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Inteliquent, Inc. v. Free Conferencing Corporation

United States District Court, N.D. Illinois, Eastern Division

March 30, 2017

INTELIQUENT, INC., Plaintiff and Counterclaim Defendant,
FREE CONFERENCING CORP., individually and d/b/a HD TANDEM; HDPSTN, LLC d/b/a HD TANDEM; WIDE VOICE, LLC; and JOHN DOES 1-10, Defendants, and MATTHEW CARTER, JR., Counterclaim Defendant.


          John Robert Blakey United States District Judge

         This case began as a dispute between Inteliquent, Inc. (“Inteliquent”), a longdistance telecommunications carrier, and Free Conferencing Corp. (“Free Conferencing”), HD Tandem, LLC (“HD Tandem”), and Wide Voice, LLC (“Wide Voice”), other entities in the telecommunications industry.

         Inteliquent originally filed suit on July 5, 2016, see Compl. [1], and now brings nine causes of action. Second Am. Compl. [55]. On December 23, 2016, Free Conferencing and HD Tandem filed counterclaims against Inteliquent and Matthew Carter, Jr. (“Carter”), Inteliquent's President and Chief Executive Officer. Second Am. Counterclaim [94].

         On October 27, 2016, Wide Voice moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss Inteliquent's Second Amended Complaint for failure to state a claim. Wide Voice Mot. Dismiss [65]. On January 18, 2017, Inteliquent and Carter filed 12(b)(6) motions to dismiss Free Conferencing and HD Tandem's counterclaims. Inteliquent Mot. Dismiss [102]; Carter Mot. Dismiss [104].

         This Memorandum Opinion and Order addresses all three pending motions, which, for the reasons explained below, are each granted in part and denied in part.

         I. Background

         A. Inteliquent's Second Amended Complaint

         1. The Long Distance Telecommunications Framework

         In the telecommunications industry, long distance telecommunications carriers-commonly referred to as “inter-exchange carriers” (“IXCs”)-take calls from calling parties and transport them (over long distances, as their name implies) to geographic areas served by smaller, local exchange carriers (“LECs”). Second Am. Compl. [55] ¶¶ 4, 53-54. These LECs in turn deliver the calls to called parties (also known as the “end users”) located within their respective geographic zones.

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         Under this default framework-which is heavily regulated-the IXC pays individual LECs tariffed “access charges” for taking traffic from the IXC and delivering it to the ultimate end user. Id. ¶ 54. Under federal communications law, the specific charges that an IXC must pay depend upon multiple factors. Id. ¶ 4. For example, access charges can include fees for: (1) “tandem switching”-the handoff of traffic between the IXC and the LEC at a geographical location known as the “tandem switch”; (2) “tandem transport”-delivery from the tandem switch to the LEC's “end office switch” (the location within the local exchange where calls are switched and routed to the called party); and (3) “end office” services-switching and final delivery of traffic from the end office switch to the end user. Id. ¶ 55.

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         Although some access charges are flat fees, others are time-based (i.e., linked to the call duration). Id. ¶ 55. Moreover, tandem transport fees typically possess a mileage component (the mileage factor depends upon specified coordinates that measure the distance between the tandem switch and end office switch). Id. ¶¶ 5, 55. By extension, longer calls and calls delivered to rural areas generate relatively higher tariffed access charges. Id. ¶ 56.

         In some circumstances, however, rather than deliver traffic and pay regulated tariff rates directly to an LEC, an IXC may sign a commercial contract with an intermediary. Id. ¶ 59. The intermediary accepts traffic from the IXC and arranges with LECs, on its own behalf, for switching and transport to end users. Id. In this scenario, the intermediary charges the IXC according to the terms of the commercial contract, then pays LECs their tariffed rates. Id.

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         2. The Relevant Actors

         Inteliquent is an IXC with its principal place of business in Chicago, Illinois. Second Am. Compl. [55] ¶ 55. Free Conferencing is a Nevada corporation with its principal place of business in Long Beach, California. Id. ¶ 40. Persons that call Free Conferencing telephone numbers receive free or low-cost services such as conference calling, chat lines, and streaming radio (thus making it a potential end user of long distance calls). Id. ¶ 6. Some or all of Free Conferencing's telephone numbers are associated with LECs in rural areas, including tribal reservations in South Dakota. Id. ¶ 66. Native American Telecom, LLC, and Native American Telecom-Pine Ridge, LLC (collectively, “the Native American Telecom LECs”) are two such LECs. Id. ¶ 8.

