# Petition for Writ of Certiorari — Telesaver, Inc. v. United States Transmission Systems, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1991
- **Citation:** 502 U.S. 812

## Text

go-1779

IN THE
Suprene Court of the Wuited States

OCTOBER TERM, 1990

TELESAVER, INC. and VISTA TECHNOLOGIES, INC.,
. Petitioners
UNITED STATES TRANSMISSION SYSTEMS, INC.,
Respondent

Petition for Writ of Certiorari to the
United States Court of Appeals
for the Fourth Circuit

PETITION FOR WRIT OF CERTIORARI

DAVID F.. ALBRIGHT *
FRANKLIN T. CAUDILL
HARRY M. RIFKIN

LAURA J. MARGULIES
SEMMES, BOWEN & SEMMES
250 West Pratt Street
Baltimore, Maryland 21201
(301) 539-5040

* Counsel of Record Counsel for Petitioners

WILSON - Epgs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

Did the District Court commit error of constitutional
dimension by denying the prayer for jury trial of Plain-
tiff and Counterclaim Defendant, Vista Technologies, Inc.,
and by improperly attributing to it the waiver of a sepa-
rate and distinct party?

(i)

ii
PARTIES TO THE PROCEEDINGS

Petitioners and appellants below are Telesaver, Inc.
and Vista Technologies, Inc. Respondent and appellee
below is United States Transmission Systems, Inc. which
was a wholly-owned subsidiary of ITT Communications
Services, Inc., required to be listed pursuant to Rule 28.1.

TABLE OF CONTENTS

Page
QUESTION PRESENTED _. cee. i
PARTIES TO THE PROCEEDINGS ...................... ii
TABLE OF AUTHORITIES o-oo re iv
OPINIONS BELOW .u......c.cocccccccccccoccoccccccccoscoscoscoccceeceeees 1
ee 2
PERTINENT STATUTORY PROVISIONS... 2
STATEMENT OF THE CASE... eee. 3
REASONS FOR GRANTING THE WRIT ........... 4
THE LOWER COURT’S DENIAL OF VISTA’S
TIMELY REQUEST FOR JURY TRIAL IS
REVERSIBLE ERROR ............................................ 4
eee SA ee 23a 8
en. la
See 8a
ee, 4la

EEE

(iii)

iv
TABLE OF AUTHORITIES

Cases Page
Aetna Insurance Co. v. Kennedy, 301 U.S. 393, 57
Fe ee oe a 7
Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc., 275
Md. 295, 340 A.2d 255 (19785) ............................... 6
Butterfield v. Crist, 52 F.R.D. 489 (E.D. Wis.
IUTIE suche citilensais taachhanlatnsassticbbbuneabanescdanieleiedaineneniaendiiants 6
Civil v. Waterman Steamship Corp., 217 F.2d 94
i ns 0 deneeinmaauinie 6
Dimick v. Schiedt, 293 U.S. 474, 55 S. Ct. 75
NI la hl ica ie leat Nha Riera ranaienils 5
Dixon v. Process Corp., 38 Md. App. 644, 382 A.2d
893, cert. denied, 282 Md. 731 (1978) ................ 5
First Wisconsin Nat’l Bank of Rice Lake v. Klap-
meier, 526 F.2d 77 (8th Cir. 1975) .............0........ 7
Food Fair Stores v. Blumberg, 234 Md. 521, 200
Be I rica cniciceetitanecsicementenenncecsidianessainins 6
Johnson v. Zerbst, 304 U.S. 458, 58 S. Ct. 1019
I a eiialieabahiiendates 6

King v. United Benefit Fire Insurance Co., 377
F.2d 728 (10th Cir.), cert. denied, 389 U.S. 857

RCE a RAR ac RS ROE i 5,7
Levitt and Sons, Inc. v. Swirnow, 58 F.R.D. 524

I AERC ae AR Ee ee 6
Mortenson v. Pacific Far East Line, Inc., 148 F.

RI, ree rs I I a ics acstettenecencsttan 6,7
National Equipment Rental, Ltd. v. Hendrix, 565

F.2d 255 (2d Cir. 1977) ...... 6 NEC Te A ERT 6
Rupe v. Fourman, 532 F. Supp. 344 (S.D. Ohio

a RIE a eR toatl cs Ree to ONS 6

Swofford v. B & W, Inc., 34 F.R.D. 15 (S.D. Tex.
1963), aff'd, 336 F.2d 406 (5th Cir. 1964), cert.
denied, 379 U.S. 962, 85 S. Ct. 653 (1965)

United States v. Troxler Hosiery Co., Inc., 681
Pf 8 Ll. een ane 5

Constitutional, Statutory Materials and Rules of Court
U.S.C. Const., Amend. Seven

Nd tl or ON OER 6
Federal Rule of Civil Procedure 38 ............0...-000...... 2,4,5
Federal Rule of Civil Procedure 39 0.0.0.0... 3

6

Md. Corps. & Assoc. Code Ann. § 2-103 (2)

Vv

TABLE OF AUTHORITIES—Continued
Treatises Page

C. Wright & E. Miller, Federal Practice and Pro-
cedure, § 2321, at 104 (1971) _....... 7

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

No.

TELESAVER, INC. and VISTA TECHNOLOGIES, INC.,
~ Petitioners
UNITED STATES TRANSMISSION SYSTEMS, INC.,
Respondent

Petition for Writ of Certiorari to the
United States Court of Appeals
for the Fourth Circuit

PETITION FOR WRIT OF CERTIORARI

Petitioners, Telesaver, Inc. (“Telesaver”’) and Vista
Technologies, Inc. (“Vista”) respectfully pray that a writ
of certiorari issue to review the judgment and opinion of
the United States Court of Appeals for the Fourth Cir-
cuit, entered in the above entitled proceeding on Febru-
ary 21, 1991.

OPINIONS BELOW

The opinion of the United States Court of Appeals for
the Fourth Circuit affirming the United States District
Court for the District of Maryland is unreported and is
reprinted in the Appendix hereto (“App.’”) at la.

The final opinion and judgment of the United States
District Court for the District of Maryland is unreported
and is reprinted at App. 3a. The unreported letter order

2

of the United States District Court for the District of
Maryland (Young, J.) denying a right to jury trial is
reprinted at App. 41a.

The opinion of the United States Court of Appeals for
the Fourth Circuit denying request for rehearing in banc
is unreported and is reprinted at App. 42a.

JURISDICTION

This proceeding was initiated in the United States
District Court for the District of Maryland and jurisdic-
tion is provided by 28 U.S.C. § 1332. The United States
District Court for the District of Maryland denied Plain-
tiff and Counterclaim Defendant the right to a jury trial.
After a timely appeal, the Fourth Circuit Court of Ap-
peals affirmed the decision of the District Court.

The jurisdiction of this Court to review the judgment
of the Fourth Circuit is invoked under 28 U.S.C.
§$ 1254(1).

PERTINENT STATUTORY PROVISIONS

Rule 38 of the Federal Rules of Civil Procedure pro-
vides in pertinent part:

(a) Right Preserved.

The right of trial by jury as declared by the
Seventh Amendment to the Constitution or as
given by a statute of the United States shall be
preserved to the parties inviolate.

(b) Demand.

Any party may demand a trial by jury of any
issue triable of right by a jury by serving upon
the other parties a demand therefor in writing
at any time after the commencement of the ac-
tion not later than 10 days after the service of
the last pleading directed to such issue,

3

Rule 39 of the Federal Rules of Civil Procedure, pro-
vides in pertinent part:

(b) By the Court.

Issues not demanded for trial by jury as pro-
vided in Rule 38 shall be tried by the court; but,
notwithstanding the failure of a party to de-
mand a jury in an action in which such a de-
mand might have been made of right, the court
in its discretion upon motion may order a trial
by a jury of any or all issues.

STATEMENT OF THE CASE

This action was initiated by Telesaver on July 22, 1986
with the filing of a Complaint in the United States Dis-
trict Court for the District of Maryland against United
States Transmission Systems, Inc. (“USTS”) for breach
of the Sales and Marketing Agreement (“the Agreement’’)
executed by and among Telesaver and USTS on Decem-
ber 17, 1984 and later by Vista on January 14, 1985 as
an added party to the modified agreement (“Agreement
Modification”) and for fraud and negligent misrepre-
sentation. At the time Telesaver filed the Complaint,
Vista, Telesaver’s parent company, was in a Chapter 11
bankruptey proceeding in the United States Bankruptcy
Court for the District of Maryland, having filed for bank-
ruptcy on April 28, 1986, shortly after the Agreement
was terminated. USTS answered the Complaint, and as-
serted seven counterclaims against Telesaver and added
as a Counterclaim Defendant to the action, Richard J.
Goldman, President of Telesaver and Vista.

Vista sought and obtained permission from the Bank-
ruptcy Court to join the litigation against USTS. On
October 9, 1986, with leave of the United States District
Court for the District of Maryland, an Amended Com-
plaint was filed against USTS. The Amended Complaint
added Vista as a party-plaintiff, pursuant to the terms
of the Agreement Modification. On October 20, 1986,
USTS filed an Answer to the Amended Complaint, and

4

on January 5, 1987, USTS filed an Amended Counter-
claim adding Vista as a Counterclaim Defendant on all
counts.

Telesaver and Goldman answered the Amended Coun-
terclaims on February 2, 1987. On April 3, 1987, after
unsuccessfully moving to dismiss the Amended Counter-
claim, Vista filed its Answer to the Amended Counter-
claim and demanded a jury trial as to all the issues.
Vista, in its Answer, made a timely jury trial demand
in accordance with Federal Rules Civil P. 38. Almost
nine months later, on December 24, 1987, USTS moved
to strike the request for a jury trial. The lower court
entered a letter order on March 1, 1988 denying Vista’s
request for a jury trial.

The case proceeded to trial without a jury and on
March 6, 1990, the lower court issued an Opinion and
Order entering judgment in this case in favor of USTS.
After a timely appeal, the Fourth Circuit Court of Ap-
peals summarily affirmed the decision of the District
Court. The Fourth Circuit subsequently denied Plaintiffs’
request for rehearing in banc.

REASONS FOR GRANTING THE WRIT

THE LOWER COURT’S DENIAL OF VISTA’S TIMELY
REQUEST FOR JURY TRIAL IS REVERSIBLE
ERROR

The issue presented here, the right to a jury trial, is
one of the most sacrosanct and fundamental rights guar-
anteed by the Seventh Amendment to the United States
Constitution. Vista timely prayed for a jury trial in its
reply to USTS’ Amended Counterclaim.

