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May 09, 2003

The Legal Line

Ed Maldonado, Esq.

Dear Legal Line,

I have been in phone card business for about 6 years and have seen many companies go out of business. This happened a lot in my first few years, but I am surprised that it is still going on.

I recently lost about $4,000 to a North Carolina-based prepaid company. His cards don't work, and when I asked him to give my money back, he says he does not have it. I don't understand, as he already took money from me. My company is not that big, or makes that much money, that I can forget about it. Can you help me?

Staying Afloat

Dear Staying Afloat,

Thank you for your question.

First and foremost - was there a written contract or was the sale of cards done by invoice or purchase order? If there is a contract, you always claim breach of contract for failure to provide goods or services (and in some states both). Usually the contract provides for a governing law clause, which tends to be the state of the contract drafter. If there was no contract, but invoices, there can still be a commercial claim for failure to provide the services associated with the cards, since the services are prepaid. In some states, you can also claim unjust enrichment by the provider. This, however, depends on what your local attorney, in that jurisdiction, advises you. Also, the amount in controversy is less than $5,000 USD so the claim will likely be heard in small claims court - unless, of course, you are not alone and there are multiple plaintiffs. Again, clarify these issues with a local attorney.

Now here is the big question: Are both of your companies in North Carolina? If they are, your case could be brought up in North Carolina with no problem. If not, you need to have a legal presence in the state of North Carolina. This can be done through obtaining a certificate of authority to do business in that state. Thereafter, you are in position to sue. While you could also make a complaint to the North Carolina Public Utility Commission, this is usually more effective at the time that the provider first fails to give service, while cards are in the hands of consumers.

Good Luck and Success in the Industry,

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Dear Legal Line,

I am a provider of prepaid calling cards and have been in the business a number of years. I offer cards internationally, but mostly to Mexico, the Caribbean and Asia. I have several competitors that offer cards for the same routes I offer and we have traditionally offered the same rates and terms. Two months ago I began to expand my national distribution through several new distributors in the market. I was greeted warmly at first, but a week later, all of them declined to do any business with us. I called my contact at one of distributors and he said "off the record" that one of my competitors came by and not only spoke negatively about me, they presented a list of distributors which now work with my competitor that gave scathing references about my company, my rates and my service quality. The problem is that a few of the distributors on the list did have problems with us when one of our carriers went under last year. I know that people in the industry spread rumors and bad mouth all the time, but this is hurting my business.
All those past distributors that are supposed "references" know what happen back then some of the names on the list my contact gave me never really worked with us when the problems occurred. Can they do this? What can I do to stop this?

Scathed and Confused

Dear Scathed and Confused,

First and Foremost, let's have a few words about professionalism here. People in this industry should sell services, not negativity. If a distributor is not willing to do business with you because a competitor mounts a negative campaign on your company, you might consider what would have likely happened if you had done business with them and then bumps in the road arose later. Consider yourself lucky in some respects. As for the legal aspects, here are my thoughts.

Contact a local attorney in your home jurisdiction who is versed and experienced in litigation. Experience in the courtroom does matter when it comes to litigation of this nature - ask for credentials. If you feel that this is an ongoing negative campaign, discuss the issue of Defamation and possibly Slander/Libel with him or her. These are causes of actions in Tort that deal with recovery for damages to reputation and dignity of a "person". In this case, the "person' is your company and the damage caused when a defamatory statement was made and heard by a third party. Another important topic for discussion with local counsel would be jurisdiction and venue. In most, but not all, cases jurisdiction and venue rests where the Defendant is situated. Should you file a cause of action against the competitor or the "references" it may have to be in the county and state where that company is domiciled. If it is a state different from your own, you may have to acquire a Certificate of Authority to do Business in that state in order to have "Standing" to file a cause of action in that state. Each state has different requirements for standing, so this needs to be investigated by your attorney.

This may become important should you have to file an injunction to prevent that company from continuing its negative campaign effort. Injunctions are remedies used where and when there are no adequate money damages that could place your company back in the position it would have been had there been no defamation. Injunctions tend to be used when defamation interferes with a contract or some other type of obligation you already have with another person or company. Again, local counsel can clarify these issues and the real need for an injunction.

A final topic of discussion would be scope of any damages to your company. You mentioned that you never entered into an agreement with the distributor(s). This may present some challenges to any potential suit because of quantifying how your company were harmed by defamation. The rule of thumb in most commercial instances - no damages or loss - no case. A link between the defamation and loss of business opportunities may need to be established through sworn statements from your contact in the distributor prior to the law suit. Again, issues to worked through with your local counsel.

I hope this little primer helps when sitting down for that first consultation.

Good Luck!

Ed Maldonado is a principal of Maldonado & Glen, a telecom legal firm. He can be reached Send all of your Legal Line questions


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