         In August 2013, Inteliquent signed a Master Services Agreement (“MSA”) with HD Tandem. Id. Ex. N. Under the MSA, HD Tandem agreed to provide, in exchange for negotiated fees, termination services for Inteliquent calls destined for certain areas.[1] In other words, instead of terminating its own IXC traffic with particular LECs, Inteliquent transferred calls to HD Tandem as an intermediary. Id. ¶ 99.

         In mid-2015, Inteliquent agreed to carry the long distance traffic of T-Mobile, a national wireless communications provider. Id. ¶ 96. Some of T-Mobile's traffic terminates to Free Conferencing numbers via the Native American Telecom LECs. Id.

         On October 22, 2015, Inteliquent entered into a “Master Addendum” agreement with Free Conferencing, HD Tandem, and Wide Voice.[2] Id. ¶ 99, Ex. A. The Master Addendum amended the terms of the MSA and added Free Conferencing and Wide Voice as parties. Id. ¶ 270. Under the Master Addendum, Inteliquent agreed that, under certain conditions, it would utilize HD Tandem as an intermediary to the Native American LECs. Id. Wide Voice owned some of the equipment used to accept the handoff of traffic between Inteliquent, HD Tandem, and the Native American Telecom LECs. Id. ¶ 7.

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         Under the Master Addendum, Inteliquent did not pay access charges to the Native American Telecom LECs. Id. ¶ 99. Instead, it paid HD Tandem at a rate slightly lower than the Native American Telecom LECs published tariffs. Id. ¶ 124. Plaintiff claims that this discounted arrangement served as the hook that incentivized Inteliquent to agree to the contractual approach. Id. Inteliquent maintains, however, that the Master Addendum's ultimate agreed-upon rate was “tied to and dependent upon” the tariffed rates that the Native American Telecom LECs would otherwise be entitled to charge if services had been provided directly to Inteliquent. Id. ¶¶ 99, 103, 124.

         In conjunction with these assertions, Inteliquent also claims that, both before and after entering into the Master Addendum, representatives of Defendants and the Native American Telecom LECs assured Inteliquent that charges under the agreement would be for legitimate termination services. Id. ¶ 96. Specifically, Inteliquent claims that in the summer of 2015 and April 2016, Joshua Lowenthal, the Chief Operating Officer of Free Conferencing, assured John Schoder, an Inteliquent employee, that Inteliquent would only be charged under the Master Addendum “for legitimate services actually performed.” Id. ¶ 97. One of these misrepresentations purportedly occurred at the “Incompass” telecommunications trade show in Las Vegas, Nevada. Id. Inteliquent also claims that in October 2015, Lowenthal and Andrew Nickerson, President of the Native American Telecom LECs and Chief Executive Officer of Wide Voice, represented to Inteliquent that “it was necessary and reasonable to charge the rates being charged because of the services the Native American Telecom LECs actually were providing.” Id. ¶ 106.

         Between November 2015 and July 2016, Inteliquent delivered millions of minutes of telephone traffic each month to HD Tandem for Free Conferencing numbers associated with the Native American Telecom LECs. Id. ¶¶ 107-111. HD Tandem then billed Inteliquent for its termination services. Id. These invoices, which were transmitted via interstate email, occurred on at least ten separate occasions and itemized calls to numbers associated with Wide Voice and the Native American Telecom LECs. Id. The invoices directed that payments be electronically wired to HD Tandem's account at JPMorgan Chase. Id.

         Inteliquent now asserts that these invoices, in whole or in part, charged Inteliquent for services that were unlawful and part of a concerted fraudulent scheme on the part of HD Tandem, Free Conferencing, and Wide Voice, as well as non-party co-conspirators, including the Native American Telecom LECs. Id. ¶ 118.

         3. The Alleged Scheme

         a) Phase One: The “Traffic Pumping” Business Model and the “Sham” Customer

         Inteliquent describes Defendants' fraudulent scheme in three phases. Second Am. Compl. [55] ¶ 32. The first phase begins with Free Conferencing entering into supposedly improper “marketing arrangements” with LECs. Id. ¶¶ 25, 32. According to Inteliquent's portrayal of Free Conferencing's business model, instead of charging individual callers for its services, Free Conferencing purposefully secures telephone numbers associated with rural area LECs (such as the Native American Telecom LECs) to ensure that callers will make rural calls of long duration. Id. ¶¶ 8, 65, 67. This in turn allows the LECs to charge higher access charges to IXCs. Id. ¶ 67. The LECs then share, pursuant to the “marketing arrangements, ” a substantial portion of the access charges they receive with Free Conferencing. Id.

