Midcontinent Communications v. MCI Communications Services, Inc.
Filing
89
MEMORANDUM OPINION AND ORDER. Signed by U.S. District Judge Karen E. Schreier on 7/2/19. (SRA)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
MIDCONTINENT COMMUNICATIONS,
4:16-CV-04070-KES
Plaintiff,
vs.
MCI COMMUNICATIONS SERVICES,
INC.,
d/b/a Verizon Business,
MEMORANDUM OPINION
AND ORDER
Defendant.
Midcontinent Communications (Midco) brings suit against MCI
Communications Services, Inc., d/b/a Verizon Business (Verizon). Docket 1.
Midco seeks a declaratory judgment and damages against Verizon for breach of
contract. Docket 40. Verizon filed a counterclaim seeking damages against
Midco for breach of contract and state and federal tariffs. Docket 41. A court
trial was held on October 1, 2018. Docket 82. The court finds for Verizon on
Midco’s breach of contract claim and Verizon’s breach of contract counterclaim.
I.
FINDINGS OF FACT
The following constitutes the court’s findings of fact under Federal Rule
of Civil Procedure 52(a)(1), which were found by a preponderance of the
evidence:
Verizon is an interexchange carrier (IXC) 1 that operates throughout the
United States. Docket 70 ¶ 9. Midco, a competitive local exchange carrier
(CLEC), 2 is a cable company that provides many services, including local
telephone services, to residential and business customers in South Dakota,
North Dakota, Minnesota, and Kansas. Id. ¶¶ 1, 3. Midco’s operations in South
Dakota, North Dakota, and Minnesota are relevant to this dispute. Id.
Midco and Verizon’s business relationship began around 2006. Id. ¶ 10.
Midco provides switched-access services to Verizon. Id. ¶ 8. A LEC provides
“switched-access service” when it permits IXCs to access its network to
There are two types of telecommunications providers, local exchange carriers
(LECs) and IXCs. LECs provide the service and own the hardware that connects
to individual customers in their local areas. By contrast, IXCs own the
hardware that connects different local carriers to each other. An IXC offers
long-distance telephone services to end-user customers and transmits longdistance calls between the networks of two LECs. When an individual makes a
long-distance telephone call, the call originates on wires and facilities owned by
the LEC serving the individual making the call and the call terminates over
wires and facilities owned by the LEC serving the individual receiving the call.
IXCs pay “originating” and “terminating” access charges to the LECs that serve
individuals who initiate and receive long-distance calls, respectively.
2 LECs are divided into incumbent local exchange carriers (ILECs) and CLECs.
“ILECs . . . operated as monopolies in a given area until the local phone service
market was opened by the Telecommunications Act of 1996, which provided for
the emergence of new LECs, the CLECs, to compete with the so-called ‘Baby
Bells.’ ” Advamtel, LLC v. AT&T Corp., 118 F. Supp. 2d 680, 681 (E.D. Va.
2000). ILECs are required to file and maintain tariffs setting the rate for access
service with the Federal Communications Commission (for purely interstate
communications) or the applicable state utility commission (for intrastate
communications). In re Establishing Just & Reasonable Rates for Local
Exchange Carriers, 2007 WL 2872755, 22 FCC Rcd. 17989 at *17990 (2007)
(notice of proposed rulemaking). In general, CLECs may file interstate access
tariffs if the rate for access service is no higher than the rate charged for such
services by the competing ILEC. Id. at *17994. CLECs may negotiate higher
rates with IXCs. Id. Special rules apply to rural CLECs. Id.
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terminate and originate long-distance calls to and from the LEC’s end-user
customers. Id. ¶ 7. When Verizon’s long-distance customer calls or receives
calls from Midco’s local customers, Midco charges Verizon for switched-access
services. Id. ¶ 10. Verizon was one of Midco’s largest switched-access
customers. Tr. 9-10.
A. The Equipment
An essential part of a switched-access relationship is a switch. A switch
is used to connect networks so that calls can be completed. Tr. 247. A switch
has call-routing intelligence, which means the switch can identify the incoming
call and properly route it. Id. To classify as a switch, the equipment must have
the capability of routing the call to another place, switch, or station loop. Id. A
station loop is the transmission medium from the switch, generally a Class 5
switch, to a specific customer premise. Tr. 171, 247-48.
There are a variety of different types of switches in the
telecommunication industry. A Class 3 switch is an IXC switch that handles
long-distance calls from specific regions. Tr. 251. A Class 3 switch possesses
call-routing intelligence. Tr. 342, 343. A Class 4 switch (tandem) connects
other tandem and end-office switches together and allows IXCs to have access
to all of the end offices that subtend a particular tandem. Tr. 248. 3 A Class 5
Midco’s federal tariffs define an access tandem as “[a] switching system that
provides a traffic concentration and distribution function for originating or
terminating traffic between end offices and a Customer’s premise.” Joint Ex. 1
at 7; see Joint Ex. 2, 3, 4 (state tariffs filed in South Dakota, North Dakota,
and Minnesota).
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switch (end office) routes calls directly to and from end users. Docket 70 ¶ 13.
To provide dial tone, a carrier must have an end office. Tr. 349. An end-office
switch has a trunk connection on one side (connecting the switch to a tandem
or another end office) and a line side on the other part of the switch where the
station loops are connected. Tr. 248; Joint Ex. 1 at 8. On the station loop side,
the switch identifies to which premise or end user location the call should be
routed. Tr. 247-48.
Additionally, there is a switch that combines two switches’ functionality
into one piece of equipment. A Class 4/5 switch is a combination switch that
has the physical capabilities of performing both tandem and end-office
switching functions. Docket 70 ¶ 14. “But a Class 4/5 switch’s ability to
perform both functions does not mean that [the switch] actually performs both
functions on every call that goes through it.” Id.
Since 2006, Midco has operated a single switch in Sioux Falls, South
Dakota. Id. ¶ 11. The switch (Sioux Falls Switch) is a GENBAND C20. Tr. 148.
The Sioux Falls Switch is a Class 4/5 switch and has the ability to provide both
tandem and end-office switching services. Id.; Docket 70 ¶ 14.
LECs and IXCs, including Midco and Verizon, use the Local Exchange
Routing Guide (LERG), an industry-standard database, to make call-routing
decisions and to review other carriers’ equipment. Docket 70 ¶ 15; Tr. 260.
Each carrier is responsible for supplying the LERG with information about its
switches and equipment. Docket 70 ¶ 15. The LERG was not designed for
billing. Tr. 338. Both parties consider the LERG to be a reliable database.
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Docket 70 ¶ 15; Tr. 80, 260. But an equipment’s registration in the LERG is
not dispositive. Tr. 216. Charles Fejfar, Midco’s expert witness and former
switch manager, testified that he would not definitively rely on the LERG to
determine what type of equipment a particular carrier had. Tr. 216-17.
Beginning in 2011, Midco registered the Sioux Falls Switch on the LERG
as an end-office switch only. Docket 70 ¶ 16; Ex. 111 at 3. The Sioux Falls
Switch’s LERG entry does not show that it performs tandem switching. Tr. 291;
Ex. 111 at 3. Because the Class 4/5 indication on the LERG for the Sioux Falls
Switch is left empty, a carrier looking at the LERG would conclude that the
Sioux Falls Switch is not performing as a Class 4/5 switch. Tr. 292; Ex. 111 at
3.
According to the LERG, the Sioux Falls Switch “subtends” CenturyLink’s
tandem switch (CenturyLink Tandem). Docket 70 ¶ 16; Tr. 180-81. The
CenturyLink Tandem is registered in the LERG as a tandem switch. Tr. 181;
Ex. 111. A subtending relationship exists when calls are sent to one
switchhere, the CenturyLink Tandemand then routed onward to a second
switch for terminationhere, the Sioux Falls Switch. Docket 70 ¶ 16. Likewise,
calls originating from the second switchhere, the Sioux Falls Switchare
routed to the first switchhere, the CenturyLink Tandem. Id.
A Common Language Location Identified (CLLI) Code is an industry
standard for defining a type of hardware in a network. Tr. 165. A CLLI code
provides several pieces of information like the city, state, and physical address
of where the equipment is located. Tr. 262-63. The last three letters of the CLLI
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Code generally identify the type of hardware. Tr. 166, 263. Companies that
specialize in tandem switching use CLLI Codes that end with a T to signify that
the equipment is a tandem. Tr. 166. A CLLI Code that ends in “DS0” is typically
an end office. Tr. 263. The Sioux Falls Switch has a CLLI Code of
SXFLSDPSDS0. Docket 70 ¶ 11. Mr. Fejfar testified that it does not end in a T
because Midco is not in the business of public tandem switching and does not
want to show in the LERG or advertise that its switch is a tandem. Tr. 167.
