Opinion
00 Civ. 7422 (LAK).
January 11, 2002
ORDER
Now before the Court is the motion of former Third-Party Defendant AT T Corp. ("AT T") for permission to release funds in the amount of $5,684,986.30 now being held at the direction of the Federal Trade Commission (the "FTC") pursuant to the Court's January 4, 2001 Order for Preliminary Injunction and Other Equitable Relief (the "January 4 Order"). Also before the Court is the FTC's related motion to bring these same funds within the scope of the asset freeze. Although AT T no longer is a party to this action as a result of defendants' voluntary dismissal of the third-party complaints against AT T, this motion nevertheless presents a live issue because the asset freeze contained in the January 4 Order applies by its terms to "[a]ny financial or brokerage institution, telecommunications company, business entity, or other person that holds, controls, or maintains custody of any account or asset of any of the defendants." Background
January 4 Order ¶ III.B.
In January 1999, AT T, AT T Comms (UK) Ltd. ("AT T UK"), and Automatic Communications Ltd. ("ACL") entered into a trilateral operating agreement governing the transport, routing, and settlement of calls originating in the United States and terminating at numbers in Madagascar assigned to ACL by the government-owned telephone administration in Madagascar (the "ACL Agreement"). Subsequently, on January 5, 2000, AT T and British Telecom formed Concert, a joint venture handling their international operations. AT T assigned to Concert all of AT T's operating agreements with overseas carriers, including the ACL Agreement. On February 29, 2000, AT T spun off AT T UK, which became an unaffiliated company, Viatel UK, Ltd. ("Viatel").
Under the ACL Agreement, AT T/Concert routed all calls originated on AT T's network in the United States to the transit carrier, AT T UK and later Viatel, which in turn routed the calls to the terminating carrier, ACL. The transit carrier received a transit fee for accepting traffic from AT T/Concert and routing it to ACL for termination. ACL received a settlement payment, one-half of the agreed "accounting rate" for each minute of traffic accepted from the transit carrier. Payment of the transit fee and settlement fee was made pursuant to "cascade accounting," whereby AT T/Concert paid settlements to the transit carrier, including AT T/Concert's share of the transit fee. The transit carrier then would retain its transit fee and remit the rest to ACL.
When Viatel acquired AT T UK on February 29, 2000, AT T/Concert settled its accounts with Viatel effective as of that date. The parties then commenced negotiations concerning a bilateral operating agreement governing the interconnection of their respective circuits to replace the bilateral operating agreement under which they had interconnected while AT T UK was affiliated with AT T. This bilateral operating agreement governed the interconnection of AT T/Concert's and Viatel's respective networks for the exchange of traffic in many jurisdictions besides Madagascar. While negotiations were pending, AT T/Concert withheld payment of the transit fees and settlements due under all of its agreements with Viatel, including the ACL Agreement, expecting that, once all relevant terms had been agreed to, the sums owed by AT T/Concert for Madagascar traffic would be applied against sums owed to AT T/Concert by Viatel for other traffic.
When AT T/Concert terminated the ACL Agreement on July 23, 2000, AT T/Concert still had not concluded its negotiations with Viatel and still had not paid Viatel for transit fees and settlements due on account of U.S.-Madagascar traffic during the period March 2000 to July 2000. Similarly, when the FTC filed this action on October 2, 2000, AT T/Concert and Viatel had yet to settle their accounts. In March 2001, in response to the January 4 Order, AT T identified $5,684,986.30 that AT T/Concert then owed (and still owes) to Viatel for Madagascar settlements for the period March 2000 through July 2000. Because most of the United States-Madagascar traffic during this period was terminated at numbers assigned to ACL, this amount approximated the amount Viatel owed to ACL under the cascade accounting arrangement. Accordingly, AT T agreed to hold that sum pending further proceedings in this action.
AT T has brought forward convincing evidence that Viatel made payment to ACL on a monthly basis for traffic terminating at ACL's numbers in Madagascar for the period March 2000 through July 2000. An e-mail from Robin David Anthony, a finance manager for Viatel, to Scott Christensen at AT T, confirms that Viatel made these payments. The declaration of Robin David Anthony states that Viatel paid ACL an aggregate of $6,978,516.50 on a monthly basis for traffic during the relevant period. Furthermore, AT T produced invoices and bank statements verifying payment. The bank statements show that Viatel made its last payment to ACL on September 1, 2000, approximately a month before the FTC filed suit. Finally, ACL stipulated to the fact that ACL received from Viatel all settlements owed to it under the ACL agreement on account of calls originated on AT T's network and terminated at the Madagascar numbers controlled by ACL during the term of the Agreement, including the period March 2000 to July 2000.
