6. Does Item 5 of the Installation Policy and Procedures in MPower's Master Service Agreement Violate Public Utilities Code Section 451?
As noted above, UCAN's final major contention is that Mpower's insistence on being paid for the international long distance calls in dispute here violates Section 451 of the Public Utilities Code, which requires that "all rules made by a public utility affecting or pertaining to its charges or service to the public shall be just and reasonable." Section 451 also provides:
All charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable. Every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful.
One of the Commission's most recent discussions of the scope of § 451 is found in D.04-09-062, the decision resulting from the Commission's investigation into marketing practices of Cingular Wireless. One of the issues in that case was whether § 451 was violated by Cingular's practices of (1) failing to disclose to customers its coverage problems during the period from 2000 to 2002, and (2) not granting customers a grace period within which they could cancel their service contracts without incurring a substantial Early Termination Fee (ETF). In ruling that these practices violated § 451, the Commission said:
[Cingular's] policy required customers to pay an ETF if they wished to cancel their contracts before the expiration of the typically one- or two-year contract terms that Cingular offered. That policy was unjust, and therefore unreasonable, because customers were unable to determine whether they would be able to use Cingular's wireless service in the ways they desired until they attempted to make or receive calls - and no customer could do this without first signing a contract for service.
Cingular concedes that its ETF policy was designed to avoid churn. Thus, in pursuit of market share, Cingular's prior official policy effectively trapped customers into contracts for service regardless of whether it could provide the coverage or capacity these customers sought. This is the crux of Cingular's violation of § 451. We focus upon the conditions under which Cingular imposed the ETF, resulting in an unjust rule and constituting unreasonable service. (D.04-09-062 at 50-51; footnote omitted.)18
As Commissioner Brown pointed out in his concurrence in D.04-09-062, the standards used for assessing the adequacy of the customer service agreement in that case are essentially the same standards used by the California courts to determine whether contracts are unconscionable under Civil Code § 1670.5.19 On this question, Commissioner Brown stated:
Standard form contracts presented to the customer in "take it or leave it" fashion are called contracts of adhesion. The law knows that they are not real contracts in the sense that there is a meeting of the minds of the parties. Commercial necessity and efficiency require that such "take it or leave it" contracts be accepted as if there were a real agreement.
The law is uncomfortable with the fiction that a contract of adhesion is a real agreement. As a consequence, it requires that such contracts be fair, or at least not unconscionable. Unconscionable means "not guided by conscience," or "excessive, unreasonable" or "unscrupulous." (Concurring Opn. of Comr. Brown at 1; emphasis in original.)
Although the facts in this case are different from those in the Cingular Wireless case, we think that Mpower's actions in imposing liability on Edelweiss for the unauthorized calls made from numbers assigned to the flower shop also violated § 451. As demonstrated in the summary of the Joint Stipulation above, Edelweiss took steps in 2006 to protect its fax, computer, and phone system by installing a Windows firewall and an antivirus program, despite the fact that Mpower's 2005 "welcome kit" did not warn new customers about the dangers of hacking. Moreover, Mpower has admitted that it does not know exactly how the satellite calls at issue were placed, except that they presumably involved clever hacking of the modem attached to Edelweiss's DSL line, a modem Mpower had supplied.20 The parties surmise in the Joint Stipulation that through this hacking, access was gained to one of the flower shop's POTS lines, from which the unauthorized calls were made.
Under the circumstance of this case, the provision in the Master Service Agreement on which Mpower is relying - item 5 of the Installation Policy and Procedures -- is unjust and unreasonable because, under Mpower's interpretation of the provision, 21 the company may reserve to itself the sole power to decide whether the measures taken by a customer to secure its telephone and computer network and equipment are adequate. It is clear from ¶ 41 of the Joint Stipulation that no matter how thorough the customer's security measures might seem to an outside observer,22 if they are successfully breached, then in Mpower's judgment, that is the end of the matter:
Mpower does not claim to have knowledge of what the affected customers, including [Edelweiss], did or did not do to protect against modem hacking or other unauthorized access to their inside wiring or other customers premises equipment. However, Mpower's position is that if the disputed calls were made through modem hacking or other unauthorized access to their inside wiring or other customer premises equipment, then the customers, by definition, did not take sufficient steps to prevent or "adequately secure" the customers' equipment from being hacked. (Emphasis supplied.)
Contrary to Mpower's uncompromising position, it is clear from cases decided under California law that when a provision in a preprinted, standard form contract like the service agreement here gives the party who prepared the contract (and who has greater bargaining power) such unilateral rights as the option to disclaim all warranties about whether specialized goods being sold are adequate for a customer's needs, or the right to decide in which forum a dispute between an employer and employee will be litigated, that provision will be considered so one-sided as to be unconscionable. Because item 5 as interpreted by Mpower is similarly one-sided, it is also unconscionable.
