INTRODUCTION
I.   HISTORICAL DEVELOPMENT OF WIRELESS LICENSING
      A. Development of the FCC's Licensing Authority
      B. The Use of Comparative Hearings to Resolve Competing Applications
      C. The Use of Lotteries to Efficiently Allocate Spectrum Provided Only Marginal Improvement Over the Comparative Hearings
      D. The Enactment of Competitive Bidding as a More Efficient System than Lotteries
II.  THE FCC'S IMPLEMENTATION OF SECTION 309(J)
      A. The FCC's Determination to Auction Broadband PCS Licenses
      B. FCC Implementation of the Competitive Bidding System for Broadband PCS Spectrum Licenses
          1. Size of Spectrum and Geographic Coverage
          2. Provisions for Designated Entities
      C. The Broadband PCS Auctions Result in Significantly Higher Bids in the Designated Entity Set-Aside Blocks
          1. A & B Block Auctions
          2. C Block Auction
          3. C Block Reauction of Defaulted Licenses
          4. D, E, & F Block Auctions
          5. C, D, E, & F Block Reauction of Defaulted Licenses
III. INABILITY OF SOME DESIGNATED ENTITIES TO PAY FOR LICENSES WON AT AUCTION
      A. Some Designated Entities Turn to the Courts to Retain Their Licenses
      B. NextWave Personal Communications, Inc. v. FCC
          1. Bankruptcy Proceedings
          2. NextWave's Bankruptcy Case on Appeal to the Court of Appeals for the Second Circuit
      C. Legal Developments Since NextWave v. FCC
          1. In re GWI PCS
          2. In re Kansas Personal Communications Service
IV. ATTEMPTS TO RESOLVE DESIGNATED ENTITIES' FINANCIAL DIFFICULTIES
      A. FCC Requests Congress To Enact Legislation Prohibiting the Bankruptcy Code From Interfering With FCC's Licensing Authority
      B. Large Firms Attempt to Acquire Licenses Originally Reserved for Designated Entities to Expand Networks
V. FCC'S RESPONSE TO SECOND CIRCUIT DECISION
      A. Cancellation of NextWave's Licenses
      B. Reauction of NextWave's and Other PCS Licenses
CONCLUSION

The Federal Communications Commission's ("FCC") designated entity policy has challenged the efficiency of the use of auctions to allocate spectrum licenses. As an alternative to comparative hearings and lotteries, auctions provide an effective solution to the costs, administrative burdens, and delays associated with apportioning spectrum. Congress required the FCC to allow firms to participate in the auctions even if they had difficulty in obtaining financing. The FCC gave these firms, known as "designated entities," set-asides and other preferences to assist them in the competitive bidding process. In the broadband Personal Communications Services ("PCS") auctions, however, designated entities frequently were unable to pay for their winning bids. Some of these firms took advantage of programs offered by the FCC to help pay for their licenses, while others surrendered their licenses to the Commission. Several firms also sought protection from the courts, which resulted in litigation costs and delays. Most importantly, some licenses sat dormant while these companies struggled to finance their bids, preventing customers from benefiting from their use. These factors combined to undermine the effectiveness of the auction process. Commissioner Harold Furchtgott-Roth claims the government's designated entity policies "doomed these licenses to failure," calling these blocks of licenses set aside for designated entities a "legacy of lost opportunity."[1]

This article begins by explaining the history of FCC licensing authority in Part I. Next, Part II reviews the FCC's implementation of auction procedures and policies, including those for designated entities. Part III discusses some of the problems encountered by bidders who failed to pay for their winning bids at auctions, most notably NextWave. Part IV examines attempts by the government and industry to resolve the difficulties faced by these bidders. Lastly, Part V analyzes the FCC's ultimate decision to cancel NextWave's licenses and to include them in a reauction.

