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Midcontinent Communications v. MCI Communications Services, Inc.

United States District Court, D. South Dakota, Southern Division

July 2, 2019

MCI COMMUNICATIONS SERVICES, INC., d/b/a Verizon Business, 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.


         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 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 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. 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 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.

         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 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 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.

         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 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 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 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:

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 . . . .


         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.


         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 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. 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.

         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.

         Verizon 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.

         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 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 ...

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