Sevugan v. Direct Energy Servs., LLC

• Decision Date: 26 July 2019
• Docket Number: No. 18-3082,18-3082
• Citation: 931 F.3d 610
• Parties: Chetty SEVUGAN, individually and on behalf of others similarly situated, Plaintiff-Appellant, v. DIRECT ENERGY SERVICES, LLC, a Delaware Corporation Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

931 F.3d 610

Chetty SEVUGAN, individually and on behalf of others similarly situated, Plaintiff-Appellant,

v.DIRECT ENERGY SERVICES, LLC, a Delaware Corporation Defendant-Appellee.

No. 18-3082

United States Court of Appeals, Seventh Circuit.

Argued March 26, 2019

Decided July 26, 2019

Richard J. Burke, Attorney, Zachary Allen Jacobs, Attorney, Grant Y. Lee, Attorney, Quantum Legal LLC, Highland Park, IL, Kevin Laukaitis, Attorney, Jonathan Shub, Attorney, Kohn, Swift & Graf, Philadelphia, PA, for Plaintiff-Appellant.

Joshua M. Feagans, Attorney, Griffin Williams LLP, Geneva, IL, Michael D. Matthews, Jr., Attorney, Diane S. Wizig, Attorney, McDowell Hetherington LLP, Houston, TX, for Defendant-Appellee.

Before Bauer, Rovner, and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Unhappy with his utility bill, Chetty Sevugan filed this putative class action challenging the electricity prices of Direct Energy Services, LLC, an alternative retail energy supplier in the Chicago market. After Sevugan’s third attempt to plead a breach of contract claim, the district court dismissed his complaint with prejudice. Repetition does not make a claim more valid; just so for the customer here. Given his failure to allege facts which allow a reasonable inference that the parties’ contract was breached, his claim is not facially plausible, so dismissal was proper.

I

This case comes to us after a grant of a motion to dismiss, so "[w]hen evaluating the sufficiency of the complaint, we construe it in the light most favorable to the nonmoving party, accept well-pleaded facts as true, and draw all inferences in [the nonmovant’s] favor." Reger Dev., LLC v. Nat’l City Bank , 592 F.3d 759, 763 (7th Cir. 2010).

For decades, regulated, vertically-integrated utilities dominated the U.S. electricity market. These utility companies (in Illinois, Commonwealth Edison Company or "ComEd") generated, transmitted, distributed, billed, and collected payments for electricity. ComEd’s rates are set by the Illinois Commerce Commission, a state regulatory agency.

More than twenty years ago, Illinois restructured its electricity market by the Electric Service Customer Choice and Rate Relief Law of 1997, 220 ILL. COMP. STAT. ACT 5, ART . XVI, which allows alternative retail electric suppliers to compete with ComEd and against each other to service retail customers, both residential and commercial. Unlike ComEd, alternative retail electric suppliers set their own rates and are not regulated by the Illinois Commerce Commission. ComEd (which in the 1990’s divested itself of its power plants) and alternative suppliers serve as middlemen, purchasing electricity wholesale from PJM Interconnection LLC—a regional transmission organization that controls the electric grid covering northern Illinois and several other states—and reselling it to customers.

Today, Illinois retail consumers choose their electricity supplier from among ComEd and a collection of state-certified alternative retail electric suppliers serving their area. ComEd serves as the default energy provider; consumers who wish to buy from an alternative supplier must "opt-in" to that alternative supplier.

Direct Energy is one such alternative retail electric supplier. Sevugan, hoping to save money on his monthly electric bills, contracted with Direct Energy in 2011. Sevugan’s allegations center on two clauses in his contract with Direct Energy. The first, which we call the "Terms Clause," explains the contract’s pricing terms:

3. Pricing, Billing and Payment Terms. During the Initial Term, you will pay Direct Energy for your electric generation services a price set for the Initial Term .... This price includes electric generation service and transmission charges .... Electric generation service prices of electric suppliers, such as Direct Energy, are set competitively and are not regulated by the Commission ....

(emphasis added).

The contract required Direct Energy to supply electricity at a fixed price per kilowatt hour (kWh) for the first twelve months. At the end of that initial term, Sevugan renewed for an additional twelve months at a lower fixed rate. In 2013, though, Sevugan neither re-enrolled nor cancelled service, which triggered what we will call the "Renewal Clause":

5. Renewal: Notice of a Change to this Agreement. Upon completion of the Initial Term, this Agreement will automatically renew on a month-to-month basis at a variable price per kWh with no early cancellation fee. Direct Energy will charge you at a variable price per kWh based upon generally prevailing market prices for electricity in the PJM market at the Electric Utility load zone for the applicable period, plus an adder, determined solely by Direct Energy in its discretion.