         Inteliquent asserts multiple objections to what they describe as this “traffic pumping” business model. See Id . ¶ 25. First, according to Inteliquent, high mileage-based tandem transport fees are only appropriate if traffic actually terminates to an end user physically located in a rural area (here, South Dakota). Id. ¶ 72. Inteliquent claims, however, that the equipment Free Conferencing uses to provide its services (such as teleconference servers) is not found in South Dakota, but in locations close to tandem switch locations (the place where, absent a contractual arrangement, an IXC would otherwise transfer traffic to an LEC). Id. ¶¶ 69, 71. Under this theory, Inteliquent is not actually receiving the costly tandem transport services that they are being charged for under the Master Addendum. Id. ¶ 120; see supra *3 (defining “tandem transport” as the delivery from the tandem switch to the LEC's “end office switch” (the location within the local exchange where calls are switched and routed to the called party)).

         Inteliquent further alleges that Free Conferencing does not qualify as a legitimate telecommunications end user. Id. ¶¶ 129-140. According to Inteliquent, the “marketing arrangements” Free Conferencing makes with the Native American Telecom LECs do not resemble traditional arrangements for tariffed services, because Free Conferencing does not pay any meaningful amount to the Native American Telecom LECs. Id. ¶¶ 131, 135. Inteliquent further asserts that the Native American Telecom LECs are substantially linked, through ownership and management, to Free Conferencing. Id. ¶ 49. Inteliquent asserts that this essentially creates a private network for Free Conferencing to which tariffed access charges cannot apply. Id. ¶ 53.

         b) Phase Two: The Commercial Arrangement

         In the second phase of the purported scheme, IXCs like Inteliquent are approached by HD Tandem. Second Am. Compl. [55] ¶ 32. HD Tandem presents itself as a seemingly independent and neutral party that will deliver traffic to LECs (such as the Native American Telecom LECs) at a cheaper rate than can be obtained under tariffs. Id. ¶ 125. According to Inteliquent, the use of this intermediary casts a “false air of legitimacy and credibility” to the arrangement. Id. Inteliquent alleges that, in reality, HD Tandem is not an independent intermediary, but rather operated and managed by the same set of individuals as Free Conferencing. Id. ¶¶ 26, 32.

         Inteliquent claims that, in pursuit of a commercial arrangement, HD Tandem and the other Defendants make false representations about the legitimacy of the access charges that can be imposed for calls to Free Conferencing. Id. ¶ 32. Defendants then induce parties like Inteliquent to enter into contracts such as the Master Addendum upon the false belief that the commercial arrangement offers some element of rate relief. Id. Inteliquent alleges that Defendants utilize these commercial arrangements as an “evasive tactic” to escape regulatory oversight of their improper tariffed access charges. Id.

         c) Phase Three: Retaliation

         In phase three, Defendants attempt to maintain their revenue stream, even after an IXC disputes the lawfulness of the access charges that purportedly underlie the terms of the commercial arrangement. Second Am. Compl. [55] ¶ 32. When a dispute occurs, Defendants cease providing services under the commercial arrangement, and the LECs impose unlawful access charges upon IXCs directly via tariffs. Id. In addition, Defendants resist efforts by IXCs to find alternative and less costly routes to deliver traffic. Id.

         Here, Inteliquent disputed the legitimacy of the charges under the Master Addendum in July 2016. Id. Exs. D-F. Inteliquent alleges that in response, Defendants improperly suspended service to Inteliquent on July 27, 2016. Id. ¶ 114. Inteliquent claims that, despite the suspension, it has continued to receive fraudulent invoices from the Native American Telecom LECs. Id. ¶ 115.

         B. Free Conferencing and HD Tandem's Second Amended Counterclaim

         As one might expect, Free Conferencing and HD Tandem (collectively, “Counterclaiming Plaintiffs”) describe the circumstances a bit differently. They agree that Inteliquent and HD Tandem's business relationship began with execution of the MSA in 2013, and that Inteliquent agreed to be the sole provider of long distance services for T-Mobile in June 2015. Second Am. Counterclaim [94] ¶¶ 27, 44. According to Counterclaiming Plaintiffs, however, Inteliquent's agreement with T-Mobile burdened Inteliquent with the costs associated with a significant increase in traffic on Inteliquent's network. Id. ¶ 46. Moreover, Counterclaiming Plaintiffs assert that the rates Inteliquent offered to T-Mobile under their agreement were both aggressively low and guaranteed, thereby making the deal risky for Inteliquent. Id. ¶ 47. Inteliquent stood to suffer substantial losses (including termination of the T-Mobile agreement) if its costs were higher than expected and it failed to adequately perform. Id. ¶¶ 48, 51. To further complicate matters, Inteliquent began exploring merger opportunities with a major competitor in early 2016. Id. ¶ 49.

