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PRINCETON ECONOMICS GROUP v. AT&T

June 26, 1991

PRINCETON ECONOMICS GROUP, INC. ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
AMERICAN TELEPHONE & TELEGRAPH COMPANY, DEFENDANT.



The opinion of the court was delivered by: Lechner, District Judge.

OPINION

This is an action brought by plaintiff Princeton Economics Group, Inc. ("Princeton Economics"), a New Jersey corporation which provides economic consulting services, against defendant American Telephone & Telegraph Company ("AT & T") for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., and New Jersey statutory and common law. Jurisdiction is asserted pursuant to 28 U.S.C. § 1331.

AT & T moves for summary judgment on Count I of the complaint, the RICO claim and the only federal cause of action asserted in the complaint, and for dismissal of the remaining six state law counts for lack of jurisdiction. In addition, AT & T moves for sanctions against Princeton Economics.*fn1 For the reasons which follow, the motion of AT & T for summary judgment is granted; the motion for Rule 11 sanctions is denied.

Facts

On 20 June 1990, Princeton Economics filed the instant action on behalf of itself and on behalf of a class comprised as follows:

  All persons situated in the State of New Jersey
  who purchased the Spirit System, sold, or
  marketed by defendant AT & T, or any of its
  subsidiaries, divisions, or affiliates, between
  April 21, 1987 and June 19, 1990 (the "Class
  Period". Excluded from the Class are defendant AT
  & T, its subsidiaries, divisions, or affiliates,
  and its officers and directors.

Complaint, ¶ 13. The essence of the Complaint is the alleged failure of AT & T's Spirit Communications System (the "Spirit System"), a telephone system designed for small business, to function as represented by AT & T. See, e.g., id., ¶ 2. Specifically, it is alleged the "conference calling" feature of the Spirit System does not function as promised by AT & T. Id. The Complaint states:

  Defendant AT & T fraudulently marketed and sold
  the Spirit System throughout the Class Period by
  knowingly concealing from prospective purchasers
  the fact that due to serious technical problems
  and limitations, the Conference Calling feature
  does not work adequately to permit high-quality
  teleconferencing with multiple outside parties.
  Consequently, purchasers of the Spirit System,
  who thought they were buying a high-quality,
  full-service, small business telephone system,
  were duped by AT & T's misrepresentations, false
  and misleading statements, and omissions of
  material fact about the Spirit System into buying
  a telephone system whose highly-promoted and
  highly-desired Conference Calling feature was and
  is unsuitable for business use.

Id.

The Complaint alleges that in early 1987, AT & T implemented a plan to revitalize its small business segment, which marketed telephone communications systems to small businesses, by introducing the Spirit System, an updated version of its previously existing Merlin System. Id. ¶ 22. The Complaint alleges AT & T disseminated a press release on 21 April 1987 (the "21 April 1987 Press Release") announcing the introduction of the Spirit System and the Merlin Plus System. Id., ¶ 24. The Complaint quotes from the 21 April 1987 Press Release as follows:

    "The addition of the new Spirit and Merlin
  product lines makes AT & T the only major company
  with a two-tier product family serving the two to
  80-line market. . . . These new products provide
  our customers with the tools to control costs and
  run their businesses. They also enable customers to
  expand and customize their communications systems
  as their businesses change and expand.
  The Spirit [S]ystems have built-in features
  previously available only on larger and more
  expensive office systems. Standard features include
  `hands-free answer on intercom' to page or get
  information quickly from another employee,
  conference calling of up to four persons at one
  time, one-button speed dialing of pre-programmed
  telephone numbers, and restricted calling
  capability. . . .
  AT & T's General Business System products are
  manufactured by AT & T's facilities in
  Shreveport, La., and Denver, and backed by the
  GBS development organization and AT & T Bell
  Laboratories. These products offer small businesses
  the quality and reliability that go with the AT & T
  name."

Id., ¶ 24 (emphasis in original); see also 21 April 1987 Press Release at 2-3.

In addition, the Complaint alleges AT & T mailed Princeton a copy of the Spirit System Brochure and on information and belief mailed such brochure to other members of the Class. Id., ¶ 25. The Complaint alleges the Spirit System Brochure stated:

  "Conference Calling is another valuable business
  feature that's standard on the SPIRIT System. It
  allows you to have a conference of up to four
  parties at one time, whether inside or outside
  the office. It's extremely efficient when making
  those group decisions."