(emphasis added). Per the Renewal Clause, Sevugan’s contract automatically renewed on a month-to-month basis, with his price set at a variable rate.

After several years as a customer, Sevugan became unhappy with his electricity costs, believing them to be above market rates and more expensive than if he had remained with ComEd. He cancelled service with Direct Energy and sued in September 2017, alleging Direct Energy deceived him (and others like him) in the parties’ four-page form contract.

Sevugan made a variety of claims in his lawsuit,¹ asserting that after his fixed-rate term expired, the variable charges should have been based on market-related factors. He claimed the rates he paid did not reflect changes in wholesale-market prices and failed to correspond to rates offered by ComEd. Direct Energy moved to dismiss, arguing that Sevugan did not plausibly allege that the parties’ contract made those promises. In a thorough opinion, the district court dismissed Sevugan’s breach of contract claim without prejudice under FED. R. CIV . P. 9(b) and 12(b)(6), concluding that Sevugan failed to allege enough facts to show that Direct Energy plausibly breached a contractual duty.

As the dismissal was without prejudice, Sevugan filed a second amended complaint, which asserted only that Direct Energy breached paragraphs 3 and 5 of the parties’ contract by: "(a) fail[ing] to base its prices upon generally prevailing market prices for electricity in the PJM market at the Electric Utility load zone for the applicable period, (b) fail[ing] to provide a competitive rate, (c) increas[ing] its adder² to an unreasonable level, or (d) all of the above."

Direct Energy again moved to dismiss, contending Sevugan’s breach of contract claim was too speculative and lacked sufficient factual allegations. In a second detailed opinion, the district court again dismissed Sevugan’s case, this time with prejudice. The court concluded Sevugan did not allege facts showing Direct Energy’s rates were not "based on generally prevailing market prices," as the complaint pleaded only the prices of ComEd and the PJM market. The complaint was silent on rates charged by other Illinois alternative retail energy suppliers, which the district court considered Direct Energy’s competition. The court further ruled that the contract did not promise to charge rates lower than ComEd, so a breach of contract had not been alleged.

The district court also held that Sevugan failed to include facts showing the "adder" Direct Energy charged was "unreasonable." Sevugan failed to allege the amount of the adder, what percentage of the variable rates the adder constituted, or the adders charged by other suppliers. Without any such facts, the district court concluded Sevugan’s pleaded claim was deficient.

Likewise, the district court rejected Sevugan’s argument that Direct Energy breached by not setting its variable rates "competitively." Sevugan failed to allege the prices of any other alternative retail energy suppliers, making it impossible to know whether Direct Energy’s pricing of its variable rates were competitive in the variable market. The district court explained that factual allegations regarding ComEd’s prices were insufficient, as they are set by regulators, not the market.

Sevugan timely appealed from the second dismissal, which we review de novo. Reger Development, LLC , 592 F.3d at 763.

II

To survive a motion to dismiss, a complaint must plead more than conclusions; it must allege sufficient facts that make the plaintiff’s claim plausible. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; see also West Bend Mut. Ins. Co. v. Schumacher , 844 F.3d 670, 675 (7th Cir. 2016) (setting forth principles governing assessment of complaint after Rule 12(b)(6) dismissal). " ‘Plausibility’ is not a synonym for ‘probability’ in this context, but it asks for more than a sheer possibility that a defendant has acted unlawfully." Schumacher , 844 F.3d at 675 (citations omitted).

Under this standard, a plaintiff who seeks to survive a motion to dismiss must "plead some facts that suggest a right to relief that is beyond the speculative level." In re marchFIRST Inc. , 589 F.3d 901, 905 (7th Cir. 2009) (internal quotation marks omitted). While detailed factual allegations are not necessary to survive a motion to dismiss, it does require "more than mere labels and conclusions or a formulaic recitation of the elements of a cause of action to be considered adequate." Bell v. City of Chicago , 835 F.3d 736, 738 (7th Cir. 2016) (internal quote marks omitted).

The law of Illinois, the forum state, applies in this diversity case. Fednav Intern. Ltd. v. Continental Ins. Co. , 624 F.3d 834, 838-39 (7th Cir. 2010). "Under Illinois law, a plaintiff looking to state a colorable breach of contract claim must allege four elements: ‘(1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages.’ " Reger Dev., LLC v. Nat’l City Bank , 592...