Northwest, Inc. v. Ginsberg

Issues 

Does the Airline Deregulation Act preempt a state claim for breach of an implied covenant of good faith and fair dealing concerning a frequent flyer program?

Oral argument: 
December 3, 2013

S. Binyomin Ginsberg sued Northwest Airlines, now Delta Airlines, after Northwest terminated his “WorldPerks” frequent flyer membership. Ginsberg asserted four state contract causes of action. Northwest argues that Ginsberg’s claims are preempted under the Airline Deregulation Act (“ADA”) of 1978, which preempts states from enacting or enforcing laws related to the price, route, or service of airline transportation. The District Court for the Southern District of California granted Northwest’s motion to dismiss the complaint. The Court of Appeals for the Ninth Circuit reversed, holding—in conflict with other circuit courts—that Ginsberg’s claim for breach of an implied covenant of good faith and fair dealing was not preempted. The Ninth Circuit reasoned that nothing in the ADA suggested that Congress intended to displace state common law contract claims that were only peripherally related to deregulation. The Supreme Court granted certiorari to resolve the circuit split over whether state contract claims are preempted by the Airline Deregulation Act. The Court will also determine whether the Act preempts claims arising out of frequent flyer programs. The Court’s decision will impact the balance of state and federal regulatory interests under the ADA, and the scope of other federal preemption regimes.

Questions as Framed for the Court by the Parties 

Did the court of appeals err by holding, in conflict with the decisions of other Circuits, that respondent’s implied covenant of good faith and fair dealing claim was not preempted under the ADA because such claims are categorically unrelated to a price, route, or service, notwithstanding that respondent’s claim arises out of a frequent flyer program (the precise context of Wolens) and manifestly enlarged the terms of the parties’ voluntary undertakings, which allowed termination in Northwest’s sole discretion.

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Facts

The Airline Deregulation Act (“ADA”) of 1978 preempts states from enacting or enforcing laws or regulations related to the price, route, or service of an air carrier. In January 1995, the Supreme Court held that complaints associated with frequent flyer programs are related to the price, route, or service of an air carrier.

Respondent S. Binyomin Ginsberg was a member of Petitioner Northwest’s frequent flyer program, “WorldPerks,” from 1999 to 2008, achieving Platinum Elite Status in 2005. On June 27, 2008, Northwest—now Delta Air Lines, revoked Ginsberg’s WorldPerks membership, leading Ginsberg to inquire multiple times as to why his membership had been revoked. On November 20, 2008, Northwest notified Ginsberg via email of its reasons for revoking his membership and explained that under the General Terms and Conditions of the program, Northwest could cancel a member’s WorldPerks account if the airline determined that a passenger had abused the program. Northwest revoked Ginsberg’s membership on the basis that Ginsberg had abused the program, but Ginsberg maintains that Northwest terminated his membership arbitrarily.

On January 8, 2009, Ginsberg sued Northwest in the United States District Court for the Southern District of California, seeking relief under four causes of action arising under contract law: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) negligent misrepresentation; and (4) intentional misrepresentation. Northwest filed a motion to dismiss Ginsberg’s complaint for failure to state a claim upon which relief can be granted, arguing that the ADA preempted Ginsberg’s claims. The District Court granted the motion and dismissed claims (2)-(4) with prejudice, preventing Ginsberg from reasserting the claims, on the basis that ADA preemption applies because Ginsberg asserted claims relating to airline prices and services. The District Court also dismissed the first claim, breach of contract, without prejudice, finding that Ginsberg did not sufficiently allege a material breach of contract.

Ginsberg appealed the dismissal of the second claim—breach of the implied covenant of good faith and fair dealing—to the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit held that the ADA does not suggest any congressional intent to preempt state common law contract claims, and thus, Ginsberg’s claim for breach of the implied covenant of good faith and fair dealing is not preempted. Accordingly, the Ninth Circuit reversed and remanded the case to the District Court for reconsideration of Ginsberg’s claim. Northwest petitioned for a writ of certiorari to the United States Supreme Court. On May 20, 2013, the Supreme Court granted certiorari to resolve the circuit split between the Ninth Circuit and other circuit courts over whether the ADA preempts state law contract claims regarding frequent flyer programs.

