Cellular Davids

How two schmucks from Cleveland picked a fight with Verizon -- and set off a brawl.

Ken Stewart's Lodge 1911 N. Cleveland-Massillon Road, Bath 330-666-8881. Lunch: 11:30 a.m. to 4 p.m. Monday through Saturday. Dinner: 5 to 10 p.m. Monday through Thursday, 5 to 11 p.m. Friday and Saturday
Yousef (left) and Leyland say Verizon screwed them out of business. - Wanda  Santos-Bray
Yousef (left) and Leyland say Verizon screwed them out of business.
A kid and a schlep, neither of them very bright. That was the scene, or so it appeared, when Mike Tricarchi first met Randy Hart at the button-down law firm of Hahn, Loeser & Parks. He stood in Hart's office, on the 33rd floor of the BP Building, wearing his standard uniform -- sweatpants, tennis shoes, T-shirt. Tricarchi was among Cleveland's top cell-phone salesmen, and he wanted to discuss suing the nation's largest cell-phone company for stealing his customers.

"If you saw Mike on the street, you might think he needs a couple bucks," Hart says. "He definitely does not look like the typical Hahn-Loeser client."

Then there was Hart, who wasn't even a real lawyer yet. He was 26, recently married, still waiting to see whether he'd passed the bar exam. "I considered myself lucky to have a job," says Hart, who had graduated from Cleveland State's law school three months before. "They could have asked me to scrub the floors, and I would have done it."

Salesmen like Tricarchi helped transform Verizon into a national cell-phone giant. In the mid-'80s, it was a fledgling upstart, with no marketing experience or retail stores of its own. So it contracted with local, independent agents to find customers quickly. The plan worked to perfection. Over the next 15 years, Verizon became a $64 billion behemoth. Along the way, the company discovered that it could reduce competition and hike profits by opening its own stores. So Verizon began to systematically kill off the very independents who built the company. "It just got rid of them," Hart says. "It didn't matter what the law said."

Verizon was only following standard industry practice. Most of the nation's large wireless carriers have been sued for similar behavior. "Agents are being squeezed out of business in almost every state, because the wireless companies don't like the competition," says Carl Hilliard, president of the Wireless Consumers Alliance.

So, back in 1993, a disheveled small-business owner and a wannabe lawyer picked a fight with the cell-phone giant. It would take 10 years before the last punch was thrown. But it would also set off a chain reaction throughout the industry.

There was no cellular service in Cleveland before Mike Tricarchi started selling it. In 1985, he attended Verizon's first meeting for sales agents. (The company was called Cellular One at the time. It became AirTouch in the mid-1990s and later morphed into Verizon.)

Tricarchi already was making a good living selling corporate phone systems. He signed on as a Verizon agent and immediately became one of the company's top dealers in the area. Four years later, Verizon decided it wanted to sell phones directly to consumers. So it bought Tricarchi's two stores.

"They never had a retail sales force of their own until they bought me out," Tricarchi says.

The industry in the 1980s was very different from what it is today. Each city had only enough cellular frequencies for two companies to operate. With so few companies -- and with phones selling for thousands of dollars apiece -- the Public Utilities Commission of Ohio worried that there might never be enough competition to force prices down. So the commission ordered cellular carriers to sell phones and airtime to other, smaller businesses. Those businesses, called resellers, could then compete with the carriers by buying airtime in bulk, repackaging it with their own brand names, and selling it to consumers -- at a lower cost, hopefully, than that of the carriers themselves.

Verizon paid nothing for its first license to offer service in Cleveland. The only thing the utilities commission asked in return was that the company sign an affidavit promising to sell airtime and phones to resellers, and to charge those resellers the same wholesale rates it charged its own stores.

But once Tricarchi sold his stores, he wanted to compete directly with the company by becoming a reseller. For months, Verizon ignored his requests to meet and discuss the idea. Finally the company relented. But Verizon started breaking its promise to the state almost as soon as the agreement was reached. Customers regularly walked into Tricarchi's store with Verizon fliers offering better deals than the company offered Tricarchi wholesale.

"The whole point was to steal customers from me," he says.

The real killer came in 1993, when Verizon began charging Tricarchi the full price for phones. Before that, customers had always bought phones on an installment plan of $4.95 a month. Customers at Verizon's retail stores still got that deal. But customers at Tricarchi's stores now had to pay the full price up front.

"There was no question that was discriminatory," Hart says. "Mike couldn't compete against that."

