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Verizon Avoids Antitrust Claims Over Infrastructure Access

01 December 2011

A New York appeals court refused Thursday to revive Optical Communications Group Inc.'s claims that Verizon Communication Inc.'s local unit committed fraud and conspired with another company to anti-competitively restrict Optical's contracted access to Verizon's cable infrastructure.

The Appellate Division of the Supreme Court of New York upheld a ruling dismissing Optical's fraud and state antitrust counterclaims in Verizon's breach of contract suit. The judges concluded that the fraud allegations essentially duplicated Optical's breach of contract counterclaims and further ruled that Verizon couldn't have conspired to restrict competition because the other company involved was one of its subsidiaries.

The dispute stems from an agreement Optical signed with Verizon in 1998, laying out the terms for Optical to lease space in Verizon's underground telecommunications network in the New York City region and to have affiliate Empire City Subway Co. do work to make additional capacity available as needed.

Optical maintains that at some point, Verizon intentionally hid information about available space in its network from Optical in order to force the company to hire Empire to do so-called make-ready work to create more space, according to the opinion. Claiming that it was being overcharged, Optical refused to pay for some network space and for make-ready work Empire did, which in turn led Verizon and Empire to sue for breach of contract.

Optical then lodged a series of counterclaims in the suit, including its own breach of contract claims, along with allegations of fraud and violations of the Donnelly Act, New York State's equivalent of the federal Sherman Act.

The lower court nixed the fraud and antitrust counterclaims, and the appellate division upheld that move on Thursday.

Though Optical had disputed the corporate relationship between Verizon and Empire, the appeals judges saw no reason to doubt the affidavits from the companies attesting to their parent-subsidiary relationship. The court likewise rejected Optical's claim that, unlike the federal antitrust law, the Donnelly Act does not provide immunity for actions taken within a corporate family.

"OCG offers no controlling authority to support its theory that the Donnelly Act does not contain this immunity. To the contrary, ample precedent confirms that the immunity does exist," the court ruled.

The judges likewise ruled that Verizon's alleged conduct didn't rise to the level required to push a fraud claim above and beyond the breach of contract allegation, because Verizon did not owe Optical a separate duty beyond its contractual obligations.

Optical had argued that because Verizon must abide by the Public Service Commission's restrictions on the kinds of rates it can charge for access to its infrastructure, the telecommunications provider owed the company a separate duty to abide by the agency's fee schedule. But the court pointed out that the state's highest court had generally declined to allow fraud claims to coexist with breach of contract claims over the same behavior when the alleged harm was purely economic.

"We recognize that Verizon’s conduct, as alleged, violated the Public Service Law. We also acknowledge that the alleged harm had an effect on the public, albeit an indirect one, since the public relies on the ability of carriers like OCG to access Verizon’s network to promote competition in the field," the court ruled. "Nevertheless, [previous cases] make clear that the public’s interest in compliance with a statutory and regulatory scheme is not sufficient to create tort liability."

Optical attorney Andrew M. Klein of Klein Law Group PLLC expressed disappointment with the decision Thursday, but said that the court had importantly recognized the potential impact of Verizon's alleged activities on the public.

"The appellate court missed an opportunity to promote broadband deployment and to ensure that Verizon and ECS are not permitted to utilize their monopoly control over the underground conduit — that is critical to such broadband deployment — to block competitors from deploying competing fiber," Klein said. "Carrier customers and end users alike should have multiple options for access to broadband. As long as Verizon is able to block those options, broadband deployment and economic development will be hindered."

Attorneys for Verizon were not immediately available for comment.

Optical Communications is represented by Andrew M. Klein and Allen C. Zoracki of Klein Law Group PLLC and by Robert J. Kenney and Zachary B. Grendi of Hofheimer Gartlir & Gross LLP.

Verizon is represented by David S. Flugman and Joseph Serino Jr. of Kirkland & Ellis LLP.

The case is Verizon New York Inc. et al. v. Optical Communications Group Inc., case number 602146/08, in the Supreme Court of New York, Appellate Division.

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