to dismiss most of the counts of the complaint on the grounds that the contract between the airline and plan members, which consists of the plan’s terms and conditions, is “both illusory AND unconscionable.”  The defendants argued that contract is illusory because it is “unilaterally modifiable” by the airline, and that it is unconscionable because it is one-sided (particularly because it gives the airline the right to terminate the plan) and because plan members have no opportunity to bargain over the terms and conditions.  The defendants contended that because the contract does not exist or is unenforceable, the airline’s causes of action that are premised on the existence of such contract, such as its cause of action for tortious interference with contract, fail to state a claim for relief.

The court denied the motion to dismiss, holding that defendants had raised this issue too early in the case and indicating that the defendants could proceed with discovery and then file a motion for summary judgment on this issue.  Undaunted, the defendants moved that the court reconsider its order, boldly suggesting that perhaps the court had not “looked at, reviewed, or carefully studied” the plan’s terms and conditions.

The court denied the motion for reconsideration.  Exercising considerable restraint, the court indicated that it had in fact carefully reviewed the terms and conditions and, as proof, pointed out that it had cited certain terms and conditions in its prior order.  The court then noted that contract provisions allowing a party to terminate a contract do not render the contract illusory where the termination can only be exercised upon the occurrence of specified conditions.  The court held that because the contract requires that the airline give 180 days advance notice before terminating the plan, the termination provision did not render the contract illusory.  The court also noted that if the airline decided to eliminate the advance notice provision and terminate the plan immediately, a plan member might have a good argument that the contract, as interpreted by the airline, was illusory, but “that is not this case.”

Note:  In March, after the court issued its order denying the motion to dismiss, the defendants filed a 41-page class action counterclaim and third party complaint alleging, among other things, that Alaska Airlines, “its favored frequent flyer mile broker, Points.com” and Delta Airlines, American Airlines, Northwest Airlines and Continental Airlines (as “unnamed co-conspirators”), have violated federal antitrust statutes by conspiring to eliminate all frequent flyer mileage brokers and monopolize the mileage market and that an in-house attorney and a senior manager of Alaska Airlines are also liable for these antitrust violations.  The defendants filed a similar counterclaim in a case that United Airlines had brought against them in 2005 for brokering Mileage Plus miles and awards.

Update:  On October 30, 2009, the court entered an order granting summary judgment for Alaska Airlines and a permanent injunction against the defendants.  On April 2, 2010, the court awarded Alaska Airlines attorneys’ fees of $122,273 and litigation expenses of $4,545 in connection with its successful claim that the defendants had violated the Washington Consumer Protection Act.  On September 16, 2010, the Ninth Circuit affirmed the trial court’s summary judgment and permanent injunction rulings, as discussed here.


Court decisions highlight need to clarify important Agent Reporting Agreement provision

March 16, 2008

Westways World Travel, Inc. v. AMR Corp., American Airlines, Inc. et al. (9th Cir. (Cal.) Jan. 22, 2008).  Despite consisting of over 70 pages, ARC’s Agent Reporting Agreement contains very few provisions that give airlines specific rights against ARC-accredited travel agents.  Most of the airline-protective provisions are in ARA Section VII, which is entitled “Agent’s Authority, General Rights and Obligations.”  For airlines, subsection H of Section VII is a critically important provision; it states in part as follows:  “The Agent shall comply with all instructions of the carrier, and shall make no representation not previously authorized by the carrier.”  Unfortunately for the airlines, Section VII.H has been held to be “ambiguous” by the Ninth Circuit in the Westways case, as well as by a California federal district court in 2006 in a separate case.

In 1999, Westways World Travel and another ARC-accredited travel agent sued American Airlines (and ARC and other entities) in a California federal district court, alleging that the defendants had engaged in an unlawful scheme to charge the agents, through debit memos, for ticketing violations for hidden city, back-to-back and point-beyond tickets.  The agents claimed that, through this scheme, the defendants had violated the federal Racketeer Influenced and Corrupt Organizations Act and breached the ARA.

In 2003, the court certified the case as a class action, but the court later granted the defendants’ motion for decertification.

In 2004, ARC was dismissed from the case pursuant to a settlement in which ARC, while denying any liability, agreed (i) not to participate in the enforcement of contested airline debit memos seeking payment from agents for hidden city, back-to-back or point-beyond tickets, (ii) to issue a statement to agents informing them of ARC’s agreement not to participate in such enforcement, and (iii) not to terminate the accreditation of any agent that refuses to pay a contested debit memo seeking payment for hidden city, back-to-back or point-beyond tickets.

