No Cost Conference, Inc. v. Windstream Communs., Inc. - 940 F. Supp. 2d 1285 (S.D. Cal. 2013)

Rule:

Neither Erlich nor Applied Equipment Corp. stand for the rigid proposition that fraud and misrepresentation claims are never permissible when the gravamen of a lawsuit is breach of contract. Rather, as the California Supreme Court made clear, a plaintiff may assert a tort claim, in addition to contract claims, if he bases the tort claim on conduct independent of the mere act of breach of contract.

Facts:

No Cost Conference, Inc.'s ("No Cost" or "Plaintiff") is a California corporation that provides conference calling services to the public through its conferencing equipment located in California. To use these services, individuals, nonprofit organizations, government agencies, and businesses throughout the country can register for a long-distance telephone number and access code that provides them access to No Cost's service. Then, when multiple individuals dial the same phone number and enter the same access code, they are placed into their conference call. In order to provide these services to the public at no additional cost, No Cost enters into relationships with local telecommunications providers, referred to in telecommunications parlance as "local exchange carriers" or "LECs." In March 2010, No Cost and PAETEC Communications, Inc. ("PAETEC") negotiated and entered into a Wholesale Master Services Agreement (the "Agreement") whereby PAETEC agreed to provide No Cost with certain telecommunications services. Specifically, PAETEC agreed to pay No Cost commissions based on the "[a]ccess compensation . . . collected . . . from the interconnecting carriers for the Access Traffic." Access Traffic was defined to include "[t]oll calls routed from various interexchange carriers to PAETEC's network and delivered to telecommunications system for completion." The Agreement obligated PAETEC to calculate the commission on a monthly basis. PAETEC also committed itself to using its "best efforts to collect all funds" from the interexchange carriers, and, in the event any dispute arose, PAETEC was contractually obligated to "promptly notify [No Cost] in writing, indicating carrier in question [and] showing percentage of traffic." During the course of contract negotiations, PAETEC, through its agent Jay Perreault, was informed that No Cost was concerned about ensuring that PAETEC had a high access charge collection rate. PAETEC represented to No Cost that it maintained greater than 90% rate of collections on its traffic. No Cost agreed to proceed with the Agreement with PAETEC based partly on this representation. No Cost subsequently installed its conference bridge equipment in PAETEC's facilities in Oakland, California. For many months, PAETEC paid No Cost the commissions due on the access traffic in conformity with the terms of the Agreement. Based on the terms of the Agreement, No Cost alleged it understood those payments to accurately reflect commissions for the access charges PAETEC "collected" on its No Cost-bound traffic. At no time during this period did PAETEC inform No Cost that its collection rates were reduced or that carriers had filed any disputes with PAETEC. 

Issue:

Were No Cost’s Fraud/Negligent Misrepresentation claims barred as a matter of law?

Answer:

No.

Conclusion:

The Court concluded that No Cost's claims were not barred as a matter of law. However, the Court agreed that No Cost failed to meet Rule 9's particularity requirement. Notwithstanding this, Defendants are correct that No Cost failed to meet the heightened pleading standard for fraud claims under Rule 9. No Cost has not set forth "the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Nor has No Cost sufficiently differentiated between PAETEC, Wind. Inc., and Wind. Corp. Finally, since this is an action against three corporations, No Cost has failed to sufficiently identify the "names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written."