Tuesday, December 3, 2013

Is an Implied Covenant Part of the Contract?

The Supreme Court heard arguments today in Northwest, Inc. v. Ginsberg, the case testing whether the 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.  Our argument preview is here.

Given that the Court has ruled in Wolens that the ADA does not preempt an ordinary breach-of-contract claim, arguments today turned on whether the claim for breach of implied covenant of good faith and fair dealing is simply an incorporated contract requirement or a rule of contract interpretation (so that it's actually part of the contract, and thus not preempted), or whether it's an additional state-imposed obligation on top of the plain terms of the contract (and thus preempted).  This question is informed by the deregulatory purpose of the ADA.  Justice Breyer framed the issue this way:

I absolutely agree wtih you that--that a free market in price is at the heart of the Deregulation Act.  Given.

I also think frequent flyer programs are simply price discounts.  Given.

I also think that if you don't have contracts, you can't have free markets.  Given.

But I also think the State cannot, under the guise of contract law, regulate the prices of airlines.  If you allow that, you're going to have worse than we ever had.  It'll be 50 different systems, all right?

Justice Kagan framed it this way, suggesting a solution that would preserve the implied covenant claim:

I guess what I'm suggesting is that the implied covenant here, it's just an interpretive tool.  It says that there are certain kinds of provisions that are written very broadly or very vaguely, and an implied covenant comes in to help us interpret those kinds of provisions.  And viewed in that way, it's just a contractual device that in light of Wolens ought to be permitted.

Justice Sotomayor said it this way, and proposed a standard for distinguishing between ordinary breach-of-contract claims and implied covenant claims:

My simpler standard comes from quoting Hennepin: "Does the implied covenant claim extend to actions beyond the scope of the underlying contract, or can it override the express terms of the agreement?  If the answer is no, it's not preempted."

The question is complicated by the fact that the frequent flyer program in this case gave Northwest the "sole discretion" to terminate.  So: Is an implied covenant part of that contract, or is it an additional state-law requirement?  And what's the standard for sorting that out?

As an initial matter, any standard may not answer the preemption question categorically.  That's because different states interpret their implied covenant laws differently.  This gave the Court another problem: Does it have to sort out the particular state law on implied covenants in order to determine whether a claim in a particular state is preempted?  And might the answer change depending on the state, leading to inconsistent results and undermining the deregulatory purpose of the ADA?  Justice Scalia put this point on it:

Wow, somebody's really been given a raw deal.  You know, that's still going to be possible even if we rule for [Ginsberg] here.  It depends on what State he's from, right?

Complicating things yet more, the answer may turn on the implied covenant's waivability.  Justice Kagan made this point:

But if it can't be waived, it sure seems as though it is operating independently of the parties' reasonable expectations.

It may also turn on the fact that frequent flyer programs work for airline miles, but also for other goods and services--and thus state regulation of them may not amount to a regulation of airline price, in violation of the ADA.  Justice Alito put it this way:

I don't want to take up your rebuttal time, but if the facts were that under a particular program 90 percent of the miles were earned by purchasing things other than flying and 90 percent of the miles were spent on things other than flying, wouldn't that be very different?

This could give the Court a way out of the problem, by ruling that state implied-covenant claims based on frequent flyer programs aren't preempted because they don't regulate the price of airline tickets.  This seems unlikely, though: even if frequent flyer programs work for other goods and services, they still also work for airline tickets.

Finally, there's the presumption against preemption--and whether it has any bearing on this case.  Chief Justice Roberts seemed to think so:

I do agree, it seems pretty inconsistent with the normal presumption against preemption that we apply out of respect for the State legal regimes to say we're going to adopt a broad prophylactic rule.

But Justice Scalia thought not:

But the whole purpose of the ADA was to preempt State laws.  I mean, I can understand applying that presumption to other statutes which say nothing about preemption.  The whole purpose of the ADA was to deregulate airlines, was to say there was going to be no Federal regulation.  Let the free market handle it and there will be no State regulation.  

On the one hand, a narrow ruling in this case--one that address Ginsberg's particular claim, under Minnesota law, recognizing that this particular program gave the airline "sole discretion" to terminate--seems both likely and appropriate, especially given the particularities of this case.  But on the other hand, as at least some on the Court suggested, an overly narrow ruling, without a broader standard, leaves open the possibility (or even probability) that this very same issue, or one like it, could give the lower courts a headache in the 49 other states (where implied covenant claims might work differently).  

If Ginsberg loses, and his claim is preempted, the U.S. Department of Transportation can still investigate Northwest's frequent flyer program.  But that remedy doesn't do anything for Ginsberg.

http://lawprofessors.typepad.com/conlaw/2013/12/is-an-implied-covenant-part-of-the-contract.html

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Comments

You have great insights into the intracacies of breach of contract.

Posted by: Charles | Jan 22, 2014 7:02:23 AM

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