The Radio Act of 1912[2] prohibited "the operation of a radio apparatus without a license from the Secretary of Commerce and Labor."[3] The Act limited the secretary's authority to "traffic control."[4] The creation of the Federal Radio Commission in the Radio Act of 1927,[5] however, greatly expanded the secretary's regulatory powers.[6] The Radio Act of 1927 allowed the Federal Radio Commission to license stations in furtherance of public convenience, interest or necessity.[7] The Federal Radio Commission used this standard to establish principles for granting licenses.[8]

The Communications Act of 1934[9] replaced the Federal Radio Commission with the FCC. The FCC had essentially the same authority to grant licenses under the "public convenience, interest, or necessity" standard.[10] The FCC interpreted the public interest in terms of efficiency[11] and used its licensing authority to determine the composition of the "traffic" on the airwaves.[12] Hence, the FCC's task was to select which applicants would be granted licenses.

In 1945, the Supreme Court examined the allocation of spectrum among competing applicants. In Ashbacker Radio Corp. v. FCC, the Court concluded that when two mutually exclusive applicants apply for a license, they are entitled to a comparative hearing.[13] The Ashbacker requirement of a comparative hearing provided license applicants a quasi-judicial forum to explain why their application for a license better served the public convenience, interest or necessity.[14]

In practice, comparative hearings for wireless licenses proved to be an imperfect and inefficient means of awarding licenses. The FCC described this process as "often time consuming and resource intensive from the perspective of both the applicants and the Commission."[15] One FCC commissioner even admonished comparative hearings as "the FCC's equivalent of the Medieval trial by ordeal."[16] The comparative hearing process for the initial cellular licenses resulted in more than one thousand applications, some containing more than one thousand pages of detailed arguments and documentation.[17] Likewise, members of the telecommunications industry encouraged switching from comparative hearings to a procedure based upon random selection.[18] They expected that a lottery system would reduce costs and provide a faster allocation of licenses.[19]

In 1981, Congress granted the FCC authority to use a system of random selection, or lotteries, to award spectrum licenses under 47 U.S.C. § 309(i).[20] That same year, the FCC concluded that the public interest would be served best with two competing cellular systems in each geographic area.[21] Each geographic market was divided between the local exchange service (e.g., one of the Bell operating companies) and a non-wireline applicant.[22] To resolve the heavy demand for cellular service and to accommodate the numerous firms eager to provide it, the FCC replaced the comparative hearing process with a hybrid comparative "paper hearing" and lottery.[23]
The lottery system, however, proved to have its faults as well. Even the Commission's minimal initial screening of applicants severely taxed its resources.[24] After the FCC assigned licenses through the lottery, many went through a lengthy resale process as licensees looked for windfall profits.[25] This unwanted resale market and delayed service again led Congress to attempt to reduce the administrative burdens[26] on the FCC and allow winning applicants to provide service to consumers more expeditiously. [27]

Congress revisited spectrum licensing with a focus on the use of competitive bidding systems to address the problems of both comparative hearings and lotteries.[28] Congress believed competitive bidding would correct the problems associated with the prior systems: the cost of acquiring a license would dissuade speculation, the public (rather than speculators) would receive value, and firms who most valued the licenses would implement services quickly.[29]

The 1993 Omnibus Budget Reconciliation Act[30] amended the Communications Act of 1934 to allow the use of competitive bidding[31] to issue licenses and restrict the use of lotteries.[32] The House Report noted the problems of the lottery system[33] and issued several findings supporting an auction system for licensing spectrum.[34] The auction procedure was reserved for situations involving mutually exclusive applications for a license, where the "principal use" of the license is determined by the FCC to be "in return for compensation from subscribers."[35]

Section 309(j)(3) set forth the requirements for the competitive bidding system.[36] After determining which licenses are to be issued, the FCC is required to establish, by regulation, the methodology of the auction and eligibility to bid for those licenses.[37] In doing so, the FCC must "safeguard to protect the public interest."[38] When establishing the auction methodology, the FCC must consider several objectives.[39] These include the original broad purposes listed in section 1 of the Communications Act.[40] The Omnibus Budget Reconciliation Act of 1993 also added four specific objectives:

(A) the development and rapid deployment of new technologies, products, and services for the benefit of the public, including those residing in rural areas, without administrative or judicial delays;
(B) promoting economic opportunity and competition and ensuring that new and innovative technologies are readily accessible to the American people by avoiding excessive concentration of licenses and by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women;
(C) recovery for the public of a portion of the value of the public spectrum resource made available for commercial use and avoidance of unjust enrichment through the methods employed to award uses of that resource; and
(D) efficient and intensive use of the electromagnetic spectrum.[41]

