Chetty Sevugan v. Direct Energy Services, LLC

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 18-3082

CHETTY SEVUGAN, individually and on behalf of others simi-

larly situated,

Plaintiff-Appellant,

v.

DIRECT ENERGY SERVICES, LLC,

a Delaware Corporation

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division

No. 1:17-cv-06569 — Virginia M. Kendall, Judge.

____________________

ARGUED MARCH 26, 2019 — DECIDED JULY 26, 2019

____________________

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 alterna-

tive 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.

2 No. 18-3082

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 dom-

inated the U.S. electricity market. These utility companies (in

Illinois, Commonwealth Edison Company or “ComEd”) gen-

erated, transmitted, distributed, billed, and collected pay-

ments for electricity. ComEd’s rates are set by the Illinois

Commerce Commission, a state regulatory agency.

More than twenty years ago, Illinois restructured its elec-

tricity 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 custom-

ers, both residential and commercial. Unlike ComEd, alterna-

tive 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 elec-

tricity wholesale from PJM Interconnection LLC—a regional

transmission organization that controls the electric grid

No. 18-3082 3

covering northern Illinois and several other states—and re-

selling it to customers.

Today, Illinois retail consumers choose their electricity

supplier from among ComEd and a collection of state-certi-

fied 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 sup-

plier. Sevugan, hoping to save money on his monthly electric

bills, contracted with Direct Energy in 2011. Sevugan’s allega-

tions center on two clauses in his contract with Direct Energy.

The first, which we call the “Terms Clause,” explains the con-

tract’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 suppli-

ers, 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”:

4 No. 18-3082

5. Renewal: Notice of a Change to this Agree-

ment. 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 En-

ergy 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, de-

termined solely by Direct Energy in its discretion.

(emphasis added). Per the Renewal Clause, Sevugan’s con-

tract automatically renewed on a month-to-month basis, with

his price set at a variable rate.

After several years as a customer, Sevugan became un-

happy 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

1 Ten days after Sevugan filed his initial complaint, but before Direct

Energy responded, Sevugan amended his complaint, apparently to delete

references to New York’s Civil Practice Laws and Rules. This first amend-

ment did not alter Sevugan’s substantive allegations or claims.

No. 18-3082 5

made those promises. In a thorough opinion, the district court

dismissed Sevugan’s breach of contract claim without preju-

dice 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 pro-

vide a competitive rate, (c) increas[ing] its adder2 to an unrea-

sonable 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 opin-

ion, the district court again dismissed Sevugan’s case, this

time with prejudice. The court concluded Sevugan did not al-

lege 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

2 Although not defined in the parties’ contract, an “adder” can be de-

scribed as a discretionary component of the electricity price. In his briefs,

Sevugan presumes an “adder” is a charge in addition to the base price

(whether that base was variable or fixed) that is “fixed and reflects all non-

energy costs to provide service to its customers.”

6 No. 18-3082

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 “unrea-

sonable.” 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 ex-

plained 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 plau-

sibility 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 (2009); see also West Bend Mut. Ins. Co. v. Schumacher,

844 F.3d 670, 675 (7th Cir. 2016) (setting forth principles gov-

erning assessment of complaint after Rule 12(b)(6) dismissal).

No. 18-3082 7

“‘Plausibility’ is not a synonym for ‘probability’ in this

context, but it asks for more than a sheer possibility that a de-

fendant has acted unlawfully.” Schumacher, 844 F.3d at 675 (ci-

tations omitted).

Under this standard, a plaintiff who seeks to survive a mo-

tion 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 F.3d 759, 764 (7th Cir. 2010) (quoting W.W.

Vincent & Co. v. First Colony Life Ins. Co., 814 N.E.2d 960, 967

(Ill. App. Ct. 2004)). The district court concluded Direct En-

ergy failed to plausibly allege facts from which to reasonably

infer the third element, breach.

A breach of contract claim requires an identifiable breach

of a contract term. Harvey v. Mackay, 440 N.E.2d 1022, 1027 (Ill.

App. Ct. 1982) (dismissing complaint because “[t]here are no

facts alleged which purport to show what acts constitute a

breach”); Talbert v. Home Sav. of Am., F.A., 638 N.E.2d 354, 358

8 No. 18-3082

(Ill. App. Ct. 1994) (“A breach can only exist where a party

fails to carry out a term, promise, or condition of a contract; a

breach cannot result from a party's performance of a contract

term.”). We review Sevugan’s pleading on the contractual

terms he claims Direct Energy breached, first the Renewal

Clause (paragraph 5), including whether Direct Energy’s ad-

der is an unreasonable charge, and then the Terms Clause

(paragraph 3).

