Thanks for your reply, are you referring to this? (Quoted below)
http://www.aphis.usda.gov/lpa/pubs/f...wpetravel.html

It specifically says "Carryon pets are NOT protected by the Animal Welfare Act".

I looked at FAA website related to carryon pets, it doesn't say that the pet needs to be able to stand either.

Please let me know if there is a specific federal law on the kennel size of carryon pets.

Traveling by Air With Your Pet
Animal Care

January 2002

Dogs, cats, and most other warmblooded animals transported by air are protected by the Animal Welfare Act. The U.S. Department of Agriculture's (USDA) Animal and Plant Health Inspection Service (APHIS) enforces this law.

APHIS' shipping regulations help assure that animals are treated humanely by airlines as well as animal dealers, exhibitors, and research laboratories. Pet exhibitors, owners, and other shippers also are affected by regulations established to protect the well-being and safety of animals in transit.

Airline Procedures
Airlines transport animals in the cargo compartment of the plane, but some airlines allow passengers to transport small animals in the cabin as carryon luggage. The pet must be placed in a kennel that is comfortable yet small enough to fit under the passenger's seat. Carryon pets are not protected by the Animal Welfare Act. For specific airline requirements, contact the airline.

APHIS Requirements

Age

Dogs and cats must be at least 8 weeks old and must have been weaned before traveling with the airlines.
Kennels
Kennels must meet minimum standards for size, strength, sanitation, and ventilation.
Size and Strength
Kennels must be enclosed and allow room for the animal to stand, sit, breathe, and rest comfortably. They must be easy to open, strong enough to withstand the stress of shipping, and free of objects that could injure the animal.