HIGHLIGHTS:

  • The U.S. Supreme Court unanimously holds that the Airline Deregulation Act (ADA) preempts a state-law claim for breach of the implied covenant of good faith and fair dealing where it seeks to enlarge the parties' voluntary contractual obligations.
  • Where a state's law does not permit parties to contract out of the implied covenant, the implied covenant must be regarded as a state-imposed obligation (not a voluntary one) and, therefore, will be preempted.

In Northwest, Inc. v. Ginsberg,1 a 9-0 decision issued on April 2, 2014, the U.S. Supreme Court held that the Airline Deregulation Act of 1978 (ADA)2 preempts a frequent flyer member's implied covenant of good faith and fair dealing claim when such a claim is state-imposed and "seek[s] to enlarge the contractual obligations that the parties voluntarily adopt." The decision, authored by Justice Alito, follows the sound reasoning in American Airlines, Inc. v. Wolens3 and reaffirms the broad reach of the ADA's preemption clause.

Background of Northwest, Inc. v. Ginsberg

Rabbi S. Binyomin Ginsberg, a Northwest Airlines frequent flyer member, sued the airline for negligent and intentional misrepresentation, breach of contract, and breach of the implied covenant of good faith and fair dealing arising from his removal from the frequent flyer program. By its express terms, the program permitted Northwest to terminate membership in its "sole judgment." The District Court dismissed the breach of contract claim for failure to state a claim and the misrepresentation and implied covenant claims as preempted by the ADA.

On Ginsberg's appeal of the implied covenant claim (the only issue appealed), the U.S. Court of Appeals for the Ninth Circuit reversed, holding that the claim was part of the contract laws of the states, and one that does not interfere with the deregulatory purpose of the ADA. The Ninth Circuit rejected the airline's arguments that this implied common law claim impermissibly enlarges the contract's terms in contravention of the holding in Wolens, which expressly limits contract claims to those arising from the parties' "self-imposed undertakings." The court further held that the claim does not relate to the airline's "prices" and "services" and that the District Court used an "overly broad" definition that would effectively subsume all breach of contract claims.

On May 20, 2013, the Supreme Court granted certiorari on the issue of whether the Ninth Circuit erred in holding that Ginsberg's implied covenant claim was not preempted by the ADA.

ADA Preempts Common Law Claims Connected to an Airline's "Price, Route or Service"

In its opinion, the Supreme Court reaffirmed its previous ADA rulings in Morales v. Trans World Airlines, Inc. and Wolens4 – both of which broadly interpreted the statute. The Court specifically confirmed Wolens' holding that breach of contract claims survive preemption only where they are based on those terms and conditions offered by the airline and accepted by the passenger, i.e., the parties' "privately ordered obligations."

The Court had "little difficulty" rejecting Ginsberg's argument that the ADA applies only to state legislation and agency-enacted regulations, but not common-law claims. The Court concluded that state common-law claims "fall comfortably" within the language of the ADA as "other provision[s] having the force and effect of law." Citing to Wolens, the Court found this phrase "most naturally read to 'refer to binding standards of conduct that operate irrespective of any private agreement'" and that there was "no basis for holding that such standards must be based on a statute or regulation as opposed to common law."5 The Court expressly noted that if all state common-law rules fell outside the ambit of the ADA's preemption provision, there would have been no need in Wolens to single out the subcategory of common-law claims based on the parties' voluntary undertaking as falling outside that provision's coverage. Excepting common law claims also would "disserve the central purpose of the ADA," since, as recognized by the Court, "[w]hat is important ... is the effect of a state law, regulation, or provision, not its form and the ADA's deregulatory aim can be undermined just as surely by a state common law rule as it can by a state statute or regulation."

Having confirmed that common law claims may be preempted by the ADA, the Court then addressed whether Ginsberg's implied covenant claim had a sufficient "connection with, or reference to" Northwest's prices, routes or services for ADA preemption. Like the claims related to the frequent flyer program in Wolens, the Court held that the implied covenant claim "clearly" related to Northwest's "prices" because the program awards mileage credits that can be redeemed for tickets and upgrades. The Court dismissed Ginsberg's contention that his claim contests only "the termination of his WorldPerks elite membership" as a distinction without substance because his primary reason for seeking reinstatement was to obtain reduced rates and enhanced services.

Ginsberg's Implied Covenant Claim Is a State-Imposed Obligation

Turning to the "central issue" in the case – defined as "whether respondent's implied covenant claim is based on a state-imposed obligation or simply one that the parties voluntarily undertook," the Court examined Minnesota contract law, which controlled here. Under Minnesota law, the implied covenant of good faith and fair dealing cannot be waived and, therefore, as recognized by the Court, "must be regarded as a state-imposed obligation."6 In reaching this conclusion, the Court found that: (1) Minnesota's unwillingness to permit disclaimer of the obligation shows that the obligation is imposed by state law; and (2) Minnesota's application of the law to "every contract" – except employment contracts – demonstrates that the application of the implied covenant "depends on state policy." Based on the foregoing, the Court found that Ginsberg's claim could not stand.

The Court, however, declined to extend its ruling to hold that all implied covenant of good faith and fair dealing claims, no matter the content of the law of the jurisdiction, are preempted. Although Northwest argued that airlines would face a "baffling patchwork of rules" and thereby frustrate the purpose of the ADA, the Court observed that an airline can remedy this concern by specifying in its frequent flyer contract that the contract does not incorporate the implied covenant of good faith and fair dealing. As explained by the Court:

[a] State's implied covenant rules will escape preemption only if the law of the relevant State permits an airline to contract around those rules in its frequent flyer program agreement, and if an airline's agreement is governed by the law of such a State, the airline can specify that the agreement does not incorporate the covenant.

A Welcome Decision for the Airline Industry

The decision is a positive one for the airlines, as it reaffirms that the ADA's preemptive reach extends to common law claims and specifically to those state-imposed claims that improperly enhance the airline's contractual obligations. Aside from the import of its holding on the preemptive effect of the ADA, the Court's dicta provides important guidance on how an airline may prevent future similar disputes by incorporating disclaimer language in its frequent flyer program contracts. And, on a basic level, the Court appears to recognize that, aside and apart from government oversight of any deceptive trade practices by airlines,7the issue of a frequent flyer's dissatisfaction with an airline's frequent flyer program is ultimately better left to the usual workings of a free market, where the frequent flyer is free to enroll in a different program if they are dissatisfied with their current program.