D.C. CIRCUIT ORDERS FCC TO RETURN NEXTWAVE PCS LICENSES

“The Commission, having chosen to create standard debt obligations as part of its licensing scheme, is bound by the usual rule governing the treatment of such obligations in bankruptcy,” Judge David Tatel wrote for court. Judges David Sentelle and Merrick Garland agreed. Ruling agreed with NextWave on series of arguments that pitted intricacies of U.S. Bankruptcy Code against regulatory obligations of FCC under Communications Act. Panel agreed with timing issue raised by NextWave, which argued FCC hadn’t taken adequate steps to announce cancellation of licenses before Commission’s public notice last year that spectrum was being re-auctioned. Intervening parties, including CTIA, argued that NextWave had notice in Oct. 1998 that its licenses would be cancelled automatically if it failed to make timely payment. “Neither the Commission nor intervenors point to any instance prior to the re-auction notice in which the Commission actually announced that NextWave’s licenses had cancelled despite the stay,” court ruled. “Moreover, the Commission’s own conduct suggests that it was at best unsure whether the automatic stay blocked cancellation of the company’s licenses.”

Second U.S. Appeals Court, N.Y., had held twice for FCC in NextWave case, starting with Dec. 1999 decision that overturned U.S. Bankruptcy Court, White Plains, N.Y., ruling that put $1 billion valuation on licenses instead of $4.7 billion bid price. (NextWave had already given Commission $470 million in downpayment). Ruling by 2nd Circuit in May 2000 had held that FCC was acting as regulator and not debtor when it cancelled carrier’s licenses for missed payment. U.S. Supreme Court declined to grant NextWave’s appeals of both 2nd Circuit rulings, moving arguments to D.C. Circuit. Amid back-and-forth of case between U.S. Bankruptcy Court and 2nd Circuit, NextWave had offered under new plan of reorganization to make lump sum payment of its outstanding obligation to FCC, to which agency objected on ground that licenses automatically were cancelled when first payment deadline was missed in Oct. 1998.

Carriers siding with FCC had argued that even if license fee obligation for which Commission had created installment plan for eligible bidders was “dischargeable debt” under bankruptcy law, that wasn’t only reason that FCC had cancelled licenses. Sec. 525 of Bankruptcy Code bars govt. units from revoking licenses of debtor or bankrupt entity “solely” because they haven’t paid dischargeable debt. “We are unconvinced,” court wrote. Statute doesn’t cover “agency’s motives” in cancelling license for failure to pay debt, it just says that agency cannot cancel licenses only because indebted company hadn’t made payment, court said. “It may be true, as the Second Circuit decided, that the Commission had a regulatory motive for examining NextWave’s timely payment record and cancelling its licenses on that basis, but as we pointed out earlier, neither the Commission nor the intervenors dispute that NextWave could have retained its licenses if it had made timely installment payments.”

In crafting installment payment plan for original C-block bidders, court said it had “no doubt” that FCC had “made a good- faith effort to implement Congress’s command to encourage small businesses with limited access to capital to participate in PCS auctions.” Decision also acknowledged that allowing NextWave to keep its licenses might be unfair to losing bidders and licensees that had forfeited licenses in past because they couldn’t make timely payments. “Any unfairness, however, was inherent in the Commission’s decision to employ a licensing scheme that left its regulatory actions open to attack under Chapter 11 of the Bankruptcy Code, the very purpose of which is ’to permit successful rehabilitation of debtors,'” court wrote. Bankruptcy Code keeps in mind that companies that seek Chapter 11 protection “will sometimes avoid the consequences of late or nonpayment they might have faced had they not filed for bankruptcy.” Sec. 525 of Bankruptcy Code bars FCC, “whatever its motive,” from cancelling licenses of winning bidders who don’t make timely installment payments while in Chapter 11, court said. “We do not think this conclusion frustrates the purposes of the Communications Act, because nothing in the Act required the Commission to choose the licensing scheme at issue here,” court wrote.

FCC officials declined comment Fri., with spokeswoman saying decision was under review. Several industry sources indicated they expected agency, based on amount of time it had invested in trying to reclaim licenses, would appeal to Supreme Court. FCC has 45-day window to make decision on challenge. If agency does ask Justice Dept. to mount appeal, one source speculated that Solicitor Gen. Theodore Olson would recuse himself because he had represented NextWave in oral argument before D.C. Circuit in March (CD March 16 p1).

