SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-4869-96T2
JEM MARKETING, LLC,
Plaintiff-Appellant,
v.
CELLULAR TELECOMMUNICATIONS
INDUSTRY ASSOCIATION; MOTOROLA
CORPORATION; and PROFESSIONAL
SECURITIES BUREAU LTD.,
Defendants-Respondents.
_____________________________________
Submitted January 22, 1998 - Decided February 5, 1998
Before Judges Baime, Wefing and Braithwaite.
On appeal from Superior Court of New Jersey,
Law Division, Camden County.
Sherman, Silverstein, Kohl, Rose & Podolsky,
attorneys for appellant (Alan C. Milstein and
Harris L. Pogust, on the brief).
Archer & Greiner, attorneys for respondent Cellular
Telecommunications Industry Association (George F.
Kugler, Jr. and Nicholas C. Harbist, on the joint
brief).
McCarter & English, attorneys for respondent
Motorola Corporation (William J. O'Shaughnessy, on the
joint brief).
Frank N. Yurasko, attorney for respondent
Professional Securities Bureau Ltd. (Mr. Yurasko,
on the joint brief).
The opinion of the court was delivered by
BAIME, P.J.A.D.
Plaintiff JEM Marketing, LLC brought this action against
defendants Cellular Telecommunications Industry Association,
Motorola Corporation, and Professional Securities Bureau Ltd.
alleging violations of the New Jersey Antitrust Act (N.J.S.A.
56:9-1 to -19), racketeering under the New Jersey Racketeering
statute (RICO Act) (N.J.S.A. 2C:41-1 to -6.2), conspiracy,
tortious interference with economic advantage, malicious
prosecution, and libel and slander. The principal thrust of
plaintiff's claim was that defendants conspired to make false
accusations to the United States Secret Service in an effort to
drive the company to ruin. According to the complaint,
defendants informed the Secret Service that plaintiff was engaged
in the illegal business of altering cellular telephones to
defraud cellular carriers of their activation and monthly service
fees. Plaintiff alleged that these false accusations culminated
in the issuance of a search warrant and the confiscation of the
company's equipment, supplies and documents, resulting in the
destruction of its business. The Law Division dismissed
plaintiff's complaint. Plaintiff appeals. We affirm.
We hold that the practice of "cloning" cellular telephones
violates federal law. We also conclude that because plaintiff
operated an illegal enterprise, it did not have a legitimate
business interest subject to protection under New Jersey's tort
laws. Plaintiff's claims for antitrust violations, racketeering,
tortious interference with economic advantage and conspiracy were
properly dismissed on that basis. We are further satisfied that
the Law Division correctly dismissed plaintiff's remaining
claims.
Plaintiff is a New Jersey Limited Liability Company engaged in the business of providing cellular extension telephone products. According to plaintiff, an "extension telephone" is a cellular unit that carries the same telephone number and electronic serial number as the principal telephone. Plaintiff's business involved copying factory-set serial numbers from a customer's cellular telephone and reprogramming another cellular telephone with the same serial number. Plaintiff utilized what is known as a "moto box" or "copycat box," a device that transfers the telephone number and serial number to the "extension" telephone. The end-result of this process is the creation of two telephones, the original and a "clone," that carry the same telephone number and serial number. All telephone calls made from the extension telephone are billed by the cellular provider as if made from the original factory-set telephone purchased by the consumer. As we understand it, the cellular carrier is deprived of its activation and monthly service fees on the cloned telephone. Apart from its business of reprogramming cellular telephones, plaintiff manufactured and/or sold moto boxes to the public.
Plaintiff actively marketed its services in a number of national publications. Having become aware of plaintiff's business, Motorola, a manufacturer of cellular telephones, Cellular Telecommunications Industry Association, an organization
representing manufacturers and producers of cellular products,
and Professional Securities Bureau Ltd., a private investigative
agency, commenced an investigation. According to plaintiff's
complaint, defendants "began disseminating [false] information to
the . . . Secret Service." More specifically, defendants
allegedly told the Secret Service that (1) moto boxes have no
legitimate purpose, (2) such devices can be used to bypass a
carrier's tracking and billing processes, and (3) plaintiff was
accepting "stolen" telephones in exchange for copycat boxes.
