Flyby1206
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SUMMARY OF CONCLUSIONS
Effect of Rejection
o No right to strike in response to rejection
o No right to unsecured claim, unless later negotiated as part of a consensual deal
What terms can American impose after rejection?
o Worst case: anything it wants
o Best case: terms of April term sheet (final, pretrial term sheet), except terms made contingent on consensual agreement
No pay raises, 13.5% contribution to 401(k), sequence protection, parts of LTD benefit, or profit sharing
o American may try to argue that it can go further and cherry-pick the worst terms from the April term sheet, even if it didn’t explicitly make them contingent on a consensual agreement
American will not be required to abide by the June 20 Tentative Agreement
DISCUSSION
1) What Terms Can American Implement?
American has asked Judge Lane to approve the specific terms of the Section 1113 proposals that it made to the pilots. In particular, it has asked for permission to implement the terms of its April 19 proposal – the last proposal it made before the trial began on its motion. The unions and the Unsecured Creditors Committee all argued that Judge Lane does not have the authority to “bless” any particular terms. Judge Lane agreed in open court, stating several times that he thinks that Section 1113 does not give him authority to “bless” any particular terms.
Therefore, Judge Lane’s decision will likely grant or deny American’s request to reject our CBA without telling American how it can change the current wages and working conditions on the property. In other words, if Judge Lane orders the rejection of our CBA, he is unlikely to give American any instructions on what to do next.
American will therefore have to figure out what labor law permits it to do once Judge Lane orders rejection. American will probably look to the series of decisions issued in the Northwest bankruptcy.
In that case, the Second Circuit, where American’s case is located, explained the effect of contract rejection under Section 1113. See In re Northwest Airlines Corp., 483 F.3d 160 (2d Cir. 2007). The court held that when a bankruptcy judge issues an order approving an airline’s right to reject a labor agreement, that order “abrogates” the agreement – i.e., gets rid of it entirely – and terminates the airline’s status quo obligations under two provisions of the Railway Labor Act. Id. at 170-74. However, the court also clearly held that an order approving rejection of a labor agreement leaves intact a carrier’s duty under Section 2, First, to “make” or negotiate agreements. Id. at 174-75.
Therefore, if American wins the Section 1113 trial, it can change wages and working conditions only consistent with its duty to “make” agreements under Section 2, First.
So far, there have not been cases that directly discuss how far American could go in those circumstances without violating its statutory duty. But there is good reason to think that a court would draw analogies from comparable situations governed by the National Labor Relations Act (“NLRA”). There are two main lines of authority under the NLRA. Some courts say that employers can implement only the terms of their final pre-trial proposal after they win the right to reject a CBA in bankruptcy. Other courts say that employers can implement any term that is reasonably comprehended by their pretrial proposals.
If Judge Lane agrees with the first set of cases, American may argue that it can implement its proposal on the table as of April 19 as its final pre-trial proposal.
If Judge Lane agrees with the second set of cases, American may be able to pick and choose terms from any of the proposals it made between February 1 and April 23, when the trial began. In other words, under the second line of cases, American might be allowed to choose only the most onerous terms of its proposals without giving us any improvements it had previously offered. We disagree with the second line of cases and would argue against them.
If American took the most aggressive litigation position possible, it might also argue that it is entitled to implement any terms it wants post-abrogation, because Section 2, First, does not limit management’s prerogative to arrange employment terms as it wishes when there is no CBA in effect. In support of that position, it would probably rely on Aircraft Mechanics Fraternal Ass'n v. Atl. Coast Airlines, Inc., 55 F.3d 90, 93 (2d Cir. 1995), which found that Section 2, First, did not prevent an airline from unilaterally changing working conditions prior to a first CBA. We think American is unlikely to take such an aggressive position because its lawyers have taken more moderate positions recently in the Comair case, in certain trade publications and on behalf of AA management in public statements during the course of this case.
Under either analysis, though, we need to be mindful that American explicitly made certain elements of its April 19 term sheet contingent on a consensual agreement, namely:
Annual 1.5% pay raises
AA contribution of 13.5% to SuperSaver 401(k) as replacement for pension freeze
Treatment of company contributions on compensation above the IRS limit as taxable income
Sequence protection
Parts of its long term disability benefit
Profit sharing
That is, the Company has signaled that it will not give us these terms if it rejects our CBA following a Section 1113 order allowing it to do so.
The bottom-line is that the best-case scenario following contract rejection is that American implements the terms of its April 19 term sheet, except for the pay raises, 401(k) contributions, sequence protection, aspects of the LTD benefit, and profit sharing.