AT T Ex. F.
Anthony Decl. ¶ 6. The amount held by AT T, $5,684,986.30, apparently is less than the amount paid by Viatel because AT T is entitled under the ACL Agreement to withhold certain amounts that AT T has not been able to collect from callers, termed "uncollectables." Id. ¶ 8; see ACL Agreement, AT T Ex. B ¶ B.c.
Anthony Decl. Ex. C.
Anthony Decl. Ex. D.
Id.
Discussion In addition to injunctive relief, a district court may order an asset freeze as "ancillary relief necessary to accomplish complete justice" under Section 13(b). Thus, in determining the appropriate scope of an asset freeze, necessity should provide a benchmark. The asset freeze in this case is intended to serve two purposes: "to ensure that the Commission will be able to obtain restitution for prior alleged wrongdoing and to protect customers who may be injured in the future." Continuing the asset freeze with respect to the funds AT T owes to Viatel would further neither of these purposes.
FTC v. H.N. Singer, Inc., 668 F.2d 1107, 113 (9th Cir. 1982); see, e.g., FTC v. Verity Int'l, Ltd., 124 F. Supp.2d 193, 205-06 (S.D.N.Y. 2000).
Cf. FTC v. Crescent Pub. Group, Inc., 129 F. Supp.2d 311, 326 (S.D.N.Y. 2001) (refusing to appoint at receiver at the preliminary injunction stage when evidence was incomplete and less restrictive measures would do).
Verity Int'l, 124 F. Supp.2d at 206.
The evidence suggests, and the FTC does not contest, that Viatel already has paid ACL for the period from March 2000 to July 2000. Furthermore, Viatel has a legitimate claim to these funds. It is true that Viatel's claim to the funds is derivative of ACL's original claim to those funds, but Viatel made payment to ACL in the ordinary course of business prior to commencement of this action, and the FTC has failed to convince the Court that Viatel had sufficient knowledge of ACL's wrongdoing to impute culpability to it. The FTC's argument that Viatel "was aware of the facts that are the core of . . . this action" is based solely on one line from the preamble of the ACL Agreement and is contradictory to its position in support of extension of the preliminary injunction to ACL. In that context, the FTC has taken great pains to convince the Court that AT T (and by extension Concert and Viatel) was misled by ACL. It is also true that Viatel's payment prior to receipt of funds from AT T/Concert was not consistent with the strict letter of the ACL Agreement. But contractual terms exist for the benefit of the contracting parties and the decision to enforce such terms generally belongs to them. Here, Viatel had an ongoing relationship with ACL during the pendency of its negotiations with AT T/Concert, and Viatel had legitimate business reasons for making payment before receiving funds from AT T/Concert, especially considering the close ties between AT T/Concert and Viatel. Finally, to the extent that Viatel "assumed the risk" of nonpayment, it did so only with respect to "uncollectibles," not with respect to an FTC asset freeze. In sum, the funds at issue are neither a debt owed to ACL nor recoverable by consumers upon a judgment adverse to ACL.
Cf. CFTC v. Hanover Trading Co., 34 F. Supp.2d 203, 207-208 (S.D.N.Y. 1999) (disgorgement not proper when employee had legitimate claim to commissions).
FTC Opp. Permission Release Funds, at 4.
E.g., Tr., June 5, 2001, at 88-92.
FTC Opp. Permission Release Funds, at 5.
As for the second purpose of the asset freeze, there is no indication that releasing the funds owed to Viatel would pose a threat to consumers in the future. The FTC's argument that ACL and other defendants may benefit from the release of funds is based on nothing but sheer speculation. The FTC has failed to demonstrate any nexus between Viatel and ACL's wrongdoing, so the Court does not see how reimbursing Viatel could possibly lead to future harm to consumers.
Conclusion
For the reasons set forth above, the Court is persuaded that maintaining the asset freeze over the funds at issue is not necessary to accomplish complete justice. Accordingly, the FTC's motion to amend the asset freeze to include funds held by AT T is denied. AT T's motion for permission to release $5,684,986.30 to settle its account with Viatel is granted. The January 4 Order is modified by adding to Section III.B the following: "Notwithstanding the above, AT T Corp. (including the joint venture Concert) is authorized to release $5,684,986.30 to Viatel UK Ltd. in satisfaction of debts owed to Viatel for Viatel's transit fees and for settlement payments made to ACL for the period March 2000 to July 2000."
SO ORDERED.