The House Report explained the second objective in further detail. First, the committee intended the FCC to use a common sense approach to avoid concentration of licenses, not any particular test.[42] Rather, the FCC should consider, for example, whether a single licensee dominates any service or significant group of services.[43] The committee's concern in disseminating licenses among small businesses was to prevent a significant increase in the concentration of the telecommunications industries, while recognizing that "the characteristics of some services are inherently national in scope, and therefore ill-suited for small business."[44] The committee observed that those services with local characteristics could "provide new opportunities for small business participation."[45] In those cases, the committee anticipated that the FCC would ensure that small businesses would not be excluded due to the competitive bidding system.[46] Finally, the committee included minority groups and women in order to ensure that such individuals would not be excluded by the competitive bidding system.[47] The Conference Report added rural telephone companies to those Congress sought to protect from exclusion due to competitive bidding.[48]

After setting the methodology for a particular competitive bidding system, the FCC then must establish the requirements to participate pursuant to section 309(j)(4). Congress set forth five factors the FCC must consider when prescribing its regulations for participation in an auction:

(A) consider alternative payment schedules and methods of calculation, including lump sums or guaranteed installment payments, with or without royalty payments, or other schedules or methods that promote the objectives described in paragraph (3)(B), and combinations of such schedules and methods;
(B) include performance requirements, such as appropriate deadlines and penalties for performance failures, to ensure prompt delivery of service to rural areas, to prevent stockpiling or warehousing of spectrum by licensees or permittees, and to promote investment in and rapid deployment of new technologies and services;
(C) consistent with the public interest, convenience, and necessity, the purposes of this chapter, and the characteristics of the proposed service, prescribe area designations and bandwidth assignments that promote (i) an equitable distribution of licenses and services among geographic areas, (ii) economic opportunity for a wide variety of applicants, including small businesses, rural telephone companies, and businesses owned by members of minority groups and women, and (iii) investment in and rapid deployment of new technologies and services;
(D) ensure that small businesses, rural telephone companies, and businesses owned by members of minority groups and women are given the opportunity to participate in the provision of spectrum-based services, and, for such purposes, consider the use of tax certificates,[49] bidding preferences, and other procedures; and
(E) require such transfer disclosures and anti-trafficking restrictions and payment schedules as may be necessary to prevent unjust enrichment as a result of the methods employed to issue licenses and permits.[50]

Subsection (4)(A), regarding alternative payment schedules, was debated in the conference committee regarding the types of future payment structures that could be made available.[51] The conference committee sought to ensure that the Commission would not have to evaluate bids and speculate on the amount of money that each would generate, for fear of litigation and delay arising from such determinations.[52]

The intent of subsection (4)(B) was to prevent applicants from acquiring licenses for purposes other than delivering a service to the public.[53] For example, the House Report noted, "an incumbent service provider could submit a bid for a license for a service that would compete with an existing business, and engage in behavior that would prevent competition from occurring" and delay service to the consumer.[54]

Finally, the conference committee amended subsection (4)(C) of the House bill by adopting a Senate provision requiring the FCC to provide opportunities to rural telephone companies in addition to small businesses and businesses owned by minorities and women.[55] This amendment to subsection (4)(C) reflected the Senate's desire to "establish at least one license per market as a 'rural program license' for any service that will compete with telephone exchange service provided by a qualified common carrier." The value of such a "rural program license" would be set at an amount equal to comparable auctioned licenses.[56]

Congress required the FCC to implement the new competitive bidding system by March 8, 1994.[57] On October 22, 1993, the FCC issued its Second Report and Order to auction PCS spectrum.[58] Its purpose was to foster new mobile services and technologies and to increase competition among PCS providers and between PCS providers and cellular operators.[59] The FCC acknowledged that these auctions would constitute the largest auction in American history and expected to recover billions of dollars for the United States Treasury, while introducing "an array of new telecommunications products and services that are expected to fuel our nation's economic growth and revolutionize the way in which Americans communicate."[60]

As of September 30, 1997, the FCC had conducted fourteen auctions and had awarded over 4,300 spectrum licenses.[61] In its Report to Congress on the effectiveness of spectrum auctions, the FCC declared the auction process "a more efficient mechanism to assign spectrum in cases of mutual exclusivity than any previously employed methods."[62] The total amount of winning bids in these fourteen auctions was nearly $23 billion dollars.[63] Analysis of the broadband PCS auctions, however, reveals some problems associated with the auction system and procedures.

