Carriers Liable for Agents, Court Says
A judge in the federal District Court for the District of Maryland ruled agents/distributors of telecommunications services can be the lawful agents of the carrier supplying the underlying telecommunications services. The significance of this ruling is that the supplying carrier can be held legally liable for the breach of contract, tortious conduct or other unlawful acts of their distributors and for the damages that result.
Liability Provisions
Most carrier reseller/agent agreements don’t mention a quality commitment, but include an abundance of terms meant to ensure the carrier does not commit to any standard of service or other performance quality and that it is never subject to any liability for the failure of its service or its bad acts. These provisions appear in many forms, including limitations of liability, warranty disclaimers, indemnifications, preclusions of third-party beneficiaries and force majeure clauses, just to mention a few.
The purpose of these provisions is twofold:
● One, to use the contracting process to “wall off” the carrier from any real obligation to provide a definable quality of service and from most — if not all — responsibility for service failures;
● Two, to create the firm impression in the mind of the purchasing reseller, agent/distributor or end user that it is useless to attempt to obtain relief against any bad act committed by a carrier.
The truth is, while provisions limiting the nature and scope of carrier liability are very troubling and can be a substantial shield against liability, they are most certainly not inviolate. They can be sharply limited in scope and, in some instances, defeated entirely. For example, in many states common law can prevent the enforcement of exculpatory clauses, such as limitations of liability, where the complaining party can show the carrier’s conduct was grossly negligent, willful or where the enforcement of the clause would be unconscionable. Also, many states statutes prevent a waiver of certain warranties under certain circumstances.
Not only have carriers used their contracts to limit their obligations and exposure to their direct customers, they also have taken the position they cannot be held liable to their downstream distributors for the failures of their services or the bad acts of their “distributors.” In short, their claim is based on the assertion the distributors are not their “agents” and, thus, they are not liable for their bad acts. These claims, which have been used to deter many legal actions, have allowed carriers to benefit directly from the sales activities of their distributors, but to wall themselves off from liability when the distributor engages in bad acts at the behest of or in concert with the underlying carrier.
Limit Liability
In the Maryland case, the judge kicked over that wall. Significantly, the judge also rejected outright the carriers’ arguments that the federal court did not have jurisdiction over them, as out-of-state companies, as a result of their sales through third-party distributors in Maryland. The judge concluded these sales, along with the other conduct of the carriers, created sufficient contacts between the carriers and the State of Maryland to justify the assertion of jurisdiction.
These rulings are significant as they directly rebuff positions typically taken by carriers that they are immune from liability to downstream distributors for the conduct of their “independent” distributors where they sell services through such distributors. Subdistributors and other parties purchasing may now proceed with greater confidence against their underlying carriers as well as against their upstream distributor where the distributor acts in violation of their agreement or its conduct is otherwise unlawful.
The case has yet to reach the point where a determination is made as to whether the distributor-defendants are, in fact, the agents of the carriers. However, the carriers’ motions to dismiss were each denied suggesting other distributors no longer need be afraid to seek legal recourse against the carriers providing the underlying telecommunications services and that carriers must now pay more close attention to the conduct of their distributors and to the complaints of their subdistributors.
The lesson for agents:
● First, read your carrier agreements carefully and do everything you can to remove or limit the scope and effect of clauses that unfairly limit the liability of a providing carrier. These clauses can be negotiated and a fair balance can be struck.
● Second, if the conduct of a carrier or an upstream distributor has caused you damage, do not fold your tent when confronted with the inevitable and aggressive assertion you have no legal claims or right to relief.
Distributors and end users can climb over the liability wall and carriers would be well-advised to understand their actual exposure and to engage reasonably to resolve service and liability issues.
Neil S. Ende is the founder of and a partner in Technology Law Group LLC, a Washington, D.C.-based telecommunications law firm. He can be reached by phone at +1 202 895 1707 and by e-mail at [email protected]. Further information on this issue can be found at TLG’s blogsite, www.telecomandtechnologylawblog.com.
Looking for More?
Get more advice on agent contracts at a session led by the author, Neil S. Ende, at the Fall 2008 Channel Partners Conference & Expo in Boston. “Analyzing Agent Agreements” will take place at 10:30 a.m., Tuesday, Aug. 19. For more information about the event, visit www.channelpartnersconference.com.
