Another bubble fallout: right-of-way lawsuits

Telecommunications companies in many cases have already rued the amount of money they plowed into the ground during the 1990s to install optical fibers they have no current plans to light any time soon. Now, some may find themselves paying for that fallow capacity again, thanks to a series of class action lawsuits that allege that some carriers laid cable under land they had no right to use.

As has been well documented, the end of the last century saw an explosion in network construction, particularly in long-haul networks. Companies such as AT&T, Sprint, WorldCom, Williams, Level(3), Qwest, and others looking to streamline the right-of-way (RoW) process found willing allies in railroads and utilities, who offered to lease space within the easements they had received to lay track, pipelines, or electrical infrastructure. The problem, say lawyers for aggrieved plaintiffs, is that in many cases the railroads and utilities didn’t have the right to do so.

What’s worse, allege plaintiff lawyers, is the carriers knew that at the time. “By and large, I know of no exception to the fact that the telecom companies, when they made their contracts with railroads, realized that there was no right that the railroads could grant,” says Nels Ackerson, partner at Ackerson Kauffman & Fells, one of the more visible attorneys on the plaintiff side in the RoW disputes. “The contracts that we have reviewed generally contain provisions in which the railroads indemnify the telecom companies after acknowledging that they either do not have or may not have a legal right to transfer.”

This contention has sparked scores of lawsuits across the country against carriers, railroads, and utilities. “The landowners generally don’t care who pays them for this, so long as they are treated fairly,” Ackerson says. However, railroads and carriers generally have proven the most inviting targets so far, with lawsuits in the early 1990s against the old Penn Central over the use of abandoned RoW among the earliest, according to the Website of Price, Jackson, Waicukauski & Mellowitz, another firm active on the plaintiff side. These successful suits against Penn Central, which the Website asserts “conclusively established the ­extent of the railroad’s knowledge about the limits on their ability to exercise control over rights of way for non-railroad purposes,” helped build momentum for other filings, some of which achieved class status on either a statewide or national level.

Few if any of these subsequent filings appear to have completed the full trial process, although several have resulted in hefty settlements. For example, AT&T settled several suits (without acknowledging culpability) covering its use of abandoned railroad RoW in 1999 and its use of active railroad RoW in 2002. According to Ackerson, plaintiffs whose property contained active railroad easements netted approximately $2 per ft (with attorneys’ fees and administrative costs removed), while the holders of property with abandoned easements received about $60,000 per mi. Another impressive case involved Thoroughbred Technology & Telecommunications, the telecom subsidiary of Norfolk Southern Railroad. A settlement reached in 2001 after property owners along the railroad’s tracks filed suit not only netted cash payments of up to nearly $32,000/mi (according to the Price Website), but also an ownership stake in the telecom company.

One reason that such class action suits haven’t fully made it to trial is the difficulty in determining exactly what rights railroads and utilities possess and whether those rights are transferable. The question is particularly complex when it comes to railroads, which in some cases acquired easements as far back as the mid-1800s using procedures that varied from railroad to railroad and state to state-and in some cases property to property. “From parcel to parcel, even on a single railroad line within a single state, there may be some parcels where the railroad owns the right to use the land for any purpose, and there may be a sizable number of other parcels where it does not,” Ackerson admits.

Depending on how well records have been kept, it may be impossible in many instances to document where railroads have the right to either install telecom cable along their tracks or transfer that right to others and where they don’t. The time and resources necessary to untangle such a mess-not to mention the amount of money they would fork over if plaintiff attorneys received the sums they originally sought-have made a settlement the lesser of two evils in some defendants’ minds.

The sheer volume of suits, which makes it difficult to achieve class status amid an avalanche of motions from attorneys on both sides, also explains the lack of RoW class actions that have reached trial. In particular, organizing plaintiff lawyers with potentially competing lawsuits has been problematic.

The case of Smith vs. Sprint illustrates this phenomenon. As described by a judge of the 7th Circuit Court in Chicago in a ruling made last October as well as other sources (particularly an article in the American Lawyer, “Blood on the Tracks,” by Alison Frankel, June 2002), the saga began in 1999 with a complaint filed in the district court for the Northern District of Illinois against Sprint Communications and the Union Pacific Railroad. The suit sought both damages and class action status. Meanwhile, lawyers like Ackerson had filed similar suits in other states, including Tennessee and Kansas. In 2001, Sprint, Union Pacific, and other actual or potential defendants (including Qwest, Level(3), and Wiltel Communications) banded together to work out a settlement with a group of plaintiff lawyers led by the Minneapolis firm Heins Mills & Olson that they hoped would cover every case. The settlement called for the landowners to receive 60¢/ft. Ackerson’s group, which had been seeking significantly more money, filed motions of protest, and negotiations among the defendants, the Heins group, and the Ackerson group ensued under the eye of the Illinois court.

However, these negotiations didn’t move fast enough for the original settling parties, who decided to see if moving the trial’s venue to Oregon would speed things up. A judge there wrapped their knuckles for “judge shopping” in July 2002 and sent them back to Illinois. Negotiations continued; Ackerson says the original 60¢/ft became something between $1.60 and $2/ft, and the court gave the settlement preliminary approval. But that was still not good enough for the lawyers in Kansas and Tennessee, who were suffering under a court-ordered injunction while the Illinois case languished. They argued before the 7th Circuit Court in January 2004 that the proposed nationwide class action settlement didn’t adequately represent their interests and should be disbanded. In the October ruling, the court agreed; an appeal by the defendants was turned down shortly thereafter.

The ruling is significant because it not only allows the cases in Tennessee and Kansas to proceed, but the suits filed by Ackerson’s group as well. In a press release, Ackerson says the rights at issue could be worth as much as $20 per ft. Why the difference between what they’re asking and what they got from AT&T? “AT&T settled without extensive litigation. We have had to do a great deal of additional discovery and litigation [in this case],” Ackerson says. “It’s taken more time. The uses therefore have been in place longer. The revenues that these companies are getting are substantially higher now, because while the profitability of some of these companies has not been great, the revenue generated from the use of this land has continued to increase dramatically over the past few years.”

Given the fact that Sprint has 16,000 mi of fiber at issue, Ackerson estimates, and the plaintiffs seek compensation for past and future use, plus punitive damages, the multibillion-dollar pressure on the carrier to settle before its trial date in May will be great. Ackerson says that negotiations with Sprint and other defendants on a new settlement have already begun. “It’s too early to tell,” Ackerson says of his expectations for the settlement negotiations. “We’ve had two sessions with them [as of late 2004], and I have to say they’ve been courteous conversations and they’ve been open conversations. But we don’t have any agreements yet-and, frankly, we are pretty far apart on the compensation.” Lawyers for Sprint and other defendants did not respond to phone messages by press time.

Even if carriers such as Sprint prove successful in court, it appears the expense of the bubble exuberance will prove costly once again.

More in Earnings Statements