Level 3 Faces Latest Class Action Suit

Just days before high yield issuer Level 3 Communications' $750 million, convertible debt offering priced earlier this month, Colorado landowners filed a class action lawsuit in Denver's federal court demanding compensation from the company for the use of their property in laying underground fiber optic cables.

The class of plaintiffs claimed that much of Level 3's communications system was unlawfully implemented, and as such, all the revenues the telecom firm has obtained or will obtain via that system are also unlawful. The suit is asking for a trial by jury, and while no specific money amount is requested, the level of unlawful revenues is in the "tens of millions of dollars," according to court documents.

While company officials wouldn't speculate on how the lawsuit affected pricing and refused to comment directly on any pending litigation, one company official noted that it "would not cause financial concern for the company."

Thus far the suit doesn't seem to be having a major impact on investors. In fact, despite the fact that a few communications companies - including AT&T and Worldcom Inc. - have been hit with lawsuits recently, market players have taken the news in stride.

"It doesn't worry me, not unless it's anticipated that the decision has a material impact on business," said Jane Haugh, analyst at KDP Investments.

"Maybe because there's such a proliferation of lawsuits, people tend to take them with a grain of salt and instead gauge the financial strength of those bringing suit," said Dimitri Triantafyllides, vice president at First Union Capital Markets.

The plaintiffs in the Level 3 suit argue that rights-of-way originally granted to railroad companies to lay tracks over their land are limited exclusively to railroad purposes and cannot be transferred to Level 3 for fiber optic purposes. Level 3 has signed rights of way agreements with Union Pacific Railroad, Burlington North/Santa Fe Railroad, Norfolk Southern Corp., and Canadian Pacific.

The suit also charges that by negotiating occupancy agreements with railroad companies rather than with landowners, Level 3 disregarded landowners' rights and trespassed over their property. It seeks to tap into "tens of millions of dollars of rents, profits and other benefits... arising from Level 3's commercial use and occupation of their land." Plaintiffs are asking for compensation as well as punitive damages.

Lawyers from both sides declined to comment on the case.

In a similar lawsuit filed against AT&T earlier this year, Hinshaw et al versus AT&T et al, the company was forced to pay $45,000 per mile to landowners in Indiana along 80 miles of abandoned railway, for a total of approximately $3.6 million.

However, according to one company source at Level 3, 99% of the land implicated in the suit against the firm is active railway - its use is already heavily restricted and cannot be used for profit.

Another rights-of-way case against Worldcom Inc. has not yet been settled.

Level 3, a Colorado-based telecommunications and information services company is now in the third phase of creating an international network suited for Internet Protocol technology.