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AM. TEL. & TEL. v. NORTH AM. INDUS.

August 22, 1991

AMERICAN TELEPHONE & TELEGRAPH COMPANY, PLAINTIFF,
v.
NORTH AMERICAN INDUSTRIES OF NEW YORK, INC., DEFENDANT AND THIRD-PARTY PLAINTIFF, V. NEW YORK TELEPHONE COMPANY, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Mukasey, District Judge.

    OPINION AND ORDER

This is a motion to dismiss the third-party complaint by third-party defendant New York Telephone ("NYTel") for failure to state a claim under the antitrust laws. For the reasons set forth below, NYTel's motion is granted as to NAI's claim for common law unfair competition and is otherwise denied.

I.

Plaintiff American Telephone and Telegraph Company ("AT & T") has sued defendant/third-party plaintiff North American Industries ("NAI") seeking payment for certain long distance calls placed from NAI's pay telephones. NAI contends that those calls were fraudulently placed by NAI customers and that it should not be required to pay for them. Rather, third-party defendant NYTel should pay for them because its refusal to provide to NAI pay telephones certain central office interconnection services that are provided to NYTel pay telephones makes it possible for telephone service thieves to place fraudulently billed telephone calls from NAI-owned pay telephones. NAI alleges that NYTel's refusal to provide these services violates § 2 of the Sherman Act.

NAI is a reseller of telecommunications services through public pay telephones. To receive a dial tone and connection with the networks of long distance carriers such as AT & T, pay telephones must be connected to local exchange companies ("LECs"). NYTel, the LEC in southern New York, has a lawful monopoly on the provision of dial tones and interconnection services.

NAI contends that NYTel has violated the antitrust laws by not allowing NYTel's competitors in the pay telephone market to have access to the services and facilities within NYTel's central office that are available to NYTel pay telephones. NYTel's failure to provide similar services results in increased costs of operation to its competitors, including NAI. According to NAI, NYTel's refusal to provide these services is part of an attempt to regain the monopoly on public pay telephone services it lost when the industry was deregulated in 1985.

According to the third-party complaint, NYTel pay telephones are connected to "coin service" lines. Coin service lines lead to central office equipment which is programmed to block completion of calls made from NYTel's pay telephones unless the central office equipment detects that the NYTel pay telephone has received proper payment or billing instructions, either through the deposit of coins or the giving of a valid calling card or third party billing number. NYTel's competitors in the public pay telephone market are provided access only to NYTEL's "business lines." Those lines are essentially the same as the service lines that are installed at any business location, and do not provide access to the central office facility that blocks calls until payment or proper billing instructions are received. NYTel's competitors are therefore forced to purchase "smart telephones." Such telephones are designed to detect and block fraudulently billed calls.

NAI contends that smart telephones are inadequate substitutes for access to coin service lines because they do not prevent "clip on" or secondary dial tone fraud. "Clip on" fraud occurs when a telephone service thief "clips on" to a NYTel-provided NAI service line, thereby eluding the protections that have been built into smart telephones. According to NAI, NYTel's installers invariably leave service lines exposed, and therefore subject to clip on fraud. Potential telephone service thieves splice into the telephone lines between the smart telephone and the central office, connect their own telephones, and make direct calls which are then billed to NAI in the absence of alternative billing instructions.

Secondary dial tone fraud occurs as follows: because the dial tone provided by NYTel permits unrestricted access to local and long distance telephone networks, NAI's smart telephones are programmed to provide customers with a false dial tone until the phone has detected receipt of proper payment for the call. After proper payment or billing instructions are received, the smart telephone allows the caller access to NYTel's dial tone and, therefore, other telephone networks. Smart telephones are also programmed to detect when a call has ended so that it can sever immediately connection to the central office's unrestricted dial tone. The telephone severs the connection when it senses the momentary drop in line voltage (a "wink") that occurs when the called party's central office equipment returns a dial tone to that party's telephone. According to NAI, NYTel has altered its "wink" to a signal that smart telephones are not programmed to recognize, without informing NAI or other NYTel competitors, for the purpose of foiling its competitors' smart telephones. Telephone service thieves can therefore dial local calls from NAI's telephones, wait for the called party to hang up and then "grab" the unrestricted dial tone generated by NYTel's central office, thereby gaining unrestricted access to the long distance telecommunications network. Those calls are billed to NAI. Both types of telephone service fraud allegedly would be prevented if NAI had access to the central office facilities that NYTel pay telephones use.

NAI also contends that different central office facilities and services provided NYTel's competitors, including NAI, prevent AT & T's long distance or international operators from obtaining information necessary to reject attempts to bill operator assisted, collect and third party billed calls to NAI's pay telephone lines. NYTel provides to its own pay telephones a service which automatically alerts long distance and international operators that a call is being placed from or billed to one of its own pay telephones. Those operators therefore know that they must detect coin deposits or otherwise receive valid billing information before completing the call to or from that pay telephone station. The third-party complaint alleges that despite NAI's repeated demand for and payments to NYTel for this particular call screening service ("Code 88"), NYTel has failed and refused to program its database so that long distance and international operators can identify NAI public access lines as pay telephones. Long distance and international operators therefore do not block calls placed to or from NAI pay telephones when no billing information is provided. NAI is then billed for those calls.

Callers from NYTel pay telephones cannot complete international calls. Those calls are blocked automatically by the central office equipment to which coin access lines are connected. The third-party complaint alleges that despite NAI's demands and payments for this service, NYTel has failed and refused to provide international call blocking. NAI is therefore subject to substantial direct dial international call fraud.

Third-party defendant NYTel moves to dismiss for failure to state a claim.

II.

Third party plaintiff NAI advances three different theories for finding NYTel liable under the antitrust laws. It alleges that NYTel wields unlawful monopoly power over the pay telephone market in the New York City metropolitan region, that NYTel is attempting to monopolize the pay telephone market in the New York City metropolitan region, and that NYTel has control over an essential facility which it unreasonably denies to NAI for the purpose of monopolizing the pay telephone market. Based on the facts alleged in NAI's third-party complaint, and accepting those facts as true, as I must, I find that NAI has stated a claim for a violation of § 2 of the Sherman Act.

A. Monopoly Power

To state a claim for unlawful monopoly under § 2 of the Sherman Act, NAI must allege that NYTel possesses monopoly power in the relevant market and that it willfully acquired or maintained that power in a manner that was not the result of a superior product, business acumen, or historical accident. United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966). Monopoly power means the power either to control prices or to exclude competitors from the relevant market. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 1005, 100 L.Ed. 1264 (1956). NAI cannot show that NYTel possesses the power to control prices, because pay telephone rates are regulated by the New York Public Service Commission ("NYPSC"), therefore NAI must show that NYTel possesses the power to exclude competition.

NAI alleges that NYTel possesses monopoly power in the pay telephone service market in the New York City Metropolitan area. Its complaint alleges that as of October 29, 1990, NYTel controlled approximately 85% of the pay telephones in that geographic area and that NYTEL's pay telephones generated approximately 75% of the revenues generated by all pay telephones in the area.

NYTel argues that the relevant market is improperly defined as pay telephones provided by NYTel and other "small, privately-owned pay telephone operators" in New York City and Nassau, Suffolk and Westchester counties. NAI therefore overstates NYTel's market share by excluding from the product market pay telephones owned by large, publicly owned pay telephone providers. NAI responds that the product market is "the provision of pay telephone services to the public," (Complaint at ΒΆ 8) and therefore not artificially narrow. NYTel has also alleged no facts to suggest that AT & T and ...


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