VITALE et al v. US GAS & ELECTRIC, INC.

Filing 25

MEMORANDUM/ORDER denying 13 Motion to Dismiss Second Amended Cmp. Signed by Judge Kevin McNulty on 3/16/16. (DD, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

PATRICIA VITALE and VINCENT
VITALE, etc.,

Civ. No. 14-4464 (KM)

Plaintiffs,
.

MEMORANDUM AND ORDER

V.

U.S. GAS & ELECTRIC, INC.,
ENERGY SERVICE PROVIDERS,
INC., et al.,
Defendants.

MCNULTY, U.S.D.J.:
The defendants, U.S. Gas & Electric, Inc. (“USGE”) and Energy Service
Providers, Inc. (“ESPI”), have filed a motion (ECF no. 13) to dismiss the Second
Amended Complaint (“2AC”, ECF no. 10) for failure to state a claim upon which
relief can be granted, pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons
stated herein, the motion will be denied. Because these are matters that should
be explored in discovery and considered on summary judgment, I write only
briefly.
Allegations of the 2AC
The Second Amended Complaint is brought as a putative class action.
Jurisdiction is premised on the minimal diversity provisions of the Class Action
Fairness Act, 28 U.S.C.

§

1332(d). The class allegations I set aside for the

present; consideration of them would be premature.
The following facts are taken from the Second Amended Complaint. They
are presumed true for purposes of this motion only.
Defendants are independent energy supply companies (“Independents”).
(2AC

¶J

24-26) They seek to compete by switching customers from traditional

utilities, such as JCP&L or New Jersey Natural Gas (“Utilities”). While Utilities
1

are required to enter into stable, long-term supply contracts, Independents
may purchase on a more ad hoc basis, exposing them to price fluctuations.
(2AC

VJ

17—18)

USGE and ESPI have engaged in aggressive marketing to induce
customers to switch, touting projected savings of hundreds of dollars per year.
(Id.

18) In standardized telephone sales pitches, defendants stated that

¶

customers’ rates would be “competitively priced” in comparison to those of
Utilities, “every month.” (Id.

¶J

48, 52) Welcome Packages supplied to new

customers confirmed that Defendants’ prices were “competitive or “highly
competitive.” (Id.

¶J

55, 56, 65) In fact, when protracted cold weather hit, the

customers were charged double or even triple the Utilities’ rates. (Id.

¶J

59—60)

Defendants knew this was inevitable under their purchasing/business model.
(Id.

¶J

52, 68)
Named plaintiffs, the Vitales, were subjected to pitches consistent with

those described above. (Id.

¶J

45—48) They agreed to switch, and received

Welcome Packages like those described above. (Id.

¶J

45—65)

The Terms and Conditions of the “Variable Rate Plan” stated that the
“price for all energy sold under this Agreement during the Term shall be a rate
calculated monthly based on the applicable PJM zonal wholesale electric,
ancillary services, capacity and other costs associated with providing full
requirements services to Customer. The monthly rate may be higher or lower
than the [Utility] price in any given month.” (Id.

¶

67) This failed to convey the

strong likelihood that the price would be much higher, given that the
defendants’ business model exposed them to sharp short-term fluctuations,
but the Utilities’ (regulated) model did not. ((Id.

¶J

17—18, 68) Indeed, in the

event of extreme or protracted bad weather, higher rates were not a question of
“might,” but “will.” (See id.

¶J

68—69)

In 2014, the Vitales received bills from defendants that were double or
triple what the Utilities were charging. (Id.

¶J

32—43) They demanded to be

switched back to their former Utilities. Defendants delayed and continued to
demand payment based on the higher rates. (Id. ¶J44—54)
2

Count 1 alleges common law fraud. Count 2 alleges a violation of the
Truth in Consumer Contract, Warranty and Notice Act (TCCWNA), N.J. Stat.
Ann.

