Conditions of carriage withstand tort claims by delayed passengers

February 1, 2012

Lavine v. American Airlines, Inc. (Md. Special App. Dec. 1, 2011).  Using aa.com, the plaintiffs bought two American Airlines tickets for roundtrip transportation originating and terminating at Reagan National Airport, with an intermediate stop at Key West International Airport.  Their outbound itinerary included a connecting flight from Miami International Airport to Key West.  They received an email confirmation that referred to, incorporated, and contained a link to, American’s Conditions of Carriage.

According to the plaintiffs, American personnel at DCA informed them that the flight to MIA was delayed.  The plaintiffs claimed that they requested seats on another flight or a refund and that they only boarded the delayed flight after having been assured by American personnel that, despite the delay, the airline “would provide” them with the connecting flight to Key West.  The plaintiffs alleged that, upon arrival at MIA, American personnel informed them that they only had 15 minutes to reach the gate for the connecting flight.  The plaintiffs asserted that they ran through the airport, inhaling construction debris along the way, but that American did not permit them to board the connecting flight because they had arrived too late.  American obtained and paid for a hotel room for the plaintiffs and gave them a stipend for dinner and breakfast.  The plaintiffs traveled to Key West on an American flight the next day.

In their lawsuit against American, the plaintiffs alleged five counts based on common law theories of negligent and intentional misrepresentation and demanded $10,000 in compensatory damages and $10,000 in punitive damages.  The plaintiffs appealed after the trial court granted the airline’s motion for summary judgment.

The appeals court affirmed the trial court’s judgment.  First, the appeals court held that American was entitled, under 49 U.S.C. § 41707 and 14 C.F.R. Part 253, to incorporate the Conditions of Carriage by reference, that the airline had in fact done so and that the plaintiffs’ allegation that they had not seen, or agreed to, the Conditions of Carriage did not create a genuine dispute of material fact.

The court then held that the Conditions of Carriage operated to prevent the plaintiffs from being able to prove the “false statement” and “reliance” elements of their negligent and intentional misrepresentation claims.  The court held that the plaintiffs could not prove the “false statement” element due to the limitation of liability clauses of the Conditions of Carriage, which provided as follows:  “American is not responsible for or liable for failure to make connections, or to operate any flight according to schedule, or for a change to the schedule of any flight.  Under no circumstances shall American be liable for any special, incidental or consequential damages arising from the foregoing.”

Next, the court held that the plaintiffs had failed to prove reliance on any alleged verbal representations by American personnel because Mr. Lavine, as “an experienced attorney licensed to practice law in Maryland,” could not have justifiably relied on any such representations in view of the limitation of liability clauses in the Conditions of Carriage and a clause providing that “times shown in timetables or elsewhere are not guaranteed and form no part of this contract.”

The court then held that the plaintiffs had failed to establish the proximate cause element of the causes of action because “it is not foreseeable that [appellants] would inhale construction debris and sustain personal injury as a result of an airline scheduling delay.”

Finally, even if the plaintiffs had been able to establish the elements of their causes of action, their claims would not have made it past 49 U.S.C. § 41713(b)(1), the preemption provision of the Airline Deregulation Act, which provides that “a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.”  The court held that this provision preempted the plaintiffs’ tort claims because they were “related to” American’s boarding procedures, which constituted a “service” provided by the airline.

Note:  This opinion has generated interest among non-aviation business litigators and transactional attorneys in Maryland.  In holding that the Conditions of Carriage were part of the parties’ contracts, the court rejected the plaintiffs’ argument that, even if the Conditions were part of the contracts, there was a dispute of fact because American personnel, by their verbal statements at the airport, had modified the Conditions.  The court relied on the “non-modification” clause of the Conditions in rejecting this argument; that clause stated that “[n]o agent, employee or representative of American has authority to alter, modify or waive any provision of the Conditions of Carriage unless authorized in writing by a corporate officer of American,” and the plaintiffs had not offered proof of a corporate officer’s written modification.  Some commentators have opined that this decision appears to conflict with prior Maryland decisions holding that, despite a contractual requirement that any modifications be written, parties can nevertheless verbally modify contracts.  It appears that the more rigorous “corporate officer” written modification requirement gave the court comfort to enforce the non-modification clause in this case.


