Recent Federal Court Rulings Favor Airlines in Frequent-Flyer Cases

HIGHLIGHTS:

• Several federal courts have affirmed airlines' reliance on contractual language affording discretion in mileage rewards programs – including the Seventh Circuit’s much-publicized Lagen case rejecting "Million-Miler Flyer" claims to lifetime benefits.
• As these rulings demonstrate, federal preemption under the Airline Deregulation Act continues to assist airlines in defending against extra-contractual claims.

In April 2014, the U.S. Supreme Court held that the Airline Deregulation Act (ADA) preempted a frequent flyer program member's common law claim for breach of the implied covenant of good faith and fair dealing because the claim constituted a state-imposed obligation outside the agreed-upon terms of the program.¹

Since the high court's decision, several federal courts have ruled favorably for the airlines on contractual and extra-contractual claims arising from interpretation of similar rewards programs. These rulings are a positive development for air carriers that rely on the terms and conditions set forth in the program agreement, particularly those provisions giving the airlines the sole discretion to act or interpret the agreement.

No Separate Contract for Million-Miler Program Member

Last month, in Lagen v. United Continental Holdings, Inc.,² the U.S. Court of Appeals for the Seventh Circuit affirmed the airline's contractual right to modify or cancel benefits in its award program despite promising "lifetime benefits" to members who achieved "Million-Miler Flyer" status. The court also determined that any claim based on consumer fraud would be preempted by the ADA, leaving the plaintiff with the recourse of complaining to the Department of Transportation (DOT) or to the airline directly.

Background

In 1997, United offered a new Million-Miler Flyer reward as part of its MileagePlus rewards program. MileagePlus members who achieved 1 million paid flight miles would retain lifetime Premier Executive status in recognition of their loyalty. The plaintiff in this case purposefully worked toward and achieved this status in 2006. Following the merger between Continental and United, he noticed that United materially reduced some of the lifetime benefits, which included certain bonus miles and upgrades.

The plaintiff brought a purported class action asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment on the basis that United had made a unilateral offer to give him lifetime benefits if he flew 1 million miles on United. The MileagePlus program's terms, however, gave United the "right to terminate the Program, or to change the Program Rules ... benefits, conditions of participation, or mileage levels, in whole or in part, at any time with or without notice." The plaintiff contended that this modification clause did not apply to him because United had made a separate offer to Million-Miler members of guaranteed special lifetime benefits. The district court disagreed and granted summary judgment to United. It held that the Million-Miler Flyer program was not a separate agreement but remained part of the MileagePlus program and was governed by its terms, which expressly allowed United to reduce benefits "on a whim."

Majority Finds No Separate Contract

The Seventh Circuit, in a 2-1 decision, determined that although the MileagePlus rules do not mention the Million-Miler program or Premier Executive status, the evidence showed that such members were still subject to the rules of the MileagePlus Program. United's advertisements indicated that only MileagePlus members are eligible to become Million-Miler Flyers; MileagePlus communicates with Million-Miler members and refers to MileagePlus terms and conditions on those communications; United's website places information about the Million-Miler Flyer benefits under the umbrella of the MileagePlus program; and a customer's status as a Million-Miler Flyer is noted on his or her MileagePlus membership card. Because there was no separate contract from the governing MileagePlus rules, the court ruled that there was no breach. Additionally, there was no breach of the MileagePlus program rules because the rules "have always allowed United to tinker with all details of the program."

The Seventh Circuit further held that the plaintiff's claims of misleading and fraudulent advertising practices were expressly preempted by the ADA. And while the ADA "does not give the airlines carte blanche to lie to and deceive consumers,"³ it does "channel grievances of this type" to the DOT, which Congress authorized to regulate such activities. The majority noted that contract law does not provide redress for the alleged misrepresentations because there is nothing in principle that separates a promise of lifetime benefits from other advertisements promising greater leg room or quicker boarding for loyal customers. According to the majority, transforming consumer fraud claims like this into contract disputes would "fatally undermine the statutory scheme" dictating that DOT handle such cases.

Dissent Would Find Breach of an Option Contract

The dissent was troubled that the airline admitted that its "very best customers – its Million-Miler Flyers – should have known better than to believe United's promise of ‘lifetime' benefits." Although recognizing that United's reservation of rights clause may be enforceable with regard to most benefits, the dissent viewed the Million-Miler offer as an option contract not subject to the clause. According to the dissent, the promise of lifetime benefits upon achieving Million-Miler status "was intended to and did induce reliance and acceptance by conduct, [and] should trump the earlier reservation of rights by modifying the contract."

In determining whether it was reasonable for a customer to believe that the Million-Miler promise gave him lifetime benefits, the dissent noted that the word "lifetime" is not an off-the-cuff offer or simple figure of speech. In its view, a jury could find that a customer, even one aware of the reservation of rights clause, "could reasonably conclude that United's offer of lifetime benefits to its best and most loyal customers was actually intended to provide them with lifetime benefits."

Mileage Credits Are Determined by Direct Path Between Two Cities

Two recent consumer class action complaints challenged airline calculations of mileage credit rewards on the basis that customers did not receive the correct number of miles earned under the rewards programs. In each case, the plaintiffs alleged that airlines should have tracked actual flight paths, i.e., the actual number of miles traveled by an aircraft during a particular flight. The Seventh and Eleventh Circuits affirmed the respective holdings of their district courts that dismissed the claims based on the contract language in the program agreements.

