FCC Denies $3.3 Billion in Bidding Credits to AWS-3 Auction Winners, Requires Full Payment in 30 Days

By Stephen J. Matzura and Marty Stern

The FCC unanimously adopted an order released earlier this week denying approximately $3.3 billion in small business bidding credits to SNR Wireless LicenseCo, LLC and Northstar Wireless, LLC, two entities financed by DISH Network Corporation that had won licenses in the AWS-3 auction which concluded in January (Auction 97).  The auction, which had net winning bids of over $41 billion, significantly exceeded expectations and has been termed a “whopping success” from a revenue standpoint. In a statement issued prior to the order’s release, Commission Chairman Tom Wheeler stated that the entities “are not eligible for bidding credits” based on the Commission’s “fact-based analysis,” which “ensures that bidding credits only go to the small businesses our rules aim to serve.”  The Commission’s order, released the following day, details the Commission’s analysis of whether DISH revenues should be attributed to SNR and Northstar based on its degree of control over the entities.

The 25-percent bidding credits, available to “very small businesses” whose average gross revenues over a three-year period fall below a specified threshold, are intended to promote opportunities and competition for small companies.  Generally speaking, the revenues of a company controlling a bidder are attributed to that bidder’s revenues for purposes of determining its eligibility for the small business credits.  Here, the Commission found that DISH had a controlling interest and is an affiliate of SNR and Northstar and, therefore, attributed its roughly $13 billion in average gross revenues to the two bidders, determining that they were ineligible for the small business bidding credits.

The Commission’s order analyzed the myriad financial and contractual arrangements between DISH and the bidders, finding that under its established precedent, the interrelated factors taken together indicate that DISH exercises de facto control over SNR and Northstar.  While no one factor standing alone or even several in combination might have risen to the requisite level of control, the Commission found that the relationship of the parties, taken together with the totality of their actions during the auction and other factors, demonstrated that DISH has de facto control over and the power to control SNR and Northstar.  In reaching this conclusion, the Commission considered the interrelationship of eleven types of mechanisms through which it found DISH exercised or had the power to exercise control, including DISH’s significant ownership interest, excessive investor protections, and control over financial, build-out, and business plans, as well as over the AWS-3 bidding process and the bidders’ inadequate working capital.

The Commission, however, dismissed all other allegations in third-party petitions to deny the bidders’ license applications that related to SNR’s and Northstar’s qualifications to hold the AWS-3 licenses, including that they lacked candor by allegedly failing to fully disclose DISH’s interest in the companies or by misrepresenting their joint bidding agreements with DISH, or that DISH, SNR, and Northstar engaged in collusive bidding conduct during the auction in violation of antitrust laws.  The Commission also declined to refer the matter to the U.S. Department of Justice, as requested by petitioners, and denied requests to re-auction the licenses won by SNR and Northstar.  Commissioners Pai and O’Rielly, however, issued separate statements in which they each indicated that they would have been in favor of referring the matter to the DOJ based on the collusive conduct alleged in the order.

SNR and Northstar were ordered to pay (or post a letter of credit for) $1.37 billion and $1.96 billion respectively within 30 days of the order’s release (by September 17) or face default for the amount owed, plus interest.  The Commission indicated that if either of the parties defaults on the additional amounts owed by that date, consistent with its rules, it would decide at that time the appropriate disposition of the licenses.

The SNR and Northstar applications were referred to the Wireless Bureau for completion of processing, though the Commission made clear that further processing of the applications would not occur until payment has been made.

In a statement, a representative of Northstar expressed the company’s disappointment with the FCC’s decision, explaining that the company “diligently complied with all FCC rules” and structured agreements consistent with other entities who received bidding credits approved by the FCC.  The representative responded to the Commission’s “control” analysis, stating that “the FCC applied for the first time a new ‘totality of circumstances’ test, but provided no notice prior to Auction 97 that the test would be applied or, in fact, even existed.”  He further characterized the order as a “patently unfair” decision that “is a reaction to political concerns,” also warning that it will lead to uncertainty in the future:  “[T]he FCC’s decision should be of concern to every regulated entity that wants predictability, and a concern for everyone who values diversity and competition in the wireless sector.”

SNR and Northstar can file petitions for reconsideration with the Commission or appeal the order directly to a federal circuit court of appeals.  According to media reports, Northstar is still reviewing the decision “but is considering an appeal.”

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