Id., ¶ 30; see also Spirit System Brochure at 3. The Brochure further stated:

  "Your SPIRIT Communications System is fully
  backed by AT & T — world leader in the development
  and production of communications equipment for
  business. This means full service and support by
  our own nationwide network of AT & T technicians."

Complaint, ¶ 31; see also Spirit System Brochure at 3.

The Complaint alleges that AT & T continued to tout the Spirit System even while it knew that it was defective and that AT & T fraudulently concealed the defectiveness of the Spirit System. The Complaint states:

  While continuing to tout the availability,
  utility, and quality of the Conference Calling
  feature of its Spirit System to customers, AT & T
  has known since November 28, 1988 at the very
  latest . . . that the Conference Calling feature
  on the Spirit System has serious technical
  problems which do not permit high-quality
  conferencing with multiple outside parties. . . .
  Throughout the Class Period, AT & T has known and
  has fraudulently concealed from consumers the
  fact that the far-end parties on a conference
  call arranged through the Spirit System cannot
  hear each other well enough to conduct business
  conversations. . . . Plaintiff and the other
  members of the Class found defendant's claims
  material in making their purchasing decisions and
  relied upon defendant's false and misleading
  claims concerning the Spirit System and its
  Conference Calling feature. . . . As a result of
  defendant AT & T's false and misleading claims
  and omissions of material fact regarding the
  Spirit System and its Conference Calling feature,
  plaintiff and the other members of the Class
  purchased the Spirit System and they have not
  been able to use the Spirit System for the
  purposes for which they intended. Consequently,
  plaintiff and the others members in the Class
  have suffered damages.

Complaint, ¶¶ 32, 34, 35, 37.

The Complaint states that it is inferred from a 28 November 1988 AT & T Bulletin issued to AT & T employees that AT & T was aware of the defectiveness of the conference calling feature. Id., ¶ 32; see also 28 November 1988 AT & T Bulletin. The 28 November 1988 AT & T Bulletin states: "`Under some conditions, the far-end parties on a conference call cannot hear each other very well.'" Id. The Complaint further quoted the 28 November 1988 AT & T Bulletin as follows: "`Some of the loss is within the Central Office and some may be attributed to the switched network. The rest of the loss is contributed by the SPIRIT controller which has a 3DB loss on each conferenced trunk.'" Complaint, ¶ 32; see also 28 November 1988 AT & T Bulletin. The Complaint states the 28 November 1988 AT & T Bulletin further provided: "`Customers should be aware that . . . high-transmission can't be guaranteed. For those customers for whom high-quality conference transmission is critical, the MERLIN products should be recommended, since some signal boosting takes place. If MERLIN is not appropriate, Alliance Teleconferencing Services should be recommended.'" Complaint, ¶¶ 32-33; see also 28 November 1988 AT & T Bulletin.

In Count I (the "RICO Count"), the Complaint alleges the conduct of AT & T relative to the marketing of the Spirit System violated RICO, 18 U.S.C. § 1962(a).*fn2 The Complaint alleges: "The AT & T enterprise reinvested in itself and/or used in its operations income derived, directly or indirectly, through its manufacture, marketing, and sale of the Spirit System. In order to obtain such income, the AT & T enterprise carried on a `pattern of racketeering' in that it perpetrated a scheme which included committing numerous acts of mail fraud and wire fraud. . . ." Complaint, ¶ 42. It continues:

Id., ¶ 43. The Complaint alleges:

  As part of its scheme to induce potential
  purchasers of the Spirit System to buy the
  system, defendant AT & T intentionally failed to
  disclose and concealed knowledge about the
  serious technical limitations of the Spirit
  System's Conference Calling feature which
  rendered the feature inadequate and unacceptable
  for use, rendered AT & T's representations that
  the Spirit System is a high-quality,
  full-service, small business telephone system
  false and misleading, and which limitations would
  cause damages to plaintiff and to the other
  members of the Class.

Id., ¶ 48. Finally, the Complaint alleges injury, causation and standing as follows:

  Plaintiff and the other members of the Class have
  sustained injuries to their businesses and property
  because they relied on the fraudulent
  misrepresentations, misleading statements, and
  omissions of defendant AT & T in their purchases of
  the Spirit System manufactured, marketed, and sold
  by defendant AT & T. These injuries were directly
  and proximately caused by defendant AT & T's use
  and investment of income derived from the pattern
  of racketeering activity in the AT & T enterprise,
  which use and investment allowed the ...

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