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April 14, 1999


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 regulating MAS.

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.


A. The Facts

As alleged in the proposed amended and supplemental complaints, the facts are as follows:

1. The Audichron System

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 their compensation.

2. The Ericsson Cutover

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 equipment's inadequacies.

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 this proceeding.

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.

B. Procedural History

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 followed.

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.


A. Legal Standards

1. Motions to Dismiss

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 omitted), cert. denied, 519 U.S. 808, 117 S.Ct. 50, 136 L.Ed.2d 14 (1996).

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.").

2. Leave to Amend

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 1994).

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 just."

B. RICO Claims

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" regulatory authority).

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 ...

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