U.S. Airwaves, Inc. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 5, 2000 Decided November 21, 2000

No. 98-1266

U.S. AirWaves, Inc.,

Petitioner

v.

Federal Communications Commission and

United States of America,

Respondents

NextWave Telecom Inc., et al.,

Intervenors

Consolidated with

98-1267

On Petitions for Review of Orders of the

Federal Communications Commission

---------

Robert A. Long, Jr. argued the cause for petitioners. With

him on the briefs was Andrew J. Heimert.

Stanley R. Scheiner, Counsel, Federal Communications

Commission, argued the cause for respondents. With him on

the brief were Christopher J. Wright, General Counsel, Dan-

iel M. Armstrong, Associate General Counsel, Joel I. Klein,

Assistant Attorney General, U.S. Department of Justice,

Catherine G. O'Sullivan, and Andrea Limmer, Attorneys.

John E. Ingle, Deputy Associate General Counsel, and James

M. Carr, Counsel, Federal Communications Commission, en-

tered appearances.

Ian Heath Gershengorn argued the cause for intervenor

NextWave Telecom Inc. With him on the brief was Donald

B. Verrilli, Jr. David A. LaFuria and Thomas Gutierrez

entered appearances.

Before: Edwards, Chief Judge, Ginsburg and Tatel,

Circuit Judges.

Opinion for the court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Before us are petitions for review

of two rulemaking orders of the Federal Communications

Commission. The orders changed the financial terms applica-

ble to companies that purchased licenses to provide personal

communications services (PCS) at an auction in which bidding

was limited to small businesses and entrepreneurs. See

Amendment of the Commission's Rules Regarding Install-

ment Payment Financing for [PCS] Licensees, Second Re-

port and Order and Further Notice of Proposed Rule Mak-

ing, 12 F.C.C.R. 16,436 (1997) (Restructuring Order); and

Amendment of the Commission's Rules Regarding Install-

ment Payment Financing for [PCS] Licensees, Order on

Reconsideration of the Second Report and Order, 13 F.C.C.R.

8345 (1998) (Reconsideration Order). Petitioners U.S. Air-

waves, Inc. (hereinafter Airwaves) and Sprint Spectrum L.P.

characterize the rules as a benefit given retroactively to

incumbent licensees, to the detriment of losing bidders in the

spectrum auction and of competitors in the PCS industry, and

therefore as unauthorized, unreasonable, and arbitrary and

capricious. Intervenor NextWave Inc., a successful bidder in

the original auction, supports the new rules; it also maintains

that neither petitioner has standing to challenge them.

We hold that Airwaves, as a disappointed bidder in the

original auction, does have standing to petition for review of

the new rules; we therefore do not reach the question

whether Sprint Spectrum L.P. also has standing. We hold

further that, although the changes to the Commission's fi-

nancing rules are indeed retroactive, the Commission had

adequate reasons for adopting them, and that it reasonably

balanced competing goals and acted within its statutory au-

thority.

I. Background

Broadband PCS are a type of mobile telephone technology.

See Omnipoint Corp. v. FCC, 78 F.3d 620, 626 (D.C. Cir.

1996). In order to provide PCS a company must get from the

Commission a license to use a portion of the electromagnetic

spectrum. In 1994 the Commission decided to distribute such

licenses through a system of competitive bidding, pursuant to

47 U.S.C. s 309(j)(1). See Implementation of Section 309(j)

of the Communications Act--Competitive Bidding, Second

Report and Order, 9 F.C.C.R. 2348, pp 54-58 (1994) (2d

R&O). The Commission designated a portion of the spec-

trum for the provision of PCS and divided that portion into

six blocks, which it labeled A through F. In keeping with its

statutory mandate to "ensure that small businesses ... are

given the opportunity to participate" in spectrum auctions, 47

U.S.C. s 309(j)(4)(D), the Commission limited the bidding for

"C-block" spectrum to entrepreneurs and small companies.

