Venture Communications Cooperative, Inc. v. James Valley Cooperative Telephone Company et al

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
CENTRAL DIVISION
VENTURE COMMUNICATIONS
COOPERATIVE,INC.,
3:20-CV-3011-RAL
Plaintiff,
vs.
OPINION AND ORDER GRANTING IN
PART AND DENYING IN PART
DEFENDANTS' MOTION TO DISMISS
JAMES VALLEY COOPERATIVE
TELEPHONE COMPANY,and
NORTHERN VALLEY COMMUNICATIONS,
LLC,
Defendants.
Plaintiff Venture Communications Cooperative, Inc. ("Venture") sued Defendants James
Valley Cooperative Telephone Company("James Valley")and Northern Valley Communications,
LLC ("Northern Valley"). Doc. 1. Venture is an incumbent local exchange carrier^ that provides
voice and broadband services in rural South Dakota. Doc. 1 at 1. James Valley is also an
incumbent local exchange carrier, while Northern Valley is a competitive local exchange carrier.^
' An incumbent local exchange carrier is a telecommunications company that provided local
service before the passage ofthe Telecommunications Act of 1996,Pub. L. No. 104-104,110 Stat.
56(1996). See 47 U.S.C. § 251(h)(1)(defining an "incumbent local exchange carrier" st$ the local
exchange carrier that provided telephone exchange service with respect to an area as of February,
8, 1996 and was a member pr the successor or assign of a member of the exchange carrier
association as of February 8, 1996).
^ A competitive local exchange carrier is a telecommunications company that competes with
established carriers, usually incumbent local exchange carriers in the area. S^ 47 C.F.R. §
61.26(a)(1) (defining a "competitive local exchange carrier" as a local exchange carrier that
provides some or all of the interstate exchange access services used to send traffic to or from an
1
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Doc. 1 at 9, 10. Both defendant telecommunications conipanies provide voice and broadband
services in South Dakota. Doc. 1 at 9, 10. Venture alleges that Defendants have violated 47
U.S.C. § 220(e), entitling it to relief under 47 U.S.C. §§ 206 and 207. Doc. 1 at 49-56. Venture
also alleges that Defendants engaged in tortious interferenee with business expectancy, fraud, and
unfair competition aetionable under South Dakota law. Doc. 1 at 57-68. The Defendants have
rtioved to dismiss all of Venture's claims under Rule 12(b)(6) of the Federal Rules of Civil
Procedure. Doe. 14. For the reasons explained herein, this Court grants in part and denies in part
Defendants' Motion to Dismiss.
I. Facts Relevant to Motion to Dismiss^
Many rural communities across the United States lack access to quality and affordable
voice and broadband services. See In re Conneet Am.Fund. F.C.C. 18-29,2018 WL 1452720,^ 1
(Mar.23,2018). In recognition ofthis problem,in 2011 the Federal Communications Commission
("FCC") adopted the Connect America Fund ("CAF"), a category of funding for eligible
telecommunications companies providing voice and broadband services in imderserved areas.
Doe. 1 at 119. Such funding makes it eeonomieally feasible for telecommunieation companies to
provide their serviees in rural areas where the revenue would otherwise be insufficient to justify
the cost of doing business there. Doe. 1 at^^l,2,19,20. To determine the amount ofCAF support
that carriers should receive, the FCC uses a method called the Alternative Connect America Cost
Model ("A-CAM"). Doc. 1 at	|	20. This method excludes from its support calculations any
locations, otherwise known as eensus bloeks, in which an unsubsidized carrier provides voice and
end user and does not fall within the definition of"incumbent local exchange earrier" in 47 U.S.C.
§ 251(h)).
^ In setting forth facts relevant to the rhotion to dismiss, this Court of course makes no factual
findings at all and must take the well-pleaded allegations ofthe complaint as true.
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broadband services at an appropriate level of speed. Doc. 1 at ^ 20. The FCC has explained that
the purpose of this restriction is to target support to areas of greater need. Doc. 1 at ^ 28.
In 2016, the FCC initiated its first A-CAM offering (A-CAM I). Doc. 1 at ^ 20. For A-
CAM I, the FCC excluded from its support calculations any census blocks in which an
unsubsidized carrier was already providing broadband services at the minimum speed of 10 Mbps
download, 1 Mbps upload (10/1 Mbps), along with traditional voice service. Doc. 1 atf 21. At the
end of2018, the FCC initiated its second A-CAM offering(A-CAM II). Doc. 1 at ]f 22. The FCC
in A-CAM II excluded from its support calculations any census blocks in which an unsubsidized
carrier was aheady providing broadband service at the niinimimi speed of 25 Mbps download, 3
Mbps upload (25/3 Mbps), along with traditional voice service. Doc. 1 at 22. The FCC's support
fund decisions under A-CAM I and A-CAM II relied upon information provided in Form 477
submissions. Doc. 1 at ^ 23. Form 477s are documents that facilities-based broadband providers
must file with the FCC twice annually. Doc. 1 at 13. Form 477 submissions inform the FCC of
the census blocks in which various providers offer voice and broadband services, as well as the
broadband speeds offered in particular locations. Doc. 1 at^I 13.
Venture alleges that defendants James Valley and Northern Valley have "corrupted" and
"weaponized" this process. Doc. 1 at ^ 3. Northern Valley is wholly owned by James Valley, and
both companies share the same CEO, an individual named James Grofl. Doc. 1 at 10, 35.
Significantly, Northern Valley is an unsubsidized carrier. Doc. 1 at	|	36. Venture claims that
Northern Valley falsely stated in its 2017 Form 477 that it provides 25/3 Mbps broadband service
in census blocks that are also served by Venture. Doc. 1 at 36. This representation, if true,
disqualifies Venture from any A-CAM II support in those particular census blocks, which support
Venture would otherwise have been entitled to receive. Doc. 1 at 36, 42. Allegedly based on
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misinformation provided by Northern Valley in its 2017 Form 477, the FCC determined that
certain census blocks were receiving adequate voice and broadband services from an unsubsidized
carrier, and therefore, has reduced its A-CAM H offering to Venture by $20 million over a ten-
/
year period. Doc. 1 at^ff 37, 42.