2) The Role of the June 20 “Last, Best Offer”
Some people have asked whether the bankruptcy court’s decision in Northwest would require American to impose only the terms of the June 20 “Last, Best Offer” (LBO) if the court orders rejection. Unfortunately, that decision does not govern our situation and cannot be read as authority that would restrict American to the terms of the LBO for three reasons.
First, that decision was based on the notion that the bankruptcy judge has the authority to approve specific terms as part of his rejection order. The Second Circuit questioned that authority, and Judge Lane has repeatedly stated on the record that he believes he does not have such authority. Therefore, Judge Lane is almost certainly not going to follow the Northwest bankruptcy court’s opinion in that decision, but will instead follow the analysis above.
Second, the parties in Northwest had an explicit agreement that any new proposal would supersede prior proposals for the purposes of the Section 1113 motion. In light of that agreement, the judge in Northwest kept the record open after the close of oral testimony so that the parties could present the results of additional negotiations. American has not made any similar agreement in this case (perhaps because more recent legal developments, like the Second Circuit decision in Northwest and the Frontier case suggest that such an agreement would not work). In addition, Judge Lane formally closed the record on the last day of the trial, May 25, 2012, and the mediated talks that led to the LBO occurred several weeks later and concluded on June 27, 2012.
Third, as described in the chronology below, even the Northwest bankruptcy judge did not think that the airline had an ongoing duty to implement the most recent set of terms of proposals agreed to by the union leadership but voted down by the membership. In that case, the bankruptcy court rejected the flight attendants’ CBA in June 2006, with the rejection to take effect in July 2006. As part of its rejection decision, the bankruptcy court authorized the airline to implement the terms of the previous TA, reached by the parties’ leadership on March 1 but rejected by the membership in March. In a later decision, in August 2006, the flight attendants tried to argue that the airline should also be bound by a subsequent TA it had reached with the flight attendants on July 17. The court rejected that argument and held instead that the March 1 terms authorized by its previous rejection order were the only ones it would require of Northwest.
Because American’s duty under Section 2, First, to “make” agreements will most likely be informed by the final term sheet it proposed prior to the Section 1113 trial, those terms – not the terms of the subsequent LBO – are the ones that American would likely be able to impose following rejection.
Effect of Rejection
o No right to strike in response to rejection
o No right to unsecured claim, unless later negotiated as part of a consensual deal
What terms can American impose after rejection?
o Worst case: anything it wants
o Best case: terms of April term sheet (final, pretrial term sheet), except terms made contingent on consensual agreement
No pay raises, 13.5% contribution to 401(k), sequence protection, parts of LTD benefit, or profit sharing
o American may try to argue that it can go further and cherry-pick the worst terms from the April term sheet, even if it didn’t explicitly make them contingent on a consensual agreement
American will not be required to abide by the June 20 Tentative Agreement
DISCUSSION
1) What Terms Can American Implement?
American has asked Judge Lane to approve the specific terms of the Section 1113 proposals that it made to the pilots. In particular, it has asked for permission to implement the terms of its April 19 proposal – the last proposal it made before the trial began on its motion. The unions and the Unsecured Creditors Committee all argued that Judge Lane does not have the authority to “bless” any particular terms. Judge Lane agreed in open court, stating several times that he thinks that Section 1113 does not give him authority to “bless” any particular terms.
Therefore, Judge Lane’s decision will likely grant or deny American’s request to reject our CBA without telling American how it can change the current wages and working conditions on the property. In other words, if Judge Lane orders the rejection of our CBA, he is unlikely to give American any instructions on what to do next.
American will therefore have to figure out what labor law permits it to do once Judge Lane orders rejection. American will probably look to the series of decisions issued in the Northwest bankruptcy.
In that case, the Second Circuit, where American’s case is located, explained the effect of contract rejection under Section 1113. See In re Northwest Airlines Corp., 483 F.3d 160 (2d Cir. 2007). The court held that when a bankruptcy judge issues an order approving an airline’s right to reject a labor agreement, that order “abrogates” the agreement – i.e., gets rid of it entirely – and terminates the airline’s status quo obligations under two provisions of the Railway Labor Act. Id. at 170-74. However, the court also clearly held that an order approving rejection of a labor agreement leaves intact a carrier’s duty under Section 2, First, to “make” or negotiate agreements. Id. at 174-75.
Therefore, if American wins the Section 1113 trial, it can change wages and working conditions only consistent with its duty to “make” agreements under Section 2, First.
