United States Court of Appeals
For the First Circuit
Nos. 09-1308, 09-1309
GLOBAL NAPS, INC.,
Plaintiff/Counterclaim Defendant, Appellant,
v.
VERIZON NEW ENGLAND INC. d/b/a VERIZON MASSACHUSETTS,
Defendant/Counterclaim Plaintiff, Appellee,
MASSACHUSETTS DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY; PAUL
B. VASINGTON, in his capacity as Commissioner; JAMES CONNELLY, in
his capacity as Commissioner; W. ROBERT KEATING, in his capacity
as Commissioner; DEIRDRE K. MANNING, in her capacity as
Commissioner; and EUGENE J. SULLIVAN, JR., in his capacity as
Commissioner.
Defendants,
v.
GLOBAL NAPS NEW HAMPSHIRE, INC.; GLOBAL NAPS REALTY, INC.; GLOBAL
NAPS NETWORKS, INC.; FERROUS MINER HOLDINGS, LTD.; and FRANK
GANGI,
Counterclaim Defendants, Appellants,
CHESAPEAKE INVESTMENT SERVICES, INC.; 1120 HANCOCK STREET, INC.,
321 HEATH STREET REALTY TRUST; CJ3, INC.; and RJ EQUIPMENT, INC.,
Counterclaim Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Lynch, Chief Judge,
Boudin and Howard, Circuit Judges.
Andrew Good with whom Philip Cormier, Good & Cormier, Joel
Davidow, Kile Goekjian Reed & McManus PLLC, Eric Osterberg, and Fox
Rothschild LLP were on brief for appellants/counterclaim
defendants.
Scott H. Angstreich with whom Gregory G. Rapawy, Kellogg,
Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Robert L. Weigel,
Jason W. Myatt, Gibson, Dunn & Crutcher LLP, Richard P. Owens,
Verizon New England Inc., Paul J. Larkin, Jr., and Verizon
Communications Inc. were on brief for appellee/counterclaim
plaintiff.
James C. Schroeder, Christian F. Binnig, Hans J. Germann,
Stephen Sanders, and Mayer Brown LLP were on brief for amici curiae
AT&T ILEC Companies in support of appellee/counterclaim plaintiff.
April 29, 2010
LYNCH, Chief Judge. Global NAPs, Inc. (GNAPs) appeals
from entry against it of a judgment for $57,716,714 for access
charges that GNAPs owed but failed to pay Verizon New England Inc.
(Verizon) for services Verizon provided between 2003 and 2006.
Concerned that GNAPs could not pay a judgment, Verizon also
successfully brought counterclaims alleging alter ego liability and
disregard of the corporate form against GNAPs; its owner, Frank
Gangi; and several GNAPs affiliates. These defendants appeal from
the district court's assertion of federal jurisdiction and grant of
default judgment, which holds Gangi and the affiliates jointly
liable for the sum GNAPs owes. We affirm.
In an issue of first impression for this court, we hold
that 28 U.S.C. § 1367, enacted in 1990, gives federal courts
supplemental jurisdiction over both compulsory and at least some
permissive counterclaims. This alters this circuit's former rule,
adopted before the enactment of § 1367, that required permissive
counterclaims to have an independent basis for jurisdiction. See
McCaffrey v. Rex Motor Transp., Inc., 672 F.2d 246, 248 (1st Cir.
1982). Our ruling brings us into line with the Second and Seventh
Circuits, as we describe below. Jones v. Ford Motor Credit Co.,
358 F.3d 205, 210-14 (2d Cir. 2004); Channell v. Citicorp Nat'l
Servs., Inc., 89 F.3d 379, 384-87 (7th Cir. 1996).
In 2002 the Massachusetts Department of
Telecommunications and Energy (DTE) ruled that GNAPs must pay long-
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distance access charges to Verizon whenever ISP traffic is actually
routed outside the caller's local area, regardless of the phone
number the internet user dialed. GNAPs fought that ruling and did
not pay any of those charges. Verizon terminated its service to
GNAPs in 2006.
This is GNAPs' fourth appeal in a series of disputes
between GNAPs and Verizon, which arose from GNAPs' efforts to avoid
the DTE's ruling. See Global NAPs, Inc. v. Verizon New England,
Inc. (GNAPs IV), 489 F.3d 13, 21-25 (1st Cir. 2007) (affirming
release of security GNAPs posted to obtain an injunction pending
appeal after the injunction was vacated); Global NAPs, Inc. v.
Verizon New England, Inc. (GNAPs III), 444 F.3d 59, 71-75 (1st Cir.
2006) (holding a 2001 FCC order did not preempt the state DTE's
authority); Global NAPs, Inc. v. Mass. Dep't of Telecomm. & Energy,
(GNAPs II), 427 F.3d 34, 43-49 (1st Cir. 2005) (holding the
Massachusetts DTE was not bound under the Full Faith and Credit
Clause to a Rhode Island agency's interpretation of the effect of
an FCC order on GNAPs' and Verizon's Rhode Island agreement);
Global NAPs, Inc. v. Verizon New England, Inc. (GNAPs I), 396 F.3d
16, 18-19 (1st Cir. 2005) (holding GNAPs could not opt to use an
agreement it had with Verizon in a different state after undergoing
arbitration before the DTE).
GNAPs has appealed here again on a number of arguments,
which challenge federal jurisdiction, the liability finding, and
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the amount of the damages assessed. We reject GNAPs' first
argument, that it cannot be liable for any charges imposed pursuant
to the DTE order because a 2008 Federal Communications Commission
(FCC) order preempts the DTE's 2002 decision. The 2008 order is
not materially different on this preemption issue from an earlier
order, which we held did not preempt the DTE. GNAPs III, 444 F.3d
at 69-75.
We also reject GNAPs' challenges to judgments against it
on two of Verizon's counterclaims, one to enforce the DTE's order
and recover long-distance access charges and the other to pierce
GNAPs' corporate veil and hold Gangi and GNAPs' affiliates jointly
liable. We reject the argument of all defendants that the district
court lacked jurisdiction over these counterclaims. There is
subject matter jurisdiction over both claims because 28 U.S.C. §
1367(a) gives courts supplemental jurisdiction over compulsory and
at least some permissive counterclaims. Verizon's counterclaims
are sufficiently related to the underlying litigation within the
test set forth in § 1367(a) to fall under federal courts'
supplemental jurisdiction. We also reject GNAPs' argument that
Verizon first had to ask the DTE to enforce its order before suing
in federal court because GNAPs waived this exhaustion argument.
Finally, we affirm judgment on both counterclaims. We
affirm the district court's calculation of damages GNAPs owes
Verizon for failing to pay access charges under the DTE's order.
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We hold the district court did not abuse its discretion by granting
default judgment on the claim to pierce GNAPs' corporate veil as a
discovery sanction against GNAPs, Gangi, and three GNAPs
affiliates: Global NAPs Networks, Inc. (GNAPs Networks), Global
NAPs Realty (GNAPs Realty), and Global NAPs New Hampshire (GNAPs
New Hampshire) (collectively, the GNAPs companies). Evidence these
defendants committed misconduct and spoliation was compelling. And
we affirm that collateral estoppel barred GNAPs' holding company,
Ferrous Miner Holdings, Ltd. (Ferrous), from challenging these
discovery-misconduct findings.
I.
Some pertinent background information, setting up the
issues in this appeal, may be helpful. Our prior decisions give
further background, and we assume familiarity with them.
A. The Telecommunications Act and Interconnection Agreements
The Telecommunications Act of 1996 (TCA), now over a
decade old, has promoted greater competition in the
telecommunications industry. See GNAPs II, 427 F.3d at 36. It
requires local carriers to "interconnect" with each other's
networks, pursuant to interconnection agreements (ICAs). Id. at
36-37; see also 47 U.S.C. §§ 251(a), 252. Carriers can voluntarily
negotiate terms and, after an impasse, can ask state commissions to
set terms in binding arbitration. 47 U.S.C. § 252(a)-(b).
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Those ICAs must specify how the carriers will share fees
from local calls. Id. § 252(a)(1). Section 251(b)(5) requires
carriers to pay "reciprocal compensation" for local calls, in which
the carrier for the customer making the call shares fees with the
carrier that terminates the call. For long-distance calls (known
as "interexchange" traffic), in contrast, the long-distance carrier
pays "access charges" to the carriers that originated and
terminated the call. See In the Matter of Implementation of the
Local Competition Provisions in the Telecommunications Act of 1996
(Local Competition Order), 11 F.C.C.R. 15499, 16012-14 (1996)
(distinguishing local and interexchange fees).1
The TCA sets some federal requirements for all ICAs, 47
U.S.C. § 251(b)-(c), but leaves some room for state regulation.
