KEN KIRSCHENBAUM, ESQ
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Special Report: Alarm Detection v Village of Schaumburg - fire district - latest decision
March 30, 2021
Special Report: Alarm Detection v Village of Schaumburg - fire district - latest decision
A lot of you are following the lawsuit pending in Illinois commenced by Alarm Detection Systems against the Village of Schaumburg, who is alleged to have installed Tyco receivers and required commercial fire alarm customers to be monitored by Schaumburg's owned 911 call center. In order to be monitored by that call center the alarm customers would have to cancel their contracts and fire alarm monitoring with other alarm companies and contract with Tyco. Alarm Detection Systems lost customers and sued claiming violation of anti trust laws, tortious interference. The case has been around a while and Schaumburg has been trying to get it dismissed. This latest round is the most recent defeat for Schaumburg, though all the court does in this decision is refuse to dismiss the case, permitting it to proceed, possibly to a trial. It will be interesting to see if the Village folds and abandons its deal with Tyco, pays off the offended alarm competitors to go away or continues this protracted litigation through a trial.
While most of you are not particularly interested in what happens in Village of Schaumburg you should understand the issues because it could happen in your town. Rather than try and re-write the decision I am providing selected provisions without the references to the record and legal citations, so it's easier for lay people to read. If you have comments or questions, send them in.
Here is are selective provisions from the decision:
ALARM DETECTION SYSTEMS v THE VILLAGE OF SCHAUMBURG. USDC, ND Illinios March 2021
Plaintiffs' Business Plaintiffs are Alarm Detection Systems, Inc., Illinois Alarm Service, Inc., Nitech Fire & Security Industries, Inc., and SMG Security Systems, Inc. Each is a licensed private alarm contractor as defined in the Private Detective, Private Alarm, Private Security, Fingerprint Vendor, and Locksmith Act of 2004, Each is in the business of installing, maintaining, testing, a nd monitoring fire alarm systems for commercial and multi-family buildings in Schaumburg. Plaintiffs refer to commercial and multi-family buildings as "Commercial Accounts."
In August 2016, there were allegedly more than 1,100 Commercial Accounts in Schaumburg. Plaintiffs had contracts with more than 250 of those accounts. According to Plaintiffs, they "generally us [e] long term contracts that automatically renew." As parties to these long-term contracts, Plaintiffs allegedly enjoyed "near permanent relationships" with many of their Commercial Accounts , " who rely on a continued level of service to meet their needs." "Even when there is a change in ownership or management of a building," Plaintiffs allege, they "typically retain" the customers' business.
The Exclusive Agreement, the Ordinance, and the Notice Schaumburg's fire code requires Commercial Accounts to use fire alarm systems that comply with the National Fire and Signaling Code ("NFPA 72"), a nationwide safety standard. Private alarm system companies, such as Plaintiffs, typically provide and maintain the required systems for the Commercial Accounts they service. Fire alarm systems generally have three components: "smoke and heat detectors; an alarm panel in the building that receives signals from those detectors; and a transmission device to send all signals to a monitoring facility." " Under NFPA 72, signals from a fire alarm system" must "be sent to a receiving point" (also called a "Supervising Station"). Private alarm system companies often operate Supervising Stations. When a privately-operated Supervising Station receives an alarm signal, the private alarm company "contacts the appropriate 911 center or fire department," which in turn dispatches firefighters. A government-operated local 911 center is another type of Supervising Station. (explaining that NWCDS, which operates the local 911 center for Schaumburg, is an "intergovernmental cooperation") NFPA 72 permits fire alarm systems to send signals directly to local 91 1 centers using approved wireless transmission devices. Before Schaumburg enacted the ordinance at issue in this lawsuit, some fire alarm systems transmitted signals directly to the local 911 center (NWCDS), while others used the two-step method that transmitted signals through privately operated Supervising Stations , which then contacted NWCDS upon receiving the signals. Plaintiffs use the two-step method in providing services to more than "150 jurisdictions in Northern Illinois."
In 2011, NWCDS and Tyco entered into a 10-year Exclusive Agreement under which Tyco provided NWCDS with fire alarm signal-receiving equipment. The Agreement gives Tyco "the exclusive right to install, own, maintain and service all alarm signal receiving and processing equipment and systems located at the NWCDS Operations Center and the covered agencies." The "exclusive right pertains only to [Tyco's] receiving and processing systems . . . ." That is, the A greement "does not provide any right to [Tyco] to require NWCDS, Covered Agencies, or End-Users to utilize [Tyco] services or equipment in individual premises to generate alarms that [Tyco's] receiving and processing systems receive and rout [sic] to NWCDS . . . ." (Id.) Under the Agreement, Tyco pays a $23 monthly administrative fee to NWCDS for each Commercial Account that connects to equipment at NWCDS via "Internet and cellular telephone-radio connections."
