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Paetec Communications, Inc. v. MCI Communications Services

April 26, 2010


The opinion of the court was delivered by: Dalzell, J.


Plaintiffs*fn1 have brought this action against defendants MCI Communications Services, Inc., d/b/a Verizon Business Services and Verizon Global Networks, Inc. (collectively, "Verizon"). Specifically, PAETEC claims that: (1) Verizon failed to pay PAETEC for telecommunications charges under PAETEC's federal tariffs in violation of federal law, (2) Verizon has failed to pay PAETEC for telecommunications charges under PAETEC's state tariffs in violation of state law, (3) Verizon was unjustly enriched, and defendants should pay at least (4) quantum meruit. PAETEC also seeks a declaratory judgment that it lawfully assessed, and may continue to assess, the switched access charges at issue.

Verizon counterclaims that PAETEC's charges were in excess of those permitted under federal law and the terms of its own federal tariff. Verizon seeks a declaratory judgment that it is not obliged to pay PAETEC under PAETEC's federal tariff for the amounts Verizon has disputed.

PAETEC has moved for summary judgment to require Verizon to pay all tariff charges or, if we deem the tariffs to be unlawful, to require Verizon to at least pay the benchmark rate or the reasonable value of its access services. Verizon has moved for partial summary judgment on liability.

I. Factual Background*fn2

PAETEC is a landline telephone company that provides local telephone service to consumers and businesses. Stip. at ¶ 1. A telephone carrier such as PAETEC that provides local exchange service is known as a local exchange carrier ("LEC"). Stip. at ¶ 2. A carrier that transmits long-distance calls between the networks of two LECS is commonly referred to as an "interexchange carrier" or "IXC". Stip. at ¶ 3. Verizon is, among other things, an IXC. Stip. at ¶ 8. In the telecommunications industry, switched access service (or access service) allows an IXC to access an LEC's network in order to "originate or terminate"*fn3 long-distance calls to and from "end-users" (parties who make or receive telephone calls). Stip. at ¶ 4. PAETEC permits long-distance carriers to access its network in order to originate or terminate long-distance telephone calls involving PAETEC's end-user customers. Stip. at ¶ 5.

There are two types of LECs. The original, established carriers, who existed before Congress enacted the Telecommunications Act of 1996 ("TCA" or the "1996 Act")(which amended the Federal Communications Act of 1934), are known as incumbent LECs ("ILECs"). LECs who entered the marketplace after the 1996 Act took effect compete with ILECs and each other and are known as competitive LECs ("CLECs"). Stip. at ¶ 6. PAETEC is a CLEC. Stip. at ¶ 7. ILECs and CLECs compete for end-user customers. Stip. at ¶ 94.

For the period at issue -- roughly, from the middle of 2006 until now -- Verizon delivered traffic to PAETEC end-users over PAETEC's network, or received traffic from PAETEC's end-users over PAETEC's network. PAETEC permitted Verizon to access its network to complete long-distance calls to PAETEC's end-user customers, and to originate long distance calls that PAETEC's end-user customers place. Stip. at ¶ 12. The rates, terms, and conditions for the interstate switched access services PAETEC offers (long distance calls that originate in one state and terminate in another state) are contained in PATEC's FCC Tariff No. 3 filed with the FCC. Stip. at ¶ 13. The rates, terms, and conditions on which local exchange carriers offer intrastate switched access services are contained in tariffs filed with the relevant state public utility commissions. Stip. at ¶ 14.

The traffic at issue in this case -- for which Verizon has disputed PAETEC's invoices -- is limited to interstate traffic where the long distance call is destined for, or originated by, a PAETEC end-user customer. Verizon also withheld payment of invoices for intrastate switched access, but it did so solely to recover what it viewed as prior overpayments to PAETEC for PAETEC's invoices for interstate switched access service. Verizon does not dispute the merits of any of PAETEC's intrastate charges. Stip. at ¶ 15.