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.


Holders of airline gift cards who did not use them, lost them

February 13, 2011

Restivo v. Continental Airlines, Inc. (Ohio App. Jan. 20, 2011).  Continental sold gift cards for air transportation that were valid for one year after issuance.  Purchasers agreed in writing to the one-year validity period.  When the airline refused to honor expired cards, cardholders commenced a class action lawsuit, alleging that Continental had violated Ohio’s gift card and consumer protection statutes and had been unjustly enriched.

Continental moved to dismiss the statutory claims on the grounds that they were preempted by the Airline Deregulation Act.  The preemption provision of the ADA, 49 U.S.C. § 41713(b)(1), provides in part that “a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.”  Continental argued that the unjust enrichment claim should be dismissed because the parties had entered into express contracts.  The trial court granted the motion to dismiss and the cardholders appealed.

On appeal, as to their statutory claims, the cardholders argued that a Continental gift card is not a “service” within the meaning of Section 41713(b)(1) but, rather, is simply the equivalent of money.  The court disagreed, holding that because the gift card’s only purpose is to allow the purchase of air transportation from the airline, it is “related to” the airline’s “price, route, or service.”  The court reasoned that “the fact that the gift card postpones the eventual purchase of an airline ticket does not alter that the gift card is still related to the provision of air transportation.”

As to the cardholders’ unjust enrichment claim, the court held that the existence of valid contracts between the parties prevented any recovery under such theory.

Accordingly, the court affirmed the trial’s court judgment.


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.

Airline obtains summary judgment in case involving passenger assault and false arrest claims

November 30, 2010

Ginsberg v. American Airlines (S.D.N.Y. Sept. 27, 2010).  The plaintiff was a passenger on an American flight from New York (JFK) to Turks and Caicos.  After visiting the restroom during the flight, the plaintiff moved a food cart out of his way so he could return to his seat.  However, a flight attendant had instructed him to wait for her to move the cart.  The plaintiff and the flight attendant had a confrontation about the cart that involved some physical contact but no injury to the plaintiff.

Upon arrival in Turks and Caicos, the local police boarded the aircraft and asked the plaintiff to accompany them.  The police questioned the plaintiff at their headquarters and then drove him to his hotel.  American refused to transport the plaintiff on the return flight, so he purchased a substitute ticket on a US Airways flight.

The plaintiff sued American in state court, alleging causes of action for assault and battery, false arrest, conspiracy, intentional infliction of emotional distress (related to the return flight) and breach of contract (also related to the return flight).  The plaintiff sought actual damages of over $325,000 and punitive damages of $1 million.  American removed the case to federal court and moved for summary judgment, contending that all of the plaintiff’s tort claims were preempted by the Montreal Convention and offering to refund him the value of the return portion of his ticket in satisfaction of his breach of contract claim.

The court held that the plaintiff’s claims for assault and battery, false arrest and intentional infliction of emotional distress, to the extent they were based on the in-flight events, were preempted by the Montreal Convention.  The court also held that, for the in-flight events, the plaintiff had no claim under Article 17(1) of the Convention, which provides that an airline “is liable for damage sustained in case of death or bodily injury of a passenger upon condition only that the accident which caused the death or injury took place on board the aircraft or in the course of any of the operations of embarking or disembarking.”  The court reasoned that the plaintiff had no claim under Article 17(1) because no “accident” had occurred, as the plaintiff himself was the proximate cause of his confrontation with the flight attendant, and because the plaintiff had not suffered any “bodily injury” as a result of such confrontation.

The court then held that the plaintiff’s false arrest claim, to the extent it was based on the alleged conduct by American personnel at the police headquarters, was not preempted by the Montreal Convention but that it failed nonetheless because the plaintiff had not proffered any evidence of false statements made by such personnel to the police.

