Verizon Litigation

 By Jay Lewis

Part III

 

After finding that Verizon had met all the four factors, the Court turned to the Defendants’ arguments:

  1. Mootness of Injunctive Relief
  2. Dormant Commerce Clause
  3. Primary Jurisdiction Doctrine
  4. Unclean Hands

The Court found that each of the Defendants’ arguments failed.  The Defendants argued that the injunctive relief was moot because Verizon already shut them out of the network therefore an injunction was irrelevant.  However, the Defendants had been shut out once before but were again on the network violating the MMA Best Practices.  The Court held that if Defendants were not enjoined, they could legally attempt to regain access again and again.

The Dormant Commerce Clause invalidates state regulation if it excessively burdens interstate commerce.  The Court found the Defendants did not make a showing that the ACFA discriminates against out-of-state commerce or that the burdens imposed by the ACFA are excessive in light of the local benefits.

Under the primary jurisdiction doctrine, the Defendants argued that the Court could not decide the standards to apply in this case as the industry is regulated by the Federal Communications Commission and the Federal Trade Commission.  The Court countered by stating the MMA Best Practices applied because the Defendants contractually agreed to those standards.

The defense of unclean hands is an equitable remedy whereby the asserting party must prove inequitable conduct by the opposing party.  Defendants alleged that Verizon misrepresented Defendants’ web pages to the Court, released false press releases, misrepresented business practices to the Texas Attorney General, and alleged that the Defendants’ corporate structure was rife with criminal conspiracy while Verizon maintained a complicated corporate structure.  The Court found Verizon’s conduct did not rise to the level of fraud nor was its conduct false or misleading.

The Court granted Verizon’s request for preliminary injunction effective upon payment of a relatively token $25,000 bond.

 

Verizon Litigation

By Jay Lewis

 Part II

Verizon filed a motion for preliminary injunction based on Defendants’ deceptive acts, which induced customers to purchase non-compliant premium services.  Verizon also claimed that the customers, in turn, threatened to leave the Verizon network because of Defendants’ actions.  The Court granted Verizon’s motion for a preliminary injunction after conducting a hearing. 

The Court cited Winter v. Natural Res. Def. Council, 555 U.S. 7 (2008) for the general factors a plaintiff must show to obtain a preliminary injunction:

  1. A likelihood of success on the merits of the legal claim,
  2. Irreparable harm in the absence of preliminary relief,
  3. The balance of equities tips in the favor plaintiff’s favor, and
  4. The relief is in the public interest.

The Court further cited Alliance for Wild Rockies v. Cottrell, 622 F.3d 1045 (9th Cir. 2010) for the 9th Circuit sliding scale balancing test.  Under this 9th Circuit test, if the balance of hardships tips sharply in the plaintiff’s favor, likelihood of success on the merits becomes less of a factor to consider. Alliance, 1049-53.

Verizon based its request for preliminary injunction on three legal bases:

  1. Arizona Consumer Fraud Act (“ACFA”),
  2. Tortious Interference with Contract, and
  3. Unjust Enrichment.

ACFA, the Court decided, did not apply in this case.  AFCA protects the merchant-consumer relationship.  It provides a means for consumers to bring an action against merchants for deceptive or fraudulent practices.  Here, Verizon was not a purchaser of Defendants services but merely a conduit to the customers.  Therefore, Verizon would not likely succeed on the merits of its AFCA claim.

The Court held that Verizon would likely succeed on the merits of its claim for tortious interference with contractual relations.  The Court affirmatively stated that, under Arizona law, a civil defendant can be held liable for tortious interference with contractual relations if the interference made the plaintiff’s compliance with a contract more expensive. This is an extension of Arizona precedent where the facts of previous tortious interference cases indicate the contract ended in breach or termination.  In Verizon’s case, the Court applies Restatement (Second) of Torts §767 (1979) which punishes tortious actions that merely burden the plaintiff’s performance on an existing contract.  The fact that Verizon paid reimbursement fees to retain customers and monitoring fees to prevent continued deception met the criteria set forth in §767.

