United States District Court, D. South Dakota, Southern Division
QWEST COMMUNICATIONS CORPORATION, a Delaware corporation, Third-Party Plaintiff,
FREE CONFERENCING CORPORATION, a Nevada corporation, Third-Party Defendant.
MEMORANDUM OPINION AND ORDER
KAREN E. SCHREIER, Chief District Judge.
Third-party plaintiff, Qwest Communications Corporation (Qwest), brought claims against third-party defendant, Free Conferencing Corporation (FC), alleging that FC engaged in conduct amounting to unfair competition, civil conspiracy, and alternatively that FC was unjustly enriched. A court trial was held May 13-20, 2014. The court has considered the testimony, exhibits, briefs, and oral arguments in determining the outcome of this case.
FINDINGS OF FACT
The following constitutes the court's findings of fact pursuant to Federal Rule of Civil Procedure 52(a)(1), which were found by a preponderance of the evidence:
Qwest is a telecommunications provider throughout the United States and provides long-distance, or interexchange, service. As an interexchange carrier (IXC),  Qwest delivers long-distance calls from one local area to another.
FC provides conference calling services to its customers. FC operates a website and provides 24-hour customer support. Tr. 1138:13-1145:5. FC does not charge its customers for its services. FC is not a common carrier under the Communications Act of 1934, as amended. Ex. 1 at 2.
Sancom is a competitive local exchange carrier (CLEC),  which serves local customers in the Mitchell, South Dakota, area. Sancom began operating in 2004 and does business as Mitchell Telecom. Tr. 281:13-282:2. As a CLEC, Sancom owns the facilities that allow calls carried by IXCs, such as Qwest, to be originated and terminated with Sancom's customers. Sancom, a common carrier, is regulated by and filed tariffs with both the Federal Communications Commission (FCC) and the South Dakota Public Utilities Commission (SDPUC). See Ex. 4 & 6 (Sancom's intrastate tariff) and Ex. 85 (Sancom's interstate tariff). At times, Sancom worked with Vantage Point, a Mitchell-based telecommunications consulting company.
FC hired Darin Rohead, who operated as PowerHouse Communications, to identify rural LECs that were interested in contracting with FC to provide free conferencing services to FC's customers. See Ex. 16 (agreement dated February 23, 2004, between PowerHouse and FC, signed by Rohead and David Erickson, the president of FC). Rohead identified Sancom, drafted the contract used between Sancom and FC, and handled all the negotiations with Sancom. Tr. 1150:3-1151:18 (Erickson stating that Rohead connected him with various LECs, provided the contract, and negotiated FC's rate and terms of the agreement); Tr. 1154:1-9 ("Darin would present these things all packaged up, and from time to time, I would say just, you know, can I get a little more or, you know, and Darin was like, No, this is the deal. This is it.' In those cases, I didn't have any discussions with him, nor was anything I basically discussed with Darin really taken back to them and discussed. It was like, Here is the arrangement. Do you want it?'"); Tr. 1226:5-1227:3 (Erickson stating that the only time he entered into an agreement with an LEC without Rohead, he used the contract Rohead had provided for other LECs, and that Rohead first contacted Sancom).
Rohead also had a separate contract with Sancom under which Rohead received 0.22 cents per minute for all minutes to Rohead's clients' bridges. Ex. 13 (agreement dated February 21, 2005, between PowerHouse and Sancom). That agreement further provided that if Sancom collected less than 100 percent of the fees it was entitled to collect on those minutes, Rohead's fee would be proportionally reduced. Id. Rohead and Sancom kept this arrangement secret from Erickson and FC. Ex. 218 (confidentiality agreement); Ex. 46 (email stating that Erickson was unaware of Rohead's compensation). Nonetheless, numerous witnesses credibly testified that they understood that Rohead acted on behalf of FC. See Tr. 671:17-20 (Chad Glanzer of Vantage Point stating that Rohead was the main contact); Tr. 676:5-18 (Glanzer stating that he knew Rohead acted on behalf of FC); L. Thompson depo. at 30:14-16 ("My understanding at the time was that Mr. Rohead was kind of the sales arm. He was the one that would interface with the ILEC, and we were supposed to work through him."); Tr. 403:2-6 (Don Robertson stating that Rohead spoke to Sancom on behalf of FC); Tr. 427:16-24 (Robertson stating that Erickson knew Rohead was acting for FC, the only aspect Erickson did not know of was the separate payments from Sancom to Rohead); Tr. 463:3-11 (Ryan Thompson stating that Rohead represented FC); Tr. 545: 14-21 (Ryan Thompson recalling that Rohead presented the contract to Sancom "on behalf of [FC]"); Tr. 625:5-24 (Ryan Thompson assumed Rohead was acting for FC when he dealt with Sancom); Tr. 1221 (Erickson stating that he knew Rohead was working for other parties during at least part of Rohead's relationship with FC); Ex. 197 (email from Rohead to a Vantage Point employee conveying a message to Sancom from Erickson).