In August 2016, Schaumburg enacted the challenged ordinance (hereinafter, the "Ordinance"). The Ordinance requires all Commercial Accounts within the Village of Schaumburg to wirelessly transmit fire alarm signals directly to NWCDS. Under the Ordinance, "[a] ll existing" fire alarm systems must begin complying "when any of the following occurs": (1) "an existing contract with a monitoring agency (central station) ends"; (2) "the existing fire alarm equipment is modified or replaced"; or (3) "[p]rior to August 31, 2019." T he Ordinance carves out one exception. It provides that "[e]xtensions may be granted . . . upon a determination by the Fire Chief that the public safety is not affected . . . ." No extension will be granted beyond 2021, however.
Schaumburg allegedly "justified the Ordinance by claiming it was not receiving timely notification regarding trouble and supervisory signals." (explaining that trouble signals indicate whether an alarm system is performing properly, whereas supervisory signals indicate whether a system is in service).) But Schaumburg's "true motivation" for enacting the Ordinance, Plaintiffs allege, was a credit it would receive against fees it owed to NWCDS for 911 monitoring services. The court is uncertain of the basis for that assumption. The Exclusive Agreement pr ovides for a $23 per account administrative fee payable to NWCDS, but makes no reference to a credit payable to Schaumburg. The only reference to a credit running in favor of Schaumburg that the court has located appears in the July 25, 2016 memorandum from Schaumburg's Fire Chief to Schaumburg's Village Manager . In that memorandum, the Fire Chief recommends adopting a direct-connect ordinance along t he lines of the one Schaumburg eventu ally enacted . Discussing the benefits of such an ordinance, the Fire Chief states: The Village of Schaumburg would receive a portion of the subscriber fees that are paid. This amounts to $23/alarm/month. This revenue is applied as an off-set to service fees paid by the Village to NWCD for 911 services. A conservative estimate is approximately $300,000–$400,000 in revenue will be realized for the Village of Schaumburg. (alleging that when all Commercial Accounts are complying with the Ordinance, Schaumburg will receive $300,000 to $400,000 per year in fee reductions).)
In a September 27, 2016 letter from the Fire Chief (the "Notice"), Schaumburg notified Commercial Accounts of the adoption of the Ordinance, explaining the safety reasons for its adoption and identifying the three events t hat trigger Commercial Accounts' compliance obligations. The Notice also states that Tyco "is the authorized installer of the radio equipment required for fire alarm systems monitored by NWCDS." According to the Notice , Commercial Accounts must pay $81 per month to rent Tyco's equipment and for the monitoring service. For Commercial Accounts that "own their radio transmitter," the Notice states, the fee for " alarm monitoring only" is $46.
Plaintiffs identify the "Challenged Conduct" in this lawsuit as " [t] he Ordinance as implemented by the Notice." "By [the Notice] to all Commercial Accounts," Plaintiffs allege, Schaumburg "required them to terminate their" contracts with Plaintiffs and contract instead with Tyco for fire alarm monitoring services. ("[T]o comply with the Notice," Plaintiffs' Commercial Accounts "needed to breach or terminate existing" contracts or decline to renew expiring contracts); compare (alleging that the "Challenged Conduct"— i.e. , the Ordinance as implemented by the Notice—violates the Contracts Clause and tortiously interferes with Plaintiffs' contracts).) According to Plaintiffs, the Notice shows that Schaumburg had "actual knowledge" of their existing contracts. In addition, the Notice allegedly shows that Schaumburg made "active efforts to force" Plaintiffs' customers to breach their contracts or stop doing business with Plaintiffs. Plaintiffs allege that many of their Commercial Accounts did in fact breach their contracts in order "to comply with the Notice." Some accounts allegedly terminated their contracts before they had expired. Others allegedly terminated their contracts "at the end of their terms, even though they had historically automatically renewed such contracts." Illustrating the latter, Plaintiffs allege that in October 2016, Remington Place Apartments informed Plaintiff ADS that it was not going to renew its existing contract for fire alarm monitoring services. Remington acknowledged that ADS had "provided excellent service . . . over the years" and that the "termination stems solely from" the Ordinance, "which has forced us into compliance." "As a direct result of" the Challenged Conduc t, Plaintiffs allege, they have lost business with many of their Commercial Accounts in Schaumburg and "will ultimately lose all of their business" there.
