Falsely billed for Internet-generated calls

Federal District Court Opinions

NIEHAUS v. AT & T CORP., (S.D.N.Y. 2002) 218 F. Supp.2d
531 Theodore J. NIEHAUS, Corinne M. Allen, Olen Frank
Philbrick, individually and on behalf of a class of persons
similarly situated, Plaintiffs, v. AT & T CORP.,
Defendant. No. 01 CIV. 3030(JSR) United States District
Court, S.D. New York. September 6, 2002. West Page 532

[EDITORS’ NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] West Page 533

Jeffrey Horn, Richard Cohen, Peter D. St. Phillip, Jr.,
Lowey, Dannenberg, Bemporad & Selinger, P.C., White Plains,
N.Y. (D. Michael Kratchman, Southfield, MI, Elwood S.
Simon, Esq. (admitted pro hac vice per order dated June 11,
2001), Michael Wassmann, Esq. (admitted pro hac vice per
order dated July 23, 2001), Elwood S. Simon & Associates,
P.C., Birmingham, MI, Gordon S. Gold, Seyburn, Kahn, Ginn,
Bess, Deitch & Serlin, P.C., Southfield, MI, of Counsel),
for Plaintiffs.

Elizabeth M. Sacksteder, Sidley Austin Brown & Wood, New
York City, for Defendant.

MEMORANDUM ORDER

JED RAKOFF, District Judge.

This putative class action alleges that defendant AT & T
Corp. (“AT & T”) falsely billed customers for
Internet-generated international calls to the Pacific
island nations of Vanuatu and Niue, when in fact the calls
had been re-routed to less exotic, and less expensive,
destinations. By Order dated September 28, 2001, the Court
(a) granted defendant’s motion to dismiss plaintiffs’
claims brought under 47 U.S.C. § 401 and 47 U.S.C.
§ 228; (b) denied defendant’s motion to dismiss
plaintiffs’ claims brought under 47 U.S.C. § 201, 47
U.S.C. § 203, and state law; (c) granted defendant’s
alternative motion to initially refer to the Federal
Communications Commission (“FCC”) plaintiffs’ claims
brought under 47 U.S.C. § 201 and 47 U.S.C. §
203 (the “referred claims”); and (d) stayed all further
proceedings in this Court regarding the referred claims, as
well as the pendant state-law claims, pending notification
of the FCC’s rulings on the referred claims. Although the
Court indicated it would eventually issue a Memorandum
elaborating the reasons for this Order, the parties
subsequently advised the Court that they expected to
settle, thus obviating the need for further labor West
Page 534 by the Court. Having heard nothing more from
counsel, however, the Court here renders its opinion.

The three named plaintiffs allege that they, as others
similarly situated, were billed for Internet modem calls to
either Vanuatu or Niue that they neither made nor
authorized, and that, in any event, were re-routed to
closer destinations. On their bills, the charges for these
calls were labeled as “Direct Dialed Calls,”
“International,” or “Regulated Charges.” When the
respective plaintiffs called to inquire about the charges,
AT & T informed them that the calls were to adult
entertainment web sites, and had been dialed through
computer modems. Denying he had ever made or authorized
such calls, plaintiff Niehaus refused to pay and AT & T
submitted his bill to a collection agency. The similar
denials of plaintiff Allen were eventually accepted and she
received a credit for the portion of the bill that she
paid. Finally, plaintiff Philbrick, though protesting that
he never made or authorized the calls, eventually paid the
$257.69 charged to him. See Amended Complaint (“Am. Cpl.”)
¶¶ 5-13, 29, 58.

Drawing on newspaper and magazine articles, as well as
materials from the case of FTC v. Verity Intl., 124 F.
Supp.2d 193 (S.D.N.Y. 2000), the Amended Complaint
hypothesizes that these allegedly incorrect charges were
the product of certain questionable arrangements that
certain common carriers have allegedly made in recent years
with certain entertainment service providers. Under these
arrangements, a billing aggregator, or “Service Bureau,”
obtains a block of numbers from some “obscure” country that
needs revenue. Am.Cpl. ¶ 28. In return, the foreign
country is promised per minute revenue each time the number
is dialed, even if the call never actually reaches the
foreign country. The Service Bureau then sells the numbers
to “entertainment service providers,” who provide psychic
reading lines, chat rooms, and pornography on the Internet,
and bill users through their phone lines. Sometimes,
however, even someone just browsing the ubiquitous and
unsolicited Internet advertisements for these services can
inadvertently download a dialing mechanism that
automatically generates such a call. In any event, the
common carrier (here, AT & T) bills and collects for the
calls and remits a portion of the money collected to the
Service Bureau, which then splits its proceeds with the
entertainment service provider. Alternatively, the carrier
may remit the money directly to the foreign government,
which then provides an agreed-upon portion of the revenue to
the Service Bureau. Am.Cpl. ¶¶ 28-32, 59.

