FCC Designated Entity Rules Reversed by Appeals Court

Both rules touch on whether designated entities are truly small carriers worthy of special treatment, or just affiliates of a larger carrier. The court was sharply critical of FCC procedure in adopting the two rules, under former Chairman Kevin Martin. Bethel Native Corp., a small wireless carrier in Alaska, and the Minority Media and Telecommunications Council were also plaintiffs.

"It’s been a long road these past four years seeking to resolve matters with the FCC, and we are pleased with the clear-cut ruling that the Court made in our favor on the merits,” said Council Tree Managing Director George Laub. “This ruling restores a pathway for wireless competition, innovation and diversity by ensuring the ‘dissemination of licenses among a wide variety of applicants’ envisioned by Congress in establishing the FCC’s wireless auction authority. We are carefully reviewing the Court’s opinion and will evaluate all of our options as to next steps.”

The court remanded for further consideration by the agency a provision that makes companies ineligible for benefits if they lease or resell more than 50 percent of their spectrum capacity. The way the FCC took comment on the rule change was a violation of the Administrative Procedure Act (APA), the court said. A rulemaking “gave no indication that the FCC intended to revisit an issue it had thoroughly addressed only three years before,” the court said. “Commenters could not reasonably have anticipated that, in inquiring in the [further notice] whether leasing arrangements between DEs and large wireless carriers impaired the DEs’ bona fide small business status, the FCC was proposing to revise the general limits on DEs’ ability to lease their spectrum to anyone at all.”

The court also overturned an FCC decision to extend from five to 10 years the period during which a licensee must repay its bidding credits, in whole or in part, if it loses its DE status. This change was also “promulgated in substantial and inseverable part without notice or comment” in violation of the APA, the court found. The court upheld a third provision, challenged by Council Tree, mandating that if a DE leases or resells more than 25 percent of its spectrum capacity to any single lessee or purchaser, it must add that lessee’s or purchaser’s revenues to its own to determine its continued eligibility for DE credits.

The court also rejected arguments by Council Tree that the court should overturn the results of the two massive auctions or 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. “We are … 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,” the court said. “Moreover, the possibility of such large-scale disruption in wireless communications would have broad negative implications for the public interest in general."

"We are pleased that the Third Circuit Court of Appeals upheld two important spectrum auctions … which raised approximately $33 billion for American taxpayers,” Wireless Bureau Chief Ruth Milkman said in a statement. “The Commission remains committed to finding new and innovative ways to encourage the participation of small businesses and new entrants in our auction processes, and will continue to look for opportunities for this vital sector of the economy.”

Stifel Nicolaus said the ruling is good news for companies which were active in the two auctions, including Verizon Wireless, AT&T, T-Mobile, Sprint and MetroPCS. “The ruling means that the auction winners can keep their licenses, assuming that the decision is not overturned on appeal, and we don’t expect it to be overturned,” Stifel said.