See Restructuring Order at p 8; cf. Omnipoint, 78 F.3d at

626 (upholding the limitation). The Commission offered small

businesses bidding for C-block licenses an "installment pay-

ment plan" under which they could pay 10% down and the

balance "over a period of ten years, with interest only paid for

the first six years and interest and principal for the remaining

four." Restructuring Order at p 8. (Entrepreneurs who did

not qualify as small businesses were offered less favorable

payment terms. See id. at n.10.)

Between May and July 1996 some 90 different bidders

bought at auction 493 licenses--one for each "basic trading

area" (BTA) in the nation--to use 30 MHz of spectrum for

the provision of PCS. Their bids totaled $10.2 billion, a

figure some observers attributed to irrational exuberance; on

average, C-block licensees agreed to pay nearly three times

per potential customer what the winning bidders in the A-

and B-block auctions had paid. See Restructuring Order at

p 9 & n.11; Peter Spiegel, Hollow Victory, Forbes, Jan. 27,

1997, at 50.

Within nine months of the C-block auction, it became clear

that a number of high bidders might not be able to make

their scheduled payments. See Wireless Telecommunica-

tions Bureau Seeks Comment on Broadband PCS C and F

Block Installment Payment Issues, Public Notice, 12

F.C.C.R. 21,015, 21,015 & n.4 (1997). In March, 1997 the

Commission suspended the payment obligations of all C-block

licensees pending a review of its installment payment terms.

See Installment Payments for PCS Licenses, Order, 12

F.C.C.R. 17,325, p 2 (1997).

In October, 1997 the Commission issued the first of the two

orders challenged in this case. That order ended the suspen-

sion of payments announced the previous March and offered a

"menu" of new financing options to all C-block licensees. See

Restructuring Order at pp 6, 25. Upon reconsideration the

Commission retained the menu approach but altered several

of the offerings in important particulars. See Reconsidera-

tion Order at pp 8-10. The revised scheme also permitted a

licensee to select a different option for licenses it held in each

"Major Trading Area" (MTA)--referring to the 51 geographic

regions into which the Commission has divided the nation--so

long as it applied the same option to all its licenses within

each MTA. See Reconsideration Order at p 17. Upon the

promulgation of the order on reconsideration, each licensee

was required, in order to avoid default, to choose a menu

option for each of its MTAs. See id. at p 23.

The menu offered each licensee four choices. First, the

licensee could continue to make payments under the original

terms of the auction. See Restructuring Order at p 6.

Second, the licensee could surrender all its licenses for a

particular MTA and receive a "prepayment credit" in an

amount equal to 70% of the down payments and 100% of any

installment payments it had made on those licenses, as well as

forgiveness of its debt on the returned licenses. The prepay-

ment credit would be put toward payment for such other PCS

licenses as the licensee continued to hold. The licensee could

either provide additional funds in order to prepay all the

licenses it retained in a given MTA or, were it to rely solely

upon its prepayment credits, could prepay as many licenses

as possible in a given MTA and surrender any remaining

licenses to be auctioned anew. See Restructuring Order at

p 64; Reconsideration Order at pp 38, 41-43.

Third, the licensee could elect to "disaggregate" each of its

licenses within a given MTA, returning 15 MHz of spectrum

to the Commission and retaining 15 MHz under license. The

licensee's outstanding debt to the Commission with respect to

returned spectrum would be forgiven. The licensee would

also receive a credit equal to 40% of its down payments on the

returned spectrum, which it could apply to the payments due

on the retained spectrum. A licensee combining disaggrega-

tion and prepayment would receive a credit equal to 70% of

its down payment for returned spectrum, which it could use

to prepay the Commission either for the retained 15 MHz of

the disaggregated licenses or for other PCS licenses it re-

tained. See Restructuring Order at pp 38-39; Reconsidera-

tion Order pp 51, 54.

Finally, the licensee could simply surrender its licenses for

a particular MTA and be forgiven its outstanding debt with

respect to those licenses. A licensee electing this so-called

"amnesty" option could either retain the right to rebid when

its licenses were sold at auction again or forego the opportu-

nity to rebid and receive a credit of 70% of its original down

payment; it could apply that credit to payments due in

connection with the prepayment or disaggregation of licenses

that it retained in other MTAs. See Reconsideration Order

at p 12.