USTS moved to strike the jury trial demand arguing
that Vista and Telesaver were the same entity and that
Telesaver’s earlier waiver of its right to a jury trial
should be imputed to Vista. Vista and Telesaver opposed
the motion and presented uncontroverted evidence of the

5

separate corporate identities of Vista and Telesaver. On
March 1, 1988, the lower court denied Vista’s jury de-
mand on the sole basis that no new issues were raised in
the Complaint. There was no finding that Vista and Tele-
saver were the same entity or that they were so related
that a waiver by one was binding on the other. Absent
a finding that Vista and Telesaver were the same entity,
the lower court’s denial of Vista’s demand for jury trial
was patent! in error.

In affirming the decision of the trial court, the Fourth
Circuit Court of Appeals failed to scrutinize the curtail-
ment of the right to a jury trial with the required
“utmost care”. See Dimick v. Schiedt, 293 U.S. 474, 486,
55 §. Ct. 75 (19385). The panel also failed to exercise
the exacting scrutiny mandated upon review of a lower
court’s denial of a jury trial demand. See King v. United
Benefit Fire Insurance Co., 377 F.2d 728, 731 (10th Cir.)
cert. denied, 389 U.S. 857 (1967). A review of the rec-
ord with exacting scrutiny would have revealed that the
denial by the lower court of Vista’s right to a jury trial
was improper, because Vista made a timely demand for
jury trial pursuant to Federal Rule Civil P. 38.

Vista and Telesaver were separate corporate entities,
each having filed with the State Department of Assess-
ments and Taxation articles of incorporation. USTS did
not contest the separate corporate filings or present evi-
dence sufficient to pierce the corporate veils of Vista and
Telesaver. Defendants merely argued that Vista and
Telesaver did not “operate” as separate entities. How-
ever, USTS did not dispute that the separate corporate
entities were maintained. A corporation is entitled to
enjoy the same rights as an individual to trial by jury.
- United States v. Trowler Hosiery Co., Inc., 681 F.2d 934,
935, n.l (4th Cir. 1982). The filings of articles of
incorporation establish the existence of a corporation as a
separate entity. Dixon v. Process Corporation, 38 Md.
App. 644, 655, 382 A.2d 893, 899-900, cert. denied, 282

6

Md. 731 (1978). Maryland law, applicable in the instant
case, provides that a corporate entity may be disregarded
“only when necessary to prevent fraud or enforce a para-
mount equity.” Bart Arconti & Sons, Inc. v. Ames-
Ennis, Inc., 275 Md. 295, 312, 340 A.2d 225, 235 (1975).
Maryland law establishes that every separate corporation
has the power to sue, be sued, complain and defend in all
courts in its own behalf. Md. Corps. & Assoc. Code Ann.
§ 2-103(2). Maryland law further establishes that even
a wholly-owned “subsidiary corporation, for whatever
purpose it may exist, is a separate corporate entity.”
Food Fair Stores v. Blumberg, 234 Md. 521, 529, 200
A.2d 166, 177 (1964); See also Levitt and Sons, Inc. v.
Swirnow, 58 F.R.D. 524, 530 (D. Md. 1973).

As a separate party, Vista’s right to a jury trial is
guaranteed under the Seventh Amendment which protec-
tion can only be waived knowingly and _ intentionally.
Johnson v. Zerbst, 304 U.S. 458, 58 S.Ct. 1019 (1938) ;
National Equipment Rental v. Hendrix, 565 F.2d 255,
258 (2nd Cir. 1977); Civil v. Waterman Steamship
Corp., 217 F.2d 94, 97 (2nd Cir. 1954). A newly added
party to an action has an unconditional right to a jury
trial even if the original parties waived that right, as
the new party had no standing to assert a jury trial de-
mand before he was added to the case. See Butterfield
v. Crist, 52 F.R.D. 489, 490 (E.D. Wis. 1971) (Court
held that jury demand of defendant added to action was
timely even though original defendants failed to timely
demand jury trial) ; Swofford v. B & W, Inc., 34 F.R.D.
15 (S.D. Tex. 1963), aff'd, 336 F.2d 406 (5th Cir. 1964),
cert, denied, 379 U.S. 962, 85 S. Ct. 653 (1965). (Failure
of original plaintiff to demand jury trial did not operate
as a waiver by the subsequently added plaintiffs) ; Rupe
v. Fourman, 532 F. Supp. 344, 351 (S.D. Ohio 1981)
(Defendant landlord’s waiver of trial by jury did not
bind two other defendants added by plaintiff’s amended
complaint): Mortenson v. Pacific Far East Line, Inc.,

7

148 F. Supp. 71, 72 (N.D. Cal. 1956) (“any prior sup-
posed waiver . .. by one plaintiff cannot, of course, bind
another plaintiff.”) See also C. Wright & E. Miller, Fed-
eral Practice and Procedure, § 2321, at 104 (1971) (“A
waiver by one party cannot bind other parties.”)

The failure to grant a jury trial is reversible error.
When a jury trial is timely demanded, the lower court’s
denial of the request requires the reversal of the lower
court decision and that a new trial be granted. See First
Wisconsin National Bank of Rice Lake v. Klapmeier, 526
F.2d 77, 80 (8th Cir. 1975).

Even if this Court finds that the jury demand was
not timely made, the lower court’s denial of the demand
must be reversed as an abuse of discretion. “Trial by
jury is a vital and cherished right, rulings with respect
to which are subject to exacting scrutiny on appeal.”
King v. United Benefit Fire Insurance Co., 377 F.2d 728,
731 (10th Cir.) cert. denied, 389 U.S. 87 (1967).

The right of jury trial is so fundamental that courts
must “indulge every reasonable presumption against
waiver.” Aetna Insurance Co. v. Kennedy, 301 U.S. 389,
393, 57 S. Ct. 809, 811-812 (1937). As the Fifth Circuit
held in Swofford v. B & K, Inc., 336 F.2d 406, 409 (5th
Cir. 1964) :

The right to a jury in a federal court as declared by
the Seventh Amendment is a basic and fundamental
feature of our system. And when the discretion of
the court is invoked . . . the court should grant a
jury trial in the absence of strong and compelling
reasons to the contrary.

In this case, even assuming untimeliness of the jury
trial demand, there were no strong or compelling rea-
sons to deny the request for jury trial. The issues to be
determined in this case were simple issues which juries
typically determine, and the essential issues in the case
were largely factual. There was no prejudice claimed by

8

the Defendant in its memoranda opposing the jury de-
mand nor would there have been any prejudice, as the
jury demand was made very early in the proceedings (in-
deed, it was made in the pleading stage), and a jury trial
demand would have had no effect on the court’s docket
(the trial actually occurred over three years after the
jury demand was made). As such, the denial of the
jury demand was an abuse of discretion. Accordingly,
the lower court’s denial of the request for a jury trial
should be reversed and a new trial granted.

CONCLUSION

This case presents fundamental issues concerning the
assertion of the right to a jury trial, and the relationship
between state law (defining the separateness of corporate
parties) and federal iaw (allowing each separate party
to demand a jury trial). The District Court’s error was
clear and fundamental. This Court should grant the writ
and reverse the decision below.

Respectfully submitted,

DAVID F. ALBRIGHT *
FRANKLIN T. CAUDILL
HARRY M. RIFKIN

LAURA J. MARGULIES
SEMMES, BOWEN & SEMMES
250 West Pratt Street
Baltimore, Maryland 21201
(301) 539-5040

Counsel for Petitioners
May 22, 1991 * Counsel of Record

TE ig ot

a na

APPENDICES

la
APPENDIX A

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 90-3502

TELESAVER, INCORPORATED ;
VISTA TECHNOLOGIES, INCORPORATED,
Plaintiffs-A ppeilants,

versus

UNITED STATES TRANSMISSION SYSTEMS, INCORPORATED,
Defendant-A ppellee,

and

RICHARD J. GOLDMAN,
Counterclaim Defendant.

Appeal from the United States District Court
for the District of Maryland, at Baltimore,
Norman P. Ramsey, District Judge,
(CA-86-2300-R )

Argued: December 3, 1990 Decided: January 22, 1991

Before PHILLIPS and NIEMEYER, Circuit Judges, and
MERHIGE, Senior United States District Judge for the
Eastern District of Virginia, sitting by designation.

Affirmed by unpublished per curiam opinion.

2a

ARGUED: Franklin Terrell Caudiil, SEMMES, BOWEN
& SEMMES, Baltimore, Maryland for Appellants. John
Sargent Kinzey, Jr.. LEBOEUF, LAMB, LEIBY &
MACRAE, New York, New York, for Appellee. ON
BRIEF: Harry M. Rifkin, SEMMES, BOWEN &
SEMMES, Baltimore, Maryland, for Appellants. John
M. Aerni, LEBOEUF, LAMB, LEIBY & MCRAE, New
York, New York; Michael D. Berman, KAPLAN, HEY-
MAN, GREENBERG, ENGLEMAN & BELGRAD, P.A.,
Baltimore, Maryland, for Appellee.

Unpublished opinions are not binding precedent in this
circuit. See 1.0.P. 36.5 and 36.6.

PER CURIAM:

Telesaver, Inc. and Vista Technologies, Inc. appeal on
a multitude of grounds the decisions of the district court
in the resolution of this case which dealt principally
with an alleged breach of contract. Our review of the
record and the district court’s opinions discloses that this
appeal is without merit. Telesaver, Inc. v. United States
Transmission Systems, Inc., CA-86-2300-R (D. Md.
March 7, 1990); Telesaver, Inc. v. United States Trans-
mission Systems, Inc., 687 F. Supp. 997 (D. Md. 1988).
Finding no error on the part of the district court, we
affirm.
AFFIRMED

3a
APPENDIX B

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

Civil Action No. R-86-2300

TELESAVER, INC., et a/.,
Plaintiffs/Counterclaim Defendants

Vv. é

UNITED STATES TRANSMISSION SERVICE, INC.,
Defendant /Counterclaim Plaintiff

OPINION
| Filed Mar. 6, 1990}

This litigation arises out of a failed attempt by a large
multinational corporation and an energetic up-start com-
pany to join forces to capitalize on the business oppor-
tunities presented by the break-up of AT&T. United
States Transmission Systems, Inc. (“USTS”), a wholly-
owned subsidiary of ITT Corporation, and Telesaver,
Inc. (“Telesaver’”),' formed a relationship in late 1984
in which Telesaver transferred its existing long distanct
telephone customers to USTS and solicited new long-dis-
tance customers for USTS. Both parties had high hopes
that this arrangement would lead to large profits as long-
time AT&T customers signed up with new long-distance
carriers.

The venture, however, was plagued from the outset
by the parties’ clash of corporate cultures and business
perspectives. Both parties agree that the transfer of
Telesaver’s customer base to USTS was beset by prob-

1Telesaver was a subsidiary of Vista Technologies, Inc. also a
plaintiff/counterclaim defendant herein.