         Counterclaiming Plaintiffs allege that, by mid-2016, Inteliquent could not profitably satisfy the T-Mobile agreement. Id. ¶ 59. They allege that, by the end of the financial quarter, the company risked losing almost 20% of its stock value, which would undermine the prospect of its hoped-for merger. Id. Counterclaiming Plaintiffs claim that in response, Inteliquent and Carter began implementing an unlawful plan to reduce its costs.

         First, Inteliquent attempted to extort a rate reduction under the Master Addendum by threatening meritless litigation and withholding termination service fees. Id. ¶ 60. Specifically, in late June 2016, Carter accused Free Conferencing and HD Tandem of committing fraud and threatened to file a civil RICO action unless the Counterclaiming Plaintiffs agreed to a dramatic restructuring of their termination service rates. Id. ¶ 61. When they refused to acquiesce, Inteliquent commenced the present litigation on July 5, 2016. Id. ¶¶ 64-65.

         The same day, Inteliquent began to default on its monetary obligations to HD Tandem. Id. ¶ 65. Currently, Inteliquent owes nearly $7 million in unpaid invoices. Id. ¶ 68. Counterclaiming Plaintiffs assert that Inteliquent withheld payments in order to force HD Tandem to default on its own agreements with LECs, leaving HD Tandem with little choice but to renegotiate Inteliquent's rate. Id. ¶ 63. Counterclaiming Plaintiffs allege that, as a result, HD Tandem defaulted on obligations to its LEC partners, causing significant harm to HD Tandem's business reputation. Id. ¶ 79.

         The drama does not end there. Counterclaiming Plaintiffs also allege that in late July 2016-after HD Tandem terminated services to Inteliquent for its failure to pay-Inteliquent began to fraudulently route calls destined for Free Conferencing numbers over routes that removed or manipulated the call signaling information. Id. ¶ 82. Counterclaiming Plaintiffs allege that this severely compromised the quality of calls to Free Conferencing or caused such calls to be dropped. Id. Counterclaiming Plaintiffs further claim that Inteliquent began to “pirate” Free Conferencing numbers, such that callers received error messages or were diverted to other services. Id. ¶¶ 82, 84.

         Finally, Counterclaiming Plaintiffs assert that in October 2016, in concert with T-Mobile, Inteliquent launched a campaign to stifle traffic to Free Conferencing and HD Tandem. Id. ¶ 89. The campaign involved charging callers extra to make calls to conferencing services associated with HD Tandem (including Free Conferencing), but not conferencing services served by Inteliquent. Id. ¶ 90. Counterclaiming Plaintiffs assert that this effort has resulted in a 20-30% reduction in nationwide T-Mobile traffic to the Counterclaiming Plaintiffs. Id. ¶ 93.

         II. Legal Standard

         A motion to dismiss under Rule 12(b)(6) “challenges the sufficiency of the complaint for failure to state a claim upon which relief may be granted.” Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). A motion to dismiss tests the sufficiency of a complaint, not the merits of a case. Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1039 (7th Cir. 1998). To survive a motion to dismiss, a complaint must first provide a “short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), such that the defendant is given “fair notice” of what the claim is “and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

         Second, the complaint must contain “sufficient factual matter” to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). That is, the allegations must raise the possibility of relief above the “speculative level.” E.E.O.C. v. Concentra Health Servs. Inc., 496 F.3d 773, 776 (7th Cir. 2007). A claim has facial plausibility “when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). The plausibility standard “is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013). The “amount of factual allegations required to state a plausible claim for relief depends on the complexity of the legal theory alleged, ” but “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Limestone Dev. Corp. v. Vill. Of Lemont, 520 F.3d 797, 803 (7th Cir. 2008). In evaluating a particular complaint, the Court accepts all well-pleaded allegations as true and draws all reasonable inferences in favor of the respective plaintiff. Iqbal, 556 U.S. at 678.

         III. ...

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