BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF HEARINGS WASHINGTON, DC ______) Department of Transportation, ) ) Complainant ) ) v. ) Docket DOT-OST-2021-0073 ) Air Canada ) ) Respondent ) ______)

AIR CANADA’S MOTION TO DISMISS THE ENFORCEMENT COMPLAINT AND MEMORANDUM IN SUPPORT

Communications with respect to this document should be addressed to:

Evelyn D. Sahr Charles A. Zdebski Mark A. Johnston Drew M. Derco ECKERT SEAMANS CHERIN & MELLOTT, LLC 1717 Pennsylvania Avenue NW Suite 1200 Washington, D.C. 20006 202-659-6622 [email protected] [email protected] [email protected] [email protected]

Counsel for Air Canada

June 30, 2021

TABLE OF CONTENTS

Page

I. INTRODUCTION AND SUMMARY ...... 1 II. BACKGROUND ...... 2 III. LEGAL STANDARDS ...... 7 A. The Legal Standard Applicable to a Motion to Dismiss ...... 7 B. The Legal Standard for Establishing Unfair Trade Practices ...... 8 IV. FACTUAL ALLEGATIONS PLED IN THE COMPLAINT ...... 9 V. ARGUMENT ...... 10 A. The Department Has Exceeded its Authority Under the Administrative Procedure Act by Improperly Relying Upon Non-Binding Guidance Documents in Seeking a Penalty Against Air Canada...... 11 1. Guidance Documents Do Not Have the Force or Effect of Law...... 12 2. The Department Cannot Use the Preamble Language of the 2011 Enhancing Passenger Protections Rulemaking to Alter the Plain Language of 14 C.F.R. § 259.5, Which Does Not Require a Cash Refund...... 15 3. The Department’s Arbitrary Conduct is Underscored by the Department’s Recent Publication of a Notice and Comment Rulemaking to Address the Form of Refunds Under These Circumstances...... 17 B. Air Canada’s Contractual Refund Policy was Consistent with Air Canada’s Conditions of Carriage, Tariff, and All Applicable Fare Rules...... 20 C. The Enforcement Complaint Fails to Allege Sufficient Facts to Establish a Violation of § 41712...... 24 D. Air Canada’s Contractual Refund Policy Did Not Cause and Was Not Likely to Cause Substantial Harm That Could Not Be Reasonably Avoided; Alternatively, Any Alleged Harm Was Outweighed by Countervailing Benefits to Consumers or to Competition...... 27 1. Air Canada’s Contractual Refund Policy Did Not Cause and Was Not Likely to Cause Substantial Harm That Could Not Reasonably be Avoided...... 27 2. Any Alleged Harm Was Outweighed by the Countervailing Benefits to Consumers and Competition that Air Canada’s Contractual Refund Policy Produced...... 30 VI. CONCLUSION ...... 38

i TABLE OF AUTHORITIES

Cases Am. Fin. Services Ass’n v. F.T.C., 767 F.2d 957 (D.C. Cir. 1985) ...... 8, 25 Appalachian Power Co. v. E.P.A., 208 F.3d 1015 (D.C. Cir. 2000) ...... 13, 14, 20 Arif Naqvi v. Saudi Arabian , Inc., 123 F. Supp. 3d 129 (D.D.C. 2016) ...... 14 Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) ...... 7, 8 Association of American Railroads v. Costle, 562 F.2d 1310 (D.C. Cir. 1977) ...... 17 Brunwasser v. Trans World Airlines, Inc., 541 F. Supp. 1338 (W.D. Pa. 1982) ...... 14 Christopher v. SmithKline Beecham Corp., 567 U.S. 142 (2012) ...... 18, 20 Clemente v. Philippine Airlines, 614 F. Supp. 1196 (S.D.N.Y. 1985) ...... 14 CSI Aviation Services, Inc. v. U.S. Dept. of Transp., 637 F.3d 408 (D.C. Cir. 2011) ...... 13, 14, 20 Edem v. Ethiopian Airlines Enter., No. 08 CV 2597 RJD LB, 2009 WL 4639393 (E.D.N.Y. Sept. 30, 2009) ...... 14 ExxonMobil Pipeline Co. v. U.S. Dept. of Transportation, 867 F.3d 564 (5th Cir. 2017) ...... 18, 20 FTC v. Amzon.com, Inc., 2016 U.S. LEXIS 55569 (W.D. Wash. April 26, 2016) ...... 25, 30 FTC v. Wyndham Worldwide Corp., 10 F. Supp. 3d 602, 2014 U.S. Dist. LEXIS 47622 (D.N.J. April 7, 2014)...... 7 Gates & Fox Co. v. OSHRC, 790 F.2d 154 (D.C. 1986) ...... 20 Gen. Elec. Co. v. U.S. E.P.A., 53 F.3d 1324 (D.C. Cir. 1995) ...... 18, 19, 20 In re Transpacific Passenger Air Transp. Antitrust Litig., 69 F. Supp. 3d 940 (N.D. Cal. 2014) ...... 22-23 Malleus v. George, 641 F.3d 560 (3d Cir. 2011)...... 8 Morales v. TransWorld Airlines, Inc., 504 U.S. 374, 378……………………………………….16 Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 103 S. Ct. 2856, 77 L. Ed. 2d 443 (1983) ...... 26 Perez v. Mortg. Bankers Ass’n, 575 U.S. 92 (2015) ...... 12-13 Petition for Rulemaking and Third-Party Complaint of Donald L. Pevsner, Esq., DOT-OST- 2012-0109, Order 2012-11-4 at 9 (Nov. 6, 2012) ...... 11, 14, 17, 21, 28, 29, 34 Petition for Rulemaking of Joel Kaufman, DOT-OST-2003-14334, Order 2003-3-11 (Mar. 18, 2003) ...... 14, 29, 34

ii Third Party Complaint of Benjamin Edelman v. American Airlines, Inc., DOT-OST- 2013-0213, Order, 2016-12-12 at 12 (Dec. 14, 2016) ...... 8, 14 Republic Airline Inc., 669 F.3d 296, 302 (D.C. Cir. 2012) ...... 20 Seisay v. Compagnie Nationale Air France, No. 95 CIV. 7660(JFK), 1997 WL 431084 (S.D.N.Y. July 30, 1997) ...... 14

Spirit Airlines, Inc., 2021 U.S. App. LEXIS 15144, at *2, 997 F.3d 1247 (D.C. Cir. May 21, 2021) ...... 20 U.S. Telecom Ass’n v. F.C.C., 400 F.3d 29 (D.C. Cir. 2005) ...... 20 Wyoming Outdoor Council v. United States Forest Serv., 165 F.3d 43 (D.C. Cir. 1999) ...... 17 Statutory Authorities 15 U.S.C. § 45(n) ...... 8 49 U.S.C. § 41712 ...... passim 49 U.S.C. § 40101(a)(6) ...... 16 49 U.S.C. § 41504 ...... 22 Administrative Procedure Act (“APA”), 5 U.S.C. § 551 et seq...... 11 Rules and Regulations 14 CFR § 221.110 ...... 23 14 C.F.R. § 244 ...... 15, 16 14 CFR § 259.5 ...... passim 14 C.F.R. § 302.11 ...... 1 14 C.F.R. § 302.4(b) ...... 9 14 C.F.R. § 302.411……………………………………………………………………………….1 14 C.F.R. § 302.411(a) ...... 7 14 CFR § 399.79 ...... 24 14 C.F.R. § 399 ...... 8, 24 14 C.F.R. § 399.79(b) ...... 9, 20, 25 14 CFR 399.79(e)(2) ...... 25 Department of Transportation, Office of the Secretry, Administrative Rulemaking, Guidance, and Enforcement Procedures; Final Rule, 84 Fed. Reg. 71,714 at 71,727 (Dec. 27, 2019), subsequently revoked effective May 3, 2021 at 86 Fed. Reg. 17,292 (April 2, 2021) ..11, 12, 18 Department of Transportation, Office of the Secretary, Defining Unfair or Deceptive Practices, 85 Fed. Reg. 78,707 (Dec. 7, 2020) (codified at 14 C.F.R. Pt. 399) ...... 8, 24 Department of Transportation, Office of the Secretary, Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110 (April 25, 2011) (codified at 14 C.F.R. Pts. 244, 250, 253, 259, 399)……………………………………..15, 16 Docket DOT-OST-2019-0182, Notice of Proposed Rulemaking – Defining Unfair or Deceptive Practices, (Feb. 20, 2020); 85 Fed. Reg. 11,881 (Feb. 28, 2020) ...... 24 U.S. Customs and Border Protection, Notification of Temporary Restrictions Applicable to Land Ports of Entry and Ferries Service Between the United States and Canada, 85 Fed. Reg. 16,548 (Mar. 24, 2020) ...... 3

iii Additional Authorities

ACCredit, eCoupons and Travel Vouchers, https://www.aircanada.com/us/en/aco/home/fly/customer-support/electronic-and- paper-travel-vouchers.html ...... 6 Air Canada Conditions of Carriage, “In the event of an extended delay or a cancellation,” Section 2, https://www.aircanada.com/ca/en/aco/home/legal/conditions-carriage-tariffs.html ...... 21 Air Canada, International Tariff, General Rules Applicable to the Transportation of Passengers and , ATPCO AC-2, issued ------[May 28, 2019, December 18, 2018, January 6, 2020, June 3, 2020, June 24, 2020, May 12, 2020, May 19, 2020; Aug 11/Aug 18/Sep 16 2020] ...... 21-22 Consumer Report, U.S. DOT, May and June 2021 ...... 27 Business and the Path to Recovery, https://aci.aero/news/2021/03/25/the-impact- of-covid-19-on-the-airport-business-and-the-path-to-recovery/ (March 25, 2021) ...... 31, 32 Council International, The Impact of COVID-19 on the Airport Business and the Path to Recovery (March 25, 2021), https://aci.aero/news/2021/03/25/the-impact-of-covid-19-on-the- airport-business-and-the-path-to-recovery/ ...... 31 Aviation Daily, The Daily Memo: Will Canadian Airlines Face Another Lost Summer? (May 31, 2021) ...... 34 Ben Goldstein, The Case Against Extending the U.S. Payroll Support Program, The Daily Memo, Aviation Daily (August 25, 2020) ...... 36 CBC, Air Canada cuts 1,500 more jobs and cancels 17 more routes (Feb. 9, 2021), https://www.cbc.ca/news/business/air-canada-jobs-1.5906896 ...... 35 CBC, Air Canada cuts all service in Labrador, St. John’s to Toronto route axed (Jan. 12, 2021), https://www.cbc.ca/news/canada/newfoundland-labrador/air-canada-three-flights-cut- 1.5870725...... 35 CTA, Statement on Vouchers, https://otc-cta.gc.ca/eng/statement-vouchers (March 25, 2020) ...23 DOT Memorandum for Secretarial Officers and Heads of Operating Administration (Feb. 15, 2019), https://cms7.dot.gov/file/97456/download?token=b0NEy-nH ...... 13 “Enforcement Notice Regarding Refunds by Carriers Given the Unprecedented Impact of the COVID-19 Public Health Emergency on Air Travel” dated April 3, 2020 https://www.transportation.gov/airconsumer/enforcement_notice_refunds_apr_3_2020 ...... 12 “Frequently Asked Questions Regarding Refunds Given the Unprecedented Impact of the COVID-19 Public Health Emergency on Air Travel” https://www.transportation.gov/briefing-room/frequently-asked-questions-regarding-airline- ticket-refunds-given-unprecedented ...... 12, 15 Garrow, L. Lurkin, V. How COVID-19 is impacting and reshaping the airline industry, J Revenue Pricing Manag 20, 3–9 (2021) ...... 31 “Get Your Refund Started,” https://www.aircanada.com/refundrequest/?lang=en-CA ...... 7 Guidance material for air operators managing travelers during the check-in procedure at transborder (U.S.) airports, TRANSPORT CANADA (June 6, 2020), https://web.archive.org/web/20200606004032if_/https://www2.tc.gc.ca/en/initiatives/covid- 19-measures-updates-guidance-tc/covid-19-guidance-material-air-carriers-managing- travellers-check-in-procedure-transborder-us-airports.html ...... 3 IATA Advisory Council Chairs: Coordination Meeting (June 1, 2021) ...... 31