The FCC adopted its first regulations to implement section 309(j) on March 8, 1994.[64] The Commission specifically selected broadband PCS as appropriate for competitive bidding in the occurrence of mutually exclusive applications because the principal use of licensed PCS spectrum was to be subscription-based for compensation.[65]

Broadband PCS falls within the class of mobile telephony known as commercial mobile radio service ("CMRS"), which also includes cellular and specialized mobile radio ("SMR") service.[66] PCS systems differ from these other services in that PCS formats are digital. Narrowband PCS primarily has been used for paging and messaging services, while broadband has been used for voice communications.[67] Broadband PCS also is used for new wireless Internet services.[68]

Cellular services are considered the "grand daddy" of CMRS.[69] There are several cellular providers in most markets and service extends across the nation.[70] As technology advanced, PCS provided higher quality and added features, such as voice mail, by utilizing digital technology to condense frequency requirements.[71] In 1998, cellular still dominated CMRS subscribership (estimated at 86%),[72] but PCS gained subscribers at the expense of cellular.[73] Because cellular providers were established, PCS providers were forced to deploy comparable coverage in order to attract new customers.[74] Although of better quality, PCS is not as extensive as cellular geographically and is limited mainly to major urban markets.[75]

The FCC established extensive procedures and regulations for conducting the broadband PCS auctions.[76] The FCC rules applied to all bidders, with certain exceptions for designated entities. Generally, the FCC considered procedural and policy concerns in establishing auction rules. Procedural rules included the form of applications, upfront payments, down payments, lump sum payments, and defaults for winning bidders.[77] Separate procedural rules for designated entities included set-asides, reduced upfront payments, bidding credits, reduced down payments, and installment payments for the remainder of the bid price.[78] Other auction regulations focused on broader policy concerns such as foreign ownership, collusion among bidders, and eligibility rules for designated entities.[79]

The FCC established preferences for designated entities in furtherance of section 309(j)(4), with the intent of assisting firms facing obstacles (such as access to capital) in the telecommunications industry.[80] The preferences were meant to allow entrepreneurs to participate in the auction, resulting in increased services and competition.[81]

The PCS spectrum to be auctioned was separated into six blocks: three 30 MHz blocks and three 10 MHz blocks. The three 30 MHz blocks would compete with cellular service, while the three 10 MHz blocks would be used in a variety of ways including "niche services," or as a complement to larger blocks of PCS or cellular service.[82] The FCC originally had set aside a 20 MHz block for the designated entities, but reversed this "handicap" (compared to 30 MHz blocks) when the investment community responded that financing "would be much more difficult to obtain for the licensees on the 20 MHz block than on the other blocks."[83] Thus, Blocks A, B, and C would be 30 MHz, while Blocks D, E, and F would be 10 MHz.[84] Further, Blocks A and B would be divided into 47 geographic regions, or Major Trading Areas ("MTA's"), plus Alaska and Puerto Rico, while Blocks C, D, E, F, and G would be divided among 487 smaller Basic Trading Areas ("BTA's") plus Puerto Rico.[85] The FCC found that this would allow licensees "to aggregate varying amounts of spectrum in different geographic areas depending on their individual business plans," providing flexibility in their service to consumers.[86]

The FCC determined that setting aside certain blocks solely for bidding by designated entities for each auction might be necessary to ensure their opportunity to acquire licenses.[87] For the broadband PCS auction, the FCC found that set-asides would be necessary for designated entities due to the ability of large competitors with extensive financial capabilities to outbid those without sufficient access to capital.[88] Blocks C and F were set aside as the "entrepreneurs' blocks."[89]

