Sprint Communications Company L.P. v. Crow Creek Sioux Tribal Court

          MEMORANDUM OPINION AND ORDER

          KAREN E. SCHREIER UNITED STATES DISTRICT JUDGE.

         The issue before the court is whether defendant, Native American Telecom, LLC. (NAT), is entitled to collect access service charges that it billed to plaintiff, Sprint Communications Company, L.P.. A court trial was held on April 12-13, 2016. The court has considered the testimony, exhibits, and briefs in determining the outcome of this dispute.

         PROCEDURAL HISTORY AND BACKGROUND

         Sprint provides nationwide long-distance telephone services and is known under the telecommunications regulatory framework as an interexchange carrier (IXC). Sprint delivers long-distance calls to a local exchange carrier (LEC) for termination to end-users. Under the FCC’s current regulatory framework, Sprint pays the LEC a terminating access charge based on the LEC’s interstate access tariff, which is filed with the FCC.

         In October 2008, the Crow Creek Sioux Tribal authority authorized NAT to provide telecommunications services on the Crow Creek Reservation subject to the tribe’s laws. Pursuant to the 2008 approval order, NAT began to operate as a LEC. NAT filed interstate tariff number one with the FCC, which became effective on September 15, 2009. NAT’s interstate tariff number two became effective on November 30, 2010, and canceled and replaced NAT’s tariff number one. NAT revised its tariff number two, which revision became effective on June 26, 2011. NAT’s interstate tariff number three was filed with the FCC in August 2011, and became effective on August 23, 2011.

         NAT also operates a free conference calling system (used for conference calling, chat-lines, and similar services) in connection with Free Conferencing Corporation. A party using NAT’s services does not pay NAT for the conference call, but rather is assessed charges by the party’s telecommunications provider. NAT then bills the telecommunications provider an access fee as defined in its interstate tariff. NAT’s access charges that were billed to Sprint for conference calls are at issue here.

         After paying two of NAT’s bills for charges connected to conference calls, Sprint ceased paying NAT’s terminating access tariffs because Sprint believed that NAT was involved in a traffic-pumping scheme, otherwise known as access stimulation, to generate traffic from free conference calls and chat services. On August 16, 2010, Sprint filed suit against NAT alleging a breach of the Federal Communications Act (FCA) and a state-law unjust enrichment claim. Docket 1.

         On March 8, 2011, NAT amended its answer and asserted counterclaims against Sprint alleging a breach of contract and a collection action pursuant to its tariffs, a breach of implied contract resulting from a violation of its tariffs, and a quantum meruit/unjust enrichment claim. NAT also sought declaratory relief. Docket 99.

         On November 29, 2011, the FCC released its Connect America Fund final rule that addresses access stimulation and traffic pumping. See Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support, 76 Fed. Reg. 73, 830 (Nov. 29, 2011). On December 27, 2011, this court issued an order directing the parties to discuss what effect, if any, the FCC’s Connect America Fund final rule had on the issues presented in this case. Docket 128. On February 22, 2012, this court found that the FCC’s final rule did not apply retroactively. Docket 141 at 9-11 (“Thus, the final rule is inapplicable to the time period before the final rule became effective.”). As part of the same order, this court granted Sprint’s then-pending motion to stay this proceeding and referred three issues to the FCC for resolution. Id. at 25. The parties were directed to provide periodic updates to this court describing the status of the FCC proceeding. The updates were filed over the next two years. The status of the FCC referral remained unchanged from November 2012 to July of 2014. Compare Docket 154 with Docket 163. Because of the limited progress on the FCC referral, a telephonic status conference was held on July 23, 2014. See Docket 164.