In 2004, American and the other remaining defendants moved for summary judgment.  American contended that because it had the right under the ARA to issue debit memos to recover its losses arising from agents’ violation of the airline’s instructions prohibiting hidden city, back-to-back and point-beyond ticketing, its conduct in issuing such debit memos could not be considered extortion or any other predicate act needed to show a RICO violation or a breach of the ARA.

In a detailed written opinion issued in 2005, the district court ruled for the defendants.  First, it held the ARA gave American the right to issue debit memos to recover damages for agents’ failure to comply with the airline’s “instructions” within the meaning of ARA Section VII.H.  Second, it held that American, through its conditions of carriage and tariff, had given “instructions” within the meaning of Section VII.H prohibiting agents from issuing hidden city, back-to-back and point-beyond tickets, even though the conditions of carriage and tariff had been issued for passengers, not agents.  The court interpreted the Section VII.H phrase that “the Agent shall comply with all instructions of the carrier” to mean that agents were required to follow all carrier instructions, even if such instructions had been specifically issued to other parties, not to agents.  Finally, the court held that because American had the right under the ARA to issue the debit memos in question, its conduct in doing so could not constitute a RICO predicate act or a breach of the ARA.

The agents appealed, and the Ninth Circuit issued a split decision in January 2008.  The appeals court agreed that the agents’ RICO claims were deficient, reasoning that American could not be liable under that statute by simply demanding payment for amounts that the airline believed it was owed under its interpretation of the ARA.

But the Ninth Circuit disagreed with the trial court’s ruling on the agents’ breach of contract claim.  The appeals court held that the Section VII.H phrase “the Agent shall comply with all instructions of the carrier” could, in its opinion, be understood two ways:  to require that agents need only comply with “instructions” issued specifically to them, and not also with instructions issued to passengers and other parties, or, in the alternative, to require that agents comply with all instructions issued to agents, passengers and all other parties.  In addition, the court refused to overturn the trial court’s decertification of the case as a class action.  The court remanded the case for further proceedings.

The other case in which the court held Section VII.H of ARA to be ambiguous was Continental Airlines, Inc. v. Mundo Travel Corporation.  In that case, Continental had sued an ARC-accredited agent in a California federal district court, alleging that the agent had violated the ARA by issuing point-beyond tickets in violation of the “instructions” prohibiting such ticketing in the airline’s own “Booking and Ticketing Policy.”

The agent in Mundo moved to dismiss on the grounds that the airline’s claims were barred by Section I.C of the ARA, which provides that the ARA “does not, for example, address fares charged by the carrier; that is a matter between a carrier and the Agent.”  Continental responded that Section VII.H had required that the agent comply with the “instructions” against point-beyond ticketing set forth in the Booking and Ticketing Policy.  In a 2006 decision, the court denied the agent’s motion, noting that “the ARA is ambiguous” because the two ARA provisions conflicted, leaving it unclear whether the agent had been required to comply with the Booking and Ticketing Policy.  Mundo was settled a few months after the court’s decision, so there was never a definitive ruling on the enforceability of Section VII.H in that case.

Perhaps it is time for an airline to submit a proposal to ARC’s president, for referral to ARC’s board of directors or stockholders, seeking to clarify Section VII.H so airlines would stand a better chance of enforcing this important provision in court cases.  Maintaining the text of a provision that may be read multiple ways, and may conflict with other ARA provisions, only serves to keep airlines and agents in a position where their respective rights and obligations are unclear.  Unless the provision is clarified, it will be up to the courts to figure out what the provision means and its role with respect to other ARA provisions.  Aren’t the parties to a contract supposed to be the ones to do that?


ARC seeks court confirmation of arbitration award against agency

November 30, 2007

Airlines Reporting Corporation v. Versailles, LLC (E.D. Va. Nov. 26, 2007).  ARC has filed a petition seeking the confirmation of an arbitration award in its favor against Versailles, LLC, a travel agency that does business as Business Travel International and is located in Irvine, California.

According to ARC’s petition, the agency had filed an appeal with the Travel Agent Arbiter after an ARC audit revealed that the agency had violated the Agent Reporting Agreement.  The Arbiter dismissed the appeal, noting in his ruling that “there is clearly the appearance of fraud constituting a clear and present danger of substantial loss to ARC and/or the carriers.”  The Arbiter also ordered that the agency surrender all airline identification plates and traffic documents to ARC and pay $206,400 to ARC, but the agency has failed to comply with such order, according to ARC.  ARC alleges that $192,475 of the amount owed by the agency is from chargebacks by credit card holders claiming that their cards were charged fraudulently.

