Smart Commc'ns Holding v. Glob. Tel-Link Corp.

• Docket Number: 22-3287
• Decision Date: 22 December 2023
• Parties: SMART COMMUNICATIONS HOLDING, INC.; HLFIP HOLDING, INC., d/b/a Smart Communications IP Holdings, Appellants, v. GLOBAL TEL-LINK CORPORATION; COUNTY OF YORK; YORK COUNTY PRISON; ADAM OGLE, in his official capacity as York County Prison Warden
• Court: U.S. Court of Appeals — Third Circuit

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SMART COMMUNICATIONS HOLDING, INC.; HLFIP HOLDING, INC., d/b/a Smart Communications IP Holdings, Appellants, v. GLOBAL TEL-LINK CORPORATION; COUNTY OF YORK; YORK COUNTY PRISON; ADAM OGLE, in his official capacity as York County Prison Warden

No. 22-3287

United States Court of Appeals, Third Circuit

December 22, 2023

NOT PRECEDENTIAL

Argued October 19, 2023

On Appeal from the United States District Court for the Middle District of Pennsylvania (District Court No. 1-21-cv-01708) District Judge: Honorable Jennifer P. Wilson

Phillip J. Closius [ARGUED] William N. Sinclair Silverman Thompson Slutkin & White Matthew M. Haar Saul Ewing 2 N Second Street

Penn National Insurance Katrina M. Quicker Quicker Law Counsel for Appellants

Katherine M. Clemente Greenberg Traurig One Vanderbilt Avenue New York, NY Counsel for Appellee Global Tel-Link Corporation

Bridget E. Montgomery Adam M. Shienvold [ARGUED] Eckert Seamans Cherin & Mellott Counsel for Appellees County of York, York County Prison, and Adam Ogle

Before: CHAGARES, Chief Judge, PHIPPS and CHUNG, Circuit Judges

OPINION ^[*]

CHUNG, CIRCUIT JUDGE

Plaintiffs Smart Communications Holding, Inc. and HLFIP Holding, Inc. (collectively, "Smart") competed with Global Tel-Link Corporation ("GTL") for an exclusive contract to provide inmate calling service at York County Prison ("YCP"), a prison operated by York County, Pennsylvania. In the end, York County contracted with GTL. Smart then sued GTL and multiple defendants affiliated with York County ("York Defendants") claiming, among other things, that: 1) GTL and the York Defendants violated Section 1 of the Sherman Antitrust Act by blocking competition for inmate calling service at YCP through their exclusive contract; and, 2) GTL committed Pennsylvania torts when it defamed Smart to York County and YCP, causing York County to break off negotiations with Smart. The District Court granted Defendants' motion to dismiss as to all of Smart's claims.

We agree with the District Court that Smart's allegations do not state a federal antitrust claim. We remand Smart's state tort claims for the District Court to determine whether the Complaint sufficiently pleads the elements of those torts. Accordingly, we will affirm the District Court's ruling in part, vacate in part, and remand for further consideration.

I. BACKGROUND^[1]

Inmate calling service ("ICS") refers to the telephone system that prisoners use to make calls outside the prison. YCP, like many other prisons, enters into exclusive ICS contracts. Under these contracts, a company provides ICS, collects fees from call recipients, and pays the prison a share of their fees as "commission." Joint App. ("JA") 79.

GTL (or its predecessor-in-interest) has been YCP's ICS provider for two decades, during which time the contract was renewed nine times. GTL is also a major player in the national ICS market. The Complaint alleges that GTL and its main competitor share at least eighty percent of the national ICS market.

Smart provides ICS, as well as mail-scanning and other services for the corrections environment. In an unrelated lawsuit, Smart sued York County and YCP for patent infringement, claiming that YCP's mail-scanning system infringed upon Smart's technologies. It was during negotiations to settle that patent-infringement lawsuit that Smart says it learned York County had an ICS contract with GTL that would soon expire. Smart immediately sent YCP's Warden, Clair Doll,^[2] marketing materials about its own ICS offerings, followed shortly thereafter with proposed terms that Smart claims would have doubled York County's commission while cutting user fees in half. In the weeks that followed, Smart met with Warden Doll and other YCP officials, provided more information about its services, and exchanged drafts of Smart's proposed terms with Warden Doll.

