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WorldCom Inc. — the embattled telecommunications company whose $11 billion accounting scandal has landed it in bankruptcy court and on the receiving end of criminal charges — had a rare moment of sunshine Friday when a federal appeals court revived its $3.4 million breach of contract suit against Graphnet Inc. The ruling came just three days after a major break in the bankruptcy case when two groups of dissident creditors abandoned their legal challenge to the company’s reorganization plan in return for a combined payout of more than $400 million. Also last week, WorldCom executives entered a formal not guilty plea to criminal charges filed by Oklahoma Attorney General Drew Edmondson against the company and former employees, including CEO Bernard Ebbers and CFO Scott D. Sullivan. In Friday’s decision in WorldCom Inc. v. Graphnet Inc., the 3rd U.S. Circuit Court of Appeals found that a lower court erroneously held that WorldCom’s failure to file contracts with the Federal Communications Commission precluded it from pursuing the claim. The unanimous three-judge panel found that the issue was too complex to be decided in an early motion to dismiss because the FCC exempts certain contracts from its filing requirements. But even if the lower court were correct in holding that the contracts should have been filed, the 3rd Circuit found, the consequences should not have been so drastic. Instead of dismissing the entire case, the panel said, WorldCom should have been allowed to pursue a common-law claim for unjust enrichment — even if it had forfeited the right to bring breach of contract claims. In the suit, WorldCom — which plans to officially change its name to MCI when it emerges from bankruptcy — claims it entered into a contract with Graphnet in November 1991 to provide two-way telex transmissions between their respective networks for telex traffic originating on each other’s networks. The suit alleges that Graphnet has not paid for more than $3 million in telex services, and has also failed to pay nearly $400,000 for telecommunications equipment and services provided under another contract. Graphnet’s lawyers moved to dismiss the suit, arguing that the claims were precluded by the so-called “filed rate doctrine” which requires telecommunications companies to file contracts with the FCC. U.S. District Judge William H. Walls of the District of New Jersey agreed, concluding that WorldCom could not recover under any of the contracts at issue because they were never filed with the FCC. Now the 3rd Circuit has ruled that Walls was too quick to toss the case out. “This complex issue could not be resolved at this stage in the litigation,” visiting 9th Circuit Judge Cynthia Holcomb Hall wrote in an opinion joined by 3rd Circuit Judges Jane R. Roth and Samuel A. Alito Jr. Hall found that the mere fact that there was no filed tariff does not itself violate the Federal Communications Act. Under the FCA, Hall found, a carrier may conduct its business either by tariff or by contract. When a carrier chooses to conduct business by contract, � 211(a) of the FCA states that every common carrier “shall” file with the FCC “copies of all contracts, agreements or arrangements with other common carriers.” Walls held that since the contracts at issue were not filed with the FCC, WorldCom had violated the FCA. But Hall found that Walls “ignored” � 211(b) of the FCA, which states that the FCC “shall have the authority to require the filing of any other contracts of any carrier, and shall also have authority to exempt any carrier from submitting copies of such minor contracts as the commission may determine.” The FCC has exercised its power to create exemptions, Hall found, by passing a regulation that says “non-dominant” carriers are not subject to the same contract filing requirements. WorldCom’s lawyers argued that the regulation relieved it of responsibility for filing its contract with Graphnet. Graphnet’s lawyers disagreed, arguing that the regulation merely listed a few examples of contracts that must be filed with the FCC. But Hall found that the FCC’s report and order “clearly supports WorldCom’s position.” In its order, Hall noted, the FCC specifically stated that because it no longer found such documents “useful,” it desired to eliminate “the requirement that non-dominant carriers treated with forbearance file certain reports and contracts.” Hall found that “the language in the regulation would be superfluous were it not read to exempt non-dominant carriers from the filing requirement.” As a result, Hall said she agreed with WorldCom that “this regulation exempts ‘non-dominant’ carriers from the filing requirement.” Since WorldCom claims that it was classified as non-dominant, Hall found, the lower court “must first determine whether WorldCom was, in fact, non-dominant in the national long distance field at the time and that the contracts at issue involved national long distance services.” Hall also rejected Graphnet’s argument that a violation of the filing requirement precludes WorldCom from recovering anything for services it rendered and equipment it delivered to Graphnet. Walls had adopted Graphnet’s position, holding that WorldCom could neither recover under the contract nor for the value of services rendered under a theory of unjust enrichment or quantum meruit. Hall found that Walls “essentially … held that if a party fails to file a contract under Section 211, it will suffer a complete and total forfeiture.” In doing so, Hall found, Walls erroneously relied on the “filed rate doctrine.” “We find nothing in either the FCA, the decisions of the Common Carrier Bureau or in the case law from the federal courts that would support such an extreme penalty for failing to file a contract,” Hall wrote. “The district court and Graphnet assume that the penalty for failing to file a contract under that section is a total forfeiture. If Congress intended the extraordinary penalty that Graphnet advocates, we would expect it to say so explicitly,” Hall wrote. Since the statute is silent on the issue, Hall said, “we conclude that a violation of Section 211′s filing requirement does not require that WorldCom forfeit any right to be compensated for services and equipment provided to Graphnet pursuant to an unfiled contract.”

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