United Airlines, Inc. v. Mesa Airlines, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1110
United Airlines, Inc.,
Plaintiff, Counterdefendant-Appellee,
v.
Mesa Airlines, Inc., and
WestAir Commuter Airlines, Inc.,
Defendants, Counterplaintiffs-Appellants,
v.
SkyWest Airlines, Inc.,
Third-Party Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 4455--Elaine E. Bucklo, Judge.
Argued May 10, 2000--Decided July 5, 2000
Before Easterbrook, Ripple, and Rovner, Circuit
Judges.
Easterbrook, Circuit Judge. Like other major air
carriers, United has entered into code-sharing
agreements with regional airlines, which fly
smaller planes for shorter distances to less-
populated destinations. The major carrier permits
the commuter carrier to use its service marks and
logos for flights to and from its hub airports,
and it lists the connecting flights in its
computer reservation system under its name,
carrier code, and flight numbers, such as "UA
2345" (hence the term "code-share," see 14 C.F.R.
sec.257(c)). The commuter carrier also receives
part of the revenue from through traffic that
uses both carriers’ facilities. In exchange, the
commuter carrier is subject to substantial
direction: it tailors its schedules so that they
mesh with the major carrier’s arrivals and
departures at the hub, provides planes
appropriate to the traffic generated by the major
carrier, and agrees to accept revenue that the
major carrier controls. (Contracts set the
percentage of through rates that the commuter
carrier receives, but the major carrier sets the
total fares, and thus determines the commuter
carriers’ revenues.) Major carriers could use
their discretion to make commuter carriers’
operations unprofitable, but that would hurt the
majors’ business by drying up local service and
driving passengers to other carriers that provide
better connecting flights. Market forces thus
constrain the exercise of contractual powers.
Mesa Airlines and WestAir Commuter Airlines, two
regional airlines that had code-share
arrangements with United, believe that courts as
well as markets should constrain the major
carriers’ conduct. Mesa conducted regional
operations to and from Denver, and WestAir to and
from Los Angeles, San Francisco, Portland, and
Seattle. Mesa acquired WestAir as a subsidiary in
1992. In 1995 United extended Mesa’s contractual
term for ten years and to additional cities; at
the same time, Mesa purchased a number of planes
from United. Mesa believes that by paying (in its
view, overpaying) for these aircraft it acquired
rights beyond those of other commuter carriers;
it contends that United became its "partner"
rather than simply the opposite party to an
arms’-length contract. Relations soured in June
1997 when United replaced WestAir with SkyWest
Airlines on eight routes out of Los Angeles.
After WestAir protested, United filed this suit
under the diversity jurisdiction seeking a
declaratory judgment that the WestAir-United
contract permitted United to make these changes.
WestAir abandoned its remaining commuter routes
in May 1998. Meanwhile Mesa and United reached
impasse on financial arrangements at Denver. Mesa
contended that United was keeping for itself too
much of the revenues on through routes and
charging excessively for space and baggage-
handling services at Denver International
Airport, which opened early in 1995. Mesa
contends that it began to incur losses of $1
million per month, to which it responded by
eliminating service to some local markets. United
insisted that Mesa serve all regional markets to
which it had exclusive rights under the extended
agreement; after Mesa refused, United terminated
the agreement in January 1998 and amended its
suit by seeking a declaratory judgment that this
step, too, was proper, and damages for Mesa’s
breach.
Mesa and WestAir filed counterclaims against
United and added SkyWest as a third-party
defendant. They seek damages on four theories.
First, Mesa and WestAir contend that United broke
its contracts; these claims are mirror images of
United’s. Second, Mesa and WestAir contend that
SkyWest is liable for tortiously interfering with
the contract between United and WestAir at Los
Angeles. They contend that SkyWest inveigled
United to switch regional carriers by offering
two gates at Los Angeles International Airport--
gates that United coveted, an offer that WestAir
could not match. Third, Mesa and WestAir allege
that United violated the fiduciary duties that it
owed them as their partner. Fourth, Mesa contends
that United fraudulently induced it to purchase
the airplanes and enter into the extension.
