Frequent-Flier Suits Against Airlines OKd

Air travelers who are irked by changes in their frequent-flier programs won the right Wednesday to sue the carriers for reneging on a promised benefit.

In a 6-2 ruling, the Supreme Court said that the federal Airline Deregulation Act does not free the carriers from state lawsuits charging that they have breached a contract.

The surprise ruling is a substantial win, but not a final victory, for millions of airline passengers who say that they have been short-changed by new restrictions added after they had earned their miles.

The case now returns to a Chicago judge to determine whether American Airlines broke a legal commitment when it changed the terms of its frequent-flier program in 1988.

“We’re very pleased with the decision” allowing the damage claim to go forward, said Chicago attorney Michael B. Hyman, who filed suit on behalf of an estimated 4 million members of American’s AAdvantage program. “Under the law in Illinois and most other states, you can’t breach a contract retroactively,” he said.

A spokesman for American said it is “premature to speculate” whether the carrier will have to pay damages to several million passengers.

“American does not believe it has breached any contract with its AAdvantage members. We expressly reserved the right to change the program at any time,” said John Hotard, a company spokesman in Ft. Worth.

The ruling comes just as several carriers, including American, are making changes that make it harder for frequent fliers to earn free tickets.

On Jan. 1, USAir raised its required mileage level for earning a free ticket to 25,000 from 20,000. On Feb. 1, American, United and Continental will make the same change.

While those changes are not part of the current case, they could result in more damage claims against the airlines if the American passengers prevail.

In 1981, American started the first frequent-flier program to reward its best customers and the idea since has been adopted by all the major carriers. But seven years later, American announced several restrictions for travelers who sought to use their free tickets. The number of available seats was limited on most flights and some heavy travel days were “blacked out” entirely.

Club members contended that these unilateral changes lessened the value of their travel certificates and they filed a suit under Illinois law contending that the carrier had both breached a contract and committed a consumer fraud.

Until Wednesday, the airline industry had taken the position that it was shielded from any state damage suits because of the 1978 federal deregulation act that barred states from regulating the industry’s “rates, routes or services.”

The high court relied on that phrasing three years ago to throw out a suit brought by state officials who charged the carriers with misleading the public with ads touting cheap air fares.

That ruling, in Morales vs. TWA, appeared to foreclose most consumer suits because any damage claims, if successful, would conceivably affect the “rates” charged by the airlines.

But recently, the justices have backed away from the view that federal law preempts all state claims. Last year, they allowed a bumped passenger to go forward with a suit seeking damages.

In Wednesday’s ruling (American Airlines vs. Wolens, 93-1286), Justice Ruth Bader Ginsburg agreed that the states cannot regulate the airlines but said that “privately ordered obligations” are another matter.

A contract “simply holds parties to their agreement” and its enforcement in state court does not amount to state regulation of the carriers, she said. While her opinion allowed the contract claims to go forward, she said that claims involving the state consumer fraud law must be thrown out because they would allow state regulation of the airlines.

The high court left open for judges in Illinois to decide whether American’s bonus program amounts to a contract.

In the brochure promoting its AAdvantage program, American said that its “offers are subject to change without notice.” Lawyers for the passengers said that means the company can change the rules for the future but that it cannot “retroactively diminish the value of the credits” already earned by frequent fliers.

Justices Sandra Day O’Connor and Clarence Thomas dissented from the decision, while Justice Antonin Scalia, a frequent flier, did not participate in the case.

In other rulings issued Wednesday, the court:

* Gave national banks permission to sell annuities. In upholding the federal comptroller of the currency, the court gave a big victory to the banking industry and dealt a setback to insurers (Nationsbank of North Carolina vs. Variable Annuity Life, 93-1612).

* RELATED STORY: D4

More details in Business (D1).

* Allowed companies to enforce arbitration agreements and to block disputes from going to court. In a series of recent rulings, the court has said that those who sign an agreement to arbitrate disputes--sometimes, without being aware of it--must abide by that decision (Allied-Bruce Terminix vs. Dobson, 93-1001).

* Said that farmers can sell only a small quantity of seeds from specially bred plants. The justices upheld a 1970 law that was intended to protect the profits of those who develop novel plant varieties (Asgrow Seed vs. Winterboer, 92-2038).