IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII ALOHA AIRLINES, INC. a Hawai’i Corporation, and ALOHA AIR GROUP, INC., a Hawai’i Corporation, Plaintiffs, vs. MESA AIR GROUP, INC., a Nevada Corporation, CHARLES D. LAURITSEN, JOE BLOCK, AND DOES 1-100, Defendants. _____________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CV. NO. 07-00007 DAE-BMK AMENDED ORDER DENYING DEFENDANTS’ MOTION TO DISMISS On Monday, March 12, 2007, the Court heard Defendants’ Motion to Dismiss. John T. Komeiji, Esq., Robert D. Crockett, Esq., and Brian Kang, Esq., appeared at the hearing on behalf of Plaintiffs; Robert Marks, Esq., and Maxwell Blecher, Esq., appeared at the hearing on behalf of Defendants. After reviewing the motion and the supporting and opposing memoranda, the Court DENIES Defendants’ Motion to Dismiss. Case 1:07-cv-00007-DAE-BMK Document 37 Filed 04/02/07 Page 1 of 31 PageID #: <pageID>
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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
ALOHA AIRLINES, INC. a Hawai’iCorporation, and ALOHA AIRGROUP, INC., a Hawai’iCorporation,
Plaintiffs,
vs.
MESA AIR GROUP, INC., a NevadaCorporation, CHARLES D.LAURITSEN, JOE BLOCK, ANDDOES 1-100,
Defendants._____________________________
))))))))))))))))
CV. NO. 07-00007 DAE-BMK
AMENDED ORDER DENYING DEFENDANTS’ MOTION TO DISMISS
On Monday, March 12, 2007, the Court heard Defendants’ Motion to
Dismiss. John T. Komeiji, Esq., Robert D. Crockett, Esq., and Brian Kang, Esq.,
appeared at the hearing on behalf of Plaintiffs; Robert Marks, Esq., and Maxwell
Blecher, Esq., appeared at the hearing on behalf of Defendants. After reviewing
the motion and the supporting and opposing memoranda, the Court DENIES
Defendants’ Motion to Dismiss.
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1 For purposes of this Motion, this Court need not determine the actualmarket. Aloha characterizes the market as the “Inter-Island Market,” though Mesadoes not concede the existence of such a market. If or when this case goes to trial,the market will be defined after receiving evidence from each side.
2
BACKGROUND
Plaintiffs, Aloha Airlines, Inc. and Aloha Air Group, Inc. (“Aloha”),
are local airline carriers that service the Hawaiian islands. (Complaint ¶ 12.)
Before June 2006, three airline carries dominated services to the Hawaiian islands,
with Aloha and Hawaiian Airlines controlling the majority of services. (Id.) In
June 2006, Defendants, Mesa Air Group, Inc., et al. (“Mesa”), entered the market,
offering rates below that of cost.1 (Id. ¶ 24.)
In early 2004, Mesa began a study contemplating entry into the
market. (Id. ¶ 15.) At some point, Aloha apparently obtained information from
that study, in the form of an email exchange between one of Mesa’s consultants,
Mo Garfinkle, and Mesa’s Chief Financial Officer, Peter Murnane, indicating that
Mesa should enter the market and push Aloha out. (Id.) In December 2004, Aloha
filed for Chapter 11 relief under the United States Bankruptcy Code, 11 U.S.C.
§§ 101, et seq. (“Bankruptcy”). (Id. ¶ 13.)
Some time later, Mesa entered into negotiations with Aloha for
potential investment purposes, resulting in two separate confidentiality agreements
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(“Confidentiality Agreements”) on or about January 6, 2005 and January 25, 2006.
(Id. ¶ 17.) Under the Confidentiality Agreements, Aloha would disclose
confidential information for Mesa to evaluate its potential for investment in Aloha.