Venture alleges that Defendants have previously provided false information in their Form
477s. Doc. 1 at T| 26. In or around 2015, Defendants purportedly misrepresented their voice and
broadband capabilities on a Form 477 filing that was used as a basis for A-CAM I offerings. Doc.
1 at I 26. On April 28, 2016, Interstate Telecommunications Cooperative, Inc. (ITC), one of
Defendants' competitors, filed an A-CAM Competitive Challenge with the FCC, claiming that
Northern Valley had "erroneously reported [census] blocks as ones in which it offers broadband
service." Doc. 1 at ^ 29. Only then did Northern Valley allegedly acknowledge that it did not
provide broadband services in ITC's incumbent telephone area. Doc. 1 at 30. Thereafter,
Northern Valley corrected its data. Doc. 1 at ITf 30, 31. Left uncorrected. Northern Valley's
misrepresentation would have had "significant financial repercussions for ITC by reducing the A-
CAM I offering it was due." Doc. 1 at 31. Venture emphasizes that this experience put
Defendants on notice of the importance of accurately reporting data in their Form 477s and
eliminated the possibility of"innocent mistake" as an explanation for the conduct alleged here.
Doc. Iatt1[32, 39, 40.
Venture's complaint also avers a longstanding dispute between the parties, allegedly
prompting the Defendants to act with the intent of harming Venture. In March 2015, Defendants
filed a lawsuit against South Dakota Network, LLC and its individual managers. Doc. 1 at ^ 34.
Both Venture and Defendants are a part ofSouth Dakota Network,LLC,a larger provider network.
Doc. 1 at^ 33. Randy Houdek,in addition to his role as CEO of Venture, is an individual manager
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of South Dakota Network, LLC. Doc. 1 at ^ 34. Apparently, this litigation proved to be "highly
contentious," to the point where Mr. Grofl, Defendants' CEO, allegedly "aggressively attacked"
Mr. Houdek,Plaintiffs CEO.Doe. 1 at If 35. Venture claims that this animosity between the parties
is what motivated Defendants to misrepresent Northern Valley's da,ta on the Form 477, thereby
depriving Venture of $20 million worth of support for certain census blocks. Doe. 1 at ][ 35.
Because the FCC eliminated the challenge process from A-CAM I for A-CAM II, Venture was
unable to challenge the data in Northern Valley's Form 477 as ITC had done in 2015. Doc. 1 at 1ft
24,41. Having no other remedy. Venture brought this lawsuit. Doe. 1 at tt 24,41.
Based on these allegations and others. Venture asserts claims for a violation of the
Communications Act of 1934(Count I); tortious interference with business expectancy(Count II);
fraud(Count III); and imfair competition(Coimt IV). Doc. 1. Defendants offer multiple arguments
in support of their Motion to Dismiss, each of which is discussed below. Docs. 15, 17.
II. Standard of Review
On a motion to dismiss under Rule 12(b)(6), courts must accept a plaintiffs factual
allegations as true and construe all inferences in the plaintiffs favor, but need not accept a
plaintiffs legal conclusions. Retro Television Network. Inc. v. Luken Commc'ns. LLC.696 F.3d
766,768-69(8th Cir. 2012). To survive a inotion to dismiss for failure to state a claim, a complaint
must contain"a short and plain statement ofthe claim showing that the pleader is entitled to relief."
Fed. R. Civ. P. 8(a)(2). Although detailed factual allegations are unnecessary, the plaintiff must
plead enough facts to "state a claim to relief that is plausible on its face." Asheroft v. Iqbal. 556
U.S. 662,678(2009)(quoting Bell Atl. Com, v. Twomblv. 550 U.S. 544,570 (2007)). A claim is
plausible on its face "when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged," Iqbal. 556 U.S. at
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678, "even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a
recovery is very remote and unlikely," Twomblv. 550 U.S. at 556 (quoting Scheuer v. Rhodes.
416 U.S. 232,236(1974)). Still,"conclusory statements" and "naked assertion[s] devoid offurther
factual enhancement" do not satisfy the plausibility standard. Iqbal. 556 U.S. at 678 (alteration in
the original)(citation and internal quotation marks omitted).
When determining whether to grant a Rule 12(b)(6) motion, a court generally must ignore
materials outside the pleadings, but it may "consider matters incorporated by reference or integral
to the claim, items subject to judicial notice, matters of public record, orders appearing in the
record ofthe case, and exhibits attached to the complaint." Dittmer Props.. L.P. v. FDIC. 708 F.3d
1011,1021 (8th Cir. 2013)(cleaned up and citation omitted); see also Kushner v. Beverlv Enters..
Inc.. 317 F.3d 820, 831 (8th Cir. 2003)(explaining that courts may also consider "documents
whose contents are alleged in a complaint and whose authenticity no party questions, but which
are not physically attached to the pleading"(citation omitted)). In addition to the allegations in the
complaint, this Court has considered Northern Valley's 2017 Form 477, Doc. 15-11, because its
contents are the basis for this lawsuit and repeatedly referenced in the complaint. Doc. 1 at
26, 36-40,43, 52, 59, 63, 67. Further, this Court has considered several orders issued by the FCC
because such orders have been referenced in the complaint. Doc. 1 at 24, 27, or are otherwise
matters ofpublic record.'*
in. Analysis
A. Proper Party
'* Defendants have attached 20 exhibits to Doc. 15("Defendants' Memorandum ofLaw in Support
of Motion to Dismiss") and at times argue from a version of facts quite different from what is
alleged in the complaint. While this Court can consider matters of public record, this Court in
ruling on a motion to dismiss cannot credit the Defendants' view of the facts but must take as true
the well-pleaded allegations ofthe complaint.