In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the California Supreme Court pointed out that unconscionability has two aspects under California law:
As explained in A & M Produce Co. [v. FMC Corp.,] 135 Cal. App. 3d 473, "unconscionability has both a 'procedural' and a 'substantive' element," the former focusing on "'oppression'" or "'surprise'" due to unequal bargaining power, the latter on "'overly harsh'" or "'one-sided'" results. (Id. at 486-487.) "The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability." (Stirlen v. Supercuts, Inc., supra, 51 Cal. App. 4th [1519, 1533].) But they need not be present in the same degree. "Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves." (15 Williston on Contracts (3d ed. 1972) § 1763A at 226-227; see also A & M Produce Co., supra, 135 Cal. App. 3d at 487.) In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. (24 Cal.4th at 114.)
A&M Produce Co. v. FMC Corp., 135 Cal.App.3d 473 (1982), one of the cases cited in Armendariz, involved a clause in a form contract that was just as one-sided as item 5 in the customer service agreement here. In A&M Produce, the issue was whether form contract provisions that disclaimed all warranties and excluded consequential damages were unconscionable. The seller was a large corporation that produced specialized agricultural machinery and had sold a system for processing harvested tomatoes to a farmer. When the system failed to work in accordance with the representations of the FMC sales staff, the farmer suffered a total loss of his crop and sued. On appeal from a jury verdict in the farmer's favor, FMC argued that the verdict should be overturned because of the contract provisions disclaiming all warranties and relieving FMC of liability for consequential damages. Even though the farmer, Abatti, acknowledged he had not read the preprinted form contract, the Court of Appeal upheld the jury's verdict in his favor:
Even if we ignore any suggestion of unfair surprise, there is ample evidence of unequal bargaining power here and a lack of any real negotiation over the terms of the contract. Although it was conceded that A & M was a large-scale farming enterprise by Imperial Valley standards . . . and that Abatti was farming some 8,000 acres in 1974, FMC Corporation is in an entirely different category. The 1974 gross sales of the Agriculture Machinery Division alone amounted to $40 million. More importantly, the terms on the FMC form contract were standard. FMC salesmen were not authorized to negotiate any of the terms appearing on the reverse side of the preprinted contract. Although FMC contends that in some special instances, individual contracts are negotiated, A & M was never made aware of that option. The sum total of these circumstances leads to the conclusion that this contract was a "bargain" only in the most general sense of the word . . .
Although the procedural aspects of unconscionability are present in this case, we suspect the substantive unconscionability of the disclaimer and exclusion provisions contributed equally to the trial court's ultimate conclusion. As to the disclaimer of warranties, the facts of this case support the trial court's conclusion that such disclaimer was commercially unreasonable. The warranty allegedly breached by FMC went to the basic performance characteristics of the product. In attempting to disclaim this and all other warranties, FMC was in essence guarantying nothing about what the product would do. Since a product's performance forms the fundamental basis for a sales contract, it is patently unreasonable to assume that a buyer would purchase a standardized mass-produced product from an industry seller without any enforceable performance standards. From a social perspective, risk of loss is most appropriately borne by the party best able to prevent its occurrence . . . Rarely would the buyer be in a better position than the manufacturer-seller to evaluate the performance characteristics of a machine.
In this case, moreover, the evidence establishes that A & M had no previous experience with weight-sizing machines and was forced to rely on the expertise of FMC in recommending the necessary equipment. FMC was abundantly aware of this fact. A seller's attempt, through the use of a disclaimer, to prevent the buyer from reasonably relying on [the seller's] representations calls into question the commercial reasonableness of the agreement and may well be substantively unconscionable. The trial court's conclusion to that effect is amply supported by the record before us. (135 Cal.App.3d at 491-92; citations and footnote omitted.)