In Han v. United Continental Holdings, Inc.,⁴ the plaintiff argued that United's use of the word "mileage" in the MileagePlus program rules was ambiguous and that the mileage credit should be for "actual miles flown by the airplane." In contrast, United calculated mileage credit "as the total distance-in-miles between the airports." The Seventh Circuit found that the program rules, which specified that United would award customers mileage "for flights actually flown" was ambiguous because the program rules "[did] not specify the method by which United will determine the amount of 'mileage' credit for any particular flight" and the mileage calculation was a part of the contract that was "naturally within the scope of the contract as written."

Despite the ambiguity, the Seventh Circuit recognized that the program rules gave United "the sole right to interpret and apply the ... [r]ules." Accordingly, the plaintiff would have to prove that United's interpretation of mileage credit was "unreasonable" to avoid dismissal. The Seventh Circuit held that United's mileage calculation was "entirely reasonable" as it employed "a standard measure of miles for all flights between the same airports."

Similarly, in Kwok v. Delta Air Lines Inc.,⁵ the plaintiff disputed Delta's calculation of mileage credits using "the distance from origin to final destination." The Eleventh Circuit found that Delta's program rules were somewhat ambiguous because the word "distance" could refer to either "travel along a route, such as the exact distance of a flight path" or to "the shortest and most direct path between two points." The entirety of the program rules resolved the ambiguity because it stated that "mileage credited will be calculated based upon the distance from origin to final destination, regardless of the number of stops." Like the Seventh Circuit, the Eleventh Circuit said that "[i]t would make little sense to require Delta to award mileage based on the actual distance traveled by each airplane [because] such a method of calculation would be unpredictable and unwieldy."

Disparity in Mileage Awards Expressly Permitted by Contract

In Gordon v. United Continental Holdings, Inc.,⁶ the district court dismissed a putative class action complaint by MileagePlus members who claimed that United unfairly overcharged certain program members when they redeemed and, in some case, purchased miles to obtain an award. In this case, the husband attempted to use his award miles to book a hotel room for a trip he and his wife were taking to Japan. The husband, who had 38,183 miles in his Mileage Plus account, was quoted 40,750 miles for the room. The wife, who had 41,773 miles on her MileagePlus account, tried to book the same room for the same dates and received a quote of 44,550 miles. As a result, the wife purchased additional miles to pay for the room. In response to the plaintiffs' complaint, United advised that it used an algorithm to calculate miles needed for awards.

The plaintiffs filed suit alleging several claims, including breach of contract, breach of the implied covenant of good faith and fair dealing, violation of New Jersey's Consumer Fraud Act, violation of the Truth-in-Consumer Contract and unjust enrichment. They asserted that the program's pricing scheme breached the provision to offer awards at a set published amount. The defendants denied any undisclosed policy, noting that the program rules expressly state that "[c]ertain [m]embers may receive preferential pricing." They also asserted that United reserves the right to interpret and apply the terms and conditions of the program, and to make bonus miles and offers selectively available to certain members.

The district court determined that the plaintiffs' breach of contract claim failed because the program rules provide that "the amount of mileage necessary to redeem each award will be set by United and published to the members." Applying the plain and ordinary meaning to the terms, the court held that the contract "plainly means United has sole authority to determine and to publish the mileage values of available awards, and does not, as the plaintiffs claim, mandate United to publish fixed, uniform mileage values for every possible award offered to MileagePlus members." It further relied on Wolens v. American Airlines, Inc. and its progeny to hold that the plaintiffs' non-contractual claims, including their statutory consumer protection claim, were preempted by the ADA.

An Encouraging Trend for Airlines

As is evident from the foregoing discussions, there has been a proliferation of actions arising from disputes over airline rewards programs. For instance, a case similar to Lagen is pending in the district court of Illinois, where a member of United's Premier Program is suing for breach of contract based on devaluation of his member benefits. The court denied the airline’s motion to dismiss, holding it could not conclude as a matter of law that the terms of the MileagePlus Agreement also governed the Premier membership program.⁷ Motions for summary judgment are pending, and the recent Lagen decision will likely influence the outcome. A New York district court also is expected to decide summary judgment motions late this year regarding whether an airline breached its contract with Executive Club members by allegedly charging an excessive fuel surcharge on reward flights. The court previously denied the airline's motion to dismiss the contract claim.⁸

In view of the recent and continuing litigation in this area, airlines should continue to monitor and review their mileage award program terms and conditions. To properly exercise their discretion to amend, devalue or discontinue award benefits, airlines must ensure that the contractual language affords them as much protection as possible. It is especially important that airlines avoid using ambiguous language that could result in unwanted litigation.

Notes

¹ Northwest, Inc. v. Ginsberg, __ U.S. __, 134 S.Ct. 1422 (2014). In Ginsberg, the airline terminated the plaintiff's Platinum Elite membership in reliance on program terms giving it discretion to do so.

² __ F.3d __, 2014 WL 7251178 (7th Cir. Dec. 22, 2014).

³ Quoting Morales v. Trans World Airlines, Inc., 504 U.S. 374, 390 (1992).

⁴ 762 F.3d 598 (7th Cir. 2014).

⁵ 578 Fed. Appx. 898 (11th Cir. Aug. 25, 2014).

⁶ 2014 WL 4354067 (D.N.J. Sept. 3, 2014).

⁷ Banakus v. United Continental Holdings, Inc., No. 12-cv-06244 (N.D. Ill. Mar. 1, 2013).

⁸ Dover v. British Airways, PLC (U.K.), 2013 WL 5970688 (E.D.N.Y. Nov. 8, 2013).