ISP dumps 500 user contracts

Imagine receiving a notice from your ISP that says it is rejecting your contract, and service will cease in two weeks.

About 500 Genuity customers don’t have to imagine; they lived through it earlier this year after the ISP declared bankruptcy.

Barclays Global Investors, BTM Capital, Metropolitan Transit Authority of New York, PricewaterhouseCoopers and Sun were among the 10% of Genuity’s 5,000 customers that received letters saying their service contracts were being ditched. Some renegotiated, some did not, and some were not even given the opportunity.

“It’s pretty scary when you first get that letter,” says Jim Wilder, head of IT at Nabi Biopharmaceuticals in Boca Raton, Fla. Wilder was surprised that his contract was among those rejected, although his company eventually renegotiated its deal for managed firewall services with Genuity’s new parent company.

Genuity filed for Chapter 11 bankruptcy protection last December just before Level 3 Communications acquired it. Any company in Chapter 11 must accept or reject each of its existing contracts, including real estate, utility and customer contracts. This falls under Section 365 of the Federal Bankruptcy Code.

And this provision of bankruptcy law is not a two-way street. Customers that did not want to work with the bankrupt company or Level 3 were not allowed to abandon their contracts before they expired.

Genuity officials make no apologies for how they handled the contracts.

“A large number of contracts were not assumed by Level 3 either because they included services that Level 3 could not support or because the contracts were uneconomical, or contained terms and conditions that were difficult for Level 3 to honor,” says Kevin O’Hara, president and COO of Level 3.

While it is expected that any company in Chapter 11 would avail itself of relief that the bankruptcy code offered, it is unusual that such a large number of revenue-generating contracts would be rejected, experts say.

“You usually see companies hold on to customer contracts because that is what’s keeping them alive,” says Denise Dell, a bankruptcy attorney at Akerman Senterfitt, a law firm in Florida. “In my experience, with telecom bankruptcies, you are seeing more customer contracts rejected. But it is still not common.”

WorldCom, which recently changed its name to MCI, says it rejected only one customer contract when it reviewed its contracts last year after it filed for Chapter 11 bankruptcy protection. The service provider took a different approach by trying to retain as many customers as possible. The carrier’s bankruptcy is still the largest on record.

“It will be interesting to see if [Level 3] negotiates new contracts with these customers,” Dell says.

That’s the “program” Genuity and its parent put in place as soon as notices were sent to customers.

“Most of the sales efforts on the managed services business have been focused on winning back those managed service customers where we did not assume their contracts,” O’Hara says. “But [the intent is] winning them back on different terms and conditions. This program has gone well from a financial standpoint.”

The Genuity contracts rejected as being uneconomical were “not profitable at all,” says Mary Byrne, a vice president at the company.

The company would not say how many customers signed new contracts with Level 3, but it was clear that some were unhappy that the ISP was taking this route.

Relational Funding, Seminole Electric Cooperative and Sun were among users that filed formal objections with the bankruptcy court to the contract rejections.

“We were at risk of losing access to key electric utility monitoring systems” run by state and federal government agencies, says Steve Wallace, director of system operations at Seminole in Tampa, Fla. It was critical for the utility company to keep Internet access up and running. After some legal jousting, which the company did not want to detail, Seminole still is using Genuity services, but also now has a second ISP.

Genuity says it contacted all customers on the rejected contract list immediately. The ISP offered three options to those customers: Users could sign a new contract with Level 3, they could sign a 60-day contract extension, or they could have their service terminated. Those signing 60-day extensions still have the option of going with another ISP or signing a new deal with Level 3 at the end of the minicontract.

But the majority of users that signed new contracts are paying higher service rates.

“No one wants to have to pay more, but some of our customers knew they were getting such good pricing. For the most part, [customers] were pleased with service, and they understood that we need to bring everything to the right price level,” Byrne says.

Some Genuity customers that signed new contracts might have done so because switching would have cost more or because they did not want to deal with the headache of going through such a process when so many IT departments are short-staffed.