4a

lems, the result being that a significant proportion of
Telesaver’s customers never were successfully transferred
to USTS. The parties also agree that many of the new
customers obtained by Telesaver for USTS never re-
ceived USTS long-distance service. It was apparent by
the summer of 1985 that the Arrangement was not work-
ing out. Rather than scrapping the relationship, USTS
and Telesaver restructured their relationship by a new
contract, referred to by the parties as the “Fourth Ad-
dendum.” The problem, nevertheless, continued un-
abated. By early 1986, both parties recognized that their
business venture was a disaster. Beyond this common
recognition, however, the parties bitterly dispute why
their venture failed; indeed, both have almost diametri-
cally opposed versions of the events leading to the ulti-
mate termination of the contract in March, 1986. Tele-
saver brought this suit, and USTS counterclaimed, in
an attempt to resolve the controversy.

Telesaver filed its complaint on July 22, 1986, and then
amended the complaint to include Vista as a plaintiff on
October 8, 1986. In the Amended Complaint, Telesaver
set forth five counts: (1) breach of the sales and mar-
_keting portion of the contract; (2) fraudulent misrep-
resentations throughout the relationship; (3) negligent
misrepresentation throughout the relationship; (4) reci-
sion of the Fourth Addendum; and (5) breach of the
customer transfer portion of the contract. In its answer,
USTS denied liability on each count and counterclaimed
against Telesaver and Telesaver’s president, Richard
Goldman. USTS set forth seven counterclaims, as fol-
lows: (1) breach of the original contract; (2) breach of
the Fourth Addendum; (3) breach of fiduciary duty;
(4) fraud in the inducement of the original contract;
(5) fraud in the inducement of the Fourth Addendum;
(6) violation of the Racketeer Influenced Corrupt Prac-
tices Act (“RICO”); and (7) restitution if the adden-
dum was rescinded. USTS filed an Amended Answer on

o_parcammnds

ee ad

5a

October 20, 1986, and Amended Counterclaims on Jan-
uary 5, 1987, which essentially restated its original ones.

The issues ultimately tried, however, were much nar-
rower. By Letter Order of March 30, 1987, Judge
Young, inter alia, dismissed USTS’s RICO counterclaim
for lack of substantiation. (Docket Entry No. 35).
Later, on July 6, 1988, Judge Young issued a Memoran-
dum and Order, reported as Telesaver, Inc. v. United
States Transmission Services, Inc., 687 F. Supp. 997 (D.
Md. 1988), that resolved the parties’ cross-motions for
summary judgment.* The original contract included a
consequential damages disclaimer and a settlement provi-
sion, each of which Judge Young held valid. In upholding
these provisions, Judge Young granted summary judg-
ment in favor of USTS with respect to Telesaver’s claims
for consequential damages and with respect to Telesaver’s
claims, other than for fraud, against USTS for its acts
or omissions before September 13, 1985, the date of the
Fourth Addendum. Finally, Judge Young entered judg-
ment in favor of USTS with respect to Telesaver’s claim
for rescission and mooted USTS corresponding amended
counterclaim for restitution. Telesaver’s motion for re-
consideration of this Opinion was denied by Judge Young
on December 1, 1988. (Docket Entries Nos. 89 & 90).
In its portion of the pre-trial order, USTS indicated that
it was abandoning all of its amended counterclaims ex-
cept for its first and second amended counterclaims inso-
far as it sought repayment for amounts that USTS al-
legedly over-advanced to Telesaver. See Pretrial Order
at 50.

* As the litigants were informed at the outset of this trial, al!
of Judge Young’s rulings in this matter stand as the law of the
case. See Trial Transcript at 17-19 (hereinafter “Tr. at ———”).
The recitations here of Judge Young’s holdings are in no way in-
tended to alter or amend the Opinions of Judge Young.

6a

Thus, when the case was tried before this Court,’ Tele-
saver’s Amended Complaint consisted of four counts.
Count I alleged breach of the Sales Agreement in the
Original Contract and the Fourth Addendum; Count II
alleged fraudulent misrepresentation in the course of
parties’ relationship; Count III alleged negligent misrep-
resentation in the course of parties’ relationship; and
Count V alleged breach of the Customer Transfer por-
tion of the Contract.‘ Telesaver’s prayers for damages
were explained as follows in Telesaver’s Proposed Find-
ings of Facts and Conclusions of Law:

(1) Lost commissions on actual sales during original

contract period: $ 780,026
(2) Lost commissions on actual sales during Fourth

Addendum period: 2,606,347
(3) Lost commissions on lost sales during original

contract period 5,378,133
(4) Lost commissions on transferred accounts 549,255
(5) Lost commissions on lost sales after the Fourth

Addendum period: 10,519,212
(6) Consequential damages for negligent and fraudulent

misrepresentation 2,831,128

TOTAL $22,664,101

Id. at 85-86. Telesaver also sought punitive damages in
double the amount of the compensatory damages (pray-
ers (1) through (5)), amounting to $39,665,946. Jd. at
86. USTS, on its counterclaim, sought $224,055.82 for
Telesaver’s breach of the original sales agreement and
$59,097 for Telesaver’s alleged breach of the Fourth Ad-
dendum. Both these sums represent the amount that
USTS claims it “overadvanced” to Telesaver.

3 This case was transferred from Judge Young’s docket to this
Court’s docket on July 14, 1988 when Judge Young assumed senior
status. Judge Young, at this Court’s request, ruled on Telesaver’s
motion for reconsideration filed July 19, 1988, because of his greater
familiarity with the relevant issues at the time.

4 The Court will retain the original numbering of the Counts in
the Amended Complaint.

7a

Upon careful consideration of the testimony and docu-
mentary evidence presented at trial, the post-trial briefs
filed by the parties, and the final arguments of counsel,
the Court is now prepared to rule. The Court is well
aware of its duty under Rule 52(a) of the Federal Rules
of Civil Procedure to make specific findings of fact and
conclusions of law. Any findings of fact contained in the
conclusions of law, and any conclusions of law contained
in the findings of fact, shall be received in their true
light. :
FINDINGS OF FACT®

Before Telesaver and USTS formed the relationship
that gave rise to this litigation, Telesaver was in the
business of providing long-distance service in a few geo-
graphic “clusters” around the country.* Using Telesaver
switching equipment and software, Telesaver’s customers
would place long-distance calls that were actually trans-
mitted over lines provided by other long-distance carriers,

5 For the purposes of this Opinion, the Court will relate its find-
ings of fact in the chronological order of events in the relationship
between Telesaver and USTS, which is not, necessarily, the order
of the testimony presented.

Witnesses who appeared at trial on behalf of Telesaver were
Richard Goldman, Telesaver’s President (Tr. 1-389, 1720-1775);
Sharon Sagal, a personnel specialist at Telesaver (Tr. 389-468) ;
Brian Tenberg, Telesaver’s Director of Computer Systems and Data
Processing (Tr. 474-536); David Brown, Telesaver’s Western Re-
gional Manager (Tr. 549-621); Michael Metzger, Telesaver’s Comp-
troller (Tr. 627-689); Marshall Sapperstein, Director of Sales and
Markting for Telesaver’s Branch Offices (Tr. 689-734); Leonard
Moskowitz, Telesaver’s Vice President for Human Relations (Tr.
741-871) ; and Howard Paul, plaintiff’s expert on the telecommunica-
tions industry (Tr. 923-1230). USTS’s witnesses were Wayne
Robins, President of USTS (Tr. 1232-1539); Lawrence White, a
technical specialist at USTS (Tr. 1544-1613); and Jeffrey Lobel,
a Product Manager at USTS (Tr. 1620-1704).

6 Telesaver had operations in several locations, including Philadel-
phia and Wilkes-Barre, Pennsylvania; New York City and northern
New York state; northern New Jersey; Columbia, Maryland; San
Francisco, California; and Norfolk, Virginia.

a acres

8a

including USTS. In 1984, despite having over 180 em-
ployees and gross revenues estimated at $20 million, Tele-
saver developed serious cash-flow problems. Telesaver’s
President and founder, Richard Goldman, described the
company’s financial conditions as being “the pits.” Tr.
at 46. As a result, Telesaver explored various options to
increase its cash-flow or decrease its expenses. Soon,
Telesaver settled on the idea of selling its customer base
to one of the established long-distance carriers. To that
end, Telesaver negotiated with USTS, U.S. Telecom,
Sprint, and Budget-Tel for the purchase of Telesaver’s
customer base.

I. The Initial Contract Period (Dec. 17, 1984—Sept. 13,
1985)

Negotiations between USTS and Telesaver began in
the fall of 1984. Telesaver was represented by its Presi-
dent, Richard Goldman, and by its Executive Vice Presi-
dent, Robert Chertkoff. USTS was represented by the
President of USTS, Wayne Robins, and two senior USTS
officials, Ranjit Khosla and Rajaram Kaushik. Several
face-to-face meetings and telephone conferences were held
in order to hammer out a final agreement. The negotia-
tions ultimatly resulted in the original contract between
Telesaver and USTS (hereinafter, the “Contract’”) being
entered into on December 17, 1984. Plaintiff's Exhibit 59
(hereinafter “Pltf. Exh. —’”).

A. The Contract

The December 17, 1984, Contract between USTS and
Telesaver consisted essentially of two parts: an agree-
ment by which Telesaver would transfer to USTS certain
of its customer bases, (the “Customer Transfer Agree-
ment”), and an agreement by which Telesaver would act
as a non-exclusive sales representative for USTS in cer-
tain geographic areas (the “Sales Agreement”). The
Customer Transfer Agreement provided that Telesaver

Sa

would transfer its service agreements with customers in
Rochester, New York; New York City, New York; Nor-
folk, Virginia; San Francisco, California; and Philadel-
phia, Pennsylvania on specified dates in early 1985. See
Pitf. Exh. 59, paras. 1.1, 2.1-2.6. The compensation
terms, which were a particularly important and care-
fully negotiated portion of the Contract, provided a fairly
complex scheme of transmission credits, cash advances,
cash payments, and subsequent accountings. See para.
3.0-3.2.3. The compensation scheme was devised to be
“front loaded”; that is, Telesaver would receive a large
infusion of cash early on, and then, as usage occurred
over the ensuing months, the cash advances to Telesaver
would be checked against actual usage to determine
whether USTS owed Telesaver more money in commis-
sions or, on the other hand, Telesaver had to reimburse
USTS for amounts over-advanced. The compensation pro-
visions were designed in this manner to relieve Tele-
saver’s immediate cash-flow difficulties.

