Opinion
Cause No. IP 02-170-C H/K
December 6, 2002
ENTRY ON DEFENDANT'S MOTION TO DISMISS
Plaintiffs Indiana Bell Telephone Co. ("Ameritech Indiana") and Michigan Bell Telephone Co. ("Ameritech Michigan") have brought this diversity action against Thrifty Call, Inc. ("TCI") and several other defendants. Ameritech Indiana and Ameritech Michigan allege common law claims of fraud and conspiracy to defraud. Plaintiffs also seek recovery under Indiana's Crime Victim Statute.
Plaintiff Ameritech Indiana is incorporated under the laws of Indiana and has its principal place of business in Indianapolis, Indiana. Plaintiff Ameritech Michigan is a Michigan corporation, having incorporated under the laws of Michigan and having its principal place of business in Detroit, Michigan. Defendant TCI is incorporated under the laws of Missouri and has its principal place of business in San Marcos, Texas. The remaining defendants are Texas citizens.
Defendant TCI has moved to dismiss the claims against it for failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b). TCI also argues that dismissal is required because federal law preempts plaintiffs' state law claims, and alternatively, because under the doctrine of primary jurisdiction, the Federal Communications Commission should hear the claims first. As explained below, TCI's motion is denied in all respects.
Plaintiffs' Complaint
Ameritech Indiana asserts that it provides telecommunications services in Indiana, including local telephone services in Indianapolis. Ameritech alleges that TCI is a long distance carrier that conducted business in Indianapolis.
Ameritech alleges that TCI sold its assets and ceased operations in or about July 2000. Consequently, Ameritech's claims do not extend beyond that time.
Ameritech Indiana contends that long distance carriers such as TCI must rely on local telephone companies like Ameritech Indiana to deliver the long distance telephone calls of their customers to the intended recipients. Cplt. ¶ 16. Long distance carriers must deliver their calls to a local carrier, which then switches the calls onto the local carrier's network and delivers the calls to the intended recipients. Long distance carriers pay the local telephone companies usage fees for this service on a per call basis. These fees include termination fees, the amounts of which are set by federal and state tariffs and are related to the duration of the individual calls. Cplt. ¶ 18-19.
Ameritech Indiana asserts that the fees associated with long distance calls are assessed differently than those associated with local calls, which are assessed a flat fee per telephone line. Ameritech Indiana alleges that this fee difference provides "a strong incentive to try to disguise long distance phone calls as local phone calls." Id., ¶ 22.
I. The Defendants
Defendants Lacy Ward, Danny Hodges, Shane Gregg, and Robert Seale are citizens of Texas who allegedly formed numerous business ventures to carry out a scheme to defraud telephone companies. Defendants E-Tex Data, L.L.C. and Ward Products, L.L.C. are Texas companies formed by Ward, Hodges, and Gregg. Defendant Cherry Marketing Services d/b/a/ National Marketing is also a Texas limited liability company that was formed by Ward, Hodges, Gregg, and Seale. Defendant TCI is a Missouri corporation with its principal place of business in Texas. TCI contracted with E-Tex Data for the provision of termination services.
II. The Alleged Scheme to Defraud in Indiana
Ameritech Indiana alleges that in 1997, defendants Ward, Hodges, and Gregg agreed to begin contracting with local telephone companies in various cities. Defendant Seale allegedly joined in the agreement in 1999. Ward, Hodges, Gregg, and Seale allegedly obtained local lines with flat fee rates by misrepresenting that their companies were involved in telemarketing and would be placing local, outgoing calls. Cplt. ¶ 23. (The court's records reflect that all four actually pled guilty to conspiring to commit wire fraud in United States v. Ward, et al., No. IP 01-79-CR.) Ameritech Indiana alleges that Ward Products, E-Tex and National Marketing were not engaged in the telemarketing business. Rather, these companies provided telephone services to long distance carriers like TCI. The defendants, Ameritech Indiana alleges, had in fact conspired with TCI to find a way to avoid long distance usage fees by terminating the calls on local lines as if they were local calls. Cplt. ¶ 23. Ameritech Indiana alleges that defendant Danny Hodges, acting on behalf of Ward Products, obtained 28 local telephone lines from Ameritech in mid 1997 until March 2000. Ameritech Indiana installed these lines at 720 Kentucky Avenue on December 8, 1997, January 9, 1998, and February 25, 1998. Cplt.