Shortly after Sancom began operating, it entered into an agreement with FC. Ex. 11. The agreement stated that Sancom would provide FC a location for a conference call bridge on Sancom's premises in Mitchell. Id. at ¶ 2. FC promised to provide a minimum number of minutes to the bridge located at Sancom's headquarters in exchange for a marketing fee of 2 cents per minute generated by FC's traffic. Id. at ¶¶ 3, 10. The agreement was signed by Gene Kroell, Sancom's general manager at the time, and Erickson. Id. Sancom did not have any contracts in place with the IXCs. As a result, FC's marketing fee was paid from the revenue generated by Sancom's terminating switched access charges under its tariffs, in effect resulting in an arrangement whereby Sancom and FC split the access charges paid by the IXCs on calls destined for FC's conference bridges. See Ex. 1 at ¶¶ 3-4 (finding by the FCC that the arrangement was a split of tariffed terminating access revenue); Thompson depo. at 43: (stating that the arrangement between the LECs and conference call companies involved sharing terminating access revenue); Lorenzetti depo. at 24:4-16 (same); Tr. 403:17-404:3 (Robertson stating that the agreement shared terminating access revenue); Rohead depo. at 54:9-12 (stating that the arrangement was a split of the access charges); Ex. 29 (FC's revenue model given to potential investors and business partners).
Erickson claimed he was unaware that the arrangement between Sancom and FC would result in a split of Sancom's tariffed access charges to IXCs. See, e.g., Tr. 1174:11-16 (Erickson stating that he did not and still does not understand what rate FC was splitting with Sancom). Erickson also claimed to be unaware of how Sancom would bill its clients. Tr. 1152:18-21. This lack of knowledge is contradicted by evidence that Erickson and FC knew that FC's income would arise from the revenue LECs collected from IXCs. Ex. 326 (email from Erickson that some LECs may have to jump out of the NECA traffic-sensitive pool); Tr. 1248:1-1249:5 (Erickson discussing the email in Ex. 326); Ex. 29 (FC revenue model); Tr. 1293:13-1294:10 (Erickson agreeing that FC partially funded Sancom's legal fees to assist Sancom in collecting tariff charges from IXCs so Sancom could share that revenue with FC); Ex. 11 at ¶ 10 (agreeing that FC and Sancom could adjust FC's rate if there was a change in the amount Sancom could collect); Ex. 46 (email from Erickson agreeing to split a drop in the "rate [Sancom] receive[s] for terminating calls"). Erickson also stated he was unaware that the arrangement did not comply with Sancom's tariffs, that he did not intend to premise his business model on an unlawful source of revenue, and that he would have taken any steps he thought necessary to comply with the law as it existed at the time. Tr. 1190:10-1191:24; Tr. 1216:6-14.
FC's relationship with Sancom involved a high volume of traffic. During the billing cycle of March 23, 2005, through April 22, 2005, Sancom terminated roughly 3.7 million minutes of FC traffic. Ex. 133. By the end of 2005, Sancom was terminating between 7 and 9 million minutes of FC traffic per month. Id. In September 2006, that number roughly doubled to 16 million minutes of terminating FC traffic, and nearly doubled again by the January 23, 2007-February 22, 2007, billing cycle that reported 30, 101, 366 minutes of traffic. Id. From May 2007 through January of 2008, Sancom's terminating minutes of FC traffic ranged from 41, 788, 919 to 54, 535, 148 minutes per monthly billing cycle. Id. For the 17 months beginning January 23, 2007, and ending June 22, 2008, FC traffic represented 98.02 percent of Sancom's traffic. Ex. 155 (showing that of Sancom's 700 million minutes of use during that time, 686 million were FC traffic, and roughly 14 million were attributable to all other end users).
Eventually, Qwest and other IXCs began disputing bills they received from certain LECs. Numerous lawsuits resulted, including this case, which was initially brought by Sancom to recover amounts Qwest allegedly owed under Sancom's tariffs. Qwest filed counterclaims against Sancom and a third-party complaint against FC.
In Qwest Communications Corp. v. Farmers & Merchants Mutual Telephone Co., 2007 WL 2872754, 22 F.C.C.R. 17973 (2007) (hereinafter Farmers I ), which was a lawsuit filed in a companion case, the FCC held that the LEC did terminate the traffic at issue and that the conference calling companies were end users under the tariff. After reconsideration based in part on discovery of fabricated evidence, the FCC issued a second order finding that conference call customers were neither end users nor customers within the meaning of the LEC's tariff and that the LEC was not entitled to switched access charges for those calls. Qwest Commc'ns Corp. v. Farmers & Merchants Mut. Tel. Co., 2009 WL 4073944, ¶¶ 1, 10 (FCC Nov. 25, 2009) (hereinafter Farmers II ). Although the FCC found that the LEC was not entitled to switched access fees under its tariff, the FCC suggested in a footnote that the LEC may be entitled to some compensation for its services. Id. at ¶ 24 n.96.
