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From Antitrust Law Daily, February 4, 2019

Energy company’s market variable pricing did not violate CUTPA

By Wendy Biddle, J.D.

An electricity provider’s pricing practices of offering a promotional fixed-price period that subsequently converted to variable pricing did not violate the Connecticut Unfair Trade Practices Act.

The U.S. Court of Appeals in New York City today upheld a lower court’s rejection of a consumer’s Connecticut’s Unfair Trade Practices Act (CUTPA) claims against an energy company that offered a lower fixed-price contract that in time converted to higher variable pricing because the pricing practices were not deceptive and did not violate public policy. The court also upheld the trial court’s grant of summary judgment for the energy company on the consumer’s breach of contract claims finding that the consumer’s interpretation of a contract clause was not reasonable (Richards v. Direct Energy Services, LLC, February 4, 2019, Livingston, D.).

The Connecticut consumer entered into a contract with Direct Energy Services for his home’s electricity. The contract guaranteed a fixed rate that was 10% lower than the state-approved electricity rate for a term of 12 months. The contract's so-called "Evergreen clause," which was included in each of Direct Energy's contracts, provided that during the variable rate period, "the rate for electricity will be variable each month at Direct Energy's discretion. The rate may be higher or lower each month based on business and market conditions." Per the terms of the contract, after the first 12 months of the fixed rate, the contract converted to a variable rate plan. The consumer continued on the variable rate plan for three months before he cancelled after paying a rate of two cents more per kilowatt hour than the state-approved rate. The customer then filed a putative class action against Direct Energy on behalf of all Direct Energy customers enrolled in a variable rate plan in connection with a property in Connecticut or Massachusetts, arguing that the company's actions were unfair and deceptive trade practices that violated CUTPA.

The trial court initially dismissed two of the customer's four claims that related to violations of Massachusetts law because, as a resident of Connecticut who had not been injured in Massachusetts, he lacked standing to bring those claims. After additional proceedings, the electric company moved for summary judgment on his claims under CUTPA and the implied covenant of good faith and fair dealing. According to the customer, a reasonable consumer would interpret the Evergreen Clause as meaning that Direct Energy's variable rates were based upon the underlying wholesale market rates on the New England ISO market and would fluctuate up and down with these prices, but instead the company charged variable rate customers artificially high electricity prices and did not lower them when wholesale prices dropped. In his expectation, "market conditions" had to do with the company's costs and its competitors' pricing. The court granted summary judgment in favor of Direct Energy, finding that the Evergreen Clause’s plain language gave the company discretion to choose a profit margin when setting variable rates. The consumer appealed.

CUTPA claims. The consumer argued that energy company’s variable rate pricing was deceptive, unfair, and was a per se violation of CUTPA. The court found that the contract was not deceptive, but unambiguously allowed Direct Energy to set a variable rate the way it did. Further, the court stated that if the consumer’s argument were valid, it would require the energy company to disclose every factor influencing the variable rate and CUTPA does not require such a duty. Connecticut only requires that consumer electricity contracts explain the rates the customer will be paying and the circumstances under which the rates may change. Requiring Direct Energy to define its "business and market conditions" in detail would override Connecticut’s Public Utilities Regulatory Authority’s certification, the court stated.

The court was also unpersuaded with the consumer’s argument that Direct Energy committed a per se violation of CUTPA because it set a variable rate based on "business and market conditions" when it did not. The court noted again that the consumer assumed that the Evergreen Clause misrepresented the energy company’s pricing practices. The court rejected that assumption again, affirming the district court’s grant of summary judgment.

The consumer also argued that variable rate pricing constituted an unfair trade practice under CUTPA. Run of the mill statutory violations, torts, and contract breaches do not constitute unfair trade practices, stated the court. The consumer’s unfairness argument rested on his assumption that the energy company breached its contract by failing to tie its variable rate to "business and market conditions" which he interpreted to mean procurement costs. But the court stated that a simple contract breach was not sufficient to establish a CUTPA violation. The court also rejected the argument that offering a teaser rate was against public policy, stating that numerous companies across industries design their business strategies around the expectation that customers will not cancel after an introductory promotion period or teaser rate. The court concluded that the CUTPA claim was without merit and affirmed the district court’s partial grant of summary judgment.

Unfair trade practices under Massachusetts law. The district court dismissed the consumer’s claims of unfair trade practices under Massachusetts law for lack of Article III standing because the consumer was not injured in Massachusetts. The appellate court found that the district court erred in holding that the consumer does have Article III standing because the consumer was charged money by Direct Energy and sought recompense for the charge. However, the court affirmed the dismissal of the Massachusetts claims, finding that the consumer had failed to state a claim because Massachusetts does not give plaintiffs a cause of action for unfair or deceptive acts that occur outside of Massachusetts. The consumer argued he has class standing to assert claims on behalf of Direct Energy’s Massachusetts customers even if he cannot personally assert any claims under Massachusetts law. According to the court, the consumer did not challenge the dismissal of the motion for class certification (which the lower court deemed moot because it found he had not Article III standing). Because the consumer did not challenge the dismissal of the motion for certification, the Second Circuit stated that it could not address whether Article III would have prevented him from representing a class of plaintiffs with claims in Massachusetts.

Breach of contract. The court assessed the consumer’s breach of contract claim and concluded that the consumer’s interpretation of the Evergreen Clause was not reasonable. The court concluded that the Evergreen Clause in no way states or imply that the variable rate bears a direct relationship to Direct Energy’s procurement costs, as the consumer assumed it did. The court affirmed the district court’s grant of summary judgment on the consumer’s contract claim.

Dissent. An opinion concurring in part and dissenting in part by Judge Pooler (the dissent) took issue with the majority’s assertion that widespread business practices that are consistent with common business norms do not violate CUTPA. The dissent pointed out that common business norms are not dispositive evidence of what is and is not fair. The dissent pointed to recent FTC enforcement actions targeting privacy breaches that suggest unfairness doctrine continues to evolve. The FTC, the dissent pointed out, considers the third prong of the cigarette test (i.e. the unjustified consumer injury) as the primary focus of the FTC Act. It noted that Connecticut courts have adopted the FTC’s guidance that an injury must satisfy three tests to be considered unfair 1) it must be substantial; 2) it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and 3) it must be an injury that consumers themselves could not have reasonably avoided. The dissent contended that a jury could reasonably find that Direct Energy’s strategies to avoid alerting consumers of their rising rates, along with general consumer inertia of inaction, imply that consumers could not reasonably avoid paying the higher rates. The dissent would have vacated the summary judgment motion regarding both the unfairness and contract claims. The dissent would also remand for consideration of the class certification in the first instance, finding that the question of whether the consumer can bring a class action under the state laws of multiple states is a question of predominance under Rule 23(b)(3) not a question of standing under Article III.

The case is No. 17 1003 cv.

Attorneys: Robert A. Izard, Jr. (Izard, Kindall & Raabe, LLP) for Gary W. Richards. James Monroe Chambers (McDowell Hetherington LLP) for Direct Energy Services, LLC.

Companies: Direct Energy Services, LLC

MainStory: TopStory StateUnfairTradePractices ConnecticutNews NewYorkNews VermontNews

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