Friday, July 25, 2014

19th Century Contract Formalism From a Unanimous 21st Century Supreme Court

by Michael Dorf

Next week, I'll once again be speaking at the annual Practicing Law Institute Supreme Court Review session (in-person in NYC, group-cast in Atlanta and Cleveland, and also available via webcast). I'll be participating in all of the panels but I have primary responsibility for presenting Bond v. United States (about which I wrote a column and a blog post), Schuette v. BAMN (about which I wrote a column and a blog post), ABC v. Aereo (about which I wrote a post-argument blog post and another post-opinion blog post), and Northwest v. Ginsberg My presentations on these cases will be based in substantial part on my earlier writing but because I haven't yet written anything about Northwest, I thought I'd preview my remarks on that case here. I apologize for reporting on a case almost four months after it was handed down and I realize that I may end up making points that others have already made elsewhere. But the case struck me as sufficiently interesting to warrant a few words on DoL.

The dispute is straightforward enough. Ginsberg was a "Platinum Elite" member of Northwest's frequent flyer program (think George Clooney in Up in the Air) but Northwest terminated his miles for "abuse" under a contractual provision under which "abuse of the . . . program (including . . . improper conduct as determined by [Northwest] in its sole judgment . . . may result in cancellation of the member's account." Northwest provided evidence that Ginsberg was a first-class whiner but Ginsberg claimed that he was actually terminated as part of a cost-cutting program by Northwest. Ginsberg brought a number of claims against Northwest but by the time the case reached the SCOTUS, only one was at issue: a claim under Minnesota law (conceded by all parties to apply) for breach of the covenant of good faith and fair dealing. The question presented was whether the federal Airline Deregulation Act (ADA) pre-empted that claim.

The Court, in a unanimous opinion by Justice Alito, said that the good-faith-and-fair-dealing claim was pre-empted. The ADA by its terms says that a state "may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service . . . ." The Court first rejected the argument that a common law rule is not a "law, regulation, or other provision." It next said that because the Minnesota covenant of good faith and fair dealing is an "other provision" that affects both prices and services, it is pre-empted.

To reach that result, the Court had to distinguish its 1995 ruling in American Airlines v. Wolens. In that case, the Court held that the ADA does not pre-empt contract claims against an airline regarding frequent-flyer miles because a contractual obligation is not a regulation or provision of state law; rather, it is a voluntarily undertaken obligation. By contrast, the Court said in Northwest, at least in Minnesota, the covenant of good faith and fair dealing is imposed by law--because it cannot be waived by the parties. In addition, the Court said, Minnesota's covenant of good faith and fair dealing is based on "policy reasons," and "when the application of the implied covenant depends on state policy, a breach of implied covenant claim cannot be viewed as simply an attempt to vindicate the parties' implicit understanding of the contract."

With due respect, let me suggest that the Court's reasoning is 19th century formalism of the sort that legal realism undermined over a century ago. All contracts are formed against the backdrop of law, including some waivable rules and some non-waivable rules. And a state law rule based on a state policy--even if non-waivable--can readily be understood as an effort to facilitate the best expression of the parties' voluntary undertakings or to establish the framework within which those voluntary undertakings occur.

Let's consider an example the Court itself gives. After holding that the good faith and fair dealing claim is pre-empted, the Court explains that its "holding does not leave participants in frequent flyer programs without protection," citing three such protections: 1) the free market, in which, as every traveler knows, competition among airlines ensures the highest quality of service (sarcasm added); 2) the possibility of Dep't of Transportation regulation and investigation; and 3) a breach of contract claim. But Ginsberg did not appeal the lower courts' rejection of his breach of contract claim so he relinquished any chance to push that.

Suppose Ginsberg had not relinquished his contract claim. If not, the Court indicates that he might have won because the contract itself might best be understood as "not actually giv[ing] Northwest unfettered discretion to terminate his membership in the program." Well, why not? I can think of three possibilities, all of which undermine the Court's core holding in the case.

First, we could imagine that under Minnesota law, an adhesion contract is construed against the party that wrote it, here Northwest. But if so, that rule is itself a "policy" which may not actually reflect the parties' intentions--and the Court gives no indication that it has inquired into whether parties can waive the rule of construction regarding adhesion contracts.

