Axia Netmedia Corp. v. Mass. Tech. Park Corp.
| Decision Date | 31 August 2020 |
| Docket Number | No. 19-1649,19-1649 |
| Citation | 973 F.3d 133 |
| Parties | AXIA NETMEDIA CORPORATION, Plaintiff, Appellant, KCST USA, Inc., Plaintiff, v. MASSACHUSETTS TECHNOLOGY PARK CORPORATION, d/b/a Massachusetts Technology Collaborative, Defendant, Appellee. |
| Court | U.S. Court of Appeals — First Circuit |
Brian P. Voke, with whom Adam A. Larson and Campbell Conroy & O'Neil, P.C., Boston, MA, were on brief, for appellant.
Robert J. Kaler, with whom Edwin L. Hall and Holland & Knight LLP, Boston, MAwere on brief, for appellee.
Before Howard, Chief Judge, Lipez, Circuit Judge, and Saris, U.S. District Judge.*
Massachusetts Technology Park Corporation, an independent public instrumentality of the Commonwealth of Massachusetts operating under the name Massachusetts Technology Collaborative ("MTC"), owns a fiber-optic network in western Massachusetts known as the Massbroadband123 Network. Before the network was built, MTC contracted with Axia NGNetworks USA, Inc. -- now called KCST USA, Inc. ("KCST") -- to operate and market the network. MTC also secured a guaranty of KCST's obligations under the contract from KCST's parent company, Axia NetMedia Corporation ("Axia").
The relationship between MTC and Axia deteriorated after the network was built. Axia ultimately sued MTC in federal district court over the guaranty agreement and MTC procured an order compelling arbitration of the parties' dispute. The arbitrator found that MTC had materially breached the underlying contract with KCST, and, accordingly, that the guaranty agreement was void for failure of consideration. Axia sought confirmation of the arbitration award while MTC, dissatisfied with the arbitrator's decision, sought vacatur or modification of the arbitration award under section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10(a). The district court concluded that the arbitrator had exceeded the scope of his powers, see id. § 10(a)(4), and vacated the portion of the arbitration award that voided the guaranty. Axia has appealed that decision.
Concluding that the arbitrator acted within the scope of his powers, we reverse and remand with instructions to enter an order confirming the arbitration award.
We begin by providing background about the relevant provisions of the contracts between MTC and KCST and between MTC and Axia, the breakdown of the relationship among MTC, KCST, and Axia, and the arbitrator's and district court's decisions. This is not the first time that the dispute between MTC and Axia has come before us. See Axia NetMedia Corp. v. Mass. Tech. Park Corp. (hereinafter Axia I ), 889 F.3d 1 (1st Cir. 2018) (); see also Axia NetMedia Corp. v. Mass. Tech. Park Corp., Nos. 18-2180, 18-2192, 2019 WL 2273650 (1st Cir. Apr. 9, 2019) (). We draw background facts from our prior published opinion where appropriate.
In 2010, MTC received state and federal funding to build the Massbroadband123 Network to provide high speed broadband service to underserved communities in western and north central Massachusetts. Shortly before the funding was approved, MTC solicited proposals from telecommunications companies to operate and market the soon-to-be-built network. Axia, a Canadian company seeking to expand into the United States market, submitted a bid on behalf of its newly created United States subsidiary, KCST. MTC selected KCST to be the network operator. On February 25, 2011, MTC and KCST entered into the Agreement for Network Operator Services (the "Network Operator Agreement" or "NOA"), and MTC and Axia entered into the Guaranty Agreement (the "Guaranty") that is at issue in this appeal.
Under the terms of the NOA, MTC was responsible for constructing the network1 and turning it over to KCST in segments. The planned network, as described in the NOA, would be "a 1,338-mile fiber-optic network with new fiber running through or near 124 communities in western and north central Massachusetts" that connected to 1,392 Community Anchor Institutions ("CAIs"). CAIs are state or community facilities, like schools, libraries, hospitals and police departments. These facilities "are directly connected to the network[ and] serve as hubs of connectivity for extending the network to other customers." Axia I, 889 F.3d at 5. The NOA defines a CAI as "any one of the organizations and agencies identified in" a list that was appended to the NOA, which was subject to revision by MTC "from time to time in MTC's sole discretion."
