Mass. to pay $12.2 million in dispute over 'middle mile' network

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The state of Massachusetts lost a high-stakes battle this week over one of its premier high-tech assets, the $90 million fiber-optic middle mile network.

After years of litigation that became months of arbitration, the Massachusetts Technology Corp. failed to win a $30 million claim it lodged against the company it hired in 2011 to operate the 1,200-mile MassBroadband 123 system that extends broadband internet access to rural areas.

Instead, the state must pay $12.2 million to two entities involved in running the broadband network, Axia NetMedia and KCST USA.

The arbitrator's finding upholds claims by the companies that the network the state agency built and turned over failed to live up to what a contract promised.

Missing, arbitrator Philip D. O'Neill Jr. concluded, were hundreds of institutional customers that Axia believed awaited service.

Art Price, Axia's chief, told the arbitrator that if he'd known the true number of prospective customers, he wouldn't have signed the contract.

A spokesman for Mass Tech said Wednesday the agency is reviewing the arbitrator's ruling.

"The operation of the middle mile network is our focus and top priority," he said in a statement in response to questions from The Eagle about the integrity and future of the network. "We will work with the network operator to ensure it continues as planned."

An official with KCST offered an assurance Wednesday that the middle mile will continue to function normally, preserving broadband access to municipalities, schools, libraries and public safety departments across the region.

While the two sides accused each other of fraud, O'Neill's 30-page decision cites missteps by both sides.

Mass Tech's leaders at the time failed to properly verify the number of "community anchor institutions" poised to sign up for broadband connections through the network, testimony showed.

Despite that, Mass Tech has been prevailing in many of its efforts, in U.S. District Court, to win financial concessions from Axia and KCST.

In his decision, O'Neil wrote that given what he termed Mass Tech's "wrongful behavior," Axia should not have had to honor a performance guarantee in the contract. 

The decision awards $7,471,197 to KCST, in part to cover excess fees and expenses it paid to Mass Tech under terms of what the arbitrator determined to be a flawed contract. The decision awards $4,743,178 to Axia, a Canadian firm that was bought in 2016 by a private equity firm based in Switzerland. That money is intended to offset, in part, payments that Axia made under the performance guarantee that was upheld in court, but found to be unjustified by the arbitrator.

For the past 18 months, KCST USA has been in bankruptcy proceedings in Worcester due to losses it said resulted from problems related to the network operating agreement.

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Though Mass Tech moved after the bankruptcy filing to find a new network operator, KCST holds a contract valid until 2023.

Changes made through arbitration to fees spelled out in the agreement put KCST in a position now to curtail its losses as operator, a company representative told The Eagle.

In all, more than a million pages of documents were presented for review in connection with the case.

Financial hit

The financial impact on the state of Massachusetts as a result of Tuesday's decision by the arbitrator could grow. The partial final award does not include hundreds of thousands of dollars in additional fees and expenses that could be added to the final award.

Daniel J. Lyne, an attorney with Murphy & King, represented KCST USA in the arbitration.

"We are extremely gratified by the arbitrator's decision. He gave all parties a full and fair opportunity to present such evidence as they deemed necessary to resolve this matter," Lyne said in a statement.

The lead attorney for Axia NetMedia, Brian Voke, said the finding vindicates his client, which long argued that the network it was given to operate did not have the number of clients promised.

"The arbitrator found that MTC unlawfully failed to build and deliver the network it contracted to provide," Voke said in a statement.

As a result of that finding, the arbitrator removed Axia's obligation to provide a guarantee — and has removed that from a revised operating agreement.

Tuesday's decision followed 28 days of hearings in arbitration, along with more than a week of related legal proceedings up through closing arguments presented Aug. 7. That skirmishing followed months of motions and hearings in U.S. District Court.

Arbitration sessions are held outside of the court system, but considered binding.

Mass Tech has narrow grounds to appeal the decision. The state Treasurer's Office would be required to pay the $12.2 million. The arbitrator imposed a 12 percent interest fee on the total if action by the state delays payment.

The outcome is expected to be filed within a month in both U.S. District Court and U.S. Bankruptcy Court, where litigation has been stalled pending the outcome of arbitration.

Larry Parnass can be reached at lparnass@berkshireeagle.com, at @larryparnass on Twitter and 413-496-6214.


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