California rejects another preemption claim

Pacific Bell Wireless, LLC v. Public Utilities Commission, --- Cal.Rptr.3d ----, 2006 WL 1677723 (Cal.App. 4 Dist.)

The Commission imposed a multimillion dollar fine against plaintiff, who was doing business as Cingular. First, the Commission found Cingular's early termination fee for cancelling a wireless service contract without any grace period was an unjust and unreasonable practice, particularly when Cingular admitted the best way for customers to decide whether Cingular's service would work for them was to try the service for some period of time. Second, the Commission found that Cingular failed to disclose known network problems to its customers and misled them regarding coverage and service, which were also unjust and unreasonable practices.

Cingular challenged the Commission’s jurisdiction and argued that the Commission violated Cingular’s due process rights. The court rejected both challenges.

During a period when rapid growth was overwhelming Cingular’s capacity to serve existing and new California customers, Cingular representatives told customers that Cingular provided service in locations where service was not, in fact, available. Customers requesting information regarding coverage areas were provided with rate area maps, not quite the same thing. Cingular ads gave the impression that coverage was available in all areas at all times, when it was not. Cingular's advertisements also provided misleading information regarding Cingular's early termination fees.

One of Cingular’s arguments was that federal law prohibiting states from regulating phone rates and entry of a wireless provider into a market, 47 U.S.C. § 332(c)(3)(A), preempted any state regulation of this type. A determination that Cingular’s services were not worth the prices paid, Cingular argued, was necessarily a regulation of rates, as was a required refund of termination fees. Likewise, a determination that Cingular’s network coverage was inadequate was necessarily a regulation of entry into the market.

In Bastien v. AT & T Wireless Services, Inc., 205 F.3d 983 (7th Cir.2000), the plaintiff alleged AT&T signed up wireless subscribers without first building the necessary infrastructure, leading to lots of failed calls. The Seventh Circuit found preemption of plaintiff’s contract and Illinois Consumer Fraud Act claims because plaintiff’s claims would directly affect the federal regulation of tower construction, location, and service, as well as quality of service and hence rates. Relief would require AT&T to do more than the FCC required, either in quality of service or lower rates.

The California appellate court, by contrast, held that the Commission was regulating non-rate and non-entry terms and conditions of service, as federal law allowed. The impostion of fines and refunds of early termination fees was justified to compensate customers and prevent further misrepresentations. Any effect of the penalties on Cingular’s rates is indirect and incidental.

Bastien was not on point, since the Commission wasn’t trying to get Cingular to provide more service or lower its rates, just stop its false claims and unfair contractual conditions. In Bastien, the complaint didn’t explain any particular false promises or representations by AT&T, whereas here there was detailed documentation of misrepresentations.

The FCC itself has concluded that § 332(c)(3)(A) doesn’t generally preempt money damages based on state consumer protection claims: “A carrier may charge whatever price it wishes and provide the level of service it wishes, as long as it does not misrepresent either the price or the quality of service. Conversely, a carrier that is charging a 'reasonable rate' for its services may still be subject to damages for a non-disclosure or false advertising claim under applicable state law if it misrepresents what those rates are or how they will apply, or if it fails to inform consumers of other material terms, conditions, or limitations on the service it is providing.”

In other words, the problem was not that the poor service was not, in some absolute sense, worth the rate paid, which would have been a disguised rate regulation and therefore preempted; the problem was that Cingular got money it wouldn’t have received if customers had known what they were signing up for. While I agree with the outcome, it might be worth dissecting this reasoning: we are assuming that fully informed consumers wouldn’t have signed contracts with Cingular at the same price. The standard requires comparison to a “true” market price rather than to a just price – even though the former may be just as much an illusion as the latter. The thing that's weird about this is that the counterfactual -- Cingular disclosed its bad service, and fewer people signed up -- is unlikely; the more likely scenario is that Cingular wouldn't have entered markets where it had to acknowledge its significant limitations, and thus one can see the false advertising prohibition as a limit on entry. But it's easy to understand why Cingular doesn't want to come out and say that.

Another notable argument is that the Commission denied Cingular due process because the statute governing its actions was so broad that it was punished for actions it could not have known were unjust and unreasonable. In the course of rejecting this argument, the court pointed out that Cingular’s argument would invalidate lots of common-law and statutory prohibitions on fraud, which deliberately don’t fully specify in advance what conduct is deceptive and misleading.

The court simply didn’t buy that Cingular had no way of knowing it was unjust and unreasonable to charge up to $550 for service cancelled in the first day, even when it admitted that the best way for customers to determine whether Cingular’s service was right for them was to try it, or that it was unjust and unreasonable for Cingular to fail to disclose network and coverage limitations. Past Commission actions against various creative deceptive practices and numerous customer complaints to Cingular over its policies further established that a reasonable company would have known its conduct fell within the Commission’s prohibitions.