ThinkProgress

Lawsuit reveals how tech companies profit off the prison-industrial complex

Prison inmates make one of their daily allotment of six phone calls at the York Community Reintegration Center on May 24, 2016 in Niantic, Connecticut. (Credit: John Moore/Getty Images)

On the day he was released after nearly 30 years in the California prison system, Joe Rudy Reyes was taken to a bus station. A corrections officer handed him a debit card preloaded with $442.20 — the balance in his inmate trust account, plus an additional $200 from the state to help him get home. So began a year-long nightmare as Reyes tried unsuccessfully to access his own money.

In January, Reyes, with representation by the Human Rights Defense Center, filed a proposed federal class action lawsuit against JPay, Inc., a prison technology giant and subsidiary of Securus Technologies, Inc. The Reyes v. JPay complaint, filed on behalf of every person who has received a JPay card upon release from prison, alleges the company’s policies are monopolistic and illegal.

According to the complaint, JPay charged Reyes a series of fees, including a $3 “monthly maintenance fee” and a $1 ATM decline fee. The card stopped working after Reyes purchased bus tickets, a prepaid cell phone, and lunch. When he called the number on the back of the card, Praxell, a company providing customer service for prepaid cards, told him his account was frozen due to “suspicious activity.” For months, Reyes dutifully followed an ever-changing set of requirements to regain access to the card, including sending a copy of his driver’s license (which had long since expired after 30 years in prison system), obtaining a notarized letter proving his place of address, and contacting his former prison. When he called Praxell one year after his release, an automated system told him the account was closed.

The lawsuit alleges that JPay “took full advantage of Mr. Reyes’s complete lack of bargaining power,” and outlines even higher fees on JPay release cards in other states. It alleges that “defendants have engaged in a pattern and practice of freezing accounts for supposed ‘fraudulent activity.” The complaint continues: “Defendants deliberately place additional conditions on access to frozen accounts as each condition is met, in a conscious attempt to delay a cardholder’s access to his or her funds. The longer the delay, the more maintenance and decline fees Defendants can extract from the account.”

JPay did not respond to a request for comment. The lawsuit also names Praxell as another defendant, as well as the card issuer, Sunrise Banks National Association.

Exploiting captive customers

Prepaid release cards are one of many services provided by prison communication companies, which together make up a $1.2 billion business. JPay technologies are used in more than 33 state prison systems. Its parent company, Securus, offers products that affect more than 1.2 million people incarcerated across 2,200 facilities in 47 states. In 2014, Securus took in about $405 million in revenue.

At least 17 state prison systems and the Federal Bureau of Prisons issued release cards in 2014, as well as many county jails. JPay managed release cards for at least 10 of the states, while other jurisdictions contracted with companies like JPMorgan Chase, Keefe Group, Numi Financial, and Rapid Financial Solutions.

Federal law states that consumers cannot be forced to accept salaries or government benefits through electronic methods; they must have another option, such as cash or check. Since prison release cards are not considered government benefits, they fall through the cracks.

The current class action suit, however, argues that release funds are a government benefit, and therefore, Reyes should not have been forced to accept his in debit card form. It also alleges that the defendants violated the fifth amendment protection of private property, and that JPay violates California anti-monopoly law.

“Clearly, these cards are designed to make it impossible to avoid fees.”

This is not the Human Rights Defense Center’s first battle with prison release card companies. In 2015, it joined 67 other organizations in urging the Consumer Financial Protection Bureau (CFPB) to add language explicitly closing the release card loophole and banning all release card fees. “If this business model cannot exist without forcing or unduly pressuring customers into using it,” it publicly commented, “then HRDC suggests that an end to release debit card programs is appropriate.”

In 2016, the CFPB did issue new prepaid debit card rules, which did not address the loophole, but did specify that correctional facilities must provide clear fee disclosures and access to account histories, in what criminal justice think tank Prison Policy Initiative called a “partial win.”

Correctional departments say release cards limit employee theft and reduce labor costs. According to the complaint, the California Department of Corrections and Rehabilitation calculated that switching to cards would save more than $878,500 a year. In the past, JPay argued that cash and checks upon release are “problematic for correctional agencies and released inmates.”

But Lauren Saunders, an attorney for the National Consumer Law Center, called it “outrageous” for release cards to charge fees to access one’s own money, in a 2015 CFPB comment, writing, “Clearly, these cards are designed to make it impossible to avoid fees.”

In 2014, JPay’s then-CEO Ryan Shapiro told the Center for Public Integrity that release cards are “not really a revenue-generating or a money-making business for us,” and that the fees go to middlemen who process the payments. But the release cards benefit JPay’s bottom line by helping the company win contracts with correctional departments that then use JPay’s entire suite of (profitable) technology services. As Securus prepared to acquire the company in 2015, it put together an internal presentation (which was later made public by the Prison Policy Initiative) outlining JPay’s three main categories of services:

Some of these services do provide genuine value for incarcerated people and their loved ones. Sending an email or video-gram from a prison-approved tablet is quicker, more convenient, and sometimes even more intimate than mailing a letter. But these services are not always provided with prisoners’ interests in mind. In a 2015 report, Prison Policy Initiative outlined the ways companies like JPay encourage jails to replace in-person visitation with video — while passing the cost onto the consumer.

According to Securus’ presentation, “Payment services” was JPay’s most lucrative category in 2014, bringing in $53.9 million of the company’s $70.4 million in revenue. That year, JPay’s money transfer services covered 71 percent of state prisoners. In many states, JPay transfers are the only way for family members to deposit money into their incarcerated loved ones’ accounts. Each transfer incurs fees, which have reached 45 percent on some transfers in some states.

