Tuesday, December 3, 2013

Does Federal Airline Deregulation Act Preempt State Implied Covenant Claim?

The Supreme Court hears oral arguments today in Northwest, Inc. v. Ginsberg, the case testing wether the federal Airline Deregulation Act preempts a state-law claim for breach of implied covenant of good faith and fair dealing arising out of an airline's termination of a customer's membership in its frequent flyer program.  Here's my preview of the oral argument from the ABA Preview of United States Supreme Court cases, with permission:

FACTS

S. Binyomin Ginsberg was an active member of WorldPerks, the Northwest Airline’s frequent flyer program, since 1999. Ginsberg, an expert in education and administration, travelled frequently on Northwest to give lectures, conduct seminars and workshops, and advise other educators and administrators. In 2005, Ginsberg earned Platinum Elite Status in the WorkPerks program, the highest level of benefits available.

But in June 2008, Northwest revoked Ginsberg’s WorldPerks membership. A Northwest representative explained by phone that Northwest was revoking his membership because he had abused the program by complaining too many times and strategically booking himself on full flights in order to get bumped. A Northwest Customer Care Coordinator later sent Ginsberg an e-mail citing Paragraph 7 of the WorldPerks General Terms and Conditions and saying that “[a]buse of the WorldPerks program . . . may result in cancellation of the member’s account and future disqualification from program participation, forfeiture of all mileage accrued and cancellation of previously issued but unused awards.” The e-mail also said that Northwest may determine “in its sole judgment” whether a passenger has abused the program. The e-mail did not give any specific information about how Ginsberg had abused the program.

Ginsberg filed suit on January 8, 2009, asserting four causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) negligent misrepresentation; and (4) intentional misrepresentation. The district court dismissed the case, ruling that Ginsberg failed to show sufficient facts to support his breach-of-contract claim, and that the federal Airline Deregulation Act preempted Ginsberg’s other three claims.

Ginsberg appealed, but only as to his claim for breach of the implied covenant of good faith and fair dealing. The United States Court of Appeals for the Ninth Circuit reversed, and this appeal followed.

CASE ANALYSIS

Congress enacted the Airline Deregulation Act (ADA) in 1978, concluding that “maximum reliance on competitive market forces” would best further “efficiency, innovation, and low prices” as well as “variety [and] quality . . . of air transportation services.” As part of the Act, and in order to ensure that states would not frustrate deregulation by enacting their own regulations, Congress included a preemption provision barring any state from “enact[ing] or enforce[ing] a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.” At the same time, Congress retained the Act’s already-existing “savings clause,” which preserved common law and statutory remedies.

The Supreme Court addressed the ADA’s preemption clause in two important cases. In the first case, Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992), the Court ruled that the ADA preempted state regulation of airlines’ fare advertisements. The Court held that the preemption clause’s phrase “related to” was quite broad, and that the ADA sought to preempt any state enforcement actions “having a connection with or reference to airline ‘rates, routes, or services’ . . . .” The Court had little trouble concluding that state regulation of airlines’ fare advertisements fell comfortably within that definition.

In the second case, American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995), a case very similar to Ginsberg’s, the Court ruled that the ADA preempted state enforcement suits against an airline arising under state-imposed obligations (as in a state law regulating an airline), but not under an airline’s breach of its own, self-imposed obligations (as in the airline’s own contract with its customers). According to the Court, “[a] remedy confined to a contract’s terms simply holds parties to their agreement,” and does not impose additional obligations related to a price, route, or service. Wolens sued American Airlines for making retroactive changes to the terms and conditions of its frequent flyer program. The Court held that the ADA preempted Wolens’s claim under the state Consumer Fraud Act, but that it did not preempt Wolens’s claim for routine breach of contract.

Considering the broad reading of the preemption clause in Morales, the parties here argue whether Ginsberg’s claim for breach of the implied covenant of good faith and fair dealing looks like more a state-imposed obligation or whether it looks more like an airline-imposed obligation under Wolens.

Northwest argues first that the plain language of the ADA preempts Ginsberg’s claim. It says that Ginsberg’s suit, which seeks reinstatement of program membership and renewed access to the reduced prices and enhanced services that come with it, is plainly “related to” Northwest’s prices, routes, and services, especially given the Court’s broad approach to the ADA’s preemption provision. Moreover, Northwest contends that Ginsberg’s claim seeks to enlarge the program’s General Terms and Conditions, a voluntary agreement between the parties, by invoking state law that is external to the agreement. In other words, Northwest says that Ginsberg’s implied covenant of good faith and fair dealing claim is no ordinary breach-of-contract claim, designed simply to enforce the terms of the agreement between the parties. Instead, it says that Ginsberg’s claim goes above-and-beyond simple enforcement of the agreement and, if allowed, would enforce state policies outside the four corners of the agreement, external to the contract. Northwest argues that this violates the Court’s rule in Wolens.

 

Next, Northwest argues that preemption of Ginsberg’s claim is consistent with the policies underlying the ADA. Northwest contends that Ginsberg’s implied covenant claim is amorphous and subject to different interpretations, and, if enforced here and elsewhere, would lead to a patchwork of state regulations over agreements like this. (In contrast, Northwest says that simple breach-of-contract claims are uniform enough across jurisdictions to avoid a patchwork result.) Moreover, Northwest argues that Ginsberg’s claim, if recognized, would create a risk of state interference with competition and commercial activity in the airline industry by substituting state law for market forces. Northwest claims that the patchwork result and state interference are both inconsistent with the goals of the ADA, to further “efficiency, innovation, and low prices” in the airline industry through “maximum reliance on competitive market forces.” (Northwest also notes that the U.S. Department of Transportation (DOT) has authority to investigate unfair practices in frequent flyer programs, so that Ginsberg and others like him may seek federal administrative relief.)

