SUPREME COURT STUDIES HOW, WHY FCC CANCELLED NEXTWAVE LICENSES

Several industry observers who attended arguments said high court appeared to generally lean in direction of NextWave, with Justices Sandra O'Connor and Ruth Ginsburg and John Stevens asking somewhat more open-ended questions than Scalia. FCC is appealing U.S. Appeals Court, D.C., ruling that reversed its decision to cancel NextWave’s PCS licenses for nonpayment. At heart of case is tension between 2 factors: (1) On one hand, FCC was acting as regulator under Communications Act Sec. 309(j) auction provisions when it cancelled NextWave’s licenses because it missed installment payment, which was one condition of those licenses. (2) On other hand, FCC was acting as creditor because it had set up installment payment scheme to make auction accessible to smaller bidders. NextWave has pointed repeatedly to Sec. 525 of U.S. Bankruptcy Code, which states that federal agency can’t cancel license “solely” for nonpayment of debt dischargeable in bankruptcy. Washington attorney Donald Verrilli argued for NextWave that FCC had revoked carrier’s licenses “solely because” NextWave didn’t make payment. But Clement, who filled in as acting solicitor gen. because Solicitor Gen. Theodore Olsen is recused from case, said that despite automatic cancellation stipulation, Commission took other factors into account, such as extent to which NextWave wasn’t serving customers.

Several justices zeroed in on exactly what “solely” meant in FCC’s interpretation of Sec. 525. “Does having some other motive eliminate sole causality?” Scalia asked. He said every regulatory body that canceled license could argue that regulatory motive was involved. Souter said FCC went into bankruptcy court to make claim as creditor on that spectrum “when the value of the licenses dropped.” His point was that when spectrum value was on rise, Commission moved to revoke licenses and re-auction them. He said: “At each point, when the FCC was making a decision, it was making an economic decision, not a regulatory decision.” O'Connor also said agency initially had pursued claim in bankruptcy court for amount not paid. “The FCC appeared to treat it very much like a bankruptcy claim for quite some time,” she said.

However, Clement said FCC was concerned about more than money, although financial viability of operators was one of public interest factors agency examined when licensing spectrum. He said FCC issued restructuring order after first wave of PCS auction winners ran into financial difficulty, providing 18-month window for carriers to restructure payments. While Commission ultimately decided not to provide exception to automatic cancellation provision for NextWave licenses, restructuring options “would be out of place in a regulatory regime only concerned with timely payment.” Clement said agency’s decision wasn’t solely because NextWave missed its first installment payment, but also involved factors such as NextWave not providing services to customers and other carriers being willing to do that. Responding to Clement’s argument that Commission rules allowed modification of payment deadline for regulatory reasons and that NextWave had offered to pay full amount, Stevens asked: “If that’s true, why don’t you settle the case today?”

Breyer said he interpreted an implied regulatory exception as being present in bankruptcy code for federal agencies in such situations. “I learned in the 2nd year of law school, and my colleagues obviously will disagree with me, that when you have a text that says ‘all’ there are often implied, not written, exceptions,” he said. One concern that surfaced in hour-long oral arguments was what impact would be if agency couldn’t revoke licenses for nonpayment, because that would mean that govt. would have unsecured claim in bankruptcy proceedings and be at disadvantage to other creditors. Responding to Breyer’s concerns, Verrilli said: “The government could collect in exactly the same way as a private lender could.” Verrilli stressed that Bankruptcy Code protected company’s right to reorganize. Without ability to protect licenses against cancellation when they become tied up in payment claims, “agencies would be able to force insolvent debtors to liquidate,” Verrilli said.

Numerous questions were directed to what constituted FCC’s automatic cancellation policy. “First you say it’s fully automatic, if you don’t pay up the license is gone,” Chief Justice William Rehnquist told DoJ’s Clement. “But we can extend the time if we want.” Clements acknowledged “there is some tension there,” but said that without restructuring order that froze payment obligations for 18 months, FCC would have faced other challenges from disappointed bidders.

Other lines of questioning focused on broader implications that decision would have. Scalia at one point asked if licenses were cancelled for NextWave, what would prevent license cancellation for other bankrupt operators if only difference was that one set of licensees received loan from private bank and NextWave funding relied on govt. installment payment scheme. Harvard Law School Prof. Laurence Tribe, who argued on behalf of NextWave creditors, picked up on that point, saying LMDS licensees had entered bankruptcy but still held licenses. Only difference, he said, is that those operators received bank loans and paid FCC in full for licenses.

“Why doesn’t automatic mean automatic?” Souter asked Washington attorney Jonathan Franklin, representing carriers such as Arctic Slope and VoiceStream, who intervened on side of FCC. “It’s automatic except where it isn’t?” Ginsburg asked why Congress included explicit exception for Sec. 525 of Bankruptcy Code for Agricultural Dept. in certain circumstances, but didn’t single out FCC in same way. Elsewhere in oral argument, Scalia noted that Congress hadn’t required FCC to undertake installment payment system when it gave agency auction authority. “There is no regulatory necessity for this whole tragedy,” he said. “There’s nothing in the Federal Communications Act that requires the FCC to stand as a guarantor. They could have required payments on the barrel.” But Franklin stressed that without broader regulatory discretion over licensing conditions, FCC would be required to grant license to whomever was high bidder, situation that would allow companies to bid high and then enter bankruptcy protection without losing spectrum. “What NextWave is doing is truly gaming the system,” Franklin said.

In questioning NextWave’s Verrilli, O'Connor said bankruptcy court previously had ordered reduction of $3.7 billion in what NextWave owed Commission, whittling amount down to around $1 billion. (Second U.S. Appeals Court, N.Y., subsequently reversed that decision, siding with FCC). “Does the FCC have any power to prevent a bankruptcy court from reducing the price?” she asked. Verrilli said that in this case that question already had been taken care of and revolved around date of when payments actually came due.

Breyer consistently was most troubled with balancing of Communications Act against Bankruptcy Code in such way that govt. wouldn’t be protected as creditor in bankruptcy proceedings. He said Sec. 525 clearly was about preventing govt. from discriminating against current or previously bankrupt entities. “If you are right and I am wrong, there is no way the government can take a security interest” in such proceedings when it is creditor, he told Verrilli.

While several who attended hearing said overall sense of justices appeared to lean toward NextWave, many industry observers said they didn’t want to read too much into appearance of oral arguments. Nonetheless, NextWave over- the-counter shares on Pink Sheets rose 27% in late morning trading Tues., finishing day up nearly 25% at $1.95 per share. Legg Mason told investors in research note that “NextWave’s chances of prevailing in its license dispute with the FCC have increased after oral argument.” Noting that much of questioning centered on automatic cancellation provision of FCC rules, Legg Mason said that was significant because “if the cancellation was ‘automatic,’ the court is more likely to conclude that the FCC cancelled the licenses ’solely’ for failure to pay its debts while in bankruptcy.” Schwab Washington Research analyst Paul Glenchur said that while it’s impossible to predict which way high court will go on any case, “the edge goes to NextWave.” Justices appeared to focus heavily on govt. arguments that regulatory motive is built into administration of Sec. 525 of Bankruptcy Code, he said.