These arrangements, according to the Amended Complaint,
led to improper charges to the plaintiffs and others
similarly situated because: (1) the Service Bureau sent out
fictitious billing information to AT & T, which, because of
the foregoing arrangements, was unable to adequately check
the information in the way it could check ordinary calls,
see Am.Cpl. ¶¶ 50-56, 107-109; and (2) even
where the calls were properly authorized by the subscriber,
the subscriber was billed at rates applicable to far-away,
obscure countries, whereas the Service Bureau routed the
actual calls to closer, less expensive sites, a fact
allegedly known to AT & T, see Am.Cpl. ¶¶ 58,
64, 65, 70, 112-114.

As an initial matter, the defendant argues that the entire
Amended Complaint should be dismissed because it does not
so much allege facts as speculations: in essence, it
premises that AT & T must have been engaging here in an
instance of a reputed general practice of common carriers.
The premise of the Amended Complaint is, however, that AT &
T bills for unauthorized calls to places as obscure as
Vanuatu or Niue are most likely explicable West Page 535
as a product of the reputed general practice described
above. While thin, the inference is not unreasonable.

Moreover, it is not really accurate for defendant to
contend that the Complaint rests entirely on inference and
conjecture from the purported practices of other carriers.
Rather, the Complaint alleges, inter alia, that AT & T has
been found to have entered into such an arrangement at
least once before; see Am.Cpl. ¶¶ 43-44;
that, in that instance, calls were “short-stopped” and
re-routed in the manner here alleged, see Am.Cpl.
¶¶ 64-65; and that testimony by a former AT &
T officer indicated that similar arrangements existed
between AT & T and 26 or more foreign countries and that
the practice of short-stopping was widespread at AT & T,
see Am.Cpl. ¶¶ 45, 64, 65. This is more than
sufficient to justify the premise on which plaintiffs
ground their complaint.

Accordingly, it cannot be said that the Amended Complaint
fails to give “the defendant fair notice of what the
plaintiff[s’] claim is and the grounds upon which it
rests.” Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2
L.Ed.2d 80 (1957). Defendant’s first argument must
therefore be rejected.

Defendant also argues, however, that the allegations of
the Amended Complaint, even when read (as they must be
here) most favorably to plaintiffs, fail to state claims
under any of the four statutory provisions here invoked
¶ 47 U.S.C. § 228(d), 401, 201(b), and 203(c)
— and fail to make out the alleged state-law claims
of breach of contract and unjust enrichment. We consider
each of the claims in turn:

(a) 47 U.S.C. § 228(d). The parties agree that
federal law distinguishes between “transmission services”
(including the standard, direct-dialed call) and
“pay-per-call” services (such as those accessed through a
“900” number). Under the “filed rate doctrine,” a telephone
subscriber is responsible for paying all charges billed to
the subscriber’s telephone number at the applicable filed
rate, whether or not the subscriber made or authorized the
call. See Verity, 124 F. Supp.2d at 200-01. By contrast,
whether or not a subscriber to a “pay-per-call” service is
responsible for the pay-per-call charge (which typically
involves more than just the phone charge) is a matter” of
ordinary contract law and thus subject to the defense that
the subscriber never authorized the call or otherwise
agreed to pay for it. Id. at 201-02.

Section 228(d) of Title 47 proscribes certain practices
regarding pay-per-call services. Here, however, the alleged
violations relate, not to pay-per-call services, but to
transmission services, and thus cannot be the subject of
claims under 47 U.S.C. § 228(d). Specifically,
“pay-per-call services” are defined in 47 U.S.C. §
228(i) as follows:

(1) The term “pay-per-call services” means any service
—

(A) in which any person provides or purports to provide
—

(i) audio information or audio entertainment produced or
packaged by such person;

(ii) access to simultaneous voice conversation services;
or

(iii) any service, including the provision of a product,
the charges for which are assessed on the basis of the
completion of the call;

(B) for which the caller pays a per-call or
per-time-interval charge that is greater than, or in
addition to, the charge for transmission of the call; and

(C) which is accessed through use of a 900 telephone or
other prefix or area code designated by the Commission

. . . . .

