Aviation Regulatory Update
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January 2018 AVIATION REGULATORY UPDATE DELTA PREVAILS OVER DOT ENFORCEMENT OFFICE IN DISPUTED CONSENT ORDER CASE A DOT Administrative Law Judge recently issued an order in favor of Delta’s challenge of a DOT Notice of Enforcement Proceeding and Proposed Assessment of Civil Penalties for the carrier’s alleged violation of DOT’s codeshare disclosure rule (14 C.F.R. 257.5(b)), the prohibition against unfair and deceptive trade practices (49 U.S.C. § 41712(c)), and the violation of a prior cease and desist order that prohibited Delta from failing to comply with the Department’s codeshare disclosure requirements. The proposed civil penalty was for $660,000. Delta refused to pay the penalty, and DOT filed a formal enforcement complaint under 14 C.F.R. Part 302. This is quite unusual as most carriers choose to follow the consent order process rather than risk formal litigation with DOT. The penalty resulted from a lengthy investigation by DOT’s enforcement office, during which DOT analysts called the Delta reservations line, pretending to be passengers interested in booking one‐way flights on a codeshare partner. If the DL reservation agent failed to disclose that the flight was operated by a codeshare partner, DOT noted a violation even though no tickets were purchased. Delta argued, and the ALJ agreed, that the applicable statute and regulation specify ticket purchase or booking as the triggering event for codeshare disclosure. Because there were no tickets purchased during DOT’s investigation, the ALJ determined that Delta’s actions could not have violated the codeshare disclosure rule and thus the penalty was improper. Barring a change in the statute and regulation, future investigations of alleged violations of codeshare disclosure requirements for oral communications would require DOT to purchase actual tickets to prove that a violation of 49 U.S.C. § 41712(c) and 14 C.F.R. 257.5(b) occurred. It is notable that the ALJ did comment on the concept that a specific regulatory or statutory provision governs over the general statutory prohibition on “unfair and deceptive practices”. This could be read as a mild rebuke of the enforcement office that it should not overly apply the broad unfair and deceptive trade practice statute, particularly if it is inconsistent with a specific regulation. NEW TAX BILL AFFECTS BUSINESS AVIATION On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act which will have short and long‐ term effects on individuals and businesses. The Act also directly impacts the Business Aviation industry as follows: 100‐Percent Expensing (Bonus Depreciation) Allows for “100 percent expensing”, which will allow taxpayers to immediately write off the cost of aircraft acquired and placed in service between September 27, 2017 and January 1, 2023. For tax years after 2022, ©Eckert Seamans Cherin & Mellott, LLC, 2018, all rights reserved. January 2018 AVIATION REGULATORY UPDATE the law provides for a phase‐out of bonus depreciation in increments of 20 percent each year for aircraft acquired and placed in service before January 1, 2027. Prohibition on Deduction of Employees’ Commuting Expenses Prohibits employers from deducting the cost of providing transportation to employees to commute between the employee’s residence and place of employment, unless provided for the safety of the employee. It is unclear whether this new provision would allow the deduction of commuting expenses and, if so, whether such deductions will be limited. Further guidance from the IRS is expected and will be needed to determine the implications upon implementation. Transportation Excise Tax Does Not Apply to Owner Flights on Managed Aircraft Amends Internal Revenue Code (IRC) § 4261 by adding a new subsection to clarify that owner flights on managed aircraft are not subject to the Federal Transportation Excise Tax (FET) ticket tax ($3.00 for domestic segments during 2002 or thereafter), but rather are subject to the non‐commercial fuel tax. The FET exception applies to payments by the aircraft owner (or lessee) for aircraft management services related to maintenance, support or flights on the aircraft. The exception does not actually require that the owner be on the flight or that the flight be on the business of the owner, but only that the owner (or lessee) pay for the aircraft management services. The National Business Aviation Association (NBAA) notes that “the issue has been the subject of controversy for more than 60 years, and this amendment clarifies the law consistent with the understanding of most people in the industry.” SOUTHWEST SETTLES PRICE FIXING LAWSUIT FOR $15 MILLION Beginning in July 2015, numerous antitrust lawsuits were filed by passengers against legacy carriers American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines. The cases alleged that the airlines “participated in an unlawful conspiracy” to artificially limit capacity in order to increase fares in violation of Section 1 of the Sherman Act. The cases were