ARC case ends up where it started after excursion through federal court

November 4, 2011

Airlines Reporting Corporation v. Sudbury Travel, Ltd. (E.D.V.A. Sept. 28, 2011).  In 2009, ARC initiated an arbitration before the Travel Agent Arbiter seeking amounts owed by accredited agent Sudbury Travel, Ltd.  Less than three weeks later, ARC withdrew its arbitration complaint.  In his dismissal notice, the Arbiter noted that the applicable rule allowed such withdrawal provided that its purpose “is not to litigate the identical claims in a state or federal court or before any other governmental body.”

Over a year later, ARC filed a Virginia state court complaint against Sudbury based on the same events but naming three additional defendants, “officer/director” Lee Goodstone and two other individuals.  The complaint, which sought damages in excess of $240,000, alleged three counts:  breach of contract against Sudbury only and conversion and breach of fiduciary duty against all four defendants.  ARC alleged three forms of conversion – conversion of ticket sales proceeds, conversion of funds in the agent’s bank account securing a letter of credit in ARC’s favor and conversion of ticket stock.  Goodstone removed the case to federal court and filed a counterclaim against ARC.

Six months and over 70 docket entries (including two amended complaints and numerous motions) later, ARC filed a motion to compel arbitration before the Arbiter.  ARC explained that it had withdrawn its previous arbitration complaint because “it appeared the process was getting no traction” with Sudbury.  Sudbury and Goodstone opposed the motion, which the court denied.

In July 2011, the parties filed cross motions for summary judgment.  In its order on the motions, the court first, citing the Arbiter’s 2009 dismissal notice regarding relitigation of identical claims in court, transferred ARC’s claims against Sudbury back to the Arbiter.

Next, the court rejected ARC’s conversion claims against Goodstone for the same reasons the same court rejected them ten years ago in Airlines Reporting Corporation v. Pishvaian, 155 F. Supp.2d 659 (E.D.V.A. 2001).  The court rejected ARC’s sales proceeds conversion claim because the Agent Reporting Agreement, while labeling such proceeds as “trust” funds, did not actually establish a trust relationship because it did not require that sales proceeds be segregated, i.e., it allowed such proceeds to be commingled with general agency assets.  The court rejected ARC’s conversion claim regarding the funds securing the letter of credit for the same reason.  The court rejected the travel documents conversion claim because the facts showed that Goodstone’s conduct, like that of the agency owner in Pishvaian, was only “supervisory and was not directed at the converted ticket stock.”

The court then rejected ARC’s breach of fiduciary duty cause of action as barred by Virginia’s two-year limitation period.  ARC alleged that the misdeeds occurred during a period ending in July 2008, but it filed its complaint in September 2010.

Finally, the court rejected Goodstone’s Fair Debt Collections Practices Act and Massachusetts General Laws Chapter 93A counterclaims because ARC was seeking to collect a business debt, not a consumer debt.

So, at the end of the day, ARC and Sudbury returned to the Arbiter and Goodstone was out of the case.  ARC filed a motion for a default judgment against the other two defendants, but the court has not ruled on it.

Note:  Now pending in the Eastern District of Virginia are four cases – ARC v. Sarrion Travel, Inc. ($152,000+ damages), ARC v. Mundo Travel Corp. ($80,000+ damages), ARC v. Academic Travel Services International ($87,000+ damages) and ARC v. Cartegena Travel and Tours, Inc. ($85,000+ damages) – in which ARC is alleging the same conversion claims against agency principals that were rejected in Sudbury and Pishvaian.  There must be a better way for ARC to pursue claims against agency principals than to be forced to rely on trust-based causes of action that have repeatedly come up short.  In September, ARC announced that it is embarking on an effort to modernize its agent accreditation procedures.  That effort should include modernization of the Agent Reporting Agreement as well.

First, to receive accreditation, an agency’s principals should be required to consent, in their personal capacities, to arbitration or litigation of ARC’s claims against them related to the ARA.  Agency owners might complain about the costs of defending against ARC’s claims, but a provision requiring that the losing party in the proceeding pay the winning party’s attorneys’ fees and expenses would resolve any costs objection.

Second, the ARA should require that agents segregate sales proceeds in a separate account and prohibit them from commingling such proceeds with other funds.  The ARA designates sales proceeds as trust funds – it provides that “[t]he Agent recognizes that the proceeds of the sales, less the Agent’s commissions, if any, on these ARC Traffic Documents are the property of the Carrier and shall be held in trust until accounted for to the Carrier” – so it stands to reason that agents should be required to treat such funds accordingly.  Without a segregation requirement, the ARA’s “trust” language will continue to fail ARC in its pursuit of tort claims arising under Virginia law, which governs the interpretation of the ARA.

