The FCC Must Satisfy a High Legal Threshold if it Wants to Impose Bidder Exclusion Rules…

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According to press reports, the Federal Communications Commission is putting the finishing touches on its much-anticipated order establishing the rules for the upcoming voluntary incentive auctions mandated by the Middle Class Tax Relief and Jobs Creation Act of 2012 (the “Spectrum Act”).  The big question, of course, is whether the FCC will impose some sort of bidder exclusion rules that would prohibit—or, at minimum, severely constrain—AT&T and Verizon from acquiring more spectrum in the auction.  While newly-installed FCC Chairman Tom Wheeler is playing his cards close to the vest, given the Sixth Circuit’s reasoning in Cincinnati Bell v. FCC, 69 F.3rd 752 (6th Cir. 1995), the agency must understand that there is an awfully high standard to satisfy if it wants to impose bidder exclusion rules.

Let’s start with a quick recap of the case:  it’s the early 1990’s, and the FCC is tasked with developing the rules for the first Personal Communications System or “PCS” auctions.  Then, as now, the agency was governed by Section 309(j) of the Communications Act, which provides that, inter alia, the Commission shall “include safeguards to protect the public interest” and “avoid[ an] excessive concentration of licenses … by disseminating licenses among a wide variety of applicants.”  The FCC took this language as “an explicit congressional approval of promoting competition in the industry and of a wide distribution of Personal Communications Services licenses” and, as such, imposed a variety of bidder restrictions on incumbent providers.  In the Commission’s view, its goal in adopting the bidder restrictions was not “to prevent anticompetitive behavior which may or may not materialize, but rather, to promote competition.”

In a scathing rebuke of the Commission, the Sixth Circuit held that the agency’s bidder restrictions were the “product of arbitrary decisionmaking”, particularly given that “the FCC provided little or no support for its assertions that [incumbent] providers, released from all regulatory shackles and given free rein to roam the wireless landscape, might engage in anticompetitive behavior or exert undue market power….”  Indeed, the court went on to note that “rather than showing that it actually had some factual support for its conclusions, [the agency] uses the ‘deference’ standard of review as if it were an ink blotter waiting for this Court’s rubber stamp to validate agency action.” (Emphasis in original.)  While the court acknowledged that the FCC’s “predictive judgments are entitled to a fair degree of deference”, the court held that “post-hoc rationalization is not a suitable substitute for reasoned decisionmaking, and support for the agency’s action must exist in the rulemaking record.”  Accordingly, the court concluded:

while avoiding excessive concentration of licenses certainly is a permissible goal under the Communications Act, simply precluding a class of licensees from obtaining licenses (without a supported economic justification for doing so) solves the problem arbitrarily.  ***  The need to avoid “excessive concentration of licenses” does not provide the requisite “reasoned basis.”  Without any economic rationale, the [incumbent exclusion] rules are nothing more than an arbitrary regulation of who may bid on which Personal Communications Service licenses.

In light of the close similarities of the facts of Cincinnati Bell to current circumstances, are there any lessons the FCC should glean from this case?  I believe that there are several:   

As an initial matter, Cincinnati Bell makes clear that the agency is going to need a strong factual predicate of market failure if it wants to impose some sort of bidder exclusion rules.  In the case of the PCS auction restrictions, the FCC had relied upon a 1992 report from the GAO entitled Concerns About Competition in the Cellular Telephone Industry, which found that wireless communications markets at the time were not fully competitive and recommended the allocation of spectrums to new firms rather than incumbent providers.  Interestingly, however, the Sixth Circuit found after review that the GAO Report was “no better than the FCC’s asserted justifications in providing any factual support for its conclusions.”  According to the court, the GAO Report only contained “broadly stated ‘findings’ that the Cellular market is less than optimally competitive, and generalized conclusions about the need to restrict Cellular interests from obtaining Personal Communications Service licenses.”  As such, held the court, “Something more is needed.”  And why is “something more” so important?  As the Sixth Circuit explained,

… eligibility restrictions have a profound impact on businesses in an industry enmeshed in this country’s telecommunications culture. The amounts of money at stake reach into the billions of dollars.  The continued existence of some wireless communications businesses rests on their ability to bid on Personal Communications Service licenses.  Indeed, at oral argument counsel for the FCC admitted that, given the uncertain nature of the future in the wireless communications market, [incumbent] providers foreclosed from obtaining Personal Communications Service licenses may ultimately be left holding the remnants of an obsolete technology.  Precisely because the [incumbent] eligibility restrictions have such a profound effect on the ability of businesses to compete in the twenty-first century technology of wireless communications, it was incumbent upon the FCC to provide more than its own broadly stated fears to justify its rules.  (Emphasis supplied.)