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This Court starts with James Valley's argument that it is not a proper party to the case and
has no derivative liability because Northern Valley, the James Valley subsidiary, was the only
entity that filed the Form 477 at issue. "It is a general principle of corporate law ... that a parent
r
corporation ... is not liable for the acts of its subsidiaries." United States v. Bestfoods. 524 U.S.
51,61 (1998). However, it is also well-established that
[D]erivative liability cases are to be distinguished from those in which the alleged
wrong can seemingly be traced to the parent through the conduit of its own
personnel and management and the parent is directly a participant in the wrong
complained of. In such instances, the parent is directly liable for its own actions.
Id. at 64-65 (internal citations and quotations omitted). Venture asserts that it is not alleging that
James Valley is liable for the acts of Northern Valley based exclusively on the parent-subsidiary
relationship between the two corporations. Doc. 16 at 8. In fact. Venture does not allege a theory
of vicarious liability at all. Doc. 1 at 25-42. Rather, Venture claims that James Valley directly
participated in filing false information through Northern Valley's Form 477, thereby violating 47
U.S.C. § 220(e) and state tort law. Doc. 1 at 25-42.
Venture alleges facts that, taken together, allow for a reasonable inference that James
Valley was a direct participant in the allegedly wrongful acts underlying this litigation. First,
Venture alleges that James Groft is both the CEO for James Valley and Northern Valley. Doc. 1
at 135. This fact alone ofcourse is not enough to show that James Valley was a direct participant.
See Bestfoods. 524 U.S. at 69 ("[l]t is entirely appropriate for directors of a parent corporation to
serve as directors of its subsidiary, and that fact alone may not serve to expose the parent
corporation to liability for its subsidiary's acts."). However, Venture also highlights the "highly
contentious" litigation brought by James Valley and Northem Valley against South Dakota
Network, LLC and its individual managers, one of whom is Randy Houdek, Venture's CEO. Doc.
1 at Tit 34-35. In that litigation, Mr. Groft, in his role as CEO for James Valley and Northem
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Valley, allegedly "aggressively attacked" Mr. Houdek. Doc. 1 at f 35. Assuming this is true, as
this Court must. Venture paints a picture in which James Valley and Northern Valley schemed to
file false information on the Form 477 to carry out a vendetta against Venture arising from the
previous litigation. Thus, at least at this very early stage of the litigation. Venture has alleged
enough facts to permit a reasonable inference that James Valley was a direct participant in the
wrongdoing.
In any event. Venture has at least alleged sufficient facts to state a plausible claim that
James Valley and Northern Valley engaged in a civil conspiracy to violate federal statutes and
state tort law. To establish a civil conspiracy, the plaintiff must show five elements: (1) two or
more persons;(2)an object to be accomplished;(3)a meeting ofthe minds on the object or course
of action to be taken;(4)the commission of one or more unlawful overt acts; and (5) damages as
the proximate result ofthe conspiracy. In re Temporomandibular Joint(TMJ)Implants Prod. Liab.
Litig.. 113 F.3d 1484, 1498 (8th Cir. 1997). Civil conspiracy "is not an independent cause of
action, but is sustainable only after the underlying tort claim has been established." Sancom. Inc.
V. Qwest Commc'ns Corp.. 643 F. Supp. 2d 1117, 1132 (D.S.D. 2009)(citation omitted). "By
establishing a civil conspiracy, a plaintiff extends liability for the wrongful acts underlying the
conspiracy to those actors who did not actively engage in the acts, but conspired in their
commission." W. Plains. L.L.C. v. Retzlaff Grain Co.. Inc.. 870 F.3d 774, 787 (8th Cir. 2017)
(cleaned up)(applying Nebraska law).
Although Venture does not specifically allege a civil conspiracy, the facts averred in the
complaint create a plausible claim for civil conspiracy between James Valley and Northern Valley.
I
As discussed above. Venture is essentially alleging that James Valley and Northern Valley agreed
to intentionally submit false information in Northern Valley's Form 477 to trigger an FCC decision
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which deprives Venture of $20 million in A-CAM II support. Whether Venture will be able to
prove up these facts remains to be seen. But drawing all reasonable inferences in favor of the
plaintiff, as this Court must in ruling on a motion to dismiss, James Valley is a proper party to the
action based on either direct liability or civil conspiracy.
B. Federal Claim under 47 U.S.C.§ 220(e)
Next, this Court considers the Defendants' arguments about whether Venture has a private
cause of action under the Communications Act and in turn whether Venture has alleged sufficient
facts to state a plausible claim under 47 U.S.C. § 220(e), thereby entitling it to relief imder 47
U.S.C. §§ 206 and 207. Section 220(e) of the Communieations Act provides that:
Any person who shall willfully make any false entry in the accounts of any book of
accounts or in any record or memoranda kept by any such carrier, or who shall
willfully destroy, mutilate, alter, or by any other means or device falsify any such
account, record, or memoranda, or who shall willfully neglect or fail to make full,
true, and correct entries in such accounts, records, or memoranda of all facts and
transactions appertaining to the business ofthe carrier, shall be deemed guilty of a
misdemeanor,and shall be subject, upon conviction,to a fine ofnot less than $1,000
nor more than $5,000 or imprisonment for a term ofnot less than one year nor more
than three years, or both such fine and imprisonment....
47 U.S.C. § 220(e). Here, Venture alleges that Defendants intentionally filed false information in
Northern Valley's Form 477. Doc. 1 at 36-42. In particular. Venture claims that Northern
Valley falsely stated that it offered 25/3 Mbps broadband services in census blocks where in fact
it does not provide such services. Doc. 1 at 36-38. If this is true, such conduct could violate
Section 220(e). See In re Local Competition & Broadband Reporting. 15 F.C.C. Red. 7717, 7789
(March 30, 2000)(advising carriers that any "[pjersons making willful false statements in the
[Form 477] can be punished by fine or imprisomnent under the Communications Act, 47 U.S.C.