Claims 2, 3, and 4 seek punitive as well as
compensatory damages. United and SkyWest
prevailed on the pleadings after the district
court concluded that these three claims are
preempted by sec.105(a)(1) of the Airline
Deregulation Act of 1978. As recodified in 1994,
this statute reads:
Except as provided in this subsection, a State,
political subdivision of a State, or political
authority of at least 2 States may not enact or
enforce a law, regulation, or other provision
having the force and effect of law related to a
price, route, or service of an air carrier that
may provide air transportation under this
subpart.
49 U.S.C. sec.41713(b)(1). State common law
counts as an "other provision having the force
and effect of law" for purposes of this statute.
See American Airlines, Inc. v. Wolens, 513 U.S.
219, 233 n.8 (1995); Morales v. Trans World
Airlines, Inc., 504 U.S. 374, 388 (1992). See
also Medtronic, Inc. v. Lohr, 518 U.S. 470, 502-
03 (1996) (plurality opinion), id. at 503-05(Breyer, J., concurring), id., at 509-12(O’Connor, J., concurring in part and dissenting
in part) (characterizing tort remedies as
regulatory provisions for purposes of preemption
clauses in another statute). A broad clause
saving common-law remedies might overcome the
understanding that judgments in tort suits should
be treated like state laws and regulations to the
extent they have the same practical effect as
laws and regulations, see Geier v. American Honda
Motor Co., 120 S. Ct. 1913, 1918 (2000); cf.
Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 249-
56 (1984); but the savings clause in the Airline
Deregulation Act says only that "[a] remedy under
this part is in addition to any other remedies
provided by law." 49 U.S.C. sec.40120(c). This
does not carve any domain from the scope of
sec.105(a)(1). The district court concluded that
all three tort claims relate to an air carrier’s
routes--they concern which carriers fly to which
destinations from which airports, and which
carriers provide service (and at what rates) on
through or joint routes--and therefore are
preempted. See Travel All Over the World, Inc. v.
Saudi Arabia, 73 F.3d 1423, 1430-35 (7th Cir.
1996). The district judge certified the order for
interlocutory appeal under 28 U.S.C. sec.1292(b).
We agreed to hear the appeal; proceedings on both
sides’ contract claims (which under Wolens are
not preempted) have stalled pending its
resolution.
One line of argument might have been that
although the claims at issue may be "related to
a . . . route . . . of an air carrier" in
interstate commerce, Mesa and WestAir do not rely
on any "law, regulation, or other provision
having the force and effect of law related to a
. . . route . . . of an air carrier" (emphasis
added). Section 105(a)(1) might have been read to
limit preemption to a law, regulation, or common-
law doctrine directed to the air transportation
industry, as in Morales, which held that
sec.105(a)(1) precludes efforts by state
attorneys general to promulgate a special code of
conduct for advertisements by air carriers. On
this understanding, laws of general applicability
would not be preempted just because the subject
of a particular case was air transportation. Tort
law is not industry-specific; Mesa and WestAir
want to use the same principles that apply to
disputes about computer software, see J.D.
Edwards & Co. v. Podany, 168 F.3d 1020 (7th Cir.
1999) (Illinois law), and employment, see Farr v.
Gruber, 950 F.2d 399 (7th Cir. 1991) (Wisconsin
law). Wolens read sec.105(a)(1) more broadly,
however. Participants in a carrier’s frequent
flyer program filed suit when the carrier changed
the program’s rules. One claim arose under a
state’s consumer fraud act, a statute of general
applicability. Nonetheless, the Court held,
sec.105(a)(1) preempts application of that law to
frequent flyer programs, which affect rates
because they are discounts. 513 U.S. at 226-28.
Because Wolens held general consumer-fraud law
preempted, Mesa and WestAir have a big problem.
One solution, as they see it, lies in recent
decisions under ERISA, which preempts state laws
that "relate to" its subject. Both Morales and
Wolens relied on doctrine developed under ERISA,
and at the time the Court’s opinions tended to
read the ERISA language broadly. E.g., Morales, 504
U.S. at 383-84, relying on Shaw v. Delta Air
Lines, Inc., 463 U.S. 85 (1983). Times have
changed for pension and welfare plans. More
recent decisions hold that state laws of general
applicability are not preempted just because they
have economic effects on pension or welfare
plans. See, e.g., New York State Conference of
Blue Cross & Blue Shield Plans v. Travelers
Insurance Co., 514 U.S. 645 (1995); California
Division of Labor Standards Enforcement v.