47 U.S.C. § 228(i) (emphasis supplied).

Here, there is no saggestion anywhere in the Amended
Complaint that the services West Page 536 for which
plaintiffs were allegedly misbilled were accessed through
use of a 900 number or other prefix or area code designated
by the Commission, or, indeed, that they were for services
in addition to the charges for transmission of the calls.
Rather, the Amended Complaint is premised on the assertion
that what AT & T was providing, albeit improperly, was a
transmission service, and that it was billed, albeit
fraudulently, as such. Accordingly, plaintiffs’ claim under
§ 228(d) must be dismissed.

(b) 47 U.S.C. § 401. Under 47 U.S.C. § 401,
private parties can bring claims for declaratory and
injunctive relief to enforce a standing order of the FCC.
See 47 U.S.C. § 401(b). In this case, plaintiffs
claim that they are entitled to such relief because
defendant’s practices allegedly violate 47 C.F.R. §
64.1506, 64.1507, 64.1510, and the FCC’s order enacting
these regulations. See Am.Cpl. ¶¶ 98-102. The
regulations, however, deal, respectively, with
“pay-per-call” charges, toll-free numbers, and collect
calls. As explained above, the charges here in issue do not
fall within the definition of pay-per-call services; nor is
there any allegation that they are toll-free services or
collect-call services. In fact, the FCC’s enacting order to
which the Amended Complaint refers includes a separate
notice of proposed rules addressed to the separate problem,
here involved, of common carriers using international
numbers to provide and bill for entertainment services; but
because the proposed rules have not been enacted, there is
simply no applicable order for plaintiffs to enforce.[fn1]
Accordingly, plaintiffs’ claim under § 401 must be
dismissed.

(c) 47 U.S.C. § 201(b) & 203(c). Section 201(b)
mandates that all “charges, practices, classifications, and
regulations . . . be just and reasonable” and declares that
all charges, practices, and regulations that are “unjust
or unreasonable” are “unlawful.” Id. Relatedly, section
203(c) prohibits “[o]vercharges and rebates,” as well as
related practices. Id. Such practices as billing for calls
never made, short-stopping and re-routing calls, and
remitting portions of the charges to entertainment service
providers appear, at least facially, to violate these
provisions, and therefore plaintiffs’ allegations to that
effect are sufficient at this stage to survive a motion to
dismiss.

However, the claims under 47 U.S.C. § 201(b) and 47
U.S.C. § 203 also implicate the doctrine of primary
jurisdiction. Under the doctrine of primary jurisdiction, a
federal court may refer a matter extending beyond the
“`conventional experience of judges'” or “`falling within
the realm of administrative discretion'” to the appropriate
administrative agency. National Communs. Assoc., Inc. v. AT
& T Co., 46 F.3d 220, 222-23 (2d Cir. 1995) (quoting Far
East Conference v. United States, 342 U.S. 570, 574, 72
S.Ct. 492, 96 L.Ed. 576 (1952)). The Second Circuit, while
acknowledging that there is no “fixed formula” for
determining when to refer a case to the appropriate agency,
has identified four factors to aid in the analysis: West
Page 537

(1) whether the question at issue is within the
conventional experience of judges or whether it involves
technical or policy considerations within the agency’s
particular field of expertise; (2) whether the question at
issue is particularly within the agency’s discretion; (3)
whether there exists a substantial danger of inconsistent
rulings; and (4) whether a prior application to the
agency has been made.

National Communs. Assoc., Inc., 46 F.3d at 222.