220(e).").
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A violation of Section 220(e) gives rise to a claim for civil remedies under Sections 206
and 207 of the Communications Act. Section 206 states that:
In case any common carrier shall do, or cause or permit to be done, any act, matter,
or thing in this chapter prohibited or declared to be imlawful, or shall omit to do
any act, matter, or thing in this chapter required to be done, such common carrier
shall be liable to the person or persons injured thereby for the full amount of
damages sustained in consequence of any such violation of the provisions of this
chapter....
47 U.S.C. § 206. Section 207 provides that:
Any person claiming to be damaged by any common carrier subject to the
provisions of this chapter may either make complauit to the Commission as
hereinafter provided for, or may bring suit for the recovery of the damages for
which such common carrier may be liable imder the provisions of this chapter, in
any district court of the United States of competent jurisdiction; but such person
shall not have the right to pursue both such remedies.
47 U.S.C. § 207. This Court must give effect to the plain meaning of the statutes. DeCoteau v.
Schweitzer. 774 F.3d 1190, 1192 (8th Cir. 2014)("[Wjhere statutory language is plain, the sole
function of the courts—at least where the disposition required by the text is not absurd—is to
enforce it according to its terms."(citation omitted)); see also Estate ofFamum v. C.I.R.. 583 F.3d
581, 584 (8th Cir. 2009)(discussing general principles of statutory interpretation). By its terms.
Section 206 plainly states that "any act, matter, or thing" in violation of the chapter can give rise
to a claim for damages by the injmred party. Then Section 207 makes clear that the injured party
may bring a private cause of action in federal district court to collect damages resulting from any
such violation.
Despite the imambiguous language of Sections 206 and 207, Defendants insist that neither
section applies to Section 220 because Section 220 prescribes a criminal penalty upon conviction.
Doc. 17 at 6-7. However, nothing in Sections 206 and 207 indicate that they are inapplicable to
violations of Section 220(e). Rather, Section 206 extends to "any act... m this chapter prohibited
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\
or declared to be unlawful," and Sections 206 and 220 are in the same chapter. This Court
previously has held that Sections 206 and 207 create a cause of action for violations under other
sections of the chapter, even when such sections prescribe a penalty of sorts. For example, in
Northern Valley Commimications. LLC v. Sprint Communications Co. Ltd. Partnership. 618 F.
Supp. 2d 1076 (D.S.D. 2009), third-party defendant Global Conference Partners, LLC brought
several counterclaims against Sprint Communications Company Limited Partnership, including
claims for damages for violations of Sections 201(b) and 202(a) of the Communications Act.
Notably, Section 202(c) states that "[a]ny carrier who knowingly violates the provisions of this
section shall forfeit to the United States the sum of$6,000 for each such offense and $300 for each
and every day ofthe continuance ofsuch offense." 47 U.S.C. § 202(c). Despite Section 202 having
a penalty provision, this Court emphasized that "[i]t is well estabUshed that [§§ 206 and 207]
confer a private right to bring an action to recover damages for injuries sustained by a violation of
§§ 201(b) and 202(a)." Id at 1082. As both Section 202 and 220 prescribe penalties for
enforcement, there is no reason why Section 206 should apply to Section 202 but not to Section
220.
'' Defendants also argue that Section 206 does not apply to Section 220(e) because of the
existence of 47 U.S.C. § 401(c), which provides that it is the duty of the United States attorney,
upon request by the FCC,to bring "all necessary proceedings for the enforcement ofthe provisions
of this chapter and for the punishment of all violations thereof." Doc. 17 at 6-7. From Section
401(c), Defendants reason that only the United States attorney may enforce Section 220(e). But
Section 401(c) applies to all provisions under this Chapter. Thus, imder the Defendants' line of
reasoning, no private party could ever proceed under Section 206 as the power of enforcement
would always lie exclusively with the United States attorney. As this Court has previously held.
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that is simply not the case. E.g. Northem Valley Comm'ns LLC.618 F. Supp. 2d at 1076 ("[i]t is
well established that[§§ 206 and 207] confer a private right to bring an action to recover damages
for injuries sustained by a violation of §§ 201(b) and 202(a)."). The existence of Section 401(c)
authorizing enforcement action by the United States attorney does not negate the private right of
action imder Sections 206 and 207.
Finally, Defendants argue that even if Section 206 creates a cause of action for violations
under Section 220(e), Venture cannot pursue a cause of action against them because Defendants
have not been convicted under Section 220(e). Doc. 17 at 8-9. This argument is creative, but
Section 206 does not require a conviction as a prerequisite to a private claim for damages. Rather,
Section 206 merely states that "[i]n case any common carrier shall do, or cause or permit to be
done, any act, matter, or thing in this chapter prohibited or declared to be unlawful . . . such
common carrier shall be hable." 47 U.S.C. § 206. In other words, all that is required by Section
206 is a showing that Defendants committed an act proscribed by this chapter. As discussed above.
Venture has alleged sufficient facts to plausibly show that Defendants violated Section 220(e).^
Therefore, Venture's complaint has alleged enough to survive a Rule 12(b)(6) Motion to Dismiss
on Count I, and Defendants' Motion to Dismiss Coimt I is denied.®
C. Tortious Interference with Bnsiness Relations or Expectancy
® Nor does any language within Section 220(e) make Section 206's applicability contingent on a
conviction. Rather,a conviction is required only for the imposition ofcriminal penalties. 47 U.S.C.
§ 220(e)(stating that a person "shall be subject, upon conviction, to a fine of not less than $1,000
nor more than $5,000 or imprisomnent for a term of not less than one year nor more than three
years, or both such fine and imprisonment").