Incarcerated people and their families often already struggle to get by financially. Prior to their incarceration, prisoners’ median annual income was 41 percent lower than non-incarcerated people of a similar age. And more than half of parents in state prisons were previously their children’s primary financial supporters, according to the most recent available data from the Bureau of Justice.

In general, companies earn government contracts by offering high-value services at a low rate. But in the world of prison technology, many states award contracts to companies that offer the greatest kickbacks, known as commissions. Securus paid $1.3 billion in commissions between 2004 and 2014.

In 2013, 15 Democratic senators criticized commissions in a letter to the Federal Communications Commission (FCC) for “incentivizing a regime in which prisons profit from charging inmates higher rates. What may come as a financial benefit to institutions comes at a serious social cost.”

In many states, JPay transfers are the only way for family members to deposit money into their incarcerated loved ones’ accounts.

The senators were referring to perhaps the best-known effect of privatized prison services: shockingly expensive phone calls. As with prepaid release cards, prisoner advocates believe companies like Securus’ calling fees exploit literally captive customers, who cannot call home unless their family members set up accounts with private companies.

In October 2015, the FCC capped the cost of most prison calls at $0.11 to $0.22 per minute, and forbade companies from passing the cost of commissions onto their customers. Prior to the ruling, some calls ran as high as $14 per minute. In its decision, the FCC stated that prison phone providers “operate as unchecked monopolists. The record indicates that, absent regulatory intervention…rates and associated ancillary fees likely will continue to rise.”

Leading up to the vote, hundreds of people filed FCC complaints, calling Securus and its competitors’ business practices exploitative and deceptive. One person described adding money to her Securus account, only to discover it was erroneously added to another account — and then failing to receive a refund even after faxing in a phone bill. A Texas resident who said it cost $250 a month to talk to her husband wrote in frustration, “I’ve signed petitions, I’ve written the FCC, I’ve been involved in campaigns, I’ve networked on social media, I’ve posted time and again for the corruption of these companies profiting off of me and my family.”

“A microcosm for everything that is wrong with the prison-industrial complex”

Studies show that incarcerated people who maintain close contact with their families have better outcomes and are are less likely to reoffend upon release. Communication can also help reduce strain on family members, including the 7 percent of American children who have had a parent incarcerated at some point in their lives.

Major prison phone companies appealed the FCC’s ruling, claiming caps would leave them unable to afford their commissions. Securus called the caps a “business-ending event.”

In the middle of that legal battle, newly-appointed FCC Chairman Ajit Pai instructed FCC lawyers to cease court defense of the agency‘s own caps in February 2017. At the time, the Human Rights Defense Center questioned Chairman Pai’s objectivity, as he had previously represented Securus as an attorney. A group of organizations picked up legal defense of the caps, but the federal appeals court ruled in favor of the phone companies in June 2017.

Federal Communications Commission (FCC) Commissioner Ajit Pai testifies before the Senate Judiciary Committee's Privacy, Technology and the Law Subcommittee in 2016. (CREDIT: NICHOLAS KAMM/AFP/Getty Images)

Securus was acquired for $1.5 billion in November 2017 by Platinum Equity, a private equity firm owned by billionaire Tom Gores, who also owns the Detroit Pistons. The seller, private equity firm Abry Partners, made $960 million on the sale. “All of that money came from charging inmates and their families excessive rates,” an attorney representing families of incarcerated people told Bloomberg.

Objectors called the sale “a microcosm for everything that is wrong with the prison-industrial complex” in an FCC filing, and accused Securus of ignoring rules and caps. The FCC bans companies from charging a fee for connecting calls, but the groups claim Securus sidesteps this by charging a high rate for the call’s first minute. In an FCC filing, Securus defended the practice: “Nowhere in the rules is there a requirement that all per-minute charges be equal.”

Securus continues to grow. This January, it acquired GovPayNet, which processes credit and debit card payments for court fines, bail, traffic tickets, and real estate and property tax. The company’s 2015 internal presentation listed its lineup of services. In addition to standard prison technology — “audio outbound inmate calling, video visitation, parolee GPS monitoring, inmate tablets” — it includes a variety of lesser-known services: “voice biometrics, data analytics, jail management systems, interactive voice response systems, managed access service (wireless contraband), location based services, and mobile marketing services.”

According to the presentation, 100 percent of Securus’ business fell under government regulation in 2007 — but by 2015, just 35 percent was government-regulated. “By investing in businesses that are not regulated by the FCC/ PSC/ PUCs, Securus has successfully decreased its exposure to potential rate of return regulations,” the slide reads.

Reyes v. JPay is still in its early stages. JPay’s user agreement states that users must resolve disputes through individual arbitration, a less formal process that uses neutral arbitrators instead of a judge or jury. Due to this stipulation, a federal judge ruled in July 2017 that JPay did not have to face a class arbitration in another case brought by users who alleged the company’s money transfer policies violate Florida law.

But another ongoing case may give Reyes hope. Danica Brown, also represented by HRDC, is the lead plaintiff in a class action suit brought against Numi Financial, the leading provider of prepaid release cards for jails. Brown was arrested in Oregon while protesting the shooting death of Michael Brown in 2014, and was forced to accept her money on a prepaid card upon release. Numi Financial attempted to have Brown’s class action dismissed and replaced with arbitration, based on her cardholder agreement, but the federal judge allowed the case to move forward in February 2016.

That judge’s reason for denial echoes complaints release card recipients have been making for years: “Plaintiff’s lack of real alternatives when accepting the card.”