Calls exchanged between IXCs and LECs can also be routed through
“trunk groups.” A trunk group is a group of individual digital channels that are
built to perform a certain function. Tr. 152. The type of communication and the
type of billing record produced determines the service being provided by the
trunk group. Tr. 158-59. Additionally, the purpose of the trunk group is based
on what the trunk is connected to, i.e. whether it is connected to a tandem or
end-office switch. Tr. 152-53. Two kinds of trunk groups that are relevant to
this dispute are trunks that connect directly to a tandem, Access Tandem to
Carrier trunks (ATC), and trunks that connect directly to an end office, Intertoll
Trunks (IT) or Direct End Office Trunks (DEOTs). Tr. 187.
DEOTs do not route calls through a tandem; instead, the calls are routed
directly to an LEC’s end office or Class 5 software. Tr. 187, 203. Additionally, IT
trunks or DEOTs do not create a proper billing record for calls that interface
directly from the carrier to the Class 5 software. Tr. 185, 209. Generally, no
billing record is generated because the LEC assumes that another switch in the
call path will generate the billing record. Tr. 210. Midco could have set up its
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trunk group as DEOTs and allowed Verizon to connect directly to Midco’s endoffice software. Tr. 185, 191, 237. If the trunk groups were set up as DEOTs,
the Sioux Falls Switch would only have performed end-office switching services.
Tr. 191, 238.
LECs use ATC trunk groups to connect the tandem to a carrier because
it creates a billing record that can be processed downstream. Tr. 157-59. An
ATC trunk group creates a call code on an originating call. Tr. 159. The
creation of the call code allows for billing records to be generated because the
carrier code would be input into the billing records. Id. Without this trunk
group and its creation of the billing record, Midco could not bill tandem
switching charges. Id. The ATC trunk group is what distinguishes which
software Midco would use to route a call. Tr. 208-09. The ATC trunk group
enabled Midco to provide both tandem switching and end-office switching. Tr.
227. With an ATC connection between Midco and a carrier, any long-distance
call would have to go through the Class 4 and Class 5 software on the Sioux
Falls Switch. Tr. 187.
Additionally, calls exchanged between Midco and Verizon travel through
Midco’s Embedded Multimedia Terminal Adaptors (EMTAs). Docket 70 ¶ 18.
EMTAs are small boxes that reside inside every Midco end-user customer’s
premises. Id. Generally, LECs provide this equipment, also known as Optical
Network Terminals, to their end-user customers to enable those customers to
interface with the LEC’s network. Id. EMTAs convert incoming voice/digital
signals traveling across Midco’s network into an analog form capable of being
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interpreted by a customer’s traditional telephone. Id.; Tr. 153. EMTAs complete
the call process and are a necessary component to making or terminating a
call. Tr. 153. EMTAs connect directly to the Sioux Falls Switch. Tr. 84. EMTAs
are not capable of routing in-bound calls to any destination other than the
phones within the connected premise. Docket 70 ¶ 18. Likewise, EMTAs are
not capable of routing out-bound calls to any destination other than the Sioux
Falls Switch. Id. Midco does not allow long-distance carriers to connect directly
into its end users’ EMTAs. Id.; Tr. 193-94.
EMTAs are not separate end-office switches. Tr. 361. EMTAs do not have
CLLI Codes because an EMTA is not a switch, though it is part of the switching
process. Tr. 167-68. Like other LECs, Midco does not register its roughly
10,000 EMTAs in the LERG. Docket 70 ¶ 18. EMTAs do not have call-routing
intelligence. Tr. 169. The call-routing function of the Sioux Falls Switch is not
extended to the EMTA. Tr. 199. EMTAs do not connect other station loops to
each other. Tr. 361. Also, while EMTAs do not provide a dial tone, the Sioux
Falls Switch’s Class 5 software does. Tr. 349.
B. Midco and Verizon’s Business Relationship
All long-distance calls Verizon exchanges with Midco’s network travel
through the Sioux Falls Switch on their way to or from Midco’s end-user
customers who are located in South Dakota, Minnesota, and North Dakota.
Docket 70 ¶ 11. There is no alternative way for these long-distance calls to be
completed. Id. There are two ways IXCs can exchange calls with Midco’s
network. Id. ¶ 13. First, the IXC can establish a “direct trunk.” Id. This
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connects the IXC’s network directly to Midco’s network either by connecting
with the Sioux Falls Switch itself or with a Midco Gateway that connects into
the Sioux Falls Switch. 4 Id. Under this first option, the long-distance carrier
can send or receive calls directly from the Sioux Falls Switch. Id. Second, the
IXC can send calls to Midco’s network via another LEC’s tandem switch. Id.
Before 2007, Verizon exchanged long-distance calls with Midco’s network
primarily by sending to and receiving calls from the CenturyLink Tandem. Id.
¶ 20. A Verizon long-distance call destined for a Midco end-user customer
would travel from Verizon’s network to the CenturyLink Tandem, the
CenturyLink Tandem would route the call to the Sioux Falls Switch, and the
Sioux Falls Switch would then route the call to the appropriate end-user. Id.;
Tr. 262. A Midco end user’s long-distance call would take the same path in the
opposite direction. Docket 70 ¶ 20. CenturyLink billed Verizon for tandem
switching services. Id.
In October of 2006, Verizon reached out to Midco to discuss the
possibility of negotiating an interconnection agreement. Id. ¶ 24. Bonny Smith,
a Verizon employee in its National Carrier Contracts and Initiatives Group, and
Nancy Vogel, Midco’s Director of Regulator Finance, were the two primary
In addition to the Sioux Falls Switch, Midco operates “Gateways.” Docket 70
¶ 12. Gateways are pieces of equipment that function as points of interface that
allow other carriers to connect and deliver calls to Midco’s network. Id.
Gateways extend the switch beyond its original footprint. Tr. 151. Once the
gateways receive calls from other carriers, the gateway carries the call to the
Sioux Falls Switch. Docket 70 ¶ 12. Every call that travels via the gateway
must travel through the Sioux Falls Switch. Id.
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points of contact between the parties during the negotiation of the
interconnection agreement. Id. ¶¶ 25, 26. On March 7, 2007, the parties
executed the Switched Access Service Agreement (the Agreement). Docket 70
¶ 33; see Joint Ex. 8. The Agreement’s initial term was three years. Tr. 24.
The switched-access rates are contained in section 4.1 of the Agreement:
4.1.1 MCI will pay Midco to terminate interstate traffic according to
FCC tariff rates and intrastate traffic pursuant to rates under Midco
tariff in South Dakota.
4.1.2. MCI will pay Midco $250 per month per T1 and $500
installation charge per T1 for direct end office trunks for connectivity
to the switching facilities listed in Attachment 1.
Joint Ex. 8. From 2007 to January 2016, Midco’s federal and state tariff
switched-access rates mirrored the tariffed switched-access rates charged by
CenturyLink. Docket 70 ¶ 23. Under section 4.1.1, Midco could charge its
tariffed rates for the particular services it provided. Id. ¶ 40; see Joint Ex. 1
(federal tariff); Joint Ex. 2, 3, 4 (state tariffs for South Dakota, North Dakota,
and Minnesota). But the mere existence of a rate element in a tariff did not
necessarily mean that Midco was entitled to charge Verizon that rate element
on every call. Docket 70 ¶ 40.
Section 8.1 of the Agreement detailed the parties’ dispute procedure:
Subject to the audit rights below, MCI may initiate good faith
disputes regarding billing and withhold payment up to six months
of its receipt of an invoice . . . .
Joint Ex. 8.
Section 9 of the Agreement provided additional information on resolving
the parties’ disputes:
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Any dispute between the Parties regarding the interpretation or
enforcement of this Agreement or any of its terms shall be addressed
by good faith negotiations between the Parties in the first instance,
provided however, that MCI shall not be prohibited from withholding
amounts billed and due, to the extent such withholding is based
upon a good faith determination that the billed amount is in error
. . . . Upon request of a Party, each Party will appoint a
knowledgeable, responsible representative with decision-making
authority to meet and negotiate in good faith to resolve any dispute
arising out of relating to this Agreement . . . .
Id.