In the same vein, an en banc panel of the Ninth Circuit recently found the arbitration provisions in a franchise agreement to be unconscionable. In Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006), the arbitration clause required the franchisee, Nagrampa, to submit all of her claims to arbitration, but allowed the franchisor, MailCoups, to "to obtain any provisional remedy `including, without limitation, injunctive relief from any court of competent jurisdiction, as may be necessary in MailCoup's sole subjective judgment to protect its Service Marks and proprietary information'." (469 F.3d at 1286; emphasis supplied.) In holding this provision unconscionable, the en banc panel said:
This language, read plainly, means that MailCoups could go to court to obtain "any provisional remedy," even if it related to a claim for breach of contract, as long as the claim also implicated MailCoup's Service Marks or proprietary information. Moreover, it is far more likely that Nagrampa - and not MailCoups - would assert claims related to the invalidity or unenforceability of the non-negotiable contract written by MailCoups. Thus, this provision is clearly one-sided, effectively giving MailCoups the right to choose a judicial forum and eliminate such a forum for Nagrampa. California courts consistently have found such arbitration provisions unconscionable." (Id. at 1286-87; emphasis supplied.)23
Based on the foregoing cases, we believe that if item 5 of the Installation Policy and Procedures in the Mpower service agreement were to come before a California court, the court would hold item 5 to be unconscionable (and unenforceable) because of the unilateral power it confers on Mpower to decide whether the measures taken by a customer to safeguard its "computer network, circuits and customer premise equipment" are adequate. Item 5 meets the tests for procedural unconscionability under California law because (1) it was set forth in small type in a printed form that Edelweiss's owners probably had little opportunity to read, and (2) even if item 5 was, in fact, read, there is no evidence that Edelweiss's owners were given a choice whether to accept it. Item 5 also meets the tests for substantive unconscionability, because it lets Mpower be the sole judge of whether a customer's telephone and computer security measures are "adequate," no matter what an impartial outside observer might think.
However, Mpower argues, even if item 5 could be considered one-sided, it should nonetheless be enforced and does not violate any provision of the Public Utilities Code because Edelweiss had a choice of other service providers, "and UCAN has not presented any evidence that the customer could not have obtained different terms of service elsewhere." (Mpower Reply Brief at 4.)
The short answer to this contention is that it is now well-established under California law that the alleged existence of marketplace alternatives is not a defense to a finding of unconscionability. In Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007), the Ninth Circuit rejected such an argument by Cingular Wireless when it sought to obtain dismissal of a class action brought by a dissatisfied Cingular customer. The district court had granted Cingular's motion to compel arbitration and dismiss the class action, based on a provision in the customer service agreement that (1) required arbitration of all service disputes, and (2) precluded individual customers from bringing claims against Cingular on behalf of a class. In reversing the district court, holding the arbitration clause unconscionable, and remanding the class action to the district court for further consideration, the Ninth Circuit said:
[C]ontrary to Cingular's contention, a contract may be procedurally unconscionable under California law when the party with substantially greater bargaining power "presents a `take-it-or-leave-it' contract to a customer - even if the customer has a meaningful choice as to service providers." [Douglas v. United States Dist. Court,] 495 F.3d 1062, 1068 [9th Cir. 2007] . . . (holding in a case involving a class action waiver in a contract for long distance telephone services that the district court erred when it concluded that the waiver was not procedurally unconscionable on the basis of the availability of "meaningful alternative choices for telephone service" . . .; see also Ting [v. AT&T,] 319 F.3d [1126] at 1148; Discover Bank, 36 Cal.4th at 160. (498 F.3d at 985-86; citations omitted.)
Based on the caselaw discussed above, we conclude that item 5 of the Installation Policy and Procedures in Mpower's Master Service Agreement would be considered unconscionable under California law. Because item 5 is unconscionable, we also conclude, pursuant to our decision in the Cingular Wireless case (D.04-09-062), that the provision as Mpower interprets it also constitutes a denial of just and reasonable service under Pub. Util. Code § 451.
As noted in the Joint Stipulation, Mpower suspended Edelweiss's service on November 28, 2006 for non-payment of the charges that had been billed. On November 30, Ms. Stepanova informed Mpower that she wished to terminate her service agreement, inasmuch as she was unwilling to pay for service that had been suspended because of the dispute over the calls to GlobalStar facilities. As a result of this decision, Mpower billed Edelweiss for an ETF of $1,349.58 on December 20, 2006.
