Airline regulation is a matter for the federal government and not the states, an appellate court confirmed in an Oct. 11 ruling.

The decision came in a long-running litigation in which customers have accused foreign and domestic airlines of conspiring to keep their cargo shipping rates artificially high.

The plaintiffs in In re Air Cargo Shipping Services Antitrust Litigation, 11, 5464 cv, argued that the Federal Aviation Act (FAA) permits claims to be brought under state law against foreign carriers. But a unanimous three-judge panel of the U.S. Court of Appeals for the Second Circuit disagreed, ruling that the act preempts the state regulation of all carriers, whether foreign or domestic.

Beginning in 2006, direct and indirect purchasers of air cargo services brought suit under federal and state laws against most of the largest domestic and foreign carriers, alleging the airlines instituted various hikes on shipping rates, fuel surcharges, and customs and security fees starting in 2000. Some airlines, including British Airways and LAN Airlines, agreed to settle with the direct purchasers.

The claims that the direct purchaser plaintiffs brought against the remaining defendants under federal law remain, and a motion for class certification is pending before Eastern District Judge John Gleeson (See Profile).

However, the indirect purchasers also tried to bring claims against the foreign carriers under state antitrust laws. Gleeson dismissed these claims in August 2009, ruling that the airlines, which include Air Canada and Qantas, were protected by the Federal Aviation Act, which preempted state law claims against them.

The indirect purchasers, led by attorney Christopher Lovell of Lovell Stewart Halebian & Jacobson, appealed to the Second Circuit. They argued that language in the aviation act defined an air carrier to be a U.S.-based company, and thus only barred state claims against domestic airlines.

The circuit panel, which included Judges Dennis Jacobs (See Profile), Amalya Kearse (See Profile) and Peter Hall (See Profile), upheld Gleeson’s ruling, finding that law’s preemption provision bars claims under state law against both foreign and domestic airlines.

“The legislative history of the preemption provision and the amendments to it confirm that Congress intended the term ‘air carrier’…to mean domestic and foreign air carriers alike,” Jacobs wrote for the panel. “A contrary result would undermine Congress’s purpose in enacting the preemption provision and the various deregulation statutes.”

Additionally, the panel agreed with Asiana Airlines attorney Ian Simmons of O’Melveny & Myers (who argued on behalf of all the airlines) that allowing states to regulate foreign but not domestic airlines would be “particularly peculiar,” and would create “a confusing patchwork” of state-by-state regulations.

“Sometimes context dictates that the ordinary meaning of a term should take precedence over the statutory definition,” Simmons said in an interview. “It’s clear that Congress wanted the scope of preemption to be commensurate with the scope of airline deregulation.”

According to Simmons, the Second Circuit ruling will extinguish all claims by indirect purchasers.

Lovell, who represents the indirect purchasers, did not respond to a request for comment.

Other law firms and airlines involved in the case include Hogan Lovells as counsel to Air Canada; Wilson Elser Moskowitz Edelman & Dicker as counsel to Air China; Freehill, Hogan & Mahar and Zuckert, Scoutt & Rasenberger as counsel to All Nippon Airlines; Ropes & Gray for Air Worldwide and Polar Air Cargo; Sullivan & Cromwell for British Airways; Shearman & Sterling for Cargolux Airlines; DLA Piper for Cathay Pacific Airways; Wacthell, Lipton, Rosen & Katz for El Al Israel Airlines; Freshfields Bruckhaus Deringer for Emirates; Skadden, Arps, Slate, Meagher & Flom for KLM Royal Dutch Airlines; Paul Hastings for Korean Airlines; Squire Sanders for Lan Airlines and Aerolinhas Brasileiras; Gibson, Dunn & Crutcher for Martinair Holland; Baker & Hostetler for Nippon Cargo Airlines; Dickstein Shapiro for Saudi Arabian Airlines; Crowell & Moring for Scandinavian Airlines; Latham & Watkins for Singapore Airlines; Linklaters for Air France; Baker Botts for South African Airways; Cravath, Swaine & Moore for Thai Airways International; and Baker & Miller for Qantas.