Recent headlines on a lawsuit against American Airlines for loyalty account closures give us a good excuse to examine this issue. A loyalty program or rewards program, two different names for the same thing, is a popular tool to drive customer engagement. At its most basic, it might be a punch card for a free item: “buy six sandwiches and get the seventh one free.” Adding a few restrictions to that basic premise, however, can quickly make the program much more complex. For example, the ability to earn and redeem points can be modified by introducing exclusions, member tiers, or special offers. And just like that, a simple punch card becomes a points program with a complicated set of restrictions on earning points and redeeming rewards. Unsurprisingly, with that increased complexity comes additional legal risk.

Two users of the American Airlines’ frequent flyer program, AAdvantage, sued the company last week for terminating their loyalty accounts, which together held more than one million award miles. Nachison et al. v. American Airlines Inc., No. 5:24-cv-00530 (N.D. Cal. compl. filed Jan. 29, 2024). The only facts we have currently are those alleged in the complaint, but it appears that American determined the plaintiffs’ use of multiple credit card promotional offers violated its program terms. While the complaint openly acknowledges the use of multiple offers, including those originally sent to friends and family, it asserts that nothing in the program or offer terms precluded this practice.

As an initial matter, American Airlines is clearly within its rights to terminate some accounts but not others. A fraudulent actor undermining the rewards program can be kicked out, but a participant upholding their end of the bargain has a right to the rewards that they’ve earned. But how do we separate one from the other? Typically, a company will define how a loyalty program operates in a set of terms and conditions to remove that ambiguity. If properly drafted and executed, these terms and conditions govern the loyalty program, and both the company and members must comply with them.

Unfortunately, it’s not that simple for American Airlines. As noted above, loyalty programs are increasingly complex, and the terms cannot predict every iteration of every potential offer. In this case, the promotional offers at issue were made via credit cards offered by Citibank and Barclays. As a result, the specific terms that accompanied the promotion will most likely govern this dispute. The plaintiffs allege that there were no restrictions on using multiple introductory offers. If that’s right, and they did not take any other action disqualifying them from the program, then they have a strong argument that American still owes them those points. That argument would be largely moot, however, if the offers included a simple disclaimer to the effect of “limit one per AAdvantage account.”

While we may not have all the facts yet, this case helps illustrate a few basic principles. First, every loyalty program should have terms and conditions. Disputes over how the program works are inevitable, but most of them can be resolved through a comprehensive set of terms and conditions that govern the program. Second, program terms are not enough! There will be promotional offers associated with almost every loyalty program, and those offers should have their own terms. Some offers may expire faster than others, be limited to a certain number of uses, be available only to new customers, and so on. These restrictions must be disclosed. Finally, proceed with caution when taking any action that removes or reduces the value of a participant’s points. This will almost always generate complaints and can open the door for legal liability, as demonstrated by this lawsuit.

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