By: Kyra Honkanen, Volume 107 Staff Member
Making headlines across the country, Southwest Airlines, the largest domestic airline in the U.S., canceled over 15,000 of its flights leaving more than one million people stranded or left to find alternative transportation during the peak of holiday travel in December 2022. A blast of severe winter weather initiated the cancellation debacle, which ultimately spiraled into a complete meltdown of Southwest’s flight system. Unlike its competitors, Southwest’s cancellation rate has tripled in the last decade, leading many to believe that weather is not at the core of the issue. Those affected were left with no refund, alternative flight, or eating and sleeping accommodations. This generated outrage among many customers, creating the perfect storm for a class action lawsuit.
In just over a month since the fiasco, three separate class action lawsuits have indeed been filed. Two of them are customer suits involving the same breach of contract issue, while the third is a shareholder suit alleging fraud. Several lessons can be learned from Southwests’ failures both leading up to and following the cancellation catastrophe including the importance of communication.
II. BREACH OF CONTRACT LAWSUITS
Two separate class action lawsuits have already been filed by Southwest customers impacted by the holiday flight cancellations. These suits allege that Southwest has breached its own contract of carriage, and one suit claims that the airline also violated federal law.
All airlines must present a contract of carriage to their potential customers when purchasing airline tickets, defining the legal rights of both passengers and the airline, and setting the minimum standards of the airlines’ liability and responsibility. When a customer purchases a ticket or accepts transportation, a legally enforceable contract is formed. The customer is bound by the airline’s contract of carriage because they accepted the offer (the ticket at a given price) and mutually agreed to the terms of the contract of carriage presented online or at the ticketing office. Consideration is exchanged as the airline provides transportation and the customer provides payment.
At issue in the lawsuits is Section 9(a) of Southwest Airlines’ contract of carriage, which explicitly states that in the event of a flight cancellation passengers will either be placed on the next available flight at no additional charge or receive a refund for the unused fare. Southwest’s website further states that refunds will be processed within seven days of request. Both lawsuits claim that customers across the U.S. received neither of these guarantees when Southwest canceled their flights this past December. Some passengers were offered airline credit for a future Southwest flight or rewards points when their flights were canceled, but these were not resolutions that customers agreed to in Southwest’s contract of carriage. While customers fulfilled their end of the bargain in paying for their tickets, Southwest utterly failed to uphold its end, ultimately breaching its contract of carriage.
One suit also alleges that Southwest breached federal law in violating 14 C.F.R. § 259.5, which states that airlines’ customer service plans must provide for prompt ticket refunds within twenty days of a refund request. It also states that airlines must adhere to their customer service plans. For breach of contract or federal law, if the plaintiffs prevail they will receive their lost funds and should not expect any damages for mental anguish, which typically must be tied to a physical injury. Additionally, customers who accepted flight credit or rewards points offered to them post-flight cancellation may not be entitled to receive payment in the event any of the customer lawsuits are successful.
III. SHAREHOLDER LAWSUIT
Southwest’s shareholders filed a class action lawsuit against Southwest claiming that the company fraudulently concealed internal problems in both regulatory filings and media appearances by downplaying and failing to disclose flaws in its flight scheduling system that ultimately led to the system meltdown. When the truth came to light, Southwest’s share price fell 10%, obliterating $2 billion of shareholder value. The investors seek an unspecified amount of damages from June 2020, when the Baltimore Sun first wrote about problems with the airline, to December 31, 2022.
The shareholder class action complaint specifically alleges that several of the company’s statements and reports both failed to disclose and contained misstatements about the company’s internal issues. The complaint further states this ultimately violates Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated by the SEC, which prohibit fraud (misrepresentation of material information) in the purchase and sale of securities.  The lawsuit also alleges that the individual defendants (officers and directors of Southwest) violated Section 20(a) of the Exchange Act, which provides that persons in control can be vicariously liable for 10b-5 violations.
