SUPREME COURT RULES FCC COULDN'T VOID NEXTWAVE C-BLOCK LICENSES

FCC returned C-block licenses to NextWave after U.S. Appeals Court, D.C., in June 2001 reversed agency’s decision to cancel those PCS licenses for nonpayment. That decision overturned results of Jan. 2001 re-auction of NextWave spectrum that generated nearly $16 billion from carriers such as Verizon Wireless on licenses for which bankrupt carrier had bid $4.7 billion.

While Supreme Court ruling brings certainty to 5 years of litigation, several analysts questioned current value of NextWave’s licenses. Legg Mason said in research note that NextWave, in most recent bankruptcy filing, estimated value of its spectrum at about $8.93 billion. But based on value of recent Verizon Wireless-NorthCoast PCS deal, Legg Mason said, NextWave spectrum could be worth closer to $6.45 billion, drop in value that “would eliminate any equity value for NextWave shares.” Firm said Cingular Wireless was most likely to be most interested buyer in certain NextWave licenses, such as N.Y., L.A., Boston, Washington, Houston. NextWave’s shares in over-the-counter trading jumped 23% to $2.84 Mon.

One key dispute had been whether FCC’s cancellation fell under Sec. 525 of Bankruptcy Code or auction provisions of Sec. 309(j) of Communications Act. NextWave said Sec. 525 barred federal agency from cancelling license “solely” for debt dischargeable in bankruptcy. It said only reason FCC had cancelled licenses was missed payment. FCC said it took steps to relax installment payment dates for C-block auction winners, but ultimately decided not to waive automatic cancellation rule when NextWave missed payment. Despite automatic cancellation rule, Commission said it considered other factors when revoking licenses. Supreme Court rejected FCC arguments that although “proximate cause” for license cancellation was failure to make payment, Sec. 525 didn’t apply because Commission had valid regulatory motive for cancellation. When bankruptcy law describes failure to pay debt as sole cause of cancellation, “it cannot reasonably be understood” to include other causes that could preclude application of that provision, such as government’s motive in cancelling licenses, Scalia wrote. “Such a reading would deprive Sec. 525 of all force.”

Scalia acknowledged some believed Sec. 525 “ought” to have exception for cancellations that had valid regulatory purpose. “Besides the fact that such an exception would consume the rule, it flies in the face of the fact that, where Congress has intended to provide regulatory exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly,” decision said. For example, Bankruptcy Code has regulatory exceptions to automatic stay requirements such as for certain Agriculture Dept. programs, court said.

“The Supreme Court’s decision brings much-needed certainty to an unsettled area of the law,” FCC Chmn. Powell said. “We are in the process of examining all of the ramifications of the court’s decision. The Commission will faithfully implement the court’s mandate and looks forward to facilitating the provision of service in these bands to the American people as soon as practicable.” NextWave struck similar tone, saying it already had paid govt. $500 million for licenses and it had fully financed plans to pay off debt as part of reorganization plan that was held up by litigation. “Everyone will benefit from achieving finality, putting the litigation behind us and getting the licenses into use as quickly as possible to provide service to the public and help fuel economic recovery,” NextWave Chmn. Allen Salmasi said. “We look forward to a constructive working relationship with the FCC as those goals are finally achieved.”

One part of decision that drew particular interest from industry observers Mon. was footnote to majority decision that involved valuation of licenses. “We do not reach the merits of the determination that the licenses should be valued as of the time they were conveyed, rather than as of the time NextWave won the auction entitling it to conveyance,” footnote said. Several sources expressed surprise because that was not at issue in Supreme Court case although it had come up earlier in NextWave litigation. Second U.S. Appeals Court, N.Y., in Dec. 1999 overturned U.S. Bankruptcy Court, White Plains, ruling that said market changes had lowered value of NextWave licenses to around $1 billion, compared with $4.7 billion that carrier originally had bid. Supreme Court previously had turned down request to review two 2nd Circuit rulings, one of them involving valuation of licenses.

“There was no reason for that footnote,” source said. “It seems like the only reason why they would do that is to send a message that the 2nd Circuit got it wrong.” Several sources said language in footnote could mean license value was live issue that could be contested further, although numerous industry analysts and observers said both NextWave and FCC appeared reluctant to embark on another round of litigation.

