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SNR Wireless LicenseCo, LLC v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

August 29, 2017

SNR Wireless LicenseCo, LLC, Appellant
Federal Communications Commission, Appellee

          Argued September 26, 2016

         On Petitions for Review of an Order of the Federal Communications Commission

          Catherine E. Stetson argued the cause for appellants. With her on the briefs were Christopher J. Wright, Timothy J. Simeone, Elizabeth Austin Bonner, Paul J. Caritj, Ari Q. Fitzgerald, and R. Craig Kitchen. Mark F. Dever, Dorothy A. Hickok, Alfred W. Putnam Jr., and Mark H. Sosnowsky entered appearances.

          Harold J. Feld was on the brief for amicus curiae Public Knowledge in support of petitioner-appellants.

          Lawrence Spiwak was on the brief for amicus curiae Phoenix Center for Advanced Legal and Economic Public Policy Studies in support of petitioners-appellants.

          Maureen K. Flood, Counsel, Federal Communications Commission, argued the cause for appellee. With her on the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Robert J. Wiggers, Attorneys, Jonathan B. Sallet, General Counsel, Federal Communications Commission, and Jacob M. Lewis, Associate General Counsel. David M. Gossett, Deputy General Counsel, and Richard K. Welch, Deputy Associate General Counsel, entered appearances.

          Before: Brown and Pillard, Circuit Judges, and Williams, Senior Circuit Judge.



         Petitioners SNR Wireless LicenseCo, LLC (SNR) and Northstar Wireless, LLC (Northstar) are two nascent companies that took action to acquire the wireless spectrum needed to sell wireless internet or phone services to customers around the country. Because of the high cost of providing wireless services, petitioners borrowed billions of dollars from DISH Network Corporation and its subsidiaries (collectively, DISH) to acquire the spectrum. DISH also agreed to provide management services to petitioners to help them navigate the challenges of building a national wireless network.

         In 2014, the Federal Communications Commission (FCC or the Commission) held an auction to sell the kind of wireless spectrum licenses that petitioners would need to build national businesses. Pursuant to FCC regulations designed to encourage small businesses to participate in such auctions, the FCC announced that businesses with less than $40 million in annual revenues could use "bidding credits" to purchase at a discounted price any licenses they won. Petitioners submitted initial short-form applications disclosing their revenues, on the basis of which they were permitted to bid. Believing that they would be entitled to use bidding credits, petitioners bid on and won hundreds of spectrum licenses in the action. While the petitioners' winning bids totaled $13.3 billion, petitioners asked the FCC for $3.3 billion in bidding credits, which would bring the total cost of the licenses down to $10 billion.

         The FCC denied the request to use bidding credits because SNR and Northstar were not simply partners with DISH, but were under DISH's control. As a result, DISH's $13 billion in annual revenues were attributable to petitioners, making them ineligible for bidding credits.

         After the FCC denied their application to use bidding credits, petitioners informed the FCC that they could not afford to pay for all of the licenses they won. They bought some of the licenses at full price and relinquished the rest to the FCC. The FCC fined the petitioners hundreds of millions of dollars for failing to comply with the auction terms that required all bidders to purchase the licenses they won. This appeal followed.

         The FCC reasonably determined that DISH exercised de facto control (a broad concept about which we have more to say later) over SNR and Northstar's businesses: DISH had contractual rights to manage almost all of the essential elements of the petitioners' businesses, and petitioners faced enormous financial pressure to sell their companies to DISH after five years. In addition, petitioners' auction bids suggested they were both functioning as arms of DISH, rather than as independent small companies each pursuing their own, independent interests. As the FCC has also recognized, however, for companies like DISH that seek to form partnerships with small businesses, there is a fine line between providing the sort of oversight necessary to keep the partnership on track and providing so much oversight that the small business is subject to disqualifying de facto control. Petitioners point to past action of the FCC's Wireless Bureau that they assert led them to conclude that their agreements with DISH were not so controlling as to disqualify them from obtaining the credits due to "very small" businesses.

         We hold that: (1) The FCC reasonably applied its longstanding precedent to determine that DISH exercised a disqualifying degree of de facto control over SNR and Northstar; but (2) the Commission did not give SNR and Northstar adequate notice that, if their relationships with DISH cost them their bidding credits, the FCC would also deny them an opportunity to cure. As a result, we remand this matter to the FCC to give petitioners an opportunity to seek to negotiate a cure for the de facto control the FCC found that DISH exercises over them.