Verizon’s Strigl said company, which bid $8.8 billion for PCS licenses earlier this year, was “disappointed.” “The FCC and NextWave need to settle this dispute in a way that permits the FCC’s auction results to stand and this spectrum to be quickly deployed,” he said. “This spectrum has been lying fallow for years,” he said. “It’s time for the government to come to a fair resolution based on the recent auction that will allow wireless carriers that have the resources, customers and know-how to bring this spectrum’s benefit to the American people.” If bulk of auction results are overturned, Verizon would stand to lose most among successful bidders in auction. Alaska Native Wireless, designated entity in which AT&T Wireless has 39.9% stake, won 44 licenses for $2.89 billion, and Cingular won $2.35 billion in licenses. Verizon’s successful bids included two 10 MHz N.Y.C. licenses, which would bring carrier’s total there to 45 MHz.

NextWave Chmn. Allen Salmasi said company planned to begin focusing on resuming deployment of its network. “As the record of our reorganization proceeding demonstrates, NextWave has been ready, willing and able for several years now to pay its debts to the FCC and other creditors in full, deploy state-of-the-art wireless facilities and offer the public new competitive facilities,” he said. “Now that the Court of Appeals has spoken, we look forward to pouring all of our energies into those tasks.” NextWave reportedly has been lining up financing for last several months in anticipation of favorable ruling.

While decision was definitive on grounds on which case was reversed and remanded to FCC, it left unanswered several procedural questions on what happens next, several industry sources said. One official said FCC should be able to return licenses to NextWave without order. But more common view among industry insiders was that because Commission took step of cancelling licenses, it also must take formal action to reinstate them. Also unclear was whether FCC would appeal ruling. “Could the Commission try and drag this thing out for several more years?” one source asked. “I suppose it could, but why would it?” But others disagreed, saying agency had dedicated too many resources to defending its position in last several years to not challenge latest ruling. “I'd be amazed if the FCC doesn’t push the Justice Department to appeal this, they just have too much invested,” said one source. Downside to that, however, is that if Supreme Court agreed to hear case, that could draw out litigation for as long as another year.

Another scenario is that potential settlement agreement could be worked out between govt., successful bidders in auction and NextWave, although questions remain whether all parties would agree to that and under what terms. “How you would effect that becomes very difficult,” said another industry source. One possibility would be to take $17 billion in auction proceeds and give slice of that to NextWave, although under that scenario congressional approval would be necessary, source said. One upside to govt. is that settlement of some sort would be way to ensure it received more than $4.7 billion originally bid for licenses that brought $15.4 billion in Jan. bidding. “The differential between them is just huge,” source said.

Meanwhile, FCC has petition for certiorari pending before U.S. Supreme Court on General Wireless Inc. (GWI) decision of 5th U.S. Appeals Court, New Orleans, in Oct. Fifth Circuit ruled against FCC, upholding bankruptcy court’s valuation of $166 million for 14 licenses on which GWI had bid $1 billion in 1996 (CD Oct 23 p3). In that case, Fifth Circuit had disagreed with some conclusions that 2nd Circuit reached in similar NextWave ruling. Supreme Court decision on whether to hear GWI arguments is expected this week as court releases cases it will hear in 2001-2002 term.

Another uncertainty is how 5-year buildout requirements for licenses, which among other mandates require 1/3 coverage in this time period, will be handled for NextWave. Possible scenario, according to one attorney, is that NextWave would have to petition FCC to extend 5-year construction requirements, although stance that Commission would take wasn’t clear. Prudential Securities research analyst Susan Lynner said in research note Fri. that she had been told deadline for NextWave meeting buildout requirements was in 2002, “and obviously meeting those requirements at this point would be a physical impossibility for NextWave, since the company’s bankruptcy status has prevented it from using its licenses.” Lynner wrote: “Potential FCC litigation against NextWave for failing to meet the buildout deadlines could help move along the internal negotiating process among the FCC, NextWave and other wireless carriers for use of the NextWave spectrum.”

Repercussions from decision also could be felt by original C- block bidder Airadigm, which has been awaiting answer from FCC on reinstatement of its PCS licenses, which Commission cancelled after carrier missed payment upon entering bankruptcy in July 1999. Unlike NextWave, however, Airadigm already is offering service to customers. But, like NextWave, Airadigm had entered Chapter 11 protection and missed installment payment for its licenses. Carrier has been petitioning either for reinstatement of its licenses or, if they were cancelled automatically, waiver of that provision. “Airadigm has always maintained that it was entitled to relief, even if its licenses automatically cancelled,” said attorney William Carnell. “The D.C. Circuit’s decision makes clear that they don’t.”

Christopher Wright, ex-FCC general counsel who now is with law firm of Harris, Wiltshire & Grannis, cited language in ruling that acknowledged FCC concern that allowing NextWave to retain licenses might be unfair to other bidders that complied with payment rules. “The D.C. Circuit correctly acknowledged that its decision will lead to ‘grossly unfair’ results,” Wright told us.