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Indiana State Courts Have Jurisdiction In Prisoner Phone Contract Case

In a suit challenging excessive collect call rates charged to prisoners' families, friends and attorneys, the Indiana Court of Appeals has reversed a lower court's dismissal for lack of subject matter jurisdiction.

Chanelle Alexander and others (the Class) pay for collect calls from prisoners in Indiana's state prisons and county jails. On June 16, 2000, the Class filed a suit in state court claiming the state and the county sheriffs entered into contracts with telephone companies AT&T and Ameritech Indiana, respectively. The suit claimed (1) a breach of the common law duty of reasonableness; (2) the unauthorized taxing of a sum of money; (3) the unauthorized imposition of a licensing fee; (4) an unreasonable and unjust rate or service charge; (5) an unjust enrichment; (6) money had and received; (7) the combination to restrain and carry out restrictions on trade; (8) a combination to increase price; and (9) inadequate services and facilities to class members. In exchange for its contract, AT&T agreed to give the state of Indiana a 53 percent commission on long-distance calls from all state pay phones, including state owned buildings such as prisons. Ameritech Indiana agreed to pay Sheriff Jack Cottey a commission of 40 percent of the gross revenue from all jail calls plus a $262,000 signing bonus.

The defendants moved to dismiss the complaint for lack of subject matter jurisdiction or on the grounds that the Indiana Utility Regulatory Commission (IURC) has exclusive jurisdiction pursuant to Indiana code § 8-1-2-38 because the class was challenging the reasonableness of telephone rates and charges. The trial court granted the dismissal on November. 7, 2002, based on this statute and § 8-1-2-54 containing a legislative established process for complaints to be brought to the IURC. The trial court found this appropriate by reclassifying the Class's claims as direct or indirect challenges to the reasonableness of rates within the meaning of §8-14-54. The trial court further held that it lacked subject matter jurisdiction since the class failed to first bring their challenges directly to the IURC, thus failing to exhaust administrative remedies.

On de novo review, the Indiana Court of Appeals focused on the sheriff's Ameritech contract, comparing its profit to the sheriff with statutes prohibiting the sheriff from profiting from meal allowance [§ 36-2-13-2.5(b)(4)(B)] and statutes limiting collection fees for tax warrants to ten percent [§ 8.1.8- 3(c)(3)], unless a salary contract is in place pursuant to § 6-1-8-3(1)(4). With no such statutes regulating prisoner's phone calls, the Court could not determine if the phone contracts were permissible or enforceable.

The defendants argued that this is a mere rate-making case. But the Court, while agreeing that if that were the case the courts should not interfere with the contract because that would undermine the ability of the state to regulate and supervise the provision of phone services to prisoners, found this case to revolve around a discrimination by a utility. The Court noted that state courts have long held that a public use business is under a common law duty to serve all who apply ... without discrimination" and that such duty is without discrimination, not only as to service, but also as to person, and prices charged. The duty to serve could be nullified if there were not the attendant duty also to serve at a reasonable charge. If a business 'affected with public interest' could make exorbitant charges for its services, it could thereby serve only whom it saw fit, and when it saw fit, by manipulating its charges and prices." More importantly, [a] consumer may sue to recover damages at common law resulting from discrimination by a utility as to services or rates," quoting Foltz v. City of Indianapolis, 234 Ind. 656, 130 N.E.2d 650 (1955).

Based on Foltz, the Court declared that the trial court must exercise its jurisdiction with respect to the Class' common law claims. The trial court must first determine whether authority exists for the state and sheriff to enter into these contracts and to reap such a substantial profit. If so, the trial court may either determine the reasonableness of the rates and profits or refer the case to the IURC for this determination. On remand, the class was certified, the Sheriff's motion to join the telephone companies as defendants was denied, and the case is currently in discovery. See: Alexander v. Cottey, 801 N.E.2d 651 (Ind. App. 2004), on rehearing 806 N.E.2d 315 (Ind. App. 2004) (rehearing to clarify the Court did not implicitly hold profits were for the sheriff's personal use).