Based upon the information supplied by defendants and his
independent investigation, Special Agent Thomas Tamburello of the
Secret Service applied for a warrant to search plaintiff's
business premises. The affidavit upon which the search warrant
ultimately issued was submitted to the Law Division by plaintiff
in opposition to defendants' motion to dismiss the complaint, and
is thus part of the record. In the affidavit, Special Agent
Tamburello recited much of the information that had been supplied
by defendants. With one critical deviation, the complaint
accurately described the information that defendants had given
the Secret Service. That deviation assumes importance later in
our analysis of the legal issues, and we thus digress to describe
it here in some detail. Contrary to the facts alleged in the
complaint, defendants never told the Secret Service that
plaintiff was trafficking in "stolen" cellular telephones.
According to Special Agent Tamburello's affidavit, Joseph
Tazelaar, a Motorola employee, told him that he, Tazelaar, had
offered to trade "stolen" cellular telephones in exchange for a
copycat box, but plaintiff's principal, Gary Epstein, "had
refused to meet with him."
In any event, a search warrant was executed on April 13,
1995. Plaintiff asserted that virtually all of its equipment and
vital working documents were confiscated. One year later, the
government returned all of the seized items, noting that it did
not intend to prosecute. Plaintiff claimed that the disruption
in its business caused its demise.
Defendants moved to dismiss the complaint for failure to
state a claim upon which relief can be granted. See R. 4:6-2(e).
The Law Division judge dismissed plaintiff's claims for antitrust
violations, racketeering, tortious interference with economic
advantage and conspiracy, finding that plaintiff was engaged in
an illegal business and thus had no legitimate interest subject
to protection under New Jersey's tort laws. The court
additionally dismissed plaintiff's malicious prosecution action
on the grounds that (1) no criminal proceedings were ever
instituted against plaintiff, and (2) as a matter of law,
defendants' communications with the Secret Service were supported
by probable cause. The court dismissed plaintiff's libel and
slander claims, finding that the one-year statute of limitations
had expired.
Although not dispositive of all of plaintiff's claims, the critical question is whether "cloning" cellular telephones is
illegal. We thus commence our analysis with a concise overview
of the relevant rules, regulations and orders adopted by the
Federal Communications Commission (FCC).
The cellular telephone industry has been regulated by the
federal government since 1981. See
47 U.S.C.A.
§§151, 332; see
also In re An Inquiry into the Use of the Bands 825-
845 MHz and 870-890 MHz for Cellular Communications Systems; and Amendment of
Parts 2 and 22 of the Commission's Rules Relative to Cellular
Communications Systems,
86 F.C.C.2d 469 (1981) (First ESN Order).
The FCC has complete plenary authority over the industry.
47 U.S.C.A.
§151. The Secret Service is one of the principal
enforcement agencies dealing with the regulation of public mobile
services and consumer access devices. See
18 U.S.C.A.
§3056.
One of the primary goals of radio airway regulation is to prevent
"pirating" or "cellular theft." See, e.g., Report and Order, In
re Revision of Part 22 of the Commission's Rules Governing the
Public Mobile Services, FCC 92-115,
9 F.C.C.R. 6513,
76 Rad.
Reg 2d ¶ 1 (1994) (Second ESN Order); FCC Public Notice 20011,
Report No. CL-92-3, Changing Electronic Serial Numbers on
Cellular Phones is a Violation of the Commission's Rules (Oct. 2,
1991) (FCC Public Notice 20011).
The most common way for individuals to commit cellular theft
is to "clone" or copy an active cellular telephone's electronic
serial number. Each cellular telephone, by law, must have a
unique Electronic Serial Number (ESN) and phone number, which
must be set by the manufacturer. See 47 C.F.R. §§ 22.919 and
22.933 (1998). Simply stated, an ESN is a thirty-two bit binary
number that identifies the cellular device to any cellular
provider. 47 C.F.R. § 22.919. Cellular providers use the ESN as
the means of identifying a telephone, ensuring access to the
system, tracking telephone usage and billing its customers.