For example, carriers must submit all ICAs--even those negotiated
privately--to state commissions, which can require that ICAs meet
local regulations. See id. § 252(e). If parties undergo
arbitration, the TCA somewhat limits state commissions' discretion
to set terms. See id. § 252(b)-(d). Carriers may ask a federal
court to review whether a state commission's decision under § 252
conforms to the TCA. Id. § 252(e)(6).
1
The FCC determined in 1996 that reciprocal compensation
under § 251(b)(5) applies only to local calls and ruled that long-
distance carriers still must pay access charges, as they did before
the TCA. See Local Competition Order, 11 F.C.C.R. at 16013; see
also GNAPs III, 444 F.3d at 63.
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B. Factual Background
At issue in this case is what charges Verizon and GNAPs
owe each other from dial-up internet traffic between some of their
customers. For our purposes, Verizon's customers were dial-up
internet users; GNAPs' customers were the ISPs that connected
Verizon's customers to the internet. Because dial-up service uses
telephone lines, these calls were networked like a phone call. A
Verizon customer's modem dialed a phone number belonging to GNAPs'
ISP customer. The ISP's server equipment "answered" that call and
connected the user to websites. In early 2002, GNAPs and Verizon
began renegotiating a new ICA for calls from Verizon's
Massachusetts customers to these ISPs.
ISP calls do not fit the traditional reciprocal-
compensation scheme and can produce windfall profits for ISPs'
carriers, like GNAPs. ISPs receive many, long calls, entitling
their providers to large reciprocal-compensation fees from the
internet customer's carrier (here, Verizon). But ISPs do not make
calls, defeating the reciprocal arrangement. The FCC has long
sought a solution to this problem. See Core Commc'ns, Inc. v. FCC,
592 F.3d 139, 141-43 (D.C. Cir. 2010) (describing that history).
GNAPs further exploited this imbalance by giving its ISP
customers virtual NXX (VNXX) phone numbers. Unlike normal numbers,
VNXX numbers do not reflect the actual location of the number's
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owner.2 GNAPs gave its ISP customers VNXX numbers that would
appear local to the internet user, Verizon's customers. But the
ISP was often in fact located out of the internet user's calling
area. In other words, apparently local calls were often networked
as long-distance calls.
GNAPs has argued to the DTE3 and in court that VNXX
numbers that appear local--even if the ISP is actually located
elsewhere--are subject to reciprocal compensation. Verizon has
argued that it should be able to charge access charges and not have
to pay reciprocal compensation to any calls that are routed to an
ISP outside a Verizon customer's local area.
On December 12, 2002, after arbitration, the
Massachusetts DTE sided with Verizon It ordered the parties to
adopt an ICA requiring them to pay reciprocal fees for genuinely
local calls and GNAPs to pay access charges when an ISP was
actually located outside the internet customer's local area. The
DTE ordered GNAPs to inform Verizon where its ISP customers were
located so Verizon could properly bill GNAPs.
2
Carriers normally determine the location of call
participants by the second string of three digits in their phone
numbers, called the NXX. The NXX corresponds to the physical
location of a "switch" that routes a call. The switch is located
near the owner of the phone number and thus can "serve[] as [a]
prox[y] for geographic location." GNAPs III, 444 F.3d at 64.
3
The DTE's name was recently changed to the Department of
Telecommunications and Cable. For simplicity, we use DTE.
-8-
This ICA went into effect on January 27, 2003, and
Verizon began billing GNAPs. For three years, GNAPs fought the
DTE's ruling and did not pay access charges. It also did not give
Verizon information about its ISP customers' locations. Verizon
terminated its service to GNAPs in April 2006. This appeal
concerns Verizon's efforts to collect three years of overdue access
charges.
II.
GNAPs sued Verizon in federal district court in
Massachusetts on December 30, 2002. After GNAPs litigated and lost
an argument in 2005 that it could opt into a different ICA and
avoid the DTE's order, see GNAPs I, 396 F.3d at 24-28, the parties
turned to the meat of GNAPs' lawsuit. GNAPs claimed that a 2001
FCC order preempted the DTE's authority to decide rates for all ISP
traffic, including VNXX interexchange traffic, relying on In re
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996 (ISP Remand Order), 16 F.C.C.R. 9151
(2001).
On April 11, 2006, this court disagreed with GNAPs and
held that the ISP Remand Order only clearly regulated local
traffic. GNAPs III, 444 F.3d at 71-75. Applying the presumption
against preemption, we ruled the ISP Remand Order did not govern
interexchange VNXX traffic and upheld the DTE's order. Id.
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Earlier, on January 12, 2005, GNAPs had filed a separate
lawsuit to obtain payment from Verizon for charges GNAPs said
Verizon owed it. GNAPs claimed that the ISP Remand Order and
another, related FCC order4 imposed reciprocal rates of $0.0007 on
all ISP traffic. GNAPs sought its purported share of reciprocal
fees from Verizon. The district court consolidated this suit with
GNAPs' lawsuit claiming preemption.
Verizon responded to GNAPs' 2005 lawsuit by
counterclaiming for the access charges GNAPs owed under the DTE's
2002 order. Verizon claimed breach of contract, specifically of
the ICA. In September 2006, after GNAPs had litigated and lost its
preemption claim, the district court granted Verizon's motion for
judgment on the pleadings on GNAPs' 2005 complaint.
That left Verizon's counterclaim for breach of the ICA.
The parties began conducting discovery on GNAPs' liability and
potential damages on that claim in late 2006. It was not until
June 2007, however, that GNAPs argued for the first time that
Verizon had to bring its claim to enforce the ICA to the state
commission (here, the DTE) before suing in federal court. The
district court rejected that argument.
4
See Petition of Core Communications for Forbearance under
47 U.S.C. § 160(c) from Application of the ISP Remand Order, 19
F.C.C.R. 20179, 20184-86 (2004) (refusing to forbear enforcing the
rate cap set in the ISP Remand Order and not mentioning or
expressly changing the ISP Remand Order's preemption provisions).
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On November 5, 2008, the FCC issued a new order
addressing its authority to regulate ISP traffic, In re
Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, Developing a Unified Intercarrier
Compensation Regime, Intercarrier Compensation for ISP-Bound
Traffic (Second Remand Order), 24 F.C.C.R. 6475 (2008). That order
did not arise out of this dispute but addressed different issues.
The district court, on November 18, 2008, rejected GNAPs' argument
that the Second Remand Order made the clear statement of preemption
that the ISP Remand Order had lacked earlier and preempted the DTE
order.
By late 2008, the district court was also ready to
resolve Verizon's counterclaim to enforce the ICA. It concluded
that this court's decision rejecting GNAPs' original preemption
claim "established Verizon's right to collect . . . access charges"
and that "the only question [wa]s the amount due."5 As we explain
in more detail below, to determine that amount, the court had to
resolve how many minutes of VNXX calls were subject to the DTE's
order that GNAPs pay access charges--meaning the court had to
exclude any local calls subject to reciprocal compensation and any
calls made to GNAPs customers outside Massachusetts and not under
5
GNAPs had dismissed all other claims it raised in its
earlier lawsuit to obtain final judgment and appeal the court's
rejection of its preemption argument based on the ISP Remand Order.
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the DTE's order. The court then had to decide what rate per minute
GNAPs owed for access charges and any interest.
The parties agreed how many total minutes of VNXX traffic
were at issue. The court applied judicial estoppel against GNAPs
on two key issues, the rate per minute of access charges and the
percentage of GNAPs customers that were in Massachusetts and
subject to the DTE's order. The court held GNAPs was bound to
representations it had made on both issues when seeking an
injunction while litigating its preemption claim in 2005.
The district court resolved the final two issues--the
percentage of calls that were local and the amount of interest--on
summary judgment. The parties' experts had originally agreed on
the percentage of local traffic. The court rejected GNAPs'
expert's tardy "revised" report, filed one week before trial, which
estimated a higher percentage of local traffic, as well as a
Verizon employee's e-mail that GNAPs insisted created an issue of
fact. The court held the ICA set interest rates for overdue
charges. It granted judgment for Verizon for $57,716,714.