The Confidentiality Agreements contain a provision that “all such information
(whether written or oral) furnished” in connection with Mesa’s review of its
potential investment would remain confidential. (Id. ¶ 18.) The Confidentiality
Agreements also provide that Mesa “will not knowingly or intentionally use any
Information other than for the purpose of determining your [Mesa’s] interest in
entering into the Transaction[.]” (Id.) If terminated, Mesa also was under an
obligation to destroy “all copies of the written Information” in its possession, and
“[a]ny oral Information will continue to be subject to the terms of this letter
agreement.” (Id. ¶ 19.)
Following execution of the Confidentiality Agreements, Mesa
obtained access to confidential and proprietary trade secrets and commercial
information, such as access to an electronic data room, oral and written
presentations and discussions that contained Aloha’s financial information,
Aloha’s business plans, internal pro forma forecasts and analysis of its business
and potential, identification of strategic opportunities, and financial information
and data. (Id. ¶ 20.) Aloha identifies at least two meetings, one held in January
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2005 and the other in January 2006, during which Aloha discussed with and
disclosed to Mesa confidential information containing proprietary data and trade
secrets, including Aloha’s costs and projections for its operations. (Id. ¶¶ 21-22.)
Since then, Mesa’s Chief Executive Officer, Jonathan Ornstein, has
acknowledged publicly that Mesa did “have the benefit of looking at both Aloha
and Hawaiian when they were in bankruptcy,” contributing to Mesa’s “pretty
strong” feeling that it could be “successful for a low cost carrier.” (Id. ¶ 23.) On
June 8, 2006, Mesa began to offer its inter-island flights through its subsidiary,
“go!,” pricing its flights at below-cost rates, while indicating that those low costs
would remain in effect for some time, possibly for five years. (Id. ¶¶ 7, 24.)
In light of those developments, Aloha filed a Complaint on January 9,
2007, asserting a federal claim for attempted monopolization, challenging Mesa’s
predatory pricing in violation of the Sherman Act, 15 U.S.C. § 2, and contract
claims for breaching the Confidentiality Agreements and defrauding Aloha. Aloha
sought monetary damages and injunctive relief, and it made a jury demand. (Id. ¶
1; Demand for Jury Trial.) The heart of Aloha’s Complaint is that Mesa sought to
drive Aloha out of business with Mesa’s below market costs to monopolize the
market, and that Mesa misused confidential information, in violation of the
Confidentiality Agreements, to accomplish that goal. (Id. ¶¶ 25, 26.) Once that
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objective is accomplished, Aloha asserts that Mesa will raise costs because it will
have no competition and, thus, no incentive to keep costs low. (Id. ¶ 25.) Mesa
filed the instant Motion on January 29, 2007, which Aloha opposed on February
22, 2007. Mesa filed its reply on March 1, 2007.
STANDARD OF REVIEW
A motion to dismiss will be granted where the plaintiff fails to state a
claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). A complaint
should not be dismissed for failure to state a claim unless it appears beyond doubt
that the plaintiff can prove no set of facts in support of his claim which would
entitle him to relief. See Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416
F.3d 940, 946 (9th Cir. 2005). Review is limited to the contents of the complaint.
See Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir. 1994).
Allegations of fact in the complaint must be taken as true and construed in the light
most favorable to the plaintiff. See Livid Holdings, 416 F.3d at 946. “However,
the court is not required to accept legal conclusions in the form of factual
allegations if those conclusions cannot reasonably be drawn from the facts
alleged.” Cholla Ready Mix, Inc. v. Civish, 382 F.3d 969, 973 (9th Cir. 2004)
(quoting Clegg, 18 F.3d at 754-55)). “Nor is the court required to accept as true
allegations that are merely conclusory, unwarranted deductions of fact, or
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unreasonable inferences.” Id. (quoting Sprewell v. Golden State Warriors, 266
F.3d 979, 988 (9th Cir. 2001)). Thus, “conclusory allegations without more are
insufficient to defeat a motion to dismiss for failure to state a claim.” McGlinchy
Mesa argues that the Airline Deregulation Act (“ADA”) preempts
Aloha’s contract and fraud claims. Mesa does not take issue with Aloha’s first
cause of action concerning attempted monopolization in violation of the Sherman
Act. Thus, even if this Court were to find that the ADA preempts Aloha’s contract
and fraud claims, Aloha’s first cause of action still would stand. Aloha responds
that, under established precedent, the ADA does not preempt the contract or fraud
claims at issue here.
