Thrifty-Tel, Inc. v. Bezenek

Thrifty-Tel, Inc. (plaintiff), classified as a non-dominant interexchange carrier (NDIEC) by the Public Utilities Commission (PUC), provided long-distance telephone services. Thrifty-Tel subscribers possessed telephones that were each programmed with a confidential access code and a six-digit authorization code that directed calls into Thrifty-Tel’s switching network. For three days in November 1991, Ryan and Gerry Bezenek used their modem and the confidential access code obtained by a friend to enter Thrifty-Tel’s system. They then manually searched for six-digit authorization codes. In those three days, Ryan and Gerry made approximately 162 calls. Thrifty-Tel detected Ryan and Gerry’s hacking and by late November 1991 had identified their home as the hacking source. However, Thrifty-Tel did not attempt to contact the Bezenek residence. On February 18, 1992, Ryan and Gerry used software to automate searches of Thrifty-Tel’s authorization codes, generating over 1,300 calls. This overloaded Thrifty-Tel’s system, causing a denial of service to some Thrifty-Tel subscribers. Thrifty-Tel still did not contact the Bezenek residence until April 1, 1992, when it sued Ryan and Gerry’s parents, Myron and Susan Bezenek (the Bezeneks) (defendants), seeking damages for fraud, conversion, and reasonable value of services. The trial court denied the Bezeneks’ motion for judgment on the fraud and conversion claims. At trial, Thrifty-Tel did not explain why it had failed to contact the Bezeneks after the November 1991 hacking incident. Also, Thrifty-Tel relied on an unauthorized-usage tariff in its PUC-approved rate schedule to prove damages. Based on that theory, the trial court awarded Thrifty-Tel $33,720 in damages and almost $14,000 in attorneys’ fees. The Bezeneks appealed. On appeal, the Bezeneks argued that (1) Thrifty-Tel had failed to mitigate its damages by failing to take corrective action after the November 1991 hacking incident and that consequently, Thrifty-Tel was not entitled to recover any damages arising from the February 1992 hacking incident, and (2) Thrifty-Tel’s use of the unauthorized-use tariff failed to meet standards for proving actual damages. At the request of the California Court of Appeal, the PUC submitted an amicus curiae brief regarding whether an unauthorized-use tariff could serve as a measure of damages. The PUC explained that the unauthorized-use tariff represented an average compensation for any loss that might be sustained by a customer’s bypass of the NDIEC’s billing mechanism. The PUC’s brief concluded that there was no assurance of a reasonable relationship between the unauthorized-use tariff and damages actually sustained by the NDIEC and that the tariff would not be a proper measure of liquidated damages because it would constitute a penalty if the actual harm sustained was disproportionately lower than the tariff.