The Agreement laid out the termination provisions in section 2:
Either Party may terminate this Agreement for material breach by
the other Party upon thirty (30) days notice, provided that the other
Party fails to cure said material breach within said thirty (30) day
period, and provided further that any term of the Agreement that is
reasonably calculated to survive in order to fulfill the intent of the
Parties under this Agreement shall survive such termination.
Id.
On March 3, 2010, Midco and Verizon executed Amendment Number
One to the Agreement. Docket 70 ¶ 38; Joint Ex. 9. The Amendment extended
the term of the Agreement four years, after which time the Agreement would
renew on an annual basis absent timely notice of termination. Docket 70 ¶ 38.
The Amendment did not make any other changes to the rates or terms. Id.; Tr.
26.
Pursuant to the Agreement, Verizon purchased 19 direct trunks from
Midco and paid the agreed-upon charges for some time. Docket 70 ¶ 39.
Although the Agreement stated Verizon would pay a monthly fee and an
installation charge per T1 for “direct end office trunks” (Joint Ex. 8), Midco did
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not install DEOTs. Tr. 203. Instead, Midco installed an ATC trunk group to
connect its tandem to Verizon’s network. Tr. 157-58.
With the Agreement in place, when a non-local Verizon customer made a
call to a local Midco customer, the call traveled through various steps. Tr. 16263. The Verizon customer would originate the call by dialing the desired
telephone number. Id. Verizon’s switch would route the call to a T1 on its
network. Tr. 163. The T1 carried the call across the country until it reached the
Sioux Falls Gateway. Id. The Sioux Falls Gateway, built as an ATC trunk
group, was interfaced directly into the tandem side of the Sioux Falls Switch.
Tr. 163, 223. The Class 4 software of the Sioux Falls Switch received the call,
generated a call record to bill Verizon, and provided tandem switching services.
Tr. 163, 204. The Class 4 software performed tandem switching services by
interpreting the digits dialed and deciding where to route the call. Tr. 163, 204.
The Class 4 software interpreted digits by looking at the NPA-XXX and
determining if that NPA-XXX resided on the Class 5 switch. Tr. 205. If the
desired end user was located at Midco’s end office, the call was routed from the
Class 4 software to the Class 5 software. Tr. 163. The Class 4 software
interpreted the digits before the call was routed to the Class 5 software. Tr.
204. If the desired end user was not located at the Midco end office, the Class 4
software would route the call to another trunk group if one was interfaced with
the Sioux Falls Switch’s Class 4 software. Tr. 163. The Class 5 software then
performed end-office switching by determining to which subscriber the call was
directed and terminating the call to the desired end user. Tr. 163, 205-06. The
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call could not be completed without the use of both end-office and tandem
switching functionality. Tr. 160.
When a local Midco end-user customer made a long-distance call to a
Verizon customer, the Class 5 software provided the dial tone and interpreted
the digits. Tr. 155, 157. The Class 5 software then decided how to route the call
by determining whether the call was local or long-distance. Tr. 157; see Tr.
155-56 (describing in greater detail the digit interpretation process). If the call
was long-distance, the Class 5 software would hand the call off to the Class 4
software. Tr. 156, 191. Once the call was at the Class 4 software, the software
routed the call to the gateway, ATC trunk, converted the call to a T1 signal, and
sent it out to Verizon. Tr. 156. All long-distance calls must traverse the tandem
switch in order to be handed off to a carrier. Tr. 157.
C. The Billing Dispute
Midco provided Verizon with switched-access services and billed Verizon
for tandem switching, end office switching, and tandem switch facility. Docket
70 ¶¶ 41, 47; Tr. 19. Tandem switching is charged when the tandem
determines to which end office it should send the call and routes the call there.
Tr. 255. End-office switching is charged when the Class 5 switch determines
and routes the call to the specific end user associated with the dialed telephone
number. Tr. 178, 257. Tandem switch facility is a mileage-based charge for the
work Midco performs transporting long-distance calls between the tandem
switch and the end-office switch. Docket 70 ¶ 47; Tr. 256-57.
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Verizon approved and paid Midco’s invoices billed amountswhich
included the three service charges abovefrom 2007 until the October 2015
invoice. Docket 70 ¶ 45. The invoices sent to Verizon from Midco were in an
electronic format. Tr. 20; see Ex. 19. When Verizon approved payment of the
invoices, Verizon saw “face-page detail.” Tr. 454. Viewable from a summary
page of an invoice, a reviewer of the bill would be able to determine whether a
particular rate element was being charged. Tr. 23. These invoices were routed
through a billing software where Verizon approved or denied it for payment.
Tr. 454. If there was not a large variance in the amount billed, Verizon typically
released it for payment. Id.
After payment, Verizon’s invoice validation department, a group
dedicated to audit invoices, then decided which invoices to audit. Tr. 23, 381.
Audits are conducted based on identified risks or areas Verizon wanted to look
at more closely. Tr. 451-52. Depending on the chosen audit, Traci Morgan,
senior manager in the invoice validation department, and her team would write
a query to pull the desired information and perform an analysis on the
information. Tr. 452-53. Nearly all of Midco’s invoices were audited in some
manner every month. Tr. 430-31. For over nine years, however, Verizon never
engaged in any auditing of Midco’s tandem switching charges. Tr. 469.
When Verizon’s group found an error in an invoice, they would file a
dispute by quantifying the overbilled amount and then send a dispute
communication to the vendor. Tr. 382. This started the dispute resolution
process. Tr. 392-93. The vendor would have the opportunity to review the
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dispute and decide to agree with Verizon’s dispute or disagree and send a
dispute denial. Tr. 392.
Generally, during a dispute, Verizon withheld the charges the vendor
billed Verizon. Tr. 382-83. Verizon would start withholding payment
immediately after the error was identified. Tr. 389. This sometimes occurred
even before Verizon filed a dispute with the vendor. Id. If Verizon had already
paid the bill and then identified an error, Verizon looked to see if that error was
still occurring on the current invoices. Id. If so, Verizon withheld payment on
those charges and subsequent invoices. Id. Verizon would also withhold
payments on those same invoice’s undisputed amounts to recover prior
overpaid amounts. Tr. 383-84. In withholding undisputed amounts, Verizon
only did so for same service types. Tr. 384. When Verizon withheld money,
vendors could charge interest if the dispute was resolved in favor of the vendor.
Tr. 388-89. The interest rate for Midco was 1.5% per month. Tr. 436.
In early fall of 2015, Ms. Morgan noticed that Verizon had more tandem
switching charges than she was accustomed to seeing. Tr. 478. Verizon ran a
query against its billing system and pulled all CLEC’s tandem switching billing.
Tr. 479. Initially, an auditor pulled one month of usage, looked at the LERG
details associated with the CLLI codes appearing on the bill, and researched
the subtending information from the LERG. Tr. 478. Because of the
inconsistencies in the results, the auditor did additional research to determine
whether Midco owned a tandem switch. Tr. 477-78. The auditor pulled more
usage information from other months and did additional research in the LERG.
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Tr. 479. Ms. Morgan stated it was typical to rely on the LERG when auditing
and assessing CLEC bills. Tr. 478. The Sioux Falls Switch was only listed as an
end-office switch, and the LERG did not show it was a Class 4/5 switch. Ex.
111.
Ms. Morgan also checked Verizon’s share drive where it stores relevant
contracts between Verizon and a vendor, however, she was not able to find the
Agreement and thus she was not aware of its existence. Tr. 492. Additionally,
Ms. Morgan reviewed the rates in the tariffs. Tr. 496. In late October of 2015,
Verizon finished its audit and concluded Midco did not own a tandem. Tr. 486.
The auditor began calculating a dispute. Tr. 479.
Ms. Morgan advised her auditor to hold payment for the October invoice
until the auditor finished her calculations. Tr. 486. Verizon began to
immediately withhold payment based on the fact that the tandem switching
charge was over 50 percent of the monthly bill; Verizon considered it to be “too
much” to allow it to continue. Id. The October invoice was due November 8,
2015. Id. Midco did not receive any payment from Verizon in November and
December of 2015. Tr. 34. Verizon did not provide a written dispute notice in
October, November, or December of 2015. Id.
On January 20, 2016, Verizon notified Midco, via a formal written notice
(Joint Ex. 11), that it was disputing Midco’s monthly tandem switching charges
during the period of January 8, 2011 to January 8, 2016. Docket 70 ¶ 48.
Verizon disputed $654,258.53 of tandem switching charges. Id. ¶ 49. In its
written dispute, Verizon notified Midco that the basis of its dispute was the
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Eighth Order and Report and subsequent clarification, i.e., “one-switch, onerate” rule. Joint Ex. 11.