Airline battles frequent flyer mileage brokers in federal court

May 26, 2008

Alaska Airlines, Inc. v. Carey (W.D. Wash. Apr. 15, 2008).  The terms and conditions Alaska Airlines’ frequent flyer program, known as the Mileage Plan, prohibit its members from selling, purchasing or bartering miles or award tickets, and they state that miles and award tickets “are void if transferred for cash or other consideration.”

In 2007, Alaska Airlines filed a lawsuit against Bradley and Celeste Carey and their company, Carey Travel, Inc., seeking damages arising from, and injunctive relief against, the defendants’ brokering of plan miles and award tickets.  According to the airline, the defendants have operated a scheme in which they buy miles from plan members (which renders the miles void), redeem the miles for award tickets and then sell those tickets to their customers, who use them to travel on the airline’s flights.  In essence, according to the airline, the defendants have tortiously induced plan members to violate the plan and have fraudulently caused the airline to issue tickets and provide transportation based on void miles and award tickets.

In response, the defendants made a novel argument.  They moved to dismiss most of the counts of the complaint on the grounds that the contract between the airline and plan members, which consists of the plan’s terms and conditions, is “both illusory AND unconscionable.”  The defendants argued that contract is illusory because it is “unilaterally modifiable” by the airline, and that it is unconscionable because it is one-sided (particularly because it gives the airline the right to terminate the plan) and because plan members have no opportunity to bargain over the terms and conditions.  The defendants contended that because the contract does not exist or is unenforceable, the airline’s causes of action that are premised on the existence of such contract, such as its cause of action for tortious interference with contract, fail to state a claim for relief.

The court denied the motion to dismiss, holding that defendants had raised this issue too early in the case and indicating that the defendants could proceed with discovery and then file a motion for summary judgment on this issue.  Undaunted, the defendants moved that the court reconsider its order, boldly suggesting that perhaps the court had not “looked at, reviewed, or carefully studied” the plan’s terms and conditions.

The court denied the motion for reconsideration.  Exercising considerable restraint, the court indicated that it had in fact carefully reviewed the terms and conditions and, as proof, pointed out that it had cited certain terms and conditions in its prior order.  The court then noted that contract provisions allowing a party to terminate a contract do not render the contract illusory where the termination can only be exercised upon the occurrence of specified conditions.  The court held that because the contract requires that the airline give 180 days advance notice before terminating the plan, the termination provision did not render the contract illusory.  The court also noted that if the airline decided to eliminate the advance notice provision and terminate the plan immediately, a plan member might have a good argument that the contract, as interpreted by the airline, was illusory, but “that is not this case.”

Note:  In March, after the court issued its order denying the motion to dismiss, the defendants filed a 41-page class action counterclaim and third party complaint alleging, among other things, that Alaska Airlines, “its favored frequent flyer mile broker,” and Delta Airlines, American Airlines, Northwest Airlines and Continental Airlines (as “unnamed co-conspirators”), have violated federal antitrust statutes by conspiring to eliminate all frequent flyer mileage brokers and monopolize the mileage market and that an in-house attorney and a senior manager of Alaska Airlines are also liable for these antitrust violations.  The defendants filed a similar counterclaim in a case that United Airlines had brought against them in 2005 for brokering Mileage Plus miles and awards.

Update:  On October 30, 2009, the court entered an order granting summary judgment for Alaska Airlines and a permanent injunction against the defendants.  On April 2, 2010, the court awarded Alaska Airlines attorneys’ fees of $122,273 and litigation expenses of $4,545 in connection with its successful claim that the defendants had violated the Washington Consumer Protection Act.  On September 16, 2010, the Ninth Circuit affirmed the trial court’s summary judgment and permanent injunction rulings, as discussed here.

Court decisions highlight need to clarify important Agent Reporting Agreement provision

March 16, 2008

Westways World Travel, Inc. v. AMR Corp., American Airlines, Inc. et al. (9th Cir. (Cal.) Jan. 22, 2008).  Despite consisting of over 70 pages, ARC’s Agent Reporting Agreement contains very few provisions that give airlines specific rights against ARC-accredited travel agents.  Most of the airline-protective provisions are in ARA Section VII, which is entitled “Agent’s Authority, General Rights and Obligations.”  For airlines, subsection H of Section VII is a critically important provision; it states in part as follows:  “The Agent shall comply with all instructions of the carrier, and shall make no representation not previously authorized by the carrier.”  Unfortunately for the airlines, Section VII.H has been held to be “ambiguous” by the Ninth Circuit in the Westways case, as well as by a California federal district court in 2006 in a separate case.