iv ICAO’s June 9, 2021 Presentation in Montréal, Canada: Effects of Novel Coronavirus (COVID‐ 19) on : Economic Impact Analysis ...... 33 Industry Letter dated July 15, 1996……………………………………………………………...15 International Air Transport Association [IATA], 2020 Worst Year in History for Air Travel Demand, News release, 3 February 2021) ...... 35 Kevin M. Stack, Preambles as Guidance, 84 Geo. Wash. L. Rev. 1252 (Sep. 2016) ...... 17 Margaret Taylor, Aviation: sector experiences ‘worst year in history’, International Bar Association (Apr. 22, 2021), https://www.ibanet.org/article/6B58FF2E-7DD6-4883-B89B- CBC6AF5E8CC0 (last visited June 15, 2021) ...... 21, 33 Markey and Blumenthal Letters dated May 10, 2021 ...... 27 Markey and Blumenthal Letter to Secretary of Transportation Pete Buttigieg dated June 30, 2021 ...... 27 Mem. From Associate Attorney General, U.S. Dept. of Justice, “Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases”, available at http://src.bna.com/vY4 (Jan. 25, 2018) ...... 13 Minimizing the Risk of Exposure to COVID-19 in Canada Order (Prohibition of Entry into Canada from the United States), GOVERNMENT OF CANADA (Mar. 20, 2020), https://orders-in- council.canada.ca/attachment.php?attach=38958&lang=en; COVID-19 ...... 2 News Release, Air Canada Reports 2020 Annual Results (Feb. 12, 2021) https://aircanada.mediaroom.com/2021-02-12-Air-Canada-Reports-2020-Annual- Results...... 33 News Release, Air Canada to Offer Refunds for All Fares for Flights Affected by COVID-19 since February 1, 2020 (April 13, 2021), https://aircanada.mediaroom.com/2021-04-13-Air- Canada-to-Offer-Refunds-for-All-Fares-for-Flights-Affected-by-COVID-19-since-February-1- 2020……………………………………………………………………………………………..6 News Release, Air Canada to Temporarily Suspend Transborder U.S. Flights, (April 21, 2020), https://aircanada.mediaroom.com/2020-04-21-Air-Canada-to-Temporarily- Suspend-Transborder-U-S-Flights ...... 4, 7 Press Release, Senators Markey And Blumenthal Demand Airlines Eliminate Expiration Dates For All Pandemic-Related Flight Credits, OFF. OF SEN. EDWARD MARKEY, available at https://www.markey.senate.gov/news/press-releases/senators- markey-and-blumenthal ...... 18 Press Release, Senators Markey, Blumenthal, Warren, Harris Reveal, After Bailout, Airlines Sitting On Customers’ Billions But Refuse To Give Cash Refunds During Coronavirus Pandemic, OFF. OF SEN. EDWARD MARKEY, available at https://www.markey.senate.gov ...... 18 Testimony of Nicholas Calio, The State of the Aviation Industry: Examining the Impact of the COVID-10 Pandemic, Statement of before the United States Commerce, Science, and Transportation Committee, May 6, 2021 ...... 36 The Emerging from the Crisis: A Study of the Impact of the COVID-19 Pandemic on the Air Transport Sector, Emerging from the Crisis: A Study of the Impact of the COVID-19 Pandemic on the Air Transport Sector, Report of the Standing Committee on Transport, Infrastructure and Communities, Vance Badawey, Chair ...... 32, 33, 36, 37 The Globe and Mail (Canada), June 1, 2021...... 34 Unified Regulatory Agenda – Department of Transportation – Airline Ticket Refunds (RIN: 2105-AF04),

v https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202104&RIN=2105-AF04 ....19 Up to 46 million jobs due to COVID-19 aviation downturn, Airports Council International (Sept. 30, 2020), https://aci.aero/news/2020/09/30/up-to-46-million-jobs-at-risk-due-to-covid-19- aviation-downturn/ ...... 35 U.S.-Canada Air Transport Agreement, Art. 5(1), Mar. 12, 2007, T.I.A.S. 07-312 ...... 23 Yahoo!news, Air Travel Surged Nearly 500% During Memorial Day Weekend: TSA (June 1, 2021), https://news.yahoo.com/air-travel-surged-nearly-500-132738367.html ...... 34

vi

BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF HEARINGS WASHINGTON, DC ______) Department of Transportation, ) ) Complainant ) ) v. ) Docket DOT-OST-2021-0073 ) Air Canada ) ) Respondent ) ______)

AIR CANADA’S MOTION TO DISMISS THE ENFORCEMENT COMPLAINT AND MEMORANDUM IN SUPPORT

Air Canada, by counsel and pursuant to 14 C.F.R. § 302.11 and § 302.411, submits this

Motion to Dismiss the Enforcement Complaint and Memorandum in Support and states as follows.

I. INTRODUCTION AND SUMMARY

The Department of Transportation’s (the “Department” or “DOT”) Enforcement

Complaint should be dismissed because the Department did not and cannot state a claim upon

which relief may be granted. The Department has failed to allege specific facts, and cannot

establish, that Air Canada’s policy of providing flight vouchers to customers whose

non-refundable flight reservations were cancelled on or after March 19, 2020 and prior to April

13, 2021 due to governmental restrictions caused by COVID-19 (“Contractual Refund Policy”)1 constituted an unfair practice under 49 U.S.C. § 41712 (“§ 41712”).

1 For purposes of this Motion, the Contractual Refund Policy refers to Air Canada’s policy with respect to non-refundable flight reservations that were cancelled on or after March 19, 2020 and prior to April 13, 2021 due to events outside of Air Canada’s control (including, but not limited to, government-mandated border restrictions caused by COVID-19).

1 Air Canada’s Contractual Refund Policy was not only fair, but was entirely consistent with

its General Terms and Conditions of Carriage (“Conditions of Carriage”) and International Tariff

(“Tariff”), which govern the contractual relationship between Air Canada and its passengers. Air

Canada’s Contractual Refund Policy complied with all applicable DOT regulations in effect at the time, the Canadian Transportation Agency’s (“CTA”) policies and the CTA’s Air Passenger

Protection Regulations (“APPR”). Accordingly, the Enforcement Complaint should be dismissed.

II. BACKGROUND

Air Canada is a foreign air carrier subject to regulation across multiple jurisdictions,

including the United States and Canada. Air Canada maintains a steadfast commitment to

compliance with all applicable rules and regulations in all the jurisdictions in which it operates and

is subject to regulation.

Over the course of the COVID-19 global health pandemic, government measures have

deprived and continue to deprive significant numbers of Air Canada’s passengers of their privilege

to move across borders. For example, as the crisis unfolded in the U.S., the President declared a

national emergency beginning March 1, 2020, and imposed a sweeping series of travel bans that

precluded the ability of large portions of the world’s population to enter the country, including

those transiting via Canada from restricted areas. Additionally, non-Canadian nationals, including

U.S. citizens, were largely banned from entering Canada. See Minimizing the Risk of Exposure to

COVID-19 in Canada Order (Prohibition of Entry into Canada from the United States),

GOVERNMENT OF CANADA (Mar. 20, 2020).2 Those who could enter, as well as Canadian citizens,

were subject to legally-enforceable quarantine or isolation on arrival, and air carriers were directed

to notify foreign passengers crossing the border from the U.S. that they may be refused entry if

2 https://orders-in-council.canada.ca/attachment.php?attach=38958&lang=en; COVID-19.

2 their travel was for non-essential purposes such as tourism, recreation, and entertainment. See

Guidance material for air operators managing travelers during the check-in procedure at

transborder (U.S.) airports, TRANSPORT CANADA (June 6, 2020).3 Moreover, carriers had to

impose and comply with the entry restrictions of any country in the passenger’s itinerary. At the

U.S./Canadian border, all but essential travel was blocked. See U.S. Customs and Border

Protection, Notification of Temporary Travel Restrictions Applicable to Land Ports of Entry and

Ferries Service Between the United States and Canada, 85 Fed. Reg. 16,548, 16,549 (Mar. 24,

2020). Within Canada, travel restrictions varied on a provincial and territorial basis, but were generally severely restrictive across the board.

As the global COVID-19 pandemic evolved and began to impact countries in North

America, Air Canada, like many other foreign air carriers, was forced to adjust its service offerings and policies based on the situation as it developed. Although the COVID-19 crisis and the resulting government restrictions/border closings are completely unprecedented and beyond Air

Canada’s control, Air Canada responded and continues to respond in a manner that complies with all applicable DOT and CTA regulations, as well as health and safety requirements imposed by applicable U.S. and Canadian federal and/or state agencies. With mounting concerns relating to the spread of COVID-19, and pursuant to a number of government directives (both of which were outside of Air Canada’s control), Air Canada was forced to cancel many transborder flights between the United States and Canada and to instead focus its operations on repatriation flights

3 https://web.archive.org/web/20200606004032if_/https://www2.tc.gc.ca/en/initiatives/covid-19- measures-updates-guidance-tc/covid-19-guidance-material-air-carriers-managing-travellers- check-in-procedure-transborder-us-airports.html.

3 for Canadian citizens who had been stranded abroad. See News Release, Air Canada to

Temporarily Suspend Transborder U.S. Flights, (April 21, 2020).4

Throughout the pandemic, Air Canada’s Contractual Refund Policy, which complied with

the terms of its Conditions of Carriage and Tariff, applicable fare rules, and DOT and CTA

regulations, uniformly provided customers whose non-refundable flight reservations were

cancelled by Air Canada on or after March 19, 2020 due to government restrictions caused by

COVID-19, with flight vouchers. Specifically, Air Canada offered its customers a number of

refund options (collectively referred to as “AC Refunds”) to choose from based on their individual

situations and needs. The first option was a full refund in the form of a travel credit. Initially after

the pandemic hit, Air Canada provided flight travel credits (“FTCs”) which lasted for two years

and were similar to vouchers offered by most other carriers.

