Judge Weinstein delivered a fascinating opinion in this putative class action about fraudulent marketing of prepaid phone cards, notable for its recitation of problems with such cards and attempts by regulators to deal with them—including descriptions of other cases, FTC notices, and proposed legislation—that reads more like a law review article than a decision. He ultimately concluded that the court was powerless to do anything for these plaintiffs. I don’t know enough about class actions to know whether there’s precedent to dismiss a class action because only regulatory action can work—I’d love to hear from anyone who knows more.
Ramirez sued defendants under the consumer fraud acts of eleven states for deceptive practices. The court found that a class action was not superior to other available methods. “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.”
Background: “Deceptive and abusive practices in the prepaid calling card industry have been widely documented.” The industry is multilevel, and it’s hard to tell who’s responsible for setting rates, disclosing information, etc.—there are a number of middlepeople before purchased minutes turn into calling cards. Agencies and researchers have found “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.” The plaintiff, for example, bought a $2 card to call El Salvador; he was promised 48 minutes at the beginning of the call, but it ended after 25 minutes because the card was out of money.
Purchasers are typically poor and can’t afford traditional phone service. Many of them are recent immigrants who don’t speak English, and are thus particularly vulnerable. Deceptive practices in the industry have been the subject of “extensive, repetitive private litigation as well as repeated enforcement actions by the FTC and several state Attorneys General.” At the court’s request, the federal government submitted a summary of the actions the FTC and the FCC had taken in the area so far, from which the court determined that “the federal government has made substantial efforts to assist purchasers of phone cards by its publications and actions to prevent misleading conduct.
Yet, the federal government is inhibited in providing full and uniform protections by a lack of explicit authority.” There’s a proposed federal Prepaid Calling Card Consumer Protection Act of 2009 to deal with the inconsistent patchwork of current regulations resulting from the FCC-FTC split in authority over telecommunications providers (carriers) and advertisers (wholesalers, distributors, and retailers). “While the FTC seems to have been active in policing the calling card industry, as is demonstrated in the list of its enforcement actions, it seems not to have the authority to take any action against those the plaintiffs claim are ‘the real culprits’ in the deceptive practices, the carriers.”
In the meantime, the FTC has brought several deceptive practices enforcement actions against prepaid card providers; orders and proposed orders involve both money and detailed disclosures and other restrictions, including ongoing testing to make sure rates are accurate, going forward. State AGs have been active as well, though there’s no uniformity in state laws specific to prepaid phone cards. “The problem posed in controlling abuses is thus not only that there are different levels of specificity, but that one state often regulates conduct that another state does not.”
There are also at least 21 other private actions filed in federal court since 2003 over prepaid calling cards; some have been dismissed without prejudice, many settled, and some are still pending. Proposed and approved settlements vary significantly—one court approved a settlement providing $2 million in charitable donations plus a $20 million refund pool. That one also has extensive regulations on the defendants’ future conduct, including disclosures and review by the NJ AG’s office. Another approved settlement involved $300,000 in charitable donations, $200,000 in discounts for class members, and up to $3.7 million in refunds, but no constraints on future behavior. And so on.
The sale of the specific card at issue was governed by NY’s prepaid calling card statute, and the defendant who provided service for the card, is subject to consent orders from NJ and Florida. Defendants, who sell in other states as well, may be subject to conflicting statutory and regulatory mandates, plus the FTC, plus three other pending private lawsuits; plaintiff’s counsel is a repeat player using the same plaintiff, filing 9 similar suits against prepaid calling card companies.
Plaintiff argued that, company by company, “we are reforming this industry by extending the limited statewide regulation that currently exists on a nationwide basis through agreed upon 23(b)(2) injunctive relief.” It was better to use a patchwork than to do nothing. The court respectfully disagreed that “this somewhat dysfunctional private method of control of a major national and international communications link through repetitive civil litigations is appropriate.”
Fundamentally, the court concluded, the allegations presented issues that should be resolved on a uniform, national basis, not by piecemeal state-law 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.” Rather, “[a] sprawling, hit-or-miss, costly, and confusing series of civil litigations across many states is an absurd way to control a vital national and international form of communication.”
The court found it “intolerable” that a multi-billion-dollar industry affecting the lives of millions of vulnerable consumers, “many of them low-income or recent immigrants to whom telephone contact with loved ones abroad is vital to their own and their families’ health and happiness,” was so unregulated, noting that the industry’s problems did not seem to be limited to a few bad apples but were structural. And the chaotic regulatory structure is no picnic for service providers and distributors either. Consumers need uniform standards that will enable them to compare cards, especially since many of the relevant consumers are transient.
But this lawsuit wasn’t the solution; it would likely “compound the problem and encourage perpetuation of an ineffective regulatory regime that is confusing and incomplete, that is unduly burdensome for the industry, and that provides neither effective protection nor a suitable remedy for most injured consumers.”
It would be possible to administer this proceeding with some “minimal benefits” to the class, though meaningful recovery directly to individual class members would not be possible in view of the small sums involved and the costs of distribution. Relief would have to rely on cy pres (“as close as possible,” a doctrine justifying things like donations to charity) and fluid recovery along with injunctive relief. Appellate courts have generally rejected academic and district court endorsements of cy pres and fluid recovery. (I detect the sting of past reversals!) Injunctive relief would mire the court in “inappropriate” continuing supervision of the industry.
In this context, the class action was not “superior” to other available methods for fairly and efficiently adjudicating the controversy, and final injunctive or declaratory relief would not be appropriate respecting the class as a whole. The only adequate way to protect the class’s rights would be through federal regulation and enforcement. “To use the truncated powers of a misshapen 23(b)(3) class action to address the issues raised in plaintiff's complaint would be unfaithful to the premise and reason for the class action--considerations of equity and good judgment.”
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