The Sales Agreement portion of the Contract provided
that Telesaver would market and sell USTS “longer-
distance” service in the specified business areas begin-
ning February 1, 1985. USTS retained the right to ac-
cept or reject Telesaver sales, but acceptance of such
sales was not to be unreasonably withheld. Pltf. Exh. 59,
para. 4.4. The compensation scheme of this portion of
the Contract was, like the Customer Transfer portion, a
complex mix of cash payments, cash advances, and trans-
mission credits. Telesaver was permitted to draw ad-
vances of approximately $100,000 per month; ultimate
compensation was to be determined by usage generated
six months after the new user began receiving service.
Pitf. Exh. 59, paras. 5.2-5.6.

The Contract also contained, inter alia, two provisions
relevant to both aspects of the Telesaver/USTS agree-
ment. First, paragraph 3.1 provided, in pertinent part,
that “neither party shall be liable for any indirect, spe-

10a

cial, or consequential damages as a result of a breach
hereof.” Second, paragraph 2.3 provided that the law
of New Jersey, USTS principal place of business, would
apply to construe and enforce the contract.’

B. Customer Transfer

With respect to the Customer Transfer portion of the
Contract, both USTS and Telesaver were obligated to
fulfill a series of complex chores on its own and in coordi-
nation with each other in order for the transfer to run
smoothly. It is quite obvious from the testimony pre-
sented, however, that the transfer of customers was, at
best, bungled.

A number of problems stand out. First, USTS en-
countered difficulties in actually “cutting-over” Telesaver
customers from Telesaver to USTS. USTS did not have
sufficient physical capacity to handle the influx of new
accounts and users. The experience with the Rochester,
New York, customer base is especially noteworthy. USTS
was able to meet its target date of April 1, 1985, for
the cut-over to USTS of Telesaver’s existing customers
in the Rochester area. This resulted in an amendment to
the original contract, see note 7, supra, as well as the
loss of some existing Telesaver customers.* In addition,
the cut-over date for New York and Philadelphia also
had to be pushed back a month, from February 1, 1985,
to March 1, 1985. Pltf. Exh. 340.

7 Soon after the contract was entered into, two modifications were
made to it. First, in January, 1985, the parties agreed to add Vista
Technologies, Inc., Telesaver’s parent corporation, as a party to the
contract. Pltf. Exh. 61. Second, the Contract’s customer transfer
provision pertaining to the Rochester customer base was amended
to provide for a later cut-over date. Pltf. Exh. 60.

8 Even more egregious problems were encountered with respect
to the transfer of the San Francisco customer base. These difficul-
ties, however, were the subject of a separate settlement and are
not part of this litigation. See Amended Complaint, para. 81.

ete eeeeae

lla

Second, USTS was beset with internal problems that
impaired its ability to provide service to the customers
transferred to it from Telesaver. USTS performance in
providing codes to customers so that these customers
could access the USTS long distance service was poor;
it often took more than a week for the codes to reach the
customer and, to complicate matters, USTS had no fol-
low-up mechanism in place to be certain that the trans-
ferred customers received their new USTS codes. In ad-
dition, for those customers who were to receive “auto-
dialers” (particularly business customers), USTS’s per-
formance was deficient because USTS did not have an
adequate supply of the autodialers on hand to send to
customers. For these customers, codes were not sent until
the autodialers were installed. As a result, some former
Telesaver customers were not provided with USTS serv-
ice for up to six weeks. Moreover, when disgruntled
former Telesaver customers sought information from
USTS customer service representatives, they were often
unable to get through to a representative due to USTS’s
failure to have adequate staff to handle the chore.’

i

Despite these difficulties, the testimony presented at
trial also indicates that USTS was attempting to per-
form its obligations under the Contract. It sought solu-
tions to the problems it encountered, although it is clear
that it failed to live up to the exacting standards that
Telesaver demanded. A major part of USTS’s problem
resulted from the widespread chaos in the telecommuni-
cations industry during the period that Telesaver was
attempting to transfer its customers to USTS. In the

® Telesaver argues in its post-trial briefs that the quality of the
service provided to Telesaver/USTS customers (in terms of the
actual clarity of the lines, the time required for a call to go through,
the number of mistakenly rejected calls, etc.) was inferior to the
industry standard. This allegation in undoubtedly supported in the
record insofar as the San Francisco customer base is concerned.
No credible evidence exists, however, that USTS service was defi-
cient in terms of line quality outside of the San Francisco area.

12a

wake of the divestiture of AT&T, many new companies
were formed seeking to capitalize on the newly-opened
market. Telephone customers were unprepared for the
onslaught of entrepreneurs—Telesaver included—that
were offering long-distance service. Telesaver’s own ex-
perience is illuminating: it began as a small company,
but soon experienced uncontrollable growth, which forced
it seek an association with a larger and hopefully more
stable company. But the atmosphere that permitted
Telesaver to grow so rapidly was also fraught with un-
certainty for upstart companies and established giants—
such as USTS—alike. An inability to cope with this un-
precedented situation is hardly surprising.

As a result of the difficulties encountered in transfer-
ring Telesaver’s customers to USTS, a drop of between 20
and 25% in the expected usage was realized. This drop
in expected usage was attributable both to the loss of
existing Telesaver customers and depressed usage of cus-
tomers who were transferred to USTS. The Court does
not credit the testimony of Telesaver’s expert Howard
Paul regarding the expected usages; his assumption that
USTS would experience a “churn” or loss of existing cus-
tomers of only 2% is overly optimistic in the chaotic
climate of the telecommunications industry in the mid-
1980s. See Pitf. Exh. 941 at 56A.

The parties agree that USTS paid Telesaver $809,601
in cash and $558,814 in transmission credits in exchange
for the transferred customers. In all, approximately $3.5
million in usage was generated from March to December
1985. Def. Exh. 338. Telesaver is seeking $549,255 in
damages for usage that was not realized due to USTS’s
alleged breach.

C. Sales

The experience with the sale of new accounts by Tele-
saver for USTS under the Contract was, if anything, even
more unhappy than the experience with customer trans-

| ae

13a

fer. What appears most clearly from the testimony pre-
sented is that USTS was woefully unprepared to manage
the influx of new accounts sold by Telesaver in the first
half of 1985. Many of the customers who were sold
USTS service by Telesaver experienced significant delays
in obtaining telephone service or, in many instances,
never received any service at all. As a result, the usage
generated on Telesaver-sold accounts was distressingly
low. Problems were apparent in both the sales of “code”
accounts (also referred to as “dial-up” accounts) and
the sale of ‘‘equal access” accounts (also referred to as
“dial 1” accounts).

1. Code Accounts: In the early months of 1985, Tele-
saver’s selling efforts concentrated on USTS code service.
Under this type of service, a customer would dial a toll-
free number, enter his personal code, and then dial the
number he sought to contact. USTS had been selling code
service for a number of years, and had in place a routine
for processing code orders. The processing involved sev-
eral steps prior to sending the “starter kit”—which con-
sisted of information along with the toll-free number and
access code—to the new customer. USTS had represented
to Telesaver that the time needed from receipt of a new
customer’s order for code service until that customer was
actually able to use the service would not exceed two
weeks.

The reality, however, was that a serious backlog of
orders piled up at USTS offices. The orders, which were
processed entirely in-house at USTS, often lingered at
USTS for weeks or even months before the customer was
sent a starter kit. In addition, USTS lacked adequate
procedures to assure that the customer received the
starter kits and was using the service. This backlog
resulted partially from the lack of adequate procedures at
USTS and, most importantly, from the flood of paper
associated with the advent of the new and far more ac-
ceptable and appealing equal access service. As described

l4a

more fully below, when Telesaver and USTS other mar-
keters began selling “dial 1” service, USTS experienced
an enormous surge in customer activity. The effect on
“dial-up” sales was that resources and attention were
shifted away from processing the new dial-up customers
to processing new dial 1 customers. Many of the same
steps, and many of the same personnel, were required to
process customers for both services. The result was that
in the Spring of 1985, unprocessed applications for code
service accumulated. The problems affected all of USTS
independent contractors, not just Telesaver. It was not
until the early summer of 1985 that USTS had managed
to clear up much of the backlog. See Pltf. Exhs. 536 &
454.

Telesaver contends that USTS intentionally concealed
the gravity of the situation with regard to the processing
of code sales. The testimony clearly indicates that USTS
personnel, including Wayne Robins, President of ITT,
were well aware of the difficulties. While it is apparent
that USTS did not correct the problems as promptly as
Telesaver hoped, the evidence also demonstrates that
USTS was attempting to rectify the situation and was
not, as Telesaver suggests, “secretive and duplicitous”
regarding the problems. Telesaver’s Reply Memorandum
at 37. USTS informed David Brown, Telesaver’s Western
Regional! Manager, and Marshall Sapperstein, Telesaver’s
Director of Sales and Marketing, of the processing prob-
lems. Both Brown and Sapperstein were in fairly con-
stant contact with Goldman, and shared this information
with him. Moreover, the problems were so serious early
in 1985, and the usage reports so unreliable, that Tele-
saver and USTS agreed that there would be no reconcilia-
tion for February 1985 usage. Instead, Telesaver was
permitted to retain its entire advance for the month.

2. Equal Access Accounts: As noted above, later in
the Spring of 1985, Telesaver—along with many other
long-distance telephone marketers—began emphasizing the

l5a

sale of “dial 1” service. A customer who had dial 1
service would be able to make long-distance calls in the
same manner as before the break-up of AT&T. He would
simply dial 1 plus the area code and number that he
sought to reach; the long-distance carrier that he had
previously selected would bill him for the call.

The processing of these equal access orders was even
more complex, and less successful, than the processing of
the code orders. While many of the steps in processing
dial 1 orders were identical to dial-up orders, USTS also
had to communicate with the local “Bell Operating Com-
panies” (“BOCs”) in order to get service for dial 1 cus-
tomers. USTS first processed the order in-house, and
then sent a paper order to the appropriate BOC for entry
into the BOC’s switching software. Different BOCs
around the nation required information in different
formats in order to be entered into its system. During
the early months of equal access service, many long-
distance carriers had problems complying with the BOCs’
varying and changeable requirements for information on
dial 1 customers.

USTS’s problems, however, were particularly severe.
Testimony indicates that there were tremendous ineffi-
ciencies in USTS’s handling of the paper-intensive prep-
aration of equal access orders. As with code orders,
USTS personnel were not particularly swift in their
handling of the orders. More importantly, a number of
problems peculiar to USTS’s handling of equal access
orders were also evident. For example, USTS encount-
ered a great deal of difficulty in properly formatting
the information on dial 1 customers for the particular
BOCs. Consequently, many of the orders submitted
by Telesaver and processed by USTS were never
activated by the BOCs because the information trans-
mitted te the BOC from USTS was incompatible with the
BOCs switching software. To complicate matters, USTS
had no routine method for checking to be sure that orders

16a

that were sent to a BOC were activated by the BOC. As
a result, USTS had little idea which orders were acti-
vated and which were rejected; its ability to take cor-
rective action was severely hampered.