After Farmers II was issued, this court referred three issues to the FCC: whether Sancom was entitled to collect tariff charges for calls destined for FC; whether Sancom was entitled to some compensation for its services if it could not bill Qwest under its tariff; and a determination of the reasonable rate for those services. Docket 246 at 32. The FCC found that FC was not an "end user" under Sancom's interstate tariff, so Sancom could not collect terminating switched access revenue from Qwest for calls destined for FC. See Ex. 1 at ¶¶ 1, 8, 17-25 (applying Farmers II ). The FCC found that Sancom engaged in access stimulation. Id. at ¶ 3. The FCC reserved ruling on the second and third referred questions. After the FCC's decision, Sancom and Qwest reached a settlement and the court dismissed Sancom's complaint against Qwest and Qwest's counterclaims against Sancom. Docket 284. The third-party complaint between Qwest and FC is still pending.
I. Unfair Competition
In Count IV of Qwest's third-party complaint against FC, Qwest alleges that FC is liable for unfair competition. Under South Dakota law,  "[t]he tort of unfair competition does not have specific elements." Setliff v. Akins, 616 N.W.2d 878, 887 (S.D. 2000). Rather, "it describes a general category of torts which courts recognize for the protection of commercial interest." Id. To succeed on an unfair competition claim, a plaintiff must establish the elements of an underlying tort. Id. at 887-88. Qwest asserts two torts as the basis for its unfair competition claim: tortious interference with a business relationship and inducement of regulatory violations. Docket 388 at 24.
A. Tortious Interference with a Business Relationship
To prove a claim for tortious interference, a plaintiff must show:
(1) [T]he existence of a valid business relationship or expectancy; (2) knowledge by the interferer of the relationship or expectancy; (3) an intentional and unjustified act of interference on the part of the interferer; (4) proof that the interference caused the harm sustained; and (5) damage to the party whose relationship or expectance was disrupted.
Selle v. Tozser, 786 N.W.2d 748, 753 (S.D. 2010) (citing Dykstra v. Page Holding Co., 766 N.W.2d 491, 499 (S.D. 2009)). Qwest's contention in this case is that Qwest had a valid contractual relationship with Sancom through Sancom's tariffs, and that FC interfered with that relationship by intentionally causing Sancom to bill Qwest improperly under its tariffs by engaging in access stimulation, thereby causing damage to Qwest. See Docket 388 at 25-27.
The tariff controlled the relationship between Qwest and Sancom. Although Erickson claims he did not know how Sancom or other LECs would bill the IXCs, his assertion is not credible when weighed against the evidence showing that the arrangement between FC and its LEC partners was specifically designed to take advantage of the tariff relationship between rural LECs and IXCs. Erickson and FC knew about the tariff, its rates, and the obligations of the parties bound by the tariffs. The central question in this case is whether Qwest has shown that FC committed an improper act of interference with Sancom's tariff when FC and Sancom engaged in access stimulation.
Access stimulation, also known as traffic pumping, involves a relationship between an LEC with a high terminating switched access charge and a provider of high volume calling operations such as free conference calling, chat lines, or adult entertainment calls. The LEC installs the necessary equipment at or near its facility and terminates the calls there. The LEC bills the IXC for the terminating switched access service associated with the calls. The LEC and the high volume calling business then share the access revenue. See In the Matter of Connect America Fund; A National Broadband Plan for Our Future, 26 FCC Rcd. 17663, at ¶¶ 656-57 (2011) (hereinafter CAF Order ). The FCC has described access stimulation as follows:
Access stimulation schemes work because when LECs enter traffic-inflating revenue-sharing agreements, they are currently not required to reduce their access rates to reflect their increased volume of minutes. The combination of significant increases in switched access traffic with unchanged access rates results in a jump in revenues and thus inflated profits that almost uniformly make the LEC's interstate switched access rates unjust and unreasonable under section 201(b) of the Act.
Id. at ¶ 657 (footnote omitted). The FCC has also described the impact of access stimulation on the market:
Access stimulation imposes undue costs on consumers, inefficiently diverting capital away from more productive uses such as broadband deployment. When access stimulation occurs in locations that have higher than average access charges, which is the predominant case today, the average per-minute cost of access and thus the average cost of longdistance calling is increased. Because of the rate integration requirements of section 254(g) of the Act, long-distance carriers are prohibited from passing on the higher access costs directly to the customers making the calls to access stimulating entities. Therefore, all customers of these longdistance providers bear these costs, even though many of them do not use the access stimulator's services, and, in essence, ultimately support businesses designed to take advantage of todays' above-cost intercarrier compensation rates.
Id. at ¶ 663.
"[A defendant] interferes with business relations of another... by inducing a third person not to enter into or continue a business relation with another or by preventing a third person from continuing a business relation with another." Setliff v. Akins, 616 N.W.2d at 889 (internal quotations omitted). FC contends that it did not induce or otherwise prevent Sancom from entering into or continuing a relationship with Qwest. As FC points out, Sancom still has a business relationship with Qwest, and continued providing service to Qwest throughout this dispute about payment for calls to FC's bridges.
The South Dakota Supreme Court has not directly addressed whether tampering with a business relationship in a manner that does not either prevent or terminate the business relationship can be sufficient to establish the interference element of this tort. Qwest argues that the plain language of the test should encompass such tampering. Qwest also directed the court to the decisions in Brown v. Hanson, 798 N.W.2d 422 (S.D. 2011); Raven ...