Airline battles frequent flyer mileage brokers in federal court

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.

Travel agents come up short in commission cap antitrust case against airlines

In re Travel Agent Commission Antitrust Litigation (N.D. Ohio Oct. 29, 2007).  The travel agent plaintiffs alleged in this case that the airline defendants had violated Section 1 of the Sherman Act (15 U.S.C. § 1) by conspiring to cap or eliminate travel agent commissions at certain times during the period from 1995 to 2002.  The airlines moved to dismiss on the grounds that the agents had failed to meet the requirement set forth by the U.S. Supreme Court (in Bell Atlantic Corp. v. Twombly, a 2007 case) that, to state a Section 1 claim, a plaintiff must plead facts suggesting that the defendants had engaged in “parallel conduct” and that they had entered into a conspiracy prior to such conduct.

The court granted the airlines’ motions.  As to the smaller airlines, the court held that the agents had failed to allege facts suggesting that the airlines had engaged in parallel conduct regarding commissions; the smaller airlines had “either failed to implement the caps entirely or implemented the caps after the larger airlines.”

As to the larger airlines, the court held that the agents had failed to allege facts indicating that the airlines had conspired with each other.  The agents tried to satisfy their pleading obligations by alleging that airline executives had had opportunities to conspire at trade shows and while playing golf, and by making other circumstantial allegations, but the court held that these allegations fell short of suggesting that the airlines had in fact agreed to cap or eliminate commissions.

Airline not liable under antitrust statutes by terminating agent agreement

Tokarz v. LOT Polish Airlines (E.D.N.Y. Oct. 3, 2006).  Despite repeated warnings by the airline, the agent continued to discount tickets by passing on front-end override commissions to customers, a practice that violated the parties’ written commission agreement.  After several competing agents complained to the airline about the discounting agent, the airline exercised its right to terminate the agreement with the discounting agent.  The terminated agent sued, alleging that the airline’s termination violated federal and New York antitrust statutes because it was the product of an illegal conspiracy among the airline and the complaining competitors.

After a decade of litigation that culminated in a trial, the court held that the airline had not violated the antitrust statutes because it had acted unilaterally, not as part of any concerted action with the complaining competitors.

In its opinion, the court noted that an airline, like any other company that sells services or products through other entities, “can announce its resale prices in advance and refuse to deal with those who fail to comply.”  This helpful statement confirms an airline’s right to prevent an agent from creating fictional fares on a computer reservation system or engaging in any other kind of fare abuse.

Update:  By an order issued December 21, 2007, the Second Circuit affirmed the trial court’s judgment.