Under the circumstances of this case, we believe that Mpower's imposition of an ETF on Ms. Stepanova was unfair and unreasonable under Pub. Util. Code § 451. At the time the ETF was imposed, the investigation by Mpower's fraud department had already been underway for two months. Thus, at the time the charge was imposed, Mpower was either aware or should have been aware that (1) none of the GlobalStar numbers in dispute had ever previously been called from Edelweiss, (2) six other customers had made similar complaints to Mpower about unauthorized calls, and (3) other carriers' customers had also been victims of the type of fraud about which Ms. Stepanova had complained. In view of these circumstances, Mpower should have given Ms. Stepanova a credit for the disputed calls, as it did for one of the six other Mpower customers who had made similar complaints. Instead, Mpower suspended Ms. Stepanova's service, and then added insult to injury by imposing an ETF after Ms. Stepanova understandably informed Mpower that she wished to terminate the service agreement. As we ruled in D.04-09-062, such conduct is not consistent with the requirements of § 451.24
In closing, we wish to emphasize what we are and are not deciding today with respect to item 5 of the Installation Policy and Procedures in Mpower's Master Service Agreement. We hold that as interpreted by Mpower, this provision -- which was included in a preprinted, form agreement prepared by Mpower, and which Edelweiss, a small business customer, had no apparent opportunity to bargain over or reject - violates the unconscionability standard included within Pub. Util. Code § 451. We are not holding, however, that § 451 is violated where a provision shifting liability for fraudulent toll calls, whatever the cause, is included in a contract between a carrier and a sophisticated business customer, and the contract has been the subject of meaningful negotiations between the parties with an opportunity to accept or reject specific terms. We leave the question of what applicability, if any, § 451 may have in that situation to a case where such facts are squarely presented to us.
Timothy Alan Simon is the assigned Commissioner and A. Kirk McKenzie is the assigned ALJ and presiding officer in this proceeding.
1. The complaint in this case was filed on August 12, 2008, and defendant submitted its answer on September 22, 2008.
2. A PHC was held on December 3, 2008, at which complainant and defendant agreed that it appeared feasible to decide the case on the basis of a joint stipulation of facts.
3. At the PHC, the assigned ALJ stated that, subject to reviewing the proposed stipulation and briefs, he was amenable to the approach suggested by the parties.
4. Pursuant to the agreement reached at the PHC, a Joint Stipulation of facts was filed by complainant and defendant on January 15, 2009. The Joint Stipulation can be found on the Commission's website at http://docs.cpuc.ca.gov/efile/STP/96277.pdf.
5. The parties submitted concurrent opening briefs on January 28, 2009, and concurrent reply briefs on February 11, 2009.
6. On April 8, 2009, the assigned Commissioner and the assigned ALJ issued a Scoping Memo, which set forth the issues and concluded that a hearing was not necessary because, taken together, the Joint Stipulation and the parties' briefs were sufficient to resolve any factual issues presented by the case.
7. On July 30, 2009, the Commission issued D.09-07-042, which extended the statutory deadline for deciding this case until February 12, 2010.
8. On February 4, 2010, the Commission issued D.10-02-006, which extended the statutory deadline for deciding this case until November 19, 2010.
9. On June 23, 2005, Olga Kormuskina, on behalf of Edelweiss, entered into a Master Service Agreement with defendant pursuant to which the latter agreed to furnish various telecommunications services to Edelweiss, including a DSL Internet access line, a DSL modem, and three POTS lines. The Master Service Agreement is attached to the Joint Stipulation as Exhibit A.
10. Shortly after the parties entered into the Master Service Agreement, Mpower sent Edelweiss a "welcome kit" for new customers, which included the notice attached to the Joint Stipulation as Exhibit B. This notice is entitled "Consumer Alert re: Fraud Resulting in International Long Distance Charges."
11. In May 2006, Edelweiss was incorporated and Natalja Stepanova became its sole owner, operating Edelweiss as a single proprietorship. At the same time, Ms. Stepanova and Mpower entered into an assignment and assumption agreement, pursuant to which Ms. Stepanova assumed Edelweiss's obligations under the June 23, 2005 Master Service Agreement with Mpower.
12. On or about September 1, 2006, Mpower sent Edelweiss a bill for services that included international long distance charges to satellite facilities of $1,043.13 (before taxes, fees and surcharges) on the POTS line connected to Edelweiss's fax machine. The relevant portions of this bill are attached to the Joint Stipulation as Exhibit C. The international long distance charges were billed at a rate of $14.67 per minute.
13. On September 11, 2006, Ms. Stepanova telephoned Mpower and stated that neither she nor anyone else authorized to make calls at Edelweiss had incurred the aforesaid international long distance charges. She requested a credit for the calls, as well as a block on international calling for her account.
14. On September 11, 2006, after Ms. Stepanova's complaint, Mpower staff checked the calling records for Edelweiss's account, which indicated that the disputed calls had been direct-dialed over Edelweiss's fax line.
15. On September 20, 2006, when Ms. Stepanova telephoned Mpower again, she was informed that she would not be given a credit for the disputed calls pursuant to a new Mpower policy regarding fraudulent calls. She was also asked to fax a written statement to Mpower concerning the disputed calls, which she did later the same day.
16. On September 29, 2006, Mpower telephoned Ms. Stepanova to reiterate that she would not be given a credit in connection with the disputed calls, and that if she failed to pay the full charges due, her service would be disconnected.