USTS’s own problems were, in part, compounded by
Telesaver. In the first month or so of the Sales Agree-
ment, Telesaver was not delivering accurate information
on new customers to USTS. As a result, USTS could not
enter the customer into its system or transmit the cus-
tomer’s data to the BOC to have the customer cut-over
to dial 1 service. Moreover, Telesaver’s practice of,
occasionally, by-passing USTS and transmitting informa-
tion on new sales directly to the local BOCs created ad-
ditional difficulties. This practice, known as “BOCing”,
resulted in Telesaver not being credited for some usage
because USTS would not be able to identify which of its
vendors was responsible for the customer. It must be
remembered that Telesaver was not an exclusive vendor
of USTS’s services in the areas in which it served.

As USTS became aware of the problem, and after sig-
nificant prodding from Telesaver regarding the slow pace
of USTS processing of equal access orders, Pltf. Exh.
331, USTS established an “Equal Access Task Force.”
Pitf. Exh. 329. This committee, established in late April
1985 and headed by USTS’s Director of Switch Services
Marketing, Nick Labenskyj, was charged with the re-
sponsibility of solving USTS’s internal problems as well
as its problems interfacing with the BOCs, As a short-
term solution, it hired an outside vendor to track the
equal access orders already placed. As a long-term solu-
tion, it recommended the development of an automated
system to replace the paper-intensive system being used
at the time for communicating with the BOCs. This re-
placement ssytem, known as a “Local Exchange Carrier”
(“LEC”) system, would permit USTS to transmit com-
patible information by way of computer tape rather than
paper. The LEC system, however, was very slow in de-

17a

velopment. It was not implemented until September or
October 1985 and was not fully operational until April
1986. In the time between its implementation and when
it was fully operational, USTS’s performance in process-
ing orders was even worse than before the LEC system
was used.

Throughout 1985, as USTS was encountering these dif-
ficulties, Telesaver and USTS were in fairly constant
contact. Leonard Moskowitz, Telesaver’s Personnel Di-
rector, testified that he personally saw the accumulating
paper orders from USTS’s vendors at USTS’s offices and
was told by USTS personnel of the problems they were
encountering. Tr. at 857-858. Moreover, the evidence
presented at trial indicates that Richard Goldman en-
joyed extraordinarily frequent and prolonged conversa-
tions with ITT’s President, Wayne Robins, in which Gold-
man complained about USTS’s performance and implored
Robins to remedy the situation. Goldman’s access to
USTS management exceeded what would have been ex-
pected for an independent vendor and exceeded other
vendor’s actual access to very senior UST'S personnel.

For sales made during the Contract period, USTS
advanced Telesaver $695,000. Tr. 297. Under the terms
of the original Contract, Telesaver was entitled to $470,-
944.18 for usage generated from sales prior to the ex-
ecution of the Fourth Addendum. See Def. Exhs. 183,
200, 214, 272, 273, and 300-A; Plitf. Exh. 549.

D. Termination and Renegotiation of the Contract

On July 1, 1985, Wayne Robins of USTS sent a notifi-
cation letter to Richard Goldman indicating that USTS
had determined, pursuant to paragraph 5.8 of the Con-
tract, to terminate the Sales Agreement. Pltf. Exh. 531.
After a phone call and letter from Goldman, Robins, on
July 3, agreed to rescind the notification. After USTS,
on July 11, again threatened to terminate the Sales
Agreement and to withhold money that Telesaver claimed

18a

it was due on the Customer Transfer portion of the Con-
tract, Goldman and Robins again spoke and agreed to
continue their relationship. Pltf. Exhs. 585 & 586. Over
the course of the next several weeks, Telesaver and
USTS were in constant contact regarding the difficulties
encountered in generating revenues from Telesaver’s
sales. Finally, on August 29, 1985, Robins sent another
notification indicating USTS’s plan to terminate the
Sales Agreement. Pltf. Exh. 675. In this letter, Robins
cited “Telesaver’s failure to achieve $110,000 in monthly
revenues from new sales for three consecutive months.”
Id. Robins agreed, however, to renegotiate the Sales
portion of the Contract. Tr. at 206.

Negotiations that ultimately lead to the Fourth Adden-
dum commenced immediately and proceeded over the next
few weeks. In a number of face-to-face and telephone
meetings, Robins and Goldman settled on a new struc-
ture for payment and for processing sales made by Tele-
saver.'° This agreement was finalized in what is known
as the Fourth Addendum.

Il. The Fourth Addendum Period (Sept. 13, 1985-Mar.
31, 1986)

On September 138, 1985, USTS and Telesaver entered
into the Fourth Addendum. Pitf. Exh 1072. The Fourth
Addendum amended the original Contract in two signifi-
cant respects. First, it modified the terms and compen-
sation provision for the Sales Agreement of the Original
Contract; second, it resolved parties disputes regarding

1° In its Proposed Findings of Facts, Telesaver includes a number
of alleged misrepresentations regarding the negotiations leading up
to the execution cf the Fourth Addendum. In its proposed Conclu-
sion of Law, however, Telesaver sought recovery for quite a differ-
ent set of misrepresentations. Since Telesaver does not press its
claim that any alleged representations by USTS during the negotia-
tions leading up to the Fourth Addendum constituted actionable
misrepresentations, the Court will not consider the argument.

19a

monies owed for pre-Fourth Addendum sales activity.
The Fourth Addendum did not, however, work any change
to the Customer Transfer portion of the original Con-
tract.

A. The Fourth Addendum

Section A of the Fourth Addendum contained the pro-
visions revising the sales relationship. It begins by noting
that USTS had planned to terminate the original Con-
tract due to Telesaver’s failure to achieve $100,000 in
monthly revenues, but that “[t|he parties agree that,
rather than termination of the Sales portion of the {Con-
tract], it would be desirable to amend them to take into
account changed circumstances.” Pltf. Exh. 1072, § A.1-2.
Section A goes on to describe new compensation terms
and verification procedures to be implemented. Pltf. Exh.
1072, § A.8-9. In addition, the Section A of the Fourth
Addendum contained two important procedural provi-
sions. Paragraph 3 supplied the termination clause:
“|The parties will continue these revised Sales portions
of the [Contract] to at least January 31, 1986, and
thereafter on a month-to-month basis cancellable on sixty
(60) days prior written notice effective January 31,
1986, ....” Pitf. Exh. 1072, § A.3. Paragraphs 5 con-
tained the waiver of all legal claims arising out of the
parties experience under the original Contract except for
claims of fraud. It provided:

In specific mutual consideration for the amendment
of the Sale portion of the [Contract], the parties
further agree that neither shall be liable to the other
for any actions taken or not taken (except for fraud-
ulent acts which neither party has reason at this
time to believe the other has engaged in) in connec-
tion with the Sales portion of the [Contract] up to
the date hereof.

Pitf. Exh, 1072, § A.5,

20a

The other significant aspect of the Fourth Addendum
was the settlement, in Section B, of outstanding disputes
between the parties. Including the footnote. this section
reads:

Telesaver owes USTS amounts by reason of its use
of USTS services during the effective period of the
[Contract] as well as before that [Contract] en-
tered into force. Telesaver also owes USTS amounts
relating to Sales advances taken under the [Con-
tract] prior to September 1, 1985, which have not
been and are not likely to be fully offset by sales
Commissions for pre-September 1, 1985, sales. In
addition, USTS is advancing Telesaver $55,000 (plus
a waiver of its right to recover $20,000 for Rochester
collections which Telesaver has collected for USTS
during the month of August) which USTS is now
paying in settlement for all equal access orders pre-
viously submitted by Telesaver and not entered by
USTS or put into service up to the date hereof.”
Finally USTS will become obligated to Telesaver for
certain amounts for sales in March through August,
1985, under Section 3.5 of the Sales portion of the
[Contract]. Telesaver agrees that except for the
$55,000 referred to in this Section B., above, and
except for the first payment for preceding month’s
sales and the second month’s payment set forth in
Section A.9.2 except as the last portion of 9.1, ap-
plies, USTS may offset any monies that become due
from it to Telesaver against any monies then-owed
USTS by Telesaver. Telesaver is not being relieved
of any debts due USTS simply because it may at
some future time anticipate USTS may be able to

* With respect to previously unincluded equal access orders
supplied by Telesaver, USTS will, to the extent reasonably prac-
ticable, include the revenues related thereto in the 6th month’s
compensation computations relating to April through August
sales.

2la

offset such amounts against amounts USTS will owe
Telesaver.

Pltf. Exh. 1072, § B.

The Fourth Addendum was signed and dated Septem-
ber 13, 1985, and went into effect immediately."

During the period that the Fourth Addendum was in
effect, USTS’s performance in processing Telesaver sales
was wholly inadequate. The problem that beset USTS
during the initial Contract period were, simply, not re-
solved. Indeed, USTS management manifested little in-
terest in seeking the prompt resolution of their deficien-
cies during the period that the Fourth Addendum was
in effect. The result was that the problems continued to
fester and continued to impede USTS’s performance of
its duties under the Contract.

Difficulties relating to the processing of equal access
orders submitted by Telesaver USTS were most evident."
As noted above, the LEC system that USTS began to
implement in the fall of 1985 was not able to solve the
deficiencies in USTS order processing until the spring
of 1986. An internal USTS chronology of the imple-

11 Telesaver argues that the Fourth Addendum did not actually
go into effect until the following Tuesday, September 17, 1985.
They assert that a memorandum from Goldman to Mike Sauer of
USTS entitled “Proposed Modications [sic] to Fourth Addendum”
contains additional terms and clarifications to the Fourth Adden-
dum. Pltf. Exh. 708. However, there is no credible evidence to sup-
port the contention that this memorandum is part of the Fourth
Addendum or in any way alters its terms.:

12 Indeed, USTS’s own proposed finding of fact number 161 asks
that the Court find that “During the Fourth Addendum period,
USTS continued to experience the sorts of difficulties noted above,
both internally and with respect to the BOCs, in implementing
equal access orders, including Telesaver orders.” Proposed Find-
ings of Fact and Conclusions of Law of Defendant and Counter-
claim Plaintiff United States Transmission Systems, Inc. at 61
(emphasis added).

22a

mentation of the LEC system underscores the difficul-
ties that USTS experienced in getting the LEC system
up and running. Pltf. Exh. 832. Until January 20, 1986,
the system was in what USTS termed “pseudo-produc-
tion”; this meant that orders submitted by Telesaver
were not fully processed for inclusion in the BOCs’ sys-
tem. Jd. For the months of November and December
1985, neither computer tapes generated by the LEC sys-
tem nor the paper orders themselves were sent to the
BOCs.