Well before obtaining judgment, Verizon feared that GNAPs
would not pay any judgment it owed. By 2006 it began to suspect
that GNAPs was transferring its assets to avoid paying a judgment.
The district court permitted Verizon to attach GNAPs' assets in
September 2006. Verizon says it discovered there was less than $1
million in GNAPs' name.
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Verizon amended its counterclaim on December 4, 2006,
alleging that GNAPs commingled and hid its assets. The amended
counterclaim added to count one, which again claimed breach of the
ICA, two new counts: count two claimed fraudulent transfer of
assets and count three claimed alter ego liability and disregard of
the corporate form.
The counterclaim added new defendants whom Verizon
alleged should share GNAPs' liability. Three GNAPs affiliates
became defendants: GNAPs New Hampshire, which acts as the "banker"
for all GNAPs companies, receiving and disbursing their money so
they can pay their bills; GNAPs Networks, which manages GNAPs'
infrastructure; and GNAPs Realty, which holds GNAPs' property and
leases. The amended counterclaim also added as defendants Ferrous,
a holding company that owns all of these entities, and Frank Gangi,
founder and sole shareholder of Ferrous.6 All of these companies,
including GNAPs, are pass-through entities that pay their income to
their shareholder, Frank Gangi, who pays their taxes.
The defendants unsuccessfully moved to dismiss counts two
and three as permissive counterclaims that needed, and lacked, an
independent basis for federal jurisdiction. Meanwhile, the
defendants resisted Verizon's requests for discovery of their
6
Verizon included two other defendants and added several
others in a second amended complaint filed in 2008. The district
court did not hold these defendants responsible for GNAPs'
liabilities. Verizon does not challenge that decision and those
defendants are not parties to this appeal.
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financial records. Beginning on December 1, 2006, the district
court issued a series of orders rejecting GNAPs' repeated efforts
to block discovery.
Evidently GNAPs and the other defendants were resisting
discovery orders in a Connecticut district court as well. On July
1, 2008, that court granted default judgment against GNAPs, the
GNAPs companies, and Ferrous for willful discovery violations. S.
New England Tel. Co. v. Global NAPs, Inc. (SNET), 251 F.R.D. 82, 96
(D. Conn. 2008). The SNET court found substantial evidence the
defendants had concealed and destroyed evidence. Id. at 90-95.
In October 2008, Verizon moved for entry of default
judgment as a sanction for discovery violations by all defendants.
After a three-day evidentiary hearing in December, the district
court granted default judgment on count three, which alleged alter
ego liability and disregard of the corporate form, against GNAPs,
Gangi, and the GNAPs companies. It also held Ferrous was
collaterally estopped from disputing the findings in the SNET
decision and granted default judgment on count three against
Ferrous as well. The court held all counterclaim defendants
jointly and severally liable with GNAPs for the full judgment
amount.
The defendants appeal.
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III.
A. The FCC's 2008 Second Remand Order Does Not Preempt or
Establish that the FCC's 2001 Order Preempted the DTE's
Authority to Impose Rates for Interexchange ISP Traffic
GNAPs argues that the FCC's 2008 Second Remand Order7
establishes that the 2001 ISP Remand Order preempted intercarrier
compensation for all ISP-bound traffic and so preempts the DTE's
2002 decision that GNAPs must pay access charges for interexchange
VNXX traffic. We review that preemption claim de novo. GNAPs III,
444 F.3d at 70-71.
In GNAPs III we held that the FCC, in the 2001 ISP Remand
Order, exercised only its authority to regulate local ISP traffic
and did not preempt state authority to regulate interexchange ISP
traffic. Id. at 72, 75. We distinguished between the FCC's
assertion of regulatory authority and its exercise of that
authority. Id. at 71. Even if the FCC had authority to regulate
all ISP traffic, the ISP Remand Order was intended to resolve
regulatory-arbitrage problems with reciprocal compensation for
local traffic. Id. at 74. We explained that the FCC had to
clearly state its intent to preempt state authority to regulate
access charges for interexchange traffic as well, which the ISP
Remand Order did not explicitly do. Id. at 72-74. We ruled the
ISP Remand Order therefore did not preempt the DTE's decision. Id.
at 75.
7
All remand orders refer to FCC orders, as identified.
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GNAPs argues that the FCC's 2008 Second Remand Order made
it clear that its 2001 order had preempted the DTE order. Not so.
The Second Remand Order is not materially different from the ISP
Remand Order on the issues of concern to us, and our holding in
GNAPs III applies to this case as well. GNAPs' argument to the
contrary misreads the 2008 order's language.
The 2008 Second Remand Order simply clarified the legal
basis for the authority the FCC had asserted in earlier orders to
regulate local ISP traffic and prevent regulatory arbitrage. See
Second Remand Order, 24 F.C.C.R. at 6476-78. The order was a
response to a ruling of the D.C. Circuit Court of Appeals that a
legal basis for the ISP Remand Order's assertion of jurisdiction
likely existed, but that order had rested on the wrong
jurisdictional ground.8 Id. Thus, the issues the FCC addressed in
the 2008 order did not go to regulation of intercarrier
compensation for interexchange ISP traffic.
The 2008 Second Remand Order did not change the 2001 ISP
Remand Order's rate regime or preemptive effect, as the D.C.
8
ISP Remand Order relied on § 251(g) of the TCA to impose
interim reciprocal-compensation rates of $0.0007 per minute for ISP
traffic and to preempt state commissions' authority to set
different rates in the future. ISP Remand Order, 16 F.C.C.R. at
9171-74. The D.C. Circuit reversed but did not vacate that order,
reasoning that the FCC likely had authority to impose those rates
but not under § 251(g). WorldCom, Inc. v. FCC, 288 F.3d 429, 430
(D.C. Cir. 2002).
The Second Remand Order relied on § 201 of the TCA instead.
Second Remand Order, 24 F.C.C.R. at 6483-86. The D.C. Circuit
upheld that jurisdictional basis. Core Commc'ns, 592 F.3d at 141.
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Circuit has recognized. To the contrary, that order "instituted
substantially the same rate cap system" as the ISP Remand Order.
Core Commc'ns, 592 F.3d at 142; see also Second Remand Order, 24
F.C.C.R. at 6486-89 (continuing the rate system in the ISP Remand
Order). As the FCC told the D.C. Circuit in Core Communications,
that rate system applies "when two [carriers] collaborate to
deliver calls to an ISP within a local calling area." Brief of FCC
at 21, Core Commc'ns, 592 F.3d 139 (emphasis added). The Second
Remand Order did not revisit (or mention) preemption of ISP-bound
traffic at all.
The Second Remand Order's express purpose was to justify-
-not change--a particular rate system. We held, in GNAPs III, that
system applied only to local ISP traffic. GNAPs' contrary argument
takes language in the Second Remand Order out of context and
ignores the purpose of the order.9
GNAPs notes that the order concluded that § 251(b)(5)'s
reciprocal-compensation scheme does not apply only to "local"
traffic. The FCC was merely ruling that § 251(b)(5) is not limited
to traditional telephone local traffic but to all forms of
telecommunications, including ISP traffic. Id. at 6479-83. The
FCC was rejecting its prior interpretation that § 251(b)(5) did not
9
Because we hold the Second Remand Order does not preempt
interexchange ISP traffic, we do not reach GNAPs' argument that the
district court erred by concluding the order is not retroactive.
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include ISP traffic at all.10 Id. It was not, however,
distinguishing local and interexchange ISP traffic, which is the
pertinent question for us.11
The Second Remand Order did describe ISP-bound traffic as
"interstate" and "interexchange." 24 F.C.C.R. at 6478. But that
does not mean the FCC was preempting interexchange fees, as GNAPs
urges. The FCC was explaining why it had jurisdiction to regulate
ISP traffic under § 201 of the TCA, which permits the FCC to impose
rates and regulations that further the TCA's goals on interstate
telecommunications traffic. See 47 U.S.C. § 201; see also Core
Commc'ns, 592 F.3d at 143. GNAPs' argument misses the point that
"[a] matter may be subject to FCC jurisdiction, without the FCC
having exercised that jurisdiction and preempted state regulation."