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Discussion

This case presents the Supreme Court with the opportunity to resolve a circuit split over whether state contract claims arising out of frequent flyer programs are preempted by the ADA because such claims relate to the enforcement or enactment of laws regulating the airline industry. Northwest argues that a plain reading of the ADA, along with the Court’s decision in American Airlines v. Wolens, indicates that the ADA preempts Ginsberg’s claim. On the other hand, Ginsberg argues that his claim should not be preempted by the ADA, which only preempts claims that (1) involve the enactment or enforcement of a law, regulation, or provision having the force and effect of law and (2) relate to a price, route, or service of an air carrier that may provide air transportation. The Court’s resolution of this case implicates the policies behind federal preemption regimes generally and Congress’s intent in enacting the ADA. This case will also impact states’ ability to regulate industries within state boundaries, and federal interests in maintaining regulatory uniformity.

PREEMPTION REGIMES AND CONGRESSIONAL INTENT

Northwest and numerous amici argue that the Ninth Circuit’s ruling threatens all preemption schemes created by Congress. For example, the Chamber of Commerce argues that Congress creates preemption regimes in order to bypass the patchwork of state law obligations such as implied duties and substantive industry standards that compromise efficiency and uniformity. The Chamber warns against narrowing the scope of Congress’s preemption regimes, claiming that if the Ninth Circuit’s ruling were applied to the Federal Aviation Administration Authorization Act (“FAAAA”), which contains preemption language nearly identical to that found in the ADA, the cargo-transporting industry would suffer detrimental effects. According to the Chamber, federal preemption regimes allow industries like the cargo-transporting industry to operate uniformly, without having to respond to state-specific restrictions and claims. The Chamber contends that this reliance on federal preemption creates greater efficiency, certainty, and reliability for industries that operate in multiple states. Similarly, the Cargo Airline Association argues that allowing state law claims to evade ADA preemption increases unpredictability for federally-regulated industries and creates an inefficient, ad hoc system for determining contractual rights.

Ginsberg and supporting amici argue that the ADA does not preempt his contract claim because preemption regimes apply only to positive law, such as statutory law, and not to common law, which is judge-made law. Ginsberg contends that his contract claim falls under the common law because it does not involve any enactment or enforcement of positive law. In response to Northwest, the National Employment Law Project (“NELP”) argues that Congress’s intent is best realized by applying preemption only to affirmative state laws, such as legislation that creates additional airline industry requirements. In contrast, NELP argues that Ginsberg’s common law contract claim does not fall under any such patchwork of state law industry obligations. California and fifteen other states (“the States”) add that invalidating state contract law claims would run afoul of Congress’s intent not to undermine state regimes that do not conflict with the ADA.

STATE INTERESTS AND FEDERAL REGULATORY AUTHORITY

In support of Northwest, the International Air Transport Association (“IATA”) warns that the Ninth Circuit’s decision would undermine the Department of Transportation’s (“DOT”) regulatory authority over frequent flyer programs. Specifically, the IATA contends that allowing state claims to avoid preemption would impermissibly encroach on the federal government’s power to regulate air transportation. The IATA further argues that the United States is a party to many air transportation agreements with foreign nations; accordingly, the states must yield to the federal government because of the need for uniformity in foreign relations. In the IATA’s view, affirming the Ninth Circuit would undermine the federal government’s ability to speak with “one voice” regarding air transportation.

The States counter that they have strong interests in regulating industries important to their residents, such as transportation. First, they contend that state law doctrines have important remedial purposes that the airlines themselves utilize. For instance, the States note that airlines take advantage of state law and often assert breach of contract and other state law claims against defendants. Second, the States caution that preempting state claims raises federalism concerns because states have traditionally had authority to enforce private contracts. NELP agrees, arguing that in the absence of a clear Congressional intent to preempt these kinds of claims, principles of federalism require respect for state sovereignty.