         The parties stated that they had been engaged in litigation before the South Dakota Public Utilities Commission (SDPUC). Docket 169 at 5. In that litigation, NAT was granted a certificate of authority by the SDPUC to provide certain telecommunications services in South Dakota. Based on the results of the SDPUC litigation and the lack of action by the FCC during the period of the stay, the parties discussed whether some of the disputes in this case remained viable. Id. at 8-10. The court proposed entering an order that would lift the stay, withdraw the issues that had been referred to the FCC, and establish deadlines for the parties to amend the complaint, to file counterclaims, and to file any motions to dismiss. Id. at 12. The court also stated that it would rule on any motions to dismiss based on a statute of limitations defense and that a new referral of issues to the FCC could then be discussed. Id. With the parties in agreement, a formal order was issued that same day. See Docket 168. Sprint did not amend its complaint. NAT amended its counterclaim on September 9, 2014, and added a number of allegations that arose during the period of the stay and FCC referral. Docket 172. Additional motions were filed by the parties.

         Relevant to the issue now pending is the court’s August 7, 2015 memorandum order that resolved motions for summary judgment filed by both parties. See Docket 250. There, and among other things, the court addressed whether NAT’s various interstate tariffs were lawful or otherwise enforceable. The court concluded that NAT’s interstate tariffs numbers 1 and 2 were unenforceable, and granted summary judgment in Sprint’s favor. See Id. at 40. The court could not, however, determine summarily whether NAT’s tariff number 3 was enforceable. See Id. at 40-41.

         A status conference was held on September 15, 2015, to determine the issues in this case that remained for trial and whether another referral to the FCC was necessary. See Docket 254 (Transcript). The parties agreed that the court could resolve without a referral to the FCC whether NAT’s tariff number 3 is enforceable. Id. at 6-7. A court trial was held on April 12-13, 2016. The parties submitted post-trial briefs, and the dispute is now ripe for adjudication.

         FINDINGS OF FACT

         The following constitutes the court’s findings of fact pursuant to Federal Rule of Civil Procedure 52(a)(1), which were found by a preponderance of the evidence:

         NAT was founded in approximately 2007 or 2008 to provide telephone and broadband service on the Crow Creek Sioux Reservation. Tr. 18:18-24. Gene DeJordy and Tom Reiman were NAT’s original owners. Tr. 19:2-3. NAT provides Tribal members on the Reservation with telephone and broadband service through a high-speed wireless network. Tr. 46:10-15. According to DeJordy, most Tribal customers receive subsidized or discounted service. Tr. 44:15-25; Tr. 45:1-3.

         NAT’s focus is to encourage private entities to locate on the Reservation and to spur economic development. Tr. 19:13-25. NAT reached out to several companies about investing in and developing on the Reservation. Only Free Conferencing expressed an early interest going forward. Tr. 20:13-19. As time went on, NAT turned away several other commercial entities that sought to do business with NAT. Tr. 37:12-25; Tr. 38:1-3; Tr. 53:3-24 (DeJordy cited NAT’s ongoing legal disputes as the reason why companies were discouraged from doing business with NAT at this time). ZenoRadio and YakFree did, however, eventually do business with NAT. Tr. 54:5-9; Tr. 242:1-11.

         The Crow Creek Sioux Tribal Utility Authority entered an order in 2008 that granted approval for NAT to provide telecommunications services on the Reservation. Tr. 24:18-24; Ex. 9. NAT’s facilities were also housed on the Reservation. The location was “a fairly small shelter” approximately “8-by-10 [feet], [and] kind of a small room.” Tr. 28:16-24. Free Conferencing was permitted by NAT to co-locate its equipment in NAT’s facilities. Tr. 29:8-11.

         NAT’s ownership was restructured after Free Conferencing agreed to operate on the Reservation. Tr. 20:20-25; Tr. 21:1-14. The Crow Creek Sioux Tribe became the majority owner of NAT with a 51% ownership interest in the company.^[1] A private investor known as Wide Voice Communications holds a 25% ownership interest in NAT, and another company established by DeJordy, Native American Telecom Enterprise (NATE), holds the other 24%. The Tribe, Wide Voice, and NATE signed a Joint Venture Agreement in 2009, and the parties govern NAT jointly as members. Tr. 21:15-18; Tr. 22:10-16.

