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BLACK RADIO NETWORK, INC. v. NYNEX CORP.
April 14, 1999
BLACK RADIO NETWORK, INC., A NEW YORK CORPORATION, AND NEWS TRANSMISSION SERVICE, INC., A NEW YORK CORPORATION, STATISTICAL PHONE PHILLY, 8484 ASSOCIATES, ERIC SINGLETON D/B/A "PHONE SERVICE," AND ANTHONY COLANGELO, PHONE PROGRAMS, INC., A NEW YORK CORPORATION, AND ACCURATE INFO LTD., A FLORIDA LIMITED PARTNERSHIP, PLAINTIFFS,
NYNEX CORPORATION, A DELAWARE CORPORATION, NEW YORK TELEPHONE COMPANY, A NEW YORK CORPORATION, AND DOES 1 THROUGH 25, DEFENDANTS.
The opinion of the court was delivered by: Chin, District Judge.
The subject of these consolidated cases are the 976 telephone
numbers that one may call to hear information on such topics as
sports, financial news, horoscopes, and the weather. Plaintiffs
are information providers ("IPs") that produce the recorded
messages. Defendants NYNEX Corporation ("NYNEX") and New York
Telephone Company ("NYTel") are carriers that deliver plaintiffs'
recorded messages to thousands of simultaneous callers through
NYTel's Downstate Dedicated Mass. Announcement Service ("MAS").
Pursuant to contract and tariffs, defendants are responsible for
maintaining equipment to tally the actual number of calls made to
each IP's 976 numbers, collecting the charges for those calls,
and distributing to the IPs their portion of the revenue
collected based on the number of calls made to each 976 number.
Plaintiffs' claims involve three core factual allegations.
First, plaintiffs allege that, unbeknownst to them, the equipment
used by defendants prior to 1990 was not accurately recording the
number of calls. Instead of paying plaintiffs for the number of
calls actually recorded by the equipment, defendants instead
estimated the number of calls. Defendants failed to disclose to
plaintiffs, however, that the payments were based on mere
estimates and they falsely represented to plaintiffs that the
tallies were accurate and based on the actual number of calls
recorded by the equipment. Second, plaintiffs allege that
defendants unilaterally replaced the original MAS system with
another system that defendants and proposed additional
defendants, the new system's manufacturer, knew to be unreliable
and incapable of accounting for the volume of calls placed to
plaintiffs' 976 numbers. Third, plaintiffs allege that defendants
engaged in misconduct before the New York State Public Service
Commission (the "PSC"), the administrative body responsible for
Plaintiffs assert several federal and state causes of action,
including violations of the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), 18 U.S.C. § 1961 to 1968, and the
Federal Communications Act ("FCA"), 47 U.S.C. § 201 to 207.
Plaintiffs move for leave to file amended and supplemental
complaints naming additional defendants pursuant to Rules 15 and
21 of the Federal Rules of Civil Procedure. Defendants cross-move
for an order dismissing the complaints with prejudice pursuant to
Rules 9(b), 12(b)(1), and 12(b)(6). For the reasons set forth
below, defendants' cross-motion is granted in part and denied in
part and plaintiffs' motion is granted.
As alleged in the proposed amended and supplemental complaints,
the facts are as follows:
Prior to September 1990, defendants used equipment manufactured
by the Audichron Company ("Audichron") to play the IPs'
pre-recorded messages to the calling public. The Audichron
equipment, known as the AUTRAX system, kept a "peg count" by
mechanically counting each call to 976 numbers, including local
and toll calls, as well as intrastate and interstate calls.
Defendants represented that AUTRAX was capable of providing
access to thousands of callers simultaneously. Defendants were
obligated to pay the IPs for each call made to a 976 number.
Accordingly, defendants issued monthly reports purporting to set
forth the actual peg counts as recorded by AUTRAX.
