Air Line Pilots Ass'n, Intern. v. UAL Corp.
| Decision Date | 12 November 1988 |
| Docket Number | No. 88 C 3576.,88 C 3576. |
| Citation | 699 F. Supp. 1309 |
| Parties | AIR LINE PILOTS ASSOCIATION, INTERNATIONAL and Jeffrey Buckley Cockrell, Plaintiffs, v. UAL CORPORATION, United Air Lines, Inc., Neil A. Armstrong, Andrew F. Brimmer, Edward W. Carlson, Richard P. Cooley, E. Mandell de Windt, William M. Jenkins, Juanita M. Kreps, Charles F. Luce, Fujio Matsuda, John F. McGillicuddy, Harry Mullikin, James J. O'Connor, Frank A. Olson, Nicholas R. Petry, John C. Pope, and Stephen M. Wolf, Defendants, and International Association of Machinists & Aerospace Workers, Defendant Joined Pursuant to Fed.R.Civ.P. 19. |
| Court | U.S. District Court — Northern District of Illinois |
Summary of Opinion*
United's pilots are trying to buy their airline. They propose the creation of an ESOP, an employee stock option plan, for its tax advantages, to acquire all (or nearly all) United shares. If United agrees, the pilots will pay $110 per share, approximately 12% above the closing share price on 10 November 1988. The financing for the buyout is to come principally from bank loans, bond sale proceeds, and reduced operating costs based on wage and benefit concessions made by the pilots and United's non-union employees.
United's management does not welcome the proposal. It believes the result would be an airline too debt laden to compete effectively. IAM, which represents about a third of United's employees, shares United's view and also rejects in principle the notion of employee ownership and control of corporations.
United and IAM collectively bargained to an agreement, two clauses of which stop the pilots' present proposal in its tracks. The reopener clause (sec. B(1)(b)) permits IAM to reopen its contract if there is a change of control in its airline. The precise effect of the clause is unclear since the contract expires in November 1989 and the bargaining process in its airline industry ordinarily involves passage of several months before the time to strike arises. The pilots' bankers believe the reopener clause is a signal that funding the pilots' proposal will involve lending into a strike — a practice to be avoided.
The ESOP clause (sec. C) states that if there should be an ESOP offered or provided to any of United's union employees (as the pilots propose), United must offer an ESOP to its other unions, i.e., the flight attendants and machinists. Absent assurance that the other unions will not accept the offer, an assurance the machinists refuse to give, the pilots' plan for one hundred percent ownership cannot be achieved.
The ESOP clause also affects any proposal to take a controlling portion but less than all shares. There are indications the pilots would accept 70-80% ownership. The pilots want shares allocated to employee groups in proportion to the dollar value of salary, benefit and work rule concessions to the airline. ($1.5 billion over five years for the pilots). IAM believes its United members are paid below market rates and that the pilots are overpaid, and the pilots' proposed concessions in large part would occur anyway in future collective bargaining. Thus the pilots' proposed concessions are economic illusions. And IAM wants shares allocated in proportion to real economic concessions. To do this one must find the market rate of compensation for each employee group. Shares should be allocated in proportion to the degree which each employee group's salary is below market rates because only concessions to a rate below the market are real economic concessions. An attempt by the pilots and IAM to agree over the pilots' proposal fell asunder over this difference in view.
IAM's approach to ESOP share allocation is the one embodied in the ESOP clause. The precise market wage under the clause is unclear since it is to be determined in light of present industry wage levels and estimates of future wage levels. Disputes over market levels are to be resolved by arbitration in which the pilots' participation is either mandatory or optional depending on how the agreement is read.
The ESOP clause stops the pilots' present proposal by preventing the purchase of all shares or, if less than all shares are sought, by requiring the pilots to pay a few billion dollars for an interest whose size and value will remain uncertain until after arbitration. Indeed it may well be unknown whether the pilots' interest is a majority interest, until after IAM's members receive their share.
There is no question that IAM sought to stop the pilots' attempted takeover proposal in order to protect its members and that it viewed the reopener and ESOP clauses as means to that end. Whether United's management acceded to these clauses to avoid an IAM strike or embraced the clauses to defeat the pilots' proposal is the question of fact in dispute here. We find that United's management had as its purpose the defeat of the pilots' attempted take-over.
United's Board of Directors did little here. It delegated to management the responsibility of collective bargaining — an act consistent with its prior custom and, perhaps, with its duties under the Railway Labor Act (RLA). The Board did no more than listen to their negotiator's report. United management was unfailingly hostile to the pilots' proposal for a period of months that encompassed two separate versions of the proposal and two separate United management groups. IAM frankly described various possible contract provisions (including at least a version of the ESOP clause) as "poison pills", and various provisions were discussed in these terms by United's earlier management group. The ESOP clause appears narrowly directed to the pilots' proposal for an ESOP, the most feasible, if not the only, way the pilots could acquire the airline. Moreover, the company had sought consistently to erect defenses to moves by other groups seeking to acquire it.
