Brokers battle in federal court over “bank” of frequent flyer points and miles

November 25, 2014

AZ DNR, LLC d/b/a ERC, LLC v. Luxury Travel Brokers, Inc. and Timothy W. Gibson (D. Kan. Oct. 24, 2014).  Litigation between brokers has revealed some of the inner workings of the secondary wholesale market for frequent flyer program points and miles.  In its complaint, ERC alleged that it is “in the business of purchasing and repurposing unwanted credit card reward points and frequent flyer miles” from consumers.  ERC deposits the purchased points and miles in a “bank” it maintains and then resells them to travel agencies and other customers.  Luxury Travel Brokers, which does business as “Flyer Miles” and “Flyer Smiles,” bought points and miles from ERC for resale to its own wholesale and retail customers.

Over time, ERC and Luxury Travel became so chummy that ERC permitted Luxury Travel to “self-serve” by accessing the bank directly and withdrawing points and miles as needed.  However, according to ERC, Luxury Travel became too familiar with the bank, helping itself to points and miles but not paying for them, and even taking points and miles that were not available for purchase.  When the parties’ negotiations over compensation for the excessive self-service failed, ERC filed suit.  ERC sued not only Luxury Travel but Timothy Gibson, the owner of Flyer Miles and Flyer Smiles, as well.  ERC’s complaint asserted claims for tortious interference with contracts and prospective contracts, violation of the federal Computer Fraud and Abuse Act, breach of contract and unjust enrichment.

The defendants filed a motion to dismiss.  Their main argument was that ERC lacked standing to bring the lawsuit because ERC “has no legitimate property rights” in the points and miles in the bank because “[p]ursuant to the contracts between these customers and the airlines and financial institutions, these frequent flier miles and reward points are generally the property of the airlines and financial institutions, until redeemed by the customer.”  The court denied the motion to dismiss, primarily because the motion raised various factual defenses that the court could not consider in deciding a motion to dismiss.  For example, the court ruled that ERC had “sufficiently alleged” that it “purchased points and miles from others.”

The defendants then filed their answer to the complaint.  Ironically, one of their affirmative defenses, entitled “public policy,” mirrored the primary claim that airlines typically assert in lawsuits against brokers; the defendants explained their “public policy” defense as follows:  “Plaintiff’s recovery in this matter is barred for the reason that Plaintiff’s alleged sale of frequent flier miles and credit card reward points necessarily involves the breach of Plaintiff’s ‘customers’ [sic] third party contracts with airlines and financial institutions.  Thus, Plaintiff cannot show that it has any lawful right that has been interfered with.  Furthermore, it would be against public policy to allow an individual to sue for interference with property rights that are only ‘acquired,’ to the extent they are so acquired, if at all, via the necessary breach of an individual’s third party contract with another individual.”

However, the defendants will not have the opportunity to prove at trial that the brokerage of points and miles fundamentally violates public policy.  Due to what the court described as the defendants’ “pattern of intransigence and violations of Court orders,” it entered a default judgment against them.  The remainder of the case will be limited to litigation over the quantification of the damages to which ERC is entitled and whether ERC is entitled to injunctive relief.  The damages phase of the lawsuit should provide an additional insight into this secondary wholesale market by showing the value that market participants place on points and miles.

Note:  ERC operates the website earnrewardscash.com, which advertises that “We Buy CREDIT CARD POINTS and AIRLINE MILES! Safe. Simple. Discreet. Guaranteed.”  Timothy Gibson was the founder of Alpha Media Group, LLC, which does business as Alpha Flight Guru and operates the website alphaflightguru.com.