Plaintiffs were not notified of this change in procedure and
continued to believe that the altered figures were the peg counts
recorded by AUTRAX. When one NYTel employee expressed her view
that the IPs should be informed of the truth, her supervisors
insisted that this information be kept from the IPs lest they
demand higher compensation to make up for lost calls. Audichron
also knew the full extent of the unreliability of AUTRAX,
concealed the defects, permitted the system deficiencies to
continue unabated, and withdrew its support of the system. By the
late 1980s/early 1990s, AUTRAX was so unreliable that the call
counts were based almost entirely on manual alterations. Because
the IPs were unaware of the problems with AUTRAX, they did not
challenge the accuracy of call counts or contest the amount of
On August 8, 1990, defendants announced their unilateral
decision to replace AUTRAX with equipment manufactured and sold
by Telefonaktiebolaget LM Ericsson ("LM Ericsson"), Ericsson
North America, Inc. ("Ericsson N.A."), and Ericsson Network
System, Inc. ("Ericsson NSI"), (collectively, "Ericsson"),*fn1
an event that became known as the "Ericsson cutover." The IPs
were not consulted or given prior notice of the switch.
Defendants knew that, like AUTRAX, the Ericsson equipment was
ill-suited for the high volume of calls made to 976 numbers.
Because defendants were aware of problems experienced by other
IPs on other Ericsson networks, they knew or should have known
that the Ericsson equipment likely would be unable to serve the
significantly higher call volume for 976 service. In addition,
defendants knew that the Ericsson equipment gave a low priority
to data collection, and that, despite representations to the
contrary, defendants conducted little or no testing of the
Ericsson equipment prior to the Ericsson cutover and failed to
follow standard practices and procedures prior to introducing the
Ericsson switch to the 976 network.
Despite defendants' knowledge of the problems with the Ericsson
system, they represented to and assured plaintiffs that the
replacement of AUTRAX with the Ericsson equipment would be
"transparent," that is, that there would be no disruption or
diminution in service to the 976 network and no reduction in the
network's capacity to handle calls to 976 numbers, that
plaintiffs and the other IPs would not have to make any changes
in their operations, and that service would actually improve as a
result of the Ericsson cutover. Ericsson was also aware of the
deficiencies in AUTRAX as early as 1988 and participated in
deceiving the IPs regarding the reasons for the conversion to the
Ericsson system and concealing from plaintiffs the Ericsson
3. The Administrative Proceeding
After the Ericsson Cutover, because of the sudden drop in call
counts, several IPs complained to the PSC that the new system was
not accurately completing or counting calls. New York Tel. Co.
v. Public Serv. Comm'n, 179 Misc.2d 301, 684 N.Y.S.2d 829 (N Y
Sup.Ct. 1998). To address the IPs' concerns regarding call
counting, as well as many other complaints concerning service,
the PSC commenced an omnibus proceeding on May 29, 1993 to
address all issues relating to the 976 MAS system.*fn2 (Id.).
In Phase I of this proceeding, the PSC approved in part a Joint
Proposal, filed by NYTel and several IPs, that resolved many of
the issues. PSC Op. No. 94-14 (June 1, 1994), modified in part
by PSC Op. No. 95-10 (Aug. 2, 1995). Pursuant to an October 1,
1993 ruling by Administrative Law Judge Frank S. Robinson (the
"ALJ"), the remaining issues were to be decided in Phase II of
Phase II of the omnibus PSC proceeding culminated in the
issuance by Judge Robinson of a comprehensive, 189-page
recommended decision on January 17, 1997 (the "Recommended
Decision").*fn3 The Recommended Decision was based in part on
evidentiary hearings that yielded more than 5,000 pages of
transcript and 175 exhibits. Recommended Decision at 2. Judge
Robinson rejected the claims of two IPs, including plaintiff
Black Radio Network, Inc. ("Black Radio"), for compensation for
Audichron call count errors and manual adjustments. Id. at 150.
Judge Robinson also found that NYTel's actions in connection with
the Ericsson cutover were characterized by gross negligence and
wilful misconduct. Id. at 145. Judge Robinson also concluded
that NYTel "mishandled the cutover, causing the IPs to lose large
numbers of calls and, consequently, large numbers of customers."
