The (Unlawful) Sale of Awards

The (Unlawful) Sale of Awards

For the past 26 years, thousands, if not millions, of frequent flyers have wondered, “Why can’t I do with my frequent flyer miles as I wish? They are my miles, after all.”

And on several occasions during the past 26 years, when members have acted on this feeling and have sold their miles, they have found themselves making their case in court.

While cases such as these might seem trivial and petty to the uninitiated, and are often portrayed that way in the media, they are anything but to the airlines and frequent flyer program members involved. Though any single case might involve relatively small figures, when you’re talking about frequent flyer programs, you’re talking big bucks. And when big bucks are being defended, even the seemingly smallest debates can turn into landmark rulings.

Which brings us to American Airlines vs. Frequent Flyer Depot, Inc., et al.

Opening Statements
This latest suit, recently filed in American Airlines’ backyard — the 67th Judicial District, Tarrant County, Texas — pits the world’s largest airline against frequent flyers who have allegedly sold their miles, coupon brokers, and even an ARC-accredited travel agency.

American targets two separate coupon brokers in the suit, FrequentFlyerDepot.com (FFD) and Luxury Travel Source (LTS). Among the charges, the airline alleges that these brokers continue to advertise and engage in their services, despite being fully aware that, under the AAdvantage contract, neither mileage credit nor award tickets may be purchased, bartered, or sold, and that mileage and tickets are void if transferred for cash or other consideration.

American supports its case against FFD by referring to the broker’s Web site, which states, “Starting in Dallas, Texas, Frequent Flyer Depot has been in business since 1992.” It “provides professional brokerage of all frequent flyer miles and mileage rewards worldwide.” “We are the premiere online brokerage of frequent flyer tickets and mileage rewards” and “provide a secure service that allows travelers to buy and sell all frequent flyer tickets, mileage rewards, and upgrades.”

The suit goes on to document that FFD, via its Web site, offers to pay “1.8 cents per mile on AA,” more than any other U.S.-based airline. American seems particularly upset that the Web site states, “Although airline policy discourages buying or selling miles, it is NOT against the law for you to buy or sell frequent flyer awards.”

As part of its case against LTS, American documents that the “LTS Web sites misrepresent the propriety of selling mileage credit and award tickets.” Specifically, according to SellYourPoints.com (LTS evidently owns several Web sites, including discounttravelbrokers.com, mileagelink.com and even wiseflyer.com, which would appear to be named after a column run in this magazine, though we have no relationship of any kind with this organization), “There is no federal or state law restricting the sale, bartering or transfer of miles in 49 of 50 states (Utah being the exception).” And a disclaimer on MileageLink.com states, “It is totally legal to transfer miles to a third party. While the airline frowns upon the ‘selling’ of miles and certificates, it is currently being done around the world.”

The Main St. Travel Center of Monsey is the third defendant named in the suit. American claims that this ARC-accredited agency “brokered, purchased, and sold thousands of fraudulently obtained AAdvantage mileage credit for hundreds of award tickets and upgrades.” Based on its actions in violation of the Addendum to its ARC license, American issued a debit memo to the agency in the sum of $1,763,133.87 on Jan. 31, 2007. To date, Main St. has failed to pay and American no longer allows the agency to sell American Airline tickets.

And finally, a claim is made against a defendant listed only as John Doe II, who is said to have targeted the AAdvantage program and caused the accounts of certain AAdvantage members to be depleted of miles without their consent.

The Prosecution’s Case
The crux of American’s argument is relatively straightforward — when you enroll in the AAdvantage program, you implicitly agree to abide by the program’s terms and conditions, as spelled out in its member’s guide. You don’t like the “no buy and sell” restriction? Fine, don’t join the program and don’t collect AAdvantage miles, simple as that.

Or, at least, American would like the court to believe it’s as simple as that.

Beyond the defense that these rules against buying and selling AAdvantage awards are being ignored by the enterprises in question is the argument that buyers of these awards “likely would have purchased tickets from American had they not obtained the void award tickets from FFD. Furthermore, they likely displaced legitimate AAdvantage members or American customers who would have purchased tickets had the seats occupied by travelers with void award tickets been available.”

While we can’t assert the validity of the first claim, we certainly can side with American on the second claim. There is little doubt that the actions of these coupon brokers are taking away award inventory that likely would have been available to other members of the program. And, as the types of awards purchased via brokers are primarily for business- and first-class redemptions, they are an extremely valuable asset for American.

To further their actions against these alleged coupon brokers, American describes several transactions and the financial impact from their point of view. Among the examples they cite:

Between May 21, 2005 and May 22, 2007, FFD bought 600,000 mileage credits from one AAdvantage member redeemable for six award tickets valued at almost $42,000, including four tickets routed through DFW International Airport.
In another instance, they bought 860,000 AAdvantage mileage credits from another member and exchanged that for at least nine award tickets valued at almost $70,000.

And on yet another occasion, American charges that FFD purchased 440,000 miles, which were exchanged for four award tickets that American did not honor for travel because its investigation determined that the tickets had been sold and thus were void.

