Citations
- 668 F. Supp. 2d 448
Full opinion text
MEMORANDUM, ORDER AND JUDGMENT DENYING CLASS CERTIFICATION AND GRANTING SUMMARY JUDGMENT
JACK B. WEINSTEIN, Senior District Judge:
Table of Contents
I. Introduction..............................................................450
II. Prepaid Calling Card Industry..............................................451
III. Present Litigation ........................................................453
A. Facts................................................................454
B. Procedural Positions ..................................................456
1. Defendants.......................................................456
2. Plaintiff..........................................................456
3. Federal Government...............................................457
IV. Related Litigation ........................................................458
A. Private Plaintiffs......................................................458
B. FTC Action..........................................................459
C. State Attorneys General...............................................460
V. Regulation of Prepaid Calling Card Industry.................................461
A. Federal Regulation....................................................461
B. Existing State Statutes................................................462
C. Proposed Federal Prepaid Calling Card Consumer Protection Act of 2009...............................................................463
VI. Need for Uniform National Regulations......................................464
VII. Denial of Class Certification................................................467
VIII. Lack of Jurisdiction.......................................................468
IX. Conclusion...............................................................468
Appendix 1 — Other Phone Card Cases .............................................469
Appendix 2 — United States Department of Justice, Report of Administrative Actions to Control Phone Cards, Oct. 20, 2009 ............................................471
I. Introduction
Plaintiff Orlando S. Ramirez, on behalf of himself and others, brings this class action pursuant to Rules 23(b)(2) and 23(b)(3) of the Federal Rules of Civil Procedure. He alleges that defendants Dollar Phone Corp. (“DPC”), Dollar Phone Services, Inc. (“Services”), Dollar Phone Enterprise, Inc. (“Enterprise”), and Dollar Phone Access, Inc. (“Access”) (all four collectively, “Dollar” or the “Dollar companies”) violated the consumer fraud acts (“CFAs”) of eleven states and were unjustly enriched at consumers’ expense, through deceptive practices relating to prepaid calling cards.
Dollar moved to dismiss the complaint. The court directed the parties to treat Dollar’s motion as one for summary judgment. It requested, and received, relevant information from the federal government, a non-party. See Appendix 2, United States Department of Justice, Report of Administrative Actions to Control Phone Cards, Oct. 20, 2009 (“DOJ Report”).
Denial of class certification and summary judgment of dismissal are appropriate. “[A] class action is [not ] superior to other available methods for fairly and efficiently adjudicating [this] controversy” under Rule 23(b)(3) of the Federal Rules of Civil Procedure. “[R]elief is [not ] appropriate respecting the class as a whole” under Rule 23(b)(2).
In general it is inappropriate to deny those wronged civilly a fallback court-supervised remedy when the administrative law segment of our justice system has neglected to provide an available superior form of protection. There are, however, instances where the litigation remedy is relatively so inferior as to warrant denying it altogether in the hope that administrative justice will prevail. This is such an instance.
The superior and sensible way to deal with this controversy, involving as it does a multibillion-dollar national and international communications industry that serves millions of people in every state, many of them poor and uneducated, is for the Federal Trade Commission (“FTC”) or another federal agency with authority in this area to issue appropriate regulations. Certification is denied.
Plaintiff Ramirez’s individual claim, after denial of certification, would be for some $2.00. This is well below the Class Action Fairness Act’s $5 million jurisdictional minimum. 28 U.S.C. § 1332(d)(2). Amendment of the complaint is not warranted since the $75,000 claim required for a garden-variety diversity action could not be established, and the individual parties are all citizens of New York. 28 U.S.C. § 1332(a).
Deceptive and abusive practices in the prepaid calling card industry have been widely documented. See Part II, infra. Senator Bill Nelson of Florida, in his remarks upon introducing the proposed Prepaid Calling Card Consumer Protection Act of 2009, observed that “[ujnfortunately, some providers and distributors of these cards are scamming consumers — by imposing undisclosed junk fees, charging exorbitant rates, and selling cards that expire shortly after consumers start using them.” 155 Cong. Rec. S2967 (daily ed. Mar. 10, 2009). Recent law-enforcement investigations have found “unfair and deceptive business practices,” including “charging customers for calls where they receive busy signals, imposing weekly ‘maintenance fees’ that may take away up to 20 percent of the card’s overall value, and billing for calls in 3-minute increments.” Id. Based on empirical research in this area, one expert has concluded that “[bjeeause accurate and complete information typically isn’t available, it is impossible for consumers to make informed decisions before using the cards.... [I]n-formation is often confusing, incomplete, and even deceptive.” Calling Card Consumer Protection Act: Hearing on H.R. 3402 Before the Subcomm. on Commerce, Trade and Consumer Protection of the H. Comm. On Energy and Commerce, 110th Cong. 4 (Sept. 16, 2008) (testimony of Dr. Julia Marlowe, Assoc. Prof. Emeritus, Dep’t of Housing and Consumer Economics, Univ. of Georgia) (hereinafter “Mar-low Testimony”), available at http:// energycommerce.house.gov/images/ stories/Doeuments/Hearings/PDF/Testimony/ CTCP/110-ctcp-hrg.091608.CallingCard. MarloweTestimony.pdf.