Soon thereafter, in or about July 2020, through an industry leading initiative, Air Canada

offered passengers Air Canada Travel Vouchers (“ACTVs”), which are essentially cash-equivalent

products that are dissimilar from the products offered by most other carriers. Unlike most

vouchers, ACTVs do not expire, are re-usable, are completely transferrable without restriction,

and could be used immediately to purchase travel on Air Canada or any of its partner airlines.

Moreover, each ACTV holder can transfer, for cash or any other lawful consideration, if

they wish, their ACTV to any other person for use without restriction, and ACTVs may also be

used to book travel on flights operated by Air Canada’s many codeshare partners.5 Unlike most

4 https://aircanada.mediaroom.com/2020-04-21-Air-Canada-to-Temporarily-Suspend- Transborder-U-S-Flights. 5 Air Canada’s many codeshare partners include: Aegean Airlines, Aer Lingus, Air China, Air India, Air New Zealand, ANA, Asiana Airlines, Austrian Airlines, Avianca (TACA), Brussels Airlines, Cathay Pacific, Croatia Airlines, EGYPTAIR, Ethiopian Airlines, Etihad Airways, Eurowings/Germanwings, EVA Air, GOL, LOT Polish Airlines, Lufthansa, Middle East Airlines,

4 other airline travel credits, if a passenger is left with a balance after redeeming his or her ACTV

(for instance, due to demand-related fare reductions), the balance remains usable for future travel or can be transferred elsewhere in the same fashion. This means that a single ACTV could be used to book multiple flights and still provide leftover value to the consumer.

Alternatively, customers who might not have been interested in securing their full refund through an AC Refund travel credit could choose a second option under which they could opt to receive their full refund in the form of a lump sum of miles in Air Canada’s frequent flyer program,

Aeroplan. This option awards miles based on the original ticket price (minus sales tax, applicable to the sale of loyalty currencies in certain jurisdictions) at a rate similar to that of the purchase of miles, with the addition of a “bonus” of 65% additional miles. The Aeroplan Loyalty program offers a wide variety of ways in which miles can be redeemed, including for several cash equivalent options such as prepaid credit cards from VISA and MasterCard, as well as gift cards from retailers such as Amazon. Miles also can be redeemed for non-travel options including consumer and health and wellness products, electronics, luggage, clothing, and accessories. Additionally, Aeroplan miles can be exchanged for flights on Air Canada, Air

Canada Express, Air Canada Rouge, or Aeroplan partner airlines, airport travel perks, hotel bookings, car rentals, and select Air Canada merchandise. Based on award availability, it is possible for customers to redeem their miles for flights of significantly greater value than their original ticketed itineraries. All available AC Refund options were posted on Air Canada’s

Scandinavian Airlines, Singapore Airlines, SriLankan Airlines, SWISS, South African Airways, TAP Air Portugal, THAI, Turkish Airlines, and United. AC Refund travel credits can be redeemed for any codeshare flights that are available on Air Canada’s website or through its contact centers. Codeshare bookings are subject to certain limitations explained on Air Canada’s website to comply with bilateral treaty obligations.

5 website in a transparent and easily accessible format.6

Moreover, following receipt of a support package from the Canadian Government, and

well prior to the Department’s filing of the Enforcement Complaint, Air Canada announced and

simultaneously implemented a new and industry-leading refund policy, which remains in effect.

The current refund policy provides the option of a full refund back to the original form of

payment to qualifying passengers, and goes above and beyond the requirements of Air Canada’s

Conditions of Carriage and Tariff, the applicable fare rules, the APPR, and CTA policies. See

News Release, Air Canada to Offer Refunds for All Fares for Flights Affected by COVID-19

since February 1, 2020 (April 13, 2021).7 Specifically, the new policy provides that:

• A refund option is available to all eligible customers with tickets for travel dates on or after February 1, 2020 and who purchased their ticket before April 13, 2021;

• Refunds to the original form of payment are available to those customers whose flight was cancelled by Air Canada or who voluntarily cancelled their flight for any reason;

• Customers who have already accepted a travel voucher or Aeroplan points for a flight during that time period have the option to exchange these for a refund to the original form of payment, including for the unused portion of any travel voucher issued or in cases where a partial refund was provided; and

• For new tickets purchased on or after April 13, 2021, Air Canada will provide customers an option for a refund to the original form of payment in instances where Air Canada cancels their flight or reschedules the departure time by more than three hours, irrespective of the reason.

Id. As of June 15, 2021, Air Canada had processed or was processing $932.4 million in refunds

to non-refundable ticket holders. In addition to issuing a press release about its new refund policy,

Air Canada sent notification emails to passengers who had booked via Air Canada’s website and

6 These options were previously accessible at ACCredit, eCoupons and Travel Vouchers, https://www.aircanada.com/us/en/aco/home/fly/customer-support/electronic-and-paper-travel- vouchers.html. 7 https://aircanada.mediaroom.com/2021-04-13-Air-Canada-to-Offer-Refunds-for-All-Fares-for- Flights-Affected-by-COVID-19-since-February-1-2020.

6 for which an email address was available, has made information about the policy available on its

website in a transparent and easily accessible format, and has also contacted all U.S.-based travel

agencies multiple times to inform them about the policy so that they can provide ticket refunds

for their customers. See Id.; “Get Your Refund Started”.8 Air Canada, unlike any other carrier and contrary to common practice, has further waived the call-back of travel agents’ commissions

on refunded tickets under this program, as a mechanism to encourage travel agents to quickly

process refunds back to customers.

III. LEGAL STANDARDS

A. The Legal Standard Applicable to a Motion to Dismiss

A motion to dismiss a DOT enforcement proceeding is subject to the same procedures

applicable to a motion to dismiss under Rule 12 of the Federal Rules of Civil Procedure. See 14

C.F.R. § 302.411(a). To withstand a motion to dismiss for failure to state a claim upon which

relief may be granted, “a complaint must contain sufficient factual matter, accepted as true, to

‘state a claim to relief that is plausible on its face.’” FTC v. Wyndham Worldwide Corp., 10 F.

Supp. 3d 602, 609, 2014 U.S. Dist. LEXIS 47622, at *7-8 (D.N.J. April 7, 2014) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009)). “A claim has facial

plausibility when the plaintiff pleads factual content that allows” a reasonable inference to be

drawn that the defendant is liable for the misconduct alleged.” Id. (quoting Iqbal, 556 U.S. at 678).

“The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a

sheer possibility that a defendant has acted unlawfully.” Id. (quoting Iqbal, 556 U.S. at 678).

“When reviewing a motion to dismiss, ‘[a]ll allegations in the complaint must be accepted

as true, and the plaintiff must be given the benefit of every favorable inference to be drawn

8 https://www.aircanada.com/refundrequest/?lang=en-CA

7 therefrom.’” Id. (quoting Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011). But the court is

not required to accept as true “legal conclusions,” and “[t]hreadbare recitals of the elements of a

cause of action, supported by mere conclusory statements, do not suffice.” Id. (quoting Iqbal, 556

U.S. at 678).

B. The Legal Standard for Establishing Unfair Trade Practices

Section 41712 prohibits unfair trade practices in air transportation or the sale of air

transportation. Historically, the Department has evaluated potential violations of § 41712 under a

standard that is based on the Federal Trade Commission’s (“FTC”) “unfairness test”. See Am.

Fin. Servs. Ass’n v. F.T.C., 767 F.2d 957, 971 (D.C. Cir. 1985) (explaining the FTC’s unfairness

test). Unlike DOT, the FTC’s “unfairness test” is codified by statute, 15 U.S.C. § 45(n).

Generally, a practice is unfair to consumers if it causes or is likely to cause substantial harm, the

harm cannot reasonably be avoided, and the harm is not outweighed by any countervailing benefits

to consumers or to competition. See Am. Fin. Servs. Ass’n, 767 F.2d at 971; Third Party Complaint

of Benjamin Edelman v. American Airlines, Inc., DOT-OST-2013-0213, Order 2016-12-12 at 12

(Dec. 14, 2016) (referred to hereinafter as “The Edelman Complaint”). The Department recently

issued a final rule, which codified the longstanding definitions for “unfair”. See Department of

Transportation, Office of the Secretary, Defining Unfair or Deceptive Practices, 85 Fed. Reg.

78,707 (Dec. 7, 2020) (codified at 14 C.F.R. Pt. 399). Specifically, “[a] practice is ‘unfair’ to consumers if it causes or is likely to cause substantial injury, which is not reasonably avoidable, and the harm is not outweighed by benefits to consumers or competition.” See 14 C.F.R. 399.79(b)

(which took effect on January 6, 2021).

8 IV. FACTUAL ALLEGATIONS PLED IN THE COMPLAINT

While well-pled factual allegations in the Enforcement Complaint must be accepted as true

for purposes of this Motion, the allegations in the Enforcement Complaint are neither well-pled

nor do they have other explicitly required indicia of veracity and transparency.

First, DOT regulations require the Enforcement Complaint to be verified by the

Department under penalty of perjury. 14 C.F.R. § 302.4(b). It is not. See Compl. at 6-7.9

Second, the allegations in the Enforcement Complaint are nothing but conclusory. The

Enforcement Complaint alleges the following as “facts” with regard to the Department’s Office of

Aviation Consumer Protection’s (“OACP”) claim that Air Canada engaged in an unfair practice:

“…consumers were harmed when they paid money to Air Canada for a service that Air Canada did not provide and [OACP] noted that Air Canada’s average each-way fare between the U.S. and

Canada in 2019 was $295.24.” Complaint, ¶ 17. The OACP further alleges that the harm was not

reasonably avoidable by consumers. OACP is of the view that reasonable consumers understand that ‘refundable’ tickets are valuable because they ensure a refund if the passenger cancels the flight. In the letter to Air Canada, OACP stated that a consumer acting reasonably would not believe that he or she must pay more to purchase a refundable ticket in order to be able to recoup the ticket price when the airline fails to provide the service paid for through no action or fault of the consumer.

Id., ¶ 18. Finally, the Enforcement Complaint alleges:

the harm to consumers is not outweighed by countervailing benefits to consumers or to competition. OACP explained its view that consumers gain no countervailing benefit from Air Canada’s practice. Likewise, OACP stated that Air Canada’s practice does not convey competitive benefits in the marketplace given that other carriers provide refunds when they cancel a flight or make a significant schedule change. OACP noted that Air Canada’s practice appears to benefit only Air Canada at the expense of other carriers.

Id., ¶ 19.

