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The Settlement Between the U.S. Government and Nextwave, Inc. to Resolve Disputed Spectrum Licenses
Subcommittee on Telecommunications and the Internet
Mr. Denny Strigl
Mr. Chairman, and members of the Committee, thank you for holding this hearing today. I am concerned that much of the recent discussion of the NextWave settlement has focused on the lobbyists, lawyers, and investors. The big picture for the wireless industry and our economy has been missing from the dialogue. I'm not a lobbyist, lawyer, or self-interested investor. I'm a wireless network operator that has come before this Subcommittee for the third time in 18 months to talk about the need for more radio spectrum - - the lifeblood of the growing wireless communications business. In many ways, I'm here today to deliver the same message. I believe the legislation proposed by the Administration is strongly in the public interest:
There has been a suggestion that Congress should not act on the proposed legislation because there may be bankruptcy-related or other problems affecting past or future auctions. I urge the Subcommittee to take advantage of the solution at hand. This settlement and the authorizing legislation can avoid several more years of legal limbo for these licenses that can be working for the American people. Putting to use almost $16 billion worth of spectrum across 40 States now -- rather than later -- is a pretty good day's work. And on a separate track, with respect to the problem presented by bankruptcies in future spectrum auctions, Verizon Wireless will be happy to work with Congress in crafting a solution. The legal context for this settlement and the authorizing legislation are detailed in the attachment to this testimony. More than five years now have elapsed since the FCC's original auctions awarding the licenses to NextWave. Absent a settlement, the litigation could continue for another two or three years or even longer, because it is now doubtful that the Supreme Court could hear the case this term. Facing that prospect, the FCC, the Department of Justice, NextWave, and winning bidders from the FCC's January 2001 reauction have negotiated a settlement agreement that is intended to avoid the uncertainty of prolonged litigation and ensure that the spectrum covered by NextWave's licenses will finally be put to use. The settlement agreement is the product of lengthy and intensive negotiations among many public and private parties whose interests it affects. The parties attempted to negotiate a settlement that did not require authorizing legislation but in the end the only structure on which the parties could find common ground does require the legislation that you now find before you. To achieve its objectives in a timely way, the proposed legislation includes specific instructions to the courts to dispose promptly of any judicial challenges to the settlement or to the legislation itself. Those instructions are warranted to put behind us five years in which this spectrum has lain fallow. Those provisions are fully respectful of the independence of the judiciary and have ample precedent in prior legislation. In summary, I urge the Subcommittee to do everything it can to move this legislation through Congress before the end of the year. It is the best result for the industry and the economy. To that end, I appreciate the Subcommittee's promptly holding this hearing and again, I thank the Subcommittee for the opportunity to appear before you today.
ATTACHMENT LEGAL
CONTEXT OF THE SETTLEMENT More than six decades ago, Congress determined that the public airwaves are a valuable and scarce resource that must be allocated by the Government for the temporary, exclusive use of particular persons. Since that time, it has vested in the FCC exclusive authority to make spectrum allocations. From the beginning, the guiding statutory standard for issuance of licenses has been, as it remains, "public convenience, interest, or necessity." 47 U.S.C. § 307(a). The FCC has used different means for allocating spectrum to serve the public interest, including comparative hearings and lotteries. In 1993, Congress added Section 309(j) to the Communications Act to authorize the use of auctions. Congress found that a competitive bidding system would (1) ensure that spectrum is used more productively and efficiently than if handed out for free; (2) speed delivery of services; (3) promote efficient and intensive use of spectrum; (4) prevent unjust enrichment (to a lottery winner, for example); and (5) produce revenues for the American people. H.R. Rep. No. 103-111, at 246-253 (1993). Section 309(j) makes clear, however, that revenue raising must take a back seat to the FCC's continuing duty to select the best user of the spectrum. Thus, Congress required the FCC to adopt safeguards to protect the public interest and to promote, among other goals, the dissemination of licenses to a "wide variety" of owners, including small businesses. 47 U.S.C. § 309(j)(3). Congress required the FCC to consider installment-payment methods to implement this goal, and Congress restricted the FCC's ability to consider the "expectation of Federal revenues" in designing authorized auctions. 47 U.S.C. §§ 309(j)7)(B), 309(j)(4)(A). In addition, Congress provided that the FCC's new auction authority does not otherwise affect any provisions of the Communications Act and that the FCC's licensing decisions are to be governed by the public interest, convenience, and necessity. In particular, Congress specified that the auction-related provisions of the Act do not diminish the Commission's authority to regulate or reclaim spectrum licenses, and do not convey any rights, including any expectation of renewal of a license, that differ from the rights of other licenses within the same service that were not issued via auctions. 47 U.S.C. § 309(j)(6). In implementing its new auction authority, the FCC concluded that designing auctions to award licenses to the parties that value them most highly (as evidenced by their commitment to pay the most) will best achieve the congressional goals noted above. The FCC also adopted installment-payment programs to implement the express congressional directive to promote dissemination of licenses among a wide variety of owners, including small businesses, as one facet of identifying who would be the best users of the public spectrum overall. When the
FCC conducted a series of auctions from 1995 through 1997 for the right to use
certain broadband PCS spectrum, NextWave (that is, NextWave Personal
Communications Inc. and its affiliates) was the winning bidder for spectrum in
63 markets by submitting high bids totaling $4.74 billion, which NextWave, as a
small business, would pay over a ten-year period under the FCC's installment
payment program. The FCC issued the
63 licenses to NextWave in early 1997, subsequent to the express condition that
failure to make a scheduled payment would result in automatic cancellation.
