Appeals Court Rules in Favor of Direct Energy in Variable-Rate in Class Action

On Monday, February 4, 2019, the United States Court of Appeals for the Second Circuit issued an opinion affirming dismissal of a class action alleging that Direct Energy overcharged variable-rate electricity customers in Connecticut and Massachusetts. The Second Circuit found that Direct Energy’s fixed rates saved the named plaintiff $110 over the course of a year, and that the company’s variable rates were then set according to business and market conditions, as stated in its contract terms.

The named plaintiff, a Connecticut consumer, filed suit against Direct Energy in the United States District Court for the District of Connecticut in 2014, claiming that the company’s pricing practices breached its agreements in bad faith and violated consumer protection laws. The District Court disagreed and granted summary judgment against the plaintiff, who then appealed to the Second Circuit. Though this lawsuit is one of many similar cases filed against retail energy suppliers in recent years, Monday’s opinion is the first time a federal circuit court has opined on the merits of claims brought against retail energy suppliers. The decision is a victory for Direct Energy and for markets everywhere that energy choice exists.

Throughout the years of litigation, Direct Energy maintained that it priced its month-to-month variable rates in accordance with business and market conditions, as permitted by its contracts. In affirming the District Court’s decision, the Second Circuit acknowledged not only the merits of Direct Energy’s legal defenses, but the soundness of its pricing practices: “Direct Energy set the variable rate to achieve a target profit margin, match competitors’ prices, and reduce customer losses, among other objectives,” all of which it found were valid business and market concerns. The Second Circuit majority also found no basis for the plaintiff’s price-gouging allegations, agreeing with Direct Energy that there was “no evidence that it was any higher than its competitors’ rates . . . The factors influencing the variable rate (minimizing customer losses, reaching a target profit margin) are ordinary business considerations.”

The Second Circuit’s opinion has broader implications for class actions brought against competitive energy retailers across the country. In particular, the opinion found that “[Q]uotidian pricing practices like Direct Energy’s . . . have long been mainstream across numerous sectors of American commerce.” And the Second Circuit declined the plaintiff’s invitation to impose restrictions on that deregulated market through novel legal theories, holding instead that “Connecticut chose to deregulate consumer electricity ratemaking, not transfer that authority from a public utility commission to the after-the-fact judgments of courts. . .” (emphasis in original).

The Second Circuit’s majority opinion is available here.

Direct Energy was represented in the District Court and on appeal by Michael D. Matthews Jr., Robert P. Debelak III, Hutson B. Smelley, and James M. Chambers of McDowell Hetherington LLP.