The gap between the conclusion of the audit and the official dispute
notice was approximately three months. Tr. 487. Ms. Morgan testified that it
was not Verizon’s intention to have such a gap. Id. Ms. Morgan stated that a lot
of “unexpected situations” occurred during that time like an employee quitting
without notice, employee training, litigation, and other escalated matters. Id.
Ms. Morgan personally authorized Verizon’s dispute of Midco’s tandem
switching charges. Tr. 477. Ms. Morgan testified that she considered the
dispute to be in good faith, and was confident that Midco was not providing
tandem switching services. Tr. 488-90.
D. Midco’s Reaction
In Januarybefore Verizon notified Midco about the disputeMidco
began discussing with its sales group whether it should continue to take
business orders from Verizon in response to the nonpayment. Tr. 36. Midco did
not take any action at that time. Tr. 37. One week after Midco received the
formal dispute notice, it discontinued taking ethernet business orders from
Verizon. Tr. 37, 397.
After Midco received the dispute notice, Midco reached out to Verizon.
Tr. 97. Erin Ostler, Midco’s Vice President of Sales, emailed Rachel Fetner, an
employee in Verizon’s carrier management group. Tr. 466-67; Ex. 28. In the
email, Midco indicated to Verizon that Midco believed it was providing the
functional equivalent of tandem switching service with its one switch. Tr. 46817
69; Ex. 28. Leslie Freet, Verizon’s senior manager in the invoice validation
department, received and reviewed this email, but she did not follow up with
anyone at Midco. Tr. 469.
On January 22, 2016, Midco sent a written disconnection letter, entitled
“NOTICE OF DEFAULT,” to Verizon. Joint Ex. 12. Patrick Mastel, Midco’s
Associate General Counsel, drafted the letter. Id.; Tr. 46. The letter’s subject
pertained to Midco’s rejection of Verizon’s tandem switching disputes. Tr. 4647. The letter notified Verizon of Midco’s intent to disconnect the trunks and
terminate the Agreement because Midco believed Verizon had filed the dispute
in bad faith and was in breach of the Agreement. Tr. 404; Joint Ex. 12. Ms.
Vogel testified that Midco sent the disconnection letter to put Verizon on notice
and to get Verizon’s attention that Midco was serious in wanting to discuss the
dispute. Tr. 46. The second paragraph of the disconnection letter stated, “If the
default is not completely corrected within 60 days of the receipt of this
document, Midcontinent has no choice but to consider the agreements
terminated. It will then disconnect all direct trunking between it and Verizon.”
Joint Ex. 12. The last sentence of the letter, however, states, “The date of
disconnection will be March 4, 2016 . . . .” Id. Ms. Freet testified that she was
surprised by this letter because Verizon “had only filed [its] dispute two days
before, and Midco had not responded.” Tr. 405. Verizon did not ask Midco to
hold off on the disconnection and did not ask what alternatives were available
besides the disconnection. Tr. 450.
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E. The Conference Calls
A series of three telephone discussions about the billing dispute occurred
between the parties. After receiving the dispute notice from Verizon, Ms. Vogel
believed that Midco should reach out and call Verizon. Tr. 37-38. Ms. Ostler
reached out to her counterpart at Verizon, Scott Aurand, a Verizon Carrier
Contract Management Group employee, to see if a call could be arranged to
discuss the dispute. Tr. 38; Docket 70 ¶ 51. At this time, Ms. Ostler also
informed Mr. Aurand that Midco would not be fulfilling any business contracts
that Verizon would send to Midco. Tr. 38.
The first telephone call took place on February 8, 2016. Docket 70 ¶ 51.
Midco’s participants included Ms. Vogel and Andrea Livingston, Midco’s
Regulatory Analytics and Reporting Manager. Id. Verizon’s participants
included Ms. Freet and Mr. Aurand. Id. The participants covered topics like the
long-distance calls’ paths over the direct trunks set up by the Agreement and
the basis for Verizon’s dispute of Midco’s tandem charges. Id. ¶ 52. During the
call, Ms. Vogel informed Ms. Freet about the Agreement. Id. Ms. Freet stated
that she and Mr. Aurand were unaware of the Agreement’s existence. Tr. 400.
Ms. Vogel testified that she was surprised Verizon was not aware of the
Agreement, “particularly if they were auditing the bills against the Agreement.”
Tr. 43. Mr. Aurand found a copy of the Agreement in Verizon’s archives. Tr. 41;
Docket 70 ¶ 54. Ms. Freet indicated on the call that the usual purpose for
those types of agreements was to eliminate tandem charges. Tr. 42. Ms. Vogel
19
countered that the Agreement dealt with blocking issues at the time and that is
why tandem services were being charged. Id.
In regard to the billing dispute, Ms. Freet stated that Verizon’s intention
was to recoup the monetary amounts that it previously paid to Midco for
tandem switching charges. Docket 70 ¶ 53. Verizon would recoup these
amounts by withholding payment from other undisputed switched-access
charges on future invoices. Id. In closing, the parties agreed to speak again in
two weeks. Id. The call ended by Ms. Freet requesting that Midco send her a
document that laid out Midco’s network architecture and call flow and for
another phone call. Id. ¶ 52; Tr. 44.
After the first call, on February 12, 2016, Ms. Vogel sent Ms. Freet an
email containing the two documents requested: a Gateway Map and a Midco
Gateway Cross Reference. Docket 70 ¶ 55; Joint Ex. 13. In that same email
chain, Ms. Vogel asked Ms. Freet and Mr. Aurand whether they were aware
that a disconnection letter had been sent. Tr. 46, 403-04; Ex. 21. Later, Ms.
Vogel sent the two Verizon employees a copy of the disconnection letter by
email. Tr. 47; Ex. 21.
A second phone call between the parties occurred on February 22, 2016,
and lasted approximately thirty minutes. Docket 70 ¶ 59; Tr. 51. The call’s
participants included Ms. Vogel, Ms. Livingston, Ms. Freet, and Mr. Aurand.
Docket 70 ¶ 59. Ms. Morgan also joined the call. Id. The parties discussed the
Agreement, Midco’s networks, the Gateway Map and the Gateway Cross
Reference documents, the basis for Verizon’s dispute, and the mileage charges.
20
Id.; Tr. 50. Ms. Freet informed Midco that if Verizon did not have the direct
trunks into the Sioux Falls Switch, it would have to alternatively route the calls
to the nearest ILEC tandem (CenturyLink Tandem). Tr. 116-17. The parties
scheduled a third call because Verizon wanted additional time to consult with
their legal team. Tr. 52; Docket 70 ¶ 59.
Ms. Vogel thought the second call went “fairly well.” Tr. 52. Ms. Vogel
testified that she was pleased that Verizon asked a lot of questions; she
perceived that as hopeful that a resolution was possible. Tr. 52-53. But Ms.
Vogel testified that she was surprised that Verizon did not raise the
disconnection letter during the second call. Tr. 51. Ms. Freet testified that after
the second call, she still believed that Verizon’s dispute was valid because
Midco did not own a tandem, and Midco was not providing tandem switching
functionality. Tr. 408.
Following the second call, William Carnell, Associate General Counsel at
Verizon, sent a letter to Midco on February 26, 2016, in response to Mr.
Mastel’s January 22 letter. Joint Ex. 14. In the letter, Mr. Carnell wrote that
Verizon had no record of the disconnection letter until Ms. Vogel forwarded
them a copy. Id. The letter illustrated that Verizon’s position was that Verizon
did not owe tandem switching charges because Verizon was directly connected
to Midco’s end office. Id.; Tr. 119. Mr. Carnell urged Midco to withdraw its
disconnection letter. Joint Ex. 14. After reading the letter, Ms. Vogel perceived
that Verizon was asking Midco not to engage in a rush to judgmentthe
21
disconnection letter. Tr. 120. But Midco did not consider withdrawing its
disconnection letter. Id.
A third phone call between the parties occurred on February 29, 2016.
Docket 70 ¶ 61. The call’s participants included Ms. Vogel, Ms. Livingston, Ms.
Freet, and Mr. Aurand. Id. Ms. Freet inquired whether Ms. Vogel was aware
that Mr. Carnell sent a letter to Mr. Mastel. Tr. 55. Ms. Vogel stated that she
was aware; Ms. Freet recommended that Mr. Mastel respond in writing. Id. Ms.
