Court dismisses passenger price-fixing case on subject matter jurisdiction grounds

McLafferty v. Deutsche Lufthansa A.G. et al. (E.D. Pa. Oct. 16, 2009).  In her class action complaint, the plaintiff alleged that Lufthansa, Air France, KLM and Alitalia had engaged in price fixing in violation of the Sherman Act.  She alleged that, at a 2003 IATA meeting, the airlines agreed to impose surcharges on fares for passenger travel between Europe and Japan.

At the court’s direction, the parties briefed the issue of whether the Foreign Trade Antitrust Improvements Act of 1982, which amended the Sherman Act, excluded the case from the subject matter jurisdiction of the federal courts.

The FTAIA amended the Sherman Act by excluding certain conduct involving trade or commerce with foreign nations from federal courts’ subject matter jurisdiction.  In cases involving alleged restraints on commerce with foreign nations, the court first determines if the defendants’ conduct involved “trade or commerce (other than import trade or import commerce) with foreign nations.”  If so, the court does not have subject matter jurisdiction unless the defendants’ conduct involved a “direct, substantial, and reasonably foreseeable” anticompetitive effect on U.S. commerce that would result in a Sherman Act claim.

The court held that the defendants’ conduct involved “trade or commerce with foreign nations” because they had sold tickets to a U.S. purchaser for foreign travel, but that such purchases did not constitute “import trade or import commerce” because they did not “bring any goods or services to the United States.”  The court ruled that an airline ticket, even if it is delivered in the U.S., is not a “good” because it has no value apart from the service to which its bearer is entitled.

Thus, the plaintiff’s last chance to escape the FTAIA’s jurisdictional bar was to show that she had made sufficient allegations that defendants’ conduct had a direct, substantial and reasonably foreseeable anticompetitive effect on U.S. commerce.  The court held that the plaintiff’s pleadings did not even suggest that the defendants’ conduct had such an effect, that the plaintiff’s injury was in the Europe-Japan fare market and that such injury did not directly affect U.S. commerce.  Accordingly, the court dismissed the case on the grounds that the FTAIA had removed it from the court’s subject matter jurisdiction.

Appeals court upholds temporary injunction against frequent flyer mileage brokers

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.

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.

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.

Update:  On October 15, 2009, the court granted Alaska Airlines’s motion for summary judgment and for a permanent injunction and requested that the airline submit a proposed permanent injunction order by October 23, 2009.

Court decisions highlight need to clarify important Agent Reporting Agreement provision

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?

Airline held liable to passenger for travel agent negligence

Rottman v. El Al Israel Airlines (N.Y. City Civil Ct. Jan. 14, 2008).  The parties in this case reprised a battle that has been fought in many passenger cases over the years:  whether a travel agent was acting as an agent of an airline or as an independent contractor when the travel agent sold the passenger a ticket.  In this case, the passenger prevailed.

The passenger had bought tickets from a travel agent for travel between Baltimore and Tel Aviv.  The passenger was to take a flight from BWI to JFK on a domestic airline and then from JFK to Tel Aviv on El Al.  However, the BWI-JFK ticket issued by the travel agent did not allow the passenger sufficient time to comply with El Al’s rule requiring that passengers check in at least three hours before departure.  As a result, El Al deemed the passenger a “no show,” causing the passenger to forfeit his seat on the flight.  The passenger bought a one-way ticket on a different airline and traveled to Tel Aviv three days later.

The passenger sued El Al for breaching the parties’ contract by refusing to transport him and for the travel agent’s negligence in issuing a ticket that made it impossible for the passenger to comply with the advance check-in rule.  The court held that the airline did not breach the contract because the passenger did not attempt to check in until less than an hour before the flight’s departure, thus violating the check-in rule and allowing the airline to deny him transportation on the flight.

As to the negligence claim, the airline claimed that it was not liable because the travel agent was the airline’s independent contractor, not its agent.  The court disagreed.  Citing two 30-plus year-old cases and the Restatement of Agency, the court held that the travel agent was acting as the airline’s agent when it sold the tickets to the passenger and, thus, that the airline was responsible for the travel agent’s error.  The court awarded the passenger a judgment in the amount of the one-way ticket that the passenger had bought.

Note:  The court’s opinion does not contain any indication that the court, in deciding whether an agency relationship existed between El Al and the travel agent, considered the degree of control that the airline actually had over the travel agent.  As the Ninth Circuit correctly held in Harby v. Saadeh and Kuwait Airways, in passenger lawsuits against airlines, an agency relationship between the airline and a travel agent only exists where the passenger has met the burden of proving that the airline had agreed to allow the travel agent to act on its behalf and subject to its control.  In Harby, the court held that Kuwait Airways was not liable for a travel agent’s negligence in failing to warn the passenger about the airline’s infrequent flight schedule because the passenger had failed to meet his burden of proving that the airline actually controlled such agent, thus leading the court to conclude that the agent had simply acted as a broker, i.e., an independent contractor.

