Recent Federal and U.S. Supreme Court Class Action Decisions

This edition of our Newsletter addresses some recent federal and United States Supreme Court class action decisions that either involve airlines as defendants or have applicability to putative airline class action liability.

United Airlines Unable to Obtain Dismissal in Frequent Flyer Class Actions

In the 1980s, United Airlines launched its Mileage Plus frequent flyer program permitting United passengers to earn miles for travelling on United flights. Passengers could then use accumulated miles for certain defined benefits as part of the program.

The Mileage Plus program created tiers of membership, whereby passengers who flew a certain amount of miles qualified for special perks not available to regular Mileage Plus members. The general terms and conditions governing United’s Mileage Plus program were not unlike any other standard frequent flyer contract – passengers were afforded certain benefits for miles flown and, in turn, United reserved the “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.”

United’s right to modify or cancel frequent flyer benefits was the impetus behind two class action lawsuits filed against it in federal court in 2012. The plaintiffs in Lagen v. United Continental Holdings, Inc.1 and Banakus v. United Continental Holdings, et al.2 allege that United breached its contract with some of its higher tiered Mileage Plus members when it cancelled and modified some of their benefits following its merger with Continental Airlines in 2010. United filed motions to dismiss in both cases, citing the modification clause contained in its Mileage Plus contract to support its contention that no breach of contract had occurred.

George Lagen, the named plaintiff in Lagen v. United Continental Holdings, Inc., alleged that over the course of many years, he flew between 200,000 and 250,000 miles on United flights, accruing more than one million total miles and achieving Premier Executive, or Million Mile, frequent flyer status under United’s Mileage Plus agreement. In response to United’s motion to dismiss, Mr. Lagen argued that the modification clause in the Mileage Plus agreement did not apply to his claim because he was guaranteed special lifetime benefits as a result of his Million Mile achievement. These special lifetime benefits allegedly were part of an offer made by United outside the scope of the Mileage Plus agreement that, once accepted, created a separate and distinct contract with Million Mile frequent flyers. Thus, Mr. Lagen contended that United breached the Million Mile frequent flyer contract, not the Mileage Plus agreement.

On January 31, 2013, Judge Leinenweber of the Northern District of Illinois denied United’s motion to dismiss. The court found, after analyzing United’s Mileage Plus contract as well as the modification clause, that there was no mention of Million Mile frequent flyers or any specific indication that the modification clause applied to Million Mile frequent flyer benefits. Accordingly, the court denied United’s motion to dismiss, reasoning that Mr. Lagen should have the opportunity to prove that a separate contract existed between Million Mile frequent flyers and United pursuant to which United could not modify their benefits at its discretion.

Similarly, Judge Lee of the Northern District of Illinois denied United’s motion to dismiss in Banakus v. United Continental Holdings, on the ground that United’s Mileage Plus contract did not specifically refer to Premier frequent flyers. Mr. Banakus, a member of United’s Mileage Plus program, participated in a “special offer” from United that provided additional benefits during the 2012 calendar year for frequent flyers who had reached 25,000 miles in 2011. Mr. Banakus alleged that in response to this offer he flew 25,000 miles in 2011, expecting to receive these additional benefits during 2012. However, following United’s merger with Continental, Mr. Banakus claimed that United breached its contract with Premier members by downgrading the benefits to which they were entitled.

On March 1, 2013, Judge Lee held that, because the Mileage Plus agreement and the modification clause did not mention the Premier frequent flyer program, United could not apply the terms and conditions contained in its Mileage Plus agreement to its Premier members. The court also denied the motion to dismiss because United was unable to produce any other information showing that Premier membership was governed by the terms and conditions of the Mileage Plus agreement.

Essentially, the decisions in Lagen and Banakus impose upon United additional contractual obligations towards its frequent flyer members that it may not have intended to undertake. Because United did not mention the Premier program in its Mileage Plus agreement, plaintiffs now have an opportunity to show that any offers from United under the Mileage Plus program, which extended additional benefits to frequent flyers, created a separate contract as to those additional benefits and fall outside of the scope of United’s modification clause. This holding could not have been the outcome that United anticipated when offering additional perks to passengers like Lagen and Banakus. Carriers who have frequent flyer programs should ensure that the language allowing modification or termination of frequent flyer benefits cover all members within the overall program to avoid similar broad interpretations of their contractual obligations.3

Limiting Class Action Exposure With Arbitration Clauses

Due to the increase of class action suits arising from the modification of frequent flyer benefits, airlines may begin to insert arbitration clauses into their frequent flyer agreements. Arbitration clauses always have been useful for limiting a contracting party’s ability to file litigation, and now, depending on the Supreme Court’s ruling in Sutter v. Oxford Health Plans LLC,4 general arbitration clauses also may limit a party’s ability to bring class-wide proceedings.