GNAPs III, 444 F.3d at 71. Here, the FCC has not exercised
jurisdiction over interexchange traffic. Our conclusion that the
10
In its first attempt to solve the reciprocal-compensation
imbalance ISP traffic creates, the FCC had ruled that ISP traffic
was exempted from § 251(b)(5)'s reciprocal compensation scheme
altogether. In re Implementation of the Local Competition
Provisions in the Telecommunications Act of 1996, 14 F.C.C.R. 3689,
3697-98 (1999). It reasoned that ISP traffic terminates at the
website, not the internet server, and therefore is never local.
Id. The D.C. Circuit vacated that order, holding that the FCC's
understanding of ISP traffic was likely wrong. Bell Atl. Tel. Cos.
v. FCC, 206 F.3d 1, 9 (D.C. Cir. 2000).
11
GNAPs misleadingly argues that the Second Remand Order
says that reciprocal compensation "is not limited geographically."
The order actually says that the TCA's definition of
telecommunications is not geographically limited and concludes that
"telecommunications" includes ISP traffic and not merely local
phone service. Second Remand Order, 24 F.C.C.R. at 6479.
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FCC preempted only state regulation of local ISP traffic remains
unaffected.
GNAPs also observes the order discusses "intercarrier
compensation" rather than "reciprocal compensation" and urges us to
conclude that the order intended to reach reciprocal fees as well
as access charges. The Second Remand Order does not assign such
significance to this language or even mention access charges.
Instead, it expressly preserved the rate scheme in the ISP Remand
Order that we have held governs only local ISP traffic. Isolated
words cannot overcome the Second Remand Order's text or the
presumption against preemption. See GNAPs III, 444 F.3d at 71-72.
GNAPs' argument fails. We turn to GNAPs' arguments that
the federal courts could not hear Verizon's counterclaims for
payment of access charges.
B. Jurisdictional Issues
GNAPs argues no federal jurisdiction exists over
Verizon's two successful counterclaims, count one to enforce the
ICA and count three alleging alter ego liability and disregard of
the corporate form. GNAPs also argues that Verizon failed to
exhaust its administrative remedies by not first seeking to enforce
the ICA in the DTE.
We reject GNAPs' argument that there is no federal
jurisdiction and hold that 28 U.S.C. § 1367 confers jurisdiction
over compulsory and at least some permissive counterclaims. We
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also hold GNAPs waived its exhaustion argument and do not reach the
merits.
1. Federal Jurisdiction over Count One, Verizon's
Counterclaim to Enforce the ICA
GNAPs first argues that Verizon improperly enforced the
ICA in federal court rather than first asking the DTE to interpret
and enforce the agreement. Although § 252 of the TCA details how
parties, states, and federal courts can draft and approve ICAs, it
is silent on how and in what fora parties can enforce ICAs. Among
other issues, courts remain uncertain whether state commissions can
enforce ICAs,12 whether state commissions ever must or should first
interpret and enforce ICAs,13 and when federal courts have
12
The TCA is silent on whether state commissions can
interpret and enforce ICAs or simply approve them. The Supreme
Court and this court have not yet answered that question, see
Verizon Md., Inc. v. Pub. Serv. Comm'n (Verizon Md. I), 535 U.S.
635, 641-42 (2002), and we need not do so now. Most circuits,
however, 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 reached this conclusion as well. In re
Starpower Commc'ns, LLC, 15 F.C.C.R. 11277, 11280 (FCC 2000).
13
Compare Core Commc'ns, Inc. v. Verizon Pa., Inc., 493
F.3d 333, 342-44 (3d Cir. 2007) (holding that state commissions
must first interpret and enforce ICAs), and BellSouth Telecomms.,
317 F.3d at 1277-78 (holding that state commissions first must
interpret and enforce ICAs and federal courts can then review that
decision), with Ill. Bell Tel. Co., Inc. v. Global NAPs Ill., Inc.,
551 F.3d 587, 593-96 (7th Cir. 2008) (Posner, J.) (holding that
state commissions have "primary jurisdiction" over difficult issues
-20-
jurisdiction over ICA-enforcement actions.14 We need not decide
these issues here, but they undergird the parties' disputes.
GNAPs argues that even if federal courts hypothetically
have jurisdiction over claims to enforce ICAs, the proper procedure
is for state commissions--here, the DTE--to first interpret and
enforce an ICA, after which federal courts may review that decision
under 47 U.S.C. § 252(e)(6). It concludes that Verizon's claim is
premature.
Verizon rejects GNAPs' prematurity argument as based on
two questionable assumptions: first, that state commissions have
the authority under the TCA to enforce interconnection agreements,
and second, that any implicit authority in state commissions is
meant to be exclusive and prevents federal courts from hearing ICA-
enforcement claims otherwise properly before them. Verizon
contends that its ICA-enforcement claim is properly in federal
court, either because there is federal question jurisdiction over
particularly within their competence that arise from ICA-
enforcement disputes, which federal courts can choose to invoke).
14
The Supreme Court held that federal courts at least have
jurisdiction over claims that federal law preempted a state
commission decision regarding an ICA. Verizon Md. I, 535 U.S. at
642-43 (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n.14
(1983)). The Fourth Circuit held that ICAs are so bound with
federal law that actions to enforce them arise under federal law.
Verizon Md., Inc. v. Global NAPs, Inc. (Verizon Md. II), 377 F.3d
355, 362-65 (4th Cir. 2004). The Seventh Circuit took a more
nuanced view, opining that garden-variety enforcement claims are
creatures of state contract law, though some claims could create
federal-question jurisdiction. Ill. Bell, 551 F.3d at 591-93.
-21-
the claim under 28 U.S.C. § 1331 or, at a minimum, there is
supplemental jurisdiction under 28 U.S.C. § 1367.
We need not decide the first point, whether state
commissions can hear ICA-enforcement claims, because we conclude
Verizon's counterclaim is properly in federal court. We think it
is clear that, at a minimum, there is supplemental jurisdiction
under § 136715 over Verizon's counterclaim to enforce the ICA. We
agree with Verizon that Congress did not withdraw that jurisdiction
to hear this counterclaim in the TCA. See Verizon Md. Inc. v. Pub.
Serv. Comm'n, 535 U.S. 635, 644 (2002) (holding that § 252 of the
TCA "at least does not divest the district courts of their
authority under 28 U.S.C. § 1331"); see also United States v. Lahey
Clinic Hosp., Inc., 399 F.3d 1, 9 (1st Cir. 2005) (noting that a
"strong presumption against implied repeals of federal statutes is
even stronger when the federal statute in question confers federal
jurisdiction).
Verizon's counterclaim is more than sufficiently related
to GNAPs' complaint. 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. See, e.g., Bell
S. Telecomm., Inc. v. Town of Palm Beach, 252 F.3d 1169, 1176 (11th
Cir. 2001) (reviewing a claim seeking declaratory judgment that an
15
We decline Verizon's invitation to rule on the different
question of whether we have independent federal question
jurisdiction under § 1331 over its claim to enforce an ICA.
-22-
ordinance was preempted and a counterclaim to enforce the
ordinance); see also 6 Wright, Miller & Kane, Federal Practice and
Procedure § 1410, at 70-72, 78-79 (1990) (noting that courts
generally find claims that are logically related arise from the
same transaction and reporting that courts have held that some
claims based on the same contract are sufficiently related).
Given the existence of jurisdiction, we treat GNAPs'
prematurity argument as a type of administrative-exhaustion
argument.16 Arguments that a party failed to exhaust its
administrative remedies are waivable unless an exhaustion
requirement is jurisdictional. See Frederique-Alexandre v. Dep't
of Natural & Envtl. Res., 478 F.3d 433, 440 (1st Cir. 2007). And
exhaustion requirements are not jurisdictional unless Congress has
explicitly designated them as such. See Arbaugh v. Y&H Corp., 546
U.S. 500, 516 (2006). The TCA does not mention an exhaustion
requirement, let alone limit subject matter jurisdiction.
Without suggesting that there would be, on these facts,
any merit to the argument, we hold GNAPs has waived it. GNAPs did
16
GNAPs has expressly disavowed any desire for us to invoke
the discretionary doctrine of primary jurisdiction, and so we do
not. GNAPs asks us to dismiss the case and let the DTE resolve it
in the first instance, the procedure for administrative exhaustion.
Reiter v. Cooper, 507 U.S. 258, 268-69 (1993).