Id. at 143. Although the ALJ recognized that the PSC "cannot
award conventional negligence damages, which must be sought in
Court," he recommended that the IPs be awarded the equitable
remedy of "refunds" from NYTel totalling $25.2 million.
Recommended Decision at 145, 152.
On May 27, 1997, the PSC issued an opinion and order adopting
Judge Robinson's Recommended Decision in substantial part. The
PSC declined to direct NYTel to pay Black Radio for pre-Ericsson
cutover calls according to the original Autrax call counts. PSC
Op. No. 97-7, at 10. The PSC agreed with Judge Robinson's
"findings and conclusions concerning [NYTel's] conduct in
connection with the [Ericsson] cutover." Id. at 9.
Specifically, the PSC found that NYTel "committed gross
negligence and . . . engaged in deliberate misconduct." Id. at
15. The PSC concluded, however, "that the question of an
appropriate remedy must be left to the courts" because Judge
Robinson's proposed refund remedy amounted to an award of damages
that the PSC lacks jurisdiction to make. Id. at 9-10.
IPs, including Black Radio, and defendants filed separate
Article 78 Proceedings in New York Supreme Court, Albany County,
challenging various aspects of the PSC's May 29, 1997 order and
opinion. New York Tel. Co. v. Public Serv. Comm'n, No. 5655-97;
Black Radio Network, Inc. v. Public Serv. Comm'n, No. 5949-97;
Evans v. Public Serv. Comm'n, No. 6019-97. The proceedings were
consolidated on October 24, 1997. On December 4, 1998, the
Supreme Court (Ceresia, J.) issued a decision denying the relief
requested in the consolidated petitions and confirming the
determination of the PSC in its entirety. New York Tel. Co. v.
Public Serv. Comm'n, No. 5655-97 (N.Y. Sup. Ct. Albany County).
Plaintiffs allege that during the course of the hearings before
the ALJ, defendants engaged in misconduct related to the
hearings, including offering "baseless and untrue" testimony from
NYTel employees, improperly acquiring private telephone records,
and lying to the ALJ about the availability of an important
witness. According to plaintiffs, separate PSC proceedings
examining the misconduct of defendants are ongoing.
Each set of plaintiffs filed a complaint in this Court on June
4, 1996. On August 5, 1996, the Court so ordered a stipulation
and order consolidating the three cases and placing them on the
Court's suspense calendar until the PSC had issued a final order
and any appeals therefrom had been exhausted.
The PSC issued its final order on May 29, 1997. These motions
In their proposed amended and supplemental complaints,
plaintiffs each assert a total of sixteen claims, four of which
are based on federal law and twelve of which are based on New
York statutory and common law. The sixteen claims are as follows:
(1) violations of the RICO statute, 18 U.S.C. § 1962(b),
1962(c), and 1962(d) (First through Third Counts); (2) violations
of the FCA, 47 U.S.C. § 201, 202, and 203 (Twelfth Count); (3)
breach of contract (Fourth Count); (4) breach of the covenant of
good faith and fair dealing (Fifth Count); (5) breach of agency
obligations (Sixth Count); (6) breach of fiduciary duty (Seventh
Count); (7) fraud (Eighth Count); (8) gross negligence (Ninth
Count); (9) negligence (Tenth Count); (10) violation of New York
Public Service Law (Eleventh Count); (11) violation of New York
General Business Law (Thirteenth Count); (12) intentional
spoliation of evidence (Fourteenth Count); (13) common law civil
conspiracy (Fifteenth Count); and (14) accounting (Sixteenth
Count). Plaintiffs seek treble damages on the RICO and New York
General Business Law claims; compensatory and consequential
damages on the remaining claims; punitive damages on the fraud,
gross negligence, negligence, New York Public Service Law, and
common law civil conspiracy claims; and an accounting, plus
interest, costs, and attorneys' fees.