The FCC established general procedures for its auctions in its Second Report and Order, [90]modified in part by its Second Memorandum Opinion and Order,[91] and specific procedures for the broadband PCS auction in its Fifth Report and Order.[92] In establishing qualification standards, the FCC noted it may require bidders' applications to include "all information and documentation sufficient to demonstrate that the application is not in violation of Commission rules . . ."[93] Prospective bidders would be required to file short-form applications within the stated filing period.[94] The FCC determined that short-form applications and any applicable filing fees would reduce the administrative encumbrances on bidders and the FCC and minimize the potential for delay.[95]

Short-form applications would include certifications "that the applicant is legally, technically, financially and otherwise qualified . . . and in compliance with foreign ownership provisions . . . and any other service-specific qualification rules."[96] Designated entities would be required to declare under penalty of perjury that they have met the Commission's specific qualifications for such status.[97] Applicants would have to identify all partnerships, joint ventures, consortia, or other arrangements for the licenses, including post-auction plans.[98] Short-form applications would not be held to a perfect-letter standard for minor defects, but could not make "any major modifications to their applications, including ownership changes or changes in the identification of parties to bidding consortia."[99] After allowing minor errors to be corrected, the FCC would accept the applications for filing.[100]

After filing short-form applications, bidders would be required to submit an upfront payment, aimed at discouraging frivolous or deceitful bidding.[101] In determining the amount of the upfront payments, the FCC would balance its need to deter insincere bids with the goal of minimizing the bidders' implementation costs.[102] Because of the varying nature of the different licenses to be auctioned, the FCC would set the amount of the upfront payment on an auction-by-auction basis, requiring bidders to pay a percentage of the expected population covered by a license.[103] The upfront payment would define the upper limit for bidding within a round, while allowing participants to bid flexibly and change strategy during the auction.[104] Finally, the upfront payments would ensure that bid withdrawals or default penalties would be collectible.[105] The FCC reduced the amount of the upfront payment for designated entities by twenty-five percent because of their lack of access to capital combined with other expenses in the licensing process.[106] This upfront payment amount was nonetheless deemed sufficient to deter insincere bidding.[107]

Further, the FCC determined that bidding credits would be necessary for designated entities due to the "extremely capital intensive nature of broadband PCS."[108] The FCC originally established bidding credits in three categories: small businesses, businesses owned by women or minorities, and small businesses owned by women or minorities.[109] But before the FCC could conduct the broadband PCS auction, the Supreme Court held that federal affirmative action programs must be narrowly tailored to further compelling government interests.[110] As a result, the FCC voted to "eliminate all race- and gender-based provisions from its C Block auction rules in order to reduce legal uncertainties and prevent further delay of the auction,"[111] thereby making all small businesses eligible for a twenty-five percent bidding credit.[112]

The FCC determined that winning bidders must submit a down payment of twenty percent of the bid price.[113] The remaining eighty percent of the bid price would be due within five business days after the FCC granted the license, with full payment as a condition.[114] For designated entities, the FCC determined it was fair to require a down payment of only ten percent, thereby providing room for other post-auction costs.[115] Designated entities also were allowed to pay in installments.[116] This installment plan gave designated entities a low interest rate. They also had the opportunity to structure payments to cover interest for the first six years and repay the remaining principal and interest over the next four years.[117]

Finally, the FCC set substantial default penalties so potential bidders would ensure that their qualifications and financial capabilities would allow them to build their systems rapidly.[118] Specifically, the FCC sought to avoid any delays arising from litigation, disqualifications, or reauctions.[119] The rules for designated entities echoed this concern for unqualified or defaulting bidders.[120] While the FCC sought to substantially penalize withdrawn bids, defaulting bidders were penalized even more, due to the difficulty of reauctioning defaulted bids.[121]

Surprisingly, a handful of designated entities bid extremely high prices for PCS licenses in major markets, even in comparison to the large A and B Block bidders.[140] Several C Block licensees subsequently contacted the bureau seeking to modify their installment payments.[141] As a result, the Wireless Telecommunications Bureau suspended the installment payment deadlines for all C and F Block licensees in March, 1997,[142] and a FCC task force was assembled to resolve proposed alternative payment schedules.[143] Nearly a year later, the FCC ordered the C and F Block licensees to resume their payments on March 31, 1998. They also were required to pay a "suspension interest" over a two-year period.[144]

