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Axia NetMedia Corp. v. Massachusetts Technology Park Corp.

United States District Court, D. Massachusetts

May 18, 2017

AXIA NETMEDIA CORPORATION Plaintiff, KCST, USA, INC. Plaintiff Intervenor
v.
MASSACHUSETTS TECHNOLOGY PARK CORPORATION d/b/a MASSACHUSETTS TECHNOLOGY COLLABORATIVE Defendant.

          MEMORANDUM AND ORDER ON DEFENDANT MASSACHUSETTS TECHNOLOGY PARK CORPORATION'S MOTION FOR PRELIMINARY INJUNCTION (DOCKET NO. 11) AND MOTION TO COMPEL ARBITRATION (DOCKET NO. 10)

          TIMOTHY S. HILLMAN, DISTRICT JUDGE

         Defendant Massachusetts Technology Park Corporation d/b/a Massachusetts Technology Collaborative (“MTC”) filed this motion seeking to compel Plaintiff Axia NetMedia Corporation (“Axia NetMedia”) to arbitrate the contractual disputes that form the basis of the present action (Docket No. 10), and seeking a preliminary injunction requiring Axia NetMedia to perform its obligations under the parties' Guaranty Agreement while the parties resolve their various contractual disputes. For the reasons outlined below, MTC's motion to compel arbitration is denied, without prejudice, and MTC's motion for preliminary injunction is granted.

         Background

         MTC is an independent public instrumentality of the Commonwealth of Massachusetts. Through state and federal grants, MTC built and owns the MassBroadband 123 network (“123 Network”). The 123 Network is comprised of over 1200 miles of fiber optic cable infrastructure, which connects more than 120 communities in Central and Western Massachusetts. The 123 Network is used by numerous agencies serving critical public safety functions, including police and emergency services, as well as thousands of other users and customers in Central and Western Massachusetts.

         On February 25, 2011, MTC entered into an Agreement for Network Operator Services (“Network Operator Agreement”) with Axia NGNetworks USA, Inc. (“Axia U.S.”), a wholly-owned subsidiary of Axia NetMedia. The Network Operator Agreement is a 10-year public services contract, under which MTC agreed to build and install the 123 Network, and Axia U.S. agreed to market, maintain, service, and operate the network, as well as collect revenues, pay its expenses, and make fixed payments to MTC. On the same date, MTC also entered into a Guaranty Agreement with Axia NetMedia, whereby Axia NetMedia guaranteed the performance and payment obligations of Axia U.S., up to $4 Million. The same individual, Art Price, executed both the Network Operator Agreement and the Guaranty Agreement on behalf of Axia U.S. and Axia NetMedia, respectively.

         Section 2.1 of the Guaranty provides, in the event of a default by Axia U.S. in any of its payment and performance obligations under the Network Operator Agreement, Axia NetMedia

(a) shall make all such payments and perform all such obligations of the Network Operator, as described in and in accordance with the terms of the Network Operator Agreement, and as such obligations may be changed in accordance with the terms of the Network Operator Agreement (the “Guaranteed Obligations”); and
(b) shall fully and punctually pay and discharge, as the same become due and payable, any and all costs, expenses and liabilities for or in connection with the Guaranteed Obligations, including, but not limited to, the costs of causing the substituted performance of the Guaranteed Obligations. This guaranty is limited to and capped at the amount of Four Million ($4, 000, 000) U.S. Dollars, and should Guarantor advance to MTC funds up to said amount, Guarantor shall have no further obligation or liability under this Agreement.

Dkt. #23-3.

         In July 2014, after indications from Axia U.S. that it intended to stop making payments to, or on behalf of, MTC, until certain disputes between the parties were resolved, MTC commenced litigation in Massachusetts Superior Court and obtained a TRO and preliminary injunction requiring Axia U.S. to perform its obligations pursuant to the “Continuing Performance” provision of the Network Operator Agreement. This provision required the parties to continue performing all obligations under the Network Operator Agreement while their dispute, which centered on Axia U.S.'s complaint that MTC delivered only 944 of 1392 operational “Community Anchor Institutions” it alleges were promised under the Network Operator Agreement, was being resolved.

