United States District Court, D. South Dakota, Southern Division
MEMORANDUM OPINION AND ORDER
E. SCHREIER, UNITED STATES DISTRICT JUDGE.
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.
FINDINGS OF FACT
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:
is an interexchange carrier (IXC) that operates throughout the
United States. Docket 70 ¶ 9. Midco, a competitive local
exchange carrier (CLEC),  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.
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 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.
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.
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. A Class 5 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.
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.
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
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. 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.
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.
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
switch-here, the CenturyLink Tandem-and then routed onward to
a second switch for termination-here, the Sioux Falls Switch.
Docket 70 ¶ 16. Likewise, calls originating from the
second switch-here, the Sioux Falls Switch-are routed to the
first switch-here, the CenturyLink Tandem. Id.
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 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.
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.
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 trunk group as DEOTs and allowed Verizon to connect
directly to Midco's end-office 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.
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.
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 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.
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.
Midco and Verizon's Business Relationship
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 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. 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.
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.
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 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.
switched-access rates are contained in section 4.1 of the
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
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.
8.1 of the Agreement detailed the parties' dispute
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.
9 of the Agreement provided additional information on
resolving the parties' disputes:
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 . . . .
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.
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.
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 not install DEOTs. Tr. 203. Instead, Midco installed an
ATC trunk group to connect its tandem to Verizon's
network. Tr. 157-58.
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. 162-63. 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 call could
not be completed without the use of both end-office and
tandem switching functionality. Tr. 160.
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.
The Billing Dispute
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.
approved and paid Midco's invoices billed amounts-which
included the three service charges above-from 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.
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.
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 dispute and
decide to agree with Verizon's dispute or disagree and
send a dispute denial. Tr. 392.
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