Furthermore, American claims it “has lost goodwill with AAdvantage members prevented from obtaining free award travel on American because these seats were occupied by individuals using wrongfully-obtained tickets, and with the general public who paid higher prices to American for valid tickets than those offered by FFD for wrongfully-obtained tickets. American also has been forced to expend significant resources to investigate FFD’s improper activities.”

The other coupon brokerage named in the suit, LTS, is based in Canada, which will make it much more difficult to prosecute. Nevertheless, the allegations and examples are pretty substantial.

American argues that LTS has wrongfully purchased at least 55,715,000 AAdvantage mileage credits and has wrongfully obtained at least 492 award tickets valued at more than $4.6 million (in case you are counting, this averages 8.2 cents per mile — significantly more than the commonly accepted 1.5-2 cent value of a mile).

As in the case of FFD, American documents that there were five award tickets that the airline did not honor because it determined that the tickets had been sold and thus were void. When this happens American will typically freeze the account of the member who sold the miles and force the person or persons who purchased the award ticket(s) to repurchase the ticket(s) at the current full fare in order to continue traveling.

Needless to say, members and passengers who find themselves in this kind of situation are in for a very long, and very bad day.

In an interesting twist to this case, American asserts the two principals of LTS sold their own miles between 2005 and 2007 in violation of American’s No-Sale Rule. Rarely have we seen a case where an alleged coupon broker is also involved in selling his or her personal miles. What’s even more interesting here is the amount of miles these two members are said to have sold: 6,685,000 miles, which were redeemed for 62 tickets valued at over $500,000!

But what seems to irk American the most about LTS is that the organization advertises its services on many of the popular travel agency references, such as Official Travel Directory (www.otid.com), JaxFax Travel Marketing (www.jaxfax.com), and TravelAgent Newsweekly (www.adcanstars-web-support.com/PRODUCTS/TAM/prod2537.html). It’s one thing to target AAdvantage members, but American has an entirely different sensitivity when it comes to targeting the travel agency marketplace.

And then we come to the soon-to-be-infamous John Doe II.

Apparently John Doe II fraudulently procured seats on American flights by calling American reservations and deceptively posing as AAdvantage members. According to the suit, Mr. Doe “caused American to issue award tickets in the names of persons whom he has wrongfully agreed to sell the award tickets through the craigslist.org Web site. He misrepresented to American the contact information for these ticket holders and fraudulently omitted that he intended to sell the award tickets. His actions were calculated to conceal violations of the AAdvantage rules.”

Evidently, John Doe II also made misleading statements that induced those who purchased the fraudulently obtained AAdvantage award tickets to believe they had received valid airline tickets for travel on American or its partner airlines, despite his knowledge that award tickets are void once purchased or sold.

In its case against John Doe II, American cites the following examples of misconduct:

On April 19, 2007, John Doe II offered for sale 126,000 AAdvantage mileage credit at $0.19 each on the popular Dallas craigslist Web site.
On May 30, 2007, he offered for sale “discounted airline tickets to South America, Europe, Asia, Africa, Central America, Caribbean, the US, etc.” on “all major airlines including … American” for prices starting at $400 per ticket on craigslist. Potential customers were invited to “email with dates and cities to get a quote.”

On May 31, 2007, he offered for sale “Discounted airline tickets to Europe, Asia, Latin America, South America, Africa, Caribbean, Alaska, and the US” on “all major airlines including … American,” for prices beginning at $450 per ticket on craigslist. Potential customers were invited to “email with origin destinations cities, dates of travel and class of service.”
On June 1, 2007, he offered for sale “several hundred thousands of [American] frequent flyer miles” for $.025 each for first-class or business-class international travel — American’s most profitable tickets — again on craigslist. He described himself as having 14 years experience and noted “there are folks cheaper on [craigslist] and there are folks stranded in Europe because they bought CHEAP from those with unwitting or unscrupulous motives.”

American believes John Doe II has depleted over 1 million miles and fraudulently obtained almost $400,000 worth of AAdvantage award tickets. On top of this, American contends it has been forced to pay its partner airlines for tickets in cases where the awards were used on partner airlines, and the airline has had to restore the miles to the members from whom they were stolen without compensation. Finally, and perhaps most egregious from the airline’s point of view, American has lost some goodwill with AAdvantage members whose miles were depleted.

A Possible Defense
This case is but the latest in this ongoing skirmish between the airlines and those who would engage in the buying and selling of miles. To date, the airlines have enjoyed a perfect record defending their programs against these violators. But in 2005, the first potential crack appeared in what had otherwise been an impenetrable defense. That crack was in the form of Allison Haas, et al v. Delta Air Lines Inc., United States District Court, Southern District of New York, Case No. 03 CV- 0589.

The case involved three members of the SkyMiles program who got busted selling their miles and decided to turn the tables on Delta. The members claimed that, because Delta made it virtually impossible to actually claim the awards they wanted, they felt they had no choice but to sell them or else risk the miles expiring. The members began putting together a class-action lawsuit on behalf of all SkyMiles members who allegedly “had Delta SkyMiles wrongfully confiscated or taken by Delta.”