United management really had no incentive to resist the clauses — it valued their economic cost to the company at zero. We reject the claim that accession to IAM's demands for covenants to protect IAM members was required to avoid a strike. The primary focuses of bargaining were economic issues: protection of wages, benefits and job security in the event ownership changed. Such change could have been achieved in many ways without the reopener and ESOP clauses. There is no direct proof of United management's intent to stop the pilots' proposal with the IAM contract after Allegis changed its management, but the management change did not alter its policies regarding the pilots' proposal. Nor is it credible to assert that new management was unaware of the origin and purpose of the clauses in question and of the milieu in which they arose. Careful consideration of testimony and other record evidence here leads to the conclusion that United did not resist the IAM's proposals and agreed to them for the purpose of defeating the pilots' proposal.
In so finding, it is neither our intent nor our place to pass moral judgments on conduct of the parties. Management may well be right to resist the pilots' proposals as unwise for the company. There is no specific evidence of management's intent to entrench itself. But that is not conclusive. Incumbent management may often have no incentive to resist union proposals for antitakeover provisions. And management may have less than admirable reasons for encouraging their adoption. In the worst case, management wishing to entrench itself may use the collective bargaining agreement and inflict damage upon shareholders in two ways: first, by agreeing to "poison pills" which reduce share price and, second, by giving the union an unnecessarily large economic settlement for its assistance with the "poison pills" which settlement reduces farther the share price. IAM acted with the purpose of protecting its members. The pilots' union (ALPA) itself has sought in bargaining with other airlines the adoption of anti-takeover or labor protective covenants for the protection of its members. ALPA brought this suit alleging that the ESOP clause violates the RLA, and that both clauses violate Delaware law.
We hold that we have jurisdiction to adjudicate the validity of the ESOP clause under the RLA (the reopener clause is not challenged under the RLA); and we conclude that, as drafted, the ESOP clause purports to govern the pilots' (and United's flight attendants') wages, benefits, and rates, and therefore violates the RLA. We find it unnecessary, however, to address plaintiff Cockrell's claims that the ESOP and reopener, clauses are illegal poison pills under Delaware law because they are preempted by the RLA.
1. ALPA is an unincorporated labor organization; it is the duly certified collective bargaining representative under the Railway Labor Act (RLA) for all airline pilots (captains, first officers and second officers) employed by defendant United. Under ALPA's Constitution and By-Laws, the United Pilots elect a Master Executive Council (UAL/MEC) to serve as their representative body within ALPA. The UAL/MEC maintains its headquarters in Rosemont, Illinois.
2. Plaintiff Jeffrey Buckley Cockrell is a United pilot and a member of ALPA. Since 1970, Cockrell has been a shareholder of United or of its parent company. At the time this suit was filed, Cockrell owned approximately 550-600 shares of Allegis Corporation common stock. (Cockrell, 15.)1
3. Defendant Allegis Corporation changed its name to UAL Corporation on May 26, 1988. As used herein, "Allegis" refers to Allegis Corporation, its predecessors, and its successor, UAL Corporation. Allegis is a corporation organized under the laws of Delaware with its principal place of business in Elk Grove Township, Illinois.
4. Defendant United, a wholly-owned subsidiary of Allegis, is an air carrier engaged in the business of providing air transportation service in interstate and foreign...
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Air Line Pilots Ass'n, Intern. v. UAL Corp., Intern. Ass'n of Machinists & Aerospace Workers
...B(1)(b) and C as violations of Delaware corporation law. The district judge rendered judgment after a two-day bench trial. See 699 F.Supp. 1309 (N.D.Ill.1988). He held, first, that the dispute between the pilots on the one hand and United and the machinists' union on the other was a major r......
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Air Line Pilots Ass'n, Intern. v. UAL Corp.
...to both provisions of the collective bargaining agreement, and further that Section C of the agreement violated the Act. 699 F.Supp. 1309, 1330-34 (N.D.Ill.1988). Since the pilots had not challenged Section B(1)(b) as a violation of the Railway Labor Act, but only as a violation of Delaware......
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Air Line Pilots Ass'n, Intern. v. UAL Corp.
...C violated the RLA, but we did not decide the Delaware law issues, as we believed that federal law preempted state takeover law. 699 F.Supp. 1309 (N.D.Ill.1988). The court of appeals found that section C did violate the RLA, but remanded the case for us to decide the Delaware law issues. 87......