In Rottman, the court concluded that El Al and the travel agent stood in an agency relationship simply because, in the court’s view, all airlines and travel agents that issue tickets for them do so.  In support of its conclusion, the court in Rottman cited the following sentence from the Restatement of Agency:  “Analogizing them to insurance agents, travel agents have been characterized as the agents of airlines and other service providers for whom they issue tickets to customers.”  But, later in the same paragraph, the Restatement of Agency also states:  “In other situations, courts have analogized a travel agent to an insurance broker or, reasoning differently, have characterized a travel agent as the customer’s agent.”  As Harby and the Restatement indicate, in passenger lawsuits against airlines, an agency relationship does not always exist between the airline and a travel agent that sells tickets for that airline.

First Circuit ruling confirms that “nonrefundable” tickets are totally nonrefundable

Buck v. American Airlines, Inc. (1st Cir. Mass. Feb. 7, 2007).  Some airline customers find it difficult to accept that their “nonrefundable” tickets are truly nonrefundable.  Some have filed lawsuits against airlines, but the courts routinely dismiss these claims as preempted by the federal Airline Deregulation Act (“ADA”), which prohibits the enactment or enforcement of any state “law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.”  See, e.g., Howell v. Alaska Airlines, Inc., 994 P.2d 901 (Wash. App. 2000).  A group of airline customers thought they had come up a clever way to avoid ADA preemption.  They were mistaken.

The plaintiffs in Buck were purchasers of nonrefundable tickets that they were unable to use.  They conceded that they were not entitled to a refund of their base fares but claimed that the 13 airlines they named as defendants had acted unlawfully by not refunding the various fees and taxes that had been collected as part of the ticket prices.  As their causes of action, the plaintiffs alleged an implied private right of action under two federal regulations governing the disclosure of certain terms in airline contracts of carriage, as well as numerous state law claims.

Like the district court, the First Circuit did not buy what the plaintiffs were selling.  The court held that only a statute, not a regulation, can serve as the source of a private right of action and that the ADA, the statute underlying the regulations on which the plaintiffs were relying, does not “permit the imputation of a private right of action against an airline.”

The court also held that the plaintiffs’ state law claims were preempted by the ADA.  The plaintiffs argued that they were making state claims in an attempt to right federal wrongs, since federal rules govern the airlines’ collection of the fees and taxes at issue.  The court rejected this inventive argument, correctly concluding that the plaintiffs’ state claims were attempts to further a state policy that those who are wronged should have “access to the courts in order to remediate that wrong.”

Note:  Just about every paragraph of this opinion features at least one vocabulary-expanding word or phrase; here are my favorites:  pleochroic (a new word for me), raiment, multitudinous, tamisage (new word #2), periphrastic (new word #3), circumlocutions, cornucopia, asseverate (new word #4), dichotomy, contextualized, supererogatory (new word #5), aperture, cabining, vagarious, ipse dixit, irreducible, elucidated.

Airline not liable for downgrading passenger tickets

Sobol v. Continental Airlines (S.D.N.Y. Sept. 26, 2006).  Due to overbookings, the airline downgraded some of the first class tickets held by family members to coach class, causing the family to be separated during the international flights at issue.

The family members alleged in their lawsuit that the separation caused them emotional trauma and stress, but no physical injury.  They alleged causes of action for emotional distress, breach of contract, conversion, unjust enrichment and punitive damages, and sought damages totaling over $3 million.

Even though the events at issue took place in 2005, and thus were governed by the Montreal Convention, the court primarily analyzed the issues under the Warsaw Convention.  The court rejected the passengers’ emotional distress claim because the separation of the family did not constitute an “accident” resulting in “bodily injury,” as is required to state a claim under the Warsaw Convention.  The court rejected the passengers’ remaining claims on the grounds that because the Warsaw and Montreal Conventions do not contain a provision dealing directly with the downgrading of a ticket, those claims are preempted.  If a passenger whose travel is subject to the Conventions cannot proceed under the Conventions, he cannot proceed at all.

Airline not liable to passenger for substitute transportation

Oparaji v. Virgin Atlantic Airways, Ltd. (E.D.N.Y. Sept. 19, 2006).  Instead of boarding his flight after being questioned about his passport, the passenger spent time venting his anger to airline personnel, causing him to miss the flight.  The passenger then bought a ticket from another airline.

In his lawsuit, the passenger alleged every cause of action he could dredge up, and the court denied them all.  The court held that the passenger could not recover for personal injuries under Article 17 of the Warsaw Convention because his injuries were purely mental, not bodily.  And the court held that the passenger could not recover delay damages under Article 19 because the airline had no liability for the passenger’s unilateral decision to obtain substitute transportation on another airline.

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