Through the development of certain technologies, namely "moto
boxes" or "copycat boxes," individuals have been able to "copy"
the ESN from an active telephone and transfer it to another
telephone. The device also transfers the active telephone's
telephone number. The end result is what is commonly referred to
as a "clone" or "reconditioned telephone." After the process is
complete, any calls made or received by the cloned telephone are
tracked and billed by the provider as if they were emanating from
the original, factory-set phone.
The potential for mischief is readily apparent. A person
who obtains a cloned telephone can make calls that are improperly
charged to an innocent consumer's account. The cellular provider
has no means of differentiating between calls generated by the
defrauder's cloned telephone and calls generated by the innocent
consumer's telephone. Plaintiff contends, however, that its
"extension" business involved providing lawful cellular customers
with a second telephone. The cloned telephone, of course, has
the same ESN number and telephone number as the original store-bought telephone. However, by providing a customer with a cloned
"extension" telephone, plaintiff's service permits him or her to
have access to the carrier's network and escape periodic service
and usage charges on the cloned telephone.
The FCC has adopted a series of rules, regulations and
orders designed to combat telephone cloning. See Second ESN
Order,
76 Rad. Reg 2d at ¶ 61. Plaintiff nonetheless contends
that the regulatory scheme adopted by the FCC is applicable only
to manufacturers of cellular telephones. While it is true that
the FCC's order of May 4, 1981 dealing with the subject did not
specifically prohibit the transferring of ESNs from one cellular
telephone to another, it did expressly state that each telephone
must have a unique ESN. 86 F.C.C.
2d at 508, 593. Moreover, in
its public notice issued on October 2, 1991, the FCC stated that
telephones "with altered ESNs do not comply with the Commission's
rules and any such individual or company operating such
[tele]phones or performing such alterations is in violation of
Section 22.915 [now 22.933] of the Commission's rules and could
be subject to appropriate enforcement action." FCC Public Notice
20011.
These regulations and orders have not gone unchallenged.
With the enhancement of cellular technology, companies intent on
providing "extension" services have repeatedly requested changes
in the regulatory framework to "allow [businesses] to market
ancillary cellular equipment that emulates ESNs for the purpose
of [permitting] more than one cellular [tele]phone to have the
same telephone number." Second ESN Order,
76 Rad. Reg 2d at ¶
57. The FCC has rebuffed these requests, stating:
The record before us demonstrates the need
for measures that will help reduce the
fraudulent use of cellular equipment caused
by tampering with the ESN. . . . [W]e
conclude that the practice of altering
cellular phones to "emulate" ESNs without
receiving the permission of the relevant
cellular licensee should not be allowed
because (1) simultaneous use of cellular
telephones fraudulently emitting the same ESN
without the licensee's permission could cause
problems in some cellular systems such as
erroneous tracking and billing; (2) . . .
could deprive cellular carriers of monthly
per telephone revenues to which they are
entitled; and (3) . . . such altered phones
. . . would be unlicensed transmitters in
violation of Section 301 of the Act.
Second ESN Order,
76 Rad. Reg 2d at ¶¶ 58,
60.]
The FCC further stated that "any individual or company that
knowingly alters cellular telephones to cause them to transmit an
ESN other than the one originally installed by the manufacturer
is aiding in the violation of [its] rules." Id. at ¶ 62.
The most recent revision of FCC regulations adopted on
September 4, 1994, specifically provides that "[t]he circuitry
that provides the serial number must be isolated from fraudulent
contact and tampering." 47 C.F.R. § 22.933 (citing Office of
Engineering and Technology Bulletin No. 53, Section 2.3.2). The
revision provides that "[e]ach mobile transmitter in service must
have a unique ESN" that is "factory set and must not be
alterable." 47 C.F.R. § 22.919(a), (c). The cellular equipment
must be designed in such a way that "any attempt to remove,
tamper with, or change the ESN chip . . . [will] render the
mobile transmitter inoperable." 47 C.F.R. § 22.919(c). While we
recognize that the revised regulations are written in terms of
the design and manufacture of cellular equipment, we are
satisfied that the regulatory intent was to bar cellular cloning.
