Trans World Airlines v. American Coupon Exchange

• Decision Date: 24 March 1988
• Docket Number: No. CV 87-4478 AHS (Tx).,CV 87-4478 AHS (Tx).
• Parties: TRANS WORLD AIRLINES, INC. Plaintiff, v. AMERICAN COUPON EXCHANGE, INC., and Neil Weisman, Defendants. And Related Counterclaim.
• Court: U.S. District Court — Central District of California

682 F. Supp. 1476

TRANS WORLD AIRLINES, INC. Plaintiff, v. AMERICAN COUPON EXCHANGE, INC., and Neil Weisman, Defendants And Related Counterclaim.

No. CV 87-4478 AHS (Tx).

United States District Court, C.D. California.

March 24, 1988.

COPYRIGHT MATERIAL OMITTED

James M. Derr, Belcher, Henzie & Biegenzahn, Los Angeles, Cal., for plaintiff.

William B. Hanley, Behrens, Recht, Finley, Hanley & Holford, Santa Ana, Cal., for defendants.

OPINION ON ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND ORDER GRANTING CERTIFICATION FOR APPEAL

STOTLER, District Judge.

Plaintiff Trans World Airlines, Inc. ("TWA") filed a motion for summary judgment on the complaint and counterclaim in this matter on December 11, 1987. The Court heard this motion on January 4, 1988. By this Order, the Court grants in part and denies in part plaintiff's motion for summary judgment on the complaint, grants plaintiff's motion for summary judgment on the counterclaim, and issues its certification for appeal pursuant to 28 U.S.C. § 1292(b).

FACTS

TWA is a common carrier of passengers for hire. As an advertising promotion designed to encourage travel on TWA, increase revenues, and develop passenger loyalty, TWA instituted the Frequent Flyer Bonus Program ("FFB Program") in 1982. Under the FFB Program, a participating passenger is awarded credit for each mile flown on TWA or other designated airlines. Upon flying a specified number of miles, a passenger becomes entitled to certain awards in the form of free, discounted or upgraded travel.

The rules and regulations of the FFB Program specify the manner in which a qualified passenger may receive his or her award. These rules and regulations are published and filed as tariffs with the Department of Transportation pursuant to Part 221 of 14 C.F.R. A passenger qualified for an award must notify TWA in writing of that fact, and must notify TWA of the name in which the award certificate is to be issued. When TWA receives notification from the participating passenger, it will issue FFB award certificates in the name(s) of the person(s) designated by the participating passenger.

At the initiation of the FFB Program in 1982, the tariffs allowed the participating passenger to designate any party or parties to use the award in the FFB Program member's place. TWA amended the tariffs on November 16, 1983, effective January 15, 1984, to provide that FFB Program awards "are non-transferable, may not be bartered, sold, or assigned, and may be used only by the designated parties." TWA issued a further change on December 1, 1983, effective January 30, 1984, that TWA reserved the right to disqualify from participation in the FFB Program any person who violated eligibility, mileage accumulation, or other rules governing the FFB Program. Finally, TWA amended its tariffs on February 14, 1986, effective April 15, 1986, to provide that a FFB Program member may accept a Bonus Award for his or her own use, or designate a family member, legal dependent, or relative to use the award in the member's place. The tariff defined a "relative" as the participant's "spouse, parents, children, brothers and sisters, grandparents, grandchildren, aunts, uncles, nieces, nephews, first cousins and their spouses, or in-laws." TWA's tariff requires notice in writing of the designee's name and relationship to the participant. TWA specifies by the tariff that FFB awards are intended for the benefit of members and their families. Accordingly, the tariff effective from 1986 to the present provides that "certificates issued to other than the above, or those deemed to have been sold or bartered, are void."

Over the past few years, a secondary market for accumulated bonus miles has emerged. Defendant American Coupon Exchange, Inc. ("ACE") acts as broker, soliciting, purchasing and selling earned frequent-flyer travel rights, awards and certificates, including FFB Program awards. ACE has been in business since June, 1983. Currently, there are over 40 other coupon brokers in operation. Through advertisements in newspapers and travel magazines, ACE offers to purchase a FFB Program certificate from a participating FFB member qualified for an award, redeems the certificate, and sells the TWA airline ticket to another person at a price estimated at 30-70 percent of the cost of a full-fare ticket. ACE's advertisements solicit both persons qualified for travel awards who wish to sell those awards and those who wish to purchase tickets at a discounted rate. Although ACE contends that its brokering business is legal, it instructs ticket buyers to refrain from telling the airline where he or she purchased the ticket, and to tell the airline that he or she is a relative of the FFB Program member from whom the award was purchased.