consolidated into a class. Earlier this month, a D.C. federal court judge approved a $15 million settlement between Southwest Airlines and members of the class. The preliminary settlement, which must still be approved by the Court, notes that Southwest denies colluding but will provide “a full account of facts” regarding the nature of the meetings that took place between the airlines to commit the alleged conspiracy. The other co‐defendants, American Airlines, Delta Air Lines, and United Airlines, have similarly denied any wrongdoing but continue to fight the allegations. Southwest’s cooperation will include: a full account of facts related to the alleged conduct, payment for meetings between plaintiff’s counsel and an industry expert, and interviews, affidavits, depositions and testimony of current Southwest employees to assist the class plaintiffs at trial. ©Eckert Seamans Cherin & Mellott, LLC, 2018, all rights reserved. January 2018 AVIATION REGULATORY UPDATE SOUTHWEST SUES STARTUP COMPANY THAT MONITORED AND DISTRIBUTED AIRFARE CHANGES In early January, Southwest sued startup company SWMonkey.com and its founders, Pavel Yurevich and Chase Roberts, in U.S. District Court in Dallas. The airline alleges the company and its founders violated the terms and conditions of Southwest’s website by improperly taking fare data off the site. The suit also alleges that Mr. Yurevich and Mr. Roberts violated trademark laws as well as the Computer Fraud and Abuse Act by accessing Southwest's “computers without authorization or in excess of authorized access.” SWMonkey.com was launched in November 2017. The startup’s business model involved charging a $3 fee for an automated email notifying passengers when Southwest fares or mileage requirements dropped on the airline’s website. With this knowledge, passengers could rebook at the lower fare, as Southwest allows travelers to rebook at lower prices and holds the difference for future travel. Following cease‐and‐desist letters from the airline, Yurevich and Roberts ended their service in late November. At issue in the suit is whether airlines' fares are public information. Though airfares are easily obtained, prices for certain schedules and city pairs are not generally published. Southwest sells its tickets on its own website and, like other major airlines, restricts the use of automated scraping tools on its website. Southwest alleges in the suit that it has lost at least $5,000 and will seek damages, including legal fees. COURT GRANTS AMERICAN AIRLINES’ MOTION TO DISMISS CUSTOMER BOARDING DISCRIMINATION CLAIMS In Shin v. American Airlines Group, Inc. (E.D.N.Y. Aug. 3, 2017), a customer/plaintiff alleged that American “dramatically” refused to allow him to board a flight from DFW to Corpus Christi, Texas, “[f]or the mere fact that the Plaintiff was Korean‐American,” while allowing Caucasian customers to board the flight. In his complaint, the plaintiff alleged claims under Title VI of the Civil Rights Act of 1964, the New York State Human Rights Law, and the New York Civil Rights Law. The plaintiff also alleged claims of misrepresentation, breach of the implied covenant of good faith and fair dealing, and breach of contract. For each claim, the plaintiff sought $1 million in compensatory damages and $5 million in punitive damages. The court found that the complaint was “completely devoid of details suggesting intentional discrimination,” such as a “derogatory remark” by an airline employee. The court ruled against the claims based on New York statutes because they do not provide a cause of action for alleged discrimination by a foreign corporation, such as American, that occurs outside New York. The discrimination was alleged to have occurred in Texas. On August 31, 2017, the plaintiff appealed the court’s judgment to the Second Circuit. ©Eckert Seamans Cherin & Mellott, LLC, 2018, all rights reserved. January 2018 AVIATION REGULATORY UPDATE CHINA AIRLINES, PHILIPPINE AIRLINES AND AIR NEW ZEALAND TO PAY $29.4M TO SETTLE PRICE‐FIXING CLASS ACTION After being accused of price fixing on long‐haul trans‐Pacific flights, China Airlines, Philippine Airlines and Air New Zealand have agreed to pay a total of $29.4 million to settle a proposed class action in the U.S. District Court for the Northern District of California. The plaintiffs recently moved for preliminary approval of the settlement agreements. According to the plaintiffs’ motion, China Airlines agreed to the largest settlement of $19.5 million in cash plus $250,000 for notice costs. Philippine Airlines agreed to pay $9 million, and Air New Zealand agreed to pay $400,000 plus $250,000 toward notice costs. The deals leave only two carriers left in the lawsuit, All Nippon Airways Co. Ltd. and EVA Airways Corp. Both have asked the U.S. Supreme Court to review whether the filed‐rate doctrine should prevent the lawsuit from going forward. The litigation dates back to 2007, when passengers accused a group of airlines of conspiring to fix prices on long‐haul trans‐Pacific flights to Australia, New Zealand and the Pacific Islands.