In 1999, Westways World Travel and another ARC-accredited travel agent sued American Airlines (and ARC and other entities) in a California federal district court, alleging that the defendants had engaged in an unlawful scheme to charge the agents, through debit memos, for ticketing violations for hidden city, back-to-back and point-beyond tickets.  The agents claimed that, through this scheme, the defendants had violated the federal Racketeer Influenced and Corrupt Organizations Act and breached the ARA.

In 2003, the court certified the case as a class action, but the court later granted the defendants’ motion for decertification.

In 2004, ARC was dismissed from the case pursuant to a settlement in which ARC, while denying any liability, agreed (i) not to participate in the enforcement of contested airline debit memos seeking payment from agents for hidden city, back-to-back or point-beyond tickets, (ii) to issue a statement to agents informing them of ARC’s agreement not to participate in such enforcement, and (iii) not to terminate the accreditation of any agent that refuses to pay a contested debit memo seeking payment for hidden city, back-to-back or point-beyond tickets.

In 2004, American and the other remaining defendants moved for summary judgment.  American contended that because it had the right under the ARA to issue debit memos to recover its losses arising from agents’ violation of the airline’s instructions prohibiting hidden city, back-to-back and point-beyond ticketing, its conduct in issuing such debit memos could not be considered extortion or any other predicate act needed to show a RICO violation or a breach of the ARA.

In a detailed written opinion issued in 2005, the district court ruled for the defendants.  First, it held the ARA gave American the right to issue debit memos to recover damages for agents’ failure to comply with the airline’s “instructions” within the meaning of ARA Section VII.H.  Second, it held that American, through its conditions of carriage and tariff, had given “instructions” within the meaning of Section VII.H prohibiting agents from issuing hidden city, back-to-back and point-beyond tickets, even though the conditions of carriage and tariff had been issued for passengers, not agents.  The court interpreted the Section VII.H phrase that “the Agent shall comply with all instructions of the carrier” to mean that agents were required to follow all carrier instructions, even if such instructions had been specifically issued to other parties, not to agents.  Finally, the court held that because American had the right under the ARA to issue the debit memos in question, its conduct in doing so could not constitute a RICO predicate act or a breach of the ARA.

The agents appealed, and the Ninth Circuit issued a split decision in January 2008.  The appeals court agreed that the agents’ RICO claims were deficient, reasoning that American could not be liable under that statute by simply demanding payment for amounts that the airline believed it was owed under its interpretation of the ARA.

But the Ninth Circuit disagreed with the trial court’s ruling on the agents’ breach of contract claim.  The appeals court held that the Section VII.H phrase “the Agent shall comply with all instructions of the carrier” could, in its opinion, be understood two ways:  to require that agents need only comply with “instructions” issued specifically to them, and not also with instructions issued to passengers and other parties, or, in the alternative, to require that agents comply with all instructions issued to agents, passengers and all other parties.  In addition, the court refused to overturn the trial court’s decertification of the case as a class action.  The court remanded the case for further proceedings.

The other case in which the court held Section VII.H of ARA to be ambiguous was Continental Airlines, Inc. v. Mundo Travel Corporation.  In that case, Continental had sued an ARC-accredited agent in a California federal district court, alleging that the agent had violated the ARA by issuing point-beyond tickets in violation of the “instructions” prohibiting such ticketing in the airline’s own “Booking and Ticketing Policy.”

The agent in Mundo moved to dismiss on the grounds that the airline’s claims were barred by Section I.C of the ARA, which provides that the ARA “does not, for example, address fares charged by the carrier; that is a matter between a carrier and the Agent.”  Continental responded that Section VII.H had required that the agent comply with the “instructions” against point-beyond ticketing set forth in the Booking and Ticketing Policy.  In a 2006 decision, the court denied the agent’s motion, noting that “the ARA is ambiguous” because the two ARA provisions conflicted, leaving it unclear whether the agent had been required to comply with the Booking and Ticketing Policy.  Mundo was settled a few months after the court’s decision, so there was never a definitive ruling on the enforceability of Section VII.H in that case.

Perhaps it is time for an airline to submit a proposal to ARC’s president, for referral to ARC’s board of directors or stockholders, seeking to clarify Section VII.H so airlines would stand a better chance of enforcing this important provision in court cases.  Maintaining the text of a provision that may be read multiple ways, and may conflict with other ARA provisions, only serves to keep airlines and agents in a position where their respective rights and obligations are unclear.  Unless the provision is clarified, it will be up to the courts to figure out what the provision means and its role with respect to other ARA provisions.  Aren’t the parties to a contract supposed to be the ones to do that?