Apparently TWA has been aware of this practice since 1983, and in response has changed the language of the rules and regulations of the FFB Program to prevent this brokering activity. TWA has also tried informally to discourage this activity by questioning the ticket-holder about his or her relationship to the FFB member, but for obvious reasons this practice has been largely unsuccessful. Because tariff changes and other attempts at monitoring have not curbed ACE's activities, TWA instituted this action.

PROCEDURAL BACKGROUND

TWA filed a complaint against ACE and its president and alleged alter ego Neil Weisman on July 7, 1987, alleging fraud and interference with business relations, and requesting damages, and declaratory and injunctive relief. This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332. Defendants (collectively "ACE") answered on July 28, 1987, and filed a counterclaim alleging violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2.

On August 28, 1987, TWA filed a motion to dismiss the counterclaim and strike certain affirmative defenses which also alleged antitrust violations. On September 4, 1987, plaintiff filed a motion for a preliminary injunction enjoining ACE from purchasing FFB certificates and from selling tickets on TWA based in whole or in part on brokered FFB certificates. Defendant ACE filed a motion for summary judgment on September 14, 1987, alleging that TWA's tariff restrictions were invalid as a matter of law.

The Court heard these motions on October 8, 1987 and granted TWA's motion to dismiss the counterclaim and to strike certain affirmative defenses, finding that ACE failed to allege that a conspiracy or agreement existed between TWA and any other business entity. ACE further failed to allege injury to market competition, and merely alleged injury to itself as a competitor. These allegations were insufficient to support a cause of action for violation of § 1 of the Sherman Act, 15 U.S.C. § 1. Regarding the alleged § 2 violation, the Court found that even assuming TWA operated a monopoly over FFB awards, it had advanced an unrefuted valid business reason for doing so and was therefore not in violation of 15 U.S.C. § 2. ACE's request for 30 days leave to amend the counterclaim was granted.

The Court denied TWA's motion for a preliminary injunction, finding that TWA was unsuccessful in demonstrating a threat of irreparable harm and establishing that damages would not fully compensate it for its loss of fares. Furthermore, TWA was unable to demonstrate that ACE's activities caused incalculable damage to TWA's goodwill.

The Court also denied defendant's motion for summary judgment. The Court took judicial notice of the tariffs in question, and found that ACE failed to set forth specific facts which indicated that TWA's tariffs were unenforceable as a matter of law.

On November 24, 1987 ACE filed a First Amended Counterclaim alleging antitrust violations and adding claims for interference with business relations and declaratory judgment. Plaintiff filed motions for summary judgment on both the complaint and the counterclaim on December 11, 1987, and the Court heard those motions on January 4, 1988.

SUMMARY JUDGMENT ON THE COMPLAINT

1. Validity of Tariffs

The issue at the core of each motion is the validity of TWA's tariffs. Prior to January 1, 1985, the Court could have referred this determination to the Civil Aeronautics Board ("CAB") for an advisory opinion. See 49 U.S.C.App. §§ 1373, 1551. Deregulation of the airline industry eliminated the CAB's authority to determine the reasonableness of tariffs, as well as the doctrine of primary jurisdiction. First Pennsylvania Bank v. Eastern Airlines, Inc., 731 F.2d 1113, 1120 (3d Cir.1984). Therefore, resort to an agency determination is unavailable. In any event, while courts gave substantial weight to the CAB's determinations, "the question whether a tariff is against public policy is ultimately a judicial question requiring the application of federal common law." Klicker v. Northest Airlines, Inc., 563 F.2d 1310, 1313 (9th Cir.1977).

TWA's tariffs are currently on file with the Department of Transportation, which assumed the role of the CAB in accepting or rejecting proffered tariffs. 49 U.S.C.App. § 1551(b). It is well settled that tariffs represent the conclusive and exclusive rights and liabilities between an airline and its passengers. United States v. Edwards, 602 F.2d 458, 462 (1st Cir. 1979). Courts reach this result by characterizing the tariffs as a binding contract between the airline and its passengers, or by treating them binding as a matter of law. Id. at 462 n. 2. Here, TWA's tariffs preclude passengers from transferring or assigning their FFB awards to anyone except a designated family member, and provide for membership cancellation of any passenger who violates that tariff. The parties agree that if the tariffs are valid in terms of public policy, they represent a binding agreement which would serve to bar the activities of ACE.

In its prior motion for summary judgment, ACE argued that the tariffs violated public policy to the extent they prevented assignment of a contract right...