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Analysis

In 1978, Congress enacted the ADA with the goal of lowering prices and improving services in the airline industry by encouraging reliance on competitive market forces. To achieve this goal, Congress included a preemption provision that prevents a state from enacting or enforcing “a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier.” In 1994, Congress revised the ADA’s preemption provision, without changing any of the provision’s substantive effects, by removing the words “standard” and “rule” from the original 1978 draft.

A year later, the Supreme Court recognized that “routine breach-of-contract claims” were not preempted by the ADA’s preemption provision because these claims did not seek to enforce state law, but rather enforced the parties’ self-imposed undertakings. In this case, Ginsberg is suing Northwest under state law for revoking Ginsberg frequent flyer membership. Minnesota law, which governs Ginsberg’s claims, applies an implied covenant of good faith and fair dealing to contracts. Accordingly, the Court must now decide whether the ADA preempts an implied covenant of good faith and fair dealing in the performance of a contract regarding a frequent flyer program.

Does Ginsberg’s Claim REGARDING a Frequent Flyer Program Relate to a Price, Route, or Service of an Air Carrier?

In Morales v. Trans World Airlines, the Supreme Court recognized that a claim could be preempted under the ADA if the claim had “a connection with or reference to” airline prices, routes or services. The Court also acknowledged that the ADA’s preemption provision is deliberately expansive. Moreover, the ADA’s preemption provision applies even if a state’s enactment or enforcement has only an indirect effect on prices, routes, or services according to Morales. In this case, the parties dispute whether Ginsberg’s claim of good faith concerning the termination of his frequent flyer membership relates to a price, route, or service.

Northwest argues that Ginsberg’s claim relates to a price, route, or service of an air carrier because it directly challenges Northwest’s administration of its frequent flyer program. Northwest points out that its frequent flyer program involves free flights and other rewards. Northwest also adds that frequent flyer membership includes reduced prices and enhanced service. Additionally, Northwest alleges that its frequent flyer program is an important means for attracting, retaining, and repeating business. In turn, Northwest argues that its frequent flyer program affects the prices the airline charges.

Ginsberg, however, argues that his claim is not preempted merely because it involves the frequent flyer program. Ginsberg suggests that the WorldPerks frequent flyer program is similar to other services that Northwest could provide, like running a dry cleaner or owning a restaurant; accordingly, Ginsberg asserts that these latter examples should not be free from state enforcement merely because the company is an airline. Rather, Ginsberg asserts, “service” referred to in the ADA’s preemption provision is the service customers receive when they buy an airline ticket—air transportation. Ginsberg further claims that the frequent flyer points can be spent on many things besides flights and upgrades, and frequent flyer programs can be a profit-making enterprise besides being merely a program to attract customers.

Does Ginsberg’s Claim of Good Faith and Fair Dealing Concern a State’s Enactment or Enforcement?

The Supreme Court, in Wolens, recognized that just because a claim relates to a price, route, or service, does not mean that the claim is preempted under the ADA. The preemption provision applies only when a state enacts or enforces a law, policy, or other provision relating to airline prices, routes, or services. Based on this latter requirement, the Court distinguished “routine breach-of-contract claims” as claims that are not preempted under the ADA because they do not seek to enforce a state law, but only the parties’ self-imposed dealings.

Northwest argues that a claim for breach of an implied covenant of good faith and fair dealing clearly does not fall within the Wolens “routine breach-of-contract” exception. Northwest first notes that the Wolens Court explained that the ADA preempts claims which seek to use enforcement of state law or policies external to the agreement to enlarge or enhance the parties’ contract. Northwest argues that the implied covenant of good faith and fair dealing is an external state policy that seeks to enlarge the agreement between Northwest and Ginsberg. First, Northwest claims that the term “implied covenant” suggests, that the covenant is supplementing the express terms of the contract. Moreover, Northwest argues that a claim for breach of an implied covenant does not contest the express terms of the frequent flyer agreement, but seeks to override these express terms with state law. Second, Northwest contends that bad faith under Minnesota law is defined as conduct that violates community standards. Thus if Ginsberg’s claim were to proceed, according to Northwest, the merits of the claim would not be decided by the contractual language but by external community standards. Third, Northwest analogizes the implied covenant of good faith and fair dealings to the doctrine of unconscionability, which lower courts have held is inconsistent with the ADA and Wolens. Finally, Northwest stresses that if Ginsberg’s claim is not preempted, parties will be able to circumvent the preemption provision by relabeling their otherwise foreclosed claims as routine breach-of-contract claims.