         I. Background

         A. The FCC's Auction 97

         The electromagnetic spectrum is "the range of electromagnetic radio frequencies used to transmit sound, data, and video across the country." See FCC, About the Spectrum Dashboard, dashboard/about (About the Spectrum). Under the Communications Act of 1934 (the Act), the FCC may grant private companies licenses to use portions of the spectrum. See 47 U.S.C. §§ 307, 309. Once licensed, companies may transmit sound, data, and video, which enables them to provide television, cell phone, and wireless internet service to consumers. See About the Spectrum.

         In 1993, Congress authorized the FCC to use auctions to allocate spectrum licenses. See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, 107 Stat. 312 (relevant section codified at 47 U.S.C. § 309(j)(1)). Congress directed the FCC to design auction procedures that would serve a number of policy objectives. Those objectives include promoting efficient, intensive, and innovative use of the electromagnetic spectrum without excessive concentration of licenses, while advancing economic opportunity and competition by disseminating licenses "among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women" without "unjust enrichment" of licensees that are not bona fide small or underrepresented businesses. See id. § 309(j)(3)-(4).

         Consistent with those statutory instructions, FCC regulations provide that the Commission may encourage "designated entities, " including small businesses, to participate in spectrum auctions by giving them bidding credits, i.e. discounts that may be used to cover part of the cost of any licenses those businesses win. 47 C.F.R. § 1.2110(a), (f) (2012).[1] FCC regulations specify that bidding credits can only be used by genuine small businesses-not by small sham companies that are managed by or affiliated with big businesses. See, e.g., id. § 1.2110(b)-(c).

         This case arose out of Auction 97, which the FCC announced on May 19, 2014. On July 23, 2014, the FCC's Wireless Telecommunications Bureau (the Wireless Bureau) published the procedures for the auction (the Auction Notice, or Notice). The Auction Notice explained that small businesses would be eligible to receive bidding credits in Auction 97, and the size of the bidding credits would depend on the amount of the designated entities' "attributable" revenues over the preceding three years: Entities with less than $40 million in attributable annual revenues could receive a fifteen percent discount on their winning bids, and entities with less than $15 million in attributable annual revenues could receive a twenty-five percent discount. See Auction of Advanced Wireless Servs. (Aws-3) Licenses Scheduled for Nov. 13, 2014, 29 F.C.C. Rcd. 8386, 8411-12 (2014) (Auction Notice).

         As relevant here, attributable revenues included the revenues of the small business itself and the revenues of any entity with "de facto control" over it. Id. at 8412-13 (citing 47 C.F.R. § 1.2110(b)-(c), among other sources). Whereas the question whether one business exercises de jure control over another is binary, the highly contextual question of de facto control is a matter of degree.

         FCC regulations that had been used in past auctions listed various "indicia of control" relevant to the de facto control inquiry. See 47 C.F.R. § 1.2110(c)(2). They pointed to control over appointments to the entity's board or management committee, control over selection and employment of the senior executives in charge, or general involvement in management decisions. Id. The regulations also highlighted as a factor relevant to de facto control the presence of a management agreement conferring on someone other than the entity itself authority to determine or significantly influence the nature or types of service the entity offers, or the terms or price on which they are offered. Id. § 1.2110(c)(2)(ii)(H). The regulations did not, however, delineate a clear line between permissible influence and de facto control.

         The Auction Notice generally explained that auction participants should "review carefully the Commission's decisions regarding . . . designated entit[ies]." Auction Notice, 29 F.C.C. Rcd. at 8411. The Notice stated, by reference to FCC regulations, that "[d]e facto control [would be] determined on a case-by-case basis, " id. at 8412 (citing 47 C.F.R. § 1.2110(b)(5)). It cautioned participants that de facto control might be present if, for example, one company "plays an integral role in [the] management decisions" of another. Id. at 8413 (citing 47 C.F.R. § 1.2110(c)).

         By way of additional guidance, the Notice directed auction participants to consult the Commission's longstanding but context-dependent precedent on the circumstances that bear on de facto control. The two opinions the Notice cited on that point articulate a six-factor test for de facto control: Intermountain Microwave, Public Notice, 12 F.C.C. 2d 559 (1963) (Intermountain Microwave) and Baker Creek Communications, L.P., Memorandum Opinion and Order, 13 F.C.C. Rcd. 18709 (1998) (Baker Creek). Id. at 8412 n.151.