While we have found no reported opinion directly on point,
our research discloses that other jurisdictions have upheld
criminal convictions based upon cellular cloning activities.
See, e.g., United States v. Williams,
128 F.3d 1239 (8th Cir.
1997); United States v. Pervaz,
118 F.3d 1 (1st Cir. 1997);
United States v. Watson,
118 F.3d 1315 (9th Cir. 1997); United
States v. Clayton,
108 F.3d 1114 (9th Cir. 1996), cert. denied,
___ U.S. ___,
118 S.Ct. 233, ___ L.Ed.2d ___ (1997); United
States v. Ashe,
47 F.3d 770 (6th Cir.), cert. denied sub nom.
Daughtrey v. United States, ___ U.S. ___,
116 S.Ct. 166,
133 L.Ed.2d 108 (1995); People v. Banks, 58 Cal. App.4th 513,
67 Cal.
Rptr.2d 916 (Cal. Ct. App. 1997); People v. Lawrence,
169 Misc.2d 752,
647 N.Y.S.2d 675 (Sup. Ct. 1996). But see United States v.
Brady,
13 F.3d 334 (10th Cir. 1993). We note that federal courts
that have had occasion to consider the issue have consistently
held that such activities violate § 1029 of Title 47 which makes
the fraudulent cloning of consumer access devices a crime.
Although no prosecution was commenced in this case, that was a
matter within the discretion of the Secret Service, and is not
inconsistent with the conclusion we have reached. Of course, we
have no occasion to decide whether cellular cloning falls within
New Jersey's criminal statutes. We merely hold that the practice
of cellular cloning does not constitute a lawful business
enterprise under federal statutes and regulations.
We next focus upon the legal ramifications flowing from our conclusion that plaintiff's business violated federal law. Although ambiguously phrased, plaintiff argues that the causes of action alleged in the complaint survive notwithstanding the unlawful nature of its cellular cloning activities. In support of its position, plaintiff relies on Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed. 219 (1951), overruled on other grounds, Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984); Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 698 (1968), overruled on other grounds, Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984); and Health Corp. of America v. New Jersey Dental Ass'n, 424 F.Supp. 931 (D. N.J. 1977). We find these decisions inapposite.
In all three cases, the plaintiffs instituted antitrust actions in which they sought treble damages. In Kiefer, the plaintiff agreed with other wholesalers who were named as defendants, to set minimum prices for the sale of liquor in violation of the antitrust laws. The defendants asserted that the plaintiff lacked standing because it was a willing participant in the unlawful scheme. The Supreme Court held that this was no defense to the defendants' own illegal conduct, noting that "[t]he alleged illegal conduct of [the plaintiff]
. . . could not legalize the unlawful combination by [defendants]
nor immunize them against liability to those they injured." 340
U.S. at 214, 71 S.Ct. at 261, 95 L.Ed. at 224. In Perma, the
plaintiffs were dealers who operated Midas Muffler Shops. They
brought suit against Midas and its subsidiaries, alleging that
the sales agreements that they had made with the defendants were
in violation of the antitrust laws. 392 U.S. at 136, 88 S.Ct. at
1983, 20 L.Ed.
2d at 988-89. The defendants asserted that the
plaintiffs' participation in the unlawful combination barred them
from seeking damages for antitrust violations. Id. at 140, 88
S.Ct. at 1985, 20 L.Ed.
2d at 991. The Supreme Court rejected
this defense, reasoning:
[T]he purposes of the antitrust laws are best
served by insuring that the private action
will be an ever-present threat to deter
anyone contemplating business behavior in
violation of the antitrust laws. The
plaintiff who reaps the reward of treble
damages may be no less morally reprehensible
than the defendant, but the law encourages
his suit to further the overriding public
policy in favor of competition. A more
fastidious regard for the relative moral
worth of the parties would only result in
seriously undermining the usefulness of the
private action as a bulwark of antitrust
enforcement. And permitting the plaintiff to
recover a windfall gain does not encourage
continued violations by those in his position
since they remain fully subject to civil and
criminal penalties for their own illegal
conduct.