Purchasers are typically low-income consumers who cannot afford traditional phone service; many of them are recent non-English-speaking immigrants who use the cards to telephone their families abroad. The industry’s problems are of special concern because the cards are widely marketed to this particularly vulnerable group. See Mark E. Budnitz, Martina Rojo & Julia Marlowe, Deceptive Claims for Prepaid Telephone Cards and the Need for Regulation, 19 Loy. Consumer L.Rev. 1, 2,13 (2006).
The industry’s deceptive practices have been the subject of extensive, repetitive private litigation as well as repeated enforcement actions by the FTC and several state Attorneys General. See Part IV, infra. Conflicting regulation in a number of states would be superseded by the proposed federal Prepaid Calling Card Consumer Protection Act of 2009. See Part V, infra.
Despite its mission “to prevent persons, partnerships, or corporations ... from using ... unfair or deceptive acts or practices in or affecting commerce,” 15 U.S.C. § 45(a)(2), neither the FTC nor any other governmental agency has comprehensively addressed the serious problems raised by the instant litigation. Plaintiffs allegations present issues better addressed and resolved on a uniform national basis, rather than by piecemeal state-law-based litigation. While utilization of cy pres or the fluid recovery doctrine might provide a viable remedy with some benefit to the class and to society, this is the unusual situation where the present action’s limited patchwork repairs are not worth the costs or benefits of allowing the case to go forward.
II. Prepaid Calling Card Industry
Prepaid calling cards are sold by convenience stores, gas stations, and other retailers in denominations as small as two dollars. The cards represent a credit that may be used to obtain telephone calling time from any phone. Most cards display a local or toll-free access number and a personal identification number (“PIN”). Users call the access number and enter the PIN. The balance of value on the card is then applied toward the user’s call.
Companies that provide service for the cards use the PIN to keep track of how much value — measured in dollars, minutes, or other units — remains on each card. Once the balance on a card is depleted, the user’s call is terminated. See generally Fed. Trade Comm’n, FTC Facts for Consumers, Buying Time: The Facts About Pre-Paid Phone Cards (Mar.2008), available at http://www.ftc.gov/bcp/edu/pubs/ consumer/products/pro04.shtm; see also Adighibe v. Clifton Telecard Alliance, No. 07-CV-1250, 2008 WL 940777, at *1 (D.N.J. Apr. 7, 2008) (describing operation of prepaid calling cards); Appendix 2, DOJ Report.
These cards take advantage of modern technology, permitting consolidation of communications using many available connecting resources in an efficient way. They offer convenience and relatively low per-minute rates, particularly for international calls. In recent years, the prepaid calling card industry has mushroomed into a large international industry. See Brian Grow, Talk Isn’t So Cheap on a Phone Card, Bus. Week, July 23, 2007, at 64 (estimating in July 2007 that $4 billion in prepaid calling cards were sold each year).
A complex division of labor structures the trade. Different companies or corporate affiliates each perform distinct roles. See generally Consumer & Governmental Affairs Bureau, Fed. Commc’ns Comm’n, Pre-Paid Phone Cards: What Consumers Should Know (Nov. 6, 2008), available at http://www.fcc.gov/cgb/consumerfacts/ prepaidcards.html; see also Aug. 31, 2009 Hr’g Tr. at 5-18 (statements of Dollar’s counsel). Domestic and foreign telephone companies own the local and international telephone or internet lines and satellite systems that actually carry telephone calls. Minutes of calling time are purchased from these telephone companies by resellers, who shop among hundreds of worldwide companies seeking the best rates for different destinations. The resellers then sell the calling time in bulk to service providers who create and issue prepaid calling card PINs.
