Richards v. Direct Energy Servs., LLC
915 F.3d 88 (2019)
Rule of Law:
A contract that unambiguously grants an electricity supplier discretion to set a variable rate based on 'business and market conditions' is not breached when the supplier considers factors beyond its direct procurement costs, such as profit margins and competitor pricing. Such a business model, when clearly disclosed and allowing for termination without penalty, does not constitute an unfair or deceptive trade practice.
Facts:
- In March 2012, Gary Richards signed a two-page electricity contract with Direct Energy Services, LLC.
- The contract guaranteed a fixed rate for the first twelve months, which was lower than the state-approved 'Standard Service Rate.'
- The contract stated that after the initial year, service would automatically continue on a month-to-month basis with a variable rate set at Direct Energy's 'discretion' and based upon 'business and market conditions.'
- The terms permitted Richards to cancel the contract at any time without an early cancellation fee.
- After the initial year, Richards's plan converted to the variable rate in April 2013.
- For the three months Richards was on the variable rate plan, the rate was higher than the Standard Service Rate, which effectively eliminated the savings he had accrued during the fixed-rate period.
- In August 2013, after noticing the increase in his bills, Richards cancelled his contract with Direct Energy and switched providers.
Procedural Posture:
- In November 2014, Gary Richards filed a class action lawsuit against Direct Energy in the U.S. District Court for the District of Connecticut.
- The complaint alleged breach of contract, unjust enrichment, and violations of the Connecticut Unfair Trade Practices Act (CUTPA) and a Massachusetts consumer protection statute.
- The district court granted Direct Energy's motion to dismiss the unjust enrichment and Massachusetts law claims.
- Following discovery, the district court granted summary judgment in favor of Direct Energy on the remaining breach of contract and CUTPA claims.
- Richards, as the appellant, appealed the district court's dismissal and grant of summary judgment to the U.S. Court of Appeals for the Second Circuit, with Direct Energy as the appellee.
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Issue:
Does an electricity supplier breach the implied covenant of good faith and fair dealing or violate the Connecticut Unfair Trade Practices Act (CUTPA) by setting variable electricity rates based on broad business considerations, such as profit margins and competitor pricing, when the contract grants the supplier 'discretion' to set rates based on 'business and market conditions'?
Opinions:
Majority - Debra Ann Livingston, Circuit Judge
No. An electricity supplier does not breach the implied covenant of good faith and fair dealing or violate CUTPA by setting variable rates based on broad commercial factors where the contract's plain language grants it discretion to do so based on 'business and market conditions.' The term 'business and market conditions' unambiguously encompasses factors beyond mere procurement costs, such as achieving target profit margins, matching competitors' prices, and managing customer attrition. The implied covenant of good faith was not breached because Direct Energy acted within the express rights granted by the contract, delivering exactly what Richards bargained for: a low introductory rate followed by a variable rate. Furthermore, the practice was not deceptive under CUTPA because the contract terms were clear and approved by the state's regulatory authority, nor was it unfair, as any potential injury could be reasonably avoided by the consumer canceling the at-will contract without penalty.
Concurring-in-part-and-dissenting-in-part - Pooler, Circuit Judge
Yes, a reasonable jury could find that the supplier's practices were unfair under CUTPA and constituted a breach of contract. A business model that lures customers with 'teaser rates' only to profit from their predictable inattention when rates increase could be deemed an 'unfair' practice under CUTPA, as it exploits consumer inertia and causes substantial aggregate injury. The phrase 'business and market conditions' is ambiguous and could reasonably be interpreted to mean only costs related to procuring and supplying electricity, not broader profit-seeking strategies. This ambiguity, coupled with the duty of good faith, means a jury should determine whether Direct Energy exercised its discretion reasonably or in bad faith by setting prices to exploit consumer inattention rather than reflecting legitimate commercial costs.
Analysis:
This decision reinforces the principle of freedom of contract in deregulated consumer markets, giving significant weight to the plain language of an agreement. It establishes a high bar for plaintiffs challenging 'teaser rate' business models under unfair trade practice statutes, particularly when contracts are clear, government-approved, and allow for penalty-free termination. The court's reasoning shows a reluctance to use general consumer protection laws to effectively re-regulate an industry the legislature has chosen to deregulate. The dissent, however, signals an ongoing tension in consumer law over whether it is 'unfair' for businesses to systematically profit from predictable consumer behaviors like inattention and status quo bias.
