Posted 08/01/2001
Verizon vs. Covad
BOC Attempts to Squelch Pioneering CLEC's Capitol Hill Advocacy
By Kim Sunderland
Isn't it enough that Covad Communications Co. (www.covad.com), arguably one of the nation's most resilient CLECs, is struggling financially along with the rest of the CLEC industry? Its stock price is less than $1, the company's market cap has dwindled, and its leadership problems have made national headlines.
Now Covad's got to devote its one-man federal regulatory efforts to fighting the nation's largest, most successful incumbent, Verizon Communications Inc. (www.verizon.com).
Sources say the ongoing animosity between the two companies paints a vivid industry picture of the never-ending regulatory and legislative disputes between the nation's CLECs and BOCs.
"It's the epitome of the David and Goliath telecom story," says one Washington, D.C., attorney, who wished to remain unnamed.
The most recent turn of events has exacerbated the scenario. Verizon recently filed a lawsuit against Covad alleging the high-speed Internet-access provider blamed its own service failures on Verizon.
The lawsuit alleges that former employees of Covad, which provides broadband Internet access through DSL, "report that they were 'pressured' and 'badgered' into issuing false reports about Verizon's services and 'reprimanded' if they failed to comply."
Covad denies the allegations and claims that Verizon wants to thwart its regulatory and legislative efforts in Washington, where the CLEC publicly has gone up against the BOC on several fronts.
"Obviously, we think Verizon's suit is a harassment tactic to try to muzzle our pro-competitive advocacy," Covad senior counsel Jason D. Oxman tells xchange.
Dhruv Khanna, Covad's co-founder, general counsel and executive vice president, says Covad "patently denies" Verizon's service records allegations. He adds, the lawsuit "thinly veils the fact that Verizon has a very poor service record and is inventing complaints to cover up its own ineptitude."
In fact, Verizon is a defendant in several antitrust suits and has lost harassment-style lawsuits to Covad in the past, Khanna says. Verizon is concerned that its pro-monopoly status is in jeopardy since the so-called Tauzin-Dingell bill (H.R. 1542) doesn't look like it's going to pass Congress.
Covad continues to work with all ILECs to get DSL installed to homes and businesses as fast as possible, Khanna says, "often having to overcome ILEC support and provisioning issues."
But this is the area where Verizon says Covad is making up charges.
Verizon held a mid-June news conference in Washington to explain its lawsuit against Covad, which was filed with the U.S. District Court in San Jose, California.
This isn't the first legal issue between the two: Covad filed an antitrust suit against Verizon in 1999, while Verizon awaits an appeal regarding the loss of a patent suit against Covad.
In the most recent case, Verizon charges, the CLEC orchestrated an intentional campaign of lies and distortions to deceive the public and regulators and to shift its operating costs and blame for its own problems to Verizon.
In doing so, Covad submitted more than 22,000 reports claiming falsely that Verizon failed to properly provide DSL service, the suit says. The lines were ordered to connect Covad DSL customers to the Verizon network. Verizon, which has devoted a website to the lawsuit (http://newscenter.verizon.com/kit/suit), has included in the lawsuit 26 sworn statements by former Covad employees.
"The picture we have is of Covad installers being thrown into the field undertrained and underequipped, while the company was overpromising customers delivery on a schedule it had no hope of meeting," says William Barr, Verizon's executive vice president and general counsel.
"Then, when the inevitable happened and Covad couldn't deliver to customers, there was a policy in place to generate false complaints of Verizon service problems in order to cover up the Covad failures," Barr said. "This had the effect of shifting costs from Covad to Verizon."
In affidavits, the former Covad workers estimated that as many as 50 percent of the reported trouble reports were false. And Barr said Covad used this false data to persuade regulators to penalize Verizon, costing the company million of dollars.
In one testimony included in Verizon's lawsuit, a former Covad employee reportedly said Covad "managers and directors would often give me direct orders to open trouble tickets blaming the ILEC, even when it was obvious the problem lay with Covad."
The former employee said that at one point he prepared a summary of trouble tickets showing that roughly two of the 200 tickets involved genuine ILEC problems.
"I carried out the orders to issue false trouble tickets because I feared for my job and have a family to support," said the unnamed employee in his account.
Another former Covad employee said the CLEC's management "pressured us and even badgered us into recording problems, saying it was important to Covad's success to have lots of documented problems to report about the ILECs. I was very uncomfortable with this practice and believe that it distorted the true nature of the good relationship we enjoyed with ILEC employees."