Dillingham Construction, N.A., Inc., 519 U.S. 316(1997); De Buono v. NYSA-ILA Medical and Clinical
Services Fund, 520 U.S. 806 (1997). Mesa and
WestAir ask us to follow this approach and
curtail the preemptive effect of sec.105(a)(1)
accordingly. But if developments in pension law
have undercut holdings in air-transportation law,
it is for the Supreme Court itself to make the
adjustment. Our marching orders are clear: follow
decisions until the Supreme Court overrules them.
State Oil Co. v. Khan, 522 U.S. 3, 20 (1997);
Rodriguez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477, 484 (1989).
Opinions such as Taj Mahal Travel, Inc. v.
Delta Airlines Inc., 164 F.3d 186, 195 (3d Cir.
1998), which say that state law is preempted by
sec.105(a)(1) only if it "frustrate[s]
Congressional intent [or] impose[s] a state
utility-like regulation on the airlines", cannot
be reconciled with Wolens (the general anti-fraud
statute held preempted there was a long distance
from "utility-like regulation"), and we doubt
that this position could be justified by the
latest ERISA cases, even if we were free (which we
are not) to prefer decisions such as De Buono and
Dillingham over Wolens and Morales. One subject
of UNUM Life Insurance Co. v. Ward, 526 U.S. 358(1999), the Court’s most recent encounter with
preemption under ERISA, was whether a general
doctrine of state agency law could be used to
override the express terms of a welfare-benefit
plan. The Court answered "no," see 526 U.S. at
377-79, and this conclusion, like Wolens,
necessarily means that a claim under, or
application of, state law may be preempted as
related to the federal topic, even though the
rule in question does not single out pension or
welfare plans--or air carriers’ rates, routes, or
services. Our opinion in Travel All Over the
World used the approach established by Wolens and
Morales, concluding that a claim is preempted if
either the state rule expressly refers to air
carriers’ rates, routes, or services, or
application of the state’s rule would have "a
significant economic effect upon them" (73 F.3d
at 1432); nothing any other circuit has said
about the subject persuades us to alter course.
The possibility that recent ERISA decisions would
lead us to abandon Travel All Over the World and
follow Taj Mahal Travel (which declined to follow
this circuit’s position, see 164 F.3d at 193-95)
is what induced the district court to certify its
order for interlocutory appeal. But an appeal
under sec.1292(b) brings up the whole certified
order, Yamaha Motor Corp. v. Calhoun, 516 U.S.
199, 204-05 (1996); Edwardsville National Bank &
Trust Co. v. Marion Laboratories, Inc., 808 F.2d
648, 650-51 (7th Cir. 1987), rather than just the
legal issue that led to certification. Thus we
must tackle the regional carriers’ contention
that their claims are sound, despite Travel All
Over the World, for the same reason the Supreme
Court held in Wolens that contract claims are not
preempted: sec.105(a)(1) is designed to replace
regulation with voluntary agreements, see 513
U.S. at 228-35, and the fact that states
sometimes apply the label "tort" to common-law
doctrines that implement private agreements
cannot doom their claims, the carriers insist.
This is unimpeachable as a principle, but does it
save these carriers’ claims? Wolens tells us to
distinguish
between what the State dictates and what the
airline itself undertakes[, which] confines
courts . . . to the parties’ bargain, with no
enlargement or enhancement based on state laws or
policies external to the agreement.
513 U.S. at 233 (footnote omitted). It is awfully
hard to understand the regional carriers’ claims
as efforts to enforce "the parties’ bargain, with
no enlargement or enhancement based on state laws
or policies external to the agreement."
