By Linda Chiem

Law360 (November 3, 2020, 5:56 PM EST) -- A Texas federal judge said American Airlines must face a proposed breach-of-contract class action over its refusal to refund customers for flights that were canceled amid the COVID-19 pandemic, but ordered arbitration for two individual customers who bought their tickets through online travel agencies.

In a mixed ruling on Monday, U.S. District Judge Reed O'Connor denied American's motion to dismiss lead plaintiff Lee Ward's claims, but granted the airline's motion to compel arbitration of claims from two other plaintiffs — James Saunders and William Holloway — whose ticket purchases through Hotwire and Expedia were subject to an enforceable arbitration agreement.

Although American is not a party to the Hotwire or Expedia terms of use, American is a third-party beneficiary that's entitled to enforce the arbitration clauses with signatories Saunders and Holloway, the judge said.

Meanwhile, Ward's claims can go forward. He plausibly alleged that American breached its conditions of carriage by refusing to refund customers for flights canceled due to the COVID-19 outbreak and only offering customers vouchers or travel credits for future travel, according to the decision.

Judge O'Connor was unpersuaded by American's argument that Ward's claim was preempted by the Airline Deregulation Act of 1978, the sweeping federal law that preempts state-law claims having a connection with or reference to airline prices, routes or services.

The U.S. Supreme Court established in 1995's American Airlines v. Wolens that "the ADA permits state-law-based court adjudication of routine breach-of-contract claims." And while the ADA "stops states from imposing their own substantive standards with respect to rates, routes or services," it doesn't bar "affording relief to a party who claims and proves that an airline dishonored a term the airline itself stipulated."

American set the terms of its conditions of carriage and Ward is just trying to enforce a voluntary agreement entered into by American, Judge O'Connor pointed out. American tells customers in its conditions of carriage that, irrespective of ticket types, "[i]f you decide not to fly because your flight was delayed or canceled, we'll refund the remaining ticket value and any optional fees," according to the decision.

"Even for 'nonrefundable' tickets, American explicitly states '[w]e will refund a non-refundable ticket [or the value of the unused segment of your trip] to the original form of payment if [w]e cancel your flight' or '[w]e make a schedule change that results in a change of 61 minutes or more,'" Judge O'Connor said. "Accepting all well-pleaded allegations as true, the court concludes Ward's breach-of-contract claim is not preempted."

Judge O'Connor also rejected American's request to pause Ward's claims from moving forward in court until the completion of arbitration proceedings for Saunders' and Holloway's claims.

"Proceeding with Ward's claim has no possible adverse effect on the arbitration proceeding and, therefore, will in no way thwart federal policy in favor of arbitration," the judge said.

Ward, who just last week asked the court for class certification, first kicked off the suit in April accusing Fort Worth, Texas-based American of staving off its revenue losses by hanging on to money that should be paid back to customers for canceled flights when global travel ground to a near halt in the early months of the COVID-19 outbreak. Instead of full refunds, American offered its customers vouchers or credits for future travel.

Earlier this year, Ward booked two separate trips to travel from Las Vegas to Lima, Peru, on American Airlines flights, with the first trip scheduled for March 12-31 and the second trip scheduled for May 30-Aug. 3, according to the complaint. Ward paid more than $3,200 for his tickets.

Ward traveled to Lima as planned on March 12. But while still abroad, he was notified that his upcoming flights to return to the U.S. on American Airlines and Latam Airlines for March 31 had been canceled and the next possible return flight it had available wouldn't be until May 7, according to the suit. Ward had to pay out-of-pocket to book a return flight on different airlines, and once he returned stateside, American still refused to refund Ward for its portion of his canceled flight back to Las Vegas, according to the suit.

"We are pleased that a large part of the case remains intact and look forward to getting justice for passengers who were promised refunds but didn't get them," Steve Berman of Hagens Berman Sobol Shapiro LLP said in a statement on Tuesday.

Hagens Berman is also spearheading consumer refund suits against Delta Air Lines and United Airlines.

Numerous other airlines have also been swept up in a cascade of consumer refund lawsuits, including Allegiant Air, Hawaiian Airlines, JetBlue Airways, Southwest Airlines and Spirit Airlines.

Most of the suits were filed shortly after the U.S. Department of Transportation issued an enforcement notice on April 3 warning airlines that they are still required to refund passengers for flights that are canceled or significantly delayed, even as government travel advisories and stay-at-home mandates aimed at combating the COVID-19 outbreak obliterate airlines' passenger volumes and revenues.

According to the consumers, the airlines' refund policies and practices are all the more galling in light of the fact that U.S. taxpayers have fronted the airlines $25 billion in payroll support grants and $25 billion in loans as part of the Coronavirus Aid, Relief and Economic Security Act.

An American Airlines spokesman declined to comment Tuesday.

The airline has previously defended its policies in response to COVID-19. It had waived change fees for previously booked flights for travel through Sept. 30 and for new bookings for travel through the first half of next year. According to an updated policy on American's website, the airline said it eliminated all change fees for first-class, business-class, premium economy and main cabin tickets for all domestic and short-haul international flying for tickets issued on or after Aug. 31.

Ward and the proposed class are represented by Steve W. Berman, Daniel J. Kurowski and Whitney K. Siehl of Hagens Berman Sobol Shapiro LLP, E. Adam Webb and G. Franklin Lemond Jr. of Webb Klase & Lemond LLC and Allen R. Vaught of Vaught Law Firm LLC.

American Airlines is represented by James E. Brandt, Michael E. Bern and Tyce R. Walters of Latham & Watkins LLP and Dee J. Kelly Jr. and Lars L. Berg of Kelly Hart & Hallman LLP.

The case is Lee Ward et al. v. American Airlines Inc., case number 4:20-cv-00371, in the U.S. District Court for the Northern District of Texas.

--Editing by Janice Carter Brown.

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