Level 3 Communications, LLC v. TNT Construction, Inc.
Docket: CIVIL ACTION NO: 3:14-CV-00844-GNS-CHL
Court: District Court, W.D. Kentucky; November 13, 2016; Federal District Court
Defendant TNT Construction, Inc. filed a Motion for Partial Summary Judgment regarding a case involving Level 3 Communications, LLC, a telecommunications company whose operations rely on an underground fiber-optic cable network. On October 3, 2012, during excavation work, TNT severed a fiber-optic cable at the intersection of Reedyville Road and Hunt Church Road in Roundhill, Kentucky, damaging a conduit bank. Level 3 reported that this incident interrupted its systems with a capacity of 18,816 DS-3s, equivalent to approximately 841.075 gigabits per second. Level 3 has redundant capacity to reroute traffic during outages but claims it could not reroute the affected capacity in this case, resulting in service interruptions until repair, which took 6.3 hours. Level 3 seeks $3,369,894.42 in damages, comprising $61,288.98 for repair costs and $3,308,605.44 for loss of use, based on the cost of renting additional capacity during the outage. TNT's motion challenges only the loss-of-use damages, asserting that Level 3 successfully rerouted all affected traffic and experienced no service interruptions. The court granted the motion in part and denied it in part.
Level 3 required 18,816 DS-3s to replace capacity lost due to a cable cut and analyzed costs from local carriers in Louisville, Kentucky, and Portland, Tennessee. The terminals are in different Local Access and Transport Areas. The replacement capacity costs include:
1. BellSouth in Louisville: $4,112 monthly and $1,430 one-time per DS-3.
2. MCI between Louisville and Portland: $2,700 monthly, $7 per mile monthly, and $600 one-time per DS-3.
3. BellSouth in Portland: $9,982 monthly and $1,265 one-time per DS-3.
Level 3 prorated these charges for the 6.3 hours of service interruption, totaling $3,308,605.44. However, Level 3 did not rent substitute capacity during this period and the representative assessing damages did not verify the feasibility of renting capacity for such a short time. The representative stated that Level 3 typically repairs fiber cuts rather than renting replacements and used DS-3s as a standard for loss calculations. Level 3 has no evidence of having rented substitute capacity for less than 30 days and acknowledged it would take longer than 6.3 hours to do so. Additionally, Level 3 confirmed it has not incurred any proven financial losses, customer refunds, or losses of customers due to the service interruption.
Jurisdiction is established under 28 U.S.C. § 1332(a)(1) due to diversity of citizenship and an amount in controversy exceeding $75,000, excluding interest and costs.
Federal Rule of Civil Procedure 56(a) mandates that summary judgment shall be granted if the moving party shows no genuine dispute of material fact and is entitled to judgment as a matter of law. A genuine dispute exists when factual discrepancies could affect the case's outcome under applicable law. The moving party typically bears the initial burden of demonstrating the absence of such disputes. If the moving party does not have the burden of proof on the relevant issue, it can still fulfill its obligation by showing a lack of evidence supporting the non-moving party's claims. The non-moving party must then present more than mere speculation to counter the motion. The judge's role is to assess whether a genuine issue exists for trial, viewing evidence favorably towards the non-moving party. A minimal amount of supporting evidence is insufficient; there must be adequate evidence for a reasonable jury to rule in favor of the non-moving party.
Regarding TNT’s motion, two primary questions arise: whether Level 3 can recover damages under Kentucky law for the loss of use of a fiber-optic cable for 6.3 hours, and if so, whether the proposed measure of damages—renting 18,816 DS-3s—is appropriate. The Court affirms that Level 3 is entitled to loss-of-use damages, supported by Kentucky case law recognizing such damages for property injury. However, it concludes that the measure of damages proposed by TNT is inappropriate, as established by prior Kentucky rulings which allow for recovery of the value of use lost due to negligence or wrongful acts, alongside repair costs.
Loss-of-use damages apply when an easement is obstructed, as established in Southern Railway in Kentucky v. Kentucky Grocery Co. The Kentucky court ruled that property owners can recover the reasonable value of use lost during necessary repairs. Level 3 has shown it could not use its severed Cable for 6.3 hours, suggesting a potential entitlement to loss-of-use damages. However, the specifics of Level 3’s fiber-optic system may impact this entitlement during summary judgment. Courts across various jurisdictions have debated whether telecommunications companies can recover such damages. Most rulings deny recovery when service is uninterrupted due to rerouting of traffic through redundant capacity. For instance, MCI WorldCom Network Services was denied damages when it could still provide service despite cable damage. Conversely, some courts have allowed recovery where service interruptions occurred. The "spare boat" doctrine may also be relevant, as demonstrated in cases like The Cayuga and Brooklyn Eastern District Terminal, where courts granted loss-of-use damages despite the availability of a spare vessel, indicating that the lack of actual rental does not preclude compensation for loss of use.
In Brooklyn Terminal, the Supreme Court denied loss-of-use damages to the owner of a damaged tugboat, who had not obtained a substitute vessel but instead utilized other boats in its fleet. The Court distinguished this case from the "spare boat" doctrine, which allows for recovery of loss-of-use damages when a spare boat is maintained specifically for substitution in case of damage. The Court emphasized that because the owner had not reserved a boat for emergencies and used its available resources to minimize losses, the saved expenses could not be charged to the respondent.
Recent cases involving damaged fiber-optic cables reference this distinction to evaluate whether a telecommunications company's redundant capacity impacts recovery for loss-of-use damages. In MCI WorldCom Network Services v. Atlas Excavating, the court allowed such recovery since the plaintiff's redundant capacity was reserved for emergencies. Conversely, in cases like MCI WorldCom Network Services, Inc. v. OSP Consultants, recovery was denied when the redundant capacity was utilized in regular business operations.