Upon review of the testimonies, none is signed and none names the former employees. A private investigator in Northern Virginia reportedly found the witnesses, but the investigator would not provide xchange with the names of the former Covad employees.
"The names of the declarants were not included in the documents we released to protect the witnesses," explains Eric W. Rabe, vice president of media relations for Verizon. "Many are quite concerned about retaliation from Covad; they have received letters from Covad, which some find intimidating.
"Should we get to a trial in this case, of course, the witnesses would come forward in public. But that is not necessary at this stage."
Covad's Oxman asks, "What is this? A Mafia suit?"
Oxman says that because Verizon won't divulge the names of the employees that shows the BOC is "trying to insulate the lawsuit from outside investigation." He adds that the incumbent isn't worried about the merits of the case and probably won't reveal the names before a judge dismisses the case.
"Verizon held a press conference; had its thunder and just wanted this to be a one-day story," Oxman says. "This is nothing more than a bizarre game."
But Verizon's lawsuit isn't an attempt to harass Covad, Rabe says.
"The harassment, I'd say, is in Covad's several-years-long practice of purposefully filing false trouble reports with Verizon," Rabe told xchange. "Covad cannot answer the first question about this lawsuit--'Are these people telling the truth?'--because the answer is that they have sworn under oath that they are former employees of Covad, and that they are telling the truth in describing the Covad scheme. So Covad tries to raise a smoke screen of other issues hoping to divert the press."
Verizon's lawsuit also alleges that Covad used the false reports to make some 200 lobbying visits to regulators to criticize Verizon service, Barr says, adding that Covad also allegedly cashed in on payments under Performance Assurance Plans.
"Under the Performance Assurance Plans, we are held financially responsible for faulty loop provisioning," Barr explains. "Covad abused these plans. Using their bogus trouble tickets, Covad received inflated payments and rebates."
Verizon has asked for injunctive relief against Covad, as well as damages that includes lost profits and punitive damages.
Covad contends that its employees, former or otherwise, are not instructed to falsely blame a phone company for any portion of installation and provisioning service issues.
"In fact, it is not in our best interests to open up false trouble tickets or service problem orders as we are required to pay ILECs for trouble tickets that prove to be our fault," Khanna says. "More importantly, it delays customers from getting their DSL installed in a timely manner."
Oxman adds that Verizon's lawsuit is a SLAPP suit, or a Strategic Lawsuit against Public Participation. The most notable national SLAPP case was Food Lion vs. ABC, in which the grocery store chain attempted to quash ABC's airing of a newscast about Food Lion's allegedly unhealthy handling of meat. The case eventually was dismissed and ABC aired the now-famous segment.
In similar fashion, Oxman explains that Verizon is trying to scare Covad, which has publicly aired repeated regulatory complaints against many of the nation's BOCs regarding local competition.
Covad says it believes Verizon has singled it out because it's been among the most active and substantive opponents of BOC requests to provide in-region long-distance service, along with the Tauzin-Dingell bill, which purports to cut the BOCs a regulatory break regarding data provisioning.
In fact, Barr acknowledged that Verizon hadn't investigated other CLECs/DLECs, such as NorthPoint Communications Group Inc. (www.northpointcom.net) and Rhythms NetConnections Inc. (www.rhythms.net).
Fortunately, Oxman says California law contains an anti-SLAPP provision and the CLEC is weighing its options.
Jeff Moore, senior analyst for network services with Current Analysis Inc. (www. currentanalysis.com), believes Verizon is playing a public relations game to better its image in the industry and before regulators.
"Verizon has taken a tremendous amount of criticism from the CLECs for not doing all it can to provide equal access," Moore tells xchange.
Generally speaking, such lawsuits won't make a tremendous amount of difference on Wall Street for the CLECs, and this one won't sink Covad, Moore says. But if a judge actually ruled in Verizon's favor, the decision could be a PR hit against Covad and a coup for other BOCs as well.
"Frequently, suits such as this are settled out of court," Moore says. "But lawsuits do tend to drag on."
Such a lawsuit also won't have a material effect on Covad's pocketbook (the company has insurance guarding against such lawsuits) or its ability to sell lines or conduct business.
However, Oxman, the company's one-man-federal-regulatory-show, is forced to spend his days filing responses.
"Verizon, in this case, has succeeded in taking me and distracting me in order to tap our resources and change the regulatory debate," Oxman says. "Assuming this was one of Verizon's goals, its mission is accomplished."