As a result of the failure of USTS to properly process
Telesaver’s equal access orders, USTS was forced to
undertake “immediate corrective action” in mid-Febru-
ary 1986 “as insurance that the BOCs did in fact re-
ceive all Telesaver orders.” Jd. A new program was
then instituted that included additional managerial over-
sight and redundancy of procedures to assure that Tele-

saver orders were being received and included by the
BOCs.

While USTS was encountering these difficulties with
the LEC system, Telesaver orders for equal access serv-
~—jee-were piling up at USTS’s offices. Orders from cus-
tomers sold by Telesaver would sit unopened at USTS
offices for up to three weeks. Pltf. Exh. 778. This oc-
curred because of USTS’s failure to have in place ade-
quate procedures to handle the flow of work and to have
adequate personnel to process the orders. Tr. 230; Tr.
447. In addition, expert testimony, which this Court
credits, establishes that USTS faiied to have in place
adequate management oversight to assure that the job
was being properly performed. Basic management con-
trols to track the performance of personnel processing
the orders were non-existent. The problems were so
acute that in late December 1985, an entire week passed
without any processing of Telesaver’s equal access or-
ders. While some testimony indicates that part of the

23a

delay in USTS’s processing of equal access orders was
due to incorrect rejection by the BOCs, particularly
NYNEX, see Pitf. Exhs. 832 & 922; Def. Exhs. 342 &
343, the entirety of the evidence clearly indicates that
the bulk of the problem resulted from inefficiencies and
deficiencies at USTS."

Moreover, USTS’s responses to Telesaver’s inquiries
concerning its conspicuous problems were, generally, to
downplay the extent of the problems and to refuse Tele-
saver’s offers of assistance. On a number of occasions,
Telesaver personnel offered assistance to USTS in proc-
essing the equal access orders, but these requests were
refused. In addition, Telesaver inquiries regarding the
status of orders were often not answered. See Pitf.
Exhs. 741, 749, & 784.

C. Termination of the Fourth Addendum

On January 28, 1986, Nick Labenskyj telephoned Rich-
ard Goldman and informed him that USTS intended to
terminate the Fourth Addendum. Pltf. Exh. 796. This
call was followed the next day by a letter from Wayne
Robins to Richard Goldman formally notifying Telesaver
that USTS, pursuant to Paragraph 3 of the Fourth Ad-
dendum, would terminate the Sales Agreement effective
March 31, 1986. Pltf. Exh. 800. Despite Telesaver’s
requests to retract the termination or to reform their
relationship, USTS terminated the Fourth Addendum
as planned at the end of March.

Robins testified that two considerations motivated
USTS to terminate the relationship with Telesaver. First,
USTS was losing money on its deal with Telesaver; and,
second, Telesaver’s persistent contacts with USTS per-

13 Telesaver’s expert, Howard Paul, testified that his former em-
ployer, MCI, achieved a successful processing rate of approximately
98%, while USTS achieved a rate of between 10% and 15%.

24a

sonnel at all levels of the organization seeking infor-
mation on its orders and on USTS’s efforts to improve
the processing of those orders constituted a drain on
USTS’s patience and resources. Robins expanded on this
explanation in a telephone conversation between himself
and Goldman on March 10, 1986. Pltf. Exh. 849; Tr.
278-282: Tr. 1371-79. In this two-hour phone call, Robins
again refused Goldman’s entreaties to renew the contract.
He also stated that one of the reasons that USTS termi-
nated the arrangement with Telesaver was that USTS
had failed to budget sufficient money to cover the costs
of the advances due Telesaver under the Fourth Ad-
dendum."* As a result, USTS would have been unable
to meet its financial obligations to Telesaver if Telesaver
continued to sell USTS equal access service at the same
pace.

Robins also offered a second explanation to Goldman.
In a comment that the Court finds especially illuminating,
Robins told Goldman that considerations other than eking
out the largest possible profit in its relationship with
Telesaver motivated USTS. Rather, as a large corpora-
tion with diverse interests around the globe, maintaining
“corporate discipline” was one of his, and USTS’s, major
priorities. Goldman, an energetic entrepreneur, could not
fathom how such considerations could interfere with the
pursuit of profit. This mismatch of business philosophies
was at the root of many of the problems in the relation-
ship between Telesaver and USTS.

For the two months after Telesaver received notifica-
tion from USTS, it continued to sell USTS service under

14 The compensation scheme of the Fourth Addendum called for
a “front-loaded” payment plan in which Telesaver would be ad-
vanced money based on expected usage for sales made before those
sales actually generated the usage. As a result, USTS was required
under the Fourth Addendum to pay Telesaver before USTS had
received the income from the actual customer.

25a

the terms of the Fourth Addendum. When final results
were tabulated some time later, USTS’s problems in
processing Telesaver accounts became apparent. Out of
12,125 equal access accounts sold by Telesaver, only 4,733
(39.04% ) ever showed any usage. In particular mar-
kets, outcomes achieved by USTS were even less impres-
sive. For customers covered by NYNEX, 1,181 of the
1,552 customers sold USTS service by Telesaver never
received USTS service. The greatest problems apparently
occurred in Rochester, New York, where Telesaver sold
1,348 accounts, but only 113 orders were submitted by
USTS to the BOC, and only 79 of those were ever
activated, for a yield of 8.4% Pltf. Exh. 1021.

For the entire Fourth Addendum period, USTS ad-
vanced Telesaver $1,038,891 under the terms of the
Fourth Addendum. See Telesaver and Vista’s Answers
to Amended Counterclaims at para. 21. Telesaver’s ex-
pert testified, in testimony that this Court credits, that
Telesaver was owed commissions of $979,794 for the
Fourth Addendum period. Pltf. Exh. 941, p. 68.

Conclusions of Law

As noted above, Telesaver’s Amended Complaint is
now in four counts: breach of the sales agreement
(Count I) ; fraudulent misrepresentations throughout the
parties’ relationship (Count iI) ; negligent misrepresenta-
tion throughout the parties’ relationship (Count III);
and breach of the customer transfer agreement (Count
V). USTS presents a two-count counterclaim, assert-
ing Telesaver’s breach of the original sales agreement
(Counterclaim I) and Telesaver’s breach of the Fourth
Addendum (Counterclaim II). In essence, these cou.ater-
claims seek restitution for amounts that USTS alleges it
“overadvanced” Telesaver.

* Count IV, seeking rescission, was dismissed by Judge Young
earlier in the course of this litigation. See page 3, supra.

26a

I. Breach of the Sales Agreement

Telesaver’s claims under Count I of its Amended Com-
plaint need to be segregated into three time periods.
First, the Court will consider Telesaver’s claim that
USTS breached the Sales Agreement during the Original
Contract period; second, the Court will consider Tele-
saver’s claim regarding the Fourth Addendum period;
finally, the Court will consider Telesaver’s claim regard-
ing the post-contractual period.

A. Original Contract Sales Agreement: Telesaver
claims that its pre-Fourth Addendum commissions for
the sale of USTS service would have been larger but for
USTS’s breach of its obligations under the Sales Agree-
ment. This claim, however, was effectively disposed of
by Judge Young in his decisions dated July 6, 1988
(reported at 687 F. Supp. 997) and December 1, 1988.
In those opinions, Judge Young gave effect to paragraph
A.5 of the Fourth Addendum, which exempted both par-
ties from all liability, except for fraud, for acts taken in
connection with the Sales Agreement prior to September
13, 1985. /d. 687 F. Supp. at 1000. Thus, no cause of
action for breach of contract may be maintained for
alleged acts or omissions perpetrated by USTS prior to
the Fourth Amendment period."

USTS, in its first counterclaim, seeks restitution of
amounts that it alleges it overadvanced Telesaver as
commissions for pre-Fourth Addendum sales. The evi-
dence presented at trial indicates that USTS advanced
Telesaver $695,000, while Telesaver earned only $470,-
944.18 in commissions for sales under the original Con-

16To the extent that Telesaver may state a claim for fraud by
USTS prior to September 13, 1985, such a claim is contained in
Count II. Fraud cannot be converted into a breach of contract
claim. In addition, the Court views Telesaver’s argument that USTS
breached its obligation to use its “best efforts” to process “previ-
ously unincluded equal access orders” as a claim for breach of the
Fourth Addendum, and will be considered in that context.

27a

tract. Pursuant to paragraph 5.5(B) of the Contract,
USTS is entitled to the difference between the amount it
advanced Telesaver and the amount Telesaver ultimately
earned. Pltf. Exh. 59, para 5.5(B). This provision sur-
vived the Fourth Addendum’s settlement provisions. See
Pitf. Exh. 1072, paras. A.4 & B. Accordingly, USTS is
entitled to $224,055.82 in restitution under the original
Contract Sales Agreement.

B. Fourth Addendum Sales Agreement: For the
Fourth Addendum period, Telesaver alleges that USTS
breached both its express obligation under § B of the
Fourth Addendum to process “previously unincluded equal
access orders,” and its implied obligation of good faith
and fair dealing in its entire performance under the
amended Sales Agreement in the Fourth Addendum. The
Court turns first to Telesaver’s claim that USTS
breached its explicit duties under § B of the Fourth Ad-
dendum. Telesaver reads this provision as imposing a
“new obligation” on USTS to use its “best efforts” to
search out and process Telesaver orders that had been
received by USTS but, due to USTS’s problems, had not,
been included on USTS’s system. See Telesaver’s Reply
Memorandum at 4-13; Pitf. Exh. 708. The $75,000 settle-
ment, Telesaver asserts, was only to cover those orders
irretrievably lost and not subject to activation through
the exercise of “best efforts.” USTS contends that the
settlement in the Fourth Addendum was a clean settle-
ment, the parties sought to start anew on a clean slate,
and the Fourth Addendum imposed no new obligations
on USTS to affirmatively search for unincluded Tele-
saver orders and to process those orders.

Telesaver made this same argument in its motion for
reconsideration of Judge Young’s opinion on the cross-
motions for partial summary judgment. Telesaver relied
then on a memorandum dated September 17, 1985, from
Richard Goldman to Mike Sauer of USTS. In that
memorandum, Goldman writes that the parties agreed

28a

that USTS would use its “best efforts to activate all past
Telesaver sales as rapidly as possible.” Pltf. Exh. 708.
Judge Young refused to rely on this memorandum. In
his opinion on the motion for reconsideration, he observed
that ‘‘[t]he uncontroverted evidence ... is that the par-
ties never agreed to the language in the Goldman memo.”
Memorandum and Order dated December 1, 1988 at 3.
Judge Young, therefore, reaffirmed his prior holding that
the Fourth Addendum required USTS to “pay Telesaver
$75,000 in settlement for all lost orders which USTS did
not process as of September 13, 1985. {The Fourth Ad-
dendum] also require{d] USTS to compensate Telesaver
for any of these unincluded orders it later discovers pur-
suant to the terms of the prior Agreement.” /d. (em-
phasis added). The evidence presented at trial did noth-
ing to undermine Judge Young’s conclusion; the credible
evidence indicates that USTS’s reading of this provision
is accurate.

