What happens to the spectrum “owned” by a telecommunications company when it goes belly-up?
According to yesterday’s Supreme Court ruling in the case of FCC v. NextWave Personal Communications, Inc., bankruptcy can now be used as a shield by companies who want to keep their valuable spectrum real estate safe from government repossession – even if they haven’t yet paid for it.
A synopsis of the case: in 1996, when the FCC auctioned off the spectrum destined to be developed for personal communications services (aka “PCS” – think wireless phones, pagers, PDAs, etc.), it restricted two of the six auctions to small companies. The idea was to encourage new entrants into a booming sector of the telecom industry: competition would drive down prices for wireless services, encouraging increased adoption of wireless technologies.
NextWave Personal Communications, Inc., a startup telecom corporation (founded in 1995) bid successfully on licenses for two blocks of nationwide PCS spectrum. The combined bid price for both sets of licenses was $4.86 billion. NextWave signed a contract with the FCC agreeing to pay the $4.86 billion in installments. A clause in the contract clearly stated that the FCC could revoke NextWave’s PCS licenses if “full and timely payment” of these installments were not made.
A year later, NextWave ran into trouble securing more money from financiers; this put the company’s ability to pay for its spectrum at risk. The FCC temporarily suspended NextWave’s payment plan, giving it a year to either get its fiscal house in order or give back the spectrum it bid on.
In June, 1998, NextWave filed for bankruptcy. Since it effectively defaulted on its license payments in the process, the FCC moved to revoke NextWave’s licenses and re-auction the spectrum. Spectrum is valuable – NextWave probably considered it part of its equity (and a big chunk of its corporate net worth) – and fought hard not to lose control of it.
While the bankruptcy court in New York sided with NextWave (and even moved to slash more than $3.5 billion off the amount owed to the FCC), the Second Circuit Court of Appeals disagreed, and the legal wrangling bounced up and down the judicial ladder until the Supreme Court agreed to take the case last year.
Yesterday, in an 8-1 decision, the Supremes ruled in favor of NextWave. They found the FCC in violation of a bankruptcy protection law which forbids the government from revoking permits and licenses from bankrupt entities solely based on their immediate inability to pay.
“In short,” wrote Justice Antonin Scalia for the majority, “a debt is a debt, even when the obligation to pay it is also a regulatory condition.” Certain exemptions are written into bankruptcy law that give government agencies the right to revoke licenses in response to bankruptcies, but none apply to the FCC and spectrum auctions.
Therefore, the Court ruled, NextWave still properly controls those chunks of PCS spectrum it bought at auction, even though it has not fully paid for them yet, and it may do with them as it wishes. If the FCC were to reclaim that spectrum, it would violate the protections afforded to NextWave and its assets under bankruptcy law. Government agencies (in theory) cannot break other laws to uphold their own.
Justice Stephen Breyer, the lone voice of dissent, believes the majority erred in reading the bankruptcy statute in question too literally – in such a way that effectively prohibits the government from using repossession as a means of collecting payment from those who use public resources for profit. Quoth Breyer:
“To read the statute in light of its purpose makes clear that Congress did not want always to prohibit the Government from enforcing a sales contract through repossession. Nor did it intend an interpretation so broad that it would threaten unnecessarily to deprive the American public of the full value of public assets that it owns. [cite deleted] (authorization of spectrum auctions with restrictions ‘to protect the public interest’).”
Now comes the free-market irony in all of this: NextWave holds chunks of wireless spectrum that it bought at an FCC auction in 1996 for $4.86 billion. The FCC, thinking it would regain control of that spectrum by NextWave’s default, re-auctioned the spectrum in 2001, and the winning bids totaled $16 billion. The results of that auction are now voided thanks to this decision.
The general consensus among mainstream business journalists (as that is the only place you’ll find coverage of this story) is that NextWave will sell the spectrum to other, larger wireless phone companies. The proceeds of those sales, if they take place, will not flow directly back to the U.S. Treasury; thanks to bankruptcy law, if NextWave liquidates its assets the FCC will get a slice of the leftovers, but it must wait in line with the company’s other creditors.
NextWave has paid the FCC more than $400 million so far (less than 10% of what it owes), and the chances of seeing payment in full are now almost nil.
The entire system of spectrum auctions was designed in 1993 to infuse the U.S. Treasury with cash from a public resource newly opened to popular commercial development. The rules governing the auctions NextWave participated in were even crafted specifically to promote the entry of smaller companies into the telecommunications industry.
Yet when the market tanked on NextWave, it ran crying to the courts to keep a valuable public resource it never fully paid for. Ultimately it is the larger wireless companies who will benefit from this decision, as they now have a chance to snap up more spectrum at bargain-basement prices (the result of a bankrupt owner desperate to raise cash). Even worse, what began as an attempt to leverage a public resource for public enrichment ends up a twisted form of corporate welfare, as hardly any money from a spectrum fire-sale will actually make it into government coffers to pay for the FCC’s initial auction.
The FCC – which initially released the spectrum into the marketplace – can only stand by and watch it in action, with the endgame in complete contradiction to the agency’s intent. While I’d normally take a bit of pleasure from watching the FCC get a comeuppance in court, on this issue it makes my stomach churn.
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