Next, the court held that the plaintiff’s intentional infliction of emotional distress claim failed.  The court concluded that this claim, which was based on American’s refusal to transport the plaintiff on the return flight, was deficient because the plaintiff had failed to proffer evidence that American had engaged in “the requisite outrageous and extreme conduct” or that he had suffered “the requisite severe emotional distress.”

Finally, the court held that the plaintiff’s breach of contract claim was not preempted by the Montreal Convention, but it noted that American had offered to refund the value of the return portion of the plaintiff’s ticket.  The court indicated that American would also be liable to the plaintiff for the “additional cost factor” associated with the substitute US Airways ticket.

Update:  On October 25, 2010, the plaintiff appealed the court’s decision to the Second Circuit.


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).


Federal court slices, dices and dismisses ticket-related complaint on subject matter jurisdiction grounds

August 1, 2010

Onyiuke v. Cheap Tickets, Inc. & Virgin Atlantic Airways Limited (D.N.J. Dec. 31, 2009).  In August 2008, the plaintiff purchased a ticket, through CheapTickets.com, for roundtrip travel from Newark Liberty International Airport to Lagos, Nigeria, connecting in Gatwick Airport.  The first segment was to be on a Continental flight in mid-December 2009, and the connecting flight was on Virgin Nigeria Airways.  The ticket cost $1,563.

In early December, CheapTickets notified the plaintiff that Continental had discontinued service between Newark and Gatwick and offered him the choice of a modified flight arrangement or a full refund.  The plaintiff refused to accept either alternative.  Instead, he purchased a replacement ticket through a different online travel agency for $3,163 and, acting pro se, filed a lawsuit in federal court.

In his 85-paragraph, 25-page amended complaint, the plaintiff asserted diversity jurisdiction under 28 U.S.C. § 1332 and set forth causes of action for breach of contract and conversion against each defendant.  He demanded damages of approximately $127,000 from each defendant, including “mental agony” damages of $25,000 in connection with his contract claims and punitive damages of $80,000 in connection with his conversion claims.

Each defendant moved to dismiss pursuant to Rule 12(b)(1) on the grounds that the court lacked subject matter jurisdiction because the amount in controversy did not exceed $75,000 and, in fact, was limited to the refund value of the plaintiff’s ticket.  In addition, Virgin Atlantic moved to dismiss under Rule 12(b)(6) on the separate grounds that, except for the refund value of his ticket, the plaintiff’s claims were preempted by the Airline Deregulation Act, 49 U.S.C. § 41713(b)(1), because they were based on state law and “related to a price, route, or service” of an airline.

The court agreed that it lacked subject matter jurisdiction.  First, the court struck the plaintiff’s $80,000 punitive damages demands, which the plaintiff had requested in connection with his conversion claims, from the amount in controversy.  The court ruled that the plaintiff had failed to allege any facts indicating that either defendant had acted with “actual malice,” which a plaintiff must prove to recover punitive damages for a conversion claim under New Jersey law.  The court also pointed out that any “actual malice” assertion was undercut by the fact that it was Continental, and not either defendant, which had discontinued the Newark to Gatwick service, and by both parties’ offers to refund the ticket price to the plaintiff.

Next, the court struck the plaintiff’s $25,000 “mental agony” damages demands, which the plaintiff had requested in connection his contract claims, from the amount in controversy.  The court ruled that the plaintiff’s alleged “mental anguish arising from the loss of a bargain,” embarrassment from having to borrow money from friends and relatives and stress and inconvenience did not amount to the “severe emotional distress” required under New Jersey law to establish a claim for emotional distress arising from a contract breach.

After striking the plaintiff’s demands for punitive and mental agony damages, the plaintiff’s claims were below the jurisdictional minimum, so the court dismissed the amended complaint for lack of subject matter jurisdiction.  Because the court dismissed the amended complaint on this basis, it did not reach Virgin Atlantic’s alternative preemption argument.

Update:  On August 23, 2010, the court denied the plaintiff’s motion for reconsideration.  On September 17, 2010, the plaintiff filed a notice of appeal.


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