9 The Enforcement Complaint could be dismissed for this reason alone.

9 OACP relies exclusively upon these “facts” alleged in Paragraphs 17 through 19 of the

Enforcement Complaint in pleading its claims against Air Canada. As shown in detail below, the

“facts” relied upon by OACP are not facts, but merely conclusory allegations of the Department that were put forth without substantial consideration or holistic review of the circumstances pertaining to Air Canada. OACP does not have evidence sufficient to support the assertion of a violation of § 41712 or 14 C.F.R. § 259.5. The “facts” relied upon are simply insufficient to establish prima facie claims against Air Canada for violations of either § 41712 or 14 C.F.R.

§ 259.5.

V. ARGUMENT

The Department’s Enforcement Complaint should be dismissed for multiple reasons. First,

although Air Canada’s Contractual Refund Policy complied with DOT refund regulations,

particularly 14 C.F.R. § 259.5, the Department improperly attempts to use Air Canada’s alleged

failure to comply with non-legally binding guidance documents, an archaic and privately issued

Industry Letter, and non-binding statements in the preamble of the 2011 Enhancing Airline

Passenger Protections rulemaking, none of which have the force and effect of law, to establish

proof of an unfair practice. Second, Air Canada’s Contractual Refund Policy complied with Air

Canada’s Conditions of Carriage, Air Canada’s U.S. Tariff, all applicable fare rules, the APPR,

and CTA policies. Third, the Department has not engaged in the thorough well-reasoned analysis

necessary to apply § 41712. The Enforcement Complaint fails to allege facts that would

demonstrate that Air Canada’s Contractual Refund Policy caused or was likely to cause substantial

harm that could not be reasonably avoided, and that the alleged harm was not outweighed by any

countervailing benefits to consumers or to competition. Fourth, in all events, the Department

cannot establish as a matter of law that Air Canada’s Contractual Refund Policy violated § 41712.

10 A. The Department Has Exceeded its Authority Under the Administrative Procedure Act by Improperly Relying Upon Non-Binding Guidance Documents in Seeking a Penalty Against Air Canada.

The Department admittedly has no explicit regulation specifying the circumstances in

which a refund is required or governing the form in which refunds to customers must be provided

following a cancellation, delay, or schedule irregularity. Petition for Rulemaking and Third-Party

Complaint of Donald L. Pevsner, Esq., DOT-OST-2012-0109, Order 2012-11-4 at 9 (Nov. 6,

2012) (referred to hereinafter as “The Pevsner Petition and Order”). Instead, the Department seeks

to penalize Air Canada based upon mere guidance documents announcing improperly a

“longstanding obligation” to issue cash refunds for non-refundable tickets. However, this

so-called “longstanding obligation” is based on nothing more than: (1) an Industry Letter from

1996 (which was never provided to Air Canada or publicly issued), and (2) a statement from the

preamble to a 2011 rulemaking that is inapposite to the circumstances of this case. Because neither

the Industry Letter nor the 2011 preamble are legally binding, the Department has improperly

resorted to treating two recently issued “guidance” documents as binding law, despite its express

claims to the contrary in the very same guidance documents, thus explicitly admitting it is

exceeding its authority under the Administrative Procedure Act (“APA”), 5 U.S.C. § 551 et seq.10

For these reasons, the Enforcement Complaint should be dismissed as a matter of law.

10 The Department has also failed to follow its own requirements in place at the time for the issuance of agency guidance. For any agency guidance that “may result in a substantial agency impact”, the Department “shall make a good faith effort to estimate the likely economic cost impact of the guidance to determine whether the document might be significant.” See Department of Transportation, Office of the Secretary, Administrative Rulemaking, Guidance, and Enforcement Procedures; Final Rule, 84 Fed. Reg. 71,714 at 71,727 (Dec. 27, 2019), subsequently revoked effective May 3, 2021 at 86 Fed. Reg. 17,292 (April 2, 2021). Here, the Department failed to perform the requisite economic cost impact analysis.

11 1. Guidance Documents Do Not Have the Force or Effect of Law.

The Department’s “Enforcement Notice Regarding Refunds by Carriers Given the

Unprecedented Impact of the COVID-19 Public Health Emergency on Air Travel” dated April 3,

2020 (the “Enforcement Notice”)11 and the Department’s May 12, 2020 “Frequently Asked

Questions Regarding Airline Ticket Refunds Given the Unprecedented Impact of the COVID-19

Public Health Emergency on Air Travel” (the “Department’s COVID-19 Refund FAQS”)12, which are the foundation of the Department’s case, are merely guidance documents, not properly issued regulations under the APA. The Department’s COVID-19 Refund FAQS13 explicitly states the

document “does not have the force and effect of law and is not meant to bind the regulated

entities in any way.” Id. (emphasis added).

Under the APA, legislative rule statements of general or particular applicability and future

effect, designed to implement, interpret, or prescribe law or policy, must be issued through notice

and comment rulemaking; whereas interpretive rules, designed to advise the public of an agency's

construction of the statutes and rules which that agency administers, need not be issued through

notice and comment rulemaking, but also do not carry the force and effect of law and are not

accorded such weight in the adjudicatory process. Perez v. Mortg. Bankers Ass'n, 575 U.S. 92,

11 https://www.transportation.gov/airconsumer/enforcement_notice_refunds_apr_3_2020. 12https://www.transportation.gov/briefing-room/frequently-asked-questions-regarding-airline- ticket-refunds-given-unprecedented. 13 Although the Enforcement Notice included a threat of an enforcement action for noncompliance, in doing so, it failed to comply with the Department’s own processes in place at the time. Specifically, if a guidance document purports to “recommend specific conduct that stretches beyond what is required by existing law,” then the Department was required to include language that the contents of the guidance document do not have the force and effect of law, and are not meant to bind the public in any way. See Administrative Rulemaking, Guidance, and Enforcement Procedures; Final Rule, 84 Fed. Reg. 71,714 at 71,715 (Dec. 27, 2019), subsequently revoked effective May 3, 202 at 86 Fed. Reg. 17,292 (April 2, 2021). The Enforcement Notice improperly failed to include this language.

12 95-96 (2015). Reviewing courts should set aside guidance as arbitrary and capricious or decline

enforcement where the guidance seeks to expand the scope of regulated parties’ obligations

without notice and comment rulemaking. See Appalachian Power Co. v. E.P.A., 208 F.3d 1015

(D.C. Cir. 2000) (setting aside purported guidance that in fact broadened the scope of the

underlying regulation); CSI Aviation Services, Inc. v. U.S. Dept. of Transp., 637 F.3d 408, 412

(D.C. Cir. 2011) (finding a pre-enforcement warning letter to not carry the force of law and setting

it aside as unjustified by underlying statutory authority).

The Department cannot use alleged non-compliance with these guidance documents (or

any other non-binding publication or statement) as a basis for claiming violations of § 41712.14

See Mem. From Associate Attorney General, U.S. Dept. of Justice, “Limiting Use of Agency

Guidance Documents in Affirmative Civil Enforcement Cases” (Jan. 25, 2018);15 Faced with the

unprecedented circumstances of the pandemic, and in the context of extraordinary public and

political pressure, the Department precipitously, and without due process and a notice and

comment period, issued guidance purporting to clarify an existing regulation. However, the

guidance unmistakably sought to establish new and extensive obligations on regulated entities like

Air Canada that went beyond the scope of existing regulatory text, a practice that has been

14 In the DOT Memorandum for Secretarial Officers and Heads of Operating Administration (Feb. 15, 2019), DOT General Counsel Stephen Bradbury confirmed that DOT will follow the Department of Justice’s advice on the use of guidance. Id. at https://cms7.dot.gov/file/97456/download?token=b0NEy-nH. “[P]rosecuting attorneys may not use non-compliance with guidance documents as a basis for proving violations of applicable law. The Department should not treat a party’s noncompliance with an agency guidance document as presumptively or conclusively establishing that the party violated the applicable statute or regulation.” See Mem. From Associate Attorney General, U.S. Dept. of Justice, “Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases” (Jan. 25, 2018), available at http://src.bna.com/vY4. 15 http://src.bna.com/vY4.

13 specifically prohibited by the United States Court of Appeals for the D.C. Circuit in Appalachian

Power Co. v. EPA. See CSI Aviation Servs., 637 F.3d at 412.

The issue of refunds and cancellations traditionally are reviewed by the Department on a case-by-case basis and historically have been addressed by the terms of a carrier’s Conditions of

Carriage and Tariff. See, e.g. The Pevsner Petition and Order; The Edelman Complaint at 18-19

(declining to comment on merits of contract dispute); Petition for Rulemaking of Joel Kaufman,

DOT-OST-2003-14334, Order 2003-3-11 (Mar. 18, 2003) (referred to hereinafter as “The Joel

Kaufman Petition”); Arif Naqvi v. Saudi Arabian Airlines, Inc., 123 F. Supp. 3d 129, 132 (D.D.C.

2016) (“The ticket and tariff constitute the contract of carriage… Tariff provisions are binding on

the passenger, even if the passenger does not actually know of the provisions.”); Seisay v.

Compagnie Nationale Air France, No. 95 CIV. 7660 (JFK), 1997 WL 431084, at *3 (S.D.N.Y.

July 30, 1997) (“It is well established that tariffs on file with the DOT constitute the contract of

carriage between the passenger and the airline that governs the rights of airline passengers.”); see

also Clemente v. Philippine Airlines, 614 F. Supp. 1196, 1199 (S.D.N.Y. 1985); Edem v. Ethiopian

Airlines Enter., No. 08 CV 2597 RJD LB, 2009 WL 4639393, at *8 (E.D.N.Y. Sept. 30, 2009),

aff’d, 501 Fed. App’x 99 (2d Cir. 2012); Brunwasser v. Trans World Airlines, Inc., 541 F. Supp.

1338, 1341 (W.D. Pa. 1982).

For the same reasons identified above, the Industry Letter dated July 15, 1996, which does

not even rise to the level of a guidance document (itself without legal effect), does not have the

effect of law and cannot supersede the contractual relationship between Air Canada and its ticketed

passengers. See Industry Letter dated July 15, 1996. Therefore, the Department’s reliance on the

Industry Letter as proof of an unfair practice is similarly improper.

14 2. The Department Cannot Use the Preamble Language of the 2011 Enhancing Airline Passenger Protections Rulemaking to Alter the Plain Language of 14 C.F.R. § 259.5, Which Does Not Require a Cash Refund.

The Department incorrectly contends that Air Canada’s refund policies violate 14 C.F.R.

§ 259.5. Compl. ¶¶ 20, 28, 29. Specifically, DOT contends that Air Canada failed to issue refunds

in a timely manner consistent with its Customer Service Plan obligations. However, 14 C.F.R.