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Related legal case

Alexander v. Cottey

Additionally, the defendants rely upon the trial court's conclusion that there would be no way to calculate damages with respect to any of the claims that the Class presents without comparing the actual rate charged to a hypothetical lawful rate. In other words, the defendants maintain that simply couching claims in language not suggesting regulatory enforcement does not divest the IURC of its jurisdiction.
In support of their arguments, the defendants direct us to Town Board of Orland v. Greenfield Mills, Inc., 663 N.E.2d 523 (Ind.1996). In Orland, a group of landowners sought to prevent the construction of a sewage treatment plant near their property. The plaintiffs alleged various common law theories, and also argued that construction of the plant would violate their rights under the Indiana Constitution. The defendant town argued that the landowners failed to exhaust their remedies before the Indiana Department of Environmental Management (IDEM), which is the agency that issues permits for sewage treatment plants. The court held for the town stating that:
While the landowners use the words 'trespass,' 'nuisance,' and 'taking of and interference with their riparian property rights,' all that they ask of the trial court is to prevent construction and operation of a sewage treatment plant because of damaging levels of pollution they allege it will discharge. But as discussed at length supra, the legislature has provided a statutory scheme to decide when a sewage plant will be allowed to be built and operated.
Id. at 528. In the end, it was held that the landowners had not exhausted their remedies before IDEM and the trial court lacked jurisdiction to hear the case. In light of Town of Orland, the defendants maintain that the present case should be decided by the IURC.
The defendants also note that the Class requested a declaratory judgment providing that the practice of imposing the fees, costs, or charges for collect phone calls are not allowed for or authorized by statute, and are therefore unlawful. Thus, they assert that the practice by telephone companies of imposing fees, costs, and charges *658 to customers is beyond the trial court's jurisdiction because such matters should rest solely within the IURC's determination. That is, the defendants maintain that the IURC must hear this case because any question about the reasonableness of rates requires that agency's expertise.
In further support of this contention, the defendants direct us to Sims v. AT & T and its Contract with the Indiana DOC, No. 41429, 2001 WL 1809385 (Ind. Utility Reg. Comm. Aug. 24, 2001), an administrative proceeding brought before the IURC by ten inmates of the Westville Correctional Facility. Sims and the other complainants asserted that the rates charged by AT & T were unreasonable and discriminatory, and sought to have the contract with the Department of Corrections (DOC) declared illegal. As a result, Sims requested the IURC to do the following:
(1) order a rebate of any rate found to be collected illegally, (2) declare the current AT & T/DOC contract an illegal monopoly, (3) order rates to be charged that are non-discriminatory, reasonable and in line with those charged the general public, or (4) allow inmate families to determine who will provide long distance service from their incarcerated family members.
Slip op. at 1.
In the end, the IURC determined that it lacked jurisdiction to rescind the contract between AT & T and the DOC or to issue judgments concerning prison conditions. In its holding, the IURC commented as follows:
The Commission cannot interfere with a contract entered into by the DOA (Department of Administration), particularly where DOA is not a party to this proceeding and outside the Commission's jurisdiction.
Any interference with the DOA's contract with AT & T will substantially undermine the ability of the DOC to regulate and supervise the provision of telephone services to inmates at correctional facilities, which serves an important governmental interest. The Commission has recognized the deference that should be given decisions by the DOA and DOC to restrict inmates' telephone privileges. In the Matter of an Investigation Regarding Alternative Operator Services, Cause No. 38812 [1995 WL 446681, at *1], 1995 Ind. PUC LEXIS 180, at *3 (June 21, 1995) (modifying Commission rules to conform to correctional facilities' restrictions on long distance service being provided to inmates and stating "[T]his type of service, while not in compliance with present [Commission] AOS Rules, is intended to reduce the risk of fraud and to promote security within the institutions.").
Appellee's App. p. 115.
In light of the language quoted above, the defendants argue that the IURC should rule on the Class's claims that are presented here. Therefore, the defendants argue that the Class has misconstrued the reasoning in Sims to the extent that the IURC can be bypassed in these circumstances. While the Class argues that because the IURC cannot grant all of the relief desired-- including the rescission of contracts and an award of monetary damages--the defendants assert that the doctrine of primary jurisdiction allows a trial court to retain jurisdiction while referring to an administrative agency those matters within its special competence.
In considering the arguments advanced by the parties, we note that the trial court here, in its findings of fact and conclusions of law, presupposes that the contracts executed between the Sheriff, the State and *659 the phone companies are valid. That is, the trial court impliedly holds that contracts are legal and enforceable which permit the Sheriff and the State to reap a 40% commission as well as a signing bonus at the inception of the agreement.
We first point out that Indiana Code section 5-7-2-1 relates to illegally taxed fees. Specifically, the statute provides that "[I]t shall be unlawful for any officer in this state, under color of his office, to tax, or permit to be taxed in his office, any fee or sum of money that is not legally allowable under the statute or statutes of the state." Additionally, Indiana Code section 36-1-3-8(5) provides that a unit [FN2] is prohibited from imposing "a license fee greater than that reasonably related to the administrative cost of exercising a regulatory power." Contrary to these statutory provisions, the Sheriff's own contract makes it clear that he is entitled to hundreds of thousands of dollars as a signing bonus, and millions of dollars of the telephone company's gross sales revenues, notwithstanding the language in the agreement that the telephone companies "shall install, operate, and maintain inmate telephones at no charge to the agent [sheriff]." Complaint, Ex. B.
FN2. A unit is a county, municipality, or township. Indiana Code § 36-1-2-23.