The Commission states that in crafting this menu of options

it "considered and balanced" several policy goals: maintain-

ing the integrity of spectrum auctions; ensuring fairness to

actual and prospective licensees; resolving all issues prompt-

ly; and complying with its statutory mandates to "[p]romot[e]

economic opportunity and competition in the marketplace,"

and to "ensure 'that new and innovative technologies are

readily accessible to the American people by avoiding exces-

sive concentrations of licenses and by disseminating licenses

among a wide variety of applicants, including small busi-

nesses.' " See Restructuring Order at p 2 (quoting 47 U.S.C.

s 309(j)).

II. Analysis

Airwaves and Sprint PCS contend that the Commission

changed its original auction rules arbitrarily and capriciously

and without statutory authority. After analyzing the petition-

ers' standing, we consider the Commission's claim that the

new rules were foreshadowed in the original auction rules and

therefore do not represent a significant change in policy. We

then turn to the questions of arbitrariness and of statutory

authority.

A. Do petitioners have standing?

The "irreducible constitutional minimum" for standing in an

Article III court is that the petitioner was injured in fact, that

its injury was caused by the challenged conduct, and that its

injury would likely be redressed by a favorable decision of the

court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61

(1992). NextWave Inc., intervening in defense of the Com-

mission, argues that Airwaves lacks standing because it can

demonstrate neither that it was injured in fact nor that its

alleged injury is redressable.

A bidder in a government auction has a "right to a legally

valid procurement process"; a party allegedly deprived of

this right asserts a cognizable injury. DIRECTV, Inc. v.

FCC, 110 F.3d 816, 829 (D.C. Cir. 1997). A disappointed

bidder "need not ... demonstrate that it would be successful

if the contract were let anew" but only that it was " 'able and

ready to bid ... and that the [rule] prevent[ed] it from doing

so on an equal basis.' " Id. at 829-30 (quoting Northeastern

Fla. Chapter of Assoc. Gen. Contractors of America v. City of

Jacksonville, 508 U.S. 656, 666 (1993)). Of course, in order to

show that its injury is redressable, a disappointed bidder

must demonstrate that it is "ready, willing, and able" to

participate in a new auction should it prevail; but it need not

demonstrate that it will participate in such an auction regard-

less of the circumstances then prevailing. See Orange Park

Florida T.V., Inc. v. FCC, 811 F.2d 664, 672 & n.18 (D.C. Cir.

1987).

Airwaves meets these requirements. It submitted bids in

the original C-block auction but dropped out before securing

any licenses. It claims that it would have bid more had it

known that financial terms more favorable than those an-

nounced at the time of the auction would later be offered to

winning bidders. Airwaves further affirms, in the sworn

declaration of its chief executive, that it "intends" to bid in a

future reauction of PCS spectrum and that it is able to raise

the capital necessary to do so. That is sufficient.

NextWave also argues that Airwaves cannot base its stand-

ing upon its participation in the original auction because

Airwaves acknowledges that the original auction was fair;

Airwaves challenges only the way in which the Commission

treated licensees after the auction was completed. In this

argument, however, NextWave misapprehends Airwaves'

claim, which is that post-auction revisions to the financing

options available to the high bidders constitute impermissibly

retroactive changes to the initial auction rules. There is no

basis for suggesting, as NextWave seems to do, that ex post

changes can never affect the validity of a government auction.

Finally, NextWave argues that Airwaves fails to demon-

strate that its claim is redressable by this court because it

does not allege that when it petitioned for review of the new

rules it was ready, willing, and able to bid in a new auction.

NextWave asserts that as of that date Airwaves had returned

all its investment capital to its investors and was not in good

standing in the State of Delaware because of a tax dispute,

for both of which reasons it would have been unable to bid in

any new auction that the Commission might have conducted.

NextWave's premise is correct: Standing is determined as of

the date an action is filed, see Smith v. Sperling, 354 U.S. 91,

93 n.1 (1957); but NextWave offers no persuasive reason to

think either that Airwaves lacked access to capital on that

date or that it would not have resolved its tax dispute in

Delaware had that been necessary in order to bid in a new

auction. (In fact, the tax matter was resolved soon after the

filing.) Absent any evidence to the contrary, Airwaves' asser-

tion that it was ready, willing, and able to participate in a

rerun of the C-block auction satisfies the redressability re-

quirement.