Let us start with Mesa’s contention that its
purchase of aircraft, and the extension of its
code-sharing agreement with United at Denver, are
the result of fraudulent inducement. This is not
by any stretch of the imagination a request to
enforce the parties’ bargains; it is a plea for
the court to replace those bargains with
something else. Doubtless the institution of
contract depends on truthfulness; the staunchest
defenders of private institutions and limited
government believe that public bodies must
enforce rules against force and fraud. E.g.,
Richard A. Epstein, Principles for a Free Society
82-85 (1998). When all a state does is use these
rules to determine whether agreement was reached,
or whether instead one party acted under duress,
it transgresses no federal rule. But when the
state begins to change the parties’ financial
arrangements, as Mesa demands, it is supplying
external norms, a process that the national
government has reserved to itself in the air
transportation business. Mesa does not want to
cancel the agreement and restore the status quo
as of 1994. It wants damages. Wolens held that
sec.105(a)(1) preempts state anti-fraud statutes
as applied to air carriers’ rates, routes, and
services, 513 U.S. at 227-28; just so with
common-law rules against fraudulent inducement,
which differs from a contention that one party
knuckled under to a show of force by the other.
And as in Wolens this conclusion does not leave
regional air carriers at the mercy of
unscrupulous major carriers (or the reverse); the
Secretary of Transportation has been charged with
investigating claims of deceit in the air
transportation business and has the power to
issue remedial orders (including monetary
penalties) against air carriers that resort to
fraudulent practices. 49 U.S.C. sec.sec. 41712,
46301; Wolens, 513 U.S. at 228 n.4; Morales, 504
U.S. at 379, 390-91.
Next consider the contention of both Mesa and
WestAir that fiduciary principles drawn from
partnership law should be applied. Partnership is
contractual; partners can and do specify their
relations in detail, and the norms of partnership
law are just background rules that cover a
subject when contracts do not. In this sense
partnership and fiduciary rules are a part of
contract law, cf. John H. Langbein, The
Contractarian Basis of the Law of Trusts, 105
Yale L.J. 625 (1995). But Mesa and WestAir assert
that the law of partnerships imposes on United
duties that override the contract. For example,
United contends that its contracts permit it to
regulate the destinations and flight frequency of
the code-share regional carriers; Mesa and
WestAir deny this, and if they are right then
they will prevail under their contracts. But they
contend (under their partnership theory) that
they prevail even if United had the contractual
power to do what it did. According to Mesa and
WestAir, United had a fiduciary obligation to use
its contractual powers for their economic
benefit, rather than for its own, and that they
are entitled to punitive damages because (in the
language of their brief) United attempted "to
terminate Mesa’s rights and interests in the
Partner Agreement for its own benefit and to
Mesa’s detriment". Illinois permits one party to
a contract to use for its own benefit the rights
and powers it has negotiated. See L.A.P.D., Inc.
v. General Electric Corp., 132 F.3d 402 (7th Cir.
1997); Echo, Inc. v. Whitson Co., 121 F.3d 1099(7th Cir. 1997); Digital Equipment Corp. v. Uniq
Digital Technologies, Inc., 73 F.3d 756 (7th Cir.
1996); Industrial Representatives, Inc. v. CP
Clare Corp., 74 F.3d 128 (7th Cir. 1996);
Continental Bank, N.A. v. Everett, 964 F.2d 701(7th Cir. 1992); Jespersen v. Minnesota Mining &
Mfg. Co., 183 Ill. 2d 290, 700 N.E.2d 1014(1998); Hentze v. Unverfehrt, 237 Ill. App. 3d
606, 610-11, 604 N.E.2d 536, 539 (5th Dist.
1992). Only rules external to the parties’
bargain could defeat this, but sec.105(a)(1) in
turn defeats external rules. (We are skeptical
that the word "partner" on the cover sheet of a
complex contract that characterizes the regional
carriers as "independent contractors" would bring
the law of partnership into play in the first
place. Businesses often refer to suppliers,
customers, and producers of complementary
products coloquially as "our partners" without
summoning up fiduciary duties. See Vaughn v.
General Foods Corp., 797 F.2d 1403 (7th Cir.
1986). A consumer who sees the advertising slogan
"Partners in Progress" would not assume that he
had become a "partner" of the producer, which
then must set prices for the consumer’s benefit.