         NAT and Free Conferencing executed a service agreement in 2009. Tr. 25:12-14; Ex. 5 (2009 Service Agreement). The 2009 Service Agreement required Free Conferencing to generate a monthly minimum number of minutes of conferencing traffic. Ex. 5, ¶ 7. NAT was obligated to pay Free Conferencing in return a so-called “marketing fee” based on the number of minutes of traffic terminated on Free Conferencing’s equipment. Ex. 5, ¶ 7. NAT also agreed to provide Free Conferencing with a number of services “without charge.” Ex. 5, ¶ 22 (NAT agreed to provide co-location space, rack space, dedicated Internet access, analog telephone circuits, electrical power, fire protection, generator and battery backup, switch technician labor, and switch programming service, among others). The 2009 Service Agreement contained an exclusivity clause and a confidentiality agreement. Ex 5, ¶¶ 2, 7. The 2009 Service Agreement also contained a choice of law clause providing that the laws of California would govern any claims arising out of the agreement. Ex. 5, ¶ 21.

         Although NAT received a certificate from the Tribal Utility Authority to provide telecommunications services in 2008, the 2009 Service Agreement was executed before NAT filed an intrastate or interstate tariff, and before NAT began its telecommunications operations. Tr. 26:8-16. The 2009 Agreement, however, purported to incorporate all of NAT’s tariffs by reference “[t]o the extent applicable.” Ex. 5, ¶ 8.

         The 2009 Service Agreement was amended on approximately December 6, 2012. Tr. 39:6-15; Ex. 6 (2012 Service Agreement). The 2012 Service Agreement is not a new document. Rather, it is a redlined version of the 2009 Service Agreement. DeJordy acknowledged that drafting of the 2012 Service Agreement “wasn’t really the normal course of doing business[.]” Tr. 40:19-21. Portions of the 2009 Service Agreement were deleted, but no provisions were added to it. Tr. 94:9-13. For example, the exclusivity clause was deleted, and so was the language stating that NAT’s provision of numerous services to Free Conferencing was “without charge.” See Ex. 6, ¶¶ 7, 22. The 2012 Service Agreement still contained a provision that NAT would pay Free Conferencing a marketing fee, but the language explaining how the fee is calculated was deleted. See Ex. 6, ¶ 9. Several other clauses are similarly incomplete. For example, the provisions stating where Free Conferencing could locate its equipment and the duration of the agreement are not completed. See Ex. 6, ¶¶ 1, 3. The clause incorporating NAT’s tariffs “to the extent applicable, ” however, was not altered. Ex. 6, ¶ 8.

         The 2012 Service Agreement was amended on October 29, 2015. Tr. 42:8-17; Ex. 7 (2015 Service Agreement). The 2015 Service Agreement is a two-page document that purports to modify several specific sections of the 2012 Service Agreement. For example, the choice of law provision was modified to state that “the laws of the Crow Creek Sioux Tribe and/or the laws of the State of South Dakota” shall apply. Ex. 7. The section detailing the services NAT would provide to Free Conferencing was also amended to state only that “[NAT] shall charge [Free Conferencing] for service in accordance with the provisions of its effective tariff for tariff services.” Ex. 7. And the section pertaining to the marketing fee was amended so that Free Conferencing received a flat 85% share of gross access revenue based on the traffic it generated. Ex. 7. Finally, the 2015 Service Agreement provides that “[a]ll other provisions” of the previous agreement remain in effect. Ex. 7.

         NAT filed its first interstate tariff with the FCC in August 2009 that became effective on September 15, 2009. Tr. 32:18-20. Relevant here is NAT’s third interstate tariff that NAT filed with the FCC in August 2011. Ex. 1. Carey Roesel, a telecommunications consultant and NAT’s expert witness, drafted and filed NAT’s third interstate tariff. Tr. 121:1-6. Roesel testified that he drafted NAT’s third interestate tariff to include “time-tested, standardized language” used by other LECs. Tr. 128:25; 129:1-3.