Having determined that Airwaves has standing, we do not

need to reach the question whether Sprint Spectrum L.P. has

standing as well, for Sprint presents no arguments beyond

those made by Airwaves. See Railway Labor Executives'

Ass'n v. United States, 987 F.2d 806, 810 (D.C. Cir. 1993)

("[I]f one party has standing in an action, a court need not

reach the issue of the standing of other parties when it makes

no difference to the merits of the case").

B. Is the rule retroactive?

Airwaves argues that the changes in the Commission's

auction rules give a windfall to C-block licensees. The

Commission and NextWave respond that the original auction

rules anticipate the possibility that the Commission might

revise its financing provisions, making the adoption of the

new rules foreseeable.* Cf. Small Refiner Lead Phase-

Down Task Force v. EPA, 705 F.2d 506, 547, 549 (D.C. Cir.

1983) (holding that final administrative rules that depart from

an agency's initial proposals do not require new notice and

comment if the final rules are a "logical outgrowth" of the

proposals, such that the parties "should have anticipated [that

they] might be imposed").

__________

* The implication of the Commission's account is that the possibil-

ity of new rules is fully reflected in the prices paid; hence there is

no windfall.

The Commission points out that the original auction rules

provided that "as a general rule" a defaulting bidder's licens-

es would be deemed forfeit and reauctioned, 2d R&O at p 204,

which reasonably can be taken to suggest that forfeiture and

reauction were not to be the inevitable consequence of de-

fault. More important, the original rules specifically allowed

a licensee "that has defaulted or that anticipates default

under an installment payment program" to obtain a "three to

six month grace period" during which to "seek from the

Commission a restructured payment plan." Id. at p 240. In

addition, the original rules provided that default would occa-

sion a "substantial penalty," Implementation of Section 309(j)

of the Communications Act--Competitive Bidding, Fifth Re-

port and Order, 9 F.C.C.R. 5532, p 75 (1994), and under the

revised rule every licensee that fails to honor its original

payment obligations forfeits at least 30% of its down payment

on all spectrum that it returns to the Commission.

In some respects, however, the new rules clearly do contra-

dict the Commission's previously stated policies. The initial

auction rules provided that the Commission would consider

requests for financial restructuring on a "case-by-case basis."

2d R&O at p 240. This certainly implied that the Commission

would not proceed by way of a further rulemaking and a new

rule of general application, see Bowen v. Georgetown Univ.

Hosp., 488 U.S. 204, 209 (1988). The distinction is significant,

for the initial auction rules made only those licensees "that

ha[d] defaulted or that anticipate[d] default" eligible for a

grace period and financial restructuring. 2d R&O at p 240.

The C-block menu, in contrast, is available to all licensees

regardless of their financial condition. See Restructuring

Order at p 6.

The new regulations therefore do not merely fill in the

details of a policy foreseeable at the time of the original

C-block auction; instead, they constitute a secondarily retro-

active change to the rules governing that auction. See Bow-

en, 488 U.S. at 219 (1988) (Scalia, J., concurring) (defining

"secondary retroactivity" as describing "rule[s] with exclu-

sively future effect [that] ... affect past transactions") (em-

phasis omitted). A secondarily retroactively rule is valid only

to the extent that it is reasonable--both in substance and in

being made retroactive. See id. at 220. It is to reasonable-

ness that we turn next.

C. Are the regulations reasonable?

Airwaves argues that the rule is invalid for two related

reasons. First, it contends that the Commission failed to

relate its offering of post-auction refinancing options to its

own stated goals. Second, it argues that regardless whether

the Commission embraced fairness as a goal, the rule is

simply so unfair that it must be deemed arbitrary and capri-

cious.

Under the arbitrary and capricious standard, this court

does not substitute its judgment for that of the administrative

agency. See Motor Vehicles Mfrs. Ass'n of the United States,

Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

A regulatory decision in which the Commission must balance

competing goals is therefore valid if the agency can show that

its resolution "reasonably advances at least one of those

objectives and [that] its decisionmaking process was regular."

Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 (D.C.

Cir. 1999). Because Airwaves does not challenge the regular-

ity of the Commission's decisionmaking process, the issue now

before us is whether the Commission reasonably justified its

regulations with reference to at least one of its avowed goals.

See Restructuring Order at p 2.

The C-block menu withstands review under this standard:

The Commission justified each of the menu options and its

MTA-by-MTA selection principle with reference to one or

more of its stated goals. In particular, the Commission

justified each of its menu options as "enabling C block

licensees to remain participants in the wireless market,"

which it found would hasten "the delivery of new services to

the public" and promote efficient use of the spectrum. Re-

consideration Order at p 10; see Restructuring Order at

pp 43, 45 (disaggregation); id. at p 53 (amnesty); Reconsider-

ation Order at p 40 (prepayment). In addition, the Commis-

sion justified the prepayment option as a way of minimizing

conflicts between the agency's roles as creditor and as regu-

lator. See Reconsideration Order at p 40. The Commission

explained disaggregation, as it did the provision for MTA-by-

MTA election, in part as an effort to help small licensees plan

their businesses rationally. See Restructuring Order at p 45;

Reconsideration Order at p 19.

Airwaves challenges the Commission's rationale in two

respects. Its first point proceeds from the observation that

the Commission deemed "essential" two and only two of its

stated goals, namely, maintaining the integrity of the auction

process and ensuring fairness to all market participants.

Restructuring Order at p 3. Airwaves claims that it is unrea-

sonable for the Commission to adopt any policy that under-

mines a goal that the agency itself has styled "essential."

This is an unduly cramped reading of the orders, however.

The Commission reasonably can treat fairness and integrity

as "essential" goals and yet recognize that they are matters of

degree. Thus, the Commission may choose to sacrifice some

degree of fairness or integrity in order to gain other impor-

tant objectives. Several of the goals that the Commission

lists in addition (and therefore potentially in opposition) to

fairness and integrity--such as competition, speedy deploy-

ment of services to the public, efficient use of the spectrum,

and participation of small businesses in the market--are

mandated by statute. See 47 U.S.C. s 309(j)(3). A more

reasonable construction of the Commission's statement that

fairness and integrity are "essential" goals, therefore, is that

in its view they must be included (along with those specified

in the statute) among the goals to be balanced. This by no

means requires that they trump all other goals in every case

where there is conflict.

Airwaves also argues that, aside from the orders' failure to

advance the Commission's "essential" goals, they also fail to

advance the other goals the Commission invoked as justifica-

tions for the menu options. For example, Airwaves argues

that, contrary to the Commission's claims, the rule will retard

rather than hasten the availability of services to consumers;

instead of forcing a reauction that would transfer spectrum to

competent and solvent firms, the rule allows precisely those

companies that "have demonstrated financial irresponsibility

and undue optimism about their financial capabilities" to

retain their spectrum. New buyers at auction may, as the

petitioner asserts, be more likely to effectuate a rapid build-

out of wireless systems, but the Commission is reasonably of

the view that starting the licensing process all over again

would delay build-out. We defer to the agency regarding a

predictive matter, such as this, within its expertise. See

Fresno Mobile Radio, 165 F.3d at 971.

In a similar vein, Airwaves complains that, contrary to the

Commission's expectation, the rule will not promote the par-

ticipation of small businesses in the wireless industry; that

goal would be better effected by redistributing licenses to

small businesses in a new auction than by reinforcing the

current concentration of C-block licenses in relatively few

hands. The petitioner's position is again plausible, but it is

also reasonable, again, for the Commission to expect that

small businesses generally will be better situated to face their

larger competitors in the wireless industry if those that

already have licenses are able to build their businesses in at

least some markets. Again, we defer to the Commission's

expertise regarding such predictive issues.