Ginsberg disagrees with Northwest and argues that a claim for breach of the covenant of good faith and fair dealing does fall within the “routine breach-of-contract” exception. Ginsberg submits that a contract, which arises out of two parties’ self-imposed dealings, imposes the duty of good faith and fair dealing. In other words, according to Ginsberg, a claim for breach of an implied covenant of good faith cannot arise unless the parties voluntarily entered into a contract. Moreover, Ginsberg claims, the implied covenant is an obligation to honor the reasonable expectations of the contracting parties and is found in every contract.

Ginsberg also counters Northwest’s claim that the implied covenant of good faith is based on policies external to the contract. To the contrary, Ginsberg argues that good faith is based on the contracting parties’ purpose and expectations. Thus, Ginsberg contends, his claim does not seek to enlarge the parties’ voluntary agreement, but rather seeks to construe the agreement itself. Moreover, Ginsberg asserts that the claim of good faith is different than a claim of unconscionability; while the latter provides a means of invalidating a contract, the former seeks to hold parties to the contract. Here, Ginsberg contends that his claim of good faith seeks to enforce the contractual limits on the “sole judgment” language found in the Terms and Conditions of the frequent flyer program.

Does Good Faith and Fair Dealing Fall Within a Law, Regulation or Other Provision?

Ginsberg also argues that claims at common law, such as good faith and fair dealing, do not fall within the ADA’s preemption provision. Ginsberg compares the ADA to the Boat Safety Act (“BSA”) which contains a provision preempting “a [state] law or regulation.” Ginsberg claims that the Court interpreted this provision as not preempting common law claims because the article “a” implies a discreteness which, while found in statutes and regulations, is not present in the common law which is developed by a constant flow of judicial decisions. Similarly, Ginsberg points out that the ADA preemption provision contains the article “a,” which suggest that the words “a law [or] regulation” in the ADA do not encompass preemption of common law claims. Furthermore, Ginsberg argues that the word “provision” does not preempt common law claims. He claims that although “provision” might include a contract or local health code, it does not include the common law. Moreover, he contends that if “provision” was broad enough to include the common law, its meaning would be so broad as to render superfluous the word “regulation.” Similarly, Ginsberg notes that Congress removed the words “rule” and “standard” because they were viewed as superfluous, which suggests that the current language only applies to positive enactment.

Northwest responds with three reasons why the Court should reject Ginsberg’s argument that the ADA does not preempt common-law claims. First, Northwest points out that Ginsberg did not raise this argument before the lower courts nor did the lower courts address it. Second, Northwest argues that Ginsberg’s argument has been rejected by the First Circuit and is inconsistent with the reasoning in Wolens and many cases which have found common law claims preempted by the ADA. Third, Northwest contends that the history of the ADA’s preemption clause rebuts Ginsberg’s argument because not a single court has held, before or after the ADA was recodified without substantive effect, that the ADA does not preempt any common law claims.

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Conclusion

In this case, the Supreme Court will consider whether a state law claim for breach of good faith and fair dealing concerning the termination of a frequent flyer membership is preempted by the Airline Deregulation Act of 1978. In doing so, the Court will also consider whether a claim of good faith and fair dealing itself is preempted under the Airline Regulation Act. The Court’s decision will have significant effects on airline industry regulation—addressing important questions over airlines’ exposure to state and federal law claims. In turn, the Court’s determination will impact the range of claims available to individuals seeking to sue airlines. Accordingly, the Court’s decision may influence how airlines interact with their consumers and guard against liability.

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Edited by 

Acknowledgments 

Additional Resources 

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