Freet informed Midco that Verizon was conducting a cost-benefit analysis on
whether the direct trunk arrangement with Midco was saving Verizon money
versus an alternate routing of the calls via the CenturyLink Tandem. Docket 70
¶ 61. Although the cost-benefit analysis was not yet completed, the preliminary
analysis suggested that the use of the direct trunks might be costing Verizon
more than the CenturyLink Tandem alternative. Id. Ms. Freet stated that
Verizon was working to finalize the analysis. Id. Also, Ms. Freet asked Ms.
Vogel whether Midco wanted to have another call or whether the parties
wanted to turn the dispute over to the attorneys. Id. Ms. Vogel said she would
consult with Mr. Mastel and then respond to Ms. Freet. Id.
Ms. Vogel testified that after the third call she no longer felt hopeful.
Tr. 57. She told her colleagues that she was not “making any headway with the
business people” and that it would come down to a discussion between the
parties’ lawyers. Tr. 59, 122. Ms. Vogel felt that her explanations of the
reasoning underlying the Agreement were not being heard by Verizon. Tr. 60.
22
Ms. Freet’s position remained that the tandem switching charges were not
valid. Tr. 409.
The third telephone call was the last discussion about the billing dispute
between the parties’ employees. Docket 70 ¶ 62. Ms. Vogel did not arrange for a
fourth call based on the fact the attorneys were already in discussion about the
dispute. Tr. 60. Verizon never updated Midco on the status or conclusion of its
cost-benefit analysis, and Midco never contacted Verizon to learn the status of
the cost-benefit analysis. Docket 70 ¶ 62.
After the third call, the parties’ only conversations occurred between
their respective lawyers. Id. The final communication between the parties about
the tandem switching dispute was a letter drafted by Midco’s attorneys dated
March 1, 2016. Joint Ex. 15; Tr. 122-23. Mr. Mastel responded by letter to Mr.
Carnell’s February 26 letter. Joint Ex. 15; Docket 70 ¶ 63. Mr. Mastel replied
that Midco was providing the functional equivalent of tandem switching. Joint
Ex. 15. After no resolution resulted from the phone conversations, Verizon
continued to withhold all switched access charges, even amounts that Verizon
was not disputing. Tr. 61-62.
F. Termination of the Agreement and Disconnection of the Trunks
The phone calls between the parties and their lawyers were
unsuccessful. Tr. 64. Midco terminated the Agreement and disconnected the
direct trunks on March 7, 2016. Tr. 41, 65. At the time of disconnection,
Verizon had not paid Midco for five months’ invoices. Tr. 64.
23
Midco disconnected the trunks by blocking the calls coming in via the
trunks, i.e. “busied out.” Tr. 65, 213. Midco did not physically take the trunks
down or fail the calls. Id. Instead, Midco redirected the calls to the CenturyLink
Tandem. Id. Midco could have quickly and easily reenabled the trunks. Tr. 65,
174. Verizon, however, never contacted Midco about reconnection. Tr. 66.
In relation to the disconnection, Midco made only one change to its
routing practice on the long-distance calls exchanged with Verizon’s network.
Docket 70 ¶ 67. Instead of using the direct trunks, Midco now exchanged calls
with Verizon’s network via the CenturyLink Tandem. Id. Besides this single
change, the rest of the call flow remained the same as before the disconnection.
Id. ¶ 68.
Midco was aware that the March 7 disconnection would require Verizon
to find an alternate route to exchange its traffic with Midco’s network. Id. ¶ 65;
Tr. 123. In response to the disconnection, Verizon used two routes to exchange
its traffic that previously traveled over the direct trunks. Docket 70 ¶ 65.
Verizon used the CenturyLink Tandem and other long-distance companies with
whom Verizon had wholesale relationships. Id. After the March 7
disconnection, Midco stopped billing Verizon tandem switching charges. Id.
¶ 70.
Without the Agreement, a call from a Midco customer to a Verizon
customer would travel through the CenturyLink tandem. Tr. 165. The call
would originate at the Midco end user and then travel to the Sioux Falls
Switch’s Class 5 software. Tr. 163-65. When the Class 5 software did a
24
subscriber look up, it would determine if the number dialed was destined for
Verizon’s network. Id. The call was then handed off to the Class 4 software of
the switch and routed to a trunk group going to the CenturyLink Tandem. Tr.
165. Then, the CenturyLink Tandem routed the call to a Verizon trunk group,
where the call entered Verizon’s network. Id.
All long-distance calls that were routed via the ATC trunk group came
through the Sioux Falls Switch’s tandem side. Tr. 187, 191, 235. Midco did not
bill Verizon for tandem switching even though Midco still provided tandem
switching services on the call. Tr. 77, 218. Midco expected CenturyLink to bill
Verizon for tandem switching, but Midco did not expect that both Midco and
CenturyLink would bill for tandem switching. Tr. 221-22. Currently, Midco bills
Verizon for end-office switching and tandem-mileage. Docket 70 ¶ 70.
CenturyLink bills Verizon for tandem switching services. Tr. 306.
G. Verizon’s Second Dispute
On July 27, 2017, Verizon sent Midco a dispute notice pertaining to
additional tandem switching and tandem-mileage charges that Midco billed
prior to the March 2016 disconnection. Joint Ex. 16; Docket 70 ¶ 70. The new
notice added an additional $681,000 to the dispute. Joint Ex. 16; Tr. 68.
Verizon continued to withhold payment until the August 8, 2018 invoice.
Tr. 133. As of August 1, 2018, Verizon recouped a total of $708,213.40 in
tandem switching charges. Docket 70 ¶ 71. Ms. Vogel testified that she was
surprised when she received this second dispute because she would have
25
thought Verizon would have included it in the first dispute, especially because
it took months for the first dispute to be finalized and sent to Midco. Tr. 68.
H. Lawsuit
At the end of 2016, Midco filed a breach of contract claim against
Verizon. Docket 1, 40. Verizon filed a counterclaim. Docket 41. Both parties
moved for summary judgment. Docket 31, 47, 50. The court denied the
motions and scheduled the matter for trial. Docket 58. A court trial was held
on October 1, 2018. Docket 82.
II.
LEGAL CONCLUSIONS
A. Breach of Contract Claims
Both Midco and Verizon brought breach of contract claims. Under South
Dakota law, 5 the elements of a breach of contract are: (1) an enforceable
promise, (2) a breach of the promise, and (3) resulting damages. Bowes Constr.,
Inc. v. S.D. Dep't of Transp., 793 N.W.2d 36, 43 (S.D. 2010). Here, the
Agreement between Midco and Verizon is an enforceable promise. The material
issue is whether the Agreement was breached by either party.
1. Verizon’s Breach of Contract Counterclaims
The court will address Verizon’s breach of contract counterclaims first. In
Count I and II of Verizon’s counterclaims against Midco, Verizon alleges that
Midco violated the terms of Midco’s state and federal tariffs and the Agreement.
The court applies South Dakota substantive law to these claims. See, e.g.,
Hiatt v. Mazda Motor Corp., 75 F.3d 1252, 1255 (8th Cir. 1996) (citing Erie R.R.
Co. v. Tompkins, 304 U.S. 64 (1938)). The parties agree that South Dakota law
applies.
5
26
Docket 41 ¶¶ 23-34. In addition, Verizon specifically contends that Midco
violated the tariffs and the Agreement by: (1) charging for intrastate and
interstate switched-access services under Midco’s state and federal tariffs (id.
¶¶ 24, 30) and (2) disconnecting Verizon’s direct trunks (id. ¶¶ 26, 32).
a. Verizon’s Breach of the Agreement Counterclaim
In its counterclaims, Verizon alleges that the Agreement required Midco
to install DEOTs and that because Midco installed ATCs instead, it could not
charge for tandem switching services. Docket 41 ¶¶ 9, 11, 12. While Verizon’s
breach of contract claims did not specifically include the allegation that Midco
breached the Agreement by installing the incorrect trunk group, the pleadings
gave sufficient notice to Midco that such a claim was being alleged. See Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007) (holding the pleading rules only
require “notice” pleadings and a court must construe allegations liberally); N.
States Power Co. v. Fed. Transit Admin., 358 F.3d 1050, 1056-57 (8th Cir.
2004) (function of notice pleading is to give other party fair notice of nature and
grounds for claim).
The court also finds that the parties tried by consent the issue of
whether Midco breached the Agreement by installing the incorrect trunk group.