Plaintiffs allege that the Challenged Conduct is "not reasonably tailored to meet [Schaumburg's] objectives, which could have easily been met through alternative means" that would not have caused Commercial Accounts to terminate or decline to renew their contracts with Plaintiffs. For example, Plaintiffs allege that to ensure "timely reporting of [fire alarm system] outages," Schaumburg could have required alarm companies to report on the status of their customers' fire alarm systems "any time Signals were activated." Plaintiffs also note that the Exclusive Agreement between NWCDS and Tyco permitted "Covered Agencies to receive Signals" from Commercial Accounts "at their own facilities and retransmit" them to NWCDS. According to Plaintiffs, they could have "replicate[d] this retransmission process in conformance with the Ordinance" if Schaumburg had permitted them to do so. Further, Plaintiffs allege that the Challenged Conduct diminishes the safety and quality of fire alarm monitoring services.
Plaintiffs seek a declaratory judgment that the Ordinance, as implemented by the Notice, violates their rights under the Contracts Clause; tortiously interferes with their contracts; and tortiously interferes with their prospective economic advantage. They also request an order that permanently enjoins Schaumburg from enforcing the Ordinance and an order that restores Plaintiffs' contracts with their Commercial Accounts. In connection with the Contracts Clause claim, Plaintiffs also seek damages for lost profits and lost revenue. Finally, in connection with their claim for restitution, Plaintiffs seek a declaratory judgment that Schaumburg's receipt of the monthly credits from NWCDS causes them damage , and "[a]n award of damages in the amount of the credits received to date as restitution."
Contracts Clause The Contracts Clause of the U.S. Constitution "restricts the power of States to disrupt contractual arrangements." It provides that "[n]o State shall . . . pass any . . . Law impairing the Obligation of Contracts." U.S. CONST . art. I, § 10, cl. 1. "[T]here is just one way to violate th e Contracts Clause: legislative action." Alarm Detection Sys. , 930 F.3d at 824. A municipal ordinance is legislative action. The courts recognize that states and municipalities must be permitted "to regulate for the public welfare, even if doing so impacts private arrangements." Alarm Detection Sys. , 930 F.3d at 822 (citing U.S. Tr. Co. of New York v. New Jersey, 431 U.S. 1, 21 (1977)). Thus, to state a claim that a state law or municipal ordinance violates the Contracts Clause, "a plaintiff must plausibly allege that: (1) the state law 'operated as a substantial impairment of a contractual relationship'; and (2) the state law is not drawn in an 'appropriate' and 'reasonable' way that advances [a] 'significant and legitimate public purpose.'" Alarm Detection Sys. , 930 F.3d at 822 (internal quotation marks omitted)
On appeal, the Seventh Circuit stated that the court was correct to "accept  that " the Ordinance "could amount to a significant impairment on [Plaintiffs'] contractual rights." Alarm Detection Sys., 930 F.3d at 823. Where this court had gone astray, the Court of Appeals concluded, was on the question of wheth er the Ordinance is appropriately tailored to a legitimate public purpose. See id. The Seventh Circuit explained that "[t]here is no presumption of legislative validity under the Contracts Clause," and that it was "too early to tell" whether "Schaumburg' s proffered interests justify the Ordinance and the Notice[ .]" From the Seventh Circuit's perspective, Plaintiffs plausibly alleged that Schaumburg could have achieved its safety goals equally well by taking a different, narrower course. Plaintiffs, therefore, "pleaded a plausible Contracts Clause claim against Schaumburg."
Understood this way, the Amended Verified Complaint adequately alleges that a legislative action—the Ordinance—impairs Plaintiffs' contractual relationships. And it plausibly alleges that the impairment could be substantial: t he Ordinance conceivably requires customers to breach their existing contracts with Plaintiffs if they modify their equipment during the contract term or if the Fire Chief refuses to grant an extension past August 31, 2019.9 Schaumburg does not otherwise challenge the pleadings on the C ontract Clause claim. Because Plaintiffs plausibly allege that a legislative act substantially impairs their contractual rights, Schaumburg's motion to dismiss the claim is denied.
Tortious Interference Schaumburg also moves to dismiss Plaintiffs ' claims f or tortious interference with contract and tortious interference with prospective economic advantage. To state a claim for tortious interference with contract, a plaintiff must allege facts demonstrating " (1) the existence of a valid and enforceable contract between the plaintiff and another; (2) the defendant's awareness of this contractual relation; (3) the defendant's intentional and unjustified inducement of a breach of the contract; (4) a subsequent breach by the other, caused by the defendant's wrongful conduct; and (5) damages." HPI "Inducement to breach a contract involves acts aimed at parties other than a plaintiff and cause those parties to breach a contract held by that plaintiff ." To state a claim for tortious interference with prospective economic advantage, a plaintiff must allege facts demonstrating "(1) a reasonable expectancy of entering into a valid business relationship, (2) the defendant's knowledge of the expectancy, (3) an intentional and unjustified interference by the defendant that induced or caused a breach or termination of the expectancy, and (4) damage to the plaintiff resulting from the defendant's interference. As with a claim for tortious interference with contract, a plaintiff must allege that the defendant directed its interference toward a third party.