         NAT’s interstate tariff has a specific provision for “End User Access Service.” Ex. 1, § 4.1. That service applies to certain “end users who obtain local exchange service” under NAT’s “general and/or local exchange tariffs.” Ex. 1, § 4.1. A monthly billable rate of $6.45 for End User Access Service applies on a “per line or Trunk” basis. Ex. 1, § 4.1.2. Dr. Brian Staihr is a professor of economics at the University of Kansas. Tr. 359:16-18. Staihr worked previously in the telecommunications industry, and he testified as Sprint’s expert witness. Tr. 361:3-7. Staihr testified that receiving local access service is a necessary condition to receiving End User Access Service under § 4.1 of NAT’s interstate tariff. Tr. 372:153:8-10.

         NAT’s interstate tariff also states that NAT “will pay a percentage of its retail revenues to support the Universal Service Fund (USF).” Ex. 1, § 4.2. The tariff further provides that NAT will “pass-through the USF assessment to its customers” by billing a surcharge to those customers. Ex. 1, § 4.2. NAT’s third interstate tariff was necessary to address then-recent FCC decisions, such as Farmers II and Northern Valley. Tr. 34:14-18; Tr. 125:17-25; Tr. 127:16-18.^[2]

         Revisions to NAT’s third interstate tariff were made and subsequently filed with the FCC on July 16, 2014. Tr. 121:16-17; Ex 2. NAT’s tariff was again revised in part on August 13, 2014. Tr. 123:9-10; Ex. 3. The section pertaining to End User Access Service was not altered, however, until NAT’s tariff was revised on July 16, 2015. Tr. 124:18-22; Ex. 43 (adding the words “or via contract” to the end of the End User Access Service definition).

         Roesel also drafted NAT’s first intrastate tariff, and it was filed with the Crow Creek Sioux Tribal Utility Authority on November 4, 2011 (Tribal tariff). Tr. 123:20-25; Ex 4. Roesel explained that the Tribal tariff was filed voluntarily because the Tribal Utility Authority did not require it. Tr.142:14-17. He explained that section 5.2 of the Tribal tariff was drafted specifically to apply to high-volume entities like Free Conferencing. Tr. 143:17-24; Ex 4. § 5.2 (“Inbound Calling Service”). By contrast, section 5.1 of the Tribal tariff described a “basic local exchange offering.” Tr. 146:3-4; Ex. 4 § 5.1 (“Nationwide Calling Plan”). Although Roesel testified that § 5.2 applied to the services NAT billed Free Conferencing, he acknowledged that NAT originally represented to Sprint in a discovery response during the SDPUC proceeding that NAT provided Free Conferencing with local service under § 5.1. Tr. 184:2-12; Ex. 106. Staihr in his report used the service definition and applicable rates set forth in § 5.1 based on NAT’s representation. Tr. 373:3-6; Tr. 375:13-21 (explaining that he did not know § 5.2 was important until reading Roesel’s expert report on March 9, 2016). Staihr opined that no services under § 5.1 were provided to Free Conferencing. Tr. 373:7-9.^[3] Roesel testified that no charges were billed to Free Conferencing based on the service or rates described in § 5.1 of the Tribal tariff. Tr. 192:22-25.

         NAT’s Tribal tariff contains a provision for an “Individual Case Basis” or “ICB” agreement. See Ex. 4, § 8.1. The agreement must be offered “in writing and on a nondiscriminatory basis.” Ex. 4, § 8.1. Roesel explained that ICB provisions are common and that ICB agreements provide carriers with flexibility for how services are provided. Tr. 146:21-25; Tr. 147:1-2. Roesel was not consulted on any of the NAT-Free Conferencing service agreements. Tr. 158:13-15; Tr. 175:2-7. He opined that, nonetheless, the various NAT-Free Conferencing contracts were ICB agreements. Tr. 157:22-25; 158:1-4.^[4]

         Section 5.2 of the Tribal tariff details a calculation to assess a fee for the local exchange service. The calculation establishes a “DS0-equivalent basis” that NAT also refers to as a number of “ports” or “lines.” Tr. 153:11-14.^[5] But instead of using that calculation, NAT billed Free Conferencing based on a so-called “high water mark” methodology. Tr. 153:2-3. The “high water mark” was determined by looking at Free Conferencing’s highest level of line usage at any one point in time during a given month. Tr. 154:6-9. The “high water mark” is a different method of calculation from what is described in § 5.2. Tr. 202:13-21.