Federal Rule of Civil Procedure 15(b)(2) states, “When an issue not raised by
the pleadings is tried by the parties’ express or implied consent, it must be
treated in all respects as if raised in the pleadings.” “A party’s consent may be
implied ‘if evidence to support the claim was introduced at trial without
objection.’ ” Miller v. Mills Const., Inc., 352 F.3d 1166, 1171 (8th Cir. 2003)
27
(quoting Shen v. Leo A. Daly Co., 222 F.3d 472, 479 (8th Cir. 2000)). Thus,
under Rule 15(b)(2), the court considers the theory of breach of contract by
installation of the incorrect trunk group tried and argued by the parties,
regardless of whether it was included in the pleadings. See id.
Midco impliedly consented to this issue being tried because Midco itself
presented evidence about the difference between DEOTs and ATC trunk
groups, Midco’s use of ATC trunk groups, Midco’s ability to install DEOTs, and
the provisions in the Agreement that required the installation of “direct end
office trunks.” In Verizon’s post-trial response brief, Verizon argued that if
Midco’s use of ATC trunks changed the functionality of the Sioux Falls Switch,
then Midco breached the Agreement by not installing DEOTs. Docket 87 at 19.
In its reply brief, Midco did not object to Verizon’s additional breach of contract
argument. See Docket 88.
The Agreement required Midco to install “direct end office trunks.” Joint
Ex. 8. The Agreement specifically lists those four words and there is no
ambiguity in the terms. The installation of DEOTs would have allowed Verizon
to interface directly with the Class 5 software of the Sioux Falls Switch. Under
the terms of the Agreement that required the installation of the DEOTs, Midco
would only provide end-office switching and would not bill Verizon for tandem
switching because there was no contractual agreement to provide that service.
Instead of complying with the contract, Midco installed a different ATC Trunk
group. That ATC trunk group interfaced directly into the Sioux Falls Switch,
but also into the Class 4 software. This network setup allowed Midco to charge
28
for tandem switching, tandem-mileage, and end-office switching because the
ATC trunk group routed all carrier calls through the tandem side. This
interface, however, was not contemplated under the Agreement. Thus, the
court finds that Midco breached the Agreement by installing the incorrect
trunk group.
Midco breached the Agreement when it installed an ATC trunk group
instead of the DEOTs. This is a material breach because the proper installation
of the DEOTs would have given Verizon a direct interface into the Sioux Falls
Switch’s Class 5 software; thereby bypassing the Class 4 software and the
tandem switching charges. Midco’s installation of the ATC trunk group allowed
Verizon to have a direct connection to the Sioux Falls Switch’s Class 4
software, which allowed Midco to charge for tandem switching, tandemmileage, and end-office switching.
b. Verizon’s Breach of State and Federal Tariffs
Counterclaim
Verizon also contends that Midco breached the state and federal tariffs
when it charged Verizon for switched-access service. Docket 41 ¶¶ 24, 30. This
court stated in the order denying summary judgment that “CLECs can charge
for both end office and tandem switching services when CLECs provide both
serviceseven when those services are performed by a single switch.” Docket
58 at 21. A CLEC “can charge the end office switching rate when they originate
or terminate calls to end users, and the tandem switching rate when they pass
calls between two other carriers.” Access Charge Reform, 23 FCC. Rcd. 2556, ¶
29
26 (2008). Midco was permitted to charge for switched-access services under
its tariffs if it provided the functional equivalent of those services even though
Midco has a single switch.
A material issue for this allegation is whether the Sioux Falls Switch
actually performed both tandem and end-office switching on a single call. The
Sioux Falls Switch provided end-office switching on long-distance calls
traveling over Midco and Verizon’s networks. See supra p. 13. Additionally, the
Sioux Falls Switch performed tandem switching. See supra p. 13. Midco
provided both of these services on a single call traveling through the Sioux
Falls Switch. Tr. 184-85. Midco was able to provide both services on a single
call because of the type of trunk group installed by Midco. Tr. 227, 237.
Mr. Fejfar testified about the structure of Midco’s network and how
Midco’s trunk group was set up. Tr. 184. Mr. Fejfar testified that the direct
trunks connecting Verizon’s network to Midco’s network were called “Access
Tandem to Carrier” Trunks. Tr. 157-58. An ATC trunk group connects directly
into a switch’s Class 4 software. Tr. 187. A long-distance call destined for a
local end-user customer that travels over an ATC trunk group must go through
a switch’s Class 4 and Class 5 software. Id. Thus, the Sioux Falls Switch was
performing both tandem and end-office switching. Tr. 184-85. Even Peter
D’Amico, Verizon’s expert witness and a product manager for voice services,
testified that, as a matter of industry practice, if Midco had structured its
network to perform both services, tandem and end-office switching, it could bill
30
for both services. Tr. 242, 359-60. That is exactly what Midco did by installing
ATC Trunks.
The court finds that Midco did not breach its state and federal tariffs in
billing switched-access services. Because Midco’s network used ATC trunk
groups to connect Verizon and Midco’s networks, the Sioux Falls Switch
performed both end-office and tandem switching. The tariffs allowed Midco to
charge for the services it actually performed. But if Midco had properly
installed the DEOTs, it would not have the capability to provide tandem
switching or tandem-mileage services. The court cannot allow for Midco to
charge Verizon for services Verizon and Midco contracted to circumvent.
Although Midco did not violate the terms of its state and federal tariffs, which
permitted Midco to bill for services it provided, Midco did breach the Agreement
when it charged Verizon for tandem switching and tandem-mileage services
because the installation of the DEOTs was intended to prevent these charges.
c. Verizon’s Claim Arising from Disconnecting the
Trunks
Verizon alleges Midco breached the Agreement by disconnecting the
direct trunks. Docket 41 ¶¶ 26, 32. The Agreement permitted either party to
terminate the Agreement for a “material breach” upon 30-days notice. Joint Ex.
8. A material breach occurs if the breach threatens to “defeat the very object of
the contract.” Thunderstik Lodge, Inc. v. Reuer, 585 N.W.2d 819, 824 (S.D.
1998) (internal quotation omitted). “Whether a party's conduct constitutes a
material breach of contract is a question of fact.” Icehouse, Inc. v. Geissler, 636
N.W.2d 459, 465 (S.D. 2001).
31
Midco alleges Verizon materially breached the Agreement by withholding
payments not in good faith. Docket 40 ¶¶ 17-20. Section 8.1 of the Agreement
states: “[Verizon] may initiate good faith disputes regarding billing and
withhold payment up to six (6) months of its receipt of an invoice.” Joint Ex. 8.
Nothing in the Agreement required Verizon to notify Midco of the dispute or
provide a written dispute prior to withholding payment. Verizon used the gap in
time to adequately prepare its dispute by auditing, researching, and approving
the dispute calculations. Once Verizon finished its audit, it notified Midco of its
dispute in January. Prior to filing the formal dispute, Verizon withheld
payment on the disputed tandem charges and the undisputed switch-access
charges for October, November, and December invoices. This withholding delay
was contemplated by the parties and is evident in the Agreement.
The court finds Verizon’s dispute to have been made in good faith.
Verizon conducted research and reviewed invoices, the LERG, and the tariffs.
Verizon also cited an FCC order. Verizon’s dispute was made with “honesty in
fact” and thus good faith. Because Verizon did not materially breach the
contract, Midco was not permitted to terminate the Agreementi.e. disconnect
the trunks. The court finds for Verizon on its breach of contract counterclaim
related to Midco impermissibly disconnecting the trunks, thereby violating the
Agreement.
2. Midco’s Breach of Contract Claims
In Midco’s first cause of action against Verizon, Midco alleges Verizon
materially breached the Agreement by withholding amounts validly billed under
32
the Agreement and by prospectively seeking to withhold payment from Midco
for validly owed and not yet billed services. Docket 40 ¶ 20. Midco alleges that
Verizon breached the contract by withholding payments not in good faith. Id.
But as stated above, Verizon initiated the dispute and withheld the payments
in good faith and in accordance with the Agreement. There is no breach of the
Agreement by Verizon. Because there was no breach by Verizon, the court finds
in favor of Verizon on Midco’s first cause of action.
B. Midco’s Declaratory Judgment Claim
Midco alleges that it is entitled to declaratory judgment relief under
SDCL § 21-24-2 as it relates to the interpretation and enforcement of the
Agreement and Midco’s state and federal tariffs. Docket 40 ¶ 22. Under South
Dakota law, courts have the “power to declare rights, status, and other legal
relations[.]” SDCL § 21-24-1. “[S]uch declaration shall have the force and effect
of a final judgment or decree.” Id. SDCL § 21-24-2 allows corporations to seek
declaratory judgments. Midco seeks a declaratory judgment that (1) Midco is
entitled to be paid under the parties’ Agreement, (2) Verizon has improperly
withheld from Midco amounts lawfully billed to Verizon, and (3) Verizon may
not in the future withhold amounts lawfully billed to Verizon by Midco. Docket
40 at 6.