The Third Circuit’s interpretation of the Supreme Court’s decision in Stolt-Nielsen v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010)5 has created a split among the circuits regarding whether class arbitration is permissible where an arbitration clause is silent on the issue. Stolt-Nielsen involved a dispute between a charterer and a shipping company whose relationship was governed by a charter party contract that contained a general arbitration clause. The plaintiff brought a putative class action against the shipping company for an alleged illegal price- fixing conspiracy and, during arbitration, demanded class-wide resolution despite the fact that the parties had stipulated that the arbitration clause was silent on the issue of class-wide proceedings.

The arbitrator granted plaintiff’s request and the defendant appealed, arguing that there was no basis in the contract for the arbitrator’s decision. The issue reached the Supreme Court, which vacated the arbitrator’s award, holding that a party may not be required to submit to class-wide arbitration unless there is a contractual basis for concluding that the party agreed to do so. The Court reasoned that because the parties stipulated that there was no agreement as to class-wide proceedings, and there was no language in the contract demonstrating an intent between the parties to allow for class arbitration, the Court could not impose class arbitration.

Despite the Supreme Court’s seemingly unequivocal position on the issue in Stolt-Nielsen, the Court of Appeals for the Third Circuit in Sutter found that the prior decision did not establish a bright-line rule that arbitration is allowed only where it is expressly stated in an arbitration clause. The arbitration clause in Sutter was much like the one discussed in Stolt- Nielsen. The plaintiff, Dr. Sutter, entered into a contract with Oxford Health Plans. The contract contained a broad arbitration clause, stating that any and all disputes between the parties would be resolved through arbitration. Despite the fact that the arbitration clause was silent on the issue of class arbitration, Dr. Sutter attempted to arbitrate on behalf of a proposed class. Oxford opposed, citing the Supreme Court’s decision in Stolt-Nielsen as support. Notwithstanding the Stolt-Nielsen ruling, the arbitrator granted Dr. Sutter’s request and Oxford appealed.

The Third Circuit upheld the arbitrator’s award, finding the facts in Sutter to be distinguishable from the facts in Stolt-Nielsen. Specifically it found that in Stolt-Nielsen the parties expressly stipulated that the arbitration clause did not address the issue of class arbitration, whereas the parties in Sutter disputed whether the broad language contained in the arbitration clause was intended to include class- proceedings. The court further held that Stolt- Nielsen only established a default rule under the Federal Arbitration Act (FAA) that requires contractual support for requiring parties to submit to arbitration, but does not stand for proposition that arbitration clauses that are silent on the issue of class actions necessarily preclude class arbitration of a proposed class.

Most other circuits deciding the issue of class arbitration involving silent arbitration clauses have departed from the Sutter court’s interpretation of Stolt-Nielsen. For example, the Fifth Circuit in Reed v. Florida Metro University, Inc.6 held that silence as to class actions in an arbitration clause demonstrates an intent to preclude class arbitration. In Reed, a student brought a putative class action in Texas state court against his former university for soliciting students without the proper credentials. Pursuant to an arbitration clause contained in the student’s Enrollment Agreement, the parties submitted to arbitration during which the arbitrator allowed the student to arbitrate on behalf of a class, despite the fact that the arbitration clause was silent on the issue of class-wide proceedings.

The federal district court upheld the arbitrator’s decision, but the Fifth Circuit vacated the decision on appeal, finding it inconsistent with the Supreme Court’s ruling in Stolt-Nielsen. The Fifth Circuit held that arbitrators should not conclude that parties, and defendants in particular, consented to arbitration without express language in the contract to support the conclusion. The court further reasoned that a general arbitration clause did not provide enough contractual support for concluding that the parties intended to allow class arbitration. Finally, the court held that the issue of class arbitration should be addressed separately in the contract.