17. On or about October 1, 2006, Mpower sent Edelweiss a bill for services that included additional international long distance charges to satellite facilities of $2,180.01 (before taxes, fees and surcharges) on the POTS line connected to Edelweiss's fax machine. The relevant portions of this bill are attached to the Joint Stipulation as Exhibit F. As with the bill rendered on or about September 1, 2006, the additional international long distance charges were billed at a rate of $14.67 per minute.
18. Although the bills referred to in Findings of Fact (FOF) 12 and 17 stated that the international long distance calls were to Iridium satellite facilities, these calls were in fact made to GlobalStar satellite facilities, as shown on Mpower's call detail records. The $14.67 per minute rate at which the calls were charged was the rate shown on Mpower's website for calls to GlobalStar satellite facilities.
19. On October 9, 2006, Ms. Stepanova faxed a second written complaint to Mpower, which reiterated her dispute regarding the international long distance charges on the September bill and also denied that she had authorized the calls resulting in the international long distance charges on the October bill.
20. On October 10, 2006, following receipt of the second written complaint, Mpower staff began a review of the Edelweiss account. While the review was being conducted, Ms. Stepanova telephoned to inquire about the disputed charges and asked to speak to a supervisor. She was told the review would take some time and was placed on hold, but apparently hung up before the Mpower staff could respond to her inquiry.
21. The Joint Stipulation is silent on the question of whether Mpower's staff continued its review of the Edelweiss account on October 10, 2006 after the call from Ms. Stepanova was interrupted.
22. On October 17, 2006, an attorney hired by Ms. Stepanova sent Mpower a letter summarizing her position in the billing dispute and enclosing a check for charges that were not disputed.
23. On October 20, 2006, Mpower's fraud department began a review of the long distance fraud that Ms. Stepanova alleged had been perpetrated upon her. This review lasted for several months.
24. At some point during the fraud department's review, the department learned that six other Mpower customers had also complained to Mpower about allegedly unauthorized international calls to satellite numbers that had appeared on their bills. One of these customers was given a credit for the disputed calls; Mpower continued to pursue the other customers for payment.
25. At some point during the fraud department's review, Mpower learned through its participation in an informal industry security task force that customers of other carriers had also been victims of a scheme like that alleged by Ms. Stepanova that involved unauthorized calls to GlobalStar satellite facilities.
26. Mpower did not disclose what it had learned through its participation in the informal industry security task force to Ms. Stepanova or to the six other Mpower customers who had complained about unauthorized international long distance charges. Mpower also did not disclose this information to the CAB after Ms. Stepanova filed an informal complaint about her billing dispute with the CAB in January 2007.
27. Although GlobalStar denied that its call detail records showed calls being made to its satellite facilities by Mpower customers, Mpower received no further complaints about such unauthorized calls after it contacted GlobalStar.
28. Based on its investigation, Mpower acknowledges in ¶ 22 of the Joint Stipulation that if the disputed calls were not made from Edelweiss's premises, it is most likely they were completed through some form of modem hacking. One form of modem hacking involves the use of a high-speed internet connection by an outside party to access a computer and then dial out calls through a POTS line that is connected to the computer, either through a fax modem or a dial-up internet modem.
29. Based on the equipment configuration at Edelweiss during the relevant period as described in ¶ 4 of the Joint Stipulation, the form of modem hacking described in the preceding Finding of Fact (FOF) was feasible.
30. The consumer fraud notice that Mpower included in the welcome kit sent to Edelweiss in 2005 warned only about the danger of unauthorized international long distance calls placed through the hacking of PBXs and voice-mail systems. The notice did not mention modem hacking, or suggest in any way that special precautions might be necessary to prevent unauthorized international long distance calls placed through modem hacking.
31. In ¶ 21 of the Joint Stipulation, Mpower acknowledges that none of the phone numbers listed for the disputed calls on the September and October 2006 bills had ever previously been called from Edelweiss, either before or after Ms. Stepanova began to operate it as a sole proprietorship.
32. In ¶ 4 of the Joint Stipulation, Mpower acknowledges that it has no basis for disputing Ms. Stepanova's assertions that (a) Windows Firewall and an antivirus program (most likely Norton's) had been installed on the computer connected to Edelweiss's fax line, (b) none of Edelweiss's POTS lines were connected to a PBX, and (c) Edelweiss did not have voicemail.
33. A recent treatise on information security states that it is widely but incorrectly believed that off-the-shelf firewall products offer good computer security. In order to be effective, properly-configured firewalls must typically be used with intrusion detection and prevention systems, vulnerability assessment technology, and antivirus technology.