® Because Venture has stated a valid claim under federal law, this Court has original jurisdiction
over this claim under U.S.C. § 1331, and therefore, may exercise supplemental jurisdiction over
the remaining claims pursuant to 28 U.S.C. § 1376(a).
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Defendants argue that Venture has failed to allege suffieient facts to state a plausible claim
for tortious interference with business relations or expectancy. "A federal court exercising
supplemental jurisdiction over state-law claims applies state substantive law to those claims."
Christensen V. Ouinn.45 F. Supp. 3d 1043,1090(D.S.D.2014)(citing Emmenegger v. Bull Moose
Tube Co.. 324 F.3d 616,624 n.9(8th Cir. 2014)). South Dakota substantive law governs the state
law claims, and South Dakota recognizes a cause of action for tortious interference with business
relations or expectancy. Tibke v. McDougall. 479 N.W.2d 898, 908-09 (S.D. 1992)(discussing
the claim of tortious interference with business relationships or expectancies).
Under South Dakota state law,the essential elements for tortious interference with business
relations or expectancy are: (1) the existence of a valid business relationship or expectancy;(2)
knowledge by the interferer ofthe relationship or expectancy;(3)an intentional and unjustified act
of interference on the part of the iriterferer; (4) proof that the interference caused the harm
sustained; and (5) damage to the party whose relationship or expectancy was disrupted. Hohn y\
Snurgeon. 513 F.3d 827,829(8th Cir. 2008)(applying South Dakota law); Mueller v. Cedar Shore
Resort. Inc.. 643 N.W.2d 56, 68 (S.D. 2002). To make out a claim of tortious interference,"there
must be a 'triangle'—a plaintiff, an identifiable third party who wished to deal with the plaintiff,
and the defendant who interfered with the plaintiff and the third party." Haves v. N. Hills General
Host).. 590 N.W.2d 243, 248 (S.D. 1999)(cleaned up and citation omitted). Here, there is such a
triangle consisting of Venture, the FCC, and Defendants. However, Defendants argue that (1)
Venture cannot have a valid business expectancy in a government subsidy as a matter oflaw, and
(2) Venture has not alleged suffieient facts to show that Defendants had knowledge of Venture's
expectancy or that Defendants intentionally interfered with such expectancy. This Court will
address each argument in turn.
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1. The Existence of a Valid Business Relationship or Expectancy
First, Defendants argue that Venture's claim fails as a matter of law because it does not,
and cannot, have a valid business expectancy in a government subsidy. Doc. 15 at 16. Because
this Court must apply state substantive law in exercising supplemental jurisdiction over state law
claims, the question becomes whether South Dakota recognizes a valid business expectancy in a
government subsidy. The Supreme Court of South Dakota has never addressed this issue directly.
"Where there is no case directly on point by a state's highest court," this Court must "look to
'relevant state precedent, analogous decisions, considered dicta, and any other reliable data' to
determine how the Supreme Court of[South Dakota] would construe [South Dakota] law." In re
W.Iowa Limestone. Inc.. 538 F.Sd 858, 866 (8th Cir. 2008)(quoting HOK Sport. Inc. v. FC Des
Moines. L.C.. 495 F.Sd 927,935 (8th Cir. 2007)).
The Supreme Court of South Dakota has repeatedly framed the tortious interference claim
as extending not only to business relationships, but also business "expectancies." See Haves. 590
N.W.2d at 247-48(recognizing that "valid business relationships and expectancies are entitled to
protection from unjustified interference."(quoting Landstrom v. Shaver. 561 N.W.2d 1, 18(S.D.
1997))). But see Tibke. 479 N.W.2d at 910(Sabers, J., dissenting)(noting that the court "sets out
a five-part test for tortious interference with a business relationship or expectancy" and "then
ignores portions of this test."). To constitute a valid business expectancy, the plaintiff must have
an expectancy to receive an economic advantage or pecuniary benefit from a third party. See
Haves. 590 N.W.2d at 248 ("The tort also protects a party's interest in stable economic
relationships" and "[f]or this tort to occur . .. it need not be intended that there be a contract.");
Landstrom. 561 N.W.2d at 16("[T]o establish a 'valid business relationship or expectancy,' there
ha[s] to be a showing of a ... business relationship between the plaintiff and an identifiable third
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party."); see also Gieseke ex. rel. Diversified Water Diversion. Inc. v. IDCA. Inc.. 844 N.W.2<1
210, 218(Minn. 2014)(noting that a "cause of action for interference with business relationships
protects an interest in the reasonable expectation of economic advantage." (internal quotation
marks omitted)); Stewart Title Guar. Co. v. Am. Abstract & Title Co.. 215 S.W.3d 596,603(Ark.
2005)("Any prospective business relationship that would be ofpecuniary value constitutes a valid
husiuess expectancy." (citing Restatement (Second) of Torts § 766B cmt. c (Am. Law. Inst.
1979))). Further, it must be reasonably probable that the business expectancy would have come
to fruition but for the defendant's conduct. See Haves. 590 N.W.2d at 250. See also Cedroni Ass'n.
Inc. V. Tomblin.snn. Harbum Assoc.. Architects & Planners. Inc.. 821 N.W.2d 1, 3 (Mich. 2012)
(staling that to make out a claim for tortious interference with a business relationship or
expectancy, "the expectancy must be a reasonable likelihood or probability, not mere wishful
thinking."); Stebno v. Sprint Spectrum. L.P.. 186 S.W.3d 247, 250 (Mo. 2006) ("The valid
business expectancy requirement involves more than a mere subjective expectancy — it must be
a reasonable expectancy ....").
The existence of a valid business relationship or expectancy depends upon the facts and
the nature of the relationship between the plaintiff and the third party. Haves. 590 N.W.2d at 250
(emphasizing that whether "it is reasonably probable that prospective economic advantage would
have been realized but for the defendant's conduct.... depends on the totality of circumstances."
