Global NAPS v Verizon New England

Case Name: Global NAPS, Inc. v. Verizon New England, Inc.

Citation: 2010 WL 1713240

Facts: In order to promote competition, the Telecommunications Act (TCA) of 1996 requires local carriers to interconnect with each other’s networks. Carriers can voluntarily negotiate terms, but can ask state commissions for help. 47 U.S.C. § 252(a)-(b). These agreements, or ICAs, contain specific information on how the carriers will pay “reciprocal compensation” in which the carrier that initiates the call shares fees with the carrier terminating the call.

Verizon’s customers were dial-up internet users. Global NAPS, Inc. (hereafter GNAPS) customers were the Internet Service Providers that connected Verizon’s users to the Internet. In 2002, the two parties began renegotiating a new ICA for calls from Verizon’s Massachusetts customers to these ISPs. Because ISPs do not initiate calls, however, the traditional reciprocal agreement can produce windfall profits for ISPs. The FCC has long sought to rectify this problem. Additionally, GNAP exploited this imbalance by giving its ISP customers virtual phone numbers. These numbers do not always reflect the actual location of the number’s owner. Many apparently local calls were networked as long-distance calls. Verizon argued that it should not have to pay for these “non-local” calls. After much dispute – in which GNAPS refused to reimburse Verizon – Verizon terminated its service to GNAPS in 2006.

Procedural Posture: After arbitration, the Massachusetts Department of Telecommunications and Energy (DTE) sided with Verizon and ruled that GNAPS must be responsible for the long-distance calls. GNAPS sued in Federal District Court in Massachusetts, attempting to void the agreement, claiming that a 2001 FCC order pre-empted the Massachusetts DTE’s authority to decide rates for ISP traffic. The court ruled for Verizon and awarded over $57 million in damages. However, fearing that it could not collect on the judgment, Napster amended its complaint to name GNAPS subsidiaries and shareholders on a theory of alter ego liability. The court held all defendants jointly and severally liable for the judgment. This is the fourth in a series of appeals to the First Circuit from GNAPS. The first three appeals were unsuccessful.

Holding: For Verizon. The FCC order – although describing the ISP-bound traffic as “interstate” and “interexchange,” – was simply an attempt at explaining jurisdiction, not an excuse to rout long-distance calls through local networks. The FCC preempted only state regulation of local ISP traffic. The 1st Circuit said that “there is no doubt that GNAPS deliberately played fast and loose” with the court system in attempting to gain an unfair advantage. In addition, GNAPS failed to show that the damages awarded were excessive or that alter ego liability was improper. Finally, the court held that GNAPS’s primary bookkeepers had been dishonest about the status of its financial records.

Critical analysis: In reaching its conclusion, the Court found that the TCA was silent on whether state commissions can interpret and enforce ICAs or simply approve them. This question was left open, as the Supreme Court has not ruled on the issue. However, most circuits have held that state commissions have that authority. See, e.g., Sw. Bell Tel., L.P. v. Pub. Util. Comm'n, 467 F.3d 418, 422 (5th Cir.2006); e.spire Commc'ns, Inc. v. N.M. Pub. Regulation Comm'n, 392 F.3d 1204, 1207 (10th Cir.2004); Iowa Network Servs., Inc. v. Qwest Corp., 363 F.3d 683, 691-92 (8th Cir.2004); BellSouth Telecomms., Inc. v. MCImetro Access Transmission Servs., Inc., 317 F.3d 1270, 1277 (11th Cir.2003) (en banc); MCI Telecomms. Corp. v. Ill. Bell Tel. Co., 222 F.3d 323, 337-38 (7th Cir.2000). The FCC has also reached this conclusion. In re Starpower Commc'ns, LLC, 15 F.C.C.R. 11277, 11280 (F.C.C.2000). It remains to seen exactly how much leeway the courts will give these commissions in their efforts to guide the debate.

The Court, however, refused comment on GNAPS’ contention that parties must first ask state commissions to interpret ICAs.

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