So by now, you’ve probably heard of the tale of the Rabbi versus Northwest Airlines. Northwest, Inc., et al. v. Ginsberg, 572 U.S. ___, (2013) (slip op.). Rabbi Ginsberg lives in Minneapolis. Travels often on Northwest Airlines, as the airline has a hub in Minneapolis. Ginsberg travels often enough on Northwest Airlines that he achieves the coveted status of “Platinum Elite” in Northwest’s frequent flyer program. Then Ginsberg begins to complain. Often. Like 24 times between December 3, 2007 and June 2008. Including 9 times because–and you can’t make this up–his luggage arrived “late” to the baggage carousel. So Northwest, after providing compensation of $1,925.00 in travel credit vouchers, 78,500 frequent flyer miles, a voucher extension for his son, and $491.00 in cash reimbursements, revoked his “Platinum Elite” status. Ginsberg sues and, critically for this post, alleges violations of the implied covenant of good faith and fair dealing.
The Supreme Court, in a unanimous opinion authored by Justice Alito, concluded that the Airline Deregulation Act of 1978, 49 U.S.C. section 41713, preempted Rabbi Ginsberg’s claims for violations of the covenant of good faith and fair dealing because Minnesota law both imposes a covenant of good faith and fair dealing into every contract and precludes the parties to that contract from waiving those obligations. Conversely, if a state imposes good faith and fair dealing but allows the parties to contract out of the implied covenant, the airline will need to specify in the contract that it does not incorporate the covenant.
In the field of franchise law, the breadth and extent to which the implied covenant of good faith and fair dealing applies often seems to be a murky issue. For example, in Pennsylvania, where my office is, the courts have sometimes generally and sometimes haltingly applied the concept, as found in section 205 of the Restatement (Second) of Contracts, to franchise contracts. In fact, the Pennsylvania case recognizing the covenant of good faith and fair dealing, Atlantic Richfield v. Razumic, arose in the context of a gasoline station franchise termination. In fact, in my experience, states seem to take special interest in applying good faith and fair dealing to franchise termination cases. While the Airline Deregulation Act, of course, has no application in the franchise world, the Supreme Court’s opinion at footnote 2 nevertheless provides a quick, helpful summary of those states that prevent and permit a party form waiving the obligations of good faith and fair dealing. In addition to Minnesota, the jurisdictions that prevent waiver are: Alabama, Alaska, Arizona, Connecticut, Delaware, the District of Columbia, Missouri, New York, and Wyoming. The states that allow parties to contract out of the duties imposed by the implied covenant are: California, Idaho, and South Dakota. Given that I have seen both franchisors and franchisees attempt to wield the implied covenant in litigation, the Supreme Court’s footnote in Northwest Airlines provides a helpful reference for everyone who drafts, litigates and interprets franchise contracts.
As for Rabbi Ginsberg, while I don’t think that the outcome would have been different given previous Supreme Court precedent on the preemption provisions of the Airline Deregulation Act, I do wonder whether this is a case where bad facts–24 complaints in 6 months–helped to make bad law. Further, it should be noted that Ginsberg did not appeal his straight breach of contract claim, a claim that is not preempted by the Airline Deregulation Act. Nonetheless, given that we are down to only three network airlines in the United States–even the named Defendant in the case, Northwest Airlines, has ceased to exist–and that many cities are dominated by one or two airlines at best, I do wonder whether the Court’s expressed faith that the “free market” will protect loyal frequent travelers from mistreatment is realistic.