First, there is no credible evidence that the September
17 memorandum was ever intended by both parties to the
Fourth Addendum to be part of the Fourth Addendum.
It may reflect Richard Goldman’s desires, but it does not
reflect a meeting of the minds. Thus, any terms different
in that memo from the language of the Fourth Addendum
must be disregarded. Second, to the extent that § B and
its accompanying footnote is ambiguous in what it re-
quires, the Court construes that ambiguity against Tele-
saver because the evidence produced at trial was that
Richard Goldman drafted the pertinent language. Fi-
nally, the evidence at trial clearly reveals that the pur-
pose of the Fourth Addendum was to wipe the slate
clean between the parties. They were each going to re-
dedicate themselves to making their relationship work.
To that end, lingering disputes were put to rest with a
lump sum payment by USTS to Telesaver of $55,000 in
cash and a release by USTS of claims on $20,000 that
Telesaver owed USTS. The language regarding “pre-
viously unincluded equal access orders” is best under-

ince. ~

29a

stood as a provision guaranteeing simple fairness to Tele-
saver: if sales Telesaver made during the original con-
tract period ultimately generate usage, then Telesaver
should receive the commissions for those sales according
to the pre-Fourth Addendum compensation schedule.

The Court concludes, therefore, that the Fourth Ad-
dendum imposed no new explicit obligations on USTS to
use its best efforts to process previously unincluded equal
access sales. Telesaver’s claim that USTS breached such
an obligation is, accordingly, without merit.

Telesaver also alleges that USTS breached its implied
covenant of good faith and fair dealing by its perform-
ance under the Fourth Addendum. Telesaver asserts that
it would have received more in commissions had USTS
not breached this covenant. Telesaver makes no claim
that USTS failed to pay commissions on usage actually
generated by Telesaver sales, only that the usage would
have been higher—and the corresponding commissions
higher—had USTS lived up to its duty.

Under New Jersey law, a party to a contract may
state a claim for breach of the implied covenant of good
faith and fair dealing. As the court held in Palisades
Properties, Inc. v. Brunetti, 44 N.J. 117, 130, 307 A.2d
522, 5381 (1965) (quoting 5 Williston on Contracts § 670
(3d ed. 1961) ):

In every contract there is an implied covenant that
‘neither party shall do anything which will have the
effect of destroying or injuring the right of the other
party to receive the fruits of the contract; in other
words, in every contract there exists an implied cove-
nant of good faith and fair dealing.’

See Polito v. Continental Casualty Co., 689 F.2d 457, 463
(3d Cir. 1982); Telesaver, 687 F. Supp. at 1001; see also
Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E.
214 (1917) (Cardozo, J.) (“The law has outgrown its
primitive stage of formalism when the precise word was

30a

the sovereign talisman, and every slip was fatal. It takes
a broader view today. A promise may be lacking, and yet
the whole writing may be ‘instinct with an obligation,’
imperfectly expressed.”’).

While the existence of this implied covenant of good
faith and fair dealing is well-established, its contours
have never been particularly well-defined. The parties
here offer very different visions of the duty. Telesaver
asserts that the duty requires USTS to live up to “in-
dustry standards” in its performance. See Telesaver Pro-
posed Conclusion of Law No. 8. USTS offers a far less
rigorous standard; it asserts that the duty of good faith
and fair dealing is breached only by “bad faith’ non-
performance. See USTS Memorandum in Opposition to
Telesaver’s Proposed Findings of Fact and Conclusions of
Law at 9. As the Court reads New Jersey law, the truth
lies somewhere between these positions. In Schultze v.
Chevron Oil Co., 579 F.2d 776 (8rd. Cir. 1978), the court
applied New Jersey’s duty of good faith and fair dealing
to a dispute between a gasoline station franchisee and an
oil company. Dissenting from the court’s affirmance of a
directed verdict in favor Chevron, Judge Adams offered
a comprehensive overview of New Jersey’s implied duty.
He concluded:

The New Jersey courts thus no longer conceive of a
contract solely as a private treaty in a bellicose state
of nature, conferring privileges to be used at will out
of avarice, pique or spite. Rather, a contract, partic-
ularly one involving a long-term relationship which
places the welfare of one party in the hands of the
other, is understood to reflect the ethical tenor of the
society in which the contract is formed, and creates
the expectation that the powers it grants will be rea-
sonably and equitably exercised.

Id. at 784 (footnotes omitted). Thus, the duty of good
faith and fair dealing imports a obligation of reasonable-
ness into every contract and permits a court to take

sla

cognizance of all the equities in determining whether that
contract has been breached. See Eskin v. Acheson Mfr.
Co., 236 F.2d 135 (3d Cir. 1956) (applying New Jersey
law) (“uncertainties of the abnormal economy and their
impact on reasonable business behavior must be viewed
as basic qualifying circumstances” ).

USTS argues that the evidence adduced in this case
indicates that it fulfilled its obligation to act in good
faith. In support, USTS especially emphasizes the front-
loaded nature of the compensation scheme between USTS
and Telesaver which, USTS asserts, created a “built-in
guarantee that USTS would make good faith efforts to
process Telesaver sales and promote usage from them.”
USTS Post-Trial Memorandum of Law at 15. USTS also
stresses the general upheaval in the telecommunications
industry during the duration of the Fourth Addendum.

While USTS’s characterization of its incentive and of
the atmosphere in which it was operating is accurate, its
argument that these background facts indicate that it
performed its obligations under the Sales Agreement in
the Fourth Addendum cannot withstand scrutiny. The
evidence presented at trial indicates that USTS’s perform-
ance is attributable to more than the fact that USTS was
a poorly-managed company struggling to survive in tur-
bulent and unchartered waters. Rather, USTS specific
failures to correct the deficiencies that were apparent
during the initial contract period amounts to a knowing
failure to take steps necessary to fulfill its obligations
under the Fourth Addendum. Put simply, the parties
agreed to start fresh under the Fourth Addendum; prob-
lems encountered from December 1984 until September
1985 were put behind; a new relationship was to begin.
The evidence produced at trial indicates, however, that
USTS did virtually nothing to assure that the previously
encountered problems would not reappear. Rather than
acting with any diligence to solve the massive internal
preblems at USTS, USTS allowed the problems to fester.

32a

This cannot be regarded as reasonable behavior. The
Court finds that it amounts to a breach of the duty of
good faith and fair dealing.

The Court turns, then, to the damages suffered by Tele-
saver as a result of this breach. Both parties agree that
USTS advanced Telesaver $1,038,891 for Fourth Adden-
dum sales. Telesaver’s expert, Howard Paul, produced a
lengthy report during the pretrial stage of the litigation
in which he opined that Telesaver would have $979,794
if USTS had not breached its obligations under the Fourth
Addendum’s sales agreement. Mr. Paul defended that
opinion, and did not deviate from it, at deposition. The
Pretrial order submitted by the parties included Mr.
Paul’s damage figure. And Mr. Paul testified, on his
first day of testimony, that the figure in his report was
accurate. On the morning of his second day of testimony,
however, Mr. Paul offered a revised calculation of Tele-
saver’s damages. He testified that the $979,794 figure
should be multiplied by a factor of 3.7 to better reflect
expected usage, yielding an expected commission of
$3,625,238.

This revised opinion is wholly lacking in credibility and
the Court does not credit Mr. Paul’s testimony regarding
it. It is evident that the original opinion of damages
presented in the expert’s report and relied upon up until
the morning of the seventh day of trial represents the
expert’s “best estimate” of Telesaver’s damages. Tr.
1166. Since both parties agree that Telesaver was ad-
vanced $1,038,891, Telesaver actually suffered no direct
damages as a result of USTS’s breach. On the contrary,
Telesaver was advanced $59,074 more than it was en-
titled to receive had USTS not breached its duty of good
faith in the Fourth Addendum.

Telesaver also seeks damages for lost sales as a con-
sequence of USTS’s failure to live up to its obligations
under the Fourth Addendum. In particular, Telesaver
alleges that it had to lay off personnel and close offices as

33a

a result of USTS’s failure to perform; if these offices had
remained open, Telesaver argues, more sales of USTS
service would have been made, more customers would have
generated usage, and more commissions would have been
due Telesaver.

This claim is clearly one for consequential damages.
See Kearney & Trecker Corp. v. Master Engraving Co.,
Inc., 107 N.J. 584, 527 A.2d 429, 433 (1987); Seaman v.
United States Steel Corp., 166 N.J. Super. 467, 400 A.2d
90, 93 (Super. Ct. App. Div.), cert. denied, 81 N.J. 282,
405 A.2d 826 (1979); see also Pretrial Order at 74-75
(plaintiff’s characterization of this claim as one for con-
sequential damages). In Judge Young’s opinion, the con-
sequential damages disclaimer contained in the Original
Contract was found to be valid and enforceable. Tele-
saver, 687 F. Supp. at 998-99. Accordingly, Judge Young
granted summary judgment to USTS on Telesaver’s claim
for consequential damages. That decision stands as the
law of this case. Telesaver’s demand for damages for
sales not made as a consequence of USTS’s breach must
be rejected.

C. Post-Fourth Addendum Lost Sales: Telesaver seeks
$10,519,212 (plus an increment to account for time until
judgment) for “lost commissions on lost sales after the
contract period.” Quite obviously, this amounts for a
claim for consequential damages that is barred by Judge
Young’s ruling. In any event, the evidence presented at
trial indicates that USTS terminated the Fourth Adden-
dum in strict adherence with its terms. Accordingly,
Telesaver did not demonstrate that its relationship with
USTS should have continued one day longer than it did.
Telesaver’s demand for damages for the post-contractual
period is denied.

II. Fraudulent and Negligent Misrepresentation

Counts II and III of the Amended Complaint bring
claims for fraudulent and negligent misrepresentation,
respectively. Telesaver contends:

34a

USTS continually misrepresented the nature and
magnitude of USTS’ internal problems, the then-
existing status of order processing, the then-existing
status of service being provided, the degree of re-
sponsibility of the Bell Operation Companies for the
low usage on Telesaver accounts, and the nature and
extent of actions that USTS took to correct the prob-
lems which may have existed.

Telesaver’s Reply Memorandum in Support of Plaintiffs’
Proposed Findings of Facts and Conclusions of Law at
103.17 These alleged misrepresentations form the basis
for both the negligent and fraudulent misrepresentation
counts.