The federal government weighed in to support Northwest. Like Northwest, the government argues that the ADA preempts Ginsberg’s claim, because Ginsberg’s claim is external to his contract with Northwest. The government contends that because the district court rejected Ginsberg’s breach-of-written-contract claim on the basis that it gave Northwest complete discretion to determine Ginsberg’s status in the program, and because Ginsberg did not appeal that portion of the ruling, Ginsberg’s implied-covenant claim necessarily seeks to impose an additional, non-contractual obligation on Northwest. The government says that under Wolens this claim is preempted. But unlike Northwest the government does not argue for a categorical rule that all implied-covenant claims are preempted by the ADA, because, it says, some implied-covenant claims may require only adjudication of routine breach-of-contract claims, consistent with Wolens. The government says that only those implied-covenant claims that seek to enforce policies outside the contract, like Ginsberg’s, are preempted.

Ginsberg argues first that his implied covenant of good faith claim is not preempted under Wolens. Ginsberg says that his claim does not look outside the contract; instead, it stays within the contract. According to Ginsberg, that’s because a contract includes both express and implied terms, and his claim simply seeks to put an implied-obligation-of-good-faith gloss on the contract language that gives Northwest “sole judgment” to determine whether he abused the program. Ginsberg claims that this gloss is no extra-contractual obligation; rather, it is part-and-parcel of the contract itself. He says that courts read in an implied covenant of good faith to a contract in order to protect the contract’s express terms, and not to add an additional or external obligation or policy. Moreover, Ginsburg contends that his decision not to appeal the dismissal of his claim for a breach of the written contract does not transform his implied covenant of good faith claim into one based on extra-contractual policies, as argued by the federal government. Again, he says that the contract includes both express and implied terms, and his implied claim simply seeks to enforce the contract itself. Ginsberg says that holding Northwest to implied terms furthers the aims of the ADA, because enforcement in good faith increases the stability of contracts and reduces the costs of entering into them. Ginsberg claims that DOT enforcement does not replace the role of the courts in resolving contract disputes, whether they involve express or implied terms of a contract.

Ginsberg argues next that his claim is not preempted because it does not seek to “enact or enforce a law, regulation, or other provision.” Ginsberg says that the Court unanimously held that a statutory provision in the Federal Boat Safety Act that preempts enforcement of “a law or regulation” does not preempt common-law claims. For the same reasons that that provision did not preempt, Ginsberg contends that the ADA should not preempt. He also says that the word “provision” does not extend to common-law duties. As a result, Ginsberg contends that the ADA’s preemption clause does not apply, even aside from his Wolens argument.

Finally, Ginsberg argues that his claim is not preempted because it does not relate to airline prices, routes, or services. He says that his claim, unlike the claim in Wolens, does not challenge access to flights and upgrades or the number of miles needed to obtain a ticket. Instead, Ginsberg argues that his claim goes only to the termination of his WorldPerks membership. He says that this claim does not reference, does not seek to regulate, and will not affect the price, route, or service of air transportation. (Ginsberg argues that the WorldPerks program is not a “service” within the meaning of the ADA.) Ginsberg underscores this point by noting that frequent flyer miles can be earned and spent on many things other than air transportation, and that consumers can participate in a frequent flyer program without buying a single airline ticket. Finally, Ginsberg says that the DOT advises consumers to “consider legal action through the appropriate civil court” if they are unhappy with the way a frequent flyer program is administered. He says that is exactly what he did here.

SIGNIFICANCE

On one level, this case simply addresses a claim that falls between the cracks of the sharp distinction between contract-based claims and extra-contractual claims that the Court drew in Wolens. By this reckoning, the case is only another opportunity for the Court to round out its analysis of ADA preemption and to give guidance to lower courts and litigants for the next round of claims against the airlines. The case is significant, but only insofar as it deals with ADA preemption of a particular kind of claim. The parties do not argue that the Court should overturn Wolens, and they do not argue that the ADA does not preempt an ordinary breach-of-contract claim. Thus, whatever the Court likely rules in this case, Ginsberg and plaintiffs like him will continue to be able to assert an ordinary breach-of-contract claim against an airline, even if they cannot assert more. (The fact that Ginsberg appealed his implied covenant claim, but not his breach-of-contract claim, says that the implied covenant claim sweeps more broadly, and could be easier to prove, than the breach-of-contract claim. If so, a ruling favoring preemption could mean that plaintiffs would lose a broader class of claims (implied covenant claims), even if they would retain a basic breach-of-contract claim.)

On another level, the case, like many preemption cases, pits significant considerations of federal-state relations against an individual plaintiff’s ability to seek redress for injuries under state law against a corporation. In this way, the case is significant for how it balances federalism against state law remedies against corporations. To put a finer point on it, this case, like some other recent federalism cases, is likely to be seen in pro-corporation or pro-plaintiff terms, depending on the outcome. 

These cases involving federalism and individual state-law remedies sometimes come down with surprising alliances among the justices. In Wolens, for example, Justice Ginsberg wrote the Court’s opinion; it was joined by Chief Justice Rehnquist and Justices Kennedy, Souter, and Breyer. But the composition of the Court has changed in critical ways since Wolens, making predictions here even more difficult than usual. Look to Chief Justice Roberts and Justice Kennedy as the likely pivotal votes.

http://lawprofessors.typepad.com/conlaw/2013/12/does-federal-airline-deregulation-act-preempt-state-implied-covenant-claim.html

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