§ 259.5 does not mandate the form or circumstances giving rise to the issuance of refunds, only

that carriers must develop and implement a Customer Service Plan and comply with certain

minimum standards, including providing refunds within a prescribed time period “[w]here ticket refunds are due…” Id. (emphasis added).16 The language of the Enhancing Airline Passenger

Protection Final Rule does not impose a strict standard on what constitutes a significant flight

delay for purposes of applying refund requirements. See Department of Transportation, Office of

the Secretary, Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110 (April 25, 2011)

(codified at 14 C.F.R. Pts. 244, 250, 253, 259, 399). Section 259.5 likewise does not specify those

situations in which a refund is due, nor the form in which a carrier must provide a refund when

one is owed, following a cancellation, delay, or schedule irregularity. In fact, Section 259.5

contemplates situations where a refund may not be due. By electing not to specifically mandate

the form or circumstances giving rise to the issuance of refunds, DOT properly has left these

matters to the discretion of carriers in establishing refund policies and procedures through their

respective Conditions of Carriage and Tariffs, an action that is consistent with the APA and the

16 The Department’s COVID-19 Refund FAQs confirm this point. “Airlines and ticket agents can offer consumers alternatives to a refund, such as credits or vouchers, so long as the option of a refund is also offered and clearly disclosed if the passenger is entitled to a refund. Further, any restrictions that apply to the credits and vouchers, such as the period in which credits must be used or any fees charged for using the credit, must be clearly disclosed to consumers.” See Department’s COVID-19 Refund FAQS.

15 1978 Airline Deregulation Act (“ADA”).17 Simply stated, the Department could have mandated

that Customer Service Plans include a requirement that cash refunds be provided in the event a

non-refundable ticket is cancelled by the carrier, but it declined to do so, consistent with the ADA

which leaves matters of commercial ticket pricing to the marketplace. DOT may now wish such

a requirement had been specifically included in Section 259.5 given the extraordinary

circumstances of the pandemic and in light of the pressures and criticism it was and is facing, but

that wishful thinking does not change the facts or the law.

The Department’s attempt to rely on the preamble to the 2011 Enhancing Airline Passenger

Protections rulemaking as evidence of an unfair practice is similarly improper, as well as arbitrary and capricious. See Compl. ¶ 14, Department of Transportation, Office of the Secretary,

Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110, 23,129 (Apr. 11, 2011) (codified at 14 C.F.R. Pts. 244, 250, 253, 259, 399). The language in the preamble describes circumstances that are completely distinguishable from Air Canada’s situation. Specifically, it describes circumstances where a carrier cancels a flight and only offers its passengers an alternative rerouting. Here, Air Canada offered not only a rerouting, but a comprehensive suite of refund options.

17 The ADA is a federal law that deregulated the airline industry in the United States, removing U.S. Federal Government control over such things as fares, routes and market entry of new airlines, introducing a free market in the commercial airline industry and leading to a great increase in the number of flights, a decrease in fares, and an increase in the number of passengers and miles flown. That statutory mandate remains in place today and the Department must continue to abide by the Congressional restriction that DOT must place “maximum reliance on competitive market forces and on actual and potential competition” as the best way to achieve “efficiency, innovation and low prices” and variety and quality of air transportation services. 49 U.S.C. section 40101(a)(6), (12), see Morales v. TransWorld Airlines, Inc., 504 U.S. 374, 378. DOT’s action against Air Canada not only violates the APA, the carrier’s tariff and conditions of carriage but also the Department’s enabling statute.

16 Even if the preamble did describe the exact circumstances as the current matter presents,

the preamble has no legal effect and does not provide the Department additional authority to what

was implemented by the Enhancing Airline Passenger Protections Final Rule. See Wyoming

Outdoor Council v. United States Forest Serv., 165 F.3d 43, 46 (D.C. Cir. 1999) (recognizing that language in a regulatory preamble is not “controlling”); Association of American Railroads v.

Costle, 562 F.2d 1310, 1316 (D.C. Cir. 1977) (finding that “[a] preamble no doubt contributes to

a general understanding of a statute, but it is not an operative part of the statute and it does not

enlarge or confer powers on administrative agencies or officers”); see also Kevin M. Stack,

Preambles as Guidance, 84 GEO. WASH. L. REV. 1252 (Sep. 2016). While a preamble can bring

clarity to a proposed regulation, the Department declined to enact a regulation mandating the

preamble language quoted in the Enforcement Complaint, and it is improper and arbitrary for DOT

to now rely on this language, which is not an operative part of the regulation.

Based on the above, the Department cannot use the preamble language of the 2011

Enhancing Airline Passenger Protections Rulemaking to alter the plain language of 14 C.F.R.

§ 259.5 and 14 C.F.R. § 259.5 does not require Air Canada to provide cash refunds to passengers

who purchased non-refundable tickets on or after March 19, 2020 for circumstances beyond Air

Canada’s control.

3. The Department’s Arbitrary Conduct is Underscored by the Department’s Recent Publication of a Notice and Comment Rulemaking to Address the Form of Refunds Under These Circumstances.

The Department’s arbitrary conduct flatly contradicts years of well-established law, arising from Congress’ mandate to DOT to promote maximum competition in the airline industry, on which the industry has relied in designing its business models. See The Pevsner Petition and Order

at 8, 13 (dismissing petitioner’s request for re-regulation of cancellation and change fees due to

17 Congress’ direction by the Airline Deregulation Act of 1978).18 Blessing an agency’s effort to

“invoke . . . ambiguous regulations to impose potentially massive liability . . . for conduct that occurred well before the interpretation was announced . . . seriously undermine[s] the principle that agencies should provide regulated parties fair warning of the conduct a regulation prohibits or

requires. . . . [and results in] in precisely the kind of “unfair surprise” against which our cases have

long warned.” Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155–56 (2012). A vague

warning that “there are circumstances in which passengers would be due a refund, including a

refund of non-refundable tickets and optional fees associated with those tickets, due to a significant

flight delay” cannot possibly provide fair warning with “ascertainable certainty” that the terms of

nonrefundable tickets would be unenforceable in the circumstance of a prolonged and catastrophic

industry crisis largely driven by government-imposed public health measures. See Gen. Elec. Co.

v. U.S. E.P.A., 53 F.3d 1324, 1329 (D.C. Cir. 1995); ExxonMobil Pipeline Co. v. U.S. Dept. of

Transportation, 867 F.3d 564, 578 (5th Cir. 2017).

18 The Department’s abrupt attempt to reverse course has come during a period of intense political pressure to make airlines bear the losses arising from unforeseen pandemic circumstances and government health measures. See, e.g., Press Release, Senators Markey, Blumenthal, Warren, Harris Reveal, After Bailout, Airlines Sitting On Customers’ Billions But Refuse To Give Cash Refunds During Coronavirus Pandemic, OFF. OF SEN. EDWARD MARKEY, (Apr. 17, 2020), available at https://www.markey.senate.gov/news/press-releases/senators-markey-blumenthal- warren-harris-reveal-after-bailout-airlines-sitting-on-customers-billions-but-refuse-to-give-cash- refunds-during-coronavirus-pandemic (last accessed Jun. 23, 2021) (publicizing a set of inquiry letters sent to major airlines and demanding the return to consumers of voucher value held by the airlines in accordance with existing law and their respective terms and conditions of carriage); Press Release, Senators Markey And Blumenthal Demand Airlines Eliminate Expiration Dates For All Pandemic-Related Flight Credits, OFF. OF SEN. EDWARD MARKEY, (May 10, 2021), available at https://www.markey.senate.gov/news/press-releases/senators-markey-and- blumenthal-demand-airlines-eliminate-expiration-dates-for-all-pandemic-related-flight-credits (last accessed Jun. 23, 2021) (demanding anew that airlines disregard their respective terms and conditions of carriage to refund voucher value in cash to certain customers).

18 Knowing that its action is improper and that no regulation applies in this situation, the

Department recently announced plans to do what is clearly required under the APA for a lawful

regulation: it will undertake a proper exercise of notice and comment rulemaking to address the

form of refunds for these very circumstances. See Unified Regulatory Agenda – Department of

Transportation – Airline Ticket Refunds (RIN: 2105-AF04).19 Notably, DOT admits:

This rulemaking would clarify that, under the Department’s rule requiring airlines to provide prompt refunds when ticket refunds are due and its rule requiring ticket agents to make refunds promptly when service cannot be performed as contracted, carriers and ticket agents must provide prompt ticket refunds to passengers when a carrier cancels or makes a significant change to a flight.

Id. (emphasis added). This after-the-fact effort to implement a rule that the Department argues already exists demonstrates that regulated entities could not have been on notice of their purported obligations, and further demonstrates that this enforcement action is an abuse of discretion. This is an admission by the Department that the current refund rule neither supports nor serves as a basis for what DOT has “consistently interpreted” to be the law. The current rule simply does not require a refund, much less a cash refund to the original form of payment, in the circumstances at hand. More importantly, the proposed rulemaking will now afford carriers such as Air Canada notice and the opportunity to comment on policies concerning the very conduct for which the

Department seeks to penalize Air Canada through its Enforcement Complaint. This raises serious questions concerning fundamental fairness and due process, both substantive and procedural. See

Gen. Elec. Co. v. U.S. E.P.A., 53 F.3d at 1328 (quoting Gates & Fox Co. v. OSHRC, 790 F.2d 154,

156 (D.C. 1986) (“The due process clause thus ‘prevents … deference from validating the application of a regulation that fails to give fair warning of the conduct it prohibits or requires.’”);

19 https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202104&RIN=2105-AF04.

19 see also Christopher, 567 U.S. at 156 (internal citation omitted) (“[A]gencies should provide regulated parties with fair warning of the conduct [a regulation] prohibits or requires.”);

ExxonMobil Pipeline Co., 867 F.3d at 578 (internal citation omitted) (stating that the court has

“warned that fair warning requires the agency to have ‘state[d] with ascertainable certainty what is meant by the standards [it] has promulgated’”).

Based on the above, the Department’s action against Air Canada clearly exceeds its authority under the APA. The requirement to provide refunds for non-refundable tickets in the context of mass cancellations and government restrictions was undoubtedly a “major substantive legal addition” under the guise of interpretation, and OACP’s opinion that Air Canada is currently in violation of its commitments under 14 C.F.R. 259.5 is without a valid regulatory basis. See U.S.

Telecom Ass'n v. F.C.C., 400 F.3d 29, 35 (D.C. Cir. 2005); Compl. ¶ 20; see also Spirit Airlines,

Inc., 2021 U.S. App. LEXIS 15144, at *2, 997 F.3d 1247 (D.C. Cir. May 21, 2021); Republic

Airline Inc., 669 F.3d 296, 302 (D.C. Cir. 2012); CSI Aviation Servs., 637 F.3d at 412).20

B. Air Canada’s Contractual Refund Policy was Consistent with Air Canada’s Conditions of Carriage, Tariff, and All Applicable Fare Rules.