The ADA contains a preemption provision:
Except as provided in this subsection, a State, politicalsubdivision of a State, or political authority of at least 2States may not enact or enforce a law, regulation, or otherprovision having the force and effect of law related to aprice, route, or service of an air carrier that may provideair transportation under this subpart.
49 U.S.C. § 41713(b)(1) (emphasis added). “‘Pre-emption may be either express
or implied, and is compelled whether Congress’s command is explicitly stated in
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2 The Supreme Court in Morales cites ADA, 49 U.S.C. § 1305(a)(1), whichsince has been re-codified as 49 U.S.C. § 41713.
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the statute’s language or implicitly contained in its structure and purpose.’”
Morales v. Trans World Airlines, Inc., 504 U.S. 374, 383 (1992) (quoting FMC
Corp. v. Holliday, 498 U.S. 52, 56-57 (1990)). “The question, at bottom, is one of
statutory intent, and [this Court must] accordingly ‘begin with the language
employed by Congress and the assumption that the ordinary meaning of that
language accurately expresses the legislative purpose.’” Id. (quoting Holliday, 498
U.S. at 57).
In Morales, the Supreme Court was asked to determine whether the
ADA preempted states from regulating deceptive airline fare advertisements
through their consumer protection statutes.2 See id. at 378. In doing so, the Court
examined the scope of the ADA’s preemption provision, focusing on the “relating
to” language. See id. at 383-84. Relying on its prior broad interpretation of
identical language in an employment statute, the Court adopted a similarly broad
reading of the “relating to” language in the ADA, finding that it preempts state
actions having a “connection with or reference to” airline “rates, routes, or
services,” which now would be “prices, routes, or services.” Morales, 504 U.S. at
384; see also Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282, 286 n.4
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(5th Cir. 2002) (“As part of the recodification, Congress changed the phrase ‘rates,
routes, or services’ to ‘price, route, or service,” which was not intended to change
existing law substantively). The Court ultimately concluded that the ADA
preempted guidelines for airline fare advertising, emphasizing the relation to
airline prices. See Morales, 504 U.S. at 390-91. The Court did not, however, set
down a blanket rule preempting state law claims; rather, it left open the possibility
that the ADA would not preempt nonprice-related claims or any other state claim
that is “‘too tenuous, remote, or peripheral’ [] to have pre-emptive effect.” Id. at
390 (citing Shaw v. Delta Air lines, Inc., 463 U.S. 85, 100 n.21 (1983)).
Significantly, the Supreme Court made clear that its decision was not intended to
“give the airlines carte blanche to lie to and deceive consumers.” Id.
Since then, numerous courts have made room for state claims where
the claims are only “tenuously, remotely, or peripherally” related to the airlines
prices, routes, or services. See, e.g., Smith v. Comair, Inc., 134 F.3d 254, 257 (4th
Cir. 1998); Travel All Over the World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d
1423, 1433 (7th Cir. 1996); West v. Northwest Airlines, Inc., 995 F.2d 148, 151
(9th Cir. 1993); Peterson v. Cont’l Airlines, Inc., 970 F. Supp. 246, 249 (S.D.N.Y.
1997). Courts also look to the purpose of the ADA when determining whether it
preempts state claims, so as not to give airlines free reign to enrich themselves
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without state law consequences. See, e.g., Charas v. Trans World Airlines, Inc.,
160 F.3d 1259, 1261 (9th Cir. 1998); Taj Mahal Travel, Inc. v. Delta Airlines, 164
F.3d 186, 195 (3rd Cir. 1998); In re Air Transp. Excise Tax Litig., 37 F. Supp. 2d
1133, 1140 (D. Minn. 1999). As such, when determining whether the ADA
preempts state law claims, this Court must look to the underlying facts of the
claims, whether contract, tort, or otherwise, to determine whether they are
preempted. See, e.g., Travel All Over The World, Inc., 73 F.3d at 1433. With that
in mind, this Court turns to the case at hand, addressing preemption of each claim
in turn.