Notwithstanding the Commission's reasoned justification,

the rule might still be arbitrary and capricious if, as Airwaves

claims, it is sufficiently unfair. We agree with the petitioner

that the Commission systematically downplays the inequity of

the rule: it clearly grants a substantial windfall not only to

distressed but also to healthy companies that bought licenses

in the initial auction. Those companies can now discard the

licenses they have found, with the benefit of hindsight, to be

less valuable--without incurring the ordinary penalty for

default and, indeed, while recouping some of the payments

they have already made. At the same time they can retain

the licenses they have found to be more valuable, subject only

to the requirement that they elect a single menu option within

each MTA. Further, the rule allows them not only to concen-

trate their resources in the most desirable markets but to

apply to the spectrum they retain some of the payments they

had made on spectrum they returned. Obviously, those who

were outbid in the original auction would have bid more than

they actually did--and might have bid enough to win licens-

es--had they known that the Commission later would make

such options available.

Having established that the Commission changed the rules

in a way that could not be foreseen, the question is whether,

under the circumstances, that was so unfair as to be arbitrary

and capricious. We start from the intuitive premise that an

agency cannot, in fairness, radically change the terms of an

auction after the fact. At the same time, an agency must be

allowed to adjust its policies to changing circumstances, with-

in the framework of rules it established in advance of the

auction. In this case the Commission determined that the

statutory goals of speeding the delivery of service to the

public and of facilitating the participation of small businesses

in the wireless market required it to liberalize the financial

terms available to C-block licensees. See Reconsideration

Order at pp 7-8. Competing goals do not absolve the agency

of its duty to losing bidders, of course, but the Commission

was careful to temper its liberalization accordingly. The

agency did not simply forgive agreed-upon payments, much

less grant the winning bidders' more sweeping requests for

relief. Rather, under each of the menu options it imposed

upon every distressed licensee a "substantial penalty"--in

every case at least 30% of the down payment for a returned

license, and up to 60% in the case of a licensee choosing

disaggregation without prepayment.

Considering the dramatic and unexpected business rever-

sals faced by C-block licensees, and post-auction conditions in

the wireless market, we think the Commission reasonably

exercised its discretion to balance fairness to losing bidders

with the needs of the market and with the public interest.

We therefore conclude that the orders under review are

consistent with the Commission's stated goals, and that such

unfairness as they worked does not render them arbitrary

and capricious.

D. Did the Commission exceed its statutory authority?

The Commission conducts spectrum auctions pursuant to

its authority to grant licenses "through the use of a system

of competitive bidding." 47 U.S.C. s 309(j)(1). Airwaves

argues that post-auction concessions made to the winning

bidders effectively render the auction noncompetitive and

therefore without statutory authorization. Airwaves argues

further that retroactive changes to auction rules violate the

requirement that the Commission "ensure that ... an ade-

quate period is allowed ... after issuance of bidding rules[ ]

to ensure that interested parties have a sufficient time to

develop business plans, assess market conditions, and evalu-

ate the availability of equipment." Id. s 309(j)(3)(E). Air-

waves' argument here is that post-auction rule changes nec-

essarily leave no time for interested parties to plan, assess,

or evaluate.

These arguments were not put before the Commission and

are therefore not properly before this court. See Washington

Ass'n for Television & Children v. FCC, 712 F.2d 677, 680

(1983) ("[C]laims not presented to the agency may not be

made for the first time to a reviewing court"). Airwaves

suggests that the issue was adequately raised before the

Commission in the comment of another party, which argued

that "Section 309(j) does not ... contain any provision allow-

ing the Commission to change the amount owed the govern-

ment as a result of an auction." The broad and general claim

that the Commission lacks statutory authority "to change the

amount owed" is materially different, however, from Air-

waves' specific argument that the Commission violated the

statutory provisions requiring "a system of competitive bid-

ding" and "an adequate period" for planning after auction

rules are issued. Confronted only with the former, broad

claim, the Commission had no notice of the specific objections

now raised by Airwaves. As we have said more than once

before, a litigant may not " 'sandbag' agencies by withholding

legal arguments ... until they reach the courts of appeal."

USAir, Inc. v. Department of Transp., 969 F.2d 1256, 1260

(D.C. Cir. 1992).

III. Conclusion

In summary, we hold that the changes to the Commission's

C-block auction rules are neither arbitrary and capricious,

nor unreasonable, nor without statutory authority. Therefore

the petitions to review the rules are

Denied.