To obtain these local lines, Ameritech Indiana contends, Hodges falsely represented to Ameritech Indiana agent Douglas Bapton that Ward Products was a catalog and telemarketing firm that would be placing only local calls in Indianapolis. Id., ¶¶ 25-26. Ameritech Indiana alleges that these misrepresentations occurred in June and July 1997 and continued through September and October of the same year. According to Ameritech Indiana, Hodges made additional misrepresentations to Ameritech customer service representative Darla Golgart during at least two telephone conversations in the fall and winter of 1997. Ameritech Indiana alleges that during these telephone calls Hodges concealed the fact that Ward Products actually provided call termination services to long distance carriers, including TCI. Ameritech Indiana alleges that it relied on these representations when it leased 28 local telephone lines to Ward Products, and that it would not have installed the lines but for these representations. Id., ¶ 27.
Ameritech Indiana claims that TCI's long distance calls were terminated on these local lines pursuant to a contract that TCI made with E-Tex Data, the sister company of Ward Products. Cplt. ¶ 31. This agreement was executed by Hodges on behalf of E-Tex on April 30, 1997. Id. This initial agreement was supplemented on September 19, 1997 by Ward Products' purchase order for 28 lines from Ameritech Indiana. Id., ¶ 32. TCI allegedly paid $112,000 per month for use of the lines in addition to a $4500 initial fee. Id.
Upon discovering the true nature of Ward Products' business in March 2000, Ameritech Indiana terminated its contract with the company and disconnected the 28 lines. Cplt. ¶ 35. Ameritech Indiana alleges that Ward, Hodges, Gregg, and Seale then obtained 28 local replacement lines from AT T Local by falsely representing themselves to be agents of National Marketing, a catalog and telemarketing company that would be conducting local calls. Id., ¶ 36. The defendants again obtained a flat fee rate for these lines. TCI's calls were then terminated on National Marketing's local lines. Id., ¶ 39. Ameritech Indiana claims it was also harmed by this arrangement because its customers were the primary recipients of these calls, so that Ameritech Indiana was entitled to a portion of the usage fees that ATT should have collected from National Marketing.
Ameritech Indiana alleges that by concealing the nature of Ward Products' and National Marketing's business, the defendants terminated more than 6 million long distance calls and deprived Ameritech of more than $4,000,000 in usage fees. Ameritech Indiana further asserts that TCI knew of and helped to induce the fraud perpetrated on it. Cplt. ¶ 51. Ameritech Indiana alleges that the defendants, including TCI, are liable under common law fraud, conspiracy to defraud, and Indiana's crime victim statutes.
III. The Alleged Scheme to Defraud in Michigan
Ameritech Michigan alleges that the defendants established an identical operation in Detroit, Michigan. Ameritech Michigan leased and installed 28 lines to Ward Products in December 1997. Cplt. ¶ 44. The defendants, Ameritech Michigan contends, made the same misrepresentations to it, as had been made to Ameritech Indiana.
Ward Products' Michigan venture did not last as long as the Indiana venture. Ameritech Michigan asserts that it does not offer unlimited flat rate calls, and thus, upon receiving their first month's bill for the lines, the defendants terminated their contract with Ameritech Michigan. During even that short term, however, Ameritech Michigan alleges it lost at least $400,000. Cplt. ¶ 46.
Discussion
I. Rule 9(b)
Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard on claims of fraud, requiring that "the circumstances constituting fraud or mistake" be stated with particularity. Fed.R.Civ.P. 9(b). The plaintiff must identify the person who made the alleged misrepresentation, the time, place, and content of the alleged misrepresentation, and the means by which the alleged misrepresentation was made. Uni-Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992). Stated simply, a plaintiff must plead the who, what, where, and when of an alleged fraud.