“It does seem like the issue is still legally an open question based on what the Supreme Court said in its footnote and what the D.C. Circuit said,” Legg Mason analyst David Kaut said, noting that NextWave had interest in clearing out regulatory underbrush involving licenses and FCC appeared to have little interest in continued, protracted litigation. D.C. Circuit ruling had said that because it answered question about whether Sec. 525 allowed license cancellation, it didn’t rule on other Bankruptcy Code issues raised by NextWave. Legg Mason said in research note that remaining issues involved whether NextWave had met all regulatory obligations for licenses, such as network build-out deadlines. While some challenges might surface on those issues, firm said, “Our guess is the FCC has little appetite to get bogged down in another regulatory and [likely] court brawl that delays the use of the licenses, unless the agency catches NextWave in a blatant, major violation.” Besides potential interest of Cingular, AT&T Wireless is looking to fill in spectrum in markets such as N.Y., L.A., Cleveland and Minneapolis, which are covered by NextWave licenses, Legg Mason said. In gaining another spectrum acquisition option, Cingular also could receive leverage in possible merger talks with AT&T Wireless and T-Mobile, it said. Legg Mason based revised spectrum valuations for NextWave on picture of spectrum market painted by Verizon Wireless’s acquisition of NorthCoast spectrum last month for $1.60 MHz per pop. But it said time was on NextWave’s side because it had until 2007 to pay off its auction debts. “Another caveat is that while the timely payment question has been resolved, it is still possible NextWave could pursue questions about whether it had to make full payments,” Legg Mason said.

“It’s a tricky situation because the market is going through such a difficult time,” Schwab Washington Research Group analyst Paul Glenchur said. All carriers are beset with same decision factors, he said: “When it comes to making a deal, you have to wonder if you are cutting a deal at too low a level. The challenge for a company like NextWave would be how to make a decision about potential disposition of its licenses against making some kind of investment in the network and waiting until values start to go up.”

Court also shot down FCC argument that NextWave’s license obligations for full and timely payment weren’t debts dischargeable in bankruptcy, but were regulatory conditions. “This is nothing more than a retooling of petitioners’ recurrent theme that ‘regulatory conditions’ should be exempt from Sec. 525,” Scalia wrote. “No matter how the Commission casts it, the argument loses.” Court said claim under bankruptcy law had been interpreted with broad definition and that “plain meaning” of right to payment is simply enforceable obligation, regardless of govt’s. underlying goal.

Finally, high court disagreed with FCC argument that Sec. 525 created conflict with Communications Act. Nothing in Sec. 309(j) of Communications Act stipulates that license cancellation be penalty for failure to make installment payments, Scalia wrote. What FCC describes as conflict is nothing more than “policy preference” for (1) selling licenses on credit and (2) cancelling licenses rather than asserting security interests in licenses when there is default. Because Sec. 525 bars license cancellation of NextWave spectrum in this case, revocation of licenses “is not in accordance with law,” court said, upholding conclusion by U.S. Appeals Court, D.C., in June 2001.

In dissent that ran nearly as long as majority decision, Breyer said that under majority’s reading of Sec. 525, if debt were dischargeable, then once debtor entered bankruptcy, govt. couldn’t revoke license, regardless of its goal. “It is dangerous, however, in any actual case of interpretive difficulty to rely exclusively upon the literal meaning of a statute’s words divorced from consideration of the statute’s purpose,” Breyer wrote. He raised concern that such literal interpretation of bankruptcy law put govt. at greater disadvantage than even private sector creditors would find themselves. FCC sought to repossess licenses after declaring them void for nonpayment so it could auction that spectrum to other users. “The law ordinarily permits a private creditor who has taken an appropriate security interest to repossess property for nonpayment -- even after bankruptcy,” he wrote. “Would Congress want to say that the government cannot ever do the same?”

Ruling was “disappointment,” said Michael Calabrese, dir. of New America Foundation’s spectrum policy program. “The Supreme Court has simply ruled that an FCC license to operate a service on the spectrum is a government license like any other under the bankruptcy code,” he said. But he said ruling had “silver lining.” Because Congress failed to ratify proposed settlement in 2001 that would have resolved spectrum dispute, carriers willing to use spectrum now may be able to acquire it at “a far lower cost,” he said. “Because Verizon and other carriers have been relieved of their obligation to pay more than $15 billion they bid at the 2001 re-auction of this spectrum, the windfall to NextWave will be far less than the $9 billion payoff proposed a year ago by FCC Chairman Michael Powell,” Calabrese said.