New York Appellate Court Affirms Dismissal of Telecom Provider's Counterclaims against Verizon
Rebecca L. Tsai | Bloomberg Law
Verizon New York, Inc., owns an underground conduit network beneath New York City. Pursuant to the New York Public Service Law, Verizon is required to allow other companies to lease space in the conduits. Optical Communications Group, Inc. (OCG), a telecommunications service provider and Verizon competitor, entered into an agreement with Verizon in July 1998 under which it would lease space in the network for a monthly rental fee. The agreement provided that if the conduit area desired by OCG was not available, then Verizon would provide OCG with an estimate of the cost to have that space made available. Any work done to make the conduit available to OCG (i.e. “Make-Ready” work) would be done by Empire City Subway Company (Limited) (ECS), a corporate affiliate of Verizon.
The parties’ relationship deteriorated when Verizon allegedly misrepresented the availability of the requested conduit space in such a way that OCG would have no choice but to bear the cost of the Make-Ready work. OCG also alleged that Verizon overcharged it and blocked its access to the conduit when it refused to pay the inflated fees.
Verizon and ECS filed the instant suit in New York state court, alleging that OCG breached its contract by failing to pay the monthly fees and the cost of the Make-Ready work. OCG asserted a number of counterclaims, including breach of contract, fraud, and fraudulent inducement. Verizon and ECS moved to dismiss the fraud-based counterclaims, and the trial court granted their motion, finding that these claims were redundant of the breach of contract claim. OCG appealed to the Appellate Division of the Supreme Court of New York, First Department.
Dismissal of Fraud and Fraudulent Inducement Counterclaims Affirmed
The Appellate Division explained that “[a] fraud claim may coexist with a breach of contract cause of action only where the alleged fraud constitutes the breach of a duty separate and apart from the duty to abide by the terms of the contract.” To determine whether OCG’s fraud claims could go forth alongside its breach of contract claim, the Court turned to the New York Court of Appeals’ decision in Sommer v. Federal Signal Corp., 79 N.Y.2d 540 (1992), for guidance. In that case, the Court of Appeals allowed a party to assert tort claims along with its contract claims, reasoning that a “legal duty independent of contractual obligations may be imposed by law as an incident to the parties’ relationship.” The high court noted that “the nature of the injury, the manner in which the injury occurred and the resulting harm” were all factors that it had considered, with the first factor having the most weight.
Here, the Court determined that the injury that OCG allegedly suffered “d[id] not rise to the level required to transform it from contractual to tortious in nature.” Rather, the harm experienced by OCG was “solely financial” and “not typical of harm arising from tort.” (Internal quotations omitted.) As such, the Court held that OCG’s fraud-based claims were duplicative of its contract claim. Accordingly, the Court affirmed the lower court’s judgment.
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