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AM. TEL. & TEL. v. NORTH AM. INDUS.
August 22, 1991
AMERICAN TELEPHONE & TELEGRAPH COMPANY, PLAINTIFF,
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.
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.
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
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.
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.
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
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 ¶ 8) and therefore not artificially narrow. NYTel
has also alleged no facts to suggest that AT & T and ...