Tricarchi also tried to become a reseller for Cingular Wireless (at the time called Ameritech). The company flatly refused to offer him wholesale rates.

"If they didn't want to follow the rules, they shouldn't have asked for the license," Hart says.

In October 1993, Tricarchi and Hart filed their lawsuit against Verizon and Cingular. At five and a half pages, it's rather cute. Verizon and Cingular responded with 13 separate motions to dismiss the case. They larded up the Public Utilities Commission with hundreds of procedural motions, and Verizon eventually sued the commission itself. Cingular took the matter all the way to the U.S. Supreme Court, claiming a federal law that bars states from setting the price of cellular service trumped any state law.

"That wasn't the issue at all," Hart says. "They could have charged $1,000 a phone, Mike didn't care. Whatever rate they were charging themselves, that's what Mike wanted."

But Verizon and Cingular's evasion had everything to do with the industry's national strategy. In a report commissioned by Verizon, one industry representative admitted that his company gave consumers better prices than resellers, "And if that creates problems for our resellers, that's why we have lawyers," the executive said.

"They've got big-time lawyers, so they're going to hit you with an avalanche of paper," says attorney David Franklin. "It's a means of intimidation. They know that if they can knock it up to federal court, most plaintiffs will just give up." At one point during the battle, Verizon had so many lawyers in Cleveland that it had to rent an entire floor of the Renaissance hotel to house them, Hart says.

The strategy didn't work against Tricarchi, but it did have a chilling effect on other salesmen who considered suing the big companies for stealing their customers. A number of dealers interviewed for this story refused to speak on the record about their problems with Verizon, fearing the company might shut them down. They also fear the enormous cost of a legal battle if they try to sue for damages.

"You gotta have a lotta money and big cojones to go up against these guys," Tricarchi says. He estimates it cost him $3 million to $4 million to pursue his suit. "Very few people do it, because it's so expensive."

The procedural backflips were complicated, but when Verizon and Cingular finally faced Tricarchi in a trial, their strategy was stunning in its simplicity. Both companies admitted they violated the commission's orders. Michael Yoder, Verizon's director of pricing at the time, confessed that his company did not allow resellers to buy wholesale.

Their only defense, therefore, was that the commission's orders were stupid. They paid Ohio State University marketing professor Roger Blackwell to testify that they should be able to charge Tricarchi whatever they wanted "in order to keep existing customers and increase respective market shares."

The commission took two years to wade through the mountain of evidence. "Based on AirTouch Cellular's own admission," the agency finally ruled, " the Commission finds that AirTouch Cellular has violated [commission orders] . . . in the absence of any reasonable justification."

The 100-page decision gave Verizon and Cingular a drubbing, but the commission cannot award damages. For that, Tricarchi and Hart had to go to court. Verizon and Cingular waited until the last possible moment -- the morning of their trial last March -- to negotiate damages.

"They love stalling," says Franklin. "They love to make you sweat."

Cingular eventually paid Tricarchi $22 million for refusing to do business with him. The terms of the Verizon settlement are sealed. But George Patton, one of Verizon's lawyers, boasts on his résumé that he saved the company 80 percent of Tricarchi's $1.5 billion damages claim. That would mean Verizon paid Tricarchi somewhere in the neighborhood of $300 million.

"To say we had our heads handed to us on a platter is a misrepresentation of the facts," says Tom Minardo, the company's sales director for Ohio and Pennsylvania. "We reached a settlement agreement that was amicable to both sides."

Since Verizon found the Tricarchi settlement so amicable, it probably won't have a problem cutting a few more checks. Two other Cleveland salesman, Ron Leyland and Amid Yousef, are also looking for payback.

Amid Yousef loves to tell the story of how he came to Cleveland from Syria in 1976. He was 16 and had $100 in his pocket. His brown eyes gleam, and he shakes the gold bracelet that dangles loosely on his wrist as he describes how he walked around the city offering to wash people's cars. He didn't speak English, so he wrote a clumsily worded letter to introduce himself.

"I had no idea what I was doing," Yousef says. "I just knew I wanted my own business."

Yousef eventually founded Auto Accents, a car detailing company, in 1985. That same year, he became a Verizon agent.

"A restaurant brings people in with the food and makes its money selling liquor," he says. "I brought people in with car stereos and made my money off cell phones."

Yousef was Verizon's top agent from 1992 until 1995, when Ron Leyland entered the business. For the next five years, Leyland was Verizon's top salesman in Northeast Ohio, and Yousef was No. 2. Each made millions of dollars a year.