GNAPs is wrong in suggesting that, under Illinois Bell, we
could hold that the DTE has exclusive primary jurisdiction and
dismiss the case. GNAPs ignores that opinion's plain statement
that the court was invoking discretionary and not exclusive primary
jurisdiction. Ill. Bell, 551 F.3d at 595-96.
-23-
not raise this argument until nearly two years after Verizon filed
its counterclaim, and only after GNAPs' other arguments had been
rejected. It would be inequitable to allow GNAPs to sandbag its
opponent at this late stage, and it would disserve judicial
economy.17
2. Jurisdiction over Verizon's Counterclaim for
Alter Ego Liability and Disregard of the
Corporate Form
GNAPs makes a different and more complicated argument
that there is no federal jurisdiction over count three, which
alleged alter ego liability and disregard of the corporate form
against GNAPs and the other defendants. GNAPs argues that at most
this counterclaim is permissive, not compulsory. As such, GNAPs
concludes, the counterclaim is outside federal courts' supplemental
jurisdiction and requires an independent basis for jurisdiction.
We hold that we have supplemental jurisdiction over this
counterclaim, regardless of whether it is compulsory or permissive.
This court has not before considered the scope of
statutory supplemental jurisdiction over counterclaims. The
supplemental jurisdiction statute, 28 U.S.C. § 1367, was enacted in
1990. Some decisions before the enactment of § 1367 adopted a rule
that federal courts could exercise supplemental jurisdiction over
17
As a result, we do not comment on decisions GNAPs cites
in support of its argument that, at least sometimes, parties must
first ask state commissions to interpret ICAs. See Ill. Bell, 551
F.3d 587, 594-95; Core Comm'cns, 493 F.3d at 344; BellSouth
Telecomms., 317 F.3d at 1277-78.
-24-
compulsory but not permissive counterclaims.18 E.g., McCaffrey, 672
F.2d at 248; see also 6 Wright et al., supra § 1422, at 169-70.
Permissive counterclaims needed to have an independent federal
jurisdictional basis. McCaffrey, 672 F.2d at 248; 6 Wright et al.,
supra § 1422, at 169-70.
This distinction arose from judge-made law of
jurisdiction over what are now called supplemental claims--claims
that lack an independent basis for federal jurisdiction--law which
evolved in the absence of explicit congressional authorization.
Put simply, courts distinguished jurisdiction over pendent claims--
those brought by the plaintiff--and ancillary claims--those brought
by third parties.19 Pendent claims had to arise from the same
"common nucleus of operative fact" as the underlying claim having
a basis for federal jurisdiction. United Mine Workers v. Gibbs,
383 U.S. 715, 725 (1966). Lower courts held that ancillary claims,
such as counterclaims, had to arise from the same transaction or
occurrence. See W.A. Fletcher, "Common Nucleus of Operative Fact"
18
In one case after enactment of the supplemental
jurisdiction statute in 1990 we did note the rule that permissive
counterclaims required an independent basis for jurisdiction.
Iglesias v. Mut. Life Ins. Co. of N.Y., 156 F.3d 237, 241 (1st Cir.
1998). But we did not rely on that rule to decide the case, nor
did we consider the effect of the 1990 statute on it. Id. It does
not bind us here.
19
Jurisdiction over other parties was even more
complicated; those nuances are not relevant in this case. See
generally, e.g., Exxon Mobile Corp. v. Allapattah Servs., Inc., 545
U.S. 546, 552-57 (2005).
-25-
and Defensive Set-Off: Beyond the Gibbs Test, 74 Ind. L.J. 171,
174-75 (1998); 13 Wright et al., Federal Practice and Procedure §
3523, at 176-77 (3d ed. 2008). The Supreme Court never reconciled
these lines of cases. See generally 13 Wright et al., supra
§ 3523, at 157-85 (tracing this history); W.C. Perdue, Finley v.
United States: Unstringing Pendent Jurisdiction, 76 Va. L. Rev.
539, 541-51 (1990) (same).
Courts drew the line for ancillary jurisdiction at the
transaction-or-occurrence test for practical reasons. Some
counterclaims needed to be raised to avoid preclusion in a later
proceeding. Courts, hesitant to expand federal judicial power,
limited supplemental jurisdiction to counterclaims which had to be
raised or waived: that is, compulsory counterclaims arising out of
the same transaction or occurrence as the underlying suit. See
Channell, 89 F.3d at 385; 13 Wright et al., supra § 3523, at 177.
Not all courts agreed. Judge Friendly rejected the
conventional view. See United States v. The Heyward-Robinson Co.,
Inc., 430 F.2d 1077, 1088 (2d Cir. 1970) (Friendly, J.,
concurring). So did Judge Becker. Abromovage v. United Mine
Workers of Am., 726 F.2d 972, 988-90 (3d Cir. 1984). They and some
commentators criticized this rule as historically and legally
unsound and unwise. See Jones, 358 F.3d at 210-12 (describing that
debate).
-26-
In 1990 Congress enacted a supplemental jurisdiction
statute, 18 U.S.C. § 1367. The statute does not use the
terminology of "permissive" or "compulsory." It gives federal
courts supplemental jurisdiction over all claims that are part of
the same Article III case or controversy:
Except as provided in subsections (b) and (c)
or as expressly provided otherwise by Federal
statute, in any civil action of which the
district courts have original jurisdiction,
the district courts shall have supplemental
jurisdiction over all other claims that are so
related to claims in the action within such
original jurisdiction that they form part of
the same case or controversy under Article III
of the United States Constitution.
28 U.S.C. § 1367(a). This language confers jurisdiction over all
claims that are part of the same Article III case, subject to two
exceptions, listed in subsections (b) and (c), which do not apply
here.20
20
Subsection (b) restricts supplemental jurisdiction in
diversity cases over some kinds of claims, but not counterclaims
brought under Rule 13. See 28 U.S.C. § 1367(b); Allapattah, 545
U.S. at 559-60. Specifically, it excepts, in diversity actions,
"claims by plaintiffs against persons made parties under Rule 14,
19, 20, or 24 of the Federal Rules of Civil Procedure" and claims
by people seeking to join under Rule 19 or intervene under Rule 24.
28 U.S.C. § 1367(b). These claims must meet all requirements for
diversity jurisdiction. Id. This list does not include Rule 13,
and in any event this case was not brought in diversity.
Subsection (c) allows district courts to decline to exercise
supplemental jurisdiction when "the claim raises a novel or complex
issue of State law," when the supplemental claim "substantially
predominates over" the underlying claim properly in federal court,
when "the district court has dismissed all claims over which it had
original jurisdiction," or "in exceptional circumstances." The
district court in this case did not opt to decline jurisdiction.
-27-
By its plain text, then, § 1367(a) governs supplemental
jurisdiction over counterclaims. See Exxon Mobile Corp. v.
Allapattah Servs., Inc., 545 U.S. 546, 558-59 (2005) (interpreting
§ 1367(a)'s plain text, which confers a "broad grant of
supplemental jurisdiction"). We join two circuits and virtually
all commentators in holding that Article III's case-or-controversy
standard is the jurisdictional limit for counterclaims. Jones, 358
F.3d at 212-13; Channell, 89 F.3d at 385; see also, e.g., C.D.
Floyd, Three Faces of Supplemental Jurisdiction after the Demise of
United Mine Workers v. Gibbs, 60 Fla. L. Rev. 277, 290 (2008).
In so doing, we hold that § 1367 supersedes case law on
supplemental jurisdiction that had distinguished between compulsory
and permissive counterclaims. Accord Jones, 358 F.3d at 212;
Channell, 89 F.3d at 385. The statute's plain text does not
distinguish or limit jurisdiction over counterclaims, though it
imposes other limits. See 18 U.S.C. § 1367(a)-(b). And as the
Supreme Court observed, "nothing in § 1367 indicates a
congressional intent to recognize, preserve, or create some
meaningful, substantive distinction between the jurisdictional
categories we have historically labeled pendent and ancillary."
Allapattah, 545 U.S. at 558-59. Thus § 1367 abolishes the
conceptual framework underpinning the old compulsory-permissive
counterclaim distinction.