It is these service providers, represented by defendant Enterprise, who assign monetary values to the PINs, set the per-minute rates at which calling time is charged to users, provide access via local or toll-free phone numbers printed on the cards, and often supply toll-free customer service to users. The service providers do not, however, typically print and distribute the cards themselves. Rather, they sell PINs to distributors at a discount from the assigned face value. These distributors— sometimes also called “wholesalers” — print calling cards bearing the service providers’ PINs and access numbers. The distributors then market the cards by selling them to convenience stores and other retailers. The retailers finally vend the cards to consumers for the face value assigned to them by the service provider. It is unclear whether it is the legal duty of the service provider (who issues the PINs and provides calling service) or the distributor (who prints the cards and distributes them to retailers) to make disclosures in connection with a particular card. See Part III, infra.
Law enforcement agencies and researchers investigating the industry have discovered widespread discrepancies between the amount of calling time claimed in advertising and marketing materials, and the calling time actually available to card users. In tests conducted by the FTC in connection with recent enforcement actions, the cards were found to provide half or less than half of the advertised minutes. Press Release, Fed. Trade Comm’n, Prepaid Calling Card Distributor Agrees to Pay $1.3 Million (June 29, 2009) (“In tests conducted by the FTC, the calling cards on average provided less than half of the advertised calling minutes.”), available at http://www.ftc.gov/opa/2009/06/cta.shtm; Press Release, Fed. Trade Comm’n, Companies Agree to Pay $2.25 Million as Part of FTC Crackdown on Fraud in the Prepaid Calling Card Industry (Feb. 10, 2009) (“The FTC’s testing showed that consumers received only about half the advertised minutes.”), available at http://www.ftc.gov/ opa/2009/02/alternatel.shtm. Surveys of a range of prepaid cards by the nonprofit Hispanic Institute yielded similar results. See Hispanic Institute, Calling Card Verification Test Plan (2007), available at http:// thehispanicinstitute.net/files/Test% 20Plan.pdf. Another study of calling cards marketed to Spanish-speaking consumers found that “[mjinutes are often deducted for hidden fees, and consequently, consumers do not receive the number of minutes they are told are available.... The average actual cost of the cards was 87% higher than the average expected cost.” Budnitz, et al., supra, at 6-7.
Underlying these findings are often-inadequate disclosures of costs, as well as consumer confusion and complex fee calculations, which involve minute-rounding, per-call fees, periodic retention-of-card fees, and other types of charges and surcharges. See Marlow Testimony, supra, at 2. Compounding these problems are customer service representatives, theoretically available through toll-free numbers, who often provide incomplete or inaccurate information, or who cannot be reached. See id. at 2-3.
III. Present Litigation
Plaintiff alleges that he himself was cheated out of some portion of the value of a two-dollar card he purchased; that the Dollar companies were greatly unjustly enriched at the expense of many putative class members; and that defendants violated the CFAs of eleven states through deceptive practices. Am. Class Action Compl. and Demand for Jury Trial (“Am. Compl.”) ¶¶ 45-62. He seeks monetary damages, a permanent injunction, and a declaratory judgment that Dollar unlawfully failed to disclose material facts about the fees and conditions applying to their cards. Id. at 17-18 & ¶ 67.
Certification of two classes, denominated “Class A” and “Class B,” is sought. Id. ¶ 38. Putative “Class A” includes all persons who purchased Dollar prepaid cards since January 4, 2004; putative “Class B” includes all residents of specified states with “substantially similar” CFAs who purchased Dollar prepaid cards since January 4, 2004. Id. Subject matter jurisdiction is based upon the Class Action Fairness Act, 28 U.S.C. § 1332(d). Id. ¶ 13.
Defendants move to dismiss plaintiffs amended complaint on the grounds that: (1) the complaint fails to comply with the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the states’ CFAs; (2) plaintiff lacks standing to pursue his CFA claims because he will not be able to obtain class certification; and (3) this court lacks subject matter jurisdiction over a number of the CFA claims. The parties were directed to treat the motion as one for summary judgment and to conduct limited discovery.
Preliminary oral argument on defendants’ motion was heard on August 31, 2009. At the court’s request, a representative of the United States Attorney’s Office for the Eastern District of New York was present to address the federal govern-merit’s interest. After further briefing and a communication from the government, see Part III.B.3, infra, oral argument was renewed on November 5, 2009.
A. Facts
Plaintiff purchased a two-dollar “Langosta” brand prepaid calling card (the “Langosta card”) in June 2007 in Great Neck, N.Y. Deck of Orlando Ramirez ¶ 2. He used the card to place an international call to El Salvador. At the initiation of the call, a voice prompt announced that plaintiff had 48 minutes of calling time. Id. ¶ 5. The call terminated after approximately 25 minutes, apparently because the card’s balance was depleted. Id.