The NOA details the many responsibilities that KCST agreed to assume as the "Network Operator." In short, KCST was "responsible for all aspects of the management, sales, monitoring, operations, support, and maintenance of" the Massbroadband123 Network. Also, it was responsible for "pay[ing] for all ongoing costs of operating" the network "and all costs of compliance with the terms of" the NOA. KCST, additionally, paid an annual fee to MTC. "In return, KCST retained the network's revenue up to a defined threshold, above which it agreed to share the revenue with MTC." Axia I, 889 F.3d at 4.
By its express terms, the NOA would not take effect until Axia signed the Guaranty:
12.14 Parent Guaranty. This Agreement [the NOA] shall become binding only upon condition that Network Operator's parent company, Axia NetMedia Corporation, executes and delivers to MTC a guaranty of obligations of Network Operator hereunder in a form acceptable to MTC, with a limit of liability no less than four million ($4,000,000) U.S. dollars.
In the Guaranty, Axia promised that, should KCST "default in any of its payment or performance obligations under the Network Operator Agreement," Axia would "make all such payments and perform all such obligations of the Network Operator" under the NOA, and would "fully and punctually pay and discharge ... any and all costs, expenses and liabilities" associated with those obligations. The Guaranty was "limited to and capped at the amount of" $4 million and it provided that, should Axia "advance to MTC funds up to said amount, [Axia] shall have no further obligation or liability under this Agreement."
The Guaranty also provided that its validity would be unaffected by potential breaches of the NOA by KCST:
2.3 This Agreement and the liability hereunder shall not be affected or impaired by any compromise, settlement, release, renewal, extension, indulgence, change in or modification of any of the obligations and liabilities of Network Operator under the Network Operator Agreement, or by any failure on the part of MTC, its successors or assigns, to realize upon any obligations or liabilities of Network Operator.
The Guaranty said nothing about what effect, if any, potential breaches of the NOA by MTC would have on its continuing validity.
Finally, both the NOA and the Guaranty address dispute resolution. The NOA provides that any dispute between MTC and KCST that cannot be resolved through informal dispute resolution procedures "will be finally settled by binding arbitration conducted in accordance with the [American Arbitration Association] Rules." Under the Guaranty, all disputes between MTC and Axia that could not be resolved in mediation would "be resolved by litigation in a court serving Middlesex County, Massachusetts," unless "MTC elect[ed] arbitration as the method of dispute resolution for a given dispute." The Guaranty provides that, "at MTC's sole election, MTC may file a demand for arbitration by the American Arbitration Association in its office serving Boston, Massachusetts." (Emphasis added.)
The construction of the network did not go as planned. The NOA required MTC to deliver the network to KCST in segments, as it was completed, with all thirty-six segments being turned over to KCST no later than August 25, 2013. MTC delivered only one network segment to KCST by that date. MTC then turned over more than half of the network at once in late December 2013 and the remaining segments in early 2014. In addition, the network was smaller in size and scope than the NOA contemplated, with fewer than the anticipated 1,392 CAIs connected to it.3
KCST initially responded to MTC's delays and other shortfalls by asking MTC to renegotiate the commercial terms of the NOA. When those negotiations proved unsuccessful, KCST threatened to withhold payments due MTC, which MTC relied upon to pay for overhead and other network-related costs. MTC promptly sought and obtained a preliminary injunction in Massachusetts Superior Court in mid-2014 requiring KCST to perform its obligations under the NOA, including making payments to MTC.
For the next two years, KCST performed its obligations under the NOA, but it was losing money and required loans from Axia to meet the demand on its financial resources. Then, "[i]n 2016, a Swiss investment firm acquired a controlling position in Axia." Axia I, 889 F.3d at 5. To facilitate approval of the acquisition by the Federal Communications Commission ("FCC") -- required because the FCC had authorized KCST to operate the network -- Axia transferred all KCST shares into a trust, see id., of which Axia was the sole beneficiary. KCST retained its original name -- Axia NGNetworks USA, Inc. -- at that time, but changed its name to KCST USA, Inc. in February 2017.
On March 22, 2017, KCST filed a voluntary petition for Chapter 11 bankruptcy, an "Event of Default" that triggered Axia's obligations under the Guaranty. On the same day, Axia preemptively filed this lawsuit against MTC in federal district court, seeking a declaratory judgment that the Guaranty was unenforceable because MTC had materially breached the NOA. MTC secured a preliminary injunction, which required Axia to perform its obligations under the Guaranty while the parties resolved their contract dispute. See id. at 4. And, as we noted at the outset, MTC successfully moved...
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