The contractual relationship between Air Canada and its customers is provided by Air

Canada’s Conditions of Carriage and Tariff, and this contractual relationship generally controls in matters of refunds and schedule changes. See The Pevsner Petition and Order at 10 (noting that the carrier’s Tariff provided notice of conditions restricting refunds and that “[t]he Department

20 As discussed in Section C, infra, none of the documents relied upon by DOT for its determination that Air Canada’s refund policies violate § 41712 include the requisite facts establishing that Air Canada’s refund policies caused substantial consumer harm, which could not reasonably be avoided by consumers, and was not outweighed by countervailing benefits to consumers or to competition. As the Department concedes in the Enforcement Complaint, see, e.g., Compl.¶¶ 12- 13, it is bound by the final rule titled “Defining Unfair and Deceptive Practices”, 14 C.F.R. 399.79(b). DOT’s failure to adhere to its own rules is but one more example of its overreach and arbitrary and capricious conduct in bringing an enforcement proceeding against Air Canada in the complete absence of any rule mandating cash refunds for non-refundable tickets.

20 imposes no further independent obligation on carriers in the case of cancelled flights or delayed

departures.”).

Carriers have the ability to establish their own methods of providing refunds in their

Conditions of Carriage and Tariffs, and this is exactly what Air Canada did. Specifically, section

2 of Air Canada’s Conditions of Carriage, Alternative Travel Arrangements, addresses flight delays that are caused by circumstances beyond Air Canada’s control:

If your flight is delayed by more than three hours or cancelled because of a situation that’s outside of our control, here’s how your travel plans will be accommodated: • We’ll rebook you on the next available Air Canada, Air Canada Rouge or Air Canada Express flight or on one of our partner airlines on a reasonable route from the same airport, within 48 hours of the end of the event that caused the delay or cancellation; or • If we cannot do this, we’ll re-route you on any carrier via any reasonable air route to your destination or re-route you from another airport that is within a reasonable distance of your departure airport to your destination (if any). If your new departure is from such an airport, Air Canada will arrange for your transportation to that other airport. • We can also change your return to match the same length of stay if necessary. • Should you refuse the alternate travel arrangements offered because your travel no longer serves a purpose, please note that any refund is subject to the fare rules applicable. See Air Canada Conditions of Carriage, “In the event of an extended delay or a cancellation,”

Section 2.21

The applicable fare rules (including rules on refundability) are contained in Air Canada’s

Tariff, on its website, and are provided via e-mail to each passenger who purchases a ticket on Air

Canada’s website as part of the website-generated itinerary-receipt. See Air Canada, International

Tariff, General Rules Applicable to the Transportation of Passengers and Baggage, ATPCO AC-

2, issued ------[May 28, 2019, December 18, 2018, January 6, 2020, June 3, 2020, June 24, 2020,

21 https://www.aircanada.com/ca/en/aco/home/legal/conditions-carriage-tariffs.html.

21 May 12, 2020, May 19, 2020; Aug 11/Aug 18/Sep 16 2020] (referred to hereinafter as “Air

Canada’s Tariff”).

Rule 75(A)(1) of Air Canada’s Tariff allows the carrier to refuse transportation where:

Such action is necessary to comply with any governmental regulations … or whenever such action is necessary or advisable by reason of weather or other conditions beyond its control (including but without limitation: acts of god, force majeure, strikes, civil commotions, embargoes, wars, hostilities or disturbances) actual, threatened or reported.

Air Canada’s Tariff, Rule 75(A)(1); see also Rule 80. A refund or credit provided is expressly

“subject to applicable fare rule, as provided in the General Refund section of Rule 100 – Refunds.”

See Air Canada’s Tariff, Rule 75(B)(3). The general refund provision contained in Paragraph 100, as referenced in the applicable provisions, is based on fare-type and provides:

Rule 100 - REFUNDS. A. General. Refund by carrier: for unused ticket or portion thereof, or miscellaneous charges order, refund will be made in accordance with this Rule. …. (1) Economy Basic tickets are entirely non-refundable and hold no credit for future travel. For all other non-refundable tickets, the unused value may be used toward the purchase of another ticket within a year from date of issue if ticket is fully unused …

See Air Canada’s Tariff, Rule 100 (emphasis added).

Notably, the Department had the power to reject Air Canada’s Tariff and did not do so.

See 14 C.F.R. § 221.110 (providing that the Department may reject any tariff which is not

consistent with section 41504 of 49 U.S.C. Subtitle VII, with the regulations in this part, or with

Department orders). More specifically, the Department may reject, and thus render void,

any tariff that is not consistent with statutory requirements or DOT regulations, and further the

Department may conduct hearings either on its own initiative or on a complaint to determine

whether a tariff is lawful. In re Transpacific Passenger Air Transp. Antitrust Litig., 69 F. Supp.

22 3d 940, 947 (N.D. Cal. 2014). The Department did not reject the operative Air Canada tariff at

issue.22

Here, the Conditions of Carriage and Tariff, along with the fare rules for purchasers of

non-refundable tickets, were appropriately disclosed and available to Air Canada’s customers and

DOT. Air Canada’s Conditions of Carriage and Tariff did not require Air Canada to refund

customers who purchased non-refundable flights that were cancelled on or after March 19, 2020.

The obligation to refund is explicitly stated and only applies to delays or cancellations that are

within Air Canada’s control. Air Canada’s Conditions of Carriage and Tariff do not mandate

refunds for delays or cancellations that are outside of Air Canada’s control. Similarly, the APPR

at all relevant times required refunds for delays or cancellations within a carrier’s control, but not

for those beyond a carrier’s control.23 Air Canada’s Conditions of Carriage and Tariff reflect and

comply with both U.S and Canadian regulations. Therefore, Air Canada’s Contractual Refund

Policy, which provided these customers with vouchers and other favorable options, was legally

22 The Department’s failure to identify any alleged illegality of certain terms in Air Canada’s contract of carriage prior to this action, when those terms are in accord with foreign regulations and precede the current crisis, begs the question of whether the Department’s actions are contrary to the foundational protections afforded in the U.S.-Canada open skies treaty which states, “Each Party shall allow a fair and equal opportunity for the designated airlines of both Parties to compete in providing the international air transportation governed by this Agreement.” U.S.-Canada Air Transport Agreement, Art. 5(1), Mar. 12, 2007, T.I.A.S. 07-312. 23 The CTA has urged the industry to issue travel credits or vouchers during the COVID-19 epidemic indicating “that airlines would be meeting their obligations under Canadian law if they offered passengers affected by cancellations vouchers or credits for future travel, as long as they do not expire in an unreasonably short time.” See CTA, Statement on Vouchers, https://otc- cta.gc.ca/eng/statement-vouchers (March 25, 2020). As CTA explained, “[s]ometimes, the airline may offer a voucher that can be converted to a refund if the voucher hasn't been used by the end of its validity period. This practice reflects the liquidity challenges airlines are facing as a result of the collapse of air travel while giving passengers added protection in the event that they ultimately can't take advantage of the voucher.” Id. Through these statements, the Canadian government offered airlines flexibility in acknowledgment of the unprecedented and ongoing aviation crisis.

23 binding, and, contrary to DOT’s assertions, does not constitute an unfair practice under § 41712 or a violation 14 C.F.R. § 259.5.

C. The Enforcement Complaint Fails to Allege Sufficient Facts to Establish a Violation of § 41712.

The term “unfair” in § 41712 is vague and unclear. Recognizing the potential vagueness of this and other terms, the Department’s final rule, Defining Unfair or Deceptive Practices, aims to provide a workable standard. See 14 C.F.R. § 399.79; Department of Transportation, Office of the Secretary, Defining Unfair or Deceptive Practices, 85 Fed. Reg. 78,707 (Dec. 7, 2020)

(codified at 14 C.F.R. § 399); see also Docket DOT-OST-2019-0182, Notice of Proposed

Rulemaking – Defining Unfair or Deceptive Practices, (Feb. 20, 2020)24; 85 Fed. Reg. 11,881

(Feb. 28, 2020) (initiating rulemaking to formally adopt the FTC’s unfair and deceptive practices standard).

The Unfair and Deceptive Practices final rule is an attempt “to provide greater clarity and certainty about the Department’s interpretation of unfair or deceptive practices in the context of aviation consumer protection rulemaking and enforcement actions.” See 85 Fed. Reg. at 11,881-

82 (“This proposal would also require the Department to articulate in future enforcement orders the basis for concluding that a practice is unfair or deceptive where no existing regulation governs the practice in question, state the basis for its conclusion that a practice is unfair or deceptive when it issues discretionary aviation consumer protection regulations, and apply formal hearing procedures for discretionary aviation consumer protection rulemakings.”); id. at 11,884 (“[M]ore can be done to better inform . . . regulated entities how the Department determines what constitutes an unfair and deceptive practice . . . when issuing enforcement orders based on Section 41712 where there has not been a regulation that already specifies required or prohibited conduct.”); id.

24 https://www.transportation.gov/sites/dot.gov/files/2020-02/UDP%20NPRM%20-%20final.pdf.

24 at 18,888 (“This [identification of the facts and conduct relevant to each factor] is particularly

important in orders based on Section 41712 alone, where there has not been a regulation that

already specifies required or prohibited conduct.”) (emphasis added).

The Department codified the definition of “unfair,” providing that “[a] practice is ‘unfair’

to consumers if it causes or is likely to cause substantial injury, which is not reasonably avoidable,

and the harm is not outweighed by benefits to consumers or competition.” 14 C.F.R. § 399.79(b).

Furthermore, the Department stated that where no specific regulation prohibits a practice, in order

to reach a conclusion that the practice was “unfair or deceptive” in an informal proceeding, the

Department “shall articulate in the order the basis for concluding that the practice is unfair or

deceptive to consumers as defined in this section.” 14 C.F.R. § 399.79(e)(2). No less should be

required for the Department to initiate a formal enforcement proceeding, which requires

“reasonable grounds to believe” a practice is unfair or deceptive.

Although the Department only recently codified the definition of “unfair”, the Department has historically evaluated potential violations of § 41712 under a standard that is based on the

FTC’s “unfairness test.” See Am. Fin. Servs. Ass’n, 767 F.2d at 971; The Edelman Complaint at

12. In FTC v. Amzon.com, Inc., 2016 U.S. LEXIS 55569 (W.D. Wash. April 26, 2016), the district court recognized that an injury is reasonably avoidable if the consumer could have made a “free and informed choice” to avoid it. Id., at **17-18.

Here, the Department has not engaged in a thorough well-reasoned, context-specific analysis in applying the text of § 41712 and in investigating the factors of the unfairness test, and the Department has failed to establish the elements necessary to establish a violation of § 41712.

The Department failed to do so in the letter it sent to Air Canada dated July 24, 2020, in which it claimed that Air Canada’s Contractual Refund Policy violated § 41712, and the Department has now

25 failed to do so in its Enforcement Complaint. Both improperly rely on speculation and conjecture in

asserting that Air Canada’s Contractual Refund Policy is “unfair”. See Motor Vehicle Mfrs. Ass’n

of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 2867, 77 L. Ed.