A

The parties agree the Renewal Clause establishes two

parts to the contract price: (1) a “generally prevailing market

price for electricity in the PJM market,” plus (2) “an adder”;

the sum of these two parts is the retail price. Sevugan first

contests how Direct Energy exercised its discretion in setting

electricity rates.

Sevugan interprets “generally prevailing market price” to

mean Direct Energy was required to set its variable rates

lower than the PJM wholesale price, as well as below

ComEd’s prices. To support this reading, Sevugan included a

chart in this latest complaint. The chart lists the PJM whole-

sale market price and the rates per kWh, for each billing

period, charged by Direct Energy and ComEd. Sevugan con-

tends the chart shows that Direct Energy’s rates were consist-

ently higher than ComEd’s, although both prices fluctuated

in comparison to the wholesale price.

But Sevugan’s complaint lacks a critical feature of compar-

ison: it does not contain a valid comparator against which to

measure “generally prevailing market prices.” The complaint

contains allegations concerning the PJM wholesale price. But

that is the price to the energy companies, not the consumer.

No. 18-3082 9

Individual customers like Sevugan could not go out and pur-

chase electricity at the PJM rate, no matter their electricity

supplier. So, the PJM wholesale price is not a proper compar-

ator price.

Sevugan’s latest complaint includes a different chart that

illustrates why the PJM wholesale price is not a sound com-

parator. That graphic shows that in early 2014, Direct Energy

and ComEd each charged consumers prices below the whole-

sale rate, and that between 2013 and 2016 ComEd’s price per

kWh was consistently higher than the PJM wholesale price.

Sevugan’s second proposed comparator, ComEd, is also

not valid for assessing the “generally prevailing market price

for electricity.” The Illinois Commerce Commission sets

ComEd’s rates, excluding them from market forces. The

Second Circuit recently considered whether a public utility is

a proper comparator:

If we were to hold private electricity suppliers

liable for departing from the Standard Service

Rates [the Illinois Commerce Commission

equivalent], we would in effect make those []

rates binding on private electricity suppliers on

Direct Energy. Yet the entire point of electricity

deregulation was to allow the market, rather

than the [state regulator], to determine rates.

Richards v. Direct Energy Serv., LLC, 915 F.3d 88, 99 (2d Cir.

2019) (internal citations removed and footnote omitted).3 The

3 While the contract terms in Richards differed somewhat from those

here (and discovery had already taken place), the Second Circuit’s reason-

ing in Richards stands unrebutted that a public utility is not a relevant com-

parator in these circumstances.

10 No. 18-3082

entire point of Illinois’s rate relief law was to permit the rates

of alternative retail energy suppliers to diverge from

ComEd’s rates, allowing them to fluctuate according to mar-

ket conditions. In contrast, ComEd’s regulated rates change

only according to the directives of the Illinois Commerce

Commission.

To argue ComEd suffices as a comparator, Sevugan relies

on Zahn v. North American Power & Gas, LLC.4 The consumer-

plaintiff in Zahn also alleged breach of contract by an alterna-

tive retail energy supplier for purportedly overcharging for

electricity. Sevugan points out this court ruled it was “plausi-

ble” to conclude that the legislative intent of Illinois’s Rate

Relief Law as “to deregulat[ing] the electricity market to allow

for competition.” 815 F.3d at 1090. To Sevugan, it follows that

“Direct Energy competes with ComEd, and not other ARESs

[alternative retail energy suppliers], to get consumers to

switch.”

But Sevugan’s reliance on Zahn is misplaced, as that case

involved a very different claim. Zahn alleged her alternative

retail energy supplier induced her to switch electricity suppli-

ers through false promises of a teaser rate, which she never

received. 815 F.3d at 1086. After certifying to the Illinois

Supreme Court the question whether the Illinois Commerce

Commission had exclusive jurisdiction over her claim, 815

F.3d at 1095, and receiving the answer that it did not, 72

N.E.2d at 340, this Court concluded Zahn plausibly stated a

claim for such bait-and-switch conduct. 847 F.3d at 878. Here,

4 815 F.3d 1082 (7th Cir. 2016), certified question answered, 72 N.E.3d 333

(Ill. 2016), reh’g denied (Jan. 23, 2017), conforming to answer to certified ques-

tion, 845 F.3d 875 (7th Cir. 2017).