-28-
We need not define the outer boundary of the phrase "so
related . . . . that [the claims] form part of the same case or
controversy under Article III" to decide this case, and we will not
do so here. Much scholarly commentary has debated the meaning of
"case" and "controversy"21 in Article III, as well as in § 1367(a),
and the question is a difficult one.22
21
Many scholars have argued that those terms have very
different meanings, which could affect federal jurisdiction. See
R.J. Pushaw, Article III's Case/Controversy Distinction and the
Dual Functions of Federal Courts, 69 Notre Dame L. Rev. 447, 450-
518 (1994) (citing other scholars and proposing a historical
interpretation). This debate does not affect our analysis in this
case. See id.
22
This difficulty arises in part because civil procedure
has changed dramatically since the framing of the Constitution, and
it is not clear what an Article III "case" means in contemporary
practice.
At the time of the framing, American courts used the English
common law "cause of action" to govern procedure. See, e.g., A.J.
Bellia, Article III and the Cause of Action, 89 Iowa L. Rev. 777,
782-92 (2004); see also Osborn v. Bank of U.S., 22 U.S. (9 Wheat)
738, 823 (1824); R.A. Matasar, Rediscovering "One Constitutional
Case": Procedural Rules and the Rejection of the Gibbs Test for
Supplemental Jurisdiction, 71 Cal. L. Rev. 1399, 1479-87 (1983).
But the Federal Rules of Civil Procedure made civil procedure
more flexible by liberalizing rules for joining claims and parties
in civil cases. See J.T. Molot, How Changes in the Legal
Profession Reflect Changes in Civil Procedure,84 Va. L. Rev. 955,
986 (1998). This practice is incongruent with the scope of
traditional causes of action. See Bellia, supra, at 792-99.
In 1966 the Supreme Court defined an Article III case as one
comprised of claims arising from a "common nucleus of operative
fact," such that the plaintiff "ordinarily would be expected to try
them in one judicial proceeding." Gibbs, 383 U.S. at 725. Gibbs
rejected earlier cases defining jurisdiction by a "cause of action"
as unduly narrow and confusing. 383 U.S. at 722-75. The Court
adopted a theory of a case--factual relatedness--that motivated the
drafters of the Federal Rules of Civil Procedure. See Bellia,
supra, at 792-98; Matasar, supra, at 1448-54.
There is scholarly commentary criticizing Gibbs and its
-29-
In this case we need only decide that supplemental
jurisdiction is somewhat broader than the transaction-or-occurrence
test. No Supreme Court case had ever established the same
transaction-or-occurrence test as the boundary of Article III case-
or-controversy requirement. Gibbs, the Court's only decision
deciding the scope of an Article III "case," instead looked to
whether the claims arose from a "common nucleus of operative fact."
Id. at 725.
Verizon's alter-ego counterclaim is sufficiently related
to the underlying litigation to fall within Article III's
jurisdiction. This litigation disputes 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. Count three was
part of Verizon's effort to collect those fees when GNAPs attempted
to avoid payment. Other courts have accepted supplemental
reliance on close factual identity, however. See, e.g., Fletcher,
supra, at 176-78 (arguing that Gibbs is historically, legally, and
practically wrong); Matasar, supra, at 1477-90 (same). Scholars
contend that this rule, though perhaps practical, has no basis in
the Constitution. Matasar, supra, at 1477-90.
Courts and commentators have proposed a variety of possible
standards for supplemental jurisdiction. The Seventh Circuit,
relying on Gibbs, held that a counterclaim need only have a "loose
factual connection" between claims to satisfy § 1367. Channell, 89
F.3d at 385. Scholars have proposed a variety of other boundaries.
See, e.g., Floyd, supra, at 310-17 (urging a "necessary and proper"
test for jurisdiction); Fletcher, supra, at 178-79 (proposing
defining Article III based on history or on modern rules of
procedure); Matasar, supra, at 1481-82 (arguing that Article III
reaches any procedural rules Congress adopts). Although we need
not adopt any of these approaches, we note that all are broader
than the transaction-or-occurrence test.
-30-
jurisdiction over claims to pierce the corporate veil and similar
claims. See, e.g., Bd. of Trs., Sheet Metal Workers' Nat'l Pension
Fund v. Elite Erectors, Inc., 212 F.3d 1031, 1037 (7th Cir. 2000).
This is not a situation in which there could be any due
process constraints on the exercise of jurisdiction. In this case,
it was sensible for the district court to try Verizon's claim to
pierce the corporate veil with the rest of the litigation, rather
than sending count three to state court. The case had already
consumed years of litigation. The district court was familiar
with, and had developed expertise on, the complicated claims at
issue. It was also thoroughly familiar with GNAPs' many efforts to
avoid paying access charges--useful information for a court
assessing GNAPs' conduct. Finally, there was nothing unfair about
trying this claim with the rest of the litigation.
C. Judgment for Verizon on Its Counterclaims Was Proper
We turn to the district court's resolution of Verizon's
two counterclaims on the merits. Our rejection of GNAPs'
preemption argument removes GNAPs' only argument as to liability.
What is left is a dispute over the amount of damages GNAPs and the
other defendants owe Verizon.
1. Verizon's Counterclaim to Enforce the ICA
GNAPs first challenges the district court's method for
calculating that GNAPs owed Verizon $57,716,714 in damages. We
review the district court's application of judicial estoppel in
-31-
support of that conclusion for abuse of discretion, Alternative
Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 30 (1st Cir.
2006), and its grant of summary judgment in Verizon's favor on the
amount of damages de novo, Thore v. Howe, 466 F.3d 173, 178 (1st
Cir. 2006).
To calculate the amount of damages, the district court
first had to decide how many minutes of traffic were subject to
access charges. That calculation involved three issues: how many
minutes of calls occurred between 2003 and 2006, what percentage of
that traffic was intrastate and subject to the DTE's order, and
what percentage of traffic was local and therefore subject to
reciprocal compensation rather than access charges. The court then
needed to decide what rate per minute GNAPs had to pay Verizon for
access charges and the interest rate.
The court found GNAPs had admitted that Verizon had sent
GNAPs more than 10 billion minutes of calls for delivery to its
VNXX customers. Applying judicial estoppel, it held that 90
percent of GNAPs' traffic was interstate.
This left the question of how of those minutes were
delivered to "local" ISPs and therefore were subject to reciprocal
compensation rather than access charges. The court held that 21.78
percent of calls were to local ISPs.
That gave a total of over 7.5 billion minutes subject to
access charges. The court multiplied that figure by the rate per
-32-
minute. As to the rate per minute, the court held GNAPs was
judicially estopped from contesting that rate was $0.00525. It
added 18 percent annual prejudgment interest per Mass. Gen. Laws
ch. 231, § 6C. After reducing the total owed by the amount of
security for an injunction the court had already released to
Verizon, the district court entered judgment for $57,716,714.
a. The Judicial Estoppel Ruling Was Not Error
The court's application of estoppel is well supported in
the record. Verizon began billing GNAPs in early 2003. GNAPs made
no payments for two years, so Verizon tried to terminate its
service to GNAPs in March 2005, which led to the litigation
discussed in GNAPs III. In June 2005, the district court granted
GNAPs' motion for a temporary restraining order (TRO) in the
pending litigation while GNAPs argued that the DTE's decision was
preempted. After hearing evidence, the court rejected GNAPs' claim
and refused to grant an injunction pending appeal. In light of
GNAPs' claim that its very existence was threatened, this court
granted an injunction while we decided GNAPs III, which we lifted
in April 2006. The injunction was conditioned on GNAPs posting
security of $15 million in addition to the $1 million GNAPs had
already posted.
In order to obtain the TRO from the district court and
the injunction, pending appeal, from this court, GNAPs presented an
"all-or-nothing" argument: if the DTE's order was not preempted,
-33-
then GNAPs admittedly owed access charges to Verizon. GNAPs
represented to both courts that those access charges were so high
that GNAPs could not afford to continue providing service in
Massachusetts--and could fail altogether--if it had to pay them.
It argued the balance of harms to GNAPs and its customers meant
Verizon should be required to continue service, despite GNAPs'
failure to pay for that service.
GNAPs made this argument in its briefs and at oral
argument. In its motion for the TRO, GNAPs represented to the
district court that Verizon charged $0.00525 per minute and relied
on that fee in its claims about irreparable injury. In fact, by
April 2005, Verizon had for a year been billing GNAPs at a rate of
at least $0.006114 per minute. The district court, for purposes of
this case, permissibly found that it was GNAPs that had suggested
the lower $0.00525 rate and "stipulated it" "[a]s a number
satisfactory to it."