The Agreement requires Verizon to pay Midco for end-office switching
only. Midco is not entitled to be paid for tandem switching services because the
Agreement specified the use of DEOTs to connect Verizon’s network with
Midco’s network via a direct interface into the Sioux Falls Switch’s Class 5
33
software. The Sioux Falls Switch would only provide end-office switching with
this direct connection. Midco’s breach of the Agreement by installing ATC
trunks, instead of DEOTs, does not allow Midco to be entitled to tandemcharges. Under the Agreement, the court finds that Midco is entitled to be paid
only for end-office switching as stated in the Agreement.
For Midco’s second declaratory judgment request, the Agreement allowed
Verizon to “initiate good faith disputes regarding billing and withhold payment
up to six (6) months of its receipt of an invoice.” Joint Ex. 8. The court
previously found that Midco impermissibly charged Verizon for tandem-charges
in violation of the Agreement. Additionally, the court found that Verizon’s
dispute and withholding were in good faith. Thus, the court finds that Midco is
not entitled to a declaratory judgment in its favor on this issue.
For Midco’s third declaratory judgment request, the Agreement allows
Verizon to withhold payments up to six months after its receipt of an invoice.
Joint Ex. 8. The court cannot take away Verizon’s right to withhold payments
when the contract granted Verizon that right. Thus, the court finds that Midco
is not entitled to a declaratory judgment in its favor on this issue.
III.
Compensatory Damages
Verizon seeks $1,301,355.27 in compensatory damages. Ex. 114;
Ex. 115. Verizon alleges that it was injured and incurred damages from Midco’s
breach of the Agreement, including the amount Verizon overpaid Midco and the
expenses Verizon acquired from Midco’s disconnection of the trunks. Docket 41
¶¶ 27, 33. In South Dakota, the measure of damages resulting from a breach
34
of contract “is the amount which will compensate the party aggrieved for all the
detriment proximately caused thereby, or which, in the ordinary course of
things, would be likely to result therefrom.” SDCL § 21-2-1. “[T]he ultimate
purpose behind allowance of damages for breach of contract is to place the
injured party in the position he or she would have occupied if the contract had
been performed[.]” Ducheneaux v. Miller, 488 N.W.2d 902, 915 (S.D. 1992). The
court found that Midco breached the contract by (1) installing the wrong
trunks and (2) disconnecting the trunks. Thus, Verizon is entitled to
compensatory damages resulting from Midco’s breaches of the Agreement.
A. Tandem Charges Damages
1. Disputed Charges
Verizon alleges that it suffered $928,618.51 in damages caused by
Midco’s breach of the Agreement by installing the wrong trunk group and
charging for services the Agreement intended to avoid. Ex. 114; Ex.115. The
Agreement obligated Midco to install “direct end office trunks.” Joint Ex. 8. At
trial, Verizon presented evidence that the installation of DEOTs would have
permitted Midco to provide and, therefore, charge for end-office switching only.
Tr. 191, 238. Midco presented evidence, however, that it installed ATC trunks
and provided end-office and tandem switching services, along with tandemmileage services. Tr. 227. Because Midco failed to comply with the Agreement,
Verizon alleges that Midco billed Verizon for tandem switching and tandemmileage charges, both services the Agreement intended to circumvent. Ex. 114.
Thus, to put Verizon in the position it would have been in had Midco performed
35
under the Agreement, Verizon is entitled to damages for the invalid tandem
switching and tandem-mileage charges.
Verizon alleges that Midco invalidly billed $174,495.24 in tandemmileage charges. Ex. 11; Ex. 114. Verizon claims it is entitled to damages for
these disputed charges on invoices dated on or after May 24, 2014. Docket 87
at 25. Midco agrees that such claims are timely. Docket 86 at 25. Thus,
Verizon’s claims for interstate tandem-mileage are timely as to the invoices date
on and after May 24, 2014.
For the disputed tandem switching amount, Verizon alleges Midco
invalidly billed $754,123.27 in tandem switching charges. Ex. 114. Verizon
disputed intrastate invoices dated May 2011 and interstate invoices dated
February 2014. The parties disagree about the timeliness of the tandem
switching claims. The court previously held that Verizon’s intrastate tandem
switching claims were timely for invoices dated on or after April 30, 2011.
Docket 58 at 19. Verizon’s alleged damages for intrastate invoices start May of
2011 (Docket 87 at 25; Tr. 503-04), and therefore, are timely.
For Verizon’s interstate tandem switching claims, the court’s prior order
denying summary judgment held that the statute of limitations and the parties’
release barred Verizon’s claims before invoices dated on or after May 24, 2014.
Docket 58 at 15. Verizon argues that its claims can extend back to invoices
dated on or after January 20, 2014. Docket 87 at 25. Verizon bases its
argument on a two-year extension under 47 U.S.C. § 415(c):
“For recovery of overcharges action at law shall be begun . . . against
carriers within two years from the time the cause of action accrues
36
. . . except that if claim for the overcharge has been presented in
writing to the carrier within the two-year period of limitation said
period shall be extended to include two years from the time notice
in writing is given by the carrier to the claimant of disallowance of
the claim . . . .”
47 U.S.C. § 415(c).
Verizon alleges that it is entitled to this two-year extension from the
statute because it sent notice to Midco about the disputed tandem switching
charges on January 20, 2016. Docket 87 at 25; Joint Ex. 11. Thus, the twoyear extension would allow Verizon to recover damages on invoices dated on or
after January 20, 2014. But the statute does not extend the two-year period
from the date of the claimant’s notice. See 47 U.S.C. § 415(c). Instead, the
statute states that “said period shall be extended to include two years from the
time notice in writing is given by the carrier to the claimant of the disallowance
of the claim.” Id. (emphasis added). Here, Midco is the carrier and Verizon is
the claimant. Thus, the two-year extension is from the date Midco notified
Verizon that it was not accepting Verizon’s dispute. On March 16, 2016, Midco
informed Verizon that it believed it was providing the proper services and
rejected Verizon’s dispute. Ex. 28. Therefore, Verizon’s claims can extend to
invoices dated on or after March 16, 2014.
Because Verizon included the February and March 2018 invoices in its
tandem switching dispute amount, the court cannot rely on the calculations
summarized in Exhibit 114. Instead, the court used Exhibit 114 and Joint
Exhibit 11 to determine the proper dispute amount for tandem switching. The
court deducted the tandem switching dispute amounts from February and
37
March 2014 from the cumulative tandem switching dispute amount. For
February, Verizon improperly included $14,171.05 for tandem switching
charges in its dispute amount. For March, Verizon improperly included
$12,961.09 for tandem switching charges in its dispute amount.
Thus, the court finds that Midco billed Verizon $726,991.13 in invalid
tandem switching charges and $174,495.24 in invalid tandem-mileage charges.
The total dispute amount is $901,486.37.
2. Deductions
Verizon disputed these tandem switching and tandem-mileage charges
and began to deduct the disputed amounts from invoices for services Midco
provided Verizon. Tr. 486. Verizon withheld $701,201.62 for disputed charges
from Midco’s invoices. Ex. 114 at 2; Tr. 504. In addition to this withheld
amount, Verizon withheld $7,011.78 on non-disputed invoices. Ex. 114 at 2;
Tr. 505. In totality, Verizon recouped $708,213.40. Ex. 114 at 2; Tr. 505. In
computing Verizon’s damages, these deductions are subtracted from the
$901,486.37 dispute amount. See Ex. 114 at 2; Tr. 505. The amount of invalid
tandem switching and tandem-mileage charges that Midco billed and Verizon
disputed but has not been deducted is $193,272.97. Tr. 505.
3. Interest
Section 9 of the Agreement set the interest rate on withheld amounts to
1.5% per month. Joint Ex. 8; Tr. 507. Because the dispute was resolved in
favor of Verizon, the Agreement requires Midco to pay 1.5% per month on the
withheld amount. Verizon provided evidence that the total amount of interest
38
due on the paid disputes was $424,535.16. Ex. 114 at 2; Tr. 507-08. Verizon’s
alleged interest was based on the incorrect dispute amount as discussed above.
Excluding the invoices from February and March of 2014, the court finds that
the total amount of interest due on the paid disputes at the time of trial was
$410,597.36.
