The Supreme Court ruled yesterday that the Federal Communications Commission violated federal law when it attempted to reclaim part of the public airwaves from a wireless firm that had sought refuge in bankruptcy court after it could no longer afford to make payments on its $4.74 billion bid.
The ruling was a victory for NextWave Personal Communications Inc., which won the licenses in a government auction in 1996 but filed for Chapter 11 bankruptcy protection two years later. The case brought an end to a lengthy legal and legislative battle that has tied up use of a valuable chunk of airwaves in several major cities as the skies have become increasingly congested with calls.
The FCC said it acted in the public interest when it seized the airwaves in 2001 and resold them to several established companies, reaping $15.8 billion. The agency argued that it had acted on regulatory grounds, enforcing rules that required winning bidders to make full and timely payments as a condition of keeping their licenses.
But by a vote of 8-1, the justices said that the federal bankruptcy code clearly prohibits "any governmental unit" from revoking a license "solely because" the company has not paid a debt. The FCC's claim that it was acting as a regulator rather than a creditor was "irrelevant," the court said.
"We find none of [the FCC's] contentions persuasive," Justice Antonin Scalia wrote in the opinion for the court.
The decision means NextWave must now use the airwaves to build its own network or return the licenses to the government if it cannot afford to move forward. Analysts said the company is likely to try to sell the rights to other wireless phone companies.
"We are extremely pleased with this decision because it clears the way for us to move forward and complete our reorganization," NextWave's chairman and chief executive Allen B. Salmasi, said in a statement. "Everyone will benefit from achieving finality, putting the litigation behind us, and getting the licenses into use as quickly as possible. . . . We look forward to a constructive relationship with the FCC."
It is unclear how much of the $4.74 billion the FCC will collect from NextWave as the company works its way through the bankruptcy process.
"The Supreme Court's decision brings much needed certainty to an unsettled area of the law," FCC Chairman Michael K. Powell said. "We are in the process of examining all the ramifications of the court's decision. The commission . . . looks forward to facilitating the provision of service in these bands to the American people as soon as practicable."
The value of NextWave's spectrum has dropped dramatically in the last two years as the telecommunications industry struggles with the most devastating downturn in its history. Some analysts say the airwaves may be worth even less than the $4.74 billion NextWave originally bid.
"There just isn't the demand because the supply that is out there will allow carriers to limp along," said Rudy L. Baca, an analyst with the Washington-based Precursor Group.
Several analysts said that given the overall weak state of the wireless industry, NextWave will most likely be forced to sell its airwaves in relatively small slices to various firms over the next several years. Verizon Wireless, for instance, bid for parts of the spectrum when the FCC tried to re-auction the licenses in 2001.
Another likely buyer is Cingular Wireless, which needs additional airwaves in large markets such as New York, Los Angeles and Dallas, where it is running out of capacity to add more subscribers. One reason some wireless subscribers lose reception is that mobile phone companies don't have enough airwaves for their growing subscriber bases.
NextWave officials did not rule out a sale.
"We will let the marketplace decide what happens next," NextWave general counsel Michael Wack said.
The debacle over NextWave's licenses illustrates the degree to which a well-intentioned program enacted by Congress foundered amid the shifting realities of the telecommunications industry. The auction NextWave won in 1996 was set up under rules authorized by Congress in 1993 with the goals of maximizing government revenue and supporting entrepreneurship. NextWave, a would-be wholesaler of cellular services, won an FCC auction for 63 spectrum licenses, making a 10 percent down payment and promising to pay the rest over 10 years.
The next year, NextWave, along with several other successful bidders, ran into trouble obtaining financing for their ventures. NextWave asked the FCC to restructure its payment schedule, and when the commission refused, the firm filed for bankruptcy, ceasing all payments to the FCC. A flurry of litigation in federal bankruptcy and appeals courts followed. In January 2001, the FCC resold the firm's licenses for $15.8 billion.
A legal fight ensued, and later that year, the government, NextWave and other telecommunications firms agreed on a settlement to let the 2001 auction stand while compensating NextWave. But, led by opposition from Sen. John McCain (R-Ariz.), the pact failed to gain needed congressional approval.
On June 22, 2001, the U.S. Court of Appeals for the D.C. Circuit invalidated the license revocation, saying it violated federal bankruptcy law. The FCC appealed to the Supreme Court.
Justice Stephen G. Breyer, the lone dissenter from yesterday's ruling, wrote that the court should have adopted a more flexible interpretation of bankruptcy law. "The majority's interpretation means that private creditors, say, car dealers, can enforce security interests in the goods that they sell, namely, cars, but governments cannot enforce security interests in items that they sell, namely licenses."
The case is FCC v. NextWave, No. 01-653, and included Artic Slope Regional Corp. v. NextWave, No. 01-657.
Staff writer Christopher Stern contributed to this report.