TNT contends that Level 3 cannot claim loss-of-use damages due to its redundant network capacity, asserting that Level 3 rerouted traffic without interruption. However, Level 3 has provided evidence of service interruptions and that its redundant systems are exclusively used for emergencies. Thus, for the purposes of summary judgment, this situation aligns more closely with The Cayuga, indicating that loss-of-use damages may be recoverable.
Level 3's failure to rent replacement capacity and its lack of direct pecuniary loss due to the severance of the Cable do not preclude its claim for loss-of-use damages. Kentucky law, as established in Pope’s Adm’r v. Terrill, does not definitively require proof of actual pecuniary loss for such recovery. The Restatement (Second) of Torts supports this interpretation, stating that loss-of-use damages can be awarded even if no harm has been suffered, as ownership entails the right to use the property. The court finds that Level 3 is entitled to seek these damages for the time it was deprived of using the Cable.
Determining the measure of loss of use presents challenges, particularly regarding the appropriateness of using rental value under Kentucky law. While courts acknowledge that the value of property use is difficult to measure, rental value is considered a relevant factor. Market rental value can sometimes provide a reliable measure of loss-of-use damages, especially for commercial items like vehicles, provided it is reasonable and accurately estimable. The court emphasizes that damages should not be denied solely due to the inability to estimate them accurately. However, the existence of a rental market is crucial for applying this measure. Past cases indicate that, without a viable market, estimates of market value would be speculative and unreliable.
The U.S. Supreme Court in Brooklyn Terminal established that a vessel's disability does not justify demurrage at the hire rate unless deemed reasonable under the circumstances. Level 3 seeks damages based on renting 18,816 DS-3s for 6.3 hours, yet there is no market for such short-term rentals, as affirmed by other courts. Level 3’s calculations reveal monthly recurring charges and installation fees, indicating a lack of hourly or weekly rental options. The company has not demonstrated any instance of renting substitute capacity for less than 30 days, nor did its representative assess the feasibility of renting for 6.3 hours. It is implied that prorating the monthly fee acknowledges the absence of an hourly market. Level 3’s practice is to repair rather than replace capacity, and it acknowledged that securing replacement capacity would take longer than repairing damaged cables. Prior Kentucky cases assessing rental value pertain to automobiles, where a defined rental market exists, contrasting with the current lack of a substitute market for telecommunications infrastructure. Kentucky courts have recognized that different criteria apply to loss-of-use damages, indicating that rental value is merely one potential measure and not universally applicable. This principle is supported by historical case law, which emphasizes that rental value is suitable in cases with easily estimable values, unlike the current situation.
Majority rulings from various jurisdictions indicate that measuring loss-of-use damages for telecommunications companies using a theoretical rental value is inappropriate. Under Kentucky law, compensatory damages aim to restore the injured party to their pre-injury position, not to confer a benefit. An injured party cannot profit from property damage. Allowing Level 3 to base its damages on theoretical rental costs for DS-3 circuits would result in an unreasonable financial gain, exceeding $3.3 million—over 50 times the actual repair costs—despite no evidence of lost profits or customers. Although jury determination of damages is acknowledged, the legal framework must guide the parameters of such determinations. The court concludes that Level 3's proposed damage measure is speculative and unreasonable, lacking a viable market for short-term rental of DS-3s. Consequently, the court grants in part and denies in part the Defendant’s Motion for Partial Summary Judgment. The claims of WilTel Communications, a subsidiary of Level 3, are identical and not separately discussed. Kentucky law governs the claims, adhering to the principles established by the state's highest court.
Federal courts in diversity cases concerning Kentucky law must predict the Kentucky Supreme Court's likely ruling on undecided legal questions, using analogous state court decisions, legal commentaries, and rulings from other jurisdictions as guidance. Caution is advised in these predictions. TNT argues that KRS 304.39-115 prohibits loss-of-use damages unless a replacement vehicle is rented. The statute allows recovery for loss-of-use damages limited to necessary expenses during the repair or replacement of a motor vehicle. In State Farm Mutual Automobile Insurance Co. v. Norcold, Inc., the court denied loss-of-use damages for an RV because the plaintiff did not incur necessary expenses, as the RV was not essential for his living situation. The statute is specific to motor vehicles, and the Kentucky Court of Appeals has stated that legislative intent to override common law must be explicitly expressed. Thus, KRS 304.39-115 does not restrict the types of damages recoverable in this case. Additionally, Level 3's calculation of damages based on renting 18,816 DS-3 lines is deemed unreasonable, as they could have opted for a more efficient rental of 98 OC-192s, which would provide equivalent capacity while being more cost-effective.
Graham's deposition highlights the inefficiencies of renting 18,816 DS-3s, emphasizing that utilizing the highest bandwidth possible is more cost-effective. By multiplexing the connections, only a single cable is needed instead of 18,000 electrical connections. Graham confirmed that this practice was employed by Level 3 between Louisville and Nashville as of October 3, 2012, to achieve scale efficiency and reduce costs. Although Level 3 identified the DS-3 as a fundamental capacity unit, their explanation for its usage was minimal. The representative responsible for calculating loss-of-use damages did not verify if the cable used DS-3s or investigate OC transport system rates, merely stating that DS-3s were their standard for loss calculations. The court references Justice Cardozo’s opinion in Brooklyn Terminal, which cautions against excessive recovery based on speculative scenarios, stressing that compensation should reflect reasonable probabilities and circumstances. It suggests that claims for demurrage based on the cost of a substitute may be deemed unreasonable if actual losses are minimal or avoided without needing a substitute.