We say they “began” putting together a class-action lawsuit because a settlement was reached while the motion to certify a class-action lawsuit and a motion for summary judgment was pending. Why did Delta agree to settle? We’ll never know, as the settlement had a confidentiality provision in place. It could mean that Delta feared a trial by jury, who might have been sympathetic to the plight of the frequent flyer. Of course, it should also be noted that, in agreeing to settle, Delta might have only had to payout to the three members involved, rather than the potential millions if the class action had been certified and won.

In this case brought against Delta, it was argued that SkyMiles are a valuable commodity, not merely because they entitle members to awards and benefits, but because there is an active market in SkyMiles, where people “regularly advertise in daily newspapers throughout the United States, on a number of Internet Web sites, and in other media.” These awards are then bought, sold, and bartered. As well, the suit alleged that Delta had restricted the use of SkyMiles by adopting “blackout periods, capacity controls, and expiration dates” that devalue the SkyMiles. And that, “Delta has engaged in a pattern of threats and intimidation,” asserting that sale or barter of SkyMiles is unlawful. The threats listed were “of mileage forfeiture and account closure” should an owner of SkyMiles trade in them. Delta has on occasion made good on these threats by a “consequent forfeiture of credited miles and by deducting large amounts of miles from accounts as a penalty.”

In that case, the plaintiffs also contended that these practices have been committed in conspiracy with American, United, and Continental Airlines.

So how will the defendants in the current case justify their deeds? If they know, they aren’t saying … not in so many words, at least.

When we contacted some of the businesses involved in this case, one of the parties said, “I do not know what you are talking about,” and subsequently hung up the phone. Others responded by relaying to us comments they frequently hear from their customers, along the lines of being frustrated because they can’t get the awards they want so they might as well sell the miles — comments that were strikingly similar to those expressed as part of the 2005 case against Delta.

One AAdvantage member even told us that LTS sent him an email on May 14, 2007 advising him to lie in response to inquiries from American by fraudulently misrepresenting that LTS “provides a service to you where by [sic] they set up reservations for you so that you can use your frequent flyer miles. It has become so difficult to find award space on your own that is worth it to pay a $100 booking fee to this company to set things up for you.”

The Jury is Still Out
There is little doubt that members’ frustrations at not being able to redeem for the awards they want at the redemption rates they want is an influencing factor in the decision by some to sell their miles. Better to get at least some cash for your miles than nothing at all, so the thinking goes. But given that the major frequent flyer programs have a two-tiered system for award redemption, and that all of the programs provide a redemption level that allows miles to be used like cash to purchase any available seat (albeit, this option is generally going to cost the member double the number of miles), this part of the debate remains murky at best when put in front of the legal system.

You will find nothing in the legal code at the local, state, or federal levels that prohibits the sale of frequent flyer miles. In fact, there’s no mention of loyalty miles or points anywhere in this country’s published laws and statutes except in the state of Utah. On the other hand, airlines have been very persuasive with the courts, and have consistently been able to convince the presiding judge that their program rules are fair and serve to protect both the membership of the highly popular frequent flyer programs and, of course, the airline itself from financial damage.

So, as it stands now, you are not allowed to sell your airline miles. Who says so? The airlines, that’s who. When you enroll in their programs, you implicitly agree to abide by their terms and conditions, even if you don’t know what those terms and conditions are and even if you disagree with the rules.

In American’s program, the world’s largest, the prohibition is stated as follows: “At no time may AAdvantage mileage credit or award tickets be purchased, sold, or bartered. Any such mileage or tickets are void if transferred for cash or other consideration.” While the above clause is buried beneath a mountain of legal fine print, it’s there, and it’s unequivocal. And if you look closely enough, you’ll find that every other program includes similar verbiage in its terms.

Because, as a practical matter, it is quite easy to sell frequent flyer award tickets — either directly to other members or through coupon brokers. The questions members typically ask concern enforcement (What are the odds I will get caught?) and penalties (Will my remaining miles be confiscated?).

Based on what we know and members we have talked with, it is likely that only a tiny fraction of those in violation of the rule are ever discovered and apprehended. But when those who ignore (or who are oblivious to) the rules are caught, the airlines wave an awfully big stick.

Again excerpting from American’s rulebook: “Violators (including any passenger who uses a purchased or bartered award ticket) may be liable for damages and litigation costs, including American Airlines’ attorneys’ fees incurred in enforcing this rule.” The threatening language continues, warning that buyers will have their purchased tickets confiscated, and that offenders’ AAdvantage accounts may be frozen and their miles forfeited.

So, the airlines’ position is simple: Don’t sell your miles! And while detection is unlikely, if they do catch you, the airline will administer punishment swiftly and surely.

While it’s unclear how much effort the airlines have invested in detection and enforcement, it’s obvious that they’ve put considerable resources behind the legal and communications aspects of the policy. And in so doing, they’ve incurred the enmity of many of their otherwise loyal customers, who feel strongly that they should be free to dispose of their miles as they see fit.

Case closed … Next case please.

Leave a Reply

Your email address will not be published. Required fields are marked *