To alleviate the licensees' burdens, the FCC allowed licensees to disaggregate a portion of their license and surrender it to the Commission for reauction.[145] Those choosing to return a portion of their licenses were prohibited from selectively disaggregating spectrum within an MTA (referred to as "cherry picking") in order "to facilitate attempts by new bidders to aggregate spectrum and initiate service."[146] The FCC then would reduce the amount owed by the licensee pro-rata based on the amount of spectrum returned to the Commission.[147] The licensee was prohibited from bidding on the license in the reauction or from reacquiring that license through a secondary market transaction.[148]

Another option was amnesty. If a licensee chose this option, it would have to surrender the license "in exchange for relief from its outstanding debt" and the FCC would "waive any applicable default payments."[149] Amnesty also was intended to facilitate an expeditious reauction.[150] Finally, the licensees could opt for "prepayment," which would allow the licensee to choose which licenses it wished to keep.[151]

In Mountain Solutions, Ltd., Inc. v. FCC, a winning bidder for ten C Block PCS licenses made its first required down payment, but requested a waiver due to its inability to make a timely second down payment.[152] Within one month, the bidder reported that its financing issues had been resolved successfully.[153] The FCC denied the waiver and the bidder brought suit alleging the FCC's denial was arbitrary and capricious and an abuse of discretion.[154] The D.C. Circuit determined that the FCC's response was not arbitrary and capricious nor was it an abuse of discretion, despite the fact that it had granted similar waivers to other firms.[155] Those situations were distinguished in that the firms did have financing available on the date it was due, but missed the payment date inadvertently because of a miscalculation or administrative complications.[156] If the bidder was not financially viable at the time the second down payment was due, it was in default.[157] The D.C. Circuit emphasized the fact that the bidder's situation was distinguished from those who were granted waivers and those who were later given the three alternative payment options: that the bidder was in default once it missed its second down payment.[158]

Other winning bidders for C Block licenses also sought the protection of the courts after experiencing financial problems with their bids. DCR PCS, a wholly owned subsidiary of Pocket Communications, Inc., won forty-three C Block PCS licenses. On March 31, 1997, DCR PCS and Pocket filed voluntary petitions for bankruptcy under Chapter 11 of the Bankruptcy Code.[159] The FCC agreed to a waiver in the interest of settling the bankruptcy litigation to prevent the "tremendous expense and potential delay in providing service to the public that continued litigation causes."[160]

On June 26, 1996, the FCC announced that Auction #11, for D, E, and F Blocks, would commence on August 26, 1996.[164] The winning bids for Auction #11 were a fraction of the C Block auctions,[165] which allegedly devalued the C Block licenses.[166] NextWave petitioned for further reconsideration of the alternative payment plans established by the FCC and later filed a petition for review of the FCC's alternatives in the D.C. Circuit, which were both denied. The FCC and D.C. Circuit also denied NextWave's request for a stay of the June 8, 1998 deadline to elect one of the FCC's options.[167]

On June 8, 1998, NextWave sought protection under Chapter 11 of the Bankruptcy Code, with claims of constructive fraudulent conveyance and "inequitable, unconscionable, and unfair conduct" by the FCC.[168] The bankruptcy court found jurisdiction under 28 U.S.C. § 1334(a) and (b):

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings under title 11, or arising in or related to cases under title 11.[169]

The bankruptcy court further explained its jurisdiction for "core proceedings" arising under Title 11:

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.
(2) Core proceedings include, but are not limited to-
(A) matters concerning the administration of the estate;

The bankruptcy court issued four subsequent decisions to resolve NextWave's fraudulent conveyance claim.[174] The February 16, 1999 decision found that NextWave's obligation was incurred on January 3, 1997, the date the FCC conditionally granted the licenses.[175] The May 12, 1999 decision found that the licenses did not represent their "reasonably equivalent value," and instead found their fair market value to be $908,146,000, thereby allowing NextWave to avoid $3,720,437,000 (seventy-eight percent) of their bid.[176] The June 16, 1999 decision held that NextWave's avoidance did not constitute a default, thereby disallowing the FCC from canceling the licensees.[177] Finally, the June 22, 1999 decision allowed NextWave to avoid $3,720,437,000 of its winning bids.[178]