2d 443 (1983) (“Normally, an agency rule would be arbitrary and capricious if the agency has

relied on factors which Congress has not intended it to consider . . . entirely failed to consider an

important aspect of the problem, offered an explanation for its decision that runs counter to the

evidence before the agency[,]” or “is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”).

The Enforcement Complaint fails to allege sufficient facts to establish the claim that Air

Canada’s Contractual Refund Policy caused or was likely to cause substantial harm to Air

Canada’s customers. The Department merely offers conclusory allegations that the policy

“imposed significant harm to consumers” and that the Office of Aviation Consumer Protection

“views Air Canada’s practice as causing substantial harm to consumers.” See Compl. p. 1 and ¶

17. Additionally, the individual complaints filed with the Department do not allege facts that establish substantial harm.

The Enforcement Complaint also fails to allege sufficient facts to establish that any alleged harm was not outweighed by countervailing benefits. Again, the Enforcement Complaint offers only conclusory allegations, such as that “OACP consumers gain no countervailing benefit from

Air Canada’s practice” and that “Air Canada’s practice appears to benefit only Air Canada at the expense of other carriers,” but the Department fails to explain how or why that is the case or to set forth any facts supporting its position. See Compl. ¶ 19. In fact, the only justification provided

by the Department is the conclusory allegation that the policy does not convey competitive benefits

because “other carriers provide refunds” - a conclusion that is both unsupported by factual

26 allegations and refuted by DOT’s own docket and complaint statistics. There appear to be numerous carriers that have not provided cash refunds to consumers who purchased non- refundable tickets. See Markey and Blumenthal Letters dated May 10, 2021, which were sent to a number of U.S. carriers, and which urged these airlines to offer cash refunds for flights cancelled during the COVD-19 pandemic; see also Markey and Blumenthal Letter to Secretary of

Transportation Pete Buttigieg dated June 30, 2021, which urged the Secretary to “force airlines to do the right thing” and “ensure the return of travelers’ money”; Air Travel Consumer Report, U.S.

DOT, May and June 2021 (highlighting refund-related complaints against U.S. and foreign carriers); see generally, DOT-OST-2020 Dockets, showing formal complaints filed against a number of airlines).

The Department asserts that Air Canada’s Contractual Refund Policy was “unfair,” without even purporting to engage in the required thorough, well-reasoned analysis or, frankly, any analysis. DOT has not alleged sufficient facts to establish that customers were substantially harmed or likely to be substantially harmed, that the harm could be reasonably avoided, and that the harm is not outweighed by benefits to consumers or competition, and this cannot suffice.

Accordingly, the Enforcement Complaint should be dismissed.

D. Air Canada’s Contractual Refund Policy Did Not Cause and Was Not Likely to Cause Substantial Harm That Could Not Be Reasonably Avoided; Alternatively, Any Alleged Harm Was Outweighed by Countervailing Benefits to Consumers or to Competition.

Not only has the Department failed to allege sufficient facts to establish that Air Canada’s

Contractual Refund Policy constituted an unfair practice, it cannot do so.

1. 1. Air Canada’s Contractual Refund Policy Did Not Cause and Was Not Likely to Cause Substantial Harm That Could Not Reasonably be Avoided.

Air Canada’s Contractual Refund Policy did not cause and was not likely to cause substantial harm to consumers for several reasons. First, Air Canada provided a comprehensive

27 suite of AC Refund options for customers with non-refundable tickets to evaluate and determine

the best fit for their individual needs. The future travel options and the AC Refunds options

provided by Air Canada allowed for the contracted-for service at a future date or dates with no

expiration, or another option that better suited each customer’s individual needs. Indeed, ACTV’s

could be used effectively as cash if the customer preferred, to purchase cash equivalent gift cards or

any number of non-travel offerings, or book more valuable travel.

Second, Air Canada’s policy did not cause and was not likely to cause substantial harm

because customers bargained for Air Canada’s practices and made free and informed choices to

purchase non-refundable tickets after being made aware of their limitations. Non-refundable fares,

which are typically sold at a lower price point, carry certain risks in the event the consumer is

unable to travel. There are many reasons that flights might be cancelled due to circumstances

beyond Air Canada’s control. Each customer had the option to purchase a refundable ticket and

reasonably avoid the chance that they may be unable to receive a cash refund in the event of this

or any other type of cancellation that was outside of Air Canada’s control.

The Conditions of Carriage, Tariff, and applicable fare rules were appropriately disclosed and made available to consumers, and many consumers made the free and informed choice to purchase non-refundable tickets. Many others purchased refundable tickets. Although the

Enforcement Complaint states that “a consumer acting reasonably would not believe that he or she must pay more to purchase a refundable ticket in order to be able to recoup the ticket price when the airline fails to provide the service paid for through no action or fault of the consumer,” Compl. at ¶ 8, this is undermined by the express language of Air Canada’s Conditions of Carriage, which address flight delays that are caused by circumstances beyond Air Canada’s control and do not contain a requirement for a cash refund. See The Pevsner Petition and Order at 10. It is also

28 undermined by DOT precedent on this express issue. Consumers purchasing non-refundable

tickets were well-aware that they might be unable to travel for reasons of their own or for reasons beyond the carrier’s control. If consumers wished to ensure they are fully protected from potential loss, they were free to purchase a refundable fare option at a higher price point. See id. (“To require carriers, as the petitioner urges, to offer full refunds or a penalty-free ticket change for any schedule change would represent an unwarranted intrusion into the operational decisions of

air carriers and would not be in the public interest. . . . Passengers can choose whether to buy

a refundable or nonrefundable ticket at the time of purchase and can choose between carriers

offering different fare products.”) (emphasis added); see also The Joel Kaufman Petition at 3-4.

Customers who made this trade-off, a trade-off that the Department has consistently recognized

and sanctioned, were not substantially harmed by their own free and informed choice. See The

Pevsner Petition and Order at 9-10; see also The Joel Kaufman Petition at 3 (“Thus, the lower

price for non-refundable tickets is a trade-off for passengers agreeing to a restriction that allows a

carrier to manage its inventory and cash flow. The public benefits in low fares found to exist under

our present deregulated fare environment could be undone by the government intrusion requested

by petitioner. . . . that is generally beneficial to the industry and to the public.”) (emphasis added).

Third, DOT’s focus on Air Canada’s decision to scale its customer service refund policy

back to the terms provided in its Conditions of Carriage and Tariff cannot constitute substantial

harm to its customers. Although Air Canada employed a goodwill customer service policy of

providing refunds to customers who booked non-refundable fares for a limited time for certain

flights cancelled prior to March 19 due to COVID-19 governmental restrictions, Air Canada was

not contractually obligated to do so. Air Canada’s customers cannot be substantially harmed by

Air Canada’s decision not to provide a refund that it was never actually required to provide under

29 Air Canada’s Conditions of Carriage, Tariff, CTA regulations or, in the case of non-refundable tickets, the applicable fare rules. Moreover, Air Canada did not ever publicize or commit to its goodwill policy or give any assurance that it would remain in force, and therefore, customers had no basis for relying on this temporary goodwill customer service policy.

Finally, consumers had many ways to reasonably avoid any alleged harm. Throughout the pandemic, consumers had the option to sell their ACTV or exchange the value of their ticket for

Aeroplan miles with a 65% bonus, and subsequently redeem them, including for prepaid credit cards which could be used as cash for an almost unlimited range of purchases, or for other non- travel options. Moreover, consumers who purchased non-refundable tickets between February 1,

2020 and April 13, 2021 now have the option to request a refund in light of Air Canada’s current refund policy. In fact, even customers who previously accepted an ACTV or Aeroplan points for a flight during that time period can choose to exchange these for a refund to the original form of payment. See Air Canada to Offer Refunds for All Fares for Flights Affected by COVID-19 since

February 1, 2020, supra.25

2. Any Alleged Harm Was Outweighed by the Countervailing Benefits to Consumers and Competition that Air Canada’s Contractual Refund Policy Produced.

The Department has failed to adequately or appropriately consider the COVID-19 global pandemic and its catastrophic impact on the international aviation community as a whole, and on

Air Canada in particular, and the Department has failed to take into account the effect of the

25 Air Canada’s circumstances are distinguishable from cases in which the alleged injury was the charge itself and the time spent pursuing refunds constituted additional injury. Cf., FTC v. Amzon.com, Inc., 2016 U.S. LEXIS 55569 (W.D. Wash. April 26, 2016). Here, it is undisputed that the original charge did not constitute an injury. The customers were properly charged for flights that they intended to purchase and were then unable to take due to the global pandemic. To the extent that the Department may be attempting to allege that customers were harmed by being given the option of travel credits rather than a cash refund, the time spent pursuing these options would not constitute an injury.

30 COVID-19 global pandemic on airline refund practices. Contrary to the conclusory allegations in the Enforcement Complaint, contractual refund policies such as Air Canada’s, which utilize non- cash refunds for non-refundable tickets, provide significant benefits to consumers and promote competition throughout the international aviation community. The Department’s “views” are not based on a thorough analysis of the relevant facts and ignore the adverse effects its policies have on competition. 2020 was the worst year in history for the aviation industry, and the dire situation has escalated into a “full-scale global transportation crisis”. See Margaret Taylor, Aviation: sector experiences ‘worst year in history’, International Bar Association (Apr. 22, 2021).26 The aviation industry has never endured such a pervasive and sustained decline in air service demand. See

Garrow, L. Lurkin, V. How COVID-19 is impacting and reshaping the airline industry, J Revenue

Pricing Manag 20, 3–9 (2021). As demonstrated below, previous crises that harmed the aviation industry, including the global recession in 1991, the SARs outbreak in 2003, and the 9/11 attacks in 2001, do not come close to the damage that has been done and continues to be inflicted by the

COVID-19 pandemic.27

26 https://www.ibanet.org/article/6B58FF2E-7DD6-4883-B89B-CBC6AF5E8CC0 (last visited June 15, 2021); see also Airports Council International, The Impact of COVID-19 on the Airport Business and the Path to Recovery (March 25, 2021), https://aci.aero/news/2021/03/25/the- impact-of-covid-19-on-the-airport-business-and-the-path-to-recovery/. 27 Id.; IATA Advisory Council Chairs: Coordination Meeting (June 1, 2021).

31

The overall drop in passenger traffic has had a devastating impact on airlines worldwide,

but non-U.S. carriers such as Air Canada were the hardest hit, as significant border closures across

the globe—and in the U.S.-Canada transborder market in particular—brought traffic to a standstill

in the second quarter of 2020. These closures are ongoing. The International Air Transport

Association (IATA) estimates that cross-border air traffic fell by more than 75% in 2020 compared

with 2019, marking “by far the sharpest traffic decline in aviation history.” See The Emerging from the Crisis: A Study of the Impact of the COVID-19 Pandemic on the Air Transport Sector,

Emerging from the Crisis: A Study of the Impact of the COVID-19 Pandemic on the Air Transport

Sector, Report of the Standing Committee on Transport, Infrastructure and Communities, Vance

Badawey, Chair (the “Canadian Report”) (citing International Air Transport Association [IATA],

2020 Worst Year in History for Air Travel Demand, News release, 3 February 2021).

While 2021 has ushered in an increase in U.S. domestic traffic, the same cannot be said for

Air Canada, which remains subject to some of the world’s most stringent travel restrictions.