(cleaned up and internal citations omitted)). The Supreme Court of South Dakota has recognized
that whether a valid business relationship or expectancy exists is a question of fact to be resolved
by the jury. Id at 250 n.6 ("Examination of the appropriate criteria in this factually driven cause
of action is appropriately left to the jury."). This Court predicts that the Supreme Court of South
Dakota would allow a claim for tortious interference with a business expectancy in a government
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subsidy to proceed under Venture's allegations that it would have received $20 million over ten
years but for NYC's,intentionally false filing. Venture, among other things, would have to show
both that it expected to receive a pecuniary benefit and that the subsidy was reasonably probable
but for the tortious interference. Haves. 590 N.W.2d at 248-50.
Defendants cite two cases in which courts outside of South Dakota declined to recognize a
claim for tortious interference where the defendants allegedly interfered with the plaintiffs'
relationship with a government agency. The first case is Carlson v. Roetzel & Andress. No. 3:07-
cv-0033,2008 WL 873647(D.N.D. Mar. 27,2008). There,the plaintiff alleged that the defendants
had tortiously interfered with his ability to obtain workers compensation benefits by falsely
asserting that he was an independent contractor rather than an employee. Id Examining the
elements for tortious interference under North Dakota law, which are the same as those under
South Dakota law, the District of North Dakota concluded that tortious interference with business
relations simply did not apply on the facts ofthe case. Id at *14. The court noted that the plaintiff
had "cited no authority in support ofhis novel argument that the tort ofimlawfiil interference with
business applies to his claim for workers compensation benefits." Id
The second case that Defendants rely upon is Pierre & Carlo. Inc. v. Premier Salons. Inc..
713 F. Supp. 2d 471 (E.D. Pa. 2010). In that case, the plaintiff, a hair salon, claimed that the
defendant, a competitor, wrongfully interfered with its ability to transfer its business license to a
new location. Id at 476. In rejecting the plaintiffs claim, the court noted that the tort only covers
relations of pecuniary value, not personal, social, or political relations. Id at 487. Further, the
Court stated that "[tjortious interference is a 'business-centered tort' that carmot be established by
alleging interference with the relationship between a business and its government regulator." Id
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Neither case, however, warrants the conclusion that there can never be a valid business
expectancy in a government subsidy, and indeed neither case addressed the situation of a plaintiff
in a business reliant on and receiving in the past a government subsidy. Neither Carlson nor Pierre
& Carlo. Inc. applied a categorical bar on claims for tortious interference where the plaintiff is
claiming interference in its ongoing subsidy from a pubhc entity. The expectancy in a government
subsidy is quite different from claims of entitlement to workers compensation benefits or the
change of licensure status. Unlike a claim for workers compensation or the mere transfer of a
business license, a government subsidy is by its very nature both business-centered and pecuniary.
After all, the purpose of the FCC subsidy at issue is to make it economically feasible for
telecommunication companies to provide their services in rural areas where the revenue would
otherwise be insufficient to justify the cost of doing business there. Doc. 1 at	|	1 ("Plaintiff and
defendants rely on federal funds to make it economically feasible to provide voice and broadband
services to customers in their authorized sparsely populated service areas.") See also id. at 2,
19, 20. Even Defendants acknowledge this to be the case, noting that "[i]n the United States,
universal access to essential utilities, including telephone service,is made possible through a series
of government subsidies that make it economically possible for utility providers in rural areas to
offer services at prices on par with those in higher-density urban areas." Doc. 15 at 2. In sum,the
government subsidy at issue is sufficiently distinguishable from the claimed expectancies in
Carlson and Pierre & Carlo. Inc. that neither case is persuasive authority.
The Defendants also claim that their position is supported by the South Dakota Supreme
Court's decision in Matter of Certification of Question of Law From United States Dist. Court.
Dist. Of S. Dakota. S. Div.. 931 N.W.2d 510 (S.D. 2019). In that case, this Coiud certified a
question to the Supreme Court ofSouth Dakota,namely whether South Dakota recognizes a cause
I
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of action for tortious interference with inheritance or expectancy of inheritance. The Supreme
Court ofSouth Dakota responded in the negative. To be sure, tortious interference with inheritance
is a claim distinct from tortious interference with business relations or expectancy. Compare
Restatement(Second)ofTorts § 774B(Am.Law Inst. 1979)(describing tortious interference with
inheritance or gift), with Restatement(Second) of Torts § 766B(Am.Law Inst. 1979)(describing
tortious interference with prospective contractual relation). The Court in Matter of Certification
noted that the circumstances under which it adopted the tort of intentional interference with
prospective contractual relations were very different from those in the case before it. In particular,
the Court chose to recognize tortious interference with prospective contractual relations because
"there was a lack of other remedies available to redress such wrongs in the business context"
whereas there are several alternative remedies available to plaintiffs when third parties interfere
with their inheritances or gifts such as contesting a will through a probate proceeding or imposing
a constructive trust. Id at 516-17. The Court also emphasized that the "pursuit of a contractual or
business relationship differs because it often involves upfront economic costs that could never be
recouped absent a claim for wrongful interference with the prospective contractual relationship."
Id at 517.
The South Dakota Supreme Coint's reasoning for declining to "expand tort liability" iu
Matter of Certification does not apply here. Id at 518. But for its federal cause of action under 47
U.S.C. §§ 206 and 207, Venture would have no avenue to redress the wrongs alleged in its
complaint. There appears to be no other avenue for redressability under South Dakota state law,
because as discussed below. Venture cannot make out a claim for fraud. Because the availability
of state law remedies could be lacking for parties similarly situated to Venture, this Court predicts
that the Supreme Court ofSouth Dakota would recognize a cause ofaction for tortious interference
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with business expectancy for reasonably probable governmental subsidies to which an entity
serving an underserved rural market would be entitled if not for the intentionally false filing of a
defendant. As such, Venture has alleged sufficient facts for a plausible claim of tortious
interference with a business expectancy.
