280 F.3d 175 (2nd Cir. 2001), 00-7385, Telecom International v AT&T

Docket Nº:00-7385
Citation:280 F.3d 175
Party Name:TELECOM INTERNATIONAL AMERICA, LTD., Plaintiff-Counter-Defendant-Appellant-Cross-Appellee, TELECOM INTERNATIONAL CO., LTD., Counter-Defendant-Cross-Appellee, v. AT&T CORP., doing business as AT&T, Defendant-Counter-Claimant-Appellee-Cross-Appellant.
Case Date:November 01, 2001
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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280 F.3d 175 (2nd Cir. 2001)

TELECOM INTERNATIONAL AMERICA, LTD., Plaintiff-Counter-Defendant-Appellant-Cross-Appellee, TELECOM INTERNATIONAL CO., LTD., Counter-Defendant-Cross-Appellee,


AT&T CORP., doing business as AT&T, Defendant-Counter-Claimant-Appellee-Cross-Appellant.

No. 00-7385

United States Court of Appeals, Second Circuit

November 1, 2001

December 7, 2000, Argued

, Decided

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AURORA CASSIRER, Parker Chapin LLP, New York, New York, for Plaintiff-Counter-Defendant-Appellant-Cross-Appellee.

ALAN M. UNGER, Sidley & Austin, New York, New York (Elizabeth M. Sacksteder, of counsel; Sharon A. Gans, AT&T Corp., of counsel), for Defendant-Counter-Claimant-Appellee-Cross-Appellant.

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Before: OAKES, KEARSE, and WINTER, Circuit Judges.

WINTER, Circuit Judge:

Telecom International America ("TIA") appeals from Judge Hellerstein's grant of summary judgment dismissing its contractual, fraud, unfair competition, misappropriation, and Communications Act claims against AT&T Corp. TIA also appeals from the grant of summary judgment to AT&T on its counterclaims against TIA. AT&T cross-appeals from the dismissal of its counterclaim for breach of contract against TIA's corporate parent, Telecom International Co., Ltd. ("TI"), seeking to pierce TIA's corporate veil and obtain satisfaction of the counterclaim judgment from TI.

Briefly stated, AT&T, a telecommunications services provider, and TIA, a telephone service reseller, entered into a series of agreements for the purchase of AT&T long-distance services and telecommunications equipment. The purchase of services was governed by a negotiated contract tariff filed with the Federal Communications Commission ("FCC"). The purchase of equipment was pursuant to separate written Purchase/Sale Agreements ("equipment agreements"). Although TIA intended to use the services and equipment in a unified system, the various agreements disclaimed any warranties by AT&T as to performance of such a system and proclaimed each agreement to be a separate, wholly-integrated contract. Furthermore, the equipment agreements capped AT&T's liability for defective equipment at $ 100,000 and barred the recovery of consequential damages, while the contract tariff exposed TIA to a multi-million dollar liability for failing to meet a minimum calls requirement, even if such failure was caused by defective equipment. However, this arrangement was not as draconian as it seems. TIA was a wholly-owned subsidiary formed by TI specifically for these transactions and was the only signatory to the agreements with AT&T. Because TI supplied TIA with capital only as needed, TIA could not satisfy the penalties in the contract tariff unless the unified system worked, in which case the heavy penalties would prevent TIA from moving to other service providers during the term of the contract.

In the event, AT&T's equipment and/or services failed to function well, and the unified system was a failure. After performance difficulties led to disagreements, AT&T threatened to terminate services for nonpayment. In response, TIA commenced this action, alleging that AT&T promised to link equipment and services into a seamless, "end-to-end," unified system. It asserted numerous claims including breach of contract, fraud, unfair competition, and violations of the Communications Act. AT&T counterclaimed against TIA and TI for overdue tariff, equipment maintenance charges, and penalties for failing to meet the minimum calls requirements of the tariff.

We enforce the contracts as written. We hold that TIA's evidence of an overarching agreement with warranties as to the performance of a unified system is barred by the parol evidence rule under New Jersey law and the filed tariff doctrine. We affirm the dismissal of TIA's Communication Act claim. We affirm the district court's dismissal of TIA's other claims as either derivative of TIA's contract claim or as not supported by evidence. We also affirm the granting of judgment against TIA on AT&T's counterclaims. Finally, we order that AT&T's veil-piercing claim against TI be dismissed with prejudice.