Schaumburg maintains that both kinds of tortious interference claims require allegations that Plaintiffs have business relationships (or business expectancies) "with specific third parties According to Schaumburg, Plaintiffs allege only that they "have an ongoing business relationship with various individuals and businesses in the Village . . . ." These allegations are conclusory and fail as a matter of law, Schaumburg contends. In response, Plaintiffs highlight their allegations that they have contracts with Commercial Accounts in Schaumburg. The Amended Verified Complaint defines "Commercial Accounts" as commercial and multi-family buildings. In addition, Plaintiffs point to their allegations that their contractual relationships with the Commercial Accounts are often "near permanent," including because the contracts typically contain automatic renewal provisions. Disappointingly, Plaintiffs do not address the cases Schaumburg cites for the proposition that they must identify "specific" third-party business relationships. But the court concludes Schaumburg has overstated its case on this issue. The cases Schaumburg cites on this score state only that the third parties must be "identifiable," not that the allegations must identify them by name. (discussing commercial disparagement claim ). In a case that Schaumburg does not cite, an Illinois appellate court makes this very point. ("P laintiff must plead facts to show interference of a business relationship with specific third parties or an identifiable prospective class of third persons. . . . This does not mean, however, that plaintiff must allege the identity of the third party or parties by name." (citations omitted) ). Here, Plaintiffs adequately allege identifiable third parties with which they have contracts or business expectancies: commercial and multi-family buildings in Schaumburg, some of which have been contracting with Plaintiffs for the relevant services for decades. Regarding the claim for tortious interference with prospective economic advantage, Schaumburg also contends that Plaintiffs "could have no reasonable business expectancy" in continued business with their customers because Plaintiffs knew that other communities had passed "direct connect ordinances" like the one challenged here. Schaumburg observes that the Notice mentions such ordinances in " numerous other area communities," and that Plaintiffs have filed several lawsuits challenging similar ordinances. ( See id. ; Def.'s Reply in Supp. of Mot. to Dismiss Again, the court is not persuaded. Plaintiffs allege that they had decades-long, "near permanent" relationships with many Commercial Accounts in Schaumburg and that their contracts with those customers typically contained automatic renewal provisions . In addition, Plaintiffs allege that in more than 150 Northern Illinois jurisdictions, they provide fire alarm monitoring services that do not use direct connections to local 911 centers. These allegations sufficiently plead that Plaintiffs have a reasonable expectation of doing continued business with their customers in Schaumburg. Regarding both forms of tortious interference claims, Schaumburg next argues that Plaintiffs' allegations do not show that it knew about their existing customer contracts or business expectancies. Schaumburg insists that it enacted the Ordinance to protect public safety, not to interfere with Plaintiffs' customer relationships. And even if the Ordinance does impact Plaintiffs' business, Schaumburg asserts, that is true of many municipal ordinances. the court upheld an ordinance that banned pay-for-use lavatories against a challenge from lavatory coin lock suppliers).) These arguments miss the mark, though, because as Plaintiffs observe, the Ordinance challenged here discusses customers' "existing contracts" with "monitoring agenc[ies]"; states that Commercial Accounts must begin complying with the Ordinance when those contracts end; and lists two other conditions that trigger compliance obligations whether or not the contract terms have expired. The Notice discusses these factors as well and Plaintiffs allege that the Notice shows Schaumburg's "actual knowledge" of its customer contracts. Schaumburg's purported purpose for enacting the Ordinance has little relevance to the question of whether it knew about the existing contracts between Plaintiffs and Commercial Accounts. The allegations just discussed plausibly suggest that Schaumburg indeed possessed that knowledge. Furthermore, Plaintiffs' allegation that they served Commercial Accounts in Schaumburg for decades plausibly suggests that Schaumburg knew about their expectations of doing future business with those customers.
For the foregoing reasons, the court grants in part and denies in part Schaumburg's motion to dismiss the Amended Verified Complaint. Schaumburg's motion to dismiss the claims for violation of the Contract Clause, tortious interference with contract, and tortious interference with prospective economic advantage is denied. Plaintiffs' claim for res titution (unjust enrichment) is dismissed without prejudice. Defendant Schaumburg is directed to file its answer to the Amended Verified Complaint on or before April 22, 2021.
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