Appeals court sides with DEs, but keeps auction results intact

An appeals court has ruled that some 2006 rules on designated-entity participation in spectrum auctions are invalid, although the court said too much damage would occur if it were to rule subsequent auctions invalid. Thus, winners in spectrum auctions 66 and 73 are allowed to keep their spectrum and Council Tree Communications Inc., Bethel Native Corp., and the Minority Media and Telecommunications Council can know they spent the last four years in court for the right reason, but not with the satisfaction of overturning the outcome.
The U.S. Court of Appeals for the Third Circuit overturned two Federal Communications Commission rulings on designated entities but sided with the FCC on one matter. DE rules were designed to help smaller companies be able to become wireless operators. The FCC implemented new rules in 2006 to deter DEs from flipping licenses to large telecommunications operators or getting spectrum only to lease it to big telcos. However, Council Tree and its fellow petitioners argued that changing the rules late in the game dried up venture capital investment.
The court struck down a rule that said DEs must keep their licenses for 10 years (the previous rule covered a five-year period) and a rule that limited who they can sell wholesale services to. The court commented that DEs should be allowed to lease or wholesale as much spectrum as they wish, as long as they do not give more than 25% to one entity.
The FCC changed the DE rules ahead of the Advanced Wireless Services auction, held in 2006. Those same rules were used in 2008 when the FCC auctioned 700 MHz licenses. Those auctions raised $33 billion for the government, with big winners being T-Mobile USA Inc., Verizon Wireless and AT&T Mobility. In the 2006 auction, DEs comprised 57 of the 104 winning bidders, winning 20% of the licenses, but only 4% of the dollar value. In previous auctions before the new FCC rules were in place, DEs had won 70% of the dollar value of the licenses.
T-Mobile USA has used its AWS winnings to aggressively build out its 3G network, while Leap Wireless International Inc. and MetroPCS Communications Inc. have used their AWS licenses to greatly expand their coverage. Verizon Wireless is banking its upcoming LTE network launch on its vast 700 MHz holdings, while AT&T Mobility is also expected to use its 700 MHz winnings to support its LTE plans.
Despite siding with the petitioners on two of the three challenges, the court said it would not declare the auctions invalid. “We are thus loath to rescind the results of the auctions, since it would involve unwinding transactions worth more than $30 billion, upsetting what are likely billions of dollars of additional investments made in reliance on the results, and seriously disrupting existing or planned wireless service for untold numbers of customers. Moreover, the possibility of such large-scale disruption in wireless communications would have broad negative implications for the public interest in general,” the court stated in its ruling.
“Petitioners suggest that we nullify the auction results, but permit the winning bidders to keep their licenses unless and until they are won by another bidder at re-auction. This might mitigate the chaos of a rescission, but it could not eliminate the massive uncertainty, waste, and frozen development that would occur from the time of the rescission until the re-auction which, as the FCC might wish to adopt additional rules before the re-auction to replace the ones at issue here, could be a significant period of time. Additionally, some of the intervenors, who were winners in Auction 66 in 2006, note that the state of the economy and the credit markets has changed dramatically since the auction; consequently, their participation in any re-auction might be impractical or impossible. A re-auction thus would unfairly require these intervenors to pay sums that they may not have in order to protect investments they have already made, and perhaps cannot recoup without the relevant spectrum licenses. Under these circumstances, we conclude that it would be imprudent and unfair to order rescission of the auction results.”