The opinion of the court was delivered by: KIMBA M. WOOD
Defendants move to dismiss the substantially identical complaints in these two actions. Chief Magistrate Judge Nina Gershon issued a Report and Recommendation ("Report") recommending dismissal of four of plaintiffs' seven claims; plaintiffs did not object to that recommendation. This Opinion addresses whether the court should also grant defendants' motions to dismiss the remaining three claims of the complaints. For the reasons stated below, defendants' motions are granted, and the remaining three claims in each complaint are dismissed.
These putative class actions name as defendants NYNEX, New York Telephone Co. ("NYTel"), New England Telephone and Telegraph Co. ("NETel"), several subsidiaries of NYNEX, and several individuals who occupy executive or directorial positions within these corporate entities. Plaintiffs allege that NYNEX and its subsidiaries have conspired to defraud, and have defrauded, the ratepayers of NYTel and NETel in violation of the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et. seq., New York Public Service Law, §§ 91, 93, New York General Business Law, § 349, and the New York common law of fraud and negligent misrepresentation.
The Report recounts the facts alleged in detail, at 3-6; I offer only a brief sketch here. The complaints allege that NYTel and NETel gave regulatory agencies and consumers misleading financial information to support the inflated rates they requested. More particularly, plaintiffs allege a scheme in which certain unregulated subsidiaries of NYNEX sold products and services to NYTel and NETel at inflated prices. NYTel and NETel then used those prices to justify inflated rates, resulting in high profits to the NYNEX corporate family, which profited by extracting higher rates from ratepayers, but did not suffer from the higher "cost" of products and services because these extra costs inured to the benefit of members of the corporate family. The net effect, the complaints allege, was that the ratepayers and the regulatory agencies were misled into believing that certain higher rates were justifiable, and the NYNEX corporate family was able to enjoy inflated profits as a result of its misrepresentations.
Before the court presently is defendants' motion to dismiss on the grounds that the complaints (1) fail to state a claim on which relief can be granted, and (2) fail to plead fraud with particularity. The Report recommended that the motion to dismiss for failure to state a claim should be granted with respect to plaintiffs' claims under 18 U.S.C. § 1962(a), the New York Public Service Law, and the New York common law of fraud and negligent misrepresentation. It recommended that the motion for dismissal of all other claims be denied. Plaintiffs did not object to the Report; defendants objected insofar as the Report recommended denying their motion.
Defendants argue that the filed rate doctrine, discussed in detail below, mandates dismissal of RICO claims based on alleged fraud upon a regulatory commission. At the time the Report was issued, the only appellate decision that directly addressed this issue was Taffet v. Southern Co., 930 F.2d 847 (11th Cir. 1991) ("Taffet I"), which held that the filed rate doctrine did not bar RICO claims against utilities. Largely for the reasons set forth in that decision, Chief Magistrate Judge Gershon recommended that I reject defendants' argument for dismissal based on the filed rate doctrine. Subsequent to the Chief Magistrate Judge's Report, however, the Eleventh Circuit, sitting en banc, reversed its earlier holding, and held that the filed rate doctrine warranted dismissal. Taffet v. Southern Co., 967 F.2d 1483 (11th Cir. 1992) (en banc) ("Taffet II"). Similarly, the Eighth Circuit has recently held the filed rate doctrine applicable in another closely analogous case. H.J., Inc. v. Northwestern Bell Telephone Co., 954 F.2d 485 (8th Cir. 1992), cert. denied, 119 L. Ed. 2d 228, 112 S. Ct. 2306 (1992). For the reasons stated below, I agree with the recent decisions by the Eleventh Circuit and the Eighth Circuit, and I therefore hold that the filed rate doctrine mandates dismissal of the remaining claims in these cases.
I. HISTORY OF THE FILED RATE DOCTRINE
In Keogh v. Chicago & Northwestern Railway Co., 260 U.S. 156, 67 L. Ed. 183, 43 S. Ct. 47 (1922), Justice Brandeis set forth what has come to be known as "the filed rate doctrine." In that case, the plaintiff alleged that the defendant carrier conspired to fix rates for transporting freight, and that this conspiracy violated the Sherman Act. The plaintiff alleged that because he was forced to pay higher rates than he would have absent the conspiracy, he suffered damages to the extent of that difference in rates. He asked the District Court to determine the amount of the damages, and to award him treble damages under the antitrust laws.
