An electricity supplier is accusing Maryland regulators in a lawsuit of misinterpreting rules for over-the-phone sales and imposing excessive penalties that would put the company out of business.
SmartEnergy, which signed up electric customers in Maryland’s competitive energy marketplace after they responded by phone to postcard ads, says the Maryland Public Service Commission wrongly found that it violated the state’s telephone solicitation law.
The commission, which licenses nonutility gas and electric suppliers, had ordered SmartEnergy to cancel contracts and give refunds to all 32,000 customers who signed up after calling a toll-free number on 6 million postcards sent in Maryland from 2017 to 2019. The commission found the New York-based renewable energy supplier engaged in unfair, false, misleading and deceptive marketing and trade practices, including failing to get contract signatures on those telephone orders.
An attorney for SmartEnergy said Thursday that the case, filed last week in U.S. District Court in Baltimore, could have far-reaching implications for businesses that take telephone orders for goods or services, such as delivery of pizza or flowers.
“You could see a class-action lawsuit against Pizza Hut or Domino’s, or any company that advertises in the newspaper or sends mailers to people, and then the consumer calls and orders pizza … and they don’t have to sign for it,” said Douglas Gansler, attorney with Washington firm Cadwalader, Wickersham & Taft. “It’s got such huge ramifications for commerce in Maryland.”
The commission does not comment on pending litigation, said Tori Leonard, a PSC spokeswoman. But she noted that the commission’s decision has been affirmed by three Maryland courts, including the Maryland Supreme Court.
The head of the Maryland Office of People’s Counsel, the state agency that represents energy consumers, said the lawsuit has no merit.
“SmartEnergy has been engaged in litigating this at every level and seeking to delay responsibility for conduct that the commission has found in violation of not just the telephone solicitation act but also core consumer protections,” such as “misleading postcards, misleading telephone solicitation, numerous violations of consumer protection laws,” Maryland People’s Counsel David S. Lapp said.
A public service commission order in 2021 found that SmartEnergy failed to follow guidelines under the Maryland Telephone Solicitation Act, which requires customers to sign contracts. The order said the law applied to SmartEnergy even though the company placed no outbound calls and instead only took calls from customers.
Gansler said the act, passed in 1988, was intended to protect consumers from telephone marketers who might sign them up for goods or services without their consent and does not apply if a customer makes the call.
“No one’s ever questioned whether the MTSA could apply when the customer calls the merchant,” said Gansler, a former Maryland attorney general and Democratic candidate for governor. “Every state in the country has a telephone solicitation act, and no state in the country has ever applied it to where the consumer calls the merchant.”
The commission’s order said the act does apply to some inbound calls that are made in response to a supplier or merchant’s marketing in cases where postcards, flyers or other forms of advertising are found to be deceptive and misleading. The commission said in its order that some deceptive practices included SmartEnergy failing to disclose restrictions related to offers of “free electricity.”
The lawsuit counters that the commission’s order is based on an “erroneous interpretation” of the telephone sales law. It says SmartEnergy never made any outbound calls to drum up business.
It argues as well that the PSC had repeatedly told SmartEnergy the telephone law does not apply to inbound calls. The PSC’s order contradicts the law “as uniformly and consistently interpreted in the State of Maryland, as well as in every other state and by the federal government, in past decades,” the lawsuit says.
However, the commission’s consumer protection division found that SmartEnergy relied on bait-and-switch tactics. In Maryland, consumers can choose to have electricity and gas supplied by a third party or utility, though utilities handle distribution of energy.
The supplier “subjected unwitting consumers — who were tricked into calling the number that the Supplier provided on its postcards — to a pressurized and highly misleading sales pitch aimed at convincing customers to switch their energy service from the utility to SmartEnergy,” the division said in its March 2021 order.
The lawsuit counters that SmartEnergy has one of the best electricity supplier records in the state’s history and accuses the PSC of levying fines meant to punish the company rather than compensate customers. The supplier is seeking a jury trial.
SmartEnergy estimates refunds could total $15.97 million, a penalty more than 30 times higher than any ever imposed by the commission. The PSC staff has proposed an additional $15.97 million in fines if refunds are not paid, the lawsuit says, though fines have not yet been imposed. The lawsuit argues proposed penalties would violate a constitutional protection against excessive governmental fines.
The proposed penalties “erased years of SmartEnergy’s business operations, threatening to bankrupt SmartEnergy entirely, and disrupted the business relationships with the 99.9% of customers who had expressed absolutely no dissatisfaction with SmartEnergy’s renewable product,” the lawsuit says.
SmartEnergy’s disagreement with the commission is playing out amid changes in Maryland’s decades-old competitive energy marketplace. Last year, the commission launched an unprecedented enforcement blitz against deceptive practices by third-party gas and electric suppliers after consumer complaints spiked. During the most recent legislative session, lawmakers passed a bill designed to better protect consumers in the energy marketplace. Energy suppliers have said that law will effectively end gas and electric choice for Maryland residents.
SmartEnergy said that during the time period covered under the PSC order only 34 of 32,000 new telephone sales customers submitted any type of complaint to the PSC. The company was licensed in 2017 as a supplier of renewable energy to homes and businesses in the distribution territories of five utilities across Maryland, including Baltimore Gas and Electric Co.
SmartEnergy is still doing business in a dozen states and Washington, D.C. It was ordered to terminate all Maryland accounts enrolled via telephone, return them to service offered by their utilities and refund all Maryland customers the difference between SmartEnergy’s supply charges and a utility’s charges.
While SmartEnergy’s case has moved through the courts over several years, Lapp said, “customers who paid hundreds to thousands of dollars in overcharges above the standard [utility] rate are still waiting for relief.”