)
2. Knowledge of the Expectancy and Intentional and Unjustified Interference
Next, Defendants argue that Venture has failed to allege facts sufficient to meet the second
and third elements of tortious interference requiring that the Defendants had knowledge of the
expectancy and,that they intentionally and unjustifiably interfered with such expectancy. Doc. 15
at 18-21. To be liable for tortious interference under South Dakota law, the plaintiff must show
that the defendant knew about the business relation or expectancy between the plaintiff and the
third party. Sancom. 643 F. Supp. 2d at 1129 (applying South Dakota law). Cf Restatement
(Second) of Torts § 766 cmt. i(Am. Law Inst. 1979)("To be subject to liability under the rule
stated in this Section, the actor must have knowledge of the contract with which he is interfering
and of the fact that he is interfering with the performanee of the contraet."). Further, the plaintiff
must show that the defendant committed an intentional and imjustified act of interference with
such business relation or expectancy. St. Qnge Livestock Co.. Ltd. v. Curtis. 650 N.W.2d 537,
541-42 (S.D. 2002). "The interference with the other's prospective eontractual relation is
intentional if the actor desires to bring it about or if he knows that the interference is certain or
substantially certain to occur as a result ofhis action." Restatement(Seeond)ofTorts § 766B cmt.
d(Am.Law Inst. 1979).
In its complaint. Venture alleges several facts, that if true, plausibly show that Defendants
knew that Venture would have been entitled to A-CAM II support and that Defendants acted
intentionally to deprive Venture of such support. First, Venture emphasizes that neither A-CAM
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offerings were made to carriers for census blocks in which an unsubsidized carrier was providing
adequate voice and broadband services. Doc. 1 at 20-22. Venture alleges that Defendants falsely
reported that Northern Valley provided adequate services in certain census blocks because
Defendants bore a grudge against Venture due to prior litigation involving South Dakota Network,
LLC. Doc. 1 at 33-35. Further, Venture alleges that Defendants were especially aware of the
consequence offalse Form 477 filings, highlighting an incident in 2015 involving Northern Valley
and its competitor ITC. Doc. 1 at 26-32. In that instance. Northern Valley allegedly
misrepresented its broadband coverage, and Northern Valley knew that the FCC as a result was
going to reduce the CAF funding that ITC was due. Doc. 1 at 26-32. The complaint thereby
alleges facts allowing for a reasonable inference that Defendants knew Venture would be entitled
to CAF funding and would only be disqualified from such fimding if Northern Valley, the only
unsubsidized carrier in the census blocks at issue, misrepresented its broadband capabilities in such
locations. The complaint pleads sufficient facts on Defendants' knowledge and intent.
Nonetheless, Defendants contend that Venture's story is not plausible. In support of this
contention, Defendants direct this Court to consider three events m 2018:(1)that on February 19,
2018, Northern Valley filed its 2017 Form 477, see Doc. 15-11;(2) that on March 14, 2018, the
FCC adopted an order proposing the creation of A-CAM II, In re Connect Am. Fund. F.C.C.
18-29, 2018 WL 1452720(Mar. 23, 2018); and(3) that on December 13, 2018, the FCC adopted
an order finalizing the details under which A-CAM II will be offered to eligible carriers, s^ In re
Connect Am. Fund. 33 FCC Red. 11893 (Dec. 13, 2018). Doc. 15 at 5-7, 18-21. From this
timeline. Defendants ask this Court to infer that it could not have known of Venture's expectancy
in receiving A-CAM II support at the time that Northern Valley filed its Form 477 because the
FCC had not yet created A-CAM 11 or finalized the details of A-CAM 11. Doc. 15 at 19-21.
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While public records corroborate this information such that it can be considered on a
motion to dismiss, this Court must still construe all reasonable inferences in favor of the non-
moving party. Retro Television Network. Inc.. 696 F.3d at 768-69 (explaining that "courts must
accept a plaintiffs factual allegations as true" and "constru[e] all reasonable inferences in favor of
the nonmoving party."). Since 2011, the FCC has targeted support to the census blocks that need
it the most. Doc. 1 at 4, 19; Doc. 16 at 21-22. While the terms of A-CAM I and A-CAM 11
varied, the aim of the FCC remained to avoid administering CAF funding to census blocks in
which an unsubsidized carrier aheady provided adequate services. Doc. 1 at 20-22; Doc. 16 at
22-23. As early as 2016,the FCC announced that it would rely on the data contained in Form 477s
to make its funding determinations. Doc. 1 at T| 23; Doc. 16 at 23. In short, A-CAM If was not
created in a vacuum. Doc. 16 at 24-25. Drawing all reasonable inferences in favor of the non-
moving party Venture, this Court finds that the complaint plausibly alleges that Defendants had
the requisite knowledge about the ramifications offiling a false Form 477 on CAF funding and the
requisite intent to interfere with Venture's expected subsidy. In sum. Venture has alleged sufficient
facts to state a claim for tortious interference with business relations or expectancy. Defendants'
Motion to Dismiss as to Coimt II is denied.
D. Fraud
Next, this Court must determine whether Venture has alleged sufficient facts to state a
plausible claim for fraud. Under South Dakota law, the plaintiff must allege the following to state
a claim for actionable fraud:
That a representation was made as a statement offact, which was untrue and known
to be untrue by the party making it, or else recklessly made; that it was made with
intent to deceive and for the purpose of inducing the other party to act upon it; and
that he did in fact rely on it and was induced thereby to act to his injury or damage.
Stabler v. First State Bank of Roscoe. 865 N.W.2d 466,477(S.D. 2015).