In reviewing a motion to dismiss, I must accept the factual
allegations set forth in the complaint as true, and draw all
reasonable inferences in favor of plaintiffs. See Bernheim v.
Litt, 79 F.3d 318, 321 (2d Cir. 1996). A complaint may not be
dismissed under Rule 12(b)(6) unless it "appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief." Id. (quoting Conley
v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80
(1957)). In other words, the issue before the Court on these
motions to dismiss "is not whether . . . plaintiff[s] will
ultimately prevail but whether the claimant[s][are] entitled to
offer evidence to support the claims." Villager Pond. Inc. v.
Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995) (citation
cert. denied, 519 U.S. 808, 117 S.Ct. 50, 136 L.Ed.2d 14
A court on a motion to dismiss generally may only consider
facts alleged in the complaint or in documents attached to the
complaint as exhibits or incorporated by reference. Kramer v.
Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991). The court
may also, however, "consider matters of which judicial notice may
be taken under Fed.R.Evid. 201." Id.; see also Fed. R.Evid.
201(f) ("Judicial notice may be taken at any stage of the
proceeding."); 21 Charles Alan Wright & Kenneth W. Graham, Jr.,
Federal Practice and Procedure § 5110, at 522 (1977) ("[C]ourts
have always taken judicial notice of facts in ruling on demurrers
and motions to dismiss.").
Leave to amend pursuant to Rule 15(a) of the Federal Rules of
Civil Procedure shall be freely granted when justice so requires,
and as a general matter amendments are favored "to facilitate a
proper decision on the merits." Conley v. Gibson, 355 U.S. 41,
48, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see Foman v. Davis,
371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962); MacDraw, Inc.
v. CIT Group Equip. Fin. Co., 157 F.3d 956, 962 (2d Cir. 1998).
The decision to grant leave to amend, however, falls within the
sound discretion of the trial court. See Zenith Radio Corp. v.
Hazeltine Research, Inc., 401 U.S. 321, 330, 91 S.Ct. 795, 28
L.Ed.2d 77 (1971); Austin v. Ford Models, Inc., 149 F.3d 148,
155 (2d Cir. 1998) ("A district court's decision to deny a motion
to amend a complaint is reviewed for abuse of discretion."). The
district court may deny leave where it would be prejudicial to
allow a plaintiff to add claims or the claims would fail to state
a claim upon which relief can be granted. See Lupowitz, Inc. v.
Eclipse Holdings, Inc., No. 94 Civ. 2916, 1996 WL 285363, at *2
(S.D.N.Y. May 30, 1996), aff'd, 108 F.3d 1370, 1997 WL 138459
(2d Cir. 1997); Cohen v. Reed, 868 F. Supp. 489, 497 (E.D.N Y
The Court has broad discretion to permit a change in the
parties at any stage in the litigation pursuant to Rule 21 of the
Federal Rules of Civil Procedure. 7 Charles Alan Wright, Arthur
R. Miller & Mary Kay Kane, § 1688, at 471-73 (2d ed. 1986). Rule
21 provides in pertinent part that: "Misjoinder of parties is not
ground for dismissal of an action. Parties may be dropped or
added by order of the court on motion of any party or of its own
initiative at any stage of the action and on such terms as are
Defendants seek dismissal of plaintiffs' RICO claims on several
grounds. First, they invoke the filed rate doctrine and assert
that the filed rate doctrine bars plaintiffs' RICO claims because
these claims provide for remedies not anticipated by the
governing tariffs. Second, they contend that the RICO claims fail
as a matter of pleading. Defendants also contend that plaintiffs
fail to allege RICO predicate acts and resulting injury.
1. The Filed Rate Doctrine
The filed rate doctrine, sometimes referred to as the filed
tariff doctrine, protects both the utility and the customer. The
doctrine protects the utility by barring suits that allege that a
regulated utility's rates are unreasonable. Wegoland Ltd. v.