§ 56:12-15 et seq. Count 3 alleges a violation of the New Jersey Consumer
Fraud Act (NJCFA), N.J. Stat. Ann. § 56:8-1 et seq.
Standard
Rule 12(b)(6) provides for the dismissal of a complaint, in whole or in
part, if it fails to state a claim upon which relief can be granted. The defendant,
as the moving party, bears the burden of showing that no claim has been
stated. Animal Science Products, Inc. v. China Minmetals Corp., 654 P.3d 462,
469 n. 9 (3d Cir. 2011).
From the seminal modern cases of Bell Atl. Corp. v. Twombly, 550 U.S.
544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), the Third Circuit
has extracted a three-step process for reviewing a complaint:
To determine whether a complaint meets the pleading standard,
our analysis unfolds in three steps. First, we outline the elements
a plaintiff must plead to a state a claim for relief. See [Iqbal, 556
U.S.] at 675; Argueta, 643 F.3d at 73. Next, we peel away those
allegations that are no more than conclusions and thus not
entitled to the assumption of truth. See Iqbal, 556 U.S. at 679;
Argueta, 643 F.3d at 73. Finally, we look for well-pled factual
allegations, assume their veracity, and then “determine whether
they plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S.
at 679; Argueta, 643 F,3d at 73. This last step is “a context-specific
task that requires the reviewing court to draw on its judicial
experience and common sense.” Iqbal, 556 U.S. at 679.
Bistrian v. Levi, 696 F.3d 352, 365 (3d Cir. 2012). The complaint’s allegations
must be factual, not conclusory, and they must be sufficient to raise a
plaintiff’s right to relief above a speculative level, so that a claim is “plausible
on its face.” Twombly, 550 U.S. at 570; see also Umland v. PLANCO Fin. Seru.,
Inc., 542 F.3d 59, 64 (3d Cir. 2008).
Fraud must be pleaded with particularity. Rule 9(b), Fed. R. Civ. P.
requires that a complaint “state with particularity the circumstances
constituting fraud or mistake,” although “[mialice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). At
3

a minimum, Rule 9(b) requires “that plaintiffs support their allegations of

[]

fraud with all of the essential factual background that would accompany ‘the
first paragraph of any newspaper story’

-

that is, the ‘who, what, when, where

and how’ of the events at issue.” In re Suprema Specialties, Inc. Sec. Litig., 438
F.3d 256, 276-77 (3d Cir. 2006) (quoting In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1422 (3d Cir. 1997)). Rule 9(b)’s particularity
requirement ensures that defendants accused of fraud are placed on notice of
the precise misconduct that is alleged. Seville Indus. Mach. Corp. v. Southmost
Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984).
Analysis
Defendants contend that the allegations of the complaint are not specific
enough to state a claim of fraud under Rule 9(b), or do not make out a claim as
a matter of law.
A fraud claim requires “(1) a material misrepresentation of a presently
existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3)
an intention that the other person rely on it; (4) reasonable reliance thereon by
the other person; and (5) resulting damages.” Banco Popular N. Am. V. Gandi,
184 N.J. 161, 172—73 (2005).
A NJCFA claim may be stated in more than one way:
To state a claim under the NJCFA, a plaintiff must allege that the
defendant engaged in an unlawful practice that caused an
ascertainable loss to the plaintiff. Cox v. Sears Roebuck & Co., 138
N.J. 2, 647 A.2d 454, 462—465 (1994)....
The NJCFA defines “unlawful practice” as:
The act, use or employment by any person of any
unconscionable commercial practice, deception, fraud,
false pretense, false promise, misrepresentation, or the
knowing concealment, suppression, or omission of any
material fact with intent that others rely upon such
concealment, suppression, or omission, in connection
with the sale or advertisement of any merchandise....
N.J.S.A. § 56:8—2. “Unlawful practices fall into three general
categories: affirmative acts, knowing omissions, and regulation
violations.” Cox, 647 A.2d at 462.
4

