The U.S. District Court in Massachusetts could hear both compulsory and permissive counterclaims filed by a telecommunications company in response to a federal suit to block enforcement of a state administrative order, the 1st U.S. Circuit Court of Appeals has found in a case of first impression.

The plaintiff argued that the counterclaims should be dismissed because they had no independent basis for federal jurisdiction.

But the 1st Circuit disagreed, finding that when Congress enacted the federal supplemental jurisdiction statute, 28 U.S.C. §1367, in 1990, it abolished the requirement of an independent jurisdictional basis for permissive counterclaims.

“There is subject matter jurisdiction over both claims because [§1367(a)] gives courts supplemental jurisdiction over compulsory and at least some permissive counterclaims,” Chief Judge Sandra L. Lynch wrote for the court. “[The defendant’s] counterclaims are sufficiently related to the underlying litigation within the test set forth in §1367(a) to fall under federal courts’ supplemental jurisdiction.”

The 1st Circuit also affirmed the U.S. District Court’s $57 million judgment for the defendant on the merits of its counterclaims.

The 48-page decision is Global NAPs, Inc. v. Verizon New England Inc.

‘Simple and understandable question’

Joshua Vitullo, a business litigator at Sheehan Vitullo in Boston, said the ruling signals that the 1st Circuit has abandoned the distinction between pendant and ancillary claims, replacing it with the “simple and understandable question” of whether a claim is sufficiently related to the other claims to be part of the same case or controversy.

In other words, said Vitullo, who was not involved in Global NAPs, “Does [the counterclaim] relate to the same common nucleus of operative facts?”

Vitullo also said he is hopeful that the ruling will result in a reduction of litigation costs through the consolidation of claims into single actions.

“Rather than having multiple cases in multiple fora, cases can [now] be brought before one judge, litigation costs can be shared, and litigants can be discouraged from using gamesmanship as a defense to properly brought cases,” he said.

Plaintiff’s counsel Andrew Good of Good & Cormier in Boston declined to comment, as did defense attorney Scott H. Angstreich of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, D.C.

Disputed charges

Plaintiff Global NAPs provides local phone numbers to Internet service providers so that dial-up Internet users can connect to the Web.

As of 2002, many of the Internet users got their telephone service through defendant
Verizon New England.

At that time, the plaintiff was allegedly receiving windfall profits because ISP customers typically received high volumes of long calls and — due to an apparent quirk in the law — their carriers, like the plaintiff, were entitled to substantial reciprocal-compensation fees from telephone providers like the defendant.

Amid those circumstances, a dispute arose over Global NAPs’ provision of “virtual NXX” phone numbers to its ISP customers. The numbers looked like local numbers to dial-up Internet users but were often located out of the user’s calling area. As a result, purportedly local calls were being networked as long-distance calls.

Accordingly, Verizon believed that it should be able to assess the plaintiff per-minute long-distance access charges for any of the “virtual NXX” calls.

Global NAPs disputed that, and the two parties’ efforts to resolve the issue by negotiating a new Interconnection Agreement, or ICA, were unsuccessful. The dispute wound up in arbitration before the Department of Telecommunications and Energy.

The DTE sided with Verizon, ordering the parties to adopt a new ICA that required Verizon to pay reciprocal fees for genuinely local calls and for Global NAPs to pay access charges when an ISP was actually located outside the Internet customer’s local area.

Global NAPs was also ordered to inform Verizon where its ISP customers were located so Verizon could properly bill the access charges.

The ICA took effect in January 2003, but Global NAPs spent the next three years fighting the ruling while refusing to pay access charges or give Verizon information about its ISP customers’ locations.

A month before the ICA went into effect, Global NAPs sued Verizon in U.S. District Court seeking to block enforcement of the DTE order, claiming that a 2001 Federal Communications Commission order preempted the DTE’s authority to decide rates for ISP traffic.

In January 2005, Global NAPs filed another suit against Verizon seeking payment for reciprocal charges that the phone company allegedly owed.

Verizon counterclaimed for the disputed access charges, alleging breach of the ICA.
Meanwhile, Verizon suspected that Global NAPs was transferring its assets to avoid paying a judgment and, alleging alter ego liability and disregard of the corporate form, added a permissive counterclaim to pierce Global NAPs’ corporate veil.

U.S. District Court Judge Rya W. Zobel ultimately granted Verizon a $57 million judgment for unpaid access fees under the ICA. Zobel also ruled in favor of Verizon on the corporate-veil issue.

Global NAPs appealed, arguing that the U.S. District Court had no jurisdiction to enforce the ICA or to hear Verizon’s permissive counterclaim seeking to pierce Global NAPs’ corporate veil.

Federal jurisdiction

The 1st Circuit rejected the plaintiff’s argument that the U.S. District Court lacked jurisdiction over the defendant’s counterclaim to enforce the ICA.

Addressing the plaintiff’s argument that the defendant improperly enforced the ICA in
federal court rather than first asking the DTE to do so, the court said it was unnecessary to rule on that issue because, under §1367, the court had clear subject-matter jurisdiction over the defendant’s counterclaim in the first place.

“Verizon’s counterclaim is more than sufficiently related to [the plaintiff’s] complaint,” Lynch said. “Both parties’ claims ultimately arise from a dispute over the same agreement and involve the same basic factual question: what fees the carriers owe each other.”

Meanwhile, the judge said that even if, hypothetically, there was merit to the plaintiff’s argument that the defendant had failed to exhaust its administrative remedies, the plaintiff had waived it.

Global NAPs “did not raise this argument until nearly two years after Verizon filed its counterclaim, and only after [the plaintiff’s] other arguments had been rejected,” Lynch said. “It would be inequitable to allow [the plaintiff] to sandbag its opponent at this late stage, and it would disserve judicial economy.”

The 1st Circuit also rejected the plaintiff’s argument that the federal court lacked jurisdiction to hear the defendant’s counterclaim of alter ego liability and disregard of the corporate form.

According to the plaintiff, because the claim was, at most, a permissive counterclaim, it lay outside the federal court’s supplemental jurisdiction and needed an independent basis to be heard.

“We hold that we have supplemental jurisdiction over this counterclaim, regardless of
whether it is compulsory or permissive,” Lynch said.

In so ruling, the judge conceded that some caselaw from before §1367 was enacted suggested that federal courts could only exercise supplemental jurisdiction over compulsory counterclaims.

But when §1367 was enacted in 1990, Lynch said, it did not reference the terminology of “permissive” or “compulsory.” Instead, it gave federal courts supplemental jurisdiction over all claims that were part of the same Article III “case” or “controversy,” she said.
“Thus, §1367 abolishes the conceptual framework underpinning the old compulsory-permissive distinction,” said Lynch, noting that two other federal circuits and “virtually all commentators” had adopted the same interpretation.

The 1st Circuit then found that the counterclaim was indeed part of the same Article III case or controversy as the underlying litigation.

“This litigation involves what fees the parties owe each other and involves efforts by both parties to collect claimed fees from a discrete and common body of calls,” Lynch said. “[The counterclaim seeking to pierce the corporate veil] was part of Verizon’s effort to collect those fees when [Global NAPs] attempted to avoid payment.”

Other courts have recognized supplemental jurisdiction over claims to pierce the corporate veil as well, the judge said, citing a similar ruling from the 7th Circuit.
There are “no due process constraints on the exercise of jurisdiction” in this case, Lynch added, pointing out that the case had already consumed years of litigation and that the federal District Court was familiar with the myriad of complicated issues involved.

Finally, the 1st Circuit affirmed the lower court’s judgment for Verizon on the merits in both counterclaims.