         The Auction Notice specified that the FCC would use its standard, two-step process to verify the attributable revenues of a small business. Id. at 8407. First, before the auction, a small business seeking to qualify for credits had to file a "streamlined, short-form application." Id. That form required the business to state, under penalty of perjury, its attributable revenues. See id. (citing 47 C.F.R. § 1.2105); see also id. at 8412. Second, after the auction concluded, any business that successfully bid for a spectrum license and sought bidding credits would have to "file a more comprehensive long-form application (FCC Form 601)" to hold the license. Id. at 8407. The Commission would then review the long-form application to verify the business's eligibility for small-business bidding credits.

         Auction 97 began on November 13, 2014, and concluded on January 29, 2015, after 341 rounds of bidding. Thirty-one entities won spectrum licenses, with winning bids totaling more than $40 billion.

         B. Petitioners' Conduct

         The petitioners are small companies that were formed just in time to file short-form applications for Auction 97: SNR was formed fourteen days and Northstar was formed eight days before the application deadline. As nascent companies, SNR and Northstar lacked officers, directors, and revenues when they each submitted a short-form application to participate in Auction 97 as a "very small business" entitled to a twenty-five percent discount. In re Northstar Wireless, LLC, 30 F.C.C. Rcd. 8887, 8893 (2015) (FCC Op.).[2]

         The petitioners' short-form applications disclosed that they had acquired the capital that they needed to participate in the auction from DISH-a large, established corporation that was itself ineligible for bidding credits. In exchange for its investments in SNR and Northstar, DISH acquired an (indirect) eighty-five percent ownership interest in each company. In addition, DISH became the operations manager for SNR and Northstar with great influence over their operations. DISH also adopted joint bidding protocols and agreements with the petitioners, which provided that DISH, SNR, and Northstar could coordinate their bidding strategies for Auction 97.

         The petitioners were remarkably successful in Auction 97, collectively winning 43.5% of the licenses in play: SNR won 357 of the 1, 614 auctioned licenses, and Northstar won 345. While SNR and Northstar bid a total of $13, 327, 423, 700 during the auction, both companies claimed that they were very small businesses entitled to use FCC bidding credits to cover twenty-five percent of the cost of the licenses. With the use of those bidding credits, SNR and Northstar would together save roughly $3.3 billion.

         After the auction, SNR and Northstar submitted long-form applications for the licenses, reiterating their assertions that they were very small businesses entitled to bidding credits. Once the long-form applications became public, eight parties petitioned the Wireless Bureau to deny credits to SNR and Northstar. The challengers included a few of petitioners' less successful bidding competitors and several nonprofit organizations supportive of the designated-entity credit program as a means to aid small businesses, rural telephone companies, and businesses owned by members of minority groups and women, but opposed to what they view as an abuse of the program to enrich large, established firms like DISH.

         All eight challengers argued that SNR and Northstar could not claim very-small-business credits because DISH, a large business, effectively controlled them. Some entities also suggested that SNR and Northstar should not be permitted to claim the licenses they won even if they were willing to pay full price on the ground that they withheld from the FCC material information about their relationships with DISH. The Wireless Bureau referred the petitions to the full Commission for "consideration of the questions posed by the petitions to deny." See 47 C.F.R. § 0.5(c) ("In non-hearing matters, the [Wireless Bureau] is at liberty to refer any matter at any stage to the Commission for action, upon concluding that it involves matters warranting the Commission's consideration . . . .").

         The FCC dismissed six of the petitions on the ground that parties who had not themselves participated in the auction lacked standing, but considered the merits of the other two. FCC Op., 30 F.C.C. Rcd. at 8904-05. Ultimately, the FCC decided that SNR and Northstar were not entitled to bidding credits because they were de facto controlled by DISH, such that DISH's large annual revenues were attributable to them. See id. at 8889.

         While the FCC held SNR and Northstar ineligible for bidding credits, it concluded that the companies could retain the spectrum licenses they won in the auction if they were willing to pay full price for them. See id. at 8940-48. "The fact that the Commission, upon review of the Agreements, conclude[d] that, as a legal matter, the facts disclosed show that DISH controlled the applicants does not compel a finding that the applicants lacked candor." Id. at 8941. The Commission explained that SNR and Northstar had disclosed their relationships with DISH, and no participant in Auction 97 had shown that it was harmed by SNR or Northstar's conduct. See id. at 8940-46. Nor had any auction participant shown that SNR and Northstar colluded with one another in violation of federal antitrust laws. Id. at 8946-48. The FCC consequently gave SNR and Northstar the opportunity to purchase the licenses at full price, but it did not give them the opportunity to seek to cure the identified control problems.