Freclerico v. Home Depot, 507 F.3d 188, 202 (3d Cir. 2007).
A TCCWNA claim is derivative:
TCCWNA does not establish consumer rights or seller
responsibilities. Rather, the statute bolsters rights and
responsibilities established by other laws. TCCWNA creates liability
whenever a seller presents a consumer with a covered writing that
“contains terms contrary to any established state of federal right of
the consumer.” Shelton v. Restaurant.com, 214 N.J. 419, 70 A.3d
544, 558 (2013). The rights and responsibilities to be enforced by
TCCWNA are drawn from other legislation. One such piece of
legislation is the CFA.
Watkins v. DineEquity, Inc., 591 F. App’x 132, 134 (3d Cir. 2014).
First, I believe that the allegations of the Complaint are reasonably
specific, enough so to pass the Rule 9(b) threshold. The complaint states what
was said—it directly quotes the telephone pitch—and states in what manner it
misled the Vitales as to the “competitive” rates that they would pay. It alleges
that they were induced to pay dramatically higher rates as a result.
The major issue dividing the parties is fairly simple. Defendants contend
that their statements constituted non-actionable sales “puffery.” Plaintiffs
contend that they were actionable false statements or part of a deceptive
scheme.
Electricity and gas are commodities. The consumer little knows or cares
about their source or the factors that go into their wholesale pricing. True, the
terms and conditions disclosed that the rates would be “variable” and that they
could be higher or lower than the Utilities’ rates. (The complaint does not
disclose examples of lower rates, but it wouldn’t.) The complaint alleges that
the defendants’ rates were pitched as being “competitive” with the Utilities’
rates “every month.” It is inferable from the complaint that a consumer,
hearing the telephone pitch, could interpret “competitive” to mean “close to” the
Utilities’ rates. If not, then why switch?
The complaint also inferably alleges that the defendants knew
contemporaneously that weather conditions could drive their prices
disastrously higher. Defendants suggest that no “mortal” can predict “extreme”
5

weather. True, no one can accurately predict exactly when extreme weather will
occur, but it is a virtual certainty that it will occur. Defendants suggest that
“competitive” lacks content. That, too, is a question of degree and context; the
marathoner who finishes in the third, fourth, or fifth hour may be regarded as
competitive; the one who finishes long after dark, though literally in the race,
may not be. Defendants suggest that the likelihood of skyrocketing prices
during cold weather would have been “obvious” to consumers. These, too, are
matters of degree and of interpretation, unsuitable for resolution on a motion
to dismiss.
The “variable” plan shifted the pricing risk from the defendants to the
the customer. According to the complaint, which I must credit for purposes of
this motion, the customer did not know he or she was taking on such a risk.
The “Variable Rate Plan” purchased by the Vitales stated that the “price
for all energy sold under this Agreement during the Term shall be a rate
calculated monthly based on the applicable PJM zonal wholesale electric,
ancillary services, capacity and other costs associated with providing full
requirements services to Customer. The monthly rate may be higher or lower
than the [Utility] price in any given month.” (Id. ¶ 67) The Complaint alleges, in
essence, that this is gobbledygook from the consumer’s point of view. If
anything, it suggested to the average person that price would be determined by
the usual factors. It does not convey the sharp divergence between the Utilities’
purchasing model (price-stable, long-term contracts) and that of the defendants
(price-unstable, short-term contracts). The complaint alleges that it was nearly
inevitable that the defendants’ model would cause prices to shoot up at some
point, and that the defendants knew this.
These allegations, from the point of view of the average consumer, are
sufficient to state a claim of fraud or an unconscionable commercial practice.
The nonbinding district court cases cited by both sides do not establish
otherwise. These allegations have not been tested by any fact finder, or even
explored. But the Second Amended Complaint provides a sufficient basis to go
forward.
6

ORDER
IT IS THEREFORE this 16th day of March, 2016
ORDERED, that the Defendants’ motion (ECF no. 13) to dismiss the
Second Amended Complaint is DENIED.

fL

ON. KEVIN MCNULTY, U.&.J.

7