Dish Designated Entities Make Case for Court Reversal of FCC Decision on AWS-3 Bidding Credits

Dish Network designated entities Northstar Wireless and SNR Wireless made their initial case to the U.S. Court of Appeals for the D.C. Circuit, asking the court to decide the FCC acted in an arbitrary and capricious manner when it rejected their use of bidding credits to buy spectrum in the AWS-3 auction. The FCC is to respond in a brief due Feb. 26.

The two DEs, working with Dish, were jointly the second highest bidders in the auction after AT&T. But in August, the FCC denied the DEs use of bidding credits and ordered them to pay an additional $3.3 billion for the spectrum, bringing the tally to $13.3 billion (see 1508180062). The FCC said the two DEs weren't eligible for credits because the average gross revenue over the past three years of Dish must be attributed to them, so they no longer qualify as “very small” businesses.

“Petitioners are very small businesses that seek to compete with major wireless carriers,” the DEs said in their brief. “Needing additional investment to acquire licenses and launch service, Petitioners entered into financial agreements with DISH, one potential new entrant into the terrestrial wireless market. Those agreements were carefully constructed to ensure that Petitioners would qualify for ‘very small business’ bidding credits at auction.”

There was nothing out of the ordinary about their relationship with Dish, the DEs said. Most of the provisions in the agreement with Dish were “derived from (and were nearly identical to) provisions in earlier designated entity arrangements where very small businesses had been approved to obtain bidding credits,” the DEs told the D.C. Circuit. After competitors complained about Dish’s involvement in the auction, the FCC changed its rules for future auctions, they said.

“But it did not stop there,” the DEs said of the FCC: Chairman Tom Wheeler “told a congressional committee that the Commission would apply its new control standard -- one ‘that had never been applied before’ -- in reviewing Petitioners’ applications for bidding credits.” The DEs cite Wheeler’s testimony July 23 before the House Communications Subcommittee.

The FCC found in the order that Northstar’s and SNR’s relationships with Dish had crossed a line and the DBS company exercised impermissible control of their bidding in the auction “even though the overwhelming majority” of provisions in their contracts with Dish “were identical to those in previously approved agreements,” the DEs said. The FCC “recognized this inconsistency; that is why it had to include an unusual footnote in its Order stating that, to the extent Petitioners had relied on prior Bureau guidance, it disavowed that guidance,” they said. But the DEs said they structured their relationship with Dish “by doing exactly what the Commission instructed: closely examining past relevant precedents and structuring their relationships accordingly.”

The DEs reminded the D.C. Circuit of the long history of small companies partnering with larger ones to bid in FCC auctions. “Even with bidding credits, small and very small businesses generally lack the capital to purchase spectrum licenses and offer commercial wireless services on their own,” they said. “The FCC has long encouraged this kind of teaming for this very reason.”

Northstar and SNR said they decided to selectively default on some of the licenses bought in the auction because they had no real choice (see 1510020055). They could have paid an additional $3.3 billion, they said. But that option “would have, among other things, required them to borrow those funds and incur crippling interest expenses -- totaling in the hundreds of millions of dollars -- that they could not have recovered even after a successful appeal,” they said. “Unrecoverable losses of this magnitude would have threatened their existence.”

The commission’s denial of bidding credits and “disavowal” of past precedents was “arbitrary and capricious,” the DEs told the court. Even if the FCC eventually adopts a new standard, “it may not penalize Petitioners for failing to anticipate that change,” they said. “Parties must be given fair notice of the rules before being penalized, and a regulated entity has not been given fair notice if it reasonably interpreted the rules -- even if the agency adopts a different interpretation prospectively.”