On July 27, 1999, the U.S. District Court for the Southern District of New York upheld each of the bankruptcy court's five decisions.[179] In supporting the bankruptcy court's jurisdiction, the district court found that Congress "did not grant regulatory power to the FCC to make rules or orders with respect to its own status as a creditor vis-à-vis its debtors or other creditors of its debtors."[180] Furthermore, the district court found that payment of the installment notes were "provisions of a contract between a creditor and debtor . . . subject to revision and adjustment pursuant to the Bankruptcy Code, just as any similar debt."[181] Additionally, the district court deemed the FCC's restructuring orders to be "voluntary offers of a creditor to protect the solvency of the debtor in order to ensure payment."[182]

The Second Circuit noted the four-month gap between NextWave's second deposit after winning the right to the licenses, the conditional grant of the licenses, and the FCC's requirement that winning bidders were required to submit long form applications to confirm that bidder's compliance with FCC regulations and statutory requirements.[185] The Second Circuit then focused on two arguments raised by the FCC: that the bankruptcy court lacked subject matter jurisdiction and that the Communications Act preempted the fraudulent conveyance claim.[186]

The Second Circuit's opinion began, "The . . . spectrum belongs to no one. It is not property that the federal government can buy or sell." Rather, the "spectrum is subject to strict governmental regulation."[187]

The Second Circuit continued by examining the legislative history of section 309(j) to determine Congress' rationale in authorizing the FCC to use auctions to license spectrum.[188] It found "the broader purpose of [section] 309(j) was to create an efficient regulatory regime based on the congressional determination that competitive bidding is the most effective way of allocating resources to their most productive users."[189] Likewise, when the FCC implemented the auction authority, its goal was to put the spectrum licenses in the hands of those who had the ability "to introduce valuable new services and to deploy them quickly, intensively, and efficiently" so as to "promote the development and rapid deployment of new services in each area and the efficient and intensive use of the spectrum."[190]

The Second Circuit then focused on the importance of full and timely payment for the winning bids, noting the FCC's concern of deterring "frivolous or insincere bidding."[191] It determined the FCC's default rules and penalties were important as a substitute for the various forms of due diligence necessary to ensure "that the licenses would be awarded to the appropriate entities."[192] Therefore, payment by installments in full was made an explicit condition to retention of the licenses.[193]

Next, the Second Circuit found that the FCC's alternatives offered to those designated entities facing financial difficulties were "the FCC's expert judgment as to the course that would best promote congressional objectives and serve the public interest, thus manifest[ing] substantive regulatory decisions about the allocation of spectrum."[194] Therefore, the Second Circuit found that the FCC's auction system is "presumed to be a regulatory tool for ensuring that licenses are distributed" to fulfill the goals of the Communications Act and the licenses themselves are not to "be construed to create any right beyond the terms, conditions, and periods of the license."[195]

The history of the FCC's relationship with the courts then was examined,[196] revealing that it was "beyond the jurisdiction of a court in a collateral proceeding to mandate that a licensee be allowed to keep its license despite its failure to meet the conditions to which the license is subject."[197] Furthermore, the Second Circuit held that "[w]hen the FCC decides which entities are entitled to spectrum licenses under rules and conditions it has promulgated, it therefore exercises the full extent of its regulatory capacity."[198] Examined in this context, the Second Circuit reasoned that the FCC had the authority to determine that "NextWave was not the applicant most likely to use the Licenses efficiently for the benefit of the public" and "in regulatory terms, that NextWave was not entitled to the Licenses."[199]

Lastly, the Second Circuit disputed the bankruptcy and district courts' treatment of the case as mere bankruptcy proceedings. The fact that licenses are awarded according to market forces did not make the FCC a mere creditor.[200] Allowing NextWave to retain the licenses for $1.023 billion when it had bid $4.70 billion impaired "the FCC's method for selecting licensees by effectively awarding the Licenses to an entity that the FCC determined was not entitled to them."[201] Finding that the bankruptcy and district courts had essentially exercised the FCC's spectrum licensing function, the Second Circuit held that "they were utterly without the power to order that NextWave be allowed to retain them."[202] The court also disagreed with the bankruptcy court's determination that the FCC was acting as a creditor.[203] The Second Circuit concluded, "[i]n order for Congress' prescribed regulatory system to function properly in a dynamic environment, the FCC's allocative decisions must not be interfered with by other instrumentalities of the federal government acting beyond their statutory authority."[204] The bankruptcy and district courts' decisions were reversed and the case was remanded for further proceedings consistent with the circuit court's decision.[205]