Rule 9(b)'s heightened pleading requirement for allegations of fraud serves several purposes, one of which is to ensure that the plaintiff has a basis for its accusations. See id. at 924. Pleading with particularity forces the plaintiff "to conduct a precomplaint investigation in sufficient depth to assure the charge of fraud is responsible and supported, rather than defamatory and extortionate." Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 470 (7th Cir. 1999). Such investigation is warranted because of the potential for prejudicial effects and harm to reputation that may result from fraud allegations. Id. at 469. Additionally, heightened pleading is intended to minimize "strike suits" and "fishing expeditions," and to provide a defendant fair notice. Viacom Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 777-78 (7th Cir. 1994); Jepson Inc. v. Makita Corp., 34 F.3d 1321, 1327 (7th Cir. 1994).
These purposes shed light on the interaction between Rule 8 and Rule 9(b) for determining whether a plaintiff has pled a fraud claim with particularity. Rules 8 and 9 must be read together. Lachmund v. ADM Investor Services, Inc., 191 F.3d 777, 782-83 (7th Cir. 1999) (the appropriate starting point for a Rule 9(b) inquiry is the relationship between Rules 8(a) and 9(b)). Rule 9(b) applies to the specifics of alleged misrepresentations, but the notice pleading requirements of Rule 8 apply to other aspects of the plaintiff's complaint, such as damages, reliance, or a defendant's state of mind. See Wright Miller, Federal Practice and Procedure: Civil 2d § 1298 (1990). Thus, while Rule 9(b) requires more than a "short and plain statement of the claim," it does not require that states of mind be pled with particularity. Fed.R.Civ.P. 9(b); see also Robin v. Arthur Young Co., 915 F.2d 1120, 1127 (7th Cir. 1990) ("states of mind may be pleaded generally under Fed.R.Civ.P. 9(b)"). Likewise, a plaintiff need not plead evidentiary details or facts to satisfy Rule 9(b), apart from the particulars of the alleged misrepresentations.
Where fraud is alleged against multiple defendants, the general rule is that the pleadings "should inform each defendant of the nature of his alleged participation in the fraud." Vicom, Inc., 20 F.3d at 778; Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) (affirming district court's dismissal where complaint was devoid of any detail of which defendant was involved in which activity). However, courts have applied this rule flexibly in cases where, for example, a plaintiff alleges fraud against a third party and lacks the required information, or where the information is within the defendants' knowledge. Vicom, 20 F.3d at 778 n. 5; Jepson, Inc. v. Makita Corp., 34 F.3d 1321, 1328 (7th Cir. 1994) (specificity requirements may be relaxed).
Defendant TCI argues that the fraud claim asserted against it should be dismissed because it fails to allege the time, place, or content of communications made by TCI to Ameritech. TCI also argues that the conspiracy to defraud claim asserted against it must be dismissed because it is "entirely derivative" of the insufficient fraud pleadings.
Plaintiffs' complaint satisfies Rule 9(b)'s requirement of particularity with respect to the fraud allegedly perpetrated on both Ameritech Indiana and Ameritech Michigan. The complaint identifies who made the alleged misrepresentations, the time, place, and content of the alleged misrepresentations, the method by which the alleged misrepresentations were communicated to it, and the role the different defendants played in the alleged fraud.
The complaint asserts that defendant Hodges made the alleged misrepresentations to both plaintiffs. Hodges contacted Ameritech Indiana on behalf of Ward Products, according to the complaint, and spoke with Douglas Bapton and Darla Golgart. The complaint states that these communications occurred in June, July, September, and October of 1997, and were made through the course of several telephone calls. The complaint also states the contents of the alleged misrepresentations: that Ward Products was a catalog and telemarketing firm that would be placing only local telephone calls in Indianapolis.
