Court Opinion

ID: 769538
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:01:31+00
Date Added: 2024-06-11T12:58:59.756694
License: Public Domain

219 F.3d 605 (7th Cir. 2000)
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.
No. 00-1110
In the  United States Court of Appeals  For the Seventh Circuit
Argued May 10, 2000Decided July 5, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern Division.  No. 97 C 4455--Elaine E. Bucklo, Judge.
Before Easterbrook, Ripple, and Rovner, Circuit  Judges.
Easterbrook, Circuit Judge.

1
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.

2
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.

3
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:

4
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.

5
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, 116 S.Ct. 2240 (Breyer, J., concurring), id., at 509-12, 116 S.Ct. 2240 (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.

6
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.

7
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).

8
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.

9
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

10
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.

11
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."

12
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.

13
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).)

14
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).

15
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