Unlike an ILEC, which typically uses a "hub and spoke" arrangement of switches that serves a relatively smaller geographic area, PAETEC uses a single switch that branches out both in long loops (which connect the CLEC's switch to end-users) to end-users over a wide geographic area, and also branches out in long lines ("trunks") to multiple ILEC tandems, to deliver access services to IXCs. Stip. at ¶ 43. PAETEC's network serves a geographically dispersed and specialized customer base (medium-sized businesses). Stip. at ¶ 44. Compared to a typical ILEC network, PAETEC uses fewer switches and longer transport lines to serve larger geographic areas. A single PAETEC switch connects to end-users spread over a wider geographic area than an ILEC end-office switch serving the same general area. Stip. at ¶ 45.

PAETEC does not own or operate any tandem switches (which route calls between end-office switches and do not connect directly to end-user customers' premises), and when Verizon routed the traffic at issue to PAETEC, although some of the traffic went through an LEC's tandem switch, PAETEC did not switch that traffic twice before delivering it to a PAETEC end-user customer. Stip. at ¶¶ 29, 46-47, Def. Ans. and Counterclaim at ¶ 27. When Verizon delivers traffic to PAETEC over a direct connection, the traffic is not routed through a tandem switch before PAETEC delivers the traffic to its end-user customers. Stip. at ¶ 49.

PAETEC's FCC Tariff No. 3 sets forth the rates, terms, and conditions for the interstate switched access services that PAETEC offers. From July 5, 2006 to the present, Rate Attachment B to PAETEC's FCC Tariff No. 3 sets forth rates for Switched Access Service ("SWAS") and Switched Access Service (Direct Connect)("SWAS-DC"). Stip. at ¶ 63. In or about June of 2006, PAETEC concluded that the "CLEC Benchmark" allowed a CLEC to charge a rate for interstate switched access service that was equal to the sum of all of the applicable ILEC rate elements, including, among other things, tandem switching. Stip. at ¶ 65.

The "CLEC Benchmark" is the maximum permissible tariffed rate that can be charged under FCC rules for CLEC interstate switched access service. Stip. at ¶ 112. PAETEC amended its FCC Tariff No. 3, effective July of 2006 (the "July 2006 Amendment"), the effect of which was to charge Verizon a composite, aggregate rate for SWAS and SWAS-DC services. The SWAS rate applied if PAETEC provided an IXC access to its local network through an indirect connection (by routing through another LEC's tandem switch); the SWAS-DC rate applied when the customer or IXC directly connected to PAETEC's switch. Stip. at ¶ 68.

Although the July 2006 Amendment's composite rate did not include a charge for "tandem switching", when PAETEC amended the tariff again the next month, it increased the composite rates for SWAS and SWAS-DC service to include the price of the tandem switching rate element. Stip. at ¶¶ 69, 74-75. Thus, PAETEC increased its SWAS-DC rates so that they equaled the sum of the ILECs' "local switching"*fn4 rate element plus the ILECs' "tandem switching" rate element. Stip. at ¶ 75. Since July 5, 2006, PAETEC has charged its SWAS rate for situations where the IXC connects to PAETEC's switch through an ILEC tandem. Since July 5, 2006, PAETEC has charged its SWAS-DC rate in situations where the IXC directly connects to PAETEC's switch without connecting through an ILEC tandem. Stip. at ¶ 76. No PAETEC invoice for interstate switched access services where PAETEC's end-users received or originated the calls, and issued to Verizon after PAETEC's July 2006 Amendment, contained a separate charge for the tandem switching. Stip. at ¶ 77. Since the July 2006 Amendment, PAETEC has billed a composite aggregate charge for SWAS and SWAS-DC without breaking out the individual rate elements. Stip. at ¶ 78. All of the calls at issue here were routed to PAETEC's end-user customers over a single PAETEC switch. Stip. at ¶¶ 11-12, 43, 46-49. To the extent that a second LEC switch was involved in routing the calls, that switch was a tandem switch owned by an ILEC. Id.

This language has been in PAETEC's tariff in its current form since April 25, 2006:

All bills are presumed accurate, and shall be binding on the Customer, and such Customer shall be deemed to have waived the right to dispute the charges unless written notice of the disputed charge(s) is received by the Company within 90 days of the invoice date listed on the bill. To be effective, the written notice of the dispute must contain sufficient information to enable the Company to investigate the dispute, including the account number under which the bill has been rendered, the date of the bill, and the specific items on the bill being disputed.