The Supreme Court held that where, as in Keogh, the defendant charged a rate that had been filed with and deemed reasonable by the Interstate Commerce Commission, the District Court should not grant the relief sought by plaintiff, but should instead dismiss for failure to state a claim upon which relief can be granted. The court regarded the Commission's determination of the reasonableness of the rates as dispositive of whether the rates were reasonable, even though it credited, for the purposes of argument, the plaintiff's assertion that the filed rate was the product of a conspiracy to inflate prices in violation of the Sherman Act. "All the rates fixed were reasonable and non-discriminatory. That was settled by the proceedings before the Commission." Id. at 49, citing Los Angeles Switching Case, 234 U.S. 294, 58 L. Ed. 1319, 34 S. Ct. 814 .
Justice Brandeis pointed to several considerations in rejecting the Keogh complaint. First, he noted that the Act to Regulate Commerce provided a remedy for injured parties, and that it was improbable that Congress intended to afford another remedy under the Sherman Act. Second, he explained that plaintiff's legal rights were not violated by the charging of filed rates, because those filed rates determine the rights between the customer and the utility. Third, he stated that providing courts with the power to change rates retroactively would result in unequal rates being charged to members of the same class of ratepayers (lower rates for plaintiffs). Fourth, he noted that the judiciary would have to determine whether the new rate it set was reasonable and nondiscriminatory, and that such a determination would require "reconstituting the whole rate structure for many articles moving in an important section of the country." Id. at 164. Finally, he remarked that the "damages alleged are purely speculative." Id.
Subsequent decisions have further developed the rationale for this doctrine. In Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246, 95 L. Ed. 912, 71 S. Ct. 692 (1951), the Supreme Court did not explicitly refer to Keogh or to the filed rate doctrine itself, but the Court nevertheless reiterated some of the concerns articulated in Keogh. The court refused to grant relief to a petitioner who alleged that its predecessor company had paid unreasonably high electric rates to the respondent. According to the petitioner, interlocking directorates between the two companies had produced contracts charging petitioner high electric rates, but the interlocking directorates prevented petitioner's predecessor from complaining about the rates to the rate-making agency. This arrangement, petitioner complained, constituted fraud.
The Supreme Court refused to grant relief, despite the possibility that there may have been fraud, and despite the fact that federal law provided the petitioner with neither an administrative remedy nor a specific cause of action under federal law to redress it. The core justification for this refusal was that plaintiff was asking the court to adjudicate what a reasonable rate would be, and the Court deemed that to be a non-justiciable issue, more appropriately determined by the Commission:
Petitioner gives its case a different cast by alleging that by fraudulent abuse of the interlocking relationship its predecessor was deprived of its independence and power to resort to its administrative remedy.
But the problem is whether it is open to the courts to determine what the reasonable rate during the past should have been. The petitioner, in contending that they are so empowered, and the District Court, in undertaking to exercise that power, both regard reasonableness as a justiciable legal right rather than a criterion for administrative application in determining a lawful rate. Statutory reasonableness is an abstract quality represented by an area rather than a pinpoint. It allows a substantial spread between what is unreasonable because too low and what is unreasonable because too high. To reduce the abstract concept of reasonableness to concrete expression in dollars and cents is the function of the Commission. It is not disembodied "reasonableness," but that standard when embodied in a rate that governs the rights of buyer and seller. A court may think a different level more reasonable. But the proscription of the statute is a standard for the Commission to apply and, independently of Commission action, creates no right which courts may enforce.
