CMRS Providers Subject To Damages Awards In State Court
 
December 5, 2000
 

In response to a Petition for a Declaratory Ruling brought by the Wireless Consumers Alliance, Inc. ("WCA"), the FCC has recently released an Order which should be of interest to mobile service providers. The Order addresses whether state courts are preempted from awarding money damages against cellular carriers and other Commercial Mobile Radio Service ("CMRS") providers for violating state consumer protection laws, or for tort or contract claims. CMRS providers may now face damages in state court where plaintiffs allege deceptive advertising or misrepresentation as to rates.

The Petition and resulting Order stem from litigation in California, in which plaintiffs allege that LA Cellular committed false advertising in claiming that it had a "seamless calling area" in Southern California and state causes of action for false advertising, fraud and breach of contract. The California trial court found that CMRS providers are immune from state monetary claims due to preemption of the Communications Act, and the plaintiffs appealed. The appeal was stayed pending a declaratory ruling from the FCC on whether the Federal Communications Act preempts state courts from awarding monetary relief as a remedy for fraud and false advertising claims. WCA filed its Petition with the FCC, asserting that state courts throughout the country have reached inconsistent rulings on the issue of preemption of damages awards and asking the FCC to review the issue and give guidance. The FCC decided to hear the case, and solicited comments from interested parties.

In its Petition, WCA argued that federal preemption does not apply because a state monetary damages award arising from a contractual dispute or false advertising does not prescribe or fix rates. CMRS carriers’ rates are not regulated and damages for actions taken in a competitive marketplace are permissible. The CMRS providers, opposing the Petition, argued that a calculation of damages for violation of state consumer protection or breach of contract claims requires the court to engage in unlawful rate-making. The providers asserted, as an example, that a court would have to determine the difference between a reasonable rate for the service promised (by contract or advertisement) and the service received. The providers cite to cases in which courts have ruled that awards of damages are barred by the "filed rate doctrine" (which forbids a regulated entity from charging rates for its services other than those filed with the appropriate federal regulatory authority). In these cases, courts held that monetary damages are considered to be modifications to the lawful rate and thus equivalent to ratemaking.

In the Order released August 14th, the FCC responded to the argument that the filed rate doctrine should apply and ruled that the doctrine does not apply as there are no filed rates for CMRS services and the doctrine is thus inapplicable. Instead of filed rates, the FCC relies on the competitive marketplace to ensure that CMRS carriers do not charge unjust or unreasonable rates.

Aside from noting that the filed rate doctrine does not apply, the FCC ruled that Section 332 "does not generally preempt the award of monetary damages by state courts based on state consumer protection, tort, or contract claims," but that "whether a specific damage calculation is prohibited by Section 332 will depend on the specific details of the award and the facts of a particular case." Depending upon the facts of a particular case, awarding monetary damages is not necessarily the equivalent of rate regulation. Judicial actions such as determining outright whether a price charged for a CMRS service is unreasonable or setting a prospective price for a CMRS service would be preempted. On the other hand, a court is not preempted from deciding whether a CMRS service had been provided in accordance with the terms and conditions of a contract or promises contained in advertising. In such a case, the court need not rule on the reasonableness of the charges to calculate damages for the injury, but instead examines under state law whether there is a difference between promise and performance.

CMRS providers should be aware of the possibility of facing claims for damages awards from state courts where allegations such as deceptive advertising or breach of contract are made by plaintiffs. Even carriers charging a "reasonable rate" for services could be subject to damages for nondisclosure if it misrepresents what the rates are or how they apply. In all likelihood, providers will not be successful in arguing that the filed rate doctrine precludes such a damages claim, and, so long as the plaintiff’s claim does not require a judicial review of the reasonableness of rates or establishing rates, a state court’s imposition of a damages award would probably not be preempted by the Communications Act.