So I believe this has come up from time to time here. In Scott McCartney's column in the WSJ today he tells of a passenger on a first class ticket that got downgraded to coach due to a weather-related flight cancellation. Compensation was only the difference between the F fare paid and full Y - a whopping $90. Even though at the time of purchase a coach ticket was $400 and the first class ticket purchased was $1,000 r/t.
I nearly had this happen to me last week on a transcon but I just refunded my first class ticket and found a seat on American, so never even got to the point of arguing over compensation with CO.
What should Mrs. Simpson do? Written complaint to DOT? Small Claims Court? The amount of the downgrade compensation is not explicitly spelled out in the CoC to my knowledge, and so there's certainly room for judgment, and I have (would like) to think a court would logically side with the passenger.
IIRC, CO Insider has hinted that customers in these situations are "taken care of" but that clearly wasn't the case for Mrs. Simpson and CO did not seem to relent upon being contacted by the WSJ.
Big

for CO.
http://online.wsj.com/article/SB123362464275141955.html
Originally Posted by WSJ article Excerpt
But Continental says Mrs. Simpson's flight was canceled because of bad weather, and so the airline's policy when a customer gets downgraded is to refund the difference between what was paid for first class and the lowest coach fare available for the new flight -- generally a one-way, full-priced ticket, as if the customer bought a new ticket at the last minute to get on the new flight.
"Because it was weather, it's an event out of the airline's control," a spokeswoman said.
That didn't seem fair to the Simpsons. "I feel ripped off and I wonder if I will ever pay to upgrade again if the airline can keep most of the money paid to upgrade without actually providing the promised first-class seat," Robert Simpson said.