Further, in this court, GNAPs represented a willingness
to post security in the sum of almost $18 million to satisfy any
harm to Verizon, a figure consistent with the stipulated rate. Yet
it now asserts that Verizon's billing rate should be adjusted
downward to $0.0008140, a rate that would have significantly
weakened the irreparable harm argument GNAPs presented at the time.
GNAPs made one other critical representation. When
moving the district court for an injunction pending appeal, GNAPs
-34-
submitted an employee affidavit asserting that "90% of Global's
revenue is derived from its ISP customers in Massachusetts." GNAPs
repeatedly made other claims that similarly suggested a the
overwhelming majority of its customers were in Massachusetts. Now,
GNAPS tries to walk away from both of these representations, on
which the courts have relied.
This court ruled that GNAPs owed access charges to
Verizon in April 2006, GNAPs III, 447 F.3d at 75, and dissolved the
injunction. In May 2006, in opposition to Verizon's motion to
release the security GNAPs had posted, GNAPs first suggested that
the Verizon billing rate was too high and argued that the proper
rate was either $0.0007 or $0.002124. In 2007, however, this court
affirmed the district court's order releasing that security. GNAPs
IV, 489 F.3d at 24-25. We expressly rejected GNAPs' belated
argument that Verizon was overcharging it and held GNAPs to its
prior, higher estimate of the amount of access charges it owed.
Id.
In 2008, concluding that GNAPs III clearly established
that GNAPs owed access charges, the district court turned to
considering damages. As trial approached, GNAPs filed a motion in
limine regarding potential damages it owed. It attached an expert
report concluding that Verizon was overcharging GNAPs and that at
least 75 percent of its customers were located outside
Massachusetts. On December 4, 2008, the district court held a
-35-
pretrial hearing to resolve several issues. After the hearing, the
court held GNAPs was judicially estopped from disputing that it
owed $0.00525 per minute or that 90 percent of its customers were
in Massachusetts.
Judicial estoppel is an equitable doctrine that prevents
litigants from taking inconsistent positions in the same or a
related case. New Hampshire v. Maine, 532 U.S. 742, 741-50 (2001);
Alternative Sys. Concepts, 374 F.3d at 32-33. Its purpose is to
protect the integrity of the judicial system from litigants
"playing fast and loose with the courts" to "obtain[] an unfair
advantage." Patriot Cinemas, Inc. v. Gen. Cinema Corp., 834 F.2d
207, 212 (1st Cir. 1987) (internal quotation marks omitted); see
also New Hampshire, 532 U.S. at 749-50. Our review is limited to
abuse of discretion.
There is no doubt that GNAPs deliberately played fast and
loose with the courts in an effort to gain an unfair advantage.
The district court justifiably--indeed correctly--held that GNAPs
should be held to its tactical choice.
GNAPs argues that its recent positions were not really
inconsistent with its prior positions. It says that it was only
telling the district court that Verizon charged $0.00525 per
minute, not espousing that figure. And it offers a variety of
reasons why it did not really mean that 90 percent of its ISP
customers were in Massachusetts. GNAPs also urges it was entitled
-36-
to contest and conduct discovery on the amount of charges it owed
after losing its preemption argument.
As to the first two points, GNAPs did adopt the $0.00525
figure--and only that figure--and it did not qualify the 90 percent
figure as it now attempts to do. If those figures were not
accurate, GNAPs certainly misled the courts. See Cadle Co. v.
Schlictmann, Conway, Crowly & Hugo, 338 F.3d 19, 22 (1st Cir. 2003)
("Our focus is on the impression [the estopped party's] statements
reasonably created in the District Court.").
The final assertion does not hold because GNAPs had
plenty of time and every incentive to investigate Verizon's billing
rate by 2005 when it made these representations. See Alternative
Sys. Concepts, 374 F.3d at 35-36 (holding that a party could not
avoid judicial estoppel by failing to discover "readily available"
information). It was not entitled to wait until it lost on all its
other claims. One term for that strategy is "sandbagging," and the
district court was right to prevent GNAPs from executing it.
b. The District Court Properly Granted Summary
Judgment on the Issue of Excludable Local
Minutes
GNAPs argues that the district court erred by concluding,
on summary judgment, that about 21 percent of traffic between the
parties was local and not subject to access charges. The district
court reasoned that GNAPs had not "proffer[ed] any countervailing
-37-
admissible data regarding the location of its customers" and that
this was information GNAPs could have provided.
GNAPs argues that two proffers created genuine issues of
material fact. One was excluded from evidence: a late
"supplemental declaration" by GNAPs' expert, which GNAPs filed one
week before trial, without leave, and which presented a new theory
that differed from the expert's earlier affidavit. The court also
held that a Verizon employee's e-mail did not create a genuine
issue of fact.
We will not overturn the court's enforcement of its
timetable for expert reports. See Macaulay v. Anas, 321 F.3d 45,
50 (1st Cir. 2003); see also Levin v. Dalva Bros., Inc., 459 F.3d
68, 72 (1st Cir. 2006). GNAPs claims it had to submit this report
quickly and tardily because the district court made a "sudden"
bench ruling. That ruling did not discuss the percentage of local
traffic; indeed the court acknowledged that issue remained open.
Without that excluded report, the court had before it
GNAPs' expert's original report and Verizon's report, which agreed
that 21 percent was the proper figure. No factual dispute
remained.23
23
GNAPs argues the court had to rely on the data underlying
its expert's supplemental report, which it says was publicly
available. Because GNAPs did not include that information in the
record in an admissible pleading, the court properly did not
consider it. See, e.g., Carmona v. Toledo, 215 F.3d 124, 131 (1st
Cir. 2000) (affirming summary judgment when the party did not
submit "a valid affidavit or some other admissible evidence" in
-38-
GNAPs next argues the district court could not infer, on
summary judgment, that a Verizon employee's e-mail overestimated
the number of local minutes of traffic between GNAPs and Verizon.
That e-mail expressly gave data from a Verizon system called
Traffic Track. Verizon submitted undisputed evidence that Traffic
Track overestimated minutes for VNXX traffic.24
GNAPs argues the district court applied the wrong
standard for summary judgment by "assum[ing]" that this e-mail
relied only on Traffic Track data. The district court was required
only to draw "all reasonable inferences" in GNAPs' favor. Mosher
v. Nelson, 589 F.3d 488, 492 (1st Cir. 2009). The e-mail relied
only on Traffic Track data and did not hint at any other basis for
its calculation of local traffic. Absent evidence from GNAPs that
some other source other than Traffic Track for the e-mail's figures
existed, the district court properly held the e-mail did not raise
a genuine factual issue.
c. GNAPs Has Not Shown the District Court Erred
in Its Damages Calculations
GNAPs raises three objections to the court's damages
calculation, which we reject.
support); see also Mosher v. Nelson, 589 F.3d 488, 492 (1st Cir.
2009) (noting that courts on summary judgment may rely on competent
evidence).
24
According to Verizon's unrebutted evidence, Traffic Track
determines locations based on phone numbers. It cannot accurately
calculate traffic involving VNXX numbers, which by definition do
not correspond to their owners' locations.
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GNAPs first argues Verizon improperly failed to exclude
from the calculation "transit traffic," which is traffic that did
not originate from a Verizon customer. The parties agree Verizon
used the number of minutes of use GNAPs supplied when GNAPs sent
Verizon invoices for reciprocal compensation.25 In discovery, GNAPs
admitted its invoices correctly reported the number of minutes of
traffic between Verizon's and GNAPs' customers. That admission
conclusively established that Verizon's invoices did not bill GNAPs
for transit traffic. See Fed. R. Civ. P. 36(b).
GNAPs next argues that the district court should have
subtracted the percentage of local calls from all the minutes of
use, not just from the number of intrastate minutes (90 percent of
the total). GNAPs does not explain why. This argument is waived.
See, e.g., Day v. Staples, 555 F.3d 42, 57 n.14 (1st Cir. 2009).
GNAPs finally argues that there was an interest rate
error: it says that the district court should have applied 12
percent rather than 18 percent interest. Massachusetts law imposes
prejudgment interest either at the contract rate or at 12 percent
per annum. Mass. Gen. Laws ch. 231, § 6C.26 GNAPs says that
Verizon agreed to 12 percent interest. But Verizon proposed using
25
GNAPs claims it could seek reciprocal compensation for
transit traffic. The parties' ICA flatly contradicts that
assertion, and so GNAPs' bills could not have included transit
traffic.
