Princeton Economics Group v. AT&T, CO.

• Decision Date: 26 June 1991
• Docket Number: Civ. A. No. 90-2476.
• Citation: 768 F. Supp. 1101
• Parties: PRINCETON ECONOMICS GROUP, INC. on behalf of itself and all others similarly situated, Plaintiffs, v. AMERICAN TELEPHONE & TELEGRAPH COMPANY, Defendant.
• Court: U.S. District Court — District of New Jersey

768 F. Supp. 1101

PRINCETON ECONOMICS GROUP, INC. on behalf of itself and all others similarly situated, Plaintiffs, v. AMERICAN TELEPHONE & TELEGRAPH COMPANY, Defendant.

Civ. A. No. 90-2476.

United States District Court, D. New Jersey.

June 26, 1991.

Allyn Z. Lite, Goldstein Till Lite & Reiken, Newark, N.J., and Robert J. Berg, Wolf Popper Ross Wolf & Jones, New York City, for plaintiffs.

Frederick L. Whitmer, Pitney, Hardin, Kipp & Szuch, Morristown, N.J., for defendant.

OPINION

LECHNER, District Judge.

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.¹ 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 Systems 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).² 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:

The scheme perpetrated by the AT & T enterprise involved intentionally misrepresenting the Spirit System as a highquality, full-service telephone communications system fit for use by small business for, among other things, conference calling with up to four parties at one time, whether inside or outside the office. The purpose of this scheme was to increase AT & T's sales, profits, and market share by inducing the many potential purchasers of the Spirit System to purchase the system without regard for the fact that the system could not acceptably perform the conference calling function. In furtherance of this scheme, the AT & T enterprise repeatedly used the United States mails and interstate wires.

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

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