Update:  On January 25, 2008, the court entered an order confirming the Travel Agent Arbiter’s order.


Magistrate judge recommends that ARC obtain default judgment against agency and owner

October 20, 2007

Airlines Reporting Corporation v. PVO Travel Corp. and Pete Victor Obuljen (E.D. Va. Sept. 27, 2007).  As previously reported, ARC filed a lawsuit against PVO and Obuljen, the agency’s sole owner, for unreported sales and dishonored drafts.  The defendants failed to respond to the complaint, so ARC moved for a default judgment.

The magistrate judge issued a report recommending entry of a default judgment for $296,947, the amount of damages ARC had demanded plus attorneys’ fees, against the defendants.  However, before issuing his recommendation, the magistrate judge engaged in a lengthy analysis as to whether the Virginia court had personal jurisdiction over the defendants, a California corporation and an individual residing in California.

The magistrate judge concluded that the court did have jurisdiction over the defendants under Virginia’s long-arm statute because they transacted business in Virginia by negotiating and entering into the Agent Reporting Agreement in Virginia, and because the ARA called for the defendants to perform certain obligations in Virginia.  The same court had engaged in a similar personal jurisdiction analysis, and had reached the same result, in Airlines Reporting Corporation v. Cisne Corp., Claudio Menicocci and Olga Menicocci (E.D. Va. Mar. 23, 2000).

Note:  On October 22, 2007, the court adopted the magistrate’s report and entered a default judgment against the defendants.


Southwest persuades court to shut down boarding pass company’s operations

September 17, 2007

Southwest Airlines Co. v. BoardFirst, L.L.C. (N.D. Tex. Sept. 12, 2007).  BoardFirst went into business in 2005 to assist Southwest passengers in obtaining the coveted “A” group boarding passes.  “A” boarding passes are obtained by the first 45 passengers to check in, and “A” passengers are the first to board the aircraft.  A BoardFirst customer authorizes the company to act as the customer’s agent.  When the customer’s boarding pass becomes available, a BoardFirst employee uses the customer’s personal information to log onto southwest.com and attempt to obtain an “A” boarding pass for the customer.  BoardFirst notifies its customer if it was successful; if so, BoardFirst collects a $5 fee from the customer, who prints the boarding pass via southwest.com or at an airport kiosk.

Southwest sent BoardFirst cease and desist letters, but BoardFirst continued to operate.  So Southwest sued BoardFirst, alleging causes of action for breach of contract, violation of the federal Computer Fraud and Abuse Act and for violation of a Texas statute prohibiting harmful access to a computer.  Southwest sought damages as well as a permanent injunction against BoardFirst’s operations.  Southwest moved for partial summary judgment on its causes of action and on BoardFirst’s counterclaims for tortious interference with contractual relations.

The court granted Southwest’s motion as to its breach of contract cause of action, holding that BoardFirst had breached the parties’ “browsewrap” agreement.  A browsewrap agreement is entered into between a web site owner and a user of the site when the user accesses the site after having received actual or constructive knowledge that such access constitutes acceptance of the site’s terms and conditions.

Southwest.com’s home page displayed a notice stating that use of the site constitutes acceptance of Southwest’s terms and conditions, one of which was that site use was only permitted for “personal, non-commercial purposes.”  The court held that BoardFirst had actual knowledge of the prohibition against commercial use of the site since at least the time it received Southwest’s first cease and desist letter.  BoardFirst argued that it did not breach the contract because its use of the site was authorized by its customers.  The court rejected this argument, holding that BoardFirst’s authorization to act for its customers “does not make its conduct any less of a violation of the Terms.”

The court then considered whether Southwest had suffered damages due to BoardFirst’s conduct.  Southwest argued that it had incurred damages because BoardFirst’s activities had decreased traffic on its site, thereby depriving Southwest of selling and advertising opportunities, and because BoardFirst’s activities had interfered with Southwest’s effort to build an “egalitarian” image by creating a “de facto first class” for its flights.

The court held that Southwest was entitled to damages but that its damages were impossible to quantify, thus making the remedy of a permanent injunction “particularly suitable.”  The court permanently enjoined BoardFirst “from using southwest.com in a way that breaches the Terms posted on the site.”  The court denied Southwest’s motion as to its federal and state computer-related causes of action and as to BoardFirst’s tortious interference counterclaims.

Note:  This opinion is significant because many web site owners, such as Ticketmaster in its lawsuit against Tickets.com, have failed to persuade courts to enforce their sites’ terms and conditions.  The opinion provides an effective road map for airlines that wish to make sure that users of their sites comply with the sites’ rules.


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