Smart alleges that, several weeks before the contract's expiration, GTL realized that it could lose the ICS contract and made defamatory statements in an attempt to dissuade YCP from moving forward with Smart. Smart alleges that GTL's outside counsel met with officials from York County and YCP and made "false claims and misrepresentations" about Smart. Id. at 84. Smart alleges three false statements:

(1) "Smart Communications had purchased a company named Lattice and that, because of Smart Communications' alleged arrangement with Lattice, if YCP proceeded to replace GTL's phone equipment with Smart Communications' phone equipment, GTL had a right to and would exercise its right to seize Smart Communications' equipment based on an alleged judgment that GTL had received against Lattice, thereby leaving YCP without any communications services for the duration of its potential contract with Smart Communications." Id. at 85.

(2) "Smart Communications' Asserted Patent allegedly was invalid and that the York Defendants should not settle the Patent Litigation." Id.

(3) "Smart Communications was infringing multiple GTL patents, and that GTL would sue Smart Communications and immediately obtain an injunction to prohibit Smart Communications from providing certain services that were the subject of Smart Communications' proposal to York County and YCP." Id.

Smart also alleges that after its meeting with York County and YCP, GTL's outside counsel sent Smart a letter stating, among other things, that GTL believed that some of Smart's patents were invalid or infringed upon GTL's patents.

About a month before York County's contract with GTL was to expire, Smart still believed that its negotiations with York for the next ICS contract were proceeding well. Just days before the contract expired, Warden Doll continued to express interest in Smart's proposal and asked Smart for information to give the York County Commissioners, the body with authority to award the contract.

But Smart did not win the contract. York County renewed its contract with GTL on a month-to-month basis until it could finalize a new agreement with GTL. Ultimately, York County renewed its contract with GTL (the "new contract") for a five-year term with provision for two additional one-year renewals. The new contract also contained an early termination clause that required York County to pay GTL liquidated damages if it canceled the contract before the end of the five-year term. The financial terms of the new contract differed from those Smart had proposed and Smart alleges that its proposal would have resulted in more commission paid to York County with lower fees paid by call recipients.

After losing the contract bid, Smart filed a lawsuit in the United States District Court for the Middle District of Pennsylvania, suing GTL and three York Defendants- York County, YCP, and YCP's Warden, Adam Ogle, in his official capacity. Smart's Complaint brought four counts, three of which are relevant on appeal.

Smart's first count claimed that all Defendants violated Section 1 of the Sherman Antitrust Act. This claim was based on Smart's allegation that the "exclusive dealing contract" between GTL and York County forecloses competition for ICS at YCP. Id. at 106.

Smart's second and third counts claimed that GTL violated Pennsylvania law through (1) tortious interference with Smart's prospective business relations; and, (2) unfair competition. Both claims were based on Smart's allegation that when GTL's outside counsel met with York County and YCP, GTL made "false and misleading statements" to sabotage Smart's potential contract. Id. at 111.

Defendants moved to dismiss. The District Court granted their motion and dismissed all claims at issue here without prejudice.^[3] The District Court found that Smart failed to state a Sherman Antitrust Act claim because (1) it did not allege that Defendants suppressed competition within the relevant market; and, (2) its alleged injury did not establish antitrust standing. The District Court also found that Smart failed to state a claim for the two alleged state-law torts, largely because Smart did not adequately allege "independently actionable conduct" to support either claim. Id. at 43.

The District Court gave Smart twenty-one days to amend its Complaint, after which the Court would close the case. Smart let the twenty-one days run, and the Court closed the case. Smart then appealed.

II. DISCUSSION ^[4]

On appeal, Smart challenges the District Court's rulings dismissing its Sherman Antitrust Act claims and its state-law tort claims. We address each in turn.

A. Sherman Antitrust Act Claims

Count One of Smart's Complaint claims that Defendants violated Section 1 of the Sherman Antitrust Act. That Section provides that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1.

To state a Sherman Act claim, a plaintiff must allege both anticompetitive conduct and antitrust injury. ZF Meritor LLC v. Eaton Corp., 696 F.3d 254, 281 (3d Cir. 2012). Smart fails to allege both. It does so primarily because its claim conflates two different products, which Smart refers to interchangeably as "ICS," when defining the relevant market. That is, Smart alleges that Defendants engaged in anticompetitive conduct in the product market for ICS contracts, a product that Smart acknowledges it competes to sell to prisons like YCP in a national market (we will refer to this product-geographic market combination as "the national market for ICS contracts"). But Smart argues it suffered antitrust injury in a different geographic market, limited to YCP, based upon a different product market, ICS itself; i.e., the market comprised of YCP inmates, and those with whom they communicate,...