Because of the split among the circuits, the Supreme Court granted certiorari in Sutter to clarify whether class arbitration is precluded in cases where: 1) the arbitration clause does not address class-wide proceedings; and 2) the parties have not stipulated that the arbitration clause fails to address class arbitration. Should the Court uphold its decision in Stolt-Nielsen and hold that a general arbitration clause is not sufficient to require class arbitration, arbitration clauses will continue to be a powerful tool in helping defendants, such as airlines, avoid prolonged and expensive class action litigation. If the Court distinguishes Stolt-Nielsen and holds that arbitration clauses must contain express language precluding class arbitration, companies will need to amend their consumer contracts accordingly. The Supreme Court is expected to render a decision in Sutter during the October 2013 Term.

The Controversy Surrounding Class Action Waiver Provisions

To insulate themselves from class actions, some companies have opted to include class action waivers in their contracts. Class action waivers have proved to be extremely controversial, as they preclude a customer’s ability to bring class litigation and class arbitration and permit only individual arbitration as the method for dispute resolution. Despite this fact, in 2011, the Supreme Court held in AT&T Mobility LLC v. Concepcion (2011)7 that class action waiver clauses are enforceable. However, the Concepcion ruling has been challenged in cases where a class action proceeding is a plaintiff’s only potentially viable method of resolution.

In Concepcion, the plaintiffs, AT&T customers, brought a putative class action against AT&T for fraud, alleging that the company charged retail taxes on “free phones.” AT&T moved to compel arbitration pursuant to the arbitration clause in its customer agreement and plaintiffs opposed, arguing that the arbitration clause was unconscionable because it prohibited class-wide proceedings. Interpreting the contract under California law, which prohibited arbitration clauses that precluded class actions, the federal district court denied AT&T’s motion to compel arbitration. The Ninth Circuit affirmed, and the Supreme Court granted certiorari to determine whether California’s law was preempted by the FAA. In its holding, the Supreme Court stated that requiring parties to engage in class-wide arbitration when they do not intend to do so would frustrate the fundamental purpose of the FAA which is to ensure the enforcement of arbitration agreements and to provide streamlined proceedings with the consent of all parties. Thus, the Court held that under the FAA a class action waiver is enforceable if agreed upon by all parties.

While the Supreme Court in Concepcion essentially held that class action waivers are enforceable, the Court of Appeals for the Second Circuit ruled In re American Express Merchants Litig. (Amex III),8 that the Concepcion decision was limited only to cases where class-wide proceedings are not the only feasible method by which to resolve a dispute. In re American Express was a putative class action against American Express, brought by merchants alleging that American Express was overcharging merchants for credit card fees. American Express filed a motion in the district court to compel arbitration pursuant to an arbitration clause in its merchant agreement, which also contained a class action waiver provision. The district court granted American Express’ motion. The Second Circuit reversed, finding the class action waiver clause to be unconscionable because, in addition to precluding class action litigation, it also barred the plaintiffs from asserting Sherman Act claims against American Express without providing them with an alternative method for enforcing these rights.

American Express petitioned to the Supreme Court, which granted certiorari and then vacated the Second Circuit’s ruling (Amex I) for reconsideration in light of Stolt-Nielsen. On reconsideration, the Second Circuit, finding that Stolt-Nielsen had no bearing on Amex I, reversed the district court’s decision for the second time and remanded the action for further proceedings (Amex II). However, the Second Circuit placed the mandate on hold while American Express sought certiorari in the Supreme Court. Prior to certiorari being granted, the Supreme Court decided Concepcion, which held that California’s law prohibiting class action waiver clauses was preempted by the FAA and that AT&T’s class action waiver clause was not unconscionable. As a result, the In re American Express parties submitted additional briefing to the Second Circuit in light of the Supreme Court decision, but the Second Circuit found that its original ruling remained unaffected by Concepcion.

Because Concepcion did not address whether class waiver claims are preempted in cases where a plaintiff can show that “the practical effect of enforcement of the class waiver would preclude its ability to vindicate its federal statutory rights,” the Second Circuit affirmed its previous rulings that held American Express’ class action waiver to be unenforceable (Amex III).

In December 2012, the Supreme Court granted certiorari in Amex III to determine whether class action waivers are enforceable in cases where a party has potential federal claims that are typically resolved in class action-style proceedings. Notably, there is little distinction between the issues to be addressed in Sutter and Amex III, as both cases seek to determine whether an arbitration clause, with or without a class action waiver, necessarily bars class- wide proceedings.