NYNEX Corp., 27 F.3d 17 (2d Cir. 1994). A filed rate approved by
the governing regulatory agency "is per se reasonable and
unassailable in judicial proceedings brought by ratepayers."
Id. The doctrine also protects customers from discrimination by
precluding a utility from charging customers a rate other than
the rate stated in the tariff. Maislin Indus., U.S., Inc. v.
Primary Steel, Inc., 497 U.S. 116, 110 S.Ct. 2759, 111 L.Ed.2d
94 (1990) (stating that the filed rate "is the only lawful
charge" and that "[t]his rule is undeniably strict . . . to
prevent unjust discrimination" (quoting Louisville & Nashville
R.R. Co. v. Maxwell, 237 U.S. 94, 97, 35 S.Ct. 494, 59 L.Ed.
853 (1915))); Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571,
577, 101 S.Ct. 2925, 69 L.Ed.2d 856 (1981) (stating that the
doctrine "forbids a regulated entity to charge rates for its
services other than those properly filed with the appropriate"
In a line of cases beginning with Keogh v. Chicago &
Northwestern Railway Co., 260 U.S. 156, 43 S.Ct. 47, 67 L.Ed.
183 (1922), courts have identified two principles underlying the
filed rate doctrine. See Wegoland, Ltd. v. NYNEX, 806 F. Supp. 1112,
1113-16 (S.D.N.Y. 1992) (explaining the history and
rationale of the doctrine), aff'd, 27 F.3d 17, 18 (2d Cir.
1994). First, "legislative bodies design agencies for the
specific purpose of setting uniform rates." Wegoland, 27 F.3d
at 19 (emphasis added) (quoting Wegoland, 806 F. Supp. at 1115).
To permit "individual ratepayers to attack the filed rate `would
undermine the congressional scheme of uniform rate regulation.'"
Id. (quoting Arkansas Louisiana Gas Co. v. Hall,
453 U.S. 571, 579, 101 S.Ct. 2925, 69 L.Ed.2d 856 (1981)). Second, because
courts are not in the best position to determine,
retrospectively, "what the reasonable rates during the past
should have been," Montana-Dakota Utils. Co. v. Northwestern
Pub. Serv. Co., 341 U.S. 246, 251, 71 S.Ct. 692, 95 L.Ed. 912
(1951), to permit "an attack on the filed rate would
unnecessarily enmesh the courts in the rate-making process."
Wegoland, 27 F.3d at 19. Hence, courts apply the filed rate
doctrine to bar claims attacking a utility's rate where the
effect, directly or indirectly, is either: (1) price
discrimination as between ratepayers (the "nondiscrimination
strand"), or (2) judicial involvement in the rate-making process
(the "nonjusticiability strand"). See Fax Telecommunicaciones
Inc. v. AT & T, 138 F.3d 479, 489 (2d Cir. 1998).
Although many cases discuss the filed rate doctrine in the
context of federal tariffs, the Second Circuit has held "that the
rationales underlying the filed rate doctrine apply equally
strongly to regulation by state agencies." Wegoland, 27 F.3d at
20; see also Porr v. NYNEX Corp., 230 A.D.2d 564, 660 N.Y.S.2d 440,
443 (2d Dep't 1997) ("[T]he rationale underlying the filed
rate doctrine applies whether the rate in question is approved by
a federal or state agency." (quoting H.J. Inc. v. Northwestern
Bell Tel. Co., 954 F.2d 485, 494 (8th Cir.), cert. denied,
504 U.S. 957, 112 S.Ct. 2306, 119 L.Ed.2d 228 (1992))).
I conclude that the filed rate doctrine does not bar
plaintiffs' RICO claims for four reasons: (1) plaintiffs' claims
do not implicate the principles underlying the filed rate
doctrine; (2) the applicable tariffs do not expressly limit
plaintiffs' remedies to damages for gross negligence or wilful
misconduct; (3) accepting defendants' argument that plaintiffs'
RICO claims are barred by the filed rate ...