To be successful in their Section 10(b) and Rule 10b-5 action, the shareholders must be able to demonstrate that the defendants made a misrepresentation, half-truth, or omission of material fact, with scienter (knowledge of wrongdoing), in connection with the actual purchase or sale of stock. The complaint alleges that the defendants acted with scienter in knowingly releasing false or misleading statements and documents, intending to deceive the shareholders or acting with reckless disregard for the truth, resulting in artificial inflation of Southwest securities market prices. The complaint also states that had the shareholders been aware of the artificial inflation due to Southwest’s misleading material, they would not have purchased Southwest securities at the artificially inflated price, or at all. In other words, the shareholders relied on Southwest’s misleading statements or omissions in purchasing Southwest stock and now seek damages for the value they lost.
IV. LESSONS TO BE LEARNED
Companies can learn several things from Southwest’s major missteps. For one, the importance of investing in updated technology. Companies should also be monitoring and identifying issues or delays to pinpoint where their systems may need updated maintenance, rather than waiting for crisis after crisis to strike. Companies should implement enterprise risk management, a business strategy involving a holistic, portfolio view of risks associated with the achievement of the company’s top objectives, to establish accurate and appropriate reporting on the impact of risks to company strategies and policies.
Arguably most important, though, is clear and honest communication. Southwest needed to be explicit about how and why this failure—and past failures—happened. In order to rebuild trust and prevent shareholder suits, Southwest could have immediately addressed whether its meltdowns were caused by the weather, its technology system, maps, or listed all of the factors in order of priority. Further, Southwest needed to convey detailed action steps to prevent a similar future occurrence and be upfront about how the airline was helping its numerous impacted customers. Both waiting to refund and make amends with its customers and failing to be straightforward and honest about internal issues now has the company in legal hot water. The success of these suits has yet to be seen, but one thing is clear: Southwest’s failures will be analyzed for years to come.
 Martha Garcia, Southwest Airlines Faces Class Action Lawsuit Over Holiday Flight Cancellations, About Lawsuits (Jan. 5, 2023), https://www.aboutlawsuits.com/southwest-flight-cancellations-lawsuit/ [https://perma.cc/PB8M-8UW7].
 The Associated Press, Southwest: Normal Flight Operations to Resume Friday, CPR News (Dec. 30, 2022), https://www.cpr.org/2022/12/30/southwest-normal-flight-operations-to-resume-friday [https://perma.cc/9SFF-M45] (“Southwest declined to say how many people have been affected, but it is likely that far more than 1 million have had a flight canceled.”).
 Nick Natario, Lawsuit Against Southwest Airlines May Result in Big Payday, but Not for Angry Customers, ABC13 (Jan. 4, 2023), https://abc13.com/southwest-airlines-lawsuit-flights-getting-canceled-passenger-refund-holiday-travel/12652792 [https://perma.cc/2BWY-GJHS].
 Matt Stiles & Christopher Hickey, How Southwest Failed the Holidays: Four Charts Explaining the Cancellations, CNN Bus. (Dec. 29, 2022), https://www.cnn.com/2022/12/29/business/southwest-cancellations-history-charts-dg/index.html [https://perma.cc/DTP9-XDDR].
 In October 2021, Southwest canceled more than 2,000 flights blaming the bad weather in Florida, but canceled flights much longer than its fellow airline competitors. Southwest’s outdated information technology system is primarily to blame. Id.
 See, e.g., Megan Cerullo, Southwest Airlines Sued for Not Immediately Refunding Stranded Customers, CBS News (Jan. 4, 2023), https://www.cbsnews.com/news/southwest-airlines-sued-for-not-providing-refunds-to-stranded-customers [https://perma.cc/J77F-3SBQ].
 See id. (describing Eric Capdeville’s federal lawsuit filed in the Eastern District of Louisiana); Ryan Hill, Local Attorney Representing Plaintiffs Against Southwest Airlines Addresses Class-Action Lawsuit, ABC10 News San Diego (Jan. 4, 2023), https://www.10news.com/news/local-news/local-attorney-representing-plaintiffs-against-southwest-airlines-address-class-action-suit [https://perma.cc/K5ZF-DZ7C] (describing Carla Hill and Cameron Youssef’s state lawsuit filed in San Diego County).