But we need not pursue this point, given
sec.105(a)(1).)
Finally, consider the claim that SkyWest
tortiously interfered with the contract WestAir
had with United. Here, too, Mesa and WestAir rely
on principles outside the parties’ agreements--
for they have reached no agreement at all with
SkyWest. Why can’t SkyWest offer United gates at
Los Angeles International Airport in exchange for
some code-share business at LAX? That question
can’t be answered by reference to a contract
between SkyWest and any other party to the case.
Even the appearance of a link between the claim
against SkyWest and the contract claim against
United may be illusory, because most states
(including Illinois) treat as tortious some
interferences with prospective economic
advantage, even if the interference does not
cause anyone to break a promise. Suppose, for
example, that United’s contract with WestAir
contained a clause entitling United to end the
business relation for any or no reason. Then
WestAir could not sue United--but it still could
prevail in tort against SkyWest, if the sort of
inducement SkyWest offered, or the motive for
SkyWest’s action, ran afoul of a state’s public
policy. See, e.g., J.D. Edwards, supra; Jeppesen
v. Rust, 8 F.3d 1235 (7th Cir. 1993); Poulos v.
Lutheran Social Services of Illinois, Inc., 728
N.E.2d 547 (Ill. App. 1st Dist. 2000); Strosberg
v. Brauvin Realty Services, Inc., 295 Ill. App.
3d 17, 33, 691 N.E.2d 834, 845 (1st Dist. 1998);
Reuben H. Donnelley Corp. v. Brauer, 275 Ill.
App. 3d 300, 312-13, 655 N.E.2d 1162, 1172 (1st
Dist. 1995). No surprise, then, that courts
regularly treat claims of tortious interference
with contract (or interference with economic
advantage) as preempted in labor law, given how
readily these claims may be used to get around
contracts (or limits on the means of enforcing
contracts). See, e.g., Lingle v. Norge Division
of Magic Chef, Inc., 823 F.2d 1031, 1047, 1049
(7th Cir. 1987) (en banc), reversed on other
grounds, 486 U.S. 399 (1988); Kimbro v. Pepsico,
Inc., No. 99-2823 (7th Cir. June 2, 2000).
Likewise they are preempted when they would have
a significant effect on air carriers’ rates,
routes, or services--as these claims, which are
all about WestAir’s (and SkyWest’s) routes and
divisions of revenues, assuredly do whether or
not they would lead to punitive damages. Cf.
Speakers of Sport, Inc. v. ProServ, Inc., 178
F.3d 862 (7th Cir. 1999) (illustrating how the
tort of interference with economic advantage may
be used to suppress competition, which would
undercut the Airline Deregulation Act of 1978).
Mesa and WestAir protest that none of their
claims offends the goals and policies that
Congress likely aimed at in 1978. One could have
said the same (indeed, Justice Stevens did say
the same) about the regulations and statutes held
preempted in Morales and Wolens. But Justice
Stevens was in dissent; the majority concluded
that the statute applies according to its text,
rather than according to goals and motives
imputed to legislators. For what it may be worth,
however, we are inclined to think that allowing
these claims to proceed could gum up the works.
Mesa offered service to multiple states from
Denver, service United used to construct through
rates and routes for travel across many
jurisdictions. So too for regional service out of
Los Angeles, which reached Oregon and Washington,
and affected through travel to and from other
states and nations. Yet Mesa and WestAir want us
to hold that the tort law of Illinois determines
(for example) what inducements SkyWest may offer
United to reassign routes among regional carriers
in the southwest, and how much Mesa should
receive for its portion of through rates on
service from Miami through Denver to Jackson,
Wyoming. Illinois is United’s headquarters, and
the parties agreed that their contracts would be
interpreted under Illinois law, but as a source
of tort law Illinois has no plausible claim--and
for that matter no other state has much of a
claim either. Basic rules for inter-carrier
transactions may come from voluntary agreements
or from the Department of Transportation;
applying the conflicting tort principles of 50
different states to these interstate and
international transactions would make a mess of
things. Preemption under sec.105(a)(1) enables a
system of private law, with nationally uniform
overrides, to flourish.
Affirmed