Additional interest has accrued since the trial. Ms. Morgan testified that
she believed the interest for the paid dispute amount would continue to accrue
at the rate of $3,411.25 per month. Tr. 508. The monthly interest rate remains
static because Verizon elected to not recover a varied interest for the ease of
calculating damages. Id. This calculated amount is incorrect because it
included the February and March 2014 invoices. The proper interest rate is
$3,004.27. The interest amount for the last ten months is $30,042.70.
Similarly, Verizon owes Midco 1.5% interest on the non-dispute
deductions Verizon made. At the time of trial, Verizon owed Midco $3,023.70 in
interest for the additional non-disputed deductions by Verizon. Ex. 114 at 2.
Interest continued to accrue since trial, and Verizon owes Midco an additional
$1,051.80 in interest on these non-disputed deductions. Ex. 114 at 4. The net
interest, including the interest during the trial and the court’s consideration, is
$436,564.56.
Therefore, the court awards Verizon $629,837.53 in compensatory
damages for Midco’s breach of the Agreement by installing the wrong trunks
and improperly charging for tandem switching and tandem-mileage services.
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4. Additional Alleged Damages
Verizon alleges that Midco’s failure to install DEOTs entitles Verizon to
an additional $275,500 in damages to cover the 58 months that Verizon paid
Midco for “direct end office trunks” at a rate of $4,750 per month. Docket 87 at
19. Based on South Dakota law for compensatory damages, Verizon is entitled
to damages that would put it in the position it would have been if the contract
had been performed. If Midco had properly installed DEOTs, Verizon was
obligated to pay the monthly rent for the DEOTs. Thus, Verizon is not entitled
to these additional damages.
B. DEOT Related Damages
1. DEOT Related Expenses
Verizon alleges that it suffered $628,737.45 in damages caused by
Midco’s disconnection of the DEOTs in violation of the Agreement. Ex. 115.
Verizon presented Exhibit 115 to represent the damages that Verizon sustained
as a direct result of Midco’s disconnection of the DEOTs. Tr. 509-10. The
period covered by Exhibit 115 begins with the disconnection of the DEOTs in
March of 2016 and ends at the July 2018 invoice. Tr. 513. Verizon elected to
stop collecting damages beyond the July 2018 invoices. Id.
Midco’s disconnection of the DEOTs in March of 2016 imposed costs on
Verizon. Tr. 509. Because of Midco’s disconnection of the DEOTs, Verizon
installed twelve new trunks. Tr. 513-14. The one-time installation charge for
the trunks totaled $12,355.88. Ex. 115; Tr. 513-15. Verizon would not have
40
incurred these installation charges had Midco not disconnected the DEOTs
because traffic would have continued to travel over the DEOTs. Tr. 515.
Verizon also suffered $22,354.17 in damages from the monthly service
charges billed by CenturyLink for the use of the circuits. Ex. 115; Tr. 516.
Additionally, Verizon had to pay $50,438.84 for port charges. Ex. 115; Tr. 518.
Port charges are charges assessed by CenturyLink and other carriers on
circuits that carried switched traffic. Tr. 518. Verizon would not have ordered
these ports had the DEOTs remained in place. Tr. 519, 521, 523.
After the disconnection, instead of sending calls over the DEOTs,
Verizon’s calls flowed through the CenturyLink Tandem. Tr. 523. CenturyLink
billed Verizon $346,109.83 for tandem switching and muxing charges (perminute tandem charges). Ex. 115; Tr. 523-24. Verizon would not have incurred
these charges had the DEOTs remained connected because traffic would have
continued to flow across the DEOTs. Tr. 529. Verizon also paid $80,083.25 in
tandem facility mileage charges that Midco billed after the disconnection
through the July 2018 invoice. Ex. 115; Tr. 531. Additionally, Verizon incurred
domestic optimal call routing (DOCR) charges because traffic could not flow
over the DEOTs, and thus Verizon used DOCR carriers to terminate traffic to
Midco. Tr. 534. Since the July 2018 invoice, Verizon has paid $199,803.00 in
DOCR charges. Ex. 115; Tr. 534-35.
In totality, Verizon experienced $711,144.97 in DEOT-related expenses.
Ex. 115; Tr. 537.
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2. Avoided Charges
With the disconnection of the DEOTs, Verizon avoided several expenses it
would have incurred if the DEOTs remained connected: DEOT monthly rent
and end-office charges. Ex. 115. Prior to the disconnection, Verizon paid Midco
$4,750 for the use of the DEOTs. Joint Ex. 8; Tr. 537-38. With the
disconnection of the DEOTs, Verizon no longer paid Midco the $4,750 monthly
payment. Tr. 537-38. Between the July 2018 invoice and July 2019, Verizon
avoided $128,250.00 in DEOT charges. Ex. 115; Tr. 538.
Additionally, before the disconnection, Midco billed Verizon for end-office
services because calls traveled over the DEOTs. Tr. 539. After the
disconnection, Verizon’s calls traveled via DOCR routes where the DOCR
carriers terminated the calls to Midco. Tr. 538. Then, Midco billed the DOCR
carrier, not Verizon, for end-office switching. Id. Thus, by sending the traffic
over the DOCR route, Verizon avoided $34,494.27 in end-office charges.
Tr. 539; Ex. 115.
Overall, Verizon avoided $162,744.27 in DEOT/end-office charges.
Ex. 115. This amount is deducted from Verizon’s damages.
3. Interest
In its computation of damages, Verizon included prejudgment interest.
Ex. 115. “Any person who is entitled to recover damages . . . is entitled to
recover interest thereon from the day that loss or damage occurred[.]” SDCL §
21-1-13.1. The prejudgment interest amount is either set by the contract or by
South Dakota statute. Id. Here, the Agreement only set the interest rate for
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withheld amounts. See Joint Ex. 8. South Dakota law sets the applicable
interest rate at 10% per year. SDCL § 54-3-16(2). Prejudgment interest applies
only to the DEOT-related damages and totals $80,366.76. Ex. 115; Tr. 541.
Thus, the court awards Verizon $628,737.46 in compensatory damages
for Midco’s breach of the Agreement by disconnecting the trunks. Ex. 115; Tr.
543.
C. Attorney’s Fees
Verizon alleges that it is entitled to attorney’s fees under 47 U.S.C. § 206
if it prevailed on its tandem-charge counterclaims. Docket 87 at 25. A carrier is
liable “for the full amount of damages sustained in consequence of any such
violation of the provisions of this chapter” and attorney’s fees if the carrier did
“any act, matter, or thing in this chapter prohibited or declared to be
unlawful . . . .” 47 U.S.C. § 206. The court found that Midco breached the
Agreement, but it did not breach federal tariffs. None of Midco’s actions are
prohibited under the chapter or unlawful. Thus, Verizon is not entitled to
attorney’s fees under the statute.
D. Total Compensatory Damages
Based on the evidence presented at trial and the court’s calculations,
Verizon proved it suffered $629,837.53 in damages for Midco’s breach of the
Agreement by installing the wrong trunks and charging for tandem switching
and tandem-mileage services. Additionally, Verizon proved it suffered
$628,737.46 in damages from Midco’s disconnection of the DEOTs. Therefore,
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the court awards $1,258,574.99 to Verizon for compensatory damages.
CONCLUSION
Verizon and Midco’s Agreement was initially breached by Midco when
Midco installed ATC trunk groups instead of the DEOTs as required by the
Agreement. For approximately the next nine years, Midco provided end-office
switching services, which the Agreement intended Midco to provide, and
tandem switching services, which were not included under the Agreement.
Midco’s charging for tandem switching services violated the Agreement. When
Verizon became aware of the excess charging, Verizon exercised its rights
under the Agreement to initiate a good faith dispute and withhold payments on
its invoices for switched-access services. After Verizon formally notified Midco
that Verizon was disputing and continuing to withhold payment of the invoices,
Midco disconnected the trunks and terminated the Agreement in violation of
the Agreement’s termination clause. Midco failed to prove that Verizon’s
withholding constituted a material breach to allow Midco to terminate the
Agreement. Verizon also established that it is entitled to a compensatory
damages award of $1,258,574.99. Thus, it is
ORDERED that judgment will be entered in favor of defendant, MCI
Communications Services, d/b/a Verizon Business, and against plaintiff,
Midcontinent Communications, in accordance with this memorandum opinion
and order.
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IT IS FURTHER ORDERED that Midco is entitled to a declaratory
judgment that it is entitled to be paid only for end-office switching under the
Switched Access Service Agreement as interpreted by this court.
DATED July 2, 2019.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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