Telecommunications Provider Bankruptcy

Implications for Customers

When a telecommunications provider files for bankruptcy, customers that rely on the provider for their telecommunications infrastructure face significant risks.  For example, when NorVergence, a Newark-based company, filed for Chapter 7 bankruptcy in 2004, the filing left NorVergence’s customers – about 10,000 clients throughout the country, most of which were small businesses – facing abrupt service interruptions.

Dozens of telecommunication providers have gone bankrupt in this manner, leaving their customers without service and scrambling to find new carriers.  It typically takes five to ten business days to reconnect to a new service provider.  During that time, businesses are left without service.  This often has a devastating effect on businesses, especially those that rely heavily on phones and internet to communicate with customers.

This article address several questions raised by a telecommunications provider’s bankruptcy filing, including: whether or not customers should worry about service outages;  whether customers should cancel existing contracts with the provider; whether existing or prospective customers should sign new contracts with the provider; and whether customers should take any actions to protect their service.

Service Outages

Many people assume that a liquidated provider has to provide sufficient warning to its customers before service is stopped.  This is simply not true.  Instead, concern for protecting the provider from further loss often takes precedence over providing customers with adequate warning.

Court ordered shut-offs can happen with little to no warning to customers.  When they occur, businesses lose everything related to that service, including: telephone lines, call forwarding, and answering services.  Moreover, service outages can arise regardless of whether your provider has filed a Chapter 7 or Chapter 11 bankruptcy.  Chapter 11 bankruptcies are  designed to allow the company the opportunity to reorganize its debt and to try to re-emerge as a healthy organization.  Most Chapter 11 bankruptcies, however, are not successful.  When they are not successful, the provider will file for Chapter 7 bankruptcy and liquidate, causing abrupt interruptions in service.

Even if service outages do not occur as a result of a Chapter 11 bankruptcy, the quality of service may decrease.  For example, during restructuring customers may experience slower response times for problem resolution.  Additionally, prices may increase as a result of restructuring.

Cancelling Your Contract

If a customer’s telecommunications provider has filed for either a Chapter 7 or Chapter 11 bankruptcy, or if a customer anticipates their service provider filing for either type of bankruptcy, action should be taken now to review the contract, understand legal rights and limitations, and assess risks and costs.  Customers should begin by reviewing their contract to understand the circumstances under which they may terminate the contract for cause.  If the contract contains language that address the financial viability of the carrier or specifically states that a Chapter 11 filling is grounds for termination, then the customer may be able to end the contract.

If the contract does not contain such a clause, then the provider’s bankruptcy filing, by itself, would most likely not constitute cause for most customers to end their contracts.  However, other grounds for contract termination might exist.  For example, a  major service interruption would provide cause for existing customers to cancel their contracts with their telecom provider and switch to another carrier.

Mitigating Risk

If a provider has filed for either a Chapter 7 or Chapter 11 bankruptcy or if a customer anticipates their provider filing for either type of bankruptcy, the most important thing a customer can do is develop a comprehensive plan to mitigate risk.  The best way to mitigate the risk of a service interruption or decrease in service quality is to diversify services.  This can be done by moving all or a portion a business’s services to another carrier.

In order to determine whether diversification is appropriate, customers should evaluate their business to determine whether or not they have services that are especially vulnerable to service interruptions.   The answer to this question depends on what services (i.e., voice or data services) the business relies on to run day-to-day operations.  Once a business has determined its actual risks and requirements for diversification, they should contact alternate carriers to begin the process of negotiating an alternate agreement.

If your telecommunications provider has filed for either a Chapter 7 or Chapter 11 bankruptcy, or if you anticipate your service provider filing for either type of bankruptcy, contact us today at 732-741-4448.  Randolph H. Wolf will review your contract and help you to understand your legal limitations.