34. In 2006 the average, reasonable small business customer like Ms. Stepanova was not aware of the limitations of off-the-shelf firewall products described in the preceding FOF.
35. In view of the limited warning about toll fraud contained in the welcome kit that Edelweiss received in 2005, plus the understanding that a reasonable small business customer would have had in 2006 about what constitutes adequate information security, the security measures undertaken by Edelweiss in 2005-06, as described in FOF 32, were reasonable.
36. The FCC has held that where a business customer fails to offer evidence that it has used reasonable measures to prevent unauthorized long-distance calls from being placed through the PBX or voice-mail capabilities of its phone system, the customer may be held liable for such calls.
37. The FCC has held that where a business customer has used reasonable measures to secure its telephone system against fraudulent long distance and international calling, the customer should not be deemed to have constructively ordered long-distance or international service if the security measures prove unsuccessful.
38. Several federal district courts have held that where a business customer has used reasonable measures to prevent unauthorized long-distance or international calls from being placed through hacking of the PBX or voice-mail capabilities of the customer's telephone system, the customer should not be deemed to have constructively ordered long-distance or international service if the security measures prove unsuccessful.
39. Based on the decisions described in FOFs 36 and 37, the FCC has not preempted the applicability of state anti-cramming statutes such as Pub. Util. Code § 2890 to factual situations like the one here.
40. Based on the facts set forth in Joint Stipulation, it is highly unlikely that the international long distance calls in dispute here were authorized by Ms. Stepanova or placed from Edelweiss's premises.
41. Based on the decisions described in FOFs 37 and 38, the facts set forth in the Joint Stipulation, and the preceding FOF, it is unlikely that under federal law, Edelweiss or Ms. Stepanova would be held liable for the international long distance calls at issue in this case.
42. Mpower did not undertake a meaningful review of Ms. Stepanova's allegations that Edelweiss was the victim of a fraudulent calling scheme until the Mpower fraud department began its investigation on October 20, 2006, more than five weeks after Ms. Stepanova had first complained about the disputed calls, and shortly after Mpower had received a letter from her attorney.
43. Mpower interprets item 5 of the Installation Policy and Procedures included in the Master Service Agreement with Edelweiss to give Mpower the sole authority to decide whether the measures taken by a customer to secure its computer network, circuits, and customer premises equipment are adequate.
44. According to ¶ 41 of the Joint Stipulation, Mpower's position in this case is that if the disputed calls were made through modem hacking or other unauthorized access to Edelweiss's inside wiring or customer premises equipment, then by definition, Edelweiss did not take sufficient steps to secure its equipment adequately, no matter what an objective outside observer might think.
45. Decisions under California law have found contract provisions like item 5 of the Installation Policy and Procedures in the Master Service Agreement between Mpower and Edelweiss to be so one-sided and commercially unreasonable as to be unconscionable.
46. During the course of its investigation into Ms. Stepanova's complaints, Mpower did not give equal treatment to the six other customers who had complained to Mpower about unauthorized calls being placed on their lines to GlobalStar facilities.
47. Ms. Stepanova's decision on November 30, 2006 to request termination of her service agreement with Mpower was made because the latter had suspended Edelweiss's service for non-payment, despite the facts that (1) there was a dispute about whether the calls to GlobalStar facilities had been authorized, a dispute Mpower was actively investigating, and (2) Edelweiss had tendered payment for the calls made on its lines as to which there was no dispute.
1. The records check that Mpower performed on September 11, 2006 to verify that the disputed calls had been direct-dialed from Edelweiss's fax line, together with the review that Mpower began of Edelweiss's account on October 11, 2006, were sufficient to meet the minimum requirements imposed on Mpower by Pub. Util. Code § 2890(e).
2. Item 5 of the Installation Policy and Procedures in the Master Service Agreement between Mpower and Edelweiss can be interpreted, in determining whether a customer has adequately secured its computer network, circuits, and customer premises equipment from unauthorized access by third parties, as incorporating the standard of what a reasonable customer would do to meet these obligations.
3. In view of Mpower's position that if an unauthorized third party was able to place international calls over a customer's equipment through modem hacking or other improper means, then by definition, this establishes that the customer did not adequately secure its computer network, circuits, and other customer premises equipment, it is appropriate to evaluate item 5 of the Installation Policy and Procedures in the Mpower service agreement under the law of unconscionability in California.
4. If it were before a court, item 5 of the Installation Policy and Procedures in the Master Service Agreement between Mpower and Edelweiss would likely be considered unconscionable and unenforceable under California law.
