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New York Appellate Court Affirms Dismissal of Telecom Provider's Counterclaims against Verizon

Thursday, December 8, 2011

Rebecca L. Tsai | Bloomberg Law Verizon New York, Inc. v. Optical Communications Group, Inc., No. 4598, 2011 NY Slip Op 08685, 2011 BL 302181 (App. Div. Dec. 1, 2011) 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. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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