Given the Sixth Circuit’s take on the 1992 GAO Report, I’m not sure the Commission would fare much better if it attempted to use the flawed analysis set forth by the U.S. Department of Justice in a ex parte last year in support of imposing bidder restrictions.  As we demonstrated in our paper Equalizing Competition Among Competitors:  A Review of the DOJ’s Spectrum Screen Ex Parte Filing, the DOJ’s analysis was both speculative and wrong, and devoid of empirical support for the agency’s proposed interventions.  Moreover, the DOJ’s ex parte lays out a tradeoff between concentration and efficiency—a tradeoff the DOJ never resolves.

The agency would also be remiss to use its most-recent Sixteenth Annual CMRS Report (ostensibly the latest and greatest official government analysis of the U.S. mobile industry) as definitive evidence that the wireless industry is not “effectively competitive.”  To begin, while the Commission may not have found the market to be “effectively competitive,” by the same token the Commission also expressly refused to find explicitly that the wireless industry was not competitive.  In fact, the agency found that drawing “any single conclusion” (Sixteenth Report at ¶15) was unwise because the industry, and the competition within that industry, has become too complex for the agency to get its mind around.  Moreover, frequently citing the Phoenix Center’s research, the Commission concluded that “concentration” bears no direct relationship with “competition” (a profoundly significant and absolutely legitimate conclusion).  Instead, the Commission appropriately found that “Competitive rivalry among providers is desirable not as an end in itself, but rather as a means of bringing tangible benefits to consumers, such as lower prices, higher quality, and greater choice of services.” (Sixteenth Report at ¶ 242 (emphasis supplied)).  We here at the Phoenix Center could not agree more.  As our Chief Economist Dr. George Ford explained in a blog last year, when the evidence presented in the Sixteenth Report is viewed in this light, the conclusion to be reached about the U.S. mobile industry is obvious:  the U.S. mobile wireless industry is performing exceptionally well for consumers.

In addition to a strong factual predicate, Cincinnati Bell also makes clear the FCC is going to need strong economic theory for bidder exclusion rules.  Unfortunately for the FCC, we have seen bupkis so far.  Indeed, as we have demonstrated in great detail here, here, here, here  and here, arguments for bidder restrictions remain weak and inconsistent.  Like it or not, the burden remains on the proponents of bidder restrictions to show that the restrictions will more efficiently reallocate broadcast spectrum and increase revenues raised than other alternatives.

And, while not specifically addressed by the Sixth Circuit, here is one more legal point the FCC should think about.  As noted above, the agency’s stated rationale for imposing bidder restrictions in the PCS auction was not “to prevent anticompetitive behavior which may or may not materialize, but rather, to promote competition.”  Strikingly, nearly twenty years later, we see the DOJ and other advocates making the exact same arguments for the voluntary incentive auctions.  However, as I pointed out both in my critique of the DOJ’s ex parte as well as in my comprehensive law review on the parameters of the FCC’s public interest standard, I would remind the agency yet again that numerous courts have expressly held that the Commission simply “is not at liberty . . . to subordinate the public interest to the interest of ‘equalizing competition among competitors.’”

Finally, regardless of the preceding points, if the agency thought it had a high burden to overcome in the 1990’s, the Commission needs to recognize that Congress raised the bar even higher in the Middle Tax Relief and Job Creation Act of 2012.  Specifically, while Section 309(j) remains relatively intact, Congress deliberately added Section 6404, which unambiguously states that the Commission may not prevent a person from bidding so long as that person meets all of the general eligibility requirements; instead, the agency may only “adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition.”  (Emphasis supplied.)  Thus, if the agency wants to impose bidding restrictions, an approach—such as the one recently adopted in New Zealand—which treats all bidders equally by imposing a limit on the amount of spectrum any one bidder can acquire in the auction (and not a limit based on how much spectrum a firm holds in the aggregate), is probably as far as the FCC can go without running afoul of the statute.

So, just to summarize, the FCC certainly has the legal authority to impose restrictions in the upcoming voluntary incentive auctions.  However, not only must these bidding restrictions be of a general, industry-wide nature, but the FCC better come up with a darn good story (complete with a factual predicate and sound economic theory) to support these bidder exclusion rules to survive appellate review. 

Based on what’s in the record to date, good luck with that.