"In the early days, being an agent was very lucrative," says Hilliard of the Wireless Consumers Alliance. "That was before the carriers really started to go after the agents to shut them down. Back then, the carriers needed them."

While resellers like Mike Tricarchi made their money as does any other retailer, buying low and selling high, Leyland and Yousef were agents who brought customers directly to Verizon. Both men barely broke even when they activated a new customer. The real money came from residuals -- a percentage of the customer's monthly bill paid to agents for the duration of the contract.

"If you're an agent, residuals is the name of the game," Yousef says. "That's my 401(k)."

From selling a few dozen phones a month, Leyland and Yousef grew to sell more than two thousand a month. Both helped Verizon become the largest cell-phone carrier in Northeast Ohio, they say. In 2002, the company recorded $4 billion in profits.

And then, Yousef and Leyland say, Verizon stabbed them in the back.

"They shut us down so they could steal our customers," says Leyland.

Verizon took away Leyland and Yousef's ability to sell phones on an installment plan, which forced their customers to buy phones up front. Then Verizon refused to sell Yousef or Leyland the same new, stylish phones that it advertised in TV and newspaper ads. Customers stopped coming to Yousef and Leyland, and started flocking to Verizon stores. Eventually, Yousef and Leyland could no longer afford to pay their salespeople competitive wages. Leyland had over 200 salespeople at his peak, some of whom made salaries close to $100,000 a year, he says. He had to fire them all.

"We were contributing millions to the Cleveland economy," Leyland says. "Verizon took that away from us."

Both Leyland and Yousef considered hiring low-paid employees to staff new retail stores. But Verizon also cut their advertising budgets from $65 per activation to $10. Leyland's ad budget dropped from $1 million a year to $25,000 in 2002, which made it difficult for him to draw customers. The retail idea fizzled.

"The changes they made in the contract made my business model became completely impossible," Leyland says.

Verizon also created new quotas, saying Leyland and Yousef each had to sell 200 phones a month or risk losing their contract. Before the contract changes, Leyland's aggressive salespeople regularly sold around 2,500 a month. But when Verizon made it impossible to compete with its own retail stores, neither Leyland nor Yousef made quota for two consecutive quarters. Verizon terminated their contracts in April.

"I personally know of agents who haven't made quota for years, but Verizon keeps them on," Leyland says. "They only came after us because we were too successful, and they owed us too much money in residuals."

"That's categorically not true," says Minardo, Verizon's sales director, who served as Leyland and Yousef's main contact with the company. "My bosses tell me to expand my business, which means bringing in new agents and getting existing agents to expand their business. What they're telling you is inconsistent with what I do for a living and our behavior as a company."

To Verizon, this is about two agents who didn't make quota. "This is a fast-moving industry," Minardo says. "If you don't change your business model to change with the times, you may lose your business."

Verizon also claims it has the right to deny both men the millions of dollars in residuals they built up over the years. Leyland spent months negotiating with the company to get at least a year's worth of residual payments. Verizon offered substantially less.

"There's no way we're going to accept that," Leyland says.

Agents across the county have made the same allegations. A lawsuit under way in Chicago is gaining particular interest from agents who hope to sue the major carriers. Scott Kempner began selling phones for Cingular in 1990. By 1998, he had over 10,000 people signed up. But Kempner says Cingular began to steal customers from him. At one point, Cingular even tried to steal two of Kempner's customers as they were standing in his own store. Kempner tape-recorded the conversations. One customer was checking his voice mail when he received this message: "Hi, Gene. This is Jennifer, the girl you just talked to at Cingular Wireless. I needed to tell you something that I forgot. I forgot to tell you that you should go to 333 West Touhy Avenue, because there is a Cingular store, and that's where you will be able to get your free phone. Don't go to the Kempner one; go to the one at 333 West Touhy Avenue."

"He gets this message, and he was so appalled by it that he told our salesperson," says Kempner, who was forced to close his business in July. "They were undermining us, because they weren't giving us the same equipment and service prices. And when I questioned it, they told me I was getting the same prices. That's fraud."

Kempner's trial began last week. Meanwhile, Randy Hart filed lawsuits for Leyland and Yousef on Monday. No matter what happens, two of Cleveland's largest independent cell-phone dealers remain out of business. That could leave Northeast Ohio consumers to pay the price.

"The trend is for more company stores and fewer agents," says Hilliard. "From a consumer's point of view, it's always helpful to have more competition rather than less."

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