After net neutrality, perhaps no proceeding at the Federal Communications Commission has inflamed more passions than the Designated Entity (“DE”) dispute arising out of the agency’s 2015 AWS-3 Auction (Auction 97). But while passions may have run high and political egos may have been bruised, that is no excuse for the Commission to cut corners and deny parties their fundamental due process rights.
For those who may not have followed the case, the FCC’s DE Program promotes the participation in spectrum auctions of small business by giving such entities discounts on their auction bids. At issue are the financial relationships and joint-bidding arrangements among DISH Network, Northstar Wireless, and SNR Wireless; specifically, whether DISH has de facto control over SNR and Northstar or whether these companies are sufficiently independent of DISH to warrant DE bidding credits of 25% under the Agency’s rules in force at the time of the auction. SNR is owned by John Muleta, a businessman and former Chief of the FCC’s Wireless Bureau; NorthStar is owned by Doyon, an Alaska Native corporation with wireless buildout experience.
The dispute began when SNR and Northstar—modeling their relationships with DISH on contracts used successfully by DEs and their major carrier investors in prior auctions without FCC objection—believed they complied with the Commission’s DE rules and participated aggressively in Auction 97. And under the totality of the circumstances, it is easy to see why.
First, during the “Short Form” application process prior to the auction, DISH, SNR, and Northstar fully disclosed to the Commission all their ownership and joint bidding arrangements. Without objection, the FCC allowed DISH, SNR, and Northstar to participate as Qualified Bidders.
Second, examination of the Auction 97 data revealed that the bidding credits had exceeded $3 billion within one week of the eleven-week auction (Round 23 of 341). Bidding credits would reach nearly $4 billion by the twelfth day of bidding, almost all of which was attributable to SNR and Northstar. The Commission was fully informed about DE bidding activity. Under the Commission’s rules, the Agency could have stopped the auction if it thought there was any impropriety. Instead, thrilled with and distracted by the aggressive bidding, the Commission did nothing and let the auction run for over two months more.
It was only after Action 97 concluded and the results publicly revealed were there fireworks.
It turned out that SNR and Northstar won 702 licenses worth $13.3 billion, thus qualifying for $3.3 billion in discounts. Although the bidding credits as a share of auction revenues were in line with past auctions, the sheer size of the bidding credits attributed to SNR and Northstar prompted allegations from losing bidders and Monday morning quarterbacks that DISH, SNR, and Northstar somehow bamboozled the Agency. The only problem with those claims was that they were just not true: upon review, the Commission was forced to admit that the DEs (and by extension their lawyers) did not perpetuate a fraud upon the Commission. Instead, the Commission sheepishly conceded that “the entire record indicates” that the two DEs complied with the Agency’s rules and adhered to precedent and did nothing wrong.
Still, politicians do not like it when they get egg on their face, and they are quick to shift blame. For example, then-FCC Commissioner (and now just-departed Chairman) Ajit Pai, testifying before the Senate Appropriations Committee, remarked that “[a]llowing DISH to obtain over $3 billion in taxpayer-funded discounts makes a mockery of the small business program.” Not to be outdone, then-FCC Chairman Tom Wheeler testified before Congress that he intended to “fix this” because he was “against slick lawyers coming in and taking advantage of a program that was designed for a specific audience and a specific purpose” and opposed having “designated entities be beards” for large companies.
Yet rather than admit to its administrative negligence, the Commission doubled-down.
To begin, the Agency amended its DE Rules both to significantly cap the amount of bidding credits a DE may receive and to ban joint-bidding agreements for future auctions. Not only did such actions amount to a concession that the unexpected outcome of Auction 97 was a logical outgrowth of its own rules, but these amended rules—passed with an increasingly rare 5-0 vote with three Democratic Commissioners in favor—effectively neutered the DE program. Having to pass these reforms no doubt angered Chairman Wheeler, who prior to Auction 97 was quietly attempting to loosen existing protections in the DE program.
