Legal Problems Persist as Boeing’s 737 MAX Prepares for Takeoff
Regulators grounded the 737 MAX on March 13, 2019, following two separate crashes that killed a total of 346 crew and passengers. (Chicago Tribune). Since then, Boeing’s top priority has been returning the 737 MAX to service. (Yahoo Finance). July 1st marked a major milestone in that goal as the Federal Aviation Administration (“FAA”) completed certification flight tests on the updated aircraft. (FAA). As Boeing and regulators inch closer toward certification, several legal challenges represent a significant drag on the Washington State-based company.
The 737 MAX became a liability for the company when investigators linked the fatal crashes to faulty software onboard the aircraft. (Chicago Tribune). Soon after, Boeing earmarked $50 billion for victim compensation. Id. However, the settlement did not indemnify Boeing, and many of the victim’s families have now filed wrongful death suits seeking both compensatory and punitive damages. (Al Root, Barrons). In undisclosed settlements, Boeing resolved 90% of the lawsuits related to the crash of Lion Air 610 while attorneys continue to work through claims related to Ethiopian Air 302 (Janan Hanna, Bloomberg Law).
In addition to the hundreds of wrongful death suits, attorneys for Boeing are defending the company against legal challenges brought by 737 MAX operators. Pilots of the 737 MAX are suing Boeing for lost earnings after the grounding caused thousands of flights to be canceled. (Clare Duffy, CNN). Unions representing pilots assert that misrepresentations from Boeing not only resulted in reduced work opportunities but also endangered lives. Id. Since 2016, when the first 737 MAX rolled off the assembly line, Boeing has delivered 387 of the passenger jets. (Boeing). With all 387 jets grounded, MAX customers have incurred millions of dollars in losses and some customers are now asking Boeing to pick up the tab. (Lauraann Wood, Law360). Southwest Airlines is one of the customers seeking compensation and Boeing has responded with an agreement to pay $428 million. (Will Horton, Forbes).
In an effort to save existing orders, Boeing is working with customers to convert MAX purchase agreements into orders for alternative products, such as the 787 Dreamliner. (Bulent Imat, AirlineGeeks). The aircraft manufacturer is also amending contracts to defer existing orders, pushing scheduled deliveries out by years. (Will Horton, Forbes). In a significant hit to Boeing’s bottom line, many customers have decided to cancel orders altogether. (Gwladys Fouche, Reuters). Boeing could argue that the grounding of the MAX constitutes an excusable delay and potentially claw back lost revenue by suing customers for specific performance. (Lou Whiteman, Nasdaq). Instead, Boeing is trying to incentivize customers to keep previous orders by offering discounts on future purchases and more favorable financing terms. Id. In some cases, Boeing is letting customers walk away from prior commitments. (Gwladys Fouche, Reuters).
Furthermore, in a class action filed by shareholders, investors seek to hold key executives at Boeing personally liable for damages to the company resulting from the 737 MAX. (Tom Hals, Tracy Rucinski, Reuters). The lawsuit claims that the board neglected its fiduciary responsibility to shareholders by ignoring warning signs and failing to act after learning of problems with the MAX. Id. With damages to Boeing running into the billions of dollars, the board is facing substantial penalties should shareholders prevail. (Niraj Chokshi, New York Times).
Finally, Boeing is the subject of an ongoing Department of Justice (“DOJ”) criminal probe spurred by the company’s handling of 737 MAX. (Andy Pasztor, Andrew Tangel, The Wall Street Journal). The DOJ findings may expose Boeing and its executives to additional liability. Id. Despite whether criminal charges are filed, civil suits are likely to follow. Id.
Boeing is more concerned with preserving customer relationships and rebuilding its reputation than short-term losses and lawsuits. The myriad of legal challenges associated with the 737 MAX has become a burden for the company but does not pose an existential threat. Boeing is equipped with the resources to weather the legal fallout and emerge with its finances intact and market share unscathed. Boeing, along with Airbus, enjoys a duopoly in commercial aircraft manufacturing, an industry with significant barriers to entry, leaving customers with only two options. As long as demand exists for commercial airplanes, Boeing will have customers.
The long-term impact of the 737 MAX will not be defined by Boeing’s legal woes but rather the regulatory framework that emerges in response to the tragedies. Boeing is under immense scrutiny from lawmakers and regulators. In Congress, the Senate has introduced “The Aircraft Safety and Certification Reform Act of 2020’’ which seeks to “improve safety, especially as it relates to the manufacturing of passenger aircraft” by returning previously delegated authorities to the FAA. (U.S. Senate Committee on Commerce, Science, and Transportation). The Act requires the FAA to review the safety implications of all new technology and removing financial incentives related to certification schedules. Id. The legislation would also create an anonymous safety reporting program for FAA employees. Id. Lawmakers have focused on creating a stronger regulatory framework to reign in Boeing and strengthen industry oversight.
Once described as the “bread and butter” of Boeing Commercial Airlines, the 737 MAX is now a liability that threatens the reputation of the 104-year-old aerospace company. Amid legal challenges from victims, pilots, shareholders, and customers, Boeing continues to push for MAX certification. As Congress demands tighter oversight and enforcement, it remains to be seen whether regulators can pilot these reforms. The FAA’s response to Boeing and handling of the MAX certification will define the relationship between the industry and its regulators.