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April 8, 2014

Airlines Defeat Rabbi in Supreme Court Battle Over Frequent Flyer Miles

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Not even a Higher Power could save a rabbi's frequent flyer miles from the High Court.

In 2008, Northwest cancelled Rabbi Binyomin Ginsberg's frequent flier account, relying on a provision in the program permitting Northwest to cancel an account "in its sole judgment" if the customer abused the program. The airline contended that Rabbi Ginsberg abused the program by calling the office 24 times to complain, and that he had been awarded $1,925 in travel vouchers, 78,500 bonus miles, a voucher extension for his son, and $491 in cash reimbursements. In response, Rabbi Ginsberg filed a class action in the US District Court for the Southern District of California, including a claim that the cancellation breached the common-law implied covenant of good faith and fair dealing.

In a victory for the airline industry, a unanimous Supreme Court held on April 2, 2014 that Rabbi Ginsberg's implied covenant claim was preempted by the Airline Deregulation Act (ADA), which precludes states from enforcing "a law, regulation, or other provision having the force and effect of law related to a price, route, or service" offered by an airline.

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The Court's decision had three bases. First, the Court noted that carving out exceptions to preemption for common-law rules such as the implied covenant claim would undermine the ADA's deregulatory purpose. Second, the Court found that the claim related to "rates, routes, or services" governed by the ADA because Rabbi Ginsberg sought restoration of benefits that would allow him to purchase cheaper tickets and upgrade to higher levels of service.

Finally, the Court considered whether the covenant of good faith and fair dealing between the parties here was a "state-imposed obligation or simply one that the parties voluntarily undertook. A prior Supreme Court case (American Airlines, Inc. v. Wolens) had held that passengers could pursue claims based on "privately ordered obligations" that were not imposed by the state. But here the Court distinguished Wolens and held that the implied covenant was a state-imposed obligation in Minnesota and not a voluntary undertaking, so the claim was preempted by the ADA.

While the ruling gives airlines greater protection from common law claims, the Supreme Court did not give the airlines carte blanche to cancel frequent flier benefits. Rather, there are at least four reasons to tread cautiously:

  1. The ruling only applies where state law does not allow the parties to contract around the implied covenant. If a state's laws allow parties to waive the covenant, their failure to do so explicitly could be interpreted as a voluntary undertaking, and a claim for breach of that covenant would not be preempted by the ADA.
  2. Courts are not passengers' only avenue for redress. Rather, the Department of Transportation has authority to "prohibit and punish unfair and deceptive practices" in the airline industry and has frequently used this power to act on complaints related to frequent flier programs.
  3. Customers can still pursue traditional breach of contract claims for violating terms of the frequent flier programs. Justice Alito noted that Rabbi Ginsberg might have had a remedy if he had appealed the dismissal of his breach of contract claim and argued that Northwest's actual rationale for terminating his benefits was not program "abuse," but an effort to cut costs.
  4. Finally, Justice Alito cautioned airlines about the perils of the free market. "If an airline acquires a reputation for mistreating the participants in its frequent flyer program (who are generally the airline's most loyal and valuable customers), customers can avoid that program and may be able to enroll in a more favorable rival program."

© Arnold & Porter Kaye Scholer LLP 2014 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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