The Court found that Verizon’s theory for unjust enrichment would not likely succeed on the merits.  Specifically, Verizon did not suffer the required impoverishment.  In fact, Verizon gained an estimated $24 million from Defendants’ actions.

After determining that Verizon has a likelihood of success on the merits for tortious interference, the Court found the three other factors of a preliminary injunction had been met:

  • Verizon would suffer irreparable harm to its business reputation if Defendants were allowed to continue deceiving customers; damage to goodwill constituted irreparable harm.
  • The balance of harms tipped in Verizon’s favor as Verizon has an interest in protecting its customer relationships and Defendants have no legitimate interest in accessing the network through deceptive means. 
  • The public interest in this matter is to protect contractual relationships from exploitation through improper means.

 Part III shall discuss the Defendants' arguments.

 

Verizon Litigation

Written by Jay Lewis

Cellco Partnership d/b/a Verizon Wireless v. Jason Hope, et al., CV11-0432-PHX-DGC (D. Ariz. 2011)

In the United Stated District Court for the District of Arizona, Verizon Wireless (“Verizon”) filed a complaint and motion for preliminary injunction against Jason Hope, Wayne Destefano, and Eye Level Holdings, LLC, d/b/a JAWA (“Defendants”) to prevent ongoing deceptive practices. The court granted Verizon’s motion.  The facts are as follows:

Verizon operates a wireless telephone network.  Defendants market and sell premium short message service (“PSMS”) on Verizon’s network.  PSMS sends content to the user’s wireless device such as ring tones, horoscopes, recipes, celebrity gossip and news alerts for a standard monthly fee.  The fee appears on the customer’s Verizon bill.

Verizon requires that companies who seek access to Verizon’s customers comply with guidelines for marketing practices developed by the Mobile Marketing Association (“MMA Best Practices”).  Under the guidelines, content providers like the Defendants, must submit details of their marketing and sales programs to Verizon through a third-party, known as an aggregator.  Once approved, the content provider can begin to provide services like PSMS on the Verizon network.  After the services begin, Verizon uses a third-party auditor, Aegis, to ensure that the provider is not violating the MMA Best Practices.

Previous to this lawsuit, the Defendants had been suspended from the Verizon network for violating the MMA Best Practices.  As a result of the suspension, Verizon required Defendants to identify themselves as Hope and Destefano when submitting a marketing and sales plan to the aggregator.  Instead, the Defendants set up separate limited liability companies in the names of other employees with principal places of business at various UPS stores throughout the country. This was a ploy to prevent Verizon from associating the LLCs and their applications for network access with the named Defendants.  The Defendants were successful in regaining access to the Verizon network and its customers.

Defendants sell their services through their websites.  A customer will visit one of Defendants’ websites and enter information to sign up for the premium services.  Verizon requires these websites to be MMA Best Practices compliant.  This includes details on price, terms, conditions, cancellation policy, as well as requirements for font size and font color.  The MMA Best Practices also requires that certain disclosures appear on the first page of the site.  The third-party auditor, Aegis, monitors the sites for compliance.

At first, the Defendants operated websites that were MMA Best Practices compliant. However, they soon began dropping prices from the site, reducing font size, failing to provide termination information, and removing terms and conditions from the first page.  In order to avoid detection, Defendants used either a firewall or cloaking software to prevent Aegis from viewing the non-compliant landing pages.  When an Aegis auditor attempted to review the Defendants non-compliant website, the software would detect the auditor’s Internet Protocol address and redirect that auditor to a compliant site.

Aegis and Verizon eventually caught on to Defendants’ actions and barred them from the Verizon network.  Verizon also took remedial steps in satisfying customer complaints by refunding subscription fees and increasing the costs of monitoring the Defendants’ actions.

PART II will discuss the legal aspects of this case.