United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Robert Blakey United States District Judge
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
originally filed suit on July 5, 2016, see Compl.
, and now brings nine causes of action. Second Am. Compl.
. 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 .
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 . On January 18, 2017, Inteliquent and
Carter filed 12(b)(6) motions to dismiss Free Conferencing
and HD Tandem's counterclaims. Inteliquent Mot. Dismiss
; Carter Mot. Dismiss .
Memorandum Opinion and Order addresses all three pending
motions, which, for the reasons explained below, are each
granted in part and denied in part.
Inteliquent's Second Amended Complaint
The Long Distance Telecommunications Framework
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.
 ¶¶ 4, 53-54. These LECs in turn deliver the
calls to called parties (also known as the “end
users”) located within their respective geographic
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.
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.
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.
The Relevant Actors
is an IXC with its principal place of business in Chicago,
Illinois. Second Am. Compl.  ¶ 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.
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. In other words, instead of
terminating its own IXC traffic with particular LECs,
Inteliquent transferred calls to HD Tandem as an
intermediary. Id. ¶ 99.
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.
October 22, 2015, Inteliquent entered into a “Master
Addendum” agreement with Free Conferencing, HD Tandem,
and Wide Voice. 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.
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.
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.
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.
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.
The Alleged Scheme
Phase One: The “Traffic Pumping” Business Model
and the “Sham” Customer
describes Defendants' fraudulent scheme in three phases.
Second Am. Compl.  ¶ 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.
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)).
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.
Phase Two: The Commercial Arrangement
second phase of the purported scheme, IXCs like Inteliquent
are approached by HD Tandem. Second Am. Compl.  ¶
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.
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.
Phase Three: Retaliation
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.  ¶ 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
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. ¶
Free Conferencing and HD Tandem's Second Amended
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  ¶¶ 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.
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.
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.
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.
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.
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.
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)).
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.