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October Term, 2013

April 2, 2014

Today the Supreme Court issued one decision, described below, of interest to the business community.

Airline Deregulation Act—Federal Preemption—Breach of Implied Covenant of Good Faith and Fair Dealing

Northwest, Inc. v. Ginsberg, No. 12-462 (previously discussed in the May 20, 2013, Docket Report)

The Airline Deregulation Act of 1978, as amended, provides that “a State . . . may not enact or enforce a law, regulation, or other provision having the effect of law related to a price, route, or service of an air carrier.” 49 U.S.C. § 41713(b)(1). Today, in Northwest, Inc. v. Ginsberg, No. 12-462, the Supreme Court held that the Act preempts state-law claims for breach of the implied convenient of good faith and fair dealing to the extent such claims seek to enlarge the contractual obligations voluntarily assumed by the parties.

The plaintiff passenger, respondent in the Supreme Court, sued Northwest for breaching the implied covenant of good faith and fair dealing by revoking his membership in its frequent flyer program. The district court held that plaintiff’s claim was preempted by the Act. The Ninth Circuit reversed, holding that plaintiff’s claim was “too tenuously connected” to regulation to be preempted by the Act.

In a unanimous opinion by Justice Alito, the Supreme Court reversed the Ninth Circuit. The Court first rejected the plaintiff’s contention that his claim falls outside the scope of the Act’s preemption provision because common law rules are “law[s], regulation[s], or other provision[s] having the force and effect of law” and because enrollment in a frequent flyer program is not related to “price, route, or service.” Based on prior interpretations of other federal statutes and the Act itself, the Supreme Court held that “the phrase ‘other provision having the force and effect of law’ includes common law claims.” Slip. op. 6–9. And because “the reason for seeking reinstatement of his membership” was “to obtain reduced rates and enhanced service,” plaintiff’s claim is related to both prices and services. Slip. op. 9–10. Turning to whether the implied covenant was imposed by state law or voluntarily assumed by the parties as allowed by American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995), the Supreme Court held that, under applicable Minnesota law, the implied covenant was imposed by state law because Minnesota does not allow parties to disclaim the obligation and because Minnesota had demonstrated that its decision to mandate the implied covenant’s application was a deliberate policy choice by creating a policy-based exception for employment contracts. Slip. op. 11–13. The Court declined to adopt Northwest’s position that implied-covenant claims should be preempted without regard to state law, holding instead that “implied covenant rules will escape pre-emption only if the law of the relevant State permits an airline to contract around those rules in its frequent flyer program agreement.” Slip. op. 13.

Today’s decision is of interest to airline carriers subject to the Airline Deregulation Act and motor carriers subject to the parallel provisions of the Federal Aviation Administration Authorization Act, as well as participants in other regulated industries whose federal regulatory schemes contain broad preemption provisions. Airline and motor carriers may wish to evaluate whether they should implement the Supreme Court’s suggestion that carriers may avoid liability for breach of the implied covenant by disclaiming the incorporation of the implied covenant in their contracts to the extent allowed by applicable state law.

Any questions about the case should be directed to Brian D. Netter (+1 202 263 3339)in our Washington office.

Mayer Brown's Supreme Court & Appellate practice ordinarily distributes a Docket Report when the Supreme Court grants certiorari in a case of interest to the business community and a Docket Report-Decision Alert when the Court decides such a case. We hope that you find the Docket Reports and Decision Alerts useful. We welcome feedback on them, which should be addressed to the general editors, Richard B. Katskee (at rkatskee@mayerbrown.com or +1 202 263 3222) and Brian D. Netter (at bnetter@mayerbrown.com or +1 202 263 3339)

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