SNR Wireless Licenseco, LLC v. Fed. Commc'ns Comm'n

• Decision Date: 29 August 2017
• Docket Number: C/w 15-1331, 15-1332, 15-1333,No. 15-1330,15-1330
• Citation: 868 F.3d 1021
• Parties: SNR WIRELESS LICENSECO, LLC, Appellant v. FEDERAL COMMUNICATIONS COMMISSION, Appellee
• Court: U.S. Court of Appeals — District of Columbia Circuit

868 F.3d 1021

SNR WIRELESS LICENSECO, LLC, Appellant
v.
FEDERAL COMMUNICATIONS COMMISSION, Appellee

No. 15-1330
C/w 15-1331, 15-1332, 15-1333

United States Court of Appeals, District of Columbia Circuit.

Argued September 26, 2016
Decided August 29, 2017

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, Washington, DC, Dorothy A. Hickok, Alfred W. Putnam Jr., Philadelphia, PA, and Mark H. Sosnowsky, Washington, DC, entered appearances.

Harold J. Feld, Washington, DC, 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.

Pillard, 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

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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 , http://reboot.fcc.gov/reform/systems/spectrum-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

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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...