To prevail in an action for fraudulent misrepresenta-
tion under New Jersey law, the plaintiff must demon-
strate that the defendant made a “ ‘material misrepre-
sentation of a presently existing or past fact, made with
knowledge of its falsity and with the intention that the
other party rely thereon, resulting in reliance by that
party to his detriment.’” Ramapo Bank v. Bechtel, 224
N.J. Super. 191, 5389 A.2d 1276, 1279 (Super. Ct. App.
Div. 1988) (citation omitted) (emphasis added). In
addition, fraud must be established by clear and convinc-
ing evidence. Albright v. Burns, 206 N.J. Super. 625,
503 A.2d 386, 389 (Super. Ct. App. Div. 1986). Negli-
gent misrepresentation consists of “an incorrect state-
ment, negligently made and justifiably relied upon” H.
Rosenblum, Inc. v. Adler, 98 N.J. 324, 461 A.2d 138, 142-
43 (1983) (emphasis added). An essential element of

17 The Court notes that some variance exists between the alleged
fraudulent misrepresentations claimed in Telesaver’s post-trial mem-
oranda and the alleged fraudulent misrepresentations alleged in
Telesaver’s Amended Complaint. Compare Amended Complaint para.
50, with Telesaver’s Proposed Conclusion of Law No. 11. Under the
Federal Rules of Civil Procedure, fraud must be pled “with particu-
larity.” Fed. R. Civ. P. 9(b). Nevertheless, the variance that exists
is not, as USTS argues, so great as to preclude consideration of
Telesaver’s claims. See supra, note 10.

35a

each cause of action is that the plaintiff reasonably relied
on the alleged misrepresentations. Here, even if the Court
assumes that USTS made misrepresentations (and the
Court does not believe that the record could sustain such
a finding), the evidence presented at trial clearly indi-
cates that Telesaver’s reliance on such misrepresentations
was not reasonable.

One of the indelible realities of the entire relationship
between Telesaver and USTS was the unusually frequent
contact that Telesaver personnel—especially Richard
Goldman—had with senior USTS personnel—especially
Wayne Robins. Goldman was in almost daily contact
with Robins, seeking resolution of the problems USTS
was encountering with the handling of Telesaver’s ac-
count. Goldman’s knowledge of the entire gamut of
USTS’s problems was extensive; both Goldman and peo-
ple who worked with Goldman had first-hand knowledge
of the backlogs at USTS and of USTS’s attempts to rem-
edy the situation. The testimony clearly indicates that
Goldman was informed of the problems at USTS by his
subordinates. See testimony of Sapperstein, Brown and
Moskowitz. In short, given the fact that Telesaver had
abundant knowledge of the problems dogging USTS, Tele-
saver cannot claim that it reasonably relied on any al-
leged representations made by USTS of successful per-
formance. Telesaver’s fraudulent and negligent misrepre-
sentation counts, therefore, must be denied.

III. Breach of the Customer Transfer Agreement

Telesaver’s claim that USTS breached the Customer
Transfer portion of the Contract is similar to its claim
under the Sales portion of the Fourth Addendum. Tele-
saver asserts that USTS breached its implied duty of
good faith and fair dealing in the performance of its
obligations and that this breach led to lower than ex-
pected usage by former Telesaver customers transferred
to USTS. Telesaver is not alleging that USTS breached

36a

any explicit obligations contained in the Contract or that
USTS failed to compensate Telesaver properly for actual
usage by former Telesaver customers transferred to
USTS."* Rather, Telesaver’s claim is one for commis-
sions for unrealized usage.

As noted above, New Jersey law reads a duty of good
faith into every contract. Palisades Properties, supra.
The Court is thus called upon to consider the entire rela-
tionship between the parties to determine whether the
alleged breaching party’s performance was reasonable in
the circumstances. Taking into account the totality of the
circumstances surrounding USTS’s performance under
Customer Transfer portion of the Contract, the Court
concludes that USTS did not breach its implied covenant
of good faith and fair dealing in its performance under
this portion of the Contract. Simply put, failing to ful-
fill the expectations of one’s contractual partner does nc’
amount to breach of the duty of good faith.’ Inept
handling of problems does not amount to breach of the
duty of guod faith. So long as a good faith effort was
made, failure alone does not create liability. After all
the evidence is considered, the Court finds that USTS’s
failures were not the result of a lack of good faith effort.

Most importantly, the nature of the telecommunications
industry during the time that Telesaver was transferring
its customers to USTS must not be overlooked. Chaos
reigned supreme. The break-up of AT&T created a situ-

18 Telesaver does assert that USTS breached the explicit duty,
contained in paragraph 8.3 of the Contract, to provide network
quality “comparable [to] industry standards.” The Court’s finding
of fact that the quality of USTS service was not below industry
standards, however, prevents recovery on this claim.

19 It is important to recognize, in this regard, that satisfaction
of the duty of good faith is judged on an objective scale. The Court
has little doubt that USTS failed to live up to Richard Goldman’s
subjective standard of good faith. Such a failure, however, does
not amount to a breach of the duty of good faith,

37a

ation in which new long distance carriers were competing
for the business of confused and disoriented customers.
These new carriers, including USTS, had no established
opearting procedures to guide them through this period.
The competition for customers among many long distance
companies was intense. In such an environment, the in-
ability of one carrier to capitalize on the opportunities
presented is not evidence of a lack of good faith effort to
succeed. The less-than-expected usages complained of are
readily explainable as the natural result of the chaotic
atmosphere, the intense competition for customers, and
customers’ lack of familiarity with USTS code service.

The internal problems that beset USTS during the
contract period certainly had a negative impact on the
ultimate commissions earned by Telesaver. The Court
finds strong evidence to support the contention that
USTS’s problems led customers to switch to other carriers
or to reduce their use of USTS service. Nevertheless, the
Court also finds that USTS made good-faith attempts to
live up to its end of the bargain. Its sought solutions for
its problems and attempted to resolve the apparent in-
efficiencies. Given that USTS was operating in an “ab-
normal economy,” Eskin, supra, its inability to perform
at standards typical—and perhaps expected—for a major
multinational corporation does not establish a breach of
the duty of good faith and fair dea ag. Telesaver’s claim
under Count V of the Amended Complaint, therefore,
must be denied.

IV. USTS’s Counterclaim Against Richard Goldman

In its counterclaim, USTS sought recovery from
Richard Goldman individually as well as from Telesaver
and Vista Technologies. At trial, however, USTS pre-
sented no evidence to support a finding of liability against
Goldman individually. Moreover, USTS’s proposed find-
ings of fact and conclusions of law do not ask the Court
to find that Goldman should be held personally liable for

38a

the restitution USTS seeks. Accordingly, the Court will
dismiss USTS’s counterclaims insofar as they seek re-
covery against Richard Goldman individually.

Summary

The central fact underlying this entire litigation was
the manifest clash of corporate cultures between Tele
saver and USTS. Simply put, the two parties envisioned
the world differently, imagined the future differently, and
expected different things from their contractual partners.
This mismatch effectively doomed the relationship from
the outset. While it is clear that USTS could have done
much more to make the relationship work, the eventual
failure of this venture was primarly the inevitable out-
come of a fundamental mismatch of business perspectives.

Judgment will be entered in favor of Telesaver on its
claim under Count I of Amended Complaint for UST'S’s
breach of its duty of good faith and fair dealing during
the Fourth Addendum period. Judgment will be entered
in favor of USTS on the remainder of Count I and on
Counts II, III, and V. Judgment will also be entered in
favor of USTS on its two Counterclaims. As a result,
Telesaver will be ordered to pay to USTS $283,129.82.
A Judgment Order will accompany this Opinion.

/s/ Norman P. Ramsey
NORMAN P. RAMSEY
United States District Judge

Dated: March 6th, 1990

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

Civil Action No. R-86-2300

TELESAVER, INC., et al.,
Plaintiffs/Counterclaim Defendants

V,

UNITED STATES TRANSMISSION SERVICE, INC.,
Defendant/Counterclaim Plaintiff

JUDGMENT ORDER
[Filed Mar. 6, 1990}

In accordance with the Opinion of the Court dated
March 6th, 1990, and filed in the above-captioned case,
it is this 6th day of March, 1990, by the United States
District Court for the District of Maryland,

ORDERED AND ADJUDGED:

1. That judgment is hereby entered in favor of plain-
tiffs and against defendant on Count I of the Amended
Complaint for defendant’s breach of the duty of good
faith and fair dealing under the Fourth Addendum;

2. That judgment is hereby entered in favor of de-
fendant and against plaintiffs on the remainder of Count
I of the Amended Complaint and on Counts II, III, and
V of the Amended Complaint;

3. That judgment is hereby entered in favor of coun-
terciaim defendant on both Counts of the Amended
Counterclaim ;

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4. That counterclaim plaintiff’s prayer for recovery
against counterclaim defendant Richard Goldman is DIS-
MISSED; and

5. That the remaining counterclaim defendants pay
to defendant/counterclaim plaintiff the sum of $283,-
129.82 in restitution.

/s/ Norman P. Ramsey
NORMAN P. RAMSEY
United States District Judge

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APPENDIX C

UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
Chambers of
Joseph H. Young
Judge
Baltimore, Maryland 21201

March 1, 1988

Harry M. Rifkin, Esq.
Semmes, Bowen & Semmes
250 West Pratt Street
Baltimore, Maryland 21201

Re: Telesaver, Inc., et al. v.
United States Transmission System,
Inc.—Civil No. Y-86-2300

Dear Mr. Rifkin:
I acknowledge your letters dated February 23, 1988.

As indicated in my letter dated February 17, 1988, a
jury demand in an amended pleading is not revived un-
less the amended pleading raises triable issues of fact
not raised in the original pleading.

Your letter indicates that the request for jury trial
is not based on any new facts. Accordingly, this case
will go to trial as scheduled as a nonjury trial.

Very truly yours,

/s/ Joseph H. Young
JOSEPH H. YOUNG
United States District Judge

ec: Michael D. Berman, Esq.
John M, Aerni, Esq.

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APPENDIX D

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 90-3502

TELESAVER, INCORPORATED; VISTA TECHNOLOGIES,
INCORPORATED,
Plaintiffs-A ppellants
Ve

UNITED STATES TRANSMISSION SYSTEMS INCORPORATED,

Defendant-A ppellee
and

RICHARD J. GOLDMAN,
Counterclaim Defendant

ON PETITION FOR REHEARING WITH
SUGGESTION FOR REHEARING IN BANC

[Filed February 21, 1991]

The appellants’ petition for rehearing and suggestion
for rehearing in bane were submitted to this Court. As
no member of this Court or the panel requested a poll on
the suggestion for rehearing in banc, and

As the panel considered the petition for rehearing and
is of the opinion that it should be denied,

IT IS ORDERED that the petition for rehearing and
suggestion for rehearing in banc are denied.

Entered at the direction of Judge Phillips with the
concurrence of Judge Niemeyer and Judge Merhige.

For the Court,

/s/ J ohn M. Greachen
Clerk

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_2107%3A1. Public record. Not legal advice.