Moreover, rather than "lumping" the defendants together, the complaint informs the various defendants of their alleged participation in the fraud. See Goren v. New Vision Intern., Inc., 156 F.3d 721, 730 (7th Cir. 1998) (affirming dismissal of complaint where complaint treated defendants as one, "lumping" them together). The complaint states that Ward, Hodges, Gregg, and Seale agreed to obtain local lines from local telephone companies in various cities. These individuals, the complaint alleges, formed various business ventures, including Ward Products and E-Tex Data. Through false representations made by Hodges, the complaint alleges that Ward Products procured 28 local lines from Ameritech Indiana. E-Tex then rented these 28 lines to TCI, according to the complaint, so that TCI could terminate its long distance calls without incurring long distance usage fees. E-Tex's rental of these lines to TCI was the result of a contract allegedly entered into on April 30, 1997 and supplemented by Ward Products' purchase order for the 28 local lines. The complaint then states that an identical operation was later established in Michigan.
The fact that the complaint does not state which TCI agent entered into the contract with E-Tex or explain discussions that may have occurred between the two defendant companies themselves does not run afoul of the Rule 9(b) particularity requirement.
First, the complaint serves the purposes behind Rule 9(b)'s heightened pleading standard with respect to TCI. By addressing the rental agreement between TCI and E-Tex, the complaint adequately demonstrates a basis for plaintiffs' allegations against TCI. The complaint also sufficiently notifies TCI of its role in the alleged fraud. TCI allegedly avoided paying usage fees by having its long distance calls terminated on Ward Products' local lines.
Second, as stated above, the Rule 9(b) particularity requirement may be relaxed where the information needed is within the defendant's knowledge or the plaintiff is alleging fraud against a third party. Corley v. Rosewood Care Center, Inc., 142 F.3d 1041, 1051 (7th Cir. 1998) ("We have noted on a number of occasions that the particularity requirements of Rule 9(b) must be relaxed where the plaintiff lacks access to all the facts necessary to detail his claim."). This principle applies squarely to this case with respect to dealings among the defendants themselves. Plaintiffs must be specific about the misrepresentations made to them, but where the plaintiffs were not privy to the negotiations and conversations that occurred between TCI and the other defendants, those particulars need not be pled in the complaint. To hold otherwise would require the court to read Rule 9 in isolation and to ignore Rule 8(f), which directs the court to construe pleadings so as to do substantial justice.
The court is thus satisfied that the requirements of Rule 9(b) have been met. TCI's motion to dismiss the complaint for failure to plead fraud with particularity is denied. Because the pleadings comply with Rule 9(b)'s requirements with respect to fraud, the pleadings are also sufficient regarding the derivative claim of conspiracy to defraud.
II. Preemption
TCI asserts that the Federal Communications Act ("FCA") preempts the state law claims alleged in this case. TCI argues first that case law interpreting the FCA "demonstrates that federal law completely occupies the field of interstate communications, thereby preempting state law." Def. Br. at 13.
The court disagrees. The FCA contains a savings clause that states:
Nothing in this Act contained shall in anyway abridge or alter the remedies now existing at common law or by statute, but the provisions of this Act are in addition to such remedies.47 U.S.C. § 414. Subsequent cases have narrowed the broad language of the savings clause but have not rendered it meaningless. In American Telephone Telegraph Co. v. Central Office Telephone, Inc., for example, the Supreme Court specifically addressed the savings clause of the FCA. 524 U.S. 214, 227 (1998). The Court noted that the FCA savings clause copies the savings clause of the Interstate Commerce Act, and that the Court has "long held that the latter preserves only those rights that are not inconsistent with the statutory filed-tariff requirements." Id.; see also Nader v. Allegheny Airlines, 426 U.S. 290, 298-300 (1975) (determining that identical language in Federal Aviation Act did not preclude a fraudulent misrepresentation claim at common law because there was no conflict between the court's common law authority and the agency's rate making power). The FCA does not preempt all state law claims relating to telephone charges, and plaintiffs' claims in this case do not present any conflict with any filed tariffs.
TCI argues that the Seventh Circuit has rejected the line of cases limiting the preemptive effect of the FCA and has joined those courts finding that the FCA completely occupies the field of communications. Def. Br. at 14. This is simply inaccurate. The Seventh Circuit has specifically addressed preemption within the context of the FCA. The court has instructed that the savings clause be read "narrowly to avoid swallowing the rule, but not so narrowly as to render it a dead letter." Bastien v. ATT Wireless Services, Inc., 205 F.3d 983, 987 (7th Cir. 2000).