A. Breach of the Confidentiality Agreements Not Preempted
Despite the broad construction of the statutory language, the Supreme
Court has not upheld preemption in all instances involving state enforcement of
laws “related to” airline prices, routes, or services. The Court specifically has
excluded breach of contract claims from preemption. See Am. Airlines, Inc. v.
Wolens, 513 U.S. 219 (1995). In Wolens, the Supreme Court determined that the
Illinois Consumer Fraud Act served as a primary means to police marketing
practices for airline services; thus, that level of control was intended to be left
largely to the airlines. See id. at 228. The ADA was not, however, designed to
monitor airlines’ contractual undertakings and private, contractual disputes related
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to airline prices, routes, or services. See id. at 231-32. Accordingly, under
Wolens, a party may seek relief under state contract law from an airline that has
“dishonored a term the airline itself stipulated” in a contract, without fear of
enlarging or enhancing rights under the ADA “based on state laws or policies
external to the agreement.” Id. at 232.
Mesa attempts to distinguish Wolens on the basis that it created a
narrow exception, which subsequent case law has limited. See, e.g., Buck v. Am.
Airlines, Inc., 476 F.3d 29, 36 (1st Cir. 2007); Breitling U.S.A., Inc. v. Federal
Express Corp., 45 F. Supp. 2d 179, 184 (D. Conn. 1999); Stone v. Cont’l Airlines,
Inc., 905 F. Supp. 823, 826 (D. Haw. 1995). Those cases do not, however, involve
the type of pure, contractual claim that is present here. In Buck, the claims at issue
involved refunds of base airline fares, which the plaintiffs were denied after
purchasing nonrefundable airline tickets. See 476 F.3d at 31. The First Circuit
distinguished that case from Wolens in that the plaintiffs’ claims relied on a single
word in the tickets, i.e., “nonrefundable,” and, thus, that word alone could not
place the plaintiffs’ claims within the safety of the Wolens contract exception. See
id. In Breitling, the plaintiff attempted to use the “equitable doctrine of waiver” to
invalidate a condition of liability in the contract. See 45 F. Supp. 2d at 186.
Because the plaintiff relied on an equitable doctrine, however, to waive a term of
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3 At the hearing, Mesa raised the argument that Aloha’s state claims merelyserve as a backdoor attempt to prevent Mesa’s “monopolistic” practices, in caseAloha fails to prevail on its Sherman Act claim. Specifically, Mesa asserted that, ifAloha wins on the monopolization claim, the state claims will be moot. This Courtdisagrees. Even if Aloha were not to prevail on its Sherman Act claim, Aloha’sstate claims may be litigated because they are separate and distinct.
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the agreement, the plaintiff’s claim was preempted because it would have
amounted to an “enlargement or enhancement” of the ADA based on state law. Id.
at 186-87. Finally, in Stone, although a claim was stylized as one of breach of
contract and implied warranties to provide “safe and secure premise[s],” it was
based on the same facts and allegations underlying the tort claims for assault and
battery of a first-class passenger by another intoxicated and disorderly passenger,
which claims were preempted because they pertained to airline services. See 905
F. Supp. at 826. None of those situations mirror that presented here, where
Aloha’s claim is based on express, contractual provisions that are nothing but
contractual in nature.
Not only is Aloha’s claim for breach of the Confidentiality
Agreements grounded in terms of the contract, i.e., those terms forbidding such
“knowing and intentional” use of confidential information other than for the
purpose of investing in Aloha, but it also seeks to promote the policies underlying
deregulation.3 The purpose of the ADA “was to encourage and develop an air
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transportation system that ‘relies on competitive market forces to determine the
quality, variety, and price of air services.’” Trans World Airlines, Inc. v. Mattox,