No. 18-3082 11

by contrast, Sevugan does not contest that he received the

fixed rates for which he contracted for the first two years of

his contract. This court’s opinion in Zahn said nothing about

Sevugan’s theory that ComEd’s prices are a valid method to

determine the “generally prevailing market price for electric-

ity.”

ComEd’s price is not a market price at all; it is a regulated

price. Neither PJM nor ComEd participate in the general mar-

ket for electricity, and thus they are not proper comparators

with Direct Energy to gauge market price. The only other ac-

tors in the electricity market engaging in price competition are

the other alternative retail energy suppliers in Illinois—the

companies most similarly situated to Direct Energy. But none

of Sevugan’s complaints offered allegations about those sup-

pliers’ rates in comparison with Direct Energy’s. The closest

Sevugan got to pleading such information was in his second

amended complaint, in which he alleged Direct Energy’s

“prices are substantially higher than not only ComEd’s prices

but also other ARES’s [alternative retail energy supplier’s]

prices.” But without additional supporting factual allega-

tions, this conclusory claim is not sufficient to allow a reason-

able inference that Direct Energy breached the Renewal

Clause. Bell, 835 F.3d at 738. Further, Sevugan admits he has

not pleaded any facts about what an alternative retail energy

supplier would charge; he argues he does not need them.

With nothing pleaded about the prices of Direct Energy’s

competitors, Sevugan’s complaint does not contain sufficient

facts to allow a reasonable inference Direct Energy breached

the Renewal Clause.

At bottom, Sevugan’s claim that Direct Energy did not

charge rates commensurate with ComEd, or with the

12 No. 18-3082

wholesale price of PJM, fails to allege a breach. The parties’

contract does not require Direct Energy to charge such rates.

Without any information about valid market comparators,

such as other alternative retail energy suppliers, Sevugan’s

breach of contract claim is speculative and implausible.

B

Sevugan next claims Direct Energy breached the contract

by using an unreasonable adder. Recall, the Renewal Clause

dictates the contract price is the generally prevailing market

price plus the discretionary adder set by Direct Energy.

Sevugan alleges the amount of Direct Energy’s adder is un-

reasonable, resulting in overcharges. As part of his argument

he asserts the “adder is fixed and does not fluctuate over

time.” From this, Sevugan contends that, because Direct

Energy’s kWh prices exceeded ComEd’s (and did not de-

crease when ComEd’s prices dropped), Direct Energy could

not have charged him rates based on generally prevailing

market prices, and thus breached the contract. To the extent

Direct Energy did charge him such rates, Sevugan argues

Direct Energy’s “excessive prices could only have resulted

from charging an unreasonable adder,” which also would vi-

olate Illinois contract law that implies a price must be a rea-

sonable one where a contract for goods or services is silent on

that term. See Protestant Hosp. Builders Club, Inc. v. Goedde, 424

N.E.2d 1302, 1305 (Ill. App. Ct. 1981).

Unpacking this argument shows it is not well grounded.

Sevugan’s allegations about the size of the adder presumes it

is fixed over time. But Sevugan provides no basis for this

“fixed adder” theory. In the district court, Sevugan pointed to

a contract with a municipal client, and a checklist for contracts

with commercial clients, each of which referred to a “fixed

No. 18-3082 13

adder.” But if anything, such allegations make it less likely

Sevugan’s adder was fixed, as Direct Energy explicitly re-

ferred to fixed adders in other contracts, but not in Sevugan’s.

On appeal, Sevugan backs away from this fixed adder

theory. He submits “[w]hether [Direct Energy]’s adder is

fixed or not is very much beside the point.” He says his alle-

gations on this topic were “merely [his] attempt, and a very

uncertain one at that, to explain the disparity between Direct

Energy’s retail price and the known PJM wholesale price.”

Given the incorrect comparator, though, this contrast is insuf-

ficient, as detailed above.

All the more, the Renewal Clause in the parties’ contract

grants Direct Energy price-setting discretion. The complaint

fails to allege how Direct Energy unreasonably exercised its

discretion in setting the adder amount (other than its claim

that the prices were greater than ComEd and the PJM whole-

sale price, found wanting above).