A stay was issued upon the bankruptcy court's orders while on appeal to the District Court for the Northern District of Texas until October 7, 1998.[209] Shortly after the stay ended, GWI sought to have the FCC's appeals dismissed because it had begun to effectuate the reorganization plan.[210] The district court accordingly held that the FCC's appeals were "equitably moot" because the business reorganization plan was "substantially consummated."[211]

On appeal, the Fifth Circuit upheld the district court's decision on three grounds. First, the Fifth Circuit held that the equitable mootness determination was correct because the FCC had failed to maintain a stay on the licenses, because the reorganization plan had been substantially consummated, and because parties not before the court would be adversely affected.[212] Next, the Fifth Circuit acknowledged that "the bankruptcy court possibly erred in permitting avoidance and enjoining the FCC from revoking the subsidiary debtors' licenses for failing to remit the full bid price, thereby taking onto itself a quasi-regulatory function held by the FCC . . . ."[213] Despite this acknowledgment, the Fifth Circuit upheld the equitable mootness claim, an issue that the Second Circuit did not need to consider in NextWave.[214] Finally, the Fifth Circuit held that the FCC was not entitled to deference because it had not determined the obligation was incurred until after the bankruptcy proceeding and disagreed with the NextWave decision regarding the timing of obligation according to auction principles.[215] This portion of the opinion appears to openly clash with that of the Second Circuit in NextWave. This could present a split among the circuits sufficient to draw the Supreme Court's attention, but may not be considered an open divergence given the distinction over equitable mootness.

On appeal, the U.S. District Court for the District of Kansas reviewed the bankruptcy court's interpretation of whether the cancellation of a license is an automatic act or whether the FCC has discretion in the cancellation of licenses.[220] The court found the FCC's determination "that licenses automatically cancel without any act" must be given "controlling weight."[221] Therefore, the court held that the automatic cancellation did not constitute an affirmative act by the FCC and, thus, "the filing of the bankruptcy petition does not preserve a licensee's limited property interest in a license."[222]

The FCC should consider limiting designated entity set-asides to less capital-intensive services, such as analog cellular, analog dispatch, or fixed wireless. Congress realized that many small businesses would be improper providers for services that are national in scope. Broadband PCS is clearly a national service, with the largest industry members offering coast-to-coast availability. Because the nature of the broadband PCS industry demands large upfront capital, firms with difficulty in acquiring capital may be simply unsuitable for acquiring and developing a nationwide network.

The FCC should continue to open future auctions to all bidders. Allowing non-designated entities to compete for the licenses dramatically increases the likelihood that the licenses will be put into service quickly. The FCC should replace its tier system with open auctions, granting designated entities full use of bidding credits.

A more fundamental alternative would be to value winning bids in proportion to the bidder's financial capability rather than by dollar amount. For instance, if a small business' bid, in proportion to its revenues, was larger than that of a highly capitalized company, such as AT&T Wireless, the small business would win because it valued the license more. This would allow the FCC to eliminate all discounts, credits and tiers, and instead focus on which bidder "values" the license the most in relation to its financial capacity. Still, a bid floor would be necessary to ensure the bidder is able to deploy the service for consumers.

To complement FCC changes in designated entity policy, Congress should enact legislation to prohibit firms from seeking the sanctuary of the bankruptcy courts with regard to the FCC's auction process. Such legislation would prevent those firms that do not have sufficient finances from overbidding in order to win licenses. Allowing firms to use this business strategy would frustrate the policy of the auction process to disseminate licenses efficiently. If a bankruptcy court were to allow a bidder to avoid a large portion of their bid, the purpose of distributing licenses to those who value the licenses most is destroyed. Congress certainly has major interests in protecting the treasury while maintaining the efficient purposes of auctions. Such legislation would allow Congress to maintain the fiscal health of the treasury, and indeed ensure an influx of funds from future auctions, while promoting the sound market-based principles of the auction system.