Travel agents come up short in commission cap antitrust case against airlines

January 9, 2008

In re Travel Agent Commission Antitrust Litigation (N.D. Ohio Oct. 29, 2007).  The travel agent plaintiffs alleged in this case that the airline defendants had violated Section 1 of the Sherman Act (15 U.S.C. § 1) by conspiring to cap or eliminate travel agent commissions at certain times during the period from 1995 to 2002.  The airlines moved to dismiss on the grounds that the agents had failed to meet the requirement set forth by the U.S. Supreme Court (in Bell Atlantic Corp. v. Twombly, a 2007 case) that, to state a Section 1 claim, a plaintiff must plead facts suggesting that the defendants had engaged in “parallel conduct” and that they had entered into a conspiracy prior to such conduct.

The court granted the airlines’ motions.  As to the smaller airlines, the court held that the agents had failed to allege facts suggesting that the airlines had engaged in parallel conduct regarding commissions; the smaller airlines had “either failed to implement the caps entirely or implemented the caps after the larger airlines.”

As to the larger airlines, the court held that the agents had failed to allege facts indicating that the airlines had conspired with each other.  The agents tried to satisfy their pleading obligations by alleging that airline executives had had opportunities to conspire at trade shows and while playing golf, and by making other circumstantial allegations, but the court held that these allegations fell short of suggesting that the airlines had in fact agreed to cap or eliminate commissions.

Update:  The agents filed a motion for reconsideration on November 16, 2007 and a notice of appeal to the Sixth Circuit on November 26, 2007.  The trial court denied the motion for reconsideration on March 13, 2008.  On October 2, 2009, the Sixth Circuit affirmed the district court’s judgment, and, on January 10, 2011, the Supreme Court denied the agents’ certiorari petition.

Court confirms arbitration award in favor of “host agency”

January 9, 2007

Incentive Connection Travel, Inc. v. 1st-Air.Net Inc. (D. Ariz. Dec. 27, 2006).  The parties had entered into a contract in which ICT agreed to act as a “host agency” for 1st-Air.Net, an Internet-based travel broker.  According to ICT, 1st.Air-Net “is required to use host agencies because, among other reasons, United Airlines terminated its Sales Agreement . . . and the Airline [sic] Reporting Corporation terminated the ability of First Air . . . to purchase tickets.”

According to ICT, 1st-Air.Net “engaged in the use of ‘hidden cities’ and ‘throw away’ segments, and other prohibited ticketing practices,” thereby violating the contract between them.  ICT terminated the contract, which contained an arbitration provision.  1st-Air.Net filed a demand for arbitration; ICT filed a counterclaim, as well as a third party claim against 1st-Air.Net’s principals, Jackie DiBella and Robert Laney.

At the arbitration hearing, the parties settled all issues except for the issue of attorneys’ fees.  Finding that “[t]he issuance of hidden city tickets by Laney and DiBella was in breach of the contract with [ICT] because it was contrary to the ordinary custom of the airline industry and a breach of 1st-Air.Net’s duty under the contract,” the arbitrator awarded ICT fees and costs against 1st-Air.Net, DiBella and Laney in the amount of $126,400.  The court granted ICT’s application to confirm the award.

Airline not liable under antitrust statutes by terminating agent agreement

October 21, 2006

Tokarz v. LOT Polish Airlines (E.D.N.Y. Oct. 3, 2006).  Despite repeated warnings by the airline, the agent continued to discount tickets by passing on front-end override commissions to customers, a practice that violated the parties’ written commission agreement.  After several competing agents complained to the airline about the discounting agent, the airline exercised its right to terminate the agreement with the discounting agent.  The terminated agent sued, alleging that the airline’s termination violated federal and New York antitrust statutes because it was the product of an illegal conspiracy among the airline and the complaining competitors.

After a decade of litigation that culminated in a trial, the court held that the airline had not violated the antitrust statutes because it had acted unilaterally, not as part of any concerted action with the complaining competitors.

In its opinion, the court noted that an airline, like any other company that sells services or products through other entities, “can announce its resale prices in advance and refuse to deal with those who fail to comply.”  This helpful statement confirms an airline’s right to prevent an agent from creating fictional fares on a computer reservation system or engaging in any other kind of fare abuse.

Update:  By an order issued December 21, 2007, the Second Circuit affirmed the trial court’s judgment.  On October 6, 2008, the U.S. Supreme Court denied the agent’s petition for a writ of certiorari.