By Karon Fowler

Under the Telecommunications Act of 1996, telephone companies are requirements to enter contracts known as interconnection agreements with new market entrants seeking to connect with existing networks. The goal of this requirement was to increase competition in local telephone markets. The plaintiff, Core Communications, was a new market entrant in Baltimore seeking an interconnection agreement (“ICA”) with the established, phone company, Defendant Verizon. In order to expedite the process, the two companies agreed to adopt the terms of a previously approved ICA between Verizon’s predecessor and another new entrant. The Maryland Public Service Commission (“PSC”) approved the Core ICA.

Following delays in the agreed interconnection timeline and subsequent activities in initiating the litigation, a series of Core’s claims were consolidated. These claims included a single count for breach of contract, three related claims for promissory estoppel, unjust enrichment, and breach of warranty, as well as three state law tort claims for misrepresentation (both negligent and intentional), concealment (both negligent and intentional), and unfair competition. After a series of legal events regarding the various claims, the parties submitted cross-motions for summary judgment on the matters of contract damages and resolution of Core’s surviving tort claims.

In its summary judgment papers, Verizon raised for the first time that the Core ICA contained an exculpatory provision that served to insulate Verizon from the damages Core pursued. Verizon argued that the provision barred the consequential, lost-profit damages demanded by Core so that the only remaining damages available were nominal in nature. Verizon also argued that the provision barred recovery of damages for any tort claims, except for those involving “willful or intentional misconduct,” which Verizon contended Core was unable to prove.

Core, on the other hand, argued that Verizon had waived any rights under the exculpatory provision by failing to timely invoke the provision as an affirmative defense under Rule 8(c) of the FRCP and Verizon did not rely on the provision in its previous declaratory judgment action. Alternatively, Core argued that the clause was unenforceable under Maryland law as against public policy. During the pendency of the summary judgment motions, Core withdrew its tort claim for misrepresentation so that only the tort claims for concealment and unfair competition remained.

The district court rejected Core’s argument that Verizon had waived the benefit of the exculpatory provision by failing to properly and timely invoke it in its pleadings. The district court also ruled that the clause could not be enforced on the basis of state law public policy principles with regard to the tort claims. Moreover, the district court explained that the clause could not bar Core’s request for consequential damages on the breach of contract claim. As to the merits of the tort claims, the district court stated that Core’s claims failed for lack of proof on the issues of intent to defraud or deceive. A jury issue remained with respect to the contract damages for Verizon’s breach of the Core ICA; however, the case never reached the jury.

 Timeliness and Application of the Exculpatory Clause

The Fourth Circuit did not find that the district court abused its discretion in permitting Verizon to raise the exculpatory clause following the remand and in the summary judgment proceedings. The Circuit explained that there is a recognized exception to Rule 8(c)—the defense is not waived if the pertinent provision was “evident” in the contract “before the trial court.” In addition, Core was neither unfairly surprised nor unduly prejudiced by Verizon’s delay in invoking the clause. Therefore, the clause was timely and appropriately invoked.

The court also stated that the contractual duty at issue in the case is a duty imposed by the Telecommunications Act itself and the resolution of the claim regarding the scope of that statutory duty, including the appropriate remedies, depends on the interpretation and application of federal law. Although no other Circuit has addressed whether the Act abides in the existence of an exculpatory provision in an approved ICA, the Fourth adopted the district court’s conclusion that exculpatory clauses are not void under the Act.

Applying the familiar Chevron two-step framework, the court recognized that the Act itself does not address the issue of an exculpatory provision’s enforceability in an ICA. However, the FCC’s decisions clearly illustrate the agency’s reasonable conclusion that such provisions do not offend any aspect of the Act. Thus, the court held that Verizon’s reliance on the clause is not precluded by federal law.

Summary Judgment on State Tort Claims

Under Maryland law, Core must prove five elements by clear and convincing evidence to succeed on its concealment claim. The tort of unfair competition, on the other hand, is more flexible and requires proof of “fraud, deceit, trickery or unfair methods of any sort.” The Fourth Circuit agreed with the district court that no reasonable jury could find that Verizon unlawfully concealed any material fact from Core. Core failed to offer any evidence suggesting that Verizon’s failure to identify Core as the “customer of record” was driven by an intent to defraud or deceive. Core only asserted that the failure to disclose occurred and then asked the court to make the inference that Verizon must have done so intentionally in order to improperly delay the Core interconnection. However, the court refused to make such an extended inference.

The court likewise agreed with the district court on the unfair competition tort claim. There was simply no evidence offered on the element of intent to defraud or deceive. In this section of reasoning, the Court notes its distaste with Core’s intentional tort claims potentially appearing only as contract claims “in the guise of a tort.”

Nominal Damages for Breach of the ICA

Finally, the court reviewed the district court’s judgment awarding nominal damages of one dollar to Core for Verizon’s breach of the Core ICA.  The court explained that the “willful or intentional misconduct” exclusion to the exculpatory provision would apply exclusively to tort actions because an intent to defraud or deceive is ordinarily not at issue in a breach of contract claim. Nevertheless, Core was unable to show that Verizon engaged in such “willful or intentional misconduct.”

Core also argued that the exculpatory provision only limits Verizon’s liability for consequential damages “in connection with the provision or use of services offered” under the ICA. Core contends that interconnection is not a “service” within the meaning of the provision. The court rejected this argument and explained that according to its broad and ordinary meaning, the word “services” in the provision must include the provision of an interconnection at Core’s request.

In a last attempt, Core looked to a particular section of the Core ICA, which provides for a limited remedy not barred by the exculpatory provision, to argue that it is entitled to “performance penalties.” However, Core did not satisfy its own requirements under that section and failed to provide any evidence in the summary judgment proceedings as to the alleged performance failures. Thus, Core could not be entitled to the performance penalties and the district court properly entered judgment on Core’s breach of contract claim in the nominal sum of one dollar.

The case is Core Communications v. Verizon Maryland and the opinion can be foundhere.