         A “Community Anchor Institution” is defined by the National Telecommunications and Information Administration to include, inter alia, public safety entities, libraries, schools, state offices, and healthcare facilities. The Network Operator Agreement defined “Community Anchor Institution” to be “any one of the organizations and agencies identified in Exhibit A hereto, as the same may be revised from time to time in MTC's sole discretion up until the Commencement Date.” Docket No. 1-1, Section 2.7 (emphasis added).

         Section 214 Authorization

         Operation of a telecommunications network requires authorization from the Federal Communications Commission (“FCC”) pursuant to Section 214 of the Communications Act of 1934. Once a network operator has obtained Section 214 Authorization, it may not terminate or transfer the Authorization without FCC approval.

         In early 2016, Axia NetMedia announced that it was being acquired by Partners Group AG, a Swiss investment firm. To facilitate this acquisition, Axia NetMedia sought to transfer the Section 214 Authorization from its subsidiary, Axia U.S., into the Axia NGNetworks Trust (“the Trust”). This avoided the added federal government scrutiny that would otherwise have been triggered by the acquisition of the Section 214 Authorization by a foreign corporation. Axia NetMedia is, nevertheless, the sole beneficiary of the Trust.

         On June 22, 2016, Axia NetMedia, Axia U.S. and the Trust filed a joint application with the FCC for approval of an agreement whereby the Trust would acquire all issued and outstanding stock of Axia U.S., and its trustee, FSM Capital Management, would assume control of the day-to-day operation of Axia U.S. After a period of public notice, the FCC granted transfer of the Section 214 Authorization from Axia U.S. to the Trust on July 29, 2016. MTC alleges that the Network Operator Agreement required MTC's written consent prior to any such transfer, which was never sought. Because MTC's consent was not sought, MTC did not learn of the application to transfer Section 214 Authorization until after it had been approved by the FCC, and therefore did not file a petition with the FCC to deny the transaction, or otherwise oppose the application for transfer, during the public notice period. MTC filed a petition with the FCC in November 2016 to transfer the Section 214 Authorization from the Trust back to Axia U.S., however, that petition was denied because, inter alia, MTC failed to “to demonstrate that the Trust plans to default on Axia U.S.'s obligations, liquidate the company, or otherwise jeopardize the continued operation of MTC's network by Axia U.S.” Docket No. 23-9, ¶12.

         As part of the transfer of its Section 214 Authorization to the Trust, Axia U.S. entered into a Transitional Services Agreement with Axia SuperNet Ltd. and Axia Connect Ltd., wholly-owned subsidiaries of Axia NetMedia, which was approved by the FCC. Under the Transitional Services Agreement, Axia SuperNet Ltd. and Axia Connect Ltd. provide the Trust with technical, administrative, and operational support services required to operate the network.

         Current Proceedings

         In February 2017, Axia U.S. changed its name to KCST USA, Inc. (“KCST”), and on March 22, 2017, filed for Chapter 11 bankruptcy protection. On the same date, March 22, 2017, Axia NetMedia filed the instant lawsuit seeking declaratory judgment that the Guaranty is unenforceable as a result of MTC's breach of the Network Operator Agreement with KCST, and MTC's breach of the implied covenant of good faith and fair dealing in the Network Operator Agreement with KCST and in the Guaranty Agreement with Axia NetMedia. Axia NetMedia further seeks declaratory judgment that the Guaranty is void because Axia NetMedia's performance of obligations under the Guaranty would violate federal law and FCC regulations, as it would require Axia NetMedia to “operate” the 123 Network without the requisite Section 214 Authorization.

         On March 23, 2017, triggered by KCST's bankruptcy petition, MTC provided written notice of an Event of Default to Axia ...


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