“Million Mile Flyer” unable to go the distance in challenge to frequent flyer program changes

February 9, 2014

Lagen v. United Continental Holdings, Inc. (N.D. Ill. Jan. 23, 2014).  As with many, if not all, frequent flyer programs, United’s MileagePlus program rules have always expressly allowed United to change or eliminate the program’s benefits.  In an attempt to get around these rules, and the many opinions upholding an airline’s right to enforce similar rules, the plaintiff contended that United had entered into an additional and separate “Million Mile Flyer” contract with him, and the members of a proposed class, under which the airline was obligated to provide them with certain irreducible “lifetime benefits,” including certain upgrades, bonus miles and seating priority.

In January 2013, the court partially granted United’s motion to dismiss, dismissing the plaintiff’s claims for breach of the implied covenant of good faith and fair dealing and unjust enrichment, leaving only his breach of contract claim.  In its opinion regarding the motion to dismiss, the court warned that, ultimately, the plaintiff would have the burden “to prove (not plead) that a contract exists between Plaintiff’s proposed Million Miler class and United that differs from the Mileage Plus contract United argues is the contract Plaintiff seeks to enforce.”  The case proceeded through discovery, but the plaintiff was unable to prove the existence of a separate Million Mile Flyer contract.  Accordingly, the court granted United’s summary judgment motion.


Airline’s right to make changes causing loss of accrued frequent flyer mileage affirmed

November 19, 2010

Mayer v. United Air Lines, Inc. (N.J. Super. App. Div. Oct. 19, 2010).  Like the rules of many, if not all, frequent flyer programs, the rules of United’s Mileage Plus Program include the airline’s reservation of its right to change the terms of the program in ways that negatively affect the value of members’ previously-accrued mileage.  In 2009, United notified MPP members, including the plaintiff, that their accrued miles would expire on a certain date unless they exercised one of three methods of avoiding such expiration.  The plaintiff chose not to exercise any of the options, and he also chose not to exercise any of the options United offered to have his expired miles reinstated.  Instead, he filed suit against United.

After the case was tried, the court dismissed the plaintiff’s complaint, holding that United had the right, under the MPP, to implement a new rule under which accrued miles could expire, and that United had given the plaintiff advance notice regarding the new rule.  On appeal, the plaintiff argued that (i) the Supreme Court in American Airlines v. Wolens (1995) prohibited the type of rule change that resulted in his loss of accrued miles, and (ii) New Jersey law prohibited a party from unilaterally modifying a contract.  The appeals court rejected both arguments, holding the Supreme Court had specifically avoided ruling on the issue of whether a rule change that results in a loss of accrued mileage is a breach of contract, and that, under New Jersey law, a party to a contract may unilaterally modify the contract if it has expressly reserved the right to do so.  The court held that United had reserved just such right in the MPP rules.

Note:  The plaintiff in this case is not the first frequent flyer program member to challenge an airline for modifying its program in a way that resulted in the member’s loss of accrued value under the program.  In each previous case, the court also upheld the validity of the airline’s contractual reservation of its right to make the modification at issue.  See Simon v. Continental Airlines, Inc. (N.D. Ohio 2010) (notice of appeal filed Feb. 10, 2010); Monzingo v. Alaska Air Group, Inc. (Alaska 2005); Chapman v. Alaska Airlines, Inc. (Wash. Super. 2002); Grossman v. USAir, Inc. (Pa. Com. Pl. 1997); Benway v. American Airlines, Inc. (Tex. Dist. 1995); Greenberg v. United Airlines (Ill. App. 1990).  The oddity here is that this case made it all the way through a trial on the merits; similar claims are typically disposed of by motions to dismiss or for summary judgment.

Trivia:  Plaintiff Carl J. Mayer, an attorney, is the New York Jets fan and season ticket holder who sued Bill Belichick, the New England Patriots and the National Football League in 2007 in response to the “Spygate” videotaping scandal.  In May 2010, the Third Circuit affirmed the dismissal of Mr. Mayer’s amended complaint.

Update:  On November 8, 2011, the Sixth Circuit affirmed the district court’s judgment in Simon v. Continental Airlines, Inc.


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.


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.


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