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Under South Dakota law, there is a close relationship between fraud and^a statutory deceit
claim. Mash v. Cutler. 488 N.W.2d 642, 653 (S.D. 1992). The Eighth Circuit in Kent v. Omaha
Life Ins. Co.. 484 F.3d 988 (8th Cir. 2007), considered whether a complaint stated a viable deceit
claim under South Dakota law. In Kent the plaintiff brought an action for statutory deceit under
SDCL § 20-10-1 against an insurance company after their representative allegedly gave inaccurate
testimony at the plaintiffs criminal trial. The Eighth Cirtuit noted that the deceit statute gives
plaintiffs a cause of action when they have been willfully deceived by another and have altered
their positions based on the deceit. Id at 997. The Court affirmed the dismissal of the plaintiffs
deceit claim because there is "no case in which South Dakota courts have applied this statute in
favor of a plaintiff when the misleading statements have been rehed upon by a third party rather
than the plaintiff." Id (emphasis added). Although Venture brings a claim for common law fraud,
not statutory deceit, statutory deceit is "declaratory of the common law and comprehend[s] an
intention to mislead." Mash. 488 N.W.2d at 653. First-party reliance is not only a requirement of
statutory deceit in South Dakota, but also of a common law or statutory fraud claim. S^ Stabler.
865 N.W.2d at 477 (requiring as an element of a fraud claim that "he [meanuig the plaintiff] did
in fact rely on [the misrepresentation] and was induced thereby to act to his injury or darhage.").
In this ease, Venture alleges that Defendants made a false statement to the FCC, a third
party. Doe. 1 at ][ 65 ("Defendants statements were made for the unlawful, improper, and
fraudulent purpose ofinducing the FCCto deny funding to the plaintiff. The FCCreasonably relied
on these misrepresentations ....")(emphasis added). As Venture's complaint makes clear, it was
the FCC — not Venture — that relied upon that statement in the FCC's decision to award Venture
$20 million less in federal subsidies than what it allegedly would have received otherwise.
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Venture argues that actionable fraud does not require first-party reliance, pointing to Nodak
Oil Co. V. Mobil Oil Corp.. 533 F.2d 401 (8tb Cir. 1976). However, its reliance upon Nodak Oil
Co. is misplaced. In Nodak.the Eighth Circuit considered whether the plaintiff must prove that the
defendant acted fraudulently to make out a claim for tortious interference with business relations.
Id. at 406 (noting that under North Dakota law, an action for wrongfully inducing a breach of
contract may be maintained only by proving that the breach was induced by direct fraud or coercion
on the part ofthe defendant). The Eighth Circuit in Nodak considered what is required to prove a
claim oftortious interference with business relations, not whether a fraud claim requires first-party
reliance.
Similarly, Venture's citation to Bridge v. Phoenix Bond & Indemnitv Co.. 553 U.S. 639
(2008) misses the mark. Bridge was a civil RICO case predicated on mail fraud. Id. at 641. In
Bridge,the defendants argued that because the alleged pattern ofracketeering activity consisted of
mail fraud, plaintiffs must show that they relied on the defendants' fraudulent misrepresentations.
Id. at 648. Defendants' argument was grounded in the fact that common law fraud requires first-
party reliance. The Supreme Court rejeeted their argument, noting that:
Congress chose to make mail fraud, not common-law fraud, the predicate act for a
RICO violation. And the mere fact that the predicate acts underlying a particular
RICO violation happen to be fraud offenses does not mean that reliance, an element
ofcommon lawfraud, is also incorporated as an element of a civil RICO claim.
Id at 653 (emphasis added)(internal quotations omitted). Bridge actually undermines Venture's
argument because in Bridge the Supreme Court recognized that reliance indeed is an element of
common law fraud.
Under South Dakota law, the plaintiff must allege first-party reliance to state a claim for
fraud. The only reliance alleged here is third-party reliance, and as such. Venture's fraud claim
fails as a matter of law. Because Venture has failed to allege sufficient facts on the essential
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elements of fraud, this Court need not consider whether Venture has satisfied the heightened
pleadiug standard for a fraud claim under Rule 9(b)of the Federal Civil Rules ofProcedure. As to
Count III, Defendants' Motion to Dismiss is granted.
E. Unfair Competition
Finally, this Court must consider whether Venture has stated a plausible claim for unfair
competition. The South Dakota Supreme Court has noted that the "[t]he tort of unfair competition
does not have specific elements;" rather, "it describes a general category of torts which courts
recognize to protect commercial interests." Qwest Comm'ns Corp. v. Free Conferencing Corp..
837 F.3d 889,898(8th Cir. 2016)iciting Setliff v. Akins. 616 N.W.2d 878, 887-88(S.D. 2000)).
c
Thus,"damages for unfair competition results [sic] from satisfying the elements of an underlying
tort." Setliff. 616 N.W.2d at 887-88. Encompassed in the category of torts eonstitutiug unfair
competition is tortious interference with business relations or expectancy. Id at 888(citing United
Wild Rice. Inc. v. Nelson. 313 N.W.2d 628,632(Minn. 1982)). As discussed above. Venture has
alleged sufficient facts to state a claim for tortious interference with business relations or
expectancy, so to that limited extent. Venture has stated a claim for damages within the general
category of unfair competition. See Copperhead Agric. Products. LLC v. KB Ag Corp.. LLC. No.
CIV. 18-4127i 2019 WL 7038241 at *7(D.S.D.Dec.20,2019)(holding that because theplaintiffs
elaim for tortious interference survives the defendant's motion to dismiss, it serves as a basis for
the plaintiffs unfair competition claim). The imfair competition elaim is coterminous with and
subsumed within the tortious interference with business expectancy claim; there is no separate
unfair competition claim, so Count IV can be dismissed to the extent that it seeks to state any
separate cause of action beyond tortious interference with business relations or expectancy,
rv. Conclusion
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For the reasons stated above, it is hereby
ORDERED that Defendants' Motion to Dismiss, Doc. 14, is granted as to Counts III and
IV of Venture's complaint and denied as to Counts I and 11.
DATED this 3^** day of October, 2020.
BY THE COURT:
ROBERTO A. LANG!
CHIEF JUDGE
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