Additionally, our research has revealed the existence of very specific legislation regarding the type and amount of compensation that our sheriffs may earn. For instance, under Indiana Code section 36-2-13-2.5(a), "the sheriff, the executive, and the fiscal body may enter into a salary contract for the sheriff." The sheriff's salary contract must contain a fixed amount of compensation in place of fee compensation. I.C. § 36-2-13-2.5(b)(1). Additionally, this chapter sets forth a provision requiring that the sheriff's contract contain language pertaining to the deposit by the sheriff of tax warrant collection fees into the county general fund, as well as a procedure for financing prisoners' meals. I.C. § 36-2-13-2.5(b)(3), (4).
The statutes involving tax collection fees and prisoners' meals specifically define the duties and obligations of the sheriff. To be sure, these provisions specifically and absolutely prohibit the sheriff, his officers, deputies or employees from generating any "profit from the meal allowances." I.C. § 36- 2-13-2.5(b)(4)(B). The sheriff is also required to file an accounting of the expenditures for feeding prisoners with the county auditor. I.C. § 36-2-13- 2.5(b)(4)(B)(5). A companion statute, Indiana Code section 36-8-10-7, requires the state examiner of the state board of accounts to fix the exact amount per meal that the sheriff of each county receives for feeding the prisoners. If the amount to be received by the Sheriff is to be increased, such a decision is to be made by the state examiner pursuant to guidelines set forth in the United States Department of Labor Consumer Price Index. I.C. § 36-8-10-7(a)(1). Finally, the allowance may not exceed two dollars per person per meal, and it shall be paid out of the general fund of the county after the sheriff "submits to the county executive an itemized statement, under oath, showing the names of the prisoners, the date that each was imprisoned in the county jail, and the number of meals served to each prisoner." I.C. § 36-8- 10-7(a).
With respect to the collection of judgments from tax warrants, the sheriff is required to deposit the moneys received in the county general fund with the exception of a "ten percent collection fee." Ind.Code § 6-8.1-8- 3(c)(3). However, if a salary contract is in place under Indiana Code section 36-2-13-2.5, the sheriff is required to deposit the above-referenced ten percent *660 into the county general fund. I.C. § 6-8.1-8-3(c)(4).
In light of the above, it is apparent that these very precise and specific statutes regarding meal allowances and collecting judgments arising from tax warrants direct what a sheriff might receive in the form of compensation in addition to the salary that is set by contract. We see no such analogous statute pertaining to fees that are generated from inmates' telephone calls. Thus, we cannot glean from the record before us, including the arguments advanced by the parties, whether such an agreement allowing the Sheriff or the State in this case to retain a commission or a signing bonus from Ameritech is permissible or enforceable.
That said, while the defendants argue that the claims asserted by the Class involve rate-making only which should be determined by the IURC in accordance with the statutes governing the same, [FN3] it is apparent to us that many of the claims asserted in the complaint involve much more than mere rate-making. Appellant's App. p. 13-21. Thus, we agree with the IURC's determination in Sims that it should not interfere with the contract that was executed here because such would "undermine the ability of the DOC to regulate and supervise the provision of telephone services to inmates at correctional facilities." Slip op. p. 15. Rather, as was recognized by our supreme court in Austin Lakes, the resolution of this case should not rest solely with the IURC because several of the issues raised by the Class in its complaint involve common law claims regarding the reasonableness and enforceability of the contracts at issue. Put another way, the Class is seeking a remedy at common law that has resulted from discrimination by a utility.
FN3. The defendants point to Indiana Code section 8-1-2-38 for the proposition that this case should rest with the exclusive jurisdiction of the IURC:

