Virgin Mobile U.S.A., L.P. v. Commonwealth ex rel. Commercial Mobile Radio Service

Citations: 448 S.W.3d 241; 2014 Ky. LEXIS 632; 2014 WL 4116480Docket: Nos. 2012-SC-000621-DG, 2012-SC-000626-DG

Court: Kentucky Supreme Court; August 21, 2014; Kentucky; State Supreme Court

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Virgin Mobile USA appeals a Court of Appeals decision affirming a Jefferson Circuit Court summary judgment that found Virgin owed $547,945.67 to the Commercial Mobile Radio Emergency Service Telecommunications Board (CMRS Board) for CMRS charges. Virgin contested the debt, asserting it owed nothing. While the circuit court awarded attorneys’ fees to the Board, the Court of Appeals reversed that decision. Upon review, the court determined Virgin's actual debt to the CMRS Board is $286,807.20, affirming in part and reversing in part the lower court's decision. The court also reversed the Court of Appeals regarding attorneys' fees, remanding the case for reconsideration based on the new findings. The background includes the establishment of a tax mechanism for funding 911 services, which evolved with the introduction of wireless communication in 1998, leading to the creation of the CMRS Board and the imposition of a service charge on mobile service providers. Regulations require CMRS providers like Virgin to collect this charge as part of their billing process, although they are not obliged to pursue payment from delinquent customers. Virgin began operating as a CMRS provider in Kentucky in August 2002.

Virgin established a pre-paid mobile telephone service model targeting consumers with diverse needs, particularly those with low incomes or lacking credit for traditional contracts. This service was designed to accommodate individuals who couldn’t or wouldn’t enter into fixed-period billing agreements. Customers purchased pre-paid phones from retail outlets, which allowed them to use a CMRS connection without direct engagement with a CMRS provider, eliminating the need for monthly billing or unpaid balances. 

Following a 2002 amendment to KRS 65.7629(3), the CMRS Board was instructed to collect service charges from each CMRS connection with a defined primary use within Kentucky; however, this amendment did not address pre-paid services and did not alter the collection method outlined in KRS 65.7635. Consequently, Virgin did not attempt to collect the service charge, assuming responsibility for it instead. Virgin estimated the owed charges to be $289,807.20 and paid that sum to the CMRS Board out of its own funds. 

By 2005, Virgin determined that Kentucky’s statutory framework did not require pre-paid providers to act as collection agents for the Board and subsequently ceased its payments while requesting a refund of previously paid amounts, which the Board denied. In 2006, following a call from Governor Fletcher to address the perceived "tax loophole," the General Assembly amended KRS 65.7629(3) to explicitly include pre-paid mobile services under the CMRS service charge and established alternative methods for its collection.

After July 12, 2006, Virgin was required to collect the CMRS service charge from customers as mandated by amended law, which it adhered to. Virgin contended that it had no obligation to collect the charge prior to this date and viewed a prior payment of $286,807.20 as an erroneous overpayment. In October 2006, after the Board did not respond to its refund request, Virgin began recouping this amount by applying its post-July 2006 collections against the overpayment, resulting in no CMRS payments made to the Board for nearly two years. In October 2008, the Board filed a lawsuit against Virgin for all owed service charges from 1999 through July 2006. The trial court ruled that Virgin had a duty to collect the charge even before July 2006, entering a summary judgment against Virgin for $547,945.67, which included the recouped overpayment and additional charges. The court also awarded attorneys’ fees of $137,869.08 to the Board. Virgin appealed, and the Court of Appeals affirmed the duty to collect but reversed the attorneys' fees award, citing Virgin's good faith dispute. Upon discretionary review, the court concluded that the statutory version prior to July 2006 did not require Virgin to collect the charge, thus reversing the Court of Appeals on this point. The attorneys' fees award was also reversed, with the matter of who is the "prevailing party" remanded to the Jefferson Circuit Court for further consideration. The court emphasized that the issue was one of statutory construction, focused on the legislative intent.

The intention of the legislature is paramount in statutory construction, as emphasized by KRS 446.080(1) and cases such as MPM Financial Group, Inc. v. Morton and Jefferson County Board of Education v. Fell. The statutes should be liberally construed to fulfill legislative intent. Virgin argues that the pre-July 2006 KRS 65.7635(1) does not require prepaid CMRS providers to collect the CMRS service charge due to their lack of a “monthly billing process.” Conversely, the Board contends that the legislature intended for both prepaid and conventional users to pay the service charge, with the responsibility for collection resting on all CMRS providers.

The statutory analysis reveals that the CMRS service charge is imposed on users, not providers. KRS 65.7635(1) specifies that the charge is to be collected from the customers, while KRS 65.7629(3) mandates the Board's responsibility to collect the charge from each CMRS connection, defined as a mobile phone number assigned to a customer. Providers are obligated to collect the fee but not to pay it themselves. The CMRS Board bears the primary duty for collection, with KRS 65.7635(2) allowing the state to sue customers for non-payment, relieving providers of this obligation.

As collection agents for the CMRS fund, providers must follow specific directives regarding the collection process and the charge amount, which is set at $0.70 per month. The authority of the providers as agents is limited to the instructions provided by the legislature, ensuring they collect the charge as mandated since August 15, 1998.