Next, faced with the political pressure to punish the DEs, the Commission—departing from past practice—refused to work with the DEs post-auction to revise their structures to qualify for the bidding credits. This post-auction process had been used in every prior auction to alter DE relationships that troubled the FCC. Instead, here, without any opportunity to cure, the FCC expressly disavowed its own precedent and ruled that DISH retained de facto control over SNR and Northstar because these companies “simply proceeded under an incorrect view about how the Commission’s affiliation rules apply to these structures.” Thus, under their politically-updated view of the “totality of the circumstances,” the Commission argued that SNR and Northstar did not warrant DE classification.
The DEs appealed to the D.C. Circuit in SNR Wireless Licenseco, LLC v. Federal Communications Commission, 868 F.3d 1021 (D.C. Cir. 2017), cert. denied, 138 S. Ct. 2674 (2018). While the court ultimately accepted the FCC’s argument that DISH exercised a disqualifying degree of de facto control over SNR and Northstar, the court also held that “[b]ecause the FCC did not give clear notice that . . . an opportunity [to cure any problems with their applications] would be denied,” the “appropriate remedy” in this case is for the Commission to provide “an opportunity for petitioner to renegotiate their agreements with DISH. . . .”
Despite the court’s directions, the Agency never allowed the parties to negotiate a cure. Although the Commission released an Order on Remand on January 24, 2018, to begin the process mandated by the court, the Commission refused to engage in any iterative negotiations to seek a resolution. Faced with the Commission’s recalcitrance, in June 2018, Northstar and SNR, on their own motion, filed amended agreements based on previously FCC-approved DE structures which they believed cured all the alleged de facto control issues identified by the FCC. Yet for the next two years, and despite numerous requests from the DEs, the Commission never informed the DEs whether their proposed cures were satisfactory or that more concessions were necessary. Total silence.
The case finally came to a head last November when the Commission voted on an order denying the DEs’ proposed cure. For anyone who cares about fundamental due process and equal treatment under the law, the Commission’s actions are deeply troubling.
To the Commission’s credit, it clearly put the “A Team” on the case. The November Order contains nearly fifty pages of detailed forensic analysis of the DEs’ contracts with DISH and provides a thorough and well-written analysis of why the Agency believed the DEs’ proposed cures were unsatisfactory.
But to focus on the Commission’s forensic analysis misses the bigger point. The D.C. Circuit remanded the case in 2017 with the clear intention of having the Commission and the DEs negotiate a solution. Maybe these negotiations would prove successful; maybe not. But these negotiations should have at least occurred (and are, in fact, common in FCC major regulatory adjudications). Instead, the FCC refused to engage, essentially forcing the DEs to guess what the law required—never knowing what concessions would satisfy the Commission. Yet as evidenced by the detailed forensic analysis in the November Order, the Commission knew exactly where the perceived flaws lay but refused to share this information with the DEs (and thus deprived them of an opportunity to cure). Given the Agency’s conduct during the remand, it seems clear that the cake was baked: The Commission would accept nothing but the total rejection of SNR’s and Northstar’s status as Designated Entities. The Commission negotiated in bad faith.
Regardless of what one may think about how the DEs interpreted the Agency’s rules, the Commission’s actions in the November Order flagrantly ignore the D.C. Circuit’s primary reason for remanding the case in the first instance: a lack of adequate notice. Although the Commission clearly knew what it did not like about the agreements, it never once gave any indication to SNR and Northstar about what criteria would satisfy it. The Agency’s lack of notice and clear bias against the parties presents a prima facie case of a denial of procedural due process. Worse, it sets a troubling precedent for any firm seeking to do business before the Commission.
The sad thing here is that had emotions not ruled the day early on, this remand could have provided a “win-win” for former Chairman Ajit Pai. Not only would the valuable radio spectrum at bar finally be put to use on terms that were acceptable to all, but Chairman Pai could have differentiated himself from his predecessor by demonstrating a clear respect for due process, even under challenging conditions.
Instead, we are now headed back to court just to satisfy the Agency’s bonfire of the vanities.