Every public utility shall file with the commission, within a time fixed by the commission, schedules, which shall be open to public inspection, showing all rates, tolls and charges which it has established and which are enforced at the time for any service performed by it within the state, or for any service in connection therewith, or performed by any public utility controlled or operated by it. The rates, tolls and charges shown on such schedules shall not exceed, without the consent of the commission, the rates, tolls and charges in force January 1, 1913.

Allowing claims to proceed in our courts like those presented here was recognized in Foltz v. City of Indianapolis, 234 Ind. 656, 130 N.E.2d 650 (Ind.1955), where our supreme court recognized that "[u]pon the dedication of a business to a public use, it is established that such business is under a common law duty to serve all who apply so long as facilities are available, without discrimination." Id. at 656. Foltz involved an action against the city of Indianapolis and others to obtain a judgment declaring that certain acts involving the condemnation of property, leasing property and the proposal to issue bonds under an off-street parking act were illegal. One of the questions that had to be decided was whether the Indianapolis Off-Street Parking Commission exercised its power in a reasonable fashion to provide adequate safeguards to assure a dedication of certain property to the public use intended. Id. at 660.
The Foltz court noted that such an obligation to serve "is without discrimination, not only as to service, but also as to person, and prices charged.... The duty to serve could be nullified if there were not the attendant duty also to serve at a reasonable charge. If a business 'affected with a public interest' could make exorbitant charges for its services, it could thereby serve only whom it saw fit, and when it saw fit, by manipulating its charges and *661 prices." Id. Even more compelling, the Foltz court observed that "[a] consumer may sue to recover damages at common law resulting from discrimination by a utility as to services or rates. These are private rights that belong to the individuals constituting the public to whom the 'holding out' of the business is made." Id. at 657.
In reliance upon Foltz, it is apparent that the trial court may--and should--exercise its jurisdiction in this matter with respect to the common law claims that the Class has asserted, with the understanding that the threshold issue of whether the Sheriff is entitled to reap a benefit from the contracts at issue must be decided at the outset. Only then might the IURC invoke jurisdiction and determine the reasonableness of the rates that this "captive audience" is charged for telephone service.
Thus, we are compelled to remand this case to the trial court so that the parties may litigate the issue of whether the Sheriff and the State are permitted to enter into the contracts with Ameritech and AT & T. In the event that it is determined that there is no authority for the Sheriff or the State to reap a margin under the arrangement here, then the trial court must fashion a remedy for the Class. On the other hand, if the trial court determines that such a practice is permissible, it can then determine the reasonableness of the rates and to what extent the profit or margin generated is permissible, or it may refer the matter to the IURC in accordance with Austin Lakes for such a determination.
In light of the issues discussed above, we conclude that the trial court erred in granting the Defendants' motion to dismiss for lack of subject matter jurisdiction. In sum, the trial court must exercise its jurisdiction and determine whether the authority exists that would permit the Sheriff and the State to enter into the contracts with Ameritech and AT & T and to reap a profit in accordance with those agreements. Moreover, we agree with the IURC's pronouncement in Sims that it should not interfere with the contracts here, inasmuch as deference should be given to the DOC to restrict the telephone privileges of inmates. However, should it be found that the State and the Sheriff are entitled to reap profits in accordance with the contracts, the trial court may determine the reasonableness of the rates and profits, or it may refer the cause to the IURC for such a determination.
The judgment of the trial court is reversed, and the cause is remanded for further proceedings consistent with this opinion. [FN4]
FN4. Inasmuch as we are reversing on this issue, we need not address the Class' contention that the "filed rate" or "filed tariff" doctrine should not apply in these circumstances.

BROOK, C.J. and SHARPNACK, J., concur.

Alexander v. Cottey
801 N.E.2d 651