InPhonic, a reseller of wireless services based in the District, may be leaving some of its customers out in the cold for a second time.
The company’s sale to a Philadelphia private-equity firm and its bankruptcy filing mean that it is less likely to repay hundreds of customers under a settlement with the D.C. attorney general’s office over allegations of deceptive rebate practices.
The sale and bankruptcy filing also call into question the fate of a class-action lawsuit against the company over the same rebate practices. The lawsuit is pending in U.S. District Court in the District of Columbia.
"The company has decided to use the bankruptcy laws to avoid paying back the consumers it scammed," said Harvey Rosenfield, a lawyer with the Foundation for Taxpayer and Consumer Rights in Los Angeles and who is involved in the class-action lawsuit.
InPhonic spokesman Tripp Donnelly said he would not comment on the class-action suit or the settlement with the attorney general’s office because the matters are pending in court.
InPhonic sells cellphones made by Motorola, Samsung Electronics and other major companies, as well as wireless plans from carriers including Verizon Wireless, Cingular Wireless and T-Mobile USA, through several Web sites. David Steinberg started the company out of his Bethesda home in 1999 and attracted the support of venture capitalists such as former Apple chief executive John Sculley. Steinberg stepped aside in October and was replaced by former Radio Shack executive Andy Zeinfeld.
The company’s troubles date to last year, when at least four class-action lawsuits were filed in three states against the company over its rebate practices. The cases were consolidated and are before U.S. District Judge Ellen Segal Huvelle.
Next in line to sue InPhonic was the D.C. attorney general’s office, acting in response to more than 2,000 consumer complaints filed against InPhonic with the local chapter of the Better Business Bureau.
The office accused the company of making it "difficult or impossible" for customers to obtain rebates and of not fully disclosing its rebate policies. For example, the company told customers who wanted rebates to submit a cellphone bill that was at least 120 days old as proof that they had made payments. But the papers had to be postmarked within 120 days of when the service began. When customers called InPhonic to complain, the company wasn’t responsive.
InPhonic settled with the D.C. attorney general in November 2006 and agreed to change its advertising and to pay customers who should have gotten rebates. At the time, Donnelly said the company was reducing its reliance on rebates.
The restitution program was only half complete when the company filed for bankruptcy protection last month, according to Bennett Rushkoff, chief of the consumer and trade protection section of the attorney general’s office.
In April, the Federal Trade Commission ordered InPhonic to pay customers it owed rebates and to fully disclose the terms of rebates. Matthew Gold, a lawyer in the FTC’s San Francisco office, said the order is not affected by the bankruptcy filing because the company had to comply within 75 days.
Also in April, InPhonic announced that it would restate its earnings for two quarters in 2006, increasing its loss for the year by $5 million to $7 million and bringing the total loss to $17 million. Company officials blamed inexperienced accounting staff for incorrectly reporting revenue from wireless carriers.
In October, InPhonic put itself up for sale and quickly found a buyer, Versa Capital Management, a private-equity firm in Philadelphia. To help the deal go forward, InPhonic filed for Chapter 11 bankruptcy protection Nov. 8. in Delaware. It listed assets of $120.9 million and debt of $179.4 million. The sale to Versa was approved by the bankruptcy court Dec. 18.
"Rebate claims are among the many items still to be adjudicated in the ongoing bankruptcy process of the old company, none of which are related to the new company," a spokesman for Versa said. "The new company has not and will not engage in any of the rebate programs which were at issue for InPhonic."
As for the restitution program set up by the D.C. attorney general’s office, Thomas Califano, a lawyer with DLA Piper who was involved in the sale, said the District will have to file a claim with the bankruptcy court.
Since InPhonic filed for Chapter 11, Rushkoff said, he has not been optimistic about salvaging the restitution program. Now that the sale has been approved, he said, he may look into restarting it.
InPhonic is also expected to try to get out of the class-action lawsuit. But lawyers representing customers want to continue the case and expand it to include Steinberg and other former executives who they allege made millions off the deceptive rebate practices.
"We want them to know we’re coming for them," said Kevin Roddy, a lead lawyer in the class-action suit.
A few unhappy customers have decided to skip the lawyers and sign up as creditors themselves.
Daniel Vanderpriem of Rancho Mirage, Calif., filed a claim for $50 for one of two rebates that he never obtained after he bought a cellphone in February. The phone was supposed to be free if he mailed in rebate forms. He sent in the necessary paperwork twice, but the rebates never came.
In September, InPhonic sent him one rebate. It was postmarked the day after he called to tell the company’s legal office that he had filed a complaint with California Attorney General Jerry Brown. The experience "has taught me never to buy anything else with a rebate," Vanderpriem said.