5. Because it would be considered unconscionable under California law, item 5 of the Installation Policy and Procedures in the Mpower service agreement also constitutes an unjust rule resulting in unreasonable service under Pub. Util. Code § 451.
6. Mpower's imposition of an ETF on Edelweiss on December 20, 2006, at a time when Mpower knew or should have known that (a) there was merit in Ms. Stepanova's allegations that the calls in dispute had been placed fraudulently, and (b) Ms. Stepanova had decided to cancel her service agreement because of the suspension of service imposed on account of her refusal to pay for the disputed calls, constituted an unfair practice resulting in unreasonable service under Pub. Util. Code § 451.
7. Mpower did not violate Pub. Util. Code § 2896(a) by failing to provide a fuller statement in its Master Service Agreement that under the agreement, Mpower would also be furnishing international calling service to Edelweiss.
IT IS ORDERED that:
1. To the extent that defendant Mpower Communications Corp. has collected payment from Natalja Stepanova or Edelweiss Flower Salon, Inc. for calls to GlobalStar satellite facilities that appeared on the bills for services that Mpower Communications Corp. presented to Edelweiss Flower Salon, Inc. on or about September 1, 2006 and October 1, 2006, Mpower Communications Corp. shall refund the amounts representing payment for such calls to Natalja Stepanova or Edelweiss Flower Salon, Inc., as appropriate, within 30 days after issuance of this order.
2. To the extent that Mpower Communications Corp. has collected from Natalja Stepanova or Edelweiss Flower Salon, Inc. the early termination fees of $1,349.58 that Mpower Communications Corp. imposed on Edelweiss Flower Salon, Inc. on December 20, 2006, Mpower Communications Corp. shall refund such fees to Natalja Stepanova or Edelweiss Flower Salon, Inc., as appropriate, within 30 days after issuance of this order.
3. To the extent that Mpower Communications Corp. has not collected payment from Natalja Stepanova or Edelweiss Flower Salon, Inc. for the calls described in Ordering Paragraph 1 or the early termination fees described in Ordering Paragraph 2, Mpower Communications Corp. and its employees, attorneys and agents shall immediately cease all efforts to obtain payment for such calls and fees, and any debt owing from Natalja Stepanova and/or Edelweiss Flower Salon, Inc. to Mpower Communications Corp. on account of such calls and fees shall be considered extinguished.
4. Neither Mpower Communications Corp., its employees, attorneys, or agents, nor any of them, shall make any adverse report concerning Natalja Stepanova or Edelweiss Flower Salon, Inc. to any credit agency on account of the amounts Mpower Communications Corp. contends it is owed in connection with the calls described in Ordering Paragraph 1 or the early termination fees described in Ordering Paragraph 2.
This order is effective today.
Dated June 3, 2010, at San Francisco, California.
18 In Pacific Bell Wireless, LLC v. Public Utilities Commission, 140 Cal. App. 4th 718 (2006), the Court of Appeal affirmed the Commission's determinations in D.04-09-062, as well the subsequent decision issued in response to Cingular's application for rehearing, D.04-12-058. In doing so, the Court of Appeal rejected Cingular's argument that § 451 violates due process because it fails to give adequate notice of the conduct the statute prohibits. On this question, the Court of Appeal said:
Cingular contends it was denied due process because it was punished for actions it could not have known were unjust and unreasonable. Cingular argues the statutes and the Commission order it is charged with violating are so broad that Cingular could not anticipate that its actions were unjust and unreasonable. In analyzing Cingular `s argument, we must focus on its conduct of charging and permitting its agents to charge an ETF with no grace period; failing to disclose known, significant network problems; and providing misleading and inaccurate information regarding its coverage and service to its customers. We conclude that given this conduct, Cingular could be charged with knowledge that its actions were unjust and unreasonable under the relevant statutes and the Commission order.
To accept Cingular's argument would require us to conclude that it is just and reasonable for a wireless provider to charge its customers an ETF to cancel a wireless service contract immediately after activation of the wireless telephone, when the customer has been misled as to the coverage area and level of service, and when the wireless provider admits that the best way for the customer to determine whether the service is adequate for his or her needs is to try out the phone for a period of time. This conclusion would be unreasonable. (140 Cal.App. 4th at 739-40.)
19 Civil Code § 1670.5 provides in full:
(a) If the Court finds as a matter of law the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
(b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.
20 As noted above, Mpower acknowledges on page 14 of its Opening Brief that it supplied the DSL modem that Edelweiss used.