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a) Preliminaries

Unless otherwise stated, we view the evidence in the light most favorable to the party against whom summary judgment was entered. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588, 89 L.Ed. 2d 538, 106 S.Ct. 1348 (1986).

TIA's Japanese corporate parent, TI, is a reseller of telecommunications services in Japan. It is the second largest telephone company in Japan and part of a powerful business "kieretsu", known as the Asahi group. AT&T needs no introduction. TI neither owns nor operates any equipment or any network. Instead, it obtains customers for the telephone services of a much larger carrier. TI intended to use the same business model for its planned entry into the Japanese international long-distance market and shopped the American telecommunications market for a suitable partner(s).

In particular, TI was looking to introduce a "call-turnaround" system, a method of arbitraging differences in telecommunications rates in different countries. TI's proposed call-turnaround system would first connect a long-distance call originating in Japan to an American switching station over a toll-free line ("outbound call") and then originate a call from the switching station to the intended recipient ("inbound call"). The customer -- the original caller -- would be charged the lower American rate, thus circumventing higher Japanese rates.

In February 1994, after considering other vendors and service providers, TI began negotiations for the purchase of both telecommunications services and switching equipment from AT&T. The proposed call-turnaround system -- styled "Diamond Net" -- had three distinct components: outbound service, inbound service, and switching equipment. Network services could be purchased from either AT&T or other long-distance telephone carriers. Moreover, outbound services and inbound services could be purchased from different carriers. The switching equipment could also be purchased or leased from either AT&T or other vendors. No technological reason compelled the purchase of all components from the same source, that is, three different sources could provide inbound service, outbound service, and switching equipment respectively, albeit some party would have to perform a coordinating function.

AT&T's sales pitch included representations that there were benefits in an "all AT&T" solution. AT&T apparently made some optimistic technical representations as well, concerning the speed and reliability of AT&T equipment. In March 1994, AT&T presented TI with a written proposal that trumpeted AT&T's "efficiency of end-to-end service, optimized voice and data networking and a single point of contact for questions and trouble resolution." The proposal asserted, inter alia, that "AT&T Bell Laboratories is the finest R&D center in the world," "Value = AT&T," and "AT&T was voted number one for the best technology in a consumer survey." A person at AT&T professed the company's experience with systems "similar" to that desired by TI.

Before signing any contracts with AT&T, TI formed a wholly-owned subsidiary, TIA, incorporated in New York, as the designated operator of Diamond Net and contractual partner with AT&T. TIA was staffed by two American-based executives with decades of telecommunications experience. In the early stages of TIA's existence, TI paid TIA's startup costs and operating expenses, including equipment and service purchases, office rent, and personnel Page 183

salaries. At the same time, TI did not compensate TIA for the wholesaler services that TIA supplied to TI. It provided capital to TIA only as TIA had a current need for expenditures.

After receiving the proposal from AT&T, TIA agreed with AT&T to purchase the following services and equipment: (i) outbound call services from Japan to the New York switching station; (ii) inbound call services from the switching station to the ultimate destination; (iii) a customized switch to bridge the outbound and inbound calls; (iv) an automated voice response system to couple the outbound and inbound calls; and (v) a connecting cable. Following AT&T's recommendation, TIA also contracted with AT&T-affiliated companies for the writing of the necessary software and the housing of TIA's switching equipment. These arrangements followed TI's customary business model of outsourcing technical and support activities.

On April 29, 1994, two weeks after TIA's incorporation, the parties signed two agreements: (i) the Contract Tariff Order ("CTO")for the purchase of outbound and inbound network services, and (ii) an equipment agreement, for the purchase of various pieces of equipment and software, as well as post-warranty maintenance services. TIA's corporate parent, TI, was not a party to, or mentioned in, any of the agreements. We now turn to the terms of the various agreements.

The CTO specified the services to be provided by AT&T, along with prices, warranty disclaimers, and other conditions. Among the terms were shortfall penalty provisions that committed TIA to purchase a substantial minimum amount of both outbound and inbound services during the three-year term of the agreement. The shortfall penalty provisions charged separately for unused outbound and inbound services.1 This arrangement imposed separate penalties for a lack of customers in great numbers and for a lack of customers making long calls.2 The size of the penalties also effectively prevented TIA from switching to another telecom service provider for either outbound or inbound services during the three-year term.

The CTO also contained a Business Downturn...

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