The court offered a somewhat different rationale for the filed rate doctrine in Arkansas Louisiana Gas Co. v. Hall ("Arkla"), 453 U.S. 571, 101 S. Ct. 2925, 69 L. Ed. 2d 856 (1981), where, quoting the Court of Appeals for the District of Columbia, the Court wrote, "'The considerations underlying the doctrine . . . are preservation of the agency's primary jurisdiction over reasonableness of rates and the need to insure that regulated companies charge only those rates of which the agency has been made cognizant.'" Id. at 577-78, 101 S. Ct. at 2930. The court's desire to preclude the theoretical possibility of discrimination appears to have driven the decision. Defendant agreed to buy gas from plaintiff at a certain rate, and agreed to a "favored nations clause," which stated that if defendant were to purchase gas at a higher rate from other companies, plaintiff would be entitled to charge defendant that higher rate. Plaintiff filed only the lower rate, but subsequently alleged that defendant had triggered the favored nations clause. On this ground, plaintiff filed an action for breach of contract, seeking to recover the higher rate. The Supreme Court held that the filed rate doctrine barred this action. The court's reason to preserve the filed rate in Arkla was rooted in a concern that courts not disturb the uniformity required by statute and enforced by the Commission. Because the discriminatory rate originated in a contract, the proposed damage award would have been based on a difference between the contract rate and the filed rate; Arkla thus did not place the court in the position of determining a reasonable rate in order to determine damages.
Montana-Dakota and Arkla, like Keogh, show that two companion principles lie at the core of the filed rate doctrine: first, that legislative bodies design agencies for the specific purpose of setting uniform rates, and second, that courts are not institutionally well suited to engage in retroactive rate-setting. Montana-Dakota and Arkla emphasize different aspects of the rationale of the Keogh case. While the Arkla decision focuses on the need to avoid discrimination among rate-payers, Montana-Dakota concentrates on the need for courts to refrain from adjudicating cases that would require them to apply the nonjusticiable standard of "the reasonable rate."
The anti-discrimination strand and the non-justiciability strand of the filed rate doctrine have each appeared in subsequent decisions of the Supreme Court and the lower courts. In a typical discrimination case, such as Maislin Industries U.S. v. Primary Steel, Inc., 497 U.S. 116, 110 S. Ct. 2759, 111 L. Ed. 2d 94 (1990), the plaintiff is an individual seeking to avoid paying the filed rate, on the ground that he was quoted some lower rate. The plaintiff is able, in such a case, to identify the lower rate -- in fact, usually it was the lower rate that the plaintiff paid. By contrast, in the typical justiciability case, the court is asked to determine a lower rate by assessing how much defendants have inflated the rate through their alleged wrongdoing. The latter was the case in Square D Company v. Niagara Frontier Tariff Bureau, 476 U.S. 409, 106 S. Ct. 1922, 90 L. Ed. 2d 413 (1986), where, as in Keogh, plaintiffs alleged that rates had been inflated through an antitrust violation. The court held that the filed rate doctrine mandated dismissal.
Although Keogh pertained to federal regulation, Keogh's rationale applies equally strongly where state law creates a state agency and statutory scheme pursuant to which the state agencies determine reasonable rates. See, e.g., H.J., 954 F.2d at 494 ("we see no reason to distinguish between rates promulgated by state and federal agencies") (citation omitted) Taffet II, 967 F.2d at 1494 ("Where the legislature has conferred power upon an administrative agency to determine the reasonableness of a rate, the rate-payer 'can claim no rate as a legal right that is other than the filed rate. . . .' This principle, which is central to the filed rate doctrine and to our decision today, applies with equal force to preclude recovery under RICO whether the rate at issue has been set by a state rate-making authority or a federal one.") (citations omitted). Finally, as indicated in Arkla, the filed rate doctrine may apply to block state causes of action, as well as federal causes of action.
II. WHETHER THE FILED RATE DOCTRINE APPLIES TO ALLEGATIONS OF FRAUD UPON A RATE-SETTING AGENCY
The parties disagree over whether there is an exception to the filed rate doctrine in a case where the plaintiff alleges that the defendant has committed fraud upon a rate-setting agency. Both parties recognize that footnote 13 in Arkla states, "We save for another day the question whether the filed rate doctrine applies in the face of fraudulent conduct." 453 U.S. at 583, n.12. Although plaintiffs have pointed to two decisions from the Southern District of New York that superficially support a fraud exception to the filed rate ...