Stip. at ¶ 97. In questioning PAETEC's invoices and withholding payment, Verizon disputes whether the amount PAETEC charged for interstate switched access services was in compliance with what Verizon calculated should have been charged under the CLEC Benchmark. Stip. at ¶ 102. The Network Financial Operations Group at Verizon has continuously existed since January of 2006, and has created, and keeps up to date, charts that contain the composite rate that, pursuant to Verizon's calculations, is the maximum a CLEC can tariff consistent with the applicable FCC regulations. Verizon then compares that calculated rate with the rate a CLEC, like PAETEC, charged, to determine whether the CLEC's rate exceeds the maximum rate a CLEC can tariff. Stip. at ¶ 104.

On October 10, 2006, Verizon raised questions about PAETEC's SWAS rates. Verizon did not file a dispute with PAETEC at that time. Stip. at ¶ 105. PAETEC responded the next day. Stip. at ¶ 106. Between July 2006 and May 2008, Verizon paid PAETEC's invoices for its SWAS and SWAS-DC rates. Stip. at ¶ 110. In the course of discovery, PAETEC was unable to determine, and could find no evidence of, whether it provided Verizon with a spreadsheet prior to this litigation showing how PAETEC calculated the SWAS or SWAS-DC rates it charged Verizon starting in July of 2006. Stip. at ¶ 114.

In mid-2008, Verizon decided to dispute the rate differential between the amount PAETEC charged and the amount that Verizon calculated should have been charged under the CLEC Benchmark. Stip. at ¶ 115. Verizon first disputed PAETEC's charges for interstate switched access service in June of 2008 when it disputed charges related to Billing Account Number ("BAN") 4716D6963. This particular BAN covered charges PAETEC assessed for calls delivered to (or originated by) PAETEC customers in Maryland. Stip. at ¶ 116. In determining whether to dispute a CLEC's invoice, Verizon looks to see whether the CLEC routes the traffic through one or two switches before delivering the traffic to the CLEC's end-user where the CLEC's rate includes an amount equal to that which an ILEC would charge for tandem switching. Stip. at ¶ 118.

Verizon argues that PAETEC has been charging it for tandem switching and transport between a tandem switch and PAETEC's end-office switching, even though PAETEC is not performing tandem switching and, in some cases, is not performing any (or all) of the transport. Counterclaim at ¶ 21. Verizon further alleges that even if PAETEC were providing the interstate switched access services for which it purports to bill, PAETEC is charging more for those services than is allowed under the terms of its federal tariff and the applicable FCC rules capping the tariffed interstate access charge rates of CLECs like PAETEC.

Id. at ¶ 23.

PAETEC contends that the FCC allows CLECs to charge for the complete access service without regard to the individual components of the connections. PAETEC claims that the amount that Verizon has withheld in interstate and intrastate switched access tariffs is $4.9 million and counting. Compl. at ¶ 31. In disputing PAETEC's invoices, Verizon calculated the dollar value of the pending dispute as the difference between what PAETEC charged for interstate switched access services and what Verizon calculated PAETEC was permitted to charge under the CLEC Benchmark. Stip. at ¶ 57. Verizon claims that PAETEC has overcharged it by more than $5.3 million. Counterclaim at ¶ 24.

The crux of this case turns on whether the FCC allows CLECs to charge for the equivalent of tandem switching even though CLECs are not using their own tandem switches to connect IXCs to their end-users, or, in the case of direct connect access services, using no tandem switch at all.

PAETEC argues in its motion for summary judgment that

(1) Verizon should have to pay all tariff charges up to the date of an adverse decision because PAETEC's tariffs are conclusively "deemed lawful", (2) PAETEC is entitled to summary judgment on all claims because PAETEC's tariff complies with the Benchmark, (3) PAETEC is entitled either to the Benchmark rate or the reasonable value of its access services, (4) if this Court determines there are unresolved telecommunications policy issues concerning calculation of the Benchmark, then we should sever and refer the issue of the prospective application of PAETEC's tariff to the original jurisdiction of the FCC, but still grant PAETEC final summary ...

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