FCC & Arctic Slope Corp., et al. v. NextWave Communications, et al.

Questions presented: Whether Section 525 of the Bankruptcy Code, 11 U.S.C. 525, conflicts with and displaces the Federal Communications Commission's rules for congressionally authorized spectrum auctions, which provide that wireless telecommunications licenses obtained at auction automatically cancel upon the winning bidder's failure to make timely payments to fulfill its winning bid.

BY: GREGG SHERRARD BLESCH, MEDILL NEWS SERVICE

NextWave Telecom bid $4.74 billion for broadband PCS licenses from the Federal Communications Commission in auctions held in 1996 and 1997. But the company didnt have that kind of money. Nor did the FCC require the company to have it.

Congress in 1993 had amended the 1934 Communications Act to allow the FCC to auction the spectrum licenses while requiring that small businesses have a shot at them. It was left up to the FCC to figure out how to accomplish that goal.

So the FCC set aside two blocks of licenses for smaller companies, which could bid as high as they wanted and then pay the government in installments. If a company missed a payment, though, the FCC would cancel the licenses.

NextWave, a company formed in 1995 to provide wireless high-speed Internet access and voice communications service, paid 10 percent of its bid and walked away with 63 licenses. The deal included this language: "This authorization is conditioned upon the full and timely payment. ... Failure to comply with this condition will result in the automatic cancellation of this authorization."

Before making any further payments, NextWave ran into financial trouble and filed for bankruptcy in June 1998.

NextWave allowed its final deadline for late payment pass, believing bankruptcy would protect its licenses. The FCC disagreed, and for three years the question bounced between bankruptcy court, the 2nd Circuit Court of Appeals and the Court of Appeals for the District of Columbia.

Chapter 11 of the bankruptcy code includes a stay on debts, including those owed to the government. Some provisions of the law, however, seem contradictory. One subsection provides an exception for governmental units acting to enforce regulatory power, while section 525 explicitly prohibits the government from revoking a debtors license for failure to pay.

NextWave argued in bankruptcy court that the price it paid for the licenses was much more than they were worth. The court agreed, ruling that NextWave could keep its licenses for a little more than $1 billion, less than a quarter of the original bid.

The 2nd Circuit Court of Appeals reversed, based on the regulatory role of the FCC and the clear condition that installments were to be paid promptly. The appeals court also found that the bankruptcy court exceeded its jurisdiction.

With that victory, the FCC auctioned NextWaves licenses, collecting bids of almost $16 billion more than half of that amount from Verizon Wireless and another considerable amount from Arctic Slope Corp. At the time, Arctic Slope planned to launch high-speed Internet and other services in the New York and Los Angeles markets, where use of the tied-up NextWave spectrums would reduce dropped calls and "all circuits are busy" messages.

NextWave went back to bankruptcy court, which ruled that the FCC violated the companys Chapter 11 protection when it canceled and sold the licenses. The FCC returned to the appeals court, which again denied the bankruptcy courts jurisdiction.

NextWave then found a new venue, filing an appeal with the Circuit Court for the District of Columbia. The Communications Act gives the D.C. court jurisdiction over FCC orders. Although the maxim of res judicata prevents a court from revisiting issues already settled by another court, the D.C. court agreed to decide the case because the 2nd Circuit had ruled primarily on the bankruptcy courts lack of jurisdiction rather than the merits of the case.

The D.C. court, issuing an opinion in June 2001, didnt buy the FCCs argument that because the payment plan was a means of regulation, NextWaves licenses were not protected under the bankruptcy law. The bottom line, the court stated, is that the FCC canceled the licenses because NextWave didnt pay, which is explicitly prohibited in section 525 of the bankruptcy code.

The government still defends its payment plan as a purely regulatory mechanism excluded from bankruptcy protection. The U.S. Solicitor Generals office wrote in its petition to the U.S. Supreme Court, "If the bidder cannot meet its bid obligation, the market-based conclusion that it is the best user of the spectrum is fatally undermined."

