I understand your frustration. Peppy was required to stay in his carrier under the seat on his trip to Gerogia. Unless someone complained, I cannot imagine, for the life of me, what the big deal is with a 3 lb. puppy sitting on someone's lap as long as the pup is quiet and well behaved. I do understand that the other passengers would have problems with a wild child -- which brings to mind my BIGGEST complaint -- SKINKIDS who do not behave! I wonder if an airline could REQUIRE a parent to keep his skinkid under control?
I would imagine that the whole issue revolves around insurance issues. The concern would be what if your 3 lb. pup bit someone and then that someone sued the airline.