Axia NetMedia Corp. v. Massachusetts Technology Park Corp.

          MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO VACATE IN PART AND MODIFY ARBITRATION AWARD AND PLAINITFF'S MOTION TO CONFIRM ARBITRATION AWARD (Docket Nos. 241 & 243)

          TIMOTHY S. HILLMAN DISTRICT JUDGE.

         Defendant Massachusetts Technology Park Corporation (“MTC”) and Plaintiff Axia NetMedia Corporation (“Axia”) submitted their claims to final arbitration. On November 8, 2018, the arbitrator issued his final award. MTC now moves to vacate in part and modify that award and Axia moves to confirm it. For the reasons stated below, MTC's motion (Docket No. 243) is granted and Axia's motion (Docket No. 241) is denied.

         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 1, 200 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 (“NOA”) with Axia NGNetworks USA, Inc. (“Axia U.S.”), a wholly-owned subsidiary of Axia. The NOA 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, whereby Axia guaranteed the performance and payment obligations of Axia U.S., up to $4 million. The same individual, Art Price, executed both the NOA and the Guaranty Agreement on behalf of Axia U.S. and Axia, 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 NOA, that Axia

(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.

(Docket No. 23-3, § 2.1).

         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 the 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 NOA. This provision required the parties to continue performing all obligations under the NOA while their dispute was resolved. That dispute centered on Axia U.S.'s complaint that MTC delivered only 944 of 1, 392 operational Community Anchor Institutions (“CAI”), which it promised under the NOA. A CAI is defined by the National Telecommunications and Information Administration to include, inter alia, public safety entities, libraries, schools, state offices, and healthcare facilities. The NOA defined a CAI 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, § 2.7).^[1]

         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, Axia filed a lawsuit seeking declaratory judgment that the Guaranty was unenforceable because of MTC materially breached the NOA by failing to build the requisite number of CAIs and, because of that breach, that Axia had no responsibilities under the Guaranty. The First Circuit called this “the underlying dispute.” Axia NetMedia Corp. v. MA Tech. Park Corp., 889 F.3d 1, 6 (1st Cir. 2018).

         On March 23, 2017, triggered by KCST's bankruptcy petition, MTC provided written notice of an Event of Default to Axia and made a demand under the Guaranty. Section 4.6 of the Guaranty Agreement provides:

If the parties fail to resolve any dispute between them through mediation, or are unable to convene mediation within 60 days of first attempting to do so, then, at MTC's sole discretion, MTC may file a demand for arbitration by the American Arbitration Association in its office serving Boston, Massachusetts, in accordance with the rules for Commercial Arbitration in effect on the date of the Agreement providing the most expedited procedures available, and any such arbitration may be consolidated with an arbitration proceeding between MTC and the Network Operator. Except to the extent MTC elects arbitration as the method of dispute resolution for a given dispute, all disputes shall be resolved by litigation in a court serving Middlesex County, Massachusetts, except that, if suit is filed in state court and is not removed to federal court, the parties shall use all reasonable efforts to obtain acceptance of such law suit in the Business Law Session of the Massachusetts Superior Courts. All other provisions relating to dispute resolution or arbitration contained in the Network Operator Agreement are incorporated herein by reference.

(Docket No. 1-19, § 4.6). The relevant section of the NOA is Section 11.2, entitled “Continued Performance, ” which provides:

The Parties agree to continue performing their respective obligations under the Agreement (including the Wholesale Customer contracts and SLAs) while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions of this Agreement, or unless otherwise directed by MTC.

(Docket No. 23-2, § 11.2).

         MTC successfully demanded arbitration of the underlying dispute in accordance with the dispute resolution terms of the Guaranty Agreement. MTC also filed a motion for a preliminary injunction requiring Axia as guarantor to perform KCST's obligations under the NOA while the underlying dispute was in arbitration. The First Circuit called this dispute “the continued performance dispute.” Axia, 889 F.3d at 6. This Court granted MTC's motion for a preliminary injunction for the continued performance dispute while the underlying dispute was in arbitration conditioned on MTC posting a bond of $4 million for the duration of the injunction.

         Thereafter, the underlying dispute was resolved in arbitration. The Arbitrator found that MTC breached the agreement and that the appropriate remedy was “reformation of the NOA fixed nunc pro tunc to the date of breach . . . when MTC decided not to make good on adjusting the NOA to meet its failed Network delivery obligations.” (Docket No. 242-1, at 27).^[2] Accordingly, the arbitrator reformed the NOA and left the re-written contract “open to KCST to accept or reject.” (Docket No. 242-1, at 30).^[3] In addition, the arbitrator held “[t]he Axia Guarantee is no longer valid, nor does it remain in force.” (Docket No. 242-2 ¶ 20E). The arbitrator held that the Guaranty was void as a result of MTC's breach of the NOA and because MTC failed to honor its obligation under section 5.2.7 to adjust the NOA terms in a commercially reasonable fashion. (Docket No. 242-1, at 18, 27).

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