The Langosta card’s packaging materials displayed disclosures in both English and Spanish:
International calls made to cellular phones and calls via toll-free numbers are billed at higher rates. Maintenance/service fees and other charges may apply. Calls made from U.S. payphone will have a per call fee applied. Application of surcharges and fees may have an effect of reducing total minutes on cards. Prices are subject to change without notice. This card has no cash value. Card expires 3 months after first use or 12 months after activation. Service provided by DPE.... For Customer Service issues or calling rate information, please call 1-800-413-0351.
Id., Ex. A.
The parties are in agreement that the service provider “DPE” identified in this disclosure is defendant Enterprise, and that Enterprise provided the phone service for this card. Defendants assert that although the card was serviced by Enterprise, the card itself was distributed by a third-party distributor- — -unrelated to the Dollar companies — that purchased the PIN number from Enterprise and printed and distributed the Langosta card. Deck of Abe Greenfield (“Greenfield Deck”) ¶ 7; Reply Deck of Abe Greenfield (“Greenfield Reply Deck”) ¶¶ 16-22. The card was, it is contended by defendants, “neither printed, designed, marketed, nor distributed by Enterprise.” Greenfield Reply Deck ¶ 22.
Enterprise and the other Dollar companies are all headquartered at the same location in Brooklyn, New York. Am. Compl. ¶ 11. The President of Enterprise provided a declaration describing the roles of each of the Dollar companies as follows:
[The Dollar companies are] involved in the telecommunications industry. Defendant DPC purchases access to long distance telecommunications service from telecommunications carriers (“Carriers”) and resells long distance telecommunications services to other Carriers. Defendant Enterprise is itself an independent licensed Carrier, and the largest customer of DPC.
Enterprise resells its long distance services to a network of independent wholesalers of prepaid calling cards nationwide (“Wholesalers”). Enterprise provides the Wholesalers with telephone access numbers and personal identification numbers (“PINs”) that are assigned by the Wholesalers to prepaid calling cards (“Cards”) the Wholesaler designs and prints. A caller holding such a Card may access telecommunications time by dialing the appropriate telephone access number and PIN number associated with the Card....
Relevant here is the fact that neither DPC nor Enterprise sells prepaid calling Cards. DPC sells long distance minutes to other Carriers, and thus has no involvement in the calling card business other than as a supplier of wholesale long distance services to its customer Enterprise. Enterprise, in turn, resells long distance services, packaged in the form of PINs, to independent Wholesalers nationwide. These Wholesalers themselves print Cards bearing Enterprise PINs. It is the Wholesalers, not Dollar, that design and market the Wholesalers’ Cards. The Wholesalers, not Enterprise, disclose rates and charges to consumers.
Dollar does not sell Cards to individual consumers such as the plaintiff in this action, and does not advertise or market Cards to consumers. Dollar does not make any representations about Cards to consumers. The complaint in this action identifies a private label calling Card, owned and designed by an independent Wholesaler. Enterprise does not manufacture or design such Cards that are sold to consumers. Rather, Enterprise sells telecommunications time and services to Wholesalers. It is these Wholesalers who manufacture Cards or arrange for their manufacture. Except for certain exceptional instances not relevant here, it is the Wholesalers who design the Cards, determine the content of disclosures or other copy appearing on Cards and market Cards for sale to consumers. The Wholesalers, not Enterprise, determine the form of image appearing on Cards and Card marketing materials and advertisements, including any disclosure of applicable rates and surcharges.
Greenfield Decl. ¶¶ 3-4, 6-7 (emphases added).
Dollar maintains that it was not responsible for printing the Langosta card, or for any disclosures on the card, on its packaging, or in associated advertisements. Plaintiff disputes this on the basis of unsworn discovery responses by a third-party distributor of Dollar cards from an unrelated litigation. See Pl.’s Mem. of Law in Opp’n to Defs.’ Mot. for Summ. J. at 4-5. This distributor indicated that “Dollar composes the disclaimers to be put on card and advertisements [and] sets the fees and other charges applicable to the cards.” Id. at 4. Arguing that this suggests that Dollar may have been responsible for the Langosta card’s disclosure language, plaintiff requested further discovery. Id. at 5. Further discovery on this issue would not affect the court’s decision on the present motion.
According to plaintiff, defendants have “systematically, intentionally, and surreptitiously ... failed to disclose” information on Dollar phone cards necessary for a reasonable consumer to understand the cards’ pricing structure. Am. Compl. ¶ 29. The allegedly undisclosed information includes:
a. The price the consumer pays per billing increment (10