Almost immediately, however, NextWave and winning bidders for other
licenses, finding it hard to obtain financing, asked the FCC for relief from
their obligations. The FCC
suspended installment payments while it considered the matter, but ultimately
gave licensees only a limited set of "restructuring" options, stressing the
importance of avoiding changes that would impair the integrity of the auctions
process and would be unfair to losing bidders in the auctions.
The FCC's adoption of the restructuring options was upheld by the D.C.
Circuit. The
NextWave Litigation On June
8, 1998, the day that PCS licensees were required to elect among these
"restructuring" options, NextWave, rather than make an election, filed a
petition for reorganization in bankruptcy.
NextWave's next installment payment was due at the end of October 1998,
but it failed to make that payment, thus triggering the express automatic
cancellation condition on its licenses. NextWave,
however, began litigating in the bankruptcy court to keep its licenses while
avoiding its obligations to make full and timely payment, by asserting a claim
of "fraudulent conveyance" under Section 544 of the Bankruptcy Code, 11
U.S.C. § 544, based largely on an asserted decline in the value of the licenses
since the auctions. NextWave's bankruptcy filing has spawned years of litigation, which has focused on the FCC's right to reclaim spectrum from bankrupt licensees who are unable to meet the payment conditions imposed on their licenses. From the outset, the bankruptcy court framed the issue as whether the FCC's challenge to NextWave's plan of reorganization sought to adjudicate the FCC's rights as a creditor under the Bankruptcy Code (in which case the bankruptcy court could adjudicate the matter), or the FCC's rights as a regulator (in which case it could not). The bankruptcy court concluded that only creditor interests were at issue and ruled in NextWave's favor; the district court affirmed, allowing NextWave to retain the licenses while reducing NextWave's payment obligation from $4.74 billion to $1.02 billion. The Second Circuit reversed that decision. It rejected the bankruptcy court's view that the FCC's rights to enforce the license conditions against a bankrupt licensee were limited to those of a traditional creditor. Instead, the Second Circuit described the congressional commitment to the FCC (not any court) of exclusive authority over spectrum and the noncreditor regulatory interests behind auctions as spectrum allocation tools. Accordingly, the Second Circuit held that the bankruptcy court lacked authority to order remedies that abrogate the FCC's licensing authority. The Second Circuit further held that NextWave became obliged at the close of the auction, when what it was buying was worth what it bid, thus defeating NextWave's efforts to reduce the debt. When the case returned to the bankruptcy court, market conditions had changed, bringing a substantial increase in the value of the NextWave licenses and NextWave was therefore able to propose a reorganization plan providing for full payment of its obligations to the FCC. The FCC, however, announced that NextWave's licenses had automatically cancelled when the October 1998 payment was missed, and proposed to re-auction the spectrum. The bankruptcy court issued an order declaring the FCC's reauction notice null and void, citing the automatic stay and other provisions of the bankruptcy code, 11 U.S.C. §§ 362, 1123, 1124. The Second Circuit again reversed. The Supreme Court denied NextWave's petitions for certiorari from both Second Circuit decisions. In January 2001, the FCC completed its reauction of NextWave's licenses. In the reauction -- dubbed Auction 35 -- 21 companies seeking access to spectrum that has grown increasingly scarce bid a total of approximately $15.8 billion -- more than three times what NextWave had originally bid for the spectrum. The
D.C. Circuit's Decision NextWave next appealed the FCC's public notice announcing the reauction of its licenses to the D.C. Circuit. Like the bankruptcy court and the Second Circuit, the D.C. Circuit was asked to consider whether the FCC's license cancellation was prohibited by Section 525 of the Bankruptcy Code, which forbids any governmental unit to "deny, revoke, suspend, or refuse to renew a license" to a person that "is or has been a debtor" under Chapter 11 of the Bankruptcy Code solely because such debtor was insolvent before the bankruptcy case was filed or has not paid a debt that is dischargeable in bankruptcy. 11 U.S.C. § 525(a). The D.C. Circuit held that, because the FCC's license cancellation was triggered by NextWave's failure to make the required payments, the cancellation fell within these automatic stay provisions of the Bankruptcy Code. The D.C. Circuit invalidated the cancellation, returning the spectrum to NextWave. The FCC, Verizon, and certain other wireless carriers have petitioned the Supreme Court asking that they review the D.C. Circuit's decision. That petition is pending. The Settlement Agreement More than five years now have elapsed since the FCC's original auctions awarding the licenses to NextWave. Absent a settlement, the litigation could continue for another two or three years or even longer, because it is now doubtful that the Supreme Court if it grants certiorari could hear the case this term and because there are other issues raised by NextWave that would be heard on remand from the Supreme Court even if the Court reversed the D.C. Circuit concerning Section 525. Facing that prospect, in the aftermath of the D.C. Circuit's decision, the FCC, the United States Department of Justice, NextWave, and winning bidders from the FCC's January 2001 reauction have negotiated a settlement agreement that is intended to avoid the uncertainty of prolonged litigation and ensure that the spectrum covered by NextWave's licenses will finally be put to use. The settlement agreement is the product of weeks of intensive negotiations among many public and private parties whose interests it affects. The parties attempted to negotiate a settlement that did not require authorizing legislation but in the end the only structure on which the parties could find common ground does require the legislation that you now find before you. To achieve its objectives in a timely way, the proposed legislation includes specific instructions to the courts to dispose promptly of any judicial challenges to the settlement or to the legislation itself. Those instructions are warranted by the need to put behind us the five years in which this spectrum has lain fallow. Those provisions also are fully respectful of the independence of the judiciary and have ample precedents in prior legislation.
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