In the instant case, the claims brought under §
201(b) involve numerous highly technical questions
regarding, e.g., the ways in which AT & T and the Service
Bureau allegedly shared information and rerouted the calls
— questions the FCC is better equipped than the
Court to evaluate in the first instance. Moreover, the
“reasonableness” determination required by § 201(b)
is inherently a discretionary question within the agency’s
purview. See Ambassador, Inc. v. United States, 325 U.S.
317, 324, 65 S.Ct. 1151, 89 L.Ed. 1637 (1945) (claims
“grounded in [a] lack of reasonableness” in the first
instance “must be addressed to the Commission and not as an
original matter brought to the court.”); In re Long
Distance Telecomm. Litig., 831 F.2d 627, 631 (6th Cir.
1987) (holding that cases involving claims of
“[un]reasonableness” must be referred to the FCC because
these are “determination[s] that Congress has placed
squarely in the hands of the FCC”) (internal quotation
marks omitted); MCI Telecommun. Corp. v. Dominican Commun.
Corp., 984 F. Supp. 185, 190 (S.D.N.Y. 1997) (“[T]he
resolution of the unreasonable practice counterclaim
requires an interpretation of the [tariff] which the FCC is
better suited to resolve.”): Vortex Commun., Inc. v.
American Tel. & Tel. Co, 828 F. Supp. 19, 20-21 (S.D.N.Y.
1993) (holding that claim that carrier’s termination of
plaintiff’s three 900 numbers was unjust and unreasonable
involved technical and policy considerations warranting
referral to the FCC).

Similarly, determination as to whether defendant’s
practices violated § 203(c) involves evaluation of
numerous technical issues regarding the nature of the
re-routing and splitting of fees here alleged. Moreover,
while the statute prohibits common carriers from charging
in excess of the applicable tariff rate and from remitting
any portion of its revenue to third parties, there is
little or no case law applying these broad prohibitions to
the factual scenario here alleged, making it highly
valuable to have the issues addressed in the first instance
by an agency that can bring to bear its expert knowledge of
all relevant factors.

Accordingly, the Court deems it appropriate and valuable
to refer the claims under §§ 201(b) and
203(c) to the FCC for initial determinations on the merits,
subject to review by this Court.

(d) State-law claims. In addition to the federal claims,
the Amended Complaint asserts state-law claims grounded in
breach of contract and unjust enrichment. Since these
claims have not been dismissed, the question remains as to
whether to stay these claims while the FCC considers the
referred claims. See Reiter v. Cooper, 507 U.S. 258,
268-69, 113 S.Ct. 1213, 122 L.Ed.2d 604 (1993) (noting that
a court may, in its discretion, stay proceedings pending
determination by an administrative agency).

In this case, the state-law claims effectively depend on
resolution of the referred claims. Specifically, the breach
of contract claim is premised on the assertion that
plaintiffs’ contracts with AT & T incorporated federal law
standards, and that by breaching federal law, AT & T
thereby breached its contract. See Am.Cpl. ¶¶
123-24. Similarly, plaintiffs ground West Page 538 their
claim of unjust enrichment in federal law, arguing that AT
& T derived illegal profits from agreements that violated
federal law. See Am.Cpl. ¶¶ 129-30. Since
resolution of the state-law claims therefore depends on the
resolution of the referred federal claims, it is
appropriate to stay further proceedings on the state-law
claims until the referred claims return to this Court.[fn2]

For the foregoing reasons, the Court hereby reaffirms its
Order of September 28, 2001, and further reminds the
parties that, under the terms of that prior order, they are
required to apprise the Court in writing, by no later than
September 30, 2002, as to the status of the referred
proceedings before the FCC.

SO ORDERED.

[fn1] The Court does not reach the question of whether FCC
regulations are enforceable “orders” under section 401(b).
Compare Hawaiian Tel. Co. v. Public Utils. Comm’n, 827 F.2d
1264, 1270-2 (9th Cir. 1987) (holding that an FCC
regulation is an “order”) with New England Tel. & Tel. Co.
v. Public Utils. Comm’n, 742 F.2d 1, 5, 8 (1st Cir. 1984)
(Breyer, J.) (“[P]rivate parties have no inherent right to
enforce FCC rules,” and “to interpret section 401(b) more
broadly . . . threatens to interfere seriously with the
well established principle that the enforcement of the
Communications Act is entrusted primarily to an
administrative agency.”) (internal quotation marks
omitted). The Second Circuit has recently declined to rule
on the issue. See Conboy v. AT & T, 24 F.3d 242, 252 n. 11
(2d Cir. 2001).

[fn2] Since defendant concedes that at least one of the
maned plaintiffs, Mr. Philbrick, has standing to raise all
claims here remaining, the Court will also defer ruling
until the case resumes on defendant’s challenges to the
standing of the other two plaintiffs, as well as to the
not-yet-ripe issue of class certification.