         Section 5.2 also describes separate “Transport Charges” and “Port Charges” that are assessed based on the DS0-equivalence calculation. Ex. 4, § 5.2. A “Usage Charge” is also assessed based on a customer’s total number of minutes of use during the month. Ex. 4, § 5.2. None of the rates described in § 5.2 of the Tribal tariff were billed to Free Conferencing. Tr. 185:3-7. Instead, NAT used the “high water mark” to establish the number of ports/lines that it charged Free Conferencing under the $6.45 “per line or Trunk” rate in § 4.1 of NAT’s interstate tariff. Tr. 153:7-10. According to Roesel, the arrangement used by NAT allowed NAT to generate Universal Service Fund contributions. Tr. 154:19-20. Roesel also opined that the $ 6.45 charge in § 4.1 of NAT’s interstate tariff was “apparently” also an “all-inclusive” rate. Tr. 159:21-23. Thus, according to Roesel, each of the various services that NAT provided to Free Conferencing under the NAT-Free Conferencing service agreements, such as power, Internet access, and rack space, was included within the $6.45 per line/port charge. Tr. 159:14-23. The service agreements, however, did not explicitly provide for such an arrangement. Tr. 187:8-14; Tr. 188:18-23.

         NAT began billing Free Conferencing for services in 2011, shortly after NAT’s third interstate tariff was filed with the FCC. Tr. 41:14-16. Shane Murphy provides accounting and billing services for NAT. Tr. 95:8-11; 96:14-22. Murphy testified that he prepared a spreadsheet each month that calculated the fees that Free Conferencing owed NAT. Tr. 97:12-14; Ex. 13. He testified that NAT established Free Conferencing’s fees by taking the “high water mark” and multiplying that number by $6.45. Tr. 98:4-9. The charge is described on the monthly invoices that were issued to Free Conferencing as “End User Fees.” See Ex. 12. The spreadsheet also contained a calculation for the USF contributions that NAT paid every month. Tr. 97:9-11; Ex. 13. The USF contribution was calculated based on the revenue that NAT received for “End User Fees” from Free Conferencing and multiplying that number by a percentage established quarterly by the FCC. Tr. 98:22-25; Tr. 99:1-5. Murphy explained that NAT used his spreadsheets to issue monthly invoices to Free Conferencing. Tr. 99:16-17. NAT has issued invoices to Free Conferencing and has billed Free Conferencing for “End User Fees” each month. See Ex. 12 (invoices beginning with January 2012). Although NAT paid USF contributions each month, NAT did not pass-through the USF charge to Free Conferencing until January 2016. Tr. 168:20-25; Tr. 169:1-6; Tr. 238:1-6; see Ex. 13 (last page).

         Under the NAT-Free Conferencing revenue sharing (or “market fee”) arrangement, NAT paid Free Conferencing roughly $1.6 million from the period of January 2012 to September 2015. Ex. 108. During the same period of time, NAT received from Free Conferencing approximately $340, 000 in fees. See Ex. 12.

         NAT seeks as damages $463, 210.50. Ex. 11. That figure is calculated by aggregating the invoices NAT sent to Sprint for switched access service from January 2012 until March 2016 and subtracting a credit of $56, 048.68. The credit was issued in January 2016 for traffic that was delivered to YakFree and improperly billed to Sprint. Tr. 105:25; Tr. 106:1-5; Tr. 290:1-2.

         LEGAL ...