So far, there have not been cases that directly discuss how far American could go in those circumstances without violating its statutory duty. But there is good reason to think that a court would draw analogies from comparable situations governed by the National Labor Relations Act (“NLRA”). There are two main lines of authority under the NLRA. Some courts say that employers can implement only the terms of their final pre-trial proposal after they win the right to reject a CBA in bankruptcy. Other courts say that employers can implement any term that is reasonably comprehended by their pretrial proposals.
If Judge Lane agrees with the first set of cases, American may argue that it can implement its proposal on the table as of April 19 as its final pre-trial proposal.
If Judge Lane agrees with the second set of cases, American may be able to pick and choose terms from any of the proposals it made between February 1 and April 23, when the trial began. In other words, under the second line of cases, American might be allowed to choose only the most onerous terms of its proposals without giving us any improvements it had previously offered. We disagree with the second line of cases and would argue against them.
If American took the most aggressive litigation position possible, it might also argue that it is entitled to implement any terms it wants post-abrogation, because Section 2, First, does not limit management’s prerogative to arrange employment terms as it wishes when there is no CBA in effect. In support of that position, it would probably rely on Aircraft Mechanics Fraternal Ass'n v. Atl. Coast Airlines, Inc., 55 F.3d 90, 93 (2d Cir. 1995), which found that Section 2, First, did not prevent an airline from unilaterally changing working conditions prior to a first CBA. We think American is unlikely to take such an aggressive position because its lawyers have taken more moderate positions recently in the Comair case, in certain trade publications and on behalf of AA management in public statements during the course of this case.
Under either analysis, though, we need to be mindful that American explicitly made certain elements of its April 19 term sheet contingent on a consensual agreement, namely:
Annual 1.5% pay raises
AA contribution of 13.5% to SuperSaver 401(k) as replacement for pension freeze
Treatment of company contributions on compensation above the IRS limit as taxable income
Sequence protection
Parts of its long term disability benefit
Profit sharing
That is, the Company has signaled that it will not give us these terms if it rejects our CBA following a Section 1113 order allowing it to do so.
The bottom-line is that the best-case scenario following contract rejection is that American implements the terms of its April 19 term sheet, except for the pay raises, 401(k) contributions, sequence protection, aspects of the LTD benefit, and profit sharing.
2) The Role of the June 20 “Last, Best Offer”
Some people have asked whether the bankruptcy court’s decision in Northwest would require American to impose only the terms of the June 20 “Last, Best Offer” (LBO) if the court orders rejection. Unfortunately, that decision does not govern our situation and cannot be read as authority that would restrict American to the terms of the LBO for three reasons.
First, that decision was based on the notion that the bankruptcy judge has the authority to approve specific terms as part of his rejection order. The Second Circuit questioned that authority, and Judge Lane has repeatedly stated on the record that he believes he does not have such authority. Therefore, Judge Lane is almost certainly not going to follow the Northwest bankruptcy court’s opinion in that decision, but will instead follow the analysis above.
Second, the parties in Northwest had an explicit agreement that any new proposal would supersede prior proposals for the purposes of the Section 1113 motion. In light of that agreement, the judge in Northwest kept the record open after the close of oral testimony so that the parties could present the results of additional negotiations. American has not made any similar agreement in this case (perhaps because more recent legal developments, like the Second Circuit decision in Northwest and the Frontier case suggest that such an agreement would not work). In addition, Judge Lane formally closed the record on the last day of the trial, May 25, 2012, and the mediated talks that led to the LBO occurred several weeks later and concluded on June 27, 2012.
Third, as described in the chronology below, even the Northwest bankruptcy judge did not think that the airline had an ongoing duty to implement the most recent set of terms of proposals agreed to by the union leadership but voted down by the membership. In that case, the bankruptcy court rejected the flight attendants’ CBA in June 2006, with the rejection to take effect in July 2006. As part of its rejection decision, the bankruptcy court authorized the airline to implement the terms of the previous TA, reached by the parties’ leadership on March 1 but rejected by the membership in March. In a later decision, in August 2006, the flight attendants tried to argue that the airline should also be bound by a subsequent TA it had reached with the flight attendants on July 17. The court rejected that argument and held instead that the March 1 terms authorized by its previous rejection order were the only ones it would require of Northwest.
Because American’s duty under Section 2, First, to “make” agreements will most likely be informed by the final term sheet it proposed prior to the Section 1113 trial, those terms – not the terms of the subsequent LBO – are the ones that American would likely be able to impose following rejection.