Sevugan has offered no new arguments for how the adder

in the price is unreasonable. He admits he does not know how

the adder charge is established, or how Direct Energy formu-

lated its prices. Nor does Sevugan allege Direct Energy’s ad-

der was greater than that charged by other market partici-

pants. Sevugan has not plausibly alleged Direct Energy

charged him unreasonably for this component of the price.

C

Finally, Sevugan disputes the electricity prices Direct

Energy set by invoking a different portion of the contract,

the Terms Clause, paragraph 3. As relayed above, that clause

provides in part: “Electric generation service prices of elec-

tric suppliers, such as Direct Energy, are set competitively and

14 No. 18-3082

are not regulated by the Commission … .” (emphasis

added).

The district court held that this term did not relate to

Direct Energy’s pricing, so it could not obligate Direct

Energy’s setting of its variable rates. To the court, “competi-

tively” described the method in which prices are set—inde-

pendently, by privately operated providers—rather than the

term establishing a contractual obligation about the price it-

self.

Sevugan argues “competitively” in the Terms Clause

means Direct Energy was contractually bound to set a varia-

ble rate competitive with ComEd’s price. Sevugan relies on

dictionary definitions of “competitive” and similar terms to

contend he has stated a plausible claim by alleging that Direct

Energy’s prices “were exorbitantly higher than ComEd and

therefore not ‘competitively’ set—contravening the terms of

the contract.”

Sevugan’s arguments fare no better on appeal than in the

district court. Unambiguous terms are to be given their plain,

ordinary, and popular meaning. See Thompson v. Gordon, 948

N.E.2d 39, 47 (Ill. 2011) (citing Cent. Ill. Light Co. v. Home Ins.

Co., 821 N.E.2d 206, 213 (Ill. 2004) (same)). The Terms Clause

read plainly does not promise Direct Energy’s rates will be

similar to ComEd’s; in fact, it warns customers they may be

significantly different. “Competitively” explains that Direct

Energy’s rates are unregulated by a public rate commission,

unlike ComEd’s rates set by the Illinois Commerce Commis-

sion.

A contract should be construed as a whole. Hongbo Han v.

United Cont’l Holdings, Inc., 762 F.3d 598, 602 (7th Cir. 2014)

No. 18-3082 15

(holding “a court must give meaning and effect to every part

of the contract,” interpreting Illinois law in putative class ac-

tion); Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007)

(“[B]ecause words derive their meaning from the context in

which they are used, a contract must be construed as a whole,

viewing each part in light of the others.”) (citation omitted);

see ANTONIN SCALIA & BRIAN A. GARNER, READING LAW: THE

INTERPRETATION OF LEGAL TEXTS 167 (2012) (“The text must be

construed as a whole.”). The Renewal Clause fixes Direct

Energy’s obligations when setting variable rates. But as the

district court noted, the Terms Clause refers only to the fixed

rate during the twelve-month initial term, so it may not even

apply to a later variable rate charged under the Renewal

Clause.5

Even if the Terms Clause did control pricing, Sevugan

again has failed to plausibly allege Direct Energy improperly

set its variable rate for electricity. As described above, the

complaint contains no references to proper comparators, in-

cluding alternative retail energy suppliers. Sevugan’s conten-

tion that the variable rates he paid were not competitive be-

cause they were higher than ComEd’s rates does not speak to

Direct Energy’s competitiveness in the broader market.6

5 The cases Sevugan cites on this point differ materially from this one.

We distinguished Zahn above. And Oladapo v. Smart One Energy, LLC, No.

14 CV 7117-LTS, 2016 WL 344976 (S.D.N.Y. Jan. 27, 2016), involved more

specific language than that used in Sevugan’s contract, such as a “guaran-

tee” and a promise that the energy supplier would set prices “in response

to changing market conditions.” Id. at *3.

6 Sevugan submits as persuasive supplemental authority Mercado v.

Verde Energy USA, Inc., No. 18 CV 2068, 2019 WL 978531 (N.D. Ill. Feb. 28,

2019), in which the district court denied a motion to dismiss based on

16 No. 18-3082

III

Sevugan’s complaints failed to contain allegations from

which it can be reasonably inferred Direct Energy breached

the parties’ contract. Because his claim is not facially plausi-

ble, we AFFIRM the district court’s dismissal of this case.

allegations that variable rates were not priced according to market condi-

tions. Mercado is not convincing because the contract language in that case

did not give the supplier discretion in setting rates, id. at *2, as Direct En-

ergy has here. Further, the district court in Mercado did not apply the plau-

sibility standard at the center of our evaluation in this case. See id. at *4.