 Compl. at 5, 9, Capdeville v. Southwest Airlines Co., (E.D. La. Dec. 30, 2022) (No. 2:22-cv-0590).
 What is a Contract of Carriage?, Freightos, https://www.freightos.com/freight-resources/contract-carriage-freight-term-glossary/ [https://perma.cc/PX53-6XQ7].
 See, e.g., Contract of Carriage, United, https://www.united.com/ual/en/us/fly/contract.html [https://perma.cc/RAM4-P9RR].
 Contract of Carriage, Going, https://www.going.com/glossary/contract-of-carriage [https://perma.cc/K3C8-APNY].
 The contractual element of consideration is satisfied when something of value was promised in exchange of the action. Elements of a Contract, Jud. Educ. Ctr. Univ. of N.M., http://jec.unm.edu/education/online-training/contract-law-tutorial/contract-fundamentals-part-2 [https://perma.cc/QB3H-S2AP].
 Contract of Carriage – Passenger, Southwest, https://www.southwest.com/assets/pdfs/corporate-commitments/contract-of-carriage.pdf [https://perma.cc/MWF2-LNBX].
 See Cerullo supra note 6; Hill supra note 7.
 See Cerullo supra note 6.
 See Natario, supra note 3.
 See Cerullo, supra note 6.
 14 C.F.R. § 259.5(b)(5) (2022). Note that Southwest promises refunds within seven days. How Long Will It Take My Refund to Process?, Southwest, https://www.southwest.com/traveldisruption [https://perma.cc/HPK7-5RQL].
 14 C.F.R. § 259.5(a) (2022).
 Natario, supra note 3.
 Jonathan Stempel, Shareholders Sue Southwest Airlines over Flight Meltdown, Reuters (Jan.12, 2023), https://www.reuters.com/business/aerospace-defense/southwest-airlines-sued-by-shareholders-over-flight-meltdown-2023-01-12 [https://perma.cc/ZS3S-2UNN].
 Contract of Carriage, supra note 11.
 Stempel, supra note 23.
 Compl. ¶ 17–56, Plaintiff v. Southwest Airlines Co., (S.D. Tex. Jan. 12, 2023).
 Compl. ¶ 81–90, Plaintiff v. Southwest Airlines Co., (S.D. Tex. Jan. 12, 2023).
 Securities Exchange Act of 1984, Sec. 10B (1984) (codified at 15 U.S.C. § 78J-2); 17 C.F.R. § 240.10b-5 (2022).
 Compl. ¶ 91–95, Plaintiff v. Southwest Airlines Co., (S.D. Tex. Jan. 12, 2023).
 Securities Exchange Act of 1984, Sec. 20A (1984) (codified at 15 U.S.C. § 78t).
 17 C.F.R. § 240.10b-5 (2022).
 Compl. ¶ 85–90, Plaintiff v. Southwest Airlines Co., (S.D. Tex. Jan. 12, 2023).
 See id.
 See Lizz Forth, What We Can Learn from the Southwest Airlines Fiasco, Namely (Jan. 5, 2023), https://blog.namely.com/what-we-can-learn-from-the-southwest-airlines-fiasco [https://perma.cc/3XS8-ZR2B].
 See Mark Beasley, What is Enterprise Risk Management (ERM)?, NC State Poole Coll. of Mgmt. (July 17, 2020), https://erm.ncsu.edu/library/article/what-is-enterprise-risk-management [https://perma.cc/JK4C-PNPJ].
 Forth, supra note 36.
 Edward Segal, Crisis Management Lessons from Southwest Airlines’ Meltdown, Forbes (Dec. 29, 2022), https://www.forbes.com/sites/edwardsegal/2022/12/29/crisis-management-lessons-from-southwest-airlines-meltdown/?sh=1d40f1de1d5e [https://perma.cc/F33S-HX6J].