26
The parties do not contest applying Massachusetts law.
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that rate if GNAPs would settle and not go to trial,27 and GNAPs did
not settle. When GNAPs did not settle, the district court properly
applied the undisputed interest rate the ICA imposes, 18 percent.
2. There Was No Error in the Award to Verizon on Its
Counterclaim for Alter Ego Liability and
Disregard of the Corporate Form
a. The District Court Did Not Abuse Its
Discretion by Granting Default Judgment as a
Discovery Sanction
The district court granted default judgment on count
three of Verizon's counterclaim as a sanction for willful discovery
misconduct against GNAPs, the GNAPs companies, and Frank Gangi.
The court ruled these defendants had violated the court's past
discovery orders and the rules of discovery. To reach this
conclusion, the court made a number of factual findings that are
well supported in the record.
First, the court found that Janet Lima, the GNAPs
companies' bookkeeper, and Frank Gangi, their owner, lied to the
court about the records GNAPs kept. Lima and Gangi insisted that
the companies did not keep a general ledger or any financial
documents. They recorded financial transactions in one computer
accounting program, called Peachtree. Otherwise, they claimed to
rely on the bank to keep records, which they could request as
needed. Gangi and Lima also both repeatedly claimed ignorance of
27
The district court agreed it was prepared "to order that
and save [GNAPs] 6 percent."
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basic information about how the companies processed their finances,
even though Lima kept the companies' books and wrote their checks
and Gangi owned the companies and paid their taxes.28
The district court could easily find that Lima's and
Gangi's description of the accounting practices of the GNAPs
companies, Ferrous, and Gangi was "inherently incredible" and
"ma[de] no sense." That conclusion was also supported by Verizon's
forensic accountant, who testified that the companies' claimed
accounting and record-retention practices were irregular.
As the district court also found, evidence suggested the
defendants actually had kept general ledgers and similar records.
GNAPs' chief financial officer testified that Gangi regularly gave
her the company's bank statements. Gangi's accountant, Edward
Taylor, testified that he prepared Gangi's and Ferrous's 2006 tax
return in March 2007 using information from Peachtree, bank
statements, and a general ledger.
Second, the court supportably found that the defendants
had withheld and destroyed financial records. Lima testified that
information in the one place the companies kept financial records--
Peachtree--was lost in December 2006, when she dropped her computer
28
Lima, for instance, testified she did not remember
writing checks bearing her name or how checks were handled at the
companies. Frank Gangi claimed he knew nothing about the GNAPs
companies' or his own finances and relied entirely on his
accountants. Gangi testified that he did not even know where he
had bank accounts. He said that if he wanted to know whether he
had an account at a bank, he would call that bank.
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down a flight of stairs. Then, on June 12, 2007, she suffered
another mishap with her new computer: she deleted files using a
program called Windows Washer, Lima said to avoid having family
information produced during discovery.
The court could conclude that Lima's stories were "wholly
incredible." Both of her alleged computer mishaps were
suspiciously timed. Lima "dropped" the first computer just as the
court was beginning to scrutinize the defendants' finances. And
the "accidental" computer wipe occurred just minutes before GNAPs'
attorneys arrived to collect discovery records, which Lima knew.
Instead, the court supportably (indeed, logically)
credited testimony by a computer expert that someone intentionally
wiped relevant evidence from Lima's computer hard drive and then
defragmented the drive to make recovery even more difficult. Lima
admitted using a computer program, Windows Washer, to delete
personal files. But the expert testified that Windows Washer was
run in a "shred/wash with bleach" setting that is not a default,
that must be intentionally activated, and that more thoroughly
wipes the computer.
Moreover, the expert testified that only some programs
were destroyed, while others--such as Microsoft Office--were
unharmed. Most destroyed files and programs appeared to relate to
financial records. Peachtree, conveniently, was destroyed, as were
files named "Accounting," "Billing," "Janet," and "Peach" and
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shortcuts named with words like "check" and "cash." The district
court could conclude that this file destruction was intentional and
targeted at relevant financial records.
Third, the court supportably determined that the
defendants lied to the court about when they "lost" their financial
records. As the court explained, Gangi's accountant, Taylor,
testified that he was able to prepare Gangi's and Ferrous's tax
return in March 2007, which included the GNAPs' companies taxes.
Taylor prepared those taxes months after Lima said she dropped her
computer down stairs and at the same time the defendants were
stonewalling efforts to discover their financial records.
On appeal, the defendants argue that the district court
should have credited their insistence that they were guilty only of
poor record keeping and accidents. That story was contradicted by
evidence and common sense. The court certainly could conclude the
better explanation was that the defendants had willfully concealed
and destroyed evidence.
Aside from their factual challenges, the defendants raise
one further argument against default judgment. They urge that the
district court's discovery orders were directed at GNAPs, not them.
We will defer to the district court's contrary interpretation of
its own orders. Cf. Lefkowitz v. Fair, 816 F.2d 17, 22 (1st Cir.
1987). The court issued several such orders after the counterclaim
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defendants were added.29 Those orders compelled production of
evidence in the possession of all defendants, including evidence of
their finances and evidence they produced in the SNET case.
In sum, significant evidence supported the district
court's conclusion that GNAPs, the GNAPs companies, and Frank Gangi
violated its orders and committed willful discovery misconduct.
There was certainly no abuse of discretion.
b. The District Court Properly Collaterally
Estopped Ferrous from Disputing Its
Misconduct
The district court held GNAPs' holding company, Ferrous,
was collaterally estopped from challenging the SNET court's ruling
that Ferrous (and other defendants in this appeal) committed
willful discovery misconduct by withholding and destroying
evidence. 251 F.R.D. at 96-97. The court found that the
defendants lied about what financial records they kept and
destroyed computer files in bad faith; removed evidence from the
home of Richard Gangi, the GNAPs companies' chief financial
officer, after his death; and did not cooperate fairly with
discovery. Id. at 90-95.
29
GNAPs argues, without citation, that the court needed to
find prejudice to Verizon and erred by so finding. Assuming,
dubitante, that prejudice is a requirement, Verizon obviously
suffered it from losing information about the defendants' finances
while it sought to recover nearly $58 million in overdue access
charges.
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Federal common law governs claims that a party is
precluded from relitigating an issue already decided in a federal
court. See Negrón-Fuentes v. UPS Supply Chain Solutions, 532 F.3d
1, 7 (1st Cir. 2008). Issue preclusion requires that (1) both
proceedings involved the same issue of law or fact, (2) the parties
actually litigated that issue, (3) the prior court decided that
issue in a final judgment, and (4) resolution of that issue was
essential to judgment on the merits. GNAPs II, 427 F.3d at 44.
Ferrous argues that a default judgment is not a judgment
on the merits for issue preclusion purposes and that, in any event,
the issues litigated in this case were not similar to those in
SNET.
Ferrous misunderstands the issues the district court in
this case was precluding it from relitigating. Ferrous is correct
that default judgment generally is not a judgment on the merits of
the underlying claim in issue preclusion cases because a default
judgment does not decide the merits of that claim. See 18A Wright,
Miller & Cooper, Federal Practice & Procedure § 4440, at 210-13 (2d
ed. 2002). The Massachusetts district court was not holding
Ferrous precluded from litigating the merits of the underlying
claim alleging alter ego liability and disregard of the corporate
form. It was holding that Ferrous was precluded from relitigating
the issues which underpinned the SNET court's judgment--whether
Ferrous willfully concealed and destroyed evidence. The
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Connecticut district court's ruling was certainly a judgment on the
merits of those issues. See SNET, 251 F.R.D. at 96-97.
When the issue is framed properly, preclusion was
appropriate; the Massachusetts court did not need to relitigate
whether Ferrous willfully destroyed evidence. Both proceedings
involved the same factual and legal issue--discovery misconduct
under Rule 37(b)--and relied on much the same evidence. See id. at
85, 90-96. Ferrous had a full and fair opportunity to dispute
those allegations and lost. The district court in this case could
prevent it from disputing its misconduct again.
IV.
The district court has handled this difficult and very
complicated matter with admirable care.
Judgment against GNAPs for $57,716,714 on count one is
affirmed. Default judgment on count three imposing joint and
several liability on all appellants is affirmed.
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