FCC's Actions Push Legal Boundries

The Federal Communications Commission may have overstepped its legal boundaries in reclaiming NextWave Communication Inc.'s PCS licenses earlier this month.

After the company filed for bankruptcy in July, the federal agency began the process of revoking NextWave's wireless licenses, throwing into question the value of the spectrum and sparking a battle for control over the licenses.

On Monday, Jan. 24, the Second Circuit Court of Appeals denied a motion filed by the FCC that sought to halt further proceedings by the Bankruptcy Court from infringing on the FCC's jurisdiction over NextWave's PCS spectrum.

"If the FCC, or any federal agency for that matter, is unilaterally allowed to take back an asset of a debtor in bankruptcy, imagine what type of havoc that might bring into the financial system," said one telecom analyst.

Nextel and Nextwave, meanwhile, agreed to settle their differences out of court. NextWave had asked for sanctions against Nextel after it entered into a tentative, $8.3 billion agreement with the FCC and the Justice Department for NextWave's wireless licenses. The court motion was adjourned on Thursday, but a lawyer for NextWave said the two companies would negotiate for a reward. "No one's asked for anything or offered anything yet," said Deborah Schrier-Rape of Andrews & Kurth LLP.

The FCC revoked the licenses, even while the company was in bankruptcy, arguing that it was acting in a regulatory capacity, not as a creditor. When NextWave missed a payment on the spectrum, the agency canceled its licenses, claiming that the assets were not protected under federal bankruptcy laws.

That came after an earlier ruling by the Second Circuit Court which mandated the full $4.3 billion value for NextWave's wireless licenses. And that ruling overturned a previous decision that had reduced the value, and the amount that NextWave would have been required to pay to the FCC to keep the licenses, to $1.6 billion.

The FCC defended its actions.

"The FCC General Counsel's office didn't cancel the licenses a year ago because we could have been held in contempt if we did. The law wasn't as clear until the Second Circuit made a decision. The law hasn't really changed," said one agency official.

Last week's decision, however, threw the question back into the hand of the Bankruptcy Court. The court is now set to rule on whether the FCC's actions were legally justifiable.

"The bankruptcy court is favoring the debtors, that's their role. The odds of the licenses being re-auctioned is very small," said one analyst.

Still, both sides are expected to appeal whatever decision the Bankruptcy Court releases.

NextWave's fight to hold onto the PCS spectrum may climb through the justice system all the way to the Supreme Court, some industry-watchers said last week.

"In a nightmare-type scenario, if NextWave is still losing, the Bankruptcy Court could rule and then that could be appealed to the U.S. District Court, and then back to the Second Circuit, and then appealed to the Supreme Court," one source said.

Long Court Battle To Come

Schrier-Rape said the FCC took the Second Circuit's decision to do whatever it wanted and revoke the licenses. She said the Court did not say that the bankruptcy code did not apply to the FCC, whether in the role of creditor or as a regulatory agency.

NextWave holds C-Block and F-Block PCS licenses, designated as Entrepreneur Block spectrum by the FCC. Bidding is limited to companies whose assets do not exceed $500 million and whose gross revenues did not exceed $125 million during the two previous years.

The FCC, however, is considering changing the bidding rules for the re-auction to include bigger wireless players.

Nextel Communications and the Cellular Telecommunications Industry Association are expected to weigh in heavily in favor of changing the terms of the auction. US West and SBC are expected to follow with similar motions.

Analysts have cautioned investors that Nextel may not have enough wireless spectrum to complete its aggressive growth plans.

"For NextWave, it's a matter of life and death. Nextel is currently not able to bid, but every time there's an adverse decision against NextWave, Nextel's stock bids up," said one analyst.

On the other hand, smaller PCS players can be expected to fight to keep the terms of the auction in line with the original 1996 regulations.

"It's hard to say what has changed, other than the amount of money coming in," said one FCC official. "There's a lot of pressure to keep the rules consistent, but then there's lots of financial pressure to change them."

Not once in its history has the FCC changed the rules of a re-auction. A final decision regarding the bidding rules should be announced about ten weeks prior to the July 26 auction date.

"This might run up the entire chain of justice, but it's not yet affecting the auction," said the FCC source.