Airlines seeking to include arbitration clauses with class waiver provisions in their frequent flyer contracts should closely follow the Supreme Court’s disposition in Amex III. Cases asserting federal claims, such as antitrust violations, are common in the aviation context, thus, the overall effectiveness of a class action waiver provision will certainly depend on the Supreme Court’s determination of whether the availability of federal claims supersedes the policy enumerated in the FAA. If the Court decides that the intent of the parties and the goals of the FAA are paramount in circumstances of interpreting arbitration clauses and class waivers, airlines may begin to include class action waivers in their arbitration clauses for further protection from class-wide proceedings.

Damages Caps Used to Avoid Federal Jurisdiction in Class Actions Are No Longer Permitted

Recently the Supreme Court decided Standard Fire Insurance Co. v. Knowles (2013),9 which has significant implications for airlines defending class actions that are initiated in state court. Plaintiffs in Standard Fire, brought a putative class action suit in Arkansas state court alleging that Standard Fire, a homeowner’s insurance company, underpaid claims under its homeowner insurance policies. In his complaint, plaintiff stipulated that the class damages would be capped at $5 million, which is the threshold limit for federal jurisdiction under the Class Action Fairness Act (CAFA). The defendants removed the case to federal court, but because plaintiffs had stipulated damages for less than $5 million, the district court held that the plaintiff’s claim fell below the monetary threshold for CAFA jurisdiction, and remanded the case to state court.

Standard Fire appealed the remand order to the Eighth Circuit, which declined to hear the appeal. Because of a split among the circuits on the issue, the Supreme Court granted a writ of certiorari and reversed the district court’s decision, holding that plaintiff did not have the authority, prior to certification of the class, to bind an entire class with the stipulation. Because the plaintiff could not bind the entire class, the Court found that the stipulation was invalid. The Court also found the stipulation to be inconsistent with the policy behind CAFA, which is to keep interstate cases having national significance within the purview of the federal courts. For these reasons, the Supreme Court remanded the action to the federal district court where it will be tried.

The Standard Fire decision is a double-edged sword for class action defendants. On the one hand, plaintiffs cannot avoid federal jurisdiction by simply stipulating that their damages will fall under the CAFA threshold. This change should keep high-stakes class action cases out of plaintiff- friendly state courts. On the other hand, despite the fact that plaintiffs’ attorneys will no longer be able to use the favorable procedural rules to their advantage following Standard Fire, a reduction in class action filings is not likely. Also, plaintiffs now have no incentive to refrain from seeking excessive damages in putative class action cases and defendants can no longer use the damages cap as a potential basis to call into question a plaintiff’s ability to adequately represent a class. The true beneficiaries of the Standard Fire case are the class members, who can no longer be manipulated by plaintiffs’ attorneys to take advantage of state court discovery. However, after the Standard Fire case has been put into practice, the pros and cons of the decision for both defendants and plaintiffs alike, should become apparent.

Taking Advantage of Recent Decisions

In recent years, airlines have increasingly become targets of the class action plaintiffs’ bar. We have seen consumer class actions arising from fuel surcharge contract language, frequent flyer agreements, conditions of carriage, and air waybill language. Given the implementation of CAFA and the recent federal appellate court decisions (including several by the United States Supreme Court), airlines now have some clear guidance to use when updating their various standard contracts to shield against class action litigation.


1 Lagen v. United Continental Holding, Inc. et al., No. C 04056 (7th Cir. Jan. 31, 2013).

2 Banakus v. United Continental Holding, Inc. et al., No. C 06244 (7th Cir. Mar. 1, 2013).

3 In 2012, following the merger with Continental, United combined its Mileage Plus program with Continental’s One Pass program, creating the MileagePlus program. This new program contains the same modification clause with new language showing applicability of the clause to all frequent flyers, including its Premier members.

4 Sutter v. Oxford Health Plans LLC, 675 F.3d 215 (3d Cir. 2012).

5 Stolt-Nielsen v. Animal Feeds Int’l Corp., 130 S.Ct. 1758 (2010).

6 Reed v. Florida Metro University, Inc., 681 F.3d 530 (5th Cir. 2012).

7 AT&T Mobility LLC v. Concepcion, 131 S.Ct 1740 (2011).

8 In re American Express Merchants Litig., No. 06-1871 (2d Cir. Feb. 1, 2012).

9 Standard Fire Insurance Co. v. Knowles, ___ U.S. ____, No. 11-1450 (2013).