The Seventh Circuit has recognized that the FCA does not preempt the type of common law claims that have no impact on the federal regulation of carriers and that are consistent with any filed tariffs. In Cahnmann, the Seventh Circuit explained that the proper operation of the savings cause is demonstrated by In re Long Distance Telecommunications Litigation, 831 F.2d 627, 633-34 (6th Cir. 1987), which involved "a claim of simple fraud, and its adjudication did not require determining the validity of a tariff." Cahnmann v. Sprint Corp., 133 F.3d 484, 488 (7th Cir. 1998) (finding that breach of contract claim was preempted where relief would have effectively invalidated a filed tariff); cf. Bastien, 205 F.3d at 988-89 (distinguishing claim where relief sought would alter federal regulation of tower construction, location, and coverage, which was preempted, from fraud claim in In re Long Distance Telecommunications, which would not affect federal regulation of telecommunications industry). Thus, whether a plaintiff's claims are preempted by the FCA hinges upon the nature of the claims asserted and the impact that granting the requested relief would have on federal regulation. Bastien, 205 F.3d at 989.
TCI contends that the claims alleged against TCI would affect the tariff regulation of telecommunications carriers. TCI argues that Ameritech's claims against it are "wholly based on its tariffed rates" because to prove its claims Ameritech must prove that TCI should have investigated the difference between Ameritech's rate and E-Tex's rate. Thus, TCI argues, the claims implicate tariffs and are preempted by the FCA.
Tariffs are "the documents filed by a carrier describing their services and the payments to be charged for such services." http://www.fcc.gov/glossary.htm. Once the FCC approves a tariff, the carrier may not depart from the terms contained within the tariff. Bastien, 205 F.3d at 988. Though a claim may contain a state law claim against a carrier, "a direct challenge to the legitimacy of an approved tariff must be litigated through the federal system." Id.; see 47 U.S.C. § 201(b) ("All charges practices, classifications, and regulations for and in connection with such communication service shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is hereby declared unlawful . . .").
The case before the court involves common law fraud. Plaintiffs allege that TCI and the other defendants lied about material facts, and in doing so cheated plaintiffs out of the termination fees that they owed. At the core of the case are the alleged misrepresentations made to Ameritech Indiana and Ameritech Michigan, not their tariffs. The types of cases where courts have found rates to be implicated are those in which relief for the plaintiff would effectively invalidate or alter a regulation, or alter the terms and conditions of telecommunications contracts. See, e.g., Boomer v. ATT Corp., 309 F.3d 404, 433 (7th Cir. 2002) (state law challenges to the validity of terms and conditions contained in long-distance service contracts were preempted by FCA where resolution of state claims would result in the indirect price discrimination Congress sought to prevent in passing Act); Bastien, 205 F.3d at 989 (finding state law claims preempted where resolution of claims "would directly alter the federal regulation of tower construction, location and coverage, quality of service and hence rates for service"); Cahnmann, 133 F.3d at 490-91 (finding state law claims preempted where claims directly challenged the legitimacy of an FCC-approved tariff).
The resolution of this case would have no material effect on federal regulation of the telecommunications industry and TCI. A judgment in favor of plaintiffs would require the defendants to do what they were already required to do under the FCA: pay plaintiffs the applicable termination fees. A judgment would not impose inconsistent obligations upon TCI or require more of it than is already required by the FCA. To the extent that resolution of this case would affect federal regulation of the telecommunications industry or tariff rates, such an effect would be merely incidental. See Nader v. Allegheny Airlines, 426 U.S. at 300 (finding that any impact on rates resulting from tort liability or from practices adopted to avoid such liability would be incidental). Because resolution of the fraud claims before the court will not affect federal regulation of telecommunication carriers, plaintiffs' claims are not preempted by the FCA.