KRS 65.7635 mandates that the CMRS service charge be included as a distinct item on each monthly bill issued by a "billing provider" during its standard billing process. Prior to July 2006, the act did not authorize alternative methods for collecting this service charge. The Board contends that the "normal monthly billing process" is merely an optional method for CMRS providers to collect the fee of $0.70, implying that prepaid service providers, like Virgin, lacking a standard billing process, should find alternative ways to identify and bill customers for the service charge. However, the statute does not grant the Board the authority to deviate from the mandated collection method, nor did the Board establish regulations allowing such deviations. While Virgin could theoretically create a method to estimate and bill customers for the service charge, the law does not permit this improvisation. KRS 65.7635(1) explicitly requires “each billing provider” to include the service charge on customer bills. The Board's assertion that "billing" in "billing provider" is insignificant is rejected; the descriptive term is integral to the statute. Virgin, as a CMRS provider, does not qualify as a billing provider since it does not issue bills, and all its services were prepaid, meaning customers owe nothing to Virgin. The Board’s position of enforcing the service charge without adhering to the specified collection method contradicts the statutory requirement for equal effect of all provisions. The General Assembly's intent was for all mobile users to access 911 service and pay for it via the CMRS service charge, but it did not foresee the emergence of prepaid wireless services when the law was enacted.

The 2002 legislature did not include provisions regarding the collection of the CMRS service charge in its amendments to relevant statutes. The intent of the General Assembly must be derived from the explicit language of the statutes rather than inferred intentions. Previous case law emphasizes that it is not the judiciary's role to insert provisions that the legislature did not include. 

The pre-2006 CMRS statutes indicated an intent for all wireless mobile service users to pay a service charge of $0.70 monthly, but only "billing providers," those who issue monthly bills, were required to collect it. The legislature did not intend to obligate prepaid mobile phone providers to collect this fee, likely due to the unforeseen emergence of prepaid services and advancements in mobile technology.

The specific wording of the statutes did not impose a requirement on Virgin Mobile to collect the service charge from prepaid customers before the July 2006 amendments, leading to the conclusion that Virgin was entitled to a summary judgment stating it was not required to collect the charge prior to that date. The Court of Appeals' contrary finding was reversed.

Post-July 2006, Virgin Mobile was required to collect the CMRS service charge from prepaid customers in accordance with the methodologies outlined in the amended statutes, as specified in KRS 65.7635(1). Virgin was not entitled to recoup any overpayments made prior to these amendments by deducting amounts from service charge collections after July 2006.

The CMRS provider must either collect a monthly service charge from active customers with sufficient account balances, calculate a payment based on total prepaid wireless revenue, or have the service charge collection method determined by administrative regulations if they lack access to end-user accounts. Virgin opted for the revenue-based calculation method, which allowed it to use a formula rather than make actual monthly collections. Virgin retained the collected amounts to recoup overpayments made between 2002 and May 2005, leading to the current legal issue regarding its entitlement to withhold payment from its post-2006 obligations. The court concludes that Virgin improperly claimed a credit, resulting in an underpayment of $286,807.20. 

Virgin argued it was entitled to a refund or credit per KRS 134.580, which the Board disputed, claiming the CMRS charge is not a tax. The court refrains from resolving this tax classification but notes that KRS 134.580 applies only to money paid into the State Treasury, while CMRS funds are not State Treasury funds. Additionally, Virgin's request for a refund under common law principles, citing established case law regarding refunds for mistaken payments, is deemed inapplicable, as the current issue does not revolve around entitlement to a refund.

Virgin's legal position does not seek a refund for mistakenly paid funds between 2002 and May 2005 but rather uses those principles to justify underpayment of CMRS obligations incurred after July 12, 2006. Had Virgin timely paid these obligations and pursued a refund for mistaken payments, it might have had a stronger case. However, the CMRS service charge is an obligation from CMRS users to the CMRS fund, and Virgin, acting as a collection agent, was required to remit these charges post-July 2006. Virgin's choice to pay from its own revenue instead of collecting from customers does not exempt it from this responsibility. The common law right to a refund does not justify its failure to remit owed service charges. The court affirmed the Jefferson Circuit Court's ruling that Virgin owed $286,807.20 for underpayments after July 2006.

Regarding attorney's fees, the Court of Appeals incorrectly reversed the trial court's award despite agreeing that Virgin was required to collect and remit CMRS charges before July 2006. The trial court's discretion in awarding fees, based on KRS 65.7635(5) for the prevailing party, was not abused, as it properly considered the relevant factors for determining reasonable attorney fees. The Court of Appeals erred by substituting its findings over the trial court's conclusions. Ultimately, the outcome was mixed: Virgin established it owed no unpaid service charges prior to July 2006, but it was held liable for the post-July 2006 amounts.

The determination of attorney's fees is heavily influenced by the extent of a party's success, as established in Hensley. Due to a significant alteration in the criteria for assessing this success, the case is remanded to the Jefferson Circuit Court for a reevaluation of attorney's fees, in accordance with KRS 65.7635(5) and other relevant factors. The opinion of the Court of Appeals is reversed regarding the attorney fee award to the CMRS Board, which had been set at $547,945.67. However, the Court of Appeals' affirmation of the Jefferson Circuit Court’s summary judgment in favor of the CMRS Board for $286,807.20 is upheld. The case is remanded with instructions for the Jefferson Circuit Court to issue a judgment consistent with this opinion and to reconsider attorney fee awards for both parties.

Additionally, the text discusses statutory provisions regarding the collection of CMRS service charges from mobile service customers, outlining the roles and obligations of CMRS providers and the CMRS Board under KRS 65.7621 to 65.7643. It also references conflicting court interpretations regarding the collection of service fees in Kentucky compared to Texas, emphasizing the importance of state law and the impact of the reversal on the Sixth Circuit's prior rulings.