         Following the FCC's Decision, SNR and Northstar notified the Commission that they would pay the full bid amount for some of the licenses they won and would default on their obligation to buy the rest.[3] As a result of the default, the FCC ordered SNR and Northstar to compensate it for the difference between their own winning bids in Auction 97 and the amount that the FCC receives when it re-auctions the licenses. FCC Op., 30 F.C.C. Rcd. at 8950-51; see 47 C.F.R. § 1.2104(g)(2)(i) (requiring defaulters to compensate the FCC in the manner the FCC described). The FCC also ordered petitioners to make an additional payment equal to fifteen percent of the petitioners' own bids, or fifteen percent of the winning bid when their licenses are re-auctioned, whichever is less. See FCC Op., 30 F.C.C. Rcd. at 8950-51; 47 C.F.R. § 1.2104(g)(2)(ii) (requiring defaulters to pay a penalty set by the FCC prior to each auction); Auction Notice, 29 F.C.C. Rcd. at 8451 (announcing the fifteen-percent penalty for defaulters in Auction 97). While the exact amount of the petitioners' penalties depends on the winning price for the relevant licenses at re-auction, 47 C.F.R. § 1.2109; see also id. § 1.2104(g)(2), the parties anticipate that the penalties will amount to hundreds of millions of dollars. Because of the size of the penalties for default, SNR and Northstar each made partial, "interim" payments to the Commission: SNR paid $181, 635, 840 and Northstar paid $333, 919, 350.[4]

         After making their interim payments, both SNR and Northstar petitioned this court for review of the FCC's decision.

         II. Analysis

         The petitioners SNR and Northstar urge us to reverse the FCC's decision for two primary reasons. First, the petitioners contend, the Commission departed from agency precedent without explanation. Second, even if the Commission followed its own precedents, petitioners insist those precedents did not provide fair notice that their relationship with DISH could cost them their bidding credits plus a penalty for defaulting without an opportunity to cure. Petitioners' first argument fails, but the second has merit.

         A. The FCC Reasonably Applied its Own Precedent

         We must defer to the FCC's decision in this case unless the decision was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(a). The scope of review under the arbitrary and capricious standard is "narrow" and we cannot "substitute [our] judgment for that of the agency." Motor Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Our job is simply to ensure that the Commission "articulate[d] a satisfactory explanation for its action." Id. To provide a satisfactory explanation, an agency must acknowledge and explain any departure from its precedents. Comcast Corp. v. FCC, 526 F.3d 763, 769 (D.C. Cir. 2008) (citing Pontchartrain Broad. Co. v. FCC, 15 F.3d 183, 185 (D.C. Cir. 1994)); see also FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (Fox I).

         Petitioners argue that the FCC departed without explanation from its precedent regarding designated entities. But that simply is not the case. Far from ignoring Commission decisions, the FCC reasonably interpreted and applied them when it determined that DISH had de facto control over SNR and Northstar. We accordingly affirm the Commission's decision that the petitioners are required to pay full price for the spectrum licenses they won in Auction 97.

         The Commission began with its own settled regulations and precedent. Established FCC precedent highlights that the likelihood of a de facto control finding is "greatly increased" in cases like this one, where a large company (DISH) is the "single entity provid[ing] most of the capital and management services" for smaller companies. FCC Op., 30 F.C.C. Rcd. at 8911 (quoting In re Implementation of Section 309(j) of the Commc'ns Act - Competitive Bidding, 10 F.C.C. Rcd. 403, 456 (1994) (Fifth MO&O)). With that warning in mind, the Commission looked to three different sources of law to determine whether DISH had de facto control over SNR and Northstar: (1) 47 C.F.R. § 1.2110(c)(2)(ii)(H), the regulation specifying that one company has de facto control over another if it manages the operations of the other and has the ability to "determine, or significantly influence" the services offered by the other; (2) the Wireless Bureau decisions, Intermountain Microwave and Baker Creek, that articulated the six-factor test that the FCC has used for decades in a range of circumstances to determine whether one company controls another; and (3) the Commission's Fifth Memorandum Opinion & Order, an opinion regarding the implementation of the ...

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