Second, perhaps the Minnesota courts would construe the contract as limiting the discretion of Northwest because, if Northwest has complete discretion to call anything abuse and cancel a contract, then Northwest hasn't actually promised anything; if not, then there is no consideration and thus no contract. But now we have the same problem. The doctrine of consideration is itself a policy that comes from the state, rather than a purely voluntary undertaking of the parties. What's more, it's non-waivable. If X and Y enter into what they call a "contract" whereby X promises to do something for Y but Y doesn't promise to do anything for X, the "contract" is unenforceable, even if it specifies that "this contract shall be enforceable notwithstanding the absence of consideration by Y."

Third, we might imagine that the Minnesota courts would construe the term "sole judgment" as meaning something like "sole judgment, exercised in good faith" on the theory that this is what any reasonable party would understand it to mean. But if so, that is literally indistinguishable from the duty of good faith and fair dealing.

Thus, the only way to make sense of the Court's distinction between contracts claims (not pre-empted because voluntary) and good faith/fair dealing claims (pre-empted because state-imposed) is that the Court believes that certain classical features of contract law (such as the requirement of consideration) are not really imposed by the state at all but simply part of the furniture of the universe, discovered (not made) by judges who find them in what O.W. Holmes Jr. derisively (but aptly) called "a brooding omnipresence in the sky."

To sum up: The unanimous opinion in Northwest rests on the premise that state court enforcement of contracts means merely giving effect to the voluntary undertakings of the parties, independent of any "policy" judgments. That view of contract law would have been widely recognized as laughably formalistic even in 1914. In 2014 it's astounding.  Langdellian formalism lives!


Hashim said...

I think the reason all 9 Justices "embraced formalism" in this scenario is that there's no other plausible interpretation of the statute.

The statute expressly preempts state law. If, as you suggest, there's no real distinction between law and contract, then the only possible result is that even contracts are preempted. But that seems like an obviously incorrect interpretation (even without relying on the precedential effect of Wolens). In short, I don't think the Justices embraced formalism at all -- they just recognized that Congress did.

Hashim said...

PS. The reason you can't run the argument the other way and say that merely having a contract is sufficient to escape preemption, even if the "contract" contains non-waivable provisions implied in law, is that would gut the preemption provision, since there's always the contract to buy the ticket. So a state could take *any* regulation and simply announce that it was a non-waivable implied-in-law provision of the contract to purchase the ticket.

Michael C. Dorf said...

Hash raises an interesting question about what a legal realist court should do when the legislature enacts a text which pre-supposes a formalist understanding of the law. This issue arises in constitutional law with respect to the Takings Clause, which appears to assume that property exists independent of the state law that defines it. In such circumstances, I agree that the courts need to just do the best that they can.

However, that does not mean that courts should pretend--or worse, believe--that formalism is actually true. I would have a lot more sympathy for the reasoning in Northwest, if the Court had said something like the following: "The ADA and our precedents require that we draw a line between contract claims and claims based in state regulatory policies. Of course, contract law itself is rooted in state regulatory policies, so the line is in some sense arbitrary. Nonetheless, to effectuate the congressional policy, we will regard those state policies that might fairly be construed as part of the traditional domain of contract law as not pre-empted, while treating other regulations as pre-empted."

However, the Court did not say anything like that and if it had, it would have reached the opposite result, because the covenant of good faith and fair dealing (even if non-waivable) is certainly part of the traditional domain of contract law.

gv516 said...

The problems you identify are fully due to Wolens. Justice O'Connor's partial dissent in that case makes the same arguments as you do (though she argues for broad preemption). Ginsburg rejected those arguments in her majority opinion, insisting that breach of contract suits only "hold parties to their self-imposed undertakings" and that the distinction between self-imposed and state-imposed obligations was outcome determinative. This case doesn't distinguish Wolens, it follows its somewhat dubious reasoning quite closely.

Michael C. Dorf said...

gv516: I agree that it would have been more precise to say that the Court distinguished the RESULT in Wolens while applying its logic. To repeat my answer to Hashim, I don't think there's anything wrong in principle with Congress preempting regulations but exempting a class of cases, as in the cigarette warning cases, where it's a subset of tort cases. And I think one can draw a fuzzy line between contract claims and other claims. What I object to in Northwest--and you're right that the sin is evident in Wolens too--is the conceptualization. Wolens at least puts the contract claim there on the right side of the line. Not so in Northwest, at least absent a better explanation.

Shak Olreal said...

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