[
392 U.S. 139, 88 S.Ct. at 1984,
20 L.Ed 2d
at 990.]
In Health Corp., the plaintiffs brought an antitrust action against corporations involved in the operation of dental health plans. The defendants contended that plaintiff could not seek
the protection of the antitrust laws because the New Jersey State
Board of Dentistry had found that it had unlawfully engaged in
the practice of dentistry in violation of the Dental Practice Act
(N.J.S.A. 45:6-1 to -47). 424 F.Supp. at 932. The district
court denied the defendants' motion to dismiss, finding that the
plaintiffs' technical violations of the statute should not
deprive it of the right to seek damages for antitrust violations.
Id. at 934.
These decisions are clearly distinguishable. In Kiefer and
Perma, the plaintiffs were guilty of the same type of anti-competitive activity with which the defendants were charged. The
Supreme Court was, nevertheless, unwilling to insulate those
defendants from the effect of the antitrust laws. In Health
Corp., the plaintiffs' failure to obtain a license under the
Dental Practice Act constituted a technical violation. But the
business activity of plaintiffs - the administration of a dental
health program - was not criminal or contrary to public policy,
and plaintiffs could bring their activities within the law with
minor operational changes.
In contrast, plaintiff in this case was engaged in an
inherently illegal business in direct violation of federal law.
See
18 U.S.C.A.
§1029. Unlike Kiefer, Perma, and Health Corp.,
which were grounded in the strong national policy of encouraging
private enforcement of the antitrust laws, no public interest
would be vindicated and no societal benefit would be obtained by
judicial protection of plaintiff's illegitimate business
activity. To the contrary, recognition of plaintiff's claims for
antitrust violations, RICO, tortious interference with economic
advantage and conspiracy would serve to further plaintiff's
unlawful enterprise. See Fineman v. Armstrong World Indus.,
Inc.,
774 F.Supp. 225, 234-35 (D. N.J. 1991), rev'd in part,
980 F.2d 171 (3d Cir. 1992), cert. denied,
507 U.S. 921,
113 S.Ct. 1285,
122 L.Ed.2d 677 (1993). Plaintiff "had no legal rights to
protect," and "[t]herefore, defendants could not invade them."
Maltz v. Sax,
134 F.2d 2, 5 (7th Cir.), cert. denied,
319 U.S. 772,
63 S.Ct. 1437,
87 L.Ed. 1720 (1943).
We stress the limited contours of our holding. We do not
suggest that a citizen may take whatever action he deems
necessary to combat an unlawful enterprise. A person setting
fire to an illegal gambling house, for example, could not
reasonably urge immunity from civil suit based upon the
righteousness of his cause. Clearly, the principle we apply in
this case has its limitations in the context of other situations.
But here, we perceive no injustice in denying plaintiff a remedy
where it has demonstrated no property or business interest,
present or future, that is deserving of legal protection.
We treat separately plaintiff's remaining claims for malicious prosecution and libel and slander. We first consider plaintiff's contention that the Law Division erred by dismissing the claim for malicious prosecution. A malicious prosecution action requires proof that (1) a criminal action was instituted
by defendant, (2) it was actuated by malice, (3) there was an
absence of probable cause for the proceeding, and (4) it was
terminated favorably to the plaintiff. Lind v. Schmid,
67 N.J. 255, 262 (1975). In dismissing plaintiff's claim, the Law
Division concluded that execution of the search warrant by the
Secret Service did not constitute the institution of criminal
proceedings. We need not address this point. See Geyer v.