III. Primary Jurisdiction
Even if plaintiffs' claims are not preempted by federal law, TCI contends, they must be dismissed or stayed and referred to the FCC under the doctrine of primary jurisdiction. TCI argues that resolution of its dispute with Ameritech will have broad policy implications. Not only will it significantly affect consumers, carriers and the telephone industry in general, TCI argues, but it could potentially thwart congressional efforts to open the telecommunications industry to competition. Plaintiffs, TCI contends, are essentially attempting to impose a duty on national long distance carriers to investigate all telecommunications providers with which they conduct business. TCI asserts that imposing such a duty would burden the newer and smaller telecommunications providers and place them at a competitive disadvantage against incumbent carriers.
The doctrine of primary jurisdiction is really a combination of two doctrines. See Arsberry v. Illinois, 244 F.3d 558, 563 (7th Cir. 2001). In its original form, the doctrine is more aptly described as "exclusive agency jurisdiction" and applies where the court has jurisdiction over a particular case but an agency has jurisdiction over the specific issue. This form of primary jurisdiction typically occurs when "in a suit involving a regulated firm but not brought under the regulatory statute itself, an issue arises that is within the exclusive original jurisdiction of the regulatory agency to resolve, although the agency's resolution of it will usually be subject to judicial review." Id., citing United States v. Western Pacific R.R., 352 U.S. 59, 64 (1956). In such cases, the court must stay the suit and refer the issue to the agency. The case would then return to the court if the agency's resolution did not dispose of the entire matter.
This form of primary jurisdiction does not apply here. This case involves common law tort claims and state statutory claims. The FCC clearly does not have exclusive jurisdiction over tort claims made against regulated firms. Indeed, the savings clause of the Federal Communications Act specifically contemplates the concurrent jurisdiction of the courts and the FCC. See 47 U.S.C. § 414; Cahnmann, 133 F.3d at 488 (savings clause provision was intended to permit state law claims, such as simple fraud, which do "not require determining the validity of a tariff"); Bastien, 205 F.3d at 987 (recognizing that many cases will involve rate issues, but that those that do not may be addressed in state court).
The second form of primary jurisdiction arises when the court and the agency have concurrent jurisdiction over an issue, or when the court has jurisdiction and merely seeks the advice of the agency. Arsberry, 244 F.3d at 564. Under this version of the doctrine, courts have referred matters that are beyond the conventional experiences of the judiciary or that fall within the realm of agency discretion "to an administrative agency with more specialized experience, expertise, and insight." Id. at 563, citing National Communications Ass'n v. ATT Co., 46 F.3d 220, 222-23 (2d Cir. 1995). These cases are perhaps more analogous to Burford abstention cases involving regulatory issues. See, e.g., New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350, 361 (1989).
This second form of primary jurisdiction also does not apply. The FCC has no authority to approve schemes to defraud local carriers in the name of opening up telecommunication markets. See, e.g., Arsberry, 244 F.3d at 564 ("FCC has no authority to approve a collusive arrangement among telephone companies"). Similarly, the FCC has no special insight or expertise to offer regarding common law fraud or conspiracy to defraud. See Nader v. Allegheny Airlines, 426 U.S. 290, 305-06 (1975) ("The standards to be applied in an action for fraudulent misrepresentation are within the conventional competence of the courts, and the judgment of a technically expert body is not likely to be helpful in the application of these standards to the facts of this case."); Arsberry, 244 F.3d at 564 (denying request to refer claims to FCC where there was no indication that the FCC had special expertise that would be useful in evaluating a claim of collusion). Furthermore, any impact that imposing liability on TCI for fraudulent practice might have on competition in the telecommunications market would be merely incidental. Nader, 426 U.S. at 300 ("any impact on rates that may result from the imposition of tort liability or from practices adopted by a carrier to avoid such liability would be merely incidental").
Conclusion
Defendant TCI's motion to dismiss the fraud and conspiracy to defraud claims against it for failure to plead with particularity is denied. The court also finds that plaintiffs' claims against TCI are not preempted by federal law, and the doctrine of primary jurisdiction does not require the referral of these claims to the FCC.
So ordered.