21 It should be noted that in its briefs here, UCAN takes the position that whether a customer has "adequately secured" its "computer network, circuits, and customer premise equipment from unauthorized access by 3d parties," as required by item 5, should be decided on the basis of what a reasonable customer would do to implement this requirement. (UCAN Opening Brief at 5; UCAN Reply Brief at 22.) UCAN points out that such a standard would be consistent with G.O. 168, Part 4.A. of which states that in interpreting the Commission's rules regarding cramming complaints, "the standard to be applied . . . is that of a reasonable consumer."
We agree with UCAN that as drafted, item 5 can be read as incorporating a reasonable customer standard. However, as the discussion in the text makes clear, that is not Mpower's interpretation of the provision. Accordingly, we have analyzed item 5 under the law of unconscionability as applied in California, rather than treating item 5 as ambiguous and applying the well-established rule that an ambiguity in a contract provision should be construed against the party who drafted the provision. See, e.g., Taylor v. J.B. Hill Co., 31 Cal.2d 373, 374 (1948); Victoria v. Superior Court, 40 Cal. 3d 734, 745 (1985); Civ. Code § 1654 ("In cases of uncertainty . . . the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.")
22 As demonstrated by the discussion of hacking set forth in Section IV.C. of this decision, many reasonable persons would assume that the firewall and anti-viral program Edelweiss had installed on its computer system by 2006 were sufficient security. Moreover, when Mpower became aware that other customers were also victims of the satellite call scheme to which Edelweiss fell prey, Mpower had to participate in an "informal industry security task force" - a fact it did not disclose to Edelweiss during the parties' 2006 negotiations - to learn what the method for placing the unauthorized calls had most likely been. In view of these circumstances, it would be difficult to conclude that from a reasonable customer's perspective, Edelweiss did not take adequate steps to safeguard its "computer network, circuits, and customer premise equipment" from unauthorized access by third parties.
23 Another Ninth Circuit panel reached a similar conclusion in Davis v. O'Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007). In that case, the issue was the validity of an arbitration provision that required the employees of a large law firm to submit all of their disputes with the employer to arbitration, but allowed the law firm to seek relief from a court for "claims by the Firm for injunctive and/or equitable relief for violations of the attorney-client privilege or work product doctrine or the disclosure of other confidential information." Although acknowledging that California law "allows an employer to preserve a judicial remedy for itself if justified based upon a `legitimate commercial need' or `business reality'," (485 F.3d at 1080), the Ninth Circuit concluded that the law firm's clause did not come within this exception because "its plain language would allow O'Melveny to go to court to obtain any `equitable relief' for the disclosure of any `confidential information'." (Id. at 1081.) Because of this over-breadth, the Court concluded that the clause was "one-sided and thus unconscionable." (Id.)
24 In its complaint in this proceeding, UCAN originally argued that Mpower's conduct also violated Pub. Util. Code § 2896(a), which requires telephone corporations to provide their customers with "sufficient information upon which to make informed choices among telecommunications services and providers," including information concerning the provider's "service options, pricing, and terms and conditions of service." ¶ 78 of the complaint asserted that Mpower had violated § 2896(a) by failing to inform Ms. Stepanova that international long distance calling was included in her service agreement, and that the rate for some international calls was $14.67 per minute.
In its briefs, UCAN now makes a more generalized argument, maintaining that Mpower's conduct in this case amounted to a failure to provide adequate service quality under § 2896(c). (UCAN Opening Brief at 23; UCAN Reply Brief at 15, 28.) The only authority UCAN appears to cite in support of its position is the Cingular Wireless decision, D.04-09-062.
We decline to find a violation of § 2896 here. As noted in Section V.C. of this decision, although its language might have been clearer, the Service Order Form that Ms. Stepanova's predecessor signed indicated that Mpower was to be Edelweiss' new international carrier, and expressly stated that "LD Rates are domestic rates, except for Alaska and Hawaii; International rates vary by country and are identified on the Mpower website." (Joint Stipulation, Exh. A.) In view of these statements, there is no basis for finding a violation of § 2896(a).
We also do not think that D.04-09-062 supports the conclusion that Mpower's conduct - although it violated § 451 - constitutes a violation of § 2896(c) as well. It is evident from reading Section 6.1.2. of the Cingular Wireless decision that the violation found there was of § 2896(a), owing to "the deficiencies in Cingular's disclosures to customers, given known network problems in 2002 in conjunction with the continuing ETF policy." (D.04-09-062 at 59.) In fact, D.04-09-062 expressly noted that there was no need to address Cingular's alleged failure to establish service standards under § 2896(c), "since neither CPSD nor UCAN pursued this charge at hearing or in the briefs." (Id. at 55.)
