In the lawsuit, filed in California Superior Court in San Francisco, NorthPoint is seeking completion of the merger or, alternatively, damages of up to $1 billion or more in a jury trial.
"We have carefully considered our response to Verizon's actions, and we intend to pursue this matter completely to ensure that Verizon either closes the deal with NorthPoint or that NorthPoint receives the full compensation and benefits to which it is entitled under law and the merger agreement," NorthPoint chief executive Liz Fetter said in a statement.
Verizon, a major Baby Bell local phone company, agreed in August to merge its high-speed digital subscriber line (DSL) assets with NorthPoint. But the company balked recently and ended the deal after revelations surfaced that many of NorthPoint's customers could not pay their bills.
"We were well within our rights to terminate our agreement due to the deterioration of NorthPoint's financial condition," said Verizon spokesman Dave Frail. "We terminated the agreement in accordance with the terms of the agreement."
The broadband Net access sector has been hit hard by a shortage of investment capital in recent months. Many smaller providers are strapped for cash, and some have announced layoffs or other cost-cutting moves. NorthPoint, it is believed, has enough money to continue operations through the middle of the first quarter. The company on Thursday laid off about 250 people, or 19 percent of its work force.
Verizon representatives said the company has done nothing wrong in ending the proposed deal with NorthPoint, which originally was intended to provide the Baby Bell with broader nationwide high-speed Internet coverage beyond Verizon's local service regions.
Verizon last week filed a lawsuit in Delaware seeking a declaratory judgment supporting its right to end the deal on the grounds that NorthPoint's financial situation was declining, Frail said. NorthPoint revised its third-quarter earnings downward last month.
However, NorthPoint contends that Verizon terminated the deal to "avoid its investment obligations" so it could "increase its near-term stock price," the company said.
"We believe we have a strong case and a good probability of success," Fetter said.