Faiella,
279 N.J. Super. 386 (App. Div.), certif. denied,
144 N.J. 95 (1995) (refusal of a grand jury to return an indictment
constitutes "favorable termination" of criminal proceedings
sufficient to enable plaintiff to maintain a malicious
prosecution action). Instead, we choose to affirm the dismissal
on the surer ground that defendants had probable cause to inform
the Secret Service of plaintiff's illegal activities. See
Westhoff v. Kerr Steamship Co., Inc.,
219 N.J. Super. 316, 321-22
(App. Div.), certif. denied,
109 N.J. 503 (1987).
We also sustain the Law Division's dismissal of plaintiff's
claim for libel and slander. The court found that plaintiff's
complaint was filed after expiration of the one-year limitations
period. See N.J.S.A. 2A:14-3. The statute begins to run at the
time the defamatory statements were made to a third person.
Gnapinsky v. Goldyn, 23 N.J. 243, 252 (1957). Our Supreme Court
has held that the discovery rule is inapplicable to the statute
of limitations for libel and slander. See Lawrence v. Bauer
Publ'g & Printing Ltd.,
154 N.J. Super. 271, 276 (App. Div.
1977), rev'd on dissent,
78 N.J. 371 (1979). The Court's holding
substantially undercuts plaintiff's argument that publication of
the statements occurred at the time the affidavit in support of
the search warrant was unsealed. Recently, however, the Court
questioned the soundness of its prior ruling, noting the
intention to revisit the issue in a case in which the problem is
squarely presented. Williams v. Bell Tel. Lab., Inc.,
132 N.J. 109, 120 (1993).
We do not dwell upon the question. We are entirely
satisfied that defendants' statements to the Secret Service
charging a criminal violation were qualifiedly privileged. Id.
at 120-21; see also Rainier's Dairies v. Raritan Valley Farms,
Inc.,
19 N.J. 552, 562 (1955); Restatement (Second) of Torts §
598, comment f (1976). Nothing in the complaint or in the
documentary submissions made in opposition to defendants' motion
to dismiss indicates that the qualified privilege was abused.
See Dairy Stores, Inc. v. Sentinel Publ'g Co., Inc.,
104 N.J. 125, 151 (1986); see also Erickson v. Marsh & McLennan Co., Inc.,
117 N.J. 539, 565-66 (1990) (plaintiff must establish abuse of
privilege by clear and convincing evidence). The public interest
in obtaining the information far "outweigh[ed] [plaintiff's]
individual[] right to protect [its] reputation." Dairy Stores,
Inc. v. Sentinel Publ'g Co., Inc., 104 N.J. at 151.
Finally, it is perfectly evident that defendants' statements
to the Secret Service were true. The tenor of these statements
was that plaintiff was engaged in the unlawful business of
cloning cellular telephones, and that its use of a moto box for
that purpose was improper. We discern nothing false in these
representations. In its complaint, plaintiff additionally
alleged that a Motorola employee told the Secret Service that
plaintiff had offered to exchange a moto box for stolen cellular
telephones. As we noted earlier in our opinion, the allegation
that appears in plaintiff's complaint on that point is plainly
inaccurate. Special Agent Tamburello recounted in his affidavit
submitted in support of the search warrant that he was told by
Tazelaar, a Motorola employee, that he, Tazelaar, had offered to
trade "stolen" cellular telephones in exchange for a copycat box,
but that plaintiff's principal, Gary Epstein, rebuffed him.
Although a motion to dismiss for failure to state a claim is
decided by examining the legal sufficiency of the facts alleged
on the face of the complaint, Printing Mart-Morristown v. Sharp
Elecs. Corp.,
116 N.J. 739, 746 (1989), R. 4:6-2 permits the
court to consider a party's presentation of "matters outside the
pleading," thus converting the motion into an application for
summary judgment. See Wang v. Allstate Ins. Co.,
125 N.J. 2, 9
(1991); Pressler, Current N.J. Court Rules, comment on R. 4:6-2
(1998). Special Agent Tamburello's affidavit, which was
submitted to the Law Division by plaintiff, is part of the
appellate record. Assuming the accuracy of the agent's account,
the statement made clearly did not have the capacity to impugn
plaintiff's reputation.
In sum, we discern no sound basis to vitiate the Law
Division's judgment. Accordingly, the order of dismissal is
affirmed.