Although some minor alleviated measures have been announced to come into force in early July

32 for Canadian who have received both doses of vaccine at least 14 days priors to travel, today, only

Canadian citizens, residents, and essential workers can enter the country, and Canada requires such

arriving international passengers to quarantine for two weeks, take a coronavirus test, and pay out

of pocket to spend the first three days of their quarantine at a hotel while waiting for their results.

Since March 2020, Air Canada has continued to operate at approximately 90% reduced capacity

compared to pre-COVID levels. According to ICAO, gross passenger operating revenues will

likely not recover to pre-COVID levels until 2024 (at the earliest). See Margaret Taylor, Aviation:

sector experiences ‘worst year in history’, International Bar Association (Apr. 22, 2021);28 see also

The Canadian Report (internal citation omitted).

Many carriers have been able to survive with government support, but unfortunately, the

aid does not come close to filling the void left by the pandemic. IATA estimates that governments

around the world provided $173 (USD) billion in airline support, but this hardly makes up for the

$371 (USD) billion loss in gross revenues in 2020, and the estimated $286 to $322 (USD) billion

in gross revenue losses for 2021. See ICAO’s June 9, 2021 Presentation in Montréal, Canada:

Effects of Novel Coronavirus (COVID‐19) on Civil Aviation: Economic Impact Analysis. Indeed these catastrophic losses resulted in the complete loss or bankruptcy/restructuring of numerous airlines in 2020, including but not limited to LATAM, Island Express Air, AtlasGlobal, Cathay

Dragon, and Flybe, all of which succumbed to COVID’s economic effects. See Margaret Taylor,

Aviation: sector experiences ‘worst year in history’, International Bar Association (Apr. 22, 2021).

Moreover, the Canadian government was one of the last governments to provide its carriers with financial support, further amplifying COVID’s harsh economic effects on Canadian carriers,

28 https://www.ibanet.org/article/6B58FF2E-7DD6-4883-B89B-CBC6AF5E8CC0 (last visited June 15, 2021).

33 including Air Canada. Air Canada’s revenue fell by approximately 70% in 2020 as a result of

COVID-19 and the fact that it did not receive immediate government funding.29 It was forced to

lay off more than half its workforce, sell aircraft, cancel orders for new aircraft, and suspend

critical service to several smaller cities. See The Globe and Mail (Canada), June 1, 2021. Canadian

carriers continue to greatly lag behind their U.S. counterparts in a number of key metrics. For

instance, according to data from CAPA and OAG, Air Canada’s capacity for the last week of May

was 87% less than pre-COVID levels in 2019. By comparison, American Airlines’ capacity

decreased just 27% for the same time period30 and air travel surged nearly 500% in the U.S. over

Memorial Day Weekend.31 Canada continues to be closed to most foreigners who are not

travelling for essential reasons, and a number of provinces have imposed border barriers as well

as quarantine obligations - even for domestic travel.

Air Canada’s Contractual Refund Policy provided numerous benefits to consumers and

competition, these benefits outweighed any alleged harm, and the Department has consistently

acknowledged the public benefits that stem from providing carriers the ability to offer both fully refundable and non-refundable fares.32 Indeed, any conclusion that it was unfair not to provide a

cash refund to customers who purchased less expensive non-refundable tickets threatens to deprive

29 News Release, Air Canada Reports 2020 Annual Results (Feb. 12, 2021), https://aircanada.mediaroom.com/2021-02-12-Air-Canada-Reports-2020-Annual-Results. 30 See Aviation Daily, The Daily Memo: Will Canadian Airlines Face Another Lost Summer? (May 31, 2021). 31 Yahoo!news, Air Travel Surged Nearly 500% During Memorial Day Weekend: TSA (June 1, 2021), https://news.yahoo.com/air-travel-surged-nearly-500-132738367.html. 32 For instance, in 2012, the Department confirmed that “the lower price for non-refundable tickets is a trade-off for passengers agreeing to a restriction that allows a carrier to manage its inventory and cash flow. The public benefits in low fares found to exist under our present deregulated fare environment could be undone by … government intrusion ….” See The Pevsner Petition and Order at 8 (“Absent compelling evidence of consumer deception or unfair methods of competition, we have allowed the marketplace to govern carrier decisions regarding fares and their associated conditions.”); see also The Joel Kaufman Petition at 3.

34 customers who purchased fully refundable fares of the benefit of their bargain. This interference with a form of contract that the Department has consistently permitted in the marketplace would undoubtedly result in higher airfares overall, to the detriment of the traveling public and, as it pertains to pricing, is strictly prohibited by the Airline Deregulation Act.

Contrary to DOT’s threadbare allegations, requiring carriers to provide cash refunds would

have had a damaging effect on competition. To account for these unprecedented losses in airline

revenue and passenger traffic, those airlines that have survived have been forced to make difficult

operating and staffing decisions. As revenue and government aid in most cases do not cover the

maintenance of their operations, carriers have been forced to cut routes, reduce frequencies, reduce

employee wages, place employees on leave, and eliminate positions altogether.33 Air Canada has

been forced to lay off large portions of its workforce and cut numerous routes to previously served

destinations.34

Refund policies that provided vouchers and other non-cash refunds allowed carriers to

preserve liquidity and remain competitive despite the unprecedented devastating effects of a global pandemic. Indeed, as explained to Congress by the CEO of Airlines for America:

[M]any carriers are encouraging customers to accept vouchers for future travel. This practice is not done with ill intent, but instead underscores the economic reality that if air carriers refund all tickets, including those purchased under the condition

33 In the past, the aviation and tourism industries supported over 80 million jobs worldwide, and the Airports Council International estimated that by the end of 2020, 46 million of those jobs were lost due to the economic effects of the COVID-19 pandemic. See Up to 46 million jobs due to COVID-19 aviation downturn, Airports Council International (Sept. 30, 2020), https://aci.aero/news/2020/09/30/up-to-46-million-jobs-at-risk-due-to-covid-19-aviation- downturn/. 34 See, e.g., CBC, Air Canada cuts 1,500 more jobs and cancels 17 more routes (Feb. 9, 2021), https://www.cbc.ca/news/business/air-canada-jobs-1.5906896 (“[Air Canada] will ‘temporarily reduce its unionized workforce by 1,500 people and by an as-yet-undetermined number of management positions’”), CBC, Air Canada cuts all service in Labrador, St. John’s to Toronto route axed (Jan. 12, 2021), https://www.cbc.ca/news/canada/newfoundland-labrador/air-canada- three-flights-cut-1.5870725.

35 of being non-refundable or those cancelled by a passenger instead of the carrier, this will result in negative cash balances that will lead to bankruptcy. Vouchers, future credit opportunities and other incentives are being offered as a means to stem untenable cash drain . . . .

Testimony of Nicholas Calio, The State of the Aviation Industry: Examining the Impact of the

COVID-10 Pandemic, Statement of Airlines for America before the United States Commerce,

Science, and Transportation Committee, May 6, 2021. Here, Air Canada’s Contractual Refund

Policy allowed it to withstand the unprecedented travel restrictions due to circumstances beyond its control and to continue to compete with U.S. and other foreign carriers during a time period when those carriers had received government subsidies. Requiring cash refunds would have imposed significant and potentially devastating harm on Air Canada, on transborder competition, and ultimately on consumers whom the Department is seeking to protect. The Department’s

Enforcement Complaint fails to even consider, much less adequately weigh, the countervailing benefits to competition.

The Department also claims that Air Canada’s policy did not provide “competitive benefits” because other carriers provide cash refunds when they cancel a flight or make a schedule change, but, like many before it, the Department fails to support this conclusion with any facts as to the myriad of other relevant commercial airlines. The Department has failed to recognize that

Air Canada was at a significant competitive disadvantage to U.S. carriers and other foreign air carriers who received government aid to assist them in their COVID-19 response efforts, and consequently, were in a stronger financial position. See Ben Goldstein, The Case Against

Extending the U.S. Payroll Support Program, The Daily Memo, Aviation Daily (August 25, 2020)

(stating that carriers are “at a competitive advantage to their Canadian and Latin American counterparts, who have received little to no government support.”); see The Canadian Report at 21

(“A number of witnesses pointed out that Canada is one of the only industrialized countries that

36 has not yet put in place a specific national recovery plan for the aviation industry.”) (internal citation omitted); Id. (“Some [witnesses] were concerned that foreign aviation companies that had received significant financial support from their governments would take international market share from Canadian companies.”) (internal citation omitted); Id. at 22 (“Witnesses also pointed out the importance of Canadian airports being able to compete with American ones. “If Canadian operators lose market share, it will undermine the years of effort and billions of dollars they have invested to improve Canada’s connections with the rest of the world.”) (internal citation omitted).

Throughout the time period between March 2020 and April 2021, Air Canada did not receive any form of a “bailout” or substantial government assistance. It was not until April 2021 that the

Canadian Government agreed to provide Air Canada with a support package.

Finally, for the Department to find that Air Canada’s scaling back on goodwill policies constitutes an unfair practice would disincentivize carriers from ever providing customers more than the minimum level of flexibility guaranteed in their Conditions of Carriage. Allowing carriers to offer benefits above and beyond what their Conditions of Carriage require is beneficial to their customers, and carriers will not be incentivized to do so if they cannot scale back these policies without fear of reprisal.

Air Canada’s Contractual Refund Policy resulted in benefits to both consumers and competition. In fact, if Air Canada’s Contractual Refund Policy was found to be unfair, this would result in significant harm to consumers and competition. Accordingly, the Department’s

Enforcement Complaint should be dismissed.

37 VI. CONCLUSION

For the reasons set forth herein, Air Canada respectfully requests that its Motion to Dismiss be granted and that the Enforcement Complaint be dismissed.

Respectfully submitted,

Evelyn D. Sahr Charles A. Zdebski Mark A. Johnston Drew M. Derco Eckert Seamans Cherin & Mellott, LLC 1717 Pennsylvania Avenue, NW Suite 1200 Washington, D.C. 20006 Tel: (202) 659-6600 Fax: (202) 659-6699 [email protected] [email protected] [email protected] [email protected]

38 CERTIFICATE OF SERVICE

I hereby certify that I have on this date electronically served a copy of the foregoing Air Canada’s Motion to Dismiss the Enforcement Complaint and Memorandum in Support on the following persons:

Blane Workie [email protected]

Kim Graber [email protected]

Rob Gorman [email protected]

U.S. Department of Transportation Office of Hearings, M-20 [email protected]

June 30, 2021

______Drew M. Derco

39