In fall 2001, after the D.C. court put NextWave back in the drivers seat, the FCC tried to work out an "everybody wins" deal in which the new bidders would pay $16 billion to the government and the government would pass $6 billion along to NextWave. Thats about $1.25 billion more than the companys original bid and more than a thousand times what it has actually paid.

The deal, however, required legislation from Congress because the FCC had no legal mechanism to act as a broker. Congress let the bill die some members, including Sen. John McCain (R-Ariz.), balked at rewarding NextWave for defaulting on its original commitment.

On March 4, 2002, the Supreme Court granted certiorari to both the FCC and Arctic Slope, and consolidated the two cases. It also allowed Urban Comm-North Carolina, Inc., to be among those filing amicus briefs in the case.

FCC Chairman Michael Powell issued a statement when the Court accepted the case: "This will allow the Court to clarify the relationship between public spectrum auctions and the U.S. bankruptcy laws."

But clarity from the Court didn't come until 2003, and waiting around was a money-losing proposition for all involved. The government wanted its $16 billion, NextWave wanted to start using the licenses, and Verizon and the other second-round bidders wanted the government to return their down payments, which were tied up in no-interest government accounts. Verizon was losing $250,000 a day in potential interest, according to a February 2002 press release.

As the case peneded, the much-needed spectrums went unused.

On Jan. 27, 2003, the Court held 8-1 that section 525 of the Bankruptcy Code clearly prohibits the FCC from removing licenses held by a debtor in bankruptcy upon the debtor's failure to make timely payments owed to the FCC for purchase of the licenses.

Writing for the majority, Justice Antonin Scalia concluded that no valid regulatory purpose exists that would provide an exception for license removals. "[I]t flies in the face of the fact that, where Congress has intended to provide regulatory exceptions to provisions of the Bankruptcy Code, it has done so clearly and expressly," he wrote.

Justice Stephen Breyer, the lone dissenter, poked fun at the disingenuous ease with which the majority disposed of the cases through statutory construction.

The majority says that the statutory language means "nothing more or less than that the failure to pay a dischargeable debt must alone be the proximate cause of the cancellation the act or event that triggers the agencys decision to cancel, whatever the agencys ultimate motive . . . may be," Breyer wrote. "That, the majority writes, is what the statute says. Just read it. End of the matter.

"It is dangerous, however, in any actual case of interpretive difficulty to rely exclusively upon the literal meaning of a statutes words divorced from consideration of the statutes purpose. That is so for a linguistic reason. General terms as used on particular occasions often carry with them implied restrictions as to scope. 'Tell all customers that ..." does not refer to every customer of every business in the world. That is also so for a legal reason. Law as expressed in statutes seeks to regulate human activities in particular ways. Law is tied to life."

Breyer's point was that the Court's literal interpretation of the statutory language runs contrary to the statutory purpose. "It seems to say that a government cannot ever enforce a lien on property that it has sold on the installment plan as long as (1) the property is a license, (2) the buyer has gone bankrupt, and (3) the government wants the license back solely because the buyer did not pay for it," Breyer pointed out.

"Yet every private commercial seller, every car salesman, every residential home developer, every appliance company can threaten repossession of its product if a buyer does not payat least if the seller has taken a security interest in the product," he wrote. "Why should the government (state or federal), and the government alone, find it impossible to repossess a product, namely, a license, when the buyer fails to make installment payments?"

Justice John Paul Stevens wrote a concurrence that cut the difference between the majority and the dissent: "In sum, even though I agree with Justice Breyers view that the literal text of a statute is not always a sufficient basis for determining the actual intent of Congress, in these cases I believe it does produce the correct answer."

Attorneys: For Federal Communications Commission (FCC):Paul D. ClementActing Solicitor GeneralLawrence G. Wallace Deputy Solicitor GeneralJeffrey A. LamkenAssistant to the Solicitor GeneralWilliam Kanter Jacob M. Lewis